Company Law and Virtue Ethics - Essay Example

Company Law and Virtue Ethics Question 1- This question focuses on whether any action should be taken against Candy about the gift of Rex 2010. Candy, a promoter accepted a gift from a client without Asif and Becky (other promoters) awareness and this caused a conflict of interest which made the company not to be compensated after the client decided not to honour his contractual obligations. This question highlights the functions and potential liabilities of promoters. A promoter refers to a person who assists by procuring capital or otherwise, in promoting commercial or financial enterprises. Promoters are normally the initial shareholders and incorporators. A promoter main duty is to offer sufficient funding or capital for the company, and to ensure that all the formalities required by the statute for incorporation are met. The promoters have a fiduciary duty to the company and its shareholders. The promoters cannot use secret corporate information for their personal gain or advantage. Becky and Asif can sue Candy to reclaim the gift of Rex 2010 for breach of fiduciary duties. Promoters normally owe fiduciary duties to the company that they are forming. They should thus disclose any profit they are making from the promotion either to the company shareholders or to an independent board. The company many sue a promoter for disgorgement of the profit and for rescission in case there is a breach of duty. Becky and Asif can also replace Candy as a shareholder because the gift of Rex 2010 created a conflict of interest between Candy and the company. When shareholders have a conflict with the decision taken by one of the employees, he or she can be changed or replaced in accordance to its articles or the pertinent law provisions. Furthermore, a company enjoys an independent existence and is used by shareholders to achieve the shareholders economic purposes. The company can thus be used as a means of replacing or seeking compensation from Candy because she created a risk of loss of compensation for the company. The gift was a business courtesy- it was a gift from a client. Before accepting the gift, Candy should have informed the other partners and not kept the gift for personal use, instead she created a conflict of interest by having a business relationship with Yienshiu. The most imperative character of Candy’s job was not to acquire a secret gain at the expense of the company. Candy-a promoter- had a legal obligation not to make secret proceeds from promoting the company without the consent of the other promoters (Tengku Abdullah v Mohd Latiff bin Shah Mohd,[1996] 2 MLJ 265) . She also had the legal duty of disclosing to the Company about the gift by Yienshiu. She was not transparent in her dealings with the other shareholders and thus did not remain true to her fiduciary duties (Fairview Schools Sdn. Bhd v Indrani a/p Rajaratnam (No1)[1998] 1 MLJ 110). The rights of the two shareholders-Becky & Asif- were harmed by an act done to the company, it is to the company that they should look to institute appropriate action because though the company and shareholders suffered the same wrong, it is only the two shareholders right that was infringed. Candy was seen by Becky and Asif as a fiduciary of the company because her relationship with the other shareholders was supposed to be one of confidence and trust. Candy owed legal and ethical duties to the company as well as to Becky & Asif which she did not honor. She did not exercise due care while carrying out her duty and did not subordinate her personal interests to the organisation of the company. Candy abused her position of reliance at the company in spite of the fact that Becky & Asif expected her to devote her full working efforts and time to the interests of the company and to stay away from any doings that would conflict or distract the company interests. When Asif and Becky protested about the client not honoring his contractual obligations, he told them to ask for Candy’s Rex 2010 and sell it for compensation for making him famous. This was a conflict of interest between the two shareholders and the clients Mintz (1995) argued that integrity is an elementary character trait that enables a CPA to withstand a client and competitive pressure which might otherwise lead to a subordination of judgment. Persons of integrity normally act out of moral principles and not convenience. Candy acted out of convenience by accepting a gift from the client. She did not place the interest of the other shareholders ahead of hers. In forming an organisation, the promoters are normally guided by each and every of the various factors involved such as the disadvantages as well as the advantages of this they have to bear in mind. This applies to all shareholders, whether a shareholder is an original subscriber like Candy or a subsequent purchaser of the company from the other shareholders. A shareholder is accountable to risks that he or she may put the company under, for instance capital loss or depreciation and reduced dividends among other risks, which may result from prejudice caused to the company by illegal treatment or ordinary commercial hazards. Candy was thus bound to take account of the risk of the company not being compensated because she had accepted a gift from the client. A company normally represents the means of achieving the economic objectives of the shareholders, while the shareholders comprise the reality behind the company. The company and the shareholders thus have a community of destiny. Nonetheless, even though a company is just a means of achieving the shareholders economic purposes, it enjoys an independent existence. As a result, the shareholders interests are both independent and in reality separated from those of the company so that the likelihood of diverging is not denied. It is evident that the measures that Becky and Asif may complain of, although carried out with respect to the company by Candy and causing it direct damage was an unlawful act with reference to the company, because Candy also, although indirectly, resulted in loss and damage to the company shareholders. According to Pettet (2001), the intrinsic traits or characteristics offer the company its stability, coherence and specific as well as the visible outward presentation. By replacing Candy, Becky & Asif should establish a good corporate reputation for their company as this would have a strategic value for the company. This would establish a favorable reputation with the organisational stakeholders which would translate into a predisposition to buy the company goods and services, to work for the company or to invest in it that is organisational performance. Talbot (2007) argued that a good corporate reputation is an intangible asset for any company as it offers a potential for creating value and also because it’s intangible makes replication by competing firms more difficult. Question 2- This question determines whether the option contained in the Agreement of 19 September is enforceable against Yuenshiu. The understanding of pre-incorporation contract is explored in this question. A pre-incorporation contract refers to a contract that is entered to by promoters when the company is in the process of being incorporated but is not yet complete. This contract is enforceable where the company and the other party to the contract make a new contract after incorporation on the same terms as the pre-incorporation contract. A promoter is held personally liable on pre-incorporation contracts. The agreement of 19 September 2011 is not enforceable against Yuenshiu by the company. At common law a contract is alleged to be made by a company before the date that it is incorporated has no effect and the company cannot ratify or adopt the contract when it is actually incorporated (Savirimuthu, 2003). Yuenshiu may claim in court that the company had not been incorporated on 19 September 2011 as agreed but on 23 September 2011. The time for ratification may be used by Yuenshiu against the company Notwithstanding the rule of law or enactment, a pre-incorporation contract may be endorsed within such period as may be specified in the contract, and if no period if specified, then within a reasonable time after the company incorporation on behalf of which or in the name of which, it has been created. A ratified contract is deemed to be valid and enforceable as if the company had been a party to the company when it had been made (Savirimuthu, 2003). In this case the company had specified the date to be 19 September 2011. While implementing the first company law directive, it was provided that an agent who alleged to make the contract for the unformed company would be held accountable for the contract by the European Communities Act 1972. s. 9(2). A company does not usually exist before it is incorporated and thus it might be incapable of acting though an agent. Alternatively, the option contained in the agreement of 19 September 2011 can also enforceable against Yuenshiu by the shareholders - Becky, Candy and Asif – and not the company. Although the company was not incorporated, it is regarded by the law as a partnership which has certain special attributes such as shares transferability. An unincorporated association is not a separate business unit, it does not have detached permissible individuality but that does deter it from being prosecutable. The three shareholders can thus sue Yuenshiu for failing to the agreement of 19 September 2011. According to the Court of Appeal in the ‘R v. L (R) and F (J) {2008} EWCA Crim 1970 (Hughes LJ)’ court cases , the uncomplicated lawful dichotomy between the unincorporated association and the separate legal personality of the company is deceptive and may conceal a more complicate legal and factual position. The court will consider the potential liability of the unincorporated company and the offences committed against the company by Yuenshiu. Though unincorporated organizations are not viewed for most functions as having a legal personality, there are many significant exceptions to this principle (Hughes LJ). There are numerous offence creating statutes that provide for liability and prosecution of such entities. An incorporated company thus has for all legal purposes, an independent legal personality from its members. Simply put, a company is a group of persons who come together for purposes of business or trade. The company may either be unincorporated or incorporated. With unincorporated bodies, the law does not treat those who engage in business together no differently than the people who conduct business individually as sole businessmen. This is because an unincorporated body does not have a separate personality in law. By comparison, an incorporated company is separated from its members. QUESTION 3- This question determines whether Candy could find herself personally involved in the agreement of 19 September 2011 with Yienshiu. The potential rights of promoters are explored in this question. Candy could find herself personally involved in the agreement of 19 September 2011 with Yienshiu because she is bankrupt. She is restricted to direct a company by the Company Directors Disqualification Act 1986. Under section 11 of the Company Directors Disqualification Act 1986 it is an offence for a un discharged bankrupt to act as a director of, or indirectly or directly engage in or be concerned in the formation, promotion or management of a company, with the exception of the leave of the court. Candy thus committed a criminal offence because she is acted as a director of the company. The maximum penalty is imprisonment for not more than two years and a fine under Section 13. She can thus be personally liable for the company loss when she was involved according to Section 15 of the act. If Candy does QUESTION 5- This question explores the process that Asif and Becky could undergo in case they decided to change the name of the company to Exceptional Galleries Ltd. The registrar consent is needed for the proposed change. If Asif and Becky made the decision that they wished to alter the company’s name to Exceptional Galleries, they can do so. They can change the name by special resolution as dictated by Section 78 or through other means offered for by the company articles. It can also be changed by resolution of the acting parties in this case Becky and Asif. Before changing the name, the two shareholders should check whether any expression or word used in their company name before the Act came into force which was not previously restricted has been added to the list of sensitive expressions and words in the ‘Company, Limited Liability Partnership and Business Names’ (Sensitive Words and Expressions, 2009). Changing the name of the company will prompt the obligation to acquire the required consents for any such expression or word. A company which has a name or expression approved for the first time by the regulations will be needed to acquire approval for the use of the relevant expression or words only if and when it alters it names following the parameters became operational in 1 October 2009. Becky and Asif have to make sure that the new name does not contain a word that requires approval for some reason under the 2009 regulations. If Becky and Asif decide to change the company’s name by special resolution, they have to give notice to the registrar of companies. Additionally they will be required to forward a copy of special resolution to the registrar. The change of name by special resolution is conditional on an event occurrence. The notice given to the registrar has to stipulate that the change is conditional and also indicate whether the event has already taken place. If the notice indicates that the event has not yet taken place, the registrar is not required to take any action until further notice. When the event takes place, the company has to notify the registrar that the even has taken place after which the registrar relies on the statement as adequate evidence of the matters stated in it. When a change of name occurs by means provided in the company’s articles, the company has to notify the registrar and the notice has to be accompanied by a statement that the change of name has been made by means offered by the company articles. The registrar may depend on the statement by the company as enough evidence of the matters stated in it. Issuing a statement to the registrar is the first step in the process of changing the company name regardless of the means used. When the registrar receives the notice of changing a company’s name, he evaluates the statement. If he or she is satisfied that the new name meet the terms with the requirement of this part as well as that the company complies with the requirement of the Companies Act and any relevant requirements of the company articles with respect to changing the name, the registrar has to save the new name on the register to replace the previous name. After registering the new name, the registrar issues a certificate of incorporation modified to meet the case conditions. Before the registrar approves the new name, there are certain procedures that he follows before entering the new name on the registrar. This shows that if the application for a new name results in any other obligations, whether the company has an advantage from an exemption from the requirement to make use of the word ‘limited’ or its permitted alternatives, whether the name falls within the ‘too like’ or ‘same as’ regimes, then the registrar has to be satisfied that those obligations have been met. The registrar also has to be satisfied that the Companies Acts requirement and any other important requirement of the company’s articles are abided by. Changing the company’s name normally commence from the date on which the corporation is given the new certificate of incorporation. This change of name doesn’t have an effect on any obligations or rights of the company. It doesn’t also deliver substandard legal proceedings in favor of and those not in favours of it. All legal proceedings that may have been started or continued against it by its earlier name may be started or continued against using its new name. The company should consider the timing of the name change and make provision for the new company stationery. In changing the name, the company also has to pay a prescribed fee. Before the name is approved by the registrar, the company should not invest in any money for advertising or printing because the name is usually on reserve and may be cancelled before incorporation. The business owners have to indicate the type of business carried out by the company, or which it is proposing to carry on, the name derivation and what the name is meant for, for instance registration of an external company or a name change or amalgamation among others. Question 6- This question focuses on the five websites that were accessed while preparing this coursework and their helpfulness. The helpfulness of the websites is rated on a scale of 1:10, 1 being least helpful and 10 being most helpful. Their helpfulness is determined by the relevance of the content to this coursework. While preparing for this coursework, the websites that I accessed are:- http://vijayhighcourt1.blogspot.com/2008/10/promoters.html This website rate is 6 on a scale of 1 to 10, The website was quite useful and had a lot of information about promoters; this information was reliable because it was supported by various case studies. http://www.economic-truth.co.uk/cima/notes/law14.pdf This website rate is 4 on a scale of 1 to 10. The website did not have a lot of relevant information related to this coursework. http://books.google.com/books?id=AE14OxMO4bQC&printsec=frontcover&dq=company+law&hl=en&ei=R1atTqXdMM-G-wba7-3MDw&sa=X&oi=book_result&ct=result&resnum=9&ved=0CFIQ6AEwCDgK#v=onepage&q=changing%20name&f=false This website rate is 8 on a scale of 1 to 10. This website has very useful information which was supported by various law cases and texts from Germany, USA and the United Kingdom. http://www.legalserviceindia.com/company%20law/com_1.htm This website rate is 7 on a scale of 1 to 10. The website had a lot of useful content related to this coursework. http://www.lawstudentforum.co.uk/threads/corporate-personality-an-introduction.392/ This website rate is 5 on a scale of 1 to 10. The website had limited text related to this course work. Bibliography Company Directors Disqualification Act (CDDA) 1986, Section 11, 13 & 15 Fairview Schools Sdn. Bhd v Indrani a/p Rajaratnam (No1)[1998] 1 MLJ 110 Mintz, Steven “Virtue Ethics and Accounting Education,” Issues in Accounting Education 10, no. 2 (Fall 1995), p. 257. Pettet, Ben. Company Law (Longman Law). (Longman, 2001). Promoters. http://vijayhighcourt1.blogspot.com/2008/10/promoters.html> Accessed November 1, 2011 Savirimuthu, J. ‘ Pre-Incorporation Contracts and the Problems of Corporate Fundamentalism- Are Promoters Proverbially Profuse?’ (2003) Co Law 196. Sheikh, Saleem . A Guide to the Companies ACT. (UK: T & F Books, 2009). Talbot, Lorainne. Critical Company Law. (Routledge-Cavendish, 2007) Tengku Abdullah v Mohd Latiff bin Shah Mohd,[1996] 2 MLJ 265 R v. L (R) and F (J) {2008} EWCA Crim 1970 (Hughes LJ) Read More