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CHAPTER 3

THE LAW RELATING TO ASSOCIATIONS 1: CORPORATIONS

A. THE CONCEPT OF CORPORATIONS

DEFINITION

REASONS FOR CORPORATE EXISTENCE

B.CORPORATIONS IN LAW

CREATION OF A CORPORATION

THE ACTS OF A CORPORATION

CESSATION OF A CORPORATION

C.COMPANIES

DEFINITION

CLASSES OF COMPANY

ADVANTAGES AND DISADVANTAGES OF CREATING A COMPANY

DISTINCTION BETWEEN DIRECTORS AND SHAREHOLDERS

THE VEIL OF INCORPORATION

D.COMPANIES IN LAW

FORMATION

NAME OF A COMPANY

CAPITAL OF A COMPANY

MEETINGS

DIRECTORS

BORROWING BY A COMPANY

COMMON SEAL

MINORITY PROTECTION

ADMINISTRATION

WINDING-UP (LIQUIDATION)

E.UNINCORPORATED ASSOCIATIONS

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A.THE CONCEPT OF CORPORATIONS

DEFINITION

A CORPORATION MAY BE DEFINED AS:

AN ARTIFICIAL UNITY OR ENTITY, NORMALLY CONSISTING OF A GROUP OF INDIVIDUALS, WHICH

THE LAW TREATS AS HAVING A COMMON WILL AND, THEREFORE, CAPABLE OF HOLDING RIGHTS

AND DUTIES.

A CORPORATION IS A LEGAL ENTITY THAT EXISTS UNDER THE AUTHORITY OF STATE LAW AND

SEPARATE FROM THE PEOPLE WHO OWN, MANAGE, AND CONTROL ITS OPERATIONS.

CORPORATIONS ACQUIRE ASSETS, INCUR DEBT, PAY TAXES, ENTER INTO CONTRACTS, SUE/ARE SUED,

HAVE

PERPETUAL EXISTENCE, AND ISSUE SHARES OF STOCK AS EVIDENCE OF OWNERSHIP.

A CORPORATION IS A PURELY ARTIFICIAL ENTITY, TREATED BY THE LAW AS A LEGAL PERSON.

WHAT IS AN ARTIFICIAL PERSON?

AN ARTIFICIAL PERSON MEANS AN ENTITY(THING ) WHICH IS REGARDED AS A PERSON IN THE EYES OF A LAW,

I.E- A BEARER OF RIGHTS ,DUTIES AND RIGHTS IN THE EYES OF THE LAW.

WHAT DO WE CALL SUCH ARTIFICIAL PERSONS?

CORPORATIONS-BECAUSE THEY HAVE BEEN GIVE A BODY(CORPUS IN LATIN)

WHAT IS THE OTHER TERM FOR ARTIFICIAL PERSONS?

JURISTIC PERSONS TO DISTINGUISH THEM HUMAN BEINGS WHO ARE REFERRED TO AS NATURAL PERSONS

WHAT ARE THE FEATURES OF CORPORATION

IT IS CREATED BY THE AUTHORITY OF THE STATE

IT HAS A SEPARATE LEGAL PERSONALITY FROM THE MEMBERS OF THE CORPORATION ;IT EXISTS

INDEPENDENTLY OF ITS MEMBERS,

IT IS ENDOWED WITH “PERPETUAL SUCCESSION”-OR “IMMORTALITY”-IT NEVER DIES EVEN IF WHEN

INDIVIDUALS WHO MAKE IT UP DIE. UNLESS IT IS BROUGHT TO AN END IN CERTAIN SPECIFIC WAYS.

.

REASONS FOR CORPORATE EXISTENCE:WHY CREATE A CORPORATION

THE PRIMARY REASON FOR THE CREATION AND RECOGNITION OF CORPORATIONS IS COMMERCIAL

AND ECONOMIC.

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THE CORPORATION HAS PERPETUAL SUCCESSION UNDISTURBED BY THE DEATH OF INDIVIDUAL

MEMBERS. THE CONTINUITY OF THE CORPORATION IS NOT AFFECTED, WHETHER OLD MEMBERS DIE,

EXISTING MEMBERS RETIRE OR NEW MEMBERS ARE ADDED.

THE COLLECTIVE PERSONALITY OF THE CORPORATION IS ENTIRELY DISTINCT FROM THAT OF ITS

MEMBERS OPERATING THE CORPORATION.

WHAT ARE THE TWO DISTINCT LIVES OF CORPORATION

THE JURISTIC LIFE OF THE CORPORATION - PERSONALITY OF A CORPORATION

THE LIFE OF THE INDIVIDUAL MEMBERS. PERSONALITY OF THE INDIVIDUALS

WHICH CASE LAID DOWN THE DISTINCTION BETWEEN THE PERSONALITY OF A CORPORATION AND THE

PERSONALITY OF THE INDIVIDUALS MAKING UP THE CORPORATION?

THE DISTINCTION BETWEEN THE PERSONALITY OF A CORPORATION AND THE PERSONALITY OF THE

INDIVIDUALS MAKING UP THE CORPORATION WAS CLEARLY LAID DOWN IN THE CASE OF SALOMON V.

SALOMON & COMPANY LTD (1897).

WHAT WAS THE CASE ALL ABOUT?

1. SALOMON INCORPORATED HIS BUSINESS AS A LIMITED COMPANY, WHICH CONSISTED OF SEVEN

MEMBERS OF HIS FAMILY AND HIMSELF.

2. HE HELD ALL THE SHARES EXCEPT SEVEN, AND ALSO DEBENTURES TO THE VALUE OF £10,000,

REPRESENTING A LOAN WHICH THE COMPANY BORROWED FROM HIM.

3. THE DEBENTURES ENTITLED HIM TO A FIRST CHARGE ON THE ASSETS OF THE COMPANY. THUS,

WHEN THE COMPANY WENT INTO LIQUIDATION, SALOMON CLAIMED THAT, AS A DEBENTURE

HOLDER, HE WAS A "SECURED" CREDITOR.

4. THE OTHER CREDITORS CLAIMED THAT SALOMON AND THE COMPANY WERE THE SAME PERSON

AND THAT A MAN COULD NOT OWE MONEY TO HIMSELF.

5. HOWEVER, THE HOUSE OF LORDS HELDTHAT A COMPANY, ONCE INCORPORATED, HAD A LEGAL

EXISTENCE OF ITS OWN, WHICH WAS QUITE INDEPENDENT OF THE EXISTENCE OF ANY INDIVIDUAL

MEMBER.

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B.CORPORATIONS IN LAW

CREATION OF A CORPORATION

WHAT ARE THE THREE CHIEF METHODS OF CREATING A CORPORATION

SINCE CORPORATE PERSONALITY IS ACQUIRED ONLY BY STATE RECOGNITION, IT CAN BE CONFERRED ONLY BY

AN AUTHORITATIVE DOCUMENT, HAVING THE STATE'S APPROVAL. THE LAW, THEREFORE, PRESCRIBES THAT A

CORPORATION CAN BE CREATED BY ONE OF THE FOLLOWING:

ROYAL CHARTER WHEREBY THE CROWN BY ITS PREROGATIVE CREATES ONE PARTICULAR

CORPORATION, E.G. A BBC WHICH WAS INCORPORATED BY ROYAL CHARTER.

SPECIAL STATUTE WHEREBY A SPECIAL ACT OF PARLIAMENT CREATES CORPORATIONS TO FULFIL

PUBLIC FUNCTIONS, E.G. THE PARASTATALS-POST OFFICE CORPORATION, MRA,MACRA,MERA,

BY REGISTRATION UNDER THE COMPANIES ACT: WHICH GOVERN THE FORMATION OF COMPANIES

AND THE BUILDING SOCIETIES ACT WHICH GOVERNS BUILDING SOCIETIES.

WHAT ARE THE RESULTS OF INCORPORATION

THE CORPORATION BECOMES A LEGAL (ARTIFICIAL/JURISTIC)PERSON.

IT MAY SUE AND SUED.

IT MAY BE PROSECUTED FOR CRIMES IN ITS CORPORATE NAME AND BE FINED

IT IS RECOGNISED AS A SEPARATE ENTITY FROM THE PEOPLE WHO ARE MEMBERS OF IT

IT CAN CARRY ON TRADING ACTIVITIES LIKE ANY OTHER ENTITY-BUT THROUGH ITS AGENTS

IT MAY HOLD AND DISPOSE OF LAND JUST LIKE ANY OTHER PERSON

THE ACTS OF A CORPORATION

EXERCISE OF POWERS: HOW DOES AN ARTIFICIAL PERSON EXERCISE POWER

AS A UNIT CONSISTING OF MANY PEOPLE, THE CORPORATION ACTS THROUGH ITS AGENTS, NAMELY

THE BOARD OF DIRECTORS, MANAGEMENT AND STAFF SELECTED/APPOINTED TO ADMINISTER ITS

AFFAIRS AND MANAGE AND ACT FOR THE COMPANY AS A WHOLE.

CORPORATIONS MUST ACT WITHIN THE POWERS CONFERRED ON THEM BY THEIR CONSTITUTIONS.

STATUTORY CORPORATIONS MAY DO ONLY THOSE THINGS PERMITTED EXPRESSLY OR IMPLIEDLY IN

THE STATUTE INCORPORATING THEM OR IN THE DOCUMENTS OF INCORPORATION GRANTED UNDER

THE STATUTE.

EVERY ACT DONE IN EXCESS OF THESE POWERS IS ULTRA VIRES, AND IS LEGALLY VOID. AN ACT

WHICH IS ULTRA VIRES DOES NOT BIND THE CORPORATION IN ANY WAY. IT IS TREATED MERELY AS

THE ACT OF THE AGENT OR OFFICIAL WHICH AUTHORISES OR PERFORMS IT.

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WHAT IS THE ULTRA VIRES RULE?

IT IS THE RULE WHICH SAYS THAT CORPORATIONS MUST ACT WITHIN THE POWERS (INTRA

VIRES)CONFERRED ON THEM BY LAW.

IF THEY GO OUTSIDE THEIR POWERS(ULTRA VIRES=BEYOND THE POWERS)THE ACTIONS THEY TAKE IS

UNLAWFUL,AND THEY WILL NOT BE VALID.

SO WHAT APPEARED TO BE VALID CONTRACT MAY NOT BE RULED ULTRA VIRES AND NOT A VALID

CONTRACT.

FORMAL CONTRACTS

HOW DOES A CORPORATION(ARTIFICIAL PERSON) ENTER INTO CONTRACTS

A COMPANY IS REPRESENTED IN ANY MATTER CONCERNING THE LAW OF CONTRACT BY ITS AGENT

OR AGENTS.

THEIR CONTRACTS MUST, OF COURSE, BE INTRA VIRES, I.E. WITHIN THECOMPANY'S POWERS.

THE COMMON LAW REQUIRED THAT, WHEN A CORPORATION ENTERED INTO A CONTRACT IT USED

ITS COMMON SEAL –THE OUTWARD SIGN OF AUTHORITY OF THE WHOLE BODY.

WHAT SHOULD PEOPLE DO WHO MAKE CONTRACTS WITH CORPORATIONS?

THEY SHOULD CHECK THE CORPORATION’S OBJECT CLAUSE TO ENSURE THAT THE PROPOSED

CONTRACT IS INTRA VIRES WITHIN THE OBJECTS OF THE COMPANY

WHAT RECENT ACT HAS WEAKENED THE ULTRA VIRES DOCTRINE?

THE EUROPEAN DIRECTIVES ON COMPANY LAW(NOW EMBODIED IN SECTION 35 AND 36 OF THE

COMPANIES ACT)

WHAT DOES IT SAY

IT SAYS THAT WHERE A PERSON ENTERS INTO AN AGREEMENT IN GOOD FAITH WITH THE DIRECTORS

OF A COMPANY ,ANYTHING THE DIRECTORS DO SHALL BE DEEMED TO BE INTRA VIRES AND THEY

CANNOT ESCAPE FROM THEIR LIABILITIES BY CLAIMING THAT THE ACT WAS ULTRA VIRES AND THAT

THE OTHER PARTY SHOULD HAVE KNOWN THIS.THE ACTIONS OF THEDIRCTORS BINDS THE COMPANY

TORTS

A CORPORATE BODY IS, IN THE LAW OF TORT, LIABLE FOR THE WRONGFUL ACT OF ITS SERVANTS,

PROVIDED THAT THE ACT WAS DONE WITHIN THE SCOPE OF THE SERVANT'S EMPLOYMENT AND

WITHIN THE POWERS OF THE CORPORATION, AND IT WAS ANACT WHICH WOULD HAVE BEEN

ACTIONABLE IF DONE BY AN INDIVIDUAL

A CORPORATION MAY SUE FOR DEFAMATION, I.E. LIBEL AND SLANDER, IF IT CAN PROVE ACTUAL

DAMAGE TO ITS TRADE OR BUSINESS INTEREST

IN CORNFORD V. CARLTON BANK (1900), IT WAS HELDTHAT A CORPORATE BODY CAN BE

CONSIDERED TO HAVE A MALICIOUS MIND AND, THEREFORE, TO BE LIABLE FOR THE TORT OF

MALICIOUS PROSECUTION.

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CESSATION OF A CORPORATION HOW IS A CORPORATION TERMINATED?

A CORPORATION CONTINUES TO EXIST UNTIL IT IS DISSOLVED IN ONE OF THE FOLLOWING WAYS:

BY VOLUNTARY SURRENDER OF ITS CHARTER TO THE SOVEREIGN

BY FORFEITURE OF THE CHARTER THROUGH SOME DEFAULT.

BY AN ACT OF PARLIAMENT

BY THE METHOD PROVIDED FOR DISSOLUTION IN THE INCORPORATING STATUTE, E.G. UNDER THE

INSOLVENCY ACT 1986 COMPANIES ARE DISSOLVED BY MEANS OF A "WINDING-UP".

NOTE THAT A CORPORATION DOES NOT CEASE TO EXIST MERELY BECAUSE ALL ITS MEMBERS ARE DEAD. IN

SUCH A CASE IT IS MERELY IN ABEYANCE AND IT CAN BE REVIVED AT ANY TIME.

C.COMPANIES

DEFINITION

THE MAJOR STATUTE GOVERNING COMPANIES IS THE COMPANIES ACT 2006,IN MALAWI COMPANIES ACT

1984,WHICH CONSOLIDATED ALL PREVIOUS STATUTES RELEVANT TO COMPANY LAW.

ONE DEFINITION OF A COMPANY IS THAT IT IS:

AN ASSOCIATION OF MEMBERS WHOSE SHARES IN THE PROPERTY OF THE COMPANY ARE

TRANSFERABLE.

ANOTHER WAY OF DEFINING IT IS:

AN ASSOCIATION OF INDIVIDUALS FOR PURPOSES OF PROFIT, POSSESSING A COMMON CAPITAL

CONTRIBUTED BY THE MEMBERS COMPOSING IT, SUCH CAPITAL BEING COMMONLY DIVIDED INTO

SHARES OF WHICH EACH MEMBER POSSESSES AT LEAST ONE, AND WHICH ARE TRANSFERABLE BY THE

OWNER.

WHAT DOES THE TERM LIMITED COMPANY MEAN?

A LIMITED COMPANYIS ONE IN WHICH THE LIABILITY OF ITS MEMBERS IS LIMITED BY THE MEMORANDUM

OF ASSOCIATION (SEE LATER) TO THE AMOUNT, IF ANY, UNPAID ON THE SHARES RESPECTIVELY HELD BY

THEM.

CLASSES OF COMPANY(WHAT ARE THE FIVE MAJOR TYPES COMPANIES?)

AS A RESULT OF THE COMPANIES ACT 2006,THE FOLLOWING FIVE CLASSES OF COMPANY NOW EXIST:

PUBLIC LIMITED COMPANIES (PLCS).

PRIVATE COMPANIES LIMITED BY SHARES.

PRIVATE COMPANIES LIMITED BY GUARANTEE WITHOUT A SHARE CAPITAL.

PRIVATE COMPANIES LIMITED BY GUARANTEE WITH A SHARE CAPITAL.

UNLIMITED COMPANIES.

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IN PRACTICE WHAT ARE THE THREE BASIC LEGAL CATEGORIES OF COMPANIES

IN PRACTICE, THESE COMPANIES FALL INTO THREE BASIC LEGAL CATEGORIES.

(A)UNLIMITED COMPANIES

THESE ARE RARE, AND DO NOT CALL FOR A GREAT DEAL OF DISCUSSION. NOTE THAT THE WORD "LIMITED" IS

NOT USED AS THE LAST WORD IN THE NAME OF THE COMPANY, AND THAT THE LIABILITY OF THE MEMBERS IS

UNLIMITED. AN UNLIMITED COMPANY MAY BE REREGISTERED AS A LIMITED COMPANY.

(B)COMPANIES LIMITED BY GUARANTEE

A COMPANY LIMITED BY GUARANTEE IS A PRIVATE COMPANY WHICH HAS THE LIABILITY OF ITS

MEMBERS LIMITED, BY THE MEMORANDUM OF ASSOCIATION, TO SUCH AMOUNT AS THE MEMBERS

MAY RESPECTIVELY THEREBY GUARANTEE TO CONTRIBUTE TO THE ASSETS OF THE COMPANY IN THE

EVENT OF ITS BEING WOUND UP.

LEADING EXAMPLES ARE TRADE ASSOCIATIONS AND ORGANISATIONS FORMED TO PROMOTE

CHARITY, EDUCATION, SCIENCE, ETC.

THEY DO NOT NORMALLY HAVE A SHARE CAPITAL, AS THEY ARE NOT FORMED FOR PROFIT, BUT THEY

ACQUIRE THE BENEFITS OF INCORPORATION BY REGISTRATION.

(C)COMPANIES LIMITED BY SHARES

THIS CATEGORY IS, BY FAR, THE MOST COMMON, AND IT REPRESENTS THE ORDINARY LIMITED

COMPANY OF MODERN COMMERCE AND INDUSTRY.

IN A COMPANY LIMITED BY SHARES, THE SHAREHOLDERS CAN ONLY BE CALLED ON AT ANY TIME TO

PAY THE COMPANY THE AMOUNT UNPAID ON THEIR SHARES. THIS LIABILITY IS STATED IN THE

MEMORANDUM AND, ONCE THE SHARES ARE FULLY PAID UP, IT CEASES.

UNDER THE ACT, COMPANIES LIMITED BY SHARES ARE CLASSIFIED AS EITHER PUBLIC OR PRIVATE.

A PUBLIC LIMITED COMPANY (PLC) IS DEFINED BY THE ACT AS A LIMITED COMPANY (WHETHER BY

SHARES OR BY GUARANTEE WITH A SHARE CAPITAL) WHOSE MEMORANDUM STATES THAT IT IS A

PUBLIC COMPANY AND WHICH HAS REGISTERED AS A PUBLIC COMPANY. SUCH A COMPANY MUST

HAVE A MINIMUM NOMINAL ALLOTTED SHARE CAPITAL OF £50,000, AND MUST IDENTIFY ITSELF ON

BUSINESS STATIONERY, ETC. AS A "PUBLIC LIMITED COMPANY

A PRIVATE COMPANY IS THEN DEFINED IN THE ACT AS ANY COMPANY THAT IS NOT A PUBLIC

COMPANY. THE MINIMUM NUMBER OF PERSONS WHO MAY FORM A PUBLIC COMPANY IS TWO.

FOR PRIVATE COMPANIES THERE IS NOW NO RESTRICTION ON THE NUMBER OF MEMBERS OR

SHAREHOLDERS, OR ON THEIR RIGHT TO TRANSFER SHARES.

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ADVANTAGES AND DISADVANTAGES OF CREATING A COMPANY

THE CHOICE BETWEEN USING A LIMITED COMPANY AS A TRADING VEHICLE AND REMAINING

UNINCORPORATED AS A SOLE TRADER OR A PARTNERSHIP IS ONE WHICH HAS SIGNIFICANTIMPLICATIONS FOR

BUSINESSES.

1. IT PROVIDES BUSINESS OWNER(S) WITH LIMITED LIABILITY

o ONCE INCORPORATED, THE MEMBERS OF A LIMITED COMPANY ENJOY LIMITED LIABILITY.

o SO LONG AS THEY HAVE PAID FOR THEIR SHARES IN FULL THEY CANNOT BE REQUIRED TO

CONTRIBUTE TO THE DEBTS OF THE COMPANY.

o LIMITED LIABILITY FOR OWNERS/SHAREHOLDERS

2. THE COMPANY CAN SUE AND BE SUED IN ITS OWN NAME.

o THIS IS AN ADVANTAGE TO SHAREHOLDERS IN THAT THEY DO NOT BECOME IMMEDIATELY

RESPONSIBLE FOR THE DEBTS OF THE COMPANY.

3. ABSENCE OF “MUTUAL AGENCY” (I.E., STOCKHOLDERS,ACTING AS OWNERS, MAY NOT ENTER THE

CORPORATIONINTO CONTRACTS OR AGREEMENTS)

o OWNERSHIP AND MANAGEMENT ARE FUNDAMENTALLY SEPARATE IN A COMPANY. GE THE

FUNDAMENTAL POINT UNDER ENGLISH COMPANY LAW;

4. SEPARATE LEGAL ENTITY (WITH RIGHTS AND RESPONSIBILITIESOF A LEGAL “PERSON”)

5. EASY TRANSFERABILITY OF OWNERSHIP (I.E., SHAREHOLDERS MAY TRADE OR SELL STOCK)

6. CONTINUITY OF EXISTENCE BEYOND ORIGINAL FOUNDERS OR SHAREHOLDERS

7. ABILITY TO RAISE LARGE AMOUNTS OF CAPITAL BY ISSUING STOCK TO INVESTORS

DISADVANTAGES OF CORPORATIONS:

1. COST RELATED TO SETTING UP THE CORPORATION AND FILING THE REQUIRED FORMS WITH THE

REGISTRAR OF COMPANIES.

2. FORMALITIES REQUIRED BY LAW (E.G., MAINTAINING CORPORATE MINUTES, HAVING A BOARD OF

DIRECTORS,

RECORDING SHAREHOLDER RIGHTS, MAINTAINING CORPORATE RECORDS AND FILINGS)

3. CONSIDERABLE ORGANIZATIONAL COSTS

4. MAY TAKE CONSIDERABLE TIME TO SET-UP AND ORGANIZE A CORPORATION

5. GREATER AMOUNT OF REGULATION AND SUPERVISION BY GOVERNMENTAL AGENCIES.

6. CORPORATIONS ARE SUBJECT TO REAL ESTATE, PERSONAL PROPERTY, AND FRANCHISE TAX

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WHAT IS THE DISTINCTION BETWEEN DIRECTORS AND SHAREHOLDERS

A COMPANY IS AN ARTIFICIAL LEGAL PERSON RECOGNISED IN LAW AS HAVING AN EXISTENCE

DISTINCT FROM THAT OF ITS MEMBERS. ONCE INCORPORATED THE MEMBERS (SHAREHOLDERS) OF

A LIMITED COMPANY ENJOY LIMITED LIABILITY. AS LONG AS THEY HAVE PAID FOR THEIR SHARES IN

FULL THEY CANNOT BE REQUIRED TO CONTRIBUTE TO THE DEBTS OF THE COMPANY.

IT IS IMPORTANT TO RECOGNISE THAT OWNERSHIP AND MANAGEMENT OF A COMPANY CAN BE

SEPARATE EVEN THOUGH THE INDIVIDUALS CONCERNED ARE PHYSICALLY THE SAME.

SHAREHOLDERS AS OWNERS OF THE EQUITY OR SHARE CAPITAL OF THE COMPANY HAVE THE RIGHT

TO FREELY TRANSFER THEIR SHARES UNLESS THERE IS SOME RESTRICTION IN THE COMPANY'S

CONSTITUTION.

SHAREHOLDERS, HOWEVER, HAVE NO AUTHORITY TO "MANAGE" THE BUSINESS OF THE COMPANY.

DIRECTORS EXERCISE DAY-TO-DAY MANAGEMENT OF THE COMPANY SUBJECT TO THE COMPANIES

ACT, THE MEMORANDUM AND ARTICLES OF THE COMPANY (SEE LATER) AND THE DIRECTIONS GIVEN

BY THE MEMBERS OF THE COMPANY BY SPECIAL RESOLUTION AT A GENERAL MEETING.

SHAREHOLDERS HAVE THE FOLLOWING RIGHTS BY VIRTUE OF OWNING SHARES IN A COMPANY:

1. TO RECEIVE DIVIDENDS

2. TO RECEIVE A RETURN OF CAPITAL IN A WINDING-UP

3. TO PARTICIPATE IN SURPLUS ASSETS ON A WINDING-UP

4. TO ATTEND AND VOTE AT GENERAL MEETINGS.

SHAREHOLDERS HAVE NO RIGHT TO SEE THE MINUTES OF DIRECTORS' MEETINGS, ONLY OF

SHAREHOLDER MEETINGS. THEIR DECISIONS AT GENERAL MEETINGS MAY IN SOME INSTANCES

REQUIRE A 75% MAJORITY.

DIRECTORSARE APPOINTED BY THE COMPANY IN ACCORDANCE WITH ITS ARTICLES OF ASSOCIATION.

THEIR ACTIVITIES ARE CONTROLLED BY THE ARTICLES, WHICH DEAL WITH APPOINTMENT,

QUALIFICATION, ROTATION AND REMUNERATION, AND BY THE COMPANIES ACT 2006, COMPANY

DIRECTORS' DISQUALIFICATION ACT 1986 AND INSOLVENCY ACT 1986.

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DIRECTORS HAVE A FIDUCIARY DUTY (DUTY OF GOOD FAITH) TOWARDS THE MEMBERS OF THE

COMPANY. EVERY DIRECTOR MUST GIVE NOTICE TO HIS/HER COMPANY OF ANY INTEREST WHICH

HE/SHE HAS IN THE SHARES AND DEBENTURES OF THE COMPANY. DIRECTORS CAN BE REMOVED

FROM THE BOARD OF A COMPANY WITHOUT THEIR CONSENT UNDER THE PROVISIONS OF TABLE A

(THE MODEL SET OF ARTICLES OF ASSOCIATION). DIRECTORS CANNOT VOTE OR PARTICIPATE IN A

BOARD MEETING DISCUSSION TO CONSIDER A MATTER IN WHICH THEY HAVE AN INTEREST UNLESS

THEY HAVE GIVEN PRIOR NOTIFICATION OF THIS INTEREST. GENERALLY DIRECTORS MAY CONSIDER

WHATEVER MATTERS THEY DEEM NECESSARY TO BE DISCUSSED AT A BOARD MEETING AND THEY

REACH DECISIONS BY A SIMPLE MAJORITY VOTE.

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THE VEIL OF INCORPORATION

THE VEIL OF INCORPORATION IS A FUNDAMENTAL PRINCIPLE OF COMPANY LAW WHICH WAS LAID

DOWN IN THE CASE OF SALOMON V. SALOMON & CO. (1897), NAMELY THAT A COMPANY DULY

INCORPORATED IS A SEPARATE LEGAL ENTITY WITH ITS OWN RIGHTS AND LIABILITIES DISTINCT FROM

THOSE OF ITS SHAREHOLDERS.

IT IS OBVIOUS THAT CORPORATIONS EXIST IN PART, IN THE FIRST PLACE TO SHIELD THEIR

SHAREHOLDERS FROM PERSONAL LIABILITIES FOR THE DEBTS OF THAT CORPORATION.

THIS PRINCIPLE, THAT UPON INCORPORATION A COMPANY BECOMES A SEPARATE LEGAL ENTITY, IS

FUNDAMENTAL TO THE ORGANISATION AND MANAGEMENT OF LIMITED COMPANIES ,

THE CASE OF SALOMON V. SALOMON & CO. LTD. (1897) ESTABLISHED THE LEGAL PRINCIPLE OF

“SEPARATE CORPORATE PERSONALITY”, I.E. FROM THE DATE STATED ON A COMPANY'S CERTIFICATE

OF INCORPORATION, THE COMPANY ACQUIRES ITS OWN RIGHTS AND LIABILITIES, SEPARATE FROM

THOSE OF ITS MEMBERS AND IT HAS PERPETUAL SUCCESSION, WHICH MEANS THAT MEMBERS CAN

COME AND GO AND THE COMPANY REMAINS –

A COMPANY HAS A DUAL NATURE AS BOTH AN ASSOCIATION OF ITS MEMBERS AND A PERSON

SEPARATE FROM ITS MEMBERS.

MOREOVER, FOLLOWING INCORPORATION, AN INCORPORATED COMPANY HAS, INTER ALIA, THE FOLLOWING

ATTRIBUTES AS A RESULT OF THE VEIL OF INCORPORATION/SHIELD OF PROTECTION.

IT CAN HOLD PROPERTY IN ITS CORPORATE NAME.

IT CAN SUE AND BE SUED IN ITS CORPORATE NAME.

IT CAN BE A DEBTOR AND CREDITOR IN ITS OWN NAME, AND EVEN OF ITS OWN MEMBERS.

INSOLVENCY OF THE COMPANY NEED NOT BRING ABOUT THE BANKRUPTCY OF ITS MEMBERS (LIMITED

LIABILITY IS ONE OF THE MAIN ADVANTAGES OF INCORPORATION).

IT HAS PERPETUAL SUCCESSION, SO THAT THE MEMBERSHIP MAY CHANGE, WITHOUT AFFECTING THE

LEGAL PERSONALITY OF THE COMPANY.

IT CAN MAKE CONTRACTS IN ITS CORPORATE NAME.

IT CAN COMMIT CRIMES, WHICH DO NOT INVOLVE MENS REA(I.E. A GUILTY MIND) SUCH AS ROAD TRAFFIC

OFFENCES (CRIMES INVOLVING MENS REACAN ALSO BE COMMITTED IF THE PERSON WHO WAS

INSTRUMENTAL IN CAUSING THE CRIME TO BE COMMITTED WAS IN A SENIOR MANAGEMENT POSITION

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WITHIN THE COMPANY, SUCH THAT HE CAN BE CONSIDERED TO BE THE ALTER EGO (OTHER SELF) OF THE

COMPANY).SEE NOW: CORPORATE MANSLAUGHTER ACT 2007.

IT CAN COMMIT TORTS, EITHER THROUGH THE INSTRUMENTALITY OF ITS OFFICERS OR ITS EMPLOYEES.

THE COMPANY CAN BE VICARIOUSLY LIABLE FOR ACTS OF EMPLOYEES COMMITTED IN THE COURSE OF

EMPLOYMENT.

WHAT DOES THE EXPRESSION “LIFTING THE CORPORATE VEIL “MEAN

THE PRINCIPLE THAT A COMPANY IS A PERSON, SEPARATE FROM ITS MEMBERS, CAN PRODUCE

UNSATISFACTORY RESULTS IN CERTAIN CIRCUMSTANCES.

COMPANY LAW, THEREFORE, RECOGNISES A NUMBER OF EXCEPTIONS TO THE PRINCIPLE OF

“SEPARATE CORPORATE PERSONALITY”.

IN THESE EXCEPTIONAL CIRCUMSTANCES, DESCRIBED COLLECTIVELY AS “LIFTING THE CORPORATE

VEIL”, THE COMPANY IS TREATED AS THE SAME PERSON AS ITS MEMBERS AND MANAGERS, I.E.

THEY LOSE THE SHIELD OF THE VEIL OF INCORPORATION AND BECOME “JOINTLY AND SEVERALLY”

LIABLE WITH THE COMPANY FOR ALL DEBTS AND LIABILITIES, AS IN THE CASE OF PARTNERS IN A

TRADITIONAL PARTNERSHIP, AS DEFINED BY THE PARTNERSHIP ACT 1890.

THERE ARE CERTAIN CIRCUMSTANCES IN WHICH COURTS WILL HAVE TO LOOK THROUGH THE

CORPORATION, THAT IS, LIFT THE VEIL OF INCORPORATION, OTHERWISE KNOWN AS PIERCING THE

VEIL, AND HOLD THE SHAREHOLDERS OF THE COMPANY DIRECTLY AND PERSONALLY LIABLE FOR THE

OBLIGATIONS OF THE CORPORATION

COMMON LAW EXAMPLES OF LIFTING THE CORPORATE VEIL INCLUDE THE FOLLOWING.

1. TRADING WITH THE ENEMY IN TIMES OF WAR-

DAIMLER CO. LTD V CONTINENTAL TYRE & RUBBER CO.(1916)

ENGLAND WAS AT WAR WITH GERMANY.

CONTINENTAL SUED DAIMLER FOR MONEY DUE IN RESPECT OF GOODS SUPPLIED.

DAIMLER CLAIMED THAT THE COMPANY WAS ACTUALLY OWNED BY GERMAN NATIONALS

AND PAYING THEM WAS ILLEGAL UNDER THE TRADING WITH THE ENEMY ACT.

THE COURT LIFTED THE CORPORATE VEIL TO DISCOVER IF THIS WAS SO, AND FOUND AS A

FACT THAT IT WAS THE GERMANS WHO WERE OPERATING THE BUSINESS. D WAS

THEREFORE SUCCESSFUL IN ITS DEFENCE.

IF, AS IN THIS CASE, THE PERSONS IN ACTUAL CONTROL OF THE COMPANY ARE ENEMY

ALIENS, THE COMPANY CAN ALSO BE SO REGARDED (AS AN ENEMY) FOR THE PURPOSES OF

THE LAW RELATING TO TRADING WITH THE ENEMY.

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2. GROUP ENTERPRISES: CASES INVOLVING GROUP OF COMPANIES WHERE THE CORPORATE VEIL

MAY BE LIFTED EITHER ON PUBLIC POLICY GROUNDS OR IN THE INTERESTS OF JUSTICE.

THE ARGUMENT OF GROUP ENTERPRISES IS TO THE EFFECT THAT IN CERTAIN CASES, SOME

COMPANIES THAT ACT AS A CORPORATE GROUP, MAY OPERATE TO HIDE BEHIND THE

ADVANTAGES OF LIMITED LIABILITY TO THE DISADVANTAGE OF THEIR CREDITORS.

THEY MAY OPERATE IN A WAY THAT THE PARENT ENTITY IS NOT CLEARLY DISTINGUISHABLE

FROM THE SUBSIDIARIES.

THE ARGUMENT IN FAVOR OF PIERCING THE CORPORATE VEIL IN THESE CIRCUMSTANCES IS

TO ENSURE THAT A CORPORATE GROUP WHICH SEEKS THE ADVANTAGES OF LIMITED

LIABILITY MUST ALSO BE READY TO ACCEPT THE CORRESPONDING RESPONSIBILITIES. THIS

WAS THE OPINION OF DOYLE CJ IN THE 1998 CASE OF TAYLOR V SANTOS LTD. 56

EACH COMPANY WITHIN THE GROUP, ACCORDING TO THE DOCTRINE OF INCORPORATION,

IS A SEPARATE LEGAL ENTITY, I.E. THERE IS A “VEIL OF INCORPORATION” BETWEEN A

HOLDING COMPANY AND ITS SUBSIDIARY(IES). SIMILARLY, THERE IS A “VEIL OF

INCORPORATION” BETWEEN CO-SUBSIDIARIES. HOWEVER, THERE HAVE BEEN A NUMBER

OF CASES WHERE THE COURTS HAVE LIFTED THE VEIL (OR VEILS) OF INCORPORATION

BETWEEN A HOLDING COMPANY AND ITS VARIOUS SUBSIDIARIES, WITH TWO MAIN AIMS

(I)FIRSTLY,WHERE TO BENEFIT THE GROUP OF COMPANIES CONCERNED.

(II)SECONDLY, TO BENEFIT THE CREDITORS OF THE GROUP OF COMPANIES CONCERNED

(INCLUDING THE INLAND REVENUE) OF AN INSOLVENT COMPANY BY MAKING OTHER

COMPANIES WITHIN THE GROUP LIABLE FOR ITS DEBTS.

3. SHAM OR FAÇADE: WHERE A COMPANY IS A SHAM AND IS SEEKING TO EVADE THE ENFORCEMENT OF

EXISTING RIGHTS

AN ARGUMENT THAT THE COMPANY UNDER SCRUTINY IS A SHAM OR A FAÇADE IS ONE OF HE

STRONGEST POINTS THAT WOULD PROMPT A COMMON LAW COURT TO LIFT THE VEIL OF

INCORPORATION.

TO SAY A COMPANY WAS MERELY A FAÇADE OR A SHAM MEANS THE CORPORATE FORM WAS

INCORPORATED OR MERELY USED AS A MASK TO HIDE THE REAL PURPOSE OF THE CORPORATE

CONTROLLER.

THE HOUSE OF LORDS IN WOOLFSON V. STRATHCLYDE (1978)STATED THAT IT IS APPROPRIATE FOR

THE COURTS TO LIFT THE VEIL OF INCORPORATION ONLY WHERE SPECIAL CIRCUMSTANCES EXIST,

INDICATING THAT IT IS A “MERE FAÇADE” CONCEALING THE TRUE FACTS.

THE "FAÇADE" OR "SHAM" CONCEPT SEEMS TO APPLY WHERE THE COMPANY CONCERNED HAS BEEN

FORMED PRIMARILY TO EVADE EXISTING LIABILITIES OR DEFEAT THE LAW.

IN THE ENGLISH CASE OF SHARRMENT PTY LTD V OFFICIAL TRUSTEE IN BANKRUPTCY59

, LOCKHART J,

STATED THAT:

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"A 'SHAM' IS…SOMETHING THAT IS INTENDED TO BE MISTAKEN FOR SOMETHING ELSE OR THAT IS

NOT REALLY WHAT IT PURPORTS TO BE. IT IS A SPURIOUS IMITATION, A COUNTERFEIT, A DISGUISE OR

A FALSE FRONT. IT IS NOT GENUINE OR TRUE, BUT SOMETHING MADE IN IMITATION OF SOMETHING

ELSE OR MADE TO APPEAR TO BE SOMETHING WHICH IT IS NOT. IT IS SOMETHING WHICH IS FALSE

OR DECEPTIVE."

4. IN THE EVENT OF FRAUDULENT TRADING

UNDER SECTION 213, INSOLVENCY ACT 1986, IF THE COURT FINDS THAT THE BUSINESS OF A

COMPANY HAS BEEN CARRIED ON WITH INTENT TO “DEFRAUD”, I.E. HAS ENGAGED IN FRAUDULENT

TRADING, IT CAN HOLD ANY PERSON (E.G. DIRECTORS, ACCOUNTANTS AND/OR EMPLOYEES) WHO

WERE “KNOWINGLY PARTIES” TO THE FRAUD PERSONALLY LIABLE TO MAKE SUCH CONTRIBUTION TO

THE COMPANY'S ASSETS AS THE COURT THINKS FIT, UNDER THE CIRCUMSTANCES.

EXAMPLES OF "FRAUDULENT TRADING" INCLUDE PAYING CREDITORS OUT OF ORDER ON THE

PREFERENTIAL LIST OF CREDITORS –ESPECIALLY A PARTY "KNOWINGLY" PAYING ONE PARTY OF

CREDITORS OFF IN THE KNOWLEDGE THAT THIS WILL RESULT IN CREDITORS HIGHER UP THE

PREFERENTIAL LIST LOSING OUT FINANCIALLY.

LIABILITY IS NO LONGER LIMITED BECAUSE THE PERSONS WHO HAVE ENGAGED IN FRAUDULENT

TRADING ARE REQUIRED TO PAY A FINE SET BY THE COURT.

5. IN THE EVENT OF WRONGFUL TRADING

UNDERSECTION 214,INSOLVENCY ACT 1986, IF ON THE WINDING-UP OF AN INSOLVENT COMPANY A

PAST OR PRESENT DIRECTOR (OR SHADOW DIRECTOR) KNEW OR OUGHT TO HAVE KNOWN, BEFORE

THE COMMENCEMENT OF THE WINDING-UP, THAT THERE WAS NO REASONABLE PROSPECT THAT

THE COMPANY COULD AVOID INSOLVENT LIQUIDATION AND FAILED TO TAKE EVERY STEP TO

MINIMISE THE LOSS TO THE COMPANY'S CREDITORS, THEN THE COURT MAY DECLARE, ON THE

APPLICATION OF THE LIQUIDATOR, THAT THE PERSON(S) IS/ARE LIABLE TO MAKE SUCH

CONTRIBUTION AS THE COURT THINKS FIT –UNLESSTHEY CAN ESTABLISH THAT THEY TOOK EVERY

STEPTHEY OUGHT TO HAVE TAKEN WITH A VIEW TO MINIMISING THE POTENTIAL LOSS TO THE

COMPANY'S CREDITORS.

THE JUDGMENT STANDARDS UNDER THIS SECTION ARE BASED ON OBJECTIVE CRITERIA RATHER

THAN “PERSONAL MORALITY AND HONESTY”; A PERSON IS TO BE JUDGED ON THE BASIS OF HIS/HER

OWN KNOWLEDGE, SKILL AND EXPERIENCE THAT COULD REASONABLY BE EXPECTED OF SOMEONE

CARRYING OUT HIS/HER "FUNCTION" IN RELATION TO THE COMPANY.

15

LIABILITY IS NO LONGER LIMITED BECAUSE THE DIRECTOR WHO HASENGAGED IN WRONGFUL

TRADING IS REQUIRED TO PAY A FINE SET BY THE COURT.

THE FOLLOWING CASES AFFECT DIRECTORS AND SHAREHOLDERS.

WILLIAMS V. NATURAL LIFE HEALTH FOODS (1998)

HERE, THE HOUSE OF LORDS STATED THAT A DIRECTOR OF A LIMITED COMPANY WAS ONLY PERSONALLY

LIABLE FOR LOSS SUFFERED AS A RESULT OFNEGLIGENT ADVICE GIVEN BY HIM ON BEHALF OF THE COMPANY

IF HE HAD ASSUMED PERSONAL RESPONSIBILITY FOR THAT ADVICE.

IN THIS CASE, SUCH AN ASSUMPTION OF RESPONSIBILITY HAD TO BE DETERMINED OBJECTIVELY AND THE

ABSENCE OF PERSONAL DEALINGS WOULD INDICATE VERY STRONGLY THAT THE DIRECTOR WOULD HAVE NO

RESPONSIBILITY.

RE CONTINENTAL ASSURANCE CO. OF LONDON PLC (1996)

HERE, THE COURT DECIDED THAT A NON-EXECUTIVE DIRECTOR OF A COMPANY HAD FAILED TO APPRECIATE

WHAT THE RESPONSIBILITIES OF A DIRECTOR WERE IN RELATION TO THE UNDERSTANDING OF A COMPANY'S

FINANCIAL AFFAIRS. THE DIRECTOR WAS REQUIRED TO EXERCISE THE COMPETENCE REQUIRED BY THE

COMPANIES ACT IN RELATION TO THE AFFAIRS OF THE COMPANY. HIS CONDUCT AS A DIRECTOR OF THE

COMPANY MADE HIM UNFIT TO BE CONCERNED IN THE MANAGEMENT OF A COMPANY AND HE WAS

DISQUALIFIED FOR THREE YEARS FROM HOLDING OFFICE AS A DIRECTOR.

HOOD SAILMAKERS LTD V. AXFORD (1997)

HERE, THE COMPANY'S ARTICLES STATED THAT A QUORUM FOR A MEETING WAS TWO DIRECTORS. AS THE

COMPANY ONLY HAD TWO DIRECTORS AND ONE OF THEM WAS ABROAD, IT WAS NOT POSSIBLE TO HOLD A

VALID MEETING. THE DIRECTOR REMAINING IN THE UK ATTEMPTED TO USE THE WRITTEN SOLUTION

PROCEDURE TO ENABLE DECISIONS TO BE MADE EFFECTIVELY BY HIMSELF, WHO REMAINED IN THE UK. THE

COURT DECIDED THAT THIS WRITTEN RESOLUTION PROCEDURE WAS INVALID AS ONE DIRECTOR WAS

ATTEMPTING TO OVERRIDE THE QUORUM REQUIREMENTS TO HIS ADVANTAGE.

ROSS V. TELFORD (1997)

HERE, THE COURT EXAMINED A CASE OF CORPORATE DEADLOCK WHERE EQUAL SHAREHOLDINGS HELD BY

TWO PARTIES IN A COMPANY WERE PREVENTING DECISIONS BEING MADE BY THE 54 THE LAW RELATING TO

ASSOCIATIONS 1: CORPORATIONS ABE

16

CREASEY V. BREACHWOOD MOTORS LTD (1993), WHERE A COMPANY TRANSFERRED ITS ASSETS TO ANOTHER

COMPANY TO AVOID LIABILITIES ARISING FROM A WRONGFUL DISMISSAL CLAIM BROUGHT AGAINST THE

FIRST COMPANY, THE COURT ALLOWED THE CLAIMANT TO PURSUE THE ASSETS OF THE FIRST COMPANY INTO

THE SECOND COMPANY. SEE ALSO GENCOR V. DALBY (2000).

STATUTORY EXAMPLES OF LIFTING THE CORPORATE VEIL INCLUDE THE FOLLOWING.

WHERE WORKING RELATIONSHIPS HAVE BROKEN DOWN WITHIN A QUASI-PARTNERSHIP COMPANY

THE LEADING CASE ON LIFTING THE VEIL ON THIS GROUND IS EBRAHIMI V. WESTBOURNE GALLERIES LTD

(1972). A BREAKDOWN IN THE MANAGEMENT OF A COMPANY OR THE COMPLETE EXCLUSION OF A MEMBER

DIRECTOR FROM PARTICIPATION IN MANAGEMENT, HAVE BEEN REDRESSED (REMEDIED) BY WINDING-UP THE

COMPANY CONCERNED ON THE JUST AND EQUITABLE GROUND IN ACCORDANCE WITH SECTION 122(1)(G) OF

THE INSOLVENCY ACT 1986. THE COURTS REGARD THE COMPANY, IN SUCH CASES, IN FACT, IF NOT IN FORM,

AS A PARTNERSHIP. THIS SCENARIO NORMALLY ARISES IN COMPANIES WITH FEW MEMBERS WHICH,

BECAUSE OF THIS AND THEIR MANAGEMENT STRUCTURE, ARE TERMED QUASI-PARTNERSHIPS.

THE FALL IN MINIMUM MEMBERSHIP OF A PLC TO BELOW THE STATUTORY MINIMUM OF TWO

MEMBERS, IN CONTRAVENTION OF SECTION 24 OF THE COMPANIES ACT 1985

THIS STATES THAT IF A PLC CARRIES ON BUSINESS WITHOUT HAVING AT LEAST TWO MEMBERS AND DOES SO

FOR MORE THAN SIX MONTHS, A PERSON WHO, FOR THE WHOLE OR ANY PART OF THE PERIOD THAT IT

CARRIES ON BUSINESS AFTER SIX MONTHS, (A) IS A MEMBER OF THE COMPANY, AND (B) KNOWS THAT IT IS

CARRYING ON BUSINESS WITH ONLY ONE MEMBER, IS LIABLE JOINTLY AND SEVERALLY WITH THE COMPANY

FOR THE PAYMENT OF THE COMPANY'S DEBTS CONTRACTED DURING THE PERIOD, I.E. AFTER THE FIRST SIX

MONTHS, OR, AS THE CASE MAY BE, THAT PART OF IT. IT SHOULD BE NOTED THAT THIS PROVISION HAS NOT

BEEN CARRIED OVER TO THE COMPANIES ACT 2006.

INCORRECTLY STATING A COMPANY'S NAME IN CORRESPONDENCE ETC.

SECTION 349(4), COMPANIES ACT 1985, STATES THAT IF AN OFFICER, FOR EXAMPLE, A DIRECTOR OR

SECRETARY, SIGNS A BILL OF EXCHANGE (E.G. A CHEQUE) ON WHICH THE CORRECT NAME OF THE COMPANY

IS NOT STATED, HE WILL BE REQUIRED TO PAY THE AMOUNT OF IT, ON THE BASIS OF PERSONAL LIABILITY, IF

THE COMPANY REFUSES TO HONOUR (PAY) IT. AGAIN, IT SHOULD BE NOTED THAT THIS PROVISION HAS NOT

BEEN CARRIED OVER TO THE COMPANIES ACT 2006.

WHERE A PLC DOES BUSINESS OR EXERCISES ANY BORROWING POWERS BEFORE IT HAS BEEN ISSUED

WITH A “TRADING CERTIFICATE” FROM THE REGISTRAR OF COMPANIES

17

THIS CAN LEAD TO THE DIRECTORS OF THE COMPANY WHICH IS IN DEFAULT BEING HELD PERSONALLY LIABLE

FOR ANY LOSS OR DAMAGE SUFFERED BY A THIRD PARTY TO ANY TRANSACTION ENTERED INTO BY THE

COMPANY IN CONTRAVENTION OF THIS SECTION.

IT SHOULD BE STRESSED THAT THE FAILURE OF A PLC TO OBTAIN TRADING CERTIFICATE (UNDER A SECTION

761 OF THE COMPANIES ACT 2006) BEFORE IT DOES BUSINESS OR EXERCISES ITS BORROWING POWERS, DOES

NOT AFFECT THE VALIDITY OF A TRANSACTION ENTERED INTO BY THE COMPANY, BUT WHERE A COMPANY

OPERATES IN CONTRAVENTION AND FAILS TO COMPLY WITH ITS OBLIGATIONS IN CONNECTION WITH THE

TRANSACTION WITHIN 21 DAYS FROM BEING CALLED UPON TO DO SO, THE DIRECTORS OF THE COMPANY ARE

JOINTLY AND SEVERALLY LIABLE TO INDEMNIFY ANY OTHER PARTY TO THE TRANSACTION IN RESPECT OF ANY

LOSS OR DAMAGE SUFFERED BY HIM BY REASON OF THE COMPANY'S FAILURE TO COMPLY WITH ITS

OBLIGATIONS (THE DIRECTORS WHO ARE LIABLE ARE THOSE PERSONS WHO HELD THE OFFICE OF DIRECTOR

AT THE TIME WHEN THE TRANSACTION WAS MADE). DIRECTORS HAVE JOINT AND SEVERAL LIABILITYWITH

THEIR COMPANY JUST LIKE PARTNERS HAVE JOINT AND SEVERAL LIABILITY WITH THEIR FIRM.

WHERE THERE IS A HOLDING AND SUBSIDIARY RELATIONSHIP BETWEEN COMPANIES, THE HOLDING

COMPANY IS REQUIRED, SUBJECT TO CERTAIN EXCEPTIONS, NOT ONLY TO PREPARE ITS OWN

INDIVIDUAL ACCOUNTS BUT ALSOGROUP BALANCE SHEETS AND PROFIT AND LOSS ACCOUNTS OF IT,

THE PARENT AND ITS SUBSIDIARY UNDERTAKINGS. THIS SUGGESTS THAT, FOR FINANCIAL PURPOSES

AT LEAST,THE COMPANIES WITHIN A GROUP ARE AS ONE. THE VEIL OF INCORPORATION CAN THEN

BE LIFTED BETWEEN THE INDIVIDUAL ENTITIES (SUBSIDIARIES) WITHIN THE GROUP SO THAT THE

COMPANIES' INVESTORS (AND OTHERS, E.G. THE INLAND REVENUE) CAN JUDGE THE FINANCIAL

POSITION OF THE GROUP AS A WHOLE.

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COMPANY. IN THIS CASE, AND IN OTHERS, WHERE DEADLOCK ARISES EITHER FROM NON-ATTENDANCE

RENDERING MEETINGS INQUORATE OR FROM EQUALITY OF VOTING POWER, COMPANIES FIND IT IMPOSSIBLE

TO FUNCTION. HOWEVER, THE DECISION IN THIS CASE MAKES IT CLEAR THAT COURTS WILL NOT ATTEMPT TO

SOLVE A DILEMMA FOR PARTIES WHICH THEY HAVE CAUSED, BY THE WAY IN WHICH THEY HAVE DIVIDED THE

SHARE CAPITAL OR ORGANISED THE QUORUM REQUIREMENTS. THE SOLUTION IS MOST LIKELY TO REST WITH

THE PARTIES THEMSELVES, WHO CAN RESOLVE THE DEADLOCK BY AGREEING TO WIND UP THE COMPANY.

RE PARK HOUSE PROPERTIES LTD (1997)

HERE, THE COURT HELD THAT WHERE DIRECTORS HAD NEVER PLAYED ANY ACTIVE ROLE IN A COMPANY AND

HAD NEVER BEEN PAID ASDIRECTORS, THEY STILL HAD OBLIGATIONS TO FULFIL. IN THIS CASE, THREE

DIRECTORS WERE DISQUALIFIED FROM HOLDING OFFICE SINCE THE LAW IMPOSES STATUTORY AND

FINANCIAL DUTIES ON ALL DIRECTORS. THEIR COMPLETE LACK OF INVOLVEMENT IN THE RUNNING OF THE

COMPANY,ITS FINANCIAL PROBLEMS AND THE PREPARATION AND FILING OF ACCOUNTS LED THE COURT TO

CONCLUDE THAT THEY WERE UNFIT TO HOLD OFFICE AS DIRECTORS.

WHAT WAS SALOMON V SALOMON&CO (1897) ABOUT

THIS IS THE CASE WHETHER THE COMPANY IS A SINGLE MEMBER PRIVATE COMPANY, A SUBSIDIARY

COMPANY IN A GROUP OF COMPANIES, OR A PUBLIC LIMITED COMPANY WITH A STOCK EXCHANGE LISTING

AND MANY THOUSANDS OF SHAREHOLDERS.

IN SALOMON'SCASE, MR SALOMON HAD CARRIED ON A SHOE MANUFACTURING BUSINESS FOR OVER 30

YEARS AND DECIDED TO FORM THE BUSINESS INTO A LIMITED COMPANY. THE COMPANY WAS REGISTERED

WITH HIM AND SIX OTHERS HOLDING THE SHARES. HE THEN SOLD HIS BUSINESS TO THE NEW LIMITED

COMPANY FOR A FIGURE OF JUST UNDER £40,000. THIS SUM WAS PAID FOR BY THE COMPANY ISSUING

SHARES VALUED AT £20,000 TO MR SALOMON AND HIS FAMILY. A SECURED DEBENTURE, WHICH WAS A

FLOATING CHARGE ON THE COMPANY'S ASSETS, WAS CREATED IN FAVOUR OF MR SALOMON FOR £10,000.

THE BALANCE WAS THEN PAID IN CASH.

HOWEVER, SOME TIME LATER THE NEW COMPANY FOUND ITSELF IN FINANCIAL DIFFICULTIES AND WAS PUT

INTO LIQUIDATION. WHEN THE FINANCIAL POSITION OF THE COMPANY WAS ASSESSED, ITS ASSETS WERE

WORTH ONLY ABOUT £6,000 AND THE AMOUNT OWING TO TRADE CREDITORS WAS ABOUT £7,000. WHEN A

JUDGMENT HAD TO BE MADE BY THE COURT, IT HAD TO DECIDE WHETHER THE TRADE CREDITORS OR THE

DEBENTURE HOLDER (MR SALOMON) WAS ENTITLED TO THE £6,000 ASSETS. THE TRADE CREDITORS ARGUED

THAT SINCE AN INDIVIDUAL COULD NOT OWE MONEY TO HIMSELF, SO TOO A COMPANY COULD NOT OWE

MONEY TO ITS MAJOR SHAREHOLDER. HOWEVER, THE COURT DECIDED THAT THE COMPANY WAS A

SEPARATE LEGAL ENTITY, WHICH COULD OWE MONEY EVEN TO A MAJOR SHAREHOLDER. THEREFORE, THE

19

DEBENTURE WHICH HAD BEEN CREATED IN FAVOUR OF MR SALOMON WAS VALID AND, AS HOLDER, HE WAS

ENTITLED TO SUCH ASSETS AS REMAINED WITHIN THE LIMITED COMPANY PRIOR TO LIQUIDATION.

THE CASE OF SALOMON V.SALOMON & CO. LTD (1897)LED TO THE COINING OF THE PHRASE 'LIFTING THE

CORPORATE VEIL'. SEE NOW: BECKETT V. HALL (2007).

ALTHOUGH THERE IS NO ONE CONSISTENT PRINCIPLE RUNNING THROUGH THESE VARIOUS EXCEPTIONS,

THOSE PROVIDED BY STATUTE TEND TO PENALISE BREACHES OF THE COMPANIES LEGISLATION AND THOSE

PROVIDED BY THE CASE LAW TEND TO INVOLVE SITUATIONS WHERE “SPECIAL CIRCUMSTANCES EXIST

INDICATING THAT IT (THE CORPORATE VEIL) IS A MERE FAÇADE CONCEALING THE TRUE FACTS”PER LORD

KEITH IN WOOLFSON V. STRATHCLYDE REGIONAL COUNCIL (1978).THE LAW RELATING TO ASSOCIATIONS 1:

CORPORATIONS 51

© ABE

D.COMPANIES IN LAW

FORMATION

INCORPORATION. HOW IS A COMPANY INCORPORATED

A COMPANY IS FORMED BY THE REQUISITE NUMBER OF PERSONS LODGING WITH THE REGISTRAR OF

COMPANIES A SIGNED MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION.

ONCE THESE DOCUMENTS ARE APPROVED BY THE REGISTRAR, THE REGISTRAR ISSUES A CERTIFICATE

OF INCORPORATION WHICH BRINGS INTO BEING A NEW LEGAL ENTITY.

A PRIVATE COMPANY MAY BEGIN BUSINESS ON THE ISSUE OF THE CERTIFICATE OF INCORPORATION,

BUT IN THE CASE OF A PUBLIC COMPANY, CERTAIN OTHER FORMALITIES MUST BE OBSERVED BEFORE

THE REGISTRAR ISSUES A CERTIFICATE TO COMMENCE BUSINESS.

20

MEMORANDUM OF ASSOCIATION

THE MEMORANDUM OF ASSOCIATION IS A SUPERIOR CONSTITUTIONAL DOCUMENT OF THE COMPANY

THAT RECORDS THE FACTUAL AND LEGAL BACKGROUND OF THE COMPANY:

THAT ITS SIGNATORIES WISH TO BE INCORPORATED AS A COMPANY;

THE PROPOSED COMPANY'S NAME, POWERS, CAPITAL AND THE SITUATION OF ITS REGISTERED

OFFICE.

IT MUST ALSO CONTAIN A CLAUSE STATING THAT THE LIABILITY OF MEMBERS IS LIMITED.

IT IS EXPECTED THAT, AS THIS DOCUMENT EXPRESSES THE POWERS OF THE COMPANY, ALL PERSONS

HAVING DEALINGS WITH THE COMPANY SHALL BE ACQUAINTED WITH ITS PROVISIONS,

PARTICULARLY AS NO ACT BEYOND ITS SCOPE IS BINDING UPON THE COMPANY, EVEN SHOULD

EVERY MEMBER ACQUIESCE. THIS IS THE ULTRA VIRES DOCTRINE REFERRED TO EARLIER.

IN ASHBURY CARRIAGE CO. LTD V. RICHE (1875), A COMPANY WAS FORMED WITH THE OBJECTS OF MAKING,

SELLING AND MENDING RAILWAY CARRIAGES AND, AS MECHANICAL ENGINEERS, TO PURCHASE, LEASE AND

WORK MINES, MINERALS, LAND AND BUILDINGS. IT PURPORTED TO ENTER A CONTRACT TO PURCHASE A

CONCESSION TO BUILD A RAILWAY IN BELGIUM. THE MEMBERS OF THE COMPANY, IN GENERAL MEETING,

RATIFIED THE CONTRACT, BUT IT WAS NEVERTHELESS HELD TO BE ULTRA VIRES AND VOID, FOR ITWAS

BEYOND THE OBJECTS CLAUSE IN THE MEMORANDUM.

HOWEVER, THE 1985 ACT CONSOLIDATED SIGNIFICANT AMENDMENTS TO THE ULTRA VIRES DOCTRINE AS A

RESULT OF THE HARMONISATION OF BRITISH COMPANY LAW WITH EC (NOW EU) LAW. SECTION 35

MODIFIED THE DOCTRINE BY PROVIDING THAT A PERSON DEALING IN GOOD FAITH WITH A COMPANY NEED

NO LONGER INQUIRE INTO THE LIMITATIONS ON THE CAPACITY OF THE COMPANY OR POWERS OF THE

DIRECTORS. THIS HAS THE EFFECT OF PREVENTING THE COMPANY FROM AVOIDING ITS RESPONSIBILITY

UNDER AN ULTRA VIRES CONTRACT, BUT LEFT THE BONA FIDE THIRD PARTY THE OPTION OF EITHER

ENFORCING SUCH A CONTRACT AGAINST THE COMPANY OR OF BACKING OUT ON THE GROUNDS THAT THE

CONTRACT WAS ULTRA VIRES.

21

IN 1989, FURTHER LEGISLATION REACHED THE STATUTE BOOK ON THIS PARTICULAR ISSUE. SECTION 108,

COMPANIES ACT 1989, SUBSTITUTED NEW SECTIONS 35, 35A AND 35B INTO THE 1985 ACT. THESE NEW

PROVISIONS, TO ALL INTENTS AND PURPOSES, ABOLISHED THE ULTRA VIRES RULE ALTOGETHER, IN SO FAR AS

IT AFFECTS COMPANIES FORMED OR REGISTERED UNDER THE 1985 ACT. THE PROVISIONS ARE AS FOLLOWS.

(A)BY SECTION 35, "THE VALIDITY OF AN ACT DONE BY A COMPANY SHALL NOT BE CALLED INTO QUESTION ON

THE GROUND OF LACK OF CAPACITY BY REASON OF ANYTHING IN THE COMPANY'S MEMORANDUM".

A SHAREHOLDER MAY, HOWEVER,STILL OBTAIN AN INJUNCTION TO RESTRAIN AN INTENDED ULTRA VIRESACT,

PROVIDING HE/SHE DOES SO BEFORE ANY BINDING LEGAL OBLIGATION HAS BEEN ENTERED INTO BY THE

COMPANY. FURTHERMORE, DIRECTORS WILL REMAIN LIABLE FOR ANY ACTS WHICH ARE ULTRA VIRESTHE

MEMORANDUM, UNLESS THOSE ACTS ARE RATIFIED BY A SPECIAL RESOLUTION AND A FURTHER SPECIAL

RESOLUTION IS PASSED TO RELIEVE THEM OF LIABILITY.

(B)SECTION 35A BRINGS WITHIN THE SECTION THE POWER OF DIRECTORS TO BIND THE COMPANY TO ACTS

WITHIN THE POWER OF THE COMPANY.

NEITHER SECTION 35 NOR SECTION 35A APPLIES TO CHARITIES.

(C)SECTION 35B RELIEVES A PARTY TO A TRANSACTION WITH A COMPANY FROM THE NEED TO INQUIRE INTO

THE TERMS OF A COMPANY'S MEMORANDUM OR ANY LIMITATION IN THE DIRECTORS' POWERS.

SIMILAR PROVISIONS ARE ENACTED FOR COMPANIES NOT FORMED UNDER THE ACT, BUT WHICH ARE

REGISTERED UNDER IT, AND FOR UNREGISTERED COMPANIES.

SECTION 110 OF THE 1989 ACT ALSO SUBSTITUTES A NEW SECTION 3A AND SECTION 4 INTO THE 1985 ACT.

THESE PROVISIONS ENABLE A COMPANY TO STATETHAT ITS OBJECT IS TO "CARRY ON BUSINESS AS A GENERAL

COMMERCIAL COMPANY", WHICH IS EXPLAINED AS ENABLING THE COMPANY TO "CARRY ON ANY TRADE OR

BUSINESS WHATSOEVER ... (AND TO DO) ... ALL SUCH THINGS AS ARE CONDUCIVE TO CARRYING ON ANY

TRADE OR BUSINESS BY IT". THE SECTIONS ALSO ENABLE THE COMPANY TO ALTER ITS OBJECTS FOR ANY

PURPOSE WHATSOEVER. SEE NOW: S21(1) COMPANIES ACT 2006. FORMERLY THE OPPORTUNITIES FOR

SUCH ALTERATIONS WERE RESTRICTED TO A FEW SPECIFIC SITUATIONS.

FOR COMPANIES WHICH CHOOSE TO ADOPT SUCH A BROADLY WORDED OBJECTS CLAUSE AND TO AVAIL

THEMSELVES OF THE MODIFIED PROCEDURES, THE ULTRA VIRESDOCTRINE WOULD APPEAR TO BE DEAD.

22

ARTICLES OF ASSOCIATION

THE ARTICLES OF ASSOCIATION ARE THE RULES FOR THE INTERNAL MANAGEMENT OF THE

COMPANY.

THE FIRST SCHEDULE OF THE COMPANIES ACT IS KNOWN AS "TABLE A" AND IT CONSTITUTES A

MODEL SET OF ARTICLES WHICH ARE APPLICABLE TO EVERY COMPANY, UNLESS THE COMPANY'S

OWN ARTICLES EXPRESSLY EXCLUDE OR MODIFY THE PROVISIONS OF TABLE A. UNDER THE 2006 ACT

THERE ARE SEPARATE SETS OF MODEL ARTICLES FOR PRIVATE COMPANIES AND PLCS.

MATTERS REGULATED BY THE SO-

CALLEDMODEL SET OF ARTICLES INCLUDE:

SHARE CAPITAL

ALTERATION OF SHARE CAPITAL

TRANSFER OF SHARES PROCEEDINGS OF GENERAL

MEETINGS

VOTES OF MEMBERS

POWERS OF DIRECTORS

APPOINTMENT OF DIRECTORS

REMOVAL OF DIRECTORS

DIVIDENDS

ACCOUNTS

WINDING-UP

23

IN 1989, FURTHER LEGISLATION REACHED THE STATUTE BOOK ON THIS PARTICULARISSUE. SECTION 108,

COMPANIES ACT 1989,SUBSTITUTED NEW SECTIONS 35, 35A AND 35B INTO THE 1985 ACT. THESE NEW

PROVISIONS, TO ALL INTENTS AND PURPOSES, ABOLISHED THE ULTRA VIRESRULE ALTOGETHER, IN SO FAR AS

IT AFFECTS COMPANIES FORMED OR REGISTERED UNDER THE 1985 ACT. THE PROVISIONS ARE AS FOLLOWS.

(A)BY SECTION 35, "THE VALIDITY OF AN ACT DONE BY A COMPANY SHALL NOT BE CALLED INTO QUESTION ON

THE GROUND OF LACK OF CAPACITY BY REASON OF ANYTHING IN THE COMPANY'S MEMORANDUM".

A SHAREHOLDER MAY, HOWEVER,STILL OBTAIN AN INJUNCTION TO RESTRAIN AN INTENDED ULTRA VIRESACT,

PROVIDING HE/SHE DOES SO BEFORE ANY BINDING LEGAL OBLIGATION HAS BEEN ENTERED INTO BY THE

COMPANY. FURTHERMORE, DIRECTORS WILL REMAIN LIABLE FOR ANY ACTS WHICH ARE ULTRA VIRESTHE

MEMORANDUM, UNLESS THOSE ACTS ARE RATIFIED BY A SPECIAL RESOLUTION AND A FURTHER SPECIAL

RESOLUTION IS PASSED TO RELIEVE THEM OF LIABILITY.

(B)SECTION 35A BRINGS WITHIN THE SECTION THE POWER OF DIRECTORS TO BIND THE COMPANY TO ACTS

WITHIN THE POWER OF THE COMPANY.

NEITHER SECTION 35 NOR SECTION 35A APPLIES TO CHARITIES.

(C)SECTION 35B RELIEVES A PARTY TO A TRANSACTION WITH A COMPANY FROM THE NEED TO INQUIRE INTO

THE TERMS OF A COMPANY'S MEMORANDUM OR ANY LIMITATION IN THE DIRECTORS' POWERS.

SIMILAR PROVISIONS ARE ENACTED FOR COMPANIES NOT FORMED UNDER THE ACT, BUT WHICH ARE

REGISTERED UNDER IT, AND FOR UNREGISTERED COMPANIES.

SECTION 110 OF THE 1989 ACT ALSO SUBSTITUTES A NEW SECTION 3A AND SECTION 4 INTO THE 1985 ACT.

THESE PROVISIONS ENABLE A COMPANY TO STATETHAT ITS OBJECT IS TO "CARRY ON BUSINESS AS A GENERAL

COMMERCIAL COMPANY", WHICH IS EXPLAINED AS ENABLING THE COMPANY TO "CARRY ON ANY TRADE OR

BUSINESS WHATSOEVER ... (AND TO DO) ... ALL SUCH THINGS AS ARE CONDUCIVE TO CARRYING ON ANY

TRADE OR BUSINESS BY IT". THE SECTIONS ALSO ENABLE THE COMPANY TO ALTER ITS OBJECTS FOR ANY

PURPOSE WHATSOEVER. SEE NOW: S21(1) COMPANIES ACT 2006. FORMERLY THE OPPORTUNITIES FOR

SUCH ALTERATIONS WERE RESTRICTED TO A FEW SPECIFIC SITUATIONS.

FOR COMPANIES WHICH CHOOSE TO ADOPT SUCH A BROADLY WORDED OBJECTS CLAUSE AND TO AVAIL

THEMSELVES OF THE MODIFIED PROCEDURES, THE ULTRA VIRESDOCTRINE WOULD APPEAR TO BE DEAD.

ARTICLES OF ASSOCIATION

THE ARTICLES OF ASSOCIATION ARE THE RULES FOR THE INTERNAL MANAGEMENT OF THE COMPANY.

24

CAN THE ARTICLES OF ASSOCIATION BE AMENDED FOLLOWING INCORPORATION?

YES, BY FOLLOWING THE PROCEDURE LAID DOWN IN SECTION 21(1) OF THE COMPANIES ACT 2006,

WHICH STATES THAT “A COMPANY MAY AMEND ITS ARTICLES BY SPECIAL RESOLUTION”. CITCO

BANKING CORP V. PUSSER’S LTD (2007)

THE STATUTORY POWER OF A COMPANY TO AMEND ITS ARTICLES MUST BE EXERCISED SUBJECT TO

THE COMMON LAW REQUIREMENT THAT THE SHAREHOLDERS WHO VOTE IN FAVOUR OF THE

RESOLUTION MUST EXERCISE THEIR POWER TO VOTE “BONA FIDES FOR THE BENEFIT OF THE

COMPANY AS A WHOLE”:ALLEN V. GOLD REEFS OF WEST AFRICA LTD (1900).

FURTHERMORE, THE ARTICLES CANNOT BE ALTERED IN SUCH A WAY AS TO CONFLICT WITH THE

MEMORANDUM (AS IT IS THE SUPERIOR CONSTITUTIONAL DOCUMENT) OR ANY PROVISION OF THE

COMPANIES ACTS.

IN PARTICULAR, NO MEMBER CAN BE BOUND BY ANY ALTERATION TO SUBSCRIBE FOR MORE SHARES

OR INCREASE THEIR LIABILITY TO CONTRIBUTE TO THE CAPITAL OF COMPANY IN ANY WAY: SECTION

25 OF THE COMPANIES ACT 2006. ANY ALTERATION TO THE ARTICLES, AFTER THE DATE ON WHICH

THE MEMBER BECAME A MEMBER, WHICH REQUIRES THE MEMBER TO TAKE OR SUBSCRIBE FOR

MORE SHARES THAN THE MEMBER HOLDS, OR WHICH INCREASES A MEMBER'S LIABILITY TO PAY

MONEY TO THE COMPANY, WILL NOT BE ENFORCEABLE AGAINST THE MEMBER IN A COURT OF

LAW,UNLESS THEY HAVE AGREED IN WRITING TO SUBSCRIBE FOR MORE SHARES ETC.

WHAT IS THE EXACT MEANING OF THE PHRASE “BONA FIDE FOR THE BENEFIT OF THE INTEREST OF THE

COMPANY AS A WHOLE”?

THE DETERMINATION OF WHETHER OR NOT AN ALTERATION IS “BONA FIDE FOR THE BENEFIT OF THE

INTEREST OF THE COMPANY AS A WHOLE”, INVOLVES A SUBJECTIVE ELEMENT, IN THAT THOSE

DECIDING ON THE ALTERATION MUST GENUINELY BELIEVE THAT THEY ARE ACTING IN THE INTERESTS

OF THEIR COMPANY AS A WHOLE.

HOWEVER, THERE IS ALSO AN OBJECTIVE ELEMENT. IN GREENHALGH V. ARDERNE CINEMAS LTD

(1951), IT WAS STATED BY EVERSHED MR THAT ANY ALTERATION HAD TO BE IN THE INTEREST OF THE

“INDIVIDUAL HYPOTHETICAL MEMBER”.

MOREOVER, IN BROWN V. BRITISH ABRASIVE WHEEL CO. (1919), AN ALTERATION TO THE ARTICLES

OF THE COMPANYWAS PROPOSED TO GIVE THE MAJORITY SHAREHOLDERS (98%) THE RIGHT TO

25

PURCHASE THE SHARES OF THE MINORITY (2%). IT WAS HELD THAT THE ALTERATION WAS INVALID

AS IT WOULD BENEFIT THE MAJORITY SHAREHOLDERS, RATHER THAN THE COMPANY AS A WHOLE

AND WAS, IN ANY CASE, TOO WIDE A POWER.

CONVERSELY, IN SIDEBOTTOM V. KERSHAW LEESE & CO. (1920), AN ALTERATION TO THE ARTICLES GAVE THE

DIRECTORS THE POWER TO REQUIRE ANY SHAREHOLDER WHO ENTERED INTO COMPETITION WITH THE

COMPANY, TO TRANSFER THE SHARES TO NOMINEES OF THE DIRECTORS AT A FAIR PRICE. IT WAS HELD THAT,

UNDER THOSE CIRCUMSTANCES, THE ALTERATION WAS VALID AS IT WOULD BENEFIT THE COMPANY AS A

WHOLE. MOREOVER, THE COURTS HAVE HELD THAT IT MAY BE IN THE INTERESTS OF THE COMPANY TO

PURCHASE, COMPULSORILY, A MEMBER'S SHARES OR TO ALTER THE WHOLE STRUCTURE OF THE COMPANY.

OF COURSE, IF IT CAN BE SHOWN THAT THE MAJORITY ARE ACTING DISHONESTLY OR OPPRESSIVELY IN

MAKING SUCH AN ALTERATION, THEN THE RESOLUTION WILL BE DECLARED INVALID: CLEMENS V. CLEMENS

BROS LTD (1976).

IS A COMPANY MEMBER ENTITLED TO OBJECT TO A PROPOSED AMENDMENT OF THE ARTICLES OF

ASSOCIATION?

YES, ANY MEMBER, IRRESPECTIVE OF THE SIZE OF HIS SHAREHOLDING, HAS TWO POSSIBLE COURSES OF

ACTION OPEN TO HIM.

(A)UNDER COMMON LAW, HE CAN SEEK TO GET THE AMENDMENT SET ASIDE ON THE GROUNDS THAT IT IS

NOT “BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A WHOLE”.

THE PHRASE “BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A WHOLE” ORIGINATES FROM THE

WORDS OF LINDLEY MR IN THE CASE OF ALLEN V. GOLD REEFS OF WEST AFRICA (1900):

"…THE POWER CONFERRED MUST, LIKE ALL OTHER POWERS, BE EXERCISED SUBJECT TO THOSE

GENERAL PRINCIPLES OF LAW AND EQUITY WHICH ARE APPLICABLE TO ALL POWERS CONFERRED ON

MAJORITIES AND ENABLING THEM TO BIND MINORITIES. IT MUST BE EXERCISED, NOT ONLY IN THE

MANNER REQUIRED BY LAW, BUT ALSO BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A

WHOLE."

IT SEEMS, THEREFORE, THAT THE TEST WHICH SHOULD BE APPLIED IS WHETHER THE PROPOSAL IS, IN

THE HONEST OPINION OF THOSE VOTING FOR IT, "BONA FIDE FOR THE BENEFIT OF THE COMPANY AS

A WHOLE" (I.E. FOR THE BENEFIT OF ALL THE COMPANY'S MEMBERS).

(B)UNDER SECTION 994(1) IN THE COMPANIES ACT 2006, HE/SHE CAN BRING A PETITION ON THE GROUNDS

THAT THE PROPOSED AMENDMENT OF THE ARTICLES IS UNFAIRLY PREJUDICIAL TO HIM/HER IN HIS/HER

CAPACITY AS A COMPANY MEMBER.

THE USUAL REMEDY AWARDED BY THE COURTS IN SUCH CASES IS THE PURCHASE OF THE MEMBER’S

SHARES UNDER SECTION 996(2)(E) IN THE COMPANIES ACT 2006.

26

SO WHAT SORT OF CONDUCT BY A COMPANY IS LIKELY TO BE REGARDED BY THE COURT AS UNFAIRLY

PREJUDICIAL?

CASE LAW HAS ESTABLISHED A NUMBER OF SITUATIONS WHICH, PRIMA FACIE,AMOUNT TO UNFAIRLY

PREJUDICIAL CONDUCT AND IT SHOULD BE EMPHASISED THAT CONDUCT MAY BE PERFECTLY LAWFUL BUT

STILL UNFAIRLY PREJUDICIAL. THUS THE FOLLOWING TYPES OF CONDUCT HAVEBEEN DEEMED TO BE

UNFAIRLY PREJUDICIAL BY THE ENGLISH COURTS.

EXCLUSION AND REMOVAL FROM THE BOARDWHERE THE COMPANY WAS ONE IN WHICH THE DIRECTOR

HAD A LEGITIMATE EXPECTATION OF BEING INVOLVED IN MANAGEMENT, I.E. A QUASI-PARTNERSHIP

COMPANY. IN RE BIRD PRECISION BELLOWS LTD (1986), A MINORITY SHAREHOLDER WITH 26% OF THE

SHARES SUSPECTED THAT THE MANAGING DIRECTOR OF “THIS QUASI-PARTNERSHIP” COMPANY WAS

CONCEALING BRIBES THAT HE HAD RECEIVED IN ORDER TO SECURE CONTRACTS. WHEN THE DEPARTMENT OF

TRADE & INDUSTRY REFUSED TO INVESTIGATE, THE MINORITY SHAREHOLDER WAS REMOVED FROM THE

BOARD. THE MINORITY SHAREHOLDER CLAIMED THAT THIS AMOUNTED TO UNFAIRLY PREJUDICIAL

CONDUCT. HIS CLAIM WAS UPHELD.

A POLICY OF MAKING LOW DIVIDEND PAYMENTS. IN RE SAM WELLER&SONS LTD (1990),THE

PETITIONERS, WHO BETWEEN THEM HELD 42.5% OF THE SHARES IN THEIR FAMILY BUSINESS, COMPLAINED

THAT THE COMPANY HAD NOT INCREASED ITS DIVIDEND FOR 37 YEARS, DESPITE ITS PROFITABILITY. IN 1985

ITS NET PROFIT HAD BEEN £36,000, YET ONLY £2,520 WAS PAID OUT IN DIVIDENDS. THE COMPANY WAS

CONTROLLED BY THE PETITIONERS' UNCLE, SAM WELLER, WHO, ALONG WITH HIS SONS, CONTINUED TO

RECEIVE DIRECTORS' FEES AND REMUNERATION. PETER GIBSON J. COMMENTED ON THE PETITIONERS'

POSITION: "AS THEIR ONLY INCOME FROM THE COMPANY IS BY WAY OF DIVIDEND, THEIR INTERESTS MAY

NOT ONLY BE PREJUDICED BY THE POLICY OF LOW DIVIDEND PAYMENTS, BUT UNFAIRLY PREJUDICED."

27

RESTRICTIONS ON A COMPANY'S POWER TO AMEND ITS ARTICLES OF ASSOCIATION

(A)ANY ALTERATION OF THE ARTICLES UST BE “BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A

WHOLE”.

THAT IS, ANY AMENDMENTS WHICH CANNOT BE SO REGARDED WILL BE DEEMED INVALID, IRRESPECTIVE OF

WHETHER A SPECIAL RESOLUTION HAS BEEN PASSED IN FAVOUR OF THE ALTERATION CONCERNED IN

GENERAL MEETING. AS INDICATED ABOVE, THE EXACT MEANING OF THE PHRASE “BONA FIDE FOR THE

BENEFIT OF THE COMPANY AS A WHOLE” IS BEST UNDERSTOOD BY MAKING REFERENCE TO DECIDED CASE

LAW IN THIS AREA.

IN SIDEBOTTOM V. KERSHAW, LEESE & CO. (1920),AN ALTERATION OF THE ARTICLES, ENABLING THE

DIRECTORS WHO WERE ALSO THE MAJORITY SHAREHOLDERS, TO REQUEST THE COMPULSORY PURCHASE OF

THE SHARES, AT A FAIR VALUE, OF ANY MEMBER COMPETING WITH THE COMPANY'S BUSINESS, WAS

APPROVED BY THE COURT. THE COURT FOUND THIS TO BE A VALID ALTERATION OF THE ARTICLES BECAUSE,

IN THE WORDS OF LORD STERNDALE MR: "IT IS FOR THE BENEFIT OF THE COMPANY THAT THEY SHOULD NOT

BE OBLIGED TO HAVE AMONGST THEM AS MEMBERS, PERSONS WHO ARE COMPETING WITH THEM IN

BUSINESS AND WHO MAY GET KNOWLEDGE FROM THEIR MEMBERSHIP WHICH WOULD ENABLE THEM TO

COMPETE BETTER."

IN BROWN V. BRITISH ABRASIVE WHEEL (1919),THE COMPANY, BRITISH ABRASIVE WHEEL, NEEDED TO

RAISE ADDITIONAL CAPITAL. NINETY EIGHT PER CENT OF THE SHAREHOLDERS WERE WILLING TO CONTRIBUTE

THE REQUIRED CAPITAL, BUT ONLY ON THE CONDITION THAT THEY COULD BUY OUT THE 2% MINORITY

SHAREHOLDING IN THE COMPANY. HAVING FAILED TO AFFECT THIS BY AGREEMENT, THE 98% MAJORITY

THEN PROPOSED TO ALTER THE COMPANY'S ARTICLES OF ASSOCIATION IN ORDER TO GIVE THEM THE POWER

TOCOMPULSORILY PURCHASE THE SHARES OF THE 2% MINORITY. THE MINORITY SHAREHOLDERS OBJECTED

TO THIS ALTERATION AND BROUGHT AN ACTION AGAINST THE COMPANY ON THE GROUND THAT THE

ALTERATION WAS NOT “BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A WHOLE”. THE COURT AGREED

WITH THE MINORITY SHAREHOLDERS, IRRESPECTIVE OF THE FACT THAT THE MAJORITY SHAREHOLDERS WERE

PREPARED TO INSERT ANY PROVISION AS TO PRICE, WHICH THE COURT DEEMED FAIR.

THE RATIONALE FOR THE COURT'S DECISION TO DISALLOW THE ALTERATION OF THAT ARTICLES WAS THAT

THE PROPOSED ALTERATION COULD NOT BE TRULY REGARDED AS 'BONA FIDE FOR THE BENEFIT OF THE

COMPANY AS A WHOLE' BUT RATHER FOR THE BENEFIT OF THE MAJORITY SHAREHOLDERS AND WAS, IN ANY

CASE, TOO WIDE A POWER. MOREOVER, THERE WAS NO DIRECT LINK BETWEEN THE COMPANY'S NEED TO

RAISE ADDITIONAL CAPITAL AND THE ALTERATION OF THE ARTICLES. ALTHOUGH THE WHOLE SCHEME OF

EVENTS HAD BEEN GEARED TOWARDS THE PROVISION OF EXTRA CAPITAL, FOLLOWING THE REMOVAL OF THE

OBJECTING MINORITY SHAREHOLDERS, IT WOULD, IN FACT, HAVE BEEN POSSIBLE AFTER THE MINORITY HAD

BEEN EXPELLED FROM THE COMPANY, FOR THE MAJORITY SHAREHOLDERS TO THEN REFUSE TO PROVIDE THE

ADDITIONAL CAPITAL.

28

(B)THE AMENDMENT MUST NOT CONTRAVENE COMPANIES LEGISLATION

THE STATUTORY RESTRICTIONS ON A COMPANY'S POWER TO ALTER ITS ARTICLES ARE THE SAME AS THE

RESTRICTIONS IN RELATION TO ITS POWER ALTER ITS MEMORANDUM.

A MEMBER CANNOT BE REQUIRED TO TAKE MORE SHARES.

SECTION 25 OF THE COMPANIES ACT 2006 PROVIDES THAT THE ARTICLES CANNOT BE ALTERED SO AS

TOREQUIRE A MEMBER TO TAKE UP MORE SHARES, OR IN ANY WAY TO INCREASE HIS LIABILITY TO

CONTRIBUTE TO THE SHARE CAPITAL OR OTHERWISE PAY MONEY TO THE COMPANY, UNLESS HE CONSENTS IN

WRITING.

THE RIGHT OF A MEMBER TO OBJECT TO A VARIATION OF HIS CLASS RIGHTS CANNOT BE TAKEN AWAY.

UNDER SECTION 633 OF THE COMPANIES ACT 2006 SHAREHOLDERS HAVE A STATUTORY RIGHT TO OBJECT TO

A VARIATION OF THEIR CLASS RIGHTS. THE OBJECT OF THIS SECTION IS TO PROTECT SHAREHOLDERS FROM

BEING PREJUDICED BY THE VOTING OF OTHER SHAREHOLDERS WHO HOLD SHARES OF ANOTHER CLASS IN

ADDITION TO THOSE OF THE CLASS AFFECTED BY THE VARIATION. IN ACCORDANCE WITH THE ACT, 15% OF

THE CLASS NOT VOTING FOR THE VARIATION MAY APPLY TO THE COURT TO HAVE IT CANCELLED WITHIN 21

DAYS OF THE CONSENT OF THE CLASS BEING GIVEN, WHETHER IN WRITING OR BY RESOLUTION. ONCE SUCH

AN APPLICATION HAS BEEN MADE, USUALLY BY ONE OR MORE DISSENTIENTS ON BEHALF OF THE OTHERS, THE

VARIATION WILL NOT TAKE EFFECT UNLESS AND UNTIL THE COURT CONFIRMS IT. FOR EXAMPLE, IF A

VARIATION REDUCES THE DIVIDEND ON PREFERENCE SHARES FROM 7% TO 6% PER ANNUM, AND 80% OF THE

PREFERENCE SHAREHOLDERS ARE ALSO ORDINARY SHAREHOLDERS, THE REQUISITE CONSENT OF THE

PREFERENCE SHAREHOLDERS IS LIKELY TO BE OBTAINED, SINCE THE VARIATION WILL LEAVE MORE PROFITS

FOR A DIVIDEND ON THE ORDINARY SHARES –THIS WOULD BE UNFAIR TO THE 20% OF THE PREFERENCE

SHAREHOLDERS WHO ARE NOT ORDINARY SHAREHOLDERS AND THEY COULD PETITION TO HAVE THE

VARIATION CANCELLED.

THE RIGHT OF A MEMBER TO BRING A PETITION ON THE GROUNDS OF UNFAIR PREJUDICE CANNOT BE

TAKEN AWAY:

SECTION 994, COMPANIES ACT 2006. A MEMBER MIGHT BRING A PETITION ON THE GROUNDS OF UNFAIR

PREJUDICE IN THE FOLLOWING CASES.

(I)WHERE THE MAJORITY SHAREHOLDER AND DIRECTOR IS USING THE ASSETS OF THE COMPANY FOR HIS

OWN PERSONAL BENEFIT. IN RE ELGINDATA (NO.1) (1991), THE MAJORITY SHAREHOLDER AND DIRECTOR

USED THE ASSETS OF THE COMPANY FOR HIS OWN PERSONAL BENEFIT. THE PETITIONER COMPLAINED THAT

THIS WAS UNFAIRLY PREJUDICIAL TO HIM AND THE COURT, SUBSEQUENTLY, ORDERED THE RESPONDENTS TO

PURCHASE THE SHARES HELD BY THE PETITIONER.

(II)WHERE THE MAJORITY SHAREHOLDER IS, IN EFFECT, TRANSFERRING SOURCES OF PROFIT INTO ANOTHER

COMPANY OWNED BY THEM. IN RE LONDON SCHOOL OF ELECTRONICS LTD (1986), A PETITION WAS

PRESENTED BY A MINORITY SHAREHOLDER WHERE THE MAJORITY SHAREHOLDER WAS, IN EFFECT,

29

TRANSFERRING SOURCES OF PROFIT INTO ANOTHER COMPANY OWNED BY HIM. THE COURT HELD THAT THIS

WAS UNFAIRLY PREJUDICIAL CONDUCT AND MADE AN ORDER FOR THE MAJORITY SHAREHOLDER

TOPURCHASE THE PETITIONER'S SHARES.

(C)THE PROPOSED ALTERATION OF THE ARTICLES MUST NOT CONFLICT WITH A COURT ORDER

FOR EXAMPLE, IN ACCORDANCE WITH SECTION 996 OF THE COMPANIES ACT 2006, FOLLOWING A PETITION

ON THE GROUNDS OF UNFAIR PREJUDICE, A COURT MAY ORDER THAT A COMPANY DOES NOT MAKE ANY, OR

ANY SPECIFIED, ALTERATIONS TO ITS ARTICLES WITHOUT OBTAINING THE LEAVE OF THE COURT.

NAME OF A COMPANY

REGISTRATION

THE MEMORANDUM MUST STATE THE NAME OF THE COMPANY.

THE GENERAL RULE IS THAT ANY NAME MAY BE SELECTED.

HOWEVER, A COMPANY CANNOT BE REGISTERED BY A NAME WHICH, IN THE OPINION OF THE

DEPARTMENT OF TRADE, IS UNDESIRABLE.

ALSO, THE LAST WORD OF THE NAME OF A LIMITED COMPANY MUST BE THE WORD "LIMITED" OR

"PLC", AS APPROPRIATE, UNLESS PERMISSION IS GIVENTO DISPENSE WITH THE WORD "LIMITED". IN

SELECTING A NAME, IT IS NOT NECESSARY TO USE THE WORD "COMPANY" AND THE MODERN

TENDENCY IS TO OMIT IT.

IN GENERAL, A NAME WILL NOT BE ALLOWED IF IT IS MISLEADING, E.G. IF THE NAME OF A COMPANY

WITH SMALL RESOURCES SUGGESTS THAT IT IS TRADING ON A GREAT SCALE.

A NAME WILL BE REFUSED IF IT IS TOO LIKE THE NAME OF AN EXISTING COMPANY. ONLY IN VERY

EXCEPTIONAL CASES AND FOR VALID REASONS WILL NAMES BE ALLOWED WHICH INCLUDE

"BRITISH", "ROYAL", "IMPERIAL", "NATIONAL", "INTERNATIONAL" "COMMONWEALTH", "CO-

OPERATIVE", "BANK", "TRUST", "CROWN", ETC.

CHANGE OF NAME

A COMPANY MAY CHANGE ITS NAME BY SPECIAL RESOLUTION, WITH THE APPROVAL OF THE DEPARTMENT

OF TRADE. A SMALL FEE IS PAYABLE TO THE REGISTRAR FOR FILING THE NEW NAME AND THE ISSUE OF A

NEW CERTIFICATE OF INCORPORATION. THE CHANGE DOES NOT AFFECT ANY RIGHTS OR OBLIGATIONS.

PART 41 OF THE COMPANIES ACT 2006

THIS ACT APPLIES TO COMPANIES, PARTNERSHIPS, OR INDIVIDUALS WHO CARRY ON BUSINESS UNDER A

NAME OTHER THANTHE CORPORATE NAME OF THE COMPANY, THE FORENAMES AND SURNAMES OF THE

PARTNERS, OR INDIVIDUAL.

BUSINESSES CONTROLLED BY THE ACT MUST STATE ON ALL LETTERS, WRITTEN ORDERS FOR GOODS AND

SERVICES, INVOICES AND RECEIPTS, AND WRITTEN DEMANDS FOR PAYMENT OF DEBTS:

IN THE CASE OF COMPANIES, THEIR CORPORATE NAME

INTHE CASE OF A PARTNERSHIP, THE NAME OF EACH PARTNER

30

IN THE CASE OF INDIVIDUALS, THEIR OWN NAMES AND

IN EACH CASE, AN ADDRESS WITHIN GREAT BRITAIN FOR THE SERVICE OF LEGAL AND STATUTORY

DOCUMENTS.THEY MUST ALSO DISPLAY ON ANY PREMISES, TO WHICH CUSTOMERS OR SUPPLIERS HAVE

ACCESS, A PROMINENT NOTICE CONTAINING SUCH NAMES AND ADDRESSES.

CAPITAL OF A COMPANY

TYPES OF CAPITAL

THE TERM "CAPITAL" MAY BE USED IN VARIOUS SENSES. IT MAY MEAN THE NOMINAL OR

AUTHORISED SHARE CAPITAL; THE ISSUED SHARE CAPITAL; THE PAID-UP SHARE CAPITAL OR THE

RESERVE SHARE CAPITAL OF THE COMPANY.

THE CAPITAL IS ISSUED IN THE FORM OF DIFFERENT CLASSES OF SHARES OR STOCK, WHICH ARE

SUBSCRIBED BY THE MEMBERS. STOCK HAS BEEN DEFINED AS "SIMPLY A SET OF SHARES PUT

TOGETHER IN A BUNDLE": MORRICE V. AYLMER (1875).

PAID-UP SHARES MAY BE CONVERTED INTO STOCK. FOR EXAMPLE, A COMPANY WHICH HAS 10,000 PAID-UP

£1 SHARES MAY CONVERT THEM INTO £10,000 WORTH OF STOCK. IF SHARES ARE CONVERTED INTO STOCK,

THE VALUE OF THE HOLDER'S STAKE IN THE COMPANY REMAINS THE SAME, ALTHOUGH IT IS EXPRESSED IN

DIFFERENT TERMS, E.G. A PERSON WHO FORMERLY HELD 100 SHARES OF A NOMINAL AMOUNT OF £1 EACH

WILL NOW HOLD A NOMINAL AMOUNT OF £100 WORTH OF STOCK.

THE DIFFERENT TYPES OF SHARE CAPITAL NOTED ABOVE ARE, IN MOREDETAIL, AS FOLLOWS.

(A)NOMINAL OR AUTHORISED CAPITAL

THE MEMORANDUM OF ASSOCIATION SETS OUT THE MAXIMUM AMOUNT OF CAPITAL WHICH THE COMPANY

IS AUTHORISED TO ISSUE, ALTHOUGH A COMPANY NEED NOT ISSUE CAPITAL TO THE FULL AMOUNT

AUTHORISED UNLESS, OR UNTIL, IT WISHES TO DO SO. THE COMPANY'S NOMINAL OR AUTHORISED CAPITAL

DEPENDS ON ITS BUSINESS REQUIREMENTS.

(B) ISSUED CAPITAL

THIS IS THAT PART OF THE COMPANY'S NOMINAL CAPITAL WHICH HAS BEEN ISSUED TO THE SHAREHOLDERS.

(C) PAID-UP CAPITAL

THIS IS THE PROPORTION OF THE ISSUED CAPITAL WHICH HAS BEEN PAID UP BY THE SHAREHOLDERS. THE

COMPANY MAY, FOR EXAMPLE, HAVE A NOMINAL CAPITAL OF £500,000 DIVIDED INTO 500,000 SHARES OF A

NOMINAL AMOUNT OF £1 EACH, OF WHICH £400,000 IS ISSUED (I.E. 400,000 OF THE SHARES HAVE BEEN

ISSUED) AND ONLY £100,000 IS PAID UP BECAUSE THE COMPANY HAS, SO FAR, REQUIRED ONLY 25P TO BE

PAID UP ON EACH SHARE.

(D)UNCALLED CAPITAL

UNCALLED CAPITAL IS THE BALANCE OF THE ISSUED CAPITAL AND IT CAN BE CALLED UP AT ANY TIME BY THE

COMPANY FROM THE SHAREHOLDERS.

31

(E)RESERVE CAPITAL

THIS IS THAT PART OF THE UNCALLED CAPITAL WHICH A COMPANY HAS, BY SPECIAL RESOLUTION,

DETERMINED SHALL NOT BE CALLED UP, EXCEPT IN THE EVENT AND FOR THE PURPOSES OF THE COMPANY

BEING WOUND UP.

SHARES

A SHARE MAY BE OF ANY CHOSEN DENOMINATION, E.G. £5, £1, 50P.

THIS IS KNOWN AS THE NOMINAL VALUE AND SHOULD NOT BE CONFUSED WITH THE ACTUAL PRICE

PAID.

A SHARE ORIGINALLY ISSUED FOR £1 MAY INCREASE IN VALUE, SO THAT THE MARKET PRICE

BECOMES £3 OR MORE, OR IT MAY DECREASE IN VALUE, SO THAT THE MARKET PRICE IS ONLY A FEW

PENCE.

THE NOMINAL VALUE ALWAYS REMAINS THE SAME AND HAS LITTLE SIGNIFICANCE, WHEREAS THE

MARKET PRICE DEPENDS ON WHETHER INVESTORS CONSIDER THAT THE FUTURE PROSPECTS OF THE

COMPANY ARE GOOD OR BAD.

WHEN SHARES ARE ISSUED, THEY NEED NOT NECESSARILY BE PAID FOR IN FULL. SOMETIMES THE

COMPANY DOES NOT NEED TO USE THE WHOLE AMOUNT REPRESENTED BY THE SHARE CAPITAL AT

THE TIME OF ISSUING THE SHARES AND CONSEQUENTLY, £1 SHARES MAY BE PAID IN PART (E.G. 50P),

WITH THE BALANCE REMAINING PAYABLE ON "CALL" FROM THE COMPANY WHEN IT REQUIRES THE

FUNDS.

THE LIABILITY OF THE SHAREHOLDER IS LIMITED TO PAYING THE MARKET OR ISSUE PRICE (OR ANY

UNPAID AMOUNT OF "CALL") OF HIS/HER SHARES. HE/SHE CANNOT BE REQUIRED TO CONTRIBUTE

FURTHER TO THE COMPANY'S DEBTS, EVEN THOUGH IT IS HOPELESSLY INSOLVENT.

THIS IS THE MEANING OF THE TERM "LIMITED LIABILITY", WHICH IS A BASIC PRINCIPLE OF COMPANY

LAW.

IN OTHER WORDS, ONCE THE SHAREHOLDER HAS PURCHASED FULLY PAID SHARES, HE/SHE IS UNDER

NO LIABILITY WHATSOEVER FOR THE DEBTS OF THE COMPANY.

IF HE/SHE HAS PURCHASED PARTLY PAID SHARES, HIS/HER LIABILITY IS LIMITED TO THE UNPAID

PORTION OF THE NOMINAL VALUE; IF THE SHARES ARE NOMINALLY £1 EACH AND 75P WAS PAID ON

ISSUE, HE/SHE IS LIABLE TO PAY NO MORE THAN 25P PER SHARE WHEN REQUESTED TO DO SO BY THE

COMPANY.

NOTE THAT WE ARE TALKING ABOUT THE NOMINAL VALUE OF PARTLY PAID SHARES; THE MARKET

PRICE VARIES ACCORDING TO DEMAND AND SUPPLY AND THE SHAREHOLDER MAY HAVE PAID 60P,

OR EVEN £1.25, EACH TO PURCHASE THE SHARES, BUT THIS DOES NOT AFFECT HIS/HER LIABILITY FOR

25P EACH.

32

THE SHARES WHICH MAKE UP THE CAPITAL OF THE COMPANY ARE USUALLY OF TWO MAIN TYPES;

1. PREFERENCE SHARES, WHICH ENTITLE THE HOLDER TO BE PAID A DIVIDEND AT A FIXED RATE PER

CENT BEFORE ANY OTHER DIVIDEND IS PAYABLE, OR

2. ORDINARY SHARES, WHICH ARE ENTITLED TO DISTRIBUTION OF A DIVIDEND OUT OF THE

REMAINING PROFIT, THE RATE OF DIVIDEND BEING DECIDED EACH YEAR ACCORDING TO WHAT

THE COMPANY CAN AFFORD.

3. IN THE EVENT OF A WINDING-UP, THE COMPANY'S PREFERENCE SHAREHOLDERS USUALLY

CARRY THE RIGHT TO THE RETURN OF CAPITAL BEFORE THE ORDINARY SHAREHOLDERS, WHO

ARE DEPENDENT UPON THE ASSETS AVAILABLE.

RIGHTS OF SHAREHOLDERS WHEN A COMPANY IS A GOING CONCERN

(A)VOTING RIGHTS

ORDINARY SHAREHOLDERS HAVE SUPERIOR VOTING RIGHTS TO THOSE ENJOYED BY PREFERENCE

SHAREHOLDERS. THE RIGHT TO VOTE AT GENERAL MEETINGS EQUALS THE RIGHT TO INFLUENCE THE

WAY THE COMPANY'S AFFAIRS ARE CONDUCTED, BY VOTING AT MEETINGS OF MEMBERS. THE

MODEL ARTICLES FOR PLCS AND PRIVATE COMPANIES ONLY GOVERN THE VOTING RIGHTS OF

ORDINARY SHAREHOLDERS. EACH MEMBER HAS ONE VOTE ON A “SHOW OF HANDS” OR ON A

“POLL” –"ONE VOTE FOR EVERY SHARE OF WHICH HE/SHE IS THE HOLDER".

PREFERENCE SHAREHOLDERS CAN NORMALLY ONLY VOTE IN CERTAIN SPECIFIED CIRCUMSTANCES

AS IDENTIFIED EITHER BY THEIR COMPANY'S CONSTITUTION OR THE TERMS OF SHARE ISSUE.

NORMALLY PREFERENCE SHAREHOLDERS OF A COMPANY ARE ONLY GIVEN THE RIGHT TO VOTE IN

CERTAIN SPECIFIED CIRCUMSTANCES, E.G. WHERE THE RIGHTS ATTACHED TO THEIR PREFERENCE

SHARES ARE BEING VARIED, IN WHICH CASE THEY WILL HAVE NO RIGHT TO VOTE IN ANY OTHER

CIRCUMSTANCES.

(B)DIVIDEND RIGHTS

ORDINARY SHAREHOLDERS ALWAYS HAVE THE RIGHT TO PARTICIPATE IN THE DISTRIBUTION OF

PROFIT. AS LONG AS THE COMPANY CONTINUES TO OPERATE AS A GOING CONCERN, ORDINARY

SHAREHOLDERS ARE ENTITLED TO A DIVIDEND OF PROFIT, WHICH MAY BE OF ANY SIZE AS

RECOMMENDED BY THE DIRECTORS AND APPROVED BY THE COMPANY'S MEMBERS. THE AMOUNT

OF DIVIDEND DISTRIBUTED TO AN ORDINARY SHAREHOLDER IS PROPORTIONAL TO THE NOMINAL

VALUE OF THE SHARES, WHICH HE/SHE HOLDS.

PREFERENCE SHAREHOLDERS ONLY HAVE THE RIGHT TO PARTICIPATE IN THE DISTRIBUTION OF

PROFIT IF IT IS EXPRESSLY GIVEN BY THE COMPANY'S CONSTITUTION AND/OR TERMS OF ISSUE.

ORDINARY SHAREHOLDERS DON'T HAVE A RIGHT TO A DIVIDEND OF A FIXED RATE. THE SIZE OF AN

ORDINARY SHAREHOLDERS DIVIDEND IS DEPENDANT ON THE SIZE OF THE COMPANY'S PROFIT. NO

PROFIT EQUALS NO DIVIDEND.

33

THE DIVIDEND OF PREFERENCE SHAREHOLDERS IS PAID AT A FIXED RATE, E.G. 6% OF THE NOMINAL

VALUE OF EACH SHARE, AND IS PAYABLE IN PRIORITY TO THE PAYMENT OF A DIVIDEND TO ANY

OTHER CLASS OF SHAREHOLDER.

ORDINARY SHAREHOLDERS DON'T HAVE A RIGHT TO A CUMULATIVE DIVIDEND. DIVIDENDS ON

ORDINARY SHARES ARE NEVER CUMULATIVE. NO PROFIT EQUALS NO DIVIDEND.

PREFERENCE SHARE DIVIDENDS IN THE ABSENCE OF AN EXPRESS PROVISION TO THE CONTRARY ARE

ASSUMED TO BE CUMULATIVE.

(C)STATUTORY PRE-EMPTION RIGHTS

COMPANIES LEGISLATION PROVIDES THAT NO COMPANY CAN ALLOT SECURITIES WITHOUT FIRST OFFERING

THEM PRO RATA TO EXISTING ORDINARY SHAREHOLDERS ON THE SAME OR MORE FAVOURABLE TERMS THAN

IT IS PROPOSING TO OFFER THEM TO OTHER PEOPLE –THIS IS COMMONLY TERMED A “RIGHTS ISSUE”. THE

SHAREHOLDERS MUST BE GIVEN 21 DAYS IN WHICH TO DECIDE WHETHER TO ACCEPT OR REJECT THE OFFER.

SECTION 561 IN THE COMPANIES ACT 2006PROVIDES VALUABLE PROTECTION FOR EXISTING SHAREHOLDERS

BY REQUIRING THAT NEW SHARES BE FIRST OFFERED TO EXISTING MEMBERS SO THAT THEIR PROPORTIONATE

HOLDING IN THE COMPANY CAN BE MAINTAINED, HENCE THE TERM RIGHTS ISSUE.

PREFERENCE SHAREHOLDERS DO NOT HAVE STATUTORY PRE-EMPTION RIGHTS, ALTHOUGH THEY COULD

OBTAIN PRE-EMPTION RIGHTS IF THEY WERE EXPRESSLY GIVEN TO THEM BY THEIR COMPANY'S ARTICLES OF

ASSOCIATION.

(D)FREELY TRANSFERABLE SUBJECT TO ARTICLES OF ASSOCIATION

THIS RIGHT APPLIES TO BOTH ORDINARY AND PREFERENCE SHARES.

RIGHTS OF SHAREHOLDERS ON WINDING-UP

(A)THE PAYMENT OF ARREARS OF CUMULATIVE DIVIDEND WHICH HAVE BEEN DECLARED

ORDINARY SHARES ARE NEVER CUMULATIVE; THEREFORE, NO SUCH RIGHTS EXIST. PREFERENCE

SHAREHOLDERS DO HAVE THIS RIGHT AND IT IS NORMAL FOR THE ARTICLES OF A COMPANY TO PROVIDE FOR

THE PAYMENT OF SUCH ARREARS.

(B)LIMITATION OF LIABILITY

THIS MEANS THAT, IN THE EVENT OF CORPORATE FAILURE, A MEMBER'S LIABILITY IS LIMITED TO ANY

AMOUNT OUTSTANDING ON THEIR SHAREHOLDING, PLUS THE WHOLE OF ANY SHARE PREMIUM. THIS RIGHT

APPLIES TO BOTH ORDINARY AND PREFERENCE SHAREHOLDERS.

(C)THE RIGHT TO HAVE THEIR CAPITAL CONTRIBUTION RETURNED

ORDINARY SHAREHOLDERS ALWAYS HAVE THE RIGHT TO HAVE THEIR CAPITAL CONTRIBUTION RETURNED TO

THEM ON WINDING-UP. IF PREFERENCE SHARES ARE GIVEN PARTICIPATING RIGHTS BY THEIR COMPANY'S

CONSTITUTION, ORDINARY SHAREHOLDERS WILL RANK BEHIND THE HOLDERS OF THAT CLASS.

(D)THE RIGHT TO PARTICIPATE INTHE DISTRIBUTION OF SURPLUS ASSETS

34

ORDINARY SHAREHOLDERS ALWAYS HAVE THIS RIGHT. THE RIGHTS OF PREFERENCE SHAREHOLDERS ARE

EXHAUSTIVE. THEY ARE NOT ENTITLED TO PARTICIPATE IN THE DISTRIBUTION OF ANY SURPLUS ASSETS

UNLESS THEY ARE EXPRESSLY GIVEN THIS RIGHT BY THEIR COMPANY'S ARTICLES OF ASSOCIATION.

ALTERATION OF CAPITAL

A LIMITED COMPANY WITH A SHARE CAPITAL, IF SO AUTHORISED BY ITS ARTICLES, MAY ALTER THE

CONDITIONS OF ITS MEMORANDUM BY:

INCREASING ITS SHARE CAPITAL BY NEW SHARES OR

CONSOLIDATING AND DIVIDING ALL OR ANY OF ITS SHARE CAPITAL INTO SHARES OF LARGER AMOUNT

THAN ITS EXISTING SHARES OR

CONVERTING ALL OR ANY OF ITS PAID-UP SHARES INTO STOCK, OR RECONVERTING STOCK INTO PAID-UP

SHARES OF ANY DENOMINATION OR

SUBDIVIDING ALL OR ANY OF ITS SHARES INTO SHARES OF SMALLER AMOUNT THAN IS FIXED BY THE

MEMORANDUM OR

CANCELLING SHARES WHICH HAVE NOT BEEN TAKEN OR AGREED TO BE TAKEN BY ANY PERSON.

ALL THESE POWERS REQUIRE A RESOLUTION OF THE COMPANY, IN GENERAL MEETING, TO BE EXERCISED

35

MEETINGS

CLASSIFICATION

THERE ARE THREE KINDS OF GENERAL (SHAREHOLDERS') MEETINGS OF COMPANIES.

(A)ANNUAL GENERAL MEETINGS (AGM)

EVERY COMPANY MUST HOLD ITS FIRST AGM WITHIN 18 MONTHS OF INCORPORATION AND THEREAFTER

WITHIN SIX MONTHS OF A COMPANY’S FINANCIAL YEAR ENDING AND AT LEAST ONCE IN EVERY CALENDAR

YEAR, IN ACCORDANCE WITH S366 CA 2006. THIS MEANS THAT, IF A COMPANY HOLDS ITS AGM ON 1

JANUARY 2010, THEN IT MUST HOLD ITS NEXT AGM BY 31 MARCH 2011 AT THE LATEST.

IF A COMPANY FAILS TO HOLD AN AGM THEN ANY MEMBER MAY APPLY TO THE SECRETARY OF STATE TO CALL

A MEETING IN DEFAULT.

THE BUSINESS CONDUCTED AT AGMS TENDS TO BE ROUTINE, SUCH AS

THE RE-ELECTION OF DIRECTORS;

APPOINTMENT OF AUDITORS,

CONSIDERATION OF ACCOUNTS AND APPROVAL OF DIVIDENDS.

IN LINE WITH THE RECOGNISED DISTINCTION BETWEEN PUBLIC AND PRIVATE COMPANIES, THE COMPANIES

ACT OF 1989 INTRODUCED A NEW PROVISION, WHICH PERMITS PRIVATE COMPANIES, SUBJECT TO APPROVAL

BY A UNANIMOUS VOTE, TO DISPENSE WITH THE NEED TO HOLD AN ANNUAL GENERAL MEETING. UNDER CA

2006 IT IS NO LONGER NECESSARY FOR A PRIVATE COMPANY TO CONVENE A GENERAL MEETING.

(B)EXTRAORDINARY GENERAL MEETINGS (EGM)

AN EXTRAORDINARY GENERAL MEETING IS ANY MEETING OTHER THAN AN AGM. EGMS ARE USUALLY CALLED

BY THE DIRECTORS, ALTHOUGH MEMBERS HOLDING 10% OF THE VOTING SHARES MAY REQUISITION SUCH A

MEETING BY VIRTUE OF S303 CA 2006.

THE DIRECTORS OF A COMPANY MUST CALL AN EGM WITHIN 28 DAYS OF BECOMING AWARE OF THIS

SITUATION, IF THE NET ASSETS OF A PUBLIC COMPANY HAVE BEEN REDUCED TO LESS THAN HALF IN VALUE OF

THE COMPANY'S CALLED-UP SHARE CAPITAL. THE MAIN PURPOSE OF SUCH A MEETING IS TO CONSIDER

WHAT, IF ANY, REMEDIAL MEASURES SHOULD BE TAKEN BY THE COMPANY TO DEAL WITH THE SITUATION.

(C)CLASS MEETINGS

THIS REFERS TO THE MEETING OF A PARTICULAR CLASS OF SHAREHOLDER, I.E. THOSE WHO HOLD A TYPE OF

SHARE PROVIDING PARTICULAR RIGHTS, SUCH AS PREFERENCE SHARES. WHERE A PROPOSAL IS PUT

FORWARD TO VARY THE CLASS RIGHTS ATTACHED TO PARTICULAR SHARES, THEN IT IS NECESSARY TO OBTAIN

THE APPROVAL OF THE HOLDERS OF THE PARTICULAR CLASS CONCERNED. IN ORDER TO ACHIEVE THIS

APPROVAL, A MEETING OF THOSE HOLDING SUCH SHARES HAS TO BE CALLED TO SEEK THEIR APPROVAL OF

ANY PROPOSED VARIATION.

36

STATUTORY PROVISIONS

THERE ARE DETAILED STATUTORY PROVISIONS CONCERNING A NUMBER OF MATTERS IN CONNECTION WITH

THE CALLING AND CONDUCT OF MEETINGS, INCLUDING THE FOLLOWING.

A SPECIFIED MINIMUM NOTICE OF MEETINGS MUST BE GIVEN TO ALL THE MEMBERS.

THE NOTICE MUST STATE WHETHER IT IS PROPOSED TO TRANSACT ANY "SPECIAL BUSINESS" AT THE

MEETING AND, IF SO, IT MUST STATE THE NATURE OF SUCH SPECIAL BUSINESS. (THIS IS TO PROTECT

MEMBERS FROM THE DANGER OF ALLOWING IMPORTANT CHANGES IN THE COMPANY'S STRUCTURE OR

POLICY TO BE MADE IN THEIR ABSENCE.)

NO BUSINESS CAN BE TRANSACTED UNLESS A QUORUM IS PRESENT.

PROVISIONS ARE MADE WITH REGARD TO THE DUTIES AND POWERS OF THE CHAIRMAN OF THE MEETING

(USUALLY THE CHAIRMAN OF THE BOARD OF DIRECTORS)

THERE ARE RULES GOVERNING VOTING. VOTING MAY BE BY SHOW OF HANDS OR (ON THE DEMAND OF

ANY PERSON PRESENT AND ENTITLED TO VOTE) BY POLL. IN THE LATTER CASE, MEMBERS MAY VOTE BY

PROXY. (A PROXYIS A WRITTEN INSTRUMENT ENTITLING ANOTHER TO VOTE IN A MEMBER'S PLACE, AND THE

ACT MAKES DETAILED PROVISIONS CONCERNING VOTING BY PROXY.)

SPECIAL PROVISIONS ARE MADE WITH REGARD TO THE THREE KINDS OF RESOLUTIONS THAT MAY BE

PASSED AT MEETINGS –ORDINARY, EXTRAORDINARY AND SPECIAL. THESE ARE OUTSIDE THE SCOPE OF YOUR

COURSE.BY THE RULE IN FOSS V. HARBOTTLE (1843), THE COURT WILL NOT INTERFERE AT THE SUIT OF A

MEMBER, OR A MINORITY OF MEMBERS WHERE THERE IS A WRONG DONE TO A COMPANY ITSELF OR AN

IRREGULARITY IN ITS INTERNAL MANAGEMENT, IF SUCH ACTION IS CAPABLE OF CONFIRMATION BY A

MAJORITY OF THE MEMBERS. HOWEVER, THERE ARE CERTAIN EXCEPTIONS TO THIS RULE, E.G. A MINORITY

MAY SUE TO PREVENT THE COMPANY FROM ACTING ILLEGALLY OR ULTRA VIRES, OR FROM PERPETRATING A

FRAUD ON THE MINORITY OF MEMBERS.

37

DIRECTORS

NATURE OF DIRECTORSHIP

ALL REGISTERED COMPANIES MUST HAVE DIRECTORS, AND NORMALLY THERE MUST BE AT LEAST

TWO, ALTHOUGH ONE SUFFICES FOR A PRIVATE COMPANY OR ONE REGISTERED BEFORE 1929.

THE POSITION OF DIRECTORS IS SIMILAR TO THAT OF TRUSTEES, E.G. IN THEIR FIDUCIARY

RELATIONSHIP TO THE COMPANY, IN ISSUING SHARES, AND APPROVING TRANSFERS OF SHARES.

HOWEVER, THEY ARE TRUSTEES FOR THE COMPANY AND NOT FOR THE INDIVIDUAL SHAREHOLDERS,

NOR FOR THIRD PARTIES WHO HAVE MADE CONTRACTS WITH THE COMPANY.

DIRECTORS ARE ALSO SOLE AGENTS FOR THE COMPANY WHEN THEY MAKE CONTRACTS FOR THE

COMPANY AND, AS SUCH, ARE IN A FIDUCIARY POSITION TO THE COMPANY AND CANNOT MAKE

SECRET PROFITS AT THE COMPANY'S EXPENSE.

A COMPANY MAY ACT ONLY THROUGH ITS AGENTS –AND SUCH AGENTS, IF THEY DIRECT AND

CONTROL THE COMPANY'S AFFAIRS, ARE DEEMED TO BE DIRECTORS. UNDER THE ACT, "DIRECTOR"

INCLUDES ANY PERSON OCCUPYING THE POSITION OF DIRECTOR, BY WHATEVER NAME CALLED.

POWERS OF DIRECTORS

THE POWERS OF DIRECTORS ARE USUALLY SET OUT IN THE ARTICLES, AUTHORISING THEM TO CARRY ON THE

BUSINESS OF THE COMPANY, AND THERE IS GENERALLY AN ADDITIONAL CLAUSE GIVING THEM POWERS OF

MANAGEMENT AND ALL THE POWERS OF THE COMPANY WHICH ARE NOT OTHERWISE SPECIFICALLY

MENTIONED IN THE ARTICLES IF THE ARTICLES ARE SILENT ON THIS POINT, THE LAW IMPLIES THAT ALL THE

ORDINARY POWERS CONNECTED WITH A BUSINESS OF THE SAME KIND AS THAT CARRIED ON BY THE

COMPANY ARE BEING CONFERRED UPON THE DIRECTORS

38

THE POWERS OF DIRECTORS MAY BE ENLARGED, OR IN CERTAIN CIRCUMSTANCES RESTRICTED BY

THE SHAREHOLDERS, AND IF THE DIRECTORS ACT BEYOND THEIR POWERS THE SHAREHOLDERS MAY

RATIFY THEIR ACT, PROVIDED IT IS NOT ULTRA VIRESTHE COMPANY.

39

ONE OF THE MAIN CHANGES OF THE 2006 ACT IS THE SETTING OUT FOR THE FIRST TIME OF A

STATUTORY FRAMEWORK FOR THE LEGAL DUTIES OF COMPANY DIRECTOR AS WE HAVE ALREADY

SAID, A DIRECTOR IS IN A FIDUCIARY POSITION TO THE COMPANY IN HIS/HER CAPACITY AS AGENT,

AND HE/SHE CANNOT, THEREFORE, PLACE HIS/HERSELF IN A POSITION WHERE HIS/HER OWN

INTERESTS CONFLICT WITH HIS/HER DUTIES. DIRECTORS MUST ON NO ACCOUNT MAKE ANY SECRET

PROFITS. ANY SUCH BENEFIT IS REGARDED AS A BRIBE, AND THE DIRECTORS ARE ACCOUNTABLE TO

THE COMPANY FOR SUCH. WHERE A DIRECTOR ACCEPTED A GIFT OF 200 FULLY PAID SHARES FROM

THE PROMOTER OF THE COMPANY, HE WAS COMPELLED TO MAKE GOOD TO THE COMPANY THE

ADVANTAGE GAINED: EDEN V. RIDSDALE LAMP CO. (1889).A DIRECTOR IS BOUND TO EXERCISE

FAITHFULLY THE TRUST HE HAS ACCEPTED, AND IS BOUND TO EXERCISE FAIR AND REASONABLE

DILIGENCE IN DISCHARGING HIS DUTIES AND TO ACT HONESTLY; BUT HE IS NOT BOUND TO DO

MORE: RE FOREST OF DEAN COMPANY (1878).

LIABILITIES OF DIRECTORS

THE DIRECTORS ARE LIABLE FOR NEGLIGENCE OR BREACH OF TRUST IN RELATION TO THE COMPANY'S

AFFAIRS. THE ACT MAKES AMPLE PROVISION FOR THE LIABILITY OF DIRECTORS GUILTY OF FRAUD, OR

GROSS NEGLIGENCE, IN RESPECT OF THE COMPANY OR THIRD PERSONS. DURING THE COURSE OF A

WINDING-UP, THE ACT PROVIDES THAT A DIRECTOR WHO HAS MISAPPLIED OR RETAINED OR

BECOME LIABLE OR ACCOUNTABLE FOR ANY MONEY OR PROPERTY OF THE COMPANY, OR HAS BEEN

GUILTY OF ANY MISFEASANCE OR BREACH OF TRUST IN RELATION TO THE COMPANY, MAYBE

COMPELLED TO REPAY OR RESTORE THE MONEY OR PROPERTY OR TO PAY SUCH SUM TO THE

COMPANY AS THE COURT THINKS FIT.

DIRECTORS ARE PERSONALLY RESPONSIBLE FOR FRAUD; ALTHOUGH, WHERE THE COMPANY HAS

TAKEN ADVANTAGE OF FRAUDULENT MISREPRESENTATIONS, THE COMPANYMAY BE HELD BOUND AS

WELL AS THE DIRECTORS.

A DIRECTOR OWES A DUTY TO THE COMPANY TO DEVOTE TO HIS/HER DUTIES SUCH CARE,

PRUDENCE, AND DILIGENCE AS COULD REASONABLYBE EXPECTED OF A REASONABLY RESPONSIBLE

PERSONIN THOSE KIND OF CIRCUMSTANCES. HE/SHE MUST EXERCISE SUCH SKILL AS MAY

REASONABLY BE EXPECTED OF A PERSON OF HIS/HERKNOWLEDGE AND EXPERIENCE. FOR CARE AND

DILIGENCE, THE DIRECTOR'S CONDUCT IS MEASURED OBJECTIVELY AGAINST THE STANDARDS OF THE

REASONABLY PRUDENT AND RESPONSIBLE PERSON. FOR SKILL,OR "PROFESSIONALISM", THE

EXECUTIVE DIRECTOR WITH A SERVICE CONTRACT WILL BE REQUIRED TO DISPLAY HIGHER

STANDARDS. LIKE ANY OTHER RESPONSIBLE EMPLOYEE, SHE WILL BE REQUIRED TO SHOW BOTH

CARE AND SKILL OF A KIND TO BE EXPECTED OF AN EMPLOYEE RECEIVING THAT KIND OF SALARY AND

CHARGED WITH THOSE KIND OF RESPONSIBILITIES.

40

BORROWING BY A COMPANY

BORROWING POWERS

TRADING COMPANIES HAVE IMPLIED POWER TO BORROW FOR TRADING PURPOSES AND TO GIVE SECURITY

FOR LOANS, UNLESS EXPRESSLY PROHIBITED FROM DOING SO BY THE MEMORANDUM OF ASSOCIATION.

OTHER COMPANIES NEED EXPRESS POWER TO RAISE LOANS. IF A LOAN (OR ANY PORTION OF A LOAN) IS

ULTRA VIRESTHE COMPANY, IT IS VOID, EVEN IF IT IS RATIFIED BY THE MEMBERS IN GENERAL MEETING.

HOWEVER, IN SUCH CIRCUMSTANCES, THE LENDERMAY HAVE THE FOLLOWING REMEDIES.

IF THE MONEY HAS NOT BEEN SPENT, HE CAN OBTAIN AN INJUNCTION RESTRAINING THE COMPANY FROM

PARTING WITH IT AND HE CAN RECOVER IT.

HE CAN BRING AN ACTION AGAINST THE DIRECTORS FOR BREACH OF WARRANTY OF AUTHORITY.

IF MONEY HAS BEEN USED TO PAY CREDITORS, THE LENDER MAY STAND IN THE PLACE OF SUCH CREDITORS

(THIS IS KNOWN AS SUBROGATION), BUT HE/SHE WILL NOT GET ANY PRIORITY WHICH MAY HAVE ATTACHED

TO SUCH CREDITORS' INTEREST.

DEBENTURES

A COMPANY MAY BORROW MONEY BY THE ISSUE OF DEBENTURES WHICH ARE, IN REALITY,

PROMISES TO REPAY THE SUM BORROWED AND ARE EXECUTED UNDER THE SEAL OF THE COMPANY.

A DEBENTURE CAN BE A DOCUMENT ISSUED TO SUCH LENDER AND IT IS THEN A SELF-CONTAINED

SECURITY, ENTITLING THE HOLDER TO TAKE ACTION IN HIS/HER OWN NAME.

AN ALTERNATIVE METHOD OF RAISING FUNDS IS TO EXECUTE ONE DEBENTURE IN THE FORM OF A

TRUST DEED, APPOINTING TRUSTEES. LENDERS DO NOT RECEIVE AN ACTUAL DEBENTURE, BUT ONLY

A DEBENTURE STOCK CERTIFICATE.

DEBENTURE STOCKIS THE WHOLE AMALGAMATED BORROWING OF THE COMPANY AND HOLDERS OF

STOCK CERTIFICATES ARE NOT, GENERALLY, ENTITLED TO TAKE PROCEEDINGS INDIVIDUALLY, BUT

HAVE TO DO SO THROUGH THE TRUSTEES, WHO ARE THE BENEFICIARIES OF THE PROMISES IN THIS

CASE.

A DEBENTURE IS MERELY A PROMISE TO REPAY THE MONEY BORROWED AND IT DOES NOT, OF

ITSELF, CONSTITUTE AN ACTUAL CHARGE ON THE ASSETS OF THE COMPANY. IT IS USUAL TO GIVE

SECURITY TO THE DEBENTURE HOLDERS BY EFFECTING A MORTGAGE OR CHARGE ON THE ASSETS OF

THE COMPANY, SO THAT, IN THE EVENT OF THE COMPANY'S BEING WOUND UP, THE DEBENTURE

HOLDERS HAVE A FIRST CLAIM TO RECEIVE PAYMENT. THIS SECURITY MAY BE GIVEN IN THE FORM

OF A FIXED CHARGE, A MORTGAGE ON SOME SPECIFIC PART OF THE COMPANY'S ASSETS, E.G. THE

FACTORY PREMISES AT X TOWN, OR BY MEANS OF A FLOATING CHARGE, WHICH MAY BE DESCRIBED

GENERALLY AS RELATING TO THE WHOLE OF THE ASSETS OF THE COMPANY. THE ADVANTAGE OF A

FLOATING CHARGE, FROM THE COMPANY'S POINT OF VIEW, IS THAT IT REMAINS ENTITLED TO DEAL

FREELY WITH THE ASSETS SO CHARGED.

41

DISTINCTION BETWEEN DEBENTURES AND SHARES

DEBENTURES MUST BE CAREFULLY DISTINGUISHED FROM SHARES IN A COMPANY. IN MODERN TIMES, THEY

ARE OFTEN REGARDED BY INVESTORS AS BEING MERELY DIFFERENT SPECIES OF THE SAME THING; EACH

ENABLES MEMBERS OF THE PUBLIC TO INVEST IN A COMPANY AND TO PARTICIPATE IN ITS PROFITS.

HOWEVER, IN LAW, THEY ARE QUITE DISTINCT.

FIRSTLY,A SHAREHOLDER IS A MEMBER OF THE COMPANY, WITH CERTAIN RIGHTS AND LIABILITIES.

WHILST A DEBENTURE HOLDER IS NOT A MEMBER OF THE COMPANY –BUT A PERSON OUTSIDE THE

COMPANY WHO HAPPENS TO BE ITS CREDITOR; LEGALLY, HIS/HER POSITION VIS-À-VIS THE COMPANY

IS SIMILAR TO THAT OF ORDINARY TRADING CREDITORS.

SECONDLY, A SHAREHOLDER'S DIVIDENDS ARE HIS/HER SHARE OF THE COMPANY'S PROFITS;

DEBENTURE HOLDERS MERELY RECEIVE INTEREST ON THE LOAN. THE POSITION OF SUCH

SHAREHOLDERS IS VERY SIMILAR IN PRACTICE TO THAT OF DEBENTURE HOLDERS –BUT THE LEGAL

POSITION, LARGELY FOR HISTORICAL REASONS, IS THAT THEY ARE COMPLETELY DIFFERENT AND

DISTINCT.

COMMON SEAL

THE COMMON SEAL OF A COMPANY IS THE SIGNATURE OF THE COMPANY AND THE SEALING OF A

DOCUMENT IS WITNESSED BY THE OFFICERS OF THE COMPANY SPECIFIED IN THE ARTICLES OF

ASSOCIATION.

THE SEAL MUST BE KEPT AT THE REGISTERED OFFICE OF THE COMPANY UNDER SOME FORM OF

CONTROL WHICH WILL ADEQUATELY PREVENT ITS UNAUTHORISED USE.

HOWEVER, AS MENTIONED ABOVE, THE COMPANY MAY ACT IN A NUMBER OF WAYS THROUGH ITS AGENTS,

AND IT IS NO LONGER NECESSARY FOR DOCUMENTS IN NORMAL BUSINESS USE TO BE IMPRESSED WITH THE

SEAL OF THE COMPANY. THE COMPANIES ACT 1989 PROVIDES FOR DOCUMENTS TO BE SIGNED AS A DEED

AND FOR COMPANIES TO DISPENSE WITH THE USE OF A SEAL IN COMMERCIAL TRANSACTIONS.

MINORITY PROTECTION

PROTECTION OF MEMBERS’ INTERESTS AGAINST UNFAIR PREJUDICE

CASE LAW HAS ESTABLISHED A NUMBER OF SITUATIONS WHICH, PRIMA FACIE, AMOUNT TO UNFAIRLY

PREJUDICIAL CONDUCT AND IT SHOULD BE EMPHASISED THAT CONDUCT MAY BE PERFECTLY LAWFUL BUT

STILL UNFAIRLY PREJUDICIAL. THUS THE FOLLOWING HAVE ALL BEEN FOUND TO BE UNFAIRLY PREJUDICIAL.

EXCLUSION AND REMOVAL FROM THE BOARD, WHERE THE COMPANY WAS ONE IN WHICH THE DIRECTOR

HAD A LEGITIMATE EXPECTATION OF BEING INVOLVED IN MANAGEMENT I.E. A QUASI-PARTNERSHIP

COMPANY: IN RE BIRD PRECISION BELLOWS LTD (1986), A MINORITY SHAREHOLDER WITH 26% OF THE

SHARES SUSPECTED THAT THE MANAGING DIRECTOR OF “THIS QUASI-PARTNERSHIP” COMPANY WAS

CONCEALING BRIBES THAT HE HAD RECEIVED IN ORDER TO SECURE CONTRACTS. WHEN THE DEPARTMENT OF

TRADE AND INDUSTRY REFUSED TO INVESTIGATE, THE MINORITY SHAREHOLDER WAS REMOVED FROM THE

42

BOARD. THE MINORITY SHAREHOLDER CLAIMED THAT THIS AMOUNTED TO UNFAIRLY PREJUDICIAL

CONDUCT. HIS CLAIM WAS UPHELD.

THE MAJORITY SHAREHOLDER AND DIRECTOR USING THE ASSETS OF THE COMPANY FOR HIS OWN

PERSONAL BENEFIT. IN RE ELGINDATA (NO.1) (1991),THE MAJORITY SHAREHOLDER AND DIRECTOR USED THE

ASSETS OF THE COMPANY FOR HIS OWN PERSONAL BENEFIT. THE PETITIONER COMPLAINED THAT THIS WAS

UNFAIRLY PREJUDICIAL TO HIM AND THE COURT GRANTED AN ORDER

43

UNDER WHAT WAS S461 OF THE COMPANIES ACT 1985, IN ACCORDANCE WITH WHICH THE RESPONDENTS

WERE ORDERED TO PURCHASE THE SHARES HELD BY THE PETITIONER.

A POLICY OF MAKING LOW DIVIDEND PAYMENTS. IN RE SAM WELLER&SONS LTD (1990),THE PETITIONERS,

WHO BETWEEN THEM HELD 42.5% OF THE SHARES IN THEIR FAMILY BUSINESS, COMPLAINED THAT THE

COMPANY HAD NOT INCREASED ITS DIVIDEND FOR37 YEARS, DESPITE ITS PROFITABILITY. IN 1985, ITS NET

PROFIT HAD BEEN £36,000 YET ONLY £2,520 WAS PAID OUT IN DIVIDENDS. THE COMPANY WAS CONTROLLED

BY THE PETITIONERS' UNCLE, SAM WELLER, WHO ALONG WITH HIS SONS CONTINUED TO RECEIVE DIRECTORS'

FEES AND REMUNERATION. PETER GIBSON J. COMMENTED ON THE PETITIONERS' POSITION: "AS THEIR ONLY

INCOME FROM THE COMPANY IS BY WAY OF DIVIDEND, THEIR INTERESTS MAY NOT ONLY BE PREJUDICED BY

THE POLICY OF LOW DIVIDEND PAYMENTS, BUT UNFAIRLY PREJUDICED."

IT SHOULD BE NOTED THAT THE COURTS MAY ALSO TAKE THE PETITIONER'S CONDUCT INTO ACCOUNT WHEN

DECIDING WHETHER CERTAIN ACTIONS ARE UNFAIRLY PREJUDICIAL, AS DEMONSTRATED BY THE CASE OF RE R

A NOBLE & SONS LTD (1983). THE MINORITY SHAREHOLDER HAD PROVIDED THE CAPITAL BUT HAD LEFT THE

MANAGEMENT OF THE COMPANY IN THE HANDS OF THE OTHER DIRECTOR, ON THE UNDERSTANDING THAT

HE WOULD BE CONSULTED IN RELATION TO MAJOR POLICY MATTERS. HOWEVER, HE WAS NOT SO

CONSULTED BY THE OTHER DIRECTOR AND CONFINED HIMSELF TO ENQUIRIES OF THE ACTIVITIES TO THE

OTHER DIRECTOR ON SOCIAL OCCASIONS AND ACCEPTED ASSURANCES THAT ALL WAS WELL. HIS PETITION,

UNDER SECTION 459 OF THE COMPANIES ACT 1985, FOLLOWED ON FROM A BREAKDOWN IN THE

RELATIONSHIP BETWEEN THE TWO DIRECTORS. IT WAS HELD THAT THE MINORITY SHAREHOLDER'S

EXCLUSION FROM THE COMPANY'S MANAGEMENT WAS LARGELY THE RESULT OF HIS OWN LACK OF

INTEREST. CONSEQUENTLY, HIS PETITION WAS DISMISSED.

IN THE EVENT THAT A PETITION IS SUCCESSFUL, THE COURT MAKE SUCH ORDER THAT IT DEEMS FIT FOR

GIVING RELIEF IN RESPECT OF THE MATTERS COMPLAINED OF, INCLUDING:

REGULATING THE FUTURE CONDUCT OF THE COMPANY'S AFFAIRS, E.G. THAT A CONTROLLING

SHAREHOLDER SHOULD CONFORM WITH ALL THE DECISIONS THAT ARE TAKEN DURING THE COURSE OF

BOARD MEETINGS

REQUIRING THE COMPANY TO DO AN ACT THAT IT HAS OMITTED TO DO OR TO REFRAIN FROM DOING AN

ACT SO COMPLAINED OF

PROVIDING FOR THE PURCHASE OF THE SHARES OF THE MINORITY SHAREHOLDER AT A FAIR VALUE BY

OTHER MEMBERS OR BY THE COMPANY ITSELF –THE USUAL REMEDY

REQUIRING THE COMPANY NOT TO MAKE ANY SPECIFIED ALTERATION/AMENDMENT TO ITS ARTICLES OF

ASSOCIATION WITHOUT LEAVE OF THE COURT.

44

APPLICATIONS BY MINORITY SHAREHOLDERS TO HAVE A COMPANY WOUND-UP ON JUST AND EQUITABLE

GROUNDS

THE COURT HAS ENORMOUS DISCRETION WHEN CONSIDERINGWHETHER IT WOULD BE “JUST AND

EQUITABLE” TO COMPULSORILY WIND-UP A COMPANY UNDER SECTION 122(1)(G) OF THE INSOLVENCY ACT

1986. COURT ORDERS ON THIS GROUND HAVE BEEN GRANTED, AMONG OTHER THINGS:

WHERE BREAKDOWN OF MUTUAL TRUST AND CONFIDENCE HAS OCCURRED, ESPECIALLY IN THE CASE OF A

QUASI-PARTNERSHIP: EBRAHIMI V. WESTBOURNE GALLERIES LTD (1972), WHERE MR EBRAHIMI AND MR

NAZAR HAD CARRIED ON BUSINESS IN PARTNERSHIP DEALING IN PERSIAN AND OTHER CARPETS. THEY

SHARED EQUALLY IN MANAGEMENT AND PROFITS. IN 1958, THEY FORMED A PRIVATE COMPANY CARRYING

ON THE SAME BUSINESS AND WERE APPOINTED AS ITS FIRST DIRECTORS.

SHORTLY AFTER THE COMPANY'S INCORPORATION, MR NAZAR'S SON, GEORGE, BECAME A DIRECTOR. MR

NAZAR AND HIS SON BETWEEN THEM HELD THE MAJORITY OF THE VOTESEXERCISABLE AT GENERAL

MEETINGS. THE COMPANY MADE GOOD PROFITS, WHICH WERE ALL DISTRIBUTED AS DIRECTOR'S

REMUNERATION; NO DIVIDENDS WERE EVER PAID. IN 1969, MR EBRAHIMI WAS REMOVED FROM HIS OFFICE

AS A DIRECTOR BY A RESOLUTION AT A GENERAL MEETING UNDERWHAT IS NOW KNOWN AS SECTION 303 OF

THE COMPANIES ACT 1985 AND A PROVISION OF THE COMPANY'S ARTICLES. FOLLOWING ON FROM THIS, MR

EBRAHIMI ASKED THE COURT TO FIND THAT IT WAS "JUST AND "EQUITABLE" TO COMPULSORILY WIND-UP

THE COMPANY. IT WAS HELD BY THE HOUSE OF LORDS THAT THE COMPANY SHOULD BE COMPULSORILY

WOUND-UP ON “JUST AND EQUITABLE” GROUNDS BECAUSE OF MR EBRAHIMI'S INABILITY, AFTER HIS

DISMISSAL, TO PARTICIPATE IN THE COMPANY'S MANAGEMENT AND BECAUSE PROFITS WERE PAID AS

DIRECTOR'S REMUNERATION.

WHERE THERE IS A COMPLETE DEADLOCK IN THE MANAGEMENT OF THE COMPANY'S AFFAIRS: RE YENIDJE

TOBACCO CO LTD (1916), WHERE TWO SOLE TRADERS HAD MERGED THEIR BUSINESSES INTO A COMPANY OF

WHICH THEY WERE THE ONLY DIRECTORS AND SHAREHOLDERS. THEY QUARRELLED BITTERLY, REFUSED TO

SPEAK TO EACH OTHER AND CONDUCTED BOARD MEETINGS BY PASSING NOTES THROUGH THE HANDS OF

THE SECRETARY. ONE SUED THE OTHER FOR FRAUD AND HE, IN TURN, PETITIONED TO HAVE THE COMPANY

WOUND-UP ON JUST AND EQUITABLE GROUNDS. THE COURT STATED THAT: “IN SUBSTANCE THESE TWO

PEOPLE ARE REALLY PARTNERS” AND BY ANALOGY WITH THE LAW OF PARTNERSHIP (WHICH PERMITS THE

DISSOLUTION IF THE PARTNERS ARE REALLY UNABLE TO WORK TOGETHER) IT WAS JUST AND EQUITABLE IN

THIS CASE TO WIND THE COMPANY UP.

WHERE THE MANAGING DIRECTOR, WHO ALSO REPRESENTED THE MAJORITY SHAREHOLDING INTEREST IN

THE MANAGEMENT OF THE COMPANY, REFUSED TO HOLD GENERAL MEETINGS, SUBMIT ACCOUNTS OR PAY

DIVIDENDS: LOCH V. JOHN BLACKWOOD LTD (1924).

45

ADMINISTRATION

WHAT IS AN ADMINISTRATION ORDER?

AN ADMINISTRATION ORDER IS AN ALTERNATIVE PROCEDURE FOR DEALING WITH THE AFFAIRS OF

AN INSOLVENT COMPANY, ESTABLISHED BY THE INSOLVENCY ACT 1986.

IT IS AN ORDER DIRECTING THAT, DURING THE PERIOD IN WHICH IT IS IN FORCE, THE AFFAIRS,

BUSINESS AND PROPERTY OF THE COMPANY SHALL BE MANAGED BY A PERSON APPOINTED FOR

THAT PURPOSE BY THE COURT AND KNOWN AS “THE ADMINISTRATOR” IN ACCORDANCE WITH

SCHEDULE B1 OF THE INSOLVENCY ACT 1986.

A LICENSED INSOLVENCY PRACTITIONER IS APPOINTED AS AN ADMINISTRATOR BY THE COURT UNDER

AN ADMINISTRATION ORDER.

THE ORDER IS USUALLY SOUGHT THROUGH A PETITION BY A COMPANY THAT IS, OR IS LIKELY TO

BECOME, INSOLVENT.

ADMINISTRATION ORDERS WERE INTRODUCED BY THE INSOLVENCY ACT 1986 AS A CONSTRUCTIVE

WAY OF TRYING TO SAVE A COMPANY'SBUSINESS.

WHO MAY APPLY FOR AN ADMINISTRATION ORDER?

IN ACCORDANCE WITH SCHEDULE B1 OF THE INSOLVENCY ACT 1986 APPLICATIONS CAN BE MADE BY:

THE COMPANY ITSELF

THE DIRECTORS OF THE COMPANY

A CREDITOR OR GROUP OF CREDITORS OF THE COMPANY (INCLUDING FLOATINGCHARGE HOLDERS

OVER THE WHOLE OR SUBSTANTIALLY THE WHOLE OF A COMPANY'S PROPERTY)

THE SUPERVISOR OF A COMPANY VOLUNTARY ARRANGEMENT –NOTICE OF THE PETITION MUST

IMMEDIATELY BE GIVEN TO PRESCRIBED PERSONS AND CANNOT BE WITHDRAWN EXCEPT WITH THE

LEAVE OF THE COURT.

46

UNDER WHAT CIRCUMSTANCES IS AN APPLICATION FOR AN ADMINISTRATION ORDER LIKELY TO BE

SUCCESSFUL? CAN ONE OR MORE OF THE OBJECTIVES OF THE THREE-PART TEST IN SCHEDULE B OF THE

INSOLVENCY ACT 1986 BE MET?

THE PRIMARY OBJECTIVEWILL BE TO RESCUE THE COMPANY IN WHOLE OR IN PART AS A GOING

CONCERN. WHERE A COMPANY CAN BE RESCUED, THEN THE RESCUE PLAN WILL BE PUT INTO

ACTION. INTER ALIA, IF THE COMPANY INVOLVED IS A HOLDING COMPANY WITH SUBSIDIARIES, THIS

COULD INVOLVE THEM SELLING OFF ONE OF THE SUBSIDIARY COMPANIES WITHIN THEIR GROUP TO

ENSURE THE GROUP'S LONG-TERM FINANCIAL SURVIVAL, IN OTHER WORDS, “DOWNSIZING”.

THE ADMINISTRATOR MAY PURSUE THE SECONDARY OBJECTIVEOF MAXIMISING RETURNS FOR THE

COMPANY'S CREDITORS AS A WHOLE, OVER AND ABOVE WHAT WOULD BE LIKELY IF THE COMPANY

WERE WOUND-UP WITHOUT FIRST GOING INTO ADMINISTRATION, IF THE ADMINISTRATOR

CONSIDERS THE PRIMARY OBJECTIVE IS NOT REASONABLY PRACTICABLE. THIS COULD INVOLVE THE

COMPANY CONCERNED CONTINUING TO TRADE UNTIL SUCH TIME AS IT HAS SATISFIED

OUTSTANDING CUSTOMER ORDERS AND SOLD ITS REMAINING STOCK-IN-TRADE, IN THE INTERESTS

OF A MORE BENEFICIAL WINDING-UP. IN THIS WAY THE COMPANY WOULD MAXIMISE RETURNS FOR

ITS CREDITORS OVER AND ABOVE WHAT WOULD BE LIKELY IF THE COMPANY WERE WOUND-UP

IMMEDIATELY WITHOUT FIRST GOING INTO ADMINISTRATION.

THE THIRD OBJECTIVE, WHICH WILL ONLY APPLY IF NEITHER OF THE OTHER TWO OBJECTIVES IS

POSSIBLE, WILL BE TO REALISE PROPERTY, TO MAKE A DISTRIBUTION TO ONE OR MORE OF THE

SECURED OR PREFERENTIAL CREDITORS BUT WITHOUT "UNNECESSARILY HARMING" THE INTERESTS

OF THE CREDITORS AS A WHOLE. WHERE THERE ARE NO FUNDS AVAILABLE FOR THE UNSECURED

CREDITORS, THE ADMINISTRATOR WILL REALISE THE COMPANY'S ASSETS AND MAKE PAYMENTS TO

PREFERENTIAL CREDITORS AND FIXED AND FLOATING CHARGE HOLDERS AND WILL ARRANGE FOR

THE COMPANY TO BE PLACED INTO CREDITORS' VOLUNTARY LIQUIDATION.

AN APPLICATION FOR AN ADMINISTRATION ORDER IS LIKELY TO BE SUCCESSFUL IN THOSE CASES

WHERE ONE OR MORE OF THE OBJECTIVES OF THE ABOVE THREE-PART TESTCAN BE SATISFIED, E.G.

THE SECOND AND THIRD OBJECTIVE.

IT FOLLOWS THAT AN ADMINISTRATION ORDER WILL NOT BE MADE WHERE A COMPANY HAS

ALREADY GONE INTO LIQUIDATION: SCHEDULE B1, INSOLVENCY ACT 1986.

47

ADVANTAGES OF THE ADMINISTRATION ORDER AS AN INSOLVENCY PROCEDURE

THE TWO MAIN ADVANTAGES ARE AS FOLLOWS.

ONCE AN ADMINISTRATION ORDER HAS BEEN ISSUED, IT IS NO LONGER POSSIBLE TO COMMENCE

WINDING-UP PROCEEDINGS AGAINST THE COMPANY OR ENFORCE CHARGES ON THE COMPANY'S

ASSETS. THIS MAJOR ADVANTAGE IS IN NO WAY UNDERMINED BY THE FACT THAT AN

ADMINISTRATION ORDER CANNOT BE MADE UNTIL AFTER A COMPANY HAS BEGUN THE

LIQUIDATION PROCESS. IT IS OPEN TO A SECURED CREDITOR TO ENFORCE THEIR RIGHTS AND TO

FORESTALL THE ADMINISTRATION PROCEDURE.

AN ADMINISTRATION ORDER CAN BE PUT IN PLACE VERY QUICKLY, IN RESPONSE TO THE URGENT

NEEDS OF A COMPANY AND ITS BUSINESS. THE COMPANY THEN HAS THE BENEFIT OF A STAY ON ALL

CREDITORS' ACTIONS AND THE ADMINISTRATOR HAS WIDE POWERS TO DEAL WITH NOT ONLY THE

COMPANY'S ASSETS BUT ALSO THOSE OF THIRD PARTIES SUBJECT, IN SOME CASES, TO THE COURT

GRANTING LEAVE FOR THE PROPOSED ACTION. ADMINISTRATION IS A COLLECTIVE PROCEDURE THAT

ALMOST ALWAYS, IN THE LONG-TERM, OFFERS BETTER RETURNS TO UNSECURED CREDITORS THAN

AN IMMEDIATE LIQUIDATION.

THE EFFECT OF AN ADMINISTRATION ORDER BEING GRANTED

IN THE EVENT THAT THE COURT MAKES AN ADMINISTRATION ORDER:

A QUALIFIED INSOLVENCY PRACTITIONER IS APPOINTED TO ADMINISTER THE AFFAIRS OF THE

COMPANY

THE RIGHTS OF CREDITORS TO ENFORCE DEBTS REMAIN SUSPENDED

ALL COMPANY DOCUMENTS MUST STATE THAT THE COMPANY IS IN ADMINISTRATION AND THE

NAME OF THE ADMINISTRATOR

ANY PETITION FOR WINDING-UP IS DISMISSED

AN ADMINISTRATION ORDER IN EFFECT CREATES A “BREATHING SPACE” FOR THE COMPANY –

IT FREEZES CIVIL ACTIONS AGAINST THE COMPANY AND REPOSSESSIONS OF GOODS FROM

THE DATE OF THE PRESENTATION OF THE PETITION.

ONCE AN ADMINISTRATION ORDER HAS BEEN ISSUED, IT IS NO LONGER POSSIBLE TO

COMMENCE WINDING-UP PROCEEDINGS AGAINST THE COMPANY OR ENFORCE CHARGES

ON THE COMPANY'S ASSETS –

THIS IS ONE OF THE MAJOR ADVANTAGES OF AN ADMINISTRATION ORDER

48

WINDING-UP (LIQUIDATION)

DEFINITION

WINDING-UP OR LIQUIDATION IS THE LEGAL TERM FOR THE TERMINATION OR DISSOLUTION OF A

COMPANY. IT IS COMPARABLE, IN SOME WAYS, WITH THE DEATH OF AN INDIVIDUAL OR WITH THE

BANKRUPTCY OF AN INSOLVENT PERSON.

(NOTE: A LIMITED COMPANY CANNOT BE MADE BANKRUPT –A BANKRUPTCY APPLIES ONLY TO

INDIVIDUALS AND PERSONS TRADING AS PARTNERS.)

MENTION THE THREE TYPE OF LIQUIDATION UNDER THE INSOLVENCY ACT

THERE ARE THREE TYPES OF LIQUIDATION UNDER THE INSOLVENCY ACT 1986:

MEMBERS' VOLUNTARY LIQUIDATION.

CREDITORS' VOLUNTARY LIQUIDATION

COMPULSORY LIQUIDATION.

CIRCUMSTANCES IN WHICH A COMPANY MAY BE WOUND-UP VOLUNTARILY

IN ACCORDANCE WITH SECTION 84(1) OF THE INSOLVENCY ACT 1986, A COMPANY MAY BE WOUND-UP

VOLUNTARILY:

1) WHEN THEPERIOD (IF ANY) FIXED FOR THE DURATION OF THE COMPANY BY THE ARTICLES EXPIRES,

OR THE EVENT (IF ANY) OCCURS, ON THE OCCURRENCE OF WHICH THE ARTICLES PROVIDE THAT THE

COMPANY IS TO BE DISSOLVED, AND THE COMPANY IN GENERAL MEETING HAS PASSED A

RESOLUTION REQUIRING IT TO BE WOUND-UP VOLUNTARILY

2) IF THE COMPANY RESOLVES BY SPECIAL RESOLUTION THAT IT BE WOUND-UP VOLUNTARILY

3) IF THE COMPANY RESOLVES BY SPECIAL RESOLUTION TO THE EFFECT THAT IT CANNOT, BY REASON OF

ITS LIABILITIES, CONTINUE ITS BUSINESS, ANDTHAT IT IS ADVISABLE TO WIND-UP

4) THE DECISION TO HAVE A VOLUNTARY LIQUIDATION MAY BE MADE BECAUSE THE COMPANY MAY BE

NO LONGER REQUIRED TO EXIST FOR ONE (OR MORE) OF A NUMBER OF REASONS, INCLUDING:

IT MAY HAVE BEEN FORMED FOR THE PURPOSE OF UNDERTAKINGA PARTICULAR PROJECT

WHICH HAS NOW BEEN COMPLETED, E.G. THE MILLENNIUM DOME

THE OWNER-MANAGER MAY BE RETIRING

ITS ORIGINAL PURPOSE (OBJECT) MAY HAVE BECOME REDUNDANT FOLLOWING A GROUP

RESTRUCTURING.

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THE DISTINGUISHING FEATURES OF A MEMBERS' VOLUNTARY LIQUIDATION

IN ACCORDANCE WITH SECTION 90 OF THE INSOLVENCY ACT 1986, THIS IS WHERE THE DIRECTORS

ARE ABLE TO MAKE A FORMAL DECLARATION (KNOWN AS A “STATUTORYDECLARATION OF

SOLVENCY”), STATING THAT ,AFTER FULL INQUIRY INTO THE COMPANY'S AFFAIRS, THEY ARE OF THE

OPINION THAT THE COMPANY WILL BE ABLE TO PAY ITS DEBTS (INCLUDING STATUTORY INTEREST)

WITHIN 12 MONTHS OF THE COMMENCEMENT OF THE WINDING-UP.

MOREOVER, A COMPANY MUST BE SOLVENTIN ORDER TO USE THIS METHOD OF LIQUIDATION AND,

IN THE EVENT THAT THE AMOUNT REALISED FROM THE COMPANY'S ASSETS IS INSUFFICIENT TO PAY

ITS CREDITORS IN FULL, THE LIQUIDATION WILL BE CONVERTED INTO A CREDITORS' VOLUNTARY

LIQUIDATION: SECTION 96, INSOLVENCY ACT 1986.

A COMPANY IS PLACED INTO A MEMBERS' VOLUNTARY LIQUIDATION ON THE PASSING OF A SPECIAL

RESOLUTION BY THE SHAREHOLDERS WHO, AT THE SAME TIME, APPOINT A LIQUIDATOR. ON HIS

APPOINTMENT, ALL DIRECTORS' POWERS WILL CEASE.

DISTINGUISHING FEATURES OF A CREDITORS' VOLUNTARY LIQUIDATION

IN ACCORDANCE WITH SECTION 90 OF THE INSOLVENCY ACT 1986, THIS IS WHERE THE DIRECTORS

ARE UNABLE TO MAKE A FORMAL DECLARATION THAT THE COMPANY CAN PAY ALL ITS LIABILITIES IN

FULL WITHIN 12 MONTHS (INCLUDING THE ADDITION OF STATUTORY INTEREST), I.E. THEY ARE

CANNOT MAKE A SECTION 89 STATUTORY DECLARATION OF SOLVENCY PRIOR TO THE

COMMENCEMENT OF THE LIQUIDATION PROCEDURE. A COMPANY USES THIS METHOD OF

LIQUIDATION WHEN IT IS INSOLVENT –IN A CREDITORS' VOLUNTARY WINDING-UP, A FORMAL

DECLARATION OF SOLVENCY IS NOT POSSIBLE OWING TO THE CIRCUMSTANCES LEADING TO THE

WINDING-UP: SECTION 90, INSOLVENCY ACT 1986.

IN THIS TYPE OF WINDING-UP, THE SPECIAL RESOLUTION IS FOLLOWED BY A CREDITORS' MEETING,

WHERE IT IS POSSIBLE FOR A LIQUIDATION COMMITTEE TO BE APPOINTED: SECTION 98, INSOLVENCY

ACT 1986. DURING THE COURSE OF THIS MEETING, THE COMPANY'S DIRECTORS MUST PLACE

BEFORE A MEETING OF CREDITORS A FULL STATEMENT OF THE COMPANY'S AFFAIRS: SECTION 99,

INSOLVENCY ACT 1986. SUCH MEETINGS FORM NO PART OF A MEMBERS' VOLUNTARY WINDING UP.

AS WITH A MEMBERS' VOLUNTARY LIQUIDATION, THE COMPANY IS PLACED IN LIQUIDATION ON THE PASSING OF A SPECIAL RESOLUTION BY THE SHAREHOLDERS WHO, AT THE SAME TIME, APPOINT A LIQUIDATOR. IN A CREDITORS' VOLUNTARY LIQUIDATION, IN DIRECT CONTRAST TO A MEMBERS' VOLUNTARY LIQUIDATION, BOTH MEMBERS AND CREDITORS HAVE THE RIGHT TO NOMINATE A LIQUIDATOR AND, IN THE EVENT OF DISPUTE, SUBJECT TO RIGHT OF APPEAL TO THE COURTS, THE CREDITORS' NOMINEE PREVAILS. IN THIS CONTEXT, THE LIQUIDATOR IS PRIMARILY ACCOUNTABLE TO THE CREDITORS.

IT IS THE LIQUIDATOR'S DUTY TO REALISE THE ASSETS, INVESTIGATE THE COMPANY'S AFFAIRS, REPORT ON THE DIRECTORS' CONDUCT AND DISTRIBUTE FUNDS AVAILABLE IN ACCORDANCE WITH THE INSOLVENCY ACT 1986.

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COMPULSORY LIQUIDATION

A COMPULSORY LIQUIDATION IS A LIQUIDATION IMPOSEDBY A COURT ORDER, USUALLY AS A DIRECT

CONSEQUENCE OF A CREDITOR'S PETITION, ON THE GROUNDS THAT THE COMPANY IS UNABLE TO

PAY ITS DEBTS: SECTION 122(1)(F).

IN ACCORDANCE WITH SECTION 123 OF THE INSOLVENCY ACT 1986, A COMPANY IS REGARDED AS

UNABLE TO PAY ITS DEBTS IF, AMONG OTHER THINGS:

A CREDITOR IS OWED MORE THAN £750 AND

PRESENTS A WRITTEN DEMAND IN THE PRESCRIBED FORM (KNOWN AS STATUTORY

DEMAND FORM 4.1) TO THE COMPANY AND

THE COMPANY FAILS TO PAY, SECURE OR AGREE A SETTLEMENT OF THE DEBT TO THE

CREDITOR'S REASONABLE SATISFACTION.

A COMPULSORY WINDING-UP PETITION MAY ALSO BE PRESENTED BY ANY OF THE FOLLOWING

PARTIES IN ACCORDANCE WITH SECTION 124(1) OF THE INSOLVENCY ACT 1986:

THE COMPANY OR ITS DIRECTORS

THE OFFICIAL RECEIVER

THE DEPARTMENT FOR BUSINESS ENTERPRISE AND REGULATORY REFORM (FORMERLY THE

DEPARTMENT OF TRADE AND INDUSTRY)

ANY CONTRIBUTORY (A“CONTRIBUTORY” IS ANY PERSON WHO IS LIABLE TO CONTRIBUTE TO THE

ASSETS OF THE COMPANY IN THE EVENT OF IT BEING WOUND-UP).

IN COMPULSORY LIQUIDATIONS, THEOFFICIAL RECEIVER IS AUTOMATICALLY APPOINTED AS

LIQUIDATOR FOR THE COMPANY CONCERNED.

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DISTINGUISHING FEATURES OF A COMPULSORY LIQUIDATION

AS WITH A VOLUNTARY LIQUIDATION, IT IS POSSIBLE FOR A COMPANY TO BE PLACED IN LIQUIDATION ON THE

PASSING OF A SPECIALRESOLUTION BY THE SHAREHOLDERS WHO, AT THE SAME TIME, APPOINT A

LIQUIDATOR.

IN ACCORDANCE WITH SECTION 122(1) OF THE INSOLVENCY ACT 1986 BOTH SOLVENT AND INSOLVENT

COMPULSORY LIQUIDATIONS ARE POSSIBLE. A COMPANY MUST BE SOLVENT IN ORDER TO BE WOUND-UP

ONJUST AND EQUITABLE GROUNDS –SEE EBRAHIMI V. WESTBOURNE GALLERIES (1972).

THIS METHOD OF LIQUIDATION IS APPROPRIATE WHERE:

A PUBLIC LIMITED COMPANY HAS BEEN REGISTERED FOR A YEAR AND HAS FAILED TO OBTAIN A TRADING

CERTIFICATE UNDER WHAT IS NOW SECTION 761 OF THE COMPANIES ACT 2006: SECTION 122(1)(B),

INSOLVENCY ACT 1986

A COMPANY DOES NOT COMMENCE BUSINESS WITHIN A YEAR OF IT BEING INCORPORATED OR SUSPENDS

BUSINESS FOR A WHOLE YEAR: SECTION 122(1)(D), INSOLVENCY ACT 1986

A COMPANY IS UNABLE TO PAY ITS DEBTS: SECTION 122(1)(F), INSOLVENCY ACT 1986

THE COURT IS OF THE OPINION THAT IT IS JUST AND EQUITABLE THAT THE COMPANY SHOULD BE WOUND-

UP: SECTION 122(1)(G) E.G. EBRAHIMI V. WESTBOURNE GALLERIES (1972).

THE MAIN EFFECTSOF THE MAKING OF A COMPULSORY WINDING-UP ORDER AGAINST A COMPANY ARE THAT:

AS SOON AS THE ORDER IS MADE, ALL ACTIONS FOR THE RECOVERY OF DEBT AGAINST THE COMPANY ARE

STOPPED

THE COMPANY WILL CEASE TO CARRY ON BUSINESS, EXCEPT WHERE IT IS NECESSARY FOR ITS BENEFICIAL

WINDING-UP (I.E. IN THE INTERESTS OF A MORE FAVOURABLE ASSET REALISATION)

THE POWERS OF THE DIRECTORS WILL CEASE AND ARE ASSUMED BY THE LIQUIDATOR

THE EMPLOYEES OF THE COMPANY ARE AUTOMATICALLY MADE REDUNDANT

THE OFFICIAL RECEIVER BECOMES THE LIQUIDATOR UNTIL AN INSOLVENCY PRACTITIONER IS APPOINTED.

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ROLE OF THE LIQUIDATOR FOLLOWING APPOINTMENT

ON APPOINTMENT, THE LIQUIDATOR TAKES OVER ALL THE POWERS OF THE DIRECTORS AND HE/SHE OWES A

FIDUCIARY DUTY TO THE COMPANY. HE/SHE MUST EXERCISE REASONABLE CARE AND SKILL WHEN

PERFORMING HIS/HER FUNCTIONS. THE LIQUIDATOR'S POWERS, WHICH ENABLE HIM TO CARRY OUT THE

WINDING-UP, ARE WHOLLY SET OUT IN THE INSOLVENCY ACT 1986. AMONG OTHER THINGS, A LIQUIDATOR'S

POWERS INCLUDE THE POWER TO:

SELL ANY OF THE COMPANY'S ASSETS

RAISE ANY MONEY FOR THE PURPOSES OF THE LIQUIDATION, BY USING THE COMPANY'S ASSETS AS

SECURITY

APPOINT AN AGENT TO DO ANY BUSINESS WHICH THE LIQUIDATOR CANNOT DO HIMSELF

DO ALL ACTS OR EXECUTE ALL DOCUMENTS IN THE NAME OF AND ON BEHALF OF THE COMPANY

DO ALL OTHER THINGS WHICH MAY BE NECESSARY FOR THE WINDING-UP OF THE COMPANY AND

DISTRIBUTING ITS ASSETS.

THE LIQUIDATOR OF A COMPANY CAN INCREASE THE ASSETS AVAILABLE FOR DISTRIBUTION TO CREDITORS BY

BRINGING AN ACTION FOR FRAUDULENT TRADING AND/OR WRONGFUL TRADING.

DIRECTORS' LIABILITY FOR "WRONGFUL TRADING"

ON THE APPLICATION OF THE LIQUIDATOR, THE COURTS CAN DEEM A DIRECTOR PERSONALLY LIABLE TO THE

COMPANY'S CREDITORS FOR THEIR LOSSES INCURRED THROUGH THE COMPANY'S WRONGFUL TRADING.

THIS APPLIES TO DIRECTORS OR FORMER DIRECTORS OF INSOLVENT COMPANIES WHO, PRIOR TO THE

COMMENCEMENT OF THE WINDING-UP OF THEIR COMPANY KNEW, OR OUGHT TO HAVE KNOWN, THAT

THERE WAS NO REASONABLE PROSPECT OF THEIR COMPANY AVOIDING INSOLVENT LIQUIDATION AND WHO

HAVE FAILED TO TAKE ALL REASONABLE STEPS TO PREVENT THAT FROM HAPPENING: SECTION 214,

INSOLVENCY ACT 1986.

THE EFFECT OF THIS STATUTORY PROVISION IS THAT A DIRECTOR MAY BE MADE PERSONALLY LIABLE FOR THE

DEBTS AND LIABILITIES OF THE INSOLVENT COMPANY IF HE/SHE KNEW THAT IT COULD NOT AVOID INSOLVENT

THE LAW RELATING TO ASSOCIATIONS 1: CORPORATIONS 73

© ABE

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LIQUIDATION AND DID NOT TAKE ALL REASONABLE STEPS OPEN TO HIM/HER TO PREVENT ITS CREDITORS

FROM SUFFERING GREATER LOSS THAN THEY WOULD HAVE SUFFERED BY AN IMMEDIATE CESSATION OF THE

COMPANY'S ACTIVITIES, OR IF A REASONABLE DIRECTOR WITH THE KNOWLEDGE AVAILABLETO HIM/HER

WOULD HAVE CONCLUDED THAT THE COMPANY COULD NOT HAVE AVOIDED INSOLVENCY AND WOULD HAVE

TAKEN MORE EFFECTIVE STEPS TO MINIMISE THE LOSSES TO CREDITORS. CONVERSELY, DIRECTORS MAY

ESCAPE LIABILITY WHERE THEY CAN SHOW THAT, AFTER THE TIME WHEN THEY KNEW, OR OUGHT TO HAVE

KNOWN, THAT THERE WAS NO REASONABLE CHANCE OF THEIR COMPANY AVOIDING INSOLVENT

LIQUIDATION, THAT THEY TOOK EVERY STEP WITH A VIEW TO MINIMISING THE POTENTIAL LOSS TO THE

COMPANY'S CREDITORS.

IN DECIDING WHAT A DIRECTOR OUGHT TO HAVE DONE, THE COURTS ADOPT A PARTLY OBJECTIVE STANDARD

BY CONSIDERING WHAT WOULD HAVE BEEN DONE BY A REASONABLY DILIGENT PERSON HAVING THE

KNOWLEDGE, SKILL AND EXPERIENCE THAT MAY REASONABLY BE EXPECTED OF A PERSON CARRYING OUT THE

SAME FUNCTIONS AS THE DIRECTOR IN QUESTION. THERE IS AN ADDITIONAL SUBJECTIVE TEST WHICH MAY

SERVE TO INCREASE THE INDIVIDUAL'S LIABILITY, DEPENDING ON THE ACTUAL KNOWLEDGE, SKILL AND

EXPERIENCE THAT THE DIRECTOR INVOLVED HAS.

THE EXTENT OF A DIRECTOR'S PERSONAL LIABILITY TO CONTRIBUTE TO THE ASSETS OF THE COMPANY IS

DETERMINED BY THE REFERENCE TO THE LOSSES INCURRED BY THE COMPANY FROMTHE DATE WHEN THE

DEFENDANT OUGHTTO HAVE REALISED THAT THE COMPANY COULD NOT AVOID GOING INTO INSOLVENT

LIQUIDATION: RE PRODUCE MARKETING CONSORTIUM LTD (1989).

UNDER THE 1986 ACT, THE COURTS, ON APPLICATION BY THE SECRETARY OF STATE OR THE OFFICIAL

RECEIVER, MUST DISQUALIFY A DIRECTOR IF THE COMPANY BECAME INSOLVENT WHILE HE/SHE WAS A

DIRECTOR AND HIS/HER CONDUCT AS A DIRECTOR OF THAT COMPANY MAKESHIM/HER UNFIT TO BE

INVOLVED IN THE MANAGEMENT OF ANOTHER COMPANY.

IN ORDER TO ENSURE THAT DIRECTORS DO NOT HAVE THE CONSTANT THREAT OF POSSIBLE

DISQUALIFICATION, THE ORDER ITSELF MUST BE APPLIED FOR WITHIN TWO YEARS OF THE LIQUIDATION,

ALTHOUGH THIS TIMELIMIT MAY BE EXTENDED AT THE COURT'S DISCRETION.

SUBSTANTIAL CASE LAW HAS DEVELOPED IN RECENT YEARS AS A RESULT OF THE PROVISIONS FOR

FRAUDULENT TRADING AND WRONGFUL TRADING CONTAINED IN COMPANIES LEGISLATION.

FRAUDULENT TRADING

FRAUDULENT TRADING OCCURS WHERE THE BUSINESS OF THE COMPANY IS CARRIED ON WITH INTENT TO

DEFRAUD CREDITORS OR FOR ANY OTHER FRAUDULENT PURPOSE. IT IS, THEREFORE, NECESSARY TO

ESTABLISH DISHONEST INTENT IN ORDER TO OBTAIN A SUCCESSFUL CONVICTION. THIS WILL BE INFERRED

WHERE A COMPANY CARRIES ON BUSINESS AND CONTINUES TO INCUR LIABILITIES WHERE THERE IS NO

REASONABLE PROSPECT OF THOSE LIABILITIES BEING MET: RE WILLIAM C LEITCH BROS. (1932).OTHER

EXAMPLES OF "FRAUDULENT" TRADING UNDER SECTION 213 OF THE INSOLVENCY ACT 1986 INCLUDE PAYING

CREDITORS OUT OF ORDER ON THE PREFERENTIAL LIST OF CREDITORS, ESPECIALLY WHERE A PARTY

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"KNOWINGLY" PAYS ONE PARTY OF CREDITORS OFF IN THE KNOWLEDGE THAT THIS WILL RESULT IN

CREDITORS HIGHER UP THE PREFERENTIAL LIST LOSING OUT FINANCIALLY.

TO THIS END, A CREDITOR WHO, KNOWING OF THE CIRCUMSTANCES, ACCEPTS MONEY FRAUDULENTLY

OBTAINED BY THE COMPANY MAY BE LIABLE TO REPAY IT, EVEN IF HE TOOK NO PART IN THE FRAUDULENT

TRADING ITSELF: REGERALD COOPER CHEMICALS LTD (1978).

IN GENERAL, IT MAY BE PROPERLY INFERRED THAT THERE IS AN INTENT TO DEFRAUD CREDITORS IF A

COMPANY CARRIES ON BUSINESS AND INCURS DEBTS WHEN, TO THE KNOWLEDGE OF THE DIRECTORS, THERE

IS NO REASONABLE PROSPECT OF THE COMPANY BEING ABLE TO PAY THEM. IT IS NOT NECESSARY TO SHOW

THAT THERE WAS NO PROSPECT OF THE CREDITORS EVER BEING PAID. IT IS ENOUGH THAT THERE IS NO

REASON FOR THINKING THAT THEY WILL BE PAID AS THE DEBTS FALL DUE OR SHORTLY THEREAFTER: IN THE

CASE OF R V. GRANTHAM (1984), TWO OF THE COMPANY'S DIRECTORS WHO ORDERED A CONSIGNMENT OF

POTATOES ON ONE MONTH'S CREDIT, AT A TIME WHEN THEY KNEW PAYMENT WOULD NOT BE

FORTHCOMING, WERE FOUND GUILTY OF FRAUDULENT TRADING.

.UNINCORPORATED ASSOCIATIONS

WE MUST NOW CONSIDER THE RATHER UNUSUAL POSITION OF GROUPS OF PERSONS WHO ARE ASSOCIATED

IN SOME COMMON INTEREST BUT HAVE NOT BECOME INCORPORATED AND, THEREFORE, HAVE NO

CORPORATE ENTITY OR LEGAL PERSONALITY. WITHIN THIS GENERAL CATEGORY ARE NUMEROUS EXAMPLES

OF ASSOCIATIONS RANGING FROM SMALL SOCIAL AND BRIDGE CLUBS; CULTURAL SOCIETIES, SPORTS CLUBS

AND RELIGIOUS BODIES (OTHER THAN THE CHURCH OF ENGLAND) TO LARGE, POWERFUL TRADE UNIONS.

ALSO INCLUDED IN THIS CATEGORY ARE PARTNERSHIPS, ALTHOUGH THEY ARE THE SUBJECT OF THE NEXT

CHAPTER.

LEGAL POSITION

SINCE THE LAW DOES NOT TREAT SUCH ASSOCIATIONS AS SEPARATE ENTITIES, WITH A LEGAL PERSONALITY

OF THEIR OWN, IT IS NECESSARY TO CLARIFY THEIR POSITION IN CERTAIN RESPECTS, AMONG WHICH THE

FOLLOWING DESERVE PARTICULAR NOTICE.

IF PROPERTY IS HELD BY A LARGE NUMBER OF PERSONS WHO FORM AN UNINCORPORATED ASSOCIATION,

IT IS USUAL TO VEST THE PROPERTY IN TRUSTEES AND TO SET OUT THE RULES AND REGULATIONS OF THE

ASSOCIATION IN A TRUST DEED.

AN UNINCORPORATED ASSOCIATION CANNOT ENTER INTO A CONTRACT. A CONTRACT MADE ON ITS

BEHALF IS REGARDED BY THE LAWAS THE CONTRACT OF THE INDIVIDUAL MEMBERS WHO ACTUALLY MADE,

OR GAVE, AUTHORITY FOR THE PARTICULAR CONTRACT –SUCH AS THE MANAGING COMMITTEE.

ANY TORTS COMMITTED IN CONNECTION WITH ANY OF THE ACTIVITIES OF THE ASSOCIATION ARE TREATED

AS THE TORTS OF THE INDIVIDUAL MEMBERS RESPONSIBLE. FOR EXAMPLE, THE COMMITTEE OF A FOOTBALL

CLUB WHICH COMMISSIONED THE REPAIR OF A STAND WAS HELD RESPONSIBLE WHEN A MEMBER OF THE

PUBLIC WAS INJURED, ON THE COLLAPSE OF THE STAND, OWING TO BAD WORKMANSHIP.

55

THE MEMBERS AS A WHOLE ARE LIABLE FOR THE DEBTS OF THE ASSOCIATION IF THE CONTRACT WAS MADE

BY AN AUTHORISED AGENT.

THE MEMBERS MAY DELEGATE CERTAIN POWERS TO A COMMITTEE, SOMETIMES INCLUDING THE POWERS

OF EXPULSION. IF A COURT CONSIDERS THAT THE EXERCISE OF SUCH POWER IS CONTRARY TO PUBLIC POLICY,

IT MAY OVERRULE THE COMMITTEE'S DECISION.

75

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CHAPTER 4

THE LAW RELATING TO ASSOCIATIONS 2: PARTNERSHIPS

CONTENTSPAGE

A.PARTNERSHIPS76

DEFINITION76

DIFFERENCES BETWEEN A REGISTERED COMPANY AND A PARTNERSHIP77

THE DUTIES OF PARTNERSHIP80

THE RIGHTS OF PARTNERSHIP81

RELATIONSHIP OF PARTNERS TO THIRD PARTIES83

TERMINATION OF PARTNERSHIP84

BANKRUPTCY OF PARTNERSHIP86

LIABILITY OF NEW AND RETIRING PARTNERS86

RIGHTS OF PARTNERS ON DISSOLUTION87

B.LIMITED LIABILITY PARTNERSHIPS87

DEFINITION87

INCORPORATION AND AGREEMENT87

“DESIGNATED MEMBERS”88

DIFFERENCES BETWEEN AN LLP, A PARTNERSHIP AND A REGISTERED COMPANY88

FINANCIAL REGULATION89

DUTIES AND RIGHTS OF MEMBERS90

TERMINATION OF MEMBERSHIP91