Company Law - Case Study Example

Company Law Issues: The major issues that must be considered in evaluating this situation is whether Paul, despite his resignation as Director, is still a shareholder in the Company, because his shares have not been bought out by anyone else. Any rights that may accrue to Paul will depend upon whether or not he is in breach of his fiduciary duties by joining a rival Company. Analysis: The Companies Act sets out the provisions by which Companies are to be governed, including appointment of Directors, articles of incorporation, rights of shareholders and procedures for legal action. Directors have a fiduciary duty to the Company, since under common law, the position of a director has been established1 to be similar to that of a trustee and the beneficiaries will be the shareholders of the Company. In the case of Fales v Canada Permanent trust for example, the trustees were held to be liable for their failure to act responsibly and for their lack of duty of care to the shareholders.2 This could prove to be a difficult issue for Peter and Mary if Paul is considered to be a shareholder. In this connection it must be noted that Paul, despite his resignation as Director, has not yet relinquished his shares in the Company which are a major 33 and 1/3rd percent. A high degree of impartiality and responsibility is expected of a person in the position of a trustee and a Director is in a similar position under common law.3 As a result, all directors will be expected to waive personal considerations and look out for the interests of the shareholders first before their own interests.4 Section 317 of the Companies Act of 1985 also places on directors a statutory duty to reveal any interest, profit or financial advantage accruing to them by virtue of their position. Applying the criteria above, it may be argued that Paul has been in breach of his fiduciary duties as a director because he has looked out for his own interests rather than that of the shareholders, by making a move to join a rival company. Justice Plowman in the case of Parke v Daily News Ltd5 held that the primary duty of the directors of a corporation is to their shareholders, superseding their duty to their employees. In the case of Mills v Mills, Latham CJ stated that a director must act “bonafide for the benefit of the company.”6 Therefore, since Paul has chosen to leave the Company to join a rival company, he has therefore acted in his own interests and not the interests of the shareholders of Ecofine, since these interests have in fact been compromised. Therefore, he is in breach of his duties as a director. A Director can resign any time, although he or she can only be removed by the shareholders7. However, Paul has gained a material advantage by joining the rival company and it may be argued that this is the result of his advantageous position as Director of Ecofine. Since Section 317 of the Companies Act of 1985 also places on directors a statutory duty to reveal any interest, profit or financial advantage accruing to them by virtue of their position, Paul needed to reveal the advantage gained by him through joining the rival company. Therefore, although he has resigned, there may still be a breach of his duties as director which has occurred through his joining a rival company. A Director of a company does not have to be a natural person8 and their decisions are to be conditioned by their own judgment of what they consider to be best at the time the decision is made.9 However, directors are expected to act in the best interests of the Company10 and therefore Paul’s action to join a rival company is in violation of their strict fiduciary obligation of a Director not to profit from their relationship with the Company.11 On these grounds therefore, Paul’s right to file suit under Section 459 may itself be contested. Although he is a majority shareholder, he has not acted in the best interests of the Company himself, therefore his grounds for filing suit against other directors may be contested. Section 459 of the Companies Act of 1985 allows shareholders to request the Court to pass an order decreeing that the affairs of the Company “are being conducted or have been conducted in a manner which is unfairly prejudicial to its members generally or of some part of its members.”12 The recent case of Bhullar v Bhullar has also re-established the court’s strict enforcement of the fiduciary duties of directors in the case of conflicts that arise when there is a clash of fiduciary duties and personal interests.13 Therefore, on these grounds, Paul may be guilty of a violation of the fiduciary duties of a director because he has allowed his personal interests to clash with his duties as director. In fact, he has allowed his personal interests to overtake his duties as director and has resigned from Ecofine to join a rival company. However, the fact remains that despite Paul’s resignation as Director, he is still a major shareholder in the Company and therefore entitled to have some say in Company affairs. The high fees the Directors have been drawing could make all three – Paul, Peter and Mary liable under new regulations. An attempt has been made to introduce increased regulation of Director incomes through the Directors Remuneration Report Regulations 2002. While existing listing rules already call for the listing of Director remuneration, this has now been made a statutory requirement under the amended Section 234 B of the Companies Act, with a new Schedule 7A that sets out detailed information that is to be included in the Directors Remuneration report.14 The directors may be deemed to have made profits for themselves by taking advantage of their fiduciary position – therefore the corporation can sue Paul, Peter or Mary, since they are accountable to the corporation for any profits made by virtue of the advantages of their fiduciary position.15 Paul owns 33 and 1/3rd% of the shares. However, despite being a minority shareholder, he will be protected from bullying by the larger shareholders through derivative claim mechanisms. Moreover the case of Foss v Harbottle16 provides minority protection, in that only a corporation can sue where a wrong arises that is ratifiable. However the terms where this minority protection will hold valid were spelt out in Edwards v Halliwell17 and a fraud should have been perpetrated on the minority18, if such protection is to hold good and the majority votes of the corporation are to be superseded. In the case of Paul however, it is unlikely that he can enjoy such protection, since he is the one who chose to violate his fiduciary duty as Director and profit from it by joining another Company. Therefore it may not be possible to support the position that a fraud has been perpetrated on him by the other directors, as a result of which he can enjoy minority protection. Conclusions: Penalization of directors and liquidators is provided for under Section 212 of the Insolvency Act and under subsections 1 and 2. Paul’s act to leave Ecofine and benefit a rival company could constitute breach of fiduciary duty, so that he may be compelled to repay or restore something to the Corporation.19 Under the same criterion however, Peter and Mary will also be liable. Directors must not cause or allow the business of the Company to be carried on in a manner that will create a serious risk or losses to the creditors of the Company.20 Therefore, all three directors may be liable under the Act, since the shareholders will be more carefully scrutinized when the Company is in liquidation, since directors must look out for the interests of the Company before their own interests.21 Since Peter and Mary have caused the Company to go into a near state of liquidation, it is possible that Paul may be able to file suit against them, because despite his resignation, he still remains a significant shareholder. Mary will also be liable because she is allowing her son to benefit at the expense of the Company, which is again a serious compromising of the fiduciary duties of a Director. Therefore, in conclusion it may be stated that despite Paul’s violation of his duties, his status as a shareholder may entitle him to file a suit under Section 459 of the Companies Act. However, he may not be able to successfully complete the suit and win a judgment in his favor, because he will be forced to reveal that he has himself compromised the interests of the Company and therefore has no standing to pursue action under Section 459. Bibliography Books: * Davies, Paul L and Gower, LCB, 1997. Gower’s Principles of Modern Company Law 6th edition, Paul Davies. Sweet & Maxwell * Directors responsibilities [Online] Available at: http://www.winters.co.uk/factsheets/directors_responsibilities.html * Farrar, J.H., Hannigan, B.M. (1998) Farrar’s Company Law Butterworths * Goulding P, 1999. Cavendish Publishing Ltd, 2nd edition * Shutkever, Carol and Smith, Martin. The Directors Remuneration report Regulations 2002. [online] available at: http://www.mondaq.co.uk/i_article.asp_Q_articleid_E_19791 Cases cited: * Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq. 461 * Brown v British Abrasive Wheel Co (1919) 1 Ch. 290 * Bhullar v Bhullar (2003) EWCA Civ 424; (2003) WL 1202661 * Clemens v Clemens Brothers (1976) 2 All ER 268 * Cook v Deeks (1916) 1 AC 554 * Edwards v Halliwell (1950) 2 All ER 1064 * Fales v Canada Permanent Trust [1977] 2 SCR 302 * Foss v Harbottle (1843) 2 Hare 461 * Great Eastern Railway Co. v. Turner (1872) 8 Ch App 149 * Mills v Mills (1938) 60 CLR 150 at 158 * Parke v Daily News Ltd (1962) 1 Ch 927 at 962-3 * Philips v Boardman (1967) 2 AC 46 YB93.239 * Regal (Hastings) v Gulliver (1967) 2 AC 134 * Re Lands Allotment Co [1894] 1 Ch 616 Legislation cited: * Companies Act 1993 * Insolvency Act of 1985 Read More