We will be discussing promoters in detail and pre incorporation contracts along with its enforceability in light of important case laws and Pakistani legislations.
ABSTRACT
We will be discussing promoters in detail and pre incorporation contracts along with its enforceability in light of important case laws and Pakistani legislations.
Keywords: Promoters, Company, Pre-Incorporation, Contract, Enforceability, General Rule.
PROMOTERS
A promoter is person who is responsible for making a company. Promoter is a person who forms the company that includes its promotional work, finding initial directors and shareholders. Promoter is a person who does so in good faith and has bona fide intention. Promoter is a person who takes necessary steps to form a company. He is the one who enters into the contracts before the incorporation of the company.
The term promoter was defined in the case ‘Twycross vs Grantit was stated in this case that promoter is the one who undertakes to form a company with reference to a given project, and to set it going, and who takes necessary steps to accomplish the purpose.'1
In another caseWhaley Bridge vs Green, Justice Brownestablished that the term promoter is not the term of law but term of business.2
Section 2(50) of Companies Act 2017defines the term promoters as
“promoter” means a person—
a) who is named as a subscriber to the memorandum of association of a company; or
b) who has been named as such in a prospectus; or
c) who has control over affairs of the company, directly or indirectly whether as a shareholder, director or otherwise23
A promoter being involved in the promotion resulting into incorporation of the company doesn't give them a legal position to avoid any personal liability in case of breach of their fiduciary duties. The promoters controls the affairs of the company but they aren't agents of company as an agent cannot exist without existing principal, they are also not trustees as company isn't a beneficiary. Hence, there are certain fiduciary duties of promoters.
1. Not to mislead any investor
2. Not to make any secret profit
3. To disclose any conflicting interest
EXPLANATION
The fiduciary duty of promoter- the promoter must has bona fide intention behind starting the company. Before incorporation of the business the company has no legal existence and the promoter is not the agent of the company but a person who initiate a project so the person known as promoter must have bona fide intention in the company. The promoter is a person who deals with 3rd party before the incorporation of business and fiduciary obligations are duties owed by promoter to 3rd party to act in loyalty in dealings which affect that person. Promoter must not make personal profits form the business of the company. Promoter must work solely for the interest of company. If a promoter makes any secret profit from the company he must disclose it before the board of directors after the company is incorporated. If promoter fails to disclose the hidden fact and profit made than company can bring an action against the promoter for recession, restitutionary claims, and for equitable compensation. If the company knows about the contract after the incorporation of the company and affirms it then no claim can brought regarding this. The same was held in the ‘Erlanger vs New Sombrero Phosphate Co.It was held that Erlanger being a promoter of the company has to declare any conflicting interests to the company promoted and cannot make any secret profits. A promoter who breaches any duty to the company and fails to disclose any conflicting interest in the company would be held liable'.4
The promoter must declare the secret profit tothe independent board of directors, Articles of Association, Prospectus or to existing and intended shareholders.
The promoter is liable to disclose all the secret interests in any transaction he has made throughout the process of incorporation of a company. Such disclosures should be made in full to the company. The promoter is also required to disclose any conflicting interest in the transaction or related to company to the third party, investors and to the company as well.
InGluckstein vs. Barnesa group of persons bought an amphitheater and sold it to a company they were promoting, hence, they made a secret profit of 20,000 £ and the same wasn't disclosed in the prospectus. It was held that the promoters were liable to pay the secrets profit to the company because the disclosure made wasn't sufficient.5
PRE-INCORPORATION CONTRACTS
These are the contracts signed by promoter on behalf of company before incorporation of the company or commencement of company's business. It is part of process of making a company that its promoter would contract with third party for the purpose of any lease land, equipment that once the company is formed it can begin with its business without any delay.
There is a general rule that the entity not in existence cannot be made party to a contract or the company having no legal existence cannot be a party to the contract.
According to common law, a corporate entity before formation/existence cannot attain the legal status hence doesn't have the contractual rights and other liabilities attached to a well- established and existing corporate entity. The legal status of pre- incorporation contracts is null and void until as for the establishment of legal status of any entity it is necessary that the entity has a valid existence. However, it is part of process of making a company that its promoter would contract with third party, considering it to be part of promotion there lies a liability that may fall on the promoter in case of any breach of fiduciary duty or fraud. The pre-incorporation contracts cannot oblige the company hence excluding the company from any future liability.
Sometimes the question arises here whether the promoter will be held liable or company in case of breach fiduciary duty or any other fraud.
Firstly, following the elements of contract law in order to create a binding agreement both the parties should be in existence to make clear offer and acceptance. General rule is if somebody doesn't exist cannot contract. Secondly, in case of agency a person cannot be an agent of non-existing principal.
[...]
1Twycross vs Grant (1877)- http://www.uniset.ca/other/cs3/2CPD469.html
2Whaley Bridge Calico Printing Co v Green (1880)
3The Companies Act, 2017
4Erlanger vs New Sombrero Phosphate Co.- https://lawcasesummaries.com/knowledge-base/erlanger-v-new- sombrero-phosphate-co-1878-3-app-cas-1218/
5Gluckstein vs. Barnes (1900) AC 240
- Citation du texte
- Ayesha Masood (Auteur), 2019, The Significance of Promoters and Enforcability of Pre-Incorporation Contracts, Munich, GRIN Verlag, https://www.grin.com/document/1353837
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