Analyzing Carillon's Corporate Failings In Light Of Director's Duties And Insolvency Law In The UK (essay).

1.Identify and explain various business concepts and principles and their interrelationships .
2.Articulate the substantive legal rules in relation to specified company and business law areas.
3.Apply the substantive law to specific cases .
4.Indicate how specific business activities can bring about liability.
5.Set out appropriate remedies for injury, damage or loss caused by a defendant’s breach of legal duty.
6.Analyse legal commercial entities – their constituents, and their civil legal rights and responsibilities.
7.Perform appropriate legal problem solving skills using clear and concise legal and business language.

Directors' Duties and Fiduciary Duty to All Stakeholders and Shareholders of the Company

The company Carillon has been in news  because of its corporate failings. The purpose of this paper is to analyze the situation of Carillion which has been subjected to corporate failing in the light of directors’ duties and insolvency law in UK. The paper also provides the steps which stakeholders and shareholders of Carillion may have taken against the directors for their actions under company law.

Directors of a company have been provided the sole responsibility to manage the affairs of the company as all shareholders and owners cannot directly participate in its operations (Hannigan 2015). In the light of the position which the directors have in the company they owe a fiduciary duty to all stakeholders and shareholders of the company as provided by the case of Regal (Hastings) Ltd v Gulliver [1942] UKHL 1. The duty is to act in best interest of the company and always give priority to the company’s interest over personal interest. The Companies Act 2006 specifically lays down statutory duties which the directors of the company have to comply with while discharging the duties in relation to the company through section 171-177 (Keay 2014). The directors are in a position to manipulate the functioning of the company in such a way that the interest of the shareholders and stakeholders is overlooked in relation to the personal interest of the director as per Re D'Jan of London Ltd [1994] 1 BCLC 561. This position allows the directors to misuse the resources of the company for making personal gains and subjecting the company and other shareholders and stakeholders to losses as per Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. The boards also as the responsibility of provide accurate information in the general meeting however it failed to do so in this case.

The feature of limited liability which is present in the company further helps the directors to get away with the losses which have been incurred by the organisation due to their activities (Roach 2016). This is because the shareholders and directors are only liable to pay the amount which they have invested in the company when the company faces insolvency as per Salomon v A Salomon & Co Ltd [1896] UKHL 1. A similar kind of situation has been seen in the United Kingdom with respect to Carillion. It has been seen that due to the actions of the directors the employees and other stakeholders of the company have been subjected to significant detriment. The company which was involved in outsourcing and construction has faced one of the most spectacular corporate failures in the United Kingdom. The company was made insolvent when it had debts of over £2 billion and is only left with £29 million in its bank (O’Grady 2018). It was the duty of the directors to ensure the interest of the stakeholder while making a decision in relation to the company as they are aware of the fact that their decision would have a direct impact on the shareholders and the stakeholder. The directors also have the duty to ensure that they make correct and evidence based disclosures, however the annual report of the company did not provide for any of the problems faced by the company (Annualreports.com 2018). The boards also as the responsibility of provide accurate information in the general meeting however it failed to do so in this case (French et al. 2014).

Statutory Duties of Directors under Companies Act 2006

The insolvency law which is present in the United Kingdom had made it more difficult for the stakeholders such as pensioners associated with the company to recover the losses which has been incurred by them due to the corporate failure. The primary legislation which governs insolvency in UK is the Bankruptcy Act 1952 and the Insolvency Act 1986. According to the Bankruptcy Act when our organisation has become bankrupt the first priority is to be provided to those creditors who have been into contractual relationship with the company before it was made insolvent. According to the IA 1986 the second priority as per section 176ZA is provided to expenses and fee which need to be paid to the person practicing insolvency in relation to the company by participating in its winding up. The third priority is provided to employee wages and amount due in relation to employees’ pension under section 175. Due to such laws stakeholders of the company such as the employees are subjected to significant detriments as they may not receive anything after the company pays off its first and second priority. The directors of the company also escape liability through the doctrine of limited liability even after causing the significant corporate failure. This situation in the UK definitely calls for reforms to the company and insolvency law. The directors of the company due to whose negligence or will full conduct the company is subjected too serious failure should not be allowed to escape by pocketing all of the companies money and subjecting the stakeholders to detriment and have to be made personally liable for any such actions.

In the case of Foss v Harbottle (1843) 67 ER 189 it had been ruled by the court that a company can make a claim against any unfair actions which it is subjected to. According to Section 994 of the Companies Act 2006 a member of the company has the right to file a petition before the court on specific grounds against the management of the company. One of such ground is that the affairs of the company are being conducted in a manner or already have been conducted in a manner which is considered to be unfairly prejudicial with respect to the interest of the members of the company in general or specific parts of its membersor a proposed or actual act or omission which has been done by the company which also includes omission or have done on its behalf is or would be prejudicial. Under the provisions of section 994 any member of a company can bring a petition.

Misuse of Resources and Manipulation of the Company's Functioning

In order to be successful the petition has to establish that the directors are carrying out the affairs of the company in a manner which is considered to be a prejudicial towards the interest of any or all shareholders of the organisation. In the case of Re a Company [1986] BCLC 376 the Court provided the type of interest which may be protected under the provisions of section 994 through the concept of legitimate expectation. It was provided in this case that the members have a legitimate expectation that the company would be managed lawfully in accordance with the articles of association and within the scope of directors’ duties. Therefore the members of Carillion would have the right to make a claim against the directors of the company under the provisions of section 994.

The directors of the organisation may also be removed show the passing of a resolution by more than 50% of the shareholders of the company under section 168 of the CA. Therefore the shareholders and stakeholders of Carillion had the option of removing the directors from the board and initiating fresh elections by requiring the directors to call a meeting as per section 303 of the CA.  The members can also ask the board to circulate a statement under section 314 of the CA. The shareholders can also make a derivative game against directors under section 262 of the Companies Act. For this claim they are required to take the permission of the court which is only provided by the court where the claim is for the benefit of the company which shows that the directors have made a profit out of the companies expense and subjective it to a loss (Rowa et al. 2017).

Therefore in the given situation Company Law in UK provided the shareholders and stakeholders of Carillion with various options of making a claim against the directors for any action which is against the interest of the company.

Conclusion

It can be concluded that if the directors are allowed to escape every time after indulging into such actions due to the doctrine of limited liability the situation which has been seen in relation to Carillion would be repeated many times in the future with respect to other companies. It can be argued that for the proper functioning of the organisation directors have to be provided with certain defences so that they can carry out business transaction freely. However if no restrictions are imposed on the manner in which directors of the organisation discharge the duties then the chances of the stakeholders and employees of the organisation being subject to detriment could significantly increased as it has been seen in the case of Carillion.  In the light of the situation it is the need of the hour to make the directors personally liable in account of serious corporate failings if not been made criminally liable.

References

Annualreports.com. (2018). Carillion plc - AnnualReports.com. [online] Available at: https://www.annualreports.com/Company/carillion-plc [Accessed 18 Mar. 2018].

Bankruptcy Act 1952 Foss v Harbottle (1843) 67 ER 189

French, D., Mayson, S., Mayson, S.W. and Ryan, C.L., 2014. Mayson, French & Ryan on company law. Oxford University Press, USA.

Hannigan, B., 2015. Company law. Oxford University Press, USA. Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 Insolvency Act 1986

Keay, A.R., 2014. Directors' Duties. Jordans.

O’Grady, S. (2018). The collapse of Carillion lays bare the reality of what is really happening to public services. [online] The Independent. Available at: https://www.independent.co.uk/voices/carillion-collapse-public-services-government-contracts-nhs-hs2-high-speed-2-construction-job-losses-a8159686.html [Accessed 18 Mar. 2018].

Re a Company [1986] BCLC 376

Re D'Jan of London Ltd [1994] 1 BCLC 561

Regal (Hastings) Ltd v Gulliver [1942] UKHL 1

Roach, L., 2016. Brexit and UK Company Law.

Rowa, A.A., Borahima, A., Rifai, A.B. and Marlang, A., 2017. The Rights of the Shareholders Minority in a Company: A Critical Analysis. JL Pol'y & Globalization, 62, p.13.

Salomon v A Salomon & Co Ltd [1896] UKHL 1The Companies Act 2006