Transcript CHAPTER 8 PROMOTERS AND PRE-REGISTRATION CONTRACTS At the end of this topic you should: • understand what is meant by the word “promoter”

CHAPTER 8
PROMOTERS AND PRE-REGISTRATION CONTRACTS
At the end of this topic you should:
• understand what is meant by the word “promoter” in
different contexts;
• know the duties of promoters to the company being formed
and the company’s remedies for breach of those duties;
and
• understand why pre-registration contracts are regulated by
the Corporations Act.
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Promoters and Their Duties –
Who Are Promoters?
In general terms, promoters are the people who
establish the company, and include:
• people who actively participate in starting the
company;
• people who take only a passive role in forming the
company;
• those acting in a professional capacity; and
• companies.
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What Are the Duties of Promoters?
Promoters automatically stand in a “fiduciary
relationship” with the company being formed: Aequitas
Ltd v AEFC Leasing Pty Ltd (2001).
This duty to serve another’s interest brings with it:
• the obligation to avoid any potential for personal
gain by the fiduciary; and
• the need to keep the principal fully informed.
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To Whom Must Promoters Make Disclosure?
Promoters must make full disclosure to an
independent board of directors if practicable: Erlanger
v New Sombrero Phosphate Co (1878).
Alternatively, full disclosure may be made to the
existing or potential members as a whole in certain
circumstances: Aequitas Ltd v AEFC Leasing Pty Ltd
(2001).
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Remedies for Breach of Promoters’ Duties –
General Law
The main remedy is rescission, by which the
company gets its money back and the asset is
returned to the promoter: Erlanger v New Sombrero
Phosphate Co (1878).
Rescission is only available if:
• the company has not affirmed the contract;
• the parties can be restored to their original
position; and
• there has been no undue delay and no innocent
party has acquired any interest in the property.
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Remedies for Breach of Promoters’ Duties –
Statute
Promoters can be liable for untrue statements or nondisclosures in prospectus or other disclosure
documents under s 728.
Investors who suffer loss through reliance upon the
prospectus can seek compensation: s 729.
In certain circumstances, promoters of failed
companies may also be liable to liquidators under
s 588FH.
Promoters of companies that list with ASX are subject
to Ch 9 of the ASX Listing Rules.
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Summary: Timeline of Promoters’ Duties
Registration
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Pre-registration Contracts
Pre-registration contracts are contracts entered into
by a person on behalf of a company that is yet to be
registered under s 119.
Example 1
Day 1
Date shelf
company is
registered
Day 7
Day 10
No problem
Date contract
Date shares in
executed in
shelf company
shelf company’s transferred to
name by
promoter and
promoter
company name
changed
Contract binding on
company on day 7,
ss 131-133 not
applicable
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Pre-registration Contracts
However, if the company is not yet registered, there
will be a problem with contracts purportedly entered
into on its behalf or for its benefit.
Example 2
Day 1
Day 7
Date contract Date company
executed
is registered
purportedly
on company’s
behalf
Day 10
Problem
Date shares in
shelf company
transferred to
promoter and
company name
changed
Contract not binding on
day 1, because company
not registered at that time
consider statutory
provisions (ss 131-133)
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Statutory Intervention
In order to overcome difficulties that existed with the
general law relating to enforcement of contracts made on
behalf of yet-to-be-formed companies, ss 131-133 were
enacted.
These sections set out the rights and liabilities of the
contracting parties and allow the company to ratify any
purported contract entered into prior to registration.
A company can ratify a purported contract.
purported contract = valid contract: s 131(1).
Promoters and/or the company may be liable: s 131(2)-(4).
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Effect of Ratification
If the company ratifies the contract within the
requisite period, each party has the normal rights
under contract law to sue for breach – the company
“becomes bound by the contract and entitled to its
benefit”: s 131(1).
Ratification of a contract is the act of adopting the
contract.
If the company subsequently breaches the contract,
the court may still order the person who entered into
the contract on the company’s behalf to pay for
damages to the other party: s 131(4).
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No Ratification
If the company fails to ratify the contract within the
relevant period (that is, the time agreed to by the
parties or, if there is no agreed time, within a
reasonable time after the making of the contract), the
other party has a right of recovery against any person
who purported to enter into the contract on the
company’s behalf: s 131(2).
If the company has been registered it may have to
repay some or all of this amount to the person who
entered into the contract on its behalf: s 131(3)(c), but
the person has no right of indemnity against the
company: s 132(2).
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No Ratification
The court may also take into account the possibility
that the company has insufficient assets and may
order the person who purported to act on its behalf to
pay: s 131(4).
With regard to the amount of damages awarded and
their appointment, the court has a broad discretion
under s 131(3) to “do anything that it considers
appropriate in the circumstances”.
The provisions will also apply where a person
purports to enter into a contract as agent of a
company believing it exists when in fact it does not.
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Ability to Avoid Liability
Under s 132, people who have purported to enter into
contracts on behalf of companies prior to registration
can exclude themselves from liability if they obtain a
signed release from the other party.
Personal liability can also be avoided where the
company and the other party enter into a new
contract in place of the pre-registration contract.
The new contract is called a novation: s 131(2)-(3).
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Summary: Statutory Provisions for Preregistration Contracts
An outsider can sue a person who entered into a
contract and that person will be liable for damages if:
• a company is never registered: ss 131(2), 132;
• a company is subsequently registered but does not
ratify: ss 131(2), (3), 132; and
• a company is subsequently registered and ratifies
contract but fails to perform: ss 131(1), (4), 132.
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Post-registration Options
Once registered, the members of the company can
either:
• ratify any pre-registration contract;
• not ratify the contract, and, possibly, sue the person
who purported to execute the contract on behalf of
their company eg for breach of promoters’ duties; or
• execute a new contract on the same or similar terms
(called a novation).
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.