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QUESTION 8

COMPANY
TUTORIAL

Benedict Ngoh
Wong Wai Hou
Cheah Kah Mun
Chyrel Rachel James

FACTS
Ting owned 3 square kilometer block of land
in Sarawak for 3 years, he paid RM15000
Tiing and a group of friends decided to form a
company to explore, mine and sell minerals
They agreed, Lombong Gali ( Tiings firm )
should bring out the new company, Grand
Strike Nickel Bhd

QUESTION 1
What rights does Grand Strike Nickel Bhd
have in relation to the first block sold to it
by Tiing?

WHAT IS THE NATURE OF THE


CONTRACT IN THE FIRST PLACE?
Generally speaking, it was a pre-incorporation contract.
Which means that it was a contract that was entered into
by a company prior to its incorporation

COMMON LAW POSITION PREINCORPORATION


Kelner v Baxter (1866) LR 2 CP 174
At common law, a company is incapable of ratifying
a pre-registration contract after it is registered, as it is
a precondition of ratification that the principal must
have been in existence when the contract was made.
Common law does not recognize pre-incorporation
contracts.

IN MALAYSIA HOWEVER,

SECTION 35(1) OF
COMPANIES ACT 1985
"Any contract or other transaction purporting to be
entered into by a company prior to its formation or
by any person 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
has been in existence at the date of the contract or
other transaction and had been a party thereto.

MEANING
Pursuant to S35(1) of the CA 1985, in light of our
question, to be entitled to the block of land sold to
Grand Nickel, based on the pre-incorporation
contract, Grand Nickel has to ratify the contract.

COSMIC INSURANCE V KHOO CHIANG POH [1981] 1 MLJ


61,PC

Facts:
Respondent brought an action against appellant for
the breach for contract of service as managing director
for the appellants. The contract was contained in a letter
signed by 12 promoters which included the appellant.
There were differences between the terms in the letter
(signed by the promoters which is contained the
contract) and the resolution.

Held :
For Section 35(1) to be invoked successfully, 3 things
must be seen to exist I. Entered by any person on behalf of the company
prior to its formation.
II. Such contract may be ratified by company after its
formation.
III. As an effect, a contract upon such ratification is
antedated to the date when it first purported to
have been made.

WHAT ARE GRAND NICKELS RIGHTS


TO THE FIRST BLOCK OF LAND?
Based on Khoo Chiang Poh and S35(1) of the
Companies Act :
To be entitled to the first block of land, Grand
Nickel has to first ratify the pre-incorporation
contract that was entered into by Tiing for the
purchase of the first block.

WHAT IF THEY DO NOT


RATIFY? S35(1)
Any contract 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 has been in existence at the date of the
contract or other transaction and had been a party
thereto.
The word MAY shows that Grand Strike Nickel Bhd
can decide whether or not to ratify. Should they
decide not to ratify, they shall not be bound by the
pre-incorporation contract.

DID THEY RATIFY?


THAI HWA REALTY SDN BHD V KETUA PENGARAH HASIL DALAM NEGERI
[1996] MLJ 317

Principle : Ratification under Section 35(1) could


have been implied by some act showing an intention
to adopt that pre-incorporation contract either by
silence or mere acquiescence or by a properly
constituted companys resolution.

IN OUR CASE,
Ratification can be implied based on the facts as Grand
Strike Nickel has included the purchase price in the
companys Prospectus.
A Prospectus is a form of document to invite public
investors.
By printing the purchase price of the first block of land
with Tiing, it goes to show that Grand Strike has already
impliedly ratify the pre-incorporation contract and
pursuant to S35(1), they are thus bound to the contract.

QUESTION 2
Is Tiing permitted to sell this block at a profit to Grand Strike
Nickel?

What formalities must be followed by him and Lombong Gali?

ISSUE 1: IS TIING A PROMOTER?


Section 4 of the Companies Act 1965
a promoter of a corporation who was a party to the
preparation of the prospectus or of any relevant portion
thereof; but does not include any person by reason only of his
acting in professional capacity.

Tycross v Grant (1877) 2 CPD 469,541, CA


A promoter is a person who undertakes to form a company with
reference to a given project and set it going and who takes the
necessary steps to accomplish that purpose.
Mohd Latiff bin Shah Mohd v Tengku Abdullah [1995] 2 MLJ 1
Whether a person will in law be regarded as a promoter in a given case
is a question of fact depending upon the circumstances of each case.

IN THIS CASE
i.

Tiing and his group of friends decided to form a company to explore,


mine and sell minerals.

ii. They then agreed Tiings firm i.e. Lombong Gali should form the new
company named Grand Strike Nickel Bhd and commenced the process
of incorporation.
iii. He furthers sold his property in pursuant to the incorporation.
iv. (this could be inferred from the fact that a contract was entered into by
Tiing and Lombong Ali stipulating that hell receive the purchase price
of the land)
Based on the given facts, it is apparent that Tiing is one who undertakes to
form a company and set it going as well as take necessary steps to
accomplish that purpose.

ISSUE 2: CAN TIING, A


PROMOTER, SELL OFF THE FIRST
BLOCK AT A PROFIT TO GRAND
STRIKE
NICKEL?

It is trite in law that promoters of a company stand in a


fiduciary relation to the company they were creating.

Lagunas Nitrate Co. v Lagunas Syndicate, Lord Lindley:


promoters of company cannot in equity bind the company by
any contract with themselves without fully and fairly
disclosing to the company all material facts which the
company ought to know.

ERLANGER V NEW SOMBERO


PHOSPHATE CO (1873) 3 APP CAS 1218,
1236
Facts: a syndicate, Erlanger purchased a lease on an island
in the West Indies which had deposits of lime phosphate for
55k. The syndicate formed a company and sold the lease to
the company through a nominee for 110k. However, the
real circumstance of the purchase was not disclosed to the
shareholders despite them questioning.
Later, a committee of investigation was appointed and they
sought to rescind the purchase and claimed for repayment of
money and shares which had passed to syndicate.

HOL:
The contract could be rescinded as there was no full and drank
disclosure as the promoters stand undoubtedly in a fiduciary
position.
It is not the law that the owner of a property cannot promote
and form a company and then sell on his property to it. What the
law seeks to prohibit is the making of secret profits by the
promoters.

IN APPLICATION,
Though Tiing stands in a fiduciary relation to the
company, he is by law permitted to sell the block at a
profit to Grand Strike Nickel provided that Tiing satisfies
his fiduciary duty by disclosing to Grand Strike Bhd that
he is doing so thereby affording Grand Strike Bhd a
right to decide whether or not to accept the offer.

ISSUE 3: WHAT FORMALITIES MUST BE


FOLLOWED BY TIING AND LOMBONG GALI?
The law requires the disclosure by the promoters to be
full, frank and explicit.
The disclosure must contain at least the information
relating to the nature of the interest of the promoters
and all the other material facts.
Gluckstein v Barnes A disclosure which is of partial
truth can be defective and may not have legal force
(the prospectus issued only disclosed the profit of 40k
but not the additional 20k earned by buying securities on the
property concerned)

DISCLOSURE CAN BE MADE IN SEVERAL


FORMS :
1) By disclosing in the memorandum or articles of
the company.
2) By communicating to an independent board of
directors.
3) By communication to the existing and intended
members of the company.

1. BY DISCLOSING IN THE MEMORANDUM


OR ARTICLES OF THE COMPANY.
Every proposed company must lodge its memorandum
with the Registrar in the incorporation process. Once the
memorandum and articles are registered with the
Registrar, every person dealing with the company is
deemed to have constructive notice of their contents.
Once a disclosure of profit by the promoter is made in
the memorandum and articles, the fact will be made
known to every member of the company as well as
an outsider who may be dealing with the

2. BY COMMUNICATING TO AN
INDEPENDENT BOARD OF DIRECTORS
Who is an independent board of directors?
Erlanger v New Sombrero Phosphate Co- the test is whether

the board is competent to form an impartial, independent


and intelligent judgment on the merits of the transactions.
Board of Directors which is appointed by the vendors does not
generally constitute an independent board.
Gluckstein v Barnes, a disclosure to a board of directors who
are the puppets of the promoters is not a disclosure to the
company in law.

3. BY COMMUNICATION TO THE
EXISTING AND INTENDED MEMBERS OF
THE COMPANY.
If there is no independent board, disclosure by the
promoters to the existing and proposed members of
the company would be sufficient disclosure.
May be sufficient if all the persons who are invited
to become members of the company are aware of
the disclosure and approve the transactions based
on their own judgment

QUESTION 3
Whether Tiing is entitled to the profit
on the 2nd block

RE CAPE BRETON CO
Defendant purchased certain mines, subsequently selling them to
a company of which he was a director.
He purchased the mines before the formation of the company - it
was clear that he was not an agent at the date of the purchase.
The company subsequently, with full knowledge of the facts,
affirmed the contract and elected not to cancel.
It was also established that there was no misrepresentation
made by the director.
Cotton LJ : A fiduciary duty arises when a promoter had begun to
promote a company when he bought a property which he
intended to sell on subsequently to the company at a profit.

APPLICATION
Tiing told the company that he will sell the property (second
block) for RM50,000. This means that he will make a profit of
RM42,000 out of the sale.
When he started to promote the company when he bought
the property which he intended to sell on subsequently to the
company at a profit, a FIDUCIARY DUTY arises.
The facts are silent on disclosure made regarding the profit
made. Furthermore, in this case, he merely told the company
about the purchase price.
Thus he will not be entitled to the profit unless he disclose
all the material facts.