When a company conduct its business, it often enters into various types of legal documents. One of the common legal documents often entered into by companies are contracts. When it comes to company and contract, the effect of such contract against the company is dependent on the type of the contract and the status of the company (Also see Incorporation Of Company : Commencement Of Business – Part 1).
Only an entity with legal personality can enter into a contract. Therefore, prior to the issuance of certificate of incorporation, a company cannot enter into any contract. In such circumstances, if there are any contracts to be entered for the benefit of the company, it will be entered by the promoter, a person who is taking active steps to incorporate (Also see Incorporation of Company Step 1, Incorporation of Company Step 2, and Incorporation of Company Step 3)the company.
Under the common law, a company is not bound by pre-incorporation contracts since it was entered at a time when it was not in existence yet nor can it claim any benefit that it should have received under such contract even though it was purportedly entered for its benefit. The one who will be responsible for all liabilities and entitled to all benefit under such contract is the promoter.
However, Section 35 of the Companies Act 1965 allows the company to ratify pre-incorporation contracts. When a company ratify such contract after it has been incorporated with the assistance of a corporate secretary in Johor Bahru, the contract will bind the company as if the company was already incorporated during the date of the contract.
In order for a company to ratify such contract, two conditions must be fulfilled:-
a) The contract has been specifically entered by the promoter or other person on behalf of the company; and
b) The ratification must be done after the company has been incorporated.
Provisional contracts are contracts made by a company after its incorporation but before it is entitled to commence its business. Only public company is not entitled to commence its business upon the issuance of certificate of incorporation. Therefore, provisional contract are only relevant in relation to contracts entered by public company.
Under the Companies Act 1965, a provisional contract is a contract that is not binding on the company unless and until it is entitled to commence its business. Unlike pre-incorporation contract, a company does not have to ratify provisional contract for it to be binding. Provisional contract will be automatically binding when the company is entitled to commence its business.
Form Of Contracts
Upon the issuance of the certificate of incorporation (or in the case of public company, the issuance of Form 23, the entitlement to commence its business), any contract entered by a company is binding on the company. However, it is only binding if it is entered by a person having the company’s authority, be it express or implied authority, to enter into such transaction.