POST INCORPORATION

OF COMPANY
Company Law
 Who is promoter?
• Twycross v. Grant: A promoter is someone who
undertakes to form and incorporate a company, to
set it going and take all necessary steps to
accomplish the purpose.

• Tengku Abdullah Ibni Sultan Abu Bakar v. Mohd

Latiff bin Shah Mohd: Promoter is also defined as
someone who starts of a venture for himself and for
others to engage in business transactions in future.
 Types of promoters
(a) Active promoters
Any persons who take active steps in ensuring
incorporation of company that is seeing that all the
procedures of incorporation are abided to.

(b)Passive promoter
Tracey v. Mandalay Ltd: A person who does not take
active part in formation of company but leaves it to
others to do on the basis that he is to profit from the
incorporation of company at later stage.
 Promoter’s duties
• Promoters have such wide powers to negotiate
contracts on behalf of an unformed company, the law
requires that the promoter must act in the best interest of
the future company and owes fiduciary duties.

• The promoter has an obligation to act in a good faith for

the benefits of the company and not to have any
conflict of interest with the company.

• The promoter has a duty of making full disclosure of his

interest in any transaction with the company.
 Fiduciary duty
(a)Disclosure of interest in a contract

A promoter must declare any interests in contracts

negotiated and entered into contract on behalf of
the company whether he has profited from the
transaction or not.

Case: Erlanger v. New Sombrero Phosphate Co.

b) Disclosed profits
The promoters must also disclose any possibility of
profits being earned through the transaction.

Case: Gluckstein v. Barnes.

(c) Other fiduciary duties

Not disclose confidential information concerning the
company to outsiders.

Case: Fairview Schools Bd v. Indraini a/p Rajaratnam

 Consequences of breach of
promoters’ duties
Rescind the contract

•The main remedy for breach of promoters’ duties is

rescission.
•This remedy is to put parties back to position as if no
contract has been concluded.
•This is to allow the company to cancel the effects of
the contract.
• Non-disclosure of interests and profits by promoter is
a breach of Section 19(1) of the Contracts Act 1950.
• Section 17 – the duty is breached even if the
promoter was silent as to the representations
because there is a positive duty on promoters to
disclose profits and interests in contract.
• Section 67 – the company seeking to rescind
contract must give notice to the party of its
intention to rescind or alternatively apply to the
court for an order to rescind the contract – Section
34(1) (a) of Specific Relief Act.
• The company may exercise the right to rescind if
the following conditions are fulfilled:-

1) The company did not affirm the contract after it

became aware of the promoter’s breach. The
company must take steps to rescind the contract
after it has notice of breach.

1) The parties must be restored to their original position

– Section 65 of the Contracts Act 1950.
 Erlanger v. New Sombrero Phosphate Co.

• The contract is voidable at the company’s option.

• The company may elect to put an end to the
contract.
• If the company terminates the contract, both
parties are to return the benefits received.
• If the property has been transferred to the
company in consideration for a sum of money, the
company has to return the property and the
promoter has to return the purchase price received.
 Where rescission is not possible (1)
1. Damages
•If the company is not possible, the court may order the
promoter to pay damages to the company for breach of
his fiduciary duty.

•Case: Re Leeds and Handley Theatres and Variety

Where the property had been sold to a third party for
valuable consideration and thus rescission was not possible.
The damages awarded to plaintiff is the profit made by the
defendant in the undisclosed interest and profit made out
of the contract with the company.
 Gluckstain v Barnes
• The promoter disclosed it made a profit of £ 40,000
but not the additional profit of £ 20,000 on
transactions connected to the property. The
company could recover the profit of £ 20,000 which
was not disclosed in the company’s prospectus.
 Where rescission is not possible (2)

2. Constructive trust

•In the course of his duty, the promoter may have

purchased a property for his own gain instead of for the
company he is promoting.
•The promoter is deemed to be a constructive trustee of
the company he is promoting and thus he can be
compelled to transfer the property to the company.
•Case: Fairview Schools Bhd v. Indrani a/p Rajaratnam
Where rescission is not possible (3)
3. Reimbursement
• The promoter when undertaking his duties to
promote the company, may have incurred cost
and expenses?
• Issue: whether he may seek for reimbursement from
the company?
• Section 26(b) of the Contracts Act 1950 – past
consideration is applicable. Case: Kepong
Prospecting Ltd.
• Any credit in the account may be used within 24
months for any of the above purposes.