Chapter 5 Company Law

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CHAPTER FIVE

PROMOTERS AND PRE-INCORPORATION CONTRACT

PROMOTERS

Before registration of a company few people undertake the initiative to prepare necessary documents and do other necessary works in order to register the company. Those people are known as promoters of the company. Promoters do necessary works for the formation of the company. When the company has been registered, sometimes the promoters become the first directors of the company or they might find new directors for the company. In Twycross v. Grant,[1] a promoter has been defined as “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.”

So, the person who is involved in the setting up of a new company is known as promoter. Promoter may include a person who enters into contracts with outsiders on behalf of the company before its incorporation.[2] A person who is a party to the preparation of the prospectus of a company is also known as promoter.[3]

The term ‘promoter’ has been defined precisely neither in the Companies Act 1965 (Malaysia) nor by the court. The term ‘promoter’ is not only used for the purpose of incorporation of a company. It can be used for initiating any other projects. The term ‘promoter’ encompasses a wide range of persons including the person who undertakes for the formation of a business company. This was observed by Gopal Sri Ram JCA in Tengku Abdullah Ibni Sultan Abu Bakar & Others v. Mohd Latif bin Shah Mohd & Others,[4] when he accepted the definition given by the counsel that: “A promoter is one who starts off a venture – any venture – not solely for himself, but for others, but of whom he may be one.”

DUTIES OF PROMOTERS

The promoters make a close and friendly relation with the proposed company as they work to incorporate the company. Therefore, the proposed company shareholders and the outsiders view them very close to the company. Such close relation with the company is known as fiduciary relation. Because of this fiduciary relation the promoters must be trustworthy to the company and the outsiders. Their relation with the proposed company is like trustees. They are not allowed to do anything with the company that may breach their trust and fiduciary duty to the company.

So, the promoters have fiduciary duty towards the company and the fiduciary duty will be breached if the promoters make secret profit using the company for their personal interest. Therefore, they should avoid making secret profit from any transaction with relation to the proposed company. If they make any secret profit while acting as promoters they should fully disclose the amount of secret profit made. In Fairview Schools Bhd v. Indrani a/p Rajaratnam & Others,[5] Mahadev Shankar JCA, in his judgment on be half of the Court of Appeal stated that:

“Promoters have a legal duty not to make any secret profit out of the promotion of the company without the company’s consent and also to disclose to the company any interest the promoters have in any transaction proposed to be entered into by the company.”

The duty to disclose secret profit may be discharged if the promoters disclose the incidence:

i) in the memorandum, articles or prospectus of the company;

ii) to an independent board of directors; or

iii) to the existing and intended members of the company.

The duty to disclose the secret profit or any interest secured by the promoters must be made to the independent board of directors. If the board of directors of the company after incorporation is not an independent board, then the disclosure would not be effectively discharged by the promoters. If the promoters or some of the promoters are in the board of directors, the board would not be considered as an independent board of directors. When the board is not an independent board, the disclosure should be made to the members of the company. And the disclosure...
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