PRE-INCORPORATION CONTRACTS

• whether the contract entered into by ali before the company was incorporated is a pre-
incorporation contract
o 1. facts that lead to legal issue
o 2. no details
o there is a contract which is lease entered by ali before pre incorporated
o cause of action: enforcement
• Whether the reimbursement agreement was a pre-incorporation contract and Whether Chan is
entitled to the reimbursement of money paid for Elly's legal fees
• 2. Whether the lease agreement is legally binding on the company and the landlord
1. A contract or transaction that purports to be made by or on behalf of a company
2. at a time when the company has not been formed
3. has effect as a contract made with the person purporting to act for the company
4. and he is personally liable on the contract.
Whether the contract entered into by Bob was in his personal capacity and not as an agent of the
company before it is incorporated
Section 65 (1) Companies Act 2016
1. Contract which is purported to be on behalf of the company or as an agent
2. During the time the company is not formed yet
3. It has effect as a contract
4. He is personally liable for the contract

 The relevant section is Section 65, CA 2016,

• Section 65 of CA 2016 recognizes the ability of the company entering into a pre-incorporation
contract.
 The company does not exist but yet the law says a contract entered into before a company is
formed. The issue is: who is going to be bound by the pre-incorporation contract.
 Section 15, 18, 20, 21: separate legal entity only comes into existence when the company has
been incorporated but pre-incorporation contract seems to recognise that there is an entity
not yet into existence but it will come in existence
• Section 65 of CA 2016
• Section 65 of CA 2016 recognizes the ability of the company entering into a pre-incorporation
contract.

 Section 65 (1) provides that contract or transaction that purports to be made by or on behalf
of a company at a time when the company has not been formed
 Application: The document was already signed appointing Chan to be in charge of all
the registration process of the company.
 This is a pre-incorporation contract to assist in the formation of the company
 has effect as a contract or transaction made with the person purporting to act for the
company or as agent for it, and he is personally liable on the contract or transaction
accordingly.
 the consequence of the pre-incorporation contract is that
 Once a pre-incorporation contract is entered into, the contract is binding on the
person making the contract on behalf of the company.
Case: Perman Sdn Bhd & Ors v European Commodities Sdn Bhd & Anor [2006] 1 MLJ 97

The first defendant, Perman was not in existence when the joint venture agreement was executed.
The agreement was still however valid but in accordance with the terms of s 35, that the joint venture
agreement should be treated as binding Raja Zainal personally as its executant. In this case, the
contract executed on behalf of the company by shareholder prior to its formation, unfortunately in
this case, the contract was not ratified.
 Application: It was already established that the agreement for the reimbursement of money to Chan is
a pre-incorporation contract. Under sec 65(1) CA 2016, the agreement would have effect on the all
three as parties as the company is yet to be incorporated.

 the person is personally liable on the contract or transaction accordingly

• Case: Perman Sdn Bhd & Ors v European Commodities Sdn Bhd & Anor [2006] 1 MLJ 97
There was nothing to show that the first defendant had ratified the joint venture agreement. Neither
was there any evidence to suggest the contrary express agreement required by sub-s (2) of s 35 of the
Companies Act 1965. It followed, in accordance with the terms of s 35, that the joint venture
agreement should be treated as binding Raja Zainal personally as its executant.

Application: The agreement would be personally binding on Chan, Ali and Bob unless and until it is
ratified by the company after its incorporation.
 personally liable: have certain right and responsibility. the person signing on
behalf of the company i.e. the promoters will be liable for the rent, he would
be personally liable to pay for the rental and he would be entitle for the
benefit using the property as agreed in the tenancy agreement.
 Contract of agency: Section 65 of CA 2016 recognizes as if the person signing on behalf
of the company is like the company’s agent.

• Section 65 (2) Companies Act 2016: Transfer of rights and liabilities to the company after its
incorporation

 Notwithstanding subsection (1), a contract or transaction referred to in that subsection may

be ratified by the company after its incorporation and the company shall be bound by the
contract or transaction as if the company had been in existence at the date of the contract
or transaction and had been a party to the contract or transaction.
 Assuming a company is incorporated, if Mr A delay the payment of the rent
 Notwithstanding subsection (1), even if Mr A who signing the contract on behalf of the
company will be personally bound by the contract, subsection 2 enable the company
to take over the obligation.
 a contract or transaction referred to in that subsection may be ratified by the
company after its incorporation: subsection 2 provided that if the company want the
benefit of the contract, if the company want to accept the contract, the company
would have to go through ratification.
 The company may ratify [ accept] or to reject, it is up to discretion.

Case: Cosmic Insurance Corporation Ltd v Khoo Chiang Poh [1981] 1 MLJ 61
The company slightly modified the previous letter of appointment that was signed prior to the company's
incorporation.
Held: The ratification was valid. The slight modification did not invalidate the position of the defendant to be
appointed as the Managing Director

From the company constitution, it is clear that the company agreed to take over all the responsibilities of
Chan, Ali and Bob and to reimburse any expenses incurred in connection to the formation of company. This is
express ratification of the pre-incorporation contract to reimburse Chan's money with slight modification
adding Ali & Bob's name. Chan's prior dealings with Elly is in connection with the formation of Chat Sdn Bhd.
He can claim reimbursement of money from the company and the three shareholders are no longer personally
liable.

• Section 65 of CA 2016
o A contract or transaction that purports: Identify whether the contract entered into by the
promoters for the purpose of assisting the company to carried on busines once it have been
formed.
o Purports: intended
 o purports to be made by or on behalf of a company: there must be some fact showing that the
contract entered into by or on behalf of a company which is yet to be incorporated.
o at a time when the company has not been formed: the contract is entered before the company
come into existence
• section 65 :
1. how to identify it is pre-incorporation contract.
a. need to establish from the fact: whether the person entered into a contract is a promoter.
2. situation: what the consequence of pre-incorporation contract. if the company wasn’t incorporated
3. subsection (2): can a company decide to accept the contract
a. what the consequence of pre-incorporation contract on the company if the company accept
the contract
b. the consequence of other parties: the person who signed the pre-incorporation contract in
the event that the company did not take up the contract.
c. : tenancy agreement, if after the contract signed by promoter on behalf of the company, 2
months later after the company was incorporated, other members found better shop with
better price. The company decided not to accept the first tenancy agreement

 What is ratification?

 a contract or transaction referred to in that subsection may be ratified by the

company after its incorporation:
 Section 65 (2) Companies Act 2016 provided that if the company want the benefit of
the contract, if the company want to accept the contract, the company would have
to go through ratification.
 The company may ratify [ accept] or to reject, it is up to discretion.

 Ratification can either be express or implied

 Express ratification

• They are clear facts showing that there is a general meeting or by way of written resolution or there is
an ordinary resolution passed adopting and agreeing to be bound by the pre-incorporation contract.

1. general meeting or by way of written

• Adopting: the ordinary resolution passed, and the content clearly says that the company ratify the
pre-incorporation contract or the company agrees to be bound by the pre-incorporation contract
• Public company: the company expressly ratified the contract: the facts must shows that the
company called a general meeting to passed ordinary resolution to adopt the pre-incorporation
contract.
o general meeting: there must be a meeting
• private company: may enter into a contract or may passed resolution by way of written resolution
o written resolution: only available for private company, no meeting is conducted but the
members get written resolution, the written resolution was send to the members and
indicate their agreement by signing for or against the resolution in the document. Public
company is not allowed.
o Section 290 CA 2016 onwards
o written resolution : section 320
2. an ordinary resolution
• an ordinary resolution requires majority votes and the period of notice to called the meeting must
not less than 14 days

 Implied ratification

 Unequivocal adoption of the pre-incorporation contract

 It must be clear that even though there is no general meeting and no written resolution, the
company by conduct has accepted the contract. the conduct of the parties who adopt the pre-
incorporation contract
  Ahmad bin Salleh & Ors v Rawang Hills Resort Sdn Bhd (1996) MSCLC 91,464

 held: The sale and purchase of the land was ratified by the company when the board passed a
resolution ratifying the pre-incorporation contract and subsequently applied to sub-divide the land
and sell their beneficial interest in the land to a third party.

 Ratification can also be combined with other matters in a resolution, but so long as its expression of
ratification is clear

 This case involves a contract for the sale and purchase of land. The company was not yet incorporated
is Rawang Hills Resort Sdn Bhd. The contract was entered by Chan on behalf of Rawang Hills Resort
Sdn Bhd. The contract clearly stated “for and on behalf of the purchaser, Rawang Hills Resort Sdn
Bhd”. After the contract was signed Chan, instead of incorporating a company, he acquired all the
shares in the existing company and convert the name into Rawang Hills Resort Sdn Bhd. That company
by way of a resolution of directors, affirmed and ratified the contract.

 The company was not yet incorporated then but Chan subsequently bought a company and
changed its name to Rawang Hills Resort Sdn Bhd. The defendant company, by way of a
resolution of directors, affirmed and ratified the contract.

 Issue: first, the company was not incorporated as Rawang Hills Resort Sdn Bhd, instead of
incorporating a company, he acquired all the shares in the existing company and convert the name
into Rawang Hills Resort Sdn Bhd. Second, the resolution was passed by directors.

 The court stated that, “Ratification can be combined with other matters in a resolution, but so long as
its expression of ratification is clear, as in this case, the process of ratification is completed by such an
act.”

 The court held that the sale and purchase of a land was ratified by the company when the board
passed a resolution ratifying the pre-incorporation contract and subsequently applied to subdivide the
land and to sell their beneficial interest in the land to a third party.

 The contract is binding on Rawang Hills Resort Sdn Bhd

 expression of ratification is clear: need to make sure there are support that shows that there was a
ratification done by the company

 board of directors and members are the same person

 argument: instead of incorporating a company, he acquired all the shares in the existing company and
convert the name into Rawang Hills Resort Sdn Bhd. But the law recognizes the method.

 s 35, CA 1965

 “….personally binding on the person who sign unless there is an express agreement to the contrary”,
the person signing the contract is personally liable.

 Clause : If the company did not ratify the contract there is no personal obligation on the person signing
the contract on behalf of the company

 If those clauses put in agreement under 1965- possible avoid being liable for pre-incorporation
contract but not possible 2016 act

 the company shall be bound by the contract or transaction as if the company had been in existence at
the date of the contract or transaction and had been a party to the contract or transaction.

 Novation agreement: I enter into a contract where I take over your right and obligation

 Perman Sdn Bhd & Ors v European Commodities Sdn Bhd & Anor [2006] 1 MLJ 97

In this case, the contract executed on behalf of the company by shareholder prior to its formation, unfortunately in this
case, the contract was not ratified.
Effect of non-ratification

Are the company under obligation to ratify the contract → no

There was a company yet to be incorpearted , there are joint ventures, the company promoters are

Held: The joint venture agreement should be treated as binding personally on Raja Zainal. The joint venture was not ratified
after Perman Sdn Bhd was incorporated. No evidence was available to exclude Raja Zainal from his personal liability

Once the company was incorporated the court found out that there was no evidence that the company had ratified the
joint venture agreement. Rely on subsection 2.

• Don’t mess up Breach of promoter’s duty, and Pre- incorporation contract

• If 3rd part is family than it will be breach of promoter’s duty