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Topic 2: PROMOTERS
A. OVERVIEW

• Who are promoters?

• In business, it refers to persons who for themselves or on behalf of
others, organize a corporation. Promoters issue a prospectus, obtain
stock subscriptions, and secure a charter. Promoters stand in a fiduciary
relationship to the proposed company and must act in Good Faith in all
their dealings for the proposed corporation.
• Definition: S. 2(1) CA
• How to identify promoters?
o Twycross v Grant (1877) 2 CPD 469
per Cockburn CJ: “one who undertakes to form a company with
reference to a given project and set it going and who takes the
necessary steps to accomplish the purpose.”
o Tengku Abdullah ibni Sultan Abu Bakar v Mohd Latiff bin Shah
Mohd [1996] 2 MLJ 265

o Tracy v. Mandalay (1953) 88 CLR 215

Held: active steps or participation is not always required.

• Q : Are those who perform ministerial duties (e.g. solicitors, accountant,

printers) promoters?

B. PROMOTERS : DUTIES

a. Fiduciary duties

a. Fiduciary duties – To make full disclosure of interest

• A promoter must make full disclosure of all material facts when dealing
with the company (c/- Erlanger v New Sombrero Phosphate Co
Ltd(1878))
• Company law recognizes promoter is subject to fiduciary duties.
- is not a trustee
- not an agent because company not yet born
- but cases insisted that promoter has fiduciary duties.

UCL/UCO3612
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• Disclosure of interest in dealings : Non disclosure of a promoter’s interest in

dealings with the proposed company – rescission of contract against the
promoter.
• Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (HL)
2 kinds:
not to make secret profit
not to exercise undue influence or fraud
Facts:
Syndicate headed by E bought an island for £55,000. A company was formed
and island was sold to the company for £110,000. If profit is not secret,
promoter can retain the profit.

• Q: How to make the disclosure?

Full and frank disclosure
Gluckstein v Barnes [1900] AC 240 (HL) – Disclosure to be made to an
independent BOD. Not to a surservient BOD.

In Gluckstein : P has fiduciary duty (has trust). It must act honestly, for
the benefit of the company. For example, if there’s a profit, a promoter must
DECLARE it for that particular of situation.

b. Not to make secret profit

• Fairview Schools Bhd v Indrani a/p Rajaratnam (No.2) [1988] 1 MLJ

110: Has a legal duty to not make any secret profit out of the promotion of
the company without the company’s consent

C. PROMOTERS : REMEDIES

i. Rescission
• The company may take action to rescind its contract with the promoters
who had not disclosed his interest in the dealings
• C/- Erlanger’s case
• However, the company may not be allowed to rescind if:-
o No steps towards rescission was taken reasonably promptly after
becoming aware of the promoter’s interest in the contract;
o Upon aware of the promoter’s interest, the company took steps
which indicated its affirmation of the contract;
o Impossibility to restore the parties back to their original position;
or
o The property was innocently acquired by a 3rd party.

UCL/UCO3612
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ii. Recovery of the profit

• By making the promoters accountable for the profit that he has made at the
expense of the company.

iii. Damages
• Re Leeds & Hanley Theatres of Varieties Ltd [1902] 2 Ch 809 :
Company’s loss was due to the promoter’s breach of duty

iv. Misfeasance proceedings

• S. 541 CA
• Only available in winding up proceedings.
• If promoter makes secret profit when forming or promoting the company, he
is guilty of misfeasance or breach of trust or duty.

D. PRE-INCORPORATION CONTRACTS

• A company comes into existence on date of incorporation. Promoter makes

contract on behalf of the company before the date of incorporation –
necessary e.g. premises, furniture, staff.

i. Common law position

• As the company as a legal entity does not exist prior to its registration,
therefore under common law regard the company as to not able to enter into
contract.
• C/- Newborne v Sensolid (Great Britain) Ltd 1954 1 QB 45 : The contract
is void for want of competent parties.
• C/- Kelner v Baxter [1866] LR 2 CP 174 : The company also incapable of
rectifying the pre-incorporation contract upon its registration. Precondition
for rectification – the company must have existed when the contract was
made.

ii. Malaysian position

• S. 64 CA – Company contracts
• S. 65 CA –
o S. 65 - Pre-incorporation contract
(1) A contract or transaction that purports to be made by or on behalf
of a company at a time when the company has not been formed has
effect as a contract or transaction made with the person purporting to
act for the company or as agent for it, and he is personally liable on
the contract or transaction accordingly.

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(2) Notwithstanding subsection (1), a contract or transaction referred

to in that subsection may be ratified by the company after its
incorporation and the company shall be bound by the contract or
transaction as if the company had been in existence at the date of the
contract or transaction and had been a party to the contract or
transaction.

• 1965 Act : S 35
o 35. Form of contracts
(1) Any contract or other transaction purporting to be entered
into by a company prior to its formation or by any person on behalf of
a company prior to its formation may be ratified by the company after
its formation and thereupon the company 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.

(2) Prior to ratification by the company the person or persons who

purported to act in the name or on behalf of the company shall in the
absence of express agreement to the contrary be personally bound by
the contract or other transaction and entitled to the benefit thereof.

C/- The Golf Cheque Book Sdn. Bhd. v Nilai Springs Bhd. [2006] 1 CLJ
259: The court highlighted 5 points to be noted before s 35(1) could be
invoked.

E. LIABILITY OF PROMOTERS
• What happens if the company fails to ratify such pre-incorporation
contract? – S. 65 (1) CA

UCL/UCO3612
PREPARED BY DARINA JOHARI, FOL, MMU, MELAKA© TRI 1, 1718