LEGAL POSITION OF THE PROMOTERS

Situation I-
Mr E was a banker who purchased and island containing phosphate mines
for 55,000 pounds. In order to obtain profit on resale, he formed a company,
New Sombrero Phosphate Co. The objective of the company was to purchase
the lease of an island and work in mining business.
Mr E was named as the promoter and he named 5 directors who were under
the Article of association, empowered to adopt and to carry into effect the
contract for the purchase by the company of the island. Out of 5 directors, 2
directors were abroad and remaining 3 directors were under the complete
control of Mr E.
The directors purchased the island for the company at a price of 1,10,000
pounds. The prospectus of the company disclosed the purchase amount and
nothing more than that. At an ordinary general meeting, the shareholders
raised objections about this purchase and the matter was therefore put
under investigation.

Ques: Whether Mr. E is liable to the shareholders of the company? If Yes, how?

Case: Emile Erlanger v. New Sombrero Phosphate Co. 1940

Lord Cairns in the case of Emile Erlanger v. New Sombrero Phosphate Co. 1940
correctly stated that the promoters of s company stand undoubtedly in a fiduciary
relation with the company they have in their hand’s the creation and moulding of
a company, they have the power of defining how, when and under what
supervision the company shall come into existence and starts its trading business.
The court held that a promoter is not prevented from selling his own property to
the company but when he does so, he is bound to take care that he sells it to the
company through the medium of board of directors who can exercise independent
and intelligent judgement on the transaction and the promoters in no case shall
make secret profits in the name of the company, therefore the company was
authorised to rescind the contract and recovered the amount.
Situation II

Mr A and Mr B originated the scheme for the formation of an

Infrastructural company, has the memorandum and articles prepared,
executed and registered, and appointed the first directors, settled the terms
and made arrangements for advertising and circulating the prospectus and
for placing the capital.
Mr A or Mr B did not became signatory to the MOA neither they took the
control of the company as Directors. They were engaged in the pre-
incorporation stage.
After incorporation of the company, it was found that the capital was raised
by advertising false statements during the time of floating the company.

Whether Mr A and Mr B can be held liable after incorporation, if they were not
the directors subsequently?

Case: Probir Kumar Misra vs Ramani Ramaswamy SC 2009

It is well known that the promoters of the Company, who act before the
incorporation of the legal person, need not necessarily be either a signatory of
the Memorandum and Articles of Association or shareholder or the Director of
the Company. The promoter, who is called as a "midwife" of the business as
coined by Henn and Alexander in Law of Corporations, has not been defined
under the provisions of the Act. Nevertheless, before the legal person has come
into existence, it is the promoter who does the major role for the purpose of
bringing the corporate person into existence like proposing the objects of the
company to be incorporated, arranging finance, formation of the original scheme,
making arrangement to get the company registered, preparing prospectus,
Memorandum and Articles of Association, etc., which are very crucial for the
company to come into existence.
In fact, they perform vital functions to bring out a corporate person and are made
liable to the Company as well as the third parties in respect of their conduct and
contracts entered by them during pre-incorporation stage including the statement
in prospectus. Law is clear that while the company which has come into existence
is not bound by the conduct of the Promoter, at the same time it is entitled to
make claim against such promoter in case it was subsequently found that the
conduct of the promoter was detrimental to the interest of the company
incorporated on the basis of principles of breach of trust.
Although not an agent of the company nor a trustee for it before its formation, the
old familiar principles of the law of agency and of trusteeship have been extended,
and very properly extended, to meet such cases; and using the word "promoter"
to describe a person acting as James Bird did, it is perfectly well settled that a
promoter of a company is accountable to it for all moneys secretly obtained by
him from it just as if the relationship of principal and agent or of the trustee and
cestui que trust had really existed between them and the company when the
money was so obtained.