The Legal Stand of the Case of Company - Essay Example

? Company Law Department: This paper is intended to discuss the legal stand of the case of XYZ Ltd. and the implications arising from different issues therein. Below is a discussion of the facts discovered in the case, the legal issues arising from the facts and a discussion to each issue with relation to possible outcomes from each case scenario should a legal proceeding arise from any of them with accordance to company law in the United Kingdom and more specifically the Companies Act 2006 chapter forty six. Facts in this case: Four band members Tim, Uma Victor and Wilma formed a company called XYZ Ltd in 2009. The purpose of the company was to manage and run the business of their band, TUVW, which they had formed in 2005. The company which is called XYZ Ltd. had shares with a nominal value of two hundred and fifty thousand pounds which were divided equally among the four founders. XYZ Ltd. was to own all the copyrights for band’s songs which were given to the company as a consideration for the allotted shares. The four shareholders also were the directors of XYZ Ltd. Employment of Xavier as the managing director of the company followed where he was to receive an annual salary of two hundred and fifty thousand pounds. Distributable yearly profits by the company were to be paid to the shareholders as dividends but the shareholders never received a single payment in dividends. Personal issues arose amongst the band members and this brought about differences between some XYZ Ltd.’s shareholders and directors causing the band members to split and form a new band. XYZ Ltd.’s existence had led to the formation of another company XYZ Concerts Ltd. to manage and run a performance tour that was to be TUVW band in the UK in 2010. All issued shares of XYZ Concerts Ltd were held by the mother company, XYZ Ltd. The responsibilities of XYZ Concerts Ltd. included organising the accommodation of the band members which had some hotel bills unpaid by the end of the UK tour. The Wyatt commenced proceedings against XYZ Ltd. after bills remained unpaid. Mitt, the father of Tim, actively involved himself in the management of the band. His reason for this was because he did not trust Xavier who was the managing director of XYZ Ltd. Xavier hired Cold Chocolate PR Consultants to help improve the band’s image in May 2011. This was after Mitt pressed Xavier to improve the bands image before the release of a new album that TUVW was working on. Cold Chocolate PR Consultants spent a hundred thousand pounds for their work and the hired consultants continued working till the end of 2011 even though the bands reputation remained extremely bad and appalling. Xavier employed Yvonne as the production manager in July 2011 and they both subsequently entered into a contract with Jump Records to produce the next five albums for the band. A payment of twenty five thousand pounds was made to XYZ Ltd. by Jump records as an advance to the total payment for the five records. Due to the bad blood between the bad members, the band never met in a single occasion since March of 2011 and two of the band members had already formed another band. In January 2012, XYZ Ltd. was pronounced insolvent though its books of account showed that the company had been insolvent since the beginning of the previous year, January 2011. At that time, the company owed the shareholders an equivalent of all dividends due to them since its incorporation, The Wyatt Hotel an equivalent of all bills incurred during their UK tour, Cold Chocolate PR Consultants an equivalent of their contracted amount as well as the amount paid by Jump Records as an advance totalling to twenty five thousand pounds. The liquidator deduced that the worth of the company as at January 2012 which was solely in the form of song copyrights was five hundred thousand pounds. Some of the issues arising in this case are discussed hereafter. First and foremost, no dividends were paid to any of the shareholders of XYZ Ltd. since its incorporation in 2009 where the articles of the company particularly required that distributable profits be shared among the four shareholders annually in form of dividends. Even though the financial progress of the company is not highlighted or pinpointed in the case, it should be determined whether there was any amount due to them in dividends before the final figure which would determine how the company’s debts would be settled. Another issue coming up in the case was whether The Wyatt had a right to sue XYZ Ltd. directly where the organising and planning of the UK tour was done entirely by the subsidiary company, XYZ Concerts Ltd. The liability of paying up the debt in bills should be determined to define if The Wyatt had a case against XYZ Ltd. per se. During the formation of XYZ Ltd. only the aggregate nominal value of the shares is stated to be two hundred and fifty thousand pounds. However, the number of shares is not indicated though the case says that they were divided equally among the four band members. As per law, the total number of shares of the company to be taken on formation by the subscribers to the memorandum of association must be specifically stated in the statement of capital and initial shareholding. (Placeholder2) There is need to determine if there was an actual number of shares that the case extract failed to mention so as to tell if the company, XYZ Ltd., was formed in accordance with the law. Section five hundred and forty two of the Companies Act 2006 states that all shares in a company must have a fixed nominal value. Allotting a share that does not have a fixed nominal value is void. This is not the case with the allotment of XYZ Ltd.’s shares which had a nominal value indicated as two hundred and fifty thousand pounds. In addition, the founding directors of XYZ Ltd. were acting within their duty to allot themselves shares since all the shares allotted were of the same class as stipulated by section five hundred and fifty of the Companies Act 2006 chapter forty six and that XYZ Ltd. was a private company giving its directors the power to allot shares of that class and to grant any rights to subscribe for or to convert any security into such shares, except to the extent that they are prohibited from doing so by the company’s articles. (Placeholder3) The case above does not mention any express or implied article prohibiting Tim, Uma, Victor or Wilma from allotting or issuing rights to the shares of XYZ Ltd. In May 2011, Xavier hired Cold Chocolate PR Consultants to improve the general image and reputation of the band in anticipation of their upcoming new album. A director of a company has the duty, under law, to promote the success of his company so long as he considers his actions to be in good faith. Xavier’s action was primarily done in a desire to maintain XYZ Ltd.’s reputation for high standards of business. (Placeholder2) Regardless of the results which were not satisfactory, Cold Chocolate PR Consultants were acting in good faith on behalf of the company and they have the right to be paid the amount agreed upon in full should the company’s asset worth be sufficient after liquidation. (Placeholder3) However, this case states that the only reason that Xavier employed Cold Chocolate PR Consultants was to safeguard his position as the managing director of XYZ Ltd. since he was being threatened by Tim’s father. This shows that he facilitated and authorised the contract between XYZ Ltd. and Cold Chocolate PR Consultants where he had a personal interest. Failure of Xavier to act on Mitt’s threats or instruction would have potentially led him to lose a job which was earning him an annual pay of two hundred and fifty thousand pounds which by law is a substantial amount. The Companies Act 2006 explains an asset as a substantial asset if the value of the asset exceeds ten per cent of the company’s asset value and is more than ?5,000, or if the asset exceeds one hundred thousand pounds. The amount in question fits the description in both manners. A company may not enter into an arrangement under which the director of the company or any person connected to that director acquires or is about to acquire from the company substantial non-cash assets whether directly or indirectly unless such an arrangement has had the approval by a resolution of the members of that company or is conditional on such an approval being gained. (Placeholder2) There had been no meeting by the members of the company since its incorporation and that would mean Xavier did not have the members’ resolution and thus was not authorised by XYZ Ltd. to enter into that contract with Cold Chocolate PR Consultants. In that regard, irrespective of whether the company was to gain or lose from the arrangement, XYZ Ltd would not have been liable to pay the one hundred thousand pounds incurred in expenses by Cold Chocolate PR Consultants in its bid to promote the band’s new album or any other amount agreed upon in the contract. XYZ Ltd. would not have been subject to the liability arising as a result of Xavier’s failure to obtain approval from the other directors required by section 190 of the companies act 2006 chapter forty six. The act further explains that the section does not relate to anything to which a director of a company is entitled to under his service contract (Placeholder2) in this case, the annual payment of two hundred and fifty thousand pounds in salary to Xavier, which he is entitled to. The amount, though substantial, is what he would have lost had he lost his job but since the contract was still intact, he was legally acting within his powers as a director and also within the law. In addition to that, Xavier failed as the managing director by not exercising his obligatory duty to exercise independent judgment. He was still the managing director when Tim’s father suggested that he worked on a strategy to improve the band’s image and reputation. Xavier was obliged by law to act in such a manner way before Tim’s father pushed him to take the initiative. He had failed XYZ Ltd. as a managing director for not exercising his independent judgement to improve the band’s image. Directors have a duty not to accept benefits from third parties under the Companies Act 2006 chapter forty six section 176. Xavier accepted a gift from Tim’s father not to tarnish his name to his son, Tim, and instigate his employment termination. This arose when he agreed to work on the image and reputation of the band after Mitt’s threat to have him fired. This section of the Companies Act states that a director of a company must not accept a benefit from a third party conferred by reason of his or her being a director and / or his doing or failure to do anything as a director. The only reason Mitt could not act and instead chose to use Xavier was because the authorisation to do as he pleased could only come from the managing director of XYZ Ltd. and thus used the threat to get it done by Xavier, a threat which worked. In the case, Mitt qualifies as a third party since he is a person other than the company and also the fact that he is acting on behalf of a body corporate associated with the company which in the case happens to be the TUVW band whose management was the main reason as to why XYZ Ltd. was formed. However, Tim’s father’s services are being provided to the company since it is in his best interest to see the company flourish and the action is not intended to benefit any other company or person other than XYZ Ltd. Acceptance of the benefit by Xavier would not be considered, for that reason, as conferred by a third party. The acceptance of the benefit by the managing director cannot be viewed as an infringement of his duties as a director since his action cannot be reasonably seen as giving rise to conflict of interest. Directors found to breach one or more of their general duties may face civil suits which would be carried in accordance with the common law rules or equitable principle if they correspond. Tim’s father would be considered as a shadow director since he has influence on the directors and Xavier is accustomed to act upon his instructions and directions and that he is not a professional or a body corporate. He may also be considered a person connected with a director as he is a member of one of the director’s family or just as a member of the director’s family since Mitt is the father of Tim. Xavier, the company’s managing director, entered into a contract with Jump Records in July 2011. This was done while Xavier was in full knowledge of the fact that Tim, Uma and Victor were not in good terms but he went ahead to organise a production contract for the band. Jump Records were not aware of the fact at the time and they dealt with the company only in good faith. Jump Records are not required by law to enquire on the limitations of the powers of the director in transacting on behalf of the company. In an event that this happens, there is a general presumption that the person dealing with the company was acting in good faith unless there is proof to the contrary. Limitations on the director’s powers in this case arise from the knowledge that Xavier had of the band members not being in good terms. The law puts that limitation to the director’s powers on any dispute arising from any agreement between the members of the company or those of any class of shareholders. (Placeholder3) This part of the law is made to protect persons dealing with the company and does not however dismiss any liability by a company’s director arising from his or her exceeding their powers. In this case, Jump Records have a case should they decide to go after the twenty five thousand pounds paid to XYZ Ltd. in advance. The members of the company may then bring an action against Xavier for acting outside his powers to hire the recording firm. The transaction is considered by law as voidable at the instance of the company since it was entered into by Xavier, the managing director and his associate Yvonne. The law provides that a transaction entered into by a director and/or their associates; in this case Xavier and Yvonne where the transaction is called in question or a liability by the company arises. This is displayed in this case by the advance payment of twenty thousand pounds by Jump Records to XYZ Ltd. Xavier and Yvonne should be held liable for authorising the transaction. The reason for this will be to account to the company for any gain they may have acquired directly or indirectly from the deal and also to indemnify the company from any loss or damage it incurred form the transaction. (Placeholder3) Yvonne can however plead not to be liable if she did not know the powers of the managing director. She had just been hired by Xavier and if she proves that she was not aware that Xavier was exceeding his powers, she will not be held liable. The law provides that any person other than the director will not be held liable if they prove that at the time of the transaction they did not know that the directors were exceeding their powers. (Placeholder3) With the issue of the director exceeding power set aside, if it is determined that Xavier was acting within his power, the contract would be valid and would wholly bide XYZ Ltd. Under the law of England and Wales or the law of Northern Ireland, a person acting under a company’s authority, whether express or implied, has a right to enter into a contract on behalf of the company. (Placeholder3) Duties of a director include one that stipulates that he has to act within his powers. It states that a director of a company must act in accordance with the constitution of the company and that he only exercise his powers for the purposes for which they are conferred. (Placeholder2) A contract entered into with jump Records by XYZ Ltd. with the authority of Xavier could be avoided by the company failure to exercise of the available defences by Xavier. XYZ Ltd became insolvent in January 2012. However, financial records showed that the company had been insolvent since January 2011. The members of the company, Tim, Uma Victor and Wilma would have a basis for bringing an action against Xavier, the managing director under exercise of members’ rights where directors have a duty to send or submit company’s financial statements and results every year. (Placeholder3) The managing director of XYZ had both the responsibility and duty to act with reasonable care, skill and diligence. Xavier was supposed to see the economic trend that XYZ Ltd. was following and hence take the necessary measures and action including informing the members of its financial difficulty beforehand. The fact that he had not noticed the company’s insolvency for a whole year shows that he did not fulfil his responsibilities as a director. The law also requires that directors send financial records to the members of a company and since it is not mentioned that Xavier sent any records financial or otherwise to the four members, he did not fully accomplish the responsibilities for which he had been entrusted with. During insolvency, the liquidator of a company, an administrator or an administrative receiver should submit to the Secretary Of State for Business, Innovation and Skills a report of the conduct of all the directors in the office for the three years of the company’s trading prior to its liquidation. This is done to assist the secretary of state in determining whether it is in the public’s best interest to seek an order to disqualify the director. (Placeholder1) In this case, the points of interest to the liquidator and subsequently to the Secretary of State will be the fact that Xavier continued the trading of XYZ Ltd. even after the company became insolvent. It was only discovered that XYZ Ltd. became insolvent in January 2011 after a whole year of trade. This had happened right under Xavier’s watch. This is not in accordance with the law and the director of XYZ Ltd. should be held liable for letting the company run for a whole year as insolvent without making a communication to its members or discovering it altogether. There was no mention of profits or losses incurred by the company under the managing director’s watch. He is bound by law to keep financial records for the company. Failure to do this would be an action that the secretary of state might be interested in. In this case, proper books of account were not kept as it took a whole year to discover the company’s insolvency. Another issue of interest to the secretary of state would be if the managing director was sending in any taxes due by the company to the Crown. This would be unlawful and action might be taken against the managing director. According to Companies Act 2006 section three hundred and eighty six, each and every company has a duty to keep sufficient or adequate records. These records should be able to outline and elaborate on the company’s dealings or transactions, to reveal with reasonable accuracy at any one given time the financial situation of the company at that material time and to enable the directors to ensure that any accounts required to be prepared comply with the desires of this act and where applicable, that of article four of the IAS Regulation. The director of XYZ Ltd. did not prepare the records as required by the Companies Act since he was unable to discover the financial situation of XYZ Ltd. for a whole year whereas if the accounts were in order, this would have been disclosed within reasonable time. Where an officer of the company fails to keep adequate records of the company’s operations, it is considered an offence and this extends to every officer who has failed to do his or her part. A person found liable of the above mentioned offence on conviction on indictment may face an imprisonment of a term not exceeding two years or a fine or both. The same person, should he or she be found liable on summary conviction, may face an imprisonment of a term not exceeding twelve months or a fine not exceeding the statutory maximum or both if the person happens to be charged in an English or a Welsh court. Those found on summary conviction in Scotland or Northern Ireland face an imprisonment of a term not exceeding six months or a fine not exceeding the statutory maximum or both. (Placeholder2)The penalty that Xavier would receive on conviction would depend on where he would be charged, something not mentioned in the case. Xavier would have a defence in such a proceeding if he would show the court that his actions were of an honest nature and that they were excusable in the circumstance that the business of the company was being carried on. In the case, there is no mention on where and how long records were being kept in XYZ Ltd. The law states that accounting records of a company should be kept at the company’s registered office or any other location designated by the directors so long as they will be made available at any given time for inspection by the company officers. Should the company directors decide to keep the company’s accounting records outside of the United Kingdom, accounts and returns with respect to the business dealt within the records must be sent and kept within the United Kingdom and are subject to open inspection. (Placeholder2) It is an offence if the requirements of section three hundred and eighty eight of the Companies Act 2006 are not met and officers found liable for such a misdeed would be punishable in the same manner as it would be if they did not keep sufficient records of the company. Section four hundred and twenty three of the Companies Act 2006 makes it a duty of all companies in the UK to circulate all annual accounts and reports of such companies to each and every member of the company, to each and every holder of the companies issued debentures and to any other person who is entitled to be notified of any general meeting to be held. The four founding members of XYZ Ltd were not actively involved in the running of the company and thus were not exposed to the day to day financial records or other records. It was Xavier’s duty however to ensure that annual accounts and reports were sent to Tim, Uma, Victor and Wilma every year. It is not mentioned in the case if the records and accounts were actually sent but ensuring that they were sent would have reduced the risk of the company operating for a whole year while being insolvent. Financial records for XYZ Ltd did not show the actual situation of the company and they may have been misleading since a whole year passed by without the insolvency being discovered. An adequate summary of the financial results of XYZ Ltd. would and should have shown the insolvency of the company in good time but the accounts kept did not show that until a year later. Section four hundred and sixty three of the Companies Act 2006 states that any director found to have prepared and false and misleading statements in reports is liable to compensate the company for any loss suffered as a result of his or her actions. He will be found so liable if he knew that the statements were untrue or misleading he actually knew that the omission was a dishonest concealment of a material fact. If Xavier would fail to prove that he did not know of the false statements or of any omission of a material fact, no other person including the members would be held liable and the creditors would be eligible for a settlement of what the company owed them. If XYZ Ltd. qualifies to be a small company for the year 2011 and its annual turnover for the year is less than five million six hundred thousand pound or if its balance sheet total for the year was not exceeding two million eight hundred thousand pounds, it would be exempt from audit and there would be a defence for the untrue and misleading financial accounts. However, this is not mentioned in the case. XYZ Ltd. also qualifies as a group company since it is the holding company of XYZ Concerts Ltd. The above mentioned exemption would also not be available if XYZ Concerts Ltd. would not qualify as a small company under the Act. (Placeholder3) In conclusion, this paper has looked into the facts of the mentioned case, the various issues that have come to existence and also the discussions to each possible result that may come up in a court of law. The discussion was focused entirely on the United Kingdom company laws and mainly argued in favour of the Companies Act 2006 chapter forty six. Bibliography Archives, T. N, 2006. Campanies Law.: legistrative.gov.uk. London. Read More