Promoter is a person responsible for setting up the company and helping raise the

necessary capital to enable the company to carry on its business. In Emma Silver
Mining Co v Lewis and Son (1879) 2 CPD 396, a person is deemed as a promoter even
he or she takes a minor part in organising the set up of a company. A person who
helps to arrange for directors, to place shares, to negotiate agreements, or prepare
prospectus is a promoter. Gerald, Jill, and Harry are also promoters before they were
appointed as directors since they raise the asset to enable the company to carry on
its business.

Promoters may abuse their position to make a gain for themselves at the expense of
the company. Promoters has fiduciary duties that he must not profit without
disclosure. He may make a profit (not fees) out of the promotion, subject to the
general rule that a contract made between a promoter and the company is voidable
at the company’s option unless it was fully disclosed to the company including all
material facts. In Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, it
held that a promoter is permitted to make profit out of a promotion with the consent
of the company (board), but if the board is not independent or under the influence
of the promoter then consent must be given by persons who provided the company
with the initial capital. In this case, Jill sold the kitchen to the new company for
$2,000,000 for himself as a result of work which he did as promoters, so that the
transaction must be fully disclosed. If the transaction or profit without disclosure, the
transaction is voidable at the election of the company.

Promoters have fiduciary duties that must not gain advantage without disclosure. In
this case, Gerald gains the advantage the keep that van which is more valuable for his
own company may breach of fiduciary duties. If Gerald did not fully disclose the
information to the company, it might be damaging for negligent or fraudulent
misrepresentation. The company can rescission the pre-incorporation contract.

In Kelner v Baxter (1866) LR 2 CP 174 , it held that company cannot be bound by any
pre-incorporation contracts because the company does not have the capacity to
make contracts or appoint an agent. Once incorporated, it also cannot ratify the pre-
incorporation contract. The promoter is personally liable. In this case, Harry asked NT
Telecom to install a phone is a pre-incorporation contract since the new company
was not a party to the original contract, the third party cannot enforce the contract
against the company. Under s.122(2), a promoter is personal liable in a pre-
incorporation contract and can enforce the contract. Therefore, Harry has personal
liability for the contract with NT Telecom. After incorporation, the company may
ratify the contract to the same extent, but if not, it likely Harry need to pay the fee
for himself.

However, there have 4 exclusions of personal liability in the pre-incorporation

contract. 1. Under s.122(2), personal liability of promoter can be excluded by express
agreement and there must be a clear exclusion of personal liability. 2. According to
s.122(3), this provision alters the common law position as company can choose to
ratify the contract and become entitled to enforce it. Ratification need not be
express and can be done impliedly by way of words or conduct. 3. Novation is the
replacement of one contract to the same effect as the original one that must have
expressly agreed to, or have done acts that are necessarily referable to, the new
agreement. 4. Implied contract is a new contract may be implied from the way the
company acts after its incorporation, but its action must be unequivocally referable
to that contract and, even if they are so, they only amount to an offer, and the offer
must be accepted by the other party.