Company Law Handbook

 

COMPANY LAW

 

1. INTRODUCTION

Types of registered company

	Type of Company	Limited or unlimited?	Public or Private?	Share Capital?
1.	Public limited company (plc)	Limited	Public	Yes
2.	Private company limited by shares (Ltd)	Limited	Private	Yes
3.	Private Company Limited by Guarantee	Limited	Private	No
4.	Unlimited Company with Share Capital	Unlimited	Private	Yes
5.	Unlimited Company Without Share Capital	Unlimited	Private	No

 

We are primarily concerned with private limited companies and public companies limited by shares (plcs).

Differences between public and private companies

The principal practical difference between public and private companies is that a public company can offer shares to the public and, if it large enough and satisfies the conditions for listing, obtain large amounts of capital through public issues of shares on a stock exchange.

Public companies are, due to their dealings with the general public, subject to a more onerous regulatory regime than private companies including:

• Accounting – tighter deadlines for preparing and filing accounts
• Capital – subject to the minimum capital requirements
• Governance – higher level of governance

 

 

Stock exchanges

 

A stock exchange is a marketplace in which shares and other financial instruments are traded. The core function of a stock exchange is to ensure fair and orderly trading, as well as efficient dissemination of price information for any shares trading on that exchange. Exchanges give companies, governments and other groups a platform to sell shares and other financial instruments to the investing public.

 

A stockbroker is a regulated professional individual, usually associated with a brokerage firm or broker-dealer, who buys and sells shares and other financial instruments for both retail and institutional clients in return for a fee or commission.

 

Trading on stock exchanges was originally conducted face to face in premises known as trading floors. Gradually many stock exchanges have moved to electronic trading.

 

The London Stock Exchange was founded in 1801. It is a recognised investment exchange for buying and selling company shares and government stocks.  The LSE operates a number of different markets.  The main market is the most important market for company shares. The Alternative Investment market (AIM) provides a market place for shares of companies which are smaller or less mature than public listed companies or only have a small proportion of their shares in public hands. For more information visit: http://www.londonstockexchange.com/home/homepage.htm

 

Legal framework in which companies operate

 

Company law is the legal framework in which companies are created and operate. Registered companies owe their existence to statute so statute is important in determining what a company’s powers are and how they are required to operate. Whilst the most important piece of legislation may be the Companies Act 2006 there are many other acts and statutory instruments which govern companies.

 

There is also a large body of case law relating to companies and, as in any area of law, the courts have an important role in determining the meaning and application of the legislation.

 

Companies Act 2006

 

The CA 2006 was the most extensive revision of company law ever undertaken. It was the result of the Company Law Review which was set up by the Department of Trade and Industry in March 1998.  The Company Law Steering Group published its final report in July 2001.

 

One of the aims of the review was to modernise the law in order to provide a simple, efficient and cost-effective framework for carrying out business activity which:

• • permitted the maximum amount of freedom and flexibility;
  • at the same time protected the interests of those involved with companies; and
  • was drafted in clear, concise and unambiguous language.

 

Historically company law was really designed to regulate public companies. The Steering Group recognised that today around 99% of all companies are private and recommended simplifying the law for small companies – a “think small first” approach. Accordingly the CA 2006 now states the law applying to private companies first with the additional requirements for public companies given in separate sections.

 

Whilst the Companies Act may have simplified the law in some areas, it can hardly be said to be concise and accessible as it contains over 1300 sections and stretches to almost 800 pages.

 

Recommended reading:

 

• ‘Reforming the Companies Act – The Way Ahead’, Arden, [2002] JBL 579 (available from Westlaw)

 

• ‘The Company Law Reform Bill, Small Businesses and Private Companies’, Henning, (2006) 27 Co Lawyer 97

 

• Modern Company Law For a Competitive Economy – Final Report (July 2001) (http://webarchive.nationalarchives.gov.uk/+/http://dti.gov.uk/cld/final_report/)

 

Registration formalities

 

Part 2, CA 2006 Company Formation

 

The CA 2006 made a number of changes to the documents and procedures required for the formation of a company.

 

Since 1 October 2009 it has been possible to incorporate both private and public companies with a sole member. Sections 7, 38 and 123, 2006 Act.  Nisbet v Shepherd [1994] 1 BCLC 300

 

Section 7 retains the requirement that those wishing to form a company must do so by subscribing their names to a Memorandum of Association, whilst at the same time reducing the significance of that document. S.7(2) reaffirms the rule that a company may not be formed for an unlawful purpose.

 

Under the CA 2006 a company’s constitution is to be found in a single place, namely the Articles of Association and the Memorandum has become a noticeably less important document which now looks quite different from its predecessors.  However, without delivering a Memorandum nobody can form a company so it is not completely ‘toothless’.

 

Under s.8 a memorandum of association is a memorandum stating that the subscribers (a) wish to form a company and (b) agree to become members of the company (taking at least one share each if the company is to have a share capital).

 

Requirements for Registration – ss.9-13, 2006 Act

 

Documents required are -

 

Memorandum of association

Application for registration

Documents required by s.9

Statement of compliance

 

Application for registration must state -

 

Company’s proposed name

Situation of registered office

Whether liability of members is to be limited and, if so, whether by shares or guarantee

Whether company is to be private or public

 

Application for registration must contain (as appropriate) statements of -

 

share capital and initial shareholdings (s.10)

guarantee (s.11)

company’s proposed officers (s.12)

intended address of company’s registered office

copy of any proposed articles of association (s.20)

 

Under the previous formation regimes the memorandum would have stated the nominal (sometimes referred to as authorised) share capital of a company and the nominal amount of each share.  The nominal capital was the total amount of share capital that a company was lawfully entitled to issue without increasing that figure by ordinary resolution in general meeting.  The CA 2006 abolished the requirement for an authorised capital but shares in a limited company having a share capital must each have a fixed nominal value (s.542).

 

Registration

 

If satisfied that the above documents comply with the Act, the Registrar will register them and issue a certificate of incorporation which is conclusive evidence that a company has been duly registered.  From the date of incorporation the subscribers and those who subsequently become members are a body corporate by the name in the certificate.  It is at this point that the separate personality principle established by Salomon v Salomon and Co. becomes effective (ss.13-16, CA 2006).

 

S.9, CA 2006 deals with the documents required for registration and s.10 with the statement of initial capital.  S.12 requires there to be a statement of proposed officers.  The statement of compliance with the provisions of the Act required by s.9 is deemed to be sufficient evidence that the Act has been complied with (s.13).

 

Memorandum and articles of association

 

1. Memorandum of association

 

Ss 7-8 2006 Act and SI 2008/3014

 

As noted above the Memorandum of Association no longer plays such a significant part in the constitution of a registered company and now looks very different from the documents previously submitted for registration.  Earlier Companies Acts have contained model form memorandums, although in truth these were in practice very different in content and extent from the documents drafted by the business world and their lawyers.

 

Under s. 8 of the 2006 Act, the memorandum of association must state that the subscribers wish to form a company under the 2006 and agree to become members of the company and, in the case of a company with a share capital, to take at least one share each. S. 8(2) of the 2006 Act states that the memorandum must be in the prescribed form (The Companies (Registration) Regulations 2008 prescribe the relevant form) and authenticated by each subscriber.

 

This is all the memorandum of association now contains. Matters that used to be contained in the memorandum of association (e.g.the objects of a company) are no longer in the memorandum but will be dealt with in the company's articles of association.

 

The memorandum is now really a "snapshot" of part of the company's constitution at the point of registration and will have no continuing relevance. It cannot be amended or updated during the life of the company.

 

2. Articles of Association

 

The Secretary of State has power under section 19 of the 2006 Act to prescribe model articles of association for certain types of companies. There are now distinct model forms for private and public companies (a change introduced by the 2006 Act).  The following forms of model articles are set out in The Companies (Model Articles) Regulations 2008 (SI 2008/3229):

• Private companies limited by shares;
• Private companies limited by guarantee; and
• Public companies.

 

From 1 October 2009, the model articles replaced Table A as the default set of articles for limited companies incorporated on or after that date. The model articles closely match in essence the 1985 provisions but in plainer English. The model articles apply automatically to companies incorporated on or after 1 October 2009 if they choose not to modify or exclude the provisions of the relevant model in their registered articles.

 

Table A continues to apply to limited companies incorporated before 1 October 2009, unless and until they specifically adopt the model articles.

 

 

2006 Act

PART 3

A COMPANY’S CONSTITUTION

 

17 A company’s constitution

Unless the context otherwise requires, references in the Companies Acts to a company’s constitution include—

(a) the company’s articles, and

(b) any resolutions and agreements to which Chapter 3 of this Part applies (see section 29).

 

18 Articles of association

(1) A company must have articles of association prescribing regulations for the company.

 

(2) Unless it is a company to which model articles apply by virtue of section 20 (default application of model articles in case of limited company), it must register articles of association.

 

(3) Articles of association registered by a company must—

(a) be contained in a single document, and

(b) be divided into paragraphs numbered consecutively.

 

(4) References in the Companies Acts to a company’s “articles” are to its articles of association.

 

19 Power of Secretary of State to prescribe model articles

(1) The Secretary of State may by regulations prescribe model articles of association for companies.

 

(2) Different model articles may be prescribed for different descriptions of company.

 

(3) A company may adopt all or any of the provisions of model articles.

 

(4) Any amendment of model articles by regulations under this section does not affect a company registered before the amendment takes effect.

“Amendment” here includes addition, alteration or repeal.

 

(5) Regulations under this section are subject to negative resolution procedure.

 

20 Default application of model articles

(1) On the formation of a limited company—

(a) if articles are not registered, or

(b) if articles are registered, in so far as they do not exclude or modify the relevant model articles,

the relevant model articles (so far as applicable) form part of the company’s articles in the same manner and to the same extent as if articles in the form of those articles had been duly registered.

 

(2) The “relevant model articles” means the model articles prescribed for a company of that description as in force at the date on which the company is registered.

 

 

28 Existing companies: provisions of memorandum treated as provisions of

articles

(1) Provisions that immediately before the commencement of this Part were

contained in a company’s memorandum but are not provisions of the kind mentioned in section 8 (provisions of new-style memorandum) are to be treated after the commencement of this Part as provisions of the company’s articles.

 

(2) This applies not only to substantive provisions but also to provision for entrenchment (as defined in section 22).

 

(3) The provisions of this Part about provision for entrenchment apply to such provision as they apply to provision made on the company’s formation, except that the duty under section 23(1)(a) to give notice to the registrar does not apply.

 

29 Resolutions and agreements affecting a company's constitution

(1) This Chapter applies to—

(a) any special resolution;

(b) any resolution or agreement agreed to by all the members of a company that, if not so agreed to, would not have been effective for its purpose unless passed as a special resolution;

(c) any resolution or agreement agreed to by all the members of a class of shareholders that, if not so agreed to, would not have been effective for its purpose unless passed by some particular majority or otherwise in some particular manner;

(d) any resolution or agreement that effectively binds all members of a class of shareholders though not agreed to by all those members;

(e) any other resolution or agreement to which this Chapter applies by virtue of any enactment.

(2) References in subsection (1) to a member of a company, or of a class of members of a company, do not include the company itself where it is such a member by virtue only of its holding shares as treasury shares.

 

Amendment of Articles

 

21 Amendment of articles

(1) A company may amend its articles by special resolution.

 

22 Entrenched provisions of the articles

(1) A company’s articles may contain provision (“provisions for entrenchment”) to the effect that specified provisions of the articles may be amended or repealed only if conditions are met, or procedures are complied with, that are more restrictive than those applicable in the case of a special resolution.

 

(2) Provision for entrenchment may only be made—

(a) in the company’s articles on formation, or

(b) by an amendment of the company’s articles agreed to by all the members of the company.

 

(3) Provision for entrenchment does not prevent amendment of the company’s articles –

(a) by agreement of all the members of the company, or

(b) by order of a court or other authority having the power to alter the company’s articles.

 

(4) Nothing in this section affects any power of a court or other authority to alter a company’s articles……………….

 

25 Effect of alteration of articles on company’s members

(1) A member of a company is not bound by an alteration to its articles after the date on which he became a member, if and so far as the alteration—

(a) requires him to take or subscribe for more shares than the number held by him at the date on which the alteration is made, or

(b) in any way increases his liability as at that date to contribute to the company’s share capital or otherwise to pay money to the company.

 

(2) Subsection (1) does not apply in a case where the member agrees in writing, either before or after the alteration is made, to be bound by the alteration.

 

 

Objects clauses

 

By virtue of the provisions below any company formed under the 2006 Act has unlimited capacity unless it chooses to restrict its objects by a provision in its articles of association.  Existing companies formed under earlier Acts may delete the contents of their objects clauses if they so choose by passing a special resolution.  In any event, whenever the company was formed, s.39 reaffirms the position introduced by the 1989 Act whereby a company’s transactions or other acts cannot be challenged on the ground that they were beyond its capacity.

 

 

 

Companies Act 2006

 

Statement of company’s objects

“31 Statement of company’s objects

(1) Unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted.

 

(2) Where a company amends its articles so as to add, remove or alter a statement of the company’s objects—

(a) it must give notice to the registrar,

(b) on receipt of the notice, the registrar shall register it, and

(c) the amendment is not effective until entry of that notice on the register.

 

(3) Any such amendment does not affect any rights or obligations of the company or render defective any legal proceedings by or against it.”

 

 

 

PART 4

A COMPANY’S CAPACITY AND RELATED MATTERS

Capacity of company and power of directors to bind it

39 A company’s capacity

(1) 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 constitution.

 

(2) This section has effect subject to section 42 (companies that are charities).

 

 

 

s.33, 2006 Act Effect of company’s constitution

 

“33(1) The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions.”

 

 

 

Consequences of registration of memorandum and articles:

 

1.  Memo and articles constitute a contract between the company and each member

 

2.  S.33 creates rights for members against the company

 

3.  Memo and articles constitute a contract between the members inter se (i.e. among themselves).

 

4.  S.33 creates contractual effect only in so far as memo and articles confer rights and obligations on members in their capacity as members (qua members).

 

 

Hickman v Kent or Romney Marsh Sheepbreeders Assoc [1915] 1 Ch 881

 

“.... I think this much is clear, first that no article can constitute a contract between the company and a third person; secondly, that no right merely purporting to be given by an article to a person, whether a member or not, in a capacity other than that of a member, as, for instance, as solicitor, promoter, director, can be enforced against the company; and, thirdly, that articles regulating the rights and obligations of the members generally as such do create rights and obligations between them and the company respectively ....” (per Astbury J.)

 

2. OTHER TYPES OF BUSINESS OWNERSHIP

 

There are a number of other forms of business ownership besides companies, the ones we are concerned with are:

 

1. 1.      Sole Traders
2. 2.      Partnerships
3. 3.      Limited Liability Partnerships

 

Sole Traders

 

A sole trader is a person who carries on business alone and does not share their profits with anyone (although they may employ people). A sole tradership is not a separate legal entity. In law there is no legal separation between the business and the individual. This means the individual contracts in their own name and has unlimited liability for all the debts of the business. If the business fails creditors can go after the sole trader’s home, car or other assets in satisfaction of the business debts.

 

Partnerships

 

Definition of Partnership (Partnership Act 1890):

 

 S(1)   Partnership is the relation which subsists between persons carrying on a business in common with a view of profit

 

Whether or not a partnership exists is a question of fact. In law there is no legal separation between the business and the partners of a partnership. This means the partners have unlimited liability for all the debts of the business and if the business fails creditors can go after the partners’ assets in satisfaction of the business debts. 

 

Partnership law is governed by the Partnership Act 1890 and a significant body of case law.

 

Limited Liability Partnerships (LLPs)

 

LLPs were designed to be a hybrid between a company and a traditional partnership, for example retaining the flexibility of a partnership with the attractive feature of limited liability. They were introduced before the Companies Act 2006 came into force and the law relating to private companies was simplified.   

 

An LLP is a body corporate and therefore a legal entity separate from its members. An LLP is incorporated by registration at Companies House like a company. LLP members have limited liability in that, generally, they are not liable to pay the LLP's debts and liabilities. An LLP does not pay corporation tax but rather than members pay income tax on their share of the LLP’s profits.

 

LLPs are incorporated under the Limited Liability Partnerships Act 2000 (as amended). There are a number of regulations which apply to LLPs including the Limited Liability Partnerships Regulations 2001(as amended). To some extent the provisions of the CA 2006 apply to LLPs.

 

 

            Recommended reading:

 

• ·         ‘Partnership law: an overview in 2013’, Milman, (2013) Co. L.N. 2013, 339, 1-4
• ·         ‘The Limited Liability Partnership: Pick and Mix or Mix-Up’. Finch and Freedman, [2002] JBL 475
• ·         http://www.legalfutures.co.uk/latest-news/hmrc-press-ahead-llp-tax-changes-6-april-offers-concessions (summarises recent changes to taxation of LLPs)

 

         

 

 

3. CORPORATE PERSONALITYAND VEIL LIFTING

Effects of Corporate Personality

 

• ·         Limited liability

 

• ·         Ownership of property

 

• ·         Suing and being sued

 

• ·         Perpetual succession

 

• ·         Nationality, domicile and residence - Daimler Co Ltd v Continental Tyre & Rubber Co [1916] 2 AC 307

 

• ·         Transferability of shares

 

• ·         Taxation – company pays corporation tax

 

Corporate Personality Cases

 

Salomon v Salomon & Co [1897] AC 22 (leading case)

Macaura v Northern Assurance Co Ltd [1925] AC 619

Lee v Lee's Air Farming [1961] AC 12

Prest  v Petrodel Resources Ltd [2013] UKSC 34, the Times, 24 June 2013

Ebbw Vale UDC v South Wales Traffic Area Licensing Authority [1951] 2 KB 366

Tunstall v Steigman [1962] 2QB 593

Metropolitan  Saloon Omnibus Co Ltd v Hawkins (1859) 4 Hurl & N 87; South Hetton Coal Co Ltdv North-Eastern News Association Ltd [1894] 1 QB 133; Jameel v Wall Street Journal Europe SPRL [2006 UKHL 44, [2007] 1 AC 359

Metropolitan  Saloon Omnibus Co Ltd v Hawkins (1859) 4 Hurl & N 87

Re Noel Tedman Holdings Pty Ltd [1967] QdR 561 (Australian case)

 

 

Corporate Personality - Recommended reading

 

• ·         ‘Corporate Form: Questioning the Unsung Hero’, Hicks, [1997] JBL 306
• ·         ‘Limited Liability: Large Company Theory and Small Firms’, Freedman, (2000) 63 MLR 317
• ·         ‘Limited Liability: A Necessary Revolution’, Griffin (2004) 25 Co Lawyer 99 (available on Westlaw)
• ·         ‘Are Corporations Evil?’, Litowitz, 58 University of Miami Law Review 811 (2004) (available via Westlaw International)
• ·         The Limited Liability of Company Directors’, Grantham [2007] Lloyd’s Maritime and Commercial Law Quarterly http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991248 

 

 

            The Corporate  Veil

 

Dimbleby & Sons Ltd v NUJ [1984] 1 All ER 751

 

“The ‘corporate veil’ in the case of companies incorporated under the Companies Acts is drawn by statute and it can be pierced by some other statute if such other statute provides; but, in view of its raison d’etre and its constant recognition by the courts since Salomon …. one would expect that any parliamentary intention to pierce the corporate veil would be expressed in clear and unequivocal language.” (per Lord Diplock, at p.758)

 

 

Tate Access Floors Inc v Boswell [1991] Ch 512

 

“If people choose to conduct their affairs through the medium of corporations, they are taking advantage of the fact that in law those corporations are separate legal entities, whose property and actions are in law not the property or actions of their incorporators or controlling shareholders.  In my judgment controlling shareholders cannot, for all purposes beneficial to them, insist on the separate identity of such corporations but then be heard to say the contrary when discovery is sought against such corporations.” (per Browne-Wilkinson VC, at p.531)

 

Statutory Veil Lifting

 

Examples:

 

1. 1.      Fraudulent trading (s. 213 Insolvency Act 1986)
2. 2.      Wrongful trading (s. 214 Insolvency Act 1986)
3. 3.      For taxation purposes
4. 4.      Disclosure and financial reporting purposes (e.g. requirement to produce group accounts under s. 399 CA 2006)
5. 5.      Employment Rights Act 1996
6. 6.      Misdescription of company - Ss82-84, CA 2006

 

           

Fraudulent trading - s.213, IA 1986 (see also s.993, 2006 Act)

 

            S.213

 

(1)        If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.

 

(2)        The court, on the application of the liquidator may declare that any persons who are knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company's assets as the court thinks proper.

 

Case: Re Patrick and Lyon Ltd [1933] Ch 786

 

Wrongful trading - s.214, IA 1986

 

S.214

 

(1)        Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a person who is or has been a director of the company, the court, on the application of the liquidator, may declare that that person is liable to make such contribution (if any) to the company's assets as the court thinks proper.

 

(2)        This subsection applies in relation to a person if -

(a)        the company has gone into insolvent liquidation,

(b)        at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and

(c)        that person was a director of the company at that time;

 

but the court shall not make a declaration under this section in any case where the time mentioned in paragraph (b) above was before 28th April 1986.

 

(3)        The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company's creditors as (assuming him to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation) he ought to have taken.

 

(4)        For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both -

(a)        the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and

(b)        the general knowledge, skill and experience that that director has.

 

(5)        The reference in subsection (4) to the functions carried out in relation to a company by a director of the company includes any functions which he does not carry out but which have been entrusted to him.

 

(6)        For the purposes of this section a company goes into insolvent liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.

 

(7)        In this section "director" includes a shadow director.

 

(8)        This section is without prejudice to section 213.

 

 

Case: Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520

 

 

 

            Veil Lifting by the Courts

             

Cases

 

Daimler Co Ltd v Continental Tyre & Rubber Co [1916] 2 AC 307

Gilford Motor Co v Horne [1933] Ch 935

Jones v Lipman [1962] 1 All ER 442

Re Bugle Press Ltd [1961] Ch 270

DHN Food Distributors Ltd v London Borough of Tower Hamlets[1976] 3 All ER 462

Woolfson v Strathclyde Regional Council [1978] SLT 159

Adams v Cape Industries plc [1990] Ch 433 (leading case) – see discussion of case below although note this was written pre Prest and VTB

 

Recent cases

 

Prest  v Petrodel Resources Ltd [2013] UKSC 34, the Times, 24 June 2013

VTB Capital plc v Nutritek International Corp and others [2013] UKSC 5

           

Veil Lifting - Recommended Reading

           

 

• ·         Case comment: Grier, ‘Piercing the corporate veil: Prest v Petrodel Resources Ltd’ (2014) Edin. L.R. 2014, 18(2), 275-279
• ·         ‘The Veil Unlifted’,  Ashe, (2013) Comp. Law. 2013, 34(10), 295-296
• ·         Ottolenghi (1990) 53 MLR 338 ‘From Peeping behind the Corporate Veil to Ignoring it Completely’
• ·         Moore [2006] JBL 180 ‘A temple built on faulty foundations; piercing the corporate veil and the legacy of Salomon v Salomon’
• ·         Bowmer (2000) 15 Journal of International Banking Law 193 ‘To Pierce or Not to Pierce the Corporate Veil: Why Substantive Consolidation is Not an Issue Under Contract Law’
• ·         Whincup (1981) 2 Co Lawyer 158 ‘Inequitable Incorporation’
• ·         Mayson et al, pgs xxvii-xxix – Note on Prest v Petrodel Resources Ltd (the commentary on the Prest case may appear in the main body of the text in the 31st edition of the text)

 

COMPANY LAW

 

CORPORATE PERSONALITY-LIFTING THE VEIL

 

The facts of the "interesting but exceptionally difficult case" of ADAMS v. CAPE lNDUSTRIES PLC [1990] 2 W.L.R. 657 were complex but gave rise (inter alia) to a consideration, by the Court of Appeal, of one of the core areas of company law, namely corporate personality and the veil of incorporation. In brief, the defendant company, Cape Industries plc (Cape), headed a group of companies involved in the mining of asbestos and the marketing of it worldwide, including the United States. During the 1970s employees of an American factory which had processed asbestos supplied by the Cape group had commenced actions in the United States against a variety of defendants, including Cape. Those actions never came to trial but were settled. Cape, without accepting liability or recognising the jurisdiction of the court, had decided to join in that settlement. Unfortunately for Cape the matter did not rest there. A further 206 actions were commenced. This time Cape decided upon a different strategy. As the company had no assets in the United States it determined to allow default judgments to be obtained against itself and to defend any subsequent actions in this country for enforcement of those judgments on the ground that, under the law of this country, the American court had no jurisdiction over it. On this occasion that strategy proved successful. Mr Justice Scott dismissed the plaintiffs’ actions for enforcement and the Court of Appeal rejected their appeal.

 

Present interest lies in the approach taken by the Appeal Court to what Lord Justice Slade described in his judgment as the "single economic unit" argument and the "corporate veil" point, two issues with which students of company law should by this stage of their studies be fully cognizant. The plaintiffs sought to establish the necessary presence of Cape within the American court's jurisdiction by virtue of the presence of its subsidiaries. To do this they had to establish either that the Cape group of companies should be treated as one unit or that the corporate veil around these subsidiaries should be lifted so as to view the shareholder who stood behind it, namely, Cape.

 

Counsel for the plaintiffs referred to a number of authorities on the issue of single economic unit including The Roberta (1937) 58 L1 L.R. 159, Harold Holdsworth & Company (Wake field) Limited v. Caddies [1955] 1 W.L.R. 352, Scottish Co-operative Wholesale Society Limited v. Meyer [1959] A.C. 324 and D.H.N. Food Distributors Limited v. Tower Hamlets L.B.C. [1976] 1 W.L.R. 852. In reliance upon these cases it was submitted that in deciding whether a company had rendered itself subject to the jurisdiction of a foreign court it was entirely reasonable to approach the question by reference to "commercial reality." The risk of litigation in a foreign court, it was argued, was part of the price which those who conducted extensive business activities within the territorial jurisdiction of that court properly had to pay. Whilst expressing some sympathy with this argument, Lord Justice Slade stated that in the cases cited above the treatment of parent and subsidiary as one unit, at least for some purposes, could be explained by the wording of a particular statute or contract. Indeed, even the discredited D.H.N. case was explicable in those terms. However, his Lordship did not accept counsel's further submission that the theme of all the cited cases was that where legal technicalities would produce injustice in cases involving members of a group of companies, such technicalities should not be allowed to prevail. In Slade L.J.'s view the court was not free to disregard the principle of Salomon merely because it considered that justice so required. Nor was there any general principle that all the companies in a group of companies were to be regarded as one. Moreover, a company was entitled to arrange the affairs of its group in such a way that the business carried on in a particular foreign country was the business of its subsidiary and not its own. On the facts of the present case this was what Cape had done.

 

The plaintiffs’ alternative line of attack was that the court should be prepared to lift the corporate veil. In Woolfson v. Strathclyde Regional Council (1978) 38 P. & C.R. 521 Lord Keith of Kinkel had stated that it was appropriate to pierce the corporate veil only where special circumstances existed indicating that it was a mere facade concealing the true facts.

 

It was alleged by the plaintiffs that the dissolution of its existing subsidiary and the formation of new companies after the original trial settlement was "a device or sham or cloak for grave impropriety" on the part of the Cape group, namely to ostensibly remove their assets from the United States to avoid liability for asbestos claims whilst at the same time continuing to trade in asbestos there. The allegations of impropriety were subsequently abandoned but the basic intention, namely to continue trading whilst reducing liability, was accepted. But was this sufficient to justify the piercing of the corporate veil? Lord Justice Slade thought not. He did not believe that the court was entitled to lift the corporate veil as against a defendant company which was the member of a corporate group merely because the corporate structure had been used so as to ensure that the legal liability (if any) in respect of particular future activities would fall on another member of the group rather than the defendant company. Such a practice might not be desirable but, according to Slade L.J., the right to use a corporate structure in this manner was inherent in our corporate law. Cape was entitled to organise the group's affairs in that mode and to expect the court to apply the Salomon principle in the ordinary way.

 

What light, if any, was thrown on the circumstances in which the court will pierce the veil? Unfortunately for the eager examinee, the answer is very little. Like the House of Lords in Woolfson, the Court of Appeal elected to hide behind its own veil. Lord Justice Slade was content to state that the authorities cited (for example, Jones v. Lipman [1962] 1 W.L.R. 832 and "certain broad dicta of Lord Denning M.R." in Wallersteiner v. Moir [1974] 1 W.L.R. 991 and in Littlewoods Mail Order Stores Limited v. Inland Revenue Commis­sioners [1969] 1 W.L.R. 1241) left the court "with rather sparse guidance as to the principles which should guide the court in determining whether or not the arrangements of a corporate group involve a facade within the meaning of that word as used by the House of Lords in Woolfson." His Lordship declined the opportunity to attempt a comprehensive definition of those principles. For a recent exposition of the statutory and judicial processes involved in lifting the veil readers should turn to an article by S. Ottolenghi, "From Peeping Behind the Corporate Veil, to Ignoring it Completely" (53 M.L.R. 338). Those who believe that Cape's actions do not deserve "moral approval" should turn to the Cork Committee's Report where it was suggested that to many "it is unsatisfactory and offensive to ordinary canons of commercial morality that a parent company should allow its wholly-owned subsidiary to fail, or that a company should be permitted by other companies in the same group, and particularly by its ultimate parent, to take commercial advantage from its membership of the group, without there being incurred by those other companies any countervailing obligations" (see Review Committee on Insolvency Law and Practice (1982) Cmnd. 8558, para. 1924). As with many of the sentiments expressed by Cork, legislative action is awaited.

 

 

 

 

 

 

4. CORPORATE MANSLAUGHTER

 

Previous common law offence – gross negligence manslaughter

 

A company will not automatically be liable for all the criminal activities of its servants or agents.

 

The “directing mind and will” of the company is the usual test to determine when a company can be held liable (Lord Reid in Tesco Supermarkets Ltd v Natrass) [1972]).

 

There are other terms used to describe the process whereby the wrongful acts, knowledge and thoughts of humans are attributed to a company:

 

• ·         alter ego/organic theory
• ·         rules of attribution
• ·         identification

 

Lennards Carrying Co v Asiatic Petroleum [1915] AC 705:

 

" .... a corporation is an abstraction.  It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing will and mind of the corporation." (per Viscount Haldane)

 

 

Bolton Engineering v Graham [1957] 1 QB 159:

 

"A company may in many ways be likened to a human body.  They have a brain and a nerve centre which controls what they do.  They also have hands which hold the tools and act in accordance with directions from the centre.  Some of the people in the company are mere servants and agents who are nothing more than the hands to do the work and cannot be said to represent the mind and will.  Others are directors and managers who represent the directing will and mind of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such .... in the criminal law, in cases where the law requires a guilty mind as a condition of a criminal offence, the guilty mind of the directors or the managers will render the company itself guilty ...." (per Denning LJ)

 

Tesco Supermarkets Ltd v Nattrass [1972] AC 153

 

"A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions.  A corporation has none of these: it must act through living persons, though not always one and the same person.  Then the person who acts is not speaking or acting for the company.  He is acting as the company and his mind which directs his acts is the mind of the company.  There is no question of the company being vicariously liable.  He is not acting as a servant, representative, agent or delegate.  He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company.  If it is a guilty mind then that guilt is the guilt of the company." (per Lord Reid) [emphasis added]

 

 

Until 2008 a company could be guilty of the common law offence of manslaughter by gross negligence. Under the previous law a company could only be convicted of the common law offence of manslaughter by gross negligence if the identification rule could be applied (i.e. the directing mind and will test). In practice it was extremely difficult to establish the necessary liability and the only successful prosecutions involved very small companies.

 

 

Relevant cases

 

Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 ALL ER 918

R v H M Coroner for East Kent, ex p Spooner (1987) 88 Cr App R 10

R v P & O European Ferries (Dover) Ltd (1990) 93 Cr App R 72

R v Great Western Trains Co Ltd (1999)

Att-Gen’s Reference (No.2 of 1999) [2000] 3 WLR 195

R v Kite and OLL Ltd, December 8, 1994

R v Jackson Transport (Ossett) Ltd (1995)

 

Corporate Manslaughter and Corporate Homicide Act 2007

 

After much dissatisfaction with the then present law, and in response to a number of high-profile disasters and the growing problems of workplace deaths, the Government proposed the creation of a specific offence of corporate manslaughter. The Corporate Manslaughter and Homicide Act 2007 largely came into force on 6 April 2008.

 

 

Corporate Manslaughter and Corporate Homicide Act 2007

 

Corporate manslaughter and corporate homicide

 

“1 The offence

(1) An organisation to which this section applies is guilty of an offence if the way in which its activities are managed or organised—

(a) causes a person’s death, and

(b) amounts to a gross breach of a relevant duty of care owed by the organisation to the deceased.

(2) The organisations to which this section applies are—

(a) a corporation;

(b) a department or other body listed in Schedule 1;

(c) a police force;

(d) a partnership, or a trade union or employers' association, that is an employer.

(3) An organisation is guilty of an offence under this section only if the way in which its activities are managed or organised by its senior management is a substantial element in the breach referred to in subsection (1).

(4) For the purposes of this Act—

(a) “relevant duty of care” has the meaning given by section 2, read with sections 3 to 7;

(b) a breach of a duty of care by an organisation is a “gross” breach if the conduct alleged to amount to a breach of that duty falls far below what can reasonably be expected of the organisation in the circumstances;

(c) “senior management”, in relation to an organisation, means the persons who play significant roles in—

(i) the making of decisions about how the whole or a substantial part of its activities are to be managed or organised, or

(ii) the actual managing or organising of the whole or a substantial part of those activities.

(5) The offence under this section is called—

(a) corporate manslaughter, in so far as it is an offence under the law of England and Wales or Northern Ireland;

(b) corporate homicide, in so far as it is an offence under the law of Scotland.

(6) An organisation that is guilty of corporate manslaughter or corporate homicide is liable on conviction on indictment to a fine.

(7) The offence of corporate homicide is indictable only in the High Court of Justiciary.

 

2 Meaning of “relevant duty of care”

(1) A “relevant duty of care”, in relation to an organisation, means any of the following duties owed by it under the law of negligence—

(a) a duty owed to its employees or to other persons working for the organisation or performing services for it;

(b) a duty owed as occupier of premises;

(c) a duty owed in connection with—

(i) the supply by the organisation of goods or services (whether for consideration or not),

(ii) the carrying on by the organisation of any construction or maintenance operations,

(iii) the carrying on by the organisation of any other activity on a commercial basis, or

(iv) the use or keeping by the organisation of any plant, vehicle or other thing;

(d) a duty owed to a person who, by reason of being a person within subsection (2), is someone for whose safety the organisation is responsible.

(2) A person is within this subsection if—

(a) he is detained at a custodial institution or in a custody area at a court, a police station or customs premises;

(aa) he is detained in service custody premises;(b) he is detained at a removal centre or short-term holding facility;

(c) he is being transported in a vehicle, or being held in any premises, in pursuance of prison escort arrangements or immigration escort arrangements;

(d) he is living in secure accommodation in which he has been placed;

(e) he is a detained patient.

(3) Subsection (1) is subject to sections 3 to 7.

(4) A reference in subsection (1) to a duty owed under the law of negligence includes a reference to a duty that would be owed under the law of negligence but for any statutory provision under which liability is imposed in place of liability under that law.

(5) For the purposes of this Act, whether a particular organisation owes a duty of care to a particular individual is a question of law.

The judge must make any findings of fact necessary to decide that question.

(6) For the purposes of this Act there is to be disregarded—

(a) any rule of the common law that has the effect of preventing a duty of care from being owed by one person to another by reason of the fact that they are jointly engaged in unlawful conduct;

(b) any such rule that has the effect of preventing a duty of care from being owed to a person by reason of his acceptance of a risk of harm.

(7) In this section—

• “construction or maintenance operations” means operations of any of the following descriptions—

(a)

construction, installation, alteration, extension, improvement, repair, maintenance, decoration, cleaning, demolition or dismantling of—

(i)

any building or structure,

(ii)

anything else that forms, or is to form, part of the land, or

(iii)

any plant, vehicle or other thing;

(b)

operations that form an integral part of, or are preparatory to, or are for rendering complete, any operations within paragraph (a);

• “custodial institution” means a prison, a young offender institution, a secure training centre, a young offenders institution, a young offenders centre, a juvenile justice centre or a remand centre;
• “detained patient” means—

(a)

a person who is detained in any premises under—

(i)

Part 2 or 3 of the Mental Health Act 1983 (c. 20) (“the 1983 Act”), or

(ii)

Part 2 or 3 of the Mental Health (Northern Ireland) Order 1986 (S.I. 1986/595 (N.I. 4)) (“the 1986 Order”);

(b)

a person who (otherwise than by reason of being detained as mentioned in paragraph (a)) is deemed to be in legal custody by—

(i)

section 137 of the 1983 Act,

(ii)

Article 131 of the 1986 Order, or

(iii)

article 11 of the Mental Health (Care and Treatment) (Scotland) Act 2003 (Consequential Provisions) Order 2005 (S.I. 2005/2078);

(c)

a person who is detained in any premises, or is otherwise in custody, under the Mental Health (Care and Treatment) (Scotland) Act 2003 (asp 13) or Part 6 of the Criminal Procedure (Scotland) Act 1995 (c. 46) or who is detained in a hospital under section 200 of that Act of 1995;

• “immigration escort arrangements” means arrangements made under section 156 of the Immigration and Asylum Act 1999 (c. 33);
• “the law of negligence” includes—

(a)

in relation to England and Wales, the Occupiers' Liability Act 1957 (c. 31), the Defective Premises Act 1972 (c. 35) and the Occupiers' Liability Act 1984 (c. 3);

(b)

in relation to Scotland, the Occupiers' Liability (Scotland) Act 1960 (c. 30);

(c)

in relation to Northern Ireland, the Occupiers' Liability Act (Northern Ireland) 1957 (c. 25), the Defective Premises (Northern Ireland) Order 1975 (S.I. 1975/1039 (N.I. 9)), the Occupiers' Liability (Northern Ireland) Order 1987 (S.I. 1987/1280 (N.I. 15)) and the Defective Premises (Landlord’s Liability) Act (Northern Ireland) 2001 (c. 10);

• “prison escort arrangements” means arrangements made under section 80 of the Criminal Justice Act 1991 (c. 53) or under section 102 or 118 of the Criminal Justice and Public Order Act 1994 (c. 33);
• “removal centre” and “short-term holding facility” have the meaning given by section 147 of the Immigration and Asylum Act 1999;
• “secure accommodation” means accommodation, not consisting of or forming part of a custodial institution, provided for the purpose of restricting the liberty of persons under the age of 18.

 

 

Gross breach

8 Factors for jury

(1) This section applies where—

(a) it is established that an organisation owed a relevant duty of care to a person, and

(b) it falls to the jury to decide whether there was a gross breach of that duty.

(2) The jury must consider whether the evidence shows that the organisation failed to comply with any health and safety legislation that relates to the alleged breach, and if so—

(a) how serious that failure was;

(b) how much of a risk of death it posed.

(3) The jury may also—

(a) consider the extent to which the evidence shows that there were attitudes, policies, systems or accepted practices within the organisation that were likely to have encouraged any such failure as is mentioned in subsection (2), or to have produced tolerance of it;

(b) have regard to any health and safety guidance that relates to the alleged breach.

(4) This section does not prevent the jury from having regard to any other matters they consider relevant.

(5) In this section “health and safety guidance” means any code, guidance, manual or similar publication that is concerned with health and safety matters and is made or issued (under a statutory provision or otherwise) by an authority responsible for the enforcement of any health and safety legislation.

 

Remedial orders and publicity orders

9 Power to order breach etc to be remedied

(1) A court before which an organisation is convicted of corporate manslaughter or corporate homicide may make an order (a “remedial order”) requiring the organisation to take specified steps to remedy—

(a) the breach mentioned in section 1(1) (“the relevant breach”);

(b) any matter that appears to the court to have resulted from the relevant breach and to have been a cause of the death;

(c) any deficiency, as regards health and safety matters, in the organisation’s policies, systems or practices of which the relevant breach appears to the court to be an indication.

(2) A remedial order may be made only on an application by the prosecution specifying the terms of the proposed order.

Any such order must be on such terms (whether those proposed or others) as the court considers appropriate having regard to any representations made, and any evidence adduced, in relation to that matter by the prosecution or on behalf of the organisation.

(3) Before making an application for a remedial order the prosecution must consult such enforcement authority or authorities as it considers appropriate having regard to the nature of the relevant breach.

(4) A remedial order—

(a) must specify a period within which the steps referred to in subsection (1) are to be taken;

(b) may require the organisation to supply to an enforcement authority consulted under subsection (3), within a specified period, evidence that those steps have been taken.

A period specified under this subsection may be extended or further extended by order of the court on an application made before the end of that period or extended period.

(4)    An organisation that fails to comply with a remedial order is guilty of an offence, and liable on conviction on indictment to a fine.

 

10 Power to order conviction etc to be publicised

(1) A court before which an organisation is convicted of corporate manslaughter or corporate homicide may make an order (a “publicity order”) requiring the organisation to publicise in a specified manner—

(a) the fact that it has been convicted of the offence;

(b) specified particulars of the offence;

(c) the amount of any fine imposed;

(d) the terms of any remedial order made.

(2) In deciding on the terms of a publicity order that it is proposing to make, the court must—

(a) ascertain the views of such enforcement authority or authorities (if any) as it considers appropriate, and

(b) have regard to any representations made by the prosecution or on behalf of the organisation.

(3) A publicity order—

(a) must specify a period within which the requirements referred to in subsection (1) are to be complied with;

(b) may require the organisation to supply to any enforcement authority whose views have been ascertained under subsection (2), within a specified period, evidence that those requirements have been complied with.

(4) An organisation that fails to comply with a publicity order is guilty of an offence, and liable on conviction on indictment to a fine.

 

 

17 DPP’s consent required for proceedings

Proceedings for an offence of corporate manslaughter—

(a) may not be instituted in England and Wales without the consent of the Director of Public Prosecutions;

(b) may not be instituted in Northern Ireland without the consent of the Director of Public Prosecutions for Northern Ireland.

18 No individual liability

(1) An individual cannot be guilty of aiding, abetting, counselling or procuring the commission of an offence of corporate manslaughter.

(1A) An individual cannot be guilty of an offence under Part 2 of the Serious Crime Act 2007 (encouraging or assisting crime) by reference to an offence of corporate manslaughter.

(2) An individual cannot be guilty of aiding, abetting, counselling or procuring, or being art and part in, the commission of an offence of corporate homicide.

19 Convictions under this Act and under health and safety legislation

(1) Where in the same proceedings there is—

(a) a charge of corporate manslaughter or corporate homicide arising out of a particular set of circumstances, and

(b) a charge against the same defendant of a health and safety offence arising out of some or all of those circumstances,

the jury may, if the interests of justice so require, be invited to return a verdict on each charge.

(2) An organisation that has been convicted of corporate manslaughter or corporate homicide arising out of a particular set of circumstances may, if the interests of justice so require, be charged with a health and safety offence arising out of some or all of those circumstances.

(3) In this section “health and safety offence” means an offence under any health and safety legislation.

20 Abolition of liability of corporations for manslaughter at common law

The common law offence of manslaughter by gross negligence is abolished in its application to corporations, and in any application it has to other organisations to which section 1 applies.

 

Recommended reading:

 

• ‘Justice is mocked if an important law is unenforced’,  Slapper, (2013),  J. Crim. L. 2013, 77(2), 91-94
• Field and Jones,‘ Five years on: the impact of the Corporate Manslaughter and Corporate Homicide Act 2007’ C.C.L.R. 2013, 24(6), 239-246
• Jones and Field, ‘Corporate Criminal liability for manslaughter: the evolving approach of the prosecuting authorities and courts in England and Wales’ (2011) Bus. L.R. 32(4), 80-86
• Ormerod and Taylor, ‘The Corporate Manslaughter and Corporate Homicide Act 2007’, [2008] Criminal Law Review 589
• Gobert, ‘The Corporate Manslaughter and Corporate Homicide Act 2007 – Thirteen years in the making but was it worth the wait?’, (2008) 71 MLR 413

Prosecutions

 

 

See the summary of corporate manslaughter cases available on the eLP and the Reading List.

 

5       FINANCING THE COMPANY

 

 

• Mayson et al, Part 3
• Dignam and Lowry chapters 5 and 6

 

Companies can raise money in a number of ways. Membership of a company limited by shares is based on contributing (or undertaking to contribute) capital for use in the business in return for the issue of shares. This is known as equity finance. A member of a company is usually entitled to receive a share of the company’s profits by receiving dividends and to participate in the governance of the company. Alternatively, or in addition, a company may obtain a loan from a bank or other institution. This is known as debt finance. A lender does not have a right to receive dividends or to participate in the governance of the company but is entitled to be paid interest. Most banks and other lenders will require some form of charge as security from a company before making any loan available.

 

 

1. Equity financing and shares

 

Legal nature of shares

 

Short v Treasury Commissioners

 

"A share is the interest of a shareholder in the company measured by a sum of money for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with [section 33 of the Companies Act 2006].  The contract contained in the articles of association is one of the original incidents of the share.  A share is not a sum of money .... but is an interest measured by a sum of money and made up of various rights contained in the contract including the right to a sum of money of a more or less amount."  (Borland's Trustee v Steel [1901] 1 Ch 279 at p.288)

 

Webb v Earle (1875) LR 20 Eq 556

Birch v Cropper (1889) 14 App Cas 525

Scottish Insurance Corp v Wilson and Clyde Coal Co [1949] AC 462

 

 

s.541 Nature of shares 2006 Act

 

“The shares or other interest of a member in a company are personal property (or, in Scotland, moveable property) and are not in the nature of real estate (or heritage).”

 

 

Classes of shares

 

art 22, Model Articles

           

            “Subject to the articles, but without prejudice to the rights attached to any existing share, the company  may  issue shares with such rights or restrictions as may be determined by ordinary resolution.”

 

-

-

-

 

 

629 Classes of shares 2006 Act

 

“(1) For the purposes of the Companies Acts shares are of one class if the rights attached to them are in all respects uniform.

(2) For this purpose the rights attached to shares are not regarded as different from those attached to other shares by reason only that they do not carry the same rights to dividends in the twelve months immediately following their allotment.”

 

Becoming a member

 

Subscription of memorandum

 

112 The members of a company 2006 Act

 

“(1) The subscribers of a company’s memorandum are deemed to have agreed to become members of the company, and on its registration become members and must be entered as such in its register of members.

(2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company.”

 

 

Agreement and entry on register

 

Register of members, ss.113-128, 2006 Act

 

 

Transfer of shares

 

Table A, arts 23-28; art 26 Model Articles

Re Smith and Fawcett Ltd [1942] Ch 304

Moodie v Shepherd (Bookbinders) Ltd [1949] 2 All ER 1044

Charles Forte Investments Ltd v Amanda [1964] Ch 240

Popely v Planarrive Ltd [1997] 1 BCLC 8

 

share certificate, ss.768-775, 2006 Act

estoppel

 

Mortgage of Shares

 

126 Trusts not to be entered on register

 

No notice of any trust, expressed, implied or constructive, shall be entered on the register of members of a company registered in England and Wales or Northern Ireland, or be receivable by the registrar.

 

Allotment of shares

 

Dunlop v Higgins (1848) 1 HL Cas 381

Household Fire Insurance Co Ltd v Grant (1879) 4 Ex D 216

Re National Savings Bank Assn (1867) LR 4 Eq 9

Byrne v Van Tienhoven (1880) 5 CPD 344

Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Exch 109

 

 

Power to allot shares

 

Hogg v Cramphorn [1967] Ch 254

Bamford v Bamford [1970] Ch 212

Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 All ER 1126

Teck Corporation v Millar (1972) 33 DLR (3d) 288

 

Companies Act 2006

 

Part 17 A Company’s Share Capital

ss.549-551

 

 

Pre-emption rights

 

Re Thundercrest Ltd [1995] 1 BCLC 117

 

Ss.561-577, Companies Act 2006

 

 

Payment for shares

 

Ss580-605, 2006 Act

Ooregum Gold Mining Co Ltd of India Ltd v Roper [1892] AC 125

Re Wragg Ltd [1897] 1 Ch 796

Hong Kong and China Gas Co Ltd v Glen [1914] 1 Ch 527

Re White Star Line Ltd [1938] Ch 458

Mosely v Koffyfontein Mines Ltd [1904] 2 Ch 108

 

Systems Controls plc v Munro Corporate plc [1990] BCLC 659

Re Ossory Estates plc [1988] BCLC 213

Re Bradford Investments plc [1990] BCC 740, [1991] BCLC 221 and 688

 

2. Debt finance

 

There are many different types of loan and debt facilities available to companies. Some of the most common ones are term loans and overdraft facilities.

 

A term loan is where a lender agrees to lend a borrower a fixed sum of money which is repayable in installments over certain amount of time (usually between 1 and 5 years). The borrower will pay interest on the amount of the loan outstanding, often in monthly installments.

 

An overdraft facility is designed to solve short-term cash flow problems. The lender, usually a bank, may agree that a company can from time to time withdraw from its bank account more money than is standing to the credit of the account, subject to an overdraft limit.  In this situation the account is said to be "overdrawn" and the company “in its overdraft”. The bank will charge interest on the amount the company is overdrawn. An overdraft is usually repayable on demand and the interest rate charged is higher for overdrafts than for term loans. 

 

For a discussion of the types of charges companies can issue to creditors as security for borrowings and the registration requirements and priority of such charges see section 8. 
6.      CORPORATE GOVERNANCE

 

Introduction – what is “corporate governance”?

 

Corporate governance is the system of legal and other mechanisms by which the company is controlled and governed. Corporate governance is particularly as an issue in public companies where the company’s shares are widely held by the public and the directors have a relatively small or insignificant shareholding. This separation of ownership and control may lead to directors acting in their own interests instead of the best interests of the company.  

 

Corporate governance has been described as “making sure that the right questions get asked and the right checks and balances are in place…[to] function as failsafe systems against corporate wrong-doing” (Maurer 2007). There is no legal definition of corporate governance and it can be interpreted in different ways. At its broadest, corporate governance concerns the question of who should own and control companies, and at its narrowest it is purely concerned with the relationship between shareholders and directors.

 

 

Recommended reading and resources:

 

• ‘Corporate governance as a failsafe mechanism against corporate crime’, Maurer (2007) 28 Comp. Law 99
• Paddy Ireland, ‘Shareholder Primacy and the Distribution of Wealth’. (2005) 68 MLR 49
• ‘New Thinking on Shareholder Primacy’, Stout (2005)  - available from : http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1763944
• “Corporate governance in practice: the view from the boardroom” available from PLC: http://uk.practicallaw.com/
• Paddy Ireland, ‘Back to the Future?  Adolf Berle, the Law Commission and Directors’ Duties’ (1999) 20 Co Lawyer 203
• ‘Institutional investors: the vote as a tool of governance’, Mallin [2010] Journal of Management and Governance
•  www.thecorporation.com and http://www.youtube.com/watch?v=s6zQO7JytzQ
• Mayson,S. et al, Company Law,  Chpt 15.2
• Dignam & Lowry, Chapts 13 - 16

 

 

 

A.      DIRECTORS

 

Definition

 

s.250    “In the Companies Acts “director” includes any person occupying the position of director, by whatever name called.” 2006 Act (formerly s.741(1), 1985 Act)

 

Shadow director

 

s.251 (1) “In the Companies Acts “shadow director”, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act. 

 

s.251 (2) “A person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity." (formerly s.741(2), 1985 Act)

 

De facto director

 

Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180

 

"A de facto director is a person who assumes to act as a director.  He is held out as a director by the company, and claims and purports to be a director, although never actually appointed as such.  To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director.  It is not sufficient to show that he was concerned in the management of the company's affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level ..... A shadow director, by contrast, does not claim or purport to act as a director.  On the contrary, he claims not to be a director.  He lurks in the shadows, sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself.  To establish that a defendant is a shadow director of a company it is necessary to allege and prove: (1) who are the directors of the company, whether de facto or de jure; (2) that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so; (3) that those directors acted in accordance with such directions; and (4) that they were accustomed so to act.  What is needed is first, a board of directors claiming and purporting to act as such; and secondly, a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others.” (per Millett J, at p.183)

 

Non- Executive Directors

 

Derek Higgs, ‘Review of the Role and Effectiveness of Non-Executive Directors’

www.dti.gov.uk/cld/non_exec_review

 

 

Appointment

 

s.250, 2006 Act

 

ss.154-155, 2006 Act; Table A arts 64-98

 

 

APPOINTMENT AND REMOVAL OF DIRECTORS

 

Requirement to have directors

154 Companies required to have directors

 

(1) A private company must have at least one director.

(2) A public company must have at least two directors.

 

155 Companies required to have at least one director who is a natural person

 

(1) A company must have at least one director who is a natural person.

(2) This requirement is met if the office of director is held by a natural person as a corporation sole or otherwise by virtue of an office.

 

157 Minimum age for appointment as director

 

(1) A person may not be appointed a director of a company unless he has attained the age of 16 years.

(2) This does not affect the validity of an appointment that is not to take effect until the person appointed attains that age.

(3) Where the office of director of a company is held by a corporation sole, or otherwise by virtue of another office, the appointment to that other office of a person who has not attained the age of 16 years is not effective also to make him a director of the company until he attains the age of 16 years.

(4) An appointment made in contravention of this section is void.

(5) Nothing in this section affects any liability of a person under any provision of the Companies Acts if he—

(a) purports to act as director, or

(b) acts as a shadow director,

although he could not, by virtue of this section, be validly appointed as a director.

(6) This section has effect subject to section 158 (power to provide for exceptions from minimum age requirement).

 

159 Existing under-age directors

 

(1) This section applies where—

(a) a person appointed a director of a company before section 157 (minimum age for appointment as director) comes into force has not attained the age of 16 when that section comes into force, or

(b) the office of director of a company is held by a corporation sole, or otherwise by virtue of another office, and the person appointed to that other office has not attained the age of 16 years when that section comes into force,

and the case is not one excepted from that section by regulations under section 158.

(2) That person ceases to be a director on section 157 coming into force.

(3) The company must make the necessary consequential alteration in its register of directors but need not give notice to the registrar of the change.

(4) If it appears to the registrar (from other information) that a person has ceased by virtue of this section to be a director of a company, the registrar shall note that fact on the register.

 

160 Appointment of directors of public company to be voted on individually

 

(1) At a general meeting of a public company a motion for the appointment of two or more persons as directors of the company by a single resolution must not be made unless a resolution that it should be so made has first been agreed to by the meeting without any vote being given against it.

(2) A resolution moved in contravention of this section is void, whether or not its being so moved was objected to at the time.

But where a resolution so moved is passed, no provision for the automatic reappointment of retiring directors in default of another appointment applies.

(3) For the purposes of this section a motion for approving a person’s appointment, or for nominating a person for appointment, is treated as a motion for his appointment.

(4) Nothing in this section applies to a resolution amending the company’s articles.

 

 

161 Validity of acts of directors

 

(1) The acts of a person acting as a director are valid notwithstanding that it is afterwards discovered—

(a) that there was a defect in his appointment;

(b) that he was disqualified from holding office;

(c) that he had ceased to hold office;

(d) that he was not entitled to vote on the matter in question.

(2) This applies even if the resolution for his appointment is void under section 160 (appointment of directors of public company to be voted on individually).

 

 

Removal of a director from office

 

 

Removal

168 Resolution to remove director

 

(1) A company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding anything in any agreement between it and him.

(2) Special notice is required of a resolution to remove a director under this section or to appoint somebody instead of a director so removed at the meeting at which he is removed.

(3) A vacancy created by the removal of a director under this section, if not filled at the meeting at which he is removed, may be filled as a casual vacancy.

(4) A person appointed director in place of a person removed under this section is treated, for the purpose of determining the time at which he or any other director is to retire, as if he had become director on the day on which the person in whose place he is appointed was last appointed a director.

(5) This section is not to be taken—

(a) as depriving a person removed under it of compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director, or

(b) as derogating from any power to remove a director that may exist apart from this section.

 

169 Director’s right to protest against removal

 

(1) On receipt of notice of an intended resolution to remove a director under section 168, the company must forthwith send a copy of the notice to the director concerned.

(2) The director (whether or not a member of the company) is entitled to be heard on the resolution at the meeting.

(3) Where notice is given of an intended resolution to remove a director under that section, and the director concerned makes with respect to it representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so—

(a) in any notice of the resolution given to members of the company state the fact of the representations having been made; and

(b) send a copy of the representations to every member of the company to whom notice of the meeting is sent (whether before or after receipt of the representations by the company).

(4) If a copy of the representations is not sent as required by subsection (3) because received too late or because of the company's default, the director may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting.

(5) Copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the court is satisfied that the rights conferred by this section are being abused.

(6) The court may order the company's costs (in Scotland, expenses) on an application under subsection (5) to be paid in whole or in part by the director, notwithstanding that he is not a party to the application.

 

Disqualification

 

Company Directors Disqualification Act 1986

A disqualification order is an order that the specified person shall not be

 

(a)               a director of a company

(b)               a receiver of a company’s property

(c)               in any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of a company

            unless (in each case) that person has the leave of the court, and

(d)       an insolvency practitioner.

 

The order will run for a specified period. (s.1, 1986)

 

S.1A introduces a disqualification undertaking which may take effect in similar circumstances.  (see Walters, [2001] Insolvency Lawyer 86)

 

Duty of court to disqualify unfit directors of insolvent companies

s.6

“(1)      The court shall make a disqualification order against a person in any case where, on application under this section, it is satisfied –

(a)               that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and

(b)               that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company.

……

(4)               Under this section the minimum period of disqualification is 2 years, and the maximum period is 15 years.”

 

‘Unfitness’

see s.9 and Schedule 1, 1986 Act

 

Matters to be regarded by court in all cases include – misfeasance, breach of duty, misapplication of property or liability to account, failure to make returns or keep accounts. Further matters in cases of insolvent companies include – extent of responsibility for causes of insolvency, for failure to supply goods or services paid for, for transactions or preferences set aside under Insolvency Act 1986.

 

 

Formal powers of management

 

 

Model Articles under 2006 Act

 

Directors’ general authority [private company]

3. Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.

 

Shareholders’ reserve power

4.—(1) The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action.

(2) No such special resolution invalidates anything which the directors have done before the passing of the resolution.

 

Directors may delegate

5.—(1) Subject to the articles, the directors may delegate any of the powers which are conferred on them under the articles—

(a) to such person or committee;

(b) by such means (including by power of attorney);

(c) to such an extent;

(d) in relation to such matters or territories; and

(e) on such terms and conditions;

as they think fit.

(2) If the directors so specify, any such delegation may authorise further delegation of the

directors’ powers by any person to whom they are delegated.

(3) The directors may revoke any delegation in whole or part, or alter its terms and conditions.…………..

 

Directors to take decisions collectively

7.—(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in  accordance with article 8.

(2) If—

(a) the company only has one director, and

(b) no provision of the articles requires it to have more than one director,

the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

 

The provisions for public companies are virtually identical.

 

Previous Model Table A,arts 70-72,84-86,94

 

"70. Subject to the provisions of the Acts, the memorandum and the articles and to any directions given by special resolution, the business of the company shall be managed by the directors who may exercise all the powers of the company. No alteration of the memorandum or articles and no such direction shall invalidate any prior act of the directors which would have been valid if that alteration had not been made or that direction had not been given. The powers given by this regulation shall not be limited by any special power given to the directors by the articles and a meeting of directors at which a quorum is present may exercise all powers exercisable by the directors.”

 

 

Towcester Racecourse Co Ltd v Racecourse Association Ltd [2003] 1 BCLC 260

 

“ …. in the absence of articles permitting the members to control the board, it is entitled to govern the company and exercise its powers without interference.  If the directors act unlawfully, then they will be accountable for their actions and for any losses suffered by the company as a result …. the proper claimant in such proceedings is the company and not the shareholders.” (per Patten J.)

 

Directors do not have complete freedom of action, even when the articles place day-to-day management in their hands.  As we will see they are subject to duties, notably under ss171-172 of the 2006 Act which circumscribe their actions.

 

 

Statutory protection for those dealing with a company’s agents

 

 

 

Companies Act 2006

 

40 Power of directors to bind the company

(1) In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution.

 

(2) For this purpose—

(a) a person “deals with” a company if he is a party to any transaction or other act to which the company is a party,

(b) a person dealing with a company—

(i) is not bound to enquire as to any limitation on the powers of the directors to bind the company or authorise others to do so,

(ii) is presumed to have acted in good faith unless the contrary is proved, and

(iii) is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company’s constitution.

 

(3) The references above to limitations on the directors’ powers under the company’s constitution include limitations deriving—

(a) from a resolution of the company or of any class of shareholders, or

(b) from any agreement between the members of the company or of any class of shareholders.

 

(4) This section does not affect any right of a member of the company to bring proceedings to restrain the doing of an action that is beyond the powers of the directors. But no such proceedings lie in respect of an act to be done in fulfilment of a legal obligation arising from a previous act of the company.

 

(5) This section does not affect any liability incurred by the directors, or any other person, by reason of the directors’ exceeding their powers.

 

(6) This section has effect subject to—

section 41 (transactions with directors or their associates), and section 42 (companies that are charities).

 

 

41 Constitutional limitations: transactions involving directors or their associates

 

(1) This section applied to a transction if or to the extent that its validity depends on section 40 (power of directors deemed to be free of limitations under company’s constitution in favour of person dealing with company in good faith).

 

Nothing in this section shall be read as excluding the operation of any other enactment or rule of law by virtue of which the transaction may be called in question or any liability to the company may arise.

 

(2) Where—

(a) a company enters into such a transaction, and

(b) the parties to the transaction include—

(i) a director of the company or of its holding company, or

(ii) a person connected with any such director,

the transaction is voidable at the instance of the company.

 

(3) Whether or not it is avoided, any such party to the transaction as is mentioned in subsection (2)(b)(i) or (ii), and any director of the company who authorised the transaction, is liable—

(a) to account to the company for any gain he has made directly or indirectly by the transaction, and

(b) to indemnify the company for any loss or damage resulting from the transaction.

 

(4) The transaction ceases to be voidable if—

(a) restitution of any money or other asset which was the subject-matter of the transaction is no longer possible, or

(b) the company is indemnified for any loss or damage resulting from the transaction, or

(c) rights acquired bona fide for value and without actual notice of the directors’ exceeding their powers by a person who is not party to the transaction would be affected by the avoidance, or

(d) the transaction is affirmed by the company.

 

 

(5) A person other than a director of the company is not liable under subsection (3) if he shows that at the time the transaction was entered into he did not know that the directors were exceeding their powers.

 

(6) Nothing in the preceding provisions of this section affects the rights of any party to the transaction not within subsection (2)(b)(i) or (ii), but the court may, on the application of the company or any such party, make such order affirming, severing or setting aside the transaction on such terms as appear to the court to be just.

 

(7) In this section—

(a) “transaction” includes any act; and

(b) the reference to a person connected with a director has the same meaning as in Part 10 (company directors).

 

 

 

Duties of directors

 

Prior to the introduction of the CA 2006 directors’ duties were governed by common law and equity. One of the most significant changes introduced by the Companies Act 2006 was the introduction of a statutory statement of duties owed by a director to a company.

 

 

 The 7 general duties owed by a director are:

 

1. 1.      Duty to act within powers and to exercise those powers for a proper purpose
2. 2.      Duty to promote the success of the company
3. 3.      Duty to exercise independent judgement
4. 4.      Duty to exercise reasonable, care, skill and diligence
5. 5.      Duty to avoid conflicts of interest
6. 6.      Duty not to accept benefits from third parties
7. 7.      Duty to declare interest in a proposed transaction or arrangement

 

(Chapter 2, General Duties of Directors, CA 2006)

 

Recommended reading:

 

• ·         ‘Directors' Duties Under the Companies Act 2006: Clarity or Confusion?’, Hood, (2013), J.C.L.S. 2013, 13(1), 1-48 
• ·         Sealy, ‘Directors’ Duties Revisited’ (2001) 22 Co Lawyer 79
• ·         Worthington, ‘Reforming Directors’ Duties’ (2001) 64 MLR 439
• ·         Ahern, ‘Directors’ duties, dry ink and the accessibility agenda’ (2012) 128 LQR 114

 

Scope and interpretation

 

CHAPTER 2

GENERAL DUTIES OF DIRECTORS

Introductory

 

170 Scope and nature of general duties

 

(1) The general duties specified in sections 171 to 177 are owed by a director of a company to the company.

(2) A person who ceases to be a director continues to be subject—

(a) to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, and

(b) to the duty in section 176 (duty not to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a director.

To that extent those duties apply to a former director as to a director, subject to any necessary adaptations.

(3) The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.

(4) The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.

(5) The general duties apply to shadow directors where, and to the extent that, the corresponding common law rules or equitable principles so apply.

 

 

Section 171 – Duty to act within powers

 

171 Duty to act within powers

 

A director of a company must—

(a) act in accordance with the company’s constitution, and

(b) only exercise powers for the purposes for which they are conferred.

 

This provision is based on a common law principle illustrated in the case of Hogg v Cramphorn Ltd [1967] Ch 254

 

Piercy v S Mills & Co Ltd [1920]

Howard Smith Ltd v Ampol Petroleum Ltd [1974]

 

 

 

Section 172 – Duty to promote the success of the company

 

172 Duty to promote the success of the company

 

(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers,

customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.

(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

 

 

This duty is based on the equitable fiduciary duty formulated by Lord Greene MR in Re Smith and Fawcett Ltd [ 1942] Ch 304:

 

“[directors must act] bona fide in a way they consider – not what the court may consider – is in the interests of the company, and not for any collateral purpose” per Lord Greene MR at p.306

 

S. 172 generated much debate both during the Bill stage and subsequent to the enactment of this provision.  It lies at the heart of the so-called ‘scope debate’ about the purpose of Company Law and whether the actions of directors in managing a company should be primarily focussed on the interests of shareholders alone (the so called shareholder primacy view) or on these interests and those of other “stakeholders” in the company e.g. customers, employees, the community, the environment etc. (the so called stakeholder pluralism view).

 

S. 172 introduces the principle of “enlightened shareholder value”. This is designed to result in companies taking account of a wide range of stakeholders who are potentially affected by their business activities. However, the overriding duty under s. 172 remains that of acting for the benefit of members as a wholei.e. enhancing shareholder value or profit maximisation. 

 

Recommended reading:

 

• ·         ‘Section 172: a groundbreaking reform of director’s duties, or the emperor in new clothes?’ Lynch (2012) Company Lawyer 33(7), 196
• ·         ‘The BIS Review and section 172 of the Companies Act 2006: what manner of clarity is needed? Okoye (2012) Company Lawyer 33(1)
• ·          ‘New Thinking on Shareholder Primacy’, Stout (2005)
• ·         ‘The Coming Transformation of Shareholder Value’, Deakin (2005) 13 Corporate Governance 11
• ·         ‘Promoting Success: The Companies Act 2006’, Linklater (2007) 28 Company Lawyer 129
• ·         ‘How directors should act when owing duties to the companies’ shareholders’, Attenborough, (2009) 20 ICCLR 339
• ·         Keay, ‘Section 172(1) of the Companies Act 2006: an interpretation and assessment’, (2007) 28 Co Lawyer 106
• ·         ‘Legal Practitioners, Enlightened Shareholder Value and the Shaping of Corporate Governance’, Loughrey, Keay and Cerioni, [2008] JCLS 79

 

Relevant cases (both pre and post 2006 Act):

 

Re Smith and Fawcett Ltd [ 1942]

Liquidator of West Mercia Safetywear Ltd v Dodd [1988]

Regentcrest plc v Cohen [2001]

Re Southern Counties Fresh Foods Ltd [2008]

Iesini v Westrip Holdings Ltd [2009]

People & Plant v HM Treasury [2009]

 

 

s. 173 – Duty to exercise independent judgement

 

173 Duty to exercise independent judgement

(1) A director of a company must exercise independent judgement.

(2) This duty is not infringed by his acting—

(a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or

(b) in a way authorised by the company’s constitution.

 

S. 173 reflects the equitable principle that operated to prevent directors fettering their discretion. For an example of the 173(2)(a) exception see Fulham Football Club v Cabra Estates plc [1994].

 

S. 174 – Duty to exercise reasonable care, skill and diligence

 

 

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

 

“(1)      A director of a company must exercise reasonable care, skill and diligence.

 

(2)        This means the care, skill and diligence that would be exercised by a reasonably diligent person with—

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

(b) the general knowledge, skill and experience that the director has.”

 

S. 174 imposes what is known as a “dual” or “twofold”, “objective/subjective standard for the statutory duty of care, skill and diligence. The objective standard is set out in s. 174(a) and the subjective standard is set out in s. 174(b).

 

Breach of this duty may also lead to a director disqualification order under the Company Directors Disqualification Act 1986.

 

Recommended reading:

 

• ·         ‘Non-Executive Directors in UK Listed Companies: Are They Effective?’, Kiairie (2007), 18 ICCLR 17
• ·         Riley, ‘The Law Commission’s questionable approach to the duty of care and skill’ (1999) 20 Co
• ·         Lawyer 196; ‘The Company Director’s Duty of Care and Skill: The Case for an Onerous but Subjective Standard’ (1999) 62 MLR 697

Cases:

 

Marquis of Bute's Case [1892] 2 Ch 100

Re City Equitable Fire Insurance Co Ltd [1925] Ch 407

Dorchester Finance Co Ltd v Stebbings 1 Co Law 38 [1989] BCLC 498

Norman v Theodore Goddard (a firm) [1991] BCLC 1028

Re D'Jan of London Ltd [1994] 1 BCLC 561

Re Barings plc (No 5) [1999] 1 BCLC 433, 482-489

 

s. 175 – Duty to avoid conflicts of interest

 

175 Duty to avoid conflicts of interest

(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

 

(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).

 

(3) This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.

 

(4) This duty is not infringed—

            (a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of        interest; or

            (b) if the matter has been authorised by the directors.

 

(5) Authorisation may be given by the directors—

            (a) where the company is a private company and nothing in the company's constitution     invalidates such authorisation, by the matter being proposed to and authorised by the   directors; or

            (b) where the company is a public company and its constitution includes provision            enabling the directors to authorise the matter, by the matter being proposed to and          authorised by them in accordance with the constitution.

 

(6) The authorisation is effective only if—

(a) any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and

            (b) the matter was agreed to without their voting or would have been agreed to if their      votes had not been counted.

 

(7) Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.

 

 

 

A director is required by this duty to avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This section makes specific reference to situations involving the exploitation of any property, information or opportunity, whether or not the company could itself take advantage of such situation. Note that this duty does not apply to transactions or arrangements with the company itself – these are covered by s. 177 (see below).

 

Note that the section provides that any interest can, however, be authorised by a quorum of non-conflicted directors. The right is given to private companies by statute, provided that their articles do not contain more restrictive provisions (the Model Articles for private companies do not displace this right). The right is also available to private companies but only if their constitutions expressly provide for such a right.    

 

Effect of consent, approval or authorisation by members (also relevant to s. 177 duty)

 

180 Consent, approval or authorisation by members

 

(1) In a case where—

(a) section 175 (duty to avoid conflicts of interest) is complied with by authorisation by the directors, or

(b) section 177 (duty to declare interest in proposed transaction or arrangement) is complied with,

the transaction or arrangement is not liable to be set aside by virtue of any common law rule or equitable principle requiring the consent or approval of the members of the company.

This is without prejudice to any enactment, or provision of the company’s constitution, requiring such consent or approval.

(2) The application of the general duties is not affected by the fact that the case also falls within Chapter 4 (transactions requiring approval of members), except that where that Chapter applies and—

(a) approval is given under that Chapter, or

(b) the matter is one as to which it is provided that approval is not needed,

it is not necessary also to comply with section 175 (duty to avoid conflicts of interest) or section 176 (duty not to accept benefits from third parties).

(3) Compliance with the general duties does not remove the need for approval under any applicable provision of Chapter 4 (transactions requiring approval of members).

(4) The general duties—

(a) have effect subject to any rule of law enabling the company to give authority, specifically or generally, for anything to be done (or omitted) by the directors, or any of them, that would otherwise be a breach of duty, and

(b) where the company’s articles contain provisions for dealing with conflicts of interest, are not infringed by anything done (or omitted) by the directors, or any of them, in accordance with those provisions.

(5) Otherwise, the general duties have effect (except as otherwise provided or the context otherwise requires) notwithstanding any enactment or rule of law.

 

Relevant cases:

 

Regal(Hastings) Ltd v Gulliver [1942] 1 All ER 378, [1967] AC 134

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

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

Cook v Deeks [1916] AC 554

Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1

Queensland Mines Ltd v Hudson (1978) 52 AJLR 399

Framlington Group plc v Anderson [1995] 1 BCLC 475

Island Export Finance Ltd v Umunna [1986] BCLC 460

Balston Ltd v Headline Filters Ltd [1990] FSR 385

CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704

Bhullar v Bhullar [2003] 2 BCLC 241

Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200; [2007] BCC 804

Shepherds Investment Ltd v Walters [2006] EWHC 836

In Plus Group Ltd v Pyke [2004] 1 BCLC 64

 

 

Recommended reading:

 

• ·         Ahern, ‘Legislating for the duty on directors to avoid conflicts of interest and secret profits: the devil in the detail’, (2010) 45 Irish Jurist 82

• Edward Brown, ‘A case of split loyalty?  Multiple Directorships and conflicts of interest under the Companies Act 2006’ B.J.I.B. & F.L. 2010, 25(10), 584-586
• Griffiths ‘Dealing with directors’ conflicts of interest under the Companies Act 2006’ Butterworths Journal of International Banking & Finance Law (2008) 23(6), 292-294
• Keay, ‘The authorising of directors’ conflicts of interest: getting a balance’ (2012) 12 Journal of Corporate Law Studies 129
• ‘Regulating  conflicts of  interest in the  post- CA  2006 era: Part 1: a triumph of disclosure over honesty and good faith’, Alotaibitarget, (2013) I.C.C.L.R. 2013, 24(1), 1-8
• ‘Regulating conflicts of interest in post-CA 2006 era: Part 2: is authorisation by the board a good innovation?’ Alotaibitarget, (2013) I.C.C.L.R. 2013, 24(10), 351-356

 

 

S. 176 – Duty not to accept benefits from third parties

 

 176 Duty not to accept benefits from third parties

 

(1) A director of a company must not accept a benefit from a third party conferred by reason of—

            (a) his being a director, or

            (b) his doing (or not doing) anything as director.

 

(2) A “third party” means a person other than the company, an associated body corporate or a person acting on behalf of the company or an associated body corporate.

 

(3) Benefits received by a director from a person by whom his services (as a director or otherwise) are provided to the company are not regarded as conferred by a third party.

 

(4) This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

 

(5) Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.

 

 

This duty is the statutory version of the previous common law duty not to make a secret i.e. unauthorised profit. This would prevent a director from, for example, accepting a bride to do or not do something in his position as a director.  This duty is a statutory version of the previous common law duty not to make a secret profit.

 

 

 

Section 177 – Duty to declare interest in proposed transaction or arrangement

 

177 Duty to declare interest in proposed transaction or arrangement

 

(1) If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.

(2) The declaration may (but need not) be made—

(a) at a meeting of the directors, or

(b) by notice to the directors in accordance with—

(i) section 184 (notice in writing), or

(ii) section 185 (general notice).

(3) If a declaration of interest under this section proves to be, or becomes, inaccurate or incomplete, a further declaration must be made.

(4) Any declaration required by this section must be made before the company enters into the transaction or arrangement.

(5) This section does not require a declaration of an interest of which the director is not aware or where the director is not aware of the transaction or arrangement in question.

For this purpose a director is treated as being aware of matters of which he ought reasonably to be aware.

(6) A director need not declare an interest—

(a) if it cannot reasonably be regarded as likely to give rise to a conflict of interest;

(b) if, or to the extent that, the other directors are already aware of it (and for this purpose the other directors are treated as aware of anything of which they ought reasonably to be aware); or

(c) if, or to the extent that, it concerns terms of his service contract that have been or are to be considered—

(i) by a meeting of the directors, or

(ii) by a committee of the directors appointed for the purpose under the company’s constitution.

 

 

Relevant provisions of the Model Articles

 

Conflicts of interest (private company)

14.—(1) If a proposed decision of the directors is concerned with an actual or proposed

transaction or arrangement with the company in which a director is interested, that director is not to be counted as participating in the decision-making process for quorum or voting purposes.

(2) But if paragraph (3) applies, a director who is interested in an actual or proposed transaction or arrangement with the company is to be counted as participating in the decision-making process for quorum and voting purposes.

(3) This paragraph applies when—

(a) the company by ordinary resolution disapplies the provision of the articles which would otherwise prevent a director from being counted as participating in the decision-making process;

(b) the director’s interest cannot reasonably be regarded as likely to give rise to a conflict of interest; or

(c) the director’s conflict of interest arises from a permitted cause.

(4) For the purposes of this article, the following are permitted causes—

(a) a guarantee given, or to be given, by or to a director in respect of an obligation incurred by or on behalf of the company or any of its subsidiaries;

(b) subscription, or an agreement to subscribe, for shares or other securities of the company or any of its subsidiaries, or to underwrite, sub-underwrite, or guarantee subscription for any such shares or securities; and

(c) arrangements pursuant to which benefits are made available to employees and directors or former employees and directors of the company or any of its subsidiaries which do not provide special benefits for directors or former directors.

(5) For the purposes of this article, references to proposed decisions and decision-making

processes include any directors’ meeting or part of a directors’ meeting.

(6) Subject to paragraph (7), if a question arises at a meeting of directors or of a committee of directors as to the right of a director to participate in the meeting (or part of the meeting) for voting or quorum purposes, the question may, before the conclusion of the meeting, be referred to the chairman whose ruling in relation to any director other than the chairman is to be final and conclusive.

(7) If any question as to the right to participate in the meeting (or part of the meeting) should arise in respect of the chairman, the question is to be decided by a decision of the directors at that meeting, for which purpose the chairman is not to be counted as participating in the meeting (or that part of the meeting) for voting or quorum purposes.

 

 

Existing Transactions – s. 182

 

In contrast to s.177 the following provision deals with those transactions which are already in existence but where a director of Company X Ltd has not for some reason declared an interest (e.g. he has become a shareholder/director in a company which already had a supply contract with Company X). Note that section 182 is not one of the general duties but a director who fails to comply with its provisions is guilty of an offence (see s183).

 

CHAPTER 3

DECLARATION OF INTEREST IN EXISTING TRANSACTION OR ARRANGEMENT

 

182 Declaration of interest in existing transaction or arrangement

 

(1) Where a director of a company is in any way, directly or indirectly, interested in a transaction or arrangement that has been entered into by the company, he must declare the nature and extent of the interest to the other directors in accordance with this section.

This section does not apply if or to the extent that the interest has been declared under section n proposed transaction or arrangement).

(2) The declaration must be made—

(a) at a meeting of the directors, or

(b) by notice in writing (see section 184), or

(c) by general notice (see section 185).

(3) If a declaration of interest under this section proves to be, or becomes, inaccurate or incomplete, a further declaration must be made.

(4) Any declaration required by this section must be made as soon as is reasonably practicable.

Failure to comply with this requirement does not affect the underlying duty to make the declaration.

(5) This section does not require a declaration of an interest of which the director is not aware or where the director is not aware of the transaction or arrangement in question.

For this purpose a director is treated as being aware of matters of which he ought reasonably to be aware.

(6) A director need not declare an interest under this section—

(a) if it cannot reasonably be regarded as likely to give rise to a conflict of interest;

(b) if, or to the extent that, the other directors are already aware of it (and for this purpose the other directors are treated as aware of anything of which they ought reasonably to be aware); or

(c) if, or to the extent that, it concerns terms of his service contract that have been or are to be considered—

(i) by a meeting of the directors, or

(ii) by a committee of the directors appointed for the purpose under the company’s constitution.

 

 

183 Offence of failure to declare interest

 

(1) A director who fails to comply with the requirements of section 182 (declaration of interest in existing transaction or arrangement) commits an offence.

(2) A person guilty of an offence under this section is liable—

(a) on conviction on indictment, to a fine;

(b) on summary conviction, to a fine not exceeding the statutory maximum.

 

 

184 Declaration made by notice in writing

 

(1) This section applies to a declaration of interest made by notice in writing.

(2) The director must send the notice to the other directors.

(3) The notice may be sent in hard copy form or, if the recipient has agreed to receive it in electronic form, in an agreed electronic form.

(4) The notice may be sent—

(a) by hand or by post, or

(b) if the recipient has agreed to receive it by electronic means, by agreed electronic means.

(5) Where a director declares an interest by notice in writing in accordance with

this section—

(a) the making of the declaration is deemed to form part of the proceedings at the next meeting of the directors after the notice is given, and

(b) the provisions of section 248 (minutes of meetings of directors) apply as if the declaration had been made at that meeting.

 

 

185 General notice treated as sufficient declaration

 

(1) General notice in accordance with this section is a sufficient declaration of interest in relation to the matters to which it relates.

(2) General notice is notice given to the directors of a company to the effect that the director—

(a) has an interest (as member, officer, employee or otherwise) in a specified body corporate or firm and is to be regarded as interested in any transaction or arrangement that may, after the date of the notice, be made with that body corporate or firm, or

(b) is connected with a specified person (other than a body corporate or firm) and is to be regarded as interested in any transaction or arrangement that may, after the date of the notice, be made with that person.

(3) The notice must state the nature and extent of the director’s interest in the body corporate or firm or, as the case may be, the nature of his connection with the person.

(4) General notice is not effective unless—

(a) it is given at a meeting of the directors, or

(b) the director takes reasonable steps to secure that it is brought up and read at the next meeting of the directors after it is given.

 

 

Relief from liability - Ratification of breach of duty

 

 

239 Ratification of acts of directors

(1) This section applies to the ratification by a company of conduct by a director amounting to negligence, default, breach of duty or breach of trust in relation to the company.

(2) The decision of the company to ratify such conduct must be made by resolution of the members of the company.

(3) Where the resolution is proposed as a written resolution neither the director (if a member of the company) nor any member connected with him is an eligible member.

(4) Where the resolution is proposed at a meeting, it is passed only if the necessary majority is obtained disregarding votes in favour of the resolution by the director (if a member of the company) and any member connected with him. This does not prevent the director or any such member from attending, being counted towards the quorum and taking part in the proceedings at any meeting at which the decision is considered.

(5) For the purposes of this section—

(a) “conduct” includes acts and omissions;

(b) “director” includes a former director;

(c) a shadow director is treated as a director; and

(d) in section 252 (meaning of “connected person”), subsection (3) does not

apply (exclusion of person who is himself a director).

(6) Nothing in this section affects—

(a) the validity of a decision taken by unanimous consent of the members of the company, or

(b) any power of the directors to agree not to sue, or to settle or release a claim made by them on behalf of the company.

(7) This section does not affect any other enactment or rule of law imposing additional requirements for valid ratification or any rule of law as to acts that are incapable of being ratified by the company.

 

Remedies for breach of duty

 

178 Civil consequences of breach of general duties

(1) The consequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied.

(2) The duties in those sections (with the exception of section 174 (duty to exercise reasonable care, skill and diligence)) are, accordingly, enforceable in the same way as any other fiduciary duty owed to a company by its directors.

 

 

Remuneration of directors

 

Service contracts

 

Since 1980 there have been legislative controls on the length of directors’ service contracts.  These controls (ss.188-189, 2006 Act) apply to the employment of a director (whether under a contract of service or for services or any other agreement) and prohibit a company from incorporating into any such contract or agreement a term by which a director's employment by the company may continue, other than at the option of the company, for more than two years (previously 5 years under 1985 Act), without that contract etc. being terminable by the company by notice; or, where it is terminable by notice but only under certain specified circumstances, unless that term is first approved by the company in general meeting.

 

Such a resolution cannot be validly passed unless a written memorandum setting out the agreement incorporating the term has been made available for inspection by members -

 

• ·         both at the company's registered office for at least fifteen days prior to the general meeting and

 

• ·         at the meeting itself.

 

Where a term has been incorporated into an agreement in contravention of section 188, it shall be deemed to be void to the extent of the contravention (i.e. deemed to be made for two years) and, in addition, the agreement shall be deemed to contain a term entitling the company to terminate the agreement at any time by the giving of reasonable notice.

 

 

 

Quoted companies – remuneration reports

 

The directors of a quoted company have a duty to prepare a directors' remuneration report for each financial year (section 420(1) CA 2006). A new directors’ remuneration regime came into force on 1 October 2013 for quoted companies whose accounting period ends on or after 30 September 2013. From this date, reports have to contain more information about how directors have been and will be paid along with information about how this relates to company performance. This can then be used by company shareholders when exercising their new legally-binding vote on the company's executive pay policy (ss 420-420(A), 2006 Act.

 

• ·         Final Regulations governing the changes: http://www.legislation.gov.uk/uksi/2013/1981/pdfs/uksi_20131981_en.pdf
• epartment for Business Innovation & Skills, Frequently Asked Questions:  https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/158048/13-727-directors-remuneration-reforms-faq.pdf

UK Corporate Governance Code

 

The Financial Reporting Council (FRC) has published consultation documents seeking views on whether, in light of the changes to directors remuneration report regime, changes to the UK Corporate Governance Code are required. It is anticipated that changes will be made to the UK Corporate Governance Code in light of these consultations. The revised Code will apply to financial years beginning on or after 1 October 2014  

 

For listed companies the UK Corporate Governance Code recommends that contracts should be for no longer than 1 year without renewal.

 

Recommended reading:

 

• ‘Controlling Executive Pay: Institutional Investors or Distributive Justice?’, C Villiers, (2010) 10 Journal of Corporate Law Studies

 

 

B       CORPORATE GOVERNANCE CODES

 

The UK Corporate Governance Code

 

The UK Corporate Governance Code is the the key source of corporate governance recommendations for large public companies (www.practicallaw.com/0-501-4233). The Code consists of principles of good governance, most of which have their own set of more detailed provisions which amplify the principles. The principles deal with the following areas:

• leadership
• effectiveness
• accountability
• remuneration of directors
• relations with shareholders

The UK Corporate Governance Code is not enshrined in legislation, it is “soft” law i.e. there is no legal compulsion to obey.  Nevertheless, even without statutory backing, it is in practice virtually obligatory for listed companies to adhere to it in most respects.  The Stock Exchange has appended the Code to the Stock Exchange Listing Rules and requires every listed company to include in its annual report a statement of whether it has applied the Principles of the Code, how it has applied them and, to the extent it has not applied them, the reasons why it has not.  This approach is described as a “comply or explain” regulatory approach.

 

The Code can be accessed from the FRC website:https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-Governance-Code.aspx

 

The Stewardship Code

 

The percentage of shares held overall by institutional shareholders (i.e. pension funds, insurance companies, unit trusts and mutual funds) has grown from about a quarter in  the 1960s to about two-thirds in more recent years, and in some companies the percentage may be as high as 80% or more. Views differ on the extent to which these institutions and their professionals should be expected, or even required, to monitor performance of those charged with the management of the companies held in their portfolio.

 

The UK Stewardship Code was introduced in 2010 and aims to enhance the quality of engagement between institutional investors and companies. The Code sets out a number of areas of good practice to which the FRC believes institutional investors should aspire and operates on a 'comply or explain' basis. The FCA requires UK authorised asset managers to report on whether or not they apply the Code.

 

The Code can be accessed from the FRC website: https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Stewardship-Code.aspx

 

 7.      LEGAL PROTECTION FOR SHAREHOLDERS

 

Statutory derivative claim (s. 260 CA 2006)

 

A shareholder is not normally permitted to sue where a wrong is done to a company of which he is a member. This is the rule known as the rule in Foss v Harbottle (1843). At the same time however the courts have recognised that in some exceptional circumstances it is appropriate to allow a shareholders to sue on behalf of the company, since otherwise justice could not be done. Accordingly a number of exceptions to the rule in Foss v Harbottle developed on a case-by-case basis, under which a shareholder could bring an action if the company would not. This type of action was described as a “derivative action” because the right of the member to sue was not personal to him but derived from the right to sue which the company had failed to exercise.

 

The Companies Act 2006 has now codified derivative actions and all derivative actions now have to be brought under the statutory provisions. A claim can only be brought in  respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.

 

The 2006 Act has effectively introduced a two stage “screening” process for claims. The purpose of this process is to weed out frivolous or unmeritorious claims. At the first stage the shareholder must show a prima facie case.  The court will review this without hearing evidence from the defendant.  If a prima facie case is established then it moves to the second stage. The court will direct the company itself to give evidence and after hearing this will decide whether to give permission for the action to continue. Section 263(2) sets out the circumstances in which the court must refuse permission. This is supplemented by  section 263(3) which sets  out the factors which the court must take into account when exercising its discretion. Section 263(4) provides that the court will take into account the views of any members who are not a party to the claim. 

 

 

s. 260 Derivative Claim

 (1) This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company—

(a) in respect of a cause of action vested in the company, and

(b) seeking relief on behalf of the company.

This is referred to in this Chapter as a “derivative claim”.

(2) A derivative claim may only be brought—

(a) under this Chapter, or

(b) in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice).

(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.

The cause of action may be against the director or another person (or both).

(4) It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company.

(5) For the purposes of this Chapter—

(a) “director” includes a former director;

(b) a shadow director is treated as a director; and

(c) references to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.

S. 261 Screening process

 

s. 261 Application to continue claim

 (1) A member of a company who brings a derivative claim under this Chapter must apply to the court for permission (in Northern Ireland, leave) to continue it.

(2) If it appears to the court that the application and the evidence filed by the applicant in support of it do not disclose a prima facie case for giving permission (or leave), the court—

(a) must dismiss the application, and

(b) may make any consequential order it considers appropriate.

(3) If the application is not dismissed under subsection (2), the court—

(a) may give directions as to the evidence to be provided by the company, and

(b) may adjourn the proceedings to enable the evidence to be obtained.

(4) On hearing the application, the court may—

(a) give permission (or leave) to continue the claim on such terms as it thinks fit,

(b) refuse permission (or leave) and dismiss the claim, or

(c) adjourn the proceedings on the application and give such directions as it thinks            fit.

Whether permission will be given

 

 

s. 263  Whether permission to be given

 

(1)     The following provisions have effect where a member of a company applies for permission (in Northern Ireland, leave) under section 261 or 262.

 

(2)     Permission (or leave) must be refused if the court is satisfied—

 

            (a)     that a person acting in accordance with section 172 (duty to promote the       success of the company) would not seek to continue the claim, or

 

(b)     where the cause of action arises from an act or omission that is yet to occur,             that the act or omission has been authorised by the company, or

 

            (c)     where the cause of action arises from an act or omission that has already       occurred, that the act or omission—

                       

                        (i)     was authorised by the company before it occurred, or

 

                        (ii)     has been ratified by the company since it occurred.

 

(3)     In considering whether to give permission (or leave) the court must take into account, in particular—

 

 

 

 

            (a)     whether the member is acting in good faith in seeking to continue the claim;

 

            (b)     the importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to continuing it;

 

            (c)     where the cause of action results from an act or omission that is yet to           occur, whether the act or omission could be, and in the circumstances would be            likely to be—

 

                        (i)     authorised by the company before it occurs, or

 

                        (ii)     ratified by the company after it occurs;

 

            (d)     where the cause of action arises from an act or omission that has already      occurred, whether the act or omission could be, and in the circumstances would           be likely to be, ratified by the company;

 

            (e)     whether the company has decided not to pursue the claim;

 

            (f)     whether the act or omission in respect of which the claim is brought gives     rise to a cause of action that the member could pursue in his own right rather than     on behalf of the company.

 

(4)     In considering whether to give permission (or leave) the court shall have particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter

 

 

 

 

UNFAIRLY PREJUDICIAL CONDUCT  -  s.994, 2006 Act

 

(Formerly s.459(1), 1985 Act)

 

In addition to the derivative action, statute has afforded shareholders the possibility to complain about the conduct of others within a company since the introduction of s. 210 CA 1948 (now s. 994 CA 2006). The most common complaint is that a controlling majority of members have unfairly prejudiced the minority.  Unfair prejudice claims can be brought on wider and more varied grounds than derivative claims and are not limited to acts of directors.

 

Key elements to s. 994:

 

1) Petition by member or members of the company

 

2) Conduct of the company’s affairs

 

3) conducted in a manner which is unfairly prejudicial

 

4) to the interests of members generally or a part of them including themselves

 

If petition is successful the court can make such order as it thinks fit (s.996).

 

PART 30

PROTECTION OF MEMBERS AGAINST UNFAIR PREJUDICE

Main provisions

 

994 Petition by company member

 

(1) A member of a company may apply to the court by petition for an order under this Part on the ground—

(a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

(1A) For the purposes of subsection (1)(a), a removal of the company's auditor from office—

            (a) on grounds of divergence of opinions on accounting treatments or audit            procedures, or

            (b) on any other improper grounds,

            shall be treated as being unfairly prejudicial to the interests of some part of the      company's members.

(2) The provisions of this Part apply to a person who is not a member of a company but to whom shares in the company have been transferred or transmitted by operation of law as they apply to a member of a company.

(3) In this section, and so far as applicable for the purposes of this section in the other provisions of this Part, “company” means—

(a) a company within the meaning of this Act, or

(b) a company that is not such a company but is a statutory water company within the meaning of the Statutory Water Companies Act 1991 (c. 58).

 

s. 996, 2006 Act Powers of the court under this Part

 

(1) If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.

(2) Without prejudice to the generality of subsection (1), the court’s order may—

            (a) regulate the conduct of the company’s affairs in the future;

            (b) require the company—

                        (i) to refrain from doing or continuing an act complained of, or

                        (ii) to do an act that the petitioner has complained it has omitted to do;

(c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;

(d) require the company not to make any, or any specified, alterations in its articles without the leave of the court;

(e) provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company’s capital accordingly.

 

 

Cases:

 

Re Legal Costs Negotiators [1999] 2 BCLC 171

Re Phoneer Ltd [2002] 2 BCLC 241

Re a Company (No 005685 of 1988) , exp Schwartz (No 2) (1989)

O’Neill v Phillips, May1999 (House of Lords), [1999] 1 WLR 1092, 2 All ER961, 2 BCLC 1

Re Saul D Harrison & Sons plc [1995] 1 BCLC 14

CAS (Nominees) v Nottingham Forest FC plc [2002] 1 BCLC 613

Re XYZ Ltd (1986) 2 BCC 99,520

Re Elgindata Ltd [1991] BCLC 959

Nicholas v Soundcraft Electronics Ltd[1993] BCLC 360.

Re Macro (Ipswich) Ltd [1994] 2 BCLC 354

Dalby v Bodilly [2005] BCC 627

Re Halt Garages (1964) Ltd [1982] 3 All ER 1016

Grace v Biagioli [2006] 2 BCLC 70

Rahman v Malik [2008] 2 BCLC 403

Re Sam Weller Ltd [1989] 3 WLR 923

 

Quasi-partnership companies

 

Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492, [1973] AC 360 - 36 MLR 129

 

“It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise.  Certainly the fact that a company is a small one, or a private company, is not enough.  There are very many of these where the association is a purely commercial one, of which it can be said that the basis of association is adequately and exhaustively laid down in the articles.  The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements : (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the member’s interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.” (per Lord Wilberforce at p.379)

 

 

Recommended reading:

 

• Hannigan, Drawing boundaries between derivative claims and unfairly prejudicial petitions’, [2009] JBL 606
• ‘Protection of minority shareholders in the post-Companies Act 2006 era’, Millman, (2013) Co. L.N. 2012, 323, 1-5

 

 

JUST AND EQUITABLE WINDING UP  -  S.122(1)(g),I.A.1986

 

Formerly:

 S.222(f),1948; S.517(1)(g),1985

 

S. 122 Circumstances in which company may be wound up by the court

 (1) A company may be wound up by the court if—

……………………

 (g) the court is of the opinion that it is just and equitable that the company should be wound up.

 

 

Cases:

 

Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492, [1973] AC 360 - 36 MLR 129

Re Bleriot Manufacturing Aircraft Co Ltd (1916)

NG Eng Hiam v NG Kee Wei (1964)

 

 

 

8.      Insolvency

 

 

Types of charges (sometimes referred to as “security”)

 

 

Part 25, 2006 Act; Ss 859A-894 (formerly ss.860-894)

 

 

Fixed Charge

 

A charge, most commonly by way of a legal mortgage,over a company's assets.  Typically, such a charge would be over land.

 

 

Floating Charge

 

"A floating security is an equitable charge on the assets for the time being of a going concern.  It attaches to the subject charged in the varying condition in which it happens to be from time to time.  It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes."

 

per Lord Macnaghten, Government Stocks and Other Securities Investment Co v Manila Rly Co [1897] AC 81

 

 

Re Yorkshire Woolcombers Assocn Ltd [1903] 2 Ch 284

 

Romer LJ stated that a floating charge was one which exhibited the following characteristics -

 

(1) a charge on a class of assets of the company, present and future;

 

(2) that class is, in the ordinary course of the company's business, changing from time to time; and

 

(3) it is contemplated by the charge that, until the holders of the charge take steps to enforce it, the company may carry on business in the ordinary way as far as concerns the class of assets charged.

 

 

It seems that a floating charge constitutes an equitable interest until such time as it crystallises, when it settles and becomes a fixed equitable charge on all the assets of the class charged owned by the company at that time (or anything of that class subsequently acquired).

 

 

Crystallisation occurs upon -

 

• ·         a winding up
• ·         the appointment of a receiver
• ·         the company ceasing to trade

 

It is unclear at present whether an express automatic crystallisation clause in a floating charge is effective.

 

see       Re Brightlife Ltd

            Cork Committee (Cmnd 8558 para 1850)

 

 

 

Registration of Charges

 

ss. 859A-894 , 2006 Act.

 

Note that the regime for registering charges changed on 6 April 2013.

 

It is necessary that facilities exist so that a person dealing with a company can establish the extent to which the company has charged any of its assets.  The Companies Act provides for a registration regime together with facilities for inspection of registration.  Charges must be registered with the Registrar of Companies within a prescribed timeframe (within 21 days beginning with the day after the date of creation of the charge)  and a failure to register will mean the charge will be invalid as against any liquidator or administrator and any creditor of the company (although note in some cases non-registration may be remedied).

 

 

Prior to 6 April 2013 there was an additional requirement in that companies were required to also register a charge in the company's own Register of Charges. The requirement to register a charge with the Registrar of Companies always carried more significance given the potential implications arising from a failure to register a charge with the Registrar of Companies. Since 6 April 2013 companies have not been required to maintain their own Register of Charges but are  obliged to keep copies of all charge documents available for inspection by members of the public on request.  

 

 

 

Disadvantages of a floating charge

 

l.  As a general principle floating charges rank in priority after fixed charges, even if the fixed charge was created after  the floating charge, unless the document creating the floating charge contains a restrictive clause preventing the creation of further security.

 

2.  Floating charges rank in priority after preferential creditors.  Fixed charges are not affected by preferential debts.  Under the Insolvency Act l986 (as amended by the Enterprise Act 2002) preferential debts are:

 

• ·         Employees' wages for previous 4 months up to max. £8OO per employee.
• ·         Occupational pension scheme contributions for previous l2 months
• ·         Levies on coal and steel production.

 

3.  Avoidance of certain floating charges

 

Where a company goes into liquidation or is subject to an administration order then, under s245 Insolvency Act l986, a floating charge previously created by the company may be retrospectively invalidated in certain circumstances.  Section 245 provides that a floating charge is invalid except to the extent of any consideration in the form of money paid, or goods or services supplied to the company either at the same time or after the creation of the charge.  Plus the relevant time period for invalidating the floating charge is l2 months prior to the start of the company's insolvency, if the charge was created during that period in favour of a person unnconnected with the company, but a 2 year period if the charge was created in favour of a person who is connected with the company.  A further precondition for invalidating the floating charge is that, if the charge was created in favour of an unnconnected person, then this section does not apply unless the company was either insolvent at the time the charge was created or became insolvent as a result of the creation of the charge.

 

4.  Since the company is left free to deal with the charged assets in the ordinary course of business, the extent and value of the assets charged may be unknown until the charge crystallises.  Thus the company may have reduced its stock of the relevant assets or the assets may have diminished in value without the charge holder being aware of this, e.g. company may decide to sell its vehicles and change to leasing vehicles.  As a precaution the charge holder may require the company to provide regular statements of the value of the assets charged.

 

5.  The company can only create a valid charge over goods etc. owned by the company.  It may be that, unknown to the chargeholder, some of the assets in the company's possession and ostensibly covered by the floating charge are not in fact owned by the company but have been supplied to the company under "Romalpa" clauses i.e. retention of ownership clauses.

 

This type of clause in sale of goods contracts takes its name from the case in which such a clause was held to be effective: Aluminium Industrie BV  v Romalpa Ltd [l976]. The case concerned a supply of foil and the sellers reserved ownership in the foil until it was paid for.  Since the company had not paid for the foil at the time it went into liquidation it was held that the company did not own the foil and so it did not form part of its assets and hence was not subject to any charge created by the company.

 

Since this case, however, the courts have construed such clauses very strictly and in many later cases have held that the relevant clause had failed to create a legal right to ownership of the goods in question but had only created an equitable interest in the goods and as such it was a charge over assets which was then void for non-registration with the Registrar of Companies.

 

Re Bond Worth l979; Re Peachdart l983

 

Nevertheless a valid "Romalpa" clause in the sale of goods to a company does create problems for the floating charge holder.

 

6.  Creditors who have obtained judgment against the company for a debt owing and who have completed execution of that judgment debt i.e. by seizing and selling some of the company's assets and obtaining payment from the proceeds of sale, have obviously effectively obtained priority over those assets to the detriment of any floating charge holder.

 

7.   Under the Enterprise Act 2002 (from 15.9.2003) a proportion of assets subject to a floating charge must be set aside to pay unsecured creditors (s.176A, Insolvency Act 1986) –

 

            50% of first £10,000

            20% of remainder up to a maximum of £600,000.

 

Some variation of this rule is possible by voluntary arrangement (s.176A (4)).  If a company’s net assets are less than £10,000 or costs of distribution to unsecured creditors would be disproportionate to benefits (s.176A (3)), the rule does not apply.

 

 

 

Distribution of assets in insolvency – ranking of creditors

 

1.         Creditors with fixed charges – creditors with fixed charges are entitled to            payment out of the charged assets before those assets are used for any other      purpose. If security inadequate to settle the amount owing to them they can claim             as unsecured creditors

 

2.         Costs of winding up – gives priority to the expenses over the claims of floating    charge holders

 

3.         Preferential creditors – certain claims of some unsecured creditors' debts are       given "preferential" status in a distribution of the realisations of a company's      assets (sections 175, 386 and Schedule 6, IA 1986). These categories were             reduced by the Enterprise Act 2002. For our purposes the relevant preferential             debts are:

1. 1. A maximum total of £800 per employee in respect of previous 4 months’ wages/salary
   2. Contributions to occupational and state pension schemes

 

4          Creditors with floating charges – the Enterprise Act 2002 changed the position of creditors who take floating charges over the assets of a company. For floating charges created after 15 September 2003 a liquidator must make a “prescribed part” of the company’s net property available for the satisfaction of unsecured debts (s. 176A Insolvency Act 1986) as follows:

1. a.       50% of the first £10,000
2. b.      20% of the remainder up to a maximum of £600,000 in value.

     

5.         Unsecured/ordinary creditors i.e. creditors with no security e.g. suppliers

 

6.         Interest on debts – paid to creditors equally regardless of priority

 

7.         Shareholders – any surplus goes to the members according to the rights attached to their shares

 

Applications by the liquidator to increase funds available to creditors

 

 

1.  Avoidance of certain floating charges created  within l2 months (2 years if connected person) of winding up, s.245 Insolvency Act l986. See notes on disadvantages of floating charges.

 

 

2.  Transactions at an undervalue, s238 I.A. 1986

 

Where a company, at a relevant time, has entered into a transaction at an undervalue with any person, then on application to the court by the liquidator, the court may make such order as it thinks fit to restore the position to what it would have been if the transaction had not been entered into.  Transactions at an undervalue include a gift by the company or a transaction where the company receives no consideration, or a transaction where the company receives consideration which is significantly less than that provided by the company.  Relevant time period for the section to apply is any time within the 2 years prior to the start of the insolvency.  Plus, that time period is only relevant if the company was insolvent at the time it entered into the transaction or became insolvent as a result of the transaction.  There is a presumption of insolvency if the transaction was in favour of a connected person.

 

Phillips v Brewin Dolphin Bell Lawrie Ltd [1999] 1 BCLC 714

 

3.  Preferences s.239 I.A. 1986

 

Where a company gives a preference to a creditor of the company (or guarantor of any of the company's debts) then, on the application of the liquidator, the court may make such order as it thinks fit for restoring the position to what it would have been if the preference had not been given.  The company gives a preference if it does anything or allows anything to be done which has the effect of putting the creditor in a better position than he would have been in if the thing had not been done, in the event of the company going into insolvent liquidation.  The court will not make an order in respect of the preference unless it is proved that the company, in making the preference, was influenced by a desire to prefer that creditor.  This desire is presumed if the preference is to a connected person.  Relevant time period is 6 months before the start of the insolvency for an unconnected person and 2 years for a connected person.  Plus that time period is only relevant if the company was insolvent at the time it gave the preference or became insolvent as a result of the preference.

 

Giving a bank a charge to secure an overdraft will not be a preference if a company’s desire is not to improve the bank’s position but merely to persuade the bank not to call in its overdraft and hence force the company to stop trading – see Re MC Bacon Ltd [1990] BCLC 324.

 

Re Exchange Travel (Holdings) Ltd [1996] 2 BCLC 524

Re Agriplant Services Ltd [1997] 2 BCLC 598

 

 

4.  Fraudulent Trading s.2l3 I.A. 1986

 

If in the course of winding up it appears that any business of the company has been carried on with intent to defraud creditors of the company, or for any fraudulent purpose, then the court, on the application of the liquidator, can make an order that any persons who were knowingly parties to the fraud shall be liable to contribute personally to the company's assets to the extent the court thinks proper.  This section applies to any person, not just directors.  It is necessary to prove "actual dishonesty ... involving real moral blame" Re Patrick & Lyon [l933].  It is sufficient if directors allow the company to incur credit at a time when it is clear that the company will never be able to pay its creditors.  It may also be sufficient to establish dishonesty and fraud to allow the company to take credit when the company is unable to meet all its liabilities as they fall due - see R v Grantham [1984].

 

Fraudulent trading by a director is grounds for a disqualification order against a director under the Company Directors Disqualification Act l986.

 

5.  Wrongful Trading  s.2l4 I.A. 1986

 

In the course of winding up, on application by the liquidator, the court may declare that a director of an insolvent company is personally liable to contribute to the company's assets.  This section applies if a company has gone into insolvent liquidation and, before the start of the liquidation, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.  Plus that the director failed to take every step he ought to have taken to minimise the potential loss to the company's creditors, (assuming the director to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation).  For the purposes of this provision, the facts which a director ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both - a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and b) the general knowledge, skill and experience that that director has.  Re Produce Marketing Consortium Ltd [l989] BCLC 520. 

 

Wrongful trading is also grounds for a disqualification order against a director.  Where a liquidator has a choice of proceeding for fraudulent trading or wrongful trading, it is likely that the choice will be wrongful trading since fraudulent trading involves a greater burden of proof.

 

6. Transactions Defrauding Creditors - s423-425 Insolvency Act 1986

 

Section 423 has broad application. There is no requirement that the company is insolvent, in liquidation or administration. A transaction can be set aside under section 423 of the IA 1986 if:

 

• The transaction is entered into at an undervalue (as under section 238, IA 1986, see Transactions at an undervalue) and
• The purpose of the transaction was to put assets beyond the reach of a person who is making or may make a claim against the company, or to otherwise prejudice a person's interests in relation to such a claim.

 

 

Position of directors/shareholders in insolvency

 

As well as being potentially liable for fraudulent or wrongful trading as outlined above, individuals involved in a company may be liable in other circumstances too in the following circumstances:

 

1. Guarantees -  any director or shareholder who has guaranteed the debts of the company will be personally liable to repay these to the extent the company is unable to. 
2. Unlawful dividends -  The payment of a dividend must be made out of profits available for this purpose (s. 830, CA 2006). S. 847(2), CA 2006 requires any member to repay a distribution which he “knows or has reasonable grounds for believing” to be unlawful. In addition, if a dividend is made unlawfully, the directors will normally be personally liable to the company, since they will have recommended and permitted payment of the dividend in breach of their duty as trustees of the company’s assets (e.g. Bairstow v The Queen’s Moat Houses plc [2001]). 

 

As noted above shareholders are repaid last in the list of creditors. In an insolvency situation this means they are likely to receive nothing.