Rolly approached Molly and Polly and asked them to be shareholders to form a company. Then Rolly acquired a shop lot worth RM350,000 in order to prepare for the company in future. She bought this shop lot below the market price as the vendor was looking urgently to sell it. After the company is formed, she sold the shop lot to Jiggles Sdn. Bhd. at market price. Thus, she gained a lucrative profit of RM200,000 without the knowledge of any other party. Definition of promoter
Section 4(1) of the Companies Act 1965 defined promoter is a person preparing prospectus. (not limited to this definition alone) According to Cockburn CJ in Twycross v Grant (1877), a promoter is a “person who undertakes to form a company with reference to a given object and set it going and takes the necessary steps to accomplish the purpose”. (Company Law in Malaysia, pg42) A promoter may be a natural person for example when the sole proprietor promotes a company to take over his business. (Company Law in Malaysia, pg42) The promotion process includes negotiations, registration of the company, obtaining directors and shareholders and preparing the paper work. In this case, Rolly is the promoter of Jiggles Sdn. Bhd as she meets the definition of promoters. She is a sole proprietor who selling cupcakes, promoted the company to take over her business. Besides, she also obtained shareholders by approaching Molly and Polly. Promoters’ duties
Thus, Rolly is under a fiduciary relationship with the company. She has an obligation to act in good faith for the best interest of the company and must avoid conflict of interest which will affect her behavior. Under the duty of promoter, promoter should not make secret profit, defraud the company by active concealment, disclose confidential information, hides any personal interest. On the other hand, they should make a true and honest account to the company for his dealing on behalf of the company and make full and frank disclosure to shareholders and directors.
In this case, Rolly had breached her fiduciary duty. She had made a secret profit of RM200,000. She did not make full and frank disclosure of her interest to the shareholders and directors of the company. She had hide her personal interest. Thus, where Rolly fails to declare her interest in the contract with the company she is promoting, the contract is voidable at the company’s option as in the case of Erlanger v New Sombrero Phosphate Co (1878). Remedies of breach of duty
As in the case of Erlanger v New Sombrero Phosphate Co (1878), the contract is voidable at the company’s option. Thus, the company may avail itself of the following remedies. The company may rescind the contract, claim for damages or recovery of secret profit. Rescind the contract-The company may choose to put an end to the contract. If the company terminates the contract, both parties are to return the benefits received. Thus, the company has to return the shop lot and Rolly has to return the purchase price received. Damages- The court may order Rolly to pay damages to the company for loss incurred when rescission is not possible, as in the case of Re Leeds and Handley Treatres of Variety. Recovery of secret profits- When rescission is not possible or the company does not want to rescind the contract, the company can recover the secret profit made by Rolly.