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Legal Implications for Misrepresentation of Company Accounts

Question

Internet Services Limited (“ISL”) was incorporated on 1 April 2012 without a constitution. It has three shareholders -

  1. Sarah Jones (who owns 40 shares)
  2. Timothy Jones, Sarah’s husband (who owns 30 shares)
  3. Paul Bailey (who owns 30 shares)

All three are also directors.

 Sarah works fulltime in the business, supplying customers with specialist internet and computer advice. Timothy helps Sarah with the book keeping and general advice (amounting to approximately 3 hours per week). Timothy is otherwise a full time sharebroker. Paul is a passive investor, who turns up to the annual meetings of shareholders, and to directors’ meetings.

Benjamin receives a letter from Timothy regarding company accounts. Ben tell Paul that Sarah took out monthly drawings, totaling $100,000 for the year, when she needed. He further informed that Sarah and he would draw a further $20,000 for both their services. Paul was furious that Sarah and Timothy had withdrawn money without his permission. Paul was hoping to receive a dividend for the year, which would have been the first since the company began.

Assume that you are Kim Smith, an employee of Benjamin Hutchinson’s accounting firm. Ben has asked for your help before he writes a reply to Tim’s letter. Write a memo to Ben setting out the legal implications of the withdrawal of money out of ISL by Sarah and Timothy, and what action (if any) that Paul could take. Specify possible remedies in your memo.

Summary: This question belongs to corporate law and discusses about actions and remedies to be taken against a firm for misrepresentation of company accounts.

Total word count: 1513

 

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