Law of Corporations

In the changing conditions for forming a new company and listing the company in stock exchange for trading its share it has become statutory to show the track record of the trading. To fulfill such conditions promoters are required enter into contracts on behalf of the company.
"A promoter stands in a fiduciary relationship towards his company. A contract made between him and the company is voidable at the company’s option unless he has disclosed all material facts relating to the contract to an independent board, and the company has freely agreed to the terms." [L.S.Sealy, Cases and Materials in Company Law, 2001 (p.35)]
Promoters hold fiduciary relationship towards the company that they form. This fiduciary relationship is the development equity law. Equity law imposes on persons holding in fiduciary relationship a duty of care to protect the interest of such company, and its stakeholders such as shareholders. The law imposes a duty on them to disclose all the material facts of contracts they make to an independent board, and the company accords free acknowledgment of the terms of contract, else such contract is voidable at the option of the company. In such condition promoters are liable for breach of such contract but not the company. Duties of promoters is elaborately described by the court in Erlanger V New Sombreno Phosphate Co2 case.
Erlanger V New Sombreno Phosphate Co2: In this case a syndicate led by Erlanger, a banker formed a company. The syndicate acquired an island for producing phosphate for a lease of 55,000 for the company, which they intended to form, prior to incorporation the new company. The promoters nominated three directors of the newly formed company among them one director was independent of the syndicate and remaining two directors are mere puppets of Erlanger. The promoters have sold the lease of the island for 110,000 at double the price they have acquired. The board of directors ratified the transaction without making any enquiry into the transaction and this transaction was undisclosed. Public have subscribed for shares. Later the phosphate shipment failed. The shareholders have removed the directors nominated by the promoters and new directors were appointed. The new board of directors has brought the proceeding before the court.
The Court has laid down what position the promoters to be placed and what duties they owe to with reference to the company, which they proposed to form. The court said (a) The promoters stand in a fiduciary position, (b) the creation and moulding of the company is in their hands, (c) they are vested with powers of defining (i) how the company starts its existence (ii) when it starts (iii) in what shape it starts (iv) under what supervision it shall start and act as trading corporation. (d) Promoters shall take care while forming the company that they provide board of directors who (i) are aware of the fact that the property, which the company is asked to purchase is of the

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