Analysis of Business Law Cases - Case Study Example

? LAW CASE STUDY Law Case Study Q1. When a company is duly registered, it acquires a separate legal personality as held by the court in the case of Salomon v Salomon & Co (1897). Explain this legal principle and discuss how it applies to McDaid Development (Ireland) Ltd and its shareholders. The concept of separate legal entity refers to existence of a company and the right that it acquires to sue and be sued in its own name, hold its own property and be liable for any debts accrued (Rose et al 2009). The important phenomenon in respect of separate legal entity is the concept of limited liability that is the liability of shareholders being limited to the extent of unpaid shares. Thus under the general notion, the company is liable for its debts and not the shareholders. (Ridley 2011) The landmark decision in respect of company incorporation was of Salomon v Salomon ([1897] AC 22) where Mr. Salomon, formed a company which included his wife, five children and himself (so as to fulfill requirements of shareholders as per the Companies Act prevailing at that time). He went on to purchase the sole trading business which was operated by him albeit overvaluing the business, but that too because of his confidence in the business. The company went into liquidation and the liquidator evaluated that the company was a sham and was an agent of Salomon and conclusion was that he should be held personally liable to the debts of the company. The House of Lords reversing the decision of the Court of Appeal observed that it was reasonable if shareholders held shares merely to fulfill technical requirements and so the procedure of setting up a business could be used by any person and if so done it would be a separate legal entity. The current Companies Act 2006 (s.7) allows a company to be formed by a single person. The next decision that was made by the House of Lords was Macaura v Northern Assurance Co. ([1925] AC 619) the court went on to say that under corporate personality assets belong to the company (Dignam et al 2012). The courts have scrutinized the concept of separate legal entity by lifting the veil of incorporation, whereby rights and liabilities of company and shareholders are treated as the same thereby removing the concept of limited liability as a result of which the shareholders are held liable for the acts of the company. This is known as lifting the veil, which is done mainly where the company is found to be a “sham” or “fraud”. The current position in respect of lifting the veil is that of Adams v Cape Industries plc where it was held that the veil would be lifted only if the company is created with the intent or purpose of fraud or where the reason was for avoidance of an existing obligation. (Dignam et al 2012) In respect of the position of McDaid Development (Ireland) Ltd and its shareholder, it is important to note that McDaid is a private limited company and has one shareholder who owns all the shares. Under the Companies Act 2006, a single person can also set up a company. The benefit that the shareholder would derive from the company is that of limited liability which means liability would be limited to the extent of unpaid shares and the shareholder would not be held accountable for the losses that have been incurred by McDaid Development (Ireland) Ltd. Q2. The Companies Act 2006 prescribes several duties on company directors. Discuss the general duties of directors according to the law. Analyze and discuss the duties breached by Peter McDaid as the managing director of McDaid Developments (Ireland) Ltd. In accordance with the provisions of section 171 of the Companies Act 2006, the directors must act within powers and to exercise them for a proper purpose. If a director breaches the same such breach is generally considered to be a breach of the director’s duty to act in good faith. Difficulties have arisen when the directors act in good faith but not for a proper purpose. In the decision of the Privy Council in Howard Smith Ltd. v. Ampol Ltd.( [1974] AC 832) it was held that if shares were issue to destroy a voting majority it would be for an improper purposed. Under section 172 of the Companies Act 2006, a director is "to promote the success of the company for the benefit of its members as a whole". The six factors which must be regarded by a director while fulfilling the duty to promote success are the likely consequences of any decision in the long term; interests of company’s employees; the need to foster the company’s business relationships with suppliers, customers and others; impact of company’s operations on community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of a company. Directors are therefore to act bona fide and honestly which is a subjective test per Lord Greene. However, liability may be incurred when they fail to direct their minds to something which might be beneficial to the company. By virtue of section 173 of Companies Act 2006 without consent of the company directors cannot fetter their discretion in respect of exercise of powers and not bind themselves to vote in a particular manner. The level of duty and care had traditionally been framed in accordance with the level of duty and care of non-executive director. Thus the degree of skill required is that reasonable expected from a person of his knowledge and experience.(Re City Equitable Fire Insurance Co [1925] Ch 407). In respect of diligence in Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498 it was held that "such care as an ordinary man might be expected to take on his own behalf." was required. The test under section 174 is that the standard of reasonable care, skill and diligence is of ‘(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b)the general knowledge, skill and experience that the director has.’ The first being an objective test and the second being a subjective test. Under section 175 to avoid conflict of interest, section 176 whereby benefits from third parties may not be accepted and section 177 to declare an interest in a proposed transaction with the company. Submitting a materially inaccurate Statement of Affairs in that he overstated the value of the Company’s land and property by ?9,850,000; The inaccurate statement of affairs appears to be breach of section 171 whereby Peter has not acted for a proper purpose and there remains the possibility of a breach of the duty as there appears to be a mala fide The entering into contracts for sale of properties as well as accounting for fixed assets the same can be said to be a breach of section 172 of Companies Act 2006 as the same does not appear to be promoting the success of the company of its members as a whole. Further the factors provided clearly show that there has been disregard of the factors listed above. Further the same appears to be a breach of section 174 as reasonable care and diligence has not been exercised by the director as enunciated in section 174. Q3. For breach of director's duties, the law prescribes penalties and liabilities. Discuss the liabilities of a director for breach of duties. Discuss how any of these liabilities apply to Peter McDaid as director of McDaid Developments (Ireland) Ltd. There are different ways in which a director can be held liable for breach of duties committed by him. The first and foremost way is where the director has provided for a personal guarantee for the debts of the company, however, such may be limited to a specific amount and being conditioned if the company goes insolvent. Peter McDaid, on the facts does not appear to be liable in respect of the same. By virtue of section 213 of Insolvency Act, if the liquidator is able to demonstrate that the company’s business was carried out with intent to defraud creditors or for any other purpose which is fraudulent, a declaration may be issued by the Court whereby any person who knowingly became a party to the fraud would be personally liable for the debts and liabilities incurred as a result of the same. Criminal liability may also be attracted by way of this section. Even a director can be held to be liable and to contribute to debts of the company (Re Todd Ltd (1990) BCLC 454). The standard of proof in respect of intent to defraud is high because of the criminal sanction. In respect of submission of an inaccurate statement of affairs, the two transactions and failure to disclose the location of the assets of the company, the liquidator can by way of section demonstrate that Peter McDaid had the intent to defraud creditors. The only issue in respect of the same would be the high standard of proof and the reluctance because of criminal liability attached to it. In the alternate by way of section 214 of Insolvency Act, there is liability by way of wrongful trading which occurs when company goes into liquidation and a director, who either knew or ought to have concluded that there was no reasonable prospect whereby the company would not go into liquidation, nonetheless carried on trading. In such a situation the liquidator can apply to court seeking contribution from the director. However, if the director can demonstrate that he had taken all steps that should reasonably have been taken to minimize loss to creditors, then it is unlikely that the court would find him to be liable. A director would be liable where over a number of years even though the company drifted towards liquidation, the directors failed to liquidate it (Re Produce Marketing Consortium Ltd. (No. 2) [(1989) 5 BCC 569]. By way of the Annual Report submitted till 2008, it may be evident that Peter McDaid continued on trading despite of the heavy liabilities that had incurred and therefore the liquidator may apply for contribution from Peter McDaid unless it is shown that due to situation beyond Peter’s control the liabilities went out of control and reasonable steps were taken by him to minimize loss to creditors. Where it becomes clear that a director has either misapplied, retained, has become accountable for any money or property of the company or guilty of misfeasance or a fiduciary duty has been breach, upon the application of a liquidator, in the course of winding up, may be required to make a personal contribution. In respect of Peter McDaid the same is apparent from the overstated value of the statement of affais, the two property transactions as well failure to account for whereabout of the fixed assets of McDaid Developments. .By virtue of section 178 of the Companies Act 2006 it becomes apparent that for breaches under section 171 to 177, the common law rule or equitable principle would apply. Q4. As a consequence of having separate legal personality, companies have limited liability. McDaid Development (Ireland) Ltd has incurred liabilities during its years in operation. Discuss the concept of limited liability and how it affects the members (shareholders) of the company, and company creditors (particularly the unsecured creditors). The principles enshrined by way of Salomon v. Salomon, it has become a settled principle that companies have limited liability. The fundamental concept of limited liability is that liability of the shareholders is limited to the extent of unpaid shares and therefore the shareholders are generally not liable for the debts of the company because the company is treated to be separate and distinct entity from its shareholders. The shareholders would however lose out on their initial investment (Ridley 2011). In respect of the creditors of the company, the secured creditors can bring about a claim and successfully claim the property that they have secured for the debt. The unsecured creditors are generally the last on the list who are settled as they are not given priority in respect of the debts that are owed by the company. If the company goes into liquidation, it is generally due to its inability to pay its debts and clear off its liabilities. The unsecured creditors having no security in respect of the loan/debt that they have given to the company are generally on the suffering end due to the fact that when liabilities are being cleared at the time of liquidation, the unsecured creditors are either left with nothing or are paid a minor share of the debt. Further, since no claim can be raised against the shareholders, the unsecured creditors are severely disadvantaged by the same. Bibliography DAVIES, P. L., WORTHINGTON, S., MICHELER, E., & GOWER, L. C. B. (2012). Gower and Davies' principles of modern company law. London, Sweet & Maxwell. DIGNAM, A. J., & LOWRY, J. P. (2012). Company law. Oxford, Oxford University Press. DINE, J., & KOUTSIAS, M. (2009). Company law. Basingstoke, Palgrave Macmillan. FRENCH, D. (2010). Blackstone's statutes on company law. Oxford, Oxford University Press. HANNIGAN, B. M. (2012). Company law. Oxford [u.a.], Oxford Univ. Press. HICKS, A., & GOO, S. H. (2008). Cases and materials on company law. Oxford, Oxford University Press. KEANE, R. (2007). Company law. Haywards Heath, Tottel. MAYSON, S. W., FRENCH, D., & RYAN, C. (2007). Mayson, French and Ryan on company law. Oxford, Oxford University Press. RIDLEY, A. (2011). Company law. London, Hodder Education. ROSE, F. (2009). Company law. London, Sweet & Maxwell. SMITH, D. (1999). Company law. Oxford, Butterworth/Heinemann. TAYLOR, C. (2013). Company law. Harlow, Essex, England, Pearson Education. WALMSLEY, K. (2011). Butterworths Company Law Handbook. London, Lexisnexis Uk. Read More

DAVIES, P. L., WORTHINGTON, S., MICHELER, E., & GOWER, L. C. B. (2012). Gower and Davies' principles of modern company law. London, Sweet & Maxwell.

DIGNAM, A. J., & LOWRY, J. P. (2012). Company law. Oxford, Oxford University Press.

DINE, J., & KOUTSIAS, M. (2009). Company law. Basingstoke, Palgrave Macmillan.

FRENCH, D. (2010). Blackstone's statutes on company law. Oxford, Oxford University Press.

HANNIGAN, B. M. (2012). Company law. Oxford [u.a.], Oxford Univ. Press.

HICKS, A., & GOO, S. H. (2008). Cases and materials on company law. Oxford, Oxford University Press.

KEANE, R. (2007). Company law. Haywards Heath, Tottel.

MAYSON, S. W., FRENCH, D., & RYAN, C. (2007). Mayson, French and Ryan on company law. Oxford, Oxford University Press.

RIDLEY, A. (2011). Company law. London, Hodder Education.

ROSE, F. (2009). Company law. London, Sweet & Maxwell.

SMITH, D. (1999). Company law. Oxford, Butterworth/Heinemann.

TAYLOR, C. (2013). Company law. Harlow, Essex, England, Pearson Education.

WALMSLEY, K. (2011). Butterworths Company Law Handbook. London, Lexisnexis Uk.

Read More