LW362: Company and Finance Law
Outline Solutions – May 2015
Question 1
Candidates should discuss CDDA was enacted with the very intention of raising overall standard of
practice in company law but also with the intention of protecting the public through remedial action,
deterrence and the encouragement of far higher standards of diligence in corporate management
Wheeler (1995). Discuss ‘unfit’ The primary way in which parliament have sought to protect the public
from ‘unfit’ directors is through the grounds for disqualification; and intelligent judicial interpretation of the
provisions contained within the CDDA 1986 has only strengthened the view that there is a need for
higher practice standards in corporate management. Re Bath Glass, Objective/subjective. AB Trucking,
Re Rolus Properties,
Explain Sections 2 to 11 of the CDDA 1986 provide the grounds for which a director can be disqualified;
all of which are conduct related. For example, commission of an indictable offence (s2), fraud (s4) or
participation in wrongful trading (s10) are all committed by conduct. However section 6 and section 8 of
the CDDA 1986 provide that a disqualification order can be granted where the court finds that the
conduct of a director makes him unfit to act in that capacity. s8 expressly states that where unfitness is
revealed it should be in the public interest for a disqualification order to be made. Egs in 2011-2012 86%
of all disqualification orders made under the ground of unfitness. The CDDA 1986 seeks to weed out all
those directors that have fallen below average and secure protection for the public with the maximum
disqualification amounting to 15 years. The courts have stated that the underlying policy reason for
setting the disqualification period is to reflect the level of risk posed to the public (Re Sevenoakes
(1991)).
The procedure contained in s17 CDDA 1986 enables a disqualified director to apply for leave to act.
What this means is that, if granted, the director can do any of the things that the disqualification order
expressly prohibits. Belcher (2012) suggests that in reality leave is only granted on a small number of
occasions. Requirements considered when determining whether or not to grant leave to act- Re Cargo
Agency Ltd (1992) Barnett (1998) Re Majestic Recording Studios (1991) directly undermines the above
by providing that an application for leave can be granted at the same time as the disqualification order.
Re Barings (2000) Re Hennelly’s Utilities Ltd (2004) where it was held that the court needs to balance
the need for the director to act against the protection of the public from the conduct that led to the
disqualification order... the protection of the public is paramount.
The far reaching civil and criminal consequences of breaching a disqualification order only emphasis the
deterrent effect of the CDDA 1986. Griffiths (1998) and Grayan (2004) note that the purpose of making a
disqualification order is to ensure that everyone’s conduct who has fallen below standard is disqualified
not only to protect the public but to encourage others to act well. Ultimately what results is an institution
of flexible minimum standards of conduct in corporate management, as recognised by the court in Re
Barings (no5)(1999) and Langhurst Leasing (1999).
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Question 2
Candidates should discus directors’ ‘fiduciary duty’ duty of skill and care is ancillary to their fiduciary
duty. A director is not expected to act negligently in carrying out his or her duties and may be personally
liable for losses suffered by the company as a consequence of such negligence. The standard of skill
Dorchester Finance Co ltd v Stebbing. The common law duty of care was equated to the statutory test
applied by the Insolvency Act 1986. Re D’Jan the director was found guilty of a breach of duty of care
but was exonerated on other grounds because directors are rarely sued for negligence during the
lifetime of a company but enforcement may take place during liquidation when the liquidator may
proceed against the director for wrongful trading provisions or disqualification of proceedings.eeubmitted
to us by a student in order to help you with your studies. This is not an example of the work written our
professional law writers.
The general duties of directors as introduced into statute remain a re-enactment of its common law
counterparts. The main reason given by the government for the codification of directors’ duties is to
provide an authoritative identification of those duties.
The general duties provide for directors to promote the success of the company; to function by the
provisions of the company’s constitution and for proper purposes; to exercise reasonable care, skill and
diligence; to exercise independent judgment; to avoid conflict of interests; to declare interests in
proposed transactions and not to accept benefits from third parties. Most of which have existed in
common law and equitable principles and also in statutes such as the companies act 1985 (the 1985
Act) as amended by companies act 1989.
The duty of directors to act within their powers; directors’ derive their powers from their company
constitution and should exercise it for proper purposes only. The duties to exercise independent
judgment and expend reasonable care, skill and diligence, do not also hold any significant changes in
law. In reality they both work simultaneously and have actually existed in the form of the duty of
reasonable care and skill under the common law;. The level of care and skill required of a director had
earlier been laid in Re City Equitable Fire Insurance Co that: expected from a person of his knowledge
and experience’. A more modern approach has been adopted in Dorchester finances’ whereby nonexecutive directors are now required by law to play more independent roles on the board. The ‘exercise
of independence ordinarily leaves no room for shadow directors, but in practice as seen in Dorchester’s
case a director will not be in breach where he honestly follows someone else’s judgment in an area of
specialty to inform his own ‘independent judgment’ or where the act is in accordance with the company
constitution.
Candidates should discuss the duty to promote the success of the company, is newly developed from
one of the common law fiduciary duties; i.e. duty of good faith to act in company’s best interest. This is
the first time directors’ duties regarding environmental and social impact of their companies has become
so important to be codified. This duty is divided into two parts which is the bona fide duty to the company
and the subjective duty; the discharge of which is set out in the non-exhaustive list in section 172(1)(a)(f). This includes the most important long term consequence of shareholders wealth which the act
intends. while the act retains the obligation of good faith to the company, it extends this benefit ‘with
regards to' the members as a whole, employees; the community; and suppliers and other stakeholders.
This is perhaps the most debated of the duties, first because of the language reconciliation differences
and secondly as it allows the director to act in the way he ‘considers’ in good faith. Both which are
relative in context and use. The provisos also require some other obligations of directors such as their
actions in the interests of creditors. Each company should be able to determine its own success strategy
and not what the government or society who have no immediate or direct monetary interests. Eg CIC’s
etc. The ‘enlightened shareholder’ Comments from Walters, Milman, Alcock, Ji Li Yap, Fisher, Keay, etc.
Ministerial Statements, Hodge. Discussion of ss173-177 with relevant case authority. Shareholders may
challenge directors’ breach of duties by bringing an unfair prejudice petition according to s 994, CA 2006.
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Question 3
(a)
The Companies Act 2006 codifies the fiduciary duties of company directors, in sections 170 – 177.
In particular, section 171 states the director’s duty to act within powers: Smith v Fawcett (1942).
Section 172 states the duty to promote the success of the company and in doing so, a variety of
factors must be taken into account, such as the impact on the environment, the reputation of the
company, business relationships with creditors etc. In addition section 173 states the duty to
exercise independent judgment and not to fetter discretion. Section 174 states the directors’ duty of
care, skill and diligence- Brazilian Rubber [1911], Dorchester Finance [1989], Macro (Ipswich)
[1994]. Moreover section 175 states the duty to refrain from exploiting corporate opportunities.
Failure to disclose a conflict of interest would make a director accountable to return any profits
made- Regal Hastings v Gulliver [1967]. Section 176 states the duty to avoid secret profits- Boston
Deep Sea v Ansell [1888]. Sections 177 & 182 impose a duty on directors to declare an interest in
a transaction with the company and provide for civil and criminal liability respectively upon failure to
do so. It should be noted that Directors owe their duties to the company as a whole (see section
170 and Percival v Wright (1902)).
(b)
Stella Under section 174 CA 2006 Stella is potentially in breach of her duty to exercise reasonable
care, skill and diligence- Brazilian Rubber [1911], Dorchester Finance v Stebbing [1989]. Both
objective and subjective tests are applied in order to define the standard of care required. The test
to be applied by the court has become one under which the director in question is to be judged by
the standards of what can be expected of a person fulfilling his functions, and showing reasonable
diligence in doing so unless the directors own skill and experience are at a higher level, in which
case the higher subjective level is applied. Her failure to attend meetings may also mean that she
has not been reasonably diligent.
It follows that the general knowledge, skill and experience postulated will be much less extensive in
a small company in a modest way of business, with simple accounting procedures and equipment,
than it will be in a large company with sophisticated procedures Benjamin Under section 176 CA
2006, Benjamin has a duty not to receive benefits from a third party - Boston Deep Sea v Ansell
[1888]. Accordingly, he is accountable to surrender any profits made to the company. Benjamin is
in breach of his obligation to disclose his conflicting interest (with regard to both the secret profit
and the gift) under s.182 CA 2006 (Declaration of interest in existing transaction or arrangement).
In addition, he arguably failed to promote the success of the company under section 172 CA 2006
and also to exercise independent judgment under section 173 CA 2006.
Amber - Under section 175 CA 2006, she is in breach of her duty to avoid conflicts of interest and
to refrain from exploiting corporate opportunities- Regal Hastings v Gulliver [1967]; Bhullar v
Bhullar [2003]; Amber should have disclosed to the board and gained the board’s approval, before
taking up the opportunity, as she failed to do so, she is liable to account for the profits made.
Furthermore, Amber is a director of a rival company. However in London and Mashonaland
Exploration Co. Ltd v New Mashonaland Exploration [1891] it was held that, unless there is a
restriction in the company’s constitution, it is possible for a director to take up a position with a rival
firm. This was also approved in Bell v Lever Bros [1932]. However, where the director holds two
rival directorships, unless one is nominal, it is likely that there would be a breach of duty- Plus v
Pyke [2002] and therefore, a director in such position should resign British Midland Tool v Midland
International Tooling [2003].
(c)
It is important to note that under section 232 CA 2006 a company is prohibited from giving directors
an indemnity in respect of breach of duty. However, there are other ways in which it is possible for
a director to be relieved from liability for breach of fiduciary, namely: By ratification by members,
section 239 CA 2006 Relief from court under section 1157 CA 2006; In respect of a director’s
conflict of interest, under section 175, it is possible for the board itself to authorise the director’s
conflict provided there is nothing in the company’s articles preventing this s175 (4).
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Question 4
Candidates should discuss sale of company’s property at undervalue, possible for company to bring an
action against controllers for damages for losses suffered by company through potential breaches of
duty by directors, s174, s172 CA 2006. Also breach of s177 to declare an interest in a proposed
transaction. If company refuses to take action Mark could commence action by way of derivative claim
under s260 CA 2006. Refer to previous situation in Foss v Harbottle. Mark will need to apply to the court
for permission to continue the claim 260(1) Problem for Mark if would have to request the court give
directions to company to provide documents. Once documentary evidence has been produced court
could give permission to continue. If court decides director acting in accordance with s172 would not
continue the claim, or if sale was authorised or ratified by company, or whether authorisation or
ratification is likely, whether company has decided not to pursue the claim and whether member has
another cause of action .s 263. Re s172 note Franbar Holdings.Phillips v Fryer.
Can Mark bring a personal action due to the decrease in the value of his shares? Discuss Prudential
Assutrance v Newman Industries, Johnson v Gore Wood, Giles v Rhind.Mark will probably not be able to
bring a personal claim. It is probable that the court would grant permission to continue the claim. Mark
will need to continue to trail and prove the case against the director and if he is successful the benefit will
be for the company and not Mark personally. Mark may have to pay costs – Wallersteiner v Moir No 2.
Demonstrates minority shareholder acting in good faith etc is likely to succeed in securing costs.
Question 5
The articles of association are a set of rules that govern the manner in which the company is to be run.
The articles are a constitutional document and under section 33 Companies Act 2006 constitute a
binding contract between the company and each member, but also between the members themselves.
(a) First point to consider is whether Michael has contractual rights in relation to his role as the company
solicitor. In Eley v Positive Life (1876) it was held that the articles conferred no rights on a member,
where the member seeks to enforce rights in a capacity other than a member. Similarly to Michael, Mr
Eley sought to assert a right conferred on him by the articles. However, Mr Ely attempted to enforce the
articles in his capacity as a solicitor, rather than a member and was unsuccessful. The same point could
be illustrated by using Salmon v Quinn (1909). Accordingly, Michael would have no right to bring an
action so as to enforce the provisions of the articles, unless he did so in his capacity as a member (or
unless he had entered in a separate contract, independent form the articles that gave him the right to be
the company’s solicitor). (b) This point is concerned with the right of the other members to enforce
against Nicholas the ‘pre-emption’ provision in the articles. The article in question is clearly part of the
‘section 33 contract’. It affects Nicholas in his capacity as a shareholder, and is clearly enforceable
against him. The question is, however, as to who can enforce it against him? The contract is certainly
enforceable by the company itself. Hickman v Kent or Romney Marsh Sheep-Breeders’ Association
[1915] was a case where the company sued a member. But could the other members sue Nicholas?
Surprisingly, the statutory wording has never made clear whether members could sue each other directly
(or whether they had to rely on the company taking the action). However, in Rayfield v Hands [1960] the
court did allow this direct action by one member against another. In Rayfield, the court suggested this
was most likely to be allowed where the company in question was a ‘quasi partnership’. This is typically
a small company, in which there is a personal relationship between shareholders, and all or most
members are also directors. We do not know if Pandora is such a company. If the other members were
not able to sue Nicholas directly, they would instead have to take proceedings against the company, and
the company would in turn then sue Nicholas.
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(c) Peter has a right in the articles to what are usually referred to as ‘weighted voting rights’. Are they
enforceable? The removal of a director is governed by section 168 Companies Act 2006. This provides
that a director is removable by ordinary resolution. A weighted voting right might seem to infringe section
168, for it might prevent a majority of members removing a director. However, in Bushell v Faith [1970]
the court held that such a weighted voting right was enforceable. Therefore, Peter would be entitled to
insist on the company honouring his weighted votes, even if this prevents his removal. However, in
Hickman v Kent or Romney Marsh Sheep-Breeders’ Association [1915] it was held that a member was
bound to comply with a provision in the company’s articles which obliged a member to submit a dispute
with the company to arbitration, rather than commencing proceedings before the courts. Thus, even if
Peter’s weighted voting right is valid, if the company fails to comply with it, Peter will have to submit his
dispute to arbitration. In addition, it should be noted than an alteration of the articles is possible under
section 21 Companies Act 2006, where a special resolution has been passed (75%). In Allen v Gold
Reefs of West Africa Ltd [1900], it was held that alterations could not be interfered with by the court
unless a change was made that was not ‘bona fide for the benefit of the company as a whole’ (see also
Shuttleworth v Cox Bros [1927]).
Question 6
(a) This part concerns a pre-incorporation contract. Although there is no legal definition of a promoter,
the courts have provided guidance in relation to their role and obligations. In Whaley Bridge Coliaco
Printing Co. v Green (1880) it was stated “the term promoter is a term not of law but of business, usefully
summing up a single word a number of business operations, familiar to the commercial world, by which
the company is generally brought into existence”. Moreover, the promoter is entrusted with undertaking
the necessary activation in relation to the company’s registration. In Twycross v Grant (1877) it was
stated that a promoter “undertakes to form a company with a reference to a given project and to set it
going, and who takes necessary steps to accomplish that purpose”. Beth has entered into a contract
prior to the company’s incorporation and purports to act for and on behalf of a non-existent company.
However, Beth would be personally liable as in Kelner v Baxter (1866) it was stated that: “the promoter
cannot be treated at law as an agent because no principal exists”. Also the company exists only from the
time of its incorporation – Jubilee Cotton Mills v Lewis (1924). In addition, section 51 Companies Act
2006 imposes personal contractual liability on the promoter in respect of a transaction with a third party,
subject to an agreement to the contrary. In particular it states: “A contract that purports to be made by or
on behalf of a company at a time when the company has not been formed has effect, subject to any
agreement to the contrary, as one made with the person purporting to act for the company or as agent
for it, and he is personally liable on the contract accordingly.”
The third party may enforce the contract against the promoter, who purports to act on behalf of a
company that is not yet incorporated- Phonogram Ltd v Lane (1982).
(b) Section 51 (1) Companies Act 2006 provides that liability can be negated, where an agreement to the
contrary exists. However, Phonogram Ltd v Lane (1981) confirmed that such a provision must be
expressly and unambiguously included in the agreement and will not be implied. It should be noted that
after its formation, a company is prevented from retrospectively ratifying a pre-incorporation contract so
as to achieve ‘unilaterally’ a transfer of the liability under the contract from the promoter to the company.
The contract remains binding between the promoter and the third party Natal Land & Colonization Co v
Pauline Colliery Syndicate (1904). However, there are ways in which a promoter may transfer liability to
the company once this has come into existence. In particular, ‘novation’ entails the entering into of a new
contract between the newly formed company and the third party under terms that are identical or very
similar to those of the pre incorporation contract, therefore relieving the promoter from personal liability.
Accordingly, if novation took place Beth could potentially avoid liability.
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(c) Although promoters are not agents, they stand in a fiduciary position and owe legal duties towards
the company- Erlanger v New Sombrero. Phosphate Co. (1878). A promoter must avoid conflicts of
interest. Accordingly, Beth has a fiduciary duty to avoid secret profits- Gluckstein v Barnes (1900) and
has an obligation to disclose her interest in a transaction. A promoter must disclose to an independent
board of directors- Erlanger v New Sombrero. Phosphate Co (1878) or to the existing and intended
shareholders. Salomon v Salomon (1897) stipulates that disclosure may not be sufficient if the
shareholders or the board directors are not truly independent. Remedies for breach of duty include the
right of the company to rescind the contract and recover the amount paid. Accordingly, with regard to the
transfer of land by Beth to AFL Ltd, it could be said that following Beth’s failure to disclose her interest in
the transaction, AFL Ltd could rescind the contract and recover the amount paid. Additionally, if the
company has lost its right to rescind the contract it could hold Beth accountable for the profits madeGluckstein v Barnes (1900) or could sue Beth in damages for breach of fiduciary duty and recover the
profit she unlawfully made-Re Leeds & Hanley Theatres of Varieties Ltd (1902).
Question 7
Candidates should discuss legal problems whether directors owe a fiduciary duty to shareholders and
the criminal offence of insider dealing under the Criminal Justice Act 1993, and whether Vernon has
breached any of his general duties that he owes to Celllular plc.
Directors owe a duty to the company and not individual shareholders Percival v Wright [1902], Peskin v
Anderson [2001] s171-177 CA 2006 based on common law and equitable principles. Gwen would fail in
a claim against Vernon for b reach of fiduciary duty. She may have an alternative claim as an action for
misrepresentation but there is nothing in the question to suggest that the price of £1.05 was suggested
as a fair price by Vernon.
In respect of instruction the solicitor to purchase 10,000 shares and encouraging Bob to purchase shares
– this constitutes the offence of insider dealing. S52 and 52(1) 2 separate offences of insider dealing and
encouraging another to deal, Define, insider, dealing, securities, inside information, price sensitive
information and apply to question. Defences in s53, penalties s61 CJA.
Also discuss breach of s 175- conflict of interest and exploitation of information. Regal Hastings v
Gulliver, IDC v Cooley, Boardman v Phipps.
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Question 8
Candidates should explain the role of the liquidator to secure the assets, realise them and distribute to
thge company’s creditors and if there is a surplus to the persons entitled to it IA 1986. S143(1). They
may also swell the assets by claims in respect of preferences s239, transactions at undervalue s239 or
wrongful trading s214, then distribute the assets according to a strict order of priority.
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Secured creditors with a fixed charge
Expenses of liquidation
Preferential creditors
Secured creditors with a floating charge
Unsecured creditors
Deferred creditors
Members
Credit Bank with a fixed charge – if the security is enough to pay the debt in full need not prove to the
liquidator at all. They should realise the asset this will cover £200k of the debt for the remaining £50k
they will be unsecured creditors. The exes of liquidation are paid next. If the companies assets are
insufficient to meet the liquidation exes then assets subject to a floating charge can by used IA 1976
s176 . Preferential debts IA sch6 – unpaid employees salaries up 4 months with a maximum of £800
each. If they are owed more they have to claim this as unsecured creditors. Unpaid PAYE and NI are no
longer preferential since Enterprise Act 2002. HM revenue and customs are therefore not preferential
creditor. The floating charge for £15k Frontline Finance, the floating charge is only valid if created at a
relevant time, the first £10k was provided before the charge so invalid. IA s 245.Re Shoe Lane Power v
Sharpe. Relevant time for person not connected with company is 12 months ending with the onset of
insolvency.s123 IA. Floating charge only valid for £5k. The £10k would be unsecured. Providing security
for an existing debt can also be considered a preference. S239. Aslo note prescribed part of floating
charge Enterprise Act 2002, 50% of net property under 10k abd 20% over. To a maximum of £600k.
Unsecured creditors share pari passue in the remaining assets of the company. Dispositions made after
the commencement of winding up are void under s127. The preference of £2k paid to Roystons would
have to be paid over to the liquidator unless Roystons were unaware of the petition and the payment had
been made in good faith. The liquidator can go back over the previous 2 years concerning transactions
at undervalue, the cars sold to connected persons, the difference between the amount paid and the book
value – the liquidator can use this to swell the assets and make more available for unsecured creditors.
Wrongful trading under s214, directors can be made personally liable if they carry on trading where they
knew or ought to have known no prospect of avoiding insolvency. Re Produce Marketing Consortium,
CDDA etc.
Conclusion and once winding up is complete apply to have company dissolved IA s205.
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