PRE-

INCORPORATION
CONTRACTS &
PROMOTERS
Promoters and
PIC in English
Law
  A Promoter is the person responsible for forming
a company, whether or not one is a promoter is a
question of fact to be determined. The term is not
defined by the companies act and judges have
shown little inclination towards formulating a
definition this term was left to be fluid so that
many can fall under this category.
 However, in Twyrocross v Grant (1877)
Cockburn CJ stated that a promoter “is one who

Definition undertakes to form a company with reference to

a given project & to set it going & takes needed
steps to accomplish it”
 The case of Whaley Bridge v Green (1879)
defines the term promoter that it is not of a legal
term but a business term. It is a number of
business familiar to the commercial world by
which a company is generally brought to
existence.
Ratification & Novation
 Ratification - Agency by ratification can arise when a person (the principal)
ratifies an act which has already been done by in his/ her name and on his/her
behalf by another person (the agent) who in fact, who had no actual authority
(whether express/ implied) to act on his behalf (the principal) when the act was
done.
 Novation - A novation is an agreement made between two contracting parties
to allow for the substitution of a new party for an existing one.
 Malaysian Law however does not make a large distinction between the
above two. In Malaysia as long as the PIC is ratified by the Company with
approved resolution, it is then sufficient.
  Rover International Ltd v Canon Film Sales 1987 Harman J.
At the time of the Pre-Incorporation Contract the company
does not exist, upon creation it is still a stranger to it. “ If
RATIFICATIO somebody did not exist then they cannot contract” The
doctrine of privity will operate to prevent rights and liability
N from being conferred.
 Kelner v Baxter 1866 “ A person cannot be an agent of a
nonexistent principal and a company cannot acquire
rights/obligations under a pre incorporation contract”. Here the
Promoters of a hotel company entered a contract on behalf for
the purchase of wine for the company, the company then
ratified the contract, and the wine was consumed but before
payment was made the company went into liquidation, the
promoters as agents were sued for the contract.
 Held
 1) Even if the promoters had signed as agents but at the time
of agreement it was inoperative the principal was
nonexistent( the company) , by such the contract would be
inoperative unless binding on defendants personally.
 2) Subsequent ratification would not relive the promoters
because the company has rights at the time of incorporation
not before. Only Novation would be allowed where a similar
contract on similar terms are made, only then the company is
liable for the contract. Failing to enter into a Novation then the
promoter is personally liable.
  The Terms of original agreement changed Re
Patent Ivory Manufacturing Co, Howard v
Patent Ivory Manufacturing and Co
 A novation is not effective if the company adopts
a contract due to the mistaken belief that it is
bound by it Re Northumbria Avenue Hotel Co
Ltd
NOVATION  A promoter is not liable if he signs the agreement
merely to confirm the signature of the company
and the contract would be a complete nullity
because the company was not in existence.
Newborne v Sensoilid Ltd.
 A promoter will be liable if he misrepresented by
representing a director of a nonexistent company.
Collin v Wright (1857)
 Promoters contracting on behalf of a putative
company will be held personally liable, unless
there is an agreement to the contrary.
  Phanograme v Lane 1982 . Lord
Denning “ Subject to any agreement to
the contrary, is to mean that in order for a
promoter to avoid personal liability the
contract must exclusively provide for the
exclusion”
 S 51 CA 2006 provides that if one
PERSONAL contracts on behalf of the company prior
LIABILTY to the formation of company then that
person is held to be liable, unless there is
an agreement to the contrary.
 There is care and duty not to make secret profits
as the case of Re lady’s Forest Gold Mind
SECRET Limited (1901), this is further explained in
PROFITS Erlanger v New Sobrero Phosphate Co a syndicate
purchased a mine of phosphate worth £ 55,000
and formed a company and sold the mine for £
100,000 without disclosing their interest in the
contract. The Board of Directors brought an
action to have the sale rescinded. The HOL held
that there needs to be disclosure to an independent
board of directors if the promoter wishes to make
an extra profit.
Gluckstein v Barnes in this case it was stated that
such disclosure would not be of much use if the
original shareholders are not truly independent
and the scheme as a whole is designed to defraud
the public. The disclosure needs to be to either the
public at large or to all members.
Promoters and
PIC in Malaysian
Law
 Who is a
promoter?
S.2(1) of the CA 2016
• Person who is involved in preparing
prospectus
PROMOTERS
• person who is a party to pre-incorporation
contract on behalf of a company that is yet to
be formed.
  A promoter is one who starts off a venture – any
venture- not solely for himself but for others, of
whom he may be one.

PROMOTERS  Tengku Abdullah ibni Sultan Abu Bakar v

Mohd Latiff bin Shah Mohd (1996) 2 MJL
265;
  Promoters can either be a natural person
as in Salomon’s case OR an artificial
person as in the case of setting up a
wholly owned subsidiary by a holding
company
 Promoters may be active or passive.
 Even if do not take active part but
benefits from forming co, can be
PROMOTERS considered as promoter (refer to the
next slide)
 Tracy v Mandalay Pty Ltd (1953) 88CLR
215.

 Professionals who prepare documents

for co formation are not promoters. (this
definition is included in CA 2016)
  S 167(1)(c): Civil liability for misstatement
in Prospectus
 S 186(8) & (9) : Prohibition of allotment
unless minimum subscription received.
 Allotment – (when a company issues new
PROMOTERS’ shares in exchange for cash or otherwise)
POWERS &  S187 (1) and (3) : Application for moneys to
DUTIES be held in trust until allotment
 S 428(1)(d): Judicial
management(restructuring of debts)
 S 429 : Inquiry into company’s dealings by
the Court through Judicial Management –
affidavit to be submitted
  At common law, promoters owe fiduciary
duty to the company
 Promoter is under strict obligation to act
in the interests of the company and must
avoid conflicts of interest
 Erlanger v New Sombreno Phosphate Co
PROMOTERS’
DUTIES  Is a promoter an agent or a trustee for
the company?
 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.
 Duties of a promoter include:

Not to make secret profit

Make true and honest account to the company for his dealings on
behalf of the company and those persons who become shareholders
PROMOTERS’ later.

DUTIES 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

Disclosure of interest in dealings
 A promoter cannot make secret profits. He must avoid conflict of
interests and make full and frank disclosure
 Fairview Schools Bhd v Indrani a/p Rajaratnam [1998] 1 MLJ
110
 promoters are trustees of co at start of promotion of PROMOTERS’
company and must not disclose confidential info to
outsiders. DUTIES
 Disclosure to be made to BOD, existing SH or prospective
shareholders.
 Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218
(HOL)
 PROMOTERS’ DUTIES
Disclosure of interest in dealings
 If disclosure made to BOD, they must be independent – Habib
Abdul Rahman v Abdul Cader (1808-1809) 4 Ky 193.
 Must be full disclosure and not partial – Gluckstein v Barnes
(1990) AC 240.

A syndicate took steps to form a company. They bought a property and

made a disclosure regarding the profit but not the discount on the
mortgages. Court: it was not a full disclosure and hence the promoters
are liable.
 Remedies:
 Rescission
 Ratification of the contract
 Recovery of secret profits and constructive trust

REMEDIE  Damages

S FOR  Rescission of contract – contract cancelled.

 Erlanger v New Sombreno Phosphate Co (1878) 3

BREACH 
App Cas 1218
Take note, the company may not be able to rescind if:

OF  It does not rescind reasonably promptly after

becoming aware of the promoter’s interest in
the contract

DUTIES  After becoming aware of the promoter’s

interest, it does something which indicated that
it has affirmed the contract
 Restitutio in integrum is impossible
 Involvement of innocent third party
  Company can claim for secret profit.
REMEDIE  The company can make the promoter account for
the profits promoter makes at the expense of the

S FOR company
 Gluckstein v Bames [1900] AC 240

BREACH
 Fairview Schools Bhd v Indrani a/p
Rajaratnam (No 2) [1998] 1 MLJ 110
 Also the company may obtain order and
OF require the promoter to hand over property
(Fairview Case)

DUTIES  Damages for breach of fiduciary duty.

 Co can claim any loss suffered
 Re Leeds and Hanley Theatres of Varieties
Ltd (1902) 2 Ch 809.
REMEDIES  Action can only be brought after the

FOR company is formed since the duty is

owed to the company.

BREACH
OF DUTIES
 Impact of s65 CA 2016:
• S.65(1) – Upon ratification the pre-incorporation
contract will be binding on the company.
• Ratification can be express/implied
MALAYSIAN PRE- • Cosmic Insurance Corporation v Khoo Chiang
Poh (1981) 1 MLJ 61.
INCORPORATION
• Express ratification – by passing of an
CONTRACT ordinary resolution.
• Implied – based on conduct of the company
in relation to the contract as to whether it
has adopted it. – accept responsibilities
(without the contract being presented during
meeting)
• Ahmad bin Salleh & Ors v Rawang Hills Resort
Sdn BHd (1996) MSCLC 91, 464 held:
• “ ratification can be combined with
other matters in a resolution, but so long
as its express of ratification is clear, as in
this case, the process of ratification is
completed by such an act”
 Impact of s65 CA 2016:
PRE-
INCORPORATION  If the company refuses to ratify, s 65(1)
CONTRACT states the person who enters into the
contract will be personally liable and is
entitles to the contact”

 Take note: under the repealed CA 1965,

promoters can exclude their liability, but
this position has changed under CA 2016.-
This is seen in S 51 CA 2006 (English Law
in which a promoter can exclude liability)

-
  ‘Disclosure based’ document – key
What is information for prospective investors to
Prospectus? make informed decision on proposed
investment in company securities.

 The (Capital Markets and Services Act

2007) CMSA s. 226 describes a
prospectus to include:
any notice, circular, advertisement or
document inviting applications or offers to
subscribe for or purchase securities or
offering any securities for subscription or
purchase.
  Effective as from 1 July 2000 the Securities Commission
(SC) as opposed to Companies Commission of Malaysia

SECURITIES (CCM) is the approving and registering authority for

prospectuses.

COMMISSION  s 232 imposes two mandatory obligations on a

corporation that is seeking public funding. They
include:
-THE  prior to that corporation seeking public funding

APPROVING that corporation must first register a prospectus

with the SC; s232(1) and

AND the corporation must also ensure that a copy of


the registered prospectus accompanies any form
of application for securities in that corporation. S
REGISTERING 232(2)
 Under S.232(7) CMSA, contravening ss 232(1) and
AUTHORITY 232(2) CMSA is punishable with a fine not
exceeding RM10 Million or imprisonment for a
term not exceeding ten years or both.
  Information provided for in the
prospectus is material to the investor,
i.e., must assist the investor in facilitating
an informed assessment as his or her
investment in the company securities;
Contents  Inclusion of false or misleading
information or omission of material
of information in the prospectus shall be
punished and not be tolerated by the
prospectus authority; and
 Due diligence is exercised by those who
prepare the contents of the prospectus.
 The CMSA requires the prospectus to
include two classes of information:
 Class one information refers to that
information that must be included in the
Prospectus to prospectus.
include  s235 of the CMSA ‘specific content’
information.
MATERIAL  Class two information refers to that
INFORMATION information which a reasonable investor
and his professional advisers would
expect to find in the prospectus.
 s 236 of the CMSA ‘reasonable investor’
information
 Contents of Prospectus S 235
 Be dated, (unless proven otherwise, the date
mentioned shall be treated as the date of the
Prospectus to issue of the prospectus): s 235(1) CMSA;
 Include a statement that the prospectus has
include been registered with the Commission and a
disclaimer stating that registration does not
MATERIAL mean that the Commission recommended the
securities nor that the Commission assumes
INFORMATION responsibility for the correctness of any
statement made or opinion or reports
expressed in the prospectus: s 235 (1)(b) (iii)
CMSA;
 General duty of disclosure s 236
 the issuer of the prospectus is given the freedom
to determine what information is relevant to the
prospective investor subject to the qualification
Prospectus to that the information included in the prospectus by
the issuer must be that which the reasonable
include investor would ‘reasonably require and
reasonably expect’ to find the prospectus.
MATERIAL  Exeter Group Ltd v ASC [1998] 16 ACLC 1382
(Australian case )
INFORMATION Held - a prospectus which merely stated that the
company’s strategy was to negotiate an investment
with an appropriate target, containing nothing more
than a profile of the directors who were given
extensive authority to make investment decisions, did
not comply with the standard set out in the Australian
equivalent of s 236 CMSA.
CONSEQUENCES FOR CONTRAVENING
SECTIONS 235 AND 236 CMSA

That the SC can refuse to register the prospectus: s 233(1) CMSA.

provided the SC has given a reasonable

That the SC can also issue a stop opportunity to the affected person to
order: s 245(1) CMSA. state why the order should not be made:
s 245(2) CMSA.

The SC can issue an interim order against the issuer without giving the
issuer an opportunity to be heard if it would be prejudicial to public
interest: s 245(3) CMSA.
LIABILITY FOR INCORRECT
STATEMENTS IN THE PROSPECTUS

Incorrect information in the prospectus refers to a statement or information

included in the prospectus, which is false or misleading.

Also extends to cover material omission of fact or information from the

prospectus.

Issuer and other persons responsible can be subjected to criminal and civil
liability: ss 246 and 248 CMSA where it includes a statement or information
that is false or misleading.
 • has made all reasonable inquiries and had
Due diligence reasonable grounds to believe that the
defense – statement or information included in the
prospectus was true and not misleading or
S.250 CMSA deceptive or that the prospectus did not include
2007 any material omission.

Reliance
DEFENCES defense – s • no liability if proves that he or she had
reasonably relied on information given by an
251,252 &
TOWARDS THE
another such as statements by experts or public
officers.
253 CMSA
PERSON 2007
PREPARING THE
PROSPECTUS Defense of
withdrawal of • withdrawn his or her consent to be associated
consent – with the preparation of the prospectus.
S254 CMSA
2007.