Fiduciary Duties in Corporate Law: A Case Study


Added on  2019-09-20

3 Pages1710 Words357 Views
Company Law AssignmentThe general rule binding the promoters is that of a fiduciary relationship with the company as well as with thethird parties, including vendors, and customers. Therefore it is imperative that the promoter must act in the bonafide interests of the company and not in their own personal interests. This assignment analyzes these aspects ofthe duties and liabilities of the promoters in the light of the Corporations Act, 2001 where in the roles of Tom,Dick and Harry have been elucidated in relation to the liability of the company towards the milk man. Secondly,whether the Dick’s action in selling the office furniture is justified and whether the company is justified inallotment of 10,000 shares to a third party to stop a takeover bid from Carol Ltd. In relation to the pre-incorporation contract between Tom and the MilkmanIn this situation involving Tom and the milkman, Tom had promised him that the incorporated company wouldtake over the liabilities. Tom appears to have acted on behalf of the company by entering into a pre-registrationcontract which is not yet in existence, and which under the common law is an invalid contract. Tom ispersonally liable under s 131(2) to pay the liabilities1 and damages to the Milkman arising out of a pre-registration contract within a reasonable amount or the timeframe agreed to. The Corporations Act imposesliability on the person to compensate the third party for the loss suffered because the registered company doesnot ratify the contract, or fails to perform its obligations under the ratified contract. The company cannot be heldliable following the popular rule established in Kelnar v Baxter 2which states that since the principal-agentrelationship cannot be in existence before incorporation, the company cannot take liability of the pre-incorporation contract through adoption or ratification. The remedy is however available both to the supplier, third party as well as the promoter who is representing theinterests of the company. Under the provisions of s 131(2), a person is liable to pay damages to other party forpre-registration contract occurs if the company is not registered or the company does not ratify the contract orenter into a substitute of it. 3It can be noted here that despite the formation of company, the bill remains unpaid,for which the milkman can bring about an action for breach making Tom liable. I would therefore advise Tommay avoid his liability under s132 (1) of the Act if he obtains a consent from other promoters to release himfrom a personal liability arising therein. If in an occasion where the company fails to ratify the contract, it willmake Tom personally liable for the pre-registration contract. Secondly, he can also avoid personal liability byagreeing with the Milkman that a substitute contract will be entered into, in place of pre-registration contractwith the registered company.Dick’s action of selling the furniture to the Company at a profitOne of the fiduciary duties of the promoter of the company necessitates that he is acting honestly and withreasonable skill, care and diligence as well as not making any profit at the expense of the company. By sellingthe furniture to the company at a profit of $ 4,000, Dick has breached the fiduciary duties without exercisingreasonable skill, care and diligence. It is the duty of a promoter to act in a bona fide and honest manner and notderive any secret benefit in his dealings with the company. This inherent duty lays down a rule for everypromoter not to make secret profit out of the company, as well as to disclose all the profits whether direct orindirect. In Gluckstein v Barnes, 4one of the promoters had failed to disclose the profit that he had made frombuying up a mortgage at a discount. The Court held the promoter liable to disgorge that portion of indirect profitback to the company. Breach of this duty can make the promoter liable to disgorge the profit back to thecompany or rescind the contract with the promoter. 5Some of the liabilities include: returning that profit to the company where in his capacity as a promoter, Dickhas made secret profit of $4,000, the right to repudiate or ratify the contract of sale or claim the profit made by1Wayne Courtney, Failed Pre-registration Contracts and the Statutory Remedy (2007) 25 C& SLJ 2262 Kelnar v Baxter(1866) LR 2 CP 1743Harris, J. Hargovan, A. Adams, M. Australian Corporate Law LexisNexis Butterworths 3rd edition,20114Gluckstein v Barnes [1900] AC 2405Nicholas Bourne, Essential Company Law (1st edn, Cavendish 2000)
Fiduciary Duties in Corporate Law: A Case Study_1

End of preview

Want to access all the pages? Upload your documents or become a member.

Related Documents
Liability of Master Plate Pty Ltd and SwimmingPool Co Ltd: Analysis of Agency Law

Business & Corporations Law Assignment

Case Study on Contract Law and Corporate Law

Business and Corporation Law - PDF

Case Study on Breach of Contract and Corporate Law

Liability of members in pre-incorporation contracts and partnership law