Company Law in the UK - Assignment Example

Question 1 Company law is a crucial branch of law that governs the registration and operation of all companies within its geographical coverage. Company law provides clear legal guidelines on how companies can be formed, registered and operated, as well as the rights of each of its member. Consequently, company law applies in legal cases in courts to settle disputes that may arise from any form of unlawful acts either by the owners, creditors or even debtors. The law is subject to amendment from time to time as a way of improving its content and its efficiency. For instance, the Company law of 2006 seems to be a restatement of the 1985 version with only a few amendments. This article will analyze a case study of the McDaid Company to evaluate the concept of the UK company law that singles out a registered company as a separate legal entity. This will be achieved by reflecting on a well-known case of Salomon v Salomon & Co (1897), in which this law concept was used to rule the case. Company registration, a fundamental requirement of the company law act, secures a company the right to engage in business transactions within the privileges and limitations that the company law offers. Companies are often registered either by a single person or by group partnership. Often, partnership has been confronted by issues of fraud where partners enter into such relationships for personal interests. Salomon v Salomon Ltd Company, formed under partnership, owed money Mr Broderip money at the time of its liquidation. In the hearing of the case, both the High Court and the court of Appeal held the majority shareholder of this company, Mr Salomon, guilty of fraud. However, the House Lords, Halsbury overturned this decision on the ground that the intention of Mr Salomon to defraud the other six partners of the Company could not be established in the provision of the law. He added that when partners establish a company, they are jointly liable for its operations. On this ground, he ruled that Salomon was not an agent of this company and that he was not liable to pay the company debts (Wooldridge, 2009, p. 46). The ruling of Lord HalsBury seems to uphold the company law that provides that whenever a company is registered, it acquires a separate legal entity and that it can no longer be termed as an agent of its members. In the case of McDaid Development (Ireland) Ltd Company, Mr Peter McDaid, also the director of the company, was the sole shareholder of the company. On bankruptcy, Mr McDaid owed the Ireland Bank over £38 million and about £800 thousand to small stakeholders. When the company was put under administration, Mr McDaid was relieved of his duties as a director for a period of eight years on the grounds of misconduct. From the court’s decision in Mr Salomon’s case, Mr McDaid cannot be held liable for the company’s debts. Lord Halsbury defended Salomon by the words, “Company’s debt is Company’s debt” (Wooldridge, 2009, p. 58). As such, company’s debts and the shareholders have little, if not no connection. However, in the U.K. Company law act of 2006, the director is liable to accountability in matters concerning company assets, which Mr McDaid had failed to provide. On this ground, the removal of Mr MCDaid is justified. In brief, Company law perceives the company as an entity that is completely isolated from its shareholders. Therefore, it is upon the members, shareholders and debtors, to evaluate the company’s viability before engaging in its operations. Though this aspect of the law has been criticized, there is still a lot of support to this ideology of the law. Question 3 The U.K. company law provides clear guidelines on the duties of Company directors and the consequences of breach of the duties so stated. The expectation of the law is that the director works in the best interest of the company and does not contribute directly to any actions that would hurt the company and its shareholder. Consequently, there exist liabilities and penalties for a director who breaches the stipulated duties. This article will use the case study of McDavid Development (Ireland) Ltd to elaborate on the duties of a director, and the penalties and liabilities associated with breach of those duties. In the UK Company law act of 2006, the director has a duty to work within the limits of the powers provided by the constitution of his company to drive the company to success; in addition, the law requires that the director exercise reasonable care, skill and diligence in all operations of the business (UK Companies Act 2006, 2006, sec. 171-176); for instance, the director is required to make a careful decision regarding sensitive business transactions like loan acquisition. This is emphasized in the Insolvency act, which requires that a director abstain fraudulent trading especially at times when the business is at the risk of bankruptcy (Finch, 2002, p. 242). The director of McDavid Company, Mr McDavid, seems to have acted against the law while he continued to acquire loans while already the company was already sending the danger of collapsing. Given that the company had experienced a loss in £500, 000 in 2007, the director would have exercised care while securing more loans. In addition, Mr McDaid provided inaccurate financial statements, which can be termed as lack of accountability (Lacy, 2002). The law states clearly the legal actions that should be taken whenever a company director underperforms in his duties. According to Lacy interpretation of the UK company law, contravention to the duties listed in the common law requires that the director be subjected to rule of common law or fiduciary law as the situation demands. The common law deals with the law of contract and tort law that demands compensation of the complainant by the defendant in proportion to the damage caused due to negligence or breach of contract. In tort law, the director is required to exercise care and expertise demanded by the position that they hold. The decision of the director of this company to borrow from the bank at a time when the company was already experiencing a financial loss has an element of negligence. According to the provision of the Insolvency act, this action may be termed as ‘wrongful trading’ given that the business at no hope of recovering. Consequently, Mr McDavid risks a penalty to contribute to the Company debts through a court order, and his removal is just a taste of the iceberg. Nevertheless, the law provides the director with the right to revoke his removal through a legal process (UK Companies Act 2006, 2006, sec. 178). In conclusion, Company law that establishes the duties of a company director also punishment against misconduct. The objective of the law is to moderate all the actions and decisions of the manager in order that they remain in line with the core objectives of the Company. The limitation of the powers of the director is crucial as it protects the shareholders and partners against any losses or damage. When a manager breaches their duties, they are a subject to the provided penalties and liabilities. If guilty, they law may require them to pay the debtors or even end their service before the end of their service period. The same law allows the directors to appeal against such penalties within a legal framework. References Finch, V., 2002. Corporate Insolvency Law; Perspectives and Principles. Cambridge: Cambridge University Press Lacy, J., (2002). Reform of U.K. Company Law. UK: Taylor and Francis. U.K. Companies Act 2006, 2006. A Company’s Directors. [Online] Available at: < http://www.imolin.org/doc/amlid/UK_Companies_Act_2006.pdf> (Accessed August 7, 2013) Wooldridge, F., 2009. European Comparative Company Law. Cambridge: Cambridge: Cambridge University Press. Read More