Assigment Law Essay Example

entered into a pre-incorporation contract and which at the same time, Tyra in the eyes of law, shall be referred as a promoter. Consequently, a pre-incorporation contract is one which is purportedly made by or on behalf of a company at a time when the company has not yet been incorporated.

In addition, Tyra was referred as a promoter because she is the person entered into contracts on behalf of a company before that company has received its certificate of incorporation. In Twycross v Grant (1877) 2 CPD 469, for example, Cockburn CJ declared that a promoter was: “one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose” In regards, the CayoteUgly Bhd (CUB) was formed and the Board of Director’s meeting has decided to issue their shares to the public.

Impulsively, Tyra’s employment was come to an end, and it was absolutely contravened with the contract she had, which was stated that she will continue to work with the company once the company has been formed for a period of three years. Besides that, she will be paid for RM 10,000 per month. Hence, the issue is whether Tyra would be successful in her action against CUB for breach of contract or not? CUB is a public company and by that it may issue shares to the public with the requirement to issue form of application for shares or debentures with a prospectus [1].

As evidence on this, Section 15 provides that a public company is not affected by the restrictions, limitations and prohibitions and it may offer its

shares and debentures to members of the public. On the other hands, a company limited by shares is defined as, “a company formed on the principle of having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them. ” [2] Nevertheless, CUB desires to venture into a new business which include on manufacturing and selling beauty products and liquor.

At this point of view, we have to look at the company’s main objects. It is a principle of company law that companies have implied powers to do anything which is incidental to their stated objects. [3] Inadvertently, CUB had entered into a contract with Slippery WhenWet Sdn. Bhd. (SWW) that was presently has been discontented by Giselle because she is a Muslim and doesn’t want to be associated with a company that manufacture and sells liquor.

The matter for doctrine of ultra virus may exist and therefore, the issue that can be raised is whether Giselle would be able to restraint the company from carrying on the business of manufacturing and selling liquor or not? Contents Issue 1: Whether Tyra would be successful in her action against CUB for breach of contract or not? Firstly, it is necessary to structure the law that relates to Tyra’s situation. It was illustrated that Tyra has been entered into a contract with Pearl, Jade and Diamond, and generally, their activity comes into a pre-incorporation contract.

In addition, Tyra shall be regarded as a promoter, as the term is used to enlighten on a person who involved in the formation of the company, and basically who enter into contracts on

behalf of a company before that company has received its certificate of incorporation. The problem takes place when Tyra was being terminated ahead of time by the Board of Directors meeting. To determine with the first issue, it is needed to see whether there is a validity of contract between Tyra and the three fellows, who are Jade, Pearl and Diamond.

At common law, pre-incorporation contract is completely void and it has no legal personality and no contractual capacity. A company before its incorporation is incapable of entering into a contract by itself, and equally incapable of acting through an agent [4]. Among others, a pre-incorporation contract was also not ratifiable by the company after he had been formed- Kelner v Baxter (1866), L. R. 2 C. P. 174 (Common Pleas). As the situation is prior to incorporation, there is another position of such transactions.

Consequently, Tyra’s contract with Pearl, Jade and Diamond is null but, the common law position have been modified by Section 35(1) and (2). Section 35(1) 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.

Based on the section 35(1), it does not really specify the time limit for ratification. It is suggested that the ratification shall be held within a reasonable time and there is no specific

procedure for ratification in respect of a pre-incorporation contract. Unless, the articles of a company provide otherwise, it seems that ratification under section 35(1) may be made by the Board of Directors on behalf of the company or by an authorised agent of the company. The Act is silent on how ratification of pre-incorporation contract should be made.

However, in Ahmad Bin Salleh v Rawang Hills Resort Sdn Bhd, it is suggested that a board resolution that has the effect confirming that the company has adopted the pre-incorporation contract will suffice. Section 35(2) 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 express agreement to the contrary be personally bound by the contract or other transactions and entitled to the benefit thereof.

This section explains that the contract will be regarded as binding between the third party and the person who acted on behalf of the company and each can sue each other to enforce the contract unless there is an agreement to the contrary. Pertaining to Tyra’s case, she has two options either to sue under the common law for breach of contract or by observing the Malaysian position for the effects of the pre-incorporation contract. As the Malaysian position explains, there must be a ratification made after the registration of the company is completed.

Apparently, there is no specification to measure such ratification for as long as it is reasonable and the contract or transaction made must have been entered into “by any person on behalf of a company prior to its formation” and these people may

be the promoters of the company [5]. Tyra’s situation is much similar to the case of Cosmic Insurance Corpn Ltd v Khoo Chiang Poh, where it was held by the Privy Council that there was a contract between the appellants and respondent appointing respondent as the managing director of the company.

At prima facie, the effects of pre-incorporation shall do a company to be bound by and entitled to the benefit of the contract as if it had been in existence at the day of the contract. In other words, ratification under section 35 shall operate retrospectively. Tyra may enforce the pre-incorporation contract against the person who executes the contract on behalf of the non-existent company and that person shall be personally liable if the company fail to ratify the contract after its registration.

As vis-a-vis, the directors of CUB have decided to terminate Tyra’s employment prematurely. The term of contract states Tyra will continue to work with CUB after it has been formed for a period of three years. As a matter of fact, Pearl, Jade and Diamond are personally liable because CUB failed to ratify the contract after its registration. Therefore, if CUB failed to ratify the contract, the person acting on behalf will be personally liable. Issue 2: Whether Giselle would be able to restraint the company from carrying on the business of manufacturing and selling liquor or not?

Under the common law position, anything done outside the object clause of the company is considered as ultra vires and void. This can be related to a case of Ashbury and Railway Carriage & Iron Co. v Riche. In this case, the objective of the company

is to make, sell, lend and hire railway carriage. However the director had suddenly interested in construction of railway. It was held that the action is void and also failed as the it was outside the objectives of the company. Another case that can be related to ultra vires is Re Jon Beaufort(London) Ltd[1953] Ch 131.

The company’s objective is to tailor and manufacture of clothes and materials. In addition, they wish to manufactured veneered panels and order coke using the company letterhead that also state the veneered panel manufacturing. The supplier of coke then enforce payment, however the action fails as the supplier is well notice of the company. However, under the Malaysian position, the act of ultra vires is considered valid. This is mainly for the purpose to protect the third party.

No act or purported act of a company (including the entering into of an agreement by the company and including any act done on behalf of a company by an officer or agent of the company under any purported authority, whether express or implied, of the company) and no conveyance or transfer of property, whether real or personal, to or by a company shall be invalid by reason only of the fact that the company was without capacity or power to do the act or to execute or take the conveyance or transfer.

2) Any such lack of capacity or power may be asserted or relied upon only in - (a) proceedings against the company by any member of the company or, where the company has issued debentures secured by a floating charge over all or any of the company's property, by the holder

of any of those debentures or the trustee for the holders of those debentures to restrain the doing of any act or acts or the conveyance or transfer of any property to or by the company; (b) any proceedings by the company or by any member of the company against the present or former officers of the company; or c) any petition by the Minister to wind up the company.

Section 20(2) indicates that any such lack of capacity or power may be asserted or relied upon only in certain situation. First situation was stated under section 20(2)(a); if the member and the holder or a floating charge may restrain the company from doing any act in condition the act is not yet completed. Under section 20(2)(b) and (c) the act must already been done. In the section 20(2)(b) it states that the remedies of this action is that the person or company may sue the director under its personal capacity.

Besides that, section 20(2)(c) stated that it can also plead from the minister to winds up the company if the act of ultra vires has been constantly occurs. Applicable for this case is the company of CayoteUgly Bhd (CUB) was formed to provide service for fashion and dance shows, promotional campaigns and product launches, talent casting and paper doll shows. In this Board of Directors’ meeting, CUB decided to issue their shares to the public. Toward this meeting, Giselle subscribes 30,000 units of shares of CUB.

Six months later, the BOD have decided that the company should venture into new business. The business that they have in mind are manufacturing and selling beauty product and liquor. For

this purposes, CUB entered into a contract too purchase three pieces of land, to be developed into factories from SlipperyWhenWet Sdn Bhd(SWW). Toward this situation the company act not specified in its object or incidental, is regarded as void at common law. Such act is referred to as being ultra vires, that is beyond the power of the company.

That the earlier company object just for provided service for fashion and dance shows, promotional campaigns and product launches, talent casting and paper doll shows. In this situation Giselle can use the doctrine of ultra vires to defense him because toward this doctrine was strictly applied to protect the interest of the shareholders and creditors. By using this doctrine of ultra vires it was extended very broadly in the case of Re Jon Beauforte (London)Ltd.

The court held supplier cannot enforce contract because he had constructive notice that such an activity was outside the company’s object. Refer to the object of the company, they have capability in term of that particular of activities but for the new business the sure not have enough capability to move on for manufacturing and selling beauty product and liquor. So in this situation it can give effect to the company environment and it also can be relate with section 20 Company Act.