Directors must act bona fide in the best interest of the company, they have certain fiduciary duties that are owed to the company and need to be upheld. In the case in question, Harry is in breach of his fiduciary duties by making an undisclosed/secret profit on behalf of Crownco Ltd. He has achieved this by selling the organic farm, Wheatacre, (originally owned and purchased by Lowcopse for £750,000) to Crownco Ltd, for £1 million. Lowcopse being the company that Harry has 25% of the shares in. A profit of £250,000 is made from this transaction that Harry will personally gain from.
Harry has a duty to Crownco Ltd and its shareholders not to make a secret profit, any profit made must be disclosed. The negotiations of this transaction were carried out by Diana, and so one can only presume that Harry had not disclosed the profit made to his peers at Crownco Ltd. If this is the fact then the area of law that can be applied to this scenario if it proved to be a problem for the shareholders would be Gluckstein v Barnes. The basic principle that this case gave rise to was the notion that any profit made by the companies directors, whether it be directly or indirectly must not be undisclosed from the companies shareholders.
If Crownco Ltd, did have a problem with Harry’s profit then the directors do have the power to rescind the original contract. Lord Blackburn, with regards to Erlanger v New Sombrero Phosphate Co provided the notion that directors who have been handed extensive powers are not entitled to disregard the interests of the corporation altogether, by this he means directors, such as Harry, should not abuse his position of power and should aim to maintain their fiduciary relationship with the company.
The legal position of William’s contract to buy non-organic carrots from Philip is a conflict of interest with the company’s original objects to sell organic vegetables, it’s unclear whether or not these objects are in fact incorporated into the Memorandum of Incorporation. If these objects are in the company’s memorandum then William may have been acting ‘ultra vires’ this being a Latin term for “beyond the powers.” An ultra vires act is one that is outside the specified and/or implied constitutional objects of the company.
If the objects are not, and standard wording was used in the memorandum, then it would be stated that the object of the company was to ‘carry on business as a general commercial company’. (Section 3A (a) & (b) Company’s act 1985). If this is the case then William would have been acting with his authority.
The doctrine and some of the more noticeable ramifications of companies carrying out ultra vires acts is clearly set out in the House of Lords in the case of Ashbury Railway Carriage and Iron Company v Riche. Because of the nature of this case, Harry and Charles would struggle to claim that Williams’s actions were ultra virus, as there are many provisions affecting the ultra virus doctrine as contained in section 35, 35A and 35B of the Companies Act 1985.
Section 35 (1) identifies the fact that no company can question the validity of the acts carried out by it’s directors on the grounds of lack of capacity by reason of anything in the company’s memorandum. This provision stipulates that Harry and Charles will not be able to claim that the contract made is ultra vires, the company shall not be called into question by reason of anything in the company’s memorandum. Furthermore, Phillip can argue the provision of section 35A (1) CA 1985, this is in favour of the person dealing with the company in good faith, the principle of this provision is to establish that directors who are bound to the company shall be deemed to be free of any limitation under the company’s constitution. The deeming effect is only in favour of third parties dealing with the company in ‘good faith.’ To evade this Charles and Harry would have to prove the contrary that Phillip was not acting in good faith. If in fact a copy of the memorandum was sent to Phillip and he knew all the facts in it, then the transaction would in fact be ultra vires. This would be extremely difficult for Charles and Harry to prove.
Section 35B, is another provision that can be used in Phillip’s defence, the applied principle of this provision is that Phillip is not bound to enquire as to whether or not the company’s memorandum permits him to any limitation on the powers of the board of directors to bind the company or authorise others to do so. These provisions will make it extremely difficult for Harry and Charles to protect Crownco Ltd from being bound by Williams’s actions, and would be legally obliged to pay Phillip.
The legal position of Crownco purchasing machinery from Diana in return for her using the proceeds to buy shares in the company can be distinguished that this is not a form of financial assistance. Section 151 CA 1985 prohibits a company from giving financial assistance for the purchase of its own shares. However, principles gained from section152 (1)(a)(i) show Crownco had purchased the ‘much needed’ machinery at an undervalue price and so there is no element of gift.
Moreover under section 153 provides the principle of larger purpose exception. This is later exemplified with section 153(1) which provided that financial assistance is not a breach of section 151 (1) if (a) the purpose in providing assistance is incremental in some larger purpose of the company and, (b) the assistance is given in good faith in the interests of the company. In this case this is highlighted by the fact that the machinery is ‘much needed’ by Crownco and is being sold for a discounted rate. Further more Harry, Charles and William want to maintain the company’s ethical, organic ethos rather than increase profits, for them to achieve this they encourage Diana to gain shares in the company to deter Camilla increasing her shareholding and abandon the ethical ethos that the company stands for.
From this, the restrictions placed in Brady v Brady will not apply
It’s explained that the Articles contain a provision that shares may be offered to outsiders by special resolution of the company. In accordance to this a Special Resolution was passed on the 22nd May. This appears to be in accordance with the provisions contained in the Companies Act 1985, section 378(2), that is, it was passed with the vote of three quarters of the members and presumably upon 21 days notice of the meeting. Therefore, providing a copy of this resolution is forwarded to the Registrar of Companies and recorded by them within 15 days, shares in Crownco can be offered to Diana.
Crownco will look to sue Lowcopse for damages with regards to Wheatacre under the notion of misrepresentation and possibly breach of material term as pesticides were used on the land up until April this year, 4 months after Crownco bought the farm.
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Appendix 1
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