Articles of Association of Vunce Ltd - Essay Example

Company Law II work: Question One (20 Marks For the purposes of these questions candi s are not required to give ity or a regulation number unless the question specifically requires this information. Read the articles of association of Vunce Ltd below and answer the questions which follow. ARTICLES OF ASSOCIATION OF VUNCE LTD PRELIMINARY 1. The regulations contained in Table A in the Schedule to the Companies (Tables A to F) Regulations 1985, apart from regulations 44 and 64, apply to the company except insofar as they are inconsistent with these articles. PROCEEDINGS AT GENERAL MEETINGS 2. Regulation 40 of Table A is amended by replacing the second sentence with: 'Three persons entitled to vote on the business to be transacted, being a member or a proxy for a member or a duly authorized representative of a corporation shall be a quorum'. 3. The persons entitled to attend and speak at general meetings and at separate class meetings are the directors (even if they are not members), the auditors (but their right to speak is limited to business which concerns them as auditors) and any other person invited to do so by the chairman. NUMBER OF DIRECTORS 4. The minimum number of directors is one and, unless otherwise determined by ordinary resolution, the number of directors is not subject to a maximum ALTERNATE DIRECTORS 5. Regulation 66 of Table A is amended by replacing 'but shall not be entitled to receive any remuneration from the company for his services as an alternate director' with the following sentence: 'An alternate director shall not be entitled to remuneration from the company for his services as an alternate director except that he may be paid by the company such part of the remuneration otherwise payable to his appointor as the appointor specifies by notice to the company'. DELEGATION OF DIRECTORS POWERS 6. Regulation 72 of Table A is amended by replacing the first sentence with the following: 'The directors may delegate any of their powers to a committee consisting of such persons as they think fit provided that a majority of the members of the committee are directors'. REMOVAL OF DIRECTORS 7. Regulation 81 of Table A is amended by replacing paragraph (e) with: 'he fails to attend three successive board meetings despite a notice being given to him prior to the third meeting that the provisions of this paragraph might apply and all the other directors (excluding the director concerned and, in his capacity as such, any alternate director appointed by the director) resolve that his office should be vacated'. PROCEEDINGS OF DIRECTORS 8. Regulation 89 of Table A is amended by adding after 'unless so fixed at any other number shall be two' the words 'except when there is a sole director in which event he shall constitute a quorum'. Please answer the following questions on the meaning and effect of the articles of association. (a) The directors wish to sign a unanimous written resolution instead of holding a board meeting. Which resolution, if any, allows them to do this This can be done via an ordinary resolution of a simple majority, which is fine because it is unanimous. (b) The 2006 annual general meeting of Vunce Ltd is due to start in the Islington Business Design Centre at 9.00 am, Monday 15 May 2006. After 33 minutes there is still no quorum. The directors are prepared to follow the articles for arranging the adjourned meeting except that they have decided that the meeting shall start at 10.30 am to allow for possible transport delays in the morning. State the actual time, date and place of the adjourned meeting: Islington Business Design Centre at 10:30am Monday 15th May 2006 (c) What is the quorum for general meetings according to the articles of association Three persons entitled to vote on the business to be transacted, being a member or a proxy for a member or a duly authorized representative of a corporation, shall be a quorum'. (d) Apart from members, who may attend and speak at separate class meetings The persons entitled to attend and speak at general meetings and at separate class meetings are the directors (even if they are not members), the auditors (but their right to speak is limited to business which concerns them as auditors) and any other person invited to do so by the chairman. (e) A vote is taken on a show of hands. The chairperson does not want a poll, but one member and two proxies holding or representing 5% of the total voting rights between them demand a poll. Explain, giving reasons, whether they have the right to demand a poll. If the parties were voting under normal circumstances then as only holding 5% of the vote they would not be able to call for a poll, because 10% is needed. Yet as two of the parties are acting as proxies for members who have the rights of power to vote then they can call for a poll. (f) List two situations in which a poll must be taken 'forthwith' (assuming a valid demand for a poll has been made) A poll demanded on the election of a chairman or on a question of adjournment shall be taken forthwith. (g) There are 1,200 issued shares in Vunce Ltd. Shareholders with 800 votes in total attend the general meeting and there are no proxy votes. Assuming that all shareholders plan to use their votes on every item, what would be the minimum number of votes required to pass the following resolutions: (i) a resolution to declare dividends This requires an ordinary resolution therefore a simple majority of 50 + 1 % -- 401 votes (ii) a resolution to sub-divide 10 shares into 10 1 shares This requires an ordinary resolution therefore a simple majority of 50 + 1 % -- 401 votes (iii) a resolution supporting the liquidator's decision to divide the assets of the company among the members If the company is wound up, the liquidator may, with the sanction of an extraordinary resolution of the company and any other sanction required by the Act, divide among the members in specie the whole or any part of the assets of the company and may, for that purpose, value any assets and determine how the division shall be carried out as between the members or different classes of members. This requires 3/4ths of the members therefore 600 votes. (iv) a resolution to reduce the share premium account: This is by special resolution which is also 3/4ths or more, except it does allow proxies. The minimum number of votes is also 600. (h) Which regulation, if any, provides specifically for the issue of redeemable shares Regulation 35 of the Articles of Association Table A (i) What fee, if any, will be charged for the registration of an 'instrument of transfer' No fee will be charged for an instrument of transfer. (j) Which regulation, if any, will allow the company to have a lien on a fully paid share Regulations 8 through to 12 deal with those that are not fully paid, whilst there is no lien available for a fully paid share. (k) Timothy follows the correct procedure for transferring his 1,000 fully paid ordinary shares to Tania. Which regulation, if any, will allow the directors to refuse to register the transfer Regulation 24 only allows refusal of shares not fully paid, therefore the directors cannot refuse fully paid shares. Question Two (30 marks) 2. Sunkit Ltd has both ordinary and preference shares. It is governed by Table A articles of association with a modification granting the preference shares a preferential fixed dividend of 7% and prior return of capital on a winding up without any participation rights. In addition, the preference shares, under their terms of issue, do not carry voting rights in general meetings. Sunkit has accumulated losses of several thousand pounds and the board, who hold 80% of the ordinary shares, propose to cut the preferential dividend on the preference shares from 7% to 2%. The preference shareholders refuse to go ahead with this and the board reply that they can easily organise an ordinary resolution in general meeting to push this through. They also add that they are considering two other proposals put together after discussion with the company secretary. Firstly, they have a plan to set up a 'cancellation' reduction of all the preference shares in order to reflect the 'capital lost' by the company in recent years. Under this procedure the preference shares would lose their shares without actually receiving any money back in return. Secondly, the board may well authorise the issue of a large number of preference shares to themselves at a specially reduced price below the par value in order to outvote the existing preference shares in the event of having to hold a class meeting. Some directors on the board may even be allowed to pay for their new preference shares by promising to provide a token amount of consultancy services in the future. Advise the preference shareholders on whether any of the board's proposals would succeed: Company Law: The general duty that the director holds is to the company, which has been established through the law of equity, which will be further discussed in the next section.1 In relation to contracts that personally benefit the director under contract law the company can make it avoidable as it is in breach of the basic duty that the director holds, which is implied in the present Company Acts. However there is the provision that if the director declares to the board his personal interest, at the soonest possible time, then if the board approves the contract then this contract is valid2. This is not the extent to which parliament has legislated director's personal interests in contracts as can be seen in the CA 1985. Section 317 of the CA 1985 has been briefly touched upon in his declaration of personal interest in the contract, yet the legislation goes further to define how and what the director must declare. This includes the nature of the interest; whereby a general notice of interest in a company or with a specific person is sufficient notice3; however only the agreement from the board in full knowledge of an interest will save a contract from being avoided, otherwise contract law will allow the contract to be avoided. If the interest is financial, rather than just a connection with a person, then the director must make a declaration to the accounts; hence strictly regulating not only direct contracts but also indirect or casual transactions4. There are certain exclusions which include; transactions within the company group; or a service contract between a director and its company5; as well as financial transactions which are below the limits set out6. Therefore the current law has set out some basic provisions in protecting the company, which impliedly protects the shareholder because the shareholder is whom the director is holding its trust for. Yet after an extensive three year review it has been revealed that the individual shareholder's interests may not be sufficiently protected by protecting the company's interest and declaring any interest in a contract to the board. The question of fair-spirited arises because is it in the shareholder's interest that agreement comes from the board of directors Should shareholders be polled This duty held to the shareholder has been a question of concern in the new CA 2004; whereby the protection of director's liability has been slackened and the powers of investigation into possible wrongdoing, negligence of acts and/or omission of acts will be strengthened. These changes in the law seem to point to ensuring that directors will act in a fair-spirited manner towards the interests of the shareholder. However the main deficiency that the legislation has not dealt with is that the director still owes only a direct fiduciary duty to the company as a whole and not to individual shareholders. This seems to limit the amount of liability the director holds because if the director held a duty to each beneficiary, i.e. shareholder, then they would be liable for legal action from individual shareholders. This would act a deterrent from wrongdoing and treating the individual shareholder's interests in much more fair-spirited manner; however no such duty exists therefore action must be taken if the duty to the company is breached which limits the legal action against a director. The following section will consider this idea of fiduciary duty further and consider if the indirect duty that the director holds, via his duty to the company, is sufficient to protect the shareholder's interests. Law of Equity: The present law does not create a fiduciary duty between individual shareholders and a director, rather this is implied because the director owes a fiduciary duty to the company as a whole, which is strictly adhered to in Regal (Hastings) Ltd v Gulliver7. This creates a limitation in the extent that the law of equity can protect the individual shareholder's interest, because it means that the company must bring a claim and ordinarily the shareholder cannot bring a claim because no duty is held to the individual shareholder8. This can cause problems in the case that all the directors enjoy a personal interest in the transaction and therefore leading to a situation where there is no one in the company prepared to take action against the directors. This has lead the law to make exceptions, but these exceptions are not for the interest of the shareholders but for creditors9 and employees10. Hence creating a situation where there are individual fiduciary duties held but as of yet not held to individual shareholders. Therefore as long as the director believes he is acting in the best interest as the company, not individual shareholders and then he can use and dispose of company property as he wishes.11 In addition in personally interested transactions, as long as the company is notified and the board agrees, that are in the best interests of the company and for proper purposes, i.e. not fraudulent, negligent or reckless, are seen as perfectly valid12. If the director is to make profit from valid personal dealings this then must be fully disclosed, otherwise he would be in breach of his fiduciary duty to the company13; even if the company could not have made profit without this dealing14. In short the current law of equity does also provide some indirect provisions in protecting the shareholder; however there is no direct fiduciary duty between the director and individual shareholder; whereas there is a direct duty to an employee or a creditor. This seems to indicate quite a large void in the both the law of equity and legislation as the company would not exist without individual shareholders; therefore as long as it can be shown that an action was in the company's general good interest then the effects on the holdings of an individual shareholder seems to be irrelevant. However in the recent case of Crown Dilmun and Dilmun Investments v Nicholas Sutton and Fulham River Projects15 the court held that the director, whom held a direct personal interest in the contested deal, required the additional written permission of the deal from individual shareholders in the business deal as there were serious consequences and conflicts in the case and ignorance is no excuse: The fact that Mr Sutton believes all of this is possible is a good demonstration of his minimal understanding of his duties and responsibilities and possibilities of conflict which he never understood at all.16 Therefore the above case indicates that the current legal changes are beginning to understand the importance of fair-spirited actions to individual shareholders. In this scenario this would mean that the preference shareholders would have to be listened to, especially under the new case law that is increasing the duty owed by directors to individual shareholders. Hence there would be come back, especially in light of the fiduciary duty owed by directors to ensure that the rights of shareholders are not breached, which it is more than likely that the directors cannot do as they please. Question Three: Company XYZ Ltd was formed in London in 1994. The company's business appeared to be promising and, in the following year, the company opened new branches in many cities in the UK. However, after a few years of operation, the company began to face financial difficulties. In June 2002, one of the directors, Janet, took an unsecured loan of 25 million from her mother, Samantha. By January 2003, the company was finding it difficult to pay its debts as they fell due. The company's losses had increased because of a rise in interest rates and high crude oil prices. However, the directors continued to trade, arguing that the auditors did not warn of any impending problems. On 28th February 2006, one of the company's creditors, the Bank of Chelsea, petitioned the court for a winding-up order against the company. A winding-up order was granted on 3rd May 2006. Discuss the legal implications of the following charges and transactions from the point of view of the liquidator. Insolvency and Creditor's: The key question in respect to insolvency is whether how the creditors under the Insolvency Acts (IA) 1986 & 2000 should be treated and the liability of the company and directors. If the company was not going in to liquidation and the company was not paying its creditors there would be a simple breach of contract17. However in this case there is the added problem of the company going into liquidation, whereby the insolvency laws have indicated there is no preferential treatment between creditors18, however in the Re Challoner Case19 it specifies that this preferential treatment cannot occur amongst creditors of the same class. Therefore in the case of these creditors how does one follow the Insolvency Act 2000 which seems to specifically dealing not with creditors on the whole but the abolition of preferential treatment towards Crown debts Therefore how does the company deal with the creditors, can they treat customers they owe goods to over normal creditors. In respect to customers were goods are owed one would advise the company to return these funds, especially in respect to his intentions too if the goods were not supplied as equity will remedy injustice in respect to original intentions of the contract20 as long as not incredible.21 However, in the case Ian Peter Phillips Case22 the judgement seems to indicate that an insolvent company must follow the laws, whereby creditors are treated equally23; yet under the new SSGR it is most likely that the return of the money, as per the original contract and intentions of the company to supply goods would occur, otherwise equitable principles and the validity of a contractual agreement would be null and void. Also can the creditors sue for the director's mismanagement of the company and lack of action, this is very hard because as long as the company was paying them then the contract is being honored and there is no fraud and there is no specific duty owed to the creditors, as with the fiduciary duty owed to the company and subsequently the shareholders. Duty held to Shareholders, Creditors & the Company: The use of words such as fair-spirited actions of a director in his own personal interest in approved contracts and transactions in the company which he is holding the trust for shareholders embraces different areas of law, which include company law, equitable law and contract law. The first point that has to be noted is that the director owes a fiduciary duty to the shareholders, at the time of creating the contract; as well as to the company and any potential creditors because he is holding their interests in trust. The actions of a director in company contracts may affect the interest of the creditors in very much the same way as individual shareholders and the company at large. Therefore it may prove that a beneficial contract to the director may be harmful to the creditors, especially if it is in the self-interest of the director or fraudulent. In order to counter negligent, omission of, or fraudulent actions of directors when considering contracts that are in their favour parliament has introduced legislation, such as the Companies Act 1985 (CA 1985), Companies Act 1989 (CA 1989) and new legislation such as the Companies (Audit, Investigations and Community Enterprises) Act 2004 (CA 2004). However this is not the only law that is applicable to this area, there are also questions of validity of contract and the proper use of one's fiduciary duty under equity law. The following discussion will explore parliamentary legislation under the CA 1985 and CA 1989, it will then consider some of the proposed changes in this area. It will then consider equity, the duties that are imposed on a director and the remedies that are available to the shareholder and in the event of insolvency the creditor in a case of misconduct. a) In December 2004, the company sold one of its buildings in Liverpool for the price of 70,000. However, the building was independently valued at 195,000. b) On March 2006, Janet sold one of the company's buildings on Oxford Street, London, for 15 million. However, according to independent valuers, the building was worth 4 million. The main question behind these two sales is whether it was in the self interest of any of the directors, therefore there may be a claim by the creditors for the extra 125,000 for the first sale and question where the proceeds went in the second sale as it was 11 million over the value. If there is not a good reason for the cheap sale the creditor may be able as a shareholder, in kind, to sue the company for unduly reducing the assets of the money invested through its loans. It has to be determined if the decision was fair and in the favor of the company; rather than down to fraudulent or negligent actions of the directors. If it were a fair and proper decision then there is no recourse for the creditors; on the other hand, if it is based on self-interest, negligent or fraudulent grounds then there is possibly successful law suit for the creditors. In the case of the first sale it went through the proper procedures of the company, therefore there is probably no avenue of recourse. In the second sale where it was in excess of 11 million over market value the question is where did the money go and why it sold for that price. In light of Janet's actions of self-interest in the following scenario, it is likely that there will be avenue for the creditors to sue Janet for the excess that the building went for as opposed to the company as she has received the proceeds. b) In April 2005, Samantha's loan to the company was converted to a floating charge secured on a substantial part of the company's assets. There may be a problem in whether this loan is valid and if Samantha can retain her money as she is the mother of Janet, therefore introducing self-interest as well as possible fraudulent purposes. This is especially so in light of the problems with the building that was sold in the excess of 7 million pounds of it worth. The creditors will probably be seen as holding priority over Samantha. d) Advise the liquidator about the difference between wrongful and fraudulent trading, and explain their relevance, if any, in the context of company XYZ Ltd. In this case negligent and self-interested based trading is wrongful, whilst holding intent to de-fraud the company is fraudulent, therefore in the case of Janet's sale of the building for 11 million it is probably fraudulent. In the case of selling the building under the market value by the company it is probably wrongful on negligence grounds. However, in the case of Samantha's loan it may be construed as fraudulent in the light of the 11 million building sale, but more likely wrongful on the basis of self-interest. Bibliography: N. Bridge, 2004, Directors Behaving Badly, NLJ 154(7129) Charlesworth and Morse, 1999, Company Law, Sweet & Maxwell Department of Trade and Industry can be found at: www.dti.gov.uk R. Edwards & N. Stockwell (2002) Trusts and Equity, Harlow England, Longman Farrar et al, 1998, Farrar's Company Law 4th Edition, Butterworths Paul L Davies, 2003, Gower's Principles of Modern Company Law (7th Edition), Sweet & Maxwell The Insolvency Service can be found at: www.insolvency.gov.uk Keenan and Bisacre, 1999, Company Law (with Scottish supplement), Prentice Hall J. Martin (2001) Hanbury and Martin: Modern Equity (16th Edition), London, Sweet & Maxwell Pillans and Bourne, 1999, Scottish Company Law, Cavendish Sealy, 2001, Cases and Materials in Company Law, LexisNexis UK Read More