Forms of Business

Sole proprietorship
Partnership
Company

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

Partners 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
Corporations 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 company
Adams v Cape Industries Plc

Lifting the veil of incorporation

Holding and subsidiary company
- Where the company is a mere faade
- Where the subsidiary is an agent of the
company
Statutory Provisions
- Reduction in number of members
- fraudulently inducing persons to invest money
- Non publication/ unauthorized use of name

Lifting the veil

Shareholders 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 Baxter
The 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 companys 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 companys use at a price greater than its
normal market value. The court declined to allow
the plaintiffs 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.