Promoter Positions

10/07/2020 0 By indiafreenotes

Position of the promoter is fiduciary concerning the company which being the promotes his position is quasi legal. A promoter is neither a trustee nor an agent of the company which he promotes because there is no trust or principal in existence at the time of his efforts. But certain fiduciary duties, like an agent, have been imposed on him under the Companies Act. As such he is said to be in & fiduciary position (a position full of trust and confidence) towards the company and the original allottee of shares. Consequently, a promoter must make full disclosure of the relevant facts, including any profit made.

He must not make any secret profits out of the transactions he makes on behalf of the company. It is to be observed that it is not the profit made by the promoter which the law forbids, but the non-disclosure of it. If full disclosure is made to an independent Board of Directors or to the shareholders as a body (and not to a selected few), the profit is permissible. A promoter vendor cannot evade his liability of disclosure of profits by disclosing to a Board of Directors who is mere nominees of his own, or in his pay.

A good illustration on the point is to be found in Gluckstein vs. Barnes. In this case, a syndicate of persons was formed to purchase the Olympia Company and to promote and register a company to which the Olympia property was to be resold. At that time the Olympia Company was in a bad shape. The syndicate first bought the debentures of the Olympia Company at a discount. Then they brought the Company for £ 1,40,000. Out of this money, provided by them, the debentures were repaid in full and a profit of £ 20,000 was 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. It was held that the profit of £ 20,000 was a secret profit made by the syndicate as promoters of the company, and they were bound to pay it to the company which was at that time in liquidation. On behalf of the syndicate it was argued that they had in fact made a proper disclosure, but it was turned down on the plea that disclosure made by them in the capacity of vendors to themselves in the capacity of directors of the purchasing company was not sufficient. The disclosure ought to be to an independent Board or to all shareholders by means of a prospectus.

Prior to incorporation of the company

Sometimes, contracts are made on behalf of a company even before it is duly incorporated. But no contract can be bind a company even before it becomes capable of contracting by incorporations. So, a pre-incorporation contract is a contract entered into by a company before it is incorporated, which is obviously not possible. Ratification of a pre-incorporation contract is not possible since ratification acts retrospectively. A person cannot entered into a contract on behalf of a company before the company incorporated or born or came into existence. However, it may be necessary to bind an outsider with a contract before the company is incorporated. Hence, the need for pre-incorporation contract.

The true legal position in respect of pre-incorporation contracts may be discussed under the following two heads:-

  • Position before 1963 (i.e., before passing of Specific Relief Act, 1963), and
  • Position since 1963.

Position before 1963

A pre-incorporation contract never binds a company since a person (legal or juristic cannot contract before his or its existence and a company before incorporation has no legal existence. Another reason is that promoters are proverbially profuse in their promises and if the corporation were to be bound by them, it would be subject to many unknown, unjust and heavy obligations).

Even where there is a request purported to enforce such a contract, the company cannot be found because ratification is not possible as the ostensible principal did not exist at the time the contract was made. In re English and colonial Produce Company case, a solicitor was engaged to prepare the necessary documents and obtain the registration of a company. He paid the registration fee and incurred the certain expenses incidental to registration. It was held in this case that the company was not liable or bound to pay for his services and expenses.

The company is also not entitled to sue on a pre-incorporation contract. As it was held in the case of Natal land and Colonisation Company v. Pauline Colliery Syndicate that the syndicate was not entitled to its claim as it was not in existence when the contract was made and a company cannot obtain the benefit of a pre-incorporation contract in the suit of specific performance. So, fact of this case was that the a ‘N’ company contracted with ‘A’, the nominee of the syndicate company which was not even incorporated, to grant a lease of certain coal mining rights for three years. After the syndicate was registered, it claimed the contracted lease which the company ‘N’ refused.

Position since 1963 (i.e., after passing of the specific relief Act, 1963)

Until the passing of the Specific Relief Act, 1963, in India the promoters found it very difficult to carry out the work of incorporation. Since contracts prior to incorporation were void and also could not be ratified, people hesitated to either supply any goods or services for the cause of incorporation. Promoter also felt shy of accepting personal responsibility. The Specific Relief Act, 1963 came as a relief to the promoters.

The specific relief Act provides under the following sections:

Section 15(h) and 19(e) of the Specific Relief Act provides as follows:

  • The contract should have been entered into by the promoter for the purpose of the company.
  • The terms of incorporation should warrant should warrant such contract.
  • The company should accept the contract after incorporation.
  • Such acceptance should be communicated to the other party to the contract.

So, preliminary contract enforced by the promoter at the prior to incorporation of the company will be treated as contract between two individuals who are in existence. Thus, the company do have no inherent right concerning ratification of those contract unless company acquiring the power as to the ratification by its memorandum as the subject-matter of contract is not contrary to the object of the company. Hence, the third party cannot sue the company, if any breach of contract has been taken place where such contract entered prior to the incorporation even they for the benefit of the company.

So, question is here that the what is the position of the promoter in relation to preliminary contracts? Or in other words we can say that if the company does not execute a fresh contract incorporation and the contract is not one warranted for the purposes of incorporation of the company, what will be the legal position of the promoter who brings about such a contract? It was observed in the case of Phonogram Limited v. Lane, that although a contract made before a company’s incorporation cannot bind the company, it is not wholly devoid of legal effect, even if all the persons who negotiated the contract are attempting to incorporate a Pop group had obtained financial assistance from a recording company. He was held personally liable to refund the amount on his project failing to materialize.

After incorporation of the company

After company came into existence, a company can ratify or adopt the contract, and this would bound the company and not the promoter. under the Specific Relief Act 1963, section 15(h) and 19(e) promoter can shift his right and responsibility to the company, if it is warranted by the terms of incorporation. If we look on the point of remuneration for promoter concerns, then it is clear that generally the promoter is not entitled for any kind of remuneration, salary and in any manner. However, once the company is incorporated & members of the company is improved then he may be compensated in terms of lump-sum amount. Nothing is entitled to obtained as a legal right he only be compensate on the ground of equity. If the allotment of share is taken place for promoter then automatically promoter becomes a member of the company.