UK COMPANY LAW - INTRODUCTION

Company law: a mix of statutes (acts) and common law (case law). Developed to protect investors,
maintain confidence in markets and fairness for stakeholders.
County Court < shares worth £120,000 < HC Chancery Division

Relevant acts​:
● Insolvency Act 1986
● Company Directors Disqualification Act 1986
● Criminal Justice Act 1993
● Financial Services and Markets Act 2000
● Company Act 2006 (CA’06)
○ Aims:
■ Enhance shareholder engagement and long term investment culture, Better
regulation ‘think small first’, Easier to set up and run company, Flexibility for the
future, Simplify and improve existing legal framework
○ Reforms:
■ Private companies - no need for company secretary or hold AGM
■ Memorandum of association - unrestricted objects
■ Articles of association simplified
■ Minimum 1 ‘natural person’ as director for ltd, but plc min. 2
■ Electronic filing, communications with shareholders and company details on
website/email - transparency

Agency Law​:
● Company (principal) can only enter contract/deed (a contract but doesn’t require consideration)
with a third party through acts of agent (because the company itself is seen as a separate legal
entity, separate from its owners, so ‘agents’ = human managers
● But agent can only act within its ‘authority’, such that the contracts they make are binding;
authority may be actual or ostensible
● Principal is not bound by contract made by agent outside their authority, but can supply
retrospective authority in order to adopt a contract made by unauthorised agent

Directors’ authority​:
● Actual authority is as stated on contract between principal & agent e.g. directors, ‘implied actual
authority’: authority delegated by directors to managers
● Directors’ are bound by company’s constitution and have a duty to promote the success of the
company
● If they go against interest of company, it is arguable that they are acting outside their authority
 ○ CA’06 s.40: even so, contract is still enforceable, proven that the third party is acting
good faith; third party is also not bound to enquire about limitation on director’ authority
(as per constitution). S.40 is to protect third party
○ Royal British Bank v Turquand (liquidator) 1856: directors power to borrow money is
limited by value unless approved by shareholders. Principal had secure loaned from
RBB but upon liquidation the liquidator argued that the loan was not approved by SH
thus unsecured; but per ‘indoor management rule’ third party doesn’t need to check
internal procedures thus loan was legit. Rule is substitute for s.40 where agent is not
director.
● Ostensible authority: as stated by principal and third party. Only applicable when no actual
authority. Based on Common law principle of ‘estoppel’ (equitable principle) (arised from rep of
company to third party).
○ Freeman and Lockyer v Buckhurst Park Properties Ltd 1964: third party (BPP director)
enters contract with an agent which they believe has authority, but actually has none.
Contract is still valid because when agreement formed, said third party is legally seen
as the representative of principal, no matter if actual authority is exceeded, ostensible
authority exists to validate contract.
○ Third party who claims they have authority on behalf of principle can be sued, from
‘breach of warranty of authority’.

Sole proprietorship (independent contractor)

● Sole trader; no legal separation between business and proprietor
● No registration required, notify HMRC
● Term is exploited: ‘synthetic self-employed’; employees of companies not recognised, doesn’t
get insurance/ other benefits e.g. Uber

Pros of sole trader Cons of sole trader

Control over hours and business, profits Personal liability for debts, limit access to
retention, privacy of affairs finance, work-life balance, lack of prestige

Low set up costs, quick and simple, few statutory Some customers will not deal with sole traders;
obligations, easy to change mind may be trapped in own zombie firm

Partnerships
General Partnership
● Partnership Act 1890: ‘partnership is the relationship which subsists between persons carrying
on a business in common with a view of profit.’
● Unincorporated, no need to register; partners are liable for debts: Insolvency Act 1986 S.74(1)
● Partnership agreement advisable; partnership dissolved on death/leaving
○ The Smiths: issue of division of profit of gigs between performers and writers
&performers. Performers claimed it should be split equally but W&P claimed they had
 agreed 40/40/10/10, no written evidence, just hearsay so held equal partnership = equal
money. But, writers still have copyright of songs
○ Pink Floyd: one member left so partnership was dissolved, but other members wanted
to carry on performing as PF; due to a precedent which had let a partnership carry on
when member left/died, held PF not dissolved.
Limited Partnership
● Limited Partnerships Act 1907
● Unincorporated, one/more ‘general’ and ‘limited’ (sleeping) partners.
○ Sleeping: contributes capital but not liable for debt& obligation, may choose to not
participate in management of firm (general expected to help manage firm). Insolvency
Act 1986 s.74(2)(d)
Quasi-partnership
● Legal status: limited liability company.
● Recognised by courts as a partnership when proven: run by owners as if a partnership and
established with partnership expectations
Limited Liability Partnership (LLP)
● Limited Liability Partnerships Act 2000. Not applicable to partnership act 1890 laws.
● Tax status as general partnership and flexibility of management structure. Need registration and
audited annual accounts. Recognised as a separate legal entity
● Members have limited liability for debt, but cannot limit personal liability for negligence;
members have the right to manage, unlike SH in PLC.

Registered Companies (incorporation): CA’06.

● Exceptions: chartered companies (approved by Queen), statutory companies (due to acts of
parliament
● Insolvency Act 1986 s.74: limited liability for SH, but not co, as it is recognised as a legal
personality
○ Salomon v Salomon 1897: precedent for issue of whether businesses can be
transferred between statuses, thus limit liability of members. Salomon co became
insolvent quickly after incorporation. Held: limited liability to SH as loans made after
incorporation; HOL wanted to encourage business growth such that it be a company
○ Macaura v Northern Assurance co. 1925: property owned by company, but insurance
under SH name; held: insurance not viable as assets owned by company is not owned
by SH, so SH have no insurable interest in it.

Pros of incorporating Cons of incorporating

Limited liability for owners; easier for investors to Financial statements must be audited and made
exit/enter public; potential criminal liability for directors

Better access to finance; tax benefits may apply Formalities of running a co. need to be observed

● Type: private and public

○ Private (ltd)
 ■ >1 director, no minimum capitalisation, must not offer shares/ debenture to
general public except on private cocern basis (CA’06 s.755)
○ Public (plc)
■ >2 directors; min. share issue £50k (but for LSE>£700k); able to offer
shares/debenture to public, but does not need to be quoted
● Types: limited by shares or guarantee
○ Shares - liability limited to agreed capital (whether it is already paid or to be paid)
○ Guarantee- members to contribute pre-agreed amount if need to cover debts
■ Usually not-for-profit; firm limited by guarantee cannot be public; only private
● Community Interest Company (CIC)
○ Companies Act 2004. Can only be CIC if passes CA 2004 s.35 test: if a reasonable
person might consider its (CIC’s) activities are being carried on for benefit of the
community.
○ Assets subject to ‘asset lock’ (members not free to distribute profit randomly); profits
may be donated to charity
● Piercing/lifting the corporate veil: disregarding the separate personality of the company. Two
distinct principles:
○ Concealment principle: the act of looking behind companies to find ‘real actor’ of
dealings, to allow for equitable/legal principles to enforce effective remedies.
○ Evasion principle: when the sole purpose of incorporating is to evade enforcement of an
existing legal obligation or liability
● Applicable when proven that assumption of ‘honest dealings’ are broken.
○ Re Darby 1911: persons declared bankrupt held CEO positions in a fraudulent
company; held: due to fraudulent intentions, assets of owners can be liable for debts as
co not recognised as separate legal entity
○ Jones v Lipman 1962: def sold land to clm, but def changed mind and tried to avoid
legal obligation through transferring asset ownership to newly formed LLC; HC held:
contract has been formed w/ clm&def, thus clm can get equitable remedy of specific
performance (which was to get LLC to carry out contract & sell land to clm)
■ Modern approach: not injunction, but possibly held that co held property on trust
for def and, following sale, clm.
○ Re H and Others 1996: criminal justice...
○ Prest v Petrodel Resources Ltd 2013: during divorce proceedings husband transfers
asset ownership to LLC. Property of LLC regarded as property of husband because
LLC was deliberately set up to avoid legal obligation; held: not separate legal entity.
■ Matrimonial Causes Act 1973 s.24(1)(a): court has power to order transfer of
assets between married persons, effectively disregarding the corporate veil

Pre-incorporation contracts:
Promoters: any person who applies to the incorporation of a co.
● Must act within reasonable skill and care and in good faith of co.
 ● is neither trustee nor agent of co: promoters are under a fiduciary duty (put in a position of trust
to manage/protect assets in order to be obligated to act for the co’s benefit). Role no longer
exists when co is incorporated
● Has a statutory duty to declare interest in any transaction in which they will benefit from (to
avoid conflict of interest). ‘no secret profit’ rule: regulated by Ca’06 for plc and common law for
ltd
○ CA’06 ss.598-604: If promoter disclose interest for profit in a transaction, such profit
must undergo independent valuation, be approved by ordinary resolution of members,
send a public notice via companies house
● CA’06 s.51: agency law not applicable if principal is non-existent
○ Cannot bind a non-existent principal: contract is binding to promoter not co
○ Promoter may/may not be personally liable for the contract dependent on whether they
signed it under their own name (liable, subject to agreement to the contrary i.e.
non-liable clause) or ‘on behalf of’ (not liable); if not liable still can be sued for breach of
warranty of authority
● Phonogram Ltd v Lane 1982: held that even if promoter signed ‘on behalf’ of non-existent co, it
doesn’t exclude personal liability, non-liable clause must be stated.
● Braymist Ltd & others v Wise Finance Company Ltd 2002: solicitor signed contract on behalf of
non-existent Braymist ltd, for clm to sell land to def, but def changed mind as value of land fell.
Solicitor arranged promoters’ contract, thus solicitor is an agent of promoter; held: solicitor can
enforce contract through common law principles, on behalf of promoter (thus if solicitor can
enforce def liability, if solicitor at fault def can enforce solicitor liability)
○ Precedent which disproved the idea that persons liable cannot enforce a contract,
because in fact, they can.

Incorporation under CA’06 s.7.​ Submit 3 docs to company house:

1.Memorandum of Association​: for categorisation purposes, e.g. ticker for quoted plcs
● Company name and number: can be refused if deemed unlawful by secretary of state (an
offence, offensive/racist/sexist/etc). Unique company number given in case co changes name
● Disclosure requirements vary by industry/quoted/size/ltd/plc, but all co information held at
companies house registrar as per CA’06 s.1080
○ Require to have registered office (can be PO box) where documents for public
inspection available (list of members, directors, secretaries, charges) Co can refuse
to comply if info not sought for proper purpose, subject to court
● London Gazette: official publication for company profiles &docs; public announcement/notice of
receipt of documents here: CA’06 s.1078; Constitutional docs, directors, accounts,
reports/returns, registered office, m&a, share capital
● Inspection available to members only: Directors’ service contracts, records of board
resolutions& meetings, ltd’s contract to buyback shares, constitutional docs
● Trading disclosures: The Company, LLP and Business Regulations 2015. Co identification,
place registered& office, company no., legal form, if insolvent/liquidated. Fine for
non-compliance: lvl 3 as per CA’06 ss.82-84
● Confirmation Statement CA’06 s.853a:
 ○ Co required to submit, even if just a ‘no change’ confirmation, annually, within 14 days
from date of last submission.
○ S.853L states officers of co liable for criminal offence if fail to update information so is
relevant and accurate
○ Ss.853B& D: statement consists of: public and trading disclosures
2.Articles of Association​: model articles default, but company can customise clauses/ make own.
CA’06 s.17: AoA & resolutions of co referred to ‘company’s constitution’ in CA’06
● Incl: directors appointment, powers, decisions, remuneration & expenses; SH rights, decisions,
dividend payment; alterations to co’s share capital structure
● CA’06 s.33: Articles bind the company and its members(&w/each other) as if ‘covenants’.
Articles are enforceable by co and all SH, but not third party.
○ Rayfield v Hands 1960: ltd’s article had clause which stated if SH wanted to sell shares,
can offer to directors who are obligated to buy at fair price. Held: clause was
enforceable but not necessarily applicable to all inc. cos because was specific added
clause and co was run more like a partnership
● Alteration of articles how: CA’06: s.21(by special resolution >75%), s.22(by
entrenchment/unanimous or court order), s.25(protection from retrospective liability for share
capital).
○ Bushell v Faith 1969: co added clause allowing weighted voting provision, thus, removal
of director from office was impossible; HOL held that clause, although weird, was
enforceable and legal.
■ Way out: quasi-partnership view of co (as only 3 SH)
● BUT! Alteration of article, even if passed by special resolution, must be bona fide for benefit of
the company - protection for minority SH
○ Brown v British Abrasive Wheel 1919: holders of 98% of co wants to own 100%, but
need to change article to allow for this; held: no change although passed special
resolution, 2% claim change was not bona fide in good faith.
3.Statement of compliance declaration​: agreeing to CA’06 clauses

Company Finance: Equity

● Share types:
○ Ordinary shares: paper based have voting rights, but electronic do not, only dividend
○ Bonus shares: ordinary shares issued as reward for loyalty, paid by co’s share premium
or undistributed profits; model article states directors approval and ordinary resolution
required to issue, but subject to co’s articles.
○ Preference shares: debt - guaranteed/fixed dividend, (ir)redeemable, may/not vote
○ Treasury shares: redeemed shares held by co
● Share issuance
○ CA’06 ss.560-577 rights issue: to raise additional capital or in exchange for assets
transferred to co. Cannot be used for manipulation of ownership%; existing SH have
right to pre-emption to preserve % in co (pro-rata).
○ CA’06 s.580: forbids shares sold at a discount, unless appropriate ir applied
 ○ CA’06 s.581: shares can be part-paid, as long as paid fully when co asks.
○ CA’06 s.610: LSE allows shares to be sold at premium during IPO; share premium not
distributable to members, but may be used to pay for expenses in issuance or to fund
bonus shares
● Altering rights of shareholders: CA’06 s.630-40; may be in order to reduce dividend costs. Can
be done through special resolution or in line with co article.
○ Minority holding 15% has 21 days to apply to companies court to have resolution
cancelled if can prove it is a case of ‘unfair prejudice’ (minority SH protection)

Capital maintenance: rationale to protect creditors

● ‘SH last’ principle when winding up, as per Insolvency Act 1986 s.74 - limited liability of SH.
● Co cannot pay SH except as part of authorised capital reduction (CA’06 s.617,641-649) or
division of profit (CA’06 s.830-831)
● Share buyback: CA’06 s.658; purchasing shares out of issued share capital is prohibited
because no capital would flow into company
○ Trevor v Whitworth 1887: HOL held buyback was ultra vires (beyond the powers) of co;
liquidator is not liable to pay SH, per SH last principle; if a company tries to do this
when in liquidation, transaction is considered void and subject to criminal sanctions for
co& its officers
■ MoA does not authorise co to purchase own shares and if AoA has added
clause which allows this, is invalid as AoA should be consistent with MoA
○ Exception for co to repurchase own shares:
■ PLC can repurchase through using distributable profits, set aside as ‘capital
redemption reserve’ - this allows capital to be maintained OR, with the
proceeds of new issue of shares (e.g. repurchase redeemable shares).
Basically, buyback can only happen if it does not reduce share capital
■ LTD: dependant if co’s articles allow i.e following its statutory process
○ Reasons to reduce capital: if co has capital in excess of needs; improve finance of
company/restructuring (tax shield); to buy-out founding SH no longer willing/able to
participate e.g. retired
● Reducing share capital ways (ltd can use plc’s way too, but is cumbersome)
○ Ltd: CA’06 s.641-644; permitted by special resolution and supported by solvency
statement which states co has enough cash to remain going concern for next 12mo
○ Plc: CA’06 s.641(b),645-651; need special resolution, confirmed by court
○ CA’06 s.641(2): not possible to reduce capital if only redeemable shares would be left
(as accounting counts it as debt security anyway)
● Capital maintenance: not so prominent in today’s world, as 50k minimum is deemed not
substantial tbh, and real value of share capital reduces over time; creditors care more about
company’s credit rating
Distribution of profits: CA’06 s.829 ​- AoA regulate as ‘final’/’interim’ dividends
● Recognised as all distribution of co’s assets to members, cash or otherwise.
 ● Member has no legal right to any dividend, but has a right to ‘fair’ dividend if co distributes
profits
● CA’06 s.830(1): distributable profits = co’s accumulated, realised (profits - losses)
○ Stricter for plc s.381: plc can only distribute up to A-L>E (net assets-capital)
■ Takes into account unrealised losses&profits
● Undistributable reserves: share premium account, capital redemption reserve
● Consequences to unlawful distribution: CA’06 s.847; SH liable to repay if he knew/had
reasonable grounds for believing distribution, or ‘could not in view of circumstances have been
unaware of’ was unlawful, regardless if he did not know the restriction of the law (principle:
when something is wrong, it’s wrong)
○ It’s a Wrap (UK) Ltd v Gula and another 2006: directors paid themselves in dividends
for tax purposes, knowing that company had made a loss (thus not viable for profit
distribution). Held: SH liable to repay, applying the general presumption that ignorance
of law is no defence/excuse to avoid liability. Good example of court applying
Marleasing principle of conforming interpretation, that courts must interpret statute as
per its intended objective
○ Re Exchange Banking co, Flintcroft’s Case 1882: directors presented reports not in fair
view of firm’s position to SH, who proceeded to distribute profits not knowing they are
operating at loss. Held; directors were jointly and severally liable to repay dividends
paid to SH back to capital (to pay off creditors) - even if not in default SH cannot vote to
ratify fraudulent actions of directors
● Approving dividend payments: CA’06 s.393; accounts must give true and fair view of economic
state of co (but issues still arise over valuation: judgements&estimates) and adhere to (I)FRS;
FS must be circulated to all members and dividend amount must be determined from accounts
laid in GM

Company Finance: debt

Directors have implied power to borrow money on behalf of co, subject to AoA
● Lease financing- leasing assets rather than purchasing them; lease period=useful lifespan of
asset and assumes risk for maintenance; sum of leasing typically greater than cost to buy
● Creditors: regulated under contract law; thus can sue co for breach of contract if defaults
○ Tax shield of debt- cost of debt deducted from tax profit calculation
○ But right to enforce contract lost if co enters insolvent liquidation- job of liquidator.
○ Sum payable to creditor = outstanding sum + accrued interest (+ cost to court)
● Overdraft facility: in agreement with co’s bank, pre & post overdraft interest limit usually set.
Useful instrument to smooth out cash flow; regulated by contract law
● Debt securities: an IOU, freely traded on exchange
○ Borrowing directly from public in form of corporate bonds or debenture stock. No voting
rights or ownership stake on co, but gets fixed payments
○ CA’06 s.738: defines: debenture as stock, bonds & any other securities of co, whether
or not has a constituting a charge on co assets
 ● Secured lending: through a ‘charge’ on co’s assets; a property right (creditor owns asset if
default); puts creditor to front of repay queue if co liquidates as creditor has the right to
repossess asset and sell/auction for fair price to repay money owed (co has to pay for auction,
and if price of asset<loan, co can be pursued for remainder
○ National Westminster Bank v Spectrum Plus Ltd 2005: issue of whether a chard held
over book debts (e.g. receivables) was fixed or floating. HOL held: floating because
creditor is not solely in control of charge - firm could access books without consent of
lender, as long as balance kept positive
Charges​:
● Fixed: holder has right to have the asset and sell it to pay back loan; company need permission
of holder to dispose of asset, because holder has property rights over it. Can only be applied to
tangible assets, one charge per asset.
● Floating: holder has right to be paid from sale of charge; co still has rights to asset operation,
charge only ‘crystallises’ when co in breach of contract.e.g loan default
○ On crystallisation the charge fixes to asset(s) and acts like a fixed asset i.e. co need
consent of creditor before disposing charged assets. Typically used to secure
debenture stock; process of crystallisation is specified in loan contract; typically:
appointment of receiver by charge holder and administrator, commencement of
liquidation and cessation of business
○ Rank in order of time of creation: first secured takes priority over all subsequent floating
charges over same asset
● Registration of charges to the Registrar of Companies: CA’06 s.859A
○ Charges only legally enforceable after registration; must be registered within 21 days
○ Charges must comply by s.859A, or not it is void against: liquidator, administrator,
creditor of co (i.e. creditors’ property right over charged asset not legally recognised)
● Retention of Title: title is retained by seller of goods until paid by buyer in full:
○ No need to register simple retention of title clauses; usually a clause in sale contract
○ 3 requirements: unambiguous retention of title in the goods, goods must not be
inextricably linked with other goods and must be separable from the property of others,
buyer has a fiduciary obligation must be placed by the supplier (e.g. keeping sale
proceeds in a trust).
○ Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd 1976: Romalpa clause.
Clm: supplier; contract specified ownership of foil (bought by def) until foil paid in full;
buyer has fiduciary obligation to keep proceeds from sale of foil to customers in a trust,
as a ‘surety’ for the outstanding bill owed by buyer to seller. Def went insolvent and the
foil was a floating charge to a creditor, but COA held retention of title clause was
effective and did not need to share with def’s creditors in liquidation.
■ Was title retention was valid because foil could still be distinctly traced in def’s
product (used foil to manufacture frying pan)
○ Borden (UK)Ltd v Scottish Timber Products 1979: issue of separability of material
supplier provided and the buyer’s end product after manufacture. Clm sued def
(liquidation) for title retention clause on resin sold by clm to def; process of creating glue
from resin is such that it cannot be separated from the glue mix and the process was
 irreversible; held: that once incorporated into new product, resin ceased to exist thus
clause invalid. During def liquidation, clm argued for their title retention clause and its
traceability but held; retention of title is not enough for very raw goods, need contractual
stipulation.

Corporate structure
Ltd: often ‘closely held’ and ‘owner managed’; family firms
Plc: evidence show SH dispersed,institutional SH dominant; governance entrusted to directors;
Company officers: directors, secretaries, managers - thus can be held liable for criminal cases
Secretar​y: administrative/legal correspondence, ensure meets Company House requirements
● Ltd no need as per CA’06 s.270. Plc required at least one s.271. It is duty of director to find
secretary with appropriate knowledge, experience and qualifications and define their job
desk/duties as not defined in CA’06
Audit requirement​: CA’06 s.475 - require audit report for SH assurance of co financial health, judging
accounts ‘true and fair view’. Small(<10.2mn turnover, <5.1mn balance sheet) and dormant co are
exempt from requirement, but SH >10% can force audit as per s.476
● Removal: CA’06 s.510-511: need ordinary resolution and special notice, like directors

Directors
Role​: board responsible for management of co & can exercise all powers of company; unless clause
added in AoA which limits director power. Powers may be delegated
● Non-executive directors: supervisory role, meant to be independent, but pay is linked to director
pay- conflict of interest
Decision making​; 2 ways:
● model art.7; approved if reach majority at board meeting and chairman can exercise casting
vote in case of deadlock; plc needs a physical meeting but ltd does not
● Ltd: model art.8; action approved if unanimous decision of directors reached; can be a
resolution in writing- informal
● Plc: CA’06 art.17-18; action approved if unanimous support of directors in the form of formal
written resolution
Types​: de jure -appointed in accordance with articles and notified to company house; de facto -claims
and purports to act as director, not legally appointed, valid through CA’06 s.161;
● shadow director: CA’06 s.251 defines: a person in accordance with whose directors or
instructions the directors of the company are accustomed to act
○ Re Hydrodam (Corby) Ltd 1993: issue of co, being a wholly owned subsidiary, meaning
its directors is another company. During liquidation claim for wrongful trading brought
on parent co’s directors, but liquidator failed to prove that although parent co’s directors
are not de jure, they are in fact shadow directors. Held: just because the parent co
owned co, does not mean directors of parent co are shadow directors of co; liquidator
need to prove that shadow director does not claim to act as director, but is directing
both de jure and de facto directors and that co is accustomed to taking orders from
shadow director on regular basis over a period of time
Appointing directors​: per AoA- ordinary resolution passed, decision of directors, rotation basis and
reappointment is possible.
● Marquis of Bute’s case 1892: Bute was appointed director at 6 mo old after death of father;
attended 1 board meeting in 38 years. Other directors defrauded the co, liquidator wanted Bute
to make contribution, but held not liable. But now will be not held so: ignorance of co’s activity
does not escape director liability; they owe a duty of care to co and are expected to know what
is happening (CA’06 s.174)
Removal​ - model article states grounds: disqualification (prohibited by law or by virtue of CA’06),
bankruptcy, physically/mentally incapable (subject to Equality Act 2010), retiring.
● Removal of director(s) by members: CA’06 s.168: ordinary resolution with special notice(28
days), no need specific reason, as s.169 states director has right to defend self, compensation
for loss of office may apply; subject to co’s AoA
Company Directors Disqualification Act 1986 s.1-6.​ Usually only in criminal acts (s.2-5) or during
insolvent liquidation (s.6), or voluntary disqualification undertaking option.
● S.1: court order of cease being director of any co; applies to all types of directors
● S.2: indictment in connection with promotion/formation/management/liquidation/ acquiring
assets of any co; crown court; <15yrs disqualified;
● S.3: >3 persistent breaches within 5 years of companies legislation; <5yrs disqualified
● S.4: fraudulent trading/other fraud; <15yrs disqualified
● S.5: summary offences; minor; magistrates court; <5yrs disqualified
● S.6: unfit to run a company; basis that incompetence of director led to liquidation, not criminal;
2-15yrs disqualified
Director remuneration​: directors ≠ employee of co, they are an ‘office’ governed by trust. Can provide
services outside director role through independent contractor or hired by co
● No ‘right’ to remuneration but allowed if AoA permit and members approve payment
● Public disclosure of pay:
○ Small companies: no requirement to disclose
○ Unquoted: annual statements must state highest director pay (salary, bonus, share
options) and highest compensation for loss of office
○ Quoted: annual accounts must state sum paid to all directors; SH now have to approve
director remuneration policy- so can vote down overcompensation
Director duties ​(CA’06 s.171-177): role based on trust & in position to be abused
● S.170: each & all directors owe duty to co,
○ Percival v Wright 1902: SH sells his shares to director, and shortly after, co was
acquired and share price went up; SH claim directors hid information to make profit and
had duty to tell SH of m&a; held: director have duty to co, not SH; director not telling SH
of upcoming m&a is director upholding confidentiality of deal
● S.171: duty to act within powers, AoA & co’s constitution or be held personally liable, and only
exercise power for the purposes conferred
○ Howard Smith Ltd v Ampol Petroleum 1974: clm BoD issued shares to raise capital and
manipulate voting power of SH, held: s.171 breached; power improperly exercised and
allotment for improper purpose is set aside
 ● S.172: duty to promote success of co; subjective test: “directors acting in good faith of co would
most likely promote success”, but must objectively judge if an intelligent and honest director
would reasonably believe he was acting in interest of co
● S.173: duty to exercise independent judgement as long as it abides to co’s constitution/contract,
best interest of co, not influenced by SH or previous director
● S.174: duty to exercise reasonable care, skill and diligence exercised by reasonably diligent
person: objectively judging expectation of all directors and subjectively considering experience
of particular director in question
● S.175: duty to avoid conflicts of interest: between him&co, unless authorised by directors (ltd),
or permitted by AoA (plc&ltd)
○ Cook v Deeks 1916: clm sued for breach of s.175, arguing that def misused power as a
director for self gain, evidently hurting co; held: breach of duty
● S.176: duty to not accept benefits from third parties; intended to avoid bribes (Bribery Act 2010);
reasonable hospitality is ok, but excessive benefits need SH approval
● S.177: duty to declare direct/indirect interest in proposed transaction to other directors at board
meeting/in writing before enter/finalised; ok if have interest, as long as declared; intended to
prevent director acting out of self interest
● Ratification of breach: CA’06 s.239: co may ratify acts as long as not criminal (then would be
disqualified); negligence, default, breach of trust/ duty ok. Require ordinary resolution with all
SH who are not connected to director in question
○ Re Attorney-General’s Reference 1984: held: court considered theft & not bona fide of
co despite unanimous decision to distribute money to members & directors
● Remedies for breach of duty: goes to company, not SH. S.174-same as tort principles in
negligence; reasonable care, skill & negligence. S.171-173,175-177: equitable remedies- return
of assets received/profit made/rescission of contracts made in breach, compensation

Shareholder role
● Although BOD is the principal body running the co, subject to AoA, SH may direct the directors
to do/not do specific action through special resolution
● CA’06 dictate SH powers [dictated by principle of SH democracy/majority]: amending
constitution(s.21(1)), remove/approve directors(s.168)/ auditor(s.489), ratifying directors’ breach
(s.239, exempt criminal), approve director remuneration(s.217)/ compensation for loss of office,
authorise share capital changes (s.641)
● Voting rights: one vote per share unless stated in AoA, different class shares may be limited to
only voting on matters relevant to them, no requirement to vote- %per those who voted
● Voting methods: proxy/director nominated proxy, show of hands, poll vote
○ CA’06 s.288: written resolution vote plausible for ltd but not plc, as it is informality
principle; not agreed in physical meeting but is binding according to ordinary/special
resolution pass: Cane v Jones 1981 per changing co’s constitution via written vote
SH meetings​: as per CA’06
● S.336’ AGM: plc must hold AGM within 6 months of FY end; 21 day notice, in order to discuss
decision for next year. Ltd exempt from this requirement due to informality principle
○ Ltd exempt from holding physical meeting per informality principle
 ○ What is discussed at plc AGM: approve of accounts/audit/dividend,
removal/appointment of directors/auditors & their remuneration policy, ec
● S.302: directors have power to call general meeting; 14 day notice and state agenda
● S.303-305: >5% SH can require directors to call a GM within 21 days and hold it within 28 days
of request; if fail, SH can call meeting himself within 3mo free of cost
● S.314: members can require co to circulate agenda (<1k words) of upcoming proposed
resolution; co also has to make and circulate resolutions member put worth; done through
>5%SH or 100SH holding shares averaging at least £100 (rule made as an attempt to help
minority SH power)
Proper claimant rule​: Foss v Harbottle 1873: director sold asset and SH deem to have made excessive
profit, but held: no breach as director duty is owed to co, not SH,
● In this case, the co should sue director (if hurt co), but this decision to sue is on BOD
○ Unlikely if SH are also on BOD; also general legal action is bad rep for co
● SH cannot sue for ‘reflective loss’: e.g. this, or sueing for fall in share price value due to
mismanagement of co by director
● Exception of proper clm rule: statutory derivative claim: for protection of minority SH can sue but
must prove the ‘standing’ that director caused harm to company and that majority SH = BOD
(thus, perpetrators are in control of co), and this action brought against co from SH is bona fide
for co as no other remedy is available
○ CA’06 s.260-264: may be brought on by person seeking relief on behalf of co when
actual/proposed/omission of act involving negligence, default, breach of duty/trust by a
director/officer of co. must apply to court for permission to continue derivative claim-
court will dismiss if no prima facie case (sufficient evidence for conviction, in this case,
harm to company)
Protection for minority SH CA’06 s.994-999​ through petition in ‘unfair prejudice’;
● on basis that co’s affairs have/are/will be conducted in a manner unfairly prejudicial to interests
of members - must show adverse effects on at least SH that is bringing the claim. Court has
very wide discretion on remedy; e.g. regulating conduct of co to ensure co abides by remedy of
court; can bring about statutory derivative claim for SH in question; require court approval if co
wants to alter AoA; order purchase SH’s shares (& reduce capital accordingly) or let other SH
buy their shares:
○ Re Brenfield Squash Racquets Club Ltd 1996: court held best solution was to order
majority were to sell their shares to minority “buy-out order”
○ Re A Company 1986: held: persons not registered as SH but have benefit of shares
(electronic=CREST) cannot petition for unfair prejudice; membership of co is required
○ Gamlestaden Fastigheter AB v Baltic Partners Ltd 2007: court held the loan by SH to co
can be protected against unfair prejudice even if relief will benefit SH as a loan creditor
and not SH’s position as a member; matters sufficiently connected to membership can
also be claimed through s.994
○ Re R. A. Noble & Son (Clothing Ltd) 1983: an objective test should be applied to
determine whether or not action constitutes unfair prejudice: has to be both unfair and
prejudice to clm’s interests in the eyes of a observing bystander; in this case court held
 that while claim was prejudicial it was due to the fault of clm’s behaviour thus not unfair
(similar to reasonable man test)
○ Re Macro (Ipswich) Ltd 1994: held that mismanagement is sufficiently significant and
serious to cause loss to co and considered unfair prejudice. Emphasised the difference
between mismanagement and commercial management- i.e. reflective loss does not
constitute unfair prejudice
○ Re Sam Weller & Sons 1990: held paying same dividend for 37 years is unfair prejudice
- director have duty to firm to distribute fair dividend (reflective of co health)
○ Re CF Booth Ltd 2017: co stopped dividends in 1986 when unprofitable year, but never
re-established dividends when profitable, instead, directors gave themselves excessive
remuneration; held: excessive remuneration and no dividend is unfair prejudice and
ordered co to buyback shares from clm
● Unfair prejudice concerns legal rights, interests & legitimate expectations of members. Unfair
prejudice constitutes as un/lawful conduct, but if unlawful it is easier to sue under CA’06, but
remedies can still be obtained to relief lawful unfair prejudice acts
● Petition to wind up (equitable jurisdiction): can only be done for ltd cos consiered quasi
partnerships. Note: unfair prejudice is not a prerequisite for this, CA’06s.994 usually won’t be
granted in combination with this
○ Insolvency Act 1986 s.122(1)(g),125(2)(b); co may be wound up if court decides it is
‘just and equitable’ to do so, however, petitioner must be ‘acting reasonably’ and must
have no other remedy available: considered last resort for minority SH.
○ Only valid if can prove ltd is a quasi-partnership: relationship between directors based
on mutual trust, mutual agreement to be involved in running the business, restriction on
transfer of shares (given as ltd unquoted)
○ Re Ebrahimi v Westbourne Galleries Ltd 1973: held: ordered co to be wind up due to
breach of faith by one director to the other as he was forced out of his role

Administration and Insolvency

Administration​: Insolvency Act 1986 and Enterprise Act 2002 promoting ‘rescue culture’
● A firm status that can save failing firm. IA’86 sets tiered purpose: 1. Rescue co as going
concern; 2. Achieve better result for co’s creditors than if straight liquidated; 3. Make a
distribution to at least 1 secured creditors. Administrator, an agent of co, is required to perform
function in order of purpose importance.
● EA’02 eased administration through court appointed administrator for dealing with floating
charge when co is in liquidation - effect of this is that it decreases value of floating charge
● Administrator may be appointed by court or ‘out of court’= directors or floating charge holder,
but if co already in liquidation, administrator must be court appointed, thus only when default
● Administration commences when court order for floating charge is filed, and the application
must satisfy that the co is/likely to unable to pay its debts and administration order is reasonably
likely to achieve purpose of administration
● Effect of administration: co must declare ‘in administration’, but, shares still continue to trade-
this is just a warning. Moratorium of insolvency proceedings (without permission of court); no
 enforcement of security over co’s assets and no steps to enforce judgement against co;
directors remain in place but may be removed.
● Ending ‘in administration’ status: expires after 1yr unless extended <6mo by court, if objective of
administration not already achieved; creditor/administrator may apply to end administration;
administration may be converted to creditors’ voluntary winding-up
Liquidation​: solvent and insolvent cases, voluntary and involuntary cases.
● Voluntary liquidation: IA’86 s.84(1): require special resolution by members, typically cheapest
way to liquidate;
○ IA’86 s.89: members’ voluntary winding-up; requires solvency declaration by directors
stating co is able to pay debts in full within defined period; co can appoint liquidator
○ IA’86 s.90: creditors’ voluntary winding-up; when no solvency declaration by co OR co
appointed liquidator believes solvency declaration is untrue- co cannot pay debt in full,
thus creditor may nominate new liquidator (s.100)
● Compulsory liquidation: begins with petition to Companies/Country court by a creditor/minority
SH through IA’86 s.124. Grounds for application: s.122(1)(f) believes co unable to pay debts to
creditor; s.122(1)(g): minority SH request on ‘just and equitable’ grounds & only remedy
● Insolvent liquidation: can be commenced by passing special resolution to trigger a creditor’s
voluntary wind-up or compulsory when winding-up petition presented to court, per IA’86 s.123:
by a creditor who is owed £750+ and has served a statutory notice (warning letter) to co and not
been paid within 3 weeks, or; if co failed to pay Judgement Order-court already held co is at
breach of contract or; it is proved co is unable to pay debts as they fall due, in the case that co
believes no outstanding money owed to creditor
● Effect of winding-up: power of board and directors cease, all (new/occuring) legal action against
co is denied/discontinued unless permitted by court, assets of co are under control of liquidator.
Liquidator is called ‘official receiver’ in compulsory w/up and is court appointed
● Secured creditors:
○ fixed charge holders have right to possess asset and thus remove from pot of assets
available to liquidate; then can sell for outstanding debt & costs associated w/ sell of
asset, but any surplus profit must be given back to liquidator. Property secured by fixed
charge is exempt from liquidation procedure unless creditor allows it
● Role of liquidator: collect, sell and distribute proceeds in satisfaction of co’s liabilities on a pari
passu (equal standing/ratio) basis. E.g. 10p:1£ for unsecured creditors. Liquidator must also
look for certain (sketchy) transactions and for causes of insolvent liquidation
● Order of payment priority: 1. Liquidator’s fees; 2. Preferential debts (but certain classes
removed by EA’02 s.251); 3. Sum set aside from floating charges for unsecured creditors; 4.
Debts secured by floating charges; 5. Unsecured creditors on pari passu basis; 6. SH
○ Note: Enterprise Act 2002 s.251 effective Sept’03, altered treatment of floating charges:
proceeds from sale of floating charges now subject to deduction which is 3-sum set
aside for unsecured creditors (as per IA’86 s.176a). Calculated by:
■ 50% of first £10k of net assets + 20% of the rest, but capped at max £600k
To ensure fairness, liquidator can apply to court to have certain transactions set aside which are
detrimental to creditors under pari passu principle: IA’86 s.238, 239, 245, 244
 ● S.238: transactions at undervalue; court remedy: restore position to what it would have been if
transaction had not taken place (within 2yrs of w/up commencement) e.g. gifts for no
consideration/significantly undervalued, transactions which led to co unable to pay debts
● S.239: preferences:
○ Proof of factual preference given through person & effect dimension: that preference
was given to a creditor, surety or guarantor of co, and that factual preference put said
person in a better position in event of liquidation.
○ Proof that preference was granted at relevant time&financial position:<2yrs for
connected persons, <6mo for others, before insolvency commenced, and grant caused
co to become insolvent or co already insolvent at that time
● S.245: invalid floating charges - no court application required, must prove:
○ Charge created in favour/preference of a person <2yrs of connected, <1yr of w/up
commencement and that co was insolvent or became insolvent due this
● S.244: extortionate credit transactions: liquidator must prove to court that transaction happening
within 3yrs of w/up commencing is/was extortionate by proving (but having taken into account
risk accepted by creditors):
○ Terms of provision of credit required grossly exorbitant payments or
○ Contravened ordinary principles of fair dealings
○ Note: court presumes transaction in question is/was extortionate, thus, burden of proof
is on the creditor to prove that loan is lawful, not liquidator to prove that it is unlawful.
Additionally, court can sub/add own terms of proof

Dissolution of principal
Co ceases to exist as when removed from register of companies at Companies House, rendering it
‘dissolved’. All legal relationships co had are terminated upon dissolution, but, as co is separate legal
person, this does not end liability of directors for breach of duty or criminal convictions