Examiners’ reports 2019

Examiners’ reports 2019

LA3021 Company law – Zone A

Introduction
The exam paper followed the same format as in previous years. Students should
refer to the Assessment Criteria to familiarise themselves with the criteria that are
applied to assessed work.
As in past years, the best scripts always focused on the actual questions being
asked, and the specific issues they raised. Good answers also demonstrated that
the student had read around the subject and was able to apply this wider reading to
the issues raised by the questions. The most common weakness was a failure to
stick to the question, as the specific comments below explain.
Once again, there were only few instances this year of students failing to follow the
rubric, by answering too many questions from one section or the other. But a few
students did still do this, and it’s worth restating that if a student answers more
questions than permitted from one of the sections, then one of their answers will be
ignored entirely.
Note that errors in student extracts, below, were present in the original text.
References to ‘CA 2006’ are to Companies Act 2006. References to IA 1986 are to
the Insolvency Act 1986.

Comments on specific questions

PART A

Question 1
Answer BOTH of the following:
a) ‘A parent company should be liable for any injuries negligently
inflicted by its subsidiaries. Unfortunately, despite the decision in
Chandler v Cape plc [2012] EWCA Civ 525, UK law is moving away
from this position.’
Discuss.
b) ‘The case of Prest v Petrodel Resources Ltd [2013] UKSC 32 has
made the law regarding the piercing of the corporate veil much
more certain, but much less effective.’
Discuss.
General remarks
This question relates to Chapters 3 and 4 of the module guide. It addresses two
related areas of law. Part (a) examines parental liability in tort for injuries inflicted by

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a subsidiary company. Part (b) focuses on ‘veil piercing’. Each part puts forward a
particular point of view – which answers need to address directly.
Law cases, reports and other references the examiners would expect you to use
For part (a): relevant cases include: Connelly v RTZ Corporation plc; Lubbe v Cape
Industries plc; Chandler v Cape plc; Thompson v The Renwick Group plc; AAA v
Unilever; Vedanta Resources plc v Lungowe; Okpabi v Royal Dutch Shell plc.
For part (b): relevant cases include: especially Adams v Cape and Petrodel
Resources Ltd v Prest. Some of the older case law also needs to be discussed, for
example: DHN Food Distributors v Tower Hamlets LBC; Woolfson v Strathclyde
Regional Council; Gilford Motor Co Ltd v Horne; Jones v Lipman; Re FG (Films);
Smith; Stone and Knight v Birmingham Corporation.
Common errors
Some students really only answered either part (a) or part (b), saying very little
about the other part. In a multi-part question, it’s essential to answer all parts. Some
answers showed little knowledge of the up-to-date case law, such as Prest,
regarding veil piercing, or the post-Chandler cases dealing with the parent’s liability
in tort.
A good answer to this question would…
For part (a) have some discussion of whether a parent company should be held
liable for injuries inflicted by the parent’s subsidiary. It might note economic
arguments - parent liability might reduce excessive risk taking, but also decrease
investment. It might note moral arguments – can parents be seen to be morally
responsible for harm inflicted by their subsidiaries? It might note ‘distributional’
arguments – that parents have deeper pockets and can spread losses more widely.
As to current UK law, a good answer might start with Chandler v Cape. This
imposed a duty of care on a parent where the Caparo test is met, and offered four
‘indicia’ for identifying when that will be so. A very good answer would show
awareness of the more restrictive post-Chandler case law. Thompson and Okpabi
both suggest there will be no duty where the parent company is a ‘pure holding
company’, not itself engaged directly in the industry in which its subsidiary has
operated. Lungowe and AAA v Unilever both seem to suggest a parent will be liable
only if it has itself been responsible for managing the subsidiary activity which gives
rise to the tort (or at least has designed and imposed the policy which produces the
tort).
For part (b) a good answer would begin with Prest, and explain the main elements
of the Supreme Court’s judgement. It would emphasise the court’s acceptance that
there is a doctrine of veil piercing in UK law, but probably as a remedy of last resort.
It should note the restriction of veil piercing to situations where a controller uses a
company under her control to evade an existing obligation. This restricted scope of
veil piercing continues to exclude some grounds which had in the past been
accepted as grounds for veil piercing (e.g. single economic entity or justice of the
case) which were arguably rather vaguer. A good answer might still ask how
precise the ‘evasion’ ground itself is (e.g. when exactly does an obligation arise).
It would then consider whether veil piercing has become less effective as a result of
this narrower approach (which did not start with Prest, but was already clearly
evident in, for example, Adams v Cape). It might note that the ineffectiveness of veil
piercing proper is arguably softened by the court’s supposed ability to use the
‘concealment principle’ but this perhaps creates as much uncertainty of its own.
Poor answers to this question…
missed one part of the question or showed inadequate knowledge of the more
recent case law. Weaker answers didn’t try to engage with the point of view put

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forward in the question. They would, for example, offer no opinion about whether
parents should be held liable for their subsidiaries’ torts or whether Prest has
indeed made the law on veil piercing more certain but less effective.
Question 2
To what extent are the boards of UK companies required to have a mix of
executive and non-executive directors, and of male and female directors?
Should boards be required to have such a mix?
General remarks
This question relates to Chapters 15 and16 of the module guide. It addressed the
composition of companies’ boards of directors. It really contains two questions. The
first is a ‘descriptive’ question – are companies required to have a board with a mix
of genders and a mix of executive and non-executive directors? The second is a
normative question: should companies be required to have such a mix?
Law cases, reports and other references the examiners would expect you to use
CA 2006, showing it has few specific rules regarding board composition. Reference
should be made to UK Corporate Governance Code (2018), and to the Davies
Review (Women on Boards), and the changes to the UK Corporate Governance
Code to reflect that review. On the normative question, reference the secondary
literature about whether a more ‘diverse’ board is beneficial and, if so, to whom.
Common errors
The common errors were the same as in previous years in respect of this type of
question on the topic of ‘corporate governance’. Too many students failed to focus
on the question that was asked. Instead, they seemed to be regurgitating some
‘standard’ essay on the history of the UK Corporate Governance Code. This
question was about two specific issues – gender diversity, and the mix of executive
and non-executive directors. Answers needed to focus on those two issues.
A good answer to this question would…
begin by considering how far UK companies are required to have a mix of executive
and non-executive directors. Company law does not require this, for any
companies. However, the UK Corporate Governance Code does recommend that
Listed Companies to which the Code applies should have at least 50 per cent non-
executives on the board (Principle 11), and these non-executives should also be
independent. The Code is not mandatory, but it is ‘enforced’ on a ‘comply or
explain’ basis.
Similarly, company law does not require boards to have a mixture of both men and
women as directors. However, the ‘Davies Review’ recommended that the largest
UK companies (the so-called FTSE 100) should aim for at least 25 per cent of their
members to be women, by 2015, and this target was raised to 33 per cent for all
FTSE 350 companies by 2020. The Corporate Governance Code did not itself
contain a requirement to implement the Davies proposal, but did require companies
to promote, and have a policy on, gender diversity, and to declare what steps they
were taking to implement this policy.
A good answer would also address the second (normative) part of the question,
regarding the arguments for/against requiring companies to have non-executives,
and gender diversity on boards. As to the former, note the role/purpose of NEDs, in
terms of monitoring their executive colleagues, and thereby addressing agency
costs. Mention might be made of the theoretical advantages of NEDs, in terms of
their independence from executives and their expertise. Weaknesses include a lack
of time and incentive to monitor effectively, a lack of information, and conflicts of
interest. With regard to gender diversity, a good answer might discuss both moral
arguments, linked to discrimination, that have been offered in favour of diversity,

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and ‘consequentialist’ arguments which have been offered in favour (having more
diversity might produce better functioning boards, which might in turn produce
better corporate performance, better corporate governance, or other social
benefits).
Poor answers to this question…
tended not to answer the question itself, did not discuss the issues of gender
diversity or the mix of executive and non-executive directors, but instead simply
described the history of the UK Corporate Governance Code.
Question 3
‘The main purposes of company law are to provide a convenient legal vehicle
for those wishing to run a business, and to protect shareholders against
those who are running the company on their behalf. UK company law does
neither of these things very well.’
Discuss.
General remarks
This question relates to Chapters 2, 11, 14, 15 and 16 of the module guide. It
required a discussion of two things: whether the purpose of company is to do the
things suggested in the title, and whether UK company law achieves these
purposes.
Law cases, reports and other references the examiners would expect you to use
For the first part of the question (what is the purpose of company law?) references
to secondary literature (the module guide, textbooks such as Dignam and Lowry, or
more specialised articles). For the second part (whether UK company law achieves
these purposes well), CA 2006 and relevant case law and articles.
Common errors
A failure to focus on the question asked. Too many students wrote exclusively on
one particular aspect of company law they wished to discuss, without trying to relate
their answer to the question asked. With all essay questions, it’s important to spend
a few moments looking carefully at the question and working out what it is asking.
A good answer to this question would…
draw on ideas from all the above chapters. It might begin by explaining what is
meant by a ‘legal vehicle’ for running a business, and how a company represents
such a vehicle. They might contrast it with alternative vehicles, such as partnerships
or acting as a sole trader.
Then, a candidate might discuss how well the company serves the needs of
someone running a business. Explain the main advantages and disadvantages of
running a business through a limited company. Points to note here might include
the limited liability enjoyed by the members, in contrast to the unlimited liability of a
sole trader or a partner. The company’s perpetual succession might also be noted,
plus its ability to create floating charges, to raise capital more easily, and its
apparently greater prestige. The answer might note the alleged disadvantages of a
company – and especially of smaller, private companies – in terms of red
tape/bureaucracy/costs of operation. A good answer might note some of the
reforms made over recent years to try to remove some of the alleged
disadvantages.
With regard to the protection of shareholders from ‘managers’ running the company,
the answer might make reference to the idea of ‘agency costs’, explain why
shareholders may need to appoint agents to run their company for them, and then
give a sense of how company law seeks to address such agency costs. Since there
are so many ways it arguably does so, students are probably bound to be selective

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here. So, they might choose to describe the shareholders’ power to remove
directors, the duties directors owe, and the way those duties are enforced, as well
as some of the more ‘corporate governance’ mechanisms (e.g. remuneration
awards, or hostile takeovers). Having identified some or all of these various ways of
controlling management, good answers also evaluated how effective they are under
UK company law. Again, an excellent answer might show an awareness of recent
reforms to improve some of these mechanisms, such as through the codification of
directors’ duties, or the introduction of the statutory derivative claim.
Poor answers to this question…
failed to focus on the question itself. Some didn’t mention UK company law at all,
and how well it might achieve the purposes mentioned in the question, or indeed
any purposes. Instead, they talked only about, for example, what companies are, or
the difference between a company and other ways of running a business.
Student extract
Most business in the UK is carried out through companies and a large
proportion are private limited companies. The law regarding the function of
companies, their lifetime business and procedures for liquidation are codified
in the Companies Act 2006, a more recent act.
Business run through companies is said to be more advantageous than that
run through a partnership or sole trader. The advantages of the company are:
 the limited liability principle, which confers protection on
shareholders, in that, in time of liquidation, the shareholder will only
lose their share value. This is unlike in partnership or sale trader,
where their personal assets would be required to contribute to the
debts of the company.
 it is easier to raise capital through a company since lenders have
more confidence in a business run through a company.
 When raising capital, for example, shareholders can be encouraged
to join the company through issuing secured shares or a floating
charge.
Company law can be seen to be convenient in that proprietors are now
certain on rules governing the formation, the regulations on how they are run
and procedures for winding up.
For example, one area where the law governing companies is very
convenient is the codification of the articles in the Act. The model articles for
both public and private limited companies provide the internal rules on the
interaction between the board and the company, between the company and
the shareholders and the interaction amongst each other. Company law
provides for the appointment of directors through the shareholders and
shareholders have a right to call or a meeting or vote at a general meeting.
All this is codified.
However, one can argue, based on decided cases, that company law has
some gaps or uncertainty. One area is the enforcement of the s.33 contract
i.e. the company’s constitution. In Salmon v Quin it was seen that a
member’s rights are unenforceable. There has been a lot of debate on this
area. The company law steering group recommended for the enforcement of
all the rights in the constitution.
The above confusion has led to shareholders taking matters into their own
hands by forming shareholder agreements. The courts have shown they are

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 willing to enforce such agreements. Company law has also provided ways in
which shareholders who are injured by their directors can be addressed.
S.994 – unfair prejudice – is one of the devices a shareholder can use when
aggrieved.
Comments on extract
Overall: this essay received a low 2:2. It did contain some interesting and relevant
points, but it was quite short, and did not address parts of the question.
Relevance of the answer to the question: In part the answer was relevant – it did
discuss the importance of company law providing a suitable ‘vehicle’ through which
to run a business, and did mention some aspects of company law that made the law
attractive, or unattractive, to business. But it only touched very briefly on the idea
that company law should protect shareholders from those running the business on
their behalf – and did not mention at all the various ways company law does this
(e.g. through directors’ duties, through the enforcement of those duties, through the
power to remove directors, and so on).
Substantive knowledge: good in parts, but lacking in areas relevant to the
question.
Use of authorities: a few mentioned.
Articulation of argument: clear.
Accuracy of information: generally, the information given was accurate.
Question 4
‘The regime for disqualifying directors is a much better way of protecting
companies’ creditors than are the provisions of sections 213 and 214
Insolvency Act 1986.’
Discuss.
General remarks
This question relates to Chapters 14 and 17 of the module guide. It looks at creditor
protection, but requires a comparison of two ways the law might protect creditors –
on the one hand, by disqualifying some people from being directors and, on the
other hand, through sections 213 and 214 IA 1986.
Law cases, reports and other references the examiners would expect you to use
Section 6 Company Directors Disqualification Act 1986 and ss.213 and 214 IA
1986; case law interpreting those provisions, such as Re Produce Marketing Ltd,
Brooks v Armstrong, Re Lo-Line Electric Motors.
Common errors
Many students answered only half of the question, in the sense that they discussed
only either disqualification or the Insolvency Act provisions. Many students talked
about ‘disqualification’, but showed that they did not understand what this means.
They misunderstood ‘disqualification’ of directors as being the same as ‘removal of
directors’ under section 168 CA 2006. ‘Removal’, under s.168, is a ‘private’ process,
effected by shareholders, which terminates a director’s position with regard to a
single company, but does nothing to prevent (‘disqualify’) a director from acting as
such for any other company in the future. Disqualification involves proceedings
brought by the state, requiring a judicial decision, which prevents someone being a
director, or concerned in the management, of any company for a specified period.
A good answer to this question would…
explain ss.213/214 IA 1986. Show the requirements that must be satisfied for a
liquidator to bring proceedings successfully under each provision. Explain the main

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limits on the effectiveness of s.213, notably the requirement to show dishonesty.

Contrast this with the ‘negligence-based standard’ that underpins section 214.
Explain who these provisions can be used against (anyone for s.213, only directors
for section 214), and the consequences of a successful action, including in terms of
who gets the fruits of an action.
A good answer might note longstanding problems over funding such actions, and
liquidators’ reluctance to bring them, and note the introduction of s.246ZD IA 1986
(by SBEEA 2015) allowing the sale of actions by liquidators.
On disqualification, explain how disqualification might promote creditor protection. A
good answer would probably focus on the section 6 ground – unfitness – explaining
its meaning and the number of successful cases brought each year. Perhaps
address the meaning of unfitness – see Re Lo-Line - including controversy over
whether mere incompetence does/should suffice.
Discuss the consequences of disqualification, including typical disqualification
periods, and the possibility of securing leave to act whilst disqualified. Mention
might also be made of the introduction of ‘compensation orders’ under CDDA 1986.
The best answers will discuss how far it’s possible to compare the two regimes (are
they trying to do very different things?) and, insofar as comparisons are possible,
will draw some.
Poor answers to this question…
only addressed either disqualification, or sections 213/214, but not both. Some did
at least discuss both mechanisms of creditor protection, but then made no attempt
to compare their effectiveness in protecting creditors. To get a good mark, the
essay had to consider the comparative aspect of the question.
Student extract
The provisions of ss.213 and 214 Insolvency Act 1986 affect the Salomon
principle by holding the people carrying out the business liable for the
company’s debts and thus ensuring creditors can claim some of the debts
whereas the disqualification regime for directors merely disqualifies the
directors from being directors for a specified duration of time as per the basis
of the offence he is guilty of.
This is of little protection to creditors since such directors cannot act in such
capacity for a time so as to take advantage of creditors. This it can be argued
that the s.213 and 214 of IA 1986 are better ways of protecting the
company’s creditors that the disqualification regime.
Company Directors Disqualification Act 1986 lists the offences under which
directors can be disqualified. They are:
1. Disqualification on conviction of indicatable offence for 5 to 15 years
[2.–6. – lists a further five grounds for disqualification.]
Thus, the directors disqualification regime disqualifies directors for various
offences for a period ranging from 5 to 15 years during which they cannot
acts as a director of the company, as a receiver of a company’s property or
directly or indirectly be concerned to take part in the promotion, formation or
management of the company unless he has leave of the court (s.1A CDDA).
This effectively protects creditors from directors acting in a capacity which
might harm them.
On the other hand, s.213 states that... [the answer then copies the relevant
statutory wording]

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 The director will then be liable for the debts of the company, as held in Re
Todd where the director was liable to pay £10,000 towards the debts of the
company. The people liable under s.213 can be directors or shareholders but
can be employees or creditors too. S.213 carries with it the possibility of a
criminal offence too (s.993 CA 2006) which introduces a strong deterrent to
fraud but has the negative effect of neutralising the effect of s.213 because
the standard of proof was difficult to establish because of the possibility of a
criminal offence arising.
Hence, a lesser offence of wrongful trading was introduced in s.214. S.214
states that if a director continues to trade where a reasonable director would
have put the company into insolvency, directors will be held liable for the
debts of the company, as seen in Re Produce Marketing where two directors
did nothing wrong except not putting the company in insolvency at the point
of no return. They had to pay £75,000 towards the debts of the company.
So, creditors can recover debts under s.213 and 214 whereas disqualification
regime only safeguards them from the disqualified personnel in the future, but
with no provisions for debt recovery. Thus, to ensure maximum creditor
protection, s.213 and 214 alongside the disqualification regime will be useful.
Comments on extract
Overall: this answer received a low 2:1. Its strength was that it focused well on the
question asked. It tried to develop a clear argument, and to reach a definite
conclusion, that addressed the point of view put forward in the question. But it had
some weaknesses that stopped it getting a higher mark. The discussion of
disqualification was rather limited. It did not say much about the most important
provision (s.6 – disqualification for ‘unfitness’). It wasted time copying out sections
from the Act. And its explanation of what s.214 covers could have been clearer and
more precise.
Interpretation of the question: good.
Relevance of the answer to the question: very good.
Substantive knowledge: OK – but needed to demonstrate more knowledge of
disqualification – especially the s.6 ground – and of wrongful trading.
Use of authorities: OK in parts – needed more on disqualification.
Articulation of argument: very good.
Accuracy of information: mostly OK.
PART B

Question 5
Mary is a director of Fastways Plc. In May 2018, she negligently forgot to
renew the company’s insurance policies. Shortly thereafter, one of Fastways’
factories burned down. Fastways suffered a loss of £1 million as a result.
John used to be married to Mary. In February 2019, he bought 2 per cent of
the shares in Fastways. He then contacted Fastways board of directors and
demanded that Fastways sue Mary for the loss Fastways suffered as a result
of Mary’s negligence. Fastways’ board met and decided that it would not be in
Fastways’ interests to sue Mary. The board noted that Fastways’ independent
non-executive directors had already recommended that no action should be
taken against her. The board also noted that Fastways’ main customer,
Eggtops Ltd, is owned by Mary’s brother and would probably cease doing
business with Fastways if Fastways sued Mary.

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Fastways board also called a shareholders’ meeting. The meeting passed a

resolution to ‘excuse Mary for her mistake’. Mary’s mother, Sally, who owns
30% of Fastways’ shares, voted in favour of the resolution.
John has now begun a derivative claim against Mary and Sally. Advise him
whether he is likely to be given permission to continue that claim against
each of them.
General remarks
This question relates to Chapter 11 of the module guide. It focuses on derivative
claims, and specifically on the ‘permission’ stage in such claims – on the criteria
that a court must apply when it decides whether to give a shareholder permission. It
requires a student to demonstrate knowledge of those criteria, and an ability to
apply those criteria to the specific facts of the question.
Law cases, reports and other references the examiners would expect you to use
Part 11 CA 2006; s.239(4) CA 2006; Franbar Holdings v Patel; Iesini v Westrip
Holdings Ltd; Kleanthous v Paphitis; Mission Capital plc v Sinclair; Wishart v
Castlecroft Securities Ltd; Wallersteiner v Moir (No 2); Bhullar v Bhullar.
Common errors
A failure to stick to what the question asked. Too many answers dealt very
superficially with the statutory criteria for granting permission to continue a
derivative claim. Some failed to mention any case law relevant to the interpretation
of those criteria. There were also often misunderstandings about what the criteria
mean, especially for example that which asks the court to consider whether a
‘hypothetical director’ acting in accordance with the duty in s.172 would continue the
claim. Also, a failure to understand s.239(4) CA 2006. Finally, most answers did not
deal separately with the claim against Sally, either simply ignoring that claim, or
treating it as the same as the claim against Mary.
A good answer to this question would…
explain that derivative proceedings are now governed by Part 11 of Companies Act
2006. Explain need to obtain court’s permission to continue the claim (s.262) and
criteria the court must apply in deciding whether to give permission. A good answer
would distinguish between the mandatory bars to granting permission, in s.263(2),
and the discretionary factors, in s.263(3).
Beginning with the claim against Mary, derivative proceedings can now be brought
in respect of any breach of duty (section 260(3)); there is now no need to show the
breach constitutes ‘fraud’. Mary seems to have committed a clear breach of s.174.
Starting with the mandatory bars, the ‘excusing’ of Mary’s behaviour looks like a
purported ratification. If valid, this will prevent any possibility of the court granting
permission. But is the ratification valid, given s.239(4)? A good answer would
explain that the resolution to ratify must be passed without counting the votes of the
wrongdoer and those connected with her. Mary’s mother is a connected person
(see ss.252–254), so her votes cannot be counted. We do not know whether,
ignoring Mary’s mother’s votes, the resolution would have been passed, but since
she has 30 per cent of the votes, it may not have been.
Next, applying the mandatory ‘hypothetical director’ bar, consider relevant factors
identified in Iesini to decide whether it’s a case where ‘no reasonable director’ would
continue the claim. Case seems strong – clear breach of s.174 – but note possibility
of relief under s.1157. The size of the claim is large. However, it might damage
relationship with one of company’s main customers (Eggtops).
If no mandatory bar applies, the court will consider discretionary matters in s.263(3);
the possibility John lacks good faith, given Mary is his former spouse. Note the

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board’s decision not to sue – the court might put a little more weight on this, given
the recommendation of non-executive directors (see Kleanthous v Paphitis). Note
also the courts’ tendency to think the claimant is often better advised to pursue
personal remedy under s.994: see, for example, Franbar, Mission Capital, but
compare Wishart. Perhaps note how, even if permission is given, it might be only to
proceed to the next stage of the proceedings, namely to ‘discovery’ of documents
(Kiani v Cooper; Stainer v Lee).
Finally, what of the action against Sally? A good answer would ask whether Sally is
guilty of any of the forms of wrongdoing (set out in section 260(3)) which must form the
basis of a derivative claim. We are not told she is a director herself; there is no reason
to think she is subject to any directors’ duties, nor that she has breached any, even if
she were. As a shareholder, she can vote as she wishes. There seems to be no cause
of action at all against her, and certainly no cause of action that falls within s.260(3).
So, it seems very unlikely that John would be given permission to continue his claim
against Sally.
Poor answers to this question…
spent too long addressing general issues regarding the nature of derivative claims,
rather than focusing specifically on the permission issue. When that issue was
discussed, poor answers said too little about the criteria for granting permission.
Poor answers mentioned only some of the relevant criteria, or else failed to provide
any real analysis of what the criteria actually mean (including case law relevant to
their interpretation), or else applied the criteria poorly to the facts of the question.
Weaker answers also tended to ignore the position of Sally. They did not ask
whether a derivative claim could be brought against Sally at all, if she is not a
director.
Student extract
The question at hand requires us to advise John whether he will be given
permission under s.260 to bring a claim against Mary, who is his ex-wife, and
has caused a £1 million loss to the company, and Sally who is Mary’s mother.
John can bring a case for a derivative claim under s.2160 of the Companies
Act 2006. He will have to prove that an actual or proposed act or omission
involving negligence, default, breach of duty or breach of trust by a director of
a company. He will pass the first test as it was Mary’s negligence that was
the reason the company suffered loss of £1 million.
Next, under s.261, he will have to bring a prima facie case. According to the
recent case of Wisthall [sic] the onus is not on the claimant to prove that it is
a prima facie case, it is on the other party to prove that it is not. This makes it
easier for the claimant to bring a claim. John will first have a paper hearing. If
it is allowed, John will be able to claim. If it is not, John will undergo an oral
hearing without any new evidence.
John will have to satisfy the bars given under s.263. The first bar is whether
Mary is fulfilling her duty to promote the success of the company. It can be
said she is not acting in bad faith, it may be a breach of section 174 but not
section 172. The next bar is whether the company authorised it. They are
ready to forgive Mary. The company has ratified it as well. The company can
give her relief under s.1157.
The next thing to consider is whether the company has pursued the claim. It
can be seen it has not.
Moreover, the size of the claim is not that big either as the company is
allowing to let it go. Lord Wedderburn states that the loss under s.263 is not

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exhaustive. We can also see from the case law that the claimant must bring
the claim in good faith. He is not. Most probably will not be given permission.
Comments on extract
Overall: this was a weak answer. Although it did focus on the question, the answer
showed a lack of knowledge about the rules that needed to be applied. Its
discussion of the relevant criteria for granting permission was sketchy, with no clear
explanation of the difference between the mandatory and discretionary bars, no
analysis of the validity of the ratification, a very confused discussion of the
‘hypothetical director’ test, and no discussion of Sally’s position.
Interpretation of the question: appropriate.
Relevance of the answer to the question: what was written was mostly relevant.
Substantive knowledge: poor. The answer showed no real grasp of the different
criteria for granting permission. The discussion of the ‘hypothetical director’
mandatory bar was very confused. There was no apparent understanding of what
‘authorisation’ and ‘ratification’ require.
Use of authorities: again, very weak – only one mentioned – and that one was
wrongly named.
Articulation of argument: the answer did try to reach a conclusion, which was
good, but the information and analysis backing up the conclusion was too weak.
Accuracy of information: lots of errors and confusions.
Question 6
In 2017, Archie, Bernard and Charles were appointed directors of
Groundsheets plc, a company making tents.
Archie is the company’s Human Resources director. In January 2019, he
decided to increase all employees’ wages by 25 per cent, adding £2 million to
the company’s annual wage bill. He decided to do this because of his belief
‘that wealth should be distributed more equally in society’.
Bernard is in charge of purchasing raw materials for the company. In
February 2019, he accepted a case of expensive wine that was given to him
by one of the company’s suppliers, to thank him for all the contracts which
Groundsheets had recently awarded to that supplier.
In March 2019, Groundsheets was offered the opportunity to buy, for £3
million, all the shares in Dingies Ltd, a company making inflatable boats.
Charles, who is a qualified accountant, looked over Dingies’ accounts and
advised Archie and Bernard that Dingies was worth much less than £3
million. He also noted that Dingies’ business was very different from that of
Groundsheets. On Charles’ advice, the board decided not to buy Dingies.
Shortly thereafter, Bernard fell out with Archie. Bernard resigned from
Groundsheets, and then immediately bought Dingies for £3 million. It is
already clear that Dingies was worth much more than £3 million, and Bernard
has made a large profit.
Discuss whether any of the directors of Groundsheets breached their duties
to the company.
General remarks
This question relates to Chapter 15 of the module guide. It concerns directors’
duties. Students must identify the duties being breached, applying relevant
provisions from CA 2006. Since those statutory provisions must be interpreted in

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the light of the older, ‘pre-Act’, case law, the question also requires students to
demonstrate good knowledge of relevant cases too.
Law cases, reports and other references the examiners would expect you to use
Sections 170–177 CA 2006; Regal (Hastings) Ltd v Gulliver; IDC v Cooley; Peso
Silver Mines Ltd v Cropper; Bhullar v Bhullar; British Midland Tool v Midland
International Tooling; Shepherds Investments Ltd v Walters; Foster Bryant
Surveying Ltd v Bryant; IEF v Umunna; Thermascan Ltd v Norman.
Common errors
In relation to Archie, a failure to discuss specifically s.172 CA 2006. In relation to
Bernard, a failure to discuss s.176, and also a failure to ask whether the gift to
Bernard created a ‘conflict of interest’ for him, as s.176 requires.
A good answer to this question would…
address the liabilities of each of the different directors in the question.
Regarding Archie, it is arguable that he has breached the duty under s.172 CA
2006. Directors must ‘promote the success of the company for the benefit of its
members’. It is true that directors must also have regard to the interests of
employees, but they must do this with a view better to promote the interests of
shareholders. Archie seems to have acted not in his shareholders’ interests.
However, the test is a subjective one – because of the ‘good faith’ requirement in
s.172. If Archie were to persuade the judge that he honestly believed that
increasing employees’ salaries was the best way to benefit shareholders, he ought
not to be found liable.
The gift to Bernard looks like a possible breach of s.176 – he is receiving a benefit
payable to him because of his conduct as a director. It would have to be shown that
this was indeed why he was given the gift. It would also have to be shown that the
gift created a ‘conflict of interest’ for Bernard. If, however, Bernard had no
expectation of receiving the gift when he took the relevant decisions, it is unlikely
that the gift created any conflict of interest for him.
Regarding Bernard’s purchase of Dingies, this looks likely a breach of s.175. He
has taken an opportunity for himself, contrary to sections 175(1). It does not matter
that the company itself rejected this opportunity – see Regal Hastings. Nor does it
matter whether the opportunity taken falls outside the scope of the company’s
existing line of business – O’Donnell v Shanahan. It is not suggested that the board
has authorised Bernard to take the opportunity.
Finally, Charles’ advice to the board that the price was too high seems a possible
breach of s.174. We are told Charles was a qualified accountant, so he will be
judged against a higher subjective standard – that of the professional accountant –
making it more likely he will be found to be in breach of s.174.
Poor answers to this question…
did not deal with each of the three characters in the question. In relation to Archie,
students might note s.172, but not clearly explain what s.172 requires of directors,
and in what ways directors are entitled, under that section, to take into account
employees’ interests. In relation to Bernard, weaker answers tended to miss s.176
altogether, or else fail to explain the importance of deciding if there was a conflict of
interest in Bernard’s receipt of the gift. In relation to Charles, weaker answers
tended to ignore his potential liability altogether, or else failed to explain fully the
meaning of s.174, and especially the significance of the ‘subjective’ element to
s.174.

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 Examiners’ reports 2019

Question 7
Agatha owns 75 per cent of the shares, and Beatrice owns 25 per cent of the
shares, of Dearview Ltd. Agatha, Beatrice and Claire are the company’s only
directors. The company has model articles of association, with an additional
article 55 which entitles Beatrice to veto any board decision to enter into a
contract for an amount exceeding £100,000.
Agatha and Claire propose, at a board meeting, that Dearview should
purchase a piece of land, for £200,000, from Eric. Beatrice disagrees, and
says she is exercising her veto over the proposed contract. Agatha and Claire
tell Beatrice they are tired of her obstructive attitude, and are going to make
the company enter into the contract with Eric anyway.
a) Assume that the contract with Eric has not yet been entered into.
Advise Beatrice whether she can prevent the company entering into
that contract.
b) Assume, now, that the contract with Eric has been entered into.
Advise Beatrice whether the company is bound by that contract,
and whether any action could be taken by the company against
Agatha and Claire.
c) Assume, now, that Dearview’s board calls a shareholders’ meeting to
vote on a resolution to alter the company’s articles by removing
article 55. Advise Beatrice whether she could challenge Agatha’s
attempt to remove article 55.
[Do NOT discuss section 994 Companies Act 2006 or section 122(1)(g)
Insolvency Act 1986 in your answer to this question.]
General remarks
This question relates to Chapters 9, 10 and 13 of the module guide. It brings
together a number of different issues. One is the question of directors’ authority to
act on behalf of the company, and the consequences of directors exceeding their
authority. A second is the ability of a shareholder to enforce a provision in the
company’s constitution which limits the authority of directors. The third is the power
of shareholders to change the articles of a company.
Law cases, reports and other references the examiners would expect you to use
Sections 21, 33 and 40 CA 2006; Eley v Positive Government Life Assurance
Society; Salmon v Quin and Axtens; Allen v Gold Reefs; Greehalgh v Arderne
Cinemas; Shuttleworth v Cox; Cumbrian Newspapers.
Common errors
Many answers confused badly the issues of, on the one hand, directors exceeding
their authority and, on the other hand, companies exceeding their capacity
(companies acting ‘ultra vires’). So, many answers thought the problem concerned
ultra vires – that the company was acting outside its own powers – but this is not so.
The company has the power to enter into this contract, but Agatha and Claire may
be exceeding their authority by making it do so. And many answers thought,
accordingly, that s.39 CA 2006 was relevant. But it is not: s.39 is relevant only to
‘ultra vires’ actions. Since this question was not about ultra vires, but about directors
exceeding their authority, s.40 is relevant, not s.39.
Another surprisingly common error was to discuss s.994 CA 2006 or s.122(1)(g):
given the question specifically told students not to discuss these provisions, no
marks could be given for such a discussion.

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A good answer to this question would…
for part (a) explain that if Beatrice exercises her power of veto, then the board does
not have authority to purchase the land. Beatrice can enforce her constitutional
power of veto under s.33. The remedy she might obtain would be most likely an
injunction preventing the company from entering into the contract to purchase the
land. It might perhaps be argued that she is exercising this power of veto ‘in her
capacity’ of a director. However, although the courts have sometimes refused to
enforce articles which confer ‘non-shareholder rights’ (see e.g. Eley), the case of
Salmon v Quin suggests this power of veto is likely to be enforceable. A good
answer might refer to s.40 Companies Act 2006, but note how this only becomes
relevant once the contract is entered into (see part b)).
For part (b) note that once the contract has been entered into, s.40 applies.
Provided that the third party (David) is acting in good faith, then the company
cannot object to the validity of the contract on the ground that the authority of the
board to make the contract was restricted by the articles. However, the other
directors would have breached s.171 Companies Act 2006 by failing to follow the
constitution. An action could be taken by the company or, if the board refused to
make the company sue, then Beatrice could perhaps bring a derivative claim on its
behalf, but it’s unlikely she would be given permission to do so.
For part (c) explain that if Agatha sought to change the articles, this would require a
special resolution under s.21 Companies Act 2006. Agatha has sufficient votes to
pass such a resolution (75% per cent). If Beatrice refused to attend, rendering the
meeting invalid, Agatha might use section 306 to ask the court to order a meeting
with a quorum of one. Beatrice might challenge any resolution to remove the veto
as not being passed bona fide for the benefit of the company as a whole (Allen v
Gold Reefs). However, the test is a subjective one (did Agatha think the alteration
was passed for the benefit of the company as a whole). And there seem good
reasons for thinking that removing such a veto could be beneficial to the company.
Beatrice might, however, argue that her veto is a class right. It would be a class
right if it was not enjoyed by all the shareholders (Cumbrian Newspapers). If it is a
class right, then it can only be altered if Beatrice, as the class enjoying the right, first
approves the alteration.
Poor answers to this question…
confused badly the issues of ultra vires and directors’ authority, and so focused on
s.39, instead of s.40. Weaker answers could not see the difference between parts
(a) and (b) of the question. In part (a) no contract has yet been made, so s.40
cannot be used to render the contract binding on the company. Weaker answers
also tended to ignore, or say very little about, part (c), regarding the alteration of the
articles.
Question 8
Fairpoint Ltd was formed in 2016. The company has model articles. On
formation, the company had three shareholders. Rita owned 60 per cent.
Thomas, Rita’s son, owned 20 per cent. Serena, Rita’s daughter, owned 20 per
cent. Rita agreed that she would be a sleeping shareholder and would not
interfere in the running of the company. Thomas and Serena were appointed
the company’s only directors, and both were given five-year employment
contracts as directors.
In 2018, Rita died. Her 60 per cent shareholding in Fairpoint was inherited by
John, her close friend. John is an environmental activist. He has written to the
directors instructing them to reduce substantially the use of plastics in the
company’s operations. Serena and Thomas have refused his request, and
told him he must remain a sleeping investor, as was Rita.

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 Examiners’ reports 2019

Advise Serena and Thomas whether:

a) John can use his majority shareholding in the company to ensure
the company follows his wishes on reducing its usage of plastic;
b) John can remove them as directors; and
c) they can take proceedings under section 994 Companies Act 2006 to
force John to purchase their shares and, if so, at what price.
General remarks
This question relates to Chapters 11, 12 and 14 of the module guide. It examines
the power of majority shareholders, but raises three different issues around that.
The first is whether a majority shareholder can tell the directors how to run the
company. The second concerns the power of the majority to remove directors. And
the third is about the statutory protection of minority shareholders who claim they
are being treated unfairly by the majority.
Law cases, reports and other references the examiners would expect you to use
Model articles, regulations 3 and 4; ss.168 and 188 CA 2006; Union Music v
Watson; Ebrahimi v Westbourne Galleries; O’Neill v Phillips; Re Home and Office
Fire Extinguishers; Grace v Biagioli; Bird Precision Bellows; Re Addbins.
Common errors
Many answers to part (a) simply asserted that a majority shareholder can pass an
ordinary resolution, without saying whether an ordinary resolution (presumably, to
tell the board to stop using plastic) would be binding on the board. Students did not
seem to understand the important of the articles (see below). On part (b), many
answers ignored the significance of the directors having long service contracts.
A good answer to this question would…
for part (a) note that the allocation of the power to manage the company depends
on the company’s constitution. For a company with Model articles, the board has
the power (Reg.3). So, Serena and Thomas, as directors, are empowered to decide
on the company’s policy re plastic use. Shareholders can, under Reg 4, instruct the
board how to act, but must pass a special resolution to do so. John lacks the votes
(he only has 60 per cent) to pass such a resolution. He might indirectly get his way
by appointing new directors, who would then take the decision he wants. For a
company with model articles, article 17 empowers the shareholders by ordinary
resolution to appoint more directors.
For part (b) note that removal of directors is governed by s.168. This permits
removal by ordinary resolution. John can pass such a resolution. Their five-year
contracts will not prevent their removal (s.168(1)). However, if their removal
breaches these contracts, then s.168(5) preserves any right to compensation they
may have. Since their employment contracts purport to be for five years, they
required shareholder approval when granted (s.188). If the approval was not given,
then the contracts become terminable on ‘reasonable notice’, which might
substantially reduce the amount of compensation payable for their breach.
An excellent answer might note that Serena and Thomas could refuse to attend the
shareholders’ meeting called to remove them as directors, depriving John of a
quorum for the meeting. John could try to use s.306 CA 2006 to overcome this (see,
for example, Union Music v Watson).
For part (c) note the conditions attaching to s.994. The petitioner must be
complaining about ‘the conduct of the company’s affairs’ (see Re Home and Office
Fire Extinguishers). Removal of directors is accepted as constituting such conduct.
So too, almost certainly, would be changing the company’s policy on the use of
plastics. The conduct must also ‘unfairly prejudice’ the ‘interests’ of the claimant. It’s

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not obvious that John’s actions breach the legal rights which Thomas and Serena
have as shareholders of the company. If, however, the company is a quasi-
partnership, then the courts might look beyond the strict legal rights of the parties
and consider informal understandings – see O’Neill v Phillips. A good answer would
ask whether this company is a quasi-partnership (see Ebrahimi). Although originally
a family company, not all shareholders were entitled to participate in management.
Moreover, there is no obvious ‘personal’ relationship with John. If it is a quasi-
partnership, consider also the significance of the fact that it was Rita, not John, who
agreed not to participate in management. Consider also the terms of a buy-out
order should one be made (buy-outs are now the ‘default remedy’ – see Grace v
Biagioli): shares are likely to be ordered to be independently valued (O’Neill), and
bought without a discount (Bird Precision Bellows O’Neill, Re Addbins).
Poor answers to this question…
often failed to mention the importance of the terms of the articles (for part (a)) or did
not discuss the significance of the directors having long service contracts (for part
(b)). Weaker answers did not discuss the importance of deciding if the company is a
‘quasi-partnership’, for part (c), nor attempt to analyse whether this company is in
fact a quasi-partnership.
Student extract
Fairpoint Ltd has three shareholders, R, S and T. After the death of R, J
inherited 60% of the shares making him a majority shareholder. T and S both
own 20% of the shares. Each are both directors.
Article 3 of the model articles states that the directors of a company have all
the managerial powers and article 4 states that the shareholders of a
company can restrict directors from acting or asking them to act in a specific
way.
a) This part requires a discussion of whether J can enforce his wishes on the
company. The model articles of a company state that the directors of a
company have managerial power. If J wants to ensure that the company
follows his wishes he will have to pass a special resolution to pass his
agenda. A special resolution means that he will need 75% of the votes to
ensure his wishes are followed. Under s.306, J can request the board to call
a meeting. In the meeting however John will not be successful as to pass his
agenda he will need 75%of the votes but he only has 60% of the votes. S and
T do not have to worry about J enforcing his commands as having a
combined 40% stake in the company they can strike down any agenda John
wishes to pass.
b) If J wants to remove S and T as directors of the company he can do this
under s.168. Under s.168(2) J will need to pass an ordinary resolution.
Having 60% of the votes he is able to do so. However, T and S have the
option of not attending the meeting which is held for their removal. This will
result in the meeting having an incomplete quorum which will deem the
meeting invalid. Under s.318, for a meeting to be valid, the quorum of the
meeting should be complete. Hence J will not be able to remove T and S as
directors.
c) If T and S wish to take proceedings s.994 of the CA 2006, they will have to
prove that the conduct of the company has been in a manner which has
unfairly prejudiced the interests of the members generally or some part. The
authority of Home and Office Fire Extinguishers states that the conduct of the
person in the managerial position of a company can amount to the conduct of
the company’s affairs. As J is a majority shareholder, his conduct will be
deemed to be conduct of the company’s affairs.

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T and S will then have to prove that the company’s conduct was unfairly
prejudicial and that a legitimate expectation was not recognised by the
company. [The answer then looked at whether this was so here but did not
discuss whether the company was a QP and the significance of that.]
T and S will be given remedies under s.996. The most common remedy has
been given in the case of Biagioli which stated that the majority would buy out
the minority. However, the minority shareholders are always at a
disadvantage as their shares are not evaluated in discount basis as
confirmed by Virdi v Specsavers [sic]. The court also said that an
independent expert will value the shares.
Comments on extract
Overall: this was good in parts, but weaker in others. Overall, it got a high 2:2.
Unlike many answers, it dealt with part (a) very well. The answer to part (b) covered
the basics, and also noted the possible ‘quorum’ problem if the threatened directors
refused to attend the shareholders’ meeting, which was very good. However, it
didn’t mention s.306 CA 2006 and, more importantly, didn’t address the directors’
long employment contracts. The answer to part (c) didn’t really address the issue of
whether the company is a quasi-partnership, which is important.
Interpretation of the question: good.
Relevance of the answer to the question: good.
Substantive knowledge: in parts, excellent, but also some important areas of
knowledge were missing.
Use of authorities: reasonable.
Articulation of argument: clear.
Accuracy of information: generally, the information given was accurate.

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