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The Concept of Promoter & Pre-incorporation Contract

The Concept of Promoter & Pre-incorporation Contract. Mgm4321 COMPANY LAW Dr. Zahira Mohd . Ishan JPP, FEP. Statutory Definition of Promoter.

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The Concept of Promoter & Pre-incorporation Contract

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  1. The Concept of Promoter & Pre-incorporation Contract Mgm4321 COMPANY LAW Dr. ZahiraMohd. Ishan JPP, FEP

  2. Statutory Definition of Promoter S. 4: in relation to a prospectus…. means ..a party to the preparation of the prospectus / of any relevant portion thereof; but does not include any person by reason only of his acting in a professional capacity. Dr. Zahira MI

  3. Judicial Definitions Twycross v. Grant(1877) :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 Whaley Bridge Calico Printing Co. V. Green [1880] 5 QBD 109 at p. 111. The term promoter is a term not of law, but of business, … by which a company is generally brought into existence. Dr. Zahira MI

  4. Judicial definition Erlanger v. New Sombrero Phosphate Co. [1878] AC 1218 Mohd. Latiff Shah Mohd. & Ors. v. Tengku Abdullah Ibni Sultan Abu Bakar & Ors. & Other Cases [1995] 3 CLJ 77: a question of fact depending upon what the so called promoter really did ; Judge is not bound to define the term. Dr. Zahira MI

  5. Summing up from the cases: Has a role in the formation: active (Wheal Ellen Gold Mining Co NL v Read) or moderate part / “undisclosed joint adventurers (Emma Silver Mining Co Ltd) May not be a professional But not in professional duties, act merely in a purely ministerial or professional capacity (Re Great Wheal Polgooth Co Ltd) Dr. Zahira MI

  6. Statutory requirements Natural person / legal person Re Darby, ex parte Brougham [1911]: can be corporate person; Fairview Schools Bhd v Indrani a/p Rajaratnam & Ors (No.2) (1998). Form 48A lodged with RoC & Official Receiver before incorporation Dr. Zahira MI

  7. Commencement & Termination Question of fact: Re Cape Breton Co; Erlanger v NSPC Upon commencement, fiduciary relationship towards company exists. Does not end when the company is registered but when the company expects no obligations from promoter :Emma Silver Mining Co. Lewis(1879). Dr. Zahira MI

  8. Relationship with Company • Neither agent nor trustee • Stands in fiduciary relationship to the company: active influence & direct control over the company they created; capable of being abused: Erlanger v NSPC: Gluckstein v Barnes; Ladywell Mining Co v Brooks Dr. Zahira MI

  9. Fiduciary Duty Relationship between the parties to a contract is of a confidential or fiduciary nature Utmost good faith Erlanger’s case : real circumstances not disclosed –directors removed & appointed new, & contract rescinded Whaley Bridge Calico Printing Co v Green & Smith: can receive benefit if not keep secret profit.Secret profit /benefit yet to be paid can be claimed by company against promisor. Dr. Zahira MI

  10. Full Disclosure by Promoter Profit made known by promoter who receive as benefit or as owner of property sold. Full, frank, explicit & material facts Half / partial truth: Gluckstein v Barnes; New Brunswick & Canada Rlwy Co v Muggeridge. Dr. Zahira MI

  11. Forms of disclosure In MoA / AoA; Communicate to an independent BOD; or Communicating to the existing & intended members of company. Dr. Zahira MI

  12. Remedies by Company Promoters are jointly and severally liable: secret profit Normally: 1. rescission of contract 2. suit to recover sp 3. suit for damages for breach of fiduciary duty Dr. Zahira MI

  13. Other remedy If company choose to affirm: cause of action for deceit, fraud / negligent misrepresentation at c/l Remedy of members: only to misstatement in prospectus particulars: claim compensation / damages in tort of deceit / negligent misstatement. Dr. Zahira MI

  14. Payments for promotion service Not entitled to reimbursement: Melhado & Ors v The Porto Alegre NHBRC; Re National Motor Mail-Coach Co Ltd, Clinton’s Claim Table A, Article 73 No remuneration Dr. Zahira MI

  15. Pre-Incorporation Contract Contract entered on behalf of company before its incorporation. Common law principle: a nullity; company & promoters signing it cannot sue /be sued. Kelnerv. Baxter; Newborne v. Sensolid (GB) Ltd. (1954) Dr. Zahira MI

  16. Section 35(1) of CA 1965 Govern pre-incorporation contract Company can opt to ratify, thereupon bound by & entitled to the benefit thereof. No time limit specified in making the option. Thus, reasonable time principle applies. No procedure specified. Refer to AoA/made by BoD/ by authorised agent of company.[The Golf Cheque Book SdnBhd & Anor v. Nilai Springs Bhd [2006] 1 CLJ 259 Can combine ratification with other matters in a resolution but make it clear [Thai Hwa Realty SdnBhd v PengarahhasildalamNegeri] Dr. Zahira MI

  17. 2 Conditions for Ratification 1- Contract made by whom? – ‘by any person on behalf of a co prior to its formation’ :promoters Cosmic Ins. Corp. Ltd. v. Khoo Chiang Poh (1980) 1 LNS 182, [1981] 1 MLJ 61: A letter signed by 12 promoters of A (incl R) constituted a pre-incorp contract & was ratified by the A. P/C rejected argument that the contract was made only between promoters inter se. Dr. Zahira MI

  18. 2- When ratified? – after co’s formation. Cosmic Ins. Corp. Ltd. v. Khoo Chiang Poh (1980) 1 LNS 182, [1981] 1 MLJ 61: Lord Roskill when delivering the Advice of the Privy Council said :- Their Lordships note three things about this subsection. First, so far as presently relevant before section 35(1) can be successfully invoked the alleged 'contract or other transaction' must purport to have been entered into 'by any person on behalf of a company prior to its formation'. Secondly, it is only after that first condition is satisfied that such a contract 'may be ratified by the company after its formation....'. Thirdly, 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. Dr. Zahira MI

  19. The Golf Cheque Book SdnBhd & Anor v. Nilai Springs Bhd [2006] 1 CLJ 259 In Ahmad bin Salleh & Ors v. Rawang Hills Resort SdnBhd [1995] 4 CLJ 197, the High Court considered s. 35(1) in the context of a resolution that had been passed by the company adopting the pre-incorporation contract in that case. There are passages in the judgment in that case which are certainly open to the interpretation that ratification must be done by way of a formal resolution.If that indeed be the suggestion, then it would be incorrect as such an approach to interpretation would cut across the legislative purpose of enacting the section. Further, there is s. 150 of the Contracts Act 1950 which reads:- “Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done.” Dr. Zahira MI

  20. Failure to Ratify s.35(2): if the company opt not to ratify, in the absence of an agreement to the contrary, person acting in the name/on co’s behalf will personally bound by the contract & entitled to the benefit thereto. Dr. Zahira MI

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