PROMOTERS & PREINCORPERATION

Erlanger v New Sombrero Phosphate Co

Mr E set up a syndicate, which bought an island for £55,000. This island was said to
have phosphate mines, and Mr E set up a company to take over the island and its
mines from the syndicate. 5 people were named as directors and subscribers (had first
shares): 2 abroad, 2 entirely under Mr E’s control, the fifth member (Mr D) was
uninformed. The syndicate sells the island to the company for £110,000; the
transaction was accepted by the 3 directors who weren’t abroad, on behalf of the
company, without any enquiries. A prospectus for shares in the company was issued
which was very favourable regarding the scheme (but the true circumstance was not
disclosed i.e. Mr E’s secret profit). Members of the public by shares in the company,
which subsequently struggles, and the shareholders discover the true circumstances.
The shareholders remove the old directors and replace them. The new directors apply
to the court to have the original sale rescinded.
Held: The court ordered the rescission and said that the promoters should have
appointed independent directors and should have made a full disclosure of the
circumstances.

Gluckstein v Barnes [1900] AC 240

Mr G and 3 others formed a syndicate and bought a property for £120,000, but claimed
they were paying £140,000. § They also promote a company of which they become
the directors and buy the property (for the company) for £180,000. In order to fund the
purchase, the company invited members of the public to buy shares, for which a
prospectus was issued. However, a £40,000 profit was disclosed, whereas the
promoters had actually made an additional £20,000 secret profit. This was not
disclosed to the prospective shareholders but was instead written in with a vague
reference to ‘interim investments. 4 years later the company went into liquidation and
the extra £20,000 was discovered. The liquidator brought an action to recover part of
this amount from Mr G.
Held: The rescission was no longer possible, however, the promoters had to account
to the company for the £20,000 secret profit

RE LEEDS & HANLEY THEATRES OF VARIETIES LTD (1902)

The Court ordered the Promoter to pay damages to the Company. The Court held that
the Promoters had fraudulently omitted to disclose the profit made by t hem on the
sale of the property to the Company. The amount of damages was equivalent to the
amount of profit made by the promoters.
Kelner v Baxter
the promoter in behalf of unformed company accepted an offer of Mr. Kelner to sell
wine, subsequently the company failed to pay Mr. Kelner, and he brought the action
against promoters. Erle CJ found that the principal-agent relationship cannot be in
existence before incorporation, and if the company was not in existence, the principal
of an agent cannot be in existence. He further explain that the company cannot take
the liability of pre-incorporation contract through adoption or ratification; because a
stranger cannot ratify or adopt the contract and company was a stranger because it
was not in existence at the time of formation of contract. So he held that the promoters
are personally liable for the pre-incorporation contract because they are the
consenting party to the contract.

Phonogram Ltd. v. Lane

there was a group of “pop” artists which are included two parties called Brian Chatton
and John McBurnie. They want to form a c ompany called “Fragile Management Ltd.”
Before the company was formed, negotiations took place for financing of the group. It
was to be financed by one of the subsidiaries of big organization called the Hemdale
Group. It was eventually arranged that money should be provided by Phonogram Ltd.
The agreed amount was£6,000. The first installment was paid. But the new company
was never performed. The group never performed under it and the £6,000 was due to
be repaid. However, that amount never repaid. So, Phonogram Ltd tried to discover
who was personally liable to repay the money. Mr.Roland Rennie had negotiated on
behalf of Phonogram Ltd. And Mr. Brian Lane had negotiated on behalf of the new
company which was to be formed. The latter was never registered and this was an
action against the defendant for recovery of the money. 11 That was signed by Mr.
Lane. The money was paid over. According to the accounts, it went into the account
of Jelly Music Ltd, which was one of the subsidiaries of the Hemdale Group which Mr.
Lane was a director. The issue is whether Mr. Lane personally liable or not. Based on
this case, the plaintiff advanced £6,000 to a company which is Jelly Music Ltd under
an agreement with the defendant to provide part of the finance for a company to form
which is Fragile Management. But, the new company was never performed. According
to Section 36(4) of the Companies Act 1985 , “ Where a contract purport to be made
by a company, or by a person as agent for a company, at time when the company has
not been formed, then subject to any agreement to the contrary the contract shall have
effect as a contract entered into by person purporting act for the company or as agent
for it, and he personally liable on the contract accordingly.” The Court was held and
makes decision that Mr. Lane was personally liable for the repayment of the £6,000 if
the contemplated contract with Fragile Management Ltd. was not in the event entered
into. 12 It is due to the general principle of legal status of pre-incorporation of English
common law that is invalid and not enforceable by law. It is because the company
legally cannot make any contract before its incorporation. So, the outsiders cannot
enforce the contact against the company and cannot legally make any contract with
the company before its incorporation. According to this case, the agent which is Mr.
Lane cannot sue the company to repay the payment. Hence, Mr. Lane also cannot
legally make any agreement with the company before its incorporation. As a result, Mr.
Lane was personally liable to that payment