Examiners’ reports 2016

Examiners’ reports 2016

LA3021 Company law – Zone B

Introduction
The exam paper followed the same format as in previous years. Most students
complied with the ‘rubric’, answering at least two problem questions and at least one
essay question. Students should refer to the Assessment Criteria to familiarise
themselves with the criteria that are applied to assessed work.
As in previous years, the most common weakness was a failure to answer the
question asked. Too many answers – and especially those to ‘essay’ questions – read
like ‘pre-prepared’ answers to a different question from the one actually asked on the
exam paper. We cannot emphasise enough the importance of taking time, in the
exam, to read and think about the question, working out what knowledge you have
that is relevant to it and then using that knowledge to produce an essay that focuses
on the actual question asked. This should always produce a better mark than
regurgitating an essay that may contain more information but information which is
simply irrelevant to the question asked.
Note that errors in student extracts, below, were present in the original extract.
All statutory references below are to the Companies Act 2006 unless you are told
otherwise.

Comments on specific questions

PART A
Question 1
‘A company’s articles of association provide very little protection for a minority
shareholder. It is too difficult for a minority to enforce the articles, and too easy
for the majority to alter them.’
Discuss.
General remarks
This question addresses the issue of minority shareholder protection but by asking,
specifically, about the protection which the articles provide. The essay 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.
Law cases, reports and other references the examiners would expect you to use
The most important statutory provision is s.33, which gives ‘contractual effect’ to the
articles. The case law which interprets s.33, e.g. Foss v Harbottle, Hickman v Kent,
Pender v Lushington, Rayfield v Hands, Eley v Positive Government Security Life

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Assurance, Beattie v E and F Beattie, Salmon v Quin & Axtens. On alteration: s.21
and relevant cases e.g. Allen v Gold Reefs, Greenhalgh v Arderne Cinemas.
Since the terms of the articles are also relevant if a minority tries to rely on s.994
(‘unfair prejudice’), s.994 is also worth mentioning, together with the cases which
make clear that a shareholder’s chance of succeeding under s.994 does depend upon
the content of the articles: see e.g. Ebrahimi v Westbourne Galleries, O'Neill v Phillips,
Saul D Harrison, Re Blue Arrow, Grace v Biagioli, and Fulham FC v Richards.
Common errors
The most common area was a tendency to focus only on the question’s reference to
‘minority protection’ and to churn out a (probably) pre-prepared essay on that topic,
without addressing at all the role the articles play in protecting a minority.
A good answer to this question would…
focus on the claim being made by the question: do the articles provide much
protection for minorities and, in particular, is it true that it is too difficult to enforce the
articles and too easy for the majority to alter them?
Perhaps begin by noting that, in theory, the articles can be easily enforced under s.33.
Explain how this is a ‘personal action’, that each individual shareholder is entitled to
bring against either the company or even, in some cases, against fellow shareholders.
Give examples of cases where this was successfully done, such as Pender, or
Rayfield v Hands. All this seems to disprove the claim in the question.
However, a good answer would then consider the limits on enforcement. These
include the problem of ‘outsider rights’ (Eley; Beattie; Salmon) and the problem of
‘internal irregularities’ (MacDougall v Gardiner). An excellent answer would point out
that the law in these areas remains uncertain and that there is a lot of academic
literature addressing whether minorities can indeed use the articles to complain about
breaches of ‘outsider rights’ or ‘internal irregularities’.
A good answer might then address the second point made in the question, namely
that it is too easy for the majority to alter the articles. It would consider s.21 and its
requirement for a ‘special resolution’ and then note how easily the minority can
prevent alteration. So, a minority can challenge an alteration on the ground that it is
not passed ‘bona fide for the benefit of the company as a whole’. An excellent answer
would consider relevant case law where the courts have applied this test – such as
Allen; Greenhalgh – noting that the courts seem reluctant to uphold challenges to
alterations. Other means of stopping alterations – such as invoking ‘class rights’, or
using s.22 – might also be noted.
Finally, although enforcing the articles under s.33 is often difficult for a minority, the
articles can still be of some assistance to the minority if they try to protect themselves
by suing under s.994 instead, for a breach of the articles may constitute ‘unfairly
prejudicial conduct’. A good answer would note relevant cases here (Ebrahimi, O’Neill,
Fulham v Richards). It would also explain how, even if a s.994 action is successful, it
will usually result not in ‘enforcement’ of the articles but rather in the ‘buy-out’ of the
minority.
Poor answers to this question…
tended, as noted above, simply to provide some discussion of how minorities protect
themselves, but without mentioning the articles at all, or without considering whether
the articles make a significant contribution to minority protection because of the
problems over enforcement and over alteration that are mentioned in the question.
Student extract
The question requires to analyse how the articles of association in a company
may offer protection for minority shareholders. The articles act as a constitution

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of the company that sets out guidelines, rules, regulations and laws by which
the company will be governed. Hence it may be easy to assume articles of
association providing clear cut provisions for the protection of minority
shareholder interests. However in practice it does not happen so. Even though
directors are appointed by shareholders, they have more authority in terms of
governing and altering the articles, since they will be the primary decision
makers in the company. Even if directors are acting unjustly towards the
minority, they can only be removed under s.168.
[The essay then noted how directors might breach their duties to the company,
which harms minorities and then continued.]
In terms of protection of minorities, they have a better provision under ss.213
and 214 of Insolvency Act where in the account of just and equitable ground a
company would be wound up. [The essay then continued to explore a fair
number of cases relevant to the winding up of companies, such as Ebrahimi, Re
German Date, Yenidje Tobacco, etc.]
Comments on extract
Overall, this was a very weak essay, which received a fail mark. The main difficulty is
that it simply did not answer the question set. It read as if the student had come
prepared to write on a winding up of the company, not on the enforcement of the
articles and chose to do that, notwithstanding that the question was clearly about the
articles.
Interpretation of the question and relevance of the answer: this was very poor.
The answer began in a way that suggested the writer appreciated it was about
enforcement of the articles and was going to focus upon that. However, the bulk of the
answer – about three-quarters of it – was not about the articles at all but about a
winding up of the company.
Substantive knowledge: very weak. Even in that small part of the essay which did
address the effectiveness of the articles in protecting minorities, no mention was made
about how the articles can be enforced (s.33). And no mention was made of the
alteration of the articles, save to say that directors can alter the articles, which is
simply wrong (see s.21). The knowledge of the winding up regime was better,
although the wrong section number was quoted (it is s.122(1)(g), not ss.213 and 214).
Use of authorities: this was better on the winding up part of the essay. Unfortunately,
as noted, this was not what the question asked about. And on the issue the question
did ask about – enforcement of the articles – no authorities were mentioned.
Accuracy of information: as noted already, too many basic errors, e.g. suggesting
directors can alter the articles.
Clarity of expression: OK.
Legibility: good.
Question 2
‘Attempts to improve the accountability of large companies through the
appointment of more independent non-executive directors have been a failure. It
would be much better to require such companies to include, on their board,
directors who are chosen by a wider range of stakeholders, and whose role is to
promote the interests of those stakeholders.’
Discuss.

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General remarks
This question addresses ‘accountability’ in large companies – a topic often discussed
under the rubric of ‘corporate governance’. It required, however, students to look at
two specific issues within this broad topic. The first is the use of non-executive
directors (‘NEDs’) to improve accountability in large companies (and whether trying to
do that has been ‘a failure’). The second is whether things would be better if more
directors were chosen by a company’s ‘stakeholders’ and if those directors were
required to promote the interests of stakeholders (rather than, say, just of
shareholders).
Law cases, reports and other references the examiners would expect you to use
The literature explaining what NEDs are, and evaluating their effectiveness, including
the UK Corporate Governance Code (2014). The literature which addresses the merits
of ‘stakeholding’, including the use of stakeholder-appointed directors. No specific
article or book or report would be seen as essential but to get a good mark, some
reference to some of this wider literature is highly desirable.
Common errors
The most common error is one that has been emphasised in previous years’
examiners reports: too many students appear to have prepared a ‘standard’ essay on
corporate governance, which simply recites the history of the UK Corporate
Governance Code. Questions on the topic of corporate governance, such as this one,
tend to be much more focused, requiring discussion of a specific aspect or issue(s) –
in this case, the two issues identified under ‘general remarks’ above.
A good answer to this question would…
perhaps begin by noting why ‘accountability’ is seen as important and problematic in
larger companies – and therefore, why ‘corporate governance’ in such companies
enjoys so much attention. As Berle and Means pointed out last century, there is often
a separation between ownership and control, leaving shareholders more vulnerable to
misbehaviour by their executives. Moreover, because of their size and power, such
companies can also significantly impact on the welfare of other stakeholders, such as
employees, consumers and neighbours.
A good answer might then address the first issue identified, namely whether the use of
NEDs to improve accountability has really been a failure. It would explain what NEDs
are, the role they are given and any evidence we have about their effectiveness. This
might include both more ‘theoretical’ arguments about the strengths and weaknesses
of NEDs and any empirical evidence about, say, whether they improve corporate
profitability. The increased reliance on NEDs in the UK, as evidenced by the
provisions of the UK Corporate Governance Code, might be noted. However, this
would only be a small part of the answer. There would be no need to provide a
lengthy, pre-prepared, summary of the whole history of different Codes of Practice in
the UK and their recommendations about the proportion of NEDs a company should
have.
A good answer would then turn to the second – stakeholding – issue in the question.
There is, of course, not necessarily a ‘right’ answer on this but a good answer would
note relevant arguments around this question.
As with any issues within the topic of corporate governance, the literature here is
voluminous. A good answer would refer to some relevant literature beyond the subject
guide and main textbook. Moreover, since corporate governance focuses on larger
companies and policy issues that are ‘in the public eye’, a good answer might include
relevant news stories reported on in the business/financial press.

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 Examiners’ reports 2016

Poor answers to this question…

tended simply to set out a discussion of the history of the Combined Code/UK
Corporate Governance Code, with little attempt to examine the issues of the success
or failure of NEDs, or whether things would be better, or even worse, if we had a
bigger dose of ‘stakeholding’ – including having some directors chosen by
stakeholders.
It is worth emphasising once again that questions on the exam paper are very
carefully drafted, so as to focus on particular and specific, issues. Answers must
address those issues; pre-prepared essays that give an answer to a different question
from the one asked will get little credit.
Student extract
The corporate governance codes for many years have tried to implement the
non-executive directors on boards in order to bring a much more independent
and diverse say into the boardroom. This much was emphasised in the
corporate governance debate and put forward by several reports such as
Hampel Report, The Stewardship Report and implemented in the Corporate
Governance Code in 2010 and 2014.
Thus what was expected by this was to improve the decisions made by boards
who would have many more non-executives directors (NEDs) …who can bring
innovative and independent decisions from their side. Thus, the appointment of
NEDs was to bring an outsourced independence who can make quality
decisions on behalf of the company … but without being influenced by the day
to day politics of the management.
[The essay then went to note that most companies seem to comply, but not
fully, with the NED requirements and then continued.] Therefore, moving
forward to the idea that directors must come from a wider range of stakeholders
may be a huge step in recognising stakeholder interests. Thus directors who
are chosen by a range of stakeholders, such as creditors, banks, interested
NGOs, environmental groups, labour representatives and suppliers, may create
a vast diversity in the boardroom.
Dodd argues that companies have a great social responsibility in making
decisions. Having a board with such stakeholder representatives may create a
much more diverse board and may also reflect in the company’s success. As
Freeman describes stakeholders as groups or individuals who have an interest
in the accomplishment of the company’s mission, such stakeholders may have
a greater impact if they are able to be on the board and make decisions
collectively. It would for sure enhance the value of the company and the
stakeholders position in the social and economic structure. [The essay
continued to note the potential advantages of stakeholding and then some of
the problems in implementing a stakeholder approach to corporate governance,
with lots more references, throughout the essay, to relevant reading.]
Comments on extract
Overall, this was a strong essay that achieved a good 2.1.
Interpretation of the question: good. The student clearly understood what the
question was asking, identified the two parts of the question and stuck to them.
Relevance of the answer to the question: again, good. The student focused on what
the question actually asked. The essay proceeded logically, first addressing the
effectiveness of NEDs and then turning to the stakeholding issue.
Substantive knowledge: very good on the stakeholding issues. On the NED issue, it
began well, with a clear understanding of what has been expected of NEDs to date

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and why they have been appointed in increasing numbers. But the essay was a bit
brief and superficial in examining their effectiveness. It did not have much to say about
the ‘theoretical’ concerns about whether NEDs are really able to make a difference
and did not refer to any empirical evidence about whether NEDs do, in practice, seem
to improve the performance of their companies.
Use of literature: excellent. The student managed to communicate the fact they had
read widely around the topic, understood the literature they had read and could see
how it was relevant to the argument/analysis the student developed.
Articulation of argument: very clear – logically structured.
Accuracy of information: very good again – no obvious errors in what was written.
Clarity of expression: good.
Legibility: good.
Question 3
‘Many small companies are more like partnerships. In small companies, there is
a close personal relationship between their shareholders, all of whom expect to
manage the company, and expect the company to come to an end if the
relationship breaks down. Unfortunately, UK company law does not reflect these
expectations.’
Discuss.
General remarks
This was a question about how well UK company law deals with the different needs of
small companies. This general topic has featured in past exam papers. However, this
question was not simply asking students to write all they know about the differences
between large and small companies. Rather, it required a focus on certain, specific
attributes of small companies and whether UK company law reflects these specific
attributes.
Law cases, reports and other references the examiners would expect you to use
The law dealing with the rights of shareholders in smaller companies and the remedies
available to shareholders in such companies when their relationships have broken
down. Section 994 CA 2006; s.122(1)(g) Insolvency Act 1986; case law interpreting
those provisions, especially Ebrahimi v Westbourne Galleries; O’Neill v Philllips.
Common errors
As with other essay-style questions, the most common error was a failure to focus on,
and therefore to answer, the question set. Too many students wrote all they knew
about the law’s treatment of small companies, without focusing on the points being
made in the question, which needed to be addressed directly.
A good answer to this question would…
begin by identifying the issues or ‘sub-questions’ that are raised here. These might be:
first, a) are small companies at all like partnerships and, in particular, do shareholders
have the ‘close relationships’, and the ‘expectations’ (participate in management,
company will terminate if the relationship breaks down) that the question suggests? And
secondly, b) does UK company law reflect these expectations – and if so, how exactly?
A good answer might start with (a) (whether small companies are like partnerships, etc.).
It might note that there are 3.5 million companies in the UK and over 99 per cent are
private. Many – most – of these are very small. With so many companies, it is difficult to
generalise about them all. But what we see from cases dealing with small companies is
that very often such companies are more like partnerships. There is often no separation
of ownership and control. All shareholders expect to be directors. Because shareholders

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are also involved in managing the company – they are not ‘sleeping investors’ – the
shareholders have a close working personal relationship. This is reflected in ‘pre-emption
provisions’ in the articles, to control the risk of strangers joining the company.
The term ‘quasi-partnership’ – defined in Ebrahimi - has become commonly used in
UK company law to describe companies that are, legally, companies but which in
reality share these attributes of a partnership.
What is perhaps less clear is whether shareholders, even in a quasi-partnership, also
expect the company to come to an end if the relationship between shareholders
breaks down. That is a very drastic response. Perhaps shareholders expect some less
destructive step to be taken – say only that some shareholders would buy out others.
A good answer would then turn to examine (b) – whether the law has failed to reflect
these expectations. Surely, the answer is that UK law has tried to reflect the reality of
these companies. It does so primarily under s.994 and under s.122(1)(g) Insolvency
Act 1986. Where shareholders fall out and one claims under one or other of these
provisions, the court will first identify if the company is a ‘quasi-partnership’ –
Ebrahimi. It will then look at the expectations of those parties (including, after O’Neill v
Phillips, whether these expectations were backed up by agreements/shared
understandings between the parties). And if the court feels that, say, a shared
expectation that all shareholders would participate in management has been breached
then the court will probably give relief. But usually, the relief given will be a buy out –
under s.994. A good answer would explain how this end result is arrived at. It would
note that in theory a winding up order is available under s.122(1)(g) IA 1986 but note
also that s.125 IA 1986 means that typically the buy out under s.994 is the preferred
remedy.
Poor answers to this question…
tended to write a very general account of the differences between big and small
companies, or tended to list a number of ways in which the law differentiated between
big and small companies (such as rules on accounts, or rules on capital maintenance).
Such essays failed to answer the specific issues and points being made by the
question as set.
Question 4
‘In theory, section 168 of the Companies Act 2006 ensures shareholders are
always able to remove directors. It is however easy to contract out of section
168, and the right of a director to claim compensation when she is removed
often makes removal prohibitively expensive.’
Discuss.
General remarks
This question was attempted by fewer students than other essay questions. Again, it
makes a number of claims, which students should focus on directly: a) does s.168
allow shareholders to remove directors – is that what it’s about? b) can one ‘contract
out’ of s.168? c) do directors have a right to claim compensation if removed under
s.168 and does that make it too expensive to remove them?
Law cases, reports and other references the examiners would expect you to use
Section 168 CA 2006. Cases relevant to the interpretation of s.168 e.g. Bushell v Faith.
Section 168(5) on the right to compensation for removal. Other financial implications of
removing directors under s.168 (e.g. the director’s right to claim that removal is unfairly
prejudicial conduct, under s.994 CA 2006); attempts to limit the amount of compensation
payable – e.g. s.188 restricting long service contracts; s.215 on compensation for loss of
office.

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Common errors
Failing to examine the issues in sufficient depth. Most students attempting this
question could describe and explain the basic effect of s.168 CA 2006. However, they
often struggled to explain whether s.168 can be ‘contracted out of’ – can be excluded
by a term of a contract with a director. And they often struggled to say much about the
issue of compensation for removed directors – either the way in which company law
preserves a director’s right to claim compensation, or the limits and controls company
law tries to put on such compensation.
The ability to remove directors and the problems that might arise if directors can claim
excessive compensation when they are removed are really important issues in
company law. So although these issues are quite ‘narrow’ and ‘technical’, a good
understanding of ‘how company law ticks’ requires a grasp of these of fundamental
points.
A good answer to this question would…
begin by summarising s.168 – and especially s.168(1) – by paraphrasing and
explaining its essential purpose. (A good answer would not simply copy out the whole
of the section – for that is just copying, is a waste of valuable time and does not show
that you actually understand what s.168 is doing.) Instead, a good answer would
explain that this section does ensure that shareholders have the power to remove a
director and that they can exercise this power by a mere ordinary resolution.
Thus, it seems correct to say that s.168 ensures shareholders, by a simple majority,
can always remove a director. However, can it be ‘contracted out of’? A good answer
might begin by noting that s.168(1) says that the power of the shareholders to remove
a director, by ordinary resolution, applies ‘notwithstanding anything in any agreement
between [the company and director]’. So, on its face, it seems wrong to say that the
shareholders’ power to remove can be contracted out of. On the contrary, s.168
seems to be a ‘mandatory’ rule. However, a very good answer would then note that
some more subtle, ‘indirect’ ways of excluding the shareholders’ right to remove a
director have been ruled to be valid. The best example, perhaps, is a so-called
‘weighted vote’. An agreement (say in the articles) that a director has extra (or
‘weighted’) votes, when faced with removal, has been held to be enforceable: Bushell
v Faith. In reality, this looks very much like contracting out of s.168.
A good answer would then turn to the compensation issue raised by the question. Can
directors who are removed get compensation? Well, s.168 does not itself create a
right to compensation. But, suppose a director has a service contract and suppose the
removal means that the company is breaking the terms of the director’s service
contract (by terminating her position prematurely). She would then probably have a
contractual right to compensation. And, crucially, s.168(5) preserves this right, even
though shareholders also have the right to remove the director. So, if lots of directors
do have service contracts then their right to claim compensation may well mean it is
very – and perhaps too – expensive for the company to remove them.
A very good answer would then note that company law does do something to stop
directors awarding themselves very long contracts which might be prohibitively
expensive to terminate early – see e.g. s.188 – any contract over 2 years must be
approved by shareholders (although, according to Atlas Wright, such approval could
be ‘informal’). An excellent answer might also mention that removal of a director who
is also a shareholder could, at least in a quasi-partnership, trigger a claim by that
director/shareholder for relief under s.994 (unfair prejudice). If successful (and most of
these claims seem to be successful) the majority who have removed the
director/shareholder could be forced to buy their shares from her, further increasing
the cost of removal.

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A very good answer might also note how, in larger, listed companies, the problem of
large compensation payments for directors being removed has become a matter of
public debate. Such payments, sometimes called ‘golden handshakes’ have been
called ‘rewards for failure’. The UK Corporate Governance Code has addressed them
a little, by recommending that directors of such companies should have contracts that
do not exceed 1 year in length.
Poor answers to this question…
tended to offer only a fairly ‘basic’ account of s.168, which noted the essentials of the
section, but failed to deal with the ability to contract out of the section, or to deal with
the wider issues surrounding the right to compensation noted above.

PART B
Question 5
In 2012, Avril and Bernice were appointed directors of Seepak Plc, which makes
canoes. In addition, David attended all board meetings of Seepak from January
2014 onwards, but he was never appointed a director.
In August 2015, Seepak was approached by Fiona. She had just invented a
revolutionary new design of canoe, and offered to sell Seepak an exclusive
licence to make and sell her canoes. Avril and Bernice felt this would be too
risky, and decided Seepak would not buy Fiona’s invention from her.
David felt Avril and Bernice were being too cautious. Without telling them, he
decided he would set up his own business making Fiona’s canoes. In
September 2015, David rented business premises. In October he told Avril he
would no longer have any involvement with Seepak, and thereafter he stopped
attending Seepak’s board meetings. In November, he bought a licence from
Fiona to make her canoes. In December he contacted shops that sell canoes
(whose owners he had often met whilst he was involved with Seepak) to obtain
orders for the new canoe.
In February 2016, Seepak itself purchased, from Bernice’s husband, Henry, a
new machine for making canoes. The purchase price was £101,000. However, by
March 2016 it was clear that David’s new canoe business was a huge success,
and that Seepak’s own sales had fallen massively. Because of the decline in its
sales, Seepak no longer needs the new machine.
Seepak has now been taken over by another company and has an entirely new
board of directors.
Advise the new board whether Seepak could take any action in respect of these
events.
General remarks
This is a question on directors’ duties. It mainly requires students to identify which
particular duties might be being breached and then to apply the relevant provisions
from CA 2006 to the directors’ conduct. But since those statutory provisions must be
interpreted in the light of the older, ‘pre-Act’, case law, the question requires students
to demonstrate good knowledge of relevant cases.
Law cases, reports and other references the examiners would expect you to use
Sections 170–177 CA 2006, s.190 CA 2006; relevant case law interpreting these
provisions, e.g. Secretary of State for Trade and Industry v Hollier and Re Gemma Ltd;
Regal Hastings, IDC v Cooley, Bhullar v Bhullar, British Midland Tool, Thermascan Ltd
v Norman.

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Common errors
Most students noted that David’s non-appointment as a director raised a difficulty but
many argued that he would be treated as a shadow director. This was a good effort
but it is much more likely that he would be a de facto director, rather than a shadow.
Most students treated David’s competition with Seepak as one possible breach of
duty. However, David’s actions continue over a number of months and involve a
number of different potential conflicts of interest. An excellent answer would break
these down individually and consider each in turn – see below.
A good answer to this question would…
take the different directors in turn, and examine each one’s potential liability. Starting
with David, the first point to decide is whether he will be subject to any directors’ duties
at all. Although not appointed a director, he might be a de facto director. He would be
so if, under s.250, he were ‘occupying the position of a director’. Explain how,
according to SS for Trade and Industry v Hollier and Re Gemma Ltd, the essence of
occupying the position of a director seems to be attendance at board meetings, with
the same rights of decision-making as other directors. Then apply to facts of question.
Explain how, if he is a de facto director, according to s.250, he will be treated as a
director like any other and thus subject to the same legal duties as other, legal
directors.
A good answer would then address David’s liability for breach of duty and specifically
breach of s.175. It would summarise this section and identify the relevant case law
that interprets it, such as Regal Hastings, IDC v Cooley, Bhullar v Bhullar, etc. A very
good answer would note that David’s conduct can be broken down into different
stages, each of which raises different issues.
a) First, his initial decision to set up in competition with Seepak. Done in secret,
and whilst still a director but merely deciding to do so is likely no breach of
duty.
b) However, taking a positive step, such as renting premises, probably does
breach s.175 – British Midland Tool. Once he starts taking steps to further his
competitive intentions, he should disclose those intentions to the board, or
‘resign’. He seems to do neither until November, when he stops attending
board meetings.
c) Purchase of Fiona’s licence probably involves the taking of a corporate
opportunity. Although this happens after he ceases to be director, note
s.170(2) and IDC v Cooley. What matters is not when he exploits this
opportunity but when he learned of it.
d) Finally, his actions in contacting shops. Another possible breach of s.175 but
again this occurs ‘post-resignation’. Cases such as Thermascan Ltd v Norman
suggest that, if the knowledge David is using in contacting the shops is his
‘general fund of knowledge’ developed whilst a director of Seepak, it will not
amount to a breach of s.175 but it would do so if he were exploiting
confidential information or trade secrets.
Avril and Bernice might both be liable under s.174, in respect of their original decision
not to purchase Fiona’s new canoe design. A good answer would note some of the
difficulties in establishing a breach of this duty of care and skill, especially in respect of
what may be mere commercial judgements.
Finally, good answers would address the purchase of the new machine. This falls not
within s175 but, because of s175(3), within s177, since it involves ‘a transaction with
the company’. Bernice should declare to the board her interest in this contract to buy
the machine (it is with her husband), although under s177(6) such a declaration is not
necessary if the board already does know, or should know, of Bernice’s interest.

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However, since the price of the machine is £100,000 or more, and since it is with
someone who is connected to a director (Henry, as Bernice’s spouse, is connected
with Bernice according to s252), shareholder approval for the purchase is also
necessary. A good answer would note the consequences of a failure to get such
approval.
Poor answers to this question…
tended simply to miss out on the level of detail noted above. So, for this question, few
answers were ‘irrelevant’ (as was often the case for essays) and few answers were
‘wrong’. But weaker answers tended, for example, just to ask whether anything done
by David might breach s.175, rather than breaking down his conduct into its different
monthly events and treating each in turn.
Poorer answers also tended to discuss little relevant case law. Section 175 is a
provision where there is a great deal of case law to help us understand and apply the
very broad wording of s.175 itself. Students must demonstrate knowledge of that to
get a good mark.
Student extract
This situation focuses on the fiduciary duties of directors of the company, set
out in Companies Act 2006, ss.170–178. … At the outset, it must be established
whether D is a director or not. The facts state he was ‘never appointed,
indicating he is not a director. However, the case of Hydrobad provides that an
individual who is not appointed as a director formerly, but who exercises duties
and powers of a director (as per the facts, he attended all board meetings) will
be consider as a de facto director. The reasoning is that the de facto director,
although not formally appointed, is a part of the ‘governing structure’ and so will
be considered as a director and subject to fiduciary duties.
[The essay then continued to note, accurately, how the duties will be owed to
the company itself, not to shareholders and then continued.]
Considering D, he will be charged with breach of s.175, conflict of interest. The
duty provides that the director must not conflict his own personal interest
against the duties owed to the company. A typical position is where the director
makes a profit using his fiduciary position. Although he resigned, s.170(5)
provides that a director, even after resignation, is still subject to ss.175 and 177
duties. The general rule, set out in Umunna, is that a director, upon resignation,
must be allowed to exploit the knowledge and skill acquired in the course of
employment, after resigning. Added, the case of Pyke Group provided that
where a director upon resignation carried out his own business and used
customers of the old company, he was not considered to be in breach of duty.
Thus, on these facts D could argue Pyke. However, in Pyke, the customers
were [unhappy with] the company, upon which they approached the director.
But in D’s case the facts do not state customers have any issue with the
company, so there is doubt whether D could use Pykes to defend himself.
[The essay continued in a similarly detailed and careful way, examining the
different examples of D’s misbehaviour and the relevant case law.]
Comments on extract
Generally, this was an excellent, first class, essay.
Relevance of the answer to the question: everything was relevant. The student
managed to go into great detail in analysing the different aspects of the scenario but
could do that because the essay stuck only to what was relevant. No time was wasted
discussing irrelevant issues.

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Substantive knowledge: excellent: the student demonstrated real in-depth
knowledge of the relevant legal rules and principles. The student’s discussion of the
Pyke case is an excellent example of how one should use a case. Here, the basic
point of the case is established and applied to the problem scenario. Ordinarily, it is
unnecessary to discuss the facts of cases – it is the decision – the ‘ratio’ – that
matters. But facts can be worth a mention if one can see a way of distinguishing
between 1) the facts of the case in question and 2) the facts of the problem scenario.
That is precisely what this student does, very clearly. A first class bit of analysis.
Use of authorities: very good.
Articulation of argument: always very clear.
Accuracy of information: excellent.
Question 6
a) Sarah married John in 2000. By 2009, Sarah had decided that she no
longer loved John, and might well divorce him in the future. In 2010,
Sarah inherited an office block in London worth £50 million. She
immediately transferred both her legal and her beneficial interest in
the office block to a company, Hidem Ltd. Sarah had formed Hidem in
1999 but it had never traded. It had issued one share, owned by
Sarah’s sister, Belinda. Belinda was also the only director of Hidem.
In March 2016, Sarah finally began divorce proceedings against John,
and John now wishes to claim financial relief from Sarah.
Assume that the amount of financial relief will depend on Sarah’s
wealth. Advise John whether, as a matter of company law, he will be
permitted to lift the corporate veil and treat Sarah as if she still owned
the office block.
b) Desparate Ltd has been trading at a loss for many months. It has
one director, Ollie. In January 2016, Ollie persuaded George to lend
£50,000 to Desparate. Ollie tells George: ‘Don’t worry about getting
your money back. I personally promise that Desparate is financially
secure’. In April 2016, winding-up proceedings are begun against
Desparate. Its liabilities massively exceed its assets. George has
not been paid.
Advise Ollie whether he will be liable:
(a) personally to George; and
(b) to contribute to the assets of the company.
General remarks
The first part of this question focused on the separate personality of companies and
the doctrine of ‘veil lifting’. The second part focused on the liability of directors in tort
and under the Insolvency Act 1986. The question was generally well answered, with
students usually providing a solid account of the position in relation to Desparate, but
performing a little less strongly in respect of the veil lifting issues.
Law cases, reports and other references the examiners would expect you to use
For part (a) relevant cases on the nature of a company’s separate legal personality:
Salomon v Salomon; the doctrine of veil lifting/piercing and relevant case law exploring
the limits of that doctrine, such as Woolfson v Strathclyde Regional Council, Adams v
Cape Industries; Petrodel Resources Ltd v Prest and VTB Capital v Nutritek
International.
For part (b) tortious actions for negligent or fraudulent misstatement; Williams v
Natural Life Health Foods Ltd; actions under ss.213 and 214 IA 1986; Re Produce
Marketing.

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 Examiners’ reports 2016

Common errors
Some answers set out a general discussion of veil piercing, without really apply that to
the facts of the questions – especially on part (a) (Sarah and John). Many essays
argued that, as occurred in Prest, the company might be treated as holding the
property on trust for Sarah – when the facts of this question seemed very clearly to
prevent the court reaching a similar conclusion. On the second part of the question
(Desparate): failing to deal with both the ‘personal liability’ to George, and the liability
to contribute to the assets of the company. They are separate parts of the question,
raising different points of law.
A good answer to this question would…
a) in respect of Hidem, note the general principle of separate legal personality, give some
authority in support of that (e.g. Salomon) and then proceed quickly to focus on the
grounds on which the veil might be ‘lifted’ and Hidem’s ownership treated as that of
Sarah. It would explore the grounds on which veil lifting is possible – drawing on the most
important cases such as Adams v Cape or, more recently, Prest. It would focus on the
‘sham/façade’ principle, which has emerged as the ‘one true ground’ for veil lifting. A
really good answer would be very clear in identifying now, after Adams and Prest, what
the courts seem to be looking for when deciding whether a company is a mere sham, in
terms of ‘evasion of a pre-existing obligation’. A good answer would explain what this
means and then apply it to the facts of the question. Does Sarah use Hidem to evade a
pre-existing obligation to John? When she transfers ownership of the property to H,
does Sarah, at that moment, have a pre-existing obligation to John she is seeking to
evade. There is perhaps no right answer to this. She is married to him, she anticipates
divorcing him, she must know that if she follows through on those things, she will have to
pay him financial relief. But on the other hand, at the moment she transfers the office
block, such proceedings for divorce and financial relief are merely ‘in the future’. So it
might be argued both ways.
A very good answer would note also some of the other conditions for a company to be
regarded as a façade. It must also be under the control of Sarah – is Hidem? And lifting
the veil must be a ‘remedy of last resort’, in the sense that there must be no other legal
means of securing John the relief he seeks. It is difficult to see what other means John
has of overcoming Sarah’s hiding of the property inside of the company.
Finally, a good answer would note that, for a company to be a façade, it is enough that it
is now being used to evade an existing obligation by someone in control; it does not need
to have been created for that purpose. That Hidem may be have been formed initially for
a lawful purpose does not preclude its now being considered a façade.
b) This question raises two distinct grounds on which a director might be held personally
liable. The first is through an action in tort – here, most likely, the tort of negligent
misstatement. A good answer would explain how such an action might be relevant but
note crucially, following Natural Life Health Products, that for Ollie to be liable, he must
have assumed ‘personal responsibility’ for the accuracy of the statement he made. This is
the crucial company law point that we want to see students grasp. Applying that to the
facts, the issue is whether the courts would treat Ollie’s statement ‘I personally promise
…’ as an assumption of personal responsibility. Again, it can probably be argued both
ways. A good answer might also note, for the sake of completeness, than an action for
fraudulent misrepresentation (deceit) might be an alternative possibility for suing Ollie.
Finally, a good answer would look at the second basis for holding Ollie personally liable,
namely a liability to contribute to the assets of the company. The relevant actions here
are those under ss.213 and 214 Insolvency Act 1986. A good answer would note relevant
case law on these provisions, such as Re Produce Marketing on s.214.

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Poor answers to this question…
failed to consider all aspects of the two halves of the question. Poorer answers on part (a)
(veil lifting) tended to churn out a general description of the law on veil lifting, without
applying it to, and focusing upon, the specific facts of the questions. Some weak answers
did not show any awareness of the more recent Supreme Court decisions, such as Prest.
Although Prest arguably just confirms the thrust of the decision in Adams v Cape, with its
emphasis on using a company to evade a pre-existing obligation, that confirmation by a
Supreme Court decision is significant and answers should mention it.
Poorer answers on part (b) (Desparate Ltd) often only chose to address one or other of
the aspects of personal liability the question raised (even though these were clearly
separated out in the question). So, many answers addressed either personal liability to
George, or liability to contribute to the company’s assets (under IA 1986) but not both.
Question 7
In January 2016, the directors of Superbank Plc decided that Superbank should
acquire Readyloans Ltd. Superbank’s directors called a meeting of Superbank’s
shareholders to approve the proposed acquisition.
At the meeting, a number of shareholders, including Arthur, strongly opposed
the acquisition, claiming the price being paid for Readyloans was too high. The
directors reassured the shareholders that they had investigated Readyloans
very carefully, and that it was worth far more than the price Superbank was
paying to acquire it. A majority of shareholders then voted to approve the
purchase, although a substantial number of shareholders, including Arthur,
voted against. The directors, who together own 10% of Superbank’s shares,
voted to approve the purchase.
By May 2016 it was clear that Readyloans was worth much less than the price
Superbank paid to acquire it. Superbank’s shares have fallen massively in value.
The directors of Superbank accept they were negligent in failing to appreciate
the true value of Readyloans.
Advise Arthur whether:
a) he could bring a personal action against the directors for the fall in the
value of his shares; and
b) if he began a derivative claim against the directors, he would be likely
to be given permission to continue that claim.
General remarks
A two-part question that addressed two different legal issues: 1) whether a shareholder
can bring a personal action against a director for a drop in the value of his shares; and 2)
whether a shareholder can get permission to continue a derivative claim. Generally,
students tended to answer part (b) better than part (a). Many assumed that part (a) was
about a derivative claim too; but a derivative claim is not a personal action against a
director. And many wrongly identified what personal action could be brought (see below).
Law cases, reports and other references the examiners would expect you to use
For part (a) (the ‘personal action’) – s.170(1) CA 2006; Coleman v Myers; Allen v
Hyatt; Platt v Platt; Peskin v Anderson; Sharp v Blank; rules on ‘reflective loss’ e.g.
Prudential Assurance; Johnson v Gore Wood.
For part (b) (permission to continue the derivative claim) – Part 11 Companies Act
2006; the need to gain the court’s permission to continue the claim under s.261; the
criteria for granting permission under s.263(2) and (3); the case law interpreting those
statutory criteria, e.g. Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch); Franbar
Holdings v Patel [2008] BCC 885; Kleanthous v Paphitis [2011] EWHC 2287; Mission

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 Examiners’ reports 2016

Capital Plc v Sinclair [2008] BCC 866; Wishart v Castlecroft Securities Ltd [2010] BCC
161.
Common errors
On part (a), a failure to understand what is meant by a ‘personal action against directors’.
This is not a derivative claim (which is brought for the benefit of the company itself). Nor
is it, strictly speaking, a claim under say s.994 CA 2006, or a claim under s.33 CA 2006.
Although both those are indeed ‘personal actions’, they are not brought against a
director(s). Section 994 actions are brought in respect of the company (not against
anyone) and s.33 actions are brought against the company itself, or sometimes against
shareholders. In fact, credit was given to students who mentioned such claims but less
than for those who considered the true personal action against a director (see below).
A good answer to this question would…
deal with each part of the question in turn. On part (a), a good answer might begin by
noting that shareholders cannot normally sue directors in a personal action. This is for
two reasons. First, although directors do owe duties, they owe them to the company, not
to shareholders personally (see now s.170(1)). Secondly, if directors breach their duties,
they harm the company and typically any loss suffered by shareholders is only a
consequence, or a ‘reflection’, of the loss suffered by the company. And shareholders
cannot sue for such reflective loss – Prudential; Johnson v Gore Wood.
So, if Arthur is to sue the directors, personally, here, he must overcome both these
problems. First, he must establish that some duty owed to him personally, as a
shareholder, has been breached. A good answer would note that, although directors do
owe their duties under CA 2006 to the company alone, the law has recognised that, in
some situations and in some types of company, directors may also owe separate duties
directly to shareholders. A good answer would note the different bases on which such
‘parallel duties’ to shareholders might arise and the case law developing these, such as
Allen v Hyatt, Platt v Platt, Peskin, and the recent case of Sharp v Blank. Secondly, Arthur
must also show that the loss he has suffered is not merely reflective loss. It seems likely
that it is. Arthur’s shares are worth less because the company itself has been harmed by
this poor transaction.
As to part (b), a good answer would explain (briefly) what a derivative claim is and how
permission to continue such a claim must be sought (s.261). It would then focus on the
criteria that the court must apply, under s.263, in deciding whether to grant such
permission. It might note that permission must be refused if the transaction has been
authorised in advance by shareholders (s.263(3). This seems to be the case here. So it
seems quite likely the court will have to refuse Arthur permission to continue. A good
answer might note that the validity of the authorisation does not depend on whether the
directors voted in favour of it (contrast ratifications). However, since the authorisation was
procured only by the director’s incompetent advice, that might, perhaps, lead a court to
disregard it. Given that, a good answer might note briefly some of the other criteria that
would be relevant in deciding whether to grant permission (assuming that the
authorisation was held not to be effective) and would consider some of the guiding case
law, mentioned above.
Poor answers to this question…
tended to confuse part (a) especially. There was a lack of clear understanding about the
nature of a personal action that is specifically against directors (although, as noted,
some credit was nevertheless given to students who did discuss ‘personal actions’ under
s.994 or s.33). Students did not always show understanding or awareness of the
‘reflective loss’ principle. And they did not show detailed or accurate knowledge of the
criteria the court must apply in deciding whether to give permission to continue a
derivative claim – and especially the fact that authorisation, if valid, is a mandatory bar
that requires the court to refuse permission.

15
Student extract
The statute provides for the minority shareholder to bring a claim; this is a
personal claim for unfair prejudice. Thus, Arthur who is a minority shareholder
may bring a claim for his personal rights, as s.994 provides a remedy with a
great deal of discretion.
[The essay then provided a very thorough analysis of s.994, identifying what
counts as unfairly prejudicial conduct, citing a lot of relevant case law and
applying it all to the facts of the question. It then turned to part (b) and the
derivative claim.]
According to s.260(3), Arthur may bring a claim against the directors only if
there is an action arising from actual or proposed act or omission. Thus, S
deciding to acquire R must be a breach of duty etc. It brings a dramatic financial
loss. …
According to s.261, Arthur must apply for the court’s permission and must have
a prima facie strong claim for this. …The real question come to Arthur under
s.263 where there are chances for his application to be rejected. Under
s.263(2)(a), if directors were promoting the company’s success (s.172) they will
not be liable. But it is highly unlikely the directors acted in promoting success of
company in buying an undervalued company. …Further in s.263(2)(c) this was
authorised before it occurred, as the shareholders agreed to pursue this
particular purchase. [The answer then continued to look at some of the other
criteria the court would apply in deciding whether to give permission.]
Comments on extract
Overall, this was a rather mixed essay. It could be criticised in many ways – see below.
And yet there were some clear strengths to it. Overall, it received a mid-2:1. We often
tend to mark ‘positively, giving credit for what is good and relevant in an essay,
notwithstanding that the work has faults.
Interpretation of the question/relevance of the answer to the question: the
student misunderstood/made an error in identifying what the first part of the question
was about. The student misunderstood the nature of the ‘personal action’ that was
required – one ‘against the directors’. However, setting aside that one error, the
answer to part (a) was otherwise very good. This is different from a situation where a
student chooses to write an entirely irrelevant answer on a completely different topic to
the one examined. So despite the error of understanding, the student did get a lot of
credit for the discussion of s.994.
Substantive knowledge: good on s.994. Reasonably solid on the derivative claim,
although some misunderstanding around the first ‘mandatory bar’ which might prevent
permission to continue the claim being given. The student suggests the test here is
whether the directors acted in accordance with s.172 – and the student thinks here the
directors did not. But this is a confusion. The mandatory bar is not asking about the
behaviour of the directors who are accused of having breached their duties. The
mandatory bar asks whether a hypothetical director, who was acting to promote the
success of the company, would think it not worth pursuing a claim against the
directors.
Use of authorities: generally very good.
Articulation of argument: generally clear.
Question 8
Martin, a wealthy environmentalist, is currently the sole director and
shareholder of Greenspaces Ltd, which he formed in 2010. He gave the

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 Examiners’ reports 2016

company £10 million, which it has used to purchase a large nature reserve. The
company has unamended model articles of association.
Martin is now 70 years old, and wishes to transfer the running of Greenspaces
to his children, Tanya and Sabrina. He will appoint each of them to be a director
of the company, and give each of them 24% of his shares. He fears, however,
that Tanya and Sabrina may not share his passion for the natural environment,
and may sell off the company’s existing nature reserve to a house-building
company, which has expressed interest in buying it.
Advise Martin whether:
a) as a 52% shareholder in Greenspace, he would still be able to prevent
Tanya and Sabrina from selling the company’s existing nature
reserve;
b) he would be able to stop such a sale if the company’s articles were
altered to include the following clause: ‘the company’s objects are
limited to the acquisition and management of areas of natural beauty’;
and
c) he would be able to stop such a sale if the company’s articles were
altered to include the following clause: ‘the directors shall not enter
into any contract over £5,000 without the consent of the shareholders’.
General remarks
Most of this question (i.e. parts (b) and (c)) were on a topic that has come up many times
before, as a problem question, namely the capacity of the company (‘ultra vires’) and the
authority of directors. In the past, students have often performed quite well in dealing with
problem questions on this topic.
However, this year, the ‘angle’ of the question was changed a little, and this seemed to
catch many students out, even though it in fact required the same knowledge as in
previous years. In past years, the question has always been ‘backward looking’, in the
sense of presenting a situation where a company has already exceeded its capacity, or
the directors have already acted beyond their authority. This year, the question was
‘forward looking’: it asked what the situation would be if, in future, the company tried to
exceed its capacity, or if in the future the directors were to act beyond their authority.
Changing the ‘angle’ of the question slightly in this way did not change what legal
knowledge was required to answer it. But it did help to differentiate between those good
students who clearly understood the legal rules and principles here, and could apply them
to a slightly different factual scenario and those who might have learnt the rules off by
heart but lacked the understanding of them to apply them in a slightly novel way.
Law cases, reports and other references the examiners would expect you to use
For part (a): rules on the ‘division of power’ inside a company. The model articles, Regs 3
and 4. For parts (b) and (c): ss.31, 39 and 40 Companies Act 2006; the rules on directors’
authority; s.33 Companies Act 2006; s.171 Companies Act 2006.
Common errors
Failing to deal with all the different aspects of the question and especially all the different
ways in which a restriction on the capacity of the company, or a restriction on the
authority of directors, might make a difference to the future behaviour of the directors –
see further the next section below.
A good answer to this question would…
take each of the three sections of the question in turn.
Starting with (a), this part of the question was probably the worst-answered section. It
raises a fundamentally important aspect of company law, namely the balance of decision-

17
making power between directors and shareholders. If the board and the shareholders
disagree about what the company should do in some situation (here, whether the
company should sell a piece of land), who makes the decision – board or shareholders?
A good answer would explain how company law leaves the balance of power between
board and shareholders to be settled by the company’s articles. The model articles
provide (Reg.3) that the board has the power to take such decisions. By Reg.4,
shareholders can interfere (by issuing ‘instructions to the board’) but only by special
resolution (‘SR’). Applied to the facts: Martin’s children would be in a majority on the
board and could ensure the board would vote to sell the land. Martin could only prevent
that, as a shareholder, if he could pass a SR but with only 52 per cent of the shares, he
would be unable to do so. Therefore, his majority of shares would not allow him to stop a
sale of the land if he was outvoted at the board.
For (b) a good answer would note how such an article, defining the company’s objects,
would restrict the company’s capacity: s.31 CA 2006. An attempt to sell the land might
then be ultra vires (if such a sale constituted a breach of the company’s restricted
capacity). Historically, ultra vires acts were void, which would have allowed Martin to
prevent such a sale. However, the position is now different. Even if the sale of the land
would be considered ultra vires, once a binding contract to sell the land had been entered
into, it would be binding on the company: s.39 CA 2006. True, if Martin discovered an
intended sale before any binding contract to sell the land were entered into, Martin could
take proceedings under s.33 to enforce the articles and obtain an injunction to prevent
the company entering into an ultra vires contract in the first place. However, this requires
Martin to be able to discover an intended sale and get to court to obtain an injunction,
before a contract is entered into by the board. He cannot be sure he would always be so
vigilant. A good answer might also note that if the board did sell the land in breach of a
restriction on the company’s capacity, this would put the directors in breach of their
duties, specifically under s.171. However, Martin might also struggle to enforce such a
breach of duty and it is unclear what remedy the court would give.
For (c), mostly the same points apply as for (b). If there were such a ‘constitutional
restriction’ (i.e. in the articles) on the authority of the directors then any attempt by the
directors to sell the land in breach of that provision would mean they were acting beyond
their authority. Historically, a contract entered into on behalf of the company by someone
lacking authority was void and unenforceable. This would, historically, have protected
Martin. But now, the position is different. Under s.40, the third party can assume the
directors have authority to make the transaction notwithstanding the constitutional limit on
their authority. A good answer would note this and how it would mean that,
notwithstanding such a limit on the board’s authority, a contract to sell the land would be
enforceable by the third party (the purchaser). The third party would have to be acting in
good faith but this is presumed to be so.
Again, if Martin could discover and take proceedings to prevent, a sale before a contract
was entered into, he could prevent the directors exceeding their authority (s.33). But that
requires constant vigilance and speedy reaction that may be impractical for Martin. Once
again, if the directors acted in breach of a constitutional limit on their authority, they would
breach their duties under s.171 and also, enforcement is unlikely and the remedy for such
a breach of s.171 unclear.
Poor answers to this question…
failed to see at all the issue around part (a) and the normal division of power between the
board and the shareholders. Similarly, they too often failed to see how the rules set out
above – in ss.31, 33, 39 and 40 applied to the different aspects of the question.

18