Analysis of Carillion's Corporate Governance

The assignment provides an in-depth analysis of the corporate governance issues at Carillion, a UK-based construction company that collapsed in 2018. It examines the role of directors and shareholders in the company's failure, discussing the provisions of the Companies Act 2006 and relevant case law. The assignment concludes by highlighting the need for personal liability for directors in cases of serious corporate failings.

Running head: COMPANY LAW
Company Law
Name of the Student
Name of the University
Author Note

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Introduction
The company Carillon has been in news because of its corporate failings. The purpose of
this paper is to analyze the situation of Carillion which has been subjected to corporate failing in
the light of directors’ duties and insolvency law in UK. The paper also provides the steps which
stakeholders and shareholders of Carillion may have taken against the directors for their actions
under company law.
Fiduciary and statutory duties of directors under Company Law
Directors of a company have been provided the sole responsibility to manage the affairs
of the company as all shareholders and owners cannot directly participate in its operations
(Hannigan 2015). In the light of the position which the directors have in the company they owe a
fiduciary duty to all stakeholders and shareholders of the company as provided by the case of
Regal (Hastings) Ltd v Gulliver [1942] UKHL 1. The duty is to act in best interest of the
company and always give priority to the company’s interest over personal interest. The
Companies Act 2006 specifically lays down statutory duties which the directors of the company
have to comply with while discharging the duties in relation to the company through section 171-
177 (Keay 2014). The directors are in a position to manipulate the functioning of the company in
such a way that the interest of the shareholders and stakeholders is overlooked in relation to the
personal interest of the director as per Re D'Jan of London Ltd [1994] 1 BCLC 561. This
position allows the directors to misuse the resources of the company for making personal gains
and subjecting the company and other shareholders and stakeholders to losses as per Howard
Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. The boards also as the responsibility of
provide accurate information in the general meeting however it failed to do so in this case.

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The feature of limited liability which is present in the company further helps the directors
to get away with the losses which have been incurred by the organisation due to their activities
(Roach 2016). This is because the shareholders and directors are only liable to pay the amount
which they have invested in the company when the company faces insolvency as per Salomon v
A Salomon & Co Ltd [1896] UKHL 1. A similar kind of situation has been seen in the United
Kingdom with respect to Carillion. It has been seen that due to the actions of the directors the
employees and other stakeholders of the company have been subjected to significant detriment.
The company which was involved in outsourcing and construction has faced one of the most
spectacular corporate failures in the United Kingdom. The company was made insolvent when it
had debts of over £2 billion and is only left with £29 million in its bank (O’Grady 2018). It was
the duty of the directors to ensure the interest of the stakeholder while making a decision in
relation to the company as they are aware of the fact that their decision would have a direct
impact on the shareholders and the stakeholder. The directors also have the duty to ensure that
they make correct and evidence based disclosures, however the annual report of the company did
not provide for any of the problems faced by the company (Annualreports.com 2018). The
boards also as the responsibility of provide accurate information in the general meeting however
it failed to do so in this case (French et al. 2014).
Insolvency Law
The insolvency law which is present in the United Kingdom had made it more difficult
for the stakeholders such as pensioners associated with the company to recover the losses which
has been incurred by them due to the corporate failure. The primary legislation which governs
insolvency in UK is the Bankruptcy Act 1952 and the Insolvency Act 1986. According to the

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Bankruptcy Act when our organisation has become bankrupt the first priority is to be provided to
those creditors who have been into contractual relationship with the company before it was made
insolvent. According to the IA 1986 the second priority as per section 176ZA is provided to
expenses and fee which need to be paid to the person practicing insolvency in relation to the
company by participating in its winding up. The third priority is provided to employee wages and
amount due in relation to employees’ pension under section 175. Due to such laws stakeholders
of the company such as the employees are subjected to significant detriments as they may not
receive anything after the company pays off its first and second priority. The directors of the
company also escape liability through the doctrine of limited liability even after causing the
significant corporate failure. This situation in the UK definitely calls for reforms to the company
and insolvency law. The directors of the company due to whose negligence or will full conduct
the company is subjected too serious failure should not be allowed to escape by pocketing all of
the companies money and subjecting the stakeholders to detriment and have to be made
personally liable for any such actions.
Question 2
Shareholder rights
In the case of Foss v Harbottle (1843) 67 ER 189 it had been ruled by the court that a
company can make a claim against any unfair actions which it is subjected to. According to
Section 994 of the Companies Act 2006 a member of the company has the right to file a petition
before the court on specific grounds against the management of the company. One of such
ground is that the affairs of the company are being conducted in a manner or already have been
conducted in a manner which is considered to be unfairly prejudicial with respect to the interest

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of the members of the company in general or specific parts of its membersor a proposed or actual
act or omission which has been done by the company which also includes omission or have done
on its behalf is or would be prejudicial. Under the provisions of section 994 any member of a
company can bring a petition.
In order to be successful the petition has to establish that the directors are carrying out the
affairs of the company in a manner which is considered to be a prejudicial towards the interest of
any or all shareholders of the organisation. In the case of Re a Company [1986] BCLC 376 the
Court provided the type of interest which may be protected under the provisions of section 994
through the concept of legitimate expectation. It was provided in this case that the members have
a legitimate expectation that the company would be managed lawfully in accordance with the
articles of association and within the scope of directors’ duties. Therefore the members of
Carillion would have the right to make a claim against the directors of the company under the
provisions of section 994.
The directors of the organisation may also be removed show the passing of a resolution
by more than 50% of the shareholders of the company under section 168 of the CA. Therefore
the shareholders and stakeholders of Carillion had the option of removing the directors from the
board and initiating fresh elections by requiring the directors to call a meeting as per section 303
of the CA. The members can also ask the board to circulate a statement under section 314 of the
CA. The shareholders can also make a derivative game against directors under section 262 of the
Companies Act. For this claim they are required to take the permission of the court which is only
provided by the court where the claim is for the benefit of the company which shows that the

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directors have made a profit out of the companies expense and subjective it to a loss (Rowa et al.
2017).
Therefore in the given situation Company Law in UK provided the shareholders and
stakeholders of Carillion with various options of making a claim against the directors for any
action which is against the interest of the company.
Conclusion
It can be concluded that if the directors are allowed to escape every time after indulging
into such actions due to the doctrine of limited liability the situation which has been seen in
relation to Carillion would be repeated many times in the future with respect to other companies.
It can be argued that for the proper functioning of the organisation directors have to be provided
with certain defences so that they can carry out business transaction freely. However if no
restrictions are imposed on the manner in which directors of the organisation discharge the duties
then the chances of the stakeholders and employees of the organisation being subject to
detriment could significantly increased as it has been seen in the case of Carillion. In the light of
the situation it is the need of the hour to make the directors personally liable in account of serious
corporate failings if not been made criminally liable.

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References
Annualreports.com. (2018). Carillion plc - AnnualReports.com. [online] Available at:
http://www.annualreports.com/Company/carillion-plc [Accessed 18 Mar. 2018].
Bankruptcy Act 1952
Foss v Harbottle (1843) 67 ER 189
French, D., Mayson, S., Mayson, S.W. and Ryan, C.L., 2014. Mayson, French & Ryan on
company law. Oxford University Press, USA.
Hannigan, B., 2015. Company law. Oxford University Press, USA.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Insolvency Act 1986
Keay, A.R., 2014. Directors' Duties. Jordans.
O’Grady, S. (2018). The collapse of Carillion lays bare the reality of what is really happening to
public services. [online] The Independent. Available at:
http://www.independent.co.uk/voices/carillion-collapse-public-services-government-contracts-
nhs-hs2-high-speed-2-construction-job-losses-a8159686.html [Accessed 18 Mar. 2018].
Re a Company [1986] BCLC 376
Re D'Jan of London Ltd [1994] 1 BCLC 561
Regal (Hastings) Ltd v Gulliver [1942] UKHL 1

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Roach, L., 2016. Brexit and UK Company Law.
Rowa, A.A., Borahima, A., Rifai, A.B. and Marlang, A., 2017. The Rights of the Shareholders
Minority in a Company: A Critical Analysis. JL Pol'y & Globalization, 62, p.13.
Salomon v A Salomon & Co Ltd [1896] UKHL 1
The Companies Act 2006