Home design ltd is a private limited company which has been incorporated and operating since 2008.
There are certain benefits to incorporation into a private limited company over a sole trader and partnership. These include; not having the requirement to hold and AGM, there is no limit set by statue on the value of share capital within the company and the company and its members are separated by the veil of incorporation.This principle was developed in the case of salmon v Salomon ltd Hl (1987) ac 22 in which it was held that a company is regarded in legal terms as a separate identity distinct from its members. This means the members of Home design ltd are only liable for their holding and not all e debts the company may have if it fails.
Home design ltd currently consists of three directors which under the companies act 2006 says that any person occupying the role of a director regardless of the title used will be deemed as a director.This can be seen in the case if Re Sykes (butcher) Ltd 1998 1 bcc 110 that any person who denies to be a director since a different title was used or they haven't been registered at companies house will be prosecuted as a de facto director if it can be proved they acted in the role as a director by completing the directors duties. (West law) A director key duty is the management of the affairs of the company on a day to day basis. A de facto director is a person that acts as a director but not appointed formally.This was also seen in the case of Re Moorgate metals ltd (1995) bcc 143.
A director has certain general duties under the Companies Act 2006 which are;• Duty to act within powers •Duty to promote success of the company •Duty to exercise independent judgement •Duty to exercise reasonable care, skill and diligence •Duty to avoid conflicts of interest •Duty not to accept benefits from third parties •Duty to declare interest in proposed transactions or arrangements (Company Law page 380-403)The company also has four shareholders costing of Nigel, Lucinda, Ian and Mary. When each shareholder entered the company they would have agreed to a shareholders’ agreement. This agreement is a contract which consists of how they want the company to be run and certain aspects of their relationship to the company and each other. (Running a limited company. 4.
3) Mary is a shareholder who holds 5% of the shareholding meaning she is a minority holder. A shareholder is a person which has an interest in the company measured by a sum of money for the purpose to receive dividends.A dividend is a share of the end of year profits payable if the directors exercise their power. Mary’s main problem is she is concerned with the way the directors are running the business, as they are making risky business decisions which are more for the directors benefit not the members. This goes against the directors duty previously mentioned to promote the success of the business for the members as a whole. The first method to address this would be to bring the concerns up at a general meeting.
Since Mary only holds 5% of the shareholding she would need to ask one of the other shareholders to request a meeting since under the Companies Act 2006 s303 members holding one tenth of the holding can request a general meeting to be called. Other than this she would need to wait for one to be called and then as see fulfils the requirement of holding at least 5% of the shareholding she will be able to put an item on the agenda. This would mean the directors would need to explain their actions and justify that it is for the benefit of the company otherwise they will need to change their actions.Under article 4 Mary will be able to exercise certain powers to direct the manner in which the directors run the company through a special resolution.
A special resolution requires 75% if the shareholding to pass which will be a problem as Nigel holds 40%. Looking at Mary’s concern that a dividend payment has not been made as any profits are given as bonus to the directors, she needs to understand that it is not a legal requirement for a company to pay dividends.Table A in the model articles state that the members can declare a dividend by ordinary resolution however they cannot declare a payment higher than that recommended by the directors. Most companies pay out dividends to give the investors a return on their original investment which might lead to future investment prospects. Therefore she will need to try and combat the issue of paying bonuses, any bonuses given to the directors must be proposed to all members.
This will enable Mary to voice her concerns to all members and try and pursued Nigel and Ian to either reinvest the money into the company or pay dividends out.The other way to achieve a change in the running of Home Design Ltd is to pass an ordinary resolution under S168 (1) CA 2006 to remove a director. An ordinary resolution requires 50% of the members, which is only possible if one of them wishes the other to be removed due to a disagreement as this would allow over 50% to agree. There are a further two duties which have been breached.
One is s173 the duty to exercise independent judgement. This duty is to ensure the directors aren’t influenced in their decision in running the business.Both Nigel and Ian have reached this duty as it appears Nigel is influenced by Ian when it comes to the decisions leading to risky business ventures. This means Nigel isn’t making an independent decision and Ian is causing this breach. The second duty is to exercise reasonable care, skill and diligence.
This is to ensure the directors carry out their functions carefully and competently. This duty is breached as their risky decisions will fall below that required from a director in statute.It will also be possible to demonstrate a breach by Simmone since a director who is inactive which is demonstrated in Lexi Holdings Plc (In Administration) V Laqumn. The court of appeal held that the directors ’were liable to the company for their brothers dishonest misappropriation of funds because the misappropriation had been as a result of their inactivity while directors. ’ (Westlaw) Since it can be proven each of the directors have breached their duty they are liable for prosecution which could result in damage being awarded included the dismissal from their position or a disqualification.
The other action Mary may wish to take is to reduce or remove her investment through a sale of shares. There are two methods for a sale of shares; the first is to sell them onto a different individual which is known as a transfer of shares. Mary would need to check if there is a pre-emption clause in the articles. If this is present it will require Mary to offer her shares to existing members first. If not then she may sell them to a third party, this is also allowed if the existing members don’t want the shares.If the shares are sold to another individual then the transfer form and share certificate are sent to Home Design Ltd which it goes in front of the board.
This is because under Section 26 (5) of the Model Articles the directors have the power to refuse a transfer as long as it is bona fide as seen in Re Smith V Fawcett (1942). If a transfer is refused, notice must be given to all parties along with the reasons within two months. If the transfer is agreed it must be registered straight away with companies house on the register of members under S112 (2) CA 2006.The other method is by selling the shares back to the company however the shares are then worthless. This is because S706 (b) (i) CA 2006 provides that any brought back shares are treated as cancelled. This is so from the company’s point of view buying back shares are a return of capital to the shareholder and therefore the company will receive no financial value in return of payment.
The other problem Mary faces is that Ian believes that Mary is elderly and an irrational and she may be better off with the money rather than having an interest in the affairs of Home Design Ltd.This may cause Ian to try to enforce the wooer within the articles of association which would force Mary to sell her shares to the directors at a fixed price determined by the company accountant as she has below 10% of the share capital. The case of Dafen Tinplate Co Ltd V Llanelly Steel Company (1907) Limited explains that this type of provision can only be used to protect the company from the conduct of shareholders that will be deter mental to the companies interests.This is also demonstrated in Brown V British Abrasive Wheel Company Limited where the directors were trying to implement a clause like this into the Articles of Association.
This was being used to force a minority of 2% to sell their shares to the majority 98%, compulsory on certain terms which would have been met. They even tried to ask the court that if this wasn't possible they would accept any method to gain the 2% value. The court held that the power granted to the directors could not be bona fide or generally for the benefit of the company as a whole but simply for the benefit of the directors.Therefore under s13 of the company’s consolidated act 1908 it was an article that was disallowed as it would be forced onto the minority. This is because it would give unrestricted and unlimited power over the minorities since if they do not agree with the directors which two make up over 50% of the share capital they could enforce this on the minority since they have enough to pass an ordinary resolution themselves. Peter has a concern with the business as well which is he doesn’t believe he will be appointed as a director if he puts his name forward.
Peter will need to look at the articles of association since these may state certain restrictions on the appointment of directors including the maximum number, if a secretary may be a director as well and if there is a nationality restriction. (Running limited company). If the maximum number has been reached and the directors wish to appoint peter then this must be put forward to the shareholders to be able to amend the articles which require a special resolution.Peter will also need to consider if he meets the criteria of a director as this may prevent him being allowed under statue.
The criteria are that he hasn’t be disqualified previously from a director’s position, he is not an undischarged bankrupt and he is over the age of 16. (Companies house) One method to be appointed is by the board of directors CA06, however peter will see this as a problem as he believes he will not be appointed which would infer he may see difficulties between himself and the directors currently holding this position.The other method is by an ordinary resolution at a general meeting however the key problem peter will face is he will need to get Nigel to agree plus the other shareholders as it requires an ordinary resolution under article 17. Lucinda who is Peter’s mother has become dissatisfied and claims her son has never been appointed as the Company Secretary. The company secretary is ‘an officer of the company with extensive duties and responsibilities’ (Bourne on company law page 281) A secretary owes a fiduciary duty to the company which are the same as a director and therefore can be prosecuted if they fail to carry out these duties with due care and diligence.The duties and responsibilities have been developed by case law including the case of Re Cleadon Trust Ltd which held that the secretary cannot without authority borrow money on behalf of the company, therefore showing they do not have unlimited authority.
Under the companies Act 2006, the requirement for a private company to appoint a company secretary was removed. The board of directors will appoint the secretary and may if they wish fix their term of office.Looking at the requirements needed for the secretary with private companies there are no legal qualifications needed it is only recommended they belong to a professional accounting body. (ICAEW file) Since House Design Ltd has chosen to appoint a secretary the company secretary must fill in the AP03 or the AP04 and send the form to companies’ house as it is one of their duties to ensure the documentation at companies’ house is up to date. This is in order to ensure a full corporate document which includes all required information about the officers of the company.
Therefore if this has been carried out Peter will be unable to sue for breach of contract. If this hasn’t taken place then it may be deemed under statue that Peter is operating without the correct authority since companies house are unaware they have a company secretary this may invalidate any duties peter has carried out so far and make himself personally liable. I believe these are the legal aspects of Home Design Ltd and the best methods for each individual have been shown separately alongside the legal problems.In conclusion Mary has several problems which have a variety of different methods to combat; Peter will need to look at how he can gain the members approval to become a director whilst ensuring the articles do not prevent him being the secretary and a director. Lastly Peter will be unable to sue for breach of contract since one of the reasonability’s as the company secretary is to ensure the companies documentation at companies house is up to date and if this is not the case Peter will be personally liable.
