Ricky`S Footwear Case Analysis - Essay Example

RICKY`S FOOTWEAR CASE ANALYSIS 6TH NOVEMBER PART A By definition as from the case of Twycross v Grant, a promoter is any person who undertakes to form a company with reference to a certain project and to set it going and who takes the necessary steps to accomplish that purpose. This was as stated by CJ Cockburn1. A promoter though not viewed as an agent of the company by law owes fiduciary obligations to the company. He is thus not top put himself in a position that puts him in a conflict with the company in question and is expected to act in good faith. He is therefore expected to make a full disclosure of his personal interests pertaining to the contracts of the company. In addition, a promoter is also expected to disclose any secret profits that he may have made in the process of promoting the company. This is illustrated in the case of Erlanger V New Sombrero Phosphates company limited (1878)2. In this case,Syndicate Erlanger purchased an island that was rich in phosphates at a price of 55,000 pounds; he later promoted a company and sold the sand island to the company he formed at 110,000 pounds which later failed. During the formation of the company, two of the directors were abroad while the rest had been nominated by Erlanger himself. When new directors took over the company, they filed a motion to rescind Erlanger. The court held that no proper disclosure on the sale was made and for this reason the company had a right to rescind the contract. Ricky is the individual who put everything together and saw to Ricky`s footwear becoming a legal company and is therefore the promoter of the company. He sold premises and stock and assets from his former business and made huge profits from the sales. The fiduciary duties that he owes the company would dictate that he discloses these profits. He however did not disclose them to either the members of an independent board or to all the new owners of the company as per the prospectus as was expected of him. For this reason, Ricky`s footwear limited has a legal claim against its promoter for making secret profits which is a breach of his obligations and it is therefore advisable that they pursue the matter in the relevant court of law. However, the company would not have had a case against Ricky had he disclosed the profits. In the event that Ricky`s footwear limited decides to file a motion against Ricky there are certain possible remedies that are available to the company at law should the court rule in their favor. These are: Right to rescission Under this remedy, the contract in question is reverted and relevant efforts are made such that the parties are taken back to the financial positions they were at before the contract was made. In this case, the company could be dissolved and money recovered so that all the investors are refunded the investments they made. Ricky`s footwear company limited would be dissolved, Ricky be made to return all the profits received so that the money can be given back to the shareholders. This is seen in the aforementioned case of Erlanger V New Sombrero Phosphates Company limited3. The court held that the company has the right to rescind the contract since the said promoter had failed to disclose the profits he made. However, this remedy will not be applicable if: it will interfere with the rights of third parties; there is no way that the parties can be taken back to their former financial positions; or the company affirms the contract. In the case where any of the above circumstances are In play, the company will have to settle for other types of remedies. Recovery of the secret profits A promoter could be ordered by the ruling court to pay back the profits he had made secretly to the company as settlement for the breach. Ricky would thus pay back the profits he made from the sale of the premises, stock and other assets which amounted to more than 20,000 pounds to the company. This is backed by the case of Glucksten V Barnes4. The defendants to this case purchased debentures in a company at a time when the company was not doing well so the debentures were bought at low prices. Later on, they bought off the same company for a price of 140,000 pounds. The company picked up and started doing well and thus when they later when they redeemed the debentures, they made a profit of 20,000 pounds. The promoters formed another company and sold the existing company to the new company at a profit of 40,000 pounds. In the prospectus of the new company they had formed, they disclosed the 40,000 pounds they had made from the sale of the company but not the profit they made from redemption of the debentures. The court held that the company has a right to recover the profits they had made because they breached their fiduciary duties to the company. Action for damages This is applicable if Ricky`s footwear has suffered any damages as a result of the non disclosure in which case the company could bring up action against Ricky for the damages caused. This is illustrated in the case of Re Leeds & Hanaley theatres of varieties (1902)5 where the court held that the promoters were guilty of failing to disclose the profits made and thus were ordered to pay damages equivalent of the profit they had made. Part B. Leather supplies cannot claim payment from Ricky footwear ltd as the leather company had entered into a contract with Ricky the business man before it was incorporated. This is according to the law of pre incorporation act in the English statute. In this situation however we have two separate entities, Ricky who owned the business before it was sold and Ricky footwear limited which he sold his business to. Ricky’s business and the formed company are different and Ricky can’t be liable to any liabilities of the company. This is according to the corporate law in which a company is a separate entity from people who created it or the share holders and in case of loses they are borne by shareholders and employees not the upper deck officials according to the limited liability law illustrated by the case Salmon vs. a salmon and co ltd (1897) Corporate separate personality Salmon conducted his business as a sole trader. He sold it to a company incorporated for the purpose called a salmon and co Ltd. The only members were Mr. Salmon, his wife and their five children. Each member took one pound share each. The company bought the business for 39,000 euro. Mr. Salmon subscribed for 20,000 further shares. However 10,000 pounds was not paid by the company, which instead issued salomon with series of debentures and gave him a floating charge on its assets. When the company failed the company’s liquidator contented that the floating charge should not be honored, and salomon should be made responsible for the company’s debts Ricky here acts as the promoter who is an individual who puts together a business especially a corporation and has several roles including financing. Ricky is therefore the principal shareholder and has a contract with incorporators for the footwear company. Generally he acts at the best interests of the company legally and hence owes it fiduciary duties (Anonymous, 2001, electronic communication). The most sited case here is Twycross v Grant Cj Cockburn stated that one who undertakes to form a company with reference to a given subject and to set it going and who takes all the necessary steps to accomplish that purpose Some of the duties of Ricky in the case of this company are to not make undisclosed profits at the expense of this company. In this case he is required to inform whenever he makes a business deal. Ricky could have understood that it was impossible to enter into a contract for supply with the leather company before incorporating his business hence he chose to form the contract as a sole business entity. Once the company is formed such a contract is not approved, rather it’s ratified. This is according to the pre-incorporation contracts under the company’s act of 1983.6 However this contract with the Leather Company and Ricky could be valid if it was in clear and well presented writing. Also if at the registration of the new Ricky and footwear ltd with the registrar of companies according to the registration of companies act it was mentioned that there was a contract to be honored. Alternatively if the pre-incorporation contract was disclosed to the registrar of companies and the memorandum of association this contract could be honored by Ricky footwear limited and that the leather shoe company could be able to claim their payment. For ratification to occur the promoter who is Ricky and the company, footwear ltd are to be in an express agreement.7 (kuala, 0ctober 7, 2008) But since none of those conditions were attained during registration with the registrar of the companies according to the question posted, Ricky should not be bound to pay the leather company as this is a whole new entity with no obligation whatsoever. This could be illustrated by the case Phonogram V Lane (1982) Before incorporating a company called fragile management ltd. L contracted with the plaintiff for a loan of 12,000 to finance a pop group called cheap, mean and nasty. The plaintiff wrote to L in which reference was made to him undertaking to pay. He nevertheless was required to sign and return a copy for and on behalf of fragile management ltd. The company was never performed and the group never performed. The court then held that the defendant was held personally liable to repay the money advanced.8 Ricky entered into a contract on behalf of the corporate formed, a pre incorporation contract, and he was to be held personally liable in case the corporation was not formed. or incase his entity was dissolved. Here the leather company has no claim against the newly incorporated company, legal footwear company. The footwear ltd should not enforce or benefit from the contract Ricky had with the leather company if it has not been ratified by the court of law. It’s important for Ricky to understand that he could have caused the Ricky Footwear Ltd to be held liable if he eventually ends up running this new company as a manager. This claim of payment from the leather shoe company could have been valid then as this becomes a responsibility of the company once it accepts to be adopted by the Leather company. This can be illustrated by the case McArthur v. Times Printing Co. (1982) Nimrocks and others were promoters of a corporation to publish a newspaper, and contracted with plaintiff to be advertising solicitor for one year after the company was formed. The corporation after formation never formally adopted the contract, although all stockholders, directors, and officers of the corporation knew of the contract but didn’t object and instead retained the plaintiff as an employee.9 In this case then the corporation is liable for promoter’s contract If the leather company wanted to claim its payment it would have filed a suit against Ricky as an individual not the formed Ricky footwear company, as the contract according to the question was signed before the incorporation and Ricky is the liable party here, otherwise the suit against Ricky footwear ltd is a total fail according to law of corporate finance10 Works cited Stephen R, Randolph W 2012. Fundamentals of Corporate finance 10th edition. McGraw-Hill, New York Kenneth W, Rodger L 2010.Business Law, Cenage Learning Stephen G 2010.Charlesworth’s Company Law 18th edition Sweet & Maxwell, London Derek F, Stephen M, Christopher R 2012 Mayson, French & Ryan on Company Law 27th edition Oxford University Press Oxford Keith W 2011 Butterworth Company Law Handbook 13th edition Butterworth’s Law London. Mayson, F & Ryan 2007. Company Law, 30th edition. Oxford university press, Oxford. Read More