CO-OPERATE LIABILITIES FOR ACTS OF OFFICIALS

There are certain situations in which the law doesnt recognize vicarious liability but insists on personal fault as a prelude to liability In such cases a company couldnt be liable if the courts apply rigidly the rule that the company is an artificial person and therefore can only act through the directors If practice and for certain purposes the courts have elected to treat the acts of certain offices as acts of the company itself. This sometimes referred to as the organic theory of companies The theory sprang from the case of Lennards Carrying Company v. Asiatic Petroleum Co. Ltd. A ship and a cargo were lost due to sea unworthiness. The owners of the ship were a limited company. The managers of the company were another limited company whose MD a Mr. Lennard managed the ship on behalf of the owners. He knew or ought to have known of the sea unworthiness but took no steps to prevent the ship from going to sea. Under the relative shipping act, the owner of a sea going ship wasnt liable to make good any laws or damage happening without his fault. The issue was whether Lennards knowledge was the companys knowledge that ship was sea unworthy. Held - Leonard was the directing mind and will of the company and his knowledge was the knowledge of the company. His fault was the fault of the company and since he knew that the ship was sea unworthy his fault was also the companys fault and therefore the company was liable. As per Viscount L.J., My Lords a corporation is an abstraction it has no mind of its own and more that it has a body of its own. Its active and directive will must consequently be sought in the person of somebody who for some purposes may be called an agent but who is really the directive mind and will of the corporation the very ego and center of the personality of the corporation. Case Bolton Engineering Co. v. Graham Here the plaintiffs who were tenants in certain business premises were entitled to a renewal of their tenancy unless the landlords who were a limited company intended to occupy the premise themselves for their business purposes. The issue was whether the defendant company had effectively formed this intention, there had been no formal general meeting or board of directors meeting had to consider the question but the managing directors had clearly manifested the intention to occupy the premises for the companys business.

It was held that the intention manifested by the directors was the companys intention and therefore the tenants were not entitled to a renewal of the tenancy. Denning L.J., stated A company may in many ways be likened to a human being, it has a brain and a nerve center which controls what it does it also has hands which hold all the tools and acts in accordance with the directions of the center. Some of the people of the company and merely servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind and will of the company. Others are directors and managers who represent the directing mind and will of the company and control what it does. The state of mind of these managers is the state of mind of the company and are treated by the law as such. Whether their intention is the companys intention depends on the nature of the matter under consideration relating to the position of the officer and agent and other relative facts and circumstances of the case. Closely related to this is the rule is the rule in Turguands case It deals with the companys liability for acts of its officers. Question as to whether or not the company is bound or not depends on the normal agency principles, if a companys officer or a companys organ does an act within the scope of its authority the company will be bound. The problem which might arise is that even if the act in question is within the scope of the organs of the officers authority their might be some irregularity in the action of the organ concerned and consequently in the exercise of authority for example if a particular act can only be valid if done by the board of directors or the general meeting the meeting might have been convened on improper notice or the resolution might not have been properly carried in the case of the directors they may not have been properly appointed in these circumstances can the company disclaim an act which was so done by arguing that the meeting was irregular. Must a 3 rd party dealing with the company always ascertain that the companys internal regulations have been complied with before holding the company liable. The answer to this question was given in the negative in the case of The Royal British Bank V. Turguand Here under the companys constitution the directors were given power to borrow on bond such sums of money as from time to time by a general resolution be authorized to be borrowed. Without such a resolution having been passed the directors borrowed money from the plaintiff band. Upon the company liquidation the bank sought to recover form the liquidator who argued that the bank cant recover it as it was borrowed without authority from the meeting.

Held even though no resolution had been passed the company has nevertheless been bound by the act of the directors and therefore was bound to repay the money. The words of Javis C.J A party dealing with a company is bound to read the companys deed of settlement memo of association but isnt bound to do more. In this case a 3rd party reading a companys documents would find not a prohibition from borrowing but permission to do so on certain conditions finding the authority may be found complete by resolution he may have a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done. This is the case, which has the rule as to indoor management. 1) This rule is based not on logic but on business convenience. First a 3rd party dealing with a company has no access to a companys indoor activities 2) It would be difficult to run business if everyone who had dealings with the company had first to examine the companys internal operations before engaging in business with the company. It would be very affair to the companys creditors if the company could escape liability on the ground that its officials acted irregularly but should the company always behave liable for the act of any people purporting to act on the companys behalf. Suppose these people are imposters what happens? In order the avoid this some limitations have been imposed on the rule. Later cases have referred to the rule to be that ordinary agency principles will always apply a) Any body dealing with the company is deemed to have notice of the contents of the companys public documents therefore any act, which is contrary to those provisions, will not bind the company unless it is subsequently ratified by the company acting through its appropriate organ. The term public document isnt defined in the companys act but so far as the registered companies are concerned the expression is not restricted to the memorandum and articles of association but it also includes some of those documents found in the companys registry these include special resolutions particulars of secretaries, charges provided that everything appears to be regular so far as can be checked from the public documents a 3rd party dealing with the company is entitled to assume that all internal regulations of the company have been complied with unless he has knowledge to the contrary or there are suspicious putting him on inquiry. Case Mahoney v. East Holyford Mining Co A mining company was founded by a W his friends and relatives. Subscriptions were obtained for applicants shares. This was paid into the bank, which was described in the prospectus as the companys bank. The communication of the letter was sent to the bank by a person describing himself as the companys secretary to the effect that

in accordance with a resolution passed on that day the bank was to pay out cheques signed by wither 2 of the 3 named directors whose signatures were attached and counter signed by the secretary. The bank then honoured debts so signed when the company funds were almost exhausted the company was ordered to wind up. It was then discovered that no meeting of the shareholders had been held and no appointment of secretary made but that with his friends and relatives, W had held themselves to be secretary and directors and had appropriated subscription money. The issue was whether the bank was liable to refund money it had paid back to the company. Held the bank wasnt liable to refund any money to the company as it had honoured the companys cheques on reliance on the letter received and in good faith. When there are person conducting the affairs of a company in a manner which appears to be perfectly consonant with the articles of association then those dealing with them externally are not to be affected by any irregularities which may take place in the internal management of the company. Directors will not necessarily and for all purposes be insiders. The test appears to be whether the acts done by them are so closely related to their position as directors as to make it impossible for them not to be treated as knowing the limitations on the powers of the officers of the company with whom they have dealt, otherwise a 3 rd party dealing with a company through an officer who is or is held out by the company as a particular type of officer for example an MD and who purports to exercise a power which that type officer will usually have is entitled to hold the company liable for the officers acts even though the officer has not been so appointed or instructs exceeding his authority as long as the 3rd party doesnt know that the companys officer has so not appointed or has no actual authority. A 3rd party however will not be protected if the circumstances are such as to put him on inquiry he will also loose protection if the public documents make it clear that the officer has no actual authority or will not have authority unless a reosution had been passed which requires filing in the company registry and no such resolution has been filed these are normal agency principles. Case Freeman & Lockyer v. Buckhurst Park Properties In this case Kapoor and Hoon formed a private company, which purchase Buckhurst Park estate. The board of directors consisted of Kapoor, Hoon and 2 others. The articles of the company contained a power to appoint a managing director but none was appointed. Though never appointed as such Kapoor acted as managing director.

In that capacity he engaged the plaintiffs who were a firm of architect to do certain work for the company, which was duly done. When the plaintiffs claim remuneration according to the agreement the company replied that its wasnt liable, because Kapoor had no authority to engage him. Held the act of engaging architects was within the ordinary ambit of the authority of a managing director was of Property Company and the plaintiffs didnt have to enquire whether a person with whom they were dealing with was properly appointed. It was sufficient for them that under the articles the board of directors had the power to appoint him and had in fact allowed him to act as managing director. 4 conditions must be fulfilled in order to entitle a 3rd party to enforce a contract entered into by the company by a person who has no actual authority 1) It must be shown that there was a representation that the agent had authority to enter into a contract of the kind sought to be enforced. 2) Such representation must be made by a person or persons who had actual authority to manage the companys business either generally or in respect of those matters to which the contract relates. 3) It must be shown that the contract was induced by such representation 4) It must be shown that neither in its memorandum nor under its articles was the company deprived of the capacity either to enter into a contract of the kind so as to be enforced or to delegate authority to do so to the agent. Case Emco Plastica International v. Freeberne Here by a resolution of the company at a meeting of the board of directors the respondent was appointed as the companys secretary. Nothing was decided in the meeting as regards his remuneration or other terms of service. The terms of his appointment were contained in a letter signed on behalf of the company by its managing director which provided that the appointment was for a maximum period of 5 years. The Managing director dealt with day-to-day affairs of the company but didnt have express authority to appoint a secretary or offer such unusually generous terms as contained in the letter. After 2 years service the company purported to dismiss the respondent by 5 days notice. The secretary sued for benefits under the contract. The company contended that the managing director didnt have authority to offer the terms of the contract

there being no resolution of the company to support it and nothing in the companys articles conferring such powers on a managing director. It was held that as a chairman he performed the functions of a managing director with the full knowledge of the board of directors and that a contract for service as the one entered into with the secretary was one which a person performing the duties of a managing director would have power to enter into on behalf of the company. Therefore the contract was genuine, valid and enforceable. If however the officer is purporting to exercise some authority which that sort of officer wouldnt normally have a 3rd party wont be protected if the officer exceeds his actual authority unless the company has held him out as having authority to act in the matter and the 3rd party has denied thereof. Unless the company is estopped, however unless a provision in the memorandum or articles or other public documents cant create an estoppel unless the 3 rd party knew of the provision and has relied on it. For this purpose regulations at the companys registry dont constitute notice because the doctrine of constructive notice operates negatively and not positively. If a document purporting to be sealed and signed on behalf of the company is proved to be forgery it doesnt bind a company. However the company can be estopped as putting as a forgery if it has been put forward as genuine by an officer acting within his actual, usual or ostensible authority. Rama Corporation v. Proved Tin & General Investments

Promoters
The company Act doesnt define the term promoter but section 45 (5) says A promoter is a promoter who was a party to the preparation to the prospectus. Apart from the fact that this definition doesnt say much, the definition is only given for the purposes of the definition. At common law the best definition is by chief justice In the case of Twyfords v. Grant He said, A promoter is one who undertakes to form a company with reference to a given project and to set it going and he takes the necessary steps to accomplish that purpose.

The term is also used to cover any individual undertaking to become a director of a company to be formed. Similarly it covers anyone who negotiates preliminary agreements on behalf of a proposed company. But those who act in a purely professional capacity e.g. advocates wont qualify as promoters for they are simply performing their normal professional duties. But they can also become promoters or find others who will. Whether a person is a promoter or not is a question of fact. The answer is promoter isnt a term of law but of business summing up in a single word the number of business associations familiar with the commercial world by which a company is born. It may therefore be said that the promoters are those responsible for its formation. They decide the scope of its business activity the negotiate for he purchase of an existing business if necessary, they instruct advocates to prepare the advocates to make the necessary documents, they secure services for directors, they provide registration fees and they carry out all other duties involved in company formation they also take responsibility in case of a company in respect of which a prospectus is to be issued before incorporation and the report of those whose report must accompany the prospectus.

DUTIES OF PROMOTERS
Their duties are to act bonafide towards the company. Though they may not strictly be an agent or a trustee for a company any one who can be properly guarded as promoter stands in a fiduciary relationship vis-avis the company. These carries the duties of disclosure and proper accounting particularly a promoter must not make any profit out of promotion without disclosing to the company the nature and the extent of such promotion. Failure to do so may lead to recovery of the profits by the company. The question, which arises, is since the company is a separate legal entity from members how is this disclosure effected. Case Erlanger v. New Sombrero Phosphates Co. The promoters of a company sold a lease to a company at twice the price paid for it without disclosing this fact to the company. It was held that the promoters breached their duties and that they should have disclosed this fact to the companys board of directors. As Lord Caines The owner of the property who promotes and form a company to which he sell his property is bound to declare that he sells it to the company through the medium of a Board of Directors who can exercise an independent judgment on the transaction and

who are not left under belief that the property belongs to the promoters and not to another person. Since the decision in the case of Salomon, it has never been doubted that a disclosure to the members themselves will be equally effective. It would appear that disclosure must be made to the company either by making it to an independent Board of Directors or to the existing and potential members. If to the former the promoters duty to the company is duly discharged, thereafter it is upon the directors to disclose to the subscribers. If made to the members it must appear in a prospectus and the articles so that those who become members can have full information regarding it. Since a promoter owes his duty to a company in the event of any non-disclosure the primary remedy is for the company to bring proceedings for 1) Either rescission of any contract with the promoter 2) Recovery of any profits form the promoter. As regards rescission this must be exercised in keeping with normal principles of contract. a) The company shouldnt have done anything to ratify the action. b) There must be restitution in inter gram restoring the parties to the origin position.

REMUNERATION OF PROMOTERS
A promoter isnt entitled to remuneration to services rendered to the company unless there is a contract so enabling him. In the absence of such a contract a promoter has no right to even his preliminary expenses or even the refund of the registration fees. He is therefore at the mercy of the directors but before a company is formed it cant enter into a contract and therefore a promoter has to spend his money with no guarantee that he will be re-inbursed but in practice the articles will usually have provision authorizing the directors to pay the promoters. Although such provision doesnt amount to a contract it nevertheless constitutes adequate authority for directors to pay promoters.

PRELIMINARY CONTRACTS BY PROMOTERS

Until a company is formed it is legally non-existent and therefore cant enter into any contract or do any other act in law. Once incorporated it cannot be liable in any contract nor can it be entitled under any contract purported to have been made on its behalf on its incorporation.

Ratification is not possible when the ostensible principle is non-existent in law when the contract was entered into. Case Price v. Kelsall One of the issues was whether or not a company could ratify a contract entered into on its behalf before incorporation. The alleged contract was that the respondent had undertaken to sell some property to a company, which was proposed to be formed between him and the appellant. In holding that the company cant ratify such an agreement the president of the court of appeal was then constituted by the Okolo L.J., A company cant ratify a contract purporting to be made by someone on its behalf before its incorporation by there may be circumstances from which it may be inferred that the company after its incorporation has made a new contract to the effect of the old agreement. The mere confirmation and adoption by directors of a contract made before formation of a company by persons purporting to act on behalf of the company creates no contractual relation whatsoever between the company and the party to the contract. However acts may be done by a company after its formation, which give rise to an inference of a new contract on the same terms as the old one. Question whether there is a new contract or not is always a question of fact, which depends on the circumstances of each individual case. Case Mawagola Farmers & Growers Ltd v. Kanyanja Prior to incorporation the promoters held public meetings and the public asked to purchase shares in a proposed company. The respondents paid for the shares bought before and after the incorporation but the company didnt a lot any shares to them but instead after incorporation allotted shares to others people. The respondent prayed for orders that the shares they paid for be allotted to them and the company registered name be rectified accordingly. The company argued that the respondent paid for money for the purchase of their shares money, the claim could be against the promoters because the company couldnt even after incorporation ratify of adopt any such contract Mustafa J.A In order that the company may be bound by agreements entered into before incorporation there must be anew contract to the same effect as the old agreement. This contract may however be inferred from the acts of the company when incorporated.

The allotment of shares to the respondents after the incorporation was held to be sufficient evidence of a new contract between the company and the respondents. Therefore the respondents were entitled to be allotted the shares agreed upon. If any preliminary arrangements are made these must therefore be left must be left to mere gentleman agreements or otherwise the promoters may have to undertake personal liability. Although the principle is clear those engaged in the formation of companies often cause contracts to be entered into on behalf of proposed company. As to whether the promoters they will be liable will depend on the terminology implored. Case Kelner v. Baxter In this case A,B and C entered into a contract with the plaintiff to purchase goods on behalf of the proposed Gravesand Royal Alexandra Hotel Company, the goods were duly supplied and consumed. Shortly after incorporation, the company in question collapsed and the plaintiff sued A,B and C for the price of the goods supplied. Held A,B and C were liable Chief justice Earl Where a contract is signed by one who prophesies to be signing as agent but who has no principle existing at the time and the contract will altogether be inoperative unless binding against the person who signed it he is bound thereby and a stranger cannot by subsequent ratification relieve him from that responsibility when the company came afterwards into existence having rights and obligations form that time but no rights or obligations by reason of anything which might have been done before. Contrast this with the case of Newborn v. Sensolid Great Britain Limited Here, the contract was entered into between Leopold Newbold London Limited and the defendant for the purchase of goods by the latter. The defendant refused to take delivery of the goods and an action commenced by Leopold Newbold. It was discovered that at the time the contract had been entered into the company hadnt been incorporated. Leopold Newbold sought personally to enforce the contract. It was held that the signature on the document was the companys signature and as the company was not in existence when the contract was signed there was never a contract and Mr. Newbold couldnt come forward and say it was his contract nut was that he made a contract for a company which didnt exist.