Acca -Corporate and Legal Personality (1)

7/31/2019 Acca -Corporate and Legal Personality (1)

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CORPORATIONS AND LEGAL PERSONALITYDEFINITION OF A COMPANYA company is an entity registered as such under theCompanies Act 2006.

The key feature of a company is that it has a legalpersonality (existence) distinct from its members anddirectors.

LEGAL PERSONALITYA person possesses legal rights and is subject to legalobligations. In law, the term 'person' is used to denote twocategories of legal person. An individual human being is a natural person. A sole trader

is a natural person, and there is legally no distinction betweenthe individual and the business entity in sole tradership The law also recognises artificial persons in the form ofcompanies and limited partnerships.Unlimited partnerships are not artificial persons.

Legal personality (also artificial personality) is thecharacteristic of a non-human entity regarded by law to havethe status of a person.

A legal person, (also artificial person and body corporate)has a legal name and has rights, protections, privileges,responsibilities, and liabilities under law, just as natural persons(humans) do. The concept of a legal person is a fundamentallegal fiction. It is pertinent to the philosophy of law, as isessential to laws affecting a corporation (corporations law) (thelaw ofbusiness associations).

Legal personality allows one or more natural persons to act as asingle entity (a composite person) for legal purposes. Legalpersonality allows such composite to be considered under lawseparately from its individual members or shareholders. Theymay sue and be sued, enter contracts, incur debt, and ownproperty. Entities with legal personality may also be subjectedto certain legal obligations, such as the payment of tax. Anentity with legal personality shields its shareholders frompersonal liability.

The concept of legal personality is not absolute. "Piercing thecorporate veil" refers to looking at individual human agents

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involved in a corporate action or decision; this may result in alegal decision in which the rights or duties of a corporation aretreated as the rights or liabilities of that corporation'sshareholders or directors.

LIMITED LIABILITY OF MEMBERSThe fact that a company's members not the company itself have limited liability for its debts protects the membersfrom the company's creditors and ultimately from the full risk ofbusiness failure.A key consequence of the fact that the company is distinct fromits members is that its members have limited liability.Limited liability is a protection offered to members of certain

types of company. In the event of business failure, themembers will only be asked to contribute identifiable amountsto the assets of the business.

ORGANISATIONS AND LEGAL PERSONALITYThe formation and constitution of business organisationsProtection for members against creditors

The company itself is liable without limit for its owndebts. If the company buys plastic from another company, forexample, it owes the other company money.Limited liability is a benefit to members. They own thebusiness, so might be the people whom the creditors logicallyask to pay the debts of the company if the company is unableto pay them itself.Limited liability prevents this by stipulating the creditors of alimited company cannot demand payment of thecompany's debts from members of the company.

PROTECTION FROM BUSINESS FAILUREAs the company is liable for all its own debts, limited liabilityonly becomes an issue in the event of a business failure whenthe company is unable to pay its own debts.

This will result in the winding up of the company and enablesthe creditors to be paid from the proceeds of any assetsremaining in the company. It is at winding up that limitedliability becomes most relevant.

Members asked to contribute identifiable amounts

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Although the creditors of the company cannot ask the membersof the company to pay the debts of the company, there aresome amounts that members are required to pay in theevent of a winding up.

CASES ON THE DOCTRINE AND VEIL OF INCORPORATIONSalomon v Salomon & Co Ltd (1897)Facts: S transferred his business to a limited company. He wasthe majorityshareholder and a secured creditor. The company went intoliquidation and the other creditors tried to obtain repaymentfrom S personally.Held: S as shareholder and director had no personal liability to

creditors, and he could be repaid in priority as a securedcreditor. This enshrined the concepts of separate legalpersonality and limited liability in the law.

Lee v Lees Air Farming Ltd (1960)Facts: This case concerned an aerial crop spraying business. MrLee owned the majority of the shares (all but one) and was thesole working director of the company. He was killed whilepiloting the aircraft.

Held: Although Lee was the majority shareholder and soleworking directorof the company, he and the company were separate legalpersons.

Therefore he could also be an employee of the company for thepurposes of the relevant statute with rights against it whenkilled in an accident in the course of his employment.

Macaura v Northern Life Assurance (1925)

Facts: M owned a forest. He formed a company in which hebeneficially owned all the shares and sold his forest to it. He,however, continued to maintain an insurance policy on theforest in his own name. The forest was destroyed by fire.Held: He could not claim on the policy since the propertydamaged belonged to the company, not him, and asshareholder he had no insurable interest in the forest.

Consequences of incorporation

There are a number of consequences of being a separate legalentity:

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A company enters into contracts in its own name and cansue and be sued in its own name.

A company is liable for its own debts. If a company fails,the liability of the shareholders is limited to any amount

still unpaid on their share capital (or any amount theyhave agreed to contribute if the company is limited byguarantee).

A company owns its own property.

A company has perpetual succession, irrespective of thefate ofshareholders.

The management of a company is separated from itsownership.

A company is subject to the requirements of the

Companies Act 2006 (CA06). Where a company suffers an injury, it is the company itself

that must take the appropriate remedial action. This isknown as the rule in Foss v Harbottle.

Lifting the veil of incorporationMeaning

The phrase lifting the veil of incorporation means that incertain circumstances the courts can look through the company

to the identity of the shareholders.The usual result of lifting the veil is that the members ordirectors become personally liable for the companys debts.

Statutory examplesThere are a number of occasions on which statute will interveneto lift the veil: Under the Insolvency Act 1986 (IA 1986), members and/or

directors liable for wrongful or fraudulent trading may be

personally liable for losses arising as a result (see chapter13). If a public company starts to trade without first obtaining a

trading certificate, the directors can be made personallyliable for any loss or damage suffered by a third party: s767CA06.

Under the Company Directors Disqualification Act 1986, if adirector who is disqualified participates in the managementof a company, that director will be jointly or severally liable

for the companys debts.

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the premises compulsorily but refused to pay compensation fordisturbance of the business since the subsidiary, which ownedthe premises, did not also carry on the business.Held: The companies were, in economic terms, mutually

interdependent on each other and therefore they should beregarded as a single economic entity. Thus there was a validclaim for disturbance since ownership of the premises andbusiness activity were in the hands of a single group.

The above case can, however, be contrasted with the morerecent case ofAdams v Cape Industries (1990):

Adams v Cape Industries (1990)

Facts: Cape was an English registered company. One of itssubsidiaries, CPC, a company incorporated and carrying onbusiness in the United States, had a court judgement against it.Held: It was unsuccessfully argued that the veil should be liftedbetween thecompanies so as to enable the judgement to be enforcedagainst Cape. The Court of Appeal said there were no specialcircumstances indicating that CPC was a mere facade for Capesuch as was the situation in Jones v Lipman. There was no

agency as CPC was an independent corporation under thecontrol of its chief executive, and the DHN doctrine of economicreality would not be extended beyond its own facts to factssuch as these where the effect would be to make a holdingcompany liable for its subsidiarys debts.

Private company versus public companyThe following table summarises the basic differences betweenpublic companies and private companies.

Public companies Private (limited)companies

Definition Registered as a publiccompany.

Any company that isnot a publiccompany.

Members At least two members. Can have a singlemember.

Name Ends with plc or publiclimited company.

Ends with Ltd orlimited.

Capital Must not be less than theauthorised

No minimum (ormaximum)

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minimum (currently50,000) and, in order totrade, must have allottedshares of at least that

amount.

requirements.

Raisingcapital

May raise capital byadvertising itssecurities (shares anddebentures) asavailable for publicsubscription.

Prohibited fromoffering its securitiesto the public.

Start oftrading

Must obtain tradingcertificate from Registrar

before commencingtrading.

Can begin from dateof incorporation.

Directors Minimum two. Minimum oneSecretary Must be qualified. Need not have one.Accounts Must file accounts

within six months.Need not layaccounts beforegeneral meeting.Must file within ninemonths.

Audit Accounts must beaudited.

Audit not required ifturnover below5.6m.

AGM Must be held each year. Need not hold anAGM..

Resolutions Cannot pass writtenresolutions.

Need not hold anAGM.

PromotersDefinitionThere is no statutory definition of a promoter.According to case law, a promoter is a person who undertakesto form acompany and who takes the necessary steps to accomplish thatpurpose:

Twycross v Grant (1878).

The definition excludes people acting in a professional capacity.

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DutiesA promoter is under a fiduciary duty to:If a promoter does make a secret profit, the company may: disclose any interest in transactions to the company and not

to make a 'secret profit' disclose any benefit acquired to an independent board

and/or to the shareholders. Rescind the contract but this is not always possible, e.g. if

a third party has acquired rights under the contract.

Obtain damages but this requires the company to proveloss.

Recover the profit the company must prove that thepromoter has failed to disclose his profit from a transaction.

Preincorporation contractsA preincorporation contract is a contract made by a personacting on behalf of an unformed company.

The position at common law is that a company, prior to itsincorporation, does not have contractual capacity and thepromoter is therefore personallyliable. (This is because a company does not legally exist until itis incorporated.)

Kelner v Baxter (1866)

Facts: A, B and C entered into a contract with the claimant topurchase goods on behalf of the proposed Gravesend Royal

Alexandra Hotel Co. The goods were supplied and used in thebusiness. Shortly after incorporation the company collapsed.Held: As the Gravesend Royal Alexandra Hotel Co was not inexistence when the contract was made it was not bound by thecontract and could not be sued for the price of the goods.Neither could it ratify the contract after incorporation.S51 CA06 reinforces the common law position by providingthat, subject toany agreement to the contrary, the person making the contractis personally

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liable. Clear and express words are needed in order to negateliability:

Phonogram Ltd v Lane (1981).The promoter can protect his position by:

including a term in the contract giving the company theright to sue under the Contracts (Rights of Third Parties)Act 1999

postponing finalising contracts until the company isformed

entering into an agreement of novation (this involvesdischarging the original contract and replacing it with a

new one) or assigning (transferring) the contract agreeing with the company that there is no personal

liability for the promoter buying an 'offtheshelf' company, so it is ready to contract.

Offtheshelf companiesAn offtheshelf company is one that has already been formed.Buying off the shelf has a number of advantages anddisadvantages:

Advantages:

cheap and simple

can trade immediately

no problem of preincorporation contracts.

Disadvantage:The articles of association may be unsuitable. They can be

altered, but thatentails cost and administrative inconvenience.

RegistrationDocuments to Registrar

The following documents must be submitted to the Registrar inorder to form a company.

Memorandum of

association

Signed by all subscribers and

stating that they wish to forma company and agree to

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become membersof the company.

Application The application form mustinclude:

the proposed name of thecompany whether themembers will have limitedliability (by shares orguarantee) whether the company is tobe private or public details of the registeredoffice.

Articles The model articles apply if noarticles are supplied.

Statement of capital andinitial shareholdings

This must state: the number of shares their aggregate nominalvalue how much has been paid up.

Statement of guarantee(if applicable)

This states the maximumamount each member

undertakes to contribute.Statement of proposedofficers

This gives details of the firstdirectors (and companysecretary, if applicable) andtheir consent to act.

Statement of compliance This provides confirmation thatCA06 has been complied with.It may be made in paper orelectronic form.

Registration fee

Registrars dutiesOn receipt of the above documents the Registrar must: Inspect the documents and ensure that Companies Act

requirements are fulfilled. Issue certificate of incorporation which is conclusive

evidence that Companies Act requirements have beenfulfilled: s15 CA06. The company exists from the date on

the certificate of incorporation.

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name.

The name gives so misleading an indication of thenature of the companys activities as to be likely to

cause harm to the public.

No timelimit

Misleading information or undertakings were givenwhenapplying for a name that required approval.

5 years

Articles of associationIntroduction

The articles of association form the companys internal

constitution. They:

set out the manner in which the company is to be governed,and

regulate the relationship between the company and its

shareholders.

There are no mandatory contents.

Model articlesFor companies incorporated under Companies Act 2006, modelarticles willbe prescribed by the Secretary of State.

These model articles will apply where a company is formedwithout registering articles or where the articles registered donot exclude or modifythe model articles.

A company: may adopt the model articles in full or in part is deemed to have adopted the model articles if there is no

express or implied provision to exclude them, or

may draft its own unique articles.Alteration of articlesProcedure

The articles can usually be altered by a special resolution(75% majority).

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Copies of the amended articles must be sent to theRegistrar within 15 days.

It is possible to entrench some of the articles. This means that aspecified

procedure (e.g. unanimous consent) may be required to changethem.

S25 CA06 prevents a member being bound by any alterationmade after hebecomes a member that requires him to increase his liability orcontributefurther to the company.

Common law restrictionAny change to the articles must be 'bona fide in interests of thecompany asa whole: Allen v Gold Reefs of Africa (1900).

It is for the members to decide whether the change isbona fide in the interests of the company as a whole.

The court will not interfere unless no reasonable personwould consider the change to be bona fide.

If the change is bona fide, it is immaterial it that happens

to inflict hardship or has retrospective operation. The change will be void if actual fraud or oppression takes

place. An alteration is not invalid merely because it causes a

breach of contract but that does not excuse breach.

Greenhalgh v Arderne Cinemas Ltd (1950)

Facts: The issue was the removal from the articles of themembers right offirst refusal of any shares which a member might wish totransfer the majority wished to make the change in order to admit an outsider to membership in the interests of thecompany.Held: The benefit to the company as a whole was held to be abenefit which any individual hypothetical member of thecompany could enjoy directly or through the company and not

merely a benefit to the majority of members only. The test ofgood faith did not require proof of actual benefit but merely the

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honest belief on reasonable grounds that benefit could followfrom the alteration.In several cases the court has held that actual and foreseendetriment to a minority affected by the alteration was not in

itself a sufficient ground of objection if the benefit to thecompany test wassatisfied.

Brown v British Abrasive Wheel Co (1919)

Facts: The articles were altered to enable the majority topurchase at a fairvalue the shares of the minority. The intention was to invokethe clause against some minority members who were refusing

to inject further capital into the company. They objected to thealteration.Held: This was not a bona fide alteration as it would benefit themajority shareholders, rather than the company as a whole.

Sidebottom v Kershaw, Leese & Co (1920)

Facts: The alteration was to expel a member who carried on a

business competing with the company.Held: It was a valid alteration.

Allen v Gold Reefs of West Africa Ltd (1900)

Facts: Z held fully paid up and partly paid up shares in thecompany. The companys articles provided for a lien for alldebts and liabilities of any member upon all partly paid sharesheld by the member. The company by special resolution alteredits articles so that the lien was available on fully paid up shares

as well.Held: The company had power to alter its articles by extendingthe lien to fully paid shares.

Southern Foundries (1926) Ltd and Federated FoundriesLtd v Shirlaw (1940)Facts: Alteration of the articles empowered the company toremove themanaging director.

Held: The alteration was valid, but the MD could sue for breachof contract.

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Legal effect of company's constitutional documentsS33 CA06 states that the provisions of a companys constitutionbind the company and its members to the same extent as ifthere were covenants on

the part of the company and of each member to observe thoseprovisions.

This means that the articles form a contract between thecompany and its members, and the members betweenthemselves, even if they do not signthem.

The articles are in all respects enforceable by the companyagainst its members.However, the articles do not bind the company to non-

members.

Hickman v Kent or Romney Marsh Sheep breedersAssociation (1920)Facts: The companys articles included a clause to the effectthat all disputes between the company and its members wereto be referred to arbitration. A member brought courtproceedings against the company.

Held: The proceedings were stayed. The company couldenforce the arbitration clause against a member.The articles are enforceable by the shareholders against thecompany.

Pender v Lushington (1877)

Facts: The articles provided for one vote per ten shares, with nomember to

have more than 100 votes. A member with more than 1,000shares transferred the surplus to a nominee and directed himhow to vote.

The chairman refused to accept the nominees votes.Held: The right to vote was enforceable against the company.

Rayfield v Hands (1958)

Facts: The articles required the directors to be members, i.e. tohold qualification shares and to purchase shares from anymember who wished to sell.

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and a person who is not a member even if they are named inthem and given apparent rights against the company. In Eleyscase above, Eleys membership was irrelevant to his claim as solicitor he had no claim he was attempting to enforce a non-

members right.

Statutory books, returns and recordsRegisters

Register ContentsMembers Names, addresses, date

became/ceased, numberof shares, type, amount paidup.

Directors andcompany secretary

Name, address, occupation,nationality, otherDirectorships within the lastfive years and date of birth.

Charges Name of chargee, type ofcharge, property charged,amount and date created.

Other documents Minutes of general meetings.Resolutions andmeetings

Records must be kept for aminimum period of ten years.

The registers must normally be kept at the companysregistered office (although the register of members andregister of directors interests can bekept where they are made up) and must be available for publicinspection.

Requests for inspection must provide details about the personseeking the information, the purpose of the request andwhether the information will bedisclosed to others. The company may apply to the court for anorder that itneed not comply with the request.

The register of directors addresses should now contain serviceaddresses rather than details of the directors residentialaddresses. The service address can be simply the companys

registered office.

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The company must also keep a separate register of thedirectors residential addresses. Both the service and theresidential addresses will need to be supplied to the Registrarof Companies.

The residential addresses will be withheld from the publicregister. However, they will generally remain available to theRegistrar and certain specified public bodies and creditreference agencies.

Annual returnThe annual return must be filed with the Registrar annuallywithin 28 days ofthe return date (which is the anniversary of incorporation). It

contains the: address of registered office

type of company

principal business activities

details of officers

details of issued shares and their holders

details of private company elections to dispense withholding

AGMs/laying accounts.Accounting records

The company must keep accounting records containingsufficient information to show and explain the companystransactions. In particular the records must show:

details of all money received and spent

a record of assets and liabilities

statement of stocks at end of year statements of all goods sold and purchased, showing the

goods and the buyers and sellers (except in the retailtrade).

Annual financial statementsCompanies are required to produce annual financial statements

including:

balance sheet and profit and loss account showing true andfair view

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directors report stating the amount of any dividend andlikely future developments.

The annual financial statements must be approved and signedon behalf of the board of directors and a copy filed with

Registrar.

Capital and financingChapter learning objectivesUpon completion of this chapter you will be able to:

examine the different meanings of capital

illustrate the difference between various classes of shares

explain the procedure for the variation of class rights

define companies borrowing powers

explain the meaning of debenture

distinguish loan capital from share capital explain the concept of a company charge and distinguish

between fixed and floating charges describe the need and the procedure for registering

company charges

explain the doctrine of capital maintenance and capitalreduction

examine the effect of issuing shares at either a discount ora premium

explain the rules governing the distribution of dividends inboth private and public companies.

Types of capitalLoan capital versus share capital

Loan capital Share capitalDefinition A debenture is a

documentissued by acompanycontaining anacknowledgmentof its indebtedness.

A share is the

interest of ashareholder in acompany measuredby a sum of money.It is a bundle ofrights andobligations.

Votingrights

A debenture is acreditor of the

company andtherefore has no

A shareholder is amember (owner) of

the company andtherefore has voting

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voting rights. rights, dependingon the class ofshares held.

Income A debenture has a

contractualright to interest,irrespective of theavailability ofprofits.

Dividends depend

on the availability ofprofits.

Liquidation A debenture hasprioritywith respect to

repayment

Shareholdersreceiverepayment after

creditors, but canparticipate insurplusassets

Voting rights None, or restricted FullDividend rights Fixed dividend paid

inpriority to otherdividends, usually

cumulative

Paid afterpreferencedividend.Not fixed.

Surplus on windingup

Prior return ofcapital, but cannotparticipate insurplus

Entitled to sharesurplus assets afterrepayment ofpreference shares.

Bonus issues

Carried out by using some of the companys reserves toissue fully paid shares to existing shareholders inproportion to their shareholdings.

Do not raise any new funds.

Rights issues

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New shares offered to existing shareholders in proportionto their shareholdings.

Raise new funds. Shares usually offered at discount to current market value

(but not at discount to nominal value).

Class rightsWhat are they?Class rights are the special rights attached to each class ofshares, such as dividend rights, distribution of capital on awinding up and voting. (See above concerning the differentrights that normally attach to ordinary shares and preferenceshares.)

How can they be varied?The procedure for varying class rights depends on whether anyprocedure isspecified in the articles:Is procedure to vary specified? Method of variation

Yes Procedure set out in articles must befollowed

No Variation needs special resolution or

written consent of 75% in nominalvalue of the class: s630 CA06.

Minority protectionUnder s633 CA06, the holders of 15% of the nominal value ofthat class, who did not consent to the variation, may ask thecourt to cancel the variation within 21 days of the passing ofthe resolution.

The court may confirm or cancel the variation. However, it willonly cancel the variation if the petitioner proves it is unfairlyprejudicial.

The court draws a distinction between:

a variation that affects the value, enjoyment or powerderived from the rights, and

a variation that changes the rights themselves.

The court will only intervene in the latter case.

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White v Bristol Aeroplane Co (1953)

Bonus issue is not a variation of class rights, even though itseffect may be to dilute the voting rights of the existingshareholders.Greenhalgh v Arderne Cinemas Ltd (1950)

The subdivision of shares is not a variation of class rights.

Issuing sharesAuthority

The directors need authority in order to allot shares. This may

be given:

by the articles, or

by passing an ordinary resolution.

The authority must state:

the maximum number of shares to be allotted

the expiry date for the authority (maximum five years).

The directors of a private company with only one class ofshares may allot shares of that class unless it is prohibited bythe articles: s550 CA06.

Issue at discountShares cannot be issued at a discount on their nominal value:s580 CA06.If this rule is breached the issue is still valid, but the allotteemust pay up the discount plus interest.

(Debentures can be issued at a discount if they do not have theimmediateright to convert to shares.)

Issue at premiumS610 CA06 requires any premium to be credited to a sharepremium account, which may only be used for:

writing off the expenses of the issue of those shares

writing off any commission paid on the issue of those shares

issuing bonus shares.

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Paying for shares private companiesPrivate companies may issue shares for noncash consideration.

The court will interfere with the valuation only if there is fraudor the consideration is 'illusory, past or patently inadequate'.

Paying for shares public companiesThere are a number of additional rules relating to the issue ofshares in public companies contained in CA06:s584 Subscribers to the memorandum must pay cash for theirsubscriptionshares.s585 Payment for shares must not be in the form of work or

services.s586 Shares cannot be allotted until at least one quarter oftheir nominal value and the whole of any premium have beenpaid.s587 Noncash consideration must be received within five years.s593 Noncash consideration must be independently valued andreported on by a person qualified to be the companys auditor.

Debentures

A debenture is a document issued by a company containing anacknowledgment of its indebtedness whether charged on thecompanys assets or not.All trading companies have the implied power to borrow for thepurpose of business.

Advantages of debentures

The board does not (usually) need the authority of a

general meeting to issue debentures. As debentures carry no votes they do not dilute or affect

the control of the company.

Interest is chargeable against the profit before tax.

Debentures may be cheaper to service than shares. There are no restrictions on issuing debentures at a

discount or on redemption.

Disadvantages of debentures

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Interest must be paid out of pretax profits, irrespective ofthe profits of the company.

Default may precipitate liquidation and/or administration ifthe debentures are secured.

High gearing will affect the share price.

Fixed versus floating chargesFixed chargeA fixed charge is a legal or equitable mortgage on a specificasset (e.g. land), which prevents the company dealing with theasset without the consent of the mortgagee.A fixed charge has three main characteristics:

It is on an identified asset.

The asset is intended to be retained permanently in thebusiness.

The company has no general freedom to deal with (e.g. sell)

the asset.

Floating chargeThe judge in Re Yorkshire Woolcombers Assocation (1903)stated that a floating charge has three main characteristics:

It is on a class of assets, present and future.

The assets within the class will change from time to time. The company has freedom to deal with the charged assets

in the ordinary course of its business.A floating charge cannot be created by a partnership.

CrystallisationA floating charge does not attach to any particular asset untilcrystallisation.Crystallisation means the company can no longer deal freelywith the assets.It occurs in the following cases:

liquidation

the company ceases to carry on business any event specified (e.g. the company is unable to pay its

debts the company fails to look after its property the company fails to keep stock levels sufficiently high).

Advantages of a floating charge

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A floating charge has the following advantages for thecompany:

The company can deal freely with the assets.

A wider class of assets can be charged.

Disadvantages of a floating chargeA floating charge has a number of disadvantages for thechargee:

The value of the security is uncertain until it crystallises.

It has a lower priority than a fixed charge. A liquidator can ignore it if it was created within 12 months

of winding up (see below).

Priority and registration of chargesPriority

The priority of a charge depends on the type of charge andwhether or not ithas been registered:

Equal charges first created has priority.

Fixed charge has priority over a floating charge. An unregistered registerable charge has no priority over a

registered charge.

A charge holder can prohibit the creation of a later chargewith priority, but the prohibition is only effective if asubsequent chargee has notice of the prohibition as well asthe charge.

RegistrationThe company must notify the registrar within 21 days of thecreation of thecharge.

Registration can be undertaken by:

the company

the chargeholder.

Failure to register:

renders the charge void against the liquidator

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if application involves one of the two methods above,

court must require company to settle a list of creditors

entitled to object

the court must not confirm the reduction until it issatisfied that all creditors have either consented to the

reduction or had their debts discharged or secured

the company must file documents with the registrar If the

share capital of a public company falls below 50,000, it

must register as a private company.

Simplified procedure for private companies:

pass a special resolution supported by a solvency

statement

the solvency statement is a statement by each of the

directors that the company will be able to meet its debts

within the following year

a solvency statement made without reasonable grounds is

an offence punishable by fine and/or imprisonment

copies of resolution/solvency statement and a statement

of capital must be filed with the Registrar within 15 days.

Purchase of own sharesA company may purchase its own shares if the relevantprocedures arecomplied with.

Procedure:

The articles must authorise the purchase.

The shares to be purchased must be fully paid.

The purchased shares must be cancelled. The company must make a return to the Registrar within

one month, accompanied by a revised statement of capital.

Finance for purchase:

Distributable profits A transfer equivalent to the nominalvalue of the purchased shares must be made to the capital

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redemption reserve. (This is a nondistributable reserve,used only for bonus issues).

Proceeds of new issue. Private companies may make a permissible capital

payment, but only to the extent that the distributableprofits and the proceeds of any new issue are insufficient(see below for further details).

There are two types of purchase:

Market purchase = purchaseon the stock exchange

Off-market purchase =purchase directly from ashareholder

An ordinary resolution isrequired stating the maximumnumber of shares and themaximum and minimumprices. The authority to purchaselastsfor a specified time themaximum is 18 months.

A special resolution isrequired. A contract of sale must beavailable for inspection bymembers for at least 15 daysbefore the meeting and at themeeting. Vendors may not vote on theresolution with the shares

whichare to be purchased.

Permissible capital payment private companies onlyPrivate companies can purchase shares out of capital, subjectto any restriction or prohibition in their articles.

The following formalities must be complied with:

The directors must make a statutory declaration statingthat the company will be able its debts as they fall dueover the next year.

The Auditors must make a statement supporting thedirectors declaration.

A copy of the directors and the auditors report must beavailable to members before the resolution approving thepayment is passed, otherwise it will be ineffective.

A special resolution must be passed within one week of

the directors statement.

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A public notice (in the gazette) must be made within oneweek of the resolution, inviting creditors to apply to thecourts to prevent the payment within five weeks if theyobject.

The payment out of capital must be made between fiveand seven weeks following the resolution.

The documents must be filed with the Registrar.

DistributionsIntroductionA company can only make a distribution (e.g. pay a dividend)out of profitsavailable for that purpose, i.e. distributable profits.

Distributable profitsDistributable profits are the accumulated realised profits (so faras not previously utilised by distribution or capitalisation) lessthe accumulated realised losses (so far as not previouslywritten off in a reduction of capital):s830 CA06.

Profit/loss trading or capital.

Accumulated overall profit/loss, not just one year in

isolation. Realised not revaluation reserve. However, provisions

(e.g. depreciation) are deemed realised.

Additional rules for a public companyA public limited company can only declare a dividend if bothbefore and after distribution its net assets are not less than theaggregate of its called up share capital and undistributable

reserves.

Undistributable reserves are:

share premium account

capital redemption reserve

unrealised profits (i.e. revaluation reserve)

reserves that the company is forbidden to distribute.

The latest audited accounts are used to make the calculations.

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Model articlesUnder the model articles, the directors recommend thepayment of a dividend and the company declares it by passingan ordinary resolution. The

amount paid cannot exceed the amount recommended by thedirectors.

DirectorsChapter learning objectivesUpon completion of this chapter you will be able to:

explain the role of directors in the operation of thecompany

discuss the ways in which the directors are appointed, can

lose their office or be subject to a disqualification order distinguish between the powers of the board of directors,

the managing director and individual directors to bind thecompany

explain the duties that directors owe to their companies demonstrate an understanding of the way in which statute

law has attempted to control directors.

Directors

Definition of directorThe term director includes any person occupying the positionof director,by whatever name called: s250 CA06.

The decision as to whether someone is a director is thereforebased on their function, not their title.

There must be at least one director who is a natural person. Inaddition, adirector must normally be aged at least 16.

Types of director

Managingdirector (MD)

The model articles allow theboard to delegate to the MDany powers they see fit. The MD has a dual role member of board and alsoexecutive officer.

Freeman & Lockyer (A Firm)v Buckhurst Park Properties

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(Mangal) Ltd (1964) the MDhas theapparent authority to enterinto all contracts of a

commercial nature.Shadowdirector

A person in accordance withwhose directions orinstructions the directors of acompany areaccustomed to act: s251CA06. Not a shadow director ifadvice is given only in a

professional capacity.Executive director Likely to be a fulltime

employee involved inmanagement.

Nonexecutivedirector(NED)

Parttime. Brings outside expertise toboard. Not an employee. Exerts control over executive

directors.Chairman of board Chairs meetings of board. Acts as spokesman for thecompany.

Appointment, removal and disqualificationAppointment

Numbers Minimum: public companies

need two private companies need one. Maximum no statutorymaximum, but the articlesmay specify a maximumnumber.

Appointmentprocedure

Usually appointed by theexisting directors or byordinary resolution.

Directors of publiccompanies should generally be

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voted on individually: s160CA06. A directors actions are validnotwithstanding that his

appointment was defective:s161 CA06.

Model articles forpublic companies

At the first annual generalmeeting (AGM) all the directorsretire and offer themselves forre-electionby ordinary resolution. At each AGM one third ofNEDs retire (those most

senior). They can be re-elected. Casual vacancies are filledby the board until the nextAGM when the new directorsmust stand for election.

Publicity The company must notifyCompanies House within 14days of new appointments and

anychanges in particulars. It mustalso enter details in theregister of directors.

Service contracts Cannot exceed two yearsunless they have beenapproved by the shareholdersby ordinaryresolution: s188 CA06.

Must be kept open forinspection at the registeredoffice.

Compensation forloss of office

Gratuitous payments mustbe disclosed to all membersand approved by ordinaryresolution. If not approved,director holds payment onconstructive trust for thecompany.

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DisqualificationModel articles Directors must vacate their office if theybecome bankrupt,insane, or absent from board meetings for six months and the

board so resolves.

Company Directors (Disqualification) Act 1986 (CDDA 1986)The CDDA 1986 was introduced to prevent the misuse of thelimited liabilitystatus of companies by directors who would set up a newcompany to carryon essentially the same business as an old company which hadceased trading with unpaid debts.

A disqualified director cannot be concerned in the managementof a company directly or indirectly or act as a liquidator,receiver or promoter.Grounds for disqualification:

Persistent breaches of CA06, e.g. failure to file returns(maximum five years' disqualification).

Conviction of a serious offence in connection with themanagement of a company (maximum 15 years'disqualification).

Fraudulent or wrongful trading (maximum 15 years'disqualification).

An investigation by the Department for Business, Enterpriseand Regulatory Reform (formerly the Department of Tradeand Industry) finds the director unfit to be concerned in themanagement of a company (maximum 15 years'disqualification).

Liquidators report finds the director unfit to be concernedin the management of a company (minimum 2 years', and

maximum 15 years', disqualification).

Breach of a disqualification order:

This is a criminal offence, which could result in a fine andimprisonment.

The disqualified director (or any person who acts on hisinstructions) is personally liable for the debts of the

company while so acting.

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RemovalUnder s168 CA06, a company may by ordinary resolutionremove a directorbefore expiration of his period of office notwithstanding

anything in:

its articles, or

any agreement between him and it.

Thus a director can be removed despite any provision to thecontrary in his service contract, although he can sue fordamages if the removal is in breach of his contract.The company must follow this procedure to remove a

director:

Special notice (28 days) is required of the resolution by

persons wishing to remove a director. The company must

forward a copy of the resolution to the director concerned.

Notice of the meeting goes to the director and all members

entitled to attend and vote.

The director concerned can require the company tocirculate written representations to members.

At the meeting the director can read out representations if

there was no time for prior circulation. The director must be

allowed to attend the meeting and to speak. An ordinary

resolution is required to remove a director.

The power of the members to remove a director may be

limited:

Bushell v Faith (1970)Facts: A provision in the articles tripled the number of votes ofshares heldby directors on a resolution to remove them. Statute onlyrequired an ordinary resolution and made no provision as tohow it could be obtained or defeated.Held: The weighted voting rights provided in the articles werevalid.

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DutiesGeneral dutiesPrior to the Companies Act 2006, common law rules andequitable principles made up the law on directors duties.

These have now been replaced by the specific statutory dutiesprovided in the Companies Act 2006. However, the old case lawstill has relevance in interpreting the new legislation andillustrating its application: s170.

Duty to act within powers: s171A director must act in accordance with the companysconstitution and onlyuse his powers for the purpose which they were given.

If this rule is not adhered to the transaction will be void, unlessit is approved by the shareholders.

Hogg v Cramphorn (1967)

Facts: The directors issued further shares and gave financialassistance for their purchase in an attempt to fight off atakeover bid, believing it to be in the best interests of thecompany.

Held: The directors were in breach of the duty to act withintheir powers.However, it was open to the members to ratify their actions,which they did.Duty to promote the success of the company: s172A director must act in good faith, in a way which promotes thesuccess of the company and for the benefit of the members asa whole.

The Act requires the directors to have regard to:

the likely consequences of any decision in the long term

the interests of the companys employees

the need to foster the companys business relationshipswith suppliers, customers and others

the impact of the companys operations on the communityand the environment

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the desirability of the company maintaining a reputationfor high standards of business conduct, and

the need to act fairly as between members of the

company.

Duty to exercise independent judgment: s173A director of a company must exercise independent judgment.

This duty is not infringed by a director acting:

in accordance with an agreement duly entered into by thecompany that restricts the future exercise of discretion byits directors, or

in a way authorised by the companys constitution.

Duty to exercise reasonable care, skill and diligence:s174

The standard expected of a director is that of a reasonablydiligent personwith:

the general knowledge, skill and experience that couldreasonably be expected of a director, and

the actual knowledge, skill and experience held by the

director.

Dorchester Finance Co Ltd v Stebbing (1989)

Facts: The company was a money lending company and hadthree directors, Parsons, Hamilton and Stebbing. All three hadconsiderable accountancy and business experience (Parsonsand Hamilton were chartered accountants). No board meetingswere ever held and Parsons and Hamilton left all the affairs of

the company to Stebbing. Parsons and Hamilton did, however,turn up from time to time and signed blank cheques on thecompanys account which they left Stebbing to deal with.Stebbing loaned the companys money without complying withstatutory regulations applying to money lending, such that theloans were unenforceable. Held: All three were liable innegligence. If a director has a special skill (e.g. as anaccountant) he is expected to use it for the benefit of thecompany. In addition to establishing the degree of care andskill required by a director, the case of Re City Equitable FireInsurance (1925) also established that:

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Directors are not bound to give continuous attention tothe affairs of their company. However, they should attendboard meetings whenever able to do so.

In the absence of suspicious circumstances, directors may

rely on employees to perform the functions that mayproperly be delegated. Duty to avoid conflicts of interest:s175

A director must avoid any situation which places him in directconflict with the interests of the company or the performance ofany other duty. This duty is not infringed if the matter has beenauthorised by the directors, provided the articles:

do not invalidate the authorisation (in the case of a privatecompany), or

expressly allow the authorisation (in the case of a publiccompany).

The relevant director does not count towards a quorum and hisvotes are not included in determining whether authorisationhas been given.Duty not to accept benefits from third parties: s176 A director

must not accept any benefit from a third party which arises byreason of him being a director or performing/not performing an

act as a director, unless acceptance cannot reasonably beregarded as likely to give rise to a conflict of interest.Duty to declare interest in proposed transaction orarrangement: s177 A director must declare the extent andnature of such an interest to the other directors. Thisdeclaration can be made in writing, at a board meeting or by ageneral notice that he has an interest in a third party.IDC v Cooley (1972)

Directors are not bound to give continuous attention to

the affairs of their company. However, they should attendboard meetings whenever able to do so. In the absence of suspicious circumstances, directors may

rely on employees to perform the functions that mayproperly be delegated.

do not invalidate the authorisation (in the case of a privatecompany), or

expressly allow the authorisation (in the case of a publiccompany).

Facts: Cooley, the managing director of IDC, had beennegotiating a contract on behalf of the company, but the third

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party wished to award the contract to him personally and not tothe company. Without disclosing his reason to the company (orits board) he resigned in order to take the contract personally.Held: He was in breach of fiduciary duty as he had profited

personally by use of an opportunity which came to him throughhis directorship: it made no difference that the company itselfwould not have obtained the contract. He was thereforeaccountable to the company for the benefits gained from thecontract.

The IDC case illustrates that an individual may still be subjectto the dutieseven after he ceases to be a director. Breach of directorsduties Directors owe their duties to the company as a whole.

This has traditionally been taken to mean to the shareholdersas a collective body, which includes present and futureshareholders. The directors owe no general duty to individualmembers: Percival v Wright (1902). Breach of duty may carrythe following consequences: The director may be required to make good any loss

suffered by the company. Contracts entered into between the company and the

director may be rendered voidable.

Any property taken by the director from the company canbe recovered from him if still in his possession. Property may be recovered directly from a third party,

unless that third party acquired it for value and in goodfaith.

An injunction may be an appropriate remedy where thebreach has not yet occurred.

S232 CA06 provides that any provision to exempt a directorfrom or indemnify him against any liability for breach of duty ornegligence is void.S239 CA06 states that the company can ratify a breach of dutyby passing an ordinary resolution.

PowersThe division of power within a company The legal theory is thatall decisions about the running of the companys businessshould be taken by the members in general meeting. However,the members usually delegate the power to manage thebusiness to the directors and they exercise all the powers ofthe company on a day today basis. Directors are required to

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exercise their powers in accordance with the companysconstitution. This requirement caused problems prior to theCompanies Act 2006 as companies normally had very narrowobjects, which had the effect of severely restricting the

directors powers. Companies now have unrestricted objects,unless the articles specifically restrict them.Note that the power to manage the business of the company isgiven to theboard as a whole, not to the individual directors. Where acompanys articles delegate the management of the companysbusiness to the board, the members have no right to interferein decisions made by the board. Directors are not agents of themembers and are not subject to their instruction as to how to

act. In Shaw v John Shaw (1935) it was held that it was for theboard to decide whether or not the company should commencelitigation and therefore an ordinary resolution instructing theboard to discontinue litigation had no legal effect. There aresome restrictions which mean that power is placed in the handsof the members rather than the directors:

some actions require a special resolution a director can be removed at any time by an ordinary

resolution of the members and they may see fit to exercise

this right should their views be ignored the members can alter the articles by passing a special

resolution. This power could therefore be used to restrictthe directors powers.

Authority of directorsIndividual directors cannot bind the company without beinggiven authority to do so. There are three ways in which thisauthority may be given:

Express Where authority is expresslygiven, all decisions taken arebinding.

Implied Authority flows from apersons position. The person appointed as themanaging director has theimplied authority to bind thecompany in the same way asthe board. The managing director is

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call a GM. 15% voting rights of classrights.

Can apply to the court tocancel a variation

25% voting rights Can defeat a special resolution

to alter name, alter articles,reduce share capital or windup company.

Certain matters require the approval of the members in ageneral meeting in order to be valid. For example, substantialproperty transactions: s190 CA06.A substantial property transaction occurs where a directoracquires from the company (or vice versa) a substantialnoncash asset. An asset is substantial if its value eitherexceeds 100,000 or exceeds 10% of the companys assetvalue and is more than 5,000. Failure to obtain the membersapproval results in the following consequences:

the transaction is voidable by the company, unless themembers give approval within a reasonable period

the director is liable to account to the company for anygain or indemnify it against any loss.

Corporate administrationChapter learning objectivesUpon completion of this chapter you will be able to: discuss the procedure relating to, and the duties and

powers of, a company secretary discuss the procedure relating to, and the duties and

powers of, the company auditors distinguish between types of meetings: ordinary general

meetings and annual general meetings explain the procedure for calling such meetings

detail the procedure for conducting company meetings distinguish between types of resolutions: ordinary, special,

and written.

Company secretaryIntroduction

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Every public company must have a qualified companysecretary. Private companies may choose to appoint asecretary, but are not obliged to do so.

The secretary is usually appointed and removed by the

directors.Qualifications

The secretary of a public company must be qualified under oneof the following conditions:

They must have held the office of company secretary in apublic limited company (plc) for at least three out of thepreceding five years.

They must be a solicitor, barrister or member of ICAEW,ACCA, CIMA, ICSA, CIPFA.

They must appear to be capable of discharging thefunctions by virtue of another position or qualification.

DutiesThere are no statutory duties, therefore the duties will bewhatever the board decides. The company secretary willtypically undertake the following:

check that documentation is in order

make returns to the Registrar

keep registers

give notice and keep minutes of meetings

countersign documents to which the company seal isaffixed.

PowersThe company secretary has the authority to bind the companyin contract. There are two types of authority:

actual authority this is the authority delegated by theboard

apparent authority regarding contracts of an administrative

nature.

Panorama Developments (Guildford) v Fidelis FurnishingFabrics (1971)

The company secretary ordered services for his own, not thecompanys, use. It was held that the contract was binding on

the company as the contract was of the sort that a companysecretary should be able to carry out.

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He is no longer a mere clerkHe is entitled to sign contractsconnected with the administrative side of a companys affairs,such as employing staff, and ordering cars, and so forth.However, two other cases indicate that there is a limit to the

companysecretarys authority:

actual authority this is the authority delegated by theboard

apparent authority regarding contracts of an administrativenature.

It does not extend to making commercial as opposed toadministrative contracts: Re Maidstone Building Provisions(1971).

It does not usually carry the authority to borrow money: ReCleadon Trust Ltd (1938).

The auditorQualifications

The auditor must be either:

a member of recognised supervisory body (ICAEW, ICAS orACCA) and eligible under their rules, or

qualified by a similar overseas body and authorised by theDepartment for Business, Enterprise and RegulatoryReform.

The auditor must not be:

an officer or employee of the company

the partner of an officer or employee of the company.

AppointmentPrivate companies

The auditors should generally be appointed by the shareholdersby ordinary resolution. However, the directors can appoint thecompanys first auditorand fill casual vacancies. An auditors term of office will usuallyrun from the end of the 28day period following circulation ofthe accounts until the end of the corresponding period thefollowing year. An auditor will automatically be deemed to be

reappointed at the end of his term unless: he was appointed by the directors

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the companys articles require actual reappointment members with at least 5% of the voting rights have given

notice to the company by the end of the companysfinancial year

there has been a resolution that the auditor should not bereappointed or

the directors decide that they do not need auditors for thefollowing year.

A company must inform the Secretary of State if it has failed toappoint an auditor within 28 days of circulating its accounts.

The Secretary of State has power to appoint an auditor in thosecircumstances.

Appointment public companiesAuditors are generally appointed by the shareholders byordinary resolution in the general meeting at which thecompanys accounts are laid. However, the directors canappoint the companys first auditor and fill casual vacancies. Anauditor of a public company holds office until the end of themeeting at which the accounts are laid, unless reappointed.Where there is a change of auditor, the term of office of theincoming auditor does not begin before the end of the previous

auditors term. This means that a new auditors term willusually begin immediately after the end of the meeting atwhich the accounts are laid. A company must inform theSecretary of State if it fails to appoint an auditor at the generalmeeting considering the accounts. The Secretary of State haspower to appoint an auditor in those circumstances.

ResignationAn auditor can resign at any time by giving written notice to

the company:s516 CA06.The resignation is effective from the date it is delivered to thecompanys registered office, or from a specified later date. Tobe effective it must be accompanied by the statement requiredby s519 CA06 (see section 2.6 below). A company whoseauditor resigns is required to inform the Registrar: s517 CA06.Failure to do so is an offence. Under s518 CA06, an auditor whoresigns can require the directors to convene a general meetingto consider his explanation of the circumstances that led to hisresignation. The directors have 21 days to send out a notice

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convening a meeting and it must be held within 28 days of thenotice.

RemovalAn auditor can be removed by ordinary resolution: s510 CA06.The resolution must be passed at a general meeting a written resolution cannot be used to remove an auditor. Special noticeof the resolution is needed (i.e. 28 days). The company mustsend a copy of the resolution to the auditor and he has theright to make a statement of his case. The company then hasto circulate his statement to the shareholders. However, if timedoes not allow for circulation, the statement can be read out atthe meeting. Notice of the resolution removing the auditormust be sent to the Registrar within 14 days.

Statement by departing auditorUnder s519 CA06, a departing auditor is required to make astatement and to deposit it with the company:

For quoted companies, this statement must explain thecircumstances surrounding his departure.

For other public companies and all private companies, itshould explain the circumstances surrounding hisdeparture, unless the auditor thinks that there is no needfor them to be brought to the attention of the shareholdersor creditors. In that case, the statement should state thatthere are no such circumstances. The deadline fordepositing the statement with the company depends on thecircumstances surrounding the auditors departure:

If the auditor is resigning, the statement should accompanythe resignation letter.

If the auditor is deciding not to seek reappointment, thestatement should be deposited at least 14 days before theend of the time allowed for appointing the next auditor.

In any other case, the statement should be deposited nomore than 14 days after the date on which he stops being

the auditor. Unless there are no circumstances to bebrought to the attention of shareholders and creditors, the

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company is obliged to circulate the statement to everyoneto whom it needs to send the annual accounts. It must dothis within 14 days of receiving it. If the company does notwant to circulate the statement, it can apply to the court for

an order that it need not circulate the statement.

DutiesThe auditor has a statutory duty to report to the members onwhether theaccounts:

give a true and fair view, and

have been properly prepared in accordance with theCompanies Act and the relevant financial reportingframework. The auditor must investigate and form anopinion as to whether:

proper books of accounting records have been kept proper returns adequate for their audit have been

received from branches not visited by them

the accounts are in agreement with the books of account

and returns the information given in the directors report is consistentwith the accounts.

If the auditor is dissatisfied with the findings of his investigationhe must qualify the audit report.

The report (whether qualified or unqualified) must state thename of the audit firm, or if an individual has been appointedas auditor, his name. Where the auditor is a firm, the seniorstatutory auditor must sign the report in his own name onbehalf of the firm. Under s507 CA06 it is a criminal offence toknowingly or recklessly cause an audit report to includeanything that is misleading, false or deceptive, or to omit arequired statement of a problem with the accounts or audit.

The offence carries an unlimited fine.

PowersThe auditor has the right to:

receive notice of, attend and speak at general meetings

access the books at all times

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require such information and explanations from thecompanys officers and employees as the auditor thinks fitfor the performance of his duties (it is a criminal offence tofail to provide the information requested, unless it was not

reasonably practicable to do so).

MEETINGSAnnual general meeting (AGM)

Timing Public companies must hold anAGM within the six monthsfollowing their financial yearend: s336.

Failure tohold

The company and every officerin default can be fined if anAGM is not held.Any member can apply to theDepartment for Business,Enterprise and RegulatoryReform to convene themeeting.

Privatecompanies

Private companies are notrequired to hold an AGM.

Notice 21 days notice is requiredunless every member entitledto attend and vote agrees to ashorter period.

The notice must state that themeeting is an AGM.

Business Usual business includes: consider accounts appoint auditors elect directors declare dividends.

Resolutions Members holding at least 5%of the voting rights (or at least100 members holding onaverage 100 paidup capital)have the right to propose aresolution for the

AGM agenda and to require

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the company to circulatedetails of the resolution to allmembers. If the members request is

received before the financialyear end, the members are notrequired to cover the costs ofcirculation. Otherwise, themembers requesting theresolution must deposit a sumto cover the companys costs.

General meetings (GM)

Timing Held whenever required.Must be held by a plc if aserious loss of capital hasoccurred, i.e. net assets havefallen to less than half of thecalled up share capital.

Notice At least 14 days.Business The person who requisitions

the meeting sets the agenda.

Class meetings

Purpose Meeting of a class ofshareholders, usually toconsider a variation of theirclass rights.

Procedure Notice, etc. as for general

meetings.Quorum Two persons holding or

representing by proxy at leastone third in nominal value ofthe issued shares of the classin question.

Calling a meeting

Who can call a meeting?

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Directors The articles usually delegatethe power to the directors.

Members Members may require thedirectors to call a GM if they

hold: at least 10% of the paid upvoting capital, or in the case of a privatecompany, 5% of the paid upvoting capital if more than 12months has elapsed since thelast GM: s303.

The directors must call a

meeting within 21 days ofreceiving a requisition.The meeting must take placewithin 28 days of the noticeconvening the meeting.If the directors do not call ameeting, the members whorequested the meeting (or anymembers holding over 50% of

the total voting rights) maythemselves call a meeting totake place within three monthsof the initial request andrecover their expenses fromthe company.

Resigningauditor

A resigning auditor mayrequire the directors toconvene a meeting so he can

explain the reasons for hisresignation.Court A court can call a meeting on

the application of a director ormember where it wouldotherwise be impracticable,e.g. to break a deadlock.

Notice

Who must receive notice? Every member and every director:

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s310.Failure to give notice Accidental failure to give notice to

one or more persons does notinvalidate the meeting: s313.

Contents ofnotice

Date, time and place of themeeting.

The general nature of the businessto be transacted.

The text of any special resolutions.Length of noticeperiod

AGM 21 daysLess if every member entitled toattend and vote agrees.GM 14 days

Less if members holding at least95% of shares agree.(Where company is private, can bereduced to 90%.)

Special notice Requires 28 days notice.Required for the removal of adirector or auditor.

ResolutionsResolutions are the way in which companies take decisions.

They are votedon by the members in person or by proxy. There are threetypes of resolution:

Type % requiredto pass

To Registrar? Purpose ofresolution

Special 75% Yes within15days

Alter name. Wind upcompany. Alterarticles. Reduceshare capital.

Ordinary >50% Only ifrequiredby statute

Usedwhenever thelaw or thearticles do notrequire a

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specialresolution.

Written(private

companiesonly)

Samemajority as

required inGM

Yes if a 75%majority is

required

The purposecan be

anythingapart fromresolutionsrequiringspecial notice.Memberscannot revoketheiragreement.

The date ofthe resolutionisthe date whenthe necessarymajority hasbeen reached.

The resolutionmust be

passed within28 days fromits circulation.

Procedure at meetingsA quorum is the minimum number of members that needs to bepresent ata meeting in order to validate business. It is generally twopersons: members or proxies: s318 CA06.

Voting is by a show of hands initially, unless a poll isdemanded. A show of hands means one member one vote,irrespective of the number of shares held.A poll may be demanded by members holding at least 10% ofthe totalvoting rights (or by not fewer than 5 members having the rightto vote on the resolution). A poll means one vote per share. Theresult of a poll replaces the result of the previous show ofhands. Quoted companies must publish the results of polls on

their website: s341 CA06. Members have a statutory rightunder s324 CA06 to appoint one or more persons as their

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proxy . A proxy can attend meetings, vote and speak on behalfof the member for whom he is acting.

InsolvencyChapter learning objectivesUpon completion of this chapter you will be able to:

explain the meaning of and the procedure involved involuntary liquidation

explain the meaning of and the procedure involved incompulsory liquidation

explain administration as an alternative to winding up.

Voluntary liquidation: s84 Insolvency Act (IA 1986)IntroductionIf a company finds itself in financial difficulty, the two mainoptions availableto it are:

Administration. This aims to rescue the company so that itmay continue trading as a going concern.

Liquidation. This winds up the company, thus bringing its

life to an end.

A voluntary liquidation occurs where the members pass aresolution to gointo liquidation. The type of resolution needed depends on thecircumstances: Where the period fixed for the duration of the company

expires or an event occurs upon which the articles providethat a company should be wound up, an ordinary resolutionmust be passed.

A special resolution must be passed if the company is beingwound up for any other reason.

There are two types of voluntary liquidation:

A members' voluntary liquidation is used where thecompany is solvent.

A creditors' voluntary liquidation is used where thecompany is insolvent.

Members' voluntary winding up. The steps involved in amembers voluntary winding up are as follows:

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Winding up commences from the passing of theappropriate resolution.

The directors make a declaration of solvency stating thatthey are of the opinion that the company will be able to

pay its debts within 12 months. It is a criminal offence tomake a false declaration.

The members appoint a named insolvency practitioner asliquidator.

The liquidator is responsible for realising the assets anddistributing the proceeds.

The liquidator presents his report to a final meeting of themembers.

The liquidator informs the registrar of the final meeting

and submits a copy of his report. The registrar registers the report and the company is

dissolved three months later.

Creditors' voluntary winding upThe steps involved in a creditors voluntary winding up are asfollows:

Winding up commences on the passing of the appropriateresolution.

There is no declaration of solvency as the company isinsolvent. A meeting of creditors must be held within 14days of the resolution to liquidate. The directors mustsubmit a statement of the companys affairs.

Both the members and the creditors have the right toappoint a namedinsolvency practitioner as liquidator. Inthe event of a dispute, the creditors nominee prevails.

The members and creditors may appoint up to fivepersons to serve on a liquidation committee.

The liquidator is responsible for realising the assets anddistributing the proceeds. The liquidator presents his report to the final meetings of

members and reditors. The liquidator informs the Registrar of the final meeting(s)

and submits a copy of his report. The Registrar registers the report and the company is

dissolved three months later.

Converting a members' voluntary liquidation into acreditors' voluntary liquidation

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If the liquidator discovers that the companys debts will not bepaid in full within the time specified in the declaration ofsolvency, he must convert the members voluntary liquidationinto a creditors voluntary liquidation. This is

done by convening a meeting of the companys creditors. Atthe meeting the liquidator must:

lay before the creditors a statement of affairs invite the creditors to appoint a different insolvency

practitioner as liquidator

invite the creditors to appoint a liquidation committee.

Compulsory liquidationGrounds for winding up: s122 IA 1986

A compulsory winding up commences when a petition for awinding up order is presented to the court. The possiblegrounds for the petition are set out in s122 IA 1986:

The company has passed a special resolution to be woundup by the court.

A public company has not been issued with a tradingcertificate within a year of incorporation.

The company has not commenced business within a yearof being incorporated or has suspended its business forover a year.

The company is unable to pay its debts. A company isdeemed to be unable to pay its debts where a creditorwho is owed at least 750 has served a written demandfor payment and the company has failed topay the sumdue within three weeks.

It is just and equitable to wind up the company. However,the court will not make an order under this ground if someother more reasonable remedy is available.

PetitionersThe following persons may petition the court for a compulsoryliquidation:

the company itself

the Official Receiver

the Department for Business, Enterprise and RegulatoryReform

a contributory. This is any person who is liable to contribute

to the assets of the company when it is being wound up.(The contributory must prove hat the company is solvent)

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a creditor who is owed at least 750.

Effect of winding upThe winding up petition has the following effects:

All actions for the recovery of debt against the companyare stopped.

Any floating charges crystallise. Any legal proceedings against the company are halted,

and none may start unless leave is granted from the court. The company ceases to carry on business except where it

is necessary to complete the winding up, e.g. to completeworking progress.

The powers of the directors cease, although the directors

remain in office. The employees are automatically made redundant, but the

liquidator can reemploy them to help him complete thewinding up.

Subsequent proceduresOn the making of the windingup order, the Official Receiverbecomes liquidator. Within three months, the Official Receiverwill summon meetings of the creditors and contributories in

order to appoint a licensed insolvencypractitioner to take over the job of liquidator and to appoint aliquidation committee.

The liquidator is responsible for realising the assets anddistributing the proceeds.

The liquidator presents his report to final meetings of themembers and creditors.

The liquidator informs the Registrar of the final meeting(s) andsubmits a copy of his report.

The Registrar registers the report and the company is dissolvedthree months later.

Application of assetsThe liquidator must repay debts in the following order:

fixed chargeholders

preferential creditors

wages or salaries due in the four months preceding thecommencement of winding up (maximum 800 per employee)

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all accrued holiday pay.

All preferential creditors rank equally amongst themselves. floating charge holders

unsecured creditors rank equally amongst themselves post liquidation interest

members declared but unpaid dividends

members return of capital (in accordance with classrights)

any surplus to be distributed to members.Note that expenses are to be paid out of the fund to which theyrelate Buchler v Talbot (2004).

AdministrationPurposeAdministration involves the appointment of an insolvencypractitioner, known as an administrator, to manage the affairs,business and property of a company. It was first introduced bySchedule 16 IA 1986, but has subsequently been amended bythe Enterprise Act 2002. Administration is often used as analternative to putting a company into liquidation, e.g. to:

rescue a company in financial difficulty with the aim of

allowing it to continue as a going concern achieve a better result for the creditors than would be

likely if the company were to be wound up realise property to pay one or more secured or

preferential creditors.

Who can appoint an administrator?An administrator can be appointed by any of the followingpersons:

the court in response to a petition by, e.g. a creditor, thedirectors or the company itself

the holder of a qualifying floating charge over thecompany's assets

the company or its directors provided that winding up hasnot already begun.

The court will only agree to appoint an administrator if it issatisfied that:

the company is or is likely to become unable to pay itsdebts, and

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the administration order is likely to achieve its objectives.

Consequences of administrationThe appointment of an administrator has the following effects:

the rights of creditors to enforce any security over thecompanys assets are suspended

any petition for winding up is dismissed

no resolution may be passed to wind up the company the directors still continue in office, but their powers are

suspended.

Carrying out the administrationThe administrator has a number of tasks:

He is the companys agent, but must act in the bestinterests of all the companys creditors.

He has wide powers to manage the business and propertyof the company, including the power to bring and defendlegal proceedings, sell assets and borrow money.

He has the power to remove and replace directors andemployees. If an employees contract is not adopted by theadministrator within 14 days, that employee is maderedundant.

He must draw up a statement of his proposals, which mustbe approved at a meeting of creditors within eight weeks ofthe commencement of administration.

If the meeting does not approve the proposals, the courtmay dismiss the administrator or make such provisions as itsees fit.

If the meeting approves the proposals, the administratorcan carry them out.

Ending the administrationThe administration will end when it is completed or when theadministrator is discharged by the court:

The administration must normally be completed within 12months of the ate on which it commenced. However, thisterm can be extended with the consent of the court or thesecured creditors.

The administrator may apply to the court for discharge at

any time. He must make an application when the purpose

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of the order has been achieved. He must also notify theregistrar and all of the creditors.

Corporate governance

Chapter learning objectivesUpon completion of this chapter you will be able to:

explain the idea of corporate governance recognise the extralegal codes of corporate governance

identify and explain the legal regulation of corporategovernance.

IntroductionDefinition

Corporate governance is the system by which companies aredirected andcontrolled. It covers topics such as:

how power is divided between the board and theshareholders

the accountability of the board to the members

the rules and procedures for making decisions.

Corporate governance provides the structure through which

the companys objectives are met, the means of attaining thoseobjectives and monitoring performance.

Interaction of ethics, governance and company lawCompliancerequirements

Penalties

Law The law mustalways beobeyed.

Penalties forinfringementof the law may be

civil orcriminal.Civil remedies mayallowthe company torecoverfunds from directorswhobreach their legal

obligations.A fine and/or

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imprisonmentmight result fromcertaincriminal

infringements.Corporategovernance

The stock exchangerulesrequire listedcompanies tocomply with theCombinedCode (see below).If a listed company

does not comply, itmust specify theprovisions withwhich it has notcomplied, and givereasons for itsnoncompliance.Unlisted companiesare under no

obligation tocomply, although itis considered bestpractice to do so.

There are no formalpenalties fornoncompliance.However, thecompany maysuffer loss ofreputation andreceive bad

publicity.

Ethics It is said that ethicsbegin

Acca -Corporate and Legal Personality (1)

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