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Promoters Meaning of ‘promoter” Twycross v Grant: one who undertakes to form a company with reference to a given purpose and to set it going and who takes the necessary steps to accomplish that purpose. Active promoter 

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One who actively undertakes the formation of a company by carrying out the procedure necessary for incorporation. A promoter will usually form a company as part of an entrepreneurial scheme. Person who actively take the required steps to form a company and cause it to acquire assets in a professional capacity, on behalf of a promoter are not promoters. [Solicitors and accountants are not promoters]. Where a company becomes a promoter due to the activities of an officer, that officer is not a promoter because they do not stand to personally gain from the promotion. However, an officer who represents the company’s directing mind and will may be considered a promoter.

Passive promoters. A person who takes no active part in the formation of a company and the raising of its share capital but leaves this to others on the understanding that they will profit from the enterprise, may be considered a promoter. Tracy v Mandalay Pty Ltd A company purchased land on which it intended to construct a block of flats. The land was then sold at a profit to Mandalay. Mandalay advertised and attracted many applicants for parcels of shares, each of which entitled the owner to sole use of a flat. The flats were not built and Mandalay brought an action against the promoters and vendor of the land to recover the money paid by its shareholders. Shareholders who initially purchased the land took part in the scheme and were promoters. Others were held to be promoters even though they fell out with the active promoters and stood only to recover their original contributions. Duties of promoters Fiduciary duties: these are owed throughout the period for which a person is a promoter. Disclosure of interest in a contract Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 A syndicate purchased an island which it hoped would prove to contain valuable minerals. A company was formed for the purpose of purchasing the island from the syndicate. The head of the syndicate nominated the directors of this company and at its first meeting, the company adopted the contract. It turned out that the island was worth less than the purchase price the company had paid. In this way, the promoters made a profit to the detriment of the company and its shareholders. Held: the company could rescind the contract and get back the purchase money of the island, with the island returning to the syndicate.

The promoters were uhder a duty when forming the company to provide it with an independent board of directors to whom full disclosure of the promoters’ interests in contracts with the company must be made. The directors would then be able to exercise an independent and reasoned judgement on the transaction. Undisclosed profits Promoters have a duty to disclose personal profits that may arise from their position. Remedies for breach of duties  

rescission of contract by company recovery of secret profits and constructive trust order (promoter is declared to be holding property on constructive trust).

Pre-registration contracts CL: a company cannot enter into a binding contract until after it is registered. Ratification meaning: reinforcing (company must reinforce the contract). Section 131: (1) If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract: (a)

within the time agreed to by the parties to the contract; or

(b)

if there is no agreed time—within a reasonable time after the contract is entered into.

(2) The person is liable to pay damages to each other party to the pre-registration contract if the company is not registered, or the company is registered but does not ratify the contract or enter into a substitute for it: (a)

within the time agreed to by the parties to the contract; or

(b)

if there is no agreed time—within a reasonable time after the contract is entered into.

The amount that the person is liable to pay to a party is the amount the company would be liable to pay to the party if the company had ratified the contract and then did not perform it at all. (3) If proceedings are brought to recover damages under subsection (2) because the company is registered but does not ratify the pre-registration contract or enter into a substitute for it, the court may do anything that it considers appropriate in the circumstances, including ordering the company to do 1 or more of the following: (a) (b) contract; (c)

pay all or part of the damages that the person is liable to pay; transfer property that the company received because of the contract to a party to the pay an amount to a party to the contract.

(4) If the company ratifies the pre—registration contract but fails to perform all or part of it, the court may order the person to pay all or part of the damages that the company is ordered to pay. Ratification after registration A company is bound by a pre registration contract if it ratifies the contract. This is formed on the date it is ratified rather than the date on which the contract was made. Aztech Science v Atlanta Aerospace Way Prior to its registration, Aztech’s promoter entered into a contract on Aztech’s behalf with Atlanta under which Atlanta, for a specified fee, agreed to provide certain services for Aztec after it was formed. Under the contract, it was agreed that the contract would come to an end if Aztech was not registered or failed to ratify the pre-registration contract within 60 days of the date of the contract, notwithstanding the effects of s 131(1). A few days prior to the 60 day deadline, a verbal assurance was given to extend the period for a few more days. Aztech was eventually registered and Atlanta failed to provide the services and Aztech sued it for a breach of contract. Held: the parties had agreed to an extension of time beyond the initial 60 days and this conduct took place on the mutual assumption that Aztech had ratified the agreement. The term ‘agreed’ in s 131 must involve a mutual understanding between the parties to a contract but does not have to be part of the contract nor contractually binding....