Analysis of the Proposal of Company Law Reform Bill - Term Paper Example

Introduction: Before discussing on the proposal of the Company law Reform Bill containing the remedy of problems associated with director's duties, it is wise to discuss who is the director, what the are the duties of the directors and what are the problems being faced by them in discharge of their duties. Directors: Every company has body of persons who will manage the affairs of the company such body of persons who are vested with the powers and responsibilities of managing the affairs of the company are called the directors. The appointment, remuneration, rights and responsibilities are regulated by the Company's Act, more specifically by table A of the act. These directors together are called the Board of Directors. Since all the directors cannot execute individually they elect one among them as a Managing Director. The board of Directors will take all policy decisions in the Board meeting and the Managing Director executes the decision taken by the board. The proviso 741(1) deals with the definition of directors, this proviso is an inclusive provision which says the directors include properly appointed directors, "de jure" directors like "governor", not properly appointed directors such as "de facto directors" and "shadow" directors. [Charlesworth & Morse, Company Law (1999)] a De facto Directors: De facto Directors are those who act openly as directors and they claim to be directors on they being performed the functions of the directors, though they are not properly appointed. These directors are recognized as de facto directors for only that period during which they acted so. [Charlesworth & Morse, Company Law(1999)] b Re Hydrodam(corby) Ltd 1 It is a decided law that person who claims to be director by de facto has to make a plea and establish that he has undertaken such function of the company which would have been undertaken by the director only, but not simply to show that he has under taken the and discharged the functions which the management below the directors could not be under taken and discharged. Re Richborough Furniture Ltd 2 In this case it was held that De facto director should satisfy either of two tests such as (a) he is sole person directing the affairs of the company or (b) he was acting on par with other directors in directing the affairs of the company, if there are other properly appointed directors. Secretary of State for Trade and Industry v. Lating 3 In this case while approving the two tests it was held that by simply satisfying either of the two test is not sufficient to claim as de fact director, but he should be still acting as such, which means that the de facto director is recognized as director only during the period in which he is acting as per the two tests. Once he ceased to be acting as such he would be ceasing to be de facto director. The court in another case Secretary of State for Trade and Industry v. Hickling 4 approved this Shadow Directors: Section 741(2) of the companies act 1985 defines shadow director as 'a person in accordance with whose directions or instructions the directors of a company are accustomed to act'. Professional persons on whose, advise the directors act are excluded from this definition. Shadow directors are vicariously liable for the action of the directors whom they appoint or control. This provision aims at preventing the persons escaping from the liability under the shelter of a board of marionette. The directors of a subsidiary who are working under the directions of the directors of the parent company then the directors of the parent company are called the shadow directors. (LS Sealy, Cases and Materials in Company Law) c Re Hydrodam(Corby)ltd 1 The court held in this case that one has to satisfy the four conditions for adjudicating a person as shadow director such as (i) he is properly appointed or de facto director (ii) the director directs the other directors in which manner they have to function in relation to the company (iii) the other directors act in accordance with the directions of that director and (iv) that those directors not only to act but they accustom to act. [Charlesworth & Morse, Company Law (1999)] d Kuwait Asia Bank E.C. v. National Mutual Life Nominees Ltd 5 : It was held that if one appoints two directors out of a seven directors the appointing director is not a shadow director and he is not liable under vicarious liability. Re Unisoft Group Ltd 6: It was held that if one director is controlled out of several directors then the person who controls such director is not covered under shadow director. Duties of the Directors: Duties of the Directors are broadly classified into fiduciary duties and duties of care to the company. Fiduciary duties: - The directors to act bona fide in the interest of the company, where the company means the share holders collectively or the share holders present and future. This means the directors shall not act for the benefit of any other stakeholders such as the employees, creditors and suppliers of the company. The fiduciary duties includes (1) the directors to exercise their powers within the constitution of the company for (i) acting bona fide for the benefit of the company (ii) exercise powers for the proper purpose. (2) directors not to be placed in a position conflicting the duties to the company and their personal interest, including (i) not to make unauthorized gains out of company's transactions (ii) to disclose the interest in such transactions and (iii) must not be a competitor to the corporate. [Charlesworth & Morse, Company Law (1999)] e Bona fide for the benefit of the company: Aberdeen Railway Co v Blaikie Bros 7 : In this case the defendant Blaikie Bros entered in to a contract with the plaintiff Railway Co. for supply of chairs. At the time of entering into a contract the chairman of the plaintiff Railway was also the Managing partner of the respondent. The House of Lords held that the contract is voidable in equity for the reason that the chairman of the plaintiff is bounded by the fiduciary duty bona fide in the interest of the company. [LS Sealy, Cases and Materials in Company Law (2001)] f Director duty towards interest of the creditors : Kinsela v Russell Kinsela Pty Ltd 8 : In this case it was held that during the solvency of the company the shareholders have proprietary right and the directors duty is in the interest of the shareholders, any action in contrary to this requires ratification by the shareholders. In case of insolvency the duty of the directors is in the interest of the company as a whole and the creditor's take the position of the shareholders. The director's action in the interest of the creditors is lawful and does not require any ratification. [LS Sealy, Cases and Materials in Company Law (2001)] g Director duty towards the individual shareholders : Re Chez Nico (Restaurants) Limited 9 : In this case it was held that the fiduciary duty of directors is towards the company in general, in special circumstances it extends towards the Individual shareholders. [LS Sealy, Cases and Materials in Company Law (2001)] h Directors duty to exercise powers for proper purpose : Howard Smith Ltd v Ampol Petroleum Ltd 10 : In this case the court found that the main purpose of allotment was to destroy the existing majority bloc of shares but not of raising money. It also found that there is no self-interest motive in the directors. The privy council held that the substantial purpose for which the directors exercised their powers and such purpose is proper or not must be examined by the courts. It was also held that where there is no self-interest motive there is no breach and the directors duty in allotment of shares can be only for raising the capital, and if it is for other purpose is wrong. [Charlesworth & Morse, Company Law (1999)] i Directors not to make secret profits by using the his office in the fiduciary position - Such secret profits are accountable to the company: Cook v Deepaks 11: In this case the defendants are the directors of a Toronto Construction Company and the plaintiff also one of the four directors of the company. They had several contracts of construction works and established the goodwill with the Canadian Pacific Railway Company. The last contract, which was processed in the same way as of the previous contracts and it was made on their name instead of the company's name. The plaintiff director claimed that company was entitled for the benefits of that contract. The House of Lords made two issues in the case (1) whether the company has right to claim the benefits of the contract from the defendants (2) whether the company can ratify the transaction by the majority votes of these three defendants. The Lords held in the first issue that the defendant cannot retain the benefits of the contract since they secured the contract by using the influence of their office of directors and there is breach of a fiduciary, hence the company is entitled to the benefits of the contract. In the second issue the Lords held that the transaction couldn't be ratified since it is against the interest of the company made deliberately with an intention to make personal gains. It further held that the ratifications leads to the majority suppressing the interest of minority, such majority rights have no sanction of law and disapproved in Menier v Hooper's Telegraph Works 12. [LS Sealy, Cases and Materials in Company Law (2001)] j The proposal contained in the Company law Reform Bill The company Law Reform Bill disposes the outdated regulations and introduces the new regulations matching to the advanced economy. The bill makes the Company Law in lucid form for better understanding of the common man including the directors without the aid of the legal professional and makes it uniform through out UK, which applies equally to England, Northern Ireland, Wales and Scotland. The Bill brings in certain provisions from EU such as Transparency Directive on size of shareholdings (The Company Law Reform Bill) IV. Codification of Duties of the Directors: The underlying concept of the Bill is to clarify the duties of the directors through the codification. For the first time in the legal history the proposal is coming forward in this bill to codify the duties of the directors to make it a unified and clear law with regards to the duties without any ambiguity and without any lengthy interpretation. It is proposed to replace the existing judges made law, common law duties and equitable duties, as discussed earlier while dealing with the duties of the Directors. It also proposes to reduce the problems faced by the directors connected with their duties. The following are the proposals of the bill with regard to the duties of the directors, which are intended to be codified law. (The Company Law Reform Bill) IV. 1. "Enlightened Shareholder Value" concept: This concept is proposed for long term benefits of the shareholders rather than a narrow concept bona fide in the interest of the shareholders. This concept enables the directors to act in the interest of the not only the shareholders but also the other stake holders of the company such as employees, suppliers, customers, the environment and business reputation. Though it is not a new law but it is new expression of law. This proposed provision gives the clarity to directors about their duty towards the company as a whole. (The Company Law Reform Bill) IV. 2. Management Buy Outs: The Bill provides a remedy to the problems of directors in Management Buy outs by proposing a provision allowing the board of directors to authorize the directors have conflicts of interest subject to the condition that such director shall not have participate in such decision of the board. With this provision the directors need not resign to buy the business from the current owners. (The Company Law Reform Bill) IV. 1. Business Judgment test: The business judgment of the directors, which was subjective has now become more objective. The courts examine and consider that the directors have protected the interest of the stakeholders of the company while taking the decisions of the business, which is also called the Business Judgment. (The Company Law Reform Bill) V. 2. The bill is more concerned to the small companies: The new bill is drafted with "Think Small First" concept with a view to regulate the small business concerns properly since their number is highest. There fore the proposed provisions are more encouraging to the small business concerns rather than the big companies. (The Company Law Reform Bill) V. 3. Indemnification of Directors against third party liabilities: The bill provides that the company to indemnity the directors against the liability towards the third party. This includes the cost of the suit both in civil and criminal cases. Though this provision exists in Audit, Investigations and Community enterprise Act 2004, the Bill proposes for a specific provision in Company law. It also proposes the indemnity to allow the parent company to indemnity the directors of its subsidiary company. (The Company Law Reform Bill) V. 4. The other proposals of the Bill in relation to the Directors Duties are as following: [Butterworths, New Law Journal (April 2005)]III 1. The Directors place the relatively timely data before the shareholders they are to hold the general meeting within six months for every financial year ended. 2. Directors to place the financial reports including the preliminary results, announcements and full accounts on he website for the benefit of the all the stakeholders of the company. 3. Directors to allow the share holders to move resolutions in respect of the accounts within 15 days of placing such accounts. 4. Improving the transparency of polls. 5. Directors to publish the scrutiny and the polls on website. On careful examination of the old law it is evident that the Duties of the Directors are governed and regulated by the judge made case laws. The Directors need to read all the way these case laws while exercising their powers and performing their duties. The Directors faced several problems while performing their duties since there are no clear and direct provisions in the Company law with regard to their duties. The Bill will remedy the problems of the Directors associated with their duties with the codification of the duties and providing indemnity to the directors against third party and other provision. Foot notes: 1. Re Hyderodam(corby) Ltd (1994) 2 B.C.L.C.180, 183 2. Re Richborough Furniture Ltd (1996) 1 B.C.L.C.507 3. Secretary of State for Trade ad Industry v. Hickling (1998) 1 B.C.L.C 110 4. Secretary of State for Trade and Industry v. Hickling (1996) B.C.C.678 5. Kuwait Asia Bank E.C. v. National Mutual Life Nominees Ltd (1990) B.C.L.C. 868 6. Re Unisoft Group Ltd (No.2) [1994] B.C.C. 766 7. Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 (House of Lords) 8. Kinsela v Russell Kinsela Pty Ltd (1986) 10 ACLR 395 at 401, 404 (NSW CA) 9. Re Chez Nico (Restaurants) Limited 10. Howard Smith Ltd v Ampol Petroleum Ltd (1974) A.C.821, PC 11. Cook v Deepaks (1916) 1 AC 554 (Privy Council) 12. Menier v Hooper's Telegraph Works (1874) 9 Ch App 350 (Court of Appeal in Chancery) a) Charlesworth & Morse, Company Law (1999, 16th ed. P.235) b) Charlesworth & Morse, Company Law (1999, 16th ed. P.236) c) LS Sealy, Cases and Materials in Company Law (2001, 7th ed. P.327) d) Charlesworth & Morse, Company Law (1999, 16th ed. P.237, 238) e) Charlesworth & Morse, Company Law (1999, 16th ed. P.267, 269) f) LS Sealy, Cases and Materials in Company Law (2001, 7th ed. P.270) g) LS Sealy, Cases and Materials in Company Law (2001, 7th ed. P.268) h) LS Sealy, Cases and Materials in Company Law (2001, 7th ed. P.265) i) Charlesworth & Morse, Company Law (1999, 16th ed. P.270) j) LS Sealy, Cases and Materials in Company Law (2001, 7th ed. P.279) Bibliography: I. Charlesworth & Morse, Company Law (1999, 16th ed.) II. LS Sealy, Cases and Materials in Company Law (2001, 7th ed.) III. Butterworths, New Law Journal (Lexis Nexis, April, 2005) IV. Charlesworth & Morse, Company Law (1999, 16th ed.) V. http://www.faegre.co.uk/articles/article_1756.aspx VI. http://www.cbi.org.uk/pdf/caclrresp110106.pdf Read More