PROMOTERS II

INTRODUCTION

1. OBJECTIVES
2. MAIN CONTENT
3. CONCLUSION
4. SUMMARY
5. TUTOR MARKED ASSIGNMENT
6. REFERENCE/FURTHER READING

INTRODUCTION

From unit 1, we have learnt the meaning of promoters and how it is possible for them to use their position to enrich themselves at the expense of the company. The promoters are also businessmen and are in business to make money, how this can be done is the focus of this unit. The law does not totally foreclose the avenue for making money against the promoters, but in most cases the promoters still refuse to follow the proper legally approved guide and in which case if caught they will be held responsible for their actions. The company also must act in order to be able to hold the promoter responsible and to recover any ill-gotten gains from the erring promoter.

OBJECTIVES

At the end of this unit the student will be able to understand the remedies available to the company and the disclosure by promoters and also how the promoter may recover the legitimate remuneration.

MAIN CONTENT:

 REMEDIES

In Salomon v Salomon, it was held that though the price Salomon got for business was inflated, but the court still held that since the members knew all the facts and acquiesced  there was no fraud or breach of duty committed by Salomon. It therefore follows that disclosure will relieve promoters of liability to the company. The profit thereby made is no longer a secret profit once a full disclosure of all the fact is made to the company.

Where a promoter fails to make the requisite disclosure the principal remedies available to the company are rescission and an accounting of the secret profits. In effect the pertinent question is how can the promoter make an effective disclosure that will effectively absolve him of any wrong doing? The answer becomes necessary because of the interpretation of the court’s decision in the case of Erlanger. From the decision it may be interpreted to mean that at all times, the promoter must provide an independent Board of Directors before disclosure is made, in the case, Lord Cairns in the Erlanger case said:

“if they are doing all this in order that t the company may, as soon as it starts to life, become, through its managing directors, the property of themselves, the promoters, it is in my opinion, incumbent upon the promoters to take care that in forming the company they provide it with an executive, that is to say, with a board of directors, who shall both be aware that the property which they are asked to buy is the property of the promoters, and shall be competent and impartial judges as to whether the purchase ought or ought not to be made.”

However, in the case of Lagunas Nitrate Co. v Lagunas Nitrate Syndicate(18899) 2Ch. 392 in the case a company was formed for the purpose of purchasing property from the syndicate consisting of nitrate works. The company was promoted by the syndicate who became its first directors. Notice was given in the company’s article of the directors’ interest. Two years later after formation, the company brought an action for rescission and damages on the ground of misrepresentation and breach of trust, it was held, that;

• The mere fact that the company did not have an independent board was not sufficient ground for rescission since the company has notice that its directors were also vendors.
• There had been no misrepresentation, where promoters make full disclosure to all members of the company, they are not liable to account for profits made on the formation of the company

(see Lord Lindley at page 425-6)

The law is clear; the disclosure to directors will be enough provided it has an existing board quite independent of the control of the promoters. If there areno such board then disclosure to the shareholders will be enough either in a general meeting or in prospectus (see Lord Davy in Salomon v Salomon(supra) at 57).

A promoter who wishes to escape liability must make sure he discloses to the board of directors totally independent of his own control. In the case of Gluckstein v Barns (1900) AC 240, Lord McNaughton (at p. 249),explained the position of the law, that “disclosure is not the most appropriate word to be used when a person who plays many parts announces to himself in one character what he has done and he is doing in another.” In the case, a syndicate (4 people) bought the Olympia company with the intention of selling it to their company to be formed. They formed the company and were the directors. They sold the property to the company and made two different profits. The prospectus issued only disclosed one of the profits. The company later went into liquidation and the liquidator claimed the latter amount as an undisclosed secret profit, it was held, by the House of Lords, that the syndicate were promoters and as such had a fiduciary duty to disclose all profits made while forming the company. It was not sufficient for the syndicate, as promoters to disclose the profit to the syndicate as directors. Lord Hailsbury was very frank when he said,

It is too absurd to suggest that a disclosure to the parties to this transaction is a disclosure to the company. They were there to do the work of the syndicate, to cheat the shareholders; and this forsooth, is to be treated as a disclosure to the company, when they were really there to hoodwink the shareholders.

The disclosure to directors will be enough provided it has an existing board quite independent of the control of the promoters. Where there is no independent board then disclosure to the shareholders will be enough either in a general meeting or in the prospectus. See Re Leeds & Hanley Theatre of Varieties Ltd (1902) 2 Ch. 809.

Promoters are not regarded as agents or trustees of the company in all cases. Where the promoter sells his own property to the company, he is not bound to disclose the price he paid for it. Re Cape Breton CO. (1885) Ch. 1795, contrast with the decision of Jessel MR in the case of Erlanger New Sombrero Phosphate CO (supra). The law is however clearly stated in the Re Cape Breton case, that a promoter is not bound to disclose the price he paid for his property, all he needs to do is to say he is the owner. See also,Omnium Electric Palaces Ltd v Baines (1914) 1 Ch. 332.

Some cases do suggest that only in clear cases in which the promoter actually sells his property to the company that he keeps his profit. The court tries to draw a distinction between a case where a vendor acts on behalf of the company by buying and selling a property to it, from a case where he sells his property to the company, property which he acquired without anticipating that the company will buy it from him.

EFFECT OF BREACH OF DUTY

The promoter must make a full disclosure of all the material facts, to the Board of Directors or the general meeting as the case may be, half disclosure will not avail him. Glusckstein v Barnes. (supra) where the promoter fails to make the appropriate disclosure the principal remedies available to the company are rescission and an account for profits. The effect of the breach of duty by the promoter is to render the contract voidable at the option of the company. See Erlanger v New Sanbrero Phosphate Co. supra. The company may decide affirm or rescind the contract.

Rescission will only be available to the company if it acts promptly without delay, as delay may mean that the company wishes to affirm the contract, or if the company shows an intention to affirm the contract, rescission will not be available. See Re Cape Breton supra. Since the contract is voidable and not void, it means that the contract is a valid contract until set aside. Where a third party acquires interest in the contract subject matter before it is rescindeded rescission may no longer be available.

Delay in rescinding the contract will operate as a bar to the remedy. See Long v Lloyd (1958) 1 WLR 753.

Leaf v Internatioanl Galleries (1950) 2 KB 86, Re Leeds and Hanley Theatres ofVarieties Ltd (supra). It is also important to note that rescission will also not be available remedy if restitutio in integrum, that is, it must be possible to restore the parties substantially to their original position, unless, due to the fault of the promoter, this possibility has been lost.Lagunas Nitrate Co. v Lagunas Nitrate Syndicate (supra).In Erlanger, Lord Blackburn observed that it has always been the practice of the court of equity to grant relief by way of rescission whenever by the exercise of its powers it can do justice by directing accounts, awarding equitable compensation and making allowances, even though it cannot restore the parties exactly to the position they were in before the contract. While agreeing with the equitable relief that may be offered to the company where rescission is no longer possible, Lord Porter explained further that it is actually possible for the company to recover damages for negligence when he said in Jacobins Marler Estate Ltd v Marler (1930) 35 PC 107,

“if the transaction to one of sale by the agent to P, the principal must in order to avoid it, be able to restore the agent to his original position. If he has resold the property, or cannot restore it to the agent in its original condition, the right to avoid the transaction will as a general rule, have been lost. But even so, it does not follow that the principal is without remedy. He may be able to recover damages from the agent for negligence in the performance of his duty. In such a case, the measure of damages will be the principal loss in the whole transaction, if he has suffered no such loss, there can be no damages. The equities governing, the relationship and in particular to that which exists between a company promoter and the company which results from the promoters and its shareholders.”

LEGISLATIVE INTERVENTION

Section 61(1) of CAMA 1990 confirms the fiduciary position of the promoter to the company and the section merely declared the common law position as explained above. However, section 62(2) states as follows:

‘A promoter who acquired any property or information in circumstances in which it was his duty as a fiduciary to acquire it on behalf of the company shall account to the company for such a property and for any profit which he may have made from the use of such property or information.’

The section does not cover circumstances when the promoter sells his own property to the company. In cases where the promoter acted as agent of the vendor of property he may argue that in so far as he did not acquire any property or information but merely acted as an agent the section may not be applicable in such a case. Also, the section may not be applicable in case of inflation of incorporation expenses by the promoter. We submit therefore, that the section is too narrow and does not cover all the issues already covered under the common law.

The section 62(3) also allows the company to rescinded any transaction entered into on its behalf by the promoter unless all the material facts known to the promoter is fully disclosed. Ratification can be ;

• by the company’s board of directors independent of the promoter,
• by all the members of the company, or
• by the company at a general meeting at which neither the promoter nor the holders of any shares in which he is beneficially interested shall vote on the resolution to enter into or ratify that transaction

The difference between (b) and (c) above is not too clear or fundamental. This is because members of the company are not different from company at general meeting, if the proviso to the third option is not available in the second option, it follows that there could be possibility of the promoter voting where he has disclosed to the members of the company. Disclosure to the members of the company could be in the prospectus and this may not need any voting or ratification, in so far as the disclosure is full.

Time does not run against the liability of the promoter (see section 62(4), we must note that where rescission may not be available as we discussed above, the section 62, may not be applicable as well.

REMUNERATION

A promoter is not entitled to recover any remuneration for his services from the company unless there is a valid contract to that effect between the promoter and company. In fact, the promoter is not entitled to recover promotion expenses from the company. See Re English & Colonial Produce Co. Ltd. (1900) 2 Ch. 439. Until the company is formed it cannot enter into any contract. see Kelner v Baxter supra.

A promoter being a business person will certainly not be contented with merely recovering promotion expenses, but also interested in making handsome profits from the promotion, this is not unreasonable, this is due to the extensive services being rendered by the promoter. Lord Hatherly explained the position thus;

“the services of a promoter are very peculiar; great skill, energy and ingenuity may be employed in constructing a plan and in bringing it out to the best advantages”” see Touche v Metropolitan Railway Warehousing Co. (1871) L.R 6 Ch. App 671 at 676

It is perfectly normal for the promoter to be properly rewarded for his services, provided he makes a full disclosure of all material facts of the contract.

CONCLUSION

The position of the promoter seems to be precarious. The company until it is incorporated cannot contract with anyone neither can it enter into any binding agreement with third parties. The promoter comes in to effect all the preliminary contracts and later submits the expenses to the company to be reimbursed. The problem is, he is at the mercy of the directors, who may decide not to ratify the contract. Upon full disclosure he is entitled to be paid all preliminary expenses, but if he is not paid he continues to be personally liable to third parties. While it is possible for the company to benefit from the preliminary contacts, it will be unconscionable for them to refuse to ratify the contract, and the law ought to state clearly that in cases where the company had benefited from the contract the company must ratify the contract or the act of benefiting should be tantamount to ratification.

SUMMARY

The promoter can only escape liability by making full discourse of all material facts  of all preliminary contracts entered into on behalf of the company. The company on being aware of any anomaly in the promotion may rescinded the contract and demand for their money if they had invested any money, or refuse to honor the contract, in which case, the promoter will be personally liable. Rescission must be done immediately the company becomes aware of the anomaly and must not delay, if not rescission will no longer be possible. Where a third party bona fide without notice acquires interest in the contract, the company cannot rescind and where restitutio inintegrum has become impossible, the company can no longer rescind. The company may also claim for damages, or recover any secrete profit made by the promoter. Upon full disclosure (see section 62) the company may then ratify the contract and before which the promoter continues to be personally liable.

TUTOR MARKED ASSIGNMENT

Discuss the current position of the law on duties of promoters, and how a promoter may recover his promotion expenses.

REFERENCES/FURTHER READING

1. Joseph Gold (1943) ‘Liability of Promoters for Secret Profit in English Law, 1943, 5 Toronto L.J 21
2. Joseph Gross, 1970, Who is a Promoter, 1970, 86 LQR