Business Law: Unlimited Partnerships and Private Limited Companies

This report delves into the legal aspects of business, primarily focusing on UK company law and the Companies Act 2006. It begins by critically discussing two forms of business organizations: unlimited partnerships and private limited companies, outlining their features, advantages, and disadvantages. The report then examines the duties of company directors, as defined by the Companies Act 2006, including the duty to act within their powers and the duty to promote the success of the company. It explores relevant case laws such as Hogg v Cramphorne and Criterion Properties plc v Stratford UK Properties LLC to illustrate these duties and their implications. The report emphasizes the importance of directors acting in good faith, promoting transparency, and balancing the interests of shareholders and other stakeholders. It also touches upon the concept of shareholder primacy and the evolution of director duties to include a more sustainable approach to company growth. References to legal frameworks and case studies are included.

LEGAL ASPECTS OF BUSINESS

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Critically discussing the main features of two forms of business organisations such as
unlimited partnership and private limited company...............................................................1
TASK 2...........................................................................................................................................3
Critically discussing the duties of company’s director...........................................................3
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................8

INTRODUCTION
UK company law regulates and monitors the functioning of business units formed under
Companies Act 2006. In UK, business units must comply with the rules and regulations
mentioned in the concerned law (McLaughlin, 2015). As per company’s constitution, Board of
directors possesses power in relation to managing business operations and taking decisions on
the behalf of stakeholders. In this, report will provide deeper insight about the features of
different types of business organizations according to company law. Further, report also presents
duties which company’s director need to consider while carry out business activities and
functions.
TASK 1
Critically discussing the main features of two forms of business organisations such as unlimited
partnership and private limited company
Unlimited partnership
Unlimited partnership firms are such entities that have at least two persons as partners in
the business. Both these partners are responsible for decision making of the company. They
jointly are liable for debts of the organization. Unlimited partnership firms have to follow simple
registration process (Ferran and Ho, 2014). There is no specific capital requirements. It is the
type of business in which all partners contribute in the daily operational process. They all discuss
about the company and take mutual decision through which organization can gain success and
can enhance its profitability. Each partners are equally responsible and have rights to make
decisions for the welfare of business unit.
In unlimited partnership firm liabilities, contribution and responsibility of each partner is
distributed equally. The partnership act revels that it is essential that unlimited partnership firm
has at least 2 partners and maximum number of partners can be unlimited (Plaza, 2014). Each
person has unlimited liability in the business unit as per their investment and shareholding in
organization. A contract is build between partners where they invest capital in the business. On
the bases of their investment in the firm profit or loss ratio is being calculated and decided.
Partnership act 1958 define that partnership is the contract between two or more people
where they agree to work together and share their profit and loss in business. Features of
unlimited partnership firm:
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 It is essential to have at least 2 persons as partners in the organization, it can be unlimited
(Klausner, 2016).
 Partnership act explain that each partners has to share their profit and loss in the business.
 Unlimited liability is the main feature of unlimited partnership firm. It is the type of
organization in which each partner has to bear unlimited obligation. If business fail to
generate necessary return then it is responsibility of both partners that to repay the
liabilities on time (Conway and Kavanagh, 2015).
 Another feature of this type of firm is that no partner has right to transfer their share to
third person. If individual wants to transfer their rights then they have to first take consent
from rest other partners. Once they have given their written consent then individual can
transfer their share to outside persons.
 Another feature of unlimited partnership firm is that applicable tax rates for these firms
are lower as compare to limited firms (Gilson, 2016).
Private limited company
The section 25 (2) of 1985 act describe indicators of legal status of private firms. Private
limited firms are such entities that are the separate legal entity and shareholders can not trade
their share to third person. These are such entities that can not trade their share in public.
Formation of limited firm is simple and affordable. This is the type of entity in which financial
resources of company are separated from the owner funds. Business owner can take loan on
behalf of the firm but financial institutions look at the creditability of the business to repay the
loan and on this behalf they grant loan to these companies (Plaza, 2014). These firms have
unlimited life, their existence always remain alive in the legal system even after the death of
director as well. It is very important for these firms that to maintain their financial accounts as
per the required standards. They have to present their annual reports and accordingly have to pay
tax at the end of each financial year. It is essential for the organization that to maintain statutory
registers and maintain accounts audit. Business owner is responsible for making decision in the
firm and on the bases of decision of directors entity run its operations. Features of these firms are
described as below:
 As per the company act 2006 it is essential to have minimum 2 members and maximum
200 members in the private limited company (McLaughlin, 2015).
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 It is the type of business in which liability of each member is limited. If company fails to
generate necessary profit then shareholders are liable to sell company's assets in order to
repay obligations but their personal assets are not at risk.
 Perpetual succession is another main feature of private limited company. It means if
shareholders got died then also firm will remain operative in the eye of law.
 Company act explains that there can not be more than 2 directors I the private limited
company (Ferran and Ho, 2014).
 Such type of business units are requires minimum £1 paid up capital.
 It is necessary for all private limited firms that to use PVT after their main name of
business.
 As per the section 2, clause 68 of company act 2006 rights to transfer share is restricted.
An shareholder can not transfer their share or rights to third person without taking
consent from other involved persons.
TASK 2
Critically discussing the duties of company’s director
Duty to act within the powers (section 171 Companies Act 2006)
On the basis of Companies Act (2006) director of the business a director of the company
must act as per company’s constitution. In addition to this, section 171 of the concerned Act
presents that director must exercise powers in relation to the purposes for which they are
conferred (Companies Act UK, 2018). Referring such aspects, it can be presented that directors
have accountability to use their powers in the best interest of company. In other words, at the
time of exercising powers directors should observe or consider company’s constitution. Further,
directors need to ensure that their decision will offer benefit to the stakeholders. Laws and
legislation presents that directors are an agent of the business unit so they not in position
pertaining to using powers beyond company’s constitution. Companies Act presents that
directors cannot take decision for their own benefits. Further, UK Companies Act provides
shareholders with the specific rights or protection in against to the undesirable act of directors.
Hence, shareholders have right to take legal action in against to the directors when they act
beyond company’s constitution. Considering the case law of Hogg V Cramphorne it can be
presented that shareholders have right to make sue on directors when they perform activities for
own benefits. In this case, intentionally new shares were allotted by the directors of company to
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the persons having possibility in relation to opposing fearing takeover bid (HOGG V
CRAMPHORN LIMITED: CHD 1966, 2018). The rationale behind such allotment is that
concerned authorities want to save their jobs in the Board team. In such case, court gave their
judgment in the favour of shareholders and considered the aspect of share allotment as void on
the ground of dishonesty.
Further, Criterion Properties plc v Stratford UK Properties LLC case also presents that
illegal or unethical activities performed by the shareholders are not tolerable. Moreover, in this
case, director had done agreement with the substantial shareholders that company will buy out
his holdings at higher price level (CRITERION PROPERTIES PLC V STRATFORD UK
PROPERTIES LLC AND OTHERS: CHD 27 MAR 2002, 2018). Further, director also stated that
changes take place in BOD team will not affect the agreement. Hence, in this, director did not act
within his boundaries so agreement was cancelled by the court.
Duty to promote the success of the company (section 172 Companies Act 2006)
The companies act 2006 section 172 explain the duty of director to promote the success
of business unit. It is responsibility of director that to promote transparency and fair dealing.
Margaret Hodge MP claims that director is completely responsible for promoting success of the
company. In order to define duty to promote success company act 2006 section 172 has given
framework of Enlightened shareholder value approach (Promoting the success of the company,
2018). In this respect company law review steering group (CLRSG) has been established so that
transparency can be maintained. The major issue was in the drafting of section that director
duties is towards the shareholders or both shareholders and others. In this respect two main
approaches have come into existence: value and pluralist approach. In this respect share holder
value approach explains the duty of director. It explains that it is responsibility of the director
that maximize wealth of shareholders and enhance their profit (Gilson, 2016). It is adopted by
case Dodge v Ford Motor co. Apart from this, pluralist approach is another major framework that
states that it is duty of director that to take care of both and make balance between interest of
shareholders and others such as employees, customers etc.
Both these approaches have some advantage and some disadvantage. In order to
minimize confusions CLRSG has taken support of hybrid approaches this was known as ESV
approach. It describes that it is responsibility of director that to take care of interest of
shareholders on priority. This is the central purpose for promoting success of the organization.
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Individual has to look at the benefits of all shareholders. It has been suggested by the case law of
Bowen LJ in Hutton v West Cork Railway (Conway and Kavanagh, 2015). This law revels that
director is completely accountable for making decision in business unit and providing benefits to
the shareholders. Company act 172 has included idea of shareholder primacy. Director has to
take correct decision that can support in promoting the success of company and can protect
interest of shareholders. Case Black v White of section 172 explains that directors have to pay
attention on interest of other stakeholders as well and they have to make decision by considering
their interest as well. If individual do not take care of these people then it may enhance long term
consequences in the business unit and entity may get failed to run its operations successfully.
This section has promoted sustainable approach for the growth of companies. Earlier to that
firms were able to gain short term benefit but after passing this section now companies are able
to concentrate on long term profit maximization (Gilson, 2016). It cam into existence after the
case John Kong Shan Ho. Another case of Item Software Ltd v Fassihi disclose that it is duty of
director that disclose all necessary information and if individual is hiding anything then it would
be considered as breach of law. Idea of shareholder primacy has come into existence by recent
case R. v HM treasury. Directors need to promote the success of company in such manner so that
they can get more benefits and can take more interest in the business unit. Section 172 explains
that director has to follow good faith this helps the person in promoting success of company.
They have to make balance between interest of employees in business unit (Promoting the
success of the company, 2018). Furthermore, section 172 explains that director is responsible for
developing relationship with suppliers, customers. They have to look at the operations and
external environment factors so that success can be promoted in effective manner. They are
responsible to act fairly with all stakeholders so that their trust can be build up.
Duty to exercise independent judgement (section 173 Companies Act 2006)
Section 173 is the part of company act 2006. This describes that it is responsibility of
director that to exercise independent judgement. They can not fetter their decision due to any
kind of influences. They are responsible to fulfil their duties towards organization rather than
individuals. They have to always take care of company's interest, benefits rather than
independent benefit. They have to make such decision that can be fruitful for the organization
and can help in the success of business unit (The duties and liabilities of directors of limited
companies incorporated in the UK, 2007). This is suggested by Fulham Football club Ltd v
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Cabra Estates. This explains that director has to enter only such contracts ion which individual is
liable to enter and director can not be the part of contract which restrict the person of their future
discretion. They are responsible to make their decision independently and their decision can not
be controlled by others. Company director is not liable to act as proxies, they have to make
decision by own independently. Case law of Re City Equitable Fire insurance explains the same
thing. In this case senior executive Mr. Bevan which was responsible to control other directors.
Thus, he has made many frauds with properties. After that it has been found that it is very
important for the organization that director remains high power in the business unit. No other
person should have such power that they can control the director (McLaughlin, 2015). Thus,
director is responsible for the independent judgement in the business unit so that all activities can
be run as per the legal guidelines (The duties and liabilities of directors of limited companies
incorporated in the UK, 2007). The current principle of this act shows that director has to
exercise their power independently. Even they can not delegate their power to others. They are
the responsible for making decision on the organization. Their duty has been explained through
the case of Re Englefield Colliery Co where director has paid money to firm because he has not
followed its responsibility effectively. In the case of Crowther Group Plc v International Plc,
court has made decision that director has to decide interest of each shareholder in the business an
accordingly they have to treat them. They have to think that what is good for the firm and what
should not be held in the organization. Entire operations of the firm are highly depended upon
their own decision and they can not get influenced by other's decision (Klausner, 2016).
CONCLUSION
From the above study it can be concluded that company act 2006 has been made by the
UK government and business units are required to comply with rules and regulations mentioned
in the concerned law. The legal features of private and partnership firms are differed from each
others. In the partnership firms, all partners are responsible for the liability of business unit
whereas in the private limited firm, directors can sell assets of the company to repay the debts
but they do not have to bear risk of selling personal assets and capital to repay the liabilities.
Company act 2006 defines duties of director through section 171, 172, 173. It can be articulated
that Companies Act provides shareholders with the specific rights or protection in against to the
undesirable act of directors. Director are responsible to follow good faith this helps the person in
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promoting success of company. They have to make balance between interest of employees in
business unit.
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REFERENCES
Books and Journals
Conway, B. and Kavanagh, A., 2015. A New Departure in Irish Company Law: The Companies
Act 2014-An Overview. Bus. L. Int'l,.16. pp.135.
Ferran, E. and Ho, L. C., 2014. Principles of corporate finance law. Oxford University Press.
Gilson, R. J., 2016. A Model Company Act and A Model Company Court.
Klausner, M., 2016. A US View of the European Model Company Act.
McLaughlin, S., 2015. Unlocking company law. Routledge.
Plaza, C., 2014. An Analysis of the Effectiveness and Impact of Mandatory Company
Greenhouse Gas Emission Reporting Under The Companies Act 2006 (Strategic Report
and Directors’ Report) Regulations 2013.
Online
Companies Act UK. 2018. [Online]. Available through:<
https://www.legislation.gov.uk/ukpga/2006/46/part/10/chapter/2/crossheading/the-general-
duties>.
CRITERION PROPERTIES PLC V STRATFORD UK PROPERTIES LLC AND OTHERS: CHD
27 MAR 2002. 2018. [Online]. Available through: < http://swarb.co.uk/criterion-properties-
plc-v-stratford-uk-properties-llc-and-others-chd-27-mar-2002/>.
HOGG V CRAMPHORN LIMITED: CHD 1966. 2018. [Online]. Available through: <
http://swarb.co.uk/hogg-v-cramphorn-limited-chd-1966/ >.
Promoting the success of the company. 2018. [Online]. Available through
<https://www.lawteacher.net/free-law-essays/business-law/promoting-the-success-of-the-
company-law-essays.php>
The duties and liabilities of directors of limited companies incorporated in the UK . 2007.
[Online]. Available through <https://www.lexology.com/library/detail.aspx?g=0c67cb7d-
c248-4b35-b5fc-9c1864c6a5f1>
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