Examiners’ report 2013

Examiners’ report 2013

LA3021 Company law – Zone A

Introduction
The examination paper followed the same format as in previous years. It produced
a wide spread of marks. Candidates should refer to the assessment criteria to
familiarise themselves with the criteria that are applied to assessed work. The best
scripts tended to be those that ensured that each answer focused on the actual
question being asked, and the specific issues it raised. Good answers also
demonstrated that the candidates had read around the subject, and was able to
apply this wider reading to the issues raised by the questions.
Note that errors in Student extracts, below, were present in the original scripts.

Specific comments on questions

PART A
Question 1
‘The purpose of company law is to facilitate business. By this standard, UK
company law is a failure, and the Companies Act 2006 has made matters
worse.’
Discuss.
General remarks
This question makes a number of claims, which candidates are asked to discuss.
The first is that the purpose of company law is indeed to facilitate business. The
second is that, if that is the purpose of company law, then UK company law fails in
this objective. The third is that the Companies Act 2006 has taken UK company law
even further away from facilitating business. Clearly, this question requires
candidates to cover a lot of ground, and answers needed to be concise and to the
point. Because no candidate can be expected to survey the whole of the Act in a
single, inevitably brief, examination answer, it is permissible to be selective and
focus on particular areas of the statute, drawing examples of ways in which the Act
may help, or hinder, those using a company through which to run their business.
Law cases, reports and other references the Examiners would expect you to
use
Relevant provisions from the Companies Act 2006 and case law interpreting those
provisions; secondary literature (including reports by the Department of Business,
Innovation and Skills) analysing whether company law in general, and the 2006 Act
in particular, are ‘business friendly’.

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Common errors
Simply listing lots of provisions from company law, or copied from the 2006 Act, with
no attempt to analyse whether such legal provisions actually help, or hinder, those
running a business through a company.
A good answer to this question would…
clearly identify the three ‘claims’ which the question puts forward (noted under
General remarks above), and then analyse each of these three claims in turn. A
good answer could, for example, consider whether the view that the role of
company law is to facilitate business might itself be controversial, especially if this is
understood as meaning that company law should only facilitate business (as
opposed to having a regulatory role too).
A good answer would then consider whether UK company law does indeed score
poorly in terms of its facilitation of business, drawing examples from a number of
different areas of the law so as to give a representative summary of the law’s
content. Finally, a good answer would also address whether the 2006 Act has
indeed made matters better or worse in this regard, identifying the most significant
changes introduced by the Act.
Poor answers to this question…
tended simply to summarise a few selected areas of the 2006 Act, without any real
attempt to evaluate whether those areas actually helped or harmed those running a
business through a company. Weaker answers also showed little ability to place the
Act in a more historical context, showing how the Act had changed UK company
law, for better or worse.
Student extract
A company, being a separate legal personality and having limited liability as
stated by Salomon v Salomon encourages investment and risk taking, which
proprietorship and partnership does not offer. This can be clearly evident
from the case of Macaura. In the case of Macaura, limited liability concept
has been called a ‘double edged sword’ because the assets and liabilities are
both of the company and not the shareholders. . .
The Companies Act 2006 has been amended from what was Companies Act
1985 in order to introduce changes and codify the law to become certain and
facilitate business. However, it also has its shortcomings which will also be
discussed in the following answer …
The answer then went on to consider how ‘aggregate theory’ suggests that
shareholders should be given ‘primacy’ within the company, through profit
maximisation, in order to encourage investment, and contrasted with arguments
favouring more attention being given to stakeholder interests. The answer
considered a variety of different areas of company law, but did not always then
analyse these areas of law to show whether they could truly be said to facilitate, or
undermine, business.
Comment on extract
Interpretation of the question: good.
Relevance of the answer to the question: rather weak – some relevant points were
made, but too often the candidate merely listed areas of company law without
explaining how far they did support business.
Substantive knowledge: quite good – showed a reasonable grasp of many areas of
company law.
Use of authorities: quite limited.

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Articulation of argument: usually reasonably clear.

Accuracy of information: good.
Clarity of expression: good.
Legibility: good.
Question 2
‘Although section 172 of the Companies Act 2006 was intended to give more
weight to the interests of a company’s ‘stakeholders’, other factors – such as
the way directors’ pay is determined, shareholder activism, and the threat of
takeovers – ensure that shareholders’ interests remain paramount.’
Discuss.
General remarks
This question requires an analysis of s.172 of the Companies Act 2006. That
analysis needs to address a number of specific issues raised by the question,
however. These included, first, whether s.172 was indeed intended to give more
weight to a company’s stakeholders and, second, whether other factors – directors’
pay, and shareholder activism – will ensure that ‘shareholder primacy’ prevails.
Law cases, reports and other references the Examiners would expect you to
use
Section 172 Companies Act 2006; case law interpreting that provision, or the
equivalent common law duty of directors (including the significance of s.170
Companies Act 2006); legal provisions relevant to the enforcement of s.172; the
Modern Company Law Review and its discussion of ‘enlightened shareholder
value’; rules governing the way directors’ pay is determined (such as the UK
Corporate Governance Code).
Common errors
Producing an essay (and sometimes possibly simply reproducing a pre-planned
essay) describing the debate for/against stakeholding, without addressing the
specific question being asked, and the specific arguments being put forward for
discussion by that question. Failing to analyse in any detail the wording of s.172
itself, and the limitations of this provision in increasing the weight that directors must
give to stakeholder interests.
Some answers simply copied out, word for word, the full text of s.172, but offered
no explanation or analysis of any significant aspects of this wording. Examiners will
give no credit simply for copying the wording of a statute which the question itself
refers to.
A good answer to this question would…
explain what are meant by ‘stakeholders’, and how s.172 might be thought to
require their interests to be ‘well served’ by directors of companies. It would then
ask whether this was indeed what s.172 was intended to achieve. This would
require some discussion of whether s.172 really does require this increased
attention to stakeholder interests, requiring in turn a careful analysis of the actual
text of the section, together with a discussion of the case law interpreting either
s.172 itself, or the equivalent common law duty, as well as the mechanisms for its
enforcement.
Reference would also be made to academic literature on s.172, and to the historical
context to s.172’s introduction, through the Modern Company Law Review,
including the latter’s promotion of ‘enlightened shareholder value’.

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A good answer would also address explicitly those other governance regimes –
directors’ pay, and shareholder activism – referred to in the question. It would
analyse whether these mechanisms really are effective to force directors to
overcome whatever pressure s.172 itself imposes on them to give greater weight to
stakeholder interests. A good answer would attempt an overall conclusion.
Poor answers to this question…
tended to focus only on discussing the arguments for/against stakeholding, with no
textual analysis of s.172 itself. Such answers might have provided a good
understanding of what is meant by stakeholding, and whether stakeholding should
be regarded as a good or bad thing, but said nothing about whether s.172 itself
takes us any further down the road towards achieving stakeholding. Some poor
answers did describe s.172, but only by copying out in full the text of the statute,
with no attempt to analyse the meaning and significance of the statutory wording.
Finally, poor answers also omitted any discussion of directors’ pay and shareholder
activism, even though these were clearly central to the question.
Student extract
From the Salmon v Salmon Co Ltd, a company has been recognized to have
its own personality which means that it has its own legal entity, asset and is
responsible for its own debts. A company can be sued or sue in its own name
… The directors occupy a fiduciary duty to the company and amongst the
director’s duty is section 172 of the CA 2006 which requires a director to
promote the success of the company. The director’s duty is incorporated in
Part 10 of the Companies Act 2006 which came into being by the
recommendation of the CLRSG which suggested that the restatement of the
director’s duty into a statutory form will provide for more accessibility.
S172 can be divided into two elements. First, directors have to promote the
success of the company in good faith and secondly [the second point is then
left blank. Instead, the answer goes on to say:] The directors have to take
into consideration of the long term interest of the company and not the short
term interest. In fact, section 172 [but again the answer stops, without
completing whatever point was going to be made].
The answer goes on to consider the ‘business review’, and the obligation to issue
shares for a proper purpose, without mentioning how this obligation arises under a
different duty from that referred to in the question.
Comment on extract

Interpretation of the question: acceptable.

Relevance of the answer to the question: weak, too many irrelevant points included.
Substantive knowledge: weak.
Use of authorities: weak, very little case law referred to.
Articulation of argument: weak – at too many points the answer simply stopped
without completing the point the writer had begun on.
Accuracy of information: acceptable.
Clarity of expression: acceptable.
Legibility: acceptable.

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Question 3
Has the UK Corporate Governance Code succeeded in eliminating agency
problems arising from the separation of ownership and control of large listed
companies?
General remarks
This question was, broadly, about the success or otherwise of the UK Corporate
Governance Code. However, it required candidates to discuss this issue of success
by reference to a particular issue, namely the reduction of ‘agency costs’ arising
from the ‘separation of ownership and control’. It was not an opportunity simply to
write generally, and purposelessly, about the history or content of the Code.
Law cases, reports and other references the Examiners would expect you to
use
The UK Corporate Governance Code itself; academic literature which explains what
are meant by ‘agency costs’ and the ‘separation of ownership and control’, and
which has analysed the success of the Code in addressing the ‘agency costs’
problems.
Common errors
Failing to focus on the question actually asked, and instead writing out a (perhaps
pre-prepared) essay on the history or content of the Code; failing to explain what
agency costs/the separation of ownership and control mean, or else badly
misunderstanding the meaning of these concepts.
A good answer to this question would…
begin by explaining what are meant by agency costs arising from the separation of
ownership and control. It would then go on to describe what the Code is, and the
companies to which it applies. It would set out the main rules and principles
contained in the Code, and then attempt an analysis of whether these rules and
principles have, in practice, managed to limit such agency costs, drawing on the
extensive literature which has attempted to measure the Code’s success in these
terms. A good answer would attempt an overall conclusion.
Poor answers to this question…
simply set out the history of the Code, or its content, whether or not this was
relevant to the specific question being asked. Poor answers also failed to explain, or
often even to refer to, the meaning of agency costs or the separation of ownership
and control, and therefore didn’t address the actual issue which the question asked.
Question 4
Are the articles of association enforceable?
General remarks
This question focuses on the enforceability of the articles of association. It requires,
therefore, a discussion of the effect of s.33 Companies Act 2006, which creates a
so-called statutory contract based on the articles. This in turn raises a number of
separate issues, such as the identity of the parties to this contract, whether one
member can sue another ‘directly’ (without joining in the company), whether all the
terms of the articles can be enforced, and whether enforcement is possible in
respect of breaches of the articles which constitute mere ‘internal irregularities’.
Law cases, reports and other references the Examiners would expect you to
use
Section 33 Companies Act 2006, the case law interpreting that provision (and its
statutory predecessors), and the academic debate which has developed around the
proper interpretation of that case law.

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Common errors
A failure to deal with the range of legal issues, noted under General remarks
above, which are relevant to the question whether the articles are enforceable. Too
many answers dealt at great length with a single issue (such as, for example, the
uncertainty whether (or when) a member might sue another member directly) but
failed to mention the other relevant issues, such as the controversy over whether
articles conferring a right on a member in a capacity other than a member can be
enforced. Such ‘selective’ answers were inevitably regarded as incomplete.
A good answer to this question would…
identify the relevance of s.33, and the different problems that the case law has
shown beset the enforcement of this ‘statutory contract’. Besides explaining clearly
the nature of each such problem, a good answer would demonstrate a sure
command of the case law that has explored/created these problems, as well as the
contributions of different scholars in trying to understand and perhaps resolve this
conflicting body of cases. A good answer would attempt an overall conclusion.
Poor answers to this question…
failed to address all the relevant problems in enforcing the articles. Poor answers
mentioned very few, if any, of the relevant cases interpreting s.33 (or its statutory
predecessors) or else made serious errors in describing or explaining those cases.
Weaker answers also showed little evidence of any wider reading, typically limiting
themselves only to repeating the basic explanation of this area in the Subject guide.
PART B
Question 5
Five years ago Jem entered into a contract to supply complex manufacturing
equipment to Rig Ltd, an oil extraction company. Because of the high risk
nature of Rig’s business Jem specified in the contract that a special report on
the likely risks to Rig’s business must be produced every six months to allow
Jem to assess the risk of continuing to supply equipment. The reports were
produced by Rig’s managing director, Simon, and revealed no significant
risks to Rig’s business. No other suppliers of Rig Ltd required such reports
and Simon had explained to the other board members that the report was
necessary because of the ‘special relationship’ the company had with Jem.
Shortly after the last risk report produced by Simon, Rig collapsed insolvent
leaving Jem with a substantial loss. Jem wishes to pursue an action against
the company and/or Simon.
Discuss the issues that might arise for Jem if he does pursue such an action.
General remarks
This is a question about the separate personality of a company, and the relationship
between the liability of a company for its own acts and the liability of its director for
representations made to a third party in connection with the management of the
company.
Law cases, reports and other references the Examiners would expect you to
use
The doctrine of corporate personality; Salomon v Salomon; the case law governing
the piercing of the corporate veil, and the tortious liability of a director for
representations made during the management of the company; Williams v Natural
Life Health Foods Ltd; actions for wrongful trading or fraudulent trading against
Simon.

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Common errors
The question seeks advice about suing either the company (Rig) or Simon
personally. The more problematic action would be against Simon, and this therefore
required the greatest discussion. The most common weaknesses were to address
this possible action simply in terms of the general doctrine of ‘piercing the veil’,
rather than focusing on the more specifically relevant doctrines of actions in tort for
negligent misstatement or deceit, or for actions for wrongful or fraudulent trading.
A good answer to this question would…
begin by explaining the differences between an action against the company (Rig)
and against Simon personally. Explain the doctrine of a company’s legal
personality, and the implications of this for the facts of the question: how an action
against Rig would be relatively unproblematic from a legal point of view, but would
in practice seem pointless, given its insolvency.
A good answer would therefore give much greater weight to discussing the more
challenging action against Simon. It would explain the difficulty for Jem in suing a
director personality, given the doctrines of separate legal personality and limited
liability. It would then note how liability might nevertheless exceptionally be imposed
on a third party behind the company. It might note that this can be done under the
doctrine of ‘piercing the corporate veil’, but note too how this doctrine has been
interpreted restrictively (for example in Adams v Cape Industries Plc), and how the
limited grounds for veil piercing seem to offer no basis for suing Simon. It would
then note how a more hopeful basis for suing Simon might arise not through ‘veil
piercing’, but rather through an action in tort, whether for deceit or for negligent
misstatement.
Finally, it might be asked whether Simon’s conduct could constitute either
fraudulent or wrongful trading, and if so whether these regimes would provide any
cause of action for Jem itself.
Poor answers to this question…
Failed to identify how company law fundamentally structures the liability of a
company, and of its agents, for misconduct during the management of a company.
Weak answers also tended simply to churn-out all the case law on lifting the veil,
without really asking how far that would help Jem given the specific nature of its
complaint against Simon, or to focus more closely on Jem’s most promising
(tortious) basis for suing Simon.
Question 6
Stephanie is the chief executive of Landholdings Plc. The company has two
other directors: Tom, a qualified land surveyor, and Gordon, who is
Stephanie’s personal fitness trainer.
The company owned a piece of land in London. Stephanie was approached by
Victoria. Victoria told Stephanie she was interested in buying the land, in
order to build a house on it. Victoria also told Stephanie that she would be
delighted if Fastbuild Ltd, a company in which Stephanie owns 25% of the
shares, submitted a bid to carry out the work to build the house.
Stephanie called a board meeting of Landholdings, and persuaded the board
to sell the land to Victoria for £99,000. She mentioned to the board that
Victoria was buying the land to build a house, and that Fastbuild Ltd was
going to bid to carry out the building work. After two minutes’ discussion, the
other directors approved the sale of the land, and Fastbuild subsequently
won the contract to build the house.

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John, a shareholder in Landholdings, has now been told that the land was
probably worth twice what Victoria paid for it, and that Fastbuild made a profit
of £150,000 on the contract with Victoria to build the house.
Advise John whether any of the directors of Landholdings breached their
duties to the company.
General remarks
This question is about the duties owed by directors to the company. Stephanie is
potentially liable for a breach of the duty to avoid conflicts of interest, in s.175
Companies Act 2006, and the duty to declare an interest in a proposed transaction,
under s.177. Tom and Gordon are both potentially liable for breaching their duty of
care, skill and diligence, found in s.174 Companies Act 2006. The ‘subjective’
nature of the duty in s.172 means that it is probably less likely that the directors
would be held to be in breach of that duty.
Note that the question asks for advice to be given only as to whether there are any
breaches of duty. No advice is requested regarding what remedies the court would
award in respect of any such breaches as are established. Nor is advice required
regarding how any such breach would be enforced.
Law cases, reports and other references the Examiners would expect you to
use
Companies Act 2006, ss.170 (in order to understand the codification of directors’
duties), 174, 175, 177 and 190. Case law interpreting these statutory provisions, or
the equivalent common law duties.
Common errors
Mistakes in understanding, or applying, the rules on conflicts of interest which are
found in ss.175 and 177 of Companies Act 2006. The sale of the land to Victoria is
a ‘transaction with the company’. Many candidates simply applied s.175 to this
contract. However, by virtue of s.175(3), the duty in s.175 does not apply to this
transaction. Instead, Stephanie’s duty is found in s.177, and is simply to declare to
the board that she is interested in the proposed transaction (to sell the land to
Victoria).
Some answers wasted time discussing what remedies might be available, or
whether John, the shareholder, could bring a derivative claim. The question did not
ask for a discussion of those matters.
A good answer to this question would…
focus only on the advice which is actually requested. In respect of Stephanie it
would distinguish between her interest in the contract entered into by the company
to sell the land to Victoria, and her profiting by her company securing the building
contract from Victoria. In respect of the former point, a good answer would note that
Stephanie’s interest in the contract of sale is covered by s.177, rather than s.175
(but would also note that the sale of the land might constitute a substantial property
transaction under s.190).
A good answer would note that Stephanie’s securing of the contract to build the
house may constitute a breach of s.175, but would show a good knowledge of the
case law, such as Regal (Hastings) Ltd v Gulliver, Island Export Finance Ltd v
Umunna and O’Donnell v Shanahan. In respect of Tom and Gordon, a good answer
would apply s.174 to each of them, but show how the objective and subjective
elements of the duty in s.174 might apply differently to these two directors, given
that one is professionally qualified whilst the other is not.

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Poor answers to this question…

failed to appreciate the difference between ss.175 and 177 noted above, and the
significance of s.175(3). Weaker answers also failed to discuss in detail the precise
scope of the duty in s.174, and the significance of the objective and subjective
elements of that duty. Poor answers also tended to attempt to apply every duty
found in ss.170–178 Companies Act 2006, rather than seeking to focus on, and
discuss in much greater depth, those duties which are most obviously relevant and
most likely to be held to have been breached by the directors.
Student extract
Directors are the principle management organ of the company and owe
fiduciary, common law and statutory duties, now codified in CA 2006, to act
bona fide for the company (Aberdeen). The duties, however, are to be
interpreted and applied in light of the pre Act case law (s.170(4)), which is
challenging to the courts considering the inconsistency in the pre Act case
laws. It is also noteworthy that more than one duty may apply to one person.
Turning to the facts, Stephanie seems to be in breach of her duties under
s175, 176 and 177 not to place herself in a conflict of interests situation
(Millett LJ in Bristol) to prevent the temptation (Aberdeen) and not to be
swayed by such interests from her duty.
Stephanie’s situation seems to fall under a corporate opportunity doctrine
defined as misapplying corporate opportunities belonging to the company . . .
see a classical line of cases such as a Cook, Regal Hastings and IDC v
Cooley. Since this was a maturing business opportunity, it would be
considered to be an asset of the company (CMS Dolphin). Although in
Bhullar it was held that same line of business required but following
O’Donnell … it need not be same line of business as Landholdings.
The answer goes on to consider the liability of Tom and Gordon under s.174, noting
Tom being a a land surveyor will have to satisfy both objective and subjective
tests (laid down in section 214 IA 1986 and now adopted by s174 for having
special skills.
Comment on extract
Interpretation of the question: good.
Relevance of the answer to the question: reasonable, but failed to fully explain the
difference between the duties under s.175 and s.177, and to explain how these
different duties apply to different aspects of Stephanie’s behaviour.
Substantive knowledge: generally good.
Use of authorities: very good.
Articulation of argument: generally reasonably clear.
Accuracy of information: good.
Clarity of expression: reasonably clear.
Legibility: poor.
Question 7
David, Eleanor, Fiona and Gertrude are the four equal shareholders, and only
directors, of Linnet Ltd. The company was formed in 2010. Prior to that time,
the four shareholders operated the business as a partnership. When the
business was operated as a partnership, it was understood that David would
not interfere in the day-to-day management of the business. As the

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partnership was very profitable, David was happy with this arrangement.
Linnet’s articles contain a provision stating that no shareholder shall be
entitled to bring proceedings under section 994 of the Companies Act 2006.
Unfortunately, since 2012 the company’s profits have declined sharply. David
has tried to insist on having more of a say in the running of the company. The
other shareholders have responded by removing him as a director of the
company. They have also made clear that any profits earned by the company
in the future will be paid as salary to the remaining directors. Moreover,
David’s daughter Helena, who was working for the company, has been
dismissed. David claims this was done to punish him.
Advise David whether he could successfully bring proceedings under section
994 of the Companies Act 2006 and, if so, what remedy the court would be
likely to give him.
General remarks
This question concerns disputes between majority and minority shareholders. It
focuses, however, on one particular statutory provision designed to protect a
minority shareholder, namely that found in s.994 Companies Act 2006. It requires,
therefore, a discussion of the conditions that a shareholder must satisfy in order to
bring a successful action under that provision, examining both the precise wording
found in s.994, and the interpretation of that wording in the substantial body of case
law that now exists. It also requires discussion of the remedies available, under
s.996, where a shareholder successfully invokes s.994.
Law cases, reports and other references the Examiners would expect you to
use
Sections 994 and 996 Companies Act 2006; the case law relevant to the
interpretation of the main elements of the statutory wording in s.994, such as
‘interests of the members’, ‘unfairly prejudicial’, conduct in the affairs of the
company, etc, including Ebrahimi v Westbourne Galleries, O’Neill v Phillips and
Fulham FC v Richards.
Common errors
Too many answers failed to limit themselves to the question actually asked. Too
often, candidates discussed all of the available minority protection regimes,
including the winding up of the company on just and equitable grounds, the bringing
of derivative claims, or the enforcement of the articles of association under s.33
Companies Act 2006. Because the question asks only for a discussion of the
regime found in s.994, there was no need to discuss other minority protection
regimes, and indeed credit could not be given for doing so.
The other most common error was a failure to demonstrate sufficient knowledge of
the relevant case law in order to be able to apply the statutory wording of s.994 to
the specific facts of the question. Finally, the provision in the articles which
ostensibly prevents a member from bringing proceedings under s.994 needs to be
addressed; such an important factual part of the question cannot simply be ignored
by an answer.
A good answer to this question would…
break down the statutory language of s.994 to show the different conditions that a
shareholder must satisfy in order to bring a successful action under that provision.
These conditions include conduct ‘of the company’s affairs’, ‘unfair prejudice’ and
the ‘interests of the members generally or some part of the members’.
It would note how the courts’ application of these different conditions varies
substantially between quasi-partnership and non-quasi-partnership companies, as
explained in Ebrahimi. The answer would consider whether this company would be

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considered to be a quasi-partnership, and how this might then affect the court’s
interpretation of the members’ interests. A good answer would also consider and
apply the important case of O’Neill v Phillips, and apply the reasoning in this case to
the agreements and understandings which we are told had already been reached
by the shareholders.
A good answer would deal expressly with the court’s likely choice of remedy should
David’s action be successful, noting Grace v Biagioli’s preference for a buy-out in
most cases. Finally, it would consider the likely effect of the article excluding
members’ right to bring s.994 proceedings. There is perhaps some uncertainty
here, but a good answer might draw on cases such as O’Neill or Fulham FC v
Richards to offer a prediction of how the courts might deal with this.
Poor answers to this question…
failed to focus on s.994, and instead wasted time looking, superficially, at many
other remedies, which were irrelevant so far as the question actually asked here
was concerned. Weak answers also showed little understanding or awareness of
the relevant case law, and therefore failed to appreciate the significance of the
parties having previously been in partnership together, the significance of their
having agreed that David would not be entitled to participate in management and so
on.
Student extract
This question raises the discussion of the majority rule and the minority
protection. Here, in advising David we must consider the section 994 of the
Companies Act 2006, and also the minority protection if any.
There must be proved the unfairly prejudicial conduct if David can claim
under section 994. Here, David has been excluded from management. This
has obviously violated section 994 and obviously is prejudicial conduct for
him (Ebrahimi). In Ebrahimi, Lord Wilberforce has stated three situations
where it is unfairly prejudicial conduct. First of all, if the company has been
formed by mutual trust and confidence of the members of the company.
Here, on the facts, the company is first of all a partnership business and only
later was a company formed so it will be said the company was built up with
mutual trust and confidence.
Secondly, the company’s members is entitled to participate in management
of the company. Here on the given facts the company’s members that is
David is also a director of the company. So from the facts David is also in
management of the company. And third the company has restricted the
shares for David.
The answer went to on discuss further David’s exclusion from management, before
turning to consider the remedies David would be likely to receive under s.996, with
a good discussion of the ‘buy-out remedy’.
Comment on extract
Interpretation of the question: good.
Relevance of the answer to the question: some of it was very relevant, with a good
discussion of remedies and of the Ebrahimi case. But some irrelevant issues were
considered, such as whether Helena might bring a derivative claim.
Substantive knowledge: reasonable – at times there were errors, such as failing to
make clear that the matter raised in Ebrahimi which was being discussed in the
answer was how we identify a quasi-partnership, not the situations in which conduct
will be considered to be ‘unfairly prejudicial’.
Use of authorities: weak, only a small number of cases were discussed.

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Articulation of argument: reasonable, although there was a tendency to over-

discuss the issue of exclusion from management, whilst under-discussing other
relevant issues.
Accuracy of Information: generally good.
Clarity of expression: reasonable.
Legibility: poor.
Question 8
Tess is the new managing director of Bakker Ltd, a bakery based in London.
The company incorporated many years ago with an objects clause that states
‘The business of the company will be to manufacture chocolates.’ The articles
of association also state that decisions on substantial property transactions
must be approved by a majority of the shareholders.
As part of Tess’s assessment of the company before she was appointed, Tess
noticed that the objects clause was incorrect and that the business had
changed substantially since incorporation. She is concerned about this
development but does not fully understand the consequences. Her first order
of business is to purchase a new building to expand the bakery funded by a
substantial loan from X bank. She is aware of the necessity for shareholder
approval but does not have time to get it so goes ahead anyway and
purchases the building. Afterwards Tess comes to you for advice as to the
objects clause and the property transaction.
Advise her.
General remarks
This question concerns, first, a company’s capacity (including the ultra vires
doctrine) and, second, the authority of a company’s directors.
Law cases, reports and other references the Examiners would expect you to
use
Companies Act 2006, ss.28, 31, 39–40 and 171; the case law governing the ultra
vires doctrine, and the authority of company agents.
Common errors
Some questions failed to demonstrate a sound understanding of the ultra vires
doctrine, or the impact on that doctrine of relevant provisions of the Companies Act
2006, especially ss.28, 31, 39 and 40. These are technically complex provisions,
and the interplay between each of them can also be difficult to grasp. It is, however,
essential to understand the differences and relationship between them, and to apply
them to the facts of the question in a logical way, if one is to produce a coherent
and comprehensible answer.
Another common error was to discuss s.190 Companies Act 2006. This defines a
‘substantial property transaction’ between the company and a director, and
requires such a transaction to be given shareholder approval. The fact that Bakker’s
constitution provides its own rules for a different sort of ‘substantial property
transaction’ is mere coincidence, and should not be confused with s.190.
A good answer to this question would…
Distinguish between the issues of capacity, and of authority, which the question
raises.
With regard to the issues of capacity, the question here is whether the running of
the bakery, the purchase of the new building and the taking of the loan may all be
considered to be beyond the company’s capacity? Given the company’s objects

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clause, it is likely they are. Because of s.28, this remains so notwithstanding s.31
Companies Act 2006.
A good answer would then consider the consequences for these various actions of
the company being beyond the company’s own capacity. The actions themselves
would be binding on the company itself, because of s.39 Companies Act 2006.
However, it is arguable that Tess herself (along with other directors) might be in
breach of the duty found in s.171 Companies Act 2006 through causing the
company to undertake ultra vires acts. A good answer would advise Tess of the
likelihood of any action being taken against her for breaching s.171, considering for
example the possibility of a derivative claim against her.
Next, with regard to the issue of authority, Tess’s purchase of the property (and
arranging the loan to finance it) may also amount to acts in excess of her authority.
A really good answer would note two reasons this might be so: first, because these
acts may be beyond the company’s own capacity (and no agent (such as Tess) can
have authority to do things which the company itself lacks capacity to do).
Second, the articles require what it calls ‘substantial property transactions’ to be
approved by shareholders. Tess needs to be advised on the different
consequences of her acting beyond her authority. The transaction itself will be
binding on the company. This is because of s.40, which ‘cures’ these ‘constitutional
limitations’ on the authority of the board to act (or to authorise Tess to do so).
However, Tess is, again, likely to be acting in breach of her duties as a director,
under s.171, by failing to observe these constitutional provisions.
Poor answers to this question…
were usually technically confused, either by failing to identify clearly the different
issues which the question raises, or in failing to distinguish clearly how the relevant
provisions of the Companies Act 2006 apply to these different issues.

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