The relationship between the Company and the promoter is a fiduciary relationship. Therefore, the promoter’s relationship with the company is neither that of the trustee and beneficiary, nor that of the principal and agent. The promoter will be held personally responsible for any misstatement, or error in the prospectus, if made by the promoter. He/she shall be called guilty of all criminal acts.
Lord Cairns explained the legal position of the promoter as follows: The promoter is, in my opinion, undoubtedly in a fiduciary position. He/she have the creation and the molding in his/her hands. He/she have the power to define how and when in what share, and the supervision of the company must begin to exist and begin to act as a commercial company.
The promoter’s fiduciary relationship was confirmed in Lagunas Nitrate Co. vs. Lagunas Syndicate, 1899 in which the Court ruled that the promoter occupies a fiduciary position in relation to the company he/she is promoting. He/she is neither agent nor trustee of the company because the company before its incorporation has no legal existence.
The fiduciary relationship of the promoter gives rise to certain consequences. Promoter is subject to a legal obligation with regard to the following matters: –
- He/she should not derive any secret profit from promoting the business.
- He/she must disclose all relevant facts to the company, including any profit made and his/her personal interest in the transaction with the company.
In accordance with Section 26 of the Companies Act 2013, the promoter’s profit must be disclosed in the prospectus itself. Disclosure must also be made of any interest of the promoter in the promotion of the company or of any property acquired or proposed to be acquired by the company during the preceding two years. The recourse for non-disclosure in such cases is that the company can rescind the contract with the promoter.
According to Section 340 of the Companies Act 2013, where during the winding up of company, it appears that a promoter who participated in the promotion or formation of the company has misapplied, misused or kept with him/her – the capital or property of the company, the Court may order the guilty promoter to reimburse or return the money or property of the company or to pay an amount to the assets of the company as compensation that the Court may deem fair and reasonable.