Company Law of Westfield Ltd - Case Study Example

Company law/Case study Introduction: This case study considers the suit filed by the management of Westfield Ltd. against one of its non-executive directors for her alleged contractual misconduct and non-disclosure of secret profits earned through contract with supplier, Lavelle Ltd. It also seeks to deal with Camilla's claim for non-receipt of emoluments. Defining the issues that arise out of the facts of case study: The main issues that arise in this case study are with regard to the fact that there has been infringement of the Articles of Association with respect to the following: Apparently, it is seen that Camilla, a non-executive director is being sued for profits earned by her in contract entered by her with one of the company's suppliers, Lavelle Ltd. The management is not invoking provisions of arbitration in its dispute with Camilla, a non-executive director, although this has been specifically provided in Articles of Association of the company. At the beginning of the last year, the Articles of Association provided for payment of 15,000 to non-executive directors. However, through suitable amendments to the Articles, this figure was brought down to 10,000 nine months later. Since other directors have received 15,000 for the last year, Camilla is also demanding that the same amount be paid to her. However, she has not been paid her emoluments, although the other directors have been duly provided with their full emoluments. From the side of Camilla, she is accountable for the profits she is alleged to have made in contract with one of the company's suppliers, Lavelle Ltd. It is seen that there are allegations on both sides, from the management's side in not invoking the required arbitration for settlement of disputes with directors, and for not paying emoluments to Camilla (although other directors were paid). Key relevant legal principles supporting these explanations with appropriate references to case law are given below: The Articles of association is a "document that sets out the internal procedures of a registered company." (Articles of Association). It needs to be clarified that the Articles of Association is not intended to establish contractual obligation between the company and its shareholders, or the directors and the company. It is meant to regulate the conduct of the members inter se, or among themselves. It is necessary to know the concept of ultra vires, as construed in the context of English Company Law. An ultra vires, or illegal act, is void and a existing outside shareholder may, therefore, bring action or obtain an injunction to prevent the director of the company to carry on the ultra vires transaction. The alleged wrongdoing director is also liable to pay damages to the company for wilful wrongdoing. It is also necessary that steps be taken so that the ultra vires act is not binding upon the company or its members. This was established in the case of Royal Bank v. Turquand and was reinforced in the case of Hickman v. Kent or Romney Sheep Breeder Association (1915) 1 Ch. 1881 Chancery Division. According to the UK Companies Act, the aspects of executive and non-executive directorships do not have much difference, in so much that non-executive directors need to monitor the activities of executive directors from an independent and non-committed position. However, in so far as non-executive directorships are concerned, their duties and responsibilities are almost the same as executive directors, except, perhaps, that non-executive directors do not take part in the day-to-day management and supervision of the company. As the Companies Act does not specifically delineate the 'fiduciary duties' of directors, it is necessary, as observed in the Cayman Islands News Bureau Limited v. Cohen and Cohen Associates Limited (1988-89) to retain "the observance of general standards of loyalty, good faith, and the avoidance of a conflict of duty and self-interest." (Kodilinye and Carmichael 2002, p.131). In this case it is seen that there are concerns whether Camilla had acted in the best interests of the company, or her personal self interests, in her purported dealings with Lavelle Ltd, as Vendor Company. While the matter is now sub judice, it is necessary that full case be now turned over to arbitrators as categorically enunciated by the Articles of Association of the company. In order to establish ultra vires, it is necessary to prove that the company, or its directors are not empowered to conduct that act. It is also possible that an act may be intra vires (within the legal ambit) but unauthorised power may be used. In such case also, the act shall be termed as void able, at the option of the company's members. The test to be applied needs to answer the following questions: 1. Was the fact of reasonableness established or an act purported to be carried out within the limit of powers In this case it is with respect to whether the contract that was entered by Camilla, a non-executive director was within the powers conferred upon her by the Articles of Association or the members at the General Meeting. 2. The act should be a bona fide one, intended to pursue business dealings of the company. In this case, it is to be seen whether entering into secret contract with the supplier, Lavelle Ltd., for personal profit, could be seen as a bona fide act for the company. 3. The third test would be with respect to the degree of benefit that the company could gain through the contract entered by its non-executive director. These questions would need to be answered in terms of Camilla's contractual obligation with Westfield Ltd, with special emphasis on the suit that has been filed for undisclosed illegal profits made by her from the Lavelle contract. Also it needs to be seen whether there has been abuse of power on the part of the director, and she has acted beyond her powers and jurisdiction as director. These allegations have to be proved beyond reasonable doubt in order to oust Camilla as Director and to proceed legally against her. However, there is one barrier that stands between the management wishing to haul Camilla to court and this is with respect to the Arbitration clause in the Articles of Association. Therefore, which the management wished to take a valid and uncontroversial stand regarding Camilla case, they have to choose between either of the two options: 1. Amend the Articles of Association with the consent of other shareholders to the effect that arbitration clause stands annulled and the company is free to proceed legally against the defaulter, Camilla. 2. Allow status quo to be maintained. The arbitrators report would clear the ground for legal action against the defaulter director, Camilla. However, it is necessary that appointment and jurisdiction of arbitrator be unbiased and in accordance with company norms. His judgement would be final but could be appealed by party, Westfield Ltd., or Camilla in a competent court of law. According to the verdict in the Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation case, it is said that if the director was in breach of the fiduciary duty to the company in entering into transaction, and this fact was known to third parties before signing the agreement, then the company is at liberty to rescind this contract, or enforce it. The contract is voidable at the option of the company. (Hicks and Goo 2008, p.168). Application of principles and case law to facts of problem: When applying the facts of the case of Hickman v. Kent or Romney Sheep Breeder Association (1915) 1CH. 1881 Chancery Division, it is seen that the Memorandum and Articles of Association are registered documents which bind the company with its members. In this case, it is necessary that the company follows the conditions laid down in the Articles of Association with regard to use of arbitration in case of conflict of interest. It would be for the arbitrator to finally decide what kind of action needs to be taken against Camilla for alleged breach of trust and fidelity. Now, in this case, the company Westfield Ltd. needs to follow the mandate of the Articles in terms of its association with Camilla. Thus, an independent arbitrator, whose terms of appointment and work have been confirmed by the Articles of Association, needs to be selected. The primary duty of the arbitrators would be to look into corruption charges and substance of case filed against Camilla. The arbitrators would need to submit their report at the General Meeting. In this case study, it is not known how the Articles of Association of Westfield Ltd views evidences and proof of illegal conduct by directors. It is possible for the company, charges being proved correct, to rescind the contract with Camilla and claim damages for losses suffered due to her misconduct. Additionally, at its option, it could also cancel the contract made with Lavelle as illegal and not binding upon the company. In case the charges against Camilla are proved, it would be necessary to settle all dues unto the date of the misconduct, i.e., signing of illegal and private gratification contract, as per terms laid down by Articles. Thus she would have the rights to claim her emoluments and dues up to the date of signing of contract. Again, if it is seen that the charges are proved fabricated and baseless, it could be incumbent upon Camilla to proceed legally to claim her rightful dues under the Companies Act and the terms and conditions enshrined under the Memorandum and Articles of Association of the company. She could also bring action for damages for mental agony, etc. brought about by other directors of Westfield Ltd. Coherence of arguments and structure adopted: It is believed that the Memorandum and Articles of Association of companies are binding documents. If Westfield Ltd. wished to proceed legally against Camilla, it would need to first amend the Articles, scrapping the arbitration clause incorporated in it. For this it is necessary to seek consent from majority of the members present and voting at a General Meeting. If this is not forthcoming, it would be necessary for the company to follow the directives as laid down in the Articles in as far as its conflict with Camilla is concerned. Conclusions: In the case of a controversial and intricate case, as the one discussed above, it is necessary to seek expert opinion by both the defendant, Camilla and also the applicant, management of Westfield Ltd. who wish to proceed legally against a non-executive director. A lot would depend upon the special characteristic of the company and the impact and interpretations of corporate and impinging law in this case. However, it could also be seen that finally, the Articles of Association of companies are mandatory documents and need to be observed in all circumstances. If a company wishes to conduct business in variance with its Articles of Association, it is necessary to first amend the Articles through special resolution at the General Meeting, giving effect to the proposed changes. It would be well within the law for shareholders to seek individual compliance with norms in order to protect their own interests and the major interests of the company. Bibliography Articles of Association. [online]. The K Zone: Wasting Your Internet Bandwidth Since 1994. Last accessed 05 March 2009 at: http://www.kevinboone.com/lawglos_ArticlesOfAssociation.html HICKS, Andrew., and GOO, S. H. (2008). Ultra Wires and Abuse of Powers. [online]. Cases and Materials on Company Law. P.168. Last accessed 05 March 2009 at: http://books.google.co.in/booksid=RulK-zdA-HwC&dq=case+and+materials+in+company+law+-+Andrew+hicks&printsec=frontcover&source=bl&ots=VqOFxBGup-&sig=Zt6VtGOMQG9W2rNfTsycVr5DHjo&hl=en&ei=2L6sSdWoOZCo6gPT8-ziBQ&sa=X&oi=book_result&resnum=1&ct=result#PPA169,M1 KODILINYE, Gilbert., and CARMICHAEL, Trevor A. (2002). Common Wealth Caribbean Trusts Law. [online]. Routledge Cavendish. P.131. Last accessed 05 March 2009 at: http://www.mondaq.com/article.asparticleid=60704 Read More