LLB Company Law England and Wales - Essay Example

Situation 1 “The Obligation to shun the conflict of Interest “ Section 175 of CA 2006 states that a director must not place himself in a scenario where he may have, or he has an indirect or direct interest that clash with that of the company. It will be regarded as a breach of duty if a director places himself in such a conflict scenario. Further, the articles of association of the company provide that no development site may be purchased without the unanimous approval of the directors. Nonetheless, in case of a private company, the probable conflict of interest may be revealed to the board and, if the board permits the conflict, no action will be initiated on a director for such violation. In certain cases, the company’s articles may require such authorisation from the shareholders and in such cases, even if the board authorises such transaction, it is not valid unless members approve the same. In case of public companies, only if the constitution specifically permits this, then only the board will have authority to authorise such transactions in which a director is interested. It is to be noted that s 175 has to be interpreted in conjunction with the s 182 CA 2006. It is the latter section that deals with the scenario where a director has an interest in a present business arrangement or transaction. For instance, if A Ltd wants to enter into business dealing with B Ltd and X is a director in both the companies; This is really a conflict of interest scenario as X is the director in both the companies. If X has made an disclosure of his interest to the board of the both companies and has obtained approval from the member of the boards, then, it is said that he has adhered with the section 175. Under section 182 of the CA 2006, X has to divulge his interest to the boards of both the companies and if X fails to do so, and then it will be regarded as an offence which may entail a fine also. (Mead, Sagar & Bampton 2009:256). The Article of the Fineshade Ltd is already containing a clause namely no development site may be purchased without the unanimous approval of the directors. However, the Articles does not specify the following matters; a) As per section 175(5) (b)), how any subject matter is to be suggested to the board and how it is to be approved by them. b) As per section 175(6)) how the quorum prerequisite to consent any conflict c) To avail the benefit of the safe harbour provided in the section 180(4)(b) both in regard to deal with the non-material conflicts and to authorise conflicts. Company has suffered a monetary loss of £70000 due to fall in market value of the property. Hence, shareholders are authorised to take derivative action against the directors of the company for the loss sustained to the company due to the conflict of interest by a director of the company. Part II of CA 2006-under s 260(3) - now provides an opportunity for shareholders to initiate derivative action against the company for any proposed act or any actual omission involving default, negligence, breach of trust or breach of duty. Under this, as exclusion to the rule laid down in Foss v Harbottle, a statutory derivative claim can be initiated by a shareholder against the company directors, and this section does not complement the rule laid down in Foss v Harbottle but simply offers a legal procedure for a derivative action.(Hicks & Goo 2008:430). In this case, Brian can make a derivative action against the directors to reimburse the loss sustained by the company. Further , board has kept silent even after finding the lapse and Brain has every right to sue the directors of the company, including Marcus for their act of negligence . Issue II “Duty to promote the Success of the Company” Duties owed by a director of a company to the company are enumerated in S 171 to 177 of CA 2006. A director of a company must function in a style in which he thinks, in good faith, would be most probable to work for the growth of the company and for the advantage of the members as a whole under “ s.172 of CA 2006.” In doing so, he should take into the following into account: The long-run outcome of any business decision The necessity to develop relationships with customers, suppliers and others. The requirement to ensure a repute for high norms of business conduct “Duty to exercise reasonable care, diligence and skill” As per s.174 of CA 2006, the duty of a director is to be gauged with the relevance to the skill, care and diligence that would be employed by a diligent and reasonable person while exercising his duty as a director. The skill, general knowledge and experience that may practically be anticipated of a person who acts as a director of a company. The skill, general knowledge and experience a director possess. (Storach & Ellis 2007:75). Under s175 of CA 2006, a director is to shun any conflict of interest. Under this, a director has to place himself in a position in which their duties to other persons should not conflict, or they should try to avoid any personal interest while carrying out the company’s business transactions. Whenever a director makes a profit in the course of business dealing as being a director of that company, then it will be construed as conflict of interest. Conflict of interest refers all kinds of conflicts which include potential or actual .If a director exploits company’s business opportunity, information or company’s property, this will be treated as a clash of interest. It is to be noted that s 180 (4), any said conflict of such interest by a director can be ratified or authorised by the members of a company if not, it will be construed as a breach of his duty. The sole aim of this section is to bar the acceptance of any kind of monetary benefits, which include bribes. This duty is said to be not contravened if the acceptance such benefits cannot be reasonably be construed as possibly tantamount to a conflict of interest. (Verlag 2007:53). Under law of agency, an agent will be held accountable if he acts negligently to his principal. Likewise, under CA2006, a director, being an agent of the company (principal) shall be held liable if he functions negligently. A duty of care is owed by the director to the company in his capacity as an agent. Cairn LJ in Ferguson v Wilson viewed that as the company is a juristic person, it can act only through the directors who are viewed as the agents for the company. Like agents are liable to principal, directors owe a duty of care to the company. Pennycuick J in Charterbridge Corp Ltd v Lloyds Bank Ltd observed that whether an intelligent and honest man while being as a director of a company could have sensibly felt that whether the transaction was for the benefit of the company or not .(Booth 1996:109). It is to be observed that under s 172 , it is the duty of the director to work for the success of the company for the advantages of its members. In this case , Kevin, the commercial director of Fineshade Ltd employed the same supplier to supply a variety of kitchen products to both stores despite the fact that these products could have been purchased more competitively elsewhere. By accepting a free holiday every year, he neglected the overall benefit that will accrue to the company if the products were purchased at competitive rates. It is assumed that Kevin does not have any approval from the shareholders for such favouritism under s180 (4) of the CA 2006. As held in Charterbridge Corp Ltd v Lloyds Bank Ltd, Kevin, as an honest and intelligent director, had not acted in the best interest of the company. Kevin could be held liable for the loss sustained by the company due to his actions. Situation 3 Under s 172 of the CA 2006, a director is required to act in a way which he thinks in good faith, and which would be likely to advance the success of the company for the advantage of its shareholders in its entirety. The duty under section 172 is subjective in nature, which connotes that the directors to take decisions what they sincerely and really thought. Further, this section demands that directors are under duty to give due recognition to the suppliers, employees, community and customers while a taking a business decision. Section 172 requires that a director should act in a way in which he regards, in good trust, would likely to advance the success of the business for the advantage of its shareholders in their entirety and in doing so, he should give more significance to the following: “In the larger interest of the company” The effect of company’s operation on the environment and the community. (Slorach S & Ellis J.G.2007:75). Until a body of case law develops on the subject “what is the advantage to the members as a whole “, the exact meaning of the same remains ambiguous. However, it can be construed that this proposition does seem to offer importance to the interests of the corporate entity. It is to be noted that s 172 (1) includes a variety of issues that the directors should bear in mind and one of such duty is the duty to take care of the well-being of the employees of the company. Though, the Independent report commissioned by Brian states that up to 20% of the staff could be dismissed to make efficiency gains, but doing so would definitely will be against the interest of the 20% employees who were made jobless. According to me , profit maximisation for the benefit of shareholders shall not be the sole aim of the directors of a company so that they will get more perquisites ,and pay increases, but they should also concentrate on the duty owed to employees and to the society as well. More attention should be paid by the directors of a company on the company’s corporate social responsibility (CSR) strategy. Since the better CSR places the company with the brilliant effect on the community, and such policy would augment any company for its faster growth in its business segment, good status in the society but also earn a good profit margin to the shareholders also. Lord Diplock held in Lonrho Ltd v Shell Petroleum Ltd that though the director’s prime responsibility is to safeguard the interest of shareholders , they should give due weight to interest of creditors also. Likewise, it is observed in Liquidator of West Mercia Sofetwear Ltd v Dodd that there should be shift in the interest of the director from that of shareholder’s to the creditors when the company is heading for insolvency. Likewise, when there is the disastrous public relations effect on the company when the directors believed that such redundancies would cause a bad impact on the community and invite ire from public, then their attention should shift from shareholders interest to the employee’s interest. Directors must initiate all possible steps to work for the reputation and success of the company among society and make sure that prosperity of the members of the company in every business decision. Further, I am of the view that the directors’ intention to amend the employee’s current fixed-term service contracts, to contracts which are automatically renewed after two years for a further two -year period is a wise business decision as it would offer directors of the company to decide about the redundancies once in two years after taking into the business scenario that may prevail during that period. Issue 4 Fineshade Ltd has adopted the model constitution as contained in CA 2006. It has an additional provision that any member holding 15% or more of the company’s shares shall have the right to appoint a director to the board. Under s 171(a) of the CA 2006, there is a general duty imposed on the directors of a company to function in tune with the company’s constitution. Since, the Articles of Association of the company constitutes as the most significant part of the company’s constitution, the directors are therefore under a duty to function in agreement with it. It is to be noted that where the directors of a company involve in an act which falls outside the ambit of their authority under the constitution of the company, then it will be construed as if they are in the breach of their duty. Under CA 2006, companies are allowed to incorporate either the whole of the new model articles or in part. As per Clause 17 of Model Article of CA 2006, a director of a company can be appointed as follows: Through an ordinary resolution in the shareholder’s meeting “By passing a board resolution ” Thus, a director can be appointed either through a board resolution or through a resolution passed by the members of the company. It is to be noted that a director who has been appointed by the board of directors can hold such an office until the conclusion of the ensuing AGM of the company. It is assumed that Brain is not impacted by the disqualification provided in the law to act as a director of a company. It is assumed that Brain is not under the age of 16 years else permission from Secretary of State has to be obtained for Brian to act as a director of a company. It is presumed that Brain is not an undischarged insolvent. If any court has issued a disqualification order or Brian has not offered a disqualification undertaking that he will not act as a director of a company. (Sheikh 2008:507). In the majority of the cases, the directors of a company are appointed in the annual general meeting (AGM) by the members of the company and in certain cases, at an extra-ordinary general Meeting (EGM) . In the general meeting, the resolution for appointing a director is moved and passed by the majority of the members present in the general meeting. In case, if a director resigns or dies, the board has the authority to appoint a director on a casual basis and such appointment is valid till the ensuing AGM and in such AGM, the shareholders may choose to make the appointment as permanent. In certain cases, the shareholders may delegate the power to appoint a director to the board or a committee of the board which is supervised by the board. However, the size of the board is restricted by the articles of association, and the board may be able to appoint directors at any juncture, but within the limits set by the articles thereby appointing a new director in the place of resignation of a director or death of a director. When the delegation of authority to appoint director is given to board by the members, it is criticised that it makes the way to usurp the power from the shareholders. Here, in this case, Marcus and his team is working against Brian and Brian, may request the company to call for a general meeting and see that he is elected as director of the company with the majority of the members of the company as he is having 15% or more of the company’s shareholding which is offering a right to appoint him as a director to the board. List of References Booth, C.D. (1996). Hong Kong Commercial Law: Current Issues and Developments. Hong Kong: Hong Kong University Hicks, A. & Goo,S.H. (2008) Cases and Materials on Company Law. Oxford: Oxford University Press Mead, L , Saga,r D. & Bampton. K.(2009).CIMA Official Learning System . Fundamentals of Ethics, Corporate Governance. London: Butterworth-Heinemann Sheikh ,S (2008). A Guide to the Companies Act . London: Taylor & Francis. Slorach, J.S & Ellis, J.G. (2007). Business Law 2007:2008.Oxford: Oxford University Press Verlag Goyang Media Ltd. Companies Act 2006. (2007) London: Verlag Goyang Media Ltd. Read More