Carol and Dianne Company Case - Coursework Example

UK Company Law Module Module Number Academic Year Seminar Directors Duties, Liabilities and Shares number Facts of the Case C&D is a company whose activities are regulated by the Companies Act 2006. In order to determine the company’s rights and liabilities, it is important to distinguish the primary legal issues arising in this scenario. These are whether: a) Ian violated Article 3A of the company memorandum by using the company’s assets to ferry residents and children to weekend games; if yes, whether that provides adequate grounds for his dismissal; b) Ian violated Article 17A by hiring Karl as driver and as the person in charge of vehicle servicing and maintenance; if yes, whether he can be held personally responsible for Karl’s mistakes; c) Ian, Carol and Diane violated Article 21A which regulates how the dividends should be shared among the three owners; e) Ian can claim his due dividends; f) Jasper can hold C&D as a company and or Ian liable for his injury; g) Ian can be held personally liable for running down the company; h) Ian’s acquisition of two vehicles from his partner amounts to self-dealing and or conflict of interest. The law C& D v Ian Article 3A of the C&D memorandum stipulates the functions of the company, which is transportation of children. As such, Ian’s use of the company’s assets to ferry residents of another company constitutes a breach of the basic law which he swore to protect. Ian could cite the Companies Act 2006 as his defence by arguing that under Sections 171 he acted within his powers; to advance the firm’s success as required under Section 172 and that he merely exercised independent decision as stated under Section 173. Regardless, Article 3A would still take precedence in a search for a solution1. The doctrine was reaffirmed in the case of Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 HL by Lord Hoffmann who ruled that courts of law should interpret the company memorandum in the same way enforceable contracts or statutory law are done. In some situations, the Articles may be less exhaustive and thus secondary laws should apply in order to prevent an absurdity. In this case, the fact that the Company’s Articles do not specify the kind of actions which should be taken against Ian for breaching Article 3A calls for his removal from office2. However, company directors enjoy near absolute immunity, and thus terminating Ian’s employment would be difficult merely on the grounds of violating the company’s Articles. This is especially true considering that he is also an executive member of the board and an important shareholder in the company. Conversely, Ian’s use of the same assets for transportation of children to weekend games seems to be within the letter and spirit of the company’s basic law. The only problem is Ian’s unfair enrichment from the exercise to the detriment of other shareholders3. As such, his liability could be established under the doctrine of misuse of company resources as it was evidenced in the case of Regal (Hastings) Ltd v Gulliver [1942] All ER 378 HL. In this case, the Court upheld claims against substantially unmeritorious conduct of directors in its ruling that what the board did was so remote from the corporate affairs of the firm in question that it was clearly seen as a breach of their management roles4. The court also found that the directors did not utilize their chances and special skills as required of them; and as a result the managerial actions benefitted them profit-wise. Ian’s conduct arguably meets these tests. Karl’s hiring and supervision Ian is arguably in breach of Article 17A in his hiring of Karl as a driver with additional responsibilities to supervise vehicle servicing and maintenance. This is because Ian’s position as the executive director arguably warrants his engagement of Karl; however, this action does not waive his implicit obligations to furnish the company’s board constituting Carol and Diane with regular reports regarding the company’s state of affairs. A reasonable director in Ian’s position would have involved his or her co-directors in hiring Karl, considering that he appears to be an executive manager5. As such, Ian is in violation of his fiduciary responsibility to the board as stipulated under section 174 of the Companies Act 2006 and should be held liable for being unfit to hold the office6. In addition, Ian’s duties extend to the need to adequately supervise Karl in his new duties as driver and overseer of the vehicles’ servicing and maintenance. Unfortunately, Ian failed in this solemn fiduciary obligation, causing damage to the company car and injury to a passenger. Ian’s failure to exercise his supervisory roles as director featured in a similar case of Re Barings plc. (No 5) [2000] 1 BCLC 523 Ch., where the court extended the liability of company directors to providing sufficient supervision of employees7. The court ruled that failure to establish proper risk management mechanisms such as proper car servicing and maintenance on the part of Ian obviously prompts drawing of adverse inferences against the directors’ liability. As such, Ian could be held liable for Karl’s mistakes under the doctrine of respondeat superior. Conversely, courts have been less enthusiastic to dictate to directors how to manage their respective companies, in what has seen many directors performing poorly, but still being considered as sufficiently competent in their work. Although the ruling in Re City Equitable Fire Insurance Co [1925] Ch 407 CH, basically concerned the functions of a nonexecutive director, it still applies in Ian’s case; the court implicitly held that a director may violate the provisions of the memorandum or Acts of parliament, but still be seen as having acted reasonably to advance the success of the corporation. As such, Ian’s lacklustre supervision of Karl or the fleet as required by the Articles may be considered by court as too insufficient to warrant his liability. Sharing of dividends and shares In determining the proper way of sharing dividends and shares, the primary body of law is Article 21 of the Memorandum. The provision states that: A preference shares shall have a nominal value of £1, shall confer on a holder the right to a fixed cumulative preferential dividend at the rate of 5% per annum which shall be deemed to be due annually on 1 February, and shall rank on a winding up both as regards dividends and capital in priority to all other shares. The preference shares shall not entitle the holders to vote on any shareholder resolution unless the dividends are in arrears in which event they shall carry one vote per share on resolutions relating to dividends. In light this provision, Carol and Diane acted arguably within the law by distributing between them a share of the company’s profits to which they were entitled by virtue of their shareholding. Their action is supported by Sections 829 through 853 of the Companies Act 2006. However, the two directors’ actions were executed without due diligence and in utter breach of their fiduciary responsibility and the general welfare of the company because they allocated to themselves twice the due amount of the company profits8. As for Ian, he has the rights to an equitable share of the £10,000 in dividends based on his percentage of investment. Corporate Liability Jasper could have the right to bring civil claims against C&D and seek compensation for the injury caused to his person under the doctrine of vicarious liability. Similarly, he can bring criminal charges against Ian under the principle of strict liability. In both cases, Jasper could cite negligence on the part of C&D and the director in an attempt to obtain the claims. However, in respect of the ruling in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 HL, Ian could survive liability claims under the doctrine of corporate veil. In Tesco, the court ruled that anybody whose mind and or actions seem to advance the interests of a company is himself a company agent. The judges added that if the company agent is guilty then the company is the one that is guilty. As such, Ian’s actions which led to Jasper’s injury should be considered the company’s injury. Conversely, subsequent examples of case law have deviated from the strict test developed in Tesco and instead adopted a wider approach to the law in order to enforce reasonable liability upon companies and or the directors where there is need9. English law has evolved to recognize the fact that despite the corporate bodies being considered as separate entities from the directors, the latter are inherently the ones that drag the former into tort. In this case, Ian’s actions and the passiveness of Carol and Diane, his co-directors, could technically make the whole board liable for injury upon Jasper. However, Carol and Diane may argue that: they were non-executive directors and thus they did not have adequate proximity to the day-today running of the company; and ferrying any passengers other than the children on the company’s trucks was itself illegal according to the company policy. As such, the company forfeited the duty of care to Jasper. Such line of argument could leave Ian liable in his individual capacity for violating Article 3A. However, as to whether Carol and Diane knew about Ian’s abuse of the company vehicles as a way to limit the liability of the latter party, the burden of proof would be too heavy to shoulder. This is especially the case in Meridian Global Funds Management Asia Limited v. Securities Commission [1995] 2 AC 500 HL, where the court held that two staffs whose actions were within the parameters of their authority had their actions properly known to the company. In light of this ruling, the other non-executive directors of C&D can be collectively held liable for Jasper’s injury on the grounds of the primacy of consumer protection from personal injury by companies. Ian’s breach of fiduciary duty Ian is likely to be found liable for violation of the duty of care, conflict of interest, non-self-dealing policy and running the company recklessly down the path to liquidation. Contrary to the provision of sections 174 of the Companies Act 2006, Ian violated the duty of care by exhibiting recklessness in the handling of the company’s assets in ways other than those spelt out in the Memorandum10. His embezzling of the company’s finances shows incompetence that a reasonable director would display. However, in proving Ian’s violation of the duty, a derivative action by Carol and Diane would easily prove that Ian owed them and the company in general a duty of care; that Ian breached this duty by acting unprofessionally, such as allocating himself the profits gained from ferrying children to weekend games; and that the company suffered losses resulting from Ian’s conduct11. Proving lost profits is also relatively easy considering that the company’s profits fell under his leadership and reckless dealings. As to whether, Ian’s misconduct as director was honest as required under section 1157 of the Act, the director’s negligent acts such as his failure to supervise the servicing and maintenance of the cars or inform his co-directors about important company operations would sufficiently betray his case12. Apart from Ian’s violation of the duty of care, he is also vulnerable to a violation of the conflict of interest. Ian’s purchase of two vehicles worth £40,000 from Garaging & Co, a business owned by his civil partner, Liam leaves him defenceless. In response, however, he may argue that the contract between C&D and Garaging & Co was basically an agreement between two separate legal entities, hence his role as an individual or familial ties with the seller of the vehicles do not suffice. In the real sense, the move by Ian would have been deemed as legitimate if the executive director had complied with Section 175 of the Companies Act 2006, which obligates directors to tamper the issue of conflict of interest by informing the board about the interests in third parties13. If he had acted that way, there are high chances that Carol and Diane would have blocked it by a vote. But even if Ian won the vote, the precedent set in the Canadian case of Cook v Deeks [1916] 1 AC 554 CH would still apply. In this case, three members of a company board teamed up to take a contract by a vote and temporarily succeeded to block a director from benefitting from the deal. The court vitiated the railway construction contract on the basis of conflict of interest on the part of the contract takers directors14. A company director has the obligation to reveal any form of self-dealing to the shareholders, who in this case double as co-directors of C&D. The duty is stated under section 177 of the Companies Act 2006 and considers disclosure of self-dealing a default condition that enables disinterested directors and shareholders to approve or decline the deal15. In this case however, self-dealing is relatively implicit in nature considering that Ian is not a director of Garaging & Co, but his wife is. As such, awarding liability would be subject to a wider argument to support the claims aimed at stimulating a similarly wider court interpretation of the issue16. Lastly, Ian may under section 172 of the Companies Act 2006 be liable for failing to advance the success of C&D. Any acts of Ian which are seen as unreasonable such as using the company’s assets to do unrelated business, failing to sufficiently maintain and service the vehicles, diverting the company revenues to his personal account, failing to inform his co-directors about how the company was fairing on or failure to carry out proper oversight roles as would be required of a reasonable company director arguably shows his incompetence and the need to eliminate him from the board17. Regardless, convincing the court on the balance of probabilities that such director is really incompetent and does not advance the company’s interests would be very difficult task, which in most cases is never won18. This is because his ferrying of unauthorized passengers, for instance, contributed to the company’s over profits. Removal of directors from office Any director whose conduct falls below the acceptable standards can be removed from office by a simple majority vote even if their term of service has not elapsed. In this case, Ian can be ejected by the two votes of Carol and Diane as required under section 168 (1) of the Companies Act 2006. Under Clause 2, a 28-day notice to vacate the office should be served on him; and under Clause 5 he should be allowed to have all of his dues including the dividends19. Conclusion Generally, company directors are relatively autonomous in their work and courts are unlikely to meddle in their operations. This is so despite clear cases of perceived incompetence on their part or violation of the company memorandum and or other laws regulating how they should run their respective companies. A director’s major line of defence is the existence of a simple element of good faith in their actions, which may be determined even where the director is engaging in a reckless business culture that is contrary to the company’s memorandum and secondary regulations. In such cases, making profits or ensuring the survival of the company would be construed as legitimate aims. Material breaches of directors’ fiduciary duty however can attract penalties and even lead to their removal from the board and office for those holding executive positions. 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Securities Commission [1995] 2 AC 500 HL Re Barings plc (No 5) [2000] 1 BCLC HL Re City Equitable Fire Insurance Co [1925] Ch 407 HL Regal (Hastings) Ltd v Gulliver [1942] All ER 378 HL Tesco Supermarkets Ltd v Nattrass [1972] AC 153 HL Read More