The Concept of Promoter &

Pre-incorporation Contract

Mgm4321
COMPANY LAW

Assoc. Prof. Dr. Zahira Mohd. Ishan

JPP, FEP
 Promoter
• The person who initiates the company’s
incorporation & intends to use the co as
vehicle to carry on business

• S.14(1) “a person who desires to form a

company…”
• S.14 (4): “application for incorp. shall be
accompanied by a statement by each
promoter or director…”
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Statutory Definition of Promoter

• S. 2 CA 2016: in relation to a prospectus

issued by or in connection with a corporation,
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.

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 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.
• 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.

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 Summing up from the cases:
1. 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)
2. May not be a professional
3. But not in professional duties, act merely in a
purely ministerial or professional capacity (Re
Great Wheal Polgooth Co Ltd) i.e an agent
carries out process of incorp. is not a promoter
(eg Company secretary,lawyer, accountant, clerk)

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 Qualifications as Promoter
• 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).

• s.199(1) CA2016:
a- within the last 5 years, was not a director of 2/>
companies which went into liquidation due to his conduct
(wholly/partially contributed) as director;
b- not contravening duties as director
c- no habitual contravention of CA2016

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 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 incorp but
when the company expects no obligations from
promoter :Emma Silver Mining Co. Lewis(1879).

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 Pr Relationship with Company
• Not an agent
• Constructive trustee may exists when in course of
duty obtained property for his own gain /benefit
instead of for the co: Fairview Schools Bhd v Indrani
a/pRajaratnam (No.2)(1998) Pr. Held the permit to
manage private school in trust for the company.

• Stands in fiduciary relationship to the company

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 Promoters’ Liability & Duty
• Common Law: Company/ liquidator can sue
promoter (relevant for private companies)
• CMSA 2007: liability in relation to issuance of
shares by a public company, which applicable
in the context of issuance of prospectus
required to be registered with the SC.
• CA2016:liability in relation to unlisted
recreational clubs that issue a prospectus.
With civil & criminal liabilities

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 Common Law Duty of Promoters (Pr)

Fiduciary duty:
1. Not to make secret profit in relation to the
promotion of the company.
(M): any profit made / benefit obtained by Pr in
relation to the promotion of the co without co’s
knowledge & consent.
• Gluckstein v Barnes [1900]

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 Common Law Duty of Promoters (Pr)
2. A strict duty to disclosure of:
- his identity as owner of any asset acquired by
co (although no $ gain / profit)

- the seller / owner of property which was not

acquired during the promotion of the company
(although no intention to do injustice / to
commit fraud)

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 Fiduciary Duty
• Relationship between the parties to a contract is of
a confidential or fiduciary nature
• Good faith: duty to disclosure
• Erlanger’s case : real circumstances not disclosed –
directors removed & appointed new, & contract
rescinded

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 Disclosure by Promoter
• For co to make an informed decision, Pr must disclose
all relevant info.
• Full, frank, explicit & material facts
• Half / partial truth:
Gluckstein v Barnes: disclosure not effective unless it
was made fully & frankly;
Whaley Bridge Calico Printing Co v Green & Smith
(1880): can receive benefit if not keep secret. Secret
profit /benefit yet to be paid can be claimed by
company against promisor.

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 Forms of disclosure
• To persons other than promoter / persons they
control / are closely associated with.
• Effectively through either:
1. To an independent BOD, or
2. The general meeting of shareholders

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 1. To an Independent BOD
• Not independent if it comprises only of the Pr of the co
who are having financial interest in the contract / obtains
the secret profit.
Erlanger v. New Sombrero Phosphate Co (1878): not illegal
for owner of property to promote & form a joint stock co &
then sell property to it, but the owner-pr is bound to take
care that he sells the property to the co through the
medium of BODs who can & do exercise an indpndt &
intelligent judgement on the transaction, & who are not left
under the belief tt the property belongs, not to the
promoter, but to some other person (per Lord Cairns LC)

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 2. To the General Meeting of Shareholders

• Disclosure of profits to this GM is as soon as

reasonable after the co has been incorporated.
• GM need to ratify: Pr’s benefit, nature & extent
of profit.
• If s’h = Pr: disclosure to be made in co’s MoA &
AoA (for private co. ) ; or in prospectus (for public
co)
• If delay in disclosure, the court will not approve
ratification / could be no ratification at all.
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 Remedies for Breach of Duty
• Company has these remedies, depending on situation:
1. Rescission of contract: but must be able to restore the
parties to their status quo. So, if property sold to the co been
disposed to 3rd party who is boa fide purchaser, this remedy
is not possible.
When recission not possible, Pr must compensate the Co. (
Gluckstein’s case)
2. Ratify the contract & recover the profit that has been
made, incl any amount promised to Pr : (Whaley Bridge’s
case)
3. If property acquired before the promotion period &
difficult to quantify the profit made, rescission is the
appropriate remedy.

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 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.

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 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

• No remuneration

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 Pre-Incorporation Contract
• A contract entered on behalf of company before its
incorporation.
• Pr may want to secure some benefit for the co by
entering into tt contract.
• Common law principle:
~ the contract is a nullity
~ effect: company & promoters signing it cannot sue
/be sued.
Kelner v. Baxter; Newborne v. Sensolid (GB)
Ltd. (1954)
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 Ratification of pre-incorporation
contract
• S.65(2) CA2016: a company may ratify the
contract after its incorporation.
• Once ratified, the company is bound.
• S. 150 of Contracts Act 1950: ratification may
be express or implied ~ no procedure.
• No time limit specified in making the option.
Thus, reasonable time principle applies.
 Ratification of pre-incorporation
contract
• No procedure specified. Generally ratification via co passing an
ordinary resolution at its GM (express ratification) .
• Cosmic Insurance Corp Ltd v Khoo Chiang Poh (1981): express
ratification via resolution by the board
• Ahmad b Salleh v Rawang Hill Resort Sdn Bhd (1995): express
ratification by resolution of the members’ meeting, ie the
company itself.
• Can combine ratification with other matters in a resolution but
make it clear [Thai Hwa Realty Sdn Bhd v Pengarah Hasil dalam
Negeri]
• Terms of resolution must be as as close as possible / similar in
effect to the terms of the contract
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 Ratification of pre-incorporation
contract
• Also, if co may taken steps to unequivocally
accept responsibility for the contract although
contract is not presented to & approved at GM
(implied ratification)

• Chung Yoke Onn v CS Khin Development Sdn

Bhd: implied ratification of the pre-incorporation
agreement, when the company adopted the
architect plan, which was dealt by promoter, to
build a block of building. No resolution passed by
company or the board.
 2 Conditions for Ratification
1- Contract made by whom? – ‘by any person on behalf
of a co prior to its formation’ :promoters
2- When ratified? – after co’s formation.

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.

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 The Golf Cheque Book Sdn Bhd & Anor v. Nilai
Springs Bhd [2006] 1 CLJ 259

• In Ahmad bin Salleh & Ors v. Rawang Hills Resort Sdn Bhd
[1995] 4 CLJ 197, the High Court considered s. 35(1) CA1965 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.”

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 Failure to Ratify

• 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.

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 References:
• Aiman & Effendy (2018). Chapter 1
• Chan WM (2014) & (2017)

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