Professional Development

Institute and Faculty of Actuaries

A practical guide to company law

Workbook

Institute and Faculty of Actuaries 1 © The University of Law Limited 2019

 Professional Development

Note: CA 2006 means Companies Act 2006

A. FUNDAMENTAL PRINCIPLES

1. Separate legal personality

A company is a separate legal person: Salomon v A Salomon and Co [1897] AC 22. This
means:

 A company owns its own property: Prest v Petrodel Resources Ltd [2013] UKSC 34.
 A company is responsible for its own debts.
 A company is responsible for its breaches of contract

Group companies are generally not liable for the activities of other group companies. In
Adams v Cape Industries plc [1990] Ch 433 the court ruled that an English parent
company was not liable for industrial injuries suffered by employees of its US subsidiary
However, in limited circumstances a parent company may assume responsibility to its
subsidiary’s employees. In Chandler v Cape plc [2012] EWCA Civ 525 the Court of
Appeal ruled that Cape plc had assumed responsibility towards the employees of its
subsidiary company because it knew the subsidiary relied on Cape’s superior knowledge
of the risks of working with asbestos

There has been recent debate on whether there is a doctrine that allows a court to pierce
the veil of incorporation. This means going behind a company and holding those who
control the company liable for its actions. The Supreme Court in Prest held that the courts
do have a power to pierce the corporate veil. However, this power is only to be used in
‘evasion’ cases and as a matter of last resort. By ‘evasion’ the Supreme Court means that
a company is being used by an individual to evade an existing (usually contractual)
liability.

Statute sometimes provides an exception to the separate legal personality principle. For
example, group company taxation and accounting rules treat group companies as an
economic whole rather than separate companies.

Test yourself

Question: Last week you bought goods from Acme Ltd. Acme Ltd’s sole director
and shareholder is James. The goods are defective. Who should you bring a legal
action against?

Answer

© The University of Law Limited 2019 2 Institute and Faculty of Actuaries

Professional Development

Test yourself

Question. Trade Ltd owns expensive residential properties in London. Trade Ltd’s
sole director and shareholder is Fred. Fred’s wife has started divorce proceedings
against him. Does she have any right to claim the properties owned by Trade Ltd?

Answer

2. Limited liability

The liability of shareholders is limited. See s. 74(2)(d) Insolvency Act 1986.

Test yourself

Question: X Ltd has just gone into liquidation owing creditors £1m. Khalid is the
sole director and shareholder in X Ltd. Khalid owns one £1 share which is fully
paid. Is Khalid liable to the creditors of X Ltd?

Answer

3. Disclosure and transparency

Separate legal personality and limited liability come at a price. The price is disclosure.
Information about a company must be delivered to the Registrar of Companies.

Most information can be viewed by anyone - s. 1085 CA 2006. s.1087 CA 2006 lists
information not available to the public. The most significant class of unavailable
information relates to protected directors’ residential addresses. This is to protect directors
from harassment from pressure groups.

Every year a company must file an annual confirmation statement – Part 24 CA 2006. The
confirmation statement must be provided once every 12 months. It covers:
 the address of the registered office;
 the type of company and its business activity;
 details of directors and secretaries;
 a statement of capital;
 details of shareholdings;
 persons with significant control

However, if nothing has changed then the company need only confirm this.

If a company changes its articles, directors, registered office or name it must notify the
Registrar of Companies.

Institute and Faculty of Actuaries 3 © The University of Law Limited 2019

 Professional Development

Companies must also keep registers and certain documents.

The following registers/documents must be maintained by a company and can be

inspected by anyone:
 register of members (s.113 CA 2006)
 register of directors (s.162 CA 2006)
 register of secretaries (s. 275 CA 2006)
 register of charges (s. 859P CA 2006)
 register of persons with significant control (Part 21A CA 2006)

Alternatively a company can elect not to keep registers itself and can make the
information public at Companies House.

Anyone seeking to inspect the register of members must give their name and address, the
purpose for which the information is to be used, the identity and address of any person to
whom the information is to be disclosed and the purpose for which the recipient proposes
to use the information (s.116(4) CA 2006). The company then has five days to allow
inspection or to refer the request to court as not being for a proper purpose (s.117 CA
2006)

In Burberry Group plc v Fox-Davies [2015] EWHC 222, a request to inspect by a tracing
agent was refused principally because the aim of the tracing agent was to trace members
(shareholders) who were unaware that they owned shares in Burberry and extract a fee
from them for telling them they owned shares.

In Burry & Knight Ltd v Knight [2014] EWCA Civ 604, the Court of Appeal said that for
members there is a presumption that a request to inspect should be granted but the
member in this case was given only limited rights to inspect because the court was
worried that the aim of the member seeking to inspect the register was to harass other
members of the company.

The following documents/registers must be maintained but can only be inspected by

members:
 directors’ service contracts (s.229 CA 2006)
 records of resolutions and meetings (s.355 CA 2006)

A company must also display its name, registered number and registered office address
on letters, order forms and websites (SI2008/495)

B. FORMATION AND CONSTITUTION

1. Formation

In order to register a new company, the following must be filed at Companies House:
 the memorandum of association
 articles of association (unless Model Articles are being used)
 a statement of capital and existing shareholdings
 a statement of proposed officers
 a statement of compliance
 the application to register and a fee (form IN01)

Once satisfied, the registrar will issue a certificate of incorporation.

© The University of Law Limited 2019 4 Institute and Faculty of Actuaries

Professional Development

A company only comes into existence when its certificate of incorporation has been
issued. If a contract is made before incorporation it is treated as made with the agent who
concluded it unless there is agreement to the contrary (s.51 CA 2006).

It’s quicker to buy an ‘off the shelf’ company from a formation agent than to incorporate
from scratch. An ‘off the shelf’ company is a company that has already been formed by an
agent. Clearly, once purchased an off the shelf company will have to be adapted to fit the
needs of the purchaser – e.g. its articles may need to be changed.

2. Types of company

Private or public company limited by shares. Members own share capital and their liability
is limited.

A company can be limited by guarantee. In this case members guarantee to contribute a

specific sum (usually £1) on winding up (liquidation). Members contribute no capital during
the life of the company. Companies limited by guarantee tend to be not for profit or
charitable operations.

Some companies are unlimited. These companies can operate with or without share
capital. Members are joint and severally liable for the company’s debts. Such companies
are quite rare. An advantage is that accounts do not have to be publically filed. Land
Rover is an unlimited company.

Common law and civil jurisdictions recognise companies and all draw a distinction
between public and private companies. In India there are both private and public
companies limited by shares and guarantee. In Germany a company with the suffix GmbH
is a private company whilst one with a suffix AG is public company.

In Germany as in many civil law jurisdictions capital requirements are more stringent for
private companies. GmbH companies require a minimum capital of EUR 25,000 (AG
require EUR 50,000). Common law jurisdictions are more relaxed in respect of minimum
capital requirements. In India under the Companies Act 2013 there are no minimum paid
up capital requirements for private or public companies.

3. Public v private company

A private company cannot offer its shares to the public – s. 755 CA 2006. A public
company can offer its shares to the public.

Public companies must have share capital of at least £50,000, of which one quarter of the
nominal value and the whole of any premium must be paid (s.763 CA 2006). Private
companies have no minimum paid up share capital requirement.

Unlike a private company, a public company must have a company secretary. The
secretary must be suitably qualified (ss. 271 & 273 CA 2006). A public company must
have at least two directors whereas a private company can operate with one director. The
same is true of shareholders.

Oher jurisdictions usually are a variation on this theme. In India a one man company must
have one shareholder whilst the number is two for a private company and seven for a plc.
In Germany both GmbH and AG companies can operate with one shareholder.

Institute and Faculty of Actuaries 5 © The University of Law Limited 2019

 Professional Development

4. The company name

Private company names must end in ltd or limited. Public company names must end with
plc or public limited company.

Company names are limited to 160 characters

The registrar must not register a name if the name is illegal or would cause an offence –
s.53(a)(b) CA 2006.

The Secretary of State’s permission is required if a proposed name includes a ‘sensitive’

word. ‘Sensitive’ words tend to be ones which imply a connection with government or a
public body.

The registrar will not allow a name to be registered if it is the same as an existing
registered name. There is a free index check that can be done online.

A person who believes another is wrongfully exploiting goodwill in a name associated with
he applicant may apply to a company names adjudicator for an order that a company’s
name be changed. See ss.69-74 CA 2006.

A person who has been a director of a company in the 12 months before it went into
liquidation is prohibited from being involved with another company with the same name or
one so similar so as to suggest an association, for five years – s216 Insolvency Act 1986.

5. The articles of association

The articles of association are effectively the company’s rule book. They will deal with
matters such as procedure at directors’ and members’ meetings, transfer of shares, and
appointment of directors.

The Companies Act contains default articles. This means that unless you specify
otherwise you inherit the default articles when you incorporate a company. Under the CA
2006 these are known as the Model Articles. Under the 1948 and 1985 Companies Acts
the default articles were known as Table A. A major change under the 2006 Act is that
there are separate Model Articles for private and public companies. Table A is ‘one size
fits all’ i.e. the articles apply to both private and public companies.

Companies are free to draft their own articles or to amend default articles as seen fit.

Any provision in a company’s articles which inconsistent with law is void: Re Peveril Gold
Mines Ltd [1898] 1 Ch 122.

The articles are a contract between the company and its members and between the
members inter se – s33 CA 2006. However, they are an unusual contract:
 They are only contractually binding in respect of membership rights – see e.g.
Eley v Positive Govt Security Life Assurance Ltd (1876) 1 ExD 88
 They can be amended by 75% majority (s.75 CA 2006)
 They are a matter of public record
 Damages are not available for breach
 There should be no implied terms – see Bratton Seymour Service Co Ltd v
 Oxborough [1992] BCLC 693.
 They cannot be voided for misrepresentation, undue influence etc.

© The University of Law Limited 2019 6 Institute and Faculty of Actuaries

Professional Development

Test yourself

Question: John is solicitor to Z Ltd. John also owns a small, minority holding of
shares in Z Ltd. Last year Z Ltd instructed John to redraft Z Ltd’s articles. John
included a provision in the articles that he was to be retained for life as Z Ltd’s
solicitor. Last week Z Ltd stopped instructing John. Can John seek a remedy under
the articles?

Answer

The articles can be altered by special resolution of members – s21 CA 2006. Any
alteration of the articles must not result in a member having to take more shares or
increase the liability of a member to contribute – s.25 CA 2006.

In many companies shareholders will enter into a shareholders’ agreement which will
regulate how the company is to be run. Shareholders’ agreements are a private contract
that operate alongside the articles. A shareholders agreement is capable of protecting
personal rights which cannot be protected by the articles.

6. The memorandum of association

The memorandum has lost much of its significance since the passing of the 2006 Act. The
memorandum merely states that the subscribers (the first people taking shares) wish to
form a company. Old style memoranda recorded a company’s name, the limited liability
status of members, the authorised capital and objects of the company and the place of the
registered office.

Companies incorporated under older legislation will still have capital and objects clauses.
These are now deemed to be part of a company’s articles – s. 28 CA 2006.

The objects clause of a company defines its capacity. For example if a company had an
objects clause that stated the company’s object was the manufacture of washing
machines its capacity is limited to doing things in furtherance of the manufacturing of
washing machines. Anything outside that object would be beyond the company’s powers.
Companies clearly would like capacity to do as many things as possible so legislation
introduced the object of carrying on business as a general commercial company. If this is
the object of a company it has capacity to do anything in the course of trade. This did not
stop lawyers drafting long winded objects clauses to add to the general commercial
company object.

These days a company’s objects are deemed to be unrestricted unless the articles say
otherwise- s.31 CA 2006.

If a company enters into a contract which is beyond its capacity a third party is protected
by s. 39 CA 2006, the effect of which is to keep the contract valid.

Institute and Faculty of Actuaries 7 © The University of Law Limited 2019

 Professional Development

C. DIRECTORS

1. Types of director

A de jure director is a properly appointed director.

A de facto director is someone who acts a director but who has not been validly
appointed: HMRC v Holland [2010] UKSC 51. There is no single test for determining
whether someone is a de facto director. The key factor is whether someone is involved in
the corporate governance of a company. A de facto director is subject to fiduciary duties:
Re Mumtaz Properties Ltd [2011] EWCA Civ 610

Test yourself

Question: Which of the following do you think are the three most important factors
in determining whether someone is a de facto director?
 Calling yourself a director
 Holding a directors’ loan account
 Doing deals with major customers
 Signing VAT returns
 Allowing the company to call you a director
 Being a signatory to the company’s bank account

Answer

A shadow director is a person on whose instructions the majority of a board are

accustomed to act – s251 CA 2006. Instructions can include advice as well as directions.
Professional advisors are excluded from the definition of a shadow director. If you are an
actuary and advise the board of a company and the board follows your advice the law
does not class you as a shadow director.

Test yourself

Question: Why might someone want to claim they are not a director of a company?

Answer

An executive director is usually an employee involved in day to day management.

A non-executive director is not an employee of the company. He/she supervises and/or

advises the executive directors.

© The University of Law Limited 2019 8 Institute and Faculty of Actuaries

Professional Development

2. Appointment

There is very little in legislation regarding appointment of directors. The only relevant
provisions relate to:

 Minimum number: 1 in a private company and 2 in a plc (ss. 154 CA 2006)

 Age requirements: must be at least 16 (ss.151-159 CA 2006)

 At least one director must be an individual (s.155 CA 2006)

Note that corporate directorships (i.e. a company being a director of another company)
were scheduled for abolition in October 2015. The implementation date has constantly
been put back and at the time of writing corporate directorships are still permitted.
The articles deal with appointment. The Model Articles (Article 17) provide that directors
can be appointed either by the board or by ordinary resolution of members. Listed
companies usually require a board appointment to be confirmed at the AGM and usually
contain retirement by rotation and re-election provisions.
A person cannot be appointed as a director if:

 they are an undischarged bankrupt;

 they are subject to a bankruptcy restriction order

 they are subject to a bankruptcy restriction undertaking

 they are subject to a disqualification order

 they are subject to a disqualification undertaking.

(Company Directors Disqualification Act 1986, ss. 11 & 13)
Note that appointments to the board of banks and financial institutions require the
approval of the regulator (either or both of the PRA and FCA)
For listed companies further conditions apply in terms of the selection process, size of the
board, diversity and training
The acts of a director are valid notwithstanding some defect in appointment: s.161(1) CA
2006. However, s.161(1) CA 2006 cannot be used to validate a nullity – e.g. appointment
of a director was made at an inquorate board meeting: Morris v Kanssen [1946] AC 459
Appointing someone to the office of director does not automatically make them an
employee.

If a director is awarded a service contract (i.e. a contract of employment), a copy must be

available at the company’s registered office: s.228(1)(b).

Any fixed term contract of employment for directors in excess of two years must first be
approved by ordinary resolution of members: s. 188 CA 2006. If it is not there is
substituted a term entitling the company to terminate the contract on reasonable notice:
s.189 CA 2006.

Civil law jurisdictions often have different requirements as to the composition of the board.

Institute and Faculty of Actuaries 9 © The University of Law Limited 2019

 Professional Development

In Germany companies with more than 500 employees must have a supervisory board
(the equivalent of the non-executive board in England) of which one third must be
employees elected by the workforce. If a German company has more than 2000
employees half of its supervisory board must be employees. There are additional rules for
employee involvement at board level in industries such as coal, steel and mining.

In India the rules are similar to those in England. Listed public companies require a
specific number of non-executive directors on the board. There is no provision for
employee involvement of the board.

3. Termination of appointment

Older articles (e.g. Table A Art 73) require retirement by rotation of the board. There is no
corresponding provision in the Model Articles.
Directors are always free to resign from office. If a director owns shares, ‘bad leaver’
clauses in a shareholders’ agreement may be a disincentive to resignation.
Members are also empowered to remove a director by ordinary resolution: s168 CA 2006.
Shareholders availing themselves of s.168 must provide special notice to the company of
intention to do so: s.168(2) CA 2006. The prevailing view is that companies cannot
contract out of the right to remove directors under s.168: Russell v Northern Bank
Development Corp Ltd [1992] 1 WLR 588. However, this has not stopped the courts from
affirming the validity of articles that provide for weighted voting rights on a vote to remove
a director (and on a vote to change the weighted voting rights in the articles): Bushell v
Faith [1970] AC 1099.
The articles could provide that the board could remove a director from office.
Removal from office may also terminate a contract of employment.
Service contracts often contain a provision requiring a director to vacate office on
termination of employment. It’s common to include a power of attorney for the rest of the
board to sign a resignation letter on behalf of the director in question if he/she will not
resign.
The articles will usually provide for automatic termination of office on specified events, for
example on becoming bankrupt.

4. Directors’ powers

Directors act collectively but may delegate to others: Model Articles, Regulations 3 and 5.

A decision is a board decision unless the articles or CA 2006 say otherwise. This is very
important in practice. It means that management of a company is largely left to the
directors. This in turn means that directors hold the real power in a company. If
shareholders are dissatisfied with directors they are expected to remove them from office
under the procedure mentioned above.

Conduct of directors’ meetings is governed by the articles. Directors in particular should

note:
 Majority rule (Model Articles, Regulation 7)
 Notice requirements (Model Articles, Regulation 9)
 Quorum (Model Articles, Regulations 11 and 14 – 2 unless otherwise stated)

© The University of Law Limited 2019 10 Institute and Faculty of Actuaries

Professional Development

5. Directors’ duties

Duties are owed to the company: s170(1) CA 2006. Only the company can enforce the
duties. This means that it is a decision of directors as to whether to sue another director
for breach of duty.

A de facto director owes duties in relation to the functions he performs: HMRC v Holland

s.170(5) CA 2006 was amended from May 2015. Shadow directors now owe duties to the
extent duties are capable of applying.

In India directors’ duties are mainly set out in the Companies Act 2013. The duties largely
correspond with the duties owed by directors in England under the Companies Act 2006.

In Germany directors have duties of loyalty to the company. The duty of loyalty is the
German equivalent fiduciary duties under English law. Directors in Germany also have a
duty of care which is based on the standard a reasonable director would exercise.

s.171 CA 2006

A director must act in accordance with the company’s constitution (This usually means in
accordance with the articles) and must only exercise powers for the purpose for which
they were conferred.

The duty involves objectively assessing the power and looking at the subjective motivation
behind the exercise of the power. The majority of cases have centred on share issues.
See e.g. Howard Smith v Ampol Petroleum Ltd [1974] AC 821

Test yourself

Question: Directors control the issue of shares. What is the only proper purpose
for issuing shares? What might be an improper purpose for issuing shares?

Answer

s. 172 CA 2006

A director must act in a way that is likely to promote the success of the company.

In Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810 the High Court said the
duty in s172 was the same as the previous case law formulation ‘to act bona fide in the
best interests of the company’

The duty is subjective: s172(1) & Regentcrest plc v Cohen [2001] 2 BCLC 80. This means
that as long as a director can show he honestly believed his actions were in the best
interests of the company a court will not hold him/her liable for breach of duty. In the
Regentcrest case the company had a claim in litigation against a director. The rest of the
board waived the claim. The company subsequently went into liquidation. The liquidator

Institute and Faculty of Actuaries 11 © The University of Law Limited 2019

 Professional Development

sued the directors who waived the claim for breach of duty. The directors argued that they
waived the claim because the expertise of the potential defendant director was needed if
the company was to have any chance of surviving. If the company had litigated against
him the potential defendant director would have had to resign. The court accepted the
directors genuinely believed it was in the company’s interest to waive the claim.

s. 172(1)(a)-(e) lists factors that directors should have regard to when promoting the
success of the company. These include employees, suppliers, the environment, and the
long term consequences of decisions.

Test yourself

Question: Cam employees sue directors for breach of duty?

Answer

s.172(3) CA 2006 makes clear that the section is subject to any rule requiring directors to
act in the interests of creditors. Directors do not owe direct duties that can be enforced by
creditors. However, directors should have regard to the interests of creditors when a
company is insolvent or close to insolvency: West Mercia Safetywear v Dodd [1988]
BCLC 250. If directors fail to consider the interests of creditors when a company is
insolvent they may be liable for breach of duty.

Where a company is insolvent or close to insolvency directors should also consider s. 214
Insolvency act 1986. This provision applies when directors know or should know a
company cannot avoid insolvent liquidation and fail to minimise loss to creditors. This is
known as wrongful trading. If a director is liable for wrongful trading then he/she has to
personally make good the loss caused to creditors.

Test yourself

Question: Why should directors put the interests of creditors above those of
shareholders if a company is insolvent?

Answer

s.173 CA 2006

A director must exercise independent judgment. This does not prevent the board agreeing
to act in a particular manner in the future if, it was thought to be in the company’s best
interests when making the agreement: Fulham FC v Cabra Estates [1994] 1 BCLC 363.

© The University of Law Limited 2019 12 Institute and Faculty of Actuaries

Professional Development

Test yourself

Question: Does s. 173 prevent directors from delegating functions?

Answer

s.174 CA 2006

A director must exercise reasonable care and skill. The level of skill required is the higher
of that which may be reasonably expected of a director or the skill actually possessed by a
director. This means that there is a minimum standard expected of directors. However,
those directors with a higher level of skill, for example a finance director with an
accountancy qualification are judged by the level of skill they actually possess.

Test yourself

Question: Alice and Bob are directors and shareholders of X Ltd. X Ltd provides
bridging finance to other companies. Last year Alice and Bob appointed their
brother Chris as a director. Chris has served two terms of imprisonment for fraud. It
has now emerged that Chris has defrauded X Ltd of significant sums. The fraud
involved channelling sums through Alice and Bob’s directors’ loan accounts. Have
Alice and Bob failed to exercise care and skill?

Answer

s. 175 CA 2006

A director must avoid a situation where he has an interest which conflicts with that of the
company.

This rule is of strict application. Therefore no dishonesty is required to breach this

provision and the company does not need to suffer any loss.

Test yourself

Question

Kamla is the managing director of X Ltd. Kamla is negotiating a lucrative contract

with Y Ltd. Y Ltd makes it known that it will not contract with X Ltd but if Kamla
resigns from X Ltd and forms her own company, Y Ltd will contract with her new
company. If Kamla resigns and forms a new company and takes the contract will
she be in breach of duty?

Answer

Institute and Faculty of Actuaries 13 © The University of Law Limited 2019

 Professional Development

s.175 CA 2006 does not apply to a conflict which arises in relation to a transaction or
arrangement with the company. These situations are covered by ss.177 & 182 CA 2006.

There will be no breach of s.175 CA 2006 if there has been authorisation by independent
directors (Sharma v Sharma [2014] BCC 73). The company’s constitution must not
prohibit giving the authorisation in the case of private companies. For public companies,
the company’s constitution must permit such authorisation.

The duty under s.175 CA 2006 applies after a person ceases to be a director in respect of
opportunities that arose when a person was a director.

Test yourself

Question: Which of the following scenarios below are capable of giving rise to a
conflict of interest?
 If a director is a competitor of the company

 If a director is a major shareholder of the company

 If a director is a customer or supplier of the company

 If a director owns property which could be affected by the company’s

actions

 If a director advises the company

 If a director takes up opportunity declined by the company

 If a director makes a profit as a result of his/her directorship

 If a director is involved in another company which is involved as above

Answer

s. 176 CA 2006

A director must not accept any benefit from a third party which is conferred because of
being a director or not doing anything as a director.

It is still open to members to authorise s.176 transactions and a company can have
articles dealing with conflicts. For example, a company may allow directors to retain
benefits under a certain level to ensure corporate hospitality is not prohibited.

s. 177 CA 2006

Directors who are interested in a proposed transaction or arrangement with the company
must declare their interest. The declaration should be made before the transaction is
entered into. No declaration need be made

 in respect of directors’ service contracts or

© The University of Law Limited 2019 14 Institute and Faculty of Actuaries

Professional Development

 where the other directors are already aware of the interest or

 where the transaction is unlikely to give rise to a conflict of interest

Where the transaction or arrangement already exists, a director is obliged to disclose any
interest under s. 182 CA 2006. Failure to declare under s. 182 is a criminal offence.

Test yourself

Question: Lizzie is a director of X Ltd. Lizzie owns 100 shares in BT plc which she
inherited last year. X Ltd is negotiating to provide marketing services to BT plc.
Does Lizzie have to declare an interest?

Answer

6. Transactions requiring shareholder approval

ss. 190-195 CA 2006

Wherever a company acquires or is to acquire a substantial non-cash asset from a

director or a person connected to a director (or vice versa) approval of shareholders is
required by ordinary resolution.

Acquire includes indirect acquisition: Re Duckwari plc [1999] Ch 253. The term is intended
to have a wide meaning and probably means just receiving.

‘Is to acquire’ means the provisions apply even though the assets are not in fact acquired:
Murray v Leisureplay Ltd [2004] EWHC 1927

Non - cash asset is any property other than cash (s.1163(1) CA 2006)

Anything over £100,000 is substantial. Anything under £5000 is not classed as

substantial. Anything between £5000 and £100,000 is substantial if it represents more
than 10% of the company’s net assets. The value is ascertained by the last accounts or if
there are no accounts by called up share capital.

Test yourself

Question: Mike is a director of Z Ltd. Mike is proposing to buy machinery from Z Ltd
for £80,000. Z Ltd’s last balance sheet showed net assets of £1m. Is shareholder
approval required for the transaction?

Answer

Failure to get approval renders the transaction voidable at the instance of the company.
The directors or connected parties are liable to account for any gain or indemnify the
company for any loss: s.195 CA 2006.

Institute and Faculty of Actuaries 15 © The University of Law Limited 2019

 Professional Development

ss.197-214 CA 2006

Where a company proposes to loan a director of the company or its holding company
money the transaction requires approval of members by ordinary resolution: s.197 CA
2006.

Exceptions include:

 Money loaned to meet business expenditure up to £50,000 (s.204 CA 2006)

 Loans to defend legal proceedings or regulatory investigations (ss.205 & 206 CA

2006)

 Loans under £10,000 (s.207(1) CA 2006)

s. 215-222 CA 2006

Payments for loss of office require approval of shareholders. This does not include
payments representing contractual entitlement. Any payment in contravention of s.215 is
held on trust by the recipient. Any director who authorised the transaction is liable to
indemnify the company for any loss it suffers. This section does not apply to contractual
entitlements.

D. SHAREHOLDERS AND SHARE CAPITAL

The definition of who is a member is in s112 CA 2006. A person must have agreed to
become a member and have his name entered in the register of members before he is a
member. Note that the law refers to member rather than shareholder. This is because the
term includes companies limited by guarantee which do not have shareholders

Shareholders take decisions reserved to them in general meetings and by resolutions

which can be ordinary or special. Resolutions are ordinary unless the CA 2006 states
otherwise. Resolutions can either be passed at a meeting or in writing. An ordinary
resolution requires a simple majority whilst a special resolution requires 75% or more to
be passed.

ss. 307-313 CA 2006 provide the notice requirements for general meetings. Failure to give
notice can invalidate a meeting (Musselwhite v CH Musselwhite & Son Ltd [1962] Ch
964). s.313 CA 2006 provides that accidental failure to give notice is to be disregarded in
determining whether notice has been properly given. s. 313 can be modified by a
company’s articles.

Informal resolutions may still be valid: Re Duomatic [1969] 2 Ch 265. This means that if all
shareholders with full knowledge of the facts pass an informal resolution it has the same
effect as if it were passed at a general meeting.

Members have the right to request a general meeting if they have at least 5% of the voting
shares in a company: s. 303 CA 2006

© The University of Law Limited 2019 16 Institute and Faculty of Actuaries

Professional Development

The court also has a power to call meetings: s306 CA 2006.

Private companies are no longer required to hold annual general meetings.

E. REMEDIES

If a director has taken property in breach of duty he holds that property on trust for the
company: JJ Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 1467.

Where a director has profited from breach of duty an account of profits is available: Murad
v Al-Saraj [2005] EWCA Civ 959.

Any transaction entered into as a result of breach of duty is voidable at the instance of the
company: Logicrose Ltd v Southend Utd FC [1988] 1 WLR 1256.

Any loss not compensated by the methods above may be the subject of equitable
compensation: Extrasure Travel Insurance Ltd v Scattergood [2003] 1 BCLC 598.

The court has the power to relieve a director from liability in whole or part if he has acted
honestly and reasonably: s.1157 CA 2006: Re D’Jan of London Ltd [1994] 1 BCLC 5

s.239 CA 2006 allows shareholders to ratify breaches of duty. Directors who are the
subject of the breach of duty claim and members connected to them cannot vote to ratify.

Ratification is not possible where the company is insolvent.

Fraud cannot be ratified.

Institute and Faculty of Actuaries 17 © The University of Law Limited 2019

 Professional Development

Answers to ‘Test yourself’

A. FUNDAMENTAL PRINCIPLES

Test yourself

Question: Last week you bought goods from Acme Ltd. Acme Ltd’s sole director
and shareholder is James. The goods are defective. Who should you bring a legal
action against?

Answer

Acme Ltd. Acme Ltd is a separate legal person and is distinct from its shareholders and
directors. Acme Ltd is the party to the contract and should be sued for breach of contract.

Test yourself

Question. Trade Ltd owns expensive residential properties in London. Trade Ltd’s
sole director and shareholder is Fred. Fred’s wife has started divorce proceedings
against him. Does she have any right to claim the properties owned by Trade Ltd?

Answer

No. The properties are owned by Trade Ltd and Trade Ltd is not a party to the divorce.
Fred’s wife could make a claim on the shares that Fred owns in Trade Ltd.

Test yourself

Question: X Ltd has just gone into liquidation owing creditors £1m. Khalid is the
sole director and shareholder in X Ltd. Khalid owns one £1 share which is fully
paid. Is Khalid liable to the creditors of X Ltd?

Answer

No. X Ltd is responsible for the debts it owes its creditors. Khalid’s liability is limited to his
investment. Put another way, the as a shareholder Khalid can is obliged to contribute to
the claims of creditors of X Ltd only if and to the extent he has not paid for his shares. If
Khalid’s shares are fully paid he has no further liability to creditors.

B. FORMATION AND CONSTITUTION

Test yourself

Question: John is solicitor to Z Ltd. John also owns a small, minority holding of
shares in Z Ltd. Last year Z Ltd instructed John to redraft Z Ltd’s articles. John
included a provision in the articles that he was to be retained for life as Z Ltd’s
solicitor. Last week Z Ltd stopped instructing John. Can John seek a remedy under
the articles?

Answer

© The University of Law Limited 2019 18 Institute and Faculty of Actuaries

Professional Development

No. Whilst the articles are a contract they are only binding in respect of membership
rights. Membership rights are rights which attach to shares or affect the exercise of rights
attached to shares. John’s right to be retained as the company’s solicitor is not a right that
arises because he owns shares in Z Ltd, unlike for example, a right to vote if his shares
were voting shares. John’s right to be retained as the company solicitor is what lawyers
call a personal right – i.e. it is personal to John. Personal rights cannot be protected in a
company’s articles. If personal rights are to be protected they should be protected in a
shareholders’ agreement.

C. DIRECTORS
Test yourself

Question: Which of the following do you think are the three most important factors
in determining whether someone is a de facto director?
 Calling yourself a director
 Holding a directors’ loan account
 Doing deals with major customers
 Signing VAT returns
 Allowing the company to call you a director
 Being a signatory to the company’s bank account

Answer

There is no single test to determine whether someone is a de facto director. Of the factors
above the three most important are probably:
 Holding a directors’ loan account
 Signing VAT returns
 Being a signatory on the company’s bank account

The latter two are functions you would only really expect a director in a company to attend
to. Calling yourself a director or allowing yourself to be called a director are the least
important factors. Much more important are factors that go to the heart of corporate
governance.

Test yourself

Question: Can employees sue directors for breach of duty?

Answer

No. Directors must have regard to the interests of employees. However, they do not owe
duties to employees. Duties are owed to the company which means only the company can
sue directors for breach of duty.

Test yourself

Question: Why might someone want to claim they are not a director of a company?

Institute and Faculty of Actuaries 19 © The University of Law Limited 2019

 Professional Development

Answer

Perhaps the law prevents them from being a director, for example an undischarged
bankrupt and someone who has been disqualified from being a director by a court under
the Company Directors Disqualification Act 1986.

Test yourself

Question: Directors control the issue of shares. What is the only proper purpose
for issuing shares? What might be an improper purpose for issuing shares?

Answer

To raise capital. Improper purposes for the issue of shares (and therefore a breach of
duty) include to prevent or enable a takeover or to dilute the holding of a shareholder so
as to make them less powerful.

Test yourself

Question: Why should directors put the interests of creditors above those of
shareholders if a company is insolvent?

Answer

If a company is insolvent it is unlikely that there will by any money for shareholders, who
get paid after creditors on insolvency. Therefore the actions of directors are more likely to
impact on creditors than shareholders.

Test yourself

Question: Does s. 173 prevent directors from delegating functions?

Answer

No. Companies could not function effectively if directors could not delegate functions.
Directors are not permitted to delegate responsibilities. In practice this means that if a
board delegates functions to others it should still supervise the exercise of those
functions.

Test yourself

Question: Alice and Bob are directors and shareholders of X Ltd. X Ltd provides
bridging finance to other companies. Last year Alice and Bob appointed their
brother Chris as a director. Chris has served two terms of imprisonment for fraud. It
has now emerged that Chris has defrauded X Ltd of significant sums. The fraud
involved channelling sums through Alice and Bob’s directors’ loan accounts. Have
Alice and Bob failed to exercise care and skill?

Answer

It is likely that Alice and B are in breach of s.174. It would not be a breach of s.174 to
employ Chris despite his previous imprisonment for fraud. However, a director is expected
to be reasonably diligent in the exercise of his/her functions. In this case a reasonable

© The University of Law Limited 2019 20 Institute and Faculty of Actuaries

Professional Development

director would be expected to ask questions about sums going through his/her loan
account. It is likely that had questions been asked the fraud would have been uncovered
which renders Alice and Bob in breach.

Test yourself

Question

Kamla is the managing director of X Ltd. Kamla is negotiating a lucrative contract

with Y Ltd. Y Ltd makes it known that it will not contract with X Ltd but if Kamla
resigns from X Ltd and forms her own company, Y Ltd will contract with her new
company. If Kamla resigns and forms a new company and takes the contract will
she be in breach of duty?

Answer
Yes. It is not a breach of duty to resign. However, it is a breach of duty to take up a
corporate opportunity that the company could have been offered without getting consent
of the board or shareholders to take up the opportunity. It is irrelevant that the company
would not be offered the opportunity and suffered no loss as a result of Kamla’s actions.

Test yourself

Question: Which of the following scenarios below are capable of giving rise to a
conflict of interest?
 If a director is a competitor of the company

 If a director is a major shareholder of the company

 If a director is a customer or supplier of the company

 If a director owns property which could be affected by the company’s

actions

 If a director advises the company

 If a director takes up opportunity declined by the company

 If a director makes a profit as a result of his/her directorship

 If a director is involved in another company which is involved as above

Answer
All of them! The list is taken from GC100 (in house counsel for FTSE100 companies) as
identifying circumstances in which s.175 is engaged.

Question: Lizzie is a director of X Ltd. Lizzie owns 100 shares in BT plc which she
inherited last year. X Ltd is negotiating to provide marketing services to BT plc.
Does Lizzie have to declare an interest?

Answer

No. Whilst Lizzie has an interest because of her shareholding in BT plc and the interest
relates to a transaction (X Ltd is to contract with BT plc) it is unlikely to give rise to a
conflict of interest given the small number of shares Lizzie owns in BT plc.

Institute and Faculty of Actuaries 21 © The University of Law Limited 2019

 Professional Development

Test yourself

Question: Mike is a director of Z Ltd. Mike is proposing to buy machinery from Z Ltd
for £80,000. Z Ltd’s last balance sheet showed net assets of £1m. Is shareholder
approval required for the transaction?

Answer

Yes. This is a substantial property transaction under s. 190 CA 2006 and therefore needs
shareholder approval. Mike is a director and is acquiring a non-cash asset (the machinery)
from his company. The non-cash asset is of substantial value as it is between £5,000 and
£100,000 and is more than 10% of the net asset value of the company.

© The University of Law Limited 2019 22 Institute and Faculty of Actuaries