The Companies Act 2006 - Term Paper Example

Swarna1 Word count: 2123 P.Swarnalatha ID # 5448 Order 194158 d 9th December 2007 Company Law Explain the ambit of section 51 of the CompaniesAct 2006 by reference to case Law authority The Companies Act 2006 contains some of the most far-reaching changes in company law for more than 150 years (Brenda Hannigan and Dan Prentice, 2007). Similarly, the Companies Act 2006 represents the most significant and wide-ranging change to company law. Everyone engaged with managing and advising companies will need to become familiar with the details and likely impact of the new legislation (Linklakers and Paines, 2007). The companies Act 2006 describes the legal provisions and basic principles of registration of companies, formation of contracts and ways to cancel the agreements. The law on private companies have been comprehensively revised to make it easier to set up and run such a company. There is a new statutory definition of directors duties and liabilities, and new draft models of association. Much of previous company law were repealed or amended by the Act. Key aspects of the legislation comprise of small business, restructuring the law to make it easier and more cost-effective to operate a small company, promotion of shareholder engagement, enhancing powers available to proxies and increasing the rights of indirect investors, reform of the audit system to increase auditor liability and enhance audit quality, codification of directors duties and reform and modernisation of company law as a whole (Gary Scanlan and Mark Lewis, 2007). The company law provisions as contained in the "Companies Act 2006" restate almost all of the provisions of the 1985 Act, along with the "Companies Act 1989", and the "2004 Act, Companies (Audit, Investigations and Community Enterprise)" (Her Majesty’s Stationary Office, 2006). At the same time, The 2006 Act provides for a single company law regime to the whole of the UK, so that companies will be UK companies rather than GB companies as at present. It also codifies certain existing common law principles, such as those relating to directors duties, implements the European Unions Takeover and Transparency Obligations Directives and introduces various new provisions for private and public companies. It also helps in interpretation of legal cases by throwing light on certain general provisions of company formation, constitutional documents and corporate capacity. Especially, section 51 of Companies Act (2006) states the principles and rules to be followed for pre-incorporation contracts, deeds and obligations. The present case study requires the careful interpretations of sub sections of Section 51 of the companies act 2006. One of the crucial aspect for legal interpretation in this case study is the time of contract formation between Bertram and Craft&Co. Some may opine that the validation of contract requires that the company formation i.e. Bertico Limit ed. is already done. But Section 51 (1) states that a contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly (Companies Act, 2006). Hence the contract made between Bertram and Craft & Co is very much valid. Similarly, Section 51(2) explains that the above mentioned sub section applies to the making of a deed under the law of England and Wales or Northern Ireland, and (b) to the undertaking of an obligation under the law of Scotland, as it applies to the making of a contract. Some of the crucial judgments like Braymist Ltd v Wise Finance Co Ltd (2002) also supported the validation of the contract even when the contract was not formed. The judge held that section 36C(1) of Companies Act (1985) enabled the agent for the unformed company to enforce the contract. The Section 36C states that the contract has effect as one made with the person purporting to act for the company or as agent for it (The companies Act, 1985 and East End Dwellings Co Ltd v Finsbury Borough Council (1952). This also demands the interpretation of more basic sections of the European Communities Act 1972 as in case of Phonogram Ltd v Lane (1982). In it the Court of Appeal expressly rejected the argument that section 9(2) should be construed solely by reference to the Directive. The concluding words abolished the previous distinction made at common law between agents who made pre-incorporation contracts and on the true interpretation incurred personal liability and those who made such contracts but incurred no personal liability. In Phonogram Ltd v Lane, it was held that section 9(2) of the European Communities Act 1972, from which section 36C(1) is derived, made these subtle distinctions irrelevant. Same thing applies here too. No doubt, in case the Section 36C is breached, the agents should be punished (Andrew Griffiths, 1993). However, in the present case study, the contract holds its validity as it satisfied the norms of 36C of The Companies Act (1985) and Section 51 of The Companies Act (2006). The judgments in cases like Cotronic (UK) Ltd v Dezonie (1991) and Oshkosh B’Gosh Inc v Dan Marbel Inc Ltd (1989) also supported the validation of contracts involving unformed companies as one of the parties. Advice to Bertram: Bertram is strongly advised not to purchase computers as his company is not in necessity of the utility of computers. However, he has to be defended legally under the Companies Act 2006 and Companies Act 1985. Let us first analyze the present case study for providing valuable advice to Bertram who desired to transfer his existing business to a company (Bertico Ltd.) so that he could obtain the benefit of limited liability according to the provisions of Companies Act 2006. As he expressed desire to buy computers from Craft & Co, he signed a contract accordingly. Fortunately, he made incorporation of the clause in the contract as ‘Bertram agent for Bertico limited.under section 51 of Companies Act 2006). Hence this has ensured that the company is not liable for the agreements made in the said contract, where as the person (Bertram) will be liable as long as the provisions of 36C of the Companies Act 1985 are satisfied. Here it self, lot of scope is there for Bertram to cancel the agreement or contract with several other supporting points in his side or favour. One most important point is that the certificate of incorporation of company has come after the formation of contract making it qualified for its legal interpretation under Section 51 of the Companies Act 2006. This provides safeguarding mechanism for the companies as a whole for their liability towards a new contract. Hence the Bertico Ltd may not be considered for its liability towards the formation of contract made by Bertram. However, the contract has to be considered very much valid on behalf of Bertram as long as it satisfies the basic provisions of Section 36C of the Companies Act 1985. Now one has to analyze the safeguarding aspects for Bertram as he decided to cancel the agreement or contract for the reason of lack of necessity at the moment. A contract which purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly. This means the "agent" will always be personally liable on the contract unless there is agreement to the contrary. This means that there are exceptions where this will not be valid as in case of Cotronic (UK) Ltd v Dezonie and Phonogram Ltd v Lane. The present case also comes under exception because of the following points. The most important safeguarding aspect for Bertram in canceling the contract is in the form of inappropriate ersons or parties who made alterations to the contract. In other words, Directors of the company (Bertico Ltd) have not executed the changes in the contract. Rather they were altered by the company secretary (Ernest) who has no legal authority to form a contract. Hence this point has to be stressed by Bertram in defending his decision to cancel the purchase of computers. The Companies Act 2006 clearly states that the members of a company are not entitled to take part in the management of the company unless they are also directors of it. Every partner is entitled to take part in the management of the partnership business unless the partnership agreement provides otherwise. Similarly, a member of a company who is not also a director is not regarded as an agent of the company, and cannot bind the company by his actions. A partner in a firm is an agent of the firm, which will be bound by his acts. These legal provisions clearly favor the stand of Bertram as none of the directors of the company signed the alterations of the contract. Even though Bertram and Dolly conducted a board meeting and formally ratified the contract with Craft & Co., the stand taken by the Craft & Co is highly objectionable. The initial terms of the contract both in time and quality of service were fully violated. A representative of Craft & Co called at the company’s office two weeks after the contract formation and told Ernest that the printer element of the computer that Bertram had ordered was out of stock and they could supply another type for a small increase in the purchase price. Ernest agreed to this immediately and signed a letter approving the alterations. Thus the basic provisions of Section 36C of the Companies Act 1985 are not at all satisfied by Craft & Co. The same type of printers were not agreed for the supply which is objectionable according to the basic provisions of the contract. Moreover, the alterations in the contract terms have to be accepted by Directors of Bertico Ltd which didn’t happen. Hence the change in terms are not legally valid. Hence the contract can be cancelled by showing the reasons of poor service of the supplier. As the time was delayed, the necessity of Bertico Ltd. has become diminished and it has strong legal ground to cancel the contract Bertram now realises that his company does not need a computer and seeks your advice on his position and that of the company. One more serious objection is that the price hike for the supply of new printers which was also not ratified by the Directors of Bertico Ltd. More importantly, novation of initial agreements has to be satisfied for making the validity of the contract under the Companies Act 2006. However, the obligations in the present case were not novated and hence the contract has lost the validity. Hence, Bertram has every legal right to cancel the agreement for purchase of computers and printers from Craft & Co. Overall, a company has no contractual capacity prior to incorporation - so contracts cannot be made on its behalf. Hence Bertico Ltd. cannot be bound to the contract because it had no contractual capacity. However the effect of pre-incorporation Contract on Person Purporting to Contract (Bertram) on behalf of the Company (Bertram) stands to partial extent. However, as the contract was changed by the Craft & Co with out getting ratified by the Directors of the company, he need not stick to the terms of the contract and hence he is advised not to purchase the computers from Craft & Co. References Andrew Griffiths (1993). Agents without principals: pre-incorporation contracts and section 36C of the Companies Act 1985. Legal Studies. 13 (2):241-253. Braymist Ltd v Wise Finance Co Ltd (2002) EWCA Civ 127. Brenda Hannigan and Dan Prentice.(2007). Companies Act 2006 U a commentary. Butterworth’s law publication. ISBN-10: 140571882X. Companies Act. (1985). www.opsi.gov.uk/si/si2004/20040016.htm Companies Act. (2006). Chapter 46. Part 4. A COMPANY’S CAPACITY AND RELATED MATTERS Capacity of company and power of directors to bind it. Section 51. Pre-incorporation contracts, deeds and obligations.www.opsi.gov.uk/ACTS/acts2006/ukpga_20060046_en.pdf.is. Cotronic (UK) Ltd v Dezonie (1991) BCLC 721. East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109 at 132/133. European Communities Act. (1972). www.opsi.gov.uk/acts/acts1972/19720068.htm. Gary Scanlan and Mark Lewis. (2007). Companes Act 2006: A guide to the new law. The law society publication. P:800. ISBN-10: 1853285684. Her Majesty’s stationery office. (2006). The Companies Act 2006. (Public General Acts – Elizabeth II). TSO The Stationery Office. P:760. ISBN-10: 0105446068. Linklakers and Paines. (2007). The ICSA Companies Act 2006 Hand Book. ICSA Publishing Limited. ISBN-10: 1860723624. Osh Kosh B’Gosh v Dan Marbel INC. (1989). BCLC 507. Phonogram Ltd v Lane (1982). 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