On 3rd November 2018 Annie had entered into a contract with Indira for fabrics, for the craft

courses,
signing the contract “Craftie Hobby Sdn Bhd”, a week before she incorporated the company as herself
as the sole shareholder and director on 15 November 2018 but the company never rectified the
contracts made by Anne with Indira. The company later suffered losses and have no more valuable
assets. Indira is now owed RM3000 for the fabrics.

The issue is that whether the contract between Indira and Craftie Hobby Sdn Bhd is a valid contract
and therefore binds Craftie Hobby Sdn Bhd.

According to common it a pre-incorporation simply is not possible. This is due to the fact that it is
considered that contracts entered before incorporation cannot be made by the company or its agents
since there is no principal in existence. A contract created before its incorporation does not bind a
company. The liability would be on the promoters of the company that had carried out the transaction,
excluding proffessionals that only acts as agents for the company and not has the executive power
over the company. In a common law case of Kelner v Baxter (1866), where the the contract was
made pre-incorporation yet since the company collapsed, and owed the plaintiff money, the plaintiff
sued for the payment and the court, held the defendant, which was the director of the company,
personally liable.

Section 35(1) of Companies Act 1965 states 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 date of the contract or
other transaction and had been a party thereto. Section 35(2) of Companies Act 1965 stated that prior
to ratification by the company the person or persons who purported to act in the name or on behalf of
the company shall in the absence of an express agreement to the contrary be personally bound by the
contract or other transaction and entitled to the benefit thereof. In the case Cosmic Insurance Corp
Ltd v. Khoo Chiang Poh (1981), Khoo Chiang Poh was appointed as Managing Director for
life by 12 promoters of Cosmic Insurance Co. before it was formed. After the incorporation of
the company, a resolution was passed to resolve that Khoo Chiang Poh will be Managing
Director and holds office for life. Later, The company sought to remove him. Khoo suedCosmic
Insurance Co for breach of contract. Respondent sued for breach of contract because he was
supposed to be appointed as Managing Director of the company for life. The appellant argued
that there was no such contract because the letter was signed before the company’s
incorporation however the court allowed the claim, this is due to the fact that the company had
ratified the pre-incorporated contract, expressly through a letter.
 In Perman Sdn Bhd & Ors v European Commodities Sdn. Bhd & Anor (2006), On 22/8/1979,
a joint venture agreement was entered between the 1st Defendant, Perman Sdn Bhd & 2nd and 9th
Defendant. Perman Sdn Bhd is a private limited company which principal by Raja Zainal &Tg Zaidah,
the wife. The private company incorporated on 26/2/1981 i.e. 18 months after the joint venture
agreement. The court held that Perman Sdn Bhd was not in existence when the joint venture agreement
was executed. There was nothing to show that the Perman Sdn Bhd had ratified the agreement. Neither
was there any evidence to suggest the contrary express agreement required by Section 35(2) Companies
Act 1965. It followed, in accordance with the term of Section 35 of Companies Act 1965, that the joint
venture agreement should be treated as binding Raja Zainal personally as its executant.

In the present case of Craftie Hobby Sdn Bhd and Indira, Anne enters into the contract with
Indira as the principal and a promoter of the private company, which is in pre incorporated. Indira
supplied fabrics at the cost of RM 3000 to Anne for the craft courses under the business of the Craftie
Hobby Sdn Bhd. Anne solely entered into a written contract using the name of Craftie Hobby Sdn Bhd.
The nature of the contract entered was for the business purposes under the company, and after the
incorporated date of the company on 15 November 2018, Anne was appointed as the director never
ratified the contract made between Craftie Hobby Sdn Bhd and Indira. In reference to the case of Kelner
v Baxter,1 the promoters who contracted "for a proposed company" were held personally responsible.
The intention of the parties, in that case, could be found in the written contract. The reference to the.
"proposed" the company indicated that the parties were aware of its non-existence. If the company later
ratifies, it is considered a new contract. Therefore, the plaintiff can claim against the defendant to get
the monetary payment for the fabrics that be used by the company.

It is unjust that neither the Craftie Hobby Sdn Bhd nor the principal, Anne should benefit by
the acquisition of property or money or the performance of services under contracts made before the
company’s incorporation without giving the consideration promised in return. The courts have therefore
tried in some cases to provide relief to the company or other parties on some ground outside the law of
contract. Thus it has been held that where before the company’s incorporation its promoters have
performed services which have increased the value of the company’s property, they can either enforce
an equitable claim against that property for the benefit of their services, or may recover the reasonable
amount of their services from the company by suing for a quantum merit.

Although a contract made before a company’s incorporation cannot bind the company, it is not
wholly devoid of legal effect, even if all the persons who negotiated the agreement are aware that the
company has not yet been incorporated. The contract takes effect as a personal contract with the person
who purports to contract the company’s behalf, and they are liable to pay damages for failure to perform
the promises made in the Craftie Hobby Sdn Bhd’s name or her behalf. This is so even though the

1
(1866) LR 2 CP 174.
contract expressly provides that only the company’s paid-up capital shall be answerable for
performance. Anne, who is the person who agrees is liable to each other at parties, and the person who
purports to represent the company is not merely responsible for paying damages for breach of their
implied warranty that they had authority to contract on the company’s behalf.

Formerly, these consequences did not ensure when a contract was made in the name of a
company before its incorporation by a person who did not purpose to contract on its behalf or as it agent,
but simply described himself in the offer or acceptance as a promoter of the company or as being in
some other way connected with it. Such contracts were as non-existent as the company in whose name
they were made. However, the statute now equates such contracts with those expressed to be made on
behalf of a company before its incorporation and they, therefore, take effect as contracts entered into
personally by the persons who make them and the knowledge or ignorance of those persons of the fact
that the company has not been incorporated is immaterial.