Tutorial 2

Tutorial 2: Promoters and Pre-incorporation Contracts
1. What is the effect of a pre incorporated contract on the company.

Under common law it is void. The company cannot get into a pre incorporated
contract because it is not in existance yet. Authority: Kelner v Bexter.
(Look at cosmic insurans v Khoo Chiang)
2. Briefly explain the Malaysian position on pre-incorporated contracts.
Section 35 (1) and (2). 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. 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.
Comparison under the Malaysian and English position : Under English Law 36
(c), if there is an agreement, the company must ratify but under Malaysian Law
Section 36, even with an agreement, it implies the company still has a choice to ratify
or not. If doesnt ratify, it is not bound by the contract.
3. In the event of a secret profit made by a promoter of a company, what are the
remedies available to the company?
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. Secret profit is the profit yu
make without disclosing it to the board of directors. (Authority : Erlanger v New
Sombrero Phosphate Co). Remedies: Rescission of the contract, file a suit for
damages.
4. What are the roles played by a promoter before the formation of the
company?
Talk about the fiduciry duties with good faith
5. If there is a contract entered into before the formation of the company, can the
company choose not to honour the contract? Please state your answer with the
support of case law.
Yes can choose, Section 35 (1) and (2).
6. In January 2009, Annie Apples and Betty Berry decided to form a company to
manufacture wine. In March 2009, Annie without telling Betty purchased a plot of
land, Grapefield at a properly conducted auction for a price of RM 375,000. This
was actually more than 100% less than its true market value at that time.
Grapefield was then transferred to the sole name of Annie.
In August 2009, Annie approached Dave Glee and explained to him that she was
forming a wine manufacturing company. She entered into an agreement with Dave to
supply a hydraulic grape press machine for the sum of RM 50,000 which shall be
payable within three months of delivery.

In December of 2009, Annie and Betty formed a company, Sloshed Sdn. Bhd. and
that company was duly incorporated in accordance with the Companies Act 1965.
They each held 500,000 RM1 fully paid up shares in the newly formed company.
In January of 2010, Annie sold Grapeacre for RM1.2 million (the actual market
value at that time) to Slosh Sdn. Bhd. Last week, they sold the company to Sean
Kayne who has now discovered all these facts. Sean has been receiving phone calls
from an irate Dave demanding payment.
Discuss.
It is arguable the intention alone amount to the formation of the company (from line
1). In order to fulfill the requirement of forming a company, you must take action to
form the company. Both of them did not fulfill the requirement of being a promoter as
of yet.
Purchasing the piece of property and transferring to your own name does not
amount to action in fulfilling the promoters requirements.
Para 2- it is a pre-incorporated contract. It is more likely than not when annie
negotiate for that purchase, it shows intentions and (action) steps taken to form the
company. Annie falls within the requirements of being a promoter. (authority :
ergland)
Para 3 - Section 4 (1) / Section 18 private companies have limited liability
Para 4 selling of Grapefield is a secret profit as it was not disclossed to the new
board of directors (Sean Kayne). Sean has remmedies resind the contract, sue for
secret profit, file suit for damages; however if sean affirms the contract sean can still
sue annie for fraud, deceit, negligence and misrepresentation.
If the company has ratified under section 35 (1) then by virtue of 35 (2), the company
is bound to the contract. If the company has not ratified, the company can choose
not to ratify and as a result the promoter (annie) would be personally liable.

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Tutorial 2: Promoters and Pre-incorporation Contracts

1. What is the effect of a pre incorporated contract on the company.

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