British company law - Free Essay Example

Question One It has become clear that the issue at hand relates to shareholders’ rights. It has been established in evidence that the Table A Articles of Association provide for two classes of shares: ordinary and preference. Ordinary shares are exactly what their name suggests, they carry with them all the rights and responsibilities of a regular shareholder of the company. The issue reaches frustration point when one considers the rights of those who hold preference shares, however. The Articles of Association provide that the preference shareholders have no participatory rights, nor do they have any rights to vote in general meetings. In addition to this, it is alleged that the directors of the company, who hold 80% of the ordinary shares of the company between themselves, are attempting to use their positions in a selfish manner, seeking to gain financially from their positions. This brief sets out to inquire into these issues, and critically analyse them in the context of British company law. While it has been established that the directors of Sunkit Ltd own 80% of the ordinary shares, there is no mandate for them to hold shares in the company in order to act as a director. The 1985 version of the Table A Articles does not provide for this requirement. For the purposes of the first analysis, it is important to consider the directors within the co ntext of being shareholders of the company, and not in terms of their official appointments. It is alleged by the preference shareholders that a scheme is proposed that would serve to reduce the preferential dividend paid to preference shareholders from 7% to 2%, with the rationale being based on commercial losses. Given that the Articles of Association provide for the dividend to be 7%, any alteration to this amount would require an alteration to the Articles. This can only be done by a special resolution at a general meeting.[1] In order for a special resolution to be passed at a general meeting of shareholders, 75% of the total votes cast must be in favour of the resolution.[2] There is also a provision that would allow the directors of the company to propose a special general meeting in writing, rather than having a physical meeting.[3] Considering this in the context of the facts at hand, the directors of Sunkit Ltd could quite legally pass a resolution amending the Articles of Association in this regard. The directors hold over 75% of the ordinary shares that are eligible to vote at general meetings (80% in fact), and could quite easily pass this resolution if they all voted in favour of the resolution, either personally or by proxy.[4] The passing of this resolution would be deemed to have been accepted by the members, and will take effect provided it is not in breach of legislation or any other law regarding corporate governance.[5] This would, however, need to be done at a general meeting using a special resolution, and not by an ordinary resolution. In regards to the alleged proposed cancellation of the preference shares, the board would not be permitted to do this where such an action would be deemed to be unfair.[6] The court would consider whether such an action can be deemed to be to be fair either between different classes of shareholders,[7] or between shareholders of the same class.[8] In this scenario, we would see that the preference shar eholders would not be paid any return for their investments, and hence one would conclude that this scheme hardly seems fair and equitable. Common law also suggests that, where a reduction of capital was to take place, the preference shares would be the last class of shares to be reduced.[9] This would effectively provide for an equitable scheme, showing that both ordinary and preference shareholders receive relatively equal treatment in regards to the reduction of capital within the company. Reduction of capital can only occur where power is granted by the Articles of Association (there is provision in article 34 of Table A), and this power can only be exercised by special resolution in an identical procedure to the case previously outlined. The reduction of capital would then need to be effected by the Court, or else it will not have a binding value.[10] Given that the rights of preference shareholders are not given legal certainty and are subject to common law interpretation, it may be recommended that the preference shareholders seek to have a provision inserted into the Articles of Association that requires any reduction of capital to be approved by them at a separate class meeting, as it would be deemed to be a variation of shareholder rights. This provision would be similar (if not identical) to the one discussed in Re Northern Engineering Industries plc [1994] 2 BCLC 709. There is a certain amount of protection for the preference shareholders at common law in regards to reduction of capital; however it would be in their best interests to seek rigid entrenchment in the articles of the company. In regards to the alleged proposal regarding the ability of directors to issue preference shares to themselves, this would quite clearly be in breach of common law provisions. These provisions have since been given effect in legislation. For example, if a director seeks to use his power to issue shares in an attempt to favour a particular class of shareholders at the expense of another group of shareholders without their consent, then such an allotment of shares would be deemed to be invalid by the Courts.[11] This principle is further enhanced through section 80 of the Companies Act 1985, which regulates the ability of the directors of the company to issue shares, outlining various requirements of disclosure and transparency. Such an action by the directors of Sunkit Ltd could not possibly succeed, as it is clearly outlawed at a legislative level. Question Two Part A The building in question is alleged to have been sold at a price that was significantly lower than the value determined by the independent valuation. At the time the property was sold, it could be argued that the directors of the company had knowledge that Company XYZ Ltd was struggling to pay its debts as and when they fell due, hence the need to turn assets into capital. It is assumed, for the purposes of this question, that the auditor that was appointed to act o n behalf of the company was appointed in coherence with relevant governing legislation.[12] This raises questions in regards to the directors and the performance of their duties. Given that the company was bordering on being insolvent, one would assume that a director would try and extract maximum value out of a transaction, rather than disposing of an asset for ‘quick cash’. There is evidence at common law that a director must act â€Å"in the interests of the company† when exercising their power to dispose of the company’s property.[13] Given the gross neglect of the value given to the directors by the auditor, it is clear that this did not happen; hence the directors (in this circumstance) may be liable for action in the Courts for breach of their duty as a fiduciary of the company. Part B This question revolves around the conversion of a substantial loan into a floating charge. The use of a floating charge meant that the company was still free to deal with the assets used to secure the charge during their normal course of business, without any consent of the chargee. The floating charge then ‘crystallises’ when, for example, the company ceases business.[14] This would turn a floating charge into a fixed charge, and allows the creditors to seek recourse from these assets in order to recover their debts. This effectively makes the company liable to pay the debt (provided it was the company that took the debt and not the director herself). Obviously if the company is found to be liable for the debt, then assets will be sold by the administrator as per standard winding-up procedures in order to pay the creditors. Part C This question differs in kind from that in Part A. We see, in fact, the opposite occurring. Rather, company property was sold at a grossly excessive price, when the property was valued by the auditor at being significantly less than then sale price. This question, then, revolves around the iss ue of fraudulent trading. It appears in the evidence that the purchaser of the property was misled into believing that the property was worth  £15 million, rather than the  £4 million it was in fact sold for. Under legislation, any person who seeks to intentionally defraud the creditors of a company may be held liable to make contributions to the company’s assets as the court sees fit,[15] or alternatively the court may seek to disqualify that person from being a director of a company.[16] Where a contribution by the director is deemed necessary by the courts, such an action can only be made during a winding up, however the director may be liable for criminal proceedings at any time.[17] In this scenario, given that the conduct of the director did not lead to a financial loss to the company in regards to this transaction, it would appear that disqualification from directorship would be a more likely option. The director, Janet, may be liable for criminal prosecution as a result of her actions in defrauding the creditor in the sale of the property. Part D There is a key distinction to be made between the concepts of ‘wrongful trading’ and ‘fraudulent trading’. Wrongful trading means that the director did not take all reasonable steps to ensure that the company did not become insolvent upon entering into the transaction, and hence relies more so on negligence on the part of the director.[18] Fraudulent trading, on the other hand, has its basis more on the intent of the director, where the intention was always to defraud a party.[19] The concept of fraudulent trading is further discussed at a common law level, which further entrenches the notions of intent and blatant dishonesty.[20] These concepts have been dealt with in the case of Company XYZ Ltd, and it has been established that there have been incidences of fraudulent trading, which tends to carry more severe criminal charges if the case is substantiated. Bibliog raphy Books Mayson, S, French, D and Ryan, C, Mayson, French and Ryan on Company Law (2003, 19th ed), London: Oxford University Press Sealy, LS, Cases and Materials in Company Law (2001, 7th ed), London: Butterworths Walmsley, K (ed), Butterworths Company Law Handbook (2003, 17th ed), London: LexisNexis Butterworths Legislation Companies Act 1985 Company Directors Disqualification Act 1986 Insolvency Act 1986 Cases British and American Trustee and Finance Corporation Ltd and reduced v Couper [1894] AC 399 Harben v Phillips (1882) 23 ChD 14 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, PC JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162 Poole v National Bank of China Ltd [1907] AC 229 Re EB Tractors Ltd [1986] NI 165 Re Floating Dock Co of St Thomas Ltd [1895] 1 CH 691 Re Northern Engineering Industries plc [1994] 2 BCLC 709 Re Patrick and Lyon Ltd [1933] Ch 786 Re Peveril Gold Mines Ltd [1898] 1 Ch 122 Re Woodroffes (Musical Instruments) Ltd [1986] CH 366 Scottish Insurance Corporation Ltd v Wilsons and Clyde Coal Co Ltd [1949] AC 462 Welton v Saffrey [1897] AC 299 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 1 Footnotes [1] Companies Act 1985, s 9(1). [2] Companies Act 1985, s 378(1) and (2). [3] Companies Act 1985, s 381A. [4] Harben v Phillips (1882) 23 ChD 14, 32 and 35-6 (Cotton LJ and Bowen LJ). [5] Welton v Saffrey [1897] AC 299, 329 (Lord Davey). See also Re Peveril Gold Mines Ltd [1898] 1 Ch 122. [6] Poole v National Bank of China Ltd [1907] AC 229, 239 (Lord Macnaughten) [7] Ibid. See also Scottish Insurance Corporation Ltd v Wilsons and Clyde Coal Co Ltd [1949] AC 462, 486 (Lord Simonds). [8] British and American Trustee and Finance Corporation Ltd and reduced v Couper [1894] AC 399, 406 (Lord Herschell LC). [9] Re Floating Dock Co of St Thomas Ltd [1895] 1 CH 691. [10] Companies Act 1985, s 135(1). [11] Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, PC. See also Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 for an Australian example. [12] Companies Act 1985, s 25. [13] JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162, 173 (Chad wick LJ). [14] Re Woodroffes (Musical Instruments) Ltd [1986] CH 366. [15] Insolvency Act 1986, s 213. [16] Company Directors Disqualification Act 1986, s 10. [17] Companies Act 1985, s 458. [18] Insolvency Act 1986, s 214. [19] Insolvency Act 1986, s 213. [20] Re EB Tractors Ltd [1986] NI 165. See also Re Patrick and Lyon Ltd [1933] Ch 786.