The Company Law for Accounts - Essay Example

Company Law for Accounts Introduction A promoter of a company has many duties including disclosure of any profits made during the promotion of the company. This means that one must not make any secret profit without disclosing it if he a promoter. If one of the promoters uses the name of a company to incorporate to make profits or any transaction concerning the pre-incorporated company, then he/she is required to disclose those profits fully. This is mean to protect shareholders from exploitation by promoters. In case a promoter makes a profit secretly, the company may commence a legal action for rescission or recovery of the profits made secretly. This promoter is assumed to have executed without outmost good faith. This means that disclosure of their activities is the most important issue and they must work within the objectives of the promoters and must use their skills knowledge for the best of the firm (Siddharthacadey, 2010). A promoter is any person involved in the planning to incorporate, or initiate a running of a company, other than persons involved in a purely professional capacity. A promoter need not necessarily be the main person behind the incorporation, but he must have some executive function. The stereotype of a company and sells his business to it is a promoter. A promoter has a fiduciary duty to the company he is forming and this requires him to disclose all profits he makes during the promotion of the company. A fiduciary is a person whom the law requires to be loyal to the interests of some other person, who is usually called the “beneficiary”.” (Slawson, 1996). Fiduciary relationship is one of the basic features of a contractual agreement as in this kind of legal relationship on party has to act as the fiduciary to the beneficiary. When two or more persons have obligation to each other it is described as fiduciary relationship. This relationship creates obligations, which ought to be fulfilled. The courts have established the principle that a promoter stands in a fiduciary relationship with the company, which he is forming. This does not mean that he is barred from making a profit out of the promotion. It means that any profit made must be disclosed to the company. Breach of promoters’ duty If a promoter makes a profit and fails to disclose he breaches his duty of fiduciary. In the event of non- disclosure of profits the company may commence proceedings for rescission or for recovery of the undisclosed profits. The case study The case at hand is that Candy received a gift that he did not disclose to the other promoters. Therefore, he should be compelled to rescind the property to the company. The law prohibits individuals from unjustly enriching themselves at the expense of other partners. The other party should be compensated adequately to act as consideration. However, it should be noted that not all instances that parties are required to make compensated. In the case of unformed company the promoter is required to disclose rather compensate. In contract law, the pre-incorporation contracts are not enforceable, but the benefit accruing from it is disc losable. Being the fiduciary person Candy had certain legal obligations to fulfil towards the beneficiary. However, the very moment the Candy has taken a wrong approach of lying company, the bond of fiduciary relationship has been violated. This was confirmed in the case of Gluckstein v Barnes [1900]. In the case promoters had made profits before incorporation but they failed to disclose this fact. In their case, they misrepresented facts in prospectus that they were to buy a property at certain amount which they were unable to raise. The public relied on this statement and made a decision to subscribe. After they had received the subscription. After a brief career, the company is ordered to be wound up. In the course of liquidation, the trick is discovered. It was held that they should return all profits they had made including penalties. The judge said To talk of disclosure to the thing called the company, when yet there were no shareholders, is a mere farce. To the intending shareholders there was no disclosure at all. On them was practiced an elaborate system of deception. The ruling provides proceedings against promoter of a company who is found to act in contrast to the requirements of fiduciary and disclosure duties. A promoter, who may found guilty of making a secret profit, will be required to return and be fined (Donald, Mckinsey and West, 2007). Conclusion The company should take legal action against Candy for rescission of the secret profit made. Profit disclosure is necessary. It is guidance or a check and balance system ensures against malpractices in the business world. However, two models that can be used may sometimes generate confusion. The rules-based deters people from committing a bad act, but it sometimes hamper in the improvement of corporate practices due to its strict guidelines. On the other hand, the principles-based is flexible and enterprises are able to innovate on certain practices to suit their needs. This type of control equates the promoter of a given company and its shareholders. Both approaches have their pros and cons and both can learn from each other. Since both have been rocked by corporate collapses that point to the pitfalls in their governance, one can adopt practices of the other that should prevent grave mistakes or impede fraudulent acts from being committed 2. Pre-incorporation contracts Introduction Pre-incorporation contracts are not enforceable because there was no legal principal at time the contact was signed. Thus, a contract made on behalf of a company before its incorporation does not bind the company, nor can it be enforced or ratified by the company after incorporation. The idea that the company was in the process of incorporation will not be an excuse of making the contract legal. In the process of promoting a company, the promoters usually incur liabilities relating to expenses and properties for the company to be formed. The company will use the property now or in the future but a contact acquiring them will not be enforced in the court of law. The ratification of by the company after incorporation does not make the transaction legal.  Therefore, pre-incorporation contracts will have to be binding in honour only, or the promoter will have to undertake personal liability. It is clear from such observation that the element of agreement between both the parties becomes extremely important. If either of the parties violates the terms and conditions that constitute the agreement, it will certainly lead to legal obligation of the violating party to the other. However, if there is no principal there will be no contract (McCaughey, 2006). Pre-incorporation contracts effects on promoters Where one purports to make a contract on behalf of company, at a time when the company has not been formed, then the subject to any agreement to the contract has effect acting as an agent. The company law provides for an express agreement to the contrary, it does not envisage an agreement whereby the promoter incurs no liability and cannot enforced the contract since such an agreement would be invalid for lack of consideration. The act envisages that the promoter protects himself by agreeing that the promoter’s liability shall cease when the company after incorporation, enters into a similar agreement. He should also agreeing that if the company does not enter into such and within affixed period either party may rescind. The case study In this case, the contract in question is pre-incorporation that is not enforceable in any court of law. In a valid contract, there are three essential elements such as the contractual expression, subject matter and the contracting parties. The commodity and price are the two essential components of a sale contract. The property must be valuable and specific. The legal authority and legal capacity of the contracting parties are important factors in a contract. The contractual obligations and the specific requirements are clarified by the common law with the help of several terms and ideas. The capacity and authority of the parties involved in a contract are specified clearly. The various clauses involved with offer and acceptance are also emphasized(Roch, 2011). In the given case of contract between the Candy and Yuenshiu, the contractual obligations are clearly defined and the parties involved are competent to enter into a valid contract but the parties do not have the capacity to enter contract. Candy has no principle and he has not discharged from bankruptcy. Yuenshiu contract to work with a non-existence company is not a valid contract since it has no principal to support it. Hereby, Yuenshiu can legally refuse honour the contract (Collins, 2003). In a similar case of the only person who can enforce the contract is Candy if he was acting as his own principle. In another case, Black v Smallwood (1966), pre-incorporation contracts were not enforced on the grounds that the contracts was between a third party and unformed company. It was held that pre-incorporation contracts could not be enforced in any court of law. will not be enforced in any court of law(Docstoc , 1996). In another case of KELNER v BAXTER 1866 B, who was promoting a company, which had not registered, made a contract on behalf of die Company with K. After the company had been registered, it attempted to ratify the contract. Later, the company, due to its insolvency, went into liquidation. Held that B was personally liable and no subsequent ratification by the company could relieve him from liability unless K agreed to release him. The ramification for by company is clear act in ways whereby the directors place themselves in positions that enable them to appropriately check and guide the company’s management. Directors have to be well versed with the basics of the business in which their company is engaged in. They are under constant obligation to remain well informed about the before and incorporation activities and about the company’s financial status. Although directors are bound to take and initiate reasonable measures to place themselves as guides and evaluators of the management, they can depend on other functionaries in areas in which extreme reliance is not required. This means that there is no way the company enforce this contract(Berryman, Gillen, Berryman, Girard, McDorman, Gillen, Woodman and Gillen, 2006). Conclusion The establish case does not recognize pre-incorporation contracts and it the responsibility of the promoter for ensuring contracts entered into are enforceable. Nobody will successful enforce this contract. Though Yuenshiu knew that cancellation of contract would lead to failure of the company is not obliged to honour the contract. It is not a matter for the directors to know about it. The breach of contract, thus, happens, first, maliciously drawing the client under a contract towards fulfilment of the terms and conditions as prescribed by the contract paper and finally violation of the fiduciary relationship that has been caused by the damage of the instruments. The contract was not intended to cause damage to any promoter but they did not provide adequate attention towards fulfilling the requirements of the beneficiary. 3. Promoter criminal liability A promoter of a company is personally liable for contracts entered into before incorporation. However, the company once formed can assume liability by novation. In this case, the promoter can be held criminally liable because he knew was bankrupt and he acted for unformed company an agent without disclosing his bankruptcy status. A bankrupt has no capacity to act as an agent. The measure of common law damages is assessed as being the amount needed to compensate the third party for not having an effective contract with the purported principal. Thus, it is necessary to calculate the amount that the third party would have recovered from the unformed company for non-performance of the contract (Macdonald and Koffman, 2007). 5. Change of Name The name of the company is in the memorandum of association. To amend a section of the memorandum of association a special is required. (Australia securities and investment commission, 2011). The name of the company is very sensitive and must be handled with extreme caution. This is largely because they form a brand that is recognised by the public and used for trading.. There is therefore need to urgently ensure that the matter is amicably resolved. First, it is important to clarify the rules that are used in amending the memorandum and eventually the name of the company. Change of company name requires a Special Resolution by Shareholders of the Company. The company must have a good reason for change of the company. This protects the public from losing their assets to the old company. This name proposed if not acceptable by the registrar, it would inform the company and direct them to change the name of the company. The change of the name as directed by registrar of companies will be open for only 21 days from the date of issuance of a direction. Then this name will be registered using the normal procedure of registering business name. The company will be informed that their name has been changed by issuing a certificate of change of name. The change of name does not change the company position in assets and obligations. All rights of all parties with a stake in the company are preserved. 6 Websites used Website Rating Comment www.siddharthacademy.com/5_COMPANIES.pdf 8 It had materials that enabled the completion of pre-incorporation contract http://www.asic.gov.au/asic/asic.nsf/byheadline/Changing+a+company+name?opendocument 7 It provided materials for change of name procedure. 7 It provided liabilities and remedy available to parties in the pre-incorporation. www.oup.com/uk/orc/bin/9780199599066/.../ansguidance_ch02.pdf 8 It provided materials for contract law http://www.docstoc.com/docs/47780539/Pre-Incorporation-Agreement 5 The website had little materials that were used in this case. Reference List Australia securities and investment commission. 2011. ‘Changing a company name’. Australia securities and investment commission < /[Accessed 31 October 2011]. Berryman, J., Gillen, W., Berryman, F., Girard, M., McDorman l., Gillen, M., Woodman, F., and Gillen-W., 2006. The Law of Trusts: A Contextual Approach. Toronto: Emond Montgomery Publication. Brillinger, R., 2006. Canadian Business Law. Toronto: Emond Montgomery Publication. Docstoc , 1996. Pre-Incorporation-Agreement [Accessed 31 October 2011]. Donald C., Mckinsey, J. and West, B., 2007. Understanding the Law. Mason: South-Western College Pub. Macdonald, E. &, Koffman, L., 2007. The Law of Contract London: Oxford University Press. McGaughey, R., 2006. The Corporation's Liability to Third Parties [Accessed 31 October 2011]. Roch, L. 2011. Company law concentrate- promotion of the company and pre-incorporation contracts. Oxford university press. >[Accessed 31 October 2011]. Siddharthacadey, 2010. ‘5 COMPANIES- pre-incorporation contract made by the promoters’. www.siddharthacademy.com/5_COMPANIES.pdf> [Accessed 31 October 2011]. Slawson, W., 1996. Binding promises: the late 20th century reformation of contract law, Princeton University Press. Read More