Company Law Reform Bill

The former owners of Quickshop Ltd. however can be liable for debts owed to the suppliers of equipment for the Homefreeze venture. Since the money lent was charged on the company’s assets, the former owners of Quickshop Ltd. therefore may be responsible for the company’s winding up. They hold some shares in the company; hence the so-called limited liability system provides the necessary mechanism for making the shareholders responsible for any financial problem of the company.

The UK Company Law of 1989 reads, “The director/s have a duty of care to the shareholder(s) of the company to act in the company's best interests even where doing so might come into conflict with their own personal interests. The concept of a company being a fully separate legal entity to the director/s is accepted in English & Welsh law save where they have acted in a fraudulent and/or reckless manner which could not be deemed reasonable by normal standards – In which case, the corporate "veil" can be lifted fully exposing the individuals behind a company to the full rigors of both civil and criminal law.

” Hence, since it was clear that Homefreeze Ltd. was on the verge of a financial collapse, Don, Dan, and David, even if they were not directors have an obligation to face criminal or civil charges. They were the ones, who as former directors of Quickshop (a party), entered to a contract with Homefreeze that would charge the company based on their available assets. The three gets the profits from the sale but experiences less risk from the financial status of Homefreeze.

It should be noted that the new UK Company law was created by the British parliament to stimulate the growth of micro-businesses in the UK, especially those concerned with companies having limited liabilities (Experts embrace new company law, 2005). The goal was to reduce red tape in the system and to small investors to engage in economic activities with low risk. It also provides that company owners and directors can engage in contracts that will reduce the liability of the company, in cases where the company’s profit level is above is marginal costs.

Since the three were the promoters of Homefreeze, on this condition, they may be held liable, only to the extent that they were promoters and not as shareholders. Under the new law, the shareholders of the company can only be responsible for their share of fraud or negligence. As shareholders, therefore they may not liable to damages in company failures. But as promoters or as charged creditors, they may face full responsibility of any company failure as in the case of Homefreeze.

In the winding up process, they also do not have priority in the winding up process, even though they were secured creditors since the law provides that all shareholders shall be deemed responsible for their share of fraud or negligence in case of a company failure. Even if they charge the company based on its available asset, still they are liable in their share of negligence. It is noteworthy that in the new law, the shareholders may be directed by law to provide reimbursement in cases of a financial collapse of a company to which they are attached in order to reinstate the financial status of the company.

The three however cannot be charged for wrongful trading since the UK Company Law of 1985 (unreformed provisions) provides that any person may engage in business contracts so long as it prescribes to the goodwill of the parties involved – the goodwill may be interpreted as the constitution of the company or existing laws on domestic trading of stocks. The three entered to a rightful contract as to mode of payment of Homefreeze.

It is noted that, “If required, an individual/company may partly pay for a share issue but this is done simply to allow for flexibility, eventually the full amount must be paid up within a certain period of generally no more than 5 years or as laid down in the company's Memorandum & Articles of Association” (UK Company Law Guide, http://www. scfgroup. com/business-services/cf-uk-law-guide. html. )  Hence, the payment to be made by the company to Don, Dan, and David was through a gradual transfer of share.

This mode of payment is seen as a just compensation for the creditors of the company to allow greater flexibility and unlimited liability. Hence, it is not correct to say that Don, Dan, and David own some share of the company as part of the interest of the debt and the total amount of debt. The debt is transformed as shares in the company for a time period specified by law. The parties may adhere or not to this form of agreement. The winding up process in Homefreeze is limited only to the shareholders and the directors, and, of course, to parties who had financial transactions related to the winding up process.

In the case of Homefreeze, no other companies were seen as “connected” to the financial collapse of the company. If for example the directors of Homefreeze entered into a contract with another company or private individual that eventually led to the collapse of the company, the directors are liable. The other party may also be held liable if proven that he has knowledge of the “relative economic injustice” in the contract.

References

Company Law Reform Bill [HL]. Sessions 05-06 Internet Publications. URL http://www. publications. parliament. uk/pa/ld200506/ldbills/034/06034. 15-21. html#j36. Retrieved August 25, 2007. Experts embrace new company law. 2005. URL http://www. contractoruk. com/news/002379. html. Retrieved August 25, 2007. UK Company Law Guide. 2007. URL http://www. scfgroup. com/business-services/cf-uk-law-guide. html. Retrieved August 25, 2007. UK Company Law of 1985 and 1989. 2006. Published from the Parliament Journal 165(18).