company law
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1
CHAPTER 3
THE LAW RELATING TO ASSOCIATIONS 1: CORPORATIONS
A. THE CONCEPT OF CORPORATIONS
DEFINITION
REASONS FOR CORPORATE EXISTENCE
B.CORPORATIONS IN LAW
CREATION OF A CORPORATION
THE ACTS OF A CORPORATION
CESSATION OF A CORPORATION
C.COMPANIES
DEFINITION
CLASSES OF COMPANY
ADVANTAGES AND DISADVANTAGES OF CREATING A COMPANY
DISTINCTION BETWEEN DIRECTORS AND SHAREHOLDERS
THE VEIL OF INCORPORATION
D.COMPANIES IN LAW
FORMATION
NAME OF A COMPANY
CAPITAL OF A COMPANY
MEETINGS
DIRECTORS
BORROWING BY A COMPANY
COMMON SEAL
MINORITY PROTECTION
ADMINISTRATION
WINDING-UP (LIQUIDATION)
E.UNINCORPORATED ASSOCIATIONS
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A.THE CONCEPT OF CORPORATIONS
DEFINITION
A CORPORATION MAY BE DEFINED AS:
AN ARTIFICIAL UNITY OR ENTITY, NORMALLY CONSISTING OF A GROUP OF INDIVIDUALS, WHICH
THE LAW TREATS AS HAVING A COMMON WILL AND, THEREFORE, CAPABLE OF HOLDING RIGHTS
AND DUTIES.
A CORPORATION IS A LEGAL ENTITY THAT EXISTS UNDER THE AUTHORITY OF STATE LAW AND
SEPARATE FROM THE PEOPLE WHO OWN, MANAGE, AND CONTROL ITS OPERATIONS.
CORPORATIONS ACQUIRE ASSETS, INCUR DEBT, PAY TAXES, ENTER INTO CONTRACTS, SUE/ARE SUED,
HAVE
PERPETUAL EXISTENCE, AND ISSUE SHARES OF STOCK AS EVIDENCE OF OWNERSHIP.
A CORPORATION IS A PURELY ARTIFICIAL ENTITY, TREATED BY THE LAW AS A LEGAL PERSON.
WHAT IS AN ARTIFICIAL PERSON?
AN ARTIFICIAL PERSON MEANS AN ENTITY(THING ) WHICH IS REGARDED AS A PERSON IN THE EYES OF A LAW,
I.E- A BEARER OF RIGHTS ,DUTIES AND RIGHTS IN THE EYES OF THE LAW.
WHAT DO WE CALL SUCH ARTIFICIAL PERSONS?
CORPORATIONS-BECAUSE THEY HAVE BEEN GIVE A BODY(CORPUS IN LATIN)
WHAT IS THE OTHER TERM FOR ARTIFICIAL PERSONS?
JURISTIC PERSONS TO DISTINGUISH THEM HUMAN BEINGS WHO ARE REFERRED TO AS NATURAL PERSONS
WHAT ARE THE FEATURES OF CORPORATION
IT IS CREATED BY THE AUTHORITY OF THE STATE
IT HAS A SEPARATE LEGAL PERSONALITY FROM THE MEMBERS OF THE CORPORATION ;IT EXISTS
INDEPENDENTLY OF ITS MEMBERS,
IT IS ENDOWED WITH “PERPETUAL SUCCESSION”-OR “IMMORTALITY”-IT NEVER DIES EVEN IF WHEN
INDIVIDUALS WHO MAKE IT UP DIE. UNLESS IT IS BROUGHT TO AN END IN CERTAIN SPECIFIC WAYS.
.
REASONS FOR CORPORATE EXISTENCE:WHY CREATE A CORPORATION
THE PRIMARY REASON FOR THE CREATION AND RECOGNITION OF CORPORATIONS IS COMMERCIAL
AND ECONOMIC.
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THE CORPORATION HAS PERPETUAL SUCCESSION UNDISTURBED BY THE DEATH OF INDIVIDUAL
MEMBERS. THE CONTINUITY OF THE CORPORATION IS NOT AFFECTED, WHETHER OLD MEMBERS DIE,
EXISTING MEMBERS RETIRE OR NEW MEMBERS ARE ADDED.
THE COLLECTIVE PERSONALITY OF THE CORPORATION IS ENTIRELY DISTINCT FROM THAT OF ITS
MEMBERS OPERATING THE CORPORATION.
WHAT ARE THE TWO DISTINCT LIVES OF CORPORATION
THE JURISTIC LIFE OF THE CORPORATION - PERSONALITY OF A CORPORATION
THE LIFE OF THE INDIVIDUAL MEMBERS. PERSONALITY OF THE INDIVIDUALS
WHICH CASE LAID DOWN THE DISTINCTION BETWEEN THE PERSONALITY OF A CORPORATION AND THE
PERSONALITY OF THE INDIVIDUALS MAKING UP THE CORPORATION?
THE DISTINCTION BETWEEN THE PERSONALITY OF A CORPORATION AND THE PERSONALITY OF THE
INDIVIDUALS MAKING UP THE CORPORATION WAS CLEARLY LAID DOWN IN THE CASE OF SALOMON V.
SALOMON & COMPANY LTD (1897).
WHAT WAS THE CASE ALL ABOUT?
1. SALOMON INCORPORATED HIS BUSINESS AS A LIMITED COMPANY, WHICH CONSISTED OF SEVEN
MEMBERS OF HIS FAMILY AND HIMSELF.
2. HE HELD ALL THE SHARES EXCEPT SEVEN, AND ALSO DEBENTURES TO THE VALUE OF £10,000,
REPRESENTING A LOAN WHICH THE COMPANY BORROWED FROM HIM.
3. THE DEBENTURES ENTITLED HIM TO A FIRST CHARGE ON THE ASSETS OF THE COMPANY. THUS,
WHEN THE COMPANY WENT INTO LIQUIDATION, SALOMON CLAIMED THAT, AS A DEBENTURE
HOLDER, HE WAS A "SECURED" CREDITOR.
4. THE OTHER CREDITORS CLAIMED THAT SALOMON AND THE COMPANY WERE THE SAME PERSON
AND THAT A MAN COULD NOT OWE MONEY TO HIMSELF.
5. HOWEVER, THE HOUSE OF LORDS HELDTHAT A COMPANY, ONCE INCORPORATED, HAD A LEGAL
EXISTENCE OF ITS OWN, WHICH WAS QUITE INDEPENDENT OF THE EXISTENCE OF ANY INDIVIDUAL
MEMBER.
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B.CORPORATIONS IN LAW
CREATION OF A CORPORATION
WHAT ARE THE THREE CHIEF METHODS OF CREATING A CORPORATION
SINCE CORPORATE PERSONALITY IS ACQUIRED ONLY BY STATE RECOGNITION, IT CAN BE CONFERRED ONLY BY
AN AUTHORITATIVE DOCUMENT, HAVING THE STATE'S APPROVAL. THE LAW, THEREFORE, PRESCRIBES THAT A
CORPORATION CAN BE CREATED BY ONE OF THE FOLLOWING:
ROYAL CHARTER WHEREBY THE CROWN BY ITS PREROGATIVE CREATES ONE PARTICULAR
CORPORATION, E.G. A BBC WHICH WAS INCORPORATED BY ROYAL CHARTER.
SPECIAL STATUTE WHEREBY A SPECIAL ACT OF PARLIAMENT CREATES CORPORATIONS TO FULFIL
PUBLIC FUNCTIONS, E.G. THE PARASTATALS-POST OFFICE CORPORATION, MRA,MACRA,MERA,
BY REGISTRATION UNDER THE COMPANIES ACT: WHICH GOVERN THE FORMATION OF COMPANIES
AND THE BUILDING SOCIETIES ACT WHICH GOVERNS BUILDING SOCIETIES.
WHAT ARE THE RESULTS OF INCORPORATION
THE CORPORATION BECOMES A LEGAL (ARTIFICIAL/JURISTIC)PERSON.
IT MAY SUE AND SUED.
IT MAY BE PROSECUTED FOR CRIMES IN ITS CORPORATE NAME AND BE FINED
IT IS RECOGNISED AS A SEPARATE ENTITY FROM THE PEOPLE WHO ARE MEMBERS OF IT
IT CAN CARRY ON TRADING ACTIVITIES LIKE ANY OTHER ENTITY-BUT THROUGH ITS AGENTS
IT MAY HOLD AND DISPOSE OF LAND JUST LIKE ANY OTHER PERSON
THE ACTS OF A CORPORATION
EXERCISE OF POWERS: HOW DOES AN ARTIFICIAL PERSON EXERCISE POWER
AS A UNIT CONSISTING OF MANY PEOPLE, THE CORPORATION ACTS THROUGH ITS AGENTS, NAMELY
THE BOARD OF DIRECTORS, MANAGEMENT AND STAFF SELECTED/APPOINTED TO ADMINISTER ITS
AFFAIRS AND MANAGE AND ACT FOR THE COMPANY AS A WHOLE.
CORPORATIONS MUST ACT WITHIN THE POWERS CONFERRED ON THEM BY THEIR CONSTITUTIONS.
STATUTORY CORPORATIONS MAY DO ONLY THOSE THINGS PERMITTED EXPRESSLY OR IMPLIEDLY IN
THE STATUTE INCORPORATING THEM OR IN THE DOCUMENTS OF INCORPORATION GRANTED UNDER
THE STATUTE.
EVERY ACT DONE IN EXCESS OF THESE POWERS IS ULTRA VIRES, AND IS LEGALLY VOID. AN ACT
WHICH IS ULTRA VIRES DOES NOT BIND THE CORPORATION IN ANY WAY. IT IS TREATED MERELY AS
THE ACT OF THE AGENT OR OFFICIAL WHICH AUTHORISES OR PERFORMS IT.
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WHAT IS THE ULTRA VIRES RULE?
IT IS THE RULE WHICH SAYS THAT CORPORATIONS MUST ACT WITHIN THE POWERS (INTRA
VIRES)CONFERRED ON THEM BY LAW.
IF THEY GO OUTSIDE THEIR POWERS(ULTRA VIRES=BEYOND THE POWERS)THE ACTIONS THEY TAKE IS
UNLAWFUL,AND THEY WILL NOT BE VALID.
SO WHAT APPEARED TO BE VALID CONTRACT MAY NOT BE RULED ULTRA VIRES AND NOT A VALID
CONTRACT.
FORMAL CONTRACTS
HOW DOES A CORPORATION(ARTIFICIAL PERSON) ENTER INTO CONTRACTS
A COMPANY IS REPRESENTED IN ANY MATTER CONCERNING THE LAW OF CONTRACT BY ITS AGENT
OR AGENTS.
THEIR CONTRACTS MUST, OF COURSE, BE INTRA VIRES, I.E. WITHIN THECOMPANY'S POWERS.
THE COMMON LAW REQUIRED THAT, WHEN A CORPORATION ENTERED INTO A CONTRACT IT USED
ITS COMMON SEAL –THE OUTWARD SIGN OF AUTHORITY OF THE WHOLE BODY.
WHAT SHOULD PEOPLE DO WHO MAKE CONTRACTS WITH CORPORATIONS?
THEY SHOULD CHECK THE CORPORATION’S OBJECT CLAUSE TO ENSURE THAT THE PROPOSED
CONTRACT IS INTRA VIRES WITHIN THE OBJECTS OF THE COMPANY
WHAT RECENT ACT HAS WEAKENED THE ULTRA VIRES DOCTRINE?
THE EUROPEAN DIRECTIVES ON COMPANY LAW(NOW EMBODIED IN SECTION 35 AND 36 OF THE
COMPANIES ACT)
WHAT DOES IT SAY
IT SAYS THAT WHERE A PERSON ENTERS INTO AN AGREEMENT IN GOOD FAITH WITH THE DIRECTORS
OF A COMPANY ,ANYTHING THE DIRECTORS DO SHALL BE DEEMED TO BE INTRA VIRES AND THEY
CANNOT ESCAPE FROM THEIR LIABILITIES BY CLAIMING THAT THE ACT WAS ULTRA VIRES AND THAT
THE OTHER PARTY SHOULD HAVE KNOWN THIS.THE ACTIONS OF THEDIRCTORS BINDS THE COMPANY
TORTS
A CORPORATE BODY IS, IN THE LAW OF TORT, LIABLE FOR THE WRONGFUL ACT OF ITS SERVANTS,
PROVIDED THAT THE ACT WAS DONE WITHIN THE SCOPE OF THE SERVANT'S EMPLOYMENT AND
WITHIN THE POWERS OF THE CORPORATION, AND IT WAS ANACT WHICH WOULD HAVE BEEN
ACTIONABLE IF DONE BY AN INDIVIDUAL
A CORPORATION MAY SUE FOR DEFAMATION, I.E. LIBEL AND SLANDER, IF IT CAN PROVE ACTUAL
DAMAGE TO ITS TRADE OR BUSINESS INTEREST
IN CORNFORD V. CARLTON BANK (1900), IT WAS HELDTHAT A CORPORATE BODY CAN BE
CONSIDERED TO HAVE A MALICIOUS MIND AND, THEREFORE, TO BE LIABLE FOR THE TORT OF
MALICIOUS PROSECUTION.
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CESSATION OF A CORPORATION HOW IS A CORPORATION TERMINATED?
A CORPORATION CONTINUES TO EXIST UNTIL IT IS DISSOLVED IN ONE OF THE FOLLOWING WAYS:
BY VOLUNTARY SURRENDER OF ITS CHARTER TO THE SOVEREIGN
BY FORFEITURE OF THE CHARTER THROUGH SOME DEFAULT.
BY AN ACT OF PARLIAMENT
BY THE METHOD PROVIDED FOR DISSOLUTION IN THE INCORPORATING STATUTE, E.G. UNDER THE
INSOLVENCY ACT 1986 COMPANIES ARE DISSOLVED BY MEANS OF A "WINDING-UP".
NOTE THAT A CORPORATION DOES NOT CEASE TO EXIST MERELY BECAUSE ALL ITS MEMBERS ARE DEAD. IN
SUCH A CASE IT IS MERELY IN ABEYANCE AND IT CAN BE REVIVED AT ANY TIME.
C.COMPANIES
DEFINITION
THE MAJOR STATUTE GOVERNING COMPANIES IS THE COMPANIES ACT 2006,IN MALAWI COMPANIES ACT
1984,WHICH CONSOLIDATED ALL PREVIOUS STATUTES RELEVANT TO COMPANY LAW.
ONE DEFINITION OF A COMPANY IS THAT IT IS:
AN ASSOCIATION OF MEMBERS WHOSE SHARES IN THE PROPERTY OF THE COMPANY ARE
TRANSFERABLE.
ANOTHER WAY OF DEFINING IT IS:
AN ASSOCIATION OF INDIVIDUALS FOR PURPOSES OF PROFIT, POSSESSING A COMMON CAPITAL
CONTRIBUTED BY THE MEMBERS COMPOSING IT, SUCH CAPITAL BEING COMMONLY DIVIDED INTO
SHARES OF WHICH EACH MEMBER POSSESSES AT LEAST ONE, AND WHICH ARE TRANSFERABLE BY THE
OWNER.
WHAT DOES THE TERM LIMITED COMPANY MEAN?
A LIMITED COMPANYIS ONE IN WHICH THE LIABILITY OF ITS MEMBERS IS LIMITED BY THE MEMORANDUM
OF ASSOCIATION (SEE LATER) TO THE AMOUNT, IF ANY, UNPAID ON THE SHARES RESPECTIVELY HELD BY
THEM.
CLASSES OF COMPANY(WHAT ARE THE FIVE MAJOR TYPES COMPANIES?)
AS A RESULT OF THE COMPANIES ACT 2006,THE FOLLOWING FIVE CLASSES OF COMPANY NOW EXIST:
PUBLIC LIMITED COMPANIES (PLCS).
PRIVATE COMPANIES LIMITED BY SHARES.
PRIVATE COMPANIES LIMITED BY GUARANTEE WITHOUT A SHARE CAPITAL.
PRIVATE COMPANIES LIMITED BY GUARANTEE WITH A SHARE CAPITAL.
UNLIMITED COMPANIES.
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IN PRACTICE WHAT ARE THE THREE BASIC LEGAL CATEGORIES OF COMPANIES
IN PRACTICE, THESE COMPANIES FALL INTO THREE BASIC LEGAL CATEGORIES.
(A)UNLIMITED COMPANIES
THESE ARE RARE, AND DO NOT CALL FOR A GREAT DEAL OF DISCUSSION. NOTE THAT THE WORD "LIMITED" IS
NOT USED AS THE LAST WORD IN THE NAME OF THE COMPANY, AND THAT THE LIABILITY OF THE MEMBERS IS
UNLIMITED. AN UNLIMITED COMPANY MAY BE REREGISTERED AS A LIMITED COMPANY.
(B)COMPANIES LIMITED BY GUARANTEE
A COMPANY LIMITED BY GUARANTEE IS A PRIVATE COMPANY WHICH HAS THE LIABILITY OF ITS
MEMBERS LIMITED, BY THE MEMORANDUM OF ASSOCIATION, TO SUCH AMOUNT AS THE MEMBERS
MAY RESPECTIVELY THEREBY GUARANTEE TO CONTRIBUTE TO THE ASSETS OF THE COMPANY IN THE
EVENT OF ITS BEING WOUND UP.
LEADING EXAMPLES ARE TRADE ASSOCIATIONS AND ORGANISATIONS FORMED TO PROMOTE
CHARITY, EDUCATION, SCIENCE, ETC.
THEY DO NOT NORMALLY HAVE A SHARE CAPITAL, AS THEY ARE NOT FORMED FOR PROFIT, BUT THEY
ACQUIRE THE BENEFITS OF INCORPORATION BY REGISTRATION.
(C)COMPANIES LIMITED BY SHARES
THIS CATEGORY IS, BY FAR, THE MOST COMMON, AND IT REPRESENTS THE ORDINARY LIMITED
COMPANY OF MODERN COMMERCE AND INDUSTRY.
IN A COMPANY LIMITED BY SHARES, THE SHAREHOLDERS CAN ONLY BE CALLED ON AT ANY TIME TO
PAY THE COMPANY THE AMOUNT UNPAID ON THEIR SHARES. THIS LIABILITY IS STATED IN THE
MEMORANDUM AND, ONCE THE SHARES ARE FULLY PAID UP, IT CEASES.
UNDER THE ACT, COMPANIES LIMITED BY SHARES ARE CLASSIFIED AS EITHER PUBLIC OR PRIVATE.
A PUBLIC LIMITED COMPANY (PLC) IS DEFINED BY THE ACT AS A LIMITED COMPANY (WHETHER BY
SHARES OR BY GUARANTEE WITH A SHARE CAPITAL) WHOSE MEMORANDUM STATES THAT IT IS A
PUBLIC COMPANY AND WHICH HAS REGISTERED AS A PUBLIC COMPANY. SUCH A COMPANY MUST
HAVE A MINIMUM NOMINAL ALLOTTED SHARE CAPITAL OF £50,000, AND MUST IDENTIFY ITSELF ON
BUSINESS STATIONERY, ETC. AS A "PUBLIC LIMITED COMPANY
A PRIVATE COMPANY IS THEN DEFINED IN THE ACT AS ANY COMPANY THAT IS NOT A PUBLIC
COMPANY. THE MINIMUM NUMBER OF PERSONS WHO MAY FORM A PUBLIC COMPANY IS TWO.
FOR PRIVATE COMPANIES THERE IS NOW NO RESTRICTION ON THE NUMBER OF MEMBERS OR
SHAREHOLDERS, OR ON THEIR RIGHT TO TRANSFER SHARES.
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ADVANTAGES AND DISADVANTAGES OF CREATING A COMPANY
THE CHOICE BETWEEN USING A LIMITED COMPANY AS A TRADING VEHICLE AND REMAINING
UNINCORPORATED AS A SOLE TRADER OR A PARTNERSHIP IS ONE WHICH HAS SIGNIFICANTIMPLICATIONS FOR
BUSINESSES.
1. IT PROVIDES BUSINESS OWNER(S) WITH LIMITED LIABILITY
o ONCE INCORPORATED, THE MEMBERS OF A LIMITED COMPANY ENJOY LIMITED LIABILITY.
o SO LONG AS THEY HAVE PAID FOR THEIR SHARES IN FULL THEY CANNOT BE REQUIRED TO
CONTRIBUTE TO THE DEBTS OF THE COMPANY.
o LIMITED LIABILITY FOR OWNERS/SHAREHOLDERS
2. THE COMPANY CAN SUE AND BE SUED IN ITS OWN NAME.
o THIS IS AN ADVANTAGE TO SHAREHOLDERS IN THAT THEY DO NOT BECOME IMMEDIATELY
RESPONSIBLE FOR THE DEBTS OF THE COMPANY.
3. ABSENCE OF “MUTUAL AGENCY” (I.E., STOCKHOLDERS,ACTING AS OWNERS, MAY NOT ENTER THE
CORPORATIONINTO CONTRACTS OR AGREEMENTS)
o OWNERSHIP AND MANAGEMENT ARE FUNDAMENTALLY SEPARATE IN A COMPANY. GE THE
FUNDAMENTAL POINT UNDER ENGLISH COMPANY LAW;
4. SEPARATE LEGAL ENTITY (WITH RIGHTS AND RESPONSIBILITIESOF A LEGAL “PERSON”)
5. EASY TRANSFERABILITY OF OWNERSHIP (I.E., SHAREHOLDERS MAY TRADE OR SELL STOCK)
6. CONTINUITY OF EXISTENCE BEYOND ORIGINAL FOUNDERS OR SHAREHOLDERS
7. ABILITY TO RAISE LARGE AMOUNTS OF CAPITAL BY ISSUING STOCK TO INVESTORS
DISADVANTAGES OF CORPORATIONS:
1. COST RELATED TO SETTING UP THE CORPORATION AND FILING THE REQUIRED FORMS WITH THE
REGISTRAR OF COMPANIES.
2. FORMALITIES REQUIRED BY LAW (E.G., MAINTAINING CORPORATE MINUTES, HAVING A BOARD OF
DIRECTORS,
RECORDING SHAREHOLDER RIGHTS, MAINTAINING CORPORATE RECORDS AND FILINGS)
3. CONSIDERABLE ORGANIZATIONAL COSTS
4. MAY TAKE CONSIDERABLE TIME TO SET-UP AND ORGANIZE A CORPORATION
5. GREATER AMOUNT OF REGULATION AND SUPERVISION BY GOVERNMENTAL AGENCIES.
6. CORPORATIONS ARE SUBJECT TO REAL ESTATE, PERSONAL PROPERTY, AND FRANCHISE TAX
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WHAT IS THE DISTINCTION BETWEEN DIRECTORS AND SHAREHOLDERS
A COMPANY IS AN ARTIFICIAL LEGAL PERSON RECOGNISED IN LAW AS HAVING AN EXISTENCE
DISTINCT FROM THAT OF ITS MEMBERS. ONCE INCORPORATED THE MEMBERS (SHAREHOLDERS) OF
A LIMITED COMPANY ENJOY LIMITED LIABILITY. AS LONG AS THEY HAVE PAID FOR THEIR SHARES IN
FULL THEY CANNOT BE REQUIRED TO CONTRIBUTE TO THE DEBTS OF THE COMPANY.
IT IS IMPORTANT TO RECOGNISE THAT OWNERSHIP AND MANAGEMENT OF A COMPANY CAN BE
SEPARATE EVEN THOUGH THE INDIVIDUALS CONCERNED ARE PHYSICALLY THE SAME.
SHAREHOLDERS AS OWNERS OF THE EQUITY OR SHARE CAPITAL OF THE COMPANY HAVE THE RIGHT
TO FREELY TRANSFER THEIR SHARES UNLESS THERE IS SOME RESTRICTION IN THE COMPANY'S
CONSTITUTION.
SHAREHOLDERS, HOWEVER, HAVE NO AUTHORITY TO "MANAGE" THE BUSINESS OF THE COMPANY.
DIRECTORS EXERCISE DAY-TO-DAY MANAGEMENT OF THE COMPANY SUBJECT TO THE COMPANIES
ACT, THE MEMORANDUM AND ARTICLES OF THE COMPANY (SEE LATER) AND THE DIRECTIONS GIVEN
BY THE MEMBERS OF THE COMPANY BY SPECIAL RESOLUTION AT A GENERAL MEETING.
SHAREHOLDERS HAVE THE FOLLOWING RIGHTS BY VIRTUE OF OWNING SHARES IN A COMPANY:
1. TO RECEIVE DIVIDENDS
2. TO RECEIVE A RETURN OF CAPITAL IN A WINDING-UP
3. TO PARTICIPATE IN SURPLUS ASSETS ON A WINDING-UP
4. TO ATTEND AND VOTE AT GENERAL MEETINGS.
SHAREHOLDERS HAVE NO RIGHT TO SEE THE MINUTES OF DIRECTORS' MEETINGS, ONLY OF
SHAREHOLDER MEETINGS. THEIR DECISIONS AT GENERAL MEETINGS MAY IN SOME INSTANCES
REQUIRE A 75% MAJORITY.
DIRECTORSARE APPOINTED BY THE COMPANY IN ACCORDANCE WITH ITS ARTICLES OF ASSOCIATION.
THEIR ACTIVITIES ARE CONTROLLED BY THE ARTICLES, WHICH DEAL WITH APPOINTMENT,
QUALIFICATION, ROTATION AND REMUNERATION, AND BY THE COMPANIES ACT 2006, COMPANY
DIRECTORS' DISQUALIFICATION ACT 1986 AND INSOLVENCY ACT 1986.
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DIRECTORS HAVE A FIDUCIARY DUTY (DUTY OF GOOD FAITH) TOWARDS THE MEMBERS OF THE
COMPANY. EVERY DIRECTOR MUST GIVE NOTICE TO HIS/HER COMPANY OF ANY INTEREST WHICH
HE/SHE HAS IN THE SHARES AND DEBENTURES OF THE COMPANY. DIRECTORS CAN BE REMOVED
FROM THE BOARD OF A COMPANY WITHOUT THEIR CONSENT UNDER THE PROVISIONS OF TABLE A
(THE MODEL SET OF ARTICLES OF ASSOCIATION). DIRECTORS CANNOT VOTE OR PARTICIPATE IN A
BOARD MEETING DISCUSSION TO CONSIDER A MATTER IN WHICH THEY HAVE AN INTEREST UNLESS
THEY HAVE GIVEN PRIOR NOTIFICATION OF THIS INTEREST. GENERALLY DIRECTORS MAY CONSIDER
WHATEVER MATTERS THEY DEEM NECESSARY TO BE DISCUSSED AT A BOARD MEETING AND THEY
REACH DECISIONS BY A SIMPLE MAJORITY VOTE.
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THE VEIL OF INCORPORATION
THE VEIL OF INCORPORATION IS A FUNDAMENTAL PRINCIPLE OF COMPANY LAW WHICH WAS LAID
DOWN IN THE CASE OF SALOMON V. SALOMON & CO. (1897), NAMELY THAT A COMPANY DULY
INCORPORATED IS A SEPARATE LEGAL ENTITY WITH ITS OWN RIGHTS AND LIABILITIES DISTINCT FROM
THOSE OF ITS SHAREHOLDERS.
IT IS OBVIOUS THAT CORPORATIONS EXIST IN PART, IN THE FIRST PLACE TO SHIELD THEIR
SHAREHOLDERS FROM PERSONAL LIABILITIES FOR THE DEBTS OF THAT CORPORATION.
THIS PRINCIPLE, THAT UPON INCORPORATION A COMPANY BECOMES A SEPARATE LEGAL ENTITY, IS
FUNDAMENTAL TO THE ORGANISATION AND MANAGEMENT OF LIMITED COMPANIES ,
THE CASE OF SALOMON V. SALOMON & CO. LTD. (1897) ESTABLISHED THE LEGAL PRINCIPLE OF
“SEPARATE CORPORATE PERSONALITY”, I.E. FROM THE DATE STATED ON A COMPANY'S CERTIFICATE
OF INCORPORATION, THE COMPANY ACQUIRES ITS OWN RIGHTS AND LIABILITIES, SEPARATE FROM
THOSE OF ITS MEMBERS AND IT HAS PERPETUAL SUCCESSION, WHICH MEANS THAT MEMBERS CAN
COME AND GO AND THE COMPANY REMAINS –
A COMPANY HAS A DUAL NATURE AS BOTH AN ASSOCIATION OF ITS MEMBERS AND A PERSON
SEPARATE FROM ITS MEMBERS.
MOREOVER, FOLLOWING INCORPORATION, AN INCORPORATED COMPANY HAS, INTER ALIA, THE FOLLOWING
ATTRIBUTES AS A RESULT OF THE VEIL OF INCORPORATION/SHIELD OF PROTECTION.
IT CAN HOLD PROPERTY IN ITS CORPORATE NAME.
IT CAN SUE AND BE SUED IN ITS CORPORATE NAME.
IT CAN BE A DEBTOR AND CREDITOR IN ITS OWN NAME, AND EVEN OF ITS OWN MEMBERS.
INSOLVENCY OF THE COMPANY NEED NOT BRING ABOUT THE BANKRUPTCY OF ITS MEMBERS (LIMITED
LIABILITY IS ONE OF THE MAIN ADVANTAGES OF INCORPORATION).
IT HAS PERPETUAL SUCCESSION, SO THAT THE MEMBERSHIP MAY CHANGE, WITHOUT AFFECTING THE
LEGAL PERSONALITY OF THE COMPANY.
IT CAN MAKE CONTRACTS IN ITS CORPORATE NAME.
IT CAN COMMIT CRIMES, WHICH DO NOT INVOLVE MENS REA(I.E. A GUILTY MIND) SUCH AS ROAD TRAFFIC
OFFENCES (CRIMES INVOLVING MENS REACAN ALSO BE COMMITTED IF THE PERSON WHO WAS
INSTRUMENTAL IN CAUSING THE CRIME TO BE COMMITTED WAS IN A SENIOR MANAGEMENT POSITION
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WITHIN THE COMPANY, SUCH THAT HE CAN BE CONSIDERED TO BE THE ALTER EGO (OTHER SELF) OF THE
COMPANY).SEE NOW: CORPORATE MANSLAUGHTER ACT 2007.
IT CAN COMMIT TORTS, EITHER THROUGH THE INSTRUMENTALITY OF ITS OFFICERS OR ITS EMPLOYEES.
THE COMPANY CAN BE VICARIOUSLY LIABLE FOR ACTS OF EMPLOYEES COMMITTED IN THE COURSE OF
EMPLOYMENT.
WHAT DOES THE EXPRESSION “LIFTING THE CORPORATE VEIL “MEAN
THE PRINCIPLE THAT A COMPANY IS A PERSON, SEPARATE FROM ITS MEMBERS, CAN PRODUCE
UNSATISFACTORY RESULTS IN CERTAIN CIRCUMSTANCES.
COMPANY LAW, THEREFORE, RECOGNISES A NUMBER OF EXCEPTIONS TO THE PRINCIPLE OF
“SEPARATE CORPORATE PERSONALITY”.
IN THESE EXCEPTIONAL CIRCUMSTANCES, DESCRIBED COLLECTIVELY AS “LIFTING THE CORPORATE
VEIL”, THE COMPANY IS TREATED AS THE SAME PERSON AS ITS MEMBERS AND MANAGERS, I.E.
THEY LOSE THE SHIELD OF THE VEIL OF INCORPORATION AND BECOME “JOINTLY AND SEVERALLY”
LIABLE WITH THE COMPANY FOR ALL DEBTS AND LIABILITIES, AS IN THE CASE OF PARTNERS IN A
TRADITIONAL PARTNERSHIP, AS DEFINED BY THE PARTNERSHIP ACT 1890.
THERE ARE CERTAIN CIRCUMSTANCES IN WHICH COURTS WILL HAVE TO LOOK THROUGH THE
CORPORATION, THAT IS, LIFT THE VEIL OF INCORPORATION, OTHERWISE KNOWN AS PIERCING THE
VEIL, AND HOLD THE SHAREHOLDERS OF THE COMPANY DIRECTLY AND PERSONALLY LIABLE FOR THE
OBLIGATIONS OF THE CORPORATION
COMMON LAW EXAMPLES OF LIFTING THE CORPORATE VEIL INCLUDE THE FOLLOWING.
1. TRADING WITH THE ENEMY IN TIMES OF WAR-
DAIMLER CO. LTD V CONTINENTAL TYRE & RUBBER CO.(1916)
ENGLAND WAS AT WAR WITH GERMANY.
CONTINENTAL SUED DAIMLER FOR MONEY DUE IN RESPECT OF GOODS SUPPLIED.
DAIMLER CLAIMED THAT THE COMPANY WAS ACTUALLY OWNED BY GERMAN NATIONALS
AND PAYING THEM WAS ILLEGAL UNDER THE TRADING WITH THE ENEMY ACT.
THE COURT LIFTED THE CORPORATE VEIL TO DISCOVER IF THIS WAS SO, AND FOUND AS A
FACT THAT IT WAS THE GERMANS WHO WERE OPERATING THE BUSINESS. D WAS
THEREFORE SUCCESSFUL IN ITS DEFENCE.
IF, AS IN THIS CASE, THE PERSONS IN ACTUAL CONTROL OF THE COMPANY ARE ENEMY
ALIENS, THE COMPANY CAN ALSO BE SO REGARDED (AS AN ENEMY) FOR THE PURPOSES OF
THE LAW RELATING TO TRADING WITH THE ENEMY.
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2. GROUP ENTERPRISES: CASES INVOLVING GROUP OF COMPANIES WHERE THE CORPORATE VEIL
MAY BE LIFTED EITHER ON PUBLIC POLICY GROUNDS OR IN THE INTERESTS OF JUSTICE.
THE ARGUMENT OF GROUP ENTERPRISES IS TO THE EFFECT THAT IN CERTAIN CASES, SOME
COMPANIES THAT ACT AS A CORPORATE GROUP, MAY OPERATE TO HIDE BEHIND THE
ADVANTAGES OF LIMITED LIABILITY TO THE DISADVANTAGE OF THEIR CREDITORS.
THEY MAY OPERATE IN A WAY THAT THE PARENT ENTITY IS NOT CLEARLY DISTINGUISHABLE
FROM THE SUBSIDIARIES.
THE ARGUMENT IN FAVOR OF PIERCING THE CORPORATE VEIL IN THESE CIRCUMSTANCES IS
TO ENSURE THAT A CORPORATE GROUP WHICH SEEKS THE ADVANTAGES OF LIMITED
LIABILITY MUST ALSO BE READY TO ACCEPT THE CORRESPONDING RESPONSIBILITIES. THIS
WAS THE OPINION OF DOYLE CJ IN THE 1998 CASE OF TAYLOR V SANTOS LTD. 56
EACH COMPANY WITHIN THE GROUP, ACCORDING TO THE DOCTRINE OF INCORPORATION,
IS A SEPARATE LEGAL ENTITY, I.E. THERE IS A “VEIL OF INCORPORATION” BETWEEN A
HOLDING COMPANY AND ITS SUBSIDIARY(IES). SIMILARLY, THERE IS A “VEIL OF
INCORPORATION” BETWEEN CO-SUBSIDIARIES. HOWEVER, THERE HAVE BEEN A NUMBER
OF CASES WHERE THE COURTS HAVE LIFTED THE VEIL (OR VEILS) OF INCORPORATION
BETWEEN A HOLDING COMPANY AND ITS VARIOUS SUBSIDIARIES, WITH TWO MAIN AIMS
(I)FIRSTLY,WHERE TO BENEFIT THE GROUP OF COMPANIES CONCERNED.
(II)SECONDLY, TO BENEFIT THE CREDITORS OF THE GROUP OF COMPANIES CONCERNED
(INCLUDING THE INLAND REVENUE) OF AN INSOLVENT COMPANY BY MAKING OTHER
COMPANIES WITHIN THE GROUP LIABLE FOR ITS DEBTS.
3. SHAM OR FAÇADE: WHERE A COMPANY IS A SHAM AND IS SEEKING TO EVADE THE ENFORCEMENT OF
EXISTING RIGHTS
AN ARGUMENT THAT THE COMPANY UNDER SCRUTINY IS A SHAM OR A FAÇADE IS ONE OF HE
STRONGEST POINTS THAT WOULD PROMPT A COMMON LAW COURT TO LIFT THE VEIL OF
INCORPORATION.
TO SAY A COMPANY WAS MERELY A FAÇADE OR A SHAM MEANS THE CORPORATE FORM WAS
INCORPORATED OR MERELY USED AS A MASK TO HIDE THE REAL PURPOSE OF THE CORPORATE
CONTROLLER.
THE HOUSE OF LORDS IN WOOLFSON V. STRATHCLYDE (1978)STATED THAT IT IS APPROPRIATE FOR
THE COURTS TO LIFT THE VEIL OF INCORPORATION ONLY WHERE SPECIAL CIRCUMSTANCES EXIST,
INDICATING THAT IT IS A “MERE FAÇADE” CONCEALING THE TRUE FACTS.
THE "FAÇADE" OR "SHAM" CONCEPT SEEMS TO APPLY WHERE THE COMPANY CONCERNED HAS BEEN
FORMED PRIMARILY TO EVADE EXISTING LIABILITIES OR DEFEAT THE LAW.
IN THE ENGLISH CASE OF SHARRMENT PTY LTD V OFFICIAL TRUSTEE IN BANKRUPTCY59
, LOCKHART J,
STATED THAT:
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"A 'SHAM' IS…SOMETHING THAT IS INTENDED TO BE MISTAKEN FOR SOMETHING ELSE OR THAT IS
NOT REALLY WHAT IT PURPORTS TO BE. IT IS A SPURIOUS IMITATION, A COUNTERFEIT, A DISGUISE OR
A FALSE FRONT. IT IS NOT GENUINE OR TRUE, BUT SOMETHING MADE IN IMITATION OF SOMETHING
ELSE OR MADE TO APPEAR TO BE SOMETHING WHICH IT IS NOT. IT IS SOMETHING WHICH IS FALSE
OR DECEPTIVE."
4. IN THE EVENT OF FRAUDULENT TRADING
UNDER SECTION 213, INSOLVENCY ACT 1986, IF THE COURT FINDS THAT THE BUSINESS OF A
COMPANY HAS BEEN CARRIED ON WITH INTENT TO “DEFRAUD”, I.E. HAS ENGAGED IN FRAUDULENT
TRADING, IT CAN HOLD ANY PERSON (E.G. DIRECTORS, ACCOUNTANTS AND/OR EMPLOYEES) WHO
WERE “KNOWINGLY PARTIES” TO THE FRAUD PERSONALLY LIABLE TO MAKE SUCH CONTRIBUTION TO
THE COMPANY'S ASSETS AS THE COURT THINKS FIT, UNDER THE CIRCUMSTANCES.
EXAMPLES OF "FRAUDULENT TRADING" INCLUDE PAYING CREDITORS OUT OF ORDER ON THE
PREFERENTIAL LIST OF CREDITORS –ESPECIALLY A PARTY "KNOWINGLY" PAYING ONE PARTY OF
CREDITORS OFF IN THE KNOWLEDGE THAT THIS WILL RESULT IN CREDITORS HIGHER UP THE
PREFERENTIAL LIST LOSING OUT FINANCIALLY.
LIABILITY IS NO LONGER LIMITED BECAUSE THE PERSONS WHO HAVE ENGAGED IN FRAUDULENT
TRADING ARE REQUIRED TO PAY A FINE SET BY THE COURT.
5. IN THE EVENT OF WRONGFUL TRADING
UNDERSECTION 214,INSOLVENCY ACT 1986, IF ON THE WINDING-UP OF AN INSOLVENT COMPANY A
PAST OR PRESENT DIRECTOR (OR SHADOW DIRECTOR) KNEW OR OUGHT TO HAVE KNOWN, BEFORE
THE COMMENCEMENT OF THE WINDING-UP, THAT THERE WAS NO REASONABLE PROSPECT THAT
THE COMPANY COULD AVOID INSOLVENT LIQUIDATION AND FAILED TO TAKE EVERY STEP TO
MINIMISE THE LOSS TO THE COMPANY'S CREDITORS, THEN THE COURT MAY DECLARE, ON THE
APPLICATION OF THE LIQUIDATOR, THAT THE PERSON(S) IS/ARE LIABLE TO MAKE SUCH
CONTRIBUTION AS THE COURT THINKS FIT –UNLESSTHEY CAN ESTABLISH THAT THEY TOOK EVERY
STEPTHEY OUGHT TO HAVE TAKEN WITH A VIEW TO MINIMISING THE POTENTIAL LOSS TO THE
COMPANY'S CREDITORS.
THE JUDGMENT STANDARDS UNDER THIS SECTION ARE BASED ON OBJECTIVE CRITERIA RATHER
THAN “PERSONAL MORALITY AND HONESTY”; A PERSON IS TO BE JUDGED ON THE BASIS OF HIS/HER
OWN KNOWLEDGE, SKILL AND EXPERIENCE THAT COULD REASONABLY BE EXPECTED OF SOMEONE
CARRYING OUT HIS/HER "FUNCTION" IN RELATION TO THE COMPANY.
15
LIABILITY IS NO LONGER LIMITED BECAUSE THE DIRECTOR WHO HASENGAGED IN WRONGFUL
TRADING IS REQUIRED TO PAY A FINE SET BY THE COURT.
THE FOLLOWING CASES AFFECT DIRECTORS AND SHAREHOLDERS.
WILLIAMS V. NATURAL LIFE HEALTH FOODS (1998)
HERE, THE HOUSE OF LORDS STATED THAT A DIRECTOR OF A LIMITED COMPANY WAS ONLY PERSONALLY
LIABLE FOR LOSS SUFFERED AS A RESULT OFNEGLIGENT ADVICE GIVEN BY HIM ON BEHALF OF THE COMPANY
IF HE HAD ASSUMED PERSONAL RESPONSIBILITY FOR THAT ADVICE.
IN THIS CASE, SUCH AN ASSUMPTION OF RESPONSIBILITY HAD TO BE DETERMINED OBJECTIVELY AND THE
ABSENCE OF PERSONAL DEALINGS WOULD INDICATE VERY STRONGLY THAT THE DIRECTOR WOULD HAVE NO
RESPONSIBILITY.
RE CONTINENTAL ASSURANCE CO. OF LONDON PLC (1996)
HERE, THE COURT DECIDED THAT A NON-EXECUTIVE DIRECTOR OF A COMPANY HAD FAILED TO APPRECIATE
WHAT THE RESPONSIBILITIES OF A DIRECTOR WERE IN RELATION TO THE UNDERSTANDING OF A COMPANY'S
FINANCIAL AFFAIRS. THE DIRECTOR WAS REQUIRED TO EXERCISE THE COMPETENCE REQUIRED BY THE
COMPANIES ACT IN RELATION TO THE AFFAIRS OF THE COMPANY. HIS CONDUCT AS A DIRECTOR OF THE
COMPANY MADE HIM UNFIT TO BE CONCERNED IN THE MANAGEMENT OF A COMPANY AND HE WAS
DISQUALIFIED FOR THREE YEARS FROM HOLDING OFFICE AS A DIRECTOR.
HOOD SAILMAKERS LTD V. AXFORD (1997)
HERE, THE COMPANY'S ARTICLES STATED THAT A QUORUM FOR A MEETING WAS TWO DIRECTORS. AS THE
COMPANY ONLY HAD TWO DIRECTORS AND ONE OF THEM WAS ABROAD, IT WAS NOT POSSIBLE TO HOLD A
VALID MEETING. THE DIRECTOR REMAINING IN THE UK ATTEMPTED TO USE THE WRITTEN SOLUTION
PROCEDURE TO ENABLE DECISIONS TO BE MADE EFFECTIVELY BY HIMSELF, WHO REMAINED IN THE UK. THE
COURT DECIDED THAT THIS WRITTEN RESOLUTION PROCEDURE WAS INVALID AS ONE DIRECTOR WAS
ATTEMPTING TO OVERRIDE THE QUORUM REQUIREMENTS TO HIS ADVANTAGE.
ROSS V. TELFORD (1997)
HERE, THE COURT EXAMINED A CASE OF CORPORATE DEADLOCK WHERE EQUAL SHAREHOLDINGS HELD BY
TWO PARTIES IN A COMPANY WERE PREVENTING DECISIONS BEING MADE BY THE 54 THE LAW RELATING TO
ASSOCIATIONS 1: CORPORATIONS ABE
16
CREASEY V. BREACHWOOD MOTORS LTD (1993), WHERE A COMPANY TRANSFERRED ITS ASSETS TO ANOTHER
COMPANY TO AVOID LIABILITIES ARISING FROM A WRONGFUL DISMISSAL CLAIM BROUGHT AGAINST THE
FIRST COMPANY, THE COURT ALLOWED THE CLAIMANT TO PURSUE THE ASSETS OF THE FIRST COMPANY INTO
THE SECOND COMPANY. SEE ALSO GENCOR V. DALBY (2000).
STATUTORY EXAMPLES OF LIFTING THE CORPORATE VEIL INCLUDE THE FOLLOWING.
WHERE WORKING RELATIONSHIPS HAVE BROKEN DOWN WITHIN A QUASI-PARTNERSHIP COMPANY
THE LEADING CASE ON LIFTING THE VEIL ON THIS GROUND IS EBRAHIMI V. WESTBOURNE GALLERIES LTD
(1972). A BREAKDOWN IN THE MANAGEMENT OF A COMPANY OR THE COMPLETE EXCLUSION OF A MEMBER
DIRECTOR FROM PARTICIPATION IN MANAGEMENT, HAVE BEEN REDRESSED (REMEDIED) BY WINDING-UP THE
COMPANY CONCERNED ON THE JUST AND EQUITABLE GROUND IN ACCORDANCE WITH SECTION 122(1)(G) OF
THE INSOLVENCY ACT 1986. THE COURTS REGARD THE COMPANY, IN SUCH CASES, IN FACT, IF NOT IN FORM,
AS A PARTNERSHIP. THIS SCENARIO NORMALLY ARISES IN COMPANIES WITH FEW MEMBERS WHICH,
BECAUSE OF THIS AND THEIR MANAGEMENT STRUCTURE, ARE TERMED QUASI-PARTNERSHIPS.
THE FALL IN MINIMUM MEMBERSHIP OF A PLC TO BELOW THE STATUTORY MINIMUM OF TWO
MEMBERS, IN CONTRAVENTION OF SECTION 24 OF THE COMPANIES ACT 1985
THIS STATES THAT IF A PLC CARRIES ON BUSINESS WITHOUT HAVING AT LEAST TWO MEMBERS AND DOES SO
FOR MORE THAN SIX MONTHS, A PERSON WHO, FOR THE WHOLE OR ANY PART OF THE PERIOD THAT IT
CARRIES ON BUSINESS AFTER SIX MONTHS, (A) IS A MEMBER OF THE COMPANY, AND (B) KNOWS THAT IT IS
CARRYING ON BUSINESS WITH ONLY ONE MEMBER, IS LIABLE JOINTLY AND SEVERALLY WITH THE COMPANY
FOR THE PAYMENT OF THE COMPANY'S DEBTS CONTRACTED DURING THE PERIOD, I.E. AFTER THE FIRST SIX
MONTHS, OR, AS THE CASE MAY BE, THAT PART OF IT. IT SHOULD BE NOTED THAT THIS PROVISION HAS NOT
BEEN CARRIED OVER TO THE COMPANIES ACT 2006.
INCORRECTLY STATING A COMPANY'S NAME IN CORRESPONDENCE ETC.
SECTION 349(4), COMPANIES ACT 1985, STATES THAT IF AN OFFICER, FOR EXAMPLE, A DIRECTOR OR
SECRETARY, SIGNS A BILL OF EXCHANGE (E.G. A CHEQUE) ON WHICH THE CORRECT NAME OF THE COMPANY
IS NOT STATED, HE WILL BE REQUIRED TO PAY THE AMOUNT OF IT, ON THE BASIS OF PERSONAL LIABILITY, IF
THE COMPANY REFUSES TO HONOUR (PAY) IT. AGAIN, IT SHOULD BE NOTED THAT THIS PROVISION HAS NOT
BEEN CARRIED OVER TO THE COMPANIES ACT 2006.
WHERE A PLC DOES BUSINESS OR EXERCISES ANY BORROWING POWERS BEFORE IT HAS BEEN ISSUED
WITH A “TRADING CERTIFICATE” FROM THE REGISTRAR OF COMPANIES
17
THIS CAN LEAD TO THE DIRECTORS OF THE COMPANY WHICH IS IN DEFAULT BEING HELD PERSONALLY LIABLE
FOR ANY LOSS OR DAMAGE SUFFERED BY A THIRD PARTY TO ANY TRANSACTION ENTERED INTO BY THE
COMPANY IN CONTRAVENTION OF THIS SECTION.
IT SHOULD BE STRESSED THAT THE FAILURE OF A PLC TO OBTAIN TRADING CERTIFICATE (UNDER A SECTION
761 OF THE COMPANIES ACT 2006) BEFORE IT DOES BUSINESS OR EXERCISES ITS BORROWING POWERS, DOES
NOT AFFECT THE VALIDITY OF A TRANSACTION ENTERED INTO BY THE COMPANY, BUT WHERE A COMPANY
OPERATES IN CONTRAVENTION AND FAILS TO COMPLY WITH ITS OBLIGATIONS IN CONNECTION WITH THE
TRANSACTION WITHIN 21 DAYS FROM BEING CALLED UPON TO DO SO, THE DIRECTORS OF THE COMPANY ARE
JOINTLY AND SEVERALLY LIABLE TO INDEMNIFY ANY OTHER PARTY TO THE TRANSACTION IN RESPECT OF ANY
LOSS OR DAMAGE SUFFERED BY HIM BY REASON OF THE COMPANY'S FAILURE TO COMPLY WITH ITS
OBLIGATIONS (THE DIRECTORS WHO ARE LIABLE ARE THOSE PERSONS WHO HELD THE OFFICE OF DIRECTOR
AT THE TIME WHEN THE TRANSACTION WAS MADE). DIRECTORS HAVE JOINT AND SEVERAL LIABILITYWITH
THEIR COMPANY JUST LIKE PARTNERS HAVE JOINT AND SEVERAL LIABILITY WITH THEIR FIRM.
WHERE THERE IS A HOLDING AND SUBSIDIARY RELATIONSHIP BETWEEN COMPANIES, THE HOLDING
COMPANY IS REQUIRED, SUBJECT TO CERTAIN EXCEPTIONS, NOT ONLY TO PREPARE ITS OWN
INDIVIDUAL ACCOUNTS BUT ALSOGROUP BALANCE SHEETS AND PROFIT AND LOSS ACCOUNTS OF IT,
THE PARENT AND ITS SUBSIDIARY UNDERTAKINGS. THIS SUGGESTS THAT, FOR FINANCIAL PURPOSES
AT LEAST,THE COMPANIES WITHIN A GROUP ARE AS ONE. THE VEIL OF INCORPORATION CAN THEN
BE LIFTED BETWEEN THE INDIVIDUAL ENTITIES (SUBSIDIARIES) WITHIN THE GROUP SO THAT THE
COMPANIES' INVESTORS (AND OTHERS, E.G. THE INLAND REVENUE) CAN JUDGE THE FINANCIAL
POSITION OF THE GROUP AS A WHOLE.
18
COMPANY. IN THIS CASE, AND IN OTHERS, WHERE DEADLOCK ARISES EITHER FROM NON-ATTENDANCE
RENDERING MEETINGS INQUORATE OR FROM EQUALITY OF VOTING POWER, COMPANIES FIND IT IMPOSSIBLE
TO FUNCTION. HOWEVER, THE DECISION IN THIS CASE MAKES IT CLEAR THAT COURTS WILL NOT ATTEMPT TO
SOLVE A DILEMMA FOR PARTIES WHICH THEY HAVE CAUSED, BY THE WAY IN WHICH THEY HAVE DIVIDED THE
SHARE CAPITAL OR ORGANISED THE QUORUM REQUIREMENTS. THE SOLUTION IS MOST LIKELY TO REST WITH
THE PARTIES THEMSELVES, WHO CAN RESOLVE THE DEADLOCK BY AGREEING TO WIND UP THE COMPANY.
RE PARK HOUSE PROPERTIES LTD (1997)
HERE, THE COURT HELD THAT WHERE DIRECTORS HAD NEVER PLAYED ANY ACTIVE ROLE IN A COMPANY AND
HAD NEVER BEEN PAID ASDIRECTORS, THEY STILL HAD OBLIGATIONS TO FULFIL. IN THIS CASE, THREE
DIRECTORS WERE DISQUALIFIED FROM HOLDING OFFICE SINCE THE LAW IMPOSES STATUTORY AND
FINANCIAL DUTIES ON ALL DIRECTORS. THEIR COMPLETE LACK OF INVOLVEMENT IN THE RUNNING OF THE
COMPANY,ITS FINANCIAL PROBLEMS AND THE PREPARATION AND FILING OF ACCOUNTS LED THE COURT TO
CONCLUDE THAT THEY WERE UNFIT TO HOLD OFFICE AS DIRECTORS.
WHAT WAS SALOMON V SALOMON&CO (1897) ABOUT
THIS IS THE CASE WHETHER THE COMPANY IS A SINGLE MEMBER PRIVATE COMPANY, A SUBSIDIARY
COMPANY IN A GROUP OF COMPANIES, OR A PUBLIC LIMITED COMPANY WITH A STOCK EXCHANGE LISTING
AND MANY THOUSANDS OF SHAREHOLDERS.
IN SALOMON'SCASE, MR SALOMON HAD CARRIED ON A SHOE MANUFACTURING BUSINESS FOR OVER 30
YEARS AND DECIDED TO FORM THE BUSINESS INTO A LIMITED COMPANY. THE COMPANY WAS REGISTERED
WITH HIM AND SIX OTHERS HOLDING THE SHARES. HE THEN SOLD HIS BUSINESS TO THE NEW LIMITED
COMPANY FOR A FIGURE OF JUST UNDER £40,000. THIS SUM WAS PAID FOR BY THE COMPANY ISSUING
SHARES VALUED AT £20,000 TO MR SALOMON AND HIS FAMILY. A SECURED DEBENTURE, WHICH WAS A
FLOATING CHARGE ON THE COMPANY'S ASSETS, WAS CREATED IN FAVOUR OF MR SALOMON FOR £10,000.
THE BALANCE WAS THEN PAID IN CASH.
HOWEVER, SOME TIME LATER THE NEW COMPANY FOUND ITSELF IN FINANCIAL DIFFICULTIES AND WAS PUT
INTO LIQUIDATION. WHEN THE FINANCIAL POSITION OF THE COMPANY WAS ASSESSED, ITS ASSETS WERE
WORTH ONLY ABOUT £6,000 AND THE AMOUNT OWING TO TRADE CREDITORS WAS ABOUT £7,000. WHEN A
JUDGMENT HAD TO BE MADE BY THE COURT, IT HAD TO DECIDE WHETHER THE TRADE CREDITORS OR THE
DEBENTURE HOLDER (MR SALOMON) WAS ENTITLED TO THE £6,000 ASSETS. THE TRADE CREDITORS ARGUED
THAT SINCE AN INDIVIDUAL COULD NOT OWE MONEY TO HIMSELF, SO TOO A COMPANY COULD NOT OWE
MONEY TO ITS MAJOR SHAREHOLDER. HOWEVER, THE COURT DECIDED THAT THE COMPANY WAS A
SEPARATE LEGAL ENTITY, WHICH COULD OWE MONEY EVEN TO A MAJOR SHAREHOLDER. THEREFORE, THE
19
DEBENTURE WHICH HAD BEEN CREATED IN FAVOUR OF MR SALOMON WAS VALID AND, AS HOLDER, HE WAS
ENTITLED TO SUCH ASSETS AS REMAINED WITHIN THE LIMITED COMPANY PRIOR TO LIQUIDATION.
THE CASE OF SALOMON V.SALOMON & CO. LTD (1897)LED TO THE COINING OF THE PHRASE 'LIFTING THE
CORPORATE VEIL'. SEE NOW: BECKETT V. HALL (2007).
ALTHOUGH THERE IS NO ONE CONSISTENT PRINCIPLE RUNNING THROUGH THESE VARIOUS EXCEPTIONS,
THOSE PROVIDED BY STATUTE TEND TO PENALISE BREACHES OF THE COMPANIES LEGISLATION AND THOSE
PROVIDED BY THE CASE LAW TEND TO INVOLVE SITUATIONS WHERE “SPECIAL CIRCUMSTANCES EXIST
INDICATING THAT IT (THE CORPORATE VEIL) IS A MERE FAÇADE CONCEALING THE TRUE FACTS”PER LORD
KEITH IN WOOLFSON V. STRATHCLYDE REGIONAL COUNCIL (1978).THE LAW RELATING TO ASSOCIATIONS 1:
CORPORATIONS 51
© ABE
D.COMPANIES IN LAW
FORMATION
INCORPORATION. HOW IS A COMPANY INCORPORATED
A COMPANY IS FORMED BY THE REQUISITE NUMBER OF PERSONS LODGING WITH THE REGISTRAR OF
COMPANIES A SIGNED MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION.
ONCE THESE DOCUMENTS ARE APPROVED BY THE REGISTRAR, THE REGISTRAR ISSUES A CERTIFICATE
OF INCORPORATION WHICH BRINGS INTO BEING A NEW LEGAL ENTITY.
A PRIVATE COMPANY MAY BEGIN BUSINESS ON THE ISSUE OF THE CERTIFICATE OF INCORPORATION,
BUT IN THE CASE OF A PUBLIC COMPANY, CERTAIN OTHER FORMALITIES MUST BE OBSERVED BEFORE
THE REGISTRAR ISSUES A CERTIFICATE TO COMMENCE BUSINESS.
20
MEMORANDUM OF ASSOCIATION
THE MEMORANDUM OF ASSOCIATION IS A SUPERIOR CONSTITUTIONAL DOCUMENT OF THE COMPANY
THAT RECORDS THE FACTUAL AND LEGAL BACKGROUND OF THE COMPANY:
THAT ITS SIGNATORIES WISH TO BE INCORPORATED AS A COMPANY;
THE PROPOSED COMPANY'S NAME, POWERS, CAPITAL AND THE SITUATION OF ITS REGISTERED
OFFICE.
IT MUST ALSO CONTAIN A CLAUSE STATING THAT THE LIABILITY OF MEMBERS IS LIMITED.
IT IS EXPECTED THAT, AS THIS DOCUMENT EXPRESSES THE POWERS OF THE COMPANY, ALL PERSONS
HAVING DEALINGS WITH THE COMPANY SHALL BE ACQUAINTED WITH ITS PROVISIONS,
PARTICULARLY AS NO ACT BEYOND ITS SCOPE IS BINDING UPON THE COMPANY, EVEN SHOULD
EVERY MEMBER ACQUIESCE. THIS IS THE ULTRA VIRES DOCTRINE REFERRED TO EARLIER.
IN ASHBURY CARRIAGE CO. LTD V. RICHE (1875), A COMPANY WAS FORMED WITH THE OBJECTS OF MAKING,
SELLING AND MENDING RAILWAY CARRIAGES AND, AS MECHANICAL ENGINEERS, TO PURCHASE, LEASE AND
WORK MINES, MINERALS, LAND AND BUILDINGS. IT PURPORTED TO ENTER A CONTRACT TO PURCHASE A
CONCESSION TO BUILD A RAILWAY IN BELGIUM. THE MEMBERS OF THE COMPANY, IN GENERAL MEETING,
RATIFIED THE CONTRACT, BUT IT WAS NEVERTHELESS HELD TO BE ULTRA VIRES AND VOID, FOR ITWAS
BEYOND THE OBJECTS CLAUSE IN THE MEMORANDUM.
HOWEVER, THE 1985 ACT CONSOLIDATED SIGNIFICANT AMENDMENTS TO THE ULTRA VIRES DOCTRINE AS A
RESULT OF THE HARMONISATION OF BRITISH COMPANY LAW WITH EC (NOW EU) LAW. SECTION 35
MODIFIED THE DOCTRINE BY PROVIDING THAT A PERSON DEALING IN GOOD FAITH WITH A COMPANY NEED
NO LONGER INQUIRE INTO THE LIMITATIONS ON THE CAPACITY OF THE COMPANY OR POWERS OF THE
DIRECTORS. THIS HAS THE EFFECT OF PREVENTING THE COMPANY FROM AVOIDING ITS RESPONSIBILITY
UNDER AN ULTRA VIRES CONTRACT, BUT LEFT THE BONA FIDE THIRD PARTY THE OPTION OF EITHER
ENFORCING SUCH A CONTRACT AGAINST THE COMPANY OR OF BACKING OUT ON THE GROUNDS THAT THE
CONTRACT WAS ULTRA VIRES.
21
IN 1989, FURTHER LEGISLATION REACHED THE STATUTE BOOK ON THIS PARTICULAR ISSUE. SECTION 108,
COMPANIES ACT 1989, SUBSTITUTED NEW SECTIONS 35, 35A AND 35B INTO THE 1985 ACT. THESE NEW
PROVISIONS, TO ALL INTENTS AND PURPOSES, ABOLISHED THE ULTRA VIRES RULE ALTOGETHER, IN SO FAR AS
IT AFFECTS COMPANIES FORMED OR REGISTERED UNDER THE 1985 ACT. THE PROVISIONS ARE AS FOLLOWS.
(A)BY SECTION 35, "THE VALIDITY OF AN ACT DONE BY A COMPANY SHALL NOT BE CALLED INTO QUESTION ON
THE GROUND OF LACK OF CAPACITY BY REASON OF ANYTHING IN THE COMPANY'S MEMORANDUM".
A SHAREHOLDER MAY, HOWEVER,STILL OBTAIN AN INJUNCTION TO RESTRAIN AN INTENDED ULTRA VIRESACT,
PROVIDING HE/SHE DOES SO BEFORE ANY BINDING LEGAL OBLIGATION HAS BEEN ENTERED INTO BY THE
COMPANY. FURTHERMORE, DIRECTORS WILL REMAIN LIABLE FOR ANY ACTS WHICH ARE ULTRA VIRESTHE
MEMORANDUM, UNLESS THOSE ACTS ARE RATIFIED BY A SPECIAL RESOLUTION AND A FURTHER SPECIAL
RESOLUTION IS PASSED TO RELIEVE THEM OF LIABILITY.
(B)SECTION 35A BRINGS WITHIN THE SECTION THE POWER OF DIRECTORS TO BIND THE COMPANY TO ACTS
WITHIN THE POWER OF THE COMPANY.
NEITHER SECTION 35 NOR SECTION 35A APPLIES TO CHARITIES.
(C)SECTION 35B RELIEVES A PARTY TO A TRANSACTION WITH A COMPANY FROM THE NEED TO INQUIRE INTO
THE TERMS OF A COMPANY'S MEMORANDUM OR ANY LIMITATION IN THE DIRECTORS' POWERS.
SIMILAR PROVISIONS ARE ENACTED FOR COMPANIES NOT FORMED UNDER THE ACT, BUT WHICH ARE
REGISTERED UNDER IT, AND FOR UNREGISTERED COMPANIES.
SECTION 110 OF THE 1989 ACT ALSO SUBSTITUTES A NEW SECTION 3A AND SECTION 4 INTO THE 1985 ACT.
THESE PROVISIONS ENABLE A COMPANY TO STATETHAT ITS OBJECT IS TO "CARRY ON BUSINESS AS A GENERAL
COMMERCIAL COMPANY", WHICH IS EXPLAINED AS ENABLING THE COMPANY TO "CARRY ON ANY TRADE OR
BUSINESS WHATSOEVER ... (AND TO DO) ... ALL SUCH THINGS AS ARE CONDUCIVE TO CARRYING ON ANY
TRADE OR BUSINESS BY IT". THE SECTIONS ALSO ENABLE THE COMPANY TO ALTER ITS OBJECTS FOR ANY
PURPOSE WHATSOEVER. SEE NOW: S21(1) COMPANIES ACT 2006. FORMERLY THE OPPORTUNITIES FOR
SUCH ALTERATIONS WERE RESTRICTED TO A FEW SPECIFIC SITUATIONS.
FOR COMPANIES WHICH CHOOSE TO ADOPT SUCH A BROADLY WORDED OBJECTS CLAUSE AND TO AVAIL
THEMSELVES OF THE MODIFIED PROCEDURES, THE ULTRA VIRESDOCTRINE WOULD APPEAR TO BE DEAD.
22
ARTICLES OF ASSOCIATION
THE ARTICLES OF ASSOCIATION ARE THE RULES FOR THE INTERNAL MANAGEMENT OF THE
COMPANY.
THE FIRST SCHEDULE OF THE COMPANIES ACT IS KNOWN AS "TABLE A" AND IT CONSTITUTES A
MODEL SET OF ARTICLES WHICH ARE APPLICABLE TO EVERY COMPANY, UNLESS THE COMPANY'S
OWN ARTICLES EXPRESSLY EXCLUDE OR MODIFY THE PROVISIONS OF TABLE A. UNDER THE 2006 ACT
THERE ARE SEPARATE SETS OF MODEL ARTICLES FOR PRIVATE COMPANIES AND PLCS.
MATTERS REGULATED BY THE SO-
CALLEDMODEL SET OF ARTICLES INCLUDE:
SHARE CAPITAL
ALTERATION OF SHARE CAPITAL
TRANSFER OF SHARES PROCEEDINGS OF GENERAL
MEETINGS
VOTES OF MEMBERS
POWERS OF DIRECTORS
APPOINTMENT OF DIRECTORS
REMOVAL OF DIRECTORS
DIVIDENDS
ACCOUNTS
WINDING-UP
23
IN 1989, FURTHER LEGISLATION REACHED THE STATUTE BOOK ON THIS PARTICULARISSUE. SECTION 108,
COMPANIES ACT 1989,SUBSTITUTED NEW SECTIONS 35, 35A AND 35B INTO THE 1985 ACT. THESE NEW
PROVISIONS, TO ALL INTENTS AND PURPOSES, ABOLISHED THE ULTRA VIRESRULE ALTOGETHER, IN SO FAR AS
IT AFFECTS COMPANIES FORMED OR REGISTERED UNDER THE 1985 ACT. THE PROVISIONS ARE AS FOLLOWS.
(A)BY SECTION 35, "THE VALIDITY OF AN ACT DONE BY A COMPANY SHALL NOT BE CALLED INTO QUESTION ON
THE GROUND OF LACK OF CAPACITY BY REASON OF ANYTHING IN THE COMPANY'S MEMORANDUM".
A SHAREHOLDER MAY, HOWEVER,STILL OBTAIN AN INJUNCTION TO RESTRAIN AN INTENDED ULTRA VIRESACT,
PROVIDING HE/SHE DOES SO BEFORE ANY BINDING LEGAL OBLIGATION HAS BEEN ENTERED INTO BY THE
COMPANY. FURTHERMORE, DIRECTORS WILL REMAIN LIABLE FOR ANY ACTS WHICH ARE ULTRA VIRESTHE
MEMORANDUM, UNLESS THOSE ACTS ARE RATIFIED BY A SPECIAL RESOLUTION AND A FURTHER SPECIAL
RESOLUTION IS PASSED TO RELIEVE THEM OF LIABILITY.
(B)SECTION 35A BRINGS WITHIN THE SECTION THE POWER OF DIRECTORS TO BIND THE COMPANY TO ACTS
WITHIN THE POWER OF THE COMPANY.
NEITHER SECTION 35 NOR SECTION 35A APPLIES TO CHARITIES.
(C)SECTION 35B RELIEVES A PARTY TO A TRANSACTION WITH A COMPANY FROM THE NEED TO INQUIRE INTO
THE TERMS OF A COMPANY'S MEMORANDUM OR ANY LIMITATION IN THE DIRECTORS' POWERS.
SIMILAR PROVISIONS ARE ENACTED FOR COMPANIES NOT FORMED UNDER THE ACT, BUT WHICH ARE
REGISTERED UNDER IT, AND FOR UNREGISTERED COMPANIES.
SECTION 110 OF THE 1989 ACT ALSO SUBSTITUTES A NEW SECTION 3A AND SECTION 4 INTO THE 1985 ACT.
THESE PROVISIONS ENABLE A COMPANY TO STATETHAT ITS OBJECT IS TO "CARRY ON BUSINESS AS A GENERAL
COMMERCIAL COMPANY", WHICH IS EXPLAINED AS ENABLING THE COMPANY TO "CARRY ON ANY TRADE OR
BUSINESS WHATSOEVER ... (AND TO DO) ... ALL SUCH THINGS AS ARE CONDUCIVE TO CARRYING ON ANY
TRADE OR BUSINESS BY IT". THE SECTIONS ALSO ENABLE THE COMPANY TO ALTER ITS OBJECTS FOR ANY
PURPOSE WHATSOEVER. SEE NOW: S21(1) COMPANIES ACT 2006. FORMERLY THE OPPORTUNITIES FOR
SUCH ALTERATIONS WERE RESTRICTED TO A FEW SPECIFIC SITUATIONS.
FOR COMPANIES WHICH CHOOSE TO ADOPT SUCH A BROADLY WORDED OBJECTS CLAUSE AND TO AVAIL
THEMSELVES OF THE MODIFIED PROCEDURES, THE ULTRA VIRESDOCTRINE WOULD APPEAR TO BE DEAD.
ARTICLES OF ASSOCIATION
THE ARTICLES OF ASSOCIATION ARE THE RULES FOR THE INTERNAL MANAGEMENT OF THE COMPANY.
24
CAN THE ARTICLES OF ASSOCIATION BE AMENDED FOLLOWING INCORPORATION?
YES, BY FOLLOWING THE PROCEDURE LAID DOWN IN SECTION 21(1) OF THE COMPANIES ACT 2006,
WHICH STATES THAT “A COMPANY MAY AMEND ITS ARTICLES BY SPECIAL RESOLUTION”. CITCO
BANKING CORP V. PUSSER’S LTD (2007)
THE STATUTORY POWER OF A COMPANY TO AMEND ITS ARTICLES MUST BE EXERCISED SUBJECT TO
THE COMMON LAW REQUIREMENT THAT THE SHAREHOLDERS WHO VOTE IN FAVOUR OF THE
RESOLUTION MUST EXERCISE THEIR POWER TO VOTE “BONA FIDES FOR THE BENEFIT OF THE
COMPANY AS A WHOLE”:ALLEN V. GOLD REEFS OF WEST AFRICA LTD (1900).
FURTHERMORE, THE ARTICLES CANNOT BE ALTERED IN SUCH A WAY AS TO CONFLICT WITH THE
MEMORANDUM (AS IT IS THE SUPERIOR CONSTITUTIONAL DOCUMENT) OR ANY PROVISION OF THE
COMPANIES ACTS.
IN PARTICULAR, NO MEMBER CAN BE BOUND BY ANY ALTERATION TO SUBSCRIBE FOR MORE SHARES
OR INCREASE THEIR LIABILITY TO CONTRIBUTE TO THE CAPITAL OF COMPANY IN ANY WAY: SECTION
25 OF THE COMPANIES ACT 2006. ANY ALTERATION TO THE ARTICLES, AFTER THE DATE ON WHICH
THE MEMBER BECAME A MEMBER, WHICH REQUIRES THE MEMBER TO TAKE OR SUBSCRIBE FOR
MORE SHARES THAN THE MEMBER HOLDS, OR WHICH INCREASES A MEMBER'S LIABILITY TO PAY
MONEY TO THE COMPANY, WILL NOT BE ENFORCEABLE AGAINST THE MEMBER IN A COURT OF
LAW,UNLESS THEY HAVE AGREED IN WRITING TO SUBSCRIBE FOR MORE SHARES ETC.
WHAT IS THE EXACT MEANING OF THE PHRASE “BONA FIDE FOR THE BENEFIT OF THE INTEREST OF THE
COMPANY AS A WHOLE”?
THE DETERMINATION OF WHETHER OR NOT AN ALTERATION IS “BONA FIDE FOR THE BENEFIT OF THE
INTEREST OF THE COMPANY AS A WHOLE”, INVOLVES A SUBJECTIVE ELEMENT, IN THAT THOSE
DECIDING ON THE ALTERATION MUST GENUINELY BELIEVE THAT THEY ARE ACTING IN THE INTERESTS
OF THEIR COMPANY AS A WHOLE.
HOWEVER, THERE IS ALSO AN OBJECTIVE ELEMENT. IN GREENHALGH V. ARDERNE CINEMAS LTD
(1951), IT WAS STATED BY EVERSHED MR THAT ANY ALTERATION HAD TO BE IN THE INTEREST OF THE
“INDIVIDUAL HYPOTHETICAL MEMBER”.
MOREOVER, IN BROWN V. BRITISH ABRASIVE WHEEL CO. (1919), AN ALTERATION TO THE ARTICLES
OF THE COMPANYWAS PROPOSED TO GIVE THE MAJORITY SHAREHOLDERS (98%) THE RIGHT TO
25
PURCHASE THE SHARES OF THE MINORITY (2%). IT WAS HELD THAT THE ALTERATION WAS INVALID
AS IT WOULD BENEFIT THE MAJORITY SHAREHOLDERS, RATHER THAN THE COMPANY AS A WHOLE
AND WAS, IN ANY CASE, TOO WIDE A POWER.
CONVERSELY, IN SIDEBOTTOM V. KERSHAW LEESE & CO. (1920), AN ALTERATION TO THE ARTICLES GAVE THE
DIRECTORS THE POWER TO REQUIRE ANY SHAREHOLDER WHO ENTERED INTO COMPETITION WITH THE
COMPANY, TO TRANSFER THE SHARES TO NOMINEES OF THE DIRECTORS AT A FAIR PRICE. IT WAS HELD THAT,
UNDER THOSE CIRCUMSTANCES, THE ALTERATION WAS VALID AS IT WOULD BENEFIT THE COMPANY AS A
WHOLE. MOREOVER, THE COURTS HAVE HELD THAT IT MAY BE IN THE INTERESTS OF THE COMPANY TO
PURCHASE, COMPULSORILY, A MEMBER'S SHARES OR TO ALTER THE WHOLE STRUCTURE OF THE COMPANY.
OF COURSE, IF IT CAN BE SHOWN THAT THE MAJORITY ARE ACTING DISHONESTLY OR OPPRESSIVELY IN
MAKING SUCH AN ALTERATION, THEN THE RESOLUTION WILL BE DECLARED INVALID: CLEMENS V. CLEMENS
BROS LTD (1976).
IS A COMPANY MEMBER ENTITLED TO OBJECT TO A PROPOSED AMENDMENT OF THE ARTICLES OF
ASSOCIATION?
YES, ANY MEMBER, IRRESPECTIVE OF THE SIZE OF HIS SHAREHOLDING, HAS TWO POSSIBLE COURSES OF
ACTION OPEN TO HIM.
(A)UNDER COMMON LAW, HE CAN SEEK TO GET THE AMENDMENT SET ASIDE ON THE GROUNDS THAT IT IS
NOT “BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A WHOLE”.
THE PHRASE “BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A WHOLE” ORIGINATES FROM THE
WORDS OF LINDLEY MR IN THE CASE OF ALLEN V. GOLD REEFS OF WEST AFRICA (1900):
"…THE POWER CONFERRED MUST, LIKE ALL OTHER POWERS, BE EXERCISED SUBJECT TO THOSE
GENERAL PRINCIPLES OF LAW AND EQUITY WHICH ARE APPLICABLE TO ALL POWERS CONFERRED ON
MAJORITIES AND ENABLING THEM TO BIND MINORITIES. IT MUST BE EXERCISED, NOT ONLY IN THE
MANNER REQUIRED BY LAW, BUT ALSO BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A
WHOLE."
IT SEEMS, THEREFORE, THAT THE TEST WHICH SHOULD BE APPLIED IS WHETHER THE PROPOSAL IS, IN
THE HONEST OPINION OF THOSE VOTING FOR IT, "BONA FIDE FOR THE BENEFIT OF THE COMPANY AS
A WHOLE" (I.E. FOR THE BENEFIT OF ALL THE COMPANY'S MEMBERS).
(B)UNDER SECTION 994(1) IN THE COMPANIES ACT 2006, HE/SHE CAN BRING A PETITION ON THE GROUNDS
THAT THE PROPOSED AMENDMENT OF THE ARTICLES IS UNFAIRLY PREJUDICIAL TO HIM/HER IN HIS/HER
CAPACITY AS A COMPANY MEMBER.
THE USUAL REMEDY AWARDED BY THE COURTS IN SUCH CASES IS THE PURCHASE OF THE MEMBER’S
SHARES UNDER SECTION 996(2)(E) IN THE COMPANIES ACT 2006.
26
SO WHAT SORT OF CONDUCT BY A COMPANY IS LIKELY TO BE REGARDED BY THE COURT AS UNFAIRLY
PREJUDICIAL?
CASE LAW HAS ESTABLISHED A NUMBER OF SITUATIONS WHICH, PRIMA FACIE,AMOUNT TO UNFAIRLY
PREJUDICIAL CONDUCT AND IT SHOULD BE EMPHASISED THAT CONDUCT MAY BE PERFECTLY LAWFUL BUT
STILL UNFAIRLY PREJUDICIAL. THUS THE FOLLOWING TYPES OF CONDUCT HAVEBEEN DEEMED TO BE
UNFAIRLY PREJUDICIAL BY THE ENGLISH COURTS.
EXCLUSION AND REMOVAL FROM THE BOARDWHERE THE COMPANY WAS ONE IN WHICH THE DIRECTOR
HAD A LEGITIMATE EXPECTATION OF BEING INVOLVED IN MANAGEMENT, I.E. A QUASI-PARTNERSHIP
COMPANY. IN RE BIRD PRECISION BELLOWS LTD (1986), A MINORITY SHAREHOLDER WITH 26% OF THE
SHARES SUSPECTED THAT THE MANAGING DIRECTOR OF “THIS QUASI-PARTNERSHIP” COMPANY WAS
CONCEALING BRIBES THAT HE HAD RECEIVED IN ORDER TO SECURE CONTRACTS. WHEN THE DEPARTMENT OF
TRADE & INDUSTRY REFUSED TO INVESTIGATE, THE MINORITY SHAREHOLDER WAS REMOVED FROM THE
BOARD. THE MINORITY SHAREHOLDER CLAIMED THAT THIS AMOUNTED TO UNFAIRLY PREJUDICIAL
CONDUCT. HIS CLAIM WAS UPHELD.
A POLICY OF MAKING LOW DIVIDEND PAYMENTS. IN RE SAM WELLER&SONS LTD (1990),THE
PETITIONERS, WHO BETWEEN THEM HELD 42.5% OF THE SHARES IN THEIR FAMILY BUSINESS, COMPLAINED
THAT THE COMPANY HAD NOT INCREASED ITS DIVIDEND FOR 37 YEARS, DESPITE ITS PROFITABILITY. IN 1985
ITS NET PROFIT HAD BEEN £36,000, YET ONLY £2,520 WAS PAID OUT IN DIVIDENDS. THE COMPANY WAS
CONTROLLED BY THE PETITIONERS' UNCLE, SAM WELLER, WHO, ALONG WITH HIS SONS, CONTINUED TO
RECEIVE DIRECTORS' FEES AND REMUNERATION. PETER GIBSON J. COMMENTED ON THE PETITIONERS'
POSITION: "AS THEIR ONLY INCOME FROM THE COMPANY IS BY WAY OF DIVIDEND, THEIR INTERESTS MAY
NOT ONLY BE PREJUDICED BY THE POLICY OF LOW DIVIDEND PAYMENTS, BUT UNFAIRLY PREJUDICED."
27
RESTRICTIONS ON A COMPANY'S POWER TO AMEND ITS ARTICLES OF ASSOCIATION
(A)ANY ALTERATION OF THE ARTICLES UST BE “BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A
WHOLE”.
THAT IS, ANY AMENDMENTS WHICH CANNOT BE SO REGARDED WILL BE DEEMED INVALID, IRRESPECTIVE OF
WHETHER A SPECIAL RESOLUTION HAS BEEN PASSED IN FAVOUR OF THE ALTERATION CONCERNED IN
GENERAL MEETING. AS INDICATED ABOVE, THE EXACT MEANING OF THE PHRASE “BONA FIDE FOR THE
BENEFIT OF THE COMPANY AS A WHOLE” IS BEST UNDERSTOOD BY MAKING REFERENCE TO DECIDED CASE
LAW IN THIS AREA.
IN SIDEBOTTOM V. KERSHAW, LEESE & CO. (1920),AN ALTERATION OF THE ARTICLES, ENABLING THE
DIRECTORS WHO WERE ALSO THE MAJORITY SHAREHOLDERS, TO REQUEST THE COMPULSORY PURCHASE OF
THE SHARES, AT A FAIR VALUE, OF ANY MEMBER COMPETING WITH THE COMPANY'S BUSINESS, WAS
APPROVED BY THE COURT. THE COURT FOUND THIS TO BE A VALID ALTERATION OF THE ARTICLES BECAUSE,
IN THE WORDS OF LORD STERNDALE MR: "IT IS FOR THE BENEFIT OF THE COMPANY THAT THEY SHOULD NOT
BE OBLIGED TO HAVE AMONGST THEM AS MEMBERS, PERSONS WHO ARE COMPETING WITH THEM IN
BUSINESS AND WHO MAY GET KNOWLEDGE FROM THEIR MEMBERSHIP WHICH WOULD ENABLE THEM TO
COMPETE BETTER."
IN BROWN V. BRITISH ABRASIVE WHEEL (1919),THE COMPANY, BRITISH ABRASIVE WHEEL, NEEDED TO
RAISE ADDITIONAL CAPITAL. NINETY EIGHT PER CENT OF THE SHAREHOLDERS WERE WILLING TO CONTRIBUTE
THE REQUIRED CAPITAL, BUT ONLY ON THE CONDITION THAT THEY COULD BUY OUT THE 2% MINORITY
SHAREHOLDING IN THE COMPANY. HAVING FAILED TO AFFECT THIS BY AGREEMENT, THE 98% MAJORITY
THEN PROPOSED TO ALTER THE COMPANY'S ARTICLES OF ASSOCIATION IN ORDER TO GIVE THEM THE POWER
TOCOMPULSORILY PURCHASE THE SHARES OF THE 2% MINORITY. THE MINORITY SHAREHOLDERS OBJECTED
TO THIS ALTERATION AND BROUGHT AN ACTION AGAINST THE COMPANY ON THE GROUND THAT THE
ALTERATION WAS NOT “BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A WHOLE”. THE COURT AGREED
WITH THE MINORITY SHAREHOLDERS, IRRESPECTIVE OF THE FACT THAT THE MAJORITY SHAREHOLDERS WERE
PREPARED TO INSERT ANY PROVISION AS TO PRICE, WHICH THE COURT DEEMED FAIR.
THE RATIONALE FOR THE COURT'S DECISION TO DISALLOW THE ALTERATION OF THAT ARTICLES WAS THAT
THE PROPOSED ALTERATION COULD NOT BE TRULY REGARDED AS 'BONA FIDE FOR THE BENEFIT OF THE
COMPANY AS A WHOLE' BUT RATHER FOR THE BENEFIT OF THE MAJORITY SHAREHOLDERS AND WAS, IN ANY
CASE, TOO WIDE A POWER. MOREOVER, THERE WAS NO DIRECT LINK BETWEEN THE COMPANY'S NEED TO
RAISE ADDITIONAL CAPITAL AND THE ALTERATION OF THE ARTICLES. ALTHOUGH THE WHOLE SCHEME OF
EVENTS HAD BEEN GEARED TOWARDS THE PROVISION OF EXTRA CAPITAL, FOLLOWING THE REMOVAL OF THE
OBJECTING MINORITY SHAREHOLDERS, IT WOULD, IN FACT, HAVE BEEN POSSIBLE AFTER THE MINORITY HAD
BEEN EXPELLED FROM THE COMPANY, FOR THE MAJORITY SHAREHOLDERS TO THEN REFUSE TO PROVIDE THE
ADDITIONAL CAPITAL.
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(B)THE AMENDMENT MUST NOT CONTRAVENE COMPANIES LEGISLATION
THE STATUTORY RESTRICTIONS ON A COMPANY'S POWER TO ALTER ITS ARTICLES ARE THE SAME AS THE
RESTRICTIONS IN RELATION TO ITS POWER ALTER ITS MEMORANDUM.
A MEMBER CANNOT BE REQUIRED TO TAKE MORE SHARES.
SECTION 25 OF THE COMPANIES ACT 2006 PROVIDES THAT THE ARTICLES CANNOT BE ALTERED SO AS
TOREQUIRE A MEMBER TO TAKE UP MORE SHARES, OR IN ANY WAY TO INCREASE HIS LIABILITY TO
CONTRIBUTE TO THE SHARE CAPITAL OR OTHERWISE PAY MONEY TO THE COMPANY, UNLESS HE CONSENTS IN
WRITING.
THE RIGHT OF A MEMBER TO OBJECT TO A VARIATION OF HIS CLASS RIGHTS CANNOT BE TAKEN AWAY.
UNDER SECTION 633 OF THE COMPANIES ACT 2006 SHAREHOLDERS HAVE A STATUTORY RIGHT TO OBJECT TO
A VARIATION OF THEIR CLASS RIGHTS. THE OBJECT OF THIS SECTION IS TO PROTECT SHAREHOLDERS FROM
BEING PREJUDICED BY THE VOTING OF OTHER SHAREHOLDERS WHO HOLD SHARES OF ANOTHER CLASS IN
ADDITION TO THOSE OF THE CLASS AFFECTED BY THE VARIATION. IN ACCORDANCE WITH THE ACT, 15% OF
THE CLASS NOT VOTING FOR THE VARIATION MAY APPLY TO THE COURT TO HAVE IT CANCELLED WITHIN 21
DAYS OF THE CONSENT OF THE CLASS BEING GIVEN, WHETHER IN WRITING OR BY RESOLUTION. ONCE SUCH
AN APPLICATION HAS BEEN MADE, USUALLY BY ONE OR MORE DISSENTIENTS ON BEHALF OF THE OTHERS, THE
VARIATION WILL NOT TAKE EFFECT UNLESS AND UNTIL THE COURT CONFIRMS IT. FOR EXAMPLE, IF A
VARIATION REDUCES THE DIVIDEND ON PREFERENCE SHARES FROM 7% TO 6% PER ANNUM, AND 80% OF THE
PREFERENCE SHAREHOLDERS ARE ALSO ORDINARY SHAREHOLDERS, THE REQUISITE CONSENT OF THE
PREFERENCE SHAREHOLDERS IS LIKELY TO BE OBTAINED, SINCE THE VARIATION WILL LEAVE MORE PROFITS
FOR A DIVIDEND ON THE ORDINARY SHARES –THIS WOULD BE UNFAIR TO THE 20% OF THE PREFERENCE
SHAREHOLDERS WHO ARE NOT ORDINARY SHAREHOLDERS AND THEY COULD PETITION TO HAVE THE
VARIATION CANCELLED.
THE RIGHT OF A MEMBER TO BRING A PETITION ON THE GROUNDS OF UNFAIR PREJUDICE CANNOT BE
TAKEN AWAY:
SECTION 994, COMPANIES ACT 2006. A MEMBER MIGHT BRING A PETITION ON THE GROUNDS OF UNFAIR
PREJUDICE IN THE FOLLOWING CASES.
(I)WHERE THE MAJORITY SHAREHOLDER AND DIRECTOR IS USING THE ASSETS OF THE COMPANY FOR HIS
OWN PERSONAL BENEFIT. IN RE ELGINDATA (NO.1) (1991), THE MAJORITY SHAREHOLDER AND DIRECTOR
USED THE ASSETS OF THE COMPANY FOR HIS OWN PERSONAL BENEFIT. THE PETITIONER COMPLAINED THAT
THIS WAS UNFAIRLY PREJUDICIAL TO HIM AND THE COURT, SUBSEQUENTLY, ORDERED THE RESPONDENTS TO
PURCHASE THE SHARES HELD BY THE PETITIONER.
(II)WHERE THE MAJORITY SHAREHOLDER IS, IN EFFECT, TRANSFERRING SOURCES OF PROFIT INTO ANOTHER
COMPANY OWNED BY THEM. IN RE LONDON SCHOOL OF ELECTRONICS LTD (1986), A PETITION WAS
PRESENTED BY A MINORITY SHAREHOLDER WHERE THE MAJORITY SHAREHOLDER WAS, IN EFFECT,
29
TRANSFERRING SOURCES OF PROFIT INTO ANOTHER COMPANY OWNED BY HIM. THE COURT HELD THAT THIS
WAS UNFAIRLY PREJUDICIAL CONDUCT AND MADE AN ORDER FOR THE MAJORITY SHAREHOLDER
TOPURCHASE THE PETITIONER'S SHARES.
(C)THE PROPOSED ALTERATION OF THE ARTICLES MUST NOT CONFLICT WITH A COURT ORDER
FOR EXAMPLE, IN ACCORDANCE WITH SECTION 996 OF THE COMPANIES ACT 2006, FOLLOWING A PETITION
ON THE GROUNDS OF UNFAIR PREJUDICE, A COURT MAY ORDER THAT A COMPANY DOES NOT MAKE ANY, OR
ANY SPECIFIED, ALTERATIONS TO ITS ARTICLES WITHOUT OBTAINING THE LEAVE OF THE COURT.
NAME OF A COMPANY
REGISTRATION
THE MEMORANDUM MUST STATE THE NAME OF THE COMPANY.
THE GENERAL RULE IS THAT ANY NAME MAY BE SELECTED.
HOWEVER, A COMPANY CANNOT BE REGISTERED BY A NAME WHICH, IN THE OPINION OF THE
DEPARTMENT OF TRADE, IS UNDESIRABLE.
ALSO, THE LAST WORD OF THE NAME OF A LIMITED COMPANY MUST BE THE WORD "LIMITED" OR
"PLC", AS APPROPRIATE, UNLESS PERMISSION IS GIVENTO DISPENSE WITH THE WORD "LIMITED". IN
SELECTING A NAME, IT IS NOT NECESSARY TO USE THE WORD "COMPANY" AND THE MODERN
TENDENCY IS TO OMIT IT.
IN GENERAL, A NAME WILL NOT BE ALLOWED IF IT IS MISLEADING, E.G. IF THE NAME OF A COMPANY
WITH SMALL RESOURCES SUGGESTS THAT IT IS TRADING ON A GREAT SCALE.
A NAME WILL BE REFUSED IF IT IS TOO LIKE THE NAME OF AN EXISTING COMPANY. ONLY IN VERY
EXCEPTIONAL CASES AND FOR VALID REASONS WILL NAMES BE ALLOWED WHICH INCLUDE
"BRITISH", "ROYAL", "IMPERIAL", "NATIONAL", "INTERNATIONAL" "COMMONWEALTH", "CO-
OPERATIVE", "BANK", "TRUST", "CROWN", ETC.
CHANGE OF NAME
A COMPANY MAY CHANGE ITS NAME BY SPECIAL RESOLUTION, WITH THE APPROVAL OF THE DEPARTMENT
OF TRADE. A SMALL FEE IS PAYABLE TO THE REGISTRAR FOR FILING THE NEW NAME AND THE ISSUE OF A
NEW CERTIFICATE OF INCORPORATION. THE CHANGE DOES NOT AFFECT ANY RIGHTS OR OBLIGATIONS.
PART 41 OF THE COMPANIES ACT 2006
THIS ACT APPLIES TO COMPANIES, PARTNERSHIPS, OR INDIVIDUALS WHO CARRY ON BUSINESS UNDER A
NAME OTHER THANTHE CORPORATE NAME OF THE COMPANY, THE FORENAMES AND SURNAMES OF THE
PARTNERS, OR INDIVIDUAL.
BUSINESSES CONTROLLED BY THE ACT MUST STATE ON ALL LETTERS, WRITTEN ORDERS FOR GOODS AND
SERVICES, INVOICES AND RECEIPTS, AND WRITTEN DEMANDS FOR PAYMENT OF DEBTS:
IN THE CASE OF COMPANIES, THEIR CORPORATE NAME
INTHE CASE OF A PARTNERSHIP, THE NAME OF EACH PARTNER
30
IN THE CASE OF INDIVIDUALS, THEIR OWN NAMES AND
IN EACH CASE, AN ADDRESS WITHIN GREAT BRITAIN FOR THE SERVICE OF LEGAL AND STATUTORY
DOCUMENTS.THEY MUST ALSO DISPLAY ON ANY PREMISES, TO WHICH CUSTOMERS OR SUPPLIERS HAVE
ACCESS, A PROMINENT NOTICE CONTAINING SUCH NAMES AND ADDRESSES.
CAPITAL OF A COMPANY
TYPES OF CAPITAL
THE TERM "CAPITAL" MAY BE USED IN VARIOUS SENSES. IT MAY MEAN THE NOMINAL OR
AUTHORISED SHARE CAPITAL; THE ISSUED SHARE CAPITAL; THE PAID-UP SHARE CAPITAL OR THE
RESERVE SHARE CAPITAL OF THE COMPANY.
THE CAPITAL IS ISSUED IN THE FORM OF DIFFERENT CLASSES OF SHARES OR STOCK, WHICH ARE
SUBSCRIBED BY THE MEMBERS. STOCK HAS BEEN DEFINED AS "SIMPLY A SET OF SHARES PUT
TOGETHER IN A BUNDLE": MORRICE V. AYLMER (1875).
PAID-UP SHARES MAY BE CONVERTED INTO STOCK. FOR EXAMPLE, A COMPANY WHICH HAS 10,000 PAID-UP
£1 SHARES MAY CONVERT THEM INTO £10,000 WORTH OF STOCK. IF SHARES ARE CONVERTED INTO STOCK,
THE VALUE OF THE HOLDER'S STAKE IN THE COMPANY REMAINS THE SAME, ALTHOUGH IT IS EXPRESSED IN
DIFFERENT TERMS, E.G. A PERSON WHO FORMERLY HELD 100 SHARES OF A NOMINAL AMOUNT OF £1 EACH
WILL NOW HOLD A NOMINAL AMOUNT OF £100 WORTH OF STOCK.
THE DIFFERENT TYPES OF SHARE CAPITAL NOTED ABOVE ARE, IN MOREDETAIL, AS FOLLOWS.
(A)NOMINAL OR AUTHORISED CAPITAL
THE MEMORANDUM OF ASSOCIATION SETS OUT THE MAXIMUM AMOUNT OF CAPITAL WHICH THE COMPANY
IS AUTHORISED TO ISSUE, ALTHOUGH A COMPANY NEED NOT ISSUE CAPITAL TO THE FULL AMOUNT
AUTHORISED UNLESS, OR UNTIL, IT WISHES TO DO SO. THE COMPANY'S NOMINAL OR AUTHORISED CAPITAL
DEPENDS ON ITS BUSINESS REQUIREMENTS.
(B) ISSUED CAPITAL
THIS IS THAT PART OF THE COMPANY'S NOMINAL CAPITAL WHICH HAS BEEN ISSUED TO THE SHAREHOLDERS.
(C) PAID-UP CAPITAL
THIS IS THE PROPORTION OF THE ISSUED CAPITAL WHICH HAS BEEN PAID UP BY THE SHAREHOLDERS. THE
COMPANY MAY, FOR EXAMPLE, HAVE A NOMINAL CAPITAL OF £500,000 DIVIDED INTO 500,000 SHARES OF A
NOMINAL AMOUNT OF £1 EACH, OF WHICH £400,000 IS ISSUED (I.E. 400,000 OF THE SHARES HAVE BEEN
ISSUED) AND ONLY £100,000 IS PAID UP BECAUSE THE COMPANY HAS, SO FAR, REQUIRED ONLY 25P TO BE
PAID UP ON EACH SHARE.
(D)UNCALLED CAPITAL
UNCALLED CAPITAL IS THE BALANCE OF THE ISSUED CAPITAL AND IT CAN BE CALLED UP AT ANY TIME BY THE
COMPANY FROM THE SHAREHOLDERS.
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(E)RESERVE CAPITAL
THIS IS THAT PART OF THE UNCALLED CAPITAL WHICH A COMPANY HAS, BY SPECIAL RESOLUTION,
DETERMINED SHALL NOT BE CALLED UP, EXCEPT IN THE EVENT AND FOR THE PURPOSES OF THE COMPANY
BEING WOUND UP.
SHARES
A SHARE MAY BE OF ANY CHOSEN DENOMINATION, E.G. £5, £1, 50P.
THIS IS KNOWN AS THE NOMINAL VALUE AND SHOULD NOT BE CONFUSED WITH THE ACTUAL PRICE
PAID.
A SHARE ORIGINALLY ISSUED FOR £1 MAY INCREASE IN VALUE, SO THAT THE MARKET PRICE
BECOMES £3 OR MORE, OR IT MAY DECREASE IN VALUE, SO THAT THE MARKET PRICE IS ONLY A FEW
PENCE.
THE NOMINAL VALUE ALWAYS REMAINS THE SAME AND HAS LITTLE SIGNIFICANCE, WHEREAS THE
MARKET PRICE DEPENDS ON WHETHER INVESTORS CONSIDER THAT THE FUTURE PROSPECTS OF THE
COMPANY ARE GOOD OR BAD.
WHEN SHARES ARE ISSUED, THEY NEED NOT NECESSARILY BE PAID FOR IN FULL. SOMETIMES THE
COMPANY DOES NOT NEED TO USE THE WHOLE AMOUNT REPRESENTED BY THE SHARE CAPITAL AT
THE TIME OF ISSUING THE SHARES AND CONSEQUENTLY, £1 SHARES MAY BE PAID IN PART (E.G. 50P),
WITH THE BALANCE REMAINING PAYABLE ON "CALL" FROM THE COMPANY WHEN IT REQUIRES THE
FUNDS.
THE LIABILITY OF THE SHAREHOLDER IS LIMITED TO PAYING THE MARKET OR ISSUE PRICE (OR ANY
UNPAID AMOUNT OF "CALL") OF HIS/HER SHARES. HE/SHE CANNOT BE REQUIRED TO CONTRIBUTE
FURTHER TO THE COMPANY'S DEBTS, EVEN THOUGH IT IS HOPELESSLY INSOLVENT.
THIS IS THE MEANING OF THE TERM "LIMITED LIABILITY", WHICH IS A BASIC PRINCIPLE OF COMPANY
LAW.
IN OTHER WORDS, ONCE THE SHAREHOLDER HAS PURCHASED FULLY PAID SHARES, HE/SHE IS UNDER
NO LIABILITY WHATSOEVER FOR THE DEBTS OF THE COMPANY.
IF HE/SHE HAS PURCHASED PARTLY PAID SHARES, HIS/HER LIABILITY IS LIMITED TO THE UNPAID
PORTION OF THE NOMINAL VALUE; IF THE SHARES ARE NOMINALLY £1 EACH AND 75P WAS PAID ON
ISSUE, HE/SHE IS LIABLE TO PAY NO MORE THAN 25P PER SHARE WHEN REQUESTED TO DO SO BY THE
COMPANY.
NOTE THAT WE ARE TALKING ABOUT THE NOMINAL VALUE OF PARTLY PAID SHARES; THE MARKET
PRICE VARIES ACCORDING TO DEMAND AND SUPPLY AND THE SHAREHOLDER MAY HAVE PAID 60P,
OR EVEN £1.25, EACH TO PURCHASE THE SHARES, BUT THIS DOES NOT AFFECT HIS/HER LIABILITY FOR
25P EACH.
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THE SHARES WHICH MAKE UP THE CAPITAL OF THE COMPANY ARE USUALLY OF TWO MAIN TYPES;
1. PREFERENCE SHARES, WHICH ENTITLE THE HOLDER TO BE PAID A DIVIDEND AT A FIXED RATE PER
CENT BEFORE ANY OTHER DIVIDEND IS PAYABLE, OR
2. ORDINARY SHARES, WHICH ARE ENTITLED TO DISTRIBUTION OF A DIVIDEND OUT OF THE
REMAINING PROFIT, THE RATE OF DIVIDEND BEING DECIDED EACH YEAR ACCORDING TO WHAT
THE COMPANY CAN AFFORD.
3. IN THE EVENT OF A WINDING-UP, THE COMPANY'S PREFERENCE SHAREHOLDERS USUALLY
CARRY THE RIGHT TO THE RETURN OF CAPITAL BEFORE THE ORDINARY SHAREHOLDERS, WHO
ARE DEPENDENT UPON THE ASSETS AVAILABLE.
RIGHTS OF SHAREHOLDERS WHEN A COMPANY IS A GOING CONCERN
(A)VOTING RIGHTS
ORDINARY SHAREHOLDERS HAVE SUPERIOR VOTING RIGHTS TO THOSE ENJOYED BY PREFERENCE
SHAREHOLDERS. THE RIGHT TO VOTE AT GENERAL MEETINGS EQUALS THE RIGHT TO INFLUENCE THE
WAY THE COMPANY'S AFFAIRS ARE CONDUCTED, BY VOTING AT MEETINGS OF MEMBERS. THE
MODEL ARTICLES FOR PLCS AND PRIVATE COMPANIES ONLY GOVERN THE VOTING RIGHTS OF
ORDINARY SHAREHOLDERS. EACH MEMBER HAS ONE VOTE ON A “SHOW OF HANDS” OR ON A
“POLL” –"ONE VOTE FOR EVERY SHARE OF WHICH HE/SHE IS THE HOLDER".
PREFERENCE SHAREHOLDERS CAN NORMALLY ONLY VOTE IN CERTAIN SPECIFIED CIRCUMSTANCES
AS IDENTIFIED EITHER BY THEIR COMPANY'S CONSTITUTION OR THE TERMS OF SHARE ISSUE.
NORMALLY PREFERENCE SHAREHOLDERS OF A COMPANY ARE ONLY GIVEN THE RIGHT TO VOTE IN
CERTAIN SPECIFIED CIRCUMSTANCES, E.G. WHERE THE RIGHTS ATTACHED TO THEIR PREFERENCE
SHARES ARE BEING VARIED, IN WHICH CASE THEY WILL HAVE NO RIGHT TO VOTE IN ANY OTHER
CIRCUMSTANCES.
(B)DIVIDEND RIGHTS
ORDINARY SHAREHOLDERS ALWAYS HAVE THE RIGHT TO PARTICIPATE IN THE DISTRIBUTION OF
PROFIT. AS LONG AS THE COMPANY CONTINUES TO OPERATE AS A GOING CONCERN, ORDINARY
SHAREHOLDERS ARE ENTITLED TO A DIVIDEND OF PROFIT, WHICH MAY BE OF ANY SIZE AS
RECOMMENDED BY THE DIRECTORS AND APPROVED BY THE COMPANY'S MEMBERS. THE AMOUNT
OF DIVIDEND DISTRIBUTED TO AN ORDINARY SHAREHOLDER IS PROPORTIONAL TO THE NOMINAL
VALUE OF THE SHARES, WHICH HE/SHE HOLDS.
PREFERENCE SHAREHOLDERS ONLY HAVE THE RIGHT TO PARTICIPATE IN THE DISTRIBUTION OF
PROFIT IF IT IS EXPRESSLY GIVEN BY THE COMPANY'S CONSTITUTION AND/OR TERMS OF ISSUE.
ORDINARY SHAREHOLDERS DON'T HAVE A RIGHT TO A DIVIDEND OF A FIXED RATE. THE SIZE OF AN
ORDINARY SHAREHOLDERS DIVIDEND IS DEPENDANT ON THE SIZE OF THE COMPANY'S PROFIT. NO
PROFIT EQUALS NO DIVIDEND.
33
THE DIVIDEND OF PREFERENCE SHAREHOLDERS IS PAID AT A FIXED RATE, E.G. 6% OF THE NOMINAL
VALUE OF EACH SHARE, AND IS PAYABLE IN PRIORITY TO THE PAYMENT OF A DIVIDEND TO ANY
OTHER CLASS OF SHAREHOLDER.
ORDINARY SHAREHOLDERS DON'T HAVE A RIGHT TO A CUMULATIVE DIVIDEND. DIVIDENDS ON
ORDINARY SHARES ARE NEVER CUMULATIVE. NO PROFIT EQUALS NO DIVIDEND.
PREFERENCE SHARE DIVIDENDS IN THE ABSENCE OF AN EXPRESS PROVISION TO THE CONTRARY ARE
ASSUMED TO BE CUMULATIVE.
(C)STATUTORY PRE-EMPTION RIGHTS
COMPANIES LEGISLATION PROVIDES THAT NO COMPANY CAN ALLOT SECURITIES WITHOUT FIRST OFFERING
THEM PRO RATA TO EXISTING ORDINARY SHAREHOLDERS ON THE SAME OR MORE FAVOURABLE TERMS THAN
IT IS PROPOSING TO OFFER THEM TO OTHER PEOPLE –THIS IS COMMONLY TERMED A “RIGHTS ISSUE”. THE
SHAREHOLDERS MUST BE GIVEN 21 DAYS IN WHICH TO DECIDE WHETHER TO ACCEPT OR REJECT THE OFFER.
SECTION 561 IN THE COMPANIES ACT 2006PROVIDES VALUABLE PROTECTION FOR EXISTING SHAREHOLDERS
BY REQUIRING THAT NEW SHARES BE FIRST OFFERED TO EXISTING MEMBERS SO THAT THEIR PROPORTIONATE
HOLDING IN THE COMPANY CAN BE MAINTAINED, HENCE THE TERM RIGHTS ISSUE.
PREFERENCE SHAREHOLDERS DO NOT HAVE STATUTORY PRE-EMPTION RIGHTS, ALTHOUGH THEY COULD
OBTAIN PRE-EMPTION RIGHTS IF THEY WERE EXPRESSLY GIVEN TO THEM BY THEIR COMPANY'S ARTICLES OF
ASSOCIATION.
(D)FREELY TRANSFERABLE SUBJECT TO ARTICLES OF ASSOCIATION
THIS RIGHT APPLIES TO BOTH ORDINARY AND PREFERENCE SHARES.
RIGHTS OF SHAREHOLDERS ON WINDING-UP
(A)THE PAYMENT OF ARREARS OF CUMULATIVE DIVIDEND WHICH HAVE BEEN DECLARED
ORDINARY SHARES ARE NEVER CUMULATIVE; THEREFORE, NO SUCH RIGHTS EXIST. PREFERENCE
SHAREHOLDERS DO HAVE THIS RIGHT AND IT IS NORMAL FOR THE ARTICLES OF A COMPANY TO PROVIDE FOR
THE PAYMENT OF SUCH ARREARS.
(B)LIMITATION OF LIABILITY
THIS MEANS THAT, IN THE EVENT OF CORPORATE FAILURE, A MEMBER'S LIABILITY IS LIMITED TO ANY
AMOUNT OUTSTANDING ON THEIR SHAREHOLDING, PLUS THE WHOLE OF ANY SHARE PREMIUM. THIS RIGHT
APPLIES TO BOTH ORDINARY AND PREFERENCE SHAREHOLDERS.
(C)THE RIGHT TO HAVE THEIR CAPITAL CONTRIBUTION RETURNED
ORDINARY SHAREHOLDERS ALWAYS HAVE THE RIGHT TO HAVE THEIR CAPITAL CONTRIBUTION RETURNED TO
THEM ON WINDING-UP. IF PREFERENCE SHARES ARE GIVEN PARTICIPATING RIGHTS BY THEIR COMPANY'S
CONSTITUTION, ORDINARY SHAREHOLDERS WILL RANK BEHIND THE HOLDERS OF THAT CLASS.
(D)THE RIGHT TO PARTICIPATE INTHE DISTRIBUTION OF SURPLUS ASSETS
34
ORDINARY SHAREHOLDERS ALWAYS HAVE THIS RIGHT. THE RIGHTS OF PREFERENCE SHAREHOLDERS ARE
EXHAUSTIVE. THEY ARE NOT ENTITLED TO PARTICIPATE IN THE DISTRIBUTION OF ANY SURPLUS ASSETS
UNLESS THEY ARE EXPRESSLY GIVEN THIS RIGHT BY THEIR COMPANY'S ARTICLES OF ASSOCIATION.
ALTERATION OF CAPITAL
A LIMITED COMPANY WITH A SHARE CAPITAL, IF SO AUTHORISED BY ITS ARTICLES, MAY ALTER THE
CONDITIONS OF ITS MEMORANDUM BY:
INCREASING ITS SHARE CAPITAL BY NEW SHARES OR
CONSOLIDATING AND DIVIDING ALL OR ANY OF ITS SHARE CAPITAL INTO SHARES OF LARGER AMOUNT
THAN ITS EXISTING SHARES OR
CONVERTING ALL OR ANY OF ITS PAID-UP SHARES INTO STOCK, OR RECONVERTING STOCK INTO PAID-UP
SHARES OF ANY DENOMINATION OR
SUBDIVIDING ALL OR ANY OF ITS SHARES INTO SHARES OF SMALLER AMOUNT THAN IS FIXED BY THE
MEMORANDUM OR
CANCELLING SHARES WHICH HAVE NOT BEEN TAKEN OR AGREED TO BE TAKEN BY ANY PERSON.
ALL THESE POWERS REQUIRE A RESOLUTION OF THE COMPANY, IN GENERAL MEETING, TO BE EXERCISED
35
MEETINGS
CLASSIFICATION
THERE ARE THREE KINDS OF GENERAL (SHAREHOLDERS') MEETINGS OF COMPANIES.
(A)ANNUAL GENERAL MEETINGS (AGM)
EVERY COMPANY MUST HOLD ITS FIRST AGM WITHIN 18 MONTHS OF INCORPORATION AND THEREAFTER
WITHIN SIX MONTHS OF A COMPANY’S FINANCIAL YEAR ENDING AND AT LEAST ONCE IN EVERY CALENDAR
YEAR, IN ACCORDANCE WITH S366 CA 2006. THIS MEANS THAT, IF A COMPANY HOLDS ITS AGM ON 1
JANUARY 2010, THEN IT MUST HOLD ITS NEXT AGM BY 31 MARCH 2011 AT THE LATEST.
IF A COMPANY FAILS TO HOLD AN AGM THEN ANY MEMBER MAY APPLY TO THE SECRETARY OF STATE TO CALL
A MEETING IN DEFAULT.
THE BUSINESS CONDUCTED AT AGMS TENDS TO BE ROUTINE, SUCH AS
THE RE-ELECTION OF DIRECTORS;
APPOINTMENT OF AUDITORS,
CONSIDERATION OF ACCOUNTS AND APPROVAL OF DIVIDENDS.
IN LINE WITH THE RECOGNISED DISTINCTION BETWEEN PUBLIC AND PRIVATE COMPANIES, THE COMPANIES
ACT OF 1989 INTRODUCED A NEW PROVISION, WHICH PERMITS PRIVATE COMPANIES, SUBJECT TO APPROVAL
BY A UNANIMOUS VOTE, TO DISPENSE WITH THE NEED TO HOLD AN ANNUAL GENERAL MEETING. UNDER CA
2006 IT IS NO LONGER NECESSARY FOR A PRIVATE COMPANY TO CONVENE A GENERAL MEETING.
(B)EXTRAORDINARY GENERAL MEETINGS (EGM)
AN EXTRAORDINARY GENERAL MEETING IS ANY MEETING OTHER THAN AN AGM. EGMS ARE USUALLY CALLED
BY THE DIRECTORS, ALTHOUGH MEMBERS HOLDING 10% OF THE VOTING SHARES MAY REQUISITION SUCH A
MEETING BY VIRTUE OF S303 CA 2006.
THE DIRECTORS OF A COMPANY MUST CALL AN EGM WITHIN 28 DAYS OF BECOMING AWARE OF THIS
SITUATION, IF THE NET ASSETS OF A PUBLIC COMPANY HAVE BEEN REDUCED TO LESS THAN HALF IN VALUE OF
THE COMPANY'S CALLED-UP SHARE CAPITAL. THE MAIN PURPOSE OF SUCH A MEETING IS TO CONSIDER
WHAT, IF ANY, REMEDIAL MEASURES SHOULD BE TAKEN BY THE COMPANY TO DEAL WITH THE SITUATION.
(C)CLASS MEETINGS
THIS REFERS TO THE MEETING OF A PARTICULAR CLASS OF SHAREHOLDER, I.E. THOSE WHO HOLD A TYPE OF
SHARE PROVIDING PARTICULAR RIGHTS, SUCH AS PREFERENCE SHARES. WHERE A PROPOSAL IS PUT
FORWARD TO VARY THE CLASS RIGHTS ATTACHED TO PARTICULAR SHARES, THEN IT IS NECESSARY TO OBTAIN
THE APPROVAL OF THE HOLDERS OF THE PARTICULAR CLASS CONCERNED. IN ORDER TO ACHIEVE THIS
APPROVAL, A MEETING OF THOSE HOLDING SUCH SHARES HAS TO BE CALLED TO SEEK THEIR APPROVAL OF
ANY PROPOSED VARIATION.
36
STATUTORY PROVISIONS
THERE ARE DETAILED STATUTORY PROVISIONS CONCERNING A NUMBER OF MATTERS IN CONNECTION WITH
THE CALLING AND CONDUCT OF MEETINGS, INCLUDING THE FOLLOWING.
A SPECIFIED MINIMUM NOTICE OF MEETINGS MUST BE GIVEN TO ALL THE MEMBERS.
THE NOTICE MUST STATE WHETHER IT IS PROPOSED TO TRANSACT ANY "SPECIAL BUSINESS" AT THE
MEETING AND, IF SO, IT MUST STATE THE NATURE OF SUCH SPECIAL BUSINESS. (THIS IS TO PROTECT
MEMBERS FROM THE DANGER OF ALLOWING IMPORTANT CHANGES IN THE COMPANY'S STRUCTURE OR
POLICY TO BE MADE IN THEIR ABSENCE.)
NO BUSINESS CAN BE TRANSACTED UNLESS A QUORUM IS PRESENT.
PROVISIONS ARE MADE WITH REGARD TO THE DUTIES AND POWERS OF THE CHAIRMAN OF THE MEETING
(USUALLY THE CHAIRMAN OF THE BOARD OF DIRECTORS)
THERE ARE RULES GOVERNING VOTING. VOTING MAY BE BY SHOW OF HANDS OR (ON THE DEMAND OF
ANY PERSON PRESENT AND ENTITLED TO VOTE) BY POLL. IN THE LATTER CASE, MEMBERS MAY VOTE BY
PROXY. (A PROXYIS A WRITTEN INSTRUMENT ENTITLING ANOTHER TO VOTE IN A MEMBER'S PLACE, AND THE
ACT MAKES DETAILED PROVISIONS CONCERNING VOTING BY PROXY.)
SPECIAL PROVISIONS ARE MADE WITH REGARD TO THE THREE KINDS OF RESOLUTIONS THAT MAY BE
PASSED AT MEETINGS –ORDINARY, EXTRAORDINARY AND SPECIAL. THESE ARE OUTSIDE THE SCOPE OF YOUR
COURSE.BY THE RULE IN FOSS V. HARBOTTLE (1843), THE COURT WILL NOT INTERFERE AT THE SUIT OF A
MEMBER, OR A MINORITY OF MEMBERS WHERE THERE IS A WRONG DONE TO A COMPANY ITSELF OR AN
IRREGULARITY IN ITS INTERNAL MANAGEMENT, IF SUCH ACTION IS CAPABLE OF CONFIRMATION BY A
MAJORITY OF THE MEMBERS. HOWEVER, THERE ARE CERTAIN EXCEPTIONS TO THIS RULE, E.G. A MINORITY
MAY SUE TO PREVENT THE COMPANY FROM ACTING ILLEGALLY OR ULTRA VIRES, OR FROM PERPETRATING A
FRAUD ON THE MINORITY OF MEMBERS.
37
DIRECTORS
NATURE OF DIRECTORSHIP
ALL REGISTERED COMPANIES MUST HAVE DIRECTORS, AND NORMALLY THERE MUST BE AT LEAST
TWO, ALTHOUGH ONE SUFFICES FOR A PRIVATE COMPANY OR ONE REGISTERED BEFORE 1929.
THE POSITION OF DIRECTORS IS SIMILAR TO THAT OF TRUSTEES, E.G. IN THEIR FIDUCIARY
RELATIONSHIP TO THE COMPANY, IN ISSUING SHARES, AND APPROVING TRANSFERS OF SHARES.
HOWEVER, THEY ARE TRUSTEES FOR THE COMPANY AND NOT FOR THE INDIVIDUAL SHAREHOLDERS,
NOR FOR THIRD PARTIES WHO HAVE MADE CONTRACTS WITH THE COMPANY.
DIRECTORS ARE ALSO SOLE AGENTS FOR THE COMPANY WHEN THEY MAKE CONTRACTS FOR THE
COMPANY AND, AS SUCH, ARE IN A FIDUCIARY POSITION TO THE COMPANY AND CANNOT MAKE
SECRET PROFITS AT THE COMPANY'S EXPENSE.
A COMPANY MAY ACT ONLY THROUGH ITS AGENTS –AND SUCH AGENTS, IF THEY DIRECT AND
CONTROL THE COMPANY'S AFFAIRS, ARE DEEMED TO BE DIRECTORS. UNDER THE ACT, "DIRECTOR"
INCLUDES ANY PERSON OCCUPYING THE POSITION OF DIRECTOR, BY WHATEVER NAME CALLED.
POWERS OF DIRECTORS
THE POWERS OF DIRECTORS ARE USUALLY SET OUT IN THE ARTICLES, AUTHORISING THEM TO CARRY ON THE
BUSINESS OF THE COMPANY, AND THERE IS GENERALLY AN ADDITIONAL CLAUSE GIVING THEM POWERS OF
MANAGEMENT AND ALL THE POWERS OF THE COMPANY WHICH ARE NOT OTHERWISE SPECIFICALLY
MENTIONED IN THE ARTICLES IF THE ARTICLES ARE SILENT ON THIS POINT, THE LAW IMPLIES THAT ALL THE
ORDINARY POWERS CONNECTED WITH A BUSINESS OF THE SAME KIND AS THAT CARRIED ON BY THE
COMPANY ARE BEING CONFERRED UPON THE DIRECTORS
38
THE POWERS OF DIRECTORS MAY BE ENLARGED, OR IN CERTAIN CIRCUMSTANCES RESTRICTED BY
THE SHAREHOLDERS, AND IF THE DIRECTORS ACT BEYOND THEIR POWERS THE SHAREHOLDERS MAY
RATIFY THEIR ACT, PROVIDED IT IS NOT ULTRA VIRESTHE COMPANY.
39
ONE OF THE MAIN CHANGES OF THE 2006 ACT IS THE SETTING OUT FOR THE FIRST TIME OF A
STATUTORY FRAMEWORK FOR THE LEGAL DUTIES OF COMPANY DIRECTOR AS WE HAVE ALREADY
SAID, A DIRECTOR IS IN A FIDUCIARY POSITION TO THE COMPANY IN HIS/HER CAPACITY AS AGENT,
AND HE/SHE CANNOT, THEREFORE, PLACE HIS/HERSELF IN A POSITION WHERE HIS/HER OWN
INTERESTS CONFLICT WITH HIS/HER DUTIES. DIRECTORS MUST ON NO ACCOUNT MAKE ANY SECRET
PROFITS. ANY SUCH BENEFIT IS REGARDED AS A BRIBE, AND THE DIRECTORS ARE ACCOUNTABLE TO
THE COMPANY FOR SUCH. WHERE A DIRECTOR ACCEPTED A GIFT OF 200 FULLY PAID SHARES FROM
THE PROMOTER OF THE COMPANY, HE WAS COMPELLED TO MAKE GOOD TO THE COMPANY THE
ADVANTAGE GAINED: EDEN V. RIDSDALE LAMP CO. (1889).A DIRECTOR IS BOUND TO EXERCISE
FAITHFULLY THE TRUST HE HAS ACCEPTED, AND IS BOUND TO EXERCISE FAIR AND REASONABLE
DILIGENCE IN DISCHARGING HIS DUTIES AND TO ACT HONESTLY; BUT HE IS NOT BOUND TO DO
MORE: RE FOREST OF DEAN COMPANY (1878).
LIABILITIES OF DIRECTORS
THE DIRECTORS ARE LIABLE FOR NEGLIGENCE OR BREACH OF TRUST IN RELATION TO THE COMPANY'S
AFFAIRS. THE ACT MAKES AMPLE PROVISION FOR THE LIABILITY OF DIRECTORS GUILTY OF FRAUD, OR
GROSS NEGLIGENCE, IN RESPECT OF THE COMPANY OR THIRD PERSONS. DURING THE COURSE OF A
WINDING-UP, THE ACT PROVIDES THAT A DIRECTOR WHO HAS MISAPPLIED OR RETAINED OR
BECOME LIABLE OR ACCOUNTABLE FOR ANY MONEY OR PROPERTY OF THE COMPANY, OR HAS BEEN
GUILTY OF ANY MISFEASANCE OR BREACH OF TRUST IN RELATION TO THE COMPANY, MAYBE
COMPELLED TO REPAY OR RESTORE THE MONEY OR PROPERTY OR TO PAY SUCH SUM TO THE
COMPANY AS THE COURT THINKS FIT.
DIRECTORS ARE PERSONALLY RESPONSIBLE FOR FRAUD; ALTHOUGH, WHERE THE COMPANY HAS
TAKEN ADVANTAGE OF FRAUDULENT MISREPRESENTATIONS, THE COMPANYMAY BE HELD BOUND AS
WELL AS THE DIRECTORS.
A DIRECTOR OWES A DUTY TO THE COMPANY TO DEVOTE TO HIS/HER DUTIES SUCH CARE,
PRUDENCE, AND DILIGENCE AS COULD REASONABLYBE EXPECTED OF A REASONABLY RESPONSIBLE
PERSONIN THOSE KIND OF CIRCUMSTANCES. HE/SHE MUST EXERCISE SUCH SKILL AS MAY
REASONABLY BE EXPECTED OF A PERSON OF HIS/HERKNOWLEDGE AND EXPERIENCE. FOR CARE AND
DILIGENCE, THE DIRECTOR'S CONDUCT IS MEASURED OBJECTIVELY AGAINST THE STANDARDS OF THE
REASONABLY PRUDENT AND RESPONSIBLE PERSON. FOR SKILL,OR "PROFESSIONALISM", THE
EXECUTIVE DIRECTOR WITH A SERVICE CONTRACT WILL BE REQUIRED TO DISPLAY HIGHER
STANDARDS. LIKE ANY OTHER RESPONSIBLE EMPLOYEE, SHE WILL BE REQUIRED TO SHOW BOTH
CARE AND SKILL OF A KIND TO BE EXPECTED OF AN EMPLOYEE RECEIVING THAT KIND OF SALARY AND
CHARGED WITH THOSE KIND OF RESPONSIBILITIES.
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BORROWING BY A COMPANY
BORROWING POWERS
TRADING COMPANIES HAVE IMPLIED POWER TO BORROW FOR TRADING PURPOSES AND TO GIVE SECURITY
FOR LOANS, UNLESS EXPRESSLY PROHIBITED FROM DOING SO BY THE MEMORANDUM OF ASSOCIATION.
OTHER COMPANIES NEED EXPRESS POWER TO RAISE LOANS. IF A LOAN (OR ANY PORTION OF A LOAN) IS
ULTRA VIRESTHE COMPANY, IT IS VOID, EVEN IF IT IS RATIFIED BY THE MEMBERS IN GENERAL MEETING.
HOWEVER, IN SUCH CIRCUMSTANCES, THE LENDERMAY HAVE THE FOLLOWING REMEDIES.
IF THE MONEY HAS NOT BEEN SPENT, HE CAN OBTAIN AN INJUNCTION RESTRAINING THE COMPANY FROM
PARTING WITH IT AND HE CAN RECOVER IT.
HE CAN BRING AN ACTION AGAINST THE DIRECTORS FOR BREACH OF WARRANTY OF AUTHORITY.
IF MONEY HAS BEEN USED TO PAY CREDITORS, THE LENDER MAY STAND IN THE PLACE OF SUCH CREDITORS
(THIS IS KNOWN AS SUBROGATION), BUT HE/SHE WILL NOT GET ANY PRIORITY WHICH MAY HAVE ATTACHED
TO SUCH CREDITORS' INTEREST.
DEBENTURES
A COMPANY MAY BORROW MONEY BY THE ISSUE OF DEBENTURES WHICH ARE, IN REALITY,
PROMISES TO REPAY THE SUM BORROWED AND ARE EXECUTED UNDER THE SEAL OF THE COMPANY.
A DEBENTURE CAN BE A DOCUMENT ISSUED TO SUCH LENDER AND IT IS THEN A SELF-CONTAINED
SECURITY, ENTITLING THE HOLDER TO TAKE ACTION IN HIS/HER OWN NAME.
AN ALTERNATIVE METHOD OF RAISING FUNDS IS TO EXECUTE ONE DEBENTURE IN THE FORM OF A
TRUST DEED, APPOINTING TRUSTEES. LENDERS DO NOT RECEIVE AN ACTUAL DEBENTURE, BUT ONLY
A DEBENTURE STOCK CERTIFICATE.
DEBENTURE STOCKIS THE WHOLE AMALGAMATED BORROWING OF THE COMPANY AND HOLDERS OF
STOCK CERTIFICATES ARE NOT, GENERALLY, ENTITLED TO TAKE PROCEEDINGS INDIVIDUALLY, BUT
HAVE TO DO SO THROUGH THE TRUSTEES, WHO ARE THE BENEFICIARIES OF THE PROMISES IN THIS
CASE.
A DEBENTURE IS MERELY A PROMISE TO REPAY THE MONEY BORROWED AND IT DOES NOT, OF
ITSELF, CONSTITUTE AN ACTUAL CHARGE ON THE ASSETS OF THE COMPANY. IT IS USUAL TO GIVE
SECURITY TO THE DEBENTURE HOLDERS BY EFFECTING A MORTGAGE OR CHARGE ON THE ASSETS OF
THE COMPANY, SO THAT, IN THE EVENT OF THE COMPANY'S BEING WOUND UP, THE DEBENTURE
HOLDERS HAVE A FIRST CLAIM TO RECEIVE PAYMENT. THIS SECURITY MAY BE GIVEN IN THE FORM
OF A FIXED CHARGE, A MORTGAGE ON SOME SPECIFIC PART OF THE COMPANY'S ASSETS, E.G. THE
FACTORY PREMISES AT X TOWN, OR BY MEANS OF A FLOATING CHARGE, WHICH MAY BE DESCRIBED
GENERALLY AS RELATING TO THE WHOLE OF THE ASSETS OF THE COMPANY. THE ADVANTAGE OF A
FLOATING CHARGE, FROM THE COMPANY'S POINT OF VIEW, IS THAT IT REMAINS ENTITLED TO DEAL
FREELY WITH THE ASSETS SO CHARGED.
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DISTINCTION BETWEEN DEBENTURES AND SHARES
DEBENTURES MUST BE CAREFULLY DISTINGUISHED FROM SHARES IN A COMPANY. IN MODERN TIMES, THEY
ARE OFTEN REGARDED BY INVESTORS AS BEING MERELY DIFFERENT SPECIES OF THE SAME THING; EACH
ENABLES MEMBERS OF THE PUBLIC TO INVEST IN A COMPANY AND TO PARTICIPATE IN ITS PROFITS.
HOWEVER, IN LAW, THEY ARE QUITE DISTINCT.
FIRSTLY,A SHAREHOLDER IS A MEMBER OF THE COMPANY, WITH CERTAIN RIGHTS AND LIABILITIES.
WHILST A DEBENTURE HOLDER IS NOT A MEMBER OF THE COMPANY –BUT A PERSON OUTSIDE THE
COMPANY WHO HAPPENS TO BE ITS CREDITOR; LEGALLY, HIS/HER POSITION VIS-À-VIS THE COMPANY
IS SIMILAR TO THAT OF ORDINARY TRADING CREDITORS.
SECONDLY, A SHAREHOLDER'S DIVIDENDS ARE HIS/HER SHARE OF THE COMPANY'S PROFITS;
DEBENTURE HOLDERS MERELY RECEIVE INTEREST ON THE LOAN. THE POSITION OF SUCH
SHAREHOLDERS IS VERY SIMILAR IN PRACTICE TO THAT OF DEBENTURE HOLDERS –BUT THE LEGAL
POSITION, LARGELY FOR HISTORICAL REASONS, IS THAT THEY ARE COMPLETELY DIFFERENT AND
DISTINCT.
COMMON SEAL
THE COMMON SEAL OF A COMPANY IS THE SIGNATURE OF THE COMPANY AND THE SEALING OF A
DOCUMENT IS WITNESSED BY THE OFFICERS OF THE COMPANY SPECIFIED IN THE ARTICLES OF
ASSOCIATION.
THE SEAL MUST BE KEPT AT THE REGISTERED OFFICE OF THE COMPANY UNDER SOME FORM OF
CONTROL WHICH WILL ADEQUATELY PREVENT ITS UNAUTHORISED USE.
HOWEVER, AS MENTIONED ABOVE, THE COMPANY MAY ACT IN A NUMBER OF WAYS THROUGH ITS AGENTS,
AND IT IS NO LONGER NECESSARY FOR DOCUMENTS IN NORMAL BUSINESS USE TO BE IMPRESSED WITH THE
SEAL OF THE COMPANY. THE COMPANIES ACT 1989 PROVIDES FOR DOCUMENTS TO BE SIGNED AS A DEED
AND FOR COMPANIES TO DISPENSE WITH THE USE OF A SEAL IN COMMERCIAL TRANSACTIONS.
MINORITY PROTECTION
PROTECTION OF MEMBERS’ INTERESTS AGAINST UNFAIR PREJUDICE
CASE LAW HAS ESTABLISHED A NUMBER OF SITUATIONS WHICH, PRIMA FACIE, AMOUNT TO UNFAIRLY
PREJUDICIAL CONDUCT AND IT SHOULD BE EMPHASISED THAT CONDUCT MAY BE PERFECTLY LAWFUL BUT
STILL UNFAIRLY PREJUDICIAL. THUS THE FOLLOWING HAVE ALL BEEN FOUND TO BE UNFAIRLY PREJUDICIAL.
EXCLUSION AND REMOVAL FROM THE BOARD, WHERE THE COMPANY WAS ONE IN WHICH THE DIRECTOR
HAD A LEGITIMATE EXPECTATION OF BEING INVOLVED IN MANAGEMENT I.E. A QUASI-PARTNERSHIP
COMPANY: IN RE BIRD PRECISION BELLOWS LTD (1986), A MINORITY SHAREHOLDER WITH 26% OF THE
SHARES SUSPECTED THAT THE MANAGING DIRECTOR OF “THIS QUASI-PARTNERSHIP” COMPANY WAS
CONCEALING BRIBES THAT HE HAD RECEIVED IN ORDER TO SECURE CONTRACTS. WHEN THE DEPARTMENT OF
TRADE AND INDUSTRY REFUSED TO INVESTIGATE, THE MINORITY SHAREHOLDER WAS REMOVED FROM THE
42
BOARD. THE MINORITY SHAREHOLDER CLAIMED THAT THIS AMOUNTED TO UNFAIRLY PREJUDICIAL
CONDUCT. HIS CLAIM WAS UPHELD.
THE MAJORITY SHAREHOLDER AND DIRECTOR USING THE ASSETS OF THE COMPANY FOR HIS OWN
PERSONAL BENEFIT. IN RE ELGINDATA (NO.1) (1991),THE MAJORITY SHAREHOLDER AND DIRECTOR USED THE
ASSETS OF THE COMPANY FOR HIS OWN PERSONAL BENEFIT. THE PETITIONER COMPLAINED THAT THIS WAS
UNFAIRLY PREJUDICIAL TO HIM AND THE COURT GRANTED AN ORDER
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UNDER WHAT WAS S461 OF THE COMPANIES ACT 1985, IN ACCORDANCE WITH WHICH THE RESPONDENTS
WERE ORDERED TO PURCHASE THE SHARES HELD BY THE PETITIONER.
A POLICY OF MAKING LOW DIVIDEND PAYMENTS. IN RE SAM WELLER&SONS LTD (1990),THE PETITIONERS,
WHO BETWEEN THEM HELD 42.5% OF THE SHARES IN THEIR FAMILY BUSINESS, COMPLAINED THAT THE
COMPANY HAD NOT INCREASED ITS DIVIDEND FOR37 YEARS, DESPITE ITS PROFITABILITY. IN 1985, ITS NET
PROFIT HAD BEEN £36,000 YET ONLY £2,520 WAS PAID OUT IN DIVIDENDS. THE COMPANY WAS CONTROLLED
BY THE PETITIONERS' UNCLE, SAM WELLER, WHO ALONG WITH HIS SONS CONTINUED TO RECEIVE DIRECTORS'
FEES AND REMUNERATION. PETER GIBSON J. COMMENTED ON THE PETITIONERS' POSITION: "AS THEIR ONLY
INCOME FROM THE COMPANY IS BY WAY OF DIVIDEND, THEIR INTERESTS MAY NOT ONLY BE PREJUDICED BY
THE POLICY OF LOW DIVIDEND PAYMENTS, BUT UNFAIRLY PREJUDICED."
IT SHOULD BE NOTED THAT THE COURTS MAY ALSO TAKE THE PETITIONER'S CONDUCT INTO ACCOUNT WHEN
DECIDING WHETHER CERTAIN ACTIONS ARE UNFAIRLY PREJUDICIAL, AS DEMONSTRATED BY THE CASE OF RE R
A NOBLE & SONS LTD (1983). THE MINORITY SHAREHOLDER HAD PROVIDED THE CAPITAL BUT HAD LEFT THE
MANAGEMENT OF THE COMPANY IN THE HANDS OF THE OTHER DIRECTOR, ON THE UNDERSTANDING THAT
HE WOULD BE CONSULTED IN RELATION TO MAJOR POLICY MATTERS. HOWEVER, HE WAS NOT SO
CONSULTED BY THE OTHER DIRECTOR AND CONFINED HIMSELF TO ENQUIRIES OF THE ACTIVITIES TO THE
OTHER DIRECTOR ON SOCIAL OCCASIONS AND ACCEPTED ASSURANCES THAT ALL WAS WELL. HIS PETITION,
UNDER SECTION 459 OF THE COMPANIES ACT 1985, FOLLOWED ON FROM A BREAKDOWN IN THE
RELATIONSHIP BETWEEN THE TWO DIRECTORS. IT WAS HELD THAT THE MINORITY SHAREHOLDER'S
EXCLUSION FROM THE COMPANY'S MANAGEMENT WAS LARGELY THE RESULT OF HIS OWN LACK OF
INTEREST. CONSEQUENTLY, HIS PETITION WAS DISMISSED.
IN THE EVENT THAT A PETITION IS SUCCESSFUL, THE COURT MAKE SUCH ORDER THAT IT DEEMS FIT FOR
GIVING RELIEF IN RESPECT OF THE MATTERS COMPLAINED OF, INCLUDING:
REGULATING THE FUTURE CONDUCT OF THE COMPANY'S AFFAIRS, E.G. THAT A CONTROLLING
SHAREHOLDER SHOULD CONFORM WITH ALL THE DECISIONS THAT ARE TAKEN DURING THE COURSE OF
BOARD MEETINGS
REQUIRING THE COMPANY TO DO AN ACT THAT IT HAS OMITTED TO DO OR TO REFRAIN FROM DOING AN
ACT SO COMPLAINED OF
PROVIDING FOR THE PURCHASE OF THE SHARES OF THE MINORITY SHAREHOLDER AT A FAIR VALUE BY
OTHER MEMBERS OR BY THE COMPANY ITSELF –THE USUAL REMEDY
REQUIRING THE COMPANY NOT TO MAKE ANY SPECIFIED ALTERATION/AMENDMENT TO ITS ARTICLES OF
ASSOCIATION WITHOUT LEAVE OF THE COURT.
44
APPLICATIONS BY MINORITY SHAREHOLDERS TO HAVE A COMPANY WOUND-UP ON JUST AND EQUITABLE
GROUNDS
THE COURT HAS ENORMOUS DISCRETION WHEN CONSIDERINGWHETHER IT WOULD BE “JUST AND
EQUITABLE” TO COMPULSORILY WIND-UP A COMPANY UNDER SECTION 122(1)(G) OF THE INSOLVENCY ACT
1986. COURT ORDERS ON THIS GROUND HAVE BEEN GRANTED, AMONG OTHER THINGS:
WHERE BREAKDOWN OF MUTUAL TRUST AND CONFIDENCE HAS OCCURRED, ESPECIALLY IN THE CASE OF A
QUASI-PARTNERSHIP: EBRAHIMI V. WESTBOURNE GALLERIES LTD (1972), WHERE MR EBRAHIMI AND MR
NAZAR HAD CARRIED ON BUSINESS IN PARTNERSHIP DEALING IN PERSIAN AND OTHER CARPETS. THEY
SHARED EQUALLY IN MANAGEMENT AND PROFITS. IN 1958, THEY FORMED A PRIVATE COMPANY CARRYING
ON THE SAME BUSINESS AND WERE APPOINTED AS ITS FIRST DIRECTORS.
SHORTLY AFTER THE COMPANY'S INCORPORATION, MR NAZAR'S SON, GEORGE, BECAME A DIRECTOR. MR
NAZAR AND HIS SON BETWEEN THEM HELD THE MAJORITY OF THE VOTESEXERCISABLE AT GENERAL
MEETINGS. THE COMPANY MADE GOOD PROFITS, WHICH WERE ALL DISTRIBUTED AS DIRECTOR'S
REMUNERATION; NO DIVIDENDS WERE EVER PAID. IN 1969, MR EBRAHIMI WAS REMOVED FROM HIS OFFICE
AS A DIRECTOR BY A RESOLUTION AT A GENERAL MEETING UNDERWHAT IS NOW KNOWN AS SECTION 303 OF
THE COMPANIES ACT 1985 AND A PROVISION OF THE COMPANY'S ARTICLES. FOLLOWING ON FROM THIS, MR
EBRAHIMI ASKED THE COURT TO FIND THAT IT WAS "JUST AND "EQUITABLE" TO COMPULSORILY WIND-UP
THE COMPANY. IT WAS HELD BY THE HOUSE OF LORDS THAT THE COMPANY SHOULD BE COMPULSORILY
WOUND-UP ON “JUST AND EQUITABLE” GROUNDS BECAUSE OF MR EBRAHIMI'S INABILITY, AFTER HIS
DISMISSAL, TO PARTICIPATE IN THE COMPANY'S MANAGEMENT AND BECAUSE PROFITS WERE PAID AS
DIRECTOR'S REMUNERATION.
WHERE THERE IS A COMPLETE DEADLOCK IN THE MANAGEMENT OF THE COMPANY'S AFFAIRS: RE YENIDJE
TOBACCO CO LTD (1916), WHERE TWO SOLE TRADERS HAD MERGED THEIR BUSINESSES INTO A COMPANY OF
WHICH THEY WERE THE ONLY DIRECTORS AND SHAREHOLDERS. THEY QUARRELLED BITTERLY, REFUSED TO
SPEAK TO EACH OTHER AND CONDUCTED BOARD MEETINGS BY PASSING NOTES THROUGH THE HANDS OF
THE SECRETARY. ONE SUED THE OTHER FOR FRAUD AND HE, IN TURN, PETITIONED TO HAVE THE COMPANY
WOUND-UP ON JUST AND EQUITABLE GROUNDS. THE COURT STATED THAT: “IN SUBSTANCE THESE TWO
PEOPLE ARE REALLY PARTNERS” AND BY ANALOGY WITH THE LAW OF PARTNERSHIP (WHICH PERMITS THE
DISSOLUTION IF THE PARTNERS ARE REALLY UNABLE TO WORK TOGETHER) IT WAS JUST AND EQUITABLE IN
THIS CASE TO WIND THE COMPANY UP.
WHERE THE MANAGING DIRECTOR, WHO ALSO REPRESENTED THE MAJORITY SHAREHOLDING INTEREST IN
THE MANAGEMENT OF THE COMPANY, REFUSED TO HOLD GENERAL MEETINGS, SUBMIT ACCOUNTS OR PAY
DIVIDENDS: LOCH V. JOHN BLACKWOOD LTD (1924).
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ADMINISTRATION
WHAT IS AN ADMINISTRATION ORDER?
AN ADMINISTRATION ORDER IS AN ALTERNATIVE PROCEDURE FOR DEALING WITH THE AFFAIRS OF
AN INSOLVENT COMPANY, ESTABLISHED BY THE INSOLVENCY ACT 1986.
IT IS AN ORDER DIRECTING THAT, DURING THE PERIOD IN WHICH IT IS IN FORCE, THE AFFAIRS,
BUSINESS AND PROPERTY OF THE COMPANY SHALL BE MANAGED BY A PERSON APPOINTED FOR
THAT PURPOSE BY THE COURT AND KNOWN AS “THE ADMINISTRATOR” IN ACCORDANCE WITH
SCHEDULE B1 OF THE INSOLVENCY ACT 1986.
A LICENSED INSOLVENCY PRACTITIONER IS APPOINTED AS AN ADMINISTRATOR BY THE COURT UNDER
AN ADMINISTRATION ORDER.
THE ORDER IS USUALLY SOUGHT THROUGH A PETITION BY A COMPANY THAT IS, OR IS LIKELY TO
BECOME, INSOLVENT.
ADMINISTRATION ORDERS WERE INTRODUCED BY THE INSOLVENCY ACT 1986 AS A CONSTRUCTIVE
WAY OF TRYING TO SAVE A COMPANY'SBUSINESS.
WHO MAY APPLY FOR AN ADMINISTRATION ORDER?
IN ACCORDANCE WITH SCHEDULE B1 OF THE INSOLVENCY ACT 1986 APPLICATIONS CAN BE MADE BY:
THE COMPANY ITSELF
THE DIRECTORS OF THE COMPANY
A CREDITOR OR GROUP OF CREDITORS OF THE COMPANY (INCLUDING FLOATINGCHARGE HOLDERS
OVER THE WHOLE OR SUBSTANTIALLY THE WHOLE OF A COMPANY'S PROPERTY)
THE SUPERVISOR OF A COMPANY VOLUNTARY ARRANGEMENT –NOTICE OF THE PETITION MUST
IMMEDIATELY BE GIVEN TO PRESCRIBED PERSONS AND CANNOT BE WITHDRAWN EXCEPT WITH THE
LEAVE OF THE COURT.
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UNDER WHAT CIRCUMSTANCES IS AN APPLICATION FOR AN ADMINISTRATION ORDER LIKELY TO BE
SUCCESSFUL? CAN ONE OR MORE OF THE OBJECTIVES OF THE THREE-PART TEST IN SCHEDULE B OF THE
INSOLVENCY ACT 1986 BE MET?
THE PRIMARY OBJECTIVEWILL BE TO RESCUE THE COMPANY IN WHOLE OR IN PART AS A GOING
CONCERN. WHERE A COMPANY CAN BE RESCUED, THEN THE RESCUE PLAN WILL BE PUT INTO
ACTION. INTER ALIA, IF THE COMPANY INVOLVED IS A HOLDING COMPANY WITH SUBSIDIARIES, THIS
COULD INVOLVE THEM SELLING OFF ONE OF THE SUBSIDIARY COMPANIES WITHIN THEIR GROUP TO
ENSURE THE GROUP'S LONG-TERM FINANCIAL SURVIVAL, IN OTHER WORDS, “DOWNSIZING”.
THE ADMINISTRATOR MAY PURSUE THE SECONDARY OBJECTIVEOF MAXIMISING RETURNS FOR THE
COMPANY'S CREDITORS AS A WHOLE, OVER AND ABOVE WHAT WOULD BE LIKELY IF THE COMPANY
WERE WOUND-UP WITHOUT FIRST GOING INTO ADMINISTRATION, IF THE ADMINISTRATOR
CONSIDERS THE PRIMARY OBJECTIVE IS NOT REASONABLY PRACTICABLE. THIS COULD INVOLVE THE
COMPANY CONCERNED CONTINUING TO TRADE UNTIL SUCH TIME AS IT HAS SATISFIED
OUTSTANDING CUSTOMER ORDERS AND SOLD ITS REMAINING STOCK-IN-TRADE, IN THE INTERESTS
OF A MORE BENEFICIAL WINDING-UP. IN THIS WAY THE COMPANY WOULD MAXIMISE RETURNS FOR
ITS CREDITORS OVER AND ABOVE WHAT WOULD BE LIKELY IF THE COMPANY WERE WOUND-UP
IMMEDIATELY WITHOUT FIRST GOING INTO ADMINISTRATION.
THE THIRD OBJECTIVE, WHICH WILL ONLY APPLY IF NEITHER OF THE OTHER TWO OBJECTIVES IS
POSSIBLE, WILL BE TO REALISE PROPERTY, TO MAKE A DISTRIBUTION TO ONE OR MORE OF THE
SECURED OR PREFERENTIAL CREDITORS BUT WITHOUT "UNNECESSARILY HARMING" THE INTERESTS
OF THE CREDITORS AS A WHOLE. WHERE THERE ARE NO FUNDS AVAILABLE FOR THE UNSECURED
CREDITORS, THE ADMINISTRATOR WILL REALISE THE COMPANY'S ASSETS AND MAKE PAYMENTS TO
PREFERENTIAL CREDITORS AND FIXED AND FLOATING CHARGE HOLDERS AND WILL ARRANGE FOR
THE COMPANY TO BE PLACED INTO CREDITORS' VOLUNTARY LIQUIDATION.
AN APPLICATION FOR AN ADMINISTRATION ORDER IS LIKELY TO BE SUCCESSFUL IN THOSE CASES
WHERE ONE OR MORE OF THE OBJECTIVES OF THE ABOVE THREE-PART TESTCAN BE SATISFIED, E.G.
THE SECOND AND THIRD OBJECTIVE.
IT FOLLOWS THAT AN ADMINISTRATION ORDER WILL NOT BE MADE WHERE A COMPANY HAS
ALREADY GONE INTO LIQUIDATION: SCHEDULE B1, INSOLVENCY ACT 1986.
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ADVANTAGES OF THE ADMINISTRATION ORDER AS AN INSOLVENCY PROCEDURE
THE TWO MAIN ADVANTAGES ARE AS FOLLOWS.
ONCE AN ADMINISTRATION ORDER HAS BEEN ISSUED, IT IS NO LONGER POSSIBLE TO COMMENCE
WINDING-UP PROCEEDINGS AGAINST THE COMPANY OR ENFORCE CHARGES ON THE COMPANY'S
ASSETS. THIS MAJOR ADVANTAGE IS IN NO WAY UNDERMINED BY THE FACT THAT AN
ADMINISTRATION ORDER CANNOT BE MADE UNTIL AFTER A COMPANY HAS BEGUN THE
LIQUIDATION PROCESS. IT IS OPEN TO A SECURED CREDITOR TO ENFORCE THEIR RIGHTS AND TO
FORESTALL THE ADMINISTRATION PROCEDURE.
AN ADMINISTRATION ORDER CAN BE PUT IN PLACE VERY QUICKLY, IN RESPONSE TO THE URGENT
NEEDS OF A COMPANY AND ITS BUSINESS. THE COMPANY THEN HAS THE BENEFIT OF A STAY ON ALL
CREDITORS' ACTIONS AND THE ADMINISTRATOR HAS WIDE POWERS TO DEAL WITH NOT ONLY THE
COMPANY'S ASSETS BUT ALSO THOSE OF THIRD PARTIES SUBJECT, IN SOME CASES, TO THE COURT
GRANTING LEAVE FOR THE PROPOSED ACTION. ADMINISTRATION IS A COLLECTIVE PROCEDURE THAT
ALMOST ALWAYS, IN THE LONG-TERM, OFFERS BETTER RETURNS TO UNSECURED CREDITORS THAN
AN IMMEDIATE LIQUIDATION.
THE EFFECT OF AN ADMINISTRATION ORDER BEING GRANTED
IN THE EVENT THAT THE COURT MAKES AN ADMINISTRATION ORDER:
A QUALIFIED INSOLVENCY PRACTITIONER IS APPOINTED TO ADMINISTER THE AFFAIRS OF THE
COMPANY
THE RIGHTS OF CREDITORS TO ENFORCE DEBTS REMAIN SUSPENDED
ALL COMPANY DOCUMENTS MUST STATE THAT THE COMPANY IS IN ADMINISTRATION AND THE
NAME OF THE ADMINISTRATOR
ANY PETITION FOR WINDING-UP IS DISMISSED
AN ADMINISTRATION ORDER IN EFFECT CREATES A “BREATHING SPACE” FOR THE COMPANY –
IT FREEZES CIVIL ACTIONS AGAINST THE COMPANY AND REPOSSESSIONS OF GOODS FROM
THE DATE OF THE PRESENTATION OF THE PETITION.
ONCE AN ADMINISTRATION ORDER HAS BEEN ISSUED, IT IS NO LONGER POSSIBLE TO
COMMENCE WINDING-UP PROCEEDINGS AGAINST THE COMPANY OR ENFORCE CHARGES
ON THE COMPANY'S ASSETS –
THIS IS ONE OF THE MAJOR ADVANTAGES OF AN ADMINISTRATION ORDER
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WINDING-UP (LIQUIDATION)
DEFINITION
WINDING-UP OR LIQUIDATION IS THE LEGAL TERM FOR THE TERMINATION OR DISSOLUTION OF A
COMPANY. IT IS COMPARABLE, IN SOME WAYS, WITH THE DEATH OF AN INDIVIDUAL OR WITH THE
BANKRUPTCY OF AN INSOLVENT PERSON.
(NOTE: A LIMITED COMPANY CANNOT BE MADE BANKRUPT –A BANKRUPTCY APPLIES ONLY TO
INDIVIDUALS AND PERSONS TRADING AS PARTNERS.)
MENTION THE THREE TYPE OF LIQUIDATION UNDER THE INSOLVENCY ACT
THERE ARE THREE TYPES OF LIQUIDATION UNDER THE INSOLVENCY ACT 1986:
MEMBERS' VOLUNTARY LIQUIDATION.
CREDITORS' VOLUNTARY LIQUIDATION
COMPULSORY LIQUIDATION.
CIRCUMSTANCES IN WHICH A COMPANY MAY BE WOUND-UP VOLUNTARILY
IN ACCORDANCE WITH SECTION 84(1) OF THE INSOLVENCY ACT 1986, A COMPANY MAY BE WOUND-UP
VOLUNTARILY:
1) WHEN THEPERIOD (IF ANY) FIXED FOR THE DURATION OF THE COMPANY BY THE ARTICLES EXPIRES,
OR THE EVENT (IF ANY) OCCURS, ON THE OCCURRENCE OF WHICH THE ARTICLES PROVIDE THAT THE
COMPANY IS TO BE DISSOLVED, AND THE COMPANY IN GENERAL MEETING HAS PASSED A
RESOLUTION REQUIRING IT TO BE WOUND-UP VOLUNTARILY
2) IF THE COMPANY RESOLVES BY SPECIAL RESOLUTION THAT IT BE WOUND-UP VOLUNTARILY
3) IF THE COMPANY RESOLVES BY SPECIAL RESOLUTION TO THE EFFECT THAT IT CANNOT, BY REASON OF
ITS LIABILITIES, CONTINUE ITS BUSINESS, ANDTHAT IT IS ADVISABLE TO WIND-UP
4) THE DECISION TO HAVE A VOLUNTARY LIQUIDATION MAY BE MADE BECAUSE THE COMPANY MAY BE
NO LONGER REQUIRED TO EXIST FOR ONE (OR MORE) OF A NUMBER OF REASONS, INCLUDING:
IT MAY HAVE BEEN FORMED FOR THE PURPOSE OF UNDERTAKINGA PARTICULAR PROJECT
WHICH HAS NOW BEEN COMPLETED, E.G. THE MILLENNIUM DOME
THE OWNER-MANAGER MAY BE RETIRING
ITS ORIGINAL PURPOSE (OBJECT) MAY HAVE BECOME REDUNDANT FOLLOWING A GROUP
RESTRUCTURING.
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THE DISTINGUISHING FEATURES OF A MEMBERS' VOLUNTARY LIQUIDATION
IN ACCORDANCE WITH SECTION 90 OF THE INSOLVENCY ACT 1986, THIS IS WHERE THE DIRECTORS
ARE ABLE TO MAKE A FORMAL DECLARATION (KNOWN AS A “STATUTORYDECLARATION OF
SOLVENCY”), STATING THAT ,AFTER FULL INQUIRY INTO THE COMPANY'S AFFAIRS, THEY ARE OF THE
OPINION THAT THE COMPANY WILL BE ABLE TO PAY ITS DEBTS (INCLUDING STATUTORY INTEREST)
WITHIN 12 MONTHS OF THE COMMENCEMENT OF THE WINDING-UP.
MOREOVER, A COMPANY MUST BE SOLVENTIN ORDER TO USE THIS METHOD OF LIQUIDATION AND,
IN THE EVENT THAT THE AMOUNT REALISED FROM THE COMPANY'S ASSETS IS INSUFFICIENT TO PAY
ITS CREDITORS IN FULL, THE LIQUIDATION WILL BE CONVERTED INTO A CREDITORS' VOLUNTARY
LIQUIDATION: SECTION 96, INSOLVENCY ACT 1986.
A COMPANY IS PLACED INTO A MEMBERS' VOLUNTARY LIQUIDATION ON THE PASSING OF A SPECIAL
RESOLUTION BY THE SHAREHOLDERS WHO, AT THE SAME TIME, APPOINT A LIQUIDATOR. ON HIS
APPOINTMENT, ALL DIRECTORS' POWERS WILL CEASE.
DISTINGUISHING FEATURES OF A CREDITORS' VOLUNTARY LIQUIDATION
IN ACCORDANCE WITH SECTION 90 OF THE INSOLVENCY ACT 1986, THIS IS WHERE THE DIRECTORS
ARE UNABLE TO MAKE A FORMAL DECLARATION THAT THE COMPANY CAN PAY ALL ITS LIABILITIES IN
FULL WITHIN 12 MONTHS (INCLUDING THE ADDITION OF STATUTORY INTEREST), I.E. THEY ARE
CANNOT MAKE A SECTION 89 STATUTORY DECLARATION OF SOLVENCY PRIOR TO THE
COMMENCEMENT OF THE LIQUIDATION PROCEDURE. A COMPANY USES THIS METHOD OF
LIQUIDATION WHEN IT IS INSOLVENT –IN A CREDITORS' VOLUNTARY WINDING-UP, A FORMAL
DECLARATION OF SOLVENCY IS NOT POSSIBLE OWING TO THE CIRCUMSTANCES LEADING TO THE
WINDING-UP: SECTION 90, INSOLVENCY ACT 1986.
IN THIS TYPE OF WINDING-UP, THE SPECIAL RESOLUTION IS FOLLOWED BY A CREDITORS' MEETING,
WHERE IT IS POSSIBLE FOR A LIQUIDATION COMMITTEE TO BE APPOINTED: SECTION 98, INSOLVENCY
ACT 1986. DURING THE COURSE OF THIS MEETING, THE COMPANY'S DIRECTORS MUST PLACE
BEFORE A MEETING OF CREDITORS A FULL STATEMENT OF THE COMPANY'S AFFAIRS: SECTION 99,
INSOLVENCY ACT 1986. SUCH MEETINGS FORM NO PART OF A MEMBERS' VOLUNTARY WINDING UP.
AS WITH A MEMBERS' VOLUNTARY LIQUIDATION, THE COMPANY IS PLACED IN LIQUIDATION ON THE PASSING OF A SPECIAL RESOLUTION BY THE SHAREHOLDERS WHO, AT THE SAME TIME, APPOINT A LIQUIDATOR. IN A CREDITORS' VOLUNTARY LIQUIDATION, IN DIRECT CONTRAST TO A MEMBERS' VOLUNTARY LIQUIDATION, BOTH MEMBERS AND CREDITORS HAVE THE RIGHT TO NOMINATE A LIQUIDATOR AND, IN THE EVENT OF DISPUTE, SUBJECT TO RIGHT OF APPEAL TO THE COURTS, THE CREDITORS' NOMINEE PREVAILS. IN THIS CONTEXT, THE LIQUIDATOR IS PRIMARILY ACCOUNTABLE TO THE CREDITORS.
IT IS THE LIQUIDATOR'S DUTY TO REALISE THE ASSETS, INVESTIGATE THE COMPANY'S AFFAIRS, REPORT ON THE DIRECTORS' CONDUCT AND DISTRIBUTE FUNDS AVAILABLE IN ACCORDANCE WITH THE INSOLVENCY ACT 1986.
50
COMPULSORY LIQUIDATION
A COMPULSORY LIQUIDATION IS A LIQUIDATION IMPOSEDBY A COURT ORDER, USUALLY AS A DIRECT
CONSEQUENCE OF A CREDITOR'S PETITION, ON THE GROUNDS THAT THE COMPANY IS UNABLE TO
PAY ITS DEBTS: SECTION 122(1)(F).
IN ACCORDANCE WITH SECTION 123 OF THE INSOLVENCY ACT 1986, A COMPANY IS REGARDED AS
UNABLE TO PAY ITS DEBTS IF, AMONG OTHER THINGS:
A CREDITOR IS OWED MORE THAN £750 AND
PRESENTS A WRITTEN DEMAND IN THE PRESCRIBED FORM (KNOWN AS STATUTORY
DEMAND FORM 4.1) TO THE COMPANY AND
THE COMPANY FAILS TO PAY, SECURE OR AGREE A SETTLEMENT OF THE DEBT TO THE
CREDITOR'S REASONABLE SATISFACTION.
A COMPULSORY WINDING-UP PETITION MAY ALSO BE PRESENTED BY ANY OF THE FOLLOWING
PARTIES IN ACCORDANCE WITH SECTION 124(1) OF THE INSOLVENCY ACT 1986:
THE COMPANY OR ITS DIRECTORS
THE OFFICIAL RECEIVER
THE DEPARTMENT FOR BUSINESS ENTERPRISE AND REGULATORY REFORM (FORMERLY THE
DEPARTMENT OF TRADE AND INDUSTRY)
ANY CONTRIBUTORY (A“CONTRIBUTORY” IS ANY PERSON WHO IS LIABLE TO CONTRIBUTE TO THE
ASSETS OF THE COMPANY IN THE EVENT OF IT BEING WOUND-UP).
IN COMPULSORY LIQUIDATIONS, THEOFFICIAL RECEIVER IS AUTOMATICALLY APPOINTED AS
LIQUIDATOR FOR THE COMPANY CONCERNED.
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DISTINGUISHING FEATURES OF A COMPULSORY LIQUIDATION
AS WITH A VOLUNTARY LIQUIDATION, IT IS POSSIBLE FOR A COMPANY TO BE PLACED IN LIQUIDATION ON THE
PASSING OF A SPECIALRESOLUTION BY THE SHAREHOLDERS WHO, AT THE SAME TIME, APPOINT A
LIQUIDATOR.
IN ACCORDANCE WITH SECTION 122(1) OF THE INSOLVENCY ACT 1986 BOTH SOLVENT AND INSOLVENT
COMPULSORY LIQUIDATIONS ARE POSSIBLE. A COMPANY MUST BE SOLVENT IN ORDER TO BE WOUND-UP
ONJUST AND EQUITABLE GROUNDS –SEE EBRAHIMI V. WESTBOURNE GALLERIES (1972).
THIS METHOD OF LIQUIDATION IS APPROPRIATE WHERE:
A PUBLIC LIMITED COMPANY HAS BEEN REGISTERED FOR A YEAR AND HAS FAILED TO OBTAIN A TRADING
CERTIFICATE UNDER WHAT IS NOW SECTION 761 OF THE COMPANIES ACT 2006: SECTION 122(1)(B),
INSOLVENCY ACT 1986
A COMPANY DOES NOT COMMENCE BUSINESS WITHIN A YEAR OF IT BEING INCORPORATED OR SUSPENDS
BUSINESS FOR A WHOLE YEAR: SECTION 122(1)(D), INSOLVENCY ACT 1986
A COMPANY IS UNABLE TO PAY ITS DEBTS: SECTION 122(1)(F), INSOLVENCY ACT 1986
THE COURT IS OF THE OPINION THAT IT IS JUST AND EQUITABLE THAT THE COMPANY SHOULD BE WOUND-
UP: SECTION 122(1)(G) E.G. EBRAHIMI V. WESTBOURNE GALLERIES (1972).
THE MAIN EFFECTSOF THE MAKING OF A COMPULSORY WINDING-UP ORDER AGAINST A COMPANY ARE THAT:
AS SOON AS THE ORDER IS MADE, ALL ACTIONS FOR THE RECOVERY OF DEBT AGAINST THE COMPANY ARE
STOPPED
THE COMPANY WILL CEASE TO CARRY ON BUSINESS, EXCEPT WHERE IT IS NECESSARY FOR ITS BENEFICIAL
WINDING-UP (I.E. IN THE INTERESTS OF A MORE FAVOURABLE ASSET REALISATION)
THE POWERS OF THE DIRECTORS WILL CEASE AND ARE ASSUMED BY THE LIQUIDATOR
THE EMPLOYEES OF THE COMPANY ARE AUTOMATICALLY MADE REDUNDANT
THE OFFICIAL RECEIVER BECOMES THE LIQUIDATOR UNTIL AN INSOLVENCY PRACTITIONER IS APPOINTED.
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ROLE OF THE LIQUIDATOR FOLLOWING APPOINTMENT
ON APPOINTMENT, THE LIQUIDATOR TAKES OVER ALL THE POWERS OF THE DIRECTORS AND HE/SHE OWES A
FIDUCIARY DUTY TO THE COMPANY. HE/SHE MUST EXERCISE REASONABLE CARE AND SKILL WHEN
PERFORMING HIS/HER FUNCTIONS. THE LIQUIDATOR'S POWERS, WHICH ENABLE HIM TO CARRY OUT THE
WINDING-UP, ARE WHOLLY SET OUT IN THE INSOLVENCY ACT 1986. AMONG OTHER THINGS, A LIQUIDATOR'S
POWERS INCLUDE THE POWER TO:
SELL ANY OF THE COMPANY'S ASSETS
RAISE ANY MONEY FOR THE PURPOSES OF THE LIQUIDATION, BY USING THE COMPANY'S ASSETS AS
SECURITY
APPOINT AN AGENT TO DO ANY BUSINESS WHICH THE LIQUIDATOR CANNOT DO HIMSELF
DO ALL ACTS OR EXECUTE ALL DOCUMENTS IN THE NAME OF AND ON BEHALF OF THE COMPANY
DO ALL OTHER THINGS WHICH MAY BE NECESSARY FOR THE WINDING-UP OF THE COMPANY AND
DISTRIBUTING ITS ASSETS.
THE LIQUIDATOR OF A COMPANY CAN INCREASE THE ASSETS AVAILABLE FOR DISTRIBUTION TO CREDITORS BY
BRINGING AN ACTION FOR FRAUDULENT TRADING AND/OR WRONGFUL TRADING.
DIRECTORS' LIABILITY FOR "WRONGFUL TRADING"
ON THE APPLICATION OF THE LIQUIDATOR, THE COURTS CAN DEEM A DIRECTOR PERSONALLY LIABLE TO THE
COMPANY'S CREDITORS FOR THEIR LOSSES INCURRED THROUGH THE COMPANY'S WRONGFUL TRADING.
THIS APPLIES TO DIRECTORS OR FORMER DIRECTORS OF INSOLVENT COMPANIES WHO, PRIOR TO THE
COMMENCEMENT OF THE WINDING-UP OF THEIR COMPANY KNEW, OR OUGHT TO HAVE KNOWN, THAT
THERE WAS NO REASONABLE PROSPECT OF THEIR COMPANY AVOIDING INSOLVENT LIQUIDATION AND WHO
HAVE FAILED TO TAKE ALL REASONABLE STEPS TO PREVENT THAT FROM HAPPENING: SECTION 214,
INSOLVENCY ACT 1986.
THE EFFECT OF THIS STATUTORY PROVISION IS THAT A DIRECTOR MAY BE MADE PERSONALLY LIABLE FOR THE
DEBTS AND LIABILITIES OF THE INSOLVENT COMPANY IF HE/SHE KNEW THAT IT COULD NOT AVOID INSOLVENT
THE LAW RELATING TO ASSOCIATIONS 1: CORPORATIONS 73
© ABE
53
LIQUIDATION AND DID NOT TAKE ALL REASONABLE STEPS OPEN TO HIM/HER TO PREVENT ITS CREDITORS
FROM SUFFERING GREATER LOSS THAN THEY WOULD HAVE SUFFERED BY AN IMMEDIATE CESSATION OF THE
COMPANY'S ACTIVITIES, OR IF A REASONABLE DIRECTOR WITH THE KNOWLEDGE AVAILABLETO HIM/HER
WOULD HAVE CONCLUDED THAT THE COMPANY COULD NOT HAVE AVOIDED INSOLVENCY AND WOULD HAVE
TAKEN MORE EFFECTIVE STEPS TO MINIMISE THE LOSSES TO CREDITORS. CONVERSELY, DIRECTORS MAY
ESCAPE LIABILITY WHERE THEY CAN SHOW THAT, AFTER THE TIME WHEN THEY KNEW, OR OUGHT TO HAVE
KNOWN, THAT THERE WAS NO REASONABLE CHANCE OF THEIR COMPANY AVOIDING INSOLVENT
LIQUIDATION, THAT THEY TOOK EVERY STEP WITH A VIEW TO MINIMISING THE POTENTIAL LOSS TO THE
COMPANY'S CREDITORS.
IN DECIDING WHAT A DIRECTOR OUGHT TO HAVE DONE, THE COURTS ADOPT A PARTLY OBJECTIVE STANDARD
BY CONSIDERING WHAT WOULD HAVE BEEN DONE BY A REASONABLY DILIGENT PERSON HAVING THE
KNOWLEDGE, SKILL AND EXPERIENCE THAT MAY REASONABLY BE EXPECTED OF A PERSON CARRYING OUT THE
SAME FUNCTIONS AS THE DIRECTOR IN QUESTION. THERE IS AN ADDITIONAL SUBJECTIVE TEST WHICH MAY
SERVE TO INCREASE THE INDIVIDUAL'S LIABILITY, DEPENDING ON THE ACTUAL KNOWLEDGE, SKILL AND
EXPERIENCE THAT THE DIRECTOR INVOLVED HAS.
THE EXTENT OF A DIRECTOR'S PERSONAL LIABILITY TO CONTRIBUTE TO THE ASSETS OF THE COMPANY IS
DETERMINED BY THE REFERENCE TO THE LOSSES INCURRED BY THE COMPANY FROMTHE DATE WHEN THE
DEFENDANT OUGHTTO HAVE REALISED THAT THE COMPANY COULD NOT AVOID GOING INTO INSOLVENT
LIQUIDATION: RE PRODUCE MARKETING CONSORTIUM LTD (1989).
UNDER THE 1986 ACT, THE COURTS, ON APPLICATION BY THE SECRETARY OF STATE OR THE OFFICIAL
RECEIVER, MUST DISQUALIFY A DIRECTOR IF THE COMPANY BECAME INSOLVENT WHILE HE/SHE WAS A
DIRECTOR AND HIS/HER CONDUCT AS A DIRECTOR OF THAT COMPANY MAKESHIM/HER UNFIT TO BE
INVOLVED IN THE MANAGEMENT OF ANOTHER COMPANY.
IN ORDER TO ENSURE THAT DIRECTORS DO NOT HAVE THE CONSTANT THREAT OF POSSIBLE
DISQUALIFICATION, THE ORDER ITSELF MUST BE APPLIED FOR WITHIN TWO YEARS OF THE LIQUIDATION,
ALTHOUGH THIS TIMELIMIT MAY BE EXTENDED AT THE COURT'S DISCRETION.
SUBSTANTIAL CASE LAW HAS DEVELOPED IN RECENT YEARS AS A RESULT OF THE PROVISIONS FOR
FRAUDULENT TRADING AND WRONGFUL TRADING CONTAINED IN COMPANIES LEGISLATION.
FRAUDULENT TRADING
FRAUDULENT TRADING OCCURS WHERE THE BUSINESS OF THE COMPANY IS CARRIED ON WITH INTENT TO
DEFRAUD CREDITORS OR FOR ANY OTHER FRAUDULENT PURPOSE. IT IS, THEREFORE, NECESSARY TO
ESTABLISH DISHONEST INTENT IN ORDER TO OBTAIN A SUCCESSFUL CONVICTION. THIS WILL BE INFERRED
WHERE A COMPANY CARRIES ON BUSINESS AND CONTINUES TO INCUR LIABILITIES WHERE THERE IS NO
REASONABLE PROSPECT OF THOSE LIABILITIES BEING MET: RE WILLIAM C LEITCH BROS. (1932).OTHER
EXAMPLES OF "FRAUDULENT" TRADING UNDER SECTION 213 OF THE INSOLVENCY ACT 1986 INCLUDE PAYING
CREDITORS OUT OF ORDER ON THE PREFERENTIAL LIST OF CREDITORS, ESPECIALLY WHERE A PARTY
54
"KNOWINGLY" PAYS ONE PARTY OF CREDITORS OFF IN THE KNOWLEDGE THAT THIS WILL RESULT IN
CREDITORS HIGHER UP THE PREFERENTIAL LIST LOSING OUT FINANCIALLY.
TO THIS END, A CREDITOR WHO, KNOWING OF THE CIRCUMSTANCES, ACCEPTS MONEY FRAUDULENTLY
OBTAINED BY THE COMPANY MAY BE LIABLE TO REPAY IT, EVEN IF HE TOOK NO PART IN THE FRAUDULENT
TRADING ITSELF: REGERALD COOPER CHEMICALS LTD (1978).
IN GENERAL, IT MAY BE PROPERLY INFERRED THAT THERE IS AN INTENT TO DEFRAUD CREDITORS IF A
COMPANY CARRIES ON BUSINESS AND INCURS DEBTS WHEN, TO THE KNOWLEDGE OF THE DIRECTORS, THERE
IS NO REASONABLE PROSPECT OF THE COMPANY BEING ABLE TO PAY THEM. IT IS NOT NECESSARY TO SHOW
THAT THERE WAS NO PROSPECT OF THE CREDITORS EVER BEING PAID. IT IS ENOUGH THAT THERE IS NO
REASON FOR THINKING THAT THEY WILL BE PAID AS THE DEBTS FALL DUE OR SHORTLY THEREAFTER: IN THE
CASE OF R V. GRANTHAM (1984), TWO OF THE COMPANY'S DIRECTORS WHO ORDERED A CONSIGNMENT OF
POTATOES ON ONE MONTH'S CREDIT, AT A TIME WHEN THEY KNEW PAYMENT WOULD NOT BE
FORTHCOMING, WERE FOUND GUILTY OF FRAUDULENT TRADING.
.UNINCORPORATED ASSOCIATIONS
WE MUST NOW CONSIDER THE RATHER UNUSUAL POSITION OF GROUPS OF PERSONS WHO ARE ASSOCIATED
IN SOME COMMON INTEREST BUT HAVE NOT BECOME INCORPORATED AND, THEREFORE, HAVE NO
CORPORATE ENTITY OR LEGAL PERSONALITY. WITHIN THIS GENERAL CATEGORY ARE NUMEROUS EXAMPLES
OF ASSOCIATIONS RANGING FROM SMALL SOCIAL AND BRIDGE CLUBS; CULTURAL SOCIETIES, SPORTS CLUBS
AND RELIGIOUS BODIES (OTHER THAN THE CHURCH OF ENGLAND) TO LARGE, POWERFUL TRADE UNIONS.
ALSO INCLUDED IN THIS CATEGORY ARE PARTNERSHIPS, ALTHOUGH THEY ARE THE SUBJECT OF THE NEXT
CHAPTER.
LEGAL POSITION
SINCE THE LAW DOES NOT TREAT SUCH ASSOCIATIONS AS SEPARATE ENTITIES, WITH A LEGAL PERSONALITY
OF THEIR OWN, IT IS NECESSARY TO CLARIFY THEIR POSITION IN CERTAIN RESPECTS, AMONG WHICH THE
FOLLOWING DESERVE PARTICULAR NOTICE.
IF PROPERTY IS HELD BY A LARGE NUMBER OF PERSONS WHO FORM AN UNINCORPORATED ASSOCIATION,
IT IS USUAL TO VEST THE PROPERTY IN TRUSTEES AND TO SET OUT THE RULES AND REGULATIONS OF THE
ASSOCIATION IN A TRUST DEED.
AN UNINCORPORATED ASSOCIATION CANNOT ENTER INTO A CONTRACT. A CONTRACT MADE ON ITS
BEHALF IS REGARDED BY THE LAWAS THE CONTRACT OF THE INDIVIDUAL MEMBERS WHO ACTUALLY MADE,
OR GAVE, AUTHORITY FOR THE PARTICULAR CONTRACT –SUCH AS THE MANAGING COMMITTEE.
ANY TORTS COMMITTED IN CONNECTION WITH ANY OF THE ACTIVITIES OF THE ASSOCIATION ARE TREATED
AS THE TORTS OF THE INDIVIDUAL MEMBERS RESPONSIBLE. FOR EXAMPLE, THE COMMITTEE OF A FOOTBALL
CLUB WHICH COMMISSIONED THE REPAIR OF A STAND WAS HELD RESPONSIBLE WHEN A MEMBER OF THE
PUBLIC WAS INJURED, ON THE COLLAPSE OF THE STAND, OWING TO BAD WORKMANSHIP.
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THE MEMBERS AS A WHOLE ARE LIABLE FOR THE DEBTS OF THE ASSOCIATION IF THE CONTRACT WAS MADE
BY AN AUTHORISED AGENT.
THE MEMBERS MAY DELEGATE CERTAIN POWERS TO A COMMITTEE, SOMETIMES INCLUDING THE POWERS
OF EXPULSION. IF A COURT CONSIDERS THAT THE EXERCISE OF SUCH POWER IS CONTRARY TO PUBLIC POLICY,
IT MAY OVERRULE THE COMMITTEE'S DECISION.
75
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CHAPTER 4
THE LAW RELATING TO ASSOCIATIONS 2: PARTNERSHIPS
CONTENTSPAGE
A.PARTNERSHIPS76
DEFINITION76
DIFFERENCES BETWEEN A REGISTERED COMPANY AND A PARTNERSHIP77
THE DUTIES OF PARTNERSHIP80
THE RIGHTS OF PARTNERSHIP81
RELATIONSHIP OF PARTNERS TO THIRD PARTIES83
TERMINATION OF PARTNERSHIP84
BANKRUPTCY OF PARTNERSHIP86
LIABILITY OF NEW AND RETIRING PARTNERS86
RIGHTS OF PARTNERS ON DISSOLUTION87
B.LIMITED LIABILITY PARTNERSHIPS87
DEFINITION87
INCORPORATION AND AGREEMENT87
“DESIGNATED MEMBERS”88
DIFFERENCES BETWEEN AN LLP, A PARTNERSHIP AND A REGISTERED COMPANY88
FINANCIAL REGULATION89
DUTIES AND RIGHTS OF MEMBERS90
TERMINATION OF MEMBERSHIP91
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