BY ZALEHA ZAIN. Pre incorporation contracts and its effects in MALAYSIA AND AT COMMON LAW. 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 ) Damages Disqualification 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 PLEASE REFER TABLE AS IN SLIDE ABOVE. TQ

1. PRE INCORPORATION
CONTRACTS

2. Definition of Pre-iC:
• Any contract or transactions which
purports to be made by or on behalf of
the company before its incorporation.

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

4. 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))

5. (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))

6. 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)).

7. Remedies for breach of P’s duties
 Rescission (rescind the contract )
Damages
Disqualification as a promoter
 Reimbursement of promotional expenses ( no
payment for P’s salary)
 Recovery of secret profit and constructive
trust

8. POSITION OF Pre-IC
• COMMON LAW
• THE COMPANIES ACT 1965

9. 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 preincorporation can be ratifiedunder this
law.

10. 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 preincorporated 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.

11. 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

12. 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

13. 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.

14. • 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.