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Canada (162,165)
RSM225H1 (13)
Dan Shear (7)
Chapter 4

Ch4C Corpns - External Affairs.doc

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Department
Rotman Commerce
Course
RSM225H1
Professor
Dan Shear
Semester
Fall

Description
CH. 4C: BUSINESS ORGANIZATIONS: CORPORATIONS: EXTERNAL RESPONSIBILITIES Agency/Indoor Management Rule:  corpn. not real person, so acts through real persons (its agents) o e.g. directors, officers, employees, and others given authority to make contracts on corpn’s behalf  indoor management rule: corp. can be liable for contracts made on its behalf by its agents o even if agents act outside of the actual authority the corpn gives them  e.g. making contract for corpn when not authorized by corpn to do so o so long as everything appears to be proper, and not reasonable to suspect lack of authority  i.e. must be reasonable to believe that the signor has the necessary authority Pre-incorporation Contracts:  written contract(s) signed on behalf of a corporation not yet incorporated  corporation must subsequently adopt that contract – or person signing will be personally bound by that contract  toprevent abuse,other party to contractcan askcourt tomake signor jointly liable with corpn under thecontract (unlesscontract expressly sayssignornotpersonally liable) Protection of Creditors: (1) Maintenance of Capital Test:  Daniel R. Shear 2000 – 2011 All rights reserved. 2  applies re: declaring and paying dividends (“dividends”)  directors become personally if pay dividends where reasonable grounds to believe that either:  corp. is (or after payment would be) unable to pay debts as they become due, or  realizable value of assets is (or after payment would be) less than total liabilities plus stated capital  in other words (to put it in accounting terms): dividends must be paid out of profits/retained earnings, not out of capital (2) Solvency Test:  applies re: corporation re-purchasing any of its previously issued shares  directors become personally liable if:  corpnis(orafterpaymentwould be) unableto pay debtsasthey becomedue, or  realizable value of assets is (or after payment would be) less than total liabilities (3) Consequences of Violating Test:  if either of the above tests are violated, directors personally liable to corpn for repayment of dividends, and in the case of dividends the corpn can require recipients of dividends to repay them (4) Winding Up:  if corpn wound up, assets liquidated (sold for $$)  Daniel R. Shear 2000 – 2011 All rights reserved. 3  order of payment
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