UNIVERSITY OF GUYANA

MNG:3200 COMMERCIAL LAW.

WEEK 2: PROMOTERS, DUTIES OF PROMOTERS, PRE-INCORPORATION CONTRACTS.

TOPIC 1: PROMOTION OF COMPANIES

Prior to its incorporation, a Company has no legal existence. A company cannot form itself.

Someone must promote it. The promoters of a company are those who are responsible for

and take preparatory steps for its formation. Generally, promoters are the persons who

comply with the necessary formalities to register a company.

A person who assists in the promotion of a company and acts in a professional capacity eg

lawyer or an accountant, is not a promoter. A promoter may be a big businessman and or a

small trader.

Note: A person may become a promoter after the company is incorporated, eg, if he raises

capital for the newly formed company.

DUTIES OF A PROMOTER

Promoters are not agents/trustees of a company. A company cannot have an agent before it

is incorporated as it has not legal personality until its incorporation.

1. Because of the possibility of abuse, the courts have held that promoters stand in a

fiduciary relationship with the company they are forming.

2. They are in a position of trust and must act in good faith.

3. Promoters must not make a secret profit and any such profits must be disclosed to the

company.

4. If such profits are not disclosed, the company may recover same when formed or the

company may repudiate the contract entered into on its behalf or a court order may

be obtained for recission.

CASE: GLUCKSTEIN V. BARNES [1900]AC 240

A syndicate purchased a land for $140,000.00 and resold it to a company it formed for

$180,000.00. The courts held that that the promoters were accountable to the

company for the profit made without full disclosure.

REMEDIES FOR BREACH OF DUTY AGAINST PROMOTERS

If a promoter makes a secret profit, he or she must account for the said profits. If

there is no disclosure, the company may rescind the contract within a reasonable time

and must have not done anything to ratify same. One must note that the contract is

voidable at the instance of the company, that is, it is valid until it is set aside. The

company may also institute recovery proceedings against the individual promoter.

PRE-INCORPORATION CONTRACTS

Guyana has made provision in its Companies Act to allow companies within a

reasonable time after its incorporation to adopt a written contract made on its behalf

prior to incorporation, since under the common law, a contract made on behalf of a
company before its incorporation cannot bind a company, nor can it be enforced or

ratified by the company after its incorporation.

This is because no legal person, natural or artificial can enter into a contract before

the company comes into existence.

The issue touching and concerning pre-incorporation contracts can be found in the

COMPANIES ACT OF GUYANA 89:01 SECTION 15 SUBSECTION 1-5)

In the case of KELNER V. BAXTER [1866] LR&CP 174, in this case three individuals

entered into a contract for the supply of wines and spirits to a proposed hotel which

at the time was not yet incorporated as a company. The wines and spirits were

delivered by the said individuals and consumed. The company collapsed after shortly

after incorporation. It was held that the three individuals were personally liable on the

contracts for the wines and spirits.

The case of PHONOGRAM LTS V. LANE [1982], in this case a contract was made by

LANE with PHONOGRAM LTD “ for and on behalf of FRAGILE MANAGEMENT LIMITED”.

The company was never incorporated. The court held that LANE was personally liable

for 6000 sterling pounds which was advanced in respect of FRAGILE MANAGEMENT

LIMITED.

In the case of RE NOTHUMBERLAND AVENUE HOTEL CO. [1886], a promoter entered

into a contract for the grant of a building lease prior to the company’s incorporation.

After incorporation, the company entered onto the land and commenced it’s building
operations. It was held that the lease was not binding as there was no evidence that a

new agreement was entered into after its incorporation.

There is one distinguishing case, the case of HOWARD V. PATENT IVORY

MANUFACTURING CO.[1888], in this case the owner of a property agreed to sell it to a

company that was about to be incorporated. After incorporation, the terms of the

agreement were modified. In this case it was held that the modification of the terms

created a new agreement entered into by the company and was therefore binding.

PROMOTER’S CONTRACT WITH A COMPANY

In the circumstances where a promoter wishes to transact a business with a company,

that is to sell his own property to the company, he must if he wishes to retain any

profits made by the transaction take steps to see that the interest of the company is

protected. He must ensure that the necessary steps of selling the property through

and independent medium, for example through the board of directors, or the existing

or intended shareholders. These bodies will be able to and can exercise an

independent judgement on the transaction.

This must be done since a promoter has a fiduciary duty towards the company. The

promoter is obligated to make full disclosure to those who were induced to join the

company. Where a promoter fails to discharge his or her burden, the company may

rescind the contract, the company can sue the promoter for breach of his/her

fiduciary duties or compel the promoter to account for the profits made.

Additionally, promoters may also be liable for untrue and misleading statements in a

prospectus.
It must be noted that the company cannot affirm the contract entered into with the

promoter and also make claims for secret profits made.

In todays Modern society, the general practice in the case of public companies, is that

the promoter makes disclosures in a prospectus which has provisions for disclosure.

RENUMERATION OF PROMOTERS

It is to be noted that a promoter has no right or claim against a newly incorporated

company for payment for the promotion services in the absence of an express

contract under seal, since the company cannot enter into a contract prior to its

incorporation and when a contract can finally be made, the consideration would have

passed hence no contract can be validated.

EXPENSES

Lawful expenses incurred by promoters may be paid if permitted by the

MEMORANDUM OR ARTICLES OF ASSOCIATION or in the case of Guyana, THE

ARTICLES OF INCORPORATION when the company is formed.

THE RULE IN TURQUAND’S CASE. [INTERNAL MANAGEMENT RULE]

The rule in Turquand’s case..ROYAL BRITISH BANK V. TURQUAND [1855]. The rule

provides that an outsider who deals with a company in reliance of the company’s

public documents such as the Articles of Incorporation and consistently with those

documents, it is entitled to assume that all matters of internal management of the

company are complied with. The outsider is entitled to assume that internal

proceedings are being properly run and need not to enquire into their regularity. Thus,

if there is an internal procedural irregularity which may affect the validity of a contract

with an outsider, the rule will allow the outsider to ignore the irregularity and to

enforce the contract for if the public documents of a company are not being complied

with in the internal management of the company, this fact should not prejudice the

outsider acting in reliance of the public documents.

The Rule in Turquands basically states that ‘’ where there are persons conducting the

affairs of a company in a manner which appears to be perfectly consonant with the

Articles of Incorporation, then those dealing with them externally are not to be

affected by any irregularity in the internal management of the company.

EXCEPTIONS TO THE RULE IN THE TURQUANDS CASE

 1. The Rule does not apply where the persons seeking to rely on it knows that

matters relating to internal management have not been complied with.

2. The Rule does not apply if the document, which is relied on, is a forgery.

3. The rule does not apply where the transaction is of an unusual nature and the

outsider is put to enquiry.

4. The rule does not apply to an insider who should have knowledge e.g a director or

secretary of the company for a person is under a duty to inform himself.

5. The Rule does not apply where the company did nothing to hold out an agent as

having authority in the particular transaction.

The Rule is designed to protect outsiders dealing with the company not to protect the

company itself. A director, therefore, cannot rely on the rule.

sources

https://mola.gov.gy/laws-of-guyana

MANGAL RAMBARRAN, AN INTRODUCTION TO COMPANY LAW IN THE COMMONWEALTH

CARRIBEAN, 1edn (1995)

CHARKESWORTH &CAIN, COMPANY LAW, 12th end (1983)