Shareholders of Richforth Ltd - Report Example

Shareholders of Richforth Ltd Shareholders of Richforth Ltd Introduction This report will advise Sarah, Marie, and Yvette if they have any personal liabilities from the Richforth Company Ltd during liquidation. A personal liability is a financial obligation that persons or an individual is marked responsible to settled through his or her assets. Marie Facts The company, a boot manufacturer has unlimited objects, but the articles limit the power of a director to enter into contracts in excess of £50,000. Recently Marie placed an order with a leather supplier for £100,000 to take advantage of a significant discount being offered for bulk purchase. The leather was delivered last week. As part of the outstanding offer, Marie received a £2,000 Cheque, which she gave to charity. Marie’s actions violated the fiduciary duty to act for a proper purpose. According to the director’s duty under section 171, Marie needed to have followed the company’s constitution alongside exercising power for “proper purposes”. Section 171 states that. "A director of a company must" (Companies Act, 2006; pg. 93): (a) Act in accordance with the constitution of the company (b) To limit power exercise for the purposes (Companies Act, 2006; pg. 93) for which they are conferred (Lukey, 1994; pp. 342). Notably, Marie went against the company articles that limited the power of the director to enter into contracts that are valued above £50,000. Therefore, when she placed an order with a leather supplier for £100,000, she totally flawed the company regulations. The case is related to the Privy Council decision of Howard Smith Ltd vs. Ampol Ltd. The case was about the directors’ power to issue new shares. It was claimed that the directors issued a large number of new shares mainly to deprive a certain shareholder of his voting majority. The court rejected the argument that the power to issue shares in order to raise new capital is too narrow, and held that it would be plausible if the reason for offering shares were to ensure financial stability and not to destroy the voting majority. 1. Additionally, the duty to reject the benefits from third parties was violated when Marie received a Cheque worth £2000 pounds after purchasing leather worth £100,000. Section 176 states that a company reject any benefit from a third party (Companies Act, 2006; pg. 43) conferred by reason including (a) His position as a director, or (b) Doing anything as a director 2. A "third party" is a person other than the company and an associated body corporate as well as a person acting on behalf of the company (Great Britain, 2007; pg. 01)  or an associated body corporate. 3. Benefits given to the director from an individual who provided services to the company are not considered (Companies Act, 2006; pg. 93) as conferred by a third party. 4. The duty herein is not infringed if the benefit is accepted and cannot reasonably be regarded to lead to a conflict of interest. 5. Any reference in this conflict of interest section includes conflict at work and interest as well as conflict of duties. Even though she gave the money to charity, the fact that she received it was a violation of the duty of loyalty. Therefore, she is liable for two crucial counts of violations including the violation of proper purpose and that of receiving benefits from a third party. Yvette is liable for personal liabilities for the above violations. Yvette Facts Yvette is one of the three directors of Rich forth Company Ltd holding equal shares in the company. As one of the directors, she outsourced the manufacturing of a large specialist order from one of the largest customers of Rich forth Ltd to Wenzhou Ltd. Yvette also sourced for the much-needed industrial leather press from Dorstel Ltd for £ 30,000 that was delivered last week. Yvette breached the fiduciary of loyalty. The fiduciary duty of loyalty requires directors (Companies Act, 2006; pg. 193) and officers to act in favor or the best interest (Great Britain, 2007; pg. 01) of the company and its stakeholders (Omar, 2000; pg. o2). The act provides a good faith and to avoid receiving improper personal benefits because of their relationship with the company without informed consent of the corporation. The main duty of loyalty stipulates that the best interest of the corporation (Great Britain, 2007; pg. 01) and its shareholders take precedence (Companies Act, 2006; pg. 93) over any interest of a director. The breach of duty of loyalty occurred in two fundamental ways. There was a conflict of interest. Yvette had a personal interest in a transaction contemplated by the corporation. She took complete interest in the company’s transactions. She outsourced the first principal manufacturing business and outsourced it to Wenzhou. She used Dorstel to acquire an industrial leather press for £ 30,000. These two significant transactions performed through her companies demonstrate that she created a conflict of interest since she did not inform other directors concerning her personal interest with the transactions. Secondly, she misappropriated corporate opportunities by exploiting the opportunities available for the company for her own personal gains. The two business transactions that Yvette undertook with her other companies denied the company the opportunity to undertake its transactions. Section 175 of the companies act specifies that directors may not undertake business opportunities that the company could without approval. This case is related to the Cook vs. Deeks where three directors took a railway contract in which the company was interested in to another company and registered a different company under their name. In the process, they excluded one of directors from the former company. Yvette’s case is related to Regal (Hastings) Ltd v Gulliver [1942] Regal owned a cinema in Hastings. In order to make the whole lot an attractive package, they took out leases on two more through a new subsidiary. They did not want to give personal guarantees like the property owner wanted. Instead, the property owner said they could have shared the capital of up to £5,000. However, Regal put it at £2,000; regardless of the reductions, the involved parties could not afford more even if they were offered (Lukey, 1994; pg. 126). Each of the four directors received £500 while the Chairman, Mr. Gulliver got outside subscribers who contributed to about £500. Finally, the board asked the company solicitor (Lukey, 1994; pg. 136), Mr. Garten, to put in the last £500 (Lukey, 1994; pg. 142). They made a profit of £3 per share when they sold the business. Then the buyers introduced an action against the directors (Lukey, 1994; pg. 142). She said that the profit was affordable, especially when obtained from the fiduciary duty to the company (Lukey, 1994; pg. 142). However, the executive had not gained fully informed (Lukey, 1994; pg. 142) consent from the shareholders. The legal conclusion was that directors who assume the complete control of a company’s business must know that they are not at liberty to sacrifice the interest of the company for their own. While acting for the company, they should not divert in their favor business that should properly belong to the company they represent. Nevertheless, it should be noted that Yvette’s actions were not entirely in violation of the fiduciary duty of loyalty. It is possible to argue that she acted in good faith for instance; Richforth Company could not manufacture the large order by one of its biggest customers. By outsourcing this job, she ensured that the job was done thereby saving the integrity of Richforth Company Ltd. She also acted in good faith, in the acquisition of the Leather press that must have improved the production of the company. It seems that the transactions (Lukey, 1994; pg. 142) were done with the purpose of advancing the welfare of the corporation. According to section 172(1) the company director must act in the way he or she considers to begood and faith towards promoting the success of the company (Great Britain, 2007; pg. 01) and benefiting its entire staff members among other stakeholders. The desirability of maintaining a company’s reputation aims at maintaining high standards of business and value addition conduct. Therefore, Yvette will incur personal liabilities amounting to profit from the two contractual opportunities that will be paid to the liquidator. Sarah Facts Sarah is a co-director of Richforth and an equal shareholder with Marie and Yvette. Sarah arranged for an agent meeting to source an alternative insurance provider for Richforth Company and prepare documentation. She signed the insurance documents without reading them. The Company experienced a serious fire resulting to the destruction of stock worth 150,000 dollars. The insurance refused to pay the claim citing inaccurate information with the company documentation submitted to the insurance company (Lukey, 1994; pg. 142). Thus, the company has gone into voluntary liquidation. According to Insolvency Act 1986 s. 143, 1. The functions of the liquidator of a company that wound up by the court (Lukey, 1994; pg. 136) are aimed towards (Great Britain, 2007; pg. 01) securing the company assets realized and distributed to the company’s creditors and if there is a surplus, to the persons entitled to it. 2. Duty of the liquidator of a company that is being wound up by the court in England and Wales, if he is not the official receiver— To furnish the official receiver with such information, to produce to the official receiver, and permit inspection by the official receiver of, such books, papers and other records, and To give the official receiver such other assistance, as the official receiver (Companies Act, 2006; pg. 93) may reasonably require for the purposes (Great Britain, 2007; pg. 01) of carrying out his functions in relation to the winding up.” Advice Sarah is liable for personal liabilities because she breached the fiduciary duty of care when she failed to examine the documents presented by the agent before signing. A fiduciary is an individual in whom another has placed the highest trust and confidence to manage (Lukey, 1994; pg. 142) and protect property or money. It comprises a relationship wherein one person has a commitment to act for another’s benefit. On the other hand, the fiduciary duty of care refers to ordinary care, skills, and prudence engaged in the type of activity in which the individual is engaged. Fiduciary duty of care also includes the examination of professional standards of the duty being performed. This case can be related to Re D’Jan of London Ltd [1993] BCC 646 in which a director of a company owned by him and the wife signed a change to an insurance policy that was erroneously filled his insurance broker (Lukey, 1994; pg. 141). He did not read the constitution; therefore, he did not realize that the document denied that, in the past, he had been a director of a company that went into liquidation. The insurance Company refused to honor the claim and his company went into liquidation. By signing the insurance document, Sarah accepted that she was the person to take responsibility for the contents. The 214(4) of the insolvency Act 1986 it is the conduct of (Lukey, 1994; pg. 142) “a reasonably diligent person having both. a) the general knowledge and skill as well as experience may have bid reasonably expected of a person carrying out similar functions as those of the director in relation to the company b) The general knowledge, skill, and experience that that the director has (Companies Act 2006. Ss. 170) Sarah is liable to compensate the company in whole because she was allegedly negligent. Even her breach of duty in failing to read the document was gross; such kind of mistake can happen to anyone especially a busy director. By neglecting to read the document, she was putting the other two directors at risk. She failed to act reasonably, because she did not include the other directors in the ratification of the document. The undertaking of ratification of this document would have led to the error identification (Great Britain, 2007; pg. 01). Therefore, Sarah should pay the liquidator the sum of 150,000 pounds. Conclusions The three Directors of Richforth Company Ltd each violated the fiduciary duties and director duties and responsibilities (Omar, 2000). However, Sarah that resulted into voluntary liquidation did the most serious violation. Since none of the directors had insurance covers towards director liabilities, they all are personally liable to the breaches. Bibliography Aberdeen Railway Co. v Blaikie Bros [1854] 1 Macq 461 (HL) Attorney General of Hong Kong v Reid [1994] 1 AC 324 (PC) Bray v Ford [1896] AC 44 (HL) Bristol & West Building Society v Mothew [1998] Ch 1 (CA) Companies Act 2006. ss. 170-177 (in particular) also ss. 31, 39, 40, 41, 180, 239, 1157 Cook v Deeks [1916] 1 AC 554 (PC) Great Britain. (2007). Companies Act 2006. Private company information. [London], BERR. http://www.berr.gov.uk/files/file42261.pdf. Hogg v Cramphorn [1967] Ch 254 (Ch) Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC) Insolvency Act 1986 s. 143 Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30 (CA) Lukey, J. (1994). A Fiduciary duty. Salt Lake City, Utah, Northwest Pub. Parker v McKenna (1874) LR 10 Ch App 96 (DC) Percival v Wright [1902] 2 Ch 421 (Ch) Re DJan of London Ltd [1993] BCC 646 (Ch) Re Duomatic Ltd [1969] 2 Ch 365 (Ch) Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL) Yukong Lines Ltd of Korea v Rendsberg Investments [1998] BCC 870 (QB) Omar, P. J. (2000). Directors duties and liabilities. Aldershot, Hants, England, Ashgate/Dartmouth. Read More