4. Promoters

Who is a promoter

There is no single definition. In Twycross v Grant Cockburn CJ described a promoter as one who undertakes to form a company with reference to a given project, sets it going, and takes the necessary steps to do so. The question is one of fact. People who find directors, buy property for the company, prepare the memorandum or raise capital are usually promoters. A lawyer or accountant who only acts professionally for the promoters is not. Section 49 of the Act deals with persons promoting a company.

The fiduciary duty

Section 50 provides that a promoter stands in a fiduciary relationship to the company. He must act in good faith and must not make a secret profit out of the promotion.

Disclosure to an independent board: a promoter who sells his own property to the company must disclose his interest and his profit. In Erlanger v New Sombrero Phosphate the House of Lords held that disclosure to a board the promoter controls is not enough. It must be to an independent board or to the members as a whole.

Hidden profits: in Gluckstein v Barnes the promoters disclosed part of their profit but hid a further profit made by buying up charges on the property cheaply. They had to account for the hidden profit. Telling themselves, as directors, was not disclosure to the company.

Remedies against a promoter

Rescission: the company may rescind a contract with a promoter who did not disclose his interest, if it acts in time and the parties can be restored to their former positions, as in Erlanger.

Account of profits: the promoter must hand over the secret profit, as in Gluckstein v Barnes.

Compensation: the company can recover its loss caused by the breach of duty.

Promoters' pay and expenses

A promoter has no automatic right to be paid for his work or his expenses, because the company did not exist when he did the work and could not have agreed to pay. In Re English and Colonial Produce Co a solicitor who did the preliminary legal work could not prove for his costs in the winding up, though the company had used his work. The articles may allow the directors to pay promoters, and the company may agree after formation to pay, but full disclosure is still needed.