By referring to relevant legislation and case law critically discuss the main features of these forms of business organisation:
A business can be organized in several different ways. Some of the popular forms of business organization are sole trader, unlimited partnership and limited liability partnership. In this part of the assignment, these business forms have been discussed in detail.
Sole trader: In case of sole trader business, the business is owned and controlled by a single person even if a number of persons have been employed. For example, the persons who provide specialist service like plumbers, hairdressers and photographs run their business as sole traders. In case of a sole trader, the business does not have a separate existence from its owner. The result of this position is that the owners of the business are considered to be personally liable regarding the debts of the business. As a result, the owner of the business may be required to repay the debts of the business from his or her own pocket. This is known as the unlimited liability of the owners of sole trader business. Similarly, in case of sole proprietorship, the owner of the business is required to arrange capital for the business (Hannigan, 2003). The owner alone is responsible regarding the management of the business and in the same way, the owner is entitled to the profits of the business and also has to bear the loss suffered by the business. A sole trader business is also known as single proprietorship or single ownership. In case the business mainly consists of trade, the organization can be called as a sole trading organization. Generally, shops and small factories are run as sole proprietorship organization. A sole trader business is the simplest and it can also be formed most easily. The reason is that not much legal formalities have been prescribed to form a sole trader business. For example, in order to start a factory as a sole trader organization, only the permission obtained from the local authorities may be sufficient. In the same way, for the purpose of starting a restaurant, it may only be required that the permission from the local health authorities should be obtained. Similarly, for running a grocery store, the proprietor may only have to follow the rules that have been prescribed by the local administration.
Some of the important features of sole proprietorship can be described as follows:-
(i) Individual Initiative: In case of a sole trader business, only one person is the owner of the business.
(ii) Risk Bearing: In this case, the proprietor of the business is also the sole beneficiary of the profit achieved by the business. On the other hand, in case the business has suffered a loss, only the owner of the business will be required to bear the loss. Therefore, in case of a sole proprietorship, the risks associated with the business have to be borne by the proprietor of the business alone.
(iii) Management and Control: In case of a sole trader form of business, the management and control of the business are the responsibility of the owner of the business. Although in such a case, the owner may decide to employ a manager or other people around the business, but ultimately, the control lies with the owner.
(iv) Unlimited Liability: In case of a sole trader business form, the loss suffered by the business has to be borne by the owner. Similarly, the owner of the business is also liable for the debts of the business. In case the assets of the business are not sufficient to meet with the liabilities of the business, the personal assets of the owner of the business can also be held liable.
(v) Secrecy: As in this case, all the important decisions have to be taken by the owner itself, the secrets of the business can be closely guarded.
Unlimited partnership: A partnership can be described as an association of persons who have decided to combine their managerial abilities and financial resources for running a business and to share the profits of the business according to the agreed ratio. As the sole provider has limited ability to finance the business and in the same way, the capacity of a single person to manage the growing business is also restricted, a need for the formation of a partnership may arise (Hicks, 2008). Consequently, generally, a partnership business arises as a result of the need for expanding the business by putting in more capital, providing better control and supervision and spreading the risks. Therefore a partnership business is owned by two or more persons. Generally, a partnership deed is drawn up by the parties. This agreement between the partners mentions the type of partnership, how much capital is going to be invested by each party and how the partners are going to share the profits and losses. Some of the typical examples of professionals who generally form a partnership business are solicitors and doctors. In case of a partnership, all the partners can derive benefit from shared expertise. However, as is the case with sole trader, in case of a partnership also, the liability of the partners is unlimited.
Main features of a partnership are as follows:-
(i) Existence of an agreement: A partnership is created between the parties on the basis of an agreement that has been concluded between two or more persons to carry on business jointly. The terms and conditions related with the partnership are mentioned in the document that is called the partnership deed. However, a partnership can also be deleted on the basis of an oral agreement.
(ii) Engagement in business: A partnership can be created only on the basis of business activities. Such a business may include any trade, industry or profession. Therefore, a partnership may be involved in any occupation, for example, the production or the distribution of goods and services with a view to earn profit.
(iii) Sharing of profits and losses: In case of a partnership business, all the partners have to share the profits and losses of the business. In case of an absence to an agreement to the contrary, the profits and losses of the business have to be shared equally by all the partners.
(iv) Unlimited liability: In case of a partnership, all the partners have unlimited liability as is the case with the sole proprietorship. If the assets of the partnership business cannot cover the liabilities of the business, the personal property of the partners can also be held liable.
(v) Agency relationship: In case of a partnership, the business is carried on by all or any of the partners who are acting on behalf of all the partners. Therefore each partner can be considered as a principal and may act in its own right. Similarly, each partner can also act on behalf of the other partners, and as their agent. Therefore, the actions of each partner can bind the other partners.
(vi) Common management: Under the partnership, each partner has the right to take part in the management of the business. It is not necessary that all the partnership take part in the routine activities of the business. However, they are entitled to do so. Even if the business is being run by some of the partners, the consent of all the partners is required to take important decisions.
Limited Liability Partnership: In case of the United Kingdom, Limited Liability Partnerships have been introduced by the Limited Liability Partnerships Act, 2000. This legislation introduced LLP to the partnership law in the United Kingdom. Therefore now a limited partnership can be established to run the business. In case of a limited liability partnership, it is required that there should be at least one general partner and in the same way, there should be at least one limited partner. The responsibilities of the general partners and the limited partners are different. Similarly, the level of liability regarding the debts of the business is also different. In case of the general partners and the limited partners. However all the partners have the tax regarding their share of the profits. As mentioned above, there should be at least one general partner and one limited partner. Such a partner can be an individual or it may be a company. The law provides that a single person cannot be a general partner as well as a limited partner at the same time. As a limited partner, a person may contribute an amount of money or property at the time of the establishment of the business. Similarly a limited partner is only liable for the debts and obligations of the business up to the amount that has been contributed by them. A limited partner also does not have the authority to manage the business and similarly the limited partners cannot remove the original contribution to the business.
By referring to relevant legislation and case law critically discuss the fiduciary duties of directors of private limited companies in the UK.
In this part of the assignment, the fiduciary duties of the directors have been analyzed. As the directors are the main management organ of the company, they are required to act for the benefit of the company. In this way, it has long been held by reports that the directors occupy a fiduciary position. A classic case is Aberdeen Rly Co v Blakie (1854), where the court stated that “the directors are a body to the duty of managing the Gen. affairs of the company has been delegated. Before the implementation of the Companies Act, 2006, the law related with the duties of the directors comprised of common law and statutory law. The Companies Act, 2006 contains a statement regarding the fiduciary and, not duties of the directors. It is worth mentioning that the duties of directors are owed towards the company and as a result, these duties may only be enforced by the company. The duties prescribed by the Companies Act, 2006 are as follows:-
The duty to act within their powers (s. 171);
The duty to promote the success of the company (s. 172);
The duty to exercise independent judgment (s 173);
The duty to exercise reasonable care, skill and diligence (s 174);
The duty to avoid conflict of interest (s 175);
The duty not to accept benefits from third parties (s. 176); and
The duty to declare a personal interest in a proposed transaction (s. 177)
In Howard Smith Ltd v Ampol Petroleum Ltd (1974), the court arrived at the conclusion that the main purpose for issuing the new shares is to reduce the percentage of the stake of the two shareholders in the company, who had refused to support the proposed takeover bid. Therefore the Lord Wilderforce was of the conclusion that the new allotment of shares by the directors of the company under such circumstances can be set aside even if no self-interest was involved in this case. The reason was that at the time of the allotment of new shares, the intention of the directive can be described as mala-fide. Moreover, the court also stated that any act or the decision made by the directors that is not within the scope of the Constitution of the company can be described as a void act. If it is a case of merely exceeding the powers of the directors, in such a case it can be described as a voidable decision.
As the directors are considered as the fiduciary agents of the company, they cannot use their powers beyond the scope of the Constitution of the company or for their personal benefit. This rule provides a remedy to the shareholders (Keay and Walton, 2003). Therefore, when the acts of the directors are not according to the Constitution of the company or the directors have misused their powers, such an action can be challenged by the shareholders. This rule was further explained in Hogg v Cramphorne (1967). In this case, the directors of the company had intentionally allocated new shares to the persons who were against the proposed takeover bid. This allotment was made by the directors only to save their own jobs in the board of the company (Finch, 2002). Therefore, the court arrived at the conclusion that the directors have not use their powers properly and as the allotment of new shares was not honest, the allotment was held to be void. The duty of the directors to promote the success of the company has been mentioned in section 172, Companies Act, 2006. This duty was explained by Lord Greene in Smith and Fawcett Ltd. (1942). It was stated that the directors are bound to use their powers “bona fide in a way that appears to them to be in the best interests of the company and not what may be considered by a court”.
Hence the powers that have been provided to the directors of the companies are inevitably given for the purpose of being used in the benefit of all the shareholders of the company. In Hutton v West Cork Railway Co (1883) It has been stated by the court that while on one hand, the companies are the institutions that have been established for maximizing the wealth of the shareholders, but at the same time, the company is also have a corporate social responsibility role to be played in the society (Dine, 2007). Section 172 as imposed significant duties on the directors, which should be discharged by the directors. The directors should take care of the likely consequences of any decision made by the director on the long-term interests of the company. In the same way, the director is also required to keep in view the interests of the employees of the company. Similarly, the director should try to foster the business relations of the company with its suppliers, customers and others. The directors should always consider the overall impact of the operations of the company on the environment and community. The directors should also make efforts to maintain a reputation of the company for its high standards of business conduct. At the same time, the directors should also act fairly among all the members of the Corporation.
In Lonrho Ltd v. Shell Petroleum Ltd. (1980) It has been stated by Lord Diplock that the directors of the company are not only required to consider the interests of the shareholders, but at the same time, they should also keep in mind the interests of the directors of the company. Similarly in Liquidator of West Mercia Sofetwear Ltd v. Dodd (1988) the court was of the opinion that when a company was facing insolvency, in such a case, the directors of the company should also start considering the interests of the creditors of the company. Therefore in case of the insolvency of the company the fiduciary duties of the director’s shift towards the creditors of the corporation.
Hence it can be said that under all circumstances, the interests of the corporation should remain the highest consideration for the directors of the company except in case where the company is facing insolvency. In the same way, the directors are required to take all the steps that are necessary for ensuring the success of the company and for enhancing the reputation of the company and to make sure the prosperity of the members of the company by every decision made by them.
At the same time, if it is found that the directors of the company have breached their duties, there are certain remedies that are available to the persons who have been affected as a result of such breach of duties by the directors. Generally a breach of duty takes place on part of the directors where the directors have focused on their personal interests instead of keeping in view the interests of all the shareholders of the corporation.
References
Andrew Keay and Peter Walton, 2003, Insolvency Law: Corporate and Personal, Pearson Longman,
Dine, Janet, 2007, Company law 6th Edition: Palgrave Macmillan
Hannigan, Brenda M. 2003 Company law / Brenda Hannigan 2nd Edition Oxford University Press
Hicks, Andrew, 2008, Cases and materials on company law Edited By Andrew Hicks, S.H. Goo, 6th Edition: Oxford University Press, Roy Goode, Principles of Corporate Insolvency Law, Third Edition, Sweet & Maxwell, 2005
Vanessa Finch, 2002, Corporate Insolvency Law: Perspectives and Principles, First Edition, Cambridge University Press
Case Law
Aberdeen Railway Co v Blaikie Brothers [1854] UKHL 1
Hogg v Cramphorn Ltd [1967] Ch 254
Howard Smith Ltd v Ampol Petroleum Ltd [1974] UKPC 3
Hutton v West Cork Railway Co (1883) 23 Ch D 654
Lonrho Ltd v. Shell Petroleum Ltd. [1980] 1 WLR 627
Smith and Fawcett Ltd. [1942] Ch 304
West Mercia Safetywear Ltd v Dodd [1988] BCLC 250
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