Analysis of Company Law Case - Coursework Example

?Analyse whether Peter has breached any of his sta y duties under part 10 of the Companies Act 2006 and advise Meg and Stewie on the process of how they may enforce the company’s rights through a statutory derivative claim. Introduction There are seven duties expected of a director under the Companies Act 2006 1 which are codification of common law The instant case needs to be examined in the light of s 175 and 177 of the Companies Act 2006 dealing with directors’ duty to avoid conflict of interests and duty to declare an interest in transactions respectively. Here , Peter whilst continuing as a director of PTV Ltd which manufactures DVD player personally invests in a rival company DVD Plus Ltd engaged in recycling of old DVD players and earns a profits of ? 150,000 without notifying his fellow directors in PTV Ltd. Sale of DVD players can be impacted due to recycling old DVD players and hence investing in both the companies results in conflicts of interest. According to section 175, it is the duty of a director to avoid a situation in which his direct or indirect interest conflicts with the interest of the company in which he is already a director. It is not an infringement if the situation is not likely to give rise to conflict of interest or if the investment is already authorised by the board. In the new Act, shareholders’ approval of the conflict of interest is required either by resolution or by Articles. 2,3. In Boardman v Phipps4. the defendant had acquired special knowledge by virtue of being his solicitor and abused it for his personal benefit along with another. Held that as a fiduciary, he should have avoided conflict of interest. In Peso Silver Mines Ltd. v. Cropper,5 a leading Canadian case law involved conflict of interest arising out of fiduciary duty, the defendant took advantage of a rejected business opportunity by the plaintiff and utilised it for his personal benefit along with others. The decision suggests that the defendant has not acted against the interest of the company as long as he has not influenced the decision to reject.6 The case of Industrial Development Consultants v Cooley 7 involved pre-existing and continuing duty of avoiding conflict of interest and the defendant Cooley was held accountable as he resigned from the plaintiff company and secured the contract meant for plaintiff company in the name of his newly formed company.8 Another relevant case is Bhullar v Bhullar 9 wherein the principle of directors avoiding conflict of interest has been upheld. It was held that failure to pass information to the company about a business opportunity and utilising it for personal benefit amounted to breach of duty against conflict of interest. This put to rest the decision in London and Mashonaland Exploration Co v New Mashonaland Exploration Co10 that “directors did not have a duty not to place themselves in a position of conflict”11. In Plus Group Ltd v Pyke12, it was held that it was not a breach of fiduciary duty to work for a competing company as he had been effectively excluded from the company of which he continued to be a director. 13 A codification of common law, section 175 can apply to multiple directorships apart from exploitation of property, information or business opportunity a director is able to access by virtue of his position. The director’s duty to inform conflict of interest cases even if the company or the directors are not interested in them. This statutory duty is not breached if already authorized by the company in the prescribed manner. Originally shareholder could only authorize such a conflict of interest. Now under the statute, in the case of a private limited company, it can be authorized by other directors who have no conflict of interest in the particular matter, provided the company’s articles also permit. In the case of a public limited company the non-conflicted directors can authorise provided the articles specifically permit it. If all the directors are conflicted, then shareholders’ approval will be required. This duty came into force with effect from 1 October 2008. Further, the authorization is valid only if the quorum at the meeting has been validly met without counting the interested director or directors or the authorization has been obtained without the interested director’s voting or would have been authorised if their votes had not been counted.14 The authorization by the board is valid only of the company has been incorporated on or after 1 October2008. In cases of earlier incorporated companies shareholders’ authorization is required before directors can act upon it.15. The above observations would go to show that the in the instant case, Peter has breached the duty against conflict of interest having acquired shares of a potential and existing competitor and earned substantial profit for himself. The other two directors Meg and Stewie being minority share holders can bring a derivative claim against Peter in the name of the company at their own legal costs without any personal benefit flowing to them as a result. In the second episode, Peter uses the capital of Meg and Stewie for manufacture of VHS tapes as against promise to manufacture VHS recorders and incurs heavy loss of ? 3 million. Peter’s action in spite of warning by the other two directors Meg and Stewie is in breach of fiduciary duties expected of him. The sections that would logically attract in this respect are s.172 and 174 namely “duty to promote the success of the company” and “duty to exercise reasonable care, skill and diligence “respectively. Peter has to demonstrate that his decision to manufacture VHS tapes was to promote the success of the company in the long term and that he exercised reasonable care, skill and diligence in doing so. If he fails on both the counts, he has breached duties expected of him under section 172 & 174. Even if he is able to justify his actions, the fact remains that his action is in breach of his promise to manufacture VHS recorders for which specific purpose, the other two directors Meg and Stewie have invested their monies in PTV Ltd. In Regentcrest plc v Cohen 16 , the court favoured the defendant director by applying the subjective test and concluded that he acted in good faith in order to promote the success of the company.17 In the instant case, Peter is stated to have believed that VHS tapes are becoming resurgent in the market and has gone ahead with the production. He had no hidden agenda of making secret profits and he would not have knowingly ventured into VHS tapes and willingly incurred a loss of ? 3 million. Be that as it may, it is doubtful he can overcome s 174 which requires a director to exercise reasonable, care, and diligence. The facts of the case reveal he has disregarded the forewarnings of his fellow directors. One can easily conclude he has acted recklessly unless he can show that his decision was in keeping with the long term market situation in mind. People might have hesitated to buy a product which is not environment friendly but in the long run it would have survived the market through long term gains weighing against its environmental implications. Again courts would not question the business decisions of the directors. As Peter has blatantly ignored the warnings of his fellow directors, he cannot escape the test of s174. A parallel can be drawn in the case D’ Jan of London Ltd, Dorchester Finance Co Ltd v Stebbing 18 in which the court held the appellant negligent by incorrect filling and signing of the insurance form resulting repudiation of claim of ? 174,0000 by the insurance company. 19 Derivative Claims A derivative claim can be initiated under Companies Act 2006 both by a member of a company and a non-member to whom shares have been transferred or transmitted by operation of law. The claim can be made only against a cause of action arising out of an actual or proposed act or omission involving negligence, default, breach of duty, or breach of trust by a director, former director, shadow director of the company. The cause of action may be against the director or another person or both.20 Prior to Companies Act 2006, shareholders could initiate a derivative action by virtue of exception rule under Foss v Harbottle 21 arising out “fraud on the minority”.22. The new Act has laid down a new derivative claims procedure in replacement of the exceptions to the rule in Foss v Harbottle. However the exceptions would continue to apply for derivative claims for acts or omissions prior to October 1, 2006. But it is not an hassle free procedure in that a shareholder cannot bring action against negligence of the director unless it could be shown that the director benefited from negligence as held in Daniels v Daniels 23 Moreover, majority of the independent shareholders should support the action as held in Smith v Croft 24 Section 260 of the 2006 Act enables a shareholder to prefer a derivative claim on behalf of the company to invoke the right of bringing actions against the erring director and seek relief thereof. Although the shareholder is the person making the claim, relief will only be in favour of the company. A derivative claim may arise out a cause of action from any act or omission actual or proposed due to “negligence, default, breach of duty or breach of trust by a director of the company. Hence the common requirement of “self rewarding” negligence is no longer required. Neither the requirement the wrong doer was in control is to be established. The cause of action may be directed against the director or any other person or both as mentioned in s.260 (3). However, in order to avoid vexatious claims, there are procedural hurdles in place to be overcome before a claim is brought. First, permission of the court is required. The Act provides that the court must refuse if it is convinced that a person acting by virtue of his duty to promote success if the company (s 172) would not seek a derivative claim, the act or omission has been authorised when such act or omission has not yet occurred, and where the act or omission has already taken place, authorisation has been made before its occurrence or has been ratified. Besides, s 263(3) enumerates certain factors that court must consider while considering to permit or not a derivative claim which includes checking whether the claimant is acting in good faith and there will be reification by the company. These hurdles and the shareholder having to incur substantial cost of making a claim without any direct benefit are rather disincentives for a potential claimant. 25 Other Remedies Ratification Under s 239, ratification is available for acts of negligence and breach of duty among others. It must be through a resolution of the members of the company26 vide Kaye v Croydon Tramways Co 27 Petition under s 294 can be preferred for an appropriate order by the court if the company is being run in a manner prejudicial to the survival of the company. In O'Neill and Another v Phillips and Others,28 the case of unfairly prejudicial manner of conduct has been decided. The court has held that directors have not acted in an unfairly prejudicial manner in not transferring the shares against the legitimate expectations. Conclusion From the foregoing analysis, the two directors as minority shareholders can bring derivative claims against the Peter who is the majority shareholder for (1) Restitution of secret profit he made by becoming a director of a rival company. (2) removal of Peter as a director for having acted negligently without exercising due care, skill and diligence. (3) As there is no question ratification for the breaches of duty under section 172, 174, and 175, ratification is not warranted. References Cases Canada Peso Silver Mines Ltd. v. Cropper, [1966] S.C.R. 673 U.K. Boardman v Phipps [1967] 2 AC 46 Bhullar v Bhullar [2003] EWCA Civ 424 Daniels v Daniels [1978] Ch. 406 Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 in ibid n 8 Mark Stamp Industrial Development Consultants v Cooley [1972] 1 WLR 443 Group Ltd v Pyke [2002] EWCA Civ 370, [2002] 2 BCLC 201 London and Mashonaland Exploration Co v New Mashonaland Exploration Co [1891] WN 165 Kaye v Croydon Tramways Co [1898] 1 Ch 358; O’Neill v Phillips (1999) 1 WLR 1092 Re D'jan Of London Ltd. [1994] 1 BCLC 561 Regentcrest plc v Cohen [2001] 2 BCLC 80, 105 Smith v Croft (No2) [1998] Ch.114 Statutes Companies Act 2006, Chapter 46 < http://www.legislation.gov.uk/ukpga/2006/46> accessed 25 March 2013 Books Bourne Nicholas, Bourne on Company Law 5/e (Routledge, 2010) 177 Fischer Jonathan, Bewsey Jane, Walters Malcolm, Ovey Elizabeth, The Law of Investor Protection, (2nd ed, Sweet & Maxwell, 2003) 512 Joffe Victor QC, Victor H. Joffe, David Drake, Richardson Giles, Lightman Daniel, Collingwood, Tim Minority Shareholders: Law, Practice and Procedure (Oxford University Press, 2011) 27 Judge Stephen, Q & A: Company Law 2008 and 2009 (Oxford University Press, 2008) 116 Mantysaari, Petri Comparative Corporate Governance: Shareholders as a Rule-maker (Springer 2005) 18 McKenna Cameron, Directors’ duties under the Companies Act 2006. (September, 2007)5 Ruff Ann R, Principles of Law for Managers (Routledge, 1995) 44 Sealy L., Worthington Sarah, Cases and Materials in Company Law (Oxford University Press, 2007) 294 Slaughter and May, Companies Act 2006, Directors’ Duties, Derivative Actions and Other Miscellaneous Provisions (2007) 5 Stamp Mark, Simons Daniel, Practical Company Law and Corporate Transactions (Sweet & Maxwell, 2010) 263-264 Websites Mark Williams, Directors’ Duties Handbook (Gaby Hardwicke 2009). < www.gabyhardwicke.co.uk/images/.../Directors'_Duties_Handbook. > accessed 25 March 2013. Scott A Turner, Shareholders and Corporations: Separate legal personality and its consequences < www.bfrs.ca/PDF/ShareholdersCorporations.pdf> accessed 25 March 2013 Read More