L1-5 Flashcards
1
Q
Saloman v Salomon & Co Ltd [1897] AC 22—significance
A
- S transferred his business of boot making, initially run as a sole proprietorship, to a company (Salomon Ltd.), incorporated with members comprising of himself and his family. The price for such transfer was paid to Salomon by way of shares, and debentures having a floating charge (security against debt) on the assets of the company.
Whether a one-man company is a fraud - (1) it confirms Separate Legal Entity (2) Shareholders continue to enjoy limited liability
- There may not be family company if without this principle.
2
Q
Lee v Lee’s Air Farming [1961] AC 12
A
- Company formed by L’s account and L as the principal shareholder + the director. In a work accident, Mr. Lee died then his wife claimed on a workers’ compensation insurance policy by alleging that L was a worker at the time of his death.
Issue: Whether one who has the full government and control of the company can also be a servant of the company
Held: - Rejected the insurer’s argument. The mere fact that someone is a director of a company is no impediment to his entering into a contract to serve the company + no contractual obligations were invalidated by the circumstance that the deceased was sole governing director in whom was vested the full government and control of the company.
Significance - Confirmed: “Companies = separate entitycan contract with their members, directors and outsiders”
3
Q
Good Profit Development Ltd. v Leung Hoi [1992] 2 HKC 539
A
- D offered orally to sell to P the Property by way of transferring to P all his and his wife’s shares in 3rd D in which the only directors and shareholders were D and W. P orally accepted. It is not alleged that the 3rd D was a party to the agreement.
- P argued: the company was the alter ego of the other Ds and a bare trustee holding the property in trust for them was in support of and supplemental to the relief sought against the Ds.
• Issue Whether the Company can be sued in this case
Held: - P’s claim has no merit. “Factually, there cannot be a resulting trust in the property in favour of the D’s because despite the fact that they might have paid part of the purchase money for the property on behalf of or through 3rd D, the money paid by them has been treated as a loan to 3rd D which contradicts any resulting trust.”
- P was not able to point to any fact which can at the present stage give rise to any threat or risk that the property will be disposed of or dealt with in a way detrimental to P prior to the determination of the dispute between him and Ds.
- Applied Salomon, “In a popular sense, a company may in every case be said to carry on business for and on behalf of its shareholders; but this certainly does not in point of law constitute the relation of principal and agent between them or render the shareholders liable to indemnify the company against the debts which it incurs
4
Q
Twycross v Grant (1877)
A
A promoter is one who undertakes to form a company with reference to a given project, and to set it going, and who undertakes the necessary steps to accomplish that purpose
5
Q
Tracy v Mandalay (1953) 88 CLR 215 per Dixon CJ at p 242 #Purpose
A
- ‘Persons who leave it to others to get up the company upon the understanding that they will profit from the operation may become promoter’
6
Q
Emma Silver Mining Co v Grant (1879)
A
- even if one did not play a major role in setting up the company, he may still be considered as a promoter. E.g. anyone who arranged for someone to be a director/ to place shares/ to negotiate a preliminary agreement/to prepare a prospectus
7
Q
Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 #fiduciary #ConsequenceofBreach
A
- D bought the lease for the Anguilian island of “Sombrero”, phosphate mining for £55,000.
- He then established New Erlanger Phosphate Co (P) before selling Sombrero’s lease to P for £110,000 through a nominee. the investors realised that D had sold the lease to P for double the price he had bought it for, and P sued D for recession due to non-disclosure and an account of profits.
Issue: Whether D is liable due to not disclosing to his conflict of interest
Held: - the relationship between a promoter and a newly formed company attracts a #fiduciary relationship. A promoter who breaches any duty to the company by failing to disclose to the company conflicting interests would be liable. D should have declared any conflicting interests to the company promoted and cannot make any “secret profits”.
- Remedies: Contract can be rescinded /resciss]ion—the contract is voidable at the election of the company
Note: - promoter is not an agent nor is he a trustee for the company which he is forming, because (1) a company does not have the capacity to appoint an agent before it comes into existence (2) and therefore, no contract to ratify (3) commercially inviable to apply the strict agency law, if so no one will sign contract with the promoters
o where there is no independent director board formed, then disclosure to the initial members maybe sufficient (Salamon v A Salomon and Co Ltd [1897])
8
Q
Gluckstein v Barnes [1900] AC 240 #Accountofprofits
A
- D, the trustees, formed a syndicate and bought a property for £120,000, but claimed they were paying £140,000. They also promote a company of which they become the directors and buy the property (for the company) for £180,000. In order to fund the purchase, the company invited members of the public to buy shares, for which a prospectus was issued. However, a £20,000 secret profit was not disclosed to the prospective shareholders, but was instead written in with a vague reference to ‘interim investments’. =>D had acquire a property intending its resale through the sale of shares in the company.
Issue: - whether D can be permitted to retain the sums which they have obtained from the company of which they were directors by the fraudulent pretence that they had paid 20,000.
Held: - that the trustees ought to have disclosed to the company the profit of 20,000; the fact that the company could not now rescind was no bar to relief; and that D as one of the trustees was bound to replace that portion of the 20,000. which had been paid to the trustees as their share.
o Statement in the prospectus as to the price of the property was deliberately intended to mislead the shareholders and to conceal the truth from them
reaffirms that disclosure to the initial shareholders is strictly required
9
Q
Re Leeds & Hanley Theatre of Varieties Ltd (1902) 2 Ch 809 #tortdamages#othergroundsforcompensations
A
- the promoter sold a property to the company, which he formed at an overvaluation.
- Held: a breach of duty by the promoter (fraudulent/negligent misrepresentation). D is liable to pay damages to the company. The damages are based upon the loss suffered by the company (available in the tort of negligence or tort of deceit respectively.)
10
Q
Re Cape Breton (1885) #exceptiontoremedy
A
- Though the promoter was in breach of fiduciary duty for non-disclosure of his interests in the transaction, the remedy of account of profits was not available. Because the property was acquired for the promoter’s own account and the promoter could not be regarded as a trustee or fiduciary vis-à-vis the company
11
Q
s.122 of CO (pre-incorporation)
A
1) This section applies if a contract purports to have been made in the name or on behalf of a company before the company was incorporated.
2) Subject to any express agreement to the contrary—
a. the contract has effect as a contract entered into by the person purporting to act for the company or as an agent for the company; and
b. the person is personally liable on the contract and is entitled to enforce the contract.
3) After incorporation, the company may ratify the contract to the same extent as if—
a. the company had already been incorporated when the contract was entered into; and
b. the contract had been entered into on the company’s behalf by an agent acting without the company’s authority.
4) Despite subsection (2)(b), if the contract is ratified by the company, then on and after the ratification, the liability of the person mentioned in that subsection is not greater than the liability that the person would have incurred if the person had entered into the contract after the company’s incorporation as an agent acting without the company’s authority. [i.e. the person can be liable to the extent that he would have been on the basis of breach of warranty of authority. ]
the company is only liable upon ratification of the contract
12
Q
Taylor v Todd [2004] 3 NZLR 76 #description
A
- D entered into a property contract with P “as agent for a company/ies and/or trust(s) to be formed”
- Held: “the description in the agreement itself indicated that it was not made on behalf of a company whose incorporation was in contemplation and which would ratify the contract in a timely fashion but that no decision had been made whether the purchaser would be a company or a trust”
Adequate description of company necessary at time of transaction.
13
Q
Kelner v Baxter#liabilitypassedtothecompany?
A
- Promoters for a new hotel business entered into a contract, purportedly on behalf of the company which was not yet registered, to purchase wine. Money wasn’t paid and the company went into liquidation. Promoters argued that liability under the contract had passed, by ratification, to the company and that they were hence not personally liable.
- Held: as C did not exist at the time of the agreement it would be wholly inoperative unless it was binding on the promoters personally and a stranger cannot by subsequent ratification relieve them from that responsibility. Can avoid personal liability through Novation.
- C is unable to ratify a pre-incorporation contract, since ratification can only be effected by a person at the time of the act; Tinnevelly Sugar Refining Co Ltd v Mirrlees Watson and Yaryan Co Ltd (1984)— principal-agent relationship cannot be in existence before incorporation because the principal of an agent is not in existence. C is not bound by that pre-incorporation contract purportedly made on its behalf, nor can it sue upon the contract.
14
Q
Newborne v Sensolid (GB) Ltd [1954] 1 QB 45 #elaborateKelner
A
- an unformed company entered into a contract, the other contracting party refused to perform his duty.
- Held: before the incorporation C cannot be in existence, and so the contract which the unformed C signed would also be not in existence (=void unless a fresh contract is made after incorporation). So C cannot bring an action for pre-incorporation contract, and also the promoter cannot bring the suit because they were not the party to contract.
15
Q
Delta Construction Co v Lidstone (1979) #followNewborne
A
- where one purports to contract with a TP on behalf of a C not yet formed there is no contract with either the individual or the corporation. One is liable to TP for breach of warranty of authority.
- Damage: based upon what TP would have recovered from C had it existed, and where C has subsequently been formed and become insolvent TP is entitled only to nominal damages
