Legal Issues of Healthy Eating Ltd - Essay Example

Healthy Eating Ltd Below are some pieces of advice for Healthy Eating Ltd concerning the issues raised in the case study: (a) En ment for compensation for loss suffered as a result of the compulsory purchase order issued by the local authority: Section 138, sub-section 2c (i & ii) of Company Act 2006 spells out if Healthy Eating ltd is entitled for compensation or not. For the purpose of ascertaining whether the holding company or its subsidiary is so interested, there shall be disregarded—any rights that the company or subsidiary has in its capacity as trustee, including in particular—(i) any right to recover its expenses or be remunerated out of the trust property, and (ii) any right to be indemnified out of the trust property for any liability that incurred by reason of any act or omission in the performance of its duties as trustee1. In the law clearly stated above, Healthy Eating Ltd. is duly referred to as the Holding Company, while its subsidiary (and trustee) is Estate Ltd. Following the legal submission above, Estate Ltd has the right to indicate its interest in a property deal or transaction acting in the capacity of trustee of Healthy Eating Ltd. And it is explained above that Healthy Eating Ltd. should disregard any rights it deems necessary, maybe in the form of a compensation or remuneration. 1. Company Act 2006, Section 138, Sub-section 2C(i & ii) obtained from the Office of Public Sector Information (UK). 2 The main reason why Healthy Eating Ltd. could not expect to be paid for any losses incurred in the property transaction is that Estate Ltd has acted as a personal representative or trustee of Healthy Eating Ltd2. In other ways, this case could be interpreted in the following assumptions: (i) Common Liability: In as much as Estate Ltd is representing the interests of Healthy Eating Ltd in the sale of the property that was purchased under compulsory purchase order by the local authority, whatever liability incurred by the Holding company (Healthy Eating ltd) cannot be indemnified because the Holding company is indirectly involved in the deal, using its trustee (Estate Ltd.) (ii) Decision Rights: As a subsidiary of Healthy Eating Ltd, Estate ltd has been given the rights to act on its capacity, making its own decision concerning any commercial transactions it may deem appropriate. As a result of this, the holding company does not have any power to seek indemnity against any action taken on its behalf by its personal representative. Considering all the facts raised above, it is legally untenable for Healthy Eating ltd to expect any forms of compensation or remuneration from the local authority on account of the losses it may have incurred because of this property deal undertaken on its behalf by its trustee. 2. Sheik, S (2008), A guide to the Company Act, Taylor & Francis, p.336 3 (b) Liability to compensate the injured volunteers: This issue concerns about the liability incurred by a subsidiary of a company to a third party. In this case study, Research Ltd, which is a subsidiary of Healthy Eating Ltd was involved in a damages suit by volunteers that participated in its new product testing, and who were poisoned by some dangerous elements in the new product. Invoking the Company Act 2006 Section 138, sub-section 2 (ii), we have: For the purpose of ascertaining whether the holding company or its subsidiary is so interested, there shall be disregarded—any rights that the company or subsidiary has in its capacity as trustee, including in particular— (ii) any right to be indemnified out of the trust property for any liability that incurred by reason of any act or omission in the performance of its duties as trustee3. The law stated above is very clear in the sense that it demonstrates the impossibility of rescuing Research Ltd out of the liability it has caused by mistakenly giving poisonous product for volunteers to test. Even though Research Ltd’s worth only 50,000 pounds, and the magnitude of damages claims against it might be huge, Research Ltd should find a way to settle this problem on its own without expecting Healthy Eating ltd to provide financial assistance to pay off the claimants4 3. Company Act 2006, Section 138, Sub-section 2C(ii) obtained from the Office of Public Sector Information. 4 The duties of a subsidiary of a holding company include but not restricted to the following typical activities depending on the company’s constitution that spells out the kind of relationship between the company and its subsidiaries4. Acting as a personal representative of the holding company in purchase of some supplies or/and in distribution of the company’s finished products. Carrying out statutory operations that add up to final requirement for successfully executing the business activities of the holding company: for example, Research ltd helps Healthy Eating Ltd to do important research about food features, the trends of the business and identifying certain scientific problems in the processes. Undertaking some services required by the holding company. The activities listed above are just examples of what a subsidiary may undertake as a personal representative of the holding company, but the Company Act 2006 section 138, sub-section 2C (ii) insists that the subsidiary would have to be responsible for its own liability, and that such a personal representative of a holding company must not expect to be bailed out using the company’s trust property/asset. The bottom line is that the level of liability the action of a subsidiary could transfer to the holding company depends on the charter included in the company’s constitution. 4. Sealy, L & Worthington, S 2007, Cases and materials in Company Law, Oxford University Press, P.68 5 (c ) The claims against Brown, Black & Co for: i. Tort of deceit in respect of Mr Brown’s statements in regards to the investment scheme ii. Damages for breach of the escrow agreement This scenario requires that one should invoke the assumption that a company, whatever its type, is a legal entity on its own, and it is in a commercial relationship with other members (normally referred to as shareholders) guided by a laid-down company’s constitution that details the rights and obligations of all the parties in the commercial agreement5. Therefore, the action of Robert, possibly one of the directors seemed to have led the Healthy Eating Ltd into following deceitful statement given by the company’s solicitor, Mr. Brown of Brown, Black & Co. Some facts must have been addressed before Robert agreeing to transfer 100,000 pounds to the account of the company’s solicitor for the investment scheme: The Company Act 2006 grants the shareholders a host of rights that are clearly outlined, and that must be respected by the company’s directors6. Some of these important rights are highlighted below section by section: (a) Section 188 requires that members’ approval is highly recommended for any long-term services that the directors ordered for the company. 5 Pettet, B. (2009). Pettet’s company law. Longman, p. 235 6 Alcock, A., Birds, J. and Gale, S. (2007). Companies Act 2006: the new law. Jordans, p. 10 6 For instance, if the directors are contracting the accounting/auditing of the company to an external finance company, it is important that the members (shareholders) append their signatures to show that such a program has been approved by them. (b) Section 190 mandates directors to seek the approval of the company’s members (shareholders) when they are investing in huge-capital property: these substantial property transactions include buying an old office building, staff quarters, restaurants for staff and giant office buildings. The shareholders, during this time, would be able to fully understand the cost, the processes of acquisition and the purpose of spending huge amount of money on such investment. This action would prevent directors from unilaterally acquiring property for the company. And this would help to eliminate corruption and restore transparency among all the member of a company. (c) Section 197 enforces the rights of shareholders in deciding whether the directors worth receiving loans and quasi-loans from the company or not. The shareholders are expected to decide if they would approve any credit transaction undertaken by the directors in their own interests. Not only this, they would also need to approve the granting of company’s loans and quasi loans to the members of directors’ families. 7 (d) Section 219 makes it compulsory that shareholders’ interests are taken into consideration and their approval must be sought before directors undertake any share transfer. (e) Section 32 encourages fair dealing and right to all information pertaining to the company: in this case, the shareholders must have in their possession all constitutional documents that detail the rules and regulations guiding the actions of every member of the company. Confusion and misunderstanding have always occurred in companies where all members have no access to the companies’ constitution, or whereby the contents of the constitution are unclear. Whenever legal cases arise from this state of misunderstanding, the affected shareholders often claim that vital information about the company has been hidden from them by the directors. In the light of the facts presented above, Robert had committed an offence by breaking the company’s constitution. A typical instance of when shareholders kicked against the selfish desires of directors who tried to break the company’s rules in pursuit of a seemingly dangerous commercial relationship is seen in Allen v HART 7. This case reveals how directors of Lakeside Canning Co. Ltd. had connived with one another and pushed the company into a deal which information had been largely hidden from the shareholders. 7. Allen v HART (1914) 30 T.L.R 444 Privy Council 8 Even though they claimed they were working for the benefits of increasing the company’s share value, however, since they had decided to make their representations for amalgamation with another company, Dominion Company, secret, this action constituted a breach of company’s constitution8. So, what would happen to Mr. Brown of Brown, Black & Co.? The actions of Mr. Brown constituted a criminal offence because he misled Healthy Eating Ltd investing in a non-realistic venture that made the company lose the chunk of money gathered from its creditors (in this case, shareholders), without actually letting them decide for or against the investment plan. This action is categorized as committing an offence through fraudulent trading. The Company Act 2006 section 993, sub-section 1 & 2 states that: (1) If any business of a company is carried on with the intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, every person who is knowingly a party to the carrying on of the business in that manner commits an offence; (2) This applies whether or not the company has been, or is in the course of being wound up9. 8. Davies, P. and Gower, L. (2003). Gower and Davies’ principles of modern company law. Sweet & Maxwell, p.410. 9. Company Act 2006, section 993, sub-section 1 & 2, obtained from the Office of Public Sector Information (UK). 9 It has been established that the action of Mr. Brown contravened the Company Act 2006; therefore, it is a commercial crime that is punishable under the law, because Mr. Brown has failed to: Pass the appropriate information to Robert of Healthy Eating Ltd Request that the creditors (or shareholders) of Healthy Eating Ltd be consulted before final decision was made about investing their money in the company. Discover that the investment was indeed bogus and non-profitable as advertized. Properly advise Healthy Eating Ltd about making the right business decisions Do everything possible to detect that the investment was actually a scam Stop the company from committing its creditors’ capital in the deal. As a result of the reasons outlined above, Mr. Brown had done something that permitted Healthy Eating ltd the power to claim for damages owing to the tort of deceit by giving misleading statements that propelled the company into involving itself in a fraudulent investment. Damages for breaking the escrow agreement According to the Company Act 2006 section 993 sub-section 3a & b (i & ii), Mr. Brown is liable to the following damages for deceiving Mr. Robert and Healthy Eating Ltd into a bogus investment: 10 A person guilty of an offence under this section is liable—(a) on conviction on indictment, to imprisonment for a term not exceeding ten years or a fine (or both); (b) on summary conviction—(i) in England and Wales, to imprisonment for a term not exceeding twelve months or a fine not exceeding the statutory maximum (or both). (ii) in Scotland or Northern Ireland, to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum (or both)10. Therefore, Mr. Brown is liable to imprisonment for a term or he will be asked by court to pay a fine or both. This is a serious breach of Company Act 2006. Conclusion Every company in the United Kingdom has its constitution which spells out clearly the kind of relationship between itself and its members, who could referred to as shareholders or the company’s creditors. The company Act 2006 explains how all these components of a company could work cooperatively together with the hope of achieving the goals of the company. So, also there are understandable descriptions of liability, what constitutes a criminal offence and what damages or punishment would be meted out to those that had contravened the laws. From the case study, Estate Ltd and Research ltd are acting in the capacity of a personal representative of Healthy Eating Ltd., and have different liabilities depending on their individual operation that are meant at fulfilling the mission of Healthy Eating Ltd. 10 Company Act 2006 section 993 sub-section 3 a & b, obtained from the Office of Public Sector Information (UK). Bibliography Alcock, A., Birds, J. and Gale, S. (2007). Companies Act 2006: the new law. London. Jordans. Davies, P. and Gower, L. (2003). Gower and Davies’ principles of modern company law. London, Sweet & Maxwell. Office of Public Sector Information (2009). “Company Act 2006. Section 138, sub-section 2c(i & ii)”, Office of Public Sector Information, United Kingdom, viewed January 23 2010. Pettet, B. (2009). Pettet’s company law, London, Longman. Sealy, L & Worthington, S 2007, Cases and materials in Company Law, Oxford, Oxford University Press. Sheik, S (2008), A guide to the Company Act, London, Taylor & Francis. Read More