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Incorporation

Kelner v. Baxter, (1866) LR 2 CP 174

KELNER V. BAXTER

Kelner v. Baxter, (1866) LR 2 CP 174

ISSUE:

  • Whether the agents i.e. the promoters of the company were liable for the pre-incorporation contract when the contract had been ratified by Gravesend after the incorporation?

RULE:

  • This case is concerned with the enforcement of a pre-incorporation contract. The position is that a pre-incorporation contract does not bind the company, although certain exceptions exist in this regard. However, this case reaffirmed the standing position that a company is not bound by any contract that it may have entered into before the company was incorporated.

FACTS:

  • A new hotel company was going to be established by the name of “Gravesend Royal Alexandra Hotel Company”. The promoters of this company entered into a contract for the purchase of wine for the hotel.
  • Although the contract was for the purchase of wine for Gravesend after the hotel started functioning, the contract was signed before the registration of Gravesend Company. For this reason, the contract was a pre-incorporation contract.
  • Later on the company, Gravesend was registered. By the time the company was registered the wine had been consumed, and before the payment could be realized in total, the company went into liquidation.
  • Eventually, for the recovery of money for the wine, the promoters of the company who had entered into the contract for the company were sued, for acting as the agents of the company when the contract was entered into on the part of the company.
  • However, the promoters contended that they were not liable for the repayment of the same since they stated that the contract had been ratified when the company was incorporated incomplete. This implied that the liability had indeed shifted on to the company.

HELD:

  • The Court held that the situation is where a promoter had entered into a contract on behalf of a party that did not exist at the time when such contract was being formed. The company had failed to repay Mr. Kelner, the seller of the wine.
  • The judges observed that the principal-agent relationship between the promoters and the company cannot be in existence before the incorporation, since the company in itself i.e. the principal was not in existence, leading to the conclusion that the promoters could not be agents of the company in the first place.
  • The judges also noted that the company could not take liability for the contract which was entered into before incorporation, neither by way of adoption nor by way of ratification. The court held that the promoters were personally liable for the contract so entered into since it was the promoters who were the parties that consented to enter into the contract.
Categories
Incorporation

Erlanger v. New Sombrero Phosphate Co. (1878) 3 App Cas 1218

ERLANGER V. NEW SOMBRERO PHOSPHATE CO.

Erlanger v. New Sombrero Phosphate Co., (1878) 3 App Cas 1218

ISSUE:

  • Was Erlanger liable to Phosphate due to not disclosing his conflict of interest?

RULE:

  • It concerned rescission for misrepresentation and how the impossibility of counter restitution may be a bar to rescission. It is also an important illustration of how promoters of a company stand in a fiduciary relationship with subscribers.

FACTS:

  • Erlanger was a French banker who bought the lease for the Anguilian island of “Sombrero”, phosphate mining for £55,000.
  • Erlanger then established New Erlanger Phosphate Co (Phosphate), before selling Sombrero’s lease to Phosphate for £110,000 through a nominee.
  • One of Phosphate’s directors was the Lord Mayor of London, who was independent of Erlanger’s initial group of founders. Two other directors were abroad, and the other directors were puppet directors of Erlanger.
  • Due Erlanger’s strong control over Phosphate, the company was essentially an extension of Erlanger. Phosphate ratified the sale of the lease.
  • Many people invested in Phosphate due to Erlanger’s skills at promotion. Eventually, the investors realised that Erlanger had sold the lease to Phosphate for double the price he had bought it for, and Phosphate sued Erlanger for recession due to non-disclosure and an account of profits.

HELD:

  • Erlanger was a promoter for Phosphate. The House of Lords unanimously held that the relationship between a promoter and a newly formed company attracts a fiduciary relationship.
  • The majority (Lord Cairns LC dissenting) also held that the contract can be rescinded.
  • A promoter owes duties of good faith and honesty to the company.
  • Erlanger should have declared any conflicting interests to the company promoted and cannot make any “secret profits”.
  • A promoter who breaches any duty to the company by failing to disclose to the company conflicting interests would be liable. The company is able to seek remedies such as rescission of contract and recovery of profits.
  • A constructive trust can also be formed for the profits gained by the promoter in breach of his or her duties.
Categories
Incorporation

Gluckstein v. Barnes,  [1900] AC 240

GLUCKSTEIN V. BARNES

Gluckstein v. Barnes, [1900] AC 240

ISSUE:

  • Whether the promoters breached their fiduciary duties to the company?

RULE:

  • Promoters of a company had acquired a property intending its resale through the sale of shares in the company. In doing so the original directors made a substantial profit which they did not disclose (though it was discoverable). The company became insolvent and investors sought repayment of the hidden profit.

FACTS:

  • Gluckstein and 3 others allegedly purchased the property for £140,000 and then promoted a company to which they on-sold the property for £180,000.
  • These persons then made up the first directors of the newly formed company. They disclosed the £40,000 profit, but not another £20,000 profit as they originally purchased the land for £120,000 and not £140,000.

HELD:

  • The House of Lords held that the syndicate had breached their fiduciary duties and were liable to account to the company for the secret profit that they had made as the company lacked independent directors.
Categories
Incorporation

Weavers Mills v. Balkis Animal AIR 1969 Mad 462

WEAVERS MILLS V. BALKIS ANIMAL

Weavers Mills v. Balkis Animal AIR 1969 Mad 462

ISSUE:

  • Can the company’s title over the property be set aside even in the absence of conveyance of property by the promoter in favour of the company after its incorporation?

RULE:

  • The logic which was followed was that the promoter is a quasi-trustee and can be obliged to transfer the property. Specific Relief Act which was passed in 1963 provided some relief to the Promoters. Section 15(h) of this act says that if a public company has made a contract with the promoters before incorporation, they can impose it. It says that the contracts entered by the promoters are for the benefit of the company. The company should accept the terms of the contract. Not only the companies can enforce pre incorporation contracts, but other parties can also enforce it on behalf of the company.

FACTS:

  • The promoters entered an oral contract with the company- Weavers Mills to buy properties on behalf of the company before its incorporation. The second defendant was the managing director of the Weavers Mills.
  • The first respondent issued a money decree against the second respondent and attached the suit property in execution of the decree.
  • The second defendant claimed that the property belonged to Weavers Mills, and he did not have the right to attach the property, but this claim got rejected.
  • After incorporation, the company took over the possession of the properties and started constructing building on it. Conveyance of properties was not held by the promoters. Despite this, the court held that company’s title over the properties cannot be set aside.
  • There was no conveyance. There was no written agreement about the purchase of properties by the promoters. There was also a collusion between the two respondents and the plaintiff argued that they tried to conduct a fraud. He also said that the promoters did not tell the directors of the company about the situation and kept them in dark.

HELD:

  • It was held that even in the absence of conveyance of property by the promoter in favour of the company after its incorporation, the company’s title over the property could not be set aside.