UCL3612 COMPANY LAW I TRI 1, 2020/2021

Tutorial

Topic 2: Promoters and Pre-incorporation Contracts

1. (a) Who is a “promoter‟? Discuss briefly his duties. [Slides: 4-17]

 Twycross v Grant - 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.
 Tengku Abdullah ibni Sultan Abu Bakar v Mohd Latiff bin Shah Mohd -
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.
 Tracy v. Mandalay - 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

Duties of promoters:-

 Duty to make full disclosure (Erlanger v New Sombrero Phosphate Co)

 Not to make secret profit (Fairview Schools Bhd v Indrani a/p
Rajaratnam)
 Full and frank disclosure (Gluckstein v Barnes)
UCL3612 COMPANY LAW I TRI 1, 2020/2021

(b) If a promoter breaches his duties, what are the remedies available to
the company to whom such duties are owed? [Slides: 20-24]

 Rescission of Contract
return what has been sold and get back the money. The 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.
Equitable remedy but may be barred
- if Inordinate and undue delay in exercising the rights of rescission 
-delay amounting to affirmation.
-Transaction has been affirmed by the company
- restitutio in integrum (restoration to original position) is not possible

 Recovery of Secret Profit

Promoters are made accountable for the profit made at the expense of
the company. The company can no longer rescind the contract.
-Gluckstein v Barnes [1900]. The court held that 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.

 Damages
If the company suffers losses - may sue for damages.
Re Leeds & Hanley Theatres of Varieties Ltd [1902] 2 Ch 809 .
Measure of damages = secret profit of the promoters
UCL3612 COMPANY LAW I TRI 1, 2020/2021

(c) What is a pre-incorporation contract? Distinguish a “pre-incorporation

contract” from a “provisional contract”. [slides: 30-37]

 Pre-Incorporation Contract: Contracts purported to be made on behalf

of a company before its incorporation. A company comes into
existence on date of incorporation.

 Under the Common Law:

Only an entity with legal personality can enter into a contract.

Therefore, prior to the issuance of certificate of incorporation, a
company cannot enter into any contract.
 Hence, acts done by purported agent will not bind the company.
 Re English and Colonial Produce Company: The company was
not bound to pay for the services and expenses incurred by the
solicitor as the company had not been incorporated yet at the
time the solicitor was engaged to serve for the company. So
there is no ctt for service between the solicitor and the
company.
 Natal Land and Colonization Company Limited v.
Pauline Colliery and Development Syndicate Limited: Held
that R company was unable to enforce the pre-incorporation
contract (ctt to get the lease) made on its behalf as a company
is not allowed to ratify, any contract made on its behalf by an
agent before it was incorporated, even after its incorporation.
Common Law cases:
 Kelner v Baxter: A non-existent company cannot appoint the
agent on its behalf. So, the promoters can’t be held personally
liable for the pre-incorporation company to buy goods or
property. There is no contract between Black and the directors.
It is because Black is intended to make the contract with the
company and not with the directors.
Malaysian Position:
 s. 65(2) of the CA 2016: a company may be bound by the
contract that made prior to the incorporation of the
company provided that they had ratified the contract
made by its agent after its incorporation.

 Ratification methods:
 Board Resolution (Express)
UCL3612 COMPANY LAW I TRI 1, 2020/2021

⁃Ahmad Salleh v Rawang Hills Resort: Despite of the D

company was not in existence when the S&P ag was entered
into, the ag (pre-incorporation) had been ratified by the D
company under s.35 of CA 2016 by way of resolution.
 Based on conduct of the company (Implied)
⁃Chung Yoke Onn v C S Kin Development: The promoter
entered into an agreement with the architect to draw building
plans. Even though neither the Board nor the members at the
general meeting passed a resolution to adopt the agreement,
the company used the plan to build a block of buildings.

Differences between Pre-Incorporation and Provisional Contract

Pre-Incorporation Contract Provisional Contract

Also known as preliminary contracts No other name

Arises in cases of public company and Arises in cases of public company.

private company.
S.65(1) : Contract made by or on S.190(5): Contract made after
behalf of company before the company incorporation of company. Only for
was incorporated. Both for public and public company.
private company.
Not binding on the company as the Public company exists during the time
company was not an entity. of this contracts made.

S.65(2): Company may ratify the

contract after incorporation
UCL3612 COMPANY LAW I TRI 1, 2020/2021

2. Ultraman Sdn. Bhd. agreed to sell 2,000 boxes of candles under a contract which
read in part: “We agree to buy from Ultraman Sdn. Bhd. 2,000 boxes of candles …”
(signed) Superwoman Sdn. Bhd. Ultraman Sdn. Bhd. delivered the goods but has
never received the price. It has now been discovered that Superwoman Sdn. Bhd.
was only incorporated the day after this contract was made. Advise the directors of
Ultraman Sdn. Bhd. whether they may recover the price, and if so, from whom?

Answer: [slides: 30-35]

Whether Superwomen Sdn Bhd is liable for damages incurred by Ultraman

Sdn Bhd?

Under pre incorporation contract, there are common law and Malaysian law
that can be referred to. Generally, a company comes into existence on date of
incorporation. In order for a promoter to set up their company, they are allowed to
enter into contract on behalf of the company before the date of incorporation.

Under common law position, company has no legal personality and no

contract capacity which is not bound by pre incorporation contract until it is
incorporated. This can be seen in the case of Re English & Colonial Produce Co
where the fact of this case is, when a solicitor was engaged to prepare the
necessary documents and obtain the registration of a company. He paid the
registration fee and incurred certain expenses incidental to registration. The court
held that the company was not bound to pay for his services and expenses. In
addition, the court mentioned that it is not desirable to saddle the corporation with
burdens imposed upon it in advance by overtly optimistic promoters.

Not only that, we can also refer to the case of Natal Land Co Ltd V Pauline
Colliery Syndicate where the fact of this case is, in December 1897 Colliery, as an
agent for a company which is not yet formed , entered into a contract with Natal
Land Ltd by which Natal Land Ltd was to grant a mining lease to the new company.
The new company (known as P) was formed in January 1898 but then Natal Land
Ltd gave notice that it would not grant the lease. P Ltd claimed that it was entitled to
the lease. It was held although the company had the benefit of the contract, it did
not impose on it any liability to pay since the contract was made before the
company was formed.
UCL3612 COMPANY LAW I TRI 1, 2020/2021

In one of the common law cases which is Kelner v Baxter, a group of promoters
for a hotel company (Gravesend) entered into a contract of wine. The contract
was supposedly on behalf of the hotel. But, at the time of performing the contract,
the hotel was not registered yet. Therefore, it was a pre-incorporation contract.
Gravesend was eventually registered, but by that stage the wine had been
consumed before the money had been paid. Gravesend soon went into liquidation.
Promoters of the hotel were sued and argued that the contract has been ratified and
the liability had passed to the company because the hotel company has been
incorporated. Issue that had been raised in this case was whether the
agents/promoters were liable for the pre-incorporation contract post ratification by
Gravesend? However, the court held that promoters are liable mainly because the
said company did not exist at the time of the contract made. Therefore, resulting
the contract wholly inoperative. The court added a stranger cannot by subsequent
ratification, relieve the promoters from that responsibility of liability. A promoter can
avoid liability if a substitute agreement novice the original pre-incorporation contract.

Next, under Malaysian position, Section 65 of companies act 2016 can be

referred to. According to section 65(1) mentioned that a contract would be affected if
the contract was made on behalf of a company which at that time is not form. This
causes the promoter to be personally liable. However, according to section 65(2) of
the Act, the promoter will not be held liable because a contract may be ratified by the
company after its incorporation and automatically the company shall be bound by the
contract. Not only that, it will show that the company has been in existence at the
date of the contract and been a party to the contract.

Based on the question given, Ultraman Sdn Bhd entered into contract with
Superwoman Sdn Bhd which later he found out that the company was
incorporated only after the contract was made. According to common law
position, the Superwoman Sdn Bhd has no legal personality and no contract
capacity, therefore Superwoman Sdn Bhd will be personally liable for damages
incurred by Ultraman Sdn Bhd. The same principle can also be seen in the case of
Kelner v Baxter where the court held that the promoters are liable mainly because
the said company did not exist at the time of the contract made. We can also look at
the Malaysian law position under section 65(1) of the companies act 2016 stipulate
UCL3612 COMPANY LAW I TRI 1, 2020/2021

that the promoter will be personally liable as the company was not incorporated
when the contract was made and the promoter acted on behalf of the company.

In conclusion, Superwoman Sdn Bhd is liable for the damages incurred by

Ultraman Sdn Bhd.