Company law revision question and answer

Kioko, an Under Secretary in the Ministry of Viwandani was entrusted with the responsibility of selling the Ministry‟s boarded motor vehicles. He invited bids frommembers of the public to buy two lorries. He also bid, through a nominee. Mwangangi, his own brother.

Subsequently, he sold the lorries to Mwangangi, at Sh.80,000 each. Kioko then formed Kima Company Ltd and instructed Mwangangi to sell the lorries to the company at Sh.350,000 each. A prospectus as issued to the public to subscribe for shares to Kima Company Ltd. The prospectus gave Mwangangi as the vendor of the lorries and did not disclose the profit Kioko was making. Musembi, a shareholder of the company has learnt of the sale of the lorries to the company and the profit Kioko made and seeks your advice on the company‟s rights in respect of the same.

Advise Musembi.
answer
Kioko was a promoter of the company and he stood in a fiduciary position towards the company he was promoting. Therefore he was bound to disclose any secret profits made in the course of the promotion which he did not.

Therefore my advice to Musembi as to the company‟s rights are:
• The company can rescind the contract.
• To recover the secret profit made Kioko.
• To sue for damages for breach of fiduciary duties.

My advice is based on the decisions in Erlanger v New Sombrero Phosphate Co., GlucksteinV Barnes

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