Tutorial 3 question 7
The company was incorporated on 1st May. On 10th June the company commenced business whereby the company’s directors, on behalf of the company, purchased the shop from Jacob. Advise the directors the legal position of the company.
In Malaysia the law allows a company to ratify a contract entered before its incorporation. Section 35(1) states that any contract entered into by a company prior to its formation or by any person on behalf of the company prior to its formation may be ratified by the company after its incorporation. In the case above, the contract between the company and Jacob may be ratified. Once the contract is ratified, it is binding on the company and the company is entitled to the contract.
In the event that the company does not ratify the contract, section 35(2) states that the person who purported to act in the name or on behalf of the company shall be personally bound by the contract and entitled to the benefits of the contract. In the case, if the company ratified the contract of Jacob, the directors of the company who commenced business on the behalf of the company, purchased the shop from Jacob, the directors could be personally liable. The directors can avoid the liability if there is an express exclusion or disclaimer clause in the pre-incorporation contract.
A private company can commerce business immediately upon receiving the certificate of incorporation. However, a public company has to comply with the provision of section 52 and obtain a Certificate of Commencement before begin to trade. In the section 52(4) provide that any contract made before the date at which it is entitled to commence business shall be provisional only. Such contracts shall not be binding on the company until the date when it is entitled to commence business. In the case, it did not mention that the company is a public or a private company. If the company is a public company, it must have a Certificate of commencement before trading. If not, the contract between Jacob will lapse.