D) PROMOTERS & PRE-INCORPORATION CONTRACTS

Question 1) Who are promoters?

Before a company comes into being there must be some persons desiring the
incorporation to take the necessary steps to incorporate it under the Act. These persons desiring
the incorporation are called the “promoters”.

Provision: Form 48A, 125, 130.

The term promoter has been explained on various occasions by the courts in the following
words:-
1. One who under take to form a company with reference to a given project and set it going
and who takes the necessary steps to accomplish that purpose;
2. It is a short and convenient way of designating those who set in motion the machinery by
which the Act enables them to create an incorporated company;
3. The term ‘promoter’ is a term not of law but of business, usefully summing up in a single
word a number of business operations familiar to the commercial world by which a
company is generally brought into existence.
4. Twycross v Grant (1877)2 CPD 469 - The term promoter involve the idea of exertion
for the purpose of getting up and starting a company and the idea of some duty towards
the company imposed by or arising from the position which the so – called promoter
assumes towards it.

Question 2) What is the duration of promotion?

The question when a person begins or ceases to be a promoter of a company depends

on the fact of each case.

Question 3) Who are prohibited from being promoters?

S130 (1) prohibits a person, unless with the leave of the High Court from being a
promoter if he is convicted whether within or outside Malaysia:-

1. Of any offence in connection with the promotion ,formation or management of a

corporation;
2. Of any offence involving fraud or dishonesty punishable on conviction with
imprisonment for 3 month or more
3. Of any offence under section 132, 132 A, or 303-Prohibition is for a period of 5 year
running from the date of conviction or if imprisonment is imposed within 5 years after
the person is release from the person. Infringement of section carries with it a penalty of
5 year imprisonment or fine of RM100, 000 or both.

Question 4) What is the fiduciary relationship between the promoter and the
company?

Promoter of a company stand in a fiduciary relation to the company they were creating
in equity the promoters stand in a fiduciary relation to it and those persons whom they induce to
become shareholders in it and count in equity bind the company by any contract with themselves
without fully and fairly disclosing to the company all material facts which the company ought to
know.

1
Case: Erlanger v New Sombrero Phosphate Co (1874-1880) ALL ER Rep 271, HL

Question 5) What are the Fiduciary Duties of the Promoter?

Promoter being fiduciaries should act with utmost good faith and not make secret profits
out of theirs promotion. Where a co-promoter has been promised a secret profit or benefit but has
not received it after the company is formed, the company may itself enforce the claim against the
promisor on the ground that the promisor holds the claim as trustee for it.
Case: Whaley Bridge Calico Printing Co v Green & Smith (1879)5 QBD 109

Question 6) What is ‘Disclosure’?

Promoters can profit out of their promotion as long no secret profits made by promoters
i.e. proper disclosure should be made by the promoters. The law requires the disclosure to be
full, front and explicit and to contain at least information relating to the nature of the interest of
the promoter and all other material facts. A partial truth can be defective
Case: Gluckstein v Barnes [1900] AC 240, HL.

Question 7) What would amount to a disclosure?

a) By disclosing in the memorandum or articles of the company;

b) By communicating to an independent board of directors; or
c) By communicating to the existing and intended members of the company

Question 8) What are remedies against Promoters?

a) Rescission of contract
b) Suit to recover secret profit
c) Suit for damages for breach of fiduciary duty

Question 9) What are payments for promotion services?

Table A articles 73 confers a power on the directors of a company to “pay all expenses
incurred in promoting and registering the company”.

Question 10) What are Pre- Incorporation Contracts?

Common law – is a contract purportedly entered into on behalf of a company before its
incorporation
Under Law – S35 (1) _ _ _ entered into by a company prior to its formation _ _ _ shall become
bound by and entitled to the benefit thereof as if it had been in existence at the date of the
contract or other transaction and had been a party thereto.

Question 11) Can a Pre-Incorporation Contract be ratified?

Conditions:-
1) The alleged contract or transaction must purport to have been entered into “by any person
on behalf of a company prior to its formation”.
2) It is only after that first condition is satisfied that such a contract or transaction may be
ratified by the company after its formation.

2
 3) It is only if both those conditions are satisfied that such a contract upon such ratification
is ante-dated to the date when it first purported to have been made.

Question 12) What is the effect of ratification?

Once ratified under S35(1), the company will become bound by and entitled to the
benefit of the contract as if it had been in existence at the date of the contract. It operates
retrospectively; it dates back to the time when the original contract was made as if the company
was already a party to it.

Question 13) What are Provisional Contracts?

It is a contract, no matter what bits character, made by a public company having a share
capital after its incorporation but before the date at which it is entitled to commence business.

Question 14) What is the binding effect of provisional contracts?

A provisional contract is not binding on a company until the date at which it is entitled
to commence business.

Question 15) What are methods of making contracts by company?

1) A contract if made between private persons would be by law required to be in writing

under seal may be made on behalf of the company in writing under the common seal of
the company.
2) A contract if made between private persons would be by law required to be in writing
signed by the parties to be changed there with may be made on behalf of the company in
writing signed by any person acting under its authority express or implied
3) A contract made between private persons would by law be valid although made by parol
only may be made by parol on behalf of the company by any person acting under its
authority express or implied.