Question

Kairul was a promoter of Sungguh Hebat Sdn. Bhd. On 22 December 2019, Kairul, on behalf of Sungguh Hebat Sdn. Bhd., entered into a contract with i-Comp, a computer firm. The contract was for the purchase of five computers to be used in the office of Sungguh Hebat Sdn. Bhd.

On 20 January 2020 Sungguh Hebat Sdn. Bhd. was incorporated. At the first board of directors meeting, the agreement between Sungguh Hebat Sdn. Bhd. and i-Comp was not discussed. The company however used the five computers supplied by i-Comp in their office. Recently, i-Comp made a demand of RM15,000 as payment for the computers. However, Sungguh Hebat Sdn. Bhd. refused to pay i-Comp for the computers because they had not ratified the contract made by Kairul.

Advise i-Comp.

Answer 1

This is an example of pre-incorporation contract because it has been entered into by the promoter Kairul of Sungguh Hebat Sdn. Bhd. on behalf of it before its incorporation. Even though, Kairul has acted as an agent of the company in representing its interest, during the process of registration, the principal did not exist at that time. Therefore, contracts entered into by the promoters are not binding on the company or the third party. However, in order to enforce such a contract, the members of the company must ratify it and accordingly communicate their acceptance to the other party involved. Unless this is done, the promoters shall be personally liable for such contracts.

In the given case, the contract has not been ratified or accepted by the company in its meeting after incorporation, hence, it is not binding on the company but on the promoter Kairul and the third party who can demand specific performance against each other.