Company Law: Made in Wales - Case Study Example

Company Law: Made in Wales (MIW) Case Study Regulations under section 82 of the companies act 2006 provide that if a company acts in a way that contravenes the laws and regulations without good excuse, the offence will be considered as having been committed by the company at large and by every officer of the company who was involved (Sheikh, 2013). Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 is a case where the court used this law and the court argued that the firm was bound by the acts of the single director. This means that with regard to the fact the three directors of Made in Wales (MIW) of refusing to buy the land only for them to allow Lisa to buy the land and then resell it to the firm at a much high profit margin, the officers are liable and the firm as a whole was liable. However, considering that the person who is suing the firm one of the shareholders, the liability in this case will not be on the firm but the directors. However, since Derek was not directly involved and he had not been attending board meetings, he may be exempt from this. Derek was not officially aware of this transaction and therefore from a legal point of view, he is not at default. Part (b) of section 82 also outlines that a person guilty of such an offence is can be prosecuted and given the punishment hat is in line with his or her offence. However, it also provides that for continued contravention, a daily default fine may apply. However, even though Derek had not attended any meeting, and was not involved in the transactions that led to MIW being in trouble, he still bears some responsibility as a director. In Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, the court made a decision, which showed what a shadow director is. This could be useful a court of law to implicate him. Section 197 outlines that for a company to give loans it requires members approval (Van Duzer, 2007). Subsection 1 of this section outlines that company may not (a) make a loan to a director or (b) give a collateral or provide security for a loan given to any of its directors director by any person or party. The section however gives an exception such as when such a transaction when the shareholders of the company have given an approval by a resolution. Section 209 however outlines that for money-lending companies, such an approval does not have to be there as long as the loan is through the correct procedure that would be in place when giving a loan to any other customer. In such a case, the do require would not be getting the loan or the security to a loan as a director of the firm, but as a customer to the firm. However, this does not apply to MIW because MIW is not a money-lending firm. Section 172 of the Companies Act 2006 outlines the duty of the directors to promote the success of the company. In this case, Martin can argue in court that the actions of the directors were in contravention of this section (Ritchie, 2007). There are a number of actions that the directors have involved themselves in that are in contravention of this section. The first one is the lending of 45,000 pounds to Paul who is one of the members of the board. Although all the other directors apart from Derek were aware of the transaction, the shareholders were not aware and so they did not give their consent, as it is required by this section of the Companies act of 2006. By giving the loan of 45000 pounds, not only did the board members contravene the law governing the actions of a firm, but they also acted in way that did not advance the interests of the firm. In fact, considering that the firm was going through hard financial times, this act was in bad faith and in essence jeopardized the future success of the firm. They all have a case to answer with regard to this because this act alone was not only a contravention of the law, but indeed also affected the success of the firm in a negative way. They did this without consultation with the shareholders and this brings in a new problem. If the case goes to court as Martin intends, he can sue the directors for giving such a big loan to one of the directors without consulting with the shareholders and for jeopardizing the future of the business. Martin can successfully argue that this action was one of the actions that the directors carried out that have led to MIW being in the current bad situation that it is in today. The facts in the case study indicate that the yacht that Paul bought with the loan was also in use to benefit the firm by entertaining potential customers thus probably bringing in new customers. However, this does not justify the act of giving such a huge loan to the director without the consent of the stakeholders (Hannigan, Prentice, & Bryant, 2009). If the yacht was a necessary asset for the firm, the directors should have bought a yacht for the MIW and have the shareholders to approve the purchase before buying the yacht. However, the fact that they gave a loan to a director without the approval of the shareholders is an outright contravention of the law, regardless of whether the yacht was used for the benefit of the firm. The other problem that comes up in the case study is the issue of the land that Lisa bought and then sold to MIW. Section 177 of the UK company act 2006 is about the duty of the directors to declare interest in proposed transaction (Birds, 2010). In Bhullar v Bhullar [2003] EWCA Civ 424, the court determined that the directors do not only have to declare such conflict of interest, but to avoid it when it arises. For instance, when the owner of the land next to the firm offered to sell to MIW, it would have been the wise thing to do for Lisa to declare of disclose that she had an interest on the transaction because she wanted to buy the land personally instead of buying it for the company. However, instead of doing this, what she did was to give an analysis that the firm did not need this land and then buy it later. The other directors are also as guilty as Lisa because they not only agreed with Lisa that MIW did not need this land, but also allowed Lisa to personally buy this land later. Furthermore, they also allowed her to sell the land to MIW at a much higher rate only a few months later. They are guilty because they did not carry a due diligence to identify whether MIW did not need this land for expansion. Secondly, even if they believed that MIW did not need this land, they should have seen a red flag when later Lisa said she wanted to buy the land. Furthermore, even more red flags should have come up when Lisa declared that she was selling the land to the firm. If the case goes to court, this will look like a typical case of fraud. The three directors will have a hard time proving they are innocent. Subsection (1) of section 177 outlines that if a director of a company has an interest directly or indirectly in a proposed transaction, the director must openly and officially declare interest to the other directors (Mullerat, 2010). Lisa, if she had any interested in the land, should have declared the interest so that the other directors can assess the situation and determine if the interest of the firm were more important. This is especially considering that owner of the land did not offer to sell the land to Lisa but offered to sell the land to MIW. Apart from the other directors, Lisa may have an even bigger responsibility to prove her innocence with regard to the transaction that led to her buying the land and then selling to the MIW. Apart from declaration of interest in a proposed transaction, the directors should also declare interest in an existing transaction or arrangement (Source Wikipedia, Books Llc, 2010). When Lisa decided to resell the land to MIW, she should have made this open not only to the directors but also to the shareholders, especially due to the inflated price. She bought the land for only 95,000 but sold it for 200000 only a mere three months later. The shareholders should have been informed about the whole transaction, including the fact that Lisa had bought the land for only 95000 three months earlier. The shareholders should also have been aware that there had been an offer to sell the land for only 100000 just before Lisa bought. The court also dealt with this issue in Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443, in which the court declared the directors of a firm have the fiduciary duty to protect the shareholders from losses. When Lisa sold the land to the company at a much higher rate that she had bought it three months earlier, the directors should also have acted as a guardian to protect the MIW from such a transaction. The law is very specific as to what a declaration is (Okoye, 2015). For instance, in the case of Lisa, just casually mentioning her interest in the land to the directors may not amount to a declaration. Under section 177 subsection 2, the act outlines the ways in which the director should make the declaration (PWC, 2013). In subsection 2 a, the act points out that the declaration can be made in a meeting of the directors. Subsection 2 b, outlines that the director’s declaration can be by notice in writing. Subsection 2 (c) notes that the declaration can be by general notice (Davies, 2011). If Lisa and the other directors intend to use some provisions in the firm’s constitution to protect them from the law, they should know that the law has already dealt with this in section 232 of the UK company act 2006. This section provides that any provisions protecting directors from liability of negligence, default, breach of duty or breach of trust will be void (Belcher, 2014). In this regard, Lisa and the other directors will not be protected from their default or any breach of trust by any provisions that may be available in the constitution of the firm. In such a situation where the directors have defaulted or breached the trust of their shareholders, the provisions of the companies act 2006 superior to the provisions in the constitution of the company (Institute of Directors, 2010). In Secretary of State for Trade and Industry v Bottrill [1999] EWCA Civ 781, the court laid foundation as to how the directors of a firm cannot use the corporate veils to hide under when they have acted in a way that is contrary to law. Subsection 2 also provides that any provision by which a director of the company provides indemnity to the directors will also be void in the face of the provisions of the act. The other issue with regard to the threat of court suits that MIW faces is with regard to Robert the supplier. Section 993 of the Companies act 2006 prohibits the offence of fraudulent activity by directors. These issues can lead to dire consequences for the directors of the firm (Mullerat, 2010). Lisa especially faces a higher risk of facing prosecution. The other two directors also face same risk as the facts indicate that they were negligent as they always agreed with Lisa even when it was clear that the decision that she was making were not in the interest of the firm. Paul, in some way may survive from prosecution because he was not involved in the decisions. However, he is not safe because as a director it was his responsibility to protect the shareholders. The fact that he was absent from broad meeting for two years despite him being a board member can be interpreted as a negligence of responsibility. In this regard, he may not completely be safe because he had the responsibility of attending the meetings and know the decisions that the other members were making. This section of the act provides that if found guilty, the director can get imprisonment or fined or both. In Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, the court made a decision that was meant at demonstrating what a shadow director was. This could be useful a court of law to implicate him. Section 1,121 puts liability of officer in default and not the firm as a whole. If one director commits a crime in relation to the operations of the firm, he or she is help responsible individually and the other directors who are not at fault are not affected (Sheikh, 2013). Lisa with regard to convincing Robert to continue supplying the firm with raw materials will be at risk of prosecution and given the punishment that goes in line with this. In such a case, because the other directors were not aware of this transaction, may not be at risk of prosecution. However, the firm as a whole may be considered has having acted in the wrong way. This is because subsection 3 of section 1,121 also outlines that an officer is “in default” for the reasons of the provision if he authorizes or permits a transaction will be doing this on behalf of the firm. When combined with section 40 that gives the directors the power to bind the company which mean that any transaction that any director approves with another person who is in business with the company is said to be binding, means that the firm was bound to this promise he gave to Robert. Part b section (i) of the act also outlines that the other party entering into a transaction with such a director (i) is not bound to enquire as to any powers the directors to bind the company. However, section (ii) shows that the law presumes such a party to have entered into the deal in good faith, unless the defendant proves otherwise. In Hely-Hutchinson v Brayhead Ltd [1967] 1 QB 549 the court rules that a de facto director has the power to enter into a contract on behalf of the firm. This means that that Lisa promised to Robert can be said to be a commitment by MIW as a firm. Section (iii) goes further to outline that such a person will not have behaved in bad faith even if he or she knew before the transaction that the act is outside the authorities of the directors. In Royal British Bank v. Turquand (1856) E & B 327, 119 ER 886), the court determined that any arty going into a contract or any transaction with a firm has the right to assume that the person who is representing the firm has observed the internal regulation of the firm. According to the above, it is clear that what Lisa promised Robert bound the MIW to the transaction and so the firm cannot argue that this was not a recognizable transaction. This may lead to two main issues. The first issue is with regard to Lisa as a person. Robert can take legal action against Lisa for acting in a way that is not honest and by pretending to act on behalf of the firm. This is especially because the actions of Lisa led to Robert making losses, as he did not get his payment after continuing to supply MIW with the raw materials. The other issue that can come and which in fact Robert has already decided to bring about it the fact that Lisa’s action are regarded by the law as having been on behalf of the law. Robert can therefore choose not to sue Lisa and sue the firm itself and he can use this section to prove that Lisa’s actions were on behalf of the firm. In this regard, the firm will not be able to argue that the action if Lisa of promising Robert that he can continue to supply the raw materials and that he will get payment and that the firm does not have responsibility of this transaction. Lisa can face further problems in this since the Companies act 2006 also requires the board of directors NOT to act in a way that jeopardizes the relationships between its suppliers or any stakeholders such as the customers as this would jeopardize the future success of the business. In Towers v Premier Waste Management Ltd [2011] EWCA Civ 92, the court reinforced this and made a decision that indicated that the directors can be prosecuted and even punished if their acts are deemed to be in contravention to this principle. Lisa acted in contravention to this requirement in a number of ways as follows; Her refusal to buy the land for the MIW It is very clear that Lisa knew that MIW would need the land for expansion and yet, when the owner of the adjoining land offered to sell the land to MIW for only 100,000, she declined the offer in argument that MIW was not in need of this land. The only issue with this is that only a few months later, she changed this position and will be harder for her to prove what changed in only three months when she later argues that the firm now needed the land. There is no such thing that can change over a period of only three months and therefore it is clear that her initial analysis that MIW did not need this land either was fraudulent or don with negligence (Mullerat, 2010). Either way, she will have a serious case to answer here. Her buying the land for herself The fact that she bought the offered land immediately after convincing the other directors to reject the offer for MIW to buy it can also be another problem. This is an indication that she had a selfish interest in the property. The fact that she chose to fulfill her interests ahead of the interest of the firm means that she acted in a way that deliberately jeopardized the future of MIW. Selling the land to MIW Her selling the land to MIW at an exorbitant rate only three months later and only three months later is the final nail in the coffin. This is the proof that she was putting her interest ahead of those of the firm and this directly relates to the problems that the firm was going through after the time. False promise to Robert Lisa persuaded Robert to continue supplying MIW telling him that he have her personal reassurance that the firm is in sound financial health. Lisa gave a false promise to Robert and never disclosed to him that the firm was going through financial difficulties. Although Robert had suspected that the firm was going through difficulties and had decided to hold his supplies to cut his losses, Lisa personally promised him that everything was all right and that he would get his payments if he continued to supply the raw materials. Robert is now threatening to ask the court to wind up the company. The court will most likely accept this request and the investigation are likely to indicate that MIW should be under receivership. This means that her acts, which were dishonest, are likely to lead to the closure of the firm, much to the loss of the shareholders. Lisa and the other three directors acted in ways that risked the success of the firm. They refused to show any level of competency or care with regard to how they were managing the affairs of the firm and their actions have led to the firm being a position that is not likely to recover. The odds stuck against them are high and many and they will definitely have a hard task in court to try to prove to the court otherwise. Reference list: Belcher, A. (2014). Directors’ Decisions and the Law: Promoting Success. London, UK: Routledge. Birds, J. e. (2010). Annotated Companies Legislation. Oxford, UK: Oxford University Press. Davies, D. (2011). Workplace Law Handbook 2011: Employment Law and Human Resources. 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