Internal company governance and capacity to contract Corporate Law: Law principles and practice Promoters and preregistration contracts A promoter brings the company into existence and determines the type of company created. Corporate Law: Law principles and practice The role of the promoter The Corporations Act does not really state the definition or function of a promoter ‘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’. Twycross v Grant (1877) 2 CPD 469 Corporate Law: Law principles and practice The role of the promoter cont … A promoter is essentially the person who forms a company by carrying out the steps leading to the registration of the company. Passive promoters A person can be held to be a promoter even though they do not take an active part in the registration of the company and other incidental activities, but leave it to others on the understanding that they will benefit or profit from the enterprise. Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 Corporate Law: Law principles and practice Duties of promoters Fiduciary Duties A promoter stands in a fiduciary relationship with the company and must act bona fide in the interests of the company and not in their own personal interest. Erlanger v New Sombrero Phosphate (1878) 3 App Case 1218 Corporate Law: Law principles and practice Duties of promoters cont … A promoter’s fiduciary duties (similarly to directors) include: • • • • not to make a profit at the expense of the company to make full disclosure of any interest in any contract entered into by the company to disclose company profits to representatives of potential investors to act honestly and with reasonable skill, care and diligence. Erlanger v New Sombrero Phosphate (1878) 3 App Case 1218 Gluckstein v Barnes  AC 240 Corporate Law: Law principles and practice Remedies for breach of duties Rescission: the company may rescind the contract when the parties can be returned to their pre-contractual position (Erlanger v New Sombrero Phosphate (1878) 3 App Case 1218); rescission and damages may also be recoverable. Recovery of secret profit: a secret profit may be recovered by the use of a constructive trust. Forfeiture: a promoter may forfeit any position they hold in the company (e.g. an appointment as a director). Corporate Law: Law principles and practice Disclosure of personal interest Promoters are required to disclose personal interest in the prospectus disclosure documentation under ss 711(2) and 711(3) of the Corporations Act 2001 (Cth). Promoters may also incur statutory liability under the following sections of the Act: 588FH, 711(2), 711(3), 728, 729. Corporate Law: Law principles and practice Pre-registration contracts A company cannot enter into a contract before it is registered, because it does not exist as a separate legal entity until registration. A pre-registration contract is made by a person on behalf of a company before it is registered or incorporated. At common law, a pre-registration contract is void. Kelner v Baxter (1866) LR 2 CP 174 Black v Smallwood (1966) 117 CLR 52 Corporate Law: Law principles and practice Pre-registration contracts cont … A party may be personally liable for a pre-registration contract if that was their intention. Bay v Illawarra Stationery Supplies Pty Ltd (1986) ACLR 429 Corporate Law: Law principles and practice Pre-registration contracts under s 131 Section 131 replaces the common law on pre-registration contracts and establishes the rights of the promoter, the company and a third party regarding a pre-registration contract: • • • a company can ratify the pre-registration contract the promoter remains liable if the company does not ratify the contract a court can determine how much the company and/or the promoter is liable for to third parties. Corporate Law: Law principles and practice Pre-registration contracts under s 131 cont … Section 131 only applies to contracts made before the company is registered. It does not apply when a company was registered at the time the contract was made and later changed its name. Commonwealth Bank v Australia Solar Information Pty Ltd (1987) 5 ACLC 124. Corporate Law: Law principles and practice Pre-registration contracts under s 131 cont … For ratification to be effective, the company must ratify and be registered within a time agreed to by the parties or within a reasonable time. Ratification is determined by the facts and may be express or implied. When the company ratifies the contract, it assumes all the rights and obligations under the contract Assumption of contract rights is not possible if the proposed company name was not reasonably identifiable with the company in whose name the pre-registration contract was entered into. Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd  NSWSC 967. Corporate Law: Law principles and practice When a company is not registered or fails to ratify the contract Under s 131(2) of the Corporations Act 2001 (Cth), a person (the promoter) is liable to pay damages to each party to the pre-registration contract if the company is not registered or if the company is registered but does not ratify the contract or enter into a substitute contract: • • within a time agreed by the parties if there is no agreed time, within a reasonable time after the contract is entered into. Corporate Law: Law principles and practice When a company is not registered or fails to ratify the contract cont … Under s 131(3) of the Corporations Act 2001 (Cth), if the promoters are sued under s 131(2), the court may do anything it considers appropriate in the circumstances, including ordering the company to do one or more of the following: • • • pay all or part of the damages that the person (promoter) was liable to pay transfer all property that the company received because of the contract to a party to the contract pay an amount to a party to the contract. Corporate Law: Law principles and practice When a company ratifies the contract but is unable to perform its obligations Section 131(4) of the Corporations Act 2001 (Cth)provides for when the company is registered and ratifies the pre-registration contract under s 131(1) but fails to perform all or part of the contract because it is unable or unwilling to perform its contractual obligations. A court may order the promoter to pay all or part of the damages that the company is ordered to pay (s 131(4)). If the company does not pay, the promoter will be required to pay the third party. Corporate Law: Law principles and practice Limiting the promoter’s liability Under s 132(1) of the Corporations Act 2001 (Cth), promoters may avoid liability if they obtain the consent of the other contracting parties to release the promoters from liability in relation to the contract. Under contract law, promoters may avoid personal liability by agreeing with the third party that a new or substitute contract will be entered into in place of the preregistration contract after the company is registered (s 132(2)). Note: Under s 132(2) a promoter has no right of indemnity against the company if sued on behalf of the company.