Analysis of Company Law - Case Study Example

Question One 1 List of the Company's Members: In order to advise Madona it is important to look in to the provisions of the Companies Act 2006 governing the Register of Members. The relevant provisions are: Under Section 113 of the Companies Act 2006 (Chapter 46) every company must keep a register of members. The company must enter in the register: "(a) the names and addresses of the members, (b) the date on which each person was registered as a member, and (c) the date at which any person ceased to be a member." It is also necessary that in the case of a company having a share capital, the register must contain the names and addresses of the members and a statement of- "(a) the shares held by each member, distinguishing each share- (i) by its number (so long as the share has a number), and (ii) where the company has more than one class of issued shares, by its class, and (b) the amount paid or agreed to be considered as paid on the shares of each member" Under Section 114 the Register is to be kept available for inspection: "(1) A company's register of members must be kept available for inspection- (a) at its registered office, or (b) at a place specified in regulations under section 1136. (2) A company must give notice to the registrar of the place where its register of members is kept available for inspection and of any change in that place"1 Under Section 1136 (1) of the Companies Act 2006 "the Secretary of State may make provision by regulations specifying places other than a company's registered office at which company records required to be kept available for inspection under a relevant provision may be so kept in compliance with that provision"2 In accordance with the above provisions Madona can inspect the register of members of Posh Cars Limited containing the names, addresses, and the details of shareholding of all the members of the company at the registered office of the company. In case any regulation has been enacted specifying the maintenance of the register of members by the Secretary of state then the register of members can be expected in such place. The address of such place will have to be intimated to the Registrar of companies and Madona can find the address of the place from the registrar in case such a regulation has been made in this respect. However Madona should note that under the new provisions "A person seeking access to the register will have to give their name and address and state the purpose for which access is being requested and indicate whether the information will be disclosed. The company can apply to the court for an order that it does not have to comply with the request on the grounds that access is not sought for "a proper purpose"."3 1.2 Mr. Cowboy's Holdings in Posh Cars Ltd: Under the provisions of Section 113 (2) it is necessary for the companies having a share capital to incorporate in the register of members the shares held by each member, with the share numbers if any and also the class of shares where there is more than one class. Hence by the inspection of the register of members of Posh Cars Ltd, Madona may be able to find out the extent of Mr. Cowboy's holdings in the company. 1.3 Access to Register of Members in the case of a Plc: Section 353 (1) of the Companies Act 1985 allows the company to maintain the register of members in a place other than the registered office through a notification to this effect. However the Registrar will be informed of the address and location of the place where the register of members will be available for inspection. With the proposed amendments in the Companies Act 2006 "persons requesting to inspect or obtain a copy of a company's register will be required to submit a written request to the company, stating their name and address, the purpose for which the information is to be used and whether the information will be disclosed to any other person. It will then be up to the company to decide whether the stated purpose is 'proper' or 'improper' and either fulfil the request within five days or make an application to the court to refuse the request."4 Question Two 2.1 Sale of Shares by Mr. Clean to Mrs. Shute "Save for a listed company, a company's Articles of Association may restrict the right of a member to transfer his shares and may require him, in specified circumstances, to offer his shares for sale. Normally, such provisions would prohibit him from transferring his shares to an outsider at a given price unless existing members have been given an opportunity to purchase the shares at the same price and such remaining members have refused to purchase the shares. Where a company's Articles contain such a provision either the procedure laid down must be followed or a Special Resolution passed by the members relaxing the pre-emption provisions in respect of a specific transfer(s)."5 Thus the shares in a company are freely transferable subject to the conditions imposed by the Articles of Association. "Even though a share is a species of chose in action, the transfer of shares is not governed by the ordinary rules of assignment." 6Then the question that arises is whether the holding of the share certificate alone is an evidence of title. In the company's context the legal title to shares is transferred only by registration of the name of the acquirer in the company's register of members. However an exception to this legality is the bearer shares where the holder is entitled to the rights of a member of the company by a mere possession of the share certificates. The requirement of registration is crucial in respect of a member's right in the conduct of the affairs of the company. Since normally there will be some part of unpaid liability on the shares the act of registration establishes a contractual bond of the new person acquiring the shares so that the company will be able to enforce his liability. Though there are no elaborate provisions in the UK Company Law governing the rights of unregistered members except section 182ff of the Companies Act 1985, the argument of the liability for unpaid calls may be taken as the legal ground for the compulsory registration of the new acquirer of the shares from an existing member. "The requirement of registration is crucial in dealing with the transfer of shares, almost like a condition precedent to its validity" Since the transfer of shares and other securities of the company is being dealt with by the Articles of Association in majority with little support from the provisions of the Companies Act the consent of both Mrs. Shute the new purchaser of the shares and the company is essential to complete the registration of the name of Mrs. Shute as a member. The company has the right to refuse the registration of the name of Mrs. Shute as per the operation of the Articles of Association of the company. Mrs. Shute as an unregistered member can not exercise any of the rights of a registered member. The only remedy available is that the company by special resolution waives the right of preemption of the existing members on the shares of Mr. Clean which were acquired by Mrs. Shute. Question Three 3.1 Fixed and Floating Charges: "A mortgage, debenture or other security documentation, is likely to create charges over particular assets as security for borrowings or other indebtedness." 7 Usually there are two kinds of charges being created in respect of the securities. They are known as 'floating charge' and 'fixed charge'. The floating charge covers the assets and other materials that are fluctuating on a daily basis. The examples of these assets are inventory and book debts of the firms which are subjected to the mortgage. Such items are included and excluded from the total charges as and when the individual items are bough and sold or realized. When a default is committed by the borrower the floating charge gets crystallized and at that point of time the floating charge is converted into a fixed charge. This fixed charge extends to all the assets existing as on the day of the conversion from the floating charge to a fixed one. The fixed charge may be considered as more effective than the floating charge. However the floating charge is more flexible. 3.2 Validity of Retention of Title Clauses against the Liquidator in cases of Winding Up: The characterization of a security and registration thereof as 'floating' and 'fixed' has given to rise to serious legal consequences in the English Courts. The reason for such increase in the litigation is that the floating charge is given a lesser priority by the legislation than the other claims in the case of insolvency of the borrower. But the floating charge is considered more superior than the floating one. This view is supported by the decision of the House of Lords in the case of Re Spectrum Plus8 The settlements out of realizations made during a winding up has to be apportioned for three distinct uses before such amounts are utilized to discharge the obligations against a floating charge. "First, the claims of preferential creditors are statutorily elevated above those of other unsecured creditors and those of the holder of a floating charge.2 Secondly, the Enterprise Act 2002 has introduced a requirement that a 'prescribed part' of assets subject to a floating charge must be set aside for payment to unsecured creditors.2 Thirdly, until recently, the expenses of liquidation were also thought to be payable out of floating charge assets,3 even though the procedure exists for the benefit of unsecured creditors alone."9 In order that a creditor secures the money advanced by him, he does not rely upon his own conclusions on the creditworthiness of the borrower but on the specific assets that the borrower provides for securing the repayment. This asset based finance is prevalent in the modern day business in the form of hire-purchase and leasing or factoring arrangements. Even the trade credits granted on the retention terms also are covered under this lending framework. A trade creditor who has supplied goods with retention of title clause is benefited to the extent his goods remain with the debtor during insolvency. However removing these goods should not affect the carrying on of the business if any by liquidator. In that case the retention of title would not result in any major advantage to the creditor in realizing the money he lent. Another kind of asset where the banks are holding the title is the book debts against which a floating charge is created in their favour. Till the decision in the case of Brumark Investments Limited (in receivership) v Inland Revenue Commissioners10 the Insolvency Practitioners were following the practice of distributing the collections against the book debts under the fixed charge to the bankers on the basis of the provisions contained in the within the bank's debenture. According to the contentions in the Brumark ruling it was argued that such realisations really represent the assets under the floating charge and hence there was no need to distribute the collections to the bankers against the fixed charges being held by them. Since the realisations of this nature represent assets under floating charge they are available for distribution in the first instance to the appointed Insolvency Practitioner to meet their remuneration and out of pocket expenses and thereafter to the preferential creditors i.e. the government departments in respect of PAYE/NIC and VAT and employee claims in respect of arrears of wages of employees including their holiday pay. The ruling in Brumark investments case by Privy Council will soon be affirmed as law and that materially affects the position of the lenders where fixed charges have been created on crystallization of the floating charge especially book debts. The lender's position is affected adversely since this ruling will result in the settlement of the costs all insolvency proceedings and full repayments to the preferential creditors before the lender can realize any money out of the collections made against the book debts. This causes a reduction in the security available to the lender against the borrowings by the company in liquidation. This will also affect the monies that the bank can expect to receive from the insolvency proceedings. In view of the above discussion it may be contended that the retention of title to goods may not hold any validity against the liquidator though legally the retention of title is tenable. Question Four: 4.1 2 million - Unsecured Loan from Shark Bank: The act of the company in getting an unsecured loan of 2 million at 60 percent while the market rate was only 13 percent can definitely be construed by the administrator or liquidator as a transaction entered into with the intention of defrauding the other creditors of the company. "To be vulnerable, a transaction at an undervalue must have been entered into during the period of two years before the commencement of winding up or the commencement of administration and the company must have been insolvent on a cash flow or balance sheet test at the time it entered into the transaction or became insolvent by entering into it." 11 Under English Law the 'inability' of a company to pay of its debts is determined by conducting two tests. The first one is the 'cash flow' test and the second one is the 'balance sheet test'. The cash flow tests apply if a company is unable to meet its financial obligations as they fall due. In this case because of the exorbitant interest rates committed the to the Shark Bank on the unsecured loan the financial stability of the company would have further deteriorated much to the detriment of the other secured and unsecured creditors. This would have naturally caused the winding up of the company. The taking of this loan may also amount to wrongful trading on the part of the directors and a court on the application of the liquidator may order the directors to make such contributions as the court may deem fit if "(a) before the commencement of the winding up, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation; and (b) thereafter the director failed to take every step with a view to minimising the potential loss to the company's creditors which he ought to have taken. The standard required as to what a director ought to know, the conclusions he ought to reach and the steps he ought to take is the standard of what would be known, reached or taken by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as those of the director in relation to the company and with the general knowledge, skill and experience that the director has."12 The act of accepting the very high interest rate of 60 percent for the unsecured loan while the prevalent market rate was 13 percent implies that the directors have not acted with care and diligence expected of them in the protection of the rights of the shareholders and creditors of the company. Hence the directors may be called upon to make good the losses sustained by the company by the liquidator through an application to the court. 4.2 3 million - Floating Charge Created in Favour of Quickie Bank: Section 400 introduced by the Companies Act 1985 specifically provides that the floating charge created by a company within a period of one year prior to the date on which the insolvency proceedings started is void against the administrator or the liquidator. In the case of Moonlight Electronic Limited the winding up petition was presented to the court on the 24th July 2007 and the floating charge in favour of Quickie Bank for the 3 million was registered in August 2006 which is within the 'relevant period' within the meaning of section 400. The provisions of section 400 as it relates to the floating charge is as under" "s 400.-(1)Where prescribed particulars of a charge created by a company, in the prescribed form, are delivered for registration more than 21 days after the date of the charge's creation, section 399(1) does not apply in relation to relevant events occurring after the particulars are delivered. (2)However, where in such a case- (a)the company is at the date of delivery of the particulars unable to pay its debts, or subsequently becomes unable to pay its debts in consequence of the transaction under which the charge is created, and (b)insolvency proceedings begin before the end of the relevant period beginning with the date of delivery of the particulars, the charge is void as against the administrator or liquidator. (3)For this purpose- (a)the company is "unable to pay its debts" in the circumstances specified in section 123 of the Insolvency Act 1986; and (b)the "relevant period" is- (i)two years in the case of a floating charge created in favour of a person connected with the company (within the meaning of section 249 of that Act), (ii)one year in the case of a floating charge created in favour of a person not so connected, and (iii)six months in any other case." By virtue of the provisions of s 400 (2) the Quickie bank though holding a registered floating charge will rank as an unsecured creditor for the realization of the amount advanced by it. 4.3 Sale of Guest House for 850,000: If the company enters into certain types of transactions within specified periods before the insolvency proceedings of the company started, the administrator or liquidator may be able to challenge such kinds of transactions. One kind of such transaction "is at an undervalue if a company makes a gift to a person or enters into a transaction on terms where the company receives no consideration or one which has a value which is significantly less than the value of the consideration provided by the company."13 Though the company may be able to offer a defense that the transaction was entered in to in good faith for the purpose of carrying on of the business of the company, the administrator or liquidator may not really consider the merit in such defenses. In order to be treated as a transaction that has vulnerability, the transaction should have been entered into during the period of two years before the date on which the winding up proceedings of the company commenced. It is also necessary that the company should have become insolvent on a cash flow test or balance sheet test at such time the transaction with an undervalue is entered into or by reason of entering into such a transaction. The same analogy of vulnerability applies to transactions which have been entered into with an intention to defraud the creditors. There is no time limit set between the date on which the transaction is entered and the date on which the winding up proceedings started, for questioning the reasonableness of such transaction. Nevertheless the transaction should have the effect of putting an asset beyond the reach of the claimants permanently or the transaction should have been entered into to prejudice the interest of the claimants. The sale of the company's guest house in September 2005 for a consideration of 850,000 as against the market value of 300,000 is one of such transaction which can be regarded as entered in to with the object of defrauding the creditors. The administrator or the liquidator has the authority to challenge the transaction as the money received as consideration otherwise would have been available for settlement of the debts of the company in winding up. In this case the court has wide powers to nullify the effect of the transaction entered into and put the parties involved back into their original position. Read More