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Issue of Capital

Sahara India Real Estate Corporation Limited & Ors. v. Securities Exchange Board of India (2013) 1 SCC 1

SAHARA INDIA REAL ESTATE CORPORATION LIMITED & ORS. V. SEBI OF INDIA

Sahara India Real Estate Corporation Limited & Ors. v. SEBI of India (2013) 1 SCC 1

ISSUE:

  • Whether SEBI has the power to adjudicate and investigate the given matter according to Section 11, 11A, 11B of the SEBI Act and under Section 55A of the Companies Act. Or whether the jurisdiction under Section 55A (c) of the Companies Act is with the Ministry of Corporate Affairs (MCA).
  • Whether the hybrid OFCDs come under the definition of “Securities” within the meaning of the SEBI Act, Companies Act, and The Securities Contracts (Regulation) Act (SCRA) for vesting SEBI with the jurisdiction to adjudicate and investigate.
  • Whether the issue of the OFCDs to millions of persons who had subscribed to that issue is a Private Placement so that not to come within the scope of SEBI Regulations and various other provisions of the Companies Act.
  • Whether listing of the provisions under Section 73 compulsorily applies to all the public issues or it only depends on the “intention of the company” for getting listed.
    Whether the Public Unlisted Companies (Preferential Allotment Rules) 2003 will be applied in this case or not.
    Whether OFCDs are Convertible Bonds and whether they are exempted from the application of SCRA as per the provisions of Section 28(1)(b).

RULE:

  • The Supreme Court has relied upon Sections 28 (1)(b), 55, 67(3), and 73 of the Companies Act, Section 2(h) of SCRA.

FACTS:

  • This landmark Judgment is undoubtedly a milestone in India’s corporate landscape. From 25th April, 2008 to 13th April, 2011, Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) floated an issue of Optionally Fully Convertible Debentures (OFCDs) and started collecting subscriptions from investors.
  • The company had over Rs. 17,656 crores during that period. In the guise of “Private Placement”, the amount was collected from about 30 million investors. This act was performed without complying with the requisites relevant to the public offerings of the securities. The Whole Time Member of SEBI was taking cognizance of the act.
  • On June 23rd, 2011 they passed an order. The order directed two companies to refund the money to the investors which were collected from them. Additionally, the promoters of the two companies along with Mr. Subrata Roy were restrained from accessing the securities market until further orders. An appeal was made before the Securities Appellate Tribunal (SAT) by the Sahara. This appeal was against the order of the Whole Time Member.
  • After hearing, on 18th Oct 2011, the SAT confirmed and maintained the order of the Whole Time Member. Subsequently, an appeal was made by Sahara before the Supreme Court of India against the order of the SAT.

HELD:

  • Issue 1: Supreme Court held that SEBI has the power to adjudicate and investigate. Also, the SC said that according to the SEBI Act, the SEBI has special powers for doing investigations and adjudication to protect the interests of the investors. The SC observed that according to provisions mentioned under Section 55A of the Companies Act, so far matters connected to the issue and transfer of the securities and non-payment of the dividend, the SEBI has the power to administer in the case of listed public companies and also in the case of those public companies which intended of getting their securities listed on a recognized and identified stock exchange in India.
  • Issue 2: The Supreme Court held that even though the OFCDs had issued that, it does not cease to be a “Security” within the meaning of the SEBI Act, Companies Act, and SCRA. It says despite having the definition of “Securities” under section 2(h) of SCRA, it doesn’t contain the term “hybrid instruments”. The definition which is provided in the Act is covering all the “Marketable securities”.
  • Issue 3: The Supreme Court held that even though the intention of the companies was of making the issue of OFCDs look like a private placement when such securities are given to more than 50 persons, it ceases to be so.
  • Issue 4: the SC refused this and held that Sec 73 (1) is a compulsory provision of law that companies should comply with and if any issue of securities exceeds 49 persons according to Sec 67(3) of the Companies Act, the intention of companies to get listed does not matter at all. The court also held that, if securities to fifty or more are offered, it is a public offering as per Section 67(3) of the Companies Act.
  • Issue 5: the SC disagreed and observed that 2003 Rules apply only in the context of preferential allotment of unlisted companies, however, if the preferential allotment is a public issue, then 2003 Rules would not apply.
  • Issue 6: The Supreme Court held that 28(1)(b), accurately points out that only the convertible bonds and shares or warrants of the type referred here are excluded from the applicability of SCRA and not debentures which are another category of securities in definition which is present in Section 2(h) of SCRA.
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Issue of Capital

Peek v. Gurney (1873) LR 6 (HL) 377

PEEK V. GURNEY

Peek v. Gurney (1873) LR 6 (HL) 377

ISSUE:

  • Can somebody who is not among the original allottees of shares can make a claim for indemnity?

RULE:

  • This case concerns itself with the act of misrepresentation made in the prospectus. The concept of misrepresentation and fraud is given under Section 18 and 17 of the Indian Contract Act, 1872, respectively. The offender can be held liable for fraud under Section 447 of the Companies Act, 2013. The principle that evolved in this case was that an action of misrepresentation can only be brought by the misled party, or “representee”, which means that only those who were an intended recipient of the representation may sue.

FACTS:

  • The prospectus for a proposed company, Overend and Gurney (defendant), included information intended to induce the purchase of shares, which later proved misleading. The prospectus was issued in July, and all shares were allotted before July was over. Peek (plaintiff) purchased large numbers of shares in Overend and Gurney on the stock exchange in October and December. After the company’s dissolution, Peek sought indemnity. The master of the rolls rejected Peek’s claim because Peek was not among the original allottees of shares. Peek appealed as a result.

HELD:

  • House of Lords held that the prospectus was only addressed to the first applicants for shares. It could not be supposed to extend to others other than these. Thus, the appellant’s action against the promoters failed since the false statements in the prospectus were not addressed to him.
Categories
Issue of Capital

Derry v. Peek, 1889 LR 14 AC 337.

DERRY V. PEEK

Derry v. Peek, 1889 LR 14 AC 337.

ISSUE:

  • Is it dishonest when a business creates a prospectus to entice investors but it later turns out to be false?

RULE:

  • A single misrepresentation is insufficient to establish dishonesty. Deception must be proven; a deceptive statement made carelessly or without good cause to believe it to be true may not qualify.

FACTS:

  • In a prospectus sent to the plaintiff on the establishment of the defendant’s business, it was stated that the business would be granted the right to employ mechanical or steam power. After obtaining the prospectus, the plaintiff purchased company stock, relying on its claims and thinking the business had full authority to employ mechanical or steam power.
  • The company was shut down because it was unable to finish its task since the board of trade forbade the use of mechanical or steam power.
  • After then, Plaintiff filed a lawsuit against the defendant for making false statements. The trial judge dismissed the case after finding that the directors knew that the usage of steam or mechanical power was dependent on the board of trade and that their reliance on the board was not unreasonable nor dishonest.
  • On appeal, the dismissal was overturned because the court determined that the Defendants should be held accountable for the Plaintiff’s reliance on the prospectus since they did not have a legitimate basis for their statements in it.
  • The defense filed an appeal.

HELD:

  • The House of Lords overturned the court of appeals’ ruling and upheld the decision of the lower court.
  • The court determined that this was an act of deceit, under which proving responsibility requires more than just establishing misrepresentation.
  • Plaintiff, in this case, relied on the prospectus, which may have contained misrepresentations, but the defendants, in this case, had a reasonable belief that they could obtain the board of trade’s approval and should not be held accountable for that belief’s eventual failure.
Categories
Issue of Capital

Sundaram Finance Service & Ltd. V. Grandtrust Finance Ltd., (2003) 42 SCL 89 (Mad)

SUNDARAM FINANCE SERVICE & LTD. V. GRANDTRUST FINANCE LTD.

Sundaram Finance Service & Ltd. V. Grandtrust Finance Ltd., (2003) 42 SCL 89 (Mad)

ISSUE:

  • Whether private complaint can be quashed at initial stage where evidence has to be recorded, witnesses have to be examined and charges have to be formed?

RULE:

  • In a case of a private complaint there are two stages, one is taking cognizance and the other is framing charges. If there would be a grave suspicion that the accused would have committed an offence, it is enough for the Court to frame charges.

FACTS:

  • The third accused party, M/s. Vishnu Forge Industries, is sponsored by the first accused, i.e., the first petitioner M/s. Sundaram Finance Services Limited. The third accused company needed money to finance the expansion of their business activities, so they approached the respondent and persuaded them to buy shares together with the first accused.
  • As a result, the respondent, assuming their assertion to be accurate, purchased 50000 equity shares at a face value of Rs. 10 each, plus a Rs. 6 premium each share. The cheque was drawn in the favor of the third accused and the first accused received it.
  • The first and the third accused entered into a Sponsorship Agreement and the very first clause in the Sponsorship Agreement provided that the first accused shall be the Sponsor and shall arrange to offer the Equity Shares for sale to the public not later than April 30, 1996, and to get them listed at the Over-the-Counter Exchange of India (OTCEI).
  • The first accused and the third accused as one party and the respondent along with the other Co-investors as another party, entered into a Divestment Agreement. Clause 15 of the Divestment Agreement stated that the Sponsor shall arrange to offer the equity shares for sale to the public not later than 30.04.1996.
  • The respondent only on such representation made by the accused believed the same to be true and had purchased the shares to the tune of Rs.8,00,000/-. Contrary to such representations the first accused failed to arrange to offer the equity shares for sale to the public. Moreover, no efforts had been taken by the accused either to list the shares or anything was done in the direction of going public.
  • Without the knowledge of the investors, including the respondent, the first and third accused had entered into a Supplementary Agreement to Sponsorship Agreement between themselves. Even when stating that the shares will be offered for sale on April 30, 1996, the Sponsor allegedly misled the respondent and made a false promise.

HELD:

  • The High Court of Madras did not discover a justification to dismiss the complaint and, as a result, dismissed the petition. None of the parties specified the Section under which the Magistrate had jurisdiction, and at any rate, the Magistrate may have brought up this issue when he or she was formulating the charges.
  • The court determined that there is adequate justification for the Magistrate to take cognizance of the offence as against the accused based on the facts of the case, which show a series of occurrences occurring between 1995 and 1996.
Categories
Issue of Capital

Shiromani Sugar Mills Ltd., v. Debi Prasad, AIR 1950 All 508

SHIROMANI SUGAR MILLS LTD. V. DEBI PRASAD

Shiromani Sugar Mills Ltd., v. Debi Prasad, AIR 1950 All 508

ISSUE:

  • Can shareholders, once the company has begun the process of winding up, seek damages or repudiate the contract on the basis of misrepresentation in the prospectus?

RULE:

  • If it can be proven that a prospectus omits material information and the shareholder comes forward in a timely manner, his name may be struck from the document and the list of shareholders.

FACTS:

  • The Company, which was a public limited Company, was formed and the authorized capital of the Company was fixed at RS. 20,00,000 divided into Rs. 15,000 preferred shares of Rs. 100 each and RS. 50,000 ordinary shares of Rs. 10 each.
  • The earned capital according to the prospectus was Rupees 16,00,000 divided into Rs. 12,000 preference shares and Rs. 40,000 ordinary shares. Out of Rs. 100, the price of a preference share, Rs. 20 were payable on application for the share, Rs. 30 were payable on the share being allotted and the balance of Rs. 60 was payable in such call or calls as might be decided by the Directors from time to time.
  • The opposing parties were all stockholders in the company; some of them failed to pay even the money for the initial allocation, while others failed to pay the money for the first and second calls. As a result, three meetings of the Directors adopted resolutions that forfeited their shares.
  • On December 7th, 1941, a decision was made to dissolve the corporation. The suits were then brought by the official liquidator to recoup the remaining amounts from the allocation as well as the first and second calls and the opposing parties fought back against the lawsuits.

HELD:

  • The Allahabad High Court ruled that the shareholder has no right to rescind because neither he nor she took any concrete actions to avoid the contract while the company was still operating.
  • Additionally, neither of them made any indication that they intended to avoid the contract at any point in time. However, if a shareholder has begun formal legal action to be relieved of his shares, the passing of time while the case is still pending will not stop the shareholder’s relief.
Categories
Issue of Capital

Securities Exchange Board of India v. M/s Opee Stock Link Ltd. & Another, SC 2016,Civil Appeal No. 2252 of 2010

SEBI V. M/S OPEE STOCK-LINK LTD. & ANR.

SEBI v. M/s Opee Stock Link Ltd. & Anr., SC 2016, Civil Appeal No. 2252 of 2010

ISSUE:

  • What is the status of irregularities observed with the issue of shares in the nature of IPO?

RULE:

  • When there is an Initial Public Offering (IPO), the shares are made available to the general public in a specific way so that even small investors, referred to as “Retail Individual Investors” (RII) in the following, also have a good chance to buy shares of newly floated companies or shares of existing companies as and when they are made available to the general public.

FACTS:

  • In an oversubscribed initial public offering, Jet Airways Limited and Infrastructure Development Finance Company Limited issued specific shares. The Securities and Exchange Board of India (SEBI) was informed of this.
  • Following an investigation, SEBI inspectors discovered that hundreds of bogus demat account holders had dishonestly purchased the shares that were intended for small investors through off-market transactions.
  • The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003, Regulations 3 and 4(1), and Sections 12A(a), (b), and (c) of the SEBI Act, 1992, are all directly violated by this.
  • The SEBI investigations revealed that some shares had been illegally purchased through off-market transactions even before the date of listing without knowing the price of these shares, utilising Demat accounts, at rates much below the market price.
  • They also came to the conclusion that the Demat accounts utilized to make these purchases were fraudulent and had been operated for the benefit of whoever was funding these fictitious Demat accounts. The signatures of the account holders varied, and several of them had registered addresses.
  • This was detrimental to the interests of small investors because these shares were reserved for them. There was no explicit decision stating that the Whole Time Member and the Adjudicating Officer of the SEBI’s findings were erroneous in the appeal submitted to the Securities Appellate Tribunal (SAT). The SEBI’s Whole Time Member and Adjudicating Officer’s decision was overturned, nonetheless.

HELD:

  • The Supreme Court of India noted that shares in the initial public offering (IPO) had been allocated below market value before being listed through demat accounts with identical registered addresses and multiple inconsistent signatures, depriving small investors of their allotted number of shares and leading to unjust enrichment.
  • As a result, the SAT’s order was overturned, and the SEBI’s Whole-Time Member and Adjudicating Officer’s orders were affirmed.
  • The Court further noted that the Securities Contracts (Regulation) Act, 1956 (“SCRA”), which regulates initial public offerings (“IPO”), is a special law designed to control the operation of recognised stock exchanges and prevent undesirable securities transactions; as a result, it shall take precedence over general clauses in the Contracts Act of 1872 and the Sale of Goods Act of 1930 in matters specifically covered by SCRA.
Categories
Issue of Capital

DLF Limited v. SEBI, SAT Order in Appeal No. 331 of 2014.

DLF LIMITED V. SEBI

DLF Limited v. SEBI, SAT Order in Appeal No. 331 of 2014.

ISSUE:

  • If transactions were carried out with the aim to defraud, and if DLF had any connections that would have allowed it to have reasonable control over the subsidiaries?
  • Should DLF have included these subsidiaries and the FIR in its prospectus, or was the information in the red herring prospectus insufficient for the investors to make an informed choice about the IPO? Does the IPO’s impact from these FIR and subsidiaries matter?
  • Whether the directors had knowledge of those transactions and knowingly withheld it prior to the IPO with the intent to deceive investors?

RULE:

  • When the court overrides a company’s restricted liability to hold investors or directors personally accountable for any fraud committed, this is known as piercing the corporate veil. The ability of the courts to impose personal culpability on directors and investors must be exercised with extreme caution because doing so would compromise a company’s fundamental characteristics of being a separate legal entity with limited liability.

FACTS:

  • Three firms, Sudipti Estates Private Limited, Felicite Builders and Constructions Private Limited, and Shalika Estate Developers, were incorporated by the three wholly-owned subsidiaries.
  • The shares of these subseries were changed so that as of November 30, 2006, Felicite became the holding company of both the other companies and the shares of Felicite Builders and Construction Pvt. Ltd. were held by the spouses of some members of the top-level management at DLF.
  • This change occurred a few days before DLF filed the second draught Red Herring Prospectus with SEBI. DLF effectively lost all control over these subsidiaries as a result, and as a result, there was no obvious need for it to disclose them in a prospectus for its firm.
  • Due to DLF’s continued close contact to the aforementioned companies, SEBI said that this sale was a sham, and DLF still maintained complete control over them. The second draught of the prospectus was returned to DLF by SEBI with minor changes made to its content, but no comments were made on disclosing the change in the subsidiaries’ ownership status or any other pertinent information.
  • Before presenting the proposal to the wider public, DLF complied with the aforementioned changes and suggestions. The final prospectus approved by SEBI open for public subscription was listed on the BSE and NSE by the Registrar of Companies on July 5th, 2007, along with the red herring prospectus.
  • When Mr. Kimsuk Sinha filed a complaint with SEBI against one of these subsidiaries, alleging that the business had cheated him of Rs. 35,000,000, SEBI became aware of the matter.
  • The oral agreement for the start of a development project that Sudipti failed to honour was the subject of the fraud. Following the following finds and orders, SEBI issued a “show cause notice” to DLF in response to this complaint.

HELD:

  • The securities appellate tribunal held that Companies still regard the concept of a separate legal entity as sacred, so any exercise of authority to breach this line must be done very carefully and judiciously. The courts must, however, simultaneously ensure that the board members of a corporation are constantly monitored to ensure that their own criminal behavior does not spread to the company without their own personal liability.
  • The judgment determined that, under the presumption that the law must be read quite mechanically, the hurdle for piercing the corporate veil is high. Regarding disclosure, the case suggested that these transactions had no meaningful effect on the IPO because the entities involved had no genuine connection to DLF. As a result, there was no need for disclosure because the transactions had no material effect on DLF or its IPO.
  • Further it was held that by restricting who has the right to file a lawsuit to only genuine investors, the range of parties who might have legitimate claims to defend investor rights but would be disqualified because they are not investors themselves is greatly reduced. Although investors are a company’s most important stakeholder, there are numerous other types of stakeholders that interact with the business on a regular basis and who should be permitted to file legal claims if their rights are violated.
Categories
Issue of Shares

Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. and Ors. AIR 1981 SC 1298

NEEDLE INDUSTRIES LTD. V. NEEDLE INDUSTRIES NEWEY HOLDING LTD. AND ORS.

Needle Industries Ltd. v. Needle Industries Newey Holding Ltd. and Ors. AIR 1981 SC 1298

ISSUE:

  • Whether the Act of NIIL issuing right shares at a price much lower than the market price to the existing Indian shareholders only constituted an act of “oppression” against the Holding Company under Section 397 of the Indian Companies Act, 1956?
  • Whether there is an abuse of fiduciary powers by the Indian Stakeholders and whether the appointment of Silverstone as Additional Director in the board meeting is valid?
  • Whether the court could decide a case, where there are allegations of mala fides and abuse of fiduciary powers, solely based on affidavits and no oral evidence?

RULE:

  • The term “Oppressive” manner indicates acts that are “burdensome, harsh and wrongful”. An isolated act, which is against the law, cannot be said to be “oppressive” unless it has a mala fide intention behind it or if that act was “harsh, burdensome and wrongful”.
  • The person alleging oppression against the other party has to show how the oppression led him to compromise on his decision and surrender to an act that lacks integrity, an act that is on the face unfair and had affected his proprietary rights.

FACTS:

  • Under Section 397 of the Companies Act, 1956 the foreign majority shareholders of the holding company, filed a case against the Indian minority shareholders of the company, its subsidiary, alleging an act of “oppression” against them.
  • The allegation of the majority was based on the deliberate act of the minority shareholders which includes the appointment of an additional director (Silverstone) by the existing board of directors under an Annual General Meeting and rightful issuance of the shares to the Indian group of shareholders at par which was far below their market price.
  • The plea of foreign majority shareholders was accepted by the division bench of Madras High Court, stating that such an act is oppressive and against the interest of the company. The bench also suspended the existing Board of Directors and even removed the Managing Director (Devagnanam) and appointed an Interim Board. A consequential direction was also issued concerning acquiring the company.

HELD:

  • When the dispute was presented for adjudication before the Supreme Court of India, based on the merits, it held that alleged acts of the minority shareholders do not amount to oppression.
  • An illegal act about the affairs of the company alone would not amount to oppression. But when an illegal act combined with the ill intention of doing such an act would amount to oppression.
  • An isolated act that is prima facie contrary to the law enforced at the time, may not necessarily and by itself suggest that the very law was violated with a mala fide intention of such violation was harsh, burdensome, and wrongful.
  • Rather, a series of such illegal acts committed one after the other can lead to the conclusion, that they were all part of the equivalent transaction whose object was to commit oppression against whom those acts were directed.
Categories
Incorporation

Kelner v. Baxter, (1866) LR 2 CP 174

KELNER V. BAXTER

Kelner v. Baxter, (1866) LR 2 CP 174

ISSUE:

  • Whether the agents i.e. the promoters of the company were liable for the pre-incorporation contract when the contract had been ratified by Gravesend after the incorporation?

RULE:

  • This case is concerned with the enforcement of a pre-incorporation contract. The position is that a pre-incorporation contract does not bind the company, although certain exceptions exist in this regard. However, this case reaffirmed the standing position that a company is not bound by any contract that it may have entered into before the company was incorporated.

FACTS:

  • A new hotel company was going to be established by the name of “Gravesend Royal Alexandra Hotel Company”. The promoters of this company entered into a contract for the purchase of wine for the hotel.
  • Although the contract was for the purchase of wine for Gravesend after the hotel started functioning, the contract was signed before the registration of Gravesend Company. For this reason, the contract was a pre-incorporation contract.
  • Later on the company, Gravesend was registered. By the time the company was registered the wine had been consumed, and before the payment could be realized in total, the company went into liquidation.
  • Eventually, for the recovery of money for the wine, the promoters of the company who had entered into the contract for the company were sued, for acting as the agents of the company when the contract was entered into on the part of the company.
  • However, the promoters contended that they were not liable for the repayment of the same since they stated that the contract had been ratified when the company was incorporated incomplete. This implied that the liability had indeed shifted on to the company.

HELD:

  • The Court held that the situation is where a promoter had entered into a contract on behalf of a party that did not exist at the time when such contract was being formed. The company had failed to repay Mr. Kelner, the seller of the wine.
  • The judges observed that the principal-agent relationship between the promoters and the company cannot be in existence before the incorporation, since the company in itself i.e. the principal was not in existence, leading to the conclusion that the promoters could not be agents of the company in the first place.
  • The judges also noted that the company could not take liability for the contract which was entered into before incorporation, neither by way of adoption nor by way of ratification. The court held that the promoters were personally liable for the contract so entered into since it was the promoters who were the parties that consented to enter into the contract.
Categories
Incorporation

Erlanger v. New Sombrero Phosphate Co. (1878) 3 App Cas 1218

ERLANGER V. NEW SOMBRERO PHOSPHATE CO.

Erlanger v. New Sombrero Phosphate Co., (1878) 3 App Cas 1218

ISSUE:

  • Was Erlanger liable to Phosphate due to not disclosing his conflict of interest?

RULE:

  • It concerned rescission for misrepresentation and how the impossibility of counter restitution may be a bar to rescission. It is also an important illustration of how promoters of a company stand in a fiduciary relationship with subscribers.

FACTS:

  • Erlanger was a French banker who bought the lease for the Anguilian island of “Sombrero”, phosphate mining for £55,000.
  • Erlanger then established New Erlanger Phosphate Co (Phosphate), before selling Sombrero’s lease to Phosphate for £110,000 through a nominee.
  • One of Phosphate’s directors was the Lord Mayor of London, who was independent of Erlanger’s initial group of founders. Two other directors were abroad, and the other directors were puppet directors of Erlanger.
  • Due Erlanger’s strong control over Phosphate, the company was essentially an extension of Erlanger. Phosphate ratified the sale of the lease.
  • Many people invested in Phosphate due to Erlanger’s skills at promotion. Eventually, the investors realised that Erlanger had sold the lease to Phosphate for double the price he had bought it for, and Phosphate sued Erlanger for recession due to non-disclosure and an account of profits.

HELD:

  • Erlanger was a promoter for Phosphate. The House of Lords unanimously held that the relationship between a promoter and a newly formed company attracts a fiduciary relationship.
  • The majority (Lord Cairns LC dissenting) also held that the contract can be rescinded.
  • A promoter owes duties of good faith and honesty to the company.
  • Erlanger should have declared any conflicting interests to the company promoted and cannot make any “secret profits”.
  • A promoter who breaches any duty to the company by failing to disclose to the company conflicting interests would be liable. The company is able to seek remedies such as rescission of contract and recovery of profits.
  • A constructive trust can also be formed for the profits gained by the promoter in breach of his or her duties.