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TABLE OF CONTENTS PAGE
INTRODUCTION 1-2
CASES IN ENGLISH COMMON LAW 3-9
CASES IN MALAYSIAN COMPANY LAW 10-11
CONCLUSION 12
REFERENCES 13
1
INTRODUCTION
Pre-incorporation contract is the contract entered by the promoters on behalf of the
company before it has been registered. Before incorporation, the company is not an artificial
legal person or separate legal entity. So, it has not right to sue and be sued, may not buy and
holds properties in its own name. The promoters, while entering into the contract, act as agents
of the company. But when the principal, i.e. the company is itself not in existence, how can it
appoint an agent to act for it? So, the promoters, themselves and not the company, become
personally liable for all contracts entered into by them even though they claim to be acting for
the prospective company.1
The legal position of pre-incorporation contracts is different in English common law and
in Malaysia common law. In English common law, the legal status of pre-incorporation contracts
is invalid and cannot be ratified and adopt the benefits of the contract which has been made on its
behalf.2
In Malaysia Companies Act 1965, the legal status of pre-incorporation contracts is
invalid and can be ratified by virtue of Section 35(1) of the Act.
“Any contract or other transaction purporting to be entered into by a company prior to
its formation or by any person on behalf of a company prior to its formation may be ratified by
the company after its formation and thereupon the company shall become bound by and entitled
to the benefit thereof as if it had been in existence at the at date of the contract or other
transaction and had been a party thereto”.
The effects of pre-incorporation under English common law and Malaysia company law
are different. Outsiders suffer total negative effects under English common law as it’s cannot be
ratified and not enforceable in court. Thus, outsiders cannot claim the price of the goods or sue
the promoters for personal liability. As a result, outsiders have to face a risky situation where
they engage into contracts with pre-incorporated company.
However, under Malaysia company law, the outsiders are secured when they make
contracts with a company in good faith. The reason is because pre-incorporation can be ratified
under this law. 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 been
approved by directors, outsiders have the right to sue the promoters for personal liability for
breach of the contract.
1
http://legalservices.co.in/articles/article/pre-incorporation-contracts-134-1.html, Friday, 21st
May 2010
2
Natal Land and Colonization Co. V Pauline Colliery and Development Syndicate[1904] AC 120
2
There are cases3
where companies carry out the contract after its incorporation. The
company cannot ratify the contract but it can make novation but novation needs evidences.
Novation differs from ratification in that, essentially, a new contract is made on the same terms
but this time between the company and the third party. However, the court will not lightly infer
that there has been a novation and, for instance, expenditure by the company on the basis of a
mistaken belief that the contract is valid will not suffice.4
However, if the company agrees with
the other party to vary the terms of a contract made before its incorporation 5
, regardless
whatever the directors’ beliefs may be, the company will be bound by the contract as varied. The
reason is the company must have had intention to enter into a contract on the original terms as
modified by the variations when it assented to the variations.6
In this paper we will discuss the legal status of pre-incorporation under English common
law and Malaysia company law with references from relevant cases.
3
Re Northumberland Avenue Hotel Company [1886] 33 Ch D 16
4
See Company Law, Simon Gaulding at p.48
5
Howard v Patent Ivory Manufacturing Company Ltd
6
See Robert R Pennington’s Company Law at p.108
3
CASES IN ENGLISH COMMON LAW
1) Kelner v. Baxter7
In this case the plaintiff and the defendants enter into a business contract. A, B and C
known as defendants entered into contract with the plaintiff to purchase some goods on behalf of
the proposed “Gravesend Royal Alexander Hotel Company”. Then the goods was already
supplied and consumed in the business after it incorporation. The goods were not yet paid. After
that, the company was collapsed and the plaintiff want to claim back the payment for goods that
already delivered to the defendants and the plaintiff also want to sued A, B and C on the contract
of price of the goods. In addition, the agreement between the plaintiff and the defendant was
happen on 27th
January 1866 before the company will be incorporation and the company receives
the certificate of incorporation on 20th
February 1866. Then, on 11th
April 1866, the company
purported to ratify the contract. The company then collapsed and this action was brought against
the defendants. The issue was whether the seller could recover the price or not.
The court held that the seller could not recover the price of the goods supplied as the
company could not make a valid contract with him before its incorporation. The contract is
invalid. In the other word, if the Gravesend Royal Alexander Hotel Company had been an
existing company at that time, the contract will be valid but in this case8
no existing company at
that time when the contract happen. Because of that, the contract is invalid. A company cannot
enter into a contract before it is incorporated, because it does not exist as a legal person yet. Even
though if the company already be incorporation and then collapse at the relevant time and
situation, it has been the law of the registered company that a contract made on behalf of the
company at a time when a company did not exist is void.
7
(1899) LR 2 CP 174
8
Kelner v. Baxter (1966) LR 2 CP 174.
4
2) Natal Land and Colonization Company Limited (Appellants) v. Pauline Colliery
and Development Syndicate Limited (Respondents)
In this case9
a contract entered between the appellant’s agents named Rycroft with Mrs de
Carrey in terms of which she was entitle to ask for a lease of the coal mining rights on the
appellant’s property. This agreement made on 9th
December 1897. In addition, Mrs de Carrey
assigned to one Louch ‘in his capacity as a provisional director of the Pauline Colliery and
Development Syndicate Limited about the registered.’ All his interest was under the contract.
Under the contract, the appellant agreed to substitution of the respondent for Mrs de Carrey. As
we know that, Rycroft and Mrs de Carrey was acting on behalf of the syndicate and the company
not incorporated yet at that time the agreement was made between both of them. The company
was incorporated as respondent company on 22nd
January 1898. Then, on 31st
January, the
appellant’s company was stopped the agreement by a telegram and say that there was no contract
between them. Because of that, the respondent company wants to claim specific performance of
an agreement to lease certain coal mining rights.
The court held that, the contract that are made between the Rycroft and Mrs de Carrey is
clear that a company cannot be adoption or ratification obtain the benefit of a contract purporting
to have been made on its behalf before the company come into existence. In addition, any
contract that the company want to do, they have register their company first and they also will
enjoy the benefit of the registration of the company (incorporation). If they are still make a
contract before they registered their company (pre-incorporation), they have to be liable if
anything happen to their company such as collapse and so on.
9
Natal Land Colonization Company Limited v. Pauline Colliery and Development Syndicate Limited.
5
3) Phonogram Ltd. v. Lane10
In 1973 there was a group of “pop” artists which are included two parties called Brian
Chatton and John McBurnie. They want to form a company called “Fragile Management Ltd.”
Before the company was formed, negotiations took place for financing of the group. It was to be
financed by one of the subsidiaries of big organization called the Hemdale Group. It was
eventually arranged that money should be provided by Phonogram Ltd. The agreed amount was
£6,000. The first installment was paid. But the new company was never performed. The group
never performed under it and the £6,000 was due to be repaid. However, that amount never
repaid. So, Phonogram Ltd tried to discover who was personally liable to repay the money. Mr.
Roland Rennie had negotiated on behalf of Phonogram Ltd. And Mr. Brian Lane had negotiated
on behalf of the new company which was to be formed. The latter was never registered and this
was an action against the defendant for recovery of the money.11
That was signed by Mr. Lane.
The money was paid over. According to the accounts, it went into the account of Jelly Music
Ltd, which was one of the subsidiaries of the Hemdale Group which Mr. Lane was a director.
The issue is whether Mr. Lane personally liable or not. Based on this case, the plaintiff
advanced £6,000 to a company which is Jelly Music Ltd under an agreement with the defendant
to provide part of the finance for a company to form which is Fragile Management. But, the new
company was never performed. According to Section 36(4) of the Companies Act 1985,
“ Where a contract purport to be made by a company, or by a person as agent for a
company, at time when the company has not been formed, then subject to any agreement to the
contrary the contract shall have effect as a contract entered into by person purporting act for the
company or as agent for it, and he personally liable on the contract accordingly.”
The Court was held and makes decision that Mr. Lane was personally liable for the
repayment of the £6,000 if the contemplated contract with Fragile Management Ltd. was not in
the event entered into.12
It is due to the general principle of legal status of pre-incorporation of
English common law that is invalid and not enforceable by law. It is because the company
legally cannot make any contract before its incorporation. So, the outsiders cannot enforce the
contact against the company and cannot legally make any contract with the company before its
incorporation. According to this case, the agent which is Mr. Lane cannot sue the company to
repay the payment. Hence, Mr. Lane also cannot legally make any agreement with the company
before its incorporation. As a result, Mr. Lane was personally liable to that payment.
10
[1981] 3 W.L.R.736 (C.A)
11
See Source of Company Law at p.216-217
12
See Hahlo’s Case and Material on Company Law at p.173
6
4) Newborne v. Sensolid (Great Britian) Ltd13
Leapold Newborne (London) Ltd is a company that purported to sell tins of ham to the
defendant. The defendant refused to take any delivery. The company sued for the breach of the
contract. When it was discovered that the company had been registered the day after the
transaction was entered into, the plaintiff who is the promoter and director of the company,
continued the action in his own name. The contract had been signed by the company itself, with
the promoter’s name typed underneath. The promoter did not sign as agent or on behalf of the
company but only authenticate the signature of the company.14
The issue of this case is whether the company makes a valid contract or not. Based on
this case, Mr. Newborne makes a contract on behalf of the company that was not incorporated or
registered. According to Section 36(C) of the Companies Act 1985,
“ A contract which purports to be made by or on behalf of a company at a time when the
company has not been formed has effect, subject to any agreement to the contrary, as one made
with the person purporting to act for the company or as agent for it, and he is personally liable
on the contract accordingly.”
The Court held that a company cannot make valid contract before its incorporation.
Moreover, a person cannot make legally binding contracts in the name of a company in
anticipation of its being incorporated. The Court cannot find that the plaintiff purported to a
contract as agent or as principal.15
The company makes a contract and must do its physical acts
through the directors but their relationship is not the ordinary one of principal or agent. Thus, the
company contract is authenticated by the signature of one of the directors. Based on this case, the
contract was purported by the company not Mr. Newborne. He purports to be selling the
company‘s good not his goods and signing the agreement on behalf of the company. Mr.
Newborne signature is merely confirming the company’s signature. The company was not in
existence when the contract was signed. Pre-incorporation contracts cannot be legally enforced
as it is invalid. As a result, outsiders who make contracts with the proposed company before its
incorporation and sell certain goods or real property cannot enforce the contract against the
company. In this situation defendants cannot sue the company to recover the selling price. The
Court makes decision that the defendants can avail themselves of the defense which they pleaded
and the appeal must be dismissed.
13
[1954] 1 QB 45
14
See Company Law, Simon Gaulding at p.49
15
See Source of Company Law at p.218
7
5) Black v. Smallwood 16
Black had entered into a contract for the sale of a land to Western Suburbs Holding Pty Ltd. The
company was not incorporated during the time of transaction of the contract. However, Black
believed that it had been incorporated. Smallwood and Cooper were directors of the company.
Furthermore, the contract shows that Smallwood and Cooper signed the contract as directors of
the company. From the contract it seems that Black intended to make contract with the company
and not with Smallwood and Cooper who purported to make the contract on behalf of the
company. Hence, Smallwood and Cooper did not act as principals while making contract. They
made the contract on behalf of the pre-incorporation company. Therefore, they are not personally
liable for the contract.
The issue of this case is whether there is a contract between promoter and third party. In
this case, the company is not existence and cannot appoint the agent on its behalf. So, in this case
there is no contract between Black and the directors. It is because Black is intended to make the
contract with the company and not with the directors. He assumes that the company will
incorporate. In English law, the company cannot approve or ratify the pre-incorporation contract.
The ratification has retrospective effect and the contract is regarded as being made at the time it
was entered into by the agent when the company was not existence. Thus, it could not make a
valid contract. Under the principle of agency law17
, a company should not have agent and
principle relation between promoters and proposed company. At that time the principal also was
not in existence. So, it could not appoint any agent to work on its behalf. Therefore, in English
common law pre-incorporation contracts are invalid and it cannot be ratified by the company
after its incorporation.
The Court held that a non-existent company18
was incapable of having agents and
consequently neither the company nor the signatories who are Smallwood and Cooper were
liable for the contract. The negative effect of English common law is that outsiders also cannot
sue the promoter personally to get back the selling price or claim damages for breach of contract.
The Court held that the person who purported to make pre-incorporation contract was also not
personally bound by contract. It is because promoters cannot be appointed as agents by non-
existent company. Hence, they are not personally liable for the pre-incorporation company to
buy goods or property. As a result, Smallwood and Cooper were not liable for the contract.
16
[1966] 117 CLR 52
17
The Law of Agency(1961), p.251-255
18
See Source of Company Law at p.214
8
6) Re Northumberland Avenue Hotel Company19
The company was registered on 25 July 1882 but before that, on 24 July, a written
contract was entered into between Mr. Wallis’s agent and another person, whom described
himself as the trustee of the company. The company was yet to be registered thus, not in
existence during that particular time. The company seems to have considered, or rather its
directors seem to have considered, that the contract was a binding contract.20
The company then
entered into transactions with Wallis in which the company acted on the terms of the contract, as
entered on 24 July by Wallis and the person who said he was the trustee.
There is no dispute that the contract was not bound to be executed by the company as it
was having any existence during that time, nor can’t the company after being incorporated the
Board of Directors ratify the contract. The main issue to be determined by the court is to hold
that there was a contract entered into between the company and Wallis on the same terms as
those contained in the contract of 24 July 1882. The court held that there was no contract
between two of them.
In this case the company carried out the contract after its incorporation due to mistaken
assumption. As explained by Cotton LJ;
… But why did the company do so? The company seems to have considered, or rather its
directors seem to have considered, that the contract was a contract binding on the company. But
the erroneous opinion that a contract entered into before the company came into existence was
binding on the company and the acting on that erroneous opinion, does not make a good
contract between Wallis, and all the acts which occurred subsequently to the existence of the
company were acts proceeding on the erroneous assumption that the contract of 24 July was
binding on the company.
When it carries out part of contract made before its incorporation because its directors
mistakenly believe that it is bound by the contract and acted based on the mistaken belief, the
company has no intention of entering into a new contract; consequently no new contract is
entered into.21
Lopes LJ said that, “it seems to me impossible to infer such a contract, for it is
clear to my mind that the company never intended to make any new contract, because they
firmly believed that the contract of 24 July was in existence, and was a binding, valid contract.”
19
[1886] 33 Ch D 16
20
See Source of Company Law at p.210
21
See Robert R Pennington’s Company Law at p.108
9
7) Howard v. Patent Ivory Manufacturing Company Ltd.22
One Jordan entered into a contract with a company about to be formed to sell its patents,
leases and various other assets. Agreed purchase price was £36,500, payable as to £6,500 in cash
and as to £30,000 in fully paid-up shares. The company then was registered.23
At a meeting with
the directors of the company, at which Jordan, a director, was present, it was resolved that in
consideration of Jordan accepting £3,000 in cash and £3,500 in debentures instead of £6,500 in
cash originally agreed. The allotment of fully paid shares should be proceeded with.
The main issue in this case is similar to Re Northumberland Avenue Hotel Company case
except that the court held was slightly different due to the difference in the facts of the case
which means the contract was binding on the company.
In present case, the court did conclude the existence of a new contract when the Board of
Directors of the newly formed company adopted the agreement in the presence of the third party
contractor.24
The case can be distinguished on its facts from previous authority, since the
company agreed with the other party to modify the terms of contract made before its
incorporation.25
The judge had clearly taken a view on the case’s facts, since the company had
enjoyed the benefits of the contract. Referring to Kay J:
…that was a variation of the contract made by distinct agreement with Mr. Jordan after passing
of a resolution…I have treated all these as assets of the company, and now I turn round and say
that there never was such agreement.’ Such a course of conduct would be, as I have
characterized it during the argument, the most flagrant dishonesty.
22
[1888] 38 Ch D 156
23
See Case and Materials in Company Law, p. 211
24
See Company Law, Simon Gaulding at p.48
25
See Robert R Pennington’s, Company Law at p.108
10
CASES IN MALAYSIA COMPANY LAW
1) Cosmic Insurance Corpn. Ltd. v. Khoo Chiang Poh 26
{P.C. (Lord Edmund-Davies, Lord Fraser of Tullybelton, Load Searman, Lord Roskill & Sir
Garfiel Barwick)
July 10th
& October 15th
,1980
[Privy Council Appeal No. 13 of 1979]
In this case, it is different with the Kelner v. Baxter and Natal Land Colonization
Company Limited v. Pauline Colliery and Development Syndicate Limited because it is under
Malaysian company law. This is a Singapore case that happens between Cosmic Insurance
Corporation and Khoo Chiang Poh. In this situation, before the company incorporation as a legal
company, Mr. Khoo Chiang Poh was appointed as the managing director to the company on
August 1971 was constituted a pre-incorporation contract between the plaintiff on the one hand
and the remaining 11 persons on the other hand, as agent for the defendant. The letter reads “Mr.
Khoo Chiang Poh shall be the managing director for life unless he resigns, dies, or commit an
offence under the Companies Act or is prohibited to become a director under the Companies Act
for any offences.” Then, on 26th
of September 1971 the company become incorporation and the
ratification of the appointment of the contract slightly modify from the previous appointment
which read “Resolved that Mr. Khoo Chiang Poh be appointed Managing Director and hold
office for life in accordance to the Articles and Memorandum of Association and is responsible
to the Board of Director.”
The court held that the ratification was duly done and validated. In Malaysian company
law, the ratification of appointment modified the previous terms of the appointment that already
made by both parties are did not affect or invalidate the appointment of the defendant for the
position of the director. In addition, under Malaysian company law, pre-incorporation contract
can be ratified and it is validated even the word or term in the ratification are different from the
previous term, and sometimes it add some condition in the ratification. Based on this contract
also, it is give benefits to the company and the outsiders and the outsiders will fell protected.
26
[1981] MLJ 61
11
2) Ahmad bin Salleh & Ors v. Rawang Hills Resort Sdn Bhd 27
HIGH COURT (SHAH ALAM) – SUIT NO 22-140-94
JAMES FOONG J
AUGUST 3RD
, 1995
The case was about the plaintiffs entered into a contract to sell a piece of land to defendants.
Part of the purchase price has been received by the plaintiff. The plaintiffs also granted
irrevocable powers of attorney to the defendants for the purpose of partitioning the said land
representing the ownership between plaintiffs’ and defendants’. The agreement mentioned that
the process will be settled within six months from the date of the contract or the date the issuance
of related document for partitioning process.
There were quite a number of issues being brought up on the plaintiffs’ side. One of the main
issue concerning pre-incorporation contract was the plaintiffs alleged that the defendants had
breached the agreement by, inter alia not being incorporated when the sale and purchase
agreement was entered into.
The court held to dismiss the plaintiffs’ claim and allowing the defendants counterclaims
which includes:
…when the first sale and purchase agreement was executed, the defendants were not in
existence. However, the agreements were subsequently ratified under s 35 of Companies Acts
1965. Also, the plaintiffs were estopped from raising this issue they had until just before the trial,
accepted the defendants as a legal entity in the first sale and purchase agreement.
27
[1995] 3 MLJ 211
12
CONCLUSION
From this paper, it has been clearly explained the legal status of pre-incorporation
contracts. With reference from relevant significant cases and related sections, we are able to
distinguish its legal status with regard of English Common Law as well as Malaysian Company
Law as governed by Companies Acts 1965.
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. The
effects of this type of contract under common law are totally negative effects for outsiders of the
said 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 Malaysian
Company 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, valid
and 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 to
the outsiders. Thus, outsiders may enter into such contracts with much more secured feelings.
While dealing with such contracts, companies may intend to carry out the pre-
incorporation contracts after been incorporated. They can do so through novation but not
ratification. However, court might pay more attention to those facts in case there is any dispute
among the contractors and contractees. The reason is because the company acts that way due to
mistaken belief that the pre-incorporation contract is binding on them when it actually not. In
case of variation on the terms of contract, the court definitely held that the contract is binding
regardless of what the company believed.
13
REFERENCES
- Harry Rajak, Sourcebook of Company Law, 2nd
Edition(1995), Jordans
- H.R. Hahlo and J.H.Farrar, Hahlo’s Case and Materials on Company Law, 3rd
Edition(1987), London Sweet and Maxwell
- LS Sealy, Case and Materials in Company Law, 7th
Edition(2001), Butterworths
- Robert R Pennington’s, Company Law, 7th
Edition (1995), Butterworths London Dublin
and Edinburgh
- Simon Gaulding, Company Law,2nd
Edition(1999), Cavedish Publishing Ltd
London,Sydney
- http://legalservices.co.in/articles/article/pre-incorporation-contracts-134-1.html

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Company Law I - Pre-incorporation Contract

  • 1. TABLE OF CONTENTS PAGE INTRODUCTION 1-2 CASES IN ENGLISH COMMON LAW 3-9 CASES IN MALAYSIAN COMPANY LAW 10-11 CONCLUSION 12 REFERENCES 13
  • 2. 1 INTRODUCTION Pre-incorporation contract is the contract entered by the promoters on behalf of the company before it has been registered. Before incorporation, the company is not an artificial legal person or separate legal entity. So, it has not right to sue and be sued, may not buy and holds properties in its own name. The promoters, while entering into the contract, act as agents of the company. But when the principal, i.e. the company is itself not in existence, how can it appoint an agent to act for it? So, the promoters, themselves and not the company, become personally liable for all contracts entered into by them even though they claim to be acting for the prospective company.1 The legal position of pre-incorporation contracts is different in English common law and in Malaysia common law. In English common law, the legal status of pre-incorporation contracts is invalid and cannot be ratified and adopt the benefits of the contract which has been made on its behalf.2 In Malaysia Companies Act 1965, the legal status of pre-incorporation contracts is invalid and can be ratified by virtue of Section 35(1) of the Act. “Any contract or other transaction purporting to be entered into by a company prior to its formation or by any person on behalf of a company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound by and entitled to the benefit thereof as if it had been in existence at the at date of the contract or other transaction and had been a party thereto”. The effects of pre-incorporation under English common law and Malaysia company law are different. Outsiders suffer total negative effects under English common law as it’s cannot be ratified and not enforceable in court. Thus, outsiders cannot claim the price of the goods or sue the promoters for personal liability. As a result, outsiders have to face a risky situation where they engage into contracts with pre-incorporated company. However, under Malaysia company law, the outsiders are secured when they make contracts with a company in good faith. The reason is because pre-incorporation can be ratified under this law. 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 been approved by directors, outsiders have the right to sue the promoters for personal liability for breach of the contract. 1 http://legalservices.co.in/articles/article/pre-incorporation-contracts-134-1.html, Friday, 21st May 2010 2 Natal Land and Colonization Co. V Pauline Colliery and Development Syndicate[1904] AC 120
  • 3. 2 There are cases3 where companies carry out the contract after its incorporation. The company cannot ratify the contract but it can make novation but novation needs evidences. Novation differs from ratification in that, essentially, a new contract is made on the same terms but this time between the company and the third party. However, the court will not lightly infer that there has been a novation and, for instance, expenditure by the company on the basis of a mistaken belief that the contract is valid will not suffice.4 However, if the company agrees with the other party to vary the terms of a contract made before its incorporation 5 , regardless whatever the directors’ beliefs may be, the company will be bound by the contract as varied. The reason is the company must have had intention to enter into a contract on the original terms as modified by the variations when it assented to the variations.6 In this paper we will discuss the legal status of pre-incorporation under English common law and Malaysia company law with references from relevant cases. 3 Re Northumberland Avenue Hotel Company [1886] 33 Ch D 16 4 See Company Law, Simon Gaulding at p.48 5 Howard v Patent Ivory Manufacturing Company Ltd 6 See Robert R Pennington’s Company Law at p.108
  • 4. 3 CASES IN ENGLISH COMMON LAW 1) Kelner v. Baxter7 In this case the plaintiff and the defendants enter into a business contract. A, B and C known as defendants entered into contract with the plaintiff to purchase some goods on behalf of the proposed “Gravesend Royal Alexander Hotel Company”. Then the goods was already supplied and consumed in the business after it incorporation. The goods were not yet paid. After that, the company was collapsed and the plaintiff want to claim back the payment for goods that already delivered to the defendants and the plaintiff also want to sued A, B and C on the contract of price of the goods. In addition, the agreement between the plaintiff and the defendant was happen on 27th January 1866 before the company will be incorporation and the company receives the certificate of incorporation on 20th February 1866. Then, on 11th April 1866, the company purported to ratify the contract. The company then collapsed and this action was brought against the defendants. The issue was whether the seller could recover the price or not. The court held that the seller could not recover the price of the goods supplied as the company could not make a valid contract with him before its incorporation. The contract is invalid. In the other word, if the Gravesend Royal Alexander Hotel Company had been an existing company at that time, the contract will be valid but in this case8 no existing company at that time when the contract happen. Because of that, the contract is invalid. A company cannot enter into a contract before it is incorporated, because it does not exist as a legal person yet. Even though if the company already be incorporation and then collapse at the relevant time and situation, it has been the law of the registered company that a contract made on behalf of the company at a time when a company did not exist is void. 7 (1899) LR 2 CP 174 8 Kelner v. Baxter (1966) LR 2 CP 174.
  • 5. 4 2) Natal Land and Colonization Company Limited (Appellants) v. Pauline Colliery and Development Syndicate Limited (Respondents) In this case9 a contract entered between the appellant’s agents named Rycroft with Mrs de Carrey in terms of which she was entitle to ask for a lease of the coal mining rights on the appellant’s property. This agreement made on 9th December 1897. In addition, Mrs de Carrey assigned to one Louch ‘in his capacity as a provisional director of the Pauline Colliery and Development Syndicate Limited about the registered.’ All his interest was under the contract. Under the contract, the appellant agreed to substitution of the respondent for Mrs de Carrey. As we know that, Rycroft and Mrs de Carrey was acting on behalf of the syndicate and the company not incorporated yet at that time the agreement was made between both of them. The company was incorporated as respondent company on 22nd January 1898. Then, on 31st January, the appellant’s company was stopped the agreement by a telegram and say that there was no contract between them. Because of that, the respondent company wants to claim specific performance of an agreement to lease certain coal mining rights. The court held that, the contract that are made between the Rycroft and Mrs de Carrey is clear that a company cannot be adoption or ratification obtain the benefit of a contract purporting to have been made on its behalf before the company come into existence. In addition, any contract that the company want to do, they have register their company first and they also will enjoy the benefit of the registration of the company (incorporation). If they are still make a contract before they registered their company (pre-incorporation), they have to be liable if anything happen to their company such as collapse and so on. 9 Natal Land Colonization Company Limited v. Pauline Colliery and Development Syndicate Limited.
  • 6. 5 3) Phonogram Ltd. v. Lane10 In 1973 there was a group of “pop” artists which are included two parties called Brian Chatton and John McBurnie. They want to form a company called “Fragile Management Ltd.” Before the company was formed, negotiations took place for financing of the group. It was to be financed by one of the subsidiaries of big organization called the Hemdale Group. It was eventually arranged that money should be provided by Phonogram Ltd. The agreed amount was £6,000. The first installment was paid. But the new company was never performed. The group never performed under it and the £6,000 was due to be repaid. However, that amount never repaid. So, Phonogram Ltd tried to discover who was personally liable to repay the money. Mr. Roland Rennie had negotiated on behalf of Phonogram Ltd. And Mr. Brian Lane had negotiated on behalf of the new company which was to be formed. The latter was never registered and this was an action against the defendant for recovery of the money.11 That was signed by Mr. Lane. The money was paid over. According to the accounts, it went into the account of Jelly Music Ltd, which was one of the subsidiaries of the Hemdale Group which Mr. Lane was a director. The issue is whether Mr. Lane personally liable or not. Based on this case, the plaintiff advanced £6,000 to a company which is Jelly Music Ltd under an agreement with the defendant to provide part of the finance for a company to form which is Fragile Management. But, the new company was never performed. According to Section 36(4) of the Companies Act 1985, “ Where a contract purport to be made by a company, or by a person as agent for a company, at time when the company has not been formed, then subject to any agreement to the contrary the contract shall have effect as a contract entered into by person purporting act for the company or as agent for it, and he personally liable on the contract accordingly.” The Court was held and makes decision that Mr. Lane was personally liable for the repayment of the £6,000 if the contemplated contract with Fragile Management Ltd. was not in the event entered into.12 It is due to the general principle of legal status of pre-incorporation of English common law that is invalid and not enforceable by law. It is because the company legally cannot make any contract before its incorporation. So, the outsiders cannot enforce the contact against the company and cannot legally make any contract with the company before its incorporation. According to this case, the agent which is Mr. Lane cannot sue the company to repay the payment. Hence, Mr. Lane also cannot legally make any agreement with the company before its incorporation. As a result, Mr. Lane was personally liable to that payment. 10 [1981] 3 W.L.R.736 (C.A) 11 See Source of Company Law at p.216-217 12 See Hahlo’s Case and Material on Company Law at p.173
  • 7. 6 4) Newborne v. Sensolid (Great Britian) Ltd13 Leapold Newborne (London) Ltd is a company that purported to sell tins of ham to the defendant. The defendant refused to take any delivery. The company sued for the breach of the contract. When it was discovered that the company had been registered the day after the transaction was entered into, the plaintiff who is the promoter and director of the company, continued the action in his own name. The contract had been signed by the company itself, with the promoter’s name typed underneath. The promoter did not sign as agent or on behalf of the company but only authenticate the signature of the company.14 The issue of this case is whether the company makes a valid contract or not. Based on this case, Mr. Newborne makes a contract on behalf of the company that was not incorporated or registered. According to Section 36(C) of the Companies Act 1985, “ A contract which purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.” The Court held that a company cannot make valid contract before its incorporation. Moreover, a person cannot make legally binding contracts in the name of a company in anticipation of its being incorporated. The Court cannot find that the plaintiff purported to a contract as agent or as principal.15 The company makes a contract and must do its physical acts through the directors but their relationship is not the ordinary one of principal or agent. Thus, the company contract is authenticated by the signature of one of the directors. Based on this case, the contract was purported by the company not Mr. Newborne. He purports to be selling the company‘s good not his goods and signing the agreement on behalf of the company. Mr. Newborne signature is merely confirming the company’s signature. The company was not in existence when the contract was signed. Pre-incorporation contracts cannot be legally enforced as it is invalid. As a result, outsiders who make contracts with the proposed company before its incorporation and sell certain goods or real property cannot enforce the contract against the company. In this situation defendants cannot sue the company to recover the selling price. The Court makes decision that the defendants can avail themselves of the defense which they pleaded and the appeal must be dismissed. 13 [1954] 1 QB 45 14 See Company Law, Simon Gaulding at p.49 15 See Source of Company Law at p.218
  • 8. 7 5) Black v. Smallwood 16 Black had entered into a contract for the sale of a land to Western Suburbs Holding Pty Ltd. The company was not incorporated during the time of transaction of the contract. However, Black believed that it had been incorporated. Smallwood and Cooper were directors of the company. Furthermore, the contract shows that Smallwood and Cooper signed the contract as directors of the company. From the contract it seems that Black intended to make contract with the company and not with Smallwood and Cooper who purported to make the contract on behalf of the company. Hence, Smallwood and Cooper did not act as principals while making contract. They made the contract on behalf of the pre-incorporation company. Therefore, they are not personally liable for the contract. The issue of this case is whether there is a contract between promoter and third party. In this case, the company is not existence and cannot appoint the agent on its behalf. So, in this case there is no contract between Black and the directors. It is because Black is intended to make the contract with the company and not with the directors. He assumes that the company will incorporate. In English law, the company cannot approve or ratify the pre-incorporation contract. The ratification has retrospective effect and the contract is regarded as being made at the time it was entered into by the agent when the company was not existence. Thus, it could not make a valid contract. Under the principle of agency law17 , a company should not have agent and principle relation between promoters and proposed company. At that time the principal also was not in existence. So, it could not appoint any agent to work on its behalf. Therefore, in English common law pre-incorporation contracts are invalid and it cannot be ratified by the company after its incorporation. The Court held that a non-existent company18 was incapable of having agents and consequently neither the company nor the signatories who are Smallwood and Cooper were liable for the contract. The negative effect of English common law is that outsiders also cannot sue the promoter personally to get back the selling price or claim damages for breach of contract. The Court held that the person who purported to make pre-incorporation contract was also not personally bound by contract. It is because promoters cannot be appointed as agents by non- existent company. Hence, they are not personally liable for the pre-incorporation company to buy goods or property. As a result, Smallwood and Cooper were not liable for the contract. 16 [1966] 117 CLR 52 17 The Law of Agency(1961), p.251-255 18 See Source of Company Law at p.214
  • 9. 8 6) Re Northumberland Avenue Hotel Company19 The company was registered on 25 July 1882 but before that, on 24 July, a written contract was entered into between Mr. Wallis’s agent and another person, whom described himself as the trustee of the company. The company was yet to be registered thus, not in existence during that particular time. The company seems to have considered, or rather its directors seem to have considered, that the contract was a binding contract.20 The company then entered into transactions with Wallis in which the company acted on the terms of the contract, as entered on 24 July by Wallis and the person who said he was the trustee. There is no dispute that the contract was not bound to be executed by the company as it was having any existence during that time, nor can’t the company after being incorporated the Board of Directors ratify the contract. The main issue to be determined by the court is to hold that there was a contract entered into between the company and Wallis on the same terms as those contained in the contract of 24 July 1882. The court held that there was no contract between two of them. In this case the company carried out the contract after its incorporation due to mistaken assumption. As explained by Cotton LJ; … But why did the company do so? The company seems to have considered, or rather its directors seem to have considered, that the contract was a contract binding on the company. But the erroneous opinion that a contract entered into before the company came into existence was binding on the company and the acting on that erroneous opinion, does not make a good contract between Wallis, and all the acts which occurred subsequently to the existence of the company were acts proceeding on the erroneous assumption that the contract of 24 July was binding on the company. When it carries out part of contract made before its incorporation because its directors mistakenly believe that it is bound by the contract and acted based on the mistaken belief, the company has no intention of entering into a new contract; consequently no new contract is entered into.21 Lopes LJ said that, “it seems to me impossible to infer such a contract, for it is clear to my mind that the company never intended to make any new contract, because they firmly believed that the contract of 24 July was in existence, and was a binding, valid contract.” 19 [1886] 33 Ch D 16 20 See Source of Company Law at p.210 21 See Robert R Pennington’s Company Law at p.108
  • 10. 9 7) Howard v. Patent Ivory Manufacturing Company Ltd.22 One Jordan entered into a contract with a company about to be formed to sell its patents, leases and various other assets. Agreed purchase price was £36,500, payable as to £6,500 in cash and as to £30,000 in fully paid-up shares. The company then was registered.23 At a meeting with the directors of the company, at which Jordan, a director, was present, it was resolved that in consideration of Jordan accepting £3,000 in cash and £3,500 in debentures instead of £6,500 in cash originally agreed. The allotment of fully paid shares should be proceeded with. The main issue in this case is similar to Re Northumberland Avenue Hotel Company case except that the court held was slightly different due to the difference in the facts of the case which means the contract was binding on the company. In present case, the court did conclude the existence of a new contract when the Board of Directors of the newly formed company adopted the agreement in the presence of the third party contractor.24 The case can be distinguished on its facts from previous authority, since the company agreed with the other party to modify the terms of contract made before its incorporation.25 The judge had clearly taken a view on the case’s facts, since the company had enjoyed the benefits of the contract. Referring to Kay J: …that was a variation of the contract made by distinct agreement with Mr. Jordan after passing of a resolution…I have treated all these as assets of the company, and now I turn round and say that there never was such agreement.’ Such a course of conduct would be, as I have characterized it during the argument, the most flagrant dishonesty. 22 [1888] 38 Ch D 156 23 See Case and Materials in Company Law, p. 211 24 See Company Law, Simon Gaulding at p.48 25 See Robert R Pennington’s, Company Law at p.108
  • 11. 10 CASES IN MALAYSIA COMPANY LAW 1) Cosmic Insurance Corpn. Ltd. v. Khoo Chiang Poh 26 {P.C. (Lord Edmund-Davies, Lord Fraser of Tullybelton, Load Searman, Lord Roskill & Sir Garfiel Barwick) July 10th & October 15th ,1980 [Privy Council Appeal No. 13 of 1979] In this case, it is different with the Kelner v. Baxter and Natal Land Colonization Company Limited v. Pauline Colliery and Development Syndicate Limited because it is under Malaysian company law. This is a Singapore case that happens between Cosmic Insurance Corporation and Khoo Chiang Poh. In this situation, before the company incorporation as a legal company, Mr. Khoo Chiang Poh was appointed as the managing director to the company on August 1971 was constituted a pre-incorporation contract between the plaintiff on the one hand and the remaining 11 persons on the other hand, as agent for the defendant. The letter reads “Mr. Khoo Chiang Poh shall be the managing director for life unless he resigns, dies, or commit an offence under the Companies Act or is prohibited to become a director under the Companies Act for any offences.” Then, on 26th of September 1971 the company become incorporation and the ratification of the appointment of the contract slightly modify from the previous appointment which read “Resolved that Mr. Khoo Chiang Poh be appointed Managing Director and hold office for life in accordance to the Articles and Memorandum of Association and is responsible to the Board of Director.” The court held that the ratification was duly done and validated. In Malaysian company law, the ratification of appointment modified the previous terms of the appointment that already made by both parties are did not affect or invalidate the appointment of the defendant for the position of the director. In addition, under Malaysian company law, pre-incorporation contract can be ratified and it is validated even the word or term in the ratification are different from the previous term, and sometimes it add some condition in the ratification. Based on this contract also, it is give benefits to the company and the outsiders and the outsiders will fell protected. 26 [1981] MLJ 61
  • 12. 11 2) Ahmad bin Salleh & Ors v. Rawang Hills Resort Sdn Bhd 27 HIGH COURT (SHAH ALAM) – SUIT NO 22-140-94 JAMES FOONG J AUGUST 3RD , 1995 The case was about the plaintiffs entered into a contract to sell a piece of land to defendants. Part of the purchase price has been received by the plaintiff. The plaintiffs also granted irrevocable powers of attorney to the defendants for the purpose of partitioning the said land representing the ownership between plaintiffs’ and defendants’. The agreement mentioned that the process will be settled within six months from the date of the contract or the date the issuance of related document for partitioning process. There were quite a number of issues being brought up on the plaintiffs’ side. One of the main issue concerning pre-incorporation contract was the plaintiffs alleged that the defendants had breached the agreement by, inter alia not being incorporated when the sale and purchase agreement was entered into. The court held to dismiss the plaintiffs’ claim and allowing the defendants counterclaims which includes: …when the first sale and purchase agreement was executed, the defendants were not in existence. However, the agreements were subsequently ratified under s 35 of Companies Acts 1965. Also, the plaintiffs were estopped from raising this issue they had until just before the trial, accepted the defendants as a legal entity in the first sale and purchase agreement. 27 [1995] 3 MLJ 211
  • 13. 12 CONCLUSION From this paper, it has been clearly explained the legal status of pre-incorporation contracts. With reference from relevant significant cases and related sections, we are able to distinguish its legal status with regard of English Common Law as well as Malaysian Company Law as governed by Companies Acts 1965. 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. The effects of this type of contract under common law are totally negative effects for outsiders of the said 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 Malaysian Company 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, valid and 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 to the outsiders. Thus, outsiders may enter into such contracts with much more secured feelings. While dealing with such contracts, companies may intend to carry out the pre- incorporation contracts after been incorporated. They can do so through novation but not ratification. However, court might pay more attention to those facts in case there is any dispute among the contractors and contractees. The reason is because the company acts that way due to mistaken belief that the pre-incorporation contract is binding on them when it actually not. In case of variation on the terms of contract, the court definitely held that the contract is binding regardless of what the company believed.
  • 14. 13 REFERENCES - Harry Rajak, Sourcebook of Company Law, 2nd Edition(1995), Jordans - H.R. Hahlo and J.H.Farrar, Hahlo’s Case and Materials on Company Law, 3rd Edition(1987), London Sweet and Maxwell - LS Sealy, Case and Materials in Company Law, 7th Edition(2001), Butterworths - Robert R Pennington’s, Company Law, 7th Edition (1995), Butterworths London Dublin and Edinburgh - Simon Gaulding, Company Law,2nd Edition(1999), Cavedish Publishing Ltd London,Sydney - http://legalservices.co.in/articles/article/pre-incorporation-contracts-134-1.html