LLB Company Law: Section 33 of Companies Act 2006 - Case Study Example

Name Institution Date Critically evaluate whether section 33 of the Companies Act 2006 has clarified the position regarding whether rights contained within a Company’s constitution may be enforced, or be expected to be enjoyed on an on-going basis, by a member, or whether the situation remains that the only way a shareholder can realistically enforce a right is through a shareholders’ agreement. 1.  Issue The legal issue involves a controversy resulting from the wording of s 33 of the Companies Act 2006 which makes it hard to interpret when shareholders rights are to be enjoyed; through established shareholders agreement or exists in an on-going basis. It opens a debate on whether the shareholder’s rights can only be enforced through shareholder’s agreement. 2. Rule S 33 falls under Chapter 4; Miscellaneous or supplementary provisions and in respect to company’s constitution. The provisions in a company’ constitution acts as a covenant that binds the company and its members. The company and its members have to observe constitutional provisions. The wording in s 33 of 2006 Company’s Act are limited and does not expressly state the rights of shareholders and the process of enforcement. There are certain elements that are missing in the section and which would have been spelled out by additional subsections. S 33(1) has introduced company constitution as a binding covenant between the company and its members while (2) indicated that money payable by members as debt just as ordinary contract debt1. Generally, it highlights the functions of a constitution in determining internal relations between a company and its shareholders. However, it creates interests and concerns of who between the company and shareholders has the powers to enforce an article when internal problems arise. Every jurisdiction has a law that companies are expected to comply with. However, to adhere to applicable legislation there must be an existing or laid down rules on the ground that guides the corporate governance. Both the company and the shareholders need to understand the extent of their actions. The introduction of Companies Act 2006 was to reform the law that regulate corporations and which was subject to criticism. However, the main changes to s. 33 has not provided any noticeable reform and particularly to company’s constitution. The way it is constructed offers a favour of as well as against shareholders in their capacity as members of a company2. The strong issues that exist here involve the members’ rights. Similarly, in contract law, some key aspects defines the relationships between the parties, the nature of obligation and the conditions where one party can take an action against the other and prove the case on a balance of probabilities. 3. Application The part that is considered as more important is complication that has made the courts and judges feel intrigued. When considering wide-range of issues that arises in a company, the section increases interpreters’ interests. When put in a company scenario or simply experimenting the section, there are foreseeable weaknesses that are seen. It leaves a larger ground of uncertainty to solve the conflicts emerging in a company making confrontation to resurface. For instance, in Bushell v Faith [1970], the wish by Bushell and Bayne to remove their brother Mr Faith as a director of Bush Court was hindered by constitutional requirements for director powers in voting3. The articles of company’s constitution were designed in a way that made it possible for the director to evade removal. One of the most important part that is necessary to make the section complete is how it structures resolution. The section should have set clear ways of solving the problem or coming up with a resolution. However, this is not obvious and this is why the sections arouse interests. The tool that should be implemented to necessitate the company and shareholders to do or not to do something are not explicit. For instance, in Cumbrian Newspapers Group Ltd v Cumberland [1986], the company was given prominence to adjust the class of rights attached to shares for the shareholders4. The company therefore is more protected by English contract law than individual members. The section does not spell out whether the company and the shareholders can come up with a strategy where they can fully exploit the existing constitutional provisions to settle a case. Many sections of an Act follow this pattern where they set up a situation, identify the areas of confrontation and offer a way for resolution. In such section, the wording requires less delicate handling. Where a different pattern is provided as in the case of s 33, then it is open to debates. The actions to be taken and the way to take them ought to have been pre-decided. What is important in this section is that, the ideas of the section should help us in understanding the place of constitution, company and shareholders and the underlying relationship. More importantly, there need to be expressed tools to help in breaking down the function of the constitution and emerging conflicts. Subsections would have acted as smaller structural units to promote the most effective way of working out a possible solution. The shareholders feel more confident when they are aware of their rights. They also feel in control if relationships between their company’s board of directors and shareholders break down5. The rights to carry out their obligation must be reserved and articulated in a way that is clear. Having looked at the shortcomings in s 33 of Company’s Act 2006, a shareholders’ agreement is necessary as it can govern a number of situations and provide a solution than the prescribed Act. Shareholders will have every interest in signing a shareholders’ agreement to avoid dramatic proportions that might resurface when the constitution does not explicitly spell out the right way for a members to claim their rights. Just as In Hickman v Kent case, the constitution required cases between a member and the company to conclude through arbitration. That meant that Mr Hickman’s had to comply with company’s dispute settling procedure instead of resorting to court6. S 33 is limited to offer solution to every conflict which might arise between a company and shareholders. Shareholders’ agreement is thus necessary to set out solutions. In certain respect, shareholders’ agreement is a kind of better contract which can be used quite often to determine between shareholders and the company before a conflict arises. For instance, shareholders’ agreement provides the rules over company’s shares and power sharing among shareholders. The agreement is determined correctively and identifies the clauses to be included and suggest solutions to different situations. Where the law does not meet the needs of a company and its shareholders like in this case where the possibility of a constitution in making decisions is unknown, stakeholders’ agreement becomes useful as it allows the parties to change the rules to fit them7. When dealing with company’s affairs, it is always expected that the tools used to determine the relationship between the directors, management and shareholders have lower uncertainty. The members would feel the need to have a more flexible or an open approach to their new case. That way, for shareholders to push through, they need to set agreements as they would be expected to be enacted and realized. Therefore, shareholders’ agreement in this case acts as a guideline and resources to allow members autonomy and space to vote or execute their plans. Nevertheless, the directors decisions can be ultimate like in the case where the profit may fail to meet the dividends and is forwarded to subsequent years like in Webb v Earle [1875]8. Eventually, an explicit document would be better in this case as it would recognize the shareholders’ position in the company and spell out the different approaches to decision-making, actions and company’s destiny. Important still, it would offer a direction and clear guideline on when and who would make decision in a certain situation. That way, it eliminates haphazard and confrontational scenarios in decision-making and implementing actions. Contract law tends to have a familiar trend through which major aspects are broken down and stated in a way that express reality. However, there are assumed aspects which do not have to be expressly stated. I regard to comparison of s 33 of Company’s Act 2006 with a contract, there are obscured aspects that make it hard for both lay interpreter as well as trained legal experts to detect inadequacies. One part of contract is followed by another for the progression of a complete law. Although much is left unstated in a contract agreement and learned judges typically mark what is unstated but assumed in contract formation process, the idea of an act is to structure a law in a more elaborate way that adds value to the law. There is a lot of uncertainty in what the section proposes and presents. Adair v Old Bushmills Distillery Co [1908] case a typical of example of how the issue of preference shares can be disproved if entitled to be paid from yearly profits9. That necessitates the need to examine the section in detail to make it authoritative over the use of company’s constitution. There is a major indication of lack of facts on enforcement or the manner in which the constitution works. 4. Conclusion In conclusion, section 33 of Companies Act 2006 has not clarified the position in regard to whether rights within a Company’s constitution can be enforced or are just expected to be enjoyed on an on-going basis. It therefore makes the relationships between the members and a company quite uncertain and conflicting. In case the members or the company tries to use the section in bringing new or unstated ideas, then the other party that might be challenged would not readily embrace them. The section needed to allow subsections to help in developing understanding of the way company’s constitution is enforced to foster confidence. In such a state, the section leaves much to be desired and to avoid conflict and to solve them on timely manner, the shareholders and the company need to be involved in drafting shareholders’ agreement to promote a sense of understanding between them. Shareholders’ agreement then decreases those elements of unknown in section 33. In actual sense, the section opens up to a fatalistic view and leaves members as well as legal experts to feel out of control and thus unwilling to make decisions with an element of unknown. The members in any company will thus see the need to work out a more predictable situation to realistically enforce their right through shareholders’ agreement. Bibliography Company Law, s.33 CA '06’, http://www.markedbyteachers.com/university-degree/law/company-law-s-33-ca-06.html, 2010, (Accessed 31 January 2014). Quebec Bar Foundation. Your Rights, Your Business, Your Shareholders’ Agreement; http://www.fondationdubarreau.qc.ca/pdf/publication/your-rights-your-business3.pdf, vol.3 No.6, (Accessed 31 January 2014). Volker, M., “The Shareholders Agreement”, http://www.sfu.ca/~mvolker/biz/agree.htm, 2008, (Accessed 31 January 2014). Cases Bushell v Faith [1970] AC 1099 Cumbrian Newspapers Group Ltd v Cumberland [1986] 3 WLR 26 Hickman v Kent [1915] 1 Ch 881. Staples v Eastman Photo Materials Co [1896] 2 Ch 303 Webb v Earle [1875] LR 20 Act Companies Act 2006, S 33(1) & (2) Read More