Promoters

o Definition
o Duty
Full disclosure
No secret benefit
Remedies obtained by company in case
breach of duty of the promoter
o Rescission of contract
o Recovery of secret profit
o Damages
Pre-incorporation contract
o Definition
o Common law position
o Malaysian law position

Promoters

Definition
o Twygross v Grant
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.
A promoter stands in a fiduciary relationship with a
company. Thus, they have a duty to act in an
utmost good faith.

Duty of a promoter
o Full disclosure
Promoters have a duty to make full disclosure to
allow the company to either accept or reject the
contract.
Partial truth is insufficient.
 Disclosure must contain all relevant
information about the transaction.
o Gluckstein v Barnes
The defendant bought a
debentures at a reasonable price
and later bought the company for
$140K.
They made a profit of $20K.
(Undisclosed to directors)
Later such company was sold to
another company.
Obtained profit of $40K
(Disclosed to directors)
Company went into liquidation.
Liquidator tried to recover for
the undisclosed profits
received.
o Profits were recoverable
as such disclosure did
not amount to full
disclosure.
o No secret benefit
Fairview Schools Sdn. Bhd v Indrani Rajaratnam
A promoter is not allowed to obtain secret
profit from the transaction proposed to be
entered by the company.
o Secret benefit : Any secret commission
or financial advantage obtained by the
promoter in a transaction.
o A profit ceased to be a secret benefit
upon the full disclosure of a company.
Whaley Bridge v Green and Smith
Green purchased certain printing works and
premises for sum of 15K.
o Later, he associated with Smith.
 Plaintiff company was incorporated to
purchase such printing works and premises.
Green promised to pay Smith 3K.
o Such payment was not disclosed to the
company.
The company was entitled to treat
the contract between the vendor
and the director as made by the
director on behalf of the company.

Remedies
o Rescission of a contract
The promoter must return all the secret profits
obtained and the company must return the
property received under a contract.
Erlanger v New Sombrero Phosphate Co
After eight months, the public investors found
out the fact that Erlanger (and his syndicate)
had bought the island at half the price the
company (now with their money) had paid for
it.
Limitation on the right to rescind the contract
Delay in rescission
Impossibility of restoration
Indefeasibility of title Acquired right of a 3 rd
party
o Recovery of secret benefit
Gluckstein v Barnes
o Damages
A company must prove actual loss and may sue
for
Breach of fiduciary duty
Fraudulent misrepresentation
Negligence
 In a transaction which concerns a sale of property
by the promoter to the company, the appropriate
measure of damages would be the promoters
profit on sale.
Re Leeds & Hanley Theatres of Varieties Ltd
o Promoters have to pay damages to the
company, the amount of which was
equivalent to the amount of profit made
by the promoters.
EXCEPTION : PROPERTY BELONGS TO THE
PROPERTY
o The company cannot insist that he sells
the property at its market price.

Pre-incorporation Contract

Definition

A contract entered into before incorporation of a company

and a third party.
Prior to its incorporation, a company does not possess a
contractual capacity.
o A promoter cannot be held liable for its act as an agent
to the company as the company (principal) is not an
existence at all.

Common Law Malaysian Law

A company was not bound
to contract entered before
its incorporation.
Kelner v Baxter
A promoters entered into a
The strict approach under
the common law was
altered under Sec.35(1)
A pre-incorporation
contract is binding on the
 contract to purchase a parties provided that the
wine from the plaintiff. The company has ratified the
company indeed went into contract after its
liquidation before payment incorporation.
was made to the plaintiff. Ratification can be made
either express or implied.
Decision: The promoters
were held personally liable Cosmic Insurance
for the non-payment of the Corporation Ltd. v Khoo
contract. Chiang Poh

Mr Khoo was appointed as

Managing Director for life
by a promoter. Such
appointment was later
ratified by the Board of
Director. Later, they
sought to remove Mr Khoo.

Held: Upon ratification of

the contract, the company
will become bound by and
entitled to the benefit of
the contract as if it had
been in existence at the
date of the contract.

Noted that a company had the right whether to ratify such

contract or not.
Prior to ratification by the company the person or persons
who purported to act in the name or on behalf of the
company shall in the absence of express agreement to the
contrary be personally bound by the contract or other
transaction and entitled to the benefit thereof. Sec.35(2)
 Unless ratification was given, a person who acted in the
name or on behalf of the company can be held liable by a
third party for failure to perform any contractual obligation.
Personal liability only arises in the absence of an express
agreement to the contrary
o Dairy Supplies Ltd. v. Fuchs (EXCEPTION)
The person who acts on behalf of the company can
be expressly excluded from liability where the
third party promises to only make the company
liable and not any other party.