Promoters
Promoters in business refers to persons who themselves or on behalf of others,
organize a corporation. Promoters issue prospectus, obtain stock subscriptions and
secure a charter. Promoters stand in a fiduciary relationship to the proposed company
and must act in good faith in their dealings. A promoter may be a natural person for
example when the sole proprietor or partners promote a company to take over his
business
Twycross v Grant – Promoters are people who undertake to form a company with
reference to a given project and set it going and who takes the necessary steps required
by law to accomplish the purpose
Tracy v Mandalay – Actives steps or participation is not always required
Erlanger v New Sombrero Phosphate Co – A person may continue to become a
promoter even after the company has been incorporated for the purpose of procuring
capital for the company
Re Cape Breton Co – Duty of a promoter may arise even at the time he purchases a
property with the intention of selling it to the company he is going to incorporate
A promoter owns fiduciary duty to the company and has obligation to act in good faith
for the benefit of it. A promoter cannot have conflict of interest with the company. He
must make full and frank disclosure of his interest in any transaction with the company
Erlanger v New Sombrero Phosphate Co Ltd – A promoter must make full disclosure
of all material facts when dealing with the company. Non-disclosure of a promoter’s
interest in dealings with the company may result in rescission of contract against the
promoter. If profit is not secret then promoter can retain profit
2 kinds of fiduciary duties:
Not to make secret profit
Not to exercise undue influence or fraud
E bought island for 55,000 and sold it to company for 110,000
Held: Promoters breached duty as no make full and frank disclosure of their interest so
the contract is voidable at the company’s option
Gluckstein v Barnes – Disclosure to be made to an independent BOD but not to a
subservient BOD. Promoters must act honestly for the benefit of the company
Fairview Schools Bhd v Indrani a/p Rajaratnam (No.2) – Promoters has legal duty
to not make secret profit out of the promotion of the company without the company’s
consent
Remedies
Rescission
Recovery of profit
Damages
Misfeasance proceedings
Rescission – The company may take action to rescind its contract with the promoters
who had not disclosed his interest in the dealing. It is voidable at the company’s option.
Parties will be restored to their original position (S.65 CA) 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
Erlanger v New Sombrero Phosphate Co – Company cant rescind if:
No steps of rescission was taken promptly after aware of the promoter’s interest
Upon aware of the interest the company took steps to indicate the affirmation of
the contract
Impossibility to restore the parties back to original position
Property acquired by innocent 3rd party
Lagunas Nitrate Co Ltd v Lagunas Syndicate – Land was already mine thus cannot
restore land to original form and cannot rescind the contract
Re Leeds and Handley Theatres of Variety – Property sold to innocent 3 rd party so
rescission not possible
Recovery of profit – By making the promoters accountable for the profit made in the
expense of the company
Gluckstein v Barnes – Disclosed 40,000 but not the other 20,000. Company can
recover the 20,000 not disclosed
Misfeasance proceedings (S.541 CA) – Only available in winding up proceedings. If
promoter makes secret profit when forming or promoting the company, he is guilty of
misfeasance or breach of trust or duty
Pre-Incorporation Contracts
A company exists on date of incorporation. Promoter makes contract on behalf of the
company before date of incorporation
Common Law: Company as a legal entity does not exist b4 registration thus the
company is not able to enter into contract
Newborne v Sensolid (Great Britain) Ltd – The contract is void for want of competent
parties
Kelver v Baxter – Company also incapable for ratifying the pre-incorporation contract
upon its registration because the condition is that the company must have existed when
the contract was made
S.64
S.65(1) – Contract made by promoter behalf of company b4 incorporation has effect as
a contract made with the person purporting to act for the company or as agent for it
and is personally liable on the contact or transaction
S.65(2) - A contract may be ratified by company after incorporation and the company
will be bound by the transaction as if the company exists at the time of incorporation
1965 S.35(1) – Contract entered b4 incorporation can be ratified and company bound
by the contract
S.35(2) – B4 ratification the person acting for the company will be bound by the
contract
