Legal Status of a Promoter, Company Law Notes CBCS Pattern

Legal Status of a Promoter
Company Law Notes CBCS Pattern

Legal Status of a Promoter

While the accurate description of a promoter may be difficult, his legal position is quite clear. 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 making full disclosure of the relevant facts, including any profit made by him.

L.J. Lindley described the position of a promoter as follows:

"Although not an agent for the company, nor a trustee for it before its formation, the old familiar principles of law of agency and of trusteeship have been extended and very properly extended to meet such cases. It is well settled that a promoter of a company is accountable to it for all money secretly obtained by him from it just as the relationship of the principal and agent or the trustee and cestui que trust had really existed between him and the company when the money was obtained".

Similarly, it was observed in Lagunas Nitrate Co. v. Lagunas Syndicate, (1899) 2 Ch. 392 that "promoters" stand in a fiduciary relation to the company they promote and to those persons whom they induce to become shareholders in it".

Considering the above definitions we can say that, A promoter cannot be an agent or trustee for the proposed company (or) company under incorporation. However, the law imposes certain duties, functions, responsibilities and liabilities on a promoter which are “like that of an agent or trustee” of a proposed/under incorporation company. This position of the promoter “like that of an agent or trustee” is called the “fiduciary duties or fiduciary role or fiduciary position” of a promoter. Fiduciary position of the promoter: The promoter stands in a fiduciary relation to the company which he promotes. They are follows:

1. Not to make any profit at the expense of the company: 

The promoter cannot make any profit of the company he promotes either directly (or) indirectly without knowledge and the consent of the company. Similarly he is not allowed to drive any profit from the sale of his own property to the company unless all material facts are disclosed. If any such secrete profits is violated to this rule, the company may compel him to account for and surrender for such profits.

2. To give benefit of negotiations to the company: 

The promoter must give benefit to the company of any contracts (or) negotiations enter into by him in respect of the company. Thus where he purchases some property for the company and he cannot rightfully sell that property to the company, he may sell at a higher price than he gave for it. If he does do, the company may on discovering the fact, the company may have the following remedies against such promoter:

a. Rescind the contract and recover the money if any already paid on the transaction (or)

b. Retain the property, pay the promoter only the cost value and deprive him the profit,(or)

c. Where the above remedies are inappropriate, the company may sue for misfeasance (i.e.., breach of duty to disclose)

3. To make full disclosure of interest and profits: 

If the promoter fails to disclose the relevant facts, the company may sue him for damages for breach of his fiduciary duty and recover them from him any secrete profit. It is important to note that profit is permissible, if full disclosure of the facts is given to the independent Board of director (or) shareholders.

4. Not to make unfair use of the position: 

The promoter must not make an unfair (or) reasonable use of his position and must take care to avoid anything which has the appearance of undue influence (or) fraud.

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