Opportunities and Restrictions of Company Law regarding Hagoja Limited - Case Study Example

Company Law Assignment The starting point in addressing the company procedure in Hagoja Limited, is to look at the procedure involved in a private company, awarding service contracts, explain who directors are in the process of managing a company, voting rights, substantial property transactions, and, resignation of directors. It is important to stress that the management of a company is usually entrusted to a body of individuals called directors. It should be noted that the Act requires a private company to have at least one director while a pubic company have a minimum of two directors. The exact name by which a person occupying the position of director is called is completely immaterial under the companies Act 2006. The ‘term’ director may include any person occupying the position of director by whatever name called. The current view however is that this provision only applies to persons properly appointed as directors but who operate under a different title. In certain cases directors may require share qualification to be appointed as a director. A share qualification is a specified number of shares which a person must hold in the company to qualify him for appointment. It should be noted that no such requirement unless the articles otherwise provide. For private companies, it should be said that private company directors will in any event usually be substantial shareholders. “When a qualification is imposed, a director not already qualified must obtain his qualification within two months of his appointment or the time fixed by the articles”1 In cases involving directors service contracts, some contracts will have to be approved by the shareholders-primarily, those which will, or may, continue to provide the director with a guaranteed term of employment for more than two years-and there are special procedural rules as to how such approval must be given. The s188 and s.189 of the companies Act 2006 contain important restriction on the length of directors service contracts and ensure that they cannot be made longer than two years without member approval. In substantial property transactions, any contract by which a company sells to or buys from a director property of any sort, and any other property dealings between directors and their companies, are subject to the general rules regarding directors’ contracts. The provisions of ss190 to 196 of the companies Act 2006 reinforce these general requirements; member approval of certain dealings, than the articles would normally stipulate. Without such approval, a company may not enter into an arrangement under which a director of the company or of its holding company, or a person connected with such a director, acquires or is to acquire from the company, directly or indirectly, a substantial no-cash asset nor to the converse case of the company acquiring such an asset from any of those persons. “If the director or connected person is a director of its holding company or a person connected with such a director, the arrangement must also be approved by a resolution of the members of the holding company”2. A company shall not be under any liability by reason of a failure to obtain approval required by s190. This usually protects the company in question from potential liability under an arrangement that is conditional on member approval when that approval is not in fact obtained. But what is a substantial non-cash asset? Section 191 defines a substantial no-cash. The Act states that its value must exceed 10 percent of the company’s asset value and be more than £5,000 or exceed £100,000, to be determined as at the time the arrangement is entered into. As regards to ratification, the companies Act 2006 has introduced a new statutory directive action against directors by shareholders. The grounds on which such an action may be brought are wider, and some of the stringent limitations on derivative actions have been removed. Further, if shareholders try to ratify the breach, and the directors concerned and people connected with them, such as family and people they are in a permanent relationship with are not allowed to vote. In Bushell v Faith3, the articles of a private company provided that: ’In the event of resolution being proposed at any general meeting for the removal from office of any director, any shares held by that director shall on a poll in respect of such resolution carry the right of three votes per share’. The House of Lords, in affirming the court of Appeal’s decision, upheld this provision for weighted voting in resolutions under s168. The House held that this was not an infringement of the requirement imposed by s168 to effect that, despite any contrary provision in the articles, any director may be removed by ordinary resolution. It must be noted that nothing in the Act prevents the articles giving a director’s shares special voting rights, for example, three votes per share on a poll. Hattie must be advised that, following the family business’s incorporation as a limited company(Hagoja Ltd),the company must be distinguished from a mere family business to a business entity with limited liability. In Salomon v Salomon,4the House of Lords stated: “The company is at law a different person altogether from the shareholders….;and, though it may be that after incorporation the business is precisely the same as it was before, and the persons are managers, and the same hands received the profits, the company is not in law the agent of the shareholders or trustee for them…..” In awarding a three year service contract to Des under the 2006 Act, Hattie must seek the approval of the shareholders, no matter how much Des needs to be rewarded for his hard work. It must be noted that, contracts providing the director with a guaranteed term of employment for more than two years must seek the shareholders approval. Any award of a service contract over two years is in breach of ss.188 and 189 of the companies Act 2006. Harry’s two year fixed service contract overseas may fall within the meaning of s.s188 and 189, and may not require the approval of the shareholders but a company with an overseas branch must give a valid notice to the registrar. The Act states that: “A company that begins to keep an overseas branch register must give notice to the registrar within 14 days of doing so, stating the country or territory in which the register is kept”5 On Ricaldo’s case, Hattie must be advised that even if Hagoja Ltd was looking for vehicle replacement, there is no fast rule in buying Ricaldo’s Van.Substantial property transactions requires member approval. Any contract by which a company sells to or buys from a director, property of any sort, and any other property dealings between directors and their companies, are subject to the general rules regarding directors’ contracts. The provision of ss.190 to 196 of the companies Act 2006 reinforce these general requirements, namely members approval of certain dealings, than articles would otherwise normally provide. Without such approval, a company may not enter into an arrangement under which a director of the company or of its holding company, or a person connected with such a director, acquires or is to acquire from the company directly or indirectly. The price for the van(£8000) in question is obviously above £5000 as required by s.191, but the sale or purchase of the van must wait until the members approve the transactions. Ricaldo may have to continue cycling while awaiting a decision from the members. If every one is in favour of the deal, fine. But every one must wait for the final decision from the members. Should members say no, that is final. The replacement of Article 14 of the model articles, to a clause on the articles, is likely to succeed under the existing Companies Act 2006. “Nothing in this chapter affects- (a)any provision of a company’s articles- (i)requiring an objection to a person’s entitlement to vote on a resolution to be made in accordance with the articles, and (ii)for the determination of any such objection to be final and conclusive, or (b)the grounds on which such a determination may be questioned in legal proceedings”6 The statutory directive however, under the companies Act 2006 suggests that shareholders, directors, and people connected with them, such as family, and people they are in a permanent relationship are not allowed to vote in the process of ratification. It must be submitted that, Lucinda, her father Harry, her partner Christa, and her new boyfriend Des are unlikely to vote in the process of ratification. But with the company’s replacement of article 14 to Hagoja’s articles, Lucinda is likely to vote in the resolution. There is no doubt that Lucinda breached s175 of the companies Act 2006 in receiving £2000. The statutory duty requires a director to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. The Act stipulates: “A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company”.7 Section 175(2) amplifies the duty by stating that it applies in particular to the exploitation of any property, information or opportunity, whether or not the company could take advantage of such property, information or opportunity. Hattie must be further advised that, the Board’s decision to pardon Lucinda needs the sanction of the members. There is no short cut. Section 175 is very clear as to what the Board must do. They (board) must seek the sanction of the members entitled to vote on Lucinda’s case before letting her free from the breach. Yes, the company never lost any money but Lucinda’s case is not over until the members hear it. Should Lucinda decide to resign from her directorship after the general meeting, she must give a written notice to that effect. “A director of a company may resign from office giving written notice of resignation to the company and any such resignation has effect from the date the notice is received by the company or from such later as may be specified in the notice”8 Should however, the members decide to remove her from office after the general meeting, she must leave the office as stipulated by the Act. “Notwithstanding in its memorandum or articles or in any agreement between a company and any of its directors, a director of a company may be removed from office by resolution of the members of the company.”9 As a general rule, the companies Act 2006 provides guidance on the voting procedure on resolution: “On a vote on resolution on a poll taken at a meeting- (a) in the case of a company having a share capital, every member has one vote in respect of each share or share or each £10 of stock held by him and (b) in any other case, every member has one vote”10 It must be finally submitted that even if Lucinda was allowed to vote under the company’s articles provisions, she is unlikely to succeed as she doesn’t have any share capital under s.284(a) above, and may rely on one vote under (b) above. On a written resolution, s.284(1)(a)states, that in the case of a company having a share capital, every member has one vote in, respect of each share or each £10 of stock held by him, and (b)in any other case, every member has on vote. Even under a written resolution, Lucinda doesn’t have a chance of a decision in her side. If a resolution is on a show of hands at a meeting to be held, s.284(2) dictates:” (a) every member present in person has one vote, and (b) every proxy present who has been duly appointed by a member entitled to vote on the resolution has one vote. And unfortunately even under s.284(2), Lucinda may not have a chance of to prove otherwise in the process of a resolution. 2000 Words Bibliography Impey, D, &, Monague, N,(2008), running a Limited Company, 6th ed, Jordan Publishing, Bristol Morse, G, Girvins, S, Morris, R, Frisby, S, and, Hudson, A(2005), Charlesworth’s Company Law, 17th ed, Sweet & Maxwell, London. Armour, D,(2006), The ICSA Company Secretary’s Handbook, 6th ed, ICSA Publishing, London. Mayson, S, French, D, and, Ryan, C(2001), Company Law, 8th ed, Blackstone Press, London. Rose, F,(2004), Company Law in a Nutshell, 6th ed, Sweet & Maxwell, London. Statutes Companies Act 1985 Companies Act 1989 Companies Act 2006 Company Law Reform Act 2006 Company Directors Disqualification Act 1986 Department for Business Enterprise and Regulatory Reform Insolvency Act 1986 Read More