Coursework Week 8
Documentary Film – Enron: The Smartest Guys in the Room (2005)
‘Enron: The Smartest Guys in the Room’ is a 2005 documentary film detailing the biggest corporate scandal and collapse in American history. Enron is the story of insatiable greed made possible by the perpetrators’ ingenious ability to invent highly questionable methods to portray the company as a successful company and win the trust and admiration of a gullible public with devastating outcomes. The outcomes include: suicides by corporate executives, jail sentences, the dismissal of more than 20,000 employees and the loss of life savings by thousands more while the company’s top executive walk away with more than $1 billion. The company gave itself an appearance of profitability by inflating its profits and concealing its losses through corrupt bookkeeping practices, with the acquiescence of its highly paid firm of accountants, Arthur Anderson.
Within two years of its founding in 1985 by Kenneth Lay, the company becomes embroiled in a scandal after two of its traders begin betting on the oil market resulting in consistent profits. But betting and the publication of consistent profits, which very few questioned, would be the hallmark of the company right up to its collapse.
Enron’s ambition was to reinvent the energy industry as a market place where gas and electricity could be traded like shares and bonds. Put simply, Enron gambled in the energy market and manipulated it and other commodities and even considered ‘trading weather’ at some point.
Its executive officers were involved in the company’s unethical and often criminal activities. These include:
By maintaining an appearance of profitability, the company’s executives were able to consistently reward themselves with huge bonuses.
Assume that Mr Kenneth Lay, the founder of Enron had provided a loan of £1 million to the company and that following the collapse of the company Mr Lay attempted to recover his money from the company but the liquidator resisted his claim on the ground that there was no difference between Mr Lay and the company since he had overall control over the company and that instead of trying to claim money from the company he should be made liable for its debts.
In the film, Mr Louis Bourget the president of Enron diverted the company’s profit into his personal account, destroyed the company’s records, and gambled the company’s money. Mr Andrew Fastow, the company’s Chief Financial Officer created a number of front companies which he uses to defraud Enron of tens of millions of dollars.
You are a legal team summoned to attend a case conference. The liquidator of the company has asked your team to prepare a legal analyses of the company law issues raised in the film and advise on:
The answer should be between 750 – 1000 words long and should address all the issues raised in the question. The written answer carries 50% of the marks available for this case conference. The group presentation carries the remaining 50%. Marks may be deducted if you do not keep within the word margin. You are expected to word count your work and make a note of this at the end. You are reminded that you must support your answer with relevant company law cases and statutory provisions.
Assessment Rationale and Criteria
The assessment method for this part of the module is designed to meet the objectives of the module and facilitate its outcomes. The coursework will allow students to develop their research and data interpretation skills both as members of a team, in respect of the group presentation, and as individuals in respect of the written answers. The written part of the coursework will allow students to develop their legal writing skills. Students must ensure that they satisfy the assessment criteria their work will be marked against.
INFORMATION BELOW MIGHT BE USEFUL AS A GUIDE. PLEASE FIND DIFFERENT CASES IF POSSIBLE WHICH SHOWS YOU HAVE DONE A RESEARCH
5. DIRECTORS’ DUTIES
To Whom do Directors Owe their Duties
1. The Shareholders as a General Body
Traditionally, directors owe their duties to the company’s shareholders (s. 170(1) CA 2006), that is to the shareholders as a general body and not to individual shareholders. See: Percival v Wright 
Exceptionally, directors may owe fiduciary duties to individual members of a small private company, e.g. when they undertake to act as the member’s agents.
2. The Creditors’ Interests
Apparently, no duty owed to company’s creditors when company is solvent.
However, where a company is insolvent or facing insolvency, it is bound to have regard to the interest of its creditors, s. 172(3) CA 2006.
3. Employees’ Interests
The Codification of Directors’ General Duties
The Companies Act 2006 codified, in sections 170 to 181 the equitable principles of fiduciary duty and the common law of negligence as they apply to directors. Sections 171 to 177 state seven general duties of directors:
a. Duty to act within powers – s. 171
Based on the equitable principle that a director of a company has a duty to exercise his powers for the purposes for which they were given. For example, the only purpose for which directors can exercise their powers to issue shares is to raise capital.
b. Duty to promote the success of the company – s. 172
Based on the equitable fiduciary duty to act bona fide in the interest of the company. Directors have a duty to act honestly and in good faith in the best interest of the company.
c. Duty to exercise independent judgment – s. 173 _____________________________
d. Duty to exercise reasonable care, skill and diligence – s. 174
Based on common law rules and equitable principles. Uses both an objective and a subjective standard.
e. Duty to avoid conflicts of interests – s. 175
Based on the equitable no-conflict and no-profit rules. S. 175(2) – the duty applies in particular to the exploitation of any property, information or opportunity. Breach will render director liable to account for the secret profits.
f. Duty not to accept benefit from third party – s. 176
A director of a company must not accept a benefit from a third party in his position as a director.
g. Duty to declare interest in proposed transaction – ss. 177 and 182
6. AUDITORS, CORPORATE INSOLVENCY AND LIQUIDATION
Appointment of Auditors
S. 485 and s. 489 CA 2006 _________________________________________________
Duties and Liabilities
Main role is to report on the accounts for a financial year of the company, s. 495 CA 2006. Auditor is to ensure that there are no financial irregularities in the company and that the directors give a true and fair account of the company’s financial performance. The auditor must perform his duties with reasonable care and skill. He is under a duty to make an exhaustive investigation if he has been, or ought to have been, put on inquiry, see;
Can the auditor be made liable to an investor who bought shares in a company on the basis of a false account published by the auditor?
CORPORATE INSOLVENCY AND LIQUIDATION
Concerned with the processes by which the life of a company comes to an end, with the aim of removing the company from all its legal relationships.
Winding-up of the company is carried through by the liquidator.
There are two methods of liquidating a company, s. 73 IA 1986; (i) voluntary liquidation which may be either members voluntary liquidation or creditors voluntary liquidation; (ii) compulsory liquidation.
Voluntary Winding up
Section 84(1) of the Insolvency Act 1986 provides that voluntary liquidation may commence in the following ways:
Compulsory Winding up
Section 122 IA 1986 empowers the court to liquidate a company. S. 124 gives a list of possible petitioners for a liquidation order.