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A Study of 'Clean Machines Ltd.' Under the Companies Act, 2006

  • 11 Pages
  • Published On: 24-11-2023

A. The Companies Act, 2006 is a comprehensive legislation governing the companies regulating in the United Kingdom. This legislation is the fruit of a deliberation over a period of nine years making it a structured document and easy to implement. The transparency and the accuracy of the companies are measured along with making places for shareholders in the governance as well. Therefore, the company set up by Gemma by the name of “Clean Machines ltd.” will be governed under this legislation.

Director

Gemma is the sole director of the company created by her as per S.154 of Companies Act, 2006, as any company should comprise of a director. The director functions on behalf of the company as the company is unable to take action on its own and the director stands as the sole person responsible for managing the company. They have the sole power to take decisions regarding the affairs of the company but the term ‘Director’ as per S.250 gives power of a director to any person who attains such position by fulfilling procedures as prescribed to have the sole control over the company. The legislation does not really provide a specific understanding or definition regarding the same, which may pose a difficulty in address the scope of directors but it also makes it flexible in nature.

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There are generally two kinds of directors; One, is the kind that is involved with the functioning of the company completely and works on a daily basis having close control over the functioning of the company. Especially for companies that are small and single handedly controlled like in the case of Gemma, they are known as executive directors. The legislation does not make it mandatory to officiate the identity of such a person acting as a executive director of the company .The other kind of company that operates at a larger scale and the director is not necessarily active and does not directly overlook the work of the company are known as non-executive director. The directors can also be spread over different sectors like the finance department or the sales department etc. which can function independently of other sectors by separate director which may not be the case for non-executive directors.

Eligibility

There is no specific legislation or separate legal recognition for a director to assume its role but the Companies Director Disqualification Act, 1986 restricts an undischarged bankrupt person from taking the role of a director of a company which otherwise may be a serious offence. The Companies Act, 2006 also lays down few criteria to disqualify person as director with regard to the age of the person. The Companies Act makes it mandatory for a director to be at least sixteen years of age. Secondly, it is mandatory for a company to have a ‘natural person’ acting as a director for the company to be eligible to act as the director of another company.

Power and Duties

The directors have the sole power to look after the affairs of a company and manage its property acting completely on behalf of the company. The Constitution of the Company must have set guidelines and principles which are to be followed judiciously by the director. The third party is not responsible for looking into the acting power of the director or the Constitution of the company as have been held in Royal British Bank v Turquand. However, Gemma being the sole director has some specific powers enlisted by the Companies Act, 2006:

  1. As held in Conway v Petronius Clothing Co Ltd, the directors reserve complete control over the books of accounts and if required the director may also be assisted by any expert in the matter.
  2. Section 247 of the Companies Act, 2006 also ensures that the Director has the right to create provisions for all the employees bound by contract under a term of employability in case the company was to cecede.
  3. Section 302 of the Companies Act, 2006 also allows the director to set up and call for meetings as and when required.
  4. The director must act with sufficient skill and diligence, forming decisions for the best interest of the company and avoiding conflicts that may pose risk to the company except when it is initiated by the Articles of Association.
  5. The Director must be mindful of accepting advantages from any third party This obligation isn't encroached if the acknowledgment of the advantage can't sensibly be viewed as prone to offer ascent to a contention and doesn't have any significant bearing to benefits given by the organization or different individuals
  6. The Director has the power to exercise his own judgment in decision making which must be independent, may also be assisted by any profession in matters lying beyond his depth.
Breach of duty

If the Director is in breach of any duty imposed on him or over utilize the powers, there are primarily four consequences accompanying the breach. Firstly, the losses that are suffered by the company due to a mis judgment on the director’s part must be compensated by the director enough to sustain the damages suffered by the company. Secondly, In case the property of the company has been damaged, the property needs to be restored by the director. The account of profit must also be looked after and manage in case of any irregularities that have shown in the books. Fourthly, in case the Director has failed to exercise authentic judgment or kept an interest hidden, in that case the contract may be revoked. It may not be applicable in case of Gemma’s company at present but for future development such may be kept in mind.

B. Termination of an employee contract

Paul Salmon, Salans LLP (2008), “ UK: Director’s duties and liabilities under the Companies Act 2006

The termination of an employee occurs when the contract that bound the employee with the responsibilities of a company comes to an end. The termination can be voluntary in nature or it may also be initiated by the employer. The contract that binds the employee should contain the clauses of termination regarding the payment or right to be noticed etc. If the termination is initiated by the employer, it is of utmost importance that such is carried out lawfully and is fair in nature.

The employer may decide to dismiss an employee on several grounds which could range from gross misconduct to showing lack of initiative, exercising duties irresponsibly, delivering poor quality work, failure to maintain a steady attendance, failure to comply by the time requirements etc. In this case, Gemma faces such an issue with Charanjit who is works as a cleaner in Clean Machine Limited. According to her, Charanjit has been delivering poor quality work along with failing to attend office as per the time. Thus, her decision to terminate Charanjit on these grounds are admissible due to continued incompetence portrayed by Charanjit, thus his services are eligible to be dismissed by Gemma.

As per section 98 of the Employment Rights Act 1996, it is important for Gemma to ensure that the dismissal that is undertake is fair otherwise the employee has the statutory right to bring questions in cases of unfair dismissal. The employee can file a claim against the employer in case of an unfair dismissal which can be brought by the employee with regard to the absence of a notice or insufficient payment of wages or failing to clear the dues.

There are a few factors that must be checked to assess the fairness of the decision of termination as undertaken by the employer. The ability or capabilities lead excess that the worker couldn't keep on working in that position without repudiating an obligation or limitation forced by or under an order that there was some other significant explanation of a sort, for example, to legitimize the excusal of a representative holding the representative's position The weight of evidence in building up a reasonable explanation is on the business. Where there is more than one explanation behind excusal, the business should show what the chief explanation was.

The termination initiated by Gemma must be served with a notice period which begins from the time the notice is communicated with the employee and remains in functions till the last day. Constructive dismissal is known as the process of termination that is undertaken by the employer in the case where the employee has engaged in a conduct that demanded the termination of his contract and no notice has been served. The Employment Rights Act 1996 entails that the employer has the duty to put forward ‘reasonable’ cause to dismiss an employee who have been serving the company for at least 2 years which must also adhere to the provisions of Code of Practice of the Advisory, Conciliation and Arbitration Service.

The grounds for fair dismissal shall include the conduct of the employee, redundancy, incapacity or incompetency of the employee. The qualifications stop to satisfy the needs of the employer or any other potential reason that is substantial enough to make the employee redundant. In case where there is gross misconduct by the employee, the termination request may be issued with initiating any notice for the same.

The period during which the employee has served his contract is an important factor that must be calculated as that reflects the amount of compensation that is due and the time that is left to claim the compensation. This makes it relevant to assess the Effective Date of Termination or EDT .In case the employee has served a period of more than two years in a company, the Employment Rights Act 1996 gives provision of ‘Statutory redundancy pay’ which is to be calculated with reference to the detailed amount of time served along with the age of the employee but it is susceptible to changes as and when the employer desires so.

The termination letter issued by the employer is a written notice officiated formally to legalize the dismissal and can be brought to effect for employees who has served the company for a minimum period of one year requesting the ground for dismissal in a written form. The letter must mention the following:

  1. The due reason as to why the employment contract is dismissed, the date from which the termination is effectuated,
  2. Whether the notice period will be served by the employee or it will be adjusted with due payment for the same.
  3. In case there are any unpaid holidays, such payment must be initiated.
  4. The duty of employee to preserve the restrictions that befall him after the dismissal of his term period.
  5. The employee also has the duty to restore back any official property that may have been use during the period of employment that belongs to the employer.
  6. The employee also has the right to initiate an appeal to deter the termination of the contract.

Once the grounds have been established as fair by the tribunal, the dismissal will be considered and followed through a series of disciplinary hearings. The opinion of the tribunals plays a significant role in adjudicating the case providing an opportunity to appeal against the action undertaken by the disciplinary body. A fair procedure to asses the grounds of dismissal must be followed otherwise, in cases of wrongful dismissal the employee shall be compensated by the tribunal as per the intensity of the claims.

C.
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Precious Time Limited supplied materials to Gemma’s company, ‘Clean Machine Limited’ , however both the companies were facing some issues which led to a dispute and dispute resolution is the only solution forward. Commercial disputes occurs every now and there are many ways to solve the disputes under United Kingdom. The United Kingdom follows the common law, hence highly depends on the principle of Stare Decisis and the code of Civil Procedure, 1998.However, for disputes concerning companies , documents play an important role, thus proper storage of electronic documents must be kept in compliance with Code of Practice issued by the BSI.

There are a few different ways a dispute can be resolved:

1. Litigation

The parties in dispute can take resort to the most sought-after resolution that is by filing a lawsuit to a court of law. This civil action undertaken by one of the parties who is a plaintiff seeking remedy for the damages caused to the party by the defendant. The court looks into the depth of the dispute and pronounces orders that may either favor the plaintiff or the defendant by ordering a certain amount of damage to be paid by the defendant or by imposing injunction for the defendant to stop continuing the work or even compel to do so. This step arises only when there has been a breach of the contractual obligations entered into by the parties and the plaintiff demands to restore the situation. However, even though this is the most convenient and known process, given the frequency of commercial disputes, legislation could be an expensive affair as well as a time-consuming process. The entire process depends upon either rof the parties and to ensure a fair procedure, equal opportunity and time makes it a lengthier process but the disputes often fall heavy on the parties bearing financial loss. Therefore, a legislation could be onerous at this position affecting the financial burden of the companies at stake. It has also been noted that the jurisdiction has posed as a restriction many a times where the judgement is grossly affected. The third hindrance could be the unsure protection of privacy, especially with commercial disputes, the privacy of a company is the most secured asset and the prolonged public litigation could cost the companies the protection of their high valued assets. The expertise of the judges involved in commercial disputes could also cost the final judgement of a case since commercial disputes demand sufficient knowledge of the financial aspect and requires expertise in the field which the particular judge may lack. Thus, it can be seen that litigation does have the quality to resolve issues but may not be the most suitable for commercial dispute resolution.

2. Alternative Dispute Resolution

The name itself suggests that there are alternative means to resolve a dispute, especially the ones concerning two companies at stake. The process of ADR involves different kinds of measures which helps the parties in reaching a particular solution which is flexible in nature. The entire process is entertained at the convenience and with the consent of the parties guided by expert officials in this field. Mediation is the most common method of providing dispute resolution where a neutral and independent body acts as the mediator between the two parties. This independent body is not arbitrarily vested, rather chosen by the parties themselves, in order to facilitate the issues and navigate it in a way that lies beneficial for both the parties, to reach a satisfactory conclusion. This process has also been seen to be more effective in reserving the relationships of the parties in case there is a possibility of a future business transaction. The ultimate intention of the process is to assure that the parties settle their issues which may not be the case in litigation where a suitable settlement may not be reached.

3. Arbitration

This process of dispute resolution is also very similar to a court proceeding wherein a person is appointed as an arbitrator by the tribunal to initiate the decision making with the expertise in that particular area. The outcome of the procedure could be either binging or non-binding on the parties. There is enormous scope intervention is fundamentally the same as court procedures, and is especially helpful in settling global debates. Interventions are held in private and can either follow methodology to be chosen by the referee in concurrence with the gatherings, or they can adhere to the guidelines of bodies, for example, the International Chamber of Commerce. It may be given in the agreements that, if the gatherings can't concede to a mediator, a specific body, for example, the Institute of Arbitrators, will select one. Even though it can uphold secrecy, maintain confidentiality about company affairs, less time consuming as well as inexpensive but the drawback that lies is the fact that there are no option of appeal given to either parties. This causes the parties to stagnate and make it difficult to award compensation if need arises.

4. Commercial Settlement

It is also possible for the parties to opt for a simple settlement between the parties within the parties themselves by taking aid in drafting the settlement but this method can completely avoid the hassle of dealing with any third party at all.

5. Negotiation

This is a more individualistic approach wherein both the parties are in direct dialogue with each other with the aid of negotiators. The professional negotiators are a lot like the advocates in the court but the solution can be reached by negotiating the position, the depth of breach and other irregularities among the parties themselves.

Lastly, both the process of litigation as well as methods of resolving disputes by the alternate methods may be a productive system if both were to work in unison rather individually. Even though the courts are of the opinion that the ADR could lessen their burden and make it an efficient process for reaching settlement by the parties. The methods under ADR have a lot of merits given the are consumer friendly, inexpensive etc. but they lack the binding order of the courts which at times makes it easier for parties in dispute to reach a finite solution. It should be sustainable if both the systems could be merged and brought in function especially with the initiative of bringing soft laws by the European Union and United Nations. The Commission counseled to a great extent on this issue prior to embracing a proposition for a mandate on specific parts of intercession in common and business-related issues. Following the conference, it was settled that enactment should be limited to guaranteeing a positive connection among intercession and legal procedures. Then again, a self-administrative instrument, the European code for arbiters, was started as the best way to deal with set principles for the intervention cycle and the arrangement and accreditation of middle people.

BIBLIOGRAPHY
Articles/ Journals
  • John Davies Head of Business Law, ACCA, Certified Accountants Educational Trust, July 2007 “A guide to Directors responsibilities under the Companies Act, 2006”
  • Paul Salmon, Salans LLP (2008), “ UK: Director’s duties and liabilities under the Companies Act 2006
  • Buchanan, Julian & Young, Lee. (2000). Buchanan, J. & Young, L. (2000) ‘Examining the Relationship Between Material Conditions, Long Term Problematic Drug Use and Social Exclusion: A New Strategy for Social Inclusion’ in J. Bradshaw & R. Sainsbury (eds) Experiencing Poverty, pp. 120-143 London, Ashgate Press, ISBN 0-7546-1288-0. 10.4324/9781315196312-7.
  • Gramberger, Marc. (2001). Citizens as Partners: OECD Handbook on Information, Consultation and Public Participation in Policy-Making. http://lst-iiep.iiep-unesco.org/cgi-bin/wwwi32.exe/[in=epidoc1.in]/?t2000=016292/(100).
Website
  • Tanya Leisuk, Factorial Blog (2020), “ Termination of Employment contract: Requirements and implications” < https://factorialhr.com/blog/termination-of-employment-contract/ > accessed on 23rd December, 2020.
  • CMS law tax, United Kingdom ( 2002) “ Termination of employment in England and Wales”, < https://www.cms-lawnow.com/ealerts/2002/08/termination-of-employment-in-england-and-wales?sc_lang=en#:~:text=This%20can%20occur%20in%20three,a%20definite%20duration)%20without%20renewal > accessed on 23rd December, 2020
  • Out Law Guide, Pinsent Masons (2005), “ Dispute Resolution” < https://www.pinsentmasons.com/out-law/guides/disputeresolution#:~:text=Litigation%20is%20the%20traditional%20form,which%20the%20parties%20must%20take. > accessed on 24th December, 2020
  • All Answers ltd, 'Alternative Dispute Resolution' (LawTeacher.net, December 2020) accessed 24 December 2020
Statutes
  • S.171, The Companies Act, 2006
  • Companies Director Disqualification Act, 1986
  • Employment Rights Act 1996
Case
  • Royal British Bank v Turquand [1856] 6 E&B 327
  • Conway v Petronius Clothing Co Ltd [1978] 1 WLR 72

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