A company does not simply come into existence and begin operations. Before incorporation, several foundational steps must be taken to ensure that the company can function properly once registered. These pre-incorporation activities are carried out by individuals known as promoters.
Simply put, a promoter is a person who undertakes the responsibility of forming a company and setting it on the path toward achieving its business objectives. This role goes beyond casual involvement. A promoter is actively engaged in the decision-making and arrangements necessary for the company’s birth.
It is important to distinguish promoters from professionals such as lawyers or accountants who may provide services during the incorporation process. Where such professionals have no interest in the company and merely render advisory services in the ordinary course of their profession, they do not qualify as promoters.
To be regarded as a promoter, a person must demonstrate a genuine interest in the proposed company. This is assessed from the facts, particularly whether the person has taken concrete steps and made decisions essential to the company’s incorporation.
The fiduciary relationship between a promoter and the company does not end immediately upon registration. It continues until two conditions are satisfied. First, the company must be fully incorporated, which occurs upon the issuance of the certificate of incorporation. Second, the company must have raised its working capital, meaning it has secured sufficient funds to meet its short-term operational expenses and liabilities.
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Duties Imposed On Promoters Under The Companies Act
Promoters stand in a fiduciary relationship with the company, and as such, the general duties of fiduciaries under common law apply to them. In addition, the Companies Act, 2019 (Act 992) expressly imposes three key duties on promoters.
Duty to Act in Good Faith
Promoters are required to act in good faith in all dealings on behalf of the company until their fiduciary relationship comes to an end. Acting in good faith entails honesty and loyalty to the company’s interests. A promoter acts in bad faith where their conduct is dishonest or where they place their personal interests above those of the company. Where the company suffers loss as a result, the promoter is liable to compensate the company.
Duty to Account
By virtue of their fiduciary position, promoters are accountable for any property or information received on behalf of the company. Where a promoter derives any benefit from such property or information, full disclosure must be made to the company. In effect, promoters are prohibited from making secret profits.
Duty to Disclose Interest in Transactions
Promoters must disclose all material facts relating to any transaction entered into on behalf of, or with, the company. Transactions entered into by promoters are voidable at the company’s instance unless the company, having been fully informed of all relevant facts, elects to affirm them.
Remedies For Breach Of Duties
Where a promoter fails to act in good faith, fails to account, or fails to make full disclosure, they are in breach of their statutory and fiduciary duties. Act 992 provides several remedies to protect the company.
Recovery of Property and Profits
The company is entitled to recover any property or profit improperly obtained by the promoter. Where confidential information belonging to the company is misused, the company may also restrain the promoter from exploiting such information for personal gain.
Compensation
A promoter is liable to compensate the company for any loss suffered as a result of the breach of duty.
Rescission of Contracts
During the pre-incorporation stage, promoters may enter into contracts on behalf of the proposed company with the intention that these contracts will bind the company after incorporation. Such contracts require ratification to become binding. Where a promoter fails to disclose material information relating to such contracts, the company may elect to rescind them.
Promoters play a critical role in the formation and early life of a company. Their actions during the pre-incorporation stage can significantly influence the company’s future success or failure. Because of this, the law imposes strict fiduciary duties on promoters, requiring honesty, transparency, and accountability.
A clear understanding of these duties and the remedies available for their breach is essential for maintaining trust and integrity in corporate practice. When promoters act responsibly and in good faith, they lay a strong foundation for the sustainability and credibility of the companies they help bring into existence.
