PROMOTER

• Sec 2(1)- “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”.
• Tengku Abdullah ibni Sultan Abu Bakar v Mohd
Latiff bin Shah Mohd [1996] 2 MLJ 265 -Person who
takes steps to form a company.
• Twycross v Grant (1877) 2 CPD 469
• The owner of a concession who wished to form a
company. He engaged a person to assist him for the
formation of the company together with a contractor who
were to provide the finance for the company.
• Corkburn CJ said: ‘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”.
• A promoter is one who starts off a venture- any venture-
not solely for himself , but for others, of whom he may
be one’
• Person who is a party to pre-incorporation contract.
• Even if do not take active part but benefits from forming
co, can be considered as promoter – Tracy v Mandalay Pty
Ltd (1953) 88CLR 215
• Professionals who prepare documents for co formation
are not promoters (eg. Solicitors)
 Fiduciary Duties of Promoter

• Under the common law, it is a principle that a promoter is in fiduciary

relationship with the company
• Therefore, promoter is obligated to act bona fide and to avoid conflict
of interest with the company.
• He also must make sure that he make full disclosure or his interest in
any contract entered into by the company.
• A promoter is under a duty to act not to defraud the company by not
disclose any affairs relating to the company.
• He is not allowed to make undisclosed profits at the expense of the
promoted company.
• A promoter who has an interest in the contract with
the company and who stands to make profits because
of his or her interest must disclose that interest or
profit to company. Otherwise, the company can
rescind the dealings and make the promoter account
for the profits.
• Refer : Erlanger v New Sombrero Phosphate Co
• Secret profits are profit made by the promoter in
relation to the promotion of the company and
without knowledge and consent of the company.
• Profits will not be a secret profit if proper disclosure
is made by the promoters. Disclosure are to be full,
frank and explicit, and to contain at least information
relating to the nature of the interest of the
promoters and all material facts.
• A promoter who acquires any property for the
intended company after the commencement of the
promotion is presumed to do so as a trustee of the
company.
• He must hand over the property of the company at
the price it was acquired for, unless he informs the
company of his right to call for the property at its
cost.
• Promoters must also avoid disclosing confidential
information of the promoted company
• A promoter is also under a duty not to take up a
contract or opportunity which in equity belong to the
company.
 Remedies for breach of duty

• 1. Rescission
• When a contract is rescinded, the contract between the
company and the promoter is cancelled and any money will be
repaid and property returned.
• Erlanger v New Sombrero Phosphate- the company successful
in rescinding the contract for the purchase of an island and
recovered the purchase consideration of £110,000 from the
promoters.
• Rescission of a contract is the remedy that a company will
seek where it has entered into a contract in which a promoter
has an interest which was not disclosed.
• 2. Recovery of secret profit
• Where a promoter makes secret profit at the expense of
the company promoted, the company can make the
promoter account for that profit unless the promoter has
disclosed that profits to the company.
• Gluckstein v Barnes-the promoters were in breach of their
duties and the company was entitled to recover the sum of
£20, 000 as secret profit which was not fully disclosed by the
promoters.
• 3. Constructive trust order
• Fairview Schools Bhd V Indrani a/p Rajaratnam [1998] 1
MLJ 110 –the company may obtain a constructive order
and require the promoter to hand it over at cost in the case
where a promoter, during the course of promotion,
acquires property for his or her personal gain instead of
the company promoted. In this case, the court held that the
permit which was applied and issued to operate the school
was held in trust for the company.
• 4. Damages
• Re Leeds & Hanley Theatres of Varieties Ltd (1902) Ch
809
• Facts: The claim was for breach of duty of care in the
promoter selling property to the company at an
overvaluation.
• Held: The court held that the promoters who had acted in
breach of their fiduciary duties were liable for damages to
the company. The measure of damages was the same as the
profit made by the promoter.
• 5. Disqualification under the CA 2016
• Pursuant to section 199 of the CA 2016, it gives power for
the court to disqualify persons from acting as director or
promoter due to certain circumstances.
• Section 199 paragraph 2, An application arising from the
circumstances referred to in paragraph (1)(a) may be made
by the Official Receiver and the Registrar shall be made a
party to the proceedings.
 Pre- incorporation contract

• Meaning – contract entered by the promoter before

company is formed but for the benefit of the
company.
• Who is bound by PIC if after company is formed,
company refuses to be bound?
Effect of pre-incorporation contract

• Under common law

• Prior to its incorporation, a company as a legal entity does not
yet exist. Therefore, the company cannot enter into contract
nor can it appoint any person to enter into contracts on its
behalf.
• Kelner v Baxter (1866) LR 2 CP 174 – a company is incapable
of ratifying a pre-registration contract after it is registered.
• Newborne v Sensolid (Great Britain) Ltd (1954) 1 QB 45- a
company is not bound by a contract made prior to its
registration.
• Provision under CA 2016.
• Section 65 (1) A contract or transaction that purports to be
made by or on behalf of a company at a time when the
company has not been formed has effect as a contract or
transaction made with the person purporting to act for the
company or as agent for it, and he is personally liable on the
contract or transaction accordingly.
• (2) Notwithstanding subsection (1), a contract or transaction
referred to in that subsection may be ratified by the company
after its incorporation and the company shall be bound by the
contract or transaction as if the company had been in
existence at the date of the contract or transaction and had
been a party to the contract or transaction.
• Section 65(1) - a promoter or a person who acts on
behalf of the company will be liable to any contract
or transaction made before the company is
incorporated.
• Section 65 (2)-a company may after its incorporation
ratify a contract or transaction referred in section
65(1).
• After such ratification, the company shall be bound
by such contract.
• If the company did not ratify the contract after its
incorporation, the promoter or any person who acts
on behalf of the company will be bound and liable
to the contract.
• How to ratify? The act is silent as to how ratification is to
be effected.
• Ratification can be express/implied and by the BOD/GM
– Cosmic Insurance Corporation v Khoo Chiang Poh
[1981] 1 MLJ 61
• Ratification may be made by a board resolution.
• Ahmad Salleh v Rawang Hills Resorts Sdn Bhd [1995] 3 MLJ
211- a board resolution that has the effect of confirming that
the company has adopted the pre-registration company will
suffice.
 The Constitution of a Company
Definition and nature
• Company constitution (Previously known as Memorandum of
Association & Articles of Association)
• is a crucial document for a company.
• It defines the rules by which a company must operate.
• It outlines the scope of the company’s activities, its legal name and the
procedures by which its members will interact and conduct business.
• It establishes the procedural matters for the company’s administration.
• It also specifies the rights and privileges of the company and those of
its members and officers.
• By law, the company must – at all times – act in accordance with its
constitution.
 Requirement of Constitution

• Sec 31(1) - A company may, but does not need a

constitution except for company limited by
guarantee.
 Adoption of Constitution
• Sec 32 – A company may adopt Constitution by way of special
resolution and lodge a copy of constitution with registrar of
Companies within 30 days of the adoption. Failure to lodge the
constitution – the company and officer in default shall be fined
for an amount not exceeding RM 50, 000 or a further fine not
exceeding RM500 for each day the offence continues after
conviction.
• Sec 32(2) - The Constitution has no effect to the extent that it
contravenes the Act.
• Sec 33(1) – Effect of the constitution- bind the company,
directors and the members
 The Contents of the Constitution

• Sec 35(1)
(a) The objects of the co. ( So, companies have full capacity to
achieve the objects unless the constitution provides
otherwise).
(b) The capacity, rights, powers or privileges of the co if the
provision restricts such capacity, rights, powers or privileges
(c) Matter contemplated under this Act to be included in the
constitution
(d) Any other matters as the company wishes to include in the
constitution
• Sec 38 (1)- A company limited by guarantee shall have a
constitution
• Sec 38 (3)- The constitution shall state
(a) The company is a company limited by guarantee
(b) Objects
(c) Capacity, rights, powers and privileges of the company
(d) Number of proposed members for the incorporation
(e) Matters contemplated in the Act to be included in the
constitution
(f) Any other matters as the company wishes to be included
in the constitution
 DOCTRINE OF ULTRA VIRES
• The doctrine of ultra vires is no longer relevant ( Previously, the
doctrine is embedded in sec 20 of Companies Act 1965).
• Reason: - Companies have the full capacity of a natural person
under the Companies Act 2016.
• However, discussion as to the effect of an ultra vires transaction
is still relevant for :-
(a) companies that choose to have the objects clause
(b) companies limited by guarantee which must have the object
clause
• The co. shall be restricted from carrying on any business or
activity which is not within those objects [Sec. 35 (2)]