International Finance Reporting Bista; Susan

Module Code: AC5001NI

Student ID: 17031073

Submitted by: Submitted To:

Student Name: Susan Bista Mrs. Sinja Poudyal (module Leader)

BA (Hons) Business Administration Lecturer, BBA Faculty

Student Number: NP01BA4A170062

Group: L3F2

Words Count: 2000

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International Finance Reporting Bista; Susan

1. The merits of the liquidator’s arguments, in British company law, that Mr Lay cannot recover his
loan from the company and that he should instead be made to contribute to the company’s debt
on the ground that there is no difference between him and the company.

Have a dream, imagine a world, identify a group of powerful people and give them what they want. You
don’t want to remember this when you wake up. Every flip offers two choices and every focus is on what
cost other might bring when an evil mind is chosen, you fear to lose. The rise and fall of empire occurs as
one breaks down the others and same story was re-lived by a group of people when all collapsed from
the base on December 2nd 2001 when Enron filed for bankruptcy. Founder, director of Enron, formed as a
merger of two natural gas companies, had some much to do to build this house of cards. These people
had claim over the decks over which company laws were easily promoted and deregulated.

Gambling of Company’s assets and reserves also encouraging employees to do so. Here, the director of
best company should have known the company was bankrupt and worthless for year. Betting on a price
of oil, broadband and weather market, but failing to meet both production and consumption, which had
a role in downfall of Enron.

Rules

 Section 40(1) - Dealing with the company, a director must act in good faith and
acts are beyond power of director S40 (2) (b).
 Section 171 of CA 2006- proper purpose rule contained state “directors must use power
for the benefit of company not to further their own interest.”
 Under company law UK standard of care is being derived from the law relating to wrongful
trading of directors
 under s 144- As a contributory, holders of fully paid are shares also member, are liable to
contribute subject to any limits on their liability provided
 Section 178 and 179- under company law there are certain rules and certain debts are
non-provable and liquidator has right to disclaim given to him
 S 174 of Companies Act 2006- the director owes a duty of care to the company at common
law to act negligently in managing its affairs.

Case Laws
Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498

Howard V patent Ivory manufacturing company

Re William C Leitch Ltd (No. 2) [1933] Ch. 267-

Thomas Saunders Partnership v Harvey [1989Pakistan National Shipping [2003

Analysis

For a new when an economic system get a pass, we debate about family life, we debate education but to
debate the fundamental structure of capitalism which is not about markets and not about the government
but how you organize the production and distribution of the goods and services but to fear is what
capitalism does with employers and employees. Karl Marx works about the state, endlessly studied the

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production and distribution of goods and services because it’s the core of economy. But Mr. Lay’s
company was trading against future product on floating charge which it never produced to earn real profit
but the company managed to hide real data from the investors and general shareholders, which shows
intentional misappropriation of company’s assets and fiduciary to investors and general shareholders.
Negligence in managing of its affairs of gambling by employees, fiduciary in accounting.

Here Mr. Lay, the director of the company himself had liquidated $200 million to company and he must
have had all the knowledge of inside information of the company. Howard V patent Ivory manufacturing
company –in case of forgery the doctrine of indoor management this case is exception and directors will
be liable for the deals made with the knowledge of internal irregularity. Under s 178 and 179 the liquidator
has right to disapprove certain debts given to earn profit for oneself. The director had the knowledge of
internal irregularity of the company, the company was not performing well and they were not generating
any profit rather only inflating the price of stock and cashing in multimillions to personal account and
hiding real profit and debt from general shareholders and investors. As Section 414(1) provides company’s
annual accounts must be approved by board of directors and signed on behalf by a director of company.
A directors be personally liable for a breach of duty to creditors (see Liquidator of West Mercia Safety
water Ltd v Dodd [1988] BCLC 250). The losses were not stated in financial books of accounts for creditors.
See (Re William C Leitch Ltd (No. 2) [1933] Ch. 267- if caught for fiduciary, lack of transparency and an
intentional misappropriation of company’s assets, the director is liable for company’s debt. If a liquidator
recovers money under wrongful and fraudulent trading heads, it goes into a fund for all the creditors( Re
William C Leitch Ltd (No 2) [1933] Ch. 261). (Charles & Stuart)

You can’t have a small group of people in a government cutting a deal with a small group of employers at
the expense of a large group of people called shareholders. Director Mr. Lay and company is not separate
but the same entity, a similar case cited is Lee v Lee’s Air Farming Co. Ltd. Also from case law, Connolly v
Sellers Arenascene Ltd (2000) 633 IRLB 15 director/ controlling shareholder will be regarded as an
employee. If the company defaults in sending out copies of its accounts and reports, then under s 425 an
offense is committed by the company, and every officer of the company who is in default. The officers
and others may be held personally liable for certain debts of the company under the rules relating to
wrongful and fraudulent trading, from the assets of the company, relating the rule of corporate
personality the directors could be liable as per law for stealing and misusing from the company which they
owned. (Charles & Stuart). Also from case law, Dorchester provides personal liability for directors in such
amount for insolvent liquidation to company’s debts under s 144, as a contributory, holders of fully paid
are shares also member, are liable to contribute subject to any limits on their liability provided by s 74 of
the Insolvency Act 1986 (Re Anglesey Colliery Co (1886) Ch. App 555). The director owes a duty of care to
the company to act negligently while managing its affairs will be liable for the negligence of duties and
care to see (Thomas Saunders Partnership v Harvey [1989]). From the case of Pakistan National Shipping
[2003] - It follows that directors may be personally liable for fraudulent misstatements. The tort of deceit.
Irrespective of whether a special relationship is found to exist. The criminal standard of proof applies to
civil claims for fraud. (Charles & Stuart)

This is the dark side of capitalism which is seasoned by greed has shown us both the upward surge and
malfunction and the malfunctions should have to be charged according to the law by order. Mr. Lay cannot
recover his loan from the company as he had knowledge of internal irregularity. To contribute to the
company’s debt, Mr. Lay is legally responsible as frauds were committed under his care and negligence.

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2. Mr. Louis Bourget’s and Mr. Andrew Fastow’s duties as directors of Enron, explaining which
duty, if any, they breached under the Companies Act 2006.
A) A small group of people over whom the management is fully entrusted, the directors of the company.
Here the director of the company, Mr. Louis Bourget, has outsourced millions of dollars of corporate funds
from Enron for his personal account. And also misappropriation of money by employees under his head
from gambling above limits over the price of oil from one could lose ten times the original investment,
the investment of a company Enron- a group of shareholders and employees. He is also charged for
manipulating earnings, destroying daily trading records. Certainly bringing others properties home is a
thief. Here Mr. Bourget has not only theft for himself but also encouraged the employee to do so. It was
found that they had gambled away all the company reserve and by acting fast they completely bluffed the
market.

Under Company Law, as a part of their general duties, the directors have a duty not to make any secret
profits. This is an equitable duty originated in directors’ role since O’Brien v Walker if the directors
misapply any funds they are liable to account for the profit made. A director must account to the company
for any personal profit he made in the course of his dealings with the company’s property, embodied in
ss 175 and 177 of CA 2006. But he managed to hide real accounts from the board. The proper purpose
rule contained in s 171 of CA 2006 states “directors must use power for the benefit of the company not
to further their own interest.” Mr. Bourget hadn’t performed the duties of care to the accounts and for
the greed of earning he held huge bets on the market. I also cite Dorchester Finance co Ltd v Stebbing
[1989] BCLC 498 where the directors were held liable for alleged negligence and misappropriation of the
company’s property. Louis Bourget is involved with others is jointly and severally liable, where money was
misappropriated for his sole benefit. Encouraging traders to gamble at high prices with the company’s
assets. Transferring corporate funds to the personal accounts without disclosing on general meetings is
also a violation of the law under CA 2006 chapter 2 part 10 s170, for which the director must be claimed
liable. The directors are liable to compensate the company as they have always been if they cause the
company loss by acting outside their powers (s 40(5)). This led to the violation of general duties of skill
and care which are aspects of the law of negligence. (REUTERS & THOMSON, n.d.)

As a director what Mr. Louis did was so related to the affairs of the company that it could properly be said
to have been done in course of his management and in the utilization of his opportunities and special
knowledge as directors and which resulted in profit to himself. See Regal (Hastings) Ltd v Gulliver [1942]
1 All ER 378. The director is liable for secret profit through the knowledge and opportunity gained as a
director. The directors do not owe any contractual or fiduciary duties to members of their company
(Pervical v wright 1902). In the case of Allen v Hyatt (1914) 30 TLR 444 the directors can be agents for
shareholders but liable if one doesn’t account for the profit which they had obtained. In the case of Re
City Equitable Fire Insurance Co [1925] Ch. 407 Romer J stated some duties of care and skills requires of
directors among them is, a director need not exhibit in the performance of his duties a greater degree of
skill than may reasonably be expected from a person of his knowledge and experience. (Charles & Stuart)
(Charles & Stuart)

Mr. Bourget has completely violated the general duties of directors and has acted in breach of other duties
and must account for his frauds to the company. A case of fraud and violation of company ethics. The
director concerned is under a fiduciary duty to communicate it to the company.

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b) In this case director of the company, Enron Corp, Andy Fastow is accused of being engaged in a
fraudulent scheme to defraud Enron‘s security holders and also for a sweet he enriched himself and also
others. He is also a general partner of a company LJM and LJM partnership existed solely to do business
with Enron. Using Enron’s stock as collateral for a lot of gambling. It was all like betting the company on
transactions. Enron was losing money on a cash basis and yet reporting profits. They had 500 million of
losses while the income was reported $1 billion, misstating earnings by over 50%. To keep stock price up
Enron hide the fact that it was 30 billion dollars in debt, which helped in inflating of Enron’s price as the
shareholder didn’t know anything behind the curtains.

Some fraudulent conduct by Mr. Andy Fastow involved of entering into undisclosed side deals,
manufacturing of earnings through sham transactions, inflating the value of Enron’s investments,
backdating documents and other illegal acts.

Under Company Act 2006 Section 155 states that a company must have at least one director who is a
natural person. A company cannot use its own stock to generate a gain or avoid a loss on its income
statement but Mr. Fastow completely tricked the audience by burying debt and burying losses. LJM was
creation of Fastow and he have had $45 million for himself from the deals made for the company. Similar
case to cite Allen v Hyatt (1914) 30 TLR 444, where the rule held that the directors had made themselves
shareholders and must consequently account for the profit which they had obtained. The proper purpose
rule contained in s 171 of CA 2006 state “directors must use power for the benefit of company not to
further their own interest.” LJM had many other subsidiary like Raptor, Jedi & etc. but when the directors
make a contract with an outsider on behalf of the company the directors will be liable for breach of
warranty of authority. Raptor losses were back stopped by Enron Stock. (Glen, 2018)

The losses were not stated in financial books of accounts for creditors. Section 40(1) provides that a
dealing with the company in good faith and acts are beyond powers of director’s s40 (2) (b). In the past
actions for breach of warranty of authority against directors have been successful e.g. in Weeks v property
(1873) LR 8 CP 427 where the company borrowed money in excess of its borrowing powers so that the
loan was ultra vires (Charles & Stuart). Enron was stashing debts in Fastow companies where investors
could not see it. The rules of law laid down in turquand and other general rules of agency with statuary
contribution of s 4 will not validate a forgery. A forgery is a crime and in no sense a genuine transaction.
(Charles & Stuart) Here Mr. Fastow has completely involved in covering the fact that Enron was becoming
a financial fantasy land. There are some fiduciary duties on which the directors are bounded for s 170(4)
CA 2006. CA 2006, s 171 requires a director to disclose any interest, direct or indirect, that he has in
relation to proposed transaction with the company. For breaching of any of these duties a director must
account of any personal profit made while dealing with company’s property the law is embodied in ss 175
and 177. To cite the similar case Gencor ACP v Dalby [2000] 2 BCLC 734, high court ruled that, the fact that
a fiduciary, such as a director, has made a profit makes him liable to account for it to the company.
Whether the company would have or would not have obtained the profit is irrelevant. (Charles & Stuart)

Under s 451 (1) of the Companies Act 2006, if a company fails to file a copy of its annual accounts and
reports with the registrar before the end of the period, then every person who immediately before the
end of that period who immediately before the end of that period was a director of the company commits
an offence. The company is liable to a civil penalty under s 453. This is in addition to any liability of the
directors under s 451. Actions were constituent with fiduciary duties to Enron and shareholders or notions
of common ethics and propriety.

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Bibliography
Charles, W., & Stuart, W. (n.d.). Company Law. In C. Wild, & S. Weinstein, Smith and keenan's Company
Law. Pearson Education Limited.

Glen, J. (2018). bto. Retrieved from www.bto.co.uk: https://www.bto.co.uk/blog/companies-act-2006-

director-duties-a-reminder.aspx

REUTERS, & THOMSON. (n.d.). UKpracticallaw. Retrieved from uk.practicallaw.thomsonreuters.com:

https://uk.practicallaw.thomsonreuters.com/0-107-
6876?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1