Fortress Ltd - Promoters Liability - Coursework Example

Fortress Ltd Promoters’ Liability Part A. The Loan Agreement Between Fortress Ltd. and Pioneer Bank The loan agreement between Fortress Ltd. and Pioneer Bank in February 2010 was for 10,000 pounds for the purpose of financing the proposed company’s bid for a contract to for security services at the Olympic Games 2012. Moreover, Fortress Ltd. was not incorporated until the following month, March. All indications are therefore that the loan agreement was established before Fortress Ltd. was actually incorporated. Adam’s liability is therefore established on the basis of a pre-incorporation contract and liability will be applicable is Adam is by law, a promoter of the company. A promoter of a company is an individual who “undertakes to form a company with reference to a given project and to see it going, and who takes the necessary steps to accomplish that purpose (Twycross v Grant 1877, 469). On the facts, Adam undertook to form Fortress Ltd. for the express purpose of securing a security services project for the Olympic games. All indications are that Adam intends to supervise the project and to ensure that it is accomplished. The mere fact that he is securing the loan for the proposed company’s project substantiates his supervision of the project. Moreover, since the term promoter is essentially a business term, whether or not a person is a promoter is question of fact (Whaley Bridge Calico Printing Co. v Green 1880, 109). On the facts of the case for discussion and pursuant to common law, Adam is for all intents a purposes a promoter. In general a company cannot be held liable for the breach of a contract that was concluded prior to the company’s incorporation (Kelner v Baxter1886 174). In cases where the contract was formed prior to the formation of the company, the person or promoters acting for the proposed company prior to its incorporation are generally liable in a personal capacity (Kelner v Baxter1886 174). The ruling in Phonogram Ltd. v Lane (1982) established that liability on the part of a promoter in a pre-incorporation contract would be sustained provided there was no agreement to the contrary. At common law however, the situation relative to a promoter’s liability in pre-incorporation contracts was not altogether clear. This was particularly so when Section 36 (C) of the Companies Act 1985 overruled the decision in Kelner v Baxter and essentially codified the decision in Phonogram Ltd. v Lane (1982). Section 36(C) which was further amended by Section 51 of the Companies Act 2006 provided that pre-incorporation contracts would have effect provided there were no agreements otherwise. In the absence of an agreement excluding liability, both the company and the promoter acting as agent would be liable for breach of the contract in a personal capacity (Companies Act 1985, Section 36(C)(1)). Section 36(C) (1) however, did not clear up the confusion as there was some confusion as to whether or not it was necessary for the wronged party to know that the company had not yet been incorporated (Bourne 2011, p. 48). For instance it was decided in (Cotronic (UK) Ltd. v Dexonie 1991,721) that it must be shown that the defendant was purporting to act on behalf of a proposed company. In another case it held that liability as mutually exclusive in that both the third party acting on behalf of the proposed company and the other contracting party were equally liable for breach of the contract (Braymist Ltd. v Wise Finance Co. Ltd. 2002, 273). In other words, there was no definitive rule of law determining when and if a promoter could be liable for a breach of a pre-incorporation contract. There were instances where a promoter could be liable only if it was clear that the other contracting party did not know that the company was incorporated at the time of entering an agreement. In other instances, liability was assigned to the promoter automatically (Savirimuthu 2003, 203). As the law currently stands, Section 51(1) of the Companies Act 2006 will apply to determine Adam’s liability relative to the loan agreement between Pioneer Bank and Fortress Ltd. The implementation of Section 51(1) of the Companies Act 2006 should operate to clear up any confusion as to whether or not Adam is personally liable to Pioneer Bank for the pre-incorporation loan of 10,000 pounds. Section 51(1) of the Companies Act 2006 provides that: A contract which purports to be made by or on behalf of a company, has effect, at a time when the company has not been formed, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and his is personally liable for the contract accordingly (Companies Act 2006, Section 51(1)). It therefore follows that in order for Adam to be exempt from liability there will have to be an express agreement to the contrary. As held in Phonogram v Ltd (1982) there would have to be an agreement that is tantamount to an exclusion of liability provision. On the facts of the case for discussion there does not appear to be such an agreement in place. Pursuant to Section 51(1), Adam must have been purporting to act on behalf of Fortress Ltd. The wording of the contract specifically states that it is between Fortress Ltd. and Pioneer Bank. Moreover, Adam was negotiating and agreeing to the terms of the agreement on Fortress Ltd. Therefore there is no doubt that Adam was purporting to act on behalf of Fortress limited. Therefore based on the codification of promoters’ liability in pre-incorporation contracts by virtue of Section 51(1) of the Companies Act 2006 and its consistency with the ruling in Phonogram v Ltd. (1982), Adam is personally liable for the defaulted loan of 10,000 pounds to Fortress Ltd. There does not appear to be an exclusion from liability clause. Therefore Adam is bound to discharge the loan made between Pioneer Bank and Fortress Ltd. Part B. Promoters’ Duties The issue is whether or not Adam as promoter breached his duties as promoter by the sale of a van from his family’s company Complex Ltd. at an excessive price to Fortress Ltd and failed to disclose his interest in Complex to the shareholders of the company. At common law the promoters’ duties toward a corporation that he is establishing is aligned to the fiduciary duties typically associated with corporate directors (Bourne 2011, p. 42). These fiduciary duties are typically defined in terms of integrity, honesty and good faith together with duties of prudence, competence and care in the conduct of business for or on behalf of the company (Fisher 2003, p. 508). In acting within the prescribed parameters of the fiduciary duty imposed on promoters, Adam is under a duty to disclose the fact that he is selling a van to the company for a profit (Bourne 2011, p. 42). That disclosure must be made to the shareholders, either those in existence or those who are going to be shareholders of the company (Salomon v A. Salomon & Co. Ltd. 1897).1 Since Adam did not disclose the excessive profit to the shareholders he is in breach of his fiduciary duty as a promoter. It is not enough to merely report a profit. The actual size and extent of the profit must be disclosed in order for the promoter to discharge his or her fiduciary duties (Gluckstein v Barnes 1900). Adam may escape liability for failure to disclose the sale of the van and the profit he obtained to shareholders is if he actually disclosed the details of the transaction to the directors of Fortress Ltd. (Erlanger v New Sombrero Phosphate Co. 1878). There is no evidence on the facts of the case for discussion indicating that Adam disclosed the details of the transaction to the directors. On the facts, it would appear that Adam did not report the profit or the sale to either shareholders of directors of Fortress Ltd. The facts of Gluckstein v Barnes (1900) are vastly similar to the facts of the case for discussion. In Gluckstein v Barnes (1900) promoters disclosed a profit that was being made relative to the resale of a hall to the company but did not disclose a profit that was being made relative to specific mortgages attached to the hall upon a discounted sale. A prospectus had been issue indicating that the promoter had agreed to buy the hall for a sum that exceeded the actual value. Lord MacNaghten noted that the promoters, “on the faith of” the prospectus: Collected subscriptions from a confiding and credulous public. And then comes the last act. Secretly, and therefore dishonestly, they put into their own pockets the difference between the real and the pretended price (Gluckstein v Barnes 1900, 240). Based on the ruling in Gluckstein v Barnes (1900).Adam therefore acted secretly and dishonestly in failing to disclose his interest in Complex Ltd. and his profit from the inflated selling price of the van. Therefore Adam, as promoter is in breach of his fiduciary duties to the shareholders and the company as a whole. The difficulty is whether or not Adam’s fiduciary duties as a promoter continues after the incorporation of Fortress Ltd. Since the van was purchased by Complex Ltd. on 2 March 2010 and Fortress was not incorporated until 10 March 2010, it is arguable that Adam was indeed acting as a promoter since his involvement with the van’s purchase predates the company’s incorporation. Moreover, is whether or not the profits derived from the sale of the vale to Fortress relates to the “pre-promotion period and so would be rightfully the property of the promoter” (Bourne 2011, p. 43). In such a case it has been ruled that the company may not seek to recover the actual profits but instead may seek rescission of the sale’s contract (Re Cape Breton Co. v Cavendish-Bentinck v Fenn 1887). Since Adam’s dishonesty and lack of good faith involves a period where he was acting as promoter of the company, he is using information derived from his promotion period and during the period of pre-incorporation. The fact that the period between the purchase of the van by Complex and the sale of the van to Fortress is so close, it appears that the deception was deliberately orchestrated. Therefore Adam would be most likely be found in breach of his duty as promoter. The remedies for breach of promoters’ duties are for either a return of the profits, or rescission. Rescission may not be an option since the company is in liquidation. This is because rescission is not a viable remedy where it is impossible (Bourne 2011, p. 43). It is possible for Fortress to sue for damages. It was held in Re Leeds and Hanley Theatres of Varieties Ltd. (1902) that a promoter could be sued for damages in a case where the promoter sold property to the company for an excessive price. It therefore follows that the shareholders of Fortress Ltd. may sue for a return of the profits or any damages that accrued to them as a result of Adam’s breach of his fiduciary duties as promoter of the company. Bibliography Bourne, N. Bourne on Company Law. Oxon, UK: Routledge, 2011. Braymist Ltd. v Wise Finance Co. Ltd. [2002] Ch. 273. Companies Act 1985. Cotronic (UK) Ltd. v Dexonie [1991] BCLC 721. Erlanger v New Sombrero Phosphate Co. [1878] 3 App. Cas. 1218. Fisher, J. The Law of Investor Protection. London UK: Sweet and Maxwell, 2003. Gluckstein v Barnes [1900] AC 240 Kelner v Baxter [1886] LR 2 CP, 174. Lagunas Nitrate Company v Lagunas Syndicate [1899] 2 Ch. 392. Phonogram Ltd. v Lane [1982] QB 939. Re Cape Breton Co. v Cavendish-Bentinck v Fenn [1887] 12 App Cas 652. Re Leeds and Hanley Theatres of Varieties Ltd. [1902] 2 CH 809. Salomon v A. Salomon & Co. Ltd. [1897] AC 22. Savirimuthu, J. “Pre-Incorporation Contracts and the Problem of Corporate Fundamentalism: Are Promoters Proverbially Profuse”. Company Lawyer, Vol. 24(7), 2003, 196-209. Twycross v Grant [1877] 2 CPD 469. Whaley Bridge Calico Printing Co. v Green [1880] 5 QBD 109. Read More