Custom «Company Law Research» Essay Paper

The new directors of unique creation limited, which creates bespoke pieces of silverware has a right to examine the company’s affairs in order to identify why the company fortunes has been declining since the onset of the credits crunch last year. Under the duties of directors, the new directors are required to ensure that the company affairs are run effectively so as to meet the needs of shareholders who elected them under Sec303 of Company Act 2006. However, they are not bound to give always continuous attentions to the company affairs as the managers and other employees are available. The outgoing directors are liable for all illegal acts that may render the company’s affairs fail to run smoothly.

In this essay, we shall examine some of the legal advice on some of the events the managers found to have interfered with the fortunes or profits of the company. First, we shall examine the case of director’s resigning based on personal matters but later transacts business of the company secretly with the consent of the company thus making a lot of profits. Secondly, we shall discuss the legality of finance directors to skip meetings for six months because of personal interests and leaving his wife to transact the company finance affairs. Moreover, we shall examine the legality of hiring a lawyer who owns majority of the company’s shares to provide financial related advices[1]. Third, we shall examine the directors’ legal obligation pertaining to support social responsibilities and receiving gifts from the charity. Lastly, the essay will address some of the significant changes in the company Act 2006 and how they have affected the areas of directors’ duties. Moreover, we shall examine whether changes reveals any link between the directors duties and the social responsibility.

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Discussion

Event 1

Den resigned as a director six months ago on the grounds that he wanted to have more time for family life. However he had been approached by a member of the Royal family and told to design some bespoke pieces of silver ewelry to commemorate the royal wedding; which he was told would happen soon. Previously, he has raised this opportunity, at a meeting of directors but was turned down. He had then resigned. The new director discovers that he had personally accepted the contract and made a huge profit.

Legal advice for Event 1 Identified by the new directors

Den as a director who resigned some six months ago on the basis that he wanted to be close to the family should be aware that any resigned director has fiduciary obligations and duties to the company such as act in good faith, be loyal and avoid any self interest conflict after being set free. The company has right to claim for compensations if its profit are interfered with by any resigned director going underground to transact its business affairs[2].

The decision was based on the case law about Canadian Aero Service Limited (Canaero, 1961).Canaero was a company in the country which main business was geographical exploration and topographical mapping. In the company, Wells, O’Malley and Zarzycki among others were the directors of the company. After facing financial constraints for years, the company was acquired by Litton industries and Wells decided to resign from the company in 1965 based on the ground that he needed to be close to the family. In 1966,O’ Malley and Zarzycki resigned from the company based on the same family issue though Well was aware that they feared to lose their positions if Canaero fails to get contracts. Secondly, the financial freedoms and authority enjoyed before had been controlled by the imposed laws from Litton Company. Three months later, they received a contract letter to perform some mapping and topographical survey for the government of Guyana. They secretly executed the agreement in November 1966 using the Canaero limited as the main contractor where they amassed a lot of profits.

A year later, there was a case against the three resigned directors. The company accused them for secretly transacting business with the company without permission. In the supreme court of Ontario (1966), the trial judge (Grant J) ruled that the three directors fiduciary obligations to contract on behalf of the Canaero Company expired immediately they resigned. The judge went further to deliver the verdict and mentioned that seniors’ officers leaving a company should not use the confidential knowledge acquired in such employment to assist them to contract business or make profits. Such information remains the asset of the principal company even after resigning hence they were found guilty[3].

The Supreme Court decision was made on the principles of companies about fiduciary duties of the company which requires directors to be loyal, have good faith and avoid having self interest conflicts with the company. It is well stated in Gower text, Principles of Modern Company Law (1969) on page 518.

Thus, in conclusion, New Unique Creation’s directors should sue Den for breaching the fiduciary obligations and duties of a resigned director. They should claim for compensation as the fruits of fortunes of the company, which it has interest in has been interfered. Secondly, they should sue on the ground that Den as a former director raised the matter which was turned down by the board but later took the jewelry contracts from the royal family secretly to amass profits.

Event 2

Secondly, Dare, the director in charge of finances, had been unaware of the deteriorating financial situation of the company as he missed all the management meetings in the last year because he had been on an extended yacht race around the world for charity. He has not been in communication with the company for a year now[4].  Deluxe, his wife who was acting on his behalf had noticed that the company finances were in bad shape and raised this issue with Delilah about nine months ago, Delilah is a lawyer and majority shareholder of the company, whose advice the company directors frequently sought and indeed followed. Delilah told her not to be such a pessimist and because of this, Deluxe did not advise the other directors about the financial situation of the company until a recent emergency board meeting.

Legal advice for Event 2 Identified by the new directors

Pursuance to the clause 4 of the memorandum of association on the directors’ interest, it is clearly stated that the official duties of the company surpass the individual interest and thus the directors has fiduciary obligation to perform them first. Dare breaches the clause by missing the management meeting in last year to attend the yacht race around the world for charity. In order to make the matter worse, he had not communicated to the company and hence the company under the article 81 about disqualification and removal of directors has a right to remove Dare from the office as he has been absent for more than six months without permissions in the meeting. He misuses the power of directors under the article 59 of the company act to appoint her wife to head the finance department as his agent without consulting other directors. Due to the poor performance and wrong consultations, the company financial performance has deteriorated over the few nine months. Thus, the board of directors has every reason to see them resign or removed from the office.

According to the UK laws, The Code of Directors Duties, a company has a right to claim for compensation from erring directors who abandon their duties to go and pursue personal profits based interest such as driving yacht. The company can also seek injunction from the court to stop Dare from carrying out the yacht race as it breaches the duties. If the director is ignorant they can also claim for damages by means of compensation[5].

Moreover, due care and diligence has significantly been featured under the corporation Act section 180(1).All directors are required to exercise duty of care while exercising their powers and discharging duties. Deluxe fails to exercise care where she sought advice on the poor financial performance of the company from Delilah who is lawyer and a majority shareholder. Delilah offered the advice based on personal interests as it is dangerous to ignore the financial status by means of avoiding pessimism. On the other hand, Deluxe did not provide advice on time to the other director as required by section 180(2) of the corporation Act. She provided the information at a recent emergency board meeting depicting a delayed business judgment financial rule.

Thus in conclusion, Dare as the finance director and Deluxe as his wife and the acting agent have not observed the above mentioned sections about duty of care, good faith and diligence, hence, they owe the company compensation. The best advice to the new directors is to legally force the finance director to resign or even compensate the company in accordance to article 81.

Event 3

The directors had also given heavily to a charity ‘Silver for Ashes’ responsible for regenerating the areas around the silver mines in South America. However, it appears that all the directors had received ‘gifts’ of free trips to South America and sports cars from the charity[6].

Legal advice to the new directors about event 3

Under, the charity law act within the amended company law 2006; directors have been mandated to support the charity organization as part of the company’s corporate social responsibilities. However, the support should not be so heavy that it ends up misusing the company property. In this situation the directors will have breach the trust law and the duty of care and diligence under section 180(1) of corporation Acts. Under, the corporation Act, directors should not use the company assets for their own interests or profits without consent of the company. The company has a separate legal entity from the director and thus has a right to sue for compensation.

In our case, the directors heavily financed the “silver for Ashes” mining sites in South America in the name of giving back to the society that is regenerating the areas only to be found that in return they enjoyed heavy returns such as free trips to South America and sport cars from this charity. They breach the charity law on trust which requires that companies to support charitable organizations without expecting returns. The new directors has a right to sue the former directors to be compensates for company resource damages. The formers directors should return the profits or benefits derived through acting based on personal interests[7].

The decision is based on the Regal (Hastings) Ltd versus Gulliver in 1942 all in ER 378.In the case law, the Regal Limited directors financed the regeneration of coal mines nearby the Gulliver children homes. In return, they received heavy sport cars and clothing from the institutions for several years. The company was found to perform financially poor and the shareholders voted against the directors before replacing them. The new directors came to find that the company property had been misused the company assets to gain profits indirectly. They sued the former directors and the House of Lord in November 1943 described the case as unmeritorious claim by the shareholders and the new directors.

In the ruling, the former directors were found guilty of supporting the charity affairs with company resources only to make profits. Later, the directors were required to return the profits they had made and the shareholders to receive it as windfall. The decision has been followed on several cases involving directors opportunistically acquiring assets and profits through charitable organization and now it’s regarded as a settled law.

Thus, in conclusion, the new directors of Unique Creation Limited have a right to sue the former directors for restoration of the company’s assets as well as the profits. They can seek for court injunction to stop the directors enjoying the trips to South America and utilization of the sport cars. The jurisdiction will act at least as a remedy for the breach by the directors of trust and duties[8].

Event 4

The new directors also want to know if there have been any significant changes in the Companies Act 2006, which have affected the area of director’s duties, especially related to wider responsibilities. They are particularly interested in knowing whether there is any link between directors’ duties and any form of social responsibility.

Legal Advice to the new directors on event 4

The company Act 2006 saw significant changes in the codified principal common laws on director duties. The traditional corporate benefits of the company duties have been swept away and, now, new emphasis is made on the corporate social responsibilities. Several responsibilities have been linked to the directors’ duties as stated below.

First, S171 requires the directors to act with the power created by various company documents. The act requires them to abide strictly by the terms and conditions provided by the memorandum list of directors and article of association. Moreover, they should socially cooperate with the shareholders by abiding to their decisions hence responsibly acting well.

Secondly, we have S172 requires the directors to promote the success of the company by continuing to act in manner that benefits the shareholders however, the recent changes made in the Act requires them to full other factors such as; ensuring that they look at the long term consequences of decisions made, put into consideration the interests of the employees, fosters a good company relationship with customers, suppliers and other stakeholders in the society, preserve the community and environment, act fairly among all members and lastly to maintain the reputation of the company through high standard and good business conduct[9].

Thirdly, the S173 requires the current directors to exercise independent judgments on all matters but the decision made should not be contrasting an agreement into by the company and the society or go against the company articles provisions that support the society affairs. Fourthly, we have S174 policy that requires the directors to exercise reasonable care diligence, and skills as per the expected standard. They should make careful decisions that advocate the interests of shareholders, customers, employees’ lenders and other stakeholders forming the business. The actual knowledge, experience, and skills of the directors should portray the interests of all stakeholders; otherwise, they will face challenges from the society which forms parts of the stakeholders[10].

Fifthly, the S175 of the company Act 2006 require all the directors to avoid conflict of interest. They should make decisions based on the interests of the shareholders and other stakeholders. The directors should avoid conferring unnecessary powers that breaches trust and duty of care. They must follow the set policies and regulations under the article of association and other documents. Some of the noticed areas of conflict includes salaries and remuneration, directors buying expensive cars and lastly consuming company time in personal matters such participating in yatch race.

Sixthly, under S176 of the company Act 2006, the directors are required to be socially responsible to all the stakeholders by avoiding benefits such as sport cars, free trips money and other items that can lure the third parties to sue the company in case of failing to honor their requests. The directors are required to be satisfied with all that belong to them and focus on the interest of shareholders only. Stiff penalties await those who receive benefits from the third parties. Lastly and not the least, the company Act 2006 contains S172 which allows the directors to frankly declare their interests in a proposed transaction of a company in order to avoid conflict in interests arising in the future. It will enable them to socially respond to the interests of all other stakeholders.

Conclusion

Essentially, the new directors should be aware of the corporation Acts, which have been instrumentally revealed to meet the company’s affairs, particularly directors’ duties and social responsibilities. They should always advocate following them as they guard the shareholders interests. The Acts preserve the rights of the company to sue those directors, who are pursuing their own interests instead of shareholders’ interests.