Company Law: Directors Fiduciary Accountability and Insider Trading - Essay Example

Company Law – Answer to Questions Director’s Fiduciary Accountability Under s 250 of Companies Act 2006 of UK, the term “director” has the meaning of “any individual holding the position of a director, by whatever name he is usually designated to be or called”. A de-facto director is one who is not officially appointed as a director in a company but executes all the responsibilities of a director and takes decisions as a director. He can also be empowered to sign documents on behalf of a company can be treated as a director by other directors. As per S 251(1) as per Companies Act 2006, a shadow director is an individual whose decisions and instructions will be acknowledged by the other directors and will be implemented. However, a de-facto director is one who cannot be vested with power to carry out the actions by himself. As they cannot be formally appointed as director, a shadow director will frequently functions from the behind scene. In Revenue and Customs Commissioners v Holland and another [2010] 1 W.L.R. 2793 case, it was held by the court that the mere fact of functioning as a director in a company will not be adequate for a person to be considered to be a de-facto director of that particular company. Actions wholly within the ambit of the responsibilities and duties of a director are to be accredited to that capacity. The court should not disregard the separate identities in law of the various companies. The court should take into account the actual accomplishment of the person to decide whether it is tantamount to a presumption of the accountabilities of a director. In Ultraframe (UK) Ltd v Fielding and others, it was held that if an improper gain is made by a director through a company by using the directorship as a tool to camouflage his infringement of fiduciary duty, in such occasions, the courts have no reluctance in piercing the corporate veil and treating the diverted revenue from the company as the gain of the director. In Gencore ACP Ltd v Dalby where a director had for some occasion dissuaded the company business opportunities away from one company to another company which he was the owner and controlled. It was held by court that as the director’s personal company had either employees or business activities, and its sole function was to receive and make payments. The court opined that it was no other than the director’s offshore bank account in a proxy name and in such occasion, courts would not hesitate to lift the corporate veil (Hannigan 2012:286). Under s171 of CA 2006, a director has a duty to function within the conditions of his authority under the constitution of the company. S 172 demands that a director should work for the success of the company as a director should exhibit good faith in his duties to company. S 173 requires that a director to carry out independent judgment. S 174 needs that a director should exhibit adequate skill, care and diligence. S 175 requires that a director has the duty to elude conflicts of interest. S 176 demands that a director has a moral duty not to receive financial benefits like secret commissions and bribes. As per section 177 of CA 2006, a director has the duty to inform his personal interest in any business transactions which the company has entered into or likely to be entered into. In Keech v Standford, it was held that a director should not avail unapproved profits from virtue of his office (Hudson 2009:535). In Boardman v Phipps [1967] 2 AC 47, it was held that a director occupies a fiduciary position and hence, there should not be any conflict of interest between his fiduciary capacity and his personal capacity. In Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (No 3), and in CMS Dolphin Ltd v Simonet, it was held that company has the authority to recoup such secret profits when a fiduciary makes an unauthorised profit. Thus, the company’s rights have always been generally termed by the courts on the footing that the fiduciary is accountable to vouch for the unauthorised or secret profits made (Citylawschool 2008: xi). Thus, the company has the primary right for a proprietary constructive trust which can raise a claim on the directors’ secret profits. The secondary right authorises the company to initiate personal remedy in the guise of an account of profits from a director. The principles of equity as applied by English courts to dissuade directors from functioning unconscionably in the sense of authorising conflict of interest as held in Yugraneft v Abramovich [2008] EWHC 2613 (Comm) (Alastairhudson.com 2013). In this case, Ben being the director of Lingua Coll Ltd, he should have disclosed his proposal to join as the director in the Eng – School Ltd to Jerry and Sheila as they are also directors of the company. He should have received their consent before joining the Eng-School Ltd. However, Ben, on the other hand, informed Jerry and Sheila that he had to take care of his sick mother and hence wanted into work from home for three days in a week. Further, for about ten months during 2012, Ben got away with secretly being a director of both companies benefitting financially in a major way. Ben’s action is against the provisions of S 175 of Companies Act 2006 of UK, which requires that a director has the duty to elude conflicts of interest. Further, Ben will be held accountable under S 176 of CA 2006, which demands that Ben has a moral duty not to receive financial benefits like secret commissions and bribes from other companies without company’s approval or other directors’ approval as held in Keech v Standford, where it was held that a director should not avail unapproved profits from virtue of his office (Clements & Abass 2013:13). It is to be noted that in Boardman v Phipps [1967] 2 AC 47, it was held that a director occupies a fiduciary position and hence, there should not be any conflict of interest between his fiduciary capacity and his personal capacity. Lingua Coll Ltd has the right to recoup such secret profits as Ben, who made an unauthorised profit by virtue of his fiduciary capacity. Lingua Coll Ltd can rely on the verdict as held in Yugraneft v Abramovich [2008] EWHC 2613 (Comm) as Ben had a conflict of interest by serving with Eng-School Ltd for claiming appropriate compensation from Ben for the secrets profits made by him. Insider Trading Insider trading provision is contained in Part V of the Criminal contained in Criminal Justice Act 1993 (CJA) which makes the insider trading transaction as a criminal offence. Insider trading is a criminal offence under section 52 of the CJA, and any transaction will be regarded as insider trading if: With the help of information availed from inside sources, if an insider engages in price-impacted securities. With the help of information gathered, if an insider encourages another person to buy or sell the price –impacted securities. If an insider divulges an information otherwise than in the normal performance of his office or professional duty or while in employment. It is to be noted that the above-mentioned offences which are said to be perpetrated by a person only if he occupies any “inside information” as an insider. An individual is said to possess an information as an insider if he is aware of the same, if he is in possession of the same , and he is aware that he is in possession of the insider information originated from an inside source. An individual is said to be having an inside information if: As being an employee , a director , an issuer of securities or a shareholder of a company, if he receives such an information By virtue of his office , employment or profession , if the insider has access to such an inside information The information so obtained may be either indirect or direct information. For instance, a wife of a director who receives inside information from her husband who is a director of that company. Here, the meaning of such inside information is pertaining to such information which: Pertains to specific securities or to a specific issuer, and it does not cover other issuers of securities or shares generally Is either precise or specific Where such information is yet to be made public Is likely to result in a significant impact on the price of such shares or securities if it were made public As per s 58(2) of the CJA, an information will not be regarded as insider information, and it will be regarded as public information if: For the objective of informing the professional advisors and investors, if such information is already published as per the rules of a regulated market. If it stored or contained in data or records due to need by any act which is available to any public inspection If it is readily available and can be sourced by the individuals who are dealing in securities to which such information pertains or of an issuer to which the information pertains Due to its publication in the newspapers or stock market public publication, it will be regarded public information (Justanswer.com 2012). Financial Services Authority (FSA) v Christopher McQuoid – in this case , the defendant who was a general counsel employed by TTP Communication got an insider information that Motorola was planning to takeover TTP. He passed the information to his father-in-law namely Melbourne who bought the shares of TTP just two days before the acquisition. His father-in-law made a profit of £50000, and he gave £25000 to Christopher. Melbourne’s trade was recognised as being suspicious and FSA initiated insider trading proceeding against McQuoid where he was awarded with a sentence of 8 months and Melbourne also received the same sentence (Outoflaw.com 2012). FSA v Mathew and Neel Uberoi- In this case, Mathew was engaged as a trainee at a stockbroker firm under 6 Month University Placement scheme. At the time of training, he came across a lot of price-sensitive insider information of various companies. He passed on this price-sensitive insider information to his father Uberoi, who purchased various company’s shares and made a profit £ 110,000 in an aggregate. Mathew was awarded one-year sentence whereas Uberoi was awarded 2 years sentence for the insider trading offence (Outoflaw.com 2012). In this case, Board of directors of Eng-School Ltd, decided to convert the company into a plc and Eng – School plc comes into existence on 10th April 2012. Ben has informed Sheila that Eng- School Plc is likely to enter into contract with Ministry of Defence to teach English to large numbers of soldiers who serving in the army of a new ally and that this information will not be made public until three days after the company is floated on the stock exchange for national -security reasons. On the basis of information, Sheila bought about ten percent of the shares that are offered at the time of floatation of the Eng-School Plc. After the news is announced to the London Stock Exchange as per listing condition¸ the value of the shares of Eng-School Plc tripled in value and Sheila made huge profits. In this scenario, Sheila cannot be charged for insider trading under s 58(2) of the Criminal Justice Act for the following reason. Ben informed Sheila that this information will not be made public until three days after the company is floated on the stock exchange for national -security reasons. This implies that the Eng –School Ltd , though become a public limited company on 10th April 2012 , the company was not listed in any stock exchanges in UK as on the date when Sheila bought the Eng –School Ltd shares. Insider trading rules will be applicable only to those companies which are listed in the stock exchanges. FSA will have the power to prosecute for insider trading only when the company is listed in a recognised stock exchange. As Sheila bought the shares during the time of floatation of Eng-School Ltd but well before it is being listed in any stock exchanges in UK, she cannot be charged for insider trading. “Registration of Charges” In April 2013, Part 25 CA was amended by the Companies Act 2006 (Amendment of Part 25) Regulations 2013. The amendments to Pt 25, hence, aim to meet issues like to remove the doubt as regards to registrability of some type of company charges, to make the process of registration easy and to allow a modernised system of electronic registration. S 859A needs registration of nearly all types of charges or mortgages created by any UK companies with the registrar of companies. Hence, it is mandatory to register both the fixed and floating charges over a company’s book debts, land, goodwill and any other type of properties. Now s859 (6) provides a list of exemption where no registration of charge on some type of loans are required. The company should register the charges within the period of twenty-one days starting with the day after the date of establishing the charge. As per s 859H, if charge is not created within 21 days, the charge will become void against the liquidator or any creditor or any administer of the company as the case may be. As per s 859H (4) of CA 2006, the money so advanced against that charge will become payable immediately. In such case, the charge holder or the company may approach a court to direct to register the charge provided if he is able to establish to the court that failure to register the charge within 21 days was due to inadvertence, accidental or some other adequate reason, or it is not detrimental to the interest of any creditors, shareholders, etc., or a court may order an extension of time for registration of charges on equitable and just grounds if it thinks fit (Slorach & Ellis 2013: 114). It is to be noted that due to non-registration of charges, the secured debt is not extinguished, and the charge will be ranked as an ordinary creditor in the case of liquidation of a company. Thus, unregistered charge holders will be paid only after the payment is made to the registered fixed and floating charge holders. Nonetheless, unregistered chargee will be regarded as an ordinary creditor during the winding up or liquidation of the company. This connotes that the chargee has to wait until those valid registered fixed and floating charges have been made payment out of the sale of company’s assets. Thus, an unregistered chargee will remain as an ordinary creditor and if there are no assets for the coverage of their payment, then, they may not receive any payment at all or may receive a negligible portion of their amount due (Slorach & Ellis 2013: 115). “Precedence of Charges” In case of a floating charge, a company holds the right to deal with the property or assets which are subject to charge. Thus, under the floating charge, the value of security may fall down due to the disposal or sale of the assets over which the charge floats with. Moreover, unless there is an explicit contractual obligation, the company is at liberty to deal with the charged assets by burdening the charged assets with the fresh loans, in particular, by offering fixed charges over some types of properties to substantiate further borrowings. Even though, the assets are registered in case of a floating charge, in case of liquidation, the fixed chargeholder has a first priority to the proceeds of the company assets. Thus, in such cases, we can say, the value of the floating charge will be eroded (Slorach & Ellis 2013: 116). The floating charge will normally will have precedence over later fixed charges provided: The instrument establishing the charge prevents the creation of later fixed charges ranking in priority or pari passu (equal) with the floating charge and this kind of provision is usually known as a “negative pledge”. The latter fixed chargee has notice of this prohibition at the juncture when he takes his charge. Where the previous charge forbids the company from extending precedence over to any subsequent charges, a latter fixed charge holder will assume precedence over the earlier the floating charge unless the later fixer charge holder is aware of such ban as held in English and Scottish Mercantile Investment Co v Brunton.( Ottley & Ottley 2011:223). In some scenarios, charges may not be recognised, for other than for non-registration, if the registration is made within a shortest possible time before the onset of insolvency proceedings (Slorach & Ellis 2013: 117). Lingua Coll Ltd offered first charge on the building to Moreshire Bank for £750,000 and the charge is registered in favour of Moreshire Bank within the statutory period 21 days from the date of creation of charge and thus Moreshire Bank is having a valid fixed charge on the Lingua Coll Ltd building. Lingua Coll Ltd created a floating charge in favour of Midland Building Society for of £50,000 on 15th February 2014 on the IT equipment within the building. Midland Building Society loan agreement contains a clause preventing any charges being created in relation to the same assets which rank above or parri-passu with it. However, the charge is registered by oversight beyond the statutory period of 21 days i.e. on 15 March 2014. The third charge is created in favour again Moreshire bank for£25,000 as fixed charge on book debts of the company. For more than 25 years, the charge holders and the banks in UK have used a customary form of debenture which had been acknowledged as creating a fixed charge over future and present book debts as held in Siebe Gorman & Co Limited v Barclays Bank Ltd [1979] 2 . In National Westminster Bank Plc v Spectrum Plus Limited and others [2004] AII ER (D) 76 (JAN) ,decision held in Siebe Gorman was reversed, On appeal by the defendant bank , the Court of Appeal held that the decision arrived in the Siebe Gorman should be maintained. When the bank is in a situation to use control over book debts, then, it should be regarded as fixed charge (Insolvencydirect.com 2012). The floating charge created in favour of Midland Building Society may be held invalid provided if the society or Lingua Coll Ltd has obtained the approval of the appropriate court for validating the late registration. It is assumed that chargee or the borrower might have taken the approval from the court for the registration of charge beyond 21 days. Thus, first charge created in favour of Moreshire Bank will receive first precedence in the repayment of debts to secured creditors from the proceeds of liquidation from the official receiver. The floating charge in favour of Midland Building Society on its IT equipment and fixed charge on book debts of the company will rank equally in receiving the payment as Society’s agreement has a “negative pledge” and hence its charge will rank pari passu with Moreshire Banks’ fixed charge on book-debts of the company. List of References Alastairhudson.com. (2013). Directors Duties. [online] available from < http://www.alastairhudson.com/companylaw/07%20-%20Directors%20duties%20-%20early%20web%20draft.pdf] [accessed 9 August 2014] Hannigan, B. (2012) Company Law .Oxford: Oxford University Press Hudson, A. (2009). Equity & Trusts. New York: Routledge-Cavendish Insolvencydirect.com. (2012). Book debts subject to a fixed or floating charge. [online] available from http://www.insolvencydirect.bis.gov.uk/technicalmanual/Ch25-36/Chapter31/part1/31-1part6.htm > [accessed 10 August 2014] Justanswer.com. (2012). Are Regulations of about Insider Trading under UK law applied? [online] available from < http://www.justanswer.com/uk-law/61tpp-regulations-insider-trading-uk-law-applied.html> [accessed 9 August 2014] Outoflaw.com. (2012). Insider Dealing. [online] available from http://www.out-law.com/page-11115 > [accessed 9 August 2014] Slorach, S & Ellis, JG. (2013). Business Law 2013-2014. Oxford: Oxford University Press City Law School. (2008). Company Law and Practice. Oxford: Oxford University Press Clements, R & Abass, A. (2012). Equity & Trusts: Text, Cases, and Materials. Oxford: Oxford University Press Ottley, M & Ottley, M. (2011). Company Law 2009-2010. New York: Taylor & Francis Read More