A pre-incorporation contract is an agreement entered into by a promoter, agent, or trustee on behalf of a company before that company has been officially registered/incorporated by the Companies Commission of Malaysia (SSM).
The Paradox: Under company law, a company only obtains its Separate Legal Entity (SLE) status upon the date of incorporation (S. 18 & S. 20 of the Companies Act 2016).
The Problem: How can an entity that does not exist enter into a contract, authorize an agent, or assume liabilities?
Under English common law, pre-incorporation contracts are void and unenforceable by or against the company. The courts apply two rigid principles of contract and agency law:
No Contractual Capacity: A non-existent entity cannot contract.
No Retrospective Ratification: Under the law of agency, a principal must exist at the time the agent contracts to later ratify that contract. Since the company did not exist when the promoter signed, ratification is legally impossible.
Facts: Promoters of a proposed hotel company purchased wine “on behalf of” the company. The wine was consumed, but the company went into liquidation before paying the supplier. The supplier sued the promoters personally.
Held: The promoters were personally liable. Since the company did not exist at the time of the agreement, it could not have authorized the contract, nor could it ratify it after incorporation. The contract was treated as made directly with the promoters.
Facts: Mr. Leopold Newborne signed a contract to sell canned ham to Sensolid. He signed using the company name “Leopold Newborne (London) Ltd” and wrote his own signature underneath. At that point, the company had not been incorporated. When Sensolid refused to take delivery, Mr. Newborne tried to sue Sensolid under his own name to enforce the contract.
Held: The contract was completely void. Because the contract was signed strictly in the company’s name (and not by Newborne acting as an agent for a future company), Newborne could not personally enforce it. The company could not enforce it either because it did not exist.
Key Distinction:
If signed: “Promoter, acting as agent for Company X” Promoter is personally liable (Kelner v Baxter).
If signed: “Company X (not yet formed)” The contract is a nullity; nobody can sue or be sued (Newborne v Sensolid).
To resolve the harshness of common law, Malaysia introduced statutory provisions that allow companies to ratify pre-incorporation contracts. This is currently governed by Section 65 of the Companies Act 2016 (which replaced Section 35 of the Companies Act 1965).
Provision
Legal Effect
Who is Liable?
Section 65(1)
A contract/transaction purporting to be made by or on behalf of an unformed company acts as a contract made with the individual promoter.
The promoter/agent is personally liable unless and until the company ratifies it.
Section 65(2)
The company can ratify the contract after its incorporation. Once ratified, the contract is retrospectively binding on the company as if the company had existed on the date of the contract.
The company becomes solely liable, and the promoter’s personal liability is discharged.
To successfully bind a company to a pre-incorporation contract in Malaysia, two conditions must be satisfied:
The contract must clearly identify that it is being entered into for the benefit of, or on behalf of, the company to be incorporated.
Case Link: Cosmic Insurance Corporation Ltd v Khoo Chiang Poh (1981)
Ratification can occur in two ways:
Express Ratification: The board of directors passes a formal resolution adopting the pre-incorporation contract, or the company signs a formal ratification deed (Ahmad bin Salleh v Rawang Hills Resort Sdn Bhd [1995]).
Implied Ratification: The company behaves in a way that unequivocally shows they have adopted the contract (e.g., accepting and using the purchased goods, paying invoices, or executing terms of the contract).
Case Link: Chung Yoke Onn v C.S. Khin Development Sdn Bhd [1985] - where the court held that using plans made by an architect before the company’s incorporation amounted to implied ratification.
Facts: Prior to the incorporation of Cosmic Insurance, 12 promoters signed a pre-incorporation contract appointing Khoo Chiang Poh as Managing Director for life. After the company was incorporated, the board passed a resolution stating: “Resolved that Mr. Khoo Chiang Poh be appointed Managing Director…”. Later, a dispute arose and the company attempted to terminate him. Khoo sued for breach of contract.
Held: The company was bound.
The contract was clearly made on behalf of the company (as KCP was appointed MD of the company, and the letter was written on headed stationery of the proposed company).
The post-incorporation resolution, even though slightly differently worded, constituted effective express ratification under the statutory equivalent of S. 65(2).
Facts: A joint venture agreement was executed before the first defendant (Perman) was incorporated. The contract was signed by a shareholder prior to formation. However, once Perman was incorporated, the company never formally or informally ratified the joint venture agreement.
Held: The contract was valid, but because it was never ratified by the company, the company was not bound. Instead, the individual who executed the contract was held personally liable under the statutory provisions (now S. 65(1)).
Facts: A consortium (CDJV) entered into a contract (Letter of Intent & Letter of Award) with Baldah. CDJV later claimed they did so as the “promoter” for a successor company (Dae Hanguru) which was yet to be incorporated. After Dae Hanguru was incorporated, it attempted to sue Baldah for breach of contract, claiming it had stepped into CDJV’s shoes under the “promoter-successor” principle.
Held: The Federal Court dismissed Dae Hanguru’s claim based on the following:
Pleading Requirement: A party seeking to rely on the statutory promoter-successor principle (S. 35 CA 1965 / S. 65 CA 2016) must explicitly plead the material facts of this relationship in court.
No Intent to Act on Behalf: There was no evidence that CDJV intended to contract on behalf of Dae Hanguru when they dealt with Baldah.
No Ratification: There was no evidence showing that Dae Hanguru had successfully ratified the original contract. In fact, Dae Hanguru had counter-proposed completely new terms, which destroyed any claim of ratifying the original contract.
Promoter Departure: In a genuine promoter-successor scenario, the promoter (CDJV) should step aside once the successor (Dae Hanguru) is formed. Here, Baldah continued to deal only with CDJV even after Dae Hanguru was incorporated.
Use this structured format when answering a hypothetical problem question in your exams.
[ PROBLEM SCENARIO ]
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[ I - ISSUE ] ──► State the legal question (Who is liable for the contract?)
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[ L - LAW ] ──► State S. 65(1) & (2) CA 2016 + Kelner v Baxter + Cosmic Insurance
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[ A - APPLICATION ]
├──► Step 1: Was the company incorporated when the contract was made?
├──► Step 2: Was the contract made "on behalf of" the company?
└──► Step 3: Did the company ratify the contract (expressly/impliedly)?
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[ C - CONCLUSION ] ──► Final verdict on liability (Promoter liable OR Company liable)
Identify the core legal conflict.
“The central issue is whether [Promoter’s Name] is personally liable on the pre-incorporation contract dated [Date] made with [Third Party’s Name], or whether the newly incorporated company, [Company Name], is bound by it.”
Sub-issues:
Was the contract made “by or on behalf of” the unformed company?
Did the company successfully ratify the contract after incorporation?
State the statutory rules and common law principles.
Common Law Position: Under common law, a company has no contractual capacity before incorporation (Kelner v Baxter). It cannot enforce or be bound by pre-incorporation agreements, nor can it ratify them because a non-existent principal cannot have an agent.
Statutory Position: This position is modified by Section 65 of the Companies Act 2016 (formerly Section 35 of the CA 1965).
Section 65(1) CA 2016 states that any contract purporting to be made by or on behalf of an unformed company has the effect of a contract made with the person purporting to act for it, making them personally liable by default.
Section 65(2) CA 2016 states that the company may ratify the contract after incorporation. Once ratified, the company is bound by and entitled to the benefits of the contract retrospectively as if it had been in existence on the date of the contract.
Two-Pronged Test: To transfer liability from the promoter to the company, two conditions must be met:
The contract must be made “by or on behalf of” the company (Cosmic Insurance Corp v Khoo Chiang Poh).
The company must ratify the contract, either expressly (e.g., via board resolution) or impliedly (by conduct, such as accepting benefits of the contract).
Apply the law directly to the facts of your exam prompt.
Fact Analysis - Pre-incorporation: Confirm that the contract was executed before the company’s incorporation date.
Apply Prong 1 (On Behalf Of): Look at how the contract was signed.
If signed ‘For and on behalf of Alpha Sdn Bhd (to be formed)’ by Promoter: This satisfies the “on behalf of” requirement (Cosmic Insurance).
If signed only in the company’s name without mentioning the promoter’s agency: Explain that while common law would treat this as void (Newborne v Sensolid), S. 65(1) CA 2016 steps in to hold the promoter personally liable anyway.
Apply Prong 2 (Ratification): Analyze the actions of the company after incorporation.
Scenario A (Express Ratification): Did the directors pass a resolution? If yes, cite Cosmic Insurance and conclude that the company is bound.
Scenario B (Implied Ratification): Did the company accept the goods/services or pay the invoices? If they did, explain that this conduct amounts to implied ratification.
Scenario C (No Ratification): If the company ignored the contract or explicitly rejected it, cite Perman Sdn Bhd or Dae Hanguru to explain that because there was no ratification, the company is not bound, and the promoter remains personally liable under S. 65(1).
State your final definitive advice.
“In conclusion, since [Company Name] [has / has not] ratified the contract, the company [is / is not] bound by the contract.”
“Therefore, [Promoter’s Name] [is personally liable to pay the third party under S. 65(1) / is discharged from personal liability under S. 65(2) and the company is solely liable].”
The central issue is whether Daud, as a promoter, has breached his fiduciary duties to the newly formed company, Daham Sdn Bhd, by making an undisclosed profit of RM50,000 on the sale of a premise to the company, and whether Daham Sdn Bhd can rescind the sale or recover the profit.
Definition of a Promoter: A promoter is defined under common law as someone who undertakes to form a company with reference to a given project and to set it going, taking the necessary steps to fulfill that purpose (Twycross v Grant [1877]).
Fiduciary Relationship: Promoters stand in a fiduciary relationship to the company they are creating (Erlanger v New Sombrero Phosphate Co [1878]). This is also recognized under Malaysian law in cases like Fairview Schools Bhd v Indrani a/p Rajaratnam (No.2) [1998].
Duty to Avoid Secret Profits & Obligation of Disclosure: Because of this fiduciary position, a promoter:
Must not make a secret profit at the expense of the unformed company.
Must make full and frank disclosure of any interest/profits made in transactions with the company (Gluckstein v Barnes [1900]).
This disclosure must be made to an independent Board of Directors, or if none exists, to the existing and prospective shareholders (via a general meeting, constitution, or prospectus).
Remedies for Breach:
Rescission: The company can rescind the contract of sale to restore both parties to their original positions (provided restitutio in integrum is still possible).
Recovery of Secret Profits: Alternatively, the company may choose to keep the property but sue the promoter to recover the undisclosed profit made (Gluckstein v Barnes).
Promoter Status: Daud and Idham decided to form Daham Sdn Bhd. Daud purchased the premise after the registration documents were submitted but before the actual incorporation. This active participation in the setup means Daud clearly falls within the definition of a promoter under Twycross v Grant. He therefore owes fiduciary duties to Daham Sdn Bhd.
Breach of Duty: Daud bought the premise for RM500,000 and sold it to the company for RM550,000 without disclosing the purchase price or the RM50,000 markup. This lack of transparency constitutes a breach of his fiduciary duty of full and frank disclosure (Gluckstein v Barnes / Fairview Schools Bhd).
No Effective Consent: Because Daud did not disclose the profit to an independent board or to the shareholders of Daham Sdn Bhd, the RM50,000 qualifies as an unauthorized “secret profit.”
Remedies:
Since Daham Sdn Bhd has now discovered the true facts, they have two alternative paths.
Path A (Rescission): If the company wishes to cancel the purchase, they can return the premises to Daud and claim the RM550,000 back, provided the property has not been altered or sold to an innocent third party.
Path B (Recovery of Secret Profit): If the company wishes to keep the premise, they can legally compel Daud to account for and refund the RM50,000 secret profit he pocketed in breach of his fiduciary duty.
In conclusion, Daud breached his fiduciary duty as a promoter of Daham Sdn Bhd. Daham Sdn Bhd is advised that they can either:
Rescind the contract of sale and recover the entire purchase price of RM550,000 (returning the property to Daud); OR
Affirm the sale and successfully claim the RM50,000 secret profit directly from Daud.
The main issue is whether Muhibbah Sdn Bhd can enforce payment for six portable air conditioners against Syarikat Mika Sdn Bhd, or whether Alice remains personally liable for the contract under Malaysian company law.
Common Law Position: Historically, a company did not exist prior to its incorporation and thus lacked capacity to contract (Kelner v Baxter [1866]). Any contract signed prior to incorporation was completely void, and the company could not ratify it afterwards because a principal must exist at the time the agent acts.
Statutory Modification (Section 65 of the Companies Act 2016):
Section 65(1): Any contract or transaction purporting to be made by or on behalf of an unformed company acts as a contract made with the promoter/agent personally, making them personally liable by default.
Section 65(2): Allows the company to ratify the contract after its incorporation. Once ratified, the company is bound retrospectively as if it had existed on the date of the contract.
Two Conditions for Binding the Company:
The contract must be made “by or on behalf of” the unformed company (Cosmic Insurance Corporation Ltd v Khoo Chiang Poh [1981]).
The company must ratify the contract after its incorporation.
Methods of Ratification:
Express: Formally passing a resolution (Ahmad bin Salleh v Rawang Hills Resort Sdn Bhd [1995]).
Implied: By unequivocal conduct showing adoption of the contract, such as accepting and using the contract’s subject matter (Chung Yoke Onn v C.S. Khin Development Sdn Bhd [1985]).
Pre-incorporation status: The contract was signed on 10 October 2019, whereas Syarikat Mika Sdn Bhd was only incorporated on 21 October 2019. This is a classic pre-incorporation contract.
Prong 1 (On Behalf Of): The contract was explicitly signed by Alice “for and on behalf of Syarikat Mika Sdn Bhd”. This satisfies the first statutory requirement under Section 65 CA 2016 and matches the principle in Cosmic Insurance.
Prong 2 (Ratification analysis):
Syarikat Mika Sdn Bhd claims they did not “authorize” the purchase and has not passed an express resolution (no express ratification).
However, the company received the six air conditioners on 15 October 2019 and did not return them. When Muhibbah Sdn Bhd’s employees arrived, they discovered that Syarikat Mika Sdn Bhd was actively using the air conditioners.
Applying the precedent in Chung Yoke Onn v C.S. Khin Development Sdn Bhd, the active use of the goods/benefits of a pre-incorporation contract by a newly formed company constitutes implied ratification by conduct.
Therefore, by keeping and using the air conditioners, Syarikat Mika Sdn Bhd has impliedly ratified the contract under Section 65(2) CA 2016.
Liability shift: Since ratification has occurred, the contract is retrospectively binding on Syarikat Mika Sdn Bhd. Consequently, Alice’s personal liability under Section 65(1) CA 2016 is fully discharged, and Syarikat Mika Sdn Bhd is now solely liable.
In conclusion, Muhibbah Sdn Bhd has a valid cause of action against Syarikat Mika Sdn Bhd to recover the outstanding payment for the six air conditioners.
By using the air conditioners, Syarikat Mika Sdn Bhd impliedly ratified the contract under Section 65(2) of the Companies Act 2016.
Alice is discharged from personal liability, and Syarikat Mika Sdn Bhd is solely liable to pay Muhibbah Sdn Bhd.