PRE INCORPORATION CONTRACTS

Definition of Pre-iC:

• Any contract or transactions which purports to be made by or on behalf of the company before its incorporation.

Who’s promoter?

• A person who undertakes to form a company and takes the preliminary steps for its incorporation (Twycross v Grant, (1877)).

What his duties & obligations?

• First and foremost, P has FIDUCIARY RELATIONSHIP with the company.

• So, what does it means? (1) It means that, a promoter must make full

disclosure of all material facts when dealing with the company (Erlanger v New Sombrero Phosphate Co Ltd(1878))

(2) P has fiduciary duty (has trust). It must act honestly, for the benefit of the company. For example, if there’s a profit, a promoter must DECLARE it for that particular of situation. (Gluckstein v Barnes (1900))

Other duties:

• Has a legal duty to not make any secret profit out of the promotion of the company w/out company consent (Fairview Schools Bhd)

• Pay compensation for any person subscribes any share of company on good faith to the prospectus, for any loss suffered because of untrue statement therein (s 46 CA)

• Criminal liability for untrue statement in prospectus, but such presumption may be rebuttable (s 47(1)).

Remedies for breach of P’s duties

Rescission (rescind the contract )DamagesDisqualification as a promoter Reimbursement of promotional expenses ( no

payment for P’s salary) Recovery of secret profit and constructive

trust

POSITION OF Pre-IC

• COMMON LAW

• THE COMPANIES ACT 1965

DISTINCTIONS BETWEEN TWO:COMMON LAW COMPANIES ACT 1965

legal status of pre-incorporation contractsis invalid and cannot be ratified and adopt the benefits of the contract which has been made on its behalf

the legal status of pre-incorporation contracts isinvalid and can be ratified by virtue of Section 35(1) of the Act.

Outsiders suffer total negative effects under English common law as it’s cannot be ratified and not enforceable in court

the outsiders are secured when they makecontracts with a company in good faith. The reason is because pre-incorporation can be ratifiedunder this law.

COMMON LAW COMPANIES ACT 1965

Thus, outsiders cannot claim the price of the goods or suethe promoters for personal liability. As a result, outsiders have to face a risky situation wherethey engage into contracts with pre-incorporated company

After ratification of the Board of Directors, the company becomes legally bound by the contract. So, outsiders can claim the price of the goods. In case of the contract not beenapproved by directors, outsiders have the right to sue the promoters for personal liability for breach of the contract.

CASES IN COMMON LAW

• Newborne lwn. Sensolid (Great Britain) Ltd [1954] 1 QB 45

• Kelner v Baxter (1866) LR 2 CP 174• Black lwn. Smallwood [1966] ALR 744• Phonogram Ltd v Lane [1982] QB 938• Braymist Ltd and others v The Wise Finance Co

Ltd [2002] EWCA Civ 127, [2002] Ch 273

CASES IN MALAYSIA:

• Cosmic Insurance Ltd. v Khoo Chiang Poh [1981] 1 MLJ 61

• Ahmad bin Salleh v Rawang Hills Resort S/B [1995] 3MLJ 211

• The Golf Cheque Book Sdn Bhd v Nilai Springs Bhd [2006] 1 CLJ 259

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

CONCLUSION

• Legal status of pre-incorporation contracts under English Common Law is invalid or illegal. It is not enforceable by law. The reason is because there is no company in existence before its incorporation. The rule is that the company only exists when it is registered. Theeffects of this type of contract under common law are totally negative effects for outsiders of thesaid company. This is because the contract cannot be ratified. So, outsiders cannot claim for the price as well as cannot sue the promoters who acted as the company’s agent for personal liability.

• There is a slight different for prep-incorporation contracts which governed by MalaysianCompany law. The legal status is still invalid and not enforceable by law. However, Board of Directors of the said company is allowed to ratify the contract and turns it into an approved, validand binding contract. This will be referring to s35 of Companies Acts 1965. In case the Board of Directors not ratifying the contract, outsiders may sue the promoters personally. The effects of this contract under Companies Acts 1965 are good for outsiders as it may provide protections tothe outsiders. Thus, outsiders may enter into such contracts with much more secured feelings.