Questions and Answers on The Companies Act of 2006

Question 3a

Upon visiting the freehold offices of Whiskin and Company limited, Sean Bush felt the building would serve the purpose of an assessment center for Clayton Financial Training Limited (CFT), and would also be a good addition to the property portfolio of the company. He thus made a proposal for the company to acquire the office. The actual value of the office is 345,000 Euros but Sean Bush proposed to purchase it at 250000 Euros. This purchase will have several advantages to CFT such as those outlined by Sean in the reasons why he wants to make the purchase. It however also has several legal pitfalls that would affect CFT negatively.

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This purchase is at risk of being considered undervalue and thus curtailed by the creditors of Whiskin Company. As elaborated in document three, Whiskin and company are on the verge of bankruptcy. The company has liabilities amounting to 615,000 Euros while its assets are valued at 498,000 Euros. From his email, Jacob Roberts also explains that he had a conversation with the finance director at Whiskin who told him that the company did not have enough funds to settle the demands from their creditors. Purchasing from them at this time would give Whiskin's creditors a legal advantage to be able to acquire a court order against any transactions with CFT according to the Insolvency Act of 1986. Under the provisions of the Act, (Cap 314a.69) if the company entering a transaction is shown to be unable to pay its debts at the time of transaction, just as Whiskin is, this will be a proof of an undervalue transaction thus increasing the risk of the asset getting lost to the creditors by court order. Notably, this would, therefore, be an unwise transaction for CFT to enter. (Ervine 2009)

The legal document may be acquired after the purchase has been made, leaving CFT at a disadvantage (Macro, 2017). In chapter 31.4A the provisions on undervalue transactions allow the holder of an office to challenge the undervalue transfer of gifting of a property that an insolvent enters in the period immediately preceding bankruptcy, or if the transaction leads to bankruptcy (section 238 and 239). This period may be up to two years before the attempt at the liquidation of insolvent company assets by creditors (section 240). Such transactions are mostly challenged by the creditors to whom an insolvent owes money. This is because in some instances such transactions are carried out to put the properties far from the reach of the creditors. This is thus unjust to the creditors as they are unable to liquidate this property in order to get their money from the debtor (Davies, 2008).

The transactions which a company enters at undervalue are assessed on a variety of factors to ensure they were not conducted to avoid payment of debtors (Mayson, et.al 2013). These factors include the following: There should be no connection between the beneficiary and the insolvent. Based on this, the creditors seeking to stop this type of transaction would have an edge over CFT since the two companies have a relation. They both benefit from LLT. This would work to the disadvantage of CFT as it gives much less credibility to the transaction and makes it seem like a plot to protect the assets of Whiskin from liquidation by their creditors. This increases the chances of their company losing the asset after purchase. The provisions in section 339 also allow for a transaction to be considered as undervalue if the beneficiary and the insolvent are considering the formation of a civil partnership.

There should be information available on the details of the valuation of the assets transferred and the basis for the valuation. The fact that CFT proposes to buy the office for much less than its actual value also makes the intentions of the transaction questionable, to the disadvantage of CFT. According to laws provided to protect creditors (section 436) a transaction for which the value given in money or money's worth is significantly lower than its actual value, the transaction is considered as undervaluing (Martinez, 2017). Any explanations given by the insolvent for the transaction are also important in the considerations to issue a court order to curtail such a transaction. Other factors that are also considered include the date of transfer of the asset and the date of insolvency which are used to determine the basis upon which the transaction was made. This provides a time window in which the creditors may file for an order to oppose the transaction.

The company may do a variety of things that give them an advantage in the assessment of the asset and the reducing the risk of losing it to creditors. First, under the provisions of the Act (section 238), the transaction can only be voided if it was entered by the insolvent company itself. This is opposed to when the transaction is done by a third party such as a mortgagee with the power conferred under its security. A transaction carried out in this way is thus not relevant as per the provision. This is however not a completely safe measure to take as the courts acknowledge that the receiver of the property may be an agent of the company facing insolvency, which makes the case considerable in court (Ridley, 2009). This would leave their company at a risk of losing that property anyway.

Thus my advice would be for him to avoid the transaction in order to avoid all the negative repercussions that it may have on the company. In spite of the fact that there are provisions in the law for precautions that a beneficiary could take in order to ensure that the company is free from litigation, it is an unsafe period to carry out the transaction given the current situation of the company.

Question 3b

Under the Companies Act of 2006 section 197-225, a company is allowed to give a loan to a director or another person in relation to the director unlike the case in the previous act of 1985. The loan that was proposed to be given to Sean from Law Training for Tomorrow Limited (LTT) was to be used by Sean in relocation to a place loser to LTT from where he could carry out his duties better. This loan is to be given to Sean in his capacity as a director of LLT, a position to which recently appointed. The loan would require the approval of all the shareholders of LLT (section 197) as it does not fall under the category of loans given for the line of work as provided under the act. As this is a private company, the approval of the shareholders has to be given in writing (section 199). In the Companies Act of 2006 there is no cap to the amount of money that can be given to the director as a loan and therefore the amount of money offered by LLT to Sean of 13,500 Euros is not in breach of any laws (Bower and Smith, 2016). This is loans given to conduct company business which can only be a maximum of 50,000 Euros.

There will be no exception to the application of the regulations in the Act since the company is not a subsidiary of any other company and is registered in the UK. As elaborated above, the expenditure is also not connected to company business thus does not receive an exemption from the law (section 204). Consequences for failure to comply with the regulations are also provided in the act albeit not as elaborately as it was in the Companies Act of 1985. In the Act of 2006, transactions that are carried out without compliance with the regulation will be voidable (section 213). Any director who receives such money or authorizes the loan has to make an account to the company in case any profits were made from the loan (Walker, 2014). The individual also has to indemnify the company in the event of any loss or damage that is sustained as a result of the loan transaction.

Question 4a

The Companies Act of 2006 in chapter 5 provides the definition of a director's service contract. As per section 227 of the Act, this contract in relation to a company is one under which the director will undertake personally to perform services for the company or its subsidiaries. It also entails the services that the director of the company will undertake personally to perform and are availed to the company or its subsidiaries by a third party (Companies Act 2006). John made an offer to give John a job at LLT for three years, fixed term service. Determination of the period of a service contract that is guaranteed is determined by several regulations. It includes the length of time during which the employment of the director continues and it can not be terminated by the company through notice. The period of time during the employment of a director where the company may terminate the employment is termed the unguaranteed period (Travers, 2007). The Act provides that any service contract that guarantees a term longer than two years requires the approval of the members of the company (section 188). The shareholder's approval requires an ordinary resolution. The ordinary resolution may be achieved through the written resolution method or at a general shareholder's meeting (Ascroft, 2006). This means that John has to have a shareholder meeting in which this matter should be discussed and approval sought. In the event that the shareholders will not agree to the contract, John will be unable to give Sean the job. Failure to meet this regulation attracts fines to all the officers of the company involved in the process of recruitment of the director.

The Act requires that the company should keep a copy of the contract given to each of their directors. In the event that there is no written contract, a memorandum of terms will be kept instead. This document will be available for inspection by shareholders without restrictions for a period of at least a year from the day of termination of the contract (section 228). The contract should also be available for inspection at the office in which the company is registered or a place that is specified in the regulations under section 1136. Any member of the company will also be entitled to gain access to a copy of this memorandum upon request and after payment of any fee that may be prescribed (Harrigan,2015). This thus means that John will be required to draft up written documents detailing the terms of the contract of service awarded to Sean and this document will then be availed to the shareholders upon demand. If a default is made in any of these regulations of section 228, every officer in the company who is in default is considered to have committed an offense. Any individual who is guilty of an offense in this section is liable to a fine not exceeding level 3 of the standard scale upon conviction. A daily fine is also imposed on defaulters which do not exceed one-tenth of level three of the standard scale. Thus it is very crucial that all the regulations on documentation should be followed.

The company should also ensure there are plans put in place to pay Sean in a case for any reason he has to lose his job before the stipulated term of service is over (Ramel and passfield, 2013). Under the Act (Section 215 -222) the director should receive at least 200 euros in case they lose their job. The law provides that this compensation for the termination of employment should be in connection with the management of the affairs of the company and not just loss of the position of director. The director should also receive payment in connection with retirement. This payment also extends to connected persons, quite similar to the older bona fide payments.

As discussed earlier, any other payments made to the director of a company will have to receive shareholder approval. This is not the case where a payment is made in good faith following one of the following circumstances: discharge of a legal duty that exists, damages for breach of such a legal duty, settlement of any claim that may arise in connection with the termi...