PROMOTERS & PRE-INCORPORATION CONTRACTS

A. Promoters
1. Introduction
2. Duties of promoters
Identifying a Promoter

‘A promoter, I apprehend, is one who undertakes to

form a company with reference to a given project
and to set it going, and who takes the necessary
steps to accomplish that purpose.’
Twycross v Grant (1877)
• Gopal Sri Ram JCA:

‘A promoter is one who starts off a venture – any

venture – not solely for himself, but for others, of
whom he may be one’

Tengku Abdullah ibni Sultan Abu Bakar v

Mohd Latiff bin Shah Mohd [1996] 2 MLJ 265

Identifying a promoter
Identifying a Promoter

Tracy v. Mandalay (1953) 88 CLR 215

Held:
active steps or participation is not always required.
s 2(1) CA :
"promoter", in relation to a prospectus issued by or in connection
with a corporation, means

• a promoter of the corporation who was a party to the preparation

of the prospectus or of any relevant portion of the prospectus;

• but does not include any person by reason only of his acting in a
professional capacity;

Introduction : Definition
 Promoters
 the person who undertakes the formation of a company

 by carrying out the procedure necessary for incorporation

 those merely acting in capacity on behalf of the person who

intends to set up a company are not promoters (e.g. lawyers and
accountants)

 those persons who enter into contracts on behalf of a company

before incorporation.
• Company law recognises promoter is subject to fiduciary duties:

- is not a trustee

- not an agent because company not yet born

- but cases insisted that promoter has fiduciary duties.

Duties of Promoters
• Duty to make full disclosure

•Duty not to make secret profit

Duties of Promoters
Erlanger v New Sombrero Phosphate Co (1878) :

• not to make secret profit

• not to exercise undue influence or fraud

A promoter must make full disclosure of all material facts when dealing
with the company.

Disclosure of interest in dealings :

Non disclosure of a promoter’s interest in dealings with the proposed
company – rescission of contract against the promoter.

Disclosure of interest in dealings

Case: Erlanger v New Sombrero Phosphate Co (1873)

• A syndicate purchased an island for £55,000 which purportedly to contain valuable

minerals. A company was formed and the island was sold for £110,000 to the company.
Directors of the company were nominated by the syndicate. The company adopted the
contract in its first meeting. It turns out that the island is worth considerably less than
the purchase price.

• Court held that the company could rescind the contract as the promoters were in
breach of their duties.

If profit is not secret, promoter can retain the profit.

Q: When is profit not secret? How to make the disclosure?
Case: Erlanger v New Sombrero Phosphate Co (1873)

Duty to disclose any profit that he makes to the

company by disclosing it to :

1. an independent board of directors; or

2. to *existing or future shareholders

*General meeting to pass a resolution (ordinary): In prospectus.

Case: Gluckstein v Barnes [1900]

Full and frank disclosure

• Disclosure to be made to an independent

board of directors.
• Not to a subservient board of directors.
 Case: Gluckstein v Barnes [1900]

 Promoter made 2 different types of profits (£40k & £20k).

 The promoters disclosed only part of the profit that they make in
the company's prospectus but the other half was not being
revealed.

 The liquidator sought to recover the sum from the promoters. • Fiduciary duty = trust
• Act honestly
 Court held that the partial disclosure was not sufficient. • For benefit of company

 Therefore the profits made was recoverable by the liquidator.

Fairview Schools Bhd v Indrani a/p Rajaratnam (No.2)
[1988] 1 MLJ 110

Has a legal duty to not make any secret profit out of the
promotion of the company without the company’s consent.

• The obligation not to make secret profit is only one of the

instance of the broad duty of a promoter to avoid conflict
of interest.

• There is also obligation not to disclose confidential

information.

Not to make secret profit

REMEDIES: 1. To a company
If a promoter breaches his / her fiduciary duties
owed to the company, the company entitle to:

a. Rescission of Contract

b. Recovery of Secret Profit

c. Damages
 Rescission = return what has been sold and get
back the money.

 Company have the right to rescind the contract if

there is non disclosure irrespective of whether or
not the promoter has made a secret profit.

 Erlanger Case : remedy granted

remedy of rescission
Rescission
Equity remedy but may be barred if:-
• No steps towards rescission was taken reasonably promptly after
becoming aware of the promoter’s interest in the contract
 delay amounting to affirmation.

• Upon being aware of the promoter’s interest, the company took steps
which indicated its affirmation of the contract;
 transaction affirmed / company by conduct affirmed.

• restitutio in integrum (restoration to original position) is not possible

• The property was innocently acquired by a 3rd party.

Lagunas Nitrate Co v Lagunas Syndicate [1899]

 • Any secret profit can be recovered by the
RECOVERY OF SECRET company
PROFIT  by making promoters accountable for the
profit that he made at the expense of the
company.

• But, the company can no longer rescind the

contract.
• Gluckstein v Barnes [1900]
• Court held : Dt must account to the company for the secret profit made
on a redemption of debentures not disclosed.

• Fairview Schools Bhd v Indrani a/p Rajaratnam (No.2) [1988]

• In case where promoter acquires property for personal gain, the
company may obtain a constructive trust order and require the
promoter to hand it over at cost.
 In situations where the company suffered
Damages losses as a result of breach of fiduciary
duty, the company may sue for damages.

Re Leeds & Hanley Theatres of Varieties

Ltd [1902]
Misfeasance
Proceedings

• Sec. 541 : Power of Court to assess damages against delinquent

officers, etc.
 misapplication, retainer, misfeasance / breach of trust or duty.

• Only available in winding up proceedings.

• If promoter makes secret profit when forming or promoting the

company, he is guilty of misfeasance or breach of trust or duty.
REMEDIES: 2. To others
To shareholders :
To whom the fiduciary duty is owed?
Can member sue if company is not interested to sue?

To creditors :
Can creditors sue?
B. Pre-incorporation contract
1. Common law position
2. Malaysian position
PRE-INCORPORATION CONTRACTS

- A company comes into existence on date of

incorporation.

- Promoter makes contract on behalf of the

company before the date of incorporation –
necessary e.g. premises, furniture, staff.
Common Law Position
• Contracts entered into on behalf of the company, before the
company is incorporated.

• A company cannot be bound by nor enforce contracts

entered into prior to its incorporation.

• The company as a legal entity does not exist prior to its

registration = not able to enter into contract.

• Common law applies the law of agency whereby the

company cannot have an agent before it is incorporated.

• The company is incapable of ratifying the contract even

after its incorporation.
Common Law Position
Case: Kelner v Baxter (1866)
Court held that the promoters were liable because they knew that the company was not
yet in existence and so they must have intended to be personally liable. Company
incapable of rectifying the pre-incorporation contract upon its registration.

Case: Newborne v Sensolid (GB) Ltd 1954 1 QB 45

The contract is void for want of competent parties.

Case: Black v Smallwood (1966)

Court held that the promoters were not liable as they thought that the company was
inexistence and did not indicate any intention that they should be personally liable.
Their intentions when signing the contract merely to authenticate the company's
signature.
• Re English & Colonial Produce Co [1906]
• Natal Land Co Ltd v. Pauline Colliery Syndicate [1904]
• Re Norththumberland Avenue Hotel Co. (1886)

Common law position

Position In Malaysia

Sec. 64 CA 2016
(1) A contract may be made
(a) In writing
(b) On behalf of a company – express / implied
(c) On behalf of a company – oral

(2) Formalities
 • Company Contracts - C. 64
• Pre-Incorporation Contract – C. 65

Companies Bill 2015

Position In Malaysia – In comparison

Sec. 35 CA 1965
• (1) Any contract or other transaction purporting to be entered
into by a company prior to its formation or by any person on behalf of a company
prior to its formation may be ratified by the company after its formation and
thereupon the company shall become bound by and entitled to the benefit thereof as
if it had been in existence at the date of the contract or other transaction and had
been a party thereto.
• (2) Prior to ratification by the company the person or persons who purported to act
in the name or on behalf of the company shall in the absence of express agreement
to the contrary be personally bound by the contract or other transaction and entitled
to the benefit thereof.

The Golf Cheque Book Sdn. Bhd. v Nilai Springs Bhd. [2006] 1 CLJ 259 :
The court highlighted 5 points to be noted before s. 35(1) could be
invoked.
 Questions:

• If the company does not ratify the pre-incorporation

contract, can the promoter be sued?

• If the company ratifies but does not fulfill its

obligation, and subsequently the company goes into
winding up. Can the promoter be sued?

Liability of promoter – s. 65 (1)

 syaidatul.adzmi@mmu.edu.my

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