To: Seth From: Your Legal Writing Assistant Date: 25 May 2024 Subject: Advice on the Role and Duties of a Company Promoter
This advice note addresses the questions you have raised concerning your role as a promoter for the new company being formed by Frank and Evans. The advice is structured into three parts as requested: defining a promoter, outlining the duties owed, and explaining the remedies for a breach of those duties.
i. Who is a Promoter?
The term ‘promoter’ lacks a precise statutory definition in the Companies Act 2006. Its meaning has been established through case law over many years. A classic judicial description was provided in the case of Twycross v Grant (1877), where Cockburn CJ stated a promoter is "one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose".
In practical terms, this means a promoter is anyone who is actively involved in the formation of a company. This could involve activities such as:
- Finding initial investors or directors.
- Negotiating preliminary agreements on behalf of the proposed company.
- Preparing the necessary company registration documents, such as the memorandum and articles of association.
- Raising finance and acquiring assets for the company.
However, it is important to note that a person is judged to be a promoter by their actions, not their title. Conversely, not everyone involved in the company's formation is a promoter. For instance, individuals like solicitors or accountants who are instructed to perform professional services in their expert capacity are not typically considered promoters (Re Great Wheal Polgooth Co Ltd (1883)). For you, Seth, because you have been specifically asked by Frank and Evans to help form the company and have agreed, you will be considered a promoter.
ii. What are the Duties Owed by a Promoter?
As a promoter, you will be in a fiduciary relationship with the company you are helping to form. A fiduciary relationship is one of trust and confidence, which imposes significant duties upon you to act in the company’s best interests. Your main duties are as follows:
1. Duty not to make a secret profit: You must not make any undisclosed personal profit from your position as a promoter. For example, if you were to sell property you own to the new company, you must not do so at an inflated price to make a profit without the company’s knowledge and consent.
2. Duty to disclose any personal interest: Arising from the duty above, you must disclose the full extent and nature of any personal interest you have in any transaction with the company. This disclosure must be full and frank. The case of Erlanger v New Sombrero Phosphate Co (1878) established that for disclosure to be effective, it must be made to either an independent board of directors or to all the members of the company (the shareholders). It is not sufficient to make a disclosure to a board that is composed of other promoters or individuals under your influence, as was shown in Gluckstein v Barnes [1900]. In that case, the promoters disclosed a profit to a board they controlled, which the courts held was not a proper disclosure.
These duties are owed to the company itself. Although the company does not exist at the time you are carrying out your promotional activities, the duties crystallise and become enforceable by the company once it is incorporated.
iii. Remedies Available for Breach of Duty
If a promoter breaches their fiduciary duties, the company has several remedies available to it once it has been formed. The main remedies are:
1. Rescission: The company may choose to rescind (i.e., cancel) the contract that is the subject of the breach. For example, if you sold your own property to the company without full disclosure, the company can return the property to you and demand the return of the purchase price (Erlanger v New Sombrero Phosphate Co (1878)). However, the right to rescind may be lost if the company waits too long to take action, if it has done something to affirm the contract despite knowing of the breach, or if it is impossible to restore both parties to their original positions.
2. Account of Profits: The company can require the promoter to account for and pay over any secret profit that they have made. This remedy forces you to give up the unauthorised profit, even if the company itself has suffered no loss. This was the remedy ordered in Gluckstein v Barnes [1900], where the promoters were forced to repay the secret profit they had made on the sale of a property to the company.
3. Damages: The company can sue the promoter for damages for breach of fiduciary duty or for negligence. This would be to compensate the company for any loss it has suffered as a result of the promoter's actions.
In summary, the role of a promoter carries significant legal responsibilities. You must act honestly, in the company's best interests, and be transparent about any personal gains or conflicts of interest.
References
Dignam, A. and Lowry, J. (2020) Company Law. 11th edn. Oxford University Press.
Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218
Gluckstein v Barnes [1900] AC 240
Re Great Wheal Polgooth Co Ltd (1883) 53 LJ Ch 42
Twycross v Grant (1877) 2 CPD 469
