McDaid Development (Ireland) Limited - Assignment Example

The concept of separate legal personality is the basic principle in the UK Company Law. The principle says that a company is an artificial, not natural, person who has its own identity which is distinct from its shareholders or members. Under this concept, the company, when formed, will become a corporate body that is separate to its owners and distinct to the directors and members. In simpler words, a company or corporation is just like an individual human being and is created for official and legal purposes. A company, thus, is created by law and is destroyed only by the defined law process. The company shall exist in its own capacity so that it can do business, carry out activities, suffer losses, enjoy profits, hire and fire employees and pay the taxes. All these procedures are done under the company’s capacity and no owner, member or shareholder is liable for those activities. The law has recognized the company as a distinct legal entity because it gives the owners the capacity to enjoy limited liability and the risk for their investment in shares and stock. This principle allows the company to be treated individually, not as a person or machine. The company cannot operate itself and so a group of experts is needed to manage the activities under the policies and rules ethically and responsibly. This concept has its roots to the UK House of Lord case of Salomon v Salomon & Co Ltd. Salomon v Salomon & Co Ltd was a case of 1897. Salomon was a sole proprietor who sold his business to a corporation. He was the main shareholder of that company. However, the company’s debts increased and it eventually had to be liquidated. When the case went to the High Court, it was held that Salomon created the corporation solely in order to transfer his individual business to it. This was prima facea and according to this, Salomon and the company were one entity. The company was the agent of Salomon and he was liable for the debts to the unsecured creditors. The House of Lords overturned this decision and held that Salomon and the company were separate entities and he personally did not owe any of the creditors. Since the company had its legal personality, the debts belonged to the company alone (Sealy, 2007, p. 37) This concept applied to McDaid Development (Ireland) Ltd as the company was a limited liability company. It had one director, one secretary and one shareholder. The owner and director could enjoy limited liability as the company had its own property and debts. The chapter 2 of part 10 in the Company Act 2006 outlines the general duties of the company’s directors. In the recent case of Towers v Premier Waste Management Limited, the general duties of the directors and their importance were reminded. The law has outlined the general duties of the directors due to the attempts made under law for the legal position of the company in the wider social and business environment. There are three main duties that fall under this provision: the fiduciary duty, the duty of skill and care and the statutory duties (Pearce, 2012, p. 5). Under the law, the directors are regarded as the fiduciaries. This means that they have undertaken to act on another person’s behalf for a particular matter under the circumstances giving rise to a confidence and trust relationship. The directors are expected to perform the obligations under the trust and confidence that is imposed on him. Moreover, the directors are supposed to act in good faith and in the interest of the person they are representing. This can also be their company. They are not supposed to abuse or disrespect that confidence and trust which is placed on them. The duty of skill and care has evolved from the fiduciary duty too but it addresses particular implications for the position of the director in the limited company. In the limited company environment, the shareholders have to place their trust on the appointed directors to run their business with their invested capital. The shareholders of the company possess a direct interest in the director’s skill. The shareholders and creditor have to develop the duty of skill and care while working with the director because of the limited liability. The company allows all the directors, owners and shareholders to exclude their personal liability; hence the creditors and shareholders have to accept the risks in working with directors. Traditionally the directors have been observed as modest and sincere but with the recent changes in trends, the duty of skill and care expected from the directors is high standard. The statutory duties are those duties that are imposed by the legislation of the company. Most of the duties are imposed in the legislation and thus it is bound on the directors to perform according to them and fulfill the obligations. Peter McDaid, the managing director of McDaid Development (Ireland) Ltd submitted an inaccurate Statement of Affairs to the company. In that he had overstated the value of the company’s assets. He also caused the company to enter into two transactions. These transactions were against the opinion of the Administrator. The director had breached the trust and confidence which was laid on him by providing an inaccurate report. Moreover, he breached the articles 202 and 204 of the Insolvency (NI) Order 1989 which meant he had acted illegally as well. He breached his fiduciary duty towards the company and the Administrator, and also his statutory duty to act according to the law. This was held in the UK case of Dorchester Finance Co Ltd v Stebbing. The court held ‘such care as an ordinary man might be expected to take on his behalf’ (Martin, 2005, p. 414). If the director of the company breaches his duties, the law outlines many liabilities and penalties for him. The most important is the claims that the company brings if it can prove that the director has breached a duty because of which loss was suffered. When directors make their personal profits, the companies can provide evidence and regain their profits. The company may also claim under law for an injunction to stop any ongoing activity, they can claim for compensation or restore the company’s profits. Furthermore, the company’s liquidator can also claim for a breach of duty from the director’s side if the company becomes insolvent. According to law, the director’s duty of care is towards the company and he owes directly to the company. This means that if there is a breach made, the shareholders cannot claim against the director or any loss caused by his breach. As the laws have developed, there is a mechanism for the shareholders that would allow them to claim in the name of the company against the directors. These claims are held and run by the shareholders, but in the name of the company. Dismissal is another penalty for the directors. When the shareholders believe that the director has breached the duty, they may simply go for dismissal without countering who is right and who is wrong. This is a right given to the shareholders in the statute and is unchangeable. Shareholder ratification takes place when the director’s breach of duty is clear. The shareholders can ratify by passing the ordinary resolution. The voting will not include the director or his family members if they are shareholders. The liability on the director may also be relived if the director can prove under the law that he acted reasonably and honestly under all circumstances. This can be done through courts or the directors themselves can go to the court to provide their proof and exempt themselves from the liability. In the case of McDaid Development (Ireland) Ltd, the company has become insolvent so the company holds no existence to claim against the director. However, the administrator can claim in the court against the director’s act. He can claim that the director failed to follow his instructions and advice which caused a breach in his duty. Moreover, Peter also acted unfaithfully and dishonestly thus he should be dismissed under law. The company could not retrieve any of the losses since the company’s assets were much lesser and it owed the bank and the unsecured creditors. The director, Peter could not pay the compensation as he was declared bankrupt. Thus the penalty that applies to him is dismissal and ban from the company. As the company forms a legal personality of its own, it has limited liability. Limited liability is the type of liability which is not imposed on the shareholders, owners or directors. It is the liability which doesn’t go beyond the amount that is invested in the company. The directors, shareholders and owners can participate to their fullest in the activities and growth of the business but their liability will remain limited. The limited liability company has the functions to provide the owners a protection from any sort of personal liability of the activities taking place in a business. This means that no matter what state the company is in, no matter how much the creditors owe to the company, they cannot claim their compensations or losses from the owner’s personal assets or personal account. The owner is free from any such liabilities (Jones, 2011, p. 519). The limited liability concept allows the companies to have more investors who are secure with their investment. If companies do not have limited liabilities, they feel insecure in risking their personal property and assets by getting involved in any company. This means that McDaid Development (Ireland) Ltd’s owners and members have limited liability towards the unsecured creditors. In the case, Peter McDaid was not personally liable for the losses that were caused because of him but since he had committed a fraud and breached his duty of care, he owed compensation to the company. Limited liability affects the shareholders in a way to secure them and provide them a free of risk atmosphere in the company to invest openly. However, the only condition in which the shareholders can be penalized to compensate from their personal assets is when they act criminally or get involved in a fraud. If the creditors are unsecured, which means that no lien has been filed, they can suffer losses and not get any compensation from the owners. When a business becomes insolvent, and cannot pay its creditors, the creditors cannot claim their losses from the personal assets of the owners. However, when the company is liquidated, the assets can be distributed to the creditors and that is the final amount that they will receive. Thus, a limited liability company can be considered as risky for the creditors, especially the unsecured ones. McDaid Development (Ireland) Ltd owed about £800,000 to the unsecured creditors and, on 28th June, 2013, declared that none of the amount was likely to be repaid. References Jones, L. 2011. Introduction to Business Law. London: Oxford University Press. Pearce, S. 2012. Company Directors’ General Duties Under the English Companies Act 2006. London: Pillsbury. Sealy, L. 2007. Cases and Materials in Company Law. London: Oxford University Press. Martin, D. 2005. The Company Director’s Desktop Guide. London: Thorogood Publishing. Read More