This article discusses the role of promoters when to proceed with company incorporation HK online, what duties should they perform, instructions related to them for higher ups and out of bound areas of operation for promoters their self and remedies for the company to compensate falsehood of promoters.
Background and Introduction
Companies ordinance imposes procedural implications to company incorporations HK when promotors submit documents for Hong Kong online company registration or off online company registration, but common law compels promoters to perform certain duties, to protect company and investors. As per the classic definition:
“Person responsible for setting up company and its business is known as Promoter”
Possibility exists that promoters may abuse their position, sensing importance and sensitivity of its position, and may make ways for their own gain through their Company incorporation HK. Referring to the prosecution of Erlanger v New Sombrero Phosphate Co. it has been established that promoters may abuse their position for their own gain and that would ultimately result in loss for company and investors. Prosecution came up with shocking revelations and narration of this abuse were reported as: Erlanger along with other members of syndicate bought a small island in the West Indies for £55,000 on lease. After acquiring land, they made Evans, an associate of Erlanger, a vendor and made syndicate buy this land for £110,000, though this sale of lease was made with the approval of board but majority of board members was beneficiary of this fraudulent practice and those who were independent directors, they were not informed of the original price of land and that is how, promoters fraudulently made situation in their favour and made loss to company, also many outsiders had investment in the company. Persistent to the further investigation of the contract, Company decided to proceed against the syndicate and later, House of Lords established this very fact that, Promoters had abused their position and selling of lease at such an inflated price proved harmful for the company and so does disadvantageous for the shareholders too. Promoters in this case not only gained much out of the situation, they even sabotaged independence of the board in making decisions for the company and superseded every legality to achieve their fraudulent aims.
Definition and Role of a Promoter
Company ordinance does not clearly define promoter and its role in daily business of the company. Clarity in the understanding of the fact that a person who is to be the promoter, will really contribute in raising funds for company or he/she just taking cover of his/her fraudulent intentions with the establishment of company. Common Law does define the promoter, in the case of Twycross v Grant as:
“Promoter is a person, who undertakes to form a company with reference to given project and to set it going and who takes the necessary steps to accomplish that purpose”.
In another case, Emma Silver Mining Co. Ltd v Lewis and Son, Lindley J gave the ruling that: A person who got up and strived to get the idea executed and starts a company, is a promoter. Not only who took active part in the formation of the company but also those who elevate the company with the understanding that they will also profit from the operations, while leaving things to the others to have their participation in elevation of company, are promoters too. It must be noted that, lawyers and accountants could not be regarded as Promoters as they assisted in their professional capacity to incorporate the company whereas Merchant banks who took part in public floatation of the company could be knows as Promoters. Promoters their self could become the initial directors or shareholders of the company, if they wanted to.
Duties, Promoter is expected to perform
As a fiduciary, promoter must not profit from its position without undertaking its interest in the operations and finances of the company. Such disclosure could be made before independent board, who will then assess its certainty and may or may not allows transaction with the promoter. Where, independent board does not exist, disclosure must be made before the initial members of the company and where there is the provision that funds be raised from the public there should be open disclosure discussed, in the prospectus, for general awareness of these transactions by the promoters. It must be noted that Disclosure must disclose all material facts and nothing be hidden in there as it happened in the case of Gluckstein v Barnes before House of Lords and house of lord established breach of duty from the side of promoters. Promoters, who were the part of syndicate too, were involved in the purchase of property which was subjected to mortgages. They purchased property in two stages, first they purchased the mortgages from the mortgages at below price than the amount of the loans owed by National Agriculture and which were secured by the mortgages and when property was mortgage free, they purchased this freehold title for £140,000 and acquired profit of £20,000. After few months they established a new company and sold this mortgage free property for £180,000 to the company. They did showed amounts of £140,000 and £180,000 but did not mentioned profit of £20,000, on this House of Lords declared this activity as breach of duties as they did not disclose the full profit they benefited from.
Remedies for the breach of duties by the Promoters
Primary remedy for the promoter’s breach of duties is Rescission, under which transaction is voidable at the election of company.
There is another remedy in the form of Account of Profits, here promoter is required to pay the company, sum of amount which he or she secretly profited. In the above-mentioned case, promoters were asked to pay company with £20,000, which they profited with breach of duty. This remedy is technical as establishment of the fact that, promoter was in fact in fiduciary position while this fraudulent activity happened, may sometimes get hard to establish and company may not furnish this remedy of Account of Profit. In, Re Cape Breton, company was not able to prove promoter’s breach of duty as at the time when property was originally purchased, promoter could not be regarded as a trustee as property for promoter’s own account way before the establishment of company, he later established.
Apart from above mentioned remedies, damages could also be filed under common law in the tort of negligence, in case, there has been fraudulent misrepresentation by the promoter inducing the company to contract, but provision of any compensation is duly dependent on circumstances.