Chapter: 4.1 Duties of Promoter in the Role, Rights and Liabilities

Duties of Promoter:

a. Not to make any secret profit at the expenses of the company:
Promoter must not make either directly or indirectly any (secret) profit at the expenses of the company which is being promoted. If any secent nrnfit it: m: ire violation of this rule, the expenses of the company may on discovering it, compels him to account for and surrender such profit. If he sells to the company, stock or shares of his own, at prices in excess of their market value, he may be liable to damage for the excess of the prices received by him over the market value.
Gluckstein v/ s Barner

A syndicate of persons was formed to raise a fund, buy a property called 'Olympia' and resell this 'Olympia' to the company. The syndicate first brought the debentures of the old Olympia company at a discount. Then they brought the company itself for 1,40,000 pounds. Out of this money provided by themselves, the debentures were repaid in full and a profit of 20,000 pounds made thereon. They promoted a new company and sold Olympia to it for 1,80,000. The profit of 40,000 pounds was revealed in the prospectus but not the profit of 20,000 pounds.

Held - profit of 20,000 pounds was a secret profit and the Promoter of the company were bound to pay it to the company because the disclosure of the profit by themselves in the capacity of vendors to themselves in the capacity of directors of the Board of Directors

b. To give benefit of negotiations to the company
The promoter must ensure that any of his acts in pursuance of the company should be beneficial to the Company. The Promoter must transfer toc~m~pany on its incorporation, all the benefits of any negotiation or contracts into which he entered into in respect of the company. Thus, where he purchases some property for the company, he cannot rightfully sell that property to the company at a price higher than he paid for it. If he does so, the company may on discovering it rescind the contract and recover the purchasemoney.

c. To make a full disclosure of interest or profit
The Promoter should make a full disclosure of all the relevant facts including any profit and his personal interest in a transaction with the company. However if a promoter fails to make such disclosure the company may sue him~for damages for breach of his fiduciary duty and recover from him any secret profit received by him on account of such non disclosure.
It is important to note that it is not the profit by the Promoter, which the law forbids, but the nondisclosure of it or the nondisclosure of interest in the transaction. If full disclosure is made, the profit is permissible. The disclosure must be made to an independent board of directors. Where there is no independent board, disclosure must be made to the intended shareholders as a whole.

d. Not to make unfair use of position
Promoter must not make an unfair or unreasonable use of his position and must take care to avoid anything which has the appearance of undue influence or fraud. A Promoter cannot relieve himself of his liability by making provision to that effect in the articles of the company.