Business and Corporate Law: St. Ronan's Ales Limited - Essay Example

St. Ronan's Ales Limited Issue of Shares worth 50,000 against the lease rent for the neighbouring land: There is no provision in the CompaniesAct 2006 that specifically prohibits the issues of shares by a private company for non-cash consideration of rent payable. Section 580 generally prohibits the issue of shares at a discount only. According to the Companies House payment for shares can be made in a variety of ways including cash, goods, services, property, goodwill, or know-how. The payment also includes cash payment made to any person other than the company allotting the shares. The Act has prescribed greater restrictions on public companies as to the form of consideration that they can receive against the issue of share. 1 Therefore the issue of shares against the consideration of lease rent can be considered valid. 2. Loan of 100,000 from Bank Companies Act 2006 has codified the duties of directors and has included these duties in the relevant sections. While Section 170 lays down the scope and nature of general duties Sections 171 to 177 and section 182 lays down the specific duties of the directors. The duties covered under these sections are made to replace the common law rules and equitable principles on which the duties of directors are based earlier. Section 170 also provides that these general duties "shallbe interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties". 2 Under section 171 the directors have a duty to act within the statutory powers granted to them. This duty must be exercised in accordance with the constitution of the company and the powers must be exercised for proper purposes. For the purpose of general duties the Companies Act 2006 has defined the constitution to include the Articles of the company and decision taken in accordance with the Articles will be construed as taken within the constitution of the company. Similarly any decision taken by the members or a class of members if they can be regarded as decisions of the company will also be treated as taken within the constitution.3 Therefore the proposed loan of 100,000 from bank for buying the shed on the land proposed to be leased against the security of the assets will be considered within the powers of the board of directors, if the Articles of the company contain a provision to this effect. More so, when it is approved by all the other directors who are also shareholders of the company the transaction can be carried out. 3. Sale of Yeast for 5,000 Under section 172 the directors of the companies have a specific duty to promote the success of the company. The action of James being the managing director of the company in researching and developing new varieties of yeast can be used to promote the business of the company. In this way although he claims a one off fee of 5000 his intention in promoting the success of the company is implied. Moreover he claims the payment from the company for his work out of the time he had to spend for the company and it is his intelligence and hard work for which he is claiming the fees. The company will also be benefited by the new variety of yeast. Therefore this transaction has the legal validity. However the reasonableness of the consideration of 5,000 received by James needs to be considered. 4. Writing Cheque for 12,000 on Companies Account Section 174 (1) of the Act prescribes the duty of the directors to act with care, skill and diligence. Section 174 (2) states the degree of care, skill and diligence to be exercised by the director specifying that the directors should exercise such care, skill and diligence as would be exercised by a reasonably diligent person with a. "the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and b. the general knowledge, skill and experience that the director has." 4 This duty can be equated with the dual test imposed under section 214 of the Insolvency Act 1986 which deals with the wrongful trading of a director. In the instant case Lan should be aware that writing a cheque for 12,000 to the credit card company against his personal expenses would make the company incur loss to the extent of 12,000. A person with reasonable diligence would normally understand that this action would put the company's funds in jeopardy. Therefore the act of Lan in issuing the cheque has to be regarded as a wrongful act done in violation of the rules prescribed under section 174. 5. Redesigning of Labels Under section 177 of the Companies Act, 2006 a director has the duty to declare interest in proposed transaction or arrangement. Subsection (1) of this section states if a director of a company is in any way directly or indirectly interested in a proposed transaction or arrangement with the company he must declare the nature and extent of that interest to the other directors" 5 In this case Tam was aware of the fact that he is going to get a reward for convincing the other directors to place the order for label design with Jim's firm. Therefore Tam cannot take the plea that he was not aware of the quantum of reward. Moreover under section 176 the directors have a duty not to accept benefits from third parties. The benefits identified to be covered under this section include both monetary and non-monetary benefits including corporate entertainment. Another point to note is whether such benefit can be regarded as giving rise to any conflict of interest. However, it is not possible to ascertain whether certain benefits do give rise to conflicts of interest or not. In the instant case although the receiving of 1000 and other material benefits by Tam does not give rise to any conflict of interest, he is under a duty to disclose his interest in the transaction since other directors had apprehension about placing the design order for the label with Jim's firm. 6. Environmental Issue relating to Waste Water Chapter 2 of Part 10 of the Companies Act 2006 has codified the general duties of the directors which are contained in section 170 to section 177 of the Act. There are other statutory obligations which are contained in the Companies Ac and several other legislations. Such duties are mostly of administrative nature like maintenance of proper books of accounts and to file the annual returns of the companies in a timely manner. The liability for breach of these duties will fall on all the officers of the company including the directors. Other legislations that deal with the civil and criminal liabilities of directors are Insolvency Act 1986, health and safety regulations and environmental legislation and Company Directors Disqualifications Act 1986. In the case of violation of environmental regulations, the director shall become liable only when it can be proved that the director has contributed to the breach through consent, connivance or neglect. In the instant case the leakage of water was an accident for which the company was penalized under the relevant legislation with a fine. Therefore the act of the directors would pass the test laid down in Section 214 of the Insolvency Act which talks of an objective assessment of a director's conduct. This standard has now been codified under section 174 in expecting the director to exercise reasonable care, skill and diligence.6 (Fortune law.com) In the wastewater leakage issue if the directors can prove that they have acted with care, skill and diligence no action lies against them. Moreover under the Act only a shareholder can bring a claim against the directors for negligence, default, breach of duty or breach of trust. (Covington and Burling) The councilor or the community as he thinks does not have a right to sue against the director for negligence in this case. 7. Declaration of Lesser Dividend and Mis-management This is a clear case of oppression and mismanagement. Wally has by the act of law become the shareholder of the company by inheriting the shares of Tess. Therefore so long as Wally will be able to prove that the remaining directors have acted in a manner to oppress his rights as an individual shareholder by understating the profit and not declaring dividends properly he can bring a derivative claim against the other directors. Previously a minority shareholder had only a limited right to bring a claim against the directors. The rule laid down in Foss v Harbottle bestowed the right to bring an action against a director only to a company and not an individual shareholder. However there ware a number of exceptions to this general rule like in circumstances where fraud on minority was committed or an illegal act took place or where there was an infringement of the personal rights of a shareholder. Under the Act of 2006 right has been given to a shareholder to bring an action for derivative claim against negligence, default, breach of duty or breach of trust by a director. The onus of proving such act on the part of other directors lies on Wally in the instant case if he wants to legally proceed against the directors.7 Therefore when the directors are found not to with the necessary care, skill or diligence or where directors have not acted by taking into account all the factors mentioned in section 172(2) an aggrieved shareholder can bring an action against the directors. However the Act has provided some safeguards in this respect. The person wishing to bring any claim should obtain the permission of the court. The Act has also prescribed where the courts will refuse permissions. "The court must also look at various factors, including the conduct of the shareholder in bringing the claim, the likelihood of the company ratifying the director's conduct, whether the company itself had decided to pursue the claim, whether the shareholder could bring an action in his own right and the views of shareholders who have no personal interest in the matter." 8 However in the instant case Wally seems to have little chances of pursuing the claim because of his criminal background; but this will have to be decided by the court. Bibliography Bytestart.co.uk 'Companies Act 2006 and Directors' Duties' retrieved November 12, 2008 from http://www.bytestart.co.uk/content/legal/35_2/companies-act-directors-duties.shtml Charity Team 'Directors' Duties under the Companies Act 2006 - Guidance for Charitable Companies retrieved 12 November from http://www.bllaw.co.uk/PDF/Charities_inforrmationsheet_Directors%20Duties.pdf Companies House 'Share Capital - GBA6 October 2008 - version 12' retrieved November 11, 2008 from http://www.companieshouse.gov.uk/about/gbhtml/gba6.shtml Corporate Law and Governance 'UK: Companies Act (2006) Implementation - Directors' Duties and Financial Assistance retrieved from http://corporatelawandgovernance.blogspot.com/2008/10/uk-companies-act-2006-implementation.html Covington and Burling "Directors and the Companies Act, 2006' retrieved November 12, 2008 from http://www.cov.com/files/Publication/88ac6901-6771-422b-853d-2453bc9c342f/Presentation/PublicationAttachment/0a7fe9ce-cbce-4177-ac37-2a9f60327653/Directors%20and%20the%20Companies%20Act%202006.pdf. Fortune Law.Com 'Directors' Duties after the Companies Act 2006' retrieved November 12 2008 from http://www.fortunelaw.com/pdf/Directors-duties.pdf. UK Statute Law Database 'Companies Act 2006 (c.46)' retrieved November 12 2008 from http://www.statutelaw.gov.uk/content.aspxLegType=All+Legislation&title=companies+act&Year=2006&searchEnacted=0&extentMatchOnly=0&confersPower=0&blanketAmendment=0&sortAlpha=0&TYPE=QS&PageNumber=1&NavFrom=0&parentActiveTextDocId=2991719&ActiveTextDocId=2991971&filesize=3586 Read More