COMPANY Partnership Relations - Assignment Example

Part A (a) What is limited liability and what is its rationale? (d) Explain how s.994 of the Companies Act 2006 operates and what purpose it serves. (b) Allcom Ltd has the following provisions in its articles: Paragraph X: “The company secretary may not make any contract on behalf of the company for an amount exceeding £10,000.” Paragraph Y: “The company’s borrowings shall not be allowed to exceed £1 million without the authorisation of the general meeting.” Paragraph Z: “The quorum for meetings of the board of directors shall be five.” Sally is the company secretary. Sally makes a contract with Motorhire Ltd to hire several cars for Allcom for a period of one year at a contract price of £50,000. Sally owns 25% of the shares of Motorhire, although she is not involved in the running of the company. At a meeting of the Board of Allcom at which four directors are present, a resolution is passed authorising Wally, the company’s finance director, to take out a loan from the company’s bank, Grandbank. This will take the company’s aggregate borrowings from Grandbank to over £1 million. Grandbank’s lawyers have read Allcom’s articles and have reported on them to Grandbank. Consider whether the contracts with Motorhire and Grandbank are binding on Allcom. (a) Limited Liability Partnerships Limited liability partnerships are regulated by the Limited Liability Partnership Act 2000. As the name suggests persons involved with a limited liability partnership have limited liability in respect of the debts, obligations and torts of the company. Unlike a general partnership, if the LLP becomes insolvent the individual members are not responsible for the losses. In such cases the members will only lose the money they have invested. If the LLP is guilty of fraudulent trading then the individual members can be made liable for the losses under s214 of the Insolvency Act 1986. Many investors prefer to invest in limited liability concerns as they are given a greater degree of safety in relation to their investment. As mentioned above limited partners are only liable to the sum of the amount they have invested. Limited partners have fewer rights than general partners and cannot have any say in the management of the company. Limited partners are not entitled to withdraw the money invested during the lifetime of the company and any involvement in the management of the company would make them liable for the debts and obligations of the company. Limited partnerships have to be registered under the Limited Partnership Act 1907. Such partnerships do not normally have more than 20 persons in the firm although there are exceptions whereby there can be more as listed in s717 of the Companies Act 1985. In all types of partnerships except for limited partnerships the courts are free to decide that the partner should be held liable, although in general practice most forms of partnership are exclude from liability1. Where the partnership is a limited partnership then the partners have limited personal liability2. Limited partners are usually those that are passive investors who have no involvement with the day to day running of the business. Section 47 of the Partnership Act 1909 states that a limited partnership must Not consist of more than twenty persons, and must consist of one or more persons called ‘general partners’, who shall be liable for all debts and obligations of the firm, and one or more persons to be called ‘limited partners’, who shall at the time of entering into such partnership contribute thereto a sum or sums of capital or property valued at a stated amount, and who shall not be liable for the debts or obligations of the firm beyond the amount so contributed. All limited partnerships must be registered3. If the partnership is not registered then all the partners will be deemed to be general partners and will all be personally liable for the debts of the company. (d) S994 of the Companies Act 2006 allows a company member to petition the court if the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or some part of its members (including at least himself) or; that an actual or proposed act or omission of the company … is or would be so prejudicial. One of the reasons why s994 of the 2006 Act has come into being was to provide some form of protection for minority shareholders. The case of Foss v Harbottle (1843)4 highlighted the problems for minority shareholders. In this case 2 minority shareholders had attempted to bring an action against the company alleging that the directors had misapplied the company’s assets. The claim was dismissed on the grounds that only the company had the right to sue and that ‘no individual member of the company is allowed to maintain an action in respect of that matter.’ Under s994 of the 2006 Act the courts will now entertain a claim by any company member who feels that they have been subjected to unfair prejudice. In order to explain how s994 works and the purpose it serves it is necessary to determine who has a right to claim and against whom, what is meant by the company’s affaire (s994 (1)(a)), how something can be unfair and prejudicial at the same time and what counts as in interest of a member. One of the unique features of s994 is that the courts have a wide discretion in the interpretation of the terms which allows judges to decide each case on its merits rather than having to defer to precedent in reaching their decisions. When determining who might be entitled to bring a claim under s994, the court will only entertain such a claim from a member of the company being complained of as described in s112 of the Companies Act 2006. In some instances the courts will allow a number of members to bring an action as long as collectively their ownership of the company does not equate to a majority of the votes5. It is the generally held opinion of the courts that if those wanting to bring an action do amount to a majority holding there would be no need to bring an action in the courts as they would be able to use their collective voting power to rectify the situation. It is possible for a shareholder to bring an action for conduct they regard as unfairly prejudicial even if such conduct occurred before they joined the company6. Claims can also be brought against someone who has already sold their shares. The courts have done this to prevent a wrongdoer from escaping liability for their actions7. Once the shareholder claiming the loss has sold their own shares they are no longer able to pursue an action against the company8. Although there is no specific requirement within the Act that stipulates that the person seeking the remedy must come ‘to equity with clean hands’, the court might consider the conduct of the claimant before determining whether relief should be granted9. Once a petition is raised by the member the court will examine the petition and if they are satisfied that the petition is well founded they can make whatever orders they see fit under s996 of the 2006 Act. In the recent case of Re Southern Countries Fresh Food Ltd [2008]10 the court allowed the petition when the shareholders were able to prove that the actions of the directors amounted to unfair prejudice. In 1996 the Law Commission made several proposals for reforms to the provisions of unfair prejudice11, however, these were not implemented. The volume of claims brought under s994 is so immense that the courts have imposed restrictions under the Civil Procedure Rules 199812. The courts have also imposed other restrictions such as limiting the time for actions to be brought, prohibition of advertising unfair prejudice claims without the leave of the court, promotion of shareholder exit articles to be incorporated into the company’s regulations and adding a winding up remedy13. From the above it can be seen that s994 of the 2006 Act is designed to protect the interests of minority shareholders. Any member of the company is entitled to bring an action claiming that the company has been unfairly prejudicial. The degrees of success are varied as there is little use of precedent in reaching the conclusion in these types of cases and therefore there is no uniformity in the whole process. Each case is judged on its individual merits, though the conduct of the parties might sway the courts to act in a specific way in order to correct any unfairness. (b) In this case in order to advise the parties as to whether the contracts are binding on Allcom it is necessary to consider the law in relation to capacity to enter into a contract, any exclusion clauses that might impact on the court decision and whether the meeting of the directors can be regarded as binding, or whether they should be able to avoid liability on the basis that there were only 4 present whereas in the company’s articles it states that meetings shall consist of 5 directors. Under section 7 of the Partnership Act 2909 a firm can be bound by the actions of one of the partners unless the partner has no authority to act in this way14. If the remaining partners can prove that the making of the contract was outside of the scope of the powers of the company secretary then the company secretary will be personally liable for the losses but the remaining partners will avoid such losses15. Under the law of contract it is possible for the contract to be declared void if there is a mistake as to the identity of the contracting party. The leading case in this matter used to be Lewis v Avery [1971]16. In this case Lord Denning stated that the contract could be avoided if the plaintiff could show that he believed that the person he was contracting with had the power and authority to enter into such a contract. The plaintiff has to show that he truly believed that he was contracting with the person who had the right to enter into such a contract. In more recent times the case of Shogun Finance v Hudson (2004)17 has become an authority on the law in relation to mistake of identity. It was stated by the House of Lords in this case that there is a strong presumption the owner intends to contract with the person physically present before him and only in extreme cases would the presumption be rebutted. In 2008 a similar decision was reached in Apvoded NV v Collins [2008]18 in which the respondent attempted to rely on the defence of mistake in relation to the identity of the person entering into the contract. In this case X purported to be entitled to deal on behalf of the owner of the hotel by offering the property for sale. The owners stated that X was not entitled to sell on their behalf and the contract was regarded as void. Applying this to the above situation this should mean that Allcom would not be bound by the contracts agreed by company secretary as the company secretary did not have the requisite authority to deal with the property in this manner. The contract is also likely to fail because of the other provisions within the articles of the company. According to the articles the company’s borrowings are not entitled to exceed £1 million and the quorum for meetings must consist of 5 directors. In the above only 4 directors were present and the company’s borrowings will exceed the limit if the contract is regarded as valid. Under s994 of the Company’s Act 2006 any member of the company would be entitled to petition the court in relation to the directors on the grounds that they have misapplied the funds of the company. This was held to be the case in Re Southern Countries Fresh Food Ltd [2008]. In Lambert v MCM Select Foods Ltd19 the plaintiff asked the court to declare the actions of the chief executive to be regarded as a breach of the articles of the company. In this case the shareholder was seeking a declaration that under the articles of the company the chief executive was duty bound to buy his shares when he chose to depart from the company. On examination of the articles of the company the court held that there was a requirement within the articles for this to take place and they ordered the company to honour the wording of the article. Applying this to the present case this would mean that Allcom could insist that the respondent adheres to the articles of the company. This could have the effect of making the contract between the two parties void, if the court determined that the company was in breach of the articles through its actions. The conclusion that can be drawn from all of the above is that the court may well decide on all counts that Allcom is not bound by any of the agreements since in all cases the persons making the agreements lacked the necessary capacity or qualification to enter into such contracts. This would mean that Allcom would not be tied to these companies or persons in any way. Bibliography Dignam, Alan J., “Company Law”, 4th ed. / Alan Dignam, John Lowry, Oxford Oxford University Press, 2006 Dingwall, F, Partnership: To Be Or Not To Be, Legal Week, 23rd November 2006 Goode, Royston Miles, “Commercial law / Roy Goode”, 3rd Edition, London, Penguin 2004. J.J. Henning, Partnership law review: the joint consultation papers and the Limited Liability Partnership Act in brief historical and comparative perspective Comp. Law. 2004, 25(6), 163-170 L Handford and K Saunders ‘In all but name’ (2006) 156 New Law Journal 1740. Philip Ridgway, The taxation of administrations and liquidations of limited liability partnerships, Insolv. Int. 2008, 21(1), 1-6 Saleem Sheikh, Limited Partnerships Act 1907: time for reform Comp. Law. 2002, 23(6), 179-184 T Prime and G Scanlan ‘Limited partnership reform - the entity, the fiduciary duties and the execution of deeds’ (2007) 28 Company Lawyer 262-269. Read More