UNIVERSITY OF TECHNOLOGY, JAMAICA

COMPANY LAW
LECTURER: T. GILPIN ALLEN

UNIT 2: PROMOTERS, PRE-INCORPORATION CONTRACTS AND FORMATION

Goals:
• Define the term promoter
• Understand the duties of promoters and the remedies available for breach of these duties
• Understand the common law and statutory position regarding pre-incorporation contracts
• Understand the legal requirements for registering a company and the effect of the certificate
of incorporation.

Promoters:
Before a company can be formed, there must be some person or persons who have an intention
to form the company and takes the necessary steps to carry out such intention. These persons or
persons are the promoters of the company. According to Cockburn CJ in Twycross v Grant
(1877)1, “he undertakes to form a company with reference to a given project and to set it going
and takes the necessary steps to accomplish that purpose”.
The expression “promoter” has never been clearly defined judicially or legislatively, hence, one
who constitutes a promoter in any particular case is a question of fact. In Whaley Bridge Calico
Printing Co v Green (1870) Bowen J explained that: “the promoter is a term not of law, but of
business, usefully summing up in a single word a number of business operations familiar to the
commercial world by which a company is generally brought into existence”.

A person may be regarded as a promoter, if he does any of the following things:

1. Giving instructions for the preparation and registration of the articles of incorporation
2. Obtaining directors of the company
3. Issuing prospectus
4. Negotiating underwriting contracts or contract for the purchase of property for the proposed
company
5. Procurement of capital
6. Preparing listing particular
A person who has undertaken no active part in the formation action of the company but has left
it to others on the understanding that he will profit from the operation is also a promoter.

1
[1877] 2 CPD 469
Bagnall v. Carlton2 - the defendants were held to be promoters “because it was their
intention and conviction to sell the prospect of the company”.

Those who act in a purely ministerial capacity such as solicitors and accountants will not be
classified as promoters merely because they undertake their normal professional duties, although,
they may if, they have agreed to become directors or to find others who will. See Re Great Wheal
Polgooth Co (1883)3.

Reasons for the Lack of Definition:

• The courts have intentionally failed to set down a definition in a formal sense, because if a
definition were laid down it might be possible for persons concerned in the promotion of
companies to avoid its application, taking advantage of their fiduciary position without
incurring the liability of promoters.
• A comprehensive definition is impossible due to the wide range of companies promoted,
from small one-man companies to the large public corporations, and given the varied
activities of the person engaged in promoting the company.

Duties of Promoters:
Persons who undertake the task of bringing a company into existence are in a position of enormous
influence, with undoubted potential for abuse both in relation to the proposed company and those
investing in the company (Burgess, 2013).
They have in their hands the creation and moulding of the company; they have the power of
defining how, and when, and in what shape, and under what supervision, it shall start into
existence and begin to act as a trading corporation. Lord Cairns LC in Erlanger v New
Sombrero Phosphate co (1878)

A promoter is not an agent for the company which he is forming because the principal must be in
existence to appoint an agent but from the moment a promoter acts with the company in mind,
he stands in a fiduciary position towards the company. That is, he must act in good faith towards
the company and this he should do whether legally compelled or not. He must not make any secret
profit out of the promotion of the company and if he does, all the profit must be disclosed to;
i. An independent board of directors
ii. The existing and intended shareholders- e.g. by making disclosure in a prospectus.

2
[1877] 6 Ch. D 371
3
[1879] 5 QBD 109
N.B. partial or incomplete disclosure will not do, it must be explicit.
In a private company, disclosure to an independent board of directors is practically impossible
because usually the promoters are the first directors and hold majority of the shares of the
company but, they must still make the disclosure.

The promoter is also not a trustee of the company he is seeking to bring into existence – Re
Leeds and Hanley Theatres of Varieties Ltd (1902)4

Remedies for breach of duty to disclose:

1. The company may rescind the contract and recover the purchase price where the promoter
sold his own property to the company.
Rescission will however be impossible if;
a. parties cannot be restored to their original position (e.g. where the property has been
altered) – restitutio in integrum.
b. Third parties have acquired rights for value by mortgage or otherwise under the contract
(e.g. if the company has charged the property for a loan in a bank before discovering the
secret profit).
c. Affirmation of the contract.

Erlanger v. New Sombrero Phosphate Co.5

Erlanger headed a syndicate that purchased an island in the West Indies said to contain valuable
mines of phosphate for ₤55,000. Erlanger formed a company for the purpose of buying the island
from the syndicate and a contract was made between a nominee of the syndicate and the new
company to purchase the island for ₤100,000, without disclosing their interests in the contract.
The phosphate operations proved to be a failure and the shareholders replaced the original
directors, who sought rescission of the contract.
Held- there had been no disclosure by the promoters of the profit they were making from the sale
and the company was entitled to rescind the contract.

See also Re Cape Breton Co (1885)6

Sinclair Investments (UK) Ltd v Versailles Trading Finance Ltd (2011)
2. The company may compel the promoter to account for the profit.

4
[1902] 2 Ch 809
5
[1878] 3 A.C. 1218
6
[1882] 9 Ch D 795
Gluckstein v. Barnes7
A promoter may not make a secret profit while acting in that capacity. If he does, he may be
compelled to account for it to the company.

3. The company may sue the promoter for damages for breach of fiduciary duty and the
measure of damages is the promoter’s profit from the transaction.

4. The company may recover damages for fraud against the promoter.

5. The company may sue for damages for negligent misrepresentation.

Remuneration of Promoters:
A promoter is not entitled to recover any remuneration for his services from the company unless
there is a valid contract to pay between him and the company. Indeed, without such a contract,
he is not entitled to recover his preliminary expenses or the registration fees.
Table A article 86 of Act gives discretion to directors to pay promoters for preliminary expenses.
This however, does not constitute a contract.

Re English & Colonial produce co. Ltd (1906)

Pre-incorporation Contracts:
This is a contract that is entered into on behalf of the company before incorporation. Agreements
of this nature are inevitable features of every new corporation and occur either by accident or
intentionally. Pre-incorporation contracts are generally entered into because the parties are
anxious to conclude the terms of the arrangement and the promoter has not had the opportunity
at the time of the contracting to incorporate the corporate vehicle on behalf of which it wishes to
contract.
N.B. The company before incorporation has no legal capacity to contract or to enter into any other
legal transaction.

Common law position:

1. A pre-incorporation contract is not binding on the company after it is formed even if the
company benefited from the contract and the person who signed the contract on behalf of
the company maybe personally liable.

7
[1990] A.C. 240
 2. An agent cannot contract on behalf of a principal not in existence.
3. A company cannot enforce a pre-incorporation contract because it is not a party to it.
4. A pre incorporation contract cannot be ratified after incorporation because of the non
existence of the principal at the time of incorporation.

Kelner v. Baxter8
Before incorporation the promoters of a hotel company signed a contract on behalf of the company,
which was yet to be incorporated for the supply of wine. The wine was supplied to the company
after incorporation and was consumed. The company ran into difficulties and could not pay the
debt. The promoters were sued and they contended that the company had since ratified the
contract on incorporation. It was held that the company could not ratify the contract and the
promoters were personally liable for the debt.

Newborne v. Sensolid (Great Britain) Ltd9

Tinned ham was to be sold by Newborne to Sensolid via a contract. The price of ham fell and
Sensolid refused to take delivery. The company sought to enforce the contract but it was
discovered that the company was not yet incorporated at the time the contract was made, so Mr.
Newborne the director sought to enforce the contract personally.
Lord Diplock argued that, “to be liable under or entitled to sue on the purported contract of an
unformed company at common law, a person must have held himself out either as an agent or as
a principal. Hence, because of how Mr. Newborne signed, the contract was one which he was
making for the company. He was not purporting to sell as an agent or as a principal. It was
therefore held that neither the company nor the director could enforce the contract.

Effect of pre-incorporation contracts at common law:

1. If from the contract, the agent was intended to be a party to the contract then the agent
will be personally liable as in Kelner v. Baxter.
2. If from the contract the agent was not intended to be a party to the contract then neither
the agent nor the company will be liable.

Companies Act
Under section 29, a company will now be able to adopt pre-incorporation contracts (oral or
written) that were made on their behalf provided that the contracts are adopted within a
reasonable time after the company is incorporated. If the company refuses to adopt the contract,

8
[1866] L.R. 2 CP 174
9
[1954] 1 Q.B. 45
the promoter can apply to the court to compel them to adopt it. However, this is left to the
discretion of the court.

29.—(1) Except as provided in this section, a person who enters into an oral or written agreement or contract in
the name of or on behalf of a company before it comes into existence or who purports to enter into such an
agreement or contract, is personally bound by the agreement or contract and is entitled to the benefits of that
agreement or contract.
(2) Within a reasonable time after a company comes into existence, it may, by any action or conduct signifying
its intention to be bound thereby, adopt an oral or written agreement or contract made in its name or on its behalf
before it came into existence.
(3) When a company adopts an agreement or contract under subsection (2)— (a) the company is bound by the
agreement or contract and is entitled to the benefits thereof as if the company had been in existence at the date
of the contract and had been a party to it;

FORMATION

Procedure:
▪ Decide on a name for the company.
▪ Conduct a search at the Companies Office of Jamaica to know whether the name chosen is
available.
▪ Prepare the articles of incorporation.
▪ Submit all the relevant documents to the Companies Office and pay the registration fee.
▪ These documents are then examined to ensure that they are fully and accurately completed.
If the documents are in order, then a Certificate of Incorporation is issued to the company.

Under the Companies Act 2004, it became possible for a company to reserve a name for up to 90
days before it is actually registered (Form 6). The advantages of name reservation include:

1. Establishing that the name is appropriate and available for use.

2. Protecting the name from use by others for the reservation period.
3. Allowing the company to use the name for pre-incorporation contracts with certainty.

Refusal by Companies Office of Jamaica to register:

 1. Where the company is being formed for an unlawful purpose, registration may be refused.
2. Section 15 provides that no company can be registered by a name which in the opinion of
the Companies Office is undesirable or closely resembles the name of another company.
In the event that a company is inadvertently registered with a name violating section 15, the
Companies Office may order the company to change its name within six weeks from date of notice.

• Names containing obscene language or indicating an illegal activity will also be refused
• Names implying connection with Royalty, or a Political Party must be justified
• Certain names e.g. containing “Engineering”, “Pharmacy”, “Medical” etc. must also be
justified and may necessitate the provision of professional certification

(More information can be found in the Companies Rules 2006 on the COJ's website)

Passing off- a company can bring an action at common law for injunction to restrain a company
from using a name which suggest the latter company is carrying on business of the complaining
company.
Ewing v Buttercup Margarine Company Ltd (1917)
Exxon Corporation v Exxon Insurance Consultants Ltd (1982)
Re Association of Certified Accountants of Britain (1998)

The following documents must be submitted:

1. The Articles of Incorporation (Form 1A used for companies making a profit or 1B for non
profit companies e.g. churches, charities, NGO’s) which will contain the following
information:
a. The Name of the Company, which must include “Limited” as the last word of the
name in the case of a Company limited by shares or by guarantee.
b. The registered address of the company which must be situated in Jamaica;
c. In the case of a Company having a share capital, the classes of shares, and the
maximum number of shares the Company is authorized to issue; if any; (If the
Company has more than 1 class of share (For e.g. Ordinary and Preference Shares)
and is issuing more than one class at the time of incorporation, then a Form 3 must
be submitted)
d. Restrictions, if any, on share transfers
e. Minimum and/or maximum number of directors;
f. Any restrictions on the business that the Company may carry on.
The stamping of Articles may be done at the Stamp Duty and Transfer Tax Department however
this is no longer a mandatory requirement as this service is now provided in house at the
Companies Office of Jamaica

2. The Business Registration Form (BRF1) a.k.a. ‘Super Form’

This form captures the required information on the directors, secretary, registered office
and the relevant information for the National Insurance Scheme (NIS), Tax Office (TRN,
TCC and GCT), Heart Trust and National Housing Trust. The provision of the directors and
company secretary details are now mandatory at incorporation.
The form must be signed by:
a. All Director(s)
b. The person declaring the accuracy of the information submitted on the form.

Please note that the ‘super form’ is a substitute for the Notice of Appointment for Company
Secretary; Declaration of Compliance; Notice of Address of Registered Office and Notice of
Appointment of Directors.

3. An Original Valid government issued identification of the principal director and the
person declaring the accuracy of the form must be presented to the Companies Office.
4. Prospectus

In addition to the relevant documents of incorporation, if the company proposes to be

registered is a public company, then its prospectus must be delivered to the Registrar and
when the Registrar sees that the content of the prospectus has been fully complied with, it is
registered.

Effect of certificate of incorporation:

Section 13 – “a certificate of incorporation given by the Companies Office in respect of any
association shall be conclusive evidence that all the requirements of this Act in respect of
registration and matters incidental thereto have been compiled with and that the company is
legally in existence”.
Colton Mills v Lewis (1924)