COMPANY LAW 12TH EDITION
Page Reference: 159 - 161
Financial assistance for purchase of own shares: recent case law
Background and Relevance
As the text makes clear section 151 of the Companies Act 1985 provides that a
company or any of its subsidiaries is prohibited from providing financial assistance for
the purpose of an acquisition of shares in the company. In the following case the
Court of Appeal ruled that where is a share acquisition auditors’ fees were paid by a
subsidiary of the target company the payment constituted unlawful financial
assistance under s151.
Chaston v SWP Group Ltd [2003] 4 Current Law 78
Auditors prepared a report for the purchaser in relation to the acquisition of the target
company and its subsidiaries. One of the subsidiaries paid the auditors’ fees. The
Court of Appeal ruled that the payment of these fees was unlawful financial
assistance under S151 CA 1985. The case revolved around a claim by the acquiring
company against a director of the subsidiary for procuring the giving of financial
assistance by his company. The Court of Appeal allowed the acquiring company’s
appeal.
The basis of the Court of Appeal's ruling was that:

the auditors’ fees had been paid by the subsidiary to facilitate the progress of
negotiations for the acquisition of the shares in the holding company by
enabling the buyer to conclude his due diligence exercise. The payment of
fees had helped to smooth the acquisition procedure and;

it was not necessary that the assistance be received by the purchaser. In this
case it had been received by the auditors but that was enough.
Comment
So advisers’ fees in an acquisition can be financial assistance. However since
S152(1)(a)(iv) states that financial assistance is ‘any other assistance given by a
company the net assets of which are thereby reduced to a material extent or which
has no assets’ the only reason why the payment fell foul of the financial assistance
rules was the material reduction in the assets of the subsidiary. If the fees had not
been so substantial in regard to the assets of the subsidiary S152(1)(a)(iv) would not
have applied.
As regards ‘due- diligence’ those acquiring companies will normally take reports on
the state of the company before purchase. A report by auditors is clearly an important
ingredient.
Page Reference: 334-337
Directors’ duties: need to avoid conflicts of interest
Background. and relevance
As the text indicates one of the major fiduciary duties of directors towards their
company is to avoid conflicts between the interests of the directors and the interests
of the company. In this connection a ruling of the High Court shows the results of
breaches by directors of their duty to promote the business of the company and to
act towards it in good faith avoiding conflicts of interest.
British Midland Tools v Midland International Trading [2003] All ER (D) 174 Three
executive directors of British Midland resigned from its board. Their resignations took
place two weeks after the retirement of another director. He left to set up a rival
business i.e. Midland International. During that two weeks the three directors knew
that Midland International was trying to poach British Midland’s employees. In fact 12
employees did resign from British Midland shortly after the period of two weeks
referred to above.
The owners of British Midland initiated a claim by the company against the director
who had retired and the three who had resigned. The High Court ruled that the three
directors who had resigned were in breach of duty. They knew of the damaging
activities that they and the retiring director were to undertake. Yet during the two
weeks that they were in office after the departure of the retiring director they did
nothing to discourage the poaching of the company’s workforce although as
executive directors they knew that they had the trust of the owners. They did not alert
the owners or their fellow directors to the poaching activity.
Comment
The retiring director was not liable because an intention by a director to set up a
competing business after his directorship ends is not in itself a conflict of interest.
There must be no competitive activity or diversion of a business opportunity or staff
away from the company while the director remains in post. It is of course possible
that a director might be in breach of a contractual duty under a restraint of trade
clause in a contract but that did not arise here.
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Requisitioning an extraordinary general meeting: a fax will do
The High Court has considered and approved of the use of a fax to request
the directors of a company to convene an extraordinary general meeting
under S368 of the CA 1985 (See PNC Telecom plc v Thomas [2003] BCC
202)
Following service of a notice on a company by fax under the provisions of
S368 CA 1985 (extraordinary general meeting on members’ requisition), the
company applied to the court for relief on the basis that the requisition by fax
was not a proper deposit at the registered office as S368 requires. The
company contended that to be valid a requisition under S368 had to be
deposited at the registered office of the company either in person or by post.
The Court dismissed the application and referred to the Companies Act 1985
(Electronic Communications) Order 2000 that specifically allows electronic
communication to be accepted as well as communication by post. In addition
the fax had been in use for a long time and no one had been disadvantaged
or misled by the fax transmission. There was no reason why such a
transmission should not be regarded as a valid deposit under S368.
Company law: liability of directors for fraudulent trading
Background and relevance
The case of Morphites v Bernasconi (2001) already appears on the website as a rare
example of director liability for fraudulent trading. The High Court found liability in
directors who had given assurance in an insolvency that the rent of premises would
be paid when they knew it would not. The matter was taken to appeal.
Morphites v Bernasconi [2003] EWCA Civ 289
The ruling of the High Court was reversed by the Court of Appeal because S213 of
the Insolvency Act 1986 requires that the business be carried on to defraud creditors.
The fact that only one creditor the landlord had been defrauded did not satisfy the
definition of fraudulent trading.