Actually, the story is as follows:
First the Shee leave the planet Albia in the Ark, escaping the first volcanic eruption that destroys most of the planet.
C1 takes place after this first eruption. C3 takes place on the Ark itself, which supposedly orbits the spherical planet the Shee chose as their new home. They possibly departed the ship and left it in orbit.
Somewhere else on the planet, a Shee that was experimenting with something called the 'Warp' completely failed to notice everyone else had left. He was possibly travelling the rather unpredictable Warp and completely missed the launch, probably arriving back on Albia decades after the events in C1. This Shee then builds/grows the Capillata and launches it using another volcano, chasing the Ark. This second eruption uncovers more of the Shee's technology and sets the scene for Creatures 2.
The Capillata is the setting for the C3 expansion 'Docking Station', which works as a standalone free game but can also be 'docked' with C3 to give you a larger world and some of the additional features, such as letting your Creatures travel to other player's worlds.
There's more background stories that came with the various breeds, but they're a bit silly. They mostly involve the Warp.
If you want a free fix of Creatures, I recommend you get Docking Station (it's free!) and check the community for additional rooms, plant life, animals, toys, useful objects and Creature breeds. There's a lot of stuff out there and plenty of stuff still gets released from time to time. One of the latest release floods even contained a rather awesome Lovecraft-themed room for aquatic creatures.