Manufacturing Consultants Inc. offered to purchase the shares of Commercial Management Ltd. from its shareholders, Bernard and Corrick. Manufacturing Consultants Inc. also agreed to lease office premises from shareholder Corrick under a long-term lease. Under the share purchase agreement, Manufacturing Consultants Inc. agreed to purchase all of the outstanding shares which were owned 50 percent by Bernard and 50 percent by Corrick. The total price payable for the shares was $100, being $50 for all of the shares of Bernard and $50 for all of the shares of Corrick. Manufacturing Consultants Inc. also agreed to repay to Bernard and Corrick loans that they had made to their corporation, Commercial Management Ltd., in the amount of $450,000. The purchase agreement provided that Commercial Management had accounts receivable outstanding in the amount of $350,000, which Bernard and Corrick warranted were all in good standing and could be collected by Commercial Management Ltd. From its customers within 60 days. Under the terms of the agreement, Manufacturing Consultants Inc. agreed to pay $100,000 as a deposit on the signing of the agreement and the balance of the money in 90 days. The shares of Commercial Management Ltd. were to be delivered at the time of signing on payment of the $50 to each shareholder. The agreement was signed on May 1 and the $100,000 paid. Bernard and Corrick signed over their shares on the same day, and each received $50 as payment in full. By June 30, Commercial Management Ltd. (now owned by Manufacturing Consultants Inc.) had collected only $225,000 of the accounts receivable, and the balance had to be considered uncollectable. At that time, they informed Bernard and Corrick that they expected them to provide the company with the remaining $125,000 that Bernard and Corrick had warranted were collectable accounts. Bernard and Corrick did not pay the balance owing. On July 31, the accountant at Manufacturing Consultants Inc. inadvertently sent Bernard and Corrick a cheque for the $350,000 balance owing under the agreement. When the error wets discovered, the company claimed repayment for the $125,000. Bernard and Corrick refused to do so, and Manufacturing Consultants Inc. instituted legal proceedings against Bernard and Corrick to recover the

$125,000 or, in the alternative, to set off rent owing to Corrick against the amount unpaid. Outline the nature and basis of the claim against the two former shareholders and any defences Bernard and Corrick might raise. Render a decision.

CASE STUDY