Lecture 4 Formation of a company ( Promoter) PDF

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Is XXX a promoter of XXX company? ● Company does not come into existence by itself, there are certain person required to form the company which is promoter ● Define who is promoter: Under common law ❖ According to Tengku Abdullah ibni Sultan Abu Bakar v Mohd Latiff bin Shah Mohd [1996], promoter is a person take steps to form a company. The steps include look for company name, investors, directors and suitable property. ❖ Even if the person do not take active part in promotion of company but is deriving some form of benefits from forming co, he is also considered as promoter – Tracy v Mandalay Pty Ltd (1953) Under Companies Act 2016 ❖ According to S.2(1), a promoter is a person who prepare prospectus (this is a shortcoming of the CA as it only refers to public company and the preparation of prospectus is not the only steps being taken) ❖ According to S.2(1), Professionals who prepare documents for co formation is not P. (because it is their job to prepare documents) ❖ A promoter is a party to PIC ❖ Promoter shall have consent to act as P - S.14(4)(a) ❖ Promoter shall not disqualified - S.14(4)(b) Are XXX in breach of their duties as Promoter for secret profit? ● A promoter is under fiduciary duties because prospective SH, directors and company have trust and confidence that promoter will act in company’s best interest ● Duty is owed to the company even the company is not formed yet, only company can sue Promoter ● Promoter cannot make secret profit, a profit that made without knowledge of SH and D Are XXX in breach of their duties as Promoter for conflict of interest? ● A promoter is under fiduciary duties because prospective SH, directors and company have trust and confidence that promoter will act in company’s best interest ● Duty is owed to the company even the company is not formed yet, only company can sue Promoter ● Promoter must avoid conflict of interest ● If Promoter cannot avoid conflict of interest, they should make disclosure to BOD or existing/ prospective SH(for public company) ie via prospectus Fairview Schools Bhd v Indrani a/p Rajaratnam [1998] Are XXX in breach of their duties as Promoter for not making full and frank disclosure? ● A promoter is under fiduciary duties because prospective SH, directors and company have trust and confidence that promoter will act in company’s best interest ● Duty is owed to the company even the company is not formed yet, only company can sue Promoter ● Promoter must make full and frank disclosure The case of Gluckstein v Barnes(1900)will illustrate the point of promoters recovery the secret profit. In this case the Defendants bought debentures cheaply in a Company at a time

when the Company was faring very badly. Later they bought over the Company for 140,000 pounds. The debentures were redeemed at full value and they made a good profit. Here they made a profit of 20,000 pounds. Later still, they formed another company and sold the Company to a new Company at a profit of 40,000 pounds. This profit was disclosed in the prospectus but not the amount of profit they made on the redemption of the debentures (20,000 pounds). The Court held that there were in breach of their duties as promoters and the Company was entitled to recover the profit from them. ● If disclosure made to BOD, BOD must be independent – Habib Abdul Rahman v Abdul Cader (1808-1890) a) When all D is SH is promoter ● The disclosure to BOD is valid b) When there are 2D, 1 is promoter ● Disclosure must be made to the director who is not the promoter c) When all D is promoter ● Disclosure should be made to SH *Disclosure to Director must be independent(where the particular Director has no connection to the promotion of the company) while disclosure to SH no need to be independent What are the remedies available for XXX company? ● Any duty is breached, company can only bring an action once it is formed (S.20,S.21) ● Company can rescind the contract. - S.65 Contracts Act 1950 ● Company can claim damages for any loss suffered – Re Leeds and Hanley Theatres of Varieties Ltd [1902] ● Company can claim for secret profit. ● Company can retain/liable/accountable for any money or property – S.541(1). (this is only applicable in the course of winding up) Who is bound by the pre-incorporation contract? ● Meaning of PIC - PIC is contract entered before the company form ● Why is there a PIC - PIC is entered for the business purpose and benefit of company ● Who is bound by PIC Under Common Law ● Promoter is bound if signs in own name – Kelner v Baxter (1866) LR 2 CP 174; ● Promoter not bound if sign on behalf of co’s name because co not formed yet – Newborne v Sensolid (Great Britain) Ltd (1954) 1 QB 45. Position under common law is not satisfactory because the position of other parties to the contract are uncertain (depends on how it is signed) Under Companies Act 2016 ● Co is bound if it ratifies PIC – S.65(2). ➔ Ratification means company approve ➔ Ratification can be express/implied. ➔ Express (writing or verbal) ratification by BOD/GM (pass resolution/ announce) ➔ Ratification by BOD – must be unanimous approval. Ratification at GM – by simple majority (51%) ➔ Implied ratification means by conduct (eg: occupy property)- Cosmic Insurance Corporation v Khoo Chiang Poh [1981] 1 MLJ 61 : the Privy Council held a preincorporation letter of appointment as Managing Director as having been duly ratified by resolution of the company passed after incorporation though the

resolution was in different terms from the letter. It was held that what was material was that the subject of the resolution was the ratification of appointment as Managing Director and not the terms of appointment. ● If no ratification, P is bound – S.65(1). ➔ The effect if there is no ratification and there is an agreement to the contrary/ clause to exclude liability, P is still bound, no longer an issue. ➔ This is to be contrast with previous law where [If there is ‘agreement to the contrary’ P is not bound – S.35(2) CA 1965]....