Promoters: position, duties and liabilities

1. Who is a promoter

The classic description is Bowen J.'s in Whaley Bridge Calico Printing Co. v. Green (1880): “promoter” is a term not of law but of business, summing up in a single word a number of business operations by which a company is generally brought into existence. Cockburn C.J. in Twycross v. Grant (1877) described a promoter as 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.

The 2013 Act now gives a statutory definition. Under section 2(69) a promoter is a person (a) who has been named as such in a prospectus or identified by the company in its annual return; or (b) who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise; or (c) in accordance with whose advice, directions or instructions the Board is accustomed to act. A person acting merely in a professional capacity is excluded from clause (c), so the solicitor, accountant or valuer who does professional work in the formation is not a promoter.

2. Functions

• Conceiving the business idea and investigating its feasibility.
• Assembling the first members and directors, and securing their consents.
• Settling the name and getting the memorandum and articles drafted.
• Filing the incorporation documents and declarations under section 7.
• Arranging property, finance, bankers, underwriters and, for a public issue, the prospectus.
• Entering into preliminary contracts for the intended company.

3. Fiduciary position and duties

The leading case is Erlanger v. New Sombrero Phosphate Co. (House of Lords, 1878). A syndicate bought a lease of a phosphate island for 55,000 pounds and, through a company it promoted and whose board it nominated, sold it to the company for 110,000 pounds without disclosing the profit to an independent board or to the members. The sale was rescinded. Lord Cairns said that promoters stand in a fiduciary position: they have in their hands the creation and moulding of the company, and must make full disclosure of any interest.

The duties that follow:

• Not to make a secret profit. A promoter may profit from the promotion, but only with full disclosure.
• Disclosure to the right body. Disclosure to a board that is not independent is no disclosure. In Gluckstein v. Barnes (House of Lords, 1900) the promoters bought the Olympia exhibition hall cheaply, sold it to their company at a large profit which they disclosed, but concealed a further profit of 20,000 pounds made by buying charges on the property at a discount. Disclosure to themselves as directors was useless; they had to account to the company for the concealed profit. Disclosure must be to an independent board or to the whole body of members, actual and intended, usually through the prospectus.
• To give the company the benefit of property acquired for it. Property bought after the promoter began acting as such is held for the company and cannot be sold to it at a profit without disclosure.
• Not to misrepresent in the prospectus or other documents.

Remedies of the company. If the duty is broken the company may rescind the contract (if restitution is still possible), or recover the secret profit, or claim damages for breach of fiduciary duty.

4. Statutory liability

• Prospectus. A promoter is liable to pay compensation to every person who subscribed on the faith of a misleading statement in the prospectus (section 35(1)(c)), and is personally liable without limit where the prospectus was issued with intent to defraud (section 35(3)). A promoter who authorised its issue is liable under section 34, which applies the fraud provision in section 447.
• Fraudulent incorporation. Under section 7(6) the promoters, the first directors and the professional who certified compliance are each liable under section 447 if the company was incorporated on false or suppressed information.
• Winding up. In a winding up the Tribunal may examine the conduct of a promoter and order him to repay or restore property and compensate the company for misfeasance or breach of trust (section 340).

5. Pre-incorporation contracts

A company cannot contract before it exists, and after incorporation it cannot ratify a contract made on its behalf before incorporation, because ratification requires a principal in existence when the contract was made: Kelner v. Baxter (1866), where promoters who bought wine for an intended hotel company were held personally liable on the contract. In India the position is modified by the Specific Relief Act, 1963. Section 15(h) allows the company to obtain specific performance of a contract made by its promoters before incorporation for the purposes of the company, if the contract is warranted by the terms of incorporation and the company has accepted it and communicated the acceptance. Section 19(e) allows the other party to enforce such a contract against the company on the same conditions. Otherwise the promoter remains personally liable, and the company must make a fresh contract (novation) if it wants to be bound.

6. Preliminary expenses and remuneration

A promoter has no right to recover from the company the expenses of promotion, or any remuneration for his services, because there was no company to contract with when he incurred them: Re English and Colonial Produce Co. (1906), where a solicitor who prepared the documents and paid the registration fees at the request of the promoters could not recover from the company. In practice the articles authorise the directors to pay the preliminary expenses, and the company usually does. But a provision in the articles is not a contract with the promoter (see Eley v. Positive Government Security Life Assurance, under the articles), so he cannot sue on it.

7. Problem

‘A’, on the instructions of certain gentlemen, prepared the necessary documents and obtained the registration of a company. He paid the registration fee and incidental expenses. The company now refuses to pay him. A wants to sue the company. Advise A.

Issue. Whether a company is liable for expenses incurred on its behalf before incorporation.

Law. Before incorporation the company had no existence and could not contract or authorise anyone; it cannot later ratify a pre-incorporation contract (Kelner v. Baxter). The person who incurs preliminary expenses at the request of promoters cannot recover them from the company (Re English and Colonial Produce Co.). Sections 15(h) and 19(e) of the Specific Relief Act apply only to contracts for the purposes of the company, warranted by its incorporation and accepted by it after incorporation. A clause in the articles authorising payment of preliminary expenses gives an outsider no right to sue (Eley).

Application. A acted on the instructions of the gentlemen who were promoting the company. His contract was with them, not with a company that did not yet exist. The company has not adopted the arrangement after incorporation; it has refused to pay. Nothing suggests a fresh contract after incorporation.

Conclusion. A cannot sue the company. His remedy is against the promoters who instructed him, who are personally liable. He would have a claim against the company only if it entered into a new contract with him after incorporation, or accepted the arrangement in the manner the Specific Relief Act contemplates.

How this is examined

A short note on “Promoter” appeared in both January 2026 and June 2025; June 2025 also set the registration expenses problem above (in Unit II). For the note: definition in section 2(69) with the professional exclusion, the fiduciary position from Erlanger and Gluckstein, statutory liability under sections 34, 35 and 7(6), and two lines on pre-incorporation contracts. For a 10-mark essay on the duties and liabilities of promoters, expand each of those and add the remedies of the company.