Legislation And Case Law On Forms Of Business Organisations And Director Duties In Private Limited Companies In The UK

1. By referring to relevant legislation and case law critically discuss the main features of these forms of business organisation:
1. Sole trader
2. Unlimited partnership
3. Limited Liability Partnership 

2. By referring to relevant legislation and case law critically discuss the fiduciary duties of directors of private limited companies in the UK. These shall include:
1. Duty to act within powers
2. Duty to promote the success of the company
3. Duty to exercise independent judgment
4. Duty to avoid conflicts of interest

Features of Sole Trader Form of Business Organization

A sole trader is a type of business organization which is owned, managed and controlled by a single person. He is the only person who has to do all the arrangements with regards capital required to run the business as well as manage the business single-handed. Thus since the business of a sole trader is a one man show, therefore the profits earned are also only his and he is not required to share the same with anyone and the losses are also only his i.e. he is the one responsible for the loss that the business entity has to face. But it is equally important to note that even though he is the only decision maker in such a form of business organisation, yet he can take the help of his family members or such other specialists and professionals.

The sole trader is also known as proprietorship form of business. In this case the business and the individual who owns the business are considered to be the same entity, thus any suit bought in the name of the proprietorship firm is directly bought in the name of the proprietor as well. The kind of organizations which generally form a part of this form of business organization are small factories and retail shops of a relatively smaller size. As mentioned earlier, sole proprietor does not demand for many legal formalities and is very simple to form. Such as to start the business of trading one needs to just procure a trade license.

In terms of law, the sole trader and the business is the same concern ie. The assets and liabilities of the business are the personal assets and liabilities of the person as well. Apart of operating a bank, insurance company and a society, a sole trader can be a part of any business. It is not necessary that the name of the business has to be in the name of the owner only, the owner can keep some other name of his business as well but the same has to be compulsorily registered under the Business Names Act. However the same is not very expensive and once the registration is done, other business owners cannot use the same name. Since the same is not a legal entity by itself thus it does not require the business to pay taxes but the owner will have to pay tax under business profits (Legal Advice Centre, 2014). The liability of a sole trader unlike many other more structured forms of business organizations is unlimited. The financiers and the other creditors can easily receiver their dues not only from the assets of the business but also the personal assets of the sole proprietor as well.

Features of Unlimited partnership form of business organization

An Unlimited partnership form of business organization is also known as simply partnership. It is basically an association between two or more people who are engaged in a business together and share the profits and losses as per the agreed proportions generally equally. The Partnership Act 1890 of UK covers the said form of business organization. Here the liability of the partners are joint and several just as they own the property in common. The act specifically defines the fact that two persons agree to work jointly with a simple aim of earning profits (Deards,2001). It is not necessary that there has to be a legal documentation of the same i.e. the partnership can commence after oral discussion or by conduct as well. It compulsorily needs at least two people to form a partnership, however after 2002 the limit on the maximum number of members have been uplifted and the same is now unlimited (Martin, 2016).

As per the Act, until and unless any provision is specifically excluded, each partner has equal rights to take part in the management, have his share of agreed profits, bear his share of loss and also has no right to be thrown out of the partnership by other partners without conducting a formal procedure (Lawsonlewis.co.uk., 2015). However, any partnership comes to an end if any one of the partner expires. Further as is mentioned that a partner is jointly and severally liable for all the debts, hence there is no term called limited liability in a partnership also similar to the sole trader.

With regards taxation, partnerships are clear i.e. each partner is taxed as an individual and the partnership firm is taxed separately from its owners. The partnerships have to adhere to the specific tax rules and regulation and the anti-avoidance measures as well. However some people are not allowed to form partnerships, they are the charitable institutions and Not-for profits firms (Ferran, & Chan Ho, 2014).

Last but not the least, in an unlimited form of partnership a partner is not allowed to set up a business which is similar to that of the firm in which he is a partner and if he does so then he would be have to account for all the gains he makes from the business to the firm. Thus if the business conducted by a partner individually is in competition with the firm only then the said feature applies as in the case of Trimble V Goldberg [1906] AC 494.

Features of Limited liability partnership Form of business organization

A Limited liability partnership (LLP) is an unconventional commercial dealing vehicle that merges supple organization of a partnership with the benefits for its partners (or “members”) of limited liability. LLP is a relatively new concept in comparison to the other forms of business organization. The same came into existence in UK by the introduction of the Limited Liability Partnership Act 2000 in Great Britain and Limited Liability Partnership (North Ireland) Act 2000 in North Ireland. It is a separate legal entity from its members or partners Like the limited company. On a LLP being incorporated, it will get a unique registration number by the Companies House. The same will remain with the LLP irrespective of the name change until it is liquidated. The restrictions to a LLP is very similar to that of a limited company (Smith, 2015).

LLP being a separate legal entity, has unlimited capacity and can perform all that activities which a natural individual is entitled to such as having a property registered in the name of a LLP, entering into contracts and agreements, being sued or sue some other person or legal entity. Any change in the number of members of a LLP does not have any adverse consequences on the existence of the same. But if the membership of an LLP becomes less than two and it still trades for more than half a year then the benefits and advantages of limited liability does not exist anymore (Ainsworth,2011).

The members of a LLP basically perform the functions similar to an agent and their liability is limited to the capital contribution made by them and the share of profits not yet withdrawn. This is what makes it different from the traditional partnership form. Thus it can be rightly said that UK LLPs have joint responsibility but not several responsibility for the decisions take by others. Thus here the members are to bear the loss to the extent they have put in the capital. But some situations may arise because of which the members may have several liability as well such as negligence on the part of a member due to which the LLP has to become liable, in such a scenario the victim may end up suing the member also along with the LLP (Companylawclub.co.uk. 2015). Further indulgence in any kind of wrongful act such as trading would apply to a LLP in the same manner as it applied to the limited companies thus enabling the fact that the members would be held equally liable if they have allowed occurrence of such a fraudulent act. The same would depend on the involvement of the member and their contribution towards the conduct of the said fraud. As in the case of Laverty V Massad (2009), the LLP member is not allowed to bring an action against any member so as to reinforce rights or redress injuries of LLP and the plaintiff lacked standing to the extent he purported to do so (Miller, 2011). The penalty to be levied has no limits and it is solely at the discretion of the court as to how much would be the penal charges.

Even though a LLP is said to be similar to a limited company yet for tax purposes, it is treated similar to a partnership firm and its members are taxed as a partner i.e. each partner is responsible to pay tax on his share of profit form the LLP. Further to this, similar to a limited company. Thus it can be said that it is UK transparent and does not pay any corporation or capital gains tax

Thus lastly it can be construed that the LLP is basically used by the accountants to maintain the tax structure of old form of partnership but further adding the features of a limited liability protection to some extent. The said form of business organization is gaining importance amongst professionals such as solicitors even though they are allowed to use a limited company structure(McCahery, & Vermeulen, 2004). 

References

Ainsworth,K., (2011), Key Characteristics of Limited Liability Partnerships, Available at https://www.wrighthassall.co.uk/knowledge/legal-articles/2011/02/20/key-characteristics-limited-liability-partnerships/ (Accessed 23^rd April 2017)

Companylawclub.co.uk., (2015), Limited Liability Partnerships (LLPs), Available at https://www.companylawclub.co.uk/limited-liability-partnerships-llps (Accessed 23rd April 2017)

Deards,E., (2001), Partnership Law in the twenty-first century, Journal of Business Law, Available at https://irep.ntu.ac.uk/id/eprint/12983/1/186865_304%20Berry%20Publisher.pdf (Accessed 23^rd April 2017)

Ferran,E., & Chan Ho,L., (2014), Principles of Corporate Finance Law, Second Edition, Oxford University Press: UK

Lawsonlewis.co.uk., (2015), Partnership Law, Available at https://www.lawsonlewis.co.uk/partnership-law.htm (Accessed 23rd April 2017)

Legal Advice Centre., (2014), UK Company Structure, Available at https://www.qlegal.qmul.ac.uk/docs/122578.pdf (Accessed 23rd April 2017)

Martin,R., (2016), Partnerships (unlimited or limited), Available at https://www.rossmartin.co.uk/starting-in-business-77750/121-limited-or-unlimited-partnership (Accessed 23rd April 2017)

McCahery, J.A. & Vermeulen, E.P.M. (2004). Limited Partnership Reform in the United Kingdom: A Competitive, Venture Capital Oriented Business Form. European Business Organization Law Review, 5(1), pp.61–85.

Miller,E.S., (2011), Recent Case Involving Limited Liability Companies and Limited Liability Partnerships, Available at https://repository.out.ac.tz/1644/1/Cases_on_Limited_Liability_Companies_and_Partinerships.pdf (Accessed 05th May 2017)

Smith,J., (2015), A guide to Limited Liability Partnerships (LLPs), Available at https://www.yourcompanyformations.co.uk/blog/a-guide-to-limited-liability-partnerships-llps/ (Accessed 23^rd April 2017) 

2. The Companies Act 2006 was enacted in the month of November 2006. It was a result of a nine year old project which led to the highest representative review of UK company law for over four decades. As per Section 154 of the Companies Act 2006, all companies are compulsorily required to appoint at least one director in case of a private company and two in case of public company. It is due to the fact that a company is an artificial legal person and thus needs a representative to act on behalf of a company. Thus as per law, a company’s directors are such individuals to whom the law looks upon for management of the conduct of the company on behalf of the owners or the shareholders. The same is applicable in case of small private companies as well where the number of shareholders may be one or two and in such a scenario also it is a necessity to have at least one director. Here the director and the shareholder may be the same person and even then as per law there is a practical division amid the interest of the investor as owner of the company and the errands of the director as the person who makes decisions on its behalf (Goddard, 2012).

One of the main results of the company law’s reform was the ‘codification’ of the principles of directors’ duties under the common law which has been specifically been agreed upon by the CLR and by the law commission of England and Wales and Scotland. In the past in UK, it has been said that the main aim of any corporate entity is to ensure that the shareholders value is maximised and the other aims are secondary. But recently the said notion has undergone changes wherein people have argued to the fact that the activities performed by the directors on behalf of a company has a great implication on the other factors of the society as well thus it would be unjust to operate with a mindset of only maximising shareholders’ wealth. Before the enactment of the said Act, the duties of the directors used to be categorised under three main headings i.e. fiduciary duties, the duty to perform with due care and skills and statutory duties.

As per law, a director is said to be in a fiduciary position i.e. a person who has agreed upon to perform his duties on behalf of someone else in such a manner which gives rise the relationship of faith and assurance. Thus it can be rightly said that they are expected to behave in the best interest of the person whom they are representing. Section 170-177 of the CA 2006 specifically prescribes the common law duties of a director of a company (Hood, 2013). As per Section 170(1) of the CA 2006, clearly mentions that the various provisions stated out with regards the duties of a director is for the company as a whole. They are not entitled to represent any single shareholder or a group f shareholders but the entire company.

As per Section 171, a director is compulsorily required to perform his duties as per the constitution of the particular company and thus is required to implement such powers only for which are being awarded to them. Section 171(a) states that the directors have to work i accordance with the directions mentioned in the constitution of the company and also be bound with the various limitations that are imposed via the constitution. By constitution it does not only mean compliance with the provisions mentioned in the articles of a company but also various resolutions passed and agreements entered into from time to time (Gibbon et.al. 2017). Section 171(b) states that the directors are to follow what is known as ‘proper purpose doctrine’ which was introduced by the court of law, mentions that the directors act as agents of a company who have been given huge powers to conduct the affairs of the company in its best interest and thus utilise it only for the benefit of the company and not for any improper purpose which is not in line with the company’s aims and goals(Salmon, 2008) .

Next is Section 172 of the CA 2006 and is one of the most crucial of all the provisions which mentions about the duties of a director. The said section was a matter of inevitable discussion amongst all the others when the Bill was placed and discussed in the Parliament. Although the said section is reflected as a single section but on careful evaluation, it is understood that it comprises of two parts. The first part demands a director to behave in a manner that is considered by the director as acting in good faith and which would help in promoting the accomplishment of the corporation for the advantage of the members on an overall basis. Although the same is in conjunction with the past common duties of a director to act in the best interest of a company and in good faith, thus if there is a misjudgement which is honest, then the same will not be construed as negligent (Rowe, 2013). Therefore the first part basically has three main elements, first is in good faith i.e. as long as a director conducts his duty honestly and in a manner which is not negligent to their responsibilities, they have full rights to make decisions. The second key element of the first part is the inclination towards the obligation of directors to make decisions which would help a company to succeed ahead. The final key element of the first part is that directors should ensure that the success of a company if for the overall benefit of the members or the investors of the company and not their personal benefits. The second part of Section 172 covers the concept of enlightened shareholders’ value. The same was included after it being recommended by the CLR (Sweigart, & Pearse, 2012). Thus while making decisions, the directors will have to consider matters such as the implication of such a decision on the company in its long run future, the interest of the employees of the company, the requirement to develop a relationship with the vendors, creditors and financiers of the company, what kind of an implication would the operations of a company have on the society and the surrounding and finally the requirement to behave in an honest manner between the members of the company (Chivers, 2007).

The next Section i.e. 173 of the CA 2006 details the fact that a director must employ autonomous judgement. The said position has two qualifications. First and foremost, the duty to exercise autonomous judgement is not breached if the director performs his duties as per the contractual agreement entered into by the company which confines the future application of prudence by the directors. Second, the duty of a director is said to have not been violated if the directors act in a manner that is confirmed by the articles and the resolutions passed by the company. Therefore these qualifications ensure the shareholders of a company, if they find it right to put some restrictions over the powers conferred to the directors (Legislation.gov.uk. 2006). The said restriction is very well narrated in the case study Hogg v Cramphorn Ltd [1967] , wherein the directors utilised their power to issue the shares in order to stop the takeover which is not as per the powers they possess. The directors of a company has the power to issue shares only for raising capital and no other reason.

Further to this Section 174 of CA 2006 states that a director should ensure that while exercising their powers for making decisions, they should take reasonable care and apply adequate skills. The said section is of high importance as the UK law has recently emphasised that the directors should employ a high degree of skill and care while making any decisions on behalf of the company. Traditionally the level of expectation was not so high as has been highlighted in the new codification of the common law of directors duties. As for diligence it also states that the powers of delegation of duty to the juniors who are competent as per them does not free them from their duty to act in a careful and diligent manner. They are still required to supervise the work of their juniors as stated in the case of Re Barings plc (No 5[2000]1 BCLC 523 (Edwards, 2016).

The duty of the directors to avoid any kind of conflict of interest is dealt with in Section 175 wherein it mentions that a director should try to ensure that a situation which may cause a direct or an indirect conflict to interest of the company should be avoided. Thus it integrates the old provisions of the common law wherein it is stated that a director is looked upon as a trustworthy person, thus he should never do anything that can betray the trust. Regal (Hastings) Ltd v Gulliver [1942], is a famous case law of UK company law in which the ruling was made against the directors and officers of the company from taking the corporate opportunities which is against the duty of loyalty and trust of a director. Thus practically speaking, a situation wherein a personal interest of a director  if it clashes with that of the company, then he should give priority to the interest of the company and not his own. Further to this a directors’ duty does not resolve simply by resigning. As per Section 170 (2)(a), the duty to avoid any kind of conflict continues to apply eve after he retires from the said position, thus even after the director has left the current position, he still has a duty of not exploiting the company’s property basis the information he secures during his tenure as a director. However the said duty has two exemptions, first it is not applicable to such conflicts that arise with regards the any such transaction entered by a director with his own company and such situations are separately addressed in Section 177 and 182 of CA 2006 and second the director will not have been said to violate the duty if the situation is such that it cannot be regarded as reasonably being likely to give rise to any such conflict of interest.

Under Section 176, a director is expected not to accept any advantage from any third party which is determined for his being a director of that company or he performing any such function which is equivalent to performance by a director. The said duty has been imposed to ensure that a director is not sidetracked from his actual performance of duties as laid down by the various sections of CA 2006 by being offered of some bribes for performing unauthorised acts. But a director can accept any benefit from a third party if the same is not likely to cause any kind of conflict of interest and the same is not related to the affairs of the company or cause any kind of detriment to the company (Davies, 2007).

Lastly is Section 177 wherein a director is required to declare any kind of interest he owes in any transaction being entered by the company. This basically ensures maintenance of transparency and is also a sort of combat against the rule of conflict of interest. Such a declaration should be made before the transaction is concluded or entered into so that the decisions can be finalised in accordance (Miller et.al. 2016). However a declaration is not mandated if such an interest does not lead to any kind of conflict of interest or the director is not aware of any such interest or the others already know of the directors interest.

Therefore on a concluding note it is understood that these basic duties are of utmost importance to ensure that the directors perform their functions being a part of the fiduciary position carefully. The most prominent method by which such limited companies are expected to account for the conduct of the affairs of the company to their members and other who are not a part of the company directly, is by complying with various legal formalities and publishing the annual accounts wherein they are required to give a detailed directors’ report stating the performance about their duties and responsibilities towards the company.  

References

Chivers,D., (2007), The Companies Act 2006: Directors’ Duties Guidance, Available at https://corporate-responsibility.org/wp-content/uploads/2013/11/directors_guidance_final.pdf (Accessed 23rd April 2017)

Davies,J., (2007), A guide to directors’ responsibilities under the Companies Act 2006, Available at https://www.accaglobal.com/content/dam/acca/global/PDF-technical/business-law/tech-tp-cdd.pdf (Accessed 23rd April 2017)

Edwards,S., (2016), The UK Corporate Governance Code : Directors’ Duties, Available at https://www.jordanscorporatelaw.com/our-thinking/blog/-/blogs/the-uk-corporate-governance-code-directors%E2%80%99-duties (Accessed 23^rd April 2017)

Gibbon,N., Peel,G., Garston,C., & Salaman,B., (2017), Corporate governance and directors’ duties in the UK (England and Wales): Overview, Available at https://uk.practicallaw.thomsonreuters.com/3-597-4626?__lrTS=20170420173321327&transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1 (Accessed 23^rd April 2017)

Goddard,R., (2012), UK: England and Wales: Directors’ duties – disclosure, creditors and other matters, Available at https://corporatelawandgovernance.blogspot.in/2012/01/uk-england-and-wales-directors-duties.html (Accessed 23rd April 2017)

Hood,P., (2013), Directors’ Duties Under the Companies Act 2006: Clarity or Confusion? Journal of Corporate Law Studies, 13(1)

Legislation.gov.uk., (2006), Companies Act 2006, Available at https://www.legislation.gov.uk/ukpga/2006/46/part/10/chapter/2/crossheading/the-general-duties (Accessed 23rd April 2017)

Miller,E.S., Bond,K., & McMahan,E., (2016), Directors’ Duties in the UK (England and Wales), Available at https://www.reedsmith.com/Directors-Duties-in-the-UK-England-and-Wales-10-31-2016/ (Accessed 23^rd April 2017)

Rowe,M., (2013), The Directors’ Duties of the Companies Act 2006- If You Cant take the Heat, Get Out of the Kitchen, Available at https://www.academia.edu/4550919/The_Directors_Duties_of_the_UK_Companies_Act_2006 (Accessed 23rd April 2017)

Sweigart,R.L., & Pearse,S.J., (2012), Company directors’ general duties under the English Companies Act 2006, Available at https://www.lexology.com/library/detail.aspx?g=9813cd03-5099-4773-8fed-acec913a08e3 (Accessed 23^rd April 2017)

Salmon,P., (2008), UK: Directors’ Duties & Liabilities Under The Companies Act 2006, Available at https://www.mondaq.com/x/63438/Directors+Officers/Directors+Duties+Liabilities+Under+The+Companies+Act+2006 (Accessed 23^rd April 2017)