Company-Law-Lecture Term 2 PDF

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Company Law Lecture 1 - Term 2 - Derivative Claims
Company Law (King's College London)
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Company Law Lecture 1 – Term 2: Derivative Claim
-How directors duties can be enforced
Who are the duties owed to? To the company, not individual shareholders: Percival v Wright [1902]
2 Ch 421
• Duties o ed to sha eholde s? - Peskin v Anderson [2001] 1 BCLC 372; and more recently Sharp v
Blank [2015] EWHC 3220 (Ch)
• Who a e fo e a ea h of a di e to s dut ? –The company only
• Who should e e po e ed to ake the litigatio de isio o ehalf of the o pa ? o The oa d

of directors? o The general meeting? o A small group of shareholders or a single shareholder?
Litigation: The Board of directors
-They have power to bring litigation under Model Article 3
-But: do the board have the right incentive to bring litigation against a breaching director (who is
part of the board)? –Is this solved by disenfranchising the guilty director? Not completely
Litigation: The General Meeting
-Article 4 model articles, shareholders instruction right by special resolution.
-Alexander Ward v Samyung [1975] – GM can instruct by simple majority also because of implied
reservation of authority by the general meeting to commence by ordinary resolution, regardless of
whether the articles provide for a special resolution instruction right or no instruction right at all
(distinguishable features from Automatic Self-Cleansing) – There was no directors in Ward case
-But tension remains: Breckland Group Holding LTd v London Suffolk – Says need special resolution
and litigation is not area in which gm can intervene
Litigation: Individual shareholders(or small group) Derivative action
-De i atio a tio is do e he sha eholde s i gs a de i ati e a tio e fo i g the o pa s

rights (not his own)
-If derivative claim is successful, any award is paid to company not to the shareholders bringing
litigation
Problems: -Shareholders usually do not have incentive to bring derivative claim (Rational apathy). –
Even if you give right to single shareholder, you cannot make sure that this is going to promote
success of the company because there is no requirement on amount of shares to bring action.
Derivative claims in public listed companies? Bridge v Daley [2015] - sha eholde s ha e to e
protected from a minor minority individual shareholder seeking to pursue a claim on behalf of the
company of which they are shareholders when they do not wish the company's assets to be applied
fo that pu pose .

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Foss v Harbottle (1843) 2 Hare 462:
T o e e s of the Vi to ia Pa k Co ought a a tio agai st the o pa s fi e di e tors and

promoters alleging that they misapplied company assets and improperly mortgaged its property.
o The action sought to compel the defendants to make good losses sustained by the company and
also sought an appointment of a receiver.
o Held: - The injury was not suffered by the claimants exclusively, it was an injury against the whole
company. - As it as ope to the ajo it i the ge e al eeti g to app o e the defe da ts
conduct the action must fail.
Dismissed on two basis:
1. The company was proper plaintiff (proper plaintiff rule)

2. The internal irregularity rule (If there is an irregularity and it can be ratified then the
shareholder cannot bring derivative action)
Edwards v Halliwell [1950] - The proper claimant in an action in respect of a wrong done to the
company is prima facie the company itself.
o Where the alleged wrong may be made binding on the company and all its members by a simple
majority, no individual member of a company is allowed to maintain an action in respect of that
atte . ...if a e e ajo it of e e s a e i fa ou of hat has been done, then cadit quaestio
the atte is settled .
-Restrictive approach:
Justification: -Risk of multiplicity of suits and nuisance litigation –Principle of the majority rule
However, the rule was very restrictive and worked to the detriment of the minority shareholder.
• If o l a o pa a i g a a tio – how does it so? Through the prism of the majority vote at
the board.
• The p o le is he e the di e to s do so ethi g u to a d a d also o the ajo it of the

shares.
• If the di e to s ontrol the majority of votes at the board and the general meeting (which is
frequently the case) they are unlikely to vote in favour of legal action against themselves.
• This ea s the opp essed i o it a e, fo all i te ts a d pu poses, a ed f o inging a legal

action
Exceptions to rule in Foss v Harbottle:
-Ultra vires and illegality (cannot be ratified) –Special majorities (to ratify) –Personal rights have
been infringed –Where there is fraud on the minority
Fraud on the minority:

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Two criteria:
1. The wrong to be addressed must be considered a wrong which falls within criteria of fraud
on the minority
-Meaning of fraud: Estmanco (Kilner House Ltd v Greater London Council [1982] – Not just fraud but
also other wrongs such as negligence, fraud not restrictively viewed.
2. requires that the wrongdoing director(s) have control of the GM (de jure or de facto)
If this is met then the shareholders can bring a derivative action
-Problem is this would not work for public companies (because director would not have more than
20% control)
Smith v Croft No.2 [1988] Ch 114 – Additio al e ui e e t: The ajo it i side the i o it . You
need to be able to prove that those shareholders who are not bringing the derivative claim would
also wish to take litigation against the wrongdoing director.
Statutory derivative claim:
CA 2006 s. 260-264
Definition – 260(1): proceedings brought by a member of the company in respect of a cause of

action vested in the company and where relief is sought on behalf of the company
-shareholder must apply to court for permission to commence claim
Subject matter of derivative claim: S. 260(3) – A claim may only be brought in respect of a cause of
action arising from an actual or proposed act or omission involving: -negligence –default –breach of
duty or trust by director
Who can bring claim? S. 260(5) – Derivative claim may be brought only by a member of the company
(s. 112 – any person who is entered in the companies register). – Also covers persons who are not
formally a member but to whom shares have been transferred by operation of law
-Cant be brought against director or another person(this does not refer to a third party but any
person who has assisted the director in the breach)
-Wider than common law derivative action. Permits cases against directors for breach of their duty
or skill and care. No eed to de o st ate f aud o the i o it o o gdoe o t ol
-Must apply for permission to continue derivative claim (s. 261)
Procedure:
Stage 1: s. 261 – prima facie case for permission (but consider lesini v Westrip Holdings Ltd). If no
prima facie case to bring claim then it must be dismissed, par .2 s. 261

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Stage 2: s. 263 – The full permission hearing, evidence is provided by the company. –Includes when
permission must be refused –When the court has discretion
Mandatory refusal: s. 263(2)
Permission MUST be refused if:
a. A person acting in accordance with section 172 would not seek to continue the claim; or
-The court must ask who the person acting in accordance with 172 is. Courts are asked to make
their own business judgement, whether or not it makes sense for the company to continue the
action. (involves assessment of damages to be paid to company, other business factors such as
reputational damage, the distraction of the litigation)
Franbar Holdings v Patel [2008] EWHC 1543 – Court appears to perform only one part, namely
the legal part, the strength of the underlying claim and the damages.
Lesini v Westrip Holdings Ltd [2010] All ER (D) 108 –
-At this stage it seems in most instances the court will only take into account legal
considerations and not business considerations
b. Where the claim arises from an act or omission that is yet to occur, that the act or omission has
been authorised by the company; or
c. Where the complaint arises from an act or omission that has already occurred, that the act or
omission was authorised before it occurred, or has been ratified since it occurred.
S. 263(3) – Court must decide in its discretion if claim can continue
• If o e of the fa to s listed i s a e p ese t, the ou t does ot auto ati all ha e to g a t

permission.
• Rathe , it still has the dis etio as to hethe o ot it a tuall g a ts pe issio to o ti ue the
derivative claim.
•S CA sets out si fa to s hi h the ou t ust, i pa ti ula , take i to a ou t he

exercising this discretion. The list is non-exhaustive
These are:
(a) Whether the member is acting in good faith;

-Connected with wellbeing of the company, interest in present and future shareholders.
Ulterior motive: Barrett v Duckett [1995], Franbar Holdings v Patel [2008]
Clean hands: Nurcombe v Nurcombe [1985] 1 WLR 370, lesini v Westrip Holdings ltd
(b) The importance that a person acting in accordance with section 172 would attach to
pursuing the action;
-Beyond legal assessment. Franbar Holdings – Court to consider -Success of the claim
o Ability of the company to make recovery on any award of damages
o Disruption and distraction
o Reputational and business damage arising from failure of proceedings
Kleanthous v Paphitis: evidence of business consideration – disinterested directors

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(c) Whether prior authorisation or subsequent ratification would be likely to occur;
(d) Whether the company has decided not to pursue the claim; and
o Independent committees o Kleanthous v Paphitis: considerable weight to disinterested
directors
-Also can consider if there is alternative cause of action: S 994 CA 2006 (Franbar Holdings Ltd
v Patel)
(e) Whether the shareholder could pursue the claim in his own right.
•S - the court shall also have particular regard to any evidence before it as to the views of
members who have no personal interest in the derivative claim.
Does Harbottle v Foss live on?
• The status of o gdoe o t ol: a s o side atio - Stimpson v Southern Private Landlords
Association [2009] EWHC 2072 [46] – There was no wrongdoer control, but it was one of the factors
which influenced the court to refuse permission.
•A o e hel i g o side atio ?
•s CA : tu i g o pa -initiated litigation into derivative litigation – high bar
Economic of derivative actions:
Who benefits from the proceeds? The company
• Who pa s fo the litigatio ? Normally losing litigant pays his own legal costs. Disincentive for
shareholders to bring derivative claim?
• Optio fo easi g the ost u de
• Walle stei e & Moi No [ ] WLR : -Courts have discretion to grant an indemnification
order. - Civil Procedure Rule 19.9E o Availability: pre and post CA 2006
-The financial well-being of the derivative litigant is not relevant: Smith v Croft, Jaybird v Greenwood
Reflective loss principle:
-Personal loss made by shareholders because of breach of duty cannot be recovered, only company
loss
However, when personal rights rely on indirect loss (direct loss to the company)

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-Priority given to company to recover loss, reflective loss rule: Prudential Assurance v Newman
Indurstries [1982] Ch 204
Johnson v Gore Wood & Co [2002] 2 AC: Breach was a breach of both shareholder rights and
company rights. Company refused to pursue litigation. – The loss was caused not because of the
breach to the shareholder but by the refusal of the company to pursue litigation
Giles v Rhind [2003] Ch 618

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Company Law Lecture 2 – Term 2 – Unfair Prejudice
S. 994-996
-Protecting minority shareholders against oppressive actions from majority shareholders (The rule in
Foss v Harbottle protects the majority) –Balance between the principle of majority rule on the on
hand, and safeguarding the minority shareholders against abuse of power, on the other.
Common Law restriction on controlling shareholder actions:
Two primary situations where courts have considered putting limits on majority:
Ratifi ation of rea h of a dire tor’s duty: NorthWestTransportation Company Ltd v Beatty:). A
director of a joint stock company passed a bye-law by the board of directors authorising the sale to
the company of his own company. Court held that this was illegal and could not be ratified by the
resolution of the gm (director was at same time majority shareholder). Such ratification cannot be
oppressive to minority - Limits on the ability of interested sha eholde s oti g - Illegalit , f aud
a d opp essio - Rational basis
Cook Deeks [ ] AC : de eloped fu the the opp essio -based restriction on the exercise
of a o t olle s otes. Di e to s e e at the sa e ti e ajo it sha eholde s, ourt held they could
not vote to ratify the breach as it would allow the majority to oppress the minority. But see Regal
Hastings v Gulliver [1942] 1 All ER 378 (where the directors were in good faith).
Alteration of articles: acting bona fide in the interests of the company as a whole Allen v Gold Reefs
of West Africa [1900] 1 Ch 656 (CA); Shuttleworth v Cox Bros (Maidenhead) [1927] 2 KB 9 (CA) ฀
Resolutions: Clemens v Clemens Bros. Ltd [1976] 2 All ER 268
Statutory Remedies
-Unfair prejudice remedy (s. 994)
Just and equitable winding up:
-S. 122(1)(g) Insolvency Act 1986 – A o pa a e ou d up the ou t if the ou t is of the

opi io that it is just a d e uita le that the o pa should e ou d up
Ebrahimi v Westbourne Galleries Ltd [1973] AC 260: just and equitable as a portal to equitable
considerations. Respondent set up a carpet dealership in 1945, the business was initially a
partnership. In 1958, a company (Westbourne) was formed to take over the business. Initially, 500
ordinary shares were issued to both the petitioner and MR Nazer, they transferred 100 shares each
to the son of Mr Nazer. This resulted in those three owning 40% and 20% and 20% split of the
shares, they were all the directors. All the profits were paid to directors remuneration. In 1969, Mr
Nazer and his son combined their votes at the GM and removed the petitioner as a director. He then
petitioned the court for the winding up of the company.

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Held: When you have a company that can be considered a quasi-partnership, there are further
equitable limits (outside of the articles) to the exercise of the power of the GM which ensure
compliance with any obligations and understandings of how the business will be managed.
Criteria for application:
-A small company (quasi partnership) –Need an informal understanding between shareholders and
quasi partner that the business will be run a certain way
When a company is a quasi-partnership? –Company is based on Personal relationships and mutual

confidence; -Understanding or agreement that some of the shareholders will participate in the
management; -There may be some restrictions on the transfer of shares.
• St aha Wil o [ ] EWCA Ci – A company was formed by the respondent (Wilcox) (Single
person company) who at a later date appointed Strahan as managing director of the company. Mr
Strahan subsequently purchased 5% shareholding in the company and had option to purchase more
later. Later Strahan was dismissed from the company and he petitioned court for remedy, held
(applying Ibrahimi criteria) that it was a quasi- partnership. • Is a just a d i di g-up petition always
desirable?
Minority Oppression Remedy (Now replaced by s. 994 – Unfair Prejudice remedy):
S. 210 CA 1948
Two pre-conditions:
o facts justify winding-up o just a d e uita le g ou d o s g IA ut i di g up

ould u fai l p ejudi e that pa t of the e e s AND
o affai s of o pa a e ei g o du ted i a a e opp essi e to so e of the e es

including the petitioner.
Limitations: o Oppression of the petitioner must be qua member (but see Ebrahimi v Westbourne
Galleries Ltd in which oppression was qua director); o Definition of oppression as conduct which was
u de so e, ha sh a d o gful S ottish Co-operative Wholesale Society Ltd v Meyer [1959] AC
359)
Unfair Prejudice remedy:
S CA A e e of a o pa a appl to the ou t petitio fo a o de u de

this Part on the ground that: (a) the company's affairs are being or have been conducted in a manner
which is unfairly prejudicial to the interests of its members generally or of some part of its members
(including at least himself) or (b) that any actual or proposed act or omission of the company
(including an act or omission on its behalf is o ould e so p ejudi ial
Right to petition:
-Conferred on a member or members

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-However this is extended to a person to whom the shares have been transmitted by operation of
law (Re a Company [1986] 2 All ER 253) (S.994(2))
-S. 995 also permits Secretary of State to petition
Expansive remedy
Criteria: -A tio o du t of o pa s affai s –Unfairly prejudicial
• A petitio a e o e ed fo u fai a tio s o p oposed a tio s of the o t olli g

shareholders but also, potentially, more ge e all fo a o du t of the o pa s affai s e e he e
there are no controlling shareholders.
• Co du t a e u fai ithout ei g p ejudi ial o p ejudi ial ithout ei g u fai a d i eithe

case would the test be satisfied
. • Co du ti g the o pa s affai s: hose affai s? De isio s take the o pa s o ga s
Subsidiaries and parents: Re City Branch Group v Rackland [2004] 4 All ER 735
Unfair prejudice to members interests:
Option 1: Objectifying the remedy – Re a Company [1986] – Can only be used to protect the
interests of a person as a member.
Re J E Cade & Son Ltd [1992] – Did not have interest as member of the company and therefore s. 994
could not be used
-This is quite broad, if it directly impact interests as a director this can then indirectly have an affect
on interest as a member
Reasonable bystander: Re R A Noble & Sons Ltd [1983] – Court used this basis to assess what is
unfair. Re Macro (Ipswich) Ltd [1983] (Although this has been rejected in later cases)
Option 2: Categorising the remedy – Equitable considerations as a subcategory
Equitable considerations and legitimate expectations:
Legitimate expectations and the unfair prejudice portal - Re A Company [1986] BCLC 376
• Re Saul D Harrison & Sons Ltd [1995] 1 BCLC 14 o The petitioner complained that the prospects
fo the o pa s usi ess had fo a u e of ea s ee so poo that a easo a le oa d
would have put it into involuntary liquidation. The essence of the petition was that the directors, in
allowing the company to continue trading, dissipated its assets to as to preserve their inflated
salaries and privileges. There was no use of corporate power to bring informal understandings.
Nevertheless, Lord Hoffman said the objective bystander criteria does not apply and even though
normally the unfair prejudice remedy is available to enforce breaches of legal rights, s.994 can also
cover legitimate expectation (something more) which arises out of an informal understanding
between the members.
Legitimate expectation:

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Lord Hoffman notion of legitimate expectation focused on the personal relationship between the
petitioner and the controlling members and the use of equity to estop the abuse of power by the
ajo it . • O the fa ts Re Saul D Ha iso & So s Ltd failed, the petitioner's rights were clearly laid
down in the articles so there was only an expectation that the board would manage the company in
accordance with their fiduciary duties, the Companies Act and the articles.
O’Neill v Phillips: The founding person (Phillips) who had build up the business handed over control
to a t usted e plo ee. Late O Neill e a e a agi g di e to of the o pa e ei i g half the
p ofits a d the e e e talks of the p ospe t of O Neill a ui i g half of the sha e apital. The
compa ega to fail; Phillips e o ed O Neill f o his positio . Phillips told O Neill he ould o
longer receive 50% of profits and that his entitlement would be limited to his salary and the
di ide ds o % of his sha eholdi g. O Neill petitio ed allegi g unfairly prejudicial conduct.
-There is no breach of a legal right but it is a question of informal understanding
Held: Phillips conduct would have been unfair had he used his majority voting power to exclude
O Neill f o the usi ess. • Ho e e , he did ot do this. He o l alte ed the te s of O Neill s
e u e atio . • The efusal Phillips to allot o e sha es to O Neill u de the p oposed i e ti e
scheme was not unfair
Negotiatio s e e ot o pleted a d the e as o o t a t. • The te i atio of the profit-sharing

a a ge e t as ot u fai as it as e e fo alised a d as depe da t o O Neill u i g the
usi ess. Phillips had to i g hi self a k i . • O Neill lost his ase as he failed to p o e u fai
prejudice.
-Lord Hoffmann took this opportunity to clarify what he meant by legitimate expectation:
He ad itted its use had aused so e o fusio a d as p o a l a istake. • Legiti ate

e pe tatio as ot a pe so al hope of the petitio e that the ould e t eated i a e tai
a e . • He suggested it as o e a u ate to speak of e uita le est ai ts hi h ake it u fai
fo a pa t to a use thei po e s u de the a ti les. • Legiti ate e pe tatio is a o se ue e, ot
a cause, of equitable restraints. It should not be allowed to lead a life of its o .
O Neill Phillips: a k to asi s
 Quasi partnership (a breach of an informal agreement is not enough)

 Contractual-like understandings
 Use of corporate power to defeat these understandings
 Equitable considerations not legitimate expectations
For unfair prejudice: 1. Either a breach of Legal rights 2. Or the breach of an informal understanding
(You need a quasi partnership and use of corporate power to defeat these understandings)
Unfair prejudi e a d i depe de t illegalit : O Neill Phillips: sha eholde s a e ot o di a il e titled

to o plai i the a se e of ea h of the te s o hi h he ag eed to affai s of the o pa
should e o du ted . • I i e I i e [ ] BCLC : u fairness contemplates breach of an
ag ee e t, o of a dut o of a legiti ate e pe tatio

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Re M Ca th Su fa i g Li ited [ ] BCLC pe Mi hael Fu ess QC: the e ui e e t fo

unfairness means it is not enough for the petitioners to show that they have been prejudiced in
some way. That prejudice must have come about as a result of some wrongdoing; either the breach
of an agreement, or the breach of some other duty owed to them as shareholders, or the frustration
of some legitimate expectation o thei pa t .
Situations where there is no independent illegality (outside equitable considerations):
De a di g easo a le o pe satio - Re a Company [1997] 1 BCLC 479: Applies a fairness of

compensation framework. Examines the fairness of the remuneration
• I o pete e ithout ea h of dut of a e - Re Elgindata [1991] BCLC 959: Court held that to
bring a 994 petition you need a breach of the duty of care.
o In re Macro Ipswich [1994] 2 BCLC 354: The activities of the management amounted to serious
mismanagement. Court accepted 994 petitions even though they did not examine whether this
amounted to a breach of the duty of care
Remedies:
s 996 CA 2006
(1) If the court is satisfied that a petition under this Part is well founded, it may make such order as
it thinks fit for giving relief in respect of the matters complained of.
Without p ejudi e to the ge e alit of su se tio , the ou t s o de a —
a egulate the o du t of the o pa s affai s i the futu e;
(b) require the company— (i) to refrain from doing or continuing an act complained of, or (ii) to do
an act that the petitioner has complained it has omitted to do;
(c) authorise civil proceedings to be brought in the name and on behalf of the company by such
person or persons and on such terms as the court may direct;
(d) require the company not to make any, or any specified, alterations in its articles without the
leave of the court;
(e) provide for the purchase of the shares of any members of the company by other members or by
the company itself and, in the case of a purchase by the company itself, the reduction of the
o pa s apital a o di gl
The buy-out remedy: s 996(2)(e) CA 2006: -The minority discount (Re Bird Precision Bellows Ltd
[1984] Ch 419, upheld in [1986] Ch 658 – Pro rate valuation) - At what point in time? (Profinance
Trust SA v Gladstone [2002] BCC 356 – When the shares are to be purchased, not when the petition
is brought)
O Neill Phillips: U fai ess does ot lie i e lusio alo e .
• A easo a le offer dissolves the unfairness

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• The Hoff a Guideli es:
o Fair value o Independent valuation by a competent expert o The expert should not give reasons
for the valuation o Equality of arms between the parties o Costs
-If there is offer by company to buy out the petitioner which meets these guidelines then the
conduct is not unfair, s. 994 claim will not succeed.
Harborne Road Nominees Ltd v Karvaski [ ] EWHC : Lo d Hoff a s e a ks e e ot

i te ded to ha e the effe t of esta lishi g a e ha is fo seizu e a d e lusio Need to e
careful not to strictly follow the guidelines because it create pressure on minority shareholders to
accept offers)
Corporate remedies for breach of duty: S.996 is not exhaustive
-Could get corporate relief in which case it would be like a derivative claim (without the safeguards
of being required to get permission to proceed) –Because of this court held the only relief you can
ask for is a personal relief (Re Charnley)
Pre-2006 paradox (?)
-Re Charnley Davies Ltd (No.2) [1990] BCLC 760
- Anderson v Hogg [2002] BCC 923
-Bhullar v Bhullar [2003] EWCA Civ 424 (corporate relief was granted)
-Clark v Cutland [2003] 2 BCLC 393
• Ku g Koh [ ] HKCU ot i di g – Unfair prejudice remedy but at the same time there
was breach of directors duty, question was if they could ask for corporate relief n base of unfair
prejudice. Court held unfair prejudice is confined to personal relief

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Company Law Lecture 3 – Term 2 – Transactional Security
-Third party enters into transaction with company but the transaction is not legally secure
Underlying policy: Strike a balance between the company and third parties on the other (the
protection of third party)
The main areas of third-party risks are: o Pre-incorporation contracts (Lecture 27) o Limited
capacity of the registered company (Lecture 28) o Limited constitutional or contractual authority of
directors/individuals who act for the company (Lectures 29&30) o Breach of fiduciary duties of
directors (Lecture 15 et seq) – recall especially s 171 CA 2006 o Transactions affected (undermined)
by the fiduciary position of directors – recall s 173 CA 2006.
Pre-Incorporation contract:
Promoters - One who undertakes to form a company with reference to a given project and to set it
goi g, a d ho takes the e essa steps to a o plish that pu pose . Pe Co k u CC.J. i
Twycross v Grant (1877) 2 CPD 469 at 541.
-The current position is unclear but the common law suggests solicitors, accountants etc. will not be
classed as promoters (Re GreatWheal Polgooth Co Ltd (1883) 53 LJ Ch 42).
-A pre-incorporation contract is one which is entered into by promoters (on behalf of, or in the
name of the company) before the formation of the company
The promoters may purport to act either: i. as the company (as its organ); ii. or as agents of the
company.
Who is liable the company or the promoter? –At the time the contract is made the company does
not exist (Kelner v Baxter (1886) – the promoters were planning to form a hotel company and
purchased wine from the plaintiff on behalf of the company before it was formed. The company
came into being but before paying the price for the win, the company went into liquidation. Held:
The promoters were personally liable to the plaintiff because the company did not exist at the time)
You cannot make a contract with a party which does not exist. – Rover International v Cannon Film
Sales [1987]
Common Law rules:
-A company cannot ratify a pre-incorporation contract made on its behalf before it was formed
-Only option is to enter into a new contract
Natal Land Co & Colonization Ltd v Pauline Colliery and Development Syndicate (PC) [1904] AC
120. – The promoters obtained an agreement from landlord that he would grant a lease of coal
mining rights to the company before the company was formed. The company, after incorporation,
could not enforce the contract but the promoters were held personally liable.

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The company was not legally in existence when the contract was made, the only way the company
can obtain the benefits of the pre-in orporation ontra t is via novation . –Enter into a new
contract
Common Law Confusion:
Kelner v Baxter (1866) LR 2 CP 174 - If a promoter is enter into the o t a t as the o pa s age t
sig i g fo a d o ehalf of the o pa the p o ote as pe so all lia le.
Newborne v Sensolid [1954] 1 QB 45 - If a p o ote is sig ed the o t a t usi g the o pa s

name and merely added his name to authenticate that of the company, the promoter was not
personally liable. o The contract was made with a non-existent entity and was a nullity.
Statute:
Section 51 CA 2006 (old s 36C CA 1985 A o t a t hi h pu po ts to e ade o o ehalf 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 pe so all lia le o the o t a t a o di gl
Justifi atio s: • P o otes e tai t . • Gi es the thi d pa t a e fo ea le o t a tual o ligatio

agai st the p o ote , su je t to a ag ee e t to the o t a . • E ou ages people to e te i to
pre-i o po atio o t a ts as the ill e safe. • St ea li es the o o la ules. • Not so good
for promoters!
Phonogram v Lane [1982] QB 931; [1981] 3 All ER 182 – Phonogram agreed to finance a company
(Fragile Management LTd) which was to be formed for the purposes of managing a pop group
Cheap Mea & Nast . The e as to e t o instalments of £6000. Mr Lane as a promoter, signed
the fi a ial ag ee e t fo a d o ehalf of F agile Ma age e t . –Both parties knew that the
company did not exist at the time. However the company was never actually incorporated.
Held: Mr Lane was personally liable for the return of the £6,000 initial payment. Lord Denning held
that fo the pe so sig i g ot to e lia le o the o t a t the e ust e a lea e lusio of
pe so al lia ilit . If ot, the s. ill e gi e its full effect.
Oshkosh B Gosh In v Dan Mar el In [ ] BCLC 5 , CA – An off-the-shelf company acquired

under the name of Egormight Ltd in 1979. In 1980 the name was changed to Dan Marbel Inc Ltd.
Before the name change was registered, a contract was entered into the plaintiff. The certificate
confirming the change of the name was not issued until 1985. The claimant (as a creditor) brought
personal action against the director arguing that he entered into contracts with the defendant
director who acted on behalf of the company (Dan Marbel Inc) at a time when the company was not
yet legally formed.
Held: (What is now s. 51) does not apply in this case. The company had been properly formed and
was not in the process of formation. –A change of name does not involve re-incorporation, the
company existed.
Badgerhill Properties v Cottrell [1991] BCLC 805, CA - Mr T was the director of Badgerhill Properties
Ltd. Badgerhill Properties Ltd entered into two contracts with Mrs C for various building works. At

lOMoARcPSD|2586320
the end of oth o t a ts, the o pa s a e had ee is ep ese ted. It appea ed as Badge hill
Property Ltd, instead of Badgerhill Properties Ltd. Mrs C alleged the building work had been carried
out unsatisfactorily. She pursued a personal action against Mr T. • She a gued that M T had
entered into contracts on behalf of a company (Badgerhill Property Ltd) at a time when it was not
legally formed. Held: The CoA refused to apply section 36(4) of the CA 1985 (now s 51 CA 2006) as
the contracts entered into were not with a non-existent company, but with a company that was
genuine and that had been properly formed, namely Badgerhill Properties Ltd.
Cotronic (UK) Ltd v Dezonie [1991] BCLC 721 - The defendant made a contract in 1986 in the name
of W Ltd in ignorance of the fact that W Ltd had ceased to exist. A new company, also named W Ltd,
was incorporated in 1989 to continue the business. The CoA held that he could not be made liable
under s 36C because he had purported to make the contract on behalf of the old company and not
the e o e. • Thus, s 51 protects third parties only in those situations where the contract identifies
a specific company as the purported contracting party and where that company is one which has not
been formed.
Weaknesses of s 51:
•S la ifies that the p o ote ill ea l al a s e lia le.
•A e p ess ag ee e t to the o t a ill e a e.
• Ho a a o pa assu e the o ligatio s of a p ei o po atio t a sa tio ?
• What s does ot add ess is the issue of atifi ation once a company has come into existence.
• A o atio is still e ui ed e e if the e is a lause i the a ti les hi h states the o pa ill

take over the contractual obligations upon corporation.
• P o ote s a e ai lia le a d e u a a e of this.
Enforcement rights of promoters?
• Re e e that o st i t o t a t la p i iples, hilst p o ote s e ai lia le fo a p e-

i o po atio o t a t, the should also ha e the ight to e fo e the te s of that o t a t. • The
legislation remains sile t o this poi t! • Braymist Ltd v Wise Finance Co Ltd [2002] BCC 514. – The
signing agent wanted to enforce a property contract against the other party on the basis of what is
now s.51. Question was whether such an agent is not only liable but also entitled to enforce the
contract . Held: such agents have now been placed in such a position for enforcement as they would
at common law. - S 51 not only confers liabilities on the agent, but also rights of enforcement (as
they would be at common law).
Capacity:
-What a o pa a o a ot do is set out i a o pa s o stitutio

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-The objects clause
-Pror to 2006 CA every company was required to have an objects clause which was set out in the
o pa s e o a du of asso iatio . –Today it is not longer necessary to include the objects
clause in the constitution
The old law – ultra vires:
-The old law was quite clear, if the act was ultra vires that act was void ab initio: invalid and
unenforceable by either party
-Objects clause laid down what the company can do (reasoning was so that those who invest in a
company are entitled to know what type of enterprise it is, and so creditors can know what kind of
business activities they carry out) –Anything done outside the objects clause was ultra vires
Ashbury Ry Carriage and Iron Co v Riche (1879) LR 7 HL 653 – An incorporated company does not
have the capacity to enter any transaction outside the object clause, not even the unanimous the
decision of the members could ratify something beyond the object clause.
This resulted i la ge a d o ple o je ts lauses .
T o p o le s: o High osts of doi g usi ess; o U e tai t i to the usi ess o ld. • Respo ses: o
Self-o de i g: la ge a d oad o je ts lause ; o Judi ial li iti g of the ult a i es do t i e; o
Legislati e espo se: the est i tio s o the o pa s apa it e e g aduall a e ded.
Interpreting objects clause:
Re Introductions Ltd [1970] Ch 199 (CoA): Before a loan was granted, bank was given copy of
companys memorandum and articles of association. So bank was aware that the activity of the
company was outside the object clause, the bank tried to argue that the company nevertheless had
the power to borrow because the ability to borrow was within the object to clause.
Held: efused to e og ise o o i g as a se si le o e ial o je t a d e uated this to a po e

which was only valid in limited circumstances. The power to borrow was not an independent object
Charterbridge Corpn Ltd v Lloys Bank Ltd [1970] Ch 62 – The plaintiff company asked the court to
declare that the legal charge given to the defendant bank as security was void and outside the object
clause. The guarantee was itself security for another company, part of a group which was all
controlled by the same person.
• Rolled Steel Produ ts v British Steel Corp (CA) [1985] 2 WLR 908; [1985] 3 All ER 52 - Object
clause gave power to company to give guarantees. The company gave a guarantee for the benefit of
one of the directors and not for the good of the company, British Corp knew of this irregularity.
Held: This was not an ultra vires transaction. Acting for an improper purpose is a separate issue of
whether it is an ultra vires act. The term ultra vires should be confined to lack of capacity as
determined by objects clause; it is only this that renders transaction void and it turns entirely on the

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interpretation of the objects clause; activity does not fall outside object clauses merely because it is
undertaken for an improper purpose
CA 2006 provisions:
The ultra vires doctrine has now been abolished.
• S CA : U less a o pa s a ti les spe ifi all est i t the o je ts of the o pa , its

o je ts a e u est i ted .
• S 9 CA : The alidit of a a t do e a o pa shall ot e alled i to uestio o the

ground of lack of capacity by easo of a thi g i the o pa s o stitutio . Even if a company
adds an object clause, the transactions outside of this will still be valid)
• P ote tio of thi d pa ties: s CA ge e all e-enacts the old provisions in s 35A & B of
the CA 1985 with some subtle re-wording.
-Re e e that o je ts lauses a e o tai ed i the o pa s a ti les if the a e i luded at all –

amendable by special resolution (s 21 and 22 CA 2006).
Continuing relevance of ultra vires doctrine:
However, the ultra vires doctrine is still relevant for the members: o S 40(4) CA 2006: Shareholders
can obtain an injunction to prevent a director acting outside the constitution providing it is
halle ged efo e a legal o ligatio has a ise . o S CA : Di e to s still have a duty to act in
a o da e ith the o stitutio . Cha ities – s 39(2) CA 2006

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Company Law Lecture 4 – Term 2 – Dealing with the Company II
Contractual capacity:
-Decisions can be taken by or behalf of a company to enter into a contract or other transaction with
a third party in two ways: i. either by its primary decision-making bodies (i.e. its board of directors or
the shareholders acting collectively); or ii. by persons (who may include individual directors) acting
as its agents.
-Question is whether the decision taken can be attributed to the company
Limited constitutional or contractual authority of directors/individuals who act for the company
• Is the o pa ou d a t a sa tio e te ed i to the oa d o sha eholde s outside thei

authority as laid down in the articles of association?
-Decisions made by the organs constitute the decision of the company.
–It is possible that a third party enters into a contract with the board of directors or GM in an area
where the articles say the board does not have any power. Question is whether these are binding on
the company?
-According to common law rules, key issue is whether the third party knew that the board acted
outside its authority (if so then the transaction was not binding on the company unless ratified).
Distinction between ultra vires a d a ts outside dire torial authority :
Ultra vires: acts which are beyond the capacity of the company. -Acts beyond the authority of the
board of directors are not strictly ultra vires: Rolled Steel Products v British Steel Corp. [1985] 2 WLR
908
The i door a age e t rule:
- Constructive notice doctrine: anyone dealing with the company is deemed to have notice of its
pu li do u e ts - Ernest v Nicholls (1857) 6 HLC 401 (HL) (therefore in almost every case, the
third party was deemed to have knowledge and therefore the transaction was not binding on the
company)
• Indoor management rule: Royal British Bank v Turquand (1856) 6 E & B 32 - security for a loan
had been given by a company through its directors. The articles empowered the directors to borrow
money provided they were authorised by a resolution passed at the GM of the Co. such authority
had not been given. Held: 3rd party may assume that internal procedure has been complied with
-In some cases the third party could assume that the board of directors had authority to act even
though the reading of the articles would lead to further inquiry

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Mahoney v East Holyford Mining Co (1875) LR 7 HL 869 – Bank was deemed to have notice but was
entitled to assume that the directors had been properly appointed. I doo a age e t ule
applies when directors have never been formally appointed.
• Mo is Ka sse [ 9 ] AC 9 • S CA – The indoor management rule applied only in

cases of defective appointment, but not in cases where there is no appointment at all. In this case
there had been appointed which had expired and was never renewed, therefore there was no
appointment at all so the indoor management rule did not apply.
S. 161 CA 2006: The acts of a person acting as a director are valid notwithstanding that it is
afterwards discovered— (a)that there was a defect in his appointment; (b)that he was disqualified
from holding office; (c)that he had ceased to hold office; (d)that he was not entitled to vote on the
matter in question.
Limitations:
-Can corporate insiders benefit (where third party is also director)?
-O l p ote ted outside s : Morris v Kanssen [1946] AC 459 – the claimant, seeking to rely on
indoor management rule, was a director at the time. Given that he was a director he was under a
duty to see the articles of association and he was under a duty to see they were complied with.
Therefore it would be inconsistent to give the director the benefit of the indoor management rule.
But see Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 – A director is an insider and can be
protected by indoor management rule unless the transaction is very connected with their position as
a director then they need to be treated as knowing the limitations of the articles of association.
- The constitution must not provide that a particular type of contract cannot be entered by the
board at all: Irvine v Union Bank of Australia (1877) 2 App Cas 366 – The indoor management rule
will not protect the third party in this situation because the powers of the directors are completely
restricted
-3 rd party ust ot have ee put o oti e of the irregularity: B. Liggett (Liverpool) Ltd v
Barclays Bank [1928] 1 KB 48 - Transaction with bank, bank had actual knowledge of articles of
association. The question was whether the bank was entitled to assume the appointment of one of
the directors was properly made. Such appointment required the consent of both existing directors.
There was a letter informing the bank of the appointment which was only signed by one of the
existing directors. It had also been communicated to the bank before by the other existing director
making clear that it should not meet any cheques which were not signed by him (because he
thought the other director was improperly withdrawing money). The bank was not entitled to
assume the authorisation of the other director.
-This requires actual notice and some other communications which put the third party on inquiry
Wrexham Association Football Club Ltd v Crucialmove Ltd [2006] EWCA Civ 237 (CA)-

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S. 40 CA 2006:
-Indoor management rule aboslished by s. 40 (2) (b)
S : I fa ou of a person dealing with a company in good faith, the power of the directors to
bind the company, or authorise others to do so, shall be deemed to be free of any limitations under
the o pa s o stitutio .
Good faith:
-No good faith qualification in s. 39
S a plifies ea i g: a person dealing with a company – (i) is not bound to enquire as to

any limitation on the powers of the directors to bind the company or to authorise others to do so,
(ii) is presumed to have acted in good faith unless the contrary is proved, and (iii) is not to be
regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the
di e to s u de the o pa s o stitutio
Ford v Polymer Vision Ltd [2009] EWHC 945 – judge approached question of bad faith by looking not
at third parties knowledge that the director had acted outside of authority, but his knowledge that
the director had acted in breach of his duty
Dealing with a company:
S a : a pe so deals ith a o pa if he is a party to any transaction or other act to which

the o pa is a pa t
-EIC Services Ltd v Phipps [2004] 2 BCLC 589 CA – There was a shareholder who received a bonus
share from the company but the court held that this was not a person dealing with a company
because this was not a bilateral transaction but a gratuitous transaction and was not dealing with
the company in the strictest sense. The share issue was void because it had not been authorised by
the GM
• Cott ell Ki g [ ] EWHC 9 –
Perso :
Directors?
o S 41(2)(b): if the 3rd party is either a director or a director of the holding company or a person
o e ted ith su h a di e to the t a sa tio is VOIDABLE.
o S 41(3): In addition (whether transaction avoided or not) such third parties AND any other
directors who authorised the transaction are liable to account to the company for any gain made &
to indemnify the company against any loss suffered.
o S 41(4): The transaction ceases to be voidable if— (a)restitution of any money or other asset which
was the subject matter of the transaction is no longer possible, or (b)the company is indemnified for
any loss or damage resulting from the transaction, or (c)rights acquired bona fide for value and
without actual notice of the directors' exceeding their powers by a person who is not party to the
transaction would be affected by the avoidance, or (d)the transaction is affirmed by the company.

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o See, however, Smith v Henniker-Major & Co [2002] EWCA Civ 762. – S.40 was not available to
director on the facts. Question was whether the director who was also chairman, could rely on (s
35(a) of 1985 act) to validate a resolution passed at the meeting attended only by himself. Director
passes resolution believing wrongly that he had power to do so assigning causes of actions to
hi self. He as a pe so deali g ith the o pa , ut ould ot el o his o istake e e
though he acted in good faith. –A person dealing with the company is not a director
Shareholders? EIC Services v Phipps [2004] 2 BCLC 37 CA – Third parties do not include members of
the company (s.40 cannot apply). Bonus shares issued without shareholder approval; shareholders in
the circumstances are not persons dealing with the company.
-Although it could be argued the dicta of this case should not be followed because if Parliament did
not want members to be included in s.40 then there would have been a separate provision dealing
with members dealing with company (like s. 41 for directors)
Power of the directors:
Protection in s 40(1) is o fi ed to ig o i g li itatio s o the po e of the di e to s to i d the

o pa o to autho ise othe s to do so .
•S does ot o e li itatio s o the po e s of the ge e al eeti g. –Only applieds to

transactions with board of directors
• Those who deal with the shareholders (collectively) are still subject to the common law.
A y li itatio u der the o pa y s o stitutio :
S The efe e es a o e to li itatio s o the di e to s po e s u de the o pa s

constitution include limitations deriving (a) from a resolution of the company or any class of
shareholders, or (b) from any agreement between the members of the company or of any class of
sha eholde s . –constitution includes: articles, resolutions, agreements
The internal effects of lack of authority:
S o l alidates the t a sa tio i fa ou of the d pa t . • S : This se tio does ot affe t

any right of a member of the company to bring proceedings to restrain the doing of an action that is
beyond the powers of the directors. But no such proceedings lie in respect of an act to be done in
fulfil e t of a legal o ligatio a isi g f o a p e ious a t of the o pa . • S : This se tio
does not affect any liability incurred by the directors, or any other person, by reason of the directors
e eedi g thei po e s .
-This is a separate thing from the validity of the transaction. The transaction might be valid but the
director could still be in breach of s. 171

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•S •S A [those a ti g o ehalf of a o pa ] B [the o pa ] • S 9 •S C[ d

party acting in good faith
Contracting through agents:
General rules of attribution (law of agency)
• Li itatio s the o pa s o stitutio o the ope atio of age ts appl
• Do t i e of o st u ti e otice and indoor management rule apply
• I pli atio s fo the ult a i es do t i e a d fo the autho it of the age ts of the o pa
•S i CA A pe so deali g ith a o pa is ot ou d to e ui e as to a
limitation of the power of the directors to bind the company or authorise other to do so .
-Only applies if there is a limitation on the power of the board to authorise someone to enter
transaction (not if there is a limitation on a specific individual)
Agency:
Age ts a o l a t on behalf of the company if the constitution permits delegation of managerial

power to others (see Model Article 5).
• If su h po e to delegate e ists, the o o la of age o es i to pla to de ide if a a to

has a tuall e o e su h a age t o delegate of the o pa . • Othe ise the age t has o
authority and the transaction does not bind the company (it is void).
• T pes of autho it a o di g to la of age : o E p ess a tual autho it ; o I plied a tual

authority aka usual authority o Apparent/ostensible authority
Actual authority:
A pe so A e o es a actual age t if the e is a contract of agency (express or implied) between

the p i ipal P a d A.
• The o pa s o stitutio ill dete i e ho a i d the o pa as p i ipal see Model

Articles 5 – usually the board).
• Hely-Hutchinson v Brayhead [1968] 1 QB 549 (CA) - Richard was the chairman of defendant
company and also chief executive officer. He often committed the company to contracts and
disclosed it to the board subsequently; the board never had a problem with this. The plaintiff was
the chairman and managing director of another company, it was planned that it would eventually be
merged ith the defe da t s o pa . As pa t of a ag ee e t to put o e i to the plai tiff
company, plaintiff was given certain letters signed by Richard, by which the defendant agreed to pay
back any money owed to the plaintiff. Richard had no authority to make the contract. Held: Richard
was acting as the agent of the company and had actual authority.
-The board had consented for months to Richard acting as chief executive and entered contracts of
his own accord.-Distinguishes between express actual and implied actual authority Appointment as
managing director confers implied actual authority to the person appointed
Who can make the agency contract for the company? –Depends on articles (usually board) • S ope
of actual authority will depend on terms (express or implied) of that agency contract. • S ith v

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Butler [2012] EWCA Civ 314 Managing director has no power to suspend the chairman of the board.
• Panorama Development v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 (CA) - A company
secretary has power to enter into contracts related to the day-to-day running of the company: e.g.
to hire a car.
Apparent authority:
-consists of authority by which a person in his position can reasonably be expected by third parties
to have that authority
-3 rd parties reasonably expect A to have authority because of his position and the type of business
o e ed o the p i ipal is estopped , ha i g ep ese ted that A is his age t, f o de i g this
Kreditbank Cassel v Schenkers [1927] 1 KB 246; [1928] AC 1 The indoor management rule does not
mean that anyone who has a pen can sit down and sign a bill/exchange in the name of the company.
Manager of branch had no ostensible authority.
• Fi st E e g UK Hu ga ia I ternational Bank Ltd [1993] BCLC 1409 Senior manager of branch

did not have ostensible authority to make decision but had ostensible authority to communicate an
offer on behalf of the bank.
Freeman and Lockyer v Buckhurst Park Properties [1964] – 2 men (Kapoor and Hoom) had formed
the defendant company to buy and re sell a large estate. Kapoor, Hoom, and a nominee of each
were appointed directors, according to the articles all four were needed to constitute..... All the day
to day management was left to Kapoor. After a plan for the immediate re sale fell through, Kapoor
decided to develop the estate and appointed the plaintiffs for planning permissions. The company
then refused to pay the fees to the plaintiffs on the ground that Kapoor had no authority to engage
them.
Held: The company was bound, on the basis of apparent authority.
-apparent authority is a legal relationship between the principal and the third party on a
representation that the agent has authority to act on behalf of the principal
Diplock LJ s four o ditio s for appare t authority:
o Representation that agent had authority
o By person(s) with actual authority
o 3 rd party induced by representation
o The act is not ultra vires
Actual authority: legal relationship between principal and agent
Apprent authority: legal relationship between principal and third party (presentation by principal to
third party that the agent has authority and it is reasonably expected by third party that he does).
-K o ledge of the o pa s o stitutio dep i es the 3rd party of the benefit of the doctrine of
apparent authority

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Company Law Lecture - Share Capital
Differences between (a) Share Capital and (b) Loan Capital
Recall Lecture 1
(a) Sha e o E uity Capital:
Co t i uted th ough issue of sha es e uities to sha eholde s
(i) Status: shareholder has rights and obligations determined by constitution (and
terms of issue). Recall the statuto o t a t i s. :
“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.”
(ii) Typical rights conferred by articles (on shareholders)

(see Model Articles for Public & Private Companies)
(1) rights in relation to general meetings:
right to attend, participate and vote in (and in certain circumstances call)

a general meeting.
(2) Right to su h di ide ds dist i utio s as the di e to s e o e d and

the company by ordinary resolution declares.
(3) Terms on which shares are transferable/exit rights:
Recall: Re Smith and Fawcett Ltd [1942] Ch 304, S&W, 535
Rayfield v Hands [1960] Ch 1, S&W 257
Companies Act 2006, s.996(2)(e)
(see also: Model Articles for Private Companies, art.26(5)
*On liquidation (or winding-up), a shareholder is entitled to a share of the surplus capital,
after all the liabilities of the company (esp. liabilities to creditors) have been satisfied.
-Insolvency rights are mandatory and determined by statute
(iv) Legally, shareholde said to had ights i the o pa
Recall: Bo la d s Ba k Steel B othe s & Co.Ltd [1901] 1 Ch 279, S&W 462 - “A

share is the interest of a shareholder in the company measured by a sum of
money, for the purpose of liability in the first place, and of interest in the

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second, but also consisting of a series of mutual covenants entered into by all
the shareholders inter se in accordance with s. 16 of the Companies Act, 1862
[CA 2006, s 33].”
Per Farwell J. at 288 (underling added)

(v) From a financial point of view, the shareholder has a stake in the success of the company
s/he is ofte des i ed i a u atel f o the legal poi t of ie as owner of o pa as s/he
will (probably) receive a share of the profit as dividends and the value of the shares will increase
with the success of the company. And if business fails, loses investment but is protected by
limited liability.
Loan Capital
Contributed (lent) by creditors under loan contract made with company
(i) Status: creditor has rights and obligations determined by loan contract (cf articles)
(ii) Typical rights conferred by loan contract

(1) no say in the running of the company;mere contractor with the company
(2) payments (often periodic) in form of interest;receivable as of contractual

right (cf dividends)
(3) Loan repayable, as of contractual right, as determined by contract (eg. by

instalments or at end of fixed term)
(iii) *On liquidation a creditor is entitled to be repaid out of company assets (if any) before any
capital is returned to the shareholders.
(iv) Legally, a edito o p o ide of loa apital said to ha e ights agai st the
company
(v) From a financial point of view, a creditor does not have any stake in the success of
the company (except to the extent that it remains solvent). However well it does,
only gets back loan plus interest.
And, if company fails, has first call on (any) assets
Hybrid securities
The t ada le ights of sha eholde s sha es/sto k a d edito s o ds are often
so e hat o fusi gl to a la e alled se u ities .
As the rights of both shareholder and creditor are generally (BUT see below as to mandatory
rules imposed in relation to share capital) not pre-determined by law but by either by (i) the
s.33 contract or (ii) the loan contract, respectively, the typical rights may generally be

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modified, giving rise to 'hybrid securities' with characteristics of both equity and debt
investment.
Some examples:
(a) H id se u ities , eg. CoCo o ds

('contingent convertible bonds'; bonds that are convertible into shares only when
the p i e of the u de l i g sha es ises to p edete i ed le el; a featu e of apital
ade ua e ui e e ts of a ks
(b) p efe e e sha es
(See Model Articles for Private Companies, art.22(1) …the o pa y ay issue

shares ith su h rights or restri tio s as ay e deter i ed y ordi ary resolutio
Re all lass ights : ss. -640)
Usually have right to fixed dividend and/or return of capital before other
shareholders.
(c) credito ith sha eholde -type ights i his loa o t a t the ould also o t a t
for shareholder-like rights)
- appointment of nominee director (recall problems)
- interest in form of share of profits
- repayment amount linked to success of company
Differences still remain:
(i) basis of the legal relationship
(is it the articles or an extrinsic contract?)
(ii) *On insolvency, creditors come first.
(iii) To maintain that order on solvency:
mandatory rules on raising and maintaining share capital
The ules o sha e apital e e de eloped the o o la ; although the UK s o ligatio

to comply with the provisions of the Second EC Directive (77/91/EEC; [1977] O.J. L26/1)
resulted in the adoption of comprehensive statutory rules in 1980. The Companies Act 2006
reflects the changes suggested by the Company Law Review Steering Group. (Minor
relaxations in Directive 2006/68/EC not implemented.)
The rules on share capital are mostly mandatory rules. They can be seen as part of the
remedial response to the problem of third party risk (insolvency) created by the limited
lia ilit ule of o pa la . The apital ai te a e ules ei fo e the edito s p io it
over shareholders in insolvency.

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SHARE CAPITAL- Some terminology

5. On incorporation
[Note: a olitio of autho ised/ o i al sha e apital i Co pa ies A t – but see s.9
eed state e t of apital a d i itial sha eholdi gs"]
Recall that o igi al sha eholde s a e alled su s i e s as the sig o su s i e to the

e o a du of asso iatio , ho subscribe fo sha es.
The term is also used for any members that take shares directly from company after a
further issue of shares.
No i al o pa Value
(a) S.542: all shares must have so- alled o i al o pa alue [EU e ui e e t fo
public companies]
[(b) S.542(3) (confirming Re Scandinavian Bank Group plc [1987] BCLC 220, Harman J):
share capital can be denominated in any currency]
(c) function of nominal value:
(i) determines what proportion of the capital subscribers have (if 100 shares at £1
par value are issued, each share gives holder 1/100th shareholding)
(ii) sets minimum alue of o side atio fo sha e. see o dis ou t ule elo : at
least nominal value must be paid)
(d) *Bea s o elatio to subscription price if issued 'at a p e iu '

a d the eafte sha e p i e .
he e o i al alue sa s nothing about value of share)
Sha es ay e fully o pa tly paid up.
See Model Articles for Public Companies: Arts.52-62

(Cf Model Articles for Public Companies: Art.21) He e alls o sha es. Ca t ha e pa tl paid
shares in private companies – although you can have your own articles rather than the model ones)
8. Mo e apital te i ology
The te capital usuall efe s to share capital (rather than loan capital)
Only true statutory defi itio is of called-up share capital s.
See s. , hi h also defi es t o o e te s:

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‘(1) References in the Companies Acts-
(a) to "issued share capital" are to shares of a company that have
been issued;
(b) to "allotted share capital" are to shares of a company that have been
allotted. (Emphasis added)
See s.558 o Whe sha es a e allotted
For the purposes of the Companies Acts shares in a company are taken to be
allotted when a person acquires the unconditional right to be included in the
o pa y s register of members in respect of the shares.(emphasis added)
Fo issued (in tax context), see: National Westminster Bank v IRC [1995] 1 AC 119 : shares
had ot ee issued to X he e X s a e had ot et ee put o the sha eholde s
register.
-So, it see s to follo that allot o e s step he holde e o es e titled to e put o

egiste a d the the sha e is a tuall issued he s/he is put on register.
Legal Capital
Not a statutory term but one used by corporate lawyers to denoted the yardstick against
which the legal ability to make distributions (eg dividends) to shareholders is measured (to
be considered in detail next week).
In essence it is:
the nominal value of allotted shares plus so alled u dist i uta le ese es
The list of undistributable reserves is now in s.831(4) (see next week).
Bo us / Capitalisatio / s ip issue.
Co e sio of o pa s p ofits o u dist i uta le ese es i to sha es so that o i al

value of shares reflect more closely their actual value. (The company may decide to issue
shares for free to each of the shareholders so that each one ends up with more shares, still
at the nominal value, but it will reflect more the actual value)
Not a t ue issue i the se se that e apital I aised it is t .
Recall: EIC Services Ltd v Phipps [ ] EWCA Ci ju idi al e pla atio of o us issue

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.Its esse e is, …, that profits and other available reserves are capitalised and applied in
paying up unissued shares or debentures, which are issued to the existing shareholders in
proportion to their entitlement to dividends. The effect is that, in contrast to a dividend
which reduces the assets of a company, a bonus issue does not reduce those assets since the
assets and liabilities side of the balance sheet remains unchanged but the capital and
reserves side of the balance sheet is rearranged with a reduction in the amount of the profits
or other relevant reserves and an equal increase in the amount of the paid up share capital
reflecting the increase in the issued share capital (see Hill v Permanent Trustee Company of
New South Wales Ltd. 1930 AC 720 at pp. 731 -732 per Lord Russell).
Rules o Raisi g Sha e Capital
Rationale: protection creditors
Case law. Note especially the early landmark decisions:
Trevor v Whitworth (1877) 12 App Cas 409, S&W 521 (next week)
Re E ha ge Ba ki g Co, Flit oft s ase (1882) 21 Ch D 546 S&W, 511 (next week)
Ooregum Gold Mining Co. of India v Roper [1892] AC 125, S&W504;
Legislative intervention (History of):
Esp. :o edee a le sha es & fi a ial assista e see next week)
: sha e p e iu a ou t see below 10(c) and next week)
1980: Need to implement Second EC Directive (77/91/EEC; [1977] O.J. L26/1
(only applicable to public companies but corresponding changes to private company

rules sometimes also made)
General rules on raising share capital (applicable to both private and public companies):
(a) Minimum capital requirement

Historically, there was never a minimum capital requirement for companies,
But note that financial institutions (e.g. banks, insurance companies) ha e apital ade ua
e ui e e ts i posed egulato s Basle Co ittee e o e datio s i ple e ted
EU & then PRA) to reduce their chances of failing (and causing crises in real economy)

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Still no minimum capital requirement for private companies (he e thi o u de

apitalisatio .
But relevant factor:
- when deciding whether to lift the corporate veil (see Re F.G. (Films) Ltd
[1953] 1 WLR 482; S&W, 61
- in wrongful trading (see Re Purpoint [1991] BCLC 491, 498), noted S&W 816
- in di e to s dis ualifi atio see Re Austinsuite Furniture Ltd [1992] BCLC

1047 and 1062; Re Chartmore Ltd [1990] BCLC 673).
But see (11) below as to public companies.
Shares cannot be allotted at a discount:
Shareholder must contribute (eventually, depending on whether the shares are fully or
partly paid up) at least the nominal value of the share.
Ooregum Gold Mining Co. of India v Roper [1892] AC 125 S&W 504 – The company had £1
nominal shares, but the company was doing so badly that the value was actual 25p. They
wanted to issue more £1 nominal shares but for 25p. HL held they could not do that, they
must raise the nominal amount. The creditors looking at the company are entitled to assume
that the nominal value has actually been raised.
Every creditor of the company is entitled to look to that capital as his security : pe Lo d
Halsbury
Mosely v Koffyfontein Mines Ltd [1904] 2 Ch 108 CA noted S&W 506 – The company wanted
to issue converted debenture stock (bonds) which are convertible into shares. Confirmed that the
p i iple of ot allotti g at a dis ou t did t appl to loa s, ut o e ti le loa sto k a ot e
issued at a discount?
Now confirmed by statute: s.580(1) – o pa s sha es ust ot e allotted at a dis ou t
Sanctions:
s.580(2): If shares are allotted i o tra e tio of this se tio , the allottee is lia le
to pay the company an amount equal to the amount of the discount, with interest at
the appropriate rate.
s.590: criminal offence by company & officers

& directors in breach of duty:
Hirsche v Sims [1894] AC 654 PC

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Note also ss.552-3: (General prohibition of commissions, discounts and
allowances), subject to limited exception in s.553.
& See Model Articles for Public Companies, art.44 (commissions)
T eat e t of p e iu (i.e. amount in excess of nominal value)
S.610 (first introduced in 1948 Companies Act)
If a o pa y issues shares at a pre iu , hether for ash or otherwise, a sum equal to the
aggregate amount or value of the premiums on those shares must be transferred to an
account called "the share premium account". (emphasis added)
Mea i g of t a sfe ed to a a ou t – a notional transfer in accounts.
The sha e p e iu a ou t is a otio al a ou t; it e o es pa t of the legal apital

and hence, together with the nominal share capital, part of the yardstick used in the
maintenance of capital context (see next week)
See s.610(3): The o pa y ay use the share pre iu a ou t to pay up e

shares to e allotted to e ers as fully paid o us shares.
and s.610(4): the provisions of the Companies Acts relating to the reduction of a
company's share capital apply as if the share premium account were part of its paid up share
capital.
and s.831(4)(a): part of so- alled u dist i uta le ese es .
Consideration fo sha es: o ey s wo th
582 General rule as to means of payment
(1) Shares allotted by a company, and any premium on them, may be paid up in
money or money's worth (including goodwill and know-ho ). [Eg Salomon]
(i) application of discount rules (see (b), above)
Value of o e s o th ust e at least as g eat as nominal value.
Ho does the la e su e that p o ote s o di e to s alue o e s o th o e tl ?
Re Wragg Ltd [1897] 1 Ch 796, 830, S&W, 510 – A company went bust having been
set up by the transfer of a business to it. The liquidator challenged the valuation (if it
was less than the nominal value then he could have got more out of the allotees). He
sued the allotees and directors (for misfeasance). CA held: the issue was a matter of

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business judgement for the promoters, as long as the value honestly and not
colourably then the court will not interfere.
(now note s.174)
(ii) application of share premium rules (see (c), above)
If alue of o e s o th is i e ess of the o espo di g o i al alue, the alue of

that excess – the premium – must be shown in the accounts i.e ust e t a sfe ed to a sha e
p e iu a ou t
Henry Head & Co Ltd v Ropner Holdings Ltd [1952] Ch 124, S&W 507;
[There are special rules in context group reconstructions (s.611) and mergers (ss
612-615), prompted by Shearer v Bercain [1980] 3 All ER 295]
(11) Special Rules Applicable to **Public** Companies Only
(implementation of 2nd Co. Law Directive)
(a) Minimum Capital Requirement
From (Art.6 of Directive)
s.761: Nominal value of a public company's allotted share capital must not be less
than the so- alled authorised minimum .
This is presently £50,000 (or equivalent in Euros) but can be altered by statutory instrument
Sanctions:
s.767(1): criminal offence by company & officers
s.767(3)
the dire tors … are joi tly a d se erally lia le to i de ify a y other party
to [any] transaction [for] any loss or damage [if] the company's [fails] to
comply ith its o ligatio s.
-Required to have at least ¼ of the shares paid up (so minimum is actually

12,500 rather than 50,000)
Payment for shares: Three statutory limitations
(See ss.584-587, with supplementary provisions in ss.588-592)
(i) S.584: Shares taken by subscribers to the memorandum of a public

company and any premium must be paid up in 'cash'.

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But ote ide defi itio of ash i s.

Cash covers (s.583(3)(c)) - “ a release of a liability of the company for
a liquidated sum”
Confirmed:Re Bradford Investments plc ((No.2) [1991] BCC 379

(in context of need for valuation, see below)
Sanction: s.590: offence by company & officers
(ii) S.585: A u de taki g given by any person that he or another should do

work or perform services for the company or any other person as
consideration for an issue of shares is prohibited
Sanction s.585 (2)
If a public company accepts such an undertaking in payment up of its shares

or any premium on them, the holder of the shares when they or the premium
are treated as paid up (in whole or in part) by the undertaking is liable-
(a) to pay the company in respect of those shares an
amount equal to their nominal value, together with the whole of any
premium or, if the case so requires, such proportion of that amount
as is treated as paid up by the undertaking; and
(b) to pay interest at the appropriate rate on the amount payable under
paragraph (a).
But note s.589: power of court to grant relief
Other consequences:
s.588: liability of subsequent holders
(& s.589: power of court to grant relief)
s.590: offence by company & officers

But note: s.591: Undertaking enforceable by company
(so obliged to work for company – but for free & to pay for shares)

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(iii) S.587: Any undertaking which is to be performed more than 5 years after
the date of the allotment of shares is also prohibited as consideration for the allotment of
shares.
Sanction s.587(2) : allottee is liable to pay the company an amount equal to

the aggregate of their nominal value and the whole of any premium (or, if
the case so requires, so much of that aggregate as is treated as paid up by
the undertaking), with interest at the appropriate rate.
Note anti-avoidance provisions: subss.(3)-(5))
And note s.589: power of court to grant relief
Other consequences:
s.588: liability of subsequent holders (& s.589: power of court to grant relief)
But note: s.591: Undertaking enforceable by company
(so bound by obligation & to pay for shares)
Valuation of payments in kind [IN OUTLINE]:
See Chapter 6 esp s. 593 (qualified by ss. 594, 595)
ss. 596, 597,
[ss.598-604 deal with transfers on incorporation]
-Esse tiall , these p o isio s p e e t sha e- ate i g e ui i g a o - ash

consideration (if lawful, see (i) -(iii), above) to be independently valued before allotment & copy of
valuation sent to allottee (s.593(1)(c)) & Registrar:
Sanctions: s.593(3): Liability of allottee
‘If [there is a ] contravention of subsection 1 and either-

(a) the allottee has not received the valuer's report required to be sent to him, or
(b) there has been some other contravention of the requirements of this section
or section 596 that the allottee knew or ought to have known amounted to a
contravention,
the allottee is liable to pay the company an amount equal to the aggregate of the
nominal value of the shares and the whole of any premium (or, if the case so
requires, so much of that aggregate as is treated as paid up by the consideration),
with interest at the appropriate rate.

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See also:
s.605: Liability of subsequent holders (& s.606: power of court to grant relief)
s.606: Power of court to grant relief to allottee
Re Ossory Estates plc [1988] BCLC 213. Harman J (gave relief)
Re Bradford Investments plc ((No.2) [1991] BCC 379

Hoffmann J (no relief)
(and note s.608: undertaking to do work enforceable)
Raising Further Capital and Dilution Protection
(a). Allotment of shares
Note (in outline) the general provision in ss.549-551:
The articles usually give the directors the power to allot further shares, and being a fiduciary
power, in exercising it the directors must act in accordance with their duties (recall
esp.ss.171, 172, 174):
Case law on the duty of directors when issuing further capital
Hilder v Dexter [1902] AC 474, S&W, 472 – it as a gued that the di e to s did t issue
the sha es at thei full p i e ot at a dis ou t, ut it as t at a p e iu . HL said as lo g as the a t
bona fide it is up to them to set the price
(See now s.172 (and s.174?))
Recall:
Howard Smith v Ampol Petroleum [1974] AC 821, S&W, 314
(See now s.171(b))
Moreover there are some mandatory statutory provisions giving the shareholders in public
(and private, if s.550 does not apply) companies control over the directors' power to issue
shares: ss. 549 – 551.
On private companies, note .550: directors have power to issue shares, but can be
excluded by articles.

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(b). Pre-emption rights [IN OUTLINE]:
Note Part 17, Chap. 3: ss 560 – 577
A p e-e ptio ight is a ight of existing shareholders to pre-empt the allotment of new
shares by subscribing for those shares in proportion to their existing shareholding so as to
maintain their proportion of the shareholding (and hence voting and distribution rights).
Historically, the articles often gave shareholders such rights and the London Stock Exchange
Rules also required companies listed on the exchange to confer pre-emption rights.
Now the 2nd Directive obliges the UK to give such rights in relation to public companies (&
they have been extended – as a default rule (so articles can exclude) - to private companies).
s.561- 563: general right (and note sanction in s.563 – issue is valid)
ss.564-6: Exceptions:
note especially s.565: non-cash allotment
ss.567-568 Exclusion of right:
(articles of private company may exclude (s.567) or modify (s.568 –

a d ote a dato p o isio if o espo di g ight

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Company Law Lecture - Share Capital II
Rules o Mai te a e of share apital
Although the principal rationale is creditor protection, occasionally minority shareholders are also
the beneficiaries of the rules in so far as capital cannot be returned to majority shareholders or
those associated with them.
(I) COMPANY MAY NOT REDUCE ITS CAPITAL BY ACQUIRING BACK ITS OWN
SHARES
(a) Common Law rule.
-A company may not reduce its capital by acquiring back its own shares:
Trevor v Whitworth (1877) 12 App Cas 409 ,S&W 521 (above, 1.)
Company may not purchase back (cf receive gratuitously: Re Castiglione [1958] Ch
549 ; confirmed in Cos Act 2006, s.659(1)) its own shares.
S. 658 – a Limited company must not purchase back its own shares (except in accordance with
provisions in this part). –If it does then there is criminal sanctions and the purported acquisition is
void
-Duomatic principle doe not apply (because it is creditor protection not shareholder protection) - Re
RW Peak (Kings Lynn) Ltd [1998
Statutory Exceptions:
In certain circumstances a company may redeem or repurchase u - a k its sha es.
Note diffe e e et ee ede ptio of edee a le sha es a d epu hase of a

shares)
Reaso s h su h u - a k a e desi a le:
1. If no market for shares (private companies):
Shareholders may have difficulty in finding someone willing to buy their stake &
minority stakes (in particular) in private companies rarely an attractive investment

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(even assuming requisites consents for transfer, which articles often impose, are
given)
Hence if the company is able to buy back shares
(1) Attractive to venture capitalists who can withdraw their investment
(2) Founders of company may wish to withdraw their investment on

retirement
(3) A oida e of u fai p ejudi e litigatio
2. Even if there is a market for the shares
(1) Capital restructuring
(2) Facilitation of employee share schemes
(3) Pricing and tax reasons
Redemption of (Redeemable) shares:
CA 2006 s. 684-689
S. 684 Power of limited company to issue redeemable shares
(1) A limited company having a share capital may issue shares that are to be redeemed
or are liable to be redeemed at the option of the company or the shareholder
("redeemable shares"), subject to the following provisions.
(2) The articles of a private limited company may exclude or restrict the issue of
redeemable shares. [new default, general permission]
(3) A public limited company may only issue redeemable shares if it is authorised to do
so by its articles.
(4) No redeemable shares may be issued at a time when there are no issued shares of
the company that are not redeemable.
Note difference between private & public companies.
See Model Articles for Private Companies, art.22(2)
Model Articles for Public Companies, art.43(2)
-They both say a company may issue redeemable shares and directors can
determine terms on which they are made
Terms and manner of redemption:
S.685 enables the directors of both private and public companies to determine the terms, conditions
and manner of a redemption of redeemable shares.

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The power requires prior authorisation by the company's members, either by resolution of the
company or through the articles (see Model Articles).
Source of funds when redeeming shares:
See s 687(2)-(5), 688, 733
Purchase of shares:
Ca s. 690-708
S.690 Power of limited company to purchase own shares

(1) A limited company having a share capital may purchase its own shares (including any
redeemable shares), subject to-
(a) the following provisions of this Chapter, and
(b) any restriction or prohibition in the company's articles.
(2) A limited company may not purchase its own shares if as a result of the purchase
there would no longer be any issued shares of the company other than redeemable
shares or shares held as treasury shares.
-Re o es the e ui e e t fo p io autho isatio i o pa s a ti les fo a pu hase of o

shares, but the member may restrict of prohibit a purchase of own shares by including a provision to
this effect in the articles.
S. 691: -limited company may not purchase its own shares unless they are fully paid up
Preventing abuse of Share Buy-Backs:
To prevent the abuse of share buy-backs, there are statutory provisions that apply to them that have
nothing to do with creditor protection.
Just as directors can use power to issue shares for improper purposes (eg. thwart takeovers) so the
buy-back of shares can be abused, in particular to prejudice minority shareholders or to manipulate
the share price.
Source of funds for buy- a k; the apital rede ptio reserve :
Unless the company is a private company (see below), shares may only be redeemed or
purchased out of
so- alled dist i uta le p ofits o
the proceeds of a fresh issue of shares made for the purpose.
See s 687(2)-(5) (redemptions) and s 692(2)-(5) (purchases)

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Accounting adjustments following a redemption or purchase

When shares are redeemed or purchased the shares must generally be cancelled (but see
T easu Sha es , elo a d the issued apital edu ed the o i al a ou t a o di gl :
See s 688 (redeemed shares) and s 706 (purchased shares).
If the redemption or purchase has been paid for by issue of new shares – then the issued
sha es epla e the edee ed/ ought sha es as the legal apital e ai s the sa e.
If it has ee ade out of p ofits, s. e ui es a t a sfe of the a ou t hi h the

o pa s issued sha e apital is di i ished to a so-called apital ede ptio ese e .
Si ila idea to sha e p e iu a ou t Lectures 31 & 32. item 10(c) , t a sfe is
notional and used in the accounting sense of noting this amount in the accounts.
-He e the o pa s legal apital is agai ot edu ed.
Private Co pa rela atio : the PCP Per issi le Capital Pa e t:
In the case of private o pa ies, s. e a les the legal apital to be reduced through a
redemption or purchase of shares, subject to any restriction or prohibition in the articles.
I.e. the funds available for redemption or repurchase extend beyond distributable profits
a d p o eeds of a f esh issue i to apital he e PCP the pe issi le apital pa e t
Since this is a reduction of legal capital, such payment can only be made if the requirements
in s 713 – 720 and s 723 are complied with, which provide publicity and procedural
safeguards (esp. solvency statement by directors) to safeguard creditors & other
shareholders.
Note the right of creditors and members to apply to the court if they object: s.721.
See Companies Act 2006, Part 18, Chap.5 (ss.709- a d s. : The PCP the
pe issi le apital pa e t
Treasury Shares:
Certain public companies may elect not to cancel shares which have been bought back, but
ot hold the sha es i t easu fo late e-sale. This facility enables them to raise capital
more quickly than they would otherwise be able to, as the directors do not have to issue
new shares. Subject to CA s. 724-732.
Prohi itio of fi a ial assista e :
-A company may not give financial assistance to another to enable them to purchase its shares.
Rationales: There are at least 5 policy reasons behind the rule:
(i) Sometimes it is said that, at least superficially, the provision of financial assistance to
so eo e else to pu hase a o pa s sha es ese les a pu hase the
company itself (and hence in breach of (I).
Note that statuto p o isio s a e i Pa t , headed Acquisition by Limited
Co pa of its o Sha es )

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(ii) Sometimes, if the financial assistance (e.g. a loan that is not repaid) results in loss of
money, again looks like the maintenance of capital rule is infringed.
C edito s e pe t assets to e used i o pa s usi ess, ot to help othe s to u

the o pa s sha es.
(iii) Sometimes, it is a straightforward case of directors not acting in the best interests of
o pa ut aidi g o pa fu ds fo thei o o asso iates e efit. He e it is
the other shareholders who are primarily prejudiced. (although, if company
becomes insolvent, creditors will suffer also).
(iv) Sometimes the context is a take-over. Takeover bidder may wish to use the assets
of the ta get o pa to fu d his takeo e asset-st ippi g takeo e s
(Original rationale behind rule (see Greene Report 1926).)
(v) Or, the context may be share-support operation by bidder of own shares offered to
target shareholders.
Wallersteiner v Moir [1974] 3 All ER 217 CA 255 per Scarman LJ:
The a enacted to protect company funds and the interests of shareholders as well
as creditors .
CA 2006 Part 18, Chap 2 – abolishes the prohibition on private companies giving financial assistance
hence now; prohibition confined to public companies.
S. 678 & 679:
S 678: Assistance for acquisition of shares in public company
In essence, a general prohibition against a public company or any of its subsidiaries from giving
financial assistance directly or indirectly to a pe so for the purpose of an acquisition of the
o pa s o sha es hethe efo e su s. o afte subs.(3)) the acquisition.
S 679: A general prohibition against a public company that is a subsidiary of a

private [holding] company from giving financial assistance to a person directly or indirectly for
the purpose of an acquisition of shares in the private company. Similarly worded to s.678
Territorial Scope:
Arab Bank plc v. Mercantile Holdings Ltd [1994] Ch 871 [1994] 2 All ER 74
Millett J held that (the old) s.151 could not have extra-territorial effect and hence the
statutory prohibition did not apply to the giving of assistance by a subsidiary incorporated in
an overseas jurisdiction.
Confirmed in 2006 Act (see definition of "company" in s.1, esp, s.1(1) ("company" means a company
which is formed and registered under the Act or a former UK Companies Act).)
Mea i g of Fi a ial Assista e :

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s. 677 - (1) In this Chapter "financial assistance" means-
(a) financial assistance given by way of gift,

(b) financial assistance given-
(i) by way of guarantee, security or indemnity (other than an indemnity in respect of the
indemnifier's own neglect or default), or
(ii) by way of release or waiver,
(c) financial assistance given-
(i) by way of a loan or any other agreement under which any of the
obligations of the person giving the assistance are to be fulfilled at a
time when in accordance with the agreement any obligation of another
party to the agreement remains unfulfilled, or
(ii) by way of the novation of, or the assignment (in Scotland,
assignation) of rights arising under, a loan or such other agreement,
or
(d) any other financial assistance given by a company where-
(i) the net assets of the company are reduced to a material extent by the
giving of the assistance, or
(ii) the company has no net assets.
(2) [Defn ‘net assets’]
Charterhouse v Tempest Diesels [1986] BCLC 1 Per Hoffmann J. S&W 531
“There is o defi itio of givi g fi a ial assista e i the se tio , although so e e a ples are
given. The words have no technical meaning and their frame of reference is in my judgment the
language of ordinary commerce. One must examine the commercial realities of the transaction
and decide whether it can properly be described as the giving of financial assistance by the
company, bearing in mind that the section is a penal one and should not be strained to cover
transactions which are not fairly within it..... main purpose of such a transaction is to enable the
pur haser to u the shares.
See also: Chaston v SWP Group plc [2003] (SW 526)
Exceptions:
The pu pose e eptio s:
s. 678 and 679 - such assistance is not prohibited if

(a) the company's principal purpose in giving the assistance is not to give it for
the purpose of any such acquisition, or
(b) the giving of the assistance for that purpose is only an incidental part of
some larger purpose of the company,

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and the assistance is given in good faith in the interests of the

company.
Old pu pose e eptio o side ed HL i , Brady v Brady [1989] AC 755, S&W 532 – Given
narrow construction by HL
(ii) Other Exceptions

Ss.678(5) & 679(5) say that the sections have effect
subject to sections 681 and 682 (unconditional and conditional exceptions to prohibition
s.681 Unconditional exceptions

(a) a distribution of the company's assets by way of-
(i) dividend lawfully made, or
(ii) distribution in the course of a company's winding
up;
(b) an allotment of bonus shares;
(c) a reduction of capital under Chapter 10 of Part 17;
(d) a redemption of shares under Chapter 3 or a purchase of
shares under Chapter 4 of this Part;
(e)-(g) [certain insolvency procedures]
s.682 Conditional exceptions

The o ditio s a e i su s. , iz
(a) if the company giving the assistance is a private
company or
(b) if the company giving the assistance is a public
company and-
(i) the company has net assets that are not reduced by the
giving of the assistance, or
(ii) to the extent that those assets are so reduced, the
assistance is provided out of distributable profits.
Consequences of breach of prohibition on financial assistance:
Criminal sanctions: S 680
Civil law effects:
(i) On transactions: Head He O Co o [1971] 1 WLR 497, - Security given in

breach held to be void
Re Hill & Tyler Ltd (In Admin.) [2004] EWHC 1261S&W 536

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Carney v Herbert [1985] 1 All ER 438 PC - Unlawful mortgages (in breach of

prohibition) could be severed from sha e t a sa tio the assisted a d he e sha e t a sa tio s
valid whilst mortgages given by company were not. Obiter: (on basis previous case law) that if the
assista e a d pu hase a e o e o posite t a sa tio se e a e ot possi le & pu hase is
tai ted u la ful assista e.
ii Directors’ and Recipient’s Liability:

Directors clearly act in breach of duties in effecting prohibited transactions & hence
liable as such (for loss especially)
Selangor United Rubber Estates Ltd v Cradock (No.3) [1968] 1 WLR
1555, S&W 540
Belmont Finance Corp. Ltd v Williams Furniture Ltd [1979] Ch 250; , S&W 538 - a
company bought an asset at an inflated price which enabled the vendors to use the proceeds to buy
a controlling stake in the company. It was held the company could sue the directors and the vendors
as well. Said company was victim and entitled to bring the claim.
Prohi itio of Distri utio s of apital to Shareholders
Re E ha ge Ba ki g Co., Flit oft s ase (1882) 21 Ch D 519, per Jessel MR: S&W, 546 - In
esse e: No di ide d a e paid out of ' apital'; o l out of p ofits
The reditor …gives redit to the o pa o the faith of the representation that the capital
shall be applied only for the purposes of the business, and he has therefore a right to say that
the corporation shall keep its capital and not return it to the shareholders, though it may be
a right which he cannot enforce otherwise than by a winding-up order.
There were many problems with the common law rule which took little account of elementary
a ou ti g p i iples hat ou ted as apital a d hat as p ofit , see S&W 541-542: attention
was paid only to the profit and loss account for the current year and it was treated in isolation).
See Earl of Halsbury in Dovey v. Corey [1901] AC 477 at 487

It is eas to la do as a a st a t p opositio that ou ust not pay dividends out of
capital; but the application of that very plain proposition may raise questions of the utmost difficulty
in their solutio . …What are profits and what is capital may be a difficult and sometimes an
almost impossible problem to solve.
Statutory intervention: CA s. 829 – 853

Definition of distribution: s. 829 Meaning of "distribution"

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(1) In this Part "distribution" means every description of distribution of a

company's assets to its members, whether in cash or otherwise, subject to the following
exceptions.
(2) [exclusions]
Dist i utio s i ki d ha e spe ial p o isio s: ss. -6
See:
Ridge Securites v IRC [1963] 1 WLR 479, 495 – the company sold something to
shareholder at an undervalue, that was held to be a distribution. (proper consideration given: not
'distribution')
Aveling Barford v Perion [1989] BCLC 626 S&W 550 (see above) - A corporate asset
was sold at an undervalue to another company. The shareholder of the selling company was the
majority shareholder of the purchasing company. Lifted the veil and held it was a distribution(Sale of
corporate asset at undervalue: 'distribution')
Re Halt Garage [1982] 3 All ER 1045, S&W, 274 – A shareholder was also a director
and was given excessive remuneration. Held this was a dressed up return of capital to the
shareholder. E essi e e u e atio to di e to /sha eholde : 'dist i utio ')
Progress Property v Moore [2010] UKSC 55; S&W 552 – If the conclusion is that it
was a genuine arms length transaction then it will stand (even if in hindsight it appears to be a bad
bargain).
General operation provision:
S. 830 Distributions to be made only out of profits available for the purpose
(1) A company may only make a distribution out of profits available for the purpose.
(2) A company's profits available for distribution are its accumulated, realised profits,
so far as not previously utilised by distribution or capitalisation, less its accumulated, realised
losses, so far as not previously written off in a reduction or reorganisation of capital duly
made.
(3) Subsection (2) has effect subject to sections 832 and 835 (investment companies
etc: distributions out of accumulated revenue profits).
(emphasis added)
(a) This is k o as the a u ulated, ealised p ofits test. It is applicable to public and
private companies.
Whether or not a profit is a "realised profit" is determined in accordance with the generally
accepted accounting principles in use at the time that the relevant accounts showing the
profit in question are prepared (section 853(4)). Accordingly, the Institute of Chartered
Accountants in England and Wales (ICAEW) and the Institute of Chartered Accountants of
Scotland (ICAS) have issued a consolidated technical release giving guidance on determining

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realised profits and losses: ( TECH 02/10: Guidance On The Determination Of Realised Profits
And Losses In The Context Of Distributions Under The Companies Act 2006.)
(b) Companies are not required to make a provision for unrealised losses a d a ot use
unrealised profits).
(c) Investment companies are treated differently under s 832
(They can only distribute trading (revenue) profits, unlike other companies which
can distribute both trading and capital (increase in value) profits, so long as it is
realised. In other words, investment companies can distribute dividends and other
income from investments (revenue), but not increases in the value of investments
(capital).)
Net assets restriction on distributions by public companies
S. 831 (1) A public company may only make a distribution-
(a) if the amount of its net assets is not less than the aggregate of its called-up
share capital and undistributable reserves, and
(b) if, and to the extent that, the distribution does not reduce the amount of
those assets to less than that aggregate.
(2) For this purpose a company's "net assets" means the aggregate of the company's
assets less the aggregate of its liabilities.
(3) "Liabilities" here includes-
(a) where the relevant accounts are Companies Act accounts, provisions of a
kind specified for the purposes of this subsection by regulations under
section 396;
(b) where the relevant accounts are IAS accounts, provisions of any kind.
(4) [Definition of undistributable reserves to include share premium

account & capital redemption reserve]
The so-called et assets test: ote e pli it efe e e to legal apital , hi h ust e p ese ed.
Justification of distribution by reference to relevant accounts: s 836
S.836 provides that the amount of a distribution which may be made is determined by reference to
the following items as stated in the company's accounts
(a) profits, losses, assets and liabilities,
(b) provisions, and
(c) share capital and reserves (including undistributable reserves).

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These company accounts are prescribed by the Companies Act. The starting point is that directors
are required to present annual accounts consisting of a balance sheet, profit and loss account and
supporting notes (ss 393(1), 396). Those annual accounts are to give a true and fair view of the state
of affairs of the company (in the case of a balance sheet) and of the profit or loss of the company for
the fi a ial ea i the ase of the p ofit a d loss a ou t . The e should e a audito s epo t as
to whether or not the true and fair view requirement has been met (section 495(3)). (On the true
and fair view requirement, see Macquarie Internationale Investments Ltd v Glencore UK Ltd [2010]
EWCA Civ 697, para.49-57.)
The effect of s 836(4) is that if accounts do not give a 'true and fair view' then the determination of
profit available for distribution under s 836 cannot be properly made. In such circumstances, the
distribution will be treated as contravening Part 23.
See, for interest:
Bairstow v. Queens Moat Houses plc and others [2002] BCC 91

BDG Roof-Bond Ltd v Douglas and ors [2000] 1 BCLC 401
Allied Carpets Group plc v Nethercott [2001] BCC 81 noted S&W 547
S. 847 Consequences of unlawful distribution
(1) This section applies where a distribution, or part of one, made by a company to
one of its members is made in contravention of this Part.
(2) If at the time of the distribution the member knows or has reasonable grounds for
believing that it is so made, he is liable-
(a) to repay it (or that part of it, as the case may be) to the company, or
(b) in the case of a distribution made otherwise than in cash, to pay the
company a sum equal to the value of the distribution (or part) at that time.
(3) This is without prejudice to any obligation imposed apart from this section on a
member of a company to repay a distribution unlawfully made to him.
(4) This section does not apply in relation to
(a) financial assistance given by a company in contravention of section 678 or

679, or
(b) any payment made by a company in respect of the redemption or purchase

by the company of shares in itself.
(ii) common law consequences: note s.847(3)

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B ea h of di e to s dut – with all liability consequences (including liability of members as

constructive trustees)
Re E ha ge Ba ki g Co,Flit oft s ase (1882)21ChD 519, S&W 546 – The directors

who made the distribution were held liable by the liquidator (directors are accountable for all
payments, even if they did not make them themselves).
Towers v African Tug Co. [1904] 1 Ch 558
Precision Dippings Ltd v Precision Dippings Marketing Ltd [1985] BCLC 385
noted S&W 543;544 – The cour confirmed that the shareholders who received the
dividends were constructive trustees if they knew or ought to have known
Allied Carpets Group plc v Nethercott [2001] BCC 81 noted S&W 547
Bairstow v. Queens Moat Houses plc and others [2001] EWCA Civ 712; [2002] BCC
91 noted S&W 546 – as paid out a d it as fou d i ea h of the ules, the a ou ts e e t
drawn up properly. The full amount had to be paid out (a certain amount would have been justified
but the paid out too much but the court held that the whole amount had to be paid back).
It s a W ap UK Ltd Gula [2005] EWCA 2015[2006] 1 BCLC 143 S&W 545 –

Payment made in breach of the rules. Court looked at statutory and common law liability. It
draws distinction between the two. S. 847 only applies to a breach of the act, whereas the
common law will cover other areas such as payment out in breach of the constitution. The
statute gives blanket liability, the member having to pay it back period. The common law a is
a bit more flexible, them being a constructive trustees in certain circumstances.
Rules that permit a Return or Reduction of Capital

Part 17, Chapter 10 s 641 – 654.
(and recall that s 710 allows for payment out of capital (a PCP) where a private company
intends to redeem or purchase its own shares.)

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Company Law Lecture – Loan Capital
CORPORATE FINANCE III: LOAN CAPITAL ESP. FLOATING CHARGE
1. Security: the context
('Proprietary') security is the creation of rights over property which may be exercised to enforce an
obligation (usually payment of a debt).
Cf 'personal security' (eg. Guarantee)
(a) Terminology: a iguit of te se u it i elatio to p op ieta se u it , he e:

lea e to use collateral he talki g a out the p ope t /la d itself & security
interest The ights i the ollate al/la d that the le de has
(b) Four types of t ue consensual(created by contract) proprietary security interests (as

listed by Millet LJ in Re Cosslett (Contractors) Ltd [1997] 4 All ER 115 S&W 608):
Possessory:
Pledge: transfer of possession (not ownership); returned on repayment
Contractual Lien: retention of possession until payment (lender is given

right to retain possession until payment is made)
Non-Possessory:
Mortgage (legal and equitable):
Defeasible outright transfer of ownership (not possession);
et a sfe o pa e t he e de to s e uit of ede ptio

e ti guished fo e losu e
Charge (only equitable: fixed and floating):
a e uita le i te est o e u a e that is lifted o

repayment
(See National Provincial Bank v Charnley [1924] 1 KB 431, per Atkin LJ,
cited in S&W 599) – all you need for a change is that the parties evince an
intention, existing or future, shall be available as security, for the repayment
of the debt....
Note more terminology: The secured party/creditor: mortgagee, chargee, pledgee, lienee
The debtor: mortgagor, chargor, pledgor, lienor
Cf. uasi se u it de i es: - ete tio of title Ro alpa lauses; e do edit

- egati e pledge lauses i.e o t a tual est i tio o eatio of fu the

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security interests - see below)

- sale and buy-back/lease- a k & epos
- set-offs
(c) Principal Reasons for taking Security
(i) priority (& enforcement) on insolvency
(ii) out-of-court enforcement
(iii) influence/control over debtor
(iv) tracing remedies
But note the following pitfalls if borrower is corporate
(i) unlawful financial assistance (Lectures 33 & 34)
(ii) reviewable transactions on insolvency (see Lectures 37 & 38)
A d if o pa se u es a othe s de t, ote di e to s' duties issues.
Note, in passing (& S&W 595), possibility of marketable loan 'securities' (eg. bonds, issued
by companies and publically marketable in similar way to shares)
2. The Floating Charge: Introduction
At common law, security interests had two major drawbacks (for business)
(a) future property could not automatically become the subject of a
se u it i te est; a e a t as eeded.
(b) creation of security interest necessarily brought with it inability
to deal with (esp. dispose of) the collateral free of the security
interest (without the consent of the creditor).
Equity overcame both drawbacks:

(a) Equity recognised that security interest could be created in future property
as soon as debtor acquired interest in the property, as long as future
property was sufficiently identified:
Holroyd v Marshall (1861-62) 10 HLC 191; 11 ER 999 – a debtor purported to create a mortgage over
certain chattels he had, the mortgage was stated to cover assets which were acquired atfer the
mortage was made. HL said this was fine. Mortgage over future chattels was allowed
Tailby v Official Receiver (1888) 13 App Cas 523 (HL) – HL confirmed
Holroyd approach and extended it to intangible assets. There was a charge over the debts that a
business incurred (present and future) HL held hat as soon as they were incurred they were
sufficiently identified and subject to the security. Charge over debts (intangible assets) allowed

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(b) E uit e og ised the floating charge hi h e a led debtor/chargor to deal with and
replace collateral in the course of business until charge stallised a d e a e fi ed/spe ifi
ha ge atta hi g to the existing collateral at time crystallisation (and future collateral, if
covered).
First case said to be:
Re Panama, New Zealand and Australian Royal Mail Co (1870) 5 Ch App 318 (CA) – The loan
o t a t pu po ted to eate a ha ge o e the hole u de taki g of the o pa . The CA
accepted that this indeed created a charge over the whole undertaking, but in particular, it implicitly
permitted the o pa to dispose of the assets i the o di a ou se of usi ess. But the o e t
the o pa o es to e ou d up, the ights of the edito atta h stallizatio
The te floati g ha ge as oi ed Jessel MR

Re Colonial Trusts Corpn Ex P Bradshaw (1879) 15 Ch D 465
A d see Lo d Ma Naughto s des iptio of the se u it as a do a t ha ge i Government
Stock and Other Securities Investment Co v Manila Rly Co [1897] AC 81 HL)
The first attempted analysis was in:
Illingworth v Houldsworth [1904] AC 355, S&W 606 (at CA level called Re Yorkshire Woolcombers
[1903] 2 Ch 2 5, CA, see Ro e LJ s judge e t, elo S&W 606) -
Lord Macnaghten drew distinction between so called fixed/specific charge & floating charge:
A specific charge…is o e that ithout ore faste s on ascertained and definite property or
property capable of being ascertained and defined. A floating charge, on the other hand, is
ambulatory and shifting in its nature, 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 faste o the su je t of the harge ithi its rea h a d grasp. [emphasis added]
The Bills of Sale Acts 1878 & 1882, which do not apply to companies, in practice (because of their
formal requirements) preclude non-corporate debtors from creating a 'floating charge'.
Hence, in practice, only companies can create 'floating charges'.
3. The Development of the Floating Charge

For a good overview of the history, see the discussions
by Lord Millet in Agnew v IRC [2001] 2 AC 710, S&W, 606; 626
and Lord Scott in Re Spectrum Plus (In liquidation) [2005] 2 AC 680,
S&W 628
Three Phases
(i) The old case law
Re Panama, New Zealand and Australian Royal Mail Co (1870) 5 Ch App 318
(CA)
Re Colonial Trusts Corpn Ex P Bradshaw (1879) 15 Ch D 465
Government Stock etc. Co. v Manila Rly Co. [1897] AC
*Re Yorkshire Woolcombers [1903] 2 Ch 295, CA, Romer LJ
(on appeal: Illingworth v Houldsworth [1904] AC 355)

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(ii) More recent case law

eg Re Bond Worth [1980] Ch 288 S&W 607 – Retention of title case. Some
suppliers sought to retain title in their raw material when they sold it to carpet manufacturers. It was
challenged that it was really a floating charge and court considered what kind of charge was created.
Judge analysed as involving the retention of an equitable/beneficial ownership and an attempt to
create the interest in the products later on, and the only form of security that permits this is the
floating charge.
Re Cosslett [1998] Ch 495 (CA), S&W 608 – This was a case of whether a
floating charge had been created inadvertently. Cosslet was a buiding contractor and had a contract
with county council to do some work for them which entailed use of machinery on a site. There was
a clause in the contract that if Cosslet abandoned the work, then the council could use the
machinery (his) to finish the work or they could sell the machinery and use the proceeds to hire
someone else to finish the work. Cosslet went into administration and the administrator claimed
that the lause eated a floati g ha ge a d had t ee egiste ed a d as the efo e oid.
Held: At first instance held not to be floating charge. CA characterised it as a floating charge,
which was void for want of registration.
(iii) The ha ges o e de ts e ei a les ase la

Siebe Gorman v Barclays Bank [1979] 2 Ll R 142 – Said it was a fixed charge
over debts.
Agnew v IRC [2001] 2 AC 710, S&W, 606; 626
Culminated in what is leading HL decision:
*Re Spectrum Plus (In liquidation) [2005] 2 AC 680; [2005] 2 All ER 209,
S&W 628
4. The Theoretical Basis
Especially relevant to issues of priority. A great deal of controversy.

See (a) Roy Goode, Legal Problems of Credit and Security (4rd Ed,
2009) 127-8 - Says it is really a p op ieta i te est i the fu d o p isi g ha ged assets;
Charge over water in river allegory. The collateral remains the same through out but the content
changes, it is a charge over something but the content of that changes. (Approved in Spectrum
case)
(b) Sarah Worthington, Floating Charges - An Alternative Theory [1994] 53 CLJ 81 - Said
you should regard the floating charge as the Chargee having a defeasible (fixed) interest, which
terminates on dealing in permitted way. –Same as a fixed charge, just a collateral which could be
dealt with (defeasible)
Similar to earlier:
(c) li e e theo ha gee o tai s (some sort of) proprietary interest but gives licence to chargor
to deal)
See, for interest: Ellis Ferran, Floating Charges: The Nature of the Security
[1988] CLJ 213 ]
Naser, The Juridical Basis of the Floating Charge, (1994) 15
Co. Lawyer 11

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(But (b) and (c) inconsistent with dicta eg. in Evans v Rival Granite Quarries [1910] 2 KB 979,
S&W 607 which deny that it is fixed charge plus licence to deal)
(d) Richard Nolan, Property in a Fund (2004) 120 LQR 108

Floati g ha ge is a o e ea ha le ha ge
5 Relevance if a Charge is Fixed or Floating:

In a number of (esp. statutory) contexts, it matters whether fixed or floating
(a) Priority: See below. –Prima facie, a fixed charge if properly perfected, obtained
priority over subsequent charges. A floating charge by definition permits dealings in the collateral
and prima facie takes subject to and after any other subsequent charges
(b) Prefere tial creditors (set out in statute IA, s .386 & Sched.6, as
amended by Enterprise Act 2002, s.251) take priority over floating but not fixed charges:
in liquidation ( IA 1986 s.175(2)(b)) and
otherwise: (IA 1986, s.40(2) & Companies Act 2006, s.754)
(We shall see next week that, after Enterprise Act 2002, s.251, the categories of '
preferential creditors' have been reduced (in essence they include certain liabilities
to employees but no longer include tax debts to Crown).)
(c) New Insolvency Act s.176A
(added by Enterprise Act 2002,), see Appendix to Lecture 38

a proportion of assets subject to a floating (but not fixed) charge are
made available for the claims of unsecured creditors.
(d) Assets (subject to floating charge) subject to costs of Liquidation/

Administration
Floating charge is subordinate to costs and expenses of administration (IA Sch.B1,
paras.70 & 99)) and liquidation (IA s.176ZA, inserted by Companies Act 2006, s.1282
(reversing Buchler v Talbot (aka Re Leyland Daf Ltd) [2004] UKHL 9)
(e) Special features in Administration
IA 1986, Sched.B1, para.70 (added by Enterprise Act 2002, s.251)
Note floati g ha gee s po e to appoi t a ad i ist ato i id., para.14)

(Administration will be considered in Lecture 37)
(f) Floating charge (only) vulnerable on insolvency under IA s.245
(see Lecture 38)
(g) Proceeds of Crime Act 2002, s 430
(6) Determining if a Charge is Fixed or Floating: the Case Law

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(a) Starting point has always been the 3 characteristics identified by

Romer LJ in Re Yorkshire Woolcombers [1903] 2 Ch 295, S&W 606
1 If it is a harge o a class of assets of a company present and future;

(2) if that class is one which, in the ordinary course of the business of the company, would be
changing from time to time; and
(3) if you find that by the charge it is contemplated that, until some future step is taken by
or on behalf of those interested in the charge, the company may carry on its business in the ordinary
way as far as concerns the particular lass of assets … [emphasis added]
(b) Third characteristic is the crucial o e the hall ark

For example, see Lord Scott Spectrum S&W 628
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. [e phasis added]
And subsequent case law:

Re Beam Tube Products Ltd (aka: Fanshawe v Amav Industries Ltd) [2006] EWHC
486; [2006] B.C.C. 615
Re Harmony Care Homes (aka, Hull v NHP Securities No. 3 Ltd)

[2009] EWHC 1961 (Ch)
For example, there can be a fixed charge over future assets:

Holroyd v Marshall (1861-62) 10 HLC 191; 11 ER 999 – The charge over future assets
were recognised as fixed charges.
Tailby v Official Receiver (1888) 13 App Cas 523 (HL)
Siebe Gorman v Barclays Bank [1979] 2 Ll R 142; Slade J,
And a floating charge even if there is not a 'class'
Re Bond Worth [1980] Ch 288 S&W 469
Re Cosslett [1998] Ch 495 (CA), S&W 608:
(c) The receivables cases

Saga started with
Siebe Gorman v Barclays Bank [1979] 2 Ll R 142; Slade J – concerned a charge to
Ba la s a k, ho had le t so e o e taki g a ha ge o e a o pa s ook de ts, p ese t a d
futu e. It as alled a fi ed ha ge . The o t a t said the o pa ould t deal ith the de ts o
assign them to someone else) themselves. The company was required to pay the proceeds into its
current account with the bank. There was no express restriction on dealing with those proceeds.
Held: this was a fixed charge. The proceeds were paid into a bank account operated by the creditor,
so the creditor could intervene and block the account, enforcing the charge. This was sufficient to
render it a fixed charge
-And ended with over-ruling of that case by

Re Spectrum Plus (In liquidation) [2005] 2 AC 680, S&W 628 – Almost identical
ha ge to Sie e Go a , as la elled spe ifi ha ge . The fi st i sta e de isio held that it as
floating charge, CA said it was fixed. HL held it to be floating. It said this was the case because there
was no restriction on the use of the proceeds of the debt, which was the hallmark of a floating
charge. In order to create a fixed charge of receiverables, you had to put the proceeds into a blocked

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account in which they need permission from the creditor to access it.
The intervening controversy:

Re Brightlife Ltd [1987] Ch 200; [1986] 3 All ER 673,S&W 615 – The charge was called
a spe ifi ha ge , si ila to Sei e. The edito as ot the a ke ith ho the a ou t i to
which proceeds were paid was kept. The creditor had no practical control. Held: it was a floating
charge because the company was free to collect its debts and pay the proceeds into its bank
account.
Re New Bullas Trading [1994] 1 BCLC 485 CA, S&W 625 – A non-bank creditor was
seeking to create a fixed charge over receiverables. The charge said they are taking a fixed
charge over the debt themselves, but a floating charge as regards the proceeds once
collected. a ha ge d afted as fi ed as egards the debts themselves but floati g as
regards their proceeds once collected)
Held: It was said this was fine.
Disapproval of Bullas:
Agnew v CIR (Re Brumark Ltd)[2001] 2 AC 710, S&W, 606; 626 - PC disapproved Bullas. After
Spectrum it is clear that Re New Bullas is not good law.
For new cases applying Spectrum, see
Re Beam Tube Products Ltd (aka: Fanshawe v Amav Industries Ltd) [2006] EWHC
486; [2006] B.C.C. 615 – They took a fixed charge over a lot of the companies collateral, then also a
floati g ha ge o e a othe assets hi h e e t o e ed the fi ed ha ge. Cou t applied
Spectrum and held there was a floating charge in relation to the receiverables
Re Harmony Care Homes (aka, Hull v NHP Securities No. 3 Ltd) [2009] EWHC 1961
(Ch)
(d) The characterisation process

See Lord Millet in Agnew S&W,606; 626
2 stage process
(i) Interpretation Stage:
o strue the i stru e t of harge a d seek to gather the
i te tio s of the parties fro the la guage they ha e used .
The object at this stage of the process is not to discover whether
the parties intended to create a fixed or floating charge.
It is to ascertain the nature of the rights and obligations that the parties
intended to grant each other in respect of the charged collateral, in
particular, has charger/debtor freedom to deal without reference to
chargee/creditor?
(ii) Characterisation stage

This is a matter of law and is the process of categorising those rights and
obligations granted (are they consistent with a fixed or floating charge?) in
respect if the charged collateral.
(e) Hence:
(i) Label used by parties not conclusive; nor does it even raise a presumption,

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see:
alled fi ed ut held floati g
Re Brightlife Ltd [1987] Ch 200, S&W 615
Agnew S&W, 606; 626
Smith v Bridgend CBC [2002] 1 AC 336 (HL)
(aka Re Cosslett (Contractors ) Ltd (CA) S&W 608)
Re Beam Tube Products
called floati g ut held fi ed :
The Russell Cooke Trust Co Ltd v Elliott [2007]
EWHC 1443 (Ch)
But per Lord Scott in Spectrum: it is clearly a factor relevant to first stage (what rights have been
granted) in that, absent express clarification, the label suggests that ha gee is o is t free to use
the collateral.
The label that the parties have attributed to the charge may be some
indication of the rights the parties were intended to have but is not
conclusive.
(ii) Touchstone of floating charge is freedom to dispose of collateral without

o se t ha ge, i.e.deg ee of o t ol ha gee has o e ollate al.
But note that a degree of restriction on freedom to dispose may be
consistent with floating charge (eg. negative pledge clause, below)
For a dis ussio , see Gullife & Pa e, The Cha a te isatio of Fi ed a d Floati g
Cha ges i Getzle & Pa e eds Company Charges: Spectrum and beyond (2006)
68)
7 Crystallisation (i.e. conversion into fixed charge)
(a) Effect:
(i) charge becomes fixed charge (so creditor can, without more, enforce)
(ii) right of company to deal in ordinary course of business terminated so actual (but
not necessarily ostensible) authority to deal terminates and creditor may obtain injunction
(b) When does a floating charge crystallize?
All depends on the terms of the charge, express or implied.
Consider the effect of the following events:
(i) Events amounting to cessation of business
-winding up
Re Panama, New Zealand and Australian Royal Mail Co (1870) 5 Ch App 318 (CA) - Once

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winding up occurs then it crystallizes any floating charges
-cessation of business (obiter)

Re Woodroffes (Musical Instruments) [1986] Ch 366; [1985] 2 All ER 908, S&W 615 - Said in obiter
floating charge crystallizes at that point
-sale of business: Re Real Meat Co Ltd [1996] BCC 254, noted S&W 614
(ii) Intervention of chargee with intention to crystallise
-appointment of receiver under the charge: Re Colonial Trusts Corporation,

ex p Bradshaw (1879) 15 Ch D 465
Evans v Rival Granite Quarries [1910] 2 KB 979
-taking of possession under charge:
Evans v Rival Granite Quarries, supra - If the receiver actually takes

possession
- appointment of administrator by chargee
(iii) Other events:
-mere default:
Government Stock v Manila [1897] AC 81, - In principle default

does t stallize the ha ge.
-crystallisation of later charge
Re Woodroffes (Musical Instruments), supra - If there a couple of

floating charges crystallization of a later charge will normally mean crystallization of the
former as well.
-All depends on the terms of the charge.
(iv Auto atic or self-ge erati g Crystallisatio

Usually refers to crystallisation in specified events (eg. insolvency, default, creation
of encumbrance, disposition outside o.c.b. etc..) without the intervention of the
chargee He e auto ati st.
But sometimes covers the case where the chargee also has to give
notice to the company.
So covers occurrence of some extraneous event, wth or without need for creditor to
give notice.
Previously controversial as crystallised floating charge had priority over preferential
creditors. Now reversed by statute and charge that is floating when created is

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subordinated to preferential creditors. Now still may be problematic as third parties

generally have no notice of crystallisation. If third parties acquire interest by
o t a t eg. su se ue t pu hase , ha gee usuall does t p ejudi e the as
company still has ostensible authority to deal with secured collateral. But does
prejudice those who obtain interest by operation of law (such as execution
creditors)
English case law (cf Cork Report) has upheld automatic crystallisation
Re Brightlife Ltd [1987] Ch 200, S&W 615
Re Woodroffes (Musical Instruments), supra S&W 615
Re Permanent Houses (Holdings) Ltd [1988] BCLC 563,
But see Re The Real Meat Co. Ltd (in rec)[1996] BCC 254
8. Priorities
(a) In general, assuming that charge is properly registered (see below), all depends on
principles of actual and ostensible agency (Recall Lectures 29&30), i.e.
(1) (i) terms of charge and hence what actual authority the chargor had and
(ii) whether the deali g as i ithi the ha go s ostensible authority and
(2) whether the charge has crystallized (in that any actual authority to deal
terminates) and whether subsequent creditors are aware of
crystallization (in so far as they are relying on ostensible authority).
Consider the priorities of a previous floating charge and a subsequent

-fixed charge:
Wheatley v Silkstone & Haigh Moor Coal Company (1885) 29 Ch. D 715 - Court held that the
charger has actual authority to deal with the collateral, so it could sell it under the ordinary course of
business. It had the actual authority to create a security interest. So subsequent fixed charge takes
priority
Re Castell & Brown [1898] 1 Ch 315 S&W 612
-floating charge (noted, S&W 613)
Re Benjamin Cope [1914] 1 Ch 800 (over same assets) - if the second

floati g ha ge is o e the sa e assets, it does t take p io it .
Cf. Re Automatic Bottle Makers [1926] Ch 412 CA – If the charger created a

subsequent floating charge over part of the collateral, subject ot a pre-existing
floating charge, then that did take priority.

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b Negative Pledge Clauses

i.e clauses prohibiting the creation of subsequent charges ranking in priority to or pari passu
with the floating charge. These are prima facie inconsistent with the implied power of the
company to deal with assets subject to the floating charge and hence do not usually affect
ostensible authority (but see NEW provisions on registration of negative pledge clauses, 9(c)
below).
- construction:
Brunton v Electrical Engineering Corp. [1892] 1 Ch 434

rd
- effectiveness vis a vis 3 parties:
English & Scottish Mercantile Investments Co. Ltd v Brunton [1892] 2

QB 700 (subsequent b.f. legal chargee without notice)
Re Castell & Brown [1898] 1 Ch 315 S&W 612
Siebe Gorman v Barclays Bank [1979] 2 Ll R 142
9. Registration of Charges
The provisions in the Companies Act 2006, Part 25 essentially re-stated the old provisions in
Companies Act 1985, Part XII. There was a long history of proposed reform (by The Company
Law Review and the Law Commission (see Consultation Paper 164, July 2002; Consultative
Report No.176, August 2004) & published a Final Report (No. 296) on August 31, 2005) but
the 2006 Act initially retained the old system.
However, Part 25, Chap 1 and 2 were replaced on April 6, 2013 by Chap A1, by the Cos Act
2006 (Amendment of Part 25) Regulations 2013.
Note that:
(a) s.859A: all charges created by the company are registrable by delivery of
documents to Registrar within 21 days.
(see 5(b), above)
(b) s. 5 H: if it is egist a le a d ot egiste ed, pa tial oid ess e sues:

charge (only) is VOID against:
- liquidator
- administrator
- a creditor
and loan is immediately repayable.
(c) Creditors have constructive notice of particulars required to be registered,

which (for the first time: cf Siebe Gorman) include whether there is a
egati e pledge lause
(d) Apart from the effect of (b) and (c), registration (in particular the time when

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the charge is registered) has no effect on priority
[There is call for the adoption of a more effective and rational registration system of security
interests along the lines of Article 9 of the US Commercial Code, but business is resistant –
hence the timid reforms in 2013.]

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Company Law Lecture 8 – Insolvency
The terms li uidatio a d winding up a e s o ous: the efe to the p o ess hi h e ds

ith the o pa easi g to e ist o dissolutio , th ee o ths afte the egist a is i fo ed
that winding-up is complete).
-Insolvenct Act 1986 (IA)
-The e is o ag eed defi itio of i sol e . O e of the g ou d to o tai a i di g up petitio is

that a o pa is u a le to pa its de ts hi h is defi ed i IA s. . The e is a list of
circumstances when this is deemed to be the case: -cash flow insolvency, s. 123(1) –balance-sheet
insolvency, s. 123(2))
-BNY Corporate Trustee Series LTd v Eurosail [2013] UKSC
2. RECEIVERS and RECEIVERSHIP
t pes of e ei e :
(a) (Ordinary) Receiver: person appointed (by creditor or the court, see
below) in order to enforce a security interest.
Usually the terms of a security instrument (mortgage, charge) enable
the creditor to appoint a receiver in certain circumstances (out of court)
to enforce security.
Usually, he takes possession of collateral, sells it, discharges the
liability from the proceeds, and hands any surplus to debtor.
Alternatively, the court also has an inherent jurisdiction to appoint a
receiver. (Such a receiver is officer of court.)
Note, an ordinary receiver (acting for the secured creditor) can co-exist with
a liquidator (acting for the benefit of all the creditors).
See, passim, Part III of the Insolvency Act 1986.
(b) Official receiver: See IA, ss.399, 400

A offi e of the ou t IA, s. appoi ted a d a ti g u de
the authority of the Secretary of State (IA, s.399).
Attached to courts with jurisdiction to wind up companies.

Undertakes compulsory liquidations of companies where no liquidator
has been appointed (usually because so few assets available) or acts as
p o isio al li uidato pe di g appoi t e t of p ope li uidato .
(c) Administrative Receiver

Relatively new, statutory concept
(not to be confused with 'administrator', see 3., below)
Defined in IA s.29(2)) as
A receiver or manager of the whole (or substantially the whole) of a
o pa y s property appoi ted y or o ehalf of the holders of
any debentures of the company secured by a charge which, as
created, was a floating charge, or by such a charge and one or
ore other se urities

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Such an extensive floating charge (over 'the whole (or substantially the whole)'
of a o pa s p ope t is k o as a ualif i g floati g ha ge .
Statute sets out the powers (IA, s.42(1) & Sch1-1A – these are extensive) and duties
of su h a ad i ist ati e e ei e as he has a age e t po e s o e the hole
o su sta tiall the hole of o pa s p ope t .
Note, in particular:
s. 40: floating charges: needs to pay preferential debts (recall
Lecture 36)
s.44(1)(a): agent of the company (and not chargee)

s.48: report for (other) company creditors
Co pa is said to e i ad i ist ati e e ei e ship
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295 PC, S&W 738 –
The privy council held that an admin receiver must take reasonable care to obtain
the true market price
Medford v Blake [2000] Ch 86 (Scott VC) S&W 741 – Confirmed that the
ad i ist ati e e ei e o es his dut to the o pa ut he does t o e a dut of
care to the company or to creditors of it, only owes duty of good faith.
BUT: The E te p ise A t , s. , i se ted a e Chapte IV, headed Prohibition

of Appointment of Administrative Receiver hi h, i esse e, generally now
p e ludes a holde of a ualif i g floati g ha ge f o appoi ti g a
administrative receiver. Thus, in order to enforce his security, such a chargee is now
forced to appoint an administrator, under Part II (see below and new s.72A).
[However, note s.72B: retention of administrative receivership for public

issues of debenture securities and other exceptions in ss.72C-G.]
3. ADMINISTRATION
(a) History
The Cork Committee Report on Insolvency Law and Practice 1982, recommended the
introduction of a wholly new corporate insolvency mechanism (modelled on the famous
Chapte i US i sol e la p i a il desig ed to fa ilitate the rescue and
rehabilitation of the viable parts of the company in financial difficulties.
Co pa said to e te / e i ad i ist atio .
The ad i ist atio p o edu e as i t odu ed Insolvency Act 1986, Part II and it
provided for a moratorium to be given to a company, from its creditors, whilst attempts
were made to save all or part of the company or at least achieve a better result for creditors
than would be achieved in a fire sale and immediate winding-up.

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Two subsequent papers:
'Bankruptcy - A Fresh Start', (The Insolvency Service, April 2000)
'Productivity and Enterprise: Insolvency - A Second Chance' (DTI, July 2001)
recommended reform, in particular:
- reducing the power of the floating chargee (abolishing his power of

veto of administration and ensuring that, generally, an administrator is
appointed instead of an administrative receiver)
- a streamlining of the process, also enabling an administrator to be

appointed without going to court.
The Enterprise Act 2002, s.248 replaces Insolvency Act 1986, Part II with the provisions in a new
Schedule B1 to the 1986.
NOTE (para. numbers are to paras. of the new IA, Sched.B1)
(b) The administrator

Must e a i sol e p a titio e a d a e appointed by:
- (1) order of court (under para.10-13) on petition by Co or dir or creditor OR
- the holde of a ualif i g floati g ha ge u de pa a. -21) OR
- (3) the company or its directors (under para.22-34)
Paras.10, 14 & 22 spell out the circumstances when an appointment may be made.
The three routes are described below and the flowchart seeks to capture them.

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(1) Para.10 (court order): if court is satisfied that:

- o pa is o is likel to e o e u a le to pa its de ts AND
- order is easo a l likel to a hie e the pu pose of the
ad i ist atio
This is similar (but not identical) to the old s.8(1) of the 1986 Act, so see
Re Harris Simons Construction [1989] 1 WLR 368, S&W 772 - on meaning of 'likely'.
Must e a eal p ospe t .
Para 12 sets out who may apply to the court, esp.:

- the company
- the directors
- one or more creditors
(2) Para.14: the holde of a e fo ea le ualif i g floati g ha ge a appoi t

administrator without a court order once the charge is enforceable (i.e. company is unable
to pay the debt secured: para.16). Notice must be given to the court & prior floating
chargees.
See new s.72A: floating chargee who is able to appoint an administrative receiver
(see above), must now generally appoint administrator,
(3) Para 22 : There are no pre-conditions before a company or its directors can appoint an
administrator out of court (a new provision) but notice needs to be given to the holder of a floating
charge who could have appointed under para.14 (& he can replace the proposed administrator with
one of his own choosing) & to the court. Often done in a 'pre-pack' administration (see (g) below).
(c) The administrator must perform his functions:

(a) i the i te est of the o pa s edito s as a hole pa a.
AND
(b) ith the o je ti e of –
(i) rescuing the company as a going concern, or
(ii) achieving a ette esult fo the o pa s edito s as a hole
than would be likely if the company were wound up (without
first being in administration), or
(iii) realising property in order to make a distribution to one or more
secured or preferential edito s pa a.
These o je ti es a e i a hie a h , so the ad i ist ato a o l pu sue ii if i is ot
easo a l p a ti a le o ii ould e ette fo the edito s. A d he a o l pu sue iii
if i a d i a e ot easo a l p a ti a le AND the edito s i te ests a e ot
u e essa il ha ed pa a. , , .
Note: Administrator owes his duties to the company and not to any creditors (as does a
director):
Re Charnley Davies Ltd (No.2) [1990] BCLC 760, S&W 774 – Makes it quite clear the
duty is owed to the company
Kyrris v Oldham [2004] BCC 111 (CA), S&W 775 - Dut o ed exclusively to the
o pa y
(d) The Mo ato iu : paras. 42-44

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One effect of an administration is the moratorium. Essentially, a moratorium freezes all

actions by creditors and thereby gives the company the needed breathing space to recover.
First, there is an interim moratorium. One effect of this is that no resolution or order for a
winding up may be passed. An interim moratorium takes effect from:
 application for administration order
 notice of intention to appoint administrator given by qualifying floating chargeholder to
prior qualifying floating chargeholder and filed at court
 notice of intention to appoint administrator filed at court by company or directors
The moratorium is then reinforced on the granting of the administration order or the
appointment of an out of court administrator. One effect of this is that the company cannot
be wound up and it has wide-ranging effect on other legal process. So for example secured
creditors will be unable to take action.
(e) The Process of Administration: details in paras.46-86.

In essence, the administrator will devise proposals (generally within 8 weeks), give notice
to the Registrar, creditors and members and then convene meetings of creditors who vote on the
proposals.
Note: Para 59: the administrator may do anything necessary or expedient for the
management of the affairs, business and property of the company. (Schedule 1 to the Insolvency Act
1986 sets out the powers of the administrator.)
Para. 61: the administrator may remove or appoint a company director.
Para 70: the administrator may dispose of property,
(f) The Process of Administration:
Para 70: the administrator may dispose of property, subject to a floating charge (as
created), as if the property were unencumbered, without the consent of the floating
charge holder - but the floating charge holder has first call on the proceeds of sale;
otherwise (para.73) rights of other secured creditors unaffected but:
Para 71: the court may give the administrator the power to override the rights of
the holder of a fixed security – but the holder of the fixed security has first call on
the proceeds of sale.
(g) 'Pre-pack(aged) administrations

Administration (usually out of court) after deal for sale of business has already
been agreed.
Controversial, esp. if no court scrutiny. E.g. who pays costs?
Re Kayley Vending Ltd [2009] EWHC 904 (actually, court admin.) – The crown
petitioned for winding up for non-payment of VAT. The court was asked to allow administratition
instead. One issue was who would pay for administration. Court held who paid the cost was at the
discretion of the court
Noted in 2010 Company Lawyer 85.
4 WINDING UP
(a) General

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See Part IV, Insolvency Act 1986 (passim) (and note that much of the detail is in the
Insolvency Rules)
Effected by liquidator who
(i) collects in assets and

augments them by
- o t i utio s f o holde s o t i uto ies of pa tl
paid up shares (if any)
- *avoidance of certain transactions (see 5, below)
- *actions under IA, ss.212- 214 (recall esp. s.214)
(ii) pays off liabilities in right order:

[Secured creditors, other than qualifying floating chargees – often
enforced by receiver appointed by creditor]
Expenses of liquidation
Preferential creditors,
Floating chargees BUT see 6. below
Unsecured creditors (including secured creditors who have not
been satisfied out of their collateral)
Members according to articles (recall 'preference shares') or
equally (or, if charitable company, according to its
constitution)
(iii) Hague v Nam Tai Electronics [2008] UKPC 13 (extending Kyrris v Oldham to
liquidation context)
(b) There are two main regimes for winding up both solvent and insolvent
companies.
Voluntary –
which is initiated by the company itself passing a special resolution (see IA, s 84) and
company may be either:
solvent (in which case it is a e e s winding up) or
insolvent (in which case it is a edito s winding up)
Compulsory –
which stems from a winding up court order granted following the presentation of a petition
– again, company may or may not be insolvent.
(i) Voluntary winding up

(1) Me es sol e t li uidatio

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Directors to make a statutory declaration (IA, s.89) that they have formed the opinion that
the company will be able to pay its debts in full, within such period, not exceeding 12 months
from the commencement of the winding up, as may be specified in the declaration. Note in
particular:
S.84(1): need for special resolution (unless articles provide that winding up is to
occur at certain date/event, when an ordinary resolution is required).
S 89(4): penalties if declaration is inaccurate (& presumption that is inaccurate).
S 89(5): presumption that the director did not have reasonable grounds for his
opinion if debts not paid within the stated time.
S 91(1): General Meeting appoints an insolvency practitioner as liquidator.
s. 90: All powers of directors cease, (unless director allowed (by gen meeting
or liquidator) to continue).
Note: Re Peveril Gold Mines Ltd [1898] 1 Ch 122 (CA) S&W 790 – The articles
purported to restrict the statutory right of a member to petition for winding up. They provided that
no member should petition unless 2 directors consented. CA held: the statutory provisions were
mandatory and could not be altered
(Note this is also an indication that the s.33 contract/covenant of the articles is not like ordinary
contracts in which the parties are free to set the terms as they wish).
(2) C edito s
A edito s voluntary winding up can arise in one of two ways:
(1) s 90: F o the outset, a edito s i di g up OR

(2) s 95: Me e s i ding-up where liquidator is of the opinion that the
company will be unable to pay its debts in full, so takes steps to
ha ge the e e s i di g up i to a edito s i di g up.
(3) Winding-up o e es
On passing of resolution: s.85(1) – relevant for 5., below
(ii) Compulsory winding up
(1) Who may petition court for a compulsory winding up order?

IA, s. 124, note esp,
-Any creditor
(but see Stonegate Securities Ltd v Gregory [1980] Ch 576 (CA)S&W
792) – Turned on whether a person was actually a creditor. There was a dispute about
whether the debt was ‘presently due’. Ca granted an injunction to stop the petition because it
was not presently due.
-Any contributory (includes shareholder with fully paid up shares)

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(but see Re Rica Gold Washing co (1879) 11 Ch D 36 (CA), S&W 791

– The question was whether there was likely to be anything left for the members on
distribution (if they had any interest). Held that the members must have a sufficient interest to
petition, n so they have to show that there will be a sufficient amount left over. (Criticized
decision)
The Company
The Directors
The Secretary of State
An administrative receiver (see 2(c) above)
An administrator (see 3 above)
(2) Circumstances in which a company may be compulsorily wound up
IA, s. 122(1), note esp.
(a) the company has by special resolution resolved that the company be wound up by
the court;
.......
(f) the company is unable to pay its debts (as defined in IA, s.123, see 1, above);
(g) the court is of the opinion that it is just and equitable that the company should be
wound up
Note s. 125(2): court may refuse order on this ground if petitioner

(i) has another remedy and
(ii) is acting unreasonably in not pursuing it.
Eg: Fuller v Cyracuse Ltd [2001] B.C.C. 806 [2001] 1 B.C.L.C.
& recall possibility of 'unfair prejudice' remedy
The just a d e uita le g ou d is odelled o the Pa t e ship A t ,s a d ea l ase

law reflected thus). Would any of the earlier cases be decided differently now that the
'unfair prejudice' remedy is available to disgruntled minority?
Re Thomas Edward Brinsmead & Sons [1897] 1 Ch 406 (CA) S&W 795 – The company was set
up to perpetuate a fraud. It was just and equitable to wind up
Loch v John Blackwood Ltd [1924] AC 783 (PC) S&W 797 – The company was successful but
managed in a very autocratic a did t all GM s et ... . O those fa ts a i di g up as o de ed,
because it was felt the minority should not have to have their investment where they had no control
(Although now they could just go under unfair prejudice and get bought out)
Re Yenidje Tobacco Co. [1916] 2 Ch 426, CA; noted S&W, 803
Re R.A. Noble (Clothing) Ltd [1983] BCLC 273; noted, S&W, 799,
Re Westbourne Galleries (aka Ebrahimi v Westbourne Galleries)

[1973] AC 360; S&W, 800
Re Guidezone Ltd [2001] B.C.C. 692; [2000] 2 B.C.L.C. 321

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“In the first place, in Ebrahimi v Westbourne Galleries Ltd Lord

Wilberforce expressly warned against simply treating a company (even a
'quasi-partnership' company) as if it were a partnership; a warning which
Lord Hoffmann quoted in O'Neill v Phillips. Secondly, in drawing a parallel
in O'Neill v Phillips between the jurisdiction to order a winding up on the
just and equitable ground and the jurisdiction under s 459, Lord
Hoffmann applied the reasoning of Lord Wilberforce in Ebrahimi v
Westbourne Galleries Ltd. Thirdly, I accept Mr Mabb's submission that it
is difficult to believe that Lord Hoffmann would have placed the limits on
the s 459 jurisdiction which he did, had he thought that by so doing he
was in effect transferring business from the s 459 jurisdiction to the
winding-up jurisdiction. On the contrary, it is plainly implicit in Lord
Hoffmann's reasoning, as I read his speech, that the winding-up
jurisdiction is, at the very least, no wider than the s 459 jurisdiction: a
proposition which is consistent with a winding-up order being, as it were,
the death sentence on a company (an analogy drawn by Mummery J in Re a
company (No 00314 of 1989), ex p Estate Acquisition and Development Ltd
[1991] BCLC 154 at 161), and with the statutory recognition in s 125(2) of
the Insolvency Act 1986 (see above) that a winding-up order is an order of
last resort. Fourthly, it would in my judgment be extremely unfortunate, and
inconsistent with the approach and the reasoning of Lord Hoffmann in
O'Neill v Phillips, if, given the two parallel jurisdictions, conduct which is
not 'unfair' for the purposes of s 459 should nevertheless be capable of
founding a case for a winding-up order on the 'just and equitable' ground.
As to Nourse J's decision in Re R A Noble & Sons (Clothing) Ltd [1983]
BCLC 273, in so far as that decision is authority for the proposition that
conduct which is not unfair for the purposes of s 459 can nevertheless
found a case for a winding up on the just and equitable ground it is in my
judgment inconsistent with O'Neill v Phillips.
I accordingly conclude that if the conduct by the majority relied on by
Surendra in the instant case is not unfair for the purposes of s 459, it
cannot found a case for a winding-up order on the 'just and equitable'
ground.” [emphasis added]
Re Neith (Hawkes v Cuddies) - Overruled Guidezone.
(3) Winding-up commences: f o date of p ese tatio of petitio o e e s

resolution, if there has been one beforehand) – relevant for 5., below
5. VULNERABLE TRANSACTIONS
Certain transactions may be re-opened (by a liquidator or administrator) to ensure the protection of
the ge e al od of edito s agai st t a sa tio s that di i ish the o pa s assets a d o fe
what is regarded as an unfair or improper advantage on the other party to the transaction.

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Re MC Bacon Ltd [1990] BCLC 324, S&W, 810 on IA, ss.238 & 239 –
The Enterprise Act 2002, Sched.17 has made technical amendments to ss.238, 240, 241, 245 to take
account of the new administration procedure (in particular, that an administrator can now be
appointed out-of-court).
*(a) Transactions at an undervalue
S. ai p o isio ; S. ele a t ti e ; S. possible court orders)
Phillips v Brewin Dolphin Bell Lawrie [2001] 1WLR 143 -
Mea i g of u de alue i s. :
4 …a o pa y e ters i to a tra sa tio ith a perso at a u der alue if—
(a) the company makes a gift to that person or otherwise enters into a
transaction with that person on terms that provide for the company to
receive no consideration, or
(b) the company enters into a transaction with that person for a consideration
the value of which, in money or money's worth, is significantly less than the
value, in money or money's worth, of the consideration provided by the
company.
(5) The court shall not make an order under this section in respect of a transaction at
an undervalue if it is satisfied—
(a) that the company which entered into the transaction did so in good faith and
for the purpose of carrying on its business, and
(b) that at the time it did so there were reasonable grounds for believing that
the transaction would benefit the company. [emphasis added]
See Re MC Bacon Ltd (above): needs to deplete company's assets
*(b) Voidable Preferences
S ai p o isio ; S. ele a t ti e ; S. possi le ou t o de s
Mea i g of p efe e e :
4 …a o pa y gi es a prefere e to a person if—
(a) that person is one of the company's creditors or a surety or guarantor for
any of the company's debts or other liabilities, and
(b) the company does anything or suffers anything to be done which (in either

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case) has the effect of putting that person into a position which, in the event
of the company going into insolvent liquidation, will be better than the
position he would have been in if that thing had not been done.
(5) The court shall not make an order under this section in respect of a preference
given to any person unless the company which gave the preference was influenced in
deciding to give it by a desire to produce in relation to that person the effect mentioned in
subsection (4)(b).
(6) [presumption that (5) applies if preference gi e to a perso o e ted ith the
o pa y other ise tha y reaso o ly of ei g its e ployee
[emphasis added]
See Re MC Bacon Ltd (above) – The company had a straight forward bank overdraft, bank
was threatening to call in the overdraft unless it got security. So the company gave it a floating
charge, the motive was to keep the overdraft and to carry on business. It was held that it had to be
seen what their subjective desire was and here it was to carry on trading and not to give the bank
priority on insolvency. Therefore subsection 5 applied and the court could not give an order.
Wilson v Masters International Ltd (aka: re Oxford Pharmaceuticals)
[2009] EWHC 1753
*(c) Avoidance of Floating (not fixed) Charges
S 245, IA (Recall Lecture 34 ; S , ele a t ti e
-A floating charge is invalid if there is no new consideration to support it (must give value for the
charge)
‘(2), a floating charge on the company's undertaking or property created at a relevant

time is invalid except to the extent of the aggregate of—
(a) the value of so much of the consideration for the creation of the charge as
consists of money paid, or goods or services supplied, to the company at the
same time as, or after, the creation of the charge,
(b) the value of so much of that consideration as consists of the discharge or
reduction, at the same time as, or after, the creation of the charge, of any debt
of the company, and
(c) the amount of such interest (if any) as is payable on the amount falling within
paragraph (a) or (b) in pursuance of any agreement under which the money
was so paid, the goods or services were so supplied or the debt was so’
[emphasis added]
Case Law (on when you give value): Re Parkes Garage (Swadlincote) Ltd [1929] 1 Ch 139, S&W
619
Re Yeovil Glove Co Ltd [1965] Ch 148 (CA), S&W 620 & noted S&W 806
It is helpful to compare ss.238, 238 and 245 and to ask in relation to each:
(1) What is the ground on which the transaction may be challenged?
See above, in essence
s.238: s. t a sa tio at u de alue as defi ed i s. & see
s.239: s. a p efe e e is gi e , as defi ed i s. , ,
s.245: s.245 to the extent that no (subsequent) value given for charge

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(2) Who may challenge the transaction?

offi e-holde , i.e.: ad i ist ato o li uidato
(3) Is an application to court necessary?

ss.238, 239: es to u a el the t a sa tio – and note s.241)
s.245: no – ha ge a just e t eated as i alid offi e-holde
(4) How far back can the office holder go?

s.238 ele a t ti e as defi ed i s. , i.e.
ea s e di g ith o set of i sol e as defi ed
s.239 ele a t ti e as defined in s.240
i ea s if gi e to o e ted ith o pa , otherwise
(ii) 6 months
e di g ith o set of i sol e as defi ed
s.245 i ea s if o e ted ith o pa , otherwise
(ii) 12 months
Note definition of 'onset of insolvency' in s.240(3)
(5) Must company be insolvent at time of transaction (or rendered insolvent

by it)?
ss.238, 239: yes (see s.240(2)
and see below, presumed if relying on s.238, if connected person)
s.245: no if connected person
yes if not connected (see s.245(4)
(6) Rele a e of e ipie t ei g a pe so o e ted ith the o pa y

'Connected person' defined in s.249.
s.238: s.240(2) raises presumption of insolvency
s.239: s.239(6): raises presumption that subs.(5) applies AND
s.240(1)(a): extends period to 2 years
s.245: s.245(4) company need not be insolvent AND
s.245(3)(a): extends period to 2 years
Note also, in OUTLINE:

(d) Extortionate credit transactions : S 244
(e) General : Ss.423-25
6. Floating Charge and unsecured creditors

The E te p ise A t a olished C o p efe e e i.e the C o ei g a p efe e tial
creditor in respect of certain (withholding taxes such as VAT & PAYE)) and instead, required
part of the collateral subject to a floating charge to be used for unsecured creditors
NOTE: INSOLVENCY ACT 1986, s.176A (in Appendix)
(added by Enterprise Act 2002, s.252)
Note: Re Permacell Finesse Ltd (In Liquidation), [2007] EWHC 3233 (Ch);

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'The legislature's policy was to create a fund out of the floating charge holder's
security to which unsecured creditors alone could have recourse, in return for the
advantage afforded to floating charge holders by the abolition of the preferential
status of Crown debt, which would otherwise have come ahead of a floating charge.'
Hence:
If floating chargee's collateral was not of sufficient value to discharge the
whole indebtedness, the shortfall was not an 'unsecured debt' for the purposes
of a claim to the 'prescribed part' under s.176A.
Ditto: Thorniley v Revenue and Customs Commissioners (aka Airbase (UK) Ltd, Re
[2008] EWHC 124 (Ch)
Cf:
Kelly v Inflexion Fund 2 Ltd (aka PAL SC Realisations 2007 Ltd (In Liquidation), Re)
[2010] EWHC 2850
On s.176A(5) see:
Re Hydroserve Ltd, [2007] EWHC 3026 (Ch)
Cf:
Re Courts Plc (In Liquidation), [2008] EWHC 2339 (Ch);
Re International Sections Ltd (In Liquidation), [2009] EWHC 137 (Ch)

The disapplication of s.176A(2) under s.176A(5) should be the exception, not
the rule (even if very small dividend would be produced: there 1.5p in the £).

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Company Law Lecture 1 - Term 2 - Derivative Claims

Company Law (King's College London)

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Company Law Lecture 1 – Term 2: Derivative Claim

-How directors duties can be enforced

• Who a e fo e a ea h of a di e to s dut ? –The company only

• Who should e e po e ed to ake the litigatio de isio o ehalf of the o pa ? o The oa d

Litigation: The Board of directors

-They have power to bring litigation under Model Article 3

Litigation: The General Meeting

-Article 4 model articles, shareholders instruction right by special resolution.

Litigation: Individual shareholders(or small group) Derivative action

-De i atio a tio is do e he sha eholde s i gs a de i ati e a tio e fo i g the o pa s

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Foss v Harbottle (1843) 2 Hare 462:

T o e e s of the Vi to ia Pa k Co ought a a tio agai st the o pa s fi e di e tors and

Dismissed on two basis:

1. The company was proper plaintiff (proper plaintiff rule)

• The p o le is he e the di e to s do so ethi g u to a d a d also o the ajo it of the

• This ea s the opp essed i o it a e, fo all i te ts a d pu poses, a ed f o inging a legal

Exceptions to rule in Foss v Harbottle:

Fraud on the minority:

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If this is met then the shareholders can bring a derivative action

Statutory derivative claim:

Definition – 260(1): proceedings brought by a member of the company in respect of a cause of

-shareholder must apply to court for permission to commence claim

-Must apply for permission to continue derivative claim (s. 261)

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Mandatory refusal: s. 263(2)

Permission MUST be refused if:

S. 263(3) – Court must decide in its discretion if claim can continue

• If o e of the fa to s listed i s a e p ese t, the ou t does ot auto ati all ha e to g a t

•S CA sets out si fa to s hi h the ou t ust, i pa ti ula , take i to a ou t he

(a) Whether the member is acting in good faith;

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(c) Whether prior authorisation or subsequent ratification would be likely to occur;

Does Harbottle v Foss live on?

•A o e hel i g o side atio ?

•s CA : tu i g o pa -initiated litigation into derivative litigation – high bar

Economic of derivative actions:

Who benefits from the proceeds? The company

• Optio fo easi g the ost u de

Reflective loss principle:

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Giles v Rhind [2003] Ch 618

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Company Law Lecture 2 – Term 2 – Unfair Prejudice

Common Law restriction on controlling shareholder actions:

-Unfair prejudice remedy (s. 994)

Just and equitable winding up:

-S. 122(1)(g) Insolvency Act 1986 – A o pa a e ou d up the ou t if the ou t is of the

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Criteria for application:

When a company is a quasi-partnership? –Company is based on Personal relationships and mutual

Minority Oppression Remedy (Now replaced by s. 994 – Unfair Prejudice remedy):

o facts justify winding-up o just a d e uita le g ou d o s g IA ut i di g up

o affai s of o pa a e ei g o du ted i a a e opp essi e to so e of the e es

Unfair Prejudice remedy:

S CA A e e of a o pa a appl to the ou t petitio fo a o de u de

-Conferred on a member or members

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