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Chapter 5: Promoters + Pre-incorporation Contracts Notes

LIA3023 Company Law notes for Promoters & Pre-incorporation Contracts....
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Company Law (LIA3023)

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PROMOTERS

There is no precise definition of the term “promoter” in CA 2016, see s 2(1).

A good definition is found in Twycross v Grant (1877) 2 CPD 469 – a promoter is “a person who undertakes to form a company with reference to a given object and set it going and takes the necessary steps to accomplish the purpose.”

Generally, a promoter is a person who takes active steps to incorporate a company – (i) prepares documents, particulars and payment of fees for the incorporation process, (ii) gets the company going – securing an office premise, raising capital for the company etc.

Whether a person is a promoter is a question of fact to be determined based on circumstances of the case.

Persons who perform a role in the formation of the company purely in his professional capacity is NOT a promoter.

Determining whether a person is a promoter is important because a promoter owes fiduciary duties to the company that he/she is promoting.

As a fiduciary, the promoter must,

  • act in the best interest of the company
  • avoid conflicts of interest with the company
  • not make a secret profit or obtain any benefit at the company’s expense
  • make a full and frank disclosure of all profit made out of his promotion

Why? Promoters are in a position of active influence and direct control which promoters have over the company. This influence and control may be abused to the detriment of the company.

Erlanger v New Sombrero Phosphate Ltd

It is not the law that promoters cannot make a profit out of promoting the company. It is also not the law that a promoter cannot sell his own property to the company he is promoting.

What the law seeks to prohibit is the making of a secret profit.

A profit is not secret if proper disclosure of the profit is made to the company.

Therefore, if a promoter has made a profit out of promoting the company, he may retain the profit if he makes a full and frank disclosure of the profit.

How? 4 ways –

  • disclose to an independent board of directors

  • disclose to members of the company in a company meeting

  • disclose in a prospectus

  • disclose in constitution

Rescission of the contract – parties are restored back to their original position

Recovery of the secret profit

Damages for breach of fiduciary duty

WHO?

DUTIES

DISCLOSURE

REMEDIES

ADDITIONAL NOTES

1. The Companies Act 2016 definition is not comprehensive.

COMMON LAW POSITION

1. Before a company is incorporated, it has no legal capacity to enter into a contract. As the

bestowing of legal personality and capacity takes affect upon incorporation. Until then, a

contract entered into by a pre-incorporated company is void.

2. A promoter is not an agent as there is no principal. The alleged principal – the pre-

incorporated company – does not exist yet.

3. Common Law sees pre-incorporation contracts as void contracts and unenforceable. A

company is not liable or bound to said contract whilst also unable to acquire any benefits

from said contract.

MALAYSIAN POSITION

1. Section 65(1) recognises pre-incorporation contracts as valid contracts made by a person

acting for the company or as its agent, and he is personally liable for the pre-incorporation

contract.

2. The person referred to in Section 65(1) is usually the promoter.

3. Section 65(2) provides that a pre-incorporation contract may be ratified by a company after

it is incorporated. The term ‘ratified’ means approve or adopt. Once it ratifies the contract

post-incorporation, the contract is binding upon the company as if the company had been

in existence at the time of the contract and was party to the contract.

4. If a company does not ratify the pre-incorporation contract under Section 65(2), the

promoter who signed and executed the contract is personally liable for the contract under

Section 65(1).

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Chapter 5: Promoters + Pre-incorporation Contracts Notes

Course: Company Law (LIA3023)

246 Documents
Students shared 246 documents in this course

University: Universiti Malaya

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PROMOTERS
There is no precise definition of
the term “promoter in CA
2016, see s 2(1).
A good definition is found in
Twycross v Grant (1877) 2 CPD
469 a promoter is “a person
who undertakes to form a
company with reference to a
given object and set it going and
takes the necessary steps to
accomplish the purpose.
Generally, a promoter is a
person who takes active steps to
incorporate a company (i)
prepares documents, particulars
and payment of fees for the
incorporation process, (ii) gets
the company going securing
an office premise, raising capital
for the company etc.
Whether a person is a promoter
is a question of fact to be
determined based on
circumstances of the case.
Persons who perform a role in
the formation of the company
purely in his professional
capacity is NOT a promoter.
Determining whether a
person is a promoter is
important because a
promoter owes fiduciary
duties to the company
that he/she is promoting.
As a fiduciary, the
promoter must,
- act in the best interest of
the company
- avoid conflicts of interest
with the company
- not make a secret profit
or obtain any benefit at
the company’s expense
- make a full and frank
disclosure of all profit
made out of his promotion
Why? Promoters are in a
position of active
influence and direct
control which promoters
have over the company.
This influence and control
may be abused to the
detriment of the company.
Erlanger v New Sombrero
Phosphate Ltd
It is not the law that
promoters cannot make a
profit out of promoting the
company. It is also not the
law that a promoter cannot
sell his own property to the
company he is promoting.
What the law seeks to
prohibit is the making of a
secret profit.
A profit is not secret if
proper disclosure of the
profit is made to the
company.
Therefore, if a promoter has
made a profit out of
promoting the company, he
may retain the profit if he
makes a full and frank
disclosure of the profit.
How? 4 ways
- disclose to an independent
board of directors
- disclose to members of the
company in a company
meeting
- disclose in a prospectus
- disclose in constitution
Rescission of the
contract parties
are restored back
to their original
position
Recovery of the
secret profit
Damages for
breach of fiduciary
duty
WHO?
DUTIES
DISCLOSURE

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