Universal Project Management Services Company Case - Essay Example

Universal Project Management Services Ltd v Fort Gilkicker Ltd 3 WLR 164 Introduction A successful business requires joint ventures and use of subsidiaries. The reasons behind making use of partnerships and subsidiaries include things like reducing on taxes, scaling the business, qualifying to do business in certain states, and many other purposes. Many legal issues occur when doing business in a partnership or working with subsidiaries. In some instances the parent company may be held accountable for the activities of their subsidiaries regardless of the fact that they are a Limited Liability Company (LLC). An additional challenge that comes up is how a company can safeguard itself from the minority stockholders attacks with the use of subsidiaries. As an example a company might protect against the interference of the manufacturing division by some stockholders but still sustain the direct control of the company administration. One strategy of dealing with such a problem is to use a subsidiary. The use of a subsidiary is designed to avoid the influence of the parent company’s stockholders over the manufacturing division.1 This is mainly because; the stockholders from the parent company usually do not become stockholders of the subsidiary. In this kind of a scenario the subsidiary is only accountable to the stockholders of the parent company on a derivative base. The subsidiary is normally answerable to the parent company, and for that reason it might appear that the subsidiary cannot be held liable to an activity derived from the stockholders of the parent company. In reference to the basis of this discussion, considering that the stockholders of the parent company hold no direct interests in the subsidiary, they do not have legal rights to the actions of the subsidiary. However, sound judgment indicates that the actions of the subsidiary may possibly affect the interests of the parent company’s stockholders. In some instances, some subsidiaries may be possessed and operated by a number of other subsidiaries, as a result developing a “multiple derivative” interests from the stockholders from the parent company. The development of the “multiple derivatives” has made it challenging to deal with the complaints of the minor stockholders of the parent company in case of mismanagement in the subsidiaries. The most successful remedy for the stockholder of the parent company who can feel abused by the mismanagement of the subsidiary is the “double or multiple derivative” suit. The “multiple derivative” law is quite different from the Foss v Harbottle ruling since it makes it possible for a member of a company to act against another company or individual in place of their company. The “multiple derivative” law has existed in the English law way before the enactment of the Companies Act 2006. Even so, most people have questioned whether the “multiple derivative” existed before the Companies Act 2006 or the Act removed this common law. The decision by Briggs J in Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164 case pointed out the law of multiple derivatives remains to be effective despite the getting into force of the company act 2006. This paper employs the IRAC method to analyse the case of Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 1642. The paper responds to the issues surrounding the case, the applicable rules, analysis of the application of the rules to the case, and provides a conclusion to the case. The paper seeks investigate what the case reveals in regards to the ongoing significance from the common law derivative claim, and what will be its most likely impact on the practical value of derivative claims in the UK. Issues In the Universal Project Management Services Ltd v Fort Gilkicker case, a particular person “P” is said to have entered into an oral contract with the UPMS to develop a property in a partnership agreement. Under the terms of the contract both the individual and the UPMS, were supposed to have equal shares in the new Limited Liability Partnership (LLP). UPMS appointed individual "F" to partner individual "P" as the directors of the newly formed Limited Liability Partnership. One of the main associates to the LLP was the Fort Gilkicker (FGL), a fort in Stoke Bay. The directors to the FGL subsidiary were again P and F. The main issue of the case between UPMS Ltd v Fort Gilkicker was born when at one point, FGL agreed to purchase the Fort Gilkicker, but due to differences between director P and F, the project failed. UPMS Ltd later noticed that it was actually "P" had influenced the failure of the project. UPMS Ltd was aggrieved and took the issue to the court. The main issue was how FGL could make a claim against FGPL and was not a stockholder in the company. Another issue was that according to the ruling of the Foss v Harbottle3 it is only the company that has been wronged that can lay a claim against the wrongdoer. In the UPMS v Fort Gilkicker case, the company that was wronged was UPMS, where the wrong doer was a major stockholder of its subsidiary. How could UPMS make a claim against it a major director of its subsidiary without the director influencing the case? The enactment of the Company 2006 Act also seemed to have removed the law of multiple derivatives. Under which law would the UPMS make it claim against P and FGPL? Rule In a previous case on Foss v Harbottle4 the court had ruled that a claim against a company can only be made by the company that has been wronged directly. This ruling implies that a company cannot therefore make a derivative claim. However, the ruling allowed for single derivative if it was proven that there was a prima facie case that the claim is justified and it fell within the ruling of Foss v Harbottle.5 The Foss v. Harbottle ruling has been quoted in several cases in England. It is an old ruling in the English common law that has been practised from the nineteenth century to protect individual interests in a partnership. Initially the law was meant to protect partnerships from the interference of a chancellor in the case of internal disputes among members in a partnership. The only time a chancellor was allowed to intervene in the disputes among partners was during dissolution. However, with increase in disputes in a number of joint ventures, the law was amended to allow for intervention of the chancellor in the matters of regulation. In a case such as Carlen v. Drury6 the partnership prevented the chancellor from intervening. The partnership had agreed to resolve all the disputes internally through a committee of 12 individuals. Lord Eldon stated that unless the committee refused or failed to act, it is the only time the court may interfere. In the Foss v. Harbottle case, Wigram VC indicated that, the applicant should exhaust all the available options to address the dispute internally. Wigram VC noted that since the company was a plaintiff, minority would not be allowed to sue the company in their own name. In the Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164, Briggs J noted it was an exception to the Foss v. Harbottle case. In the Russell v Wakefield Waterworks Company (1875) LR 20 Eq 474, at 480, Sir George Jessel MR pointed out that the exceptions to the Foss v. Harbottle ruling depends on the necessity of the case.7 In addressing the need for derivative action, Lord Denning, in Wallersteiner v Moir (No 2) [1975] 1 QB 373 case, pointed out that the company should be given the right to make a claim to ensure justice to all. The law of multiple derivatives under the common law was reviewed in the Waddington Ltd v Chan Chun Hoo Thomas [2008] HKCU 1381 in Hong Kong Court of Appeal.8 This case indicated that the derivative claim was applicable under the common law. The derivative claim was deemed flexible to allow the member of the parent company to make a claim against the wrong doers of their parent company. The multiple derivative actions include the cases of double, multiple or ordinary derivative claims. The Company 200 6 Act reconstructed the multiple derivative claim to redefine the procedural aspects of the claim. According to the company 2006 Act, the derivative claim can only be made with respect to the section 260 of the Company 2006 Act, and according to the proceedings for the protection of individual against discrimination. Analysis The Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164 is a memorable case because it made it clear that the English common law on derivative action was still applicable in the court. Some people had argued that the Company 2006 Act did away with the derivative claim. However, this was disapproved when Briggs J upheld the submissions by UPMS against P and FGPL.. The ruling is considered as an exception to long applied Foss v Harbottle ruling. The UPMS v Fort Gilkicker Ltd ruling allowed an individual to bring an action against a company. The derivative action is a way in which the court is able to confer the right to bring an action to the stockholders of the parent company to allow them sues the wrongdoers to their company. With respect to the Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164, Briggs J allowed UPMS to claim against “P” and FGPL. The breach of contract between UPMS and P by “P”, who was a director of the FGL, raised several questions. One of the questions was how FGL could put forward a claim against P without P interfering with the claim negatively. According to the ruling in Foss v Harbottle, an individual could not claim against the wrongdoer on behalf of the company. The Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164 was an exceptional case that allowed the stockholder of the parent company to claim against P and FGPL for the injustices directed to the parent company.9 Briggs J argued that the derivative claim allowed the stockholders to raise their concerns against the wrongdoers. The derivative claim ensures that even those wrongs performed on stockholders indirectly through the use of multiple subsidiaries can be addressed. It is not surprising therefore that the court extended locus standi to the members of a company. The enactment of the Company 2006 Act was seen as the end of the multiple derivative claims. However, the Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164 indicates this is not the case. The Company 2006 Act provides a procedural way of dealing derivative claims. According to the company 2006 Act, all the derivative actions; single, double or multiple can be addressed using a single procedure to ensure justice to the stockholders of the company. Some have argued that the Company 2006 Act marked the end of the derivative action in the common law. The words “may only be brought” in the subsection 2 of the section 260 of the Company 2006 Act has been interpreted to mean that the derivative action was superseded. This argument was advanced by P in his defence. P argued two parallel rules could not exist on the issue of multiple derivatives. Instead, the Company 2006 Act was a statutory code for the parliament that outlined all the regulations on multiple derivatives. This argument assumes that the company 2006 act addressed all the issues regarding the company law. This is not the case since the English law is also based on precedents and not only on the parliament statutory bodies. According to the argument by UPMS, the company 2006 Act only applied to single derivative claims. According to the section 260, subsection1, derivative action is defined to mean the proceedings brought by a stockholder of a company who has an interest in the company that has done a wrong. Therefore it can be argued that when section 260, subsection 2 argues that the derivative action can only be made under that chapter, and then it only addresses a single derivative claim. Therefore a stockholder in a parent company is has no interests in the subsidiary of the parent company. The wording of the s260 could raise the issue on whether; the company law does address the multiple derivative actions. The statutory provisions in the company 2006 act do not indicate on the removal of the derivative action. If the parliament would have planned to remove the derivative claim from the act, then it should have clearly stated so. It well understood that the English common law cannot be removed through the use of a statute unless it is clearly stated in the statue. In the case of the company 2006 act, the common law of derivative action has not been removed. The common law and the company 2006 act seem to be unclear on their application in relation to each other. According to the UPMS, the company 2006 act section 260 does not remove the common law with the statue. On the other hand, it was necessary to allow the subsidiaries to have legal provisions to protect them against parent companies that wrong them. In the Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164, Briggs J went against the Foss v Harbottle ruling and accepted the submissions of the UPMS. Although the Company 2006 act seemed to have removed the single derivative claim, it had not addressed the multiple derivative actions. The case of Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164 could be considered as a multiple derivative and hence the decision by Briggs J to uphold UPMS submissions. Conclusion The Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164 went against the Foss v Harbottle10 ruling by allowing a company that has not been affected directly by the wrong of an individual to make a claim on behalf of the wronged company. The ruling of the Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164 is considered a landmark ruling because it made it clear that multiple derivative claim are permissible at common law despite the coming into force of the Company 2006 Act. The enactment of the Company 2006 act had initially made many people to think that multiple derivative claim had been superseded. However, following the submissions by the UPMS against P, Briggs J observed that it was important to consider the multiple derivatives in order to address injustices against stockholders of the parent company by the subsidiaries. The ruling indicated that the English common law was still crucial in resolving company legal issues. The decision by Briggs J sets a precedent for solving other disputes in company law. It is likely to be considered in many disputes involving stockholders in parent company and the management of the subsidiaries. The multiple derivative claims will ensure the rights of the stockholders are not abused due to their lack of direct control on the decisions of the subsidiaries. Without the application of the multiple derivative claim, the issue regarding the Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164 could not have been addressed. Failure to address the injustices could have set a negative precedent of impunity against minority stockholders in the company. The multiple derivative claims is one of the most effective remedies for injustices meted out by the subsidiaries against the stakeholders of the parent company. Multiple derivative claim should be considered when the parent company cannot sue the subsidiaries due to conflict of interests as observed in the case of Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164. The claims by the stockholders should be allowed when the parent company cannot make a claim against it stakeholder. Bibliography Cases Foss v Harbottle (1843) 2 Hare 461. Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR 164. Carlen v. Drury (1812) V & B 154. Russell v Wakefield Waterworks Company (1875) LR 20 Eq 474, at 480 Waddington Ltd v Chan Chun Hoo Thomas [2008] HKCU 1381 Statutes Companies Act 2006, s260 Secondary Sources Painter, William H. "Double Derivative Suits and Other remedies with Regard to Damaged Subsidiaries." Ind. LJ 36 (1960):143-162. Thompson, Robert. "Public and Private Faces of Derivative Lawsuits, The."Vand. L. Rev. 57 (2004): 1747. Kleinberger, Daniel S. "Direct Versus Derivative and the Law of Limited Liability Companies." Baylor L. Rev. 58 (2006): 63. Davies, Paul Lyndon. Introduction to company law. Oxford University Press, 2010. Reisberg, Arad. "Derivative claims under the Companies Act 2006: much ado about nothing?." (2009): De Dier, Stijn. "Friends with Benefits?! A Comparative View on Legal Standing to Challenge Board Decisions." European Company and Financial Law Review10, no. 3 (2013). Stanley, Clare. 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