Company Law All Notes

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Lecture notes - all lectures
Company Law (King's College London)
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Companies
Sunday, October 4, 2015 1:16 PM
Debate
- Ltd good for shareholders, but why government? Bad for creditors for sure
○ Facilitate investment by general public
○ Facilitate public securities market - investor does not have to worry about personal wealth of
fellow investors
 Values of individual's shares would fluctuate in a joint/severally liable relationship
based on fellow investors wealth
○ Encourages diversification
○ But why private ltds?
 Encourages small businesses, dissuades separate registration scheme (Company Law
Review)
 Salomon
Important legislation
- S.16 Companies Act
○ Establishes company
Types of companies
- Company limited by shares
○ Normal, default company members liability limited by share contribution
 LLP allows shares to be of equal value
○ Liability of members limited by nominal value of shares
○ Like a guarantor
- Company limited by guarantee

○ Guarantee to pay certain amount on liquidation by shareholders
○ Used for non-business purposes: most charities
 People want separate legal entity, doesn't want to inefficiency
Unlimited company
- Rare, but sometimes ok for tax reasons
- Liability of members not limited at all
 S.74 Insolvency Act
- Unincorporated associations
- Officers all liable unless terms of association limits liability
- Partnerships
- All liable to each other - partners one firm policy
 Unless creditor knows of limitation
- Cannot limit partnership by changing terms - can only do so in respect to creditors
Concepts of ‘owner shielding’ and ‘entity shielding’[2]
- Owner shielding
 "owner" signified by economist as shareholder
 Similar to limited liability
- Entity shielding
 Doctrine of privity
 Just as member not directly liable to creditor, the corporation is shielded from any liability
the shareholder incurred
 But shareholders have liability to contribute to company-right of recourse
What can creditors do?

- Personal guarantees by directors
- Higher interest rates
- Security over company's assets

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- Security over company's assets

Government actions:
- Public disclosure of finances, wrongful trading all help creditors assess limited liability companies
Common person
- S.112 Companies Act
○ Person can be shareholder in another company unless contrary intention
 Pharmaceuticals Companies
□ Contrary intention: company cannot sit exam and be qualified chemist
 "natural persons"
 "individuals" = insider dealing in Criminal Act
- Interpretation Act 1978
○ Unless contrary intention appears, persons = persons corporate
- LPA 1925:
○ All instruments, unless context requires, persons require
Separate legal entity consequences:

- Macaura v Northern Assurance
○ Owned company, sold it and then owned shares
○ Had insurance for own property, when company property burned down tried to claim
insurance
 Insurance did not cover the burned assets because only director is insured
- Lee v Lee's Air Farming
○ As shareholder (director) of company, one can own as well as be an employee of the
company
○ Wife can claim indemnities from company by defining dead husband as "employee"
- Owning substantial shares in a company does not mean you own it

○ Gramophone and Typewriter
 German subsidiary with HQ in London for tax purposes that owned 99% shares.
 English company paid tax on dividends gotten from Germany company but not profits
 IRS wanted to tax all German Co. profits
□ Court: no, separate legal entities
○ Lornho v Shell Petroleum
 Sought discovery of certain documents who were in the "power" of oil companies to
disclose
 Oil companies were parents, subsidiaries had assets
 On facts subsidiary operated independently so no "power"
□ However: Shaw LJ: if subsidiary wholly dependent, possible to be under "power"
of parent company
Limited Liability
- Company does not have limited liability
- Started with Salomon
- Authority: S.74 Insolvency Act
○ 1). Starting point all liable
○ 2d. Company limited by shares: no contribution is needed beyond amount owed by shares
 Section 3: what is a company limited

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Corporate Veil
Thursday, 1 October 2015 09:13
When to hold shareholders liable?

- Historical confusion regarding "piercing"
- Prest v Petrodel
○ Statute: if one spouse is entitled to property, then in matrimonial dispute the court can award it to another
 Husband was sole holder of several offshore company with several assets
 Ex-wife claimed these assets When will the court go behind/through a company
 Question: was husband "entitled" to these assets as shareholder? - Evasion principle (fraud)
□ Husband: no, assets owned by company (separate legal person, all he has are shares - Concealment
□ Wife: why didn't she just argue for the shares…stupid going for assets - Trust (Prest)
 Argued husband was "entitled to assets" - Agency
○ 1st instance - Single economic unit
 Can't pierce veil, but matrimonial = more jurisdiction ○ only if by interpretation by statute
○ CoA ○ Very limited application
 No wider discretion to pierce veil in matrimonial cases ○ Not standalone
○ UKSC - Attribution of characteristics (nationality of shareholders)
 Prest - Tort
□ Company is created by amalgam of both Companies Act and Salomon ○ Chandler v Cape
 Lord Sumption:  Parent company owed direct duty of care to employees of subsidiary
□ define "piercing corporate veil":
 Mainly looking at it from fraud
 Disregarding the separate personality of the company
 Where a person who owns a company is identified with company by virtue of that control
 Pierce = treating individuals and companies as the same
 Lift = looking behind the two
□ "concealment principle" - not real piercing
 Separate identity of company remains intact
 Look behind veil to see secrets going on behind the company
□ "evasion principle" - real piercing
 People trying to evade legal liability by erecting a company
 Judge can ignore this when the company is used to evade and only when evade
 "broader principle of English law"
◊ Dislikes dishonesty
 Contrast: Nothing wrong in creating a company and then causing it to incur liability rather than
yourself
◊ Creation of company to incur future liabilities OK
◊ Ltd. Is a warning to those dealing with company that its shareholders do not have to pay its debts
□ Piercing: where a person is controlling/owning company is said to be of the same as the company due to
that relationship
 Lord Neuberger
□ Guildford motor / Lipman were supposedly piercing, but he doesn't think it was actually piercing
□ Guildford = considered to be agent, not piercing
□ If one can go a route other than piercing, then not piercing
 Lord Walker
□ "not sure if there's doctrine of piercing the veil"
 Others not sure this is what's happening
○ On facts:
 Company was not set up to evade existing obligation to wife
□ Courts therefore did not pierce veil
 Husband beneficially entitled to the company's assets
□ Trust held
□ Sufficient for causes of matrimonial act
○ Limited judgement
 When can corporate veil be lifted?
□ Limited to the evasion principle
○ Wideness of jurisdiction to lift veil
 L Clarke:
□ Hesitant to limit situations where corporate veil piercing is appropriate
 Connoway
□ "Court should draw back corporate veil when common sense and justice demands it"
□ Discretion is wide
Evasion principle:
- Gilford Motor v Horn S213-214 Insolvency act
□ C employed D
 Contract: D could not solicit C's customers for a given period should he leave employment
□ D was advised by solicitors to create a company to compete with C
 D's company shareholder was wife, but D was director
 C sought injunction
□ D was individually restricted from undertaking competing business
 Sought to evade restriction by creating company to do something he contractually couldn't.
□ SCoA
 Company was used as a device to mask activities of D that breached covenant
□ Not reasoning, just using metaphor
- Jones v Lipman
□ Entered into contract to convey land to Jones
 Lipman did not want to part with land changed his mind
□ Lipman created company and transferred money to land
 Wants to prevent Jones from specific performance
□ CoA
 Pierced veil: give land back to Jones
- Baker (post Prest)
□ Bankrupt acquires after bankruptcy
 Trustee can ask to pay into estate to pay off existing creditors
 But bankrupt ran companies
□ CoA
 Can trustee take company assets?
□ Company interposed to enable Baker to frustrate/evade his existing legal obligations
□ Therefore can pierce
 Freezing injunction against companies to stop them from dissipating the money
Concealment principle
- Prest: husband's companies were considered existing, but trustees for his assets
- Horn
□ Couldn't solicit customers "either solely or jointly with or as agent for any other person"
□ Company exists as a separate legal entity, but if you look behind to see
 It is used by horn to carry on business
 Did not matter whether business belonged to him or the company, he was carrying it on!
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 Did not matter whether business belonged to him or the company, he was carrying it on!
 Company using company to conceal fact that he was soliciting customers
- Lipman
□ Owned and controlled company: so was in a position to transfer land to Jones
□ Look at facts: company controlled by him
- Gencor v Dalby
□ D was director of C company
□ Directors are fiduciaries and owe obligations to companies
 3rd party paid bribe to a company that director controlled "Bernsted"
□ Company was "alter ego" through which Dalby enjoyed his secret project
 Disregarding separate entity - looks like a piercing case on the wording
□ Separate identity was accepted, but that the company was liable to account b/c it was receiving a profit on director's
account
 Concealment case
*anything that talks about piercing before Prest v Petrodel:
Attribution cases
- Not mentioned in Prest
- Example of concealment?
□ Separate legal identity not challenged
□ Sometimes rights/obligations that arise depends on characteristic of person
 Discovering characteristics of company
- Daimler Co Ltd v. Continental Tyre & Rubber Co Ltd
□ Legislation in question: Enemy alien cannot invoke jurisdiction of courts at time of war
 Enemy alien: "someone who voluntarily trades/resides with enemy"
□ Respondent:
 Incorporated in England, all but 1 share was held by person resident in Germany
 All directors resident in Germany
 1 other share held by English resident (company secretary)
□ Appellant (being sued for default)
 That company was enemy alien, so could not sue them
□ Judgement
 CoA
□ Company English, Salomon cited: identity of shareholders/directors irrelevant
 Broad view of Salomon: did not say ignore directors/shares
◊ Only that they do not need to contribute when company goes bust
 HL
□ Company was separate legal entity
 Also not agent of shareholders
□ But: doesn't mean one cannot look behind the company to define its characteristics
 Test for human being: do they trade with others?
 Court has to find equivalent test for an artificial person
□ Essential test: who is company controlled by?
 Makes sense because legislation use to prevent enemies from taking advantage
 Trading With Enemy Act 1932
□ Confirms HL approach: company "controlled" by enemy not allowed to trade
- De Beers
□ Residency issue:
□ Look at where real control of company is
 Directors met in UK and made corporate decisions here
 Although company was incorporated in South Africa
- Where law is legislated for humans that predicate certain characteristics
□ Look at the characteristics of those who control the company
Single Economic Unit

- Conglomerates own shares of companies
□ Need group accounts: draw up accounts of whole group
 If single economic unit, then must be single legal unit?
□ If separate legal unit is ignored, then piercing the veil!
- Adams v Cape Industries
□ Group of companies that held shares in each other
□ Cape = holding company based in Illinois
 Whether English companies were present in Illinois
 Depends on whether they carried on activities there
□ On facts:
 Some companies did operate in Illinois, but not these particular English companies
 Plaintiffs: "corporate veil should be lifted and activities of Illinois companies should be considered part of Cape"
□ Should regard group as single unit
 Defendants: "we are all separate entities, so look at where we ourselves carried business -not others"
□ Judgement:
 Slade:
 Issue turns on particular wording of specific statute
□ If one has statute/contract/document, matter of interpretation it might be obvious that drafter meant for a
group of companies to be regarded as one entity
□ No general principle that a group should be regarded as one single unit
 Depends on wording of constitution!
 Future liability is fine: it's what companies are for. Erection to avoid existing liability is wrong
- Statute interpretation
□ DHN Food Distributors v. Tower Hamlets LBC
 Statute: if person carried on business on land, he got compensation for price of land and disturbance of business
 DHN owned all shares in Broans, but Broans owned land
□ DHN bought shares in Broans rather than buying land itself for tax reasons
 Tower Hamlets: do not think they owned land so gave minimal compensation for disturbance
□ L Denning: in a group context we could ignore separate legal entities but can look at the overall economic
group
 Way too wide!
□ Woolfson
 Did not follow DHN: turning on interpretation of particular statute
 DHN not relevant elsewhere
□ City Branch Group
 Interpretation of phrase "company affairs"
- Contract interpretation
□ Beckette v Hall
 Hall (D) had contract of employment with Beckette (C), D cannot solicit D's clients
 Beckette sought injunction for breach of contract with C
□ Client of C does not just mean parent company, but its subsidiaries as well
- Ordinary principles of law
□ Chandler v Cape
 Parent company owed duty of care directly to employees of subsidiary
- Don't get carried away: limited application
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Agency
- Arises out of contract: must find contract between principle and agent
□ Agency sometimes not sufficient to lift veil
 Key factor: authority to bind: can be on facts or legal
- Salomon v A Salomon
□ No agency agreement here
□ However: clear that if such an agreement can be deduced and company can be said to be agent
 Then company/shareholder subject to all obligations of agent/principal
- FG Film
□ Facts
 FG in the business of making films
 Advantageous to have film registered as British film
 FG (Films) Ltd incorporated company in UK issued 1 pound shares, 90 of shares owned by FG president, 10
owned in the UK
□ No place of business and no staff
□ Applied to register film made by US corporation
□ Court
 FG Ltd (english company) acted as agent of FG inc, so it had not made the film
 Not considered to fall under statute
 Finding of agency
□ No assets
□ Everything did was agent of FC Inc
 Express agency: parent appoints subsidiary as agent to sell tires on its behalf
Post-Prest Interpretations of Pre-Prest Caselaw

- Darby v Brougham
□ Promoter of company is regarded as fiduciary
 Mustn't make secret profit off asset it sells to it
□ Decided to promote company "Welsh Slate Quarries Ltd"
 Instead of acting as promoters themselves (their past was well known)
 Incorporated a company to promote
□ Darby was only shareholder
 All contracts = city of london as promoter, registered Welsh Slate
□ City of London promoter bought license for 3.5k
 Sold to slate company for 18k pounds, fraud
 Money rolled in to City of London Corp, but
□ Welsh Slate company goes bust and liquidator claims Darby as liable
 Courts:
□ Investment was mere agent of Darby, piercing the veil
□ Profit was made was directly/indirectly through agency of corporation - promotor on facts was agent of Darby,
Darby made secret profit
 Must disgorge profits
□ Agent concealment?
 D was under restriction not to make secret profit, could be evasion
 Agency concealed real people behind veil, concealment
Concealment or Evasion?
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Statutory Lifting of Veil

Friday, 16 October 2015 12:12
Companies Act (Company accounts)

Insolvency
Fraudulent Trading
• Augustus Barnet
○ English subsidiary of spanish company
○ Spanish company gave english company 1m per year, English company went bankrupt
 Creditors wanted to sue Spanish company
○ Facts
 Spanish parent company was not fraudulent - only said it would support, then
changed its mind
• Produce marketing
○ S.213: must have real moral blame/dishonesty
• Insolvency Act
○ S.213
 In course of winding up
 Fraudulent behavior in course of running company
 knowing parties liable
 Can catch directors/shareholders
○ Broad: catches everyone - not even involved in
○ Narrow: dishonesty hard to find
Wrongful Trading (S.214)

- Elements
○ Course of winding up (insolvent liquidation)
 Liquidation: failure only!
 Mere insolvency not enough
○ Director knowledge:
 No reasonable prospect that company would avoid failure
□ 214(4)
 Objective reasonable test
 General knowledge that can be reasonably expected from a director
◊ Produce market case
 Someone in a company of that nature and size
 Experience also taken into account
 General knowledge that you know
□ Difficult to find when "reasonable prospect"
 Kudos case
◊ :don't expect companies to be clairvoyant
○ Defense: if director has taken all steps to minimize loss to creditors
○ How do you catch shareholders if case explicitly refers to directors
 S214.7: shadow directors also liable, definition in S.251
 S.251 Companies Act: Shadow Directors
□ People who direct the actions of the directors
□ Hydrodam
 Shadow director is someone who lurks in shadows: puppeteer
◊ Wrong!
□ Devril
 Sets out principles for shadow direct
◊ No reference in 214 for anyone lurking in the shadows
◊ Need someone who is accustomed to act in someone's
directions

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Organs
Thursday, 8 October 2015 17:28
Organs of companies
- Members in general meetings
○ Subscribers who set up company/others who join
○ Can act collectively
- Directors (board)
○ Smaller group appointed by the members
- When organs act, they act as company (not as agents)
○ Organ can appoint agents or act as principal
 Agent: CEO: when they act, act in agency relationship with company
○ Director
How do these organs get power?

- Constitution
○ Provides for decision making by these organs
○ Companies Act S.17
 Company's articles of association = constitution
○ S.29: any special resolution
○ S.257: some other things relating to director's duties: resolution of board itself
- Articles
○ Memorandum of association
 Less important after 2006 Act
□ Used to contain more information: nature of company used to be stated
 Document that subscribers sign/register to create the company
 S.8
□ Memorandum stating:
 Subscribers want to create company
 Subscribers become members (members are people who take at least 1 share each)
Articles of Association (regulations)

- How to find out
○ Find in public register
○ Might be out of date
○ Courts may alter company
 However, this should be limited: may mislead public
- Crucial constitutional argument
○ S.18
 Company must have articles of associations prescribing regulations for the company
 (3)
□ Articles must be contained in single document
○ S.21
 Unless articles registered, model articles apply
 Subscribers have a choice to not register (in which default articles apply)
- Deal with internal and external
- Model articles (default)
○ Used to be schedules in company acts (tables)
○ Different for different type of company
 Table for Company Limited by Shares relevant
□ Table B (Joint Stock Companies Act 1856)
□ Table A (subsequent Companies Act)
□ 1985 - models should not be in companies acts
 Since then model articles set out in statutory instrument under act, power to secretary of
state
 Companies Act 2006 (S.19-20)
- Model articles for private companies limited by shares: Schedule 1
- Model articles for private companies limited by guarantee: Schedule 2
- Model articles for public companies limited by shares: Schedule 3
 s.20(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’
□ 1990 company: 1985 act applicable
□ 1980 company: 1948 act applicable
○ Regulation of internal affairs left to company itself
 Can do what they want, or use model articles
- Ascertaining articles of registered company
○ S.20: model articles apply unless excluded by registered articles (in part or whole)
○ Registration
 Determining articles may be difficult: how much does model and articles work together?
□ Forcing all articles in one place is used to solve this
 Easily discoverable by the public
- Typical contents of model articles
○ Sch.1 (limited by shares)
 Part 1: Organs:
□ Art. 3: designates board of directors as decision making organ
 Lots of power for efficiency
□ Art. 4: shareholders reserve power
 What shareholders can do to as company
 Part 2: Directors
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 Part 2: Directors
□ Directors pay, election, etc.
 Part 3: Shares and Distributions
□ Dividends to shareholders of profits
□ Transfers of shares, sale of shares
 Part 4: general meeting
- Enforcement of articles
○ S.33
 the provisions of a company’s constitution, when registered, bind the company and its
members to the same extent as if there were covenants, signed and sealed on the part of the
company and of each member, to observe those provisions
 Why so obscure?
□ Historical: predecessor to registered company (1844) was deed of settlement companies
 Trust creation
□ Provision came from original wording of deed of settlement
 "covenant" used because trust: company no longer trust
 Predecessor
□ 1856, 1862, 1908, etc.
 Old case law refers to previous provisions (don’t be confused!)
○ Case law interpreting S.33
 Articles create a "contract" between company and member so they can enforce rights against each
other
□ Member against company
 Wood v Odessa
◊ Directors need to pay out dividends
◊ Facts:
 Want to issue debentures instead: handed out pieces of paper rather than
cash
 Shareholder argued that he was entitled to dividends, not IOUs
– Wanted injunction to stop company from breaching its articles
◊ Court:
 Granted on basis of S.33
 Matter of construction: title did entitle him to dividend once
 There was a "contract" between company and shareholders
– Obiter: also created contract between each individual shareholder and
every other shareholder
□ Company v Member
 Hickman v Kent & Marsh Sheep Breeders
◊ Provision: if any dispute between members of association, settled by arbitration
 Arbitration Act: if parties have submitted to arbitration by agreement, then
court must stay any proceedings in breach of agreement
 Hickman had dispute
 Was this an agreement to arbitrate under Arbitration Act?
◊ Court:
 Yes, articles created an "agreement" under Arbitration Act
 Article created contract inter se between members in their capacity as
shareholders
– E.g directors pay provision, shareholder cannot enforce this provision
even if he is director
 Member can enforce against another member
– Most times provisions only to do with how directors function
□ Member v member
 Rayfield v Hands
◊ Articles entitled member wished to transfer shares to compel directors at fair value
◊ Rayfield wanted out - asked directors to buy shares
 Directors refused
 Rayfield went to court to enforce court to buy shares
◊ 1st instance
 Court said yes, can enforce against directors
 Borland Trustee v Steeler
◊ Article entitled directors to purchase shares of any shareholder
 Makes shareholder vulnerable in company
◊ Judge assumed this article was enforceable, did not extend
○ Conflicting decisions regarding S. 33
 Juridical controversy
□ Pre-hickman
 Some provisions in articles were not binding on company
 Pritchard's Case
◊ Facts
 Were shares "fully paid up"
 A contract in writing
 Articles said original members would transfer land for shares
◊ Court of Appeal :
 Articles were simply deeds of partnership by which shareholders agree inter
se - OK with members agreeing among themselves
 Did not believe company could be party to such contracts
 Did not confer any rights onto company
 Eley v Positive Government Securities
◊ Outsiders cannot enforce rights
◊ Eley was solicitor to company: company then ignored provision then appointed
someone else as solicitor
 Eley had become member of company
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 Eley had become member of company

 Eley sued for breach of contract
◊ Articles didn’t give Eley any rights against company
 Beckwith case
◊ Director given certain rights to remuneration by certain article, could he enforce
against company?
 Articles viewed as only creating contract between shareholders inter se
 Brown v Trinidad
◊ Director seeking to enforce an article
 Dismissed and wants to enforce right to be director
◊ Court said no
□ Hickman Principle
 First instance:
◊ Conflicting: Wood v Odessa and Pritchard's Case etc.
◊ S.33 seems to bind company with members
◊ Introduced idea
 S.33 only applied to rights "qua member" : only provisions relating to
membership were enforceable against the company
– But how to gloss this through section?
 Reconciled cases, but no particular reason
□ Post-hickman
 Beatty v Beatty
◊ Explicitly approved Hickman
◊ Company suing director for sums director owed
◊ Articles: arbitration clause similar to Hickman
 Director wanted to rely on this
◊ 1st instance:
 Clause as a matter of construction didn't apply to disputes of a kind (between
director and company)
 Director could not invoke
◊ Court of Appeal
 He was trying to invoke a right qua director
 Contractual force given only to members about their membership status, here
it was applying it qua member
 Bratton Seymour v Oxborough
◊ Company management for building, shares held by flat owners
◊ LJ Stein:
 Liked Hickman principle and is good law
 Rayfield v Hans
◊ Directors required to purchase shares of shareholders
◊ 1st instance
 To be enforceable, right had to relate to members inter se and not to member
as such/director as such
 Here shareholder cannot impose right against directors
– Here judge accepting directors as members?
– Not being sued as director
 Rogue cases not applying Hickman
□ Poulbrough v Richmond Consolidated Mines
 Article: directors had to hold shares to nominal value of 500 shares
 Poubrough used to be director and had 500 shares
◊ Then equitably mortgaged shares: remained legal owner but executed a charge to
creditor
◊ Other directors did not allow him, and said he no longer satisfied qualification of
holding 500 shares
 Poubrough went for injunction
 Court
◊ Director enforcing rights against director
◊ Jessle MR
 No problem seeing director enforcing articles
 Was still legal owner of 500 shares
 Director had right by constitution by company to be present at management
 Clearly thought constitution gave rights to people in rights of capacity of not
just pure member
□ Queen and Axtens v Salmon
 Gave director right to veto under certain conditions
◊ Director vetoed board of director decision
◊ Other directors ignored veto and went ahead
 CoA
◊ Salmon's rights to veto was enforceable
□ Richmond Gate case
 Quantum meruit claim: only succeed if no contract for remuneration
 Claim dismissed b/c articles made provision for remuneration for directors
 Implied that articles created contractual right
○ In practice: not a big issue
 Even if Hickman applies, outsider rights (rights not qua member that can't be enforced) usually
enforceable via an implied extrinsic contract
□ No need to rely on S.33
□ Ex Parte Beckwith
 Article fixed director for 1000 pounds per annum
 Company went into liquidation without paying directors, director claimed in liquidation
for remuneration
Judge: S.33 did not create rights between company and director
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 Judge: S.33 did not create rights between company and director
◊ However: director had implied extrinsic contract that incorporated the article as a
term
 Ordinary contract of employment between director and contract
 Article is implied in this contract
○ Mere irregularity (internal management) cases
 Breaches of articles that concern procedure to be adopted in general meeting
 Limited S.33
□ McDougal v Gardner S.33 limitations
 General meeting: chairman, contrary to articles, refused to hold a poll although requested - Outsiders
to do so by shareholders - Rights must be qua members
◊ If a shareholder unhappy with result due to unrepresented voting power, then they ○ Cases when courts enforce
can demand a poll, then can take into account strength of each shareholder shareholder rights given to him
◊ Shareholder goes to court not as director
 CoA  Justified: in certain
◊ Irregularity principle: court won't interfere in such "mere irregularities" relationships between
□ Pender v Lushington shareholders, no
 General meeting voting case difference between
◊ 1 vote per shareholder (not per share) was article here shareholder rights qua
◊ Guy gave shares to nominees who would vote as him member/as director
◊ Chairman refused to accept nominee's votes as they were just shareholders' shares  Small companies: rights
 CoA all tied up together
- Personal rights
◊ Right to vote was right to property belonging to shareholders' interest
○ Procedural matters cannot be
 Court enforces the property right: each shareholder had a vote
enforced
 Agree that there should be limitations to shareholder rights
○ Company should sue because it
◊ litigation to trivial things are undesirable (bog down company)
is the one being damaged:
□ Distinction between relational contracts/discrete contracts
majority shareholders should
 Discrete contract:
sue on behalf of company, not
◊ buying coffee, -one off transactions
minority on behalf of
◊ Fair enough that rights and obligations need to be upheld
themselves
 Relational contracts
◊ Contracts that govern long-term relationship between parties
◊ Rules of club/article of association
◊ View 1
 Need more nuanced approach to breaches of it
– Law ought to support the long-term efforts
– Litigation upsets this long-term relationship
◊ View 2
 Pender v Lushington is right one
– Should be able to complain if there are procedural difficulties
– Law Commission: recommended overturning of Hickman
○ S.33 summary
 Articles enforceable by members against company, company against members, and members inter se
□ 2 limitations
 Hickman principle: articles only bind members qua members (but sometimes can enforce
non-member rights through other means)
 Mcdougal v Gardner: mere irregularities are unenforceable (but Pender v Lushington)
Critique of contractual analysis

- S.33 says "contract" is created - not straightforward contract
○ Why is it not like a contract?
 Some rights are not enforceable here (Hickman/Irregularity principle)
 Reflective loss principle: to be considered in shareholder litigation
□ Limits shareholders rights
 Relationship usually alterable by special majority in general meeting
□ Articles can be altered
□ Ordinary rights cannot be altered in normal contract: but here minority can have rights altered
by majority
 Articles are public document
 Glosses on "members"
□ No room for implied terms
 Bratton Seymour v Oxborough
◊ Management company formed and each flat owner gets shares
◊ Articles said nothing about contributing to upkeep of common parts
 One tenant argued that there was implied article that flat owners were to
contribute to upkeep
 No implied term because it's publicly registered and would be prejudicial to
3rd parties
 Equitable Life
◊ Court draws distinction between implying terms and interpreting terms
◊ Articles gave directors wide discretion to pay bonuses
 Could they do what they like? Or literally as much? Argued for limitations
 HL: L Steyn
– Distinction between interpreting an article and implying terms into
articles
– Here was matter of interpretation that there were limits to terms
– Denied that this was implying any terms
 No rectification remedy
 Excluded from UCTA
 Enforcement
Distributing
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Distributing
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Alteration and Shareholder Agreements

Tuesday, 20 October 2015 16:43
Background
- Agreements historically alterable by 75% shareholder agreement
○ Different than normal contract unanimity rule
○ But if shareholders give contract rights, they can be waived by others
 Minority oppression
- Law responding to minority oppression
○ S.25: not liable to pay more from lateration to company
○ Class rights
- Memorandum
○ Could not be changed: but can add provisions
2006
- Memorandum no longer constitutional document
- Articles can be altered by 75% majority but entrenchment of provisions in articles now
possible
Alteration
- S.21.1: company may amend articles by special resolution
○ S.283: definition of "special resolution"
 Show of hands
 On poll
 Written resolution
Restrictions
- Statutory
- Common Law
- Contracts/agreements
Entrenchment
- Alteration history
○ Historically memorandum could have unalterable (entrenched)
○ Hence
 Provision in articles themselves could not render articles unalterable
□ Walker v London Tramways
 Subscribers declared certain articles to be unalterable
 Wanted to change them subsequently, could do so
 Such statements ineffective b/c sought to oust statutory power
□ Punt v Symons
 Company entered into contract to not alter certain article
◊ Article gave certain people power to appoint directors
 Company cannot contract out its right to alter articles
□ However:
□ Members can agree not to vote to change
 Russel v Northern Bank
◊ Everyone needed to consent before new shares are issued
◊ Courts: shareholders were bound to agreement
- Statutory entrenchment
○ CA 2006 S.22
 Allows entrenchment for articles
□ 22.3.a.
Unanimity rule unaffected

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 Unanimity rule unaffected

 Members can always vote to change article
 "articles may contain provisions that can only be altered if conditions are complied
with that are more restrictive than those of a special resolution"
□ Initial inclusion must be unanimous
 S.3/S.4
□ Without prejudice to other mode of amendment
 Unanimous agreement
 Court
□ Only derogation from s.21
 S/23 formalities
○ S.25
 If altering articles to increase obligations on shareholders, it is not binding on
shareholder who does not consent
○ S.630
 Class Right to vote cannot be altered without consent of 75% of that class affected
○ No case law on this yet
 So what do you need?
□ More restrictive than special resolution (require 90%)
□ Russell Case: consent of specified person is needed for the change
□ Completed entrenchment: reiterate common law: articles cannot be
changed unless unanimity
Prevention of minority oppression when articles are altered

- Usually 25% are at mercy of 75% majority
- Right to vote is property right
○ Basic
 Therefore in principle member can deal with that right or exercise it as they wish
 Plenty of authority to back this up
○ Lenders can fetter voting rights by contract
 Puddephatt v Leith
□ Shareholder excercised legal mortgaged shares to Leith
 Legal title to leith, who was put on title as shareholder
 Equity of redemption on Puddephatt (for redemption of loan)
□ As part of legal mortgage, leith agreed to vote as Puddephatt
□ J Seargent
 Injunction to forth Leith to vote in way Puddephat required
 Russell v Northern Bank
□ Members can do what they want
○ Members can exercise votes as they please, even in their self-interest
 Northern Counties v Jackson 1974
□ CoA:
 property right: members can exercise as they please
 Shareholder in principle not under any fiduciary obligations as to how
they vote
□ On facts
 Jackson gave undertaking to county that they that it would use its best
endeavors to issue shares to painters
◊ Such issue of shares needed consent of shareholders in general
meeting
◊ Directors of company were also shareholders
 Made it known that they weren't going to vote to issue
more shares
 County wanted to force directors to vote in capacity as shareholders
◊ Court: entitled to vote as they liked
◊ Members themselves not bound by undertaking: company did
 Strong case: directors when acting as directors have fiduciary duties
◊ However, directors here were acting as shareholders
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◊ However, directors here were acting as shareholders

 Majority can vote in their self interest - no need to take into account interest of
minority!
- Limitation of majority's rights
○ "Bona fide in interests of company as a whole"
 General principle applicable to power conferred on majority to bind minority
□ S.33: articles bind shareholders
□ The "binding" is key
 Assenagon Asset Mangement v Irish Bank
□ Referred to articles case law
○ Constraint of majority if it results in minority oppression
 Most prevalent in article altering
 Early case law
□ Allen v Gold Reefs 1900
 Relevant article: if shareholder owed company money, company had a
lien over "all shares (not being fully paid) held by member"
 75% of members voted to delete part in brackets
◊ Wanted security interest over all shares (whether paid or fully
paid)
◊ Only 1 minority shareholder held fully-paid shares
 Did not want company to have a charge over his shares
 Lost the vote
 Minority went to court to challenge alteration
 CoA
◊ Freedom of majority of shareholder not unfettered when it
came to a vote that affected right of others
◊ MR Lindly:
 Power of alteration subject to general principles of law
and equity
 Test: It must be exercised not only in manner required by
law but also bona fide in benefit of company as a whole
 Burden on challenge to prove it's not bona fide in benefit
of company as a whole
 On facts: majority did act bona fide in company's right
 S.33 implications
◊ Lindley: Effect is unclear
 Effect of change on extraneous contract
◊ This does not invalidate resolution to articles
 Bona fide test
□ Bona fide: good faith: subjective test
 For members to decide whether it's best for the company
□ Benefit of company as whole: objective test
 Court decides whether it's for benefit of company
□ Allen v Gold Reef: satisfied both tests
 Good for company b/c increased security objectively
 Members genuinely thought it was a good deal
□ Mostly satisfied in every case
 Except:
◊ Where alterations are made to facilitate buyout of minority
 Leads to minority oppression b/c it ejects members
without consent
 Majority wants complete control for buyout
 Sensitive scenario
 Borland's Trustee v Steele
– No problem if article allowing overuling of minority
was in here in the beginning: only matters if
alteraction
– Facts: minority at outset buy into company knowing
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– Facts: minority at outset buy into company knowing

that risk
 Brown v Abrasive Wheel Co 1919
◊ Injunction given to stop alteration
◊ Court applied objective approach
 Can't be good for company to include power of buyout in
articles
 b/c no one would invest in company knowing they could
be ousted at any time
 Sidebottom v Kershaw 1920
◊ Facts
 Articles altered to allow directors to buy out "at a fair
price" the shareholding of any member who competed
with the company's business
 Article directed at plaintiff minority shareholders who
were involved in competing business which annoyed other
shareholders
◊ CoA
 Seems to apply objective test: very much to benefit to
company to get rid of members who are involved in
competition
 Then applies subjective test: alteration should be decided
by businessmen who understand nature of business and
competition
 Both approaches lead to same conclusion
• If motive had been malicious, the change would cease to
be "bona fide"
– However, no evidence on facts
– Seem to apply subjective test
 Dafen Timplate v Llanelli Steel
◊ Majority wanted to introduce large power to exclude minority
• Could require any member to transfer shares at fair value
to approved transferee
◊ 1st instance
• Applied objective approach: rejected subjective approach
• Question is whether in fact the alteration is in benefit of
company
• Objective approach only in cases of expropriation: see
Arden Cinemans
 Australia
◊ Gambotto approach
• Abandoned bona fide company test b/c imprecise
• Objective test: court will interfere when alteration beyond
any contemplation of articles or are oppressive
◊ Constable v Executive Connections
• Rejected Gambotto approach, approved UK objective test
□ Alteration in other contexts besides buyouts
 Dismissal of directors: Shuttleworth v Cox
◊ Facts
• Articles gave 6 grounds on which director could be
dismissed
– Other directors want to dismiss but does not want
to use one of those grounds
– Altered articles to include 7th ground for dismissal
which they hoped to use
 "if a director is requested in writing by all
other directors in writing, then he must go"
◊ CoA
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◊ CoA
• Applied subjective test: only question is whether or not
the shareholders think their alteration is for the benefit of
company
– L Banks: If overly oppressive that no reasonable man
can consider it for the benefit for company, or if
capable of being of benefit to company then might
not be bona fide
– Malice
• Rejected objective test: not for judge to decide whether
it's for the best interest
 Greenbalgh v Ardene cinemas 1951
◊ Court
• Used subjective test
– If decision was discriminatory, then challenge will
succeed - could be getting to oppressive, much like L
Banks' qualificaiton
• Test: put court as a hypothetical shareholder and ask if
this alteration would be good for him, and unfair for him
– This is approach criticised: no such thing as universal
shareholder
•
 Citco Banking v Pussers 2007
◊ L Hoffman:
• Alteration leading to expropriation: compulsory forcing
minority to sell shares to majority
– Minority could be oppressed
• Arden cinemans hypothetical test
– Could work where benefit of company is irrelevant
(redistribution of dividend payments doesn't affect
the company), shareholders are affected however:
so use ardene case?
• Restated that shareholders can vote as they fancy
• Applied subjective test in Shuttleworth
– Shareholders honestly intend to exercise powers
• Rejected objective test in Daffen Tinplate
◊ Clarity achieved: subjective test
 Unfair prejudice another possible route: pt 30 Cos Act
○ Alteration of articles: variation of class rights
 Cos Act 1980 , rpt in 2006
□ Introduced model articles that prohibited restriction of class rights
Shareholder Agreements
- Ordinary contracts
○ Usually between members and company itself
 Protects members in certain way
 Venture capital scenario:
□ Buy shares: but require shareholders/company to get protection
 VC might want to have power over directorship
 VC might get rights over the way members to exercise their
rights/issue new shares
 Get pre-emption rights on transfer of shares
- Supplement constitution
- Pros and cons of using separate shareholder agreement
○ Pros
 Limitations of s.33
□ Contract is enforceable as of right
□ Reliance on s.33 limitations
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□ Reliance on s.33 limitations

 Hickman principle
 Mere irregularity
 Articles are subject to change under S.21
□ Contracts cannot be changed without consent 11
 Privacy
□ Articles must be registered publicly
○ Cons
 Privity of contract
□ S.33 binds all members - including new ones
□ Only work in smaller companies with less shareholders
 Company not bound by shareholder agreement
- New provisions in 2006 acts
○ S.17: defines company's constitution as articles, and certain resolutions within S 29
 Privity issue
□ S.33: articles bind members, etc.
□ If shareholder agreement is part of constitution and is registered, then S.33
applies
 Incentive to register shareholder agreement to escape privity
limitation
○ S.29.1.b:
 Any resolution/agreement agreed by all members that would not have effect
without majority unless passed by special resolution
 Some sort of agreement that deal with rights of members that would otherwise be
in the articles
 Worry
□ These cover shareholder agreements
□ Therefore these are part of the constitution
□ If these are the case, then this would have impact on pros and cons of
shareholder agreements
 Pros:
◊ Must register S.29 agreements
◊ Failure to register = criminal
◊ Unclear whether shareholder agreements within S.29
□ May be that if shareholder agreements under S.29, must be registered
 No privacy/simplicity advantage
 In practice people don't really register b/c stupid to enforce
- Common elements of shareholder agreements
○ Russell v Northern Bank Development
 Statutory provision to issue shares
□ Shareholders agreed to not exercise power
 HL:
□ members could agree how to vote, but could not bound company since it
could not contract out of its obligations to 3rd parties
□ Company cannot contract rights away, but members can
Extrinsic contracts
- Articles as basis for implied terms in extrinsic contract
○ British Iron v Beckwith
 Director could not enforce provision that said he was to be remunerated a certain
amount
 Court:
□ S.33 predecessor only bound members inter se, not other members
 Director could establish extrinsic contract between himself and company
□ Offer, acceptance, intention to create legal intentions
□ Implied terms into extrinsic contract by referring to articles
○ Read v Astoria
 Extrinsic contract between director and company
Notes Page 18
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 Extrinsic contract between director and company

 Nothing said about termination of employment
□ Provision in articles that enabled general meeting to terminate employment
 Read worked 17 years as director
□ Wanted reasonable notice
□ General meeting passed resolution terminating employment
□ Battle of implied terms:
 Article implied that he can be terminated
 Reasonableness implied that he should be given notice
 CoA
□ When conflict of implications, article implication always trumps reasonable
implication
□ Can be dismissed
□ Furthermore: express terms that contradict implied terms
○ Nelson v Nelson/Sons
 Article:
□ Director can be removed without cause
 When removed without cause, director wanted to fight
□ Said implied that he cannot be removed without cause
□ However, express contradiction
□ Director removed
- Alteration on extrinsic contracts

○ Intended that the implied term should reflect articles
○ Shuttleworth v Cox
 Director appointed with no special contractual terms
 Termination of employment governed by articles, which were implied in
□ Other director inserted 7th ground in articles to get rid of him
 Court
□ Contract is a contract made on terms of alterable article
□ Contract changes as articles change
□ Matter of intention: any such alteration if effects articles only has
prospective effect
○ Swabey v Port Darwin
 10 pounds p/h altered to 5 pounds/h
 CoA
□ Same approach as Shuttleworth
□ Alteration did affect director, but only prospectively, not retrospectively
○ Implied term was implied in original form?
 Implied on basis it would not be altered?
 British Equitable Assurance
□ Life policy taken out by defendant from plaintiff - company issued life policy
to employee
□ Insurance policy
□ Registered company after this
 Company proposed to alter articles
 CoA
◊ Terms of life policy were not altered and were terms as they
stood at the time
◊ Policy
 HL:
◊ Parties contemplated that the implied terms would not be
altered
◊ Straightforward contractual interpretation
- Express term in contract
○ Implied terms based on articles ignored if contradictory to express terms
○ Southern Foundries v Shirlaw
 Fixed term contract 10 years
Notes Page 19
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 Fixed term contract 10 years

 Articles of company he was employed by allowed shareholders to sack directors at
any time
□ On basis Shirlaw was sacked
 Shirlaw sued on contractual right for 10 year term
□ Could sue: express term contradicted implied articles
- Look at extrinsic contracts:
○ Are there implied terms? If so is there alteration?
○ Etc

Notes Page 20
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Decision making by group:

Monday, November 2, 2015 10:22 PM
Decision making by group:

- AG v Davy
○ Chartered company of 12 members
○ Function was to choose a chaplain
 3 of 12 members turned up to meeting designated to make a choice
 Was this an effective choice?
○ L Hardwick: whenever a group of people become incorporated, a major part of them can do a
specific act on behalf of the company
 Majority rule principle
 But then hardwick:
□ If only a portion appear when everyone is called to the meeting, then the majority
of these can decide
- Organs of company
○ When company is healthy:
 Shareholders: come together in general meetings
 Directors: board meeting
 Lack of formal recognition of other stakeholders?
□ Creditors
□ Employees
□ Suppliers
□ Customers
□ Community that company affects
□ Why not?
 All these have relationship with company (contract)
 Their rights are protected by this contract, not by insisting on part of the
decision making machine
 Can be given rights through constitution
○ When company is in liquidation
 Liquidator replaces the shareholders/directors
□ 3rd party creditor right enforcement becomes important
- Articles
○ Determine
 What organs exist
 What their functions are
 How these organs function
○ Model articles for private company limited by shares (Sch. 1 Companies Model Regulations
Act 2008)
 Companies Act 2006: default rules subject to contrary provisions in articles
□ S.284: shareholder votes: one vote per share subject to articles
□ Mandatory provisions: S.21: allows company to alter articles by special resolution
- Default division of power
○ Companies MRA 2008
 Default rules that can be altered
□ Art 3: Directors have all powers in company
□ Art 4: shareholder reserve power: shareholders may by special resolution direct
directors take/refrain from taking specified action
 Articles can change:
□ Can include veto powers for employees, etc.
○ Those forming company can decide where division of power lies, or just rely on default
position
- Companies without articles subject to default rules at the time
Different default rules for older companies

Notes Page 21
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○ Different default rules for older companies

 Original provision: Companies Clauses Consolidation Act 1845 (1 year after registered
company could be possible)
□ S.90
 Directors subject to control/direction of general meeting especially
convened for the purpose
◊ Here, shareholder is repository of decision making
◊ Directors are purely agents doing bidding of owners
 Earlier cases analysed on basis that shareholders were true decision makers
 Subsequent articles shifted power to board
□ Division of power happened because model article drafted in a different way
□ Isle of Wight v Tahourdin
 Based on old S.90
 Court allowed general meeting to tell directors what to do
□ Automatic Self Cleaner v Cunningworth
 Based on newer articles
◊ Directors given specific power to sell company property as they see fit
◊ Default articles: directors could manage company, very similar to
modern day
 Facts;
◊ Majority of shareholders wanted company to sell its whole
undertaking to another company
 Directors refused and took a long-term view and thought it was
unwise
 General meeting convened: ordinary resolution passed (50%)
directing directors to sell
 Directors still refused, majority went to court trying to enforce
 CoA
◊ Looked at articles, found they explicitly gave power to sell to the
board, not the general meeting
◊ Collins LJ disapproved Tahourdin analysis
 Articles were different back then, now the articles no longer
apply principle/agent relationship
 Directors acquire power from articles, not from general meeting
◊ *if this arose today, shareholders decision must pass by special
resolution (75%)
◊ In this case
 Smaller majority was trying to take away the power conferred
as a larger majority (director powers)
□ Quinn v Axton
 Articles gave managing director right to veto various transactions
 Court upheld this
◊ But Hickman suggests that only rights "qua member" are enforceable
 Bargain made by shareholders…amounts to that directors should manage
business, and shareholders do not unless there is an article to that effect
◊ Articles provide directors with power!
□ Gramaphone & Typewriter v Stanley
 English parent holding company that owned all shares in German company
 Court refused to regard business of German company as business of English
company
◊ Articles
 Directors manage company, not shareholders
 Germany company was run by directors, not shareholders
– Justified separate legal entity for tax purposes
- Separation between shareholders/directors
○ Bearle & Means
 Large companies with dispersed shareholdings

Notes Page 22
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 Large companies with dispersed shareholdings

□ Small group of executives who manage company
□ Efficiency sake
 Separation of control/ownership
□ Agency cost
 Cost of employing another to act for you
 Agent interests may misalign with you - lack of incentive to act for principal
◊ Legal response to lack of incentive:
 Fiduciary obligation
◊ Economic response to lack of incentive
 Market for corporate control
 Where directors don't act for benefit of big company, the price
of shares will drop
– Shareholders in such a scenario will just sell their shares
(path of least resistance
– Force price of shares to drop even further
– Where shares do not reflect potential value of company,
then potential takeover
– Directors then become vulnerable to takeovers and
replacement
- Decision to litigate
○ Part of management of business, so prima facie decision of the board
○ John Shaw v Shaw
 Dispute within company whereby majority of shareholders were also directors
□ Small company
 Directors wanted to direct funds to themselves
□ To pacify minority, articles were changed to give managerial power to 3
independent persons:
□ Board gave power to independents
 Independents decided that it would be good to sue old directors who
breached fiduciary obligation
 Independent directors brought action against old directors
□ Majority of shareholders objected (because they were directors!)
 Passed resolution telling directors to stop action
 Article: "if powers of management given to directors, they and they alone
can exercises these powers" - GM can't interfere unless general meeting
gives power
◊ Could litigate
○ Breckland v London Suffolk Properties
 A had 51% and B had 49%, both directors
 A and B entered into extraneous contract that dealt with decisions - shareholder
agreement
□ Decision to litigate needed consent of 2 directors (both)
□ One wanted to litigate, the other didn't
 A convened a general meeting to get resolution passed (with 51%)
 Court
□ Decision to litigate was for the board, not for general meeting
□ In any event articles said B's consent was required for action
 Default articles put power in directors
□ Minority protection
○ Mitchell v Hobbes 1996
 Managing director instructed solicitors to issue claim on behalf of company (not the
board)
□ Board has power to delegate to individuals
□ Art. 3: directors has to decide management decisions unless it has delegated that
decision to someone else
 Court:
□ Art 3: apply to facts
Notes Page 23
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□ Art 3: apply to facts

□ On facts manager not given right to litigate: all down to the articles
□ Power must be explicitly delegate
○ Why fuss about litigation?
 Sometimes directors are potential defendants to a claim: they owe fiduciary duties
□ If they breach, company has right to sue: but if decision is in hands of director,
won't sue themselves
□ How does the law respond? Answered later on
 Problematic area, but managerial decisions generally exempt
- Mandatory provisions conferring power to general meeting
○ Subscribers may want articles to be in stone: but can't do unless entrenchment provisions are
invoked
 Special resolution: S.21
 Certain transactions between members and directors
□ Situations where director is transacting with company
□ Response to agency costs
□ Applies to shadow directors as well S.252 Company Act (contrast with Insolvency
Act)
□ Certain types
 S.188 CA
◊ Long term (2 years) employment contracts of directors requires
agreement by GM
◊ S.189: Void to the extent of contravention, terminable at any time by
reasonable notice
 S.190 CA
◊ Substantial non-cash asset arrangements
 Arrangement: Re Duckwari
 Substantial non-cash asset: Ultraframe v Fielding
◊ General meeting need to approve this
 Contract is voidable in instance of company without approval
 Director liable to account for profits made
 GM can always subsequently affirm contract
 S.197-214
◊ Loans, quasi-loans, credit transactions
◊ If directors borrow money must be approve
◊ Voidable but can be affirmed
 S.215-222
◊ Golden handshake
◊ Give director generous severance when they retire
◊ Require GM approval
◊ Consequence: golden handshake held on trust for company, directors
who authorized this are personally liable to indemnify the company
 Provisions as to capital
◊ Considered next semester
 S.168
□ Removal of directors
 1948: Members by ordinary meeting can remove director
 Bare majority can always remove board
 "notwithstanding anything in any agreement between company
◊ However, S.168(5)(a)
 Directors right to damages
 Entitled to compensation in respect of termination preserved
 Long term contracts need to be approved, b/c removal of long-
term directors will be expensive for company
□ Relationship between Art. 4 and 168
 special resolution required to instruct directors, but only bare majority to
remove directors?

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remove directors?
◊ Although S.168 allows removal, it doesn't in theory give power to
dictate them
◊ Directors have duty to be independent
◊ Directors must think about both minority and majority - practical
tension between S.168 and S.4
□ Practical limitations
 Big disincentive to remove if expensive
 Unfair prejudice claims in quasi partnership companies
◊ If company formed out of partnership, may be unfair scenarios
 Bushell v Faith
◊ 3 shareholders/director with 1/3rd shares
◊ Article: on resolution to remove directors, that director vote has 3
votes per share
 Although director held minority of shares, they had majority on
decision to remove them
 Conflict between 168 and article
– majority of shareholders can remove director,
– Vote distribution of shares depend on the articles
◊ Court
 Conflicting principle: article tripling vote was invalid, as it was
contrary to the old S.168
◊ HL
 Majority: nothing in statute which precluded tripling of vote
 Powerful dissent: unconcealed effect to make director
irremovable
 Could have amended articles to remove this provision to
redress the balance of powers
 S.168: removed the "notwithstanding any articles"
– Legislature enforced the decision of the court: can be
something in articles
– If a company wants to be listed on public exchange, listing
rules prohibit weighted voting
 But in private company, this is one way to require
consent
 Not that controversial: could have shareholder agreements
 Shareholder agreement
◊ Agree between shareholder/director not to remove any directors
◊ Russell v Northern Bank
 Shareholder agreement for voting intention, court upheld this
agreement as it was pro rata
 Only work in small companies
○ Other cases where members may act
 Principle/agent analysis
□ Appointment of directors
 Since GM has inherent right to appoint directors by ordinary resolution
unless articles provide otherwise
□ If deadlocked directors, GM can take over
 Irvine v Union Bank Australia
◊ Article: if director interested in a company, then he can't vote on a
board in favour of it
◊ All directors were in this case interested in the contract, so they were
all disqualified
◊ Therefore, GM could make decision which was the pragmatic choice
 Barron v Potter
◊ Article: appointment of directors only gave power to board
◊ Director created a GM and appointed new director

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◊ Director created a GM and appointed new director

 On fact there was no board that could act, so exceptionally GM
had to act
 Sensible result
 Foster v Foster
◊ Deadlock, GM decides
 GM seems to have residual power
□ Affirmation of unlawful acts by board
 If directors are agents of GM then ok
 But if directors not, then difficult to justify
◊ Grant v UK switchback railways
 Directors disqualified, GM ratified contract that directors had
signed when disqualified
 GM allowed to approve this
- Duomatic principle
○ Salomon v Salmon
 L Davies: company is bound intra vires by unanimous agreement of its shareholders
 Review proceeding 2006 act
□ Members may by unanimous agreement change company regardless of articles
○ Limited by recent case law
 Confines this to situations when GM has power to act
□ Non-compliance with formalities dealing with this power: cannot waive
formalities that are there for someone else
 E.g. dismissal of directors:
□ Persons dissenting must be competent to affect the act to which they have
assented
 Re Express Engineering
□ Small company: 5 shareholders/directors
 Decided company would borrow money from syndicate
 Articles disqualified director from voting if he was interested in contract
 If company went into liquidation, and liquidator wanted to challenge this
contract
◊ Company had no power to enter into syndicate
□ Court:
 Applied Salomon, can unanimously agree to take out loan
 All agreed, so company was bound
 Could just apply Irvine: GM had power b/c board of director was disqualified
◊ Basis was unanimous decision of shareholders bound company
 Broker Holdings
□ Shareholders entered into flawed contracts, directors were not validly appointed
□ Liquidator wanted to challenge
 Asquith: as long as all shareholders agree, then it binds company
 Duomatics Case
□ Article: directors remuneration needed GM consent
□ On facts, directors involved were only 2 voting shareholders
 Award of remuneration was valid as all voting members agreed
 Principle was stated in narrow terms:
◊ Must be a decision that a GM had the power to carry into effect
◊ Here
 Cane v Jones
□ In effect, articles can be altered by informal unanimous agreement
□ Articles gave chairman vote:
 All shareholders had agreed between themselves that chairman should not
have casting vote
 1st instance judge
◊ Duomatic principle applied: despite what article said, chairman no
longer had vote
◊ Articles as registered: chairman had casting vote
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◊ Articles as registered: chairman had casting vote

 Unanimous agreement not alerting people to change is scary
 Such unanimous agreement is not registered
○ Limitations
 General meeting must have power
 Protection for persons who are not members must not be weighed in members'
decisions
□ Some protections in act are for protection of creditors
□ These protections cannot be unanimously rejected by members
Levers of Control : why do shareholders have ultimate power?

- Directors duties
- Removal/appointment
- Alter articles

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Directors
09 November 2015 16:06
Companies Act Part 10

- Definition
○ S.250
 Definition of director
□ Person who occupies position of director whoever they're called
□ Whoever acts as director is caught
 Management organ
□ e.g. sometimes governers, trustees, but are de factor directors
- Number
○ S.154
 Private at least 1 director
 Public at least 2 director
 S155 in CA 2006
□ At least on director must be a natural person
□ Small business/enterprises act changed this again
 Corporate directors cannot exist: all directors must be natural persons
◊ Like canada, australia, etc.
- Age
○ S.156
○ Director must be at least 16
- S.161
○ Act of director are valid despite defaults in appointment
○ Morrison v Hanson
○ 3rd parties are protected by normal law of agency along with this
- Registration
○ Company's own register must stick them in
- S.168
○ Can be removed by ordinary resolution
○ Formalities
 Extra notice (28 days)
 Allows directors to speak
 Could be overruled by company's own articles
○ Bushell v Faith
 De facto impossible to remove director due to construction of articles
 Allowed
- S.248
○ Minutes of director meetings must be recorded for 10 years
Points
- No eligibility criterial besides minimum gave
○ Can be disqualified later on
○ Phoenix syndrom prevention
 S.26 Insolvency Act
□ Prevent directors in a liquidated company from being a director to a
similarly named company within 12 months
- No mandatory rules as to composition/function of board
○ Model articles provide default rules, but not mandatory
○ Feature of anglo-american corporate law
○ Combined code of corporate government
 Soft law - guidance documents for public listed companies

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 Soft law - guidance documents for public listed companies

□ Initiative of business community because they were afraid of statute
□ Suggests
 At least half board should be non-executive directors
 Same person should not both be chair of board and CEO
□ Applies to public listed company
 To be listed on stock exchange, must complain
 LJ Arden
◊ Good practice even for non-listed companies
◊ All companies with minority shareholders to adhere to the code
 Macro v Ipswich
– Unfair prejudice in company without such guidelines
Articles
- Appointment of directors
○ Model Art.17
 First directors appointed by subscriber
 Subsequent appointments
□ Ordinary resolution (general meeting)
 Inherent power
 Wocester Cosetry v Witting
 Shareholders should appoint who can run the company!
□ Decision of directors
 Appoint each other
 The norm
 S.168: GM can remove
- Termination
○ Model Art. 18
 6 circumstances
□ Virtue of any provision of company's act, or prohibited by law
 S.168: removed by shareholders
 Reference to company director disqualification act
□ Bankruptcy
□ Physically mentally inapable
□ If director notifies that he is resigning/retiring
 Shuttleworth v Cox
□ GM added 7th ground , variation valid?
□ Yes still
- Remuneration
○ Model Art. 19
 Remuneration decided by directors and can take any form
□ Shares or cash: align interest to shareholders
 Controversial: directors setting own pay?
□ Mandatory statutory provisions in act
 S.188-9
◊ If contract more than 2 years, need GM approval
 S.227-230
◊ Allow inspection of remuneration packages by GM
 Special provisions for quoted companies
- Expenses
○ Reasonable expenses of meeting
- Mechanics of decision making

○ Model Art. 7-8
 Any decision of director must be either by majority in meeting or unanimous
decision under Art. 8
 Art. 8
□ Written resolution must have unanimous agreement from directors
Model Art. 16
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○ Model Art. 16
 Director set own rules about communication
□ Contrast to GM: lots of mandatory provisions for minority protection
○ Model Art. 10
 Participation: irrelevant of communication forms
 Much more flexible than GM rules
○ Quorum: 2 unless larger
○ Art. 11
 Allow GM to appoint, deals with deadlock problem
○ Mandatory minute-keeping
Art. 14: conflict of interest provision

- Beneficiary can modify fiduciary duty that the fiduciary is under
- Deals with fiduciary duty when director deals with company
○ Director should be able to deal subject to some safeguards
○ Applies
 Actual/proposed transaction with company with interested director
○ Substantive
 Such a director is not counted for quorum: disenfranchised
 Exceptions
□ Ordinary resolution may give him franchise
□ If not reasonable to believe conflict would arise
Delegation and committees
- Art. 5/6
○ General power of delegation on board: can delegate decision making in any way to any
people that they see fit
○ No formalities: can occur implied/express way
 Smith v Buckler
 Mitchell v Hobbes Mill
□ Appointment of managing director: could MD issue write on behalf of
company
□ Power in the board in Art. 3
 On facts questions was if they delegated this power to initiate
litigation
□ Delegation possible
 Possible to happen, but on facts need to determine
○ Important
 In practice board only meets very occasionally
 Usual to delegate down to managing director and beyond
○ Art. 5
 Sub delegation is OK as well
 Deals with delegation to persons/committees
○ Art. 6
 Delegate to committees
Conclusions as to directorial decision making
- Board of directors as group: decision making organ
- Directors have all managerial powers
- Unless delegation has occurred, decision must be make by whole board
○ Guiness v Saunders
 3 directors given carriage of takeover bid
 Decided 1 of them should have a fee for his role
□ Was this decision to give him the remuneration was effective
 HL
□ Prima facie decisions have to be made by entire board
□ This board allowed to act on this takeover, did they get right to remunerate
as well?
 No right to remunerate was delegated
□ Board as a whole responsible for remuneration
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□ Board as a whole responsible for remuneration

○ Mitchell v Hobbes
 Delegation did not extend to litigation
- Agents
○ MD is agent of company
Categories of directors
- De Jure/defacto director
○ De Jure:
 Properly appointed in Law
 Art. 17: appointed by directors/GM, if appointed then properly
○ De facto
 Director who acts as one without proper appointment
 Treated as a de jure director for duties
 Re Kateck
□ Depends on if person is acting as director
 Revenue Customs v Hollande
□ Corporate director is not without more a corporate director of that company
□ Deals with corporate director: no more of these
 No longer relevant case?
□ Illustrate 2 important propositions
 How corporate director operates: no longer relevant
◊ Assuming that corporate director A could be director X
◊ A itself must have directors as a company
 A has H as human director
 When H acts, he acts as organ of A
◊ When A acts as director of X, H will be voting/making decision
◊ While H is acting as director of A, he is not acting as director of
X: company A is acting as director of X
 Companies are separate legal entities
◊ Company A as legal entity is director of X
◊ Human H is only director of A, because A/H are separate entities
□ Facts:
 H was director of company A
◊ Set up a number of companies (40) with company A as their sole
director
◊ Tax avoidance scheme
 Companies (composite companies) rewarded employees
with salaries and dividends (tax efficient)
 Provide them with same tax advantages had they set up
own service companies, but relieve them of admin duties
 Each company was liable for higher rate than they had
thought, tax avoidance failed
 Composite companies owed a lot to IRS and went bust
 212 claim against H for breach against director's duties to
composite companies
– Alleged A as de factor director
□ Supreme Court
 H was de jure director of company A, and when he acted he was
director of company A
 Company A was director of composite companies
 A and H had separate companies
◊ Nothing to justify lifting veil to say A is de facto director of X
- De facto director
○ Usually same position as De Jure
 3rd parties dealing with him are protected by S.161/agency principles
 Subject to directors duties

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 Subject to directors duties

□ S.250 definition of director
 Someone who occupies position of director: nothing about properly
appointed
- Shadow Directors
○ S.251
 Defined for purposes of the CA 2006
 Very similar to IA provision
 Extra subsection 3
□ A body corporate is not a shadow director
□ Explicitly precludes a parent from being a shadow director for specific
provisions inside the 2006 act
○ Companies Act puts same duties as de jure to shadow directors
 Insolvency Act 212 does not apply
□ Revenue Customs v Holland case: must prove de facto, not enough shadow
- Executive/non-executive directors
○ Commercial, not legal terms
 Articles to decide whether to have these
 Executive
□ Hands-on managerial responsibilities
□ Remunerated by salaries
 NEDs
□ Role is defined by articles
□ Normally independent/not part of directive, oversee, advise, etc.
□ Part time and remunerated by fees
□ Important feature of corporate governance debate
 Half board comprising independent - natural persons
 Board can delegate to committees (non-executive
committees/appointment committees)
 Desirable to have truly independent board where there are minority
shareholders
◊ Non-execs can keep eye on execs
○ Both are directors for purposes of act
 Directors duties apply for both
 Content of duties varies between execs/non execs
- Nominee directors
○ Chosen by someone (creditor, founders, etc.)
○ Appointed to represent interests of nominator
○ Difficulty
 Compatibility of role of nominee for someone else's interests and role of director
for company's interests
 Conflicting duties
Provisions as to service contracts/expenses

- Remunerations: how much/when should directors be paid
○ Fiduciary has no prima facie right to remuneration
 Saunders case
□ Directors awarded themselves a fee
□ Court: no expectation of fee at all, must be negotiated
○ Articles makes provisions for remuneration
 Fiduciary duty modified by articles
 Model Art. 19
□ Directors have right to award themselves remuneration
□ Shareholder approval needed for certain things
○ Chapter 5 CA 2006
 Inspection of service contracts
 Applicable to shadow directors
Annual accounts must contain remuneration stats
Notes Page 32
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○ Annual accounts must contain remuneration stats
- Executive remuneration
○ Cadbury report
○ Remuneration should be set of remuneration committee set by non-executive directors
○ Regulators do impose things on banking sector
 Restrictions on banking directors
 Not applicable to wide range

Notes Page 33
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General Meeting
09 November 2015 14:41
How does general meeting come to a conclusion?

- Relevant provisions
○ Companies Act Part 13
○ Model Articles Part 4 -Art.38-48
- Contrast with board meetings: main law is in articles
Members resolution
- Can decide in meetings
- Private companies can make decisions by written resolution
○ Companies Act S.281.1.1.a
- S.281.3
○ Ordinary resolution: simple majority
- S.281
○ Resolution passed by not less than 75%
 S.21.1: amend articles by special resolution
 Art.4 model article can give direction to directors by special resolution
Voting
- S.284
○ General default rule
○ Written resolution: 1 vote per share (or majority of share)
○ Show of hands at meeting: count votes of everyone present irrespective of shareholding
○ Poll: at meeting, one vote per share/one vote per member
 Weight of share all down to the articles
□ Shares with multiple votes
□ Or shares with no votes
□ Differential voting rights
□ If you want certain shareholders to have special powers, then give them
Counting votes
- Differently if done at meeting or by written resolution
○ Written resolution
 If special resolution, must be stated that it is proposed as a special resolution
 Definition of ordinary/special S282/283
□ Passed by requisite majority
□ If it's passed by majority of members representing the total voting rights of
eligible members: majority of those who can vote
○ General meeting
 Must be decided on a show of hands
□ unless a poll is required by articles
 Normally
□ All down to the articles
□ Given that any member may demand a poll : a count of vote taking into
account actual number of votes which those presents have according to
shareholding
 Requisite majority
Details of resolutions
- Written resolution
○ Only available for small companies
 Usually ignored that you have to pass resolutions
 2006 mandatory rule for private companies
□ No need to have meetings (no need for annual general meeting)
□ Can do most business through written resolution
 Points to note

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 Points to note
□ Only available for private companies - public companies must have AGM
□ S.300 CA: this is mandatory
 Articles can't preclude use of written resolution
□ S.288.2
 Can't use written resolution either to remove director/auditor
◊ Can be done through general meeting!
 See: S.169: director given a chance to discuss this and intervene and
make his case, impractical to do so if done only on written
○ How do they work
 S.291: formalities when proposed by directors
 S.292: formalities when proposed by members
□ 5% of voting members to agree if they want to circulate this resolution
□ Don't want vexatious members insisting on unpopular resolutions
○ How to agree to written resolution
 S.296
□ By authenticated document by hand/electronic
□ Resolution lapses after 27 days if no requisite majority
- Meeting
○ Definition
 Byng and London Life Association
□ Room for general meeting was too small so organized overflow room with
visual/audio links
□ CoA
 Participants don't have to be face to face for GM
 Had audio/visual links worked and allowed all those in all rooms to
see, hear and participate, then that's good enough for GM
 Company Law Review
 2 way real time communication: i.e. opportunity to communicate/vote
 Art.37 model article
□ Define meeting for purposes of model articles:
 Attendance is immaterial to whether two people are in the same
room as each other
 2 or more people are not in same room attend GM if
◊ They have rights to speak and vote
◊ Are able to exercise such rights
○ Types
 Annual General Meetings
□ S.336-340
 Public companies must have AGMs and various things have to happen
 General meeting
□ Meetings other than AGM
○ Who may call general meeting?
 S.302
□ Director can always call GM: often need GM approval
 Articles require approval for various things
 Transactions directors make (golden handshakes, loans, etc.) require
GM approval
 S.303
□ 10% general members can call general meeting
□ Cannot be vitiated by articles: mandatory provision, must have right
 S.304
□ If directors refuse GM
□ Members then can call meeting at company's expense
 S.306
□ Court may order meeting to be held if impractical to hold meeting
□ When can court exercise this discretion?
British Union for Abolition of Vivisection
Notes Page 35
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 British Union for Abolition of Vivisection

◊ Always being disrupted by protestors
◊ Impractical to conduct meeting
◊ Court:
 Meeting only need to have executives, others voted by
post
 Ignoring shareholder agreements
◊ Union Music v Watson
 Company formed with opera singer as 49% shareholder,
Union Music had 51% of shareholder
 Shareholders agreement
– Both shareholders had to attend any meetings
before any business could be transacted
– Mrs. Watson resigned as director so no business
could be transacted
– Union Music
 Wanted to call shareholder's general meeting
to appoint other directors to continue
business
 Impasse because Watson refused to come and
make the decision
 Business could not be transacted, court was asked to call
general meeting
 Push matters forward to appoint new director
– Overrode what parties agreed should happen?
– More important that company kept functioning
 Court does not overturn
◊ Ross v Telford
 Deliberate deadlock: both shareholders had 50% of
shareholding
– Knew that this could give rise to problems in the
beginning
 CoA would not upset original intention
 Different from Union:
– Here was 50/50
– Union was 51/49, majority shareholder has different
rights
○ Running general meetings
 Notice requirements
□ S.307-313
 Statutory mandatory requirements: minority protection
 Make sure everyone in shareholding has sufficient notice etc.
□ Articles can be stricter but cannot relax
 Mandatory rules
◊ 307:
 need 14 days notice
 Public AGM requires 21 days
◊ Special notice
 Auditor
◊ 313
 Accidental failure to give notice is not fatal
◊ Members decide whether to turn up or not
 Usually directors call meetings
 Circulation of documents: S.317
□ Members may have interest in circulating statements
□ 5% of members can require circulation of statements of up to 1000 words
 Quorum: S.318
□ Quorum
Notes Page 36
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□ Quorum
□ Model articles reinforce
 Chairman S.319:
□ Any member can be elected as chairman as board of directors
 Right to poll: S.321
□ Useful when show of hands does not represent shares
□ Allow members to declare poll
□ Model art. 44
 Corporate shareholders S.323
□ Corporate member authorizes somebody to turn up and exercise powers of
corporation
 Proxies 324-331
□ Members can appoint proxy
□ Notice of meeting must draw attention to this right
○ Exercise of members voting rights
 Members an exercise votes/contractually fetter their votes as they please
 Property right
 Constraints:
□ No fiduciary duty
□ Certain circumstances
 Alteration of articles: altering right of fellow members, must act bona
fide for company as a whole
 Ratification of director's duties S239
◊ Directors who are being accused of breaches are
disenfranchised, though can still speak
 Self-interested voting
◊ Derivative claim
◊ Other members who have been written over can have unfair
prejudice remedy
◊ Successful wind-up claim on unjust or unequitable grounds
 Clemens v Clemens
□ J Foster
 Extended bona fide test to ordinary vote
 Standard Bank v Walker
□ Court
 Gave injunction to stop shareholders from exercising veto over a
restructuring agreement
 Only way to save company
 Interference with shareholders' rights to vote

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Director's Duties
09 November 2015 16:22
Companies Act 2006 Part 10

- Statutory clarification
- Before the law was in case law
○ Difficult to find/understand by directors
- Law report
○ Advised codification for general duties of Company directors
○ Make duties clear and accessible to business community
○ Tries to be reasonably comprehensive
- Statute is starting point:
○ S.171-177
S.170
- "These duties are general duties owed by a director of a company to the company"
- Points to note:
○ "general duties": refer to S.171-177
○ In S.179: more than one duty may apply in any given case: duties are cumulative, not
mutually exclusive
○ Duties are to the company: not to anyone else
○ Duties are owed by director
 De jure/de facto
 Senior managers?
□ Sometimes hard to tell difference between director and senior manager
□ Rason v Customer Services
 Person in managerial heirarchy, would have been a breach if he were
director but not mere employee
 Court:
◊ Are they of such a status that they ought to be subject to this
status as director?
◊ On facts, was not
 Shadow directors
□ S.170.5: replaced by SME and Employment Act 2015
 General duties apply to shadow director to the extent that they are
capable
□ Issue:
 Shadow directors are statutory concepts: insolvency and liquidation
construct
 Conflict in cases: Ultraframe: shadow was statutory construct, other
case said they should be treated as normal directors
 Former director
□ S.170.2
 Cannot get rid of responsibilities by resigning
○ Make no distinction between executive/non-executive directors
 Actual nature of obligation is a factual issue however:
□ When assessing the actual obligations, then distinction can be found
between the different directors
□ However, starting point is the same
- 170.3
○ General duties are based on common law/equitable principles
○ S.171-177 replaces common law principles
○ However: 170.4
 171-177 should be interpreted in accordance with common law and equitable
principles

Notes Page 38
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principles
 Should still look at case law to interpret statute:
□ Old law is still material!
 Old law still relevant for 3 reasons
□ Indicates type of scenarios that occur in practice:
□ How courts in applying the statutory provisions will be heavily influenced by
case law
□ So far as contradiction, statute prevails
Contexts in which director's duties become applicable

- Where other members of board bring claim against fellow board member
○ Rare: board
○ Plus Group v Pike
 Falling out between directors:
- Control of Pcompany is being transferred to a new board
○ More common
○ Successful takeover, new shareholders might sack old board and appoint new board
 New board may find old board were in breach of duties
 Bring action against directors
○ Regal Hastings v Gulliver
 Old board sued by new
- Liquidation of company
○ Liquidator looks back at what's going on, and can bring action on behalf of company
○ S.212 Insolvency Act
 Allows liquidator to bring misfeasance procedure against director if breach is
found
- Disqualification proceedings
○ Companies Directors Disqualification Act
 Re Bearings No.5
□ Disqualification procedure: court can decide
- Potential directors may also be part of board that decides whether to sue them?
○ Common law respond to this dillema
 Derivative claim:
□ Minority shareholder may bring the company's claim against directors who
are in charge of company
□ If director's aren't doing anything because they are implicated, shareholders
can apply
- Unfair prejudice procedure
Sources of director's duties

- 2 types
○ Fiduciary obligations (S.171,172, 173, etc.)
 Historically courts treated directors as fiduciaries/trustees, with company as
beneficiary
□ Not surprising: history of company began with trustee
□ Managing property of another
 Very early cases
□ Great Easter Railway v Turner
 L Selborn: Directors are mere trustees/agents of company, trustees in
the money, agents in transactions on behalf of company
 Would not be like this currently:
◊ Board is not agent, but they are organs: part of the company n
◊ Individually directors are agents
 In a trust situation, property is vested in trustees
□ But in company, the company owns the assets: not trustees
□ But still trustees to justify fiduciary obligations
 Law and Economics scholars
□ Fiduciary duties are "agency costs"
Notes Page 39
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□ Fiduciary duties are "agency costs"

□ Law's response to agent's mismatch incentives for acting in benefit of
beneficiary
○ Duty of care and skill (S.174)
 Negligence, etc.
- Important to distinguish between the two sources
○ Trusts vs Tort
 Content differences
□ Bristol v West Building Society
 Breach of fiduciary duties have different consequences than breach of
other duties
 Not every breach by fiduciary is a breach of fiduciary duty
 Why separate?
◊ Fiduciary obligations are different from contract/tort,
foundations are separate
◊ In contract and tort, obligations are between equal parties
 Freedom to contract
◊ In fiduciary obligation, obligations are between a superior and
an inferior party
 One party exercises significant power over the other
□ Pilmer v Duke Group
 Consequences of breach difference
□ S.178 CA
 Consequences of breach of 171-177 is same as if common
law/equitable principle applied
◊ 171-177 except 174 are fiduciary duties
◊ Distinction between common law/equitable principle
 Fiduciary duty breaches causes all sorts of interesting things to happen

Notes Page 40
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Common Principles
Monday, November 16, 2015 3:38 PM
Authorization
- Ex ante modification of director's duty
○ Before action occurs, director modifies duties they owe
○ Articles of association: can change director's duties
 Allows company to modify
 CA 180.4
1) Company can give authority
a) Who within a company?
i) General meeting/board, intuitively must be general meeting
ii) Other provisions of act confirm the GM is referred to here
b) NB: directors are given exception at sometimes to alter their duties:
S.175
2) Where articles are about conflict of interest
Ratification
- Ex post modification of director's duty
○ Can always forgive someone for breach
○ S.239
 S.1: company allowed to generally ratify breach of duty, negligence
 S.2: GM has power to ex post modify by resolution (majority vote on proposition)
 S.3/4: disenfrancised directors/those collected with them on voting on this
proposition
□ Reversal of case law
 N-West Transportation v Beatty
◊ Facts
 A director sold a steamship he owned to the company
 In fact, price was fair and company needed steamship
 However, contract is voidable due to his fiduciary duty
– Beneficiary can always adopt a voidable transaction
– GM ratified transaction in this case
 But directors were majority shareholders?
 Minority argued this was ineffective
◊ Privy Council
 Shareholders can vote as they please
 Ratification was effective
– But court showed that it was worried about this
– "may be quite right to have opposing minority to
challenge" - in some cases such as this, minority
should claim if majority breaches
 Seemed to confirm that interested directors could vote
qua shareholder
 S.6: confirmation of Duomatic principle
□ Nothing here contradicts anything by unanimous consent of members of
company
□ No need for general meeting if unanimous
□ S.6.b: procedural freedom for litigation
 S.7: limits to power to ratify: will come back later
□ Maydoff v Raven
 Court: limitations were similar to those of the Duomatic case
◊ General meeting can't ratify breach that could affect others,
such as creditors
Terminology
• Ratification: post breach
• Authorization: pre breach

Notes Page 41
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S.170
Tuesday, November 17, 2015 5:35 PM
S170
- Directors owe duty to Company
○ Significant: who can enforce?
Other stakeholders
- Not owed to individual members/creditors/employees
- No standing to enforce duty, even if breach may affect them
- Multinational Gas v Multinational Gas
○ Dillon: directors owe fiduciary duties to company, not to creditors or individual
shareholders
- S.172.1
○ Enlightened shareholder value
 Main goal is increase shareholder value:
 Be nice to these stakeholders to increase shareholder value
□ Long-term increase in shareholder value
○ Outside people (not creditors!) whose interests have to be considered
Duties to Individual shareholders

- Default rule: Directors owe no rights
○ Percival v Wright
 Facts
□ Directors negotiating takeover for company in secret
□ Plaintiff: shareholder offered to sell shares to directors, wanted to be out -
directors said yes
 Takeover didn't occur, but plaintiff still mad for not being told
 Wanted shares back: realized company was a takeover target
 Said directors owed fiduciary obligations to shareholders
◊ Important fiduciary obligation is disclosure
◊ No disclosure was breach
 Court:
□ Acknowledged directors owed fiduciary obligation to company
□ But no duty owed to shareholders in this case
○ Pesky v Anderson
 Confirmed the above
 No fid ob. To individual shareholders
- However:
○ Directors could on facts assume fiduciary obligation to individual shareholders
 Separate from duty to company!
 Allan v Hyatt
□ Agency relationship found between directors/shareholders
□ Facts
 Directors entered into classic agency relationship
 Agreed to sell shares on behalf of shareholders
 Therefore owed fiduciary relationship
 Coleman v Myers
□ New Zealand
□ Facts:
 Minority shareholders relied on directors for advice
 Directors knew that minority relied on their advice
 Directors bought shares
□ Court:
Distinguished from Percival: relied on advice!

Notes Page 42
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 Distinguished from Percival: relied on advice!

- Takeover context
○ Facts
 Directors of target company often first to know of this potential deal
 Directors usually have a view about the takeover bid
□ However, sometimes conflict: directors usually prejudiced in takeovers
 Directors' fiduciary duty to company should inhibit flexibility
□ e.g. Director's can't issue more shares to thwart takeover
□ Directors in difficult scenario
○ During takeovers, duties to shareholders are difficult
○ Public companies: Takeover code
 Gething v Kilner
□ Facts
 A company owned lots of land, and B wanted to takeover to get land
 Directors were OK with this and agreed that they would recommend
offer to shareholders
 Stockbrokers brought in to advise on price
◊ Stockbrokers said stock price was too low
◊ But directors accepted price for their shares
◊ Recommended price to other shareholders without telling them
stockbroker analysis
 Minority shareholder sought injunction against company from
recommending this low price
◊ Did directors have duties to disclose this?
□ Court
 Only duties directors owed to shareholders was not to mislead
 Not fiduciaries to shareholders
 Takeover scenarios not give rise to fiduciary obligations
 Horing Internationa v Lord Grade
□ Very specific: not as helpful, example of facts changing default rule
□ Facts
 2 rival bidders for company, directors favoured lower bid
◊ Articles: any transfer of shares can only be made to someone
nominated by directors
 Directors given power by shareholders in saying who
could be shareholders
 Very unusual to have this power
□ Court of Appeal
 This unusual power was given in capacity of fiduciaries
 As result of this, directors owed fiduciary duties
◊ Must get best reasonable price for shareholders
 Must take higher bid
 Dawson International v Coats Paton
□ Directors but have one master
 Company: if you have shareholders, interests may clash
□ However, normal tortious etc duties
Duties to Creditors
- S.172.3
○ Duty imposed here subject to any enactment/rule of law that requires creditor's interest
to be taken into account
- Distinction between share capital/loan capital
○ Both shareholders/lenders give capital to company
 Shareholders have interest "in" company
 Creditors have interest "against company
○ In solvent company, shareholder capital is at risk - not loan
 In insolvent company, creditors at risk as well: but creditors have priority over
members
Notes Page 43
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members
- Insolvency scenario
○ Should directors owe fiduciary duty to creditors?
 Yes
□ Because directors are directly dealing with creditors' interests
□ Directors will heavily prejudice creditors if no duties: nothing to lose, only
risks creditor capital
 West Mercia
□ Recognizes that the creditors' interests are at stake
- Law's response to the director's prejudice against creditors in insolvency
○ Insolvency Act
 Wrongful trading: incentive for directors to not prejudice creditors
○ Directors disqualification Act
○ CA 993
- Statutory provisions solve director problem
○ No need for fiduciary obligation to be enclosed
- Earlier cases statements: maybe it is a good idea?
○ Winkworth v Edward Baron Development
 L Templeman: maybe should have fiduciary duties to creditors? Obiter dictum
- However
○ Recent authority denied directors owing duties to creditors
 Yukong Line
□ Statutory provisions were sufficient
 Why no fiduciary duty?
□ If you give individual creditors right to sue creditors
 Would interfere with insolvency
 Creditors will try to disrupt equal distribution and jump the queue
 Jump queue
- Company's Act
○ S.173
 Subject to any enactment that requires directors to act in interest of creditors
□ S.213-214 insolvency act: wrongful trading
 Subject to rule of law that requires directors to act in interest of directors
□ Not as far as duties
□ But what does it mean?
 Leave it open to some obligation for directors to act for creditor
 Statute may accept creditors are special in insolvency?
Duties to Employees
- 1990 Act
○ S.309.1
 Directors must have interest of employees in general when making decision
 Duty imposed in this section is owed by director to company/to company alone
 Director's must have regard to interest of employees, but only enforceable by
company
□ Unenforceable by people which duty is designed to protect
 Distinction between to whom the duty is owed, and the content of the duty
○ Now in S.172 in the 2006 act
- Issues with pluralism
○ Conflict of interest if owed to every stakeholder

Notes Page 44
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S 171-173
21 November 2015 17:40
- s.171
○ Content
 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.
 Duties are cumulative
○ 171.a
 "Accordance with company's constitution"
□ S.257
 definition for purposes of part 10 (directors duties)
◊ Any resolution or any other decision come in accordance with constitution
 General meetings/director resolutions passed under articles
◊ Any decision by members of company treated by rule of law/enactment as decision by company
 e.g. Duomatic principle (rule of law)
 In addition to matters in S.17
□ Smith v Forsyth
 Director's power in articles to veto transfer of shares
◊ Directors could decide who could be a new shareholder
◊ Not explicitly limited in any way
◊ Common provision in small quasi-partnership companies
 CoA
◊ Someone objected to veto directors gave
◊ Construed to find if there were any limitation on this power
 Discretion was "drafted in widest possible terms"
 No constitutional limitation on this veto power
◊ Director did not act outside of constitution
□ Guiness v Saunders
 Facts
◊ 3 board members were put in charge to deal with takeover bid
 Decided that 1 of them would receive fee for services
◊ Model articles: fixing of director's remuneration was power of full board
 No delegation to parties
 HL:
◊ Transaction was void b/c was outside power to fix fee
◊ Breached 170.a
□ Other consequences of breach
 Protects 3rd parties
◊ S.39-40: certain transactions, even if in breach of duties, are effective vis-a-vis 3rd parties
○ 171.b
 Proper purpose case law
□ Case law read in light of statutory provision, if conflict then legislation
 Contrast with old law
□ Smith v Forsyth
 Directors must not act in any co-lateral purpose
 Looked for collateral purpose
 Now: positively phrased
◊ Directors must acted on the purpose of which the power is conferred
◊ Positive assertion of purpose is important
◊ Difference
□ Regarded as part of bona fide requirement
 Subjective twist to proper purpose doctrine
 S.171.b is no longer bona fide
◊ Is objectively phrased: no relation to bona fide
 Directors issuing shares
□ Power to issue shares prima facie set out in articles
 Purpose also
 Historically given to directors
 Companies Act curtailed the unfettered discretion
◊ CA 549
□ Purpose for this power?
 To issue shares
 Other purposes
◊ Punt v Simons
 Facts
– Company made contract agreeing not to alter articles
– Directors wanted to alter articles
 Issued more shares to sympathizers to alter articles
 Other party to contract objected
 Sought injunction:
1. Company promised not to alter articles, company could not contract out of statutory power to alter constitution
2. Challenged issue of shares: issue share was for sole object of alterating, collateral purpose.
 Court:
– Director's issuing shares are primary for purpose of raising capital
– But still had other purposes!
 Statutory powers etc.
 But on facts, unfair purpose to manipulate articles: not part of any other legitimate purpose
 No proper purpose:
 Note: no need to articulate what the exact purpose was because he was sure it was not in contemplation of constitution, but
now would need to articulate after CA
◊ Takeover bids
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◊ Takeover bids
 Hogg v Cranphorn
– Facts
 Takeover bid
 Threatened takeovers would make directors nervous
 Tempted to issue shares so bidder does not get 50%
 Motivated not by personal conviction
 But takeover was of concern by employees and others: (weren't thinking of us, all others)
– 1st instance
 Improper purpose: thwart primary purpose
 But GM could have authorized/ratify this issue of shares as long as votes attached to new shares ignored
 Duty can be modified ex ante!
 Bamford v Bamford
– Facts
 Takeover bid
 Thought issue was challenged, so before challenge called GM to ratify their issuance
 GM agreed
– CoA
 Was a breach because primary purpose was to issue shares
 But GM could ratify
 Harlow Nominees
– Issue was for purposes of company
 Howard Smith v Ampole
– Takeover: rival takeover bidders, Ampole was shareholder at war with directors
 Ampole wanted to buy more shares
 Howard Smith: outside takeover bidder
– Directors issued shares to Howard
 Claimed for 2 purposes
 Company needed issuance
 Issued to favour Howard over Ampole
– Court
 Ampole challenged
 L Wilberforce:
 Confirmed power to issue shares was a fiduciary power, must be exercised according to fiduciary obligations
 Court must determine purpose for which it was conferred
 Refused to give alternative purposes for issuance of shares - so confirmed in theory but did not give any
examples
 However: on facts
 Power was not for purpose of diluting general power
 Unconstitutional for directors to use power over shares to destroy majority/create new majority
 Interferes with accountability mechanism that holds them to account (GM)
◊ Lee Panavision
 Outgoing directors were being gotten rid of
– Before leaving, delegated managerial powers to plaintiff
 Permitted in articles
 Fiduciary power: must be exercised for proper purpose
– Motivation
 Directors wanted to hamper new directors' managerial powers by delegating to another body
 New directors came in and refused to comply with these managerial powers restrictions
 Court:
– Unconstitutional for directors to interfere with managerial powers of successors
– Improper purpose
◊ Not just for takeovers: for any other purpose
 Court must now spell out purpose
◊ But the old case law only states negative
 JKX
◊ Does not apply to all powers?
◊ L Sumption: normally articles will be silent as to purpose, just figure out from context
 3 principles for exercising power: where there are no explicit purposes outlined for particular powers
◊ Smith v Forsythe: Exercise bona fide for company's best interest
◊ If acting in own interest, can't be acting for proper purpose
◊ Cannot exercise power to adjust constitutional balance of company: thwart majority wishes
S.172
- Duty to promote success of company
- Old case law
○ Overarching general fiduciary duty to act bona fide, lots of controversy:
 What does a company mean for this purpose?
□ Wealth maximization (shareholder value) vs pluralist (stakeholder interest approach)
 Wealth maximization
◊ Maximize wealth of shareholders
◊ Dodger v Ford Company
 US Case
 Facts
– Henry Ford thought his shareholders had done very well out of investments
– Henry would reduce prices/expand production of cars, increase employment
– Thought he could spread benefits to greatest possible number to help them build up their homes
– Shareholders challenged this: directors are profit engineers
 Court
– Directors could not use it for anything but shareholder value
– Ford must not social engineer
◊ Legal advantage:
 Clear-cut, easy to tell if director has broken obligation
◊ Criticism:
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◊ Criticism:
 Other stakeholders whose interests are also affected
 Employees: marxist theory
 Customers
 Community in which company functions
 Pluralist approach
◊ Directors must take into account interest of other stakeholders
◊ Legal disadvantage
 Discretion is unreviewable: can always argue interest for some group
◊ Economic disadvantage
 Discourages shareholders to invest in companies
 Enlightened shareholder value approach in 172
◊ Focus on shareholder: director must focus on success of company on its member as a whole
 But must have regard to other things too
◊ Shareholder value approach
 But still has to keep in mind other interests
◊ Reflects english case law
 Hutton v West Cork Railway
– Directors decided to give employee a trip to the countryside
– Expenditure was challenged
– CoA
 "law does not say no cakes and ale, only that no cakes and ale unless for benefit of company"
 Here was for benefit of company
 Most companies require liberal dealings between servants
 Eases relationship: better value of company
 Bottom line is shareholder wealth, but to achieve it should help employees
- Content
○ (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 t he company for the benefit of
its members as a whole,
 Director
 In good faith: subjective test, motivations of director
□ Court does not make business judgements
□ Only duty with subjective duty in it
□ Limitation is always here at all other duties (including 171)
□ Why?
 Court should not make business judgements in stead of directors, courts want to take a limited role
 Same for shareholder alteration of articles - subjective test
○ Good Faith
 Smith v Forsythe
□ Courts articulated this duty as well
□ Directors must act bona fide what they consider (not what the court considers) as good for the company
 Regent Crest v Cohen
□ Facts
 2 directors under contractual liability to company
 Other director voted in board to waive company's claim to the money as long as directors agree to carry on for free
 Company then went into liquidation
◊ Liquidator challenged waiver of liability
◊ Could not be good for company! Challenged
□ Court
 Good example for court's strange reaction
 X must really believe in good faith
◊ Director convinced court that his actions towards the other director was bona fide
◊ Presence of director more valuable than lump sum
 Not for courts to determine what is objectively good
 Controversial case
□ Item Software v Fazihi
 Facts
◊ Fazihi was director if IS
◊ Item software was distributor for company X
◊ Fazihi set up own company in competition with IS, and when contract came under renewal, Fazihi wanted to get contract for his
own company
◊ Other directors sued F for breach
 Court
◊ 1st instance
 As matter of fact, breach of S.175 did not cause IS to lose contract
 However, losing of contract was that other directors didn't realize Fazihi was negotiating for own company
– Had they known that they would have negotiated differently
 Breach of duty that caused loss was lack of disclosure by F
 How to impose duty of disclosure?
– Aspect of bona fide duty to disclose any wrongdoing
– For benefit of company to know if director is misbehaving
– Strange:
 Wide duty: "duty of 172 is focused on principle, dynamic and capable of application in any
 Whenever director is in breach of any other duty, he will always breach 172 if he does not disclose it
○ Promote success of company for benefit of members as a whole
 Members are focal point of duty
 As a whole: majority as well as minority
□ Majority can remove directors, but directors duty toward whole group
□ Mills v Mills
 Directors must act fairly between different classes of shareholders
 Almost identical to shareholder voting to alter articles
□ Alan v Goldreefs
□ Only similarity
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□ Only similarity
 Bona fide: subjective test
 Court does not decide what is right for the company, only decides if directors/shareholders believed it to be so
□ Otherwise different
 Directors under fiduciary obligation: cannot act under self-interest
◊ Comes with baggage of fiduciary obligation
 Shareholders can act in their self interest
○ Directors have to give regard to certain other things when making decisions
 Background
□ Non exhaustive
□ Other considerations
 Charter Bridge v Lloyds Bank
◊ Facts
 Directors of subsidiary in group
 Directors did not follow well-being of company, but rather well-being of the whole group
 Clear that well-being of subsidiary depends on group
◊ Not a breach b/c welfare so closely linked
 But this seem to be a judgement on the facts rather than the good faith?
 Justified through consideration of other parties required
 If courts don’t in fact take into account company, not able to take into good faith - so must apply objective test
◊ So there is breach
 But no loss! So no breach: logic is sort of there
 You breach, but charter bridge can rescue you
– Safety net
◊ Single economic unit argument?
 Parent is shadow director
 Veil lifting cases
 Other considerations not ranked
□ What if they do not take into account the other list?
 On face, seems to be breach
 Charter Bridge
◊ Directors looked at benefit of group - not shareholders of subsidiary
◊ Court considers whether honest/ reasonable director could have thought it was for benefit of company
◊ If they considered these other factors, could they have
 Could decision have been for benefit of company?
 Objective test
 170.2: Actual non-exhaustive list
□ Likely consequences of decision in long term
 Tries to inhibit short-termism
□ Interest of company's employees
□ Need to foster company's relationship with suppliers, customers and others
□ Impact on community/environment
□ Desirability of company's reputation for high standards
□ Act fairly between members of company
 In practice- enforcement
□ Taken into account only when they benefit shareholders as a whole
□ To what extent does S.172 allows challenge to directorial decision making?
 Duty owed to company: no stakeholders have any locus standi to sue for breach
◊ No one with any locus standi would not be interested in these interests
◊ Mismatch between content and enforcement
◊ What's the point then?
 Directors nudged to follow provision
– Annual report: must publish statement about how they have performed this duty. Must articulate this
– No stronger enforcement mechanism
□ Employees
 Bullock report
◊ Says employees should be appointed to board: e.g. German company law
◊ Never enacted
 S.309 CA 85
◊ Regard must be had regarding these matters
◊ Interest of employees/members
◊ Owed to company/company alone, enforceable as any other fiduciary
 S.172 re-enactment of 309
◊ Enforcement of any breach done by company
 Case law 309
◊ Additional indirect effect
 Provided defense for directors who might otherwise be accused of not acting in best interest of company
 Re Welfab Engineers
– Company gone bust: liquidators sued directors for breach of duty
 When company was going bust, directors had 2 offers
 Asset stripping offer: offered more money
 Other offeror agreed to keep on work force
 Directors rejected higher offer and accepted lower offer
– Judge: MJ Hoffman
 Directors were obliged to have regard to company's employees
 They kept this in mind, and were not in breach
 Must however keep success of shareholders as a whole
 May construe it as a long-term investment
◊ Will be similar application in S.172
 Will encourage b/c they will be less likely to be held by the beginning of S.172 liable in breach
□ Creditors
 Not in the list
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 Not in the list

 Special provision: S.172 (3)
◊ Rule of law/enactment can require directors to take into account in certain circumstances rights of directors
◊ "enactment"
 Insolvency act S.214: wrongful trading, liability for directors who continue trading in insolvency scenario
◊ "rule of law"
 Case law?
– Could augment 214, put in duties in duties beyond 214
◊ Re HCL Environment
 Liquidator alleged breach of 172.3
 Court: directors had considered so not breach
□ Human rights/environment
 People & Planet Case
◊ In situation where lower CSR policy would be a detriment to shareholders, then directors should raise
 Would they be in breach if they don’t consider?
 Or is it that if they raised, it would be a defence
S.173
- Duty to exercise independent judgement
○ Mustn't be dictated to
○ Used to be "no fettering of discretion" - negative
- Nominee directors
○ Directors appointed to future intents of appointee
○ Scottish Cooperative v Mayer
 Parent company nominated directors of subsidiary, who followed instructions of parent
 Minority shareholders dissented
 L Denning
□ Directors of subsidiary should act on benefit of subsidiary
- Qualifications
○ Not infringed by
 S.173.2
□ In accordance of agreement with company that later restricts exercise of discretion by directors
 Appointment of director - agreement could modify
 Levin v Clarke
◊ Creditor wanted someone in company to monitor
◊ Contracted with company, no violation of 173
□ Otherwise authorized by constitution
 S.257
 Permits ex ante authorization
- Why this duty?
○ Fulham Football Club
 Claimant football club entered agreement with landlord
 Landlord promised hefty payment if football club agreed to any future planning of landlord to change land
□ Landlord applied for planning permission
 Directors changed minds and want to oppose application
□ Directors argued
 Not bound by contract because that fettered their discretion
 Crazy! Companies can always get rid of contracts b/c directors change their mind
 Why legislation
□ Only ensures that they are independent when entering into the contract
□ But can limit their own discretion through earlier contracts
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S.174-175
Saturday, November 28, 2015 5:40 PM
S.174
- Director must exercise reasonable skill, care and diligence
○ Reasonableness
 S.174.2
□ General knowledge skill and diligence reasonably expected to
□ General skill/diligence that that particular director has
- Not a fiduciary duty
○ S.178.2:
 S.174 is only one that is not a fiduciary duty, common law duty of care and skill
- Similar to wrongful trading in IA
○ 214: general knowledge/skill experience to assess wrongful trading
- Common duty is lax
○ Donoghue v Stevenson
○ Chancery courts dealing with competency before negligence
 Very lax rules: historically directors were trustees who were amateurs
 Chancery division did not take donoghue into account: still applied
□ However, were strict with fiduciary duties
 City Equitable Far Insurance
□ Pre-donoghue
 Director committed fraud, liquidators sued other directors
 MJ Roma:
◊ Standard he expected for directors
 3 standards
– Reasonable skill expected of his particular skill and
experience
– Duty is intermittent: not bound to give continuous
attention, no need to attend all board meetings for
example
– Directors justified in trusting others
 Lexi v Luqman
□ Directors must proactively investigate suspicious behavior
□ 1 director misappropriated funds, their two sisters who were also directors
at first escaped liability
□ Court of appeal held that the sisters were also liable:
 Duty to be on guard and pursue adequate explanations
○ Pushing towards a stronger criteria
 Delegation: ongoing duty to supervise and duty of care in selecting delegatee
 Directors should be sucked into this professional negligence area
□ Dorchester Finance v Stebbing
 3 directors of company
◊ 1 was running, other 2 were sleeping: other two wrote blank
checks
◊ Fraud of checks
 Court said all 3 were liable
◊ Distinguished City Equitable (which said directors no need to
attend all board meetings)
 Here the 2 other directors did sign the checks: facilitated
the fraud
□ S.214.4 IA
 Directors must act competently in case of insolvency
□ Disqualification act
Disqualifies directors if incompetent

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 Disqualifies directors if incompetent

 Re D'Jan of London
□ Facts
 Director here applied for insurance for company
 Director without checking form just signed it off, there were many
misrepresentations on the contract which the insurance company was
able to use to deny payout, which forced company into liquidation
 Claim by liquidator under S.214 for any breach of duty
◊ Breach duty of care
□ L Hoffman:
 IA provision for competency is a general standard for competency, not
limited to insolvency
 Cohen v Selby
□ Facts
 Company owned by father/son
 Son appointed director, father was de facto director who ran company
 Father was negligent: lost company jeweler
□ Court
 Son found not liable
◊ Son acted reasonably in trusting father
◊ Even if son had taken more interest in company, son could not
have helped father stop this
 Bearings Case
□ Disqualification case against non-executive directors who failed to stop
employee was running up huge losses
□ Judge
 Although delegation is OK, does not absolve directors from supervising
 All directors have continuing duty to know functioning of company
◊ Even non-directors have some duty of supervision
 Australia
□ Ordinary professional negligence standards applied to directors
 AWA Case
◊ Director and CEO to undertake risky investments
◊ Huge losses
◊ Sued auditors, who then sued CEO and directors
◊ Auditor succeeded against CEO
 Court applied ordinary principles to assess CEO
 Did not find non-executive directors liable b/c they took
reasonable steps, made inquiries that were fobbed off by
the CEO
 S.174 clarifies this old case law
□ Care skill and diligence that can be reasonable expected by someone in his
position
 Minimum objective standard
 Must be fine-tuned according to his position and the nature of the
company
◊ Executive vs sleeping director
□ General skill/knowledge the director has
 Subjective standard that can raise the standard
 Stupid: punishes people for being experts, even if they were not hired
as directors based on their expertise
 Causation:
□ Breach must have caused the loss
 See Cohen:
◊ Sons could not have stopped father from losing the diamonds
◊ Sons were not liable because even if they had breached the
duty, no loss would have caused

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duty, no loss would have caused
S.175
- Duty to avoid conflict of interest
○ No conflict rule: not no profit
 No profit is part of no conflict rule
○ SubS 1: Must avoid situation where his interest conflicts/may conflict with company's
interests
○ SubS 2:Applies in particular to exploitation of information or opportunity
 Irrelevant whether he can or cannot exploit opportunity
○ Tito v Widell:
 Shepherd must not become the wolf!
- 175.1: Avoid certain situations where he has direc/indirect interest that can conflict with
interest of company
○ Scope very wide
 Actual or potential interest
 Direct or indirect
□ S.175.7:
 Can conflict with countervailing duties to others, not just own self-
interests
 Limits
□ Does not arise in arrangements with company: does not apply to self-dealing
□ Specific provisions deal with self-dealing scenarios
 Such transactions are common so less cumbersome
- Common law development
○ Aberdeen Railway v Blakey Bros
 Overarching rule: director cannot profit from their position
○ Corporate opportunity cases
 Directors see opportunity come to company and instead of helping company
 Cook v Deeks
□ Case
 Successful company with 4 directors
 Perform contract for Canadian railway company
 New contract came up for negotiation, and 3 directors diverted it to
their own name
 Cook was 4th director and sued other 3 on behalf of company
□ Court
 People cannot sacrifice the opportunity for the company that they
 Must account for profits, held opportunity for company
 3 directors went to GM and got shareholders to agree with their
actions
◊ PC: not effective approval: minority oppression, deprived
company from what belonged to it
◊ S.239 does allow ratification: what is impact of S.239?
 Does this impact the decision? Why did it not work? 2
opinions:
– Directors voted to ratify: S.239 disenfranchises
directors in such decisions
– Certain breaches that are so heinous that cannot be
ratified
 S.239.7: does not prejudice any rule of law
that says such acts are incapable of being
ratified by company
 Regal Hastings v Gulliver
□ Facts
 Regal formed subsidiary to rent 2 cinemas to make profit
◊ Landlord wanted personal guarantee from directors or capitalize
the subsidiary (issue more shares)
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the subsidiary (issue more shares)

◊ Directors issued more shares
 Directors bought these shares b/c regal could not buy all
shares
 Landlord rented cinema to A, share value in A increased
 Takeover bidder bought all shares in regal and acquired shares in A
◊ Directors got profit from the shares
 New board wanted to disgorge original directors of their profits
 Directors acted bona fide, and claim by Regal was completely
unmeritorious: greedy and wanted more profits from directors
□ Court
 HL applied Keech v Sandford, directors liable to account
 Fiduciary to disgorge profits does not depend on fraud
◊ Only rests on mere circumstance that profits have been made
 Should have protected themselves by resolution
◊ S.236
◊ Could have asked members to ratify, but did not
◊ However: S180: no disenfranchment of ex ante ratification
◊ In contrast with Cook v Deeks
 Regal can ratify, Cooks can't: what's the difference?
 Maybe heinous nature of breach?
 Buller v Buller
□ Facts
 Family property company, family quarrelled and divided into 2 camps
 Decided that family would not acquire new property because could
not work together
 2 directors formed another company "S" and heard that property near
the original premises of A's company were for sale
◊ Wanted to buy
◊ Other directors thought this was a breach because should have
bought for company
□ CoA
 New company held property on trust for A
 Strict application of rule: especially because the old company had
already decided to not carry on any business
◊ Directors must have A's interest in foremost: whether A should
have acquired this
◊ Special because the property was adjacent
 "company may have been interested in this opportunity"
◊ Definition of corporate opportunity
 Is it possible to be company's interest?
 All about loyalty
 Item Software case

□ Director seeking to divert contract to himself
 Duty to disclose under S.172
□ S.175 case
○ S.170.a
 Person who ceases to be a director continues to be subject to S.175
□ Exploitation of information/opportunities that arose during his directorship
 Canadian Aero Services v Omalley
□ Director was negotiating on behalf of company for contract
□ Resigned and then diverted contract to own company
□ SC
 Contract was a maturing business opportunity
 Fiduciary survived resignation with regard to such opportunities
 Industrial Developments v Cooley

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 Industrial Developments v Cooley

□ Facts
 3rd party contract reluctant to give contract to company but rather
dealt with directors directly
□ Court
 Even if 3rd party would not deal, the director may have not been
acting for best interests of company
 Sometimes allow resigned directors to take opportunities
□ Maturing business opportunity test
□ Inland Export Finance v Ummuna
 Director resigned for own reason
 Old contractor with company approached him and wanted a contract
 Court
◊ No maturing opportunity at time of resignation
◊ No liability
□ Borston v Headline Filters
 Director resigned because he wanted to set up own business
 When resigned, he hadn't decide what he wanted to do
 Later old customer went to him directly
 Court
◊ Was there a mature business opportunity?
◊ Not in present case on facts, did not breach
◊ Policy: wants to allow directors to create competition in market
 Now entrenched in statute law 170.2:
□ "opportunities that directors were aware of"
 Wider tests than maturing business?
 To what extent does this change the test?
◊ Subject to any necessary adaptations
□ Not totally clear if old law lives or if new law has changed
○ S.175.7
 Any conflict interest includes a conflict between self-interests and other interests
 Puts to rest cases about directorship in competing companies
□ Case law
 Mashonaland Case
◊ Court had lax approach
◊ Permitted directors to act as directors in competing companies
◊ Odd: equitable rules suggests that fiduciary duties are free of
other influences
 Pre-act case law began to doubt Mashonaland
◊ Plus group v Pike
 Facts
– One director disagreed, so others excluded him
from management
– The director set up business and started to busniess
with old company's clients
– Other directors sued
 Court
– Pike's duty had been reduced to vanishing point by
fellow directors/shareholders
– No longer under fiduciary duty, but no duty
– Obiter: competing directorship concept
 LJ Sedley: should not be allowed
◊ Foster Bryant v Bryant
 Disapproved Mashonoland
□ No need to worry about case law any more
 Statute precludes acting as director for more than 1 company
- S.175.3

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- S.175.3
○ Duty does not apply in conflict of interest arising from a transaction or arrangement with
company
○ 175 and 177 are mutually exclusive in regard to specific scenario
 However: overall situations can violate both, as long as the breaches attach to
different things
- Statutory modification of S.175
○ Only applied to S.175: directors cannot get around other statute
○ S.175.4.a
 If a situation cannot be reasonably regarded as likely to give rise to conflict of
interest
□ L Upjohn: Boardman v Phipps
 S.175.2
□ Immaterial whether company can take advantage of this opportunity
□ Conflicts with S.175.4.a?
 Real likelihood of conflict vs irrelevance of likelihood for company to take
advantage?
 NB trust cases:
□ Totally irrelevant whether company was going to take advantage of
opportunity
□ Queens Silver Mines Case
 Company actively rejected opportunity, so directors could take it up
□ Extent of corporate opportunity doctrine
 Should there be a reasonable prospect that the company would have
taken advantage of the opportunity to hold directors accountable?
 Conflicting statutes perpetuates case law uncertainty
○ S.175.4.b
 Duty not infringed if this has authorized by directors
 Fellow directors can authorize a director to take advantage of the opportunity
□ Ex ante GM can modify: but here directors can authorize ex ante!
□ Ex post must still be GM ratification
 S.175.5
□ How is this authorization achieved?
□ Private and public distinction
 5a. Private: where no constitution not allowing this, directors can
authorize other directors to take corporate opportunities. However,
articles can modify
 5b Public: possibility not here unless constitution so provides.
◊ Do model articles constitution apply? Don't think so
 Assuming constitution permits
□ S.176
 Only allowed when quorum is met without counting those directors
interested
 Interested directors disenfranchised
◊ Any other interested ones! Not just the one who diverts interest
 Clarifies common law
□ No doubt that GM can modify duty, but question about directors approval?
□ Policy
 Problems
◊ Directors may have a culture of easy conflict resolving
 Incentive to say yes is strong, because those who approve
may themselves in future ask for approval
◊ Ratifying by general meeting 239.7 - subject to enactment/rule
of law
 Nothing in S.175 that echoes this limitation
 Easier to approve as director than as shareholder?
◊ Company law review committee
 Recommended that such decisions are reported in
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 Recommended that such decisions are reported in

director's reports
 Not present?
◊ S.176.6:
 If you don't like idea about companies can say yes, can
always in constitution state directors cannot
– Or must report before the GM approval
– Can alter default position of S.175
 Limitations to the wide scope of director ratification
□ S.172
 Other directors, when agreeing to this, must in good faith think that it
does benefit the company
 S.180.4 - authorization possible
□ General duties have effect subject to any rule of law
□ S.175 director's authorization is additional way of relaxing duty
□ When 174a talks about enabling the GM
 Must mean GM, because directors approve 175 meetings
 Can directors as shareholders vote under 174a, given they are
disenfranchised over
□ Sharma v Sharma
 Facts
◊ Dental practitioner who had two dental practices, formed
company A with husband and inlaws to carry on dental practices
◊ Sharma made director
◊ All shareholders agreed that she could acquire further practices
for self and not company
◊ Woman then became estranged from husband, and acquired 5
practices in own name
◊ Divorce proceedings: beneficial ownership of these contracts
was in question
◊ Shareholders of A claimed she was breaching fiduciary duty
◊ S.175 breach
 Court
◊ As all shareholders of A agreed that she could acquire practices
by herself, she was not in breach of fiduciary duty
◊ Applied duomatic principle
◊ Analysis:
 S.180.4.a permits general meeting to modify S.175
obligation
– GM can due this formally, and duomatic operates to
do away from formalities
□ S.180.4.b
 Where provisions that deal with conflict of interest, they take
precedent over other default duties
 Allow articles to modify them
◊ No model articles that modifies director's interest
 S.239- ratification possible
□ General rule GM can ratify breaches of duties
□ S.239.7: some acts incapable of being ratified by company
 Cook v Deeks: is this an example?

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S.176
Thursday, 3 December 2015 09:06
Director cannot gain benefits from any 3rd party

Scope
- Company law
○ Logicross v South End United
 Facts
□ H was director/principle shareholder of logicross, M was chairman of board
of defendant
□ Contract negotiated H and M on behalf of their companies
□ H bribed M: paid 70k into offshore bank account
□ M then had a lapse of conscience so paid 70k into the account
 Still didn't make full disclosure about nature of the 70k
□ Terminated Logicross later, logicross asked for their bribe back
 LJ Millet
□ Contract made in breach of a fiduciary duty is voidable against a contractor
 South end could rescind the license b/c
□ Bribe?
 In equity the company's money
 Director held on trust for company
 Whether they accepted contract or not, bribe was always the
company's
◊ Even when company rescinded contract, bribe was theirs b/c it
was outside contract
- "Bribe"
○ AG v Reid
 Gift given to fiduciary to induce him to betray his trust
- "Benefit"
○ Any benefit in the dictionary sense
- "By reason of status as director"
○ Ex-director
 S.170.2: person who ceases to be director continues to be under S.176
- S.176.2: "3rd party"
○ Excludes situation where director provides services to company through another
company owned by him (tax advantages)
- S.176.4: benefit must be likely to give rise to conflict: small Christmas gifts OK
○ Company hospitality
- S.176.5: conflict of interest includes conflict of duties
○ Odd? No talking about conflict of interest at all
- No provision in 176 allowing directors to authorize such a benefit!
○ Can modify ex ante S.180.4
○ Ex post S.239
○ But nothing specific in here that goes beyond that
Conflict between 175/176

- Both deal with conflicts: one action may fall under both provisions
○ S.179: Except otherwise provided, more than one general duty can apply
- S.175: no conflict of interest, S.176: cannot receive benefit from 3rd party
○ One who takes a corporate o
○ pportunity can fall within both
○ However: 175 gives specific ways to authorize decision but 176 does not apply
 If we give meaning to 175, must be some cases that are only within 175 and not
within 176
□ Otherwise, authorization under 175 would be pretty worthless b/c director's

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□ Otherwise, authorization under 175 would be pretty worthless b/c director's

actions would just be a breach of 176
 S.175.2: applies particular to corporate opportunities
□ Allows directors to authorize this in advance
□ Corporate opportunities only fall within 175 and can be authorized
 Directors can authorize by S.175, shareholders can authorize S.176
 Not caught by 176: even if working of 176 would appear to catch them
□ Why?
 Benefit contemplated under 175, company could have legitimately
acquired for itself
 S.176: cannot be contemplated by the company
- Ex ante modification of duty
○ General duties a: have affect subject to rule of law
○ Company's articles can contain articles
How would ratification/authorization apply to 176

- Duomatic principle
- Check if anything in articles (not present in model articles)
- S.239
○ Company may ratify a breach
○ S.239.7: preserves non-ratifiable breaches
 No ratification in Cooke v Deeks situation: does this principle extends to S.176
bribes?
 Heinous breaches? No case law on this
 S.7 contemplates that there are non-ratifiable breaches,
- S.180/239
○ Ratification/authorization
 Available unless one takes the view that certain breaches of 175 cannot be ratified
(i.e. 176, Cook v Deeks)

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S.177/182
S.177/182- duty to declare

- Duty to declare interest in proposed or existing transaction/arrangement
○ Must declare to other board members
○ If declared, no normal right to remedy that arises from fiduciary duty
○ Only S.177 applies in this scenario: S.175/176 do not apply
- S.175: does not arise from a conflict arising from a transaction between director and company
Common Law
- Aberdeen Railway Company v Blaiki
○ Facts
 Respondents, BB were partnership who sold chairs to railway company
 Directors didn't want chairs later, so didn't pay
 BB wanted to be paid, directors said the transaction was a breach
○ Court
 No fairness/unfairness of contract
 Inflexible rule in common law that no dealing must occur
○ However: sometimes perfect commercial sense for director to deal with company
 Remuneration contracts?
 Or very good commercial contract?
 Alternative: This duty can be modified by modifying the articles
○ Court trying to curb complete freedom given in articles
 Rule in 1929: whatever the articles said, there was an obligation to disclose an
interest of a director in company : criminal sanction
 S.317 CA 1985
 Mandatory rule in law interfering with commercial freedom!
□ Only other one: GM can always vote to dismiss director
□ Here also to stop directors from altering articles too favorably
CA 2006
- Modern rule of dealing has become a simple requirement for disclosure
○ mere declaration by directors is enough to preclude a breach
○ Other directors can veto the deal
○ Might lead to a no objection culture - directors give each other green light too easily
- S.177:
○ Duty to declare future transaction - directly/or directly interested in transaction
○ Directors treated as being aware of matter which they ought to be aware
○ Exceptions
 No reasonable likelihood of conflict ( Cowan Groot v Eagle Trust)
 Other directors are aware/reasonably ought to be aware
 Where interest concerns service contracts that are remuneration
 Single director not required to make declaration to himself
○ Model Articles Art.14: if one makes a declaration, one is not allowed to vote
- S.182:
○ Continuing obligation to declare a past transaction
 Applies when there is no declaration of proposed transaction
○ Director may be appointed and already has relationship with company
○ Unclear why this needs to be separated from 177
- Compare 2 sections
○ Common provisions
 Both apply to director who are interested in an arrangement with company
 Sub 1: if any way a director is directly/indirectly interested in transaction
 Interested:
□ Not needed that director is transacting himself with company!
□ Only that he is interested in

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□ Only that he is interested in

 Transaction:
□ Does not necessarily have to be contract
 However 177 deals with proposed transaction, 182 about made ones
 Sub 3: if interest changes, must update interest/further declaration must be made
if old one no longer accurate
 Requirement of declaration:
○ Not an authorization!
○ Must declare nature + extent of interest: must state specifically
○ Sub 4 of both sections
 177: declaration must be made before director enters into
arrangement
 182: declaration must be made as soon as reasonably practical
□ Failure to comply does not render the declaration void
 Even if beyond reasonable time must be declared
 S.177.5
 No requirement for declaration of interest that the director is not aware/not
aware of transaction in question
 Might be unaware: beneficial of trust of which he is not aware and trustee
decides to transact with company
 S.177.6
 C: contracts of employment
○ Differences
 S.2
 S.182: mandatory notice given
- S.185 - general notice
○ General notice not given any particular transaction
○ Anticipatory general declaration by directors for potential conflicts and generally declare
○ Director must say whether he has interest in any firm - and will be interested in any
transaction made in that firm
 Must say nature/extent of duty
- S.180: articles can always impose own requirements
- Narrowing of provision compared with S.317 (old provision)
○ Old provision caught not only directors, but their connected persons (spouses)
○ No such reference to connected persons here
 Covered by "indirect interest"
- S.186 - written records to be kept in small family enterprises
○ No sense in declaring himself!
○ Useful for liquidation
• S.188 Long-term employment contracts over 2 years
○ If director negotiated more than 2 year contract, then needed approval of general
meeting
○ If no approval, then 179
 Void for contravention and terminable at any time with reasonable notice
○ Wright v Atlas
 Predecessor to S.188
 Sole shareholder at the time, did not ask for declaration
□ Sold company: new shareholders sued and said S.188 was breach
 Court:
□ Applied duomatic principle: sole shareholder agrees with himself then
effective
• S.191
○ Substantial non-cash asset sales
• S.195
○ Contract is voidable and directors have liability to account
 Subsequent affirmation of contract is possible
Re Duckwari
Notes Page 60
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○ Re Duckwari
 Facts
□ Director sold his own company some land which was owned through
another company
□ Was a substantial non-cash asset
□ Price was fair
 X sold land at same price he paid for it
 Terms of sale gave director 50% of any profit of development
□ However, no approval by general meeting
□ Value of property dropped, court had to deal with consequences
 Court:
□ Gave "arrangements" a very large meaning under S.177 - much wider than
just contracts
□ Applied s.190
 Directors liable for loss incurred by any transaction
 Loss was due to property market falling: but no rules of remoteness
applied, still had to pay the loss
• Loans, credit loans, and quasi-loans
○ Transaction is voidable in instance of company
○ Party to arrangements are liable to account,
○ Subsequent affirmation to dealis possible
○ Cairo Menswear Case
 Confirmed that contract was voidable
 No rule for imposition of constructive trust: statute set out consequences
exhaustively, no room for constructive trust
• Golden handshakes
○ S.217: require GM approval
○ Consequences of contravention
 S.222:
□ Held on trust: director who authorized must indemnify company as well
Differneces betweeen 177/182

- Consequences of breach
○ Civil consequences
 Aberdeen railway: transaction is voidable
○ S.182
 Criminal consequence: hangover from old law
- S.180.1
○ In a case where S.177 is complied with and proposed transaction is disclosed
○ Not voidable if declared
 Precludes breach/other consequences
 Without prejudice to any article require such consent/approval
○ Must declare before for 177 to apply
○ Chapter 4 enactments all require approval
 "without prejudice" : protects application of Ch. 4 or provision for company's
constitution requiring consent/approval
○ S.180.4.b
 General duties not infringed by anything done by directors in accordance with
constitution
 Model articles have in model articles - Art -14: deals with transactions with
directors
□ Conflict of interests section:
 Only applies to conflict of interest in very specific scenarios
 Art.41
◊ Only applied to 177 scenario
◊ Director disenfranchised in quorum
Relationship between 175/177?

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Relationship between 175/177?

-

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Ratification and Authorization

S.178
- civil consequences of breach of directors' duties
- Consequences of breach are same as common law and equity breaches
○ All duties besides 174 (duty of care and skill) are owed as if they are fiduciary duties
 S.174 not a fiduciary duty: common law duty of care
- No codification of remedies
○ Too complicated to do so
- S.171-177
○ S.182 Not included?
 Provides for own consequences: S.183
○ Chapter 4
 Remedy provisions already in Chapter 4
 Contract rendered voidable, golden handshakes held on trust, etc.
- S.179
○ Duties are generally cumulative unless otherwise provided
 More than one duty may apply to one case
□ Mutually exclusive provisions
 If 177 applies, then 175/176 do not apply even if wording seems to
catch (others (174, etc can still apply)
 If 175 (corporate opportunity), cannot fall under 176
S.180.4
- Ex ante authorization: general duties have effect subject to any rule of law, or subject to
company's articles dealing with conflicts of interests
○ 4.a: any rule of law enabling company to authorize breach in advance
 Not GM in analogy to
○ 4.b: anything dealing with conflicts of interests in articles
 None in model articles
- Fly in the ointment
○ S.232: provisions protecting directors from liability (exemption clauses)
 Any provision that proports to exempt director from any liability that he would
incur through negligence or is void
 S.232.3- scope
□ Catches exemption clauses in articles, contracts with company, or otherwise
 S.232.4Nothing in this section prevents articles from exempting any provision that
was previously lawful
 Does this cover S.180.4?
□ S.180.4.b allows articles to exempt: does this clash with s.232?
○ How to reconcile 180.4.b. with 232
 One theory
□ 232 outlaws exemption once a breach has happened (if breach duty, then
not liable)
□ S.180.4 ex ante modifying duty to prevent a breach from occurring:
conceptually different
□ However, is a little artificial
 S.232.4.
□ Certain provisions are lawful if previous case law said so
□ History
 Articles often contained extensive exemption clauses
 City Equitable Case
◊ Directors not liable unless they acted with willful default
 1929: CA included provision that banned exemption clauses
◊ However: immediate problem arose:

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◊ However: immediate problem arose:

 Model Articles issued inder 1929 act included provisions
allowing self-dealing if there was disclosure
– Similar provision to 177
 How to deal with these model articles given S.232 - are
they outlawed?
 Movie Text Case
– Very paradoxical to find that this provision conflicts
with articles
– How are articles valid despite S.232?
 Overriding principle of equity that directors
mustn't put themselves in position of conflict
 Imposed a disability, not a duty (trustees are
disabled, not a duty not to) - semantics?? How
are disabilities not duties?
 Therefore, 232 did not apply because it
was not a duty
 Got out of wording of S.232
– Articles can exclude/modify, in doing so they do not
exempt directors from breach b/c no duty - just a
disability imposed
– 2 problems:
 Reasoning is suspect: real difference between
disability and duty?
 Especially now: duties are defined as
obgliations
□ Intention is to preserve certain exemptions: model articles
 How much does S.232.4 preserve? Narrow wording: only in model
articles that are previously lawful
◊ Old model article dealt with conflict of interest
◊ If provision does not deal with conflict, and only deals with
skill/etc, then is not covered
 Ex ante modification has to comply with S.232 - no one quite clear
how they operate
◊ Maybe 184 always OK because Movie Text
◊ S.232 extremely problematic
○ S.232.2
 Extends to any indemnity that the director takes under
 Covers insurance contracts: desirable that directors should be able to insure
themselves against liability
□ S.233: certain insurance contracts
S.239
- Content
○ Ex post ratification of negligence, default, breach of duty
○ Only resolution of members where directors are disenfranchised
 Contrast with authorization: director not disenfranchised if they move forward
- S.239.7
○ Unratifiable breaches
○ "does not affect any enactment or rule of law that imposes additional burdens for
ratification"
 Rule of law: articlesn can always modify burdens
○ "or any other law that makes acts that are unratifiable"
 Which breaches are not ratifiable?
 Franbar Holdings v Patel
□ Ratification was relevant in deciding whether derivative claim has standing
□ Judge: S.239.7
Looked at Northwest Transport v Beatty
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 Looked at Northwest Transport v Beatty

 General meeting could ratify breach
◊ As long as its not brought about by unfair/improper means,
illegal, or oppressive to shareholders
◊ Unfair/improper means
 Kay v Croydon Tramways
– Failure to disclose all circumstances - director was
interested in transaction it was trying to ratify
◊ Illegal or Fraudulent
 Bowthorpe Holdings
– If creditors are prejudiced
– If company insolvent at time of ratification,
creditors' money are at risk. Members have no more
thing at stake, wrong that they can ratify a decision
– Makes sense
 Duomatic principle limit: creditors capital are
at risk, members should not make decisions
regarding this
◊ Oppressive to shareholders who oppose it
 Cooke v Deeks
– Corporate opportunities diversion case, ratification
by majority oppressive to minority shareholders
 Franbar v Patel
– Diversion of opportunity that, following Cooke v
Deeks, was unratifiable
 Problem with view that all corporate opportunities are
unratifiable
– Regal Hastings v Gulliver
 Obiter Dictum: directors could have gotten
ratification from GM
 What is the difference between Regal and
Cooke?
 Some corporate opportunites are ratifiable
under Regal
– S.239.4
 Disenfranchised directors in Cooke: definition
of majority and minority different
 Previously did not allow majority to overrule,
partly because directors would from that
majority, but now no such problem existed:
still unratifiable?
 S.171
□ Bamford v Bamford
 GM could ratify breach of S.171
 Transaction for improper purpose
 Creditors rights are infringed
 S.172
□ No case law
 S.173
□ Act independently: one could modify this duty by contract, suggests that the
duty is not as immutable
 S.174
□ Negligence:
□ Multinational case: ratifiable
 S.176
□ Bribes and secret commissions: heinous breach, unratifiable?
□ But if GM thinks OK, why not?
 S.177
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 S.177
□ Northwest Transport v Beatty
 Director sold steamship to company, GM could ratify
□ Analogy to Chapter 4: certain transactions OK
 Madoff Securities v Raven
□ Strike-out issue
□ Judge: said it was very difficult to tell when something is ratifiable
- Impact of S.239 on interpretation of ex ante in S.180.4a?
○ S.180.4a: preserves any rule of law enabling company to authorize
 Does company mean GM? Yes!
 If drawing analogies with 239, in 239 directors are disenfranchised: should S.180.4
also disenfranchise directors?
□ Weird if authorization is disenfranchised but ratification is not
○ Does ex ante authorization also unauthorizable?

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Remedies
S.178
- Common law rules and equitable principles
S.179
- Duties are cumulative
- Important: different remedies for different situations
Specific Duties
- Breach of common law duties
○ S.174
 Historically, lax duty
□ Never a fiduciary duty: L Millet: not all duties fiduciaries were under are
fiduciary duties
□ Ordinary common law damages for loss caused applies
 Remedies
□ Compensation
 Must prove loss incurred by company
 Put company in position if breach had not occurred
 Common law principles of remoteness or causation apply
◊ However, few case law on this point
 Little case law
□ Hard to establish breach
 Don’t want to disincentivise directors
□ Hard to assess loss
 If directors were capable what would loss be?
 AWA Australian Case
◊ Thought possible to quantify loss: amount that would have been
there if loss-making transactions had not happened
- Breach of fiduciary duties
○ S.171, 175, etc.
 Compensation:
□ Target Holdings
 Can award damages according to loss in breach of fiduciary duties
□ Richmond Pharmacology
 S.172, 175 were
 Breaches did not cause loss, so nominal damages were awarded
□ Item Software v Fazihi
 Equitable compensation claimed
○ Usually relied upon because better remedies than loss
 Attractive: no need to show company suffered loss
 Murad v Al-Saraj
□ Fiduciary duty owed by joint venturer over another
□ LJ Arden: in interest of efficiency and give incentive to fiduciary to act in best
interest of principal extensive liability to account
○ How does it panned out?
 Voidable contract
□ Recession not available if company can't return the contract, or if innocent
3rd party rights will be affected, or if company has affirmed contract
 Affirming contract vs ratifying breach of duty
◊ Company can affirm contract but can still sue director for breach
◊ If company stuck with contract, can still sue director
 Void?
□ When contract made without company's authority
□ S.171

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□ S.171
 Guiness v Saunders
◊ Gave director A a huge fee, not allowed under constitution, so
was void
□ S.171.b
 Improper purpose scenario: voidable
 Can be affirmed
 Bamford v Bamford
 Distinction between 171.a not clear enough?
 Chapter 4
□ Transactions that need GM approval: own remedies
 Statute spelt out consequences of breach
 S.188
◊ service contract more than 4 years need approval
◊ If no approval, provision is void and terminable
 S.195
◊ Substantial property transactions between director and
company are voidable unless restitution is not possible
◊ Company must indemnified for damage
◊ Directors account for profits, certain 3rd parties are liable for
breach
 Distinguish between 177 and 176
□ S.177: Directors who are common to contract
 Directors need to disclose to other directors
□ S.176: Transaction with 3rd party in context with Breach
 Logicros: any tainted contract is voidable against contractor if 3rd
party aware of breach
 Company can keep secret commission whether contract can be
rescinded or not
○ Disgorgement
 S.175 breach
□ Court will impose constructive trust on director and will require him to give
back property
□ Harrison v Harrison
 Director bought property without disclosing potential of property
 Sold property, had to account for profits of sale
○ Bribes
 European Ventures
□ Fiduciary holds it on trust for company
○ Account of profits
 If directors make profits from breach without being able to identify property used
 Directors must account for profits: personal claim, not proprietary
□ So far as profits accountable to property,
 Regal Hastings
□ Profits made by directors by selling shares had to be sold back
□ Irrelevant that company did not suffer loss
 Buller v Buller, Murad
□ No defense to fidicuary of causation
○ Equitable allowance
 English courts refuse to exercise this discretion b/c is undermines fiduciary duties
□ Guiness v Saunders
 Directors worked hard to deal with takeover
 No equitable allowance was made
□ Quartermaster v Pike
 Court refused despite lots of effort put in by directors
□ Murad case
 Thought this was tough, but for HL to decide
 Contrast to Australia
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 Contrast to Australia
□ More lax
○ Rights against 3rd parties
 Ultraframe case
□ How these work in the corporate context
□ Knowing receipt
 Future cases to learn
◊ Belmont case
◊ International Sales and Markets
◊ Raw Steel Product
 Buller v Buller
◊ Recipient company was constructive trustee
◊ State of mind: commercial context
 Acadelia Case
– Whether it was unconscionable for 3rd party to
retain property
◊ Tracing+ proprietary claims arise after liability has been
established, personal claim persists
□ Dishonest assistance
 Personal claim
◊ Twinsectra v Yardley
◊ Barlow Clowes
 Chapter 4
□ Statutory remedies against 3rd parties in line with common law
 Duckwari Case
S.1157
- Court has discretion to give directors relief
○ Applies to negligence, default, breach of duty of an officer of company
○ "acted honestly and reasonably and ought fairly to be excused, court can relieve wholly
or partially on terms it sees fit"
- Directors often rely on this term
- Successful reliances
○ S.174
 Re Dijan
□ Facts
 Director owned 90% of shareholding and wife owned 1%, signed
insurance policy without reading it properly
 Company's items were uninsured because of wording
 At time, company was solvent even though it was huge loss
 Only peoples' interests were affected was the shareholders
□ LJ Hoffman
 Applied S.174 test of competence
 Lifted veil: applied doctrine of concealment
◊ Company was separate legal entity, economic reality taken into
account
◊ Fact that only people prejudiced was himself, stupid for him to
pay into the company because it was basically himself
 Confirmed S.174 was common law
 Weird that S.1157 can be used for 174
□ S.1157 requires directors to act reasonably, but 174 breach requires
unreasonableness?
○ Duomatic case
 2 breaches
□ Articles required directors remuneration to be authorized by GM, director
withdrew without GM
◊ However, all members agreed to this drawing, so no need for
special resolution

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special resolution
 Later on, more shareholders came on board and directors kept
drawing
◊ Now the principle no longer applied, because new shareholders
entered
◊ However, court said director could be excused because acting
reasonably - S.1157
 Can reasonably expect to withdraw because no one had
objected to this before
□ Large sum paid to retiring director who was threatening to sue company
 Breach of S.215: golden handshake provisions require GM approval
 Directors not excused
◊ because no attempt to properly quantify amount director was
allowed to
◊ Did not act reasonably
 Court looks closely at facts to assess reasonableness
- Failed reliances
○ Dorchester Finance
 Sleeping directors who were signing blank shares so 1 could do whatever he liked
 Not acting reasonably
 If in breach of 174, then by definition you are not acting reasonably - more
supportable than Dijan
○ Guiness v Saunders
 Did not get 1157
○ Produce Marketing
 Relief not available if in breach of wrongful trading provisions
□ S.214: directors liable to contribution would be completely undermined if
court interpreted 1157 to cover this

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Derivative Claim
Thursday, 21 January 2016 09:13
Who are owed?

- Company:
○ Percival v Wright: Company
- Shareholders:
○ Peskin v Anderson
○ Sharp v Blank
Who can enforce? a
- The company
○ Organ?
 Board
□ Model Article 3: directors given control over litigation
□ Board conflicts
 Board members have conflicts
 What if we disenfranchise wrongdoing directors?
◊ But other directors will still want to be nice
 General meeting?
□ By special resolution can instruct directors to litigate
□ Implied reservation of authority
 Alexander Ward v Samyung
◊ Facts
 Company went bankrupt, were proceedings properly commenced?
 General meeting made ordinary resolution to litigate
◊ Law
 Distinguished from automatic self-cleansing
– In Alexander, there were no directors
– Conflict was not between shareholders and directors here
 Allowed, ordinary resolution can intervene
 Breckland group holding
◊ General meeting cannot force directors without special resolution
◊ Reversed alexander
◊ Good law
 Small group of shareholders?
□ Derivative action only
 No lower limit
 Bring action on behalf of company
 Enforce COMPANY'S rights, not shareholders
◊ If derivative claim is successful, award compensates company, not shareholder
□ Problem
 Shareholders usually do not have incentive to bring claims
◊ Publicly listed company: shareholder stake too small
 Can bring action regardless of share amount
◊ Environmental group can bring derivative action
◊ Bridge v Daley
 Minority shareholder could act in ways that are detrimental to other shareholders
□ Common law
 Foss v Harbottle
◊ Facts
 2 shareholders brought action against company's directors alleging misapplication of company assets
 Wanted to directors to repay
◊ Held
 Internal irregularity rule:
– As injury was suffered not just by the 2 members but the whole company, there needed
– If an action can be ratified, shareholder cannot bring derivative action
 Restrictive approach
◊ Justifications:
 Risk of too many suits
 Principle of majority
◊ Oppressed minority barred from legal action
◊ Problem: directors who were shareholders could vote
 But CA 2006 reversed this
 Exceptions to Foss (where acts cannot be ratified)
◊ Edwards v Halliwell
 Ultra Vires and illegality
 Where special majority is needed
 Personal rights
 Fraud on the minority
– Requirements
 Fraud /wrongdoing
 Estmanco v GLC
 Not just fraud, but other wrongs
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 Not just fraud, but other wrongs

 Self-serving negligence
 Wrongdoing directors have control of general meeting
 De jure or de facto
 Public listed companies shareholders do not attend
 Very difficult in public listed companies b/c almost impossible for directors to have de facto/de
jure control
 Smith v Croft No.2
 Majority inside minority rule:
 Shareholders who are not bringing derivative claim would risk on taking litigation
– Main flaw: shareholder could not bring claim because 2nd requirement (de jure control) is never fulfilled
□ Statutory
 S.260-264 CA 2006
◊ Rationale
 Increased protection for minority
 Streamline common law rules
 Propose legal certainty
 Formal structure different than Foss
◊ Starting point changed
 CA: Shareholder can clearly apply for claim to court
– Contrast from old case law: starting point is no claim
 Key aspects
◊ S.260(3)
 Derivative claim can be brought on any actual or proposed act/omission about
– Negligence
– Default
– Breach of duty or trust you by director
 Fraud of minority no longer needed
 Covers all potential wrongs that could be committed by director
 Proposed wrongs too!
– Proposed decision by board that would be a breach
– If success, then remedy would be injunction
◊ S.260(5)
 Who can bring claim
– Only by member of company: anyone entered on company's register
– People who are not formally members, but whom shares have transferred to by operation of law
◊ Who is defendant
 Directors only
– Shadow/former as well
 "another person"
– Cannot be against 3rd parties
– Claim against person who has assisted director in breach
◊ No need to demonstrate wrongdoer control
 Court permission
◊ S.261: shareholder must app;y to court for permission
◊ 2 stage procedure
 S.261: is there a prima facie case for permission?
– if no prima facie case, then must dismiss case
 S.263: the full permission hearing
– Evidence provided by company
◊ Stage 1
 Prima facie case
 If there is a prima facie case, then go to stage 2
◊ Stage 2
 S.263(2)
– Situations where permission must be refused
A) A person acting in accordance with 172 sold not seek to continue claim
B) Situations where breach has been authorized or ratified
 Pretty straightforward
– Subsection a.
 Act does not specify who hypothetical person is
 Courts are asked to make business judgement: whether or not it makes sense for company to continue
act
 Not a legal case: commercial question as to how to promote success of company
 Criteria:
 claim, compensation paid to company
 Destruction caused by process
 Reputational damage
 Franbar Holdings v Patel
 Court only considered strength of underlying claim and compensation that would be paid if
claim succeeded
 Did not venture into commercial judgement
 Repeated legal analysis
 Iesini v Westrip Holdings
 Is this approach correct?
 Sub. A talks about 172 in general, not just on legal issues
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 Sub. A talks about 172 in general, not just on legal issues

 If no requirement to refuse permission, the court must decide whether claim can continue
– 6 factors court must take into account when exercising discretion
 Whether member is acting in good faith
 Subjective standard
 Ulterior motive:
 Barret v Duckett
 Franbar Holdings
 Clean hands
 Nurcombe v Nurcombe
 Iesini v Westrip Holdings
 Importance that a person acting in pursuant to 172 would attach to the action
 Different from para2, subsectiona
 In practic court takes into practice only legal considerations
 Business and legal factors taken into account
 Business is beyond legal assessment
 Franbar Holdings v Patel
 Court must take into account different considerations
 Ability of company to recouperate
 Destruction caused to company, etc.
 Reputational damage
 Observing these factors?
 First part of Franbar: this should be taken into account
 2nd part of jugdement: didn't really take these as essential criteria
 Also see
 Kleanthous v Paphitis
 Authorisation/ratification likely?
 Business and legal considerations
 Should detect opinion of majority, but hard to obtain in public company
 Different from common law
 Here ratification is just a factor among many
 Possibility of ratification completely denies motion in common law
 Has company decided not to pursue claim
 Independent committees to establish whether company has made this decision
 Whether shareholder could pursue claim in his own right
 Possible alternatives
 S.994 CA 2006: prejudice against minority
 Nature of relief
 Costs
 Views of disinterested members
 Similar to Smyth
 Majority within minority
 Non exhaustive list
 No wrongdoer control requirement explicitly
 However, court can still take into account
 Stimpson v Southern Private Landloard
 Wrongdoer control influenced court to grant permission
 Overwhelming criteria actually
◊ Company litigation that turns into derivative claim
 E.g. shareholders think directors not doing a good job, want to take over litigation
 Must apply to court to take
– Criteria very stringent
 Company abused court process
□ Economics of derivative actions
 Who gets benefits of proceeds?
◊ Company
◊ Shareholder gets trickle down benefits only
 Who pays for litigation
◊ UK: loser pays both court fees
◊ Shareholders disincentivised to bring action b/c little reward and high cost
◊ Wallesteiner v Moir
 Indeminifcation discretion by court
 Usually capped
 Financial well being of claimant irrelevant
 Reflective loss principle
◊ If same transaction breaches both shareholder and company rights, who gets to sue?
 Prudential Assurance vs Newan Industries
– Facts
 Transaction subject to shareholder approval
 Also self dealing
 Breached both shareholder and company rights
– Law
 Shareholders rights only reflect those of company, so cannot sue if company decides to sue
 Jonson v Gore Wood
– If breached both company and shareholders
 Company chooses not to sue
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 Company chooses not to sue

 Can shareholders sue?
– Only when wrongdoing director bars action
Notes Page |74
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Unfair Prejudice
Thursday, 28 January 2016 09:18
Common Law
- 2 contexts of protection
○ Ratification of breach of director's duties where the conflicted director is a shareholder
 S.239
□ Director disenfranchised
□ However, common law different-instead has criteria of minority shareholders
 Northwest Transportation Co. Ltd
◊ Facts
 Wrongdoing directors had right to vote/ratify breach of director's duty
 Bylaw passed by director/majority shareholder (same person) that allowed director's own
property to be sold to company
◊ Court
 Court said this was illegal
 Such regulation cannot be oppressive to minority shareholders who oppose it
– Evidence to court that the company needed property, and the price was not oppressive
 Cook v Deeks
◊ Facts
 Taking of corporate opportunity by directors
 When negotiations had been finalized, the directors took this in their own name
◊ Court
 Directors were majority shareholders
 Could they exercise their votes as shareholders to ratify the breach?
– Not possible b/c allows majority to oppress minority
 Regal Hastings v Gulliver
◊ Court accepted that directors acted in good faith
 Suggested that directors could ratify breach
◊ Contrast with Cook
 Court: if actions were taken by directors to benefit company, then OK
 If actions were not bona fide, then not allowed
○ Alteration of company's AA by GM
 Allen v Goldreefs
□ Alteration of company's AA could not be altered until this was bona fide for company as a whole
- Common law deficient
○ Minority is not protected from abuses in every case
Statutory remedies
- S.122, para 1, s.(g) IA 1986
○ Power of court to order winding-up of a company
 When court is of opinion that it is just and equitable to do so
 Power derives from past rules that could resolve deadlocks in smaller companies
○ Radical: court winds up a company
○ Ebrahim v Westbourn Galleries
 Facts:
□ Carpet dealership in 1945
 Business was originally partnership of 2 partners, A/B
□ 1958: new company, Westbourn Galleries was created to take over partnership
 500 ordinary shares issued to both petitioner and Mr. Nazar
 Both A and Mr. Nazar transferred 100 shares each to the son of Mr. Nazar
◊ A, Nazar, Nazar's son had 40, 40, and 20 percent
◊ New company with 3 shareholders, all of whom were directors
 No dividends, all profits were paid through director remuneration
□ 1969
 Mr. Nazar/son put their votes together and then removed A as a director
□ A petitioned for unjust/equitable winding up of company
 Court
□ When a company that can be considered as a quasi-partnership, ability of shareholder to exercise power at general
meeting is not limited to compliance with company's articles/with CA 2006
 Equitable considerations limit powers of shareholders
◊ On facts: removing director using votes is not illegal, which is what happened: but on facts was informal
understanding
◊ Ensure compliance between any informal understandings about how the business is to be run
□ However, not as wide as it seems
Not every small companies can apply Ebrahim
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 Not every small companies can apply Ebrahim

 2 criteria
◊ Small company considered as quasi-partnership
◊ Informal understanding between shareholders/quasi partners that company will be run in a specific way
 Shareholders will participate in management of company
– Not absolute right: only when agreed
□ L Wilberforce
 3 criterial to determine whether a company is quasi-partnership
◊ Company based on personal relationships
◊ Requirement to obtain consent of shareholders before selling shares
◊ Understanding or agreement between shareholders
 Strathan v Waycocks
□ Facts
 Initially company formed by A that was run by A as sole shareholder
 Later on, single shareholder appointed B as managing director
 B then purchased 5% in company and had option to purchase more at later stage
◊ At this point 2 shareholders: 95%, 5%
 Later B was fired
□ Court
 This was a quasi-partnership, applied criteria of Wilberforce in Ebrahim
 Winding up petition is very radical
◊ Can result in value destruction as creditors are paid off
◊ Minority shareholders may be hesitatant to pull the trigger
- Unfair prejudice - 1985CA S.459, S.994 CA 2006
○ 1st parliament's attempt to protect shareholders
□ S.210 CA 1948
 2 preconditions
◊ Need to have facts that justify winding up of company on basis of just/equitable ground
◊ Efforts of company should have been oppressive to shareholders
 Very restrictive
◊ Ebrahim
○ S.994
□ Content
 Shareholders can apply when conduct is unfairly prejudicial to interests of members
 OR actual or proposed act or omission that is prejudicial
□ Who can apply?
 Current shareholders can apply for relief under S.994
◊ Current member who has not registered shares has locus
 S.995
 Secretary of state can petition if he thinks company has been carried on unfairly
 Controlling shareholder can in theory can apply as well but no sense b/c majority interest will not be infringed by
majority
□ 2 key concepts
 Need conduct of company's affairs
 Wide enough to catch activities by company's organs
◊ GM or board of directors
 Re City Branch v Breckland
◊ Subsidiaries and parents
 Conduct must be unfairly prejudicial to members' interests
 Unfair prejudice replaced oppression remedy (S.210 1948)
◊ Court gave broad interpretation of S.994 to protect minorities
 Court did not define what is fair/unfair, but used old cases
◊ Basically used Ebrahim case
 Court's interpretation of what is unfair changes over years
◊ Who can sue?
 Re a Company 1986
– Corporate conduct affects interest of a person as a member
 Not as capacity of employee/creditor
 Cade v Son Ltd
 Petition had interest as freeholder of farm
 Not unfairly prejudicial conduct against interest of member as member
– What about cases where impact on your capacity as director has an impact on your interest
as shareholder?
 Wide
◊ What is unfair/fair?
 Starting point: company's articles
– Broadly: breach of agreement between members (articles or legitimate expectations
 Noble v Sons
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 Noble v Sons
– Adopted objective standard
– A lot of uncertainty because judge is empowered to defer to facts
– Rejected in later cases
 Legitimate expectations and unfair prejudice portal

– Re Saul Harrison
 Business model was unsustainable and could not justify operation of company
 Continuing business was unfairly prejudicial to petitioner's interests
 Legitimate expectation
 Arises out of informal understanding between members
 Criteria
 Small company
 Legitimate expectations to be treated a certain way
 O'Neill v Phillips
– Facts
 Phillips had all shares and O'Neill was employed as manual worker
 1985: O'Neill became company's only director and was sold 25% shares
 In 1991 fortunes declined and Phillips remade himself managing director
 Phillips told O'neill he'll no longer receive 50% profits, and would be limited to
dividends and salary
– Court
 No breach of legal right, but informal understanding
 He discussed these new shares, but not good enough for unfair prejudice
 But never any agreement: so no unfair prejudice
 Criteria
 Termination of profit-sharing was not unfair b/c not formalized
 No unfairly prejudicial conduct, no formal conduct of company's affairs
 L Hoffman: legitimate expectation clarified
 Not objective criteria
 Not focused on petitioner's viewpoint: not based on his hope that he would be
treated in a certain manner
 Goodbye to legitimate expectations?
 Goes back to ebrahim: equitable considerations
 Specific reference in Phillips to quasi-partnerships
 If fair offer for minority's shares, then not unfairly prejudiced
 Basically, either
– Petitioner must prove breach legal right
– OR Breach of informal understanding
 2 requirements
 Quasi-partnership
 Use of corporate power to defeat these understanding
 Beyond equitable considerations?
– Unfair prejudice and independent illegality
 Independent illegality
– Reasonable compensation
 May not be a direct breach if changed, but could be unfair lu prejudiced
 Re a Company 1997
 Firmness framework
– Incompetence?
 Re Elgindata
 Must establish duty of care
 In re Macro Ipswich
 Serious mismanagement
 Accepted 994, even though court did not determine whether activities breached
duty of care
○ S.996 CA 2006
□ Any order the court sees fit
 Most commonly buyout offer: require majority to offer minority buyout
 Evaluation of shares
◊ Minority discount: Re Bird precision
 Pro rata valuation of shareholding of minority shareholding
◊ When do we evaluate shares?
 Profinance Trust v Gladstone
– At time when shares are purchased: not when 994 claim is granted
– Depends on facts and what is equitable, if directors get then shares would plummet by time
of court order
 Unfairness does not lie in exclusion alone
If offer by company to buyout shares before the full hearing, and minorities do not accept, then this is not
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 If offer by company to buyout shares before the full hearing, and minorities do not accept, then this is not
unfair
◊ Hoffman guidelines in O'Neill
 Fair value
 Independent valuation by competent expert
 Expert should not give reasons for valuation
 Equality of arms between parties
 Costs
◊ But this puts huge pressure on shareholders to accept offer, because hard to prove unfair
□ Unfair and director's duties
□ 994 is non-exhaustive list
 Can give corporation relief as well as personal
□ S.994 can be a functional equivalent of a derivative claim
 Same as bringing a successful derivative claim
 Before 2006:
◊ 994 brought on basis of director's duty, but petition is confined to personal remedies
 Charnley Davies
◊ Anderson v Hogg
 Corporate relief allowed as part of 994
 Bhullar v Bhullar, Clark v Cutland
 No point to go back and ask shareholder to bring derivative claim, so corporate relief is given
◊ He would succeed
□ Kung v Koh
 Unfaired prejudice is confined to personal relief
□ In practice
 Unlikely to bring 994 petition asking corporate relief b/c indemnification orders
 No incentive to bring 994 for corporate relief
◊ Derivative claim to bring better because indemnification order
◊ 994 would bring corporate relief for company, but costs go to shareholder: no incentive
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Transactional Security
Thursday, 4 February 2016 10:10
3rd party risks

- Pre-incorporation contracts
- Limited capacity of registered company
- Limited authority of directors
- Breach of fiduciary duties
- Transactions undermined by fiduciary position of directors
Why?
- Protect creditors
○ Response to limited liability
○ Shareholders have lots of protection

Notes Page 79
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Promoters
Promoter
- Twycross v Grant
○ L Cockburn: One who undertakes to form a company with reference to a given project
and to set it going, who takes the necessary steps to accomplish that purpose
- Promoter is business term
- CA 1985 S.67.3
○ People who act in professional capacity are not promoters unless they go outside their
professional activity
○ Removed in CA 2006
- Current position
○ Professionals are not promoters
○ Re Great Wheal Polgooth
- In short: someone who takes all steps to form company
Pre-incorporation Contracts
- One entered into by promoters BEFORE incorporation of company
- Promoter may purport to act
○ As the company (shareholder)
○ Or as agents of company (board)
- Popular b/c business expediency
- Legal issues
○ Who is liable if things go wrong - company or promoter?
 Kelner v Baxter
□ Facts
 Promoters were going to form company, purchased wire on behalf of
company from claimant before company formed
 Before paying price for wire, company went into liquidation
 Who should pay price for wire: company or promoters?
□ Court
 Company cannot be party to any contract
 Promoters personally liable
 Confirmed in Rover International v Cannon Film Sales
○ Ratification post formation
 Cannot!
□ At time when contract was made, company did not yet exist
□ Cannot fill in gap of authority for agents, for he was not an agent yet
 Natal Land co v paulin Colliery
□ Facts
 Promoter agreed with landlord that former would be granted land
 Company could not after incorporation enforce contract, but
promoters could be personally liable
 Company can only get benefits through novation
□ Law
 Novation: new contract with company
 However: privity: company cannot enforce contract b/w promoters
and 3rd parties
○ Common law confusion
 Kelner v Baxter
□ If pre-incorporation contract was entered into by promoter, and sighed "for
and on behalf of the company"

Notes Page 80
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and on behalf of the company"

□ Promoter personally liable if this is correct
 Newborn v Sensolid
□ If promoter signed the contract using the company's name, he is not
personally liable
□ Just a matter of signing
□ Non-existing company cannot sign
 Arbitrary distinction on contract signing?
□ Statutory intervention
 S.51 CA 2006
◊ any contract made by or on behalf of company before
formation, subject to any agreement to contrary, is made
personally by promoter
◊ Promoters now nearly always personally liable
 Justification
◊ Promotes certainty
 No longer matters how the contract is signed
◊ Gives 3rd party an enforceable contractual obligation
◊ Encourages opposing party to enter into pre-incorporation
contracts
 But disincentivises promoters!
◊ Streamlines common law rules
 Case law under statutory provision
◊ Phonogram v Lane
 Facts
– Mr. Lane was promoter who signed for on behalf of
a company (Fragile Management) that hasn't
existed yet
– Phonogram signed with Mr. Lane
– Phonogram agreed to finance 6000
 Court
– Mr. Lane personally liable to return the 6000 upon
liquidation
– Denning
 Express agreement for promoter to not be
held personally liable
 Must be very explicit - cannot be be
interpretive
– Reversed part of Newborn ruling
◊ Oshkosh B'Gosh v Dan Marbel
 Facts
– 2 options to start company: form own company or
buy another
– In 1980 Mr. Grace bought new company, resolution
passed to change name to Dan Marbel
– Claimant argued he entered into contract with Mr.
Grace, who acted on behalf of company before
company was legally formed
– C wanted to make director personally liable
 Court of Appeal
– S.36C CA 1985
 Does not apply in this case: company had
been formed, albeit under another name
 S.51 CA 2006 does not apply to company that
trades under its new name before completely
changing name
 b/c no creation of new company
 Mr. Grace not personally liable
Notes Page 81
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 Mr. Grace not personally liable

◊ Badgerhill Properties v Cottrell
 Facts
– Mr. T director of Badgerhill
– Company's name had been misrepresented after
entering into contract with Mr. C
 Badgerhill Properties Ltd = real
 Badgerhill Property Ltd = fake
– Mrs. C sought personal action against Mr. T due to
bad construction
– Argued that Mr. T was promoter, entered into
contract on behalf of company (Badgerhill Property
Ltd) when it wasn't formed
 Court
– Incorrect name: not that there was no company
– Not pre-incorporation contract, S51 could not apply
– Only misrepresentation of name
◊ Cotronic ltd v Dezonie
 Facts
– Defendant made contract in name of W Ltd without
knowing that W Ltd had ceased to exist
– New company was formed after signing became W
Ltd and contunied business
 Court
– Pre incorporation contract? If yes, then promoter is
personally liable
– Defendant not liable under S.51
– At time contract was made, parties were in
ignorance that W ltd had ceased to exist.
– Formation of new company not appreciated by
parties when new contract was signed
– Contract remained on old W Ltd, not new one
 S.51 not apply
 Weaknesses of S.51
◊ Promoter will nearly always be liable
◊ Any express agreement will be rare
◊ Statutory reforms done nothing to ratify a contract
 Common law applies: company once formed cannot ratify
 Only novation - new contract
• Promoters enforce rights?
○ If they are personally liable, they should be able to enforce terms
○ Legislation remains silent
○ Braymist Ltd v Wise Finance
 Promoter can enforce contract
 When a promoter cannot enforce contract against 3rd party
□ If identity of company was crucial, then not binding on promoter

Notes Page 82
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Capacity
What a company can or cannot due: set out in constitution
Objects clause
- What is it
- Company had memorandum: must specify object for which it was incorporated
- Says what company can do
- Ultra Vires
- Anything beyond object clause was void ab initio
- Shareholders cannot, even unanimously, ratify any act that exceed this
- Transaction invalid and unenforcuuueable
- Justification
- Those who invest in company are entitled to know what type of enterprise it is
- Creditors would like to know business activities
- Problems
- High costs of doing business
- Uncertainty into the business world
- Information costs high for 3rd parties: must assess whether contract was ultra vires
- Responses
- Broad object clause drafting
- Judicial limiting of Ultra Vires
- Re introductions
□ Facts
 Before secured loan granted, bank was given company AA and memorandum
 Bank expressly aware that company was ultra vires
 Bank tried to argue that company had power to borrow nevertheless, b/c power to borrow was within
company's object clauseu
□ Court
 Refused to recognise "borrowing" as sensible commercial object
 Reducing power to borrow from independent object to
- Charterbridge v Llyods Bank
□ Facts
 Defendant bank got security
 Appellant said this was void, ultra vires
 Guarantee itself was security for another company, other companies within same group all controlled by
same person
 uUltra vires b/c
◊ Director had not bona fide intended to further interests of company
□ Court
 Whether Director was bona fide was irrelevant
 Act that comes within clause is not ultra vires just because director entered contract for improper purpose
- Rolled Steel products v British Steel
□ Facts
 Specific objects clause gave power to company to give guarantees
 Company guaranteed obligation of associated company
 However, this was in no way advantage of company, but for benefit of own directors
 British steel also knew of this irregularity
□ CFI
 Ultra vires and cannot ratify
□ CA
 Reversed CFI, not ultra vires b/c acting for improper purpose not unltra vires
 S.171 claim can work
□ Improper purpose =/= ultra vires
 Ultra vires cannot be ratified, improper purpose can
- Legislative response
- CA 2006 removed compulsory object clause
□ S.31
 Unless company's articles specifically restricts objects, its objects are unrestricted
□ S.39
 Even if company chooses to add object clause, those restrictions will not affect validity
 Even if there is ultra vires, transaction is valid and enforceable
□ No longer threatens transactional security of 3rd parties
□ Object clauses are contained in company's articles
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□ Object clauses are contained in company's articles

 Amenable by special resolution (S.21/22)
- Continuing relevance of object clauses
- Ultra vires doctrine still relevant for members (even though 3rd parties are protected)
- S.40.4: shareholders can obtain injunction to prevent director from acting outside constitution
- S.171: directors must act in accordance to constitution
□ Rolled Steel Products
□ Act within object clause but breach S.171?
- S.39.2 CA 2006
Contractual Capacity
- Who can make decisions?
- Primary decision making bodies (board or shareholders collectively)
- Persons acting as its agents
- Can these be attributed to company?
- Limited constitutional/contractual authority of directors who act for company
- When company acts through organs
- This is the company doing
□ No single board member is liable if not contractually enforceable
□ Unless misrep/fraud
- No doubt that company is bound when organs act
□ But possible that board/GM has no power due to AA
- When board acts outside powers conferred upon them
- When GM acts outside powers conferred upon them
- Ultra Vires vs "acts outside directorial authority"
- Ultra Vires: acts beyond capacity of company
- Outside objects clause
- CA 2006: no more need for objects clause, no Ultra Vires doctrine
- Acts beyond authority of directors not necessarily Ultra Vires
□ Rolled Steel Products v British Steel Corp
□ Ultra vires beyond capacity of company, board authority arises not from this purpose
- Is company bound by director's breach
- Common law
□ Depends on the knowledge of 3rd party of breach?
 Did 3rd party know the directors were acting outside of their authority
 Doctrine of constructive notice
◊ 3rd parties are imposed notice of publicly registered documents, which include AA
◊ Effect: in almost every case 3rd party was deemed to have knowledge
 Contract was void unless ratified by company
 Insecure, risk of transactional insecurity increased
□ Indoor management rule
 Royal British Bank v Turquand
◊ Revised constructive notice
◊ Indoor management rule
 Gave specific situations where it was possible to bind company even if it was reasonably
discerable through AA that they may not have authority
◊ Facts
 Security granted by board to 3rd party, but this must be authorized by shareholders
◊ Court
 3rd party had right to infer that internal procedure has been complied with
 Mahoney v East Holyford
◊ Approval of indoor management rule
◊ Facts
 Company with 3 directors, 2nd director gave bank copy of board resolution giving check-signing
powers to all 3 directors
 Bank accepted checks signed by 2 checks by directors
 However, boards were not properly appointed
◊ Court
 Bank was allowed to assume that the board was properly appointed
 Even though constructive notice, given that nothing appeared on AA, and nothing was contrary to
AA, bank was entitled to assume directors were properly appointed
 Morris v Kanssen
◊ HL
 Indoor management rule applied only when defective appointment
 Did not apply when not appointed at all
 S.161 2006
◊ Validates acts of directors if

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◊ Validates acts of directors if

 they have been defectively appointed
 Or disqualified
 When they are not entitled to vote on matter
◊ Knowledge of 3rd party of defective appointment renders this protection void
□ Limitations to Indoor Management rule
 Only protected outsider
◊ Morris v Kanssen
 Given he was director, he was under duty to see AA
 Director not given protection if indoor management rule
 Hely-Hutchinson v Brayhead
– Limited Morris
– Directors not prima facie excluded from IMR
– Only when transaction closely connected with your position as director are you thought to
have constructive notice
 Constitution must not provide that a particular type of contract cannot be entered by the board at all
◊ Irvine v Union Bank of Australia
 Directors restricted from borrowing above a certain amount
 3rd party must not have been put on notice of the irregularity
◊ B Liggett v Barclays Bank
 Facts
– Company has directors L, M and was going to appoint C
– Prior communication between M and Bank that bank should not accept any checks that
were not signed by M
– AA required all checks to be signed by both directors
– M thought other director was improperly withdrawing money from company accounts
– However, bank met checks carrying signatures of L and C
– Was bank put on notice because of its conversation with M?
 Court
 S.40 CA 2006
◊ Abolished indoor management rule
 Good faith
 Applies to actual notice
– Only good faith 3rd parties can benefit
– No such qualifications S.39
◊ S.40.2.b
 Amplifies meeting of good faith
 "good faith"
– Person dealing with company not bound to inquire as to any limitation on powers of
directors to bind company
– Presumed to have acted in good faith unless contrary is proved
– Even if 3rd party has been put on notice, can still be protected
 Fact that company could have found the contract as an unauthorized one
 Not bad faith just because no inquiry
 No constructive notice applies
– 3rd party not bad faith just because he knew it was beyond power of directors
– Ford Polymer Vision
 Bad faith investigated not by 3rd party's knowledge, but by his knowledge of whether
directors may have acted in breach of a duty
 Actual knowledge not automatic bad faith
 "dealing with company"
– S.40.2.a "deals with company if he is party to any transaction or other act to which
company is a party"
– EIC Serfices v Phipps
 Shareholder received bonus share
 Not a person dealing with company, because not bilateral: gratuitous transaction on
part of company
 "Persons"
– Directors
 S.41.2
 If 3rd party is director of company/holding company connected with director,
this transaction is voidable
 S.41.3
 Any one who authorized transaction is personably liable to account for any
gains made
 S.41.4
 When transaction ceases to be voidable
 Smith v Henniker-Major

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 Smith v Henniker-Major
 Whether director who was also chairman could rely on S.35.a 1985 to
validate resolution passed at meeting attended only by himself
 However, no quorum since it was 2
 Could not rely on own mistake even though acted on good faith
– Shareholders
 EIC Services v Phipps
 Shareholders are not persons dealing with company
 Bonus shares issued without shareholder approval
 Davies: if parliament wanted not to have shareholders to be included in S.40,
there should be another provision about unauthorized transactions with
members
 This decision is not correct
– Sum up
 Unauthorized transaction with 3rd party: S.40: binding
 Unauthorized transaction with director: S.41, personally liable and void
 Unauthorized transaction with shareholder: transaction not binding, but scholars
think S.40 should apply
 "power of diretors"
– Protection in S.40 is confined to ignoring limitations on powers of "directors to bind
company or to authorize others to do so"
 No limitation on power of shareholders
– S.40: unauthorized act with Board of directors: NOT WITH GM
 "any limitation under the company's constitution"
– What is company's constitution?
 S.40.3
 Resolutions of company
 Agreements among shareholders
 Along with AA
 Internal effects of lack of authority
– S.40 only validates transaction in favour of 3rd party
 S.40.4
 Every single shareholder has power to restrain
 S.40.5
 Does not affect any liability incurred by directors
– Transaction may be valid, but directors will still be liable (e.g. S.171)
 Breach of director duties
- Reconciling legal tensions
- Contracting through agents
- General rules of attribution
- Company can act through agent
- Doctrine of constructive notice and indoor management rule apply
- S.40.2.b.i 2006
- A person dealing with a company is not bound to enquire as to any limitation of the power of the directors to bin dthe
company or authorize other to do so
- Power of board of directors to authorise agents
□ E.g. board appoints agent, but AA limits power of board - S.40 applies if 3rd party is good faith
 However: if AA says X cannot contract on behalf of the company
◊ And X is agent
◊ S.40 does not apply b/c this is not a restriction on board's power to authorize
- Agency
- Agents may only act on behalf of company if constitution permits dlegation
- If such power exists, then common law of agency come to play
- Model articles
□ Directors can appoint agents subject to AA
- Approach
- Are directors allowed to delegate to 3rd parties?
- If so, common law of agency comes into place
□ Has be actually become such an agent?
□ Otherwise no authority and transaction is void
- Types of authority
□ Actual authority
 Expressly/impliedly conferred
 Contract of agency b/w principal (company) and agent
◊ AA determines who can bind company as principal (usually directors)
 Hely-Hutchinson v Brayhead
◊ Facts
 R was chief executive and chairman

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 R was chief executive and chairman

– Often commited company to contracts and only told board afterwards
– No problem expressed by board: accepted this post-inform practice
 A was director of plaintiff company given letters signed by R, where the company guaranteed any
repayment of money owed to the plaintiff
 D (company) argued that R had no authority
◊ Court
 R was acting as agent of company and had actual authority
 Actual authority can be express/implied
 Implied here b/c common practice by board to never objective previous transactions
 Who can act as principal?
◊ Depends on AA
 Directors
 Agent who has power to sub-delegate
◊ Panorama Development Case
 Company secretary has power to enter into contracts related to day-to day running of company,
such as hiring car
□ Apparent authority
 Authority of a person by circumstances can be reasonably expected to have by 3rd parties
◊ Relationship between agent and 3rd party
 When is it?
◊ When 3rd party can be reasonably expected to believe the agent is actually an agent of company
 Freeman and Lockyer v Buckhurst Park
◊ Facts
 2 men formed D company to sell large estate
 K and H and nominee of each were appointed directors
 All 4 needed to constitute quorum
 All day to day management left to K
 K decided to plaintiff company as architects
 Company then came back and did not want to pay architects since K was not agent
◊ Court
 Apparent authority: K apparently had agency
– Pearson
 Estoppel by representation
 If company represents that X had authority
– Legal relationship between principal and 3rd party created by a presentation made by
principal
– Actual authority: relationship between pincipal and agent (agency contract)
– Apparent authority: relationship between principal and 3rd party
 These representations can be made by people with actual authority
 K in this case was able to make such representations because he was also director
 4 conditions Diplock for apparent authority
– Represntation that agent had authority
– By persons with actual authority
 But conflict if director himself represents himself as agent?
– 3rd party induced by representation
 Actual knowledge of lack of authority
 Can one be put on notice?
 Not very
– Not ultra vires
 Knowledge
◊ If 3rd party knows of no authority, then transaction is not valid
 Summary
◊ Ultra vires: S.39
◊ Unauthorized by board: S.40
◊ Unauthorized by GM: common law: IMR, constructive notice
◊ Unauthorized by agent: agency rules, s.42

lOMoARcPSD|2347701
Corporate Finance
19 February 2016 14:50
2 sources of finance
- Shares/equity capital
○ S.7 CA
 Minimum 1 share
○ fShareholders
 Tempt contribution in exchange for shares: subject to constitution of company
 Constitution sets out rights as shareholder
□ Status of shareholders come from AA: S.33
 Provision bind members as covenants which give rights to
shareholders between themselves
□ Typical rights for shareholders
 Model articles
◊ Rights to general meetings (attend, vote, etc)
◊ Dividends as directors recommend and company by ordinary
resolution declares
◊ Terms when shares are transferable/exit rights (put options:
Rayfield v Hans)
 On liquidation, shareholders entitled to surplus capital
□ Mandatory insolvency rule
□ Subject to interests for creditor
 Rights in company measured by sum of money for liabilility and interest
□ Liability: cough up money
□ Interest:
 Stake in success of company
□ Owners of the company: fortunes are linked to company
- Loan capital
○ Money raised through borrowing
○ Contract relationship
 Status/rights of creditor depends on loan contract
□ Typical rights for creditor
 No say in running of company generally
 Interest payments
◊ Contractual entitlements which the lender can sue for, unlike
shareholders
 Getting capital back
◊ Shareholder can get money by transferring shares
◊ Creditor can get loan back as per contract
□ More concrete and enforceable because by contract
□ Creditor could contract for shareholder rights
 Right to nominate director: ways around acting autonomously
 Interest rate depending on how successful of company is
○ Upon liquidation
 Creditor are prioritized in liquidation
○ No stake in success of company: only solvent
○ Bonds
○ Can creditors have rights that have usual rights of shareholders?
○ Creditor could contract for shareholder rights
 Right to nominate director: ways around acting autonomously
 Interest rate depending on how successful of company is
- Hybrid securities?
○ Securities: bonds/stocks
○ Play around with rights of shareholders/creditors
 Typical rights are not determined by law but by contract/constitution

Notes Page 88
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 Typical rights are not determined by law but by contract/constitution

○ Creative investment opportunities to create specific offerings
 CoCo bonds
□ Contingent convertible bonds, debt that convert to equity when price gets
to certain sum
 To start with, very secure
 If company does very well they become shares
 Preference shares
□ Prioritized shareholders over others

Notes Page 89
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Shares
20 February 2016 20:46
Terminology
- Capital
○ Share capital (nominal value) + share premium
- Abolition of nominal share capital
○ Authorized capital: set a cap on how much share capital a company could raise
 Alterable by company resolution
 EU law doesn't require this concept, abolished in 2006
- Subscribers
○ Original shareholders
- Nominal
○ S.542
 All shares must have nominal value, 1£ usualy
 Requirements for public companies EU, but UK made requirement for both private and pubic
○ Function
 Helps determine what proportion of capital the company had
○ Bears no relation based on subscription price
- Fully/partly paid up
○ Partly paid up: must pay up later
○ Attractive for company: ready source of capital
○ Attractive for creditor: can raise money to pay shares
○ Attractive for shareholder: only have to pay half price
○ Model Articles
 Not allowed in private companies
- Issued Share Capital
○ When shareholder actually is put on register
○ National New West Minster case
- Allotted share capital
○ S.558: when person acquires unconditional right to be included in register
○ When shareholder is entitled to be put on register
○ Comes before issuance
- Legal capital
○ Yardstick against which legal ability to make distributions (make dividends) is measured
 e.g undistributable reserves
- Bonus/capitalization issue
○ EIC Case
○ Company profits/reserves to convert to shares
 So share value more accurately reflects company value
□ Company started with 100£, 100 1£ shares, now it is 100,000£ pounds
□ Company may issue 999£ shares to all its shareholders for free: but now nominal shares reflect the actual value of shares
□ Make shares more liquid: now have 1000 shares, so can sell/buy and are more attractive to shareholders
○ Capitalization is more accurate than bonus, because shareholders do not get more money
Common Law
- Mandatory rules
○ Purpose
 Weird: usually company law rules are quite facilitative
 Remedial response towards 3rd party risk due to limited liability
 Capital of at least nominal value of shares is raised
□ Value must be maintained for business activities, cannot be given back to shareholders
○ Sources
 English Common Law
□ Application
 Private companies
◊ EC law not applicable
◊ However, sometimes english law emulates EC law for consistency sake
 EC Law
□ Only applies to public companies
○ General rules
 Applies both to private and public law
 Minimum capital requirement
□ Never insisted in english common law
 Rational
◊ Anti-competitive, financial barriers against companies
◊ Companies vary in risk they undertake, and minimum one reflects risk for creditors. Different between civil law, where company
cannot be set up without capital
 Possible to have thin/undercapitalized companies
◊ Frowned upon still in common law
 Veil lifting: FG Film Case, undercapitlization allowed agency establishment
 Wrongful trading: S.214
 Director disquaification: whether directors are fit and proper to run business
 Shares cannot be allotted at a discount at nominal rate
□ Oregum Gold Mining v Roper
 Shareholder allowed to use the nominal value as security
Facts
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 Facts
◊ Nominal value was higher than shares because it was doing terribly
◊ Company wanted to issue more shares at lower price than nominal price
 Court
◊ Cannot do so, company entitled to assume that nominal value has been raised
□ Mosely v Koffeyfountein
 Facts
◊ Company wanted to issue debenture convertible bonds
◊ Loan capital, so principle of discount not applicable
 Court
◊ Principle applied to debenture stock that are immediately convertible to shares
◊ Nominal value of stock must be made up
□ Confirmed in CA S.580
 Sanctions
◊ If shares allotted, allottee is liable to pay company at amount equal to discount with interest
◊ Criminal offense for directors
 Herschell v Simms
– Directors were liable for loss
 Certain commissions are allowed
◊ S.44
 Treatment of premium: amount exceeding nominal value
□ S.610 CA 2006
 If company issues shares, value (cash or otherwise) of premium on those shares must be transferred to a separate account (sha re
premium account)
◊ Notional/virtual transfer, not actual
◊ Amount of premium raised must be written in accounts
 Important to know what it is, as it is legal capital
 Company may use share premium account to create bonus shares
◊ Share premium account converted to ordinary share capital
◊ Treated just like share capital
□ S.582 CA
 Shares allotted can be paid up by money/money's worth
◊ Goodwill/knowhow
◊ Salomon got 20,000 shares for business
 How do you know it has issued nominal value/how to know if it has to set up premium account?
◊ Must value value's worth
◊ Discount rule
 Money's worth must be at least as great as nominal value of shares
 Relaxed rule
– Promoters and directors of company are under fiduciary obligations, partly to not overpay for money's worth
– Re Rag
 Facts
 Company gone bust having been set up by transfer of business to it
 Liquidator challenged valuation: if less than nominal valuation, then can get more money out of allottees
 Sued for directors for misfeasance
 Court
 Value is amount for business judgement for promoters
 As long as valued honestly, court will not interfere
 S.174 obligation to value honestly (directors)
 Quite hard to challenge valuation, court deliberately made it so
◊ Share premium account
 Must determine value and find excess, which showed in accounts
 Henry Head v Ropner
○ Public Company
 Company Law Directive from EC
□ Minimum capital requirement
 Nominal value must not be lower than "authorized minimum"
◊ Current AM is 50,000£
 Sanctions
◊ Criminal offense
◊ S.767
 Directors are J/S liable for loss incurred by 3rd parties
 If something goes wrong directors liable for loss
 Partly paid up shares? No need to raise 50k at once
◊ S.586
 All shares must be at least a quarter paid up
 EU requirement
◊ Sanction
 Allottee liable to pay company with interest
 Subsequent holder of shares are liable for holder of access, but court has discretion to grant relief
 Criminal offence to breach rules
◊ So actually, 12.5k needs: not large amount at all
□ What one can pay for shares
 Common law: money for money's worth
 EU limited this in 3 ways
◊ Subscribers must pay up in cash to public company
 Initial amount must be cash
 Cash defined as: discharge liability by issuing shares, so can transfer money
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 Cash defined as: discharge liability by issuing shares, so can transfer money
– Can get around cash requirement
 Sanction
– Offense by company and its officers
◊ S.585
 Undertaking by person who will undertake work/perform services for company for shares is prohibited
 I.e salary cannot be shares
 Sanctions
– If public company accepts this, holder of shares is liable to pay company money's worth value
– Ignores fact of consideration
– S.591
 Undertaking is enforceable by company
 Obliged to do work, but must pay shares back as well
– Court has power to order relief
◊ Any undertaking to be performed 5 years after issuance of share is also prohibited
 Obligation for shares must be immediate
 Sanctions
– Allottee must pay company value of shares to company
– Undertaking still enforceable by company
– Court has power to order relief
 Valuation of payments in kind
◊ Money's worth in shares: remember Re Rag
 Much stricter than common law
◊ Chapter 6
 Prevent share-watering
– When require non-cash consideration
 Requires public company to have any money's worth to be independently valued by expert
– Valuation sent to registrar and allottee
– Formal and complicated
 Money's worth is OK, but must be expertly valued
◊ Sanctions
 If not valued (either allottee did not receive report)
 Allottee liable to pay amount to company
○ Allotment of further shares
 Articles usually give directors power to allot further shares
□ Fiduciary power, must be acting for proper purpose
 Technical issues
□ Public companies
 Are directors obliged to issue shares at premium?
◊ Hilder v Dexter
 Directors should have issued share at premium, but issued at lower price: not at discount
 HL
– Left to directors as long as they acted bona fide
 Wouldn't be quite relaxed given S.171/172
 Statutory provisions giving shareholders in public companies
◊ S.549-551
□ Private companies
 S.550
◊ Unfettered power for directors usually in issuing shares
 When one class of shares only in private companies
◊ Articles can put constraints
 Pre-emption rights
□ Right of existing shareholders to insist on issuing more shares so they may purchase and maintain proportionate power
□ S.561
□ Not automatic
 Used to be put into articles (which they usually did)
 LSE required companies to confer pre-emption rights
□ 2nd EU directive
 Obliged to have such rights in public companies
 Extended to default rule to private companies
◊ Unless articles exclude them
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Capital Maintenance
Saturday, 5 March 2016 14:54
Rationale
- Limit amount of company assets that can be given to shareholders
○ Because in principle shareholders are subordinated to creditors
○ If money used for business, creditors can complain
○ But not OK if given to shareholders
General
- Maintenance
○ Capital must be maintained for creditors
- Trevor v Whitworth 1887
○ Paid-up capital may be diminished or lost in course of company's dealings
○ Creditors should be assume that no part should be paid out except in legitimate course
of business
- Aveling Barford v Perion
○ L Hoffman
 An unauthorized return of capital is ultra vires
□ Ultra Vires: used sloppily (Rolled Steel Products)
 Cannot be approved by shareholders
□ Makes sense: rule that protects creditors, shareholders cannot waive
 Substance, not outward appearance of return of capital
□ May be disguised
- Flitcroft's Case
○ Creditor gives credit to company on faith that capital only applied to course of business
3 rules on maintenance
- Company prohibited from reducing capital by buyback shares
○ Common law rule
 Trevor v Whitworth
□ Buying back shares
□ Shareholders cannot decide to sell shares back to company later on if they
dislike investment
 Castilioni Case
□ Can give back shares: but cannot receive remuneration
□ S.659.1 CA 2006
○ Sanctions
 Criminal offense by company
 Proported acquisition is void:
□ RWP Kings Lynn Case
 Rule is mandatory: cannot be ignored in AA
 Duomatic principle does not apply
◊ Creditor protection
○ Statutory exceptions
 Redeem or repurchase shares
□ Redemption
 Shares are issued as can be sold back to company: contracted to be
sell-backable
 1929 first introduced
◊ Part 18 CA 2006
 S.684
– Limited company may issue shares that are liable to
be redeemed at
 Option of company
 Option of shareholder

Notes Page 93
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 Option of shareholder
– Opposite default rules
 Private company may restrict/exclude these
shares in articles
 Public company can only issue redeemable
shares if it is allowed in articles
– Difference between private/public company model
articles
 Art. 22: company may issue shares that are
redeemable, directors dictate terms
 Art. 23: company may issue shares that are
redeemable, directors dictate terms
 Terms and manner of redemption
◊ S.685
 Directors of private/public companies can determine
terms/conditions/manner of redemption
 Prior authorization of members through AA, or
authorization
– Present in model articles
 Which funds can be used to determine shares?
◊ Look to purchase
□ Purchase
 Any shares (originally redeemable or not)
 1981 first introduced
◊ S.690
 Limited company may purchase own shares (including
redeemable shares) subject to AA and further provisions
 Private companies may prohibit purchase
◊ S.691
 Payment of shares
– Limited may not buy shares unless fully paid up
 Preventing abuse of share buybacks
◊ No carte blanc to buy back shares
 Why exceptions?
□ Scenarios for buy-back
 No market for shares - shareholders may find it difficult for people to
buy shares
◊ Locked in as shareholder of private company
◊ Allow companies to save shareholders
 Venture capitalists may only invest if they know they can redeem
shares at any time
 Unfair prejudice
◊ Remedy is usually buyout , easier if redeemable to begin with
 Capital finance
◊ Company wants to restructure capital: wants more loan than
equity finance
◊ Employee share schemes: John Lewis
◊ Tax reasons to reduce share capital
 Source of funds
□ Cannot reduce legal capital
 Unless company is private company, shares can only be
redeemed/repurchase out of
◊ Distributable purchase
◊ Accounting adjustment following redemption/repurchase
◊ Shares are destroyed and the amount of payment reduced from
account

Notes Page 94
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account
◊ If redemption paid for by purchase of new shares, new ones will
be accounted for
 If not issuing new shares
◊ S.733
 Transfer of amount by which amount share capital is
diminished to Capital Redemption Reserve (CRR)
 Redemption mustn't affect legal capital
□ Private companies
 Relaxation
◊ Permissible capital payment
◊ Allows legal capital to be reduced by buyback
 Subject to restriction in articles
◊ Funds available for redemption extend beyond new shares
 Can eat into legal capital: permissible capital payment
 Safeguards for this relaxation
◊ Lengthy procedure for this to operate
◊ Criteria
 Publicity
 Directors must make solvency statement to safeguard
creditors
– Must be able to pay debts for up to a year after
– Ensure that creditors must be able to be paid
– If misrepresents, criminal offence
– Creditors can object to court if they don't like this
◊ Alternative route to protect creditors rather than blanket ban on
buyback
 Treasury Shares
□ Very recent
□ Share purcahsed back are usually written off
 Not necessarily cancelled
 Can down the line re-sell them without issuing shares
 Allows them to sell more quickly: quicker transactions
□ Safeguards
 Repurchased shares must be paid for out of distributive proceeds
- Ban on financial assistance
○ Cannot give financial assistance to another person to buy its own shares
○ Rationale
 Not as clear because not listed out in common law
 Provision of assistance seems like company purchasing its own shares
 If financial assistance results in loss, then maintenance of capital is lost
 Directors may be raiding company funds
 Other shareholders are being prejudiced
 Takeover context
□ Bidder may use assets of target company to fund takeover
□ Asset-stripping takeover
 Share support
□ Want to support price of shares, generate demand for shares
 Wallersteiner v Moir
□ Maintenance requirement exists to protect shareholders as well
□ Not just creditors
○ Statutory invention
 Completely reformulated in 1981: significant change of approach
□ Prohibition limited to certain forms of financial assistance
□ Defense introduced (principle purpose)
 Reasonable transactions getting caught
 2006 CA
□ People should repeal restrictions, catching too many
Notes Page 95
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2006 CA
□ People should repeal restrictions, catching too many
□ Repealed in relation to private companies
□ Retained for public companies
 EU law requirement: Directive bans financial assistance for public
companies
□ Public companies
 S.678
◊ Public company/subsidiaries may give financial assistance to 3rd
parties for buy shares
 Both before and after
 S.679
◊ Prohibition against public company that is a subsidiary in private
company
 Both before and after
 Slight extension to private companies
– Only if private companies hold public ones
□ Territorial scope
 LJ Millet:
◊ Old provision did not have extraterritorial scope
◊ Not applying to subsidiary established in overseas territory
○ What is financial assistance?
 S.677
□ Gift
□ Guarantees/security/indemnity
□ Any thing given out from company where net assets are reduced
 Case law
□ Charterhouse v Tempest Diesels
 L Hoffman
◊ No definition of giving financial assistance
◊ Language of ordinary commerce
◊ Should not be strained because penal
◊ Sale of an asset to 3rd party to enable company to give
 If effect is to provide purchase with cash paid for shares
◊ If main purpose is to enable party to buy shares, does not
matter if balance sheet is affected
□ Chaston v SWP Group
 Company paid accountant fees as part of process of purchasing shares
 L Arden:
◊ Was financial assistance because it helped purchaser purchase
sharehs
◊ b/c accountant was needed for share purchasers, essentially
company paid for shareholders
○ Defenses
 Principle purpose defense
□ If only ancillary, then OK if in good faith
 Good faith is there in any event because directors are bound anyways
□ Brady v Brady
 Facts
◊ Very narrow transaction
◊ Re-arrangement of company ownership due to dispute, one
party received some funds to purchase shares
 Court
◊ Financial assistance
◊ Even though restructuring, was given not incidental
◊ Consistent with EC law: blanket prohibition
 Exceptions
□ Redemption of shares

Notes Page 96
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□ Redemption of shares
□ Payment of dividends
○ Consequences
 Criminal sanction
 Civil law effects
□ Transaction is void
 Hiden v O'Connor
◊ Security given in financial assistance
◊ Security was void
 Hill v Tyler
◊ Confirms
◊ Void
 Unlawful mortgages were severed from share transactions
□ Director liability
 Make good loss/disgorge profits
 Belmont Case
◊ Company bought asset as inflated price, allowed vendors to buy
controlling stake in company
◊ Company could sue directors as well as vendors
◊ Company was claimant: entitled to bring claim
- Controlling distributions
○ Prohibition of handing over capital to shareholders (Dividends, etc)
○ Flitcroft's Case
 MJ Jessel
□ Creditor gives credit on faith that money will be given in proper course of
business
□ No dividend may be paid out of capital, only profits
 Difference between capital/profits??
◊ Courts were not accountants, very hard to find difference
○ Difference between capital/profits??
 Statute intervened
□ 2nd EC directive as implemented by the CA 2006
□ Constrain distribution to shareholders
 "distribution"
◊ S.829
 Every description of distribution to members, whether by
cash or otherwise
 Very wide: not just cash
– Any distributions in kind
◊ Ridge Securities
 Company sold something to shareholder under value
– Shortfall that was received was considered
distribution
◊ Where proper consideration is given, not distribution
 Director's remuneration is not distribution:
– Provide services
– Holt Garage
 Facts
 Shareholder was director given
excessive remuneration
 Law
 Dressed up return of capital
– Progress Property v Moore
 Facts
 If it was general arms length
transaction, it will stand

Notes Page 97
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transaction, it will stand

 SC:
 transaction not void just because it's a
bad deal: seems to focus more on
purpose and relationship
 Avelon Barford v Perion
– Company assets sold undervalue to another
company
– Majority shareholder of that 2nd company is the 1st
company shareholder
– Court
 Lifted veil, J Hoffman thought this was a
distribution b/c selling short
 When can distribution be made
◊ S.830
 Profits available for the purpose only
 Company's profits available are
– Accumulated realized profits test
 Accumulated realized profits minus
accumulated realized losses
– What is a realized profit/loss?
 General accounting principles
– Have to ask accountants
 Public companies
◊ EC Directive
 S.831
– Public company can only make distribution if
 net assets is not less than net reserves and
called up share capital
 Distribution does not reduce the amount of
assets to less than that amount
 Basically legal capital
– How to decide net assets/net reserves/etc
 Must ask accountants
 S.836: must be discovered through accounts
of true and fair view- very important
 Allied Carpets Case
 Accounts did not give true and fair view
 Distribution was in breach
– Legal capital must be covered by net assets
□ Consequences of unlawful distribution
 S.847
◊ If any time the member knows/has reasonable grounds to
believe it is paid, he is liable to pay back the value of distribution
 Important for liquidator
◊ S.847.3
 Common law consequences
◊ Flitcroft Case
 Directors who made distribution also made liable, not just
shareholder!
– Liable for all payments
◊ Precision Dipping Case
 Shareholders who receive dividends are constructive
trustees if they knew/ought to have known
◊ Bairstows v Queens Moat House
 26m paid out, not compliant
 Full amount had to be paid back
 Particularly harsh
Notes Page 98
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 Particularly harsh
– Some dividends were justified, but all issued must
be paid back, even if a portion is justified (is not
below legal assets)
◊ It's a Wrap Case
 Difference between common law and statute
– Statute
 S.846 only applies to breach of act
 Member must pay it all back, unqualified
– Common law
 Covers other situations of breach, such as
breach of AA - broader
 Remedy more flexible - constructive trustee of
member
□ Rules applying to return to capital
 Sometimes desirable that company should be able to rearrange share
capital
 Private companeis
◊ Allowed in certain circumstances
 Court
◊ Part 17 CA
◊ Interested parties can apply to court
 Scheme must not prejudice minority shareholders
□ Constitution can opt out of exceptions, not out of rules themselves

Notes Page 99
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Debt Financing
10 March 2016 14:58
Security interests
- Why important
○ Priority in insolvency: can proceed against collateral rather than wait in line
○ Influence/control over debtor
 Creditors can have rights of control
 Nominee director on board
○ Tracing rules
 Rights over collateral, one can follow security interest into 3rd party possession
- Creation of rights over property
○ Rights can used to enforce obligation: pay back money
○ Mortgage over land
 Creates rights in land that back up obligation to pay
○ Proprietary security
 Property right given to secure a promise
○ Personal security
 Promise by C to A, who lends to B, that if B does not pay A back C will
- Terminology
○ Security
 The security right in the property, or the property itself
 Confusion!
□ Collateral
 Property over which the security interest operates
□ Security interests
 Actual rights
- Floating charges
○ Re Coslette
 Millet: 4 types of consensual security interests
□ Possessory: Lender actually takes control of collateral
 Pledge
◊ Borrower transfer possession to lender until debt is paid (pawnbroking)
 Documents or title that represented rights are transferred
 Contractual lien
◊ Lender given right to retain possession under contract
◊ Fixing cars, retain until price is paid
□ Non-possessory: Borrower keeps control of collateral
 Mortgage
◊ Legal or equitable
◊ Defeasible outright transfer
◊ Equity of redemption, destroyed by foreclosure
 Charge
◊ Only equitable charges
◊ Fixed or floating charge: equitable interest on collateral that lifted when loan is repaid
◊ National Provincial Bank v Charnley
 Agreement that certain property present or future will be subject to a charge
- Quasi-security interests
○ Retention of title: Romalpa clause
 Possession kept until money is paid
○ Negative pledge clause
 Contractual restrictions on future security interests
- Corporation as a borrower
○ Security interests are vulnerable some times
 Security in twilight time are vulnerable
 Directors acting in breach in borrowing subject to director duties
 Lending money more risky than to sole trader
- Debt securities
○ Security sense here
 Tradeable on markets
○ PLCs
 Bonds: portions of loans given to companies

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Floating Charge
- Why do they exist?
○ Common law security interests had drawbacks
 Problems
□ Security could not be created on future property
 Cumbersome in businesses as they are continuously acquiring new things
□ Inability to deal with collateral for debtor
 Dealing with it would destroy interest
□ However, corporate capital changes all the time, stagnates growth
○ Equity
 Overcame these problems
□ Security could be created over future property
 Holroy v Marshall
◊ Mortgage covered present and FUTURE chattels
◊ HL: fine, as soon as they came in, chattels are subject to these charges
 Must be easily identifiable
 Tialby v Official Receiver
◊ Charge can be over future intangible property as well
 Facts: charge over debts, is OK
□ Dealing with collateral?
 Floating charge
◊ Purpose
 Security that allows debtor to create charge over a pool of assets that could be dealt with as the
debtor wished until crystallization
 Debtor can substitute collateral
 Can have a certain time until it "crystallized", at which time it becomes a fixed charge
◊ Re Panama Royal Mail
 Contract created charge over whole undertaking of company
 CA
– Charge existed over whole property
– Implicitly permitted company to dispose of assets in ordinary course of business
 Because that's what the business does!
– However, as soon as company is wound up, the charge crystallizes and binds on property
 Terminology
◊ Government Stock Securities Co v Manila Rly
 L McNaughton
– Describes it as a "dormant charge"
- History
○ Phase 1
 Yorkshire, Panama, Etc.
□ Courts describe that this exists
□ Woolcombers: first analysis of its character
○ Phase 2
 Re Bondworth
□ Retention of title case, suppliers of carpet yarn wanted to retain title when sold to carpet manufacturers
□ Court
 Had to see what type of charge was here
 Retention of equitable beneficial ownership: floating charge
 Found floating charge even though parties not intending for it
◊ Recharacterized retention of title as floating charge
 Re Coslette
□ L Millet
 Whether floating charge was created inadvertently
□ Facts
 Coislette was building contractor that entailed use of machinery
 Clause: if Coslette abandoned work, council could sell machinery or use it to finish construction
 Coslette went into administration
◊ Administrator: clause created floating charge, and was void because was not registered
□ Law
 CFI
◊ Not floating charge, straightforward fixed charge created by contract
 CoA
◊ Characterized as floating charge
◊ Debtor is allowed to use collateral and dispose, so was floating
○ Phase 3
 Modern commerce

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 Modern commerce
 Charges over debts
□ Fixed or floating?
 Sieb Gorman
◊ Can create fixed charge over debts
 Agnew Case
 Re Spectrum Plus
- Theory
○ Fungibility?
○ Analysis
 Yorkshire Woolcomber's Case
□ CA
 LJ Romer
◊ Distinction between fixed charge and floating charge
◊ A fixed charge is one that fastened on definite property that can be ascertained/defined
◊ A floating charge is ambulatory and shifting in nature, hovering over property that it is intended to
affect, until crystallization occurs that makes it fasten on the specific property
○ Academics
 Roy Goode
□ Proprietary interest in a fund
 A collection of charged assets
□ River Thames is collateral, but the content (water itself) changes
□ Approved in Spectrum Case
 L Walker agreed
 Sarah Worthington
□ Defeasable fixed interest that terminates when collateral is dealt with
□ Floating charge same as fixed charge
 Just under collateral that can be dealt with, and replaced whenever dealt with
□ License theory:
 Chargee gets some collateral interest
□ Problem with this theory
 Inconsistent with Evans v Rival Granite
◊ Court said that the chargee does not have fixed interest, explicitly different
 Richard Nolan
□ Floating charge overreachable charge
□ When one deals with property, charge then puts it on proceeds
□ Kind of like Trustee when he deals with property
 Overreaches interests of beneficiaries
- Fixed or floating?
○ Why do we care
 Priority
□ Fixed charges
 Fixed charge properly perfected is prioritized over subsequent charges
 Floating charges by definition permits dealings with collateral
◊ Lower priority: subject to fixed charges
□ Preferential creditors
 e.g tax and employees
 Floating charge:
◊ preferential creditors can take priority before floating charge
□ Unsecured creditors
 IA 176a
◊ Proportion of assets subject to floating charge is made available to unsecured creditors
◊ Does not apply to fixed chargee
□ Administration costs
 Assets of floating charge subject to costs of liquidation/administration
□ Challenged under 245 IA
□ Proceeds of Crime Act
 Confiscation of assets applicable to collateral under floating charge
 Why statute has intervened?
□ Too attractive to creditors, too much power
□ Should be limited in certain way
○ Case law
 Yorkshire Woolcombers
□ Romer LJ
 3 characteristics - not exhaustive
◊ Charge on class of assets present and future
 Only present can also be floating charge
 Only future can also be floating charge

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 Only future can also be floating charge

◊ Assets would change time to time in ordinary course of business
 Not that important
– Re Croftbell
 Floating charge even though doesn't change time to time
– Hollroy v Marshall
 Charge over future assets are fixed charges
 No freedom to deal with
– Sieb Gorman
 Fixed charge over receivables because it could not be dealt with, even if it is not yet
in pot
◊ Contemplated that company can deal with class as they like until a later event (action taken by lender,
e.g.) in ordinary course of business
 Most important characteristic
 Agnew v Commissioners of Inland Revenue
– L Millet: 3rd criteria most important
 Re Spectrum Plus
– L Scott:
 3rd characteristic is the most essential
 3rd characteristic definite: if satisfied, can only be floating charge
– But not incompatible for fixed charges to allow borrowers to deal with property in some
way?
– Freedom to deal most important characteristic
 Depends on the circumstances:
– Nature of asset class is relevant for document interpretation
– Assets subject to security remain under control of chargor
 Control test: can have certain restrictions
 Negative pledge clause: restricts more security on this asset, but can still
control asset as they want
 Hallman v Care Homes
– Agreed with Spectrum most important criteria
 Receivable cases
□ To have fixed, one must tell debtors to not deal with either proceeds or assets which the proceeds come from
□ Both must go into a separate bank account managed by creditor
□ Sieb Gorman v Barclays
□ Facts
 Company charged all its present and future debts to Barclays
 Called a fixed debt - however, court looks to substance
 Contract: company could not deal with debts themselves
 Company required to pay proceeds from debts to current account with bank
– No express restriction on dealing with the proceeds that went into this account!
□ Slade:
 Restrictions on dealing with debts + requirement to pay debt receivables to Barclay's account = fixed
charge
 Proceeds were paid into bank account owned by creditor
 Creditor could intervene, therefore not enough control by debtor: fixed charge!
 Bank could enforce its right to money inside the account and prevent company from withdrawing from
it
□ Significance
 Problem: fixed creditors need control over secured assets, but companies need ready access to book
debts b/c important for cashflow
□ Overruled by Sepctrum
□ Spectrum Plus
□ Facts
 Wanted to create fixed charge, same way as Sieb
□ Law
 CFI
 Charge was floating
 CoA
 Charge was fixed
 HL
 Charge was floating
– No restriction on use of debt: hallmark of floating charge!
– To be fixed, the account must be "blocked" by creditor
 Debtor must require permission before dealing with it
□ Brightlife Case
□ Issue with non-bank creditors
Creditor is not banker: no practical control

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 Creditor is not banker: no practical control

 Charge was therefore floating
– Because company was free to collect its debts, and once outside account it can be free to
deal with it
 Significance
 Big difference between bank creditors and other creditors
– Only banks could restrict use of proceeds!
 Can non-bank creditors create fixed charges over receivables?
– Fixed charge on debts themselves
– Floating charge on proceeds
□ Facts
 Fixed charge on actual debts
 Floating charge on proceeds from debts
 Is this dual approach possible?
 Goode
 Cannot, must have same charge over both
□ Bullas Trading
□ Can have fixed charge over debts, floating charge on proceeds
□ Disapproved by Privy Council in Agnew
□ Agnew
□ PC: not possible, indivisible floating charge over proceeds
 Separate proceeds from book debts and actual debt
 Actual debt subject to fix, proceeds floating
 Court said no: cannot separate the two, they are one and the same
□ L Millet
 2 stage process of characterizing charge
 Stage 1
– Interpret documentation and circumstances
– Seek to gather intention of parties on factual basis
– Not to discover what parties intended legally, but the rights and obligations they intended
to grant each other
 In this case, does debtor have right to deal with collateral
 Stage 2
– Do those rights or obligations give rights to fixed charge or floating charge
– Does not depend on intention of parties
 Substance, not name
 Label used by party is not conclusive/no presumption
 Brightlife
 Agnew
 However, label may be some indication of what the parties want, even if not decisive
□ Cases post spectrum
□ Beantube Products
 Facts
 Fixed charge over as much as possible over company
 Floating charge over "any other assets" not covered by fixed charge
– e.g. proceeds from debt
 Court
 Applied Spectrum/Agnew
 Floating charge in relation to receivables of debt
□ Basically depends on control
□ However, a degree of control by creditor can still be a floating charge
 Fixed charge with some control by debtor
 Floating charge with some restrictions on debtor
 Crystallization
□ Convert floating charge to fixed charge
□ Effects
 Right to deal with asset is terminated
 Affects actual, not ostensible authority
 Still ostensible ability to deal if creditor has no ability deal with property
 Fixes on specific assets
□ When does it occur
□ Up to contract
□ Occurs on events
 Implicit events
 Company ceases on business
– Panama Case
 Winding up petition = crystallization
 Cecassion of business

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 Cecassion of business
– Woodruf case
– Real Meat Case
 Company sells all assets
 Explicit events
 If chargee appoints receiver under charge, they are indicating that they want to enforce, which
means no more floating charge
– Global Trust Case
 Evans v Rival Granite
– Chargee takes control of charge = crystallization
 Other events
 Government Stock v Manila
– Automatic default on credit unlikely to cause crystallization
 Re Woodruff
– Crystallization of future charge probably means crystallization of former charge as well
□ Turns on term of charge, depends on creditor
□ Automatic crystallization
□ Crystallization in specified events
 Default, additional encumberance
 No action/intervention of chargee
□ Sometimes means
 Chargee has right to crystallize in certain events and has to give notice
□ Big issue
 Crystallized floating charges becomes fixed charges
 Therefore fixed charge priority rules applied
 Creditors would like to create fixed charge faster
 Reversed by statute
 Charge that is floating when created is subordinated!
– No longer muc
– h of an issue, even if crystallizes is still subordinated to preferential creditors, etc.
 Problematic when 3rd parties have no idea about crystallization, who contracts later with
company where the assets they get for security are subject to floating charge that has previously
crystallized
○ Priority of charges
 Depends on actual/ostensible authority to create charge
□ Depends on whether charge is crystallized
 Whether subsequent creditors are aware
 e.g.
□ Floating charge and subsequent fixed charge
□ Chassel v Brown
 Chargor has authority to deal with collateral
 Can sell it or deal with it as they wish
 Can create new security over it as well
 Fixed charge is effective
□ Floating charge and subsequent floating charge
□ Benjamin Cope
 First in time prevails
□ Automatic Bottle Makers
 If subsequent floating charge only applied to part of the former floating charge, then OK
 Negative pledge clauses
□ Inconsistence with company's ability to control?
 Does not take away actual authority of chargor
 Company has ostensible authority
 Registration of charges
□ CA part 25: all about registration
 CA Amendment
◊ Replaced old company act b/c lots of controversy
◊ All charges created by company are registrable, must be registered within 21 days
 Partially void against liquidator, administrator, other creditor if not
 However loan itself is still effective and becomes automatically enforceable
 Creditors have constructive notice of negative pledge clauses if registered
– Floating charge would take priority from these creditors
○

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Insolvency
Thursday, 17 March 2016 15:17
Insolvency Act 1986

- General
○ When is a company insolvent?
 When company is unable to pay debts
□ S.123
 Cash-flow insolvency: unable to pay debts as they fall due
 Balance sheet insolvency: when assets are less valuable than liabilities
□ Beer v NY Corporate Trustees
 SC defined insolvency more clearly
○ Applicability
 Applies to all companies except banks and investment firms
□ Regime for commercial companies not applicable for these
 Systemic issues during financial crises
 Banking Act 2009: liquidation of banks and systemically important
investment firms
Receivers/Receivership
- 3 types
○ Ordinary receiver
 Can co-exist with liquidator
□ Receiver only interested in specific collateral, liquidator has wider remit
 Appointed by creditor/court to enforce security interest
□ Take possession of collateral, discharge debt, and handover surplus to
borrower
 Etymology: person used to go in to "receive" property
 How are they made?
□ Contractually provided
□ Court appointed too
 Person appointed is officer of court
○ Official receiver
 S.399 IA
□ Court official who undertakes compulsory liquidation of companies
□ Officer of court appointed by secretary of state
 If company does not have liquidated
 Stop gap before actual liquidator is appointed
○ Administrative receiver
 Statutory concept
□ Receiver of substantially whole of company
 Ordinary receiver under floating charge the covers practically all assets
of company
 Floating charge must be "qualifying"
□ Statutory duties
 Must take into account interests of other creditors if your floating
charge is so extensive
◊ Actions not only affect floating charge holder, also other
creditors
 Powers
 Duties
◊ S.40
 Obliged to pay preferential debts out of assets before
paying creditor
◊ S.44
 Admin receiver is an agent of company not chargee

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 Admin receiver is an agent of company not chargee

◊ S.448
 Admin receiver must make a report about how other
creditors will be affected
 Case law
□ What common law duties do they have?
 Downsview Nominees
◊ Admin must take reasonable care to obtain true market price
 Melford v Blake
◊ Vice Chancellor
 Admin owes duty of good faith to company
 Admin does not owe duty of care to company or to
creditors of it
 Enterprise Act 2002
□ Generally holder of qualifying floating charge precluded from appointing
admin receiver, but rather an receiver
 Basically can't expect admin receiver to act in good faith for other
creditors
 Made these very rare: has to appoint administrator, which is very
different
Administration
- New concept-1980sn
- Purpose
○ Chapter 11 influenced
 Corporate rescue rather than protecting creditors
○ Rescue and rehabilitation of viable parts of company
○ Life support process
- Insolvency Act 1986
○ Moratorium given to company to creditors while attempts are made to rescue
company/get better results for creditors
○ Enterprise Act modifies a lot of this
○ Sch.B.1
 Administration procedure
□ Done by administrator
 Qualified insolvency practitioner
 Appointed by court or outside court
◊ Outside court: person with qualifying floating charge can be
appointed by floating charge holder
 Para 14
□ Qualifying floating chargee can appoint
administrator without applying to court
 Why out of court?
◊ Admin receiver can be appointed out of
court
□ Only do so when default on charge
◊ Inside court
 When company is insolvent/likely to be insolvent
 Order is reasonably possible to achieve administration
□ Who can apply?
 Creditors or company
◊ Can whenever
◊ Director need to tell floating charge holder when they do so
however
 Hard for creditors, who don't have access to accounts
 What does administrator do
□ Act in interest of creditors as a whole
However owes duty to company

Notes Page 107
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 However owes duty to company

 But must act in interest of creditor
◊ Conflict between creditor and company
 Re Charnley Davies
 Kyrris v Oldham
□ Duties owed exclusively to company
□ Courts afraid that individual creditors could sue
administrator if duty is owed to creditors: admin
should not be tempted to prejudice those who don't
sue
□ Act with objective of 3 alternative purposes, in descending importance:
 Hierarchy:
◊ Rescue company as going concern
◊ Achieve better result for creditors than likely if creditors are
wound up
◊ Realize property to realize distribution to creditors
 Pursue 2nd only if he cannot pursue 1st
 Process
□ Moratorium
 Happens as soon as admin is appointed
 Gives breathing room to company
◊ Cannot be sued
 Interim moratorium
◊ Immediate
◊ No resolution/order for winding up can be passed
◊ Happens as soon as application for moratorium, or notice to
appoint has been filed when out of court
□ Administrator devises proposals
 Ideas about how company can be saved
 Vote on proposals
◊ Creditors should agree to certain compromises
 May dispose property, appoint director, etc.
□ Secured creditors?
 Para 70 Sch.B.A
◊ Admin can dispose creditor under floating charge (if it was
under floating charge at time of administration, no point of
crystallizing)
 WITHOUT CONSENT OF FLOATING CHARGE OWNER!
 Floating charge holder has first call on sale price
 Para 71
◊ Court may give administrator right to override interests of
security owner
 But secured creditors get first bid
 Override consent because if secured creditors insist, might
hurt administration
- Pre-packed administrations
○ Directors negotiate sale of business and appoint administrator that uses his powers to
effect this sale
○ Problem
 Transparency
□ Administration
 Administrator must draft reports
□ Directors during pre pack
 Only concerned with interests of secured creditors - why?
 No care about unsecured creditors
◊ If pre pack happens, unsecured creditors might feel they got a
worse deal than if it had gone to administration

Notes Page 108
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worse deal than if it had gone to administration

○ Costs
 If it comes out of company assets, then unsecured creditors basically pays
 Re Cayley Vending
□ Facts
 Company supplied cigarettes
 Bad when cigarette regulation came
 Rival wanted to purchase for economies of scale
 Crown: winding up for no payment for VAT, aka liquidation
 Court asked about administration
□ Court
 Presented with pre-packed deal about being purchased by rival
 Issue raised by crown: who pays for this?
◊ Court sympathetic to pre-pack process
◊ Costs are at discretion of court, not necessarily an expense of
administration that would trickle down to unsecured creditors
 However, a lot of these pre-packs are out of court: who
then controls who pays the costs?
Winding up
- Part 4 IA
○ Duties of liquidator
 Collect assets
□ Partially paid shares: shareholders has to pay rest
□ Share capital has to be paid up
 Certain transactions happened before winding up can be challenged
□ Twilight
 Director liability
□ Maybe directors carry on trading
□ Liable for wrongful trading under 214
○ Unsecured creditors
 Can look to collateral to get paid, receivership
 Collateral cannot be used by liquidator
○ What comes out, in hierarchy
 Expenses of liquidation
 Preferential creditors
□ Employees, etc.
 Floating charges
 Unsecured creditors
□ Secured creditors who were not totally satisfied out of their collateral
 Members get rest according to articles
○ Bad for members
 Temptation to dip into assets before liquidation
 Why we have capital maintenance rules!
○ Hague v Namtae Electronics
 Status of liquidator
□ Obligation is to company
□ Though must take account of other interests of creditors
- 2 main regimes for liquidation
○ Voluntary
 Initiated by company itself
□ Pass special resolution
 Members winding up
 3/4 of members must agree
◊ Articles may alter this: ordinary resolution may bring to end
◊ Must have process: people must vote
□ Directors make statutory declaration
 Specify that company is solvent
Must provide evidence to support these declarations
Notes Page 109
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 Must provide evidence to support these declarations

□ GM appoints liquidator
 All powers of directors cease and liquidator takes over
 All responsibilities/liabi
□ Peveril Goldmine case
 Restrict statutory right of member to petition for winding up
◊ Articles: did not allow individual members to petition without
certain consent
 CoA
◊ Statutory right cannot be contracted out of
◊ S.33 cannot be contract outside
◊ Whether a valid contract may be made where individual
shareholder agrees not to apply for wind-up
 Extrinsic ordinary contracts?
□ Sriking off
 Voluntary striking off
◊ Board of directors make application to registrar
 Striking off
◊ Clean up register
 Creditors
□ How does it come about
 If directors don't make declaration of solvency, creditors declare
 If shareholders first starts wind-up process
◊ Then liquidator decides company is actually insolvent
◊ This becomes creditor wind-up
 Upon insolvency, creditor money is affected
□ Wind-up commences on passing of resolution
 Important to know when this is because twilight transactions
○ Compulsory winding up
 IA S.124
□ Who may petition court?
 Any creditor "presently due"
◊ Stonegate Securities
 Who is a creditor?
 Must be a creditor with debt "presently due"
 CA
– Injunction to stop, because debt not presently due
 Any contributory
◊ Shareholder who paid up all shares
 Eureka Goldwash
– Whether there is likely anything left upon
insolvency for shareholders
– Court:
 Member must have had a sufficient interest to
petition
 Member can only sue if company looks if it's
solvent
◊ Only then will the shareholder have an
interest
 Criticized
◊ Can't tell often if this is true
◊ Members should be able to apply
 Administrative receiver
◊ If he sees no hope, can wind up
 Circumstances for when a company can be wind up
□ Company can decide by special resolution
75% of members can decide, court cannot contest

Notes Page 110
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 75% of members can decide, court cannot contest

◊ When company cannot pay debts (cashflow/balance sheet)
◊ 1221g
 Court decides that it is just and equitable to wind up
– S.1252
 Court may refuse an order under this ground
if
 Petitioner has another remedy but does
not use
 Syracuse case
 Petitioner was minority
shareholder, offered to by him
out
 Was sufficient other remedy,
would not get winding up
provision
– Modelled on partnership act
 Unfair prejudice petition
 Fraud
 Edward Brinsmead
 Company set up to perpetuate a
fraud
 Just and equitable to wind up
 Lock v John blackworth
 Company successful, but managed
autocratically by directors
 On facts, winding up was ordered so
they can withdraw their investment
 Felt that minority should not have
their investment in scenario
where they are not in control
 Unfair prejudice now
 Lack of probity
 Deadlock
 Yinidje Tobacco - Ibrahimi
 Quasi partnership
 Wider than 994: no unfairness here so
no remedy under 994
 Not in parties' contemplation
 Equitable considerations
 Re Guidezone
 Relationship between unfair
prejudice and just and equitable
windup
 Ibrahim case
 L wilberforce warned
against company as if
it were a partnership
 Understanding not to
remove each other
from the board:
unjust and
unequitable
 Wind-up jurisdiction is no wider
than 459 jurisdiction
 If it is not unfair, then the
court would not say that it
is just and equitable for it to

Notes Page 111
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is just and equitable for it to

wind up
 Might be confined to quasi-
partnership scenario
- Vulnerable transactions
○ Purpose
 Certain transactions can be overturned
□ Messes with priority that occurs during liquidation
 Administration and liquidation available
□ Protect creditors against transactions that confers improper advantage,
given liquidation
○ S.240
□ Relative time
□ Transactions must be made at certain times
□ Historical differences between different transactions
□ S.238
 Defined in 240
◊ 2 years before onset of insolvency
◊ Onsent of insolvency
 S.240.3
– Winding up: commencement of winding up,
voluntary is when resolution is passed
□ S.239
 Defined in 240
◊ 2 years if given to someone connected with company
◊ Otherwise 6 months
□ S.245
 Defined in 240
◊ 2 years if given to someone with company
◊ Otherwise 12 months
○ S241
□ Court given power to give order to effect to challenge
○ Types
□ Transactions that are undervalue
□ S.238 IA
 If company makes a gift
 If company asking for consideration that is significantly less than
property
◊ MC Bacon
 If transaction that depletes company's assets
 Giving security for unsecured asset is not within this, b/c
does not deplete assets, only makes creditor position
stronger
 Sub. 5 Good faith defense
◊ Reasonable grounds for belief that this would be good for
company in ordinary course of business
□ Voidable preferences
□ S.239 IA
 Company gives preference if that person is one of the company's
creditors
 AND makes that person better off in company's liquidation
 Sub. 5 Defense
◊ Company must have a desire to make this person a creditor
◊ OK if motive is not to prefer
◊ MC Bacon
 Bank threatened to call in debt unless it got security
 Floating charge given, but not prefer

Notes Page 112
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 Floating charge given, but not prefer

 No problem
□ Avoidance of floating charge
□ S.245 IA
 Floating charge is invalid to extent that new consideration is not given
to it
◊ Invalid except to extent of aggregate
 Value as/after charge
 Discharge of debt for company
◊ Floating charge for debt that is already incurred is invalid
○ Comparing the 3 types
□ Good faith defense for undervalue/voidable preferences
□ Administrator/liquidator can challenge such transactions
□ Court
□ S.238/239
 Court must order certain transactions/returns
□ S.245
 Administrator does not need to go to court
 Can just be ignored
○ Must a company be insolvent at time of transaction or as a result of transactions?
□ Insolvency presumed in S.238 if
□ Recepient is connected person
□ 245
□ No need if floating charge given to someone who is not connected
○ Relevant of person being connected to person
Floating charges and unsecured creditors

- Enterprise Act abolished crown preference
○ Tax is no longer preferred
○ Crown gives up preference but in exchange
□ Some collateral must be kept for unsecured creditors
□ S.176a
□ Liquidator must make prescribed part for satisfaction for unsecured creditor
□ Statutory instrument
 50% of collateral if property under 10k
 50% of first 10k, and 20% of the rest, up to 600k being available
 Determined by amount that floating chargees used to have to pay the
crown
□ Permacell
□ Exchange of preference for crown for unsecured creditors
□ Encourage business

Notes Page 113

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Lecture notes - all lectures

Company Law (King's College London)

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- Company limited by guarantee

What can creditors do?

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- Security over company's assets

Separate legal entity consequences:

- Owning substantial shares in a company does not mean you own it

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When to hold shareholders liable?

*anything that talks about piercing before Prest v Petrodel:

Single Economic Unit

Post-Prest Interpretations of Pre-Prest Caselaw

Statutory Lifting of Veil

Companies Act (Company accounts)

Wrongful Trading (S.214)

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How do these organs get power?

Articles of Association (regulations)

 Eley had become member of company

Critique of contractual analysis

Alteration and Shareholder Agreements

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 Unanimity rule unaffected

Prevention of minority oppression when articles are altered

◊ However, directors here were acting as shareholders

– Facts: minority at outset buy into company knowing

□ Reliance on s.33 limitations

 Extrinsic contract between director and company

- Alteration on extrinsic contracts

 Fixed term contract 10 years

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Decision making by group:

Decision making by group:

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○ Different default rules for older companies

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 Large companies with dispersed shareholdings

□ Art 3: apply to facts

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◊ Director created a GM and appointed new director

◊ Articles as registered: chairman had casting vote

Levers of Control : why do shareholders have ultimate power?

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Companies Act Part 10

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 Soft law - guidance documents for public listed companies

- Mechanics of decision making

Art. 14: conflict of interest provision

□ Board as a whole responsible for remuneration

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 Subject to directors duties

Provisions as to service contracts/expenses

○ Annual accounts must contain remuneration stats

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How does general meeting come to a conclusion?

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 British Union for Abolition of Vivisection

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