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CONTENTS

Section Page no.

Module Calendar (lecture & seminar plan) 3

Module Descriptor 4

Teaching Staff and Contact Details 7

Student Responsibility 8

Assessment and Feedback 9

Textbooks and Materials 15

Guidance to Referencing and Citations 16

Lecture Programme: LECTURE 1 – Methods of Trading; Formation; incorporation 25

LECTURES 2 & 3 – Separate legal personality & ‘lifting the veil’ of incorporation 28

LECTURE 4 – Promoters and Pre-Incorporation Contracts 31

LECTURE 5 and 6 – The Constitution of a Company 34

LECTURE 7 – Directors 40

LECTURES 8 & 9– Directors’ Duties 42

LECTURE 10 - Disqualification of Directors 45

LECTURE 11 – Final Coursework briefing, Revision & Coursework Technique 49

LECTURE 12 – Shares and Shareholders (an overview) 50

LECTURE 13 – Shareholders’ Meetings and Voting 54

LECTURE 14 – Feedback from the Coursework 57

LECTURE 15 –Shareholders’ Rights and Remedies 58

LECTURES 16 & 17 – Maintaining and Raising Capital & Charges 62

LECTURES 18 & 19– Insolvency and Liquidation 66

LECTURES 20 & 21 –Vulnerable Transactions in Insolvency &Directors’ Liabilities 70

LECTURE 22 – Revision, Exam Preparation and Technique 73

Seminar Programme: Seminar 1 - Introduction and Forming a Company 75

Seminar 2 - Companies and Separate Legal Personality 76

Seminar 3 - Separate Legal Personality and Lifting the Veil of Incorporation 77

Seminar 4 - Promoters and Pre-Incorporation Contracts 79

Seminar 5 - Company's Constitution, Article clauses & Shareholder Agreements 81

Seminar 6 - Directors' Duties 83

Seminar 7 - A Shareholders’ Meeting and Voting 85

Seminar 8 - Minority Shareholder Protection 87

Seminar 9 - Charges: Fixed and Floating 89

Seminar 10 - Liquidation and vulnerable transactions 91

Appendix 1: Sample previous Examination Paper (May 2012) 93

3

Wk No W/C Date Lecture Lecture Subject Area Seminar Seminar Subject Area

10 1st Oct 1Methods of trading; Company Formation;

Consequences of Incorporation

2 Separate Legal Personality & "Lifting the Veil"

3 Separate Legal Personality & "Lifting the Veil"

12 15th Oct 4 Promoters & Pre-Incorporation Contracts

13 22nd Oct 5 Constitution of a Company

14 29th Oct 6 Constitution of a Company

15 5th Nov 7 Directors Generally

16 12th Nov

17 19th Nov 8 Directors' Duties

18 26th Nov 9 Directors' Duties

19 3rd Dec 10 Disqualification of Directors

20 10th Dec 11 Final Coursework briefing and technique

21 17th Dec No lecture - assessment preparatonNo seminars - Blackboard MCQ exercises as

revision

22 24th Dec Student Vacation

23 31st Dec Student Vacation

24 7th Jan STUDY WEEK

25 14th Jan SHU Exam Period - 14th to 18th

26 21st Jan SHU Exam Period - 21st to 25th

27 28th Jan 12 Shares and Shareholders - an overview

13 Shareholders' Meetings and Voting

14 Coursework Feedback

29 11th Feb 15 Shareholder Rights and Remedies

30 18th Feb 16 Maintaining and Raising Capital - Inc Charges

31 25th Feb 17 Maintaining and Raising Capital - Inc Charges

32 4th Mar 18 Insolvency and Liquidation

33 11th Mar 19 Insolvency and Liquidation

34 18th Mar 20 Vulnerable Transactions in Insolvency

35 25th Mar Student Vacation

36 1st Apr Student Vacation

37 8th Apr 21 Vulnerable Transactions in Insolvency

38 15th Apr 22 Revision Overview and Exam Technique

39 22nd Apr No lecture - assessment preparatonNo seminars - Blackboard MCQ exercises as

revision

40 29th Apr

41-44 6th May to 31st May

2-3 5th Aug to 16th Aug 2013

11 8th Oct

1Introduction to Company Law and

Forming a Company

Reading week

2 Companies and Separate Legal Personality

3Separate Legal Personality

& "Lifting the Veil"

4 Promoters and Pre-incorporation contracts

5 The Constitution of a Company

28 4th Feb

COMPANY LAW - LECTURE & SEMINAR PLAN - 2012/13

SHU Exam Period

Referred/Deferred Assesment Period

STUDY WEEK

6 Directors' Duties

7 Shareholders' Meeting and Voting

8 Minority Shareholder Protection

9 Charges: Fixed/Floating

10 Liquidation

4

MODULE DESCRIPTOR

MODULE TITLE Company Law

SI MODULE CODE 24-5005-00L & 24-6015-00L

CREDITS 20

LEVEL 5 & 6

JACS CODE M221

SUBJECT GROUP LAW

DEPARTMENT Law, Criminology and Community Justice

MODULE LEADER Mark Edwards

NOTIONAL STUDY

HOURS BY TYPE

Tutor-led Tutor-directed Self-directed Total Hours

30 100 70 200 MODULE AIM(S)

The module is designed to introduce you to the legal structure of a company as an economic

mechanism of conducting business and to develop your knowledge, understanding and

appreciation of topics central to company law. The aim is to enable you to identify key legal issues

in relation to company law and propose coherent solutions to practical, hypothetical situations,

through the use of case law, statute and regulatory practice.

MODULE LEARNING OUTCOMES

By engaging successfully with this module you will be able to – Level 5

Identify, explain and apply legal principles and concepts in relation to company law.

Evaluate and critically analyse the relevance and significance of facts presented, by coherently

synthesising a line of legal argument, justified by relevant legal authority.

Demonstrate research skills by distinguishing between the range of legal and academic sources

that are relevant.

Use and explain specific terminology in relation to company law.

Solve legal problems by identifying solutions and critically evaluate aspects of law, in a written

form, to accepted academic and legal conventions.

Level 6

Identify, explain and apply legal principles and concepts in relation to company law in

sufficient detail for the purpose and identify uncertain, ambiguous, contradictory or limited

legal aspects.

Evaluate and critically analyse the relevance and significance of facts presented, by coherently

synthesising a line of legal argument, justified by relevant legal authority and make defensible

judgements and arguments.

Demonstrate research skills by identifying a broad range of sources and distinguishing

between the range of legal and academic sources that are relevant.

Use and explain specific terminology in relation to company law.

Solve legal problems by identifying focussed contemporary solutions and critically evaluate

and comment on aspects of law, in a written form, to accepted academic and legal conventions.

5

INDICATIVE CONTENT The learning outcomes will be met by covering the following general topics in the module: Company formation

Separate Legal Personality and lifting the veil

Promoters and Pre-incorporation contracts

Company Constitution

Management of a Company – in particular roles and responsibilities of directors

Company Ownership – in particular shares and shareholders

Raising of Capital

Insolvency and liquidation

Vulnerable transactions in insolvency and directors’ liabilities

LEARNING AND TEACHING METHODS You will be supported in your learning, to achieve the learning outcomes, in the following ways:

Contact sessions Lectures:

The module is delivered via a weekly one-hour lecture designed to introduce a particular topic

area and to concentrate on the key aspects of that part of the law. The lecture is delivered via a

PowerPoint presentation, slides for which are provided via Blackboard (see VLE below).

Seminars:

Seminars are delivered fortnightly to timetabled classes of a maximum of 20 students. Typically

seminars are based on hypothetical company law problem scenarios that require adoption of an

‘enquiry-based’ learning approach to study. You are required to come prepared to discuss pre-

prepared solutions to the problem. Learning occurs through the collective contributions of

students and is guided and corrected by the seminar tutor. The learning in the seminars feeds-

forward to subsequent seminars and learning is directly aligned to the assessment tasks in the

module.

The approach to the subject matter is broadly incremental, each lecture building on the knowledge

gained in the earlier lectures. The role of the seminars is to reinforce legal and academic content

and to provide opportunities for you to apply, discuss and reflect on your learning.

Module Manual

Learning is supported by a Module Manual (this document) that contains a full lecture and

seminar schedule, details on the aims and objectives, the learning, teaching and implementation

strategy, an overview of assessment and feedback on the module, student resources required,

details of the module delivery team, the role of the student within the module, summative

assessment feedback criteria, lecture outlines, seminar questions with preparation tips and a

sample prior year assessment paper.

6

Virtual Learning Environment (VLE) Blackboard

The delivery of the module is aided by a bespoke “Blackboard” site to which all students are

enrolled. Blackboard is the main communication device with students outside contact sessions. The

Blackboard site includes an electronic version of the Module Manual and all the material within

that Manual (detailed above) can be accessed electronically.

In addition, the Blackboard site includes:

links to PowerPoint slides for all lectures

access to formative assessment in the form of multiple choice questions that support and

supplement each seminar

links to some key cases and statutes

assessment guidance

guides to using legal databases (e.g. Westlaw and LexisLibrary)

guides on how to reference for the assessment task using the Oxford Standard for Citation

of Legal Authorities

external links to key Government and legal profession web sites

assessment details, criteria and guidelines

on-line submission of coursework

feedback on grades attained in formative and summative assessment

a Blackboard ‘help’ content area

rules and regulations in relation to the University’s cheating procedure

On-line Multiple Choice Questions and Feedback

Learning is supported outside contact sessions with a set of formative assessment questions

through a series of on-line “Multiple Choice Questions” (MCQ’s) that support and supplement

each seminar. Each question provides the opportunity for additional information to supplement

knowledge, whether the question is answered correctly or not. This will give you immediate

feedback on how you are progressing on the module. The use of this Computer Assisted Leaning

(CAL) will help you develop and broaden research skills as well as “forcing” the use of IT in

learning. As these questions support the seminar preparation, it also aids time management skills.

Weekly surgery/Meetings/Drop-in sessions

Each tutor has a formal weekly ‘surgery’ time that students can arrange to meet their seminar tutor

in order to support their learning. You can also contact tutors via-e-mail and arrange mutually

convenient times for meetings. At specific times throughout the module, drop-in sessions may be

timetabled to offer feedback or guidance. Students can e-mail or call tutors for advice or guidance.

Peer Support Groups

e-learning is further built into the module, with the ability of students to use a discussion board to

act as a method of peer support. Additionally you can optionally work in peer groups to

collaborate on seminar preparation work via a WIKI. Please contact the Module Leader, Mark

Edwards, if you would like this to be set up for you and your peers.

7

Teaching Staff and Contact Details

Teaching Staff The members of staff teaching on this course are: Mark Edwards (Module Leader) Jeremé Snook

Mark Edwards has overall administrative responsibility for the course.

Students will be allocated to seminar groups. It is essential that you keep to these groups and

changes will be agreed only in exceptional circumstances.

Please note that attendance at seminars is compulsory and registers will be kept.

Staff Contact Details

Mark Edwards Office: Southbourne, Room 243

(Module Leader) Tel: 0114 225 5454

e-mail: mark.edwards@shu.ac.uk

Jeremé Snook Office: Southbourne, Room 240

Tel: 0114 225 2285

e-mail: j.snook@shu.ac.uk

8

Students' Role within the Module We assume that you will take responsibility for your own learning and we expect you to attend

ALL lectures and seminars, as learning is a shared experience and you have a part to play in

promoting both individual and collective understanding. Many of the legal concepts and

terminology will be new to students (it has its own unique language in parts) so attendance in

lectures and seminars is mandatory. Attendance is essential to:

gain understanding of the relevant legal principles and their application

help you test your understanding of the material with your module tutor

help you develop your knowledge and skills

help you prepare for all your assessments

receive information about the module

receive feedback on your understanding and progress Preparation for seminars

We want you to feel comfortable attending seminars as these are vital to your development and

overall results. Therefore, it is essential that you prepare the seminar material as indicated in the

module handbook. However, this does not mean we expect students to know all of the answers all of the time - far

from it. Students learn by getting things wrong, as well as right, and our seminars are such that we

encourage students to have a go! That said, we know students do benefit by doing sufficient work in advance of the seminar as then

they really do gain the maximum benefit from it. This approach works as it prevents students

'sponging' off the work of others. It also prevents the seminar becoming a second lecture, which is

fruitless for everyone. Absence

If you are absent, which should be because of an emergency or serious illness only, then please be

courteous and let your tutor know as soon as you can, preferably in advance. If you are absent for

a significant period of time you must also let the law administration staff in Southbourne know. If the absence is due to illness or other personal problems, which may affect your assessments(s),

you may need to submit an Exceptional Extension Request Form or an Extenuating Circumstance

Form. These are available on shuspace or from Southbourne Helpdesk. Please see the submission

of exceptional extension requests and the submission of extenuating circumstances for more

information. Plagiarism

We actively have systems that detect plagiarism, so please familiarise yourself with the SHU

assessment and plagiarism regulations. These can be found on both ‘shuspace’ and the Company

Law Blackboard site.

Important points

there is a direct correlation between attendance, seminar preparation and good results in this

module.

students who always attend do very well in the module - Company law historically boasts a

high level of 2:1 and 1st class student marks!

students who don't attend regularly do very badly - poor attendees struggle with the legal

concepts in company law and invariably fail.

9

ASSESSMENT

Task

No.

TASK DESCRIPTION SI Code Task

Weighting %

Word Count /

Duration

1 Essay – Problem question CW 50% 2,000

2 Examination – (Pre-Seen) EX 50% 2 hours

ASSESSMENT CRITERIA

The learning in the module is measured by two separate summative assessment tasks: coursework

and an exam, marks from which count towards the overall module mark. It is also formatively

assessed by a series of separate on-line ‘tests’ in the form of multiple choice questions.

Formative The series of multiple choice questions, comprising between 10 and 20 questions each, are set to

supplement most seminar topic areas. These are completed after the lecture on the topic area, but

before the seminar, however, are not linked to the overall module marks.

Summative Task 1 – Coursework.

This task is a 2,000 word answer to a company law based problem question on semester one

delivered materials. It is due in after the end of semester one (see Assessment Manager for exact

date) and is weighted at 50% of the module marks. The coursework will be available to view on

Blackboard from 9th November. Please note that staff are not allowed to comment on draft

assignments in advance of submission. Please refer to further key information on this task on page

12 onwards below.

Task 2 - Examination

This task is a pre-seen exam where you are required to answer the questions set, within a two hour

period. The assessment comes at the end of the academic teaching year in May. This task is also

weighted at 50% of the module marks.

The Criteria for Assessment

You are assessed based on the following criteria, in both summative assessment tasks, in order to

calculate whether the learning outcomes (above) have been met based on the question(s) set:

Identification of the legal issues raised

Application of the law to the facts

Understanding of the topic

Use of legal authority

Use of other materials

Effective conclusion drawing together evidence and stating advice clearly

Presentation of references

Spelling, grammar and syntax

Overall presentation

10

Pass Descriptor To pass the module a student will meet the following criteria:

Sufficient key aspects of the main legal issues, raised by the question, are identified.

Credible grasp of some relevant legal principles applied to the facts.

Use of plausible legal and academic authority to back up arguments made.

Some credible solutions incorporated in the work.

The use of a recognised method of referencing (OSCOLA only for coursework).

The work written is understandable and commensurate with a minimum standard acceptable

for an English law degree.

The work has some logical or credible structure and is presented in line with academic

conventions and guidance supplied in an assessment rubric.

Retrieval of failure The module is governed by university regulations on assessment and adopts the “Model A”

assessment method, which provides that a mark of 40% must be achieved in the module overall to

pass.

Re-assessment for students, who have not achieved the 40% module minimum mark, is done on a

task for task basis. A new coursework question and new exam is set for the August re-assessment

period on the same basis as the original tasks above. Under university regulations, following

referral, the overall mark for the module will be capped at 40%.

Students will be able to benefit from general and specific feedback (see feedback section below) on

the original task to help improve in the specific re-assessed task.

FEEDBACK

You will receive feedback on your performance in the following ways

Feedback through seminars

You will receive informal feedback from the tutor, and from peers, in relation to how you are

progressing on the module in seminars. You can self-assess your own performance and

understanding in these seminars, and reflect on how you might further enhance your own

learning. Seminars are fortnightly so this method of feedback is immediate and built into the

module from start to finish.

Feedback through e-learning/formative assessment

On-line Multiple Choice Questions (MCQ) – Most seminar topics are supported by an on-line

multiple choice test which acts primarily as formative assessment. The MCQ’s are set up to give

specific feedback on both correct and incorrect answers. This supplements understanding and

knowledge and feeds back, on completion, on a question by question basis. Overall you gain a

mark (e.g. a score out of 20) that immediately feeds-back to give an overall indicator of how

successful your learning on that topic has been so far. As any learning gaps are filled by feedback

on incorrect answers, and even correct answers are supplemented by feedback and additional

information. This extra learning feeds-forward into the seminar on that topic.

11

Discussion boards & WIKI’s – These mechanisms allow for peer feedback in an environment where

learning is not reliant on tutor input. It allows for the learning gained from these mechanisms to

feed-forward into seminars, in addition to formative and summative assessment.

My Grades – Formative and summative feedback on marks can be accessed through the VLE

Blackboard site. Formative results on the MCQ's are available immediately on completion of the

test. Marks for summative assessment will be made in line with the timescales detailed below.

Summative assessment

Task 1 (problem question coursework). A tutor will complete a formal ‘feedback sheet’ that is

designed to give feedback on the key assessment criteria. This feedback allows you to see which

areas of your learning on that assessment task have been good, and which areas need to be

improved. The form allows you to reflect on the positives and negatives in your work and

implement strategies to improve future work. It feeds-forward into the next assessment task as the

key areas being assessed are automatically broken down into their component parts, so a student

can focus future learning as appropriate. There is also an additional comments section that allows

for specific comments on the work by the tutor and, by corollary, this gives you an indication how

future work could be improved. Feedback would normally be made in line with timescales defined

on Assessment Manager.

Task 2 – pre-seen exam. Feedback can be sought by students directly to tutors immediately

following the release of marks.

One-to-one feedback

You can arrange to see a tutor individually during timetabled surgery time, or at a mutually

convenient time, to obtain feedback on your learning. Usually this is best done following specific

topics, and the seminars on that topic.

12

ASSESSMENT OF THE COURSEWORK PROBLEM QUESTION.

The following two pages contain a copy of the marksheet that your tutor will complete for the

problem question coursework assessment you are required to do.

Please read it as it indicates what you need to do, in each aspect of your work, to gain the highest

possible mark.

Your work will be assessed on the following area:

IDENTIFICATION OF LEGAL ISSUES RAISED

APPLICATION OF LAW TO FACTS

UNDERSTANDING OF THE TOPIC

USE OF CASES AND CASE CITATION

USE OF OTHER MATERIALS

CONCLUSION

PRESENTATION OF REFERENCES

SPELLING, GRAMMAR AND SYNTAX - Note, this is extremely important.

OVERALL PRESENTATION

You should note that each section does not carry the same weighting, and that the final mark

reflects the academic worth of the assignment as a whole.

FEEDBACK SHEET – PROBLEM ASSESSMENT

STUDENT NAME: ..........SAMPLE ONLY................... MODULE: ..........SAMPLE ONLY..................................

1st

70%and over 2:i

60 - 69% 2:ii

50 -59% 3rd

40 - 49% FAIL

Below 40%

IDENTIFICATION OF

LEGAL ISSUES

RAISED

Excellent identification of legal

issues raised Accurate identification of legal

issues raised Generally accurate identification

of legal issues raised Incomplete identification of legal

issues raised

Little or no identification of legal

issues raised

APPLICATION OF

LAW TO FACTS

Excellent application Cogent application Sound application Incomplete application

Little or no application

UNDERSTANDING

OF TOPIC

Evidence of a high degree of

insight, imagination or

innovative thought

Evidence of insight and

imagination Clear grasp of the scope and

limitations of relevant legal

principles

Some grasp of the relevant legal

principles Errors of factual interpretation as

well as misapplication of

relevant/irrelevant legal

principles

USE OF LEGAL

AUTHORITY

Excellent use of relevant

authority for resolving the

problem

Accurate use of relevant

authority for resolving the

problem

Adequate use of relevant

authority. Some inadequate or

irrelevant use of authority

Poor use of authority Inadequate and/or irrelevant use

of authority

USE OF OTHER MATERIALS

Excellent initiative in reading

around the subject in support of

your solution

Clear use of secondary materials

to support your solution Adequate use of secondary

materials Poor use of secondary materials Little or no use of secondary

materials

CONCLUSIONS DRAWN

Excellent conclusions drawing

together your evidence and

stating clearly your advice

Cogent and intelligent

conclusions generally Conclusions attempted but some

points missing

Conclusions rather perfunctory

or repetitive or comes to an

abrupt end without proper

concluding section

No proper conclusions drawn

14

Other Features PRESENTATION OF

REFERENCES

References effectively used and

appropriately cited and listed

References generally used and

cited correctly References not always properly

used and/or cited correctly References not used and/or

poorly cited No attempt at references or

citation. Weak or no

Bibliography

SPELLING,

GRAMMAR AND

SYNTAX (SENTENCE STRUCTURE)

No errors of grammar, spelling

or syntax. Articulate and

persuasive use of English

Few errors of grammar, spelling

or syntax. Effective use of

English

Occasional errors of grammar,

spelling or syntax. Style

generally effective

Frequent errors of grammar,

spelling or syntax. Style too

casual, too colloquial and

careless

Grammar, spelling and syntax

and use of English need urgent

attention

OVERALL

PRESENTATION

Excellently organised,

structured and presented

Well organised structure and

presentation

Organisation, structure and

presentation generally

satisfactory

Organisation, structure and

presentation need attention Weak presentation or structure

Students should note that each section does not carry the same weighting, and that the final mark reflects the academic worth of the assignment as a whole.

ADDITIONAL TUTOR FEEDBACK

MARK AWARDED

LEARNING RESOURCES (Including textbooks and materials) The key learning resources available to support students’ learning are: Textbooks: Alan Dignam and John Lowry, Company Law (7th edn, OUP 2012) Charles Wild and Stuart Weinstein, Smith & Keenan’s Company Law (15th edn, Longman 2011) Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012)

Cases & Materials Textbook:

Len Sealy & Sarah Worthington, Cases and Materials on Company Law (9th edn, OUP 2010)

Alan Dignam, Hicks and Goo’s Cases and Materials on Company Law (7th edn, OUP 2011)

Statute Book:

Mark Edwards (ed), Company Law 2012/13 – Statute Seminar Companion (2nd edn, Longman 2012)

Derek French, Blackstone’s Statutes on Company Law 2012-13 (OUP, Oxford 2012)

Other learning resources: The ‘Virtual Learning Environment’ (VLE) – the e-learning mechanism known as Shuspace –

and specifically Blackboard (also see above)

Legal databases – in particular Westlaw and LexisLibrary

o These resources are invaluable as they provide on-line electronic links to cases, statutes,

journal articles and other key legal materials

The Learning Centre

o Core text books

o Key text area

o Silent study area

o Group study areas

o Individual work areas

o PC’s, Wifi for laptops

o Hire of audio-visual equipment Company Law Module Manual (details of key information it contains can be found above)

Lecture slides

o These are available to print off in advance of lectures to assist with note taking and to

form a basis for research for seminars. These will also be a useful aid to revision later

on in the module.

Screen-casts

o Occasionally screen-casts are used to graphically present legal material or to explain

seminar or lecture concepts. This can be a useful way to start logically constructing

structured legal arguments.

Company Law Club on-line

o This is an on-line resource with up-to-date information on all the key areas covered by

the course.

16

Guide to Referencing and Citations for Law Students

Accurate and consistent referencing is essential in all academic work. Whenever you refer to either

the work or ideas of someone, or are influenced by another's work, you must acknowledge this.

Similarly if you make a direct quotation from someone's work this should be referred to accurately.

There are a number of systems of referencing. This guide offers guidance based on the Oxford

Standard for Citing Legal Authorities (OSCOLA) - it differs in some small respects from OSCOLA.

The full OSCOLA document, giving more examples and covering the full range of materials, is

available online from Oxford University.

Quotations and Referencing

Passages taken from the work of others must be suitably acknowledged with the use of speech

marks and a clear reference to the source.

Accurate quoting and referencing give credit both to you and to those whose work you have used.

References and quotes reflect your research and indicate the depth of reading you have

undertaken. They also allow others to follow up on the work that you have done.

If you do not accurately reference your work you may commit plagiarism. This is a disciplinary

offence under the University's Assessment Regulations, is regarded as cheating (whether

intentional or not), and normally will result in the coursework being marked as zero. More serious

consequences are also likely to follow. You should be aware that the Law Society and Bar Council

requires all applicants for membership to declare whether they have ever 'committed an act of

plagiarism or cheating in any form of assessment' and will require two referees to provide written

statements to the Society concerning the issue. You should also be aware that employers are

extremely reluctant to hire people who have been found guilty of acts of dishonesty.

It is important, therefore, to make a careful note of your sources of information as you are doing

your research and collecting materials to incorporate in your answer so that you can identify and

acknowledge them when writing up and list those sources in your bibliography.

References - footnotes

Each time you use a resource, directly or indirectly, the reference must be accompanied by a

footnote giving details of the source, as outlined below.

Your footnotes will give the details of the resource, including page or paragraph numbers where

appropriate.

Substantial quotations (of three lines or more) should be single spaced, indented from the margin

and preceded by a colon. This ensures that there is a clear distinction between your own words

and the words you are quoting. Thus:

17

Howarth has argued that:

In cases involving injuries caused by the police in the course of apprehending suspects,

whether the injury is to the suspect or to third parties, a relevant consideration is the public

interest in the punishment and prevention of crime. The more dangerous the criminal to

public safety, the more risks the police should be entitled to take.1

The 1 after the quote links to a footnote giving details of the source quoted, including the page(s).

Shorter quotes should be enclosed in quotation marks.

How to footnote specific materials The rules for footnotes are based on OSCOLA - see

http://www.law.ox.ac.uk/published/OSCOLA_4th_edn.pdf for details.

General note: If you are using an electronic source do not simply copy and paste from the

browser's address bar. You should always provide the title of the work you are referencing and the

author and date, if available, separate from the URL. You should ensure that any web address is

permanent so that it can be followed by the reader.

Books: Author initial surname, title, (edition, publisher year) page(s). For example:

D Howarth A textbook on tort (Butterworths 1995) 51

Journal articles: Author initial surname, 'title of article', (year) details of journal, first page at

specific page(s). For example:

C McGlynn 'Families, partnerships and law reform in the European Union: balancing

disciplinarity and liberalisation' (2006) 69 (1) MLR 92 at 94

If you have used an online version of an article, use the same format but add the details of the

database you used. For example:

C McGlynn 'Families, partnerships and law reform in the European Union: balancing

disciplinarity and liberalisation' (2006) 69 (1) MLR 92 at 94 <http://onlinelibrary.wiley.com>

accessed 24th June 2008

Use an accepted abbreviated form of the title where available; you can search by title on the Cardiff

site. For example, MLR is the preferred abbreviation for Modern Law Review.

Case report

A practice note issued by Lord Woolf CJ stated that:

For the avoidance of doubt, it should be emphasised that both the High Court and the Court of

Appeal require that where a case has been reported in the official law reports published by the

1 D Howarth A textbook on tort (Butterworths 1995) 51.

18

Incorporated Council of Law Reporting for England and Wales it must be cited from that source.

Other series of reports may only be used when a case is not reported in the law reports.

[2001] 1 All ER 193

This practice note also introduced neutral citation, whereby

The neutral citation will be the official number attributed to the judgment by the court and must

always be used on at least one occasion when the judgment is cited in a later judgment. Once the

judgment is reported, the neutral citation will appear in front of the familiar citation from the

law report series. Thus: Smith v Jones [2001] EWCA Civ 10 at [30], [2001] QB 124, [2001] 2 All ER

364, etc. The paragraph number must be the number allotted by the court in all future versions of

the judgment.

Give case details as per the following.

Where no neutral citation is available: Case name citation (court) page. Example:

Re W (a minor) (medical treatment) [1992] 4 All ER 627 (CA (Civ)) 646

Where a neutral citation is available: Case name neutral citation, report citation, page. Example:

R. (on the application of L) v Commissioner of Police of the Metropolis [2009] UKSC 3, [2010] 1

A.C. 410, 412

If you have used a report with paragraphs rather than pages, put the paragraph(s) numbers in [ ]

after the citation, e.g. this EU case (example taken from OSCOLA document):

Case C–176/03 Commission v Council [2005] ECR I–7879, paras 47–48

UK Legislation Title, year, and sections etc as appropriate. For example:

Unfair Contract Terms Act 1977, s2 (1)

EU legislation Type of legislation number title OJ reference, article number. For example (taken

from OSCOLA document)

Council Regulation (EC) 139/2004 on the control of concentrations between undertakings (EC

Merger Regulation) [2004] OJ L24/1, art 5

19

Bibliography

Basics

The rules for bibliography are based on OSCOLA - see

http://www.law.ox.ac.uk/published/OSCOLA_4th_edn.pdf for details.

General note: If you are using an electronic source do not simply copy and paste from the

browser's address bar. You should always provide the title of the work you are referencing and the

author and date, if available, separate from the URL. You should ensure that any web address is

permanent so that it can be followed by the reader.

A bibliography gives details of the books, articles, Parliamentary proceedings, government

publications and other sources you have consulted or used. This should appear at the end of your

assignment, starting on a new sheet. Items in the Bibliography should be ordered alphabetically by

author and, when there is more than one entry by an author, then by date. Where there are two or

more works by an author in the same year distinguish them by date and letter (e.g. 1995a; 1995b).

The details of the items used in your work should be given in the following style. There are two

principal differences between footnotes and bibliography entries:

(i) Your footnotes will where necessary specify the pages used for the particular reference

(ii) In the bibliography the author's name comes first followed by initial(s)

Books

When referring to books, the format is: Author surname initial(s), Title in Italics (edition if not the first, publisher date)

Example: Treitel G H, The law of contract (12th edn, Sweet and Maxwell 1995)

If there are two authors name both; more than two, name only the first followed by 'and others':

Twining W and Miers D, How to do things with rules (4th edn, Cambridge University Press

1999)

Goode R and others, Transnational commercial law: international instruments and commentary

(OUP 2004)

Edited books should be listed thus:

Lloyd-Bostock S (ed), Psychology in legal contexts (Palgrave Macmillan 1981)

A chapter in an edited book should give:

the author's surname and initial(s), 'title of the chapter', edited book reference followed by

detailed location in the book. Thus:

Inman M, 'Police Interrogation and Confessions' in Lloyd-Bostock S (ed) Psychology in legal

contexts (Palgrave Macmillan 1981)

20

Journals

When referring to journal articles, give author's surname and initials, the title in single inverted

commas, year, volume, issue, journal name and page references. Example:

McGlynn C, 'Families, partnerships and law reform in the European Union: balancing

disciplinarity and liberalisation' (2006) 69 (1) MLR 92

Use an accepted abbreviated form of the title where available; you can search by title on the Cardiff

site. For example, MLR is the preferred abbreviation for Modern Law Review.

If you are unsure of a journal article's correct citation, it is often found on the first page of the

article.

If you quote from a journal article accessed via a database, reference it as if it were a hard copy

journal, adding the name of the database and date accessed:

Ralton A, 'Establishing a beneficial share: Rosset revisited' [2008] Fam Law 424

<http://www.lexisnexis.com> accessed 24th June 2008

Electronic sources

When quoting from electronic sources, the format is: author, title, (date) where available, [online], <address>, and date accessed, e.g. Rayner J, Lawyer in the news (2008) [online]

<http://www.lawgazette.co.uk/> Accessed 20/06/2008

It is generally advisable to use the 'top level' address when listing news items such as the one

above.

If you are quoting an electronic book from an eBook database, give:

author(s) or editor(s), title, [online], (date), edition (if not the first), eBook from name of

database, address, date accessed, e.g.

CIA The world factbook [online] (2008) eBook from Bartleby. <http://www.bartleby.com>

accessed 20/06/2008

Parliamentary Proceedings

Refer to debates reported in Hansard as follows: HC Deb or HL Deb followed by date, volume,

and columns. Thus: HC Deb 7 February 1940, vol 357, cols 234-45

HL Deb 21 July 2005, vol 673, col WA261

HC Deb 25 July 2006, vol 449, col 1199W

The W and WA refer to written answers. If you are quoting from before 2001, put WA in

parentheses to indicate a written answer.

21

Refer to Bill committee debates reported in Hansard as follows: title of the Bill followed by Deb,

date and column. Thus:

Armed Forces Bill Deb, 17 February 2011, cols 89-118

Refer to other committee material as follows: name of committee, report title in italics, then in

brackets house session, and paper number.

Thus:

Business, Innovation and Skills Committee Is Kraft working for Cadbury? (HC 2010-12, 871)

Other official materials

For materials such reports of law reform bodies or government departments, give the name of the

organisation, the title of the report and reference number if any, and the date in brackets. Thus:

Criminal Law Revision Committee, Theft and Related Offences (Cmnd 2977, 1966) DHSS, Reform of the Supplementary Benefits Scheme (Cmnd 7773, 1979) Law Commission, Liability for Psychiatric Illness, Consultation Paper No 137 (1995)

To list Royal Commissions, give the title of the Commission's Report plus year; Command number;

Chair's name. Thus:

Report of the Royal Commission on Gambling (1978, Cmnd 7200, Chairman Lord

Rothschild)

European Commission documents

For European Commission documents, give the following details: the body that produced the

document, the title and the COM number. Thus: Commission, 'Proposal for a Council Regulation repealing Regulation (EEC) No 3448/80 on the

implementation of Article 43 of the 1979 Act of Accession concerning the system of trade

applicable to the goods covered by Regulations (EEC) No 3033/80 and (EEC) No 3035/80'

COM(2010) 751 final

Radio, television and film

Use the following styles for radio and television programmes and films. Radio: Title of broadcast, date of broadcast, station; e.g. Unreliable evidence, 24/04/2010, BBC Radio 4

If you have listened to a recording of the show provided through the VOD service or a CD

recording, add [VOD Sound recording off-air] or [Sound recording off-air] as appropriate, e.g. Law in action, 25/02/2010, [VOD Sound recording off-air] BBC Radio 4 Television: Title of broadcast, date of broadcast, station; e.g. In search of medieval Britain: Heartlands, 23/04/2010, BBC4

22

If you have watched a recording of the show provided through the VOD service or a DVD

recording, add [VOD recording off-air] or [DVD off-air] as appropriate, e.g.

Criminal law, 18/11/2006, [DVD off-air] ITV3

Feature films / training films: Title, year of release, [format], director / presenter, production

company; e.g.

Property, 2009, [DVD], Lucinda Acland, Legal Network Television

Filmed lectures: Title, date of lecture, [format], lecturer; e.g.

Confession and identification evidence, 17/02/2010, [VOD Off-air], Bob Hoskins

If you watch / listen to a broadcast via a service such as iPlayer, use the original date of

broadcast.

Personal communications

If you have conducted empirical research as part of your work and need to quote from a personal

communication use this style.

Name of person, role of person, form of communication, date of communication [personal

communication]; e.g.

L Klaff, Senior Lecturer Sheffield Hallam University, Phone call, 26/04/2010 [personal

communication]

Table of Cases

Give a list of cases after your bibliography, starting on a new page. List the cases alphabetically by

name.

Note: if you have used a database to access case reports, list the details of the cases as detailed

below. Do not give the address of the item(s) from the database.

The case below is an example of a case with a neutral citation and a citation from the ICLR Law

Reports.

OBG Ltd and another v Allan and others Douglas and others v Hello! Ltd and others (No

3) Mainstream Properties Ltd v Young [2007] UKHL 21, [2008] 1 AC 1

For pre-2001 cases you will only need to list the report(s)

Pepper (Inspector of Taxes) v Hart [1993] AC 593 (HL)

In the case where there is no neutral citation, indicate the court in brackets, e.g. (HL) for House of

Lords, (QB) for Queen's Bench.

23

Table of European Cases

If you have referred to European cases, list them after the UK cases in a separate list. European

cases are cited as follows:

European Court of Justice and General Court

Case 151/73 Ireland v Council [1974] 1 CMLR 429

Joined Cases C-430 & 431/93 Jereon van Schijndel v Stichting Pensioenfonds voor Fysiotherapeuten

[1995] ECR I-4705

Case 240/83 Procureur de la République v ADBHU [1985] ECR 531

Where possible cite the official reports, the European Court Reports (ECR). If an ECR report is

unavailable, the second best report is usually the Common Market Law Reports (CMLR). The Law

Reports, the Weekly Law Reports or the All England Reports can also be cited. For an unreported

case, cite the relevant notice in the Official Journal (OJ). If not yet reported in the OJ, then cite the

case number, case name, court, and date of judgment.

If you wish to refer to the Opinion of the Advocate General in a case, simply add 'Opinion of AG

{name}' after the case details.

European Commission competition decisions Aluminium Cartel [1985] OJ L92/1

European Commission Merger Task-Force/ Competition Directorate Alcatel/Telettra (Case IV/M042) Commission Decision 91/251/EEC [1991] OJ L122/48

European Court of Human Rights

Cite the official reports or the European Human Rights Reports, using one or the other

consistently. Plattform ‘Ärtze für das Leben’ v Austria (1988) Series A no 139 Young, James and Webster v UK (1982) 4 EHRR 38

Table of Statutes

Give a list of statutes after your table of cases, starting on a new page.

Statutes should be listed alphabetically by short title and year. Example: Human Rights Act 1998

Legal Services Act 2007

The Sale and Supply of Goods Act 1994

24

Table of EU legislation

If you need to refer to EC legislation, do so in a list after the Table of Statutes. Provide the

legislation type, number and title, then publication details from the Official Journal (OJ). Order the

list by year then number.

Council Regulation (EC) 1984/2003 of 8 April 2003 introducing a system for the statistical

monitoring of trade in bluefin tuna, swordfish and big eye tuna within the Community [2003] OJ

L295/1

To refer to a treaty give its name and OJ reference, as in this example from the OSCOLA document:

Consolidated Version

Further help

You can get more help with referencing from the following:-

the referencing pages on Shuspace

the SHU referencing wiki- http://shureferencinghelp.pbworks.com/

the Learning Centre Helpdesks

25

LECTURE TOPICS

LECTURE 1 – Brief lecture outline.

Methods of Trading; Company Formation & Consequences of incorporation

There will be a brief introduction to the key aspects of the module in this lecture.

The main (not only) types of trading organisations in the UK are:

sole traders

partnerships (general and limited)

limited liability partnerships

limited liability companies (this area will be the main focus of this module)

The Main Differences Sole Traders

The majority of businesses in the UK operate as ‘sole traders’ and that sole trader is personally

responsible for any business debts. There is no legal separation between personal and business

assets. A sole trader can keep his/her assets secret (apart from to Her Majesty’s Revenue and

Customs (HMRC))!

Partnerships

Covered by the Partnership Act 1890, a partnership is responsible for its own debts and

partners are responsible for each other’s debts in respect of the partnership business (joint and

several liability). The accounts do not need to be disclosed. In addition:

a partnership is created by agreement (not necessarily in writing)

each partner is an agent of the partnership

it does not have legal personality (but does in Scotland)

every partner has an equal say in the management (unless otherwise agreed)

Note - the Limited Partnership Act 1907 provided for a hybrid form of partnership but these

are not common.

Limited Liability Partnerships

The Limited Liability Partnership Act 2000 came into force on 5th April 2001. After a slow take

up of this ‘new’ business association it has become more popular; by April 2011 there were

43,224 LLP’s.

The difference between a LLP and a general partnership is that, once registered with the

registrar of companies, it attains status as a separate legal personality. Consequently the

personal and business assets and liabilities of the partners and LLP are separate.

Limited Liability Companies

These are created under provisions of the Companies Act 2006 by registration of documents

with the registrar of companies. There are approximately 2.4m registered companies in Great

Britain. When a company is incorporated, it gains a ‘legal personality’ separate to any human

individuals associated with it. Most importantly members are not normally responsible for the

company’s debts.

26

In addition:

there are considerable formalities associated with forming a company

a company can own property, sue and be sued in its own name

it does not have a maximum number of members

its management is delegated to directors

it has perpetual succession

companies can give floating charges (a form of security for indebtedness)

A limited liability company is owned by its members (shareholders in a company limited by

shares).

The impact of the EU

Note that in recent years the European Company (Societas Europaea (SE)) has come into being

(since 8th Oct 2004) although there is still little take up in the domestically; only 24 had been

registered in Great Britain by March 2010 and only 431 across the whole of Europe. European

Legislation for a new type of European private company, called the Societas Privata Europaea

(SPE), was planned to be set up for 1st July 2010 but this has still yet to come into force at the

time of writing this manual.

Classification of Companies

There are essentially two types:

PUBLIC limited companies – normally written ‘plc’ after the company name

PRIVATE limited companies - normally written ‘Limited’ or ‘Ltd’ after the company

name

Most trading companies in the UK (over 2.1m) are Private Limited Companies (limited by

shares) whereas Public companies represent only about 11,500. However ‘plc’s’ are often large

or extremely large organisations with huge turnovers, employing thousands of people. A

company can change from Public to Private, or vice-versa, governed by Part 7 CA’06.

Companies are either limited by shares (established since 1855 - i.e. their liability is limited to

the value of the share value) or by a separate type of company which is limited by guarantee.

There are unlimited companies (not common), Community Interest Companies (e.g. Figment

Theatre and see s.35 CA’06) and listed companies – those who are quoted on a recognised

stock exchange.

FORMATION OF A COMPANY

This is governed by ss.7-16 Companies Act 2006 and administered by Companies House in

Cardiff and the registrar of companies. The formalities of forming a company are explained at:

http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml.

The key constitutional document is now the Articles of Association (s.18 CA’06) which

contains internal rules on how the company is to be run. The Memorandum of Association

(ss.7 and 8 CA’06) is now a simple statement (authenticated by each subscriber) of:

intent to form a company

agreement to become members and take at least one share each.

27

It will contain the name of the company, its registered office, its purpose and liability. These

areas will be covered in detail in later lectures.

Once formalities are complete, the Registrar will issue a certificate of incorporation (ss.15-16).

There are restrictions on the names a company can choose (Part 5 CA’06) and complaints

about the use of a name can be made to the Company Names Adjudicator. Companies

previously set up, but no longer trading, can also be bought ‘off the shelf’ and effectively re-

used by a newly forming company.

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 1 & 2 Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 1 & 5

28

LECTURE 2 & 3 – Brief lecture outline.

Separate legal personality and ‘lifting the veil’ of incorporation

The doctrine of separate legal personality ‘has long been regarded as a cornerstone of English

law’.2 A company is a separate legal entity from the people who make up the company and

this is said to create a ‘veil’ between the company and its other constituents (either human or

corporate). Therefore, an incorporated company has separate legal personality from its

members, directors, employees and it is a separate legal entity from any subsidiary company,

even if it owns 100% of that subsidiary’s shares!

Whilst this is the general rule, this metaphorical ‘veil’ can be lifted by exception under

common law, equity or statute.

Separate Legal Personality and Limited liability

Limited liability is not new; it was established by the Limited Liability Act 1855. Significantly

this was extended by the case of Salomon v A Salomon & Co Ltd [1897] AC 22 (HL). This case is

the most important case in company law and must be understood (the full case is on the

Blackboard site). This case was significant because it extended the principle of separate legal

personality to essentially ‘one-man’ companies.

Effects of Separate Legal Personality

In Salomon, the decision not to ‘lift the veil’ of incorporation worked to the advantage of the

person who effectively owned the business, but this is not always the case. The following cases

demonstrate the varying outcomes for the individuals involved:

Lee v Lee’s Air Farming [1961] AC 12 (PC)

Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL)

The general rule (if indeed there is one) is that the courts are unwilling to ‘lift the veil’ of

incorporation to hold individuals to account. The exceptions to this general ‘rule’ arguably do

not create a consistent principle, and the decision in Salomon still holds centre stage in legal

decisions in this area.

The Exceptions

Statutory lifting of the Veil

There are too many to list here but Lord Diplock in Dimbleby & Sons v National Union of

Journalists [1984] 1 All ER 751 (HL) 758 said that any intention to lift the veil should be

‘expressed in clear unequivocal language’. Examples

Various Tax legislation; Insolvency Act ss.213 Wrongful Trading and s.214 Fraudulent

Trading; Company Directors Disqualification Act 1986 s.6 - Duty of court to disqualify unfit

directors of insolvent companies; Companies Act 2006 – s. 1205 Criminal consequences of

failure to make required disclosure (e.g. using inaccurate company name); Companies Act

2006 s 156(7) – Offence to trade more than 3 months with less than minimum number of

directors; Companies Act 2006 s 767(3) – Doing business without a trading certificate.

2 J P Lowry, ‘Lifting the Corporate Veil’ [1993] JBL 41, 41.

29

Judicial Lifting the Veil Public Policy: Daimler v Continental Tyre Co [1916] 2 AC 307 (HL); Fraud/sham or facade:

Gilford Motor Co v Horne [1933] Ch 935 (CA)

Jones v Lipman [1962] 1 WLR 832 (ChD)

Agency Relationship

Smith Stone & Knight Ltd v Birmingham DC [1939] 4 All ER 116 (KBD)

FG (Films) Ltd [1953] 1 All ER 615 (ChD).

Single Economic Entity within Corporate Structures

Adams v Cape Industries Plc [1990] Ch 433 (CA) – this is the leading case in this area and

must be read and understood

DHN Food Distributors v Tower Hamlets LBC [1976] 1 WLR 852 (CA)

Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 WLR 352 (HL)

Littlewoods Mail Order Stores v Inland Revenue Commissioners [1969] 1 WLR 1241 (CA)

Meyer v Scottish Cooperative Wholesale Society Ltd [1959] AC 324 (HL)

Woolfson v Strathclyde RC 1978 SC (HL) 90

Other key post Adams cases:

Creasey v Breachwood Motors Ltd [1992] BCC 638 (QBD) – note overruled

Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447 (CA)

Re Polly Peck International Plc (No.3) [1996] 1 BCLC 428 (ChD)

Trustor AB v Smallbone (No.2) [2001] 1 WLR 1177 (ChD)

Tort law

Williams v Natural Life Health Foods Ltd House of Lords [1998] 1 WLR 830 (HL)

Chandler v Cape plc [2012] EWCA Civ 525 – (although liability here was eventually

established on common law tortious, duty of care principles, not lifting the veil)

Equity - Personal relationship companies (quasi-partnerships)

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL)

Corporate Crime

Corporate Manslaughter and Corporate Homicide Act 2007

Note the influence of the Human Rights Act 1998 and the European Convention on Human

Rights in cases like Connelly v RTZ Corp Plc (No.2) [1998] AC 854 (HL) and Lubbe v Cape Plc

(No.2) [2000] 4 All ER 268 (HL) where the issue of the right to a fair trial (or lack of it in a

foreign forum) under Art 6 ECHR was considered. However, neither of these cases alter the

leading authority in Adams v Cape Industries Plc [1990] Ch 433 (CA).

30

Justice?

Students may think it curious that in the leading case in this area, Adams v Cape Industries Plc

[1990] Ch 433 (CA), that the court refused to lift the veil in the interests of justice. In that case

Slade LJ famously stated:

‘…save in cases which turn on the wording of particular statutes or contracts, the court is

not free to disregard the principle of Salomon…merely because it considers that justice

so requires. Our law, for better or worse, recognises the creation of subsidiary

companies...as separate legal entities’.

After Adams, it appears to limit the circumstances when the corporate veil can be lifted to

where:

statute or documentation has to be clarified or,

where the company is a mere façade or,

where the subsidiary in an agent in law.

The Court of Appeal has arguably ‘wobbled’ a little in recent years without ever casting real

doubt on the decision in Adams. The following cases perhaps show the shoots of a changing

attitude but no more than that; Adams still remains the key authority:

Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613; [2007] ICR 1539 (CA)

Ratiu v Conway [2005] EWCA Civ 1302; [2006] 1 All ER 571 (CA)

The justice argument has often been heard in the context of tortious claims. In a key case,

heard earlier this year, the Court of Appeal ruled, in Chandler v Cape plc [2012] EWCA Civ 525,

that a parent company may be liable for its subsidiary’s breaches of health and safety laws

without the need to consider lifting the corporate veil. In Chandler, the subsidiary company no

longer existed, but the Court of Appeal held that Cape (the parent company) had superior

knowledge of the asbestos risks that had caused harm, so it made it appropriate to find it (the

parent) had assumed a duty of care to the subsidiary’s employees using common law duty of

care principles from Caparo v Dickman [1990] 1 All ER 568 (HL).

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 2 & 3 Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 5

31

LECTURE 4 – Brief lecture outline.

Promoters and Pre-Incorporation Contracts A yet to be formed company will clearly need human intervention, in the form of promotion,

before the company can come into legal existence. Those taking some, or all of the steps, that

are required to form a company, will be classed as promoters.

Twycross v Grant (No.1) (1877) 2 CPD 469 (CA)

Those acting in their professional capacity (e.g. solicitors or accountants) will be not be classed

as such as long as their actions do not go beyond their professional duties – see Re Great Wheal

Polgooth Co Ltd (1883) 53 LJ Ch 42 (ChD). Duties of Promoters

Promoters have a fiduciary duty (a duty of trust with respect to another to act solely for the

others benefit).

Bristol & West Building Society v Mothew [1998] Ch 1 (CA)

They have a duty not to make a profit, a duty disclose and a common law duty of care and

skill.

Erlanger v New Sombrero Phosphate Co (1877-78) LR 3 App Cas 1218 (HL)

Gluckstein v Barnes [1900] AC 240 (HL)

Re Leeds and Hanley Theatres of Varieties [1902] 2 Ch 809 (CA)

Failure to disclose an interest by a promoter will render any contract voidable at the

company’s discretion, or the company may rescind the transaction. Often the remedy is that

the promoter will have to ‘account for’ any profit – i.e. pay it back. Different rules exist where a promoter has acquired property before promotion or after it but

in either case must still make a disclosure.

Re Coal Economising Gas Co (1875-76) LR 1 Ch D 182 What constitutes full disclosure? – see the contrasting decisions for public and private

companies in:

Erlanger v New Sombrero Phosphate Co (1877-78) LR 3 App Cas 1218 (HL)

Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 (CA)

Salomon v A Salomon & Co. Ltd. [1897] AC 22 (HL)

Gluckstein v Barnes [1900] AC 240 (HL) It seems that, following the decision in Lagunas, for private limited companies, disclosure to

the board of directors, or present and future shareholders via the memorandum or articles,

will be sufficient disclosure.

Statutory duties exist under ss.598 to 604 CA’06 in relation to public companies.

Pre-Incorporation Contracts

A pre-incorporation contract is one entered into on behalf of the company yet to be formed. At

common law there is a fundamental problem with pre-incorporation contracts - remember

from contract law that if a party does not exist (i.e. a company yet to be formed) they cannot

contract – see Rover International Ltd v Cannon Film Sales Ltd (1987) 3 BCC 369 (CA).

32

These contractual issues created problems with the capacity of a company to contract. In short,

a company cannot be bound by a pre-incorporation contract made in their name – see Natal

land & Colonisation Co v Pauline Colliery Syndicate [1904] AC 120 (PC). As companies are not allowed to ratify or adopt contracts after formation, this again causes

problems in this area.

Re Northumberland Avenue Hotel Co (1886) 33 Ch D 16 (CA)

Browne v La Trinidad (1887) 37 ChD 1 (CA)

Companies may continue with these contracts via novation (entering a second contract on the

same terms with fresh consideration). This occurs after incorporation and a court will require

clear evidence of novation – see Bagot Pneumatic Tyre Co v Clipper Pneumatic Tyre Co [1902] 1

Ch 146 (CA). Novation can also occur by conduct; an example may be taking delivery of goods

and using them after incorporation.

Re Patent Ivory Manufacturing Co (1888) 38 ChD 156 (Ch)

Heinhuis v Blacksheep Charters Ltd (1987) 46 DLR (4th) 67 (Canadian case) Whether pre-incorporation contracts were binding at common law was confusing and

arbitrary based on how a contract may have been signed for by a promoter:

Kelner v Baxter (1866) LR 2 CP 174 (CCP)

c/f - Newbourne v Sensolid (Great Britain) Ltd [1954] 1 QB 45 (CA) Statute to the rescue?

The UK was obliged to implement Art. 7 of the First Directive on Company Law (68/151); this

was enacted by s.9(2) European Communities Act 1972. Later this became s.36(4) CA’85 then

following repeal by the CA’89 it became s.36C CA’85 and is now s.51(1) CA’06.

'A contract which purports to be made by or on behalf of a company at a time when the

company has not been formed has effect, subject to any agreement to the contrary, as

one made with the person purporting to act for the company or as agent for it, and he is

personally liable on the contract accordingly'. Note here that the transposition is not literal from the original French text of Art 7. UK

companies still remain unable to ratify pre-incorporation contracts unlike many civil law

jurisdictions in the EU despite this being a recommendation of the Jenkins Committee as far

back as 1962! This essentially means a promoter will be personally liable unless he has a valid, express

agreement to the contrary.

Phonogram v Lane [1982] QB 938 (CA) There will be situations where what is now s.51(1) CA’06 may not apply:

In certain situations where a company is acquired ‘off-the-shelf’

Oshkosh B'Gosh Inc v Dan Marbel Inc Ltd (1988) 4 BCC 795 (CA)

Misnamed companies

Badgerhill Properties Ltd v Cottrell [1991] BCC 463 (CA)

Where a company is no longer in existence

Cotronic (UK) Ltd v Dezonie [1991] BCLC 721 (CA)

33

The idea behind making those forming contracts on behalf of yet to be formed companies

liable on them, is to give greater certainty to third parties making contracts. This creates a risk

for promoters as, unless they can expressly make an ‘agreement to the contrary’, compliant

with s.51(1) CA’06, they will be personally liable if the company chooses not to novate the

contract. Will a third party be likely to consent to an ‘agreement to the contrary’ being placed

in the contract, as the effect will be to void that contract should the company choose not to

novate it? Probably not. Fortunately, as many promoters become the first directors of a

company, this will rarely cause problems in practice.

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 4 Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 5

34

LECTURE 5 and 6 – Brief lecture outline.

The Constitution of a Company Since the introduction of the Companies Act 2006, a company’s ‘articles of association’

(articles) are now the key constitutional document (s.17 CA’06). They, along with any

resolution and agreements affecting the company’s constitution (s.29), form the basis of the

constitutional documents of the company. Some examples will be special resolutions and

shareholder agreements either between a shareholder and the company or with another

shareholder(s).

Puddephat v Leith [1916] 1 Ch 200 (ChD)

Punt v Symons & Co Ltd [1903] 2 Ch 506 (ChD) The articles (Chapter 2 CA’06) are essentially the rule book of the company. Some of the key

issues set out in the articles are:

Voting rights attached to different classes of shares

Powers of directors

Powers of the board

Payment of dividends

Alteration of capital structure For practitioners this area of company law is very important as legal advice on how to set up

rules to protect individuals’ interests are common. Shares

The articles may provide directors with powers to issue shares (s.551) and may contain pre-

emption rights (right of first refusal to buy shares on not less favourable terms). This is

common in many companies, particularly private companies who cannot, by law, offer their

shares to the public. The articles of a company operate in conjunction with statute (mainly

CA’06) are also likely to contain:

rules on the allotment of new shares (s.561)

rights which attach to shares (e.g. voting rights)

Details of the Articles

All companies must have articles (s.18(1)) but if they do not create their own, a default set of

articles will apply (s.20). Currently these are the Companies (Model Articles) Regulations 2008

but students should be aware that companies formed under previous Companies Acts are

governed by articles as defined in the Companies (Tables A to F) Regulations 1985 (SI

1985/805).

A company’s articles will be void if they are inconsistent with the general law or statutory

provisions.

Welton v Saffery [1897] AC 299 (HL)

Re Peveril Gold Mines Ltd [1898] 1 Ch 122 (CA)

Baring-Gould v Sharpington Pick and Shovel Syndicate [1899] 2 Ch 80 (CA) The articles are a business document to allow businesses to effectively operate.

Holmes v Lord Keyes [1959] Ch 199 (CA)

Rayfield v Hands [1960] Ch 1 (Ch)

35

Amending the Articles

A company may amend its articles under s.21(1) CA’06 by special resolution. This requires a

75% majority vote (s.283). This is interesting because the articles form contractual agreements

between the company and shareholders and shareholders inter se, yet they can be changed by

some, not all, of the members. Perhaps surprisingly only an ordinary resolution (over 50% -

s.282) is required changing the power of directors to allocate shares (s.551) or determine

conditions of redemption shares (s.685) even though this has the effect of altering the articles.

A court also has limited powers to amend a company’s articles. Some interesting cases on the validity of amending a company’s articles are:

Cane v Jones [1980] 1 WLR 1451 (Ch)

Taylor v Pilsen Joel and General Electric Light Co (1884) LR 27 Ch D 268 (Ch)

Hutton v Scarborough Cliff Hotel Co. Ltd (LC 1865) 4 De G J & S 672

Contractual Effect of the Articles

This is now covered by s.33 CA’06.

s.33 - Effect of company’s constitution

(1) The provisions of a company’s constitution bind the company and its members to

the same extent as if there were covenants on the part of the company and of each

member to observe those provisions.

The articles form the basis of a contract which, since the introduction of the Companies Act

2006, now equally binds both the company and its members. In the Mayson text book the

authors state that this ‘has ended more than a century of controversy’; previously statute (s.14

CA’85) only referred to covenants by the members, not by the company. However, the articles do not operate like a normal contract as you learned in Law of Contract

in year 1. The key feature of a normal contract is that it can only be varied by agreement by all

parties; the ‘s.33 contract’ (as the articles are often referred to as in this respect) allows

variation of terms by the majority, even if it is against the wishes of some parties to the

contract i.e. minority shareholders.

The Articles Contract – The Company and its Members

The effect of s.33 CA’06 is that only provisions relating to membership are contractual rights;

these are referred to as insider rights:

Bisgood v Henderson's Transvaal Estates Ltd [1908] 1 Ch 743 (CA)

Beattie v E&F Beattie Ltd [1938] Ch 708 (CA)

London Sack & Bag v Dixon [1943] 2 All ER 763 (CA) For an example of a contract enforceable by the members against the company:

Rayfield v Hands [1960] Ch 1 (Ch) For an example of a contract enforceable by the company against the member:

Hickman v Kent or Romney Marsh Sheepbreeders Association [1915] 1 Ch 881 (Ch) For examples of what happens where rights of ‘outsiders’ are contained in the articles:

Eley v Positive Government Security Life Assurance Co Ltd (1876) LR 1 Ex D 88 (CA)

Quin & Axtens Ltd v Salmon [1909] 1 Ch 311 (CA)

36

Restrictions on Amendments to the Articles

A member is not bound by alteration to articles if it requires them to take or subscribe for

more shares, or it requires the member to increase their liability (s.25).

Companies often have ‘entrenched provisions’ which cannot be changed unless certain

conditions or procedures, which are more restrictive that passing a special resolution, are met

(s.22). Section 22(2) provides that provisions for entrenchment may only be made on formation

of the company, or by amendment of the articles agreed by all members, but this sub-section

in not yet in force as the Government is still consulting on how this may impact upon class

rights.

Weighted Voting

Assume you are one of three directors with equal shares and voting rights. What happens

when the other two directors gang up on you to remove you as a director? They only need

over 50% of the vote (s.168 CA’06) and you are out! Directors get around this, by setting up in

the articles, weighted voting clauses so that in the event of the above their votes would carry

additional weighting. An example would be where a resolution to remove a director

transpires; the votes of the director subject to the potential removal would have their votes

multiplied to ensure a majority.

Bushell v Faith [1970] AC 1099 (CA)

This case also established that although a company cannot validly pass a resolution which

prevents it altering its articles (s.21), a weighted voting clause was not such a provision.

Amalgamated Pest Control Pty Ltd v McCarron [1995] 1 QdR 583

Majority Rule

The basic rule of company law is that the majority rules! However, this is subject to some

limitations. Members must only exercise their rights in certain limited circumstances if it is

‘bona-fide for the benefit of the company as a whole’.

Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)

Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9 (CA)

This is a two part test:

Subjective – Did 75% act with honest belief it was for the benefit of the company as a whole.

Objective – A Court’s objective minimum standard which members’ subjective view will be

judged against.

These limited circumstances are:

When amending the company’s articles

When appointing a director

At a class meeting

When voting if the company should take legal action to enforce its rights against those

controlling the company, when there has been an illegal, fraudulent or ultra vires act. In other circumstances a member can vote in his own interests:

Carruth v ICI Ltd [1937] AC 707 (HL)

Citco Banking Corp NV v Pusser's Ltd [2007] UKPC 13

37

This can sometimes lead to discrimination but the courts are reluctant to interfere with the

majority decisions.

Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 (CA)

c/f

Australian Fixed Trusts Pty Ltd v Clyde Industries Ltd [1959] SR (NSW) 33

Citco Banking Corp NV v Pusser's Ltd [2007] UKPC 13

A company has to be careful, however, if by amending its articles they impact on the terms of

another contract. For an interesting case where a company amended its articles validly to

remove a director, but in doing so breached a separate contract with the same director relating

to his office as Managing Director, see:

Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 (HL)

Remedies (only when the bona-fide test is relevant/applicable) An injunction will be available as a remedy if an alteration to the articles does not pass the

‘bona-fide for the benefit of the company as a whole’ test, in the circumstances detailed on the

previous page. However, only damages will be available as a remedy if the objection relates to

an alteration that will cause a breach of a separate contract:

Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 (HL)

Moffatt v Farquhar (1878) LR 7 Ch D 591 (Ch)

A court will not alter a company’s articles (rectification) as they have been approved by the

registrar in their original form.

Scott v Frank F Scott (London) Ltd [1940] Ch 794 (CA)

The ‘Capacity’ and ‘Objects’ of a Company

Fortunately for students this area is now much simpler since full implementation of the

Companies Act 2006. Historically companies were unable to create contracts outside their

capacity; essentially because they had no legal right to act or contract in a particular aspect.

This was linked to a company’s ‘objects’, a company law phrase simply meaning the ‘purpose’

of the company. In effect this was because a company was acting ultra vires i.e. beyond its

powers. This ultra vires doctrine is now effectively removed as it relates to a company but will

still apply to directors (see below). Effects of the Companies Act 2006

It is now clear that:

a company has unlimited capacity – s.39

unless a company chooses to limit its ‘objects’ (purpose) then its objects are unrestricted –

s.31.

A company can limit or amend its objects, under s.21, by special resolution (s.283). Statute has

intervened to protect third parties in contracts who historically were left without a remedy

when a company entered into a contract beyond its capacity. The Effect of Directors

Directors have a duty to act in line with the company’s constitution, and a general duty to act

within their powers (s.171). If a director acts ultra vires (beyond his/her powers) a shareholder

38

may gain, in advance only, an injunction to prevent this s.40(4). An ultra vires act by a

director will still bind the company as long as the third party has acted in good faith and

this is presumed in the act (s.40 and s.161). The doctrine of constructive notice in this area

only is also abolished by s.40(2)(b)(i). If an ultra vires act involves a third party who is a director, holding company or person

connected with a director the act is voidable by the company (s.41 and s.252). A court will

interpret a contract, with more than one potential meaning, consistently with business

common sense.

Rainy Sky S.A. & Ors v Kookmin Bank [2011] UKSC 50 A company can ratify an ultra vires act under s.239 by ordinary resolution (over 50% - s.282)

but the votes of the party concerned, or those connected (s.252), are not counted for calculating

the over 50% majority. If a company chooses not to ratify an ultra vires act, then they will have to go ahead with the

contract and the company remedy lies against the director(s) personally (s.41). A director

responsible for an ultra vires act will have to personally ‘account for’ (pay back) money

incurred by the company as a result of the transaction and can be subject to disqualification as

a director.

Re Lands Allotment Co [1894] 1 Ch 616 (CA)

Re Samuel Sherman Plc [1991] 1 WLR 1070 (Ch) An act by a director will be within their powers (intra vires) if it is within an express object

clause in the articles or is ancillary to it:

Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246 (CA)

Re Horsley and Weight Ltd [1982] Ch 442 (CA)

It will also be considered intra vires if it is in accordance with an express or implied power, or a

valid subjective clause:

Bell Houses Ltd v City Wall Properties Ltd [1966] 2 QB 656 (CA)

Note – a ‘power’ is a means of achieving an object (a purpose) of the company.

Why still have object clauses?

Essentially to protect shareholders and creditors, as it is they who will lose money if a

company embarks on an unprofitable venture. It can also aid investment; would you lend

money to a company if it was unlimited what they may choose to do with it?

Where a company does limit its objects, acts outside them are clearly ultra vires. If the basis

upon which a company is formed is no longer possible to be done, and this is reflected in the

objects, then a company can be wound up on just and equitable grounds (s.122(1)(g)

Insolvency Act 1986).

Re Bristol Joint Stock Bank (1890) LR 44 Ch D 703 (Ch)

However, because of the effect of s.31 and s.39 CA’06, repudiation of any contract is restricted

to where a person could not have had actual authority to act on its behalf outside its objects.

Whether an act is outside a company’s objects clause can be interpreted differently by the

courts:

Cotman v Brougham [1918] AC 514 (HL)

39

Some key changes relating to ‘Objects’ and ‘Capacity’ in the Companies Act 2006

Most areas remain the same from the CA’85 although the section numbers have changed.

However, the key differences are:

Companies Act 1985 Companies Act 2006

Up until 30th Sept 2009 every company had to

state its objects in the memorandum of

association and were limited to pursuing

those stated objects

s.31 now makes a company’s objects

unlimited unless the articles of association

specifically limit them

Under s.5, shareholder(s) with 15% of the

votes could apply to the court to challenge a

change to a company’s objects.

There is no such provision now as the

company’s capacity is unrestricted (s.39) as

can it objects be (s.31).

Under s.35 a company’s capacity was not

limited by its memorandum (this derived

from Art. 9 EC Directive 68/151 EEC)

s.39 now makes it absolutely clear that a

company has unlimited capacity to act.

s.35(3) required a special resolution (75%) to

be passed to relieve a director of liability

s.239(2) only an ordinary resolution (>50%) is

now needed – but the votes of the director

concerned and those connected to him do not

count

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 8 &12 Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 3

40

LECTURE 7 – Brief lecture outline.

Directors

A company acts through the people who represent it. The owners of a company (shareholders)

appoint directors (normally office holders) and delegate the running of the company to them.

It is the directors who make the day to day decisions on the way the company is run. What constitutes a director is defined in s.250 CA’06 – it can be someone who acts in that

capacity even if they are not called, or formally appointed, as a director. There are different

types of director e.g. shadow directors, de-jure directors, de-facto directors, executive

directors, non-executive directors, alternate directors and nominee directors. Companies can

also be directors!

Number of directors (s.154 CA’06)

Private companies – must have at least one director.

Public companies – must have at least two.

Note – the registration requirements under ss.162 to 167 CA’06 Directors do not have to be qualified in any way, although in a public company a Company

Secretary has to be qualified (s.272 CA’06). Appointment

There are formalities on the appointment of directors when the company is first formed (ss.9-

16 CA’06) and subsequently. Directors can be appointed by either members or directors –see

the Companies (Model Articles) Regulations 2008. Since the CA’06, a director cannot be appointed if under 16 years-old (s.157(1) CA’06) but

there is now no maximum age. The acts of a director are valid, even if there was a defect in

their appointment (s.161 CA’06). Termination

In public companies a system of retirement by rotation exists, although they may seek re-

appointment by the members. Directors can be disqualified from office (see later lecture) and

the Model Articles (art 18/22) details when a person ceases to be a director – e.g. if they resign,

retire, become bankrupt or become physically or mentally incapable. Formalities on the dismissal of a director are contained in ss.168 to 169 CA’06 and this can be

by ordinary resolution (over 50% required as defined in s.282). The normal position is that the

company’s articles of association cannot override statute but see the way weighted voting

clauses can be construed to, in effect, defeat the intention of statute:

Bushell v Faith [1970] AC 1099 (HL) The CA’06 also provides for removal by written resolution (s.288) but note that, as directors

may be employees as well as office-holders, dismissal may be a breach of contract:

Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 (HL) The Board and Decision Making

The board of directors are chosen to govern the affairs of a company and directors operate as

part of that board:

Re Marseilles Extension Railway Co Ex p. Credit Foncier and Mobilier of England (1871) LR 7

Ch App 16 (CA)

41

They must act collectively and all directors may take part in the decision making process.

Decisions have to be taken in accordance with the company’s constitution and a general rule is

that decisions are taken following a unanimous or majority vote (also see later lecture on

meetings and voting). The Model Articles do allow companies to set a quorum (minimum

number who must be present) for directors’ meetings. They also contain details on notice

periods of meetings and voting. One director can be appointed to chair meetings and the

decision making process. Each director has one vote but the chairman can exercise a casting

vote (art. 13/14). In the absence of a casting vote clause in a company’s adopted articles a

resolution is not adopted in the event of equal votes.

Moodie v W&J Shepherd (Bookbinders) [1949] 2 All ER 1044 (HL) Directors Remuneration

The basic position is that a director has no right to remuneration unless provided for in the

company’s constitution and approved by the members:

Guinness Plc v Saunders [1990] 2 AC 663 (HL) The terminology is key here; directors, as office holders, are paid ‘fees’ for holding office and

they are normally referred to as office holders:

McMillan v Guest [1942] AC 561 (HL)

...but a director can also be an employee as a matter of fact based on the conditions upon

which services are provided:

Montgomery v Johnson Underwood Ltd [2001] ICR 819 (CA)

Case C-232/09 Dita Danosa v LKB Lizings SIA [2010] ECR 00 (pregnant director case –

classed as a ‘worker’ for the purposes of employment law)

Quoted companies have to produce a report, by name, of what a director has been paid (s.420

CA’06) and every company is required to have a note in annual accounts of directors’

aggregate remuneration (although small companies (defined in s.383) can omit this).

Powers of Management

The Model Articles state that ‘subject to the articles, the directors are responsible for the

management of the company’s business, for which purpose they may exercise all the

powers of the company’. They are required to exercise those powers within the constitution of

the company but this may involve taking decisions against the wishes of majority shareholder.

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC) Directors make the day to day decisions of the company. This differs to the members who

make the strategic decisions. Clearly the members appoint directors and vote on matters not

reserved for the company’s management. Members do have a reserve power, exercised by the

passing of a special resolution (75% s.283 CA’06), to direct directors to take, or refrain from

taking, specified action – but this is rarely done. In many companies, directors are not only

shareholders but may also be majority shareholders, so they can dominate all aspects of the

running of a company. Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 13.

Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 15.

42

LECTURES 8 & 9– Brief lecture outline.

Directors’ Duties

The Companies Act 2006 altered the legal position with regard to the law on the duties of

directors. The previous common law, equitable and fiduciary duties were codified into seven

general duties:

s.171 - Duty to act within powers

s.172 - Duty to promote the success of the company

s.173 - Duty to exercise independent judgment

s.174 - Duty to exercise reasonable care, skill and diligence

s.175 - Duty to avoid conflicts of interest

s.176 - Duty not to accept benefits from third parties

s. 177 -Duty to declare interest in proposed transaction or arrangement

These general duties are based on common law rules and equitable principles (s.170(3)&(4)) so

much (though not all) of the common law will remain relevant. Consequently, a director still

has a fiduciary duty to act bona-fide in the best interests of the company and an equitable duty

of extreme trust and good faith – these are now codified in the general duties.

Bristol & West Building Society v Mothew [1998] Ch 1 (CA)

Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3d) 371

Lindgren v L&P Estates Co [1968] Ch 572 (CA)

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL) A director owes his duty to the company (s.170(1)) - though note the possible impact of

s.172(1):

Percival v Wright [1902] 2 Ch 421 (Ch)

Some key cases in the lecture: s.171 - Duty to act within powers

Alexander v Automatic Telephone Co [1900] 2 Ch 56 (CA)

Hogg v Cramphorn [1967] Ch 254 (Ch)

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC)

Dawson International plc v Coats Patrons plc [1990] BCLC 560 (CS)

s.172 - Duty to promote the success of the company Re BSB Holdings Ltd [1996] 1 BCLC 155 (Ch)

Charterbridge Corp v Lloyds Bank Ltd [1970] Ch 62 (Ch)

Re DKG Contractors Ltd [1990] BCC 903

Extrasure Travel Insurances Ltd v Scattergood [2003] 1 BCLC 598 (Ch)

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC)

Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187 (PC)

Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30 (CA)

Lonrho Ltd v Shell Petroleum Co Ltd (No.1) [1980] 1 WLR 627 (HL)

Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11 (Ch)

Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246 (CA)

Re Smith & Fawcett [1942] Ch 304 (CA)

Yukong Line Ltd of Korea v Rendsburg Investments Corp Liberia [1998] 1 WLR 294 (HC)

43

s.174 - Duty to exercise reasonable care, skill and diligence Re Barings (No.6) [2001] BCC 273 (CA)

Re Brazillian Rubber Plantation and Estates Ltd [1911] 1 Ch 425 (Ch) – for historical comparison only –

no longer good law

Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 (CA) – for historical comparison only – no

longer good law

Re D'Jan of London Ltd [1993] BCC 646 (ChD)

Dovey v Cory [1901] AC 477 (HL)

Re Park House Properties Ltd [1998] BCC 847 (Ch)

s.175 - Duty to avoid conflicts of interest Aberdeen Railway Co. v Blaikie Bros [1854] 1 Macq 461 (HL)

Bray v Ford [1896] AC 44 (HL)

British Midland Tool Ltd v Midland International Tooling Ltd [2003] EWHC 954 (Ch)

Cook v Deeks [1916] 1 AC 554 (PC)

Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 (Assizes)

Regal Hastings Ltd v Gulliver [1942] 1 All ER 378 (HL)

Shepherds Investments Ltd v Walters [2006] EWHC 836 (Ch)

s. 177 -Duty to declare interest in proposed transaction or arrangement Re Express Engineering Works Ltd [1920] 1 Ch 466 (CA)

Note – these are not the only duties directors have – these are just the general ones. Directors

have a number of wide ranging responsibilities contained in the Companies Act 2006 and

other legislation.

The consequences for any breach of these general duties are the same as they were at common

law, or under equitable principles (s.178 CA ’06). Often this will require a director to account

for any profit (pay it back) or indemnify for any loss.

Substantial Property Transactions

Another common area of potential abuse by directors is in relation to substantial property

transaction. Rules governing this area are found on ss.190 to 196 CA’06. Member approval is

needed for transactions exceeding 10% of the company’s assets (if more than £5k) or £100,000.

Loans and Credit

Again this is another area where significant changes have arisen since the implementation of

the Companies Act 2006; prior to its enactment loans were restricted or prohibited, and were

subject to criminal sanctions. This area is covered by ss.197 to 214 CA’06 and again loans or

security require member approval, although no approval is needed if it falls within the

exceptions in ss.204 to 209. Note there are different rules that exist for public and private

companies and whether the person is ‘connected’ or not with the company (as defined in ss.

252 to 256).

Remedies against directors in breach

Remedies are designed to deter directors from breaching their duties, not to compensate a

company for loss:

Murad v Al-Saraj [2005] EWCA Civ 959 (CA)

44

Civil remedies for failing to gain approval for substantial property transactions (s.195) and

loans/quasi loans (s.213), exist in the Companies Act 2006, as do criminal sanctions for failing

to declare an interest in an existing transaction or arrangement (s.183).

A court can order property to be returned to the company:

JJ Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 1467 (CA) It can also confiscate the profits of a director and return it to the company:

Murad v Al-Saraj [2005] EWCA Civ 959 (CA) Additionally this will still be the case even if the profit could not have been made by the

company without the director:

Regal Hastings Ltd v Gulliver [1942] 1 All ER 378 (HL)

Rescission is a remedy where each party returns what was transferred in the first place:

Erlanger v New Sombrero Phosphate Co (1878) LR 3 App Cas 1218 (HL)

Bentinck v Fenn (1887) LR 12 App Cas 652 (HL)

Armstrong v Jackson [1917] 2 KB 822 (KBD) Equitable compensation by the court is also a remedy, if the remedies above do not sufficiently

address the situation, although s.21 of the Limitation Act 1980 limits any claim for breaches of

fiduciary duty to six years.

Relief for Directors

A company can ratify acts in breach of his duty as a director, under s.239 CA’06 if it relates to

negligence, default or breach of duty or trust – i.e. it can relieve the general duties. However,

only ‘disinterested’ members can now vote s.239(3)&(4). Note that some acts, for example

illegal actions, are incapable of being ratified (s.239(7)). Fully informed consent for ratification

to be valid is needed:

Kaye v Croydon Tramways [1898] 1 Ch 358 (CA)

Section 1157 CA’06 gives the court power to relieve a director from liability if he acted

honestly and reasonably:

Re Produce Marketing Consortium Ltd (In Liquidation) (No.1)[1989] 1 WLR 745 (Ch) The test for acting reasonably is an objective test:

Re Duomatic Ltd [1969] 2 Ch 365 (Ch) The test whether someone is acting honestly is subjective.

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 14. Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 16.

45

LECTURE 10 – Brief lecture outline.

Disqualification of Directors The protection of limited liability can be abused. A Director can carry on business, via a

company, allow it to slide into insolvency, form a new company and carry on that business,

‘leaving behind him a trail of unpaid creditors’. This was major concern of Cork Committee

1982.

This area of law is now primarily governed by the Company Directors Disqualification Act

1986 (hereafter CDDA) and this lays down a regime to address the need to protect the public

against abuse of the corporate form. The effect of a disqualification order under s.1(1) is that a

person is, inter alia, prevented from being in any way, directly or indirectly, concerned with

the promotion, formation or management of a company, for a specified time period, without

the leave of the court. Being involved is a company’s management is widely interpreted so as

to capture people like management consultants.

R v Campbell (1984) 78 Cr App R 95 (CA)

Disqualification applies to companies as well as individuals, and both public and private

companies.

Official Receiver v Brady [1999] BCC 258 (Ch)

R v Ward [2002] BCC 953 (CA)

Notice must also be given to the party who the order is sought against (s.16 CDDA’86).

Since the introduction of the Insolvency Act 2000, disqualification undertakings can be made

without the need for court hearings (discussed further below).

It is a criminal offence to breach a disqualification order or undertaking (s.13); to do so can

carry a two-year custodial sentence. Importantly, those in contravention may also be liable for

all the debts and liabilities of the company incurred whilst in breach (s.15).

Discretionary Orders

The main ones are: s.2 - Disqualification on conviction of indictable offence.

Note this has to be in connection with the ‘‘promotion, formation, management, liquidation or

striking off of a company’. The maximum disqualification period is 15 years. s.3 - Disqualification for persistent breaches of companies legislation

Persistent is defined as three instances in five years - s.3(2). The maximum disqualification

period is 5 years. s.4 - Disqualification for fraud, etc., in winding up.

Applies where, in the course of winding up, a party is guilty of any fraud in relation to the

company, is in breach of any duty or has been guilty of an offence (whether convicted or not)

of knowingly being a party to fraudulent trading contrary to s.993 CA’06. The maximum

disqualification period is 15 years. s.8 - Disqualification after investigation of company.

46

Mandatory Orders s.6 - Duty of court to disqualify unfit directors of insolvent companies.

(1) The court shall make a disqualification order against a person in any case where, on an

application under this section, it is satisfied—

(a) that he is or has been a director of a company which has at any time become insolvent

(whether while he was a director or subsequently), and

(b) that his conduct as a director of that company (either taken alone or taken together

with his conduct as a director of any other company or companies) makes him unfit to be

concerned in the management of a company Note under s.6(1) the court SHALL make an order if the test above is satisfied and this is

subject to a two year minimum and 15 year maximum period. Applications are made by the

Secretary of State or Official receiver – s.7(1).

The objective of disqualification is not to satisfy the demands of shareholders, but to protect

the public and raise standards of responsibility.

Re Cubelock Ltd [2001] BCC 523 (Ch)

Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 (CA)

Secretary of State for Trade and Industry v Ettinger [1993] BCC 312 (CA)

Meaning of ‘Unfitness’

The court judges the conduct in line with s.6, and whether that conduct has made the director

‘unfit to be concerned in the management of a company’.

Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 (CA)

It is construed as meaning unfit to manage companies generally; no account can be given to a

director reforming past conduct. Unfitness is a matter of fact for the judge to decide.

Re Polly Peck International Plc (In Administration) (No.3) [1993] BCC 890 (Ch)

Re Grayan Building Services Ltd (In Liquidation) [1995] Ch 241 (CA)

Re Hitco 2000 Ltd [1995] BCC 161 (Ch)

Proceedings are civil under s.6, so the standard of proof is based on the balance of

probabilities, although individual charges can be aggregated to warrant disqualification.

Determining Unfitness

A court is required to take into account matters listed in Sch 1 – but these are not exhaustive.

Essentially there are two lists:

1st list – generally applicable

Breach of fiduciary or other duty

Degree of culpability in fraud on creditors

Failure to comply with accounting and publicity requirements of the Companies Act. 2nd list – applicable when the company is insolvent

• Extent of the director’s involvement in cause of insolvency

• Failure to provide goods/services which have been paid for.

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It is unlikely that ordinary commercial misjudgement, in itself, will justify disqualification.

Gross negligence or total incompetence may be required, or at least incompetence or

negligence to a very marked degree.

Re Lo-Line Electric Motors Ltd [1988] Ch 477 (Ch)

Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 (CA) Trading whilst merely insolvent may not determine unfitness. It must be shown the party

knew, or ought to have known, there was no prospect of meeting creditor’s claims

Secretary of State for Trade and Industry v Creegan [2004] BCC 835 (CA)

A court has a wide jurisdiction; it can disqualify non British subjects and those who were not

properly appointed directors

Re Lo-Line Electric Motors Ltd [1988] Ch 477 (Ch)

Re Seagull Manufacturing Co Ltd (In Liquidation) (No.2) [1994] Ch 91 (Ch)

Period of Disqualification

For unfitness the most serious cases will result in disqualification of over 10 years; 6 to 10

years for serious cases and 2 to 5 years for, relatively, not very serious cases.

Disqualification UNDERTAKINGS Under s.6 or s.8 the Secretary of State may accept a disqualification undertaking from a party

not to do things prevented by a disqualification order for a specific period of time; no

application to the court is needed (s.1A). This can only be accepted if it is within the public

interest – s.7(2A) and s.8(2A). The penalties for breach are the same as for a breach of a

disqualification order (s.13). An application can be made to vary the undertakings but these

are unlikely to succeed unless there are unforeseen circumstances have arisen since the

undertaking was given.

Secretary of State for Trade and Industry v Jonkler [2006] 1 WLR 3433 (Ch) Most disqualifications occur as a result of undertakings – nearly 75% in 2009/10 out of a total

of 1,543 disqualifications.

Leave to act during periods of disqualification

A person subject to a disqualification order or undertaking, can apply to do any of the things

which it prohibits - s.1(1) & s.1A(1) i.e. a director who is disqualified can apply to be a director

despite them being banned. This seems bizarre but, infrequently, circumstances arise when it

is appropriate to do so. For example the ‘banned’ director may be essential in the short term

for the continuance of the company trading. In one case (Hennelly’s) leave was granted for a

banned director to act in that capacity in order to raise essential finance for the company and

secure large contracts (thus protecting jobs and helping to pay creditors). This is a

controversial area for the courts, and one that requires protection of public interest and an

absolute need of the company.

Re Cargo Agency Ltd [1992] BCC 388 (Ch)

Re Harbour Lane Ltd [1998] 2 BCLC 64 (Ch)

Re Hennelly's Utilities Ltd [2005] BCC 542 (Ch)

Re Dawes & Henderson (Agencies) Ltd (In Liquidation) (No.2) [1999] 2 BCLC 317 (Ch)

48

Registration requirement

A register is maintained by the Secretary of State for both orders and undertakings. It is a

public document (s.18 CDDA) and can be searched on-line at Companies House. A court must

send details of a disqualification order to the Secretary of State within 14 days (SI 2001/967).

Variations of orders or undertakings and grants of leave to act as a director must also be sent.

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 13 Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 20

49

LECTURE 11

Semester 1 – Final Coursework briefing, Revision and Coursework Technique.

This lecture is not intended to give students answers to the coursework question but is

designed to re-cap on certain key company law concepts that have been discussed in semester

one. It will be useful for guidance on technique in answering a company law problem

questions and should reinforce material covered in seminars. It will also cover referencing.

Please note that staff are not allowed to comment on draft assignments in advance of

submission

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LECTURE 12 – Brief lecture outline.

Shares and Shareholders (an overview) This is a vast and complex area of company law. This lecture will only be an overview of the

area (we could spend a whole semester on shares and shareholders!). There are different types

of securities which encompass: shares, debentures, options and share warrants, to name a few.

This module will focus mainly on shares and, latterly, debentures in later lectures.

An often quoted definition of a share is from Borland's Trustee v Steel Bros & Co Ltd [1901] 1 Ch

279 (Ch) 288 (Farewell J)

‘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, and of interest in the second.... A share is not a

sum of money...but is an interest measured by a sum of money and made up of various

rights...’

A person becomes a shareholder by exchanging capital in return for a share of the company.

First shareholders pay the company for those shares; after that shares can be bought from

existing shareholders. People can also become shareholders through employee share schemes

and under operation of law (e.g. when a shareholder dies, their shares will transmit to their

personal representative). After those who, on incorporation, have subscribed for shares, a

company issues shares and allots them to new members (s.558, Companies Act 2006). Note

that companies can also become shareholders, not just human beings.

A shareholding gives a member certain rights, most notably to share in company profits,

attend and vote at meetings and take a share in any surplus capital should the company be

wound-up. Each share must have a value assigned to it (s.542) and this is called its ‘nominal’

value. Share Capital

The following are basic definitions of the terms students will find in text books: Authorised Share Capital

Represents the total nominal value of shares which may be issued by the company Issued Share Capital

The part of the authorised share capital that has been issued to its shareholders Called-up Share Capital

The total amount that those who hold shares have been required to pay in return for those

shares Uncalled Share Capital

The difference between the nominal value of the issued share capital and the value of the

called-up share capital. Paid-up Share Capital

The total actually paid for the company’s shares In a public company a minimum of £50,000 share capital must be allotted (s.763) and at least a

quarter of that must be ‘paid-up’ (s.586).

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Partly Paid Shares

A company may not require all the value of the share to be paid immediately, but can make a

‘call’ (i.e. demand) for payment at any time for the remainder. If a shareholder refuses to pay

the balance, the company can sue for payment or forfeit the shares. Note forfeiture is strictly

interpreted by the court.

Hunter v Senate Support Services Ltd [2005] 1 BCLC 175 (Ch)

Re National Provincial Marine Insurance Co (1869-70) LR 5 Ch App 559 (CA)

Re China Steam Ship Co (1868) LR 6 Eq 232 (Ch) Class Shares

A company may have different classes of shares with different rights and obligations. Section

33 of the Companies Act 2006 ensures that where such rights are contained in the articles, all

new members are bound by them. In absence of any such provision in the articles, members

within each class must be treated equally.

Birch v Cropper (1889) LR 14 App Cas 525 (HL)) Some of the main share types Ordinary shares

If a company has only one class of share, they must be ordinary shares. These attract whatever

rights are contained within the company’s articles. Sometimes these are referred to as ‘equity

shares’ - see s.560(1) and s.548. Preference Shares

These entitle the holder to a fixed rate of annual dividend and are paid in priority to other

classes. Usually they are ‘cumulative’, so if a dividend is not paid in one year, they are entitled

to it the following year, as well as any dividend due separately in the current year.

Webb v Earle (1875) LR 20 Eq 556 (Ch)

Preference shares generally do not carry voting rights; historically they have been a form of

finance but such shares are less common now due to the effect of taxation rules. Note – a dividend is a share in an amount of money that is paid to shareholders out of

distributable profits (s.830). Deferred Shares

Often called ‘founder shares’ these have a restriction that no dividend can be paid for a

financial year, unless ordinary shareholders receive certain amounts in that same year. Redeemable Shares

These are issued by the company in the expectation that they will be bought back by the

company at a later, specified date. These can only be issued in accordance with Part 18,

Companies Act 2006 as the general rule is that a company cannot acquire its own shares. A

shareholder will receive the nominal value of the share on redemption. Once redeemed, the

shares are cancelled but the company’s overall capital has to be maintained in a redemption

reserve (s.733) Variation of Class Rights

Any changes to class rights are governed by s.630 to 635, Companies Act 2006. Changes can

only be made in line with provisions of the articles (s.630(2)(a)) or a 75% approval by members

of the class in question. Section 633 allows 15% of the class members or more to challenge any

52

variation in court. Whilst the court has to consider all circumstances, and be satisfied the

variation would not cause ‘unfair prejudice’ to the class, the following cases suggest the courts

take a very narrow view and are reluctant to declare a variation invalid.

White v Bristol Aeroplane Co [1953] Ch 65 (CA)

Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 (CA)

Adelaide Electric Supply Co Ltd v Prudential Assurance Co Ltd [1934] AC 122 (HL) Authorisation of Share Issues

Directors have a general power in a company to allocate shares, but this is controlled by ss.549

to 551. That power can be revoked by ordinary resolution of the members and only renewed

by special resolution. Pre-Emption Rights

Section 561, Companies Act 2006 gives existing shareholders the right of first refusal to buy

shares before they are offered to outsiders. Companies can create new shares to raise finance

(a rights issue) but the effect will be to dilute an existing member’s proportionate holding if

they do not have the chance to purchase them; s.561 gives them the right to purchase the

shares in order to ensure their holding is not diluted. A private company can disapply this

provision in their articles (s.567) and any company can allow its members to disapply pre-

emption rights generally (s.570) or for a specific allotment (s.571). Share Certificates

A company must have share certificates ready for delivery within two months of allotment.

Failure to do so renders the company liable to being sued or being subject to an order for

specific performance. (This does not apply to ‘uncertified’ shares operated through CREST)

Sri Lanka Omnibus Co v Perera [1952] AC 76 (PC) Transfers of Shares

Whilst the general position is that shares are freely transferable, in practice many restrictions

are in place; for example a private company cannot offer its shares for sale to the public (s.755).

Any transfers of shares have to accord with the company’s articles (s.544(1)).

Re Discoverers Finance Corp Ltd [1910] 1 Ch 312 (CA) 316 (Buckley LJ) A company records ownership of its shares in a register of members (s.113). A share certificate,

for certified shares, is evidence of ownership of a specific amount, value and class of shares.

Uncertified shares have existed since 1996 as dealings on the London Stock Exchange have

been able to be transacted by CREST, a computer based system that records and transfers title

to shares electronically. Only listed companies need to have uncertified shares (i.e. where no

share certificate is issued). This module syllabus does not overly concern itself with uncertified

shares but those eventually going into practice will become more familiar with it at LPC stage.

A company can only register a transfer if a ‘proper instrument’ is completed - s.770(1) i.e. it is

submitted on correct documentation. The objective is that HMRC can collect stamp duty (a

tax) on it.

Re Greene [1949] Ch 333 (Ch) 339 (Harman J) If they are fully paid up shares, transfer can be governed by the Stock Transfer Act 1964, s.1(1)

and (4)(a). Membership is confirmed by registration of a transferee as the new owner of

certified shares.

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Directors’ Approval

A general power exists in most private companies allowing directors to restrict membership;

such a power exists in art. 26(5) of The Companies (Model Articles) Regulations 2008 (SI

2008/3229) for private companies. Even in public companies (where shares are freely

transferable) art. 63(5) gives a general power to refuse to register partly paid shares. Other

than that, in public companies, refusal would only occur in exceptional circumstances (art

46(3)). If a company adopts its own articles, such a power of refusal must exist in them and it

must be sufficiently clear.

Re Copal Varnish Co Ltd [1917] 2 Ch 349 (Ch)

Greenhalgh v Mallard [1943] 2 All ER 234 (CA) A refusal to register must be notified to the transferee within two months and, new to

company law in the Companies Act 2006, the company must give reasons for doing so (s.771). Transfers and pre-emption rights

A director has a duty not to register shares to an outsider that is subject to pre-emption rights.

If they do, an existing member has a right to purchase those shares.

Tett v Phoenix Property & Investment Co Ltd (1986) 2 BCC 99140 (CA)

Cottrell v King [2004] BCC 307 (Ch)

Fraudulent transfers

If a signature of a shareholder is forged, the instrument is void and the shares are not

transferred. Section 775 stipulates that a certificate does not represent the transferor’s title to

the shares, so a remedy for a transferee would have to be to claim damages for negligent false

certification. A company is indemnified at common law by the person who has presented a

transfer for registration, but if the error was that of the company, the indemnity is lost.

Sheffield Corp v Barclay [1905] AC 392 (HL)

Cadbury Schweppes Plc v Halifax Share Dealing Ltd [2006] BCC 707 (Ch)

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 7 & 9. Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 6, 7 & 14.

54

LECTURE 13 – Brief lecture outline.

Shareholders’ Meetings and Voting

Meetings are the major way shareholders (the owners of the company) can make their

opinions known to the directors (the managers of the company). This area is covered by Part

13 CA’06. There are different types of meeting (e.g. General Meetings, Class Meetings) and the general

rules are that it should be properly convened and conducted with a minimum number of

people present, and voting has to be properly carried out (s.301). Historically, the idea was

that meetings could be conducted face-to-face, although a proxy (someone attending on a

shareholders behalf) has always been allowed. With modern expertise, audio and visual

technologies allow valid meetings to be conducted without the need to physically meet

(s.360A):

Byng v London Life Association Ltd [1990] Ch 170 (CA)

Re Giga Investments Pty Ltd (1995) 17 ACSR 472

Types of General Meeting

Extraordinary general meetings

Annual General Meetings (AGM) Private companies are not required to have AGM’s (but many do).

Public companies must hold them within six months of the accounting reference date (s.336

CA’06). This allows members to debate the company’s latest annual results. Notice

Decisions in meeting will be invalid if they are not called in line with ss.301 to 335 CA’06 (note

additional requirement under ss.336 to 340 for public companies).

Bentley Stevens v Jones [1974] 1 WLR 638 (ChD)

Re Haycraft Gold Reduction & Mining Co [1900] 2 Ch 230 (ChD)

Musselwhite v CH Musselwhite & Son Ltd [1962] Ch. 964 (ChD) The basic position (s.307) is that 14 ‘clear’ days notice is needed for a general meeting. For a

public company 21 ‘clear’ days is required for an AGM, although longer can be provided.

Shorter notice periods are allowed for general meetings but require up to a 95% majority vote;

for a public company AGM it must be unanimous. Accidental failure to notify a meeting will

not necessarily invalidate the meeting outcomes:

Re West Canadian Collieries [1962] Ch 370 (ChD) Special Notice

When dismissing a director or auditor (or replacing one who has been dismissed) 28 clear

days notice is required

Contents

Notification needs to contain sufficient detail as to what the meeting will discuss (s.311).

Tiessen v Henderson [1899] 1 Ch 861 (ChD) 866 (Kekewich J)

Baillie v Oriental Telephone & Electric Co Ltd [1915] 1 Ch 503 (CA)

55

Circulars are important as they contain more detail to the notification letter, and in some cases

are key in relation to the interests of directors.

Re Moorgate Mercantile Holdings Ltd [1980] 1 WLR 227 (ChD)

Kaye v Croydon Tramways Co [1898] 1 Ch 358 (CA)

Campbell v Australian Mutual Provident Society (1908) 77 LJ PC 117

Advance Bank of Australia Ltd v FAI Insurances Australia Ltd (1987) 9 NSWLR 464

Directors will normally call company meetings, and propose resolutions, but members can

also do this under s.303 and s.314 respectively. Additionally a court can call a meeting (s.306). Quorums

A minimum number of members must be present for meetings to be valid.

Edinburgh Workmen's Houses Improvement Co Ltd (1935) SC 56

Re Cambrian Peat (1875) 31 LT 773.

Re El Sombrero [1958] Ch 900 (ChD) The rules on quorums are governed by s.318 CA’06 and the Companies (Model Articles)

Regulations 2008. Meetings – other issues

A chair is appointed to supervise meetings and proceedings, have the casting vote and must

act honestly and fairly:

National Dwellings Society v Sykes [1894] 3 Ch 159 (ChD)

Blair v Consolidated Enfield Corp. (1995) 128 DLR (4th) 73 Under s.355 CA’06, records must be kept for 10 years; it is a criminal offence not to do so and

certain resolutions under s.30 must be registered within 15 days. Decisions may be binding if

unanimously agreed, even if there was no meeting.

Re Duomatic Ltd [1969] 2 Ch 365 (ChD)

c/f Re D'Jan of London Ltd [1993] BCC 646 (ChD) VOTING

The general rule is: one share, one vote, but this is not always the case. Surprisingly the

‘default’ position is that votes are cast (and decisions taken) by a show of hands (Art 43/34).

However, they can also be cast by ‘poll’ as shares can be subject to weighted voting rights.

Re Horbury Bridge Coal, Iron and Wagon Co (1879) 11 ChD 109

A proxy can vote (s.324) and they are key, particularly in public companies where

shareholders are disperse and often cannot attend in person. Corporate shareholders (s.323)

can also vote at a meeting via a human representative, as can a member who is personally

bankrupt, as long as this is in accordance with the directions of the ‘Trustee in Bankruptcy’.

Morgan v Gray [1953] Ch 83 (ChD)

Methods of voting (ss.282 to 284 CA’06)

Show of hands – each voter is counted once.

By a poll – each member’s votes are counted. Demand for a poll is covered by s.321 CA’06 and

under Art 45/36 of the Model Articles.

Second Consolidated Trust Ltd v Ceylon Amalgamated Tea & Rubber Estates Ltd [1943] 2 All ER

567 (Ch)

56

Any motion at the meeting is passed by either an ordinary resolution (over 50% - s.282) or a

special resolution (75% - s.283). Directors who are Members

A member can vote as he thinks fit if he is exercising a vote in his capacity as a member, even

if he is also a director of the company. A director, acting in his capacity as a member, has no

fiduciary duty to the company nor, when voting, are they subject to the no-conflict rule.

Carruth v ICI Ltd [1937] AC 707 (HL) 765 (Lord Maugham)

Peters American Delicacy v Heath (1939) 61 CLR 457

North West Transportation Co Ltd v Beatty (1887) LR 12 App Cas 589 (PC)

However, the court will intervene where the power of the majority binds a minority; members

are required to vote bona-fide in the best interest of the company and not for improper

purpose in specified circumstances:

Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)

Re Western Mines Ltd (1975) 65 DLR (3d) 307

Voting Agreements

A member can validly enter into an agreement (a shareholder agreement) that restricts or

determines the way they vote.

Puddephat v Leith (No.1) [1916] 1 Ch 200 (ChD)

Greenwall v Porter [1902] 1 Ch 530 (ChD) However, they will only apply to shareholders, not specific shares.

Greenhalgh v Mallard [1943] 2 All ER 234 (CA)

A shareholder agreement can be a separate contract between two shareholders, or formed via

the articles of association.

Bushell v Faith [1970] AC 1099 (HL)

Quin & Axtens Ltd v Salmon [1909] AC 442 (HL)

Written Resolutions in Private Companies

The Companies Act 2006 introduced a new statutory procedure for passing written resolution

in private companies (ss.288-300). Private companies no longer have to hold meetings

(s.288(1)) but resolutions proposed by directors or members have to obtain a majority

(ordinary or special dependant up the resolution) of those entitled to vote.

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) various chapters Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 14

57

LECTURE 14 – Brief lecture outline.

Feedback from the Coursework In addition to the individual feedback you will receive on your coursework papers and mark-

sheet, there will be a lecture to go through the coursework.

This lecture is designed for a number of reasons:

To go though indicative content to the coursework question itself.

o You can then see what bits you got right and wrong!

To discuss an indicative structure that could/should have been adopted.

To discuss technique issues from the coursework.

o What was done well and what was done not so well.

To feed-forward into other assessments in this module and others.

o This is key – by attending this session you will find out more on how to do better

next time in the next assessment(s) you undertake on the course, not just the

module.

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LECTURE 15 – Brief lecture outline.

Shareholders’ Rights and Remedies – Derivative Claims & Unfair Prejudice Petitions and

winding up under s.122(1)(g), Insolvency Act 1986

The basic principle of company law is that the majority rule! This can cause problems to

minority shareholders if the majority are acting in a way that may be against the interests of

the company, or against their own personal interests as minority shareholders.

As a consequence of separate legal personality, if a wrong is done to the company it is logical

that only the company can decide what action to take. This is known as the ‘proper claimant’

(formerly proper plaintiff) rule:

Foss v Harbotte (1843) 2 Hare 461 (V-C) The rule in Foss v Harbottle is problematic for minority shareholders; how do they get a

majority to vote to take action when it is likely that the majority shareholders themselves are

causing the ‘wrong’? Clearly the majority will not vote for the company to take any action (the

turkeys voting for Christmas analogy)!

The protection available for minority shareholders can be split into two main areas: Derivative Claims – where a minority shareholder can bring a claim in a representative

capacity of the company for a wrong done to the company.

Cooke v Cooke [1997] 2 BCLC 28 (Ch)

Unfair Prejudice Petitions – where a minority shareholder can petition against a majority

shareholder in order to redress unfairly prejudicial conduct affecting them personally as a

shareholder. This is a personal remedy.

Derivative Claims (formerly under common law derivative ‘actions’)

Exceptions to the rule in Foss v Harbottle were developed under the OLD common law so that

shareholders could bring cases in a representative capacity of the company:

i. Where there was an illegal or ultra vires act.

Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204.

Smith v Croft (No 2) [1988] Ch 114. ii. Where a special resolution was required or where there had been non-

compliance with a special procedure.

Edwards v Halliwell [1950] 2All ER 1064 (CA) iii. Where a member’s personal rights had been infringed.

Pender v Lushington (1870) 6 ChD 70.

MacDougall v Gardiner (1875) 32 LT 653.

Wood v Odessa Waterworks Co (1889) 42 ChD 636. iv. Where fraud had been perpetrated on the minority and the wrongdoers are in

control.

Cook v Deeks [1916] 1 AC 554 (PC)

Old

Common

Law

Exceptions

59

These were called derivative actions but these common law exceptions have now been

replaced in the Companies Act 2006 by derivative claims (ss.260-264).

This area of law has changed as a result of the Companies Act 2006. Most notably a derivative

claim can now be brought under s.260(3) for:

‘an actual or proposed act or omission involving negligence, default, breach of duty or

breach of trust by a director (or another person or both) of the company.

The most significant change is that ‘fraud on the minority’ is no longer required, nor is the

requirement that the wrongdoers be in control of the company – merely negligence, default,

breach of duty or breach of trust is required. Linked to this, under s.239 CA’06, ratification of

these types of acts by directors must only be by votes of ‘disinterested members’. Will this open the floodgates for claims to be made? So far this has not materialised as the

court has to grant permission for a member to continue (s.261).

Kiani v Cooper [2010] EWHC 577 (Ch)

A court must refuse to permit a claim to proceed if, under s.263(2) a person’s act or omission

has satisfied the duty to promote the success of the company under s.172 or if it has been

authorised or ratified by the company. The court will also have to pay regard to the views of

disinterested members (s.263) and they will control the ability of another member to take over

any claim (s.264).

Unfair Prejudice Petitions

The common law exceptions to the rule in Foss v Harbottle proved to be too limited, as

arguably, are the new statutory provisions. As a result, additional individual redress for

shareholders was created by s.210 of the then CA’48. This required conduct of a majority

shareholder (often a director too) to be ‘oppressive’ against a minority shareholder. The scope

of this protection was widened under s.75 of the then CA’80 to include conduct that could be

classed as ‘unfairly prejudicial’. This latterly became s.459, CA’85 and is now contained in

s.994 CA’06. A number of case law principles have developed in this area, but have to be read in light of the

leading decision in O'Neill v Phillips [1999] 1 WLR 1092 (HL).

Case law suggests that unfairly prejudicial conduct need not be intentional, nor that

misconduct of the petitioner will preclude a remedy, but a member has to be unfairly

prejudiced in their capacity as a member.

Re a Company (No.007623 of 1984) (1986) 2 BCC 99191 (Ch).

Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273 (Ch).

Re a Company (No.004475 of 1982) [1983] Ch 178 (Ch).

For a successful petition, conduct has to be both unfair and prejudicial, not the mere

questioning of commercial judgement.

Re Cumana Ltd [1986] BCLC 430 (CA)

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The scope of what is now s.994 CA’06 appeared to be extended by the adoption of a public law

concept of ‘legitimate expectation’ by Lord Hoffmann in:

Re Saul D Harrison & Sons Ltd [1994] BCC 475 (CA) (a key case in this area of law) Following a growth in petitions under this heading, the House of Lords (Lord Hoffmann again

presiding in this case) clarified, and limited, the scope of the concept of legitimate expectation as

it applies in company law in this area. Essentially, a legitimate expectation to be treated in a

certain way by a majority shareholder, had to be linked to an enforceable legal right of the

petitioner, not a personal hope.

O'Neill v Phillips [1999] 1 WLR 1092 (HL) (First unfair prejudice case in HL) For examples of unfairly prejudicial petitions see:

Re Tottenham Hotspur plc [1994] 1 BCLC 65 (Ch)

Re Elgindata Ltd [1991] BCLC 959 (Ch)

Re London School of Electronics Ltd [1986] Ch 211 (Ch)

Re Halt Garage (1964) [1982] 3 All ER 1016 (Ch)

Grace v Biagioli [2005] EWCA Civ 1222; [2006] BCC 85 (CA) Unfair prejudice – Court Powers (s.996 CA’06)

These are potentially wide ranging as the court can make an order as it thinks fit! However,

the only remedy personally for the minority shareholder is for the court to force a majority

shareholder to purchase their shares – all other remedies relate to the company itself. Often the

remedy of forcing the purchase of the minority shareholder’s shares is not a satisfactory

solution for the minority shareholder:

Re Elgindata Ltd [1991] BCLC 959 (Ch) Following Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, it is likely that

companies will want to include arbitration agreements in their constitutions. In Fulham FC, the

Court of Appeal upheld the effectiveness of an arbitration agreement which covered disputes

giving rise to unfair prejudice petitions. This case overruled previous case law in Exeter City

Association Football Club Ltd v Football Conference Ltd [2004] EWHC 2304 (Ch) – so now a

petition can be stayed in favour of arbitration.

Other Remedies

Under s.122(1)(g) a minority shareholder can apply to have the company wound-up on ‘just

and equitable’ grounds. This is rarely done; the courts are reluctant to wind-up a solvent

trading company. Most often this is done following the breakdown of a quasi-partnership:

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL)

c/f Larvin v Phoenix Office Supplies Ltd [2002] EWCA Civ 1740

A minority shareholder can also ask the Department for Business, Innovation and Skills (BIS)

to investigate under Part XIV CA’85 (this is one of the limited parts of the 1985 Act that appear to

remain) but this usually applies to large companies, and will require the support of at least 200

members and 10% shareholding. Conclusion

Speaking to practitioners in this area they stress how difficult, and costly, it can be for

minority shareholders to successfully petition on these grounds. They tell us that the courts

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often reflect an unwillingness to involve themselves in the machinations of companies. In

effect this approach re-enforces the majority rule principle. However, a relatively recent case

has shown the power of the courts; the Chancery Division ordered that a significant

shareholder sell his shares to a minority shareholder who had petitioned for unfairly

prejudicial conduct. This is not unique but it is rarely done.

Oak Investment Partners XII Ltd Partnership v Boughtwood [2009] EWHC 176 (Ch)

Re a Company (No.000789 of 1987) Ex p. Shooter [1990] BCLC 38 (Ch)

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 10 & 11. Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 18.

62

LECTURE 16 & 17 – Brief lecture outline.

Maintaining and Raising Capital including Charges

The principle of capital maintenance is that once capital is paid to the company, it is there for

the benefit of the creditors, not the members.

Trevor v Whitworth (1887) LR 12 App Cas 409 (HL)

Note: This does not mean that a company cannot use its capital (and maybe lose it!). The rule

is, therefore, no guarantee that creditors will be paid. As a result there are controls on

payments out of capital.

Hill v Permanent Trustee Co [1930] AC 720 (PC) 731 (Lord Russell of Killowen)

The main elements of the ‘rules’ relating to maintenance of capital are as follows:

(i) a company may not issue shares at a discount

(ii) dividends can only be made out of profits

(iii) a company may not purchase its own shares (however, there are substantial exceptions to

this rule)

(iv) public companies may not give ‘financial assistance’ for the principal reason of

purchasing its own shares Reduction of capital

Generally a reduction in issued share capital is illegal unless authorised by statute.

Trevor v Whitworth (1887) LR 12 App Cas 409 (HL)

Section 641, Companies Act 2006 details the circumstances where this is permitted and the

court will not approve a reduction without it has a ‘discernible purpose’.

Re Thorn EMI Plc (1988) 4 BCC 698 (Ch) 702 (Harman J)

Court procedures and certification are detailed in ss.648 to 649 and in public companies any

serious loss of capital (50% reduction or more) requires the directors to hold a meeting of

members within 56 days to consider what measures to take (s.656).

FINANCIAL ASSISTANCE

The Companies Act 2006 does not now restrict a private company giving financial assistance

to purchase its own shares; it still remains restricted for public companies. The objective

historically was (and is) to prevent unscrupulous takeovers of companies by effectively using

a company’s own finances to fund share purchase (Greene Committee (Cmnd 2657, 1926)

[30]). Consequently, financial assistance is prohibited for public companies under ss.678 to 679

but there are limitation (ss.677 & 683) and exceptions (ss.681 to 682) the most controversial

being where the reason for giving assistance is only an incidental part of some larger company

purpose.

Heald v O'Connor [1971] 1 WLR 497 (QB)

Brady v Brady [1989] AC 755 (HL)

If a company gives financial assistance in contravention of statute then the company, and

every officer in default, commits an offence punishable by a fine and/or a maximum two year

jail sentence (s.680).

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RAISING CAPITAL – Through Shares

Companies have two main ways of raising money: sell or issue more shares or through

borrowings. In practice how this is done differs for private companies compared to public

companies; s.755 for example prevents a company offering its shares for sale to the public.

Private companies can raise capital by issuing more shares for example, but it is usually

(though not always) existing, or even founder members of the company, who will purchase

them. Public companies raise large amounts of money from the public/intuitional investors

and their shares are freely transferable. This part of the lecture will focus on public companies

raising capital by selling shares on the London Stock Exchange (LSE), although there are many

stock exchanges in Europe and the rest of the world where shares are traded. The LSE provides a forum to allow listed public companies to raise capital by having their

shares publicly traded. The LSE is one stock exchange with two markets: the ‘Main Market’ or

‘Official List’ and the Alternative Investment Market (AIM) for less established companies. A

company can offer for sale unissued shares, usually via a merchant bank, to the public or for

the merchant bank to place with clients. A company may also offer shares direct to the public

by advertising and producing a prospectus or by creating a new rights issue. The area is heavily regulated by the LSE and, mainly, the Financial Services Authority (FSA).

The main legislation covering this area is the Financial Services and Markets Act 2000.

RAISING CAPITAL – ‘CHARGES’

In addition to raising capital through shares, companies will also raise it through borrowings.

Borrowings can be in a number of forms but are often in the forms of loans or overdrafts.

Lenders (typically banks) will want security on these loans and the usual document giving

security is called a ‘debenture’ (s.738 CA’06).

Levy v Abercorris Slate and Slab Co (1888) LR 37 Ch D 260 (Ch) 264 (Chitty J)

‘...a debenture means a document which either creates a debt or acknowledges it, and any

document which fulfils either of these conditions is a “debenture”.’

There are different types of security a company can give (e.g. pledge, lien, legal mortgage,

equitable mortgage) but ‘charges’ will be the main focus in this module (ss.860 to 877 CA’06). Terminology

A company will borrow money, give security on it and create a charge in favour of the lender,

so is called the ‘chargor’.

A lender gains security (the charge) from the borrower (the company) and is called the

‘chargee’.

Where the debt is fully paid off in accordance with the terms of the debenture, then the debt is

discharged and the security ends. Problems occur when the terms are not met (e.g. failure to

make a repayment) or as a result of lenders often making loans repayable on demand.

Williams & Glyn's Bank Ltd v Barnes [1981] Com LR 205 (HCt)

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Types of Charges

Fixed charge

This is legal or equitable form of security under which a specific asset (usually an appreciating

asset) is used as security for the loan. In the event of default this allows the chargee to seize the

asset, sell it and give any surplus back to the company. Generally the chargor is prevented by

the chargee from dealing with the asset without consent, so is an inappropriate form of

security for an asset that frequently fluctuates. Most importantly a valid fixed charge holder

is the first creditor to be paid out when a company goes into liquidation as the relevant

assets are taken out of the pool of assets caught by any other security.

Wheatley v Silkstone & Haigh Moor Coal Co (1885) LR 29 Ch D 715 (Ch) Floating charge

This is lesser form of security than a fixed charge but still provides a chargee with priority

over unsecured creditors on liquidation of a company. As a company can deal with assets

secured by a floating charge it is an appropriate form of security for assets that constantly

change, for example book debts and stock. Floating charges are often created over a class of

assets but can be on the whole of the company’s assets.

Illingworth v Houldsworth [1904] AC 355 (HL)

Re Yorkshire Woolcombers Association [1903] 2 Ch 284 (CA) Crystallisation

This occurs when an event or condition applies which causes a floating charge to stop

‘floating’ over fluctuating assets and fasten upon existing assets at that time. This can be

triggered under operation of law (i.e. liquidation, appointment of an administrator or receiver,

cessation of trading) or by a breach in the terms of the debenture.

Re Borax Co [1901] 1 Ch 326 (CA)

George Barker (Transport) Ltd v Eynon [1974] 1 WLR 462 (CA)

Griffin Hotel Co Ltd [1941] Ch 129 (Ch)

Re Permanent Houses (Holdings) Ltd (1989) 5 BCC 151 (Ch)

Why is the Form of Security Important?

It is important because, on liquidation, a valid fixed charge holder is paid out first, whereas a

floating charge holder will only be paid after liquidation expenses, preferential creditors and

after a prescribed portion of the reserve fund allocated for unsecured creditors. However, a

floating charge holder will still have priority over unsecured creditors (subject to the monies

set aside under the unsecured creditors fund- s.176A IA’86).

Re Lewis Merthyr Consolidated Collieries Ltd (No.1) [1929] 1 Ch 498 (CA)

Re Spectrum Plus Ltd (In Liquidation) [2005] 2 AC 680 (HL)

Spectrum Plus is the leading authority on the conceptual possibility of having a floating charge

over book debts, but this is only possible if strict controls exist on the ability of the chargor to

deal with the asset in question (see Lord Hope’s criteria at para [54] in the HL judgment). This

has now resolved conflicted historical case law in this area.

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Registration of Charges

For any charge subject to s.860, CA’06 to be valid, it must be registered via the charges register

at Companies House. This is a public document (s.879(7)) and the basic rule is that registration

must be done within 21 days (s.870). The charge can be registered by the company or the

lending party and failure to register makes the money secured by the charge immediately

repayable (s.874). Failure to register the charge will invalidate the security but the debt will still remain valid

and will still be liable to be repaid. Therefore, a creditor will lose his priority for repayment.

Re Monolithic Building Co [1915] 1 Ch 643 (CA) If registered, the Registrar will issue a certificate that is conclusive evidence of valid

registration; it is notice to all the world of its existence.

Ali v Top Marques Car Rental Ltd [2006] EWHC 109 (Ch)

G and T Earle Ltd v Hemsworth Rural District Council (1928) 44 TLR 605 (KBD)

Negative Pledge Clauses

An example of a negative pledge clause is where an earlier charge ‘prevents’ a future charge

ranking in priority to it (e.g. preventing a later fixed charge being created as under common

law this will rank in priority to a floating charge).

Re Hamilton's Windsor Ironworks Co Ltd (1879) LR 12 Ch D 707 (Ch)

Consequently, the question of the validity of these clauses arises. If a charge is validly

registered this provides ‘constructive notice’ of an earlier charge to future charge holders. This

would perhaps logically signify that a later charge could not have priority to the earlier one.

However, as negative pledge clauses do not need to be registered, a future charge holder

given priority to an earlier created charge must have actual notice of the negative pledge

clause itself for the earlier charge to retain priority.

English and Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 QB 700 (CA)

G and T Earle Ltd v Hemsworth Rural District Council (1928) 44 TLR 605 (KB)

Avoidance of Charges

A liquidator is always on the lookout for charges that have been created within a specified

period before liquidation. Under s.245 Insolvency Act 1986 the liquidator can apply to the

court to have a floating charge set aside if it was created within two years of the onset of

liquidation for a person connected (see s.249 s.435 IA’86) with the company or twelve months

for someone not connected. For unconnected persons it can only be set aside if the company

was insolvent at the time of granting the floating charge (s. 245(4) and s.123 IA’86).

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 5 & 6. Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 10 & 11.

66

LECTURE 18 & 19– Brief lecture outline.

Insolvency and Liquidation There are a number of procedures that can come into play when a company gets into financial

trouble; many result in the dissolution of the company: its death! Liquidation is a procedure

under which a company can be dissolved. It involves a liquidator ‘winding-up’ the company,

effectively shutting it down by ending its legal relationships and, very importantly, collecting

assets, paying debts in priority defined by law and distributing any surplus back to the

members (they should be so lucky!) – see s.143 IA’86. Where a company is unable to pay all

creditors in full they are paid, subject to provisions in relation to preferential payments, in

equal percentages (pari passu) – s.107 IA’86 and r.4:181 IR ’86. In insolvency and liquidation procedures, a qualified insolvency practitioner or official

receiver will take over the governance of the company from the directors. The insolvency

procedures covered in these lectures are: Creditors’ voluntary winding-up

Winding-up by the court

Members’ voluntary winding-up

Administration

Voluntary arrangement The qualified insolvency practitioners involved are varied but could be an Official Receiver,

Administrative Receiver, Administrator, Supervisor of a voluntary arrangement, Liquidator or

Provisional liquidator. The legislation in this area is primarily, but not exclusively, covered in

the Insolvency Act 1986. A very brief overview of the various procedures is detailed below: Administration

Football fans will be well familiar with this term; it seems to be an occupational hazard for

football clubs to enter and exit administration on a regular basis! This occurs when a company

is insolvent (unable to pay its debts) or is likely to be so. The objective of an Administrator is

to establish if the business can be made viable i.e. restructured to become solvent or sold to

avoid liquidation. An administrator has significant powers and, during the time of

appointment, creditors are prevented from enforcing security or taking legal action against the

company in relation to pre-administration issues. Voluntary Arrangement

A Company Voluntary Arrangement (commonly known as a CVA) is where the company’s

directors, a Liquidator or Administrator, proposes a composition or a scheme of arrangement.

This is basically a proposal to creditors to accept a proportion of what they are owed, or an

agreement between the company and creditors or members to affect a takeover. It may seem

strange that a creditor would agree to take less than what they are owed, but often this can be

better than allowing a company to go into liquidation where a creditor may receive even less

of what they are owed, or even nothing at all! Members’ voluntary winding up

This only applies in solvent companies and is a liquidation procedure not an insolvency

procedure. It requires 75% of the members to approve a resolution to wind up the company

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following a statutory declaration by the directors that the company is solvent (s.84). This

procedure does not involve the court. Creditors’ voluntary winding up

This procedure is still initiated by the members passing a special resolution, as above, but in

this instance there is no statutory declaration of solvency (s.90). This is both an insolvency and

a liquidation procedure, although technically it can apply to a solvent company as the

company may turn out to be solvent but the directors have not made such a declaration prior

to the resolution being passed. Both members’ voluntary winding up and creditors’ voluntary winding up involve the

company going into liquidation. Winding up by the court (Compulsory Liquidation)

This can apply to both solvent and insolvent companies but invariably it involves mostly

insolvent companies. Only a court with jurisdiction can issue a winding up order and that

petition can be applied for by the company, its directors, any creditor, a contributory, a

liquidator, an administrator, an administrative receiver, the Secretary of State or an official

receiver. An order can be made in eight instances as defined in s.122(1). The main ones are:

s.122(1)(f) – where a company is unable to pay its bills

s.122(1)(g) – where the court thinks it is ‘just and equitable’ to do so.

s.122(1)(g)

There are numerous grounds for winding up under this section but the main ones are: The disappearance of the substratum of the company

Re German Date Coffee Co (1881-82) LR 20 Ch D 169 (CA)

The illegality of the company’s activities

Re Thomas Edward Brinsmead & Sons [1897] 1 Ch 406 (CA)

Deadlock in the management of the company

Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426 (CA)

Quasi-Partnership Companies

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL)

Re Zinotty Properties Ltd [1984] 1 WLR 1249 (Ch)

Re Abbey Leisure Ltd [1990] BCC 60 (CA)

Oppressive conduct by the majority shareholder or directors

Loch v John Blackwood Ltd [1924] AC 783 (PC)

s.122(1)(f)

These petitions are the most common and are invoked where a company cannot pay its debt

as defined in s.123 Insolvency Act 1986. A company is defined as being unable to pay its debts

if:

It cannot pay a debt over £750 within 21 days following a written demand

It has failed to pay (wholly or in part) following judgments made against it.

It is unable to pay debts as the fall due

Company assets are less than its liabilities

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A court will not lightly wind up a company, so there cannot be any dispute on substantial

grounds concerning the existence of the debt owed.

Re Selectmove Ltd [1995] 1 WLR 474 (CA) When a company enters liquidation the powers of the directors cease; they transfer to the

liquidator, and the director ceases to hold office.

Re Farrow's Bank Ltd [1921] 2 Ch 164 (CA) 173 Lord Sterndale MR

Re Ebsworth & Tidy's Contract (1889) LR 42 Ch D 23 (CA) 43 Lord Esher MR

Measures Bros Ltd v Measures [1910] 2 Ch 248 (CA) 256 (Buckley LJ)

A provisional liquidator can be appointed in the period between a petition for compulsory

liquidation being made and the court dealing with that petition. The provisional liquidator

maintains the status quo in that time and prevents prejudice between those opposing, and

those applying for, winding up.

Powers of office holders in insolvency and liquidation procedures

These are extensive and many practical ways a liquidator can exert this power are discussed in

more detail in the next lecture. Certain persons connected with the company have to, under

penalty, provide information to the insolvency practitioner who is the office holder dealing

with the company’s situation (ss234-235). For example they have to provide information on

the promotion, formation, business dealings, affairs or property of the company and will have

to ‘attend to’ the office holder at such times as they may reasonable require. Penalty for failure

to do so carries a maximum sentence of seven years in jail (e.g. Sch.10). They have the power to require a person to appear before a court for oral examination in a

private examination (s.236). This can also be done in public as a public examination. An office

holder can apply for money and goods to be seized via a court warrant (s.236(5)) and for

records to be produced (s.236(3)).

Dissolution

A company is finally dissolved when the registrar removes the name of the company from the

register in Companies House and after three months have passed in both liquidation and

administration procedures the company. Dissolution ends a company’s relationship with its

members and it ceases to be a party to any legal relationship; its legal personality is at an end.

It is the death of the company – RIP ! Dissolution occurs at the end of both voluntary and compulsory winding up and can apply on

completion of administration if the administrator thinks there is nothing to distribute to

creditors (Sch. B1 para 84(1)).

The other methods where a company may be wound up are: By order of the court

An example is under s.900(2)(d), CA 2006 where a company transfers its business to another

registered company. By the registrar

E.g. - Under s.1000, CA 2006 where the registrar will strike of a defunct company

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By cancellation of registration

This applies where a court orders the Registrar to cancel a registration. Usually this applies

where there has been a procedural problem. Examples are where there is no memorandum of

association or where the ‘memo’ fails to state the name of individuals/amounts subscribed. It

can also apply where a company does not have the minimum paid up capital required by law

or where the founder members lack capacity. The Attorney General will invariably have

applied for judicial review of the Registrar’s decision to register these companies in the first

place. A good example of a registration being cancelled because the company’s objects to carry

on the business of prostitution were considered illegal/against public policy is:

R v Registrar of Companies Ex p. Attorney General [1991] BCLC 476 (Div Ct) By Act of Parliament

For example bank mergers.

Phoenix Companies

Finally in the lecture we will touch on ‘phoenix companies’ and how legislation tries to

prevent directors, whose companies have been wound up, from starting up the ‘same’

business again – often in the same premises and with similar names (s.216). Second hand car

dealers used to be notorious for this! A director is prevented from being a director, or being

involved in the management of a company with a similar name, for a period of five years and

will be subject to a maximum two year jail term if he/she does.

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 17. Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 20.

70

LECTURE 20 & 21 – Brief lecture outline.

Vulnerable Transactions in Insolvency and Directors’ Liabilities From commencement of winding up certain transactions may be invalidated. This can apply

where transactions occur that have been made as a ‘preference’ or at an ‘undervalue’ within

certain prescribed periods. This can also apply to floating charges under s.245, IA’86. Claw-back

Under the Insolvency Act 1986 a liquidator can ‘claw-back’ property or avoid transactions if

they have been made within specified periods in the following circumstances:

if the company has made a ‘transaction at undervalue’ – s.238

if the company has made a ‘preference’ – s.239

Re M.C. Bacon Ltd [1990] BCLC 324 (Ch) Under s.240 IA’86 the time periods (ending with onset of insolvency) that apply to the above are:

for a person connected with the company – 2 years. (see see s.249 and s.435 IA’86)

for a person not connected with the company – 6 months. A company is insolvent if it meets the criteria set down in s.123 IA’86 but is usually evidenced

by its assets being less than its liabilities. Remember we discussed in the earlier lecture on floating charges that a liquidator can also

apply to a court, under s.245 IA’86, to set aside a floating charge made within a prescribed

period. These prescribed periods are detailed in s.245(3):

o for a person connected with the company – 2 years. (see see s.249 and s.435 IA’86)

o for a person not connected with the company – 12 months.

Note that if the person is unconnected, the liquidator must also establish the company was

insolvent at the time the charge was granted - s.245(4). Some other key vulnerable transactions are:

s.423 – Transactions defrauding creditors

s.244 – Extortionate credit transactions

A company cannot agree that, should it go into liquidation, its property has to go to another

party and, thus, not be available for distribution to creditors. This issue of the ‘anti-

deprivation principle’ was considered again relatively in the UK Supreme Court in Belmont

Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38. There are many

exceptions to this principle, the obvious one being validly registered charges, but in Belmont,

Lord Collins at [78] said that the anti-deprivation principle only applied to deliberate

intentions to evade insolvency laws, and was not to be applied unless one of the main

purposes of the transaction was also to evade insolvency law [104].

71

Liability for Wrongful or Fraudulent Trading Fraudulent Trading (s.213 Insolvency Act 1986 & s.993 Companies Act 2006)

Although fraudulent trading is harder to prove than wrongful trading, students will find more

appeal case law concerning fraudulent trading by directors. It is harder to prove because it is a

criminal offence and, therefore, a person:

must have been a knowing party to the offence

must have intended to defraud

and the company must be in the course of winding up. If a liquidator can establish fraudulent trading against an individual (not just a director) then

the court can order that individual to personally contribute to the company’s assets (s.213(2)).

Re Bank of Credit and Commerce International SA (No.14) [2004] BCLC 236 (ChD)

Welham v Director of Public Prosecutions [1961] AC 103 (HL)

Re Patrick and Lyon Ltd [1933] Ch 786 (ChD)

R v Lockwood [1986] Crim LR 244 (CA)

Re a Company (no.001418 of 1998) [1991] BCLC 197 (ChD)

Re Maidstone Building Provisions Ltd [1971] 1 WLR 1085 (ChD)

R v Miles [1992] Crim LR 657 (CA)

Re Bank of Credit and Commerce International SA, Banque Arabe Internationale

D’Investissement SA v Morris [2001] 1 BCLC 263 (ChD)

Morphitis v Bernasconi [2003] Ch 552 (CA)

Wrongful Trading (s.214 Insolvency Act 1986)

Directors can more easily ‘wrongfully’ trade as there is no need to prove fraud under this

section. Again it applies only during winding-up and when its assets cannot meet its

liabilities. The key part of the offence (s.214(2)) is that before winding up commenced: ‘that person knew or ought to have concluded that there was no reasonable prospect

that the company would avoid going into insolvent liquidation’. The standard a director is judged by is a dual objective and subjective standard.

s.214(4) A director is judged by the standard of a reasonably diligent person having both

(a) the general knowledge, skill and experience that may reasonably be expected

of a person carrying out the same functions as are carried out by that director in

relation to the company, and

(b) the general knowledge, skill and experience that that director has. Directors have a defence to wrongful trading if they ‘took every step’ to minimise losses to

directors (s.214(3)). Any contribution made by an individual, as a result of a court order, go to the general assets of

the company.

Re Purpoint Ltd [1991] BCC 121 (ChD) Disqualification of Directors

For both fraudulent and wrongful trading, a person can be disqualified from being a director

for up to 15 years (see s.4 and s.10 Company Directors Disqualification Act 1986).

72

Case law and the nature of liability

A few good cases that explain this area aspect are:

Re Produce Marketing Consortium (In Liquidation) Ltd (No.2) (1989) 5 BCC 569 (ChD)

Re Purpoint Ltd [1991] BCC 121 (ChD)

Rubin v Gunner [2004] BCC 684 (ChD) Directors are in an unenviable position sometimes. Should they carry on trading in the hope or

expectation that the company can be ‘turned around’, or ‘throw in the towel’ and close the

business immediately? The law has to strike a balance on how it judges the action of directors

in this regard.

Secretary of State for Trade and Industry v Taylor [1997] 1 WLR 407 (Ch) The law recognises that directors who have a reasonable belief that continuing to trade will be

to the benefit of creditors may avoid personal liability (the ‘Sunshine test’):

Re White and Osmond (Parkstone) Ltd (30th June 1960) unreported (Ch)

Secretary of State for Trade and Industry v Gill [2006] BCC 725 (Ch)

Singer v Beckett [2001] BPIR 733 (Ch)

Re Augustus Barnett & Son Ltd (1986) 2 BCC 98904 (ChD) However, a director runs the risk of at least a wrongful trading claim against him if the

business proves ultimately unsuccessful and he has not taken ‘every step’ to minimise creditor

liability as required by s.214(3) IA’86.

Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 17. Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law

(29th edn, OUP 2012) Ch 20 mainly and some in Ch 11.

73

LECTURE 22

Semester 2 – Revision, Exam Preparation and Technique.

These lectures are designed to help those students who have attended throughout the

programme to sharpen up their understanding of company law. A good understanding of

company law will be important for those wishing to undertake their LPC or BPTC or those

progressing into the business world directly. Therefore, the lectures are about enhanced

learning.

They are not a substitute for missed lectures or seminars – there is way too much to be covered

in this module to make up for this at the end. Therefore, please do not rely on this lecture to

fill huge gaps created by missing earlier lectures/seminars.

They will be useful for guidance on technique in answering company law questions in an

examination and should reinforce material covered in seminars.

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SEMINAR PROGRAMME

The seminars in this Module take place in a fictitious setting of “Old Town”. In the

Town there are a number of companies and characters seeking your advice on

different company law problem scenarios. On Blackboard you will be able to take a

tour of Old Town to see how the different seminars link to the overall syllabus. In the

seminars you will create a new company at the beginning, see how companies are

promoted and set up, and how they protect their separate legal status. You will

explore the legal importance of a company’s constitution and the impact of

shareholder agreements.

In the second semester you will see how easy it is for directors to breach their duties

and how a company can seek redress against directors. You will take part in a

fictitious shareholders’ meeting and understand how limited protection of minority

shareholders can be in company law. You will also understand how a company raises

capital through borrowings and explore the security it has to give to lenders, often

banks, for any borrowings it makes. Finally you will see the death of a company:

liquidation and dissolution.

All this takes place in a small, fictitious Town in the same way as all these issues do

take place, in every town and city across the country, every day.

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Seminar 1. Introduction and Forming a Company

This is an ‘in-class’ workshop exercise to get you familiar, in part, as to how a company is

formed. We are aware that many of these terms will be new to you, so do not worry; as the

lectures and seminars progress the mystique will soon disappear!

You are required to complete an IN01 form on behalf of your friend, Mr Holmes. This is an

application to register a company, and an accompanying memorandum of association. These

will be handed to you in the first seminar.

Your friend is wishing to set up a Garden Centre in Old Town, with two of his friends: Mr

Watson and Mr Moriarty. They wish to trade as a private company limited by shares and, on

formation, wish to become equal shareholders and also directors of the new company. Mr

Watson will take on the role as company secretary. As shareholders they want to:

ensure you have the right to vote on shareholder resolutions,

receive any declared dividends, and

a right to any capital should the company be wound up.

As founders of the company, the three will invest £1,000 each in newly issued shares in the

company. Details relating to the new company are as follows:

New Blooms Ltd

1 Carlisle Street

Old Town

South Yorkshire

OV4 1RS

Nominal value of shares - £2 each.

Class of shares – ordinary.

All shares are not redeemable.

Details of the three parties forming the new business are:

Sherlock Holmes

221b Baker Street

London

NW1 6XE

Dob: 14/12/1945

Dr John Hamish Watson

42 Cavendish Place

London

NW2 4AA

Dob: 01/01/1946

James Moriarty

247 Hanging Gardens

London

EC4 7HH

Dob: 01/06/1954

The company will be adopting the Model Articles for Private Companies Limited by Shares

under The Companies (Model Articles) Regulations 2008.

Note – for future reference, all information and documentation related to setting up a

company can be found at:

http://www.companieshouse.gov.uk/infoAndGuide/companyRegistrationPaper.shtml

76

Seminar 2. Companies and Separate Legal Personality

Harry is a solicitor in Old Town at the legal firm Dewy, Cheatham and Howe LLP. Sally has

come to see Harry for advice about the benefits and risks of starting up a business as a Florist

on the High Street. She is thinking of setting up a private company. She has done some of her

own research but wants to know: 1. What the main advantages and disadvantages are of trading as a private company

compared to operating as a sole trader or in a partnership? 2. What limited liability means and what the significance is to her of the House of Lords

decision in Salomon v A Salomon & Co. Ltd. [1897] AC 22 (HL)? 3.(a) Will it be easier for an incorporated limited company to raise capital?

3.(b) Will raising capital in a small company effectively mean that limited liability becomes

illusory?

Brad is a partner in Dobart Haulage. He and his partners are considering transferring their

partnership to a private limited company. Brad knows there are fundamental differences

between how membership in a partnership and a company operates, but seeks advice on the

following:

4. (a) If partners were wishing trade as a company as equal shareholders, instead of a

partnership, how could they set up the company to ensure they all retain the right to be

involved in its management? 4. (b) Could there be a remedy if this is not achieved in practice?

How should Harry be advising Sally and Brad, respectively, on the company law issues

raised above?

Some Sources for Seminar Preparation Lectures

Refer to lecture notes in the manual and PowerPoint slides for lecture 1 in particular but also

lecture 2 and 3. Case law

Salomon v A Salomon & Co. Ltd. [1897] AC 22 (HL)

Bushell v Faith [1970] AC 1099 (CA)

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL)

Statute

Companies Act 2006 ss. 3, 7-16, 168, 994

Partnership Act 1890 s.24

Insolvency Act 1986 s.122(1)(g)

Other sources

http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml

77

Seminar 3. - Separate Legal Personality and Lifting the Veil of Incorporation This is typical of the type of question that can appear in either coursework or an exam. To answer it

students will need to understand the concepts of separate legal personality and what is meant by ‘lifting

the veil’ of incorporation; both these concepts have been covered in the lectures. It may appear tough

but have a go and see how many issues you can identify and address here! The storyboard on

Blackboard will help you to identify some of the issues.

........................................................................................................................................................ Q1. Hallam Ltd operated from the industrial quarter of Old Town. They manufactured alloy

wheels and John was their Managing Director. Under his service contract with Hallam Ltd,

John covenanted not to solicit Hallam’s business within three years of leaving them. John later

resigned from Hallam Ltd and within a year he and his brother formed a company nearby,

Motor Ltd, which also manufactured alloy wheels. John was appointed as their Sales Director.

Hallam Ltd had been negligent and caused Mary, the company secretary, to have a serious

accident, which meant she could not work again. She initiated an action against Hallam Ltd

for compensation. At the same time, but for purely commercial and economic reasons, Hallam

Ltd transferred ownership of its business to a separately run associate company, Tyres Ltd,

based in London. Six months before the trial of Mary's court action, Hallam Ltd went into

insolvent liquidation.

Mary believes that Hallam Ltd was liquidated in order to defeat her claim for damages. Her

Majesty’s Revenue & Customs (HMRC) has also challenged the transfer of assets to Tyres Ltd

on the ground that it was a tax avoidance scheme.

Tyres Ltd operates one of its business ventures from premises owned by another one of its

subsidiaries, Brightside Ltd. Those premises have been compulsorily acquired by the Local

Authority. Compensation under the statute allows for payments to be made ‘to the owner of

the expropriated land, at market value, and assessed damages for any loss of profit suffered

by the land’s owner’. Tyres Ltd are wishing to claim the £150,000 costs of relocating its

operations elsewhere.

Advise the parties on the relevant matters above that relate to company law.

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Some Sources for Seminar Preparation Lectures

Refer to lecture notes in the manual and PowerPoint slides for lectures 2 and 3. Also there is a

screencast (a storyboard) on Blackboard for this seminars that will show you how to break

down some of the issues the seminar poses. Case law

The Albazero [1977] AC 774 (CA)

Adams v Cape Industries Plc [1990] Ch 433 (CA)

Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613

Bristol & West Building Society v Mothew [1998] Ch 1 (CA)

DHN Food Distributors v Tower Hamlets LBC [1976] 1 WLR 852 (CA)

Ebbw Vale UDC v South Wales Traffic Area Licencing Authority [1951] 2 KB 366 (CA)

Gilford Motor Co v Horne [1933] Ch 935 (CA)

Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 (Assizes)

Jones v Lipman [1962] 1 WLR 832 (ChD)

Lee v Lee’s Air Farming [1961] AC 12 (PC)

Littlewoods Mail Order Stores v Inland Revenue Commissioners [1969] 1 WLR 1241 (CA)

Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL)

Newton-Sealy v Armstrong Services Ltd [2008] EWHC 233 (QB)

Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447 (CA)

Salomon v A Salomon & Co. Ltd. [1897] AC 22 (HL)

Smith Stone & Knight Ltd v Birmingham DC [1939] 4 All ER 116 (KBD)

Stenhouse Australia v Phillips [1974] AC 391 (PC).

Woolfson v Strathclyde RC 1978 SC (HL) 90

Statute

Companies Act 2006 ss. 123, 170-179, 256, 1162

Insolvency Act 1986 s.143

Enterprise Act 2002 s.251

For wider reading in this area: Articles

P T Muchlinski, ‘Holding Multinationals to Account: Recent developments in English

Litigation and the Company Law Review’ [2002] 23 Company Lawyer 168 S Ottolenghi, ‘From peeping behind the corporate veil, to ignoring it completely’ [1990] 53

MLR 338

K V Krishnaprasad, ‘Agency, limited liability and the corporate veil’ [2011] 32(6) Company

Lawyer 163

There are a ‘gazillion’ articles on lifting the veil – here are two classic ones and a more

modern one that explain the concepts well, in particular the modern day challenge to

separate legal personality: the parent and subsidiary relationship.

79

Seminar 4. - Promoters and Pre-Incorporation Contracts

Q1. Alex, Bill and Charlie, who are electricians, worked together initially as partners. They

operated their business from commercial premises, a small business unit on Cartridge Street,

Old Town. The premises were owned by Alex, which he bought for £50,000. The business

became successful and they won a contract to re-wire six regional hospitals. As a result they

decided to expand and form a company three months ago. Alex sold the business premises to

the company for £100,000. Bill got a great deal for purchasing five vans. When purchased they

were worth £15,000 each but he got them for £12,000 per van. He sold four of them to the

company for £12,000 each, but kept one for his own company, which operates in the same line

of business.

Charlie ordered computer equipment costing £30,000 from Hightech Ltd, together with a

servicing agreement for five years costing £120 a month. Charlie told Hightech Ltd that the

company, when incorporated, would assume liability and pay the bill. Charlie paid £1,500

deposit for the computers. When the company was formed Alex, Bill and Charlie became

equal shareholders and directors. Unfortunately, the contact to re-wire the hospitals has not

proved profitable, the company’s financial position has deteriorated and Hightech Ltd have

not been paid. Yesterday the Old Town Court appointed a liquidator to wind-up the

company.

What are legal issues here that the liquidator needs to consider relating solely to promoters

and pre-incorporation contracts?

Do not discuss the validity of the formation of the company or any directors’ duties.

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Some Sources for Seminar Preparation Lectures

Refer to lecture notes in the manual and PowerPoint slides for lecture 4.

Some key Case Law

Re Ambrose Lake Tin & Copper Mining Co (1880) LR 14 Ch D 390 (CA);

Braymist Ltd v Wise Finance Co Ltd [2002] Ch 273 (CA)

Bristol & West Building Society v Mothew [1998] Ch 1 (CA)

Browne v La Trinidad (1887) 37 ChD 1 (CA)

Re Cape Bretton Co (1885) 29 Ch D 795 (CA);

Erlanger v New Sombrero Phosphate Co (1877-78) LR 3 App Cas 1218 (HL)

Gluckstein v Barnes [1900] AC 240 (HL)

Heinhuis v Blacksheep Charters Ltd (1987) 46 DLR (4th) 67

Hichens v Congreve (1828) 4 Russ 562 (Ch

Howard v Patent Ivory Manufacturing Co (1888) LR 38 Ch D 156 (Ch)

Kelner v Baxter (1866) LR 2 CP 174 (CCP)

Ladywell Mining Co v Brookes (1887) 35 Ch D 400 (CA)

Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 (CA)

Natal land & Colonisation Co v Pauline Colliery Syndicate [1904] AC 120 (PC)

Newbourne v Sensolid (Great Britain) Ltd [1954] 1 QB 45 (CA)

Re Northumberland Avenue Hotel Co (1886) 33 Ch D 16 (CA)

Omnium Electric Palaces Ltd v Baines [1914] 1 Ch 332 (CA)

Re Patent Ivory Manufacturing Co (1888) 38 ChD 156;

Phonogram v Lane [1982] QB 938 (CA)

Rover International Ltd v Cannon Film Sales Ltd (1987) 3 BCC 369 (CA)

Salomon v A Salomon & Co. Ltd. [1897] AC 22 (HL)

Twycross v Grant (No.1) (1877) 2 CPD 469 (CA).

Statute

Companies Act 2006, s.51(1)

Insolvency Act 1986 ss.143, 212

81

Seminar 5. The Company's Constitution – Article clauses and Shareholder Agreements

Q1. Qwerty Ltd is another Company on the industrial estate in Old Town. It manufactures

keyboards for computers. The company’s three directors hold most of the shares; John and

Paul 35% each and George holds 20%. Ringo holds the remaining 10% of shares. All the shares

carry one vote each. The company’s articles of association contain the following provisions:

i. On a resolution to remove a director the votes attached to shares held by that director

shall treble.

ii. Any member who intends to transfer shares shall inform the directors who will take the

said shares equally between them at fair value.

iii. All management services required by the company will be exclusively supplied by

George.

iv. Disputes between the company and its members shall be referred to arbitration.

v. All members of the company agree that the articles of the company cannot be altered.

In March the three directors (John, Paul and George) entered into a written shareholder

agreement. It was signed by the three directors and detailed how directors wishing to sell their

shares in the future would have to offer them first to the existing directors. Contained in the

agreement were the following clauses:

This agreement is intended to bind future shareholders of the company

The sale of any shares by existing members shall contain an undertaking that the

purchaser will enter into this agreement and be bound by all its terms.

Recently there have been serious disagreements between all the directors.

You are to advise the parties on the following in respect of company law:

a) All directors are unsure as to the validity of the voting clause in the articles when

attempting to remove a director and are frustrated at their inability to change the articles

of association.

b) Ringo has become disillusioned with the company and wants to sell his shares to the

directors but they have refused to purchase them.

c) The directors have passed a resolution to contract with Clarity Ltd for all Qwerty Ltd's

management services.

d) John has backed out of selling property he owns to Paul, and Paul wishes to refer the

dispute to arbitration.

e) John is unsure about the implications of the shareholder agreement that he and his fellow

directors have recently signed, and is considering proposing a resolution to alter the

articles so that this agreement will be included.

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Some Sources for Seminar Preparation Lectures

Refer to lecture notes in the manual and PowerPoint slides for lecture 5 & 6.

Some key Case Law Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)

Bushell v Faith [1970] AC 1099 (CA)

Eley v Positive Government Security Life Assurance Co Ltd (1876) LR 1 Ex D 88 (CA)

Greenhalgh v Arderne Cinemas Ltd [1943] 2 All ER 234 (CA) 239 (Lord Green MR)

Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 (CA)

Hickman v Kent or Romney Marsh Sheepbreeders Association [1915] 1 Ch 881 (Ch)

London Sack & Bag v Dixon [1943] 2 All ER 763 (CA)

Puddephat v Leith [1916] 1 Ch 200 (ChD)

Punt v Symons & Co Ltd [1903] 2 Ch 506 (ChD)

Quin & Axtens Ltd v Salmon [1909] 1 Ch 311 (CA)

Rayfield v Hands [1960] Ch 1 (Ch)

Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246 (CA)

Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588 (HL)

Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9 (CA)

Re Tavarone Mining (1873) LR 8 Ch App 956 (CA)

Welton v Saffery [1897] AC 299 (HL)

Wood v Odessa Waterworks Co (1889) LR 42 Ch D 636 (ChD)

Statute

Companies Act 2006. In particular ss. 21, 29, 31, 33, 39, 168, 282, 283

83

Seminar 6. - Directors' Duties

Q1. Lesley, Kim and Claire are the three directors and equal shareholders of Bronx Ltd (“the

company”) a well established company in Old Town.

The company, a boot manufacturer, has unlimited objects but the articles limit the power of a

director to enter into contracts in excess of £50,000. Recently Claire placed an order with a

leather supplier for £100,000 to take advantage of a significant discount being offered for bulk

purchase. The leather was delivered last week. As part of the special offer Claire personally

received a £2,000 cheque which she gave to charity.

Three months ago Bronx Ltd was unable to manufacture a large specialist order from one of its

regular customers. To ensure the customer was not let down, Kim arranged for the work to be

done by Browns Ltd. Kim has also sourced for the company a much needed industrial leather

press from Machines Ltd for £30,000 and this was delivered last week. Kim holds a 25%

shareholding in both Browns Ltd and Machines Ltd.

Within the last year Lesley arranged for an agent to source an alternative insurance provider

for the company, and prepare the relevant documentation. As she was so busy, she signed the

insurance forms without reading them. Unfortunately the company has just experienced a

serious fire resulting in the destruction of stock valued at £150,000. The insurance company

have refused to pay the claim as the documentation submitted by the company contained

inaccurate information. Lesley accepts that the insurance claim is invalid and, as a result, the

company has now gone into voluntary liquidation.

Advise Lesley, Kim and Claire if they are likely to have any personal liabilities once the

liquidator becomes aware of the above facts.

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Some Sources for Seminar Preparation Lectures

Refer to lecture notes in the manual and PowerPoint slides for lectures 7,8, 9 & 10.

Some key Case Law Aberdeen Railway Co. v Blaikie Bros [1854] 1 Macq 461 (HL)

Attorney General of Hong Kong v Reid [1994] 1 AC 324 (PC)

Bray v Ford [1896] AC 44 (HL)

Bristol & West Building Society v Mothew [1998] Ch 1 (CA)

Cook v Deeks [1916] 1 AC 554 (PC)

Re D'Jan of London Ltd [1993] BCC 646 (Ch)

Re Duomatic Ltd [1969] 2 Ch 365 (Ch)

Hogg v Cramphorn [1967] Ch 254 (Ch)

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC)

Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30 (CA)

Parker v McKenna (1874) LR 10 Ch App 96 (DC)

Percival v Wright [1902] 2 Ch 421 (Ch)

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL)

Yukong Lines Ltd of Korea v Rendsberg Investments [1998] BCC 870 (QB)

Statute

Companies Act 2006. ss. 170-177 (in particular) also ss. 31, 39, 40, 41, 180, 239, 1157

Insolvency Act 1986 s. 143

85

Seminar 7. – A Shareholder Meeting and Voting

This seminar is a little different in that during the seminar we will be conducting a mock

shareholders’ general meeting, with you as students playing the parts of individual

shareholders.

You will be given a briefing at the seminar, by your tutor, with further information.

To prepare for the seminar you need to be familiar with the company in Old Town that

you will be either a shareholder or director of. Details of the company are listed below and

further important facts appear on the next page.

Company Name Sentia Limited

Issued shares 100,000

Nominal value of shares £1 each

Shareholders No. of Shares

Shareholder ‘A’ 3,000

Shareholder ‘B’ 2,000

Shareholder ‘C’ 26,000

Shareholder ‘D’ 10,000

Shareholder ‘E’ – the Chairman 10,000

Remaining other shareholders 49,000 between them

Directors No. of Shares

Shareholder ‘E’ – the Chairman 10,000

Shareholder ‘D’ 10,000

Director ‘X’ 0 (i.e. not a shareholder)

Date board of Sentia Limited gave written

notice of the general meeting

3rd June

Date of the general meeting 7th July

Resolutions to be voted on at the meeting

a) A special resolution to change the name of

the company to Krios Limited.

b) An ordinary resolution to increase the

capital of the company to £150,000 and

subdivide shares into 300,000 at 75p each.

Note - Can you identify a potential error here

prior to the seminar?

c) An ordinary resolution to remove

Director ‘X’ as a director.

This resolution was added and notified to all

via the company website 8th June.

Articles:

The Companies (Model Articles) Regulations

2008, Schedule 1.

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86

Other issues to be aware of and areas to research:

1. At the shareholders meeting an amendment to a resolution will be proposed.

2. The Chairman will be casting the votes of proxies.

3. Shareholder ‘D’ was not notified of the meeting because the Secretary thought their shares

had been sold on to another party. Shareholder ‘D’ attends as they were told about it by

Director ‘X’.

4. Shareholder ‘A’ and shareholder ‘B’ wrote to the Chairman, after receiving the original

notification of the meeting, requesting to add the resolution c) that was not on the original

notice. The Chairman instructed the Secretary to add the resolution to the website on 8th June

and the Secretary called to inform Director ‘X’ to look on the web for full details that day.

After holding the shareholders’ meeting the group will:

Advise on the validity of the meeting and the resolutions.

Some Sources for Seminar Preparation Lectures

Refer to lecture notes in the manual and PowerPoint slides for lecture 13.

Some key Case Law Baillie v Oriental Telephone & Electric Co Ltd [1915] 1 Ch 503 (CA)

Clemens v Clemens Bros Ltd [1976] 2 All ER 268 (Ch)

Re Fenner plc (11th June 1990) unreported (CC)

Foss v Harbottle (1843) 2 Hare 461

Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512 (CA)

Re Moorgate Mercantile Holdings Ltd [1980] 1 WLR 227 (Ch).

Musselwhite v CH Musselwhite & Son Ltd [1962] Ch 964 (Ch)

Tiessen v Henderson [1899] 1 Ch 861 (Ch)

Statute

Companies Act 2006

77, 78, 168, 169, 260

– part 13 ss. 281-361 – in particular 282, 283, 301-302, 307, 309-315, 324-325, 360.

382, 617, 618, 994, 1147, 1168

The Companies (Model Articles) Regulations 2008, Schedule 1.

87

Seminar 8. – Minority Shareholder Protection

SME Ltd (‘the company’) is a company in Old Town’s commercial district. It was formed in

October 2010 to run a business previously carried on in partnership by Neil, Steve and

Melanie. They sold their business to the company, in exchange for shares, and became equal

shareholders and directors of the company on incorporation. They were joined on the board of

directors by David. A clause in articles states that any shareholder wishing to transfer their

shares must offer them for sale to the other shareholders. In January 2011 Steve died leaving

his shares to his wife, Joan, who was also appointed to the board to replace him. The company

is a Sports Management company who have many famous sports stars on their books.

During 2011 Neil, the managing director, proposed that the company sell its premises to raise

capital to set up a sports TV channel. Joan thought it was too risky but David and Melanie

supported the plan which went ahead. Joan was subsequently voted off the board.

A few months ago, Joan received indisputable evidence that David was taking some clients,

who would otherwise have become clients of SME Ltd, for his own, small private sports

management business. When she raised it with Neil and Melanie, they did not want to do

anything about it as David is a former, high profile, football star who still continues to bring

large amounts of clients and profits to SME Ltd.

The company has grown since incorporation, and is highly profitable, but Joan is unhappy

that no dividend has been declared. All profits have been reinvested in the company, except

for the remuneration fees of the directors which is high due to the company’s performance.

Advise Joan of the potential remedies she may seek as a minority shareholder.

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Some Sources for Seminar Preparation Lectures

Refer to lecture notes in the manual and PowerPoint slides for lecture 15 in particular but also an

understanding of lecture 12 and 13. Some key Case Law

Re a Company (No.004475 of 1982) [1983] Ch 178 (Ch).

Re a Company (No.000789 of 1987) Ex p. Shooter [1990] BCLC 38 (Ch)

Re a Company (No.00330 of 1991) Ex p. Holden [1991] BCC 241 (Ch).

Cooke v Cooke [1997] 2 BCLC 28 (Ch)

Re Cumana Ltd [1986] BCLC 430 (CA)

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL)

Re Elgindata [1991] BCLC 175 (Ch)

Foss v Harbotte (1843) 2 Hare 461 (V-C) (Major case)

Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227 (PC)

Larvin v Phoenix Office Supplies Ltd [2002] EWCA Civ 1740

Re London School of Electronics Ltd [1986] Ch 211 (Ch).

Moodie v W&J Shepherd (Bookbinders) [1949] 2 All ER 1044 (HL).

Re National Savings Bank Association (1865-66) LR 1 Ch App 547 (CA);

O’Neill v Phillips [1999] 1 WLR 1092 (HL) (Major case)

Oak Investments Partners XII Ltd Partnership v Boughtwood [2009] EWHC 176 (Ch)

Re Sam Weller & Sons Ltd [1990] Ch 682 (Ch)

Re Saul D Harrison & Sons Ltd [1994] BCC 475 (CA)

Smith v Croft (No 2) [1988] Ch 114 (Ch) Statute

Companies Act 2006, ss. 168, 172, 175, 239, 260 to 264; 282, 283, s.582 & ss. 994 to 996.

Insolvency Act 1986, ss. 74(2)(d), 125(2), s.122(1)(g)

Partnership Act 1890, s.35(f)

89

Seminar 9 – Charges: Fixed and Floating.

Since seminar 1, New Blooms Ltd has ‘blossomed’ into a significant business, now growing

plants, fruits and vegetables, and distributing this produce and garden supplies across the

county. A few months ago, Holmes, Watson and Moriarty went to see Harry, at local solicitors

Dewy, Cheatham and Howe LLP, as they were wishing to expand significantly. They wanted

to know the following:

Q1. How they could raise money through borrowings and, specifically, what was meant by a

“floating charge” and how can it be distinguished from a “fixed charge”.

Q2. (a) What steps a Bank will take to ensure a floating charge is valid? Q2. (b) Under what circumstances will the security become enforceable?

What will Harry have advised on the points above?

Q3. On 1st January, New Blooms Ltd created a floating charge over its assets in favour of

Hallam bank plc as security for a loan of £100,000. The charge was not registered. On 1st

February, New Blooms Ltd created a second floating charge in favour of Credit Bank plc as

security for an existing overdraft facility of £25,000. The charge contained a term prohibiting

New Blooms Ltd from creating subsequent charges that would rank in priority to that of

Credit Bank plc. The Credit Bank plc charge was duly registered. On 1st March, New Blooms

Ltd purchased computer equipment from Hightech Ltd at a price of £75,000. New Blooms

paid £10,000 in cash, and created a fixed charge over its book debts in favour of Hightech Ltd

to secure the balance of the purchase price. This charge was duly registered.

Homes, Watson & Moriarty are back to see Harry to discuss the legal position of the above

charges. What will Harry advise?

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Some Sources for Seminar Preparation Lectures

Refer to lecture notes in the manual and PowerPoint slides for lecture 16 and 17.

Some key Case Law

English & Scottish Mercantile Investment Trust v Brunton (1892) 2 QB 700 (CA)

G and T Earle Ltd v Hemsworth Rural District Council (1928) 44 TLR 605 (KBD)

Re Hamilton Windsor Ironworks Co Ltd (1879) LR 12 ChD 707 (ChD)

Levy v Abercorris Slate and Slab Co (1888) LR 37 ChD 260 (ChD)

Re Spectrum Plus Ltd (In Liquidation) [2005] 2 AC 680 (HL)

Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284 (CA) - & [1904] AC 355 (HL)

For the historical development of the law relating to charges on book debts see:

Agnew v Inland Revenue Commissioner (Brumark Investments Ltd, Re) [2001] 2 AC 710

Re New Bullas Trading Ltd [1994] BCC 36 (CA)

Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142 (ChD)

Spectrum Plus Ltd (In Liquidation), Re [2004] Ch 337 (CA)

Statute

Companies Act 2006, ss. 738, 860, 870, 874

Enterprise Act 2002, 251.

Insolvency Act 1986, ss. 175, 176A, 176ZA, s.245

Articles:

Look on the Blackboard site in seminar 9 for a selection of articles on book debts.

91

Seminar 10. – Liquidation and vulnerable transactions

Tough economic times have seen the demise of one of Old Town’s longest established

companies, Hallam Ltd. These are the events leading up to its liquidation.

Q1. In May 2009, Hallam Ltd (“the company”) borrowed £30,000 from Jim, the brother of one

of the directors; the loan was expressed to be repayable on demand. In August 2011, the

company created a floating charge over the company’s assets and undertakings, in favour of

Nat East Bank plc, to secure the company’s overdraft of £100,000. The floating charge, which

was duly registered, prohibited the company from granting a further floating charge over all

or any part of its assets or undertakings without first giving notice to Nat East Bank plc. The

floating charge further provided that the granting of a subsequent floating charge entitled the

Bank to give notice to Hallam Ltd, which notice would crystallise the bank’s charge. On 3rd

December 2011, the company borrowed £70,000 from Eric. The loan was secured by a fixed

charge over the company’s factory and the charge was duly registered. In January 2012, Jim

threatened to recall his loan unless it was secured. The company repaid the loan and Jim, who

then lent the same amount of money to the company; the loan was secured by a floating

charge, which was duly registered.

On 1st June 2012, Her Majesty’s Revenue & Customs (HMRC), which was owed £20,000 in

unpaid PAYE contributions, presented a petition to wind up the company. At that date the

company’s overdraft stood at £105,000, the extra £5,000 over the agreed limit having been

borrowed to pay staff wages. The company’s factory is worth £90,000 and the other assets are

likely to realise about £45,000. The liquidation costs are estimated at £6,000.

Advise the liquidator on the validity of the charges and transactions in this scenario.

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Some Sources for Seminar Preparation Lectures

Refer to lecture notes in the manual and PowerPoint slides for lectures 18,19,20 and 21.

Some key Case Law Re Barleycorn Enterprises Ltd [1970] Ch 465 (CA)

Destone Fabrics, Re [1941] Ch 319 (CA)

General Auction Estate and Monetary Co v Smith [1891] 3 Ch 432 (ChD)

MC Bacon Ltd (No.1), Re [1990] BCC 78 (CA)

Re Patent File Co (1870-71) LR 6 Ch App 83 (CA)

Re Produce Marketing Consortium (In Liquidation) Ltd (No.2) (1989) 5 BCC 569 (Ch)

Statute Companies Act 2006 – 738, 860-867, 869-877

Enterprise Act 2002 - s.251

Insolvency Act 1986 – Part IV – Chapter VI (ss.120-162) – covers winding up.

Key sections:-, ss. 115, 122, 123, 175, 176ZA, 213, 214, 238, 239, 240, 245, s.249, s.423, 435 & Sch 6

para 11.

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PREVIOUS YEAR’S EXAM PAPER

SEMESTER TWO EXAMINATION - MAY 2012 MAIN

FACULTY: Development and Society

DEPARTMENT: Law, Criminology and Criminal Justice

MODULE TITLE: Company Law

MODULE LEADER: Mark Edwards

TIME ALLOWED: 2 hours (plus 10 minutes reading time)

(SEEN PAPER) ___________________________________________________________________

INSTRUCTIONS TO CANDIDATES: 1. The University Regulations on academic conduct, including cheating and plagiarism, apply

to all examinations.

2. The normal examination regulations of the University apply (see script answer book). 3. Please do NOT start writing until told to do so by the Invigilator.

4. Candidates must NOT use red ink on the script answer book.

5. The memory of any programmable/graphical calculator used during this examination must be

cleared before the start of the paper. 6. Answer ONLY TWO questions from any of the choice of three questions available. 7. This is a CLOSED BOOK examination i.e. no materials can be taken into the exam room.

8. NO notes can be used in this examination.

9. Start each new question on a new page and each question carries equal marks. ________________________________________________________________ STATIONERY REQUIREMENTS PER STUDENT:

1 x 24 Page Answer Booklet

________________________________________________________________

94

Q1 Lorraine, Peter, Ian and Richard are equal shareholders and directors of Temor Limited. Lorraine, who is married to Peter, previously participated very little in the company, leaving business matters to her husband. As the couple now plan to divorce, she has recently fully involved herself with the company and its affairs. She has come to see you for advice on what is the role of a director and what are her main legal duties. She also seeks your advice on the following: a) Ian and Richard entered into a contract outside the articles of association but,

at a recent shareholders’ meeting, their actions were ratified. Peter, Ian and Richard voted in favour of a resolution to approve the contract, and to relieve the directors of their breach of company rules. Only Lorraine voted against.

b) At the same shareholders’ meeting, a resolution to loan £15,000 to Richard was approved; again only Lorraine voted against. A further loan of £5,000 has also been made to Ian, but was not voted upon at the meeting.

c) Peter has personally taken over a contract that Temor Limited was negotiating to secure, as the company was unable to take on the contract due to cash-flow problems.

d) Six months ago, at a board meeting that Lorraine did not attend, the directors agreed to continue trading despite the company being insolvent. The directors were given assurances, by a prospective new customer, they were highly likely to win a lucrative new contract but that contract was won by a competitor three months ago. The accounts of Temor Ltd now show their trading position has worsened by £80,000 since that board meeting and by £60,000 in the last three months, resulting in the company now seeking voluntary liquidation.

Advise Lorraine on matters relating to company law.

PTO for Question 2

95

Q2 Brothers, Anil and Bhanu, were in a partnership for several years, selling package tours to India, before converting their business into a company two years ago. On incorporation, they became equal shareholders and directors. A year ago, the brothers agreed to let their respective eldest sons, Charak and Darshan, who are best friends, join the company and all four then became equal shareholders and directors. Although the company is prospering, Anil now regrets allowing the sons to join the company. Since they joined, Bhanu’s son, Darshan, entered into a contract in excess of the company’s articles of association that lost the company £25,000 but, at a shareholders’ meeting, Bhanu and Charak voted to relieve Darshan of his breach of duty with only Anil voting against. Also the board of directors voted against a resolution to take legal action against Darshan. Following major disagreements between Anil and the others, Anil was removed as a director, by three votes to one, at the next Shareholders’ Meeting. At the last board meeting, the remaining directors decided that they would not declare any dividend this year, instead deciding that all profits be paid as director bonuses to reward them for doing so well in such a tough economic climate. When the sons joined the company, Anil had discussed with all the others that if the company performed well, he, as the founder of the original business, should get an increased share of the profits. The other shareholders are now refusing to implement any change to allocation of shareholder profits. Advise Anil on the company law issues raised by the scenario above and whether he would be able to rely on any of the relevant protections available to minority shareholders.

PTO for Question 3

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Q3 A liquidator has been appointed by the court to wind-up Vangas Limited following a successful petition by one of the company’s creditors, National Bank plc. The winding-up commenced on 1st May 2012. The company have summarised (below) details of the loans it has outstanding with companies:

i. 1st April 2010 – A £100,000 debenture loan from National Bank plc secured by a validly registered fixed charge over the company’s book debts.

ii. 1st June 2011 - A £50,000 debenture loan from Commercial Bank plc secured by a validly registered floating charge over the company’s premises. This loan contained a term preventing the granting of a subsequent charge ranking in priority to it.

iii. 1st April 2012 - A £30,000 debenture loan from Rapidloan Limited secured by a validly registered fixed charge over the company’s premises. As the loan was only for three months, and at a highly inflated interest rate, Rapidloan Limited did not check the loan history of Vangas Limited.

In addition Colin, who is the brother of one of the directors, is concerned about his unpaid wages and a £10,000 loan he made to the company several years ago. Colin and the company realised he may be disadvantaged if the company went into liquidation so, in March 2012, the company gave him improved security on his loan by granting him a validly registered fixed charge, secured on the company’s premises. The HMRC argue that only National Bank plc, and the statutory preferential part of Colin’s wages, should be paid in priority to their claim for unpaid taxes as the company has been proved to be insolvent for the last year. Advise the liquidator.

END