There is a process and several stages when forming a company and the first stage is the

formation. A person called promoter conceives the idea of carrying on a business. For the
incorporation of a company various formalities are required to be carried out. The promoters
carries out these functions and bring the company into existence. A promoter conceptualizes
the idea of a company and the purpose of it's formation. A promoter may be individual,
syndicate, association, partner and or company. It is the promoter who undertakes, does and
goes through all the necessary and incidental requirements keeping in view the object of a
proposed company in order to bringing into existence as such incorporated company.

A Promoter is a person who is involved in the promotion of a company, does all necessary
preliminary work, incidental to the formation or promotion of the company.

According to Zimbabwe Companies and Other Entities Act Chapter 24.31 Section 2 “promoter”,
in relation to a prospectus, means any person who is a party to the preparation of the
prospectus but does not include a person who acts in a professional capacity for persons
engaged in procuring the formation of a company;

Legal Position of a Promoter

A promoter is neither an agent of, nor a trustee for, the company because it is not in existence.
But he occupies a fiduciary position in relation to the company and therefore requires to make
full disclosure of the relevant facts, including any profit made by him as held by Lord Cairns in
Erlanger v. New Sombrero Phosphate Co. (39 LT 269).

Promoters have been described to be in a fiduciary relationship that is relationship of trust and
confidence. This relationship of trust and confidence requires the Promoter to make a full
disclosure of all material facts relating to the formation of the company.

Duties of the Promoter

Duty Not To Make Secret Profits

Promoter should not make any secret profit at the expense of the company he promotes,
without the knowledge and consent of the company and if he does so, the company can
compel him to account for it. The commonest way in which professional promoters used to
make a secret profit was by purchasing property or business themselves and reselling it to the
company at an enhanced price. Promoters may obtain secret profits by other methods than
reselling property to company. For example, the vendor may agree to pay a share of profit to
the promoter. A promoter is not forbidden to make profit but to make a secret profit. He may
make a profit out of promotion with the consent of the company, in the same way as an agent
may retain a profit obtained through his agency with his principal’s consent. The principle is
that the promoter must be honest with his company and the shareholders, both present and in
the future.

Case: Gluckstein v. Barnes (1900)

Facts

In this case, a syndicate of persons was formed to buy a property called ‘Olympia’ and re-sell
this ‘Olympia’ to a company to be formed for the purpose. The syndicate first bought the
debentures of the old Olympia Company at a discount. Then they bought the company itself for
£ 1,40,000. Out of this money provided by themselves, the debentures were repaid in full and a
profit of £ 20,000 made thereon. They promoted a new company and sold Olympia to it for £
1,80,000. The profit of £ 40,000 was revealed in the prospectus but not the profit of £ 20,000.

Held

Profit of £ 20,000 was a secret profit and the promoters of the company would be bound to pay
it to the company because the disclosure of the profit by themselves in the capacity of directors
of the purchasing company was not sufficient.

Duty to Disclose All Relevant Facts

In keeping with his fiduciary capacity, a promoter is bound to disclose to the company all
relevant facts including any profit made from the sale of his own property to the company and
his personal interest in a transaction with the company. The Promoter must bear in mind that
while making a disclosure, he must make the full and complete disclosure. If he contracts to sell
his own property to the company without making a full disclosure, the company may either
repudiate the contract or affirm the contract and recover the profits made by the promoter.
The well-settled general rule is that promoters of a corporation must act in the utmost good
faith in dealing on behalf of and with the corporation. If they undertake to sell property to the
corporation, and in doing so obtain a secret profit, it is a breach of trust and a fraud on the
corporation. For such conduct, promoters are liable to the corporation, either at law or equity
according to the circumstances of the case. The corporation may recover damages at law for
the fraud, or in a proper case may rescind the transaction and recover what it has parted with.

Example

‘A’ was the owner of some arid land. He and some of his friends, decided to form a company to
manufacture microchips. They appointed the first directors of the company and ‘A’ sold his own
land to the company at a price higher than the actual valuation of the land. When the company
was formed, the purchase agreement of land was approved at the meeting of the shareholders
but the fact of A’s ownership and the profit made by him were not disclosed at the meeting.
Subsequently, when the company went into liquidation, the liquidator filed a suit against ‘A’ to
recover the profits made by him in the sale of land. You would observe that in this case ‘A’ had
defaulted in his duty to make full disclosure of all material facts and had made a secret profit
out of promotion. As there was no disclosure by the promoters of the profit they were making,
the company is entitled to rescind the contact. ‘A’ could have retained the profits made by him if
he had made a full disclosure to the directors of the company, all the relevant facts of the
transaction including his personal interest and the profit made.

Duty To give the benefit of negotiations to the company

The promoter must pass on to the company, the benefit of any negotiation or agreement that
he carried in his capacity of a promoter. For example, when he hasnegotiated a certain price for
some land for the company, he must sell the property to the company at the negotiated price.
If he charges a price higher than the negotiated price, the company may rescind the contract on
discovering the truth of the matter. If, due to some reason, the contract could not be rescinded,
the company is entitled to claim damages from the promoters and the amount of damages shall
be equal to the amount of profits made by promoters. However, it should be remembered that
secret profits on the sale of property can be recovered from the promoter only when the
property was bought and sold to the company while he was acting as a promoter. The
promoter must act honestly and diligently to escape liability with respect to dealing with the
future company and the outsiders.

Duty to promote future allottees

The promoters stand in a fiduciary position towards the company. It does not mean that they
stand in such relation only to the company but they also stand in this position to the future
allottees of shares. The promoters must ensure that the prospectus issued at his instance
contains all material facts and particulars and does not contain any misstatements.

Duty of Utmost good faith

The Promoter must act with utmost good faith and disclose all relevant information related to
the promotion and incorporation of the company. If he does not do this he will be breaking the
relationship of trust and that will lead to breach of the company.

Duty to act with reasonable care

Promoters are expected to exercise reasonable care and diligence in managing the affairs of the
company during the promotion stage.

Duty to avoid conflict of interest

Promoters must avoid conflict of interest and refrain from taking advantage of their position for
personal gain at the expense of the company.

Remedies for Breach of Duty

Rescission of the contract

The company may on learning of the secret profit, rescind the contract entered into by the
promoter to make the said profit. This must be exercised on normal contractual principles, that
is to say, the company must have done nothing to show an intention to ratify the agreement
after finding breach involving non-disclosure or misrepresentation.

To Recover Secret Profit

The company may require the promoter to refund the amount of secret profit. If a promoter
makes a secret profit or does not disclose any profit made, the company has a remedy against
him. This remedy varies according to the circumstances which may be divided into the following
tow situations:

(A) Where the promoter was not in a fiduciary position when he acquired the property but only
when he sold it to the Company: If the property on which the profit was made was acquired
before the promoter became promoter, there can be no claim for the recovery of the profit as
such. (Re Ambrose Lake Tin & Copper Co. [1880] 14 Ch. D 390) Thus if a person acquires
properties or had it before he takes any active steps in the promotion of a company and sells it
to the company at a profit, he is entitled to retain that profit. Here the promoter, as in
Solomon’s case must have had the property for a certain length of time. He can hardly be said
to be in a fiduciary relation to the company.
(B) Where the promoter was in a fiduciary position when he acquired the property and when he
sold it to thecompany: This may happen in any of the following circumstances:
(i) Where the promoter bought property with a view to selling it to the company which he
intends to promote.
(ii) Where the promoter resells to the company at an increased price, the property which he
purchased after he commenced the promotional activities.

(iii) Where a person is a promoter for acquiring the property for the company in the capacity of
an agent.

Suit for breach of duty

The company may sue the promoter for misfeasance, as the promoter, by making the secret
profit, has defaulted in his duty towards the company. Where the above remedies would be
inappropriate, say, where the property has been altered so as to render rescission impossible
and the promoter has already received the inflated price, the company may sue for
misfeasance ( breach of duty to disclose).The measure of damages in such a situation will be
the difference between the market value of the property and the contract price.

Damages

The company or its shareholders can seek financial compensation for any losses suffered as a
result of the promoter's breach of duty, including any financial harm or damages caused by the
wrongful actions of the Promoter. This is described as equitable compensation for the breach of
duty.

Specific Performance

In certain cases, the company may seek a court order for specific performance, compelling the
Promoter to fulfill their obligations or to take corrective actions to remedy the breach.

Injunction

The company may seek an injunction to prevent the Promoter from engaging in further actions
that breach their duties or prevent further harm to the company's interest.

In conclusion, a Promoter owes to the company a number of duties to fulfill which includes the
utmost good faith. The Promoter must not break the relationship of trust. So that is the
Promoter is in a fiduciary relation with the company he/she promotes.
References:

COMPANIES AND OTHER BUSINESS ENTITIES ACT [CHAPTER 24:31]

Legal Position of a Promoter by RANVIJAY SINGH ASS.PROFESSOR(GUEST FACULTY), FACULTY

OF LAW UNIVERSITY OF LUCKNOW.

THE INSTITUTE OF COMPANY SECRETARIES OF INDIA COMPANY LAW

Chartered Secretary : ICSI, New Delhi

Student Company Secretary : ICSI, New Delhi