PROMOTERS & PRE-INCORPORATION

CONTRACTS
Promoter
S2(1): The person who is involved in preparing the prospectus, or any part of the prospectus.
Person who is a party to pre-incorporation contract on behalf of a company that is yet to be
formed.

Twycross v Grant: A promoter is a person who undertakes to form a company with reference
to a given subject and to set it going and who takes all the necessary steps to accomplish that
purpose

Tengku Abdullah ibni Sultan Abu Bakar v Mohd Latiff bin Shah Mohd (1996): A
promoter is one who starts off a venture – any venture- not solely for himself but for others,
of whom he may be one.

Non active participants as promoters – Tracy v Mandalay [1953]: “persons who leave it to
others to get up the company upon the understanding that they also will profit from the
operation may become promoters.” Held that non-active participants in the formation process
may be promoters. In this case it was alleged that various people associated with a newly
formed company (Mandalay Pty Ltd) had breached their fiduciary duties to the company.
They had participated in a scheme whereby the new company purchased land and shares at
inflated prices, producing substantial gains for the participants. The High Court confirmed
that promoters owe fiduciary duties to their charge. The second issue was whether all of the
defendants were promoters, as some were not directly involved in the formation process or
the impugned transactions.

Duties of Promoters
Fiduciary duties of a promoter – Edlanger v New Sombreno Phosphate: Promoters’
responsibilities cover the issue of a prospectus, raising of funds from the public and the
performance of contracts imposed upon the company by the promoters.
- Not to make a secret profit
- Make true and honest account to the company for his dealings on behalf of the
company and those persons who become shareholders later.
- Not to defraud the company by actively concealing any affairs relating to the
company.
- Not to disclose confidential information to 3rd parties.
- Not to hide any personal interests
1671(c): Civil liability for misstatements in the prospectus.
186(8): Breach of statutory duty if authorized or permitted allotment without minimum
subscription.
187(1), (3): Promoters are trustees for money to be held until allotment. Liable for the
money.
199: Disqualification of promoters by the court.
S428(1)(d): Liability during judicial management.
S429: Inquiry by the judicial manager, intervention by the court.
S503: Liquidators can examine promoters and their actions.
S590(6): Minister can order the investigation of affairs of a company.
S485(1), (2): Report of liquidator questioning actions of the promoter.
S502: Summoning of persons connect with the company by the court.
S541: Power of the court to assess damages against delinquent officers i.e. promoters.

Disclosure on Interest in Dealings

Fairview Schools Bhd v Indrani a/p Rajaratnam - promoters are trustees of co at start of
promotion of company and must not disclose confidential info to outsiders. A promoter
cannot make secret profits. He must avoid conflict of interests and make full and frank
disclosure

Edlanger v New Sombreno Phosphate - A group of syndicates (promoters) bought a piece of

land thinking it had valuable minerals. A company was later formed by the promoters to
purchase the land which turned out to be valueless. The company now argued that the
contract is void because the promoters did not disclose that that they had an interest in the
sale. HELD: the company can repudiate contract since there was a duty on promoters to
disclose their interests after the company was formed. This would allow company a good
judgment whether to adopt or not to adopt the contract.
Breach of duties by promoter – 3 remedies for the company:
1. Rescission of contract
2. Damages for breach of fiduciary duty - Re Leeds and Hanley Theatres of Varieties
Ltd (1902) 2 Ch 809 – company can claim losses suffered as a result.
3. Claim for the secret profit made by the promoter.

Note: Company can only sue after its incorporation since the breach of duty is one that is
owed to the company.
PRE – INCORPORATION CONTRACTS
- Contract entered into by promoter before company is formed but for the benefit of the
company.

Who is bound by pre – incorporation contract?

Common Law
- Newborne v Sensolid [1954]: A company is not bound by a contract prior to its
registration as the company is at the material time, non – existent.

- Keiner v Baxter [1866]: A company cannot ratify a pre-registration contract after it is

registered. In this case, A, B and C purportedly acting on behalf of the Gravesend
Royal Alexandra Hotel Co Ltd which was in the process of being formed, entered into
a contract for the purchase of wine from K. The wine was delivered to the co after its
formation, but it went into liquidation before K was paid. Held: the co was not liable.
However it held that A,B and C were personally liable, and no ratification could
release them from such liability.

Statute
S65(1) – If a company ratifies a pre-incorporation contract after incorporation, both parties
are bound by the valid and legally enforceable contract - CONTRAST

- Cosmic Insurance Corporation v Khoo Chiang Poh [1981]: ratification can be

express or implied and done by the BODs or shareholders at a general meeting. There
was a pre-incorporation letter appointing Mr. Khoo Chiang Poh as future managing
director and was given power to negotiate and enter into contracts on behalf of the
company that would be formed later. After the incorporation of the company a
resolution was passed thus: “Resolved that Mr Khoo Chiang Poh be appointed
managing director and holds office for life in accordance to the articles and memo of
association and is responsible to the BOD”. A dispute arose later between the
company and Khoo and the company sought to remove him. Issue was ‘whether the
letter from the promoters was a pre-incorporation contract and if so, whether it was
ratified by the company. The PC held that the company had ratified the contract via
the resolution.

S65(2) – before contract is ratified, it will be regarded as personally binding between 3rd
party and promoter.
- Perman S/B v European Commodities S/B (2006) 1 MLJ 97 – If there is ‘express
agreement to the contrary’, then promoter is not bound.
- Phonogram Ltd v Lane (1982)1 QB 938 – Agreement to the contrary – where there is
a provision in the PIC stating that the person acting on behalf of the company which is
yet to be formed is not bound. Such agreements must be EXPRESS. Before
incorporating a co called Fragile Mgt Ltd, L contracted with the Plaintiff for a loan of
12 000 pounds to finance a pop group called Cheap Mean and Nasty. The Plaintiff
wrote to L in which reference was made to him undertaking to pay. He nevertheless
was required to sign and return a copy ‘for and on behalf of Fragile Mgt Ltd’. The co
was never formed and the group never performed. It was held that the defendant was
personally liable to repay the money advanced.