Worldwide Galleries Online Ltdlegal qns.docx

Worldwide Galleries Online Ltdlegal qns.docx

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WorldwideGalleriesOnlineLtdlegalqns

WorldwideGalleriesOnlineLtd.

Question1:

CouldanyactionbetakenagainstCandyaboutthegiftofRex2010?

Ifsoonwhatgroundsandbywhom?

Givereasonsforyouranswer.

Candywasdeclaredabankruptpursuanttoacourtorderdated23rdJune2011therefore,herlegalcapacityisrestricted.Shecannottakeanypartinthepromotion,formationormanagementofalimitedcompanywithoutthepermissionofthecourt.Therefore,apersonwishingtotakeanyactionagainstheronthebasisofheractionsasapromoterwouldbeabletopointoutthisfactanduseittovoidanycontractssheconcludedonbehalfoftheCompanywithoutCourtpermission,whetherornottheywerelaterratified.Consequently,inadditiontohighlightingthefactthattheCompanyhadnotbeenformedby19thSeptember2011whenhesignedthecontract,YuenshiucanadoptthisargumenttodeterfurthereffortsbyWorldwideOnlineGalleriesLtd.toenforcethecontractualobligations.SincehedoesnotseeminterestedinrecoveringtheRex2010andhasevensuggestedthatBeckyandAsifasthedirectorsofWorldwideOnlineGalleriesLtd.retrievethepaintingthathegavetoCandyanduseitascompensation,thenactionagainstCandydoesnotliehere.

Notwithstandingtheforegoing,itisclearthatAsifandBeckyproceededtoworkwithCandywhetherinignoranceordefianceofherlegalincapacityandallowedhertonegotiateandconcludecontractsonbehalfoftheCompanythatwasyettobeformedaswellastoparticipateinitsformation.CandyispresentlyashareholderinWorldwideGalleriesOnlineLtd.butatthetimeofhernegotiationswithYuenshiu,theCompanywasnotinexistenceandthusshewasapromoter.CockburnCJinthecaseofTwyCrossv.Grantdefinedapromoterasapersonwho“undertakestoformaCompanywithreferencetoagivenprojectandtosetitgoingand…takesthenecessarystepstoaccomplishthatpurpose”.ItwasinherpositionasapromoterthatCandyconcludedthecontractwithYuenshiuandalsoreceivedRex2010.ThequestionthenarisesastowhethersheisliabletoanypartyforreceivingandkeepingtheRex2010forherself.

Apromoterstartstoworkforacompanybeforeitcomesintoexistence.However,intheabsenceofcontract,whichcannotbeconcludedbythecompanybeforeitsregistration,thepromotercannotbeconsideredasanagent,trustee,officialoremployeeoftheCompany.Nevertheless,duetothetrustandconfidenceinherentintheirpositionrelativetothecompanytobeformedaswellasitsinvestors,theyareconsideredtoowefiduciaryduties.Theseincludethedutytoactingoodfaith,engageinfairdealingandensurefulldisclosure,nottomakeanysecretprofitandtodeclareanyinterestorprofitarisingofanytransactioninvolvingthecompany.InthecaseofErlangerv.NewSombreroPhosphateCo.

itwasheldthatiftheCompanyentersintoatransactioninwhichthepromoterwasinterested,thenitisvoidableifitwasnotproperlyapprovedbythecompanyafterfulldisclosure.Intheinstantcase,CandyenteredintoacontractonbehalfoftheyettobeformedCompanywithYuenshiutomarketandsellhisartwork,whichdecisionwaslaterratifiedthroughaboardresolution.However,thisdecisionremainsvoidableattheoptionoftheCompanyduetothefactthatCandydidnotmakefulldisclosureandfailedtotellitsDirectors,BeckyandAsif,thatshehadreceivedavaluablepaintingaftersigningtheagreementwithYuenshiu.Inviewofthefactthatshewasactingasapromoteratthetime,sheowedafiduciarydutytotheCompanywhichcantakeactiontorecoverthepaintingoritsvaluefromCandyonthegroundsthatitwasasecretprofitthatwasnotdisclosedthusbarringinformedapprovalbytheBoard.InthecaseofGlucksteinv.BarnesthePlaintiffandthreeotherswerethepromotersofacompanywhoboughtapropertythattheylatersoldtothelatterataprofitbutfailedtofullydisclosetheprofitstheyhadmadefromdealingwithit.Therewasnoindependentboardtoexaminethedealingsofthepromotersandwhenthecompanylaterwentintoliquidation,theliquidatorsoughttorecoverfromthePlaintiffwhohadmadeanextraprofitthatwascompletelyundisclosed.ItwasheldthatthePlaintiffhadtoaccountfortheundisclosedbenefitthathehadobtainedwhileactingasapromoteroftheCompanyowingfiduciaryduties.

Therefore,itemergesthatCandycanindeedfacelegalactionoverreceivingtheRex2010.Thisisbecauseatthetime,shewasactingasapromoterandoughttohavemadefulldisclosuretotheCompanythroughitsBoardandshareholders,namelyBeckyandAsif.However,shefailedtodosoandthisamountedtosecretprofit,whichwasbroughttotheCompany’sattentionbyYuenshui.Healsohasanopportunitytosuefortherecoveryofhispainting,claimingthatitwasofferedbecauseofthecontractthathadbeenconcludedbetweenhimandWorldwideOnlineGalleriesLtd.otherwisehewouldnothaveofferedit.Notwithstandingthisfact,heexpressesnointerestinenforcinghisrights.BeckyandAsifcanonlyactthroughtheCompanyinordertogettheirinterestinthepaintingasindividuallytheywouldhavenolocusstandi,anditwouldnotbecounter-productivetodoso.Thisisbecauseitwouldemergethattheykneworoughttohaveknownaboutherincapacitytocontract.However,thecompanyisuniquelyplacedtoenforceitsrightsasagainstCandy.

Question2:

Istheoptioncontainedintheagreementof19September2011enforceableagainstYuenshiu?

Ifsobywhomandgivereasonsforyouranswer.

Yuenshiuconcludedacontractwithagallerycompanythatwasyettobeformed.Whilethisiscommoninnegotiations,problemscanariseprimarilyduetothefactthatnon-entitiescannothavelegalrightsorduties.Acompanyisalegalentitythathasitsownseparateandartificialpersonality.ThisrulewasestablishedinthecaseofSalomonv.Salomon&Co.wherebyitwasheldthatacompanyisdistinctfromitsmembersanddirectors,haslimitedliabilityandactsinitsownright.Further,thatithasthecapacitytoenterintocontracts,ownproperty,sueandbesued.However,wherethecompanyhasnotyetcomeintoexistence,noneoftheserightsanddutiesaccrueandintheeventthatcontractsareconcludedonitsbehalfbeforeitcomesintoexistence,theBoardofDirectorshastoseetoitthatthecontractsitwishesthecompanytocontinuewitharenovated.Thismustbeonthesametermsastheoldoneinordertobeeffective.Therefore,indeterminingwhethertheoptionsignedoffonbyYuenshiuisvalidandenforceableagainsthim,itisimportanttoestablishthatalltherequirementsofavalidpre-incorporationcontractaremetandthatitstermsweresubsequentlynovatedbytheboardofWorldwideOnlineGalleriesLtd.

Thefirstissueiswhetherthepersonwhoconcludedthecontractonbehalfofthecompanytobeformedhadlegalcapacitytodoso.Thisisakeyconsiderationbecauseasshallbesubsequentlydiscussed,theymaybeheldpersonallyliableforthecontract,thustheyhavetobeinapositiontocreatelegalrelations.Ithasalreadybeenestablishedhereinthatadeclaredbankruptcannotengageintheformation,promotionormanagementofacompany.Candyhadjustbeendeclaredabankruptafewmonthsprior,andshedidnothavethelegalcapacitytoconcludethecontractonbehalfofWorldwideOnlineGalleriesLtd.Thegeneralprinciplesofcontractlawalsoprovidethatundischargedbankruptsdonothavelegalcapacitytoenterintoacontracttobindanotherperson.

Further,sincetheCompanyhasnolegalexistencebeforeincorporation,itcannotenterintoacontracteitherbyitselforthoughanagent,thusrequiringthatthepromoterswhoareinvolvedinformingit,incurpersonalliabilitywheretheysignedintheirownname.ThiswasthedecisioninthecaseofKelnerv.BaxterwhereErleCJwasoftheviewthatinasituationinwhichapersonsignsasanagentforaprincipalthatisnotyetexistingorwhereacontractwouldbewhollyinoperativeunlessthepartiesareheldliable,thenitisconceivablethatapromoterincurspersonalliability.ThisruleisupheldevenwheretheCompanyratifiesthecontractasthisdoesnothingtodiminishortakeawaytheresponsibilityofthepromoterwhopersonallysignedbeforeincorporation.Inapplyingtheforegoingrationaletothiscase,itisapparentthatCandy,beingtheonewhosignedtheagreementwithYuenshiuistheonewhowouldincurliability.Therefore,inalegalsuitinwhichtheissuefordeterminationiswhethertheoptioncontainedintheagreementisenforceable,thenCandy’slackofcapacitywouldoperateasavitiatingelementthatsummarilydisposesofthematter.Yuenshiuwouldbeabletoarguethatnovalidcontractisformedbyapersonwhohasnocapacitytocreatelegalrelations,consequently,hecannotbeboundtotheobligationscontainedinsuchavoidablecontract.

InthesubsequentcaseofNewbornev.Sensolid（GreatBritainLtd.）thecentralissuewaswhetheracompanypromoterwhosignedacontractforthesaleofgoods,butindicatedthatitwasonbehalfoftheCompanycouldbeheldpersonallyliable.Atthehearing,theDefendantscontendedthatwhentheysignedthecontractostensiblywiththeCompany,itwasnotyetinexistenceandassuchneitheritnorthepromotercouldenforcethesame.InfindingfortheDefendant,theCourtwasoftheviewthatthecontractwasanullitybecausethepromoterhadsignedonbehalfofacompanythatdidnotyetexistandinsodoing,hecouldnotclaimpersonalliabilityandinvokehisrighttoenforcethecontract.Intheinstantcase,CandydidnotsignthecontractonbehalfoftheCompany,eventho