Company Issues - Essay Example

Company Issues The legal issues that are raised in this case will be governed by the Companies Act of 1985 and 1993, and the Insolvency Act of 1986.Major aspects that must be taken into consideration are (a) abuse of the fiduciary duties of Directors (b) pre-incorporation contracts and (c) majority rule and minority protection. In the case of Muddle, there is a conflict of interest between his fiduciary duty to “Restore Ltd” vis a vis his personal interest in his own Company “City Construction Ltd”. In the case of Samson, there is an issue of penalization that arises under the Insolvency Act. The question of majority rule and minority protection arises in the van purchase, mismanagement of Resort Ltd by Samson and Delilah and the sale of shares to prevent a take over bid. Another significant issue raised by this case scenario is the liquidation of “Crystal Ltd” which increases the level of scrutiny of director activity. 1. The relevant issue that arises here is the pre incorporation of the contract for the purchase of the van. Per Section 36 (c ) of the Companies Act of 1985, any contract made prior to the incorporation of a Company by a person will make the person himself/herself liable for said contract. Muddle has signed the sale document on behalf of resort Ltd, in February, when the Company was not formed. Moreover, Muddle is a minority shareholder with only 20% of the shares, he can only table resolutions, he cannot push them through. If the Articles of association of Resort Ltd do not provide him authority to make the van purchase, it should have been ratified at a Board meeting with requisite majority, otherwise it will not stand. The rule established in Foss v Harbottle1 provides minority protection in that a corporation can sue where a wrong arises that is ratifiable. However, since Samson and Delilah oppose the purchase, hence Muddle may be personally liable for payment on the van. 2. Mr. Muddle may be found guilty of a serious breach of fiduciary duty that is expected of a Director of Resort Ltd. He has used his influence as Director in order to derive personal benefit through the sale of the building in Mislington to Restore Ltd, to the tune of 250,000 pounds2. Section 317 of the Companies Act of 1985 also places on directors a statutory duty to reveal any interest, profit or financial advantage accruing to them by virtue of their position. Therefore, by using his position to influence the purchase of the building in Mislington which he owns, he has breached his fiduciary duty and allowed it to conflict with his personal gains, without revealing the nature of his interest, since he has conducted the sale using his cousin as proxy. In the recent case of Chan v Zacharia, it was further held, as per Deanne J, that a fiduciary must not allow a situation to develop where there will be a conflict of his fiduciary duties with his personal interests and he/she must not make use of the fiduciary position to gain a personal advantage.3 However, this is exactly what Mr. Muddle has done which will render him liable. The recent case of Bhullar v Bhullar has also re-established the court’s strict enforcement of the fiduciary duties of directors in the case of conflicts that arise when there is a clash of fiduciary duties and personal interests.4 3. Muddle owns 20% of the shares of Resort Ltd, Samson 35% and Delilah effectively owns 45% (35% plus the 10% shares who vote according to her wishes). Thus, Delilah has an influential minority stake and can put forward a take over bid. 4. A Director of a company does not have to be a natural person5 and directors are expected to act in the best interests of the Company6 and their decisions are to be conditioned by their own judgment of what they consider to be best at the time the decision is made.7 However, the fact that the directors of Resport Ltd do not pay dividends but distribute it among themselves as directors remuneration could be deemed to be a violation of their strict fiduciary obligation not to profit from their relationship with the Company.8 They could be liable under new regulations. An attempt has been made to introduce increased regulation of Director incomes through the Directors Remuneration Report Regulations 2002. While existing listing rules already call for the listing of Director remuneration, this has now been made a statutory requirement under the amended Section 234 B of the Companies Act, with a new Schedule 7A that sets out detailed information that is to be included in the Directors Remuneration report.9 4. Under the Articles of Incorporation of Resort Ltd, Mr. Muddle is being well compensated as a Director of Resort Ltd and under Article (3), he is obliged to offer his shares to the other members so that they can buy it at a fair value. He should have divulged his interest in the Islington property and offered the corporation the opportunity to purchase it at a fair value. But he not only did not disclose it to the other directors as he was obliged to under the Companies Act, but he has made a profit for himself by taking advantage of his fiduciary position – therefore the corporation can sue him, since he is accountable to it for any profits he has made by virtue of the advantages of his fiduciary position.10 5. Muddle owns 20% of the shares. However, despite being a minority shareholder, he will be protected from bullying by the larger shareholders through derivative claim mechanisms. . Moreover the case of Foss v Harbottle11 provides minority protection in that only a corporation can sue where a wrong arises that is ratifiable. However the terms where this minority protection will hold valid were spelt out in Edwards v Halliwell12 and a fraud should have been perpetrated on the minority13, if such protection is to hold good and the majority votes of the corporation are to be superseded. In the case of Muddle however, it is unlikely that he can enjoy such protection, since he is the one who has fraudulently profited from Resort Ltd. 6. However, Samson and Delilah may have good cause of action to have Mr. Muddle removed from the Board of Directors. They could consider bringing a suit against either Muddle or Samson and Delilah under Section 459 of the Companies Act of 1985, requesting the Court to pass an order decreeing that the affairs of the Company “are being conducted or have been conducted in a manner which is unfairly prejudicial to its members generally or of some part of its members.”14 7. Section 35a of the Companies Act deals with ultra virus changes, which will be applicable in the case of Crystal Ltd, and may justify the classification of Samson’s act to withdraw 6000 pounds as a fraud on the subsidiary. Penalization of directors and liquidators is provided for under Section 212 of the Insolvency Act and under subsections 1 and 2, Samson’s act could constitute breach of fiduciary duty, so that he may be compelled to repay or restore the money that he has withdrawn14a. Moreover, there is also the issue of conflict of interest, which will also arise in Samson’s case as in Muddle’s because he is the director of two companies simultaneously. 8. Moreover, Samson’s move to withdraw the cash from Crystal Ltd has made that subsidiary go into liquidation. The Companies Act spells out the provision when under liquidation, Directors must not cause or allow the business of the Company to be carried on in a manner that will create a serious risk or losses to the creditors of the Company.15 Therefore, Samson’s decision may make him liable under the Act, since the shareholders will be more carefully scrutinized when the Company is in liquidation. The Companies Act of 1993 does not impose the duty of good faith or competence but only imputes a duty to the Company, as spelt out by Hoffman LJ: “….if a director chooses to participate in the management of a Company and exercise powers on its behalf, he owes a duty to act bona fide in the interests of the Company.”16 This was also stated by Latham CJ in Mills v Mills, that a director must act “bonafide for the benefit of the company.”17 A Director of Crystal Ltd to look out for the interests of the Company before their own interests.18 This is where Samson may be in breach of his fiduciary duties as Director of Crystal Ltd because he has caused the Company to go into liquidation and acted mala fide rather than bona fide in the interests of the Company.. 9. The Company law reform Bill, Section 428(5) and 429 clarifies that for a take over bid to be successful, the offerer should have acquired a 90% threshold before shares can be compulsorily purchased. Therefore, the issue of additional shares could prevent Hillspot from reaching that threshold. Bibliography Cases: * Bishopsgate Investment Management Ltd v Maxwell (No 2) [1993] BCLC 1282 at P1286 * Bhullar v Bhullar (2003) EWCA Civ 424; (2003) WL 1202661 * Brown v British Abrasive Wheel Co (1919) 1 Ch. 290 * Philips v Boardman (1967) 2 AC 46 YB93.239 * Chan v Zacharia (1984) 154 CLR 178 at 198-9 * Clemens v Clemens Brothers (1976) 2 All ER 268 * Costa Rica Ry v Forwood [1900] 1 Ch. 756 (HC) * Cook v Deeks (1916) 1 AC 554 * Great Eastern Railway Co. v. Turner (1872) 8 Ch App 149 * Keech v Sandford (1726) Sel Cas Ch 61 * Mills v Mills (1938) 60 CLR 150 at 158 * Re Lands Allotment Co [1894] 1 Ch 616 * Regal (Hastings) v Gulliver (1967) 2 AC 134 Books/Articles: * Directors responsibilities [Online] Available at: http://www.winters.co.uk/factsheets/directors_responsibilities.html. * Davies, Paul L and Gower, LCB, 1997. Gower’s Principles of Modern Company Law 6th edition, Paul Davies. Sweet & Maxwell pp 303-305 * Shutkever, Carol and Smith, Martin. The Directors Remuneration report Regulations 2002. [online] available at: http://www.mondaq.co.uk/i_article.asp_Q_articleid_E_19791 * Farrar, J.H., Hannigan, B.M. (1998) Farrar’s Company Law Butterworths * Goulding Simon, 1999. Company Law Cavendish Publishing Ltd, 2nd edn at pp 245 Legislation: * Companies Act of 1985, Companies Act of 1993 * Directors Remuneration Report Regulations 2002 * Insolvency Act of 1985 Read More