ASSIGNMENT

Course Code 18BMC206A

Company
Course Law and
Name Corporate
Governance
Programme B.B.A
Management
Department
studies
Faculty FMC

Name of the Student Sonal Singh

Reg. No 20MCMS017102
Semester/Year III/2nd
Course Leader/s Advocate Reet Singh
 Declaration Sheet
Student Name Sonal Singh
Reg. No 20MCMS017102
Semester/Yea
Program-me BBA III/2ND
r
Course Code 18BMC206A
Course Title Company Law and Corporate Governance
Course Date to
Course Leader Advocate Reet Singh Ma’am

Declaration

The assignment submitted herewith is a result of my own investigations and that I have
conformed to the guidelines against plagiarism as laid out in the Student Handbook.
All sections of the text and results, which have been obtained from other sources, are
fully referenced. I understand that cheating and plagiarism constitute a breach of
University regulations and will be dealt with accordingly.

Signature of the
Sonal Date 19/11/2021
Student
Submission date
stamp
(by Examination & Assessment
Section)
Signature of the Course Leader and Signature of the Reviewer and date
date
 Management and Commerce

Department School of Law

Programme BBA Batch 2020

Semester 3rd

Course Code 18BMC206A Course Title Company Law and Corporate

Governance

Course Leader Advocate Reet Singh

Assignment

Reg. No. 20MCMS017102 Name of Student SONAL SINGH

Assignment
s

Marking Scheme Marks

o

t
s

e
k

r
First Second
x

a
a

Examiner Examiner Marks

M
M

Marks
A

(individual Task)
t

P
A.1 Case Study 10

A.2 Case Study 15

Part-A Max Marks 25

Total Assignment Marks 25

Course Marks Tabulation

Component-1 (B) First Remarks Second Remarks

Assignment Examiner Examiner

A
 Marks (Max 25 )

Signature of First Examiner Signature of Second Examiner

Assignment

Instructions to Students:

1. The assignment consists of 1 parts.

2. Maximum marks is 25.
3. Part 1 of the assignment has to be neatly word processed as per the prescribed format.
4. Restrict your Assignment to 5 pages only.
5. The printed assignment must be submitted to the exam section and the practical aspects
presented before the course leaders on the assigned date.
6. Submission Date:
7. Submission after the due date is not permitted.
8. IMPORTANT: It is essential that all the sources used in preparation of the assignment must be
suitably referenced in the text.
9. Marks will be awarded based on the sections and subsections attempted by the student.
10. Each individual will have to submit a typed assignment on the topics.
11. Each individual report have to be submitted.
Part A (10 Marks) A.1 Case Study

Andrew and Cathryn Sims are a married couple and partners in a business that sells video games
hardware and software. The business proves to be extremely successful, and they open up a number
of branches. In order to limit their liability, they instruct their solicitor to incorporate the business,
calling the new company Sims Gaming Ltd.

Around the same time, MicroTech is about the release a new games console – the Game Player.
Andrew and Cathryn are keen to acquire as many of these consoles as possible. Andrew hears of a
potential source (Halo Ltd) and is offered fifty consoles. Eager to purchase the consoles, Andrew
does not wait until the company is incorporated and enters into a contract with Halo Ltd ‘for and on
behalf of Sims Gaming Ltd. Cathryn is also offered a number of consoles and, prior to the company
being incorporated, she enters into a contract with Players Ltd for forty consoles. She signs the
contract ‘Sims Gaming Ltd pp. Cathryn Sims (a director).’

The certificate of incorporation is issued and, at the first board meeting of Sims Gaming Ltd, Andrew
and Cathryn ratify both contracts. Andrew and Cathryn both have extensive software libraries.
Andrew sells to Sims Gaming Ltd a number of games that he acquired prior to engaging in the
company’s formation. Cathryn sells to the company a number of games that she acquired whilst the
company was being formed.

Shortly thereafter, Halo Ltd refuse to sell Andrew the fifty consoles promised, as it believes that it can
sell all the consoles to the public for a higher price. Cathryn is concerned that Players Ltd will also
refuse to sell the forty consoles promised.

A shareholder of Sims Gaming Ltd, William, discovers the above and seeks your advice regarding
whether or not any breaches of the law have occurred.

Answer the following questions:

1. Is the contract between Andrew and Halo Ltd enforceable? (2 Marks)

2. Is the contract between Cathryn and Players Ltd enforceable should Players Ltd refuse to sell
her the consoles? (2 Marks)

3. If the answer to the above two questions is no, does the fact that the company ratified the
contracts make any difference? (2 Marks)

4. by selling items to Sims Gaming Ltd, have Andrew or Cathryn breached their duties as
promoters? (2 Marks)

5. A written report on the basic understanding of the report (2 Marks)

A.1.2 Case study (15 Marks)

Ethos plc is a major, international graphic design company. One of Ethos’ directors, Mike, is in
extreme financial difficulty and is close to having to declare himself bankrupt (which would make him
ineligible to act as a director of Ethos). Accordingly, to prevent this, the other directors of Ethos cause
the company to lend Mike Rs.15, 00,000. The transaction is disclosed at a meeting of the directors
and the directors unanimously agree to authorize the loan. Mike was present at this meeting, but did
not vote on whether the loan should be made.

Ethos’ Articles of Association state that ‘Ethos plc may engage in any activity directly related, or
incidental to, the carrying on of a graphic design business.’ The directors of Ethos cause the company
to lend Rs.5, 00,000 to Ceri, who will then pay off the loan over a two-year period. Ceri is a major
client of Ethos, but aside from this, she has no other links with the company or its directors. A
number of Ethos’ members hear of the loan and argue that Ceri must repay the money immediately.

The board of Ethos discover that Asset Strip plc is considering a takeover bid of Ethos. Asset Strip
plans to break up the various parts of Ethos and sell them off individually and to remove the
company’s directors. Ethos is making a considerable profit and the directors genuinely believe that it
would not be in the interests of the company or its members for Ethos to be taken over by Asset
Strip.

Accordingly, the directors cause the company to issue new shares to Sylvia - an existing member who
is known to oppose the takeover - with the aim of preventing the takeover from succeeding. As the
attorney, advice whether or not Ethos or any of its directors have breached the law.

This problem question requires you to discuss the law relating to directors’ duties, with a strong focus
on those transactions involving the company/directors that require shareholder approval.

Discuss the following issues:

1. The validity of the Rs.15, 00,000 loan made to Mike by Ethos (3 Marks)
2. The validity of the Rs.5, 00,000 loan made to Ceri by Ethos (3 Marks)
3. Ethos’ response to the potential takeover bid. (4 Marks)
4. A written report on the basic understanding of the report (5 Mark)

Part A

A.1) SOLUTIONS:
1. YES, this contract between Andrew and Halo is enforceable, as there are two types of
contract, written and oral. Here; the contract between Andrew and Halo is oral and thus this
contract is enforceable.

2. Similarly the contract between Cathryn and Players Ltd is enforceable as it’s a written
contract and they have signed it. Therefore; Players Ltd can’t refuse to sell her the consoles.

3. If the answer to the above two questions are no, then the contracts must describe the
rights and obligations associated with those agreement. Since they are legally binding,
which means that either party may see legal action if the other party does not abide by the
terms and conditions, and so the company ratified the contracts make difference.

4. By selling items to Sims Gaming Ltd, Andrew or Cathryn have breached their duties as
promoters. As per section 102, promoter, director, manager or other key managerial
personnel shall hold such benefit in trust for the company, and shall, without prejudice to
any other action being taken against him under this act, and is liable to compensate the
company to the extent of the benefit received by him.

5. The basic understanding of the report is that, Andrew and Cathryn Sims are married and
partners in a business that sells video games hardware and software. The contract between
Andrew and Halo is enforceable as it was an oral contract; also contract between Cathryn
and Players Ltd is enforceable because it was a written one. Selling items to Sims Gaming
Ltd, Andrew & Cathryn have breached their duties as promoters.

A.1.2) SOLUTIONS:

1. a) The first issue is the 15, 00,000 loan that Ethos has made to Mike. A company may
advance loans including any loan represented by a book debt or give guarantee or
provide security in connection with any loan taken to any person in whom any of the
directors of the company is interested. Section 185(2) allows a company to give
loans to any person/entity in whom any of the directors are interested in subject to
certain conditions.
 b) 185(2) provide that the duty to declare an interest in a proposed transaction or
arrangement is not breached where the director discloses his interest to the
company before the transaction is entered into. Under the 2006 Act, disclosure
to the directors will suffice (although the company’s articles can require more
exacting disclosure requirements). Accordingly, the board of Ethos has not
breached this duty.

2. a) The second issue is the 5, 00,000 loan made to Ceri by Ethos. This situation involves a
discussion of the duty to avoid a conflict of interest, or the duty to declare an interest in a
proposed transaction. However, this is not the case, as the question makes clear that Ceri
has no links with the company or its directors. So simply, no conflict exists.
b) It can be assumed that the question concerns the rules relating to loans, quasi-
loans and other credit transactions. And those rules only apply to situations
where the company makes a loan or quasi-loan to a director, or enters into a
credit transaction with a director. As Ceri is not a director, these rules do not
apply.
c) The relevant duty is the duty found in the section 185(2), which provides that the
directors are under a duty to act in accordance with the company’s constitution.
The Articles of Association form the most important part of the company’s
constitution, so the directors are under a duty to act in accordance with it.

3. a) The third issue to discuss is the directors’ response to the potential takeover bid. The
relevant duty to discuss here is the duty found in the section 196 which states that a
director must only exercise powers for the purposes for which they are conferred. This duty
is based on the common law ‘proper purpose’ doctrine and many of the cases decided
under the common law remain relevant. The majority of the cases involving the proper
exercise of directors’ powers, like our problem, concern the power of the directors to issue
shares.
b) Issuing shares in order to prevent Asset Strip from taking over Ethos could be
regarded as a proper purpose, as the directors genuinely believe that the
takeover would not be in the interests of the company or its shareholders.
However, a side effect of preventing the takeover is that the directors retain
control of the company, and the courts have repeatedly indicated that it is an
improper purpose of power for directors to issue shares in order to keep
themselves in office.
c) The order aforesaid may provide for the continuation by or against the
 transferee company of any legal proceedings pending by or against any
transferor company and may also] contain such consequential, incidental and
supplemental provisions as may, in the opinion of the Central Government, be
necessary to give effect to the amalgamation.
d) There is no legal principle that states that the directors cannot act in order to
prevent a takeover from succeeding. However, in most cases, directors acting in
such a way will have difficulty establishing that they are not acting in such a way
in order to maintain themselves in office.

4. a) Setting up a limited company offers protection from personal liability as a director in

most instances, and should your business fail, your liability will be limited to the amount of
money you put into the company.

b) There are circumstances in which the threat of director bankruptcy becomes a

real possibility, however, when your company enters insolvency. The protection
you receive as a company director can be removed – a process commonly known
as ‘lifting the veil of incorporation.’

c) If you fail to place the interests of creditors first, it could lead to the liquidator
pursuing you for any additional company debt taken on from the date of
insolvency – potentially before this date if fraudulent activity is uncovered.

d) Essentially, this means you must stop trading, make sure the company takes on
no further debt, and does not accept new orders or deposits from customers.
You should also seek professional assistance if you haven’t already done so.

e) It is common practice for directors to withdraw money from their company on a

temporary basis, which is fine when business is profitable. If your company
enters insolvency, however, and your director’s loan account is overdrawn, the
liquidator will pursue you for repayment in order to increase returns for
creditors.