Company Liquidation and Winding Up - Essay Example

Company Law Assignment After several years of conducting business, in cosmetics, as a sole trader; Brad married Angelina. Brad is a sole trader and he had sought Angelina's help, due to her superior knowledge of cosmetics. A person who does business on his own is a sole trader1. He owns the assets of the business and is solely responsible for its liabilities. All the business activities are performed by the sole trader, and this person can enter into contracts for the purpose of business2. Presumed authority is the authority that a third party assumes the agent to possess, notwithstanding the fact that such authority is absent. It arises, whenever, a principal's words or conduct apparently denotes the presence of such authority with an agent. Such authority is what is perceived by third parties to have been vested in an agent by the principal. The existence of such authority requires a representation to have been made to the third party. Such representation should originate from the principal or some entity having accrual authority3. In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd, the company was held to be liable, because the managing director had the authority to enter that particular type of contract on behalf of the company4. Angelina had been representing Brad, in his business, for many years. She used to help Brad in running his business, as she was well versed with makeup articles. As such, she had been acting as a representative of Brad, while conducting business with third parties. According to the ruling in the Freemans case, Angelina had acted as an agent of Brad, while entering into a contract with Aniston Ltd. This contract with Aniston Ltd is valid, in accordance with the principle of ostensible authority, which permits an agent to form a valid contract on behalf of her principal. Consequently, Brad is responsible for the acts of Angelina, while doing the business, including the contract with Aniston Ltd. In Hitchman, His Lordship held that a director of a company did not owe a fiduciary duty to an individual creditor5. The directors' duties are stipulated in various sections of the Companies Act. Instances where a company's director will be held liable are given in the sequel. If a director wilfully acts over and above the powers bestowed upon him by the articles of association of the company, then he will be held liable for such transgressions. If the company becomes insolvent as a result of the fraudulent activities of a director, then he will be held to be responsible. Section 174(1) established the duty to exercise reasonable care, skill and diligence. This duty enshrines the rule of duty of care and skill of common law. Section 174(2) describes the amount of care, skill and diligence to be exercised by a director. Furthermore, the directors of a limited company are not personally liable for the acts of the company. However, if a director abuses his position in the company, then he will be held personally liable and prosecuted accordingly6. Brad, as a director with a fiduciary duty towards the company, has to ensure the well being of the company. He sold ' 100,000 worth goods to Sess for '60,000. As a director of the company, Brad cannot act in a manner that causes a loss to the company. For example, Section 172 of the Companies Act 2006 imposes a duty to promote the success of the company on its directors. This duty had been developed from the fiduciary duties owed by directors, such as duty of good faith and the duty to act in the best interests of the company7. Selling goods at a lower price results in financial loss to the company, and thereby implies a breach of statutory duties. Brad breached the fiduciary duty conferred up on him by section 172 of the Companies Act 2006. The director has to consider the long term consequences of the decisions taken in the interest of the company. He has to consider the interests of the employees of the company and other factors such as the relationships with the clients and suppliers of the company. In addition to these factors, the director must foresee the impact of his decision on society and the environment. Moreover, the director should not harm the reputation and good will of the company8. Subsequently, Brad entered into a contract with Clooney Ltd to supply his future company with materials for the succeeding 5 years. Thereupon, he registered a limited company, namely Beautiful Boy Ltd or BB Ltd, with one director and shareholder, and he was this sole shareholder. The share capital consisted of ordinary and class B shares. The latter empowered their holder to have a 51% share of the votes in any resolution passed to dismiss a director. Liability in respect of pre incorporation contracts was clarified in Rover International Ltd v Canon Film Sales Ltd. In this case it was opined that a contract cannot be made on behalf of a non - existent company9. Nevertheless, the promoter will be personally liable for pre incorporation contracts entered into by him. Unless there is specific exclusion of liability, a promoter will be held liable, even if he has formed the contract on behalf of the company10. This situation was confirmed in Phonogram Ltd. v Lane, wherein the promoter Lane had entered into a contract with the Phonogram Ltd, on behalf of a company. Lane was the promoter of this company, which was never incorporated. The court held Lane liable as the promoter of that company, in the absence of an express and unambiguous condition that disclaimed liability in the contract11. Brad's contract with Clooney Ltd is a pre incorporation contract. Consequently, Brad is personally liable as a promoter of the company. The BB Ltd adopted Table A as its Articles of Association, with just a few amendments. Its memorandum declared that the objective of the company was to sell cosmetics and related products. Tom joined Brad on the board as a director, and the articles were so amended that every board of directors' decision had to be approved of by both the directors. The poor performance of the company spurs Brad to venture into other business avenues. However, Brad agrees to finance a film, without informing Tom and Katy. The alarming financial status of the company actuates Tom to call for a shareholders meeting, but Brad refuses to participate. Consequently, Tom and Katy write formal letters to Brad recommending voluntary winding - up proceedings. Brad is unwilling to adopt this course of action. As such, the company's business is to sell cosmetics and related products. Financing a film is not incidental to the original business of selling cosmetics. In A-G v Great Eastern Railway, the court ruled that anything resulting from or incidental to a company's explicit aims was intra vires12. A transaction is held to be ultra vires, if the company's director or agent lacks the authority to enter into that particular transaction, either specifically or by implication. Liability is attached for ultra vires transactions. As a director Brad is duty bound to act within the powers conferred upon him by the articles of association and to exercise such powers for the proper purposes of the company. Moreover, he had agreed to finance the film, without informing the other shareholders of the company. Since he had breached the duties conferred upon him by the Companies Act, the transactions are deemed to be void. In addition, the other shareholders of the company did not ratify same. Hence, this transaction is void. Brad's approach to business had been influenced by the advice provided by his elder brother Sess. At the latter's behest, Brad grants Sess a floating charge over all the assets of BB, in exchange for a '50,000 loan. Brad informed Sess about his company's loan with the Recession Bank. The loan contract had specified that crystallisation of the charge would transpire if the BB Ltd failed to make a monthly profit of '5000. Brad consented to sell Sess '100,000 worth of cosmetics for '60,000 as a mark of appreciation. On coming to know about this Tom and Katy decide to dismiss Brad as a director, to which Brad responds that it is impossible. Section 173 of the 2006 Company Act enjoins several duties upon a company's director, and one of them is to exercise independent judgement13. As Brad followed the advise of Sess, while taking an important decision making a floating charge on the assets of the company, it cannot be deemed as an independent judgement that benefits the company. Accordingly, Brad's dependence on Sess's advice will not rescind his responsibility. The director of a company can be removed by the shareholders at any point of time, prior to the expiry of their term14. This is irrespective of any stipulation in the articles of association or service contract that seeks to preclude such removal15. The poor economic performance of the company prompts the directors to obtain a '90,000 loan from Recession Bank plc. In the guise of security, this bank creates a charge on the company's premises, although it permits it to rent out the same. In addition, Eric's Engineering Ltd agrees to sell a machine to this company, payment for which is to be made at a later date. The sale contract contains a reservation of title clause, which specifies that Eric Engineering is to retain legal and equitable ownership of the machine, till such time as it has not been paid for in full. Similarly, some other companies also agree to provide materials on credit to BB Ltd. In the Romalpa case16, the court ruled that ownership would remain with the supplier, if the purchaser is deemed to be insolvent. Therefore Eric Engineering can enforce its rights against BB Ltd, in respect of the machinery supplied by it. It is only when the charge crystallizes, due to non - performance of some condition stipulated in the charge instrument, that the floating charge holder obtains possession right over assets17. A number of additional and specific provisions, in the context of floating charges were enforced by section 176A of the 1986 Insolvency Act. For instance, a floating charge on a company's property or undertaking will be invalid if created at a relevant time. The exception provided was that invalidity would not apply to the extent that the value was bestowed upon the company, either after or at the time of the creation of the charge18. The courts may order compulsory winding up of a company, on the basis of a petition by the creditors, directors, DTI, receiver or Secretary of State.. During the liquidation process, the company's assets will be distributed among the creditors, in a priority that will determined by the insolvency law19. This order comprises of secured creditors like banks, preferential creditors such as tax authorities, floating charge holders, general creditors and share holders. Property with Retention of Title will not be available to creditors during the process of liquidation, because title to the goods rests with some third party20. Therefore, the Recession Bank plc, will have priority over the other creditors, while distributing the assets. Lastly, general creditors and the shareholders will be accommodated, subsequent to payments being made to floating charge holders like Sess. The Company Act 2006 introduces a statutory procedure that permits shareholders to ratify a breach of director's duty21. Under this Act , it is sufficient if the directors of a company merely ascertain whether what they intend to do is prohibited by the articles of association of the company22. A charge held by a bank gives it a prior claim over unsecured creditors, with regard to the payment of its debts out of those assets. Therefore, the Recession Bank plc will have priority over all the other unsecured creditors to the extent of the amount owed to it23. Bibliography Aluminium Industrie Vassen BV v Romalpa (1976) All ER 552 Avoidance of floating charges. Retrieved 5 April 2009 from http://www.insolvency.gov.uk/freedomofinformation/technical/TechnicalManual/Ch25-36/Chapter31/part4/part7/part_7.htm Companies Act 2006 Companies Act 2006. Retrieved 5 April 2009 from http://www.freshfields.com/publications/pdfs/2006/CompaniesAct2006.pdf Company Liquidation and Winding Up. Retrieved 5 April 2009 from http://www.businesslifeline.com/liquidation.asp Dennis Campbell, International Agency and Distribution Law, 2007. Page II/499. Published by Lulu.com. ISBN 1430314699, 9781430314691 FAQS Companies Act 1985. Retrieved 5 April 2009 from http://www.berr.gov.uk/whatwedo/businesslaw/co-act-2006/1985-act/page17152.html#BM13574 Finch, Vanessa. Corporate insolvency law. 2002. Page 82. Cambridge University Press Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd 91964) 2 QB 480 Hitchman v Crouch Butler Savage Associates (1983) 127 SJ Insolvency Act 1986 Impey, David and Montague, Nicholas. Running a Limited Company. 2008. Page 3. Jordans Loose, Peter, Griffiths, Michael and Impey, David. The Company Director: Powers, Duties and Liabilities. 2008. Page 142. Jordans Morse, Geoffrey, Britain, Great and Palmer, Francis Beaufort. Palmer's company law. 2007. Page 169. Sweet & Maxwell Phonogram Ltd. v Lane (1982) QB 938 Rover International Ltd. v Canon Film Sales Ltd (1987) 1 WLR 1599 The Sole Trader. Retrieved 5 April 2009 from http://www.businessbureau-uk.co.uk/new_business/sole_trader.htm Read More