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Chapter 5: Promoters + Pre-incorporation Contracts Notes
Course: Company Law (LIA3023)
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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
REMEDIES
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