Forms of Business

Sole proprietorshipPartnershipCompany

Sole proprietorship

• One man business• No formalities• No difference between the business and

ownership/ autonomy• Owners liability unlimited• Raising capital impossible

partnership

• Association of 2 or more persons• To carry on business• For making profit

Partnership and ethical issues• Partner’s duty- Partners stand in a fiduciary relationship with other,

means- Partners cannot make any secret profit from

partnership business- Partners must bear the loss of the partnership business

in absence of any contract on this issue- Partners are liable jointly and individually for the acts

of other partners- Fraudulent act of one partner does not bind the other

partners

Corporations

• Corporations are creations of statute• Are legal persons• Corporation’s authority to act and liability for

its actions are separate and apart from its owners, who are called shareholders

• Limited liability of shareholders

Corporate personality

• With incorporations company become a legal person distinct from its shareholders;

• Cases:• Salomon v. Salomon & Co Ltd• Lee and Lees Air Farming Co• Macaura v. Northern Assurance Company

Corporate Personality, ethics & Lifting the veil of incorporations

• Lipman v. Jones (sale of land case)• Gilford Motor Company Ltd v Horne (solicitor

case)• Holding and subsidiary companyAdams v Cape Industries Plc

Lifting the veil of incorporation

• Holding and subsidiary company- Where the company is a mere façade- Where the subsidiary is an agent of the

companyStatutory Provisions- Reduction in number of members- fraudulently inducing persons to invest money- Non publication/ unauthorized use of name

Lifting the veil

• Shareholder’s limited liability means that shareholders are liable up to their investment

• In certain situations the corporate veil of limited liability can be lifted, holding the shareholders personally liable

Formation of company, promoters and ethical issues

• Memorandum and articles of association• Memorandum contains object clause of the

company. Any act done outside the scope of the memorandum is considered ultra vires of the company

• The object clause can be changed with consent of the shareholders at a general meeting

• Memorandum is a constructive notice to the public of the business of the company based on which public subscribe shares of the company

• Therefore it is very important that memorandum remains as it is

Articles and ethics• Articles of association contains internal

management rules of the company within which company runs its business

• Articles of association provides the general guide line of business management but how far those rules have been complied with or not is a question of fact and part of indoor management of which creditors are not aware

• Therefore, indoor management rule protect the third parties dealing with the company from deffective dealing by the board of directors.

Promoters, pre – incorporation contracts and ethics

• Promoters: persons who takes necessary steps to form a of company

• The subscriber to the Memorandum of the company

• They are the first shareholders and directors of the company

• Any unfair dealing of the promoters with the company before incorporation make them liable even after their retirement from the company

Pre incorporation contracts

• Contracts entered into by the promoters before incorporation of the company during the formation period

• Presumption is that the company will ratify all these pre incorporations contract on its incorporation

• If no new contract concluded, the promoters remain liable to the other parties

Pre incorporation contract and personal benefit of the promoters

• Kelner v BaxterThe promoters of a hotel company entered into a

contract on its behalf for the purchase of wine. When the company came into existence it ratified the contract. The wine was consumed but before payment was made the company went into liquidation. The promoters, as agents, were sued on the contract. They contented that liability has passed to the company on ratification. Court held ratification not enough. New contract is necessary.

Directors

• Every corporation is governed by a board of directors (elected by the shareholders)

• Directors can be shareholders• Number of directors is set forth in the

companies act and company’s bylaws

Duties of Directors

• Directors are fiduciaries of the corporation. They owe ethical and legal duties to the corporation

• Directors are expected to act in good faith, using prudent business judgment, and in the best interest of the corporation

• Failure to exercise due care may subject individual directors to personal liability for negligence

Majority rule and fraud on minority

• As a general rule, courts would not normally interfere in the internal management of a company when the decision has been taken by a majority decision. In any case, the majority of the members may even alter the articles of association.

Foss v Hasbottle• Two members of a company brought a suit on

behalf of themselves and all other members except those who were defendants and directors of the company for compelling them to compensate for the losses suffered by the company for the directors purchasing their own land for company’s use at a price greater than its normal market value. The court declined to allow the plaintiff’s suit as it found nothing that prevented such an action to be brought by the company itself.

• The majority of the proprietors at a special general meeting assembled, … has power to bind the whole body, and every individual corporator must be taken to have come into the corporation upon the terms of being liable to be so bound. … The very fact that the governing body of proprietors assembled at the special general meeting may so bind even a reluctant minority is decisive to show that the frame of this suit cannot be sustained whilst that body retains its functions

Statutory Protection of the Minority:

• the rule of majority is not absolute. The examples where an individual member may successfully sue in her/his own name would include the followings:

• For preventing a company from acting illegally or inconsistent with its memorandum of association;

• For preventing actions that demands special majority when such majority approval has not been obtained;

• For preventing a company to act inconsistently with its articles of association;

• For vindicating a statutory right such as the right to seek any rectification in the share register under Section 43 of the Companies Act, 1994.

• Above n 1, 516.