Tutorial 3

Question 1
a) Who is a “promoter”? Discuss briefly his duties.
 Twycross v Grant
 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 ibni Sultan Abu Bakar v Mohd Latiff bin Shah Mohd
 Gopal Sri Ram stated that a promoter is one who starts off a
venture- any venture- not solely for himself but for others, of
whom he may be one’.
 Tracy v Mandalay
 Active steps or participation is not always required.
 Section 2(1) of the CA 2016
 “promoter”, in relation to a prospectus issued by or in connection
with a corporation, means
o A promoter of the corporation who was a party to the
preparation of the prospectus or of any relevant portion of
the prospectus.
o But does not include any person by reason only of his acting
in a professional capacity.
 Person who undertakes the formation of a company
 By carrying out the procedure necessary for incorporation
 Those merely acting in capacity on behalf of the person who
intends to set up a company are not promoters
 Those persons who enter into contracts on behalf of a company
before incorporation.
 Subject to fiduciary duties: is not a trustee, not an agent because
company not yet born, but cases insisted that promoter has
fiduciary duties, duty to make full disclosure, duty not to make
secret profit.
 Erlanger v New Sombrero Phosphate Co
 A promoter must take full disclosure of all material facts
 Non- disclosure of a promoter’s interest in dealings with the
proposed company- rescission of contract against the promoter.
 Syndicate headed by Erlanger purchased an island for £55,000
(purportedly contained phosphates) - a company was formed –
directors (1- independent; 2 abroad; remainder – puppets) - island
was sold for £110,000 to the company - the purchase was ratified
by the board of directors - it turned out that the island was worth
considerably less than the purchase price
  It was held that company could rescind the contract, the
promoters were in breach of their duties.
 The promoters must disclose it to the independent board of
directors (BOD) or existing (general meeting to pass a resolution,
in prospectus) or future shreholders.
 Fairview Schools Bhd v Indrani a/p Rajaratnam
 Has a legal duty to not make any secret profit out of the promotion
of the company without the company’s consent.
 Gluckstein v Barnes
 Promoter made 2 different types of profits (£40k & £20k).
 Prospectus disclosed the profit of £40k; but the £20k profit was
not disclosed.
 The liquidator sought to recover the sum from the promoters.
 Held: Partial disclosure was not sufficient.
 Liquidator was allowed to recover the profits
b) If a promoter breaches his duties, what are the remedies available to the
company to whom such duties are owed?
 Company is entitled to
 Rescission of contract
 Recovery of secret profit
 Damages
 Rescission- return what has been sold and get back the money.
 Company has the right to rescind the contract if there is non-
disclosure irrespective of whether or not the promoter has made a
secret profit.
 Erlanger Case
o Remedy was granted
 Equitable remedy but may be barred if:
o Inordinate and undue delay in exercising the rights of
rescission delay amounting to affirmation.
o Transaction has been affirmed by the company
o Restitution in integrum (restoration to original position) is not
possible
o Lagunas Nitrate Co v Lagunas Syndicate [1899]
 A 3rd party has innocently acquired the property
 Recovery of secret profit
 Promoters are made accountable for the profit made at the
expense of the company
 Company can no longer rescind contract
 Gluckstein v Barnes
o promoter must account to company for secret profit made
 Fairview Schools Bhd v Indrani a/p Rajaratnam
 o In case where promoter acquires property for personal gain,
company may obtain a constructive trust order and require
promoter to hand it over at cost
 Damages
 If suffer losses, may sue for damages
 Re Leeds and Hanley Theatres of Varieties Ltd
o Measure of damages= secret profit of promoters
 Misfeasance proceedings
 Section 541 of CA 2016 states that a power of court to assess
damages against delinquent officers
o Misapplication, retainer, misfeasance
 Only available in winding up proceedings
 If promoter makes secret profit when forming or promoting
company, he is guilty of misfeasance
c) What is a pre-incorporation contract? Distinguish a “pre-incorporation contract”
from a “provisional contract”.
 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.
 A pre-incorporation contract is one which is purportedly made by or on
behalf of a company at a time when the company has not yet been
incorporated.
Common law
 Until incorporated, no legal personality, no contract capacity and not
bound by pre-incorporation contract.
 Re English & Colonial Produce Co
o Solicitor was engaged to prepare the necessary documents and
obtain the registration of a company. He paid the registration fee
and suffered certain expenses related to registration. Court held
that the company was not bound to pay for his services and
expenses.
 Natal Land Co Ltd v Pauline Colliery Syndicate
o The court held that, the contracts that are made between the
Rycroft and Mrs. de Carrey is clear that a company cannot be
adoption or ratification obtain the benefit of a contract purporting to
have been made on its behalf before the company come into
existence.
o In addition, any contract that the company want to do, they have
register their company first and they also will enjoy the benefit of
the registration of the company (incorporation). If they are still
making contract before they registered their company (pre-
 incorporation), they have to be liable if anything happens to their
company such as collapse and so on.
 Company can enter into a new contract to put into effect the terms of pre-
incorporation contract- novation- company can sue or be sued
 Kelner v Baxter
o Baxter and two others agreed on behalf of a company yet to be
formed to purchase trade stock for its business.
o Later the company was formed and accepted and used the trade
stock but failed to pay for the stock.
o Held: that the pre-incorporation contract was not binding on the
company after its formation and that the promoters or persons
acting on behalf of the company before the formation were
personally liable.
o Further, no ratification could release them from such liability.
 Newborne v Sensolid (GB)
o The issue of this case is whether the company makes a valid
contract or not.
o Based on this case, Mr. Newborne makes a contract on behalf of
the company that was not incorporated or registered. According to
Section 36(C) of the Companies Act 1985
o “A contract which purports to be made by or on behalf of a
company at a time when the company has not been formed has
effect, subject to any agreement to the contrary, as one made with
the person purporting to act for the company or as agent for it, and
he is personally liable on the contract accordingly.”
o The Court held that a company cannot make valid contract before
its incorporation.
o Moreover, a person cannot make legally binding contracts in the
name of a company in anticipation of its being incorporated.
 Black v Smallwood
o Held that promoters were not liable as they thought that the
company was in existence- did not indicate any intention that they
should be personally liable- intention when signing the contract was
merely to authenticate the company’s signature.
Position in Malaysia
 Section 65 (1) & (2)
 The effect of Section 65 (1) of Companies Act 1965
 Allows a third party to enforce the contract against
i. The company if it has ratified the contract after its incorporation or
ii. The promoter or any person acting on behalf of the company, if the
company does not ratify.
How to ratify
Expressly by way of broad resolution or resolution of general meeting
 Ahmad Salleh v Rawang Hills Resort Sdn Bhd
o The court held to dismiss the plaintiffs’ claim and allowing the defendants
counterclaims which includes: …when the first sale and purchase
agreement was executed, the defendants were not inexistence. However,
the agreements were subsequently ratified under s 35 of Companies
Acts1965.
o Also, the plaintiffs were estopped from raising this issue they had until just
before the trial, accepted the defendants as a legal entity in the first sale
and purchase agreement
Implied ratification
 Kelner v Baxter
 Chung Yoke Onn v C S Khin Development SB
o The promoter entered into an agreement with the architect to draw
buildings plan.
o Even neither the board nor the members at the general meeting passed
the resolution to adopt the agreement the company used the plan to build
a block of buildings.
o The court held that there was implied ratification of the agreement.
 Applicable to public company
o Section 190(5) of the CA 2016, “any contract made by the company
before the date on which it is entitled to commence business shall be
provisional only and shall only be binding on the company to commence
business.”
Provisional contract:
 Section 190(5) of the CA 2016 any contract made by a company before the
date on which it is entitled to commence business shall be provisional only and
shall only be binding on the company to commence business.
Question 2(previous trimester midterm question was similar)
Ultraman Sdn Bhd agreed to sell 2,000 boxes of candles under a contract which read in
part: “We agree to buy from Ultraman Sdn Bhd 2,000 boxes of candles…”(signed)
Superwoman Sdn. Bhd.
Ultraman Sdn. Bhd. delivered the goods but has never received the price. It has now
been discovered that Superwoman Sdn. Bhd. was only incorporated the day after this
contract was made.
Advise the directors of Ultraman Sdn. Bhd. whether they may recover the price, and if
so, from whom?
Answer:
This question is mainly regarding pre-incorporation contracts. Generally, a company
comes into existence on the date of incorporation however, a promoter can make
contracts on behalf of the company before the date of incorporation when rendered
necessary.
The issue of the question is whether the contract between Ultraman Sdn Bhd and
Superwoman Sdn Bhd is legally binding, whether Utraman Sdn Bhd is able to recover
the price of the delivery of the 2000 boxes of candles and whether Ultraman Sdn Bhd
recover the price from the promoter that incorporated the contract.
The rules in this question would be of Re English & Colonial Produce Co, Natal Land
Co Ltd v Pauline Colliery Syndicate, Kelner v Baxter, Black v Smallwood, Ahmad
Aalleh v Rawang Hills Resort Sdn Bhd, Section 65 of Companies Act (CA) 2016,
As per the application of the rules mentioned above, first and foremost, In the case of In
Re English and Colonial Produce Company , a solicitor was engaged to prepare the
necessary documents and obtain the registration of a company. He paid the registration
fee and incurred certain expenses incidental to registration. Court held that the
company was not bound to pay for his services and expenses. Looking at this case, the
common law position establishes that there is no obligation of a company that is yet to
be incorporated to be bounded upon the terms of any made contract as there is no legal
personality as well as the capacity to contract is not fulfilled. in the case Natal Land &
Colonization Co v Pauline Colliery Syndicate [1904], in which a company was
unable to enforce a pre-incorporation contract made on its behalf. There is also a long-
standing principle of agency law which stipulates that a company as principal cannot
ratify, retrospectively adopt, any contract made on its behalf by an agent before it was
incorporated and Natal Land is a good example of this rule in operation. Taking the
common law principles as an example, it is safe to say that the directors of Ultraman
Sdn Bhd would not be able to recover the price of the delivered goods as a matter of
fact that the company was not incorporated. This as a result establishes that a pre-
incorporated contract is not binding in nature.
However, the directors of Ultraman Sdn Bhd can take an action against the agents or
the promoters that signed on behalf of Superwoman Sdn Bhd as we can see in the
following cases that establishes this principle where the promoters are able to be
personally liable for an encounter of a pre-incorporated contract.
In Kelner v Baxter, where the promoter in behalf of unformed company accepted an
offer of Mr. Kelner to sell wine, subsequently the company failed to pay Mr. Kelner, and
he brought the action against promoters. Erle CJ found that the principal-agent
relationship cannot be in existence before incorporation, and if the company was not in
existence, the principal of an agent cannot be in existence. He further explain that the
company cannot take the liability of pre-incorporation contract through adoption or
ratification; because a stranger cannot ratify or adopt the contract and company was a
stranger because it was not in existence at the time of formation of contract. So he held
that the promoters are personally liable for the pre-incorporation contract because they
are the consenting party to the contract.
In Newborne v Sensolid (Great Britain) Ltd, Court of Appeal interpreted the finding of
Kelner v Baxter in a different way and developed the principle further. In this case an
unformed company entered into a contract, the other contracting party refused to
perform his duty. Lord Goddard observed that before the incorporation the company
cannot be in existence, and if it is not in existence, then the contract which the unformed
company signed would also be not in existence. So company cannot bring an action for
pre-incorporation contract, and also the promoter cannot bring the suit because they
were not the party to contract.
This case created some amount of confusion that, if the contract was sign by the agent
or promoter, then he will be liable personally and he has the right to sue or to be sued.
But if a person representing him as director of unformed company enters into the
contact then the contact would be unenforceable. This distinction was found
objectionable by the Windeyer J in Black v Smallwood and this was also criticized by
Professor Treitel in the Law of Contract. Later in Phonogram Limited v Lane, Lord
Denning settled the position, he found that if an unformed company enters into the
contact, then it cannot bind the company, but the legal effect of contract does not
entirely lack. And even in that situation the promoter or representor are personally liable
for the pre-incorporation contract.
In Phonogram Limited v Lane, a person was attempting to from a company which was
going to run a pop artists group and that person arranged financial assistance from a
recording company. But this company never came in existence, and the amount was
due. The recording company brought an action against the person who represented the
unformed company. Lord Denning analyzed Kelner v Baxter, Newborne v Sensolid,
Black v Smallwood and the section 9(2) of the European Communities Act, 1972,
and found that the promoters are personally liable for the pre-incorporation contract.
However, as per the case of Black v Smallwood, if the promoters are able to show that
there they innocently believed the company was already in existence as well as did not
indicate any intention whereby they would be personally liable and that their intention in
signing the contract was merely to authenticate the company’s signature, the promoters
of Superwoman Sdn Bhd would probably not be liable and Ultraman Sdn Bhd would not
be able to recover the price of the 2000 boxes of candles if that is the case per se.
Section 65 (1) of the Companies Act 2016 strengthens the fact that Ultraman Sdn
Bhd might be able to sue the promoters or agents that signed on behalf of Superwoman
Sdn Bhd as they would already be personally liable when getting into a pre-incorporated
contract before the existence of a company unless a contrary is proven that the agents
innocently believed that the company was already in existence as per Black v
Smallwood.
As a conclusion, a pre-incorporated contract is not binding upon a company however,
the agents or promoters that represent the company in signing on behalf of the
company can be personally liable hence the directors of Ultraman Sdn Bhd most likely
would be able to recover the price of the 2000 boxes of candles from the promoter of
Superwoman Sdn Bhd.
If the company does not rectify any sort of contract in the notice of the company and
only the promoter had acted thus the company is not liable.
However, if the company rectifies and are aware thus the company is liable.