Business Organisations and the Law - Essay Example

Business Organisations and the Law Introduction/Background Essentially, a company is a type of business organisation whose accurate designation and description diverge depending on its geographical jurisdiction. In an American business environment, a company is a corporation, or less commonly, an association, partnership, or union which carries on an industrial endeavor. In general terms, a company can be a corporation, partnership, association, joint-stock company, trust, fund, or an organised cluster of individuals (whether incorporated or not). In contrast, within English law and in the Commonwealth realms, a company is a form of corporate body or corporation, normally registered under the Companies Act or parallel legislation and does not take account partnerships or any other unincorporated group of individuals. Principally, UK company law is ruled by the Companies Act of 2006, the Insolvency Act 1986, the Company Directors Disqualification Act 1986 and the old Companies Act 1985. A limited company can be registered in England and Wales, Scotland, Northern Ireland and Australia. Registration of business firms in Great Britain is done through Companies House while the registration of companies in Northern Ireland is through the Department of Enterprise, Trade and Investment (Davies 2008; Companies Act 2006; Sealy and Worthington 2007). Basically, there are four major categories of companies (BERR 2008, p. 5): 1. Private company limited by shares - this type of business organization has a share capital and the accountability of each member is restricted to the amount not paid on shares that a member holds; this type of private company cannot sell its shares to the general public 2. Private company limited by guarantee - here, a member does not throw in any amount as a contribution to the capital during its lifetime as it does not purchase shares. The member's liability is limited to the amount that he/she has agreed to contribute to the company's assets if it decides to wind up its activities 3. Private unlimited company - this form of business organisation may or may not have a share capital and there is no limit to its members' liability and since there are no limitations on members' liability, the company can disclose less information compared to other types of companies 4. Public limited company - this kind of group has a share capital and the liability of every member is limited to the amount unpaid on shares that a member holds; it can also offer its shares for sale to the general public and likewise can be quoted on the stock exchange. Administrative Receivership In the United Kingdom, administrative receivership10 is a process whereby a creditor can enforce security against a business firm's assets endeavoring to gain settlement or compensation of the secured debt. Previously, it was the most accepted scheme of enforcement by secured creditors, however, recent governmental restructuring and legal developments in several jurisdictions have significantly diminished its importance in specific nations11. Administrative receivership diverges from simple receivership in that an administrative receiver is assigned over all of the assets and tasks of the business firm. This signifies that an administrative receiver can, as a rule, only be assigned by the holder of a floating charge. Because of this remarkable responsibility, bankruptcy/insolvency legislation more often than not endows broader powers to administrative receivers and likewise also have power over the exercise of those powers in an effort to take the edge off potential prejudice to unsecured creditors. Normally, an administrative receiver is an accountant with substantial knowledge, familiarity and understanding regarding insolvency matters. Current Implication As it is, administrative receivership is a significant component of contemporary insolvency practice. Today, business firms that plunge into financial complexities may well have security packages that were created prior to the 15th of September 2003, a circumstance expected to continue for more years. In addition, enforcement will also be an important facet of the circumstances where administrative receivership is still allowed, for instance, the facility to assume responsibility of the entire cluster of assets is central to structuring insolvency-remote special purpose firms that issue securities or manage road and rail network projects. In common law fields outside of the United Kingdom, administrative receivership remains active and sound. In fact, there are numerous offshore jurisdictions that market transaction structures to banks on the basis that they still preserve the autonomy to appoint administrative receivers in those areas. Due to this very distinctive task, insolvency legislation typically grants extensive clout and authority upon administrative receivers under appropriate and valid insolvency law. Nonetheless, the consequence is that administrative receivers are frequently called on to file reports under applicable legislation with regards to the period of their receivership12. Facts of the Case Marina and Mortimer are the sole shareholders and directors of Imitation Furs Ltd. In order to expand their business they applied for a loan from Easy Bank Plc. Easy Bank Plc agreed to grant a loan of 500,000 to Imitation Furs Ltd, to be secured by a floating charge over the company's stock in trade. The charge was created on the 1st of July 2007. However, in February 2008 it was discovered that the company's solicitor had failed to register the charge. In April 2008 Marina and Mortimer applied for a further loan of 50,000 from Finance Co Ltd. Finance Co Ltd granted the loan to Imitation Furs Ltd to be secured by a floating charge over Imitation Furs Ltd's undertaking. A search at Company's House had not revealed any other existing charges. This floating charge was registered on the 24th of April 2008 at Companies' House, the same day it was created. In October 2008 Marina and Mortimer also decided to double their orders for polymeric fibers with Synthetic Fibres Plc, needed for the production of fake furs. Synthetic Fibres Plc insisted on a reservation of title clause in all contracts for future supplies of polymer fibers. In November 2008 Synthetic Fibres Plc made a delivery of 30,000 worth of polymeric fibres to Imitation Furs Ltd. Following the advice of their accountants on the 18th of March 2009, Imitation Furs Ltd is now in insolvent liquidation. The liquidator of Imitation Furs Ltd seeks your advice on the following points: the validity of the charges created in favour of Easy Bank Plc and Finance Co Ltd and the goods supplied under the reservation of title clause. Discussion Based on the details found in the case study, the first task should be to provide an elucidation on what a floating charge is. Basically, there is no constitutional designation of a floating charge and what parties identify a charge is not irrefutable proof of its status,4 however, case law does confirm that particular features need to exist if a charge is to be categorised as a floating charge.5 These are: a) that the charge is placed over a class of assets both present and future; b) that the class is one which, in the ordinary course of business, changes from time to time; and c) that the charge leaves the company free to deal with the charged asset in the ordinary course of the company's business. The kinds of assets that are normally subject to a floating charge are stock in trade, raw materials and finished articles.6 Validity of the Charges In numerous jurisdictions, due to their remarkable consequence on the accessibility of assets to unsecured creditors on insolvency, it is imperative that floating charges be registered7. However, in the case study, not all charges have been registered. As a general rule, fixed and floating charges are subject to registration at Companies House, when and if not registered within 21 days from date of creation, the charge is considered void8, as what is to become of Easy Bank Plc's charge; nonetheless, the principal liability continues to be legally binding and becomes directly repayable9. As far as Finance Company Ltd. is concerned, the charge it made on Imitation Furs has always been valid since the charge was immediately registered on the day it was created. One question that can arise is, would there be a possibility that these charges can be pronounced invalid According to the law, fixed and floating charges can be set aside if Imitation Furs goes into insolvent liquidation within a legal phase of the charge being created and that the charge was intended to favor one creditor over another10. Goods Supplied under the Reservation of Title Clause The employment of reservation of title clauses - or, ordinarily referred to as the Romalpa clauses - is extensive in the sale of goods. Under this type of clause, the seller keeps ownership of the goods until they are paid for in full, however, the buyer is permitted to accept delivery of the goods; in the event that the buyer does not comply with his financial obligations, the seller can therefore take possession of the items in question. Basically, the Romalpa clause circumvents the presupposition laid down in the Sale of Goods Act 1908 which stipulates that ownership of the goods passes to the buyer upon delivery. The Romalpa clauses, created after the decision in Aluminium Industrie Vaassen VB v Romalpa Aluminium Ltd. aims to shield the unpaid seller from the bankruptcy of the buyer and to overpower the claims of other creditors who hold registered charges over a corporate purchaser's assets who would otherwise take precedence over the seller's assertion. In essence, the distinctive function of an ROT clause then is to guarantee that compensation is obtained for goods sold to the buyer or to retain ownership of such goods until all monies owed by a buyer to the seller are paid. In doing so, an ROT clause illustrates and seeks to retain, the characteristics between possession of goods and actual title to such goods. In cases where a legitimate ROT clause is nonexistent, title to goods will characteristically shift upon the creation and development of a contract or otherwise upon delivery11. In the case, this is the kind of protection that Synthetic Fibres Plc sought to ensure for themselves when they got into the deal with Imitation Furs Ltd. Conversely, the Consumer Guarantees Act 1993 likewise provides Imitations Furs some security against Romalpa clauses. The Act provides that for the clause to go into operation, the following two circumstances must be met: The purchaser must have obtained oral advice, recognised and conceded by such purchaser in writing, of the way in which his or her right to undisturbed possession of the goods is affected by the Romalpa clause. Such verbal information must be adequate to allow a levelheaded consumer to be aware of and at the same time value the broad character and consequence of the clause. The purchaser must also have received a written copy of the conformity for supply, or of the portion of the agreement which encloses the Romalpa clause. In the Imitation Furs case, what is seen is a 'simple' ROT clause retaining title of specific goods (polymeric fibres) on behalf of the seller until such time that Synthetic Fibres Plc has been paid for those goods. By its very character, a simple ROT clause will provide only to retain title in the specific goods. As a consequence, a simple ROT clause will not take effect if the particular items subject to it cannot be identified from among all the other goods that may be in the possession of the buyer (Collier 1989, p. 65). Hence, it is imperative for the seller of such goods to make sure that the goods being declared as subject to the simple ROT clause can be effortlessly identified. If the goods are not or cannot be considered independently identifiable (either through distinctive classification, coding or storage location) and cannot be differentiated from other goods (including other goods sold by the vendor and already paid for), the ROT clause is dubious and not easy to prove to be enforceable. Still, the ambiguity influencing this specific sphere of the law signifies that the enforceability of retention of title clause in an indenture is dependent on a combination of several elements which includes the drafting of the clause, the character and nature of the goods themselves and the type of treatment the goods might or should receive. The vital set-up of the clause retaining ownership in the vendor until full payment has been complied with encompasses the following circumstances: where the buyer resells the goods to a sub-purchaser in the customary practice of business, in which case it is demanded that the earnings of such resale or the balance due to the buyer from the sub-purchaser are held by the buyer on behalf of the seller; and where the purchaser integrates the goods in some other product in whatever fashion, in which case it is provided that title to the end product will not pass to the buyer until the indebtedness to the seller has been complied with The courts have acknowledged the fact that each case must be settled on the specific phrasing of the clause involved, on the clear-cut queries and issues raised for decision, on the manner that the matter has been carried out in court and on all circumstances of the case12. The outcome of the courts construing certain clauses has been the conception of an official labyrinth necessitating the exercise of prudence13 in giving counsel on the phrasing of Romalpa clauses and on their analysis and elucidation in a given circumstance. As far as judicial authorities and legal practitioners are concerned, a charge will be produced in situations where the ROT clause in question does not declare to preserve legal rights on the goods but rather advantageous or equitable ownership. Correspondingly, a charge is expected be crafted in circumstances where the goods are integrated into an end product and the contractor/provider seeks to maintain title in the end product until paid for the original goods. In these cases, a charge will most probably to be deemed to be created. Such charges necessitate registration and are doubtfully enforceable against an insolvency practitioner by virtue of Sections 266 and 267 of the Corporations Act. Retention of Title in the Perspective of Insolvency/Liquidation ROT clauses can shelter a vendor of goods from the purchaser's insolvency by empowering such vendor to beat the claims of secured and unsecured creditors who might otherwise take precedence over the vendor's assertions and confiscate goods that have not been paid for by the purchaser. In the event of a purchaser's insolvency, the ROT clause can normally be employed by vendors to prevent items sold from becoming available for: distribution amongst unsecured creditors; distribution to secured creditors under a fixed or floating charge/security; and sale or other use by an administrator other than in the ordinary course of business In practically all cases concerning a ROT clause, goods have been conveyed and transported to the purchaser before any type of payment have been extended to the vendor. In such situations, and assuming that the ROT clause is applicable and legally binding, the vendor stays as the owner of the goods regardless of the fact that the buyer has possession of the said items. In most circumstances, the buyer may even be allowed by the stipulations of the written agreement and the ROT clause to have the goods put up for sale prior to making any payment to the vendor. In such cases, a third party buyer who purchases the items will receive good title in the items granting that the acquisition has been made in good faith, for value and without discernment of any constraint on the sale. In addition, where the purchaser has become insolvent and there exists a legitimate and compelling ROT clause, the insolvency practitioner should, upon demand by the owner in title, have the goods available for return, failing which he or she may be subject to a claim by the vendor for injunctive relief or for conversion of the goods. Section 442C of the Corporations Act 2001 tackles this issue and thwarts an administrator from disposing a property that is in the control or ownership of the insolvent business firm but which is held by another party except if such disposal is conducted 'in the ordinary course of business', with the knowledge and permission of the owner or with the court. To illustrate, in the case of Osborne Computer Corporation v Riddell14, the court wrapped up the issue by stating that the 'ordinary course of business' signified that goods supplied which was subject to an ROT clause could be resold until such time as an order or stipulation for the return of the goods had been made by the owner in title. Conversely, any sale made after such order and requirement would not be deemed to be in the ordinary course of business and could lead to an action against an insolvency practitioner. Conclusion In the case study therefore, the following points can be made: Synthetic Fibres is protected by Imitation Furs insolvency through the ROT clause which was insisted upon by Synthetic Fibres in all contracts for future supplies of polymeric fibers, hence, Synthetic Fibres stays as the owner of the goods regardless of the fact that Imitation Furs has possession of the said items, likewise, Synthetic Fibres can beat the claims of secured and unsecured creditors who might otherwise take precedence and can confiscate polymeric fibers that have not been paid for by Imitation Furs. According to the law, floating charges are subject to registration at Companies House, when and if not registered within 21 days from date of creation, the charge is considered void. In the case of Easy Bank's non-registration of the charge (discovered only after more than 180 days after its creation), such charge becomes void, however, the principal liability of Imitation Furs to Easy Bank continues to be legally binding and becomes directly repayable Notes 1 Sections 29(2) and 251 of the Insolvency Act 1986 and Article 5(1) of the Insolvency (Northern Ireland) Order 1989 2Particularly in the UK following the promulgation of the Enterprise Act 2002 3See Section 48 of the Insolvency Act 1986, calling for reports to be filed at Companies House within 3 months of the end of the receivership 4Agnew v Commissioner of Inland Revenue (2001) 5llingworth v Houldsworth (1904) 6 In Re Panama New Zealand and Australian Royal Mail Co 1870 7Section 395 of the Companies Act 1985 8Section 395(1) of the Companies Act 1985 96Section 395(2) of the Companies Act 1985 10Section 239 of the Insolvency Act 1986 11Aluminium Industrie Vaassen VB v Romalpa Aluminum Ltd [1976] All ER 552 (CA) 12Clough M ill Ltd v Martin ( [1985] 1 WL R 111) (CA ) 13Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 14Osborne Computer Corporation v Riddell (1995) 13 ACLC 1210 Bibliography BERR, 2008, "Company formation," Department for Business Enterprise & Regulatory Reform, Version 22 Collier, B., 1989, Romalpa clauses: Reservation of title in sale of goods transactions, The Law Book Company Limited Companies Act 2006 Corporations Act 2001 Davies, P. 2008, Gower's modern company law, 8th ed., Sweet and Maxwell Sealy, L. and Worthington, S. 2007, Cases and materials in company law, 8th ed., Oxford, Oxford University Press Read More