Part A
SP (a company incorporated) has a separate legal identity that is distinct from its owners and directors. This means that Agnes is not liable for repaying the debts of the company unless there has been a breach of her duty as the director of the company. In order to evade culpability, it is advised that Agnes should contact HMRC for discussing tax repayment and she should also hold a general meeting of the company. Such meeting would allow her to document her concerns, raised the probable solutions to the problems and inform Khalid regarding the financial situation of SP.
According to the provisions of the Constitution of SP, Agnes is prevented from overruling decisions that have been passed by the board of the company (and a special resolution is necessary). Consequently, alternative shareholder remedies like the removal of the , derivative and unfair prejudice actions have been examined, but they are not advised until the other avenues of mediation have been used, because they contradict the main purpose of Agnes to remain in business.
Any potential liability for wrongful reporting has not been considered in this report because it only arises if the company goes into liquidation.
Saxon Physio is a limited corporation that is regulated by Model Articles Regulations and with no amendments. The company has before shareholders, Agnes, Maria and Charles who are also the directors of the company. Khalid is also a shareholder, but he is not a director.
Some of the concerns that Agnes has regarding the company are the non-payment of the text for last year, ‘taking far more on credit than usual’, borrowing more than the company can afford (through pre-agreed overdraft) and delay in making payments to the employees and suppliers of the company. All the decisions have been made without the approval of Agnes or they were delegated to individual directors, but shareholder agreements were not provided and it is not clear if they are present.
SP is a private corporation limited by shares. This means that it has its own legal identity that is separate from its members as they are protected by a corporate veil. Under these circumstances, in case the company becomes insolvent, the liability of the shareholders of the company is equal to the nominal value of their share capital and the liability to repay the debts and liabilities is of the company alone. It appears that Agnes has not made any personal guarantees on behalf of the company to the creditors of the company which may result in losing the benefit of limited liability. As a result, in accordance with the general rule mentioned in Salomon v Salomon, she cannot be held personally liable. But it needs to be noted that Agnes is also a director of the company, which means that there are certain circumstances where the court may disregard her limited liability.
The Directors duties and the fiduciary duties of Agnes are in favor of the company and not directly towards the shareholders or the creditors individually or jointly. But as Agnes is directly related with the routine management of the company, it can be stated that her actions decide the strategic direction of the company. Therefore, even if indirectly, Agnes has a duty towards the shareholders and creditors of the company. As a director, she has the responsibility to promote the success of the company and to use reasonable care, skill and diligence by making decisions on behalf of the company. These can be processed by using the subjective and objective test. It is thus was ready of the members of the company to define success (according to guidance provided by section 172(1), including “the likely consequences of a decision, the interests of the employees, suppliers and customers of the company) and the directors should follow it.
Liability as a Director
It is unlikely that action may be initiated under sections 172 or 174. It is very difficult to grow a breach of s172, because a conclusive test is not present for evaluating if the directors’ had regard to an issue and in any case, because the company itself is required to bring such action, which is unlikely to happen.
It can be argued that there has been a breach of the duty of skill, care and diligence by Agnes towards the company when it allowed the financial position of the company to deteriorate. But it also needs to be mentioned that in fact, Agnes paid a dividend attention to the affairs of the company. She regularly voted against the harmful resolutions, and was looking for professional employees in her efforts to resolve the financial problems of SP. These actions can also be used for establishing that Agnes had “regard” for the issues faced by the company.
Moreover, when decisions were taken without the knowledge of Agnes (through delegation) they were not taken after receiving the ascent of fitness and as a result. She cannot be held liable for these decisions.
Constitution
The model articles mentioned in paragraph 4(1) that the shareholders can require the directors to refrain from acting in a particular way through a special resolution (75%). Moreover, it has been mentioned in paragraph 4(2) that the earlier decisions cannot be overturned even by passing a special resolution.
General Meeting (GM)
According to section 303 CA 2006, a right is available to Agnes according to which she can require the directors to call a general meeting of the company within 21 days for resolving the problems and to criticize the actions of the directors. As a result offer considerable voting capital, she may submit a text of the religion which she intends to move in the meeting.
According to s168(1) CA, it is possible for a company to remove a director from office by passing an ordinary resolution.
In Foss v Harbottle, it was stated by the court that in cases where a wrong has been done to the company, the proper claimant is the company. Generally, the courts do not go into the issues concerning the internal management of the company, particularly when majority decisions are involved. The field of common law is also very restrictive. But by using the procedure mentioned in sections 260-264, CA, it is possible for a shareholder to bring action against the director for breach of duty/trust and negligence without the requirement of establishing that such actions have resulted in a loss to the company. This process has two stages and the permission to bring derivative action has to be granted by the court.
Unfair Prejudice
It can be established by this that the affairs of SP were conducted in such a way that was unfairly prejudicial for the interests (it has to be measured by using reasonable bystander test).
It is not possible for Agnes to rely on the Constitution of SP for preventing Charles and Maria in a way that is harmful for the company as she has only 40 percent shares in the company. Even after his getting support from Khalid (20% shares) they would not have been necessary 75% that is required. By not having sufficient voting numbers, Agnes is also prevented from amending the articles so as to use an ordinary resolution in place of a special resolution for taking control over the actions of the directors.
Agnes and Khalid can also consider removing Charles and/or money from the board of the company. Even if Khalid is an old friend of Charles and has not been shown that Khalid is not going to act in the best interests of the company and its shareholders. This means that there are chances that Khalid may be persuaded to vote, along with Agnes.
The derivative and unfair prejudice actions cost a lot of time and money. They may result in an order by the court according to which the shares belonging to Agnes made the purchase by the company and this is not intended by Agnes right now.
Directors’ Duties
But in case it does once to use these options, she will be required to provide sufficient evidence, which clearly establishes the breach of duties by the directors (derivative action) or reveal a breach of the terms of the Constitution of the company by other directors (like legitimate expectations of being actively involved in the management of SP) and at the same time, Agnes has come to the court with clean hands (unfair prejudice action).
The relationship between Charles and Maria (along with their conduct of delegating duties without the consent of Agnes) can be used as evidence to show that SP is being managed as a quasi-partnership. Hence the court may be willing to consider Agnes as a minority shareholder and provide additional rights to her.
As the shareholder of the company, it is not the liability of Agnes to repay the debts of SP. Even if she is generally protected at present but she needs to keep in mind that she owes duties as the director of the company and in case it is found that she has breached these duties, the protection provided by limited liability can be lifted and she may be held liable for repaying the debts of the company.
It is also unfortunate for Agnes that the Model Articles Regulations have been adopted by SP as its constitution which means that she needs special resolution for: preventing the actions of Charles and Maria; to reverse the earlier decisions and for amending the articles. But with the help of Khalid, it is possible for her to remove Maria and/or Charles from their position as the directors or use other radical solutions that may be provided by the courts (unfair prejudice and derivative action).
In order to avoid potential liability, it is recommended that Agnes should:
- Contact HMRC for arranging the repayment of debt. Regular failure to pay tax for a significant period may result in penalties and fines imposed on SP by the HMRC and ultimately a petition for the liquidation of the company(Agnes will be implicated in an investigation). By approaching HMRC and discussing the possibilities to repay tax in installments or Time to Pay arrangement, Agnes, may be able to establish that she acted with diligence.
- Agnes may use her power as the director(or shareholder u/s 303) for calling a general meeting for discussing her concerns and the possible solutions to the financial problems faced by the company Like Company Voluntary Arrangementfor tax repayment, appointing a non-executive director and discussing considerations related with payment to employees and suppliers (these may include salary sacrifices of directors and freezing dividends). I can help Agnes in proposing a meeting in writing to the shareholders mentioning the resolution.
Holding a general meeting will also allow Agnes to inform Khalid regarding the problems faced by the company and also to remind other directors of their duties and hope that they will stop acting in harmful way. However, if this does not happen, more radical alternatives are available to Agnes (removing director; derivative or unfair prejudice action) in order to prevent the harmful actions.
Table of Statutes
Companies Act 2006
Insolvency Act 1986
Social Security Administration Act 1992
The Companies (Model Articles) Regulations 2008, SI 2008/3229
Table of Cases
Foss v Harbottle (1843) 67 ER 189
Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] 2 All ER 563
Peskin v Anderson [2001] 1 BCLC 372
Salomon v Salomon & Co Ltd [1897] AC 22
Scottish Co-operative Wholesale Society Ltd v Meyer [1958] 3 All ER 66 (HL)
RA Noble & Sons Clothing Ltd [1983] BCLC 273 at 290
Re a Company [1986] BCLC 376, per Hoffman J
Re Bovey Hotel Ventures Ltd
Re Jayflex Construction Ltd [2004] 2 BCLC 145
Re Saul D Harrison & Sons Plc [1995] 1 BCLC 14
Re Southern Countries Fresh Food Ltd [2008] EWHC 2810
Wallersteiner v Moir (No.2) [1975] 1 All ER 849
Analysis
Books
Hannigan B, Company Law (4th edn, OUP 2015) ch 8
Mavrikakis A and others, Business Law and Practice (College of Law Publishing 2018)
Other Secondary Sources
‘Company Voluntary Arrangements’ (GOV.UK, 2018)
Freshfields Bruckhaus Deringer LLP, ‘Derivative Actions under the Companies Act 2006’ (2007)
‘If You Do Not Pay Your Tax Bill’ (GOV.UK, 2018)
Keay A, ‘The Duty to Promote the Success of the Company: Is it Fit for Purpose?’ (2010)
Macfarlanes LLP, ‘Unfair Prejudice Petitions- Lessons to be Learnt and Recent Developments’ (2015)
Morrison M, ‘Derivative Claims’ (Uk.practicallaw.thomsonreuters.com, 2018)
Ohrenstein D, ‘Reflective Losses & Derivative Claims’ (2015) <https://www.radcliffechambers.com/wp-content/uploads/2015/12/Dov_Ohrenstein_-_Minority_Shareholders.pdf> accessed 12 August 2018 (for general guidance, not included in footnotes)
Slaughter and May, ‘Companies Act 2006: Directors’ Duties, Derivative Actions and Other Miscellaneous Provisions’ (2007)
Weeks E, ‘Guide to the Law Relating to Shareholder Disputes – Cripps’ (Cripps LLP, 2018)
Reporting Obligations: Further Guidance
This note has been commissioned for giving advice regarding new reporting obligations concerning Modern Slavery and the consequences of non-compliance.
A requirement has been introduced by the Modern Slavery Act, 2015 on qualifying commercial organizations (providing goods or services, with total turnover of more than £36 million, calculated as net turnover of the organization) for preparing and transparency statement regarding each financial year as mentioned in section 54(1). This came into force in 2017 and has to be complied with by all qualifying firms. The businesses below the prescribed financial threshold are also encouraged to publish transparency statement on their own.
According to section 54(4)(a), as well as the statement is the “statement of the steps taken by the organization during financial year for ensuring that slavery and human trafficking does not take place” in its supply chain or in any part of its business. This includes the structure of the organization, its business policies and due diligence processes regarding slavery and human trafficking in the supply chains of the organization. Then, the statement has to be approved by the board of directors and signed by a director (in a partnership, by the general partner). In case the company has a website, a link should be provided to the statement at a prominent place on the website.
It is advised that all qualifying organizations should review their supply chains and the supply chains of their partners in order to make sure that steps have been taken to deal with the problem. These may include the review of UN Guiding Principles on Business and Human Rights, reflecting best practices and was the basis of this legislation.
The new provisions do not carry any sanctions for noncompliance, but it has been provided by section 54(11) that the responsibility of creating and publishing the statement is legally enforceable by Secretary of State. As a result, noncompliance may result in civil proceedings in the High Court, culminating in an injunction or Scotland, specific performance of statutory duty. It should be noted by qualified firms that the actions mentioned above would entail significant legal costs that need to be treated as an incentive for ensuring compliance even if no legal sanctions are going to be faced.
The Modern Slavery Act 2015 (Transparency in Supply Chains) Regulations 2015
Exten-Wright J, ‘How Employers Can Prepare for The Modern Slavery Act’ (Personnel Today, 2018)
United Nations, ‘Guiding Principles on Business and Human Rights’ (United Nations, 2011)
PWC, ‘The Modern Slavery Act: How Should Businesses Respond?’ (PWC, 2015)
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