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PROMOTER AND PRE INCORPORATION OF COMPANIES


WHO IS A PROMOTER?
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.

A promoter lays the foundations for a company in terms of negotiations, registration of the company, obtaining directors and shareholders and preparing all the paperwork.

A person who is involved in preparing the prospectus of a company is also a promoter: s 4(1), CA 1965. However, this interpretation is narrow since not all companies will issue a prospectus (e.g. private companies would not issue a prospectus) and in addition, issuing of prospectus is not the only step required to form a company.

In TWYCROSS v GRANT (1877) 2 CPD 469, Cockburn CJ observed:     
The question as to when one who in the outset was a promoter of a company continues or ceases to be so, becomes, therefore, as it seems to me, one of fact. A promoter, I apprehend, is one who undertakes to form a company with reference  to a given project and to set it going, and who takes the necessary steps to accomplish that purpose.

A person who has entered into a pre-incorporation contract on behalf of a company that is yet to be formed can also be considered a promoter.

Even if a person does not take an active part in forming a company but he benefits from forming the company, he can be considered as a promoter – Tracy v Mandalay Pty Ltd (1953) 88 CLR 215. The court noted that as used in connection with companies the term ’promoter’ involved the idea of exertion for the purpose of getting up and starting a company.

However, professionals who prepare documents for company formation are not considered promoters since the preparation of the documents is the job of the professionals.           

PROMOTER’S DUTIES

A promoter is under a fiduciary duty which is owed to the company. This means that a promoter must make full disclosure of all material facts when dealing with the company. Generally, disclosure must be made to an independent board of directors after the company is floated – ERLANGER v NEW SOMBRERO PHOSPHATE CO (1878) 3 App Cas 1218.; GLUCKSTEIN v BARNES [1900] AC 240

A promoter is not an agent nor is he a trustee for the company which he is forming, because a company cannot have an agent before it comes into existence. However, a promoter stands in a fiduciary relationship with the company and those persons who become shareholders latter.
This fiduciary duty exists even though the company has not been formed because the would-be investors, directors and creditors have placed their trust and confidence on the promoter to ensure that the company is properly formed.          

The duties of a promoter include:
  Duty not to make a secret profit at the expense of the company.
  Duty to make a true and honest account to the company for his dealings on behalf of the company that is being set up.
  Duty not to defraud the company by active concealment of any affairs relating to the company.
  Duty not to disclose confidential information to third parties.
  Duty not to hide any personal interests.


PROMOTER’S DUTIES – DISCLOSURE
A promoter cannot make secret profit. He must avoid conflict of interest and make full and frank disclosure – FAIRVIEW SCHOOLS BHD v INDRANI A/P RAJARATNAM & ORS (no. 2) [1998] 1 MLJ 110.

The disclosure should be made to the BOD, existing shareholders or prospective shareholders, ie via the prospectus.

ERLANGER v NEW SOMBRERO PHOSPHATE CO (1878)
Facts:
  A syndicate took steps to form a company. They bought an island and sold it to the company. Disclosure was made to directors. There were five directors. Two were overseas and another two were part of the syndicate. The fifth director, who was the Mayor of London, was too busy to give attention to the company’s affairs.

Held:
  Disclosure was not made to an independent board of directors but to the two directors who were also the promoters. Therefore, the promoters are in breach of their fiduciary duties.
If disclosure is made to the BOD, the BOD must be independent – HABIB ABDUL RAHMAN v ABDUL CODER (1808-1890) 4 Ky 193. This means that a director must not have also been a promoter of the company.

Disclosure must be full and not partial. In GLUCKSTEIN v BARNES [1900] 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. The court held that it was not a full disclosure and therefore, the promoters are liable.

REMEDIES FOR BREACH OF DUTY BY A PROMOTER
There are three remedies available where a promoter has breached his fiduciary duty:
1. Rescission of the contract: the contract between the company and the promoter is cancelled and any money will be repaid and property returned.

2.  Damages for breach of fiduciary duty: the company can claim damages for any loss suffered. This is especially in cases where the property was bought at a high value resulting in loss to the company. In Re Leeds & Hanley Theatre of Varieties Ltd (1902), the promoter sold a property to the company, which he formed at an overvaluation. The court held that it was a breach of duty by the promoter. Therefore, he is liable to pay damages to the company. The damages are based upon the loss suffered by the company.

         3.  Recovery of the secret profit: even if the promoter did not make secret profit, he could be made liable if there was no full disclosure

Since the duty is owed to the company, action can only be brought after the company is formed and only by the company.

If a promoter is involved in preparing the prospectus and it contains an untrue statement or there is omission, he must compensate any person who suffered loss: s 46, CA 1965.

If a promoter who is in breach of his duty is in control of the company’s management and the voting power at the general meeting and he uses that influence and control to prevent the company from bringing an action against him, a minority shareholder may bring an action under one of the exceptions to Foss v Harbottle (1843).

If in the course of winding up it is discovered that a promoter has breached his fiduciary duty in relation to the company, the court may on the application of the liquidator or of any creditor or contributory examine the conduct of the promoter, and compel him to repay or restore the money or property or any part thereof with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust or duty as the court thinks just: s 305, CA 1965.


PRE-INCORPORATION CONTRACT

A pre-incorporation contract is a contract purported to be made by or on behalf of a company which has not been formed. The pre-incorporation contract will be entered into by the person acting on behalf of the company yet to be formed. This person would be the promoter.

As a general rule, a promoter is held personally liable on pre-incorporation contracts. The courts simply hold that promoters cannot be agents since the company has yet to come into existence and as such, the company cannot enter into a contract with the promoter, or be a principal.

If, however, the promoter secures the contracting party’s agreement to hold only the corporation (not the promoter) liable on the contract, the promoter will not be liable in the event of any breach of contract.

The validity of pre-incorporation contracts in Malaysia is governed by s 35(1) and (2) of CA 1965. By s 35(1), a company may after its incorporation ratify the pre-incorporation contract. Once ratified, the contract becomes valid and binding between the parties. Both the company and other party will be able to enforce it. By s 35(2) of CA 1965, before the contract is ratified, it will be regarded as personally binding between the third party and the person who acted on behalf of the future company (i.e. promoter), unless there is an express agreement to the contrary.

Ratification can be either express or implied – Ahmad bin Salleh & Ors v Rawang Hills Resort Sdn Bhd (1995) and it can be done by the BOD or the shareholders at a general meeting – Cosmic Insurance Corporation Ltd v Khoo Chiang Poh (1981). Express ratification means that it is either in writing or in oral terms. Implied ratification is based on the conduct of the company in relation to the contract as to whether it has adopted it.

If there is an ‘agreement to the contrary’, the person acting on behalf of the company which is yet to be formed is not bound: s 35(2), CA 1965. An agreement to the contrary is where there is a provision in the pre-incorporation contract which states that the person acting on behalf of the company which is yet to be formed is not bound.


Note that ‘agreement to the contrary’ must be express and not implied – Phonogram Ltd v Lane (1982).
PROMOTER AND PRE INCORPORATION OF COMPANIES PROMOTER AND PRE INCORPORATION OF COMPANIES Reviewed by Kamaruddin Mahmood on 4:23:00 PTG Rating: 5

2 ulasan:

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