Friday, October 3, 2008
Before a Company is incorporated, or in the process of incorporation, it is common for someone lay the groundwork of the Company.In practice, one does not always wait to receive the Certificate of Incorporation before commencing business.Negotiations for the purchase of material or land would already have commenced. The people who take the responsibility of starting the Company are referred to as Promoters.
In Tengku Abdullah v Mohd Latiff bin Shah Mohd, 2 MLJ 265 Gopal Sri Ram JCA said:
"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."
However the most cited case in this regard is Twycross v Grant where CJ Cockburn said,
" One who undertakes to form a company with reference to a given subject and to
set it going and who takes all the necessary steps to accomplish that purpose.'
The promoter lays the foundations for a Company in terms of negotiations,
registration of the Company, obtaining directors and shareholders and preparing all the paperwork.
However, because the Promoter is such an important person in the formation of the company, the law places several responsibilities on him. These are known as fiduciary duties.
THE FIDUCIARY DUTIES
The following are some of the fiduciary duties that the Courts will insist that a Company promoter has to observe.
1.Top of the list is not to make a secret profit at the expense of the company
2.A duty to account to the company for the benefit for any property he might
purchase with the intent of selling the property to Company for a pfofit later.
3.a duty not to defraud the Company by active concealment of any affairs relating to
4. a duty not to disclose confidential information to outsiders
5. a duty not to hide his personal interests through a nominee.
A Promoter is in a fiduciary relationship with the Company he promotes and as such he owes fiduciary duties towards it.This means that he is in a position of trust and must at all times act honestly and in good faith for the Company as a whole.
However, the most important aspect of his duty is not to make a secret profit at the expense of the Company. In the case of Fairview Schools Sdn. Bhd v Indrani a/p Rajaratnam (No1) 1 MLJ 110 Mahadev Shanker JCA said,
" Promoters have a legal duty not to make a secret profit out of the promotion of
the Company without the Company's consent and also to disclose to the Company any
interests the promoters have in any transaction proposed to be entered into by
There are many cases where Promoters did not remain true to their fiduciary duties. The bottomline requirement from Promoters is that they must be transparent in their dealings with the Company.
There are three remedies in situations where the Promoters have breached the Fiduciary Duties.
1. Rescission 2. Recovery of the Secret Profit.
3. Damages for breach of FD or deceit
If the Company has entered into a Contract with the promoter and it is later discovered there had been no transparency, the Company is entitled to rescind the contract.It is irrelevant that the promoter has made no profit from the contract.S17 Contracts Act states that non-disclosure amounts to a fraud and by Sect 19 the Contract becomes viodable.
Under Sect 34(1) Specific relief Act 1950 the Company can apply to the Court to rescined the contract.Once the contract is rescinded, restitution has to take place. This is where the Company has to return whatever it received from the Promoter and the Promoter has to return all monies received from the company.+
ERLANGER v NEW SOMBRERO PHOSPHATE CO. (1878)
In this case, Erlanger bought an island containing phospates for 55,000 pounds.Later, Erlanger promoted a Company and sold the property to it for 110,000 pounds.All the Directors of that Company were nominees of Erlanger annd two of them were directly under his control.Later the old board was replaced by a new board which brought an action to rescind the contract with Erlanger.
TheCourt held that there had been no adequate disclosure of the circumstances of the sale and the Company was entitled to rescind the contract.
RECOVERY OF THE SECRET PROFIT
GLUCKSTEIN V BARNES
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 soold 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.The Company can recover the secret profit even though they chose not to rescind the contract. The liability of the promoters is "joint or several". A Promoter who is found liable may recover contributions from the other prmoters.
DAMAGES FOR BREACH OF FIDUCIARY DUTIES.
In the case of RE LEEDS & HANLEY THEATRES OF VARIETIES LTD.(1902)
The Court ordered the Promoter to pay damages to the Company. The Court held that the Promoters had fraudulently omitted to disclose the profit made by t hem on the sale of the property to the Company.The amount of damages was equivalent to the amount of profit made by the promoters.
MAKING CONTRACTS FOR THE COMPANY
The Company's Act 1965 S35(4) details the circumstances in which contracts may be made on behalf of a Company.The Section compares the situation that would exist between private persons and relates it tpo the Company.
S34(4)(a) the common seal should ber affixed by the authority of the Board of Directors, signed by a Director and countersigned by the Company Secretary. Table A Art 96