 Company Law is about

o formation of companies,
o continuing regulation
o procedures for dealing with assets when terminated in liquidation.
 Company law where
o Tort,
o contract,
o equity all combine
 CA 2006, Final Report of Department for Business Enterprise and Regulatory Reform BERR,
 Company Law Steering Group (CLRSG)

Company Law
Company Law
Forms of Business Organization

 Legal form of business,

Sole trader/sole proprietorship

 No Legal Filing
 No Fees
 No Professional Advise needed
 Not useful for raising capital
 Unlimited Liability

Partnership

 General or unlimited partnership;

 legal partnership to pool resources; Two minimum, no maximum,
 3 people in business together automatic partnership, continued existence end if partner dies
 Jointly and severally liable each partner can be sued for the total debts of partnership,
 partnerships founded on relationships of trust if trust is breach remaining partners pay more,
 if trust is maintained, then risk is reduced as partners share risk
 No legal filing
 Partnership Act 1890.
 Section 1; business with common view of profit
 Partnership Act entities each partner to
o participate in management,
o to an equal share of profit,
o to indemnity for liabilities,
 Draft partnership agreement, vary terms, can provide flexible organizational structure
Company

 companies are designed as investment vehicles, limited liability minimizes risk

 formed by applying to registrar of the companies,
 names of first directors, members plus a small fee,
 The shareholders (also called members) own the company by owning its shares
 and the directors manage it.

Categories of Company

 essentially, a company can be limited in capital

o based on the number of shareholders who are owed money on their shares.
o This limits the company to only pay out original investments should it go under
o or suffer major financial setbacks.
 company limited by shares,
o public or
o private
 there are also company limited by guarantee
o charitable or
o public interest ventures
o where no profit is envisaged,
o people in the venture guarantee to pay debt should the venture fail
 under CA 2006, both private and public companies can be formed with a single shareholder
 Private companies can insist that those who leave first offer their shares to other members.
 Public companies can also do but restriction on sale would not encourage general public to invest
 Public companies have a minimum capital requirement of UK pounds, 50,000,
o needs one quarter to be paid and
o ability to call on members from remaining amount.
 Private companies have no minimum capital requirement,
o can have authorized share capital of $1
o divided into shares of 1p each
 Public companies must have at least two directors,
o public companies must have a company secretary
o private companies can choose to have one,
 procedure for passing shareholders resolutions,
o Part 13 of CA2006 allow most to be passed in writing
o rather than pass resolutions at meetings where members are physically present.

Limited Liability

 Members only liable for the unpaid amount of their shares not responsible for the debts,

The Constitution of the Company

 Memorandum still exists as separate document; registration requirements under 2006 Act.
The Memorandum

 Since CA 2006 the memorandum only needs to state, that

o the subscribers i.e. those who wish to form the company have a share capital,
o each subscriber agrees to take at least one share in the company.
o At least one person must subscribe to the memorandum,
o now they only need to authenticate it,
 statement of capital and initial shareholding,
o how many shares subscribers are taking
o and the nominal value of those shares,
o face value rather than the actual amount subscribers are paying for them
 it is no longer necessary for companies to have an authorized share capital
 shares may be fully paid, partly or even unpaid, shares may even be paid for in goods & services

The Articles of association

 set of rules for running the company,

 organizational structure,
 power allocation between
o board of directors (main management organ)
o general meeting (main shareholding organ)
 can provide own articles; use model articles by state or statutory instrument; apply by default
 from 2009 onwards different articles are made available for private public and private companies
 most companies adopt without changes or with minor changes
 company can alter its articles,
o resolution to do so must be passed by special resolution of the shareholders.
o S.21 CA 2006,
o requires 75% majority of votes cast,
 S.168 CA right to remove any director, for any reason whatsoever by simple majority
 membership of the board is subject to continuing approval of shareholders in general meeting
 now companies can choose whether to have any statement of their objects
 such a clause is now but in the articles

Some General Problems with the Corporate form

 although similar statutory framework applied

o the problem is that small private company and large public companies are not similar
 investors exercise control once a year at AGM,
o but for majority of company’s separation of powers does not exist

Large Company

AGM meets once a year primarily to elect directors to the board

 directors will be a mix of
o professional managers,
o executive directors
o non-executive directors and
o independent outsider,
 executive directors will have a small shareholding but not significant
 annual reports for directors and prospectuses for the future,
 auditor checks the accounts prepared by directors,
 directors act as fiduciary (bound to act in interests and for benefit of another)
 trustees also have fiduciary duties) duty to act bona fides (in good faith)
 in the interests of shareholders, company bound by acts of agents

Small Company

 Shareholders and directors often the same people, also the only employees of the company
 most statutory assumptions about the company will not hold
 UK company law modified, reduce some of the requirements and burden on private companies,
 CA 2006 ..think small first

Freedman study

 90% of all companies in the UK were small private concerns,

 many debts owed to banks can be reclaimed from personal assets of shareholders
o if company was in insolvent liquidation
 CLRSF; final report modern company law statutory requirements for small businesses covering;
o Constitutional structure,
o Decision-making;
o Accounts;
o Audit;
o Dispute resolution
 UK Government in 2015 enacted small business enterprises and employment act
o which reduced the amount of information that must be filed with the registrar of
companies

Minority issues

 company law assumes company operates by its constitutional organs

 One limited protection available to minority shareholders is in some cases
o to enforce personal rights under the company constitution,
o but often ineffective especially if complaint is for misbehavior
o eventually a statutory remedy was introduced
o now in s.994 CA 2006 to make it easier for shareholders to bring such an action
The Nature of Legal Personality
Corporate Personality

 Corporate personality;
o can sue and be sued in its own name,
o hold property
o and be liable for its debts
 Modern company law only began in mid-19th Century when series of company’s acts were passed
 which allowed ordinary individuals to form registered companies with limited liabilities.
 Way in which corporate personality link together can be explained by series of cases.

Solomon v Solomon & Co

 Mr Solomon business as a leather merchant, requirement 7 shareholders behalf of Mr Solomon,

 purchased sole trading leather business, $39,000 value not FV but confidence on future prospects,
 Price was paid in $10,000 worth of debentures
 Debenture is a written acknowledgement of debt like mortgage
 Giving a charge over all of companies’ assets (debt is secured over companies’ assets,
 Mr Solomon could if not repaid is debt, sell companies assets and get his money back
 plus $20,000 in@1 shares and $ 9,000 in cash, also paid of business creditors in full,
 Mr Solomon held 20,001 shares (1 debenture) in company, company holding 6 remaining shares
 He was also because of debenture a secured creditor,
 liquidator appointed, court appointed official who sells of remaining assets and liabilities and
distributes proceeds to those who are owed money by the company
 Liquidator alleged Mr Solomon personally liable for debts, CoA agreed,
 HoL disagreed, registration procedure could be used by individual to carry on a one-man business
 Company formed in compliance of regulations is a separate person
 and not just an agent or trustee of its controller
 as a result debt of the company were its own
 and not those of the members,
 the members liability limited to the amount they invested
 Decision also confirmed that debentures instead of shares can further protect investors

Macura

 Macuara v Northern Assurance Co [1925],

 sell all timber for issued share capital of Irish Canadian Saw Mills ltd. insured it on his own name.
 HOL timber belonged to company not Mr Macuara
 who had no insurable interest in property of company,
 debt belong to corporation assets belong to corporation
 More modern examples in
 Barings Plc (in liquidation) v Coopers & Lybrand N0.4 [2002],
 loss suffered by a company as a result of a loss of its subsidiary
 a company in which it held all the shares was not actionable by the parent,
 subsidiary was proper plaintiff, company is separate legal entity
 with its own property rights and obligations

Lee

 Lee v Lee Air Farming [1961],

 owned all shares, sole Governing Director, sole trader operated through a corporation, Chief pilot.
 Company as part of its statutory obligation
 paying insurance policy to cover claims bought by workers compensation act,
 New Zealand CoA, worker, so no compensation payable, appealed in privy council in London,
 company; Mr Lee distinct entities capable of legal relations, contractual relationship employed,
 give as Governing Director give himself orders as Chief Pilot, master and servant relationship,
 fitted definition of worker under Act, widow entitled to compensation

Limited Liability

 Separate legal personality and limited liability are not the same thing,
 limited liability is logical consequence of existence of separate personality,
 responsible for own debts, shareholders lose initial investment but not responsible for debts,
 just as humans can have restriction placed on its legal personality e.g. children.
 Company can have legal personality without limited liability as conferred by statute
 s.3 (4) CA 2006. Company still be formed without limited liability registered unlimited company

LIFTING THE VEIL OF INCORPORATION

Introduction

 The price of protection to shareholders is at expense of creditors

 however legislator and courts have intervened where they may be unjust consequences,
 may involve holding individual’s insider company personally liable,
o either to the company
o or to 3rd party who has been inured
o and sometimes it may involve refusing to treat company as separate legal personality.
Legislative Intervention

 Where group structures emerge; parent company is sole shareholder in number of subsidiaries,
o CA recognized treating each company within a group as separate was misleading
 S.399 CA 2006 parent companies’ duty to produce group accounts
 S.409 CA 2006, requires parent to provide
o detail of shares it holds in subsidiaries
o and subsidiaries name
o and country of activity
 Possibility to commit fraud
o introduced civil and criminal provisions
o negated effect of corporate personality and limited liability
 S.993 CA offence of fraudulent trading and
 ss.213-215 of Insolvency Act 1986 contains important provisions

Insolvency Act s. 213

 S.213 Fraudulent trading provision,

 if in the process of winding up company appears to court business of company carried out to
defraud creditors or any fraudulent purpose,
o anyone involved can be called to contribute towards debt
o be it directors, shareholders, employees or creditors
 Re Todd Ltd [1990] director was found liable for $70,000 to debts of company due to activities
 S.993 CA 2006 Criminal liability could follow with imprisonment as ultimate penalty,
o but neutralized effect of s.213 as high standard of proof intent to defraud.
o because of possibility of criminal charge
 Re Patrick & Lyon Ltd [1993] involved proving actual dishonesty
o according to current notions of fair trading among commercial me,
o real moral blame, difficult to obtain in practice
 S.214 of Insolvency Act 1986 covered lesser offence of wrongful trading

Insolvency Act S.214

 Not about intent to defraud but reasonable director ought to have concluded
 no reasonable prospect to avoid liquidation, not continue to trade otherwise contribute to debts
 Re Productive Marketing Consortium Limited (No.2)(1989) 2 directors over 7 yrs did not put
company into liquidation contribute $75,000 towards debt of company
 S.213 for anyone hence qualifies limitation of liability,
 Small companies’ directors member of company, limitation of liability is indirectly affected,
 parent companies may have limited liability affected acted as shadow director
 i.e. different than an advisor, who directors accustomed to taking directions
Judicial Veil lifting

 Judiciary with difficult situations where loss shall lie,

o reverted to stricter application of Solomon
o and prepared to lift veil less frequently
 Gilford Motor Company Ltd v Horne [1933] not to solicit customers from former employer,
o company a front and
o Mr Horne; issued injunction against himself and company
o even though company never signed a covenant not so solicit
 Jones v Lipman [1962] Mr Lipman changed mind to sell land, conveyed land to company,
o judge found company to be a façade and granted an order for specific performance
 S. 1159 (2) CA 20061960s difficulty with group structures, wholly owned subsidiaries
 Economic reality one business organized through 4 separate legal personalities,
 parent could choose to conduct more risky liability prone activities though a group subsidiaries
 but parents liability limited
 DHN Ltd v Tower Hamlets [1976] Lord Denning, single economic reality treated as one
 Woolfson v Strathclyde RC [1978] disproved Dinning’s view veil lifted only of façade
 Adam v Cape Industries plc [1990] CoA judiciary bringing more certainty into law,
 earlier cases did not identify with clarity and precision when veil could be lifted,
 too much subjective interpretation, CoA preferred narrower approach

Adam v Cape Industries plc [1990]

 CAPE mined and marketed Asbestos,

 In US NACC; sued for personal injury, settled in action, 1978 NACC closed down,
 subsidiary formed; re-organizing business; minimize presence; taxation and other liabilities
 Did not defend action; default judgments Cape sold mining and marketing business no US assets,
 Argument for UK courts; separation between CAPE and group companies ignored,
 was not if Cape is liable, established by default in US, is Cape present in US? CoA ruled for CAPE
 Interest of justice to vague a ground to lift the veil,
 Second the mere fact that a group of companies was a single economic unit was also not itself
sufficient to allow the veil to be lifted. Followed decision in Wolfson where in previous instance
veil had been lifted on this ground such as DHN it was because Court was interpreting statute or
contractual document which on proper interpretation of terms required two or more companies
to be treated as one unit.
 Under general law subsidiary
 Adams narrows situations where veil of incorporation lifted, reasonably clear restrictive
o Court is interpreting statute or document
o Company façade (Anglo German Breweries Ltd (in liquidation) Chelsea Corp Inc [2012]
o Where subsidiary is agent of the company, and acting within parents actual or apparent
authority then actions of subsidiary would bind parent.
 Other exceptions to Adams rule Ratiu v Conway (2006)
 Two recent Supreme court decisions have affirmed Adams,
 VTB Capital plc v Nutritek International Corp [2013]
 Petrodel Resources Ltd v Prest [2013], Lord Sumpton evasion & Concealment principal
 Veil pierced only on evasion, use company to evade obligation controller already had,
 not necessary that just be formed for the purpose but merely that it was used for the purpose
 Concealment, courts ability to see through behavior, many ways, using company was one,
 court can always see through use does not need to pierce the veil
 put blackmail money in company; court can regard blackmailer and recipient of money

 Actions in Tort; means of avoiding Solomon principal,

 liable under law of Tort for injuries, acting for company will not prevent personal tortious liability,
 bus driver for pedestrian. Not straightforward for Directors
 One case where tort may arise when manager acting on behalf of company misleads a 3rd party

 Willaims v Natural Life Health Foods Ltd [1998], HoL

 emphasized Solomon principal negligent misstatement, Directors employees personally liable,
 company sell franchises to run retail health food shops, brochure, NLHF also ceased to trade,
 effect nullify protection offered by limited liability, for negligent misstatement
 reasonable reliance by claimant; assumption of personal liability Director create special
relationship between them.
 No evidence of personal dealing in the case or that MD was prepared to assume, personal liability

 Standard Chartered Bank v Pakistan National Shipping Corp (No.1) [2003]

 Recent cases suggest if tort is deceit rather than negligence
 courts will allow personal liability to flow to a Director or Employee

 However directors liability on tort proved to be less than settled

 MCA Records Inc v Charity Records Ltd,
 director had authorized a number of infringing acts under Copyright Design and Patent Act 1988.
 Court of Appeal took a much more relaxed approach to possibility of liability,

 no reason director or controlling shareholder not be liable with the company as joint tort fearer,
 if not exercising control through constitutional organs of company
 under circumstances where he would be liable if he wasn’t director or controlling shareholder,
 found Director liable a joint tort feasor,

 Could shareholders be liable under Tort, shareholder in company operates unsafe system due to
which employee is injured,
 if only a shareholder unlikely to be involved in decisions that led to unsafe work practices,
 case of nonfeasance, i.e. failed to stop rather than misfeasance

 Chandler v Cape plc (2012) CoA

 shareholder can nonetheless be liable, if shareholder owed a duty of care to those injured
 Duty of care would only arise for parent companies, for injuries caused by subsidiaries
 and even then if several other conditions were satisfied.
o Parent in same industry.
o Parent ought to have known as much about health and safety,
o parent ought to have known subsidiaries operations were unsafe
o subsidiary or employee were relying on parent to safeguard employee health & safety.

 Cases after Chandler growing reluctance by courts to impose duty of care on parent companies
 Thomson v Renwick Group Ltd (2104) CoA
 refused to impose duty of care on parent within corporate group
 that acted merely as holding company i.e carried out no business itself but merely owned shares
in subsidiary companies, which conducted all of groups business

 Although Chandlier suggested parent company may be liable for non-feasance,

 for failure to prevent subsidiary from harming others
 now appears parent only liable, where guilty for active misfeasance.
 AAA v Unilever plc [2018] court suggested parent would typically owe a duty of care to those
injured by subsidiaries negligence only if,
o parent had in substance taken over management of subsidiary activity which led to injury
o or parent had taken over management of particular activity of subsidy which caused injury

 In one respect Chandler had been broadened,

 Lungowe v Vedanata Resources Plc [2017]
 court refused to strike out claim bought by neighbors of company (i.e. not just employees)
 claim by resident may still be arguable depending on the facts of the case.

COMPANY FORMATION PROMOTORS AND

PRE-INCORPORATION CONTRACTS.
Determining who is a promotor

 Person who takes necessary steps to form a company

 Whaley Bridge Calico Printing Co v Green (1879)
 Bowen J explained promotor not term of law but of business, number of business operations,
 Promotion process involves
o registering with companies’ house,
o entering into pre-incorporation contracts,
o in the case of public companies issuing a prospectus,
o appointing directors
o and finding shareholders to invest
 CA 2006 does not define promotor; judges have framed tests to determine if activities relate to
promotion
 Twycross v Grant (1876 – 77)
 Cockburn CJ said promotor is who undertakes to from company necessary steps to accomplish
 as long as work of formation continues retain character of promotors,
 if governing body formed then functions of promotors end.
 Definition is broad to prevent taking steps to avoid duties borne by promotors,
 breadth legacy of 19th century fraudulent schemes perpetrated against investors,
 judges responded by holding promotors fiduciaries by analogy with trustees
 and subject to range of duties aimed at ensuring high standards of behavior.

Fiduciary position of promotors

 Lord Cairns L.C, creation and molding of company, and under what supervision start into existence
and begin acting as trading corporation.
 Obligations fiduciary owes to his or her principal,
o Directors duties are duties to principal,
o to act with loyalty and good faith in dealings which affect person,
o more than just acting honestly, and fairly,
o fiduciaries must only act in the interests of principal
o and must not follow their own self-interests to dictate their behavior in conflict with
principals’ best interests.

Duties and Liabilities

 Bringing company into existence often requires acquiring property,

o duty to not make secret profits from such transactions.
o Should not sell property to company in which they have personal interest,
 Promotors should make full disclosure, of any such profits to independent board of directors
o once company comes into existence
o otherwise company can bring an action for recession.
 Erlanger v New Sombrero Phosphate Co,
 syndicate purchased mine for $55,000, through nominee sold mine to company for $ 100,000
not disclosing interest in contracts, mining operations fruitless,
 shareholders removed old directors new board successfully brought action sale rescinded.
 Solomon v Solomon Co Ltd (1897)
 HoL took the view that if the board was not independent,
 disclosure of all material facts should be made to the original shareholders,
 Glukstein v Barnes [1900] HoL further refined duty by holding that full disclosure to original
shareholders will not be sufficient, if they are not fully independent and the whole schemes
is designed to defraud investors,
 Where full disclosure is not made contract is voidable at company option but right to rescind
may be lost if
 Company affirms contract Re Cape Breton Co (1885)
 Company delays in its right to rescind contact
 For recession to be available it must be possible to restore at least substantially, parties to
their original position unless due to fault of promoter this possibility has been lost out,
Lagunas Nitrate Co v Laguna Syndicate [1899]
 Where company has been affirmed the company can nevertheless sue promotor to account
for the secret profit
 Pre-Incorporation Contracts
 Prior to certificate of incorporation company cannot be bound by contracts,
 Promotors will need to contract with 3rd parties for lease of premises, business equipment’s,
and connection to utilities, so once certificate of incorporation I issued the company can begin
trading.
 Promotor cannot bind a nonexistent, principal i.e. the company to contract
 Common law addressed the problem by applying settled principles of contract and agency,
 Reform now found in s.41 of CA 2006.

Common Law Position

 Fundamental principal of law of contract that company must be in existence for an agreement
to be a binding contract. Stranger to contact once it comes into existence
 Privity doctrine operates to prevent rights & Liabilities being conferred on the company Klener
v Baxter (1866 – 67)
 The Contract (Right of Third Parties ) Act 1999 which allows for enforcement if contracts by
3rd parties if contract so expressly provides does not apply to pre-incorporation contracts.
 Klener v Baxter (1866 – 67)
 Promotors of a hotel company entered int contracts on its behalf to purchase wine, company
subsequently after existence ratified contract, wine consumed but before payment company
went int liquidation, it was held as company did not exist at time of agreement it would be
wholly inoperative unless it was binding on the promotors personally and stranger cannot by
subsequent ratification relive them from that responsibility.
 However promotor can avoid personal liability if company or 3rd party substitute i.e. novation.
i.e. new contract with similar terms.
 Novation may also be inferred from the conduct of the parties, where terms of original
agreement are changes Re Patent Ivory Manufacturing Co, Howard v Patent Ivory
Manufacturing Co (1888)
 However Novation is ineffective if the company adopts the contact due to the mistaken belief
that it is bound by it (Re Northumberland Avenue Hotel CO Ltd (1888).
 A promotor can also avoid personal liability, where he signs the agreement merely to confirm
signature of the company because in doing so he has not held himself out as agent or
principal. Signature and contractual document will be a complete nullity because the
company was not in existence Newborne v Sensolid (Great Britain Ltd [1954]
 Common law position has now been modified as a result of UKs implementation of First
European Community Directive on Company Law by s.51 CA 2006, provisions seek to protect
3rd party by making promotors personally liable when company after incorporation fails to
enter into a new contract on similar terms.
Companies Act 2006 s. 51

 S. 51 (1) says a contact on behalf of a company by a persona purporting to act for company
or as agent for it, and he is personally liable on contract accordingly,
 Phonogram Ltd v Lane [1982] the meaning of S.51 was considered by CoA. Lord Denning took
phrase subject to an agreement to the contrary to mean that for promoter to avoid personal
lability contract must expressly provide for his exclusion.
 Court also held it was not necessary for putative company to be in process of creation at the
time contract was entered into.
 Braymist Ltd v Wise Finance Co Ltd [2002] an issue before CoA was whether a person acting
as agent of an unformed company could enforce a pre-incorporation contract under s.51. held
that although terms of first directive referred to liability and not to enforcement it did not
follow that s.51 was similarly limited in scope so as to prevent enforcement of contracts made
be persons on behalf of unformed companies.
 The words in the section he is personally liable on the contract accordingly did not operate to
negate the view rather merely phrase the abolition of common law distinction between
agents who incurred personal liability on pre-incorporation contracts and those who did not.
 Section is a double edged so that party who is personally liable for contract is also able to
enforce it.

Freedom of establishment

 Companies are no longer static entities whose operation are confined to jurisdiction they are
incorporated. Article 2, 43 and 48 of EC treaty seek to confer right of establishment on natural
persons and companies alike to carry on business in any member state and that they have
their registered office or principal place of business within the European community article
48.
 Member state which seeks to impede right of a company registered in another member state
from carrying on business within its jurisdiction will be in breach
 Cerntros Ltd v Erversus-og-Selkabssyrelsen [2002] Denmark was in breach refusing to allow
Cetros Ltd private company registered in England to establish branch in Denmark. Even
through Denmark was its primary operational establishment. Chose UK for incorporation of
its undercapitalized company in order to avoid minimum capital requirements under Danish
Law. Motives cannot be regarded as abusive nut consequence of their freedom to
incorporate in one state and set up secondary establishment in another
 Pan European business entity the European Company (SE) which became available in October
2004, will address concerns of member states wishing to regulate undercapitalized companies
incorporating within their jurisdiction.
 Further draft 14th EC Company Law Harmonization Directive aim to facilitate corporate
migration. A company will be able to move its registered office between member states
without having to disrupt its operation by reincorporating in host jurisdiction.
 Incorporation registrar company, 2 types Pvt Ltd shares not traded openly in mkt no limit SH;
Public Ltd no max limit min 2; Pvt Ltd company listed company registered to stock mkt can be sold
in mkt unlisted company, cannot be traded on stock mkt,
 BoD of company run operation of company, SH elect appoint Director divorce bw ownership (SH)
& control (directors),

Corporate Personality

 Company has a legal existence of its own juristic person; own property, sue, bank accounts
 Partnership sue owner, sue company not owner, perpetual existence unless liquidated
 Joint Stock Companies Act 1844 incorporation of commercial companies by pvt Individuals,
unlimited liability
 Limited Liabilities Act 1855; simpler registration process, liability limited to shares subscribed
 Salmon v Salmon & Co (1897) leather business, 1892 Salmon & Company, family, not active role,
min 7 SH sold leather business sole proprietor to company for 39,000, 9000 cash, 10,000 as loan
2000 shares, liquidated, sham, Mr S liable to debts of company CoA agreed, HoL MacNaughten
overturned, Company registered according to procedure, seprate legal person, not agent or
trustee of controller debts of company own not of SH, liability members limited to shares
subscribed
 Macaura v Norther Assurance (1925), owned timber for which insurance, sold timber to company
he owned, fire, timber company property not his so no insurance
 Lee v Lees Air Farming (1961) PC of NZ, incorporated Lees Air Farming Ltd, governing director,
chief pilot, SH, director, employee, plane crash, staute, widow of worker statutory compensation
CoA Lee not worker no compensation appeal PC was worker and company sperate legal identity,
contractual relationship, master servant relationship, widow entitled to compensation
 Barrings PLC (2002) sperate personalities parent & subsidiary, parent company not sued on behalf
of subsidary company

Lifting the veil of incorporation

 Commit fraud by sperate legal personality, lift veil to impose liability on owners and officers;
statutory & judicial

Statutory Veil lifting

 S 933 of CA 2006, criminal liability for fraudulent trading
 S 213 Insolvency Act 1986 civil liability for fraudulent trading; winding up a company business
carried out to defraud creditors of company or any other person, for fraudulent purpose; court
declare any person who knowingly participates to carry such business has to make such
contributions to company’s assets as court thinks proper; any persons all officers & SH covered
 Retodd (1990): Director fraudulent activities, liquidation liable contribute 70,000 debts company
 Re Patrick & Lyon (1933) fraud explained, actual dishonesty, current notions fair trading among
commercial men, moral blame, not every dishonest act fraud, cases commercial men put blame,
high threshold for fraud, if proved per s.213 criminal liability may also be imposed s.993 CA 2006
 S. 214 Insolvency Act, applies to Directors, easier to prove, no criminal liability, but civil liability
for negligent trading , course of winding up appears before winding up Director knew no
reasonable prospect company would avoid insolvent liquidation, court may declare such Director
to make contributions to company’s assets as it deems proper; only applies if insolvent liquidation
 Reproduce marketing (1989) over 7 yrs insolvency, 2 directors not put into liquidation beyond
point of no return, liable under s.214 to contribute 75,000 to debts of company

Judicial Veil lifting

 Initially applying strict Solomon principle more interventionist approach divides into 3
eras/phases

1897 – 1996 Classical; limited cases, Solomon principle, only lifted if company mere façade

 Daimer v Continental (1916) company with German SH, wartime unlawful trade with enemy
 Gilford Motors (1933) former employee Mr Horne bound to not solicit customers, incorporated
company to avoid non solicit clause, front for Mr H & issued injunction against company
 Jones v Lipman (1962) contract to sale land to merchant for a price, value appreciated, transferred
title to company, sued company and asked specific performance, Solomon, contract with
merchant not company and cannot sue company, lifted veil, company façade

1966 – 1989 Interventionist years; relaxed approach to Solomon principle, intervened and lifted veil
more openly

 DHN Foods (1976) Denning L group of companies single economic unit treated as such tax
purposes; criticized case
 Woolfson v Strathdyde (1978) HoL disapproved Denning , each group company sperate unless
façade
 Re A Company (1985) Denning view considerable effect, CoA stated court pierce veil of
incorporation if necessary to achieve justice irrespective of legal efficacy of corporate structure
under consideration
 Lowry (author)(1993) criticized interventionist approach lead to uncertainty of safety of
incorporation, policy erode established legal principles isn’t welcome
 Gallagher & Zeigher (1990) lifting veil can negatively impact other aspects of law such as Director
Duties, Individual taxation principles and rule in Foss v Harbottle

1989 – Present, back to basics post cape

 Adams v Cape Industries (1990) English company, mining/marketing asbestos, worldwide
marketing subsidiary Capasco, all operations in US by NAAC (subsidiary of Cape) later by various
small subsidiaries incorporated in US, Adams US citizen filed actions against Cape and Capasco in
US, Cape challenged not subject US jurisdiction, but US courts gave default/ex-parte (D not appear
judgement in favor of C) against Cape, Adams to enforce US judgment approached UK courts, only
enforce if against Cape, not taken part in proceeding in US nor has assets in US, all assets in name
of subsidiary sperate legal entities, lift veil of incorporation,
o CoA veil not be lifted simply because
 judge believes interest of justice to do; disapproved R A (Company)
 group of companies’ single economic unit not sufficient lift veil disapproved DHN
o law considers p & s separate legal entities but di allow lifting of veil in following cases
 mere façade to enable someone avoid ore existing obligation eg Jones v Lipman
 where interpretation of contract or statue appears 2 or more companies treated
as single entity (statue requires lifting of veil, or for contract if companies onshore
7 offshore in business with A both sign separate contract with A but if they sign
superseding Coordination agreement then veil will be lifted)
 subsidiary is agent of parent and within scope of authority, Parent (Principle) will
be liable for acts of the subsidiary (agent) basis of agency
 Adams v Cape Industries considered good rule (well celebrated judgment) separate personality
well settled principle and veil only lifted in 3 scenarios –
 Creasey v Beachwood Motors (1993) Court another ground lifting veil if common directorship &
SH, assets of one company transferred another by Directors without regards duties as Directors
 Belhaven Pubs (1998) overruled Creasy; Belhaven Pubs Ltd & Others sister concerns (companies)
reorganized financial crises leaving no assets & liabilities in Belhaven Pubs in litigation with Ord at
time 7 therefore wanted to have name of Belhaven substituted with parent company, Court held
reorganization legitimate action, assets transferred at full market value and motive crisis;
 Kensington International v Congo (2006) court held dishonest transaction involving transfers bw
related companies designed to avoid exiting liabilities and a sham, lift veil
 Petrodel Resources (2013) recent view on judicial veil lifting SC reaffirmed façade will only ground
liability to evade existing legal obligation

Lifting the veil in Tortious Liability under Personal injury cases,

 if P exerting control over S commits tort then subsidiary cannot be held liable
 Chandler v Cape (2011) employee of Capes wholly owned S (not existed) suffered asbestos
related injury, action against Cape external control over S health & safety policy, held assumption
of responsibility by P over health & safety policy of subsidiary created special relationship bw
employees and Parent which gave rise to duty of care

Tortious Liability – Economic Losses

 Willaims v Natural Life Health Foods (1998) NLHF selling franchises of retail health foods shops,
company brochure, details financial projections by company Md, C purchased franchise but
suffered losses, bought action against MD had personal responsibility towards C. HoL director or
employees of company could personally be liable for negligent misrepresentation only if
assumption of personal responsibility by director to create special relationship, no evidence of
personal dealing for special relationship

General point

 If tort of deceit is involved courts more willing to impose liability on tort fearer
 Standard Chartered Bank v Pakistan national Shipping Corporation 2002

Directors as Join-Tort Feasers

 MCA Records (2003) court held director joint tort feaser with company as he was personally
involved in commission of tort

Liability of SH in Tort

 Thomson v Renwick (2014) Coa refused to impose Doc on parent company which was purely
holding company & business was to hold shares in its subsidiaries, not itself carry operations
in same line of business (compare v Chandler)

Advantages if Limited Liability

 Encourages investments, encourages risk taking, facilitates public share market, business
assets of individual out of reach of individuals personal creditors (Haansman and Kroakman),
Limited liability also benefited large powerful creditors, secured lending in form of fixed and
floating charges, risk premium in terms of interest charged and board representation all
improved creditors monitoring mechanism
 Disadvantages of limited liability; risk is moved to creditors small creditors (trade creditors)
cannot secure their transactions, actions of large powerful secured creditors often
detrimental to smaller unsecured creditors upon liquidation, in group structures limited
liability has allowed very effective double limitation of liability for parent companies and SH.

RAISING CAPITAL EQUITY

 In private companies the investment is largely provided by founding members, either through
their personal savings, or from Bank loans. Private companies also restrict the ability of their
shareholders to transfer their shares, s.755 prohibited from raising capital from general
public.
 Listing rule of LSE require that a company be made a public company,
 Public companies can advertise the fact that they are offering shares to the public the
company should issue a prospectus giving a detailed and accurate description of the
company’s plans, minimum capital requirement of $50,000 s.763 of CA, only needs one
quarter of that to be paid up, plus the ability to call on the members for the remaining amount
s.586 CA 2006, if public company is listed on LSE restrictions on transfer will be prohibited,
higher regulation

Public companies and the public interest

 CLRSG in its consulting document Completing the structure identified tighter accounting rules,
more onerous capital management regime and stricter rules for board of directors, where
public companies subject to enhanced regulation.
 Public companies may decide to list on stock exchange, this involves applying to LSE, and
fulfilling a vary strict set of criteria to ensure business is a sound one.
 Listing is a private contractual arrangement between pubic company and LSE (itself a listed
Public Company).
 Shareholders of a listed companies tend to be what are called institutional investors. Pension
funds, insurance companies, professional management funds and investment vehicles of
foreign states, i.e. sovereign wealth funds.

Raising money from the public

 The company could of its shares for subscription itself issuing a prospectus and advertising in
general press,
 Offer for sale, agreement with an issuing house (a merchant bank) it will allot its entire issue
of shares to the issuing house, the issuing house will then try to sell shares to its clients and
general public, takes the risk shares will not sell
 A placing, shares may not be offered to the general public at all but are placed with the clients
of a merchant bank or group of merchant banks
 The company could raise money through a rights issue, new shares offered to the existing
shareholders in proportion to their existing shareholding. These pre-emption rights are
conferred on shareholders by s.561 CA 2006. Once a company is listed, further capital raising
is more straightforward without the complication of the initial listing process.

FCA, FSA and LSE

 Financial Conduct Authority is main UK financial services regulator, listed companies are
within its ambit, following enactment of Financial Services and Markets Act 2000 (FSMA) FCA
became the main UK listing authority, with responsibility for admitting securities (shares &
Debentures) to listing, making the listing rules and policing compliance with them,
 LSE is principal recognized Investment Exchange (RIE) for trading securities of UK and foreign
Companies, government stocks & options to trade company securities in the UK.
 Once a company has obtained a listing by complying with the listing rules, it can only maintain
listed status if it complies with the continuing obligations specified in the listing rules. LSEs
statutory obligation to operate an orderly market also obliges it to monitor listed companies
on an ongoing basis.

Obligations when listing

 While compliance obligations for companies are complex they broadly cover the availability
of past accounts, compliance with minimum market capitalization and minimum proportion
of shares in public hands requirement, list rules focus on information that must be available
to the public, by a company when its shares are being listed,
 These disclosure requirements operate on the principle that all documents issued must.
 Contain such information as investors and their advisors would reasonably require and expect
to find there for making an informed assessment of a) assets & Labilities, financial position,
profits and losses and prospects of issuer of securities, rights attaching to those securities
 Requirements aim to allow informed decisions by investors
 If shares by listed companies are offered to the public a prospectus document is issued to the
public inviting them to invest In shares, submitted to and approved by the FCA is required.
 Since 2005 and the implementation of the Prospectus Directive (Directive 2003/71/EC) in the
Prospectus Regulations 2005, single regime is now in place in Part VI of FSMA regulating the
prospectus requirements of listed and non-listed offerings

Continuing Obligations
 Once a company has achieved a listing it continues to be subject to a number of obligations
to disclose the information necessary to maintain an orderly market and to protect investors
 The continuing obligations require listed companies to publish half yearly reports on their
activities, together with profits and losses made during the first six months of each financial
year. Further by way of an additional requirement to the duty to issue full annual accounts
and reports a listed company must also publish a preliminary statement of annual accounts.
Directors of Listed companies must also publish strategic report covering the developments
and performance of the business which identifies the principle risks and uncertainties ahead
 S.172 CA 2006 link between this report and Directors Duty
 Continuing obligations also operate as a means of preventing insider dealing as listing rules
require a listed company to publish price sensitive information as quickly as possible, failure
to comply with the listing regime carries the possibility that the FCA will sanction the company
or individual responsible for the failure, this could lead to wide range of criminal and civil
sanctions
 On 20th January 2007 a version of Transparency Directive 2004/109/EC was implemented for
UK listed Companies. Part 43 of CA 2006 amends Part VI of the FSMA in a number of ways to
implement the requirements of the Directive, it requires companies to produce, periodic
financial reports and specifies the minimum content of those reports, it requires the major
shareholders to disclose their holdings at certain thresholds. On the Implementation Directive
responsibility for the shareholding disclosure was moved from DTI (now the Department for
Business Energy and Industrial Strategy (BEIS) to the FCA. Directive also requires that
companies disclose information to investors on a fast non-discriminatory and pan-European
basis. Additionally, the transparency regime provides for criminal and civil penalties for non-
compliance.

Reforming the regulatory structure

CLRSG considered the current regulatory arrangement for public companies, in Regulatory
and institutional framework for company law. It didn’t feel any need for redrawing the
regulatory map. Companies Act 2006 did not as a result affect the regulatory structure within
which listed companies operate. However the credit crisis in Autumn 2008 led to major
overhaul of the structure of financial regulators in UK. The Financial services act 2012 enacted
introducing major changes to the Financial services and Markets Act 2000. The FSA was
replaced by two new regulatory bodies, the first was the Prudential Regulatory Authority
(PRA) which is a subsidiary of Bank of England and is responsible for promoting the stable and
prudent operation of the financial system through regulation of all deposit taking institutions,
insurers and investment banks
The other regulatory body is the FCA, it is responsible for regulation of conduct in retail was
well as wholesale, financial markets and infrastructure that supports those markets.it acts as
a UK listing Authority

Insider dealing

 Having a company’s shares listed on stock exchange -while advantageous for raising capital, -
also carries with it risk that insiders may wish to take advantage of their access to privileged
confidential information, by buying and selling shares on the basis of that information. Every
country in the world with a major stock exchange has made this practice illegal because of its
potential to destroy public confidence in the stock market, as we discussed above with regard
to the continuing obligations companies, the FCA and LSE also attempt to ensure that
opportunities to insider deal are minimized by requiring that companies disclose any
significant information that might affect share prices as quickly as possible.
Criminal Sanctions for insider dealing
 Part V of the Criminal Justice Act 1993 contains the main criminal provisions specifically on
insider dealing. Section 52 (1) states: an individual who has information as an insider is guilty
if in the circumstances mentions in subsection (3) that it is a regulated market and the insider
deals himself as a professional or through a professional intermediately, he deals in securities
that are price affected securities in relation to the information
 The insider will also be guilty of an offence if they induce others to deal in price sensitive
securities on a regulated market, whether or not the insider knows the information to be price
sensitive
 It is an offence just to disclose price sensitive information to another person in an irregular
manner s.52(2)(2). If found guilty a fine or imprisonment for up to 7 years is possible.
However, the criminal standard of proof very difficult to achieve because of the complexity
many insider dealing situations.as a result civil offence was introduced

Civil Sanctions regime

 Criminal provisions against insider dealing have not proved terribly effective, enforcement
has been problematic partly because of criminal burden of proof that must be satisfied,
moreover there are other ways besides insider dealing through which share markets may be
manipulated or distorted, this might be done for example by releasing false information to
the market in order to affect share prices.
 Because of these problems with the criminal insider dealing regime, UK Law has been
extended to cover market abuse more generally. The legislation imposes a range of penalties
on those engaging in market abuse including civil penalties and statements of censure
 Market abuse was first regulated by the Financial Services and Markets Act 2000 (FSMA)
section 123 of the FSMA empowers the FCA to impose penalties for market abuse, however
much of the detail of the regulation here is not found in the FSMA itself. Some is contained in
regulations that have been made under the FSMA the Financial services and Markets Act 2000
(Market Abuse) Regulations 2005. And many more of the relevant rules are now found in EU
regulation that was introduced in 2014, namely the Market Abuse Regulation, MAR is complex
and it makes many changes to the fine details of the regulation of market abuse
 What counts as market abuse is now defined by MAR. Essentially it covers two types of
behavior insider dealing and market manipulation. To quantify as market abuse the behavior
must not only fall into one of these two categories but must also relate to trading in financial
instruments on certain specified markets. The financial instruments that are covered include
shares in a company while the markets include the London stock exchanges main Market. The
fact that the regulation of market abuse is limited to trading on formal market shows that the
purpose of the regulation is not so much ensuring fairness in individual transactions but rather
about protecting the integrity of the market as a whole.
 The principal penalty for market abuse is a fine which can be imposed on any person who has
engaged in market abuse or has required or encouraged any other person to do the same. In
addition, the FCA may censure those who have engaged in market abuse and the Secretary of
State may also apply to the court for a restitution order in favor of those injured by market
abuse. However, the FSMA makes no provision for an individual shareholder who has suffered
a loss as a result of breach of the market abuse provisions described above to bring
proceedings to recover such a loss. ‘

Regulating Takeovers

 One of the consequences of listing on the LSE is that the shares of the company can be easily
bought and sold, this also means that the entire listed shareholding can be bought in the listed
market place thus affecting the takeover of the company
 Strangely given the importance of this area the companies act contains relatively few
provisions on the regulation of takeovers.
 Section 219 CA 2006 contains disclosure requirements for directors’ salaries
 Transparency directive requires anyone acquiring 3 percent holding in a company to disclose
their interest to the company and again every time their interest increases it decreases by 1
per cent.
 Section 979 CA 2006 governs post-takeover compulsory purchase of dissenting minority
 Additionally, ss.8950901 CA 2006 and s.110 insolvency act 1986 allows effective takeovers of
companies in crisis and liquidation, the conduct of the takeover itself which is of greatest
concern to shareholders and companies is left to self-regulatory system to govern
 Since 1968 the conduct of takeovers has been governed by the panel on takeovers and
mergers (the panel). The panel administers the rules on takeovers called the City Code on
Takeovers and Mergers (the code) The Panel and Code aim to achieve equality of treatment
and opportunity for shareholders in a takeover bid, the code while flexible emphasizes a
number of general principles, these are
 Equality of treatment and opportunity for all shareholders in takeover bids
 Adequate information and advice to enable shareholders to asses the merits of the offer.
 No action which might frustrate an offer is taken by a target company during the offer period
without shareholders being allowed to vote on it.
 The maintenances of fair and orderly market in the shares of the companies concerned
throughout the period of the offer.
 Until the CA 2006 the panel was non statutory body but its decision were subject to judicial
review because of the Public nature of its regulatory role. R v Panel on Takeovers and Mergers
ex p Datafin (1987)
 However the courts would only hear the review after the takeover was complete thus
eliminating the use of the courts in a tactical sense during the progress of a takeover bid, the
code while flexible emphasis a number of general principles, these are
 Equality of treatment and opportunity for all shareholders in takeover bids
 Adequate information and advice to enable shareholders to asses the merits of the offer,
 No action which might frustrate and offer is taken by a target company during the offer period
without shareholders being allowed to vote on it
 The maintenances of fair and orderly markets in the shares of the companies concerned
throughout the period of the offer.
 Until CA 2006 the panel was on statutory body but its decisions were subject to judicial review
because of the public nature of tis regulatory role R v Panel on Takeovers and Mergers Ex
Datafin (1987)
 However the courts would only hear the review after takeover was complete thus eliminating
the use of the courts in a tactical sense during the progress of a takeover bid.
 Prior to 2006 the panel had no formal power to sanction but was held in great respect by the
financial services sector, as a result the panel had number of options it could take,
 first panel could issue critical statements about the conduct of a bid which would alert
shareholders to irregularities,
 second the panel was reorganized by FSA as it was then called, the various regulatory bodies
licensed by FSA and professional bodies.
 This means the panel could pass the matter to these bodies requesting a sanction. For
example a listed company that did not follow the code could have the LSE remove or suspend
its listing and company’s professional advisors could have disciplinary proceedings brought
against them by their professional body. The FSA might also have withdrawn its investment
authorization from any person who is subject to an adverse ruling of the panel
 The reform of takeovers
 The reform of takeovers in the EU has been subject of much discussion since 1989, when the
European Commission put forward a draft directive on European takeovers
 Unfortunately, there are very different views on takeovers within the EU member states and
for more than a decade no progress was made
 Eventually in 2001 political agreement was reached on a text of the draft directive by council
of ministers but it was rejected by the European Parliament.
 In April 2004 a much-compromised directive was eventually agreed
 The Directive requires the establishment of a statutory body which would oversee statutory
takeover provision. The CA 2006 part 28 as a result converted the self-regulating panel s 942
CA 2006 into such a statutory body to oversee takeovers in the United Kingdom on 6 April
2007.
 Under the Takeover Directive reforms the panel now has its own range of sanction contained
in s..952 – 956 CA 2006
 Thus the panel now has formal powers to issue statements of censure, issue directions refer
conduct to other regulatory bodies order compensation to be paid for breach of the code and
refer a matter for enforcement by the court
 This means the panel can take action itself or pass the matter to other regulators requesting
a sanction, for example a listed company that does not follow the code could face
 The LSE removing or suspending its listing
 Disciplinary proceedings being brought against the company’s professional, advisors by their
professional body
 The FACA might withdraw its investment authorization from any person who is the subject of
an adverse ruling of the panel.

RAISING CAPITAL; DEBNTURES

Debentures

 Debenture is document that evidences or acknowledges the company’s debt Levy v Abercorris
Slate and Slab Co (1887)
 Definition provided by s.738 of CA 2006, debenture includes debenture stock, bonds and any
other securities of a company whether constituting a charge on the assets of the company or
not
 Mortgage of freehold property by company is a security and charge on its assets.
 A charge or security interest Is a right in rem meaning the things as opposed to the person.
Created by a grant or declaration of trust which if fixed implies a restriction on debtors
dominion of the assets in question Goods (2003)
 Debenture stock is money borrowed form a number of different lenders on the same terms,
such lenders forma class who usually have their rights set out in a trust deed, the trustee often
a bank represents their interests as a whole
 The trust deed will generally set out the following terms
 Obligation to pay the principal sum with interest
 Security if any that is given for the loan
 Events that will trigger the enforcing of the security.

Company Charges

 Creditors will often require security from a borrower before lending money, so that in the
event of default on a on repayment the creditor can enforce security interest, creditor seeks
to ensure priority over general body of creditors should company be wound up.
 Granting of security by a company does not mean that the title to the secured asset passes to
the creditor instead it creates an encumbrance on the property, the creditor gets a right to
have security made available by an order of the court, National Provincial Bank v Charnley
[1924] for companies most comment charges given as security interest are fixed and floating
charges

Fixed and floating charges

Fixed Charges

 A company may grant a fixed charge to creditor over certain property such as warehouse
 Such charge is similar to a mortgage in that the rights of the creditor (charge) attach
immediately to the property and company’s (chargors) power to deal with the asset is
restricted.
 Agnew v Commissioner of Inland Revenue [2001] L. Millet stated that, fixed charge gives the
holder of the charge an immediate proprietary interest in the assets subject to the charge
which binds all those whose hands assets may come with notice of the charge.

Floating Charge

 Floats over the whole or a part (class) of chargors assets which may fluctuate as a result of
acquisitions and disposals
 Corporate property that can be made subject to floating charge includes stock in trade, plant
(machinery) and book debts (receivables)
 Company can continue to deal with the assets in the course of business without having to
obtain charges permission
 Ashborder BV v Green Gas Power Ltd [2005] Etherton J reviewed the characteristics of the
floating charge and examined the notion of charger being allowed to deal with the charged
assets in the ordinary course of business
 The judge noted that whether a transaction was within ordinary course of business is a mixed
question of fact and law and viewpoint of the objective observer on facts is a useful aid
 Floating charge converts to a fixed charge over the assets within its scope upon the
occurrence of a crystallizing event such as a default on payment or wining up of the company

Impact of Liquidation

 Distinction between a fixed and floating charge becomes important when company goes into
liquidation because of ranking of charges against general body of creditors
 Re Yorkshire Woolcombers Association [1903] Romer LJ listed following features of floating
charge
 It is a charge on a class of assets of a company, present and future
 The class is one which in the ordinary course of the business of the company would be
changing from time to time
 By the charge it is contemplated that until some future step is taken by or on behalf of those
interested in the charge the company may carry on its business in ordinary way as far as
concerns the particular class [charged]
 In determining whether a charge is fixed or floating the courts will look to the substance of
the matter irrespective of what description the parties use to categorize it, in this regard L.
Milled explained in Agnew v Commissioner of Inland Revenue that
 In deciding whether a charge is fixed or floating chare the court is engaged in a two-stage
process, at the first stage it must construe the instrument of charge and seek to gather the
intentions of the parties from the language they have used
 Object at the stage is not to discover whether parties intended to create a fixed or a floating
change , it is to ascertain the nature of rights and obligations which the parties intended to
grant each other in respect of the charged assets.
 Once these have been ascertained the court can then embark on the second stage of the
process which is one of categorization, which is a Metter of law it does not depend on the
intentions of the parties, if their intention properly gathered from the language of the
instrument is to grant the company rights in respect of charged assets which are inconsistent
with the nature of fixed charge however they may chosen to describe it.
 L Millet noted that Romer LJs third distinguishing feature is classic hallmark of floating charge,
more recently in National Westminster Bank plc v Spectrum Plus Ltd [2005] Lord Phillips MR
explained a fixed charge arose when charger agreed that he no longer have right of free
disposal of assets charged but they should stand as security for the discharge of obligations
owed to the charge
 Floating charge was normally granted by a company which wished to be free to acquire and
dispose of assets in normal course of business but nonetheless to make assets available as
security to the chargee in priority to other creditors should it cease to trade. hallmark of the
floating charge was the agreement that charger should be free to dispose of his assets in
normal course of business unless and until chargee intervened up until that moment the
charge floated
 Arthur D Little Ltd v Ableco Finance LLC [2002] charger Arthur D little Ltd guaranteed the
liabilities of its two parent companies to Ableco by creating a charge, described as a first fixed
charge over its shareholding in a subsidiary company CCL.
 Chargor retained both its voting and dividend rights with respect to the shares until default.
Companys administrator argued it was a floating charge. It was held applying L Millets
reasoning in Agnew that whether or not a charge was fixed or floating is a question of law
and the particular charge in issue was fixed it did not flat ov34 the body of fluctuating assets
and notwithstanding the company’s voting and dividend rights, It could not deal with the
assets in the ordinary course of business i.e. company could not dispose of or otherwise deal
with the shares, the asset was therefore under the control of the chargee.
 Queens Moat Houses Plc v Capita IRG Trustee Ltd [2004] it was held existence of a right to
unilaterally require chargee to release property from a charge did not render what is
otherwise a fixed charge or floating charge
 Book Debts
 Book debts are debts arising in business in which its is the proper and usual course to keep
books and which ought to be entered int these books Official Receiver v Tailby (1886)
 It is common for company to have debts continuously owed to its custormers for goods and
services that company has renderd. Rather than wait for a company can broow money form
creditors against the debts that remain unpaid.
 Question before courts has been whether a fixed charge can be created over book assets,
 Privy council in Agnew v Commissioner of Inland Revenue [2001] and more specifically by the
HoL in National Westminster Bank Plc v Spectrum plus Ltd, it is worthwhile considering the
cases that gave rise to the problem in order to understand the reasoning of HoL in Spectrum
 Siebe Gormon & CO v Barclays Bank Ltd [1979] the company granted a debenture in favor of
Barclays Bank the security was expressed as a a first fixed charge over all its present and future
book debts
 The debenture required the company to repay the proceeds of all book debts into Barclays
account and it prohibited the company from charging or assigning its books without first
obtaining the banks consent. It was held that the company’s charge over its receivables was
fixed, judges reasoned that taking the restrictions placed on the company’s power to deal
with the proceeds o the debts together with the banks right to prevent the company making
withdrawals from the account even when it was in credit gave the bank the degree of control
that was inconsistent with floating charge
 Chalk v Kahn [2000] by contrast under the terms of the charge described as a fixed charge the
charger was required to pay the proceeds into a specified account not held with the charge
bank but with another bank,
 Since the chargee had no control over the account it was held that charge was a floating
charge
 Re New Bullas Trading Ltd [1994] contentious decision reached by CoA was to create
combined fixed and floating charge over books assets, here fixed charge was on uncollected
book debts but as soon as the proceeds of debt were credited to a specified bank account a
floating charge too over them, it was criticized in Agnew L Millet declared it to eb
fundamentally mistaken in Agnew debenture so drafted to mirror that in New Bullas but Privy
council held that were the charger company is freed to deal with the charged asset(s) in
ordinary course of business it must be treated as a floating charge but where chargee retains
control of debts and their proceeds so as to severely restrict the company’s freedom to deal
with them as in Siebe Gorman it will be a fixed charge, the notion of combined charge was
rejected by Privy Council
 In National Westminster Bank Plc v Spectrum Plus Ltd [2005] the charger Spectrum granted a
fixed (specific) charge to the bank over its book debts to secure and overdraft of $250,000,
the debenture stated that the security was a specific charge over all present and future book
debts and other debts, it also prohibited spectrum from charging or assigning debts and the
company was required to pay the proceeds of collection into an account held with the bank.
The debentures did not specify any restrictions on the company’s operation of the account.
 Specturms account was always overdrawn and the proceeds from its book debts were paid
into the account which Spectrum drew on as and when necessary.
 When Spectrum went into liquidation the bank sought a declaration that the Debenture
created a fixed charge over the companys books debts and their proceeds. The Crown
however argued that the debenture merely created a floating charge so that its claims in
respect of tax owed by the company took priority over the bank, the trial judge applying
Brumark and declining to follow Bullas held that given that the charge permitted Spectrums
to use proceeds of the debts in normal course of business it be construed as a floating charge.
In so holding the Vice Chancellor also declined to follow Siebe Gormon.
 Bank successfully appealed to CAa, Lord Phillips Mr delivering the leading judgment (Jonathan
Parker and Jacob LJJ concurring) took the view that where charger is prohibited from
disposing of its receivables before they are collected and is required to pay proceeds into an
account with the chargee Bank the charge is construed to be fixed
 He explained that it was not as a matter of precedent open to the CoA to hold Bullas was
wrongly decided even though the privy Council in Brumark expressed the view that the
decision was mistaken. Further Siebe Gormon was correctly decided given that the debenture
in that case clearly restricted the company’s ability to draw on the bank account into which
proceeds of its book debts were paid. The CoA noted that the form of debenture used in Siebe
Goromon had been followed for some 25 years and thus it was inclined hold that it had
customary usage acquiring meaning.
 Lord Philipps observed that in Siebe Gormon Slade J could properly have held the charge on
book debts created by debenture to be a fixed charge simply because of the requirements i)
that the book debts should nit be disposed of prior to collection and that ii0 that on collection
the proceeds should be paid to the bank itself, it follows that he was certainly entitled to hold
that the debenture imposing as he found restrictions on the use of the proceeds of books
debts created a fixed charge over book debts.
 A seven member House of Lords as expected overturned the decision of the CoA and
overruled Siebe Gorman and Bullas. Following the reasoning adopted by Privy Council in
Brumark it held that although it is possible to create a charge over book debts and their
proceeds (Tailby v Offical Receiver (1888) the charge in the present case was a floating charge
. Lord Scott delivered the leading judgment, he stressed that the ability of the charger to
continue to deal with the charged assets characterized it as floating, for a fixed charge to be
created over book debts the proceeds must be paid into a blocked account Re Keenan [1986]
 Lord Scott reasoned that the banks debenture placed no restrictions on the use that Spectrum
could make of the balance on account available to be drawn by Spectrum. Slade J in [Siebe
Gormon] thought that it might make a difference whether the account was in debit or credit.
I must respectfully disagree, the critical question in my opinion is whether the charger can
draw on the account. If the chargor bank account was in debit and the charger had no right
to draw on it the account would have become and would remain until the drawing rights were
restored a blocked account. The situation would be as it was in Re keeton Bros Ltd. But so
long as the charger can draw on the account and whether account is in credit or debit the
money paid is not being appropriated to the repayment of the debt owing to the debenture
holder but is being made available for drawings on the account by the charger.
 Although House of Lords has jurisdiction in an exceptional case to hold that its decision should
not operate retrospectively or should otherwise by limited it nevertheless held that in this
case there for no good reason for postponing the effect of overruling Siebe Gorman.
 For a case which lender did unusually have sufficient control over the book debts that has
been charged by a borrower for that charge to be a fixed one Re Harmony Care Homes Ltd
[2009[
 Priority
 The general rule is that security interests are prioritized according to the order of their
creation, however a feature of floating charge is that the company can continue to deal with
the charged assets in the ordinary course of business. Therefore, a fixed charge can be created
which will take priority over an earlier floating charge. In order to protect their priority floating
charges can insert a so-called negative pledge clause in the charge that prohibits the charger
from creating a charge that ranks equally with (pari passu) or in priority to the earlier floating
charge
 Such a restriction is not inconsistent with the nature of the floating charge (Re Bright life Ltd
[1987]) However it should be noted that the subsequent chargee will not lose priority unless
he has actual notice of the negative pledge clause. Mere notice of the earlier floating charge
is not sufficient (Wilson v Kelland [1910[) where there are competing floating charges the
governing principle is that the earliest created takes priority. However the parties may agree
that company may create a subsequent lofting charge which will take priority or rank pari
passu with the earlier floating charge (Re Benjamin Cape & Sons Ltd [1914]
 Registration
 Understandably a creditor who is considering lending money to a company may wish to find
out extent of its indebtedness. Companies are therefore required to register certain details
of mortgages over their assets under s.859A CA 2006
 Mortgages is a broad term likely to cover most type of charges a company would create.
Section 859A replaced s.860 CA 2006 which contained a much longer list of different types of
charge subject to registration
 The 21 day registration requirement
 Part 25 of the CA 2006 lays down the registration requirements. The principal obligations are
contained in s.859A-Q which provides that prescribed particulars of certain categories of
charges created by a company, together with the instrument creating it must be delivered to
or received by the Companies Registrar within 21 days of the creation of the charge. Failure
to deliver the particulars to the registrar within 21day period renders the charge void against
a liquidator and any creditor of the company (see Smith v Bridgend County Brough Council
[2002]
 Note the loan is not void for want of registration of the charge but rather the failure to register
results in the lender ranking as an unsecured creditor.
 Previously if a charge was not registered the company and every defaulting officer is liable to
a fine s.860 (40. This criminal sanction has now been repealed
 Once registered a charge is valid from the date of its creation, this results in what has been
termed the 21-day invisibility problem (see CLRSG consultation document registration of
company charges (October 2000). This is because whenever a person checks the register it
cannot eb assumed that it is comprehensive because there may eb a charge for which 21 day
is still running
 Section 859 A also requires companies t maintain at its registered office a register containing
certain prescribed particulars of all registrable mortgages, the failure to keep such a register
does not affect the validity of the charge
 When a charge is registered the registrar must issue a certificate stating the amount secured
by the charge, the certificate is conclusive evidence that the statutory registration
requirements have been complied with. The charge cannot then be set aside if particulars are
incorrect Re CL Nye Ltd [1971]
 Registration sis a perfection requirement it does not determine priority which depends on the
date charge was created. Creditors who ought to reasonably have searched the register will
be deemed have a constructive notice of the charge (Sibe Gorman)
 Rectification of the register may be possible when the court is satisfied that the failure to
register within the required period or that omission or misstatement of any particular was
accidental or inadvertent or is not of a nature to prejudice creditors or shareholders of the
company or that on other grounds it is just and equitable to grant relief s.873
 Generally, leave to register out of time is granted by the courts subject to the rights of
intervening secured creditors and provided the company is solvent

Avoidance of floating charges

 Section 245 of the insolvency Act 1986 invalidates a floating charge created within 12 months
(termed relevant time) prior to the onset of insolvency unless it was created in consideration
for money paid, or goods or services supplied at the same time or subsequent to the creation
of the charge
 The relevant time is extended to two years where charge is created in favor of a non
connected person within the relevant time i.e. 12 months will not be invalidated if the
company was able to pay its debts at the time charge was created and did not become unable
to do so as a result of creating the charge
 It should be note that this provision does not extend to charges created in favor of connected
persons. The term connected person is defined by s.249 as a director or shadow director of
the company; an associate of a director or shadow director of the company; an associate of
the company. The object of s.245 is to prevent an unsecured creditor obtaining a floating
charge to secure his or her existing loan at the expense of other unsecured creditors.

CAPITAL
 Guinness v Land Corporation of Ireland (1883); Legal rules governing maintenance of share
capital are a mixture of legal and accounting principles that are aimed to ensure that
company’s capital is not dissipated on activities beyond its objectives
 No part of company capital can be returned to the members as to subtract from the fund from
which creditors are to be paid.
 Company’s share capital is not kept in a ring-fenced bank account to be drawn upon in event
of winding up to meet claims of creditors. It is a book keeping entry.
 2006 reforms are directed towards removing requirements that are unnecessary and
burdensome for private companies.

Raising Capital; shares may not be issued at a discount.

 Ooregum Gold Mining Company Roper [1892] codified in s.552 of the CA 2006, shares shall
not be issued at a discount to their nominal value. But payment can be deferred, thus there
can be paid up and unpaid up capital, shareholders remain liable to contribute the balance
outstanding, outsider can be sure that company has received it had claims to the sum total of
its issued share capital.
 Consideration paid does not have to be in money and so goods and services may be the price
paid
 Re Wragg Ltd [1897] judgment of directors which was made in good faith that benefit received
in return for shares was equal in value to their nominal value was not open for challenge.
 Public companies must satisfy strict requirements where consideration for shares is other
than money,
 Re Wragg only applies to private companies, for public companies s.593 of CA 2006 requires
an independent valuation of any non cash consideration, failure to comply with this provision
renders allottee/holder liable to pay again in cash together with interest, could end up paying
twice for shares. Policy here is directed towards public companies issuing shares at a discount.
 2005 consultative document states requirement for authorized shares is to be removed , it is
invariably set at a level higher than company will need and so it serves no useful purpose.
Achieved by Part 17 of CA 2006 which abolishes concept of authorized share capital but
retains the concept of nomical value. Thus s.542 (1) requires companies to issue shares with
a fixed nominal value. The requirement for public companies to have a minimum share capital
of $50,000 or eruo equivalent 65,000 is retained
 Returning funds to share holders
 Dividends
 Part 23 of CA 2006 codifies common law by requiring dividends may only be paid out of
accumulated profits and not if the effect would be to reduce net assets below the value of its
share capital
 Dividend paid in breach of this is unlawful and ultra vires, director who ought o have known
payments amounted to breach is liable to repay dividends, Bairstow v Queens Moat Houses
plc [ 2001]
 Bairstow v Queens Moat Houses plc [ 2001]directors who acted on company 1991 accounts
that incorrectly showed inflated profits paid dividends that exceeded available distributable
reserves COA held that liability was not limited to difference between unlawful dividends and
the dividends that could lawfully be paid, directors owe fiduciary duties to company and have
trustee like responsibilities arising out of their duty to manage company in interests of its
members. Ordered to pay $78 million
 A shareholder who worth knowledge of fact receives an improper dividend payment will be
liable to repay it as a constructive trustee RC v Richmond [2003]
 It’s a Wrap (UK) Ltd v Gula [2005] liquidators sought repayment of dividends paid to
defendants who were sole shareholders and directors of company. During a two-year period
where there were no profits available for distribution, company’s accounts showed that
dividends had nevertheless been paid to the defendants, when company went to insolvent
liquidation liquidator claimed dividends had been paid in contravention of s.263 (1) CA 1985
now s.847 CA 2006, defendants argued the dividends were paid as renumeration and only
appeared as dividends based on advise that this was tax efficient. Court dismissed the
liquidators claim as it was meant for tax efficiency and not avoidance
 The word is so made contained in s.277(1)now s.847 (2) required that defendants knew or
had reasonable grounds to believe, not just facts giving rise to contravention but also legal
result of contravention. CoA reversed the judges decision and held defendants ignorance of
law was no defense. Arden LJ stated s.277 (now s.847) had to be interpreted in a manner
consistent with Article 16 of Second Company Law Harmonization Directive, which it is
designed to implement and she concluded that section should be interpreted as meaning that
shareholder cannot claim that he is not liable to return distribution because he did not know
of the restrictions in the Act, on the making of distributions, he would be liable if he ought to
have reasonably known facts which mean that distribution contravened requirements of the
act
 Other examples of illegal returns on capital
 Disguised gifts out of capital
 Re Halt Garage (1964), court held where directors of company are also shareholders their
renumeration might be viewed as a disguised gift out of capital. A director who had received
renumeration (wife of majority shareholder) had actually not provided any services due to
ill health, and the company had gone into insolvent liquidation, Oliver J held that only S10 out
of $30 per week had been paid to her while she was ill was genuine renumeration, she was
therefore required to repay the balance
 Aveling Barford Ltd v Perion Ltd [1989] both company’s were owned and controlled by Mr
Lee, Aveling Barford Ltd while not technically insolvent, did not have any distributable
reserves, it did however own a sports ground fir which planning permission for residential
redevelopment had been granted in October 1986 directors decided to sell sports ground
valued at $650,000 to Orion Lts for $350,000 sale was completed in February 1987. In August
1987 Perion Ltd resold it for $1.52 million, when availing Barford Ltd went into liquidation the
liquidator successfully sued to have Perion Ltd declared a constructive trustee of the proceeds
of sale on the ground that the transaction was an unauthorized return of capital by Aveling
Barford Ltd to Lee its sole shareholder via Perion Ltd
 Decision u Aveling Barford has proved controversial because of its impact on companies in a
group who want to transfer assets to each other, In Completing the structure (November
2000) CLRSG concluded part vIII of Companies Act 1985 should be changed to enable intra-
group transfer of assets to proceed in a more straight forward way
 This has been implemented by ss.845-846 CA 2006

Reduction of share capital

 CA 2006 contains a range of deregulatory measures that target the requirements contained
in CA 1985 that were considered unnecessary and burdensome for private companies,
however with respect to public companies’ provisions generally restate the pre-existing
regime ss.642 – 644 CA 2006
 Under CA 2006, companies no longer need authority in the Articles of Association which
permits a reduction of capital, although they are able to restrict or prohibit the power if they
wish s.641(6)
 Section 641 (1) states general rule that a private limited company may reduce its capital by
special resolution supported by a solvency statement
 Any limited company may reduce its capital by special resolution if confirmed by the courts.
 Private company is not compelled to follow the new simplified procedure but can opt instead
to go through the rather convoluted and expensive step of obtaining courts confirmation as
was required under 1985 Act and which preserved for public companies

Private Companies: Reduction of capital supported by solvency statement

 Simplified procedure for private companies to reduce their capital is detailed in ss.642-644
CA 2006.
 Solvency statement as required private companies under s.641 must be made by all of the
directors not more than 15 days before the date on which the special resolution is passed
s.642 (1)
 If one or more of the directors is not able or is not willing to make the statement the company
will not be able to use the solvency state procedure to effect a reduction in capital unless the
dissenting director or directors resign (in which case reduction statement made by remaining
directors)
 When special resolution is passed as a written resolution a copy of Directors solvency
statement must be sent or submitted to every eligible member at or before the time at which
proposed resolution is sent or submitted to them, s.642 (2)
 If the resolution is passed at general meeting a copy of the solvency statement must be made
available for inspection by members throughout the meeting s. 642(3)
 If the resolution is passed at a general meeting a copy of the solvency stamen must be made
available for inspection by members throughout the meeting, s.642 (3)
 However, the validity of the resolution is not affected by a failure to comply with these
requirements s.642 (4).
 Section 643 provides that solvency statement must state that each of the directors has
formed the opinion taking into account all of the company’s liabilities including any
contingent or prospective liabilities that
o As regards to the company’s situation at the date of the statement there is no ground
on which the company could then be found unable to pay its debts and
o If it intended to commence the winding up of the company within 12 months of that
date the company will be able to pay its debts in full within 12 months of the winding
up or in any other case the company will be bale to pay its debts as they fall due
during the year immediately following that date.
 Section 644 lays down filing requirements in respect of reduction of capital. Within 15 days
after the special resolution is passed company must file with the Registrar a copy of the
solvency statement together with a statement of capital and a statement of compliance
 Special resolution itself must also be filed in accordance with s.30 CA 2006. The resolution
does not take effect until these documents are registered s.644 (4)
 If the directors make a solvency statement without reasonable grounds for the opinions
expressed in it and the statement is subsequently delivered to the registrar every Director
who is in default commits an offence, the penalties which may include imprisonment are set
out in s.643 (5)
Public Companies: reduction of capital confirmed by the court

 Public companies are required to have a special resolution for reduction in capital confirmed
by the court
 Interest of the creditors are safeguarded
 S.645 and s.646 CA 2006 specify procedure for making such an application for order an order
confirming the reduction including the creditors right to object. The court will settle a list of
creditors with a view of ensuring that each of them has consented to the reduction
 If a creditor does not consent court may in its discretion dispense with that creditors consent
where the company secures the debt or claims.646 (4)
 If on such an application an officer of the company intentionally or recklessly conceals a
creditor or misrepresents the nature or amount of debt owed by the company or is knowingly
concerned in any such concealment or misrepresentation, he or she commits an offence s.647
 The court may make an order confirming the reduction of capital on such terms and
conditions as it thinks fit s.648 (1)
 However court will not confirm reduction until every creditor is satisfied or his debt has been
discharged or secured s.648 (2)
 Reduction will take effect on registration of the court order confirming the reduction and
statement of capital by the Registrar s.649 (5)
 When there is a reduction of capital certain shares will be cancelled or reduced in minimal
value, main issues is court has to balance the interests of different classes of shareholders,
for fairness money should be repaid in order in which the classes of shares would rank as
regards to repayment of capital on winding up
 However if the proposed reduction varies or abrogates class rights it may be possible to
disapply this prima facie approach
 Re Chatterket-Whitfield Colliers Ltd [1948] company’s coal mining business has been
nationalized and it proposed to carry on operations on a reduced scale for which it would
need less capital, it therefore decided to reduce its capital by paying off the preference capital
but keeping its ordinary shareholders. Court confirmed the reduction as fair because it was
carried out in accordance with the rights of the two classes of shareholders in a winding up
Re Saltdean Estate Co Ltd [1968]
 If the reduction of public company capital has the effect to brining the nominal value of its
allotted share capital below the authorized minimum, registrar must not register the court
order confirming the reduction unless either the court so directs or company is first- re-
registered as a private company s. (650) section 651 provides for an expedited procedure for
re-registration as a private company.

Redemption or purchase by a company of its shares

 Court approval for reduction of capit y a company of its own shares. because of the risk to
creditors (Trevor v Whitworth (1887)).
 This is given statutory effect by s.658 (1) CA 2006. However, s.684 expressly allows a limited
company to issue shares that are to be al can be avoided where the reduction is achieved
through a redemption or purchase b
 redeemed at the option of the company or the shareholders
 Public company must be authorized by it articles to issue redeemable shares s.684 (3)
 For private companies no such authorizations is required although their articles may exclude
or restrict the issuing of redeemable shares.684(2)
 Section 690 (1) confers on limited companies the power to purchase their own shares,
although thi is subject to any restriction or prohibition in the articles of association
 The difference between a redemption and a purchase of shares in this context is that for a
redemption shares will have to be issued on the basis that they are redeemable and so the
holders will have been aware of the trems of the redemption from the putset. For a purchase
of shares the parties will need to agree the terms of repurchase at the time the company
seeks to exercise the power
 Scope of General prohibition contained sin s.658 (1) was considered in Acatos and Hutcheson
plc v Watson [1994]
 It was held it was not lawful for a company to purchase another company, whose only asset
was a significant shareholding nearly 30 percent in the purchasing company
 This would even though it would have been unlawful for the purchasing company to buy its
own shares directly.
 Lightman J observed that to hold otherwise would permit target companies to protect
themselves against a takeover bid by the simple device of buying shares in the purchasing
company, he described the result as absurd
 As a result the need for companies, particularly private companies to have greater flexibility
over their capital the rule in Trevor v Whitworth has been relaxed

Effecting a redemption of shares

 For both public and private companies the directors may determine the terms conditions and
manner of redemption if so authorized by the articles of association or by a resolution of the
company s.685 (1)
 An ordinary resolution is required even though its effect is to amend the articles s.685(2)
 Shares may not be redeemed unless they are fully paid, and terms of the redemption may
provide that the amount payable on redemption may by agreement between the company
and shareholder concerned be paid on a date later than the redemption date s.686(1) and (2)
 Where the Directors are authorized to determine the terms conditions and manner of
redemption they must do so before shares are allotted, and such details must be specified in
any statement of capital which company is required to file s.685 (3)
 When company redeems and redeemable shares it must give proper notice to the Registrar
within one month specifying the shares redeemed together with a statement of capital which
details the companys shares immediately following the redemption s.689. if default is made
by complying with the notice requirements an offence is committed by the company and
every officer of the company who is in default s.689 (4)

Effecting a purchase by a company of its own shares

 S.690 (1) authorizes a limited company to purchase its own shares including any redeemable
shares, subject to any restriction or prohibition in the company’s articles
 Further a company may not purchase its own shares if as a result there would no longer be
any issued shares other than redeemable shares s.690 (2)
 Only fully paid shares can be purchased and they must be paid for on purchase s.691
 Payments by instalments therefore is not permissible Pena v Dale [2004]
 A company cannot subscribe for its own shares but it is restricted ti purchasing them from
existing members Re VGM Holdings Ltd [1942]
 With respect to financing the purchase a public company must use distributable profits or the
proceeds to a fresh share issue made for the purposes of financing the purchase s.692(2)
however a private company may as under CA 1985 purchase its own shares out of capital
s.692(10 and s.709
 As mentioned above the main difference introduced by the 2006 Act for a private company is
the power to purchase its own shares need no longer be contained in the articles. The articles
may however restrict or prohibit the exercise of statutory powers. Where private company
purchases its own shares out of capital, then the ordinary use of capital must eb permissible
capital payment under s.709 and the company and its directors must comply with of
safeguards designed to protect the company’s creditors in such a case. However for small
buy-backs a private company can pay for its shares it is repurchasing out of capital without
complying with such safeguards s.692 CA 2006. A small buy back is one where the amount
paid does not exceed (the lower of0 $15,000 or 5 percent of the company share capital.
 For larger purchases where the company is using a permissible capital payment under s.709
the directors are required to make a statement specifying amount of the permissible capital
payment for shares in question.
 Section 714 provides that this statement must also confirm, that directors have made a full
enquiry into the affairs and prospects of the company and that hey have formed the opinion
o As regards the company situation immediately after the date on which payment out
of capital is made, there will be no grounds on which the company could then be
found unable to pay its debts and
 In forming their opinion on company solvency and prospects the directors must into account
all the company’s liabilities, including contingent and prospective liabilities.
 Directors who make this statement without reasonable grounds for their opinions commit an
offence s.715
 As an additional safeguard s. 714 (6) provides that the directors statement must have nnexed
to it a report by the companys auditor confirming its accuracy, futher the payment out of
capital must eb approved by a special resolution of the company which may be passed on the
date of the directors statement or within the week immediately following s.716the holders of
the shares in question are barred from voting on the resolution
 Within the week following the date of s.716 resolution the company must give Public notice
in London Gazette (official newspaper of record for UK and in an appropriate newspaper out
of the proposed payment
 This must also state that any creditor may apply to court under s.721 within five weeks of the
resolution for an order preventing the payment s.719. following the purchase, the company
must give notice to registrar, such notice must include a statement of capital s.708
 In certain circumstances a company which purchases its own shares need not cancel them
but can instead hold them in treasury form where they can either be sold or transferred for
example to an employee share scheme
 This relaxation which took effect in 1st December 2003 was introduced by Companies
(Acquisition of Own Shares) (Treasury Shares) Regulations 2003. The regulations inserted
ss.162A-162G into the 1985 Act which are re0enacted in ss.724 – s732 CA 2006
 For qualifying shares as defined in s.724(2) to become treasury shares they must be purchased
by the company out of distributable profits.
 There are a number of restrictions on the rights attaching to treasury shares
 For example, s.726(@) states that the company may not exercise its rights in respect of
treasury shares. any purported exercise of such a right is void. Further no dividend or other
distribution may be paid to the company s.726(3)

Prohibition on Public Companies assisting acquisition of their own shares

Financial Assistance

 A company might wish to provide financial assistance for the purchase of its own shares by
for example giving a gift to a third party on the understanding that the money would be sued
to buy the donor company shares or for instance through guaranteeing a potential purchaser
borrowing. This is prohibited by companies act 2006.
 The policy underlying the prohibition is explained by Arden LJ in Chastan v SWP Group Plc
[2003] previously common practices of purchasing the shares of a company having a
substantial cash balance or easily realizable assets and so arranging matter that the purchase
money was lent by the company to the purchaser, mischief is that resources of the target
company and its subsidiaries should not be used to directly or indirectly to assist the
purchaser financially to make the acquisition. This may prejudice the interests of the creditor
of the target or its group and the interests of any shareholder who do not accept the offer to
acquire their shares or to whom the offer is not made.
 A loan does not deplete a company’s net assets because although funds leave the company,
their loss is matched in the company’s accounts by the debts of to the company that is thereby
created, thus the prohibition on financial assistance in the Act is wider than that which would
be required if the only policy in operation was to maintain the company’s share capital.
 It recognizes the need to protect shareholders and outsiders from the company misusing its
assets to finance the purchase of its own shares, even if the capital maintenances doctrine is
not thereby infringed. Peter Smith J in Anglo Petroleum Ltd v TFB mortgages Ltd [2006]

The statutory provisions prohibiting financial assistance,

 The prohibition against public companies providing financial assistance is laid down by s.678
(1) of the 2006 Act which provides where a person is acquiring or proposing to acquire shares
in a public company it is not lawful for that company or a company that is a subsidiary for that
group to give financial assistance directly or indirectly for the purpose of acquisition before
or at the same time as the acquisition takes place.
 Prior to CA 2006 the prohibition also extended to private companies s.151 CA 1985
 It is noteworthy that s.678 makes no reference to proof of improper intention, breach is
therefore determined objectively from the surrounding circumstances, section 678(30
broadens the prohibitions so as to cover situations where assistance is provided by a private
party in order to discharge a liability incurred by a purchaser for the purposes of acquiring
shares but which at the time post acquisition assistance is given has registered as a public
company.
 Section 678 (1) is supplemented by s.679 (1) which extends the prohibition to cover financial
assistance directly or indirectly provided by a public company which is a subsidiary of a private
company for the purpose of acquiring shares in the private company, before or at the same
time as the acquisition takes place
 Section 679 (1) extends the prohibition to cover after the event financial assistance given by
a public company to its private holding company
 Section 677 (together with s.683(1) and (2) seeks to limit the scope of the meaning of financial
assistance by listing certain forms or ways in which it can arise, examples include
 Giving of a guarantee security or indemnity other than and indemnity in respect of the
indemnifiers own neglect or fault or by way of resales or waiver or by way of a loan
 The giving of a security is illustrated by Herald v O connor [1971] Mr and Mrs Heald sold all of
the shares in D.E. (stoke on Trent) Ltd to O’ Connor. The Price was $35,000 but they lent him
$25,000 to enable him to complete the purchase, the company thereby granted vendors a a
floating charge over all of its assets by way of security for the loan. Thus if Connor defaulted
the security would be enforceable against the company this was held to be illegal
 A residual category falls within s.677(1)(d) which proscribes any other financial assistance
given by the company where the net assets of the company are reduced to a material extent
by the giving of assistance or the company has no net assets therefore even if a public
company were in a position to return funds to share holders because it had distributable
profits it would not be able to provide any sort of financial assistance for the acquisition of its
own shares which materially depleted its net assets. In this regards s..677(2) and (2) state that
in determining the company’s net assets it is the actual value of the assets and liabilities as
opposed to their book value that is to be applied Parlett v Gupp’s (Bridport) Ltd
 The exceptions
 Section 681 contains a wide list of constitutional exceptions. Those in s.681(2) are
unexceptional. They mainly relate to procedures which are specifically authorized elsewhere
in the Act. For example, to effect a redemption of shares or a reduction of capital, so called
conditional exceptions are listed in s.682. They therefore only apply if the company has no
net assets and either
o Those assets are not reduced by the giving of the financial assistance or
o To the extent those assets are so reduced the assistance is provided by distributable
profits
 An example for the conditional expectation is where provisions of financial assistance by the
company is for the purposes of an employee share scheme provided it is made in good faith
and in the interests of the company or its holding company s. 682(2)(b) or which assets in the
promotion of a policy objective such as facilitating the acquisition of shares by employee
share scheme or by spouse or civil partners, widows, widowers or surviving civil partners
children of employees (see s 682(2)(c)
 Section 678(2) and (3) however also contain the principal purpose and incidental pat of larger
purpose defenses which are carried over from the 1985 Act. In essence financial assistance is
not prohibited
 If the principal purpose is not to give it for the purpose of an acquisition of shares or where
the assistance is incidental to some other larger purpose of the company
 In either case where financial assistance is given in good faith in the interests of the company
 The exceptions are designed to ensure that the prohibition in s.678(1) does not also catch
genuine commercial transactions which are in the interests of the company
 However attempting at asses a persons purpose is necessarily difficult (for instance the need
to distinguish purpose from effect) because the court will need to determine whether giving
of assistance for the purpose of an acquisition of shares is an incidental part of larger purpose
 Sometimes is a purpose of a transaction between A and B if it is understood by both of them
that it will enable B to bring about the desired result
 The difficulties of assessing purpose came to the fore in Brady b Brady [1989]
 Brady v Brady [1989] the scheme involved a company’s business being divided between two
brothers, who were controlling shareholders, they were not on speaking terms and the
deadlock between them threatened the survival of the company and its subsidiaries.it was
decided that jack should take haulage business and Bob the soft drinks business, however the
haulage business was worth more than the soft drinks business, and so to make the division
fair and equal extra assets had to transferred from the haulage business to the drinks
business, the involved the principal brady transferring assets to a new company controlled by
Bob. It was conceded that s.151(now s.678) had been breached because the transfer involved
Brady providing financial assistance towards discharging the liability of its holding company,
M for the price of shares which M had purchased in Brady. When Jack sought specific
performance of the agreement, Bob who by now had decided against the arrangement
contended it was an illegal transaction , jack argued however that the financial assistance was
incidental part of a larger purpose of the company )removal of deadlock between the two
brothers which threatened to result in the liquidation of the business)
 House of Lords held that the purpose of the transaction was to assist in financing the
acquisition of the shares; the essence of the reorganization was for Jack to acquire Brady Ltds
shares and therefore the acquisition of those shares was not incidental to the reorganization.
Lord Oliver concluded that the acquisition was not a mere incident of the scheme devised to
break the deadlock, it was the essence of the scheme itself and the object which the scheme
set out to achieve
 This approach means that in looking for some larger overall corporate purpose it is necessary
to distinguish purpose from the reason why purpose is being formed,
 Commercial advantages flowing from providing the financial assistance for the acquisition of
shares may be the reason for providing it but commercial advantages are a by product of
providing the assistance, they are not an independent propose to which the financial
assistance can be considered incidental
 The approach of the House of Lords in Brady towards the interpretation of the purpose
exceptions has been criticized on the basis that it truly restricts the width of the defenses
s.678 and indeed it makes I very hard to ascertain exactly what sort of situations would fall
within these exception
 Ascertaining whether or not the prohibition has been breached is a fact-intensive exercise
and the case law provides little guidance in predicting an outcome. In MT Realizations Ltd v
Digital Equipment Co Ltd [2003] Mummery LJ stressed that each case is a matter of applying
the commercial concepts expressed in non-technical language to the particular facts, the
authorities provide useful illustrations of the variety of fact situations in which the issue can
arise but its rare to find an authority which requires a particular result to be reached on
different facts
 The facts of Dyment v Boyden [2005] [provides an interesting illustration of how an allegation
of financial assistance can arise. The Court of Appeal had to consider whether rent which was
significantly greater than the market value for premises in question constituted a breach of
s.679 (s.151 of the 1985 Act)
 Because of the local authority rules the transfer of shares had to be undertaken in order that
the respondents no longer retained an interest in the company.
 CoA held that the trial judge was right in finding that the company’s entry into lease was in
connection with the acquisition by the appellant of shares but was not for the purpose of
acquisition.
 His finding that the entry into the lease was for the purposes of acquiring the premises rather
than shares was a finding of fact which the court of appeal should not interfere

The sanctions for breach

 Section 680 CA 2006 makes a breach of the prohibition a criminal offence with the company
being liable to fine and every officer of it who is in default liable to imprisonment or fine or
both. The effect of this is to make the transaction unlawful which can affect the enforceability
of the underlying agreement
 Carney v Herbert [1985] privy Council had to decide if the vendors of shares in A Ltd could sue
the purchaser or the guarantor thereof for the purchase price when subsidiary of A Ltd had
provided illegal financial assistance in relation to the purchasers acquisition (by charging land
owned by it a security for the purchasers promise to pay for the shares.)
 If the agreement could not have been severed the purchaser would have been able to keep
the shares without any payment being made for them. Lord Bingham delivering the decision
for the Privy council stated as a general rule when parties enter into a lawful contract for
example sale and purchase and there is an ancillary provision which is illegal but exists fir the
exclusive benefit of the plaintiff, the court may and probably will if the justice of the case so
requires and there is no public policy objection permit the plaintiff if he so wishes to enforce
the contract without the illegal provision
 The Privy council therefore severed the illegal charges and allowed the vendors to sue for the
purchase price

Dealing with Insiders: AoA & SH Agreement

Constitution of the company
 AoA is constitution governs relations bw GM and BoD, GM meeting body of SH,
 AoA irrelevant rules of company and contain governance agreements, provided by founders upon
incorporation of company if no articles are provided the model articles will be adopted as
company’s constitution

Model Articles

 Previously one set of model articles under CA which was criticized for its one size fits all approach,
CA 2006 2 model articles one for public limited company and one for private limited companies
 Model articles now provide for
o Organization of meetings, voting at meetings, allocation of powers to board, appointment
of directors, decision making by directors
o Default set of rules but articles of all companies’ variant of model articles

Key Management Powers

 Article 3 provides general authority to directors to manage companies business and exercise all
powers of company
 Article 4 provides SH have reserved power and they can direct board by special resolution to take
or refrain from action, but SH cannot invalidate any action prior to resolution (directors roved/or
stopped)
 Howard smith v Ampol Petroleum Wilberforce L, BoD primary powers wielding organ of company,
Directors within management powers may take decisions against wishes of majority and majority
cannot control them in exercise of powers while they remain in office
 Sh do have power to remove directors by simple majority
 BoD also has powers to recommend dividends on shares to GM, although GM decides wither to
give or not to give dividends they cannot do so without recommendation of board

Key Shareholders power

 GM supervisory role over board, in public companies GM required to meet at least 1 every year,
no such requirement for pvt companies s.336 of CA 20066
 Important SH powers
o Powers to elect and move directors, power to issue shares, annual accounts and reports
to be presented before GM, no requirement to vote or approve account but in large
companies practice to get accounts approved, approval of directors renumeration and
pay package – s.420 of CA 2006, power to alter AoA by special resolution s.21 of CA 2006
o Previously pvt companies also had to have general meeting, this requirement, removed
after Company Law Review Steeling Group (CLRSG)(2001) recommend action many
recommendation of CLRSG incorporated in CA 2006
 AoA as contract for membership,
 S.33 of Ca 2006 states that AoA contract bw SH and company, s.33 the provision of a company
association bind company & its members to same extent as if there were covenants on part of the
company & each of the member to observe these provisions, Hickman v Kent (1915) contract for
management comes from this case whereby Astbury J stated articles regulating rights and
obligations of members generally as such do create rights and obligations bw them & company
respectively
 AoA very unique type of contract it can be varied (amended) without consent of all parties to the
contract (by special resolution) and it binds future members as well.
 AoA as interse SH contract, while it clears that AoA can be enforced by the company on the SH
and vice versa it is not clear whether SH can enforce articles against another SH
 Wood v Odeska: Sterling J stated AoA constitute contract bw SH & company and also bw each
individual SH & other
 Welton v Saffery; Herschell L held no contract amongst individual of company however if there
are any rights of SH against another such rights enforced through company
 Salmon v Quin (1909) Farwell J held a contract bw SH are unenforceable
 Rayfield v Hands (1960) Vaisey J held AoA is directly enforceable by one member against another
(case involves quasi partnership)
 CLRSG recommended in final report that all rights in constitution be enforceable against the
company and other members, unless constitution provides otherwise, CA 2006 did not
incorporate the recommendations of CLRSG, law remains same and uncertain

Rights under AA that can be enforced by SH

 Company can sue SH for breach of AoA, SH can only enforce articles, SH personal rights breached
 Weederburn L (1975) Personal rights, extrajudicially provided following list of personal rights
o Voting rights, right to protect class rights, shares transfer presumption right, right to be
registered as a SH, right to obtain share certificate, right to claim dividend which has been
declared, right to enforce procedure for declaring dividend, right to appoint directors,
procedural rights such as notice of meeting
o Case law for enforcing personal rights is still contradictory
 Mac Doughall v Gardiner (1875) courts refused to uphold individual right to a poll vote, stating
that breach complained of can be ratified by a majority resolution
 Pender v Lushington (1877) - SH able to enforce his right to a vote in GM

Outsider Rights
 Outsider is not a member of the company and is not a party to contract of membership AoA
 Eley (1876) AoA if a company provided certain SH shall be appointed as the solicitor of company,
courts held AoA is not contract bw the solicitor & the company, solicitor cannot enforce AoA
 Solomon v Quin (1909) one off; AoA of company required consent of both directors, decision
taken by 1 director subsequently ratified by GM, other director sued for breach of his right,
Director is outsider to AoA, however in this case courts upheld his right, as his rights as members
were being enforced which had a incidental effect on his rights as Directors rather than vice versa
 Hickman v Kent (1915) courts stated it is clea that no article can constitute a contract bw company
7 third person, no right merely purporting to be given by an article to a person, whether a member
or not, in a capacity other than that of member, such as solicitor, promoter, director, can be
enforced against the company
 Globallink (2003) AoA provided an indemnity clause for the directors, Directors unable to benefit
from it as AoA not a contract bw company 7 its Directors/Officers
Shareholder Agreements
 For SH to easily enforce their rights as AoA is uncertain, but not mandatory & only enforceable to
those who are party to it
 Uncertainty to enforceability of AoA bw SH and company and amongst SH interse, SH usually enter
into a separate SH agreement (SHA) amongst themselves & the company, SHA generally governs
rights of shareholders and how to exercise those rights especially the right to alter articles or
voting rights in a GM
 Benefit of SH agreement is that it is easily enforceable among the parties
 Puddephatt v Leith (1916), company usally part to SHA can the company agree to limit its
constitutional rights
 Punt v Symons (1903) it was held in Punt that the company cannot contract out the right to alter
its AoA then if contract states AoA wont change it cant be enforceable as s.21 says it’s a legal right
to change its AoA in practically the SHA is only enforceable bw SH & SH and not company, hence
if through 75% majority members agree to change AoA, however if one disagrees then they
cannot sue the company but they can sue other SH through SHA.
 Russel v Northern Bank (a992) company and SH entered into SHA where it was agreed not to
increase the share capital of company without the agreement of all the parties of SHA.
 Company tied to increase share capital which was objected by a SH who sued the company to
enforce the SHA and the statue s.121 of CA 1985 allowed for increasing share capital of company
but SHA restricted it.
 Court held that SHA cannot be enforced against the company, however it can be enforced against
all other parties i.e. the SH and thus the SHA was indirectly enforceable against the company

Dealing with Insiders AOA:

Altering the Articles
 AoA must not conflict with statues & Shareholders exercise power amend articles in good faith Commented [AS1]: air, open, and honest
o Allen v Gold Reefs (1900) : Lindley MR 1st test AoA bonafidness; power to amend Articles
according to law and genuine benefit of company as a whole, No excess
 Courts usually follow Allen AoA internal company matter to be resolved within the company and
there is a remedy for min. SH through statutory minority protection s.994 of CA 2006 so courts
are reluctant
 S.26 CA Articles can be amended by members by special resolution 75% : Commented [AS2]: ordinary resolution majority > 50%
 can be clanged by 25% alteration not genuine interest of company because:
o courts reluctant to decide if an issue was armful for the company and
o AoA usually not affect company but minority shareholders
 Articles also amended by Informal methods
o RE Duomatic: decision regarding alteration of articles not taken at a general meeting can
be taken provided its supported by all SH
 Greenhalgh (1951) Another test rarely applied is whether changes discriminatory toward minority
SH: test to challenge is change discriminatory between SH
 Shareholders only vote for genuine interest of companies by means of special resolution for
altering AoA, no general requirement for vote
 Clemant (1976) Foster J: Majority is not entitled to vote as they please, selfish
 CLRSG- Recommended companys constitution be altered by soecial resolution and certain
provisions of articles can be entrenched which would require 100% resolution for a change;
recommendations implemented in s.21 and s.22 of CA 2006

Dealing with outsiders the Ultravires doctrine

Objects Clause
 Companies Previously required to have an objects clause in their constitution documents:
o Set out purposes for company incorporated; business which company could undertake
o anything not in purpose could not be carried out
 Two issues with Objects Clause
o Nearly impossible to change it
o Doctrine of constructive notice left 3rd party with unenforceable contract
 Objects clause public documents, 3rd party had constructive notice of limitation
of company’s power
 Classical approach impossible to change objects clause hence unfair to 3rd party
 Ashbury Carriage v Richie (1875) HoL, If company beyond scope of objects, the acts were void as
ultravires the objects:; Richie was too strict; relaxed approach Commented [AS3]: beyond the powers
 Courts then started using more relaxed approach allowing transactions incidental, and open
ended objects clause eg “Company can carry out any commercial venture”, problems still Commented [AS4]: happening as a result of
 Re JON BeauFORDE (London) 1953: gown making company, evolved into, veneered panel making,
, didn’t change object clause, coal merchant supplied coal and the transaction was held ultravires
as coal merchant had not constructive notice of object clause, the letter head did not make a
difference
 Overdraft (more money out vs in bank) Debenture type of security given to bank against a loan
 Re Introductions (1970): specific aim providing foreign visitors accommodations and
entertainment during Festival of Britain, pig breeding, overdraft secured by debenture, insolvent,
bank tried to reclaim overdraft courts held transaction void and bank cant enforce debenture

Reforms of the Object clause:

 ECA 1972: Incorporation of EU law led to removal of constructive notice doctrine, transaction
valid if entered by director and 3rd party acted in good fait
 CA 1985
o s.3 & s.4 how to change objects of company easily & have wide objects clause
o s.35 replaced by s.39 of CA 2006, anything in the company memorandum does not limit
the company’s powers anymore – removing all restrictions on powers of company
 CA 2006
o S.8, reduces MoA to a simple document required at time of incorporation, previously part
of constitutive documents.
o S.31 allows company to have unlimited objects unless company chooses to have limited
objects clause,
o S.39 replica of s.35 of previous Act, objects shall not limit actions of company
 Result of the reform any limitations through objects clause became redundant
 Issue of companies power reduced to whether action taken by person who had authority from
company (Director) or not

Internal Authority
 Given company’s powers are not limited, was internal authority given to transact to those who
transacted with outsider
 Principles of agency will apply, to be seen whether officer had actual or apparent (ostensible)
authority to act on behalf of company
o Actual authority; expressly or impliedly given to A to transact on behalf of P
o Apparent authority is by estoppel; arises when P made a representation of authority to Commented [AS5]: principle which precludes a person
3rd party on reliance of which 3rd party transact from asserting something contrary to what is implied by
a previous action or statement of that person or by a
 Hely Hechinson v Bravhead (1968) Brayheads CEO asked Hely to invest in Brayheads subsidiary previous pertinent judicial determination.
and gave indemnity (assurance) in case of loss Brayhead will pay, HH sued Brayhead for indemnity
BH argued CEO did not have authority and company wasn’t bound. CoA CEO had apparent
authority and implied actual authority
o Denning Mr: BoD by conduct over months acquiesced to his acting as CEO and committing
BH to contracts without necessity of sanction from the board
 Indoor Management Rule: Constitution AoA sets procedure for action eg SH resolution for loan
beyond a certain limit, outsider can assume all internal procedures complied with and binding
 Royal British Bank v Turnquand (1856) SH resolution for loan, manager not taken approval from
GM. Not possible to find whether authorization was taken bank could assume all internal
authorization obtained
 IMR codified CA 1985 s.35A and s.35B now covered in s.40 CA 2006
 S.40: outsider protected if deals with board or person authorized & if outsider is acting in GF
 Statue provides person presumed to be acting in GF unless BF proven s.40 (2)(b)(ii) CA 2006
 EIC Services v Phipps (2004) For BF active dishonesty to be proved
 For related party transaction (Director with family) will be void at instance of company s.332 A CA
1985 now s.41 CA 2006

Other Attribution issues

 Agency principle and s.39 & 40 of CA 2006 solved ultravires problem, problem for finding liability
for commission of Torts and Crimes

Liability for company in Tort

 Initially Tort ultravires act and company never authorized by objects clause to commit Tort
 Campbell v Paddington (1911) can be vicariously liable for Tort of employees Commented [AS6]: through the actions of another
 Courts introduced alter ego organic theory (complex) to find fault of company, identify individual person

classified as alter ego of company i.e. actions of company itself, others fault is companies fault,
 Leonards Carrying co. v Asiatic Petroleum (1915) fault element to be proved on part of company
to impose liability on the company under Merchant Shipping Act 1894.
o Viscount Haldane LC; corporation has no mind or will, active directing sought by an agent
because of whose action company is liable as its own actions
 Tesco super markets v Nattras (1971) Offence under Trade Description Act 1978 sold at higher
price than advertised, courts held store manger not alter ego of company as not the guiding mind
of company hence not liable for his actions,
 AE difficult to find in large companies as no single individual embodiment of company, used to
save themselves from fault-based liability

Control theory

 Meridan Global Funds 1995 (PC) Hoffman L organic theory/alter ego provides misleading analysis,
who are controllers of company for attribution, compatible with Soloman principle and advantage
to attribute fault of company for actions of individual lower down organization, 2 senior managers
controllers of company, who’s fault attributed to company
 McNicolas v Customs & Excise Commissioner applied L Hoffmans approach, knowledge of
company’s site manager sufficient to find liability of VAT fraud,
 Despite control theory alter ego theory still holds ground
 Stone Rolls v Moore Stephens: AE used in this case to attribute fault on company
 R v St Regis (2011) lack of directing mind and will of company made it impossible to impose liability
on company

Liability of company in crime

 Relevant mens rea has to be found in AE of company, large companies complex structures
impossible to find AE and company never held liable for crim
 Increasing work place deaths disasters govt responded by proposals of reform and offence of
corporate manslaughter through The Corporate Manslaughter and corporate Homicide Act 2007,
manslaughter offences is based around management failure of company on its parent leading to
cause of death

Majority Rule and Wrongs Against the Company

Introduction
 Where directors have breached their duties to company, as a consequence of Solomon doctrine
company can sue in its own right to vindicate a wrong done to it, thus whenever a wrong has been
committed against the company, the proper claimant is the company.
 Company is a metaphysical person and must act through its organ of management the directors
and the decision to bring legal proceedings is generally vested in the board
 What if the wrongdoers are the directors themselves who controlling the company prevent it from
seeking legal redress against them?
 Law permits minority shareholding in exceptional circumstances to bring a derivative action on
the company’s behalf.
 Tension between the theory of corporate personality and majority rule
The rule in Foss v Harbottle – the proper claimant rule
 Foss v Harbottle (1843) rule is that when wrong committed proper claimant company rationale is
twofold, prevents multicity of proceedings being brought in respect of the same issue, minority
shareholders could bring hundreds of actions, if majority does not seek to bring action minority is
bound by that decision
 Model articles of association for public and private companies place management of companies
into the hands of their directors and the decision to sue a 3rd party who has committed a wrong
against the company or on the other hand to defend an action brought against the company falls
within the remit of the board.
 Consequently, where directors do not hold majority shares as in a large public company
shareholder cannot direct them to sue or defend an action Breckland Group Holdings Ltd v London
and Suffolk Ltd (1988)
 Edwards v Halliwell [1950] Jenkins LJ explained; proper plaintiff in an action in respect of wrong
done to a company is prima facie the company itself, where alleged wrong is transaction made
binding on company and all its members by a simple majority of the members no individual
member of the company is allowed to maintain an action in respect of that matter for the simple
majority of members is in favor then cadit quaestio
 Foss v Harbottle claimants were two shareholders in the Victoria Park Company, bought an action
against company’s five directors and promotors alleging that defendants had misappropriated
assets belonging to the company and had improperly mortgaged its property.
 The claimant sought an order to compel defendants to make good losses suffered by the
company, they also applied for the appointment of a receiver held that action must fail, harm was
suffered by whole company not just two shareholders, open to the majority in general meeting
go approve defendants conduct to allow an action would frustrate wishes of the majority
 MacDougall v Gardiner (1875), the chairman of Emma Silver Mining Co adjourned general meeting
without allowing a vote on the issue of adjournment as requested by shareholder MacDougall, he
bought an action claiming declaration that chairman had acted improperly injunction to restrain
directors from taking any further action
 CoA held no point in suing where ultimately a meeting has to be called at which majority will get
its way
 Burland v Earle [1920] Lord Dunley formulated what ahs become classic statement of the rule,
elementary principle of the law relating to joint stock companies that court will not interfere with
the internal management of companies acting within their power and has nor jurisdiction to do
so, in order to redress wrong or recover money or damages action should prima facie be brought
by the company itself
 Forms of action
 No of different types of actions that could be brought
 Corporate actions
 Company will be named as claimant, it must be brought where wrong has been done to the
company it must be authorized by whoever within company has authority to decide company will
sue ordinarily board of directors
 Derivative action/claims
 This is the name of proceedings brought by one or more shareholders, but to enforce a cause of
action that the company itself has. Shareholders suing not to enforce their own right but to
enforce company’s rights, in respect o a breach of duty owed to the company by a Director, if
successful benefits will go to the company. Such proceeding as exception to Foss, restrictive
conditions must be satisfied before such proceedings can be brought, these used to be set out in
common law where proceedings were called derivative actions rules are now incorporated into
legislation and name of such proceedings have been changed to derivative claims
 Personal actions
 This is action brought by and in names of individual shareholders or group sue to enforce their
own rights and own benefit, in situations where misconduct does not constitute a wrong to the
company but is infringement of personal rights of the shareholder and shareholder can sue
personally
 Macdougall v Gardiner as Mellish LJ observed where right of the shareholder has been infringed
by the majority, he can sue but by shareholders personally here right or injury is suffered
shareholder personally.
 Shareholders right can arise by virtue of contract for example under a company’s constitution or
shareholders agreement. Thus when a dividend is declared but not paid shareholder can sue
personally for payment by way of a legal debt Wood v Odessa Waterworks Co (1889)
 The representative action
 Representative action is brough by shareholder on behalf of himself and all other members who
have an interest in litigation, for example where class of shareholders allege class action has been
infringed
 Action avoids costs of multiple suits, courts judgment will be binding on those represented, thus
a representative action is brought where wrong has been committed by the company to a class
of shareholders.
 Person actions for reflective loss
 If directors have breached their duty defrauded the company of several million pounds, should
the shareholders argue that their shares are also now worth less, directors fraud is breach of
duties but to the company not to individual shareholders, wrong is only to the company even
though shareholders out of pocket, shareholders may eb able to show alongside duties which
directors owes to the company they also owe duties to individual shareholders number of grounds
which apply exceptionally
 First directors may owe a duty of care to shareholders in Tort, duty would include not misleading
the shareholders by giving carless advice to shareholders on how they might vote at a
shareholders meeting Sharp v Blank [2015]
 If directors were to enter into sufficiently close relationship with shareholders to give rise to duties
owed directly to them where directors are advising shareholders on the sale of their shares
 Where there is some sperate contract between directors and shareholders and that contract
imposes obligations on the directors in favor of shareholders Platt v Platt [1999] however even if
shareholders were able to establish that exceptionally the directors owe shareholders some
duties (over and above duties directors owed to the company) shareholders would face second
difficulty
 Second difficulty is where a wrong first results in a loss to company and this leads in turn to
diminution in value of a members shareholding the shareholders loss has been termed reflective
loss, by L Bingham and L Millet in Johnsosn v Gore Wood & Co [2001[ the shareholders loss merely
reflects the loss caused first to the company.
 Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] CoA held that a shareholder
cannot sue for such a reflective loss, Foss Harbottle rile means shareholders reflective loss will be
remedied if company sues the wrongdoer
 However if court is satisfied that a member suffered a personal loss which is separate and distinct
from that sustained by the company and if member can show this arose from breach of duty owed
personally to them so they can overcome the first difficulty noted above, then member will be
able to sue (Johnson v Gore Wood & Co.) The authorities were summarized by L Bingham in the
Johnson decision as supporting 3 propositions
o Where a company suffers loss caused by a breach of duty owed to it only the company
may sue in respect of that loss, shareholder is not entitled to sue merely a shareholder to
make good diminution in value of the shareholders shareholding where that merely
reflects the loss suffered by the company, a claim will not lie by a shareholder to make
good a loss which would be made good if the company’s assets were replenished through
action against party responsible for the loss, even if the company acting through its
constitution organs has declined or failed to make good that loss
o Where a company suffers loss but has no cause of action o sue to recover hat loss the
shareholders in the company may sue in respect of it (if the shareholders have a cause of
doing so) even though the loss is a diminution in value for shareholding
o Where company suffers loss caused by a breach of duty to it and shareholder suffers a
loss separate and distinct from that suffered by the company caused by breach of a duty
independently owed to the shareholder each may sue to recover the loss caused to it by
breach of the duty owed to it but neither may recover loss caused to the other by breach
of the duty owed to the other
 Recently the no reflective loss principle has been subjected to considerable judicial scrutiny, these
cases suggest that the principle is of wide application and will readily be invoked by the courts.
Essential point is that courts prefer the company itself to sue for the loss rather than permitting
potentially many individual personal actions to be brought by those who have suffered some harm
as a result of the loss caused to the company
 Ellis v Property Leeds [2002] CoA appeal held principle applies equally where the claimant is suing
a qua director as to when he sues a qua shareholder,
 Svilleja Garcia v Marex Financial Ltd [2018] it was held that the principle also prevents a creditor
from suing personally for the reflective loss and it does so whether or not the creditor is a
shareholder in the company
 Principle also applies when company happens to be in administrative receivership for being in
administrative does not prevent the company itself from pursuing any claim it may have for harm
done to it,
 Gardner v Parker [2004] in which CoA also stressed that the bar is an obvious consequence of the
rule against double recovery
 However the prohibition can be circumvented where the shareholder is able to bring a claim qua
beneficiary of a trust of shares of which the wrongdoer is trustee Walker v Stones [2001]
 Breeze v Chief Constable of Northfolk [2018] court confirmed that the reflective loss principle is
not restricted to cases where there is a breach of directors duties, rather the principle applies to
any situation where company whether or not it sues has a cause of action in respect of an
actionable wrong which if pursued to its fullest extent would enable it to seek to recoup the loss,
in this particular case the claim the company itself could have sued for was misfeasance in a public
offence
 One exception to reflective loss principle was established in Giles v Rhind [2001]; company was
insolvent due to former directors’ breach of certain duties (not tot compete or misuse confidential
information). Both duties were also express terms in a shareholders agreement to which
defendant and claimant were parties, although the company had initiated an action against its
former director the administrative receivers discontinued it, when the defendant director applied
for a security of cost order, in effect the defendant had by his breach of duty rendered the
company incapable of seeking legal redress against him. The claimant bought a personal action
against the former director to recover losses to the value of his shareholding loss of renumeration
and loss of value of loan stock. CoA found that this situation had not confronted HoL in Johnson v
Gore Wood & Co. Given the duties in question were expressly provided for in shareholders
agreement it was held that the claimant could pursue his claim for breach of agreement including
his losses in respect the value of his shareholding.
 However in Sevilleja court also held that the exception must be construed narrowly, company’s
inability to use must be legal rather then merely factual effect of wrongdoing against the company
must be such as to create legal barrier to the company suing and not merely factual difficulties
such as lack of necessary funds to pursue the action.
 Derivative claims introduction
 S.260 (10 CA 2006 proceedings brought be a member of a company in respect of a cause of action
vested in the company and seeking relief on behalf of the company
 Prior to CA 2006 rules governing derivative actions were in case law which were much criticized
eg views of the law commission, rules were inaccessible and often unclear and too restrictive and
shareholders found difficulty in brining such actions
 Law commission felt Foss rule was sound and derivative proceeding would remain exception to
the rule, a procedural device enable individual shareholders to take action for the company, to
ensure companies rights were vindicated but there should be a new derivative procedure with
more modern flexible and accessible criteria.
 Achieved by introducing derivatives claim in Part 11 of CA 2006. The common law derivative
action has almost completely been replaced by new statutory claim but not entirely
 Multiple derivative actions are not covered by statutory provisions of Part 11.
 Multiple derivatives actions is one brought by shareholder of a parent company in respect of a
wrong done to company subsidiary and so on, such claims must still be brought under the old
common law procedure Re Fort Gilkicker Ltd [2013]
 When a derivative claim is brought the company, itself is joined as a defendant, it cannot be joined
as a claimaint.t hat would only be possible if the board had authorized this and id derivative claim
is being brought, we must assume the board is refusing to do that. By being joined as a defendant
to the action, however the company can still be bound by the judgement and can enforce any
remedy awarded. The wrongdoers will also be joined as defendants.
 A short excursion into former common law
 Old rules may still influence judges when they apply the new statutory provisions,
 At common law derivative action was only available when there was a fraud on minority 9
exception to Foss) appears in a longer list of exception to Foss which Jenkins LJ set out in Edwards
v Halliwell [1950] These were
 Where act complained of is illegal or is wholly ultra vires the company
 Where the matter in issues requires the sanction of a special majority or there has been non-
compliance with a special procedure
 Where a member’s personal rights have been infringed
 Where fraud has been perpetrated on the minority and the wrongdoers are in control
 In Prudential Assurance v Newman (No.20[1982] attempts to add a fifth exception where it would
interest of justice to do so was rejected by CoA
 Only fraud on minority is true exception wrong indeed done to company in first 3 cases wrong is
not being done to company it is the shareholder who is being wronged as Wedderburn noted in
his article shareholders rights.
 Fraud on the Minority
 Twin elements a wrong constituted fraud and wrongdoer control (i.e.. those who had wronged
the company were in control of it) defined preconditions for a successfully derivative action
 The meaning of fraud
 Not all breaches of duty by directors amounted to fraud, sometimes said only breaches which
cannot be reified by majority (Cooks v Deeks) amounted fraud but raises the question which
duties cannot be ratified by majority and therefore amount to fraud
 Megarry V-C in Estmamanco (Kilner House0 Ltd v GLC [1982] explained
 Fraud in the phrase fraud on minority seems to be being used as comprising not only fraud at
common law but fraud in the wider equitable sense of that term
 Fraud here does not necessarily mean breach of duty was dishonest or deceitful some guidelines
were laid down in Burlan v Earl fraud defined as when the majority are endeavoring directly or
indirectly to appropriate themselves money, property or advantage which belong to the company
or in which the shareholders are entitled to participate
 Daniels v Daniels [1978] Templeman J expressed the view that the term fraud should extend to
cases of self-serving negligence, fraud on the minority principle would be satisfied where the
directors use their power intentionally or unintentionally fraudulently or negatively in a manner
which benefits themselves at the expense of the company but note that per say negligence itself
is not sufficient
 Paviles v Jensen [1956] Danckwerts J accepted that the forbearance of shareholders extends to
directors who are an amiable set of lunatics, in this case although the Directors were negligent,
they did not derive any personal benefit, contrast common law position with reforms by CA 2006
Part 11
 The meaning of wrongdoer control
 Wrongdoer control is also unclear in its meaning there was debate over whether actual (de jure0
control was required for example wrongdoers needed to control 51% or more of votes or whether
defacto control sufficed
 Prudential Assurance Co Ltd v Newman Industries Co Ltd (No.20 CoA adopted a restrictive
approach to the issue and this; lead was followed in Knox
 Smith v Croft (N.20 [1988] who stated that if the majority of the shareholders were independents
of the wrong doers did not wish for action to proceed for disinterested reasons as occurred on
the facts of the case the single member who sought to initiate the proceedings would be denied
standing to sue (locus standi)
 Logic was that if a majority is disinterested then company stopped from suing not by wrongdoers
but by non-wrongdoing shareholders
 This attempted to re-assert importance of majority rule but rule by a majority of disinterested
and partial shareholders. The judge went on to observe that in determining independence of
shareholders who did not support an action eb brought against the wrongdoers, their votes
should be disregarded but only if the court is satisfied either that the vote was equivalent is
actually cast with a view to supporting the defendants rather than securing benefit to the
company
 The statutory procedure: Part 11 of CA 2006
 The grounds for bringing a derivative claim are laid down by s.260(3) which provides such claims
are brought only in respect of a cause of action arising from an actual or proposed act or omission
involving negligence, default, breach of duty or breach of trust by a director of the company.
 The scope of breach is wider and is not limited to fraud rather that a derivative claim can now be
brought for a breach of duty to exercise reasonable care, skill, and diligence whether or not that
breach is self-serving (compared to case of Pavilides v Jensen)
 Section 260.3 also makes it clear that a derivative claim may be brought for example against a
third party who dishonestly assists directors breach of fiduciary duty or one who knowingly
receives property in breach of fiduciary duty
 CA 2006 does not say that the shareholder brining the derivative claim must show the wrongdoers
are in control of the company it is less clear whether this means this condition no longer applies
to the new statutory claim Kershaw D

The application for permission to continue a derivative claim

 Section 261 states that once a derivative claim is been bought the member must apply to the
court for permission to continue it.
 This entails two stage process, the first stage involves a paper hearing where the court considers
the members evidence, onus is on the member to establish that they have a prima facie case for
permission to continue the derivative claim, if this is not demonstrated the court will dismiss the
application
 If the application is dismissed at this stage the applicant may request the court to reconsider its
decision at an oral hearing although no new evidence will be permitted at this hearing from either
member of the company
 The practice direction 19 C derivative claim which amends part 19 of the civil procedures rules
(CPR) provides that this stage of the application will normally be decided without submission from
the company.
 If the court does not dismiss the application at their stage the application will then proceed to the
second stage which is a full permission hearing and the court may order the company to provide
evidence at this stage
 Section 263(2) and (3) sets out the criteria which the court must take into account when
determining whether to grant permission to a member to continue a derivative claim
 Section 263(2) and (3) sets out the criteria which the court must take into account when
determining whether to grant permission to a member to continue a derivative claim
 Section 263 (2) contains three criteria that operate as what might be called mandatory bars, in
the sense that if any one these criteria applies the court must then refuse its permission to
continue the claim. So permission must be refused if the court is satisfied that
 Person acting in accordance with s.172 (duty to promote the success of the company) would not
seek to continue the claim or
 Whether the claim arises form an act or omission that is yet to occur that the act or omission has
been authorized by the company or
 Where complaint arises from an act or omission that has already occurred that the act or omission
was authorized before it occurred or has been ratified since it occurred.
 Re Singh brothers Contractors (North West Limited) [2013]An example of a case where court
found that breach of duty had been authorized or ratified by the shareholders
 In Cullen Investments Ltd v Brown [2015] the court made clear that for an authorization to be
effective the director would have to show that he had made a full and frank disclosure to the
shareholders about his conduct. The same point would presumably apply to ratification
 For the first of these mandatory bars (whether person is acting in accordance with s.172 etc) the
issue here is really whether continuing the claim would be in the best interests of the company
 In Lesini v Westrip Holdings Ltd [2009], Lewison J Listed the considerations to take into account
in deciding whether it would be in the company’s interest to continue or to stop proceedings
these included
o The size of the claim
o The strength of the claim
o The cost of the proceedings
o The company’s ability to fund the proceedings
o The ability of the potential defendants to satisfy a judgment
o The impact of the company if it lost the claim and had to pay not only its own costs but
the defendants as well.
o Any disruption to the company’s activities while the claim is pursued
o Whether the prosecution of the claim would damage the company in other ways (e.g. by
losing the services of a valuable employee or alienating a key supplier or customer)
 However Leison J also noted that a judge should only refuse permission under this mandatory bar
if no reasonable director would think it worth proceeding with the claim, in other words if there
were a reasonable doubt about whether it was in the company’s best interest to continue the
claim then the judge ought to stop proceedings on this ground.
 Where none of the mandatory bars apply the judge is not compelled to refuse permission, but
nor are they compelled to give permission to let it continue, instead the judge now has a secretion
what to do and exercise that discretion they must move on and apply a list of discretionary factors
set out in s.263 (3) these factors are
 Whether the member is acting in good faith
 The importance that a person acting in accordance with s,172 (duty to promote the success of the
company) would attach to pursuing the action
 Whether prior authorization or subsequent ratification of the act or omission would likely to occur
 Whether the company has decided not to pursue the claim
 Whether the shareholder could pursue the action in their own right
 In a number of cases the courts have decided that the shareholders would be better off pursuing
an action in their own right, the action that the court has in mind here is a claim under s.994 CA
2006 for unfair prejudice Mission Capital plc v Sinclair [2008] and Franbar holdings v Patel [2008]
 The reference above to whether the company ahs decided not to pursue the claim means the
board of directors. In Keanthous v Papthitis [2011] the court placed some weight on this factor
with the judge noting that the company’s Directors were better placed than the judge to
determine the likely impact upon the economy of either continuing or stopping the claim.
 Section 263 (4) goes on to add the requirement as laid down in Smith v Croft No.(2) that the court
shall have particular regard to any evidence before it as to the views of the members who have
no personal interest ii the derivative claim. There will need to be a factual enquiry into whether
or not the breach is likely to be ratified. In practice the courts will probably adjourn the permission
hearing in order for the question of ratification to be put to the company.
 Provision is also made for a member of the company to apply to court to continue derivative claim
originally brought by another member but which is being poorly conducted by him or her.
 Section 264 provides that the court may grant permission to continue the claim where manner in
which the proceedings have commenced or continue by the original claimant amounts to an
abuse of the process of the court. The claimant has failed to prosecute the claim diligently, and it
is appropriate for the applicant to continue the claim as a derivative claim, a member may apply
to the court to continue the action as a derivative claim, a member may apply to the courts to
continue the action as derivative claim on the grounds listed in s.264.
 This addresses the situation where directors fearing a derivative claim by a member, seek to block
it by causing the company to sue but with no genuine intention of pursuing the action diligently
 In assessing the statutory reforms, it is noteworthy that there is little or no change of emphasis in
terms of formulation. The focus of the rule laid down in Foss v Harbottle and its jurisprudence
was on prohibiting claims unless one of the exceptions to the rule was satisfied. The statutory
language similarly proceeds from the rather negative stand point that the court must dismiss the
application or claim in the circumstances specified in ss.261(2), 262(3), 263 (2) – (3) and 264 (3)
 The modern case law though decided prior to the 2006 Act suggests that the mandatory
requirement for permission cannot be dismissed as a mere technicality.
 It reflects the real and important principles that the CoA affirmed in Barret v Duckett and
underlines the need for the court to retain control over all the stages of a derivative action (see
Portfolios of Distinction v Laird).
 Against the background of the statutory criteria for granting permission to continue the claim, the
decision in Jafari-Fini v Skillglass [2005] is of interest, CoA upheld the judges refusal to allow the
derivative claim for continue, Chadwick LJ explained that the company itself would not benefit
from the action and the claimant shareholder had alternative avenues open to him, specifically a
personal claim.
 A major deterrent against speculative claim is of course costs, Although CPR.r.19.9E enables the
court to order the company to indemnify the member, in practice such an order will rarely be
granted where permission is denied.
 Finally, it is also noteworthy that the law on ratifications has been tightened and votes of the
wrongdoer will no longer be counted on such ordinary resolutions (although such member may
eb counted towards the quorum and may participate in the proceedings, see further ss.175 and
239 CA 2006/
The Proceedings costs and remedies

 If the permission is granted to continue the claim the member will bring the action on the
company’s behalf
 The Civil procedure (Amendment) Rules 2007 r.7 and Schedule 1 substitute CPR 19.9 and insert
new CPR rr.19.9A-19.9F. As noted above the company for whose benefit a remedy is sought must
be made a defendant in the proceedings in order to formally to be a party to the action and be
bound by any judgement
 If permission is granted to continue the claim the member will bring the action int eh company’s
behalf
 Unless otherwise permitted or required by r.19.9A or r.19.9C the claimant may take no further
action in the proceedings without the permission of the court.
 A practical hurdle which confronts a shareholder litigant is the cost of a proposed action. This is
covered by r.10.9E.
 The court may order the company to indemnify the claimant against any liability in respect of
costs incurred in the claim or in the permission application or both.
 An application for costs made at the time of applying for permission to continue the claim is
commonly called a pre-emptive costs order.
 It derives from the decision Wallersteiner v Moir (No.2) [1975] where Buckley LJ observed that
the shareholder who initiates the derivative claim may be entitled to be indemnified by the
company at the end of the trial for his costs provided, he acted reasonably in bringing the action.
The position is in the event the action falling was also considered by the court
 Lord Denning MR said but what if the action fails, assuming that the minority shareholder had
reasonable grounds for bringing the action, that it was reasonable and prudent course to take in
the interest of the company he should not himself be liable to pay the costs to the other side but
the company itself should be liable because he was acting for it and not for himself. In addition,
he should himself be indemnified by the company in respect of his own costs even if the action
fails. It is well known Maxim of the Law, that he who would take the benefit of a venture if it
succeeds ought to bear the burden if it fails…In order to be entitled to this indemnity the minority
shareholder soon after issuing his writ should apply for the sanction of the court in somewhat the
same way as the trustee does.
 In Smith v Croft (No.2) decided under the old RSC (Rules of the Supreme Court), Walton J held
that the shareholders personal means to finance the action was a relevant factor to be taken into
account by the court in determining the need for and indemnity. The judge also added that even
where the shareholder is impecunious, he should still be required to meet a share of the costs as
an incentive to proceed with the action with due diligence
 Finally in Bhullar v Bhullar [2015] the court refused to award an indemnity where it felt the
claimant was using the derivative claim as a tactic to pressurize the majority and the dispute
between the parties was likely to be settled under s.994 CA 2006(unfair prejudice proceedings)
Class Rights
Introduction
 Consider the nature of a share and the interest a shareholder has a company
 How the capital of an economy may be divided into various classes carrying with them different
grades for their holders
 How the company may vary the rights attaching to a class of shares

Shares and class rights

 In quasi-partnership type companies, a small number of shares may be issued, to the
partners/directors in order to give them complete control over the enterprise. Such companies
usually look to the banks to finance the business operations of the company by means of loan
capital
 In large companies shares issued as major source of capital, residual control of management is
vested with them because shareholder bear ultimate risk should company fail
 Andrew v Gas Meter Co [1897] company may issue shares with different rights attaching to them,
such class right for example preferential dividend rights attaching to the preference shares are
largely a matter of contract between the member and the company and company seeking to vary
such rights must go through the statutory procedure

Nature of a share
 A share is a contract between the shareholder and company and a right of property, somewhat
unhelpfully termed chose in action which can be bought, sold and charged.
 Classical definition of a share was delivered in Farwell in Barlands Trustee v Steel Bros & Co Ltd
[1901]
 A share is the interest of a shareholder in the company measured by a sum of money for the
purpose of liability in the first place, for the purpose of liability in the first place and of interest in
the second, but also consisting of a series of mutual covenants entered into by all shareholders
interse in accordance with [section 16CA 1862 now s.33 CA 2006]
 The contract contained in the articles of association is one of the original incidents of the share
 A share is not a sum of money but an interest measured by a sum of money and made up of
various rights contained in the contract, including the right to a sum of money of a more or less
amount
 Shareholders do not have an interest in the property belonging to the company, rather their
relationship is with the company as a separate and distinct entity in its own right, a shareholder
thus has rights in company not against it as the case of debenture holders
 Short v Treasury Commissioners [1948] affirmed by HoL [1948] legal nature of a share was
subjected to considerable examination by the court in relation to its valuation. The Government
purchased all of the shares in the company valuing them on the basis of quoted share price.
 The shareholders argued because the whole of issued shares were being acquired then the entire
undertaking should be valued and price apportioned between them, it was held however that
where a purchaser is buying control but none of the sellers hold a controlling interest the higher
price that control demand can be ignored
 The treasury was therefore able to purchase the company for a price considerably less than its
asset value

Classes of Shares

 Broadly shareholder has rights and liabilities that arise from the general nature of the share.
 There is presumption of equality between the shareholders so that they are deemed to enjoy
equal voting and dividend rights when the company is a going concern and equal rights to
participate in any surplus assets should the company be wound up. This presumption of equality
will be rebutted where a company issues shares that carry different class rights.
 For example the holders of preference shares generally enjoy preferential dividend rights and
priority in the return of capital in a winding up.
 Generally the articles of association give the company power to issue shares with such rights or
restrictions as the company may by ordinary resolution determine. The different classes of shares
commonly issues are ordinary, preference redeemable and employers’ shares
 Ordinary Shares
 Equities, participate in any dividends after payment to preference shareholders, and in any
surplus should the company be wound up after preference shareholders have had their capital
returned.
 Holders of ordinary shares control the general meeting on the basis of one vote per share

Preference Shares

 Holders of preference shares have certain preferential rights attached to their shares, a fixed
preferential cumulative dividend will be paid to them in any year which the company ahs
distributable profits
 Cumulative element means that the arrears became in respect of those years in which dividend
was not declared
 It is also presumed that preference shares are cumulative (Webb v Earle (1875)
 Where preference shares are participating as to dividend they have the right to a further dividend
payment after the ordinary shareholders received a distribution equivalent to their initial fixed
rate.
 Preference shareholders are generally entitled to return on capital on winding up in priority to
the ordinary shareholders, but unless they have an express right of participation, they do not have
a claim to any surplus assets Scottish Insurance Corpn Ltd v Wilson and Clyde Coal Co Ltd [1949]
 Preference shares generally have restricted voting rights so their owners cannot vote in general
meetings unless for example their dividends are in arrears

Redeemable shares

 Section 684 of the Companies Act 2006 provides that a company having a share capital may issue
shares which are redeemed or are liable to be redeemed at the option of the company or
shareholder.
 Such shares may not be redeemed unless they are fully paid and the terms of the redemption
must provide for payment on redemption s.689 (1).
 Private Companies may redeem shares out of capital s.687(1) but public companies may only
redeem redeemable shares our of distributable profits the proceeds of a new issue of shares that
is made for the purposes of redemption s.687 (2)

Employees Shares.

 To give employees a stake in business companies may issue shares to them such shares enjoy
certain tax advantages. Employee shares are generally issued through an employee share scheme
which is defined as being a scheme for facilitating the holding of shares or debentures in a
company or for the benefit of
 Bonafide employees or former employees of the company including its subsidiary or holding
company or
 Their spouse’s civil partners, surviving spouses, surviving civil partners or minor children or step
children under age of 18 s.1166
 Such shares are normally issued as ordinary shares or preference shares and are typically subject
to restrictions relating to their disposal.

Management of Company
Directors Introduction
 Company artificial legal entity has to operate through human organs, management with BoD act
on collective basis, large companies AoA delegation authority to committees of board to
individual directors
 Director defined cA 2006 s.250 person occupying position of Director whatever the name,
members of company board considered directors
 S.154 of CA 06 min no of Dir, 1 for Pvt ltd company 2 for public ltd company

Position of Directors

 Till 19th century GM meeting constitutional supremacy considered controllers and BoD agents
following decisions of GM, by 20th century AoA give managerial autonomy to BoD
 Automatic Self Cleansing Filter Syndicate (1906) CoA: if AoA provided general management
powers to board cannot be taken away by GM
 Model Articles (Article 3) provides managerial autonomy to Directors, whos actions only restricted
by Special resolution of GM. BoD duty of care and fiduciary duties
 Barron v Potter (1914) Managerial power revert back to GM if deadlock on board

Appointment of Directors

 Governed by AoA; Statutory provisions of CA 2006;-

 s.16(6) first directors in whose name company constituted, s.154 min no of Directors, s 160
individual voting for each director in public limited company s.157 min age 16

Renumeration of Directors

 Not entitled to renumeration as of right, from AoA or service contract, model articles Directors
entitled to determine own renumeration [CoI] transparency and accountability, reforms 20 yrs

Reform proposal

 BIS proposed mandatory requirement for annual report statement of renumeration policy and
details of renumeration of each director

Reforms

 Director Renumeration Report Regulation 2002; Reform proposal incorporated, codified in CA 06

 S 422 approved by Board, renumeration report made but not with statue, director who knew of
non-compliance punished by fine;
 s.439 special notice to SH if company intends to pass resolution approving Directors
renumeration, s. 440 failure to comply with 439 punishable by fine
 s.412 annual accounts shall disclose emoluments (perks) pensions and severance packages
 s.228 -2.30 directors service contracts available inspection company members registered office

Removal of Directors

 company remove director by ordinary resolution before expiry of tenure, special notice to SH for
passing resolution, Directors can address meeting, give defense or farewell speech, written
statement to GM
 Bushell v Faith (1970) AoA provided resolution to remove director shares carry right to 3 votes
HoL L Upjohn entrenching Director; Parliament never given company right to issues shares with
rights & restrictions as it thought deemed fit, in framing s.168 CA 1985 Parliament seeking
Ordinary Resolution sufficient to remove Director, had parliament desired go further and enact
every share entitled to vote deprived of rights under articles made plain terms
 Nowadays while weighing voting clauses commonly encountered in pvt companies of quasi
partnership nature expressly prohibited by LSE listing rules(listed pvt limited co)

Categories of Directors

 Executive Directors, full time officers of company, service contract, 1 i.e. CEO/MD
 Non-Executive; all others appointed for supervision, monitors activities of ED, usually on board of
larger companies

Defacto Directors

 Not formally appointed but acts as a director

 Gemma v Davies (2008) wife company secretary, held not de facto Director, demonstrate
performed functions that can only be performed by Director and real influence in governance of
company on equal footings with husband, clerical function.

Shadow Directors
 S.251 (1) CA 06, person in accordance with whose directions or instructions directors accustomed
to act, professional advisors excluded, but if effectively controlling company held liable as shadow
director Re Tasbian

Re Hydrodam (Corby) Ltd (1994)

 Whether 2 directors of parent company shadow directors of subsidiary, held not liable, merely
being on board of parent not automatically make them shadow directors of subsidiary, Millet K 4
point test on shadow Directors;
o Dr jure and De facto Directors identifiable, Shadow Director have directed those directors Commented [AS7]: definition, by right; according to
on how to act in relation to company affairs, directors accustomed to act on shadow law
directions, behavior of directors as such they do not exercise any discretion or judgment Commented [AS8]: in fact whether by law or not
of own but in accordance with directions of others
 Re Unisoft (1993)Merly controlling 1 Director not sufficient, shadow director must influence all
directors or governing majority

Directors Disqualification

 Companies Director Disqualification Act 1986 court power to disqualify person to be a Director,
liquidator, administrator, receiver or manager of company’s property or get involved in
management promotion or formation of company
 Disqualified director cannot take part in any such activities, listed in statue directly or in other
capacity
 R v Campbell (1984) disqualified cannot take part in management (directly) by being
management consultant (nor indirectly)
 CDDA 1986 two types of disqualification orders

Discretionary Order

 S.2 CDDA 1986 Conviction of offence in connection with promotion formation or

management of company, disqualified for 5 yr (summary offence) 10 yr (indictment)
 S.3 CDDA 1986 persistent breach of companies legislation i.e defaults on statutory compliance
convicted three
 S.4 CDDA 1986 Fraud, fraudulent trading under s.993 CA 06 or otherwise, 15 yrs for s.993 CA
06 10 yrs for s.213 & 214 IA 1986
 S.8 CDDA 1986 disqualifcation after investigation of company, DTI after investigation finds
disqualification in public interest DTI can seek disqualification from court, 15 yrs

Mandatory Order

 S.6 CDDA 1986 mandatory disqualification orders where (a) person is director of company which
is declared insolvent and person conduct infit to be concerned with management of company
 Sevenoakes Stationers (1991): rationale for disqualifying directors to protect public and potential
creditors of companies from loosing money through companies becoming insolvent when
directors unfit to be concerned with management of company

Unfit: factors to be considered where courts find unfitness

 Misfeasance, breach of director duty or fiduciary duty, degree of director’s culpability in fraud,
extent of director’s failure to comply with statutory requirements, if company is insolvent
extent of director’s responsibility in insolvency
 Re Dawson (1987) Unfitness requires gross negligence or total incompetence; mandatory
disqualification max period 15 yrs
 Disqualification undertaking, Insolvency Act 2000 provides Secretary of State can accept
disqualification undertaking from director (voluntary declaration of disqualification) courts
time saved and DTI will not have to procure a disqualification order, in such case
disqualification period will be reduced

Statutory Minority Protection

 Winding up company under s. 122(1)(g) Insolvency Act 1984 just & equitable grounds and
 remedies for unfairly prejudicial conduct under s 994 of CA 2006

Just & Equitable grounds under s. 122(1)(G) Insolvency Act 1984

 gives courts powers to wind up company where just & equitable, based upon law of partnership
which courts can dissolve
 Ebrahimi v Westbourne Galleries Ltd 1973: Nazar & Emrbahimi partners oriental rug business 10
yrs, company with equal shares, Nazars on Director & SH, Ebrahimi minority SH at board 7 GM,
outvoted, Ebrahim out of Board, held according to CA and AoA but court jurisdiction to subject
legal rights to equitable considerations, essence in accordance with proper partnership exclusion
in breach of understanding so just & equitable to wind company
I. Failure of Company’s substratum – reason for establishment not exist anymore
 Re German Date Coffee (1882) company incorporated for obtaining German patent for
manufacturing coffee substitute from dates, never received patent CoA ordered winding up
II. Fraud Company formed to perpetrate fraud and winding up only solution SH recover
investment
 Re Thomas Edward Brinsmead (1897) company formed to perpetrate fraud by impersonating
another famous company,
III. Deadlock relationship bw parties broken and no reconciliation
IV. Justifiable loss of confidence in company management, quasi partnership lack of confidence
in probity Commented [AS9]: moral principles
 Loch v John Blackwood (1924) majority SH considered company as own & coercing minority
SH sell their shares to hi, at under value by not declaring dividend
V. Exclusion from participation in small pvt company where a relationship based on mutual
confidence, quasi partnership with understaning bw partners minority SH to participate in
management is broken
 Ebrahimi v Westbourne Galleries Ltd (1973): L Wilberforce listed elements in petitions
brought under just & equitable grounds
o Basis of business association personal relationship and mutual confidence (found
where pre-existing partnership converted to limited company)
o Understanding All or certain SH (excluding sleeping partners) will participate in
management
o Restriction on transfer of members interests preventing petitioner leaving

Relationship with other remedies

 Winding up measure of last resort, to make a winding up application, petitioner first exhaust
al remedies eg purchase of shares under s 994 CA 2006, winding up if SH disagreement grave
nature
 Need for alternative remedy for minority protection than an order for winding up, s 994 CA
2006 member of company may apply to court by petition for an order on ground;
o Company affairs in manner prejudicial to its members generally or part of members
(at least himself)
o Actual or proposed act/omission is/would be prejudicial

Conduct of company’s affairs: Company’s affairs give rise to prejudicial conduct

 Nicholas v Sounderaft Electronics (1993) parent company failed to pay debts owed to
subsidiary (C minority SH) CoA actions done as conduct of affairs of company
 Re City Branch Group (2005): subsidiary’s actions considered as actions of parent as wholly
owned and common directorship

Interests of members

 Petitioner prove his interest as member unfairly prejudiced, liberal approach of courts
 O Neil v Phillips employee with shares in company, courts held interests as members were
involved but no unfair prejudice on part of company
 Re Sam Weller & Sons Ltd (1990) Peter Gibson J: Legislative intent to keep word broader word
‘interest’ than ‘rights’
 Courts don’t have arbitrary power to declare something as affecting interests of another
member, starting point for courts are rights as contained in Articles

Unfair prejudicial: P must establish interests qua member unfairly prejudiced

 Re Bovery Hotel Ventures (1981) test for unfair prejudice is objective

 Re Ringtower Holdings plc (1988) Peter Gibson J, test is unfair prejudice not unlawfulness and
conduct may be lawful but unfairly prejudicial, notion of unfairness considered by Jenkins
Committee a visible departure from standards of fair dealing and violation of fair play on
which SH is entitled to rely
 O Neil v Phillips (1999) L Hoffmann held fairness to be determined by reference to traditional
or general equitable principles, company law developed from law of partnership was treated
by equity as contract of good faith
o Company striping asbestos from building and Phillips was sole SH & Director, 1983
appointed O Neil (manual worker) to BoD 25% SH in company, 1985 discussed
informally Phillips hope O Neil take over sole management of company allowed 50%
share of profits, Phillips retired from management O Neil de facto MD, 1991 business
struggling, Phillips critical O Neils management, resumed control, repudiated profit
sharing agreement, O Neil filed petition, Phillips conduct unfair prejudice, HoL
although O Neil prejudiced bur Philips conduct not unfair on circumstances, 1985
discussion never formalized fatal, without firm agreement O Neil to manage company
no basis for right to do so. As for profit sharing agreement all evidence that only so
so long O neil MD . L Hoffman O Neils petition to grant ‘no fault divorce’ which section
could not provide

Examples of unfair prejudice

 Re Ghyll Beck Driving Range Ltd: exclusion from management

 Re Elgindata Mismanagement which includes breach of Directors duties of care and skill
 Re Sam Weller Excessive remuneration by Directors & failure to pay dividends
 Breach of fiduciary duties (though duties owed by Dir to company) case law under s.994
shows personal remedy may be obtained

Remedies for unfairly prejudicial conduct

 Remedies for UPC S 996 of CA 2006, court can inter alia give following orders Commented [AS10]: among other things
o Regulate company affairs, refrain company from particular action, provide for purchase
of shares of any member of company by other members or by company itself (common)
 Re Bird Precision Bellows Ltd (1984) When ordering buyout courts determine approach for
valuation of shares, in reaching FV of min SH, generally no discount applied

Director Duties
 Directors are in fiduciary position and must act in company’s best interest,
 historically considered as trustees of assets of the company
 common law-imposed duty to take due care and skill
 duties of directors in common law, equity and statue.
 Law commission in 1999 suggested restated in single statute,
 Company Law Review Steering Group (CLRSG) advocated codification of director duties, directors
should know what is expected of them and correspond to accepted norms of society
 CA 2066 Part x Sets out Director Duties

Beneficiary of Director Duties

 S.170 Ca 06 DD owed to company and not to SH individually

 Percival v Wright (1902): Dir offer buy shares, negotiating sale to outsider at higher price, SH
initially approved directors asking to buy shares

What is a company

 Greenhalgh (1951) Everstead, Mr, Company doesn’t mean commercial entity distinct from
corporates, means corporation as a general body
 2nd Savoy Hotel Investigation Report (by parliamentary committee) Directors act for LT Interest
of company including future SH, In certain situations Directors do owe a duty of care to SH
 Gething v Kilner (1972) In recommending SH to takeover bid Dir duty of care to SH to be honest
 Coleman v Myers (1977) duty of disclosure towards SH arose in small pvt company, SH handful,
few family members placing Directors in direct fiduciary relationship with SH
 Duty towards SH arise if special relationship bw Dir &SH
 Heron International (1983) Lawton LJ where Dir decide bw rival bidders interest of company
interest of current shareholders
 S.170(2) resignation of director no defense to breach of duties

List of Director Duties

 S.171 duty to act within powers, S.172 promote success of company, s. 173 exercise independent
judgement, s. 174 exercise reasonable care, skill & diligence, s.175 avoid conflict of interest bw
Dir & SH, s.176 duty not to accept benefits from 3rd parties, has to disclose and get it approved,
s.177 and s.182 duty to declare interest in proposed transaction or arrangement

S.171 duty to act within powers

 Dir required to act within company’s constitution and exercise powers for purposes conferred
 If Dir exceed powers conferred in constitution and enter contract with 3rd party he contract may
be valid & binding upon company by virtue of s.40 CA 2006 but Dir liable under s.171
 ReFawcett (1942) S.171 proper purpose rules stated by Greene L director exercise discretion what
they consider (not what court may consider) in best interest of company and nothing else
 Extra Travel Insurance (2002) Dir transferred 200K to group company to pay creditor, they have
power to invest or pay debt, breach s.171 improper purpose even though good faith, Company
may sue directors but the payment they made will be valid
 Hogg v Cramphorn (1967) share allotment was invalid despite fact directors acted in good faith,
primary purpose for allotment was to stop takeover bid & stay in control
 Percy v Mills (1920) directors had allotted shares when company not in need of additional capital,
court held breach of proper purpose rule
 Howard Smith Ampol Petroleum (1972) Dir allotted shares good faith to bidder, LT interest as new
SH control of company, existing majority SH share reduced 55% to 36%, though company required
additional capital Dir did it so to defeat existing majority, breach of proper purpose rule where
directors exercise power with mixed motives, court will seek to determine principle purpose of
conduct, and action challenged if principal purpose improper
 Main reason Dir have power to allot share is to raise additional capital not change SH pattern of
company
 Teck Corporation v Miller Dir can issue shares for purpose other than raising capital provided
reason benefits company as a whole

S. 172 Duty to promote success of company

 Dir required to promote enlightened SH value (ESV) Dir must act in good faith what would most
likely promote success of company for benefit of members as a whole, in doing so Directors regard
to factors listed in s.172 (1)
o Likely consequences of decision in LR, interest of employees, need to foster company’s
business relationship with suppliers, customers and others, impact of company
operations on community and environment, maintain reputation for high standards of
business conduct, act fairly bw member of company (subjective consideration)
 Regent Crest v Cohen (2001) Test for s.172 is objective , Jonathan Parker stated question Is
whether Director honestly believed his act or omission was in interest of company
 Charter Bridge v LLOYD (1970) takes objective standards into account subjective circumstances,
Pennycuick J stated whether duty has been discharged or not will be from the perspective of
honest intelligent man in position of Director of company concerned and whether such person in
totality of circumstances have regarded reasonably transaction was for benefit of company
 Test is objective but totality of circumstances factored for determine breach
 Neptune (1995) sole director resolved service contract terminated 100,892 paid to him as
compensation, held not acting in what honestly and reasonable considered best interest of
company, exclusively for person interest
 Extrasure travel Insurance Dir must promote success of company they are Dir in, not any
subsidiary or sister company

Business Review

 As per s.172 (1) directors of large companies required to highlight esv providing a business
review part of annual report, highlighting company’s performance not only financially but
socially environmentally and in terms of employees, requirement from s.417 of CA 2006

S. 172 Insolvency of company

 Where company insolvent duty to promote success of company means act in interest of SH
of company as a whole (creditors meeting means body of creditors), in UK known as duties in
the zone of insolvency in UK requirement comes from 172(3)
 Kinsell v Russell Dillonts LJ stated that in solvent company proprietary interest of shareholder
entitle them as general body to be regarded as the company but when company is insolvent
the interest of creditors to intrude and the become entitled to displace powers of SH
 Yukong Line: duty owed to creditors as a whole not to single creditor , so single creditor
cannot sue for breach
 S.172 (3) settles the point that directors of insolvent companies owe duties to creditors, no
guidance given under statute when director should shift attention away from interest of
general meeting to interest of creditors identifying exact time in practical terms is fraught
with difficulty Cork Report (1982)

S. 173 Duty to exercise Independent Judgement

 S.173 (1) director of company must exercise independent judgment

 S.173 (2) duty is not infringed if director acting in accordance with agreement entered by company
restricts exercise discretion by directors and acting in way authorized by company’s constitution
 Fullham Football Club v Cabra Estates (1994) Directors of Football club had contracted with Cobra,
club landlord stated they will support Cobras proposal for future development of ground rather
than the proposal pur forward by local authority, in return Cobra agreed to pay substantial fee to
club, later Directors wanted to renege (go back) from promise on the ground stating this contract
unlawfully fettered discretion of directors, CoA sated that contract with landlord conferred
significant benefits for the company the directors in entering into contract had not improperly
fettered the future exercise of their discretion, (as directors put restriction on themselves through
discretion)

s.174 Duty to exercise reasonable care skill and diligence

 Judged according to standards expected of person carrying out functions of Director (objective)
and knowledge, skill and experience a Director possess (subjective) (be judged to his level of skill
& experience) inactivity on part of Directors is unacceptable, it will not be an excuse for directors
to say that he was unaware of state of affairs or that he trusted other Directors to exercise
reasonable care skill and diligence
 Re Brain D Pierson (2001) courts stated office of Directors has certain min responsibilities and
functions which are not simply discharged by leaving all management functions and consideration
of company’s affair to another without question, even in case of a family cannot be a sleeping
director as functions of Directors itself requires some consideration for company’s affairs to be
exercised
 Re DJan of London (19913) directors had negligently failed to disclose certain facts to insurance
company, insurance company due to non-disclosure rightly repudiated fire insurance policy,
Director was held to be negligent
 Dorchester Finance v Stebbings – non-executive directors had left a blank signed cheque with
Stebbings MD, courts held non-executive directors as negligent they allowed MD to do as he
pleased, slimily give him blank cheques, without telling him where to spend it

S.175 duty to avoid conflict on interest

 S.175 (1) director of company avoid situation which he has indirect interest or possibly may
conflict with the interest of the company
 S.175 is codification of fiduciary equitable obligations to avoid conflict
 JJ Harrison (2000) held that proceeds/profits made from breech of fiduciary duty held by director
as constructive trustee (trustees have a duty to avoid conflict of interest)
 Bray v Ford (1896) Hecchell L stated it is an inflexible rule of equity that a person in fiduciary
position is not allowed to put himself in a position where his interest and duty conflict
 Bristol & West Building Society (1998) Millet L stated that directors woe a single minded loyalty
towards company, as a fiduciary he must not make an unauthorized profit and not place him a
position where his duty and interest may conflict
 Regal Hastings v Gulliver (1942), company regal owned a cinema Directors wished to buy 2 further
so all 3 could be sold at profitable value, regal formed subsidiary for acquiring additional cinemas,
Landlord not ready to grant lease to subsidiary unless its paid up capital was atheist 5K, at that
time regal could not inject more than 3K, directors in their personal capacity decided to invest
the remainder 2K, later entire business sold off and Directors made a handsome profit, were later
sued for breach of fiduciary duty and claimed for account of profits; Russell l held directors liable
as fiduciary not allowed to profit from exercising fiduciary obligation, not dependent on
commission or fraud or malafide intentions, simply based on making a profit

Corporate Opportunities
 It will be a breach of fiduciary duty by Director to appropriate for his own benefit and economic
opportunity which is considered to belong rightly to company which he serves
 Opportunity is considered as asset of the company which cannot be misappropriated by Directors
 Cook v Deeks (1916) directors directed certain railway construction contracts which were offered
to the company for own personal benefit, Buckmaster L held them liable even though SH had later
ratified actions of directors on found their action was fraudulent
 IDC v Cooley (1972) MD failed to obtain a lucrative contract from Gas Board for the company, gas
board later approached MD and stated they wished to contract with him in his personal capacity,
MD did not disclose offer to company and resigned giving excuse of ill-health, later he contracted
with Gas Board Roskill J held Director Liable to company for all profits received under contract.
Information which came to MD whilst he was with company was of concern to the company and
was relevant for them to know, he had a duty to pass on that information to the company, it was
irrelevant he was approached in his personal capacity and the Gas Board would have never
contracted with IDC
 Peso Silver Mines v Cropper (1966) SC of Canada Peso offered opportunity to buy 126 mining
claims, some of which were located adjacent to companies existing mining territories, Board
bonafide declined offer because of financial state of the company, risks involved and value of the
mining claims, later 3 of company’s Directors along with company’s geologist formed a syndicate
(partnership) and purchased these claims which turned out to be successful/profitable. The
company later claimed profits held on constructive trust by directors, Court held no violation of
Director duties as initial decision of directors to reject opportunity was made in good faith and
sound commercial reason is interest of company
 Bhullar v Bhullar (2003) Silver Crest acquired Whitehall Mill, Dir of Silver Crest also Dir of Bhullar
Brothers Ltd for acquisition of investment property, Bhullar owned property in vicinity of White
Hall and evidence acquisition of White Hall commercially worth while for Bhullar Bros Ltd, before
purchase by Silver Crest Dir resolved to divide the company’s business and refrain it from
acquiring further properties. Courts held that even though Bhullar Board had resolved not to buy
further…to disclose and forward opportunity to the company
 Seems that any opportunity within company’s line of business is off limits to the Director unless
company’s permission to proceed is first obtained;
 O Donnell v Shanhahan (2009) strict approach reaffirmed by CoA; Rimer LJ stated the rationale of
no conflict and no profit rules is to under pin the fiduciary duty of undivided loyalty to beneficiary,
if opportunity comes to him in capacity of fiduciary his Principle entitled to know about it, Director
cannot be left to make the decision as to whether he is allowed to help himself to its benefits

Post Resignation Breaches

 Duty under s.175 continues even after resignation, but not prevent Director to set a business
in competition of the company, he can also while being Director make an intent for setting up
a competing business and take preliminary steps in this regard provided he does not engage
in actual competitive activity during his directorship Balson v Headline Filters (1990)

Competing Directorships

 Initially it was thought duty to avoid conflict bw personal interest and duty as company director,
therefore director was allowed to hold office in two competing companies Chitty J in London &
Masholand (1891) could be directors in 2 companies as conflict bw duty; however modern courts
taken stricter stance for competing Directorship and in Bristol & West Building Society Millet J
held double employment is clearly an example of conflict of Interest
 Sedley J in Plus Group stated it is questionable if London & Mashonlaland still stands as good law
 S,175 (7) states competing Directorships would be breach of s.175

Authorization of Breach

 Case law developed on avoidance of conflict is very strict and fetters entrepreneurial activity
by existing directors, company Law Review recommended that Law should only prevent
exploitation of business opportunities where clear case of exploitation
 S.175 (5)(a) Private Ltd Company; therefore allows that in a private limited company,
independent directors (other than those who have a conflict) can authorize a conflict provided
constitution does not expressly prohibit them to do so.
 S.275 (b) allow that independent directors can authorize a conflict in a public limited company
provided that such is permitted expressly under company’s constitution

Self-Dealing

 Dealing of director in his personal capacity with the company

 Aberdeen Railways (1854) Earlier position; company contracted with business of a director to
supply iron chairs, court held fiduciary not allowed to enter engagements in which he has or
can have a personal interest that can conflict or possibly may conflict with interest of company
Cranworth L held duty to company imposed on him obligation to obtain iron chairs at lowest
possible price, his personal interest will lead him in an entirely opposite direction, very evil
against which risk is directed
 S.175 (3) duty to avoid conflict of interest set out in s.175 (1) does not apply to conflict of
interest arising in relation to transaction or arrangement with company self-dealing is
removed from the realm of Directors fiduciary duties and replaced with statutory obligation
to disclose an interest under s.177

s. 177 duty to not accept benefits from 3rd parties

 Prohibits Dir from accepting benefits conferred by reason of him being a director or him doing or
not doing anything as a Director (can include bribes and non-monetary benefits)
 Duty will not be violated if acceptance of benefits cannot be reasonably regarded as likely to give
rise to conflict of interest, term benefit is undefined in the Act, however hansard (Parliamentary
recordings) that ordinary dictionary meaning should be given (which includes non-financial
benefits as well) Unlike s.175 breach of this duty cannot be avoided by prior authorization

s. 177 duty to disclose interest in a transaction

 Requires Dir t declare any interest whether direct or indirect that he has in a proposed transaction,
duty is only to disclose intent before entering in the transaction
 Boulting (1963) Upjohn LJ stated Dir mays sometime be placed in a situation that though their
interest and duty conflict they can honestly and properly give services to both sides and serve 2
masters to the great advantage of both, if persons entitled to benefit of the rule is content with
that position and understands what are his rights in the matter, there is no reason why he should
not relax the rule and it be commercially to his advantage to do so.
 Lee v Panavision (1992) Runciman (1992) Macpherson (1992) all generate principle that informal
disclosure to board is sufficient
 Gwembe Valley (2000), however precise information should be given

Certain Specific Duties:

 in certain transactions chances of conflict is so high that a member’s approval required before
undertaking such transaction, these transactions are
 s.188 of CA 2006 long term service contract of Director, s.190-196 of CA 2006 substantial property
transactions, s.197 – s.214 of CA 2006 loans and quasi loans given by the company to the Director
 s.215-s.222 of CA 2006 payment for loss of office, termination of service contract
 s.190 – s.196 of CA 2006, requires SPT (substantial property transaction) which involves
acquisitions or disposals of substantial non-cash assets be approved by SH
 SPT is where assets value exceeds 100K or 10% of company’s net value whichever is lower
 Company will not be liable where under the contract approval is not coming (such
transactions/contracts the company won’t be bound by a contract that does not have prior
approval, its void abinito)
 STP not valid without prior SH approval, no obligation company will arise under such transaction
 Re Duckwari (1997) company purchased an asset worth 495,000 from a person connected with a
Director, 4 yrs later asset was worth 90K, Dir was held liable to account for profits made as result
of breach
 S.197 – s.214 of CA 2006 – loans & qausi loans, Directors giving loans to them in favorable terms
(disguised renumeration or gift) CA 1980 following services of DTI (Department of Trade and
Investment) investigation severely tightens law governing loans to directors
 CA 2006 s.194-s.214 requires prior approval of company’s members (and in some cases even from
members of holding company) for giving a loan to the Director/shadow Director/connected
person or giving a guarantee on their behalf
 Exceptions for this are in s.204 to s.209. a loan without SH approval will be voidable at instance
of the company
 Whether the company chooses to avoid a loan or not Director will not be liable to account for
gains he made to the company and indemnify the company from any loss it suffers

Remedies

 Company can seek following remedies form a director for breach of duties; damages or
compensation, restoration of company’s accounts/assets, account for profits made; liability to
account arises even where director had acted honestly, and that company could not have
obtained the benefit in any case (Regal Hastings and IDV v Cooley)
 Murad v ALSARAJ (2005) Arden LJ stated that equity imposes stringent liability on a fiduciary as a
deterrent in the interest of efficiency and to provide an incentive to fiduciaries to resist the
temptation to misconduct themselves, the law imposes exacting standards on fiduciaries and an
extensive liability to account
 The liability to account by Directors is by way of constructive trust
 JJ Harrison (20002) Chadwick LJ stated any director who disposes off company property in breach
of their fiduciary duties are treated as having committed a breach of trust, he is described as a
constructive trustee
 This principle was re-affirmed in case of CMS Dolphin; injunctions, recession of contract where
the director failed to disclose the interest

Relief from Liability

 director can be relieved of liability of breach in 2 ways; ratification, relief under s.1157 of CA 2002

Ratification

 s.239 of CA 2006 provides that SH can ratify any breach committed by directors
 s.239 (3) the ratification is effective only if the votes of directors is in breach are regarded
 North West (1887) previously the Director in breach could also vote
 Law was changed following CLRSG recommendations

Relief under s.1157 of CA 2006

 S,1157 confers discretion on courts to relieve the liability of officer of the company if such officer
acted honestly and reasonably, having regard to al the circumstances he ought fairly be excused
 Re Djan of London Dir had incorrectly filed insurance form due to which coverage was not given
by the insurer when property caught fire, Directors liability for breach of s.174 was partly relieved
with the rationale that 99% of companies’ shares were owned by Dir himself and remaining 1%
by his wife, economic reality was Director made a loss for himself, judge observed that it seems
odd that a person found to have been guilty of negligence can never satisfy he acted reasonably
 Re Duckwari (Obiter dicta) a director who intends to make a personal gain by way of direct or
indirect, in a SPT can be never be said to have acted reasonably, your own benefit is not
reasonable even if it is honest