PGDL Company Law Model Answers PDF

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Company Law Model AnswersAnswering academic questions: • Introduce the area of law and explain all key terms; •Detailed explanation of requested areas with authorities; • Conclusion. Read the advance release material carefully: identify the stakeholders in the company and its business and note any i...

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Company Law Model Answers Answering academic questions: • Introduce the area of law and explain all key terms; • Detailed explanation of requested areas with authorities; • Conclusion. • Read the advance release material carefully: identify the stakeholders in the company and its business and note any issues such as extracts from the articles or shareholders agreements or other issues raised in the company file. Anticipate possible areas for questions. Advising on the legal position in relation to something. Week 2 – Limited liability & legal personality 1. What is separate legal personal personality? A: Separate legal personality is the doctrine that a company is a legal person independent and distinct from its members. 2. What is limited liability? A: Limited liability is the logical consequence of a company’s separate legal personality: Because it is a legal person, a company ‘owns’ and is responsible for paying its own debts. Therefore, the company’s members cannot be held personally liable for the debts of the company – their liability is limited to the amount unpaid on their shares. This principle – axiomatic to company law – was properly established by the seminal case of Saloman v Saloman: Mr. Salomon (S) sold his sole trader business to a company he had incorporated ‘The Salomon Company.’ Under this arrangement, S became the sole director, a creditor and the majority shareholder of this company (though, to comply with incorporate regulations which required seven subscribers, his family members had a share each). Subsequently, the company entered insolvent liquidation, and Mr. Broderip (B) (who S had previous sold his debenture to) brought legal proceedings to hold S personally liable for the full extent of the debenture, on grounds that the Saloman Company was a ‘mere alias’/agent of S. Whilst Court of Appeal sided with B, their verdict was unanimously overturned by the House of Lords, on the grounds that ‘’the company is at law, a different person from its subscribers’’ and neither the members or directors(and S was both) are liable to pay its debts. This ruling (based on a literal interpretation Companies Act 1862) established that it is the time it is incorporated a company is separate in law from its members: it is not their agent and they are therefore not obliged to pay its debts. 3. What are the consequences of separate legal personality and limited liability? The consequences of the Saloman principle can be summarised as follows; A) The company, not its shareholders, owns its own property – Macuara v Northern Assurance Co. B) A company may enter into contracts on its own behalf, and it is therefore the company, not its agents (the directors) or its members, that assumes the rights and obligations arising from that contract. In Lee v Lee’s Air Farming, the Privy Council held that an employment contract between Lee and the company in which he was the sole director and shareholder, validly made him an employee of that company. C) Can sue and be sued on its own behalf– In Adams v Cape the court held that Cape, a parent company of NAAC, was not liable for the faults of the latter; NAAC was a legal entity in its own right and could be sued as such. 4. In what circumstances can the shareholders of the company be liable to pay the company’s debts? ‘Piercing the corporate veil’ represents an exception the doctrine of limited liability, whereby the courts can (though only in highly restricted circumstances) make individual members liable for the debts/obligations of the company. The courts, in such circumstances, look behind the company’s separate legal personality in deciding which controlling members should be held responsible.

The correct circumstances in which the corporate veil may be pierced have been historically, notoriously ambiguous. The following themes can be drawn from the case law however: 1. ‘Façade/Sham’ Cases: The courts have been willing to hold that where a company has been incorporated as a ‘façade’ that conceals an improper or ulterior purpose, then the culpable shareholder may be personally liable for its debts. This is because by using the company as a ‘front’ s/he has abused the doctrine of separate personality. In Jones v Lipman for example, Lipman changed his mind about a land sale so incorporated a company and transferred the land to it, to evade this obligation). 2. Single economic entity cases – although this was not always the case (see DHN Foods v Tower Hamlets) it is now accepted that parent companies are not liable for their subsidiary on grounds they are one economic entity. (Though in specific statutory circumstances concerning for example Taxation economic grouping can be treated differently – s.399 CA 2006). This is therefore not a solid basis for piercing. 3. Tort: A parent company might owe a duty of care to its subsidiary if certain conditions are met (see Chandler v Cape and VTB v Nurtiek) however this is not an example of veil piercing. Prest v Petrodel: The circumstances in which the corporate veil may be pierced were clarified to a great extent by this seminal case, where the issue received definitive treatment from Lord Sumption. The facts where that Mrs Prest, as part of divorce proceedings, claim for the matrimonial home, despite it being owned by Mr. Prest’s company, on the basis it was held on trust for Mr. Prest. The Supreme Court confirmed the Saloman principle but when on to differentiate between the concealment principle and the evasion principle. The concealment principle, where the courts look behind corporate structures to understand the players behind them, was held not to be true example of piercing the corporate veil. The evasion principle on the other hand was deemed a true exception to limited liability, and example of vale piercing: This is where to evade a pre-existing legal obligation, interposes a company which he controls so as to frustrate the enforcement of his obligation by the shield of separate legal personality (Gilford). In such circumstances, the veil may be lifted but not – and this is a crucial caveat – if there is another legal remedy available, as there was in Prest (specific performance). Week 4 – Managing Companies: Directors and the board – 1. Transactions 11. Relief 1. What are the powers/functions of directors? Directors are responsible for managing the company’s business – its strategic and operational activities – on a day-today basis. MA 3 provides that ‘’subject to the articles, directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.’’ Directors are agents of the company and thereby their conduct is governed by common law principles of agency (Howard smith v Ampol Petroleum Ltd) as well as by statute. An important function of the Companies Act 2006 was to codify and clarify the legal duties incumbent on directors: The general duties of directors are now set out by ss.171-178 CA 2006. Note that whilst directors are invested with wide powers to manage the company, these are trammelled by the reserve authority vested in shareholders by MA 4 which provides ‘shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action’ and similar such provisions in CA 2006 which protect the shareholders against arbitrary use of directorial power. Note also that a private limited company must have at least one director – s154.

2. What are the different types of company director? The term ‘director’ is not defined in CA 2006; instead 250 states ‘director’ includes any person occupying the position of director, by whatever name called. The importance of recognising whether a person is a director of any category, is that the same fiduciary duties apply to all directors. There different categories of director are: At law: (i) De jure directors A de jure director (informally known as a ‘Companies House directors’) is a director who has been properly appointed at law. (ii) De facto directors A de facto director is someone who ‘’claims to act and purports to act as a director, although is not validly appointed at such’’ – Millet J in Re Hydrodam (Corby). There is no one definitive test for determining whether someone is a de facto director, but in Re Hydrodam (Corby) Ltd Millet J stated that the relevant criteria are (1) whether that person occupies the corporate governance of the company and (2) ‘’undertook (company) functions… which could properly be discharged only by a director.’’ (iii) Shadow directors Section 251(1) CA 2006 defines a shadow as a ‘person in accordance with whose directions or instructions the directors of the company are accustomed to act.’’ In Secretary of state for Trade and Industry v Deverell Morrit LJ stated that it would be ‘’sufficient to show that in the face of directions from the alleged shadow director, the properly appointed directors or some of them cast themselves in a subservient role.’’ (iv) Alternate directors An alternative director is someone discharges the duties and acts in lieu of a director who is absent; and therefore, is effectively a ‘replacement director.’ An alternative director is usually a fellow board member or appointed by the board - the exact procedure may be dealt with by the articles of association. In practise: (i) Executive directors: A director who is both an executive officer and a senior company employee. Such a director will generally be tasked with heading up one area of company business, for example the sales department and will spend most of his time on this. (ii) Non-executive directors: A non-executive director is board member but not an employee of the company. Non-exec directors do not participate in the day-to-day management of the company. Their role is generally to provide specialist independent judgement and advise to the board on company strategy, performance, communications, appointments and renumeration; and to uphold the interests of the shareholders. 3. How can a new director be appointed? CA 2006 does not set down a statutory procedure for the appointment of the directors, so this will be dealt with by the Articles of Association. MA 17(1) straightforwardly provides: ‘’Any person who is willing to act as a director… may be appointed to be a director: (a) By ordinary resolution (of the shareholders), or (b) By a decision of the directors. The second of these procedures is more expedient and more commonly used. Another point to appreciate is that persons appointed as directors must consent to do so. This consent must be confirmed on form AP01, which in turn, is required to be sent to Companies House whenever a new director is appointed. 4. Director’s contract?

Under MA 19, the board can decide the terms of an individual director’s service contract and thereby set renumeration. Pursuant to S228 CA 2006 the company must keep a record the service contracts of every director. However, where a service contract provides a ‘guaranteed term’ of longer than two years, or capable of being such, s188 applies and the relevant provision of service contract requires shareholders’ a via ordinary resolution otherwise it will be void under s189(a) CA 2006. 5. How can a director be fired? S168 CA 2006 allows the shareholders to remove any director by ordinary resolution. Any notice of such a resolution must however be provided 28 days before a General Meeting which is the only available mechanism by which directors can be dismissed – s.169 provides directors have a right to be heard and therefore written resolutions are not available to remove directors. Another mitigating factor is that directors who are also shareholders are entitled to vote in any motion for their dismissal, and Bushell v Faith clauses may be inserted into the articles: These allow the director in question extra votes per-share which may be used to block such a resolution.

6. What is the board – How do board meetings work? In exercise of their managerial powers, directors act through the vehicle of ‘the board.’ ‘Board resolutions’ – i.e. the decisions of the board – can be passed by a simple majority under Art 7(1) MA. A ‘chairman’ may be appointed under Art 12 MA and, in the event of a deadlock, will have the casting vote – Art 13 MA. Art 11(2) MA states that the quorum for a directors’ meeting may be fixed from time to time by a decision of the directors but it must never be less than two and unless otherwise fixed, it is two. 7. General Overview of director’s duties under the Companies Act 2006? An important function of CA 2006 was to codify the equitable and common law directors’ duties long developed by the courts. The spine of this work is the Directors’ General duties now set out ss.171-177 CA 2006: these set the legal parameters in which directors operate, and should be interpreted in accordance with the old common law rules and equitable principles – s170(4). It is also important to note that directors are fiduciaries who owe their duties and loyalties to the company, not the shareholders (s.170(1). The company is therefore the proper claimant in respect of any breach of duty – Foss v Harbottle. The axiomatic principle here is that directors must not abuse the trust the company has placed in them. The general duties set out in ss.171-177 are as follows: s.171: Duty to act within powers. This provides that a director must (a) act in accordance with company’s constitution; (b) Only exercise powers for the purpose for which they are conferred. s171(a) is relatively self-evident. 171(b) means that the directors cannot use their powers for an improper purpose: for example, in Hogg v Crampton an allotment of shares was deemed to have been to undermine the voting control of the majority shareholders which was an improper/mala fide use of the directors’ power to issue shares.

s.172: Duty to promote the success of the company. S172(1) clarifies this duty, stating that a director must act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole. This means the director should calculate his actions to enhance the relationship between the company’s management, members and stakeholders and to boost the productivity, reputation and long-term success of the company. S173: Duty to exercise independent judgement. This requires the director to act independently – he should not allow himself to be manipulated by a fellow director or member – Madoff Securities International Ltd v Raven. S174: Duty to exercise reasonable skill, care and diligence. This codifies the old common law duty of reasonable care and obliges directors to attain the knowledge and understanding to ‘’enable them to properly discharge their duties are directors’’ – Re D’Jan of London Ltd. S.175: Duty to avoid a conflict of interests. This codifies the historical fiduciary duty of loyalty, and obliges a director to avoid any possible conflict of interests (unless the matter has been authorised by the board) A director must not exploit property, information or opportunity that he has been exposed to by virtue of his professional position irrespective of whether the company would have made use of it – Regal (Hastings) Ltd v Gulliver. S.176: Duty not to accept benefits from third parties. S.177: Duty to declare an interest in a proposed transaction. S (177) (1) If a director is any way, directly or indirectly interested in a proposed transaction with the company, he must declare the nature and extent of this to the other directors. Other duties Sections 188 – s.222 CA 2006 detail four types of transaction that require shareholder approval before being entered into by a director. If the director does not obtain this requisite approval, he will be in breach of both his general duties and these specific provisions. The four classes of transaction are: 1. Directors long term service contracts (ss.188-189) - where directors’ service contracts provide a ‘guaranteed term’ of longer than two years, or capable of being such, s188 stipulates that the relevant provision requires shareholder approval via ordinary resolution otherwise it will be void under s189(a) CA 2006. 2. Substantial Property Transactions (ss.190-196): A substantial property transaction refers to a transaction between a company and a director or his/her connected persons, that deals with non-cash assets of a value that (a) exceeds 10% of the company’s asset value and is more than £5,000, or (b) exceeds £10,000 – s.190 – 196.’’ If such a transaction is entered into without an ordinary resolution of the shareholders, under s195(2) it is ‘’voidable at the instance of the company’’ unless (a) restitution is impossible’ (b) ‘’the company has been indemnified…by any other persons for the damage suffered by it, or (c) Third party rights accrued in good faith from the transaction. Under s.195(3) the culpable director is ‘’liable to account to the company fir any profits made and to indemnify the company for any loss incurred.’’ 2a) Summary – If a director enters into a transaction between himself (or connected persons) and the company that deals with non-cash assets exceeding (i) 10% of the company’s asset value; or (ii) £10,000, without first obtaining shareholder approval via an ordinary resolution, the transaction is voidable and the director may have to account to the company for any profits/losses – s.195(3).

*Connected persons? Members of the director's family: spouse or civil partner, parents, children or step-children (s 253). Note that brothers, sisters, grandparents, grandchildren, uncles and aunts are NOT connected persons under CA 2006. Companies in which the director (and others connected with them) hold more than 20% of the shares (s 254). A business partner of the director or those connected with them (s 252(2)(d)). Trustees of a trust the beneficiaries of which include the director or those connected with them (s 252(2)(c). 3. Loans to directors (s197 – 214): Shareholder approval is required before a director (or connected person) obtains a loan from the company. A memorandum detailing the nature, amount and purpose of any such prospective loan must be supplied to the shareholders before approval is sought – s 197(3). If such a transaction is entered into without an ordinary resolution of the shareholders, under s195(2) it is ‘’voidable at the instance of the company’’ unless (a) restitution is impossible’ (b) ‘’the company has been indemnified…by any other persons for the damage suffered by it, or (c) Third party rights accrued in good faith from the transaction. Under s.195(3) the culpable director is ‘’liable to account to the company fir any profits made and to indemnify the company for any loss incurred.’’ Note that ss.204-209 sets out a number of exceptions to this requirement, including s.204 – expenditure on company business; s.205 – Loans for defending proceedings brought against a director and s.207 – Minor and business transactions. In Champagne Perrier-Jouet SA v HH Finch Ltd loan defined as a ‘’sum of money lent for a period of time, to be returned in money or money’s worth.’’ Exceptions (s 204 -209)  s 204: Expenditure on company business (up to £50,000)  s 205: Loans for defending proceedings brought against a director.  s 206: Loans for defending regulatory actions or investigations  s 207: Minor and business transactions – loans of up to £10,000 do not require shareholder approval  s 208: Intra group transactions  s 209: Money lending companies 4. Payment for loss of office: Under s.217 any payment for loss of office must be approved by an ordinary resolution of the shareholders. There are two exceptions to this obligations: s220: Where the payment is made in good faith: (a) in discharge of an existing legal obligation; (b) by way of damages for breach of such an obligation; (c) by way of settlement or compromise of any claim arising in connection with the termination of a person’s employment; (d) by way of pension in respect of past services. s. 122 – No shareholder approval required for payments under £200. Remedies (copy pasted): ‘’If no shareholder approval is obtained, s 222 sets out that the director holds the payment on trust for the company and any director who authorised the payment is jointly and severally liable to the company for any resulting...