Company Law

Question 1

Distinguish between public and private companies.

Answer 1

A private company is a company which is not public (s4(1)). It may be limited by shares or guarantee but must not offer securities to the public (s755(1)(a)) or allot securities with the view to offer them to the public (s755(1)(b)).

A public company is a company limited by shares or guarantee (s4(2)) and having a share capital value above £50,000 (s763(1)(a)). In relation to the share capital, they must have a certificate of incorporation stating them as a public company (s4(2)(a)).

Public companies will be marked as Plc (s58(1) and private companies will be marked with Ltd (s59(1)).

Question 2

What is perpetual succession?

Answer 2

The company is its own legal entity and therefore is never ending unless it dies.

Its existence is independent of its members. A change in the company’s membership by a transfer of shares or death does not represent a change in the company itself which will continue to exist as a legal entity and carry on business regardless of the identity of its members.

Question 3

What is the ‘Salomon principle’?

Answer 3

The company having its own separate legal personality was established in Salomon v Salomon & Co Ltd [1897].

A company is an artificial construct. When a company is formed, a veil of incorporation is created and shields the members from externality.

The veil shields the directors from liability once the company is registered as the company is liable not the members.

This means the company can enter contracts, sue and be sued.

Question 4

What limits of liability exist generally?

Directors

Answer 4

Companies are liable for their own debts, without limit.

Members are generally only required to pay back the amount unpaid on their shares or amount of their guarantee.

Directors will not be liable for business debts (except if due to insolvency).

s3(2) CA 2006 - The members of an unlimited company are guarantors of the company’s debts and are liable in the event of a winding up without any restriction on the amount owed.

Question 5

What is piercing the corporate veil?

Answer 5

Piercing the corporate veil is important because if it was never possible to go beyond the veil created upon the formation of the company, members guilty of fraud or illegality would never incur personal liability for their actions.

Question 6

Explain judicial instances in which the veil can be pierced.

List.

Answer 6

1. Trading with the enemy/public policy - Daimler (1916)
2. The need to identify a company’s residence in order to determine liability for corporation tax - Bullock (1960)
3. The formation of a company for a fraudulent purpose - Horne [1933]
4. Implied agency/trusteeship – FG Films Ltd [1953]
5. To establish the existence of a holding and subsidiary companies – Tower Hamlets (1976)

Question 7

Main case in which piercing the veil occurred?

Answer 7

Prest [2013] – Acknowledged piercing the veil as being a procedure followed only on rare occasions.

• Supreme Court allowed an appeal
• Properties held by the companies were transferred to the wife on the basis that the assets were held in trust for the husband by the companies he had set up
• She was entitled to them in divorce
• He had not evaded a legal obligation or breached any restriction to justify lifting the veil

Question 8

What is the future of piercing the veil?

Answer 8

R v Sale [2013] -

The judge had been correct to lift the veil to as the matter fell within the concealment principle identified in Prest.

They acted together in the corruption and the company served to hide what Sale was doing.

However, the veil will not be lifted simply because there is a sole shareholder and director (Tartan Army).

Question 9

What is a promoter?

Answer 9

Promoters are in charge of setting things up to form a company.

Twycross v Grant (1877) 2 CPD 459 - “One who undertakes to form a company with reference to a given project and to get it going, and who takes the necessary steps to accomplish that purpose.”

Because prior to incorporation, the company lacks the legal capacity to enter into a contract.

Question 10

What are a promoters rights and responsibilities? What remedies exist for when they are not followed?

Answer 10

Duties of Promoters: The relationship between the promoter and the company is a “fiduciary” one –

(a) Duty to disclose profit to an independent board of directors or the company’s shareholders

(b) Duty to disclose identity and interest in property sold to the company

The appropriate remedies in such cases may be:
- rescission of the contract
- damages for breach of fiduciary duty

Question 11

What is the status of a pre-incorporation contract?

Answer 11

The lack of legal capacity of the unincorporated company means that individuals who enter into contracts on the company’s behalf will be personally liable (s51) and the company will not be liable. unless you were authorised to do so (example; through novation).

Question 12

List solutions to the problems of personal liability when making contracts prior to a company’s formation.

Answer 12

1. Ensure that promoters become the first directors of a company.
2. Incorporate the company before making contracts.
3. Purchase an “off the shelf” company.
4. Make a draft agreement with the other party (not legally binding).

Question 13

How is a company formed?

Answer 13

Section 7, CompaniesAct2006
(1)A company is formed under this Act by one or more persons–

(a)subscribing their names to a memorandum of association, and

(b)complying with the requirements of this Act as to registration.

(2)A company may not be so formed for an unlawful purpose.

Question 14

What does the memorandum of association do?

Answer 14

Section 8, CompaniesAct2006

(1)A memorandum of association is a memorandum stating that the subscribers–

(a)wish to form a company under this Act, and

(b)agree to become members of the company and to take at least one share each.

(2)The memorandum must be in the prescribed form and must be authenticated by each subscriber.

Question 15

What must the registration documents include?

Answer 15

Section 9, CompaniesAct2006

(2)The application for registration must state–

(a)the company’s proposed name,

(b)what country of the union the company’s registered office is situated

(c) whether the liability of the members of the company is to be limited, and if so whether it is to be limited by shares or by guarantee,

(d) whether the company is to be a private or a public company

…

(4)The application must contain–

(a)in the case of a company that is to have a share capital, a statement of capital and initial shareholdings;

(b)in the case of a company that is to be limited by guarantee, a statement of guarantee;

(c)a statement of the company’s proposed directors/officers

…

(5)(b) a copy of any proposed articles of association (not supplied by the default application of model articles)

Question 16

What does the statement of compliance, s13, do?

Answer 16

Section 13, CompaniesAct2006

(1)The statement of compliance required to be delivered to the registrar is a statement that the requirements of this Act as to registration have been complied with.

(2)The registrar may accept the statement of compliance as sufficient evidence of compliance.

Question 17

What is a company’s constitution comprised of?

Answer 17

Section 17, CompaniesAct2006

Unless the context otherwise requires, references in the Companies Acts to a company’s constitution include–

(a)the company’s articles, and

(b)any resolutions and agreements

Question 18

Explain Articles of Association.

Answer 18

Section 18, CompaniesAct2006

(1)A company must have articles of association prescribing regulations for the company.

(2)Unless it is a company to which model articles apply, it must register articles of association.

(3)Articles of association registered by a company must–

(a)be contained in a single document, and

(b)be divided into paragraphs numbered consecutively.

Question 19

Public limited companies (Plc) must obtain a trading certificate.

True or False?

Answer 19

True.

Section 761, CompaniesAct2006

(1)A public company must not do business or exercise any borrowing powers unless the registrar has issued it with a certificate under this section (a “trading certificate”).

Question 20

List the steps of the registration proceedure.

Answer 20

The registration process is a 5-part procedure;

1. Constitutional documents are drawn up on the companies behalf.
2. Documents are then submitted to the Registrar and the statement of compliance should be delivered.
3. The Registrar then examines the documents to ensure it is in compliance with the CA 2006.
4. The Registrar then issues a certificate of incorporation and a notice is published in The Edinburgh Gazette.
5. The company can then begin business at the appropriate date;
   a. Private on the date of
   issue of the certificate
   of incorporation.
   b. Public on the date on
   receipt of the trading
   certificate.

Question 21

Can companies re-register and change status?

Answer 21

This can occur in 3 ways:

• Private company re-registers as a public company.
• Public company re-registers as private company.
• Unlimited company re-registers as a limited company.

Question 22

What is the effect of constitutional documents?

Answer 22

Constitution and memorandum of association - s8 and s17.

The documents describe the powers, rights, duties and liabilities the shareholders, company (as its own legal entity) and members of the company hold to each other.

Question 23

What documents is the statement of a company’s objects contained in and what is the process of creating the statement?

Answer 23

Section 31, CompaniesAct2006

(1)Unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted.

(2)Where a company amends its articles so as to add, remove or alter a statement of the company’s objects–

(a)it must give notice to
the registrar,

(b)on receipt of the notice, the registrar shall register it, and

(c)the amendment is not effective until entry of that notice on the register.

Question 24

What does the CA 2006 state about naming a company?

Answer 24

SS 54 & 55 – Approval of Secretary of State required for the use of certain words.

AG [1981] - Attempt to register a company called ‘Prostitutes Ltd’. However, this was deemed to cause offence and so the Secretary of State held this would not be allowed.

S66 – Application refused if the name the is the same as one already on the register.

S67– Secretary of State has power to direct company to change name if the same or similar to another registered company.

S77 – Power to company to change name by special resolution. Notice to Registrar of change (s80), with copy of resolution. Certificate of registration upon change of name.

You may also not pass yourself off to be a company you are not - Phones 4U [2006].

Question 25

What does the CA 2006 state about the location of a company’s registered office?

Answer 25

Section 86, CompaniesAct2006

(1)A company must ensure that its registered office is at all times at an appropriate address.

The company must also be registered in the country of the union in which its address is (Scottish address = Scottish register).

Section 87, CompaniesAct2006

(1)A company may change the address of its registered office by giving notice to the registrar.

Question 26

What issues do the Articles of Association govern?

ISSUES

Answer 26

The Articles can govern issues such as:

• the holding of meetings;
• the voting rights of members;
• the appointment of directors;
• the declaration of dividends
• the appointment of company secretaries.

There are no compulsory clauses as the contents of the articles will depend on the internal arrangements of each individual company.

Question 27

What is the legal effect of the Memorandum of Association and the Articles of Association?

Answer 27

Section 33, CompaniesAct2006 -

(1)The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions.

Question 28

How may amendments be made to the Articles of Association?

Answer 28

Section 21, CompaniesAct2006

(1)A company may amend its articles by special resolution.

A copy of the special resolution and new Articles to go to Registrar within 15 days.

Question 29

What restrictions are imposed when attempting to alter a company’s Articles of Association?

Answer 29

Articles cannot be altered for the following purposes:

1. To contravene the provisions of company legislation.
2. To escape liability for breach of a contract
3. To impose a liability on members to take more shares than they already hold.
4. To deprive members of rights given to them by the court.
5. To undertake any act which is not for the benefit of the company as a whole
   ……………………………………………..
   Section 22, CompaniesAct2006 - Entrenchment

(1)A company’s articles may contain provision (“provision for entrenchment”) to the effect that specified provisions of the articles may be amended or repealed only if conditions are met, or procedures are complied with, that are more restrictive than those applicable in the case of a special resolution.

(2)Provision for entrenchment may only be made–

(a)in the company’s articles on formation, or

(b)by an amendment of the company’s articles agreed to by all the members of the company.

Question 30

Distinguish between commercial decisions and administrative decisions a company may make.

Answer 30

Commercial decisions can be ratified or rejected by the company where necessary.

Administration of the company deals with decisions members should make (for example, maintenance of specific company books and filing with the Registrar).

Question 31

Both public limited companies and private companies are required to have a secretary.

True or False.

Answer 31

False.

Section 270, CompaniesAct2006

(1)A private company is not required to have a secretary.

Section 271, CompaniesAct2006

A public company must have a secretary.

Question 32

Explain annual general meetings.

Answer 32

Section 336, CompaniesAct2006

(1)Every public company must hold a general meeting as its annual general meeting in each period of 6 months beginning with the day following its accounting reference date (in addition to any other meetings held during that period).

Private companies are not obliged by statute to hold annual general meetings (AGM) unless their Articles of Association state otherwise.

Question 33

What are the basics of meetings?

Answer 33

The members must attend or, in certain circumstances, be represented at company meetings where acts require agreement of majority of the members.

Meetings are fully monitored by statute.

There are 3 types of meeting:
- Annual General Meetings
- Extraordinary General
Meetings
- Meetings of Classes of
Shareholders

Question 34

Explain extraordinary general meetings.

Answer 34

Section 302, CompaniesAct2006

The directors of a company may call a general meeting of the company.

Section 303, CompaniesAct2006

(1)The members of a company may require the directors to call a general meeting of the company.

Section 306, CompaniesAct2006
(1)This section applies if for any reason it is impracticable–

(a)to call a meeting of a company in any manner in which meetings of that company may be called, or

(b)to conduct the meeting in the manner prescribed by the company’s articles or this Act.

(2)The court may, either of its own motion or on the application–

(a)of a director of the company, or

(b)of a member of the company who would be entitled to vote at the meeting, order a meeting to be called, held and conducted in any manner the court thinks fit.

Question 35

How much notice must be given in regards to meetings?

Answer 35

Section 307, CompaniesAct2006

(1)A general meeting of a private company (other than an adjourned meeting) must be called by notice of at least 14 days.

(2)A general meeting of a public company (other than an adjourned meeting) must be called by notice of–

(a)in the case of an annual general meeting, at least 21 days, and

(b)in any other case, at least 14 days.

Question 36

Can directors attend meetings by proxy?

Answer 36

Yes.

Section 145, CompaniesAct2006

(1) Gives the nominee the same rights as a registered member; but only the registered member can enforce the rights against the company and only he can transfer the shares.

Question 37

What is quorum and what is the effect?

Answer 37

Quorum is how many people must be present for it to be valid and if the quorum is not met, it would be invalid.

Section 318, CompaniesAct2006

Question 38

Distinguish ordinary and special resolutions.

Answer 38

Resolutions can be passed if ordinary with a simple majority; above 50% (s282).

Resolutions can be passed if special with a 75% majority (s283).

Question 39

What is the effect of written resolutions?

Answer 39

Written resolution procedure of 2006 Act overrides the terms of the Articles and requires no meeting.

Section 288(1), (2), (3) & (5), CompaniesAct2006

Question 40

Do resolutions need to be sent to the Register?

Answer 40

Yes.

Section 30, CompaniesAct2006

(1)A copy of every resolution or agreement, or a written memorandum setting out its terms, must be forwarded to the registrar within 15 days after it is passed.

Question 41

How may members allot and transfer shares?

Answer 41

If you have a share in a company you have a right to transfer it to someone or allot it (give or apportion to someone).

Section 558, CompaniesAct2006 - A person acquires an unconditional right to be entered on the register of members when a previously unissued share is allotted to him (allottee).

Section 563-565, CompaniesAct2006 - Directors will be able to allot without authority in certain cases.

Section 555, CompaniesAct2006 - within one month of making an allotment a ltd company must make a return of allotment of shares to the Registrar, with statement of capital (public notice to be given by PLC – ss1077 & 1078). Within 2 months the company must have share certificates ready for delivery (s769).

Question 42

Who are directors?

Answer 42

A ‘Director’ is a real person representing and acting on behalf of a company and include any person occupying the position of director, by whatever name called (s250).

Question 43

How many directors are companies required to have?

Answer 43

Section 154, CompaniesAct2006 -

(1) A private company must have a least one director

(2) A public company must have at least 2 directors.

Question 44

What is the main obligation directors are under?

Answer 44

Directors are under a fiduciary duty.

Question 45

In what way can directors be appointed?

Answer 45

Appointment through signing up to the Memorandum of Association.

Article 17(9) & (12), Model Articles - A director may be appointed to the board by ordinary resolution or by co-option by the rest of the directors.

Section 168(3), CompaniesAct2006 - A person may be appointed to fill a vacancy through dismissal or retirement.

Question 46

How may directors be removed?

Answer 46

Section 168, CompaniesAct2006 - By special resolution of the members notwithstanding any agreement between the company and the director.

Section 312, CompaniesAct2006 - A special notice of 28 days is required.

However, the director has the right to appeal the decision of removal under a fair hearing.

Section 169, CompaniesAct2006 - Company must send copy notice to Director and at the meeting the director has a right to protest/make representations.

Question 47

What classes of persons are excluded?

Answer 47

Section 157, CompaniesAct2006 - Minimum age of 16

Section 11, Company Directors Disqualification Act 1986 - Undischarged bankrupts.

Article 18 of the draft Model Articles - A person ceases to be a director as soon as certain situations occur; medical certificate that is physically/mentally incapable and may remain so for more than 3 months.

Question 48

Are directors entitled to renumeration?

Answer 48

No, the constitutional documents should state how much directors are to be paid.

Question 49

What is the employment status of directors?

Answer 49

Directorship is an office and does not automatically equal employment (Stac [2015]).

Question 50

What must the register of directors contain?

Answer 50

Section 162 & 165, CompaniesAct2006 - A company is required to keep a register of directors which is a public document and a register of their home addresses.

Question 51

What case upheld directors have the right to a free trial?

Answer 51

Saunders v UK (1997)

Question 52

What are the powers of directors and in what sections can they be found?

Answer 52

Section 39, CompaniesAct2006 - An act will not be called into question on the grounds of lack of capacity by reason of the company’s constitution.

Section 40, CompaniesAct2006 - Powers of directors to bind the company are deemed to be free of limitation.

Section 41, CompaniesAct2006 - Constitutional limitations apply with respect to transactions involving directors.

Question 53

What is the indoor management rule?

Answer 53

The indoor management rule - You cannot call into question by arguing there is a lack of capacity. Actual or ostensible authority need to be established before the indoor management rule can be relied upon. As well as if there is conduct of which the reasonable person should be wary.

Section 39, CompaniesAct2006 - 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 constitution.

Question 54

What are directors duties?

Answer 54

• Act in accordance with the company’s constitution (171(a))
• Only exercise powers for the purposes for which they are conferred (172(b))
• Duty to Promote Success of the Company. This is the heart of a directors obligations. (s172)
• Duty to exercise independent judgement in the best interest of the company (s173)
• Duty to exercise reasonable care, skill and diligence (objective or subjective standard) (s174)
• Duty to avoid conflict of interest (s175 & s182)
• Duty not to accept any benefits from Third Parties (s176). This can be as small as chocolates.
• Duty to declare interest, direct or indirect, in proposed transaction (s177)

Question 55

What duties are liable to after retirement?

Answer 55

• Duty to avoid conflict of interest (s175)
• Duty not to accept any benefits from Third Parties (s176)

Question 56

What test determines whether directors have promoted the success of the company?

Answer 56

Lloyds Bank Ltd [1970] – “the proper test…

• whether an intelligent and honest man
• in the position of a director
• could, in the whole of the existing circumstances, have reasonably believed that the transactions
• benefit of the company.”

Question 57

What happens if the director breaches their duties?

Answer 57

Section 178, CompaniesAct2006 - The consequence of breach (or the threat of breach) are the same as would apply if the corresponding common law rule or equitable principle applied.

Section 239, CompaniesAct2006 - A breach of duty can be ratified by members but do not affect matters which are incapable of being ratified by the company.

Duomatic principle - Informal ratification by through consent of all members.

However, nothing illegal can be ratified.

Question 58

What are the corporate governance theories?

Answer 58

Agency theory - Focuses on the principle and agent relationship and recognising ownership and control.

Stewardship theory - The idea of trusting someone as a ‘steward’ to direct and instruct individuals with the purpose of aligning principles and agents interests.

Stakeholder theory - Looks at a range of actors in the company (such as; employees, creditors, customers, ect). This may result in trade-offs to reach a balance between each stakeholder.

Question 59

What is corporate governance?

Answer 59

Corporate governance is a system by which companies are directed and controlled and which directors are responsible for.

Shareholders also have a role in governance as they appoint directors and auditors.

Question 60

What committee reports form the UK corporate governance code?

Answer 60

Cadbury Report 1992
Greenbury Report 1995
Hampel Report 1998
Turnbull Report 1999
Higgs Report 2003

Question 61

What did the Cadbury Committee 1992 establish?

Answer 61

Focussed on financial reporting and accountability, specifically control and reporting by directors and auditors.

It created the Code of Best Practice for PLCs:

• Openness
• Integrety
• Accountability

Question 62

What did the Greenbury Committee 1995 establish?

Answer 62

Response to recompense paid to directors.

An independent remuneration committee was directly accountable to shareholders, consisting mainly of non-executive directors.

• Publishing of directors pay
• Independent renumeration committee
• Encouragement of performance related pay

Question 63

What did the Hampel Committee 1998 establish?

Answer 63

Broader than two previous reports but with the interest of creating more accountability.

Question 64

What are the main principles of the UK corporate governance code?

LEARR

Answer 64

• Leadership
• Effectiveness
• Accountability
• Remuneration
• Relations with shareholders

Question 65

What drives the UK corporate code?

Answer 65

‘Comply or Explain’

Question 66

What must signatories consider when applying the main principles of the UK corporate governance code?

Answer 66

• “the effective application of the UK Corporate Governance Code and other governance codes”
• “directors’ duties, particularly those matters to which they should have regard under s172 of the Companies Act 2006”]
• “diversity, remuneration and workforce interests”
• “audit quality”
• “environmental and social issues”.

Question 67

What companies does the UK corporate governance code apply to?

Answer 67

The UK Corporate Governance Code applies to public companies.

It does NOT apply to private
companies BUT they are required to disclose their governing arrangements.

Question 68

What are non-executives role in a company?

Answer 68

Non-executive directors (NEDs) are often thought able to control the boards though this may not be the case.

• Challenge and develop stategy
• Determine renumeration
• Appoint & remove directors
• Have meetings without other directors present

Question 69

What are shareholders and institutional investors role in a company?

Answer 69

Supply equity and seek maximum return. Corporate governance aims to ensure best profits. Company law should reflect interests beyond shareholders.

Institutional investors are very powerful investors making them very influential. This means they can vote on with their feet.

s172 applies here as they must promote the success of the company.

Question 70

What are auditors role in a company?

Answer 70

• Give independent and objective assurance on accounts
• Do not hold an executive position
• Can identify deficiencies in directors but cannot make decisions

Section 505, CompaniesAct2006 - Company must disclose name of auditor in audit reports.

Question 71

At what point do individuals become a member of a company?

Answer 71

CA 2006, s112 - A person becomes a member of a company when he agrees and his name is added to the register of members.

Question 72

What ways may a person become a member of a company?

Answer 72

1. Subscribing to the memorandum of association
2. Applying for a sale for shares
3. Transferal from an existing member
4. Succession of shares upon a member’s death or bankruptcy
5. Acquisition of shares via employee share scheme
6. Signing and filing an undertaking as a director to take a qualification share
7. Holding yourself out as a member and allowing yourself to be added to the register of members

Question 73

Can a company become a member of another company?

Answer 73

Yes, where it is authorised by the Articles of Association because it is a legal person.

A representative can be nominated to attend meetings and vote on behalf of the company.

However, a company cannot become a member of itself or buy its own shares.

Question 74

What information must the register of members include?

How may members rectify an incorrect register?

Answer 74

CA 2006, s113 -

• Names and addresses of members;
• Statement of shares held by each member and classes
  of shares;
• Amount paid on each member’s shares;
• Date on which each member was entered in the register
• Date on which any person ceased to be a member

CA 2006, s114 - Company must keep a register of members available for inspection.

CA 2006, s116 - Any member of a company may inspect the register.

CA 2006, s125 - Any member may apply to the court for an order for rectification of the register if certain information is incorrect, missing or additional.

Question 75

What does the Companies Act 2006 say about substantial property transactions?

Answer 75

CA 2006, s190 - Unless approved by a resolution of members of a company, a company may not enter into an arrangement.

CA 2006, s191 - An asset is substantial in relation to a company if its value exceeds 10% of the company’s asset value and is more than £5,000 or exceeds £100,000.

Question 76

When does an individual cease to be a member?

Answer 76

A person ceases to be a member of a company when his name is removed from the register of members.

CA 2006, s113- The date of termination of a member must be recorded in the Register of Members.

CA 2006, s121 - The name may not be removed from the register for 10 years.

Question 77

Discuss dividends in relation to directors.

Answer 77

CA 2006, s830 - There are no automatic rights to dividends as they are entirely reliant on profits. The payment is provided for in the Articles of Association.

BM v Belcher - Dividends must be properly declared or they can be repaid to the company as it will be interpreted as a loan.

Question 78

Explain the common law principle of majority rule.

Answer 78

If a member wants to raise proceedings to cure misgoverning, they cannot do so. This is because the company, as a separate legal personality, is the proper pursuer for things done to the company.

Orr v Glasgow / Foss v Harbottle

This rule avoids multiple actions being raised by stakeholders regarding the wrongs.

Question 79

What are the exceptions to the majority rule principle?

Answer 79

Edwards v Halliwell [1950] set out 4 exceptions:

• Member’s personal rights are infringed, they can sue to recover loss
• To prevent an ultra vires act
• Object to a resolution incorrectly passed where a special majority should have ruled
• Where the majority commit fraud on the minority

Question 80

How is the minority protected?

Answer 80

The ‘proper plaintiff’ rule set down in Foss

‘indoor management rule’ established in Turquand

They are only applicable in specified circumstances and at the discretion of the court

Question 81

What are derivative proceedings?

Answer 81

Proceedings brought in the name of the member against the company as an exception to the proper pursuer rule and are treated as being brought by the company as an association of its members under exception of the defendants.

Question 82

What are the steps and necessary requirements of derivative proceedings?

Answer 82

Section 265, CA 2006 - There are two steps:

• Ask for permission for leave to raise action
• The action then proceeds

Must be vested in the company and be in respect of an ‘actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of a company’.

Can be against the director, another person or both.

Question 83

What is the courts involvement with derivative proceedings?

Answer 83

Section 268, Companies Act 2006 - The Court has wide discretion as to whether permission should be granted.

Hook v Sumner [2015] - The defendants met and undertook a number of transactions in relation to the company without the participation of the claimant. They eventually agreed to pass a special resolution to change the Articles of Association.

Held: Court held that they could bring a derivative proceeding because they were in good faith.

Question 84

What requirements must be met for the court to allow derivative proceedings?

Answer 84

The individual must be in good faith and attempting to promote the success of the company.

Section 268(2), Companies Act 2006 -

the courts must in addition take into account:

• Whether the member is acting in good faith in raising the proceedings
• The importance a person acting in terms of s172 would attach to raising or continuing the action
• Whether the act/omission could be authorised or ratified
• Whether company has decided not to raise proceedings about the same issue
• Whether the action could be pursued by member in his own right rather than on behalf of the company

Question 85

On what grounds must the court refuse derivative proceedings?

Answer 85

Section 268(1), Companies Act 2006 -

The courts must refuse if satisfied:

(a) That a person acting in accordance with s172 would not seek to raise or continue the proceedings, or

(b) where the cause of the action has yet to occur, the act or omission has been authorised by the company, or

(c) whether the act or omission was authorised or ratified

Matin v Hughes - The mere fact of a deterioration in their relationship does not suffice. The breakdown of trust and confidence must flow from, or amount to, unfairly prejudicial conduct.

Question 86

What is unfair prejudice?

Answer 86

Concerned with situations of unfair prejudice where interests of the company have been impacted due to pre-bias.

If a minority shareholder’s interests are unfairly prejudiced then the member may petition the court for an order regulating the affairs of the company or to restrain the company from continuing its prejudice.

Question 87

On what grounds may a member raise an action under unfair prejudice?

Answer 87

Section 994, Companies Act 2006 - A member of a company may apply to the court by petition for an order on the ground that:

(a) The company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or some part of its members (including at least himself)

or

(b) An actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

Question 88

What powers do the court have in relation to unfair prejudice?

Answer 88

The court it is
empowered to ‘make such order as it thinks fit for giving relief in respect of matters complained of’ and which will enable the company’s future running.

Section 996(2), Companies Act 2006 -
(a) regulate the conduct of the company’s affairs in the future

(b) require the company to refrain from doing or continuing an act complained of or to do an act it has omitted to do

(c) authorise civil proceedings be brought in the name of the company. Require company not to alter Articles unless with leave of court

(d) provides for the purchase of shares of members by other members of the company itself (with the appropriate reduction in capital).