The Management Style of the Organization - Essay Example

?Corporate Law Peter and Amanda have been in partnership for many years in the car trade in Kent. They have decided to incorporate their business as a private company limited by shares, called Kent Cars Ltd. As an expert on corporate law you are requested to advise on the matters listed below: (a) What provisions should be included in the article of association to ensure that Peter and Amanda can realise their shareholding in the company if either of them should wish to leave the business (b) To what extent can the company`s financial affairs be kept secret from the public? (c) Assuming the Peter and Amanda are the only directors and shareholders in the company, what provisions should be included in the Article of Association to ensure that Peter and Amanda remain as company directors despite any disagreements between them or the introduction of new shareholders or directors to the company? (d) To what extent, if any, could Peter or Amanda or both incur personal liability for the company`s debts if the business fails? (e) Assume that there is one additional member of the board of directors, John, to whom the actual day-to-day running of the business has been left and who simply reports back to the board on the business he had transacted. John refers to himself as the managing director of Kent Cars Ltd, although he has never been officially appointed as such. A month ago John entered into a contract on Kent Cars Ltd behalf with James to create a company website, however, Kent Cars Ltd did not wish to order the actual website produced by James. The board of directors had refused to pay James, claiming that John did not have the necessary authority to enter into the contract with him. Analyse the situation with regard to the authority of John to make contracts on behalf of Kent Cars Ltd and in particular advise whether or not Kent Cars Ltd is liable to James. Answers a. In accordance with the section 18 of Companies Act 2006, in order for a company to exist, as a legal entity, it needs to have articles of association, which will ‘prescribe regulations for the company,’ (18.1 Companies Act 2006). Peter and Amanda are free to regulate the terms under which their partnership will be developed – with the restrictions set by the specific Act; this means that Amanda and Peter can add any term in the articles of association but this term should not be in clear opposition with the rules of Companies Act 2006. If either of the partners leaves the business, then the partnership would be eliminated; the business would have to be terminated, unless an arrangement has been made in advance, with relevant terms included in the articles of association, that in such case the company will continue to exist being transformed to a single member company – in the context of the article 123 (part 2 of Companies Act 2006). However, the shareholding of the leaving partner should be secured; this target can be achieved through specific terms in the articles of association, as for example the following ones: (part 2, part 9): a) a term defining that the leaving member would have the right to exit the firm anytime after a relevant notice, without his right to ask for his share on the company’s property to be influenced, b) a term defining that the leaving member would ask for his share from the firm’s profits within the particular financial year – referring to the period beginning in the first day of the current year and ending the day when the particular member decides to leave the company, c) a term defining that the share of the particular member would not be affected (reduced) by potential limitations in the company’s wealth because of the decisions of the other member – referring to the period beginning the day that the leaving member leaves the firm up to the day that his share is given to him, d) a term should be also included stated that any right of the members/ shareholders on the company’s assets would be kept – in case that the assets will be not sold or, in other way, distributed between the shareholders; this would be the case that the company would continue to operate as ‘one member company’; in the above case, a term would be included in the articles of association prohibiting the right of the remaining member to sell the company’s assets; an additional term should exist for repaying the leaving member for his contribution to the firm’s assets – on annually basis or on different time points, as arranged between the company’s members. In the above case also, the right of the leaving member on the company’s assets would prohibit any third party, contracting with the company, to ask for the selling of these assets – in case that a debt has been developed by the firm towards this party. At this point, the following issue should be made clear: the power of the leaving member to ask for his share in the particular company would be directly related to the reason for which the member leaves the company. In this context, if the specific member had left the firm at his will, then his right on his share on the company would not be affected. However, if he had left the company because of a Court decision, for instance in the case of fraudulent behaviour, then any agreement made in regard to his rights on the company’s wealth (at the level of his share) would be rather considered as void, since there would a need to secure the rights of the members or the third parties who had suffered damage because of this member’s fraudulent behaviour. b. Since the company is made public, then its financial affairs should be made known to the public, ensuring the protection of the funds of the shareholders. The specific obligation of the company is set in the article 423 – chapter 7 of Companies Act 2006 – where reference is made to the obligation of the companies to circulate a copy of their annual accounts and reports, within the deadline set in the article 424 of the above Act. However, in the article 426 of the same Act, an exception is introduced from the above obligation; it is explained that a company may choose to circulate a summary financial statement – instead of its annual accounts and reports – under the terms described in the article 426 of the 2006 Act. In this context, the financial affairs could not be kept secret from the public; it would be just possible that certain details of the firm’s financial transactions and status are not made clear to the public but such option would exist only if the terms of the article 426 could apply. c. In the context of existing case law, the rights of the shareholders to decide on the removal of a company director is absolute, meaning that a director can be removed with a simple majority of the shareholders, an issue highlighted in the case Bushell v Faith [1970]. In the Companies Act 2006, the details related to the removal of directors are described in the articles 168 and 169 of Chapter 1. The specific provisions, in practice, verify the decision of the Court in the case of Bushell v Faith. In the above articles, it is noted that the shareholders can remove a director by an ordinary resolution without restrictions or limitations in their right. A notice for the relevant meeting is required but no exceptions apply on the particular process, i.e. no power is recognized to the director to deny leaving his position in the company. The right of the director to protest against his removal – as included in the article 169 of Chapter 1, is rather typical. Indeed, despite the fact that the director has the right to ask for a hearing from the shareholders – presenting his view on his removal – still such activity does not have a particular influence on the shareholders’ decision, meaning that the shareholders are not obliged to recall their view on the director’s removal. However, if there is a mistake in the process followed for notifying the director for the relevant meeting, then the Court may recognize to the specific director the right for compensation, in the context of the article 169 of the 2006 Act. The above process is differentiated only in the following case: if in the articles of association particular terms have been included regarding the removal of directors, then these terms should be applied – as a priority. In the literature, the increased power of shareholders on the company’s governance is highly emphasized. In accordance with Cahn and Donald (262) in UK the power of shareholders on the management of a company is extensive, being expressed through their right to remove the directors anytime, with no restrictions. Schneeman also refers to the right of shareholders to remove the directors without a particular cause or justification, exercising their right to decide on the management style of the organization (352). However, the above researcher also notes the potential right of a director to protest against his removal in case that such right is provide in the articles of association (Schneeman 352). Moreover, it is also noted that even if such right exists, the director could be still removed by a Court proceeding, in case that one of the following terms exist:’ the director has been involved in fraudulent activities and his removal from the company is for the interest of the company’ (Schneeman 353). In the case under examination, Amanda and Peter are the only shareholders – and directors; this means that their removal from the particular position would be possible only if one of them would ask for the removal of the other one – under the terms explained above. If such case would exist, the other member could be effectively protected if the following term would be added in the articles of association: that a shareholder would not have the right to ask for the removal of a director unless the exception of the fraudulent behaviour, as explained above. d. One of the most important advantages of the limited liability companies is that its owners cannot be held liable for the debts of the company (Schneeman 202); in fact, regarding the specific issue, the owners of a limited liability company are considered as enjoying the same protection as the company’s shareholders. In the case under examination, this means that Amanda and Peter would not be obliged to pay for the company’s debts. However, the following issue should be taken into consideration, as highlighted in the study of Schneeman: in most limited liability companies, their owners face difficulties in order to retrieve the necessary funds for their business. In most cases, financial institutions that provide funds to such businesses, require that the members of these businesses personally guarantee for the relevant loans (Schneeman 202); in this case, if the loans are become due, the members of the limited liability company can be held liable for the repayment of the loan – since they contracted with the bank not as members of the company but as individuals, offering personal guarantee on the money borrowed. This issue has been reviewed in the case Addy v Mayers where the Court held that the members of a limited liability company can be held responsible for the company’s debts in case that they had offered a personal guarantee when receiving the relevant funds (Schneeman 202). In the specific case, Amanda and Peter could not be held liable for their company’s debts under the terms that they have not offered a personal guarantee for the funds borrowed for their business– if there is such case. Otherwise, there would be no obligation of Peter and Amanda for the company’s debts. e. In order to evaluate whether Kent Cars Ltd is liable or not towards James, the following issue should be made clear: whether John had actually the power to bind the company or not. In accordance with the case law developed in the specific field, a company can be held liable for the acts of its agents even if there is no written arrangement between the company and the agent but a series of events had taken place that had given the impression to the third person – contracting with the agent – that the agent acts on behalf of the particular company. In the case Freeman & Lockyer v Buckburst Park Properties Ltd [1964],’ the directors of the firm had allowed one director, Kapoor, to act as if he was the managing director of the company’ (McIntyre 337); in this context, ‘Kapoor contracted with a firm of architects for the development of a particular project’ (McIntyre 337); however, the other directors refused to pay the architects claiming that Kapoor did not have the power to bind the company not being a managing director (McIntyre 337). The Court rejected their claim and held the company liable for the payment of the relevant obligation. Another similar decision is that of Royal British Bank v Turquand [1856] where the Court held that a third party could ask to be compensated by a company in case that he had contracted with a person who seemed to be appropriately appointed as director, even if he was not actually director of the particular firm, and that a meeting of directors has been held – or even if such impression was given (Slorach and Ellis 84). In the case under examination, John has been actually a member of the board of directors; this means that he could be reasonably regarded by third persons as having the power to bind the company in various contracts. James had reasonably thought that John acted in behalf of Kent Cars Ltd; therefore, the company would be held liable for compensating James for his work – even if John was not formally appointed as a managing director. In fact, the company would be held liable for the contracts signed by John, even if ‘he was ceased or disqualified from holding office or if there was a defect in his appointment’ (section 161A CA 2006, in Slorach and Ellis 84), since a priority is given to the protection of the third parties that proceed to contracts with firms through persons who can be normally expected as acting on behalf of the particular firms. In any case, the following issue should be taken into consideration: the company itself could be held liable for the amount due to James, not the other two directors of the company, who would be protected from any potential liability for the firm’s debts, as members of a limited liability company (Slorach and Ellis 44). It should be noted that in order for James to be compensated for his work it would be necessary that the registration of the specific company has been successfully completed; otherwise, the incorporation of the firm would still be in progress and any contract of the firm with third person could be opposed as void (Keenan and Richies 80); in the above case, James might had the right to seek for the amount due directly by John, being considered as liable for the contract developed with James. Works Cited Cahn, Andreas, Donald, David. Comparative Company Law: Text and Cases on the Laws Governing Corporations in Germany, the UK and the USA. Cambridge: Cambridge University Press, 2010 Keenan, Denis, Riches, Sarah. Business law. Essex: Pearson Education, 2007 MacIntyre, Ewan. Business Law. Essex: Pearson Education, 2008 Schneeman, Angela. Law of Corporations and Other Business Organizations. Belmont: Cengage Learning, 2009 Slorach, Scott, Ellis, Jason. Business Law 2007-2008. New York: Oxford University Press, 2007 Legislation Companies Act 2006 Case Law Addy v Mayers [2000] No 990387 S.C Bushell v Faith [1970] AC 1099 Lockyer v Buckburst Park Properties Ltd [1964] 2 QB 480 Royal British Bank v Turquand [1856] E & B 327 Court of Exchequer Read More