Companies cannot act before they exist, yet someone has to do the work of bringing them into existence. That person is the promoter. A promoter finds the business idea, gathers the capital, signs the early contracts and sees the company through registration.
Because the promoter acts for a company that does not yet exist. Often stands to profit from it, the law holds the promoter to a high standard and regulates the contracts made before incorporation.
This topic covers who a promoter is, the duties a promoter owes and the remedies for breach, and the rules on pre-incorporation contracts, including how the company can ratify them and who is liable until it does. Examiners like the remedies and the effect of section 96.
In 30 seconds
A promoter is anyone who takes part in forming a company for a given project and sets it going, or who helps raise its capital. A professional who acts only in a professional capacity is not a promoter.
A promoter is a fiduciary who must act in utmost good faith and make no secret profit, may sell property to the company only with disclosure, and risks having the transaction rescinded unless it is approved independently. The remedies are rescission, recovery of the secret profit, damages and compensation, and no limitation period applies.
A pre-incorporation contract does not bind the company, but section 96 lets the company ratify it after incorporation. Until then the person who acted is personally bound.
Who is a promoter?
A promoter, under section 85 of Companies and Allied Matters Act (CAMA), is any person who undertakes to take part in forming a company for a given project and to set it going, and who takes the necessary steps to do so, or who, for a proposed or newly formed company, undertakes a part in raising its capital.
A person who acts strictly in a professional capacity in forming the company, such as a solicitor or an accountant, is not a promoter. The test is what the person actually does. Someone who finds the business, arranges the capital and signs for the company before it exists is a promoter. A lawyer who merely prepares the documents for a fee is not.
Duties of a promoter
| Duty | What it means |
|---|---|
| Fiduciary duty | The promoter stands in a fiduciary position to the proposed company and must observe utmost good faith in every transaction with the company or on its behalf |
| No secret profit | A promoter must not make a secret profit. If he acquires property or information in circumstances where it was his duty to acquire it for the company, he must account to the company for the property, the profit made or the use of the information |
| Disclosure when selling | A promoter may freely sell his own property to the proposed company, but must disclose his interest in it to the company after incorporation |
| Rescission unless approved | The company may rescind any transaction between itself and a promoter unless, after the promoter discloses all material facts, the transaction is entered into or ratified by the board independently of the promoter, or by all members where that can be done without a meeting, or by a general meeting at which neither the promoter nor the holders of shares in which he is beneficially interested vote (section 86) |
Remedies for breach of the promoter’s duties
- Rescission of the contract. The company may avoid the contract and recover any money it spent. Two conditions apply, taken from the ordinary law of rescission. The company must not have shown an intention to affirm the contract after discovering the breach. It must still be possible to restore the parties to their pre-contract positions (restitutio in integrum). If a third party has acquired rights in the property, rescission may be impossible.
- Recovery of the secret profit. Where the promoter was under a duty to acquire the property for the company, for example when he bought it after becoming a promoter with a view to reselling to the company, the company may recover the profit (section 86(2)). This is without prejudice to the right to rescind.
- Damages. A promoter who is party to a wilful false statement in a prospectus that induces subscription is liable in damages for fraud to the subscriber.
- Compensation. It is recoverable in every case of lack of utmost good faith, for example where the promoter failed to supply information that CAMA requires in a prospectus.
No period of limitation applies to a company’s proceedings to enforce a promoter’s duties. The court may, on terms, including lapse of time, relieve a promoter from liability wholly or partly if it thinks it equitable (section 86(4)).
Pre-incorporation contracts
A pre-incorporation contract is a contract entered into by a promoter for a proposed company, usually to acquire property, rights or interests for it. As a general rule it does not bind the company when it is later incorporated. The reasoning is that the company did not exist when the contract was made, so nobody could act for it.
Before CAMA, the company could not even ratify such a contract, because an agent’s act can be ratified only if the principal existed when the act was done.
Section 96: ratification and personal liability
- Ratification. Any contract or transaction purporting to be made by the company, or by a person for it, before its formation may be ratified by the company after formation. The company then becomes bound by it and entitled to its benefits as if it had been in existence at the date of the contract and had been a party to it. Continental Bank Plc v Erostrate Ltd (2002) applied the rule.
- Personal liability. Before ratification, the person who purported to act for the company is, unless there is an express agreement to the contrary, personally bound by the contract and entitled to its benefits.
Promoters and pre-incorporation contracts in more detail
Why a promoter is treated as a fiduciary
The promoter is in a position of trust and power. Before the company exists, it has no directors, no board and no independent members who can question the promoter’s dealings. The promoter knows more than anyone else about the project, and often has the chance to sell property to the new company at a price he fixes himself.
The law fills the gap by requiring good faith and disclosure, so that the first investors and the company are not exploited by the person who created it.
The three ways to cure a promoter’s conflict
A promoter’s transaction with the company is safe if, after full disclosure of the material facts, it is approved by (i) a board independent of the promoter, or (ii) all the members without a meeting, or (iii) a general meeting in which neither the promoter nor holders of shares in which he is beneficially interested may vote.
Each route puts the decision in the hands of people who can judge it independently.
A secret profit: numbers
A promoter, Kunle, buys land for ₦20 million after becoming a promoter of Bright Farms Ltd, intending to resell it to the company. After incorporation he sells it to the company for ₦30 million without telling it he bought it for ₦20 million. The secret profit is ₦10 million.
The company may recover the ₦10 million, or rescind the sale, return the land and take back its ₦30 million, provided it has not affirmed the contract and the land can still be returned. If Kunle had disclosed the cost price and the board, independently of him, approved the sale, there would be no breach.
Choosing between the remedies
| Situation | Best remedy |
|---|---|
| The property is still held and has fallen in value | Rescission, to get the price back |
| The property has been resold to an innocent buyer | Recovery of the secret profit, since rescission is no longer possible |
| The prospectus contained a wilful lie that induced subscriptions | Damages for fraud to the subscribers |
| The prospectus left out information that CAMA requires | Compensation |
Pre-incorporation contracts: protecting both sides
A third party who contracts with a promoter for a company that does not yet exist has no claim against the company until it ratifies. But section 96 gives the third party a claim against the promoter, who is personally bound.
The promoter can avoid personal liability by agreeing in the contract that he will not be bound, or the parties can sign a fresh contract with the company after it is formed, which replaces the old one (known as novation). The company may decide whether to ratify, and ratification takes effect from the date of the original contract.
It is safest for the board to ratify in a resolution, so the decision is on record.
Worked example: a contract before incorporation
Scenario. Amaka is promoting Cedar Foods Ltd, which is not yet registered. She signs a contract with a supplier to buy machinery for ₦8 million in the name of Cedar Foods Ltd. The company is incorporated a month later. The supplier delivers the machinery, and the board refuses to pay, saying the contract was made before the company existed. Advise the supplier.
- General rule. A pre-incorporation contract does not bind the company when it is incorporated, since the company did not exist when it was made.
- Ratification. Under section 96 the company may ratify the contract after formation, and if it does, it is bound as if it had been a party from the start. The board has refused, so there is no ratification yet.
- Personal liability. Before ratification, the person who purported to act for the company, Amaka, is personally bound by the contract, unless there is an express agreement to the contrary.
- Conclusion. The supplier cannot enforce the contract against Cedar Foods Ltd unless it ratifies. It may sue Amaka for the ₦8 million.
Applying the rules to a scenario
A second worked problem
Scenario. Ben and Nyom, preparing to incorporate Beny Ltd, bought prime land on behalf of the proposed company and still owe the vendors ₦100 million. The company was incorporated six months ago and now says it is not bound. The vendors have asked Ben and Nyom to pay.
- Classify the dealings. They are pre-incorporation contracts made by promoters for a proposed company.
- State the general rule. A pre-incorporation contract does not bind the company when it is incorporated, because the company did not exist when it was made.
- Apply section 96. The company may ratify the contract after its formation. If it ratifies, it becomes bound and entitled as if it had been a party from the start, and the vendors can look to the company. Ratification is best done by a board resolution adopting the contracts.
- Personal liability. Until it ratifies, the people who purported to act for the company, Ben and Nyom, are personally bound by the contracts and entitled to their benefits, unless there is an express agreement to the contrary. The vendors may therefore sue them for the ₦100 million.
- Duties as promoters. Ben and Nyom are fiduciaries. If they made a profit on the land, for example by buying it cheaply and selling to the company at a higher price without disclosure, the company can rescind or recover the secret profit.
- Advice. The company should decide whether it wants the land. If so, the board should ratify. If not, the promoters remain liable to the vendors and may seek to recover from the company only if it ratified or benefitted.
Promoters and professionals: the line
A lawyer who prepares the memorandum, a chartered accountant who prepares the accounts for the prospectus. A company secretary acting as such are not promoters merely because they do this work. If the same person also finds the business, negotiates the property, arranges the capital and signs for the company, he is a promoter as well as a professional and owes the fiduciary duties.
Questions that have been asked on this topic, and how to answer them
| Question theme | What a full answer contains |
|---|---|
| State and explain three fiduciary duties of a promoter | Utmost good faith, no secret profit, disclosure of interest in property sold to the company. Add the rule that transactions can be rescinded unless independently approved. Explain each in two or three sentences |
| Remedies for a promoter’s breach | Rescission with its two conditions, recovery of secret profit, damages for fraud in a prospectus, compensation, and no limitation period |
| Preliminary contracts made before incorporation | The general rule, section 96 ratification, personal liability of the person acting, and the effect on the third party |
| Who is a promoter? | The section 85 definition and the exclusion for professionals |
Common mistakes in the exam
- Saying a solicitor who prepares the incorporation documents is a promoter. A purely professional role is excluded.
- Saying a pre-incorporation contract binds the company automatically. It binds only if ratified.
- Forgetting the promoter’s personal liability before ratification.
- Listing rescission without its two conditions.
- Saying a limitation period bars the company. None applies, though the court may relieve a promoter.
- Confusing a promoter’s lawful sale of his own property, which is allowed with disclosure, with a secret profit.
Quick revision
- Promoter: section 85, takes part in forming a company or raising its capital. Professionals acting as such are excluded.
- Duties: utmost good faith, no secret profit, disclosure when selling, transactions rescindable unless independently approved (section 86).
- Remedies: rescission (two conditions), recovery of secret profit, damages for fraud, compensation. No limitation period.
- Pre-incorporation contracts: not binding on the company, ratifiable under section 96, promoter personally bound until ratification.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Section A style: multiple choice
Question 1. A person who acts strictly in a professional capacity in forming a company is:
- A promoter
- Not a promoter
- A director
- A member
Show the answer
B. Section 85 excludes solicitors and accountants acting as such.
Question 2. Which of these is a duty of a promoter?
- To make a secret profit
- To act in utmost good faith
- To avoid disclosure
- To hold no property
Show the answer
B. A promoter is a fiduciary.
Question 3. The remedy of rescission is available only if:
- The company has affirmed the contract
- Restitutio in integrum is still possible and the company has not ratified
- A third party has acquired rights
- Five years have passed
Show the answer
B. Both conditions must be met.
Question 4. A pre-incorporation contract, as a general rule:
- Binds the company automatically
- Does not bind the company until it ratifies
- Is void for everyone
- Binds only the third party
Show the answer
B. The company did not exist when it was made.
Question 5. Under section 96 of CAMA, before the company ratifies a pre-incorporation contract, the person who acted is:
- Not liable
- Personally bound, unless there is an express agreement otherwise
- Liable only to the company
- A director
Show the answer
B. He is also entitled to its benefits.
Question 6. The case that applied the rule on ratification of a pre-incorporation contract is:
- Salomon v Salomon
- Continental Bank Plc v Erostrate Ltd
- Jones v Lipman
- Young v Bristol Aeroplane
Show the answer
B. It was decided in 2002.
Question 7. A secret profit is a profit that a promoter:
- Discloses to the board
- Makes without disclosing it to the company
- Pays to the government
- Shares with all members
Show the answer
B. He must account for it.
Question 8. A limitation period for proceedings by the company to enforce a promoter’s duties:
- Is one year
- Is six years
- Does not apply
- Is twelve years
Show the answer
C. The court may relieve a promoter on equitable terms.
Question 9. A promoter may sell his own property to the proposed company if he:
- Conceals his interest
- Discloses his interest to the company after incorporation
- Is a director
- Pays tax
Show the answer
B. Disclosure is required.
Question 10. Recovery of damages from a promoter is available where the promoter is party to:
- A true statement in a prospectus
- A wilful false statement in a prospectus that induced subscription
- A profitable contract
- A lawful sale
Show the answer
B. It is liable in damages for fraud.
Section B style: written questions
Question 11 (10 marks). Explain the duties of a promoter of a company.
Question 12 (20 marks). (a) Define a promoter and distinguish a promoter from a professional adviser. (4 marks) (b) State and explain the remedies available to a company for a promoter’s breach of duty. (10 marks) (c) Explain the effect of a pre-incorporation contract and the rule in section 96 of CAMA. (6 marks)
Question 13 (10 marks). Explain what is meant by a pre-incorporation contract and the position of the parties to it.
Model answers
Show the model answer to Question 11
Duties of a promoter. A promoter is a person who undertakes to take part in forming a company for a given project and to set it going, or who helps raise its capital. He owes the following duties. First, he is a fiduciary to the proposed company and must observe utmost good faith in all transactions with it or on its behalf.
Second, he must make no secret profit: if he acquires property or information in circumstances where it was his duty to acquire it for the company, he must account for the property, the profit or the use of the information. Third, he may sell his own property to the company, but must disclose his interest after incorporation.
Fourth, any transaction between him and the company may be rescinded unless, after full disclosure of the material facts, it is entered into or ratified by the board independently of the promoter, by all the members, or by a general meeting at which neither he nor the holders of shares in which he is interested vote.
Show the model answer to Question 12
(a) Promoter and professional. A promoter takes part in forming a company for a given project and sets it going, or helps raise its capital. A person who acts strictly in a professional capacity, such as a lawyer or accountant, is not a promoter. Amaka, who finds the project, arranges capital and signs contracts for the company before it exists, is a promoter.
(b) Remedies. Rescission: the company may avoid the contract and recover what it has spent, if it has not affirmed the contract after discovering the breach and restitutio in integrum is still possible. Recovery of the secret profit: available where the promoter should have acquired the property for the company, as when he bought it after becoming a promoter with a view to resale to the company.
Damages: payable to a subscriber where the promoter was party to a wilful false statement in a prospectus. Compensation: recoverable where the promoter lacked utmost good faith, for example by omitting information that CAMA requires in a prospectus. No limitation period applies, though the court may relieve a promoter on equitable terms.
(c) Pre-incorporation contracts. They do not bind the company when it is incorporated, because it did not exist when they were made. Under section 96 the company may ratify the contract after formation and then becomes bound as if it had been a party from the start.
Before ratification, the person who purported to act for the company is personally bound and entitled to its benefits, unless there is an express agreement to the contrary.
Show the model answer to Question 13
A pre-incorporation contract is a contract entered into by a promoter on behalf of a proposed company. As a general rule it is not binding on the company when it is incorporated, because the company did not exist when the contract was made and nobody could have acted on its behalf.
Before CAMA, the company could not even ratify the contract, because an agent’s act is ratifiable only if the principal existed at the time. Section 96 now allows the company to ratify the contract after formation. When it does, it becomes bound by the contract and entitled to its benefit as if it had been in existence and a party at the date of the contract.
Until ratification, the person who purported to act for the company is, in the absence of an express agreement to the contrary, personally bound by the contract and entitled to its benefits. Continental Bank Plc v Erostrate Ltd (2002) applied this rule.
Pathfinder on promoters and pre-incorporation contracts
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
From the Business Law paper set under the previous syllabus. Includes a part on pre-incorporation contracts. Revise section 96 and the position of the promoter before ratification.
Revise first: Pre-incorporation contracts
Multiple-choice questions can test who is a promoter, the remedies for breach of duty and the rule on ratification. Check Section A of every diet you practise for items on these points.
Revise first: Duties of a promoter
Source: ICAN Pathfinder, Corporate and Business Law. Diets covered: May Diet, 2022 to May Diet, 2024. Earlier diets are mapped where they fit.
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