Law Of Association


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Promoter - wHO N wHAT is promoter

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Law Of Association

  1. 1. Q1. (Tute 3) Who is Promoter? Corporation Act, section 9; Before a company can be formed, there must be some persons who have an intention to form a company and who take the necessary steps to carry that intention into operation. such persons are called 'promoters'. The term 'promoter' is of frequent occurrence in many company matters. There is, however, no legal definition of the term promoter and it has never been clearly defined either judicially or legislatively. It is not a term of art, nor a term of law, but of business. For this purpose, we have to take recourse to judicial pronouncements. In this absence of any legal definition, most of the definitions of the term promoter are in terms of the functions that the promoters usually perform. A promoter is one who performs the preliminary duties necessary to bring a company into existance. He develops the idea and induces others to join the enterprise. It was stated in Twycross V.Grant, (1877) 2 C.P.D. 469 that a 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." "The term promoter" may be a promoter even if he undertakes a lesser active role in the formation of a company. Any person who obtains a director, places shares or negotiates preliminary agreements may be covered by this term. Who constitutes a promoter in a particular case is, therefore, a question of fact, there being no clear legislative or judicial definition. A company may have several promoters. A promoter may be a natural person or a company. The promoter originates the scheme for the formation of a company; gets together the subscribers to the memorandum, gets the memorandum and articles prepared, executed and the terms of preliminary contracts with vendors and agreement with underwriters, and makes arrangement for preparation, advertisement and circulation of the prospectus on behalf of the promoter, which as a solicitor who draws up an agreement or articles, an accountant or valuer who prepares figures or valuation on behalf of a promoter, and who paid by him is of a promoter. The law follows a legal formula when deciding who is a promoter; such as; 1. defining a promoter pursuant to statute and common law 2. applying an activities or functions best 3. question of fact Types of Promoters: 1. Active The person who undertakes the formation of a company by carrying out the procedure necessary for incorporation is obviously a promoter. Incorporation includes, among other things, registration of the company, payment of registration and legal fees, preparation of the company’s constitution, obtaining directors and shareholders, raising capital, negotiation of preliminary agreements and preparation of a prospectus. 2. Passive The person who takes no active part in the incorporation of a company and the raising of its share capital, but leaves this to others on the understanding that he or she is to profit from the enterprise, may be held to be a promoter.
  2. 2. Duties of a Promoter: There are two fiduciary duties of a promoter, namely: 1. A promoter cannot make either directly or indirectly any profit at the expense of the company he promotes, without the knowledge and consent of the company and that if he does so, in disregard of this rule, the company can compel, him to account for it. In relation to disclosure it may be noted that half disclosure is worse than none. In Gluckstein V.Barnes (1900) AC 240, was in difficulties and the debentures were worth very little. A syndicate consisting of X, Y and Z purchased a great number of debentures very cheaply. Then they purchases Olempia for 140,000 Pounds and sold it to new company, which they promoted for 180,000 Pounds. Consequently the debentures were paid in full out of 140,000 Pounds and the syndicate made a profit of 20,000 pounds on debentures discount. X, Y and Z became directors of the new company. They disclosed their profit of 40,000 but not their profit of 20,000. It was held that there was of insufficient disclosure and X, Y and Z must pay 20,000 to the company. 2. A promoter is not allowed to derive a profit from the sale of his own property to the company unless all material facts are disclosed. If a promoter contracts to sell his own property to the company by without making a full disclosure, the company may wither repudiate the sale or affirm the contract and recover the profit made out of it by the promoter. Either way the dishonest promoter is deprived of his advantage. In Erlanger v New Sombrero phosphate Co.(1878) 3 App Cas 1218, a syndicate of which Erlanger was the head purchased an island containing mines of phosphate for 55,000 Pounds. E then formed a company to buy this island. A contract was made between X and nominee of the syndicate and the company for its purchase at 110,000 Pounds. The details of the sale were not disclosed to the shareholders or to an independent Board of directors. The company now sought to rescind the contract of sale. It was held that as there had been no disclosure by the promoters of the profit they were making the company, was entitled to rescind the contract. It must be borne in mind that it is not the profit made by the promoter, which the law forbids, but the non-disclosure of it. If full disclosure is made the profit is admissible. It must be disclosed to an independent Board of directors, if there is one, but, if, as is often the cases in a private company or a one- man company, the promoter is himself one of the directors, it must be disclosed to the shareholders. In case, therefore, the promoter wishes to sell his own property to the company, he should either disclose the fact: (a) to an independent Board of directors, or (b) in the articles of association of the company, or (c) in the prospectus, or (d) to the existing and intended shareholders directly. A promoter has more responsibilities that rights when he transacts with a third-party or for the future company. He/She must act honestly and diligently to escape liability with respect to dealing with the future company and the outsiders.
  3. 3. Q2. Twycross v Grant (1877) 2 CPD 469 A 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. The principle to come from this case is that promoters have a Fiduciary relationship with the company to act in good faith. As to when a promoter ceases to be a promoter is a question of fact in each case. If the promoters act in their own interests and not in the interests of their company, there is a breach in their fiduciary relationship. The law provides the company and its members with a measure of protection against any exploitation by the promoters shall not derive any secret profit ant its expense. Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 High Court of Australia Promoters – Obligations The respondent, Mandalay Pty Ltd, was incorporated in 1948 with the intention that it should purchase land held by the appellant company and the shares in the appellant company, which were held by the seven other appellants with the aim of erecting a block of units on the land. The respondent purchased the land and shares, and to finance the purchase issued shares to members of the public. It proved to be impossible to erect the building and the respondent sought to have the contracts of sale of the land and the shares rescinded and to have the appellants repay the purchase price with interest. Held: Promoters were under a Fiduciary duty to disclose to the company, which they are promoting the material facts when selling their property to the company, and to place the new company in a proper position to decide whether to accept the offer by appointing an independent board and fully disclosing the position to that board. Those persons who took an active part in the promotion of the company and the raising of the share capital were promoters, and those who left it to others to get up the company on the understanding that they would profit from the operation were also promoters. All seven shareholders in the appellant company were promoters, and as they had failed to discharge their fiduciary obligations the transaction was voidable against them. The contracts were rescinded and each appellant was ordered severally to repay the purchase moneys with interest. Q3. (i) The legal consequences of identifying a person as a promoter; Until a company is registered a company is a non-existed entity unable to act on its own behalf. It is regarded that person attending to the registration and pre-company contracts are regarded as promoters. Title of promoters subjects such a person to significant legal obligation. (ii) Common law obligation to promoter and consequences for breaching obligation; Common law duties:
  4. 4. • To disclose an interest in any contract entered into by the company. • To disclose relevant information regarding the affairs of the company. • Not to compete with the company, nor make secret profit or commission at the expense of the company. Remedies for breach of promoter’s duties; • Rescission (Company has the right to rescind contract) • Damages (Breach of duty caused upon a promoters act of fraudulent misrepresentation of the company may seek the remedy of damages in addition to rescission) • Constructive Trust Order (If acting on behalf of the company the promoter personally gains property which would otherwise have been directed to the company, the company may seek a Constructive Trust Order for the property to be returned to it) The cases relating to duties of promoters: • Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 • Gluckstein v Barnes (1900) AC 240 • Re: Leeds and Hanley Theatres of Varieties Led (1902) 2 Ch 809 • Salomon v Salomon & Co Ltd (1897) AC 22 Q4. Pre-registration contract; Common Law: Prior to its registration, a company does not exist as a legal person. This proposition resulted in the common law rule that a company cannot enter into a binding contract until it is registered by ASIC. This common law rule meant that a person could not make legally binding contracts in the name of a company in anticipation of it being registered. Case: Newborne v Sensolid (Great Britain) Ltd (1954) 1 QB 45. Under Statute of a section 131(1), if a person enters into or purports to enter into a contract on behalf of or for the benefits of a company before it is registered, the company becomes bound by the contract if the company notifies the contract; (a) within the time agreed (b) if there is no agreed time within a reasonable amount of time
  5. 5. Q5 and Q6. Liability of both the company and promoter (if any) at common law for pro-registration contracts; The Company: A common law rule recognizes that a company is unable to contract pre-registration, as it does not exist. This is seen from an agency point of view. However, a company could become liable for a pre-registration contract namely, where a substitution of contract occurs without ratifying the original contact. A company may bear some liability to an outsider even if it does not ratify a pre- registration contract – under section 131(3), if a person is sued for damages because the company is registered but does not ratify the pre-registration contract or enter into a substitute for it, the court may order to do one or more of the following; • pay all or part of the s 131(2) damages • transfer to the other contracting party property that the company received because of the contract • pay an amount to a party to the contract Promoter: At common law, the liability of a promoter will be determined according to his intension to become personally liable. Section 131(1) modifies the common law position and allows companies to ratify pre-registration contracts. This means the company becomes bound by the contract and entitled to the benefits. Section 131(2) has the effect of imposing liabilities on promoter for pre-registration contract where the company does not register does not ratify. Cases: • Kelner v Baxter (1866) LR 2 CP 174 • Black v Smallwood (1966) 117 CLR 52 • Bay v Illawarra Stationery Supplies Pty Ltd (1986) 4 ACLC 429 Q7.
  6. 6. Q8. Company registration process; • Decide on type of company • Company name • Consents of members, directors, secretary • Decide nature of company constitution • Lodge application for registration • Payment of registration fees • Certificate of registration issued Q9. Post-registration; • Establish written financial records – (s286(1)) • Open bank a/c if needed • Appoint auditor if required – (s327(1)) • Establish minute books • Establish registers – s168 (members, debentures etc) • Issue shares, where applicable • Display company name (ss144, 153(1)) • May arrange for a common seal • Lodge details of any post-registration appointment of directors/secretary (s242(1)) Q10. The issue of a certificate of registration; “The issue of a certificate of registration is a more formality for a company and does nothing more than recognize the company as a legal person”. Registration gives a company all the rights of a
  7. 7. natural persons as well as granting a company all the power of a body corporate s 124. This is the law of wealthy.