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Company Law


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Company Law

  1. 1. Company Law Essay Banner Number: B00124229 Date: 02/12/2016 Word count: 2324 Pages: 8 Lecturer: Colin McFadyen
  2. 2. Contents Page Page 3 – Introduction Page 3 – Research Sources Pages 3 & 4 – Directors Duties Page 5 – Disqualification of Directors Page 6 – Analysis Page 7 - Conclusion Page 8 – Bibliography
  3. 3. Introduction The following essay has been requested to analyse the question of “The standard of fitness applied to company directors, is not that high and does nothing to prevent the rogue director from surfacing time and time again”. The purpose of the essay is to determine whether the writer agrees with the above-mentioned statement and what evidentiary proof they have sourced to prove or disprove their stance on the subject. Research Sources There are several sources that the writer has determined that best suit the requirements requested under this question and as such has decided to use the company’s act 2006, which outlines the duties required of the director, the Company Directors disqualification act 1985 is applied when these duties are not adhered to, case law to show how these have been applied in law, and textbooks which have provided further case information in which to clarify writer’s stance. Directors Duties First and foremost, there is no formal qualifications to be a director and in fact anyone over the age of 16 can become a director. Thus, being said there have been provisions put in place to ensure that directors follow guidelines under S.170 CA 2006 are the newly codified duties of directors and these are still relevant even when a person stops being a director, these are based on previous common law practices and state that the duty of the director is to the company for which he is employed. they will find a breakdown of what is expected of a director upon entering that position. There are seven main provisions which are expected of a director. S.171 CA 2006 – duty to act within powers previously known as proper purpose rule - this advises that the director can only act in the remit of the company and of the position of which he has been employed so for example unless authorised cannot issue cheques. Taking in the fact that common law has been the basis for this provision the writer feels the appropriate case law example would be the case Hogg V Cramphorn Ltd (1967) Ch 254 Chancery division – the facts of the case was where the company issued shares to prevent takeover which they believed was not in the best interests of the company and although they must act for the benefit of the company the fiduciary duties were inappropriately used thus bringing the validity of the shares into question this was then held by judge J Buckly to be the case and that the company had indeed issued the shares incorrectly.
  4. 4. S.172 CA 2006 – duty to promote the success of the company. This section advises that they must adhere to the six factors in which to do so. The six factors include consideration as to the likely consequences of the decision and how this will affect long term, also includes be in the interests of the employees, fostering of relationships on behalf of the company e.g. suppliers and customer to name a few. How the company operations may affect the community and environment, company reputation must be maintained with a high business conduct and fair treatment between members of the company. Section 173 companies Act 2006 – duty to exercise independent judgement – this implies that yes you can take advise but the advice does not necessarily have to be taken on board using own judgement is exactly that deciding that as a director whom has taken all the facts on board believes in the decision made. The best case to analyse this would be Westmid Packing Services Ltd where lord Woolf advised that no one individual should dominate a person and as two of the respondents failed to keep on top of the financial situation they had not exercised independent judgement Section 174 companies act 2006 – duty to exercise reasonable care, skill and diligence – this again implies that all decisions should be based with all the facts examined and that the director would be expected to have a certain level of expertise for the role of which he is employed. Section 175 companies act 2006 – duty to avoid conflicts of interest -this is here to see that all decisions are made in the best interests of the company and should there be a conflict this is brought to the attention or removed from the situation altogether so the director is not gaining an advantage for himself or others within his circle this however can be mitigated if the directors are made fully aware and authorised the transaction to continue upon full receipt of the facts. Section 176 companies Act 2006 – duty not to accept benefits from third parties – this is where they cannot accept gifts or monetary gain from a person in return for favourable service etc. Section 177, companies act 2006 – duty to declare interest in proposed transaction or arrangement – this again falls in with the remit of avoiding conflict and as mentioned if such conflict does exist this should be made fully aware to all parties concerned. This being advised the list of requirements is comprehensive but does allow the opportunity for the rogue director the opportunity in which to operate after all if he can prove he has followed the legislation and can provide evidence to state this then he has done what has been expected of him and as such will be more likely to remain as a director. There is one way in which to get the rogue director and that is by having him disqualified under the director’s disqualification act 1985. This act has several processes in place in which to remove a director of which the writer will now discuss
  5. 5. Disqualification of directors In 2008 the cork committee recommendedthatthe legislationhadtogofurther for a directorwhom islackinginabilitytoperformthe role requiredof him. Thiswasbroughtinmainlyas the committee wantedtotry and preventrogue tradersbeingable tohide underthe guise of alimitedliability company. Firstly, tounderstandthatthere isthree waystoremove a directorfrompositionfirstly wouldbe underthe articlessetoutat the time of settingupof the companywhichonlyallowsfor renewal fromthe companypositionnot necessarily fromthe companydependantonwhatisin the articles. Secondlyisunderthe insolvencyactwhichagaincan heraldissuesasthere wasa consensus was to how rigorously wouldthisbe presentedandactioned. The thirdwayisobviouslyunderthe disqualificationactmentionedabove,thiscanonlyachieve aresultbybeingappliedforthroughthe court inwhichto get a directorremovedfromthe register. There are several reasonsastowhy a directorcan be disqualified. Firstly, theycanbe disqualifiedonthe groundsof unfitnessunder section6 and 7 the secretaryof state or official receivercanapplytothe court to have a directorand shadowdirectordisqualifiedif inthe publicsintereststodoso. B undersection6 of the CDDA 1986 statesthat a directorcan be disqualifiedif the companyof whichtheyare the directorbecomes insolventorhisconductisprovento be unfitthusbeingthe case the directorwill be disqualifiedfor a minimumof twoyearsand a maximumof 15 yearswhere the directorwill not be allowedto be a director,act as a directorin anyway.Unfitnesscanbe deemedasdirectors’responsibilityforthe failure of the company,breachof dutyand misapplicationof companypropertytoname buta few. Commercial moralitycanalsobe lookedatinregards to a requestfordisqualificationof adirector thisisundera veryfine balance asthe courts will meetthe needtoprotectthe publicagainstthe unreputable directorwhomisabusingthe limitedliabilitysystem. The issue with disqualification guidelines are they are for UK based companies and if someone whom has been disqualified in another country can become a director here The writer feels the best cases to look at would be Ipcon Fashions Ltd (1989) 5 B.C.C. 773 where the director allowed the company to incur further debts after realising the company was insolvent and as he had previously had businesses that had been insolvent judge Hoffman had disqualified him for 5 years as the commercial morality was severely lacking on the opposite side of the scale was Dawson print limited (1987) 3 bcc 322, again judge Hoffman was listening to this case and felt that the director was unlucky as had issues with employees and some bad luck but the commercial morality wasn’t an issue so no disqualification was imposed.
  6. 6. Analysis The writer has looked at both the directors duties as they are noted under the Companies act 2006 where the writer feels these need to be more exhaustive by this the writer deems that there has to be more practices in place for someone to become a director at this moment in time to become a doctor you have to study and go through numerous exams where as there is no formal qualification for a director in fact anyone over the age of 16 can become a director which allows for scrupulous people to take advantage of the processes in place as they haven’t had to prove themselves fit and capable of undertaking such an important position within the company and in fact the CA 2006 only stipulates they should have some relevant experience for the position of which they are looking to undertake. The term good faith is the persons believe he is doing what is best for the company but again this can be incorrect as this based on the person’s judgement and if things are going wrong for the company they could have a flawed vision of what is in the best interests as stress can affect a person’s view on any given situation. Also, the fact that conflicts of interest can still arise due to the fact the company can be made aware and the director still be in the position if the company agrees to this. The writer would like to see an academy set up so that directors have to go through a similar process to say that of a teacher or a doctor, where they have to prove competence prior to taking up the role and prove that they have the relevant skills and expertise and although some people feel this would hinder enterprise in the long run the writer believes it would be less detrimental than that of having to disqualify a director or the company going out of business and potential losses to the other stakeholders of the company which in turn could have a detrimental effect on them whether it be a business, employee or the community as a whole as there is nothing worse than job losses or companies losing money due to mishandling of the company assets and finances. In regards to the Company director’s disqualification act 1986 the writer believes this could also be tightened up firstly as there is nothing in the provision on which states that a disqualified director must go through any skills enhancement once the term for his disqualification is discharged he can immediately set himself up again. As previously mentioned there is no formal training to become a director and this can also be said there is nothing in place after they have been disqualified to prove they have learned from the previous issues which caused them to be disqualified in the first place so for example if you lose your driving licence in some instances you will have to undertake your test to prove you are fit and capable to get back behind the wheel of a car but that’s where the law falls down there is nothing to show a disqualified director is fit and capable to take on that role again. The second failing of the disqualification act would be that it only relates to UK directors so there is nothing to stop a disqualified director setting up a business outside the UK and operating within the UK. The writer would like for a list to be openly available so we can search for people whom have done such a task and for their companies not be allowed to operate in the UK. The third problem the writer has found noticeable there is no international register so there is nothing stopping and international person whom is disqualified in their country coming over here and setting up a company and becoming a director here.
  7. 7. Conclusion The writer was asked for an essay and to make and analysis as to whether the provisions in place would prevent a rogue director resurfacing time and time again. The writer has proved the case that nothing is there to prevent it from happening and that further recommendations would be justifiable in being made in regards to this, the writer feels that to become a director is great in theory but without knowing the mindset or skillset of someone this could lead to the company failing and although widely recognised in the ca 2006 that they should have some level of expertise there is nothing in the provision in which to examine this and as such the writer has obviously come to the conclusion that there is nothing in the current provisions which prevent this from happening the writer has also advised potential remedies to this firstly a formal qualification being applied to become a director and should you become disqualified resitting that qualification to show improvement on issues that caused the disqualification in the first instance also a UK wide and international register so someone whom has been disqualified here cannot then set up international company and operate here with his base elsewhere or the same can be said if disqualified internationally not be able to operate as director in UK.
  8. 8. Bibliography Bibliography CompaniesAct(SI 2006).Availableat: October 2016).·(no date) (Accessed:13 November 2016). Micheler,E.(2012)Gowerand Davies’principles of modern company law.9th edn.Edited by ProfessorPaul Davies and SarahWorthington.London:Sweet& Maxwell 24 July. Pettet, B.G., Lowry,J. and Reisberg,A.(2012) Pettet,Lowry & Reisberg’s company law:Company andcorporate financelaw.4th edn. New York: PearsonLongman 26April. WestlawUK log in (2016a) Availableat: d=IC29FA1F0E42711DA8FC2A0F0355337E9&hitguid=IC29F7AE0E42711DA8FC2A0F0355337E9&rank=1&spos=1&ep os=1&td=37&crumb-action=append&context=37&resolvein=true(Accessed:15 November 2016). WestlawUK log in (2016b) Availableat: ACBD0C0E43611DA8FC2A0F0355337E9&hitguid=I6ACBD0C0E43611DA8FC2A0F0355337E9&rank=1&spos=1&epos= 1&td=5&crumb-action=append&context=17&resolvein=true(Accessed:21 November 2016). WestlawUK log in (2016c) Availableat: 9FBEBE0E43611DA8FC2A0F0355337E9&hitguid=I59FBEBE0E43611DA8FC2A0F0355337E9&rank=1&spos=1&epos=1 &td=183&crumb-action=append&context=37&resolvein=true(Accessed:18 November 2016). WestlawUK log in (2016d) Availableat: =I9EAC5360E4B811DAB61499BEED25CD3B&hitguid=IA971DEF0E43611DA8FC2A0F0355337E9&rank=1&spos=1&ep os=1&td=89&crumb-action=append&context=74&resolvein=true(Accessed:20 November 2016). Wild,C.and Weinstein,S.(2013)Smith and Keenan’s company law.16th edn.Harlow,England:Pearson Education9 August. Citations, Quotes & Annotations CompaniesAct(SI 2006).Availableat: October 2016). (CompaniesAct) Note: chapter 2 sections170 - 177