1.Meaning of Promoter

A promoter is a person who undertakes to form a company, sets it going, and takes the necessary steps to accomplish that purpose.

Under Section 2(69) of the Companies Act, 2013 (India), a promoter is:

A person named as promoter in the prospectus or annual return, or

A person who has control over the affairs of the company, or

A person on whose advice the Board is accustomed to act.

2. Fiduciary Position of Promoters

Promoters occupy a fiduciary position toward the company they form.

This means:

They must act in good faith.

They must disclose all material facts.

They must not make secret profits at the expense of the company.

A promoter is not technically an agent or trustee (because the company does not yet exist), but equity treats them as standing in a fiduciary relationship.

3. Meaning of Secret Profit

A secret profit is any profit made by a promoter:

Without full disclosure to the company, and

Without consent of an independent and informed board or shareholders.

Secret profits typically arise when:

A promoter purchases property cheaply and resells it to the company at a higher price without disclosure.

A promoter receives commissions or benefits from third parties secretly.

A promoter enters into undisclosed self-dealing transactions.

4. Legal Consequences of Secret Profits

If a promoter makes secret profits, the company may:

Rescind (cancel) the contract.

Recover the secret profit.

Sue for damages for breach of fiduciary duty.

Hold the promoter accountable under fraud provisions (e.g., Section 447, Companies Act, 2013).

5. Case Laws on Secret Profits by Promoters

Here are 6 landmark cases:

1. Erlanger v. New Sombrero Phosphate Co. (1878)

Facts:
Promoters bought an island for £55,000 and sold it to the company for £110,000 without proper disclosure.

Held:
House of Lords held that promoters must make full disclosure. The company was allowed to rescind the contract.

Principle:
Failure to disclose profit = breach of fiduciary duty → contract can be set aside.

2. Gluckstein v. Barnes (1900)

Facts:
Promoters purchased property at a low price and resold it to the company at a higher price. They disclosed part of the profit but concealed an additional gain.

Held:
Court held that partial disclosure is insufficient. Promoters had to return the undisclosed secret profit.

Principle:
Full and frank disclosure is mandatory. Concealed profit must be repaid.

3. Emma Silver Mining Co. v. Grant (1879)

Facts:
Promoters sold a mine to the company without revealing prior ownership and profit.

Held:
Court ruled that promoters must disclose their interest and profit; failure makes them liable.

Principle:
Promoters cannot sell property to the company at a profit without proper disclosure.

4. Lagunas Nitrate Co. v. Lagunas Syndicate (1899)

Facts:
Promoters disclosed their profit to an independent board and shareholders.

Held:
Since full disclosure was made to an independent body, transaction was upheld.

Principle:
Secret profit is unlawful only when there is non-disclosure. Proper disclosure validates the transaction.

5. Re: Leeds and Hanley Theatres of Varieties Ltd. (1902)

Facts:
Promoter purchased property and resold it to company without proper disclosure.

Held:
Court ordered promoter to account for secret profits.

Principle:
Promoter holds profit in trust for the company if not disclosed.

6. Old Dominion Copper Mining & Smelting Co. v. Bigelow (1909)

Facts:
Promoters sold property to company at inflated price without disclosure to independent board.

Held:
Court held promoters liable for undisclosed profits.

Principle:
Disclosure must be made to an independent board or fully informed shareholders.

6. When Is Profit Allowed?

A promoter can make profit if:

The profit is fully disclosed, and

Disclosure is made to:

An independent board of directors, or

All existing and intended shareholders.

Without proper disclosure, profit becomes secret and illegal.

7. Key Legal Principles Established

Promoters owe a fiduciary duty to the company.

Secret profits are recoverable.

Full disclosure must be clear, complete, and made to an independent authority.

Partial disclosure is not sufficient.

The company may rescind contracts or sue for damages.

Courts strictly enforce transparency to prevent abuse of power.

8. Summary

Secret profits by promoters amount to:

Breach of fiduciary duty

Fraud or misrepresentation (in serious cases)

Unjust enrichment

Courts consistently hold that transparency and full disclosure are the foundation of lawful promoter conduct.