Major Issues on Company Law - Essay Example

? Company Law No: Company Law Introduction Before going through the case, it is necessary to have a brief look at Company law, Company Act 2006 and the Insolvency Act 1986 and their implications. Company law  It regulates Companies established under the Companies Act 2006, Insolvency Act 1986, the Corporate Governance Code, European Union Directives and the court rulings. The formation of a company is the basic legal requirement to run business1. Article of Association The Article of Association contains the a) powers of directors, and the shareholders to vote b) ways and means to run the business c) methods to adopt for proposed changes in regulations. The rights, duties and powers are conferred to the company and its members who become part and parcel of the Articles of Association2. The articles of association of a company are a binding force for the existing members and future members who wish to join in the days ahead. Moreover, the heirs of members, successors and the legal agents are to comply with the provisions of article. The article of association binds the company and its members as they sign the required documents. In other words, it is a kind of contract that exists between the company and its members. As per the terms of article, the association members can enjoy certain rights and duties towards company; where against the company has certain obligations towards its members. Similarly, the company expects its members to fulfill their duties and obligations that are required for smooth functioning of a company3. The constitution of a company relies on articles of association. The Articles identify a set of procedures to conduct business, preparation of accounts, hold meetings and directors’ appointment. These rules are subject to change with the changing circumstances except compulsory terms that are derived out from the Companies Act 20064. In Attorney General of Belize v Belize Telecom Ltd5, it was held by the courts that appropriate formation of a company could be instrumental in removing a director from office by shareholders. Where the articles of the company are silent on an issue, the competent court of law will fill the gap as we have seen in the case of Attorney General V Davy6. Company Act 2006 Under the Companies Act 2006, different sorts of companies can be formed. It provides guidance with regard to the formation of a Limited / Unlimited company, the shareholders, the directors and the employees. Incorporation of Unlimited Company makes the company liable for all losses and debts under the civil law. If a company is formed limited by guarantee, the guarantor’s liability will be limited to the extent of guarantee7. Insolvency Act 1986 It addresses the insolvency of firms and individuals in line with the bankruptcy law of the United Kingdom. There are two kinds of bankruptcy law, which comprised cash flow insolvency and balance sheet insolvency. The definition of insolvency under the Insolvency Act 1986 is that if an individual or the company is unable to pay off the debts on due dates, in order to save the company from becoming insolvent, the company will satisfy the court provided that the value of its assets is more than the amount of its debts8. In terms of cash flow insolvency, let us look at the case law Re Chine Finance plc9 where the court examined the financial status of cited company to determine its present and future capabilities to pay off debts when they were due. Hence, the creditors would be in a position to call earlier insolvency of the company10. Brief History The case in point is about Paul, who in the year 2010 established sizzling business of supplying delicious food to individuals and companies. In the subsequent year, Paul formed a company namely Murdock Kitchens Ltd and became its sole director by issuing ordinary shares of pound sterling 40,000. During the course of business, he entered into an agreement with Yorkshire Water to supply food for lunches. Later on, Paul got seriously injured due to explosion of oven. To carry out company’s business, he appointed Julie as company’s secretary. In order to expand business, Paul registered PK Bradford Ltd at the same address of Murdock Kitchens Ltd to run its affairs by the three directors (Paul, Shahid and Mirza). The company’s secretary received summon for an unpaid bill related to advertising and packaging of PK Bradford Ltd at the address of Murdock Kitchens Ltd. Further, she received a letter from solicitor of Murdoch Kitchen that they cease to continue with the business due to trading loss over the last six months. The incoming directors Shahid and Mirza intended to shift Murdock Kitchens Ltd into the restaurant business. Therefore, change in the company’s articles of association was inevitable. For a proposed change in the Article Association, the company issued notice that contained date of a meeting to be held on the 1st February 2012 without specifying the proposed change. Legal issues Whether Paul can sue the company for his fatal accident? Who is liable to meet the contract with Yorkshire Water? Which company is liable to discharge the summons for unpaid money? What would be the proposed action in relation to the threatening letter from the solicitors? Whether the resolution passed at the meeting is valid? Whether change can be incorporated due to indifferent attitude of Paul? Legal Opinion Can Paul sue the company for his serious injuries, which may prove to be fatal? Yes, he can sue the company in the capacity of employee provided that the company enters into contract, which makes the director, an employee under the common law. The board of director is empowered to award service contracts to its directors. However, Section 188 of the Company law requires fixed term of contract through an ordinary resolution, which ensures benefits to its employee at the time of sickness or disability11. Court Judgment The larger bench of the Supreme Court of UK headed by Lord Philip ruled in the case of Bolton MBC v Municipal Mutual Insurance Ltd 200612 that Public liability relates to the insured’s relationships. Another angle of employers’ liability is that vide Employers’ Liability (Compulsory Insurance) Act 1969, it is incumbent upon every employer carrying on any business in UK to maintain approved insurance policies against liability for bodily injury or disease sustained by the employees in the course of their employment in the business13. Which company is liable to discharge the summons for unpaid monies? In the normal circumstances, PK Bradford Ltd which is a subsidiary of Murdock Kitchen Ltd is liable to pay the bills on due dates. In this particular case, sister concern of Murdock Kitchen Ltd due to its cash flow insolvency could not pay the bill well in time, therefore, as per UK law the parent company is liable to pay the outstanding bills or be ready to face the consequences in accordance with law14. Who is liable to meet the contract with Yorkshire Water? PK Bradford Ltd, a subsidiary of Murdock Kitchens Ltd, used to manage and operate its own business. As per the Company law, stock of the subsidiary is treated as the assets of the parent company in the balance sheet. Apart from the stocks, subsidiary has its own bank accounts, operating capital and ownership of assets. The purpose of a subsidiary is to limit the liability. Breach of Contract by Murdock Kitchen Ltd Let us look at the breach of contract by Murdock Kitchen Ltd., with Yorkshire Water where breach contract exists. In accordance with UK law, breach of contract comes into surface where another stakeholder fails to perform under the contract. This can be happened in certain forms such as failure to supply the goods or service mutually agreed upon. In effect, the actual breach happens when one party of the agreement refuses to perform his or her obligations on the given time and date. In this respect, reference is made to Poussard v Spiers15 and Bettini v Gye16. The contract may be expressed or implied. See the case of Hochster v De La Tour17 as a case law example of express renunciation. Renunciation is implied in a situation where the defendant no longer intends to perform his part of contract. We may cite here the case example of Omnium D’Enterprises v Sutherland18. The remoteness of loss in contract can be seen in Hadley v Baxendale19. In the mentioned cases, the court established the principle that if one party of the contract is found breaching the contract, the other party of the contract has the right to claim damages fairly and reasonably. Perusal of the mentioned cases provides a clear picture about the non-performance of Murdock Kitchen Ltd., in meeting obligations of Yorkshire Water. Had the company ensure supply of food continuously; its distribution channel would not suffer substantial losses. In otherwise situation, sister concern of Murdock Kitchen Ltd, would afoot the utility bills / other bills. Insolvency Here, we may find two kinds of insolvency, one is balance sheet insolvency and the other one is cash flow insolvency. In cash flow insolvency, the company finds it difficult to meet its financial obligations on due dates. When liabilities exceed assets of the company, it is called balance sheet insolvency. Both insolvencies may attract insolvency proceedings. The court initiates liquidation process to pay off outstanding debts of the company20. Under the mentioned scenario, Murdock Kitchen Ltd, parent company of PK Bradford Ltd, is liable to meet the contractual obligations with Yorkshire Water. Required notice under the Companies Act Contents of notice As per Company law, all shareholders are entitled to have a written notice of a meeting unless otherwise required by the article of the company. Apart from issuing notices to the members, notice of general meeting must be given to each director of the board. A point, which is always missed by the company, is not to send the former articles to the auditors21. Notice to be sent to the members and the directors should be in hard copy form. In addition, the options of emailing or website links can also be used. The liberty of choosing methods for sending notices is left at the discretion of the issuer. The most important things are that the company should follow the relevant provisions of the Companies Act in letter and in spirit. Failure to comply with the provisions of Companies Act and the article can invalidate the notice, the proposed meeting and the resolutions passed as well22. Documents and information can be dispatched to shareholders by way of website provided that the resolution allows the sender to do so. It is the prerogative of the members as to which form of sending documents and information most suited to him. Under section 311, Section 283 and Section 325, notice must have the time, date and place of meeting and the general agenda about the proposed changes / amendments23. If notice in question does not meet the requirement of Companies Act, it has no legal authority to convene a meeting for the expected changes. It is incumbent upon the issuer to ensure incorporation of time, date, place of meeting and complete text of all motions in the notice for the members24. In the case under discussion where notices were sent to the members and the directors contained date of meeting only. Since the notice lacks other ingredients as required by the Companies Act, therefore, the notice may be termed as invalid. Hence, the resolution passed in meeting for the proposed changes in the article of company has no legal value. Can a resolution be passed without a clear agenda? To pass a resolution, the quorum should be complete in all respects. In case of insufficient members to fulfill quorum’s requirements according to the rules and regulations of association, the resolution will be treated as invalid. Therefore, any motion or motions passed at the meeting will be ineffective. If passage of resolution meets the quorum requirements, it should be termed as valid resolution to be recorded in the minutes. Further, under the Companies Act, resolution cannot be passed without a clear agenda. If it is passed without a clear agenda, it will be considered as invalid resolution25. With the above clarification, the passage of resolution at the meeting of Murdock Kitchen Ltd by all means is treated as invalid resolution. Moreover, passage of all resolutions requires a simple majority. How to respond to the threatening letter from Solicitor? In the first place, Julie being the secretary of the company should not get into panic even if a letter that she received from the solicitor is strong worded. Instead, she should find out specified time to respond to the allegations leveled against the company of her husband. If comfortable time is there to respond to the letter of petitioner’s solicitor, she must peruse the contents carefully for a point wise reply with the assistance of competent lawyer. As an interim reply, she should ask the solicitor of the petitioner to give some time to examine the allegations that are contained in their letter. As a first step, the company’s secretary should note down at what time the letter is received at business address. In the meantime, if she receives letter duly signed by the judge or from a court official, it requires some urgent action on her part. She should immediately comply with the court orders. The non-compliance of court order may attract contempt of court proceedings, which brings bad name to the company. Moreover, the negative impact on the business of the company can not be ignored. Under the mentioned scenario, she has the choice to file an appeal in the competent jurisdiction against the order of subordinate judiciary. In the meantime, she must prepare for the upcoming hearing to be heard in person in accordance with the law26. A threatening letter from the solicitor means that legal action against the company is in the offing. Therefore, the company should take it seriously until the normalcy of the situation. If company made something wrong, remedial measures should be taken to streamline the things at the earliest possible time. If threatening letter is issued wrongly by the issuer, it attracts legal action against the identifiable individual or individuals whose misdeeds caused substantial losses in trade27. In the case under discussion, the threatening letter was issued to Murdock Kitchen Ltd., by the Solicitor instead of PK Bradford Ltd. Case Law McDonald's Restaurants v Morris & Steel In the year 1990, McDonald's Restaurants filed a suit against David Morris and Helen Steel for damages. This is perhaps one of the longest periods of litigation in the history of United Kingdom that merits court action. In the year 1986, the campaign was initiated by a small environmental group of campaigners with the distribution of a pamphlet entitled as what’s wrong with McDonald. In the specified pamphlet, it was claimed that the McDonald's corporation sold inferior quality of food, mistreated their work force and its unethical marketing practices to sell its products, which amounts to cruelty with human beings and the animals. Further, the management of the said company used resources and created pollution. Moreover, its packaging is solely responsible for destroying the forest of South America. Despite winning two hearings by the McDonald, the opinion of the masses put the company in an embarrassing position. The company made concerted efforts to convince the defendants to drop the case by paying the mutually agreed amount28. Whether change can be incorporated due to indifferent attitude of Paul? Yes, proposed changes can be incorporated in the Articles of Association of the company through passage of resolution with simple majority under the Companies Act 2006. Bibliography Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 Attorney General v Davy (1741) 26 ER 531 Bettini v Gye (1876) 1 QBD 183 Bolton MBC v Municipal Mutual Insurance Ltd [2006] EWCA Civ 50 Cheffins, B. 1997. Company Law: Theory, Structure and Operation. Oxford: Oxford University Press. Davies, P. 2010. Introduction to company law. Oxford: Oxford University Press. Finch, V. 2009. Corporate Insolvency Law: Perspectives and Principles. London: Cambridge University Press. Hadley v Baxendale [1854] EWHC J70 Hochster v De La Tour (1853) 2 E&B 678 Keay, A. and Walton, P. 2008. Insolvency Law. New York: Longman. McDonald's Corporation v Steel & Morris [1997] EWHC QB 366 Micklethwait, J. and Wooldridge, A. 2003. The company: A short history of a revolutionary idea. New York: Modern Library. Omnium D'enterprises v Sutherland [1919] 1 KB 618 Poussard v Spiers (1876) 1 QBD 410 Re Cheyne Finance plc [2007] All ER (D) 25[7] Sealy, L. and Worthington, S. 2007. Company law: Text, Cases and Materials. Oxford: Oxford University Press. Simpson, R. C. 1972. Employers' Liability (Compulsory Insurance) Act 1969. The Modern Law Review, 35(1), 63-68. Read More