COMPANY LAW

QUESTION 1 – SHAREHOLDERS

Whether the proposals set out in the email to Sylwia are legally
permissible.

Several proposals are set out in both the emails and the board meeting. First,
there will be financial assistance of £ 1 million, a loan taken from Edinburgh
bank and financed by the subsidiary company of OIL. Alternatively, the
company is also offering to offer the investor's lender a floating charge over its
stock to liquidate the investor's loan. Secondly, there is the proposal of issuing
5% cumulative participating preference shares in the company to the investor.
The company has also proposed the payment of shares taken during the
company's incorporation and restricts the amendment of the Articles of
Association.

Beginning with the amendment of the Article of Association, Section 21

provides that a company can amend its Articles of Association through a
special resolution, preferably of 75% of those present and voting. There are,
however, limitations to this provision, which include statutory restrictions, the
bonafide test, entrenchment, and contracting out of the right to alter. In Allen v
Gold Reefs of West, it was stated that a company could not deprive itself of its
power to modify the Articles of Association because of the presence of a
statement in that respect in the Articles of Association. 1 However, in Russell’s
case, it was held that shareholders could get into a separate agreement not to
alter the Articles of Association.2 Under Statutory restrictions, Articles of
Association that are inconsistent and override statutory rights and powers are
void and thus unenforceable. The change of Articles of Association after one
becomes a member does not bind them to subscribe to more shares; neither
does it increase their liability to contribute more share capital nor make them
lend or pay money to the company.3 A request by Sylwia to have a provision

1
Allen v Gold Reefs of West Africa [1900] 1 CH 656,
2
Russell v Northern Bank Development Corporation [1992] 1 WLR 588
3
Kaushik Dhar, ‘Articles of Association and Alteration of Articles’ [2012] SSRN Electronic
Journal <https://papers.ssrn.com/abstract=2014347> accessed 19 May 2022.

1
stating that the Articles of Association cannot be amended could be seen as
one trying to override statutory provisions and thus unenforceable.

Secondly, let us check whether the proposed options for the loan payment are
legal. Section 678 of the Companies Act prohibits a Plc and its subsidiary
from giving financial assistance directly or indirectly at the purchase of shares
or before the purchase.4. It is also prohibited to reduce any liability after.
Section 6795 It also prohibits, for shares in the case of a private limited
company, which is a subsidiary company for a Plc, from providing financial
assistance. There are, however, exceptions to these provisions. The first
exception is where the company's primary purpose is not to provide financial
assistance or discharge such liability or such is only an incidental sector of a
larger purpose if it is all done in good faith. It is done in the company's
interests. Section 680 provides for offering financial assistance as a criminal
offense. In Heald v Connor, the court provided that unlawful financial
assistance is unenforceable by either party in the suit as a civil consequence. 6
Therefore, it is unlawful for OIL to provide any financial assistance to Sylwia
by using its subsidiary as the financer of Sylwia's loan.

Whether one can have cumulative, participating preference shares, we need

to understand that Preference shares are a class of shares that provide the
holder with a right to dividend. Usually, the percentage is of nominal value,
and the preference is in the capital when winding up the company. Preference
shareholders do not always acquire participating rights in the company's
meetings. However, it must be noted that preferential shares cannot be
participating shares. Sylwia will invest £2 million in OIL to be issued with 5%
cumulative participating preference shares in OIL, so Sylwia will not always
have cumulative participating rights. This, therefore, means that the investor
cannot have the 5% cumulative participating preferential share.

The other issue to consider is whether directors can allot company shares.
For one class of shares, directors have the automatic authority to assign
shares of that class unless the articles provide. Otherwise, they can also grant
4
Companies Act 2006 s.678
5
Ibid.
6
Heald v Connor [1971] All ER 1105,

2
rights to subscribe for or convert any security into such shares except to the
extent the articles may prohibit such activities. 7. However, where there exists
more than one class of shares, directors lack automatic authority, as they
need authorisation by the articles of association or by a resolution of the
company.8 To be able to allot shares as directors of the company, the law
allows shareholders to allot for one class of shares automatically and where
there are many classes, by authorisation by the members through a
resolution.9 Therefore, Amy and Lee could only allot shares for more than one
class unless they get authorisation from the shareholders.

The procedure of Issuing Preference shares

A private company is likely to have several classes of shares. These are

preference shares and ordinary and redeemable shares. The rights derived
from these classes of shares are usually provided for under the Articles of
Association of the company. For preference shares, holders have preferred
rights and are in relation to the receiving of dividends before other
shareholders holding other classes of shares. This gives preference shares
an attractive face to investors and buyers and thus are more attractive.

For a company to issue preference shares, its Articles of Association have to

provide for such, and where they are not provided for, then the company will
be required to alter and amend its Articles. They are issued also depending
on the impact they will have on the company and its business.

In regards to the procedure for allotting the shares, The first step is to identify
how many types of shares the company owns. This will help us to know the
correct procedure to be taken and the authority to have in allotting the
preferential shares. In our case, the company has both ordinary shares and
preferential shares. The ordinary shares are the ones that provide equal
voting rights and can always be participating. The preferential shares should
not be participating in the first place, so it means that the preferential shares

7
Companies Act 2006, s550.
8
Ibid, s551 & s281
9
Sankalp Jain, ‘Capital of a Company - Shares and Debentures’ [2021] SSRN Electronic
Journal <https://papers.ssrn.com/abstract=3894781> accessed 19 May 2022.

3
being allotted cannot be participating. There need to be two things of
consideration. The first one is the preemption right, and the second is the
authority to allot.

The first thing is to take advice to ensure that one is in incompliance with the
statutory procedure. The directors of the company will then decide whether a
share is the best way to raise funds; in which this process has already been
done because the directors have decided that issuing preferential shares to
Sylwia will be the best way of raising funds. After making the decision on the
transfer of shares, the next thing is to know how much is to be sent, which has
been agreed to be 5% cumulative.

The next thing is to ensure that the directors have the authority to allot the
shares. In our case, the directors do not have direct authority because there is
more than one type of share. Because they do not have automatic authority,
they will have to pass a shareholder resolution to obtain authority either by
circulating a written resolution or calling a shareholders' meeting that will give
authority through an ordinary resolution.10

Consequently, the need to ensure the issue complies with any preemption
rights or other restrictions in the Companies Act, articles of association and
shareholders' agreement. If it does not, it may be possible to pass a
shareholder resolution to vary or disapply preemption rights. They will then be
the pass board resolutions to offer the shares to the intended recipients and,
upon receipt of acceptances and any payments due, issue the shares.

Lastly, there will be the need to notify Companies House by filing form SH01
and a copy of any shareholder resolution, then update the company's register
of shareholders and issue share certificates.

QUESTION 2- DIRECTORS

The legal consequences of the contents of the Board Minutes from

March 2022 and April 2022

10
Emma Szelepet, Tolley’s Company Law Handbook, vol 1 (1st edn, LexisNexis UK 2022)

4
Directors are provided for in law under the Companies Act 2006, Part 10. In
looking at the legal consequences of the contents of the minutes of the two
board meetings held in March and April, we will first look at the contents of the
minutes.

The meeting held by the directors of LoVegan Limited, Hugo and Ivana Parag,
in March 2022 was to discuss and vote for the appointment of Susan Ost as a
Marketing Director at the company. The meeting was duly convened with all
the board members present, and they unanimously voted to make the
appointment immediately without even consulting with the members.

The meeting held in April was well convened with all three board members
present. The agenda of the meeting vote and discuss the payment of Amir
Ost's (Susan's Husband) loan at Deva bank and discuss the supplier of
delivery bags for the company. They unanimously agreed for the company to
pay Amir's loan and for him to repay the company in instalments starting from
April of 2022, and to enter into an agreement with PIL to supply them with the
delivery bags.

Second, we will look at the duties of directors in a company to determine

whether the resolutions they entered into during their meetings were legally
binding or had any legal consequences.

Duties of Directors

These are provided for under the Companies Act of 2006 under sections 170
to section 177 and the include Duty to exercise independent judgment 11. Duty
to exercise reasonable skill, care and diligence as a skilled director would or
any person would while acting as a director of the company. 12

In Re Barings plc, it was held that directors of a company must be informed of

the affairs of the company and work well with other directors as a monitoring
system for the company and that a director will be responsible for his actions,
including those arising from functions he had delegated. 13
11
Companies Act 2006, s173
12
Ibid, s174
13
Re Barings plc (No 5) [1999] 1 BCLC 433

5
Another obligation is the duty to avoid conflict of interests between his
interests and those of the company. 14 It applies to the exploitation of an
opportunity, information or property and is immaterial whether the company
can take advantage of such or not. This duty does not apply to conflicts
stemming from an arrangement or a transaction with the company. It is not
infringed where the directors authorise the matter. Such authorisation is given
where the constitution does not invalidate it for private companies. The
approval by the directors is effective where the required quorum for the
meeting is met, and the matter is voted for even where the concerned director
is not considered or his vote counted.

It is also the duty of a director not to accept benefits from a third party. 15. A
director is not allowed to accept any benefit from a third party for the reason of
him being a director, doing, or not doing something as a director. One cannot
infringe this duty if the benefit does not give rise to a conflict of interest. 16 The
duty of a director is to declare any interests that they directly or indirectly have
in an agreement or transaction. 17. Where such arise, then they must declare
such interest to the other directors, and it should be done before the company
enters into the transaction. The director need not make the declaration where
the other directors are aware of it, it does not reasonably raise a conflict of
interest, or the transaction involves his term of service being discussed by the
directors.

Section 178 of the Companies Act 2006 provides for civil consequences in
case of breach of the above duties depending on the nature of the violation
according to equitable principles, common law, or the fiduciary duty the
director owes the company. These remedies include injunctions, damages,
making an agreement voidable and indemnifying for loss.

Section 180 of the Act provides for consent and approval of members to be
sought by directors if the duty is on conflict of interest or on the duty of
directors to declare interests in a given transaction being carried out or

14
Companies Act 2006, s175.
15
Ibid, s176.
16
Companies Act 2006, s176 (4).
17
Ibid, s177.

6
agreement entered into. Where this authorisation is given, then the
transaction cannot be set aside for breach of rules.

From the above, the resolution made by the board of directors in March can
be seen as an exercise of the directors' independent judgment, care and
diligence to employ Susan as marketing director to improve online marketing
for the company, thus bringing benefit to the company. As for the resolution
from the second board meeting, Susan, as a director, cannot be said to be in
breach of the rules even though the loan is paid by the company and is meant
to help her husband. This is because the other directors already know of the
interest she derives from the arrangement, and they have authorised it by the
required quorum during the meeting. The above two resolutions are therefore
binding on the company.

The likelihood of Graham and Surinder being able to remove Susan from
the board successfully.

In considering whether Graham and Surinder Saunders are likely to have

Susan removed as a director, we will look at the provisions of the law of
instances when a director of a company can be removed from office and the
procedure likely to be followed in that removal. Section 168 and 169 provide
for the removal of a director of a company. 18. Such removal could be as a
result of the director’s negligence, breach of duty of care, default or breach of
trust towards the company.

The procedure to be followed is that a special notice of the intention is to be

sent to the director and the members. This notice should be reasonable 19. A
meeting is then held, and an ordinary resolution is passed for his removal it
agreed upon.20 This can be done before the expiry of his term of office,
notwithstanding any agreement made between him and the company.

The director can protest their removal. The main task is to identify how this
can be done. Upon receipt of the notice of the intended resolution from the

18
Companies Act 2006.
19
Browne v La Trinidad [1887]
20
Ibid, s168; s281 (3)

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company, he writes to the company and claims entitlement to be heard during
the meeting. The company, upon the request, makes representations to all
members to whom the notice was sent. Where it is impossible to do so, or the
representations are sent too late, the director can request they be read at the
meeting. Suppose the court is satisfied upon the application of the company
or other aggrieved party that the rights conferred under this section are
violated. In that case, it can order the director to pay company costs if they
are in breach, either in whole or in part, whether he is a party to the
application or not.

The Company Director's Disqualification Act 1986 provides for disqualification

of a director through a court's disqualification order where they breach
company rules, fraudulent trading, or engage in inappropriate conduct as a
director.21 The disqualified director is prevented from acting as a director of a
company or being involved in the company's management unless with the
leave of court.

From the above, it is unlikely for Graham and Surinder Saunders to remove
Susan as a company director. Their efforts can be frustrating because she
has not violated any company rules to form grounds for her removal and due
to the lack of the required majority to pass the proposal. 22.

QUESTION 3- INSOLVENCY

Great Space Limited is a company which owns, maintains and lets out office
space in several cities across the Northwest of England. The company has
three directors: Sandhya Sharma-Aziz, Farhat Sharma-Aziz and Ronan
Breen. This means that the company's decisions have to involve all the three
directors and have to be in line with the due process, failure to which amounts
to voidable transactions. These voidable transactions include Preferences,
transactions at an undervalue and transactions defrauding creditors.

Defrauding Creditors

21
Company Directors Disqualification Act 1986 ('CDDA'), s3, s6 & s10
22
Companies Act 2006, s282 & s283

8
Suppose it appears that at any time during the winding up of the company,
any wrongful business has been carried out by the company with the intent to
defraud creditors. In that case, the liquidator can apply to the court to declare
the people involved liable for making such contributions to the company's
assets as the court may deem fit. 23 This applies to a person when the
company has gone insolvent. The person was a director at that time, and
before the liquidation, the person knew or ought to have known that the
company would become insolvent with no prospects of survival. In Re
Hawkes Hill Publishing Co Ltd, the court held that “…the question was
whether the directors knew or ought to have known that there was no
reasonable prospect of avoiding insolvent liquidation”. 24

Transactions At An Undervalue

Under Section 241 of the Insolvency Act 1986, a company enters into a
transaction at an undervalue when it makes a gift to a connected person. 25Or
enters into an arrangement with a person where the company gets no
consideration, and where there is a consideration, the money worth is less
than the worth of the consideration given by the company. In Phillips v Brewin
Dolphin Bell Lawrie, it was stated that, at any time, the liquidator in a
liquidation process must always establish the value of the consideration
made.26.

Great space Limited, in their board meeting, considered selling marc the office
furniture from the company's Chester office building. The furniture has a
market value of $9,000, but the board unanimously voted that the equipment
could be sold to marc for $6,000. This amounted to a transaction at an
undervalue. The administrator can reverse the transaction if it is at an
undervalue by applying to the court for a reversal that returns the company's
finances to the position before the transaction. The proceeds of such a
preferred claim are held for the benefit of the creditors.

23
Insolvency Act 1986, s213 & s214; Companies Act 2006, s993.
24
Re Hawkes Hill Publishing Co Ltd [2007] BCC 937 Ch.
25
Companies Act 2006, s249 & s435.
26
Phillips v Brewin Dolphin Bell Lawrie [2001] UKHL 2

9
Summary Remedy Against The Directors

Under section 212 of the Insolvency Act 1986, if it appears that a liquidator,
officer of the company or anyone concerned with the company's management
has misapplied or retained any property of the company or is guilty of a
breach, of their fiduciary duty. Upon the application to the court by a creditor,
the official receiver or liquidator is found liable. They are ordered to restore
the property retained or compensate the company to the extent of their
breach.27

In this case, either the creditors, liquidator or official receiver can bring an
action to court against Farhat and Sandhya for breaching their fiduciary duty
and transferring some amount of money belonging to the company to their
daughter Rosa where the court could order them to repay or restore the
property back.

Preference Claim

This is a claim brought against a director of a company which has gone into
insolvent liquidation or administration if the company has done something
such as making payment which has the effect of putting one or more creditors
into a better position than others. 28 Section 239 of the insolvency Act provides
that the court shall, on such application, make an order as it thinks fit for
restoring the position to what it would have been if the company had not given
that preference.

Farhat Sharma Aziz’s transaction with her daughter Rosa is a voidable

transaction, and a preference claim can be taken against him. The amount of
100,000 transferred from the company account to Rosa’s account without the
knowledge of Ronan, who is also a director in the company, makes that
transaction voidable.

Further, Section 241(2) provides that third parties who acquire the company's
properties from persons other than the company in good faith and for value
Insolvency Act 1986, s212 (1), (2) & (3).
27

David Kershaw, Company Law in Context: Text and Materials, vol 1 (1st edn, Oxford
28

University Press 2012)

10
cannot be prejudiced by an order. However, one cannot benefit from this
exception if one is connected to the company because it will be presumed that
the preference was not given in good faith as stipulated in section 241(2A) of
the Insolvency Act.29 A similar transaction is witnessed between Farhat
Sharma and Rosa, Farhat's daughter, hence bringing out the close connection
to the company, making the whole transaction voidable.

Where fraudulent or wrongful transactions are carried out during the

liquidation period, courts make orders to restore the company to its position
before the transaction was carried out and protect the interests of the victims
against the delinquent directors. All the processes disused above are
essential in swelling the assets of GSL.

29
Gerard McCormack, ‘Swelling Corporate Assets: Changing What Is on the Menu’ (2015) 6
http://dx.doi.org/10.1080/14735970.2006.11419946 39
<https://www.tandfonline.com/doi/abs/10.1080/14735970.2006.11419946> accessed 19 May
2022.

11
 Reference

Statutes

Companies Act 2006

Company Directors Disqualification Act 1986

Insolvency Act 1986

Case law

Allen v Gold Reefs of West Africa [1900] 1 CH 656

Browne v La Trinidad [1887]

Heald v Connor [1971] All ER 1105

Phillips v Brewin Dolphin Bell Lawrie [2001] UKHL 2

Re Barings plc (No 5) [1999] 1 BCLC 433

Re Hawkes Hill Publishing Co Ltd [2007] BCC 937 Ch

Re Peveril Gold Mines Ltd [1898] 1 Ch 122.

Russell v Northern Bank Development Corpn Ltd [1992] 1 WLR 588

Bibliography

Dhar K, ‘Articles of Association and Alteration of Articles’ [2012] SSRN

Electronic Journal <https://papers.ssrn.com/abstract=2014347> accessed 19
May 2022

Jain S, ‘Capital of a Company - Shares and Debentures’ [2021] SSRN

Electronic Journal <https://papers.ssrn.com/abstract=3894781> accessed 19
May 2022

Kershaw D, Company Law in Context: Text and Materials, vol 1 (1st edn,
Oxford University Press 2012)

12
McCormack G, ‘Swelling Corporate Assets: Changing What Is on the Menu’
(2015) 6 http://dx.doi.org/10.1080/14735970.2006.11419946 39
<https://www.tandfonline.com/doi/abs/10.1080/14735970.2006.11419946>
accessed 19 May 2022

Select E, Tolley’s Company Law Handbook, vol 1 (1st edn, LexisNexis UK

2022)

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