B.A. LL.B. (Five Years) Sem 6 Company Law 2021 Mar Question Paper with Solutions

For full marks, cover: who a promoter is (section 2(69) of the Companies Act 2013; Twycross v. Grant); his position (a fiduciary, neither agent nor trustee); his duties one by one (disclosure to an independent board or the members, no secret profit, the benefit of what he acquires, a true prospectus, true incorporation documents), with Erlanger; his liabilities one by one (to the company for secret profit, sections 7(5) and 7(6), section 35, section 300, section 340, section 447); pre-incorporation contracts (Kelner v. Baxter; the Specific Relief Act 1963); a table.

Who is a promoter

A promoter is the person who brings a company into being. He conceives the business, gathers the people and money, and gets the company registered. In Twycross v. Grant, (1877) 2 CPD 469, Cockburn CJ 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".

Section 2(69) of the Companies Act 2013 now defines the word. A promoter is a person:

Duties of a promoter

1. To disclose his interest. If he sells his own property to the company, or takes a commission, he must disclose it. The profit is not unlawful in itself. Concealing it is.

2. To disclose to someone able to judge. Disclosure must be made to an independent board of directors, or to the members and intended members, usually through the prospectus. Telling a board he controls is no disclosure at all.

Erlanger v. New Sombrero Phosphate Co., (1878) 3 App Cas 1218, is the leading case. A syndicate headed by Erlanger bought the lease of an island for 55,000 pounds. Through a nominee, it sold the lease to the company it had just formed for 110,000 pounds. The directors were the syndicate's own choice, and the profit was not disclosed to the members. The House of Lords held that promoters stand in a fiduciary position. They must disclose their interest to an independent board or to the members. The company was allowed to rescind the purchase.

3. Not to make a secret profit. A profit made and not disclosed belongs to the company. It must be handed over.

3. Civil liability for the prospectus. Under section 35(1)(c), a promoter is liable to pay compensation to every subscriber who suffered loss by a misleading statement or omission. Section 35(2) gives defences. One is that he withdrew his consent. Another is that he did not know of the issue and gave public notice at once. Under section 35(3), where the prospectus was issued with intent to defraud, he is personally liable without any limit.

4. Criminal liability for the prospectus. Under section 34, a person who authorises the issue of a prospectus containing an untrue or misleading statement is liable under section 447.

5. Public examination. In a winding up by the Tribunal, the Company Liquidator may report fraud in the promotion or formation of the company. The Tribunal may then order the promoter's public examination on oath (section 300).

6. Misfeasance. Section 340 reaches a person who took part in the promotion or formation of the company. He may be ordered to repay or restore money or property. The order covers money he misapplied or retained, or loss caused by his misfeasance or breach of trust. The application must be made within five years.

7. Fraud. Section 447 punishes fraud with imprisonment and fine. Sections 7(5), 7(6) and 34 route into it.

Conclusion. A promoter, defined in section 2(69), forms the company and stands in a fiduciary position towards it. He must disclose his interest to an independent board or the members, and make no secret profit. His statements in the prospectus and incorporation papers must be true. Erlanger lets the company rescind or recover where he fails. The Act adds liability under sections 7(5), 7(6), 34, 35, 300, 340 and 447. On contracts made before incorporation he is personally bound, as Kelner v. Baxter holds, unless the company adopts them under the Specific Relief Act.