Company Law: Go Low PLC - Case Study Example

Company Law Task Introduction This work is an essay on Go Low, a company that develops golf s. The company was established in the year 2006 by Alexander, Graeme and Rory-who have been members of the European golf tour for ten years. Starting the business required £500,000. All three personally invested £100,000, and raised the remaining £200,000 by issuing shares to the public. In 2008, the company’s financial performance was adversely affected by the financial crisis. Graeme informed the board of the success of another company that he controls – PGA Ltd – that specializes in redesigning existing golf courses. A joint venture with PGA Ltd was formed in which, Go Low PLC would contribute £20,000 per year for the next ten years to cover the cost of the business, and in return would receive 35% of any profits made annually, assuming there are any. In order to operate as expected, Go Low PLC needed additional funding. A £100,000 loan deal was signed between Kent Bank and Go Low PLC. Unfortunately, the plan did not go as expected. The first golf courses that Go Low PLC and PGA Ltd attempted to redesign were left half complete and no profits were made. On account of this lack of success, Go Low PLC lost all of the money borrowed from Kent Bank and became insolvent. Consequently, it has been unable to keep the terms of its agreement with PGA Ltd. In regard to the above introduced case study, the essay contains responses to the following questions. First, Graeme approaches a law firm to ascertain the options he has for recovering the money owed by Go Low to PGA Ltd. Provide an advice for Graeme. Second, Kent bank approaches a law firm to determine whether it can enforce the contract against Go Low PLC. Lastly, Monty, a minority shareholder in Go Low PLC, wants to know the legal options that are available to the shareholders who are unhappy with the contract entered into by Go Low PLC with Kent Bank. An advise for Graeme According to the law of contract, the parties to a contract are bound by the terms of the contract. For this reason, the parties to a contract are expected by the law to ensure that their responsibilities, as spelt out by the terms of the contract, are met. From the case, Go Low PLC had a responsibility of paying £ 20,000 to PGA Ltd for the next ten years. On the other hand, the PGA had a responsibility of helping Go Low redesign its golf courses and pay 35% of the total annual profits realized. Unfortunately, Go Low could not keep his responsibilities as spelt out in the contract. Consequently, it breached the contract. Greame should, therefore, take a legal action against Go Low by first proving that it kept its end of the contract. If the Graeme through PGA met its obligation in the contract, the law of contract recommends termination of the contract. The most appropriate next step for Graeme is to sue Go Low for the damages caused. That is, the damages caused by not meeting the terms of the contract. According to this provision, it is impossible for Graeme to recover (20,000*10) = £ 200,000 but the value equivalent to the damages caused by Go Low for violating the terms of the contract1. Advise to Kent Bank The relationship between Go Low PLC and Kent Bank is based on borrower-lender. Go Low is the borrower whereas, Kent Bank is the Lender. From the case study, Go Low was solvent. For this reason, the company could not pay the amount owed to Kent Bank. According to the company law, a solvent company should be liquidated. The process of liquidation primarily involves selling a company’s assets. The proceeds from the sale of assets are then used to pay debt. The remaining proceeds are returned to the members. After which, a company should be dissolved. Kent bank should be aware of the two methods which can be used to wind up Go Low PLC. They are “members voluntary winding up” and “creditor’s voluntary winding up”2. A voluntary winding up is referred to as members’ voluntary winding up only if a company’s directors make and deliver a declaration of solvency to the registrar. A declaration of solvency is a statutory declaration that a company’s directors have fully assessed a company’s affairs and are convinced that the company will be able to pay debts within a period of 12 months. The declaration includes a statement of a company’s assets and liabilities as at the latest date before a declaration is made. First, the declaration must be made within the thirty days immediately preceding the date of the passing of the resolution to wind up. Second, must be delivered to the registrar for reputation before that date. If the liquidator later concludes that the company will be unable to pay its debts he shall further notify the registrar accordingly and call a meeting of creditors and lay before them a statement of assets and liabilities3. Under creditors’ voluntary winding up, If no declaration of solvency is made and delivered to the registrar, the liquidation process is a creditors voluntary winding up even if in the end the company pays its debts in full. To commence a creditors voluntary winding up the directors convene a general meeting of member to pass a special resolution. They also convene a meeting of creditors, sending notices to creditors individually and advertising the meeting once in the Kenya Gazette and once at least in a newspaper circulating in Kenya. The meeting of members is held first and its business is: (a) To resolve to wind up; (b) To appoint a liquidator; and (c) To nominate representatives to be members of the committee of inspection. The creditors meeting is convened for the same day at a later time than the members meeting or it is held the following day. One of the directors presides at the creditors meeting and lays before it a full statement of the companys affairs and a list of creditors with the amounts owing to them. The creditors meeting nominates a liquidator and up to five representatives of creditors to be members of the committee of inspection. If the creditors nominate a different person to be a liquidator, their choice prevails over the nomination by the members (subject to a right of appeal to the court). The following are the main differences between members’ and creditors voluntary winding up: (a) In a creditors voluntary winding up, the liquidator, although responsible to members as well as creditors, is selected by the creditors. In a members voluntary winding up, he is appointed by the members; (b) In a creditors voluntary winding up, the liquidator must obtain the approval (usually) of the committee of inspection for the exercise of certain statutory powers. In a members voluntary winding up, he obtains approval from the members in general meeting; (c) There is a committee of inspection in a creditors voluntary winding up with up to five members, a majority of whom being appointed by the creditors. There is no committee in a members voluntary winding up4. Powers of the Liquidator The liquidator (in any type of liquidation) has numerous statutory powers, but in the exercise of some of them, he must obtain the approval of the court, or of the committee of inspection or of meetings of members or creditors. He may always apply to the court for an order to resolve any unusual difficulty. The more important statutory powers of the liquidator are: (a) To conduct legal proceedings in the name and on behalf of the company; (b) To carry on the business of the company so far as may be necessary for the beneficial winding up thereof. (c) To appoint an advocate and to assist him in the performance of his duties; (d) To pay any classes of creditors in full; (e) To make any compromise with creditors; (f) To compromise calls In the latter method of winding up, Kent Bank will be able to recover the full amount borrowed by Go Low5. Advise to Monty According to decisions of English courts, companies are democratic organizations whose affairs are to be managed by the directors, according to the provisions of the Companies Act, the companys memorandum and articles of association and, where a decision of the members is required, according to the decision of the majority of the companys members expressed as an ordinary or special resolution. The minority of members who have been outvoted during the passing of the relevant resolution must be prepared to abide by the decision of the majority of the companys members6. The purpose of this provision is to protect the minority members in a company against the majority members in the company by ensuring that they do not hold a joint meeting in which the majority class could pass a resolution for variation of the minoritys rights despite their opposition. Such a resolution would not be a fair one as it would effectively enable the majority forcibly to modify or appropriate to themselves some rights of the minority. However, the fundamental flaw in the article is its failure to make provision for the protection of the minority members in the minority class. This omission has been compensated for by Section 74 of the Act, which entitles the holders of not less in the aggregate than fifteen per cent of the issued shares of the class being varied to apply to the court to have the variation cancelled, provided that they did not consent to or vote in favor of the resolution for the variation7. Oppression Of Minorities The company Act provides that any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members, including himself, may make an order under the section. The court is empowered to make such order as it thinks fit with a view to bringing to an end, the matters complained of if, on any such petition, it is of the opinion that: (a) The companys affairs are being conducted as alleged by the applicant, and (b) To wind up the company would unfairly prejudice the applicants, but the proved facts would have justified the companys winding up on the "just and equitable" grounds. An order made by the court, following the submission of a complaint by a member, may regulate the conduct of the companys affairs in future8. The meaning of Oppression - The Company Act does not define the word "oppression" or what constitutes "oppressive conduct". However, the Cohen Committees Report (1947) gave the following as examples of oppressive conduct foreseen by the Section. For a relief to be ordered by the court in favor of the oppressed member, the oppression complained of must be complained of by a member of the company and must be oppression to some part of the members (including himself) in their or his capacity as a member or members of the company as such. Second, the word "oppression" must be given its ordinary sense and the question must be whether in that sense the conduct complained of is oppressive to a member or members as such9. Concisely, the shareholders who are unhappy with the decision made by the majority shareholders could seek the court’s help to cancel the agreement or transaction complained of by the minority shareholders. Bibliography French, Derek. Blackstones Statutes on Company Law, (Oxford University press 2013). OSullivan, Janet, and Jonathan Hilliard. The Law of Contract. (Oxford: Oxford University Press, 2012). Stecher, Matthias W. Protection of Minority Shareholders, ( Kluwer Law International 1997). Read More