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COMPANY REVISIONTABLE OF CONTENTS
Limited liability / Salomon
Lifting the veil
- Fraudulent Trading
- Wrongful Trading
The Company’s Constitution
Decision making organs
- Duomatic Principle
- GM powers
- Director’s Powers
Director’s Duties
- S171- Duty to act within powers
- S172- Duty to act to promote the success of the company
- S173- Duty exercise independent judgement
- S174- Duty of care and skill (only common law duty)
- S175- Duty to avoid conflicts of interest
- S176- Duty not to accept benefits from third parties
- S177 & 182 Duty to declare self interest
- Transactions requiring approval by GM
- Remedies
Corporate Governance
Derivative Claim
Unfair prejudice Petition
Dealing with the company
- Pre-incorporation contracts s51
- Ultra-Vires s39
- Authority
Corporate finance
- Share Capital (Raising Share Capital)
- Share Capital (Capital Maintenance)
- Loan Capital
Insolvency
, Overview
Model Articles
- S20(1) CA 2006: Unless the Articles are registered the model articles will apply
- Article 3: “Subject to the articles, the directors are responsible for the management of the
company’s business” – division of powers
- Article 4: Shareholders’ reserve power
(1) The shareholders may, by special resolution, direct the directors to take, or refrain from
taking, specified action.
(2) No such special resolution invalidates anything which the directors have done before the
passing of the resolution.”
- Art.5: General power of delegation: Directors are permitted to delegate to ‘such person or
committee’ and ‘on such terms and conditions’ ‘as they think fit’
- Art 7(1) The general rule about decision-making by directors is that any decision of the
directors must be either a majority decision at a meeting or a decision taken in accordance
with article 8.
- Art 8 – formalities for BoD decision
- Art.17 – appoint directors 1) either by ordinary resolution (i.e. majority of GM) Worcester
Corsetry Ltd v Witting [1936] - the GM has an inherent power to appoint directors by
ordinary resolution or (more usually) 2) by a decision of the directors.
- Art.18- Lists 6 circumstances when a person ‘ceases to be a director’: Bankrupt; mentally
incapable for 3months etc; director notifies that resigning or retiring (and such resignation
or retirement has effect in accordance with its terms)
- Renumeration- Art.19- Determined by directors and may take ‘any form’ – BUT
o ss.188-9 (length of contract): approval of GM if over 2 yrs
o ss.227-30 (inspection by members) – members can inspect the remuneration
arrangements so they can’t be secret
- Decision Making- Arts.7 & 8: any decision of the directors must be either a majority decision
at a meeting or a unanimous decision under article 8.
- Art.9- Any director may call Board meeting
- Quorum: Art.11- 2 unless larger number fixed (by directors) otherwise
- Article 14 - “an actual or proposed transaction or arrangement with the company in which a
director is interested”
(1) such director not counted for purposes quorum or voting purposes.
(2) unless
(a) ordinary resolution permits
(b) interest “cannot reasonably be regarded as likely to give rise to a conflict of interest”
OR
(c) permitted transaction under Art.14(4)
Limited Liability
- S3(2) CA 2006 – if the members liability is limited to the amount, if any, unpaid on the shares
held by them, the company is “limited by shares”
- Insolvency Act 1986 s74(2)(d) – ‘in the case of a company limited by shares, no contribution
is required from any member exceeding the amount (if any) unpaid on the shares in respect
of which he is liable as a present or past member’
- Protects the shareholder as the creditors cannot have recourse to the shareholder’s assets
beyond unpaid shares – e.g Salomon, the unsecured creditors could not have recourse to
the shareholder’s assets
- Rationale – asset partitioning reducing creditor monitoring costs; encourages investment ;
equally the shareholder may make nothing from the investment
- Problems: when facing hardship/insolvency the risk is on the creditors
, - Solution: wrongful trading; capital maintenance; fraudulent transactions
- Fraudulent Trading s213 IA 1986 (real moral blame/ high bar)
- Wrongful Trading s214 IA 1986 (reckless)
- Every step defence
Separate Legal Personality
- Macuara v Northern Assurance 1925 – Lord Buckmaster “no shareholder has any right to
any item of property owned by the company, for he has no legal or equitable interest
therein. He is entitled to a share in the profits while the company continues to carry on the
business and a share in the distribution of the surplus assets when the company is wound
up”
- Other laws may apply – e.g Tort Law in Chandler v Cape 2012 – assumption of responsibility
of a parent company to the subsidiary’s employees
- Prest – Piercing the corporate veil = The evasion principle: Where a company was created so
that the individual can evade or frustrate the enforcement of existing liabilities (although
better explained by imputing knowledge to the company); Lifting the veil = The concealment
principle: 'look[ing] behind [the company] to discover the facts which the corporate structure
is concealing' – Sumption para 28
- Veil was not pierced in prest because the companies were pre-existing but recovery through
trusts law as Mrs Prest had a beneficial interest
- Creates the problem of transactional security Rules on: attribution; pre incorporation
contracts; limited capacity of the company; director’s authority limited by the constitution;
those purporting to act for the company
Constitution
- s17 - defines “company constitution”: a) The company’s articles, and b) Any resolutions and
agreements to which Chap 3 applies
- S257 – the constitution includes a) resolutions and b) decisions by members which are
equivalent to decisions by the company
- Model Article 3- “Subject to the articles, the directors are responsible for the management
of the company’s business”
Enforcement
- S33(1) – company + members bound by constitution = statutory contract
- Hickman – enforcement limited to qua member
- Outsiders – cannot rely on s33 but Articles may be incorporated into an implied contract
- Cannot enforce qua member where the matter is a mere irregularity
Altering the Articles
- s.21(1): “A company may amend its articles by special resolution.”
- S22- entrenchment
- s.283 – special resolution = 75% majority
- Minority oppression rules: Allen v Gold Reefs ‘bona fide for the benefit of the company as a
whole’ (or the class)
Organs
- BoD- management
- GM – reserved powers/ override where BoD deadlock (Forster v Forster)/ s168 remove
directors
- Duomatic Principle – informal unanimous consent rule (must be 100% unanimity and must
be where the shareholders are the interested parties ie not creditors)
- CA 2006 s. 281(4) – preserves it
, Director’s Duties
- s.170(3)- The general duties (s171-s177) are based on certain common law rules and
equitable principles as they apply in relation to directors and have effect in place of those
rules and principles as regards the duties owed to a company by a director. [
- Prima facie- the statute applies in place of old case law, BUT….
- s.170(4)- The general duties shall be interpreted and applied in the same way as common
law rules or equitable principles, and regard shall be had to the corresponding common law
rules and equitable principles in interpreting and applying the general duties.
- S170(1) - ‘The general duties specified in sections 171 to 177 are owed by a director of a
company to the company’.
- S179 – duties are cumulative
Director
- S251(2) – professional advisers are excluded from being shadow directors
- S251(1) - “shadow director” = a person in accordance with whose directions or instructions
the directors of the company are accustomed to act.
- S252 – persons connected to a director
- S250 – director = de jure or de facto
- S170(5) – duties apply to shadow directors as far as they are capable of applying
- S170(2) – former directors (continuous ONLY for s175 and s176)
Act within Powers
- S171- Duty to act within powers
- S171(a) - act in accordance with the company’s constitution (as defined in s 257 – wider than
s17)
- S171(b) - only exercise powers for the purposes for which they are conferred
Promote the success of the company
- S172- Duty to act to promote the success of the company
- Regents Crest – subjective test – difficult to prove breach
- Item Software – duty to disclose?
Exercise independent judgement
- S173- Duty exercise independent judgement
- Madoff Securities - ‘He may legitimately defer to the views of those with greater experience
or expertise than him’
- Defences: s.173(2)(b): unless ‘authorised by the company’s constitution’ OR s.173(2)(a):
unless in furtherance of previous agreement (Fulham Football Club)
Duty of care and skill
- S174- Duty of care and skill (only common law duty)
- S174(1) must exercise reasonable care, skill and diligence.
- S174(2)(a) the general knowledge, skill and experience that may reasonably be expected of a
person carrying out the functions carried out by the director in relation to the company, and
(objective test/ minimum standard)
- S174(2)(b) the general knowledge, skill and experience that the director has. (subjective
test)
- Causative Loss - Cohen v Selby
- Remedies: s178 - The consequences of breach (or threatened breach) of sections 171 to 177
are the same as would apply if the corresponding common law rule or equitable principle
applied. DAMAGES
Avoid conflicts of interest
- S175- Duty to avoid conflicts of interest
- s.175(1) - A director of a company must avoid a situation in which he has, or can have, a
direct or indirect interest that conflicts, or possibly may conflict, with the interests of the
company.
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