CORPORATE COMPLIANCE AND PRACTICE (DCA 212)

DCA 212 Chapter 6.doc

C H A P T E R SIX :
PROMOTERS AND PRE-INCORPORATION CONTRACTS

PROMOTERS

A. DEFINITION
1. A promoter is ‘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’ per Cockburn CJ in Twycross v Grant (1877).

2. Thus Mr. A and Mr. B who have taken relevant steps to form the company to be
called XYZ may be regarded as the promoters of the company.

3. Promoters are persons who are likely to influence or affect the future of the company
after its incorporation.

4. They are regarded as fiduciaries in relation to the company.

5. They act in a position of trust and must at all times act honestly and for the benefit of
the future company.

6. Promoters must never take any secret profits from the promotion of the company
unless they make adequate disclosure to an independent board of directors or to
directors or to all the present and intended shareholders.

B. SECRET PROFITS: REMEDIES

Where a promoter has made secret profits, the company has several remedies available to
it:
1. First, the company may seek to rescind the contract made with the promoter as held in
Erlanger v New Sombrero Phosphate Co. and also in Habib Abdul Rahman v Abdul
Cader.

2. The company may also seek to recover the secret profit made by the promoters.
Case: Gluckstein v Barnes

3. The promoters may also be held liable for damages for breach of fiduciary duty.
Case: Re Leeds & Hanley Theatres of Varieties Ltd.

4. Thus, the company, XYZ may be advised that as Mr. A and / or Mr. B being a
promoter(s) having made a secret profit of ______ without disclosing it to the
company, it is entitled to rescind the contract, or alternatively to recover the secret
profit, or may allow him to keep the profit and affirm the contract..

The company may be advised that it can i) rescind the contract or ii) affirm the
contract and either recover the secret profit from the promoter or allow him to keep it.

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PREPARED BY : SHARON GANA
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CORPORATE COMPLIANCE AND PRACTICE (DCA 212)
DCA 212 Chapter 6.doc

PRE-INCORPORATION CONTRACTS
A. DEFINITION
1. A pre-incorporation contract is one which is purportedly made by or on behalf of a
company at a time when the company has not yet been incorporated.

2. At common law such contracts were totally void.

3. This was because until a company was incorporated it has no capacity to contract.

4. A company could not ratify the contract after its incorporation.

5. Thus, in Kelner v Baxter, it was held that the pre-incorporation contract was not
binding on the company after its formation, and that the promoters or persons acting
on behalf of the company before the formation were personally liable.

6. Further, no ratification could release them from such liability.

7. However, a person carrying on the affairs of an existing company under a new name
which has not yet been registered will not be personally liable.
Case: Oshkosh B’Gosh v Dan Marbel

B. MALAYSIAN POSITION
1. The Malaysian position is governed by section 35(1) and (2) of the Companies Act
1965.

2. By virtue of section 35(1) of the Companies Act 1965, any contract or other
transaction purporting to be made by a company prior to its formation may be ratified
by the company after its formation.

3. After such ratification, the company shall become bound by and entitled to the benefit
thereof as if it had been in existence at the date of the contract or other transaction,
and as if it had been a party thereto.

4. By virtue of section 35(2) of the Companies Act 1965, prior to ratification by the
company, the person or persons who purported to act 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.

5. Thus, in Malaysia, a pre-incorporation contract can be ratified by the company after

its incorporation.

6. Once ratified, either party can sue the other party for breach upon the contract as
illustrated in Cosmic Insurance Co. Ltd. v Khoo Chiang Poh (1981).

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PREPARED BY : SHARON GANA
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CORPORATE COMPLIANCE AND PRACTICE (DCA 212)
DCA 212 Chapter 6.doc

7. If the company does not ratify the contract after its formation, the person purporting
to act on behalf of the company will incur personal liability.

8. Apply:
Thus, as the contract has not been ratified by the company after it was incorporated,
the promoter or person acting on behalf of the company would be personally liable or
entitled to its benefit under section 35(2) of the Companies Act 1965 unless he has
expressly excluded personal liability.

Or

As the contract has been ratified by the company after its incorporation, the company
shall be bound by and entitled to the benefit of the contract under section 35(1) of the
Companies Act 1965.

Learning outcome
1. To identify a pre incorporation contract and its effect on the company as well as the
promoter of company.
2. Be able to identify on the duties and obligation of promoter of company.
3. To advise the company on the effect of secret profit made by the promoter of
company.

Exercise
1. What is the effect of a pre incorporated contract on the company.
2. Briefly explain the Malaysia position on a pre-incorporated contract.
3. In the event of secret profit made by promoter of company, what are the remedies that
are available to the company?
4. What are the roles played by promoter before the formation of the company.
5. If there is a contract entered into before the formation of the company, can the
company choose not to honour the contract? If yes please your answer with the
support of case law.

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PREPARED BY : SHARON GANA
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