Erlanger v. New Sombrero Phosphate Co. [1878]
Introduction
- This case is related to Section 2(69) which deals with the promoters of a company.
Fact
The appellant along with one 'Thomas Westall' wanted to buy the lease of the island of West Indies, from the official liquidator of the company named "Old Sombrero Ltd." For this purpose, they formed a syndicate and the members of syndicate purchased the lease of the island from the official liquidator for £ 55,000, later on syndicate formed Joint Stock Company to resell this island for £110,000 which might afford them profit.
The director of the company was directly or indirectly connected with members of syndicate. The directors were empowered to adopt and carry into effect the contract for the assignment of the Island of Sombrero.
In the first general meeting, without any inquiry into facts and figures the sell of island was ratified.
After a time the company was wound up and as per the advice of counsel, Committee appointed to investigate the matter of the purchase.
Therefore , After the report shareholders of the company "New Sombrero phosphate Co. Ltd." filed case against against the appellant and demanded for the share of profit from the promoters who had re-sold the island in double amount to the company without disclosing information to them.
Issue
Q. 1. Whether the duty was fulfilled by the promoters in the present case.
Ratio Decidendi
- As per section 2(69) of the company's act: 'promoter' means a person :
(b) who has control over the affairs of the company, directly or indirectly.
(c) in accordance with whose direction or instructions the Board of Director act, except the person who is acting merely in a professional capacity.
' Lord Cairns J' observation
- A promoter stands in a fiduciary position in respect of the company.
- Promoters are the creator and moulder of the company. They have power to define how, when and in what shape company should be in existence.
- Promoters shall provide an executive to the company in the form of Board of Directors which shall be competent and impartial in deciding purchase of the property of the promoter.
- Owner of a property may form a company and sell his property to it but through an independent and impartial Board of Directors.
- If Board of Directors will be very connected with the promoter, than they will become incapable of taking right decision. In the present case, the directors were connected with the syndicate members directly or indirectly, who wished to sell the island to the company.
- It was the duty of the promoters to take care that the contract for the purchase of their property was submitted to the independent director.
- The contract ratified by only 3 out of 5 directors of which two were already in the syndicate, in addition of the solicitor who was also a member of the syndicate.
- Appointment of directors afforded no protection to the company since all, except one, of them were already influenced by the syndicate.
- As per LORD 'O' HAGAN : The Original purchase of island was perfectly legitimate, the object of the purchaser was to sell it again by forming a company by which they might also get profit on the transaction, but the privilege given to them for promoting such a company for such object involves the utmost faith, the complete truthfulness, and a care regard to the protection of the future shareholder.
Judgment
- Promoter failed to realise their fiduciary position and fullfill their duties.
- Therefore the promoter has to share the profit with the shareholder, which has taken by selling island to the company.
- Appeal Dismissed.
