Law of Business Associations - Coursework Example

?Law of Business Associations Table of Contents Table of Contents 2 Question 3 Case Overview 3 Partnership law of United Kingdom 3 Question 2 8 Introduction 8 Deficiency of Company Law 8 Conclusion 14 References 16 Question 1 Case Overview Sally and Anita, both own local businesses of website designing. At a certain point of time, both of them perceived that they can operate more effectively if they work together as one single business unit based on a partnership contract. The underlying motive of Anita is to obtain profits through the business which had been shrinking owing to her health concerns. However, Sally is concerned about the fact that Anita remains unwell very frequently which makes her scope of contribution for the overall business questionable. Sally is also concerned about the fact that owing to the health complications of Anita, a situation might arise, where the entire business will be Sally’s responsibility where she would want to take over to the entire business by paying off Anita. Partnership law of United Kingdom Partnership in business is commonly known as the relationship between two people or a group of people who view to work together under one name with the intention to earning maximum profit. According to the s. 25 & s. 26 Vict.Ch.89 of the Partnership Act 1890 of UK, people involved in a partnership are deemed as jointly accountable for the failure as well as the success of the business as both of them own the common property. Furthermore, the law also suggests that, at the least two people or group would be required to form a partnership agreement1. a) As depicted in the given case referral, both Sally and Anita are eager to work together as a combined unit. The underlying motive of Sally is to obtain competitive advantages in the local market. However, the motive of Anita was to continue obtaining profits, by mitigating her limitation of poor health. Here, neither of the parties has invested any significance towards investments made to the business. In this regard, section 24 of the UK Partnership Act 1890 depicts that when two individuals or companies are engaged in any partnership, they invest equal amount to the overall business whereby the profits or losses resulting from their operations will also be shared equally. Since both Sally and Anita are assumed to invest equally in the business, they are also liable to share the outcomes of the business equally. Furthermore, section 24 of the Partnership Act 1890 also depicts that owing to similar contributions in the form of capital to the business, either companies or individuals involved in the partnership will equally take part in the management of the business, including all the ordinary matters linked with the company operations. Contextually, both Sally and Anita will need to share the responsibilities of the business equally owing to the section 24 of the Partnership Act 1890. In precise, it can be stated that remuneration and work responsibility of both the parties will be equal in accordance to their inputs in the combines operation of both the businesses2. Furthermore, Sally is also concerned about the frequent health complications of Anita. Owing to this aspect, it is evident that Sally will need to provide greater inputs to the business as compared to Anita, owing to Anita’s health problems and consequently, Anita’s share shall logically remain limited or lower than that obtainable by Sally. In such situations, where the partners involved in the business are recognised to fail in actively contributing towards the organizational success and are thereby termed as ‘sleeping partners’. According to the Limited Partnerships Act 1907 of the UK, sleeping partners will be only being liable to get profits for the amounts they have invested in the business. In this regard, Anita will be eligible to realise a marginal amount from the profit of the business, whereas Sally, owing to her greater contribution towards the management of the business, will be liable to obtain a larger section of the profit of the business. Furthermore, since Sally’s contribution in managing the business is large in comparison to Anita, she can certainly be able to take control over the entire business by paying Anita an agreed sum of amount as part of the settlement process [Newstead v IRC 53 TC 535]. Section 24 of the Partnership Act 1890 clearly depicts that all the partners involved in the partnership should have equal contributions towards the management of the business which cannot be compromised apart from death of the partner. Hence, owing to this particular regulation as per the UK Partnership Act 1890, Sally can end the partnership through mutual settlement with Anita3;4;5. b) As presumed in the case, after separation of the partnership between the two, i.e. Sally and Anita, several months later Sally has received a new photocopier that was ordered by Anita when they were in the partnership. In this case, Sally is concerned about the fact that whether she shall be liable to pay for the photocopier ordered by Anita. In this regard, some additional inputs or information will be required to justify the concern raised by Sally with context to the entire scenario. The first aspect that would be needed in this regard would be the time period for which Sally and Anita operated together as partners for the same business. It is depended on the duration of the business for the period of which both Sally and Anita were partners and had equal liability for the expenditure of the business. A minimal period of partnership will not make Anita liable to pay for the photocopier that is received after 12 months of separation. However, conversely, if the duration of the partnership between Sally and Anita is for a considerable period of time, than the liability of Anita in this entire scenario would be treated differently. Hence, the information about the duration of partnership between Anita and Sally will be a vital driver to decide on the liability of Anita to pay for the photocopier received by Sally after a year6. The subsequent aspect that would be required to answer the liability of Anita is the agreement of the partnership. It is vital to understand that in any sort of partnership, the agreement between the parties involved is significant in regard to taking any crucial decision. Generally, a partnership contract or agreement includes the name of the firm, partners along with their respective addresses. It includes the amount of capital that is being invested by each of the partners and the profit they have agreed upon to share. Apart from this, the deed of the partnership will also include the minimum duration of the partnership and rights and responsibilities of the partners among others. Besides, the partnership deed will also include the clause that will mention all the aspects associated with the post-separation responsibilities of the partners. Owing to this aspect, the partnership agreement will be required to answer the accountability of Anita to pay for any asset order during the partnership, but received after separation, as the partnership deed will include the agreed liability of the partners before, between and after the partnership. Furthermore, Sally will also need to provide a detailed report about the aspects on the basis of which she separated with Anita. This will certainly help in depicting the liability of Anita during the post-separation period of the partnership7. Question 2 Introduction The company law provisions are principally applicable to the corporations, partnerships as well as other business groups to guide them in performing in a transparent and responsible manner, rendering due significance to the interests of the stakeholders and shareholders of the company. The company law is thereby intended to direct the business structures with emphasis to corporate liabilities, taxes, shareholders, investors, creditors as well as employees’ potentials. Accordingly, the legal business structure postulates the directors to conduct the business operations in a transparent and ethically sound manner by legally sharing the profit with every stakeholder8. Notably, directors are often reported to perceive intentions to misuse their power when distributing remuneration and profit based rewards or benefits among themselves and other stakeholders of the company. The discussion in the following section will aim at addressing the limitations of company laws which offer directors with such unethical scopes and accordingly mention the requisite guidelines that intend to restrict directors from conducting such activities. Deficiency of Company Law The UK Companies Act 2006 relating to payment of managerial remuneration suggest that company need to adopt remuneration policies to motivate the directors as well as employees to enhance the performance of the company. However, in this context, the problem arises in the last decade when the directors’ remuneration increases rapidly comparing with the performance of the company during a given period of time. In such instances, it is assumed that the directors are increasing their pay unethically, which, if continues for a long term period, may ultimately harm the stakeholders’ interests from the company9. It has often been argued in this context that the failure of conducting a fair and transparent pay policy by directors also misguides the shareholders regarding the financial condition of the company. It is owing to such risks that the Department of Business Innovation and Skills (BIS) and Financial Services Authority (FSA) have been deciphering deep concerns regarding the failure of the UK companies’ governance system in restricting the director’s misconduct of disbursing remuneration to the stakeholders without rewarding themselves unethically. Another limitation of the company laws in restricting directors to conduct such activities underlay the given rights to the governing bodies of the organisation to maintain confidentiality when disclosing the actual financial conditions of the organisation as well as the remuneration of the directors. In addition, there also exists an assortment of deficiency in revealing the measures taken by the directors to allocate themselves remunerations and rewards or benefits from the profits earned by the company at large10. According to the company law, the board of directors are generally appointed by the shareholders to support the effective continuation of the organisation and to satisfy the interests of all the stakeholders. In this regard, it is suggestible that the directors will have to be more responsible to promote the long term success of the organisation taking into concern the various interests of shareholders, suppliers, customers, employees as well as the environment and overall society. Besides, another vital responsibility of the board of directors is to design and develop organisational strategies which are required to increase the overall competitiveness of the company. Therefore, to respect the law and satisfy the interests of the stakeholders, the remuneration committee of the organisation also should be very cautious when rewarding the directors and employees. The profitability of the stakeholders is also deeply related with the effective director’s remuneration strategy of the organisation. In this regard, the directors are restricting with the imposition of several guidelines and obligations which have been discussed below. Directors’ Meeting The directors are liable to frequently meet with the board members and managers for deciding the nature and scale of companies operations. In the board meeting, the directors are also required to mitigate any problem arising in the organisation and ensure the normal flow of operational activities conducted in a regular manner. Although, the legislature of the corporate law is not including the directors’ responsibilities regarding the conduct of board meeting, it must be essentially included in the company memorandum and corporate governance structure11. Meeting with Shareholders Meeting with the shareholders is often regarded as a formal responsibility of the directors as per the provisions of company laws and other relevant governmental articles. The underlying assumption to this obligation of company directors postulates that the sustainability of the organisation depends largely on the fulfilment of shareholders’ interests and their commitments towards business growth and objectives. Besides, the selection of the directors can also be directly related with the voting power of the shareholders. Therefore, as per company law, directors are obliged to conduct general meetings with the stakeholders, at least within every six months. However, in this context also, a major deficiency of company law can be observed in terms of private limited companies. To be mentioned, corporate laws lack applicability in the context of private limited companies in respect of the provisions to conduct shareholder meetings. Hence, in private companies, the decision completely depends on the board of directors giving a significant scope to the directors to perform unethical practices when disbursing the remuneration to their account12. Financial Management According to the UK Company Act 2006, the director (s) of an organisation should be liable to produce transparent financial statements, mentioning all the requisites considered when documenting the transactions. As an organisational head, the directors should take the responsibility that liabilities of the organisation, under any circumstances, does not increase the organisational total asset. However, no particular or specific guidelines have been enacted to oblige directors for disclosing the financial factors of the organisation along with the distribution of profits among the liable participants13. Fiduciary Duties Directors are required to implement their power in alliance with the best interests of the corporation. These duties are well known in the industry as ‘Fiduciary Duties’. The assumption guiding this particular obligation of company directors postulates the significance of the best interests of the corporation as well as the company directors, which needs to be coherently related with their moral principle of loyalty, honesty as well as faith. The contemporary public corporations have been observed as highly conscious regarding this particular context. On the contrary, it is also observed that the modern private companies enjoy greater scope to disregard such obligations owing to the limited applicability of fiduciary duties related company laws. As a consequence, directors are often alleged to compromise their fiduciary duties in protecting company interests by rewarding themselves with extra remunerations14. The Duty of Care The duty of care obliges directors to assess the future implications of their acts, protecting the rights and interests of all the parties involved in the process, either directly or indirectly. It is in this context that by performing unethical activities in rewarding themselves with excess remuneration, directors tend to compromise with the interests of the stakeholders and shareholders to the company who are also liable to be rewarded with appropriate margin of profits earned. Therefore, the provision of duty of care as per the company law tends to restrict directors to conduct such unethical activities15. Duty of Loyalty In accordance with the duty of care, the duty of loyalty bestowed on directors tend to specify their moral responsibilities of being fair and transparent when conducting any activity, rendering due significance to the best interests of the corporation. In this context the directors have to be very truthful regarding the corporate dealings as well as financial activities. However, the constraint lay on the fact that the directors are not legally liable to disclose the corporate reality among the public which gives them ample scope to breach their duty of loyalty16. Duty of Diligence The duty of diligence necessitates a director to be present at meetings and to disclose the required information regarding all aspects of the corporation, together with any concerns that may affect the corporation. However, in this context also it is notified that the directors are not legally liable to perform their duty of diligence, as the policies are entirely to be based on the memorandum of the company17. Accordingly, with the concern to mitigate these vital concerns Financial Stability Forum (FSF) of the UK has implemented particular principles which concentrate on effective supervisory oversight and stakeholder engagement in compensation. According to the FSF, the lack of transparency in the compensation system at large-sized companies can be accounted as one of the vital reasons for the failure of companies in maintaining sustainability and transparency in their operations18. This further justifies the requirement of specific legal principles to guide and restrict directors from performing unethical profit distribution activities. Stakeholders’ Interventions and Responsibilities A responsible business setup is required to accumulate all the stakeholders of the organisation for decision making. It is in this context that the intervention of stakeholders in the decision making of directors concerning any function of the business, tend to restrict the directors from performing unethical profit distribution activities. Stakeholders of any organisation generally include employees, management, shareholders, trade unions, creditors, customers, suppliers and the local community. Contextually, stakeholders at major organisations possess the right to vote in favour or against company decisions which also includes the disbursement of profits as well as seeking organisational information among others. Altogether, these interventions restrict the directors from keeping away any facts regarding the distribution of profits as remuneration or rewards in excess of the decided margin to their personal accounts19. Conclusion Following the brief discussion constructed above regarding the deficiency of company laws when imposing the rules and responsibilities about director’s rights and obligations to disburse excess remuneration in their personal accounts. The rules and regulations regarding director’s remunerations and their responsibilities are coherently related with the success of business. In this context, the UK corporate governance code presents supervision in regards with designing remuneration agreements for the directors and employees of the listed companies. The Financial Services Authority (FSA) remuneration code is also concerned about observations, suggestions as well as directions of the entire procedure of the financial corporations. The European Commission has also deciphered significant consideration towards remuneration polices and agreements for the European Union listed companies. However, a critical understanding to the applications of these policies as noted under the company law, some major deficiencies can be identified in regards with the successful implementation of these concerning factors. Contextually, it has often been argued that directors can obtain excessive remunerations by misusing their authoritative rights to decide upon the benefits and rewards to be distributed among the stakeholders and shareholders of the company transparently. These consequences result fundamentally owing to the flaws of company laws to restrict directors from conducting such acts. However, particular guidelines, as mentioned above have been practiced widely to direct director’s responsibilities when allocating rewards, remunerations and distributing profits among the shareholders. References Crown, ‘Partnership Act 1890’ [2013] (Home) accessed 08 April 2013. Crown, ‘Limited Partnerships Act 1907’ [2013] (Home) accessed 08 April 2013. Christopher Bruner and Christopher M. Bruner, Corporate Governance in the Common-Law World: The Political Foundations of Shareholder Power. (Cambridge University Press, 2013). Grundy Milton, ‘GITC Review’ [2012]. (Review) accessed 08 April 2013. McDermott Will & Emery, ‘The U.K. Companies Act 2006: Key Provisions’ [2007]. (Financial Services Law) accessed 08 April 2013. Financial Stability Forum, ‘FSF Principles for Sound Compensation Practices’ [2009] (Financial Stability Forum) accessed 08 July 2013. Joseph W. Weiss, Business Ethics: A Stakeholder and Issues Management Approach: A Stakeholders and Issues Management Approach with Cases. (Cengage Learning, 2008). Legislation, ‘Companies Act 2006’ [2006] (Companies and Companies Acts) accessed 08 July 2013. Morse Geoffrey, Partnership Law. (Oxford University Press, 2010). Read More