UNIT 2

PROMOTION OF COMPANIES

The promotion of a company refers to the process of setting up a company and making it ready for incorporation. A promoter is a person who undertakes to form a company, ensures its registration, and makes the necessary arrangements for its business operations to commence. In Nigerian law, the duties and liabilities of promoters are well established, particularly in relation to their fiduciary responsibilities to the company.

WHO IS A PROMOTER?

A promoter is not a term defined explicitly under Nigerian law, but it refers to any individual or entity that is actively involved in the formation of a company. The courts have developed the definition of a promoter in various cases and according to Twycross v Grant (1877), a promoter is someone who takes part in the process of forming the company or in raising capital for it. In Nigeria, this interpretation has been widely accepted. See the case of Twycross v Grant (1877) where the court establishes who a promoter is and their role in the promotion of a company. The role and duties of promoters include the following:

1. Fiduciary duty: Promoters are under a fiduciary duty to the company they are forming. They must act in good faith, avoid conflicts of interest, and not make secret profits. They must disclose any personal interests or benefits they derive from the company’s formation. If a promoter fails in this duty, the company can seek redress. See section 67 of the companies and allied matters act (CAMA) 2020 which requires promoters to disclose any benefit they receive in relation to the company's formation to the board of directors or shareholders.
2. Disclosure of profits: Promoters must disclose to the company any profits made during the promotion. If a promoter sells property to the company at a profit without disclosure, the company can rescind the contract or claim the profits. See the case of Lagunas Nitrate Co v Lagunas Syndicate (1899) where the court emphasizes the requirement of full disclosure of profits by promoters.
3. Duty of care: A promoter must ensure that the steps taken in forming the company are proper and lawful. They must exercise due diligence in their dealings.
4. Avoidance of conflicts of interest: Promoters must not place themselves in a situation where their personal interests conflict with those of the company.

LIABILITIES OF PROMOTERS

If a promoter breaches their fiduciary duties, they may be held liable to the company. They may also face criminal liability under certain sections of the companies and allied matters act (CAMA) if they engage in fraudulent activities. The liabilities of promoters include the following:

1. Liability for misrepresentation: If the promoter makes any misrepresentation or fraudulent statements while forming the company, they can be held liable under both civil and criminal laws.
2. Civil liability: The company can sue a promoter to recover secret profits or for rescission of any contracts if there has been a breach of fiduciary duty.

PRE-INCORPORATION CONTRACTS

Pre-incorporation contracts are agreements made by promoters on behalf of a company that has not yet been legally incorporated. Since a company cannot contract before it comes into existence, pre-incorporation contracts present legal challenges regarding their enforceability. The issue of whether a company is bound by pre-incorporation contracts entered into by its promoters was a contentious one until it was addressed by statute. Under Nigerian law, pre-incorporation contracts are governed by the companies and allied matters act (CAMA) 2020. See section 72, CAMA 2020 which specifically addresses pre-incorporation contracts and states that any contract made by a person on behalf of a company prior to its incorporation shall be subject to ratification by the company after its incorporation and if the company ratifies the contract, it is bound by its terms, as if it were a party from the beginning. This provision implies that promoters who enter into contracts on behalf of the company before it is incorporated are personally liable unless the company ratifies the contract after incorporation. Once ratified, the company assumes liability under the contract.

PERSONAL LIABILITY OF PROMOTERS

If the company does not ratify the pre-incorporation contract, the promoter remains personally liable. This means the promoter must ensure that the company ratifies the contract once it comes into existence to avoid liability. See the case of Kelner v Baxter (1866) where the court held that a promoter is personally liable on a contract entered into before the incorporation of the company. This principle is also applicable in Nigeria.

ENFORCEABILITY OF PRE-INCORPORATION CONTRACTS

A pre-incorporation contract can only become enforceable against the company if it is properly ratified. Until the company ratifies it, the promoter who signed the contract remains liable. The contract becomes voidable if the company chooses not to ratify it. See the case of Kelner v Baxter (1866) where the court established the principle that a promoter is personally liable on contracts entered into on behalf of a non-existent company and also the case of Newborne v Sensolid (1954) where the court highlights the unenforceability of a pre-incorporation contract against a company that has not yet been formed.

LIMITATIONS OF PRE-INCORPORATION CONTRACTS

1. Company ratification: This is where the company must exist at the time of ratification and must have the capacity to enter into the contract.
2. Promoter's risk: This is where until ratification occurs, promoters bear the risk of personal liability. Therefore, promoters must take steps to ensure that the company ratifies the contract as soon as it is incorporated.

CONCLUSION

Both the promotion of companies and pre-incorporation contracts are critical areas of corporate law in Nigeria. Promoters play a pivotal role in the formation of companies and must adhere to their fiduciary duties to avoid personal liability. Pre-incorporation contracts present challenges because they are agreements made before the company is a legal entity, but they can become enforceable once ratified. The companies and allied matters act (CAMA) 2020 provides a statutory framework for addressing the legal issues surrounding these topics, ensuring that the rights and obligations of all parties involved are clearly defined.