PROMOTERS & PRE-INCORPORATION CONTRACTS

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

‘A promoter … 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) 2 CPD 469
• 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) 3 App Cas 1218:
• not to make secret profit
• not to exercise undue influence or
fraud

A promoter must make full disclosure of all material facts.

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 headed by Erlanger purchased an island for £55,000

(purportedly contained phosphates) - a company was formed – directors
(1- independent; 2 abroad; remainder – puppets) - island was sold for
£110,000 to the company - the purchase was ratified by the board of
directors - it turned out that the island was worth considerably less than
the purchase price

• Held: Company could rescind the contract - promoters were in breach of

their duties.

Disclosure of interest in dealings

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.

Fairview Schools Bhd v Indrani a/p Rajaratnam (No.2)
[1998] 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.

Not to make secret profit

Case: Gluckstein v Barnes [1900] AC 240

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).

 Prospectus disclosed the profit of £40k; but the £20k profit

was not disclosed.
• Fiduciary duty = trust
 The liquidator sought to recover the sum from the • Act honestly
promoters. • For benefit of company

 Held : Partial disclosure was not sufficient.

 Liquidator was allowed to recover the profits.

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

a. Rescission of Contract

b. Recovery of Secret Profit

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

 Company has 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
Equitable remedy but may be barred if:-

• Inordinate and undue delay in exercising the rights of rescission

 delay amounting to affirmation.

• Transaction has been affired by the company

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

 Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392

• A 3rd party has innocently acquired the property.

 • Promoters are made accountable for the profit
RECOVERY OF made at the expense of the company.
SECRET PROFIT
• The company can no longer rescind the contract.

• Gluckstein v Barnes [1900]

• Held : Promoter must account to the company for the secret profit
made.

• Fairview Schools Bhd v Indrani a/p Rajaratnam (No.2) [1998]

• 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.
 If the company suffers losses - may sue for
Damages damages.

Re Leeds & Hanley Theatres of Varieties Ltd

[1902] 2 Ch 809
 Measure of damages = secret profit
of the promoters
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?
• General rule: No, promoter cannot seek re-imbursement
unless in 3 situations:
• (i) there is a contract personally binding on other promoters
• (ii) there is a contract made on behalf of the company (before
incorporation) and the contract was ratified under s 65 CA
• (iii) there is a contract made by the company and promoter
after the incorporation

• Note: Past service provided to an existing company constitute a valid

consideration: Kepong Prospecting Ltd v Schmidt [1968] 1 MLJ 170

Reimbursement of pre-incorporation expenses

UCL3612 Company Law 1
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

• Until incorporated, no legal personality, no contract capacity

– not bound by pre-incorporation contract
• Re English & Colonial Produce Co [1906] 2 Ch 435
• Natal Land Co Ltd v. Pauline Colliery Syndicate [1904] AC
120 (PC)

• Company can enter into a new contract to put into effect the
terms of pre-incorporation contract – novation – company
can sue or be sued
Common Law Position
Case: Kelner v Baxter (1866) LR 2 CP 174
Held: Promoters were liable - knew that the company was not yet in existence - must have
intended to be personally liable - company could not ratify 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 – promoter not liable

Case: Black v Smallwood (1966) 39 ALJR 405

Held: Promoters were not liable -- they thought that the company was in existence - did not
indicate any intention that they should be personally liable - intention when signing the contract
was merely to authenticate the company's signature.
 Position in Malaysia
• Company Contracts - C. 64
• Pre-Incorporation Contract – C. 65

Companies Bill 2015

• The effect of s 65(1) of Companies Act 1965:

allows a third party to enforce the contract against

i. the company if it has ratified the contract after its

incorporation; or

ii. the promoter or any person acting on behalf of the

company, if the company does not ratify.
(i) expressly by way of board resolution or resolution of general meeting
- Ahmad Salleh v. Rawang Hills Resort Sdn. Bhd. [1995] 3 MLJ 211

(ii) Implied ratification

- Kelner v. Baxter (1866) LR 2 CP 174
- Chung Yoke Onn v. C S Khin Development SB
[1985] 1 CLJ 89

How to ratify?
• Applicable to public company

• Section 190(5) CA :
“Any contract made by a company before the date on which
it is entitled to commence business shall be provisional only
and shall only be binding on the company to commence
business.”

Provisional contract
• Chan Wai Meng, Essential Company Law in Malaysia : Navigating the
Companies Act 2016 (Sweet & Maxwell 2016)

• Companies Act 2016

Essential Readings
 syaidatul.adzmi@mmu.edu.my

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