Company Law Textbook PDF

Department of Law, Criminology
and Community Justice
Company Law
Module Manual 2013-2014

Level 5 & Level 6
Module Team: Mark Edwards, Jeremé Snook
© SHU All rights Reserved 2013
CONTENTS
Section Page no.
Module Calendar (lecture & seminar plan) 3
Module Descriptor 4
Teaching Staff and Contact Details 7
Student Support and Student Admin Contact Details 8
Student Responsibility 9
Assessment and Feedback 10
Textbooks and Materials 16
Guidance to Referencing and Citations 17
Lecture Programme:
LECTURE 1 – Methods of Trading; Formation; incorporation 28
LECTURES 2 & 3 – Separate legal personality & ‘lifting the veil’ of incorporation 31
LECTURE 4 & 5 – Promoters and Pre-Incorporation Contracts 35
LECTURE 5 & 6 – The Constitution of a Company 38
LECTURE 8 – Directors 44
LECTURES 9 & 10 – Directors’ Duties 47
LECTURE 11 - Disqualification of Directors 50
LECTURE 12 – Final Coursework briefing, Revision & Coursework Technique 54
LECTURE 13 – Shares and Shareholders (an overview) 55
LECTURE 14 – Shareholders’ Meetings and Voting 59
LECTURE 15 & 16 –Shareholders’ Rights and Remedies 62
LECTURES 17 & 18 – Maintaining and Raising Capital & Charges 65
LECTURES 19 & 20– Insolvency and Liquidation 69
LECTURES 21 & 22 –Vulnerable Transactions in Insolvency &Directors’ Liabilities 73
LECTURE 23 & 24 – Revision, Exam Preparation and Technique 76
Seminar Programme:
Seminar 1 - Introduction and Forming a Company 78
Seminar 2 - Companies and Separate Legal Personality 79
Seminar 3 - Separate Legal Personality and Lifting the Veil of Incorporation 80
Seminar 4 - Promoters and Pre-Incorporation Contracts 82
Seminar 5 - Company's Constitution, Article clauses & Shareholder Agreements 84
Seminar 6 - Directors' Duties 86
Seminar 7 – Feedback from the Coursework 88
Seminar 8 - A Shareholders’ Meeting and Voting 89
Seminar 9 - Minority Shareholder Protection 91
Seminar 10 - Charges: Fixed and Floating 93
Seminar 11 - Liquidation and vulnerable transactions 95
Appendix 1: Sample previous Examination Paper (May 2013) 97

MODULE CALENDAR – LECTURE AND SEMINAR PROGRAMME 2013/14
Wk W/C
No. Date Lectures Seminars
1. Methods of trading; Company Formation; 1. Introduction to Company Law and Forming a
10 30th Sept
Consequences of Incorporation. Company.
2. & 3. – Separate Legal personality and ‘Lifting 1. Introduction to Company Law and Forming a
11 7th Oct
the veil’ (2 lectures this week) Company.
12 14th Oct 4. Promoters and Pre-Incorporation Contracts. 2. Companies and Separate Legal Personality.
13 21st Oct 5. Promoters and Pre-Incorporation Contracts. 2. Companies and Separate Legal Personality.
3. Separate Legal Personality and Lifting the
14 28th Oct 6. Constitution of the Company
veil.
3. Separate Legal Personality and Lifting the
15 4th Nov 7. Constitution of the Company
veil.
16 11th Nov 8. Directors Generally. 4. Promoters and Pre-Incorporation Contracts
th
17 18 Nov Reading Week
th
18 25 Nov 9. Directors’ Duties 4. Promoters and Pre-Incorporation Contracts
19 2nd Dec 10. Directors’ Duties 5. The Constitution of a Company
th
20 9 Dec 11. Disqualification of Directors 5. The Constitution of a Company
th
21 16 Dec 12. Final Coursework briefing and technique. 6. Directors’ Duties
22 23rd Dec Student Vacation
th
23 30 Dec Student Vacation
th
24 6 Jan Student Study Week
th
25 13 Jan SHU Exam Period – 13th – 17th Jan
26 20th Jan SHU Exam Period – 20th – 24th Jan
27 27th Jan 13. Shares and Shareholders – an Overview 6. Directors’ Duties
rd
28 3 Feb 14. Shareholders’’ Meetings and Voting 7. Coursework Feedback
th
29 10 Feb 15. Shareholder Rights and Remedies 7. Coursework Feedback
30 17th Feb 16. Shareholder Rights and Remedies 8. Shareholders’ Meeting and Voting
17. Maintaining and Raising Capital and Charges
31 24th Feb 8. Shareholders’ Meeting and Voting
as Security
18. Maintaining and Raising Capital and Charges
32 3rd Mar 9. Minority Shareholder Protection
as Security
33 10th Mar 19. Insolvency and Liquidation 9. Minority Shareholder Protection
th
34 17 Mar 20. Insolvency and Liquidation 10. Charges: Fixed/Floating
35 24th Mar 21. Vulnerable Transactions in Insolvency 10. Charges: Fixed/Floating
st
36 31 Mar 22. Vulnerable transactions in Insolvency 11. Liquidation
th
37 7 Apr 23. Revision and Exam Technique 11. Liquidation
38 14th Apr Student Vacation
st
39 21 Apr Student Vacation
th
40 28 Apr 24. Revision and Exam Technique 12. Blackboard Revision exercises (all groups)
41- 5th – 30th
SHU Exam Period
44 May
4th -15th
2-3 Refer/Defer Assessment Period
Aug
3
MODULE DESCRIPTOR
MODULE TITLE Company Law

SI MODULE CODE 24-5005-00L & 24-6015-00L
CREDITS 20
LEVEL 5&6
JACS CODE M221
SUBJECT GROUP LAW
DEPARTMENT Law, Criminology and Community Justice
MODULE LEADER Mark Edwards
NOTIONAL STUDY Tutor-led Tutor-directed Self-directed Total Hours
HOURS BY TYPE 30 100 70 200
MODULE AIM(S)
The module is designed to introduce you to the legal structure of a company as an economic
mechanism of conducting business and to develop your knowledge, understanding and
appreciation of topics central to company law. The aim is to enable you to identify key legal issues
in relation to company law and propose coherent solutions to practical, hypothetical situations,
through the use of case law, statute and regulatory practice.
MODULE LEARNING OUTCOMES

By engaging successfully with this module you will be able to
– Level 5
 Identify, explain and apply legal principles and concepts in relation to company law.
 Evaluate and critically analyse the relevance and significance of facts presented, by coherently
synthesising a line of legal argument, justified by relevant legal authority.
 Demonstrate research skills by distinguishing between the range of legal and academic sources
that are relevant.
 Use and explain specific terminology in relation to company law.
 Solve legal problems by identifying solutions and critically evaluate aspects of law, in a written
form, to accepted academic and legal conventions.
Level 6
 Identify, explain and apply legal principles and concepts in relation to company law in
sufficient detail for the purpose and identify uncertain, ambiguous, contradictory or limited
legal aspects.
 Evaluate and critically analyse the relevance and significance of facts presented, by coherently
synthesising a line of legal argument, justified by relevant legal authority and make defensible
judgements and arguments.
 Demonstrate research skills by identifying a broad range of sources and distinguishing

between the range of legal and academic sources that are relevant.
 Use and explain specific terminology in relation to company law.
 Solve legal problems by identifying focussed contemporary solutions and critically evaluate
and comment on aspects of law, in a written form, to accepted academic and legal conventions.
4
INDICATIVE CONTENT
The learning outcomes will be met by covering the following general topics in the module:
 Company formation
 Separate Legal Personality and lifting the veil
 Promoters and Pre-incorporation contracts
 Company Constitution
 Management of a Company – in particular roles and responsibilities of directors
 Company Ownership – in particular shares and shareholders
 Raising of Capital
 Insolvency and liquidation
 Vulnerable transactions in insolvency and directors’ liabilities
LEARNING AND TEACHING METHODS
You will be supported in your learning, to achieve the learning outcomes, in the following ways:
Contact sessions
Lectures:
The module is delivered via a weekly one-hour lecture designed to introduce a particular topic
area and to concentrate on the key aspects of that part of the law. The lecture is delivered via a
PowerPoint presentation, slides for which are provided via Blackboard (see VLE below).
Seminars:
Seminars are delivered fortnightly to timetabled classes of a maximum of 20 students. Typically
seminars are based on hypothetical company law problem scenarios that require adoption of an
‘enquiry-based’ learning approach to study. You are required to come prepared to discuss pre-
prepared solutions to the problem. Learning occurs through the collective contributions of
students and is guided and corrected by the seminar tutor. The learning in the seminars feeds-
forward to subsequent seminars and learning is directly aligned to the assessment tasks in the
module.
The approach to the subject matter is broadly incremental, each lecture building on the knowledge
gained in the earlier lectures. The role of the seminars is to reinforce legal and academic content
and to provide opportunities for you to apply, discuss and reflect on your learning.
Module Manual
Learning is supported by a Module Manual (this document) that contains a full lecture and
seminar schedule, details on the aims and objectives, the learning, teaching and implementation
strategy, an overview of assessment and feedback on the module, student resources required,
details of the module delivery team, details of student support staff, the role of the student within
the module, summative assessment feedback criteria, lecture outlines, seminar questions with
preparation tips and a sample prior year assessment paper.
5
Virtual Learning Environment (VLE)
Blackboard
The delivery of the module is aided by a bespoke “Blackboard” site to which all students are
enrolled. Blackboard is the main communication device with students outside contact sessions. The
Blackboard site includes an electronic version of the Module Manual and all the material within
that Manual (detailed above) can be accessed electronically.
In addition, the Blackboard site includes:

 links to PowerPoint slides for all lectures
 access to formative assessment in the form of multiple choice questions that support and
supplement each seminar
 links to some key cases and statutes
 assessment guidance
 guides to using legal databases (e.g. Westlaw and LexisLibrary)
 guides on how to reference for the assessment task using the Oxford Standard for Citation
of Legal Authorities
 external links to key Government and legal profession web sites
 assessment details, criteria and guidelines
 on-line submission of coursework
 feedback on grades attained in formative and summative assessment
 a Blackboard ‘help’ content area
 rules and regulations in relation to the University’s cheating procedure
On-line Multiple Choice Questions and Feedback

Learning is supported outside contact sessions with a set of formative assessment questions
through a series of on-line “Multiple Choice Questions” (MCQ’s) that support and supplement
each seminar. Each question provides the opportunity for additional information to supplement
knowledge, whether the question is answered correctly or not. This will give you immediate
feedback on how you are progressing on the module. The use of this Computer Assisted Leaning
(CAL) will help you develop and broaden research skills as well as “forcing” the use of IT in your
learning. As these questions support the seminar preparation, it also aids time management skills.
Weekly surgery/Meetings/Drop-in sessions

Each tutor has a formal weekly ‘surgery’ time that students can arrange to meet their seminar tutor
in order to support their learning. You can also contact tutors via-e-mail and arrange mutually
convenient times for meetings. At specific times throughout the module, drop-in sessions may be
timetabled to offer feedback or guidance. Students can e-mail or call tutors for advice or guidance.
Peer Support Groups

e-learning is further built into the module, with the ability of students to use a discussion board to
act as a method of peer support. Additionally you can optionally work in peer groups to
collaborate on seminar preparation work via a WIKI. Please contact the Module Leader, Mark
Edwards, if you would like this to be set up for you and your peers.
6
Teaching Staff and Contact Details
Teaching Staff
The members of staff teaching on this course are:
Mark Edwards (Module Leader)
Dr. Jeremé Snook
Mark Edwards has overall administrative responsibility for the module.
Students will be allocated to seminar groups. It is essential that you keep to these groups and
changes will be agreed only in exceptional circumstances.
Please note that attendance at seminars is compulsory and registers are kept.
Staff Contact Details
Mark Edwards Office: Southbourne, Room 243

(Module Leader) Tel: 0114 225 5454
e-mail: mark.edwards@shu.ac.uk
Dr. Jeremé Snook Office: Southbourne, Room 240

Tel: 0114 225 2285
e-mail: j.snook@shu.ac.uk
Details of ‘surgery’ times or other times when students can arrange to see tutors can be found
on Blackboard.
7
Contact Details for Student Support and Student Administration Staff
HELPDESK
Helpdesk is often the best first point of contact as they can help directly, or put you in
contact with the relevant section that can assist with your query.
Tel: - 0114 225 2543

e-mail: - fdsenquiries@shu.ac.uk
Other staff supporting students are:
Student Support
Tel: - 0114 225 2543 (best accessed via Helpdesk)
e-mail: - Southbourne@shu.ac.uk
Staff: -
Howard Mitchell – Student Support Officer
Seyi Junaid – Student Support Administrator
Nicola Pearson – Student Support Administrator
Student Administration
Tel: - 0114 225 2559
e-mail: - Carl.Green@shu.ac.uk
Staff: - Carl Green – Student Administrator
Contacts during periods of staff absence

If staff are not contactable (usually because of being on leave, or away from the Campus on
University business) they will have an out-of-office reply set up on their e-mail directing you
who to contact. Invariably you will be re-directed to a colleague or the helpdesk (details
above) and to information on the Blackboard site.
Always check out Blackboard and ShuSpace for information as most questions can be
answered on there.
8
Students' Role within the Module
We assume that you will take responsibility for your own learning and we expect you to attend
ALL lectures and seminars, as learning is a shared experience and you have a part to play in
promoting both individual and collective understanding. Many of the legal concepts and
terminology will be new to students (it has its own unique language in parts) so attendance in
lectures and seminars is mandatory. Attendance is essential to:
 gain understanding of the relevant legal principles and their application
 help you test your understanding of the material with your module tutor
 help you develop your knowledge and skills
 help you prepare for all your assessments
 receive information about the module
 receive feedback on your understanding and progress
Preparation for seminars

We want you to feel comfortable attending seminars as these are vital to your development and
overall results. Therefore, it is essential that you prepare the seminar material as indicated in the
module handbook in advance of attending.
However, this does not mean we expect students to know all of the answers all of the time - far
from it. Students learn by getting things wrong, as well as right, and our seminars are such that we
encourage students to have a go!
That said, we know students do benefit by doing sufficient work in advance of the seminar, as then
they really do gain the maximum benefit from it. This approach works as it prevents students
'sponging' off the work of others. It also prevents the seminar becoming a second lecture, which is
fruitless for everyone.
Absence
If you are absent, which should be because of an emergency or serious illness only, then please be
courteous and let your tutor know as soon as you can, preferably in advance. If you are absent for
a significant period of time you must also inform the law student support staff in Southbourne.
If the absence is due to illness or other personal problems, which may affect your assessments(s),
you may need to submit an Exceptional Extension Request Form or an Extenuating Circumstance
Form. These are available on shuspace or from Southbourne Helpdesk. Please see the submission
of exceptional extension requests and the submission of extenuating circumstances for more
information.
Plagiarism
We actively have systems that detect plagiarism, so please familiarise yourself with the SHU
assessment and plagiarism regulations. These can be found on both ‘shuspace’ and the Company
Law Blackboard site.
Important points
 there is a direct correlation between attendance, seminar preparation and good results in this
module.
 students who always attend do very well in the module - Company law historically boasts a
high level of 2:1 and 1st class student marks!
 students who don't attend regularly do very badly - poor attendees struggle with the legal
concepts in company law and invariably fail.
9
ASSESSMENT
Task TASK DESCRIPTION SI Code Task Word Count /

No. Weighting % Duration
1 Essay – Problem question CW 50% 2,000
2 Examination – (Pre-Seen) EX 50% 2 hours
ASSESSMENT CRITERIA
The learning in the module is measured by two separate summative assessment tasks: coursework
and an exam, marks from which count towards the overall module mark. It is also formatively
assessed by a series of separate on-line ‘tests’ in the form of multiple choice questions.
Formative
The series of multiple choice questions, comprising between 10 and 20 questions each, are set to
supplement most seminar topic areas. These are completed after the lecture on the topic area, but
before the seminar, however, are not linked to the overall module marks.
Summative
Task 1 – Coursework.
This task is a 2,000 word answer to a company law based problem question on semester one
delivered materials. It is due in after the end of semester one (see Assessment Manager for exact
date) and is weighted at 50% of the module marks. The coursework will be available to view on
Blackboard just before reading week. Please note that staff are not allowed to comment on draft
assignments in advance of submission. Please refer to further key information on this task on page
13 onwards below.
Task 2 - Examination
This task is a pre-seen exam where you are required to answer the questions set, within a two hour
period. The assessment comes at the end of the academic teaching year in May. This task is also
weighted at 50% of the module marks.
The Criteria for Assessment

You are assessed based on the following criteria, in both summative assessment tasks, in order to
calculate whether the learning outcomes (above) have been met based on the question(s) set:
 Identification of the main legal issues raised

 Identification of the facts creating legal issues
 Coverage of the relevant law
 Application of the law to the facts
 Legal conclusions drawn
 Understanding of the topic
 Effective conclusion drawing together key themes
 Presentation of references
 Spelling, grammar and syntax
 Structure and Presentation
10
Pass Descriptor
To pass the module a student will meet the following criteria:
 Sufficient key aspects of the main legal issues, raised by the question, are identified.
 Credible grasp of some relevant legal principles applied to the facts.
 Use of plausible legal and academic authority to back up arguments made.
 Some credible solutions incorporated in the work.
 The use of a recognised method of referencing (OSCOLA only for coursework).
 The work written is understandable and commensurate with a minimum standard acceptable
for an English law degree.
 The work has some logical or credible structure and is presented in line with academic
conventions and guidance supplied in an assessment rubric.
Retrieval of failure
The module is governed by university regulations on assessment which provides that a mark of
40% must be achieved in the module overall to pass.
Re-assessment for students, who have not achieved the 40% module minimum mark, is done on a
task for task basis. A new coursework question and new exam is set for the August re-assessment
period on the same basis as the original tasks above. Under university regulations, following
referral, the mark for each task is capped at 40%.
Students will be able to benefit from general and specific feedback (see feedback section below) on
the original task to help improve in the specific re-assessed task.
FEEDBACK
You will receive feedback on your performance in the following ways
Feedback through seminars

You will receive informal feedback from the tutor, and from peers, in relation to how you are
progressing on the module in seminars. You can self-assess your own performance and
understanding in these seminars, and reflect on how you might further enhance your own
learning. Seminars are fortnightly so this method of feedback is immediate and built into the
module from start to finish.
Feedback through e-learning/formative assessment

On-line Multiple Choice Questions (MCQ) – Most seminar topics are supported by an on-line
multiple choice test which acts primarily as formative assessment. The MCQ’s are set up to give
specific feedback on both correct and incorrect answers. This supplements understanding and
knowledge and feeds back, on completion, on a question by question basis. Overall you gain a
mark (e.g. a score out of 20) that immediately feeds-back to give an overall indicator of how
successful your learning on that topic has been so far. As any learning gaps are filled by feedback
on incorrect answers, and even correct answers are supplemented by feedback and additional
information. This extra learning feeds-forward into the seminar on that topic.
11
Discussion boards & WIKI’s – These mechanisms allow for peer feedback in an environment where
learning is not reliant on tutor input. It allows for the learning gained from these mechanisms to
feed-forward into seminars, in addition to formative and summative assessment.
My Grades – Formative and summative feedback on marks can be accessed through the VLE
Blackboard site. Formative results on the MCQ's are available immediately on completion of the
test. Marks for summative assessment will be made in line with the timescales detailed below.
Summative assessment
Task 1 (problem question coursework). A tutor will complete a formal ‘feedback sheet’ that is
designed to give feedback on the key assessment criteria. This feedback allows you to see which
areas of your learning on that assessment task have been good, and which areas need to be
improved. The form allows you to reflect on the positives and negatives in your work and
implement strategies to improve future work. It feeds-forward into the next assessment task as the
key areas being assessed are automatically broken down into their component parts, so a student
can focus future learning as appropriate. There is also an additional comments section that allows
for specific comments on the work by the tutor and, by corollary, this gives you an indication how
future work could be improved. Feedback would normally be made in line with timescales defined
on Assessment Manager.
Task 2 – pre-seen exam. Feedback can be sought by students directly to tutors immediately
following the release of marks.
One-to-one feedback
You can arrange to see a tutor individually during timetabled surgery time, or at a mutually
convenient time, to obtain feedback on your learning. Usually this is best done following specific
topics, and the seminars on that topic.
12
ASSESSMENT OF THE COURSEWORK PROBLEM QUESTION.
The following two pages contain a copy of the marksheet that your tutor will complete for the
problem question coursework assessment you are required to do.
Please read it as it indicates what you need to do, in each aspect of your work, to gain the highest
possible mark.
Your work will be assessed on the following areas:
IDENTIFICATION OF THE MAIN LEGAL ISSUES RAISED
IDENTIFICATION OF THE FACTS CREATING LEGAL ISSUES
COVERAGE OF THE RELEVANT LAW
APPLICATION OF THE LAW TO THE FACTS
LEGAL CONCLUSIONS DRAWN
UNDERSTANDING OF THE TOPIC
USE OF AUTHORITY
OVERALL CONCLUSION DRAWING TOGETHER KEY THEMES
PRESENTATION OF REFERENCES
SPELLING, GRAMMAR AND SYNTAX - Note, this is extremely important.
STRUCTURE AND PRESENTATION
You should note that each section does not carry the same weighting, and that the final mark
reflects the academic worth of the assignment as a whole.
13
FEEDBACK SHEET – PROBLEM ASSESSMENT
STUDENT NAME: ......SAMPLE ONLY...................................... MODULE: .............SAMPLE ONLY.................................................
1st 2:i 2:ii 3rd FAIL FAIL

70%and over 60 - 69% 50 -59% 40 - 49% Between 30% and 39% Below 30%
Introduction
IDENTIFICATION Excellent and Accurate synopsis of the Generally accurate synopsis Limited synopsis of the Incomplete synopsis of the Very little or no synopsis of
comprehensive synopsis of main legal issues raised by of the majority of main main legal issues raised by main legal issues raised by the main legal issues raised
OF THE MAIN the main legal issues raised the question. legal issues raised by the the question. the question. by the question.
LEGAL ISSUES by the question. question.
RAISED
Body of Essay
IDENTIFICATION Comprehensive Identification of the Majority of the facts and Limited identification of Largely incomplete Very little or no
identification of the facts significant facts and the the related legal issues facts and the related legal identification of the facts identification of the facts
OF THE FACTS and the related salient legal related legal issues identified throughout. issues. and the related legal issues. and the related legal issues.
CREATING LEGAL issues throughout. throughout.
ISSUES
COVERAGE OF Excellent detailing of the Accurate detailing of the Generally accurate detailing Limited detailing of the Largely incomplete Very little or no detailing of
relevant law. relevant law. of the relevant law. relevant law. detailing of the relevant the relevant law.
THE RELEVANT law.
LAW
APPLICATION OF Excellent application. Cogent application. Reasonable application. Limited application. Largely incomplete Very little or no
application. application.
THE LAW TO THE
FACTS
LEGAL Excellent conclusions Cogent and intelligent Conclusions attempted but Conclusions limited, Largely incomplete Very little or no attempt to
drawing together your conclusions generally. lacking in adequate detail. perfunctory or repetitive. conclusions. conclude.
CONCLUSIONS evidence and stating advice
DRAWN clearly.
UNDERSTANDING A comprehensive and high Wide-ranging degree of Reasonable knowledge and Limited knowledge and Largely incomplete Very Little or no
degree of knowledge and knowledge and understanding. understanding. knowledge and knowledge and
THE TOPIC understanding. understanding. understanding. understanding.
1st 2:i 2:ii 3rd FAIL FAIL
70%and over 60 - 69% 50 -59% 40 - 49% Between 30% and 39% Below 30%
USE OF Excellent use of relevant Accurate use of relevant Adequate use of relevant Limited or weak use of Largely incomplete use of Very little or no use of
authority for resolving the authority for resolving the authority. Some inadequate relevant authority. relevant authority. relevant authority.
AUTHORITY problem. problem. or irrelevant use of
authority.
Overall Conclusion
OVERALL Excellent conclusion Accurate conclusion Adequate conclusion Conclusion lacks Conclusion is incomplete, Very limited conclusion or
drawing together the key drawing together most of drawing together the meaningful content and is vague, and/or repetitive. conclusion missing.
CONCLUSION themes of advice given, the main points of advice, general themes of advice largely repetitive.
avoiding unnecessary with limited unnecessary given.
repetition. repetition.
Other Key Features

PRESENTATION References used effectively References generally used References used References infrequently References poorly used, Very little or no attempt at
and appropriately cited, correctly and appropriately inconsistently and used correctly, cited, cited and formatted. Weak referencing or citations.
OF REFERENCES formatted and listed. cited, formatted and listed. occasionally incorrectly formatted or listed, bibliography. Very weak or no
cited, formatted and listed. correctly. bibliography.
SPELLING, No, or extremely few, Few errors of grammar, Occasional errors of Frequent errors of Grammar, spelling and/or Grammar, spelling and/or
errors of grammar, spelling spelling or syntax. grammar, spelling or grammar, spelling or syntax, and use of English, syntax, and use of English,
GRAMMAR AND or syntax. Articulate and Effective use of English. syntax. Style generally syntax. Style too casual, is consistently poor. need urgent attention.
SYNTAX persuasive use of English. effective. too colloquial and/or
careless.
STRUCTURE AND Carefully organised, Well organised structure Organisation, structure and Careless organisation, Poor organisation, structure Very poor organisation,
coherently structured and and presentation. presentation generally structure and presentation. and presentation. structure and presentation.
PRESENTATION excellently presented. satisfactory.
15
LEARNING RESOURCES (Including textbooks and materials)
The key learning resources available to support students’ learning are:
Textbooks:
Alan Dignam and John Lowry, Company Law (7th edn, OUP 2012)
Brenda Hannigam, Company Law (3rd edn, OUP 2012)
Charles Wild and Stuart Weinstein, Smith & Keenan’s Company Law (16th edn, Longman 2013)
Stephen Mayson, Derek French and Christopher Ryan, Mayson French & Ryan on Company Law
(30th edn, OUP 2013)
Cases & Materials Textbook:

Len Sealy & Sarah Worthington, Cases and Materials on Company Law (10th edn, OUP 2013)
Statute Book:
Derek French, Blackstone’s Statutes on Company Law 2013-14 (OUP, Oxford 2013)
Other learning resources:
 The ‘Virtual Learning Environment’ (VLE) – the e-learning mechanism known as Shuspace –
and specifically Blackboard (also see above)
 Legal databases – in particular Westlaw and LexisLibrary

o These resources are invaluable as they provide on-line electronic links to cases, statutes,
journal articles and other key legal materials
 The Learning Centre http://library.shu.ac.uk

o Core text books
o Key text area
o Silent study area
o Group study areas
o Individual work areas
o PC’s, Wifi for laptops
o Hire of audio-visual equipment
 Company Law Module Manual (details of key information it contains can be found above)
 Lecture slides
o These are available to print off in advance of lectures to assist with note taking and to
form a basis for research for seminars. These will also be a useful aid to revision later
on in the module.
 Screen-casts
o Occasionally screen-casts are used to graphically present legal material or to explain
seminar or lecture concepts. This can be a useful way to start logically constructing
structured legal arguments.
 Company Law Club on-line

o This is an on-line resource with up-to-date information on all the key areas covered by
the course.
Guide to Referencing and Citation for Law Students
Thorough, accurate and consistent referencing is essential in all academic work. Whenever
you refer to either the work or ideas of someone, or are influenced by another's work, it is
crucial that you acknowledge this. Similarly, if you make a direct quotation from someone's
work, this must be referred to accurately.
There are a number of systems of referencing. This guide offers guidance based on the fourth
edition (4th edn, Hart Publishers 2012) of the Oxford University Standard for the Citation of
Legal Authorities (OSCOLA). The full OSCOLA document, giving more examples and covering
the full range of materials/sources, is available online from Oxford University.
Quotations and Referencing
As the OSCOLA guide explains:
There are two golden rules for the citation of legal authorities. One is consistency. The
other is consideration for the reader. Legal writing is more persuasive when the author
refers to legal materials in a clear, consistent and familiar way. When it is easy to
identify and to find the author’s sources, it becomes easier for the reader to follow the
argument.1
Passages taken from the work of others must be suitably acknowledged with the use of
quotation marks and a clear reference to the source.
Accurate quoting and referencing give credit both to you and to those whose work you have
used. References and quotes reflect your research and indicate the breadth and depth of the
reading you have undertaken. They also allow others to follow up on the work that you have
done.
Plagiarism
If you do not accurately reference your work, you may commit plagiarism. This is a disciplinary
offence under the University's Assessment Regulations, is regarded as cheating (whether
intentional or not), and will normally result in the coursework/assessment being marked as
zero. More serious consequences are also likely to follow. You should be aware that the Law
Society and Bar Council requires all applicants for membership to declare whether they have
ever 'committed an act of plagiarism or cheating in any form of assessment', and will require
two referees to provide written statements to the Society concerning the issue. You should
also be aware that employers are extremely reluctant to hire people who have been found
guilty of acts of dishonesty.
It is important, therefore, to make a careful note of your sources of information as you are
doing your research and collecting materials to incorporate in your answer, so that you can
identify and acknowledge them when writing up and list those sources in your bibliography.
For more details regarding plagiarism and collusion please refer to the University regulations
which can be found on the student intranet at http://students.shu.ac.uk/rightsrules/index.html
under ‘Misconduct’.
If you are still in doubt about this issue, please see your academic advisor or module tutor.
1
OSCOLA (4th edn, Hart Publishers 2012) 1.
17
References: Footnotes
Law coursework should be referenced using footnotes (rather than endnotes or Harvard/in-
text citation).
Each time you use a source, directly or indirectly, the reference must be accompanied by a
footnote giving details of the source, as outlined below.
Your footnotes will give the details of the source, including page or paragraph numbers where
appropriate. Close each footnote with a full stop (or, exceptionally, a question or exclamation
mark).
In the main body of your coursework, substantial quotations (of three lines or more) should be
single spaced, indented from the margin and preceded by a colon (quotation marks should not
be used). This ensures that there is a clear distinction between your own words and the words
you are quoting. For example:
Howarth has argued that:
In cases involving injuries caused by the police in the course of apprehending

suspects, whether the injury is to the suspect or to third parties, a relevant
consideration is the public interest in the punishment and prevention of crime. The
more dangerous the criminal to public safety, the more risks the police should be
entitled to take.2
The number after the quote - in this case 2 - links to a footnote giving details of the source
quoted, including the page(s) or paragraph number(s) (see below).
Shorter quotations (of up to three lines) should be enclosed within quotation marks. For
example:
Dixon suggests that, under the revised regime introduced by the Land Registration Act 2002,
‘successful new claims to adverse possession of registered land are likely to slow to a thin
trickle.’3
 For further guidance on footnotes, see OSCOLA, pages 3-5.
How to reference specific materials in footnotes
Books:
When referencing books/textbooks, the format is:
Author, title (edition - if not the first, publisher year) page(s).
For example:
David Howarth, Textbook on Tort (Butterworths 1995) 51.
Hilaire Barnett, Constitutional & Administrative Law (10th edn, Routledge 2013) 10.
2
David Howarth Textbook on Tort (Butterworths 1995) 51.
3
Martin Dixon, Modern Land Law (8th edn, Routledge 2012) 443.
18
If there are two authors, name both; more than two, name only the first followed by 'and
others'. Thus:
William Twining and David Miers, How to do Things with Rules (4th edn, Cambridge
University Press 1999).
Royston Goode and others, Transnational Commercial Law: International Instruments

and Commentary (OUP 2004).
When referencing edited books, the editor/s name/s should be followed by (ed). For example:
Richard Wilson (ed), Human Rights in the ‘War on Terror’ (Cambridge University Press
2005).
A chapter in an edited book should give:
Author, 'title of the chapter', the edited book reference. Thus:
Geoffrey Robertson, ‘Fair Trials for Terrorists?’ in Richard Wilson (ed), Human Rights
in the ‘War on Terror’ (Cambridge University Press 2005).
 For further guidance on referencing books, see OSCOLA, pages 34-37.
Journal Articles:
When referencing journal articles, the format is:
Author, 'title of article' (year) | volume(issue) | journal name or abbreviation | first page,
specific page(s) that is/are being referred to or from which the quotation used is taken.
For example:
Clare McGlynn, 'Families, Partnerships and Law Reform in the European Union:
Balancing Disciplinarity and Liberalisation' (2006) 69(1) MLR 92, 94.
If you are using a journal article that has only been published electronically, use the same
format as above, but add the web address or details of the database used to access the
article, followed by the date on which you most recently accessed the article. For example:
Richard Stone, ‘Forming Contracts without Offer and Acceptance, Lord Denning and
the Harmonisation of English Contract Law’ (2012) 4 Web JCLI
<http://webjcli.ncl.ac.uk/2012/issue4/pdf/hyde4.pdf> accessed 1 August 2013.
When referencing journal articles, use an accepted abbreviated form of the journal name
where available; you can search by name/title on the Cardiff Site. For example, MLR is the
preferred abbreviation for Modern Law Review.
 For further guidance on referencing journal articles, see OSCOLA, pages 37-38.
19
Online/Electronic Sources:
When referencing online sources, the format is:
Author, ‘title’ (site, date of article/source) <address> date accessed.
For example (taken from OSCOLA):
Sarah Cole, ‘Virtual Friend Fires Employee’ (Naked Law, 1 May 2009)
<www.nakedlaw.com/2009/05/index.html> accessed 19 November 2009.
General note: If you are using an electronic source do not simply copy and paste from the
browser's address bar. You should always provide the title of the work you are referencing and
the author and date, if available, separate from the URL. You should ensure that any web
address is permanent so that it can be followed by the reader.
 For further guidance on referencing online sources, see OSCOLA, page 42.
News/Newspaper Articles:
When referencing newspaper articles, the format is:
Author, ‘the title’ the name of the newspaper in italics (city of publication, date).
Example:
Vikram Dodd, ‘Two Held Over Suspected Mosque Bombing Campaign’ The Guardian
(London, 20 July 2013)
If the article is sourced from the internet, provide the web address and date of access.
Example:
Peter Woodman, ‘Drink-drive Accidents Soared by 25% Last Year’ The Independent
(London, 1 August 2013) < http://www.independent.co.uk/news/uk/crime/drinkdrive-
accidents-soared-by-25-last-year-8741903.html> accessed 1 August 2013.
Radio, Television and Film
Use the following styles for radio and television programmes and films.
Radio: Title of broadcast, date of broadcast, station; e.g.
Unreliable evidence, 24/04/2010, BBC Radio 4
If you have listened to a recording of the show provided through the VOD service or a CD
recording, add [VOD Sound recording off-air] or [Sound recording off-air] as appropriate, e.g.
Law in action, 25/02/2010, [VOD Sound recording off-air] BBC Radio 4
Television: Title of broadcast, date of broadcast, station; e.g.
20
In search of medieval Britain: Heartlands, 23/04/2010, BBC4
If you have watched a recording of the show provided through the VOD service or a DVD
recording, add [VOD recording off-air] or [DVD off-air] as appropriate, e.g.
Criminal law, 18/11/2006, [DVD off-air] ITV3
Feature films / training films: Title, year of release, [format], director / presenter,
production company; e.g.
Property, 2009, [DVD], Lucinda Acland, Legal Network Television
Filmed lectures: Title, date of lecture, [format], lecturer; e.g.
Confession and identification evidence, 17/02/2010, [VOD Off-air], Bob Hoskins
If you watch / listen to a broadcast via a service such as iPlayer, use the original date of
broadcast.
Personal Communications:
If you have conducted empirical research as part of your dissertation and need to quote from a
personal communication (whether an e-mail or letter), give the name of the author and the
recipient of the communication, and the date. If you are yourself the author or recipient of the
communication, say ‘from author’ or ‘to author’ as appropriate.
Example:
Letter from Nick Clegg to author (20 January 2013)
Parliamentary Proceedings
Refer to debates reported in Hansard as follows: HC Deb or HL Deb followed by date, volume,
and column/s.
Thus:
HC Deb 7 February 1940, vol 357, cols 234-45

HL Deb 1 July 2013, vol 746, col 975
HL Deb 21 July 2005, vol 673, col WA261
HC Deb 25 July 2006, vol 449, col 1199W
HC denotes House of Commons / HL denotes House of Lords

The W and WA refer to written answers. If you are quoting from before 2001, put WA in
parentheses to indicate a written answer.
Refer to Bill committee debates reported in Hansard as follows: title of the Bill followed by Deb
date, column.
Thus: Armed Forces Bill Deb 17 February 2011, cols 89-118
21
Refer to other committee material, such as reports, as follows: name of committee, report title
in italics then in brackets house session, paper number.
Thus:
Business, Innovation and Skills Committee, Is Kraft Working for Cadbury? (HC 2010-
12, 871)
Other official materials
For materials such as reports of law reform bodies or government departments, give the name
of the organisation/department, the title of the report (in italics) and reference number if any,
and the date in brackets. If you are referring to, or quoting from, a specific page or paragraph,
add the page or paragraph (para) number after the brackets. Thus:
Home Office, Ending Gang and Youth Violence Report: One Year On (Cm 8493, 2012)
12.
Criminal Law Revision Committee, Theft and Related Offences (Cmnd 2977, 1966).
Joint Committee on Human Rights, Enhancing Parliament’s Role in Relation to Human

Rights Judgments (2009-10, HL 85, HC 455) paras 13-17.
Law Commission, Liability for Psychiatric Illness, Consultation Paper No 137 (1995).
To list Royal Commissions, give the title of the Commission's Report plus year; Command
number; Chair's name. Thus:
Report of the Royal Commission on Gambling (1978, Cmnd 7200, Chairman Lord
Rothschild)
European Commission documents
For European Commission documents, give the following details: the body that produced the
document, the title and the COM number.
Thus:
Commission, 'Proposal for a Council Regulation repealing Regulation (EEC) No

3448/80 on the implementation of Article 43 of the 1979 Act of Accession concerning
the system of trade applicable to the goods covered by Regulations (EEC) No 3033/80
and (EEC) No 3035/80' COM(2010) 751 final
Statute and Case Law
Statute and case law are two of the principal sources of law in the United Kingdom.
When referring to statutes in your coursework, the title of the Act (or an abbreviated version of)
should generally be included main body of your answer (rather than only in a footnote).
22
UK legislation:
Cite a statute by its title (using capitals for the major words) and year, and section etc as
appropriate. For example:
Unfair Contract Terms Act 1977, s 2(1)
Human Rights Act 1998, s 3(1)
 For further guidance on referencing UK legislation, see OSCOLA, pages 23-28.
EU legislation Type of legislation number title OJ reference, article number. For example
(taken from OSCOLA document):
Council Regulation (EC) 139/2004 on the control of concentrations between

undertakings (EC Merger Regulation) [2004] OJ L24/1, art 5
 For further guidance on referencing EU legislation, see OSCOLA, pages 28-29.
Case Law:
‘The components of a typical case citation are the case name, the neutral citation and the law
report.’4
The neutral citation will be the official number attributed to the judgment by the court and
must always be used on at least one occasion when the judgment is cited in a later
judgment. Once the judgment is reported, the neutral citation will appear in front of the
familiar citation from the law report series. Thus: Smith v Jones [2001] EWCA Civ 10, [2001]
QB 124, [2001] 2 All ER 364, etc.
Cases should be cited as follows:
Where no neutral citation is available: Case name citation (court) page.
Example: Re W (a minor) (medical treatment) [1992] 4 All ER 627 (CA (Civ)) 646
Where a neutral citation is available: Case name neutral citation, report citation, page.
Example:
R. (on the application of L) v Commissioner of Police of the Metropolis [2009] UKSC 3,

[2010] 1 AC 410, 412
If you have used a report with paragraphs rather than pages, put the paragraph(s) numbers in
[ ] after the citation, e.g.
A v Secretary of State for the Home Department [2004] UKHL 56 [118]-[119]
4
OSCOLA (4th edn, Hart Publishers 2012) 13.
23
When referring to case law in your coursework, the name of the case (in italics) should
generally be included in the main body of your answer, whilst the citation should be placed in a
footnote. For example:
In the case of Re W (a minor) (Medical Treatment)5 it was held that …
 For further guidance on referencing cases, see OSCOLA, pages 13-23.
Bibliography, Table of Cases and Table of Statutes
A bibliography, a table of cases, and a table statutes, should be provided at the end of your
coursework (each should start on a separate page).
Bibliography
The rules for bibliography are based on OSCOLA (pages 11-12) - see
http://www.law.ox.ac.uk/published/OSCOLA_4th_edn.pdf for details.
A bibliography gives details of the books, articles, Parliamentary proceedings, government

publications and other sources that you have quoted from, referred to, or cited in your
answer This should appear at the end of your assignment, starting on a new page. Items in
the Bibliography should be ordered alphabetically by author surname and, when there is more
than one entry by an author, then by date. Where there are two or more works by an author in
the same year distinguish them by date and letter (e.g. 1995a; 1995b).
Items in bibliographies should take the same form as the citations used in footnotes (see
guidance above), with the following important exceptions:
i. Your footnotes will, where necessary, specify the page/s or paragraph/s used for the
particular reference (these should not be included in your bibliography).
ii. In the bibliography, the author's surname comes first, followed by initial(s) (which, as
opposed to in footnotes, are used instead of the author’s full forename).
Books
For the purposes of a bibliography, the format is:
Author surname initial(s), Title in Italics (edition if not the first, publisher date)
Example:
Treitel G H, The Law of Contract (12th edn, Sweet and Maxwell 1995)
5
[1992] 4 All ER 627 (CA (Civ)) 646.
24
Journals
When referencing journal articles in a bibliography, give author's surname and initials, the title
in single inverted commas, year, volume, issue, journal name and page references.
Example:
McGlynn C, 'Families, Partnerships and Law Reform in the European Union:

Balancing Disciplinarity and Liberalisation' (2006) 69(1) MLR 92
Table of Cases
Give a list of cases after your bibliography, starting on a new page. List the cases
alphabetically by title.
Note: if you have used a database to access case reports, list the details of the cases as
detailed below. Do not give the address of the item(s) from the database.
The case below is an example of a case with a neutral citation and a citation from the ICLR
Law Reports.
OBG Ltd and another v Allan and others Douglas and others v Hello! Ltd and others
(No 3) Mainstream Properties Ltd v Young [2007] UKHL 21, [2008] 1 AC 1
For pre-2001 cases you will only need to list the report(s)
Pepper (Inspector of Taxes) v Hart [1993] AC 593 (HL)
In the case where there is no neutral citation, indicate the court in brackets, e.g. (HL) for
House of Lords, (QB) for Queen's Bench.
Table of European Cases
If you have referred to European cases, list them after the UK cases in a separate list.
European cases are cited as follows:
European Court of Justice and General Court
Case 151/73 Ireland v Council [1974] 1 CMLR 429
Case 240/83 Procureur de la République v ADBHU [1985] ECR 531
Where possible cite the official reports, the European Court Reports (ECR). If an ECR report is
unavailable, the second best report is usually the Common Market Law Reports (CMLR). The
Law Reports, the Weekly Law Reports or the All England Reports can also be cited. For an
unreported case, cite the relevant notice in the Official Journal (OJ). If not yet reported in the
OJ, then cite the case number, case name, court, and date of judgment.
If you wish to refer to the Opinion of the Advocate General in a case, simply add 'Opinion of
AG {name}' after the case details.
25
European Commission competition decisions
Aluminium Cartel [1985] OJ L92/1
European Commission Merger Task-Force/ Competition Directorate
Alcatel/Telettra (Case IV/M042) Commission Decision 91/251/EEC [1991] OJ L122/48
European Court of Human Rights
Cite the official reports or the European Human Rights Reports, using one or the other
consistently.
Plattform ‘Ärtze für das Leben’ v Austria (1988) Series A no 139
Young, James and Webster v UK (1982) 4 EHRR 38
Table of Statutes
Give a list of statutes after your table of cases, starting on a new page.
Statutes should be listed alphabetically by short title and year. For example:
Human Rights Act 1998

Legal Services Act 2007
Sale and Supply of Goods Act 1994
Table of EU legislation
If you need to refer to EC legislation, do so in a list after the Table of Statutes. Provide the
legislation type, number and title, then publication details from the Official Journal (OJ). Order
the list by year then number.
Council Regulation (EC) 1984/2003 of 8 April 2003 introducing a system for the statistical
monitoring of trade in bluefin tuna, swordfish and big eye tuna within the Community [2003] OJ
L295/1
 For further guidance on bibliographies, tables of cases, and tables of statutes, see
OSCOLA, pages 10-12.
Further help
You can get more help with referencing from the following:-
 The SHU Library Gateway referencing pages: http://libguides.shu.ac.uk/referencing

 the Learning Centre Helpdesks
26
LECTURE PROGRAMME
Note-
Please print off lecture slides in advance of lectures and bring those to
the lectures with you. This will assist in note taking.
All lecture slides will be posted in advance of lectures and can be

found in the “Lectures” content area on the Company Law Blackboard
site.
Lectures are an introduction to an area or aspect of the law. There is not an

expectation that students prepare anything in advance of lectures – unlike
seminars which rely heavily on preparation pre-class.
However, after lectures we would expect that students supplement their

knowledge with reading as guided here in the module manual and from materials
on the Blackboard site. This reading will help in preparation for seminars and will
ultimately be a vital building block of knowledge and understanding for
assessments.
27
LECTURE 1 – Brief lecture outline.
Methods of Trading; Company Formation & Consequences of incorporation
There will be a brief introduction to the key aspects of the module in this lecture.
The main (not only) types of trading organisations in the UK are:

 sole traders
 partnerships (general and limited)
 limited liability partnerships
 limited liability companies (this area will be the main focus of this module)
The Main Differences
Sole Traders
The majority of businesses in the UK operate as ‘sole traders’ and that sole trader is personally
responsible for any business debts. There is no legal separation between personal and business
assets. A sole trader can keep his/her assets secret (apart from to Her Majesty’s Revenue and
Customs (HMRC))!
Partnerships
Covered by the Partnership Act 1890, a partnership is responsible for its own debts and
partners are responsible for each other’s debts in respect of the partnership business (joint and
several liability). The accounts do not need to be disclosed. In addition:
 a partnership is created by agreement (not necessarily in writing)
 each partner is an agent of the partnership
 it does not have legal personality (but does in Scotland)
 every partner has an equal say in the management (unless otherwise agreed)
Note - the Limited Partnership Act 1907 provided for a hybrid form of partnership. These are
not common but are used in certain business ventures.
Limited Liability Partnerships

The Limited Liability Partnership Act 2000 came into force on 5th April 2001. After a slow take
up of this ‘new’ business association it has become more popular; by April 2012 there were
49,005 LLP’s.
The difference between a LLP and a general partnership is that, once registered with the
registrar of companies, it attains status as a separate legal personality. Consequently the
personal and business assets and liabilities of the partners and LLP are separate.
Limited Liability Companies

These are created under provisions of the Companies Act 2006 by registration of documents
with the registrar of companies. There are approximately 2.6m registered companies in the
UK. When a company is incorporated, it gains a ‘legal personality’ separate to any human
individuals associated with it. Most importantly members are not normally responsible for the
company’s debts.
28
In addition:
 there are considerable formalities associated with forming a company
 a company can own property, sue and be sued in its own name
 it does not have a maximum number of members
 its management is delegated to directors
 it has perpetual succession
 companies can give floating charges (a form of security for indebtedness)
A limited liability company is owned by its members (shareholders in a company limited by

shares).
The impact of the EU

Note that in recent years the European Company (Societas Europaea (SE)) has come into being
(since 8th Oct 2004) although there is still little take up in the domestically; only 23 were
registered in the UK by March 2011 and only 431 across the whole of Europe. European
Legislation for a new type of European private company, called the Societas Privata Europaea
(SPE), was planned to be set up for 1st July 2010 but this still looks unlikely to come into force
now as it failed to get the unanimous approval by the EU Council when last considered in
May 2011.
Classification of Companies
There are essentially two types:
 PUBLIC limited companies – normally written ‘plc’ after the company name
 PRIVATE limited companies - normally written ‘Limited’ or ‘Ltd’ after the company
name
Most trading companies in the UK (over 2.1m) are Private Limited Companies (limited by
shares) whereas Public companies represent only about 11,500. However ‘plc’s’ are often large
or extremely large organisations with huge turnovers, employing thousands of people. A
company can change from Public to Private, or vice-versa, governed by Part 7 CA’06.
Companies are mainly either limited by shares (established since 1855 - i.e. their liability is
limited to the value of the share value) or by a separate type of company which is limited by
guarantee. There are unlimited companies (not common), Community Interest Companies
(e.g. Figment Theatre and see s.35 CA’06) and listed companies – those who are quoted on a
recognised stock exchange.
FORMATION OF A COMPANY
This is governed by ss.7-16 Companies Act 2006 and administered by Companies House in
Cardiff and the registrar of companies. The formalities of forming a company are explained at:
http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml.
The key constitutional document is the Articles of Association, under s.18, CA’06, which
contains internal rules on how the company is to be run. The Memorandum of Association
(see ss.7 and 8 CA’06) is now a simple statement (authenticated by each subscriber) of:
 intent to form a company
 agreement to become members and take at least one share each.
29
It will contain the name of the company, its registered office, its purpose and liability. These
areas will be covered in detail in later lectures.
Once formalities are complete, the Registrar will issue a certificate of incorporation (refer to
ss.15-16). There are restrictions on the names a company can choose (Part 5 CA’06) and
complaints about the use of a name can be made to the Company Names Adjudicator.
Companies previously set up, but no longer trading, can also be bought ‘off the shelf’ and
effectively re-used by a newly forming company.
Learning Outcomes
At the end of the lecture you will have an overview of:
• the different methods of business trading.

• the key features of an incorporated company.
• an understanding of limited liability.
• how a company is formed.
• key features of a company.
• the different types of company.
Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 1 & 2.
Ch 1
(30th edn, OUP 2013) Ch 1 & 5.
30
LECTURE 2 & 3 – Brief lecture outline.
Separate legal personality and ‘lifting the veil’ of incorporation
The doctrine of separate legal personality ‘has long been regarded as a cornerstone of English
law’.6 A company is a separate legal entity from the people who make up the company and
this is said to create a ‘veil’ between the company and its other constituents (either human or
corporate). Therefore, an incorporated company has separate legal personality from its
members, directors, employees and it is a separate legal entity from any subsidiary company,
even if it owns 100% of that subsidiary’s shares!
Whilst this is the general rule, this metaphorical ‘veil’ can be lifted by exception under
common law, equity or statute.
Separate Legal Personality and Limited liability

Limited liability is not new; it was formally established by the Limited Liability Act 1855 (now
replaced). Significantly this was extended by the case of Salomon v A Salomon & Co Ltd [1897]
AC 22 (HL). This case is the most important case in company law and must be understood
(the full case is on the Blackboard site). This case was significant because it extended the
principle of separate legal personality to essentially ‘one-man’ companies.
Effects of Separate Legal Personality

In Salomon, the decision not to ‘lift the veil’ of incorporation worked to the advantage of the
person who effectively owned the business, but this is not always the case. The following cases
demonstrate the varying outcomes for the individuals involved:
Lee v Lee’s Air Farming [1961] AC 12 (PC)
Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL)
The general rule (if indeed there is one) is that the courts are unwilling to ‘lift the veil’ of
incorporation to hold individuals to account. The exceptions to this general ‘rule’ arguably do
not create a consistent principle, and the decision in Salomon still holds centre stage in legal
decisions in this area.
The Exceptions
 Statutory lifting of the Veil
There are too many to list here but Lord Diplock in Dimbleby & Sons v National Union of
Journalists [1984] 1 All ER 751 (HL) 758 said that any intention to lift the veil should be
‘expressed in clear unequivocal language’.
Examples
Various Tax legislation; Matrimonial Causes Act 1973, s.24; Insolvency Act ss.213 Wrongful
Trading and s.214 Fraudulent Trading; Company Directors Disqualification Act 1986 s.6 -
Duty of court to disqualify unfit directors; Companies Act 2006 – s. 1205 Criminal
consequences of failure to make required disclosure; Companies Act 2006 s 156(7) – Offence to
trade more than 3 months with less than minimum number of directors; Companies Act 2006 s
767(3) – Doing business without a trading certificate.
6
John P Lowry, ‘Lifting the Corporate Veil’ [1993] JBL 41, 41.
31
 Judicial Lifting the Veil
Public Policy: Daimler v Continental Tyre Co [1916] 2 AC 307 (HL);
Fraud/sham or facade:
Gilford Motor Co v Horne [1933] Ch 935 (CA)
Jones v Lipman [1962] 1 WLR 832 (ChD)
Agency Relationship
Smith Stone & Knight Ltd v Birmingham DC [1939] 4 All ER 116 (KBD)
FG (Films) Ltd [1953] 1 All ER 615 (ChD).
Single Economic Entity within Corporate Structures

Adams v Cape Industries Plc [1990] Ch 433 (CA) – this is the leading case in this area and
must be read and understood
DHN Food Distributors v Tower Hamlets LBC [1976] 1 WLR 852 (CA)
Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 WLR 352 (HL)
Littlewoods Mail Order Stores v Inland Revenue Commissioners [1969] 1 WLR 1241 (CA)
Meyer v Scottish Cooperative Wholesale Society Ltd [1959] AC 324 (HL)
Woolfson v Strathclyde RC 1978 SC (HL) 90
Other key post Adams cases:
Creasey v Breachwood Motors Ltd [1992] BCC 638 (QBD) – note overruled
Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447 (CA)
Re Polly Peck International Plc (No.3) [1996] 1 BCLC 428 (ChD)
Trustor AB v Smallbone (No.2) [2001] 1 WLR 1177 (ChD)
Tort law
Williams v Natural Life Health Foods Ltd House of Lords [1998] 1 WLR 830 (HL)
Chandler v Cape plc [2012] EWCA Civ 525 – (although liability here was eventually
established on common law tortious, duty of care principles, not lifting the veil)
Equity - Personal relationship companies (quasi-partnerships)

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL)
Corporate Crime
Corporate Manslaughter and Corporate Homicide Act 2007
Note the influence of the Human Rights Act 1998 and the European Convention on Human
Rights in cases like Connelly v RTZ Corp Plc (No.2) [1998] AC 854 (HL) and Lubbe v Cape Plc
(No.2) [2000] 4 All ER 268 (HL) where the issue of the right to a fair trial (or lack of it in a
foreign forum) under Art 6 ECHR was considered. However, neither of these cases alters the
leading authority in Adams v Cape Industries Plc [1990] Ch 433 (CA).
32
Justice?
Students may think it curious that in the leading case in this area, Adams v Cape Industries Plc
[1990] Ch 433 (CA), that the court refused to lift the veil in the interests of justice. In that case
Slade LJ famously stated:
‘…save in cases which turn on the wording of particular statutes or contracts, the court is
not free to disregard the principle of Salomon…merely because it considers that justice
so requires. Our law, for better or worse, recognises the creation of subsidiary
companies...as separate legal entities’.
After Adams, it appears to limit the circumstances when the corporate veil can be lifted to
where:
 construing statute, contract or other documentation,
 the company is a mere façade concealing the true facts,
 the subsidiary was acting as an agent in law for its parent.
In the general context of looking at ‘sham’ arrangements, Munby J, in the family law case of
Ben Hashem v Ali Shayif [2009] 1 FLR 115 (Fam), formulated the following:
(i) ownership and control of a company were not enough to justify piercing the corporate
veil;
(ii) the court cannot pierce the corporate veil merely because it is thought to be necessary
in the interests of justice;
(iii) the corporate veil can be pierced only if there is some impropriety;
(iv) the impropriety must be linked to the use of the company structure to avoid or
conceal liability;
(v) to justify piercing the corporate veil, there must be “both control of the company by
the wrongdoer(s) and impropriety, and
(vi) the company may be a “facade” even though it was not originally incorporated with
any deceptive intent, provided that it is being used for the purpose of deception at the
time of the relevant transactions.
The Court of Appeal in VTB Capital Plc v Nutritek International Corp [2012] 2 Lloyd’s Rep 313
(CA) [79-80] largely followed Ben Hayshem but emphasised “The relevant wrongdoing must be
in the nature of an independent wrong that involves the fraudulent or dishonest misuse of the
corporate personality of the company for the purpose of concealing the true facts”.
The justice argument, rejected in Adams, has often been heard in the context of tortious claims.
In a recent case, the Court of Appeal ruled, in Chandler v Cape plc [2012] EWCA Civ 525, that a
parent company may be liable for its subsidiary’s breaches of health and safety laws without
the need to consider lifting the corporate veil. In Chandler, the subsidiary company no longer
existed, but the Court of Appeal held that Cape (the parent company) had superior knowledge
of the asbestos risks that had caused harm, so it made it appropriate to find it (the parent) had
assumed a duty of care to the subsidiary’s employees using common law duty of care
principles from Caparo v Dickman [1990] 1 All ER 568 (HL).
33
In some cases the Court of Appeal has arguably ‘wobbled’ a little in recent years, without ever
casting real doubt on the decision in Adams. The following cases perhaps showed the shoots of
a changing attitude, but no more than that, and Adams still remains the key authority:
Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613; [2007] ICR 1539 (CA)
Ratiu v Conway [2005] EWCA Civ 1302; [2006] 1 All ER 571 (CA)
Such potential expansion of the doctrine of ‘lifting the veil’ has been curtailed somewhat by
the Supreme Court during 2013. It was denied any application in VTB Capital Plc v Nutritek
International Corp [2013] UKSC 5 and a few months later in Prest v Petrodel Resources Limited
[2013] UKSC 34. Prest was a divorce case, which considered the argument that a husband had
hidden his properties in companies he controlled, and that these should be transferred to his
wife. On the facts his wife was awarded property, but on the basis of a resulting trust; the
court held this was not a ‘lifting the veil’ circumstance. More importantly for company law,
Lord Sumption compendiously restricts the doctrine of lifting the veil, emphasising the rare
circumstances it may be possible.
Learning Outcomes
 the doctrine of separate legal personality.

 key cases and statutes that underpin the doctrine.
 the effects of separate legal personality.
 the exceptions to that doctrine – i.e. circumstances where a court may disregard separate
legal personality, called ‘lifting the veil’.
 key cases on judicial lifting the veil
 how the doctrine of separate legal personality applies in parent and subsidiary companies.
Core Text Books:
Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 2 & 3
Ch 1
(30th edn, OUP 2013) Ch 5
34
Promoters and Pre-Incorporation Contracts
A yet to be formed company will clearly need human intervention, in the form of promotion,
before the company can come into legal existence. Those taking some, or all of the steps, that
are required to form a company, will be classed as promoters.
Twycross v Grant (No.1) (1877) 2 CPD 469 (CA)
Those acting in their professional capacity (e.g. solicitors or accountants) will be not be classed
as such as long as their actions do not go beyond their professional duties – see Re Great Wheal
Polgooth Co Ltd (1883) 53 LJ Ch 42 (ChD).
Duties of Promoters
Promoters have a fiduciary duty (a duty of trust with respect to another to act solely for the
others benefit).
Bristol & West Building Society v Mothew [1998] Ch 1 (CA)
They have a duty not to make a profit, a duty disclose and a common law duty of care and
skill.
Erlanger v New Sombrero Phosphate Co (1877-78) LR 3 App Cas 1218 (HL)
Gluckstein v Barnes [1900] AC 240 (HL)
Re Leeds and Hanley Theatres of Varieties [1902] 2 Ch 809 (CA)
Failure to disclose an interest by a promoter will render any contract voidable at the
company’s discretion, or the company may rescind the transaction. Often the remedy is that
the promoter will have to ‘account for’ any profit – i.e. pay it back.
Different rules exist where a promoter has acquired property before promotion or after it but
in either case must still make a disclosure.
Re Coal Economising Gas Co (1875-76) LR 1 Ch D 182
What constitutes full disclosure? – see the contrasting decisions for public and private
companies in:
Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 (CA)
Salomon v A Salomon & Co. Ltd. [1897] AC 22 (HL)
It seems that, following the decision in Lagunas, for private limited companies, disclosure to
the board of directors, or present and future shareholders via the memorandum or articles,
will be sufficient disclosure.
Statutory duties exist under ss.598 to 604 CA’06 in relation to public companies.
Pre-Incorporation Contracts
A pre-incorporation contract is one entered into on behalf of the company yet to be formed. At
common law there is a fundamental problem with pre-incorporation contracts - remember
from contract law that if a party does not exist (i.e. a company yet to be formed) they cannot
contract – see Rover International Ltd v Cannon Film Sales Ltd (1987) 3 BCC 369 (CA).
35
These contractual issues created problems with the capacity of a company to contract. In short,
a company cannot be bound by a pre-incorporation contract made in their name – see Natal
land & Colonisation Co v Pauline Colliery Syndicate [1904] AC 120 (PC).
As companies are not allowed to ratify or adopt contracts after formation, this again causes
problems in this area.
Re Northumberland Avenue Hotel Co (1886) 33 Ch D 16 (CA)
Browne v La Trinidad (1887) 37 ChD 1 (CA)
Companies may continue with these contracts via novation (entering a second contract on the
same terms with fresh consideration). This occurs after incorporation and a court will require
clear evidence of novation – see Bagot Pneumatic Tyre Co v Clipper Pneumatic Tyre Co [1902] 1
Ch 146 (CA). Novation can also occur by conduct; an example may be taking delivery of goods
and using them after incorporation.
Re Patent Ivory Manufacturing Co (1888) 38 ChD 156 (Ch)
Heinhuis v Blacksheep Charters Ltd (1987) 46 DLR (4th) 67 (Canadian case)
Whether pre-incorporation contracts were binding at common law was confusing and
arbitrary based on how a contract may have been signed for by a promoter:
Kelner v Baxter (1866) LR 2 CP 174 (CCP)
c/f - Newbourne v Sensolid (Great Britain) Ltd [1954] 1 QB 45 (CA)
Statute to the rescue?

The UK was obliged to implement Art. 7 of the First Directive on Company Law (68/151); this
was enacted by s.9(2) European Communities Act 1972. Later this became s.36(4) CA’85 then
following repeal by the CA’89 it became s.36C CA’85 and is now s.51(1) CA’06.
'A contract which purports to be made by or on behalf of a company at a time when the
company has not been formed has effect, subject to any agreement to the contrary, as
one made with the person purporting to act for the company or as agent for it, and he is
personally liable on the contract accordingly'.
Note here that the transposition is not literal from the original French text of Art 7. UK
companies still remain unable to ratify pre-incorporation contracts unlike many civil law
jurisdictions in the EU despite this being a recommendation of the Jenkins Committee as far
back as 1962!
This essentially means a promoter will be personally liable unless he has a valid, express
agreement to the contrary.
Phonogram v Lane [1982] QB 938 (CA)
There will be situations where what is now s.51(1) CA’06 may not apply:
 In certain situations where a company is acquired ‘off-the-shelf’

Oshkosh B'Gosh Inc v Dan Marbel Inc Ltd (1988) 4 BCC 795 (CA)
 Misnamed companies
Badgerhill Properties Ltd v Cottrell [1991] BCC 463 (CA)
 Where a company is no longer in existence

Cotronic (UK) Ltd v Dezonie [1991] BCLC 721 (CA)
36
The idea behind making those forming contracts on behalf of yet to be formed companies
liable on them, is to give greater certainty to third parties making contracts. This creates a risk
for promoters as, unless they can expressly make an ‘agreement to the contrary’, compliant
with s.51(1) CA’06, they will be personally liable if the company chooses not to novate the
contract. Will a third party be likely to consent to an ‘agreement to the contrary’ being placed
in the contract, as the effect will be to void that contract should the company choose not to
novate it? Probably not! Fortunately, as many promoters become the first directors of a
company, this will rarely cause problems in practice.
Learning Outcomes
 the role of a promoter and nature of their duties.

 the legal rules surrounding disclosure and transfer of assets to a company.
 the legal position on pre-incorporation contracts.
 the personal risks associated with promotion.
 the importance of the distinction between a company being in the course of formation and
actual incorporation
Core Text Books:
Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 4
Ch 2
37
LECTURE 6 and 7 – Brief lecture outline.
The Constitution of a Company
Since the introduction of the Companies Act 2006, a company’s ‘articles of association’
(articles) are now the key constitutional document - see s.17 CA’06. They, along with any
resolution and agreements affecting the company’s constitution, form the basis of the
constitutional documents of the company. Some examples will be special resolutions and
shareholder agreements either between a shareholder and the company or with another
shareholder(s).
Puddephat v Leith [1916] 1 Ch 200 (ChD)
Punt v Symons & Co Ltd [1903] 2 Ch 506 (ChD)
The articles, covered in Chapter 2, CA’06, are essentially the rule book of the company. Some
of the key issues set out in the articles are:
 Voting rights attached to different classes of shares
 Powers of directors
 Powers of the board
 Payment of dividends
 Alteration of capital structure
For practitioners this area of company law is very important as legal advice on how to set up
rules to protect individuals’ interests are common.
Shares
The articles may provide directors with powers to issue shares, as does statute under s.551
CA’06, and may contain pre-emption rights (right of first refusal to buy shares on not less
favourable terms). This is common in many companies, particularly private companies who
cannot, by law, offer their shares to the public. The articles of a company operate in
conjunction with statute (mainly the Companies Act 2006 and Insolvency Act 1986) and are
also likely to contain:
 rules on the allotment of new shares (s.561, CA’06)
 rights which attach to shares (e.g. voting rights)
Details of the Articles

All companies must have articles under s.18(1) CA’06, but if they do not create their own, a
default set of articles will apply under s.20. Currently these are the Companies (Model
Articles) Regulations 2008 but students should be aware that companies formed under
previous Companies Acts are governed by articles as defined in the Companies (Tables A to F)
Regulations 1985 (SI 1985/805).
A company’s articles will be void if they are inconsistent with the general law or statutory
provisions.
Welton v Saffery [1897] AC 299 (HL)
Re Peveril Gold Mines Ltd [1898] 1 Ch 122 (CA)
Baring-Gould v Sharpington Pick and Shovel Syndicate [1899] 2 Ch 80 (CA)
The articles are a business document to allow businesses to effectively operate.

Holmes v Lord Keyes [1959] Ch 199 (CA)
Rayfield v Hands [1960] Ch 1 (Ch)
38
Amending the Articles
A company may amend its articles under s.21(1) CA’06 by special resolution. This requires a
75% majority vote under s.283.. This is interesting because the articles form contractual
agreements between the company and shareholders and shareholders inter se, yet they can be
changed by some, not all, of the members. Perhaps surprisingly only an ordinary resolution, a
simple majority defined in s.282, is required changing the power of directors to allocate shares
under s.551, or determine conditions of redemption shares under s.685, even though this has
the effect of altering the articles. A court also has limited powers to amend a company’s
articles.
Some interesting cases on the validity of amending a company’s articles are:

Cane v Jones [1980] 1 WLR 1451 (Ch)
Taylor v Pilsen Joel and General Electric Light Co (1884) LR 27 Ch D 268 (Ch)
Hutton v Scarborough Cliff Hotel Co. Ltd (LC 1865) 4 De G J & S 672
Contractual Effect of the Articles

This is now covered by s.33 CA’06.
s.33 - Effect of company’s constitution
(1) The provisions of a company’s constitution bind the company and its members to
the same extent as if there were covenants on the part of the company and of each
member to observe those provisions.
The articles form the basis of a contract which, since the introduction of the Companies Act
2006, now equally binds both the company and its members. In the Mayson text book the
authors state that this ‘has ended more than a century of controversy’; previously statute (s.14
CA’85) only referred to covenants by the members, not by the company.
However, the articles do not operate like a normal contract as you learned in Law of Contract
in year 1. The key feature of a normal contract is that it can only be varied by agreement by all
parties; the ‘s.33 contract’ (as the articles are often referred to as in this respect) allows
variation of terms by the majority, even if it is against the wishes of some parties to the
contract i.e. minority shareholders.
The Articles Contract – The Company and its Members

The effect of s.33 CA’06 is that only provisions relating to membership are contractual rights;
these are referred to as insider rights:
Bisgood v Henderson's Transvaal Estates Ltd [1908] 1 Ch 743 (CA)
Beattie v E&F Beattie Ltd [1938] Ch 708 (CA)
London Sack & Bag v Dixon [1943] 2 All ER 763 (CA)
For an example of a contract enforceable by the members against the company:

For an example of a contract enforceable by the company against the member:

Hickman v Kent or Romney Marsh Sheepbreeders Association [1915] 1 Ch 881 (Ch)
For examples of what happens where rights of ‘outsiders’ are contained in the articles:
Eley v Positive Government Security Life Assurance Co Ltd (1876) LR 1 Ex D 88 (CA)
Quin & Axtens Ltd v Salmon [1909] 1 Ch 311 (CA)
39
The key quote that explains this area well comes from Astbury J in Hickman v Kent or Romney
Marsh Sheepbreeders Association [1915] 1 Ch 881 (Ch) 900, who said:
“…no article can constitute a contract between the company and a third person; secondly,
that no right merely purporting to be given by an article to a person, whether a member
or not, in a capacity other than that of a member, as, for instance, as solicitor, promoter,
director, can be enforced against the company; and, thirdly, that articles regulating the
rights and obligations of the members generally as such do create rights and obligations
between them and the company respectively”.
In practice this can be problematical for individuals. In Browne v La Trinidad (1887) 37 Ch D 1

(CA) an articles clause provided for a particular shareholder to be a director but he was
subsequently voted out of office. This was held to be valid as, under what is now s.33 CA’06,
this did not create a membership right. Similarly an indemnity clause for directors contained
in the articles in Globalink Telecommunications Ltd v Wilmbury Ltd [2002] EWHC 1988 (QB) was
held not to be binding between the company and its officers by virtue again of s.33. It would
bind the company if the company was party to a separate contract to that effect.
Restrictions on Amendments to the Articles

A member is not bound by alteration to articles if it requires them to take or subscribe for
more shares, or it requires the member to increase their liability - see s.25.
Companies often have ‘entrenched provisions’ which cannot be changed unless certain
conditions or procedures, which are more restrictive that passing a special resolution, are met
– see s.22. Section 22(2) provides that provisions for entrenchment may only be made on
formation of the company, or by amendment of the articles agreed by all members, but this
sub-section is still not yet in force.
Weighted Voting
Assume you are one of three directors with equal shares and voting rights. What happens
when the other two directors gang up on you to remove you as a director? They only need a
simple majority (over 50% of the vote) under s.168, CA’06 and you are out! Directors get
around this, by setting up in the articles, weighted voting clauses so that in the event of the
above their votes would carry additional weighting. An example would be where a resolution
to remove a director transpires; the votes of the director subject to the potential removal
would have their votes multiplied to ensure a majority.
Bushell v Faith [1970] AC 1099 (CA)
This case also established that although a company cannot validly pass a resolution which
prevents it altering its articles (as s.21 allows this), a weighted voting clause was not such a
provision.
Amalgamated Pest Control Pty Ltd v McCarron [1995] 1 QdR 583
Majority Rule
The basic rule of company law is that the majority rules! However, this is subject to some
limitations. Members must only exercise their rights in certain limited circumstances if it is
‘bona-fide for the benefit of the company as a whole’.
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)
Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9 (CA)
40
This is a two part test:
Subjective – Did 75% act with honest belief it was for the benefit of the company as a whole.
Objective – A Court’s objective minimum standard which members’ subjective view will be
judged against.
These limited circumstances are:
 When amending the company’s articles
 When appointing a director
 At a class meeting
 When voting if the company should take legal action to enforce its rights against those
controlling the company, when there has been an illegal, fraudulent or ultra vires act.
In other circumstances a member can vote in his own interests:

Carruth v ICI Ltd [1937] AC 707 (HL)
Citco Banking Corp NV v Pusser's Ltd [2007] UKPC 13
This can sometimes lead to discrimination but the courts are reluctant to interfere with the
majority decisions.
Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 (CA)
c/f
Australian Fixed Trusts Pty Ltd v Clyde Industries Ltd [1959] SR (NSW) 33
Citco Banking Corp NV v Pusser's Ltd [2007] UKPC 13
A company has to be careful, however, if by amending its articles they impact on the terms of
another contract. For an interesting case where a company amended its articles validly to
remove a director, but in doing so breached a separate contract with the same director relating
to his office as Managing Director, see:
Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 (HL)
Another interesting case to look at is Russell v Northern Bank Development Corp Ltd [1992] 1
WLR 588 (HL). This concerned a shareholder agreement where the company agreed not to
increase the share capital without the agreement of all parties. The House of Lords had no
trouble in saying that a contract that a company will not use its statutory power (now under
s.617 CA’06) is unenforceable, the case is more interesting because it did not rule the
shareholder agreement itself invalid. As a result it could be enforced against the members
directly (not the company) and, in consequence, could prevent them from voting to increase
the share capital.
Remedies (only when the bona-fide test is relevant/applicable)
An injunction will be available as a remedy if an alteration to the articles does not pass the
‘bona-fide for the benefit of the company as a whole’ test, in the circumstances detailed on the
previous page. However, only damages will be available as a remedy if the objection relates to
an alteration that will cause a breach of a separate contract:
Moffatt v Farquhar (1878) LR 7 Ch D 591 (Ch)
41
A court will not alter a company’s articles (rectification) as they have been approved by the
registrar in their original form.
Scott v Frank F Scott (London) Ltd [1940] Ch 794 (CA)
The ‘Capacity’ and ‘Objects’ of a Company

Fortunately for students this area is now much simpler since full implementation of the
Companies Act 2006. Historically companies were unable to create contracts outside their
capacity; essentially because they had no legal right to act or contract in a particular aspect.
This was linked to a company’s ‘objects’, a company law phrase simply meaning the ‘purpose’
of the company. In effect this was because a company was acting ultra vires i.e. beyond its
powers. This ultra vires doctrine is now effectively removed as it relates to a company but will
still apply to directors (see below).
Effects of the Companies Act 2006

It is now clear that:
 a company has unlimited capacity – s.39
 unless a company chooses to limit its ‘objects’ (purpose) then its objects are unrestricted –
s.31.
A company can limit or amend its objects, under s.21, by special resolution (a 75% majority
unders.283). Statute has intervened to protect third parties in contracts who historically were
left without a remedy when a company entered into a contract beyond its capacity.
The Effect of Directors

Directors have a duty to act in line with the company’s constitution, and a general duty to act
within their powers under s.171 CA’06). If a director acts ultra vires (beyond his/her powers) a
shareholder may gain, in advance only, an injunction to prevent this under s.40(4). An ultra
vires act by a director will still bind the company as long as the third party has acted in
good faith, and this is presumed in the act (s.40 and s.161). The doctrine of constructive
notice in this area only is also abolished by s.40(2)(b)(i).
If an ultra vires act involves a third party who is a director, holding company or person
connected with a director the act is voidable by the company (s.41 and s.252). A court will
interpret a contract, with more than one potential meaning, consistently with business
common sense.
Rainy Sky S.A. & Ors v Kookmin Bank [2011] UKSC 50
A company can ratify an ultra vires act under s.239 by ordinary resolution (over 50% - s.282)
but the votes of the party concerned, or those connected by virtue of s.252, are not counted for
calculating the over 50% majority.
If a company chooses not to ratify an ultra vires act, then they will have to go ahead with the
contract and the company remedy lies against the director(s) personally (s.41). A director
responsible for an ultra vires act will have to personally ‘account for’ (pay back) money
incurred by the company, or indemnify them for any loss, as a result of the transaction and
can be subject to disqualification as a director.
Re Lands Allotment Co [1894] 1 Ch 616 (CA)
Re Samuel Sherman Plc [1991] 1 WLR 1070 (Ch)
42
An act by a director will be within their powers (intra vires) if it is within an express object
clause in the articles or is ancillary to it:
Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246 (CA)
Re Horsley and Weight Ltd [1982] Ch 442 (CA)
It will also be considered intra vires if it is in accordance with an express or implied power, or a
valid subjective clause:
Bell Houses Ltd v City Wall Properties Ltd [1966] 2 QB 656 (CA)
Note – a ‘power’ is a means of achieving an object (a purpose) of the company.
Why still have object clauses?

Essentially to protect shareholders and creditors, as it is they who will lose money if a
company embarks on an unprofitable venture. It can also aid investment; would you lend
money to a company if it was unlimited what they may choose to do with it?
Where a company does limit its objects, acts outside them are clearly ultra vires. If the basis
upon which a company is formed is no longer possible to be done, and this is reflected in the
objects, then a company can be wound up on just and equitable grounds under s.122(1)(g),
Insolvency Act 1986.
Re Bristol Joint Stock Bank (1890) LR 44 Ch D 703 (Ch)
However, because of the effect of s.31 and s.39 CA’06, repudiation of any contract is restricted
to where a person could not have had actual authority to act on its behalf outside its objects.
Whether an act is outside a company’s objects clause can be interpreted differently by the
courts:
Cotman v Brougham [1918] AC 514 (HL)
Learning Outcomes
At the end of the lectures you will have an overview of:
 the essential components of the constitution of a company.

 what articles of association are, how they operate and how they can be changed.
 restrictions on amendments of the articles of association.
 the importance of setting up the articles correctly on formation.
 section s.33, Companies Act 2006 and its contractual effect.
 remedies for ultra vires acts
 the importance of majority rule in company law.
Core Text Books:
Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 8 &12
Ch 2, 3, 4.
43
Directors
A company acts through the people who represent it. The members of a company (its
shareholders) appoint directors (normally office holders) and delegate the running of the
company to them. It is the directors who make the day to day decisions on the way the
company is run.
What constitutes a director is defined in s.250 CA’06 – it can be someone who acts in that
capacity even if they are not called, or formally appointed, as a director. There are different
types of director e.g. shadow directors, de-jure directors, de-facto directors, executive
directors, non-executive directors, alternate directors and nominee directors. Companies can
also be directors!
Number of directors (s.154 CA’06)

Private companies – must have at least one director.
Public companies – must have at least two.
Note – the registration requirements under ss.162 to 167 CA’06
Directors do not have to be qualified in any way, although in a public company a Company
Secretary, under s.272 CA’06, has to be qualified.
Appointment
There are formalities under ss.9-16 CA’06 on the appointment of directors when the company
is first formed and subsequently. Directors can be appointed by either members or directors –
see the Companies (Model Articles) Regulations 2008.
Since the CA’06, a director cannot be appointed if under 16 years-old (s.157(1) CA’06) but
there is now no maximum age. Section 161 CA’06 makes it clear that the acts of a director are
valid, even if there was a defect in their appointment.
Termination
In public companies a system of retirement by rotation exists, although they may seek re-
appointment by the members. Directors can be disqualified from office (see later lecture) and
the Model Articles (art 18/22) details when a person ceases to be a director – e.g. if they resign,
retire, become bankrupt or become physically or mentally incapable.
Formalities on the dismissal of a director are contained in ss.168 to 169 CA’06 and this can be
by ordinary resolution (over 50% required as defined in s.282). The normal position is that the
company’s articles of association cannot override statute but see the way weighted voting
clauses can be construed to, in effect, ‘get around’ the intention of statute:
Bushell v Faith [1970] AC 1099 (HL)
Section 288 CA’06 also provides for removal by written resolution but note that, as directors
may be employees as well as office-holders, dismissal may be a breach of contract:
44
The Board and Decision Making
The board of directors are chosen to govern the affairs of a company and directors operate as
part of that board:
Re Marseilles Extension Railway Co Ex p. Credit Foncier and Mobilier of England (1871) LR 7
Ch App 16 (CA)
They must act collectively and all directors may take part in the decision making process.
Decisions have to be taken in accordance with the company’s constitution and a general rule is
that decisions are taken following a unanimous or majority vote (also see later lecture on
meetings and voting). The Model Articles do allow companies to set a quorum (minimum
number who must be present) for directors’ meetings. They also contain details on notice
periods of meetings and voting. One director can be appointed to chair meetings and the
decision making process. Each director has one vote but the chairman can exercise a casting
vote (art. 13/14). In the absence of a casting vote clause in a company’s adopted articles a
resolution is not adopted in the event of equal votes.
Moodie v W&J Shepherd (Bookbinders) [1949] 2 All ER 1044 (HL)
Directors Remuneration
The basic position is that a director has no right to remuneration unless provided for in the
company’s constitution and approved by the members:
Guinness Plc v Saunders [1990] 2 AC 663 (HL)
The terminology is key here; directors, as office holders, are paid ‘fees’ for holding office and
they are normally referred to as office holders:
McMillan v Guest [1942] AC 561 (HL)
...but a director can also be an employee as a matter of fact based on the conditions upon
which services are provided:
Montgomery v Johnson Underwood Ltd [2001] ICR 819 (CA)
Case C-232/09 Dita Danosa v LKB Lizings SIA [2010] ECR 00 (pregnant director case –
classed as a ‘worker’ for the purposes of employment law)
Quoted companies have to produce a report, by name, of what a director has been paid (s.420
CA’06) and every company is required to have a note in annual accounts of directors’
aggregate remuneration, although small companies (defined in s.383) can omit this.
Powers of Management
The Model Articles state that ‘subject to the articles, the directors are responsible for the
management of the company’s business, for which purpose they may exercise all the
powers of the company’. They are required to exercise those powers within the constitution of
the company but this may involve taking decisions against the wishes of majority shareholder.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC)
Directors make the day to day decisions of the company. This differs to the members who
make the strategic decisions. Clearly the members appoint directors and vote on matters not
reserved for the company’s management. Members do have a reserve power, exercised by the
passing of a special resolution (75%, s.283 CA’06), to direct directors to take, or refrain from
taking, specified action – but this is rarely done. In many companies, directors are not only
45
shareholders but may also be majority shareholders, so they can dominate all aspects of the
running of a company.
Learning Outcomes
At the end of this lecture you will have an overview of:
 what a director is.

 the different types of director.
 the basic role of a director.
 how directors are appointed and terminated.
 the decision making process of directors and their meetings.
 the basic relationship between directors and members (shareholders).
Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 13.
Ch 6, 17.
(30th edn, OUP 2013) Ch 15.
46
LECTURES 9 & 10– Brief lecture outline.
Directors’ Duties
The Companies Act 2006 altered the legal position with regard to the law on the duties of
directors. The previous common law, equitable and fiduciary duties were codified into seven
general duties:
s.171 - Duty to act within powers

s.172 - Duty to promote the success of the company
s.173 - Duty to exercise independent judgment
s.174 - Duty to exercise reasonable care, skill and diligence
s.175 - Duty to avoid conflicts of interest
s.176 - Duty not to accept benefits from third parties
s. 177 -Duty to declare interest in proposed transaction or arrangement
These general duties are based on common law rules and equitable principles (s.170(3)&(4)) so
much (though not all) of the common law will remain relevant. Consequently, a director still
has a fiduciary duty to act bona-fide in the best interests of the company and an equitable duty
of extreme trust and good faith – these are now codified, in statute, in the general duties.
Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3d) 371
Lindgren v L&P Estates Co [1968] Ch 572 (CA)
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL)
A director owes his duty to the company (s.170(1)) - though note the possible impact of
s.172(1):
Percival v Wright [1902] 2 Ch 421 (Ch)
Some key cases in the lecture:
s.171 - Duty to act within powers

Alexander v Automatic Telephone Co [1900] 2 Ch 56 (CA)
Hogg v Cramphorn [1967] Ch 254 (Ch)
Dawson International plc v Coats Patrons plc [1990] BCLC 560 (CS)
s.172 - Duty to promote the success of the company

Re BSB Holdings Ltd [1996] 1 BCLC 155 (Ch)
Charterbridge Corp v Lloyds Bank Ltd [1970] Ch 62 (Ch)
Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11 (Ch)
Re Smith & Fawcett [1942] Ch 304 (CA)
Yukong Line Ltd of Korea v Rendsburg Investments Corp Liberia [1998] 1 WLR 294 (HC)
s.174 - Duty to exercise reasonable care, skill and diligence

Re Barings (No.6) [2001] BCC 273 (CA)
Re D'Jan of London Ltd [1993] BCC 646 (ChD)
Dovey v Cory [1901] AC 477 (HL)
Re Park House Properties Ltd [1998] BCC 847 (Ch)
47
s.175 - Duty to avoid conflicts of interest
Aberdeen Railway Co. v Blaikie Bros [1854] 1 Macq 461 (HL)
Bray v Ford [1896] AC 44 (HL)
British Midland Tool Ltd v Midland International Tooling Ltd [2003] EWHC 954 (Ch)
Cook v Deeks [1916] 1 AC 554 (PC)
Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 (Assizes)
Regal Hastings Ltd v Gulliver [1942] 1 All ER 378 (HL)
Shepherds Investments Ltd v Walters [2006] EWHC 836 (Ch)
s. 177 -Duty to declare interest in proposed transaction or arrangement

Re Express Engineering Works Ltd [1920] 1 Ch 466 (CA)
Note – these are not the only duties directors have – these are just the general ones. Directors
have a number of wide ranging responsibilities contained in the Companies Act 2006 and
other legislation.
The consequences for any breach of these general duties are the same as they were at common
law, or under equitable principles, as defined in s.178 CA ’06. Often this will require a director
to account for any profit (pay it back) or indemnify for any loss.
Substantial Property Transactions

Another common area of potential abuse by directors is in relation to substantial property
transaction. Rules governing this area are found in ss.190 to 196 CA’06. Member approval is
needed for transactions exceeding 10% of the company’s assets (if more than £5k) or £100,000.
Loans and Credit

Again this is another area where significant changes have arisen since the implementation of
the Companies Act 2006; prior to its enactment loans were restricted or prohibited, and were
subject to criminal sanctions. This area is covered by ss.197 to 214 CA’06 and again loans or
security require member approval, although no approval is needed if it falls within the
exceptions in ss.204 to 209. Note there are different rules that exist for public and private
companies and whether the person is ‘connected’ or not with the company (as defined in ss.
252 to 256).
Remedies against directors in breach

Remedies are designed to deter directors from breaching their duties, not to compensate a
company for loss:
Murad v Al-Saraj [2005] EWCA Civ 959 (CA)
Civil remedies for failing to gain approval for substantial property transactions (s.195) and
loans/quasi loans (s.213), exist in the Companies Act 2006, as do criminal sanctions for failing
to declare an interest in an existing transaction or arrangement (s.183).
A court can order property to be returned to the company:

JJ Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 1467 (CA)
It can also confiscate the profits of a director and return it to the company:
Murad v Al-Saraj [2005] EWCA Civ 959 (CA)
48
Additionally this will still be the case even if the profit could not have been made by the
company without the director:
Regal Hastings Ltd v Gulliver [1942] 1 All ER 378 (HL)
Rescission is a remedy where each party returns what was transferred in the first place:
Erlanger v New Sombrero Phosphate Co (1878) LR 3 App Cas 1218 (HL)
Bentinck v Fenn (1887) LR 12 App Cas 652 (HL)
Armstrong v Jackson [1917] 2 KB 822 (KBD)
Equitable compensation by the court is also a remedy, if the remedies above do not sufficiently
address the situation, although s.21 of the Limitation Act 1980 limits any claim for breaches of
fiduciary duty to six years.
Relief for Directors

A company can ratify acts in breach of his duty as a director, under s.239 CA’06 if it relates to
negligence, default or breach of duty or trust – i.e. it can relieve the general duties. However,
only ‘disinterested’ members can vote s.239(3)&(4). Note that some acts, for example illegal
actions, are incapable of being ratified (s.239(7)). Fully informed consent for ratification to be
valid is needed:
Kaye v Croydon Tramways [1898] 1 Ch 358 (CA)
Section 1157 CA’06 gives the court power to relieve a director from liability if he acted
honestly and reasonably:
Re Produce Marketing Consortium Ltd (In Liquidation) (No.1)[1989] 1 WLR 745 (Ch)
The test for acting reasonably is an objective test:

Re Duomatic Ltd [1969] 2 Ch 365 (Ch)
The test whether someone is acting honestly is subjective.
Learning Outcomes
At the end of these lectures you will have an overview of:
 the general duties of directors, with focus on ss170 to 177 CA’06.

 the continuing and enduring nature of fiduciary and equitable duties for directors.
 how a director can be in breach their duties, the consequences for the director and the
potential remedies for the company.
Core Text Books:
Ch 19.
(30th edn, OUP 2013) Ch 16.
49
Disqualification of Directors
The protection of limited liability can be abused. A Director can carry on business, via a
company, allow it to slide into insolvency, form a new company and carry on that business,
‘leaving behind him a trail of unpaid creditors’. This was major concern of Cork Committee
1982.
This area of law is now primarily governed by the Company Directors Disqualification Act
1986 (hereafter CDDA) and this lays down a regime to address the need to protect the public
against abuse of the corporate form. The effect of a disqualification order under s.1(1) is that a
person is, inter alia, prevented from being in any way, directly or indirectly, concerned with
the promotion, formation or management of a company, for a specified time period, without
the leave of the court. Being involved is a company’s management is widely interpreted so as
to capture people like management consultants.
R v Campbell (1984) 78 Cr App R 95 (CA)
Disqualification applies to companies as well as individuals, and both public and private
companies.
Official Receiver v Brady [1999] BCC 258 (Ch)
R v Ward [2002] BCC 953 (CA)
Notice must also be given to the party who the order is sought against (s.16 CDDA’86).
Since the introduction of the Insolvency Act 2000, disqualification undertakings can be made
without the need for court hearings (discussed further below).
It is a criminal offence under s.13o breach a disqualification order or undertaking; to do so can

carry a two-year custodial sentence. Importantly, those in contravention may also be liable
under s.15 for all the debts and liabilities of the company incurred whilst in breach.
Discretionary Orders
The main ones are:
s.2 - Disqualification on conviction of indictable offence.

Note this has to be in connection with the ‘‘promotion, formation, management, liquidation or
striking off of a company’. The maximum disqualification period is 15 years.
s.3 - Disqualification for persistent breaches of companies legislation

Persistent is defined as three instances in five years - s.3(2). The maximum disqualification
period is 5 years.
s.4 - Disqualification for fraud, etc., in winding up.

Applies where, in the course of winding up, a party is guilty of any fraud in relation to the
company, is in breach of any duty or has been guilty of an offence (whether convicted or not)
of knowingly being a party to fraudulent trading contrary to s.993 CA’06. The maximum
disqualification period is 15 years.
s.8 - Disqualification after investigation of company.
50
Mandatory Orders
s.6 - Duty of court to disqualify unfit directors of insolvent companies.

(1) The court shall make a disqualification order against a person in any case where, on an
application under this section, it is satisfied—
(a) that he is or has been a director of a company which has at any time become insolvent
(whether while he was a director or subsequently), and
(b) that his conduct as a director of that company (either taken alone or taken together
with his conduct as a director of any other company or companies) makes him unfit to be
concerned in the management of a company
Note under s.6(1) the court SHALL make an order if the test above is satisfied and this is
subject to a two year minimum and 15 year maximum period. Applications are made by the
Secretary of State or Official receiver – s.7(1).
The objective of disqualification is not to satisfy the demands of shareholders, but to protect
the public and raise standards of responsibility.
Re Cubelock Ltd [2001] BCC 523 (Ch)
Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 (CA)
Secretary of State for Trade and Industry v Ettinger [1993] BCC 312 (CA)
Meaning of ‘Unfitness’
The court judges the conduct in line with s.6, and whether that conduct has made the director
‘unfit to be concerned in the management of a company’.
It is construed as meaning unfit to manage companies generally; no account can be given to a
director reforming past conduct. Unfitness is a matter of fact for the judge to decide.
Re Polly Peck International Plc (In Administration) (No.3) [1993] BCC 890 (Ch)
Re Grayan Building Services Ltd (In Liquidation) [1995] Ch 241 (CA)
Re Hitco 2000 Ltd [1995] BCC 161 (Ch)
Proceedings are civil under s.6, so the standard of proof is based on the balance of
probabilities, although individual charges can be aggregated to warrant disqualification.
Determining Unfitness
A court is required to take into account matters listed in Sch 1 – but these are not exhaustive.
Essentially there are two lists:
1st list – generally applicable
 Breach of fiduciary or other duty
 Degree of culpability in fraud on creditors
 Failure to comply with accounting and publicity requirements of the Companies Act.
2nd list – applicable when the company is insolvent

• Extent of the director’s involvement in cause of insolvency
• Failure to provide goods/services which have been paid for.
51
It is unlikely that ordinary commercial misjudgement, in itself, will justify disqualification.
Gross negligence or total incompetence may be required, or at least incompetence or
negligence to a very marked degree.
Re Lo-Line Electric Motors Ltd [1988] Ch 477 (Ch)
Trading whilst merely insolvent may not determine unfitness. It must be shown the party
knew, or ought to have known, there was no prospect of meeting creditor’s claims
Secretary of State for Trade and Industry v Creegan [2004] BCC 835 (CA)
A court has a wide jurisdiction; it can disqualify non British subjects and those who were not
properly appointed directors
Re Lo-Line Electric Motors Ltd [1988] Ch 477 (Ch)
Re Seagull Manufacturing Co Ltd (In Liquidation) (No.2) [1994] Ch 91 (Ch)
Period of Disqualification
For unfitness the most serious cases will result in disqualification of over 10 years; 6 to 10
years for serious cases and 2 to 5 years for, relatively, not very serious cases.
Disqualification UNDERTAKINGS
Under s.6 or s.8 the Secretary of State may accept a disqualification undertaking from a party
not to do things prevented by a disqualification order for a specific period of time; no
application to the court is needed (s.1A). This can only be accepted if it is within the public
interest – s.7(2A) and s.8(2A). The penalties for breach are the same as for a breach of a
disqualification order (s.13). An application can be made to vary the undertakings but these
are unlikely to succeed unless there are unforeseen circumstances have arisen since the
undertaking was given.
Secretary of State for Trade and Industry v Jonkler [2006] 1 WLR 3433 (Ch)
Most disqualifications occur as a result of undertakings – well over 70% in 2010//11 out of a
total of 1,615 disqualifications.
Leave to act during periods of disqualification

A person subject to a disqualification order or undertaking, can apply to do any of the things
which it prohibits - s.1(1) & s.1A(1) i.e. a director who is disqualified can apply to be a director
despite them being banned. This seems bizarre but, infrequently, circumstances arise when it
is appropriate to do so. For example the ‘banned’ director may be essential in the short term
for the continuance of the company trading. In one case (Hennelly’s) leave was granted for a
banned director to act in that capacity in order to raise essential finance for the company and
secure large contracts (thus protecting jobs and helping to pay creditors). This is a
controversial area for the courts, and one that requires protection of public interest and an
absolute need of the company.
Re Cargo Agency Ltd [1992] BCC 388 (Ch)
Re Harbour Lane Ltd [1998] 2 BCLC 64 (Ch)
Re Hennelly's Utilities Ltd [2005] BCC 542 (Ch)
Re Dawes & Henderson (Agencies) Ltd (In Liquidation) (No.2) [1999] 2 BCLC 317 (Ch)
52
Registration requirement
A register is maintained by the Secretary of State for both orders and undertakings. It is a
public document (s.18 CDDA) and can be searched on-line at Companies House. A court must
send details of a disqualification order to the Secretary of State within 14 days (SI 2001/967).
Variations of orders or undertakings and grants of leave to act as a director must also be sent.
Learning Outcomes
 the Company Directors Disqualification Acct 1986 and the parties it covers.
 the circumstances in which a director (or others) may be banned, and for how long.
 the operation of disqualification orders and the ever prevalent area of disqualification
undertakings.
 penalties for contravention of a disqualification orders or undertakings.
 registration requirements.
Core Text Books:
Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) Ch 13
Ch 20.
(30th edn, OUP 2013) Ch 20
53
LECTURE 12
Semester 1 – Final Coursework briefing, Revision and Coursework Technique.
This lecture is not intended to give students answers to the coursework question but will be is
useful for guidance on technique in answering a company law problem questions and should
reinforce material covered in lectures or seminars. It will also cover referencing and writing
technique issues.
Please note that staff are not allowed to comment on draft assignments in advance of
submission.
54
Shares and Shareholders (an overview)
This is a vast and complex area of company law. This lecture will only be an overview of the
area (we could spend a whole semester on shares and shareholders!). There are different types
of securities which encompass: shares, debentures, options and share warrants, to name a few.
This module will focus mainly on shares and, latterly, debentures in future lectures.
An often quoted definition of a share is from Borland's Trustee v Steel Bros & Co Ltd [1901] 1 Ch
279 (Ch) 288 (Farewell J)
‘A share is the interest of a shareholder in the company measured by a sum of money, for
the purpose of liability in the first place, and of interest in the second.... A share is not a
sum of money...but is an interest measured by a sum of money and made up of various
rights...’
A person becomes a shareholder by exchanging capital in return for a share of the company.
First shareholders pay the company for those shares; after that shares can be bought from
existing shareholders. People can also become shareholders through employee share schemes
and under operation of law (e.g. when a shareholder dies, their shares will transmit to their
personal representative). After those who, on incorporation, have subscribed for shares, a
company issues shares and allots them to new members (s.558, Companies Act 2006). Note
that companies can also become shareholders, not just human beings.
A shareholding gives a member certain rights, most notably to share in company profits,
attend and vote at meetings and take a share in any surplus capital should the company be
wound-up. Under s.542 CA’06, each share must have a value assigned to it and this is called
its ‘nominal’ value.
Share Capital
The following are basic definitions of the terms students will find in text books:
Authorised Share Capital

Represents the total nominal value of shares which may be issued by the company
Issued Share Capital

The part of the authorised share capital that has been issued to its shareholders
Called-up Share Capital

The total amount that those who hold shares have been required to pay in return for those
shares
Uncalled Share Capital

The difference between the nominal value of the issued share capital and the value of the
called-up share capital.
Paid-up Share Capital

The total actually paid for the company’s shares
In a public company a minimum of £50,000 share capital must be allotted (s.763) and at least a
quarter of that must be ‘paid-up’ (s.586).
55
Partly Paid Shares
A company may not require all the value of the share to be paid immediately, but can make a
‘call’ (i.e. demand) for payment at any time for the remainder. If a shareholder refuses to pay
the balance, the company can sue for payment or forfeit the shares. Note forfeiture is strictly
interpreted by the court.
Hunter v Senate Support Services Ltd [2005] 1 BCLC 175 (Ch)
Re National Provincial Marine Insurance Co (1869-70) LR 5 Ch App 559 (CA)
Re China Steam Ship Co (1868) LR 6 Eq 232 (Ch)
Class Shares
A company may have different classes of shares with different rights and obligations. Section
33, Companies Act 2006 ensures that where such rights are contained in the articles, all new
members are bound by them. In absence of any such provision in the articles, members within
each class must be treated equally.
Birch v Cropper (1889) LR 14 App Cas 525 (HL))
Some of the main share types
Ordinary shares
If a company has only one class of share, they must be ordinary shares. These attract whatever
rights are contained within the company’s articles. Sometimes these are referred to as ‘equity
shares’ - see s.560(1) and s.548.
Preference Shares
These entitle the holder to a fixed rate of annual dividend and are paid in priority to other
classes. Usually they are ‘cumulative’, so if a dividend is not paid in one year, they are entitled
to it the following year, as well as any dividend due separately in the current year.
Webb v Earle (1875) LR 20 Eq 556 (Ch)
Preference shares generally do not carry voting rights; historically they have been a form of
finance but such shares are less common now due to the effect of taxation rules.
Note – a dividend is a share in an amount of money that is paid to shareholders out of

distributable profits (s.830).
Deferred Shares
Often called ‘founder shares’, these have a restriction that no dividend can be paid for a
financial year, unless ordinary shareholders receive certain amounts in that same year.
Redeemable Shares
These are issued by the company in the expectation that they will be bought back by the
company at a later, specified date. These can only be issued in accordance with Part 18,
Companies Act 2006 as the general rule is that a company cannot acquire its own shares. A
shareholder will receive the nominal value of the share on redemption. Once redeemed, the
shares are cancelled but the company’s overall capital has to be maintained in a redemption
reserve (s.733).
Variation of Class Rights

Any changes to class rights are governed by s.630 to 635, Companies Act 2006. Changes can
only be made in line with provisions of the articles (s.630(2)(a)) or a 75% approval by members
of the class in question. Section 633 allows 15% of the class members or more to challenge any
56
variation in court. Whilst the court has to consider all circumstances, and be satisfied the
variation would not cause ‘unfair prejudice’ to the class, the following cases suggest the courts
take a very narrow view and are reluctant to declare a variation invalid.
White v Bristol Aeroplane Co [1953] Ch 65 (CA)
Adelaide Electric Supply Co Ltd v Prudential Assurance Co Ltd [1934] AC 122 (HL)
Authorisation of Share Issues

Directors have a general power in a company to allocate shares, but this is controlled by ss.549
to 551. That power can be revoked by ordinary resolution of the members and only renewed
by special resolution.
Pre-Emption Rights
Section 561, Companies Act 2006 gives existing shareholders the right of first refusal to buy
shares before they are offered to outsiders. Companies can create new shares to raise finance
(a rights issue) but the effect will be to dilute an existing member’s proportionate holding if
they do not have the chance to purchase them; s.561 gives them the right to purchase the
shares in order to ensure their holding is not diluted. A private company can disapply this
provision in their articles (s.567) and any company can allow its members to disapply pre-
emption rights generally (s.570) or for a specific allotment (s.571).
Share Certificates
A company must have share certificates ready for delivery within two months of allotment.
Failure to do so renders the company liable to being sued or being subject to an order for
specific performance. (This does not apply to ‘uncertified’ shares operated through CREST)
Sri Lanka Omnibus Co v Perera [1952] AC 76 (PC)
Transfers of Shares
Whilst the general position is that shares are freely transferable, in practice many restrictions
are in place; for example a private company cannot offer its shares for sale to the public under
s.755 CA’06. Any transfers of shares have to accord with the company’s articles under s.544(1).
Re Discoverers Finance Corp Ltd [1910] 1 Ch 312 (CA) 316 (Buckley LJ)
A company records ownership of its shares in a register of members (s.113). A share certificate,
for certified shares, is evidence of ownership of a specific amount, value and class of shares.
Uncertified shares have existed since 1996 as dealings on the London Stock Exchange have
been able to be transacted by CREST, a computer based system that records and transfers title
to shares electronically. Only listed companies need to have uncertified shares (i.e. where no
share certificate is issued). This module syllabus does not overly concern itself with uncertified
shares but those eventually going into practice will become more familiar with it at LPC stage.
A company can only register a transfer if a ‘proper instrument’ is completed - s.770(1) i.e. it is
submitted on correct documentation. The objective is that HMRC can collect stamp duty (a
tax) on it.
Re Greene [1949] Ch 333 (Ch) 339 (Harman J)
If they are fully paid up shares, transfer can be governed by the Stock Transfer Act 1964, s.1(1)
and (4)(a). Membership is confirmed by registration of a transferee as the new owner of
certified shares.
57
Directors’ Approval
A general power exists in most private companies allowing directors to restrict membership;
such a power exists in art. 26(5) of The Companies (Model Articles) Regulations 2008 (SI
2008/3229) for private companies. Even in public companies (where shares are freely
transferable) art. 63(5) gives a general power to refuse to register partly paid shares. Other
than that, in public companies, refusal would only occur in exceptional circumstances (art
46(3)). If a company adopts its own articles, such a power of refusal must exist in them and it
must be sufficiently clear.
Re Copal Varnish Co Ltd [1917] 2 Ch 349 (Ch)
Greenhalgh v Mallard [1943] 2 All ER 234 (CA)
A refusal to register must be notified to the transferee within two months and, new to
company law in the Companies Act 2006, the company must give reasons for doing so (s.771).
Transfers and pre-emption rights

A director has a duty not to register shares to an outsider that is subject to pre-emption rights.
If they do, an existing member has a right to purchase those shares.
Tett v Phoenix Property & Investment Co Ltd (1986) 2 BCC 99140 (CA)
Cottrell v King [2004] BCC 307 (Ch)
Fraudulent transfers
If a signature of a shareholder is forged, the instrument is void and the shares are not
transferred. Section 775 stipulates that a certificate does not represent the transferor’s title to
the shares, so a remedy for a transferee would have to be to claim damages for negligent false
certification. A company is indemnified at common law by the person who has presented a
transfer for registration, but if the error was that of the company, the indemnity is lost.
Sheffield Corp v Barclay [1905] AC 392 (HL)
Cadbury Schweppes Plc v Halifax Share Dealing Ltd [2006] BCC 707 (Ch)
Learning Outcomes
 what a ‘share’ is, and the nature of shares and shareholdings.

 how shares are issues and allotted.
 the terminology associated with shares and share capital.
 restrictions on the issuing and transferring of shares.
 the different types (classes) of shares.
 the rights associated with share ownership.
 the rights of ‘pre-emption’ – essentially the right of first refusal to buy shares.
 the transferring of shares.
Core Text Books:

Ch 11, 12, 13.
(30th edn, OUP 2013) Ch 6, 7 & 14.
58
LECTURE 14– Brief lecture outline.
Shareholders’ Meetings and Voting
Meetings are the major way shareholders (effectively the owners of a company) can make
their opinions known to the directors (the managers of the company). This area is covered by
Part 13 CA’06.
There are different types of meeting (e.g. General Meetings, Class Meetings) and the general
rules are that it should be properly convened and conducted with a minimum number of
people present, and voting has to be properly carried out (s.301). Historically, the idea was
that meetings could be conducted face-to-face, although a proxy (someone attending on a
shareholders behalf) has always been allowed. With modern expertise, audio and visual
technologies allow valid meetings to be conducted without the need to physically meet
(s.360A):
Byng v London Life Association Ltd [1990] Ch 170 (CA)
Re Giga Investments Pty Ltd (1995) 17 ACSR 472
Types of General Meeting

 Extraordinary general meetings
 Annual General Meetings (AGM)
Private companies are not required to have AGM’s (but many do).
Public companies must hold them within six months of the accounting reference date (s.336
CA’06). This allows members to debate the company’s latest annual results.
Notice
Decisions in meeting will be invalid if they are not called in line with ss.301 to 335 CA’06 (note
additional requirement under ss.336 to 340 for public companies).
Bentley Stevens v Jones [1974] 1 WLR 638 (ChD)
Re Haycraft Gold Reduction & Mining Co [1900] 2 Ch 230 (ChD)
Musselwhite v CH Musselwhite & Son Ltd [1962] Ch. 964 (ChD)
The basic position (s.307) is that 14 ‘clear’ days notice is needed for a general meeting. For a
public company 21 ‘clear’ days is required for an AGM, although longer can be provided.
Shorter notice periods are allowed for general meetings but require up to a 95% majority vote;
for a public company AGM it must be unanimous. Accidental failure to notify a meeting will
not necessarily invalidate the meeting outcomes:
Re West Canadian Collieries [1962] Ch 370 (ChD)
Special Notice
When dismissing a director or auditor (or replacing one who has been dismissed) 28 clear
days notice is required
Contents
Notification needs to contain sufficient detail as to what the meeting will discuss (s.311).
Tiessen v Henderson [1899] 1 Ch 861 (ChD) 866 (Kekewich J)
Baillie v Oriental Telephone & Electric Co Ltd [1915] 1 Ch 503 (CA)
59
Circulars are important as they contain more detail to the notification letter, and in some cases
are key in relation to the interests of directors.
Re Moorgate Mercantile Holdings Ltd [1980] 1 WLR 227 (ChD)
Kaye v Croydon Tramways Co [1898] 1 Ch 358 (CA)
Campbell v Australian Mutual Provident Society (1908) 77 LJ PC 117
Advance Bank of Australia Ltd v FAI Insurances Australia Ltd (1987) 9 NSWLR 464
Directors will normally call company meetings, and propose resolutions, but members can
also do this under s.303 and s.314 respectively. Additionally a court can call a meeting (s.306).
Quorums
A minimum number of members must be present for meetings to be valid.
Edinburgh Workmen's Houses Improvement Co Ltd (1935) SC 56
Re Cambrian Peat (1875) 31 LT 773.
Re El Sombrero [1958] Ch 900 (ChD)
The rules on quorums are governed by s.318 CA’06 and the Companies (Model Articles)
Regulations 2008.
Meetings – other issues

A chair is appointed to supervise meetings and proceedings, have the casting vote and must
act honestly and fairly:
National Dwellings Society v Sykes [1894] 3 Ch 159 (ChD)
Blair v Consolidated Enfield Corp. (1995) 128 DLR (4th) 73
Under s.355 CA’06, records must be kept for 10 years; it is a criminal offence not to do so and
certain resolutions under s.30 must be registered within 15 days. Decisions may be binding if
unanimously agreed, even if there was no meeting.
Re Duomatic Ltd [1969] 2 Ch 365 (ChD)
c/f Re D'Jan of London Ltd [1993] BCC 646 (ChD)
VOTING
The general rule is: one share, one vote, but this is not always the case. Surprisingly the
‘default’ position is that votes are cast (and decisions taken) by a show of hands (Art 43/34).
However, they can also be cast by ‘poll’ as shares can be subject to weighted voting rights.
Re Horbury Bridge Coal, Iron and Wagon Co (1879) 11 ChD 109
A proxy can vote (s.324) and they are key, particularly in public companies where
shareholders are disperse and often cannot attend in person. Corporate shareholders (s.323)
can also vote at a meeting via a human representative, as can a member who is personally
bankrupt, as long as this is in accordance with the directions of the ‘Trustee in Bankruptcy’.
Morgan v Gray [1953] Ch 83 (ChD)
Methods of voting (ss.282 to 284 CA’06)

Show of hands – each voter is counted once.
By a poll – each member’s votes are counted. Demand for a poll is covered by s.321 CA’06 and
under Art 45/36 of the Model Articles.
Second Consolidated Trust Ltd v Ceylon Amalgamated Tea & Rubber Estates Ltd [1943] 2 All ER
567 (Ch)
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Any motion at the meeting is passed by either an ordinary resolution (over 50% - s.282) or a
special resolution (75% - s.283).
Directors who are Members

A member can vote as he thinks fit if he is exercising a vote in his capacity as a member, even
if he is also a director of the company. A director, acting in his capacity as a member, has no
fiduciary duty to the company nor, when voting, are they subject to the no-conflict rule.
Carruth v ICI Ltd [1937] AC 707 (HL) 765 (Lord Maugham)
Peters American Delicacy v Heath (1939) 61 CLR 457
North West Transportation Co Ltd v Beatty (1887) LR 12 App Cas 589 (PC)
However, the court will intervene where the power of the majority binds a minority; members
are required to vote bona-fide in the best interest of the company and not for improper
purpose in specified circumstances:
Re Western Mines Ltd (1975) 65 DLR (3d) 307
Voting Agreements
A member can validly enter into an agreement (a shareholder agreement) that restricts or
determines the way they vote.
Puddephat v Leith (No.1) [1916] 1 Ch 200 (ChD)
Greenwall v Porter [1902] 1 Ch 530 (ChD)
However, they will only apply to shareholders, not specific shares.

Greenhalgh v Mallard [1943] 2 All ER 234 (CA)
A shareholder agreement can be a separate contract between two shareholders, or formed via
the articles of association.
Bushell v Faith [1970] AC 1099 (HL)
Quin & Axtens Ltd v Salmon [1909] AC 442 (HL)
Written Resolutions in Private Companies

The Companies Act 2006 introduced a new statutory procedure for passing written resolution
in private companies (ss.288-300). Private companies no longer have to hold meetings
(s.288(1)) but resolutions proposed by directors or members have to obtain a majority
(ordinary or special dependant up the resolution) of those entitled to vote.
Learning Outcomes
 shareholder meetings and formalities surrounding their calling and conduct.
 voting formalities at shareholder meetings, how they are cast and voting agreements.
Core Text Books:

Alan Dignam and John Lowry, Company Law, (7th edn, OUP 2012) various chapters
Ch 21.
(30th edn, OUP 2013) Ch 14
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Shareholders’ Rights and Remedies – Derivative Claims & Unfair Prejudice Petitions and
winding up under s.122(1)(g), Insolvency Act 1986
The basic principle of company law is that the majority rule! This can cause problems to
minority shareholders if the majority are acting in a way that may be against the interests of
the company, or against their own personal interests as minority shareholders.
As a consequence of separate legal personality, if a wrong is done to the company it is logical

that only the company can decide what action to take. This is known as the ‘proper claimant’
(formerly proper plaintiff) rule:
Foss v Harbotte (1843) 2 Hare 461 (V-C)
The rule in Foss v Harbottle is problematic for minority shareholders; how do they get a
majority to vote to take action when it is likely that the majority shareholders themselves are
causing the ‘wrong’? Clearly the majority will not vote for the company to take any action (the
turkeys voting for Christmas analogy)! However, a decision of a company not to take action
against a director who may be in breach of s.260(3) CA’06 may be reasonable – see the case of
Smith v Croft (No.2) [1988] Ch 114 (Ch) as an example.
The protection available for minority shareholders can be split into two main areas:
 Derivative Claims – where a minority shareholder can bring a claim in a representative

capacity of the company for a wrong done to the company.
Cooke v Cooke [1997] 2 BCLC 28 (Ch)
 Unfair Prejudice Petitions – where a minority shareholder can petition against a majority
shareholder in order to redress unfairly prejudicial conduct affecting them personally as a
shareholder. This is a personal remedy.
Derivative Claims (formerly under common law derivative ‘actions’)

Exceptions to the rule in Foss v Harbottle were developed under the OLD common law so that
shareholders could bring cases in a representative capacity of the company. These were called
derivative actions but these common law exceptions have now been replaced in the
Companies Act 2006 by derivative claims (ss.260-264).
This area of law has changed as a result of the Companies Act 2006. Most notably a derivative
claim can now be brought under s.260(3) for:
‘an actual or proposed act or omission involving negligence, default, breach of duty or
breach of trust by a director (or another person or both) of the company.
The most significant change is that ‘fraud on the minority’ is no longer required, nor is the
requirement that the wrongdoers be in control of the company – merely negligence, default,
breach of duty or breach of trust is required. Linked to this, under s.239 CA’06, ratification of
these types of acts by must only be by votes of ‘disinterested members’.
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Has this opened the floodgates for claims to be made? So far this has not materialised as the
court has to grant permission for a member to continue (s.261).
Kiani v Cooper [2010] EWHC 577 (Ch)
A court must refuse to permit a claim to proceed if, under s.263(2) a person’s act or omission
has satisfied the duty to promote the success of the company under s.172 or if it has been
authorised or ratified by the company. The court will also have to pay regard to the views of
disinterested members (s.263) and they will control the ability of another member to take over
any claim (s.264).
Unfair Prejudice Petitions

The common law exceptions to the rule in Foss v Harbottle proved to be too limited, as
arguably, are the new statutory provisions. As a result, additional individual redress for
shareholders was created by s.210 of the then CA’48. This required conduct of a majority
shareholder (often a director too) to be ‘oppressive’ against a minority shareholder. The scope
of this protection was widened under s.75 of the then CA’80 to include conduct that could be
classed as ‘unfairly prejudicial’. This latterly became s.459, CA’85 and is now contained in
s.994 CA’06.
A number of case law principles have developed in this area, but have to be read in light of the
leading decision in O'Neill v Phillips [1999] 1 WLR 1092 (HL).
Case law suggests that unfairly prejudicial conduct need not be intentional, nor that
misconduct of the petitioner will preclude a remedy, but a member has to be unfairly
prejudiced in their capacity as a member.
Re a Company (No.007623 of 1984) (1986) 2 BCC 99191 (Ch).
Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273 (Ch).
Re a Company (No.004475 of 1982) [1983] Ch 178 (Ch).
For a successful petition, conduct has to be both unfair and prejudicial, not the mere
questioning of commercial judgement.
Re Cumana Ltd [1986] BCLC 430 (CA)
The scope of what is now s.994 CA’06 appeared to be extended by the adoption of a public law
concept of ‘legitimate expectation’ by Lord Hoffmann in:
Re Saul D Harrison & Sons Ltd [1994] BCC 475 (CA) (a key case in this area of law)
Following a growth in petitions under this heading, the House of Lords (Lord Hoffmann again
presiding in this case) clarified, and limited, the scope of the concept of legitimate expectation as
it applies in company law in this area. Essentially, a legitimate expectation to be treated in a
certain way by a majority shareholder, had to be linked to an enforceable legal right of the
petitioner, not a personal hope.
O'Neill v Phillips [1999] 1 WLR 1092 (HL) (First unfair prejudice case in HL)
For examples of unfairly prejudicial petitions see:

Re Tottenham Hotspur plc [1994] 1 BCLC 65 (Ch)
Re Elgindata Ltd [1991] BCLC 959 (Ch)
Re London School of Electronics Ltd [1986] Ch 211 (Ch)
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Re Halt Garage (1964) [1982] 3 All ER 1016 (Ch)
Grace v Biagioli [2005] EWCA Civ 1222; [2006] BCC 85 (CA)
Unfair prejudice – Court Powers (s.996 CA’06)

These are potentially wide ranging as the court can make an order as it thinks fit! However,
the only remedy personally for the minority shareholder is for the court to force a majority
shareholder to purchase their shares – all other remedies relate to the company itself. Often the
remedy of forcing the purchase of the minority shareholder’s shares is not a satisfactory
solution for the minority shareholder:
Re Elgindata Ltd [1991] BCLC 959 (Ch)
Following Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, it is likely that
companies will want to include arbitration agreements in their constitutions. In Fulham FC, the
Court of Appeal upheld the effectiveness of an arbitration agreement which covered disputes
giving rise to unfair prejudice petitions. This case overruled previous case law in Exeter City
Association Football Club Ltd v Football Conference Ltd [2004] EWHC 2304 (Ch) – so now a
petition can be stayed in favour of arbitration.
Winding-Up
Under s.122(1)(g) a minority shareholder can apply to have the company wound-up on ‘just
and equitable’ grounds. This is rarely done; the courts are reluctant to wind-up a solvent
trading company. Most often this is done following the breakdown of a quasi-partnership:
In Ebrahimi, Lord Wilberforce laid down the following conditions that had to exist to wind-up
a quasi-partnership:
1. Basis of business association was a personal relationship and mutual confidence
2. Understanding that all or specific shareholders will participate in management
3. A restriction on the transfer of members’ interest preventing the petitioner leaving
Learning Outcomes
 the importance and effect of the basic principle in Company Law – majority rules!
 the ‘proper plaintiff rule’ in Foss v Harbottle, its effect and the exceptions available to
minority shareholders.
 the potential remedies available to the courts in relation to minority shareholders.
 the conditions to bring a winding-up petition on just and equitable grounds.
Core Text Books:
Ch 15, 16.
(30th edn, OUP 2013) Ch 18.
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Maintaining and Raising Capital including Charges
The principle of capital maintenance is that once capital is paid to the company, it is there for
the benefit of the creditors, not the members.
Trevor v Whitworth (1887) LR 12 App Cas 409 (HL)
Note: This does not mean that a company cannot use its capital (and maybe lose it!). The rule
is, therefore, no guarantee that creditors will be paid. As a result there are controls on
payments out of capital.
Hill v Permanent Trustee Co [1930] AC 720 (PC) 731 (Lord Russell of Killowen)
The main elements of the ‘rules’ relating to maintenance of capital are as follows:
(i) a company may not issue shares at a discount
(ii) dividends can only be made out of profits
(iii) a company may not purchase its own shares (however, there are substantial exceptions to
this rule)
(iv) public companies may not give ‘financial assistance’ for the principal reason of
purchasing its own shares
Reduction of capital
Generally a reduction in issued share capital is illegal unless authorised by statute.
Trevor v Whitworth (1887) LR 12 App Cas 409 (HL)
Section 641, Companies Act 2006 details the circumstances where this is permitted and the
court will not approve a reduction without it has a ‘discernible purpose’.
Re Thorn EMI Plc (1988) 4 BCC 698 (Ch) 702 (Harman J)
Court procedures and certification are detailed in ss.648 to 649 and in public companies any
serious loss of capital (50% reduction or more) requires the directors to hold a meeting of
members within 56 days to consider what measures to take (s.656).
RAISING CAPITAL – Through Shares

Companies have two main ways of raising money: sell or issue more shares or through
borrowings. In practice how this is done differs for private companies compared to public
companies; s.755 for example prevents a company offering its shares for sale to the public.
Private companies can raise capital by issuing more shares for example, but it is usually
(though not always) existing, or even founder members of the company, who will purchase
them. Public companies raise large amounts of money from the public/intuitional investors
and their shares are freely transferable. This part of the lecture will focus on public companies
raising capital by selling shares on the London Stock Exchange (LSE), although there are many
stock exchanges in Europe and the rest of the world where shares are traded.
The LSE provides a forum to allow listed public companies to raise capital by having their
shares publicly traded. The LSE is one stock exchange with two markets: the ‘Main Market’ or
‘Official List’ and the Alternative Investment Market (AIM) for less established companies. A
company can offer for sale unissued shares, usually via a merchant bank, to the public or for
the merchant bank to place with clients. A company may also offer shares direct to the public
by advertising and producing a prospectus or by creating a new rights issue.
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The area is heavily regulated by the LSE along with the Financial Conduct Authority (FCA –
who regulate the financial services industry) and the Prudential Regulation Authority (PRA -
part of the Bank of England and responsible for the prudential regulation and supervision of
banks, building societies, credit unions, insurers and major investment firms). Both the FCA
and PRA were formed in 2103 out of what was formerly the Financial Services Authority
(FSA). The main legislation covering this area is the Financial Services and Markets Act 2000.
RAISING CAPITAL – ‘CHARGES’

In addition to raising capital through shares, companies will also raise it through borrowings.
Borrowings can be in a number of forms but are often in the forms of loans or overdrafts.
Lenders (typically banks) will want security on these loans and the usual document giving
security is called a ‘debenture’ (s.738 CA’06).
Levy v Abercorris Slate and Slab Co (1888) LR 37 Ch D 260 (Ch) 264 (Chitty J)
‘...a debenture means a document which either creates a debt or acknowledges it, and any
document which fulfils either of these conditions is a “debenture”.’
There are different types of security a company can give (e.g. pledge, lien, legal mortgage,
equitable mortgage) but ‘charges’ will be the main focus in this module.
Most text books will partially out of date in this area as The Companies Act 2006 (Amendment
of Part 25) Regulations 2013, that came into force on 6th April 2013, repeals Chapter 1 and 2 of
Part 25 of the CA’06 that covered ss.860-892. The new Regulations replace these original
sections with Chapter A1 and A2, now covering s.859A to s859Q.
Terminology
A company will borrow money, give security on it and create a charge in favour of the lender,
so is called the ‘chargor’.
A lender gains security (the charge) from the borrower (the company) and is called the
‘chargee’.
Where the debt is fully paid off in accordance with the terms of the debenture, then the debt is
discharged and the security ends. Problems occur when the terms are not met (e.g. failure to
make a repayment) or as a result of lenders often making loans repayable on demand.
Williams & Glyn's Bank Ltd v Barnes [1981] Com LR 205 (HCt)
Types of Charges
Fixed charge
This is legal or equitable form of security under which a specific asset (usually an appreciating
asset) is used as security for the loan. In the event of default this allows the chargee to seize the
asset, sell it and give any surplus back to the company. Generally the chargor is prevented by
the chargee from dealing with the asset without consent, so is an inappropriate form of
security for an asset that frequently fluctuates. Most importantly a valid fixed charge holder
is the first creditor to be paid out when a company goes into liquidation as the relevant
assets are taken out of the pool of assets caught by any other security.
Wheatley v Silkstone & Haigh Moor Coal Co (1885) LR 29 Ch D 715 (Ch)
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Floating charge
This is lesser form of security than a fixed charge but still provides a chargee with priority
over unsecured creditors on liquidation of a company. As a company can deal with assets
secured by a floating charge it is an appropriate form of security for assets that constantly
change, for example book debts and stock. Floating charges are often created over a class of
assets but can be on the whole of the company’s assets.
Illingworth v Houldsworth [1904] AC 355 (HL)
Re Yorkshire Woolcombers Association [1903] 2 Ch 284 (CA)
Crystallisation
This occurs when an event or condition applies which causes a floating charge to stop
‘floating’ over fluctuating assets and fasten upon existing assets at that time. This can be
triggered under operation of law (i.e. liquidation, appointment of an administrator or receiver,
cessation of trading) or by a breach in the terms of the debenture.
Re Borax Co [1901] 1 Ch 326 (CA)
George Barker (Transport) Ltd v Eynon [1974] 1 WLR 462 (CA)
Griffin Hotel Co Ltd [1941] Ch 129 (Ch)
Re Permanent Houses (Holdings) Ltd (1989) 5 BCC 151 (Ch)
Why is the Form of Security Important?

It is important because, on liquidation, a valid fixed charge holder is paid out first, whereas a
floating charge holder will only be paid after liquidation expenses, preferential creditors and
after a prescribed portion of the reserve fund allocated for unsecured creditors. However, a
floating charge holder will still have priority over unsecured creditors (subject to the monies
set aside under the unsecured creditors fund- s.176A IA’86).
Re Lewis Merthyr Consolidated Collieries Ltd (No.1) [1929] 1 Ch 498 (CA)
Re Spectrum Plus Ltd (In Liquidation) [2005] 2 AC 680 (HL)
Spectrum Plus is the leading authority on the conceptual possibility of having a floating charge
over book debts, but this is only possible if strict controls exist on the ability of the chargor to
deal with the asset in question (see Lord Hope’s criteria at para [54] in the HL judgment). This
case resolved conflicting historical case law in this area.
Registration of Charges
The requirement to register, via Companies House, will apply to every charge or mortgage
granted by a UK company or limited liability partnership (LLP) unless expressly excluded by
the 2013 Regulations or any other statute. This is a public document (s.1085) and the basic rule
is that delivery of the correct documentation to effect registration must be done within 21 days
under s.859A(4). The charge can be registered by the company or any other person interested
in the charge (s.859A) and failure to register makes the money secured by the charge
immediately repayable – see s.859H(4).
Failure to register the charge will invalidate the security but the debt will still remain valid
and will still be liable to be repaid. Therefore, a creditor will lose his priority for repayment.
Re Monolithic Building Co [1915] 1 Ch 643 (CA)
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If registered, the Registrar will issue a certificate that is conclusive evidence of valid
registration (s.859I(6)); it is notice to all the world of its existence.
Ali v Top Marques Car Rental Ltd [2006] EWHC 109 (Ch)
G and T Earle Ltd v Hemsworth Rural District Council (1928) 44 TLR 605 (KBD)
Negative Pledge Clauses

An example of a negative pledge clause is where an earlier charge ‘prevents’ a future charge
ranking in priority to it (e.g. preventing a later fixed charge being created as under common
law this will rank in priority to a floating charge).
Re Hamilton's Windsor Ironworks Co Ltd (1879) LR 12 Ch D 707 (Ch)
Consequently, the question of the validity of these clauses arises. If a charge is validly
registered this provides ‘constructive notice’ of an earlier charge to future charge holders. This
would perhaps logically signify that a later charge could not have priority to the earlier one.
However, as negative pledge clauses do not need to be registered, a future charge holder
given priority to an earlier created charge must have actual notice of the negative pledge
clause itself for the earlier charge to retain priority.
English and Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 QB 700 (CA)
G and T Earle Ltd v Hemsworth Rural District Council (1928) 44 TLR 605 (KB)
Avoidance of Charges
A liquidator is always on the lookout for charges that have been created within a specified
period before liquidation. Under s.245 Insolvency Act 1986 the liquidator can apply to the
court to have a floating charge set aside if it was created within two years of the onset of
liquidation for a person connected (see s.249 s.435 IA’86) with the company or twelve months
for someone not connected. For unconnected persons it can only be set aside if the company
was insolvent at the time of granting the floating charge (s. 245(4) and s.123 IA’86).
Learning Outcomes
 the principles of capital maintenance and controls on reductions.
 how companies raise capital through selling or issuing shares.
 how companies raise money through borrowings.
 the forms of security gives for borrowings – specifically ‘charges’ and their registration.
 the terminology and different types of charge.
 consequences on security when things do not go as planned or registration requirements
are not met.
Core Text Books:
Ch 8, 22.
(30th edn, OUP 2013) Ch 10 & 11.
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Insolvency and Liquidation
There are a number of procedures that can come into play when a company gets into financial
trouble; many result in the dissolution of the company: its death! Liquidation is a procedure
under which a company can be dissolved. It involves a liquidator ‘winding-up’ the company,
effectively shutting it down by ending its legal relationships and, very importantly, collecting
assets, paying debts in priority defined by law and distributing any surplus back to the
members (they should be so lucky!) – see s.143 Insolvency Act 1986. Where a company is
unable to pay all creditors in full they are paid, subject to provisions in relation to preferential
payments, in equal percentages (pari passu) – s.107 IA’86 and r.4:181 Insolvency Regulation
1986.
In insolvency and liquidation procedures, a qualified insolvency practitioner or official

receiver will take over the governance of the company from the directors. The insolvency
procedures covered in these lectures are:
 Creditors’ voluntary winding-up

 Winding-up by the court
 Members’ voluntary winding-up
 Administration
 Voluntary arrangement
The qualified insolvency practitioners involved are varied but could be an Official Receiver,
Administrative Receiver, Administrator, Supervisor of a voluntary arrangement, Liquidator or
Provisional liquidator. The legislation in this area is primarily, but not exclusively, covered in
the Insolvency Act 1986.
A very brief overview of the various procedures is detailed below:
Administration
Football fans will be well familiar with this term; it seems to be an occupational hazard for
football clubs to enter and exit administration on a regular basis! This occurs when a company
is insolvent (unable to pay its debts) or is likely to be so. The objective of an Administrator is
to establish if the business can be made viable i.e. restructured to become solvent or sold to
avoid liquidation. An administrator has significant powers and, during the time of
appointment, creditors are prevented from enforcing security or taking legal action against the
company in relation to pre-administration issues.
Voluntary Arrangement
A Company Voluntary Arrangement (commonly known as a CVA) is where the company’s
directors, a Liquidator or Administrator, propose a composition or a scheme of arrangement.
This is basically a proposal to creditors to accept a proportion of what they are owed, or an
agreement between the company and creditors or members to affect a takeover. It may seem
strange that a creditor would agree to take less than what they are owed, but often this can be
better than allowing a company to go into liquidation where a creditor may receive even less
of what they being offered under a CVA, or even nothing at all!
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Members’ voluntary winding up
This only applies in solvent companies and is a liquidation procedure not an insolvency
procedure. It requires 75% of the members to approve a resolution to wind up the company
following a statutory declaration by the directors that the company is solvent (s.84). This
procedure does not involve the court.
Creditors’ voluntary winding up

This procedure is still initiated by the members passing a special resolution, as above, but in
this instance there is no statutory declaration of solvency (s.90). This is both an insolvency and
a liquidation procedure, although technically it can apply to a solvent company as the
company may turn out to be solvent, but the directors have not made such a declaration prior
to the resolution being passed.
Both members’ voluntary winding up and creditors’ voluntary winding up involve the
company going into liquidation.
Winding up by the court (Compulsory Liquidation)

This can apply to both solvent and insolvent companies but invariably it involves mostly
insolvent companies. Only a court with jurisdiction can issue a winding up order and that
petition can be applied for by the company, its directors, any creditor, a contributory, a
liquidator, an administrator, an administrative receiver, the Secretary of State or an official
receiver. An order can be made in eight instances as defined in s.122(1). The main ones are:
s.122(1)(f) – where a company is unable to pay its bills
s.122(1)(g) – where the court thinks it is ‘just and equitable’ to do so.
s.122(1)(g)
There are numerous grounds for winding up under this section but the main ones are:
 The disappearance of the substratum of the company

Re German Date Coffee Co (1881-82) LR 20 Ch D 169 (CA)
 The illegality of the company’s activities
Re Thomas Edward Brinsmead & Sons [1897] 1 Ch 406 (CA)
 Deadlock in the management of the company
Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426 (CA)
 Quasi-Partnership Companies
Re Zinotty Properties Ltd [1984] 1 WLR 1249 (Ch)
Re Abbey Leisure Ltd [1990] BCC 60 (CA)
 Oppressive conduct by the majority shareholder or directors
Loch v John Blackwood Ltd [1924] AC 783 (PC)
s.122(1)(f)
These petitions are the most common and are invoked where a company cannot pay its debt
as defined in s.123 IA’86. A company is defined as being unable to pay its debts if:
o It cannot pay a debt over £750 within 21 days following a written demand
o It has failed to pay (wholly or in part) following judgments made against it.
o It is unable to pay debts as the fall due
o Company assets are less than its liabilities
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A court will not lightly wind up a company, so there cannot be any dispute on substantial
grounds concerning the existence of the debt owed.
Re Selectmove Ltd [1995] 1 WLR 474 (CA)
When a company enters liquidation the powers of the directors cease; they transfer to the
liquidator, and the director ceases to hold office.
Re Farrow's Bank Ltd [1921] 2 Ch 164 (CA) 173 Lord Sterndale MR
Re Ebsworth & Tidy's Contract (1889) LR 42 Ch D 23 (CA) 43 Lord Esher MR
Measures Bros Ltd v Measures [1910] 2 Ch 248 (CA) 256 (Buckley LJ)
A provisional liquidator can be appointed in the period between a petition for compulsory
liquidation being made and the court dealing with that petition. The provisional liquidator
maintains the status quo in that time and prevents prejudice between those opposing, and
those applying for, winding up.
Powers of office holders in insolvency and liquidation procedures

These are extensive and many practical ways a liquidator can exert this power. These are
discussed in more detail in the next lecture. Certain persons connected with the company have
to, under penalty, provide information to the insolvency practitioner who is the office holder
dealing with the company’s situation (ss234-235). For example they have to provide
information on the promotion, formation, business dealings, affairs or property of the
company and will have to ‘attend to’ the office holder at such times as they may reasonable
require. Penalty for failure to do so carries a maximum sentence of seven years in jail (e.g.
Sch.10).
They have the power to require a person to appear before a court for oral examination in a
private examination (s.236). This can also be done in public as a public examination. An office
holder can apply for money and goods to be seized via a court warrant (s.236(5)) and for
records to be produced (s.236(3)).
Dissolution
A company is finally dissolved when the Registrar removes the name of the company from the
register in Companies House and after three months have passed in both liquidation and
administration procedures the company. Dissolution ends a company’s relationship with its
members and it ceases to be a party to any legal relationship; its legal personality is at an end.
It is the death of the company – RIP !
Dissolution occurs at the end of both voluntary and compulsory winding up and can apply on
completion of administration if the administrator thinks there is nothing to distribute to
creditors (Sch. B1 para 84(1)).
The other methods where a company may be wound up are:
 By order of the court

An example is under s.900(2)(d), CA 2006 where a company transfers its business to another
registered company.
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 By the registrar
E.g. - Under s.1000, CA 2006 where the registrar will strike of a defunct company
 By cancellation of registration
This applies where a court orders the Registrar to cancel a registration. Usually this applies
where there has been a procedural problem. Examples are where there is no memorandum of
association or where the ‘memo’ fails to state the name of individuals/amounts subscribed. It
can also apply where a company does not have the minimum paid up capital required by law
or where the founder members lack capacity. The Attorney General will invariably have
applied for judicial review of the Registrar’s decision to register these companies in the first
place. A good example of a registration being cancelled because the company’s objects to carry
on the business of prostitution were considered illegal/against public policy is:
R v Registrar of Companies Ex p. Attorney General [1991] BCLC 476 (Div Ct)
 By Act of Parliament
For example bank mergers.
Phoenix Companies
Finally in the lecture we will touch on ‘phoenix companies’ and how legislation tries to
prevent directors, whose companies have been wound up, from starting up the ‘same’
business again – often in the same premises and with similar names (s.216). Second hand car
dealers used to be notorious for this! A director is prevented from being a director, or being
involved in the management of a company with a similar name, for a period of five years and
will be subject to a maximum two year jail term if he/she does.
Learning Outcomes
 legal consequences when a company becomes insolvent – administration or liquidation.
 the parties involved in administration or liquidation and the legislation that covers this.
 the administration process and procedures.
 CVA’s (Company Voluntary Arrangements).
 company winding-up procedures (liquidation) and its consequences.
 The dissolution of a company and its legal implications.
Core Text Books:
Ch 25, 26, 27.
(30th edn, OUP 2013) Ch 20.
72
Vulnerable Transactions in Insolvency and Directors’ Liabilities
From commencement of winding up certain transactions may be invalidated. This can apply
where transactions occur that have been made as a ‘preference’ or at an ‘undervalue’ within
certain prescribed periods. This can also apply to floating charges under s.245, IA’86.
Claw-back
Under the Insolvency Act 1986 a liquidator can ‘claw-back’ property or avoid transactions if
they have been made within specified periods in the following circumstances:
 if the company has made a ‘transaction at undervalue’ – s.238
 if the company has made a ‘preference’ – s.239
Re M.C. Bacon Ltd [1990] BCLC 324 (Ch)
Under s.240 IA’86 the time periods (ending with onset of insolvency) that apply to the above are:
 for a person connected with the company – 2 years. (see see s.249 and s.435 IA’86)
 for a person not connected with the company – 6 months.
A company is insolvent if it meets the criteria set down in s.123 IA’86 but is usually evidenced
by its assets being less than its liabilities.
Remember we discussed in the earlier lecture on floating charges that a liquidator can also
apply to a court, under s.245 IA’86, to set aside a floating charge made within a prescribed
period. These prescribed periods are detailed in s.245(3):
o for a person connected with the company – 2 years. (see see s.249 and s.435 IA’86)
o for a person not connected with the company – 12 months.
Note that if the person is unconnected, the liquidator must also establish the company was
insolvent at the time the charge was granted - s.245(4).
Some other key vulnerable transactions are:

 s.423 – Transactions defrauding creditors
 s.244 – Extortionate credit transactions
A company cannot agree that, should it go into liquidation, its property has to go to another
party and, thus, not be available for distribution to creditors. This issue of the ‘anti-
deprivation principle’ was considered again relatively recently in the UK Supreme Court in
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38. There are
many exceptions to this principle, the obvious one being validly registered charges, but in
Belmont, Lord Collins at [78] said that the anti-deprivation principle only applied to deliberate
intentions to evade insolvency laws, and was not to be applied unless one of the main
purposes of the transaction was also to evade insolvency law [104].
73
Liability for Fraudulent or Wrongful Trading
Fraudulent Trading (s.213 Insolvency Act 1986 & s.993 Companies Act 2006)
Although fraudulent trading is harder to prove than wrongful trading, students will find more
appeal case law concerning fraudulent trading by directors. It is harder to prove because it is a
criminal offence and, therefore, a person:
 must have been a knowing party to the offence
 must have intended to defraud
 and the company must be in the course of winding up.
If a liquidator can establish fraudulent trading against an individual (not just a director) then
the court can order that individual to personally contribute to the company’s assets (s.213(2)).
Here are a series of cases in this area, many of which will be covered in the lectures.
Re Bank of Credit and Commerce International SA (No.14) [2004] BCLC 236 (ChD)
Welham v Director of Public Prosecutions [1961] AC 103 (HL)
Re Patrick and Lyon Ltd [1933] Ch 786 (ChD)
R v Lockwood [1986] Crim LR 244 (CA)
Re a Company (no.001418 of 1998) [1991] BCLC 197 (ChD)
Re Maidstone Building Provisions Ltd [1971] 1 WLR 1085 (ChD)
R v Miles [1992] Crim LR 657 (CA)
Re Bank of Credit and Commerce International SA, Banque Arabe Internationale
D’Investissement SA v Morris [2001] 1 BCLC 263 (ChD)
Morphitis v Bernasconi [2003] Ch 552 (CA)
Wrongful Trading (s.214 Insolvency Act 1986)

Directors can more easily ‘wrongfully’ trade as there is no need to prove fraud under this
section. Again it applies only during winding-up and when its assets cannot meet its
liabilities. The key part of the offence (s.214(2)) is that before winding up commenced:
‘that person knew or ought to have concluded that there was no reasonable prospect
that the company would avoid going into insolvent liquidation’.
The standard a director is judged by is a dual objective and subjective standard.
s.214(4) A director is judged by the standard of a reasonably diligent person having both
(a) the general knowledge, skill and experience that may reasonably be expected
of a person carrying out the same functions as are carried out by that director in
relation to the company, and
(b) the general knowledge, skill and experience that that director has.
Directors have a defence to wrongful trading if they ‘took every step’ to minimise losses to
directors (s.214(3)).
Any contribution made by an individual, as a result of a court order, go to the general assets of
the company.
Re Purpoint Ltd [1991] BCC 121 (ChD)
74
Disqualification of Directors
For both fraudulent and wrongful trading, a person can be disqualified from being a director
for up to 15 years (see s.4 and s.10 Company Directors Disqualification Act 1986).
Case law and the nature of liability

A few good cases that explain this area aspect are:
Re Produce Marketing Consortium (In Liquidation) Ltd (No.2) (1989) 5 BCC 569 (ChD)
Re Purpoint Ltd [1991] BCC 121 (ChD)
Rubin v Gunner [2004] BCC 684 (ChD)
Directors are in an unenviable position sometimes. Should they carry on trading in the hope or
expectation that the company can be ‘turned around’, or ‘throw in the towel’ and close the
business immediately? The law has to strike a balance on how it judges the action of directors
in this regard.
Secretary of State for Trade and Industry v Taylor [1997] 1 WLR 407 (Ch)
The law recognises that directors who have a reasonable belief that continuing to trade will be
to the benefit of creditors may avoid personal liability (the ‘Sunshine test’):
Re White and Osmond (Parkstone) Ltd (30th June 1960) unreported (Ch)
Secretary of State for Trade and Industry v Gill [2006] BCC 725 (Ch)
Singer v Beckett [2001] BPIR 733 (Ch)
Re Augustus Barnett & Son Ltd (1986) 2 BCC 98904 (ChD)
However, a director runs the risk of at least a wrongful trading claim against him/her if the
business proves ultimately unsuccessful and he/she has not taken ‘every step’ to minimise
creditor liability as required by s.214(3) IA’86.
Learning Outcomes
 the options available to a liquidator, and their limitations, in order to challenge the validity
of certain transactions made prior to liquidation.
 What a liquidator must do to validly challenge the validity of security on company debts.
 the conditions for someone to be held accountable for fraudulent trading.
 the conditions that directors must be aware of to avoid liability for wrongful trading.
 the legal, practical, business and economic problems facing directors in continuing trading
whilst the company is insolvent.
Core Text Books:
Ch 22.
(30th edn, OUP 2013) Ch 20 mainly and some in Ch 11.
75
LECTURE 23 & 24
Semester 2 –Exam Preparation and Technique.
These lectures are designed to help those students who have attended throughout the
programme to sharpen up their preparation and technique ready for the company law exam.
A good understanding of company law will be important for all students after their degree,
regardless of what they choose to do, as invariably most will end up either working for a
company, advising a company or owning/running one! Therefore, the lecture is also about
enhanced learning.
They are not a substitute for missed lectures or seminars – there is way too much to be covered
in this module to make up for this at the end. Therefore, please do not rely on this lecture to
fill gaps created by missing earlier lectures/seminars.
It will be useful for guidance on technique in answering company law questions in an

examination and should reinforce material covered in seminars.
76
SEMINAR PROGRAMME
The seminars in this Module take place in a fictitious setting of “Old Town” (I know, not the
most imaginative of names!). In the Town there are a number of companies and characters
seeking your advice on different company law problem scenarios. In the seminars you will
create a new company at the beginning, see how companies are promoted and set up, and
how they protect their separate legal status. You will explore the legal importance of a
company’s constitution and the impact of shareholder agreements.
In the second semester you will see how easy it is for directors to breach their duties and how
a company can seek redress against directors. You will take part in a fictitious shareholders’
meeting and understand how limited protection of minority shareholders can be in company
law. You will also understand how a company raises capital through borrowings and explore
the security it has to give to lenders, often banks, for any borrowings it makes. Finally you will
see the death of a company: liquidation and dissolution.
All this takes place in a small, fictitious Town in the same way as all these issues do take place,
in every town and city across the country, every day.
Preparation for seminars

Please ensure you bring this module manual to the seminars.
We want you to feel comfortable attending seminars as these are vital to your development
and overall results. Therefore, it is essential that you prepare the seminar material in advance
as indicated in the module handbook – usually problem questions set or discursive points.
However, this does not mean we expect students to know all of the answers all of the time -
far from it. Students learn by getting things wrong, as well as right, and our seminars are such
that we encourage students to have a go!
That said, we know students do benefit by doing sufficient work in advance of the seminar as
then they really do gain the maximum benefit from it. This approach works as it prevents
students 'sponging' off the work of others. It also prevents the seminar becoming a second
lecture, which is fruitless for everyone.
You will be given some guidance on what to read, for example key cases, statutes, articles etc.
but degree education is about autonomous learning, so we will deliberately not spoon-feed
students. Therefore, you should not be restricted in your reading. Your tutor can also give you
guidance on how to best make use of your available time so that you take a planned and
strategic approach to reading.
77
Seminar 1. Introduction and Forming a Company
This is an ‘in-class’ workshop exercise to get you familiar, in part, as to how a company is
formed. We are aware that many of these terms will be new to you, so do not worry; as the
lectures and seminars progress the mystique will soon disappear!
You are required to complete an IN01 form on behalf of Mr Holmes. This is an application to
register a company, and an accompanying memorandum of association. These will be handed
to you in the first seminar.
Mr Holmes is wishing to set up a Garden Centre in Old Town, with two of his associates: Dr
Watson and Professor Moriarty. They all wish to trade as a private company limited by shares
and, on formation, wish to become equal shareholders and also directors of the new company.
Dr Watson will take on the role as company secretary. As shareholders they want to:
 ensure you have the right to vote on shareholder resolutions,
 receive any declared dividends, and
 a right to any capital should the company be wound up.
As founders of the company, the three will invest £1,000 each in newly issued shares in the
company. Details relating to the new company are as follows:
New Blooms Ltd

1 Carlisle Street  Nominal value of shares - £0.50 each.
Old Town  Class of shares – ordinary.
South Yorkshire  All shares are not redeemable.
OV4 1RS
Details of the three parties forming the new business are:
Mr Sherlock Holmes Dr John Hamish Watson Professor James Moriarty

221b Baker Street 42 Cavendish Place 247 Hanging Gardens
London London London
NW1 6XE NW2 4AA EC4 7HH
Dob: 14/12/1975 Dob: 01/01/1976 Dob: 01/06/1984
The company will be adopting the Model Articles for Private Companies Limited by Shares
under The Companies (Model Articles) Regulations 2008.
Note – for future reference, all information and documentation related to setting up a
company can be found at:
http://www.companieshouse.gov.uk/infoAndGuide/companyRegistrationPaper.shtml
Learning outcomes – At the end of the seminar you will be familiar with the basic form to set
up a company (IN01), what the memorandum of association is and have an introduction to
some key terminology associated with the formation of a company.
78
Seminar 2. Companies and Separate Legal Personality
Harry is a solicitor in Old Town at the legal firm Dewy, Cheatham and Howe LLP. Sally has
come to see Harry for advice about the benefits and risks of starting up a business as a Florist
on the High Street. She is thinking of setting up a private company. She has done some of her
own research but wants to know from Harry:
1. What the main advantages and disadvantages are of trading as a private company
compared to operating as a sole trader or in a partnership?
2. What limited liability means and what the significance is to her of the House of Lords
decision in Salomon v A Salomon & Co. Ltd. [1897] AC 22 (HL)?
3.(a) Will it be easier for an incorporated limited company to raise capital?

3.(b) Will raising capital in a small company effectively mean that limited liability becomes
illusory?
Brad is a partner in Dobart Haulage. He and his partners are considering transferring their
partnership to a private limited company. Brad knows there are fundamental differences
between how membership in a partnership and a company operates, but seeks advice from
Harry on the following:
4. (a) If partners were wishing trade as a company as equal shareholders, instead of a

partnership, how could they set up the company to ensure they all retain the right to be
involved in its management?
4. (b) Could there be a remedy if this is not achieved in practice?
How should Harry be advising Sally and Brad, respectively, on the company law issues
raised above?
Some Sources for Seminar Preparation
Lectures - Refer to textbook, lecture notes in the manual and PowerPoint slides for lecture 1 and 2.
Case law
Statute
Companies Act 2006 ss. 3, 7-16, 168, 994
Partnership Act 1890 s.24
Insolvency Act 1986 s.122(1)(g)
Other source: http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml
Learning outcomes – An understanding of different forms of business trading and

appropriateness; the application of the doctrine of separate legal personality; the effect of
limited liability; the importance of setting up a company to protect shareholders and directors;
the realities of trading for small companies.
79
Seminar 3. - Separate Legal Personality and Lifting the Veil of Incorporation
Q1. Six months ago John set up a business as a sole trader manufacturing steel wheels. John
took out an annual buildings and contents insurance policy at that point. Three months ago
John transferred his business to a company he had formed, Motor Ltd, and in consideration of
the business and its assets he was issued with 25,000 £1 shares. John became sole shareholder
and director of the company. He took the title as Chief Operating Officer on an employment
contract and then started manufacturing alloy wheels too.
Three months before setting up his business, John had worked for Hallam Ltd (also an alloy
wheels manufacturer) as their Managing Director under a service contract, under which John
had covenanted not to carry on the same business within a year of leaving the company.
Yesterday John had an accident at work and lost a finger whilst working on a poorly
maintained lathe. Later in the day, stock valued at £10,000 was stolen from the warehouse of
Motor Ltd.
Using relevant authority, identify and apply relevant company law that applies in the
scenario above in order to advise John.
Q2. Tyres Ltd operates one of its business ventures from premises owned by one of its
subsidiaries, Brightside Ltd, that it wholly owns. Brightside Ltd was set up solely to own the
premises of the group but is run by a separate board of directors. Those premises have been
compulsorily acquired by the Local Authority. Compensation under the statute allows for
payments to be made ‘to the owner of the expropriated land, at market value, and assessed
damages for any loss of profit suffered by the land’s owner’. Tyres Ltd are wishing to claim
£150,000 as the market value of the land and £50,000 for loss of profit.
Using relevant authority, advise Tyres Ltd of the legal position in relation to their claim.
Pto for Seminar Preparation notes

80
Lectures
Refer to textbook, lecture notes in the manual and PowerPoint slides for lectures 2 and 3.
Case law
The Albazero [1977] AC 774 (CA)
Adams v Cape Industries Plc [1990] Ch 433 (CA)
DHN Food Distributors v Tower Hamlets LBC [1976] 1 WLR 852 (CA)
Ebbw Vale UDC v South Wales Traffic Area Licencing Authority [1951] 2 KB 366 (CA)
Gilford Motor Co v Horne [1933] Ch 935 (CA)
Jones v Lipman [1962] 1 WLR 832 (ChD)
Lee v Lee’s Air Farming [1961] AC 12 (PC)
Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL)
Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447 (CA)
Prest v Petrodel Resources Limited [2013] UKSC 34.
Smith Stone & Knight Ltd v Birmingham DC [1939] 4 All ER 116 (KBD)
VTB Capital Plc v Nutritek International Corp [2013] UKSC 5
Woolfson v Strathclyde RC 1978 SC (HL) 90
Statute
Companies Act 2006 ss. 123, 1162
Employers’ Liability (Compulsory Insurance) Act 1969
For wider reading in this area:
Articles
P T Muchlinski, ‘Holding Multinationals to Account: Recent developments in English
Litigation and the Company Law Review’ [2002] 23 Company Lawyer 168
S Ottolenghi, ‘From peeping behind the corporate veil, to ignoring it completely’ [1990] 53 MLR
338
K V Krishnaprasad, ‘Agency, limited liability and the corporate veil’ [2011] 32(6) Company Lawyer
163
 There are a ‘gazillion’ articles on lifting the veil – here are two classic ones and a more modern
one that explain the concepts well, in particular the modern day challenge to separate legal
personality: the parent and subsidiary relationship.
Learning outcomes –
 An understanding of the doctrine of separately legal personality and how that can create
differing outcomes both positive and negative for individuals.
 The exceptions that that doctrine i.e. the circumstances where a court will lift the metaphorical
veil that exists between a company and its constituents.
 A logical structure of answering problem questions.
 An ability to identify the legal issue, how to state the relevant law, how to apply that back to
the facts and how to give advice.
 The importance of introductions and conclusions in problem questions.
81
Seminar 4. - Promoters and Pre-Incorporation Contracts
Q1. Alex, Bill and Charlie, who are electricians, worked together initially as partners. They
operated their business from commercial premises, a small business unit on Cartridge Street,
Old Town. The premises were owned by Alex, which he bought for £50,000. The business
became successful and they won a contract to re-wire six regional hospitals. As a result they
decided to expand and form a company three months ago. Alex sold the business premises to
the company for £100,000. Bill got a great deal for purchasing five vans. When purchased they
were worth £15,000 each but he got them for £12,000 per van. He sold four of them to the
company for £12,000 each, but kept one for his own company, which operates in the same line
of business.
Charlie ordered computer equipment costing £30,000 from Hightech Ltd, together with a
servicing agreement for five years costing £120 a month. Charlie told Hightech Ltd that the
company, when incorporated, would assume liability and pay the bill. Charlie paid £1,500
deposit for the computers. When the company was formed Alex, Bill and Charlie became
equal shareholders and directors. Unfortunately, the contact to re-wire the hospitals has not
proved profitable, the company’s financial position has deteriorated and Hightech Ltd has not
been paid. Yesterday the Old Town Court appointed a liquidator to wind-up the company.
What are legal issues here that the liquidator needs to consider relating solely to promoters
and pre-incorporation contracts?
Do not discuss the validity of the formation of the company or any directors’ duties.
Not - this is a variation of a question in the Dignam and Lowry text book.
82
Lectures
Refer to textbook, lecture notes in the manual and PowerPoint slides for lecture 4 & 5.
Some key Case Law

Re Ambrose Lake Tin & Copper Mining Co (1880) LR 14 Ch D 390 (CA);
Braymist Ltd v Wise Finance Co Ltd [2002] Ch 273 (CA)
Browne v La Trinidad (1887) 37 ChD 1 (CA)
Re Cape Bretton Co (1885) 29 Ch D 795 (CA);
Heinhuis v Blacksheep Charters Ltd (1987) 46 DLR (4th) 67
Hichens v Congreve (1828) 4 Russ 562 (Ch
Howard v Patent Ivory Manufacturing Co (1888) LR 38 Ch D 156 (Ch)
Kelner v Baxter (1866) LR 2 CP 174 (CCP)
Ladywell Mining Co v Brookes (1887) 35 Ch D 400 (CA)
Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 (CA)
Natal land & Colonisation Co v Pauline Colliery Syndicate [1904] AC 120 (PC)
Newbourne v Sensolid (Great Britain) Ltd [1954] 1 QB 45 (CA)
Re Northumberland Avenue Hotel Co (1886) 33 Ch D 16 (CA)
Omnium Electric Palaces Ltd v Baines [1914] 1 Ch 332 (CA)
Re Patent Ivory Manufacturing Co (1888) 38 ChD 156;
Phonogram v Lane [1982] QB 938 (CA)
Rover International Ltd v Cannon Film Sales Ltd (1987) 3 BCC 369 (CA)
Twycross v Grant (No.1) (1877) 2 CPD 469 (CA).
Statute
Companies Act 2006, s.51(1)
Insolvency Act 1986 ss.143, 212
Learning outcomes –
 An understanding of the duties, responsibilities and rights of a promoter.
 The rules surrounding disclosure of property transferred to a company on formation.
 The importance of the acquisition date of transferred property.
 Pre-incorporation contracts and the potential liability of promoters.
 The basic functions of a liquidator.
 An understanding of how to structure and answer problem questions.
83
Seminar 5. The Company's Constitution – Article clauses and Shareholder Agreements
Q1. Qwerty Ltd is another company on the industrial estate in Old Town. It manufactures
keyboards for computers. The company’s three directors hold most of the shares; John and
Paul 35% each and George holds 20%. Ringo holds the remaining 10% of shares. All the shares
carry one vote each. The company’s articles of association contain the following provisions:
i. On a resolution to remove a director the votes attached to shares held by that director
shall treble.
ii. Any member who intends to transfer shares shall inform the directors who will take the
said shares equally between them at fair value.
iii. All management services required by the company will be exclusively supplied by
George.
iv. Disputes between the company and its members shall be referred to arbitration.
v. All members of the company agree that the articles of the company cannot be altered.
In March the three directors (John, Paul and George) entered into a written shareholder
agreement. It was signed by the three directors and detailed how directors wishing to sell their
shares in the future would have to offer them first to the existing directors. Contained in the
agreement were the following clauses:
 This agreement is intended to bind future shareholders of the company

 The sale of any shares by existing members shall contain an undertaking that the
purchaser will enter into this agreement and be bound by all its terms.
Recently there have been serious disagreements between all the directors.
You are to advise the parties on the following in respect of company law:
a) All directors are unsure as to the validity of the voting clause in the articles when
attempting to remove a director and are frustrated at their inability to change the articles
of association.
b) Ringo has become disillusioned with the company and wants to sell his shares to the
directors but they have refused to purchase them.
c) The directors have passed a resolution to contract with Clarity Ltd for all Qwerty Ltd's
management services.
d) John has backed out of selling property he owns to Paul, and Paul wishes to refer the
dispute to arbitration.
e) John is unsure about the implications of the shareholder agreement that he and his fellow
directors have recently signed, and is considering proposing a resolution to alter the
articles so that this agreement will be included.

84
Lectures
Refer to textbook, lecture notes in the manual and PowerPoint slides for lecture 6 & 7.
Some key Case Law

Eley v Positive Government Security Life Assurance Co Ltd (1876) LR 1 Ex D 88 (CA)
Greenhalgh v Arderne Cinemas Ltd [1943] 2 All ER 234 (CA) 239 (Lord Green MR)
Hickman v Kent or Romney Marsh Sheepbreeders Association [1915] 1 Ch 881 (Ch)
London Sack & Bag v Dixon [1943] 2 All ER 763 (CA)
Puddephat v Leith [1916] 1 Ch 200 (ChD)
Punt v Symons & Co Ltd [1903] 2 Ch 506 (ChD)
Quin & Axtens Ltd v Salmon [1909] 1 Ch 311 (CA)
Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588 (HL)
Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9 (CA)
Re Tavarone Mining (1873) LR 8 Ch App 956 (CA)
Welton v Saffery [1897] AC 299 (HL)
Wood v Odessa Waterworks Co (1889) LR 42 Ch D 636 (ChD)
Statute
Companies Act 2006. In particular ss. 21, 29, 31, 33, 39, 168, 282, 283
Learning Outcomes:
 An understanding of the company constitution, in particular the articles of association and
shareholder agreements.
 How to assess the validity to article clauses.
 The contractual effect of article clauses, in particular the effect of the ‘s.33 contract’.
 The difference between ‘insider’ and ‘outsider’ rights.
 The validity and application of shareholder agreements.
 How to focus on key aspects when answering problem questions.
85
Seminar 6. - Directors' Duties
Q1. Lesley, Kim and Claire are the three directors and equal shareholders of Bronx Ltd (“the
company”) a well established company in Old Town.
The company, a boot manufacturer, has unlimited objects but the articles limit the power of a
director to enter into contracts in excess of £50,000. Recently Claire placed an order with a
leather supplier for £100,000 to take advantage of a significant discount being offered for bulk
purchase. The leather was delivered last week. As part of the special offer Claire personally
received a £2,000 cheque which she gave to charity.
Recently Kim sourced for the company a much needed industrial leather press from Machines
Ltd for £30,000 and this was delivered last week. Kim holds a 25% shareholding in Machines
Ltd.
Within the last year Lesley arranged sourced an alternative insurance provider for the
company and prepared the relevant documentation. As she was so busy, she rushed
completing the forms. Unfortunately the company has just experienced a serious fire resulting
in the destruction of stock valued at £150,000. The insurance company have refused to pay the
claim as the documentation submitted by the company contained inaccurate information.
Lesley accepts that the insurance claim is invalid and, as a result, the company has become
insolvent and has now gone into voluntary liquidation.
Advise Lesley, Kim and Claire if they are likely to have any personal liabilities once the
liquidator becomes aware of the above facts.

86
Lectures
Refer to textbook, lecture notes in the manual and PowerPoint slides for lectures 8, 9, 10 & 11.
Some key Case Law
Aberdeen Railway Co. v Blaikie Bros [1854] 1 Macq 461 (HL)

Attorney General of Hong Kong v Reid [1994] 1 AC 324 (PC)
Re Barings (No.6) [2001] BCC 273 (CA)[
Bray v Ford [1896] AC 44 (HL)
Cook v Deeks [1916] 1 AC 554 (PC)
Re D'Jan of London Ltd [1993] BCC 646 (Ch)
Re Duomatic Ltd [1969] 2 Ch 365 (Ch)
Hogg v Cramphorn [1967] Ch 254 (Ch)
Percival v Wright [1902] 2 Ch 421 (Ch)
Statute
Companies Act 2006. ss. 170-177 (in particular) also ss. 31, 39, 40, 41, 180, 239, 1157
Company Directors Disqualification Act 1986 s.6, Sch.1
Insolvency Act 1986 s. 143
Learning Outcomes:
 An understanding of the role of directors and specifically their general duties.
 The ability to identify potential breaches of duty and remedies.
 Awareness of the contractual position for a company for contracts made on their behalf by
directors.
 Potential remedies available for breaches and the implications for companies and directors
individually.
 The basic role of a liquidator.
 The risks of disqualification for directors and the circumstances they arise.
 Further development of clear advice required in structured problem questions.
87
Seminar 7. – Feedback from the coursework
In addition to the individual feedback you will receive on your coursework papers and mark-
sheet, there will be a seminar to go through the coursework.
This seminar is designed for a number of reasons:
 To go though indicative content to the coursework question itself.

o You can then see what bits you got right and wrong!
 To discuss an indicative structure that could/should have been adopted.
 To discuss technique issues from the coursework.
o What was done well and what was done not so well.
 To feed-forward into other assessments in this module and others.
o This is key – by attending this session you will find out more on how to do better
next time in the next assessment(s) you undertake on the course, not just the
module.
88
Seminar 8. – A Shareholder Meeting and Voting
 This seminar is a little different in that during the seminar we will be conducting a mock
shareholders’ general meeting, with you as students playing the parts of individual
shareholders.
 You will be given a briefing at the seminar, by your tutor, with further information.
 To prepare for the seminar you need to be familiar with the company in Old Town that
you will be either a shareholder or director of. Details of the company are listed below and
further important facts appear on the next page.
Company Name Sentia Limited

Issued shares 100,000
Nominal value of shares £1 each
Shareholders No. of Shares

Shareholder ‘A’ 3,000
Shareholder ‘B’ 2,000
Shareholder ‘C’ 26,000
Shareholder ‘D’ 10,000
Shareholder ‘E’ – the Chairman 10,000
Remaining other shareholders 49,000 between them
Directors No. of Shares

Shareholder ‘E’ – the Chairman 10,000
Shareholder ‘D’ 10,000
Director ‘X’ 0 (i.e. not a shareholder)
Date board of Sentia Limited gave written 3rd June

notice of the general meeting
Date of the general meeting 7th July
Resolutions to be voted on at the meeting

a) A special resolution to change the name of
the company to Krios Limited.
b) An ordinary resolution to increase the Note - Can you identify a potential error here
capital of the company to £150,000 and prior to the seminar?
subdivide shares into 300,000 at 75p each.
c) An ordinary resolution to remove This resolution was added and notified to all
Director ‘X’ as a director. via the company website 8th June.
Articles: The Companies (Model Articles) Regulations

2008, Schedule 1.
Pto...
89
Other issues to be aware of and areas to research:
1. At the shareholders meeting an amendment to a resolution will be proposed.
2. The Chairman will be casting the votes of proxies.
3. Shareholder ‘D’ was not notified of the meeting because the Secretary thought their shares
had been sold on to another party. Shareholder ‘D’ attends as they were told about it by
Director ‘X’.
4. Shareholder ‘A’ and shareholder ‘B’ wrote to the Chairman, after receiving the original
notification of the meeting, requesting to add the resolution c) that was not on the original
notice. The Chairman instructed the Secretary to add the resolution to the website on 8th June
and the Secretary called to inform Director ‘X’ to look on the web for full details that day.
 After holding the shareholders’ meeting the group will:
Advise on the validity of the meeting and the resolutions.
Lectures
Refer to textbook, lecture notes in the manual and PowerPoint slides for lecture 14.
Some key Case Law
Baillie v Oriental Telephone & Electric Co Ltd [1915] 1 Ch 503 (CA)

Clemens v Clemens Bros Ltd [1976] 2 All ER 268 (Ch)
Re Fenner plc (11th June 1990) unreported (CC)
Foss v Harbottle (1843) 2 Hare 461
Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512 (CA)
Re Moorgate Mercantile Holdings Ltd [1980] 1 WLR 227 (Ch).
Musselwhite v CH Musselwhite & Son Ltd [1962] Ch 964 (Ch)
Tiessen v Henderson [1899] 1 Ch 861 (Ch)
Statute
Companies Act 2006
77, 78, 168, 169, 260
– part 13 ss. 281-361 – in particular 282, 283, 301-302, 307, 309-315, 324-325, 360.
382, 617, 618, 994, 1147, 1168
The Companies (Model Articles) Regulations 2008, Schedule 1.
Learning Outcomes
 The basic principles surrounding shareholders’ meetings.
 The law surrounding the calling of shareholders’ meeting, with key focus on notice issues.
 The law surrounding the inclusion and amendment of resolutions.
 An understanding of the power of majority shareholders.
 Remedies for invalid meetings and resolutions.
90
Seminar 9. – Minority Shareholder Protection
SME Ltd (‘the company’) is a company in Old Town’s commercial district. It was formed in
October 2011 to run a business previously carried on in partnership by Neil, Steve and
Melanie. They sold their business to the company, in exchange for shares, and became equal
shareholders and directors of the company on incorporation. They were joined on the board of
directors by David. A clause in articles states that any shareholder wishing to transfer their
shares must offer them for sale to the other shareholders. In January 2012 Steve died leaving
his shares to his wife, Joan, who was also appointed to the board to replace him. The company
is a Sports Management company who have many famous sports stars on their books.
During 2012 Neil, the managing director, proposed that the company sell its premises to raise
capital to set up a sports TV channel. Joan thought it was too risky but David and Melanie
supported the plan which went ahead. Joan was subsequently voted off the board.
A few months ago, Joan received indisputable evidence that David was taking some clients,
who would otherwise have become clients of SME Ltd, for his own, small private sports
management business. When she raised it with Neil and Melanie, they did not want to do
anything about it as David is a former, high profile, football star who still continues to bring
large amounts of clients and profits to SME Ltd.
The company has grown since incorporation, and is highly profitable, but Joan is unhappy
that no dividend has been declared. All profits have been reinvested in the company, except
for the remuneration fees of the directors which are high due to the company’s performance.
Advise Joan of the potential remedies she may seek as a minority shareholder.
Pto...
91
Lectures
Refer to textbook, lecture notes in the manual and PowerPoint slides for lecture 15 & 16 in
particular but also an understanding of lecture 13 and 14.
Some key Case Law
Re a Company (No.004475 of 1982) [1983] Ch 178 (Ch).

Re a Company (No.000789 of 1987) Ex p. Shooter [1990] BCLC 38 (Ch)
Re a Company (No.00330 of 1991) Ex p. Holden [1991] BCC 241 (Ch).
Cooke v Cooke [1997] 2 BCLC 28 (Ch)
Re Cumana Ltd [1986] BCLC 430 (CA)
Re Elgindata [1991] BCLC 175 (Ch)
Foss v Harbotte (1843) 2 Hare 461 (V-C) (Major case)
Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227 (PC)
Larvin v Phoenix Office Supplies Ltd [2002] EWCA Civ 1740
Re London School of Electronics Ltd [1986] Ch 211 (Ch).
Moodie v W&J Shepherd (Bookbinders) [1949] 2 All ER 1044 (HL).
Re National Savings Bank Association (1865-66) LR 1 Ch App 547 (CA);
O’Neill v Phillips [1999] 1 WLR 1092 (HL) (Major case)
Oak Investments Partners XII Ltd Partnership v Boughtwood [2009] EWHC 176 (Ch)
Re Sam Weller & Sons Ltd [1990] Ch 682 (Ch)
Re Saul D Harrison & Sons Ltd [1994] BCC 475 (CA)
Smith v Croft (No 2) [1988] Ch 114 (Ch)
Statute
Companies Act 2006, ss. 168, 172, 175, 239, 260 to 264; 282, 283, s.582 & ss. 994 to 996.
Insolvency Act 1986, ss. 74(2)(d), 125(2), s.122(1)(g)
Partnership Act 1890, s.35(f)
Learning Outcomes
 The implication of the basic principle in Company Law – majority rules!
 How the ‘proper plaintiff [claimant] rule’ in Foss v Harbottle operates against the minority
 What the most effective exception to the rule in Foss may be available.
 The hurdles to be overcome in bringing a successful derivative claim.
 How a personal petition for unfair prejudice may be applied.
 The likelihood of bring a successful winding up petition on just and equitable ground.
 The importance of statute as well as case law in authority to support legal outcomes.
 How to structure an answer to the problem question in the time allowed.
92
Seminar 10 – Charges: Fixed and Floating.
Since seminar 1, New Blooms Ltd has ‘blossomed’ into a significant business, now growing
plants, fruits and vegetables, and distributing this produce and garden supplies across the
county. A few months ago, Holmes, Watson and Moriarty went to see Harry, at local solicitors
Dewy, Cheatham and Howe LLP, as they were wishing to expand significantly. They wanted
to know the following:
Q1. How they could raise money through borrowings and, specifically, what was meant by a
“floating charge” and how can it be distinguished from a “fixed charge”.
Q2. (a) What steps a Bank will take to ensure a floating charge is valid?
Q2. (b) Under what circumstances will the security become enforceable?
 What will Harry have advised on the points above?
Q3. On 1st January, New Blooms Ltd created a floating charge over its assets in favour of
Hallam bank plc as security for a loan of £100,000. The charge was not registered. On 1st
February, New Blooms Ltd created a second floating charge in favour of Credit Bank plc as
security for an existing overdraft facility of £25,000. The charge contained a term prohibiting
New Blooms Ltd from creating subsequent charges that would rank in priority to that of
Credit Bank plc. The Credit Bank plc charge was duly registered. On 1st March, New Blooms
Ltd purchased computer equipment from Hightech Ltd at a price of £75,000. New Blooms
paid £10,000 in cash, and created a fixed charge over its book debts in favour of Hightech Ltd
to secure the balance of the purchase price. This charge was duly registered.
Homes, Watson & Moriarty are back to see Harry to discuss the legal position of the above
charges. What will Harry advise?
93
Lectures
Refer to textbook, lecture notes in the manual and PowerPoint slides for lecture 17 and 18.
Some key Case Law

English & Scottish Mercantile Investment Trust v Brunton (1892) 2 QB 700 (CA)
G and T Earle Ltd v Hemsworth Rural District Council (1928) 44 TLR 605 (KBD)
Re Hamilton Windsor Ironworks Co Ltd (1879) LR 12 ChD 707 (ChD)
Levy v Abercorris Slate and Slab Co (1888) LR 37 ChD 260 (ChD)
Re Spectrum Plus Ltd (In Liquidation) [2005] 2 AC 680 (HL)
Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284 (CA) - & [1904] AC 355 (HL)
For the historical development of the law relating to charges on book debts see:
Agnew v Inland Revenue Commissioner (Brumark Investments Ltd, Re) [2001] 2 AC 710
Re New Bullas Trading Ltd [1994] BCC 36 (CA)
Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142 (ChD)
Spectrum Plus Ltd (In Liquidation), Re [2004] Ch 337 (CA)
Statute
Companies Act 2006, ss. 738, 859A-Q
Enterprise Act 2002, 251.
Insolvency Act 1986, ss. 175, 176A, 176ZA, s.245
Articles:
Look on the Blackboard site in seminar 10 for a selection of articles on book debts.
Learning outcomes
 How companies raise money through borrowing and its implication.
 The difference between fixed and floating charges and why this is important for lenders.
 Registration requirements relating to charges and the impact of non-registration.
 The legal position on borrowings, in particular the importance of registration and the
priority given in law to payment.
 The impact of negative pledge clauses and the rules surrounding actual and constructive
notice.
94
Seminar 11. – Liquidation and vulnerable transactions
Tough economic times have seen the demise of one of Old Town’s longest established
companies, Hanbury Ltd. These are the events leading up to its liquidation.
Q1. In May 2010, Hanbury Ltd (“the company”) borrowed £30,000 from Jim, the brother of one
of the directors; the loan was expressed to be repayable on demand. In August 2012, the
company created a floating charge over the company’s assets and undertakings, in favour of
Nat East Bank plc, to secure the company’s overdraft of £100,000. The floating charge, which
was duly registered, prohibited the company from granting a further floating charge over all
or any part of its assets or undertakings without first giving notice to Nat East Bank plc. The
floating charge further provided that the granting of a subsequent floating charge entitled the
Bank to give notice to Hanbury Ltd, which notice would crystallise the bank’s charge. On 3rd
December 2012, the company borrowed £70,000 from Eric. The loan was secured by a fixed
charge over the company’s factory and the charge was duly registered. In January 2013, Jim
threatened to recall his loan unless it was secured. The company repaid the loan to Jim, who
then lent the same amount of money to the company; the loan was secured by a floating
charge, which was duly registered.
On 1st June 2013, Her Majesty’s Revenue & Customs (HMRC), which was owed £20,000 in
unpaid PAYE contributions, presented a petition to wind up the company. At that date the
company’s overdraft stood at £105,000, the extra £5,000 over the agreed limit having been
borrowed to pay staff wages. The company’s factory is worth £90,000 and the other assets are
likely to realise about £45,000. The liquidation costs are estimated at £6,000.
Advise the liquidator on the validity of the charges and transactions in this scenario.

95
Lectures
Refer to textbook, lecture notes in the manual and PowerPoint slides for lectures 19, 20, 21 and
22.
Some key Case Law
Re Barleycorn Enterprises Ltd [1970] Ch 465 (CA)

Destone Fabrics, Re [1941] Ch 319 (CA)
General Auction Estate and Monetary Co v Smith [1891] 3 Ch 432 (ChD)
MC Bacon Ltd (No.1), Re [1990] BCC 78 (CA)
Re Patent File Co (1870-71) LR 6 Ch App 83 (CA)
Re Produce Marketing Consortium (In Liquidation) Ltd (No.2) (1989) 5 BCC 569 (Ch)
Statute
Companies Act 2006 – 738, 860-867, 869-877
Enterprise Act 2002 - s.251
Insolvency Act 1986 – Part IV – Chapter VI (ss.120-162) – covers winding up.

Key sections:-, ss. 115, 122, 123, 175, 176ZA, 213, 214, 238, 239, 240, 245, s.249, s.423, 435 & Sch 6
para 11.
Learning Outcomes
 What the role of the liquidator is in winding-up procedures
 How to establish validity of charges in liquidation.
 How to establish the legitimacy of transactions leading up to liquidation.
 The basis upon which a liquidator may seek to set aside charges or transactions in
liquidation.
 The hierarchy of payments to be made to creditors on liquidation and how to apply these.
 The importance of understanding and applying statutory conditions to vulnerable
transactions and charges.
96
PREVIOUS YEAR’S EXAM PAPER
SEMESTER TWO EXAMINATION - MAY 2013

MAIN
FACULTY: Development and Society
DEPARTMENT: Law, Criminology and Community Justice
MODULE TITLE: Company Law
MODULE LEADER: Mark Edwards
TIME ALLOWED: 2 hours (plus 10 minutes reading time)
(SEEN PAPER)
___________________________________________________________________
EXAM REGULATIONS:
1. The University Regulations on academic conduct, including cheating and

plagiarism, apply to all examinations.
2. The normal examination regulations of the University apply (see script answer
book).
INSTRUCTIONS TO CANDIDATES
1. Please do NOT start writing until told to do so by the Invigilator.
2. Candidates must NOT use red ink on the script answer book.
3. Answer ONLY TWO questions from any of the choice of three questions
available.
4. This is a CLOSED BOOK exam. No material may be taken into the exam room.
5. Start each new question on a new page.
6. Each question carries equal marks.
___________________________________________________________________
STATIONERY REQUIREMENTS PER STUDENT:
 1 x 16 Page Answer Booklet

___________________________________________________________________
97
Q1 Harry is a solicitor in Old Town at the legal firm Dewy, Cheatham and Howe LLP.
The clients below require his advice on the following:
a) The directors of Amber Ltd.

Amber Ltd turns steel coils of wire into nuts and bolts. Its corporate director,
Calcite Ltd, used its contacts in the industry to gain a 50% discount on
purchases of steel coils of wire from ASR plc, although the value of the
order exceeded the limit contained in the articles of association of Amber
Ltd. Amber Ltd has massive stocks of coil wire, so have refused to accept
delivery, but ASR plc is threatening legal action on the contract.
b) The owners of Parkland LLP.

Parkland LLP owns the land that is the home to Old Town Rugby Club Ltd.
The directors of the Rugby Club have agreed to support Parkland’s
development plans for the site, and Parkland has paid the Club £3m as part
of that agreement. Parkland is now worried that this agreement may be
invalid as a fetter of a director’s discretion.
c) Asif and his son, Raj, both directors of Trojan Ltd, an art shop.
Raj, a student, took very little part in the company’ affairs and left the
running of it to Asif. Following severe flooding, that caused a significant loss
of stock, the company has just been wound-up as the company was
negligent by forgetting to renew its property insurance. The company owes
considerable sums to creditors. Both Asif and Raj are concerned about the
implications to them individually, as they both wish to start up another
company.
d) Tom, a director of a banking software company, Infobank Ltd

Last year, Tom resigned his position as a director with Dataserve plc and,
after serving full notice, took up a position on the board of rival company,
Infobank Ltd. Recently Tom invited some former clients to an industry
exhibition of new software at Earls Court, where Infobank Ltd signed up a
number of Dataserve’s clients. Tom had no restraint of trade clause in his
previous contract but wants to know if he has breached any duty as a
director.
e) The directors of Monash Ltd.

Monash Ltd has recently become insolvent. The board of directors want to
continue trading as they are confident of their ability to turn the company
fortunes around. However, they are unsure of any personal liability, if any,
should any creditor successfully apply to have the company wound up.
Using case law and statute discuss the advice that Harry should be giving
to his respective clients on each of the issues detailed above.
98
Q2 Last year, five friends; Cheryl, Kimberley, Nadine, Nicola and Sarah, formed a
small ladies fashion business, called Milano Ltd, in an upmarket part of Old Town.
On incorporation, they took 20 of the 100 shares each in the new company and
became directors. They included in the company’s articles of association, a
clause stating that “on a resolution to remove a director, the votes attached to
shares held by that director shall be multiplied by five”.
A short period after incorporation, Cheryl and Sarah began exploring other
ventures and have ploughed all their remaining finances into those projects. As a
consequence, the pair have neglected their duties to Milano Ltd.
Kimberley, Nadine and Nicola want to remove the weighted voting clause from
the articles so as to be able to remove, separately, both Cheryl and Sarah as
directors. However, they know Cheryl and Sarah would use their votes to block
such a move.
As a consequence, the three directors, Kimberley, Nadine and Nicola, plan to

allot 60 new shares in the company, through a rights issue. They know Cheryl
and Sarah do not have the finances to take up their entitlement of new shares.
This will allow Kimberley, Nadine and Nicola to acquire another 20 shares each.
Using relevant legal authority, give advice on the following:
a) The ability of directors to create a rights issue in a private company with one
class of share.
b) Based on the law, and their expected new shareholding, will Kimberley,
Nadine and Nicola be able to alter the articles of association to remove the
weighted voting clause?
c) What would give Kimberley, Nadine and Nicola the legal right to remove a
director, and how would this be done?
d) How likely is it that Cheryl and/or Sarah will be successful in using the
relevant protection offered to minority shareholders to:
i. challenge the rights issue.
ii. challenge the alteration of the articles.
iii. challenge their removal as directors.
iv. achieve a personal remedy of selling their shareholding.
v. seek to have the company wound-up.
99
Q3 Despite the directors of Attire Ltd taking every step to minimise potential loss to
creditors, the company has just been wound-up, on the 1st of April 2013, following
a successful petition by a creditor, the HMRC. Attire Ltd operated from a large
distribution centre in Old Town, and was a wholly owned subsidiary of Garb plc,
which continues to trade profitably.
Previously Garb plc provided Attire Ltd with direct financial support, as well as
letters of comfort, in which Garb plc pledged its continued financial support.
These letters were sent to banks which supplied credit to Attire Ltd. These
pledges have also been referred to in Garb plc’s accounts for the last three years.
Three months ago Garb plc refused a request from Attire Ltd for further finance.
A liquidator has now been appointed and he now knows of the following in
respect of Attire Ltd.
a) Hallam Bank plc, owed £40,000 by Attire Ltd, wishes the liquidator to
pursue Garb plc for the money as it fears Attire Ltd will not have sufficient
funds to pay it.
b) Xenon Investments plc is owed £75,000 from a debenture loan, secured in

June 2012 by a validly registered fixed charge over Attire Ltd’s book debts.
At the time, Xenon had insisted on being granted a fixed charge as a
condition of the loan. Attire Ltd’s book debts, when paid, are paid into Attire
Ltd’s general account.
c) A £10,000 debenture loan from Fred, who is the father of one of the
directors. When Garb plc refused to continue financing Attire Ltd, Fred was
granted a validly registered fixed charge against the company’s premises.
d) Attire Ltd has a special account, worth £50,000, containing money paid in
advance by customers, for goods not yet received. The liquidator is
receiving calls from these customers for the money held in this account to
be returned to them.
e) The premises that Attire Ltd owned and operated from were transferred to
Garb plc three years ago for £25,000 less than its then market value.
Using relevant case law and statute, advise the liquidator on the company
law issues above, and conclude by advising how these impact upon the
priority of payments made to creditors in liquidation.
END
100

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Department of Law, Criminology

and Community Justice

Module Manual 2013-2014

Appendix 1: Sample previous Examination Paper (May 2013) 97

MODULE TITLE Company Law

MODULE LEARNING OUTCOMES

 Use and explain specific terminology in relation to company law.

 Demonstrate research skills by identifying a broad range of sources and distinguishing

 Use and explain specific terminology in relation to company law.

LEARNING AND TEACHING METHODS

In addition, the Blackboard site includes:

On-line Multiple Choice Questions and Feedback

Weekly surgery/Meetings/Drop-in sessions

Peer Support Groups

The members of staff teaching on this course are:

Mark Edwards (Module Leader)

Dr. Jeremé Snook

Mark Edwards has overall administrative responsibility for the module.

Staff Contact Details

Mark Edwards Office: Southbourne, Room 243

Dr. Jeremé Snook Office: Southbourne, Room 240

Tel: - 0114 225 2543

Other staff supporting students are:

Contacts during periods of staff absence

Preparation for seminars

Task TASK DESCRIPTION SI Code Task Word Count /

The Criteria for Assessment

 Identification of the main legal issues raised

To pass the module a student will meet the following criteria:

You will receive feedback on your performance in the following ways

Feedback through seminars

Feedback through e-learning/formative assessment

Your work will be assessed on the following areas:

IDENTIFICATION OF THE MAIN LEGAL ISSUES RAISED

IDENTIFICATION OF THE FACTS CREATING LEGAL ISSUES

COVERAGE OF THE RELEVANT LAW

APPLICATION OF THE LAW TO THE FACTS

LEGAL CONCLUSIONS DRAWN

UNDERSTANDING OF THE TOPIC

OVERALL CONCLUSION DRAWING TOGETHER KEY THEMES

SPELLING, GRAMMAR AND SYNTAX - Note, this is extremely important.

STRUCTURE AND PRESENTATION

1st 2:i 2:ii 3rd FAIL FAIL

Other Key Features

The key learning resources available to support students’ learning are:

Brenda Hannigam, Company Law (3rd edn, OUP 2012)

Cases & Materials Textbook:

Other learning resources:

 Legal databases – in particular Westlaw and LexisLibrary

 The Learning Centre http://library.shu.ac.uk

 Company Law Club on-line

Quotations and Referencing

As the OSCOLA guide explains:

Howarth has argued that:

In cases involving injuries caused by the police in the course of apprehending

 For further guidance on footnotes, see OSCOLA, pages 3-5.

How to reference specific materials in footnotes

When referencing books/textbooks, the format is:

Author, title (edition - if not the first, publisher year) page(s).

David Howarth, Textbook on Tort (Butterworths 1995) 51.

Royston Goode and others, Transnational Commercial Law: International Instruments

A chapter in an edited book should give:

Author, 'title of the chapter', the edited book reference. Thus: