Problem
The hotel company
Abu and Fatu decide to form Lumley Hotels Ltd. Before it is registered, Abu signs a contract 'for and on behalf of Lumley Hotels Ltd' to buy furniture worth Le 200,000 from Kamara. Fatu buys a plot of land for Le 1,000,000 and, after incorporation, sells it to the company for Le 3,000,000. The board, made up of Abu and Fatu, approves the purchase. The other shareholders are not told about Fatu's profit. The company never pays Kamara. Advise Kamara and the company.
issue
Who is liable to Kamara on the pre-incorporation contract, and what can the company do about Fatu's undisclosed profit on the land?
rule
At common law a company cannot ratify a contract made before it existed, and the person who signed may be personally liable: Kelner v Baxter. Section 59 of the Companies Act 2009 lets the company ratify after formation; until it does, the person who acted is personally bound unless there is an express agreement to the contrary. Signing 'for and on behalf of' is not such an agreement: Phonogram v Lane. Promoters are fiduciaries under section 50 and must disclose their profit to an independent board or the members: Erlanger v New Sombrero Phosphate; Gluckstein v Barnes. The company may rescind, or claim an account of the profit.
application
Abu signed for a company that did not yet exist. If the company has ratified the contract after formation, it is bound and Kamara can sue it. If it has not, Abu is personally bound under section 59(2), because signing for the company is not an express agreement excluding his liability. Kamara should sue Abu, and the company if there is evidence of ratification. Fatu was a promoter. She sold her own land to the company at a profit of Le 2,000,000 and disclosed only to a board she and Abu controlled, which is not an independent board. The members were not told. Fatu breached her fiduciary duty. The company may rescind the purchase if it acts promptly and can return the land, or affirm it and make Fatu account for the profit.
conclusion
Abu is personally liable to Kamara unless the company has ratified, in which case the company is liable. The company can rescind the land purchase or recover Fatu's Le 2,000,000 profit.
Problem
The covenant and the new company
Mohamed sold his pharmacy in Bo to Salone Pharma Ltd and promised not to open a competing pharmacy in Bo for three years. Six months later he formed Healthway Ltd, in which he and his wife hold all the shares, and Healthway opened a pharmacy next door. Salone Pharma's directors also want to know whether they can sue Mohamed's family for Healthway's debts if Healthway fails. Advise Salone Pharma.
issue
Can the court restrain Healthway, a separate company, from breaching Mohamed's covenant, and can Mohamed's family be made liable for Healthway's debts?
rule
A company is a separate legal person: Salomon v Salomon. The veil may be pierced only where a person deliberately evades an existing obligation by interposing a company he controls: Prest v Petrodel. A company used as a device to evade its controller's covenant can be restrained: Gilford Motor v Horne; Jones v Lipman. Courts will not otherwise ignore separate personality just because it seems fair: Adams v Cape Industries.
application
Mohamed owed an existing obligation not to compete. He formed Healthway, which he controls, and used it to do what he promised not to do. That is the evasion principle in Prest, and the facts are close to Gilford Motor v Horne. The court is likely to grant an injunction against both Mohamed and Healthway. As to Healthway's debts, there is no evidence that Healthway is being used to evade any obligation owed to its creditors. Under Salomon its debts are its own, and the members of a limited company are liable only for any unpaid amount on their shares. Unless a statute applies, such as section 458 on fraudulent trading by directors in a winding up, Mohamed and his wife are not liable for Healthway's debts.
conclusion
Salone Pharma can obtain an injunction against Mohamed and Healthway. It cannot make Mohamed's family liable for Healthway's debts merely because they own it.
Problem
The director's opportunity
Isata is a director of Freetown Builders Ltd. A government agency invites Freetown Builders to tender for a road contract. Isata tells the board the contract is not worth pursuing, then resigns, forms her own firm and wins the contract. Separately, the other directors issue new shares to their friends so as to outvote Sorie, who holds 40 per cent of the shares and opposes the board. Advise Freetown Builders and Sorie.
issue
Is Isata liable for taking the road contract, and can Sorie challenge the share issue?
rule
A director is a fiduciary who must act in good faith in the company's best interests: section 231. She must not, without the company's consent, place herself in a position of conflict, and the duty about confidential information survives resignation: section 235. A director who diverts an opportunity that came to her as director must account: Regal (Hastings) v Gulliver; IDC v Cooley; Item Software v Fassihi. Powers must be used for proper purposes: sections 231(5) and 234; Howard Smith v Ampol. Section 240 makes the director liable to compensate and account, and section 241 lets the company or a member sue. A member may seek an injunction or relief from unfairly prejudicial conduct: sections 256 and 266.
application
The invitation came to the company and Isata learned of it as a director. She misled the board and resigned to take it. She was in a conflict without the company's consent, and her failure to disclose her own plan was itself a breach of loyalty, as in Fassihi. Resignation does not protect her: IDC v Cooley and section 235. Under section 240 she must account for her profit. The share issue was made to destroy Sorie's ability to block the board, which is an improper purpose, like Howard Smith v Ampol, whatever the directors believed. Sorie can sue under section 241, seek an injunction or declaration under section 256, or petition under section 266 for unfairly prejudicial conduct.
conclusion
Freetown Builders can make Isata account for the profit on the road contract. Sorie can have the share issue set aside as an improper use of the directors' powers.
Essay
Does the minority need more than Foss v Harbottle?
'The rule in Foss v Harbottle leaves minority shareholders at the mercy of the majority.' Discuss with reference to the Companies Act 2009.
issue
How far does the Act protect minority shareholders, given the rule that only the company can sue for a wrong done to it?
rule
Foss v Harbottle holds that the company is the proper claimant and the court will not interfere where the majority can ratify. Section 255 enacts the rule. The common law exceptions cover illegal acts, special majority matters and personal rights (Edwards v Halliwell; Pender v Lushington) and fraud on the minority (Cook v Deeks; Daniels v Daniels). The Act adds injunction and declaration (section 256), the derivative action with leave (section 258), and relief for oppressive and unfairly prejudicial conduct (sections 265 to 267). The court may wind up on the just and equitable ground: section 350; Ebrahimi v Westbourne Galleries.
application
The rule has good reasons: it respects majority rule and separate personality and prevents many suits over matters the majority could approve. Its weakness was that the wrongdoers were often the majority. The common law exceptions helped but were narrow and uncertain. The Act changes the balance. A member can restrain illegal and irregular acts under section 256 and can bring a derivative action under section 258 if the wrongdoers are in control, notice was given, and the action is in good faith and in the company's interests. Shareholder approval is not conclusive (section 260), and security for costs is not required (section 262), removing practical barriers. Section 266 offers a broad remedy for oppressive or unfairly prejudicial conduct, and English cases such as Scottish CWS v Meyer and O'Neill v Phillips show how such a remedy works. As a last resort, a member of a quasi-partnership can seek winding up.
conclusion
The statement overstates the position. Foss v Harbottle remains the starting point, but the Act gives the minority real remedies. Their value depends on the courts' readiness to grant leave and relief.
