Chapter 4

Report
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 [1900] 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
[2004] 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.

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