CHAPTER 2: COMPANY FORMATION

1. Companies wishing to operate in Malaysia must register with the Companies

Commission of Malaysia (Companies Division). Under the regulations of the Companies
Commission of Malaysia, there are different procedures for local companies and foreign
companies. Companies in Malaysia are mainly governed by the Companies Act of 2016
(CA 2016).

2. By virtue of Section 18 CA 2016 …

“Upon the date of incorporation specified in the notice of registration issued under section
15, there shall be a company by the name and registration number as stated in the
principal register kept by the Registrar for this purpose.”

3. Names of companies

Before a company is incorporated, approval must be obtained from the Registrar for the
Use of the proposed name. By Section 26 CA 2016:(1) A name is available if it is not—

(a) undesirable or unacceptable;

(b) identical to an existing company, corporation or business;

(c) identical to a name that is being reserved under this Act; or

(d) a name of a kind that the Minister has directed the Registrar not to accept for
registration.

4. Registration and incorporation.

4.1 Section 15 CA 2016 provides:

“If the Registrar is satisfied that the requirements of this Act as to the application for
incorporation are complied with and upon payment of the prescribed fee, the Registrar
shall—

(a) enter the particulars of the company in the register;

(b) assign a registration number to the company as its company registration number;
and

(c) issue a notice of registration in the form and manner as the Registrar may
determine.
4.2 Effect of incorporation

Section 20 CA 2016 states:

“A company incorporated under this Act is a body corporate and shall—

(a) have legal personality separate from that of its members; and

(b) continue in existence until it is removed from the register.

Tan Lai v Mohamed bin Mahmud (1982)

It was held that the company’s legal persona is the result of statutory acts of the
Registrar of Companies under s. 16 of Companies Act 1965. A certificate of
incorporation therefore prevents any doubt from being cast upon the legal existence and
persona of a company.

5. Promoters & Pre- Incorporation Contracts

5.1 Promoters

5.1.1 Who is a promoter?

Before a company is incorporated, or in the process of incorporation, it is common

for someone to lay the groundwork of the company. In practice, one does not
always wait to receive the Certificate of Incorporation before commencing
business. Negotiations for the purchase of material or land would already have
commenced. The people who take the responsibility of starting the company
are referred to as promoters.

5.1.2 There is no specific definition in CA 2016 except for the one in Section 2 which
says:

“promoter”, in relation to a prospectus issued by or in connection with a

corporation, means a promoter of the corporation who was a party to the
preparation of the prospectus or of any relevant portion of the prospectus; but
does not include any person by reason only of his acting in a professional
capacity;

5.1.3 Therefore, solicitors, bankers and other professionals involved in the company but
merely acting in their professional role are not regarded as promoters.
5.1.4 The common law definition is found in:

Twycross v Grant (1877)

It was held that a promoter 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”.

Tengku Abdullah v Mohd Latiff bin Shah Moh (1996)

It was held that "A promoter is one who starts off a venture-any venture-not solely
for himself, but for others, but of whom, he may be one."

5.1.5 The promoter lays the foundations for a company in terms of negotiations,
registration of the company, obtaining directors and shareholders and preparing all
the paperwork. However, because the promoter is such an important person in
the formation of the company, the law places several responsibilities on him.
These are known as fiduciary duties. This means that he is in a position of trust
and must at all times act honestly and in good faith for the company as a whole.

5.1.6. The duties of a promoter are as follows:

a. The promoter is not to make a secret profit at the expense of the company.

Fairview Schools Sdn. Bhd v Indrani a/p Rajaratnam (No1)(1998)

It was held that "Promoters have a legal duty not to make a secret profit
out of the promotion of the company without the company's consent and
also to disclose to the company any interests the promoters have in any
transaction proposed to be entered into by the company".

b. A duty to account to the company for the benefit for any property he might
purchase with the intent of selling the property to company for a profit later.

Erlanger V New Sombrero Phosphate Co (1878)

A syndicate took steps to form a company. They leased an island for £55,000
to mine phosphate. They set up a company and became first directors. The
lease was sold to the company for £110,000. The board of directors ratified
the purchase.

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. Shares were offered to public.
Shares were allotted accordingly.

The first shipment of phosphate failed. The board of directors was sacked.
A new board was appointed. The new board sought to rescind the contract
for the sale of the lease. It was held that disclosure was not made to an
 independent board of directors but to the two directors who were also the
promoters. Therefore, the promoters were in breach of their fiduciary duties.

c. A duty not to defraud the company by active concealment of any affairs

relating to the company.

d. A duty not to disclose confidential information to outsiders.

e. Disclosure must be full and not partial.

Gluckstein V Barnes (1900)

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 were
liable.

5.1.7 Remedies for breach of fiduciary duties

5.1.8 There are three remedies in situations where the promoters have breached
their fiduciary duties:

a. Rescission

If the company has entered into a contract with the promoter and it is later
discovered there had been no transparency, the company is entitled to
rescind the contract. It is irrelevant that the promoter has made no profit
from the contract.

Section 17 Contracts Act 1950 states that non-disclosure amounts to a

fraud and by Section 19 Contracts Act 1950 the contract becomes
voidable.

Under Section 34(1) Specific Relief Act 1950 the company can apply to the
court to rescind the contract. Once the contract is rescinded, restitution
has to take place. This is where the company has to return whatever it
received from the promoter and the promoter has to return all monies
received from the company.

Erlanger V New Sombrero Phosphate Co. (1878) (discussed earlier)

The court held that there had been no adequate disclosure of the
circumstances of the sale and the company was entitled to rescind the
contract.
 b. Recovery of the secret profit

Gluckstein V Barnes (1900) (discussed earlier)

The court held that there was a breach of their duties as promoters and the
company was entitled to recover the profit from them.

** The company can recover the secret profit even though they chose not to
rescind the contract. The liability of the promoters is "joint and several".
A promoter who is found liable may recover contributions from the other
promoters.

c. 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.

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 was liable to pay damages to the company. The damages were
based upon the loss suffered by the company.

1.2 Pre-incorporation contracts

1.2.1 By virtue of Section 65 (1) CA 2016:

“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.

1.2.2 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.

1.2.3 However, Section 65(2) CA 2016 allows ratification of such a pre-incorporation

contract by providing:

“…..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”
1.2.4 What amounts to ratification? Section 150 of the Contracts Act 1950 provides:

“Ratification may be expressed or may be implied in the conduct of the person on

whose behalf the acts are done.”

1.2.5 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.

Ahmad bin Salleh & Ors v Rawang Hills Resort Sdn Bhd (1995)

On 12 April 1991 the plaintiffs agreed to sell their undivided shares in a piece of
land to the defendant. The defendant was not yet incorporated. Incorporation date
was 25 April 1991. The pre-incorporation contract was ratified through a
resolution of directors on 10 May 1991. The plaintiffs alleged that the defendants
had breached the agreements by inter alia not being incorporated when the first
sale and purchase agreement was entered into.

It was held, dismissing the plaintiffs' claim that on the issue of the pre-
incorporation contract, that when the first sale and purchase agreement was
executed, the defendants were not in existence.

However, the agreements were subsequently ratified under s 35 of the Companies

Act 1965.

Also, the plaintiffs were stopped from raising this issue as they had until just
before the trial, accepted the defendants as a legal entity in the first sale and
purchase agreement.

Cosmic Insurance Corporation Ltd v Khoo Chiang Poh (1981).

Mr. Khoo was appointed as a managing director of the company prior to its
formation. The condition of the appointment was that he shall be the managing
director for life unless he resigns, dies or commits an offence under the
Companies Act. Later on, the company was incorporated and the appointment
of Mr. Khoo was ratified with the same condition.

A dispute arose between the company and Mr. Khoo where the company
terminated his service. Mr. Khoo brought an action to the court. It was held that
the appointment was a pre-incorporation contract and the condition in Section
35CA 1965 was fulfilled. Therefore, the termination was not valid.
 1.2.6. An example of implied ratification is seen in the case of:

Chung Yoke Onn v CS Khin Development Sdn Bhd. (1985)

The promoter entered into an agreement with the architect to draw building plans.
Even though neither the Board nor the members at the general meeting passed a
resolution to adopt the agreement, the company used the plan to build a block of
buildings.
The court held that there was implied ratification of the agreement.

1.2.6 The Companies Act 2016, unlike the Companies Act 1965, does not contain a
provision dealing with an agreement to exclude a promoter from being liable for
the pre-incorporation contract if it is not ratified by the company. Reference may
have to be made to Section 149 of the Contracts Act 1950:

“Where acts are done by one person on behalf of another but without his knowledge
or authority, he may elect to ratify or to disown the acts. If he ratifies them, the
same effects will follow as if they had been performed by his authority.

Therefore, the principal (the company) who ratifies the contract will be bound to
perform the contract, as if he has entered into the contract. The agent would not be
a contracting party.

Thus, the general law of agency dictates that once the company has ratified the
contract, the agent is no longer liable, unless the contract provides that he is
personally bound by the contract.

QUICK REVIEW QUESTIONS

1. The term 'promoter' describes anyone who is involved in the formation of a company.
True or False?

a) True
b) False

2. A promoter is in a fiduciary relationship with the unformed company, he is never permitted to

make a profit out of the company's promotion. True or false?

a) True
b) False

3. What principle was established by the House of Lords in the case of Erlanger v New
Sombrero Phosphate Co (1878)?

A. A promoter who makes a profit out of his promotion of the company will only be
permitted to keep that profit is he discloses this fact to persons regarded as
 independent.
B. A promoter who makes a profit out of his promotion of the company will not be
permitted to keep that profit if the company never comes into existence.
C. A promoter who makes a profit out of his promotion of the company will only be
permitted to keep that profit is he discloses this fact to the company's members
once the company is incorporated.
D. A promoter who makes a profit out of his promotion of the company will only be
permitted to keep that profit is he discloses this fact to the Registrar of
Companies.

4. Andrew is a promoter of a company. Before the company is fully incorporated, he

enters into a contract on its behalf with a third party. Under the common law, would a
valid contract exist and, if so, who would be the parties to the contract?

A. No contract would exist.

B. A contract would exist and it would be between the unformed company and the
third party.
C. A contract would exist and it would be between Andrew and the third party.
D. A contract would exist and it would be between Andrew and the company.

5. Can a company, upon successful incorporation, ratify a pre-incorporation contract

made for its benefit?

a) Yes
b) No

6. Generally, upon ratification of a pre-incorporation contract, who would be personally

liable on the contract under the Companies Act of 2016?

a) The promoter
b) The company