PROMOTERS
* A promoter is the principal person who procures or aids in procuring the
formation of a company but he is not a professional engaged in the formation of
the company such as an advocate, accountant, printer of prospectuses etc.
Twycross v. Grant (1877) 2C.P.D. 469 Lord Cockburn ;
“One who undertakes to form a company with reference to a given project and to set it
going, and who takes the necessary steps to accomplish that purpose.”
* Duties of a promoter are:
(a) Discharging the necessary formalities of incorporation, such as preparing the
memorandum and articles of association of the proposed company and he may
engage services of an advocate for that purpose or any other expert.
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Cont…
(b)Recruiting shareholders and appointing the first directors of the company.
(c) Acquiring business assets(including trading capital) for use by the
company; and
(d)Negotiating preliminary business contracts on behalf of the proposed
company.
* Promoters owe a fiduciary duty to the company and hence they ought to
disclose all personal interests that might conflict with the company.
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Cont…
* They have a fiduciary duty to account for secret profits e.g. a promoter,
may upon incorporation, become a director of a company of which he had
sold some property at an exorbitant price. He should refund the sum in
excess of the usual sale price. Read Re Leeds and Hanley Theatre of
Varieties [1902]2Ch,809 and Gluckstein v Barne[1900]AC,240.
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CONT…
* Liability of a promoter terminates after dissolution of a company since
upon dissolution it ceases to exist and hence cannot sue or be sued.
* In respect of promoters inter se, none can sue the other for the cost of
forming the company unless there is an agreement upon which such an
action would be based.
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Cont…
* A company is not liable for transactions done before it is incorporated. A
contract purportedly entered into on behalf of a company before
incorporation is void and upon incorporation a company cannot ratify such
a contract. Whoever purports to act for a company before incorporation is
personally liable-s44(1).
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Cont…
Kelner v. Baxter (1866) LR 2CP 174
A promoter is not an agent for the company he is forming because a company
cannot have an agent before it comes into existence.
Gluckstein v. Barnes [1900] AC 240
A promoter is not a trustee for a company that is yet to be formed. However from
the moment he acts with the company in mind, he stands as a fiduciary towards the
company.
* Lagunas Nitrate Co. v. Lagunas Syndicate (1899) 2Ch 392
Requirement of an independent board may be difficult to achieve
promoters will usually be the first directors
REMEDIES OF COMPANIES AGAINST PROMOTERS
* Rescind the contract and recover the purchase money paid.
* Compel the promoter to account for any profit he has made,
* Sue the promoter for damages for breach of his fiduciary duties.
REMUNERATION OF PROMOTERS
A promoter has no right against the company for payment of his services rendered
before the Formation of the company in the absence of a contract under seal,
because the services would constitute past consideration.
PRE-INCORPORATION CONTRACTS
Section 44
Kelner v. Baxter
Companies are not bound by pre-incorporation contracts made on their behalf
before they are incorporated.
Braymist Ltd v. Wise Finance Co. Ltd [2002] EWCA Civ 127
The underlying contract is subject to all the normal rules of contract
Natal Land Co. & Colonisation Ltd v. Pauline Colliery and
Development Syndicate Ltd [1904] AC 120 (PC) N Co.
And
Re English and Colonial Produce Co. Ltd [1906]2 Ch 435
Persons, who purport to act on behalf of a company before it is
incorporated, cannot enforce any liabilities arising from such action
against the company.
