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Question 8 company tutorialBenedict Ngoh Wong Wai HouCheah Kah MunChyrel Rachel JamesFactsTing owned 3 square kilometer block of land in Sarawak for 3 years, he paid RM15000Tiing 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 BhdQuestion 1What 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 incorporationCommon law position pre-incorporationKelner 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.

MeaningPursuant 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 -

Entered by any person on behalf of the company prior to its formation.Such contract may be ratified by company after its formation.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 317Principle : 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 1965a 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, CAA 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 caseTiing and his group of friends decided to form a company to explore, mine and sell minerals.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.He furthers sold his property in pursuant to the incorporation.(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, 1236Facts: 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 :By disclosing in the memorandum or articles of the company.

By communicating to an independent board of directors.

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 company.2. By communicating to an independent board of directorsWho 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 judgmentQuestion 3Whether Tiing is entitled to the profit on the 2nd blockRe Cape Breton CoDefendant 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.