Company Law and Legitimacy of the Decisions - Essay Example

?COMPANY LAW al Affiliation) Research on 3 Cases CASE John currently operates a shoemaking business as a sole trader. He runs the business from premises rented in Stratford. However, a recent boost in sales as a result of the Olympic Games has convinced John to expand the business. He wishes to makes shoes for departmental stores and this will probably require him to get new premises and hire more staff. John wishes to reorganize his shoe business. He would also want to know the legal formalities that would need to be followed when reorganizing the business.  Explanations of the options available to John with reference to relevant statutory provisions and case law On the initiative undertaken by John with regards to changing the legal formality of the business, there are a number of options available; I would advise him to incorporate his business since it will offer him a number of advantages relating to returns and management of the business. Incorporation entails the aspect of registering a business entity under the companies’ Act where it runs its activities as a separate legal entity in which the owner is free from the liabilities of the business. The following are the benefits attached to incorporation of a business: a. The business once registered as a separate entity i.e. as a company, it acquires independent corporate existence features, upon these features, the owner is distinct from the company and therefore cannot bear any liability of the company or be compelled to pay any debt owed by the entity.1 b. The business once registered will start living its own legal life upon which all the liabilities which John in his earlier sole proprietorship, would to bear as an entrepreneur. He will be protected by having limited liabilities in that only the charges for shares and capital he will incur after which his personal property, is safeguarded from any liability the company may suffer. c. A company has a characteristic of perpetual existence and under this feature cannot end unless under the provided legal mechanisms. Once he registers his business as a company, it has ability to never die as the death of the owner cannot affect the existence of the company.2 d. The company once registered, is required to be run by professionals and proper management will be achieved unlike other modes of running business activities. e. Unlike in his current business organisation, a company once registered under the Act t acquires the ability to own separate property in that, it can hold the property in its own name and this deters any other persons even its directors, from claiming the company’s assets. f. Also, with the ability to transfer the shares of the company, there is a room to raise more capital further facilitating the aspect of increasing production by expanding business activities. g. The aspect of incorporation also attracts numerous merits of taxations. This achievement of saving taxes is done through for instance, leasing company’s property from which one reduce the amount of tax paid since the holders of such leases are to pay property taxes. This advantage has been well developed in our jurisprudence such as in the case of Macaura V Northern Assurance ltd, whereby in this case the claimant who had the majority shareholding of the company had gone to court to claim for compensation from an insurance company upon the fire tragedy which burnt all the company properties, their honourable justices were of the opinion that the companies properties belong to the company and not the holder of the large number shares and only the company through its agents can claim this compensation. This position clearly outlines the fact that the properties of the company are safeguarded as those of the company and in case of any damage on them still the members of the company cannot be held liable of the same. h. By creation of an independent corporate existence, the owner will be able to keep a private and confidential identity away from that of business.3 i. Also when he registers his business, the level of confident to the target customers rises as many people feel fairly secure in dealing with companies that sole proprietorship. Thus incorporation raises the level of credibility of business affairs of the company. j. Further, when incorporated it’s easier to sell as corporate attract more buyers than either sole proprietorship or partnerships. This because unlike in sole ownership, the new buyer won’t be liable of the acts of the previous owner.4 In order for him to be able to incorporate his business, he needs to ensure that he satisfies all the requirements to be able to be granted registration. This according to the Section 7 of the Companies Act5, is an organization must submit particular requirements to be registered in order to attain the status a company. To be fully registered by the registrar of companies, the owner of the business is required to provide the following documents which are also registered to that effect: These include: a. The memorandum of association.6 This document outlines the clauses which show relationships existing between the company and the external environment. It is an essential document filed for registration and provides company name, the registered office clause, company objectives and liability clause. This last clause provides the nature of the liability the members may incur and stipulates whether the member’s liability is limited by shares only or otherwise. It also notes a company’s working capital which has a minimum threshold that is attained for a company to be registered. b. Articles of Association This is a mandatory requirement before any company registration takes effect.7 The document stipulates the rules and regulations used to govern the internal company management. It also contain share capitals, the rights of the shareholders and commission payment procedures, procedure of transferring the shares, the protocol of governance which will include the powers of the managers, secretary etc. This document is meant to provide all the proper requirements for the smooth running of the company. Therefore, in conclusion it’s advisable that John register his business as a private limited company due to the advantages aforementioned, unlike running other mode of business organisations such as sole proprietorship or partnership whose income is less and the liability is not limited. CASE 2 Parts Ltd has recently had a compulsory purchase order by the council for the land on which it carries out its paper making business. Mars Ltd, a book making company and the parent company of Parts Ltd, wishes to claim compensation for Parts Ltd’s loss of business. Similarly Mars Ltd has recently had financial troubles which have left its directors concerned over the ability of the company to pay its debts as they fall due. The directors have opted to continue trading with the hope of turning the corner.   Using relevant statutory provisions and case law: a) Advise Mars Ltd on the legitimacy of their claim over Parts Ltd’s land. It should be first understood that the council has a domain power to acquire land within its jurisdiction; therefore, under exercise of police power the council can compulsorily acquire land within its jurisdiction. This aspect of acquisition manifests the eminent domain doctrine in that, the council has the ultimate title of all lands within its jurisdiction. Individuals can own land but the title is subject to eminent domain of the state where, if the state or its agents regard the land as useful for public benefits, then they can compulsorily take it and compensate the title holder. This aspect of public benefit is encompassed where land is required for use by a public body and the acquisition such land is essential to the interests of defence, and communal safety and its utilization will promote the public benefit.8 However, there are requisites that need to be satisfied before the Mars limited can lodge a claim on behalf of the parts limited. In this regard it should be understood that a registered a company is regarded as separate legal entity which has its own capacity as a person in the face of the law.9 Therefore, in concurring with position of their lordship in the Cape industries case, it can e regarded that part limited despite being a subsidiary company of the Mars limited it’s a separate legal entity which is expected in the face of the law to run its own affairs independently without the other companies either bearing its liability or even institution suits on its behalf.10 Even if a company is a subsidiary company it still has a different life and exists as a separate entity.11 Though this aspect of the parent company has ability and general supervision was acknowledged in the case of Southard Ltd by Justice Templeman, that though the company may be a subsidiary and under the parent company its liabilities cannot be borne by the other companies or the parent company. This shows that the liabilities of part limited cannot be borne by the Mars ltd but in the upholding of rules of natural justice i deem it vital t allow the parent company sue or institute a proceeding on behalf of the subsidiary company. Therefore from the position issued by Lord Denning,12that in considering whether a company is a subsidiary and though may be in the face of the law be regarded as a separate entity it’s vital to consider the aspect of economic unit of operation, in that they operate under a single economic unit then that can create a proper ground to show a clear link between the two companies and their mode of operation. It can therefore be concluded that the Mars ltd has the ability to sue on behalf of the parts ltd in the support of Denning’s approach, since there can be established a clear economic link between the companies. b)      Advise Mars Ltd’s directors on the consequences of their decision to continue trading. A company is regarded as a separate legal entity from its owners. It has been widely regarded as a group of persons associated together with a common aim; the entity must be registered under the Company’s Act. This implies that a company comes into existence upon registration under the Act and this is known as incorporation. Incorporation has a number of advantages to its directors/owners and these include the aspect of independent corporate existence in that, the entity has an outstanding feature of independent existence (Derrick, 2008)13. Under this feature, directors of Mars Ltd are separate from the company since it has its vested interests with a corporate personality which is very distinct from the shareholders’14 In this case it was held that though the owner had a large share of the business, he was very different from the company and therefore could not be held liable for the company’s debts. In line with this decision in Salomon,15 it can be highlighted that the decision by directors of Mars Ltd to continue trading despite the fact that the company is making losses, cannot be held liable for the company’s liabilities since the company is a distinct and separate entity which a legal capacity similar to those of the owners under the Act, and therefore, the shareholders should not be held liable for the company’s liabilities. Further, unlike other business organizations, companies’ owners enjoy limited liability in that the company is regarded as a separate body living its own business life and its members cannot be held liable for its debts. The liability of its owners is limited to shares and a member is only expected to just pay up the fees for the share after which they cannot be held liable for any other arising liability. Therefore, under the protection of this feature, the directors of the Mars Ltd cannot be held liable of any debt of the company in case it collapses. It can therefore be concluded that the directors of the Mars Ltd are not to suffer any loss in case the company collapses since they are different from the company and enjoy limited liability, and the only loss they may suffer upon collapse of the company, is that the company’s properties will be seized by creditors and they directors will not be able to receive any dividend when the company is placed under receivership upon it being declared bankrupt. Further, the directors of Mars Ltd should understand that the concept of lifting the veil cannot be applied in a bankruptcy situation unless under the following circumstances: a. Determination of character, in order to regard whether it’s an enemy company for instance.16 b. Where there is evidence that the company is evading taxes or in claims of acting as a separate company.17 c. Where there is proof that the company in the course of its business, is committing fraud or has improper conduct.18 d. Also, where the statute requires that the veil be lifted upon. However, the directors of Mars Ltd should take into account that according to the Insolvency Act,19 it provides that the directors are to bear liability of the company’s debts if they knew that the company was with an objective perspective going to become insolvent and there is evidence that they never took any measure to within they powers to stop the collapse of the company nor did they decide to wind up the company to avoid insolvency they are to bear the liability. Therefore, since from the fact above there is no indication that the directors did not foresee the collapse of the company nor did they undertake any measure with aim of reducing the creditors debts they should then know that they are to be held liable for their the loss of the creditors properties and in compensation to creditors their properties shall be attached and sold to repay the creditors since them as directors have decided to undertake the risk.20 Therefore in conclusion, the directors of the Mars ltd should understand that as directors they are expected to comply with the statutory provisions and also undertake all that it pertains to ensure that the company’s stakeholders do not suffer injury as a result of any mismanagement.21 These aspects above indicates that the directors of Mars Ltd if they continue with their trading with well knowledge that the Company is about to be declared insolvent they shall be held liable for the companies liabilities to the extent which the court may deem fit, and this has been held to be determined with regard to the directors contributions to the loss.22 CASE 3  James, a director and shareholder of Pizano Ltd’s, wants to leave the company over internal disagreements. The articles of association require him to first offer his shares to directors, who will pay for them at a fair value. James does not believe that the directors will offer him a fair value for his shares. He has decided to bypass the requirement under the articles and seek external buyers.   Using relevant statutory provisions and case law: a)      Advise James on legitimacy of his decision not to offer his shares to the directors first. The Articles of Association is one of the fundamental documents used in company registration together with memorandum of association. This requirement is mandatory for companies limited by guarantee and those limited by shares.23 The Article of Associations contains rules and regulations that govern general administration of company operations.24 Upon registration both the Articles of association and memorandum binds the shareholders to the company; it serves as a covenant that they shall observe all the rules and guidelines applied by the company. James should understand that the Articles of Association serve a binding agreement upon its members in relation to the company thus he is bound by the provisions of the articles since he placed his seal on it25. Due to the fact that this document gives an analogy of the rights and liabilities of its members; it creates a contract among members and the parent company. They are bound by the terms of the articles and upon breach of the provisions of the contract the party is held liable. James should appreciate the fact that Articles of Association regulates the company internally to effect proper management. Its relationship with memorandum of associations is that its articles are aimed at facilitating the achievement objectives stipulated in the former document. James, acting contrary to the provisions of the articles of association is in contravention with the objectives of the company as stipulated in the memorandum of association thus such a breach is an illegality. Further, his acts amounted to going beyond his powers in that he acted ultra vires while exercising his right of leaving the company at will. His failure to follow the due process of selling off his shares first was a breach of the internal rules of the company. Acting ultra vires which is inconsistent with the provisions of the Articles and it may be regarded as a nullity if it can be concluded that upon breach of those internal rules he violated the elements outlined in the memorandum of association.26 The term ultra vires means acting beyond the limits of power. James’ acts may lead to a failure of the company from not achieving its objectives as provided in the memorandum; this is regarded as acting ultra vires and is not accepted in law.27 This Ultra Vires doctrine is aimed at preventing any wrongful acts within or without the company which may result to a breach of its operations as stipulated in the memo and may also amount to misuse of company property. Though James may argue that his act did not contravene the memorandum of association and unlike a breach of a provision in the memo which may render the act being regarded as void, provisions of the Articles of associations are subject to manipulation provided they do not contravene the memo. References University of London External System chapter 4. B. Pettet, J. Lowry & A. Reisberg 2009, Pettet’s Company Law, Longman, New York. Sealy Sarah l 2008, Cases and material in company law, Oxford University Press, Oxford. F. Derrick 2008, Blackstone’s statutes on company law, Oxford University Press, Oxford. The Companies Act 2006 The Insolvency Act 1986. Read More