Case law references

Question 1

Braymist Ltd v Wise Finance Co Ltd [2002]

Chapter 1

Answer 1

In some instances the statutory provision may be drafted poorly or unclearly and need to be interpreted by court.

Pre s.51 - pre-incorporation contract -
the person who signs on behalf of a company can personally enforce the pre-incorporation contract.

It was clearly Parliament’s intention that s. 36C [now replaced by s51] resulted in the creation of a contract between the promoter (Sturges) and the third party (Wise). A contract could only take effect if both parties were able to enforce it, and so Sturges was able to sue Wise on the contract.

Question 2

Erlanger v New Sombrero Phosphate Co (1878)

Chapter 3

Answer 2

Pre-incorporation contracts, fudiciary duties, disclosure of nature of transaction and profits

Disclosure is only valid if the persons to whom disclosure is made are independent

Question 3

Royal Mail Estates Ltd v Maple Teesdale [2015]

Pre-incorporation contract

Answer 3

If a person signs a contract on behalf of a company that is yet to be incorporated, then the PERSON signing the contract can be LIABLE as if it were the party specified in the contract.

The court stated that ‘there is only a contrary agreement… if there is found to be an agreement between the parties by which they intended to exclude the [s. 51] effect’. As neither RME nor MT knew that Kensington had not been incorporated at the time of the contract, it followed that they could not have had in mind s. 51 when they agreed the words in clause 24.1. Accordingly, clause 24.1 did not amount to an agreement to the contrary and MT’s application was refused. 29

Question 4

Lee v Lee’s Air Farming Ltd [1961]

Answer 4

Contractual capacity

Lee might have been the company’s only director and owned almost all its shares, but this did not alter the fact that the company was a separate person. Accordingly, he had not entered into a contract with
himself – he contracted with the company and was its employee. Lee’s widow was therefore entitled to compensation. 37

Question 5

Macaura v Northern Assurance Co Ltd [1925]

Answer 5

Company’s assets are distinct from those of other persons

In order to claim on the policy, Macaura would need to have an insurable interest in the timber. He did not have such an interest as the timber did not belong to him – it belonged to the company. Accordingly, Macaura’s claim failed. 38

Question 6

Cristina v Seear [1985]

Answer 6

Any business being carried on by the company is the company’s business, not that of its directors or member

Question 7

Salomon v A Salomon & Co Ltd [1897]

Answer 7

Salomon is seminal for three reasons:

1. Incorporated company could legitimately be used to shield its members from liability
2. It recognises the validity of the one-person company
3. Relationship of agency or trusteeship is not established simply because a person holds shares

Question 8

Gilford Motor Co Ltd v Horne [1933]

Answer 8

Corporate personality can be disregarded where the company was being used to perpetuate a fraud, facade or sham or was used to evade from some form of legal obligation.

Question 9

Smith, Stone and Knight Ltd v Birmingham Corporation [1939]

Answer 9

Courts could disregard corporate personlaity where a relationship of agency existed. In such a relationship, the principal is liable for the acts of the agent.

The court held that, due to the level of domination that SSK had over the subsidiary (SSK owned the subsidiary’s business, the land upon which it conducted business and it owned 497 of the subsidiary’s 502 shares), the subsidiary was an agent of SSK. Accordingly, the subsidiary’s corporate personality was disregarded and SSK received the compensation.

Question 10

Petrodel Resources Ltd v Prest [2013]

Piercing the corporate veil

Answer 10

Court provided clarity on disregarding the corporate personality.
Courts will only pierce the veil when other remedies have been of no assistance

Mrs Prest’s appeal was allowed and the Supreme Court ordered that the assets held by the companies were held on trust for Mrs Prest’s benefit. Accordingly, the Court did not need to disregard the companies’ corporate personalities and indeed, the Court refused to do so. The Court did clarify when the courts could disregard corporate personality (although such comments were only obiter). Lord Sumption stated that there was only one instance in which the courts could pierce the veil, namely where ‘a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control’.
Further, a court could only pierce the veil in this instance if ‘all other, more conventional, remedies have proved to be no assistance’. 42

Question 11

Wood v Baker [2015]

Answer 11

Concealment principle in disregarding corporate personality

The Court stated Baker had ‘demonstrated a way of working which involves interposing front men, or front companies, between his trustees and his business affairs…’ These companies were clearly
interposed in order to avoid the obligations he owed to his trustees in bankruptcy, which was a clear example of the evasion principle in action.
Accordingly, the court order was granted and the corporate personalities of the various companies were disregarded and their assets frozen

Question 12

Chandler v Cape Industries plc [2012]

Answer 12

Duty of care to impose liability on a parent company for injuries caused by subsidiary.

Asbestos, subsidiary dissolved, parent co ordered to pay damages.

Question 13

Williams v Natural Life Health Foods Ltd [1998]

Answer 13

Personal liability

Mistlin was not liable. In order to establish liability for negligent misstatement, the claimants would need to show that Mistlin assumed a responsibility towards them when making the statement. Mistlin had never dealt directly with the claimants and so the court held that
‘[t]here were no exchanges or conduct crossing the line which could
have conveyed to the [claimants] that Mr. Mistlin was willing to assume personal responsibility to them’.

Question 14

Meridian Global Funds Management Asia Ltd v Securities Commission
[1995]

Answer 14

Attribution (defendant had certain state of mind)
However, “directing mind and will” test is not suitable in all cases.

Lord Hoffmann stated that the constitution, along with general legal principles of agency and vicarious liability, will usually be enough to determine who is liable. If not, the court may need to determine exactly how a particular rule applies to a company, which may involve the court having to ‘fashion a special rule of attribution for the particular substantive rule’. In some cases, the ‘directing mind and will’ approach might be appropriate, but in other cases, it might not be. It will be a ‘question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company’.
In Meridian, in terms of whose knowledge was to count as the knowledge of the company, Lord Hoffmann did not feel that this was a
case where a special rule of attribution needed to be fashioned, as the
case could be determined on agency principles. Accordingly, the person whose knowledge would be attributed to the company is ‘the person who, with the authority of the company, acquired the relevant interest’, namely the chief investment officer. To rule otherwise would allow the policy of the law to be defeated as it would encourage board members to pay little attention to what their investment managers were doing.
On this basis, the chief investment officer’s knowledge was attributed to Meridian and it was held liable.

Question 15

Bilta (UK) Ltd v Nazir (No 2) [2015]

Answer 15

Attribution as a defence
Can actions of certain people be attributed to the company?
Wrongdoing of directors cannot be attributed to the company as a defence against illegality.

Lord Neuberger stated that:
‘Where a company has been the victim of wrong-doing by its directors, or of which its directors had notice, then the wrongdoing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the
company’s liquidator.’

Some questions remain unanswered (does the ratio of Bilta only apply to insolvent companies, for example). Lord Neuberger in Bilta recognised this and
stated that the Supreme Court needed to address in a future case the proper approach to how the illegality defence applies to companies.

Clarification is still needed.

Question 16

Rayfield v Hands [1960]

Answer 16

Sometimes Article provisions need to be interpreted by courts when there is no clarity.

The court stated that article 11 imposed an obligation upon the directors to take Rayfield’s shares because article 11 stated that the directors ‘will take the said shares’ and this indicated a ‘resultant prospective eventuality, in which the member has to sell his shares and the directors have to buy them’. 53

Question 17

Greenhalgh v Arderne Cinemas Ltd [1951]

Answer 17

Amendment to Articles - in some cases the amendment affects not the company itself, but members - hypothetical members’ as a whole benefit.

Evershed MR stated that ‘the case may be taken of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favour, for that person’s benefit’. In determining this, the court would ask whether ‘the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give to the former an advantage of which the latter were deprived’. Applying this, the court held that
the amendment was valid because it might well be in a hypothetical member’s benefit to sell his shares directly to an outsider. Further, the advantage obtained by Mallard was also obtained by all the other
shareholders, so the amendment did not discriminate between majority and minority shareholders. 54

Question 18

Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [1927]

Answer 18

If amendment is motivated by fraud or malie, then it will not be bona fide.

Bankes LJ confirmed that the test for altering the articles was subjective, but went on to discuss how the subjective belief of the shareholders should be ascertained, stating:
‘The alteration may be so oppressive as to cast suspicion on the honesty of the persons responsible for it, or so extravagant that no reasonable men could really consider it for the benefit of the company. In such cases the Court is, I think, entitled to treat the
conduct of shareholders as it does the verdict of a jury, and to say that the alteration of a company’s articles shall not stand if it is such that no reasonable men could consider it for the benefit of the
company.’
Applying this, he stated that ‘it seems to me impossible to say that the action of [Shuttleworth’s co-directors] was either incapable of being for the benefit of the company or such that no reasonable men could
consider it for the benefit of the company’. Accordingly, Shuttleworth’s challenge failed and the amendment was deemed to be valid. 55

Question 19

Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd [1920]

Answer 19

Article provisions must be drafted carefully if they are to be valid.
Share expropriation or squeeze out provisions.
Unrestricted and unlimited power of expropriation was not for the benefit of the company.
Such a provision might in some circumstances be
very prejudicial to the company’s interest.’
The court held that the amendment of the articles was not bona fide for the benefit of the company, and was therefore invalid. 56

Question 20

Hickman v Kent or Romney Marsh Sheepbreeders’ Association

Answer 20

Enforcing s33 contract - if a member breaches a term of constitution, the company can sue the member for breach of constitution.

If a member breaches a term of the constitution, the company can sue the member for breach of contract. The constitution formed a contract between the company and Hickman, and Hickman had breached this contract. Accordingly, the court stayed the legal proceedings brought by Hickman and allowed the company to enforce the arbitration clause. 57

Also members cannot sue to enforce outsider rights.

Question 21

Wood v Odessa Waterworks Co (1889)

Answer 21

If the company breaches a term of the constitution, a member can sue the company for breach of contract.

Wood’s action succeeded and an injunction was granted preventing the bonds from being issued. Stirling J stated that the articles provide that:
‘the directors may, with the sanction of a general meeting, declare a dividend to be paid to the shareholders. Prima facie that means to
be paid in cash. The debenture-bonds proposed to be issued are not payments in cash; they are merely agreements or promises to pay:
and if the contention of the company prevails a shareholder will be compelled to accept in lieu of cash a debt of the company payable at some uncertain future period. In my opinion that contention ought not to prevail.’ 57

Question 22

Rayfield v Hands [1960]

Answer 22

If a member (or members) of the company breaches a term of the constitution, another member can sue for breach of contract

The directors had breached the articles and so Rayfield’s action succeeded. The court ordered that the directors should purchase Rayfield’s shares. 58

Question 23

Eley v Positive Government Security Life Assurance Co (1876)

Answer 23

Outsiders cannot enforce constitution

Although the company might have removed Eley in breach of the articles, Eley could not sue for breach because, as an outsider, he was not party to the s. 33 contract. Accordingly, his action failed. 58

Question 24

Beattie v E and F Beattie Ltd [1938]

Answer 24

Members can only enforce s33 contract if they bring a claim in their capacity as members.
Greene MR stated that ‘the contractual force given to the articles of association… is limited to such provisions of the articles as apply to the relationship of the members in their capacity as members’. The dispute was between the company and EB in his capacity as a director, not in his capacity as a member. Accordingly, the arbitration article could not be enforced and the legal proceedings continued. 59

Question 25

MacDougall v Gardiner (1875)

Answer 25

Internal irregularities

Mellish LJ stated:
‘if the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there
can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes.’
Accordingly, the court held that, although the chair had breached the articles, the breach was an internal irregularity and so the shareholder’s action failed. 59

Question 26

Russell v Northern Bank Development Corp Ltd [1992]

Answer 26

in cases where the company is party to an agreement, and the agreement seeks to restrict co’s statutory rights/ Shareholders are bound by the agreement, but the co is not.

The House distinguished between the company and the five
shareholders. The shareholders had simply agreed to exercise their votes in a particular way and so clause 3 was binding upon the shareholders.
However, the effect of clause 3 upon the company was to unlawfully
fetter the company’s statutory powers (i.e. to increase its share capital) and so clause 3 was not binding upon the company. The House severed the part of clause 3 that sought to bind the company and declared binding the parts of clause 3 that affected the five shareholders. 61

Question 27

Hely-Hutchinson v Brayhead Ltd [1968]

Answer 27

Implied actual authority

A person need not be formally appointed to obtain implied actual authority

Lord Denning MR stated:
‘It is plain that… Richards had no express authority to enter into these… contracts on behalf of the company… but he had authority implied from the conduct of the parties and the circumstances of the case.’

The conduct Lord Denning MR referred to was the fact that ‘the board by their conduct over many months had acquiesced in [Richards] acting as their chief executive and committing Brayhead Ltd to contracts without the necessity of sanction from the board’. Accordingly, Richards had implied actual authority to enter into the indemnity on Brayhead’s behalf and Hely-Hutchinson’s claim succeeded. 64

Question 28

Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964]

Answer 28

Apparent authority

The principal has placed the agent in a position in which the outside world is generally regarded as carrying authority to enter into transactions of the kind.

Diplock LJ stated:
‘The representation which creates “apparent” authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal’s business with other persons. By so doing
the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an
agent so acting in the conduct of his principal’s business has usually “actual” authority to enter into.’
By acquiescing to Kapoor acting as managing director, Buckhurst had represented to the architects that Kapoor had the authority to engage in activities that a managing director would usually be authorised to
undertake, including entering into contracts on behalf of the company.
Accordingly, Kapoor had apparent authority to engage the architects
and so Buckhurst was liable to pay them. 66

Question 29

Royal British Bank v Turquand (1856)

Answer 29

Indoor management rule, s40
Turquand rule - third parties that deal with the company can assume that the co’s internal rules have been complied with.

Jervis CJ held that the company was bound to pay back the money to
the bank. He stated that ‘[f]inding that the [directors’] authority might
be made complete by a resolution, [the bank] would have a right to
infer the fact of a resolution authorising that which on the face of the
document appeared to be legitimately done’. In other words, the bank
was entitled to assume that the directors had complied with the articles. 69

Question 30

Bushell v Faith [1970]

Answer 30

Weighted voting rights can make the removal difficult or impossible.

The Companies Act 1948 did not prohibit weighted voting rights clauses and so the clause was valid. Accordingly, the resolution was validly defeated by Faith and Bushell’s claim failed. 82

Question 31

Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame

Answer 31

Division of powers
Power of management is vested in directors, shareholders cannot usurp power

The right to manage the company was vested in the directors and the shareholders could only interfere if the articles so provided. The shareholders had not passed an extraordinary resolution (they had
merely passed an ordinary resolution), and so the directors were not compelled to comply with the shareholders’ direction and could therefore refuse to sell the assets. 87

Question 32

Salmon v Quin & Axtens Ltd [1909]

Answer 32

‘Subject to Articles’, provisions in the articles can be inserted that affect the division of power between M and D.

The power of management vested in the directors was subject to the articles, which gave the claimant a power of veto. The claimant had validly exercised this veto and so the court granted an injunction restraining the company from acquiring the properties.

Question 33

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd
[1971]

Answer 33

Secretary can enter into administrative contracts, and has apparent authority to do so.

Lord Denning MR stated that the company secretary:
‘is an officer of the company with extensive duties and
responsibilities…. He is no longer a mere clerk. He regularly makes representations on behalf of the company and enters into contracts on its behalf which come within the day-to-day running of the company’s business. So much so that he may be regarded as held
out as having authority to do such things on behalf of the company. He is certainly entitled to sign contracts connected with the administrative side of a company’s affairs, such as employing staff, and ordering cars, and so forth. All such matters now come within the ostensible authority of a company’s secretary.’
Applying this, the court held that the hiring of cars was an administrative matter and so the secretary had apparent authority to enter into the contract on behalf of the company, which was therefore required to pay the hire charges.

Question 34

Howard Smith Ltd v Ampol Petroleum Ltd [1974]

Answer 34

Breach of power - substantial purpose

It is the propriety of substantial purpose that will determine if breach of duty has occurred.

Lord Wilberforce stated that the substantial purpose of the allotment was to ‘dilute the majority voting power held by Ampol… so as to enable a then minority of shareholders to sell their shares more
advantageously’. As to whether this purpose was proper or improper, he stated that ‘an issue of shares purely for the purpose of creating voting power has repeatedly been condemned’. Miller’s directors were held to be in breach of duty and the share allotment was set aside 96

Question 35

Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970]

Answer 35

Duty to promote success of the company - Subjective approach

Pennycuick J concluded that the directors of the subsidiary company did not consider how the agreement would affect the subsidiary – instead, they considered only how the agreement would affect the corporate group. A subjective test was therefore of no use: instead, the test to apply would be ‘whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company’. Based on this, the court held that no breach of duty had occurred.

Question 36

Fulham Football Club Ltd v Cabra Estates plc [1992]

Answer 36

Duty to exercise independent judgement - exceptions

No breach of duty where D acts in accordance with an agreement duly entered into by Co that restricts the future exercise of discretion.

Neill LJ stated that:
‘it does not follow from that proposition that directors can never make a contract by which they bind themselves to the future exercise of their powers in a particular manner, even though the contract taken as a whole is manifestly for the benefit of the
company. Such a rule could well prevent companies from entering into contracts which were commercially beneficial to them.’
Here, the directors of Fulham honestly believed that the agreement was in Fulham’s interests and it did indeed confer significant benefits upon Fulham. The court held that the duty had not been breached and the agreement between Vincenza and Fulham was valid. 100

Question 37

Bhullar v Bhullar [2003]

Answer 37

Duty to avoid conflicts of interest - when the the Co could take advantage of the property, information or opportunity but chose not to do so.

Jonathan Parker LJ stated that:
‘the relevant question … is not whether the party to whom the duty is owed … had some kind of beneficial interest in the opportunity: in my judgment that would be too formalistic and restrictive an approach. Rather, the question is simply whether the fiduciary’s exploitation of the opportunity is such as to attract the
application of the rule.’
Applying this, the court held that even though S had not acquired the property while acting for the company, he did have a duty to inform the company of the opportunity so that it could decide whether to
acquire the property or not. By failing to do so, the s. 175 duty had been breached. The fact that the company had agreed not to acquire any more properties was irrelevant. 102

Question 38

In Plus Group Ltd v Pyke [2002]

Answer 38

Breach of duty - directorship in rival co

Brooke LJ stated that ‘[t]here is no completely rigid rule that a director may not be involved in the business of a company which is in competition with another company of which he was a director’ and Sedley LJ stated that cases involving directors taking up rival directorships were ‘fact-specific’. However, Sedley LJ did go on to state that the situations where a director can take up a rival directorship were ‘very narrow indeed’.
The court agreed that this was one such situation (although the reasoning of the judges did differ in parts) and that Pyke had not acted in breach of duty as he had been excluded from management, he was not permitted to withdraw his money from IPG, and he had not used any confidential information he acquired while at IPG. 103

Question 39

Industrial Development Consultants Ltd v Cooley [1972]

Answer 39

Breach of duty, s175 - former directors - exploitation of property , information or opportunity of which he became aware when he was a director of the Co.

Cooley was held in breach of duty and had to account for the profits he made. Cooley should have told the company that the Gas Board was once again looking for someone to build the depots. By not doing so and obtaining the contract himself, he ‘embarked upon a deliberate policy and course of conduct which put his personal interest as a potential contracting party with the Eastern Gas Board in direct conflict with his pre-existing and continuing duty as managing director of the plaintiffs’. He had exploited an opportunity he became aware of while he was a managing director and resigned so that he could take advantage of it himself. 104

Question 40

Re Duomatic Ltd [1969]

Answer 40

Ratification - Court’s power to grant relief

A director who could be found liable for certain conduct can be relieved of liability by court, if it believes that D acted honestly and reasonably.

The court held that all three payments were made in breach of duty, so the question was whether to grant relief to the directors concerned. The court held:
‹‹ as regards payment (a), relief was granted on the ground that all the members knew and approved of the remuneration payments;
‹‹ as regards payment (b), relief was granted as E had merely followed a practice that had been followed in previous years; and
‹‹ as regards payment (c), relief was not granted as such a loss of office payment should have been disclosed to, and authorised by, the members of the company and this had not occurred. 108

Question 41

Re Burry & Knight Ltd [2014]

Answer 41

Inspection of the register

No-access court order - improper purpose

Arden LJ stated that the information Knight sought would not provide any benefit to the members. Further, she agreed with the contention that Knight wished to inspect the register in order conduct a vendetta
against the controllers of the company. This was held to be an improper purpose and so the no-access order was granted. 119

Question 42

Re Duomatic Ltd [1969]

Answer 42

Unanimous assent - if all members agree, then the decision will be validly made even if no meeting takes place.

Buckley J stated ‘where it can be shown that all shareholders who have a right to attend and vote at a… meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be’. The directors held all the voting shares and their unanimous assent was regarded as a decision of the company. Accordingly, the liquidator’s claim failed. 125

Question 43

Giles v Rhind [2002]

Answer 43

Exception to No Reflective Loss principle
member can bring a claim for losses that are reflective of those sustained by the Co if the Co is unable to claim due to that person’s conduct.

The court noted that, in Johnson, it was held that a member could sue for a reduction in the value of his shareholding if the company did not have a cause of action. Here, Waller LJ stated that ‘the same should be true of a situation in which the wrongdoer has disabled the company from pursuing that cause of action’. Giles’ personal action against Rhind was therefore allowed to continue. 135

Question 44

Foss v Harbottle (1843)

Answer 44

Derivative claim - Proper claimant

The court held that the conduct engaged in by the defendants had
not just caused loss to Foss and Turton – it was ‘an injury to the whole corporation’. Wigram V-C stated that ‘[i]t was not, nor could it successfully be, argued that it was a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation’. There was nothing preventing the company from commencing proceedings to obtain redress and, as it was the proper claimant, Foss and Turton’s claim failed. 137

Question 45

Re Legal Costs Negotiators Ltd [1999]

Answer 45

Unfairly prejudicial conduct - Company affairs - Petition under s.994 will not succeed if it’s based onthe conduct of a person in relation to his own affairs and not those of the company

Peter Gibson LJ stated that Hateley’s decision to keep the shares did not constitute conduct relating to the company’s affairs – the conduct
complained of related to Hateley’s own affairs as a member. The directors’ petition was struck out. 142

Question 46

Re Home & Office Fire Extinguishers Ltd [2012]

Answer 46

Unfairly prejudicial conduct - what amounts to company affairs?

One member attacking the other constituted to company affair.

The court was satisfied that, based on the available evidence, it was Simon that attacked Guy. One might assume that Simon attacking Guy would not constitute conduct relating to the company’s affairs, but the court held that it did. This was because Simon’s conduct ‘was a breach of the implied understanding that he and Guy, would act properly and in good faith towards each other, and it was also a single event which made it impossible for them to continue their association as directors of, and shareholders in, the Company’. Guy’s petition succeeded and Simon was ordered to sell his shares to Guy. 143

Question 47

Grace v Biagioli [2005]

Answer 47

Unfair prejudicial conduct - Conduct was prejudicial but FAIR.

The court held that, in removing Grace from office, the other directors had indeed treated him in a prejudicial manner. However, his removal was not unfair because, by entering into negotiations to purchase a rival company, Grace had placed himself in a position of actual or potential conflict with his duties as a director. The other directors were justified in removing Grace from office.
144

Question 48

Re Sam Weller & Sons Ltd [1990]

Answer 48

The interests of members - Interests are wider than rights. Petitioners’s rights were not unfairly prejudicied, but his interest were.

The court held that the payment of low dividends did not breach the petitioners’ rights as members. However, Peter Gibson J went on to state that ‘[t]he word “interests” is wider than a term such as “rights” … Parliament recognised that members may have different interests, even if their rights as members are the same’. The director was also a member, and his interests differed to those of the other members. The director might wish to retain profits in order to bolster the value of his own shareholding. As regards the other members, however, Peter Gibson J stated:
‘It may well be in the interests of the other shareholders, including the petitioners, that a more immediate benefit should accrue to them in the form of larger dividends. As their only income from the company is by way of dividend, their interests may be not only prejudiced by the policy of low dividend payments, but unfairly prejudiced.’ The director’s strike out application was dismissed.

Question 49

O’Neill v Phillips [1999]

Answer 49

Equitable considerations- often involve “a fundamental understanding between the shareholders which formed the basis of their association, but was not put into a contractual form. The breach of such an understanding can amount to unfairly prejudicial conduct.

Lord Hoffmann stated that:
‘a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But… there will be cases in which equitable considerations make it unfair for those conducting the affairs of the
company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.’
The House held that Phillips had not promised to transfer any shares to O’Neill, nor had he promised that O’Neill would always receive an equal share of the company’s profits. There had been no breach of the company’s constitution (so O’Neill’s rights had not been breached) and there were no facts indicating that ‘equitable considerations’ were relevant here. 146

Question 50

Ebrahimi v Westbourne Galleries Ltd [1973]

Answer 50

Quasi-partnership - equitable considerations - just and equitable winding up - exclusion of member from management will justify winding up

There was no doubt that the removal of E was conducted in accordance with statute and the company’s articles, but this did not mean that the just and equitable remedy would not apply. Lord Wilberforce stated that these equitable considerations could arise if the company in question was a quasi-partnership. Here, the company was a quasi-partnership and so equitable
considerations would apply. The relevant consideration here was the understanding that E and N would be involved in management of the business, and there was an indisputable inference that ‘the character
of the association would, as a matter of personal relation and good faith, remain the same’. The House therefore held that, by removing E
from office, N and G had breached this understanding and so the court ordered that the company be wound up.

Question 51

Re Mackenzie and Co Ltd [1916]

Answer 51

Variation of class rights - as long as class rights remain the same the alteration will not be enough to be classified as variation.

The reduction of the nominal value of the preference shares did not constitute a variation of the preference shareholders’ class rights. The reason for this was that the class right itself had not changed – the
preference shareholders were still entitled to a 4% dividend on the amount paid up on their shares. All that had changed is their enjoyment of the class right (i.e. the right was less valuable).	169

Question 52

British America Nickel Corp Ltd v MJ O’Brien Ltd [1927]

Answer 52

Variation is not valid if it not for the benefit of the class as a whole, not individual members.

Viscount Haldane stated that the power to vote on the variation of a class right ‘must be exercised for the purpose of benefitting the class as a whole, and not merely individual members only’. Here, Booth had
supported the variation to benefit himself, and not the bondholders as a whole. The court therefore held that the resolution approving the variation was invalid.	170

Question 53

Brady v Brady [1989]

Answer 53

Financial assistance - the principal purpose and incidental purpose- fin assistance as part of scheme to restructure the group in order to rescue a company.

It was argued that this financial assistance was not prohibited because it was part of a larger purpose (the division of the business) and it was incidental to that purpose. The financial assistance did not fall within the exception and so was prohibited. As regards whether the assistance was given for the purpose of acquiring the shares, Lord Oliver stated that ‘it is important to distinguish between a purpose and the reason why a purpose is formed’. The reason for the assistance was to divide the business between the brothers, but the purpose of the assistance was indeed to provide financial assistance to acquire shares. As regards the assistance being for an incidental purpose, Lord Oliver
went on to state that a ‘larger’ purpose is not the same as a ‘more important’ purpose. The assistance was ‘not a mere incident of the scheme devised to break the deadlock. It was the essence of the scheme itself and the object which the scheme set out to achieve.’ The financial assistance was not an incidental part of a larger purpose 182

Question 54

Bairstow v Queens Moat Houses plc [2001]

Answer 54

Dividend - Consequences of unlawful distribution - liability of directors - directors liable to repay the amount of distribution

The directors’ claim for wrongful dismissal failed and they were ordered to repay the company over £78.5 million. Robert Walker LJ provided guidance regarding director liability.
- The directors are liable to repay an unlawful dividend payment irrespective of whether the company is solvent or insolvent.
- Where an unlawful dividend is paid based on improperly prepared
accounts, then the directors will be liable to repay the full amount of the unlawful dividend. This is the case even if the company could pay out a dividend had the accounts been prepared properly.
- Relief under s. 1157 of the CA 2006 (discussed in Chapter 7) would only be granted where the directors had acted honestly and reasonably in paying out the unlawful dividend. 187

Question 55

Agnew v Inland Revenue Commissioner [2001]

Answer 55

Type of charge - the court may conclude that a charge described as floating is actually a fixed charge.

Lord Millett stated that the key issue in determining the status of
the charge was whether ‘the company should be free to deal with
the charged assets and withdraw them from the security without the
consent of the holder of the charge; or, to put the question another
way, whether the charged assets were intended to be under the control of the company or of the charge holder’. The company controlled the charged assets as it was able to collect the proceeds and place them outside the scope of the fixed charge. This was held to be ‘inconsistent with the nature of a fixed charge’ and so the purported fixed charge was held to be a floating charge. 196

Question 56

Re Spectrum Plus Ltd [2005]

Answer 56

Book debts - fixed charge over book debts - it is possible but only if the chargeholder has the requisite control over the charged assets.

Lord Scott stated that:
‘the essential characteristic of a floating charge, the characteristic that distinguishes it from a fixed charge, is that the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the
meantime, the chargor is left free to use the charged asset and to remove it from the security.’
As the company was free to draw from the bank account into which the proceeds of the book debts were paid, it was able to remove such sums from the scope of the fixed charge. The bank did not have sufficient control over the charged assets for the charge to be categorised as fixed, and it was held to be a floating charge.
The House stated that in order to create a fixed charge over a company’s book debts, the chargeholder should have sufficient control over the charged assets so that the assets are preserved for the benefit of the chargeholder. Lord Hope stated how this could occur:
- the charge could prevent the company from dealing with the book debts in any way, so they are preserved for the benefit of the chargeholder’s security; or
- the charge could prevent all dealings with the book debts other than their collection, and to require the proceeds when collected to be paid
(i) to the chargeholder directly;
(ii) into an account with the chargeholder bank that the company cannot access; or
(iii) into a separate account with a third-party bank which the chargeholder then takes a fixed charge over. 197

Question 57

Caparo Industries plc v Dickman [1990]

Answer 57

Auditor liability to a third party - auditor does not owe duty of care to third parties, unless there is special relationship

Lord Oliver stated that such a relationship would typically arise where:
‘(1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice is given;
(2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose;
(3) it is known either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent
inquiry, and
(4) it is so acted upon by the advisee to his detriment.’
Applying this, the House held that Fidelity’s auditor did not owe a duty to Caparo because the purpose of an audit is not to help potential investors make investment decisions. If a potential investor is to impose liability on the auditor, a special relationship will need to be established, and Caparo had not done that. 211

Question 58

Re National Farmers Union Development Trust Ltd

Answer 58

Scheme of arrangement involves a ‘compromise or arrangement’ - a party unilaterally giving up all their rights without receiving anything in return will not constitute a scheme of arrangement.

The court refused to sanction the scheme, on the ground that it did not involve a compromise, but would result in the vast majority of members completely surrendering their rights. Brightman J stated:
‘The word “compromise” implies some element of accommodation on each side. It is not apt to describe total surrender. A claimant who abandons his claim is not compromising it. Similarly, I think
that the word “arrangement” in this section implies some element of give and take. Confiscation is not my idea of an arrangement. A member whose rights are expropriated without any compensating
advantage is not, in my view, having his rights rearranged in any legitimate sense of that expression.’ 229

Question 59

Re Produce Marketing Consortium Ltd (No 2) [1989]

Answer 59

Wrongful trading - S214 - objective/subjective test

Knox J stated that the directors’ knowledge was based ‘not only what was actually there but what, given reasonable diligence and an appropriate level of general knowledge, skill and experience, was
ascertainable’. Although the annual accounts were delayed, the directors would have known of the company’s financial position by July 1986.
Based on this, they ought to have concluded that the company was in ‘irreversible decline’, and that the company should not have continued trading. Accordingly, the directors had engaged in wrongful trading and they were ordered to contribute £75,000 to the company’s assets. 264

Question 60

Ricketts v Ad Valorem Factors Ltd [2003]

Answer 60

Prohibited name - reuse - breach of s216 is criminal offence - personal liability for debts incurred (managing new company)

The court stated that this was not a true ‘Phoenix syndrome’ case in that there was no transfer of assets between the two companies run by Ricketts, nor was there any evidence to indicate that the company
had been used to avoid debts or that anyone has been misled by the similarity in the companies’ names. However, the court rejected a purposive approach and stated that if Air Equipment was a prohibited
name, then s. 216 would be breached. Mummery LJ stated that the name ‘Air Component’ was so similar to ‘Air Equipment’ as to suggest an association with it. Accordingly, it was a prohibited name and Ricketts had breached s. 216. He was found criminally liable and was held personally liable for the debt that Air Equipment Co Ltd owed to Ad Valorem. 266

Question 61

Re MC Bacon Ltd (No 1) [1990]

Answer 61

Liquidation - preference

Millett J stated that ‘there must have been a desire to… improve the creditor’s position in the event of an insolvent liquidation’. However, ‘the mere presence of the requisite desire will not be sufficient by itself.
It must have influenced the decision to enter into the transaction… It need not have been the only factor or even the decisive one.’
The court held that Bacon had not desired to prefer the bank. Bacon’s choice was to either grant the bank the security it sought or be forced into liquidation by the bank calling in the overdraft. Granting the debenture was ‘the unavoidable price of obtaining the desired
advantages’. The desire behind granting the debenture was not to prefer the bank, but to enable Bacon to continue trading. 270

Question 62

Woolcombers Association

Answer 62

Floating charge to have the following characteristics:-

i) an equitable charge
ii) on a class of assets
iii) which the directors are free to deal with
iv) until crystallisation.  This is what distinguishes a floating charge from a fixed charge.

Question 63

Evans v Rival Granite Quarries

Answer 63

Upon crystallisation, the chargor will be unable to dispose or deal with the charged assets unless the chargeholder consents.

Question 64

Illingworth v Illingworth [1904] -

Answer 64

Hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp’.

Question 65

Re Peachdart Ltd

Answer 65

Property or assets subject to retention of title – if the goods have been mixed with other goods or materials to produce a product and/or effort has been expended by the buyer/company in producing the new product, the seller is unlikely to be able to claim the product

Question 66

Philips v Brewin Dolphin Bell Lawrie Ltd [2001]

Answer 66

Transaction at an undervalue is:
the transaction must be:
(i) entered into by the company;
(ii) for a consideration;
(iii) the value of which measured in money or money’s worth;
(iv) is significantly less than the value;
(v) also measured in money or money’s worth;
(vi) of the consideration provided by the company.’

Question 67

Payne v The Cork Company Ltd [1900]

Answer 67

member cannot be deprived of the rights afforded by s. 111 by a provision in the company’s Articles of Association

Question 68

La Seda de Barcelona SA [2010]

Devi v People’s Bank of Northern India Ltd [1938]

Answer 68

Effects of scheme
The scheme will not bind third parties, although it can indirectly affect third party rights (see Re La Seda de Barcelona SA [2010] EWHC 1364 (Ch)).
Once sanctioned by the court, a scheme of arrangement cannot be amended simply because the members or creditors wish to amend it (Devi v People’s Bank of Northern India Ltd [1938] 4 All ER 337 (PC)).

Question 69

Phonogram v Lane

Answer 69

In Phonogram v Lane, Lord Denning took the phrase “subject to any agreement to the contrary” to mean that for a person to avoid personal liability the contract would have to expressly provide for his exclusion.

Question 70

Re Ghyll Beck Driving Range Ltd

Answer 70

Exclusion from management of a quasi-partnership can amount to unfair prejudice