When it comes to conducting profitable business, individuals can associate themselves with two primary types of organizations: partnerships and companies. Each category has distinct legal characteristics. Companies are incorporated entities, while partnerships are not. Incorporation establishes a separate legal entity, whereas unincorporated entities lack independent existence.
Companies can be categorized as limited by shares, guarantee, or unlimited. The regulations governing companies are outlined in two key documents: the Memorandum of Association, which defines the company’s powers and duties, and the Articles of Association, which governs its internal administration.
Within a company, members participate in general meetings alongside the board of directors. The board, comprising directors, is delegated the responsibility for day-to-day management, with accountability during these meetings. Directors exercise powers delegated by the members, and delegation is to the board as a whole, rather than individual directors.
Incorporated companies offer several advantages over other business associations, with limited liability for members being a significant highlight. Under the law, a company and its members are considered distinct entities.
Advantages of incorporation include:
- Corporate status
- Limited liability
- Permanent existence
- Transferability
- Contractual ability
- Delegated powers
- Economic and financial benefits
However, incorporation also presents certain disadvantages, such as formalities, administration expenses, inspection, and the impact on company activities.
If a shareholder expresses dissatisfaction with a director’s actions, legal action can be pursued through derivative action. This legal concept enables a shareholder to sue on behalf of the company. To proceed, the shareholder must obtain court permission. Upon approval, the shareholder can pursue the claim; however, an unsuccessful attempt may result in bearing the opposing parties’ costs and facing an order restraining further action.
Court permission is typically granted if the court finds a prima facie case to answer. Key criteria for granting permission include:
- The best interests of the company in pursuing the matter through court
- The absence of personal motives or ulterior agendas from the shareholder
- Compliance of the director with the duty to promote the company’s success
Directors generally do not bear personal liability; however, specific circumstances may render them personally liable for actions performed on behalf of the company. Directors can be held jointly and collectively liable for acts, omissions, or violations of their duties that harm the company’s interests or violate obligations towards third parties.
The Companies Act 2015 explicitly states directors’ obligations, which encompass:
- Acting within the powers granted by the company’s constitutional documents
- Promoting the success of the company
- Exercising independent judgment
- Demonstrating reasonable care, skill, and diligence
- Avoiding conflicts of interest
- Rejecting benefits from third parties
- Declaring interests in proposed transactions or arrangements in writing
Other factors that may be considered include:
- The shareholder’s good faith in bringing the claim rather than acting vexatiously
- Opinions of other shareholders without personal interests in the claim
- Availability of alternative remedies, such as shareholders’ agreements
Four exceptions to directors’ personal liability are recognized, covering:
- Acts that are illegal or beyond the company’s legal powers
- Irregularities in passing resolutions requiring a qualified majority
- Acts that infringe upon individual members’ rights
- Acts constituting fraud against the minority when the wrongdoers control the company
In conclusion, shareholders alone possess the right to sue directors on behalf of the company. Provisions for company representatives approaching the court on the company’s behalf are absent. Preferably, parties should seek amicable resolution through Alternative Dispute Resolution (ADR) methods.
