DR. MD.

ABDUL JALIL, COMPANY LAW, CHAPTER FIVE, 2013

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
1 2

[1877]2 CPD 469. See R. Rachagan, J. Pascoe and A. Joshi, Principles of Company Law in Malaysia, Kuala Lumpur: Malayan Law Journal, 2002. 3 Section 4 of Companies Act 1965. 4 [1996] 2 MLJ 265.

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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 companys 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) ii) iii) in the memorandum, articles or prospectus of the company; to an independent board of directors; or 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 of interest of promoters must be full disclosure. If part of the profit is disclosed and a part of it not disclosed, then the disclosure would not be considered as full disclosure. In Erlanger v. New Sombrero Phosphate Co6, the court held that all the transactions from which the promoters secure any benefit from the promotion of the company must be properly disclosed.
5 6

[1998] 1 MLJ 110. [1877] 2 CPD 469.

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The disclosure of the benefit received by the promoters out of promotion must be full, frank and explicit. All material facts related to the benefit received must be disclosed. A disclosure of profit by the promoters which is half truth or partial truth can be defective and may not have legal effect.7 HOW THE PROMOTERS MAY BREACH THE FIDUCIARY DUTY Promoters have fiduciary relation with the company. Fiduciary relation means very close relation in which the company relies very much on the promoters as its well-wishers. Therefore, the promoters duty is to act bona fide for the interest of the company and avoid being involved in conflict of interests with the company.8 The fiduciary duty is breached if i) the promoters make secret profits out of contracts with the company; ii) the promoters do not disclose the secret profit made out of promotion and keeps the money with them as opposed to their fiduciary duty; iii) the promoters refuses to deliver the secret profit when asked by the company; iv) the promoters act in conflict of interests with the company; v) during promotion the promoters buy property with the intention of selling it to the company at a profit; vi) the promoters disclose confidential information of the proposed company without authorization; vii) the promoters do not avoid taking up a contract or opportunity that in equity belongs to the company. In Fairview Schools Bhd. v. Indrani a/p Rajaratnam & Others 9, Mahadev Shankar JCA, on be half of the Court of Appeal observed that: If a promoter acquires any property for the inchoate company after the commencement of the promotion, he is presumed to do so as the trustee of the company, so that he must hand it over to the company at the price he gave for it, unless he discloses not merely the profit he proposes to make but also informs the company of its right to call for the property at its cost price. Hence, it will amount to breach of fiduciary duty by the promoters if they buy certain property for the proposed company and later sell it to the company with profit and the profit is not disclosed to the company. In fact, when the promoters secure any benefit or acquire any property on behalf of the inchoate company, they receive it as trustees of the company and they should return the benefit or property to the company without being asked to return as mentioned by the Mahadev Shanker, Judge in the Court of Appeal, Malaysia.
7

Chan and Koh, op. cit., at p. 198. See also the decision in Gluckstein v. Barnes [1900] AC 240. (House of Lords) 8 S. Rachangan et al, op. cit., at p. 152. 9 [1998] 1 MLJ 110.

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PERSONS WHO ARE PROHIBITED TO BECOME PROMOTERS Some people are prohibited to be promoters of a new company. 10 Those people are: a) If a person has been convicted of an offence in connection with the promotion, formation or management of a corporation; b) If a person has been convicted of an offence involving fraud or dishonesty punishable on conviction with imprisonment for three months or more; or c) If a person has been convicted of an offence under sections 132, 132A or 303 of Companies Act 1965. The above persons are not entitled to be appointed as promoters and cannot work as promoters unless they have obtained leave of High Court to work as promoters. The conviction of offence mentioned above might be in Malaysia or abroad. The period of prohibition is five years within which time the above mentioned persons are not entitled to be promoters. The five years prohibition period will run from the date of the conviction or if imprisonment is imposed, from the date of the persons release from the prison. If the provisions of sections 130, 132, 132A and 303 of the Companies Act are violated, the person will be liable for a penalty of five years imprisonment or a fine of RM100,000 or both. REMEDIES AGAINST PROMOTERS FOR BREACHING FIDUCIARY DUTY When the promoters breach their fiduciary duty to the company by making secret profit out of the promotion, they would be liable to the company to account for the secret profit made by them. The promoters need to fully and properly disclose all the benefits they have gained out of the promotion. If they fail to fully and properly disclose the financial benefits they have gained, the company as a separate legal personality can claim certain remedies against the promoters. The promoters are jointly and severally liable to the company for the secret profit they made out of promotion. If a promoter pays personally all the secret profit made, he may seek to claim proper contribution from the co-promoters. 11 However, court may disregard his claim for contribution from other copromoters for policy consideration. The company may claim the following remedies from the promoters for breaching fiduciary duty.
10 11

See section 130, 132, 132A and 303 of the Companies Act 1965. S. Rachangan et al, op. cit, at p. 155.

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i) ii) iii)

Rescission of the contract; Recovery of the secret profit; Damages for breach of fiduciary duty.

The company can enforce any of the above remedies against the promoters for making secret profit out of promotion. These remedies have been explained briefly below by the help of decided cases. Rescission of the Contract When the promoters have made secret profit by making some contract with other companies or people on be half of the company or by selling certain goods to the company before or after its incorporation, they are obliged under company law to fully disclose and return the profit to the company after its incorporation. If the promoters fail to do so, the company can exercise its power to rescind the contract made by the promoters to sell something to the company. The reason for rescission of the contract is that the promoters have been personally benefited out of promotion but the company has not been benefited or the company has suffered loss. The exercise of power for rescission of contract was successfully done in Erlanger v. The New Sombrero Phosphate Co.12. In this case a syndicate purchased a lease of an island in the West Indies. The island contained deposits of phosphate of lime. Mr. Erlanger was the chief in the syndicate. The syndicate purchased the lease of island for 55,000. Subsequently a company was formed by the syndicate and it sold the island to the new company for 110,000 through a nominee. As a result the syndicate earned 55,000 secret profit. The articles of the company empowered the directors to adopt the purchase of the lease, which was ultimately done. A prospectus was issued by the company giving a very favorable account of the scheme and many people bought shares. The real circumstances of the purchase were not disclosed to the shareholders despite being questioned by the shareholders. Later an investigation committee was formed to investigate the incidence and it recommended the removal of the original directors and appointment of a new board of directors. The new board of directors was appointed and it rescinded the purchase contract and claimed for repayment of the money and shares which had passed to the syndicate. The House of Lords held that the purchase contract could be rescinded. Rescission of contract is an equitable remedy. The company can exercise this right through an independent board of directors. However, if the company ratifies the contract, the right to rescind the contract will be lost. 13 Inordinate or
12 13

[1878] 3 Appeal Cases 1218; [1874-80] All ER 271. (decided by the House of Lords). Chan & Koh on Malaysian Company Law: Principles and Practice, Kuala Lumpur: Thomson, Sweet & Maxwell Asia, Second edition, 2006, at p. 203.

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undue delay on the part of the company to rescind the contract may also prevent it from obtaining such remedy.14 The right to rescind the contract is lost if: a) after being informed of the secret profit the company ratifies the contract; b) the company shows no interest to rescind the contract and as a result inordinate or undue delay has been caused to exercise the remedy; c) restitutio integrum is impossible; d) an innocent third party has meanwhile acquired rights to the property. Restitutio integrum means to restore the parties to their original position. The right to rescind the contract is lost when it is not possible to restore the parties to their original position. For example, a company has substantially altered the conditions of a property obtained through purchase from the promoters. The company may not rescind this contract on the ground of undisclosed secret profit made by the promoters as it would not be possible to put the promoters in their pre-contract position as the property has undergone substantial change in the hands of the company.15 Recovery of the secret profit The company after incorporation can recover the secret profit made on the ground of breach of fiduciary duty and principle of trust. Under the principle of trust law when promoters receive profit out of promotion they hold it as trustees for the company and bound to return to the company. Recovery of secret profit is an alternative remedy which is usually claimed when the company does not rescind the contract. In Gluckstein v. Barnes16, it was held by the court that the company could recover the secret profit even though it chose not to rescind the contract. In Gluckstein v. Barnes17 a company was able to recover the sum of 20,000 as secret profit which was not fully disclosed by the promoters. In this case a syndicate consisted of four persons bought a property known as Olympia for 140,000 from a liquidator. Then it sold the property to a company which it promoted for 180,000 by making 40,000 profit. The syndicate also made another 20,000 profit by buying securities on the property at a discount. A prospectus was issued by the company to the public to raise capital. In this prospectus the promoters disclosed 40,000 profit but another 20,000 profit
14 15

See Lagunas Nitrate Co. v. Lagunas Syndicate [1899] 2 Ch 392. (decided by Court of Appeal) See S. Rachagan, J. Pascoe and A. Joshi, Principles of Company Law in Malaysia , Kuala Lumpur: Malayan Law Journal, 2002. 16 [1900] AC 240. (House of Lords) 17 [1900] AC 240. (House of Lords)

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was not disclosed. The company went into liquidation within four years of its incorporation. The liquidator sued the syndicate to recover 20,000 undisclosed profit. House of Lords held that the disclosure of secret profit was not full and allowed the liquidator to recover 20,000 undisclosed profit from the syndicate. When a co-promoter was promised by another co-promoter to pay an amount of secret profit but it was not paid, the money is kept by the promisor as trustee for the company. In Whaley Bridge Calico Printing Co. v. Green & Smith 18, Green in association with Smith bought certain calico printing works and premises for the sum of 15,000. Later the plaintiff company was incorporated and the printing works and premises were sold to it for 20,000. Green promised to pay 3000 secret profit to Smith which in fact was not paid. The issue was whether the company could recover the money form Green. The court held that Green held the money as trustee for the company and therefore bound to pay back the money to the company. So, the company was entitled to recover the secret profit from Green. When the promoters disclosed the profit made by them out of promotion of the company and later the independent board of directors ratified the contract without claiming the profits, whether the company later can claim the profit or not is an issue. In some case it was decided that a promoter may not effectively relieve himself of his liability in respect of his breach of fiduciary duty by inserting a clause in the articles whereby the company and the subscribers agree to waive their rights against him.19 Besides, on the ground of breach of fiduciary duty and on trust principle secret profit can be recovered by the company from the promoters even if the pre-incorporation contract has been affirmed afterwards. This opinion is supported by the observation of Bowen J. in Whaley Bridge Calico Printing Co. v. Green & Smith20, where he observed that: As soon as Smith and Green formed the company and nominated its board, it became their duty, in my opinion, to inform the company of this private arrangement between them. Thereupon the company might either, at its option, decline the proposed purchase or accept it, claming the benefit of Smiths bargain, or might, if they thought it reasonable, sanction the agreement and allow Smith to retain the profit himself. The company cannot be worse off because the existence of this contract was concealed from them.21 However, in Tracy v. Mandalay Pty Ltd22 it was decided that if the contract from which the promoters secure profit is ratified properly by an independent
18 19

[1879]5 QBD 109. Gluckstein v. Barnes [1900] AC 240 at 255 (House of Lords); Omnium Electric Plaaces Ltd. V. Baines [1914] 1 Ch 332 at 347 (Court of Appeal). 20 [1879]5 QBD 109. 21 Ibid., at p. 112-113. 22 [1953] 88 CLR 215.

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board of directors after its incorporation, the company loses the right to rescind the contract and to recover the secret profit later. In this case, the promoters sold a property to the company that was acquired prior to the commencement of the promotion and the company elected not to rescind the contract but to proceed with the contract with the promoter. The court held that the company was not entitled to recover secret profit made by the promoters. The decision in Tracy case has been different from Whaley Bridge case. It is clear that the company was not entitled to recover the secret profit after the contract was ratified by the independent board of directors. So, subsequent ratification of the transaction by an independent board of director is an important factor which will bar the company from recovering the secret profit if the ratification clearly waved the right of recovery of the secret profit. If the board of directors is not independent, the decision will be a contrary one. Another reason behind such decision might be that the promoters acquired property before the commencement of their work as promoters and later sold the property to the company while acting as promoters for the company. The issue is whether the promoter will be liable for breach of fiduciary duty for making secret profit by selling the property to the company which he acquired before the commencement of the promotion work. If the answer is yes, then the promoter cannot keep the profit legally with him and the company after incorporation may opt to recover the secret profit. However, if the independent board of directors after incorporation expressly resolved that the company will not claim the secret profit from the promoters, then the company will lose the right to recover the secret profit afterwards. Damages for breach of fiduciary duty The fiduciary duty of the promoters may be breached if they make profit out of contracts with the company and they did not disclose to the company the secret profit they made. Such a non-disclosure of the promoters personal interest will amount to fraud with the company. The fiduciary duty may also be breached if the promoters acted negligently whereby the company suffered loss. In these circumstances, the company may sue the promoters for damages in addition to the rescission of contract. If the non-disclosure of secret profit amounts to a fraudulent act, the company may obtain damages from the promoters and also can rescind the contract. To claim damages, the company must prove that it has suffered loss due to the fraudulent or negligent transaction. However, when the transaction has been rescinded, the company may not be able to prove loss and in that case it may not claim damages. In Re Leeds and Handley Theatres of Varieties Ltd 23, the court held that the promoters had fraudulently omitted to disclose a profit made by
23

[1902] 2 Ch 809.

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them on the sale of a property to the company. Therefore, the company was entitled to claim damages from the promoters and the appropriate measure of damages was the promoters profit on the sale. In this case the damages awarded by courts amounts to recovery of secret profit made by the promoters. LIABILITY OF PROMOTER UNDER SECTION 130 OF COMPANIES ACT 1965 Section 130 of the Companies Act 1965 provides that if a person is convicted of any offence in connection with the promotion, formation or management of a corporation, he shall be disqualified automatically from being a director or promoter for five years from the date of conviction or from the date of release from jail if he was imprisoned.24 However, the person can be appointed for such position if he has obtained the leave of court. If a person is convicted on indictment of an offence in connection with the promotion of a company might be disqualified by the court to become a director in the company.25 PRE-INCORPORATION CONTRACTS Pre-incorporation contract is the contract which is made on behalf of a proposed company before its incorporation with the Registrar of Companies under the Companies Act 1965 (Malaysia). Pre-incorporation contracts are made by the promoters when they sell certain goods or real property to the company or outsiders sell certain goods or real property to the company and the negotiation is done by the promoters on behalf of the company. Pre-incorporation contracts suffer from lack of legal enforceability. As a result outsiders who make business contract with the company before incorporation are seriously affected. The legal position of pre-incorporation contracts in English common law is different from Malaysian company law. LEGAL STATUS OF PRE-INCORPORATION CONTRACTS IN ENGLISH COMMON LAW In English common law pre-incorporation contracts are not recognized. It is considered as invalid and unenforceable by law. Pre-incorporation contracts are not recognized and held invalid in English common law because a company legally cannot make any contract before its incorporation. Before incorporation, a company does not achieve the status of separate legal personality and therefore it cannot make any contract. Hence, outsiders also cannot legally make any binding contract with the company before its incorporation.
24 25

S. Rachangan et al, op. cit., at p. 156. Re Leeds and Handley Theatres of Varieties Ltd [1902] 2 Ch 809. See also, Samser Kamar Latiff, Company Law of Malaysia, Kuala Lumpur, 2000, at p. 20.

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In Newborne v. Sensolid (Great Britain) Ltd .26, the court held that a company cannot make valid contract before its incorporation and also a person cannot make legally binding contracts in the name of a company in anticipation of its being incorporated. Pre-incorporation contracts cannot be legally enforced as it is invalid. As a result outsiders who make contracts with the proposed company before its incorporation and sell certain goods or real property cannot enforce the contract against the company. In that situation outsiders also cannot sue the company to recover the selling price. In English common law, the company cannot ratify the pre-incorporation contract27. The reasons are firstly: the ratification has retrospective effect and the contract is regarded as being made at the time it was entered into by the agent when the company was not in existence.28 Before incorporation the company had no legal existence. So, it could not make a valid contract. The contract was invalid and after incorporation it cannot ratify the previous invalid contract. Secondly, under the principle of agency law a company also cannot ratify pre-incorporation contract. Under the principle of agency law there should have agent and principal relation between the promoters and the proposed company. At that time the principal was not in existence. Therefore, it could not appoint any agent to work on its behalf. For these reasons in English common law pre-incorporation contracts are invalid and it cannot be ratified by the company after its incorporation. Another negative effect of English common law is that outsiders also cannot sue the promoters personally to get back the selling price or claim damages for breach of contract.29 In Black v. Smallwood30, the court held that the person who purported to make the pre-incorporation contract was also not personally bound by the contract. Because, promoters cannot be appointed as agents by the nonexistent company. Hence, they are not personally liable for the preincorporation contracts although the promoters usually negotiate with outsiders on behalf of the pre-incorporation company to buy goods or property. In the above case, Black had entered into a contract for the sale of a land to Western Suburbs Holding Pty Ltd. which was not incorporated when the contract was made, although Black believed that it had been incorporated and that Smallwood and Cooper were its directors. The contract shows that Smallwood and Cooper signed the contract as directors of the company. From the contract it seems that Black intended to make contract with the company and not with Smallwood and Cooper who purported to make the contract on
26 27

[1954] 1 QB 45. Kelner v. Baxter (1866) LR 2 CP 174. 28 Ibid. 29 Black v. Smallwood (1966) 117 CLR 52. 30 Ibid.

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behalf of the company. Hence, Smallwood and Cooper did not act as principals while making the contract. They made the contract on be half of the preincorporation company. Therefore, they were not personally liable for the contract. This is an Australian case. The High Court of Australia held that a non-existent company was incapable of having agents and consequently neither the company nor the signatories (Smallwood and Cooper) were liable for the contract. In Kelner v. Baxter31, three persons made a contract to purchase goods on behalf of the proposed Gravesend Royal Alexander Hotel Company from a third party. The goods were supplied and the company used the goods in its business after its incorporation. The price of the goods was not paid. The issue was whether the seller could recover the price. The court held that the seller could not recover the price of the goods supplied as the company could not make a valid contract with him before its incorporation. A non-existent company could not make a contract. As the contract was invalid, the supplier of the goods could not recover the price. In exceptional circumstances, promoters or other persons who contract on behalf of the company to buy certain things from outsiders might be personally bound for the contract and might be liable for breach of the contract, for example, when the promoters make the contract as principals or intended to make the contract as principals.32 Under English common law the negative effects of a pre-incorporation contract can be overcome by making a fresh contract by the company after its incorporation on same terms as the pre-incorporation contract. The company becomes bound by such a fresh contract. Such fresh contracts are known as novation33. THE EFFECT OF PRE-INCORPORATION CONTRACT IN ENGLISH COMMON LAW Under common law the company is not bound by a contract made before its incorporation. As a result, the other contracting party cannot enforce the contract against the company. Because of this negative effect of the common law, pre-incorporation contracts cause difficulties for the other contracting party.34 There are serious negative effects of pre-incorporation contracts in English common law. The outsiders who make pre-incorporation contracts in good faith with the company through the promoters, fall in a very bad situation as they
31 32

(1866) LR 2 CP 174. Kelner v. Baxter (1866) LR 2 CP 174. 33 Shanthy Rachangan et al, op. cit., at p. 158; Chan & Koh, op. cit., at p. 207. 34 Shanthy Rachangan et al, op. cit, at p. 158.

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cannot enforce the contract and the company also cannot ratify it after its incorporation. As a result, outsiders who supplied certain goods to the company cannot claim the price of the goods. Promoters also not personally bound by the pre-incorporation contract and outsiders who made the contract with the company cannot sue the promoters for personal liability for breach of the contract. So, English common law has put outsiders on a risky position where they make contracts with the pre-incorporation company. LEGAL STATUS OF PRE-INCORPORATION CONTRACTS IN MALAYSIA Under the Companies Act 1965 (Malaysia) pre-incorporation contract can be ratified by the company after its incorporation. 35 When a contract is ratified by the company, the company becomes bound by the contract and it can receive the benefit of the contract. After ratification it will be presumed that the contract existed at the date when it was first made. Section 35(1) of the Companies Act 1965 (Malaysia) provides to this regard that: Any contract or other transaction purporting to be entered into by a company prior to its formation or by any person on behalf of a company prior to its formation may be ratified by the company after its formation and thereupon 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 had been a party thereto. Section 35(1) of the Companies Act 1965 (Malaysia) has not accepted the English common law position on the status of pre-incorporation contracts. In common law, pre-incorporation contracts cannot be ratified and it is void. The outsiders could not enforce the contract against the company and as a result they could not get back the price of the goods supplied to the company36. The above section in the Companies Act 1965 (Malaysia) is very significant. It states that by ratification of the pre-incorporation contact, the company becomes bound by the contract. This section provides retrospective effect of the ratification stating that the ratification of the contract will be assumed as if it was made at the date of the contract before incorporation and the company was a party thereto. Such provision in the Act in fact makes the ratification of the contract effective from the date of its first formation guaranteeing all the rights and benefits of the contract to both the company and outsiders. Thus, the outsiders are fully protected by section 35(1). Under Malaysian company law pre-incorporation contracts can be ratified and validated even if the terms in the ratification are a bit different from the preincorporation contract or additional conditions are added in the ratification. In
35 36

Section 35 (1) of the Companies Act 1965 (Malaysia). Kelner v. Baxter (1866) LR 2 CP 174.

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Cosmic Insurance Corporation v. Khoo Chiang Poh 37, The Privy Council held that the pre-incorporation letter of appointment of the respondent as managing director which was later ratified by a resolution of the company after its incorporation validated and affirmed the previous appointment although the terms in the ratification of appointment as the managing director was a bit in different terms. This is a Singapore case38 and the facts are: Mr. Khoo Ching Poh was appointed as the managing director of the company before its incorporation. The preincorporation appointment letter reads: Mr. Khoo Ching Poh shall be the managing director for life unless he resigns, dies, or commits an offence under the Companies Act or is prohibited to become a director under the Companies Act for any offence. The ratification of the appointment slightly modified the terms in the previous appointment letter which reads: Resolved that Mr. Khoo Ching Poh will be appointed managing director and will hold office for life in accordance to the articles and memorandum of association and is responsible to the Board of Directors. In this case the Privy Council on appeal observed that the important matter was the ratification of the pre-incorporation appointment for the position of managing director which was duly done and validated. The ratification of appointment slightly modified the previous terms was not material and the modification of terms in the ratified appointment letter did not affect or invalidate the appointment of the defendant for the position of managing director. The court held that the ratification was duly done. In Ahmad bin Salleh & Others v. Rawang Hills Resort Sdn Bhd 39, James Foong J. observed that: Ratification can be combined with other matters in a resolution, but so long as its expression of ratification is clear, as in this case, the process of ratification is completed by such an act. In the above case the first sale and purchase agreement was executed on 12 April 1991 by one Chan Wah Long for and on behalf of the company Rawang Hills Resort Sdn Bhd. At that time, Rawang Hills Resort Sdn Bhd was not yet incorporated. The company was later incorporated and its directors passed a resolution to ratify the previous sale and purchase contract. The resolution read: That the company does hereby affirm and ratify the purchase of the benefits and rights to the sale and purchase agreement for the acquisition of the 186 acres of land being Lot 3514, Mukim Rawang, made up to 12 April 1991. James Foong J. in the court held that the defendant companys directors passed the resolution to ratify the previous sale and purchase of land contract which was effective ratification of the pre-incorporation contract. The court observed:
37 38

(1981) 1 MLJ 61. This case was related to section 41 of the Companies Act (Singapore) which was in pari materia with section 35 of the Companies Act (Malaysia). 39 [1995] 3 MLJ 211.

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From the evidence as tendered, it cannot be denied that when the first sale and purchase agreement was executed the defendants were not in existence, but this does not prevent the defendants from ratifying such an agreement under section 35 of the Companies Act 1965 This court is of the opinion that the following words, that the company do hereby affirm and ratify the purchase of the benefits and rights to the sale and purchase agreement for the acquisition of the 186 acres being Lot 3514, Mukim Rawang, made up to 12 April 1991 found in the first part of this resolution, is sufficiently clear for the defendant to ratify the said agreement. Section 35(2) also allows outsiders to sue the person(s) who purported to execute the pre-incorporation contract on behalf of the company if the company after incorporation fails to ratify the contract. In that case the person who purported to make and execute the contract on behalf of the company will be personally liable to fulfill the contract or to pay compensation for breach of the contract. However, if the pre-incorporation contract expressly excluded the personal liability of the person or persons who purported to make the contract on behalf of the company will not be personally liable for non-execution of the pre-incorporation contract. EFFECT OF PRE-INCORPORATION MALAYSIAN COMPANY LAW CONTRACTS UNDER

Malaysian company law has put outsiders in a safe position when they make contracts with a company in good faith. Under Malaysian company law, preincorporation contracts are probably invalid but it can be validated by ratification under section 35(1) of the Companies Act 1965 (Malaysia). When the pre-incorporation contract is validated by ratification, it is binding on the company and the outsiders who made pre-incorporation contracts with the company. Hence, we can say that section 35(1) of the Companies Act 1965 (Malaysia) has put an innocent outsider in a far more satisfactory position than under the common law of England.40 Section 35 of Companies Act (Malaysia) is very significant as it allows outsiders to enforce pre-incorporation contracts after its incorporation by requesting the board of directors to ratify the contracts. After ratification the company undertakes the obligation to fulfill the terms of the contract and by ratification it is assumed that the contract was in fact made at the date before its incorporation by validating retrospective enforcement of the pre-incorporation contract which is not possible under the common law of England. The common law of England totally prohibits ratification and retrospective enforcement of the pre-incorporation contract.
40

Samser K. Latif, supra, at p. 22.

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 DR. MD. ABDUL JALIL, COMPANY LAW, CHAPTER FIVE, 2013

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SAMPLE QUESTIONS 1. Who are promoters? Explain the duties of promoters. 2. Explain how a promoter may breach his fiduciary duty to the proposed company. Explain the remedies available against the promoters for breach of fiduciary duty. 3. A syndicate of four persons have been appointed to promote a garments company Quality Garments Pvt. Ltd (QA Ltd.). Before incorporation of the company it bought few cartons of garments from Famous Garments Pvt Ltd (FA Ltd.) for RM 90,000. The promoters negotiated for the contract on behalf of the company before its incorporation. Now answer the following questions: i) QA Ltd. Refuses to pay the price to FA Ltd. Advise FA Ltd. About its legal rights against QA Ltd. in English common law and in Malaysian company law. QA Ltd. is interested to ratify the pre-incorporation contract with FA Ltd. Advise QA Ltd. about ratification of contract law under English common law and Malaysian company law. Suppose QA Ltd. refuses to ratify and fulfill the contract. Can FA Ltd. sue the promoters personally for the price? Explain your answer referring to English common law and Malaysian company law.

ii)

iii)

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