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

A syndicate acquired an interest in the phosphate-bearing island of Sombrero and promoted a company to purchase it at a substantial profit. The company approved the purchase through a board which did not provide an adequately independent assessment of the promoters' position. Investors later discovered the circumstances and the company sought to rescind the transaction. The promoters argued, among other matters, that delay and the extraction of phosphate prevented the parties being restored to their original positions. The dispute concerned the disclosure required from company promoters and the practical limits of equitable rescission.

Could the company rescind its purchase from promoters who failed to secure independent informed approval, despite delay and changes caused by working the property?

The House of Lords upheld rescission. Promoters occupy a fiduciary position in relation to the company they are forming and must make proper disclosure when selling their own property to it. Approval through an inadequately independent board did not satisfy that responsibility. The lapse of time did not, on the circumstances, amount to a bar through laches. Nor did rescission require the court to achieve a physically exact reversal of every change to the property. Substantial restoration could be achieved through accounts and financial adjustments for benefits and deterioration. The remedy set aside the transaction on restorative terms, rather than simply awarding the company a fixed sum for the promoters' undisclosed gain.

A promoter selling property to the promoted company must secure properly informed approval free from the undisclosed conflict. Equitable rescission may remain available where accounts and compensation can achieve substantial restoration, although delay and other equitable bars must be assessed.

Erlanger links fiduciary disclosure with the remedial question of rescission. It is not merely a rule against earning a profit: the defect concerned approval of the conflicted transaction. The case also demonstrates equity's practical approach to restoration where an asset has been used. Compare Boardman on unauthorised profit, while keeping an account of profits distinct from rescinding the underlying contract. Whether a remedy is barred depends on the actual delay and consequences, not the passage of time alone.