Tutorial 3

Q1. Explain the fiduciary duty of a promoter and the consequences of breach of such
duty.

Introduction
Promoter is one who undertakes to form a company with reference to a given subject
and to set it going and takes all the necessary steps to accomplish that purpose.
The promoter stands in a position of fiduciary relationship with the company where
trust and confidence are placed upon him in his actions. Promoter must always act in
the best interest of the company.
The law places fiduciary duties on promoter because he holds an important position in
forming the company.

Content
In Erlanger V New Sombrero Phosphate Co (1878) 3 App Cas 1218, it held that
promoter owes a fiduciary duty to the company. The fiduciary duty of the promoter
does not end even though the company is in incorporated. If anything found out
wrong after the promoter incorporating the company, the promoters is still liable. The
promoter was failed to disclosure the land transaction to the company. Therefore, the
company can rescind the contract. The promoter must make full and frank disclosure
of his or her interest in any transaction to the company, board of director and
shareholder.

Fairview School Bhd V Indrani (No 2).

A promoter who is also a shareholder. He or she must be full disclosure and not
partial disclosure. In Gluckstein v Barnes [1900] AC 240, it was held that the
disclosure was not effective unless it was made fully and frankly. The promoter
disclosure £40,000 profit, but they do not disclosure another £20,000 profit on the sale
that made on a discounted price. The promoters should inform in the board to tell his
personal interest in that property, and let the shareholder know the transaction.

In Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, it held that directors and
officers from taking personal advantages of a corporate opportunity is in violation of
their duty of loyalty to the company. A promoter cannot make a secret profit at the
expense of the company. Promoters have a legal duty not to take any profit or benefit
out the promotion of the Company without the Company's consent and to disclose to
the Company any interests the promoters have in any transaction proposed to be
entered into by the Company. The law expects transparency. A promoter has a duty to
avoid a conflict of interest. In Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq
461, it was held that Blaikie had breached his duty by placing himself in a position
where his personal interest conflicted with his duty to the company. Blaikie holds the
position as the director and managing partner at the both companies. Blaikie Bros sell
the equipment at the highest price because he is a director and he has to protect his
furniture company, but as a director in Aberdeen, he has protected the interest of
Aberdeen to buy the furniture at lowest possible price. To perform his fiduciary
duties, he is now in a conflict-of-interest situation which the court said he must avoid.
A promoter has 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 profit later.
Even if there was no intention to do injustice or commit fraud, the promoter is in
breach of duty if he hides his identity as the owner of property acquired by the
company. It is a duty of promoter not to defraud the Company by active concealment
of any affairs relating to the company. and not to hide his personal interests through a
nominee.

Case ? A promoter must also not to disclose confidential information to outsiders.

Consequences of breach of duty
When a promoter breached his duty, the company has the right to rescission the
contract. 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. In S.17 Contracts Act 1950, if the promoters do not disclosure all relevant
information to the company, he or she has the intention to defraud the company and
by S.19 Contracts Act 1950 the contract between the two parties become voidable.
Under S. 34(1) Specific Relief Act 1950, the Company can apply to the Court to
rescind the contract. Once the contract is rescinded, the Company has to return
whatever it received from the Promoter and the Promoter has to return all monies
received from the company.

Damages for breach of fiduciary duties. Where recission is not possible, the
company can claim damages for the loss suffered from the promoter, especially for
the case which consists a high value in loss to the company. In 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 them on the sale of the property to the Company. The amount of
damages was equivalent to the amount of profit made by the promoters.

Recovery of the secret profit. The company may elect to not to rescind the contract
despite the promoter has breached his fiduciary duties. Company can just proceed to
claim for the secret profit. This include any amount that is promised to the promoter.
In Gluckstein V Barnes, the Court held that the promoters breach of their duties 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. Therefore, the
promoters are required to replace the portion of £20,000 secret profit which was paid
to them.

Conclusion
A promoter owns a fiduciary relationship to the company, he or she must make full
disclosure all relevant information, avoid in making a secret profit of the company. If
a promoter fails to do so, the promoter might bear a worse consequent. The company
have the right to rescind the contract, claim the damages for breach of fiduciary duties
from that promoter, and recovery of the secret profits which was hide by the
promoter.
Q2)
A)
Identification of Issues
Whether Charles is a promoter or not?
The contract he signed with pretty lady is it a pre-incorporation contract?
Whether Pretty Lady Sdn Bhd can claim the rental payment from Charles or Smart
Care Sdn Bhd?

Explanation of Law
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.
Thus, where a person who is already carrying on business decides to expand the
business and incorporate the company and use it as a means to conduct a business. In
the case of Twycross v Grant (1877) 2 CPD 469 as per Cockburn CJ,person who
undertakes to form a company with reference to a given object and set it going and
takes the necessary steps to accomplish the purpose.

According to Section 2(1) Companies Act 2016, person who is involved in preparing
prospectus is the promoter of the company, but professionals who prepare documents
for co formation are not promoters . In the case of Tengku Abdullah ibni Sultan Abu
Bakar v Mohd Latiff bin Shah Mohd [1996] 2 MLJ 265, the appellant is on behalf of
the club to enter into a contract to purchase shares in Raintree Development Bhd from
Allied Capital Sdn Bhd for the sum of RM 47 million. The person involve in a pre-
incorporation contract, he is a promoter.

A pre-incorporation contract is a contract entered into by a company or on behalf of a

company at the time before the company was incorporated or not formed yet.
According to Section 65(1)Companies Act 2016, a contract or transaction that
purports to be made by or on behalf of a company when the company has not been
formed has effect as a contract or transaction made with the person purporting to act
for the company or as agent for it, and he is personally liable on the contract or
transaction accordingly.

Ratification is accepting/adopting/confirming of the contract by the company.

According to Section 65(2) Companies Act 2016, after the company is incorporation,
it may ratify the contract, and it shall be bound by the contract or transaction as if the
company had been in existence at the date of the contract or transaction and had been
a party to the contract or transaction.

In the case of Chung Yoke Onn v CS Khin Development Sdn Bhd (1985), the
promoter entered into an agreement with the architect to draw building plans. Even
though neither the Board nor the members at the general meeting passed a resolution
to adopt the agreement, the company used the plan to build a block of buildings. The
court held that there was implied ratification of the agreement.

In the cases of Kelner v Baxter (1866) LR 2 CP 174, the promoters of a hotel

company entered into a contract on its behalf for the purchase of wine. promoters, as
agents, were sued on the contract. They argued that liability under the contract had
passed, by ratification, to the company. It was held, however, that as the company did
not exist at the time of the agreement it would be wholly inoperative unless it was
binding on the promoters personally and a stranger cannot by subsequent ratification
relieve them from that responsibility.

Newborne v Sensolid (Great Britain) Ltd (1954) I QB 45 as an unformed company

entered into a contract, the other contracting party refused to perform his duty. Lord
Goddard observed that before the incorporation the company cannot in existence, and
if it is not in existence, then the contract which the unformed company signed would
also be not in existence. So company cannot bring an action for pre-incorporation
contract, and also the promoter cannot bring the suit because they were not the party
to contract.

In the case of Cosmic Insurance Corporation v Khoo Chiang Poh [1981] 1 MLJ 61,
the company passed a resolution appointing the respondents as MD for life and in
accordance with the company’s constitution.

Application of law
Charles is a promoter because he has taken every active steps by looking for
investors, directors and property. The contract was entered on 1st February 2019 by
Charles, however the company was formed on 17 th March 2019. The contract is
actually for the benefits of the company and it was entered into before the company
was incorporated. It shows that it is a pre-incorporation contract. According to Section
65(1) Companies Act 2016, Charles signed an agreement with Pretty Lady Sdn Bhd
by stating that the monthly rental will be paid by the Company. Although the
company haven’t form, he is on behalf on his company to sign the contract, so he is
liable personally to it. However, as soon as the company was incorporated, company
started to use the property. Then, according to Section 65(2) Companies Act 2016,
there is a ratification by the company and this ratification is implied ratification
according to the Cosmic Insurance Corporation v Khoo Chiang Poh [1981] 1 MLJ 61.

Concluding Advice
A) Charles is a promoter and the contract signed between him and pretty lady is pre-
incorporation contract. Since the company is moved in to use the property, according
to Section 65(2) Companies Act 2016, the company has ratified the contract.
Company is now bound by the contract. Pretty Lady Sdn Bhd can only bring an action
against the company, Smart Care Sdn Bhd and not charles.

B) Since the company did not move in to use the property, in that case there is no
ratification by the company. Section 65(1) & 65(2) Companies Act 2016 are very
clear on the ratification that know ratification the person entered into contract will still
be liable personally. In this case, the sentences inside the contract is not effective.
Charles will still be liable personally.
Q3)

Introduction
Section 9(b) Companies Act 2016 stipulates that ‘A company shall have one or more
members…’. This provision allows the incorporation of a company with only one
member.

Content
As a general rule, it is a must to register company name before incorporation of the
company. To differentiate an unlimited company from the others, section 25(1)
Companies Act 2016 provides that the name of an unlimited company shall end with
the word ‘Sendirian’ or the abbreviation ‘Sdn.’. Whilst, in the case of a public
company, its name should end with the word ‘Berhad’ or its abbreviation ‘Bhd.’ In
addition, there are few criteria where a company name is not available, which
determined under section 26 Companies Act 2016. Firstly, the company name is
undesirable or unacceptable. Secondly, the company name is identical to the name of
the existing business or the name reserved under the registrars which registered under
Companies Commission of Malaysia (CCM). Thirdly, the company name which is
prohibited under the direction of the minister.

Section 27(1) Companies Act 2016 requires an applicant to apply and confirm the
availability of the proposed company name with the Registrar and if the proposed
company name is available, S.27(5) Companies Act 2016 the Registrar will reserve
the name for a period of 30 days from the date of lodgment of application. Upon
being satisfied that the company name is acceptable, the company should pay for
reservation of the name which lasts for a period of 30days or even longer starting
from the lodgment of the application. The confirmation and reservation of company
name is to avoid other intended company from having the same name as ours. Section
14(1) of the CA 2016 provides that a person who desires to form a company shall
apply for incorporation to the Registrar.

Conclusion
In conclusion, there is no company could register its name to their fancy as subject to
ROC approval.