Duties and Liabilities of Promoters

Promoters have been described to be in fiduciary relationship (relationship of trust and confidence) with the company. This relationship of trust and confidence requires the promoter to make a full disclosure of all material fact relating to the formation of the company. He 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.

A promoter is not forbidden to make profit but to make secret profit. In Gluckstein v. Barnes, 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 £20,00 made thereon. They promoted a new company and sold Olympia to it for £ 1,80,000. The profit £ 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 were bound to pay it to the company because the disclosure of this profit by themselves in the capacity of vendors to themselves in the capacity of directors of the purchasing company was not sufficient.

Disclosure to be made to whom? In Erlanger v. New Sombrera Phosphate Co., it was held the disclosure should be made to an independent and competent Board of Directors. This is duty is not discharged if he makes the disclosure to the Board of Directors who are mere nominees of his own or are in his pay.

Where it is not possible to constitute an independent Board of Directors, the disclosure should be made to the whole body of persons who are invited to become shareholders and this can be done through the prospectus. Thus, the promoters have to ensure that ‘the real truth is disclosed to those who are induced by the promoters to join the company.’

Liabilities of a promoter are:

  (1) For non-disclosure. In case a promoter fails to make full disclosure at the time the contract was made, the company may either: (i) rescind the contract and recover the purchase price where he sold his own property to the company, or (ii) recover the profit made, even though rescission is not claimed or is impossible, or (iii) claim damages for breach of his fiduciary duty. The measure of damages will be the difference between the market value of the property and the contract price.

  (2) Under the companies act. (i) Promoter is liable to the original allottee of shares for the mis-statements contained in the prospectus. It is clear that his liability does not extend to subsequent allottees. He may also be imprisoned for a term which may extend to 2 years or may be punished with fine upto Rs50,000 for such untrue statements in the prospectus (Ss.62 and 63). (ii) In the course of winding up of the company, on an application made by official Liquidator, the court may make a promoter liable for misfeasance or breach of trust (s.543). The court may also order for the public examination of the promoter (Ss.478 and 519).

Where there are more than one promoter, they are jointly and severally liable and if one of them is sued and pays damages, he is entitled to claim contribution from other or others. However, the death of a promoter does not relieve his estate from liability arising out of abuse of his fiduciary position.