Business and Corporate Law: St. Ronans Ales Ltd - Case Study Example

The conduct of each of the directors of St. Ronan’s Ales Ltd can be interpreted as a breach of directors’ duties within the provisions of the Companies Act 2006. The Act merely expands on pre-existing duties that were imposed by statute and constructed on by equitable and common law principles.1 Cumulatively the law evolved so that it requires that directors act in good faith at all times and in the company’s best interest.2 By extension, directors are required to act diligently and in a manner consistent with that of a business person.3 Sections 171-188 of the Companies Act 2006 expands the duty even further requiring that directors act in a manner calculated to promote the company’s success and to take account of the effect that their decisions have on all stakeholders including the community and the environment.4 The Loan The company directors’ decision to borrow 100,000 pounds against the assets of the company is negligent and a breach of the directors’ statutory duties pursuant to Sections 171-188 of the Companies Act 2006. It is a firmly established tenet of company law that directors in the course of exercising their duties are held to a specific standard. The standard is compared to the care and conduct that would generally be anticipated of a business man with the relevant skills and training.5 Taking this approach, it is inconceivable that a business man running a business with a 1 million pound turnover and net assets of 100,000 pounds would borrow money against the entire net worth of the business. In the event the company fails to repay the loan all of the company’s assets will be depleted. The directors’ duties have already been the subject of codification under the Companies Act 1985. The 1985 imposes upon the director the duty to safeguard the interest of the companies’ members.6 By taking out a loan which is secured by the company’s entire net worth the directors have exposed the company to the risk of foreclosure to the detriment of each of its members. Although each of the shareholders approved the load, only two of them are active directors. It therefore follows that the other members trusted Ian and James, the two active directors and went along with them as a result of that trust. Despite the misplaced judgment, each of the directors are equally responsible to all of the members of the company, including their employees. They each have a duty to act with reasonable care, skill and diligence.7 The duty includes an obligation to exercise independent judgment and to seek advice when appropriate. When ascertaining the best interests of the members of the company and its employees the court will generally apply an objective test. This test assessed how a reasonable business person would act in similar circumstances.8 Placing the company’s entire net worth in jeopardy by way of a loan is certainly not the conduct expected cannot of a reasonable man of business. This loan from the bank against the company’s net worth is particularly problematic since the directors issued 50,000 pounds in shares to the local farmer for the lease of his land. This move further compromises James’ duty as a director. The entire deal appears to be suspicious. James convinced the other directors to approve the transfer of shares to the local farmer and to approve a loan to pay for the building of a large shed which would be acquired from the farmer. In Re Dominion International Group plc (No 2)[1996] 1 BCLC 572 the court said that the mere fact that such a transaction could possibly be a conflict of interest was sufficient to veto such a transaction.9 It is certainly possible that the transaction with the local farmer and the resulting loan is a conflict of interest. If James has an interests in the proposed transaction he has a duty to disclose that interests to the other members of the board. His failure to do so is a breach of his fiduciary duties as a director under the Companies Act 2006. James By offering to sell his experimental yeast to the company for 5,000 pounds with the added tax benefit for the company, James is acting for a collateral purpose. Such conduct is a breach of a directors duty and rises to the level of a conflict of interest.10 The approach to conflict of interest in the context of a director’s duty forms a part of the Companies Act 2006 and is incorporated in Sections 171-188. Section 175 of the Companies Act 2006 codified the common law principles against conflict of interest with some modifications. Under Section 175, a director is required to avoid scenarios in which he has or may have interest that conflicts with the company’s interest.11 A conflict of interest may arise if the director takes advantage of a business opportunity as a result of his position within the company. This is certainly the case here, where James, an active director is using his position to sell his own personal property to the company. However, by virtue of Section 175, if James fully discloses his proposed sale to the other members of the company in a board meeting and the company agrees to it, there will be no breach of his director’s duties.12 Ian Using the company’s money to discharge a personal debt is also a conflict of interest under Section 175 of the Companies Act 2006. As previously stated this part of the 2006 Act draws on the common law. The courts have typically had little or no tolerance for directors making personal use of their company’s information or property. This is primarily because the view taken is that a director is in a fiduciary relationship with the company and each of its members. As a result he is required to subscribe to strict principles of confidentiality. By allowing directors to use information that arises out of company business transactions or to make personal use of company property is contrary to principle of confidentiality. It therefore follows that implicit in the fiduciary duty is the requirement that directors are forbidden to make personal use of the company’s property or any knowledge of information derived as a result of their fiduciary relationship with the company.13 The facts of the case however, do not reveal whether or not Ian returned to the funds to the company. If he did return the money promptly and always intended to, he cannot be said to have made personal use of the company property in circumstances where there could possibly be a conflict of interest. Even upon a narrow interpretation of Section 175 of the Companies Act, 2006 there is required to be both a possible conflict of interest at the very least and the personal use of company property in order for there to be a breach of director’s duty. Tam Although Tam is not regularly active in the Companies’ business he is a director nonetheless. By virtue of Section 176 of the Companies Act 2006 he has duty not to accept benefits from a third party.14 This provision replaces the common law principle against directors obtaining a secret profit. Moreover, in order for the director to be in breach of his director’s duties in circumstances where he accepts benefits from a third party there must be a conflict of interest.15 The mere fact that Tam is acting for a collateral purpose implies that there is a conflict of interest. Tam goes out of his way to use his position as director and Jame’s father to convince the others to hire Jim to redesign the company’s labels knowing all along that he would be receiving a personal payment for his efforts. He is therefore using his position to promote his own personal interest. It therefore follows that there is a conflict of interest. Section 177 of the Companies Act 2006 also requires that directors who stand to obtain a personal benefit from a company transaction are required to disclose that interest to the other members of the company.16 The disclosure must be made before the company approved the proposed transaction.17Since Tam did not disclose his personal benefit, the transaction can be vetoed. In any event, Tam is in breach of his director’s duties. River Tweed The members of the community that have been impacted by the waste deposited to the River Tweed as a result of an accident at St. Ronan’s Ales Ltd. do not have a right to bring action against the company under the Companies Act 2006. That right belongs to the company itself and not its stakeholders. By virtue of Section 172 of the Companies Act 2006 the directors are required to promote the companies’ success. This includes taking into account the company’s business reputation and standing in the community, the company’s business relations and maintaining high business standards.18 The members of the community can bring actions against the company itself under the law of tort. However, they will have to have suffered some form of injury in order to substantiate a successful claim. Wally By manipulating the companies profits so as to deplete the company’s share value, the directors are acting improperly and in breach of their respective fiduciary duties to the company. The relevant duties have already been discussed and include the duty to act in good faith, to promote the companies interest, to act in the best interest of the company and each of its members and to exercise care, skill and diligence. By manipulating the company’s share value the directors are acting in a manner that was not only detrimental to Wally, but to the members of the company as a whole. The conduct was collectively and singularly “unfairly prejudicial” to the members of the company.19 Section 459(1) provides as follows: “Any member of a company may apply to the Court by petition for an order under this section on the grounds that the affairs of the company are being or have been conducted in a manner which is unfairly prejudicial to some part of the members (including at least himself) or that any actual or proposed act of omission of the company (including an act of omission on its behalf) is or would be so prejudicial.”20 This right of action under Section 459(1) has been retained by the Companies Act 2006 and has been modified somewhat. The modifications permit an action to succeed in the absence of proof of fraud on the part of the directors and the action can proceed even if the conduct began prior to the current member obtaining shares in the company.21 In all the circumstances Wally can bring a derivative action against the directors. Bibliography Boyle, A.J. (2002) Minority Shareholders’ Remedies. Cambridge: Cambridge University Press, Companies Act 1985 Companies Act 2006 Farrar, J.H.; Hannigan, B.M.(1998) Farrars Company Law London Edinburgh and Dublin: Butterworths Gower, L.C.B., (2005) Gowers Principles of Modern Company Law. London, Sweet & Maxwell Lee Panavision Ltd v. Lee Lighting Ltd [1992] BCLC 22. Parke v. Daily News Ltd [1962] Ch 929 Re City Fire Equitable Insurance Co. Ltd. [1925] Ch 407 Re Dominion International Group plc (No 2)[1996] 1 BCLC 572 Software (UK) Ltd v. Fassihi (2002) EWHC 3116. Read More