Companies Act 2006 - Assignment Example

Student’s Name Instructor: Course: Date: Introduction Companies Act 2006 is the law that regulates corporations. Companies are also regulated by the corporate governance code, the Insolvency Act 1986, Court cases and European Union Directives. Considering all the laws governing these organizations, companies are legal bodies that run and organize business. Companies generate more revenue and employees millions of works and thus form an important part of the economy. The United Kingdom has modernized its corporation statute allowing more freedom for stakeholders to design the rule of the company1. However, this is only possible if the rights of the various stakeholders are complied with. Is a public company’s proposal to repay capital to members likely to meet with opposition under the procedures in ss.641-649 and ss.630-640 Companies Act 2006? According to Trevor vs Whitworth (1887) share buy backs are unlawful. The facts of this case were that a company bought back its own capital and during the liquidation process the one shareholder applied to the court for assistance so as to get the balances owed to him. The court held the position that he should be paid. “Company” means a company that was formed after commencement of the company’s Act and is duly registered under the set provisions in the act. It can also mean the company which was formed immediately before the commencement of this Act and it should have been registered under Companies Act 1985. The company may also have been formed for the purpose of this Act and as such it will be assumed to have been formed and duly registered for under the Act. A public company can either be limited by guarantee or limited by shares it should also have capital in form of shares. For a company the certificate of incorporation should explicitly state that it is a public company. The regulations relating to registration under the Act should be complied with during the relevant time. According to the companies Act 2006 section 641(6) the companies Articles could have provisions that restrict the possibility of paying back members for their capital contributions. As such this can only be possible through a court ruling or through amendment of the company’s articles; this would take a considerable amount of time and would involve approval from the registrar. For the company to repay back the capital all the capital must have been paid up by the members. According to the company’s Act 2006 s641, (b), a company will be able to reduce its share capital either through a special resolution which has been confirmed and authorized by the court or through special resolution supported by the company’s statement in case of liquidation2. The section opposes the possibility of a company repaying its members if after doing so; no other member will be holding any capital in the organization. It will not be possible to repay members if the members left only have redeemable shares. The purpose of repaying back the capital to the members will vary, first it may result from the fact that the company has excess capital that it does not need. This would mean that the company has an exaggerated financial position. Secondly, the company may have not utilized the capital paid by members inadequately and as such the value of assets in the statement of financial position does not represent the value of capital. The directors of the company are responsible for making the decision of repaying capital to the members. The company’s Act 2006 gives directions in which the directors can make such resolutions. The directors should make a solvency statement before a resolution is passed to allow for the repayment. The directors should ensure that every member eligible for the repayment has a copy of the resolution before its approval. All the members should have a copy of the resolution during the general meeting for inspection before the approval is done. Upon inspection of the proposal the members of the company may or may not approve the proposal. This is rare, however, in case the members don’t approve the resolution the court have the final say. According to the company’s act the solvency statement should include opinions formed by the directors indicating reasonable grounds for the repayment of capital. The opinions should be formed at the specific date of the statement3. The statement will include an evaluation form each director about the company’s ability to repay the current debts. There should be an assurance that the company will discharge the present total debts. The statement should also include an opinion of the company’s ability to meet its debts over the next twelve months during the period of repayment of capital to its members. In the case See Poole Vs National bank of China (1907) it was stated that the court had no business to determine the wisdom of course adopted by a corporation in management of its affairs. As such it is the business of the management to make relevant decisions for the company. The evaluation can be based on whether the company will be able to meet its debts in full or it will meet its debt when they fall due during the year. All the liabilities of the company will be considered and the date up to which the evaluation was carried out is very valuable. It will also include the names of all the directors of the company. The reasonability of the opinions cited by each of the directors will be important, more so because the resolution has to be submitted to the registrar. According to the company’s Act, upon the evaluation of the resolution by the registrar, in case the grounds for making the opinions in the resolution are not reasonable enough the proposal to repay members their capital will not be possible. Furthermore, the directors will be liable to an offence that is punishable by law. The directors may be imprisoned for a maximum of twelve months or they will be fined an amount that will not exceed the statutory minimum. This will be another form of opposition from the Act because most directors will be very careful when forming an opinion that will enable the company to repay capital to the members4. The Act gives the procedures that will be followed after the approval of a resolution by members. The registrar should receive the approved resolution after 15 days. The documents the registrar receives include the resolution and the company’s statement of capital, CA 2006 s644 (1)5. The capital statement will include the total number of shares of the company, the current nominal value of the shares and classification of the shares. In the statement of capital should also have the particular rights of each class of shares, should indicate the nominal value of each class shares and should give the aggregate number of shares in each class. In addition the value paid up share by the members will be indicated. The director’s statement of confirmation, that the solvency statement was submitted to the members of the company and that it was made not more than 15 days of the approval, will also be submitted to the registrar 15 days after passing the resolution. If the company is not able to meet the deadlines set by the Act, the validity of the resolution will not be affected6. The failure to follow the above procedures will lead to the rejection of the resolution by the registrar. It is important to note that the proposal to repay members their capital can only take place when the proposal is registered by the registrar. Therefore, the proposal will be faced by opposition if any of the requirements of the act are not met. The registrar will not register the resolution if he has not received a copy of the resolution, a copy of the statement of solvency, capital statement evaluating the capital structure and a confirmation from the directors that the proper procedures have been followed. This requirements will inhibit the proposal to repay capital given the director have not met all the requirements. If the confirmation by the directors is not true, this will be an offence that will be punishable by law. As such the directors will have a restriction that they cannot just submit documents to the registrar considering the consequences of such actions, CA s649 (1). The court may or may not confirm the repayment of capital to members depending on the circumstances facing the company. In this regard, the creditors to the company may object the proposed repayment of capital to members, CA s646 (1). This is possible because the creditors are entitled to repayment by the company on the value of claims owed to them by the company. As such the court will prepare on its own the list of creditors that eligible to oppose the reduction of capital by the company. The court will also issue a public notice to all the creditors that have been excluded from the list of creditors to present their claims. The decision of the court will certainly be to make sure that the claims of the creditors are secured. As such the directive will be either to make sure that the company has provided fully for debts even after repayment of capital CA s646 (3a). The company will either accept to provide for the full debt owed to creditors or will not be willing to do so. Consequently, if the company is not will to provide fully for the debt the court will give a direction on the amount that the company should provide for. The decision by the court will made as it deems fit upon being satisfied that the claims of the creditors are true. These will obviously oppose the decision by the company to reduce the amount of capital. The court may give a direction that the company to give proper information to the public about the repayment of capital to members. This will be done through publishing the reasons or the causes of the reduction in capital. If the publication will affect the company negatively the organization might abandon its need to repay the capital by members. In a nutshell the objection by the creditors will affect the possibility of reduction of capital significantly. In the case Scottish Insurance co Ltd Vs Wilsons and Cycle Coal limited (1948). As long as the shareholders and the creditors are not prejudiced wider public concerns do not influence the court. As such the court concentrate on where the process of share reduction is lawful7. The public company upon repayment of capital to members should not surpass the authorized minimum share capital, CA s650 (1). This public company will not be able to reduce the value of its capital beyond the minimum unless the court directs so. The other option available to the public company will only be to re-register as a private company first then reduce the capital. This is quite a long procedure Question 2 Validity of the transactions that involved the sale and transfer of equipment and the shed respectively The validity of the above transactions can be challenged from various angles. In this regard the transactions raise a various questions. The managing director of the company sold the tools and equipment to his sister; these raise issues of conflict of interest in the transaction. Ownership of the shed was transferred to the college with no consideration being given for the transfer. There is no clear definition of the kind of transfer; this is probably because the company had no contractual terms with the institution. The validity of the transfer will depend on the agreement of transfer which in this case may have been in the under the consent of the company or the college. The terms of the transfer should indicate whether the company expected any gains from it. In case such transfer had some gains expected, the plague attached to the shed should not be attached and as such the transfer could be challenged. The validity of the transfer may be challenged depending on the party who authorized the transfer. The constitution of the company should have indicated the person responsible to authorize the transfer. If the transfer was authorized by any other person it would be challenged and as such the ownership of the shed will revert back to the company. Another way in which the validity of the transfer can be challenged will depend on the reasons behind the transfer. According to the Company’s Act the directors of the company should ensure that the directors of the company should ensure the success of the company to the long term8. The directors are expected to exercise reasonable care, diligence and skill. In case the decision made by the managing director to the shed lacked in this qualities the validity of the transfer could be challenge on the fact that due diligence was not practiced. The director will also have to be liable in law for making such a decision and may be punished by law. The transfer transaction can still be challenged if a reasonable direct or indirect conflict of interest is indentified. The conflict of interest might have resulted to the exploitation of the company’s property. According to the company’s Act the directors of a company should avoid conflicts of interest unless where authorized by the company’s constitution or they are running a private company9. The transfer of the shed can also be challenged under the fact that it was illegal and the persons involved in the transaction did not act in good faith. The illegality of the transfer will be from the fact that the transfer had no consideration and the company’s performance was not that perfect to enable it give out such a valuable donation. Proper authorization for the transfer may not have been done or all the persons responsible to authorize the transaction did not do so. The transfer of the shed may either have been under an express agreement or in writing. The validity of the transfer will be challenged if there was written agreement between the college and the company. The college will be liable to prove that actual transfer occurred while the company will have an upper hand in proving that no real transfer occurred given that it is not record anywhere. The other transaction involved the sale of tools and equipments to the managing director’s sister. This could be challenged on the fact that there might be reasonable conflict of interest. The director will be questioned under law for the transaction if he did not state the interest in the transaction in 2007. There should be records showing the value of the goods sold and an agreement for sale. The fact that the tools may have been greatly undervalued during the sale will not be challenged. However, the director will be liable in explaining under what grounds he sold the equipments when they were undervalued. Proper procedure for the sale of tools and equipments should have been followed; in case the procedures were not followed the transaction can be challenged under illegality. Challenging the validity of the floating charge in favor of Beatrice The floating charge in favor of Beatrice secures the loan from with all the assets available to the firm. In case of the liquidation the floating charge will crystallize on any asset of the company. As such this condition is flexible for the company as it has the ability to work with its any of its assets without the need for consent from Beatrice. Beatrice is safer considering that her debt is secure. However, the validity of the floating charge in favor of Beatrice can be challenged. The company granted the floating charge after the two loans have been given by Beatrice, the liquidator can argue that there is no way that the charge would relate to the amount of loan that had already been issued by the creditor. This is because the purpose of the entire the contract had already been executed and as such there is no way it would relate to the actions taken prior, Re Brightlife ltd [1987]. The validity of the floating charge could be challenged if it was not registered with the registrar. As such there will be no evidence to proof that the company has secured the loan under floating charge. This will be possible if the confirmation by Beatrice of the registration documents is not adequate. The registration document by the registrar should contain an authorized signature and the official seal of the registrar. The certificate of registration should also contain the value of proper evidence that the requirements of the companies act have been due met. In addition, the company has a fixed charge on the company’s building from the bank. In the liquidation process this may be the only asset available in which the floating can crystallize and be paid off. This will mean that the floating charge may not be given priority at all. In the case of Cooke Trust limited Vs Elliot(2007) a charge was described oddly as a floating charge and then a floating charge with restrictions similar to those of a floating charge. The court was asked to determine the nature of the charge and in light of the restrictions decided it to be a floating charge. The liquidation process and priorities The loan from Lenda plc has been secured on a floating charge on the company’s vehicles without covering any other asset. The floating charge is duly registered. During the liquidation process only one vehicle is remaining. This means that the floating charge on the loan can only crystallize on the vehicles. However, before Lenda plc can recover some debt from the asset the liquidation process will have to take place. In the process some activities are given priority than others. The claims on the asset will have to cover the liquidation costs, the claims under fixed charges, the company’s expenses and then the creditors with a floating charge. As such the creditors will receive payment when the expenses stated have been met. The value of the debt cannot be paid from another asset because the term of the floating charge state the asset has been secured with the vehicles10. Consequences of the failure to register the fixed charge in the company’s house A fixed charge is a loan that is secured on a specific asset in the company. This charge should be registered and a certificate of registration issued. Failure to register the charge may lead to it being voidable and the company may fail to execute the charge. This will be possible because there is no record of the charge in the office of the registrar. In case of an application by the Dee Bank plc to the registrar for compulsory liquidation of the company no authorization can be given by the registrar on such claims. Hence it means that the Dee Bank’s fixed charge is void and the claims of the bank cannot be met by either the administrator or the liquidator of the company because of the lack of evidence of such a charge. The consequences of the void charge are aggravated by the fact that the security on the loan can be used to repay other claims on the company. Consequences of Sylvia as a management consultant Sylvia is in the list of disqualified directors, she is not in the list of disqualified consultants. As such there is liability on the current director for hiring Sylvia as a management consultant. The manager had doubts about on the involvement with the company in the past. As such they should have taken time to enquire the reasons for disqualification of Sylvia. It is for the good of the company that the managers should not involve themselves with a party that had been disqualified from the institution. The managers will be liable if upon consultations with Sylvia they made a decision that affected the company negatively or led to a loss in the company’s operations. The management could also be liable if they are facilitating fraudulent operations in the company with the help of Sylvia11. The management consultant will be liable in the case there were provisions set, upon her disqualification that she should not associate with the organization. The provisions may have not entirely limited her involvement in the company but partially. As such the management consultant will be liable if she bridged the provisions set upon her disqualification. The consultations with the management may also be positive considering the level of experience that she has. The management could also be taking the advantage from the fact the Sylvia knows the company really well and her advice will create positive impact in the organization although the company has not been performing well. Work cited Alan J, and John P. Lowry. Company Law. Oxford: Oxford University Press, 2009. Print. Hinchy, Russell D, and Peter M. McDermott. Company Law. Frenchs Forest, N.S.W: Pearson Education Australia, 2006. Print. French, Derek. Company Law, 2006-2007. Oxford: Oxford University Press, 2006. Print Mayson, Stephen W, Derek French, and Christopher Ryan. Mayson, French and Ryan on Dignam Company Law. Oxford: Oxford University Press, 2007. Print. Company Law 2006. London: FL memo, 2006. Print. Morse, Geoffrey. Palmer's Company Law: Annotated Guide to the Companies Act 2006. London: Sweet & Maxwell, 2007. Print. Bennett, David A. Palmer's Company Law: Annotated Guide to the Companies Act 2006. London: Sweet & Maxwell, 2009. Print. Steinfeld, Alan. Blackstone's Guide to the Company Law Reform Act 2006. Oxford: Oxford University Press, 2007. Print. Companies Act 2006: Private Company Information. London: BERR, 2007. Internet resource. Morris, Glynis D. The Companies Act 2006. London: LexisNexis, 2007. Print. Walmsley, Keith. The Companies Act 2006. London [u.a.: LexisNexis Butterworths, 2007. Print. Hannigan, Brenda. Company Law. Oxford: Oxford University Press, 2009. Print. Read More