Examiners’ reports 2019

Examiners’ reports 2019

LA3021 Company law – Zone B

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 is 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
‘The remuneration of directors is out of control. “Remuneration committees”
provide little control over excessive pay. And shareholders have no powers,
and no incentive, to take action.’
Discuss.
General remarks
This question relates to Chapters 14 and 16 of the module guide. It is, broadly, on
the topic of ‘corporate governance’, but focuses only on some specific issues within
that broad topic, namely how the remuneration of directors is determined. It asks
you to comment on two particular methods to control directors’ remuneration,
namely ‘remuneration committees’ and ‘shareholder power’.
Law cases, reports and other references the examiners would expect you to use
To show whether such pay is ‘out of control’, students might refer to a variety of
sources, such as media comment, or the work of the ‘High Pay Centre’. Reference
to the UK Corporate Governance Code (2018) is essential, but specifically its

1
provisions on executive pay, including ‘remuneration committees’. Mention should
also be made of existing statutory provisions that address pay, for example those
relating to the directors’ remuneration report, found in ss.420-422A CA 2006, and
including Companies (Miscellaneous Reporting) Regulations 2018/860.
Common errors
As in past years, the most common error on this ‘corporate governance’ question
was the regurgitation of a pre-prepared answer which summarises the history of the
UK Corporate Governance Code, and perhaps mentions some of its specific
provisions, but has almost nothing to say about remuneration in particular.
A good answer to this question would…
say something about whether executive pay is ‘out of control’ – perhaps noting
media comment about executive pay, and awareness that this problem is much
greater in larger companies with dispersed ownership, especially quoted
companies.
The answer would focus on the two forms of control mentioned in the question. It
would explain ‘remuneration committees’ - their composition, and how they might
regulate executive pay. It would say whether such committees are mandatory for
companies, noting the recommendations of the UK Corporate Governance Code,
and commenting on the code’s enforcement. There should be some awareness of
whether such committees appear to have worked well in regulating executive pay,
and then some discussion of the strengths, and also the weaknesses, of such
committees and the NEDs which compose their membership.
Turning next to shareholder control, a good answer would look at the specific rules
that do to some extent empower shareholders to have greater involvement in the
process of setting executive pay – the reporting requirements for quoted companies
in s.447 CA 2006, and the requirement for a shareholder vote on the remuneration
report (s.439). Some evaluation of whether these mechanisms work well –
especially around the issue of whether shareholders have any incentive to become
involved in the process – should also be given.
Finally, a good answer might also note the recent corporate governance reforms
that have been implemented. In particular, the Companies (Miscellaneous
Reporting) Regulations 2018/860 require quoted companies to reveal the ratio
between the pay of their CEO and the average pay of the company’s UK workforce.
Poor answers to this question…
failed to answer the question asked – they did not address the specific topic of
remuneration of directors, and did not examine the effectiveness of remuneration
committees, nor the powers enjoyed by shareholders.
Question 2
‘Provisions in a company’s articles provide little protection for minority
shareholders. Such provisions are rarely enforceable, and too vulnerable to
alteration by the majority.’
Discuss.
General remarks
This question relates to Chapters 9 and 10 of the module guide. It looks at one
specific area of minority shareholder protection, namely that provided by the
company’s articles of association. The answer must focus on that. Simply writing
out a pre-prepared essay on minority protection is insufficient. And an answer that
makes no reference to the articles fails to answer the question at all.

2
 Examiners’ reports 2019

Law cases, reports and other references the examiners would expect you to use
Section 33 CA 2006 and case law interpreting s.33, for example: Foss v Harbottle;
Hickman v Kent; Pender v Lushington; Rayfield v Hands; Eley v Positive
Government Security Life Assurance; Beattie v E and F Beattie, Salmon v Quin &
Axtens. Academic commentary thereon, for example by Wedderburn, Baxter. On
alteration: s.21 CA 2006 and relevant cases such as Allen v Gold Reefs,
Greenhalgh v Arderne Cinemas.
Common errors
Too many essays failed to mention the articles, their enforcement under s.33, or
their alteration under s.21. Some answers focused exclusively on, say, s.994 CA
2006, or on derivative claims. Whilst some mention of these alternative ways of
protecting minorities might have been relevant, after considering the strengths and
weaknesses of the articles, an essay focused entirely on those alternatives, and
saying nothing about the articles, did not answer the question at all.
A good answer to this question would…
note the continuing uncertainty over key aspects of the ‘statutory contract’, created
by s.33 CA 2006, which permits enforcement of the articles.
One area of doubt/controversy concerns the enforcement of ‘outsider rights’. A
good answer would discuss some of the relevant case law that illustrates the lack of
consistency in the cases, and would also note academic attempts to explain or
resolve such inconsistencies.
A second area concerns the categorisation of some breaches of duty as ‘mere
internal irregularities’, with the breach of the articles seen as a wrong done to the
company to be resolved by the operation of majority rule. Again, a good answer
would note the apparently conflicting case law, such as Pender, and MacDougall,
and again might note academic attempts to resolve this controversy.
On the alteration point, explain s.21 and the need for a special resolution. Analyse
the judicial policing of alterations through the requirement that such be passed
‘bona fide for benefit of company as a whole’. A good answer would explore the
judicial construction and application of this test, through the relevant case law. It is
generally applied as a subjective test, and the requirement of ‘benefit of the
company as a whole’ seems to come down to a rather easily satisfied requirement
to avoid discrimination against the minority. A good answer might note a rather
stricter approach in ‘expropriation’ cases, as well as the ability of well-advised
minorities to prevent future alteration through the use of ‘provisions for
entrenchment’ under s.22 CA 2006 or the creation of ‘class rights’.
Poor answers to this question…
did not answer the question asked, instead giving a (presumably pre-prepared)
essay on some entirely different area of minority protection. Weaker answers also
often failed to address the issue of alteration, or failed to support the answer with
sufficient reference to case law, or to academic commentary.
Student extract
In general principle, the company is a separate legal person. Only the
company itself can sue the wrongdoer. If the wrongdoer control the majority
of the board of the company, they can ratify the act by passing a resolution. It
is impractical for the minority shareholder to protect their interests under the
articles. Therefore it leads the transformation of derivative claim from
common law to statutory action. And it provides a personal claim of unfair
prejudice for the minority to bring an action to the wrong act of the company.

3
 At common law, the principle of derivative claim was established in the case
of Foss v Harbottle. Subsequently, Edwards v Halliwell list some exceptional
circumstances to the rule in Foss. If the act is ultra vires the company or
illegal, or interferes the personal interests of member, or the acts is improper
procedure, or existence of fraud or wrongdoer control of the majority.
However, the courts are reluctant to open the gate and consider the
derivative claim at common law.
The statutory derivative claim is provided for under s.260–264 CA 2006. [The
essay then worked through the statutory rules governing derivative claims,
including referring to articles that discuss how these new provisions are being
applied by the courts, concluding:] As such, the court discourage the use of
derivative actions to enhance the balance between shareholders’ rights and
the directors’ development in order to help the growth of the company.
However, the minority can still have an unfairly prejudicial remedy governed
by s.994 CA 2006. This is brought on grounds that the company’s affairs are
being or have been conducted in a manner that is unfairly prejudicial to the
interests of members generally or some part of its members, including at
least the shareholder himself. The actual or proposed act or omission is not
only prejudicial but also unfair (O’Neill v Phillips).
[There then followed a reasonable description of the basics of s.994 actions,
including again mentioning relevant academic opinion.]
Comments on extract
Overall: this essay was a bad fail. It failed to answer the question set at all. Much of
the information given was accurate. Had the question been different (had it, for
example, asked about derivative claims or s.994 CA 2006, or to identify the most
effective area of minority protection), then it would have been a pass. But the
‘answer’ said nothing about articles of association.
Interpretation of the question: inappropriate.
Relevance of the answer to the question: almost entirely irrelevant. A brief
discussion of, for example, s.994 might have been appropriate, at the end of an
analysis of the articles (their enforceability and alteration), but merely to describe
these alternative areas of minority protection on their own simply did not answer the
question.
Substantive knowledge: good – but not used in a way that answers the question.
Use of authorities: no relevant authorities used.
Articulation of argument: OK – but not relevant to the question asked.
Accuracy of information: OK – but again, not relevant to the question asked.
Question 3
Does UK company law ensure that directors must prioritise the interests of
shareholders? Should it do so?
General remarks
This question relates to Chapters 15, 16 and 17 of the module guide. It had two
parts to it, both of which a student needed to answer. The first part was
‘descriptive’: does UK company, currently, require directors to put shareholders’
interests first. The second part was a ‘normative’ question. It required students to
say whether, in their opinion, shareholders’ interests should be treated in this way
(or whether, for example, the interests of other ‘stakeholders’ (such as employees)
should sometimes take priority over the interests of shareholders).

4
 Examiners’ reports 2019

Law cases, reports and other references the examiners would expect you to use
Section 172 CA 2006, and relevant case law, for example: Regentcrest plc v
Cohen; Extrasure Travel Insurances Ltd v Scattergood; Charterbridge Corp v
Lloyds Bank Ltd; West Mercia Safetywear Ltd v Dodd. On enforcement of s.172:
s.170(1) CA 2006, the rule in Foss v Harbottle and Part 11 CA 2006 (derivative
claims). Finally, reference to changes made following the Government’s recent
Corporate Governance Review.
On the normative part of the question, reference the abundant literature that
discusses the debate around shareholder primacy versus stakeholding.
Common errors
Failure to mention s.172 CA 2006 – really the key statutory provision. Discussion
only of the first, descriptive part of the question, with no mention of whether the law
should, in the student’s opinion, require directors to prioritise shareholders’
interests.
A good answer to this question would…
first, consider whether or not UK company law does indeed require directors to
prioritise the interests of shareholders. This requires examination of s.172. Students
might note how this does seem to require directors to put shareholders first.
Although it says directors are ‘to have regard to’, stakeholder interests, this is to be
done only so as to ‘promote the success of the company’ and ‘for the benefit of the
members’ (meaning shareholders). It would note that creditor interests are put
somewhat higher, at least where insolvency is threatened; note s.172(3), and
statutory provisions which elevate creditor interests when a company is near
insolvency (e.g. s.214 Insolvency Act 1986).
It might also question how easily shareholders can enforce this provision against
directors if the latter were determined to prioritise stakeholder interests? Note that
s.172 entails a ‘subjective test’ – Regentcrest. It is for directors themselves to judge
what will best promote the company’s success, and it is difficult for shareholders to
challenge that. Note also that the duty is owed to the company itself (section
170(1)) making enforcement more difficult still.
The answer might then widen its focus beyond s.172 to other elements of UK
company law or corporate governance that support shareholder primacy (e.g.
shareholders alone hire/fire directors; executive pay tends to be ‘performance
related’ – in terms, essentially, of shareholder value; the role of takeovers etc.). And
reference changes that followed from the Government’s recent Corporate
Governance Review, such as the inclusion in the UK Corporate Governance Code
(2018) of a recommendation that companies adopt a method for allowing the views
of employees to be represented within company decision making.
Finally, the answer should say at least something about whether company law
ought to require shareholder interests to be prioritised. A good essay would give
some flavour of the arguments that are used in the debate between shareholder
primacy and stakeholding. A very good answer would discuss and critically evaluate
some of the wider literature addressing this question.
Poor answers to this question…
tended only to answer half of it, by focusing only on what the current law says,
without addressing whether the law ought to prioritise shareholder interests. Poor
answers also tended to be rather weak in their analysis of s.172. Some, for
example, simply copied out the whole of the section, from the statute book. This is a
waste of time. Credit can be given for knowing that s.172 is relevant, but not for
copying out the section from a book that students are allowed to take into the exam.
Instead, students should summarise, in their own words, the key points from the

5
statute, explaining, again in their own words, the meaning and significance of these
key points, and how they are relevant to the question asked.
Question 4
A parent company which exercises control over a subsidiary will be held
liable for any torts that the subsidiary commits. Moreover, such a parent will
also be liable for any contractual debts incurred by the subsidiary, in
accordance with the so-called “single economic entity” principle.
To what extent do you agree with the above statement?
General remarks
This question relates to Chapters 3 and 4 of the module guide. It addresses two
related areas of law. The first is whether a parent company is liable for any torts
committed by its subsidiary company, if the parent is ‘in control’ of that subsidiary.
The second is whether there is a ‘single economic entity’ principle that means that a
parent is also liable for the contractual debts that its subsidiary incurs. The question
is phrased as a clear statement that a parent is indeed liable, and so answers need
to reach a conclusion to demonstrate whether the student does, or does not, agree
with the statement.
Law cases, reports and other references the examiners would expect you to use
For the ‘tortious part’: 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 the ‘single
economic entity’ principle part: Adams v Cape and Petrodel Resources Ltd v Prest;
DHN Food Distributors v Tower Hamlets LBC; Woolfson v Strathclyde Regional
Council; Re FG (Films); Smith, Stone and Knight v Birmingham Corporation.
Common errors
Some dealt only with one part of the question – for example, only examining liability
in tort, or under the single economic entity principle. Some answers repeated a
(presumably) pre-prepared summary of the basic rules governing veil-piercing, but
without relating this to the actual question. Some students confirmed the existence
of the single economic entity principle, quoting older cases, such as DHN, but
without mentioning the significance of subsequent cases, such as Adams v Cape.
A good answer to this question would…
begin by asking whether a parent company that is controlling its subsidiary would
be held liable for torts committed by its subsidiary. It is true that, in some
circumstances, a parent can owe a duty of care to those who might be injured by
the negligence of its subsidiary. This is first established in Chandler v Cape.
Chandler imposed a duty of care on a parent where the Caparo test is satisfied, and
offered four ‘indicia’ for identifying whether the Caparo test was likely to be met.
However, it is not quite accurate to suggest that a parent which controls its
subsidiary will always be liable for its subsidiary’s torts. For one thing, the Chandler
indicia don’t necessarily require the parent to be in control of the subsidiary. And the
post-Chandler cases, such as Okpabi, Lungowe, Vedanta, and AAA v Unilever,
while putting more emphasis on control, require that the parent be controlling the
particular activity which causes harm, rather than requiring the parent to be
generally in control of all its subsidiary’s activities.
Moving to the second half of the question, it is not true that a parent controlling its
subsidiary is likely to be held liable for its subsidiary’s contractual debts. The ‘single
economic entity’ ground for veil piercing was rejected in both Adams v Cape and
Prest v Petrodel. Moreover, VTB Capital v Nutritek suggests that even where the
veil can be lifted, it should not be done in order to impose on a shareholder a

6
 Examiners’ reports 2019

contractual liability incurred by their company. A good answer would explain when
the veil can be pierced, post-Prest, and show how this is a much narrower ground
than the question suggests.
Poor answers to this question…
made the ‘errors’ noted above. Also, weaker answers tended to lack a deep
knowledge of case law, and especially more recent case law. Poorer answers got
the basic points about parental liability for subsidiaries’ torts, and discussed
Chandler. But they failed to discuss the post-Chandler case law, and its growing
emphasis on the need to show that the parent company was in control of the
subsidiary’s activities which amounted to the commission of a tort. Weaker
answers, when discussing veil piercing, also tended simply to repeat all the student
knew about veil piercing, without trying to use this information to explain whether
the single economic entity principle still survives, and whether it means, as the
statement claims, that a parent will be responsible for its subsidiaries’ contractual
debts.
Student extract
This essay will first discuss the court’s trend in imposing tortious liability. It
will then discuss whether a parent is liable for subsidiary’s contractual debts
by the doctrine of veil piercing. It is common for employees or other parties to
sue the parent company for tort of negligence, for the deeper pockets it likely
has. The court does not always allow that to happen.
In Chandler v Cape, the employee would like to sue the parent, Cape, for
tortious liability. Lady Arden emphatically rejected this is veil lifting. Instead,
her ladyship approached the issue with tortious angle of assumption of
responsibility. To establish duty of care on parent, claimant has to show that
the parent and the subsidiary are engaged in the same line of business. He
has to show that the parent has the same level of knowledge about health
and safety as the subsidiary. He has to show that the parent knows or ought
to know the system of work is unsafe. Lastly, he has to show the employee
and the subsidiary has reasonable reliance on the safety from the parent.
Although the court has tried to extend the scope to cover neighbours in
Lungowe v Vedanta, it is not easy to establish duty on the parent given the
strict criteria laid down by Lady Arden. As confirmed in Okpabi v Shell,
affirming Thompson v Renwick, if parent company is a mere holding
company or its duty was only to appoint a director to the subsidiary, such a
parent will not be liable for tortious liability.
Recent decision AAA v Unilever shows the courts’ reluctance to impose duty
of care on parent. It is only liable for misfeasance in the sense that it is
responsible for causing the injury or at least that it gave advice that caused
the injury.
b) [after general introduction explaining concept of separate legal personality
and the Salomon decision]
The court has been very protective of the corporate veil. However, it adopted
an interventionist approach after DHN, in which Lord Denning held that the
group of companies are considered as a single economic unit. This approach
was rejected after Adams v Cape. The court of appeal, following Lord Keith in
Woolfson v Strathclyde, rejected the argument of single economic unit and
also held that the interests of justice is too vague as a ground for piercing the
veil.

7
 Dignam and Lowry argue that the decision in Adams reduced the possibility
to lift the veil to only three situations… [then explains these three grounds,
and continued] In Prest, Lord Sumption set out two grounds for veil piercing,
the concealment ground and the evasion ground.
It is concluded that a parent may be liable for subsidiary’s contractual debts,
but not based on the single economic principle. Instead, the parent will be
liable only based on the limited circumstances described above.
Comments on extract
Overall: a very strong essay, that gained a first. It was well-structured, addressing
the two different issues that the question raised. And in answering those two issues,
it applied the relevant law, and only the relevant law, to each issue separately.
Interpretation of the question: good.
Relevance of the answer to the question: excellent.
Substantive knowledge: demonstrated good knowledge, including of the up to
date case law. It also showed a good understanding of the legal principles emerging
from this case law.
Use of authorities: excellent.
Articulation of argument: very clear and concise.
Accuracy of information: good.
PART B

Question 5
You have been consulted by Huan, the Chairperson of the board of directors
of Oldstuff plc, a company dealing in antiques. She tells you about three sets
of events which recently occurred at Oldstuff.
a) In June 2018, Kong, who was then a director of Oldstuff, secretly
decided to set up a new business in competition with Oldstuff. In
July, he bought premises from which to conduct his new business.
In September 2018, he resigned as a director of Oldstuff. In October
2018, he negotiated a large and very profitable contract with Janet
for his new business. Janet had been a client of Oldstuff, and in
October 2018 Oldstuff was still actively trying to get further
contracts from Janet. However, Janet had already decided not to
award any new contracts to Oldstuff because she was unhappy with
the service Oldstuff had given her in the past.
b) Vanya has never been appointed a director of Oldstuff, but has
regularly attended its board meetings. In December 2018, she
negotiated for Oldstuff to purchase a Greek statue for £1 million. It
is now clear the statue was only worth £600,000. Vanya is a world-
famous expert on Greek statues.
c) In April 2019, Oldstuff agreed to purchase a set of paintings from
George, a director of Oldstuff, for £300,000. Because of a downturn
in Oldstuff’s business, it no longer wants these paintings.
Advise Huan whether Oldstuff could take any action in respect of these
events.

8
 Examiners’ reports 2019

General remarks
This question relates to Chapter 15 of the module guide. It concerns directors’
duties. It requires students to identify the duties that might be being breached,
applying the relevant provisions from CA 2006 and also to demonstrate good
knowledge of relevant case law.
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 v Cropper; Bhullar v Bhullar; British Midland Tool v Midland
International Tooling; Shepherds Investments Ltd v Walters; Foster Bryant
Surveying v Bryant; IEF v Umunna; Thermascan Ltd v Norman; s.190 CA 2006; Re
Gemma Ltd.
Common errors
A failure to deal with all parts of the question, including ignoring Vanya’s non-
appointment as a director, or treating Vanya as a shadow (rather than a de facto)
director. Treating the purchase of the Greek statue, in part (b), as a ‘substantial
property transaction’ under s.190 CA 2006 (we are not told this purchase was from
a director, or someone who is connected with a director). Not treating the purchase
of the paintings (in part (c)) as a substantial property transaction (the price is over
£100,000, and we are told the purchase was from a director).
A good answer to this question would…
address each of the three scenarios in the question. Kong’s setting up of his own
business raises a possible breach of s.175. The decision to set up in business in
competition and the taking of some steps to further this intention could constitute a
breach. British Midland, and Shepherds Investments, both suggest that once the
decision to set up in competition has been formed, only the most limited of steps
can be taken without either informing the board or resigning as a director.
Moreover, he also takes a contract from Janet, a client of Oldstuff. He seems to
have used his knowledge while a director to profit personally; see Regal and IDC v
Cooley. It does not seem to matter that Janet was unwilling to deal again with
Oldstuff – IDC v Cooley. Does it matter that he takes the contract only post-
resignation? Probably not: what matters is when he acquired the relevant
information (IDC and now s.170(2)). True, some cases (e.g. Umunna) suggest that
if the resignation is not motivated by the desire to secure the contract, and the
contract isn’t a ‘maturing business opportunity’, then a director will not be liable.
However, neither of these conditions applies to Kong.
Vanya may be a de facto director – if she participates in ‘governance of the
company’ through attendance at board meetings as an equal with other directors’:
re Gemma. (Note: we are not told anything to indicate that she was a shadow
director, within the definition in s.251 CA 2006.) If she is a de facto director, she’s
liable to same duties as de jure directors. These include s.174 – duty of care and
skill – which she’s arguably breached. A good answer would note that s.174(2)
imposes a higher subjective test for those who are more highly qualified, which
probably applies to Vanya, given her expertise. Judged against that, she’s likely in
breach of duty by overvaluing the statue.
Regarding the purchase of the paintings, George, as a director of Oldstuff, had an
interest in a transaction being entered into by Oldstuff. He was therefore required to
declare this under s.177, unless the board either already knew of the interest, or
ought to have known. Since George is the vendor of the paintings, it seems
reasonable to think the board ought to have realised he had an interest in the
transaction. However, the contract will also be caught by s.190, requiring
shareholder approval. This is because it is ‘substantial’ (meaning over £100,000)
and it is with a director. Shareholder approval was therefore required. Without

9
shareholder approval, the transaction is voidable, George would be liable to
account for any gain made, and he and all other directors who approved the
transaction must indemnify Oldstuff for any loss it suffers (s.195).
Poor answers to this question…
tended to make the errors noted above. Note that the purchase in part (b) is not a
substantial property transaction. It is certainly substantial (it is over £100,000). But
to be caught by s.190, and therefore require shareholder approval, remember that
the transaction must be with a director, or someone ‘connected’ with a director. But
we were told nothing to indicate this was so in respect of the purchase in (b).
Also on part (b), poorer answers tended not to explain the significance of the
‘subjective standard’ which s.174 includes (it is because of this that Vanya’s
expertise on Greek statues will be relevant).
On part (a), better answers worked through the different acts which Kong committed
to set up his business (secretly deciding to set up in competition – renting premises
– resigning from the board – approaching Janet) and analysed each in turn, asking
whether each might amount to a breach of duty. Weaker answers tended to lump
them all together as ‘competing with the company’.
Student extract
Huan is a chairperson of the board of directors of Oldstuff, and would like to
know any action that can be taken regarding the actions of the directors.
Kong (K), Vanya (V) and George (G) may have breached their duties as
stipulated in ss.170–177 Companies Act (CA) 2006.
a) Kong secretly decided to set up in competition with Oldstuff (O). He has
likely breached the duty to avoid conflicts of interest in s.175 CA 2006. It
should be noted that he was not breaching this duty when he has the
intention in June 2018. But when he starts to buy the premises in July, he
was still a director and put his intention into action, so breaches his duty then.
Following Plus Group v Pyke, being a director of two competing companies
there was an irreconcilable conflict of interest. However, he would try to
argue that he had the contract with Janet only after he resigned as a director.
He should not be liable, as per IEF v Umunna, that a director can keep the
profit he made after he resigned. The resignation has stopped his fiduciary
duty to the company, as per British Midland v Midland. However, this would
be subject to whether the opportunity or information has come to him whilst
being a director. …following IDC v Cooley, the director should be
accountable for all the profit he made out of the opportunity or confidential
information after resignation as these came to him whilst still a director.
Resignation did not excuse the breach, as per s.170(2). However, if the
information were part of his ‘general fund of knowledge from being a director’,
following Thermascan v Norman, this would not be confidential information
and he would not be liable.
b) Vanya has never been appointed a director, but she acted as a director by
regularly attending board meetings. She is a de facto director under s.250. As
she is a de facto director the general duties apply to her.
[Answer does not cite relevant case law regarding the test for being a de
facto director, but goes on to discuss V’s liability under s.174 in overvaluing
the Greek statue. Answer talks about the ‘objective’ test under s.174,
requiring her to show a reasonable level of care and skill, then continue.]

10
 Examiners’ reports 2019

But subject considerations would also apply to her, according to her special
level of skill and knowledge. As a reasonably diligent person with her special
skill and knowledge, a world-famous expert of Greek statues, it is not difficult
to conclude that the over-estimation of value means she breaches the duty.
c) George, a director of Oldstuff, has an agreement with the company. He
may have breached his duty under s.177 if he did not declare his interest in
the proposed transaction or arrangement. Any declaration must be made
before the company enters into the contract. … Failure to seek approval from
shareholders will also make G liable under s.190 CA 2006, as the contract is
for more than £100,000.
Comments on extract
Overall: a good answer that scored a mid-2:1. It identified most relevant issues,
identified much of the relevant law, and applied it accurately to the questions. There
were no obvious errors in the answer. To have raised the mark higher, to a first, it
needed a bit more depth to the discussion – for example, in setting out the relevant
case law defining a de facto director, and applying this to Vanya’s case, or in
discussing Kong’s liability for taking a contract from Janet, including around the
concept of a ‘maturing business opportunity’.
Interpretation of the question: good – spotted relevant issues.
Relevance of the answer to the question: always relevant.
Substantive knowledge: on the whole, good but needing more depth in some
places to raise the mark to a first class.
Use of authorities: good.
Articulation of argument: good.
Accuracy of information: good.
Question 6
Fairways Ltd has two shareholders: Investortec plc (which owns 51 per cent)
and Assetrich plc (which owns 49 per cent). The company has two directors:
Petra (appointed by Investortec) and Russell (appointed by Assetrich).
Fairways’ articles say that any contract over £50,000 must be approved by
both directors of the company. It was also agreed, informally, between
Investortec and Assetrich that all profits from Fairways would be paid out as
dividends to the shareholders.
In January 2019, Petra’s son, Trevor, was working as an intern for Fairways.
He went to one of Fairway’s suppliers, Veronica, to purchase a new machine
for Fairways, for £80,000. Veronica was concerned whether Trevor was
authorised to make the contract. She telephoned Petra. Without consulting
Russell, Petra assured Veronica that Trevor had full authority. The contract
was then made.
A week later, Russell discovered what Trevor had done. Russell reminded
Petra that he never approved the purchase of the machine, which he says
Fairways does not need. He also complains that no dividends have been paid
by Fairways for three years, even though it has made substantial profits.
Advise Russell whether:
a) Fairways is bound by the contract entered into with Veronica; and
b) Assetrich could successfully take proceedings under section 994
Companies Act 2006 and, if so, what remedy the court would award.

11
General remarks
This question relates to Chapters 12 and 13 of the module guide. It brings together
two different areas of company law. The first concerns authority to act on behalf of
the company, and the consequences of someone exceeding their authority. The
second is the protection afforded to a minority shareholder by s.994 CA 2006.
Law cases, reports and other references the examiners would expect you to use
Section 40 CA 2006. Freeman v Lockyer. Section 994 CA 2006. Relevant case
includes: Ebrahimi v Westbourne Galleries; O’Neill v Phillips; Re Home and Office
Fire Extinguishers; Grace v Biagioli; Bird Precision Bellows; Re Addbins.
Common errors
For part (a): a failure to understanding that the issue here is about the authority of
someone (Trevor) to act on behalf of the company. Many answers wrongly
addressed the issue as one of ultra vires, to which they applied s.39 CA 2006.
A good answer to this question would…
For part (a) note that there seem to be two difficulties in finding that Fairways is
bound to the contract with Veronica. The first is that it is entered into by Trevor, an
intern, who (even ignoring the company’s article about contracts over £50,000)
would be unlikely to have authority to make such a large contract. Veronica did
check, however, and was reassured he had authority. This might seem to allow
Veronica to claim that Trevor had ‘ostensible or apparent’ authority: see Freeman v
Lockyer. However, for that to be so, there must be a representation to the third
party (Veronica) by someone who does have authority, which it is reasonable for
the third party to rely upon. This gives rise to the second difficulty here, which is that
the representation is by Petra, who does not herself have authority, because of the
limitation in the articles.
Can Veronica invoke s.40 to overcome this second difficulty? Under that section,
provided Veronica is acting in good faith, the board is presumed to have full
authority to enter this transaction, or to authorise others to do so, disregarding the
limit in the articles regarding contracts for over £50,000.
For part b) note the conditions attaching to s.994. The petitioner must be
complaining about ‘the conduct of the company’s affairs’. Russell’s complaints
seem to fall into that category – both the contract which should not have been
authorised, and the non-payment of dividends.
The conduct must also ‘unfairly prejudice’ the ‘interests’ of the claimant. The scope
of a member’s interests includes at least the member’s legal rights. The failure to
follow the constitutional provision regarding approval of contracts over £50,000
seems clearly to infringe Assetrich’s rights. The non-payment of the dividend is
somewhat different. It does not infringe Assetrich’s legal rights. Rather, it goes
against a shared understanding between the members. It seems that courts will
take account of this, but only in a quasi-partnership (O’Neill v Phillips). So, a good
answer would explain this, and then identify whether this company constitutes a
quasi-partnership (Ebrahimi). Re Sam Weller suggests non-payment of dividends
can be unfairly prejudicial, at least in a quasi-partnership where there is agreement
that profits will be distributed.
As to the remedy, note remedies available in section 996, and the courts’
preference for ‘buy outs’: Biagioli. Note terms of buyouts: independent valuation and
pro rata purchase price: O’Neill; Re Addbins.
Poor answers to this question…
on part (a), as noted above, wrongly thought that the issue here concerned ‘ultra
vires’, and then applied s.39 CA 2006 to the facts. S.39 is indeed relevant, when the
issue is one of ultra vires, but this question is not about that. A contract is said to be

12
 Examiners’ reports 2019

ultra vires when it is beyond the capacity of the company itself (because of some
restriction on the capacity of the company, found in the company’s articles of
association). But we are not told here of any restriction on the company’s own
capacity to enter into a contract of the type made with Veronica. The issue is only
about whether Trevor has authority to act for the company in entering into this
contract. That depends on the general rules governing authority, including the
special rule applying to companies under s.40 CA 2006.
On part (b), many weaker answers failed to discuss whether Fairways is a quasi-
partnership, and to explain why this might be significant.
Question 7
Mary has been successfully running her own restaurant business as a sole
trader for many years. She has now decided to incorporate her business as a
private company limited by shares, to be called Tuckin Ltd. Her friends,
Norma and Olivia, have also each agreed to invest £100,000 in Tuckin.
Norma has agreed that she will become a 10% shareholder in Tuckin. It is also
agreed that Norma will be a director of the company, with a five-year service
contract. However, Norma wants to be sure that she will not be able to be
removed as a director whilst she is a shareholder.
Olivia is unsure whether to lend her £100,000 to the company, or to use the
money to buy shares in the company. She has two concerns. First, she wants
to get the highest return she can on her investment. Second, she wants to be
able to get all of her £100,000 investment back, easily and quickly, in five
years’ time when she intends to retire to Australia.
a) Explain to Mary the advantages and disadvantages of running a
business through a private company limited by shares, rather than
running a business as a sole trader;
b) Advise Norma how directors are removed from office, and whether
Norma could ensure that she could not be removed so long as she
is a shareholder; and
c) Advise Olivia whether, taking into account her two concerns, she
ought to make an unsecured loan to the company or instead to buy
shares in the company.
General remarks
This question relates to Chapters 2, 6, 7 and 14 of the module guide. It brings
together several areas of the module. One is the advantages of running a business
through a company. A second concerns the removal of directors and, specifically,
whether a director can be made ‘irremovable’. The third concerns the difference
between the rights of a shareholder and of an (unsecured) creditor of a company.
Law cases, reports and other references the examiners would expect you to use
Sections 22, 168, 169 and 188 CA 2006. Bushell v Faith on weighted voted rights.
Common errors
On part (b), some answers merely stated that if it were agreed that Norma can be a
director for five years, then she could not be removed. But s.168 CA 2006 clearly
says otherwise. So, the (limited) protection provided by a five-year contract, in the
light of s.168, needed to be explained, and other, more effective, methods of
preventing removal needed to be identified.
A good answer to this question would…
For part a) explain the main advantages and disadvantages of running a business
through a limited company. Points to note here might include the limited liability

13
enjoyed by the members, in contrast to the unlimited liability of a sole trader. A good
answer might note that often, in smaller companies, limited liability is lost insofar as
members give personal guarantees for any debts of the company. 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. Taxation may also
be a relevant factor. Disadvantages to note include the greater bureaucracy and
disclosure requirements attaching to companies.
For part b) note that removal of directors is governed by s.168 CA 2006. This
permits removal by ordinary resolution. Mary would be able to pass such a
resolution. Norma could object (s.169) but that’s probably little defence against
removal. Norma’s five-year contract will not prevent her removal (s.168(1)).
However, if her removal breached that contract, then s.168(5) preserves any right to
compensation she would have. Since her employment contract purports to be for
five years, it requires shareholder approval (s.188 CA 2006). If the approval is not
given, then the contract becomes terminable on ‘reasonable notice’. Since the five-
year contract does not prevent Norma’s removal, a more effective protection would
be a weighted voting right: Bushell v Faith. She would also need to protect the
weighted voting right from alteration – say by making it a class right, by entrenching
it under s.22 CA 2006, or by applying weighted voting to the alteration of that article
too.
In part c) note that to maximise her return, it would probably be better to buy
shares. As a shareholder she would not be guaranteed any return, but would share
in profits. If these were high, she would likely get more than the specified interest
payable on a loan. However, recovering her investment would be easier in the case
of a loan. As a shareholder, she would ordinarily have to find someone else to buy
her shares. In a small private company, selling a non-controlling stake is usually
difficult. Typically, any buyer would insist on applying a discount to the price.
Poor answers to this question…
tended to be weaker in addressing parts (b) and (c) – generally, part (a) was better
answered. On part (b), lots of answers did not really explain the relevant rule
regarding removal of directors (found in s.168 CA 2006), nor make clear that this
rule will apply to Norman ‘notwithstanding anything in any contract with the director’,
such as the five-year contract which Norma is to be given. Nor did weaker answers
examine other, more effective, ways in which Norma might be protected from
removal, such as through a ‘weighted voting’ provision.
On part (c), students did not really explain the differences between being, on the
one hand, a shareholder in a company and, on the other hand, a creditor of a
company, insofar as those differences would be relevant to Olivia’s two concerns.
Perhaps students were thinking some specific rules governed exactly the two
concerns Olivia has. But students just needed to show they understood the basic
differences between ‘shareholders’ and ‘creditors’, and then apply these to the two
things Olivia wants to achieve. The question was testing basic understanding of
company law, and an ability to apply this to a couple of specific issues.
Question 8
George owns 70 per cent of the shares of Beasties Ltd. Henry, Joan and Fiona
each own 10 per cent of the shares of Beasties Ltd. The four shareholders are
the company’s only directors. Fiona has also lent Beasties £100,000. Under a
personal guarantee, George personally promised Fiona to repay that loan to
her if Beasties fails to do so.
In 2018, George made a series of negligent decisions which caused
substantial losses for Beasties. The company is now on the verge of

14
 Examiners’ reports 2019

insolvency, Fiona’s shares are almost worthless, and the company is unable
to repay her loan.
Fiona demands that Beasties sue George. However, the directors vote not to
take any action. A shareholders’ meeting, attended by all the shareholders,
passes a resolution to ratify George’s breaches of duty. Only Fiona votes
against.
Advise Fiona whether:
a) if she started a derivative claim against George, she would be likely
to be given permission to continue that claim; and
b) could personally claim against George, both for the drop in the
value of her shares and to enforce the personal guarantee in
respect of the loan.
[Do NOT discuss section 994 Companies Act 2006 or section 122(1)(g)
Insolvency Act 1986 in your answer to part (b).]
General remarks
This question relates to Chapter 11 of the module guide. Part (a) focuses on
derivative claims, and specifically on the ‘permission’ stage – and the criteria a court
applies when deciding whether to give permission. Part (b) focuses on personal
claims against directors, and the so-called ‘reflective loss’ principle.
Law cases, reports and other references the examiners would expect you to use
For part (a): Part 11 CA 2006, and s.239(4) CA 2006. Relevant case law includes:
Kleanthous v Paphitis; Franbar Holdings v Patel; Iesini v Westrip Holdings Ltd. For
part (b): Johnson v Gore Wood; Sevilleja Garcia v Marex Financial Ltd.
Common errors
For part (a), the main mistake was 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. There was also often misunderstanding
about how ratification, and s.239(4) CA 2006, operate – see below.
For part (b), many students seemed unaware of the reflective loss principle, and
how it might apply to the personal claims that Fiona might wish to bring against
George.
A good answer to this question would…
for part a) explain that derivative proceedings are now governed by Part 11 of CA
2006. Explain such proceedings can be brought in respect of any breach of duty;
there is no need to show the breach constitutes ‘fraud’. A clear breach of s.174
here.
It would explain the 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).
The most logical place to start here would be the mandatory bar of ratification. We
are told all the shareholders, apart from Fiona, voted in favour. Under s.239(4), a
resolution for ratification must be passed without the votes of the wrongdoer/those
connected with the wrongdoer. So George’s votes must be disregarded. However,
we are not told that any of the other shareholders are connected to George, within
the definition in ss.252–4. If that is so, then Henry, Joan and Fiona would still be
entitled to vote. Since Henry and Joan voted in favour of ratification, the resolution
to ratify would still be passed, by a two-thirds majority. (Remember, to decide if a
resolution is passed, one asks if the required majority (for an ordinary resolution,

15
more than 50 per cent) amongst the votes actually cast was achieved, not whether
more than 50 per cent of all the votes in the company supported the resolution). It
seems likely, then, that the ratification is valid.
An excellent answer might note that there has long been doubt whether all
breaches of duty are capable of ratification. Those amounting to ‘fraud on the
minority’ might still be incapable of ratification; see Franbar. However, even if that is
so, simple negligence, as this appears to be, does not constitute fraud. A good
answer might note briefly the other mandatory bars, and discretionary factors, which
a court would have to consider and apply in the event that the ratification were
invalid (say because some other shareholder’s votes were also to be disregarded).
For part b) so far as the drop in the value of her shares is concerned, there are two
difficulties in Fiona bringing a personal claim against George. The first is that
George does not appear to have breached any duty owed to Fiona. George’s duties
under ss.171–177 CA 2006 are owed to the company itself, not personally to
shareholders. Second, the loss for which Fiona is claiming is reflective loss, and
cannot be sued for by a shareholder in a personal action: see Johnson v Gore
Wood.
Regarding the claim under the personal guarantee, the first problem alluded to
above no longer applies. Fiona has a contractual cause of action against George.
However, an excellent answer might note that the claim still seems to be one for
reflective loss. Her loss – inability to recover the loan directly from the company – is
a reflection of the harm caused to the company (by George’s negligence). It does
not seem to matter that her claim is qua creditor: see Sevilleja Garcia v Marex
Financial Ltd. So, it is arguable that the reflective loss principle ought to apply to the
claim under the personal guarantee. (That said, personal guarantees are a settled
commercial practice, and it seems most unlikely that the court in Sevilleja intended
to cast doubt on their validity.)
Poor answers to this question…
showed the weaknesses noted above: on part (a), weaker answers tended to lack
focus on the specific issue raised – whether permission to continue the action would
likely be granted. Poorer answers tended to misunderstand how s.239(4) is to be
applied, given George voted in favour – see above. Weaker answers did not
understand how the reflective loss principle applied to part (b) of the question.
Student extract
Part (a): The right to bring a derivative claim by a member was provided
under s.260-264 Companies Act 2006. There would be a two stage process
in considering the likelihood of derivative claim being permitted. The 2 stages
were given in ss.261 and 263 respectively.
First, in s.261 it was stipulated that there must be a prima facie case, or else
the application would be dismissed. The courts adopted quite a loose
approach for this part. This can be seen in the cases of Franbar v Patel and
Castlecroft. On the current facts, the requirement for a prima facie case was
satisfied as George was negligent and cause the company a heavy loss.
The second stage was given under s.263, which consists of two parts, the
mandatory and discretionary parts. Under s.263(2), the court must refuse the
permission under the following circumstances… [the student then
summarised briefly the three mandatory bars]. Under s.263(3), the
discretionary factors to be considered are… [the student then briefly
summarised the discretionary factors].

16
 Examiners’ reports 2019

On the current facts, it would be unlikely that permission would be granted.

Although a notional director may seek to continue the claim to recover the
heavy loss, the breach of duty here has been ratified by the general meeting.
Under s.239(4), George would not be eligible to vote for a resolution to ratify
the breach of duty. But, without George’s vote, the resolution can still be
ratified, as the remaining two shareholders voted for it.
(b) Fiona can seek to enforce the personal agreement with George. For the
drop in the share value, it was an issue of reflective loss, as discussed in the
case of Prudential Assurance v Newman. It was held that where the
wrongdoing cause a drop in value of the company and so a drop in the value
of a shareholder’s shares, the cause of action is for the company, but not the
shareholder. So, Fiona cannot claim for the loss in value of shares.
However, Lord Bingham stated in Johnson v Gorewood that there would be
three exceptions. [The answer then described these three exceptions,
supposedly derived from Johnson, but concluded that none applied to Fiona’s
claim for the drop in share value.]
Comments on extract
Overall: this was a solid answer, that got all the essential points right. It was quite a
short answer (possibly a little rushed by a student running out of time). However, by
focusing on precisely what the question asked, and by being written with concision,
it managed to cover the basics in few words. It scored a high 2:2.
Interpretation of the question: good.
Relevance of the answer to the question: all relevant.
Substantive knowledge: on the basics, this was good. For part (a), it focused
almost entirely on the ratification issue, but it got this right, showing a good
understanding of s.239(4) and the rules for the passing of resolutions. On (b) it
spotted the relevance of the reflective loss principle, and cited the most important
authority. But the knowledge covered only the basics, and in places elaboration was
needed. This was especially so on part (b) where more needed to be said about
whether the reflective loss rule does apply to claims by creditors – and to discuss
the Marex case. On (a), given the importance of the validity of the ratification to the
student’s answer, some discussion of whether this breach of duty is capable of
ratification was appropriate too, and again would have added depth to the basic
answer.
Use of authorities: OK.
Articulation of argument: clear.
Accuracy of information: good – no obvious errors – but the answer needed
expansion and more depth in places.

17