Promoters in Nigerian Company Law: Who They Are, Their Duties, and Their Liabilities

Every company has a moment of conception before its moment of birth. The certificate of incorporation marks the legal birth. But before that certificate is issued, before the memorandum and articles of association are filed, before the CAC name reservation is made, someone must have had the idea, taken the initiative, and set the whole process in motion. That person, or those persons, are the promoters of the company.

The promoter is one of the most important yet least visible figures in company law. After incorporation, directors and shareholders occupy centre stage. But in the critical period between the decision to form a company and the moment it comes into legal existence, it is the promoter who acts, who commits, and who bears personal responsibility for the arrangements that will define the company’s early commercial life. Understanding the promoter’s legal position, duties, and liabilities under CAMA 2020 is essential for any Nigerian law student.

Definition of a Promoter: Section 85 of CAMA 2020

The starting point is the statutory definition. Section 85(1) of CAMA 2020 provides that a promoter, for the purposes of the Act, means a person who undertakes to take part in forming a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose.¹

This definition has three elements. First, the person must have undertaken to take part in forming the company. A person who merely offers casual advice or makes an introductory connection does not fall within the definition. Second, the person must have done so with reference to a given project, meaning the promotion is directed at a specific intended company, not merely at the abstract concept of company formation. Third, the person must have taken the necessary steps to accomplish the formation, meaning actual acts of promotion rather than mere intention.

The classic judicial articulation of this definition predates the Nigerian statute. In Twycross v Grant,² Cockburn CJ described a promoter as one who undertakes to form a company with reference to a given project, sets it going, and takes the necessary steps to accomplish that purpose. This formulation, adopted and amplified in section 85 of CAMA 2020, has been consistently applied by Nigerian courts.³

Who Is Not a Promoter?

Section 85(2) of CAMA 2020 expressly excludes certain persons from the category of promoter. A person acting in a professional capacity in the formation of a company is not a promoter by reason only of that professional involvement.⁴ Thus, a legal practitioner who prepares and files the MEMART, a chartered accountant who advises on the financial structure of the proposed company, or a company secretary who assists with registration formalities, is not a promoter merely because of that professional work. They owe professional duties to their clients but do not owe the fiduciary duties that CAMA 2020 imposes on promoters.⁵

This exclusion is practically important. It prevents the stringent duties imposed on promoters from extending to every professional who assists in the incorporation process. But the exclusion is limited to persons acting purely in a professional capacity. If a legal practitioner goes beyond professional assistance and becomes personally involved in setting up the company as a business venture, taking equity, sourcing investors, or negotiating commercial contracts for the proposed company, they may cross the line and become a promoter in law.⁶

The Legal Position of a Promoter

The promoter occupies a distinctive and somewhat anomalous position in Nigerian company law. They are not an agent of the proposed company, because the company does not yet exist and there can be no principal where there is no legal person.⁷ They are not a trustee of the company in the strict legal sense, because again, the company as beneficiary does not yet exist.

The correct characterisation, established by Lord Cairns in the landmark English decision of Erlanger v New Sombrero Phosphate Co⁸ and consistently followed in Nigerian law, is that the promoter stands in a fiduciary relationship to the proposed company. As Lord Cairns observed, promoters undoubtedly stand in a fiduciary position. They have in their hands the creation and moulding of the company. They have the power of defining how and when and in what shape and under whose supervision it shall come into existence and begin to act as a trading corporation.⁹

This characterisation of the promoter as a fiduciary has direct and significant legal consequences. It means that the promoter is subject to all the obligations that attend a fiduciary relationship: the duty to act in the best interests of the company, the duty to make full and frank disclosure of all material interests and transactions, and the prohibition on making secret profits at the company’s expense.¹⁰

Duties of a Promoter Under CAMA 2020

Duty of Utmost Good Faith: Section 86(1)

Section 86(1) of CAMA 2020 provides that a promoter of a company stands in a fiduciary relationship to the company and shall observe utmost good faith towards the company in any transaction with it or on its behalf.¹¹ This is a codification of the equitable principle established in Erlanger. The promoter must deal honestly and openly with the proposed company, must not take advantage of his privileged position in the formation process, and must at all times act in the interests of the company rather than his own personal interests.

Duty to Account for Profits: Section 86(2)

Section 86(2) of CAMA 2020 provides that a promoter shall account for any profit made by reason of a transaction entered into on behalf of the company or through the use of information or opportunities arising in the course of the promotion.¹²

This provision addresses the most common form of promoter misconduct: the secret profit. A promoter who, in the course of promoting a company, identifies a valuable asset and purchases it at a low price with the intention of reselling it to the company at a profit, has used information obtained in a fiduciary capacity for personal gain. Section 86(2) requires that such profit be accounted for to the company.

The leading case on this duty is Erlanger v New Sombrero Phosphate Co.¹³ In that case, Erlanger, a Paris banker, headed a syndicate that purchased a small Caribbean island containing phosphate deposits for £55,000. He then promoted a company to acquire the island and arranged for the island to be sold to the company for £110,000. The company’s board of directors was composed largely of persons nominated by Erlanger who took no independent steps to investigate the transaction. When the company was wound up and the facts emerged, the House of Lords held that the contract was voidable because the promoter had made a profit from a transaction with the company without making full disclosure to an independent board.¹⁴

Lord Cairns’ formulation of the duty in Erlanger requires the promoter to make full disclosure not merely to any directors, but to an independent board, meaning directors who are genuinely independent of the promoter’s influence and capable of exercising unbiased judgment on the transaction.¹⁵ Disclosure to a board composed entirely of the promoter’s nominees does not satisfy this requirement.

The principle was taken further in Gluckstein v Barnes,¹⁶ where the House of Lords held that even partial disclosure is insufficient. The promoter must disclose the full extent of the profit, not merely its existence. Gluckstein had made a secret profit within a secret profit: he had purchased debentures in a company at a discount before the company’s assets were sold to a new company promoted by him, and then participated in repaying those debentures at face value from the proceeds of the sale. He disclosed his profit on the sale of the property to the new company but did not disclose his profit on the debentures. The House of Lords held that this partial disclosure did not satisfy his duty and that he was liable to account for the full amount.¹⁷

Duty to Disclose: What Constitutes Adequate Disclosure?

Section 86(3) of CAMA 2020 provides that a transaction between the promoter and the company may be rescinded by the company unless, after full disclosure by the promoter, the transaction is ratified on behalf of the company either by an independent board of directors or at a general meeting of the company at which the promoter does not vote.¹⁸

This provision identifies two alternative modes of ratification that will protect a promoter who has made a profit from a transaction with the company: ratification by an independent board, and ratification by a general meeting at which the promoter has no voting rights. In either case, the cornerstone is independent approval. A promoter cannot ratify his own transactions or obtain ratification from persons under his control. The ratifying body must be capable of making a genuinely independent commercial judgment.¹⁹

In the Nigerian case of Orhobo v Tarka,²⁰ the court confirmed that a promoter who obtained the incorporation of a company and then purported to contract with it without adequate disclosure was not protected by the company’s subsequent conduct. The court held that the promoter remained liable to account for the secret advantage obtained.

Duty in Relation to Pre-Incorporation Contracts

The promoter’s duties intersect significantly with the rules on pre-incorporation contracts in Nigerian law. When a promoter enters a pre-incorporation contract on behalf of the proposed company, section 96(2) of CAMA 2020 makes the promoter personally bound by that contract until the company ratifies it after incorporation.²¹ The promoter must therefore be scrupulous in ensuring that pre-incorporation contracts are properly disclosed to the company after incorporation so that the board can make an informed decision on ratification. A promoter who conceals the terms of a pre-incorporation contract from the board may breach both the duty of disclosure under section 86(3) and the duty of utmost good faith under section 86(1).

Liabilities of a Promoter

The consequences of a breach of the promoter’s fiduciary duties are serious and multi-faceted.

Rescission of Contract

Where a promoter has entered into a contract with the company without making adequate disclosure of a material profit or interest, the company may rescind the contract.²² This means the contract is set aside and the parties are restored, as nearly as possible, to their pre-contract positions. The company must elect to rescind within a reasonable time of discovering the breach: delay may result in the right to rescind being lost.²³

The right to rescind is also lost where: the company, with full knowledge of the facts, affirms the contract;²⁴ it is impossible to restore the parties to their original positions, for example because the property sold to the company has been irreversibly altered;²⁵ or third parties have acquired rights in the subject matter of the contract in good faith for value without notice of the promoter’s breach.²⁶

Account for Secret Profits

Even if rescission is not available, or if the company prefers not to rescind, the company may sue the promoter to account for the secret profit made.²⁷ In Gluckstein v Barnes,²⁸ the House of Lords held that the promoter was liable to disgorge the entire undisclosed profit, not merely the excess over what would have been a reasonable return. The promoter is treated as having received the profit as a constructive trustee for the company.

Damages for Fraud

Where the promoter’s breach of duty amounts to fraud, for example where he has deliberately misrepresented the terms of a transaction or concealed material facts with dishonest intent, the company may claim damages for deceit in addition to or instead of the other remedies available.²⁹ The company must establish that the promoter made a fraudulent misrepresentation, that the company relied on it, and that it suffered loss as a result.

No Limitation Period: Section 86(4)

Section 86(4) of CAMA 2020 provides that there is no limitation period within which the company must bring a claim against a promoter for breach of the duties imposed by section 86.³⁰ This is an exceptional provision: in most areas of Nigerian law, claims are time-barred after a specified period. The absence of a limitation period for promoter claims reflects the view that the promoter’s fiduciary duty is of a character so fundamental that time alone should not bar its enforcement. However, section 86(4) also provides that the court may give relief from liability to a promoter if it deems it equitable to do so, preserving some judicial discretion in appropriate cases.³¹

Remuneration of Promoters

Promoters are not entitled to any remuneration for their services in forming the company as of right. There is no implied right to remuneration and no contract can be implied between the promoter and the proposed company, since the company does not exist at the time the promotional work is done.³²

However, a promoter may be remunerated for his services after incorporation if the company, acting through its board or general meeting, agrees to pay him. Such remuneration must be properly approved and disclosed.³³ If the articles of association provide for the payment of preliminary expenses, including promotion costs, that provision may form the basis for a valid claim for reimbursement after incorporation.³⁴

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CAMA 2020 Highlight: Promoters Under the Current Regime

Statutory definition (section 85). CAMA 2020 is one of the few Nigerian statutes to define “promoter” expressly. Section 85(1) adopts the Twycross v Grant formulation: a person who undertakes to take part in forming a company, to set it going, and who takes the necessary steps to accomplish that purpose. Professionals acting purely in a professional capacity are excluded by section 85(2).

Fiduciary duty codified (section 86(1)). The duty of utmost good faith, developed at equity in Erlanger v New Sombrero Phosphate Co, is now a statutory obligation under section 86(1). A promoter who breaches this duty is liable under CAMA 2020 directly, not merely under equitable doctrine.

Duty to account for profits (section 86(2)). Any profit made through a transaction on behalf of the company or through the use of information or opportunities arising in the promotion must be accounted for to the company. This is the statutory version of the Erlanger secret profits rule.

Independent ratification required (section 86(3)). A promoter may protect himself from liability only through full disclosure followed by ratification by either an independent board or a general meeting at which the promoter cannot vote. Disclosure to a captive board does not suffice.

No limitation period (section 86(4)). Claims against promoters for breach of the section 86 duties are not time-barred. The court retains discretion to grant equitable relief in appropriate cases.

Interaction with section 96. The promoter’s duty of disclosure under section 86(3) runs parallel to the pre-incorporation contract regime under section 96. A promoter who enters pre-incorporation contracts without adequately disclosing their terms to the board after incorporation may breach both provisions simultaneously.

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Footnotes

¹ Companies and Allied Matters Act 2020 (CAMA 2020), s 85(1).

² Twycross v Grant (1877) 2 CPD 469, per Cockburn CJ.

³ CAMA 2020, s 85(1); J Olakunle Orojo, Company Law and Practice in Nigeria (4th edn, Mbeyi & Associates 1992) 52.

⁴ CAMA 2020, s 85(2).

⁵ Orojo (n 3) 52.

⁶ ibid 53.

⁷ Kelner v Baxter (1866) LR 2 CP 174, per Erle CJ; Orojo (n 3) 54.

⁸ Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (HL).

⁹ ibid, per Lord Cairns LC.

¹⁰ CAMA 2020, s 86; Orojo (n 3) 55.

¹¹ CAMA 2020, s 86(1).

¹² CAMA 2020, s 86(2).

¹³ (1878) 3 App Cas 1218 (HL).

¹⁴ ibid, per Lord Cairns LC.

¹⁵ ibid; CAMA 2020, s 86(3).

¹⁶ Gluckstein v Barnes [1900] AC 240 (HL).

¹⁷ ibid, per Lord Halsbury LC.

¹⁸ CAMA 2020, s 86(3).

¹⁹ Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (HL), per Lord Cairns LC; Orojo (n 3) 57.

²⁰ Orhobo v Tarka [1976] 1 FNLR 208.

²¹ CAMA 2020, s 96(2); see our article on pre-incorporation contracts in Nigerian law.

²² CAMA 2020, s 86(3); Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (HL).

²³ Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 (CA).

²⁴ Re Cape Breton Co (1885) 29 Ch D 795 (CA).

²⁵ Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 (CA).

²⁶ Orojo (n 3) 58.

²⁷ Emma Silver Mining Co v Grant (1879) 11 ChD 918; CAMA 2020, s 86(2).

²⁸ Gluckstein v Barnes [1900] AC 240 (HL).

²⁹ Orojo (n 3) 59.

³⁰ CAMA 2020, s 86(4).

³¹ ibid.

³² Orojo (n 3) 60.

³³ CAMA 2020, s 86(5).

³⁴ ibid; Orojo (n 3) 61.