Gower Davies Principles of Modern Company Law.

Classics Series
Gower’s Principles of Modern Company

Law
Tenth Edition
Classics Series
Gower’s Principles of Modern

Company Law
Tenth Edition
Paul L. Davies QC (hon), FBA
Allen & Overy Professor of Corporate Law Emeritus
Senior Research Fellow
Harris Manchester College
University of Oxford
Sarah Worthington QC (hon), FBA
Downing Professor of the Laws of England and Fellow of Trinity College
University of Cambridge
with a contribution from
Dr. Eva Micheler
Reader in Law
London School of Economics and Political Science
Ao Universitätsprofessor
Wirtschaftsuniversität Wien
First Edition 1954
Tenth Edition 2016
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2016 Thomson Reuters (Professional) UK Limited
Preface
In addition to the general updating which a book of this scope requires for
a new edition, there have been three drivers of change in the corporate law
area since the ninth edition of 2012. First, the Supreme Court has
continued to be active in the area of core corporate law, unusually so by
historical standards. Even the old chestnut, piercing the veil, has given the
Justices something to chew on in VTB Capital Plc v Nutritek International
Corp [2013] UKSC 5 and Petrodel Resources Ltd v Prest [2013] UKSC
34. These decisions confirm the limited scope of that doctrine in English
law, whilst demonstrating the availability of alternative techniques for
handling the underlying problem. Re-assertion of orthodoxy was also the
main thrust of Eclairs Group Ltd v JKX Oil and Gas Plc [2015] UKSC 71
on directors’ use of powers for an improper purpose, though dicta in the
case generate some uncertainties for the future. The Supreme Court’s latest
and perhaps conclusive statement on the availability of proprietary
remedies for breach of fiduciary duty is to be found in FHR European
Ventures LLP v Mankarious (No.2) [2014] UKSC 45. Finally, in Bilta
(UK) Ltd v Nazir [2015] UKSC 23 the Court began the process of bringing
order out of the chaos left by its previous decision in Stone & Rolls Ltd v
Moore Stephens [2009] UKSC 39 concerning the availability of the
illegality defence where the company has been used as a vehicle for fraud
by its only directors and shareholders.
On the domestic legislative front, life has been quiet since the passing of
the Companies Act 2006, but the Small Business, Enterprise and
Employment Act 2015 has had a significant impact in some particular
areas of company law, despite the lack of any explicit reference to
companies in the title. The requirement for the revelation of controlling
positions in all companies aims to make it less easy for companies to be
used to hide criminal or otherwise objectionable activities. One might say
that this is using the law in an attempt to limit the ‘negative externalities’
of the corporate form. It is thus quite different from the beneficial
ownership disclosures long required (and at a much lower level) in relation
publicly traded companies, which are motivated by more traditional
company and market concerns. Consequently, we deal with the new
disclosure rules in Ch.2, whilst leaving the established ‘major
shareholdings’ rules in Ch.26. In addition, the 2015 Act underlines
government’s view that the promotion of small businesses and enterprise
requires enhanced creditor protection in relation to limited companies, in
this case through reforms both to the procedures for disqualifying directors
(Ch.10) and to those for recovering compensation from directors who
engage in wrongful trading (Ch.9). Legislative reversal of the courts’ (at
least initial) unwillingness to apply directors’ duties to shadow directors
goes in the same direction.
Finally, the shape of the substantive reforms resulting from the financial
crisis of 2007–9, which were inchoate at the time of the previous edition,
have now become clearer. Not surprisingly, given the nature of the crisis,
the reforms have focussed on banks and other financial institutions rather
than on companies across the board. Nevertheless, the reform of financial
markets has had an impact on the rules governing access by companies to
the capital markets and their obligations once admitted, as discussed in
Part 6 of the book. This is an area where EU law frequently takes the lead
and a significant change here has been the Community’s increasing use of
Regulations, rather than Directives, to effect the reforms, with a
consequent change in the balance between EU and domestic rules in
implementing the changes. At the time of writing the future shape of this
body of rules is subject to considerable political uncertainty.
We would like to thank very warmly Professor Eva Micheler of the
London School of Economics and Political Science for updating Ch.27 on
Transfer of Shares, for which she has taken responsibility over a number
of editions.
Sarah Worthington would like to thank Michael Lok for his significant
research assistance in the updating of particular parts of this edition; that
he managed to provide this help while also conducting an increasingly
busy and successful practice in Hong Kong is testament to his energy and
organisation.
We have sought to state the law as at the end of February 2016,
although some references to later material have been possible.
PLD, SEW
June 2016
Table of Abbreviations
AADB Accounting and Actuarial Discipline Board

ADR American Depositary Receipt
AGM Annual General Meeting
AIM Alternative Investment Market
AMP Accepted Market Practice
APB Auditing Practices Board
ARC Accounting Regulatory Committee
ARD Accounting Reference Date
ARP Accounting Reference Period
ASB Accounting Standards Board
BERR Department for Business, Enterprise & Regulatory
Reform
BIS Department for Business Innovation & Skills
BoT Board of Trade
BR Business Review
CA Companies Act
CARD Consolidated Admissions Requirements Directive
CDDA Company Directors Disqualification Act 1986
CEO Chief Executive Officer
CESR Committee of European Securities Regulators
CfD Contract for Differences
CFO Chief Financial Officer
CGC UK Corporate Governance Code
CIB Companies Investigation Branch (of BERR)
CIC Community Interest Company
CIO Charitable Incorporated Organisation
CJA Criminal Justice Act 1993
CLR Company Law Review
CPR Civil Procedure Rules
CRR Capital Redemption Reserve
DB Defined Benefit (pension scheme)
DC Defined Contribution (pension scheme)
DEPP Decision Procedure and Penalties Manual (of FCA)
DTI Department of Trade and Industry
DTR Disclosure and Transparency Rule (of FCA)
DR Directors’ Report
DRR Directors’ Remuneration Report
EBLR European Business Law Review
EBOR European Business Organization Law Review
ECJ European Court of Justice
ECtHR European Court of Human Rights
EEA European Economic Area
EEIG European Economic Interest Grouping
EFRAG European Financial Reporting Advisory Group
EG Enforcement Guide (of FCA)
ESMA European Securities and Markets Authority
ESV Enlightened Shareholder Value
FCA Financial Conduct Authority
FRC Financial Reporting Council
FRRP Financial Reporting Review Panel
FRS Financial Reporting Standard
FRSEE Financial Reporting Standard for Smaller Entities
FSA Financial Services Authority
FSAP Financial Services Action Plan (of the EC
Commission)
FSMA Financial Services and Markets Act 2000
GAAP Generally Accepted Accounting Principles
GEFIM Gilt-edged and Fixed-Interest Markets
GP General Principle (of the Code on Takeovers and
Mergers)
HKCFAR Hong Kong Court of Final Appeal Reports
HLG High Level Group of Company Law Experts
IA Insolvency Act
IAASB International Auditing and Assurance Standards
Board
IAS International Accounting Standards
IASB International Accounting Standards Board
IFRS International Financial Reporting Standards
IPO Initial Public Offering
ISA International Standard on Auditing
JCLS Journal of Corporate Law Studies
KPI Key Performance Indicators
LLP Limited Liability Partnership
LP Limited Partnership
LR Listing Rules
LSE London Stock Exchange
Ltd Limited
Ltip Long-term incentive plan
MAD Market Abuse Directive (Directive 2003/6/EC)
MAR Market Abuse Regulation (Regulation (EU)
No.596/2014)
MIFID Directive on Markets in Financial Instruments
MTF Multilateral Trading Facility
MO Management Organ (of an SE)
Nasdaq National Association of Securities Dealers
Automated Quotation System (a US stock
exchange)
NED Non-Executive Director
OEIC Open-ended Investment Company
OFR Operating and Financial Review
OR Official Receiver
OSOV One Share One Vote
OTC Over the counter
PCP Permissible Capital Payment
PD Prospectus Directive (Directive 2003/71/EC)
PIE Public Interest Entity
PIP Primary Information Provider
PLC Public Limited Company
POB Public Oversight Board
PR Prospectus Rules (of FCA)
PSC People with Significant Control
PSM Professional Securities Market
PUSU “Put Up or Shut Up”
PIE Public Interest Entity
RINGA Relevant Information not Generally Available
RIS Regulated Information Service
RS Reporting Standard or Statement
RSB Recognised Statutory Body
SBEEA 2015 Small Business, Enterprise and Employment Act

2015
SCE European Cooperative Society
SE Societas Europaea or European Company
SME Small or Medium-sized Enterprise
SNB Special Negotiating Body (of employee
representatives)
SO Supervisory Organ (of an SE)
SPV Special Purpose Vehicle
SR Strategic Report
SS Secretary of State
SSAP Statement of Standard Accounting Practice
TD Transparency Directive (Directive 2004/109/EC)
UCITS Undertakings for Collective Investment in
Transferable Securities
UCTA Unfair Contract Terms Act
USR Uncertificated Securities Regulations
UKLA United Kingdom Listing Authority
Documents from the Company Law Review and the Government Response to it
Completing CLR, Completing the Structure, URN 00/1335,
November 2000
Developing CLR, Developing the Framework, URN 00/656,
March 2000
Final Report CLR, Final Report, 2 vols, URN 01/943, July 2001
Formation CLR, Company Formation and Capital
Maintenance, URN 99/1145, October 1999
Maintenance CLR, Capital Maintenance: Other Issues, URN
00/880, June 2000
Modernising Modernising Company Law, Cm 5553, 2 vols, July
2002
Overseas CLR, Reforming the Law Concerning Oversea
Companies,
Companies URN 99/1146, October 1999
Strategic CLR, The Strategic Framework, URN 99/654,
February 1999
TABLE OF CONTENTS
PAGE
Preface v
Table of Abbreviations vii
Table of Cases xxxix
Table of Statutes xciii
Table of Statutory Instruments cxxi
Table of European Material cxxvii
Table of Takeovers Code cxxxv
PARA
PART 1
Introductory
1. TYPES AND FUNCTIONS OF

COMPANIES
USES TO WHICH THE COMPANY MAY BE 1–1
PUT
Business vehicles: companies and
partnerships (limited and unlimited)
Partnership Act 1890 and 1–2
Companies Act 2006
Limited Liability Partnerships Act 1–4
2000
Limited Partnership Act 1907 1–5
Non-business vehicles: charitable,
community interest and limited by
guarantee companies
Not-for-profit companies 1–6
Company limited by guarantee 1–8
Company limited by shares 1–11
Community Interest Company 1–12
(“CIC”)
The advantages of the modern 1–13
corporate form
DIFFERENT TYPES OF REGISTERED 1–17
COMPANIES
Public and private companies 1–18
Officially listed and other publicly 1–22
traded companies
Limited and unlimited companies 1–27
Classification according to size: large, 1–28
medium and micro companies
Classification according to activity: 1–29
for-profit and not-for-profit
companies
UNREGISTERED COMPANIES AND OTHER
FORMS OF INCORPORATION
Statutory and chartered companies 1–31
Building societies, friendly societies 1–34
and co-operatives
Open-ended investment companies 1–36
EUROPEAN UNION FORMS OF
INCORPORATION
European Economic Interest 1–37
Grouping
The European Company (societas 1–40
europaea or “SE”)
CONCLUSION 1–47
2. ADVANTAGES AND
DISADVANTAGES OF
INCORPORATION
LEGAL ENTITY DISTINCT FROM ITS 2–1
MEMBERS
LIMITED LIABILITY 2–9
PROPERTY 2–16
SUING AND BEING SUED 2–18
PERPETUAL SUCCESSION 2–19
TRANSFERABLE SHARES 2–24
MANAGEMENT UNDER A BOARD 2–27
STRUCTURE
BORROWING 2–31
TAXATION 2–34
FORMALITIES AND EXPENSE 2–35
PUBLICITY
The company’s affairs 2–39
The company’s members and 2–40
directors
“People with significant control”— 2–42
the PSC Register
CONCLUSION 2–48
3. SOURCES OF COMPANY LAW
AND THE COMPANY’S
CONSTITUTION
SOURCES 3–1
Primary legislation 3–3
Secondary legislation 3–5
Delegated rule-making
The Financial Conduct Authority 3–7
Financial Reporting Council 3–9
Common law 3–10
Review and reform 3–11
THE COMPANY’S CONSTITUTION
The significance of the constitution 3–13
Model articles of association 3–14
What constitutes the constitution? 3–16
The legal status of the constitution 3–18
(i) The parties to the contract 3–19
(ii) The contract as a public 3–20
document
(iii) Limits to the provisions which 3–23
can be enforced: only rights
“as a member”
(iv) Further limits to the provisions 3–27
which can be enforced: not
mere procedural irregularities
(v) Altering the contract 3–31
SHAREHOLDER AGREEMENTS 3–33
THE EUROPEAN COMPANY 3–36
4. FORMATION PROCEDURES
FORMATION OF DIFFERENT TYPES OF 4–1
COMPANY
Statutory companies 4–2
Chartered companies 4–3
Registered companies 4–4
FORMING A COMPANY BY REGISTRATION
Registration documents 4–5
Certificate of incorporation 4–7
Purchase of a shelf-company 4–9
CHOICE OF TYPE OF REGISTERED COMPANY 4–10
CHOICE OF COMPANY NAME 4–13
Warning the public about limited 4–14
liability or other status
Prohibition on illegal or offensive 4–16
names
Names requiring special approval 4–17
Prohibition on using a name already 4–18
allocated
Restrictions on use of a defunct 4–19
company’s name—phoenix
companies
Use of a business name other than the 4–20
corporate name
MANDATORY AND ELECTIVE NAME 4–22
CHANGES
Requirements to change a name 4–23
Passing off actions 4–25
Company names adjudicators 4–27
Company’s election to change its 4–30
name
Effect of a name change 4–31
CHOICE OF APPROPRIATE ARTICLES 4–32
CHALLENGING THE CERTIFICATE OF 4–34
INCORPORATION
COMMENCEMENT OF BUSINESS 4–38
RE-REGISTRATION OF AN EXISTING 4–39
COMPANY
(i) Private company becoming 4–40
public
(ii) Public company becoming 4–41
private limited company
(iii) Private or public limited 4–43
company becoming unlimited
Ban on vacillation between limited 4–44
and unlimited
(iv) Unlimited company becoming a 4–45
private limited company
(v) Becoming or ceasing to be a 4–46
community interest company
CONCLUSION 4–47
5. PRE-INCORPORATION AND
INITIAL CORPORATE
CONTRACTING
INTRODUCTION 5–1
“PROMOTERS” AND THEIR DEALINGS WITH
THE COMPANY
Meaning of “promoter” 5–2
Duties of promoters 5–6
(a) Statutory rules 5–7
(b) Common law and equitable 5–10
rules
(c) Full disclosure and consent 5–11
Remedies for breach of promoters’ 5–15
duties
Remuneration of promoters 5–21
PRELIMINARY CONTRACTS ENTERED INTO 5–23
BY PROMOTERS
COMPANIES’ PRE-INCORPORATION 5–24

CONTRACTS
CONCLUSION 5–29
6. OVERSEAS COMPANIES, EU LAW
AND CORPORATE MOBILITY
OVERSEAS COMPANIES 6–2
Establishment: branch and place of 6–4
business
Disclosure obligations 6–5
Execution of documents and names 6–7
Other mandatory provisions 6–8
COMPANY LAW AT EU LEVEL

Harmonisation 6–9
A new approach and subsidiarity 6–12
EU forms of incorporation 6–13
The single financial market and 6–14
company law
Corporate governance 6–15
Reform of the existing directives 6–16
CORPORATE MOBILITY 6–17
Domestic rules 6–18
EU law: initial incorporation 6–20
EU law: subsequent re-incorporation 6–24
EU law: alternative transfer 6–27
mechanisms
Conclusion 6–28
CONCLUSION 6–30
PART 2
Separate Legal Personality and Limited Liability
7. CORPORATE ACTIONS
INTRODUCTION 7–1
CONTRACTUAL RIGHTS AND LIABILITIES 7–4
Contracting through the board or the 7–5
shareholders collectively
Constructive notice and the rule in 7–6
Turquand’s case
Statutory protection for third parties 7–9
dealing with the board
(a) “In favour of a person dealing 7–10
with a company in good faith”
(b) “Dealing with a company” 7–11
(c) Persons 7–12
(d) The directors 7–13
(e) Any limitation under the 7–14
company’s constitution
(f) The internal effects of lack of 7–15
authority
Contracting through agents 7–16
Agency principles 7–18
Establishing the ostensible authority 7–20
of corporate agents
Knowledge 7–24
Knowledge of the constitution as an 7–26
aid to third parties?
Ratification 7–27
Overall 7–28
The ultra vires doctrine and the 7–29
objects clause
TORT AND CRIME 7–30
Tortious liability
Vicarious liability 7–31
Assumption of responsibility 7–32
Fraud 7–33
Recovery by the company from the 7–34
agent
Liability of non-involved directors 7–35
Accessory liability 7–36
Direct liability 7–37
Criminal liability 7–38
Regulatory offences 7–39
Identification 7–40
Beyond “directing mind and will” 7–41
Criminal liability of directors 7–42
Corporate manslaughter 7–43
Sanctions 7–44
Personal liability under the 2007 7–45
Act
Failure to prevent criminal acts 7–46
Litigation by the company 7–47
CONCLUSION 7–48
8. LIMITED LIABILITY AND
LIFTING THE VEIL
THE RATIONALE FOR LIMITED LIABILITY 8–1
LEGAL RESPONSES TO LIMITED LIABILITY 8–5
Disclosure of information 8–6
LIFTING THE VEIL 8–7
Under statute or contract 8–8
At common law 8–10
The “single economic unit” 8–11
argument
Façade or sham 8–12
The agency and trust arguments 8–13
The interests of justice 8–14
Impropriety 8–15
CONCLUSION 8–17
9. PERSONAL LIABILITY FOR
ABUSES OF LIMITED LIABILITY
PREMATURE TRADING 9–3
FRAUDULENT AND WRONGFUL TRADING 9–4
Civil liability for fraudulent trading 9–5
Wrongful trading 9–6
Shadow directors 9–7
The declaration 9–8
Impact of the wrongful trading 9–9
provisions
COMMON LAW DUTIES IN RELATION TO 9–11

CREDITORS
PHOENIX COMPANIES AND THE ABUSE OF 9–16
COMPANY NAMES
The prohibition 9–17
Exceptions 9–19
MISDESCRIPTION OF THE COMPANY AND 9–20
TRADING DISCLOSURES
COMPANY GROUPS
Limited liability 9–21
Ignoring separate legal personality 9–24
CONCLUSION 9–25
10. DISQUALIFICATION OF
DIRECTORS
DISQUALIFICATION ORDERS AND 10–2
UNDERTAKINGS
Scope of disqualification orders and 10–3
undertakings
Compensation 10–4
DISQUALIFICATION ON GROUNDS OF 10–5
UNFITNESS
The role of the Insolvency Service 10–7
The role of the court 10–8
Breach of commercial morality 10–9
Recklessness and incompetence 10–10
DISQUALIFICATION ON GROUNDS OTHER
THAN UNFITNESS
Serious offences 10–12
Disqualification in connection with 10–13
civil liability for fraudulent or
wrongful trading
Failure to comply with reporting 10–14
requirements
REGISTER OF DISQUALIFICATION ORDERS 10–15
BANKRUPTS 10–16
OTHER CASES 10–17
CONCLUSION 10–18
11. LEGAL CAPITAL, MINIMUM
CAPITAL AND VERIFICATION
MEANING OF CAPITAL 11–1
NOMINAL VALUE AND SHARE PREMIUMS
Nominal value 11–3
No issue of shares at a discount 11–4
The share premium 11–6
MINIMUM CAPITAL 11–8
Objections to the minimum capital 11–9
requirement
DISCLOSURE AND VERIFICATION 11–10
Initial statement and return of 11–11
allotments
Abolition of authorised capital 11–12
Consideration received upon issue 11–13
Rules applying to all companies 11–14
Public companies 11–15
Valuation of non-cash 11–16
consideration
Further provisions as to sanctions 11–18
Share capital and choice of currency 11–19
CAPITALISATION ISSUES 11–20
CONCLUSION 11–21
12. DIVIDENDS AND DISTRIBUTIONS
THE BASIC RULES 12–1
IDENTIFYING THE AMOUNT AVAILABLE FOR 12–5
DISTRIBUTION
Interim and initial accounts 12–6
Interim dividends 12–7
Adverse developments subsequent to 12–8
the accounts
DISGUISED DISTRIBUTIONS 12–9
Intra-group transfers 12–11
CONSEQUENCES OF UNLAWFUL
DISTRIBUTIONS
Recovery from members 12–12
Recovery from directors 12–13
REFORM 12–15
The central issues 12–16
13. CAPITAL MAINTENANCE
ACQUISITIONS OF OWN SHARES
The general prohibition 13–2
Acquisition through a nominee 13–3
Company may not be a member of 13–4
its holding company
Specific exceptions to the general 13–5
prohibition
REDEMPTION AND RE-PURCHASE
Introduction 13–7
Some history 13–8
General restrictions on redeemable 13–9
shares and on repurchases
Creditor protection: all companies 13–11
Private companies: redemption or 13–12
purchase out of capital
Directors’ statement 13–14
Shareholder resolution 13–15
Appeal to the court 13–16
Legal capital consequences 13–17
Protection for shareholders 13–19
Off-market purchases 13–20
Market purchases 13–21
Companies with a premium listing 13–22
Payments otherwise than by way of 13–23
the price
Treasury shares 13–24
Sale of treasury shares 13–26
Whilst the shares are in treasury 13–27
Failure by the company to perform 13–28
Conclusion 13–29
REDUCTION OF CAPITAL
Why are reductions of capital 13–30
allowed?
The statutory procedures 13–33
Procedure applying to all companies 13–34
Creditor objection 13–35
Confirmation by the court 13–36
Procedure available to private 13–39
companies only
Solvency statement 13–40
Reduction, distributions and re- 13–43
purchase
FINANCIAL ASSISTANCE
Rationale and history of the rule 13–44
The exceptions
Specific exceptions 13–50
General exceptions 13–52
Exemption for private companies 13–55
Civil remedies for breach of the 13–56
prohibition
CONCLUSION 13–59
PART 3
Corporate Governance: The Board and Shareholders
14. THE BOARD

THE ROLE OF THE BOARD 14–1
The default provision in the model 14–3
articles
The power of the board—the legal
effect of the articles
The board and shareholders 14–5
The board and senior management 14–9
Default and confirmation powers of 14–11
the general meeting
Unanimous consent of the 14–15
shareholders
The mandatory involvement of 14–18
shareholders in corporate decisions
The mandatory functions of the 14–21
directors
APPOINTMENT OF DIRECTORS 14–23
REMUNERATION OF DIRECTORS 14–30
Composition of the remuneration 14–33
committee
Mandatory shareholder approval of

certain aspects of the remuneration
package
General 14–34
Long-term incentive pay schemes 14–35
Mandatory and advisory shareholder 14–38
votes on remuneration policy and
implementation
General disclosure: the directors’ 14–44
remuneration report
REMOVAL OF DIRECTORS 14–48
Shareholders’ statutory termination 14–49
rights
Weighted voting rights 14–51
Director’s procedural rights on 14–52
termination
Director’s contractual rights on 14–53
termination
Control of termination payments 14–56
Disclosure 14–57
Shareholder approval 14–59
STRUCTURE AND COMPOSITION OF THE 14–63
BOARD
Legal rules on board structure 14–64
Legal rules on board composition
Employee representatives 14–67
Gender diversity—women on 14–68
boards
Corporate governance codes, The 14–69
Cadbury Report and non-executive
directors
The requirements of the UK 14–75
Corporate Governance Code
Enforcement of the UK Corporate 14–77
Governance Code
CONCLUSION 14–81
15. SHAREHOLDER DECISION-
MAKING
THE ROLE OF THE SHAREHOLDERS 15–1
SHAREHOLDER DECISION-MAKING
WITHOUT SHAREHOLDER MEETINGS
The nature of the problem 15–6
Written resolutions 15–8
Where written resolutions not 15–10
available
The procedure for passing written 15–11
resolutions
Written resolutions proposed by 15–13
members
Wider written resolution provisions 15–14
under the articles
Unanimous consent at common law 15–15
IMPROVING SHAREHOLDER PARTICIPATION
Analyses of shareholder participation 15–22
The role of institutional investors 15–25
Conflicts of interest and inactivity 15–27
“Fiduciary investors” 15–29
The UK Stewardship Code 15–30
The role of indirect investors 15–31
Governance rights—voluntary 15–34
transfer arrangements for all
companies
Information rights—mandatory 15–40
transfer options in traded
companies
THE MECHANICS OF MEETINGS 15–42
What happens at meetings? 15–43
Types of resolution 15–44
Wording and notice of proposed 15–47
resolutions
Convening a meeting of the 15–48
shareholders
Annual general meetings 15–49
Other general meetings 15–51
Meetings convened by the court 15–53
What is a meeting? 15–55
Getting items onto the agenda and 15–56
expressing views on agenda items
Placing an item on the agenda 15–57
Circulation of members’ statements 15–59
Notice of meetings and information 15–60
about the agenda
Length of notice 15–61
Special notice 15–63
The contents of the notice of the 15–65
meeting and circulars
Communicating notice of the 15–66
meeting to the members
Attending the meeting
Proxies 15–67
Corporations’ representatives 15–72
Voting and verification of votes
Voting as a governance issue 15–73
Votes on a show of hands and polls 15–75
Verifying votes 15–76
Establishing who is entitled to vote 15–77
Publicity for votes and resolutions 15–78
“Empty” voting 15–81
Miscellaneous matters
Chairman 15–82
Adjournments 15–83
Class meetings 15–84
Forms of communication by the 15–85
company
Forms of communication to the 15–86
company
CONCLUSION 15–87
16. DIRECTORS’ DUTIES
INTRODUCTION 16–1
TO WHOM AND BY WHOM ARE THE DUTIES
OWED?
To whom are the general duties owed
and who can sue for their breach?
The company 16–4
Individual shareholders 16–5
Other stakeholders 16–7
By whom are the general duties
owed?
De facto and shadow directors 16–8
Senior managers 16–11
Former directors 16–13
Directors of insolvent companies 16–14
DIRECTORS’ DUTIES OF SKILL, CARE AND
DILIGENCE
Historical development 16–15
The statutory standard 16–16
Remedies 16–20
INTRODUCTION TO DIRECTORS’ VARIOUS
DUTIES OF GOOD FAITH AND LOYALTY
Historical background 16–21
Categories of duties 16–22
DUTY TO ACT WITHIN POWERS 16–23

Acting in accordance with the
constitution
Constitutional limitations 16–24
Other situations? 16–25
Improper purposes
The rule 16–26
Which purposes are improper? 16–27
When is a power exercised for 16–29
improper purposes?
Remedies 16–30
DUTY TO EXERCISE INDEPENDENT 16–33
JUDGMENT
Taking advice and delegating 16–34
authority
Exercise of future discretion 16–35
Nominee directors 16–36
DUTY TO PROMOTE THE SUCCESS OF THE
COMPANY
Settling the statutory formula 16–37
Interpreting the statutory formula
Defining the company’s success 16–40
Failure to have regard, or due 16–41
regard, to relevant matters
A duty to disclose wrongdoing 16–45
The problem of “short-termism” 16–46
Corporate groups 16–47
Employees 16–48
Creditors 16–49
Donations 16–50
OVERVIEW OF THE NO-CONFLICT RULES 16–52
TRANSACTIONS WITH THE COMPANY (SELF-
DEALING)
The scope of the relevant provisions 16–54
Approval mechanisms 16–55
Duty to declare interests in relation to 16–57
proposed transactions or
arrangements
Purpose of the disclosure 16–58
requirement
Who is subject to this duty? 16–59
The interests to be disclosed 16–60
Methods of disclosure 16–61
Remedies 16–62
A continuing role for the articles in 16–63
setting tighter constraints
Duty to declare interests in relation to 16–64
existing transactions or arrangements
Methods of disclosure 16–65
Remedies 16–66
TRANSACTIONS BETWEEN THE COMPANY 16–67
AND DIRECTORS REQUIRING SPECIAL
APPROVAL OF MEMBERS
Relationship with the general duties 16–68
Substantial property transactions
The scope of the requirement for 16–70
shareholder approval
Exceptions 16–72
Remedies 16–73
Additional rules for listed 16–77
companies
Loans, quasi-loans and credit
transactions
Arrangements covered 16–78
Method of approval and related 16–81
disclosures
Exceptions 16–82
Remedies 16–83
Directors’ service contracts and 16–84
gratuitous payments to directors
Political donations and expenditure 16–85
CONFLICTS OF INTEREST AND THE USE OF
CORPORATE PROPERTY, INFORMATION AND
OPPORTUNITY
The scope and functioning of section 16–86
175
A strict approach to conflicts of 16–87
interest
Identification of “corporate” 16–89
opportunities
Issues of scope 16–90
Effect of director’s resignation 16–94
Effect of board determinations of 16–95
scope
Competing and multiple directorships 16–99
Competing with the company 16–100
Multiple directorships 16–102
Approval by the board 16–103
A conceptual issue 16–105
Remedies 16–106
DUTY NOT TO ACCEPT BENEFITS FROM
THIRD PARTIES
The scope of section 176 16–107
Remedies 16–108
REMEDIES FOR BREACH OF DUTY 16–109
(a) Injunction or declaration 16–110
(b) Damages or compensation 16–111
(c) “Restoration” of property 16–112
(d) Avoidance of contracts 16–113
(e) Accounting for profits: 16–114

disgorgement of disloyal gains
(f) Summary dismissal 16–116
SHAREHOLDER APPROVAL OR 16–117
“WHITEWASH” OF SPECIFIC BREACHES OF
DUTY
What is being decided? 16–118
Who can take the decision for the 16–119
company?
Disenfranchising particular voters 16–121
Voting majorities 16–123
Non-ratifiable breaches 16–124
GENERAL PROVISIONS EXEMPTING
DIRECTORS FROM LIABILITY
Statutory constraints 16–125
Conflicts of interest 16–126
Provisions providing directors with 16–128
an indemnity
Insurance 16–129
Third party indemnities 16–130
Pension scheme indemnity 16–132
RELIEF GRANTED BY THE COURT 16–133
LIABILITY OF THIRD PARTIES 16–134
LIMITATION OF ACTIONS 16–138
CONCLUSION 16–140
17. THE DERIVATIVE CLAIM AND
PERSONAL ACTIONS AGAINST
DIRECTORS
THE NATURE OF THE PROBLEM AND THE 17–1
POTENTIAL SOLUTIONS
The board and litigation 17–2
The shareholders collectively and 17–3
litigation
Derivative claims 17–4
Other possible solutions 17–7
THE GENERAL STATUTORY DERIVATIVE
CLAIM
The scope of the statutory derivative
claim
The court’s gatekeeper role 17–11
The types of claims covered by the 17–13
statutory regime
Shareholder claimants 17–16
Deciding whether to give permission 17–17
for the derivative claim
The prima facie case and judicial 17–18
management of proceedings
Mandatory refusal of permission 17–19
Discretionary grant of permission 17–20
Varieties of derivative claim
Taking over existing claims 17–22
Multiple derivative claims 17–24
The subsequent conduct of the
derivative claim
General issues 17–25
Information rights 17–26
Costs 17–27
Restrictions on settlement 17–28
THE STATUTORY DERIVATIVE CLAIM FOR 17–29
UNAUTHORISED POLITICAL EXPENDITURE
SHAREHOLDERS’ PERSONAL CLAIMS 17–32
AGAINST DIRECTORS
Reflective loss 17–34
CONCLUSION 17–39
18. BREACH OF CORPORATE
DUTIES: ADMINISTRATIVE
REMEDIES
INTRODUCTION 18–1
INFORMAL INVESTIGATIONS: DISCLOSURE 18–2
OF DOCUMENTS AND INFORMATION
FORMAL INVESTIGATIONS BY INSPECTORS

When inspectors can be appointed 18–5
Conduct of inspections
Extent of the inspectors’ powers 18–7
Control of the inspectors’ powers 18–8
Reports 18–10
POWER OF INVESTIGATION OF COMPANY 18–11
OWNERSHIP
LIABILITY FOR COSTS OF INVESTIGATIONS 18–12
FOLLOW-UP TO INVESTIGATIONS 18–13
CONCLUSION 18–15
PART 4
Corporate Governance—Majority and Minority
Shareholders
19. CONTROLLING MEMBERS’

VOTING
INTRODUCTION 19–1
REVIEW OF SHAREHOLDERS’ DECISIONS
The starting point 19–4
Resolutions where the company’s 19–6
interests are centre stage
Resolutions more generally 19–7
Resolutions to expropriate members’ 19–8
shares
Other resolutions 19–10
The future 19–11
Voting at class meetings 19–12
CLASS RIGHTS 19–13
The procedure for varying class rights 19–14
What constitutes a “variation” 19–16
The definition of class rights 19–18
Other cases 19–21
SELF-HELP 19–22
Provisions in the constitution 19–23
Shareholder agreements 19–25
Prior contracts 19–26
Binding only the shareholders 19–28
CONCLUSION 19–29
20. UNFAIR PREJUDICE
INTRODUCTION 20–1
SCOPE OF THE PROVISIONS 20–4
INDEPENDENT ILLEGALITY AND 20–6
LEGITIMATE EXPECTATIONS OR EQUITABLE
CONSIDERATIONS
Informal arrangements among the 20–7
members
The balance between dividends and 20–10
directors’ remuneration
Other categories of unfair prejudice 20–12
PREJUDICE AND UNFAIRNESS 20–13
UNFAIR PREJUDICE AND THE DERIVATIVE 20–14
ACTION
REDUCING LITIGATION COSTS 20–18

REMEDIES 20–19
WINDING UP ON THE JUST AND EQUITABLE 20–21
GROUND
CONCLUSION 20–23
PART 5
Accounts and Audit
21. ANNUAL ACCOUNTS AND

REPORTS
INTRODUCTION
Scope and rationale of the annual 21–1
reporting requirement
The classification of companies for 21–2
the purposes of annual reporting
Micro companies 21–3
Small companies 21–4
Medium-sized companies 21–5
Large companies and public 21–6
interest entities
THE ANNUAL ACCOUNTS
Accounting records 21–7
The financial year 21–8
Individual accounts and group 21–9
accounts
Parent and subsidiary undertakings 21–10
Parent companies which are part 21–11
of a larger group
Companies excluded from 21–12
consolidation
Form and content of annual accounts
Possible approaches 21–13
True and fair view 21–14

Going concern evaluation 21–15
Companies Act accounts 21–16
Accounting standards 21–17
IAS accounts 21–18
Applying the requirements to 21–20
different sizes of company
Notes to the accounts 21–21
NARRATIVE REPORTING 21–22
Directors’ report 21–23
The strategic report
Rationale and history 21–24
Contents of the Strategic Review 21–25
Verification of narrative reports 21–26
Liability for misstatements in 21–27
narrative reports
APPROVAL OF THE ACCOUNTS AND 21–29
REPORTS BY THE DIRECTORS
THE AUDITOR’S REPORT 21–30
REVISION OF DEFECTIVE ACCOUNTS AND 21–31
REPORTS
FILING ACCOUNTS AND REPORTS WITH THE 21–33
REGISTRAR
Speed of filing 21–34
Modifications of the full filing 21–35
requirements
Other information available from the 21–37
Registrar
Confirmation statement 21–38
Other forms of publicity for the 21–39
accounts and reports
CONSIDERATION OF THE ACCOUNTS AND
REPORTS BY THE MEMBERS
Circulation to the members 21–40
Circulation of the Strategic Report 21–41
only
Laying the accounts and reports 21–42
before the members
CONCLUSION 21–43
22. AUDITS AND AUDITORS
INTRODUCTION 22–1
Sources of audit law 22–2
The duties of the auditor 22–3
Overarching issues 22–4
AUDIT EXEMPTION
Subsidiaries 22–7
Dormant companies 22–8
Non-profit public sector companies 22–9
AUDITOR INDEPENDENCE AND 22–10
COMPETENCE
Regulatory structure 22–11
DIRECT REGULATION OF AUDITOR
INDEPENDENCE
Non-independent persons 22–12
Non-audit remuneration of auditors 22–13
Auditors becoming non-independent 22–14
Auditors becoming prospectively 22–15
non-independent
THE ROLE OF SHAREHOLDERS AND THE 22–16
AUDIT AUTHORITIES
Appointment and remuneration of 22–17
auditors
Removal and resignation of auditors
Requirement for shareholder 22–18
resolution
Notifications 22–19
Failure to re-appoint an auditor 22–20
Whistle blowing 22–21
Shareholders and the audit report 22–22
THE ROLE OF THE AUDIT COMMITTEE OF
THE BOARD
Introduction 22–23
Composition of the audit committee 22–24
Functions of the audit committee 22–25
AUDITOR COMPETENCE 22–26
Qualifications 22–27
Auditing standards 22–28
Quality assurance, investigation and 22–29
discipline
Empowering auditors 22–30
LIABILITY FOR NEGLIGENT AUDIT
The nature of the issue 22–31
Providing audit services through 22–34
bodies with limited liability
CLAIMS BY THE AUDIT CLIENT
Establishing liability 22–36
Limiting liability 22–38
General defences 22–39
Limitation by contract 22–42
CLAIMS BY THIRD PARTIES
The duty of care in principle 22–44
Other issues 22–52
CONCLUSION 22–53
PART 6
Equity Finance
23. THE NATURE AND

CLASSIFICATION OF SHARES
LEGAL NATURE OF SHARES 23–1
THE PRESUMPTION OF EQUALITY BETWEEN 23–4
SHAREHOLDERS
CLASSES OF SHARES 23–6
Preference shares 23–7
Canons of construction 23–8
Ordinary shares 23–9
Special classes 23–10
Conversion of shares into stock 23–11
24. SHARE ISSUES: GENERAL RULES
PUBLIC AND NON-PUBLIC OFFERS 24–2
DIRECTORS’ AUTHORITY TO ALLOT 24–4
SHARES
PRE-EMPTIVE RIGHTS
Policy issues 24–6
The scope of the statutory right 24–7
Waiver 24–10
Sanctions 24–12
Listed companies 24–13
Pre-emption guidelines 24–14
Criticism and further market 24–15
developments
THE TERMS OF ISSUE 24–17
ALLOTMENT 24–18
Renounceable allotments 24–19
Failure of the offer 24–20
REGISTRATION 24–21
Bearer shares 24–22
CONCLUSION 24–23
25. PUBLIC OFFERS OF SHARES

INTRODUCTION 25–1
Public offers and introductions to 25–2
public markets
Regulatory goals 25–3
Listing 25–5
Premium and standard listing 25–6
Types of public market 25–7
Regulated markets and multi- 25–8
lateral trading facilities
Listing and regulated markets 25–9
The regulatory structure 25–10
Types of public offer 25–11
Offers for sale or subscription 25–12
Placings 25–13
Rights offers 25–14
ADMISSION TO LISTING AND TO TRADING
ON A PUBLIC MARKET
Eligibility criteria for the official list 25–15
Exchange admission standards 25–16
THE PROSPECTUS 25–17
The public offer trigger 25–18
Exemptions from the prospectus 25–19
requirement on a public offer
The admission to trading trigger 25–20
The form and content of prospectuses 25–22
Summary 25–23
Supplementary prospectus 25–24
Registration statement and 25–25
securities note
Verifying the prospectuses 25–26
Reputational intermediaries 25–27
Vetting by the FCA 25–28
Authorisation to omit material 25–29
Publication of prospectuses and other 25–30
material
SANCTIONS 25–31
Compensation under the Act 25–32
(a) Liability to compensate 25–33
(b) Defences 25–34
(c) Persons responsible 25–35
Civil remedies available elsewhere 25–36
(a) Damages 25–37
(b) Rescission 25–39
(c) Breach of contract 25–40
Criminal and regulatory sanctions 25–41
Ex ante controls 25–42
Ex post sanctions 25–43
CROSS-BORDER OFFERS AND ADMISSIONS 25–44
DE-LISTING 25–45
26. CONTINUING OBLIGATIONS AND
DISCLOSURE OF INFORMATION
TO THE MARKET
INTRODUCTION 26–1
PERIODIC REPORTING OBLIGATIONS 26–3
EPISODIC OR AD HOC REPORTING 26–5
REQUIREMENTS
DISCLOSURE OF DIRECTORS’ INTERESTS 26–9
Who has to disclose? 26–11
What has to be disclosed, to whom 26–12
and when?
DISCLOSURE OF MAJOR VOTING
SHAREHOLDINGS
The scope of the disclosure obligation
Which companies are subject to the 26–16
regime?
When does the disclosure 26–17
obligation arise?
Indirect holdings of voting rights 26–19
Financial Instruments 26–20
Exemptions 26–22
The disclosure process 26–23
SANCTIONS 26–24
Compensation for misleading 26–25
statements to the market
Compensation via FCA action 26–28
Administrative penalties for breaches 26–29
Criminal sanctions 26–32
CONCLUSION 26–33
27. TRANSFERS OF SHARES
CERTIFICATED AND UNCERTIFICATED 27–3
SHARES
TRANSFERS OF CERTIFICATED SHARES
Legal ownership 27–5
Estoppel 27–6
Restrictions on transferability 27–7
The positions of transferor and 27–8
transferee prior to registration
Priorities between competing 27–10
transferees
The company’s lien 27–11
TRANSFERS OF UNCERTIFICATED SHARES 27–12
Title to uncertificated shares and the 27–14
protection of transferees
THE REGISTER 27–16
Rectification 27–19
TRANSMISSION OF SHARES BY OPERATION 27–21
OF LAW
28. TAKEOVERS
INTRODUCTION 28–1
THE TAKEOVER CODE AND PANEL 28–3
The Panel and its methods of
operation
The status and composition of the 28–4
Panel
Internal appeals 28–5
Judicial review 28–6
Powers of the Panel 28–7
Sanctions 28–9
The “cold shoulder” and criminal 28–11
sanctions
THE SCOPE OF THE CITY CODE 28–13
Transactions in scope 28–14
Companies in scope
Full jurisdiction to the Panel 28–15
Divided jurisdiction 28–16
THE STRUCTURE OF THE CODE 28–18
THE ALLOCATION OF THE ACCEPTANCE 28–19
DECISION
Post-bid defensive measures 28–20
Defensive measures in advance of the 28–21
bid
The break-through rule 28–22
Disclosure of control structures 28–25
TARGET MANAGEMENT PROMOTION OF AN 28–26
OFFER
Disclosure and independent advice 28–27
Compensation for loss of office 28–28
Gratuitous payments 28–29
Contractual compensation 28–32
Competing bids 28–33
A duty to auction or a duty to be 28–34
even-handed?
Binding the target board by 28–36
contract
EQUALITY OF TREATMENT OF TARGET 28–37
SHAREHOLDERS
Partial bids 28–38
Level and type of consideration 28–39
Mandatory offers 28–41
Exemptions and relaxations 28–43
Acting in concert 28–44
Interests in shares 28–45
Conclusion 28–46
To whom must an offer be made? 28–47
Wait and see 28–48
THE PROCEDURE FOR MAKING A BID 28–49
Before the approach to the target 28–50
board
Company-triggered disclosures 28–51
Sanctions 28–53
Interests in shares and acting in 28–54
concert
Before a formal offer is made to the 28–55
target shareholders
Put up or shut up 28–56
Initial announcements 28–57
The formal offer
Conditions 28–58
Timetable 28–59
Bid documentation 28–61
Employees’ interests 28–62
Profit forecasts and valuations 28–63
Liability for misstatements 28–64
Dealings in shares 28–65
Solicitation 28–66
The post-offer period
Bidding again 28–68
The bidder’s right to squeeze out 28–69
the minority
Challenging the squeeze-out 28–73
The sell-out right of non-accepting 28–75
shareholders
CONCLUSION 28–77
29. ARRANGEMENTS,
RECONSTRUCTIONS AND
MERGERS
THE FUNCTION OF SCHEMES OF 29–1
ARRANGEMENT
Mergers 29–2
Takeovers 29–3
Other cases 29–4
Creditors’ schemes 29–5
THE MECHANICS OF THE SCHEME OF 29–6
ARRANGEMENT
Proposing a scheme 29–7
Convening and conducting meetings 29–8
The sanction of the court 29–11
Additional requirements for mergers 29–12
and divisions of public companies
CROSS-BORDER MERGERS 29–16
Employee participation 29–20
Further uses of cross-border mergers 29–22
REORGANISATION UNDER SECTIONS 110 29–24
AND 111 OF THE INSOLVENCY ACT 1986
CONCLUSION 29–26
30. MARKET ABUSE
INTRODUCTION 30–1
APPROACHES TO REGULATING INSIDER
DEALING
Disclosure 30–5
Prohibiting trading 30–6
Relying on the general law 30–7
Directors’ fiduciary duties 30–8
Breach of confidence 30–9
Misrepresentation 30–10
Prohibiting insider dealing 30–11
THE CRIMINAL JUSTICE ACT 1993 PART V 30–12
Regulating markets 30–13
Regulating individuals 30–15
Inside information 30–16
Particular securities or issuers 30–17
Specific or precise 30–18
Made public 30–19
Impact on price 30–21
Insiders 30–22
Recipients from insiders 30–23
Mental element 30–24
Prohibited acts 30–25
Defences 30–26
General defences 30–27
Special defences 30–28
CRIMINAL PROHIBITIONS ON MARKET 30–29
MANIPULATION
REGULATORY CONTROL OF MARKET
ABUSE
Background 30–30
Insider dealing 30–31
Dealing 30–32
Persons covered and exemptions 30–38
Market manipulation
Transactions and orders to trade 30–39
Dissemination of information 30–40
Misleading behaviour and market 30–41
distortion
Accepted market practices 30–42
Safe harbours 30–43
Share buy-backs 30–44
Price stabilisation 30–45
ENFORCEMENT AND SANCTIONS 30–47
Investigation into market abuse 30–48
Sanctions for market abuse 30–51
Penalties 30–52
Injunctions 30–53
Sanctions for breach of the criminal 30–54
law
Restitution orders and injunctions 30–55
Disqualification 30–56
CONCLUSION 30–57
PART 7
Debt Finance
31. DEBTS AND DEBT SECURITIES

INTRODUCTION 31–1
Difference between debt (loans), 31–2
equity (shares) and hybrid
instruments
Should a company use debt or equity 31–4
in its financing?
DIFFERENT STRUCTURES IN DEBT

FINANCING
Terminology 31–5
Defining a “debenture” 31–6
Small and large scale loans 31–8
Debts and “debt securities” 31–9
SINGLE AND MULTIPLE LENDERS
Single lenders 31–10
Syndicated loans 31–11
Debt securities: distinguishing 31–12
“bonds” and “stocks”
Debt securities: trustees for the 31–14
bondholders or stockholders
ISSUE OF DEBT SECURITIES
Private issues 31–15
Public issues of debt securities 31–17
Special rules: covered bonds 31–19
TRANSFER OF DEBTS AND DEBT
SECURITIES
Transfer of simple debts 31–21
Transfer of debt securities 31–22
PROTECTIVE GOVERNANCE REGIMES IN
DEBTS
General 31–24
Defining repayment terms 31–25
Protecting the debt holder against the 31–26
borrower’s possible default
Protecting multiple lenders from their 31–28
lead intermediary
Protecting multiple lenders from each 31–30
other
CONCLUSION 31–32
32. COMPANY CHARGES
INTRODUCTION 32–1
SECURITY INTERESTS
The legal nature of security interests 32–2
The benefits of taking security 32–4
THE FLOATING CHARGE
The practical differences between 32–5
fixed and floating charges
Crystallisation 32–8
Automatic crystallisation 32–9
Priority accorded to floating charges 32–10
Negative pledge clauses 32–11
Subordination agreements 32–12
Statutory limitations on the floating 32–13
charge
(i) Defective floating charges 32–14
(ii) Preferential creditors 32–15
(iii) Sharing with unsecured 32–17
creditors—the “prescribed
part”
(iv) Costs of liquidation 32–18
(v) Powers of the administrator 32–20
Distinguishing between fixed and 32–21
floating charges
REGISTRATION OF CHARGES
The purpose of a registration system 32–24
The reformed registration system
What has to be registered 32–26
The mechanics of registration 32–27
Geographical reach of the 32–28
registration provisions
The effect of failure to register 32–29
Late registration 32–30

Defective registration 32–31
Effect of registration 32–32
Reform proposals and registration 32–33
systems elsewhere
ENFORCEMENT OF FLOATING CHARGES
Receivers and administrators 32–34
Receivership
Appointment of an administrative 32–37
receiver
Function and status of the receiver 32–38
and administrative receiver
The receiver’s liability with respect 32–40
to contracts
Publicity of appointment and 32–42
reports
Administration
Function 32–43
Appointment 32–44
Powers and duties 32–45
Protections for creditors and 32–47
members as against the
administrator
Publication of appointment 32–48
Administration expenses 32–49
End of administration 32–50
CONCLUSION 32–51
PART 8
Insolvency and its Consequences
33. WINDING UP, DISSOLUTION AND

RESTORATION
INTRODUCTION 33–1
TYPES OF WINDING UP 33–2
Winding up by the court
Grounds for winding up 33–3
Who may petition for a court 33–4
ordered winding up?
Proof that a company is unable to 33–5
pay its debts
The court’s discretion 33–6
Liquidators, provisional 33–7
liquidators and official receivers
Timing of commencement of 33–8
winding up
Voluntary winding up—general
Instigation of winding up 33–9
Timing of commencement of 33–10
winding up
Members’ voluntary winding up
Declaration of solvency 33–11
Appointment and obligations of 33–12
liquidator
Creditors’ voluntary winding up
Instigation of winding up 33–13
Appointment of liquidator 33–14
“Liquidation committee” 33–15
POWERS AND DUTIES OF THE LIQUIDATOR 33–16
COLLECTION, REALISATION AND
DISTRIBUTION OF THE COMPANY’S ASSETS
Maximising the assets available for 33–17
distribution
Statutory “claw back” and 33–18
avoidance provisions
Statutory provisions requiring 33–19
wrongdoers to make contributions
The common law “anti-deprivation 33–20
principle”
Benefit of the statutory claw backs 33–21

and wrongdoer contributions
Proof of debts and mandatory 33–22
insolvency set off
Distribution of the company’s assets 33–24
DISSOLUTION
After winding up
The normal process 33–27
Early dissolution 33–28
Striking off of defunct companies 33–29
Voluntary striking off 33–30
RESURRECTION OF DISSOLVED COMPANIES 33–31
Administrative restoration 33–32
Restoration by the court 33–33
CONCLUSION 33–34
PAGE
Index 1181
TABLE OF CASES
A Harris v Harris Ltd. See Harris v A Harris Ltd

Aas v Benham [1891] 2 Ch. 244 CA 16–97
Abbey Leisure Ltd, Re; sub nom Virdi v Abbey Leisure 20–18, 20–21
[1990] B.C.C. 60; [1990] B.C.L.C. 342 CA (Civ Div)
Abbey National Building Society v Cann [1991] 1 A.C. 56; 32–11
[1990] 2 W.L.R. 832; [1990] 1 All E.R. 1085; [1990] 2
F.L.R. 122; (1990) 22 H.L.R. 360; (1990) 60 P. & C.R.
278; (1990) 87(17) L.S.G. 32; (1990) 140 N.L.J. 477
HL
Aberdeen Ry v Blaikie Bros (1854) 1 Macq. H.L. 461 HL 16–54, 16–88
Sc
Abouraya v Sigmund [2014] EWHC 277 (Ch); [2015] 17–6, 17–14, 17–24
B.C.C. 503
Acatos and Hutcheson Plc v Watson [1995] B.C.C. 446; 13–4
[1995] 1 B.C.L.C. 218 Ch D
Accrington Corp Steam Tramways Co, Re [1909] 2 Ch. 40 23–8
Ch D
Actiesselkabet Dampskibs Hercules v Grand Trunk Pacific 6–4
Ry; sub nom Actiesselskabet Dampskib Hercules v
Grand Trunk Pacific Ry [1912] 1 K.B. 222 CA
Adams v Cape Industries Plc [1990] Ch. 433; [1990] 2 8–10, 8–11, 8–12, 8–13, 8–16
W.L.R. 657; [1991] 1 All E.R. 929; [1990] B.C.C. 786;
[1990] B.C.L.C. 479 CA (Civ Div)
Addlestone Linoleum Co, Re (1888) L.R. 37 Ch. D. 191 25–40
CA
Admiralty v Owners of the Divina (HMS Truculent); sub 7–40
nom HMS Truculent v Owners of SS Divina [1952] P.
1; [1951] 2 All E.R. 968; [1951] 2 Lloyd’s Rep. 308;
[1951] 2 T.L.R. 895; (1951) 95 S.J. 731 PDAD
ADT Ltd v BDO Binder Hamlyn [1996] B.C.C. 808 QBD 22–51
Agip (Africa) Ltd v Jackson [1991] Ch. 547; [1991] 3 13–57
W.L.R. 116; [1992] 4 All E.R. 451; (1991) 135 S.J. 117
CA (Civ Div)
Agnew v IRC. See Brumark Investments Ltd, Re
Agriculturist Cattle Insurance Co, Re; sub nom Stanhope’s 16–26
Case (1865–66) L.R. 1 Ch. App. 161 LC
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] 16–20, 16–30, 16–111, 16–112
UKSC 58; [2015] A.C. 1503; [2014] 3 W.L.R. 1367;
[2015] 1 All E.R. 747; [2015] 2 All E.R. (Comm) 189;
[2015] P.N.L.R. 10; [2015] W.T.L.R. 187; 18 I.T.E.L.R.
216; (2014) 158(43) S.J.L.B. 49
AIB Group (UK) Plc v Personal Representative of James 32–38
Aiken (Deceased) [2012] N.I.Q.B. 51
Air Ecosse Ltd v Civil Aviation Authority, 1987 S.C. 285; 32–45
1987 S.L.T. 751; (1987) 3 B.C.C. 492 IH (2 Div)
Airbase (UK) Ltd, Re. See Thorniley v Revenue and
Customs Commissioners
Airbus Operations Ltd v Withey [2014] EWHC 1126 QB 16–11, 16–62, 16–108, 16–114
Airey v Cordell [2006] EWHC 2728 (Ch); [2007] Bus. L.R. 17–11
391; [2007] B.C.C. 785; (2006) 150 S.J.L.B. 1150
Airlines Airspares v Handley Page [1970] Ch. 193; [1970] 2 32–40
W.L.R. 163; [1970] 1 All E.R. 29 Ch D
Aktieselskabet Dansk Skibsfinansiering v Brothers [2001] 2 9–5
B.C.L.C. 324 CFA (HK)
Al Nakib Investments (Jersey) Ltd v Longcroft [1990] 1 22–46, 25–38
W.L.R. 1390; [1990] 3 All E.R. 321; [1990] B.C.C.
517; [1991] B.C.L.C. 7; (1990) 87(42) L.S.G. 37;
(1990) 140 N.L.J. 741 Ch D
Alabama New Orleans Texas & Pacific Junction Ry Co, Re 29–11
[1891] 1 Ch. 213 CA
Albazero, The. See Owners of Cargo Laden on Board the
Albacruz v Owners of the Albazero
Albert v Belgium (A/58); Le Compte v Belgium (A/58) 18–14
(1983) 5 E.H.R.R. 533 ECHR
Alexander Ward & Co Ltd v Samyang Navigation Co Ltd 14–11, 17–3
[1975] 1 W.L.R. 673; [1975] 2 All E.R. 424; [1975] 2
Lloyd’s Rep. 1; 1975 S.C. (H.L.) 26; 1975 S.L.T. 126;
(1975) 119 S.J. 319 HL
Al-Fayed v United Kingdom (17101/90); sub nom Al- 18–8, 18–14
Fayed v United Kingdom (A/294–B) (1994) 18
E.H.R.R. 393 ECHR
Ali v Top Marques Car Rental Ltd [2006] EWHC 109 (Ch); 32–32
(2006) 150 S.J.L.B. 264
Alipour v UOC Corp (Winding up Petition) [2002] EWHC 27–6
937 (Ch); [2002] 2 B.C.L.C. 770
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch. 656 19–4, 19–5, 19–11
CA
Allen v Hyatt (1914) 30 T.L.R. 444 PC 16–5, 30–8
Allfiled UK Ltd v Eltis [2015] EWHC 1300 (Ch); [2016] 16–100, 16–101, 16–110
F.S.R. 11
Allied Business & Financial Consultants Ltd, Re; sub nom 16–86, 16–92, 16–97, 16–98
O’Donnell v Shanahan [2009] EWCA Civ 751; [2009]
B.C.C. 822; [2009] 2 B.C.L.C. 666
Allied Carpets Group Plc v Nethercott [2001] B.C.C. 12–12
81QBD
Allied Domecq Plc, Re [2000] B.C.C. 582; [2000] 1 29–3
B.C.L.C. 134 Ch D
Alpstream AG v PK Airfinance Sarl [2015] EWCA Civ 32–37, 32–38
1318; [2016] 2 P. & C.R. 2
Al-Saudi Banque v Clarke Pixley (A Firm) [1990] Ch. 313; 22–46
[1990] 2 W.L.R. 344; [1989] 3 All E.R. 361; (1989) 5
B.C.C. 822; [1990] B.C.L.C. 46; [1989] P.C.C. 442;
[1989] Fin. L.R. 353; (1990) 87(10) L.S.G. 36; (1989)
139 N.L.J. 1341 Ch D
Altitude Scaffolding Ltd, Re [2006] EWHC 1401 (Ch); 29–8
[2006] B.C.C. 904; [2007] 1 B.C.L.C. 199
Ambrose Lake Tin & Copper Mining Co Ex p. Moss, Re; 5–18, 16–113
sub nom Ex p. Taylor, Re (1880) L.R. 14 Ch. D. 390
CA
AMEC Properties v Planning Research & Systems [1992] 32–40
B.C.L.C. 1149; [1992] 1 E.G.L.R. 70; [1992] 13 E.G.
109 CA (Civ Div)
American Express International Banking Corp v Hurley 32–38, 32–38
[1985] 3 All E.R. 564; (1986) 2 B.C.C. 98993; [1986]
B.C.L.C. 52; [1985] F.L.R. 350; (1985) 135 N.L.J. 1034
QBD
AMF International Ltd (No.2), Re; sub nom Cohen v Ellis 33–1
[1996] 1 W.L.R. 77; [1996] B.C.C. 335; [1996] 2
B.C.L.C. 9 Ch D
AMG Global Nominees (Private) Ltd v SMM Holdings Ltd; 13–49
sub nom AMG Global Nominees (Private) Ltd v Africa
Resources Ltd [2008] EWCA Civ 1278; [2009] B.C.C.
767; [2009] 1 B.C.L.C. 281; (2008) 158 N.L.J. 1684
Ammonia Soda Co Ltd v Chamberlain [1918] 1 Ch. 266 12–3
CA
Anderson v Hogg, 2002 S.C. 190; 2002 S.L.T. 354; [2002] 20–16
B.C.C. 923; 2001 G.W.D. 40–1501 IH (Ex Div)
Andrew v Kounnis Freeman [1999] 2 B.C.L.C. 641; [2000] 22–50
Lloyd’s Rep. P.N. 263 CA (Civ Div)
Andrews v Gas Meter Co [1897] 1 Ch. 361 CA 23–6
Andrews v Mockford [1892] 1 Q.B. 372 CA 25–38
Anglesea Collieries, Re (1866) L.R. 1 Ch. 555 33–1
Anglo Danubian Steam Navigation & Colliery Co, Re 31–15
(1875) L.R. 20 Eq. 339 Ct of Ch
Anglo Petroleum Ltd v TFB (Mortgages) Ltd; TFB 13–49, 13–57
(Mortgages) Ltd v Sutton; TFB (Mortgages) Ltd v
Anglo Petroleum Ltd [2007] EWCA Civ 456; [2007]
B.C.C. 407; [2008] 1 B.C.L.C. 185
Anglo-Austrian Printing and Publishing Union (No.3), Re; 33–21
sub nom Brabourne v Anglo–Austrian Printing and
Publishing Union [1895] 2 Ch. 891 Ch D
Annacott Holdings Ltd, Re [2013] EWCA Civ 119; [2013] 20–20
2 B.C.L.C. 46
Annacott Holdings Ltd, Re; sub nom Tobian Properties, Re 20–10
[2012] EWCA Civ 998; [2013] Bus. L.R. 753; [2013]
B.C.C. 98; [2013] 2 B.C.L.C. 567
Antonio Gramsci Shipping Corp v Recoletos Ltd [2013] 2–8
EWCA Civ 730; [2013] 4 All E.R. 157; [2013] 2 All
E.R. (Comm) 781; [2014] Bus. L.R. 239; [2013] 2
Lloyd’s Rep. 295; [2014] 1 B.C.L.C. 581; [2013] 2
C.L.C. 44; [2013] I.L.Pr. 36
Apcoa Parking Holdings GmbH, Re [2014] EWHC 3849 29–11
(Ch); [2015] 4 All E.R. 572; [2016] 1 All E.R. (Comm)
30; [2015] Bus. L.R. 374; [2015] B.C.C. 142; [2015] 2
B.C.L.C. 659
Arab Bank Plc v Mercantile Holdings Ltd [1994] Ch. 71; 13–47, 13–56
[1994] 2 W.L.R. 307; [1994] 2 All E.R. 74; [1993]
B.C.C. 816; [1994] 1 B.C.L.C. 330; (1995) 69 P. & C.R.
410; [1993] E.G. 164 (C.S.); (1994) 91(12) L.S.G. 37;
[1993] N.P.C. 130 Ch D
Arctic Engineering (No.2), Re; sub nom Arctic Engineering 32–42
Ltd, Re [1986] 1 W.L.R. 686; [1986] 2 All E.R. 346;
(1985) 1 B.C.C. 99563; [1986] P.C.C. 1; (1986) 83
L.S.G. 1895; (1985) 130 S.J. 429 Ch D
Armagas Ltd v Mundogas SA (The Ocean Frost) [1986] 7–19, 7–22, 7–33
A.C. 717; [1986] 2 W.L.R. 1063; [1986] 2 All E.R. 385;
[1986] 2 Lloyd’s Rep. 109; (1986) 2 B.C.C. 99197;
(1986) 83 L.S.G. 2002; (1986) 130 S.J. 430 HL
Armagh Shoes Ltd, Re [1984] B.C.L.C. 405 Ch D (NI) 32–21
Armitage v Nurse [1998] Ch. 241; [1997] 3 W.L.R. 1046; 5–14, 31–29
[1997] 2 All E.R. 705; [1997] Pens. L.R. 51; (1997) 74
P. & C.R. D13 CA (Civ Div)
Armour Hick Northern Ltd v Whitehouse [1980] 1 W.L.R. 13–46, 13–52
1520
Armstrong v Jackson [1917] 2 K.B. 822 KBD 5–17, 16–113
Arthur Guinness, Son & Co (Dublin) Ltd v Owners of the 7–40
Motor Vessel Freshfield (The Lady Gwendolen) [1965]
P. 294; [1965] 3 W.L.R. 91; [1965] 2 All E.R. 283;
[1965] 1 Lloyd’s Rep. 335; (1965) 109 S.J. 336 CA CA
Ash & Newman v Creative Devices Research [1991] 32–40
B.C.L.C. 403
Ashby v Blackwell, 28 E.R. 913; (1765) 2 Eden 299 Ct of 27–5
Ch
Ashpurton Estates Ltd, Re. See Victoria Housing Estates
Ltd v Ashpurton Estates Ltd
ASIC v Healey [2011] FCA 717 16–1
ASIC v Macdonald (2009) 256 ALR 199 16–1
ASIC v Rich [2003] NSWSC 85 16–19
Assénagon Asset Management SA v Irish Bank Resolution 19–11, 31–30, 31–31
Corp Ltd (formerly Anglo Irish Bank Corp Ltd) [2012]
EWHC 2090 (Ch); [2013] 1 All E.R. 495; [2013] Bus.
L.R. 266
Associated Provincial Picture Houses Ltd v Wednesbury 16–43
Corp [1948] 1 K.B. 223; [1947] 2 All E.R. 680; (1947)
63 T.L.R. 623; (1948) 112 J.P. 55; 45 L.G.R. 635;
[1948] L.J.R. 190; (1947) 177 L.T. 641; (1948) 92 S.J.
26 CA
Association of Certified Public Accountants of Britain v 4–23
Secretary of State for Trade and Industry; sub nom
Association of Certified Public Accountants of Britain,
Re [1998] 1 W.L.R. 164; [1997] B.C.C. 736; [1997] 2
B.C.L.C. 307; (1997) 94(35) L.S.G. 33; (1997) 141
S.J.L.B. 128 Ch D
Astec (BSR) Plc, Re [1999] B.C.C. 59; [1998] 2 B.C.L.C. 20–8, 20–12, 28–41
556 Ch D (Companies Ct)
Atkins v Wardle (1889) 5 T.L.R. 734 CA 9–20
Atlantic Computer Systems Plc, Re [1992] Ch. 505; [1992] 32–46
2 W.L.R. 367; [1992] 1 All E.R. 476; [1990] B.C.C.
859; [1991] B.C.L.C. 606 CA (Civ Div)
Atlas Maritime Co SA v Avalon Maritime Ltd (The Coral 8–17
Rose) (No.1) [1991] 4 All E.R. 769; [1991] 1 Lloyd’s
Rep. 563
Atlasview Ltd v Brightview Ltd; Atlasview Ltd v Reedbest 20–2, 20–15, 20–20
Properties Ltd; sub nom Brightview Ltd, Re [2004]
EWHC 1056 (Ch); [2004] B.C.C. 542; [2004] 2
B.C.L.C. 191
Att Gen of Belize v Belize Telecom Ltd [2009] UKPC 10; 3–21
[2009] 1 W.L.R. 1988; [2009] Bus. L.R. 1316; [2009] 2
All E.R. 1127; [2009] 2 All E.R. (Comm) 1; [2009]
B.C.C. 433; [2009] 2 B.C.L.C. 148
Att Gen of Hong Kong v Reid [1994] 1 A.C. 324; [1993] 3 16–108, 16–115
W.L.R. 1143; [1994] 1 All E.R. 1; (1993) 143 N.L.J.
1569; (1993) 137 S.J.L.B. 251; [1993] N.P.C. 144 PC
(NZ)
Att Gen’s Reference (No.2 of 1982), Re; sub nom Att Gen’s 7–47, 16–4
Reference (No.2 of 1983), Re [1984] Q.B. 624; [1984] 2
W.L.R. 447; [1984] 2 All E.R. 216; (1984) 1 B.C.C.
98973; (1984) 78 Cr. App. R. 131; [1985] Crim. L.R.
241; (1984) 81 L.S.G. 279; (1984) 128 S.J. 221 CA
(Crim Div)
Att Gen’s Reference (No.1 of 1988), Re [1989] A.C. 971; 30–23
[1989] 2 W.L.R. 729; [1989] 2 All E.R. 1; (1989) 5
B.C.C. 625; [1990] B.C.L.C. 172; [1989] P.C.C. 249;
(1989) 89 Cr. App. R. 60; [1989] Crim. L.R. 647;
(1989) 139 N.L.J. 541 HL
Att Gen’s Reference (No.2 of 1998), Re [2000] Q.B. 412; 18–2
[1999] 3 W.L.R. 961; [1999] B.C.C. 590; (1999) 96(21)
L.S.G. 37; (1999) 149 N.L.J. 746 CA (Crim Div)
Att Gen’s Reference (No.2 of 1999), Re [2000] Q.B. 796; 7–43
[2000] 3 W.L.R. 195; [2000] 3 All E.R. 182; [2001]
B.C.C. 210; [2000] 2 B.C.L.C. 257; [2000] 2 Cr. App.
R. 207; [2000] I.R.L.R. 417; [2000] Crim. L.R. 475;
(2000) 97(9) L.S.G. 39 CA (Crim Div)
Augustus Barnett & Son Ltd, Re [1986] B.C.L.C. 170; 8–4, 9–5
(1986) 2 B.C.C. 98904; [1986] P.C.C. 167 Ch D
(Companies Ct)
Australian Metropolitan Life Association Co Ltd v Ure 16–26
(1923) 33 C.L.R. 199 High Ct (Aus)
Automatic Bottle Makers Ltd, Re; sub nom Osborne v 32–10
Automatic Bottle Makers Ltd [1926] Ch. 412 CA
Automatic Self Cleansing Filter Syndicate Co Ltd v 14–6
Cuninghame [1906] 2 Ch. 34 CA
Aveling Barford Ltd v Perion Ltd (1989) 5 B.C.C. 677; 12–10, 12–11, 16–120, 16–124, 19–6
[1989] B.C.L.C. 626; [1989] P.C.C. 370 Ch D
Aveling Barford Ltd, Re [1989] 1 W.L.R. 360; [1988] 3 All 32–38
E.R. 1019; (1988) 4 B.C.C. 548; [1989] B.C.L.C. 122;
[1989] P.C.C. 240; (1988) 138 N.L.J. Rep. 275; (1989)
133 S.J. 512 Ch D (Companies Ct)
Azevedo v IMCOPA-Importacao, Exportaacao e Industria 16–124, 31–31
de Oleos Ltda [2013] EWCA Civ 364; [2015] Q.B. 1;
[2014] 3 W.L.R. 1124; [2014] 2 All E.R. (Comm) 97;
[2014] B.C.C. 611; [2014] 1 B.C.L.C. 72
B Johnson & Co (Builders) Ltd, Re [1955] Ch. 634; [1955] 32–38, 32–40
3 W.L.R. 269; [1955] 2 All E.R. 775; (1955) 99 S.J. 490
CA
B Liggett (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 7–8
K.B. 48 KBD
Badgerhill Properties Ltd v Cottrell [1991] B.C.C. 463; 5–26, 5–28
[1991] B.C.L.C. 805; 54 B.L.R. 23 CA (Civ Div)
Bagnall v Carlton (1877) L.R. 6 Ch. D. 371 CA 5–3
Bahia and San Francisco Ry Co Ltd, Re (1867–68) L.R. 3 27–6
Q.B. 584 QB
Bailey v Medical Defence Union (1995) 18 A.C.S.R. 521 14–55
High Ct (Aus)
Bailey Hay & Co, Re [1971] 1 W.L.R. 1357; [1971] 3 All 15–19
E.R. 693; (1971) 115 S.J. 639 Ch D
Baillie v Oriental Telephone & Electric Co Ltd [1915] 1 15–65
Ch. 503 CA
Baily v British Equitable Assurance Co. See British
Equitable Assurance Co Ltd v Baily
Bain and Company Nominees Pty Ltd v Grace Bros 15–65
Holdings Ltd [1983] 1 A.C.L.C. 816
Baird v J Baird & Co (Falkirk) Ltd, 1949 S.L.T. 368 OH 16–124, 19–4
Bairstow v Queens Moat Houses Plc; Marcus v Queens 12–13, 12–14, 16–32, 16–112
Moat Houses Plc; Hersey v Queens Moat Houses Plc;
Porter v Queens Moat Houses Plc [2001] EWCA Civ
712; [2002] B.C.C. 91; [2001] 2 B.C.L.C. 531
Balkis Consolidated Co Ltd v Tomkinson [1893] A.C. 396 27–6
HL
Balston Ltd v Headline Filters Ltd (No.2) [1990] F.S.R. 385 16–94, 16–101
Ch D
Bamford v Bamford [1970] Ch. 212; [1969] 2 W.L.R. 1107;3–25, 14–6, 14–13, 16–30, 16–113, 19–
[1969] 1 All E.R. 969; (1969) 113 S.J. 123 CA (Civ 6
Div)
Bamford v Harvey [2012] EWHC 2858 (Ch); [2013] Bus. 17–21
L.R. 589; [2013] B.C.C. 311
Bank of Baroda v Panessar [1987] Ch. 335; [1987] 2 32–37
W.L.R. 208; [1986] 3 All E.R. 751; (1986) 2 B.C.C.
99288; [1987] P.C.C. 165; (1987) 84 L.S.G. 339; (1986)
136 N.L.J. 963; (1987) 131 S.J. 21 Ch D
Bank of Beirut SAL v Prince El-Hashemite [2015] EWHC 4–7
1451 (Ch); [2016] Ch. 1; [2015] 3 W.L.R. 875; [2016] 1
B.C.L.C. 127
Bank of Credit and Commerce International (Overseas) Ltd 16–136
v Akindele; sub nom BCCI v Chief Labode Onadimaki
Akindele [2001] Ch. 437; [2000] 3 W.L.R. 1423; [2000]
4 All E.R. 221; [2000] Lloyd’s Rep. Bank. 292; [2000]
B.C.C. 968; [2000] W.T.L.R. 1049; (1999–2000) 2
I.T.E.L.R. 788; (2000) 97(26) L.S.G. 36; (2000) 150
N.L.J. 950 CA (Civ Div)
Bank of Credit and Commerce International SA (In 32–2, 33–23
Liquidation) (No.8), Re; sub nom Morris v Rayners
Enterprises Inc; Morris v Agrichemicals Ltd; Bank of
Credit and Commerce International SA (No.3), Re
[1998] A.C. 214; [1997] 3 W.L.R. 909; [1997] 4 All
E.R. 568; [1998] Lloyd’s Rep. Bank. 48; [1997] B.C.C.
965; [1998] 1 B.C.L.C. 68; [1998] B.P.I.R. 211; (1997)
94(44) L.S.G. 35; (1997) 147 N.L.J. 1653; (1997) 141
S.J.L.B. 229 HL
Bank of Credit and Commerce International SA (In
Liquidation) (No.14), Re. See Morris v Bank of India
Bank of Credit and Commerce International SA (In
Liquidation) (No.15), Re. See Morris v Bank of India
Bank of Credit and Commerce International (Overseas) Ltd 22–49
(In Liquidation) v Price Waterhouse (No.2) [1998]
Lloyd’s Rep. Bank. 85; [1998] B.C.C. 617; [1998]
E.C.C. 410; [1998] P.N.L.R. 564; (1998) 95(15) L.S.G.
32; (1998) 142 S.J.L.B. 86 CA (Civ Div)
Bank of Ireland v Jaffery [2012] EWHC 1377 (Ch) 16–135
Banque Financière de la Cité SA (formerly Banque Keyser 32–32
Ullmann SA) v Westgate Insurance Co (formerly Hodge
General & Mercantile Co Ltd); sub nom Banque Keyser
Ullmann SA v Skandia (UK) Insurance Co; Skandia
(UK) Insurance Co v Chemical Bank; Skandia (UK)
Insurance Co v Credit Lyonnais Bank Nederland NV
[1991] 2 A.C. 249; [1990] 3 W.L.R. 364; [1990] 2 All
E.R. 947; [1990] 2 Lloyd’s Rep. 377; (1990) 87(35)
L.S.G. 36; (1990) 140 N.L.J. 1074; (1990) 134 S.J.
1265 HL
Barbados Trust Co Ltd (formerly CI Trustees (Asia Pacific) 31–22
Ltd) v Bank of Zambia [2007] EWCA Civ 148; [2007]
2 All E.R. (Comm) 445; [2007] 1 Lloyd’s Rep. 495;
[2007] 1 C.L.C. 434; (2006–07) 9 I.T.E.L.R. 689
Barclays Bank Ltd v TOSG Trust Fund Ltd [1984] A.C. 7–10
626; [1984] 2 W.L.R. 650; [1984] 1 All E.R. 1060;
(1984) 1 B.C.C. 99081; [1984] B.C.L.C. 1; (1984) 81
L.S.G. 1360; (1984) 134 N.L.J. 656; (1984) 128 S.J. 26
HL
Barclays Bank Plc v Grant Thornton UK LLP [2015] 22–48
EWHC 320 (Comm); [2015] 2 B.C.L.C. 537; [2015] 1
C.L.C. 180
Barclays Bank Plc v Stuart Landon Ltd [2001] EWCA Civ 32–30
140; [2002] B.C.C. 917; [2001] 2 B.C.L.C. 316
Baring v Noble (Clayton’s Case) (1816) 1 Mer 572, 35 ER 32–14
781, [1814–23] All ER Rep 1
Barings Plc v Coopers & Lybrand (No.1) [2002] 1 B.C.L.C. 17–37
364
Barings Plc (In Administration) v Coopers & Lybrand 22–49
[1997] B.C.C. 498; [1997] 1 B.C.L.C. 427; [1997]
E.C.C. 372; [1997] I.L.Pr. 576; [1997] P.N.L.R. 179 CA
(Civ Div)
Barings Plc (In Liquidation) v Coopers & Lybrand (No.2).
See Barings Plc (In Liquidation) v Coopers & Lybrand
(No.5)
Barings Plc (In Liquidation) v Coopers & Lybrand (No.4); 22–36, 22–49
Barings Futures (Singapore) Pte Ltd (In Liquidation) v
Mattar (No.3) [2002] 2 B.C.L.C. 364; [2002] Lloyd’s
Rep. P.N. 127; [2002] P.N.L.R. 16 Ch D
Barings Plc (In Liquidation) v Coopers & Lybrand (No.5); 22–39
Barings Futures (Singapore) Pte Ltd (In Liquidation) v
Mattar (No.4) [2002] EWHC 461 (Ch); [2002] 2
B.C.L.C. 410; [2002] Lloyd’s Rep. P.N. 395; [2002]
P.N.L.R. 39
Barings Plc (In Liquidation) v Coopers & Lybrand (No.7); 22–40
Barings Futures (Singapore) PTE Ltd (In Liquidation) v
Mattar (No.4) [2003] EWHC 1319 (Ch); [2003] Lloyd’s
Rep. I.R. 566; [2003] P.N.L.R. 34
Barings Plc (No.5), Re. See Secretary of State for Trade and
Industry v Baker (No.5)
Barleycorn Enterprises Ltd, Re; sub nom Mathias & Davies 32–18
v Down (Liquidator of Barleycorn Enterprises Ltd)
[1970] Ch. 465; [1970] 2 W.L.R. 898; [1970] 2 All E.R.
155; (1970) 114 S.J. 187 CA (Civ Div)
Barlow Clowes International Ltd (In Liquidation) v 16–135
Eurotrust International Ltd [2005] UKPC 37; [2006] 1
W.L.R. 1476; [2006] 1 All E.R. 333; [2006] 1 All E.R.
(Comm) 478; [2006] 1 Lloyd’s Rep. 225; [2005]
W.T.L.R. 1453; (2005–06) 8 I.T.E.L.R. 347; (2005)
102(44) L.S.G. 32; [2006] 1 P. & C.R. DG16
Barn Crown Ltd, Re [1995] 1 W.L.R. 147; [1994] 4 All 33–18
E.R. 42; [1994] B.C.C. 381; [1994] 2 B.C.L.C. 186 Ch
D (Companies Ct)
Barnes v Andrews (1924) 298 F. 614 16–18
Baroness Wenlock v River Dee Co (No.3) (1887) L.R. 36 15–15
Ch. D. 674 Ch D
Barrett v Duckett [1995] B.C.C. 362; [1995] 1 B.C.L.C. 243 17–2

CA (Civ Div)
Barron v Potter; Potter v Berry [1914] 1 Ch. 895 Ch D 14–11
Barrow Borough Transport Ltd, Re [1990] Ch. 227; [1989] 32–30
3 W.L.R. 858; (1989) 5 B.C.C. 646; [1989] B.C.L.C.
653; (1989) 86(42) L.S.G. 39; (1989) 133 S.J. 1513 Ch
D (Companies Ct)
Bath Glass Ltd, Re (1988) 4 B.C.C. 130; [1988] B.C.L.C. 10–11
Bath v Standard Land Co Ltd [1911] 1 Ch. 618 CA 16–7
Batten v Wedgwood Coal & Iron Co (No.1) (1885) L.R. 28 32–18
Ch. D. 317 Ch D
Baume & Co Ltd v AH Moore Ltd (No.1) [1958] Ch. 907; 4–25
[1958] 2 W.L.R. 797; [1958] 2 All E.R. 113; [1958]
R.P.C. 226; (1958) 102 S.J. 329 CA
Baytrust Holdings Ltd v IRC; Thos Firth & John Brown 24–21
(Investments) Ltd v IRC [1971] 1 W.L.R. 1333; [1971]
3 All E.R. 76; [2008] B.T.C. 7044; (1971) 50 A.T.C.
136; [1971] T.R. 111; (1971) 115 S.J. 624 Ch D
BDG Roof Bond Ltd (In Liquidation) v Douglas [2000] 12–5, 15–20
B.C.C. 770; [2000] 1 B.C.L.C. 401; [2000] Lloyd’s
Rep. P.N. 273; [2000] P.N.L.R. 397 Ch D
Beattie v E&F Beattie Ltd [1938] Ch. 708; [1938] 3 All 3–24
E.R. 214 CA
Bechaunaland Exploration Co v London Trading Bank Ltd 31–23
[1898] 2 Q.B. 658 QBD (Comm Ct)
Beconwood Securities Pty Ltd v ANZ Banking Group Ltd 32–3
[2008] FCA 594 Fed Ct (Aus)
Bede Steam Shipping Co Ltd, Re [1917] 1 Ch. 123 CA 27–7
Belcher v Heaney [2013] EWHC 4353 (Ch) 32–40
Bell Group Ltd (In Liquidation) v Westpac Banking Corp 9–14
(No.9) [2008] WASC 239
Bell v Lever Bros Ltd; sub nom Lever Bros Ltd v Bell 16–5, 16–11, 16–42, 16–45, 16–53, 16–
[1932] A.C. 161 HL 100
Bellador Silk Ltd, Re [1965] 1 All E.R. 667 Ch D 20–21
Belmont Finance Corp Ltd v Williams Furniture Ltd [1979] 13–57
Ch.250 CA
Belmont Finance Corp Ltd v Williams Furniture Ltd (No.2) 13–46, 13–52, 13–53, 13–57, 16–136
[1980] 1 All E.R. 393 CA (Civ Div)
Belmont Park Investments Pty Ltd v BNY Corporate 27–21, 33–20
Trustee Services Ltd; Butters v BBC Worldwide Ltd;
sub nom Perpetual Trustee Co Ltd v BNY Corporate
Trustee Services Ltd [2011] UKSC 38; [2012] 1 A.C.
383; [2011] 3 W.L.R. 521; [2011] Bus. L.R. 1266;
[2012] 1 All E.R. 505; [2011] B.C.C. 734; [2012] 1
B.C.L.C. 163; [2011] B.P.I.R. 1223
Benedetti v Sawiris [2013] UKSC 50; [2014] A.C. 938; 14–30
[2013] 3 W.L.R. 351; [2013] 4 All E.R. 253; [2013] 2
All E.R. (Comm) 801; 149 Con. L.R. 1
Benedict v Ratner 268 U.S. 354; 45 S.Ct. 566; 69 L.Ed. 991 32–6
(1925)
Benfield Greig Group Plc, Re. See Nugent v Benfield Greig
Group Plc
Benjamin Cope & Sons Ltd, Re; sub nom Marshall v 32–10
Benjamin Cope & Sons Ltd [1914] 1 Ch. 800 Ch D
Bennett’s Case, 43 E.R. 879; (1854) 5 De G.M. & G. 284 16–26
Ct of Ch
Benson v Heathorn, 62 E.R. 909; (1842) 1 Y. & C. Ch. 326 16–103
Ct of Ch
Bentinck v Fenn; sub nom Cape Breton Co, Re (1887) L.R. 5–15, 5–17, 5–18, 16–62, 16–113
12 App. Cas. 652 HL
Berendt v Bethlehem Steel Corp (1931) 154 A. 321 15–75
Berkeley Applegate (Investment Consultants) Ltd (No.3), 32–18
Re (1989) 5 B.C.C. 803 Ch D (Companies Ct)
Bermuda Cablevision Ltd v Colica Trust Co Ltd [1998] 20–12
A.C. 198; [1998] 2 W.L.R. 82; [1997] B.C.C. 982;
[1998] 1 B.C.L.C. 1; (1997) 141 S.J.L.B. 247 PC
Berry v Tottenham Hotspur Football & Athletic Co Ltd; 27–7
Stewart v Tottenham Hotspur Football & Athletic Co
Ltd [1935] Ch. 718 Ch D
Bersel Manufacturing Co Ltd v Berry [1968] 2 All E.R. 552 14–49
HL
Betts & Co Ltd v Macnaghten [1910] 1 Ch. 430 Ch D 15–47
Bhullar v Bhullar; sub nom Bhullar Bros Ltd, Re [2003] 16–86, 16–92, 16–95, 16–98, 16–127,
EWCA Civ 424; [2003] B.C.C. 711; [2003] 2 B.C.L.C. 20–16
241; [2003] W.T.L.R. 1397; (2003) 147 S.J.L.B. 421;
[2003] N.P.C. 45
Bhullar v Bhullar [2015] EWHC 1943 (Ch); [2016] 1 17–24, 17–27
B.C.L.C. 106
Biggerstaff v Rowatt’s Wharf Ltd; Howard v Rowatt’s 7–20, 32–10
Wharf Ltd [1896] 2 Ch. 93 CA
Bilta (UK) Ltd (In Liquidation) v Nazir; sub nom Jetivia SA 7–2, 7–30, 7–37, 7–40, 7–47, 9–5, 16–
v Bilta (UK) Ltd [2015] UKSC 23; [2016] A.C. 1; 4, 16–126, 22–41
[2015] 2 W.L.R. 1168; [2015] 2 All E.R. 1083; [2015] 2
All E.R. (Comm) 281; [2015] 2 Lloyd’s Rep. 61; [2015]
B.C.C. 343; [2015] 1 B.C.L.C. 443; [2015] B.V.C. 20
Birch v Cropper; sub nom Bridgewater Navigation Co, Re 11–3, 19–2, 23–7
(1889) L.R. 14 App. Cas. 525 HL
Bird Precision Bellows Ltd, Re; sub nom Company 20–19
(No.003420 of 1981), Re [1986] Ch. 658; [1986] 2
W.L.R. 158; [1985] 3 All E.R. 523; (1985) 1 B.C.C.
99467; [1986] P.C.C. 25; (1986) 83 L.S.G. 36; (1986)
130 S.J. 51 CA (Civ Div)
Bisgood v Henderson’s Transvaal Estates Ltd [1908] 1 Ch. 29–24
743 CA
Bishop v Bonham [1988] 1 W.L.R. 742; (1988) 4 B.C.C. 32–38
347; [1988] B.C.L.C. 656; [1988] F.L.R. 282; (1988)
Bishopsgate Investment Management Ltd (In Liquidation) v 16–112
Maxwell (No.1) [1994] 1 All E.R. 261; [1993] B.C.C.
120; [1993] B.C.L.C. 1282 CA (Civ Div)
Black v Smallwood [1966] A.L.R. 744 High Ct (Aus) 5–25
Black White and Grey Cabs Ltd v Fox [1969] N.Z.L.R. 824 14–6
CA (NZ)
Blackspur Group Plc, Re; sub nom Eastaway v Secretary of 10–7
State for Trade and Industry [2007] EWCA Civ 425;
[2007] B.C.C. 550; [2008] 1 B.C.L.C. 153; [2007]
U.K.H.R.R. 739
Blenheim Leisure (Restaurants) Ltd (No.2), Re [2000] 30–33
B.C.C. 821; (1999) 96(40) L.S.G. 42; (1999) 143
S.J.L.B. 248 Ch D
Bloom v National Federation of Discharged Soldiers (1918) 2–18
35 T.L.R. 50 CA
Bloom v Pensions Regulator [2013] UKSC 52; [2014] A.C. 33–24
209; [2013] 3 W.L.R. 504; [2013] 4 All E.R. 887;
[2013] Bus. L.R. 1056; [2013] B.C.C. 624; [2013] 2
B.C.L.C. 135; [2013] B.P.I.R. 866; [2013] Pens. L.R.
299
Bloomenthal v Ford; sub nom Veuve Monnier et Ses Fils 27–6
Ltd (In Liquidation), Re; Veuve Monnier et Ses Fils Ltd
Ex p. Bloomenthal, Re [1897] A.C. 156 HL
Blue Arrow, Re (1987) 3 B.C.C. 618; [1987] B.C.L.C. 585; 20–8
[1988] P.C.C. 306 Ch D (Companies Ct)
Blue Metal Industries Ltd v RW Dilley [1970] A.C. 827; 28–70
[1969] 3 W.L.R. 357; [1969] 3 All E.R. 437; (1969) 113
S.J. 448 PC (Aus)
Blue Note Enterprises Ltd, Re [2001] 2 B.C.L.C. 427 Ch D 30–33
(Companies Ct)
Bluebrook Ltd, Re; Spirecove Ltd, Re; IMO (UK) Ltd, Re 29–10
[2009] EWHC 2114 (Ch); [2010] B.C.C. 209; [2010] 1
B.C.L.C. 338
BNY Corporate Trustee Services Ltd v Eurosail-UK 2007- 33–5
3BL Plc [2013] UKSC 28; [2013] 1 W.L.R. 1408;
[2013] 3 All E.R. 271; [2013] 2 All E.R. (Comm) 531;
[2013] Bus. L.R. 715; [2013] B.C.C. 397; [2013] 1
B.C.L.C. 613
Boardman v Phipps; sub nom Phipps v Boardman [1967] 2 16–60, 16–90, 16–114
A.C. 46; [1966] 3 W.L.R. 1009; [1966] 3 All E.R. 721;
(1966) 110 S.J. 853 HL
Bolitho (Deceased) v City and Hackney HA [1998] A.C. 21–17
232; [1997] 3 W.L.R. 1151; [1997] 4 All E.R. 771;
[1998] P.I.Q.R. P10; [1998] Lloyd’s Rep. Med. 26;
(1998) 39 B.M.L.R. 1; [1998] P.N.L.R. 1; (1997) 94(47)
L.S.G. 30; (1997) 141 S.J.L.B. 238 HL
Bolton (Engineering) Co Ltd v Graham & Sons. See HL
Bolton Engineering Co Ltd v TJ Graham & Sons Ltd
Bond Worth Ltd, Re [1980] Ch. 228; [1979] 3 W.L.R. 629; 32–3, 32–26
[1979] 3 All E.R. 919; (1979) 123 S.J. 216 Ch D
Bonham-Carter v Situ Ventures Ltd [2013] EWCA Civ 47; 15–19, 15–20, 15–63
[2014] B.C.C. 125
Borden (UK) Ltd v Scottish Timber Products Ltd [1981] 32–26
Ch. 25; [1979] 3 W.L.R. 672; [1979] 3 All E.R. 961;
[1980] 1 Lloyd’s Rep. 160; (1979) 123 S.J. 688 CA
(Civ Div)
Borland’s Tr v Steel Bros & Co Ltd [1901] 1 Ch. 279 Ch D 3–19, 19–8, 23–2, 27–21
Borvigilant, The. See Owners of the Borvigilant v Owners
of the Romina G
Boulting v Association of Cinematograph Television and 16–36
Allied Technicians [1963] 2 Q.B. 606; [1963] 2 W.L.R.
529; [1963] 1 All E.R. 716; (1963) 107 S.J. 133 CA
Boulton v Jones, 157 E.R. 232; (1857) 2 Hurl. & N. 564; 2–22
(1857) 27 L.J. Ex. 117; (1857) 30 L.T. O.S. 188 Ex Ct
Bovey Hotel Ventures Ltd, Re Unreported 10 June 1982 20–13
CA
Bowman v Secular Society Ltd; sub nom Secular Society 4–35
Ltd v Bowman; Bowman, Re [1917] A.C. 406 HL
Brace v Calder [1895] 2 Q.B. 253 CA 2–22
Bradford Banking Co Ltd v Henry Briggs Son & Co Ltd; 27–11
sub nom Bradford Banking Co Ltd v Briggs & Co;
Bradford Banking Co v Briggs & Co (1887) L.R. 12
App. Cas. 29 HL
Bradford Investments Plc (No.1), Re [1990] B.C.C. 740; 11–16, 23–8, 31–2
[1991] B.C.L.C. 224 Ch D (Companies Ct)
Bradford Investments Plc (No.2), Re [1991] B.C.C. 379; 11–18
Bradford Third Equitable Benefit Building Society v 22–44
Borders [1941] 2 All E.R. 205; 110 L.J. Ch. 123 HL
Brady v Brady [1989] A.C. 755; [1988] 2 W.L.R. 1308; 9–13, 13–46, 13–53, 13–54, 13–57, 16–
[1988] 2 All E.R. 617; (1988) 4 B.C.C. 390; [1988] 37
B.C.L.C. 579; [1988] P.C.C. 316; [1988] 2 F.T.L.R.
181; (1988) 132 S.J. 820 HL
Brand & Harding Ltd (Co. No.554589), Re [2014] EWHC 20–22
247 (Ch)
Bratton Seymour Service Co Ltd v Oxborough [1992] 3–21
B.C.C. 471; [1992] B.C.L.C. 693; [1992] E.G. 28 (C.S.)
CA (Civ Div)
Bray v Ford [1896] A.C. 44 HL 16–52
Braymist Ltd v Wise Finance Co Ltd; sub nom Wise 5–28
Finance Ltd v Braymist Ltd [2002] EWCA Civ 127;
[2002] Ch. 273; [2002] 3 W.L.R. 322; [2002] 2 All E.R.
333; [2002] B.C.C. 514; [2002] 1 B.C.L.C. 415; [2002]
9 E.G. 220 (C.S.); (2002) 99(13) L.S.G. 25; (2002) 146
S.J.L.B. 60; [2002] N.P.C. 25
Breckland Group Holdings Ltd v London and Suffolk 3–25, 14–6, 14–11, 17–3
Properties [1989] B.C.L.C. 100
Breitenfeld UK Ltd v Harrison [2015] EWHC 399 (Ch); 16–52
[2015] 2 B.C.L.C. 275
Brenfield Squash Racquets Club Ltd, Re [1996] 2 B.C.L.C. 20–19
184 Ch D
Brian D Pierson (Contractors) Ltd, Re [1999] B.C.C. 26; 9–9
[2001] 1 B.C.L.C. 275; [1999] B.P.I.R. 18 Ch D
(Companies Ct)
Brian Sheridan Cars Ltd, Re; sub nom Official Receiver v 10–3
Sheridan [1995] B.C.C. 1035; [1996] 1 B.C.L.C. 327
Ch D (Companies Ct)
Bridge v Daley [2015] EWHC 2121 (Ch) 17–18, 17–21
Bridgewater Navigation Co, Re [1891] 2 Ch.317 CA 23–7, 23–8
Briess v Woolley; sub nom Briess v Rosher [1954] A.C. 16–5
333; [1954] 2 W.L.R. 832; [1954] 1 All E.R. 909;
(1954) 98 S.J. 286 HL
Brightlife Ltd, Re [1987] Ch. 200; [1987] 2 W.L.R. 197; 32–9, 32–15, 32–21, 32–22
[1986] 3 All E.R. 673; (1986) 2 B.C.C. 99359; [1986]
P.C.C. 435; (1987) 84 L.S.G. 653; (1987) 131 S.J. 132
Ch D (Companies Ct)
Bristol & West Building Society v Mothew (t/a Stapley & 16–20, 16–52, 16–101
Co); sub nom Mothew v Bristol & West Building
Society [1998] Ch. 1; [1997] 2 W.L.R. 436; [1996] 4
All E.R. 698; [1997] P.N.L.R. 11; (1998) 75 P. & C.R.
241; [1996] E.G. 136 (C.S.); (1996) 146 N.L.J. 1273;
(1996) 140 S.J.L.B. 206; [1996] N.P.C. 126
Bristol Airport Plc v Powdrill; sub nom Paramount Airways 32–2, 32–46
Ltd (No.1), Re [1990] Ch. 744; [1990] 2 W.L.R. 1362;
[1990] 2 All E.R. 493; [1990] B.C.C. 130; [1990]
B.C.L.C. 585; (1990) 87(17) L.S.G. 28 CA (Civ Div)
Britannia Homes Centres Ltd, Re [2001] 2 B.C.L.C. 63 CA 10–3
(Civ Div)
British & Commonwealth Holdings Plc v Barclays Bank 12–9, 13–28, 13–49, 29–11
Plc [1996] 1 W.L.R. 1; [1996] 1 All E.R. 381; [1996] 5
Bank. L.R. 47; [1995] B.C.C. 1059; [1996] 1 B.C.L.C.
1; (1995) 139 S.J.L.B. 194 CA (Civ Div)
British Airways Board v Parish [1979] 2 Lloyd’s Rep. 361; 9–20
(1979) 123 S.J. 319 CA (Civ Div)
British American Nickel Corp Ltd v MJ O’Brien Ltd [1927] 31–30, 31–31
A.C. 369 PC (Can)
British Asbestos Co Ltd v Boyd [1903] 2 Ch. 439 Ch D 7–7
British Association of Glass Bottle Manufacturers v 4–36
Nettlefold [1911] 27 T.L.R. 527
British Diabetic Association v Diabetic Society Ltd [1995] 4–25
4 All E.R. 812; [1996] F.S.R. 1 Ch D
British Eagle International Airlines Ltd v Compagnie 33–20, 33–23
Nationale Air France [1975] 1 W.L.R. 758; [1975] 2 All
E.R. 390; [1975] 2 Lloyd’s Rep. 43; (1975) 119 S.J. 368
HL
British Equitable Assurance Co Ltd v Baily; sub nom Baily 19–27
v British Equitable Assurance Co [1904] 1 Ch. 374 CA
British India Steam Navigation Co v IRC (1880–81) L.R. 7 31–6
Q.B.D. 165 QBD
British Midland Tool Ltd v Midland International Tooling 16–101
Ltd [2003] EWHC 466 (Ch); [2003] 2 B.C.L.C. 523
British Murac Syndicate Ltd v Alperton Rubber Co Ltd 19–27
[1915] 2 Ch. 186 Ch D
British Racing Drivers Club Ltd v Hextall Erskine & Co 16–70
[1996] 3 All E.R. 667; [1996] B.C.C. 727; [1997] 1
B.C.L.C. 182; [1996] P.N.L.R. 523 Ch D
British Telecommunications Plc v One in a Million Ltd; 4–26
Marks & Spencer Plc v One in a Million Ltd; Virgin
Enterprises Ltd v One in a Million Ltd; J Sainsbury Plc
v One in a Million Ltd; Ladbroke Group Plc v One in a
Million Ltd [1999] 1 W.L.R. 903; [1998] 4 All E.R.
476; [1999] E.T.M.R. 61; [1997–98] Info. T.L.R. 423;
[1998] I.T.C.L.R. 146; [2001] E.B.L.R. 2; [1999] F.S.R.
1; [1998] Masons C.L.R. 165; (1998) 95(37) L.S.G. 37;
(1998) 148 N.L.J. 1179 CA (Civ Div)
British Thomson Houston Co Ltd v Federated European 7–21
Bank Ltd [1932] 2 K.B. 176 CA
British Thomson Houston Co Ltd v Sterling Accessories 7–35
Ltd; British Thomson Houston Co Ltd v Crowther &
Osborn Ltd [1924] 2 Ch. 33 Ch D
British Union for the Abolition of Vivisection, Re [1995] 2 15–54
B.C.L.C. 1 Ch D
British Waggon Co v Lea & Co; Parkgate Waggon Co v 2–22
Lea & Co (1879–80) L.R. 5 Q.B.D. 149 QBD
Brook v Masters. See Brooks v Armstrong 9–6
Brooks v Armstrong; sub nom Brook v Masters [2015] 16–15
EWHC 2289 (Ch); [2015] B.C.C. 661; [2016] B.P.I.R.
272
Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch. 290 19–8, 19–9, 19–11
Ch D
Brumark Investments Ltd, Re; sub nom IRC v Agnew; 32–21, 32–22, 32–23
Agnew v IRC [2001] UKPC 28; [2001] 2 A.C. 710;
[2001] 3 W.L.R. 454; [2001] Lloyd’s Rep. Bank. 251;
[2001] B.C.C. 259; [2001] 2 B.C.L.C. 188
Brumder v Motornet Service and Repairs Ltd [2013] 16–15, 16–17
EWCA Civ 195; [2013] 1 W.L.R. 2783; [2013] 3 All
E.R. 412; [2013] B.C.C. 381; [2013] 2 B.C.L.C. 58;
[2013] I.C.R. 1069; [2013] P.I.Q.R. P13; (2013)
157(38) S.J.L.B. 41
Brunningshausen v Glavanics (1999) 46 N.S.W.L.R. 538 16–6
CA (NSW)
Brunton v Electrical Engineering Corp [1892] 1 Ch. 434 Ch 32–11
D
Bryanston Finance Ltd v De Vries (No.2) [1976] Ch. 63; 33–6
[1976] 2 W.L.R. 41; [1976] 1 All E.R. 25; (1975) 119
S.J. 709 CA (Civ Div)
BTH v Federated European Bank. See British Thomson
Houston Co Ltd v Federated European Bank Ltd
BTR Plc, Re [1999] 2 B.C.L.C. 675 Ch D (Companies Ct) 29–8
BTR Plc (Leave to Appeal), Re [2000] 1 B.C.L.C. 740 CA 29–3, 29–11
(Civ Div)
Buchler v Talbot; sub nom Leyland DAF Ltd, Re [2004] 9–10, 32–3, 32–18, 32–38
UKHL 9; [2004] 2 A.C. 298; [2004] 2 W.L.R. 582;
[2004] 1 All E.R. 1289; [2004] B.C.C. 214; [2004] 1
B.C.L.C. 281; (2004) 101(12) L.S.G. 35; (2004) 154
N.L.J. 381; (2004) 148 S.J.L.B. 299
Buenos Ayres Great Southern Ry Co Ltd, Re; sub nom 23–8
Buenos Ayres Great Southern Ry Co Ltd v Preston
[1947] Ch. 384; [1947] 1 All E.R. 729; [1948] L.J.R.
131; 176 L.T. 468 Ch D
Bugle Press, Re; sub nom Houses & Estates Ltd, Re; HC 8–12, 28–74
Treby’s Application [1961] Ch. 270; [1960] 3 W.L.R.
956; [1960] 3 All E.R. 791; (1960) 104 S.J. 1057 CA
Burberry Group Plc v Fox-Davies [2015] EWHC 222 (Ch); 27–18
[2015] 2 B.C.L.C. 66
Burge v Haycock [2001] EWCA Civ 900; [2002] R.P.C. 28 4–25
Burgess v Purchase & Sons (Farms) Ltd [1983] Ch. 216; 27–7
[1983] 2 W.L.R. 361; [1983] 2 All E.R. 4 Ch D
Burgoine v Waltham Forest LBC [1997] B.C.C. 347; 16–128
[1997] 2 B.C.L.C. 612 Ch D
Burkinshaw v Nicolls; sub nom British Farmers Pure 27–6
Linseed Cake Co, Re (1877–78) L.R. 3 App. Cas. 1004
HL
Burland v Earle [1902] A.C. 83 PC (Can) 5–18, 16–113, 16–122, 16–124, 19–4,
23–8
Burry & Knight Ltd, Re [2014] EWCA Civ 604; [2014] 1 19–11, 27–18
W.L.R. 4046; [2015] 1 All E.R. 37; [2014] B.C.C. 393;
[2015] 1 B.C.L.C. 61
Bushell v Faith [1970] A.C. 1099; [1970] 2 W.L.R. 272; 14–51, 15–44, 19–19, 19–24, 20–7
[1970] 1 All E.R. 53; (1970) 114 S.J. 54 HL
Byblos Bank SAL v Rushingdale Ltd SA; Byblos Bank 32–37
SAL v Barrett; Byblos Bank SAL v Khudhairy; sub
nom Rushingdale SA v Byblos Bank SAL (1986) 2
B.C.C. 99509; [1987] B.C.L.C. 232; [1986] P.C.C. 249
CA (Civ Div)
Byng v London Life Association Ltd [1990] Ch. 170; 15–55, 15–82, 15–83
[1989] 2 W.L.R. 738; [1989] 1 All E.R. 560; (1989) 5
B.C.C. 227; [1989] B.C.L.C. 400; [1989] P.C.C. 190;
(1989) 86(16) L.S.G. 35; (1989) 139 N.L.J. 75; (1989)
C Evans & Son Ltd v Spritebrand Ltd [1983] Q.B. 310; 7–36
[1985] 1 W.L.R. 317; [1985] 2 All E.R. 415; (1985) 1
B.C.C. 99316; [1985] P.C.C. 109; [1985] F.S.R. 267;
(1985) 82 L.S.G. 606; (1985) 129 S.J. 189 CA (Civ
Div)
Cabra Estates Plc v Fulham Football Club. See Fulham
Football Club Ltd v Cabra Estates Plc
Cadbury Schweppes Plc v Halifax Share Dealing Ltd 27–6
[2006] EWHC 1184 (Ch); [2006] B.C.C. 707; [2007] 1
B.C.L.C. 497; (2006) 103(24) L.S.G. 29; (2006) 150
S.J.L.B. 739
Cadbury Schweppes Plc v IRC (C–196/04) [2007] Ch. 30; 6–24
[2006] 3 W.L.R. 890; [2006] S.T.C. 1908; [2006]
E.C.R. I-7995; [2007] 1 C.M.L.R. 2; [2007] All E.R.
(EC) 153; [2006] C.E.C. 1026; [2008] B.T.C. 52; 9
I.T.L. Rep. 89; [2006] S.T.I. 2201 ECJ (Grand
Chamber)
Calgary and Edmonton Land Co Ltd (In Liquidation), Re 29–4
[1975] 1 W.L.R. 355; [1975] 1 All E.R. 1046; (1974)
119 S.J. 150 Ch D
Calmex Ltd, Re [1989] 1 All E.R. 485; (1988) 4 B.C.C. 4–23
761; [1989] B.C.L.C. 299; [1989] P.C.C. 233 Ch D
(Companies Ct)
Canada Safeway Ltd v Thompson [1951] 3 D.L.R. 295 16–136
Canadian Aero Service v O’Malley [1973] 40 D.L.R. (3d) 16–11, 16–92, 16–93, 16–94, 16–95,
371 Sup Ct (Can) 16–101
Canadian Land Reclaiming & Colonizing Co, Re; sub nom 16–8
Coventry & Dixon’s Case (1880) L.R. 14 Ch. D. 660
CA
Candler v Crane Christmas & Co [1951] 2 K.B. 164; [1951] 22–46
1 All E.R. 426; [1951] 1 T.L.R. 371; (1951) 95 S.J. 171
CA
Cane v Jones [1980] 1 W.L.R. 1451; [1981] 1 All E.R. 533; 3–22, 15–19
(1980) 124 S.J. 542 Ch D
Caparo Industries Plc v Dickman [1990] 2 A.C. 605; [1990] 22–32, 22–45, 22–46, 22–7, 22–50, 22–
2 W.L.R. 358; [1990] 1 All E.R. 568; [1990] B.C.C. 51, 26–26, 28–64
164; [1990] B.C.L.C. 273; [1990] E.C.C. 313; [1955–
95] P.N.L.R. 523; (1990) 87(12) L.S.G. 42; (1990) 140
N.L.J. 248; (1990) 134 S.J. 494 HL
Cape Breton Co, Re. See Bentinck v Fenn
Capital Cameras Ltd v Harold Lines Ltd [1991] 1 W.L.R. 32–10
54; [1991] 3 All E.R. 389; [1991] B.C.C. 228; [1991]
B.C.L.C. 884 Ch D
Cardiff Savings Bank, Re; sub nom Marquis of Bute’s Case 16–15
[1892] 2 Ch. 100 Ch D
Carecraft Construction Co Ltd, Re [1994] 1 W.L.R. 172; 10–2
[1993] 4 All E.R. 499; [1993] B.C.C. 336; [1993]
B.C.L.C. 1259 Ch D (Companies Ct)
Cargill v Bower (No.2) (1878–79) L.R. 10 Ch. D. 502 Ch D 7–35
Cargo Agency Ltd, Re [1992] B.C.C. 388; [1992] B.C.L.C. 10–3
Carl Zeiss Stiftung v Rayner & Keeler Ltd (Pleadings: 4–5
Striking Out) [1970] Ch. 506; [1969] 3 W.L.R. 991;
[1969] 3 All E.R. 897; [1969] R.P.C. 194; (1969) 113
S.J. 922 Ch D
Carlton Holdings, Re; sub nom Worster v Priam 28–73
Investments, Ltd [1971] 1 W.L.R. 918; [1971] 2 All
E.R. 1082; (1971) 115 S.J. 301 Ch D
Carney v Herbert [1985] A.C. 301; [1984] 3 W.L.R. 1303; 13–57
[1985] 1 All E.R. 438; (1984) 81 L.S.G. 3500 PC (Aus)
Carrington Viyella Plc, Re (1983) 1 B.C.C. 98951 Ch D 20–14
Carruth v ICI Ltd; sub nom ICI Ltd, Re [1937] A.C. 707 15–75, 15–84
HL
Cartesio Oktató és Szolgáltató Bt (C–210/06); sub nom 6–24, 6–25
Application Brought by Cartesio Oktató és Szolgáltató
Bt (C–210/06) [2009] Ch. 354; [2009] 3 W.L.R. 777;
[2009] Bus. L.R. 1233; [2009] All E.R. (EC) 269;
[2008] E.C.R. I–9641; [2009] B.C.C. 232; [2010] 1
B.C.L.C. 523; [2009] 1 C.M.L.R. 50; [2009] C.E.C. 557
Cartmell’s Case, Re; sub nom County Palatine Loan and 16–34
Discount Co Re v Cartmell’s Case; County Palatine
Loan and Discount Co, Re (1873–74) L.R. 9 Ch. App.
691 CA
CAS (Nominees) Ltd v Nottingham Forest FC Plc [2002] 20–12
B.C.C. 145; [2002] 1 B.C.L.C. 613 Ch D (Companies
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Castell & Brown Ltd, Re; sub nom Roper v Castell & 32–10, 32–11
Brown Ltd [1898] 1 Ch. 315 Ch D
Castiglione’s Will Trusts, Re; sub nom Hunter v Mackenzie 13–5
[1958] Ch. 549; [1958] 2 W.L.R. 400; [1958] 1 All E.R.
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Catalinas Warehouses & Mole Co Ltd, Re [1947] 1 All E.R. 23–8
51 Ch D
Cavendish Square Holdings BV v Makdessi. See Makdessi
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Cedarwood Productions Ltd, Re; sub nom Secretary of 10–12
State for Trade and Industry v Rayna [2001] 2 B.C.L.C.
48; (2001) 98(20) L.S.G. 42 Ch D
Celtic Extraction Ltd (In Liquidation), Re; Bluestone 33–16
Chemicals Ltd v Environment Agency; sub nom
Official Receiver (as Liquidator of Celtic Extraction Ltd
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[2001] Ch. 475; [2000] 2 W.L.R. 991; [1999] 4 All E.R.
684; [2000] B.C.C. 487; [1999] 2 B.C.L.C. 555; [2000]
Env. L.R. 86; [1999] B.P.I.R. 986; [1999] 3 E.G.L.R.
21; [1999] 46 E.G. 187; (1999) 96(32) L.S.G. 33;
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Central and Eastern Trust Co v Irving Oil Ltd (1980) 110 13–47
D.L.R. (3d) 257 Sup Ct (Can)
Centros Ltd v Erhvervs- og Selskabsstyrelsen (C–212/97) 6–4, 6–22
[2000] Ch. 446; [2000] 2 W.L.R. 1048; [2000] All E.R.
(EC) 481; [1999] E.C.R. I–1459; [1999] B.C.C. 983;
[2000] 2 B.C.L.C. 68; [1999] 2 C.M.L.R. 551; [2000]
C.E.C. 290
Champagne Perrier-Jouet SA v HH Finch Ltd [1982] 1 27–10, 27–11
W.L.R. 1359; [1982] 3 All E.R. 713; (1983) 80 L.S.G.
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Chan v Zacharia (1984) 154 CLR 178 High Ct (Aust) 16–115
Chandler v Cape Plc [2012] EWCA Civ 525; [2012] 1 8–8
W.L.R. 3111; [2012] 3 All E.R. 640; [2012] I.C.R.
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Channel Collieries Trust Ltd v Dover St Margaret’s & 7–7
Martin Mill Light Ry Co [1914] 2 Ch. 506 CA
Charles Forte Investments v Amanda [1964] Ch. 240; 27–7, 33–6
[1963] 3 W.L.R. 662; [1963] 2 All E.R. 940; (1963) 107
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Charnley Davies Ltd (No.2), Re [1990] B.C.C. 605; [1990] 20–15, 20–16
Charterbridge Corp v Lloyds Bank Ltd [1970] Ch. 62; 9–14, 16–42
[1969] 3 W.L.R. 122; [1969] 2 All E.R. 1185; [1969] 2
Lloyd’s Rep. 24; (1968) 113 S.J. 465 Ch D
Charterhouse Capital Ltd, Re [2015] EWCA Civ 536; 16–6, 19–8, 19–9, 19–11, 28–69
[2015] B.C.C. 574; [2015] 2 B.C.L.C. 627
Charterhouse Investment Trust v Tempest Diesels Ltd 13–53
(1985) 1 B.C.C. 99544; [1986] B.C.L.C. 1 Ch D
Chartmore Ltd, Re [1990] B.C.L.C. 673 Ch D 10–3
Chase Manhattan Equities Ltd v Goodman [1991] B.C.C. 30–10, 30–54
308; [1991] B.C.L.C. 897 Ch D
Chaston v SWP Group Plc [2002] EWCA Civ 1999; [2003] 13–46, 13–48, 13–49, 13–55, 13–57
B.C.C. 140; [2003] 1 B.C.L.C. 675
Chatterley-Whitfield Collieries Ltd, Re. See Prudential
Assurance Co Ltd v Chatterley–Whitfield Collieries Ltd
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] 32–12
1 A.C. 472; [1992] 2 W.L.R. 108; [1991] 4 All E.R.
989; [1992] B.C.C. 98; [1992] B.C.L.C. 371; (1992)
89(1) L.S.G. 32; (1991) 135 S.J.L.B. 205; [1991] N.P.C.
119 PC (NZ)
Chesterfield Catering Co Ltd, Re [1977] Ch. 373; [1976] 3 20–21
W.L.R. 879; [1976] 3 All E.R. 294; (1976) 120 S.J. 817
Ch D
Chesterfield United Inc, Re [2012] EWHC 244 (Ch); [2012] 33–7
B.C.C. 786; [2013] 1 B.C.L.C. 709
Chez Nico (Restaurants) Ltd, Re [1991] B.C.C. 736; [1992] 16–6, 28–71, 28–74
B.C.L.C. 192 Ch D
Child v Hudson’s Bay Co, 24 E.R. 702; (1723) 2 P. Wms. 23–1
207 Ct of Ch
China and South Seas Bank Ltd v Tan [1990] 1 A.C. 536; 32–37
[1990] 2 W.L.R. 56; [1989] 3 All E.R. 839; [1990] 1
Lloyd’s Rep. 113; (1989) 86(46) L.S.G. 37; (1989) 139
N.L.J. 1669; (1990) 134 S.J. 165 PC (HK)
Choppington Collieries Ltd v Johnson [1944] 1 All E.R. 15–65
762 CA
Cinematic Finance Ltd v Ryder [2010] EWHC 3387 (Ch); 17–21
[2010] All E.R. (D) 283; [2012] B.C.C. 797
Citco Banking Corp NV v Pusser’s Ltd [2007] UKPC 13; 19–9, 19–10, 19–11
[2007] Bus. L.R. 960; [2007] B.C.C. 205; [2007] 2
B.C.L.C. 483
Citibank NA v MBIA Assurance SA; sub nom Citibank NA 31–29
v QVT Financial LP [2007] EWCA Civ 11; [2007] 1
All E.R. (Comm) 475; [2008] 1 B.C.L.C. 376; [2007] 1
C.L.C. 113
City & County Investment Co, Re (1879–80) L.R. 13 Ch. 29–25
D. 475 CA
City Equitable Fire Insurance Co Ltd, Re [1925] Ch. 407; 16–15, 16–17, 16–21, 16–125
[1924] All E.R. Rep. 485 CA
City Index Ltd v Gawler; sub nom Charter Plc v City Index 16–135
Ltd [2007] EWCA Civ 1382; [2008] Ch. 313; [2008] 2
W.L.R. 950; [2008] 3 All E.R. 126; [2008] 2 All E.R.
(Comm) 425; [2007] 2 C.L.C. 968; [2008] P.N.L.R. 16;
[2008] W.T.L.R. 1773; (2008) 105(2) L.S.G. 27
City Investment Centres Ltd, Re [1992] B.C.L.C. 956 10–11
Civil Service Co-operative Society v Chapman [1914] 30 9–20
T.L.R. 679
CL Nye Ltd, Re [1971] Ch. 442; [1970] 3 W.L.R. 158; 32–32
[1970] 3 All E.R. 1061; (1970) 114 S.J. 413 CA (Civ
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Clark v Cutland [2003] EWCA Civ 810; [2004] 1 W.L.R. 20–16
783; [2003] 4 All E.R. 733; [2004] B.C.C. 27; [2003] 2
B.C.L.C. 393; [2003] O.P.L.R. 343; [2003] Pens. L.R.
179; [2004] W.T.L.R. 629; [2003] W.T.L.R. 1413;
(2003) 147 S.J.L.B. 781
Clark v Urquhart; Stracey v Urquhart; sub nom Urquhart v 25–33
Clark; Urquhart v Stracey [1930] A.C. 28; (1929) 34 Ll.
L. Rep. 359 HL
Clark v Workman [1920] 1 Ir.R. 107 16–35
Clark Boyce v Mouat [1994] 1 A.C. 428; [1993] 3 W.L.R. 16–52
1021; [1993] 4 All E.R. 268; (1993) 143 N.L.J. 1440;
(1993) 137 S.J.L.B. 231; [1993] N.P.C. 128 PC (NZ)
Clay Hill Brick Co v Rawlings [1934] 4 All E.R. 100 7–20, 7–21
Claygreen Ltd, Re. See Romer–Ormiston v Claygreen Ltd
Clayton’s Case. See Baring v Noble, Clayton’s Case
Clenaware Systems Ltd, Re. See Harris v Secretary of State
for Business, Innovation and Skills
Cleveland Trust Plc, Re [1991] B.C.C. 33; [1991] B.C.L.C. 11–20, 12–2, 12–5, 12–8, 27–19
Cloverbay Ltd (Joint Administrators) v Bank of Credit and 18–14, 32–38
Commerce International SA; sub nom Cloverbay Ltd
(No.2), Re [1991] Ch. 90; [1990] 3 W.L.R. 574; [1991]
1 All E.R. 894; [1990] B.C.C. 414; [1991] B.C.L.C. 135
CA (Civ Div)
Clydebank Football Club Ltd v Steedman, 2002 S.L.T. 109; 12–10
2000 G.W.D. 31–1217 OH
CMS Dolphin Ltd v Simonet [2002] B.C.C. 600; [2001] 2 16–94, 16–101, 16–114, 16–137
B.C.L.C. 704; [2001] Emp. L.R. 895 Ch D
Cohen v Selby; sub nom Simmon Box (Diamonds) Ltd, Re 16–18, 17–2
[2002] B.C.C. 82; [2001] 1 B.C.L.C. 176 CA (Civ Div)
Coleman v Myer [1977] 2 N.Z.L.R. 225 CA (NZ) 16–6
Coleman Taymar Ltd v Oakes [2001] 2 B.C.L.C. 749; 16–111
(2001) 98(35) L.S.G. 32; (2001) 145 S.J.L.B. 209 Ch D
Colin Gwyer & Associates Ltd v London Wharf 9–14, 9–15
(Limehouse) Ltd; Eaton Bray Ltd v Palmer [2002]
EWHC 2748 (Ch); [2003] B.C.C. 885; [2003] 2
B.C.L.C. 153; [2003] B.P.I.R. 1099; (2003) 100(7)
L.S.G. 34
Collen v Wright, 120 E.R. 241; (1857) 8 El. & Bl. 647 Ex 7–30
Ct
Colonial Bank v Cady; London Chartered Bank of Australia 27–10
v Cady; sub nom Williams v Colonial Bank; Williams v
London Chartered Bank of Australia (1890) L.R. 15
App. Cas. 267 HL
Colonial Bank v Whinney (1886) L.R. 11 App. Cas. 426 23–1
HL
Colonial Trusts Corp Ex p. Bradshaw, Re (1880) L.R. 15 32–6
Ch. D. 465 Ch D
Comet Group Ltd (In Liquidation), Re [2014] EWHC 3477 33–7
(Ch); [2015] B.P.I.R. 1
Commissioners of HM Revenue and Customs v Holland.
See Revenue and Customs Commissioners v Holland
Compania de Electricidad de la Provincia de Buenos Aires 3–18
Ltd, Re [1980] Ch. 146; [1979] 2 W.L.R. 316; [1978] 3
All E.R. 668; (1978) 122 S.J. 14 Ch D
Company, Re (1988) 4 B.C.L.C. 80 20–8
Company (No.00996 of 1979), Re. See Racal
Communications Ltd, Re
Company (No.003729 of 1982), Re [1984] 1 W.L.R. 1090; 33–5
[1984] 3 All E.R. 78; (1984) 81 L.S.G. 2693; (1984)
128 S.J. 580 Ch D
Company (No.004475 of 1982), Re [1983] Ch. 178; [1983] 2–21, 20–4, 20–13
2 W.L.R. 381; [1983] 2 All E.R. 36; [1983] B.C.L.C.
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Company (No.007623 of 1984), Re (1986) 2 B.C.C. 99191; 24–6
Company (No.005287 of 1985), Re [1986] 1 W.L.R. 281; 20–14
[1986] 2 All E.R. 253; (1985) 1 B.C.C. 99586; (1986)
83 L.S.G. 1058; (1985) 130 S.J. 202 Ch D (Companies
Ct)
Company (No.007828 of 1985), Re (1986) 2 B.C.C. 98951 20–2
Ch D
Company (No.008699 of 1985), Re (1986) 2 B.C.C. 99024; 2–21, 16–6, 20–4, 20–12, 20–13, 28–34
[1986] P.C.C. 296; [1986] B.C.L.C. 382 Ch D
Company (No.00477 of 1986), Re [1986] B.C.L.C. 376; 20–4
1986) 2 B.C.C. 99171 Ch D
Company (No.003160 of 1986), Re [1986] B.C.L.C. 391; 20–2
(1986) 2 B.C.C. 99276 Ch D (Companies Ct)
Company (No.003843 of 1986), Re (1987) 3 B.C.C. 624; 20–8
Company (No.00370 of 1987), Ex p. Glossop, Re; sub nom 20–12, 20–14
Company (No.00370 of 1987), Re, Ex p. Glossop
[1988] 1 W.L.R. 1068; (1988) 4 B.C.C. 506; [1988]
B.C.L.C. 570; [1988] P.C.C. 351; (1988) 85(41) L.S.G.
43; (1988) 132 S.J. 1388 Ch D (Companies Ct)
Company (No.005009 of 1987) Ex p. Copp, Re (1988) 4 9–7
B.C.C. 424; [1989] B.C.L.C. 13 Ch D (Companies Ct)
Company (No.006834 of 1988) Ex p. Kremer, Re (1989) 5 20–18
Company (No.008126 of 1989), Re. See Hailey Group, Re
Company (No.008790 of 1990), Re [1992] B.C.C. 11; 33–5
[1991] B.C.L.C. 561 Ch D
Company (No.00330 of 1991) Ex p. Holden, Re [1991] 20–18
Company (No.007936 of 1994), Re [1995] B.C.C. 705 Ch 20–21
D (Companies Ct)
Company (No.000836 of 1995), Re [1996] B.C.C. 432; 20–18
[1996] 2 B.C.L.C. 192 Ch D (Companies Ct)
Company (No.004415 of 1996), Re; Company (No.004413 20–12, 20–21
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[1997] 1 B.C.L.C. 479 Ch D
Concord Trust v Law Debenture Trust Corp Plc [2005] 31–29
UKHL 27; [2005] 1 W.L.R. 1591; [2005] 1 All E.R.
(Comm) 699; [2005] 2 Lloyd’s Rep. 221; [2006] 1
B.C.L.C. 616; [2005] 1 C.L.C. 631; (2005) 155 N.L.J.
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Connelly v RTZ Corp Plc (No.2) [1998] A.C. 854; [1997] 3 8–10
W.L.R. 373; [1997] 4 All E.R. 335; [1997] C.L.C. 1357;
[1997] I.L.Pr. 805; [1998] Env. L.R. 318; (1997) 94(32)
L.S.G. 28; (1997) 147 N.L.J. 1346; (1997) 141 S.J.L.B.
199 HL
Connolly Bros Ltd (No.2), Re; sub nom Wood v Connolly 32–11
Bros Ltd (No.2) [1912] 2 Ch. 25 CA
Consolidated Goldfields of New Zealand, Re [1953] Ch. 33–1
689; [1953] 2 W.L.R. 584; [1953] 1 All E.R. 791;
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Constable v Executive Connections Ltd [2005] EWHC 3 19–7
(Ch); [2005] 2 B.C.L.C. 638
Consumer and Industrial Press Ltd (No.1), Re (1988) 4 32–44
B.C.C. 68; [1988] B.C.L.C. 177; [1988] P.C.C. 436 Ch
D (Companies Ct)
Contex Drouzhba Ltd v Wiseman [2007] EWCA Civ 1201; 7–32
[2008] B.C.C. 301; [2008] 1 B.C.L.C. 631; (2007) 157
N.L.J. 1695
Continental Assurance Co of London Plc (In Liquidation),
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Continental Assurance Co of London Plc (No.4), Re Singer
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Continental Assurance Co of London Plc, Re [1977] 1 10–11
B.C.L.C. 48
Cook v Deeks [1916] 1 A.C. 554 PC (Can) 5–13, 5–18, 16–104, 16–124, 16–127,
20–14
Cooper Chemicals Ltd, Re. See Gerald Cooper Chemicals
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Copecrest Ltd, Re. See Secretary of State for Trade and
Industry v McTighe (No.1)
Cork & Brandon Ry v Cazenove, 116 E.R. 355; (1847) 10 23–1
Q.B. 935 QB
Coroin Ltd, Re [2012] EWCA Civ 179; [2012] B.C.C. 575; 3–21, 16–61, 16–86, 20–8, 20–13, 27–7
[2012] 2 B.C.L.C. 611
Corporate Jet Realisations Ltd, Re. See Green v Chubb
Cosslett (Contractors) Ltd, Re; sub nom Clark 32–2, 32–26
(Administrator of Cosslett (Contractors) Ltd) v Mid
Glamorgan CC [1998] Ch. 495; [1998] 2 W.L.R. 131;
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B.C.L.C. 205; 85 B.L.R. 1 CA (Civ Div)
Costa Rica Ry Co Ltd v Forward [1901] 1 Ch. 746 CA 16–62
Cotronic (UK) Ltd v Dezonie (t/a Wendaland Builders Ltd) 5–26, 5–28
[1991] B.C.C. 200; [1991] B.C.L.C. 721; CA (Civ Div)
Cottrell v King; sub nom TA King (Services) Ltd, Re 27–8
[2004] EWHC 397 (Ch); [2004] B.C.C. 307; [2004] 2
B.C.L.C. 413; [2005] W.T.L.R. 63
Coulthard v Neville Russell (A Firm) [1998] B.C.C. 359; 22–49
[1998] 1 B.C.L.C. 143; [1998] P.N.L.R. 276 CA (Civ
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County Leasing Asset Management Ltd v Hawkes [2015] 33–33
EWCA Civ 1251; [2016] B.C.C. 102
Cousins v International Brick Co [1931] 2 Ch. 90 CA 15–70
Cowan de Groot Properties v Eagle Trust [1992] 4 All E.R. 16–136
700; [1991] B.C.L.C. 1045 Ch D
Cox v Ministry of Justice [2016] UKSC 10; [2016] 2 7–31
W.L.R. 806; [2016] I.C.R. 470; [2016] I.R.L.R. 370;
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Cranleigh Precision Engineering Ltd v Bryant [1965] 1 16–110
W.L.R. 1293; [1964] 3 All E.R. 289; [1966] R.P.C. 81;
(1965) 109 S.J. 830 QBD
Craven-Ellis v Canons Ltd [1936] 2 K.B. 403 CA 14–30
Crawley’s Case. See Peruvian Railways Co, Re
Credit Lyonnais Bank Nederland NV (now Generale Bank 7–33
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Guarantee Department [2000] 1 A.C. 486; [1999] 2
W.L.R. 540; [1999] 1 All E.R. 929; [1999] 1 Lloyd’s
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(1999) 143 S.J.L.B. 89 HL
Cretanor Maritime Co Ltd v Irish Marine Management Ltd 32–10
[1978] 1 W.L.R. 966, CA
Crichton’s Oil Co, Re [1902] 2 Ch. 86 CA 23–8
Grøngaard, Criminal Proceedings against (C–384/02) 28–62
[2005] E.C.R. I–9939; [2006] 1 C.M.L.R. 30; [2006]
C.E.C. 241; [2006] I.R.L.R. 214 ECJ
Criterion Properties Plc v Stratford UK Properties LLC 16–26, 16–27, 16–30, 16–113, 16–136,
[2004] UKHL 28; [2004] 1 W.L.R. 1846; [2004] B.C.C. 16–137, 28–21
570; [2006] 1 B.C.L.C. 729; (2004) 101(26) L.S.G. 27;
(2004) 148 S.J.L.B. 760; [2004] N.P.C. 96 HL
Crompton & Co Ltd, Re; sub nom Player v Crompton & Co 32–8
Ltd [1914] 1 Ch. 954 Ch D
Cryne v Barclays Bank Plc [1987] B.C.L.C. 548 CA (Civ 32–37
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CU Fittings Ltd, Re (1989) 5 B.C.C. 210; [1989] B.C.L.C. 10–11
Cuckmere Brick Co v Mutual Finance [1971] Ch. 949; 32–38
[1971] 2 W.L.R. 1207; [1971] 2 All E.R. 633; (1971) 22
P. & C.R. 624; (1971) 115 S.J. 288 CA (Civ Div)
Cukurova Finance International Ltd v Alfa Telecom Turkey 27–10, 27–15
Ltd [2009] UKPC 19; [2009] Bus. L.R. 1613; [2009] 3
All E.R. 849; [2010] 1 All E.R. (Comm) 1173; [2009] 1
C.L.C. 701; [2009] 3 C.M.L.R. 11 PC
Cukurova Finance International Ltd v Alfa Telecom Turkey 32–39
Ltd [2013] UKPC 2; [2015] 2 W.L.R. 875; [2013] 4 All
E.R. 989
Cullen Investments Ltd v Brown [2015] EWHC 473 (Ch); 17–21
[2015] B.C.C. 539; [2016] 1 B.C.L.C. 491
Cumana Ltd, Re [1986] B.C.L.C. 430 20–14
Cumbrian Newspapers Group Ltd v Cumberland & 19–18, 19–19, 19–27
Westmorland Herald Newspaper & Printing Co Ltd
[1987] Ch. 1; [1986] 3 W.L.R. 26; [1986] 2 All E.R.
816; (1986) 2 B.C.C. 99227; [1987] P.C.C. 12; (1986)
83 L.S.G. 1719; (1986) 130 S.J. 446 Ch D
Currie v Cowdenbeath Football Club Ltd [1992] B.C.L.C. 20–8
1029
Curtain Dream Plc, Re [1990] B.C.L.C. 925Welsh 32–2
Development Agency v Export Finance Co Ltd [1992]
B.C.L.C. 148
Curtis Furnishing Stores Ltd (In Liquidation) v Freedman 13–56
[1966] 1 W.L.R. 1219; [1966] 2 All E.R. 955; (1966)
110 S.J. 600 Ch D
Curtis v Pulbrook [2011] EWHC 167 (Ch); [2011] 1 27–9
B.C.L.C. 638
Customer Systems Plc v Ranson [2012] EWCA Civ 841; 16–11
[2012] I.R.L.R. 769; (2012) 156(26) S.J.L.B. 31
Customs and Excise Commissioners v Hedon Alpha [1981] 16–133
Q.B. 818; [1981] 2 W.L.R. 791; [1981] 2 All E.R. 697;
(1981) 125 S.J. 273 CA (Civ Div)
CVC/Opportunity Equity Partners Ltd v Demarco Almeida 20–18, 20–19, 20–20
[2002] UKPC 16; [2002] B.C.C. 684; [2002] 2 B.C.L.C.
108
Cyona Distributors, Re [1967] Ch. 889; [1967] 2 W.L.R. 9–5
369; [1967] 1 All E.R. 281; (1966) 110 S.J. 943 CA
D’Jan of London Ltd, Re; sub nom Copp v D’Jan [1993] 15–19, 16–15, 16–133
B.C.C. 646; [1994] 1 B.C.L.C. 561 Ch D (Companies
Ct)
D’Nick Holding Plc, Re. See Eckerle v Wickeder
Westfalenstahl GmbH
Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd 19–8
[1920] 2 Ch. 124 Ch D
Daimler Co Ltd v Continental Tyre & Rubber Co (Great 2–19
Britain) Ltd; Continental Tyre & Rubber Co (Great
Britain) Ltd v Thomas Tilling Ltd; sub nom Continental
Tyre & Rubber Co (Great Britain) Ltd v Daimler Co Ltd
[1916] 2 A.C. 307 HL
Daniels v Anderson (1995) 16 A.C.S.R. 607 16–16, 16–17
Daniels v Daniels [1978] Ch. 406; [1978] 2 W.L.R. 73; 16–124
[1978] 2 All E.R. 89; (1977) 121 S.J. 605 Ch D
Danish Mercantile Co v Beaumont [1951] Ch. 680; [1951] 17–5
1 All E.R. 925; (1951) 95 S.J. 300 CA
Daraydan Holdings Ltd v Solland International Ltd [2004] 16–108, 16–115
EWHC 622 (Ch); [2005] Ch. 119; [2004] 3 W.L.R.
1106; [2005] 4 All E.R. 73; [2004] W.T.L.R. 815;
[2004] N.P.C. 49
Darby Ex p. Brougham, Re [1911] 1 K.B. 95 KBD 5–2
Davidson & Tatham v Financial Services Authority (FSM 30–30
Case No.31) 12 October 2006
Davies v United Kingdom (42007/98) [2005] B.C.C. 401; 10–7
[2006] 2 B.C.L.C. 351; (2002) 35 E.H.R.R. 29 ECHR
Davis v Radcliffe [1990] 1 W.L.R. 821; [1990] 2 All E.R. 32–32
536; [1990] B.C.C. 472; [1990] B.C.L.C. 647; (1990)
87(19) L.S.G. 43; (1990) 134 S.J. 1078 HL
Dawson International Plc v Coats Paton Plc (No.1), 1989 16–35
S.L.T. 655; 1989 S.C.L.R. 452; (1989) 5 B.C.C. 405 IH
Dawson International Plc v Coats Paton Plc (No.2); sub 28–36
nom Dawson International Plc v Coats Patons Plc, 1993
S.L.T. 80; [1991] B.C.C. 276 OH
Dawson Print Group, Re (1987) 3 B.C.C. 322; [1987] 10–11
Day v Cook [2001] EWCA Civ 592; [2003] B.C.C. 256; 17–37
[2002] 1 B.C.L.C. 1; [2001] Lloyd’s Rep. P.N. 551;
[2001] P.N.L.R. 32
DC v United Kingdom (39031/97) [2000] B.C.C. 710 10–7, 18–14
ECHR
De Lasteyrie du Saillant v Ministère de l’Economie, des 6–24
Finances et de l’Industrie (C–9/02) [2005] S.T.C. 1722;
[2004] E.C.R. I-2409; [2004] 3 C.M.L.R. 39; [2006]
B.T.C. 105; 6 I.T.L. Rep. 666; [2004] S.T.I. 890 ECJ
(5th Chamber)
Dean v Prince [1954] Ch. 409; [1954] 2 W.L.R. 538; [1954] 27–7
1 All E.R. 749; 47 R. & I.T. 494; (1954) 98 S.J. 215 CA
DEG-Deutsche Investitions und Entwicklungsgesellschaft 16–62, 16–138
mbH v Koshy (Account of Profits: Limitations); sub
nom Gwembe Valley Development Co Ltd (In
Receivership) v Koshy (Account of Profits: Limitations)
[2003] EWCA Civ 1048; [2004] 1 B.C.L.C. 131; [2004]
W.T.L.R. 97; (2003) 147 S.J.L.B. 1086
Deloitte Haskins & Sells v National Mutual Life Nominees 22–46
[1993] A.C. 774; [1993] 3 W.L.R. 347; [1993] 2 All
E.R. 1015; [1993] B.C.L.C. 1174; (1993) 143 N.L.J.
883; (1993) 137 S.J.L.B. 152 PC (NZ)
Denham & Co, Re (1884) L.R. 25 Ch. D. 752 Ch D 16–18
Denis Hilton Ltd, Re [2002] 1 B.C.L.C. 302 Ch D 10–12
Derry v Peek; sub nom Peek v Derry (1889) L.R. 14 App. 21–27, 22–44, 25–32, 25–37
Cas. 337; (1889) 5 T.L.R. 625 HL
Destone Fabrics Ltd, Re [1941] Ch.319 CA 32–14
Devlin v Slough Estates Ltd [1983] B.C.L.C. 497 3–29
DHN Food Distributors v Tower Hamlets LBC; Bronze 8–8, 8–11
Investments Ltd (In Liquidation) v Tower Hamlets
LBC; DHN Food Transport v Tower Hamlets LBC
[1976] 1 W.L.R. 852; [1976] 3 All E.R. 462; 74 L.G.R.
506; (1976) 32 P. & C.R. 240; [1976] J.P.L. 363; (1976)
Diamandis v Wills [2015] EWHC 312 (Ch) 14–30
Diamix Plc, Re; sub nom Fiske Nominees Ltd v Dwyka 28–70, 28–74
Diamond Ltd [2002] EWHC 770 (Ch); [2002] B.C.C.
707; [2002] 2 B.C.L.C. 123
Diamond Resorts (Europe) Ltd, Re [2012] EWHC 3576 29–19
(Ch); [2013] B.C.C. 275
Diamond v Oreamuno (1969) 248 N.E. 2d 910 CA (NY) 30–8

Dimbula Valley (Ceylon) Tea Co Ltd v Laurie [1961] Ch. 12–3, 19–16, 23–8
353; [1961] 2 W.L.R. 253; [1961] 1 All E.R. 769;
(1961) 105 S.J. 129 Ch D
Direct Line Group Ltd v Direct Line Estate Agency Ltd 4–26
[1997] F.S.R. 374 Ch D
Dir Gen of Fair Trading v Pioneer Concrete (UK) Ltd; sub 7–39
nom Supply of Ready Mixed Concrete (No.2), Re
[1995] 1 A.C. 456; [1994] 3 W.L.R. 1249; [1995] 1 All
E.R. 135; [1995] I.C.R. 25; (1995) 92(1) L.S.G. 37;
(1995) 145 N.L.J. 17; [1995] 139 S.J.L.B. 14 HL
Dixon v Kennaway & Co [1900] 1 Ch. 833 Ch D 27–6
DKG Contractors Ltd, Re [1990] B.C.C. 903 Ch D 16–120, 19–6
Dodge v Ford Motor Co (1919) 170 N.W. 66 16–39
Dominion International Group (No.2), Re [1996] 1 20–1
B.C.L.C. 634 Ch D
Dominion Royalty Corp v Goffatt [1935] 4 D.L.R. 736 Sup 5–17
Ct (Can)
Domoney v Godinho [2004] EWHC 328 (Ch); [2004] 2 27–19
B.C.L.C. 15
Dorchester Finance Co v Stebbing [1989] B.C.L.C. 498 Ch 16–15
D
Dorman Long & Co Ltd, Re; South Durham Steel & Iron 15–59, 15–71, 29–11, 31–14
Co Ltd, Re [1934] Ch. 635 Ch D
Double S Printers Ltd (In Liquidation), Re [1999] B.C.C. 32–23
303; [1999] 1 B.C.L.C. 220 District Registry (Leeds)
Douglas Construction Services Ltd, Re (1988) 4 B.C.C. 10–11
553; [1988] B.C.L.C. 397 Ch D (Companies Ct)
Dovey v Cory; sub nom National Bank of Wales Ltd, Re 16–17
[1901] A.C. 477 HL
Downsview Nominees Ltd v First City Corp Ltd; sub nom 32–38, 32–39
First City Corp Ltd v Downsview Nominees Ltd [1993]
A.C. 295; [1993] 2 W.L.R. 86; [1993] 3 All E.R. 626;
[1993] B.C.C. 46; [1994] 2 B.C.L.C. 49; (1992) 89(45)
L.S.G. 26; (1992) 136 S.J.L.B. 324 PC (NZ)
DPP v Kent and Sussex Contractors Co [1944] K.B. 146 7–40
KBD
DR Chemicals Ltd, Re; sub nom Company (No.005134 of 20–19
1986), Re (1989) 5 B.C.C. 39 Ch D (Companies Ct)
Drake v Morgan [1978] I.C.R. 56; [1977] Crim. L.R. 739; 16–131
(1977) 121 S.J. 743 QBD
Dranez Anstalt v Hayek [2002] 1 B.C.L.C. 693 Ch D 16–94
Drax Holdings Ltd, Re; InPower Ltd, Re [2003] EWHC 29–5
2743 (Ch); [2004] 1 W.L.R. 1049; [2004] 1 All E.R.
903; [2004] B.C.C. 334; [2004] 1 B.C.L.C. 10
Drew v HM Advocate, 1996 S.L.T. 1062; 1995 S.C.C.R. 10–3
647 HCJ (Appeal)
Drown v Gaumont-British Picture Corp Ltd [1937] Ch. 402 11–6
Ch D
DTC (CNC) Ltd v Gary Sergeant & Co; sub nom DTC 21–7
(CNC) Ltd v Gary Sargeant & Co; DTC (CNC) Ltd v
Gary Sargent & Co [1996] 1 W.L.R. 797; [1996] 2 All
E.R. 369; [1996] B.C.C. 290; [1996] 1 B.C.L.C. 529 Ch
D
Dubai Aluminium Co Ltd v Salaam; Dubai Aluminium Co 7–31, 9–5
Ltd v Amhurst Brown Martin & Nicholson [2002]
UKHL 48; [2003] 2 A.C. 366; [2002] 3 W.L.R. 1913;
[2003] 1 All E.R. 97; [2003] 2 All E.R. (Comm) 451;
[2003] 1 Lloyd’s Rep. 65; [2003] 1 B.C.L.C. 32; [2003]
1 C.L.C. 1020; [2003] I.R.L.R. 608; [2003] W.T.L.R.
163; (2003) 100(7) L.S.G. 36; (2002) 146 S.J.L.B. 280
Duckwari Plc (No.1), Re; sub nom Duckwari Plc v 16–71
Offerventure Ltd (No.1); Company (No.0032314 of
1992), Re [1995] B.C.C. 89; [1997] 2 B.C.L.C. 713;
[1994] N.P.C. 109 CA (Civ Div)
Duckwari Plc (No.2), Re; sub nom Duckwari Plc v 16–32, 16–60, 16–74
Offerventure Ltd (No.2) [1999] Ch. 253; [1998] 3
W.L.R. 913; [1999] B.C.C. 11; [1998] 2 B.C.L.C. 315;
(1998) 95(22) L.S.G. 28; (1998) 95(20) L.S.G. 36;
(1998) 142 S.J.L.B. 163 CA (Civ Div)
Duckwari Plc (No.3), Re; sub nom Duckwari Plc v 16–74
Offerventure Ltd (No.3) [1999] Ch. 268; [1999] 2
W.L.R. 1059; [1999] 1 B.C.L.C. 168; (1999) 96(4)
L.S.G. 37; (1999) 143 S.J.L.B. 29 CA (Civ Div)
Dunderland Iron Ore Co Ltd, Re [1909] 1 Ch. 446 Ch D 31–12, 31–14
Duomatic Ltd, Re [1969] 2 Ch. 365; [1969] 2 W.L.R. 114; 15–15, 15–17, 15–19
[1969] 1 All E.R. 161; (1968) 112 S.J. 922 Ch D
Dyment v Boyden [2004] EWCA Civ 1586; [2005] 1 13–52
W.L.R. 792; [2005] B.C.C. 79; [2005] 1 B.C.L.C. 163;
[2005] 1 E.G.L.R. 19; [2005] 06 E.G. 142; (2004)
101(48) L.S.G. 25; (2004) 148 S.J.L.B. 1406; [2004]
N.P.C. 176
Eagle Trust Plc v SBC Securities Ltd [1993] 1 W.L.R. 484; 11–18, 16–136
[1992] 4 All E.R. 488; [1991] B.C.L.C. 438 Ch D
Eagle Trust Plc v SBC Securities Ltd (No.2); sub nom 16–136
Eagle Trust Plc v SBCI Swiss Bank Corp Investment
Banking Ltd [1995] B.C.C. 231; [1996] 1 B.C.L.C. 121
Eastaway v Secretary of State for Trade and Industry. See
Blackspur Group Plc, Re
Eastaway v United Kingdom (74976/01) [2006] 2 B.C.L.C. 10–7
361; (2005) 40 E.H.R.R. 17 ECHR
Ebrahimi v Westbourne Galleries Ltd; sub nom Westbourne 2–26, 14–51, 20–4, 20–8, 20–9, 20–19,
Galleries, Re [1973] A.C. 360; [1972] 2 W.L.R. 1289; 20–21
[1972] 2 All E.R. 492; (1972) 116 S.J. 412 HL
Eckerle v Wickeder Westfalenstahl GmbH; sub nom 15–36, 15–38
D’Nick Holding Plc, Re [2013] EWHC 68 (Ch); [2014]
Ch. 196; [2013] 3 W.L.R. 1316; [2014] B.C.C. 1
Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71; 15–77, 16–26, 16–27, 16–29, 16–31,
[2015] Bus. L.R. 1395; [2016] B.C.C. 79; [2016] 1 19–11, 28–51
B.C.L.C. 1
Eddystone Marine Insurance Co, Re [1893] 3 Ch. 9 CA 5–22
Edge v Pensions Ombudsman [2000] Ch. 602; [2000] 3 16–26, 16–43
W.L.R. 79; [1999] 4 All E.R. 546; [2000] I.C.R. 748;
[1999] O.P.L.R. 179; [1999] Pens. L.R. 215; (1999)
96(35) L.S.G. 39; (1999) 149 N.L.J. 1442 CA (Civ Div)
Edinburgh & District Aerated Water Manufacturers 4–36
Defence Association Ltd v Jenkinson & Co (1903) 5 F.
1159; (1903) 11 S.L.T. 240 IH
Edwards v Halliwell [1950] 2 All E.R. 1064; [1950] W.N. 17–5, 17–21
537; (1950) 94 S.J. 803 CA
Edwards v Standard Rolling Stock [1893] 1 Ch. 574 Ch D 32–37
Egyptian International Foreign Trade Co v Soplex
Wholesale Supplies Ltd (The Raffaella)
Ehrmann Bros Ltd, Re; sub nom Albert v Ehrmann Bros 32–29
Ltd [1906] 2 Ch. 697 CA
EIC Services Ltd v Phipps [2004] EWCA Civ 1069; [2005] 7–11, 7–12, 11–7, 11–15, 15–16, 15–19
1 W.L.R. 1377; [2005] 1 All E.R. 338; [2004] B.C.C.
814; [2004] 2 B.C.L.C. 589; (2004) 148 S.J.L.B. 1118
El Sombrero, Re [1958] Ch. 900; [1958] 3 W.L.R. 349; 15–54
[1958] 3 All E.R. 1; (1958) 102 S.J. 601 Ch D
El-Ajou v Dollar Land Holdings Plc (No.1) [1994] 2 All 7–37, 7–41, 7–40, 16–135
E.R. 685; [1994] B.C.C. 143; [1994] 1 B.C.L.C. 464;
[1993] N.P.C. 165 CA (Civ Div)
Electra Private Equity Partners v KPMG Peat Marwick 22–47
[2000] B.C.C. 368; [2001] 1 B.C.L.C. 589; [1999]
Lloyd’s Rep. P.N. 670; [2000] P.N.L.R. 247 CA (Civ
Div)
Elektrim SA v Vivendi Holdings 1 Corp; Law Debenture 31–28
Trust Corp Plc v Vivendi Holdings 1 Corp [2008]
EWCA Civ 1178; [2009] 2 All E.R. (Comm) 213;
[2009] 1 Lloyd’s Rep. 59; [2008] 2 C.L.C. 564
Eley v Positive Government Security Life Assurance Co 3–23, 19–19
Ltd (1875–76) L.R. 1 Ex. D. 88 CA
Elgindata Ltd (No.1), Re [1991] B.C.L.C. 959 20–7, 20–8, 20–19
Elliott v Planet Organic Ltd; sub nom Planet Organic Ltd, 20–20
Re [2000] B.C.C. 610; [2000] 1 B.C.L.C. 366 Ch D
ELS (formerly English Lifestyle), Re; sub nom Ramsbotton 32–10
v Luton BC [1995] Ch. 11; [1994] 3 W.L.R. 616; [1994]
2 All E.R. 833; [1994] B.C.C. 449; [1994] 1 B.C.L.C.
743; [1994] R.A. 363; (1994) 91(23) L.S.G. 27 Ch D
(Companies Ct)
Elsworth Ethanol Co Ltd v Hartley [2014] EWHC 99 16–8
(IPEC); [2015] 1 B.C.L.C. 221
Emerald Supplies Ltd v British Airways Plc [2010] EWCA 2–18
Civ 1284; [2011] Ch. 345; [2011] 2 W.L.R. 203; [2011]
C.P. Rep. 14; [2011] U.K.C.L.R. 20; (2010) 160 N.L.J.
1651
Emma Silver Mining Co v Grant (1879) L.R. 11 Ch. D. 5–3, 5–4
918; (1879) 40 L.T. 804 CA
Emmadart Ltd, Re [1979] Ch. 540; [1979] 2 W.L.R. 868; 32–39, 33–5
[1979] 1 All E.R. 599; (1979) 123 S.J. 15 Ch D
English & Colonial Produce Co Ltd, Re [1906] 2 Ch. 435 3–23, 5–21
CA
English and Scottish Mercantile Investment Co Ltd v 32–11
Brunton; sub nom English and Scottish Mercantile
Investment Trust Ltd v Brunton [1892] 2 Q.B. 700 CA
English, Scottish and Australian Chartered Bank, Re [1893] 29–11
3 Ch. 385 CA
Enviroco Ltd v Farstad Supply A/S; sub nom Farstad 9–24
Supply A/S v Enviroco Ltd [2011] UKSC 16; [2011] 1
W.L.R. 921; [2011] Bus. L.R. 1108; [2011] 3 All E.R.
451; [2011] 2 All E.R. (Comm) 269; [2011] 2 Lloyd’s
Rep. 72; [2011] B.C.C. 511; [2011] 2 B.C.L.C. 165;
(2011) 108(16) L.S.G. 18
Equitable Life Assurance Society (No.2), Re [2002] EWHC 29–8, 29–11
140 (Ch); [2002] B.C.C. 319; [2002] 2 B.C.L.C. 510
Equitable Life Assurance Society v Bowley [2003] EWHC 16–17, 16–133
2263 (Comm); [2003] B.C.C. 829; [2004] 1 B.C.L.C.
180
Equitable Life Assurance Society v Ernst & Young [2003] 22–36, 22–37
EWCA Civ 1114; [2003] 2 B.C.L.C. 603; [2004]
P.N.L.R. 16; (2003) 100(38) L.S.G. 33; (2003) 147
S.J.L.B. 991
Equitable Life Assurance Society v Hyman [2002] 1 A.C. 16–26, 16–43, 16–31, 16–43
408; [2000] 3 W.L.R. 529; [2000] 3 All E.R. 961;
[2001] Lloyd’s Rep. I.R. 99; [2000] O.P.L.R. 101;
[2000] Pens. L.R. 249; (2000) 144 S.J.L.B. 239 HL
Equiticorp International Plc, Re [1989] 1 W.L.R. 1010; 33–5
(1989) 5 B.C.C. 599; [1989] B.C.L.C. 597; (1989)
86(41) L.S.G. 36; (1989) 133 S.J. 1405 Ch D
Eric Holmes (Property) Ltd (In Liquidation), Re [1965] Ch. 32–32
1052; [1965] 2 W.L.R. 1260; [1965] 2 All E.R. 333;
(1965) 109 S.J. 251 Ch D
Erlanger v New Sombrero Phosphate Co; sub nom New 5–10, 5–12, 5–17, 16–62, 16–113
Sombrero Phosphate Co v Erlanger (1877–78) L.R. 3
App. Cas. 1218 HL
Ernest v Nicholls, 10 E.R. 1351; (1857) 6 H.L. Cas. 401; 7–6

(1857) 3 Jur. N.S. 919; (1857) 30 L.T. O.S. 45 HL
Ess Production Ltd (In Administration) v Sully [2005] 9–18, 9–19
EWCA Civ 554; [2005] B.C.C. 435; [2005] 2 B.C.L.C.
547; [2005] B.P.I.R. 691
Essanda Finance Corp Ltd v Peat Marwick Hungerford 22–51
(1997) 188 C.L.R. 241 High Ct (Aus)
Etablissements Somafer SA v Saar-Ferngas AG (33/78); 6–4
sub nom Ets Somafer SA v Saar–Ferngas AG (33/78)
[1978] E.C.R. 2183; [1979] 1 C.M.L.R. 490
Euro Brokers Holdings Ltd v Monecor (London) Ltd; sub 14–16, 15–15, 15–20
nom Eurobrokers Holdings Ltd v Monecor (London)
Ltd; Monecor (London) Ltd v Euro Brokers Holdings
Ltd [2003] EWCA Civ 105; [2003] B.C.C. 573; [2003]
1 B.C.L.C. 506; (2003) 147 S.J.L.B. 540
Eurocruit Europe Ltd (In Liquidation), Re; sub nom 17–2
Goldfarb v Poppleton [2007] EWHC 1433 (Ch); [2008]
Bus. L.R. 146; [2007] B.C.C. 916; [2007] 2 B.C.L.C.
598
European Parliament v Council of the European Union (C– 6–13
436/03) [2006] E.C.R. I-3733; [2006] 3 C.M.L.R. 3 ECJ
Europeans Ltd v Revenue and Customs Commissioners 8–8
[2011] EWHC 948 (Ch); [2011] S.T.C. 1449; [2011]
B.C.C. 527; [2011] 4 Costs L.O. 447; [2011] B.V.C.
239; [2011] S.T.I. 1442
Evans v Brunner Mond & Co Ltd [1921] 1 Ch. 359 Ch D 16–50
Evans v Rival Granite Quarries [1910] 2 K.B. 979 CA 32–8, 32–10
Evans’s Case. See London, Hamburgh, & Continental
Exchange Bank (No.1), Re
Evling v Israel & Oppenheimer Ltd [1918] 1 Ch. 101 Ch D 23–8
EW Savory Ltd, Re [1951] 2 All E.R. 1036; [1951] 2 23–8
T.L.R. 1071; [1951] W.N. 619; (1952) 96 S.J. 12 Ch D
Exchange Banking Co (Flitcroft’s Case), Re (1882) L.R. 21 11–2, 12–13, 12–15, 16–32
Ch. D. 519 CA
Exeter Trust Ltd v Screenways Ltd [1991] B.C.C. 477; 32–31
[1991] B.C.L.C. 888; (1991) 135 S.J. 12 CA (Civ Div)
Expanded Plugs, Ltd, Re [1966] 1 W.L.R. 514; [1966] 1 All 20–21
E.R. 877; (1966) 110 S.J. 246 Ch D
Express Engineering Works Ltd, Re [1920] 1 Ch. 466 CA 14–16, 15–17
Expro International Group Plc, Re [2008] EWHC 1543 29–3
(Ch); [2010] 2 B.C.L.C. 514
Extrasure Travel Insurances Ltd v Scattergood [2003] 1 16–40, 16–42
B.C.L.C. 598 Ch D
Exxon Corp v Exxon Insurance Consultants International 4–25
Ltd [1982] Ch. 119; [1981] 3 W.L.R. 541; [1981] 3 All
E.R. 241; [1982] R.P.C. 69; (1981) 125 S.J. 527 CA
(Civ Div)
FCA v Da Vinci Invest Ltd [2015] EWHC 2401 (Ch); 30–53
[2016] 1 B.C.L.C. 554
F De Jong & Co, Re [1946] Ch. 211 CA 23–8
Facia Footwear Ltd (In Administration) v Hinchliffe [1998] 9–14
1 B.C.L.C. 218 Ch D
Fairline Shipping Corp v Adamson [1975] Q.B. 180; [1974] 7–32
2 W.L.R. 824; [1974] 2 All E.R. 967; [1974] 1 Lloyd’s
Rep. 133; (1973) 118 S.J. 406 QBD
Fargro Ltd v Godfroy [1986] 1 W.L.R. 1134; [1986] 3 All 17–2
E.R. 279; (1986) 2 B.C.C. 99167; [1986] P.C.C. 476;
(1986) 83 L.S.G. 2326; (1986) 130 S.J. 524 Ch D
Farrow’s Bank Ltd, Re [1921] 2 Ch. 164 CA 33–7
Fayed v United Kingdom. See Al-Fayed v United Kingdom
(17101/90)
Feetum v Levy; sub nom Cabvision Ltd v Feetum [2005] 32–36
EWCA Civ 1601; [2006] Ch. 585; [2006] 3 W.L.R.
427; [2006] B.C.C. 340; [2006] 2 B.C.L.C. 102; [2006]
B.P.I.R. 379; (2006) 103(5) L.S.G. 29
Ferguson v Wallbridge [1935] 3 D.L.R. 66 PC 17–2
Fern Advisers Ltd v Burford [2014] EWHC 762 (QB); 16–21
[2014] B.P.I.R. 581
FG Films, Re [1953] 1 W.L.R. 483; [1953] 1 All E.R. 615; 8–8
(1953) 97 S.J. 171 Ch D
FHR European Ventures LLP v Cedar Capital Partners LLC 16–53, 16–107, 16–108, 16–115
[2014] UKSC 45; [2015] A.C. 250; [2014] 3 W.L.R.
535; [2014] 4 All E.R. 79; [2014] 2 All E.R. (Comm)
425; [2014] 2 Lloyd’s Rep. 471; [2014] 2 B.C.L.C. 145;
[2014] Lloyd’s Rep. F.C. 617; [2014] 3 E.G.L.R. 119;
[2014] W.T.L.R. 1135; 10 A.L.R. Int’l 635; [2015] 1 P.
& C.R. DG1
FHR European Ventures LLP v Mankarious [2013] EWCA 16–94, 16–108, 16–115
Civ 17; [2014] Ch. 1; [2013] 3 W.L.R. 466; [2013] 3
All E.R. 29; [2013] 2 All E.R. (Comm) 257; [2013] 1
Lloyd’s Rep. 416; [2013] 2 B.C.L.C. 1; [2013] 2
E.G.L.R. 169; [2013] W.T.L.R. 631; 15 I.T.E.L.R. 902;
[2013] 1 P. & C.R. DG24
FI Call Ltd, Re; sub nom Global Torch Ltd v Apex Global 20–1
Management Ltd [2013] EWCA Civ 819; [2013] 1
W.L.R. 2993; [2013] E.M.L.R. 29
Financial Conduct Authority v Capital Alternatives Ltd 16–60
[2014] EWHC 144 (Ch); [2014] 3 All E.R. 780; [2014]
2 All E.R. (Comm) 481; [2014] Bus. L.R. 1452
Firedart Ltd, Re; sub nom Official Receiver v Fairall [1994] 10–11
2 B.C.L.C. 340 Ch D
First Energy (UK) Ltd v Hungarian International Bank Ltd 7–23
[1993] 2 Lloyd’s Rep. 194; [1993] B.C.C. 533; [1993]
B.C.L.C. 1409; [1993] N.P.C. 34 CA (Civ Div)
First Independent Factors and Finance Ltd v Churchill; sub 9–19
nom Churchill v First Independent Factors & Finance
Ltd [2006] EWCA Civ 1623; [2007] Bus. L.R. 676;
[2007] B.C.C. 45; [2007] 1 B.C.L.C. 293; [2007]
B.P.I.R. 14; (2006) 150 S.J.L.B. 1606
First Independent Factors and Finance Ltd v Mountford 9–18
[2008] EWHC 835 (Ch); [2008] B.C.C. 598; [2008] 2
B.C.L.C. 297; [2008] B.P.I.R. 515
First Subsea Ltd v Balltec Ltd [2014] EWHC 866 (Ch) 16–45, 16–94, 16–100, 16–101
Fiske Nominees Ltd v Dwyka Diamond Ltd. See Diamix
Plc, Re
FJL Realisations Ltd, Re. See IRC v Lawrence
Fliptex Ltd v Hogg [2004] EWHC 1280 (Ch); [2004] 32–44
B.C.C. 870
Flitcroft’s Case. See Exchange Banking Co (Flitcroft’s
Case), Re
Floor Fourteen Ltd, Re. See Lewis v IRC
Florence Land and Public Works Co Ex p. Moor, Re (1878– 32–6
79) L.R. 10 Ch. D. 530 CA
Fomento (Sterling Area) v Selsdon Fountain Pen Co [1958] 22–36
1 W.L.R. 45; [1958] 1 All E.R. 11; [1958] R.P.C. 8;
(1958) 102 S.J. 51 HL
Fons HF (In Liquidation) v Corporal Ltd [2014] EWCA Civ 31–6
304; [2015] 1 B.C.L.C. 320
Ford v Polymer Vision Ltd [2009] EWHC 945 (Ch); [2009] 7–10
2 B.C.L.C. 160
Forest of Dean Coal Mining Co, Re (1878–79) L.R. 10 Ch. 16–112
D. 450 Ch D
Forsikringsaktieselskapet Vesta v Butcher [1989] A.C. 852; 22–31
[1989] 2 W.L.R. 290; [1989] 1 All E.R. 402; [1989] 1
Lloyd’s Rep. 331; [1989] Fin. L.R. 223; (1989) 133 S.J.
184 HL
Forster v Wilson, 152 E.R. 1165; (1843) 12 M. & W. 191 33–23
Ex Ct
Fort Gilkicker Ltd, Re [2013] EWHC 348 (Ch); [2013] Ch. 17–24
551; [2013] 3 W.L.R. 164; [2013] 3 All E.R. 546;
[2013] B.C.C. 365; (2013) 163 N.L.J. 268
Forthouse Development Ltd (In Administration), Re [2013] 32–32
NICh 6
Foskett v McKeown [2001] 1 A.C. 102; [2000] 2 W.L.R. 16–112
1299; [2000] 3 All E.R. 97; [2000] Lloyd’s Rep. I.R.
627; [2000] W.T.L.R. 667; (1999-2000) 2 I.T.E.L.R.
711; (2000) 97(23) L.S.G. 44 HL
Foss v Harbottle, 67 E.R. 189; (1843) 2 Hare 46 Ct of 3–25, 5–10, 114–6, 16–124, 17–3, 17–
Chancery 4, 17–5, 17–6, 17–11, 17–12, 17–14,
17–21, 17–32, 17–39, 20–5, 20–14, 20–
16
Foster v Foster [1916] 1 Ch. 532 Ch D 14–11
Foster & Son, Re [1942] 1 All E.R. 314 23–8
Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 16–101
200; [2007] Bus. L.R. 1565; [2007] B.C.C. 804; [2007]
2 B.C.L.C. 239; [2007] I.R.L.R. 425; [2007] 12 E.G.
154 (C.S.); (2007) 104(13) L.S.G. 24
Foster Clark’s Indenture Trust, Re; sub nom Loveland v 32–41
Horscroft [1966] 1 W.L.R. 125; [1966] 1 All E.R. 43;
(1966) 110 S.J. 108 Ch D
Framlington Group Plc v Anderson [1995] B.C.C. 611; 16–94, 16–101
[1995] 1 B.C.L.C. 475 Ch D
Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch); 16–124, 17–18, 17–21
[2008] B.C.C. 885; [2009] 1 B.C.L.C. 1; [2009] Bus.
L.R. D14
France v Clark (1884) L.R. 26 Ch. D. 257 CA 27–10
Fraser v Whalley, 71 E.R. 361; (1864) 2 Hem. & M. 10 KB 16–26
Freeman & Lockyer v Buckhurst Park Properties (Mangal) 7–20, 7–22, 7–26
Ltd [1964] 2 Q.B. 480; [1964] 2 W.L.R. 618; [1964] 1
All E.R. 630; (1964) 108 S.J. 96 CA
Freevale Ltd v Metrostore (Holdings) Ltd [1984] Ch. 199; 32–40
[1984] 2 W.L.R. 496; [1984] 1 All E.R. 495; (1984) 47
P. & C.R. 481; (1984) 81 L.S.G. 516; (1984) 128 S.J.
116 Ch D
Fulham Football Club (1987) Ltd v Richards [2011] EWCA 20–2
Civ 855; [2012] 1 All E.R. 414; [2011] B.C.C. 910
Fulham Football Club Ltd v Cabra Estates Plc [1992] 16–35
B.C.C. 863; [1994] 1 B.C.L.C. 363; (1993) 65 P. & C.R.
284; [1993] 1 P.L.R. 29; (1992) 136 S.J.L.B. 267 CA
(Civ Div)
Full Cup International Trading Ltd, Re; sub nom 20–22
Antoniades v Wong [1995] B.C.C. 682 Ch D
(Companies Ct)
Fuller’s Contract, Re [1933] Ch. 652 Ch D 2–16
Fyffes Group Ltd v Templeman [2000] 2 Lloyd’s Rep. 643; 16–135
(2000) 97(25) L.S.G. 40 QBD (Comm Ct)
Gaiman v National Association for Mental Health [1971] 16–27, 16–37, 16–46
Ch. 317; [1970] 3 W.L.R. 42; [1970] 2 All E.R. 362;
(1970) 114 S.J. 416 Ch D
Galeforce Pleating Co Ltd, Re [1999] 2 B.C.L.C. 704 Ch D 21–7
(Companies Ct)
Galloway v Halle Concerts Society [1915] 2 Ch. 233 Ch D 16–26, 23–5
Galoo Ltd v Bright Grahame Murray [1994] 1 W.L.R. 22–50, 28–64
1360; [1995] 1 All E.R. 16; [1994] B.C.C. 319 CA (Civ
Div)
Gambotto v WCP Ltd (1995) 127 A.L.R. 417 High Ct 23–2
(Aus)
Gambotto v WCP Ltd (1995) 182 C.L.R. 432 High Ct (Aus) 19–9, 19–11
Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] 20–16
UKPC 26; [2007] Bus. L.R. 1521; [2007] 4 All E.R.
164; [2007] B.C.C. 272; [2008] 1 B.C.L.C. 468
Gardner v Parker [2004] EWCA Civ 781; [2005] B.C.C. 46; 17–34, 17–37
[2004] 2 B.C.L.C. 554; (2004) 148 S.J.L.B. 792
Gebhard v Consiglio dell’Ordine degli Avvocati e 6–23
Procuratori di Milano (C–55/94) [1996] All E.R. (EC)
189; [1995] E.C.R. I–4165; [1996] 1 C.M.L.R. 603;
[1996] C.E.C. 175
Gee & Co (Woolwich) Ltd, Re [1975] Ch. 52; [1974] 2 15–17, 15–19
W.L.R. 515; [1974] 1 All E.R. 1149; (1973) 118 S.J. 65
Ch D
Geilfuss v Corrigan, 95 Wis. 651, 70 N.W. 306 (1897) 32–6
Geltl v Daimler AG (C–19/11) [2012] 3 C.M.L.R. 32; 26–6, 30–37
[2012] Lloyd’s Rep. F.C. 635 ECJ (2nd Chamber)
Gemma Ltd (In Liquidation) v Davies; sub nom Gemma 16–8
Ltd (In Liquidation), Re [2008] EWHC 546 (Ch);
[2008] B.C.C. 812; [2008] 2 B.C.L.C. 281; [2009] Bus.
L.R. D4
Gencor ACP Ltd v Dalby [2000] 2 B.C.L.C. 734; [2001] 8–16, 16–137
W.T.L.R. 825 Ch D
Generics (UK) Ltd v Yeda Research and Development Co 16–11
Ltd [2012] EWCA Civ 726; [2013] Bus. L.R. 777;
[2012] C.P. Rep. 39; [2013] F.S.R. 13
Geneva Finance Ltd, Re (1992) 7 A.C.S.L.R. 4 32–39
Genosyis Technology Management Ltd, Re. See Wallach v
Secretary of State for Trade and Industry
George Barker (Transport) Ltd v Eynon [1974] 1 W.L.R. 32–3, 32–8, 32–10, 32–40
462; [1974] 1 All E.R. 900; [1974] 1 Lloyd’s Rep. 65;
(1973) 118 S.J. 240 CA (Civ Div)
George Newman & Co, Re [1895] 1 Ch. 674 CA 15–17
Gerald Cooper Chemicals Ltd, Re [1978] Ch. 262; [1978] 2 9–5
W.L.R. 866; [1978] 2 All E.R. 49; (1977) 121 S.J. 848
Ch D
GHE Realisations Ltd (formerly Gatehouse Estates Ltd), Re 32–50
[2005] EWHC 2400 (Ch); [2006] 1 W.L.R. 287; [2006]
1 All E.R. 357; [2006] B.C.C. 139
GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch); 16–45
[2012] 2 B.C.L.C. 369
Giles v Rhind [2002] EWCA Civ 1428; [2003] Ch. 618; 17–37
[2003] 2 W.L.R. 237; [2002] 4 All E.R. 977; [2003]
B.C.C. 79; [2003] 1 B.C.L.C. 1; (2002) 99(44) L.S.G.
32
Gilford Motor Co Ltd v Horn [1933] Ch. 935 CA 8–15
GL Saunders Ltd (In Liquidation), Re [1986] 1 W.L.R. 215; 32–19
(1986) 83 L.S.G. 779; (1985) 130 S.J. 166 Ch D
Glasgow City Council v Craig [2008] CSOH 171; 2009 9–18
S.L.T. 212; [2010] B.C.C. 235; [2009] 1 B.C.L.C. 742;
[2009] R.A. 61
Glaxo Plc v Glaxowellcome Ltd [1996] F.S.R. 388 Ch D 4–23, 4–26
Global Energy Horizons Corp v Gray [2012] EWHC 3703 16–101
(Ch)
Global Torch Ltd v Apex Global Management Ltd. See FI
Call Ltd, Re
Globalink Telecommunications Ltd v Wilmbury Ltd [2002] 3–23
EWHC 1988 (QB); [2002] B.C.C. 958; [2003] 1
B.C.L.C. 145
Gluckstein v Barnes; sub nom Olympia Ltd, Re [1900] A.C. 5–13, 5–14, 5–16, 5–19, 16–113
240 HL
Godfrey Phillips Ltd v Investment Trust Ltd [1953] Ch. 23–8
449; [1953] 1 W.L.R. 41; [1953] 1 All E.R. 7; 46 R. &
I.T. 81; (1952) 31 A.T.C. 548; [1952] T.R. 507; (1953)
97 S.J. 8 Ch D
Goldtrail Travel Ltd (In Liquidation) v Aydin [2014] 16–120, 16–121, 19–6
EWHC 1587 (Ch); [2015] 1 B.C.L.C. 89
Gomba Holdings (UK) Ltd v Homan; Gomba Holdings 32–39
(UK) Ltd v Johnson Matthey Bankers Ltd; sub nom
Gomba Holdings (UK) Ltd v Homan & Bird [1986] 1
W.L.R. 1301; [1986] 3 All E.R. 94; (1986) 2 B.C.C.
99102; [1986] P.C.C. 449; (1987) 84 L.S.G. 36; (1986)
130 S.J. 821 Ch D
Gomba Holdings (UK) Ltd v Minories Finance Ltd 32–39
(formerly Johnson Matthey Bankers Ltd) (No.1) [1988]
1 W.L.R. 1231; [1989] 1 All E.R. 261; (1989) 5 B.C.C.
27; [1989] B.C.L.C. 115; [1989] P.C.C. 107; (1988)
85(36) L.S.G. 41; (1988) 132 S.J. 1323 CA (Civ Div)
Goodfellow v Nelson Line (Liverpool) Ltd [1912] 2 Ch. 16–122, 19–4, 31–30
324 Ch D
Governments Stock and Other Securities Investment Co Ltd 32–9
v Manila Ry Co Ltd; sub nom Government Stock
Investment and Other Securities Co v Manila Ry Co
[1897] A.C. 81 HL
Gower Enterprises Ltd (No.2), Re [1995] B.C.C. 1081; 10–3
[1995] 2 B.C.L.C. 201 Ch D (Comm Ct)
Grace v Biagioli [2005] EWCA Civ 1222; [2006] B.C.C. 20–13, 20–19
85; [2006] 2 B.C.L.C. 70; (2005) 102(48) L.S.G. 18
Gramophone & Typewriter Ltd v Stanley [1908] 2 K.B. 89 14–6
CA
Granada Group Ltd v Law Debenture Pension Trust Corp 16–70, 28–32
Plc [2015] EWHC 1499 (Ch); [2015] Bus. L.R. 1119;
[2015] 2 B.C.L.C. 604
Grant v Rails [2016] B.C.C. 293 9–9
Grant v United Kingdom Switchback Rys Co (1889) L.R. 7–27, 14–12
40 Ch. D. 135 CA
Gray v G-T-P Group Ltd; sub nom F2G Realisations Ltd (In 32–22
Liquidation), Re; Gray v GTP Group Ltd [2010] EWHC
1772 (Ch); [2011] B.C.C. 869; [2011] 1 B.C.L.C. 313
Grayan Building Services Ltd (In Liquidation), Re; sub 10–3, 10–9
nom Secretary of State for Trade and Industry v Gray
[1995] Ch. 241; [1995] 3 W.L.R. 1; [1995] B.C.C. 554;
[1995] 1 B.C.L.C. 276; (1995) 92(1) L.S.G. 36; (1994)
138 S.J.L.B. 227 CA
Gray’s Inn Construction Co Ltd, Re [1980] 1 W.L.R. 711; 33–18
[1980] 1 All E.R. 814; (1980) 124 S.J. 463 CA (Civ
Div)
Great Wheal Polgooth Co, Re (1883) 53 L.J. Ch. 42 5–3
Green v Chubb; sub nom Corporate Jet Realisations Ltd , 33–7
Re [2015] EWHC 221 (Ch); [2015] B.C.C. 625; [2015]
2 B.C.L.C. 95
Green v El Tai [2015] B.P.I.R. 24 Ch D (Companies Ct) 16–42
Greenhalgh v Arderne Cinemas Ltd [1946] 1 All E.R. 512; 13–33, 19–16, 19–17, 19–18
90 S.J 248 CA
Greenhalgh v Arderne Cinemas Ltd [1951] Ch. 286; [1950] 16–35, 19–10, 31–30
2 All E.R. 1120; (1950) 94 S.J. 855 CA
Greenhalgh v Mallard [1943] 2 All E.R. 234 CA 19–28, 27–7
Greenwall v Porter; sub nom Greenwell v Porter [1902] 1 19–4, 19–28
Ch. 530 Ch D
Gregson v HAE Trustees Ltd [2008] EWHC 1006 (Ch); 16–7
[2009] Bus. L.R. 1640; [2009] 1 All E.R. (Comm) 457;
[2008] 2 B.C.L.C. 542; [2008] Pens. L.R. 295; [2008]
W.T.L.R. 1; [2008] 2 P. & C.R. DG
Greythorn Ltd, Re [2002] B.C.C. 559; [2002] 1 B.C.L.C. 28–73
437 Ch D
Grierson Oldham & Adams, Re [1968] Ch. 17; [1967] 1 28–74
W.L.R. 385; [1967] 1 All E.R. 192; (1966) 110 S.J. 887
Ch D
Griffin Hotel Co Ltd, Re [1941] Ch. 129; [1940] 4 All E.R. 32–8
324 Ch D
Griffith v Tower Publishing Co Ltd [1897] 1 Ch. 21 Ch D 2–22
Griffiths v Secretary of State for Social Services [1974] 32–41
Q.B. 468; [1973] 3 W.L.R. 831; [1973] 3 All E.R. 1184;
(1973) 117 S.J. 873 QBD
Griffiths v Yorkshire Bank Plc [1994] 1 W.L.R. 1427; 32–11, 32–19
(1994) 91(36) L.S.G. 36 Ch D
Grimaldi v Chameleon Mining NL (No.2) [2012] FCAFC 6 16–115
Grongaard, Criminal Proceedings against (C–384/02) 30–36
[2005] E.C.R. I-9939; [2006] 1 C.M.L.R. 30; [2006]
C.E.C. 241; [2006] I.R.L.R. 214 ECJ
Gross v Rackind; sub nom Citybranch Group Ltd, Re; City 20–1
Branch Group Ltd, Re; Rackind v Gross [2004] EWCA
Civ 815; [2005] 1 W.L.R. 3505; [2004] 4 All E.R. 735;
[2005] B.C.C. 11; (2004) 148 S.J.L.B. 661
Grosvenor Press Plc, Re [1985] 1 W.L.R. 980; (1985) 1 13–36
B.C.C. 99412; [1985] B.C.L.C. 286 ; [1985] P.C.C. 260;
(1985) 82 L.S.G. 2817; (1985) 129 S.J. 541 Ch D
Grove v Advantage Healthcare (T10) Ltd; sub nom 32–31
Advantage Healthcare (T10) Ltd, Re [2000] B.C.C. 985;
Grovewood Holdings Plc v James Capel & Co Ltd [1995] 9–10
Ch. 80; [1995] 2 W.L.R. 70; [1994] 4 All E.R. 417;
[1995] B.C.C. 760; [1994] 2 B.C.L.C. 782; [1994] E.G.
136 (C.S.); (1994) 144 N.L.J. 1405 Ch D
Growth Management Ltd v Mutafchiev [2006] EWHC 2774 19–28
(Comm); [2007] 1 B.C.L.C. 645
GSAR Realisations Ltd, Re [1993] B.C.L.C. 409 Ch D 10–11
GT Whyte & Co Ltd, Re [1983] B.C.L.C. 311 Ch D 32–14
Guardian Assurance Co Ltd, Re [1917] 1 Ch. 431 CA 29–3
Guidezone Ltd, Re; sub nom Kaneria v Patel [2001] B.C.C. 20–8, 20–13, 20–22
692; [2000] 2 B.C.L.C. 321 Ch D (Companies Ct)
Guinness Peat Group Plc v British Land Co Plc [1999] 20–13, 20–20
B.C.C. 536; [1999] 2 B.C.L.C. 243; [1998] N.P.C. 168
CA (Civ Div)
Guinness Plc v Saunders; Guinness v Ward [1990] 2 A.C. 3–25, 14–31, 16–30, 16–63, 16–112,
663; [1990] 2 W.L.R. 324; [1990] 1 All E.R. 652; 16–113
[1990] B.C.C. 205; [1990] B.C.L.C. 402; (1990) 87(9)
L.S.G. 42; (1990) 134 S.J. 457 HL
Gwembe Valley Development Co Ltd v Koshy (No.3). See
DEG–Deutsche Investitions und
Entwicklungsgesellschaft mbH v Koshy (Account of
Profits: Limitations)
H&K (Medway) Ltd, Re; sub nom Mackay v IRC [1997] 1 32–19
W.L.R. 1422; [1997] 2 All E.R. 321; [1997] B.C.C.
H, Re. See Customs and Excise Commissioners v Hare
Haden Bill Electrical Ltd, Re. See R&H Electric Ltd v
Haden Bill Electrical Ltd
Hague v Nam Tai Electronics Inc [2006] UKPC 52; [2007] 13–9
2 B.C.L.C. 194
Hailey Group, Re; sub nom Company (No.008126 of 1989), 20–19
Re [1992] B.C.C. 542; [1993] B.C.L.C. 459 Ch D
(Companies Ct)
Halcyon House Ltd v Baines [2014] EWHC 2216 (QB) 16–11, 16–94, 16–100, 16–101
Halifax Plc v Halifax Repossessions Ltd [2004] EWCA Civ 4–24, 4–28
331; [2004] B.C.C. 281; [2004] 2 B.C.L.C. 455; [2004]
F.S.R. 45; (2004) 27(4) I.P.D. 27036; (2004) 148
S.J.L.B. 180
Hall v Cable and Wireless Plc; Martin v Cable and Wireless 26–26, 26–27
Plc; Parry v Cable and Wireless Plc [2009] EWHC 1793
(Comm); [2011] B.C.C. 543; [2010] 1 B.C.L.C. 95;
[2010] Bus. L.R. D40 QBD (Comm)
Hallett v Dowdall, 118 E.R. 1; (1852) 18 Q.B. 2; (1852) 21 2–14
L.J.Q.B. 98 QB
Halt Garage (1964) Ltd, Re [1982] 3 All E.R. 1016 Ch D 12–10, 14–32, 16–124
Hampton Capital Ltd, Re [2015] EWHC 1905 (Ch); [2016] 7–11, 7–16
1 B.C.L.C. 374
Hannam v Financial Conduct Authority [2014] UKUT 233 30–37
(TCC); [2014] Lloyd’s Rep. F.C. 704
Harben v Phillips (1883) L.R. 23 Ch. D. 14 CA 3–28, 15–67
Harborne Road Nominees Ltd v Karvaski [2011] EWHC 20–18
2214 (Ch); [2012] 2 B.C.L.C. 420
Harbro Supplies Ltd v Hampton [2014] EWHC 1781 (Ch) 16–101
Hardoon v Belilios [1901] A.C. 118 PC (HK) 27–8
Harlow v Loveday; sub nom Hill & Tyler Ltd (In 13–47, 13–57
Administration), Re [2004] EWHC 1261 (Ch); [2004]
B.C.C. 732; [2005] 1 B.C.L.C. 41; (2004) 101(26)
L.S.G. 27
Harlowe’s Nominees Pty Ltd v Woodside Oil Co (1968) 16–26
121 C.L.R. 483 High Ct (Aus)
Harman v BML Group Ltd; sub nom BML Group Ltd v 15–54
Harman [1994] 1 W.L.R. 893; [1994] B.C.C. 502;
[1994] 2 B.C.L.C. 674; (1994) 91(21) L.S.G. 40; (1994)
138 S.J.L.B. 91 CA
Harmer, Re; sub nom Harmer (HR), Re [1959] 1 W.L.R. 3–25
62; [1958] 3 All E.R. 689; (1959) 103 S.J. 73 CA
Harold Holdsworth & Co (Wakefield) Ltd v Caddies; sub 8–11
nom Caddies v Holdsworth & Co [1955] 1 W.L.R. 352;
[1955] 1 All E.R. 725; 1955 S.C. (H.L.) 27; 1955 S.L.T.
133; (1955) 99 S.J. 234 HL
Harris v A Harris Ltd; sub nom A Harris v Harris Ltd, 1936 16–124, 19–4
S.C. 183; 1936 S.L.T. 227 IH
Harris v Beauchamp Bros [1894] 1 Q.B. 801 CA 32–37
Harris v Secretary of State for Business, Innovation and 10–3
Skills; sub nom Clenaware Systems Ltd, Re [2013]
EWHC 2514 (Ch); [2015] B.C.C. 283; [2014] 1
B.C.L.C. 447
Harris Simons Construction Ltd, Re [1989] 1 W.L.R. 368; 32–44
(1989) 5 B.C.C. 11; [1989] B.C.L.C. 202; [1989] P.C.C.
229; (1989) 86(8) L.S.G. 43; (1989) 133 S.J. 122 Ch D
(Companies Ct)
Hawk Insurance Co Ltd, Re [2001] EWCA Civ 241; [2002] 29–6, 29–9
B.C.C. 300; [2001] 2 B.C.L.C. 480
Hawkes Bay Milk Corp Ltd v Watson [1974] 1 N.Z.L.R. 5–25
218
Hawkes v Cuddy; sub nom Neath Rugby Ltd, Re [2009] 20–19, 20–22
EWCA Civ 291; [2010] B.C.C. 597; [2009] 2 B.C.L.C.
427
Hawkesbury Development Co Ltd v Landmark Finance Pty 32–39
Ltd (1969) 92 WN (NSW) 199
Hawks v McArthur [1951] 1 All E.R. 22 Ch D 27–8, 27–10
Haysport Properties Ltd v Ackerman [2016] EWHC 393 16–11
Heald v O’Connor [1971] 1 W.L.R. 497; [1971] 2 All E.R. 13–56, 13–57
1105; (1970) 115 S.J. 244 QBD
Hearts of Oak Assurance Co Ltd v Att Gen [1932] A.C. 392 18–9
HL
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] 22–44, 25–32, 25–38, 25–40
A.C. 465; [1963] 3 W.L.R. 101; [1963] 2 All E.R. 575;
[1963] 1 Lloyd’s Rep. 485; (1963) 107 S.J. 454 HL
Hellenic & General Trust, Re [1976] 1 W.L.R. 123; [1975] 29–8
3 All E.R. 382; (1975) 119 S.J. 845 Ch D
Helmet Integrated Systems Ltd v Tunnard [2006] EWCA 16–11
Civ 1735; [2007] I.R.L.R. 126; [2007] F.S.R. 16
Hely-Hutchinson v Brayhead Ltd [1968] 1 Q.B. 549; [1967] 7–12, 7–18, 7–20, 7–21, 16–30, 16–63,
3 W.L.R. 1408; [1967] 3 All E.R. 98; (1967) 111 S.J. 16–113
830 CA (Civ Div)
Henderson v Bank of Australasia (1890) L.R. 45 Ch. D. 330 15–47
CA
Henderson v Merrett Syndicates Ltd (No.1); Deeny v 16–20
Gooda Walker Ltd (Duty of Care); Feltrim
Underwriting Agencies Ltd v Arbuthnott; Hughes v
Merrett Syndicates Ltd; Hallam-Eames v Merrett
Syndicates Ltd; sub nom Arbuthnott v Fagan;
McLarnon Deeney v Gooda Walker Ltd; Gooda Walker
Ltd v Deeny [1995] 2 A.C. 145; [1994] 3 W.L.R. 761;
[1994] 3 All E.R. 506; [1994] 2 Lloyd’s Rep. 468;
[1994] C.L.C. 918; (1994) 144 N.L.J. 1204 HL
Henry Head & Co Ltd v Ropner Holdings Ltd [1952] Ch. 11–7
124; [1951] 2 All E.R. 994; [1951] 2 Lloyd’s Rep. 348;
[1951] 2 T.L.R. 1027; (1951) 95 S.J. 789 Ch D
Hepburn v Revenue and Customs Commissioners [2013] 5–25
UKFTT 445 (TC); [2013] S.T.I. 3031
Hercules Management Ltd v Ernst & Young (1997) 146 22–51
D.L.R. (4th) 577 Sup Ct (Can)
Heron International Ltd v Lord Grade; sub nom Heron 17–38, 28–34
International Ltd v Lew Grade [1983] B.C.L.C. 244;
[1982] Com. L.R. 108 CA (Civ Div)
Hickman v Kent or Romney Marsh Sheepbreeders 3–18, 3–23, 3–24, 3–25, 3–26
Association [1915] 1 Ch. 881 Ch D
Hilder v Dexter [1902] A.C. 474 HL 11–5
Hill & Tyler Ltd (In Administration), Re. See Harlow v
Loveday
Hill v Spread Trustee Co Ltd; sub nom Nurkowski, Re 33–18
[2006] EWCA Civ 542; [2007] Bus. L.R. 1213; [2007]
1 W.L.R. 2404; [2007] 1 All E.R. 1106; [2006] B.C.C.
646; [2007] 1 B.C.L.C. 450; [2006] B.P.I.R. 789; [2006]
W.T.L.R. 1009
Hillman v Crystal Bowl Amusements; Hillman v Ireton 15–72
Properties; Hillman v Calgary Development Co [1973]
1 W.L.R. 162; [1973] 1 All E.R. 379; (1972) 117 S.J. 69
CA (Civ Div)
Hindle v John Cotton Ltd (1919) 56 S.L.T. 625 16–29
Hirsche v Sims [1894] A.C. 654 PC 16–29
Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 16–100
Ch. 169 CA
HL Bolton Engineering Co Ltd v TJ Graham & Sons Ltd 7–40
[1957] 1 Q.B. 159; [1956] 3 W.L.R. 804; [1956] 3 All
E.R. 624; (1956) 100 S.J. 816 CA
HLC Environmental Projects Ltd, Re [2013] EWHC 2876 9–14, 16–26, 16–42, 16–133
(Ch); [2014] B.C.C. 337
Ho Tung v Man On Insurance Co Ltd [1902] A.C. 232 PC 15–19
Hoare & Co Ltd, Re (1933) 150 L.T. 374 28–74
Hodge v James Howell & Co [1958] C.L.Y. 446 CA 19–16
Hogg v Cramphorn [1967] Ch. 254; [1966] 3 W.L.R. 995; 3–25, 16–26, 16–30, 16–113
[1966] 3 All E.R. 420; (1966) 110 S.J. 887 Ch D
Hoicrest Ltd, Re; sub nom Keene v Martin [2000] 1 W.L.R. 27–19
414; [2000] B.C.C. 904; [2000] 1 B.C.L.C. 194; (1999)
96(44) L.S.G. 39; (1999) 143 S.J.L.B. 26 CA (Civ Div)
Holders Investment Trust, Re [1971] 1 W.L.R. 583; [1971] 19–12
2 All E.R. 289; (1970) 115 S.J. 202 Ch D
Holdsworth & Co v Caddies. See Harold Holdsworth & Co
(Wakefield) Ltd v Caddies
Hollicourt (Contracts) Ltd (In Liquidation) v Bank of 33–18
Ireland; sub nom Bank of Ireland v Hollicourt
(Contracts) Ltd; Claughton (Liquidator of Hollicourt
(Contracts) Ltd) v Bank of Ireland [2001] Ch. 555;
[2001] 2 W.L.R. 290; [2001] 1 All E.R. 289; [2001] 1
All E.R. (Comm) 357; [2001] Lloyd’s Rep. Bank. 6;
[2000] B.C.C. 1210; [2001] 1 B.C.L.C. 233; [2001]
B.P.I.R. 47; (2000) 97(45) L.S.G. 41 CA (Civ Div)
Holmes v Lord Keyes [1959] Ch. 199; [1958] 2 W.L.R. 15–75
772; [1958] 2 All E.R. 129; (1958) 102 S.J. 329 CA
Home & Colonial Insurance Co Ltd, Re [1930] 1 Ch. 102; 33–16
(1929) 34 Ll. L. Rep. 463 Ch D
Home & Office Fire Extinguishers Ltd, Re [2012] EWHC 20–13
917 (Ch)
Home Treat Ltd, Re [1991] B.C.C. 165; [1991] B.C.L.C. 3–22
Hooper v Western Counties and South Wales Telephone Co 31–7
Ltd (1892) 68 LT 78
Hopkins v TL Dallas Group Ltd; Hopkins v TL Dallas & 7–18, 7–24
Co Ltd [2004] EWHC 1379 (Ch); [2005] 1 B.C.L.C.
543
Houghton v Nothard Lowe & Wills. See JC Houghton & Co
v Nothard Lowe & Wills Ltd
Houghton v Saunders [2015] 2 N.Z.L.R. 74 5–3
House of Fraser Plc v ACGE Investments Ltd; sub nom 19–16
ACGE Investments v House of Fraser; House of Fraser,
Re; House of Fraser Plc, Petitioner [1987] A.C. 387;
[1987] 2 W.L.R. 1083; 1987 S.C. (H.L.) 125; 1987
S.L.T. 421; 1987 S.C.L.R. 637; (1987) 3 B.C.C. 201;
[1987] B.C.L.C. 478; [1987] B.C.L.C. 293; [1987]
P.C.C. 364; [1987] 1 F.T.L.R. 54; (1987) 84 L.S.G. 491;
(1987) 131 S.J. 593 HL
Howard v Patent Ivory Manufacturing Co; sub nom Patent 7–12
Ivory Manufacturing Co, Re (1888) L.R. 38 Ch. D. 156
Ch D
Howard Smith Ltd v Ampol Petroleum Ltd [1974] A.C. 16–26, 16–27, 16–29, 16–30, 16–31,
821; [1974] 2 W.L.R. 689; [1974] 1 All E.R. 1126; 118 16–43
S.J.L.B. 330; (1974) 118 S.J. 330 PC (Aus)
Hudson Bay Apparel Brands LLC v Umbro International 7–19, 7–20
Ltd [2010] EWCA Civ 949; [2011] 1 B.C.L.C. 259;
[2010] E.T.M.R. 62 CA (Civ Div)
Hunt v Edge & Ellison Trustees Ltd; sub nom Torvale 7–12, 15–17, 15–20
Group Ltd, Re Ch D (Companies Ct)
Hunter v Hunter [1936] A.C. 222 HL 27–8
Hunter v Senate Support Services Ltd [2004] EWHC 1085 16–30, 16–43
(Ch); [2005] 1 B.C.L.C. 175
Hunting Plc, Re [2004] EWHC 2591 (Ch); [2005] 2 13–34, 19–16, 23–6
B.C.L.C. 211
Hurst v Crampton Bros (Coopers) Ltd [2002] EWHC 1375 27–7
(Ch); [2003] B.C.C. 190; [2003] 1 B.C.L.C. 304; [2003]
W.T.L.R. 659; [2002] 2 P. & C.R. DG21
Hussain v Wycombe Islamic Mission and Mosque Trust Ltd 15–19
[2011] EWHC 971 (Ch); [2011] Arb. L.R. 23; (2011)
108(20) L.S.G. 23
Hutton v Scarborough Cliff Hotel Co (Limited), B, 62 E.R. 23–6
717; (1865) 2 Drew. & Sm. 521 Ct of Chancery
Hutton v West Cork Ry (1883) L.R. 23 Ch. D. 654 (1883) 16–37, 16–140
L.R. 23 Ch. D. 654 CA
Hyde Management Services (Pty) Ltd v FAI Insurances 31–7
(1979–80) 144 C.L.R. 541 High Ct (Aus)
Hydrodan (Corby) Ltd (In Liquidation), Re; sub nom 9–7, 16–9, 32–4
Hydrodam (Corby) Ltd (In Liquidation), Re [1994]
B.C.C. 161; [1994] 2 B.C.L.C. 180 Ch D
I Fit Global Ltd, Re [2013] EWHC 2090 (Ch); [2014] 2 20–2, 27–19
B.C.L.C. 116
IC Johnson & Co Ltd, Re [1902] 2 Ch. 101 CA 32–30
Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch); 17–11, 17–19, 17–20, 17–21
[2010] B.C.C. 420; [2011] 1 B.C.L.C. 498
IFE Fund SA v Goldman Sachs International [2007] EWCA 31–28
Civ 811; [2007] 2 Lloyd’s Rep. 449; [2007] 2 C.L.C.
134; (2007) 104(32) L.S.G. 24
Igroup Ltd v Ocwen; sub nom IGroup Ltd, Re [2003] 32–31
EWHC 2431 (Ch); [2004] 1 W.L.R. 451; [2003] 4 All
E.R. 1063; [2003] B.C.C. 993; [2004] 2 B.C.L.C. 61;
(2003) 100(46) L.S.G. 24
IJL v United Kingdom (29522/95); GMR v United 18–14
Kingdom (30056/96); AKP v United Kingdom
(30574/96) [2002] B.C.C. 380; (2001) 33 E.H.R.R. 11;
9 B.H.R.C. 222; [2001] Crim. L.R. 133 ECHR
Illingworth v Houldsworth; sub nom Houldsworth v 32–6, 32–21
Yorkshire Woolcombers Association Ltd; Yorkshire
Woolcombers Association Ltd, Re [1904] A.C. 355 HL
Imam-Sadeque v Bluebay Asset Management (Services) 16–94
Ltd [2012] EWHC 3511 (QB); [2013] I.R.L.R. 344
Imperial Mercantile Credit Association (In Liquidation) v 16–60, 16–62, 16–103, 16–114, 16–137
Coleman; Imperial Mercantile Credit Association (In
Liquidation) v Knight; sub nom Liquidators of the
Imperial Mercantile Credit Association v Edward John
Coleman and John Watson Knight (1873) L.R. 6 H.L.
189
In a Flap Envelope Co Ltd, Re; sub nom Willmott v Jenkin 13–40
[2003] EWHC 3047 (Ch); [2003] B.C.C. 487; [2004] 1
B.C.L.C. 64
In Plus Group Ltd v Pyke [2002] EWCA Civ 370; [2003] 16–100, 16–101
B.C.C. 332; [2002] 2 B.C.L.C. 201
Industrial Development Consultants Ltd v Cooley [1972] 1 16–92, 16–94, 16–95, 16–101, 16–127
W.L.R. 443; [1972] 2 All E.R. 162; (1972) 116 S.J. 255
Assizes (Birmingham)
Industrial Equity (Pacific) Ltd, Re [1991] 2 H.K.L.R. 614 29–8
Industries and General Mortgage Co Ltd v Lewis [1949] 2 16–107
All E.R. 573; [1949] W.N. 333; (1949) 93 S.J. 577 KBD
Ing Re (UK) Ltd v R&V Versicherung AG [2006] EWHC 7–23, 7–27
1544 (Comm); [2006] 2 All E.R. (Comm) 870; [2007] 1
B.C.L.C. 108; [2006] Lloyd’s Rep. I.R. 653
IRC v Crossman; IRC v Mann; sub nom Paulin, Re; 23–2
Crossman, Re [1937] A.C. 26 HL
IRC v Lawrence; sub nom FJL Realisations Ltd, Re [2001] 32–41
B.C.C. 663; [2001] 1 B.C.L.C. 204; [2001] I.C.R. 424
CA (Civ Div)
IRC v Richmond; sub nom Loquitur, Re [2003] EWHC 999 16–112
(Ch); [2003] S.T.C. 1394; [2003] 2 B.C.L.C. 442; 75
T.C. 77; [2003] S.T.I. 1029; [2003] S.T.I. 1873
Inn Spirit Ltd v Burns [2002] EWHC 1731 (Ch); [2002] 2 12–14
B.C.L.C. 780; [2003] B.P.I.R. 413
Inquiry under the Company Securities (Insider Dealing) Act 18–2
1985 (No.1), Re; sub nom Investigation under the
Insider Dealing Act, Re; Lindsay v Warner [1988] A.C.
660; [1988] 2 W.L.R. 33; [1988] 1 All E.R. 203; (1988)
4 B.C.C. 35; [1988] B.C.L.C. 153; [1988] P.C.C. 133;
(1988) 85(4) L.S.G. 33; (1987) 137 N.L.J. 1181; (1988)
132 S.J. 21 HL
INS Realisations Ltd, Re. See Secretary of State for Trade
and Industry v Jonkler
Instant Access Properties Ltd, Re [2011] EWHC 3022 (Ch); 10–7
[2012] 1 B.C.L.C. 710
International Game Technology Plc, Re [2015] EWHC 717 29–19, 29–22
(Ch); [2015] Bus. L.R. 844; [2015] B.C.C. 866; [2015]
2 B.C.L.C. 45
International Sales & Agencies Ltd v Marcus [1982] 3 All 7–11, 7–15
E.R. 551; [1982] 2 C.M.L.R. 46 QBD
Inverdeck Ltd, Re [1998] B.C.C. 256; [1998] 2 B.C.L.C. 27–7
242 Ch D
Investigation under the Insider Dealing Act, Re. See Inquiry
under the Company Securities (Insider Dealing) Act
1985 (No.1), Re
Invideous Ltd v Thorogood [2014] EWCA Civ 1511 16–98
Ireland v Hart [1902] 1 Ch. 522 Ch D 27–10
Irvine v Irvine [2006] EWHC 406 (Ch); [2007] 1 B.C.L.C. 20–10, 20–19
349
Irvine v Union Bank of Australia (1876–77) L.R. 2 App. 7–8, 14–11
Cas. 366 PC (India)
Island Export Finance Ltd v Umunna [1986] B.C.L.C. 460 16–94, 16–101
Isle of Thanet Electric Supply Co, Re [1950] Ch. 161; 23–8
[1949] 2 All E.R. 1060; (1950) 94 S.J. 32 CA
Isle of Wight Ry v Tahourdin (1884) L.R. 25 Ch. D. 320 14–6
CA
IT Human Resources Plc v Land [2014] EWHC 3812 (Ch); 16–45
[2016] F.S.R. 10
Item Software (UK) Ltd v Fassihi; sub nom Fassihi v Item 16–11, 16–45, 16–100
Software (UK) Ltd [2004] EWCA Civ 1244; [2004]
B.C.C. 994; [2005] 2 B.C.L.C. 91; [2005] I.C.R. 450;
[2004] I.R.L.R. 928; (2004) 101(39) L.S.G. 34; (2004)
148 S.J.L.B. 1153
It’s a Wrap (UK) Ltd (In Liquidation) v Gula [2006] 12–12
EWCA Civ 544; [2006] B.C.C. 626; [2006] 2 B.C.L.C.
634; (2006) 103(21) L.S.G. 24
J Sainsbury Plc v O’Connor (Inspector of Taxes) [1991] 1 27–16
W.L.R. 963; [1991] S.T.C. 529; [1991] S.T.C. 318; 64
T.C. 208; [1991] B.T.C. 181; [1991] S.T.I. 529; (1991)
135 S.J.L.B. 46 CA (Civ Div)
J&S Insurance & Financial Consultants Ltd, Re [2014] 20–10, 20–13
EWHC 2206 (Ch)
Jackson & Bassford Ltd, Re [1906] 2 Ch. 467 Ch D 32–14
Jacobus Marler Estates Ltd v Marler (1913) 85 L.J.P.C. 5–18, 5–19, 16–113
167n
Jalmoon Pty Ltd (in liquidation) v Bow (1997) 15 A.C.L.C. 15–17
230
James v Thomas Kent & Co [1951] 1 K.B. 551; [1950] 2 14–55
All E.R. 1099; [1951] 1 T.L.R. 552; (1951) 95 S.J. 29
CA
James McNaughton Paper Group Ltd v Hicks Anderson & 22–50
Co [1991] 2 Q.B. 113; [1991] 2 W.L.R. 641; [1991] 1
All E.R. 134; [1990] B.C.C. 891; [1991] B.C.L.C. 235;
[1991] E.C.C. 186; [1955–95] P.N.L.R. 574; (1990) 140
N.L.J. 1311 CA (Civ Div)
James R Rutherford & Sons, Re; sub nom Lloyds Bank v 32–15
Winter [1964] 1 W.L.R. 1211; [1964] 3 All E.R. 137;
(1964) 108 S.J. 563 Ch D
Janata Bank v Ahmed [1981] I.C.R. 791; [1981] I.R.L.R. 16–12
457 CA (Civ Div)
Jarvis Plc v PricewaterhouseCoopers [2001] B.C.C. 670; 22–19
[2000] 2 B.C.L.C. 368; (2000) 150 N.L.J. 1109 Ch D
(Companies Ct)
JC Houghton & Co v Nothard Lowe & Wills Ltd [1928] 7–22
A.C. 1; (1927–28) 29 Ll. L. Rep. 63 HL
JE Cade & Son Ltd, Re [1991] B.C.C. 360; [1992] B.C.L.C. 20–8, 20–9, 33–6
Jeavons Ex p. Mackay, Re; sub nom Jeavons Ex p. Brown, 33–20
Re (1872–73) L.R. 8 Ch. App. 643 CA
JEB Fasteners Ltd v Marks Bloom & Co [1983] 1 All E.R. 22–46, 22–52, 28–64
583 CA (Civ Div)
Jelf Group Plc, Re [2016] B.C.C. 289 29–3
Jesner v Jarrad Properties Ltd, 1993 S.C. 34; 1994 S.L.T. 20–13, 20–22
83; [1992] B.C.C. 807; [1993] B.C.L.C. 1032 IH (2
Div)
Jessel Trust Ltd, Re [1985] B.C.L.C. 119 Ch D 29–10
Jetivia SA v Bilta (UK) Ltd. See Bilta (UK) Ltd (In
Liquidation) v Nazir
JH Rayner (Mincing Lane) Ltd v Department of Trade and 2–9
Industry; Maclaine Watson & Co Ltd v Department of
Trade and Industry; Maclaine Watson & Co Ltd v
International Tin Council; TSB England and Wales v
Department of Trade and Industry; Amalgamated Metal
Trading Ltd v International Tin Council [1989] Ch. 72;
[1988] 3 W.L.R. 1033; [1988] 3 All E.R. 257; (1988) 4
B.C.C. 563; [1988] B.C.L.C. 404; [1989] P.C.C. 1;
[1989] P.C.C. 68; (1988) 132 S.J. 1494
JJ Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 16–21, 16–62, 16–112, 16–138
1467; [2002] B.C.C. 729; [2002] 1 B.C.L.C. 162;
[2001] W.T.L.R. 1327
John Crowther Group Plc v Carpets International [1990] 16–35, 28–36
B.C.L.C. 460
John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 K.B. 113 14–6, 17–2
CA
John v Rees; Martin v Davis; Rees v John [1970] Ch. 345; 15–83
[1969] 2 W.L.R. 1294; [1969] 2 All E.R. 274; (1969)
113 S.J. 487 Ch D
John Smith’s Tadcaster Brewery Co Ltd, Re; sub nom John 19–16
Smith’s Tadcaster Brewery Co Ltd v Gresham Life
Assurance Society Ltd [1953] Ch. 308; [1953] 2 W.L.R.
516; [1953] 1 All E.R. 518; (1953) 97 S.J. 150 CA
Johnson v Gore Wood & Co (No.1); sub nom Johnson v 17–35
Gore Woods & Co [2002] 2 A.C. 1; [2001] 2 W.L.R.
72; [2001] 1 All E.R. 481; [2001] C.P.L.R. 49; [2001]
B.C.C. 820; [2001] 1 B.C.L.C. 313; [2001] P.N.L.R. 18;
(2001) 98(1) L.S.G. 24; (2001) 98(8) L.S.G. 46; (2000)
150 N.L.J. 1889; (2001) 145 S.J.L.B. 29 HL
Joint Stock Discount Co, Re; sub nom Shepherd’s Case 27–7
(1866–67) L.R. 2 Ch. App. 16 CA
Joint Stock Discount Co v Brown (No.3) (1869) L.R. 8 Eq. 16–111
381 Ct of Chancery
Jones v Lipman [1962] 1 W.L.R. 832; [1962] 1 All E.R. 8–15
442; (1962) 106 S.J. 531 Ch D
Joseph Holt Plc, Re. See Winpar Holdings Ltd v Joseph
Holt Group Plc
JRRT (Investments) Ltd v Haycraft [1993] B.C.L.C. 401 27–8
Jubilee Cotton Mills Ltd, Re; sub nom Jubilee Cotton Mills 5–3, 5–16
Ltd (Official Receiver and Liquidator) v Lewis [1924]
A.C. 958 HL
Jupiter House Investments (Cambridge) Ltd, Re [1985] 13–36
B.C.L.C. 222
Kamer van Koophandel en Fabrieken voor Amsterdam v 6–7, 6–22, 6–23, 6–29
Inspire Art Ltd (C–167/01) [2003] E.C.R. I–10155;
[2005] 3 C.M.L.R. 34
Karak Rubber Co Ltd v Burden (No.2) [1972] 1 W.L.R. 13–45, 13–57, 13–58
602; [1972] 1 All E.R. 1210; [1972] 1 Lloyd’s Rep. 73;
(1971) 115 S.J. 887 Ch D
Kaupthing Singer & Freidlander Ltd (In Administration),
Re (2011). See Mills v HSBC Trustee (CI) Ltd
Kaupthing Singer & Friedlander Ltd (In Administration), 31–22
Re; sub nom Newcastle Building Society v Mill [2009]
EWHC 740 (Ch); [2009] 2 Lloyd’s Rep. 154; [2009] 2
B.C.L.C. 137
Kaye v Croydon Tramways Co [1898] 1 Ch. 358 CA 15–65
Kaye v Zeital. See Zeital v Kaye
Kaytech International Plc, Re; sub nom Secretary of State 10–5, 10–11, 16–10, 16–8
for Trade and Industry v Kaczer; Potier v Secretary of
State for Trade and Industry; Secretary of State for
Trade and Industry v Potier; Secretary of State for Trade
and Industry v Solly [1999] B.C.C. 390; [1999] 2
B.C.L.C. 351 CA (Civ Div)
Keech v Sandford, 25 E.R. 223; (1726) Sel. Cas. Ch. 61 Ct 16–89
of Chancery
Keenan Bros Ltd, Re [1986] B.C.L.C. 242 Sup Ct (Irl) 32–22
Kellar v Williams [2000] 2 B.C.L.C. 390 PC 11–1
Kelner v Baxter (1866–67) L.R. 2 C.P. 174 CCP 5–24, 5–26
Kemp v Baerselman [1906] 2 K.B. 604 CA 2–22
Kensington International Ltd v Congo [2007] EWCA Civ 8–12
1128; [2008] 1 W.L.R. 1144; [2008] 1 All E.R. (Comm)
934; [2008] 1 Lloyd’s Rep. 161; [2008] C.P. Rep. 6;
[2007] 2 C.L.C. 791; [2008] Lloyd’s Rep. F.C. 107;
(2007) 104(45) L.S.G. 31
Keypak Homecare Ltd (No.2), Re [1990] B.C.C. 117; 10–9
Khoshkhou v Cooper [2014] EWHC 1087 (Ch) 20–8, 20–19
Kingston Cotton Mill Co (No.1), Re [1896] 1 Ch. 6 CA 22–12
Kingston Cotton Mill Co (No.2), Re [1896] 2 Ch. 279 CA 22–36
Kinlan v Crimmin [2006] EWHC 779 (Ch); [2007] B.C.C. 13–10, 13–20, 15–20
106; [2007] 2 B.C.L.C. 67
Kinsela v Russell Kinsela Pty Ltd [1986] 4 N.S.W.L.R. 722 9–15
Kirby v Wilkins [1929] 2 Ch. 444 Ch D 15–31
Kitson & Co Ltd, Re [1946] 1 All E.R. 435 CA 20–22
Kleanthous v Paphitis [2011] EWHC 2287 (Ch); [2012] 17–21
B.C.C. 676; (2011) 108(36) L.S.G. 19
Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 8–4
1 W.L.R. 379; [1989] 1 All E.R. 785; [1989] 1 Lloyd’s
Rep. 556; (1989) 5 B.C.C. 337; (1989) 86(16) L.S.G.
35; (1989) 139 N.L.J. 221; (1989) 133 S.J. 262 CA (Civ
Div)
Knight v Lawrence [1991] B.C.C. 411; [1993] B.C.L.C. 32–39, 32–40
215; [1991] 01 E.G. 105; [1990] E.G. 64 (C.S.) Ch D
Knightsbridge Estates Trust Ltd v Byrne [1940] A.C. 613 31–21, 31–6, 31–7
HL
Knowles v Scott [1891] 1 Ch. 717 Ch D 33–16
Konamaneni v Rolls Royce Industrial Power (India) Ltd 17–4
[2002] 1 W.L.R. 1269; [2002] 1 All E.R. 979; [2002] 1
All E.R. (Comm) 532; [2003] B.C.C. 790; [2002] 1
B.C.L.C. 336; [2002] I.L.Pr. 40 Ch D
Koninklijke Philips Electronics NV v Princo Digital Disc 7–36
GmbH [2003] EWHC 2588 (Pat); [2004] 2 B.C.L.C. 50
KR Hardy Estates Ltd, Re [2014] EWHC 4001 (Ch) 20–20
Kreditbank Cassel GmbH v Schenkers Ltd [1927] 1 K.B. 7–19, 7–22, 7–26
826 CA
Kung v Kou (2004) 7 HKCFAR 579 20–16, 20–17
Kuwait Asia Bank EC v National Mutual Life Nominees 9–15, 16–28, 16–36
Ltd [1991] 1 A.C. 187; [1990] 3 W.L.R. 297; [1990] 3
All E.R. 404; [1990] 2 Lloyd’s Rep. 95; [1990] B.C.C.
567; [1990] B.C.L.C. 868 PC
La SA des Anciens Etablissements Panhard et Levassor v 4–25

Panhard Levassor Motor Co Ltd [1901] 2 Ch. 513;
(1901) 18 R.P.C. 405 Ch D
Lady Forrest (Murchison) Gold Mine Ltd, Re [1901] 1 Ch. 5–18, 5–19, 16–113
582 Ch D
Lady Gwendolen, The. See Arthur Guinness, Son & Co
(Dublin) Ltd v Owners of the Motor Vessel Freshfield
(The Lady Gwendolen)
Ladywell Mining Co v Brookes; Ladywell Mining Co v 5–10, 5–17, 5–18, 16–113
Huggons (1887) L.R. 35 Ch. D. 400 CA
Lafonta v Autorité des marchés financiers (C–628/13) 30–37
EU:C:2015:162; [2015] Bus. L.R. 483; [2015] 3
C.M.L.R. 11; [2015] C.E.C. 1129; [2015] Lloyd’s Rep.
F.C. 313 ECJ (2nd Chamber)
Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch. 392 5–3, 5–13, 5–17, 16–113
CA
Lanber Properties LLP and Lanber II GmbH, Re [2014] 29–19
EWHC 4713 (Ch)
Land and Property Trust Co Plc (No.1), Re; sub nom 20–21
Andromache Properties Ltd, Re [1991] B.C.C. 446;
Lander v Premier Pict Petroleum Ltd, 1997 S.L.T. 1361; 14–62, 28–32
[1998] B.C.C. 248; 1997 G.W.D. 17–759 OH
Lands Allotment Co, Re [1894] 1 Ch. 616 CA 16–24, 16–111, 17–2
Langen & Wind Ltd v Bell [1972] Ch. 685; [1972] 2 27–8
W.L.R. 170; [1972] 1 All E.R. 296; (1971) 115 S.J. 966
Ch D
Larvin v Phoenix Office Supplies Ltd; sub nom Phoenix 20–23
Office Supplies Ltd v Larvin; Phoenix Office Supplies
Ltd, Re [2002] EWCA Civ 1740; [2003] B.C.C. 11;
[2003] 1 B.C.L.C. 76; (2003) 100(5) L.S.G. 29
Law Debenture Trust Corp Plc v Concord Trust [2007] 31–29, 31–30
EWHC 1380 (Ch)
Lebon v Aqua Salt Co Ltd [2009] UKPC 2; [2009] B.C.C. 7–41
425; [2009] 1 B.C.L.C. 549
Lee (Samuel Tak) v Chou Wen Hsien [1984] 1 W.L.R. 14–49
1202; (1984) 1 B.C.C. 99291; (1984) 81 L.S.G. 2929;
(1984) 128 S.J. 737 PC (HK)
Lee v Lee’s Air Farming Ltd [1961] A.C. 12; [1960] 3 8–9
W.L.R. 758; [1960] 3 All E.R. 420; (1960) 104 S.J. 869
PC (NZ)
Lee v Neuchatel Asphalte Co (1889) L.R. 41 Ch. D. 1 CA 12–3
Lee Behrens & Co Ltd, Re [1932] 2 Ch. 46 Ch D 16–41, 16–50
Lee Panavision Ltd v Lee Lighting Ltd [1991] B.C.C. 620; 16–26, 16–27
[1992] B.C.L.C. 22 CA (Civ Div)
Leeds and Hanley Theatres of Varieties Ltd (No.1), Re 5–17, 5–19
[1902] 2 Ch. 809 CA
Leeds Estate, Building and Investment Co v Shepherd 16–24, 22–36
(1887) L.R. 36 Ch. D. 787 Ch D
Leeds United Association Football Club Ltd, Re; sub nom 32–49
Leeds United Association Football Club Ltd (In
Administration), Re [2007] EWHC 1761 (Ch); [2007]
Bus. L.R. 1560; [2008] B.C.C. 11; [2007] I.C.R. 1688
Legal Costs Negotiators Ltd, Re; sub nom Morris v Hateley 20–1
[1999] B.C.C. 547; [1999] 2 B.C.L.C. 171; (1999)
96(13) L.S.G. 31 CA (Civ Div)
Lehman Brothers International (Europe) (In 31–31
Administration), Re [2009] EWCA Civ 1161; [2010]
Bus. L.R. 489; [2010] B.C.C. 272; [2010] 1 B.C.L.C.
496
Lehman Brothers International (Europe) (In 32–3
Administration), Re; sub nom Pearson v Lehman
Brothers Finance SA [2011] EWCA Civ 1544
Lemon v Austin Friars Investment Trust Ltd [1926] Ch. 1 31–2, 31–6
CA
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd; sub 7–40
nom Asiatic Petroleum Co Ltd v Lennard’s Carrying Co
Ltd [1915] A.C. 705 HL
Levy v Abercorris Slate and Slab Co (1888) L.R. 37 Ch. D. 31–6
260 Ch D
Lewis v IRC; sub nom Floor Fourteen Ltd, Re [2001] 3 All 33–25
E.R. 499; [2002] B.C.C. 198; [2001] 2 B.C.L.C. 392;
(2000) 97(46) L.S.G. 39 CA (Civ Div)
Lewis v Nicholson and Parker, 118 E.R. 190; (1852) 18 7–30
Q.B. 503 QB
Lewis Merthyr Consolidated Collieries Ltd, Re (No.1); sub 32–19
nom Lloyds Bank Ltd v Lewis Merthyr Consolidated
Collieries Ltd [1929] 1 Ch. 498 CA
Lexi Holdings Plc (In Administration) v Luqman [2009] 16–18
EWCA Civ 117; [2009] B.C.C. 716; [2009] 2 B.C.L.C.
1
Leyland DAF Ltd v Automotive Products Plc [1993] B.C.C. 32–46
389; [1994] 1 B.C.L.C. 245; [1994] E.C.C. 289; (1993)
Leyland DAF Ltd, Re. See Buchler v Talbot
Libertarian Investment Ltd v Hall (2013) 16 HKCFAR 681 16–20, 16–111, 16–112
Hong Kong Court of Final Appeal
Liberty International Plc, Re; Capital & Counties Properties 13–35
Plc, Re [2010] EWHC 1060 (Ch); [2010] 2 B.C.L.C.
665; [2011] Bus. L.R. D17
Lifecare International Plc, Re (1989) 5 B.C.C. 755; [1990] 28–74
Lightning Electrical Contractors Ltd, Re [1996] B.C.C. 950; 9–16
[1996] 2 B.C.L.C. 302 Ch D
Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd; 31–22
St Martins Property Corp Ltd v Sir Robert McAlpine &
Sons [1994] 1 A.C. 85; [1993] 3 W.L.R. 408; [1993] 3
All E.R. 417; 63 B.L.R. 1; 36 Con. L.R. 1; [1993] E.G.
139 (C.S.); (1993) 143 N.L.J. 1152; (1993) 137 S.J.L.B.
183 HL
Lindgren v L&P Estates Co [1968] Ch. 572; [1968] 2 16–13, 16–41, 16–42
W.L.R. 562; [1968] 1 All E.R. 917; (1967) 204 E.G. 15
CA (Civ Div)
Lindsley v Woodfull. See Woodfull v Lindsley
Linvale Ltd, Re [1993] B.C.L.C. 654 Ch D 10–9
Lion Mutual Marine Insurance Association v Tucker; sub 3–23
nom Lion Mutual Marine Insurance Association Ltd v
Tucker (1883–84) L.R. 12 Q.B.D. 176; (1883) 32 W.R.
546 CA
Liquidator of Marini Ltd v Dickenson; sub nom Marini Ltd, 12–14
Re [2003] EWHC 334 (Ch); [2004] B.C.C. 172
Liquidator of West Mercia Safetywear Ltd v Dodd; sub 9–12, 16–120, 19–6
nom West Mercia Safetywear Ltd (In Liquidation) v
Dodd (1988) 4 B.C.C. 30; [1988] B.C.L.C. 250; [1988]
P.C.C. 212 CA (Civ Div)
Lister v Hesley Hall Ltd [2001] UKHL 22; [2002] 1 A.C. 7–31
215; [2001] 2 W.L.R. 1311; [2001] 2 All E.R. 769;
[2001] I.C.R. 665; [2001] I.R.L.R. 472; [2001] Emp.
L.R. 819; [2001] 2 F.L.R. 307; [2001] 2 F.C.R. 97;
(2001) 3 L.G.L.R. 49; [2001] E.L.R. 422; [2001] Fam.
Law 595; (2001) 98(24) L.S.G. 45; (2001) 151 N.L.J.
728; (2001) 145 S.J.L.B. 126; [2001] N.P.C. 89 HL
Lister v Romford Ice and Cold Storage Co Ltd; sub nom 7–34, 16–12
Romford Ice & Cold Storage Co v Lister [1957] A.C.
555; [1957] 2 W.L.R. 158; [1957] 1 All E.R. 125;
[1956] 2 Lloyd’s Rep. 505; (1957) 121 J.P. 98; (1957)
101 S.J. 106 HL
Lister & Co v Stubbs (1890) L.R. 45 Ch. D. 1 CA 16–108, 16–115
Livanona Plc and Sorin SpA, Re [2015] B.C.C. 914 29–19
Living Images Ltd, Re [1996] B.C.C. 112; [1996] 1 10–11
B.C.L.C. 348 Ch D
Lloyd Cheyham & Co v Littlejohn & Co [1987] B.C.L.C. 21–17, 22–36
303; [1986] P.C.C. 389 QBD
Lloyd v Casey; sub nom Casey’s Film & Video Ltd, Re 20–2
[2002] 1 B.C.L.C. 454; [2002] Pens. L.R. 185 Ch D
Lloyd v Grace Smith & Co [1912] A.C. 716 HL 7–31
LNOC Ltd v Watford Association Football Club Ltd [2013] 16–39
EWHC 3615 (Comm)
Loch v John Blackwood Ltd [1924] A.C. 783; [1924] All 20–22
E.R. Rep. 200; [1924] 3 W.W.R. 216 PC
Logicrose Ltd v Southend United Football Club Ltd (No.2) 16–107
[1988] 1 W.L.R. 1256; [1988] E.G. 114 (C.S.) Ch D
Lombard Medical Technologies Plc, Re [2014] EWHC 29–19
2457 (Ch); [2015] 1 B.C.L.C. 656
London & Mashonaland Exploration Co v New 16–100
Mashonaland Exploration Co [1891] W.N. 165
London and General Bank, Re [1895] 2 Ch. 166 CA 22–12
London India Rubber Co, Re (1867–68) L.R. 5 Eq. 519 Ct 23–8
of Chancery
London Iron & Steel Co Ltd, Re [1990] B.C.C. 159; [1990] 32–37
London Sack & Bag Co v Dixon & Lugton [1943] 2 All 3–23
E.R. 763 CA
London School of Electronics Ltd, Re [1986] Ch. 211; 20–13, 20–14
[1985] 3 W.L.R. 474; (1985) 1 B.C.C. 99394; [1985]
P.C.C. 248; (1985) 129 S.J. 573 Ch D
London, Hamburgh, & Continental Exchange Bank (No.1), 24–21
Re; sub nom Evans’s Case (1866–67) L.R. 2 Ch. App.
427 CA
Lonrho Ltd v Shell Petroleum Co Ltd (No.2) [1982] A.C. 30–54
173; [1981] 3 W.L.R. 33; [1981] 2 All E.R. 456; (1981)
125 S.J. 429 HL
Lonrho Plc (No.2), Re; sub nom Lonrho v Bond Corp 28–51, 28–53
(No.2) [1990] Ch. 695; [1989] 3 W.L.R. 1106; (1989) 5
B.C.C. 776; [1990] B.C.L.C. 151; (1989) 133 S.J. 1445
Ch D (Companies Ct)
Loquitur, Re. See IRC v Richmond
Lordsvale Finance Plc v Bank of Zambia [1996] Q.B. 752; 31–27
[1996] 3 W.L.R. 688; [1996] 3 All E.R. 156; [1996]
C.L.C. 1849 QBD
Lovett v Carson Country Homes Ltd; sub nom Carson 7–19
Country Homes Ltd, Re [2009] EWHC 1143 (Ch);
[2011] B.C.C. 789; [2009] 2 B.C.L.C. 196
Lowe v Fahey; sub nom Fahey Developments Ltd, Re 20–14
[1996] B.C.C. 320; [1996] 1 B.C.L.C. 262 Ch D
Lowry (Inspector of Taxes) v Consolidated African 11–5
Selection Trust Ltd [1940] A.C. 648 HL
Lubbe v Cape Plc; Afrika v Cape Plc [2000] 1 W.L.R. 8–10
1545; [2000] 4 All E.R. 268; [2000] 2 Lloyd’s Rep.
383; [2003] 1 C.L.C. 655; [2001] I.L.Pr. 12; (2000) 144
S.J.L.B. 250 HL
Lundie Bros, Re [1965] 1 W.L.R. 1051; [1965] 2 All E.R. 20–4
692; (1965) 109 S.J. 470 Ch D
Lydney and Wigpool Iron Ore Co v Bird (1886) L.R. 33 5–3, 5–10
Ch. D. 85 CA
Lyle & Scott Ltd v Scott’s Trs; Lyle & Scott v British 3–19, 27–7, 27–8
Investment Trust [1959] A.C. 763; [1959] 3 W.L.R.
133; [1959] 2 All E.R. 661; 1959 S.C. (H.L.) 64; 1959
S.L.T. 198; (1959) 103 S.J. 661; (1959) 103 S.J. 507 HL
MacDougall v Gardiner (1875–76) L.R. 1 Ch. D. 13 CA 3–27, 3–29
Mackay, Ex p. See Jeavons Ex p. Mackay, Re
Mackenzie & Co, Re; sub nom Mackenzie & Co Ltd, Re 19–16, 23–8
[1916] 2 Ch. 450 Ch D
Macmillan Inc v Bishopsgate Investment Trust Plc (No.3) 27–10
[1995] 1 W.L.R. 978; [1995] 3 All E.R. 747 Ch D
MacPherson v European Strategic Bureau Ltd [2002] 12–9, 13–41, 16–32

B.C.C. 39; [2000] 2 B.C.L.C. 683; (2000) 97(35) L.S.G.
36 CA
Macro (Ipswich) Ltd, Re; sub nom Earliba Finance Co Ltd, 20–8
Re; Macro v Thompson (No.1) [1994] 2 B.C.L.C. 354
Ch D
Madoff Securities International Ltd (In Liquidation) v 15–17, 15–20, 16–17, 16–21, 16–34,
Raven [2013] EWHC 3147 (Comm); [2014] Lloyd’s 16–42, 16–62, 16–112, 16–120, 16–
Rep. F.C. 95 124, 19–6
Mahesan S/O Thambiah v Malaysia Government Officers’ 16–108
Co-operative Housing Society [1979] A.C. 374; [1978]
2 W.L.R. 444; [1978] 2 All E.R. 405; (1978) 122 S.J. 31
PC
Maidstone Building Provisions, Re [1971] 1 W.L.R. 1085; 9–5
[1971] 3 All E.R. 363; (1971) 115 S.J. 464 Ch D
Mair v Rio Grande Rubber Estates Ltd [1913] A.C. 853; 25–37
1913 S.C. (H.L.) 74; (1913) 2 S.L.T.166 HL
Majestic Recording Studios Ltd, Re (1988) 4 B.C.C. 519; 10–11
Makdessi v Cavendish Square Holdings BV [2015] UKSC 31–27
67; [2015] 3 W.L.R. 1373; [2016] 2 All E.R. 519;
[2016] 1 Lloyd’s Rep. 55; [2016] B.L.R. 1; 162 Con.
L.R. 1; [2016] R.T.R. 8; [2016] C.I.L.L. 3769
Malleson v National Insurance & Guarantee Corp [1894] 1 3–31
Ch. 200 Ch D
Man Nutzfahrzeuge AG v Freightliner Ltd; sub nom Man 22–36, 22–49
Nutzfahrzeuge AG v Ernst & Young [2007] EWCA Civ
910; [2007] B.C.C. 986; [2008] 2 B.C.L.C. 22; [2007] 2
C.L.C. 455; [2008] Lloyd’s Rep. F.C. 77; [2008]
P.N.L.R. 6; (2007) 104(37) L.S.G. 35; (2007) 151
S.J.L.B. 1229
Mancetter Developments v Garmanson and Givertz [1986] 7–36
Q.B. 1212; [1986] 2 W.L.R. 871; [1986] 1 All E.R. 449;
(1986) 2 B.C.C. 98924; [1986] 1 E.G.L.R. 240; (1985)
83 L.S.G. 612; (1983) 83 L.S.G. 612; (1986) 130 S.J.
129 CA (Civ Div)
Manifest Shipping Co Ltd v Uni–Polaris Insurance Co Ltd 9–5
(The Star Sea); Star Sea, The; sub nom Manifest
Shipping Co Ltd v Uni–Polaris Shipping Co Ltd (The
Star Sea) [2001] UKHL 1; [2003] 1 A.C. 469; [2001] 2
W.L.R. 170; [2001] 1 All E.R. 743; [2001] 1 All E.R.
(Comm) 193; [2001] 1 Lloyd’s Rep. 389; [2001] C.L.C.
608; [2001] Lloyd’s Rep. I.R. 247
Manisty’s Case (1873) 17 S.J. 745 16–26
Manlon Trading Ltd (Directors: Disqualification), Re; 10–7
Knight (practising as Dibb & Clegg, Barnsley), Re; sub
nom Official Receiver v Aziz [1996] Ch. 136; [1995] 3
W.L.R. 839; [1995] 4 All E.R. 14; [1995] B.C.C. 579;
[1995] 1 B.C.L.C. 578 CA (Civ Div)
Mann v Edinburgh Northern Tramways Co [1893] A.C. 69; 5–3
(1892) 20 R. (H.L.) 7 HL
Manson v Smith (Liquidator of Thomas Christy Ltd) [1997] 33–23
2 B.C.L.C. 161 CA (Civ Div)
Marblestone Industries Ltd v Fairchild [1975] 1 N.Z.L.R. 5–25
529
Maresca v Brookfield Development and Construction 20–21
[2013] EWHC 3151 (Ch)
Marini Ltd, Re. See Liquidator of Marini Ltd v Dickenson
Market Wizard Systems (UK) Ltd, Re [1998] 2 B.C.L.C. 10–3
282; [1998–99] Info T.L.R. 19; [1998] I.T.C.L.R. 171;
[1999] Masons C.L.R. 1; (1998) 95(33) L.S.G. 34;
(1998) 142 S.J.L.B. 229 Ch D (Companies Ct)
Marshalls Valve Gear Co Ltd v Manning Wardle & Co Ltd 14–6
[1909] 1 Ch. 267 Ch D
Massey v Wales (2003) 57 N.S.W.L.R. 718 CA (NSW) 14–11
Matchnet Plc v William Blair & Co LLC [2002] EWHC 6–4
2128 (Ch); [2003] 2 B.C.L.C. 195
Mathew Ellis Ltd, Re [1933] Ch. 458 CA 32–14
Mawcon, Re; sub nom Mawcon, Ltd, Re [1969] 1 W.L.R. 7–27
78; [1969] 1 All E.R. 188; (1968) 112 S.J. 1004 Ch D
Maxwell v Department of Trade and Industry; Maxwell v 18–8
Stable [1974] Q.B. 523; [1974] 2 W.L.R. 338; [1974] 2
All E.R. 122; (1974) 118 S.J. 203 CA (Civ Div)
MC Bacon Ltd (No.1), Re; sub nom Company (No.005009 32–14, 33–18
of 1987) (No.1), Re [1990] B.C.C. 78; [1990] B.C.L.C.
MC Bacon Ltd (No.2), Re; sub nom Company (No.005009 33–18, 32–19, 33–25
of 1987) (No.2), Re [1991] Ch. 127; [1990] 3 W.L.R.
646; [1990] B.C.C. 430; [1990] B.C.L.C. 607 Ch D
(Companies Ct)
MCA Records Inc v Charly Records Ltd (No.5) [2001] 7–36
EWCA Civ 1441; [2002] B.C.C. 650; [2003] 1 B.C.L.C.
93; [2002] E.C.D.R. 37; [2002] E.M.L.R. 1; [2002]
F.S.R. 26
McCarthy Surfacing Ltd, Re; sub nom Hecquet v McCarthy 20–2
[2006] EWHC 832 (Ch)
McCarthy Surfacing Ltd, Re; sub nom Hequet v McCarthy 20–10, 20–12, 20–14, 20–19
[2008] EWHC 2279 (Ch); [2009] B.C.C. 464; [2009] 1
B.C.L.C. 622
McDonald v Horn [1995] 1 All E.R. 961; [1995] I.C.R. 17–27
685; [1994] Pens. L.R. 155; (1994) 144 N.L.J. 1515 CA
(Civ Div)
McGuinness v Bremner Plc; sub nom McGuiness, 20–12
Petitioner, 1988 S.L.T. 891; 1988 S.C.L.R. 226; (1988)
4 B.C.C. 161; [1988] B.C.L.C. 673 OH
MCI WorldCom International Inc v Primus 7–22
Telecommunications Inc; sub nom Primus
Telecommunications Inc v MCI Worldcom
International Inc [2003] EWHC 2182 (Comm); [2004] 1
All E.R. (Comm) 138; [2004] 1 B.C.L.C. 42
McKillen v Misland (Cyprus) Investments Ltd [2012] 16–10
EWHC 521 (Ch)
McMahon v North Kent Ironworks Co [1891] 2 Ch. 148 Ch 32–37
D
McMillan v Le Roi Mining Co Ltd [1906] 1 Ch. 331 Ch D 15–75
Measures Bros Ltd v Measures [1910] 2 Ch. 248 CA 16–110
Mechanisations (Eaglescliffe), Re [1966] Ch. 20; [1965] 2 32–32
W.L.R. 702; [1964] 3 All E.R. 840; (1965) 109 S.J. 230
Medforth v Blake [2000] Ch. 86; [1999] 3 W.L.R. 922; 32–38, 32–39, 32–40
[1999] 3 All E.R. 97; [1999] B.C.C. 771; [1999] 2
B.C.L.C. 221; [1999] B.P.I.R. 712; [1999] Lloyd’s Rep.
P.N. 844; [1999] P.N.L.R. 920; [1999] 2 E.G.L.R. 75;
[1999] 29 E.G. 119; [1999] E.G. 81 (C.S.); (1999)
96(24) L.S.G. 39; (1999) 149 N.L.J. 929 CA (Civ Div)
Menier v Hooper’s Telegraph Works (1873–74) L.R. 9 Ch. 16–124
App. 350 CA in Chancery
Mercantile Bank of India v Chartered Bank of India [1937] 7–26
1 All E.R. 231
Mercantile Credit Association v Coleman. See Imperial
Mercantile Credit Association (In Liquidation) v
Coleman
Mercantile Trading Co, Schroeder’s Case, Re (1871) L.R. 11–15
11 Eq. 13
Meridian Global Funds Management Asia Ltd v Securities 7–3, 7–41, 7–43, 9–5, 14–22
Commission [1995] 2 A.C. 500; [1995] 3 W.L.R. 413;
[1995] 3 All E.R. 918; [1995] B.C.C. 942; [1995] 2
B.C.L.C. 116; (1995) 92(28) L.S.G. 39; (1995) 139
S.J.L.B. 152 PC (NZ)
Merrett v Babb [2001] EWCA Civ 214; [2001] Q.B. 1174; 7–32, 22–34
[2001] 3 W.L.R. 1; [2001] B.L.R. 483; (2001) 3
T.C.L.R. 15; 80 Con. L.R. 43; [2001] Lloyd’s Rep. P.N.
468; [2001] P.N.L.R. 29; [2001] 1 E.G.L.R. 145; [2001]
8 E.G. 167 (C.S.); (2001) 98(13) L.S.G. 41; (2001) 145
S.J.L.B. 75
Metropolitan Bank v Heiron (1879–80) L.R. 5 Ex. D. 319 16–108, 16–115
CA
Meyer v Scottish Co-operative Wholesale Society Ltd; sub 8–11, 16–41, 16–100, 16–101, 20–1,
nom Scottish Co-operative Wholesale Society v Meyer; 20–4
Meyer v Scottish Textile & Manufacturing Co Ltd
[1959] A.C. 324; [1958] 3 W.L.R. 404; [1958] 3 All
E.R. 66; 1958 S.C. (H.L.) 40; 1958 S.L.T. 241; (1958)
102 S.J. 617 HL
Michaels v Harley House (Marylebone) Ltd; sub nom 15–81, 27–8
Michaels v Frogmore Estates Plc [2000] Ch. 104;
[1999] 3 W.L.R. 229; [1999] 1 All E.R. 356; [1999]
B.C.C. 967; [1999] 1 B.C.L.C 670; (1999) 31 H.L.R.
990; [1999] L. & T.R. 374; [1998] E.G. 159 (C.S.);
[1998] N.P.C. 150 CA (Civ Div)
MIG Trust, Re. See Peat v Gresham Trust Ltd
Might SA v Redbus Interhouse Plc [2003] EWHC 3514 15–82
(Ch); [2004] 2 B.C.L.C. 449
Millennium Advanced Technology Ltd, Re; sub nom Tower 20–21
Hamlets LBC v Millennium Advanced Technology Ltd
[2004] EWHC 711 (Ch); [2004] 1 W.L.R. 2177; [2004]
4 All E.R. 465; [2004] 2 B.C.L.C. 77; (2004) 101(18)
L.S.G. 34
Miller v Bain (Director’s Breach of Duty); sub nom 16–138
Pantone 485 Ltd, Re [2002] 1 B.C.L.C. 266 Ch D
(Companies Ct)
Mills v HSBC Trustee (CI) Ltd; sub nom Kaupthing Singer 33–22
& Freidlander Ltd (In Administration), Re [2011]
UKSC 48; [2011] 3 W.L.R. 939; [2011] Bus. L.R. 1644;
[2012] 1 All E.R. 883; [2012] B.C.C. 1; [2012] 1
B.C.L.C. 227; [2011] B.P.I.R. 1706; (2011) 161 N.L.J.
1485; [2011] N.P.C. 105
Mills v Mills (1938) 60 C.L.R. 150 High Ct (Aus) 16–29
Mills v Sportsdirect.com Retail Ltd (formerly Sports World 27–10, 27–15
International Ltd) [2010] EWHC 1072 (Ch); [2010] 2
B.C.L.C. 143; [2010] 2 P. & C.R. DG19
Milroy v Lord, 45 E.R. 1185; (1862) 4 De G.F. & J. 264 27–9
QB
Ministry of Housing and Local Government v Sharp [1970] 32–32
2 Q.B. 223; [1970] 2 W.L.R. 802; [1970] 1 All E.R.
1009; 68 L.G.R. 187; (1970) 21 P. & C.R. 166; (1970)
Minster Assets Plc, Re (1985) 1 B.C.C. 99299; [1985] 29–10
P.C.C. 105; (1985) 82 L.S.G. 277; [1985] B.C.L.C. 200
Ch D
Mirror Group Newspapers Plc, Re. See Thomas v Maxwell
Mission Capital Plc v Sinclair [2008] EWHC 1339 (Ch); 17–18
[2008] B.C.C. 866; [2010] 1 B.C.L.C. 304
Mohammed v Financial Services Authority [2005] UKFSM 30–30
FSM012
Mohamud v Wm Morrison Supermarkets Plc [2016] UKSC 7–31
11; [2016] 2 W.L.R. 821; [2016] I.C.R. 485; [2016]
I.R.L.R. 362; [2016] P.I.Q.R. P11
Mohoney v East Holyford Mining Co (1874–75) L.R. 7 7–7
H.L. 869 HL (UK–Irl)
Mond v Hammond Suddards (No.2); sub nom RS&M 33–25
Engineering Co Ltd, Re [2000] Ch. 40; [1999] 3 W.L.R.
697; [2000] B.C.C. 445; [1999] 2 B.C.L.C. 485; [1999]
B.P.I.R. 975 CA (Civ Div)
Monnington v Easier Plc [2005] EWHC 2578 (Ch); [2006] 14–52, 15–54
2 B.C.L.C. 283
Moodie v W&J Shepherd (Bookbinders); sub nom Moodie 27–7
v WJ Shephard (Bookbinders); Shepherd’s Trustees v
W&J Shepherd (Bookbinders) Ltd; Shepherd’s Trustees
v Shepherd [1949] 2 All E.R. 1044; 1950 S.C. (H.L.)
60; 1950 S.L.T. 90; 1949 S.L.T. (Notes) 55; [1949]
W.N. 482; (1950) 94 S.J. 95 HL
Moore v I Bresler Ltd [1944] 2 All E.R. 515 KBD 7–40
Moorgate Mercantile Holdings Ltd, Re [1980] 1 W.L.R. 15–19, 15–47, 15–65
227; [1980] 1 All E.R. 40; (1979) 123 S.J. 557 Ch D
Moorgate Metals Ltd, Re; sub nom Official Receiver v 10–3
Huhtala [1995] B.C.C. 143; [1995] 1 B.C.L.C. 503 Ch
D
Morgan Crucible Co Plc v Hill Samuel Bank & Co Ltd; sub 28–64
nom Morgan Crucible Co Plc v Hill Samuel & Co Ltd
[1991] Ch. 295; [1991] 2 W.L.R. 655; [1991] 1 All E.R.
148; [1991] B.C.C. 82; [1991] B.C.L.C. 178; (1990)
140 N.L.J. 1605 CA (Civ Div)
Morija Plc, Re; sub nom Kluk v Secretary of State for 10–2
Business, Enterprise and Regulatory Reform [2007]
EWHC 3055 (Ch); [2008] 2 B.C.L.C. 313
Morphitis v Bernasconi; sub nom Morphites v Bernasconi 9–5, 9–8, 9–19
[2003] EWCA Civ 289; [2003] Ch. 552; [2003] 2
W.L.R. 1521; [2003] B.C.C. 540; [2003] 2 B.C.L.C. 53;
[2003] B.P.I.R. 973; (2003) 100(19) L.S.G. 30; (2003)
Morris v Bank of India; sub nom Bank of Credit and 9–5
Commerce International SA (In Liquidation) (No.14),
Re [2003] EWHC 1868 (Ch); [2003] B.C.C. 735;
[2004] 2 B.C.L.C. 236
Morris v Bank of India; sub nom Bank of Credit and 9–5
Commerce International SA (In Liquidation) (No.15),
Re; Bank of India v Morris [2005] EWCA Civ 693;
[2005] B.C.C. 739; [2005] 2 B.C.L.C. 328; [2005]
B.P.I.R. 1067
Morris v CW Martin & Sons Ltd; sub nom Morris v Martin 7–31
[1966] 1 Q.B. 716; [1965] 3 W.L.R. 276; [1965] 2 All
E.R. 725; [1965] 2 Lloyd’s Rep. 63; (1965) 109 S.J. 451
CA
Morris v Kanssen; sub nom Kanssen v Rialto (West End) 7–7, 7–12
Ltd [1946] A.C. 459 HL
Morris v Royal Bank of Scotland Plc No. (HC-2014- 31–22
001910) Unreported 3 July 2015 Norris J
Mosely v Koffyfontein Mines Ltd [1904] 2 Ch. 108 CA 31–3
Mosely v Koffyfontein Mines Ltd; sub nom Koffyfontein 3–29
Mines Ltd v Mosely [1911] 1 Ch. 73 CA
Moss Steamship Co Ltd v Whinney; sub nom Whinney v 32–38
Moss Steamship Co Ltd [1912] A.C. 254 HL
Moulin Global Eyecare Trading Ltd (in liquidation) v Comr 7–3, 16–4
of Inland Revenue [2014] 3 HKC 32 HKCFA
Mousell Bros Ltd v London & North Western Ry [1917] 2 7–39, 16–126
K.B. 836 KBD
Movitex v Bulfield (1986) 2 B.C.C. 99403; [1988] B.C.L.C. 16–127
104 Ch D
MS Fashions Ltd v Bank of Credit and Commerce 33–23
International SA (In Liquidation); High Street Services
v Bank of Credit and Commerce International;
Impexbond v Bank of Credit and Commerce
International; sub nom MS Fashions Ltd v Bank of
Credit and Commerce International SA (No.2) [1993]
Ch. 425; [1993] 3 W.L.R. 220; [1993] 3 All E.R. 769;
[1993] B.C.C. 360; [1993] B.C.L.C. 1200; (1993) 137
S.J.L.B. 132 CA (Civ Div)
MSL Group Holdings Ltd v Clearwell International Ltd 16–50
[2012] EWHC 3707 (QB)
MT Realisations Ltd (In Liquidation) v Digital Equipment 13–49
Co Ltd [2003] EWCA Civ 494; [2003] B.C.C. 415;
[2003] 2 B.C.L.C. 117
Multinational Gas & Petrochemical Co v Multinational Gas 15–17, 15–19
& Petrochemical Services Ltd [1983] Ch. 258; [1983] 3
W.L.R. 492; [1983] 2 All E.R. 563; (1983) 127 S.J. 562
CA (Civ Div)
Murad v Al-Saraj; Murad v Westwood Business Inc [2005] 16–114
EWCA Civ 959; [2005] W.T.L.R. 1573; (2005) 102(32)
L.S.G. 31
Murray’s Judicial Factor v Thomas Murray & Sons (Ice 20–8
Merchants) Ltd , 1992 S.C. 435; 1992 S.L.T. 824;
[1992] B.C.C. 596; [1993] B.C.L.C. 1437 IH (2 Div)
Musselwhite v CH Musselwhite & Son Ltd [1962] Ch. 964; 15–66, 15–81, 27–8
[1962] 2 W.L.R. 374; [1962] 1 All E.R. 201; (1962) 106
S.J. 37 Ch D
Mutual Life Insurance Co of New York v Rank 19–21, 20–23, 24–11, 28–71
Organisation Ltd [1985] B.C.L.C. 11 Ch D
Mutual Reinsurance Co Ltd v Peat Marwick Mitchell & Co; 22–12
sub nom Mutual Reinsurance Co Ltd v KPMG Peat
Marwick [1997] 1 Lloyd’s Rep. 253; [1996] B.C.C.
1010; [1997] 1 B.C.L.C. 1; [1997] P.N.L.R. 75 CA (Civ
Div)
MyTravel Group Plc, Re [2004] EWCA Civ 1734; [2005] 2 29–2, 29–4, 29–9, 29–10, 29–14
B.C.L.C. 123
Nanwa Gold Mines Ltd, Re; sub nom Ballantyne v Nanwa 24–20
Gold Mines Ltd [1955] 1 W.L.R. 1080; [1955] 3 All
E.R. 219; (1955) 99 S.J. 709 Ch D
Natal Land & Colonization Co Ltd v Pauline Colliery and 5–24
Development Syndicate Ltd [1904] A.C. 120 PC
National Bank Ltd, Re [1966] 1 W.L.R. 819; [1966] 1 All 29–3, 29–4, 29–11
E.R. 1006; (1966) 110 S.J. 226 Ch D
National Dwellings Society v Sykes [1894] 3 Ch. 159 Ch D 15–83
National Farmers Union Development Trusts, Re; sub nom 29–4
NFU Development Trust, Re [1972] 1 W.L.R. 1548;
[1973] 1 All E.R. 135; (1972) 116 S.J. 679 Ch D
National Motor Mail-Coach Co Ltd, Re [1908] 2 Ch. 515 5–21
CA
National Provincial & Union Bank of England v Charnley 32–32
[1924] 1 K.B. 431 CA
National Telephone Co, Re [1914] 1 Ch. 755 Ch D 23–8
National Westminster Bank Ltd v Halesowen Presswork 33–23
and Assemblies Ltd; sub nom Halesowen Presswork &
Assemblies v Westminster Bank Ltd [1972] A.C. 785;
[1972] 2 W.L.R. 455; [1972] 1 All E.R. 641; [1972] 1
Lloyd’s Rep. 101; (1972) 116 S.J. 138 HL
National Westminster Bank Plc v IRC; Barclays Bank Plc v 24–18
IRC [1995] 1 A.C. 119; [1994] 3 W.L.R. 159; [1994] 3
All E.R. 1; [1994] S.T.C. 580; [1994] 2 B.C.L.C. 239;
67 T.C. 38; [1994] S.T.I. 756; (1994) 91(32) L.S.G. 44;
(1994) 138 S.J.L.B. 139 HL
NBH Ltd v Hoare [2006] EWHC 73 (Ch); [2006] 2 16–74
B.C.L.C. 649
Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald 16–60
[1996] Ch. 274; [1995] 3 W.L.R. 108; [1995] 3 All E.R.
811; [1995] B.C.C. 474; [1995] 1 B.C.L.C. 352 Ch D
Neufeld v Secretary of State for Business, Enterprise and
Regulatory Reform. See Secretary of State for Business,
Enterprise and Regulatory Reform v Neufeld
Neville (Administrator of Unigreg Ltd) v Krikorian [2006] 16–83
EWCA Civ 943; [2006] B.C.C. 937; [2007] 1 B.C.L.C.
1
New British Iron Co Ex p. Beckwith, Re [1898] 1 Ch. 324 14–55
Ch D
New Bullas Trading Ltd, Re [1994] B.C.C. 36; [1994] 1 32–22
New Cedos Engineering Co Ltd, Re [1994] 1 B.C.L.C. 797 7–7, 15–15, 27–7
Ch D
New Chinese Antimony Co Ltd, Re [1916] 2 Ch. 115 Ch D 23–8
New Generation Engineers Ltd, Re [1993] B.C.L.C. 435 Ch 10–11
D (Companies Ct)
New York Breweries Co Ltd v Att Gen; sub nom Att Gen v 27–21
New York Breweries Co Ltd [1899] A.C. 62 HL
New York Taxicab Co Ltd, Re; sub nom Sequin v New 32–37
York Taxicab Co Ltd [1913] 1 Ch. 1 Ch D
New Zealand Guardian Trust Co Ltd v Brooks [1995] 1 7–34, 31–14
W.L.R. 96; [1995] B.C.C. 407; [1995] 2 B.C.L.C. 242;
(1995) 92(1) L.S.G. 36; (1994) 138 S.J.L.B. 240 PC
(NZ)
Newborne v Sensolid (Great Britain) Ltd [1954] 1 Q.B. 45; 5–24, 5–26
[1953] 2 W.L.R. 596; [1953] 1 All E.R. 708; (1953) 97
S.J. 209 CA
Newgate Stud Co v Penfold [2004] EWHC 2993 (Ch); 16–60
[2008] 1 B.C.L.C. 46
Newhart Developments Ltd v Co-operative Commercial 32–39
Bank Ltd [1978] Q.B. 814; [1978] 2 W.L.R. 636; [1978]
2 All E.R. 896; (1977) 121 S.J. 847 CA (Civ Div)
Newman and Howard, Re [1962] Ch. 257; [1961] 3 W.L.R. 20–21
192; [1961] 2 All E.R. 495; (1961) 105 S.J. 510 Ch D
NFU Development Trust, Re. See National Farmers Union
Development Trusts, Re
Ngurli v McCann (1954) 90 C.L.R. 425 High Ct (Aus) 16–26
Nicholas v Soundcraft Electronics Ltd; sub nom Soundcraft 16–42, 20–1
Magnetics, Re [1993] B.C.L.C. 360 CA (Civ Div)
Nicholson v Permakraft (NZ) Ltd [1985] 1 N.Z.L.R. 242 9–13
Nielsen Holdings Plc, Re [2015] EWHC 2966 (Ch) 29–19
Nilon Ltd v Royal Westminster Investments SA [2015] 27–19
UKPC 2; [2015] 3 All E.R. 372; [2015] B.C.C. 521;
[2015] 2 B.C.L.C. 1
Noel Tedman Holding Pty Ltd, Re (1967) Qd.R. 561 Sup Ct 2–19
(Qld)
Nokes v Doncaster Amalgamated Collieries Ltd; Donoghue 29–12
v Doncaster Amalgamated Collieries Ltd [1940] A.C.
1014 HL
Norman v Theodore Goddard [1992] B.C.C. 14; [1991] 16–15, 16–17
B.C.L.C. 1028 Ch D
Nortel GmbH and Lehman Bros International (Europe) Ltd,
Re. See Bloom v Pensions Regulator
North v Marra Developments (1981) C.L.R. 42 High Ct 30–29
(Aus)
North Development Pty Ltd, Re (1990) 8 A.C.L.C. 1004 32–38
North Holdings Ltd v Southern Tropics Ltd [1999] B.C.C. 20–18
746; [1999] 2 B.C.L.C. 625 CA (Civ Div)
North West Transportation Co Ltd v Beatty (1887) L.R. 12 5–13, 16–122, 16–124, 19–4
App. Cas. 589 PC (Can)
North Western Ry v M’Michael (1850) 6 Ry. & Can. Cas. 23–1
618; 20 L.J. Ex. 97; 5 Exch. 114
Northampton Regional Livestock Centre Co Ltd v Cowling 16–114, 16–133
[2014] EWHC 30 (QB)
Northern Counties Securities Ltd v Jackson & Steeple Ltd 16–122, 19–4, 28–58
[1974] 1 W.L.R. 1133; [1974] 2 All E.R. 625; (1974)
118 S.J. 498 Ch D
Northern Engineering Industries Plc, Re [1994] B.C.C. 618; 19–17
[1994] 2 B.C.L.C. 704 CA (Civ Div)
Norton v Yates [1906] 1 K.B. 112 KBD 32–10
Norwest Holst Ltd v Secretary of State for Trade [1978] Ch. 18–2, 18–5
201; [1978] 3 W.L.R. 73; [1978] 3 All E.R. 280; (1978)
Novatrust Ltd v Kea Investments Ltd [2014] EWHC 4061 17–6, 17–14, 17–24
(Ch)
Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908; 16–114, 16–135, 16–137
[2015] Q.B. 499; [2015] 2 W.L.R. 526; [2014]
W.T.L.R. 1521; (2014) 158(28) S.J.L.B. 37
NRG Vision Ltd v Churchfield Leasing Ltd (1988) 4 B.C.C. 32–37
56; [1988] B.C.L.C. 624 Ch D
Nugent v Benfield Greig Group Plc; sub nom Benfield 20–18
Greig Group Plc, Re [2001] EWCA Civ 397; [2002]
B.C.C. 256; [2002] 1 B.C.L.C. 65; [2002] W.T.L.R. 769
Nuneaton Borough Association Football Club Ltd (No.1), 24–21
Re (1989) 5 B.C.C. 792; [1989] B.C.L.C. 454 Ch D
(Companies Ct)
NV Slavenburg’s Bank v Intercontinental Natural
Resources Ltd. See Slavenburg’s Bank NV v
Intercontinental Natural Resources
NW Transportation Co v Beatty. See North West
Transportation Co Ltd v Beatty
O’Donnell v Shanahan. See Allied Business & Financial
Consultants Ltd, Re
O’Neill v Phillips; sub nom Company (No.000709 of 1992), 20–6, 20–7, 20–8, 20–9, 20–18
Re; Pectel Ltd, Re [1999] 1 W.L.R. 1092; [1999] 2 All
E.R. 961; [1999] B.C.C. 600; [1999] 2 B.C.L.C. 1;
(1999) 96(23) L.S.G. 33; (1999) 149 N.L.J. 805 HL
Oakdale (Richmond) Ltd v National Westminster Bank Plc 32–4
[1996] B.C.C. 919; [1997] 1 B.C.L.C. 63; [1997] E.C.C.
130; [1997] Eu. L.R. 27; (1996) 15 Tr. L.R. 541 Ch D
Oakes v Turquand; Peek v Turquand; sub nom Overend 4–10, 25–39
Gurney & Co Ex p. Oakes and Peek, Re; Overend
Gurney & Co, Re (1867) L.R. 2 H.L. 325 HL
Oasis Merchandising Services Ltd (In Liquidation), Re; sub 9–10, 33–21
nom Ward v Aitken [1998] Ch. 170; [1997] 2 W.L.R.
764; [1996] 1 All E.R. 1009; [1997] B.C.C. 282; [1997]
1 B.C.L.C. 689; (1996) 146 N.L.J. 1513 CA (Civ Div)
Odyssey Entertainment Ltd (In Liquidation) v Kamp [2012] 16–94
EWHC 2316 (Ch)
Official Receiver v Stern (No.1). See Westminster Property
Management Ltd (No.1), Re
Official Receiver v Stern (No.3). See Westminster Property
Management Ltd (No.3), Re
Old Silkstone Collieries, Re [1954] Ch. 169; [1954] 2 19–16

W.L.R. 77; [1954] 1 All E.R. 68; (1954) 98 S.J. 27 CA
Oliver v Dalgleish [1963] 1 W.L.R. 1274; [1963] 3 All E.R. 15–71
330; (1963) 107 S.J. 1039 Ch D
Olympia Ltd, Re. See Gluckstein v Barnes
Olympus UK Ltd, Re [2014] EWHC 1350 (Ch); [2014] 29–17
Bus. L.R. 816; [2014] 2 B.C.L.C. 402
Omnium Electric Palaces Ltd v Baines [1914] 1 Ch. 332 5–14, 5–18
CA
Ooregum Gold Mining Co of India Ltd v Roper; Wallroth v 11–4
Roper; Ooregum Gold Mining Co of India Ltd v
Wallroth; Wallroth v Ooregum Gold Mining Co of India
Ltd [1892] A.C. 125 HL
Opera Photographic Ltd, Re [1989] 1 W.L.R. 634; (1989) 5 15–54
B.C.C. 601; [1989] B.C.L.C. 763; [1989] P.C.C. 337;
(1989) 133 S.J. 848 Ch D (Companies Ct)
Oshkosh B’Gosh Inc v Dan Marbel Inc Ltd (1988) 4 B.C.C. 5–28
795; [1989] B.C.L.C. 507; [1989] P.C.C. 320; [1989] 1
C.M.L.R. 94 CA (Civ Div)
Ossory Estates Plc, Re (1988) 4 B.C.C. 460; [1988] 11–18
O’Sullivan v Management Agency and Music Ltd [1985] 16–113, 16–114
Q.B. 428; [1984] 3 W.L.R. 448; [1985] 3 All E.R. 351
CA (Civ Div)
Othery Construction, Re [1966] 1 W.L.R. 69; [1966] 1 All 20–21
E.R. 145; (1966) 110 S.J. 32 Ch D
Oval 1742 Ltd (In Creditors Voluntary Liquidation), Re; 32–15
sub nom Customs and Excise Commissioners v Royal
Bank of Scotland Plc [2007] EWCA Civ 1262; [2008]
Bus. L.R. 1213; [2008] B.C.C. 135; [2008] 1 B.C.L.C.
204
Overnight Ltd (In Liquidation), Re; sub nom Goldfarb v 9–8
Higgins [2010] EWHC 613 (Ch); [2010] B.C.C. 796;
[2010] 2 B.C.L.C. 186; [2011] Bus. L.R. D30
Owners of Cargo Laden on Board the Albacruz v Owners of 8–11
the Albazero (The Albazero; The Albacruz); sub nom
Concord Petroleum Corp v Gosford Marine Panama SA
[1977] A.C. 774; [1976] 3 W.L.R. 419; [1976] 3 All
E.R. 129; [1976] 2 Lloyd’s Rep. 467; (1976) 120 S.J.
570 HL
Owners of the Borvigilant v Owners of the Romina G 7–27
[2003] EWCA Civ 935; [2003] 2 All E.R. (Comm) 736;
[2003] 2 Lloyd’s Rep. 520; [2004] 1 C.L.C. 41
Oxford Benefit Building & Investment Society, Re (1887) 16–24
L.R. 35 Ch. D. 502 Ch D
Oxford Fleet Management Ltd (In Liquidation) v Brown 15–20
[2014] EWHC 3065 (Ch)
Oxted Motor Co Ltd, Re [1921] 3 K.B. 32 KBD 15–19
P&O Steam Navigation Co v Johnson (1938) 60 C.L.R. 189 5–18
High Ct (Aus)
Pacaya Rubber & Produce Co Ltd (Burns Application), Re 25–37
[1914] 1 Ch. 542 Ch D
Panama New Zealand and Australian Royal Mail Co, Re 32–6
(1869–70) L.R. 5 Ch. App. 318 CA
Panhard et Levassor v Panhard Levassor Motor Co. See La
SA des Anciens Etablissements Panhard et Levassor v
Panhard Levassor Motor Co Ltd
Panorama Developments (Guildford) Ltd v Fidelis 7–22
Furnishing Fabrics Ltd [1971] 2 Q.B. 711; [1971] 3
W.L.R. 440; [1971] 3 All E.R. 16; (1971) 115 S.J. 483
CA (Civ Div)
Pantmaenog Timber Co Ltd, Re; Official Receiver v 10–7
Meade–King (A Firm); Official Receiver v Wadge
Rapps & Hunt (A Firm); Official Receiver v Grant
Thornton (A Firm); sub nom Official Receiver v Hay;
Pantmaenog Timber Co (In Liquidation), Re [2001]
EWCA Civ 1227; [2002] Ch. 239; [2002] 2 W.L.R. 20;
[2001] 4 All E.R. 588; [2002] B.C.C. 11; [2001] 2
B.C.L.C. 555; (2001) 98(35) L.S.G. 32; (2001) 151
N.L.J. 1212; (2001) 145 S.J.L.B. 210
Pantone 485 Ltd, Re. See Miller v Bain (Director’s Breach
of Duty)
Paragon Finance Plc v DB Thakerar & Co; Paragon Finance 16–139
Plc v Thimbleby & Co [1999] 1 All E.R. 400; (1998)
95(35) L.S.G. 36; (1998) 142 S.J.L.B. 243 CA (Civ
Div)
Paramount Airways Ltd (No.2), Re; sub nom Powdrill v 6–8
Hambros Bank (Jersey) Ltd [1993] Ch. 223; [1992] 3
W.L.R. 690; [1992] 3 All E.R. 1; [1992] B.C.C. 416;
[1992] B.C.L.C. 710; (1992) 89(14) L.S.G. 31; (1992)
136 S.J.L.B. 97; [1992] N.P.C. 27 CA (Civ Div)
Park Business Interiors Ltd v Park, 1991 S.L.T. 818; 1991 11–14
S.C.L.R. 486; [1990] B.C.C. 914; [1992] B.C.L.C. 1034
OH
Parke v Daily News (No.2) [1962] Ch. 927; [1962] 3 7–29, 16–50
W.L.R. 566; [1962] 2 All E.R. 929; (1962) 106 S.J. 704
Ch D
Parker & Cooper Ltd v Reading [1926] Ch. 975 Ch D 15–19
Parker v Financial Services Authority [2006] UKFSM 30–30
FSM037
Parker-Knoll Ltd v Knoll International Ltd (No.3) [1962] 4–25
R.P.C. 243 CA
Parker-Tweedale v Dunbar Bank Plc (No.1) [1991] Ch. 12; 32–39
[1990] 3 W.L.R. 767; [1990] 2 All E.R. 577; (1990) 60
P. & C.R. 83; (1990) 140 N.L.J. 169; (1990) 134 S.J.
886 CA (Civ Div)
Parkinson v Eurofinance Group Ltd; sub nom Eurofinance 20–1, 20–20
Group Ltd, Re [2001] B.C.C. 551; [2001] 1 B.C.L.C.
720; (2000) 97(27) L.S.G. 37 Ch D
Parlett v Guppys (Bridport) Ltd (No.1) [1996] B.C.C. 299; 13–47
[1996] 2 B.C.L.C. 34 CA (Civ Div)
Paros Plc v Worldlink Group Plc [2012] EWHC 394 28–36
(Comm); (2012) 108(14) L.S.G. 20
Parsons v Sovereign Bank of Canada [1913] A.C. 160 PC 32–38
(Can)
Partco Group Ltd v Wragg; sub nom Wragg v Partco Group 28–64
Ltd [2002] EWCA Civ 594; [2002] 2 Lloyd’s Rep. 343;
[2004] B.C.C. 782; [2002] 2 B.C.L.C. 323; (2002)
99(23) L.S.G. 27; (2002) 146 S.J.L.B. 124
Patrick and Lyon Ltd, Re [1933] Ch. 786 Ch D 9–5
Paulin, Re. See IRC v Crossman
Paycheck Services 3 Ltd, Re. See Revenue and Customs
Commissioners v Holland
PCCW Ltd, Re [2009] 3 HKC 292 HKCFA 29–11
Peach Publishing Ltd v Slater & Co; Slater & Co v Sheil 22–51
Land Associates Ltd [1998] B.C.C. 139; [1998]
P.N.L.R. 364 CA (Civ Div)
Peaktone Ltd v Joddrell [2012] EWCA Civ 1035; [2013] 1 33–33
W.L.R. 784; [2013] 1 All E.R. 13; [2012] C.P. Rep. 42;
[2013] B.C.C. 112
Pearce Duff & Co Ltd, Re [1960] 1 W.L.R. 1014; [1960] 3 15–19
All E.R. 222 Ch D
Peat v Gresham Trust Ltd; MIG Trust, Re [1933] Ch. 542 32–30
CA
Pedley v Inland Waterways Association [1977] 1 All E.R. 15–63
209; (1976) 120 S.J. 569 Ch D
Peek v Derry. See Derry v Peek
Peek v Gurney; Peek v Birkbeck; Peek v Barclay; Peek v 25–38
Gordon; Peek v Rennie; Peek v Gibb; Peek v Overend
& Gurney Co; Peek v Turquand; Peek v Harding (1873)
L.R. 6 H.L. 377; [1861–1873] All E.R. Rep. 116 HL
Peekay Intermark Ltd v Australia & New Zealand Banking 31–28
Group Ltd [2006] EWCA Civ 386; [2006] 2 Lloyd’s
Rep. 511; [2006] 1 C.L.C. 582
Peel v London & North Western Ry (No.1) [1907] 1 Ch. 5 15–59
CA
Peña v Dale [2003] EWHC 1065 (Ch); [2004] 2 B.C.L.C. 13–10, 15–19
508
Pender v Lushington (1877) L.R. 6 Ch. D. 70 Ch D 3–27, 3–29
Pennington v Waine (No.1); sub nom Pennington v 27–9
Crampton (No.1) [2002] EWCA Civ 227; [2002] 1
W.L.R. 2075; [2002] 4 All E.R. 215; [2002] 2 B.C.L.C.
448; [2002] W.T.L.R. 387; (2002) 99(15) L.S.G. 34;
(2002) 146 S.J.L.B. 70; [2002] 2 P. & C.R. DG4
Pennyfeathers Ltd v Pennyfeathers Property Co Ltd [2013] 16–86, 16–98, 16–118
EWHC 3530 (Ch)
Penrose v Official Receiver; sub nom Penrose v Secretary 9–19
of State for Trade and Industry [1996] 1 W.L.R. 482;
[1996] 2 All E.R. 96; [1995] B.C.C. 311; [1996] 1
B.C.L.C. 389 Ch D
Peoples Department Stores v Wise [2004] 3 S.C.R. 461 Sup 9–15
Ct (Can)
Percival v Wright [1902] 2 Ch. 421 Ch D 16–5, 16–6, 30–8
Performing Right Society Ltd, Re [1978] 1 W.L.R. 1197; 27–16
[1978] 3 All E.R. 972; (1978) 122 S.J. 729 CA (Civ
Div)
Performing Right Society Ltd v Ciryl Theatrical Syndicate 7–35
Ltd; sub nom Performing Right Society Ltd v Ciryl
theatrical Syndicate Ltd [1924] 1 K.B. 1 CA
Pergamon Press, Re [1971] Ch. 388; [1970] 3 W.L.R. 792; 18–8
[1970] 3 All E.R. 535; (1970) 114 S.J. 569 CA (Civ
Div)
Permacell Finesse Ltd (In Liquidation), Re [2007] EWHC 32–17
3233 (Ch); [2008] B.C.C. 208
Perry v Day [2004] EWHC 3372 (Ch); [2005] 2 B.C.L.C. 17–37
405
Peruvian Guano Co, Re; sub nom Kemp, Ex p. [1894] 3 Ch. 14–55
690 Ch D
Peruvian Rys Co, Re; sub nom Crawley’s Case; Robinson’s 25–39
Case (1868–69) L.R. 4 Ch. App. 322 CA
Pervil Gold Mines Ltd, Re [1898] 1 Ch.122 CA 33–4
Peskin v Anderson [2001] B.C.C. 874; [2001] 1 B.C.L.C. 16–5, 16–6
372 CA (Civ Div)
Peso Silver Mines v Cropper (1966) 58 D.L.R. 2d 1 16–96
Peter Buchanan Ltd v McVey [1955] A.C. 516 (Note) Sup 12–8
Ct (Irl)
Peter’s American Delicacy Co Ltd v Heath (1939) 61 19–10, 19–11
C.L.R. 457
Petrodel Resources Ltd v Prest [2013] UKSC 34; [2013] 2 2–8, 8–8, 8–13, 8–15, 8–16, 16–137
A.C. 415; [2013] 3 W.L.R. 1; [2013] 4 All E.R. 673;
[2013] B.C.C. 571; [2014] 1 B.C.L.C. 30; [2013] 2
F.L.R. 732; [2013] 3 F.C.R. 210; [2013] W.T.L.R.
1249; [2013] Fam. Law 953; (2013) 163(7565) N.L.J.
27; (2013) 157(24) S.J.L.B. 37
PFTZM Ltd, Re; sub nom Jourdain v Paul [1995] B.C.C. 9–7
Phelps v Hillingdon LBC; Jarvis v Hampshire CC; G (A 7–32, 22–34
Child) v Bromley LBC; Anderton v Clwyd CC; sub
nom G (A Child), Re [2001] 2 A.C. 619; [2000] 3
W.L.R. 776; [2000] 4 All E.R. 504; [2000] 3 F.C.R.
102; (2001) 3 L.G.L.R. 5; [2000] B.L.G.R. 651; [2000]
Ed. C.R. 700; [2000] E.L.R. 499; (2000) 3 C.C.L. Rep.
156; (2000) 56 B.M.L.R. 1; (2000) 150 N.L.J. 1198;
(2000) 144 S.J.L.B. 241 HL
Philip Morris Products Inc v Rothmans International 27–8
Enterprises Ltd [2001] EWCA Civ 1043; [2002] B.C.C.
265; [2001] All E.R. (D) 48 (Jul); [2001] E.T.M.R. 108;
(2001) 98(34) L.S.G. 37
Phillips (Liquidator of AJ Bekhor & Co) v Brewin Dolphin 33–18
Bell Lawrie Ltd (formerly Brewin Dolphin & Co Ltd)
[2001] UKHL 2; [2001] 1 W.L.R. 143; [2001] 1 All
E.R. 673; [2001] B.C.C. 864; [2001] 1 B.C.L.C. 145;
[2001] B.P.I.R. 119; (2001) 98(12) L.S.G. 43; (2001)
145 S.J.L.B. 32 HL
Phillips v Manufacturers Securities Ltd (1917) 116 L.T. 209 19–8

Phipps v Boardman. See Boardman v Phipps
Phoenix Contracts (Leicester) Ltd, Re [2010] EWHC 2375 20–12
(Ch)
Phoenix Office Supplies Ltd, Re. See Larvin v Phoenix
Office Supplies Ltd
Phonogram Ltd v Lane [1982] Q.B. 938; [1981] 3 W.L.R. 5–25, 5–26
736; [1981] 3 All E.R. 182; [1981] Com. L.R. 228;
[1982] 3 C.M.L.R. 615; (1981) 125 S.J. 527 CA (Civ
Div)
Phosphate of Lime Co v Green (1871–72) L.R. 7 C.P. 43 15–19
CCP
Piercy v S Mills & Co Ltd [1920] 1 Ch. 77 Ch D 16–26
Pilmer v Duke Group Ltd [2001] 2 B.C.L.C. 773 High Ct 24–6
Platt v Platt [1999] 2 B.C.L.C. 745 Ch D 16–6
Plaut v Steiner (1989) 5 B.C.C. 352 Ch D 13–49
Pocock v ADAC Ltd [1952] 1 All E.R. 294 (Note); [1952] 14–55
1 T.L.R. 29 KBD
Polly Peck International Plc (In Administration) (No.4), Re; 8–4
sub nom Barlow v Polly Peck International Finance Ltd
[1996] 2 All E.R. 433; [1996] B.C.C. 486; [1996] 1
B.C.L.C. 428
Portbase Clothing Ltd, Re; sub nom Mond v Taylor [1993] 32–11, 32–19
Ch. 388; [1993] 3 W.L.R. 14; [1993] 3 All E.R. 829;
[1993] B.C.C. 96; [1993] B.C.L.C. 796 Ch D
(Companies Ct)
Portfolios of Distinction Ltd v Laird [2004] EWHC 2071 17–11
(Ch); [2005] B.C.C. 216; [2004] 2 B.C.L.C. 741
Possfund Custodian Trustee Ltd v Diamond; Parr v 25–38
Diamond [1996] 1 W.L.R. 1351; [1996] 2 B.C.L.C. 665
Postgate & Denby (Agencies), Re [1987] B.C.L.C. 8; 20–8
[1987] P.C.C. 1 Ch D
Potters Oils Ltd, Re [1986] 1 W.L.R. 201 Ch D 32–4, 32–37, 32–38
POW Services Ltd v Clare [1995] 2 B.C.L.C. 435 Ch D 27–19
Powdrill v Watson; Ferranti International Plc, Re; sub nom 32–40, 32–41, 32–46
Paramount Airways Ltd (No.3), Re; Talbot v Cadge;
Talbot v Grundy; Leyland DAF Ltd (No.2), Re [1995] 2
A.C. 394; [1995] 2 W.L.R. 312; [1995] 2 All E.R. 65;
[1995] B.C.C. 319; [1994] 1 B.C.L.C. 386; [1995]
I.C.R. 1100; [1995] I.R.L.R. 269; (1995) 92(17) L.S.G.
47; (1995) 145 N.L.J. 449; (1995) 139 S.J.L.B. 110
Power v Sharp Investments Ltd; sub nom Shoe Lace Ltd, 32–14
Re [1993] B.C.C. 609; [1994] 1 B.C.L.C. 111 CA (Civ
Div)
Powertrain Ltd, Re [2015] EWHC 3998 (Ch); [2016] 16–133
B.P.I.R. 456
Precision Dippings Ltd v Precision Dippings Marketing Ltd 12–5, 12–12, 15–20
[1986] Ch. 447; [1985] 3 W.L.R. 812; (1985) 1 B.C.C.
99539; [1986] P.C.C. 105; (1985) 129 S.J. 683 CA (Civ
Div)
Premier Motor Auctions Leeds Ltd, Re [2015] EWHC 3568 32–18
(Ch)
Press Caps, Re [1949] Ch. 434; [1949] 1 All E.R. 1013; 28–74
[1949] L.J.R. 1460 CA
Price v Strange [1978] Ch. 337; [1977] 3 W.L.R. 943; 27–8
[1977] 3 All E.R. 371; (1978) 36 P. & C.R. 59; (1977)
243 E.G. 295; (1977) 121 S.J. 816 CA (Civ Div)
Priceland Ltd, Re; sub nom Waltham Forest LBC v 33–32, 30–33
Registrar of Companies [1997] B.C.C. 207; [1997] 1
B.C.L.C. 467; [1996] E.G. 188 (C.S.) Ch D (Companies
Ct)
Primlaks (UK) Ltd, Re [1989] B.C.L.C. 734 Ch D 32–44
Primrose (Builders) Ltd, Re [1950] Ch. 561; [1950] 2 All 32–15
E.R. 334; 66 T.L.R. (Pt. 2) 99 Ch D
Produce Marketing Consortium Ltd (In Liquidation) (No.1), 9–6, 9–9, 16–144
Re; sub nom Halls v David [1989] 1 W.L.R. 745;
[1989] 3 All E.R. 1; (1989) 5 B.C.C. 399; [1989]
B.C.L.C. 513; [1989] P.C.C. 290; (1989) 133 S.J. 945
Ch D (Companies Ct)
Produce Marketing Consortium (In Liquidation) Ltd, Re 9–6, 9–8
(No.2) (1989) 5 B.C.C. 569; [1989] B.C.L.C. 520 Ch D
(Companies Ct)
Profinance Trust SA v Gladstone [2001] EWCA Civ 1031; 20–20
[2002] 1 W.L.R. 1024; [2002] B.C.C. 356; [2002] 1
B.C.L.C. 141; (2001) 98(30) L.S.G. 37
Progress Property Co Ltd v Moore; sub nom Progress 12–9, 12–10, 31–8
Property Co Ltd v Moorgarth Group Ltd [2010] UKSC
55; [2011] 1 W.L.R. 1; [2011] Bus. L.R. 260; [2011] 2
All E.R. 432; [2011] B.C.C. 196; [2011] 2 B.C.L.C.
332; [2011] B.P.I.R. 500; (2010) 108(2) L.S.G. 18
Pro-Image Studios v Commonwealth Bank of Australia 11–15
(1990–1991) 4 A.C.S.R. 586
Prudential Assurance Co Ltd v Chatterley-Whitfield 13–34, 19–16
Collieries Ltd; sub nom Chatterley-Whitfield Collieries
Ltd, Re [1949] A.C. 512; [1949] 1 All E.R. 1094 HL
Prudential Assurance Co Ltd v Newman Industries Ltd 15–65, 16–122, 17–11, 17–34, 17–35,
(No.2) [1981] Ch. 257; [1980] 3 W.L.R. 543; [1980] 2 19–6
All E.R. 841 Ch D
Puddephat v Leith (No.1); sub nom Puddephatt v Leith 15–81, 19–4, 19–28, 28–45
[1916] 1 Ch. 200 Ch D
Pullan v Wilson [2014] EWHC 126 (Ch); [2014] W.T.L.R. 16–107
669; (2014) 158(10) S.J.L.B. 37; [2014] 1 P. & C.R.
DG21
Pulsford v Devenish [1903] 2 Ch. 625 Ch D 29–25, 33–16
Punt v Symons & Co Ltd [1903] 2 Ch. 506 Ch D 16–26
Purewal v Countrywide Residential Lettings Ltd [2015] 32–39, 32–40
EWCA Civ 1122; [2016] 4 W.L.R. 31; [2016] B.P.I.R.
177; [2016] H.L.R. 4; [2016] 1 P. & C.R. 11
Qayoumi v Oakhouse Property Management Ltd (No.2); 17–27
sub nom Qayoumi v Oakhouse Property Holdings Plc
[2002] EWHC 2547 (Ch); [2003] 1 B.C.L.C. 352;
[2003] B.P.I.R. 1
Quah v Goldman Sachs International [2015] EWHC 759 32–37
(Comm)
Quarter Master UK Ltd (In Liquidation) v Pyke [2004] 16–114
EWHC 1815 (Ch); [2005] 1 B.C.L.C. 245
Queensland Mines Ltd v Hudson [1978] 52 A.L.J.R. 379 16–86
Queensway Systems Ltd v Walker [2006] EWHC 2496 16–83
(Ch); [2007] 2 B.C.L.C. 577
Quickdome Ltd, Re (1988) 4 B.C.C. 296; [1988] B.C.L.C. 20–2
370; [1989] P.C.C. 406 Ch D (Companies Ct)
Quin & Axtens Ltd v Salmon; sub nom Salmon v Quin & 3–25, 14–6, 14–11
Axtens Ltd [1909] A.C. 442 HL
R&H Electric Ltd v Haden Bill Electrical Ltd; sub nom 20–4
Haden Bill Electrical Ltd, Re [1995] B.C.C. 958; [1995]
2 B.C.L.C. 280 Ch D (Companies Ct)
R. v Board of Trade Ex p. St Martin Preserving Co Ltd 18–5, 32–40
[1965] 1 Q.B. 603; [1964] 3 W.L.R. 262; [1964] 2 All
E.R. 561; (1964) 108 S.J. 602 QBD
R. v British Steel Plc [1995] 1 W.L.R. 1356; [1995] I.C.R. 7–39
586; [1995] I.R.L.R. 310; [1995] Crim. L.R. 654 CA
(Crim Div)
R. v Brockley (Frank) [1994] B.C.C. 131; [1994] 1 10–3
B.C.L.C. 606; (1994) 99 Cr. App. R. 385; [1994] Crim.
L.R. 671; (1994) 138 S.J.L.B. 5 CA (Crim Div)
R. v Campbell (Archibald James) (1984) 78 Cr. App. R. 95 10–3
CA (Crim Div)
R. v Cole (Philip Francis); R. v Birch (David Brian); R. v 9–18
Lees (Francis Gerard) [1998] B.C.C. 87; [1998] 2
B.C.L.C. 234; (1997) 94(28) L.S.G. 25; (1997) 141
S.J.L.B. 160 CA (Crim Div)
R. v Creggy (Stuart) [2008] EWCA Crim 394; [2008] Bus. 10–12
L.R. 1556; [2008] 3 All E.R. 91; [2008] B.C.C. 323;
[2008] 1 B.C.L.C. 625; [2008] Lloyd’s Rep. F.C. 385
R. v Cross (John Morris) [1990] B.C.C. 237; [1991] 30–26
B.C.L.C. 125; (1990) 91 Cr. App. R. 115 CA (Crim
Div)
R. v De Berenger, 105 E.R. 536; (1814) 3 M. & S. 67 KB 30–1, 30–3, 30–29
R. v Georgiou (Christakis); sub nom R. v Hammer 10–12
(Michael) (1988) 4 B.C.C. 322; (1988) 87 Cr. App. R.
207; (1988) 10 Cr. App. R. (S.) 137; [1988] Crim. L.R.
472 CA (Crim Div)
R. v Goodman (Ivor Michael) [1993] 2 All E.R. 789; [1992] 10–12, 30–56
B.C.C. 625; [1994] 1 B.C.L.C. 349; (1993) 97 Cr. App.
R. 210; (1993) 14 Cr. App. R. (S.) 147; [1992] Crim.
L.R. 676 CA (Crim Div)
R. v Grantham (Paul Reginald) [1984] Q.B. 675; [1984] 2 9–5
W.L.R. 815; [1984] 3 All E.R. 166; (1984) 1 B.C.C.
99075; (1984) 79 Cr. App. R. 86; [1984] Crim. L.R. 492
CA (Crim Div)
R. v HM Treasury Ex p. Daily Mail (81/87); R. v Customs 6–24
and Excise Commissioners Ex p. Daily Mail (81/87)
[1989] Q.B. 446; [1989] 2 W.L.R. 908; [1989] 1 All
E.R. 328; [1988] S.T.C. 787; [1988] E.C.R. 5483;
[1989] B.C.L.C. 206; [1988] 3 C.M.L.R. 713; (1989)
133 S.J. 693
R. v ICR Haulage Ltd [1944] K.B. 551; (1945) 30 Cr. App. 7–40
R. 31 CCA
R. v International Stock Exchange of the United Kingdom 25–42
and the Republic of Ireland Ltd Ex p. Else (1982) Ltd;
R. v International Stock Exchange of the United
Kingdom and the Republic of Ireland Ltd Ex p. Thomas
[1993] Q.B. 534; [1993] 2 W.L.R. 70; [1993] 1 All E.R.
420; [1993] B.C.C. 11; [1993] B.C.L.C. 834; [1993] 2
C.M.L.R. 677; (1994) 6 Admin. L.R. 67; [1993] C.O.D.
236
R. v Kemp (Peter David Glanville) [1988] Q.B. 645; [1988] 9–4, 9–5
2 W.L.R. 975; (1988) 4 B.C.C. 203; [1988] B.C.L.C.
217; [1988] P.C.C. 405; (1988) 87 Cr. App. R. 95;
(1988) 152 J.P. 461; [1988] Crim. L.R. 376; (1988) 152
J.P.N. 538; (1988) 132 S.J. 461 CA (Crim Div)
R. v Lord Kylsant [1932] 1 K.B. 442; (1932) 23 Cr. App. R. 25–37
83 CCA
R. v McQuoid (Christopher) [2009] EWCA Crim 1301; 30–54
[2009] 4 All E.R. 388; [2010] 1 Cr. App. R. (S.) 43;
[2009] Lloyd’s Rep. F.C. 529; [2009] Crim. L.R. 749
R. v Panel on Takeovers and Mergers Ex p. Datafin Plc 28–6
[1987] Q.B. 815; [1987] 2 W.L.R. 699; [1987] 1 All
E.R. 564; (1987) 3 B.C.C. 10; [1987] B.C.L.C. 104;
[1987] 1 F.T.L.R. 181; (1987) 131 S.J. 23 CA (Civ Div)
R. v Panel on Takeovers and Mergers Ex p. Guinness Plc 28–6, 28–9
[1990] 1 Q.B. 146; [1989] 2 W.L.R. 863; [1989] 1 All
E.R. 509; (1988) 4 B.C.C. 714; [1989] B.C.L.C. 255;
(1988) 138 N.L.J. Rep. 244; (1989) 133 S.J. 660 CA
(Civ Div)
R. v Philippou (Christakis) (1989) 5 B.C.C. 665; (1989) 89 7–47, 16–4
Cr. App. R. 290; [1989] Crim. L.R. 585; [1989] Crim.
L.R. 559 CA (Crim Div)
R. v Registrar of Companies Ex p. Att Gen [1991] B.C.L.C. 4–5, 4–35

476 DC
R. v Registrar of Companies Ex p. Central Bank of India.
See R. v Registrar of Companies Ex p. Esal
(Commodities) Ltd (In Liquidation)
R. v Registrar of Companies Ex p. Esal (Commodities) Ltd 4–34, 32–26, 32–32
(In Liquidation); sub nom R. v Registrar of Companies
Ex p. Central Bank of India [1986] Q.B. 1114; [1986] 2
W.L.R. 177; [1986] 1 All E.R. 105; (1985) 1 B.C.C.
99501; [1986] P.C.C. 235; (1985) 129 S.J. 755
R. v Registrar of Joint Stock Companies Ex p. More [1931] 4–5, 4–34
2 K.B. 197 CA
R. v Rigby (Carl); R. v Bailey (Gareth Scott) [2006] EWCA 26–28, 26–32
Crim 1653; [2006] 1 W.L.R. 3067; [2007] 1 Cr. App. R.
(S.) 73
R. v Rozeik (Rifaat Younan) [1996] 1 W.L.R. 159; [1996] 3 7–47, 16–4
All E.R. 281; [1996] B.C.C. 271; [1996] 1 B.C.L.C.
380; [1996] 1 Cr. App. R. 260; [1996] Crim. L.R. 271;
(1995) 139 S.J.L.B. 219 CA (Crim Div)
R. v Saunders, Times Law Reports, 15 November 2002 18–14
R. v Secretary of State for Trade and Industry Ex p. Lonrho 18–10
Plc [1989] 1 W.L.R. 525; [1989] 2 All E.R. 609; (1989)
5 B.C.C. 633; (1989) 139 N.L.J. 717; (1989) 133 S.J.
724 HL
R. v Secretary of State for Trade and Industry Ex p. 10–7, 18–14
McCormick [1998] B.C.C. 379; [1998] C.O.D. 160;
(1998) 95(10) L.S.G. 27 CA (Crim Div)
R. v Secretary of State for Trade and Industry Ex p. 18–2
Perestrello [1981] Q.B. 19; [1980] 3 W.L.R. 1; [1980] 3
All E.R. 28; (1980) 124 S.J. 63 QBD
R. v Secretary of State for Transport Ex p. Factortame Ltd 6–2
(C–221/89) [1992] Q.B. 680; [1992] 3 W.L.R. 288;
[1991] 3 All E.R. 769; [1991] 2 Lloyd’s Rep. 648;
[1991] E.C.R. I–3905; [1991] 3 C.M.L.R. 589; (1991)
141 N.L.J. 1107
R. v Smith (Wallace Duncan) (No.1) [1996] 2 B.C.L.C. 9–4
109; [1996] 2 Cr. App. R. 1; [1996] Crim. L.R. 329;
(1995) 92(44) L.S.G. 31; (1996) 140 S.J.L.B. 11 CA
(Crim Div)
R. v St Regis Paper Co Ltd [2011] EWCA Crim 2527; 7–41
[2012] 1 Cr. App. R. 14
R. v Ward, Times, 10 April 1997 10–12
R. v Wimbledon Local Board (1881–82) L.R. 8 Q.B.D. 459 15–75
CA
R. v Young (Steven Kenneth) [1990] B.C.C. 549; (1990– 10–16
91) 12 Cr. App. R. (S.) 262; [1990] Crim. L.R. 818 CA
(Crim Div)
R. (on the application of 1st Choice Engines Ltd) v 18–2
Secretary of State for Business, Innovation and Skills
[2014] EWHC 1765 (Admin)
R. (on the application of Amro International SA) v 30–50
Financial Services Authority; sub nom Financial
Services Authority v Amro International SA [2010]
EWCA Civ 123; [2010] Bus. L.R. 1541; [2010] 3 All
E.R. 723; [2010] 2 B.C.L.C. 40; (2010) 107(10) L.S.G.
17
R. (on the application of Clegg) v Secretary of State for 18–8
Trade and Industry; sub nom Clegg v Secretary of State
for Trade and Industry [2002] EWCA Civ 519; [2003]
B.C.C. 128
R. (on the application of Griffin) v Richmond Magistrates’ 9–18
Court [2008] EWHC 84 (Admin); [2008] 1 W.L.R.
1525; [2008] Bus. L.R. 1014; [2008] 3 All E.R. 274;
[2008] B.C.C. 575; [2008] 1 B.C.L.C. 681; [2008] 1 Cr.
App. R. 37; [2008] Lloyd’s Rep. F.C. 196; [2008]
B.P.I.R. 468
R. (on the application of POW Trust) v Chief Executive and 21–34
Registrar of Companies [2002] EWHC 2783 (Admin);
[2004] B.C.C. 268; [2003] 2 B.C.L.C. 295; (2003)
100(10) L.S.G. 27
R. (on the application of Yukos Oil Co) v Financial 25–42
Services Authority and London Stock Exchange [2006]
EWHC 2044
RA Noble & Sons (Clothing) Ltd, Re [1983] B.C.L.C. 273 20–13, 20–22
Ch D
Racal Communications Ltd, Re; sub nom Company 18–3
(No.00996 of 1979), Re [1981] A.C. 374; [1980] 3
W.L.R. 181; [1980] 2 All E.R. 634 HL
Rackham v Peek Foods Ltd [1990] B.C.L.C. 895 16–35, 28–36
Rackind v Gross. See Gross v Rackind
Raffaella, The; sub nom Soplex Wholesale Supplies Ltd v 7–23
Egyptian International Foreign Trade Co [1985] 2
Lloyd’s Rep. 36; [1985] Fin. L.R. 123 CA (Civ Div)
Raiffeisen Zentralbank Österreich AG v Royal Bank of 31–28
Scotland Plc [2010] EWHC 1392 (Comm); [2011] 1
Lloyd’s Rep. 123; [2011] Bus. L.R. D65
Railtrack Plc (In Administration) (No.2), Re; sub nom 32–45
Winsor v Bloom; Winsor v Special Railway
Administrators of Railtrack Plc [2002] EWCA Civ 955;
[2002] 1 W.L.R. 3002; [2002] 4 All E.R. 435; [2002] 2
B.C.L.C. 755; [2003] B.P.I.R. 507; [2002] A.C.D. 103;
(2002) 99(35) L.S.G. 37; (2002) 146 S.J.L.B. 183
Rainford v James Keith & Blackman Co Ltd [1905] 2 Ch. 27–10
147 CA
Rainham Chemical Works Ltd (In Liquidation) v Belvedere 7–35, 8–13
Fish Guano Co Ltd; Ind Coope & Co v Rainham
Chemical Works Ltd; sub nom Belvedere Fish Guano
Co Ltd v Rainham Chemical Works Ltd [1921] 2 A.C.
465 HL
Rakusens Ltd v Baser Ambalaj Plastik Sanayi Ticaret AS; 6–4
sub nom Rakussens Ltd v Baser Ambalaj Plastik Sanayi
Ticaret AS [2001] EWCA Civ 1820; [2002] 1 B.C.L.C.
104; (2001) 98(42) L.S.G. 37; (2001) 145 S.J.L.B. 237
Raleigh UK Ltd v Mail Order Cycles Ltd [2011] EWHC 8–8
883 (Ch); [2011] B.C.C. 508
Rama Corp Ltd v Proved Tin & General Investments Ltd 7–20
[1952] 2 Q.B. 147; [1952] 1 All E.R. 554; [1952] 1
T.L.R. 709; (1952) 96 S.J. 197 QBD
Rampgill Mill, Re [1967] Ch. 1138; [1967] 2 W.L.R. 394; 32–15
[1967] 1 All E.R. 56; [1966] 2 Lloyd’s Rep. 527; (1967)
111 S.J. 130 Ch D (Companies Ct)
Randall and Quilter Investment Holdings Plc, Re [2013] 27–4
EWHC 4357 (Comm)
Ransomes Plc, Re; sub nom Winpar Holdings Ltd v 13–38
Ransomes Plc; Ransomes Plc v Winpar Holdings Ltd
[2000] B.C.C. 455; [1999] 2 B.C.L.C. 591 CA (Civ
Div)
Ratners Group Plc, Re (1988) 4 B.C.C. 293; [1988] 13–38
Ravenhart Service (Holdings) Ltd, Re. See Reiner v
Gershinson
Rawnsley v Weatherall Green & Smith North Ltd [2009] 9–10
EWHC 2482 (Ch); [2010] B.C.C. 406; [2010] 1
B.C.L.C. 658; [2010] B.P.I.R. 449; [2010] P.N.L.R. 6
Rayfield v Hands [1960] Ch. 1; [1958] 2 W.L.R. 851; 3–19, 3–23, 3–24, 19–19
[1958] 2 All E.R. 194; (1958) 102 S.J. 348 Ch D
Rayner (Mincing Lane) Ltd v Department of Trade. See JH
Rayner (Mincing Lane) Ltd v Department of Trade and
Industry
Read v Astoria Garage (Streatham) Ltd [1952] Ch. 637; 14–55
[1952] 2 All E.R. 292; [1952] 2 T.L.R. 130 CA
Real Meat Co Ltd (In Receivership), Re [1996] B.C.C. 254 32–8
Ch D
Redcard Ltd v Williams; sub nom Williams v Redcard Ltd 7–4
[2011] EWCA Civ 466; [2011] Bus. L.R. 1479; [2011]
4 All E.R. 444; [2011] 2 B.C.L.C. 350; [2011] 2
E.G.L.R. 67; [2011] 25 E.G. 106; [2011] 19 E.G. 96
(C.S.); (2011) 161 N.L.J. 635; [2011] 2 P. & C.R. DG11
Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] 19–10, 19–11, 31–30
EWHC 2703 (Ch); [2006] 1 B.C.L.C. 149
Reeves v Commissioner of Police of the Metropolis [2000] 22–40
1 A.C. 360; [1999] 3 W.L.R. 363; [1999] 3 All E.R.
897; (2000) 51 B.M.L.R. 155; [1999] Prison L.R. 99;
(1999) 96(31) L.S.G. 41; (1999) 143 S.J.L.B. 213
Regal (Hastings) Ltd v Gulliver [1967] 2 A.C. 134; [1942] 8–4, 16–89, 16–90, 16–91, 16–92, 16–
1 All E.R. 378 HL 96, 16–107, 16–114, 16–124, 16–127,
16–137, 17–2, 28–29
Regentcrest Plc (In Liquidation) v Cohen [2001] B.C.C. 16–40, 16–104
494; [2001] 2 B.C.L.C. 80 Ch D
Reid v Explosives Co Ltd (1887) L.R. 19 Q.B.D. 264 CA 32–41
Reiner v Gershinson; sub nom Ravenhart Service 20–10
(Holdings) Ltd, Re [2004] EWHC 76 (Ch); [2004] 2
B.C.L.C. 376
Relfo Ltd (In Liquidation) v Varsani [2014] EWCA Civ 16–112
360; [2015] 1 B.C.L.C. 14
Reprographic Exports (Euromat), Re (1978) 122 S.J. 400 32–34
Resolute Maritime Inc v Nippon Kaiji Kyokai (The 25–37
Skopas); Skopas, The [1983] 1 W.L.R. 857; [1983] 2
All E.R. 1; [1983] 1 Lloyd’s Rep. 431 QBD (Comm Ct)
Revenue and Customs Commissioners v Holland; sub nom 12–13, 16–8, 16–10, 16–112, 17–2
Paycheck Services 3 Ltd, Re; Holland v Revenue and
Customs Commissioners [2010] UKSC 51; [2010] 1
W.L.R. 2793; [2011] Bus. L.R. 111; [2011] 1 All E.R.
430; [2011] S.T.C. 269; [2011] B.C.C. 1; [2011] 1
B.C.L.C. 141; [2011] B.P.I.R. 96; [2010] S.T.I. 3074
Revenue and Customs Commissioners v Walsh [2005] 9–18
EWHC 1304 (Ch); [2005] 2 B.C.L.C. 455; [2005]
B.P.I.R. 1105
Revlon Inc v Cripps & Lee Ltd [1980] F.S.R. 85; (1979) 8–11
Rex Williams Leisure Centre Plc, Re; sub nom Secretary of 18–14
State for Trade and Industry v Warren [1994] Ch. 350;
[1994] 3 W.L.R. 745; [1994] 4 All E.R. 27; [1994]
B.C.C. 551; [1994] 2 B.C.L.C. 555 CA (Civ Div)
Rica Gold Washing Co Ltd, Re (1879) L.R. 11 Ch. D. 36 20–21
CA
Richborough Furniture Ltd, Re; sub nom Secretary of State 10–10
for Trade and Industry v Stokes [1996] B.C.C. 155;
[1996] 1 B.C.L.C. 507
Richmond Gate Property Co, Re [1965] 1 W.L.R. 335; 3–25, 14–30
[1964] 3 All E.R. 936 Ch D
Richmond Pharmacology Ltd v Chester Overseas Ltd 16–98
[2014] EWHC 2692 (Ch); [2014] Bus. L.R. 1110
Ricketts v Ad Valorem Factors Ltd [2003] EWCA Civ 9–18
1706; [2004] 1 All E.R. 894; [2004] B.C.C. 164; [2004]
1 B.C.L.C. 1; [2004] B.P.I.R. 825; (2003) 153 N.L.J.
1841
Ridge Securities Ltd v IRC [1964] 1 W.L.R. 479; [1964] 1 12–9, 12–10, 31–8
All E.R. 275; 44 T.C. 373; (1963) 42 A.T.C. 487;
[1963] T.R. 449; (1964) 108 S.J. 377 Ch D
Rigby and Bailey v R. See R. v Rigby (Carl)
Rights & Issues Investment Trust v Stylo Shoes Ltd [1965] 19–10, 19–15
Ch. 250; [1964] 3 W.L.R. 1077; [1964] 3 All E.R. 628;
(1964) 108 S.J. 839 Ch D
Ringtower Holdings, Re; sub nom Company (No.005685 of 20–8
1988) (No.2), Re (1989) 5 B.C.C. 82 Ch D (Companies
Ct)
Ringuet v Bergeron [1960] S.C.R. 672 16–35
RM Arnold & Co Ltd, Re [1984] B.C.L.C. 535; (1984) 1 32–30
B.C.C. 99252 Ch D
RMCA Reinsurance Ltd, Re [1994] B.C.C. 378 Ch D 29–8
(Companies Ct)
Robert Batcheller & Sons v Batcheller [1945] Ch. 169 Ch D 15–65
Roberta, The (1937) 58 Ll. L. Rep. 159 PDAD 8–11
Roberts v Frohlich [2011] EWHC 257 (Ch); [2011] 2 9–9
B.C.L.C. 625
Roberts v Letter T Estates [1961] A.C. 795; [1961] 3 27–7
W.L.R. 176; (1961) 105 S.J. 525 PC
Roberts & Cooper Ltd, Re [1929] 2 Ch. 383 Ch D 23–8
Robinson v Randfontein Estates [1921] A.D. 168 Sup Ct 5–18
App Div (SA)
Robson v Drummond, 109 E.R. 1156; (1831) 2 B. & Ad. 2–22
303 KB
Robson v Smith [1895] 2 Ch. 118 Ch D 32–8, 32–10, 32–11
Rock (Nominees) Ltd v RCO (Holdings) Plc (In Members 20–12, 28–74
Voluntary Liquidation) [2004] EWCA Civ 118; [2004]
B.C.C. 466; [2004] 1 B.C.L.C. 439; (2004) 148 S.J.L.B.
236
Rod Gunner Organisation Ltd, Re. See Rubin v Gunner
Rolled Steel Products (Holdings) Ltd v British Steel Corp 12–12, 16–31, 16–124
[1986] Ch. 246; [1985] 2 W.L.R. 908; [1985] 3 All E.R.
52; (1984) 1 B.C.C. 99158 CA (Civ Div)
Rolloswin Investments v Chromolit Portugal Cutelarias e 2–19
Produtos Metalicos SARL [1970] 1 W.L.R. 912; [1970]
2 All E.R. 673; (1970) 114 S.J. 354; (1970) 114 S.J. 147
QBD
Romer-Ormiston v Claygreen Ltd; sub nom Claygreen Ltd, 27–7, 27–8
Re [2005] EWHC 2032 (Ch); [2006] B.C.C. 440;
[2006] 1 B.C.L.C. 715; (2005) 102(38) L.S.G. 28
Rose, Re; sub nom Midland Bank Executor & Trustee Co 27–9
Ltd v Rose [1949] Ch. 78; [1948] 2 All E.R. 971; [1949]
L.J.R. 208; (1948) 92 S.J. 661 Ch D
Rose v Lynx Express Ltd [2004] EWCA Civ 447; [2004] 27–7
B.C.C. 714; [2004] 1 B.C.L.C. 455; (2004) 101(17)
L.S.G. 31; (2004) 148 S.J.L.B. 477
Rose v McGivern [1998] 2 B.C.L.C. 593 Ch D 14–6, 15–51, 15–64, 15–65
Rose (Deceased), Re; sub nom Rose v IRC [1952] Ch. 499; 27–9, 27–10, 27–16
[1952] 1 All E.R. 1217; [1952] 1 T.L.R. 1577; (1952)
31 A.T.C. 138; [1952] T.R. 175 CA
Ross v Telford [1997] B.C.C. 945; [1998] 1 B.C.L.C. 82; 15–54
(1997) 94(28) L.S.G. 26 CA (Civ Div)
Rother Iron Works Ltd v Canterbury Precision Engineers 32–10, 32–40

Ltd [1974] Q.B. 1; [1973] 2 W.L.R. 281; [1973] 1 All
E.R. 394; (1973) 117 S.J. 122 CA (Civ Div)
Rottenberg v Monjack [1992] B.C.C. 688; [1993] B.C.L.C. 32–39
374; [1992] N.P.C. 89 Ch D
Rover International Ltd v Cannon Film Sales Ltd [1989] 1 5–28
W.L.R. 912; [1989] 3 All E.R. 423; [1988] B.C.L.C.
710 CA (Civ Div)
Royal Bank of Canada v Starr (1985) 31 B.L.R. 124 5–25
Royal Bank of Scotland Plc v Sandstone Properties Ltd 27–6
[1998] 2 B.C.L.C. 429 QBD
Royal British Bank v Turquand, [1843–60] All E.R. Rep. 7–7, 7–8, 7–12, 7–24, 7–25, 8–6
435; 119 E.R. 886; (1856) 6 El. & Bl. 327 Ex Ct
Royal Brunei Airlines Sdn Bhd v Tan; sub nom Royal 7–37, 16–135
Brunei Airlines Sdn Bhd v Philip Tan Kok Ming [1995]
2 A.C. 378; [1995] 3 W.L.R. 64; [1995] 3 All E.R. 97;
[1995] B.C.C. 899; (1995) 92(27) L.S.G. 33; (1995) 145
N.L.J. 888; [1995] 139 S.J.L.B. 146; (1995) 70 P. &
C.R. D12 PC
Royal Mail Co, Re (1870) L.R. 5 Ch. App. 318 32–6
Royal Mail Estates Ltd v Maple Teesdale [2015] EWHC 5–25, 5–28
1890 (Ch); [2016] 1 W.L.R. 942; [2015] B.C.C. 647
Royal Scottish Assurance Plc, Petr [2011] CSOH 2; 2011 13–36
S.L.T. 264
Royal Trust Bank Plc v National Westminster Bank Plc; 32–23
Royal Trust Bank Plc v Brookes Associates Finance Ltd
[1996] B.C.C. 613; [1996] 2 B.C.L.C. 699 CA (Civ
Div)
Royscot Trust Ltd v Rogerson; sub nom Royscott Trust v 25–37
Maidenhead Honda Centre [1991] 2 Q.B. 297; [1991] 3
W.L.R. 57; [1991] 3 All E.R. 294; [1992] R.T.R. 99;
(1992) 11 Tr. L.R. 23; [1991] C.C.L.R. 45; (1991) 141
N.L.J. 493; (1991) 135 S.J. 444 CA (Civ Div)
Rozenblum (Bulletin criminel 1985 No.54) 9–23
RS&M Engineering Ltd, Re. See Mond v Hammond
Suddards (No.2)
Ruben v Great Fingall Consolidated [1906] A.C. 439 HL 7–19, 7–33
Rubin v Gunner; sub nom Rod Gunner Organisation Ltd, 9–9
Re [2004] EWHC 316 (Ch); [2004] B.C.C. 684; [2004]
2 B.C.L.C. 110
Runciman v Walker Runciman Plc [1993] B.C.C. 223; 14–56
[1992] B.C.L.C. 1084 QBD
Russell v Northern Bank Development Corp Ltd [1992] 1 19–25, 19–26, 19–28
W.L.R. 588; [1992] 3 All E.R. 161; [1992] B.C.C. 578;
[1992] B.C.L.C. 1016; (1992) 89(27) L.S.G. 33; (1992)
136 S.J.L.B. 182 HL
Russell Cooke Trust Co Ltd v Elliott; sub nom Russell– 32–23
Cooke Trust Co Ltd v Elliott [2007] EWHC 1443 (Ch);
[2007] 2 B.C.L.C. 637
Russian Petroleum and Liquid Fuel Co Ltd, Re; sub nom 31–15
London Investment Trust Ltd v Russian Petroleum and
Liquid Fuel Co Ltd [1907] 2 Ch. 540 CA
Rutherford (James R) & Sons Ltd, Re. See James R
Rutherford & Sons, Re
Ruttle Plant Hire Ltd v Secretary of State for the 9–10
Environment, Food and Rural Affairs [2008] EWHC
238 (TCC); [2009] 1 All E.R. 448; [2008] B.P.I.R. 1395
RW Peak (Kings Lynn) Ltd, Re [1998] B.C.C. 596; [1998] 15–20
1 B.C.L.C. 193; [1998] 1 B.C.L.C. 183 Ch D
(Companies Ct)
S Abrahams & Sons, Re [1902] 1 Ch. 695 Ch D 32–30
Safeguard Industrial Investments Ltd v National 27–7
Westminster Bank Ltd [1981] 1 W.L.R. 286; [1980] 3
All E.R. 849; (1981) 125 S.J. 184 Ch D
Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472; 7–42, 16–4
[2011] Bus. L.R. 1629; [2011] 2 All E.R. 841; [2011] 1
Lloyd’s Rep. 462; [2011] 1 C.L.C. 80; [2011]
U.K.C.L.R. 339
Said v Butt [1920] 3 K.B. 497 KBD 32–40
Salomon v Salomon & Co Ltd; Salomon & Co Ltd v 1–3, 2–1, 2–2, 2–3, 2–4, 2–6, 2–7, 2–
Salomon; sub nom Broderip v Salomon [1897] A.C. 22 15, 2–33, 2–48, 5–2, 5–9, 5–13, 8–2, 8–
HL 10, 9–1, 14–16, 31–8
Salt v Stratstone Specialist Ltd (t/a Stratstone Cadillac 5–19, 16–113
Newcastle) [2015] EWCA Civ 745; [2016] R.T.R. 17;
[2015] C.T.L.C. 206
Saltdean Estate Co Ltd, Re [1968] 1 W.L.R. 1844; [1968] 3 19–16, 23–8
All E.R. 829; (1968) 112 S.J. 798 Ch D
Sam Weller & Sons Ltd, Re; sub nom Company 20–10, 20–12, 24–6
(No.000823 of 1987), Re [1990] Ch. 682; [1989] 3
W.L.R. 923; (1989) 5 B.C.C. 810; [1990] B.C.L.C. 80;
[1989] P.C.C. 466; (1988) 133 S.J. 1297 Ch D
Sarflax Ltd, Re [1979] Ch. 592; [1979] 2 W.L.R. 202; 9–5
[1979] 1 All E.R. 529; (1979) 123 S.J. 97 Ch D
Sasea Finance Ltd (In Liquidation) v KPMG (formerly 22–21
KPMG Peat Marwick McLintock) (No.2) [2000] 1 All
E.R. 676; [2000] B.C.C. 989; [2000] 1 B.C.L.C. 236;
[2000] Lloyd’s Rep. P.N. 227 CA (Civ Div)
Saul D Harrison & Sons Plc, Re [1994] B.C.C. 475; [1995] 16–48, 20–6, 20–7, 20–8, 20–9, 20–13,
1 B.C.L.C. 14 CA (Civ Div) 20–14
Saunders v United Kingdom (19187/91); sub nom Saunders 10–7, 18–14
v United Kingdom (43/1994/490/572) [1997] B.C.C.
872; [1998] 1 B.C.L.C. 362; (1997) 23 E.H.R.R. 313; 2
B.H.R.C. 358 ECHR
Savoy Hotel Ltd, Re [1981] Ch. 351; [1981] 3 W.L.R. 441; 15–4, 29–4, 29–7, 29–9
[1981] 3 All E.R. 646; (1981) 125 S.J. 585 Ch D
Sayers v Clarke–Walker [2002] 2 B.C.L.C. 16 QBD 22–36
SBA Properties v Cradock [1967] 1 W.L.R. 716; [1967] 2 18–5
All E.R. 610; [1967] 1 Lloyd’s Rep. 526; (1967) 111
S.J. 453 Ch D
Scandinavian Bank Group Plc, Re [1988] Ch. 87; [1987] 2 11–19
W.L.R. 752; [1987] 2 All E.R. 70; (1987) 3 B.C.C. 93;
[1987] B.C.L.C. 220; [1987] P.C.C. 173; [1987] 1
F.T.L.R. 224; (1987) 84 L.S.G. 979; (1987) 131 S.J. 325
Ch D
Schering Chemicals Ltd v Falkman Ltd [1982] Q.B. 1; 30–9
[1981] 2 W.L.R. 848; [1981] 2 All E.R. 321; (1981) 125
S.J. 342 CA (Civ Div)
Schofield v Schofield [2011] EWCA Civ 154; [2011] 2 15–19, 15–62
B.C.L.C. 319
Scholey v Central Ry Co of Venezuela (1869–70) L.R. 9 25–39
Eq. 266 LC
Schweppes Ltd, Re [1914] 1 Ch. 322 CA 19–16
Scott v Brown Doering McNab & Co; Slaughter & May v 30–29
Brown Doering McNab & Co [1892] 2 Q.B. 724 CA
Scott v Frank F Scott (London) Ltd [1940] Ch. 794; [1940] 3–21
3 All E.R. 508 CA
Scott v Scott [1943] 1 All E.R. 582 Ch D 14–6
Scott Group Ltd v McFarlane [1978] N.Z.L.R. 553 CA 22–46
(NZ)
Scottish & Newcastle Breweries Ltd v Blair, 1967 S.L.T. 72 9–20
OH
Scottish Co-operative Wholesale Society v Meyer. See
Meyer v Scottish Co-operative Wholesale Society Ltd
Scottish Insurance Corp Ltd v Wilsons & Clyde Coal Co 13–40, 19–16, 20–3, 23–7, 23–8
Ltd; sub nom Wilsons & Clyde Coal Co Ltd,
Petitioners; Wilsons & Clyde Coal Co v Scottish
Insurance Corp Ltd [1949] A.C. 462; [1949] 1 All E.R.
1068; 1949 S.C. (H.L.) 90; 1949 S.L.T. 230; 65 T.L.R.
354; [1949] L.J.R. 1190; (1949) 93 S.J. 423 HL
Scottish Petroleum Co (No.2), Re (1883) L.R. 23 Ch. D. 25–39
413 CA
Scotto v Petch; Scotto v Clarke; sub nom Sedgefield 27–7
Steeplechase Co (1927) Ltd, Re [2001] B.C.C. 889;
[2000] All E.R. (D) 2442 CA (Civ Div)
Sea, Fire and Life Insurance Co, Re, 43 E.R. 180; (1854) 3 2–14
De G.M. & G. 459 Ct of Chancery
Seagull Manufacturing Co Ltd (In Liquidation) (No.2), Re 6–8
[1994] Ch. 91; [1994] 2 W.L.R. 453; [1994] 2 All E.R.
767; [1993] B.C.C. 833; [1994] 1 B.C.L.C. 273 Ch D
(Companies Ct)
Seagull Manufacturing Co Ltd (No.3), Re [1995] B.C.C. 10–3
1088; [1996] 1 B.C.L.C. 51 Ch D
Sebry v Companies House [2015] EWHC 115 (QB); [2015] 32–32
4 All E.R. 681; [2015] B.C.C. 236; [2015] 1 B.C.L.C.
670
Second Consolidated Trust v Ceylon Amalgamated Estates 15–71, 15–75, 15–82
[1943] 2 All E.R. 567
Secretary of State for Business, Enterprise and Regulatory 8–9
Reform v Neufeld; Howe v Secretary of State for
Business, Enterprise and Regulatory Reform; sub nom
Neufeld v Secretary of State for Business, Enterprise
and Regulatory Reform [2009] EWCA Civ 280; [2009]
3 All E.R. 790; [2009] B.C.C. 687; [2009] 2 B.C.L.C.
273; [2009] I.C.R. 1183; [2009] I.R.L.R. 475; [2009]
B.P.I.R. 909; (2009) 106(15) L.S.G. 15
Secretary of State for Business, Innovation and Skills v 16–8
Chohan [2013] EWHC 680 (Ch); [2015] B.C.C. 755;
[2013] Lloyd’s Rep. F.C. 351
Secretary of State for Business, Innovation and Skills v
Doffman. See Stakefield (Midlands) Ltd, Re
Secretary of State for Business, Innovation and Skills v
Doffmann (No.2). See Stakefield (Midlands) Ltd, Re
Hamilton [2015] CSOH 46; 2016 S.C.L.R. 19
Weston [2014] EWHC 2933 (Ch); [2014] B.C.C. 581;
[2014] Lloyd’s Rep. F.C. 648
Secretary of State for Trade and Industry v Baker (No.5); 10–3, 10–10, 16–17
sub nom Barings Plc (No.5), Re [2000] 1 W.L.R. 634;
[1999] 1 All E.R. 1017; [1999] B.C.C. 960; [1999] 1
B.C.L.C. 262; (1998) 95(45) L.S.G. 38; (1998) 148
N.L.J. 1474 Ch D
Secretary of State for Trade and Industry v Baker [2001] 10–10, 16–17
B.C.C. 273; [2000] 1 B.C.L.C. 523 CA (Civ Div)
Secretary of State for Trade and Industry v Barnett (Re 10–3
Harbour Lane Ltd) [1998] 2 B.C.L.C. 64 Ch D
(Companies Ct)
Secretary of State for Trade and Industry v Becker; sub nom 9–7, 9–17
Balfour Associates (IT Recruitment Ltd), Re [2002]
EWHC 2200 (Ch); [2003] 1 B.C.L.C. 555
Secretary of State for Trade and Industry v Carr; sub nom 22–30
TransTec Plc, Re [2006] EWHC 2110 (Ch); [2007]
B.C.C. 313; [2007] 2 B.C.L.C. 495
Secretary of State for Trade and Industry v Deverell [2001] 9–7, 16–10
Ch. 340; [2000] 2 W.L.R. 907; [2000] 2 All E.R. 365;
[2000] B.C.C. 1057; [2000] 2 B.C.L.C. 133; (2000)
97(3) L.S.G. 35; (2000) 144 S.J.L.B. 49 CA (Civ Div)
Secretary of State for Trade and Industry v Ettinger; sub 10–9
nom Swift 736 Ltd, Re [1992] B.C.C. 93; [1993]
Secretary of State for Trade and Industry v Ivens; sub nom 10–5
Country Farm Inns Ltd, Re [1997] B.C.C. 801; [1997] 2
Secretary of State for Trade and Industry v Joiner; sub nom 10–9
Synthetic Technology Ltd, Re [1993] B.C.C. 549 Ch D
(Companies Ct)
Secretary of State for Trade and Industry v Jonkler; sub 10–2
nom INS Realisations Ltd, Re [2006] EWHC 135 (Ch);
[2006] 1 W.L.R. 3433; [2006] 2 All E.R. 902; [2006]
B.C.C. 307; [2006] 2 B.C.L.C. 239; (2006) 156 N.L.J.
273
Secretary of State for Trade and Industry v McTighe 10–7
(No.1); sub nom Copecrest, Re [1993] B.C.C. 844;
[1994] 2 B.C.L.C. 284 CA (Civ Div)
Secretary of State for Trade and Industry v McTighe 10–9
(No.2); sub nom Secretary of State for Trade and
Industry v McTigue [1997] B.C.C. 224; [1996] 2
B.C.L.C. 477
Secretary of State for Trade and Industry v Palfreman, 1995 10–3
S.L.T. 156; 1995 S.C.L.R. 172; [1995] B.C.C. 193;
[1995] 2 B.C.L.C. 301 OH
Secretary of State for Trade and Industry v Rayna. See
Cedarwood Productions Ltd, Re
Secretary of State for Trade and Industry v Taylor; 10–11
Secretary of State for Trade and Industry v Gash; sub
nom Company (No.004803 of 1996), Re; CS Holidays
Ltd, Re [1997] 1 W.L.R. 407; [1997] B.C.C. 172;
Secretary of State for Trade and Industry v Tjolle [1998] 16–8
B.C.C. 282; [1998] 1 B.C.L.C. 333; (1997) 94(24)
L.S.G. 31; (1997) 141 S.J.L.B. 119 Ch D
Secretary of State for Trade and Industry v Van Hengel; sub 10–9, 10–11
nom CSTC Ltd, Re [1995] B.C.C. 173; [1995] 1
Secretary of State for Trade and Industry v Worth; sub nom 10–3
Dicetrade Ltd, Re [1994] B.C.C. 371; [1994] 2 B.C.L.C.
113 CA (Civ Div)
Sedgefield Steeplechase Co (1927) Ltd, Re. See Scotto v
Petch
Segers v Bestuur van de Bedrijfsvereniging voor Bank–-en 6–22
Verzekeringswezen, Groothandel en Vrije Beroepen
(79/85) [1986] E.C.R. 2375; [1987] 2 C.M.L.R. 247
Selangor United Rubber Estates Ltd v Cradock (No.3) 13–45, 13–56, 13–57, 13–58, 16–134
[1968] 1 W.L.R. 1555; [1968] 2 All E.R. 1073; [1968] 2
Lloyd’s Rep. 289; (1968) 112 S.J. 744 Ch D
Selectmove Ltd, Re [1995] 1 W.L.R. 474; [1995] 2 All E.R. 33–5
531; [1995] S.T.C. 406; [1994] B.C.C. 349; 66 T.C. 552
CA (Civ Div)
Seven Holdings Ltd, Re [2011] EWHC 1893 (Ch) 17–21
Sevenoaks Stationers (Retail) Ltd, Re [1991] Ch. 164; 10–3, 10–9, 10–10
[1990] 3 W.L.R. 1165; [1991] 3 All E.R. 578; [1990]
B.C.C. 765; [1991] B.C.L.C. 325; (1990) 134 S.J. 1367
CA (Civ Div)
Sevic Systems AG v Amtsgericht Neuwied (C–411/03) 29–16
[2006] All E.R. (EC) 363; [2005] E.C.R. I–10805;
[2006] 2 B.C.L.C. 510; [2006] 1 C.M.L.R. 45; [2006]
C.E.C. 355
Shahar v Tsitsekkos; Kolomoisky v Shahar [2004] EWHC 15–17
2659 (Ch)
Sharma v Sharma [2013] EWCA Civ 1287; [2014] B.C.C. 16–86, 16–98, 16–118
73; [2014] W.T.L.R. 111
Sharp v Blank [2015] EWHC 3220 (Ch) 16–5, 16–6
Sharpley v Louth and East Coast Ry Co (1875–76) L.R. 2 25–39
Ch. D. 663 CA
Shearer v Bercain Ltd [1980] 3 All E.R. 295; [1980] S.T.C. 11–5, 11–7
359; 63 T.C. 698; [1980] T.R. 93; (1980) 124 S.J. 292
Ch D
Sheffield (Earl of) v London Joint Stock Bank Ltd; sub nom 27–10
Easton v London Joint Stock Bank (1888) L.R. 13 App.
Cas. 333 HL
Shepherd’s Case. See Joint Stock Discount Co, Re
Shepherds Investments Ltd v Walters [2006] EWHC 836 16–11, 16–45
(Ch); [2007] 2 B.C.L.C. 202; [2007] I.R.L.R. 110;
[2007] F.S.R. 15; (2006) 150 S.J.L.B. 536
Sheppard & Cooper Ltd v TSB Bank Plc (No.2) [1996] 2 32–37
All E.R. 654; [1996] B.C.C. 965 Ch D
Sherborne Associates Ltd, Re [1995] B.C.C. 40 QBD 9–9
(Mercantile Ct)
Sherborne Park Residents Co Ltd, Re (1986) 2 B.C.C. 3–25, 16–31
Shindler v Northern Raincoat Co [1960] 1 W.L.R. 1038; 14–55
[1960] 2 All E.R. 239; (1960) 104 S.J. 806 Assizes
(Manchester)
Shipway v Broadwood [1899] 1 Q.B. 369 CA 16–108
Short v Treasury Commissioners [1948] A.C. 534; [1948] 2 2–16, 23–1, 23–3
All E.R. 509; 64 T.L.R. 400; [1949] L.J.R. 143; (1948)
92 S.J. 573 HL
Shropshire Union Railways and Canal Co v R. (on the 27–10
Prosecution of Robson) (1874–75) L.R. 7 H.L. 496 HL
Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 3–31, 19–8, 19–9, 19–10
K.B. 9 CA
Sidebottomv Kershaw Leese & Co Ltd [1920] 1 Ch. 154 19–8, 19–9
CA
Siebe Gorman & Co Ltd v Barclays Bank Ltd; sub nom 32–10, 32–21, 32–22
Siebe Gorman & Co Ltd v RH McDonald Ltd [1979] 2
Lloyd’s Rep. 142 Ch D
Sikorski v Sikorski [2012] EWHC 1613 (Ch) 20–10
Simm v Anglo-American Telegraph Co; Anglo-American 27–5
Telegraph Co v Spurling (1879–80) L.R. 5 Q.B.D. 188
CA
Simo Securities Trust, Re [1971] 1 W.L.R. 1455; [1971] 3 28–72
All E.R. 999; (1971) 115 S.J. 755 Ch D
Simtel Communications Ltd v Rebak [2006] EWHC 572 16–12
(QB); [2006] 2 B.C.L.C. 571
Sinclair Investments (UK) Ltd v Versailles Trade Finance 16–53, 16–108, 16–115
Ltd (In Administration) [2011] EWCA Civ 347; [2012]
Ch. 453; [2011] 3 W.L.R. 1153; [2011] 4 All E.R. 335;
[2011] Bus. L.R. 1126; [2011] 2 B.C.L.C. 501; [2011]
W.T.L.R. 1043; [2011] 2 P. & C.R. DG6
Singer v Beckett; sub nom Continental Assurance Co of 9–8, 9–9
London Plc (In Liquidation), Re [2007] 2 B.C.L.C. 287;
[2001] B.P.I.R. 733 Ch D
Singh v Singh [2014] EWCA Civ 103 17–21
Singla v Hedman [2010] EWHC 902 (Ch); [2010] B.C.C. 9–9
684; [2010] 2 B.C.L.C. 61
Sipad Holding v Popovic (1995) 19 A.C.S.R. 108 32–41
Skandinaviska Enskilda Banken AB (Publ), Singapore 7–23, 7–33
Branch v Asia Pacific Breweries (Singapore) Pte Ltd
[2011] SGCA 22 CA (Sing)
Skopas, The. See Resolute Maritime Inc v Nippon Kaiji
Kyokai (The Skopas)
Slavenburg’s Bank NV v Intercontinental Natural 2–32
Resources [1980] 1 W.L.R. 1076; [1980] 1 All E.R.
955; (1980) 124 S.J. 374 QBD
Smith v Bridgend CBC. See Smith (Administrator of
Cosslett (Contractors) Ltd) v Bridgend CBC
Smith v Butler [2012] EWCA Civ 314; [2012] Bus. L.R. 15–54
1836; [2012] B.C.C. 645
Smith v Croft (No.2) [1988] Ch. 114; [1987] 3 W.L.R. 405; 13–57, 17–21
[1987] 3 All E.R. 909; (1987) 3 B.C.C. 207; [1987]
B.C.L.C. 206; [1986] P.C.C. 209; [1987] 1 F.T.L.R.
319; (1987) 84 L.S.G. 2449; (1987) 131 S.J. 1038 Ch D
Smith v Croft (No.3) (1987) 3 B.C.C. 218; [1987] B.C.L.C. 19–6
355 Ch D
Smith v Henniker-Major & Co [2002] EWCA Civ 762; 7–12, 7–13, 7–27, 16–30
[2003] Ch. 182; [2002] 3 W.L.R. 1848; [2002] B.C.C.
768; [2002] 2 B.C.L.C. 655; (2002) 99(37) L.S.G. 36
Smith v Van Gorkam (1985) 488 A. 2d 858 16–18
Smith v White Knight Laundry Ltd [2001] EWCA Civ 660; 33–33
[2002] 1 W.L.R. 616; [2001] 3 All E.R. 862; [2001]
C.P. Rep. 88; [2003] B.C.C. 319; [2001] 2 B.C.L.C.
206; [2001] P.I.Q.R. P30
Smith & Fawcett Ltd, Re [1942] Ch. 304 CA 16–27, 16–40, 16–41, 16–43, 16–43,
27–7
Smith (Administrator of Cosslett (Contractors) Ltd) v 32–2, 32–22
Bridgend CBC; sub nom Cosslett (Contractors) Ltd (In
Administration) (No.2), Re [2001] UKHL 58; [2002] 1
A.C. 336; [2001] 3 W.L.R. 1347; [2002] 1 All E.R. 292;
[2001] B.C.C. 740; [2002] 1 B.C.L.C. 77; [2002] B.L.R.
160; [2002] T.C.L.R. 7; 80 Con. L.R. 172; [2001]
N.P.C. 161
Smith New Court Securities Ltd v Citibank NA; sub nom 5–17, 25–37, 25–39
Smith New Court Securities Ltd v Scrimgeour Vickers
(Asset Management) Ltd [1997] A.C. 254; [1996] 3
W.L.R. 1051; [1996] 4 All E.R. 769; [1997] 1 B.C.L.C.
350; [1996] C.L.C. 1958; (1996) 93(46) L.S.G. 28;
(1996) 146 N.L.J. 1722; (1997) 141 S.J.L.B. 5 HL
Smith Stone & Knight Ltd v Birmingham Corp [1939] 4 All 8–8
E.R. 116
Smithton Ltd (formerly Hobart Capital Markets Ltd) v 16–8, 16–9, 16–10, 16–70, 16–71
Naggar [2014] EWCA Civ 939; [2015] 1 W.L.R. 189;
[2014] B.C.C. 482; [2015] 2 B.C.L.C. 22; (2014)
158(29) S.J.L.B. 37
Société Générale v Walker; sub nom Société Générale de 27–10
Paris v Tramways Union Co Ltd (1886) L.R. 11 App.
Cas. 20 HL
Soden v British & Commonwealth Holdings Plc (In 33–26
Administration) [1998] A.C. 298; [1997] 3 W.L.R. 840;
[1997] 4 All E.R. 353; [1997] B.C.C. 952; [1997] 2
B.C.L.C. 501; (1997) 94(41) L.S.G. 28; (1997) 147
N.L.J. 1546 HL
Sound City (Films) Ltd, Re [1947] Ch. 169; [1946] 2 All 19–15
E.R. 521; 62 T.L.R. 677; [1947] L.J.R. 220; 176 L.T.
28; (1946) 90 S.J. 629 Ch D
South African Supply and Cold Storage Co, Re; sub nom 29–2
Wild v. South African Supply & Cold Storage Co
[1904] 2 Ch. 268 Ch D
South African Territories Ltd v Wallington [1898] A.C. 309 31–7
HL
South India Shipping Corp v Export-Import Bank of Korea 6–4
[1985] 1 W.L.R. 585; [1985] 2 All E.R. 219; [1985] 1
Lloyd’s Rep. 413; (1985) 1 B.C.C. 99350; [1985]
P.C.C. 125; [1985] Fin. L.R. 106; (1985) 82 L.S.G.
1005; (1985) 129 S.J. 268 CA (Civ Div)
South London Greyhound Racecourses Ltd v Wake [1931] 7–19, 7–22
1 Ch. 496 Ch D
South Western Mineral Water Co Ltd v Ashmore [1967] 1 13–56, 13–57
W.L.R. 1110; [1967] 2 All E.R. 953; (1967) 111 S.J.
453 Ch D
Southern v Watson [1940] 3 All E.R. 439 CA 8–13
Southern Foundries (1926) Ltd v Shirlaw [1940] A.C. 701; 14–55, 19–26, 19–27
[1940] 2 All E.R. 445 HL
Sovereign Life Assurance Co (In Liquidation) v Dodd 29–8
[1892] 2 Q.B. 573 CA
Sowman v Samuel (David) Trust Ltd (In Liquidation) 32–4
[1978] 1 W.L.R. 22; [1978] 1 All E.R. 616; (1978) 36 P.
& C.R. 123; (1977) 121 S.J. 757 Ch D
Spector Photo Group NV v Commissie voor het Bank-, 30–32
Financie- en Assurantiewezen (CBFA) (C–45/08)
[2010] Bus. L.R. 1416; [2010] All E.R. (EC) 278;
[2009] E.C.R. I–12073; [2011] B.C.C. 827; [2010] 2
B.C.L.C. 200; [2010] 2 C.M.L.R. 30; [2010] C.E.C.
591; [2010] Lloyd’s Rep. F.C. 295
Spectrum Plus Ltd (In Liquidation), Re; sub nom National 32–10, 32–6, 32–21, 32–23
Westminster Bank Plc v Spectrum Plus Ltd (In
Creditors Voluntary Liquidation) [2005] UKHL 41;
[2005] 2 A.C. 680; [2005] 3 W.L.R. 58; [2005] 4 All
E.R. 209; [2005] 2 Lloyd’s Rep. 275; [2005] B.C.C.
694; [2005] 2 B.C.L.C. 269; (2005) 155 N.L.J. 1045
Spence v Crawford [1939] 3 All E.R. 271; 1939 S.C. (H.L.) 5–17, 16–113
52; 1939 S.L.T. 305 HL
Spies v R. [2000] HCA 43; [2000] 201 C.L.R. 603 9–15
Sportech Plc, Petr [2012] CSOH 58; 2012 S.L.T. 895 13–36
Springbok Agricultural Estates Ltd, Re [1920] 1 Ch. 563 Ch 23–8
D
St Piran Ltd, Re [1981] 1 W.L.R. 1300; [1981] 3 All E.R. 20–12, 28–9
270; (1981) 125 S.J. 586 Ch D
St Regis Paper Company Ltd v R. See R. v St Regis Paper
Co Ltd
Stablewood v Virdi [2010] EWCA Civ 865; [2011] 27–8
W.T.L.R. 723; [2010] All E.R. (D) 204
Stainer v Lee [2010] EWHC 1539 (Ch); [2011] B.C.C. 134; 17–20, 17–27
[2011] 1 B.C.L.C. 537
Stakefield (Midlands) Ltd, Re; sub nom Secretary of State 10–6
for Business, Innovation and Skills v Doffman [2010]
EWHC 3175 (Ch); [2011] 2 B.C.L.C. 541
Stakefield (Midlands) Ltd, Re; sub nom Secretary of State 10–9
for Business, Innovation and Skills v Doffmann (No.2)
[2010] EWHC 3175 (Ch); [2011] 2 B.C.L.C. 541
Standard Chartered Bank Ltd v Walker [1982] 1 W.L.R. 32–37, 32–38
1410; [1982] 3 All E.R. 938; [1982] Com. L.R. 233;
(1982) 264 E.G. 345; (1982) 79 L.S.G. 1137; 264 S.J.
479 CA (Civ Div)
Standard Chartered Bank v Pakistan National Shipping 7–32
Corp (No.2); Standard Chartered Bank v Mehra [2002]
UKHL 43; [2003] 1 A.C. 959; [2002] 3 W.L.R. 1547;
[2003] 1 All E.R. 173; [2002] 2 All E.R. (Comm) 931;
[2003] 1 Lloyd’s Rep. 227; [2002] B.C.C. 846; [2003] 1
B.C.L.C. 244; [2002] C.L.C. 1330; (2003) 100(1)
L.S.G. 26; (2002) 146 S.J.L.B. 258 HL
Stanford Services, Re (1987) 3 B.C.C. 326; [1987] B.C.L.C. 10–10
607; [1987] P.C.C. 343 Ch D (Companies Ct)
Stanhope’s Case. See Agriculturist Cattle Insurance Co, Re
Stanley (Henry Morton), Re; sub nom Tennant v Stanley 1–1
[1906] 1 Ch. 131 Ch D
Staples v Eastman Photographic Materials Co [1896] 2 Ch. 23–8
303 CA
Starglade Properties Ltd v Nash [2010] EWCA Civ 1314; 16–135
[2011] Lloyd’s Rep. F.C. 102; [2011] 1 P. & C.R. DG17
Steedman v Frigidaire Corp [1933] 1 D.L.R. 161 PC 5–17
Steen v Law [1964] A.C. 287; [1963] 3 W.L.R. 802; [1963] 13–57
3 All E.R. 770 PC (Aus)
Stein v Blake (No.1) [1996] A.C. 243; [1995] 2 W.L.R. 33–23
710; [1995] 2 All E.R. 961; [1995] B.C.C. 543; [1995] 2
B.C.L.C. 94; (1995) 145 N.L.J. 760 HL
Stein v Blake (No.2) [1998] 1 All E.R. 724; [1998] B.C.C. 17–37
316; [1998] 1 B.C.L.C. 573 CA (Civ Div)
Steinberg v Scala (Leeds) Ltd [1923] 2 Ch. 452 CA 23–1
Stepney Corp v Osofsky [1937] 3 All E.R. 289 CA 2–19
Stewarts (Brixton) Ltd, Re [1985] B.C.L.C. 4 20–14
Sticky Fingers Restaurant Ltd, Re [1991] B.C.C. 754; 15–54
Stimpson v Southern Landlords Association [2009] EWHC 17–18
2072 (Ch); [2010] B.C.C. 387
Stocznia Gdanska SA v Latreefers Inc; Stocznia Gdanska 6–8
SA v Latvian Shipping Co (Abuse of Process); sub nom
Latreefers Inc, Re [2000] C.P.L.R. 65; [2001] B.C.C.
174; [2001] 2 B.C.L.C. 116; [2001] C.L.C. 126
Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A 16–4, 22–41
Firm); sub nom Moore Stephens (A Firm) v Stone &
Rolls Ltd (In Liquidation) [2009] UKHL 39; [2009] 1
A.C. 1391; [2009] 3 W.L.R. 455; [2009] Bus. L.R.
1356; [2009] 4 All E.R. 431; [2010] 1 All E.R. (Comm)
125; [2009] 2 Lloyd’s Rep. 537; [2009] 2 B.C.L.C. 563;
[2009] 2 C.L.C. 121; [2009] Lloyd’s Rep. F.C. 557;
[2009] B.P.I.R. 1191; [2009] P.N.L.R. 36; (2009) 159
N.L.J. 1218; (2009) 153(31) S.J.L.B. 28
Stonegate Securities Ltd v Gregory [1980] Ch. 576; [1980] 33–5
3 W.L.R. 168; [1980] 1 All E.R. 241; (1980) 124 S.J.
495 CA (Civ Div)
Stothers v William Steward (Holdings) Ltd [1994] 2 27–7
B.C.L.C. 266; 1994] B.C.C. 284 CA (Civ Div)
Strahan v Wilcock [2006] EWCA Civ 13; [2006] B.C.C. 20–7, 20–19
320; [2006] 2 B.C.L.C. 555; (2006) 103(6) L.S.G. 30
Stroud Architectural Services Ltd v John Laing 32–11
Construction Ltd [1994] B.C.C. 18; [1994] 2 B.C.L.C.
276; 35 Con. L.R. 135; (1993) 9 Const. L.J. 337 QBD
Stupples v Stupples & Co (High Wycombe) Ltd [2012] 16–45
EWHC 1226 (Ch); [2013] 1 B.C.L.C. 729
Stylo Shoes Ltd v Prices Tailors Ltd [1960] Ch. 396; [1960] 33–5
2 W.L.R. 8; [1959] 3 All E.R. 901; (1960) 104 S.J. 16
Ch D
Suburban and Provincial Stores, Re [1943] Ch.156 CA 19–15
Sugarman v CJS Investments LLP [2014] EWCA Civ 1239; 15–46
[2015] 1 B.C.L.C. 1; [2014] 3 E.G.L.R. 127; [2015] 1 P.
& C.R. DG11
Sukhoruchkin v Van Bekestein [2014] EWCA Civ 399 16–9
Sunrise Radio Ltd, Re [2009] EWHC 2893 (Ch); [2010] 1 11–5
B.C.L.C. 367
Supply of Ready Mixed Concrete (No.2), Re. See Director
General of Fair Trading v Pioneer Concrete (UK) Ltd
Surrey Garden Village Trust, Re; sub nom Addington 33–6
Smallholders, Re [1965] 1 W.L.R. 974; [1964] 3 All
E.R. 962; (1965) 109 S.J. 552 Ch D
Sutherland (Duke of) v British Dominions Land Settlement 27–7
Corp Ltd [1926] Ch. 746 Ch D
Sutherland v British Dominions Corp. See Duke of
Sutherland v British Dominions Land Settlement Corp
Ltd
Swabey v Port Darwin Gold Mining Co (1889) 1 Meg. 385 14–55
CA
Swaledale Cleaners Ltd, Re [1968] 1 W.L.R. 1710; [1968] 27–7
3 All E.R. 619; (1968) 112 S.J. 781 CA (Civ Div)
Swallow Footwear Ltd, Re, Times, 23 October 1956 32–37
Swift 736 Ltd, Re. See Secretary of State for Trade and
Industry v Ettinger
Swiss Bank Corp v Lloyds Bank Ltd [1979] Ch. 548; 31–27
[1979] 3 W.L.R. 201; [1979] 2 All E.R. 853; (1979) 123
S.J. 536 Ch D
Sybron Corp v Rochem Ltd [1984] Ch. 112; [1983] 3 16–11
W.L.R. 713; [1983] 2 All E.R. 707; [1983] I.C.R. 801;
[1983] I.R.L.R. 253; (1983) 127 S.J. 391 CA (Civ Div)
Sycotex Pty Ltd v Baseler (1994) 122 A.L.R. 531 9–15
Synthetic Technology Ltd, Re. See Secretary of State for
Trade and Industry v Joiner
System Controls Plc v Munro Corporate Plc; sub nom 11–15
Systems Controls v Monro Corporate [1990] B.C.C.
386; [1990] B.C.L.C. 659 Ch D
Systemcare (UK) Ltd v Services Design Technology Ltd 8–8
[2011] EWCA Civ 546; [2012] 1 B.C.L.C. 14; [2011] 4
Costs L.R. 666
T&N Ltd, Re [2006] EWHC 1447 (Ch); [2007] Bus. L.R. 29–4, 29–5, 29–9
1411; [2007] 1 All E.R. 851; [2007] 1 B.C.L.C. 563;
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Target Holdings Ltd v Redferns [1996] A.C. 421; [1995] 3 12–14
W.L.R. 352; [1995] 3 All E.R. 785; [1995] C.L.C. 1052;
(1995) 139 S.J.L.B. 195; [1995] N.P.C. 136 HL
Tatung (UK) Ltd v Galex Telesure Ltd (1989) 5 B.C.C. 325 32–11
QBD (Comm Ct)
Taupo Totara Timber Co v Rowe [1978] A.C. 537; [1977] 3 14–62, 28–32
W.L.R. 466; [1977] 3 All E.R. 123; (1977) 121 S.J. 692
PC (NZ)
Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 W.L.R. 413; 20–7
(1987) 3 B.C.C. 132; [1987] B.C.L.C. 472; (1987) 84
L.S.G. 900; (1987) 131 S.J. 473 PC
Taylor v National Union of Mineworkers (Derbyshire Area) 3–29, 17–1
(Injunction) [1985] I.R.L.R. 99; [1985] B.C.L.C. 237
High Ct
Taylor v Walker [1958] 1 Lloyd’s Rep. 490 QBD 16–107, 16–108
Tech Textiles Ltd, Re; sub nom Secretary of State for Trade 10–3
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(Companies Ct)
Teck Corp Ltd v Millar (1972) 33 D.L.R. (3d) 288 Sup Ct 16–26
(BC)
Teekay Tankers Ltd v STX Offshore & Shipping Co [2014] 6–4, 6–5
EWHC 3612 (Comm); [2015] 2 All E.R. (Comm) 263;
[2015] Bus. L.R. 731; [2015] 2 B.C.L.C. 210; [2014] 2
C.L.C. 763
Telewest Communications Plc (No.1), Re [2004] EWCA 29–9
Civ 728; [2005] B.C.C. 29; [2005] 1 B.C.L.C. 752
Telewest Communications Plc (No.2), Re [2004] EWHC 29–11
1466 (Ch); [2005] B.C.C. 36; [2005] 1 B.C.L.C. 772
Telomatic Ltd, Re; sub nom Barclays Bank Plc v Cyprus 32–26, 32–30
Popular Bank Ltd [1993] B.C.C. 404; [1994] 1 B.C.L.C.
Tennent v City of Glasgow Bank (In Liquidation) (1878– 25–39
79) L.R. 4 App. Cas. 615; (1879) 6 R. (H.L.) 69 HL
Tesco Stores Ltd v Brent LBC [1993] 1 W.L.R. 1037; 7–40, 7–41
[1993] 2 All E.R. 718; (1994) 158 J.P. 121; (1994) 13
Tr. L.R. 87; [1993] C.O.D. 280; (1994) 158 L.G. Rev.
78; (1993) 137 S.J.L.B. 93 DC
Tesco Stores Ltd v Pook [2003] EWHC 823 (Ch); [2004] 16–11
I.R.L.R. 618
Tesco Supermarkets Ltd v Nattrass [1972] A.C. 153; [1971] 7–40, 7–41
2 W.L.R. 1166; [1971] 2 All E.R. 127; 69 L.G.R. 403;
(1971) 115 S.J. 285 HL
Tett v Phoenix Property & Investment Co Ltd (1986) 2 27–7, 27–8
B.C.C. 99140; [1986] P.C.C. 210; [1986] B.C.L.C. 149;
(1986) 83 L.S.G. 116; (1985) 129 S.J. 869 CA (Civ
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Theakston v London Trust Plc (1984) 1 B.C.C. 99095; 27–7
[1984] B.C.L.C. 390 Ch D
Thermascan Ltd v Norman [2009] EWHC 3694 (Ch); 16–13
[2011] B.C.C. 535
Thomas v Maxwell; sub nom Inquiry into Mirror Group 18–7
Newspapers Plc, Re [2000] Ch. 194; [1999] 3 W.L.R.
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B.C.L.C 690; (1999) 96(14) L.S.G. 31 Ch D
(Companies Ct)
Thomas Gerrard & Son Ltd, Re [1968] Ch. 455; [1967] 3 22–36
W.L.R. 84; [1967] 2 All E.R. 525; (1967) 111 S.J. 329
Ch D
Thomas Mortimer Ltd, Re [1965] Ch. 186 (Note); [1964] 3 32–14
W.L.R. 427 (Note) Ch D
Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All E.R. 25–39
573 Ch D
Thompson v Renwick Group Plc [2014] EWCA Civ 635; 8–10, 16–36
[2015] B.C.C. 855; [2014] 2 B.C.L.C. 97; [2014]
P.I.Q.R. P18
Thorby v Goldberg (1964) 112 C.L.R. 597 High Ct (Aus) 16–35
Thorn EMI Plc, Re (1988) 4 B.C.C. 698; [1989] B.C.L.C. 13–38
Thorniley v Revenue and Customs Commissioners; sub 32–17
nom Airbase (UK) Ltd, Re; Airbase Services
International Ltd, Re [2008] EWHC 124 (Ch); [2008] 1
W.L.R. 1516; [2008] Bus. L.R. 1076; [2008] B.C.C.
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Threlfall v ECD Insight Ltd [2012] EWHC 3543 (QB); 16–11
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Thundercrest Ltd, Re [1994] B.C.C. 857; [1995] 1 B.C.L.C. 24–12
Tiessen v Henderson [1899] 1 Ch. 861 Ch D 15–47, 15–65
Tilt Cove Copper Co Ltd, Re; sub nom Trustees Executors 32–37
and Securities Insurance Corp Ltd v Tilt Cove Copper
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Timmis, Re; sub nom Nixon v Smith [1902] 1 Ch. 176 Ch 16–138
D
Tintin Exploration Syndicate v Sandys (1947) 177 L.T. 412 11–14
TM Kingdom Ltd (In Administration), Re [2007] EWHC 32–50
3272 (Ch); [2007] B.C.C. 480
Tobian Properties, Re. See Annacott Holdings Ltd, Re
Tolhurst v Associated Portland Cement [1902] 2 K.B. 660 2–22
CA
Top Creative Ltd v St Albans DC [1999] B.C.C. 999; 33–32
[2000] 2 B.C.L.C. 379 CA (Civ Div)
Topham v Charles Topham Group Ltd [2002] EWHC 1096 11–20
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Torvale Group Ltd, Re. See Hunt v Edge & Ellison Trustees
Ltd
Toshoku Finance UK Plc (In Liquidation), Re; sub nom 33–24
Khan v IRC; Kahn v IRC; IRC v Kahn [2002] UKHL 6;
[2002] 1 W.L.R. 671; [2002] 3 All E.R. 961; [2002]
S.T.C. 368; [2002] B.C.C. 110; [2002] 1 B.C.L.C. 598;
[2002] B.P.I.R. 790; [2003] R.V.R. 106; [2002] B.T.C.
69; [2002] S.T.I. 237; (2002) 99(12) L.S.G. 33; (2002)
146 S.J.L.B. 55
Tottenham Hotspur Plc, Re [1994] 1 B.C.L.C. 655 Ch D 20–8
Touche v Metropolitan Ry Warehousing Co (1870–71) L.R. 5–21
6 Ch. App. 671 LC
Towcester Racecourse Co Ltd v Racecourse Association 3–21, 16–5
Ltd [2002] EWHC 2141 (Ch); [2003] 1 B.C.L.C. 260;
(2002) 99(45) L.S.G. 34
Towers v Premier Waste Management Ltd [2011] EWCA 16–95, 16–98, 16–101
Civ 923; [2012] B.C.C. 72; [2012] 1 B.C.L.C. 67;
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Transatlantic Life Assurance Co, Re [1980] 1 W.L.R. 79; 27–19
[1979] 3 All E.R. 352; (1979) 123 S.J. 859 Ch D
Transbus International Ltd (In Liquidation), Re [2004] 32–45
EWHC 932 (Ch); [2004] 1 W.L.R. 2654; [2004] 2 All
E.R. 911; [2004] B.C.C. 401; [2004] 2 B.C.L.C. 550
TransTec Plc, Re. See Secretary of State for Trade and
Industry v Carr
Transvaal Lands Co v New Belgium (Transvaal) Land & 16–52, 16–60, 16–113
Development Co [1914] 2 Ch. 488; 84 L.J. Ch. 94; 21
Mans. 364; [1914–15] All E.R. Rep. 987; 59 S.J. 27;
112 L.T. 965; 31 T.L.R. 1 CA
Travel Mondial (UK) Ltd, Re [1991] B.C.C. 224; [1991] 10–9
Trebanog Working Men’s Club and Institute Ltd v 8–8
MacDonald; Monkwearmouth Conservative Club Ltd v
Smith [1940] 1 K.B. 576 KBD
Trevor v Whitworth (1887) L.R. 12 App. Cas. 409 HL 12–8, 13–2, 13–44
Truculent, The. See Admiralty v Owners of the Divina (The
HMS Truculent)
Trustor AB v Smallbone (No.2) [2001] 1 W.L.R. 1177; 16–137
[2001] 3 All E.R. 987; [2002] B.C.C. 795; [2001] 2
B.C.L.C. 436; (2001) 98(20) L.S.G. 40; (2001) 151
N.L.J. 457; (2001) 145 S.J.L.B. 99 Ch D
TSB Nuclear Energy Investment UK Ltd, Re [2014] EWHC 29–12
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Tse Kwong Lam v Wong Chit Sen [1983] 1 W.L.R. 1349; 32–38
[1983] 3 All E.R. 54; (1983) 80 L.S.G. 2368; (1983)
127 S.J. 632 PC (HK)
Tudor Grange Holdings Ltd v Citibank NA [1992] Ch. 53; 32–39
[1991] 3 W.L.R. 750; [1991] 4 All E.R. 1; [1991]
B.C.L.C. 1009; (1991) 135 S.J.L.B. 3 Ch D
Tulsesense Ltd, Re; sub nom Rolfe v Rolfe [2010] EWHC 15–17, 15–19
244 (Ch); [2010] 2 B.C.L.C. 525; [2010] Bus. L.R. D99
Tussaud v Tussaud (1890) L.R. 44 Ch. D. 678 Ch D 4–25
Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 A.C. 16–135
164; [2002] 2 W.L.R. 802; [2002] 2 All E.R. 377;
[2002] P.N.L.R. 30; [2002] W.T.L.R. 423; [2002] 38
E.G. 204 (C.S.); (2002) 99(19) L.S.G. 32; (2002) 152
N.L.J. 469; (2002) 146 S.J.L.B. 84; [2002] N.P.C. 47
Twomax Ltd v Dickinson, McFarlane & Robinson, 1982 22–46
S.C. 113; 1983 S.L.T. 98 OH
Twycross v Grant (No.1) (1876–77) L.R. 2 C.P.D. 469 CA 5–3, 5–4
UBAF Ltd v European American Banking Corp (The 31–28
Pacific Colocotronis); Illustrious Colocotronis, The
[1984] Q.B. 713; [1984] 2 W.L.R. 508; [1984] 2 All
E.R. 226; [1984] 1 Lloyd’s Rep. 258; (1984) 81 L.S.G.
429; (1984) 128 S.J. 243 CA (Civ Div)
Uberseering BV v Nordic Construction Co Baumanagement 6–24, 6–25
GmbH (NCC) (C–208/00) [2005] 1 W.L.R. 315; [2002]
E.C.R. I–9919; [2005] 1 C.M.L.R. 1
UK Safety Group Ltd v Hearne [1998] 2 B.C.L.C. 208 Ch 14–31
D
Ultraframe (UK) Ltd v Fielding; Burnden Group Plc v 9–14, 16–9, 16–14, 16–71, 16–100, 16–
Northstar Systems Ltd (In Liquidation); Northstar 114, 16–135, 16–137, 32–8
Systems Ltd (In Liquidation) v Fielding [2005] EWHC
1638 (Ch); [2006] F.S.R. 17; [2007] W.T.L.R. 835;
(2005) 28(9) I.P.D. 28069
Ultramares Corp v Touche (1931) 174 N.E. 441 22–32
Unidare Plc v Cohen; sub nom Kilnoore Ltd (In 27–8
Liquidation), Re [2005] EWHC 1410 (Ch); [2006] Ch.
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Union Music Ltd v Watson; Arias Ltd v Blacknight Ltd 15–54
[2003] EWCA Civ 180; [2004] B.C.C. 37; [2003] 1
B.C.L.C. 453
Uniq Plc, Re [2011] EWHC 749 (Ch); [2012] 1 B.C.L.C. 29–11
783; [2012] Bus. L.R. D18
United Australia Ltd v Barclays Bank Ltd [1941] A.C. 1; 16–108
[1940] 4 All E.R. 20 HL
United Pan Europe Communications NV v Deutsche Bank 16–110
AG [2000] 2 B.C.L.C. 461 CA (Civ Div)
University of Nottingham v Fishel [2000] I.C.R. 1462; 16–11
[2000] I.R.L.R. 471; [2001] R.P.C. 22; [2000] Ed. C.R.
505; [2000] E.L.R. 385; (2001) 24(2) I.P.D. 24009 QBD
Uruguay Central and Hygueritas Ry Co of Monte Video, Re 31–14
(1879) 11 Ch. D. 372 Ch D
US v Carpenter (1986) 791 F. 2d 1024 30–19
US v Chiarella (1980) 445 U.S. 222 30–22
Uxbridge Permanent Benefit Building Society v Pickard 7–19, 7–33
[1939] 2 K.B. 248 CA
VALE Epitesi kft’s Application (C–378/10) [2013] 1 6–26
W.L.R. 294; [2012] 3 C.M.L.R. 41; [2013] C.E.C. 422
ECJ (3rd Chamber)
Valletort Sanitary Steam Laundry Co Ltd, Re [1903] 2 Ch. 32–11
654 Ch D
Vandepitte v Preferred Accident Insurance Corp of New 31–14
York [1933] A.C. 70; (1932) 44 Ll. L. Rep. 41 PC
(Canada)
Vectone Entertainment Holding Ltd v South Entertainment 15–54
Ltd [2004] EWHC 744 (Ch); [2005] B.C.C. 123; [2004]
2 B.C.L.C. 224
Victor Battery Co Ltd v Curry’s Ltd [1946] Ch. 242 Ch D 13–56
Victoria Housing Estates Ltd v Ashpurton Estates Ltd; sub 32–30
nom Ashpurton Estates Ltd, Re [1983] Ch. 110; [1982]
3 W.L.R. 964; [1982] 3 All E.R. 665 CA (Civ Div)
Victoria Steamboats Co, Re [1897] 1 Ch. 158 Ch D 32–8, 32–37
Village Cay Marina Ltd v Acland [1998] B.C.C. 417; 27–7
[1998] 2 B.C.L.C. 327 PC
Vintage Hallmark Plc, Re; sub nom Secretary of State for 10–10
Trade and Industry v Grove [2006] EWHC 2761 (Ch);
[2008] B.C.C. 150; [2007] 1 B.C.L.C. 788
Virdi v Abbey Leisure. See Abbey Leisure Ltd, Re
Vivendi SA v Richards [2013] EWHC 3006 (Ch); [2013] 16–8, 16–9, 16–10
B.C.C. 771; [2013] Bus. L.R. D63
Vodafone Group Plc, Re [2014] EWHC 1357 (Ch); [2014] 13–36
B.C.C. 554; [2014] 2 B.C.L.C. 422
VTB Capital Plc v Nutritek International Corp [2013] 8–15, 8–16
UKSC 5; [2013] 2 A.C. 337; [2013] 2 W.L.R. 398;
[2013] 1 All E.R. 1296; [2013] 1 All E.R. (Comm)
1009; [2013] 1 Lloyd’s Rep. 466; [2013] B.C.C. 514;
[2013] 1 B.C.L.C. 179; [2013] 1 C.L.C. 153
W&M Roith Ltd, Re [1967] 1 W.L.R. 432; [1967] 1 All 16–41, 16–43
E.R. 427; (1966) 110 S.J. 963 Ch D
Waddington Ltd v Chan Chun Hoo Thomas [2009] 2 17–35
B.C.L.C. 82 CA (HK)
Walker v Standard Chartered Bank; Jasaro SA v Standard 14–51
Chartered Bank [1992] B.C.L.C. 535 CA (Civ Div)
Walker v Wimborne (1976) 137 C.L.R. 1 9–12
Wallace v Universal Automatic Machines Co [1894] 2 Ch. 32–8
547 CA
Wallach v Secretary of State for Trade and Industry; sub 9–22
nom Genosyis Technology Management Ltd, Re [2006]
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Wallersteiner v Moir (No.1); sub nom Moir v Wallersteiner 13–45, 13–56, 13–57
(No.1) [1974] 1 W.L.R. 991; [1974] 3 All E.R. 217;
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Wallersteiner v Moir (No.2) [1975] Q.B. 373; [1975] 2 17–27
W.L.R. 389; [1975] 1 All E.R. 849; (1975) 119 S.J. 97
CA (Civ Div)
Walls Properties Ltd v PJ Walls Holdings Ltd [2008] 1 I.R. 27–8
732
Walter Symons Ltd, Re [1934] Ch. 308 Ch D 23–8
Warman International Ltd v Dwyer (1995) 182 CLR 544 16–114
High Ct (Aus)
Waste Recycling Group Plc, Re [2003] EWHC 2065 (Ch); 29–11
[2004] B.C.C. 328; [2004] 1 B.C.L.C. 352; [2004] Env.
L.R. D2
Watson v Duff, Morgan & Vermont (Holdings) [1974] 1 32–30
W.L.R. 450; [1974] 1 All E.R. 794; (1973) 117 S.J. 910
Ch D
Watts v Financial Services Authority [2005] UKFSM 30–52
FSM022
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B.C.C. 98961 Ch D
Weatherford Global Products Ltd v Hydropath Holdings 16–94
Ltd [2014] EWHC 2725 (TCC); [2015] B.L.R. 69
Weavering Capital (UK) Ltd (In Liquidation) v Dabhia 16–17
[2013] EWCA Civ 71; [2015] B.C.C. 741
Webb v Earle (1875) L.R. 20 Eq. 556 Ct of Chancery 23–8
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572
Webster v Sandersons Solicitors [2009] EWCA Civ 830; 17–35
[2009] 2 B.C.L.C. 542; [2009] P.N.L.R. 37; [2010]
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Welch v Bank of England [1955] Ch. 508; [1955] 2 W.L.R. 27–5
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Welfab Engineers Ltd, Re [1990] B.C.L.C. 833 9–14
Welsh Development Agency v Export Finance Co Ltd 32–2, 32–3, 32–37, 32–40
[1992] B.C.C. 270; [1992] B.C.L.C. 148 CA (Civ Div)
WeSellCNC.com Ltd, Re [2013] EWHC 4577 (Ch) 33–15
Wessex Computer Stationers Ltd, Re [1992] B.C.L.C. 366 20–21
West Canadian Collieries, Re [1962] Ch. 370; [1961] 3 15–66
W.L.R. 1416; [1962] 1 All E.R. 26; (1961) 105 S.J.
1126 Ch D
West Mercia Safetywear Ltd (In Liquidation) v Dodd. See
Liquidator of West Mercia Safetywear Ltd v Dodd
Westbourne Galleries, Re. See Ebrahimi v Westbourne
Galleries Ltd
Westburn Sugar Refineries Ltd v IRC, 1960 S.L.T. 297; 53 12–3
R. & I.T. 365; 39 T.C. 45; (1960) 39 A.T.C. 128; [1960]
T.R. 105 IH (1 Div)
Westdeutsche Landesbank Girozentrale v Islington LBC 16–112
[1996] A.C. 669; [1996] 2 W.L.R. 802; [1996] 2 All
E.R. 961; [1996] 5 Bank. L.R. 341; [1996] C.L.C. 990;
95 L.G.R. 1; (1996) 160 J.P. Rep. 1130; (1996) 146
N.L.J. 877; (1996) 140 S.J.L.B. 136 HL
Westmid Packing Services Ltd (No.2), Re; sub nom 10–3, 10–10, 16–17
Westmid Packaging Services Ltd (No.3), Re; Secretary
of State for Trade and Industry v Griffiths (No.2) [1998]
2 All E.R. 124; [1998] B.C.C. 836; [1998] 2 B.C.L.C.
646
Westminster Corp v Haste [1950] Ch. 442; [1950] 2 All 32–18
E.R. 65; 66 T.L.R. (Pt. 1) 1083; (1950) 114 J.P. 340; 49
L.G.R. 67 Ch D
Westminster Property Group Plc, Re [1985] 1 W.L.R. 676; 28–53
[1985] 2 All E.R. 426; (1985) 1 B.C.C. 99355; [1985]
P.C.C. 176; (1985) 82 L.S.G. 1085; (1985) 129 S.J. 115
CA (Civ Div)
Westminster Property Management Ltd (No.1), Re; sub 10–7, 18–14
nom Official Receiver v Stern (No.1) [2000] 1 W.L.R.
2230; [2001] 1 All E.R. 633; [2001] B.C.C. 121; [2000]
2 B.C.L.C. 396; [2000] U.K.H.R.R. 332 CA (Civ Div)
Westminster Property Management Ltd (No.3), Re; sub 16–120, 19–6
nom Official Receiver v Stern (No.3) [2001] EWCA
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Whaley Bridge Calico Printing Co v Green; Whaley Bridge 5–3, 5–4, 5–16
Calico Printing Co v Smith (1879–80) L.R. 5 Q.B.D.
109 QBD
Wharfedale Brewery Co Ltd, Re [1952] Ch. 913; [1952] 2 23–8
All E.R. 635; [1952] 2 T.L.R. 543 Ch D
Wheatley v Silkstone & Haigh Moor Coal Co (1885) L.R. 32–10
29 Ch. D. 715 Ch D
White v Bristol Aeroplane Co; sub nom British Aeroplane 19–16, 19–17
Co, Re [1953] Ch. 65; [1953] 2 W.L.R. 144; [1953] 1
All E.R. 40; (1953) 97 S.J. 64 CA
White Horse Distillers Ltd v Gregson Associates Ltd [1984] 7–36
R.P.C. 61 Ch D
White Star Line Ltd, Re [1938] Ch. 458 CA 11–14
Whitehouse v Carlton House Pty (1987) 162 C.L.R. 285 HC 16–29
(Aus)
Wilkinson v West Coast Capital [2005] EWHC 3009 (Ch); 16–96
[2007] B.C.C. 717
Will v United Lankat Plantations Co Ltd [1914] A.C. 11 HL 23–8
William C Leitch Bros Ltd, Re (No.1) [1932] 2 Ch. 71 Ch 9–5
D
William Metcalfe & Sons Ltd, Re [1933] Ch. 142 CA 23–7
Williams v Central Bank of Nigeria [2014] UKSC 10; 16–135, 16–139
[2014] A.C. 1189; [2014] 2 W.L.R. 355; [2014] 2 All
E.R. 489; [2014] W.T.L.R. 873; 16 I.T.E.L.R. 740;
(2014) 164(7596) N.L.J. 16
Williams v Natural Life Health Foods Ltd [1998] 1 W.L.R. 7–32, 22–34, 22–35
830; [1998] 2 All E.R. 577; [1998] B.C.C. 428; [1998] 1
B.C.L.C. 689; (1998) 17 Tr. L.R. 152; (1998) 95(21)
L.S.G. 37; (1998) 148 N.L.J. 657; (1998) 142 S.J.L.B.
166 HL
Williams v Redcard Ltd. See Redcard Ltd v Williams
Williams & Glyn’s Bank Ltd v Barnes [1981] Com. L.R. 31–25
205 High Ct
Wilson Lovatt & Sons Ltd, Re [1977] 1 All E.R. 274 Ch D 33–16
Wilson v Kelland [1910] 2 Ch. 306 Ch D 32–11
Windsor Steam Coal Co (1901) Ltd, Re [1928] Ch. 609 Ch 33–16
D
Winkworth v Edward Baron Development Co Ltd [1986] 1 9–15
W.L.R. 1512; [1987] 1 All E.R. 114; (1987) 3 B.C.C. 4;
[1987] B.C.L.C. 193; [1987] 1 F.L.R. 525; [1987] 1
F.T.L.R. 176; (1987) 53 P. & C.R. 378; [1987] Fam.
Law 166; (1987) 84 L.S.G. 340; (1986) 130 S.J. 954 HL
Winpar Holdings Ltd v Joseph Holt Group Plc; sub nom 28–71
Joseph Holt Plc, Re [2001] EWCA Civ 770; [2002]
B.C.C. 174; [2001] 2 B.C.L.C. 604; (2001) 98(28)
L.S.G. 42
Winthrop Investments Ltd v Winns Ltd [1975] 2 16–26, 16–31
N.S.W.L.R. 666 CA (NSW)
Wise v Perpetual Trustee Co Ltd [1903] A.C. 139 PC (Aus) 27–8
Wise v Union of Shop, Distributive and Allied Workers 3–25
[1996] I.C.R. 691; [1996] I.R.L.R. 609 Ch D
Wishart, Petr; sub nom Wishart v Castlecroft Securities Ltd 17–27
[2009] CSIH 65; 2010 S.C. 16; 2009 S.L.T. 812; 2009
S.C.L.R. 696; [2010] B.C.C. 161; 2009 G.W.D. 28–446
Wishart v Castlecroft Securities Ltd [2010] CSIH 2; 2010 17–27
S.L.T. 371; 2010 G.W.D. 6–101
WJ Hall & Co, Re; sub nom WJ Hall & Co Ltd, Re [1909] 23–8
1 Ch. 521 Ch D
Wood Preservation v Prior [1969] 1 W.L.R. 1077; [1969] 1 27–8
All E.R. 364; 45 T.C. 112; [1968] T.R. 353; (1968) 112
S.J. 927 CA
Wood, Skinner & Co Ltd, Re [1944] Ch. 323 Ch D 23–8
Woodford v Smith [1970] 1 W.L.R. 806; [1970] 1 All E.R. 15–67
1091 (Note); (1970) 114 S.J. 245 Ch D
Woodfull v Lindsley [2004] EWCA Civ 165; [2004] 2 16–94
B.C.L.C. 131; (2004) 148 S.J.L.B. 263
Woodroffes (Musical Instruments) Ltd, Re [1986] Ch. 366; 32–8, 32–9
[1985] 3 W.L.R. 543; [1985] 2 All E.R. 908; [1985]
P.C.C. 318; (1985) 82 L.S.G. 3170; (1985) 129 S.J. 589
Ch D
Woods v Winskill [1913] 2 Ch. 303 Ch D 32–18
Woolfson v Strathclyde RC; sub nom Woolfson v Glasgow 8–8
Corp, 1978 S.C. (H.L.) 90; 1978 S.L.T. 159; (1979) 38
P. & C.R. 521; (1978) 248 E.G. 777; [1979] J.P.L. 169
HL
Woven Rugs Ltd, Re [2002] 1 B.C.L.C. 324 Ch D 15–54
Wragg, Re [1897] 1 Ch. 796 CA 11–14
Wrexham Associated Football Club Ltd (In Administration) 7–8, 7–25
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Wright v Atlas Wright (Europe) Ltd; sub nom Atlas Wright 15–15, 15–17, 15–18, 15–20
(Europe) Ltd v Wright [1999] B.C.C. 163; [1999] 2
B.C.L.C. 301; (1999) 96(8) L.S.G. 29 CA (Civ Div)
Yagerphone Ltd, Re [1935] Ch. 392 Ch D 9–10
Yeovil Glove Co, Re [1965] Ch. 148; [1964] 3 W.L.R. 406; 32–14
[1964] 2 All E.R. 849; (1964) 108 S.J. 499 CA
Yorkshire Woolcombers Association Ltd, Re. See
Illingworth v Houldsworth
Yuen Kun Yeu v Att Gen of Hong Kong [1988] A.C. 175; 4–5
[1987] 3 W.L.R. 776; [1987] 2 All E.R. 705; [1987]
F.L.R. 291; (1987) 84 L.S.G. 2049; (1987) 137 N.L.J.
566; (1987) 131 S.J. 1185 PC
Yukong Line Ltd of Korea v Rendsburg Investments Corp 8–15, 9–15, 16–7, 16–9
of Liberia (The Rialto) [1998] 1 W.L.R. 294; [1998] 4
All E.R. 82; [1998] 1 Lloyd’s Rep. 322; [1998] B.C.C.
870; [1998] 2 B.C.L.C. 485; (1997) 94(39) L.S.G. 39;
(1997) 141 S.J.L.B. 212 QBD (Comm Ct)
Zanzibar (Government of) v British Aerospace (Lancaster 25–39
House) Ltd [2000] 1 W.L.R. 2333; [2000] C.L.C. 735
QBD (Comm Ct)
Zeital v Kaye; sub nom Dalmar Properties Ltd, Re; Kaye v 27–9, 27–16
Zeital [2010] EWCA Civ 159; [2010] 2 B.C.L.C. 1;
[2010] W.T.L.R. 913
Zinotty Properties Ltd, Re [1984] 1 W.L.R. 1249; [1984] 3 27–7
All E.R. 754; (1984) 1 B.C.C. 99139; [1985] P.C.C.
285; (1984) 81 L.S.G. 3589; (1984) 128 S.J. 783 Ch D
TABLE OF STATUTES
1677 Sunday Observance Act (c.7) 2–19

1782 House of Commons (Disqualification) Act (c.45) 2–3
s.3 2–3
1793 Registration of Friendly Societies Act (c.54) 1–34
1834 Trading Companies Act (c.94) 1–31
1837 Chartered Companies Act (c.73) 1–31
1844 Chartered Companies Act (c.56) 1–31, 3–18
Joint Stock Companies Act (c.110) 1–3, 16–21
1845 Companies Clauses Consolidation Act (c.16) 1–31, 23–4, 29–25
s.75 23–4
s.90 14–6
s.111(4) 29–25
Lands Clauses Consolidation Act (c.18) 1–31
Railways Clauses Consolidation Act (c.20) 1–31
1848 Joint Stock Companies Winding–Up Act (c.45) 20–21
1855 Limited Liability Act (c.133) 1–3, 9–1
1856 Joint Stock Companies Act (c.47) 1–3
1870 Joint Stock Companies Arrangement Act (c.104) 29–5
1874 Building Societies Act (c.42) 1–34
1878 Bills of Sale Act (c.31) 2–32
1882 Bills of Sale Act (1878) Amendment Act (c.43) 2–32
s.5 2–32, 2–33
s.6(2) 2–32
s.8(1) 2–33
(2) 2–33
(4) 2–33
s.9 2–32
s.17 2–32
1888 Trustee Act (c.59) 16–138
1889 Companies Clauses Consolidation Act (c.37) 1–31
1890 Partnership Act (c.39) 1–2, 1–5
s.1(1) 1–6, 2–35
s.5 1–2, 2–14
s.8 2–14
s.10 22–34
s.12 22–34
s.17(2) 2–24
(3) 2–24
s.18 2–22
ss.20–22 2–16
s.23 2–16
s.24(1) 23–4
(5) 1–3
(7) 2–24
(8) 14–4
s.30 16–100
s.31 2–24
s.33 2–20
s.34 1–3
Directors’ Liability Act (c.64) 25–10, 25–32
1891 Forged Transfers Act (c.43) 27–10
1892 Forged Transfers Act (c.36) 27–10
1899 Electric Lighting (Clauses) Act (c.19) 1–31
1907 Limited Partnerships Act (c.24) 1–5
s.4(2) 1–5
s.6 1–5
s.7 1–5
s.8 1–5
s.8A 1–5
s.8B 1–5
1908 Companies (Consolidation) Act (69) 1–21, 29–5, 32–14
s.45 19–16
1914 Bankruptcy Act (c.59)
s.38(1)(c) 2–32
1917 Companies (Particulars as to Directors) Act (c.28)
s.3 16–9
1925 Law of Property Act (c.16)
s.85(1) 32–3
s.86(1) 32–3
s.101 32–37
1928 Agricultural Credits Act (c.43) 2–33, 32–51
Companies Act (c.45) 10–16
1929 Companies Act (c.23) 13–8, 13–44, 15–61, 16–125, 32–14
s.45 13–46
Table A art.66 14–26
1939 Prevention of Fraud (Investments) Act (c.16)
s.12 26–32
1945 Law Reform (Contributory Negligence) Act (c.28)
s.1(1) 22–39
1948 Companies Act (c.38) 6–6, 11–6, 15–59, 15–61, 15–67, 16–
78, 18–5, 23–11
s.47 24–20
s.54 13–46, 13–47, 13–53
s.98(2) 4–34
s.154 9–24
(10)(a) 9–24
s.165(b) 16–46
s.210 20–4, 20–21
Sch.1 Table A 3–14, 3–15
1963 Stock Transfer Act (c.18) 27–5
s.770(1) 27–5
1969 Statute Law (Repeals) Act (c.52) 2–19
1967 Misrepresentation Act (c.7) 5–19, 25–37, 25–40, 26–26
s.2(1) 5–19, 25–37, 28–64
(2) 5–19, 25–39
s.3 5–14
1971 Powers of Attorney Act (c.27)
s.4 15–70
1972 European Communities Act (c.68) 3–5, 6–3, 29–16
s.2 13–35
s.9 7–9, 7–10
1973 Matrimonial Causes Act (c.18) 8–8
1977 Unfair Contract Terms Act (c.50) 22–42
s.2 22–48
1978 Civil Liability (Contribution) Act (c.47) 16–111
s.1 7–34
1980 Companies Act (c.22) 4–11, 16–9, 30–4, 30–11
Pt V 30–11
Limitation Act (c.58) 16–138
s.21 16–138
1981 Senior Courts Act (c.54)
s.51(3) 8–8
Companies Act (c.62) 11–7, 13–8, 13–46
1983 Companies (Beneficial Interests) Act (c.50) 13–5
1985 Companies Act (c.6) 1–36, 11–7, 13–10, 15–14, 18–1, 18–8,
20–8, 21–24, 25–33, 26–16, 26–17
s.2(5)(a) 11–12
s.8(2) 3–15
s.14(2) 3–18
s.17(2)(b) 3–32
s.24 9–1
s.36C 5–28
s.121 11–12
s.127(1) 19–18
s.155 13–40
(2) 13–55
s.160(3) 13–10
s.198 26–16
s.285 7–7
s.303 14–49
s.306 4–10
s.309 16–48
s.309A 16–126
s.310 16–126
Pt X 18–15
s.317 16–55, 16–60, 16–66
(5) 16–60
s.318 14–57
s.319(3) 15–20
s.324(1) 26–12
(6) 26–11
s.349(4) 9–20
s.358 27–18
s.359 27–19
s.367 15–50
Pt XIV 18–1, 18–3, 18–4, 18–12, 18–13
s.431 18–5, 18–12
(2)(c) 18–5
(3) 18–5
(4) 18–5
s.432 18–1, 18–5
(1) 18–5
(2) 18–5, 18–6, 18–10
(a) 18–5
(2A) 18–10
(3) 18–5
(4) 18–5
s.433 18–7
s.434 18–7
(1) 18–7
(2) 18–7
(3) 18–7
(4) 18–7
s.436 18–7
s.437 18–10
(1) 18–10
(1A) 18–10
(2) 18–5
(3) 18–10
(c) 18–10
s.438 18–5, 18–13
s.439 18–12
(4) 18–12
(5) 18–12
(6) 18–12
(8) 18–12
(9) 18–12
s.441 18–14
s.442 18–11
(1) 18–11
(3) 18–11
(3A) 18–11
s.443 18–11
s.444 18–11
s.446 18–11
s.446A 18–8
s.446B(1) 18–8
(2) 18–8
s.446C 18–8
s.446D 18–8
s.446E 18–8
s.447 18–1, 18–2, 18–3, 18–4, 18–5, 18–7,
18–9, 18–12, 18–13, 18–14
(3) 18–2
(7) 18–2
(8) 18–2
s.447A 18–14
s.448 18–2
(1) 18–3
(2) 18–3
s.448A 18–2
s.449 18–13
s.450(1) 18–2
(2) 18–2
s.451 18–2
s.452(1) 18–9
(1A) 18–9
(c) 18–9
(1B) 18–9
(2) 18–9
(4) 18–9
(5) 18–9
s.453A(1)–(3) 18–3
(4) 18–3
(5) 18–3
(5A) 18–3
s.453B(3) 18–3
(4)–(10) 18–3
s.453C 18–2
(1) 18–3
s.459 16–97, 20–1, 20–4, 20–14
s.651 33–33
s.652A 33–30
s.653 33–33
s.711A 7–25
s.716 1–3
(1) 1–3
Sch.15C 18–13
Sch.15D 18–13
Table A 3–14
art.38 15–66
art.53 15–14
Business Names Act (c.7)
s.5 9–20
Company Securities (Insider Dealing)
Act (c.8) 30–11
s.3(1)(a) 30–27
(b) 30–27
s.7 30–27
s.9 30–22
(b) 30–22
s.10(b) 30–20
Companies Consolidation (Consequential Provisions)
Act (c.9)
ss.1–9 4–41
1986 Insolvency Act (c.45) 1–38, 2–32, 3–4, 6–8, 9–4, 9–5, 10–7,
12–9, 18–14, 29–2, 29–25, 32–37, 32–
38, 33–1, 33–12, 33–16, 33–25, 33–29,
33–30
Pt I 32–47, 33–7
s.6 20–2
Pt II 32–36
s.9(2) 32–35
(3) 32–35
s.11 32–46
(1) 10–16
s.15(1) 32–20
(3) 32–20
s.22(2) 6–8
s.27 32–47
Pt III 32–15
Ch.II 32–5
s.29(2) 32–34
s.33 32–15
s.34 32–37
s.35 32–37
s.38 32–42
s.39 32–42
s.40 32–15
(1) 32–15
s.41 32–42
s.42 32–38
(1) 32–4
(3) 32–39
s.43 32–38
s.44 32–38, 32–41
(1)(b) 32–41
(c) 32–41
(2) 32–41
(3) 32–41
s.45(1) 32–38
s.47 32–38
(2) 30–29
s.48 32–42
s.52(2) 32–37
s.72 32–38
s.72A 32–35, 32–44
(4) 32–35
ss.72A–72H 32–36
s.72B 32–36
(1) 32–36
(a) 32–36
(b) 32–36
ss.72B–72D 31–21
ss.72B–72H 32–35
ss72C–72G 32–36
Pt IV 33–2
Ch.I 33–2
Ch.II 33–2
Ch.III 33–2
Ch.V 33–2
Ch.IV 33–2
Ch.VI 33–2
Chs VII–X 33–2
Ch.X 33–2
s.74 2–12, 2–25, 4–10, 8–1, 33–1
(1) 8–1
(2)(d) 1–11
(f) 33–26
s.76 2–25, 13–14, 13–18, 32–50, 33–1
s.77 4–45
s.79(2) 33–1
s.84 14–18
(1)(a) 2–19, 33–9
(b) 33–9
(3) 33–9
s.85(1) 33–9
s.86 33–10, 33–18
s.87(1) 33–10
s.88 25–39, 33–10, 33–11, 33–18
s.89 33–11, 33–15
(1) 33–11
(2) 33–11
(3) 33–11
(4) 33–11
(5) 33–11
s.91(1) 33–12
(2) 33–12
s.92(1) 33–12
(2) 33–12
s.93(1) 33–12
(2) 33–12
s.94 33–27
(1) 33–12
(3) 33–12
(4) 33–12
s.95 33–11, 33–14
s.96 33–11, 33–14
s.98(1) 33–13
(2) 33–13
s.99 33–13
s.100 33–14
s.101 33–15
(1) 33–15
(2) 33–15
(3) 33–15
s.102 33–15
s.103 33–15
s.106 33–27
s.107 8–1
s.110 19–3, 29–2, 29–24, 33–15
(1) 29–24
(3) 29–24
s.111 19–3, 29–2, 29–24
s.115 32–18, 33–24
s.117 33–3
s.122 33–3
(1)(b) 11–8
(g) 20–21, 20–22
(2) 32–37
s.123 33–5, 33–18
(1)(a) 33–5
(e) 33–5, 13–40
s.124 4–38, 33–4, 33–5
(1) 20–21
(2) 33–5
(4)(a) 11–8
(5) 33–11
s.124A 4–38, 18–13, 20–2, 20–21, 32–45, 33–4
(1)(a) 18–13
s.124B 6–27, 33–4
s.124C 33–4
s.125(2) 20–21, 33–6
s.127 20–21, 33–8, 33–18
s.128 33–8, 33–18
s.129 33–8, 33–18
(1) 33–11
s.131 33–7
s.132 33–7
s.133 33–7
s.134 33–7
s.135 33–7
s.136(1) 33–7
(2) 33–7
(3) 33–7
(4) 33–7
(5) 33–7
s.137 33–7
s.140 33–7
s.141 33–15
s.143 33–7
(1) 33–7
s.145(1) 33–7
s.146 33–27
s.156 32–18, 33–24
s.165(2)(b) 33–15
(6) 33–15
ss.165 et seq. 33–16
s.166 33–15
s.168(3) 33–22
(5) 33–22
s.172 9–11
(1) 9–14
(3) 9–11
(8) 33–27
s.175 32–15
(2)(b) 32–15
s.176A 32–17
(2) 32–17
(b) 32–17
(3)(a) 32–17
(b) 32–17
(4) 32–17
(5) 32–17
s.176Z 32–19
s.176ZA 9–11, 32–18
(3) 32–19
s.176ZD 9–10
s.178 32–38
ss.178 et seq. 33–16
ss.183–184 33–18
s.189 33–26
(4) 33–11
ss.190 et seq. 9–17
s.201(1) 33–27
(2) 33–27
(3) 33–27
(4) 33–27
s.202(1) 33–28
(2) 33–28
(3) 33–28
(4) 33–28
(5) 33–28
s.203(1) 33–28
(2) 33–28
(3) 33–28
(4) 33–28
s.204 33–28
s.205(1) 33–27
(b) 33–27
(2) 33–27
(3) 33–27
(4) 33–27
s.212 12–13, 17–2, 32–47, 33–1, 33–16, 33–
19, 33–16
s.213 6–8, 9–4, 9–5, 9–6, 9–7, 10–13, 33–1,
33–16, 33–19, 33–21
(2) 9–8
ss.213–215 32–46
s.214 6–8, 9–4, 9–6, 9–7, 10–13, 11–9, 16–
15, 32–4, 32–19, 33–1, 33–16, 33–19,
33–21
(1) 9–8
(2) 9–6
(3) 9–6, 9–9
(4) 9–6, 16–15
(6) 9–6
s.215 9–8
(2) 9–8
(3) 9–8
(4) 9–8
(5) 9–7
s.216 4–19, 9–18, 9–17, 9–18, 9–19
(3)(c) 9–18
(6) 9–18
(8) 6–8
s.217 9–18
(1) 9–18
(6) 6–8
Pt V 1–38, 4–37, 6–8, 32–17, 33–2
s.220 6–8
s.221(4) 6–8
s.225 33–2
Pt VI 33–2
s.230(2) 32–15
s.232 32–37
s.233(2)(a) 33–25
(b) 33–25
s.234 32–37
s.235 10–7, 33–7
s.236 10–7, 32–38, 33–7
s.238 12–9, 33–18, 33–21
ss.238–245 33–8
ss.238–246 33–2
s.239 12–9, 33–18, 33–21
s.240(2) 33–18
s.241 33–18
s.245 2–5, 32–14, 32–45, 33–18
(1) 32–14
(2)(a) 32–14
(b) 32–14
(3)(a) 32–14
(b) 32–14
(4) 32–14
(5) 32–14
(6) 32–14
s.246ZA 9–4, 9–5, 9–6
(2) 9–8
ss.246ZA–246ZC 32–46
s.246ZB 9–4, 9–6, 9–7
(1) 9–8
(2) 9–6
(3) 9–6
(4) 9–6
(6) 9–6
s.246ZD 9–10
s.246ZE 33–15
s.246ZF 33–15
Pt VII 33–2
s.247(1) 32–15, 32–38
s.249 32–14
s.251 9–7, 32–7, 32–21, 33–11
s.283(1) 27–21
(3)(a) 27–21
s.306 27–21
s.315 27–21
(3) 27–21
s.336 32–15
s.386 33–25
ss.386–387 32–15
s.387(4)(a) 32–15
Pt XIII 33–7
s.388(1) 32–38
(5) 33–7
s.389(2) 33–7
s.390(1) 32–38
(4) 32–38
(a) 10–16
ss.423–425 2–6
s.435 32–14
Sch.B1 32–43, 32–36
para.3(1) 32–43
(2) 32–35, 32–43
(3) 32–43
(4) 32–43
para.5 32–44
para.11 32–44
para.12 32–44
(1)(a) 32–44
para.14 32–35, 32–44
para.21 32–44
para.22 32–44
para.25(c) 32–44
para.28 32–44
para.36 32–44
para.39 32–45
para.41 32–44
para.42 32–45
para.43 32–45
(4) 32–45
para.44 32–45
para.46 32–44, 32–48
para.45 32–48
para.49(4) 32–45
(5) 32–45
(8) 32–45
para.53(2) 32–45
(3) 32–45
para.59 32–45
para.61 32–45
para.69 32–45
para.70 32–20, 32–45, 33–17
(2) 32–45, 33–17
para.71 32–45, 33–17
(3) 33–17
para.73 32–47
para.74 20–2, 32–47
(2) 32–47
(3) 32–47
(4) 32–47
(5) 32–47
(6) 32–47
para.75 32–47
para.76(2)(b) 32–50
para.78(4) 32–50
para.79(2) 32–50
(3) 32–50
para.99 32–49
(4) 32–46
para.107 32–45
Sch.1 32–4, 32–38, 32–45
Sch.2A 32–36
para.1(1) 32–35
para.2 32–35
(1) 32–37
(2) 32–37
Sch.4 33–7, 33–16, 33–24
Sch.4A 10–16
Sch.6 32–15, 33–7, 33–25
para.8 32–15
para.9 32–15
para.10 32–15
para.11 32–15
Company Directors Disqualification Act (c.46) 1–38, 3–4, 6–8, 10–1, 10–5, 10–12, 10–
14, 10–15, 10–17
s.1 10–1, 10–2
(1) 10–3
(a) 32–42
(b) 10–3
s.1A 10–1, 10–2
(1) 10–3
(b) 10–3
(2) 10–3, 10–5
s.2 10–12, 10–14, 10–16, 30–56
ss.2–5 10–12
s.3 10–14, 32–42
(2) 10–14
s.4 10–12
(1)(b) 10–12
(2) 10–12
s.5 10–14
(1) 10–14
(2) 10–14
s.5A 10–1, 10–12
s.6 10–1, 10–3, 10–5, 10–7
(1) 10–5
(b) 10–5, 10–8
(1A) 10–5
(2) 10–5
(3C) 10–1
(4) 10–3, 10–5
ss.6–8 10–6
s.7 10–1, 10–5
(1) 10–5
(2) 10–7
(2A) 10–5
(3)(d) 32–38
(4) 10–7
s.7A 10–7
s.8ZA(1) 10–6
(2) 10–6
s.8ZC(1) 10–6
s.8ZD(1) 10–6
(3) 10–6
s.8ZE(1) 10–6
s.8 10–1, 10–5, 18–13, 18–14, 30–56
(1) 10–1
(2) 10–5
(2B) 10–5
(4) 10–3, 10–5
s.8A 10–2
s.9 10–8
ss.9A–9E 10–17
s.10 10–13
s.11 10–16
s.12C 10–8
s.13 10–3
s.14 10–3
s.15 10–3, 10–16
(1)(a) 10–3
(b) 10–3
(2) 10–3
s.15A(1) 10–1
(3) 10–4
(4) 10–4
(5) 10–4, 17–10
ss.15A–15C 17–10
s.15B 17–10
(2) 10–4
(3) 10–4
s.16 10–1
(2) 10–12, 10–14
s.17 10–2
s.18 10–15
ss.21A–21C 10–5
s.22(2A) 10–1
(4) 10–5
(5) 10–5
(7) 32–42
ss.22A–22C 10–3, 10–17
ss.22E–22F 10–3, 10–17
Sch.1 10–8
Building Societies Act (c.53) 1–34, 4–1
Financial Services Act (c.60) 3–4
1988 Criminal Justice Act (c.33) 30–54
1989 Companies Act (c.40) 7–25, 9–24, 18–1, 18–3, 18–11, 20–14,
21–17, 21–31, 22–5, 33–11
s.112 7–9
1992 Friendly Societies Act (c.40) 1–34, 4–1
Trade Union and Labour Relations (Consolidation)
Act (c.52)
s.10(3) 4–36
Pt VI Ch.III 16–85
1993 Criminal Justice Act (c.36) 30–15, 30–54
Pt V 30–1, 30–4, 30–11, 30–12
s.52 28–62
(1) 30–12, 30–25
(2)(a) 30–25
(b) 30–25
(3) 30–13, 30–14
s.53 30–26
(1)(a) 30–27
(b) 30–28
(c) 30–27
(2)(a) 30–27
(b) 30–28
(c) 30–27
(3)(a) 30–25
(b) 30–27
(5) 30–26
(6) 30–27
s.54(2) 30–25
s.55 30–25
(1)(b) 30–25
(4) 30–25
(5) 30–25
s.56(1)(b) 30–18
(d) 30–21
(2) 30–25
s.57 30–25, 30–24
(1) 30–32
(2)(a) 30–22
(b) 30–23
s.58 30–19
(2) 30–20
(a) 30–20
(b) 30–20
(c) 30–20
(d) 30–19
(3) 30–20
s.59 30–13
s.60(2) 30–17
(4) 30–17
s.61 30–54
s.62 30–14
(1) 30–14
(2) 30–14
s.63 30–28
(2) 30–54
Sch.1 28–57, 30–26, 30–28
para.1 30–28
para.2(1) 30–19
1994 Insolvency Act (c.7) 32–46
s.2 32–41
Deregulation and Contracting Out Act (c.40) 4–4, 33–30
1995 Proceeds of Crime Act (c.11) 30–54
1996 Employment Rights Act (c.18) 20–6
Pt XII 32–16
s.189 32–16
1997 Building Societies Act (c.32) 1–34
1998 Competition Act (c.41) 16–4
Human Rights Act (c.42) 18–1, 18–14, 28–5, 28–6, 28–7, 29–25
s.6 25–28
(1) 28–6
s.8 28–8
1999 Contracts (Rights of Third Parties) Act (c.31) 3–23
s.6(2) 3–23
2000 Financial Services and Markets Act (c.8) 1–3, 1–18, 1–23, 1–36, 3–4, 3–7, 8–2,
13–24, 24–1, 25–5, 25–8, 25–10, 25–
17, 25–30, 25–33, 25–38, 25–44, 25–
44, 26–15, 26–26, 26–28, 28–3, 28–4,
28–9, 28–11, 30–4, 30–11, 30–30, 30–
32, 30–52
s.19 25–8
s.21 25–11
Pt VI 1–23, 25–10, 25–42, 25–43
s.73A 3–8, 25–5
s.74 1–18, 24–2, 25–5
s.75(2) 25–2
(3) 25–42
(4) 25–42
(5) 25–15
(6) 25–42
s.77(1) 25–42
(5) 25–42
s.79(3A) 25–17
s.80(1) 25–17
s.81(3) 25–24
s.82 25–29
s.84 25–22
s.85 25–30
(1) 25–17, 25–22
(2) 25–17, 25–20, 25–22
(3) 25–41
(4) 25–32
(5)(a) 25–19
(b) 25–19
s.86(1) 31–17
(a) 25–19
(b) 25–19
(c) 25–19
(d) 25–19
(e) 25–19
(1A) 31–17
(1B) 31–17
(2) 25–19
(3) 25–19
(4) 25–19
(7) 25–19
s.87A 25–28, 25–42
(1)(a) 25–44
(2) 25–22
(3) 25–23
(5) 25–23
(6) 25–23
s.87B(1)(a) 25–29
(b) 25–29
(c) 25–29
(2) 25–29
s.87C 25–28
s.87D 25–28, 25–42
s.87G 25–24
s.87H 25–44
s.87J 25–28
s.87K 25–42
s.87L 25–42
s.87O 25–42
s.87Q 25–22
s.88 25–27
s.89A 26–21
(1) 26–16
(3)(a) 26–16
s.89A–89G 26–15
s.89C 26–21
s,89F 26–21
s.89NA 26–31
(4) 26–31
s.90 5–7, 25–10, 25–32, 25–33, 25–34, 25–
35, 25–36
(1) 25–33
(3) 25–33
(6) 25–36
(7) 25–33
(8) 5–7, 25–36
(11) 25–33
(12) 25–23, 25–33
s.90A 21–28
s.91 30–40
(1) 25–43
(1A) 25–43
(1ZA) 26–30
(1B) 26–30
(2) 25–43
(2A) 26–30
(2B) 26–30
(3) 25–43, 26–30
s.93 25–43
ss.93–94 3–8
s.96 1–23
s.97 25–43, 26–30
s.102B 25–30, 31–17
Pt VIII 13–24, 30–30, 30–47
s.118 13–24
(1) 26–31
(5) 30–37
(9) 30–37
s.119 3–8
s.124 30–52
s.125 30–52
s.126 30–52
s.127 30–52
s.133(1) 30–52
(4) 30–52
s.133A 30–52
s.134 30–52
s.135 30–52
s.137A 28–11
s.138 28–9
s.138D 15–29
s.143 28–9, 28–11
Pt XI 25–43, 25–47
s.169 30–50
(4) 30–50
(7) 30–50
(8) 30–50
s.174(2) 30–52
s.235 1–36
s.262 1–36
s.263(3) 1–36
Pt XVIII 25–8
s.286(4A)–(4E) 25–8
Pt XXII 22–21
s.380 26–28
(6) 30–55
s.381 26–28, 30–53
(1) 30–53
s.382 26–28
(1) 26–28
(3) 26–28
(8) 26–28
(9) 30–55
(a) 26–28
s.383 26–28
(1)(b) 26–28
(5) 26–28
(10) 26–28
s.384 26–28
s.387 25–42, 25–43
s.392 30–52
s.393 30–52
s.397 28–65
s.400 7–42
s.401 25–41, 26–32
s.402(1)(a) 30–54
s.413 28–8
Sch.1ZA para.25 25–28
Sch.10 25–34
Sch.10A 21–28
Sch.11A para.9 25–19
Limited Liability Partnerships Act (c.12) 1–4, 1–5, 2–14
s.2(1) 1–6
Insolvency Act (c.39) 10–1, 10–2
2001 Criminal Justice and Police Act (c.16) 18–8
2002 Enterprise Act (c.40) 2–33, 31–21, 32–16, 32–34, 32–35, 32–
36, 32–44, 32–51
s.248 32–36
s.250 32–35
s.251 32–16
Sch.16 32–36
Sch.18 32–36
Sch.20 10–16
2004 Companies (Audit, Investigations and Community 1–12, 1–29, 3–9, 4–6, 18–1, 18–3, 22–
Enterprise) Act (c.27) 29
s.14 21–32
(2) 21–32
(7) 21–32
Pt 2 1–12, 4–12
s.26(1) 1–12
(3) 1–12
s.28 1–12
s.30 4–12
ss.30–31 1–12
s.32 4–12
s.33 14–14
s.35 1–12
(2) 4–6
s.36(3)–(6) 4–6
s.37 4–46
ss.41–51 1–12
s.44 17–10
s.45 14–24
s.46 14–49
s.52(1) 4–46
Pensions Act (c.35)
ss.43–51 28–62
2005 Charities and Trustee Investment (Scotland) Act (asp 1–30
10)
2006 Fraud Act (c.35)
s.9 9–4
s.12 7–42
Companies Act (c.46) 1–2, 1–3, 1–17, 1–20, 1–23, 1–29, 1–
30, 1–38, 3–1, 3–3, 3–5, 3–10, 3–16, 3–
30, 4–1, 4–5, 4–10, 4–13, 4–18, 4–33,
5–10, 6–3, 9–1, 9–17, 10–15, 11–7, 11–
12, 12–11, 13–2, 13–11, 13–33, 13–35,
13–44, 13–55, 14–2, 14–27, 14–66, 15–
7, 15–8, 15–14, 15–15, 15–29, 15–44,
16–1, 16–2, 16–4, 16–7, 16–15, 16–15,
16–37, 16–125, 16–127, 16–140, 17–3,
17–6, 18–1, 18–13, 19–14, 19–20, 20–
8, 20–14, 21–1, 21–24, 21–43, 22–2,
22–31, 22–42, 22–43, 23–11, 24–2, 24–
4, 24–18, 26–3, 26–15, 26–19, 27–7,
27–18, 28–69, 29–16, 29–25, 29–26,
30–3, 31–22
s.1(1) 4–5
s.3(1) 1–8
(2) 1–11
(3) 1–8
(4) 1–27
s.4(2) 1–27, 4–11
(a) 1–21
s.5 1–8
s.6(2) 1–12
Pt 2 4–4
s.7 9–1
(1) 1–3, 4–5, 4–33
(2) 4–5
s.8 4–5, 4–33
(1) 4–33
s.9 4–5
(1) 4–33
(2)(a) 4–5, 4–13
(b) 4–5, 6–18
(c) 4–5
(d) 4–5
(4)(a) 4–5
(b) 4–5
(c) 4–5
(d) 4–5
(5)(a) 4–5, 21–37
(b) 3–20, 4–5, 4–32
s.10 4–5, 11–11
s.11 4–5
s.12 4–5, 14–23
s.12A 4–5
s.13 4–5, 33–30
s.14 3–20, 4–7
s.15 4–7, 4–35
(3) 4–7
(4) 4–7, 4–34, 4–36
s.16(2) 4–5, 4–8
(3) 4–38
(5) 4–8
(6) 4–8
Pt 3 Ch.3 3–16, 13–21
s.17 3–16, 7–3, 7–14, 7–17, 16–24
(a) 7–14
s.18 3–13
(2) 3–15
(3)(a) 3–15
s.19 3–14
s.20 3–14, 4–5
(1) 3–15
(a) 3–15
(b) 3–15
(2) 3–15
s.21 3–31, 19–14, 19–18, 19–23, 19–25
(2) 3–31
(3) 3–31
s.22 3–32, 19–14, 19–23
(2) 3–32, 19–23
(3) 19–23
(a) 3–32
(b) 3–32
(4) 3–32
s.23 3–32
s.24 3–32
s.25 19–1
(1) 3–32
s.26 3–22, 3–31, 4–46
s.27 3–22
s.28 4–5, 19–14
(1) 7–29
s.29 3–16, 3–22, 7–14, 7–17
(1)(b) 15–21
ss.29–30 15–79, 16–24
s.30 3–22
s.31 7–29
(1) 7–29
s.33 3–17, 3–18, 3–19, 19–23, 27–8, 33–26
(1) 3–35
(2) 3–18
s.38(2) 4–46
s.39 7–29
(1) 7–29
s.40 3–17, 3–33, 7–9, 7–12, 7–13, 7–14, 7–
15, 7–17, 7–25, 7–28, 7–29, 16–31, 16–
63, 16–113
(1) 7–9, 7–25, 16–37
(2) 7–10, 7–11
(b) 7–10
(3) 7–14
(b) 3–17, 3–33
(4) 7–12, 7–15
(5) 7–5, 7–15, 16–31
(6) 7–12
s.41 7–12, 16–31, 16–37
(1) 7–12, 16–37
(2) 7–12, 16–31
(3) 7–12
(4) 16–31
(b) 7–12
(5) 7–12
(7)(b) 7–12
s.42 7–9
s.43 7–4
s.44 7–4, 27–5
s.45 4–13, 7–4
ss.51 5–25, 5–27, 5–28
(1) 5–25
Pt 5 Ch.6 9–20
s.53 4–16, 4–46
s.54 4–17
s.55 4–17
s.56 4–17
(3) 4–17
s.57 4–13, 6–7
s.58 16–18
ss.58–59 4–14
s.59 16–18
s.60 4–15
(1)(a) 4–15
(b) 4–15
(c) 4–15
s.61 4–15
s.62 4–15
s.64 4–23
(3) 4–24
s.65(1) 4–14
s.66 4–18, 4–23, 33–32
(3) 4–18
(4) 4–18
s.67 4–23
s.68(2)(a) 4–23
s.69(1) 4–27
(3) 4–28
(4) 4–27
(5) 4–27
s.70 4–27
s.73(1) 4–28
(3) 4–28
(4) 4–28
s.74 4–28
s.75 4–23
(2)(a) 4–23
s.76 4–23
(3)–(5) 4–23
s.77 4–31
(1) 4–24, 4–30
s.80 4–31
s.81(1) 4–31
(2) 4–31
(3) 4–31
s.82 4–20
(1) 9–20
(a) 4–13
(2)(a) 4–13
s.83 9–20
(1) 9–20
(2) 9–20
(3) 9–20
s.84 9–20
ss.86–87 21–37
s.88 6–18
(1) 4–14
Pt 7 4–39
s.90 9–3
(1) 4–40
(b) 11–8
(2)(b) 11–8
(e) 4–44
(4) 4–40
ss.90–96 4–40
s.90A 26–26
s.91 4–40, 9–3
(1)(a) 11–8
(d) 11–15
s.92 4–40
s.93 4–40, 11–16
s.94 4–40
(1)(b) 4–40
s.95 4–40
s.96 4–40
(5) 4–40
s.97 4–41
(1) 4–41
(2) 4–41
s.98 4–41, 13–5, 17–29
(3)–(6) 4–41
s.101 4–41
s.102(1)(a) 4–43
(c) 4–43
(2) 4–43, 4–44
s.103(4) 4–43
s.104 4–43
s.109(1)(a) 4–43
(c) 4–43
(2) 4–43, 4–44
s.105 4–45
(2) 4–44
(4) 4–43
s.111 4–43
s.112 9–24, 17–16, 27–16
(1) 4–33
(2) 24–21
Pt 8 Ch.2 2–40
s.113 14–22, 27–16, 27–20
(3) 27–16
(7) 16–12
s.114(2) 27–17
s.115 27–17, 27–20
s.116 27–18
s.117 27–18
s.122 27–20
(1) 24–22
(3) 24–22
(4) 24–22
s.123(2) 27–16
s.125 27–19
(1) 27–19
(2) 27–19
(3) 27–19
s.126 15–34, 15–35, 27–11, 31–12
s.127 27–5, 27–14, 27–16, 27–19
s.129(2) 27–17
s.132 27–17
s.136 13–4
s.137(1)(b) 13–4
(c) 13–4
(4) 13–4
s.144 13–4
Pt 9 15–33
s.145 15–36, 15–37, 15–39, 15–40, 15–40
(1) 15–35
(2) 15–36
(3)(f) 15–36
(4)(a) 15–36
(b) 15–36
s.146 15–68, 21–40
(1) 15–40
(2) 15–40
(3)(a) 15–40
(b) 15–40, 21–40
(5) 15–40
s.147 15–40
(4) 15–40
s.148(2)–(4) 15–40
(6) 15–40
(7) 15–40
(8) 15–40
s.149 15–68
s.150(2) 15–40
(3) 15–40
(4) 15–40
(5)(a) 15–40
s.151 15–33
s.152 15–38, 15–75
(2)–(4) 15–38
s.153 15–57
(1)(a) 15–59
(d) 22–22
Pt 10 16–1, 16–2, 16–85, 16–133
Ch.1 2–40
Ch.2 16–1, 16–3, 16–9, 16–11, 16–15, 16–
32, 16–56, 16–63
Ch.3 14–19, 16–3, 16–9, 16–52, 16–56, 16–
67, 16–109
Ch.4 9–24, 16–9, 16–52, 16–67, 16–68, 16–
69, 16–71, 16–77, 16–81, 16–84, 16–
109, 16–121, 19–4, 28–32
Ch.4A 14–41, 16–67, 16–68, 16–69, 16–109,
16–121, 19–4, 28–32
s.154 2–29, 14–2
s.155 14–2, 16–8
s.156 14–2
ss.156A–156C 16–8
s.157 14–27
(4) 14–27
(5) 14–27
s.158 14–27
s.160 14–25
s.161 7–7
s.162 14–23
s.163 14–23
s.164(1) 27–16
s.165 14–23
s.167 14–23
s.168 14–6, 14–8, 14–49, 14–50, 14–51, 14–
62, 14–66, 15–2, 15–10, 15–47, 15–54,
16–116, 20–7
(1) 14–49, 14–51
(2) 14–52
(5)(a) 14–53
(b) 14–52
s.169 14–52, 15–20
(1) 14–52
(2) 14–52, 15–10
(3) 14–52
(4) 14–52
s.170(1) 16–4, 16–35, 16–37, 16–101
(2) 16–13
(a) 16–94
(3) 16–2, 16–3
(4) 3–10, 16–2, 16–3, 16–16, 16–21, 16–
140
(5) 16–9, 16–10
ss.170 et seq. 16–12
s.171 3–24, 7–5, 7–15, 16–23, 16–24, 16–25,
16–30, 16–31, 16–32, 16–31, 16–98,
16–105, 28–21
(a) 16–30, 16–32
(b) 16–26, 16–29, 16–30, 16–31, 16–40,
16–41, 16–43
ss.171–174 16–119, 16–121
ss.171–177 16–109
s.172 16–39, 16–40, 16–43, 16–44, 16–46,
16–49, 16–50, 16–140, 17–8, 17–19,
17–20, 17–21, 21–25
(1) 16–26, 16–37, 16–38, 16–48
(a)–(f) 16–41
(c) 16–49
(f) 16–43, 28–21
(2) 16–40
(3) 16–49
s.173 16–33, 16–34, 16–35
(2)(a) 16–35
(b) 16–35
s.174 9–6, 16–15, 16–14, 16–20, 16–26, 16–
98, 16–109, 16–140, 21–27
s.175 16–54, 16–68, 16–86, 16–88, 16–96,
16–99, 16–100, 16–103, 16–105, 16–
107, 16–112, 16–119, 16–121, 16–127,
16–141
(1) 16–52, 16–86, 16–88, 16–99
(2) 16–52, 16–86, 16–88, 16–90, 16–92,
16–96
(3) 16–52, 16–54, 16–56, 16–86
(4) 16–98
(a) 16–86, 16–88, 16–90, 16–96
(b) 16–103
(6) 16–103, 16–121
(7) 16–86, 16–99
s.176 16–52, 16–68, 16–104, 16–107, 16–
108, 16–119
(3) 16–107
(7) 16–100
s.177 16–52, 16–56, 16–58, 16–59, 16–60,
16–62, 16–63, 16–65, 16–67, 16–70,
16–86, 16–101, 16–112, 16–119, 16–
121, 16–126, 16–127
(1) 16–57
(2) 16–61, 16–107
(b) 16–61
(3) 16–57, 16–107
(4) 16–65
(5) 16–60
(6)(a) 16–60, 16–86
(b) 16–60
(c) 16–60, 16–86
s.178 16–3, 16–21, 16–30, 16–62, 16–66, 16–
108, 16–109
(2) 16–20
(5) 16–104
s.179 16–22, 16–107
s.180(1) 16–63, 16–103
(a) 16–119
(b) 16–119
(2) 16–68
(3) 16–68
(4)(a) 16–107, 16–108, 16–121
(b) 16–102, 16–126, 16–127
s.181(2) 16–86
(b) 16–104
(5) 15–18
s.182 16–56, 16–59, 16–64, 16–66
(1) 16–64
(3) 16–65
(4) 16–65
(6)(b) 16–65
s.183 16–66
s.184 16–62
s.185 16–61, 16–62
(4) 16–61
s.186 16–65
s.187 16–59
(1) 16–59, 16–65
(2)–(4) 16–65
s.188 14–60, 14–61, 16–84
(1) 14–60
(3) 14–60
(4) 14–60
(6)(a) 16–69
s.189 14–60
s.190 16–60, 16–70, 16–71, 16–73, 16–76
(2) 16–71
(3) 16–71
(4)(a) 16–71
(b) 16–71, 16–69
(6) 16–72
s.191 16–71
(5) 16–71
s.192(a) 16–72
(b) 16–72
s.193 16–72
s.194 16–72
s.195 16–71, 16–73, 16–74, 16–75, 16–83
(2) 16–73
(c) 16–73
(3) 16–74, 16–76
(4) 16–76
(a) 16–75
(b) 16–75
(c) 16–75
(d) 16–75
(6) 16–76
(7) 16–76
(8) 16–74, 16–73
s.196 16–71, 16–73, 16–75, 16–83, 16–118
s.197 16–78, 16–79, 27–11
(1) 16–79
(3) 16–81
(4) 16–81
(5)(a) 16–69
(b) 16–81
s.198 16–79, 27–11
(2) 16–79
(3) 16–81
(5) 16–81
(6) 16–79
(a) 16–69
(b) 16–81
s.199 16–80
s.200 16–79
(4) 16–81
(5) 16–81
s.201 16–79, 16–80
(2) 16–79, 16–80
(4) 16–81
(5) 16–81
(6)(a) 16–69
s.202 16–80
s.203 16–79, 16–80
(1) 16–80
(3) 16–81
(4) 16–81
(5)(a) 16–69
(b) 16–81
s.204 16–82
ss.205–206 16–82
s.206(3) 16–82
s.207(1) 16–82
(2) 16–82
(3) 16–82
s.208(2) 16–82
(3) 16–82
(4) 16–82
s.209 16–82
s.210 16–82
s.213 9–6, 16–83
(2) 9–5
(4)(d) 16–83
s.214 9–5, 9–9, 9–10, 16–83, 16–118
(5) 9–6, 16–16
s.215 14–46, 14–62, 16–84
(1) 28–30
(3) 14–62, 28–31
s.216 28–31
s.217 14–62
(4)(a) 16–69
s.218 14–62
(4)(a) 16–69
s.219 14–62, 28–30
(1) 28–29, 28–31
(2) 28–29
(3) 28–29
(5) 28–29
(6) 28–30
(a) 16–69
(7) 28–31
s.220 14–62
(1)(a) 28–32
(b) 28–32
(c) 28–32
(d) 28–32
(3) 28–32
s.221 28–31
s.222(1) 14–62
(3) 28–29
s.223 14–60, 16–69, 28–30
s.225 16–68
s.226A 14–43
s.226B 16–68
ss.226B–226C 14–53
s.226C 14–59, 16–68, 28–32
s.226E 14–59
(1) 14–41
(2) 14–41
(3) 14–41
(4) 28–32
(5) 14–41
s.226F 16–68, 28–32
s.228 14–57
s.229 14–57
s.231 16–60
(4) 16–60
(5) 16–60
(6) 16–60
s.232 5–14, 16–126, 16–127, 16–128, 16–
129, 16–130, 16–132
(1) 16–125
(2) 16–128
(3) 16–128
(4) 16–126, 16–127
s.233 16–129
s.234 16–131, 16–132
(2) 16–130
(3) 16–130
(4)–(6) 16–130
s.235 16–132
s.236 16–131
s.237 16–131
s.238 16–131
s.239 13–20, 16–118, 16–124, 16–140, 17–3,
19–4
(2) 16–123
(a) 16–103
(3) 16–104, 16–121
(4) 16–104, 16–121
(5)(d) 16–121
(6)(a) 16–123
(b) 16–118
(7) 16–123, 16–124
s.240 14–23
s.241 14–23
s.242 14–23
s.243 14–23
s.244 14–23
s.245 14–23
s.246ZA
(2) 9–5
s.246ZB 9–5
(5) 9–6
s.246ZC 9–8
s.246 14–23
s.247 16–48, 16–50
s.248 16–62
s.250 13–40, 14–29, 16–8
(3) 16–42
s.251 16–59, 16–69
(1) 16–9
(2) 16–10
(3) 9–23, 16–10, 16–69
s.252 16–71, 19–2, 28–31
s.253 16–71
s.254 14–46, 16–71
s.255 14–46
s.256 16–79
s.257 7–15, 16–24
s.258 28–31
Pt 11 17–11, 17–14, 17–15, 17–32, 20–14,
20–15
s.260(1) 17–13, 17–16, 17–24
(a) 17–32
(2) 20–14
(3) 17–14
(4) 17–16
(5) 17–15
(c) 17–16
ss.260–264 17–13
s.261(2) 17–18
(4)(a) 17–25
s.262 17–22
(1) 17–22
(2) 17–22
(3) 17–22
(5)(a) 17–25
s.263 16–118, 17–2, 17–12
(1) 17–17, 17–22
(2)(a) 17–8, 17–19
(b) 17–8, 17–19
(c) 16–118, 17–8, 17–19
(3) 17–20, 17–21
(b) 17–20, 17–21
(c) 16–118, 17–8
(d) 17–8
(4) 17–20, 17–21
(5) 17–0
s.264 17–23
(1) 17–23
(5)(a) 17–25
s.265 17–32
(1) 17–13, 17–16
(3) 17–14
(4) 17–14
(5) 17–16
(6)(b) 20–14
(7) 17–15
(e) 17–16
ss.265–269 17–13
s.266(3) 17–18
(5)(a) 17–25
s.267 17–22
(1) 17–22
(2) 17–22
(3) 17–22
(5)(a) 17–25
s.268 17–12
(1) 17–17, 17–22
(a) 17–19
(b) 17–19
(c) 17–19
(2) 17–20, 17–21
(b) 17–20
(3) 17–20, 17–21
(4) 17–20
s.269 17–23
(1) 17–23
(5)(a) 17–25
s.270 4–5
s.271 4–5
s.276 21–37
s.277 15–87
s.281 15–42
(1) 15–8, 15–45
(2) 15–45
(3) 15–44, 16–68, 16–81
(4) 14–16, 15–18
(a) 15–15
(c) 15–15
s.282 15–44
(3) 15–45
(5) 15–65
s.283 15–44
(3) 15–44
(4) 15–45
(6) 15–44, 15–47, 15–65
(b) 15–65
s.284 15–4, 23–8
(4) 15–4
s.288(2) 15–10, 22–18
(3) 15–13
s.289 15–11
s.290 15–12
s.291 15–12
(2)(a) 15–12
(b) 15–12
(3) 15–12
(6) 15–12
(7) 15–12
s.292 15–9, 15–13, 21–8
(2)(a) 15–13
(b) 15–13
(c) 15–13
(4) 15–11, 15–13
(3) 15–13
(5) 15–13
s.293(1) 15–13
(2) 15–12
(3) 15–13
(6) 15–13
(7) 15–13
s.294 15–13
s.295 15–13
(2) 15–13
s.296(1) 15–12
(2) 15–12, 15–86
(3) 15–12
(4) 15–8, 15–11, 15–12
s.297 15–12
s.298 15–12
s.299 15–85
s.300 15–14
s.301 15–47
s.302 15–9, 15–51
s.303 15–51
(2)(b) 15–51
(4) 15–51
(5) 15–51
ss.303–306 15–9
s.304(3) 15–51
(4) 15–51
s.305(1) 15–51
(b) 15–51
(6) 15–51
(7) 15–51
s.306 15–54, 19–24
(1) 15–53
(2)–(4) 15–53
(2) 15–53
(5) 21–2
(6) 21–2
s.307 15–61, 15–62, 21–40
(1A)(b) 15–61
(2) 15–58
(3) 15–61
(4) 15–62
(5) 15–62
(6) 15–62
(7) 15–62
s.307A 15–61
s.309 15–85
s.310 15–66
(1) 15–66
(2) 15–66
s.311 15–65
(2) 15–47
(3) 15–65
s.311A 15–65
s.312 14–52, 15–47, 15–63, 22–20
(1) 15–47
(2) 15–63
(3) 15–63
(4) 15–63
s.313 15–66
s.314(4)(d) 15–59
ss.314–316 15–59
s.316 15–59
s.317 15–13, 15–59
s.318(1) 15–54
(2) 15–54
s.319 15–82
s.319A(1) 15–49
(2) 15–49
s.320 22–32
s.321 15–75
(1) 15–63
s.322 15–75
s.323 15–72
(2) 15–72
(3) 15–72
(4) 15–72
s.324(1) 15–68, 15–75
(2) 15–68, 15–72
ss.324–331 15–68
s.324A 15–70, 15–71
s.325 15–68
(2)–(4) 15–68
s.326 15–68
(1) 15–68
(2) 15–68
s.327 15–68
s.328 15–68
s.329 15–68, 15–75
s.330 15–70
(2) 15–70
(3) 15–70
(b) 15–70
(4) 15–70
(5)–(7) 15–70
(6)(c) 15–70
s.331 15–68
s.332 15–83, 33–10
s.333 15–86
s.334 15–84
(2) 15–84
(4) 15–84
(6) 15–84
s.335 15–84
(2) 15–84
(4) 15–84
(5) 15–84
s.336 15–8
(1) 15–48, 15–50
(1A) 15–8, 15–50
(3) 15–50
(4) 15–50
ss.336–340 15–48
s.337(2) 15–62
s.338 15–57, 15–63
(2) 15–57
(4) 15–57
ss.338–340 15–59
s.338A 15–49
(1) 15–49, 15–57
(2) 15–49, 15–57
(3) 15–49
(4) 15–49, 15–57
(5) 15–49
s.339(1) 15–57
s.340(1) 15–57
(2) 15–57
s.340B(1) 15–57
(2) 15–57
s.341 15–78
s.342 15–76
(4)(d) 15–76
s.343 15–76
(3)(b) 15–76
s.344 15–76
(2) 15–76
s.347(1) 15–76
s.348 15–76
s.349 15–76
(4) 9–20
s.350 15–76
s.351 15–76
s.352 15–76, 15–84
s.353 15–76
s.354 15–76
s.355 15–79
s.356 15–80
(2) 15–21
s.358(1) 15–79
(3) 15–79
s.359 15–79
s.360 15–61
s.360A 15–55
s.360C 15–8
Pt 14 16–85, 17–29, 21–23
s.364 16–85
s.365 16–85
s.366 16–85
(3) 16–85
(4) 16–85
(b) 16–85
s.367(1) 16–85
(2) 16–85
(3) 16–85
(4) 16–85
(5) 16–85
(6) 16–85
(7) 16–85
s.368 16–85, 19–19
s.369 17–29
(1) 16–85
(2) 16–85
(3) 16–85
(b) 16–85
(4) 16–85
s.370 17–29
(1)(b) 17–29
(5) 17–31
s.371(4) 17–30
(5) 17–30
s.372 17–30
s.373 17–26, 17–30
s.378 16–85
s.379(1) 16–85
Pt 15 21–5, 21–43
s.380 15–83
ss.381–384 14–44
s.382 21–3
(2) 21–4
s.383(1) 21–9
(4)–(7) 21–9
(6) 21–9
s.384(1) 21–4
(a) 21–2
(2) 21–4
(a) 21–9
s.384A 21–3
(2) 21–3
(3) 21–3
s.384B(1)(a) 21–2
(2) 21–3, 21–9
s.385 14–40, 14–44, 15–76, 16–69, 21–25,
22–22
(4)–(6) 14–40
s.386 21–7
(3) 21–7
(5) 21–7
ss.386–389 21–7
s.387(2) 21–7
(3) 21–7
s.388(2) 21–7
(3) 21–7
(4) 21–7
s.389(4) 21–7
s.390(2) 21–8
(3) 21–8
(5) 21–8
ss.390–392 21–8
s.391 15–50
(2) 15–50, 21–8
(3) 21–8
(4) 21–8
s.392(2) 21–8
(3) 21–8
(5) 21–8
s.393 21–14
(1) 21–14
(1A) 21–17
s.394 21–10, 21–29
ss.394A–394C 21–10
s.394B(2)(b) 21–20
s.395 6–6, 21–13
(2) 21–13
(3)–(4B) 21–13
(4) 21–13
(5) 21–13
s.396 21–16
(2A) 21–17
(4) 21–14
(5) 21–14
s.399 21–9
(2) 21–10
(2A) 21–9
s.400(1)(a) 21–11
(b) 21–11
(c) 21–11
(2)(a)–(b) 21–11
(c)–(d) 21–11
(e)–(f) 21–11
s.401(1)(a) 21–11
(b) 21–11
(c) 21–11
(2)(a)–(c) 21–11
(d)–(e) 21–11
(f)–(g) 21–11
s.402 21–12
s.403 21–13
(1) 21–13
(3) 21–13
(4)–(5B) 21–13
(5) 21–13
(6) 21–13
s.404(1) 21–9, 21–16
(4) 21–14
(5) 21–14
s.405 21–12
s.407 21–10, 21–13
s.408 21–10
s.409 21–21
s.410 21–21
s.412 14–44
(2) 14–46
(4) 14–46
s.413 16–81
s.414(4) 21–29, 22–43
(5) 21–29
s.414A 21–24, 21–29
s.414B 21–24
s.414C 21–25
(1) 21–24
(2) 21–25
(3) 21–25
(4) 21–25
(5) 21–25
(6) 21–25
(7) 21–25
(8)(a) 21–25
(b) 21–25
(11) 21–25, 28–25
(13) 21–25
(14) 21–25
s.414D(1) 21–29
(2) 21–29, 22–43
(3) 21–29
s.415 21–29
(1A) 21–23
s.415A 21–23
s.416(1) 21–23
(3) 21–23
s.417(5)(c) 21–25
s.418(2) 22–30
(4) 22–30
(5) 22–30
(6) 22–30
s.419(1) 21–29
(3) 22–43
s.419A 21–29
s.420 14–39, 21–29
s.421(2A) 14–39
s.422(2) 22–43
s.422A 14–39
s.423(1) 14–58, 21–40
(2) 21–40
(3) 21–40
s.424(2) 21–42
(a) 21–42
s.425 14–22
s.426 21–41
(2) 21–41
(3) 21–41
(5) 21–41
s.426A 21–41
s.430 15–85, 21–39, 21–41
s.431 21–40
s.432 21–40
s.433 21–39
s.434 21–39
s.435 21–39
s.436 21–39
s.437 15–49, 15–57
(3) 21–42
ss.437–438 21–42
s.439 14–39, 14–41, 14–42
(5) 14–42, 14–59
s.439A 14–39, 14–41, 14–58
s.441 2–39, 21–33
(1) 14–58
s.442 15–57, 21–34
s.444(1) 21–36
(3) 21–36
s.444A 21–36
s.445(3) 21–36
(4) 21–36
s.446 21–35
s.447 21–35
s.448 1–27, 2–6, 4–10, 8–6, 21–36
s.451 21–34
s.452 21–34
s.453 21–34
s.454 21–31
(2) 21–31
s.456(1) 21–32
(1)–(3) 21–31
(2)–(7) 21–31
(5)–(6) 21–31
s.457 3–9, 21–31, 21–32
s.459 16–6, 21–31, 28–47
ss.460–462 21–31
s.463 16–15, 21–27, 21–28
(1) 21–27
(2) 21–27
(3) 21–27
(4) 21–28
(5) 21–28
s.464 21–17
s.465(3) 21–5
s.466 21–9
s.467(1) 21–5
(2)(a) 21–6
(4) 21–25
s.468 3–5
s.471 21–35
(2) 21–40
s.472 21–21
Pt 16 14–21
Ch.2 14–19
s.474(1) 21–2, 21–6
s.475 22–4
(2)–(4) 22–6
s.476 22–6
s.477(1) 22–6
s.478(a) 22–6
(b) 22–6
ss.478–479 22–6
s.479(1) 22–6
s.479A 22–7
(1) 22–7
(2) 22–7
s.479B(a) 22–7
s.479C(3) 22–7
s.480(1) 22–8
(za) 22–8
(2) 22–8
s.482(1) 22–9
s.485 21–17
(3) 21–17
s.487 21–17, 22–3
(2)(b) 21–17
(c) 22–17
(d) 21–17
s.488 22–17
s.489(3) 22–17
(4) 22–17
s.491(1)(b) 22–17
(1A) 22–14
(1B) 22–14
s.492(1) 21–17
s.493 21–17
s.494 22–13
s.495 22–43
(1) 21–30
(3) 22–3
(3A) 22–3, 22–6
(4) 22–3
(b) 22–3
(c) 22–3
s.496 21–26, 22–3
s.497A 22–3
s.498(1) 22–3
(2) 21–7, 22–3
(3) 22–30
(4) 14–47, 22–3
(5) 22–3
s.498A 22–3
s.499 22–30
(1) 22–30
(2) 22–30
(3) 22–30
(4) 22–30
s.500 22–30
s.501 22–30
(1) 22–30
s.502(1) 22–16
(2) 22–16, 22–18
s.503 21–30
(3) 22–31
s.504 22–14
(3) 22–31
s.506 21–30
s.507 22–43
(1)–(3) 22–43
ss.508–509 22–43
s.510 15–10, 15–47, 22–18
(3) 22–18
(4) 22–18
s.511 22–18
(2) 22–18
(3)–(5) 22–18
(3)–(6) 15–10
(6) 22–18
s.513 22–18
s.514 22–20
s.515(2) 22–20
(3) 22–20
(4)–(7) 22–20
s.516(1) 22–18
s.518 22–19
(3) 22–19
s.519 22–19
(1) 22–19, 22–20
(2A) 22–19
(3A) 22–19
s.519A(3) 22–19
s.520 22–19
(1) 22–20
s.521 22–19
(1) 22–20
s.522 22–19
(1) 22–20
s.523(1) 22–20
s.527(2) 22–22
(3) 22–22
(5) 22–22
(6) 22–22
ss.527–531 15–58, 22–22
s.528(4) 22–22
s.529(2) 22–22
(3) 22–22
s.531 22–22
s.532 22–42
s.534(3) 22–42
s.535(1) 22–42
s.536 22–42
s.537(1) 22–42
(2) 22–42
Pt 17 Ch.6 11–16, 24–7
s.540(2) 23–11
s.541 23–1
s.542(1) 11–3
(2) 11–3
(3) 11–19
s.543 23–11
s.544 2–25
s.547 11–9, 11–14
s.548 11–7
s.549 14–18
(1) 24–5
(3) 24–5
(3)–(4) 24–5
(6) 24–5
s.550 24–4
s.551 13–9, 28–21
(2) 24–5
(3) 24–5
(4) 24–5
(a) 24–5
(b) 24–5
(6) 24–5
(7) 24–5
(8) 24–5
s.552 11–14
(3) 11–14
s.553 11–7, 11–14, 27–6
s.554 24–21, 31–22
s.555 11–11
(4)(c) 23–6
s.556(3) 23–6
s.558 24–18
s.560(1) 24–7
(2)(b) 24–11
(3) 13–26
s.561 24–9, 24–10
(2) 24–7
(4) 24–9
s.562 24–9, 24–10, 24–12
(4) 24–9
(5) 24–9, 24–16
s.563(3) 24–12
s.564 24–7
s.565 24–7
s.566 14–37, 24–7
s.567 24–10
(3) 24–10
s.568 24–10
(4) 24–10, 24–12
(5) 24–10, 24–12
s.569 14–18, 24–10
(1) 24–10
(2) 24–12
ss.569–571 14–37
s.570 24–10, 28–21
(1) 24–10
(2) 24–12
s.571 24–10
(1) 24–10
(2) 24–12
(5)–(7) 24–10
(6) 24–5
s.572 24–10
s.573 24–11
(3) 24–12
(5) 24–12
s.577 24–7
s.578(1) 24–20
(b) 24–20
(2) 24–20
(3) 24–20
(4) 24–20
(5) 24–20
s.579(1) 24–20
(2) 24–20
(3) 24–20
(4) 24–20
s.580 11–3
(1) 11–4
(2) 11–4
s.581 23–5
s.582(1) 11–14
s.583(3) 11–15
(c) 11–15, 31–3
(d) 11–15
(5) 11–15
s.584 11–15
s.585 11–15
(1) 5–22
(2) 11–15
(3) 11–15
s.586 4–11, 11–8, 11–18
(3)(d) 11–16
s.587 11–15
(1) 11–15
(2) 11–15
(3) 11–15
(4) 11–15
s.588(2) 11–18, 27–6
(3) 11–18
s.589 11–18
(1) 11–18
(3) 11–18
(4) 11–18
(5) 11–18
(6) 11–18
s.591 11–15
s.593(1) 11–16
(2) 11–16
(3) 11–16, 11–18
ss.593 et seq. 5–9
ss.594–595 11–16
s.596(1) 11–16
(3)–(5) 11–16
s.598 5–8, 11–17
(1)(a) 11–17
(2) 11–17
s.599(1)(c) 11–17
s.601 11–17
s.603 11–17
(a) 4–40, 5–8
s.604(3)(b) 11–18
s.605 11–18
(1) 11–16
(3) 11–16, 11–18, 27–6
(4) 11–18
s.606 11–18
(4) 11–18
(5) 11–18
(6) 11–18
s.610 11–6, 11–7, 12–2
(2) 11–7
(3) 11–7
(4) 13–30
s.611 11–7
(2)–(5) 11–7
s.612(4) 11–7
ss.612–613 11–7
s.613(3) 11–7
s.616(1) 11–7
s.617 23–11
(5) 13–33
s.618 13–33
s.620 12–2, 23–11
s.622(1) 11–19
(3) 11–19
(5) 11–19
(6) 11–19
s.624(1) 11–19
s.626 11–19
s.627 11–19
s.628 11–19
s.629 19–18
s.630 14–18, 19–14, 19–15, 19–17, 19–18,
19–19, 19–20
(1) 19–19
(3) 19–14
(4) 19–14
(5) 19–14
(6) 19–14
s.631 19–14, 19–15, 19–20
s.632 19–15
s.633 19–15
(1) 19–15
(5) 19–15
s.634 19–15
s.636 23–6
s.637 23–6
s.641 13–30
(1)(a) 13–40
(b) 13–34
(2) 13–9
(2A) 29–3
(2B) 29–3
(3) 13–33
(4) 13–34
(a) 13–33
(b) 13–33
s.642(1) 13–41
(2) 13–42
(3) 13–42
(4) 13–15, 13–42
s.643 13–40, 13–41
(1) 13–40
(a) 13–14, 13–40

(b) 13–40
(2) 13–40
(3) 13–40
(4) 13–14, 13–41
(5) 13–41
s.644(1) 13–42
(2) 13–42
(3) 13–42
(4) 13–42
(6) 13–42
(7) 13–15, 13–42
(7)–(8) 13–42
s.645 13–34
(1) 13–35
(2) 13–35, 13–36
(3) 13–36
(4) 13–35, 13–36
s.646(1)(b) 13–35
(2) 13–36
(3) 13–36
s.648 4–42
(2) 13–35
(3) 13–37
(4) 13–37
s.649 13–37
(3)(a) 13–37
(6) 13–37
s.650 13–37
(2) 11–8
ss.650–651 4–42
s.651 11–8, 13–37
s.653 13–33
s.655 25–40
s.656 11–9
s.657 3–5, 13–35
(1) 11–17
Pt 18 21–23
Ch.5 13–13
Ch.6 13–25
s.658 1–28, 13–4
(1) 4–10, 13–2
(2) 13–2, 13–9
s.659(2)(a) 13–5
(b) 13–5
(c) 13–5
s.660 13–3
(2) 13–3
s.661(2) 13–3
(3)–(4) 13–3
s.662(1)(a) 13–5
(2) 13–5
(b) 11–8
(3)(a) 13–5
s.669 13–6
s.670 13–2, 13–57, 27–11
ss.671–676 13–5
s.677 13–48
(1)(a)–(c) 13–48
(2) 13–48
s.678 13–44, 13–47, 13–52, 13–55
(1) 13–47
(2) 13–52, 13–53
(3) 13–47
(4) 13–52, 13–53
s.679 13–55
(3) 13–55
s.681 13–50
(2) 13–45
s.682(1) 13–50
(2) 13–50
(a) 13–58
s.683 13–48
(1) 13–50
s.684 13–8, 14–9
(4) 13–9
s.685 23–6
(1) 13–10
(2) 13–10
(3) 13–10
(4) 13–10
s.686(1) 13–10
(2) 13–10
(3) 13–10
s.687(2) 13–11
(3) 13–11
(4) 13–11
s.688 13–11
(a) 13–24
s.689 13–10
s.690 13–9
(2) 13–9
s.691(1) 13–10
(2) 13–10
s.692(1ZA) 13–12
(2) 13–11
(b) 13–11
(3) 13–11
s.693(2) 13–19
(3)(b) 13–19
(5) 13–19
s.693A 13–20
s.694 13–20
(2)(b) 13–20
(3) 13–20
(4) 13–20
(5) 13–20
s.695 13–15, 13–20
(2) 13–20
s.696 13–20
(2)(a) 13–20
(5) 15–18
ss.697–699 13–20
s.699(6) 15–18
s.700 13–20
s.701 13–21
(2) 13–21
(3) 13–21
(4) 13–21
(5) 13–21
(6) 13–21
(7) 13–21
(8) 13–21
s.704 13–24
s.705 13–20, 13–23
s.707 13–10
s.709 13–13
(1) 13–13
(2) 13–13
s.710 13–13
s.711 13–13
s.712(3) 13–13
(4) 13–13
(6) 13–13
(7) 13–13
s.714(3)(a) 13–14
(b) 13–14
(4) 13–14
(6) 13–14
s.715 13–14
s.717 13–15
s.718(1) 13–15
(2) 13–15
(3) 13–15
s.719 13–16
s.720A 13–14
s.721(1) 13–16
(2) 13–16
(3)–(7) 13–16
(6) 13–5
s.723 13–17
s.724(1) 13–25
(b) 13–25
(2) 13–25
s.725 13–25
s.726(1) 13–27
(2) 13–27
(3) 13–27
(4)(a) 13–27
(5) 13–27
s.727(1)(a) 13–26
(b) 13–26
(2) 13–26
(4) 13–26
s.728 13–26
s.729 13–26
(2) 13–26
(3) 13–26
(4) 13–26
(5) 13–26
s.730 13–26
s.731(2) 13–26
(3) 13–26
(4)(b) 13–27
s.733(2) 13–11
(3) 13–11
(4) 13–26
(6) 13–30
s.734(3) 13–17
(4) 13–17
s.735 13–28, 33–26
(2) 13–28
(3) 13–28
(4) 13–28
(5) 13–28
(6) 13–28
Pt 19 31–6
s.738 31–6, 31–12
s.739 31–7, 31–25
s.740 31–7, 31–15
s.741 31–7, 31–16, 31–22
(1) 13–25
(2) 13–25
s.743 31–7, 31–22
ss.743–748 31–15
ss.743 et seq. 31–7
s.744 31–22
s.745 31–16
s.749 31–16
s.750 31–29
s.752 31–15
s.753 31–15
s.754 32–15
s.755 1–18, 24–2, 31–17
(1) 24–2
(3) 24–3
(b) 24–2
(4) 24–2
(5) 24–2, 31–7
s.756 24–3
(2) 24–3
(3)(a) 24–3
(b) 24–3
(6) 24–3
s.757 20–19, 24–2
s.758 20–19
(2) 24–2
(3) 24–2
s.759 13–5
(1) 24–2
(3) 24–2
(5) 24–2
s.760 24–2
s.761 4–11, 4–38, 9–3, 11–8
(2) 11–8
(4) 11–8
s.762 11–8
(1)(c) 5–4
s.763 4–11, 11–8
(4) 4–38
s.764(1) 11–8
(3) 11–8
(4) 11–8
s.765 4–11, 11–8, 11–19
(1) 11–19
(2) 11–8
s.766 11–19
s.767(1) 9–3, 11–8
(2) 9–3, 11–8
(3) 9–3, 11–8
(4) 11–8
s.768 27–5, 27–14, 31–22
(2) 27–5
s.769 24–21, 31–22
s.770 31–22
s.771 20–2, 27–7, 27–21, 31–22
(1) 27–7, 27–13
s.773 27–21
s.774 27–21
s.776 31–22
s.778 31–22
s.779 24–22
(2) 24–22
(3) 24–22
(4) 24–22
ss.784–790 27–4
Pt 21A 2–42
s.790ZF 2–45
ss.790A–790ZG 2–42
s.790C 4–5
(7) 2–42
(10) 2–42
s.790D 2–45
s.790E 2–45
s.790F 2–45
s.790G 2–45
s.790H 2–45
s.790I 2–45
s.790M 2–42, 2–45, 4–5
(1) 2–44
s.790N 2–46
s.790O 2–46
(4) 2–46
s.790P 2–46
s.790R 2–46
s.790U(1) 2–44
s.790W 2–46
Pt 22 16–27, 28–51, 28–54
s.793 27–7, 28–51, 28–52, 28–53
(2) 28–51
(5) 28–51
(6) 28–51
ss.793–797 15–77
ss.793 et seq. 16–27
s.794 28–53
s.795 28–53
s.796 28–53
s.797(1) 28–53
s.798 28–53
s.799 28–53
s.800 28–53
(3) 28–53
(a) 28–53
(b) 28–53
(4) 28–53
s.801 28–53
(1) 28–53
s.802 28–53
s.803(2) 28–52
(3) 28–52
s.804 28–52
(2) 28–52
s.805 28–52
(1) 28–52
(2) 28–52
(4) 28–52
(5) 28–52
(6) 28–52
(7) 28–52
s.806 28–52
s.807 28–52
s.808 28–51
ss.808–819 28–51
s.820(1) 28–54
ss.820–823 28–54
s.824 28–54
(2)(a) 28–54
(b) 28–54
(5) 28–54
(6) 28–54
s.825 28–54
(1)–(3) 28–54
(4) 28–54
Pt 23 12–2, 13–41
s.829(1) 12–9
(2) 12–9
(b) 13–41
s.830 12–3, 12–4, 12–5
(1) 23–8
(2) 12–3
s.831 4–40, 12–4, 12–5, 13–7
(1) 12–2
(2) 12–2
(4)(a) 12–2
(c) 12–4
ss.832–835 12–3
s.836(2) 12–5
(a) 12–6
(b) 12–6
s.837(2) 12–5
(3) 12–5
(4) 12–5
(5) 12–5
s.838 12–6
s.839 12–6
s.840 12–7
s.841 12–3
s.844 12–3
s.845(1) 12–11
(2) 12–11
(3) 12–11
s.846 12–3, 12–11
s.847 12–12
(2) 12–12
(3) 12–12
(4) 12–12
(a) 13–56
s.851(1) 12–8
(2) 12–11
s.853(4) 12–3
s.853A 21–38
s.853L 21–38
Pt 24 21–38
s.859(3) 32–26
(4) 32–26
s.859A 32–24, 32–28
(1) 32–26
(2) 32–26
(4) 32–27, 32–32
(6) 32–26
(7) 32–2, 32–26
s.859D 32–26
s.859E 32–27
s.859F 32–27, 32–30
(2) 32–30
(3) 32–30
s.859G 32–28
s.859H 32–26, 32–29
(4) 32–29
s.859L 32–32
(1)–(3) 32–27
(4) 32–27
(5) 32–27
s.859M 32–31
s.859P 32–28
s.859Q 32–28
Pt 25 32–24
Ch.A1 32–25
Ch.1 32–25
Ch.1A 32–32
Ch.2 32–5, 32–25
s.860(7) 32–25, 32–26
s.874 32–25, 32–26
s.876(1)(b) 32–27
s.890K 4–5
Pt 26 19–21, 29–1, 29–13, 29–14, 19–15
s.895 14–18, 29–1, 29–2, 31–31
(1) 29–6
s.896 29–6
(1) 29–8
(2) 29–7
ss.896–899(1) 29–6
s.897 29–10
(1) 29–10
(b) 29–10
(2) 29–10
(3) 29–10
(4) 29–10
(5)–(8) 29–10
s.898 29–10
s.899 29–11, 31–31
s.899(1) 29–3, 29–10
ss.899–901 3–32
s.900 29–2, 29–12
(1) 29–2
(2)(a) 29–2
(d) 29–2
(e) 29–12
Pt 27 29–2, 29–12, 29–13
s.902(1)(c) 29–13
(2) 29–14
(a) 29–14
(b) 29–14
(3) 29–13
s.904(1)(a) 29–14
(b) 29–14
ss.905–906A 29–13
s.908 29–13
s.909 29–13
s.910 29–13
s.915 29–13
s.915A 29–13
ss.916–917 29–13
s.918 29–13
s.918A 29–13
s.919 29–14
ss.920–921A 29–13
s.923 29–13
s.924 29–13
s.925 29–13
s.931 29–13
s.932 29–13
ss.935–937 29–13
Pt 28 Ch.2 28–15
Ch.3 28–15, 28–70
s.942 28–4
(2) 28–6
(3)(a) 28–7
(b) 28–5
s.943 28–6, 28–7
(2) 28–7
(3) 28–7
(a) 28–7
s.944(1) 28–6, 28–7
s.945 28–6, 28–7
s.946 28–7
s.947 28–6
(1)–(3) 28–8
(10) 28–8
s.948 28–8
s.949 28–8
s.950 28–17
s.952 28–10
(2)–(8) 28–10
s.953 28–12
(2) 28–12
(4) 28–12
s.954 28–10
s.955 28–9
(2) 28–9
(4) 28–6
s.956(1) 28–6
(2) 28–6
ss.957–959 28–4
s.961 28–6
ss.966–967 28–24
s.968(6) 28–24
s.974(1) 28–70
(2) 28–70
(3) 28–70
(4) 28–70
s.975(2) 28–72
s.976 28–71
s.978 28–71
(2) 28–71
(3) 28–71
s.979 19–8
(2) 28–70, 28–73
(4) 28–70
(5) 28–72
s.980 28–73
s.981 28–73
(2) 28–73
(4) 28–73
(5) 28–73
s.982 28–73
(4) 28–73
s.983(1) 28–75
(2)(b) 31–3
(2)–(4) 28–75
(3)(b) 31–3
(6) 28–75
(7) 28–75
(8) 28–75
s.984(1)–(4) 28–76
(5)–(7) 28–76
s.985 28–76
s.986(1) 28–73
(3) 28–76
(4) 28–74
(9) 28–73
(10) 28–73
s.987 28–70
s.988 28–75
s.989 31–3
s.990 28–70, 31–3
Pt 29 9–4
s.993 9–4, 9–5
Pt 30 19–15, 20–1, 20–23
s.994 16–27, 16–97, 18–5, 20–2, 20–4, 20–5,
20–6, 20–7, 20–8, 20–9, 20–12, 20–13,
20–14, 20–15, 20–17, 20–21, 20–22,
27–7, 32–47
(1) 20–1
(1A) 20–1, 22–18
(2) 20–2, 27–21
(3) 20–2
(4) 20–2
s.995 20–2
s.996 20–14, 20–16, 20–19, 20–20, 20–21
(2) 20–19
(a) 20–19
(b) 20–19
(c) 20–15, 20–19
(d) 20–19
(e) 20–19
(3) 28–24
Pt 31 33–1, 33–29
s.1000 33–29
(2) 33–29
(3) 33–29
(4)–(6) 33–29
(7)(a) 33–30
s.1001 33–29
(1)–(4) 33–29
s.1002 33–29
s.1003 33–11
(2) 33–30
(3) 33–30
(4) 33–30
(5) 33–30
(6)(a) 33–30
s.1004 33–30
(1)(a) 33–30
s.1005 33–30
s.1006(1) 33–30
s.1009 33–30
s.1011 33–30
s.1012 33–30
s.1024(1) 33–32
(3) 33–32
(4) 33–32
s.1025(1) 33–32
(2) 33–32
(3) 33–32
(4) 33–32
(5) 33–32
s.1026 33–32
s.1027(2) 33–32
(3) 33–32
(4) 33–32
s.1028(1) 33–32
(2) 33–32
(3) 33–32
(4) 33–32
s.1029(1) 33–33
(2) 33–33
s.1030(1) 33–33
(2) 33–33
(3) 33–33
(4) 33–33
(5) 33–32
s.1031(1) 33–33
(2) 33–33
(3) 33–33
s.1032(1) 33–33
(2) 33–33
(3) 33–33
s.1033 33–32
Pt 32 18–8
Pt 33 Ch.1 1–33
s.1040(3) 1–33
(4) 1–33
s.1041 1–33
s.1042 1–33
s.1043 1–32
(1)(a) 1–32
(b) 1–32
(c) 1–32
(d) 1–32
(2) 1–32
(3) 1–32
(4) 1–32
Pt 34 6–3, 6–8, 6–9
s.1044 6–3
s.1045 6–7
s.1046 6–5
s.1047(1) 6–7
(2) 6–7
(3) 6–7
(4) 6–7
(5) 6–7
s.1048 6–7
s.1049 6–6
s.1051 6–6
s.1052 6–7
s.1053(2) 6–6
s.1056 6–5
s.1058 6–6
s.1060 21–37
s.1066 4–7, 4–13
s.1068(3) 4–33
(5) 4–33
s.1079 33–18
s.1085 21–37
s.1086 21–37
s.1087 21–37
s.1089 21–37
s.1090 21–37
s.1091(3) 21–37
s.1099 4–18
s.1103(1) 6–6
s.1105 6–6
s.1112 11–11
s.1121 14–22
(3) 14–22
s.1122 14–22
s.1126(2) 18–2
(3) 18–2
s.1129 18–2
s.1132 18–3
s.1136 15–79, 27–17
s.1139(2) 6–5
(b) 6–5
s.1145 15–85
s.1146 15–86
s.1150 11–16
(2) 11–16
ss.1151–1152 11–16
s.1153 11–16
s.1157 9–6, 12–5, 12–13, 12–14, 16–30, 22–42
s.1158 16–85, 16–96
s.1159 9–24
s.1161 21–10
(1) 21–10
s.1162 9–24, 21–10
(2)(a) 21–10
(b) 21–10
(c) 21–10
(3) 21–10
(4) 21–10
(5) 21–10
s.1163 16–71
s.1166 23–10
s.1169 22–8
s.1173 16–12
(1) 16–71, 16–79, 22–34
s.1176 18–13
Pt 40 10–1
s.1184 10–1
s.1189 10–15
Pt 41 4–20
Ch.2 4–20
s.1192(2) 4–20
(3) 4–20
ss.1192–1199 4–20
s.1193(4) 4–20
s.1194(3) 4–20
s.1197(5) 4–20
s.1198(2) 4–20
s.1200 4–20
s.1206 4–20
s.1207 4–20
s.1212 29–17
(1) 22–34
(a) 22–11
(b) 22–27
s.1214 29–17
(1)–(3) 22–12
(5) 22–12
(6) 22–12
s.1215(1) 22–12
s.1217 3–9, 22–11
s.1221 22–27
ss.1239–1247 22–27
s.1248(3) 22–12
ss.1248–1249 22–12
s.1261(1) 22–12
s.1266 26–15
ss.1277–1280 15–27
s.1278 15–27
s.1279 15–27
s.1280 15–27
s.1282 9–11
ss.1288–1292 3–5
Sch.1A 2–42
Pt 1 4–5
Ch.5 2–45
Sch.1B 2–45
Sch.2 28–8
Sch.4 para.6 15–86
Sch.5 15–85, 33–30
para.6 15–85
para.9(a) 15–85
(b) 15–85
para.10(1) 15–85
(2) 15–85
(3) 15–85
para.11 15–85
para.12 15–85
para.13(1) 15–85
para.14 15–85
Sch.6 9–24
Sch.7 9–24, 21–10
para.4 21–10
(3) 21–10
Sch.10 3–9
para.6 22–27
para.17 22–33
Sch.10A 26–26, 26–30
para.1 26–26
para.2 26–25, 26–26
para.3(4) 26–26
para.5 26–26
para.6 26–26
para.7(1) 26–26
(2) 26–26, 26–27
(3) 26–26
para.10(3) 26–30
Legislative and Regulatory Reform Act (c.51) 3–5
2007 Corporate Manslaughter and Corporate Homicide Act 7–2, 7–43, 7–44, 7–45, 7–46
(c.19)
s.1(3) 7–43
(6) 7–44
s.2 7–43
(5) 7–43
s.8 7–43
s.9 7–44
s.10 7–44
s.18 7–45
s.20 7–43
Bankruptcy and Diligence etc (Scotland) Act (asp 3)
s.40 32–10
(5) 32–10
(6) 32–10
s.41 32–10
s.45 32–8
2010 Bribery Act (c.23) 3–4, 7–46, 16–107
s.7 7–46
s.8 7–46
s.14 7–46
2011 Charities Act (c.25) 1–30, 4–1, 22–5
Pt 11 1–30
s.105(9) 16–22
ss.178 et seq. 10–3
s.197 7–29
s.198 7–29
2012 Financial Services Act (c.21) 30–30
Pt IA 25–10
Pt 7 28–65, 30–4, 30–19, 30–29, 30–51, 30–
54, 30–55
s.89 26–32, 30–29
(2) 26–32
(3) 30–43
s.90 26–32, 30–29, 30–39
(1) 30–29
(2) 30–29
(3) 30–29
(4) 30–29
(9) 30–43
(a) 30–29
(b) 30–29
(10) 30–29
s.92 26–32
2013 Enterprise and Regulatory Reform Act (c.24) 28–32
s.82 14–41
2014 Co-operative and Community Benefit Societies Act 1–32, 1–35, 4–1, 4–18
(c.14)
2015 Small Business, Enterprise and Employment Act 2–42, 4–5, 10–1, 10–5, 10–6, 21–38,
(c.26) 24–22, 26–14, 32–45, 32–46, 33–15
s.33 21–2
s.34 21–2
s.84 24–22
s.87 14–2, 16–8
s.89(1) 16–9
s.94 27–16
s.110 17–10
s.117 9–4
s.127 32–50
s.164(1) 27–16
Sch.4 24–22
Sch.5 27–16
TABLE OF STATUTORY INSTRUMENTS
1985 Companies (Tables A to F) Regulations (SI 1985/805)

Sch.1 Table A 3–14, 14–48, 15–44, 15–65
art.17 23–5
art.38 15–65, 15–66
art.41 15–54
art.53 15–14
art.76 15–64
art.82 14–31, 15–47
art.84 14–48
art.92 7–7
1986 Insolvency (Scotland) Rules (SI 1986/1915)
rr.4.78–4.82 9–19
Insolvency Rules (SI 1986/1925) 9–19, 33–1, 33–22
Pt 3 32–42
Pt 4 33–1
r.4.73 33–22
rr.4.73–4.94 33–22
r.4.82 33–22
r.4.83 33–22
r.4.86 33–22
r.4.88 33–17
r.4.90 33–23
(3) 33–23
Pt 4 Ch.12 33–15
r.4.151 33–15
r.4.218 9–10, 32–18, 33–24
(a) 33–25
r.4.220 32–18
(1) 33–24
rr.4.228–4.230 9–19
r.4.229 9–19
r.4.230 9–19
r.7.47(1) 10–2
r.12.3(1) 33–22
r.13.12(1) 33–22
Insolvency Regulations (SI 1986/1994) reg.27(2) 33–15
1989 European Economic Interest Grouping Regulations 1–38, 4–1
(SI 1989/638)
reg.3 1–38
reg.18 1–38
reg.19 1–38
reg.20 1–38
Sch.4 1–38
1994 Insider Dealing (Securities and Regulated Markets) 30–14
Order (SI 1994/187)
art.4 30–14
art.9 30–14
art.10 30–13
Sch 30–14
Companies Act 1985 (Audit Exemption Regulations) 22–5
(SI 1994/1935)
Insolvent Partnerships Order (SI 1994/2421) 2–16
1995 Contracting Out (Functions in Relation to the 4–4
Registration of Companies) Order (SI 1995/1013)
1997 Companies Act 1985 (Audit Exemption) 22–5
(Amendment) Regulations (SI 1997/936)
1998 Civil Procedure Rules (SI 1998/3132) 17–27, 17–28, 20–1
r.19.6 2–18, 17–32
r.19.9 17–18, 17–27
(3) 17–13
(4) 17–11
r.19.9A 17–18
r.19.9F 17–28
r.19A(2) 17–11
r.48.2(1) 8–8
2000 Official Listing of Securities (Change of Competent 25–5
Authority) Regulations (SI 2000/968)
Companies Act 1985 (Audit Exemption) 22–5
2001 Financial Services and Markets Act 2000 (Regulated
Activities) Order (SI 2001/544)
art.77 32–36
Financial Services and Markets Act 2000 (Recognition 25–8
Requirements for Investment Exchanges and
Clearing Houses) Regulations (SI 2001/995)
Financial Services and Markets Act 2000 (Prescribed 13–24
Markets and Qualifying Investments) Order (SI
2001/996)
art.4 26–16, 26–31
Limited Liability Partnerships Regulations (SI 1–4
2001/1090)
Pt II 2–39
reg.4(2) 10–3
Open–Ended Investment Companies Regulations (SI 1–36
2001/1228)
Pt II 1–36
reg.15(11) 1–36
Pt III 1–36
2001 Financial Services and Markets Act 2000 (Official
Listing of Securities) Regulations (SI 2001/2956)
reg.3 24–2, 25–42
reg.6 25–35
Financial Services and Markets Tribunal (Legal 30–52
Assistance) Regulations (SI 2001/3632)
Financial Services and Markets Tribunal (Legal 30–52
Assistance–Costs) Regulations (SI 2001/3633)
Uncertificated Securities Regulations (SI 2001/3755) 15–77, 27–4, 27–16, 27–18, 27–20, 31–
22
reg.3(1) 27–14, 31–22
reg.15 27–4
reg.16 27–4
reg.19 31–22
reg.22(1) 31–22
(2) 31–22
(3) 31–22
reg.23 27–17
reg.24 27–19
(1) 27–14, 27–16
(2) 27–17, 27–19
reg.25 27–20
(2)(b) 27–19
reg.27(1) 27–12, 27–13
(2) 27–13
(3) 27–13
(4) 27–13
(5) 27–13, 27–14
(6) 27–13, 27–21
(7) 27–12
(8) 27–13
(9) 27–13
reg.28 27–4
reg.31(2) 27–15
reg.34 24–21
reg.35 27–15
(7) 27–15
reg.36(1) 27–15
(4) 27–15
(6) 27–15
(9) 27–15
reg.40 27–18
(2) 31–29
reg.41(1) 15–77
Sch.1 27–4
Sch.4 para.2(1) 27–16
(2) 27–16
(3) 27–16
(7) 27–17
para.3 27–16
para.4(1) 27–16
(4) 27–17
para.5(1) 27–16
(2) 27–17
(3) 27–18
para.6(3) 27–17
(4) 27–17
para.9 27–18
2003 Companies (Acquisition of Own Shares) (Treasury 13–25
Shares) Regulations (SI 2003/1116)
Insolvency (Prescribed Part) Order (SI 2003/2097) 32–17
art.2 32–17
Companies (Acquisition of Own Shares) (Treasury 13–25
Shares) No.2 Regulations (SI 2003/3031)
Financial Collateral Arrangements (No.2) Regulations 27–15
(SI 2003/3226)
2004 European Public Limited-Liability Company 4–1
Regulations (SI 2004/2326)
Pt 2 3–36
Pt 3 3–36, 14–67
Pt 4 3–36
reg.63 14–66
Pts 5–7 3–36
reg.78(3) 14–66
(4) 14–66
(5) 14–66
Information and Consultation of Employees
reg.20 28–62
2005 Companies Act 1985 (Power to Enter and Remain on 18–3
Premises: Procedural) Regulations (SI 2005/684)
Open–Ended Investment Companies (Amendment) 1–36
Companies Act 1985 (Operating and Financial Review 21–24, 21–26
and Directors’ Report etc.) Regulations (SI
2005/1011)
reg.8 21–26
reg.11 21–26
Community Interest Company Regulations (SI 1–12, 4–6
2005/1788)
regs 1–3 4–6
reg.2 4–6
regs 7–11 4–12
reg.11 4–6
Companies Act 1985 (Operating and Financial 21–24
Review) (Repeal) Regulations (SI 2005/3442)
2006 Transfer of Undertakings (Protection of Employment) 29–12
European Cooperative Society Regulations (SI 1–40
2006/2078)
Financial Services and Markets Act 2000 (Markets in 25–8
Financial Instruments) (Modification of Powers)
2007 Insolvency (Amendment) Rules (SI 2007/1974) 9–19
Companies Act 2006 (Commencement No.3,
Consequential Amendments, Transitional
Provisions and Savings) Order (SI 2007/2194)
Sch.3 para.23A(4) 15–44
Companies (Cross-Border Mergers) Regulations (SI 1–33, 29–16, 29–17, 29–23, 29–26
2007/2974)
reg.2 29–16, 29–17
(3) 29–17
(4)(a) 29–16
reg.3(1) 29–20
reg.6 29–19
reg.7 29–17
reg.8 29–17
reg.9 29–17
(7)–(8) 29–17
reg.9A 29–17
reg.10 29–18
reg.11 29–18
regs 12–12A 29–18
reg.13 29–18
reg.16 29–19
reg.17 29–19
(1) 29–19
reg.22 29–21
Pt 4 Ch.2 29–21
reg.28 29–21
reg.29 29–21
reg.30 29–21
reg.31 29–21
reg.36 29–21
reg.38 29–21
reg.39 29–20, 29–21
reg.40 29–21
Companies Act 2006 (Commencement No. 5,
Transitional Provisions and Savings) Order (SI
2007/3495)
Sch. para.2(1) 15–44
(5) 15–44
2008 Regulated Covered Bonds Regulations (SI 2008/346) 31–19
reg.2 31–20
Pt 2 31–20
Pt 3 31–20
reg.9 31–20
reg.17(2) 31–20
reg.17A 31–19
reg.23(1) 31–20
reg.27 31–20
Pt 7 31–20
reg.40(2) 31–23
Companies (Revision of Defective Accounts and 21–31
Reports) Regulations (SI 2008/373)
Small Companies and Groups (Accounts and 21–16, 21–17
Directors’ Report) Regulations (SI 2008/409)
reg.3 21–18
reg.5A 21–21
reg.8 21–18
Sch.1 21–18
Pt 1 21–16
para.1A 21–20
para.2 21–16
Pt 2 21–16
para.10 21–16
Pt 3 21–21
para.66 21–21
Sch.5 21–23
Sch.6 21–16, 21–18
Large and Medium–sized Companies and Groups 21–16, 21–23, 21–36
(Accounts and Reports) Regulations (SI 2008/410)
reg.3 21–18
reg.4(2A) 21–17
reg.9 21–18
reg.11(3) 22–3
Sch.1 21–18
Pt 1 21–16
para.2 21–16
Pt 2 21–16
para.10 21–16
Pt 3 21–21
para.45 21–17
para.72 21–21
Sch.4 paras 4–6 21–10
Sch.5 para.1 14–46
para.2 14–46
paras 3–5 14–46
Sch.6 21–16, 21–18
Sch.7 21–23
Pt 1 21–23
para.7 21–23
Pt 2 13–22, 21–23
Pt 3 21–23
Pt 4 21–23
Pt 6 21–23, 28–25
Pt 7 21–23
Sch.8 14–44
Pt 3 22–3
Companies (Disclosure of Auditor Remuneration and
Liability Limitation Agreements) Regulations (SI
2008/489)
reg.4 22–13, 22–17
reg.5 22–17
(1)(b) 22–13
(3) 22–13
(4) 22–13
reg.8 22–42
Sch.1 22–13
Sch.2A 22–13
Companies (Trading Disclosure) Regulations (SI 9–20
2008/495)
reg.4 9–20
reg.6(2) 9–20
Companies (Late Filing Penalties) and Limited 21–34
Liability Partnerships (Filing Periods and Late
Filing Penalties) Regulations (SI 2008/497)
Companies (Authorised Minimum) Regulations (SI
2008/729)
reg.5 11–19
Regulated Covered Bonds (Amendment) Regulations 31–19
(SI 2008/1714)
Limited Liability Partnerships (Accounts and Audit) 1–4
(Application of Companies Act 2006) Regulations
(SI 2008/1911)
Small Limited Liability Partnerships (Accounts) 1–4
Large and Medium-sized Limited Liability 1–4
Partnerships (Accounts) Regulations (SI 2008/1913)
Companies (Reduction of Share Capital) Order (SI
2008/1915)
reg.2 13–40
reg.3 13–33
reg.10 13–42
Companies (Company Records) Regulations (SI 27–17
2008/3006)
Companies (Registration) Regulations (SI 2008/3014)
reg.3 4–5
Sch.1 4–33
Sch.2 4–33
Companies (Model Articles) Regulations (SI 3–14, 19–14
2008/3229)
Sch.1 3–14, 27–4
art.3 7–5, 7–17, 17–2
art.4 7–5, 7–17, 14–7, 14–16
(2) 14–7
art.13 15–44
art.14 14–31
art.16 16–58
art.17 14–24
art.19 14–31
art.21 19–2
art.24 27–4
art.26 4–32, 27–7
art.27 27–21
(2) 27–21
(3) 27–21
art.28 27–21
(3) 27–21
art.30 12–1, 12–7
art.37 15–55
art.39 15–82
art.41 15–83
(6) 15–83
art.44 15–75
Sch.2 3–14
Sch.3 3–13, 3–14
art.3 3–13, 17–2
art.4 14–7, 14–16
(2) 14–7
art.5 14–3
art.13 14–28, 14–31
art.14 15–44, 16–58
art.20 14–24
art.21 14–24
art.23 14–31
arts 25–27 14–28
art.28 15–52
art.29 15–55
art.31 15–82
art.33 15–83
(6) 15–83
art.36 15–75
art.40 15–47
(1) 15–47
(2) 15–47
(3) 15–47
art.45 15–34
art.46 27–4
art.70 12–1, 12–7
art.71 19–2
arts 79–80 15–66
art.81 7–20
2009 Companies (Particulars of Usual Residential Address) 14–23
Companies (Shares and Share Capital) Order (SI 23–6
2009/388)
art.2 11–11
Open–Ended Investment Companies (Amendment) 1–36
Companies (Shareholders' Rights) Regulations 15–67
2009/1632 (SI 2009/1632)
reg.22 15–44
Overseas Companies (Execution of Documents and 32–29
Registration of Charges) Regulations (SI
2009/1917)
reg.6 5–28
Pt 3 32–28
Overseas Companies Regulations (SI 2009/1801) 6–3, 6–5
reg.2 6–3
Pt 2 6–5
reg.3 6–3
reg.4(2) 6–5
reg.5 6–5
reg.6 6–5
(1)(e) 6–5
reg.7(1)(e) 6–5
(f) 6–5
reg.8(1) 6–5
reg.9(1) 6–6
(2) 6–6
reg.11 6–5
Pt 3 6–5
reg.17 6–5
Pt 4 6–5
reg.30 6–3
reg.31(1)(b) 6–6
(2) 6–6
reg.32(5) 6–6
reg.33 6–6
reg.34 6–6
reg.38 6–6
Pt 5 6–6
Ch.3 6–6
Pt 6 6–6
regs 60–61 6–6
reg.62 6–6
reg.63 6–6
reg.66 6–6
Pt 7 6–6
reg.67 6–6
Pt 8 6–6
reg.68 6–3
reg.77 6–6
Registrar of Companies and Applications for Striking
Off Regulations (SI 2009/1803)
reg.7 6–6
Limited Liability Partnerships (Amendment) 1–4
Overseas Companies (Execution of Documents and
Registration of Charges) Regulations (SI
2009/1917)
Pt 2 6–7
Pt 3 32–28
Legislative Reform (Limited Partnerships) Order (SI 1–4, 1–5
2009/1940)
Community Interest Company (Amendment) 1–12
Companies (Share Capital and Acquisition by 13–35
Company of Own Shares) Regulations (SI
2009/2022) reg.3
European Economic Interest Grouping (Amendment) 1–38
European Public Limited–Liability Company 1–42, 14–66, 14–67
European Public Limited–Liability Company 1–42
(Employee Involvement) (Great Britain)
European Public Limited-Liability Company 1–42
(Employee Involvement) (Northern Ireland)
Companies (Authorised Minimum) Regulations (SI
2009/2425)
reg.2 11–8
Unregistered Companies Regulations (SI 2009/2436) 1–32
Companies (Companies Authorised to Register) 1–33
Companies (Unfair Prejudice Applications) 20–1, 20–19
Proceedings Rules (SI 2009/2469)
Companies (Disqualification Orders) Regulations (SI 10–15
2009/2471)
2011 Companies (Disclosure of Auditor Remuneration and 22–13
Liability Limitation Agreements) (Amendment)
(SI 2011/2859)
Open-Ended Investment Companies (Amendment) 1–36
2012 Supervision of Accounts and Reports (Prescribed
Body) and Companies (Defective Accounts and
Directors’ Reports) (Authorised Person) Order (SI
2012/439)
reg.4 21–31
Statutory Auditors (Amendment of Companies Act 21–17
2006 and Delegation of Functions etc) Order (SI
2012/1741)
Registrar of Companies (Fees) (Companies, Overseas
Companies and Limited Liability Partnerships)
Sch.1 para. 8 4–5
(SI 2012/2977)
2013 Financial Services Act 2012 (Misleading Statements
and Impressions (Order (SI 2013/637)
art.2 26–32
Companies Act 2006 (Strategic Report and Directors’ 16–39
Report) Regulations (SI 2013/1970)
2013 Companies (Receipt of Accounts and Reports) 21–41
reg.5 21–41
Large and Medium-Sized Companies and Groups
(Accounts and Reports) (Amendment) Regulations
(SI 2013/1981)
Sch.8 14–44, 14–45
Pt 3 14–58
Pt 4 14–44, 14–58
Pt 5 14–44
Pt 6 14–44
2014 Companies (Striking Off) (Electronic 33–29
Communications) Order (SI 2014/1602)
Company, Limited Liability Partnership and Business 4–17
Names (Sensitive Words and Expressions)
Reports on Payments to Government Regulations (SI 21–22
2014/3209)
2015 Company, Limited Liability Partnership and Business 4–17
(Names and Trading Disclosures) Regulations (SI
2015/17)
reg.2 4–13
reg.3 4–15
regs 4–6 4–14
reg.7 4–18
reg.8 4–18
Sch.2 4–18
Sch.3 4–18
Companies Act 2006 (Amendment of Part 17) 29–3
Companies, Partnerships and Groups (Accounts and 21–1
Reports) Regulations (SI 2015/980)
reg.8 21–36
Transparency Regulations (SI 2015/1755) 26–2
2016 Insolvency (Amendment) Rules (SI 2016/187) 33–15
Register of People with Significant Control 2–42
Statutory Auditors and Third Country Auditors 22–2
Regulations (draft)
reg.2 22–36
reg.3(1) 22–11
(d)–(f) 22–27
(g) 22–29
(h) 22–29
(2) 22–11
Pt 4 22–27
reg.4 22–29
reg.8 22–15
Sch.1 para.7 22–15
Sch.2 22–29
TABLE OF EUROPEAN MATERIAL
Treaties and Conventions

Brussels Convention 6–4
EC Treaty (Treaty of Rome) 6–9
art.85 32–4
art.86 32–4
European Convention on Human Rights 10–7, 18–8, 18–14, 28–6
art.6 18–8, 18–14, 30–30
(1) 10–7
Protocol 1 art1 29–11
Treaty on the Functioning of the European Union (TFEU) 6–2
art.5 6–12
art.49 6–4, 6–20, 6–26, 29–16
art.50 6–9, 6–13
(1) 22–9
(2)(g) 6–9
art.54 6–20, 6–26, 22–9
art.114 6–14
art.288 6–9, 6–15, 25–10
art.290 6–14
art.291 6–14
art.294 6–9
art.308 6–13
art.352 6–9
Directives
1968 Dir.68/151 on co-ordination of safeguards for the 4–34, 5–28, 6–5, 6–11, 6–16, 7–9
protection of the interests of members and others
[1968] OJ L65/8 (First Company Law Directive)
art.2(1)(b) 3–20
art.3 21–37
art.9(2) 32–39
art.11(1)(a) 4–36
art.12(2) 4–37
1977 Dir.77/91 on co-ordination of safeguards for the 6–11, 6–16, 11–2, 11–3, 11–8, 11–10,
protection of the interests of members and others 11–13, 11–17, 12–15, 13–24, 13–25,
[1977] OJ L26/1 (Second Company Law Directive) 13–35, 13–39, 13–44, 13–46, 13–59,
24–1, 28–69
art.2(b) 7–29
art.6 11–8
art.10 11–17
art.10A 11–17
art.10B 11–17
art.11 5–8, 11–17
art.15(1)(a) 12–2, 12–5
(c) 12–3, 12–5
art.17 11–9
art.23 13–46, 13–51
(1) 13–44
art.23A 13–44
art.25 13–51
art.32 13–35
1978 Dir.78/660 on the annual accounts of certain types of 6–11, 6–16, 21–1, 21–13, 21–16, 21–
companies [1978] OJ L222/11 (Fourth Company 17, 21–18, 21–29, 22–5
Law Directive)
art.33(2)(c) 12–3
art.43(1) 16–81
(13) 16–81
art.46A 6–15
Dir.78/855 on mergers of public limited liability 6–11, 6–16, 29–2, 29–12, 29–12, 29–
companies [1978] OJ L295/36 (Third Company 15, 29–17
Law Directive)
1982 Dir.82/891 on the division of public limited liability 6–11, 6–16, 29–2, 29–12, 29–12, 29–15
companies [1982] OJ L378/47 (Sixth Company Law
Directive)
1983 Dir.83/349 on consolidated accounts [1983] OJ 6–11, 6–16, 9–24, 21–1, 21–13, 21–16,
L193/1 (Seventh Company Law Directive) 21–17, 21–18, 21–29
Dir.83/459
art.43(1) 16–81
(13) 16–81
1984 Dir.84/253 on the approval of persons responsible for 6–11, 22–2, 22–5
carrying out the statutory audits of accounting
documents [1984] OJ L126/20 (Eighth Company
Law Directive)
1988 Dir.88/627 on the information to be published when a 26–15
major holding in a listed company is acquired or
disposed of [1988] OJ L348/62
1989 Dir.89/228 25–18
Dir.89/592 co-ordinating regulations on insider 30–11, 30–14, 30–16, 30–18, 30–26
dealing [1989] OJ L334/30
art.1 30–18
art.2(3) 30–14
(4) 30–28
art.5 30–14
Dir.89/666 on disclosure requirements [1989] OJ 6–3, 6–4, 6–5, 6–7, 6–11
L395/36 (Eleventh Company Law Directive)
art.2 6–5
art.8 6–5
Dir.89/667 on single-member private limited-liability 1–3, 2–15, 6–11
companies [1989] OJ L395/40 (Twelfth Company
Law Directive)
art.5 16–60
1993 Dir.93/22 on investment services in the securities field 25–8
[1993] OJ L141/27
1994 Dir.94/19 on deposit-guarantee schemes [1994] OJ
L135/5
art.1(5) 6–4
2001 Dir.2001/34 on the admission of securities to official 25–5, 25–6, 25–10, 25–15, 25–17, 25–
stock exchange listing and on information to be 44, 31–23
published on those securities [2001] OJ L184/1
(Consolidated Admissions Requirements Directive)
(CARD)
Title III Ch.II 25–15
Ch.III 25–15
art.5 25–5
art.8 25–6
art.11 25–15
art.20 25–17
art.43 25–15
art.44 25–15
art.46 25–15, 31–23
art.48 25–15
art.49 25–15
(2) 25–15
art.54 25–15
art.56 25–15
art.58 25–15
art.60 31–23
art.62 25–15
arts 89–97 26–15
art.105 25–5
Annex 1 25–22
Dir.2001/86 supplementing the Statute for a European 1–42, 6–13, 14–67
company with regard to the involvement of
employees [2001] OJ L294/22
2002 Dir.2002/14 establishing a general framework for 3–36
informing and consulting employees in the
European Community [2002] OJ L80/29
Dir.2002/47 on financial collateral arrangements 27–10, 27–15
[2002] OJ L168/43
2003 Dir.2003/6 on insider dealing and market 6–14, 26–9, 30–11, 30–30, 30–30
manipulation [2003] OJ L96/16 (Market Abuse
Directive) (MAD)
Dir.2003/51 on the annual and consolidated accounts 21–1
of certain types of companies, banks and other
financial institutions and insurance undertakings
[2003] OJ L178/16 (Accounts Modernisation
Directive)
Dir.2003/53 [2003] OJ L178 21–16
Dir.2003/58 on disclosure requirements in respect of 6–16
certain types of companies [2003] OJ L221/13
art.1 21–37
Dir.2003/71 on the prospectus to be published when 6–14, 24–3, 25–10, 25–17, 25–18, 25–
securities are offered to the public or admitted to 19, 25–22, 25–26, 25–27, 25–30, 25–
trading [2003] OJ L345/64 (Prospectus Directive) 32, 25–33, 25–35, 25–36, 25–42, 25–
(PD) 44, 26–2, 26–6, 28–16, 30–46, 31–17,
31–18
art.1(2)(h) 25–19
art.2(1)(e) 25–19
(m) 25–44
(n) 25–44
(2) 25–19
art.3 25–17, 25–22
(2) 25–19
(a) 25–19
(b) 25–19
(c) 25–19
(d) 25–19, 31–17, 31–18
(e) 25–19
(3) 25–20
art.4(1)(a) 25–19
(b) 25–19
(d) 25–19
(e) 25–19
(2) 25–20
(a) 25–21
(h) 25–21
art.5(1) 25–22, 25–23
(2) 25–23
(3) 25–25
(4) 25–22
art.6 25–32, 25–35
(2) 25–23, 25–33
art.7(2)(b) 31–17, 31–18
(e) 25–19
(g) 25–19
art.8 25–22
(2) 25–29
art.9(3) 25–25
art.11 25–25
art.12 25–25
art.13 25–28
(4) 25–28
(6) 25–28
art.14 25–30
art.15 25–30
(5) 25–19
art.16 25–24
art.17 31–17
(1) 25–44
(2) 25–44
art.18 25–44
art.20 25–44
art.21(3) 25–32
(a)–(c) 25–28
(d)–(h) 25–42
art.23 25–44
art.25 25–43
Dir.2003/72 supplementing the Statute for a European 1–40
Co-operative Society with regard to the involvement
of employees [2003] OJ L207/25
2004 Dir.2004/25 on takeover bids [2004] OJ L142/12 6–14, 9–23, 15–5, 28–4, 28–5, 28–6,
(Takeovers Directive) (TD) 28–7, 28–9, 28–12, 28–13, 28–14, 28–
15, 28–16, 28–17, 28–18, 28–20, 28–
22, 28–23, 28–33, 28–74
Recital (18) 28–25
art.1(1) 28–13, 28–17
art.2(1)(a) 28–13, 28–14
(d) 28–44
(e) 28–70
art.3 28–18
(1) 28–7
art.4 28–4, 28–7, 28–16
(1) 28–4
(2)(b) 28–16
(c) 28–16
(e) 28–16
(5) 28–7
(6) 28–5, 28–6
art.5 28–41
art.6(5) 28–8
art.9 28–18, 28–20, 28–23, 28–24
(2) 28–33
art.10 21–23, 28–25
art.11 28–22, 28–23, 28–24, 28–25
art.12 28–23
(2) 28–23
(3) 28–20, 28–23, 28–24
art.15 28–69, 28–70
Dir.2004/39 on markets in financial instruments 25–8
[2004] OJ L145/1 (MIFID)
Title II 25–8
Title III 25–8
art.44 25–8
Annex II Pt 1 25–19
Dir.2004/109 on the harmonisation of transparency 6–14, 21–6, 21–32, 21–39, 26–2, 26–3,
requirements in relation to information about issuers 26–4, 26–5, 26–8, 26–14, 26–15, 26–
whose securities are admitted to trading on a 17, 26–20, 26–24, 26–25, 26–26, 26–
regulated market [2004] OJ L390/38 (Transparency 27, 26–29, 26–31, 28–25, 30–40
Directive) (TD)
Ch.III 26–15
art.2(1)(d) 26–16
art.4 21–34, 26–3
art.5(2) 26–3
(4) 26–3
art.6 26–4
art.7 26–25, 26–26
art.9 26–21
(1) 26–17
(2) 26–18
(4) 26–22
(5) 26–22
(6) 26–22
(6a) 26–22
art.10 26–19, 26–21
(a) 26–19
(b) 26–19
(e) 26–19
(f) 26–19
(g) 26–19
(h) 26–19
art.12 26–19
(2) 26–17, 26–18
(5) 26–19
(6) 26–23
art.13 26–19, 26–20, 26–21
(1) 26–20, 26–21
(a) 26–23
(b) 26–19
(2) 26–22
art.13a 26–21
art.15 26–18
art.21 26–8, 26–13, 26–23
art.21a 26–23
art.22 26–23
art.24 21–32, 26–29
art.28(1) 26–29
(c) 26–30
arts 28–28b 26–29
art.28a 26–29
art.28b 26–29
(2) 26–31
art.30(1) 26–29
2005 Dir.2005/56 on cross–border mergers of limited 1–40, 6–12, 6–29, 29–16, 29–17, 29–
liability companies [2005] OJ L310/1 (Cross-Border 20, 29–23, 29–26
Mergers Directive)
Recital (3) 6–27
art.1 29–16
art.4(1)(b) 6–27, 29–23
art.16(1) 29–21
(2) 29–21
(3)(h) 29–21
(4)(a) 29–21
(c) 29–20
2006 Dir.2006/43 on statutory audits of annual accounts 6–11, 21–11, 22–2, 22–5, 22–29
and consolidated accounts [2006] OJ L157/87
(Eighth Directive on Auditors)
Ch.2 22–27
art.1(2)(f) 22–2
art.22 22–12, 22–18
art.22a 22–15
art.26 22–28
art.32 22–11
(4b) 22–11
art.38 22–18
art.39 22–24
(1) 22–24
(2) 22–24
(3) 22–24
(4) 22–24
(6) 22–25
Dir.2006/46 on the annual accounts of certain types of
companies [2006] OJ L224/1
art.1(7) 6–15
Dir.2006/68 on the formation of public limited liability 6–16, 11–13, 13–35, 13–44
companies and the maintenance and alteration of
their capital [2006] OJ L264/32
2007 Dir.2007/14 on implementation of certain provisions
of Dir.2004/109 on the harmonisation of
transparency requirements in relation to information
about issuers whose securities are admitted to
trading on a regulated market [2007] OJ L69/27
art.3 26–3
art.10 26–19
art.11(1) 26–20
Dir.2007/36 on the exercise of certain rights of 6–12, 6–15, 14–39, 15–67, 15–69
shareholders in listed companies [2007] OJ L184/17
(Shareholder Rights Directive)
art.7 15–77
art.12 15–67
art.14 15–75, 15–78
Dir.2007/63 on the requirement of an independent 6–16, 29–13
expert's report on the occasion of merger or division
of public limited liability companies [2007] OJ
L300/47
2009 Dir.2009/49 on disclosure requirements for medium- 6–16
sized companies and the obligation to draw up
consolidated accounts [2009] OJ L164/42
Dir.2009/65 on undertakings for collective investment 31–20
in transferable securities [2009] OJ L302/32
(UCITS)
art.52(1)(a) 31–20
(4) 31–20
Dir.2009/109 on reporting and documentation 1–23, 6–16, 29–12
requirements in the case of mergers and divisions
[2009] OJ L259/14
2010 Dir.2010/73 on the prospectus to be published when 25–10, 25–19
securities are offered to the public or admitted to
trading [2010] OJ L327/1
2012 Dir.2012/6 on the annual accounts of certain types of 21–3
companies as regards micro-entities [2012] OJ
L81/3
Dir.2012/30 on co-ordination of safeguards for the 13–51, 24–1, 24–4, 24–14, 24–16
protection of the interests of members and others in
respect of the formation of public limited liability
companies and the maintenance and alteration of
their capital [2012] OJ L315/74
art.29 24–4
art.32 24–20
art.33 24–6
2013 Dir.2013/34 on the annual financial statements, 14–39, 21–1, 21–2, 21–3, 21–4, 21–11,
consolidated financial statements and related reports 21–14, 21–18, 21–21, 21–22, 21–29,
of certain types of undertakings [2013] OJ L182/19 22–2
Ch.10 21–22
art.2 21–2, 21–6
art.3 21–4, 21–6
(11) 21–2
(12) 21–2
art.4 21–14
(3) 21–14, 21–17
(4) 21–14
art.6 21–15
art.8 21–16
(6) 21–18
art.10 26–19
art.13(2) 21–18
art.14 21–20
art.16(2) 21–21
(3) 21–21
arts 16–18 21–21
art.17 21–21
(1)(r) 21–21
art.18 21–21
art.19 21–24
(11) 30–6
(12) 30–6
(13) 30–7
art.19a 21–24
art.22 21–10
art.23 21–20
art.29 21–24
art.29a 21–24
art.33 21–29
(2) 21–29
art.34 22–5
art.35 21–26
art.36 21–20
(1)(b) 21–21
(3) 21–20
Dir.2013/50 on transparency requirements in relation 26–2, 26–15
to information about issuers whose securities are
admitted to trading on a regulated market [2013] OJ
L294/13
2014 Dir.2014/56 on statutory audits of annual accounts 22–2
and consolidated accounts [2014] OJ L158/196
Dir.2014/57 on criminal sanctions for market abuse 30–4
[2014] OJ L173/179 (Market Abuse Directive)
Dir.2014/65 on markets in financial instruments 25–8, 25–19
[2014] OJ L173/349 (MIFID II)
Dir.2014/91 on undertakings for collective investment 31–20
in transferable securities as regards depositary
functions, remuneration policies and sanctions
[2014] OJ L257/186
Dir.2014/95 on the disclosure of non-financial 21–1, 21–24
information [2014] OJ L330/1
2015 Dir.2015/849 on the prevention of the use of the 2–42
financial system for the purposes of money
laundering or terrorist financing [2015] OJ L141/73
(Fourth Money Laundering Directive)
Regulations
2001 Reg.2157/2001 on the Statute for a European 1–38, 1–42, 6–13, 6–27, 14–66, 29–20
company (SE) [2001] OJ L294/1
Recital (14) 14–66
Preamble 20 1–42
Title III 3–36
art.2 1–44
art.3(2) 1–38
art.4 1–38
art.5 3–36
art.7 6–27
art.8 6–19, 6–27
art.9 2–42, 3–36
(1)(c) 1–42, 3–36, 14–66
art.10 1–42, 3–36
art.11 1–42, 4–14
art.16 1–37
art.38 3–36, 14–66
art.39(1) 14–66
(2) 14–66
(3) 14–66
(5) 14–66
art.40(1) 14–66
(2) 14–66
art.41(3) 14–66
(4) 14–66
art.43(2) 3–36
art.47(4) 14–66
art.48 14–66
art.56 3–36
art.63 1–42
art.64 6–27
art.66 1–44
art.69(a) 6–27
2002 Reg.1606/2002 on the application of international 21–1, 21–18, 21–19, 21–29, 21–30, 21–
accounting standards [2002] OJ L243/1 (IAS 31, 22–3
Regulation)
Recital (9) 21–14
art.2 21–18
art.3 21–19
(2) 21–19
art.4 21–13, 21–18
art.5 21–13, 21–18
art.6 21–19
2003 Reg.1435/2003 on the Statute for a European Co- 1–40
operative Society [2003] OJ L207/1 (SCE)
2004 Reg.809/2004 on information contained in 25–10, 25–15, 25–22, 25–27, 25–28,
prospectuses as well as the format, incorporation by 25–29, 25–42, 25–43, 25–44
reference and publication of such prospectuses and
dissemination of advertisements [2004] OJ L149/1
(Prospectus Regulation)
art.3 25–22
art.4a 25–22
art.5(4) 25–19
art.8 30–46
art.9 30–46
art.10 30–46
art.21(2) 31–17
art.28 25–25
art.29 25–30
art.30 25–30
art.33 25–30
art.34 25–30
Annex I 31–17
para.1 25–35
para.13 25–27
para.14.1 5–4
Annex III para.6.5 30–46
Annex IV 31–17
Annex V 31–17
Reg.2086/2004 on the adoption of certain international 21–18, 21–19
accounting standards in accordance with
Reg.1606/2002 on the insertion of IAS 39 [2004]
OJ L363/1
2005 Reg.1864/2005 on international accounting standards 21–19
[2005] OJ L299/45
2007 Reg.1569/2007 establishing a mechanism for the 25–44
determination of equivalence of accounting
standards applied by third-country issuers of
securities [2007] OJ L340/66
2010 Reg.1095/2010 establishing a European Supervisory
Authority (European Securities and Markets
Authority) [2010] OJ L331/84
art.17 30–49
art.19 30–42, 30–49
2012 Reg.486/2012 on the format and the content of the 25–19
prospectus, the base prospectus, the summary and
the final terms and as regards the disclosure
requirements [2012] OJ L150/1
2013 Reg.575/2013 on prudential requirements for credit
institutions and investment firms [2013] OJ L176/1
art.129 31–20
2014 Reg.537/2014 on specific requirements regarding 22–2
statutory audit of public-interest entities [2014] OJ
L158/77
art.1 22–2
art.2(16) 22–14
art.4(3) 22–25
art.5 22–13
(4) 22–13, 22–25
(5) 22–13
art.6(3) 22–25
art.7 22–21
art.10 22–3
art.11 22–25
art.12 22–21
(3) 22–21
art.13 22–29
art.16 22–14, 22–17, 22–25
(4) 22–25
(5) 22–25
(6) 22–14
art.17 22–14
(7) 22–14
art.21 22–36
art.23(3) 22–29
art.24(1) 22–11, 22–29
art.26 22–29
art.27(1)(c) 22–25
art.29 22–29
arts 30–30b 22–29
art.30a 22–29
Reg.596/2014 [2014] OJ L173/1 (Market Abuse 26–2, 26–5, 26–6, 26–9, 26–12, 26–15,
Regulation) 26–24, 26–25, 26–26, 26–29, 26–30,
26–31, 30–1, 30–4, 30–6, 30–30, 30–
31, 30–32, 30–34, 30–36, 30–37, 30–
38, 30–39, 30–40, 30–41, 30–42, 30–
43, 30–44, 30–46, 30–47, 30–48, 30–
49, 30–50, 30–51, 30–57
Recital (50) 26–6
Ch.4 30–47
Ch.5 30–47
art.2 26–6
art.3(1) 26–11
(25) 26–11
(26) 26–11
art.5 30–43
art.7 26–6
(1) 30–31
(2) 26–6, 30–37
(4) 30–37
art.8(1) 30–31, 30–35
(2) 30–36
(3) 30–36
(4) 30–35
(5) 30–38
art.9(1) 30–38
(2) 30–38
(3) 30–32
(4) 30–38
(5) 30–38
(7) 30–38
art.10(1) 30–36
(3) 30–36
art.12 30–39
(1)(a) 30–39
(b) 30–39
(c) 26–31, 30–40
(d) 30–40
(2)(a) 30–41
(b) 30–41
(c) 30–41
art.13 30–42
(2) 30–42
(3) 30–42
(4) 30–42
(5) 30–42
(6) 30–42
art.14 30–32, 30–33
art.15 30–39
art.17 26–6, 26–8
(1) 26–8
(4) 26–6
(5) 26–7, 27–7
(6) 26–6
(7) 26–6
art.18 26–8
(6) 26–8
art.19(1) 26–13
(2) 26–13
(3) 26–13
(5) 26–11
(6)(g) 26–13
(7) 26–12
(8) 26–12
(14) 26–14
art.21 30–40
art.23(2) 30–48
art.24 30–49
art.25(1) 30–49
(2) 30–49
(5) 30–49
(6) 30–49
(7) 30–49
art.26 30–50
art.27 30–48
art.28 30–48
art.30 30–51
(2)(i) 26–30
(j) 26–30
(3) 30–51
art.32 30–48
(4) 30–48
art.34 30–52
Reg.909/2014 on improving securities settlement in 31–12
the European Union and on central securities
depositaries (CSDs) [2014] OJ L257/1 (CSDR)
Recital (11)
art.3 31–12
(1) 27–4
art.76(2) 27–4
art.79 31–12
2015 Reg.2015/761 supplementing Dir.2004/109 on certain
regulatory technical standards on major holdings
[2015] OJ L120/2
art.5 26–23
Reg.2015/848 on insolvency proceedings [2015] OJ 6–8
L141/19
TABLE OF TAKEOVERS CODE
City Code on Takeovers and Mergers 3–1, 3–14, 14–19, 16–6, 16–27, 19–3,
20–12, 22–45, 28–3, 28–4, 28–5, 28–6,
28–7, 28–8, 28–9, 28–10, 28–11, 28–
12, 28–13, 28–14, 28–15, 28–17, 28–
18, 28–19, 28–20, 28–21, 28–23, 28–
26, 28–27, 28–29, 28–33, 28–34, 28–
35, 28–36, 28–37, 28–38, 28–39, 28–
41, 28–42, 28–44, 28–45, 28–46, 28–
48, 28–49, 28–50, 28–54, 28–55, 28–
56, 28–57, 28–58, 28–62, 28–63, 28–
64, 28–65, 28–68, 28–69, 28–70, 28–
72, 28–74, 28–75, 28–76, 28–77, 29–7,
29–12, 29–13, 30–28
Definitions 28–44, 28–45, 28–56, 28–65
Introduction A8 28–4
Introduction 2(a) 28–37, 28–64
(b) 28–18
(c) 28–7
Introduction 3(a)(i) 28–15
(ii) 28–15
(b) 28–14
Introduction 4(b) 28–18
Introduction 6–8 28–5
Introduction 9(a) 28–5, 28–8
Introduction 10 28–7
(b) 28–10
General Principle 1 28–18, 28–37, 28–39
General Principle 2 28–18, 28–36
General Principle 3 28–18, 28–20
General Principle 4 28–65
r.1 28–55
(a) 28–55
(b) 28–55
r.2.1 28–57
r.2.2 28–56, 28–57
r.2.3 28–56, 28–57
r.2.4 28–57
n.1 28–57
r.2.6 28–56
r.2.7 28–56
r.2.8 28–56
r.2.12 28–62
r.3 28–27, 28–55
r.3.1 28–27
n.1 28–27
r.3.2 28–27
n.2 28–27
r.3.3 28–27
r.4.1 30–28
r.4.2 28–65
r.4.3 28–67
r.4.5 28–72
r.5 28–35
r.6 28–39
n.3 28–39
r.6.1 28–39, 28–40
(c) 28–39
r.6.2 28–39, 28–40
rr.8.1–8.3 28–65
r.9 28–41, 28–43, 28–44, 28–46
n.1 28–44
r.9.1 28–41, 28–44
n.2 28–44
n.7 28–43
nn.8–15 28–43
r.9.2 28–44
r.9.3 28–41, 28–58
(b) 28–58
r.9.4 28–58
n.1 28–41
r.9.5 28–41
n.3 28–41
r.9.6 28–41
r.9.7 28–41
r.10 28–58
r.11.1 28–40
(c) 28–40
n.4 28–40
n.5 28–40
r.11.2 28–40
n.1 28–40
r.12 28–41, 28–58
r.13 28–56, 28–57, 28–58
r.13.4 28–58
r.13.5 28–58
r.14 28–47
r.14.1 n.3 28–47
r.15 28–47, 28–72
r.16 28–27
r.16.1 28–39
n.1 28–39
n.3 28–39
r.19 28–62, 28–66
r.19.1 28–63
n.9 28–63
r.19.4 28–66
n.1 28–66
n.2 28–66
n.3 28–66
n.4 28–66
n.5 28–66
r.19.5 28–66
n.1 28–66
n.3 28–67
r.19.6 28–67
r.19.7 28–62
r.19.8 28–62
r.20.1 28–67
n.3 28–67
r.20.2 28–34
n.1 28–34
n.3 28–34
r.20.3 28–27
r.21 28–20, 28–21, 28–23
r.21.1 28–20
n.2 28–20
r.21.1(a) 28–20
(b) 28–20
n.2 28–20
r.21.2 28–36
(b) 28–36
n.1 28–36
n.2 28–36
r.23 28–61
r.23.2 28–62
r.24 28–61
r.24.2 28–62
r.24.5 28–29
r.24.6 28–27
r.25 28–27, 28–61
r.25.2 28–62
n.2 28–27
n.4 28–27
n.5 28–27
r.25.5 28–29, 28–32
r.25.9 28–62
r.28 28–63
r.28.1 28–63
r.28.2 28–63
r.28.3 28–63
r.28.4 28–63
r.28.5 28–63
r.29 28–63
r.30.1 28–56, 28–59
r.31.1 28–39, 28–59
r.31.2 28–59
r.31.3 28–59
r.31.4 28–75
r.31.5 28–59
r.31.6 28–59
n.4 28–35
r.32.1 28–39, 28–59
r.32.2 28–59
r.32.3 28–39, 28–59
r.32.4 28–59
r.32.5 28–60
r.32.6 28–62
r.33.1 28–60
r.33.2 28–60
n.2 28–60
r.34 28–35
r.35 28–58
r.35.1 28–58, 28–68
r.35.2 28–58, 28–68
r.35.3 28–68
r.36 28–38
r.36.1 28–38
r.36.2 28–38
r.36.3 28–38
r.36.4 28–38
r.36.6 28–38
r.36.7 28–38
r.37 28–43
r.37.1 n.2 28–43
r.37.3 28–20
Appendix 1 28–43
Appendix 7 28–14
Appendix 7.3(f) 28–36
PART 1
INTRODUCTORY
The company, incorporated under the successive Companies

Acts, is a dominant institution in our society, and all the more so
with increasing government or public sector retreat from a
number of areas in which previously it had been a monopoly or
near-monopoly provider of services or, less often, of goods. Yet,
the role of the Companies Act company is not easy to describe
with accuracy. Even in the area of profit-making business
activity, where it is a major force, it has no exclusive position
and faces competition, at least in relation to smaller businesses,
from other legal forms, such as the partnership or the sole trader
(if the latter is a legal form at all). Moreover, the company is not
just a vehicle for making profits: it can be, and is increasingly,
used in the not-for-profit sector, i.e. where the aim of the
undertaking is either not to make profits or, if it is, not to
distribute them to the members of the company. And finally, the
Companies Act company is not the only type of company;
companies may also be created by Act of Parliament or royal
charter, although this happens rather rarely.
The dominance of Companies Act companies arises largely
because this is a highly flexible vehicle for carrying on business,
whether for profit or not-for-profit. Of course, the question
inevitably arises whether the proposed activity should be carried
on through a company or another legal form, but none of these
other legal forms is used across so many types and scales of
activity as is the corporate form. In other words, the company
has many competitors in the shape of other legal vehicles for
carrying on business, but it is perhaps not much of an
exaggeration to say that for all these other vehicles their primary
competitor is the company. Companies are used as business
vehicles from the smallest, one-person business to the largest,
multi-national undertaking. The characteristics of the corporate
form which give it such flexibility obviously deserve to be
studied.
Of course, business today is often a multi-national activity.
British companies may carry on activities in other states, and
companies from other jurisdictions may carry on business in the
UK. The right of British companies to carry on business in other
Member States of the EU, whether directly or through a
subsidiary company, and the right of companies from other
Member States to do so in the UK (their “freedom of
establishment”), are obviously matters of legitimate concern for
the EU. However, globalisation means that the international
dimension of British company law is not restricted to the EU,
nor, indeed, has it ever been.
In this part we shall try to analyse the function of the modern
company and its structure, discuss its advantages and
disadvantages, see how it is created and introduce the
international element of British company law.
CHAPTER 1
TYPES AND FUNCTIONS OF COMPANIES
Uses to Which the Company May Be Put 1–1

Business vehicles: companies and partnerships
(limited and unlimited) 1–2
Non-business vehicles: charitable, community
interest and limited by guarantee companies 1–6
The advantages of the modern corporate form 1–13
Different Types of Registered Companies 1–17
Officially listed and other publicly traded companies 1–22
Limited and unlimited companies 1–27
Classification according to size: large, medium and
micro companies 1–28
Classification according to activity: for-profit and
not-for-profit companies 1–29
Unregistered Companies and Other Forms of Incorporation 1–31
Statutory and chartered companies 1–31
Building societies, friendly societies and co-
operatives 1–34
Open-ended investment companies 1–36
European Union Forms of Incorporation 1–37
European Economic Interest Grouping 1–37
The European Company (societas europaea or “SE”) 1–40
Conclusion 1–47
USES TO WHICH THE COMPANY MAY BE PUT

1–1
Although company law is a well-recognised subject in the legal
curriculum and forms the subject of a voluminous literature, its
exact scope is not obvious since “the word company has no
strictly legal meaning”.1 Explicitly or implicitly, many courses
on “company law” solve the problem of defining the scope of
the subject by concentrating on those companies created by
registration under the Companies Acts. That will be true of this
book. Since there are more than three million such companies in
the UK today, in practical and pragmatic terms this is a sensible
solution, for clearly the law applying to such companies is a
matter of major concern to many people. However, to state that a
book is going to deal, principally, with companies formed under
particular Acts of Parliament does not convey much by way of
understanding what role such companies perform in society.
The term “company” implies an association of a number of
people for some common object or objects. The purposes for
which men and women may wish to associate are multifarious,
ranging from those as basic as marriage and mutual protection
against the elements to those as sophisticated as the objects of
the Confederation of British Industry or a political party.
However, in common parlance the word “company” is normally
reserved for those associated for economic purposes, i.e. to carry
on a business for gain.2 But it would be wrong to say that
company law is concerned only with those associations which
people use to carry on business for gain—and for two reasons.
First, companies are not the only legal vehicles which people
may use in order to associate for gainful business. Secondly,
companies incorporated under the Companies Acts may be used
for carrying on not-for-profit businesses, or for purposes which
can be only doubtfully characterised as businesses at all. We will
look at each of these matters in turn.
Business vehicles: companies and partnerships
(limited and unlimited)
Partnership Act 1890 and Companies Act 2006
1–2
English law provides two main types of organisation for those
who wish to associate in order to carry on business for gain:
partnerships and companies. Historically, the word “company”
was colloquially applied to both,3 but the modern lawyer regards
companies and company law as distinct from partnerships and
partnership law. Partnership law, which is now largely codified
in the Partnership Act 1890, is based on the law of agency, each
partner becoming an agent of the others,4 and it therefore affords
a suitable framework for an association of a small body of
persons having trust and confidence in each other. A more
complicated form of association, with a large and fluctuating
membership, requires a more elaborate organisation which
ideally should confer corporate personality on the association:
that is, it should recognise that it constitutes a distinct legal
person, subject to legal duties and entitled to legal rights separate
from those of its members. This the modern company can
provide easily and cheaply by permitting incorporation under a
general Act of Parliament, the current such Act being the
Companies Act of 2006.
1–3
This might seem to imply that the difference between
partnerships and companies is that the former is used to carry on
small businesses and the latter large ones (or, better, that the
former is used by a small number of people to carry on a
business and the latter by a large number). The mid-Victorian
legislature was, it seems, animated by some such idea.5
Partnership numbers were capped by statute, and incorporation
was compulsory for larger numbers of people associating
themselves for business purposes. Thus, s.716(1) of the
Companies Act 1985, re-enacting a provision first introduced by
the Joint Stock Companies Act 1844 (which in fact set the limit
slightly higher at 25), provided that, in principle, an association
of 20 or more persons formed for the purpose of carrying on a
business for gain must be formed as a company6 (and so not as a
partnership); whilst the Limited Liability Act 1855 required
companies with limited liability to have at least 25 members.7
However, the Joint Stock Companies Act 1856 quickly reduced
the minimum number to seven for companies,8 and the decision
of the House of Lords at the end of the nineteenth century in
Salomon v Salomon9 in effect allowed the incorporation of a
company with a single member, the other six being bare
nominees for the seventh. This judicial decision preceded by
nearly a century the adoption of EC Directive 89/667,10 which
required private companies formally to be capable of being
formed with a single member. The 2006 Act extended this
facility to public companies.11 As for the maximum limit for
partnerships, this too has been eliminated over the past two
decades, thus, the 2006 Companies Act contains no equivalent to
s.716 of the 1985 Act.
But this eventual collapse of the Victorian segregation of the
two business forms does not mean that they are equally well
adapted to different sizes of business. In fact, it is clear that
where a large and fluctuating number of members is involved,
the company has distinct advantages as an organisational form.
This is because the company has built into it a distinction
between the members of the company (usually shareholders) and
the management of the company (vested in a board of directors).
Although this division can be replicated within a partnership, it
has to be distinctly chosen by the partners, since the default rule
is the less practical universal participation in management.12
Limited Liability Partnerships Act 2000
1–4
On the other hand, where a small number of persons intend to set
up a business and all to be involved in running it, the distinction
made by company law between shareholders and directors often
becomes a nuisance, for they are the same (or nearly the same)
people. The internal machinery imposed by company law often
appears impossibly cumbersome in such cases. Despite the
amendments made in recent years to meet the needs of small
companies,13 the practical problems have proved troubling. As a
result, the Limited Liability Partnerships Act 2000 now provides
a useful hybrid legal vehicle. Although a hybrid, the limited
liability partnership (“LLP”) is much nearer to a company than
to a partnership, and to that extent the title of the Act is
misleading. The LLP is governed by company law principles,
often adapted to its particular needs, rather than by partnership
law principles, except in two crucial respects. Like companies,
the LLP has separate legal personality and the partners have
limited liability. Unlike companies, however, are taxation rules
(the members are taxed as if they were partners) and the internal
decision-making machinery, where the division between
members and directors is abandoned, and the members have the
same freedom as in a partnership to decide on their internal
decision-making structures.14 The LLP has proved a reasonably
attractive legal form, especially for professional businesses.15
Limited Partnership Act 1907
1–5
The Limited Liability Partnerships Act 2000 is to be sharply
distinguished from the confusingly similarly named, but much
earlier, Limited Partnership Act 1907. The limited partnership is
a true partnership, which is governed by the 1890 Partnership
Act and the common law of partnership, except insofar as is
necessary to give effect to its particular features.16 These special
features are that some (but not all) the partners of a limited
partnership have limited liability,17 and that, in return, they are
prohibited from taking part in the management of the partnership
business and do not have power to bind the partnership as
against outsiders, and certain information about the limited
partnership has to be publicly filed (in fact, with the registrar of
companies).18 From 1 October 2009, limited partnerships have
had to indicate this feature in their names by the addition of the
words “limited partnership” or “LP”.19 The 1907 Act in effect
provides for the existence of a “sleeping partner”, often someone
who contributes assets to the partnership and therefore wishes to
become a member of the partnership in order to safeguard his or
her investment and obtain an appropriate return on it, but who
does not want to be involved in its business. There were more
than 33,000 limited partnerships in existence in 2015.20 Although
a small number compared with the private company, the number
has been growing in recent years, because of the attraction of the
limited partnership in certain specialised fields of commercial
activity.21 For the purposes of this book, however, there is a gulf
between, on the one hand, the registered company and the
limited liability partnership, which are both in essence creatures
of company law, and, on the other, the partnership and the
limited partnership, which are creatures of partnership law.
Non-business vehicles: charitable, community
interest and limited by guarantee companies
Not-for-profit companies
1–6
As noted earlier, the statement that company law is the law
relating to associations formed with a view to carrying on
business for gain is inaccurate; there is no requirement in the
Companies Act or elsewhere that use of a registered company
should be limited to such purposes.22 In practice, a company may
be not-for-profit in a strong sense, in that a provision in its
constitution prohibits the distribution of profits to the members
of the company, either by way of dividend or in a winding up.
Or it may be so in the weak sense of not being run in order to
make a profit, though it may from time to time do so and it may
then distribute these profits to its members. “Not-for-profit” is
not a term of art in British company law, in the way it is in the
laws of many states of the US.
1–7
Not-for-profit companies may pursue purposes which are
charitable in a legal sense (in which case the company will be
subject to the charities legislation as well as the companies
legislation)23 or which are public interest purposes which do not
fall within the rather narrow legal definition of charitable
purposes.24 Alternatively, the purpose of the company may be to
promote a private interest, but that private interest may not be
making a profit. A typical example is the use by the tenants of a
block of flats of a company to hold the freehold title to the block
or to see to the care and maintenance of the common parts of the
block. These are clearly purely private purposes, but the tenants
will fund the company, usually through service charges, simply
to the level needed so that it can discharge its obligations and
would be surprised, even indignant, if the company made a
significant profit on its activities.
Company limited by guarantee
1–8
The Companies Acts have long provided a particular form of the
company which may be regarded as particularly suitable for
companies which carry on a not-for-profit activity. This is the
company “limited by guarantee”, as opposed to the company
“limited by shares”,25 the latter being the form normally used for
profit-making activities and by far the more common one. The
Companies Act does not permit a company to be created in
which the members are free from any liability whatsoever, but,
as an alternative to limiting their contribution to the amount
payable on their shares,26 it enables them to agree that in the
event of liquidation they will, if required, subscribe an agreed
amount.27 The guarantee company is widely used by charitable
and quasi-charitable organisations (such as schools, colleges and
the “Friends” of museums and picture galleries) since
incorporation with limited liability is often more convenient and
less risky than a trust.28 However, a division of such an
undertaking into shares is unnecessary, since no sharing of
profits is contemplated, and the creators of the company may
regard membership of the company divorced from shareholding
as a more appropriate expression of the objectives of the
company.
1–9
It might be thought that a company limited by guarantee imposes
a more limited financial obligation upon the members than one
limited by shares, since the members of a guarantee company do
not have to put any money into the concern when it is set up, as
they normally would have to if they subscribed for shares. The
members of a guarantee company are under no liability so long
as the company remains a going concern; they are liable, to the
extent of their guarantees, only if the company is wound up and
a contribution is needed to enable its debts to be paid. But since
the par value of shares can be set at a very low level (perhaps
one penny)29 and a member of a company limited by shares is
obliged to buy only one share, it is doubtful whether this
financial argument carries much weight in the choice between
companies limited by shares and by guarantee. In fact, the level
of the guarantee is usually also set at a nominal level, so the
financing aspects of not-for-profit companies probably play little
part in a person’s decision whether to apply for membership. For
this reason, companies limited by shares can be and are in fact
used for non-profit purposes. For example, in the case of the
service company mentioned above, often each tenant will have
one share in the company.30
1–10
A more important advantage of the guarantee company would
seem to be the fact that admission to, and resignation from,
membership are easier than in a share company. Upon
resignation from a share company, the member’s share has to be
allocated elsewhere, either back to the company or to a new
member, and on admission of a new member a new share may
have to be created, unless another member is resigning at exactly
the same time. The issuance, transfer and repurchase of shares
are all matters which are regulated by the Companies Act in the
interests of creditors,31 and these provisions may make the
transfer of membership in not-for-profit companies cumbersome.
Where, however, membership is not attached to shares, joining
and leaving can be as easy as in any club or association, i.e.
normally, joining is simply a matter of agreement between
company and prospective member and leaving is a matter of
unilateral decision by the member, perhaps subject to certain
conditions relating to notice or discharge of obligations owed to
the company.32
Company limited by shares
1–11
A guarantee company is, however, unsuitable where the primary
object is to carry on a business for profit and to divide that profit
among the members. Just as a partnership agreement will need to
prescribe the shares of the partners, so will a company’s
constitution need to define the shares of its members, and if
these shares are to be transferable it will be convenient for them
to be expressed in comparatively small denominations. The
members who subscribe for the shares will be under a duty to
pay the company for them in money or money’s worth, and the
company is accordingly said to be “limited by shares”, that is to
say, the members’ liability to contribute towards the company’s
debts is limited to the nominal value of the shares for which they
have subscribed, and once the shares have been “paid up” (i.e.
paid for) the members are under no further liability.33 A
fundamental distinction between this type of company and the
guarantee company is that the law assumes that in a company
limited by shares its working capital will be, to some extent at
any rate, contributed by the members; their contributions float
the company on its launching and are not a mere life-belt to
which creditors may cling when the company sinks, which is
how the guarantee company might be viewed. However, as we
shall see,34 since the Companies Act lays down no minimum
capital requirement for private companies, the contribution of
the shareholders to the initial financing of the company limited
by shares may be exiguous.
Community Interest Company (“CIC”)
1–12
Despite the long availability of the guarantee company for non-
profit purposes, it does have a limitation in terms of its
financing. Since there are no shares to be sold, the guarantee
company must either operate on the basis that it needs no long-
term working capital (many clubs can exist simply on their
subscription income) or it must raise that capital by way of debt
(i.e. loans to it). Partly for this reason, in Pt 2 of the Companies
(Audit, Investigations and Community Enterprise) Act 2004 the
Government created a new type of company,35 known as the
Community Interest Company, to which the 2006 Act provisions
apply subject to the modifications made in the 2004 Act.36 Such
a company can be either a company limited by shares or by
guarantee, its purposes are limited to pursuit of community
interests,37 distributions to the members of the company and the
payment of interest on debentures are subject to a cap and its
assets otherwise “locked in”,38 and, investors having less
incentive to exercise control over the company because their
potential rewards are limited, a Regulator of Community Interest
Companies is given potentially extensive powers of intervention
in the CIC’s affairs.39 Registration as a CIC is not compatible
with charitable status40 and does not attract the tax relief afforded
to charities, and so it is not clear how attractive the CIC would
be where the community purposes were also charitable (which,
however, they might well not be).41
The advantages of the modern corporate form
1–13
So far, we have established two negative, and therefore not
wholly helpful, propositions. First, the company form is not
limited to the association of large numbers of people in the
carrying on of a business, but can be used by small numbers,
even by the individual entrepreneur. Secondly, the company
form is not confined to the carrying on of a profit-making
activity. However, a positive proposition has also emerged. This
is that the comparative advantage of the company (as against, for
example, the partnership or the trust) does indeed lie in the
association of large numbers of people for the carrying on of
large-scale business. This is for two reasons.
The first is more obvious. Company law, by insisting upon the
central role of directors in the running of the company, permits a
large and fluctuating body of members (the shareholders) to
delegate oversight of the company’s business to a small and
committed group of persons (the directors). As important,
however, is that over the years successive Companies Acts and
the common law have developed a set of rules for regulating the
relationship between shareholders and directors when authority
is delegated to the directors in this way.42
Secondly, and less obviously, by providing for the creation of
separate legal personality, limited liability and transferable
shares, company law makes it possible to isolate business risks
within the business vehicle (thus insulating the shareholders),
and facilitates the raising of risk capital from the public for the
financing of corporate ventures. Raising funds by the sale of
shares often gives companies greater flexibility than in the case
of debt finance, and is therefore a crucial element in financing all
businesses except those where the risk of failure is very low.43
Although there are other ways of isolating risk and financing
enterprises, none is both as simple and as flexible as the
company.
1–14
This analysis is borne out by the statistics classifying businesses
by their legal type. These show that of businesses in the private
sector of the economy in 2015 employing more than 250
employees, 6,860 were organised as companies and only 55 as
partnerships (and five as sole traders). On the other hand, of
those with fewer than five employees, 1,232,210 were
companies (75 per cent of all companies), 160,905 were
partnerships (69 per cent), and 425,175 were sole traders (87 per
cent).44 This shows not only, as one would expect, that there are
many more small businesses than large businesses, but also, and
more relevant from our point of view, that among large
businesses the company form predominates, whilst in small
businesses it faces a distinct challenge from the partnership and
from those who make no formal distinction between their
personal and business lives (the sole trader).
1–15
From a functional viewpoint it could be said that today there are
three distinct types of company:
1. Companies formed for purposes other than the profit of their
members, i.e. those formed for social, charitable or quasi-
charitable purposes. In this case incorporation is merely a
more modern and convenient substitute for the trust.
2. Companies formed to enable a single trader or a small body of
partners to carry on a business. In these companies,
incorporation is a device for personifying the business and,
normally, divorcing its liability from that of its members
despite the fact that the members retain control and share the
profits. In this case, the company is often a substitute for a
partnership.
3. Companies formed in order to enable the investing public to
share in the profits of an enterprise without taking any part in
its management. In this last type, which is economically (but
not numerically) by far the most important, the company is
again a device analogous to the trust, but this time it is
designed to facilitate the raising and putting to use of capital
by enabling a large number of owners to participate in
endeavours too large for any of them individually, and to
entrust management of the endeavour to a small number of
expert managers.
1–16
However, this threefold categorisation needs to be treated with
caution. First, there may be hybrid companies or companies
which in a particular moment of their growth straddle the second
and third categories. For example, a company which was
formerly controlled wholly by the members of a particular
family may have begun to bring in one or two outside financiers
(sometimes called “business angels”) in order to expand the
business and these outsiders will naturally have wanted a share
in the control of the company. At a later date, the family
members may have retired from active management of the
company and may have brought in professional managers to run
the company (to whom shares have been allocated), but the
family members may still be the predominant shareholders.
Secondly, even if a company is squarely within the third
category and has a large number of shareholders, from whom the
directors constitute a distinct body, there may be great variations
in extent to which the shareholdings are dispersed and the ease
with which those shares can be traded. At one end of the scale is
a company listed on the London Stock Exchange45 with many
thousands of shareholders who are able to trade their shares with
other investors with great ease; whilst at the other end is a
company which does in fact have several hundred shareholders,
many of whom are perhaps its employees, but which has never
made a formal offer of its shares to the public and whose shares
may not be traded on a public exchange.
DIFFERENT TYPES OF REGISTERED COMPANIES
1–17
It follows from what has just been said that the range of
functions that may be performed by a company formed by
registration under the Companies Acts is extremely wide. Yet,
they are all subject to a single Act, today that of 2006. Is this
sensible? Would it be better to have different legislation for
different types of company, or can sufficient differentiation
among different sorts of companies be achieved within a single
Act? Let us look at this matter with reference to five possible
divisions among companies, the first three of which have long
been recognised in British law, the fourth of which is not
formally so recognised but is in practice catered for to some
extent, and the fifth of which can be said to have become
recognised in recent years.
Public and private companies
1–18
A division commonly found in the company laws of many states
is that between public and private companies, the former being
those which are permitted to offer their securities (whether
shares or marketable debt securities46) to the public47 (though
they may not in fact have done so) and the latter being those
which are not so permitted. The distinction is embedded in the
Companies Act, and suffixes, which are a mandatory part of a
company’s name, distinguish private (“limited” or “Ltd”) from
public (“public limited company” or “Plc”) companies.48 The
distinction is important not just for the obvious one that
companies which do not offer their shares to the public need not
be concerned with the rules governing this process, which today
are set out largely in the Financial Services and Markets Act
2000 (“FSMA”) and not in the Companies Act.49 Rather,
whether a company is public or private is taken more generally
as an indication of the social and economic importance of the
company, so that the public company is more tightly regulated
than the private company in a number of ways which do not
directly concern the offering of shares to the public.
1–19
However, unlike many continental European countries, there is
no separate legislation for public and private companies. The
approach of the single Act seems to be feasible because,
although British public companies are more highly regulated
than private companies, the British legislation has always had
less ambitious regulatory goals for public companies than our
continental counterparts. Thus, for example, the German
Aktiengesetz, applying to public companies, divides the board of
directors into two bodies, the supervisory board and the
management board, and deals in some detail with the allocation
of functions between them and the method of appointment of
their members.50 By contrast, the British Act says very little
about what the board is to do or how its members are to be
appointed,51 and certainly does not require the creation of
separate supervisory and management boards.52 These matters
are left to be decided by each company itself in its constitution.
Consequently, different sizes and types of company can adjust
these matters to suit their own particular situation, whereas in
Germany to relieve private companies of the demands of the
Aktiengesetz has been seen to require the enactment of a separate
and more flexible statute for private companies (the
GmbHGesetz).
1–20
Moreover, where a distinction is needed between the level of
regulation to be applied to public and private companies, that
can readily be embedded in a single Act. The risk with a
singleAct, however, is that too little thought will be given to
explicitly applying or disapplying the relevant rules, and as a
consequence public companies may be under-regulated or
private ones over-regulated. To address this issue, the Company
Law Review53 considered the then current rules applying to
private companies to see which were excessive and could
therefore be eliminated entirely or applied only in a modified
form. It also advocated re-ordering the Companies Act
provisions so as to make it more transparent which applied to
private companies.54 The Companies Act 2006 embodies this
approach.
1–21
The choice between a public and a private company is one for
the incorporators themselves or, after incorporation, for the
shareholders.55 The default rule is that the company is private
unless the parties state otherwise,56 and an overwhelming
proportion of companies on the companies register are private
ones. As of 2015, only about 7,500 companies on the register in
Great Britain were public (down from 9,200 in 2009), whilst the
total number of registered companies was over three million.57
This is a big change from the position which obtained when
the notion of the private company was introduced by the
Companies (Consolidation) Act 1908. The view then was that,
because a private company was exempted from some of the
publicity provisions of the Act, access to that status should be
restricted. A company could qualify as private only if it (a)
limited its membership to 50; (b) restricted the right to transfer
shares; and (c) prohibited any invitation to the public of its
shares. Only (c) has survived into the modern law as a
requirement for private status.58
Officially listed and other publicly traded
companies
1–22
Although public companies may offer their shares to the public,
some choose not to. And even if they do, those shares may or
may not be subsequently traded on a public share exchange, such
as the London Stock Exchange. Offering shares to the public and
arranging for those shares to be traded on a public market are
two separate things, although the public’s willingness to buy the
shares offered is likely to be increased if the shares can later be
traded on a public market. This is because a public market makes
it much easier for a shareholder to sell shares to another investor,
or to purchase more shares in the company, should that be
desired. Consequently, public offerings of shares and the
introduction of those shares to trading on a public market often
go together.59
1–23
By and large, the companies legislation makes very few
differentiations according to whether a public company’s shares
have actually been offered to the public or are in fact publicly
traded, and the 2006 Act makes fewer than its predecessor.
However, a company taking either of these steps will find itself
subject to the Financial Services and Markets Act 2000 and to
rules made under it by the Financial Conduct Authority
(“FCA”),60 as well as to an increasing number of Community
laws. This regulation, naturally, is mainly concerned with the
issues thrown up by public offers and public trading—these are
discussed later in the book—but it is important to note at this
stage a curiosity of the British approach. This is that admission
to a public market may bring with it obligations for the company
of a recognisably “company law” type, obligations which could
have been included in the Act but are not. This is particularly
true of certain parts of the “Listing Rules” made by the FCA. A
company seeking to have its shares traded on the Main Market
(whether Premium or Standard Listing)61 of the London Stock
Exchange must first have them admitted to the “Official List” of
securities, a list maintained by the FCA, acting in its capacity as
the UK Listing Authority (“UKLA”).62 Although a main purpose
of this regulation is to secure proper disclosure of information
about the company at the time its shares are offered to the
public,63 the UKLA is also empowered to impose on listed
companies rules governing their conduct thereafter.64 Such
listing rules relate mainly to the orderly conduct of the public
share market, but they also contain rules regulating the internal
affairs of companies, which thus supplement the provisions of
the Companies Act and the common law relating to companies.65
In particular, the Listing Rules contain provisions on related
party transactions66 and significant transactions67 which
supplement the statutory rules on directors’ and controlling
shareholders’ conflicts of interest, set a limit on the
constitutional division of powers within companies,68 and
provide the legal anchor for the UK Corporate Governance
Code.
1–24
This last is probably the best-known example of such a
“supplementary” Listing Rule. Companies subject to the Listing
Rules must indicate to their shareholders each year how far they
have complied with the UK Corporate Governance Code (a
Code drafted by the Financial Reporting Council69 and attached
to the Listing Rules) and to explain areas of non-compliance.70
This Code deals with the composition and functions of the board
of directors. In short, the fact of listing is being used to identify a
small group of very important British and overseas companies to
which additional company law obligations are attached.71
1–25
The identification of publicly traded companies as a separate
group for company law purposes has become increasingly
important in recent years and it is unlikely that the importance of
this category will diminish in the future. However, it is not
obvious that the additional regulation of such companies should
be confined to listed companies on the Main Market and not
extend to those whose shares are traded on “secondary” markets,
such as the Alternative Investment Market (“AIM”).72 Nor is it
obvious that such additional regulation should be embodied in
the Listing Rules rather than the Companies Act.
1–26
Because of the importance, even in core company law matters,
of a company having its securities traded on a public market, an
ambiguity has arisen about the term “public company”. For the
company lawyer it normally still means a company which for the
purposes of the Companies Act is public, not private, as
discussed in the previous section. For the capital markets lawyer,
that is not enough to make a company public: it must also have
offered its shares to the public and/or have made a public market
available for the trading of the shares. The ambiguity can be
avoided by using the term “publicly traded” to refer to the latter
type of company.
Limited and unlimited companies
1–27
We have already considered how the liability of members may
be either limited by shares or limited by guarantee.73 Since
limited liability is the advantage which is often said to drive
entrepreneurs’ decisions to incorporate, it is notable that the Act
also provides a category of private company where members’
liability is unlimited. Such an unlimited company may have a
share capital (in order to provide working capital and to measure
each member’s rights in the company), but that capital no longer
acts as a limit on liability.74 It is not surprising that few unlimited
companies are formed,75 and it has never been suggested that
there should be separate legislation for such companies.
Nevertheless, the current law does take the view that some
regulation otherwise applicable to companies registered under
the Act need not be applied to unlimited companies. This is true
in particular of the obligation to publish the company’s
accounts76 (since creditors of such companies can rely on the
credit of the shareholders), and the prohibition on a company
acquiring its own shares77 (again a potential threat only to
creditors who are confined to the company’s assets for the
satisfaction of their claims). Consequently, the unlimited
company may be attractive for those shareholders who are
willing to stand behind their company and for whom the
advantages of privacy or flexibility of capital structure are
important.
Classification according to size: large, medium and
micro companies
1–28
Classification based on size does not differentiate technical legal
categories, although the Companies Act recognises the different
needs of different sizes of company. At one end of the scale is
the listed company, at the other is the very small company where
the directors and the shareholders are the same people and where
the size of the business carried on is also small. The Company
Law Review reported research which indicated that 65 per cent
of active companies have a turnover of less than £250,000, 70
per cent have only two shareholders and 90 per cent fewer than
five shareholders.78 However, the Review came out against
separate legislation for companies whose directors and
shareholders were identical and whose businesses were small in
size (sometimes called “micro” companies) on the grounds that
it would be undesirable to create a regulatory barrier to
expansion, which might occur if a company became subject to
different rules when its directors and shareholders ceased to be
identical.79 For the same reason, it was opposed to a distinct
regime for micro companies even within a single Act.80 Instead,
it applied most of its reforms to private companies as a whole,
but some of them were crafted as default rules drafted with
micro companies particularly in mind, and it was expected that
private companies of a larger size would opt out of them. The
advantage of such an approach is that the legal regime does not
formally cease to be applicable to a particular small company as
it expands, though it is likely to find the regime less convenient
and thus to opt out of it. The Companies Act 2006 adopts this
approach. Those who want a corporate form which gives still
more flexibility than the private company provides, especially in
relation to internal decision-making structure, must go to the
Limited Liability Partnership.81
Classification according to activity: for-profit and
not-for-profit companies
1–29
The term “not-for-profit company” is not formally used in the
legislation. As we have already seen, these activities are
typically run though companies limited by guarantee, which may
prove suitable for carrying on a not-for-profit business but are
not regulated in fundamentally different ways from a company
limited by shares.82 The same is true of the community interest
company (“CIC”), created in 2004.83 A CIC is either a company
limited by shares or limited by guarantee and formed under the
Companies Act 2006, but the Companies (Audit, Investigations
and Community Enterprise) Act 2004 provides a set of rules
which those forming a CIC can adopt and which are designed to
meet the needs of an entity whose aims are to promote the
interests of the community or a section of it rather than to make
a private profit for its members.84
1–30
Those not-for-profit companies which are also charities85 are
presently subject to the burden of double regulation, under the
Companies Act and the charities legislation.86 Consequently,
there is an argument that a special form of charitable company
should be created and made subject to a single regulatory
regime, namely, that for charities. This has been done, but on an
optional basis.87 The Charities Act 2006 has introduced the
Charitable Incorporated Organisation (“CIO”) for England and
Wales. A CIO is a corporate form available to companies whose
purposes are charitable, and is designed for their particular
needs. However, unlike a CIC, a CIO is not registered by the
Registrar of Companies under the Companies Act 2006 but by
the Charity Commissioners under the Charities Act 2011.
Nevertheless, much of the law applicable to CIOs will be
familiar to a general company lawyer and some of the decisions
on the companies legislation will be capable of being read across
to the rules governing the CIO.88
UNREGISTERED COMPANIES AND OTHER FORMS OF
INCORPORATION
Statutory and chartered companies
1–31
Beyond the different types of companies registered under the
Companies Act, there are alternative forms of incorporation
which are available for the carrying on of business, including
large-scale businesses, namely by special Act of Parliament or
by means of a charter granted by the Crown, either under the
Royal Prerogative or under powers conferred upon the Crown by
statute to grant charters of incorporation.89 In 2015, there were
43 companies in existence formed under special Acts and 850
incorporated by Royal Charter.90
In the past, statutory incorporation by private Acts of public
utilities, such as railway, gas, water and electricity undertakings,
was comparatively common since the undertakings would
require powers and monopolistic rights which needed a special
legislative grant. During the nineteenth century, therefore, public
general Acts91 were passed providing standard clauses which
could be deemed to be incorporated into the private Acts unless
expressly excluded. As a result of post-war nationalisation
measures, most of these statutory companies were taken over by
public boards or corporations set up by public Acts (but many, if
not most, of them have now been “privatised” and become
registered companies). These boards and corporations fall
outside the scope of this book. But some statutory companies
remain and others may be formed. The statute under which they
are formed need not incorporate them but today this is invariably
done.
As for companies chartered by the Crown, such a charter
normally confers corporate personality, but, as it was regarded as
dubious policy for the Crown to confer a full charter of
incorporation on an ordinary trading concern, it was empowered
by the Trading Companies Act 1834 and the Chartered
Companies Act 1837 to confer by letters patent all or any of the
privileges of incorporation without actually granting a charter.
Today an ordinary trading concern would not contemplate trying
to obtain a Royal Charter, for incorporation under the
Companies Acts would be far quicker and cheaper. In practice,
therefore, this method of incorporation is used only by
organisations formed for charitable, or quasi-charitable, objects,
such as learned and artistic societies, schools and colleges,
which want the greater prestige that a charter is thought to
confer.
1–32
However, there is an important regulatory policy issue arising
out of the fact that statutory and “letters patent” companies are
not created by registration under the Companies Act. Unless
express provision is made to the contrary, the provisions of the
Companies Act will not apply to such companies. This may give
such “unregistered” companies an unfair competitive advantage
as against companies formed by registration under the Act, and
may mean that those dealing with such companies are
inadequately protected. This problem was addressed, but only
partially solved, by s.1043 of the 2006 Act, which applies some,
but not all, of the provisions of the Act to unregistered
companies, being “bodies incorporated in and having a principal
place of business in the United Kingdom”,92 unless they are
incorporated by or under a general public Act of Parliament.93 In
addition, unregistered companies falling within the section must
have been formed for the purpose of carrying on a business for
gain.94 In other words, the problems of unfair competition and
inadequate protection were not perceived as arising in relation to
not-for-profit companies, which, as we have seen, constitute the
main type of company created by the Crown.
The section provides that those parts of the Act which apply to
unregistered companies are to be set out in regulations,95 and any
charter, enactment or other instrument (e.g. letters patent)
constituting the company is subordinated to those parts of the
Act which are thereby made applicable.96 The main areas of
regulation so applied are those relating to accounts and audit,
corporate capacity and directors’ authority, company
investigations and fraudulent trading. This leaves out some large
and important parts of the Act, such as those dealing with the
removal of directors, fair dealing by directors, distribution of
profits and assets, registration of charges, arrangement and
reconstructions and takeover offers, and unfair prejudice.
1–33
An alternative policy embodied in the Act towards unregistered
companies is to encourage them to register under the Act and
thus become subject to its provisions in full. This encouragement
is provided by enabling them to register under the Companies
Act without having to form a new company and wind up the old
one, although sometimes registration under the Act is a step in a
plan designed to produce the winding-up of the company once it
has registered. The method of doing this is dealt with in Pt 33
Ch.1 of the Act. As far as statutory and letters patent companies
are concerned, a basic distinction is drawn between those which
are “joint stock companies” (essentially those with a share
capital)97 and those which are not. Only the former may make
use of this special registration process and must register as a
company limited by shares and not as an unlimited or guarantee
company.98 The details of the effect of registration, provisions
for the automatic vesting of property, savings for existing
liabilities and rights and similar matters are dealt with in
regulations.99
Building societies, friendly societies and co-
operatives
1–34
Although the Victorian legislature devoted considerable efforts
to the elaboration of what we today call companies legislation in
order to facilitate the carrying on of large-scale business, it did
not confine its efforts to this legislation. Even in the area of
commercial activities, the legislature was aware that the
company form, despite its flexibility, would not suit all types of
business, especially where the members of the organisation were
intended to have a different relationship with it than shareholders
with a company.
Some of these other forms of incorporation were confined to
specific activities, such as the building societies,100 whose
principal purpose is to make loans secured on residential
property. The building society is an incorporated body, very
similar to a company—which is why it has been easy for many
of them in recent years to “demutualise” by converting
themselves into registered companies—but its members are
those who deposit money with it or borrow from it rather than
those who invest risk capital in it.
A less striking example is the friendly societies legislation,101
which until recently contemplated only the formation of
unincorporated bodies, but now permits incorporation of bodies
whose purposes must include the provision on a mutual basis of
insurance against loss of income arising out of sickness,
unemployment or retirement. The friendly society constituted, if
you like, a self-help response to the perils of ordinary life before
the rise of the welfare state from the beginning of the twentieth
century, and still such societies have a role to play in the areas
neglected by the state system.
1–35
However, probably the most important of the “non-company”
incorporated bodies were those created under the old Industrial
and Provident Societies Acts, and now the Co-operative and
Community Benefit Societies Act 2014,102 which provide, inter
alia, for the incorporation of co-operative societies, which can be
deployed in a wide range of commercial settings. Membership
and financial rights are accorded to people in co-operatives
usually on the basis of the extent to which they have participated
in the business of the society, whether as customers (as in retail
co-operatives), producers (for example, agricultural co-
operatives) or as employees (worker co-operatives). There were
over 10,100 industrial and provident societies in existence in
2015,103 and they are of importance in some limited areas of
commercial activity.104 All these entities are outside the scope of
this book.105
Open-ended investment companies
1–36
The Victorian penchant for devising corporate vehicles for
specialised purposes was revived in 1996 with the creation of the
Open-Ended Investment Company. It is perhaps an indication of
the changes in the nature of the UK economy over the previous
150 years that, this time, the specialised purpose was that of
“collective investment”. Broadly, collective investment means
the coming together of a number of investors, often a large
number of relatively small investors, who pool their resources
for the purposes of achieving better returns on their investments.
Those investments will typically be the purchase of corporate
securities, though the range of investments is not confined to
these. This better return, it is hoped, will result partly from the
greater size of the fund to be invested and partly from the
employment of specialised management to discharge the
investment task.106
Both the trust (in the shape of “unit trusts”, which can trace
their origin back to the 1860s) and the registered company (in
the shape of the “investment company”) have long been used for
this purpose. In the case of an investment company the investor
buys shares in a company whose resources are allocated to the
purchase of investments. However, as we have noted already in
relation to guarantee companies,107 a company limited by shares
suffers from the disadvantage that the repurchase of shares by
the company is not freely available. An investor who wishes to
dispose of his or her investment in the company will normally
have to sell the shares to another investor, but the market price
of the shares, depending on supply and demand, may well be
less than the value of the underlying investments held by the
company which the share represents. These difficulties can be
avoided by the use of the unit trust, which is free to make a
standing offer to buy back units from investors at a price which
fully reflects the value of assets held in the trust. However, in the
1990s the trust came to be regarded as an English peculiarity
which might not fare well in international competition with
continental European and US investment funds, organised on a
corporate basis.
The Government’s response was the creation of a corporate
vehicle which had the same freedom as the trust to repay to
investors the value of the shares held, the value being calculated
on a similar basis. Thus, s.262 of the Financial Services and
Markets Act 2000 (the current governing legislation) permits the
Treasury to make regulations for the creation of corporate bodies
to be known as open-ended investment companies (“OEIC”),
and an essential ingredient of the definition of an OEIC is that it
provides to investors in it an expectation that they shall be able
to realise their investment within a reasonable period and on the
basis of a value calculated mainly by reference to the value of
the property held within the scheme by the company.108 This
power has been exercised in regulations,109 which require the
OEIC to provide that its shareholders be entitled either to have
their shares redeemed or repurchased by the OEIC upon request
at a price related to the value of the scheme property or to sell
their shares on a public exchange at the same price.110 In general,
the Regulations are a combination of provisions drawn from the
Companies Act 1985111 (but without the crucial general principle
to be found in the companies legislation that a company limited
by shares cannot acquire its own shares)112 and from the
Financial Services and Markets Act concerning the authorisation
of those wishing to engage in investment business.113
EUROPEAN UNION FORMS OF INCORPORATION
European Economic Interest Grouping
1–37
Legislation creating corporate bodies remains mainly a matter
for the Member States of the EU, but there are now two forms of
incorporation provided by EU law. Both are concerned to
promote cross-border co-operation among companies formed in
different Member States; both are in consequence rather
specialised forms of incorporation; both are implemented by
Regulations, which are therefore directly applicable in the
Member States (though in both cases supplementary national
legislation is required); but the two differ in most other respects.
The European Economic Interest Grouping (“EEIG”) is based on
the model of the French groupement d’intérêt économique
(“GIE”), and is designed to enable existing business
undertakings in different Member States to form an autonomous
body to provide common services ancillary to the primary
activities of its members. Any profits it makes belong to its
members and they are jointly and severally responsible for its
liabilities. In addition, the members of the EEIG, acting as a
body, may take “any decision for the purpose of achieving the
objects of the grouping”.114 Although the managers of the EEIG
also constitute an organ of the Grouping and may bind it as
against third parties, it is clear that the Regulation does not insist
upon the delegation of management authority from the members
to the managers. For this reason and because of the lack of
limited liability for the members, the EEIG is as much like a
partnership as like a company.
1–38
The basic requirements for the formation of an EEIG are simply
the conclusion of a written contract between the members and
registration at a registry in the Member State where it is to have
its principal establishment. The members must be at least two in
number and may be companies incorporated under national laws,
partnerships or natural persons, but at least two of the members
must carry on their principal activities in different Member
States.115 The Regulation116 confers upon the EEIG full legal
capacity, though whether it is afforded corporate personality is
left to national law,117 which is also left with considerable scope
to supplement the mandatory provisions of the Regulation. The
UK supplemented the EC Regulations by the European
Economic Interest Grouping Regulations 1989118 which
nominate the Companies Registrar as the registering authority. A
number of the sections of the Companies Act 2006119 and the
Insolvency Act120 are applied to an EEIG as if it were a company
registered under the Companies Act and it may be wound up as
an unregistered company under Pt V of the Insolvency Act.121
1–39
The ancillary nature of the EEIG is illustrated by the restrictions
placed upon it by art.3 of the EU Regulation. The general
principle is that the EEIG’s activities “shall be related to the
economic activities of its members and must not be more than
ancillary to those activities”. The latter part of the restriction, in
particular, is then supplemented by prohibitions on the EEIG (a)
exercising management over its members’ activities or those of
another undertaking; (b) holding shares in a member company;
(c) employing more than 500 workers122; or (d) being a member
of another EEIG. Given the above, it was always likely that the
take-up of the EEIG in Britain would not be high. That has
turned out to be the case, though the number of EEIGs with
principal establishment in Great Britain has grown steadily from
23 in 1991 to 279 in 2015.123 The EEIG will receive little further
discussion in this book.
The European Company (societas europaea or
“SE”)
1–40
The European Company,124 by contrast, is not intended for
ancillary activities but rather to facilitate the cross-border
mergers of companies and their mainstream activities, something
which the creation of a single market within the EU has
promoted. Of course, a cross-border merger does not necessarily
need a European Company. An English company could merge
with a French company, so as to produce a resulting company
which was either English or French (or indeed registered in some
third state), though in fact such an exercise has been difficult to
carry out in the past, but should be facilitated by the Cross-
Border Mergers Directive.125 Alternatively, the English or
French company can offer to buy the shares of the other
company (a process known as a takeover offer).126 If the offer is
accepted by the shareholders of the offeree company, that
company becomes a subsidiary of the offeror company, but the
important point for present purposes is that, in a takeover, there
is no need for structural changes to the pre-existing companies:
the two companies continue as before after the takeover, albeit
with different shareholders in the target company (and perhaps
also in the bidder). In this way, the English or French company
could build up a string of subsidiary companies operating in as
many Member States of the EU as was desired.
1–41
What can the European Company add to this situation? Its
advantages from a company law perspective are mainly
psychological. In the situation described at the end of the
previous paragraph, the English (or French) company had built
up a group structure which operated effectively throughout the
EU, but the lead or head company in the group was clearly
identified as English (or French, as the case might be). It is
argued that a cross-border group might be more acceptable to
those who work in or with it if it could be formed under a EU
type of incorporation, which was not identified with any
particular Member State,127 and there might even be some saving
of transaction costs if all the existing national subsidiaries could
be folded into a single SE. Thus, the English and French
companies, when they originally merge, might choose to do so
by forming an SE, to replace the existing French and English
companies. In addition or instead, the controllers of the group
might choose to roll their various national subsidiaries into an
SE, whether the top company in the group continued to be an
English company or a French company or was a newly formed
SE.
1–42
This was the vision of the original proponents of the SE, put
forward as long ago as 1959.128 By the time the SE was adopted
by the EU (in 2001129) and came into force (in October 2004),
however, this vision had been crucially compromised. Essential
to the concept of an EU form of incorporation, divorced from the
law of the Member States, is the notion that the SE law should
provide a comprehensive code of company law rules for the SE.
However, the adopted version of the SE not only fails to regulate
adjacent legal areas such as taxation, competition law,
intellectual property and insolvency,130 even within core
company law the SE law relies heavily on the national laws of
the Member States.131 The provisions specified at EU level for
the SE come near to detailed regulation in only four areas:
formation, transfer of the registered office of the SE,132 board
structure and employee involvement.133 In the latter two areas
the rules applying to any particular SE will vary according to the
choice made by the SE itself, any agreement made between the
SE and the employee representatives or to the national origins of
the companies forming the SE. Outside these four areas, the SE
is to be governed by the law relating to public companies in the
jurisdiction in which it is registered.134 Thus, it seems that there
will be at least as many different SEs as there are Member States
of the EU. This fact is emphasised by the absence of an EU
registry for the SE. The SE has to be registered in one of the
Member States of the EU. Since the SE is to be embedded in the
domestic law of the state of registration, this is obviously the
correct technical rule, but it does make clear the fact that, for
example, a German-registered SE will look rather different from
a British-registered one.135
1–43
What the SE law achieves is only partial harmonisation of the
company law applying to that body.136 In fact, since those
forming an SE apparently have a free choice of the state in
which they register their SE—it does not have to be one of the
states in which existing businesses operate—the SE rules may
promote a certain competition among the Member States to
make their rules transposing the SE, and by extension their
national company laws, attractive to businesses. However, it
should be noted that the requirement to have registered and head
offices in the same state will constitute a brake on such
competition.137
1–44
Unlike a domestic company, the SE can be formed only by
existing companies138 and not by natural persons. In line with its
cross-border objectives, those existing companies must already
have a cross-border presence. The four methods of formation
are: merger, formation of a holding SE, formation of a subsidiary
SE and transformation.139 The merger route is confined to public
companies140 (which in this context includes an SE) and to
certain types of merger.141 The companies must have registered
and head offices in the EU and at least two of them must be
incorporated in different Member States. A holding SE can be
formed by public or private companies if at least two of them are
incorporated in different Member States or for two years have
had a subsidiary or branch in another Member State. The SE in
this case results from a form of share-for-share takeover offer,
made by the new SE to the shareholders of the founding
companies. A subsidiary SE may be formed by a similar set of
companies, in this case by the forming companies subscribing
for the shares of the SE. The most tightly regulated form of
incorporation of the SE is that of transformation: a public
company which for at least two years has had a subsidiary
company governed by the law of another Member State may
convert itself into an SE. The Regulation also provides for the
conversion back of an SE into a public company governed
wholly by domestic law.142 It will be clear from this that the SE
is a form of incorporation not available to companies
incorporated outside the EU.
1–45
Since the SE is so much part of domestic law, the rules applying
to SEs registered in Great Britain will be referred to from time to
time in this book. However, the take-up of this legal form has
been rather limited. Throughout the EU as a whole only some 60
SEs had been formed as of early 2007 and only 12 of these had
operations and employees (as opposed to being shelf
companies).143 There were three SEs registered in the UK, but all
without operations and employees.
1–46
Despite these discouraging figures the Commission has
committed itself to producing an equivalent form of EU
incorporation specifically designed for small- and medium-sized
private enterprises, the “Societas Privata Europaea” or SPE,144
and, more recently, on a single-member private company, the
“Societas Unius Personae” or SUP.145
CONCLUSION
1–47
After a period of stability in the variety of legal forms on offer to
those who wish to incorporate their businesses—before 2000 the
last significant innovation had been the introduction of the
private company at the beginning of the twentieth century—at
least four significant new forms of incorporation have been
made available in less than a decade: the limited liability
partnership, the community interest company, the charitable
incorporated organisation and the European Company (or
societas europaea). These innovations reflect different driving
forces at the policy level. The LLP was a response to the desire
of large partnerships to find a form of incorporation with limited
liability in an increasingly litigious world, but which
nevertheless provided the tax advantages and internal
management flexibility traditionally associated with the ordinary
partnership. The CIC reflected the Government’s desire to
encourage the deployment of entrepreneurial skills towards the
solution of social problems; and the CIO a desire to involve
private bodies in the delivery of welfare state objectives. The SE
reflected the goal of the European Commission and Community
more generally to deepen the single European market by
promoting cross-border mergers. Of the three, only the last
produced an innovation in the core areas of company law, but, so
far, its up-take, as we have noted, has been limited.
1
Per Buckley J in Re Stanley [1906] 1 Ch. 131 at 134.
2But not universally; we still talk about an infantry company, a livery company and the
“glorious company of the Apostles”.
3So that it was common for partners to carry on business in the name of “—&
Company”.
4
Partnership Act 1890 s.5.
5 Though the legislature seems to have been influenced in this view more by problems of
civil procedure in relation to large partnerships than by the idea that the partnership itself
was inappropriate for large numbers of joint venturers. See Law Commission and
Scottish Law Commission, Joint Consultation Paper on Partnership Law (London,
2000), paras 5.51–5.61.
6
It could be formed as a registered company or as a statutory or chartered one (see
below, para.1–26) or indeed as an Open-Ended Investment Company under the Financial
Services and Markets Act 2000 (see below, para.1–31). If it was formed as a partnership
it would be automatically dissolved for illegality: Partnership Act 1890 s.34.
7
And contained other provisions designed to restrict limited liability to relatively
substantial companies, such as that each of the 25 members had to have subscribed for
shares with a nominal value of at least £10, of which 20 per cent had to be paid up.
8
And removed the capital requirements of the 1855 Act.
9
Salomon v Salomon [1897] A.C. 22. See below, paras 2–1 et seq.
10 EC Directive 89/667 [1989] O.J. L395/40.
11 2006 Act s.7(1)—which is not confined to private companies.
12
Partnership Act 1890 s.24(5).
13
Discussed throughout this book, but especially in Ch.15.
14 For more detail see G. Morse et al (eds), Palmer’s Limited Liability Partnership Law,
2nd edn (London: Sweet & Maxwell, 2011). The Limited Liability Partnerships
(Application of Companies Act 2006) Regulations 2009/1804 repeals and replaces much
of SI 2001/1090. It, plus SI 2009/1833, SI 2008/1911, SI 2008/1912, and SI 2008/1913,
applies parts of the CA 2006 to LLPs.
15
Almost 60,000 were on the register at the end of 2014/15 (though there were over 3.3
million private companies registered at the same date): BIS/Companies House,
Statistical Tables on Companies Registration Activities 2014/15, p.6.
16
1907 Act s.7.
17
1907 Act s.4(2) requires that there must be at least one general partner who is liable
for the debts and obligations of the firm.
18 1907 Act ss.6 and 8.
19 Legislative Reform (Limited Partnership) Order 2009/1940 inserting ss.8A and 8B
into the Limited Partnership Act 1907.
20
BIS/Companies House, Statistical Tables on Companies Registration Activities
2014/15, p.6. However, it is not clear how many of them are active: the 1907 Act
requires limited partnerships to register but provides no mechanism for de-registration.
21 Notably, venture capital or private equity investment funds, where the investors can
be limited partners distinct from the managers of the fund who are general partners; and
in property investment, where tax-exempt investors may wish to be excluded from any
management role. See the Law Commissions, Limited Partnerships Act 1907: A Joint
Consultation Paper (2001), Pt I.
22 Unlike both the partnership and the LLP where the intention (if not the actuality) of
carrying on the business for profit is part of the definition of these legal vehicles, and
indeed an unincorporated association meeting this test is a partnership, without the need
for any formalities to make it so: Partnership Act 1890 s.1(1); Limited Liability
Partnerships Act 2000 s.2(1).
23
There is no obligation for bodies which pursue charitable objects to incorporate,
though they increasingly do so today in order to obtain the benefits of limited liability,
since such organisations are increasingly carrying more financial risk.
24
An adaptation of the corporate form especially designed for those pursuing public
interest goals which are not charitable is the Community Interest Company (CIC): see
below, para.1–12.
25
2006 Act s.3(1).
26
It is not possible to create a hybrid form (i.e. a company limited by guarantee but also
with a share capital), although prior to 1980 it was: s.5.
27
2006 Act s.3(3).
28
There were some 40,000 guarantee companies in existence in 1998: CLR,
Developing, para.9.12.
29 See para.11–3.
30
This may be convenient if the members are not to have exactly identical obligations,
for example, where the obligation to contribute to the costs of the company is related to
the size of the flats. In that case different contribution obligations can be attached to each
share.
31
See below, Chs 11 and 12.
32 Where membership changes are expected to be relatively rare and where a new
member will always be available to replace the leaving one, as with the service company
formed by the leaseholders of a block of flats, this potential disadvantage of the share
company will not show itself.
33 2006 Act s.3(2) and more clearly in s.74(2)(d) of the Insolvency Act 1986, discussed
further in paras 8–1 to 8–4.
34 See below, Ch.11.
35 2004 Act s.26(1). A company may be formed as a CIC or later convert into one.
36 2006 Act s.6(2). Also see SI 2009/1942 amending SI 2005/1788.
37 2004 Act s.35.
38 2004 Act ss.30–31.
39
2004 Act ss.41–51—subject to an appeal to an Appeal Officer (s.28).
40 2004 Act s.26(3).
41As at the end of 2015 some 10,639 CICs had been registered. See Regulator of
Community Interest Companies Annual Report 2014/2015, p.38.
42
See below, Pt 3.
43 See below, Pts 6 and 7.
44 Office for National Statistics, UK Business: Activity, Size and Location 2015.
47
2006 Act s.755. Further, s.74 of the FSMA 2000 and its associated regulations
prevent a private company from having its securities listed on an exchange. See below,
para.25–15. The largest IPO (Initial Public Offering) on the London Stock Exchange
was completed in May 2011 by Glencore International Plc. The company raised $10
billion at admission, but the 2014 NYSE listing of Alibaba Holdings Group more than
doubled that.
48
2006 Act ss.58 and 59. Companies registered in Wales may use the Welsh
equivalents. See below, Ch.4.
49
See below, Ch.25.
50
Other legislation requires the mandatory presence of employee representatives on the
boards of large public companies, but this applies also to the boards of large private
companies.
51
Though it does contain an important provision, s.303, enabling an ordinary majority
of the shareholders to remove any director at any time. See Ch.14.
52 Typically, there is only a single board in British companies, but there is nothing in the
legislation to stop them establishing a separate “management board” below the main
board, and this is sometimes done. On the division within a single board between
executive and non-executive directors, see paras 14–75 to 14–76.
53 See para.3–3.
54
Final Report I, Ch.2. Particular CLR proposals are noted at appropriate points in the
book, but an illustration of the recommendations noted here was the removal of the
prohibition on a company giving financial assistance for the acquisition of its shares
from private companies. See paras 13–44 et seq.
55
A company originally incorporated as private may, subject to certain safeguards,
transform itself into a public one, or vice versa. See paras 4–39 et seq.
56 2006 Act s.4(2)(a).
57
2014/15, p.8. The total number of companies on the register has been increasing quite
rapidly, whilst the number of public companies gently declined over the same period.
Now fewer that one in 400 companies is a public one.
58 Private companies are in fact very likely to restrict the transfer of shares (see Ch.27)
and to have fewer than 50 members, but these are no longer necessary incidents of being
private.
59 These processes are discussed in Ch.25.
60 On 1 April 2013, the former Financial Services Authority was replaced by the
Financial Conduct Authority (responsible for policing the City and the banking system),
and a new Prudential Regulatory Authority (responsible for carrying out the prudential
regulation of financial firms, including banks, investment banks, building societies and
insurance companies), with all other responsibilities being assumed by the Bank of
England and its Financial Policy Committee.
61The Listing Regime is divided into two segments, giving UK and overseas issuers the
same choice of Listing Regimes. These are either Premium or Standard, with Premium
Listing requiring adherence to more stringent standards (including for overseas
companies), including “comply or explain” against the UK Corporate Governance Code,
and the requirement to offer pre-emption rights. Standard Listing requires adherence to
the lower EU minimum standards, including compliance with the EU Company
Reporting Directive which requires companies, amongst other things, to provide a
corporate governance statement and to describe their internal control and risk
management systems’ main features.
62
FSMA 2000 Pt VI.
63
See below, Ch.25.
64
FSMA 2000 s.96.
65
Companies whose shares are traded on secondary markets, such as the Alternative
Investment Market, may also be subject to exchange rules which perform a similar
function, but the rules of secondary markets are less demanding than the Listing Rules
which apply to the Main Market/Official List.
66 LR 11.
67 LR 10.
68
See paras 14–18, 16–77 and 19–2 on these matters.
69
See below, para.3–9.
70 LR 9.8.6 and 9.8.7. See further below, para.14–69.
71 There are some 1,500 British companies listed on the Exchange. However, most of
the Listing Rules apply to all companies with primary listings, no matter where
incorporated.
72The CLR thought the Combined Code (the predecessor to the UK Corporate
Governance Code), for example, should apply to all quoted companies: Completing,
para.4.44.
73 See above, paras 1–8 and 1–9.
74
2006 Act s.3(4). However, only a private company can be unlimited; a public
company must be limited by shares or guarantee: s.4(2).
75BIS/Companies House, Statistical Tables on Companies Registration Activities
2014/15, p.8 indicates that in 2015 there were fewer than 5,000 on the register.
76 2006 Act s.448. See para.21–35. Unlimited companies must still produce accounts for
their members.
77 2006 Act s.658. See para.13–2.
78
Developing, paras 6.8–6.9.
79 Strategic Framework, Ch.5.2.
80 Developing, Ch.6; Final Report I, para.2.7.
81 See above, para.1–4.
83
See above, para.1–12.
84Profitable trading will be a condition for the company’s survival but that profit will be
devoted mainly to the promotion of the community objectives.
85
For the categorisation of not-for-profit companies see above, para.1–7.
86
Charities Act 2011 in England and Wales; Charities and Trustee Investment
(Scotland) Act 2005. The regulation of charities is a devolved matter.
87
Developing, paras 9.7–9.40; Completing, paras 9.2–9.7; Final Report I, paras 4.63–
4.67.
88
Charities Act 2011 Pt 11.
89Under many ad hoc statutes the Crown has been given power to grant charters in
cases falling outside its prerogative powers. Moreover, by the Chartered Companies
Acts 1837 and 1884, the prerogative was extended by empowering the Crown to grant
charters for a limited period and to extend them. Thus the BBC Charter was for 10 years
and has been prolonged from time to time.
90BIS/Companies House, Statistical Tables on Companies Registration Activities
2014/15, p.8.
91
The Companies Clauses Acts 1845–1889. These Acts, containing the general
corporate powers and duties, were supplemented in the case of particular utilities by
various other “Clauses Acts”, e.g. the Lands Clauses Consolidation and Railways
Clauses Consolidation Acts 1845, the Electric Lighting (Clauses) Act 1899, and
numerous Waterworks Clauses Acts, and Gasworks Clauses Acts.
92 This is an interesting nod on the part of British law towards the “real seat” theory of
incorporation (see below, paras 6–2 et seq.), for this section does not apply to a British
unregistered company which does not have a place of business in the UK. By contrast, a
company registered under the Companies Act will be governed by that Act even if it
conducts the whole of its business outside the UK.
93
2006 Act s.1043(1)(a). This would include the Companies Act itself but also, for
example, the Co-operative and Community Benefit Societies Act 2014. See below, paras
1–35 and 1–36.
94
2006 Act s.1043(1)(b). Open-ended investment companies are also excluded
(s.1043(1)(d)) as are other unregistered companies specifically excluded by direction of
the Secretary of State (s.1043(1)(c)).
952006 Act s.1043(2), (3). These are the Unregistered Companies Regulations 2009 (SI
2009/2436).
96
2006 Act s.1043(4).
97 See 2006 Act s.1041.
98 See 2006 Act s.1040(4), qualifying the broader provisions of s.1040(3).
99 2006 Act s.1042. See the Companies (Companies Authorised to Register) Regulations
2009 (SI 2009/2437), which not only applies the relevant parts of the Companies Act
2006, but also the Companies (Cross-Border Mergers) Regulations 2007 (SI 2007/2974).
This Part of the Act also allows for the registration of the few remaining “deed of
settlement” companies, a private law form of quasi-incorporation which was invented to
avoid the costs of statutory or royal incorporation and which was overtaken by the
introduction of formation by registration under a general Act in the middle of the
nineteenth century. For details, see the sixth edition of this book at pp.29–31.
100 The current legislation is the Building Societies Acts 1986–1997, but it can trace its
origins to an Act of 1874.
101
Currently, the Friendly Societies Act 1992, but that legislation can be traced as far
back as the Friendly Societies Act 1793.
102
The legislation is traceable back to the middle of the nineteenth century.
103
2014/15, p.8. The registration function had been delegated, somewhat bizarrely, to the
Financial Services Authority. Since the Co-operative and Community Benefit Societies
Act 2014 came into force, the registration function has now been transferred to the
Financial Conduct Authority.
104
For a fascinating comparative attempt to explain the successes and failures of the co-
operatives, see H. Hansmann, The Ownership of Enterprise (USA: Harvard University
Press, 1996).
105
As is the trade union, that other expression of the Victorian genius for collective self-
help, but with whose legal status the legislature encountered much more difficulty.
106 The legal definition of a “collective investment scheme” is to be found in s.235 of
the FSMA 2000.
108
FSMA 2000 s.236(3).
109
Open-Ended Investment Company Regulations (SI 2001/1228), as amended by SI
2005/923, SI 2009/553 and SI 2011/3049.
110
SI 2001/1228 reg.15(11).
111
Pt III of the Regulations.
112 See para.13–2.
113 Pt II of the Regulations.
114
Council Regulation 2137/85 [1985] O.J. L199/1 art.16.
115
Council Regulation 2137/85 [1985] O.J. L199/1 art.4.
116
Council Regulation 2137/85 [1985] O.J. L199/1.
117 In the case of EEIGs with their principal establishment in Great Britain corporate
personality is conferred by the European Economic Interest Grouping Regulations 1989
(SI 1989/638) reg.3, as amended by SI 2009/2399 which updates the regulations to
accommodate the Companies Act 2006.
118 See previous note.
119 SI 1989/638 reg.18 and Sch.4.
120 SI 1989/638 reg.19.
121 In which case the provisions of the Company Directors Disqualification Act 1986
(see below, Ch.10) apply: reg.20.
122 This restriction seems to have been motivated in part to avoid the EEIG being used
by German companies to avoid domestic worker participation legislation, which bites at
the 500 employee level.
123
2014/15, p.8.
124
There is also a statute for a European Co-operative Society (SCE) (Council
Regulation 1435/2003 [2003] O.J. L207/1) and an accompanying directive on the
involvement of employees (Directive 2003/72/EC [2003] O.J. L207/25). They have been
transposed domestically by the European Cooperative Society Regulations 2006/2078.
These are not discussed further in this book.
125
Directive 2005/56/EC. See Ch.29, below.
126
See below, Ch.28.
127
It is easy to overstate the force of this psychological argument: there is no guarantee
that the shareholdings or management of a SE will be spread equally across the Member
States in which it operates.
128 By Professor P. Sanders of the University of Rotterdam, though the French claim co-
paternity.
129
Council Regulation 2157/2001/EC [2001] O.J. L294/1, and the accompanying
Directive on worker involvement (Council Directive 2001/86/EC [2001] O.J. L294/22).
The European Company must use the abbreviation SE as either a prefix or suffix to its
name and in the future other types of entity will not be able to avail themselves of this
acronym: Regulation art.11.
130 Reg.2157/2001 art.63 and Preamble 20.
131
See SI 2009/2400 making the necessary changes to apply Companies Act 2006, and
SIs 2009/2401 and 2009/2402 on employee involvement in Northern Ireland and Great
Britain.
132
See para.6–27.
133
This is the matter dealt with in the accompanying Directive. See below, Ch.14.
134 Articles 9(1)(c)(ii) and 10 of reg.2157/2001. It seems that this happens
automatically, by force of the Regulation, without the Member State having to provide
for it or to identify the applicable parts of the domestic law. For this reason the European
Company statute, as adopted, is relatively short (70 articles in the Regulation and 17 in
the Directive), whereas the 1975 proposal contained 284 articles.
135It has been unkindly remarked that the SE proposal started as a “sausage” and ended
up as a “sausage skin”.
136K.J. Hopt, “The European Company under the Nice Compromise: Major
Breakthrough or Small Coin for Europe?” [2000] Euredia 465.
137
See paras 6–17 et seq.
138 And sometimes analogous legal entities.
139 Reg.2157/2001 art.2 and ss.2–4. In addition, an established SE can set up further SEs
as subsidiaries: art.3(2).
140 Including, of course, their equivalents in other Member States.
141 Merger by acquisition and merger by formation of a new company: see para.29–12.
142 Reg.2157/2001 art.66.
143
Please see http://www.seeurope-
network.org/homepages/seeurope/secompanies.html#established [Accessed 11 April
2016]. The legality of forming shelf SEs has been contested on the grounds that there
will have been no negotiations with the employee representatives over employee
involvement.
144
For further details, see http://www.europeanprivatecompany.eu/home/ [Accessed 31
January 2016]. Proposal for a Council Regulation on the Statute for a European private
company, COM(2008) 396/3 of 25 June 2008; European Parliament legislative
resolution of 10 March 2009 on the proposal for a Council Regulation on the Statute for
a European private company (COM(2008)0396 – C6-0283/2008 – 2008/0130(CNS)).
145
Please see http://www.consilium.europa.eu/en/press/press-releases/2015/05/28-29-
compet-single-member-private-companies/ [Accessed 11 April 2016].
CHAPTER 2
ADVANTAGES AND DISADVANTAGES OF
INCORPORATION
Legal Entity Distinct from its Members 2–1

Limited Liability 2–9
Property 2–16
Suing and being Sued 2–18
Perpetual Succession 2–19
Transferable Shares 2–24
Management under a Board Structure 2–27
Borrowing 2–31
Taxation 2–34
Formalities and Expense 2–35
Publicity 2–39
The company’s affairs 2–39
The company’s members and directors 2–40
“People with significant control”—the PSC Register 2–42
Conclusion 2–48
LEGAL ENTITY DISTINCT FROM ITS MEMBERS

2–1
As already emphasised, the fundamental attribute of corporate
personality—from which indeed all the other consequences flow
—is that the corporation is a legal entity distinct from its
members. Hence it is capable of enjoying rights and of being
subject to duties which are not the same as those enjoyed or
borne by its members. In other words, it has “legal personality”
and is often described as an artificial person in contrast with a
human being, a natural person.1
As we have seen, corporate personality became an attribute of
the normal joint stock company only at a comparatively late
stage in its development, and it was not until Salomon v
Salomon2 at the end of the nineteenth century that its
implications were fully grasped even by the courts. The details
of this justly celebrated case merit attention.
2–2
Salomon had carried on a prosperous business as a leather
merchant for many years. In 1892, he decided to convert his
business into a limited company, and for this purpose Salomon
& Co Ltd was formed with Salomon, his wife and five of his
children as members, and Salomon as managing director. The
company purchased Salomon’s business as a going concern for
£39,000—“a sum which represented the sanguine expectations
of a fond owner rather than anything that can be called a
businesslike or reasonable estimate of value”.3 The price was
satisfied by £10,000 in debentures, conferring a charge over all
the company’s assets; £20,000 in fully paid £1 shares; and the
balance in cash. The result was that Salomon held 20,001 of the
20,007 shares issued, and each of the remaining six shares was
held by a member of his family, apparently as a nominee for
him. The company almost immediately ran into difficulties and
only a year later the then holder of the debentures appointed a
receiver and the company went into liquidation. Its assets were
sufficient to discharge the debentures but nothing was left for the
unsecured creditors.
2–3
In these circumstances Vaughan Williams J and a strong Court
of Appeal held that the whole incorporation transaction was
contrary to the true intent of the Companies Act and that the
company was a mere sham, and an alias, agent, trustee or
nominee for Salomon, who remained the real proprietor of the
business. As such he was liable to indemnify the company
against its trading debts. But the House of Lords unanimously
reversed this decision. They held that the company had been
validly formed, since the Act merely required seven members
holding at least one share each. It said nothing about their being
independent, or that they should take a substantial interest in the
undertaking, or that they should have a mind and will of their
own, or that there should be anything like a balance of power in
the constitution of the company. Hence the business belonged to
the company and not to Salomon, and Salomon was its agent. In
the blunt words of Lord Halsbury LC4:
“Either the limited company was a legal entity or it was not. If it was, the business
belonged to it and not to Mr Salomon. If it was not, there was no person and no
thing to be an agent at all; and it is impossible to say at the same time that there is a
company and there is not.”
Or, as Lord Macnaghten put it5:
“The company is at law a different person altogether from the subscribers…; and,
though it may be that after incorporation the business is precisely the same as it was
before, and the same persons are managers, and the same hands receive the profits,
the company is not in law the agent of the subscribers or trustee for them. Nor are
the subscribers, as members, liable in any shape or form, except to the extent and in
the manner provided by the Act.”6
2–4
The Salomon case established that (a) provided the formalities of
the Act are complied with, a company will be validly
incorporated, even if it is only a “one person” company; and (b)
the courts will be reluctant to treat a shareholder as personally
liable for the debts of the company by “piercing the corporate
veil”.7 Whereas acceptance of the former argument would have
involved denying the separate legal personality of the company,
the second could have been upheld without that consequence,
though it would have involved undermining the concomitant of
separate legal personality, i.e. limited liability (see below).
2–5
The objection of the unsecured creditors in this case was based
on the overvaluation of the business which was sold to the
company in exchange for shares and debentures in it. In the case
of a public company today, the business would be the subject of
an independent valuation so far as it was used to pay up shares,8
but in the case of a private company, or even of debentures
issued by a public company, the main protection of unsecured
creditors lies in disclosure of the company’s financial position.9
Unlike some countries, English law has developed no significant
doctrine whereby loans to a company by its major shareholders
are treated as equity. Even today, the best the unsecured
creditors could hope for is that a floating charge securing a
debenture might be at least partially invalidated if there was
either a successful petition for a winding-up or an administration
order within two years of the creation of the charge.10 In this
case, Salomon was able to give himself protection against the
downside risks of his business by taking a position as secured
creditor through the debentures, whilst taking the full benefit of
any upside gains through his (in effect) 100 per cent
shareholding.11
2–6
Of course, this decision does not mean that a promoter can with
impunity defraud the company which he forms, or swindle his
existing creditors. In the Salomon case it was argued that the
company was entitled to rescind the sale of the business in view
of its wilful overvaluation by Salomon. But the House held that
there was no basis for rescission on the facts, since all the
shareholders were fully conversant with what was being done
and had effectively affirmed the deal. Had Salomon concealed
the profit from his fellow shareholders, the position would have
been different.12 Nor was there any fraud on Salomon’s pre-
incorporation creditors, all of whom were paid off in full out of
the purchase price. Otherwise, they or Salomon’s trustee in
bankruptcy might have been entitled to upset the sale.13
2–7
In any event, since the Salomon case, the complete separation of
the company and its members has never been doubted. The
decision opened up new vistas to company lawyers and the
world of commerce. Not only did it finally establish the legality
of the “one-person” company (long before EC law required this)
and showed that incorporation was as readily available to the
small private partnership and sole trader as to the large public
company, but it also revealed that it was possible for a trader not
merely to limit his liability to the money which he put into the
enterprise but even to avoid any serious risk to the major part of
that by subscribing for secured debentures rather than shares.
This result at the time seemed shocking, and the decision was
much criticised.14 A partial justification for it is that the public
deal with a limited company at their peril and know, or should
know, what to expect.15 In particular a search of the company’s
file at Companies House should reveal its latest annual accounts
and whether there are any charges on the company’s assets.16
2–8
Nonetheless, the doctrine of separate corporate personality is
what underpins much of the success of companies as effective
business structures, and its inviolability was further reinforced in
Prest v Petrodel,17 where the Supreme Court affirmed the
importance of the doctrine and indicated that the courts may only
“pierce the corporate veil” in exceptionally limited
circumstances.18
LIMITED LIABILITY
2–9
It follows from the fact that a corporation is a separate person
that its members are not as such liable for its debts.19 Hence, in
the absence of express provision to the contrary, the members
will be completely free from any personal liability for the
company’s debts. The rule of non-liability also applies to
obligations other than debts: the company is liable and not the
member.
2–10
However, the principle applies only so long as we concentrate on
the position of members as such, and remains true, once the
company ceases to be a going concern, only subject to the
particular terms of the shareholding—then, members may be
required to make contributions to the company’s assets if their
shares were issued on that basis. Something more should be said
about each of these qualifications on limited liability.
2–11
First, members who become involved in the management of the
company’s business, for example as directors, will find that
separate legal personality does not necessarily protect them from
personal liability. Although acting on behalf of the company,
they may have done things which have made them personally
liable to the company or to outsiders. The most obvious example
is that of a tort committed in the course of directorial duties. The
extent to which those acting on behalf of companies are
personally liable for their acts to third parties depends on the
operation of the doctrines of agency and rules such as
assumption of responsibility in tort law and identification in
criminal law. These are matters discussed in Ch.7.
2–12
Secondly, although the doctrine of separate legal personality
normally shields members (as such) from personal liability so
long as the company is a going concern, it does not necessarily
extend further. If a company enters insolvent liquidation, the
question becomes whether the liquidator acting on behalf of the
company can seek contributions from its members so as to bring
the company’s assets up to the level needed to meet the claims of
the company’s creditors. In the case of an unlimited company,20
s.74 of the Insolvency Act does indeed impose on the members
such an obligation to contribute to the assets of the company. In
the case of companies limited by shares or by guarantee,21
however, that obligation is limited (hence, by transfer, the term
“limited company”) and is not, as it is with unlimited companies,
open-ended.
In the case of a company limited by shares, each member is
liable to contribute when called upon to do so the full nominal
value of the shares held insofar as this has not already been paid
by the shareholder or any prior holder of those shares (which it
normally will have been). In the case of a guarantee company,
each member is liable to contribute a specified amount (normally
small) to the assets of the company in the event of its being
wound up while a member, or within one year after ceasing to be
a member. In effect the member, without being directly liable to
the company’s creditors, is in both cases a limited guarantor of
the company. When, therefore, obligations are incurred on
behalf of a limited company, the company is liable and not the
members, though in the case of a guarantee company or of partly
paid shares the company may ultimately be able to recover a
contribution from the members towards the discharge of its
obligations. However, in the typical case of a company limited
by shares with fully paid shares in issue, no further liability will
arise for the member in the absence of specific statutory
provision to the contrary, which provisions are rare.22
2–13
By contrast, an unincorporated association, not being a legal
person, cannot itself be liable, and obligations entered into on its
behalf can bind only the actual officials who purport to act on its
behalf, or the individual members if the officials have actual or
apparent authority to bind them. In either event the persons
bound will be liable to the full extent of their property unless
they expressly or impliedly restrict their responsibility to the
extent of the funds of the association, as the officials may well
do. Hence the extent to which the member will be liable depends
on the terms of the contract of association. In the case of a club,
and presumably most learned and scientific societies, there will
generally be implied a term that the members are not personally
liable for obligations incurred on behalf of the club.
2–14
And the position is different again for members of a partnership,
being an association carrying on business for gain. Each partner
is an agent of all the others, and acts done by any one partner in
“carrying on in the normal way business of the kind carried on
by the firm” bind all the partners.23 Only if the creditor knows of
the limitation placed on the partner’s authority will the other
members escape liability.24 Moreover, an attempt to restrict the
partners’ liability to partnership funds by a provision to that
effect in the partnership agreement will be ineffective even if
known to the creditors25; the partners can restrict their financial
liability, in respect of acts otherwise authorised, only by an
express agreement to that effect with the creditor concerned.26
This explains the pressure, which bore fruit in 2000, for the
creation of an incorporated legal entity with the internal
flexibility of a partnership but the advantage of limited liability,
i.e. the limited liability partnership.27
2–15
The overall result of the broad recognition by the courts of the
separate legal entity of the company and of the limited liability
of its members is to produce at first sight a legal regime which is
very unfavourable to potential creditors of companies, a situation
which they have naturally sought to readjust by contract in their
favour, so far as is in their power. For large lenders, especially
banks, there are a number of possibilities, to be used separately
or cumulatively. Apart from the obvious commercial response of
charging higher interest rates on loans to bodies whose members
have limited liability, such lenders may seek to leap over the
barrier created by the law of limited liability by exacting as the
price of the loan to the company personal guarantees of its
repayment from the managers or shareholders of the company,
guarantees which may be secured on the personal assets of the
individuals concerned. Instead of or in addition to obtaining
personal security by contracting around limited liability, large
lenders may seek to improve the priority of their claims by
taking security against the company’s assets. As we shall see
later on in this chapter, chancery practitioners in the nineteenth
century were quick to respond to this need by creating the
flexible and all-embracing instrument of the floating charge to
supplement the traditional fixed charge mechanisms which were
already available.
However, these self-help remedies may not be practicable for
trade creditors or employees28 and, even in the case of large
lenders, there is a strong danger that, when things begin to go
wrong, the controllers of the company will take risks with the
company’s capital which were not within the contemplation of
the parties when the loan was arranged. For these reasons,
although the legislature has not overturned Salomon v Salomon
and, indeed, under the influence of EU law,29 the one-person
company is now expressly recognised by domestic law, the
Companies and Insolvency Acts are full of provisions whose
purpose cannot be completely understood except against the
background of limited liability. In particular, the extensive
publicity and disclosure obligations placed upon limited liability
companies,30 the provisions relating to wrongful trading,31 and
the expanded provisions on the disqualification of directors,
especially on grounds of unfitness,32 must all be seen in this
light.
PROPERTY
2–16
One obvious advantage of corporate personality is that it enables
the property of the association to be more clearly distinguished
from that of its members. In an unincorporated society, the
property of the association is the joint property of the members.
The rights of the members to that property differ from their
rights to their separate property, since the joint property must be
dealt with according to the rules of the society and no individual
member can claim any particular asset. By virtue of the trust the
obvious complications can be minimised but not completely
eradicated. And the complications cause particular difficulty in
the case of a trading partnership both as regards the true nature
of the interests of the partners33 and as regards claims of
creditors.34 By contrast, on incorporation, the corporate property
belongs to the company, and members have no direct proprietary
rights to it but merely to their “shares” in the undertaking.35 A
change in the membership, which causes inevitable dislocation
to a partnership firm, leaves the company unconcerned; the
shares may be transferred, but the company’s property will be
untouched and no realisation or splitting up of its property will
be necessary, as it will on a change in the constitution of a
partnership firm.
2–17
Identification of the company’s property is not the only
advantage; corporate personality also enables that property to be
segregated from the members’ personal assets. Thus, the claims
of the business creditors will be against the property of the
company and the claims of the members’ personal creditors
against the property of the member. Neither set of creditors is in
competition with the other; and each has to monitor the
disposition only of the assets against which its claims lie.36
SUING AND BEING SUED
2–18
Closely allied to questions of property are those relating to legal
actions. The difficulties in the way of suing, or being sued by, an
unincorporated association have long bedevilled English law.37
The problem is obviously of the greatest practical importance in
connection with trading bodies, and in fact has now been solved
in the case of partnerships by allowing a partnership to sue or be
sued in the firm’s name. Hence, there is now no difficulty so far
as the pure mechanics of suit are concerned—although there
may still be complications in enforcing the judgment.
In the case of other unincorporated bodies (such as clubs and
learned societies) not subject to special statutory provisions, the
problems of suit are still serious. Sometimes its committee or
other agents may be personally liable or authorised to sue.
Otherwise, the only course is a “representative action” whereby,
under certain conditions, one or more persons may sue or be
sued on behalf of all the interested parties.38 But resort to this
procedure is available only subject to compliance with a number
of somewhat ill-defined conditions, and the law, which has been
inadequately explored, is obscure and difficult. The result is apt
to be embarrassing to the society when it wishes to enforce its
rights (or, more properly, those of its members) though it has
compensating advantages when it wishes to evade its duties.39
Needless to say, none of these difficulties arises when an
incorporated company is suing or being sued: the company as a
legal person can take action to enforce its legal rights and can be
sued for breach of its legal duties.
PERPETUAL SUCCESSION
2–19
One of the obvious advantages of an artificial person is that it is
not susceptible to “the thousand natural shocks that flesh is heir
to”. It cannot become incapacitated by illness, mental or
physical, and it has not (or need not have) an allotted span of
life.40 This is not to say that the death or incapacity of its human
members may not cause the company considerable
embarrassment; obviously it will if all the directors die or are
imprisoned, or if there are too few surviving members to hold a
valid meeting, or if the bulk of the members or directors become
enemy aliens.41 But these vicissitudes of the flesh have no direct
effect on the disembodied company.42 The death of a member
leaves the company unmoved; members may come and go but
the company can go on forever.43 The insanity of the managing
director will not be calamitous to the company provided that he
is removed promptly; he may be the company’s brains, but
lobectomy is a simpler operation than on a natural person.
2–20
Once again, the disadvantages in the case of an unincorporated
society can be minimised by the use of a trust. If the property of
the association is vested in a small body of trustees, the death,
disability or retirement of an individual member, other than one
of the trustees, need not cause much trouble. But, of course, the
trustees, if natural persons, will themselves need replacing at
fairly frequent intervals and the need for constant appointment of
new trustees is a nuisance if nothing worse. Indeed, it may be
said that the trust never functioned at its simplest until it was
able to enlist the aid of its own child, the incorporated company,
to act as a trust corporation with perpetual succession.
Moreover, the trust can obviate difficulties easily only when a
member, or his estate, has, under the constitution of the
association, no right to be paid a share of the assets on death or
retirement, which, of course, is the position with the normal club
or learned society. But on the retirement or death of a partner,
the default rule is that the partnership is automatically dissolved,
so far at any rate as the departing partner is concerned,44 and he
or his estate will be entitled to be paid his share. The resulting
dislocation of the firm’s business can be reduced by special
clauses in the articles of partnership, providing for a formula for
valuation of his share and for deferred payment, but cannot be
eradicated altogether.45
2–21
With an incorporated company these problems do not arise.
Although the member or his estate is not generally entitled to be
paid out by the company, if the member (or a personal
representative, trustee in bankruptcy, or receiver) wishes to
realise the value of the shares, these can be sold, whereupon the
purchaser will, on entry in the share register, become a member
in place of the former holder. This is not always as easy as it
sounds, however. The seller might not be able to find a
purchaser at all, especially one who meets any restrictions which
might be imposed on transfer,46 and the other members might not
have sufficient free capital to purchase the shares. Now,
therefore, but subject to stringent conditions, purchase by the
company is allowed,47 as it has long been under the laws of
many other countries.
2–22
The continuing existence of a company, irrespective of changes
in its membership or its management, is helpful in other
directions also. When an individual sells a business to another,
difficult questions may arise regarding the performance of
existing contracts by the new proprietor,48 the assignment of
rights of a personal nature,49 and the validity of agreements made
with customers ignorant of the change of proprietorship.50
Similar problems may arise on a change in the constitution of a
partnership.51 Where the business is incorporated and the sale is
merely of the shares, none of these difficulties arises. The
company remains the proprietor of the business, performs the
existing contracts and retains the benefits of them, and enters
into future agreements. The difficulties attending vicarious
performance, assignments and mistaken identity do not arise.
2–23
Although a company may shift control of its business by means
of a transfer of its shares to new investors, it does not follow that
it will always choose this method of effecting the change of
control. The directors or shareholders of the company could
decide instead to sell the underlying business of the company to
the new investors, who, perhaps, may form their own company
in order to take the new business. In this case, the transferring
company (rather than its shareholders) will be left holding the
consideration received on the sale of its business. This method is
particularly likely to be attractive to the transferring company if
it is divesting itself of control of only part of its business (though
even then a transfer of control by sale of shares may be possible
if the relevant part of the business is held in a separate group
subsidiary company). When a company disposes of the whole or
part of its business (as opposed to the shareholders deciding to
transfer their shares), the difficulties mentioned in the previous
paragraph in relation to the sale of a business by an
unincorporated entity arise in relation to companies as well. To
sum up, a company,52 unlike an unincorporated body, has the
option to shift control by means of a transfer of shares, but it
may choose instead to dispose of the underlying business (or
even just of the assets used in the business).
TRANSFERABLE SHARES
2–24
Incorporation, with the resulting separation of the business
(owned by the company) from the shares (owned by its
members), greatly facilitates the transfer of the members’
interests. Without this formal incorporation of the business
enterprise, approximately the same ends can be achieved through
the device of the trust coupled with an agreement for
transferability in the deed of settlement. But in this case, even
after transfer, the member will remain liable for the firm’s debts
incurred during the time when he or she was a member.53 This
ongoing liability (i.e. the absence of limited liability associated
with companies) means that opportunities to transfer are, in
practice, much restricted.
A partner has a proprietary interest which can be assigned
(subject to the terms of the partnership deed), but the assignment
does not operate to divest the partner of status or liability as a
partner; it merely affords the assignee the right to receive
whatever the firm distributes in respect of the assigning partner’s
share.54 The assignee can be admitted into partnership in the
place of the assignor only if the other partners agree55 and the
assignor will not be relieved of any existing liabilities as a
partner unless the creditors agree, expressly or impliedly, to the
release.56
2–25
With an incorporated company, freedom to transfer members’
interests, both legally and practically, can be readily attained.
The company can be incorporated with its liability limited by
shares, and these shares constitute items of property which are
freely transferable in the absence of express provision to the
contrary, and in such a way that the transferor drops out57 and
the transferee steps into his shoes.
2–26
Even in an incorporated company, the power to transfer may, of
course, be subject to restrictions. In a private company some
form of restriction was formerly essential in order to comply
with the then current statutory definition; although this is no
longer a statutory requirement, it is still a desirable provision if
such a company is to retain its character as an incorporated
private partnership. In practice, these restrictions are usually so
stringent as to make transferability largely illusory. Nor is there
any legal objection arising out of the Companies Act to
restrictions in the case of a public company, although such
restrictions, except as regards partly paid shares, are unusual,
and are prohibited by the Listing Rules if the shares are to be
marketed on the Stock Exchange.58 But there is this fundamental
difference: in a partnership, transferability depends on express
agreement and is subject to legal and practical limitations,
whereas in a company it exists to the fullest extent in the absence
of express restriction. The partnership relationship is essentially
personal, and where a private company is, functionally, an
incorporated partnership, the same approach is maintained.59 On
the other hand, the relationship between members of a public
company is essentially impersonal and financial and hence there
is usually no reason to restrict changes in membership.
MANAGEMENT UNDER A BOARD STRUCTURE
2–27
A further important feature of company law is that it provides a
structure for the pursuit of larger and riskier endeavours by
allowing many people to participate, via the purchase of shares,
and separating that participation from the management of the
company, which is delegated to a smaller and expert group of
people who partly constitute and who are partly supervised by a
board of directors. This separation of what is conventionally, but
controversially, termed “ownership” of the company (i.e.
shareholding) from its “control” (i.e. management) is a feature of
large companies and it is therefore important that the
organisational law governing companies should deal with its
consequences. By contrast, as with transferable shares, this is not
a feature of small companies, where “owners” and “managers”
are often identical people, or substantially so. Then, as noted in
Ch.1,60 the corporate machinery for separating these roles may
be more of a hindrance than a help, but it is crucial in the
efficient functioning of large companies.
2–28
The legal implications of this development were first explored in
the US by A.A. Berle and G.C. Means in The Modern
Corporation and Private Property,61 which drew attention to the
revolutionary change thus brought about in our traditional
conceptions of the nature of property. Today, the great bulk of
large enterprise, at least in the US and the UK, is in the hands
not of individual entrepreneurs but of large public companies in
which many individuals have property rights as shareholders in
the enterprise to which they have directly or indirectly
contributed capital. After home ownership, direct or indirect62
investment in companies probably constitutes the most important
single item of property for most people, and yet whether this
property brings profit to its “owners” no longer depends on their
energy and initiative but on that of the management from which
they are divorced. The modern shareholder in a public company
has ceased to be a quasi-partner and has become instead simply a
supplier of capital. If a person invests in the older forms of
private property, such as a farm or a shop, he or she becomes
tied to that property and the business endeavour. The modern
public company provides a new type of property in which the
relationship between the “owner” and the business plays little
part; and indeed the owner can realise the wealth represented by
the property whenever needed, by selling shares, and therefore
without removing the business property from the enterprise
which requires it indefinitely. “The separation of ownership
from management and control in the corporate system has
performed this essential step in securing liquidity.”63
Even when, as is increasingly the case, shareholding in large
companies is concentrated in the hands of institutional
shareholders, such as pension funds and insurance companies,
which do have a more significant potential for intervention in
management than individual shareholders, such participation is
discontinuous or episodic and usually precipitated by some crisis
in the company’s affairs rather than a day-to-day way of
managing the company.64
2–29
Despite the fact that the board, and especially the “managing
director” or the “chief executive officer”, is the driving force
behind the operation of the large company, the British
Companies Act, unlike its continental counterparts, says very
little about the board of directors. The Act insists there be
directors, but only two are required in the case of a public
company and, in the case of a private company, one will do.65
Many sections of the Act impose administrative burdens on the
directors or assume in some other way the existence of a board
of directors, but the composition, structure and functions of the
board are left to a very high degree to companies to decide
themselves, through their articles of association66 or through
mere corporate practice. In the case of listed companies,
however, this private ordering by companies themselves has
become significantly qualified by the development in the last 18
years of the UK Corporate Governance Code and its
predecessors.67
2–30
In the face of this “hands off” approach on the part of the Act,
can the claim be made good that British company law provides
machinery, except in the most rudimentary way, whereby the
separation of ownership and control can flourish? The most
obvious answer to this question consists in pointing to the duties
created originally by the common law, but now restated in the
Act, which aim to require the directors to exercise the powers
conferred upon them competently and loyally in the interests of
the company, which is normally to be seen as the interests of the
shareholders.68 Thus, one may say that the approach of company
law to the regulation of the separation of ownership from control
is to allow companies maximum freedom to decide on the
division of powers between shareholders and board and on the
functions of the board, but then to concentrate on the regulation
of the way the board discharges the powers conferred upon it,
whatever they may be. How successfully this is done is the topic
of later chapters. All we need note here is the importance of the
fact that in large companies there are two decision-making
bodies, shareholders in general meeting and the board of
directors, and that in terms of management functions the board is
invariably the more important organ.
BORROWING
2–31
So far we have considered only the advantages or disadvantages
which flow inevitably or naturally from the fact of incorporation.
But incorporation also has important consequences in respect of
borrowing and taxation.
2–32
At first sight one might suppose that a sole trader, or partners,
being personally liable, would find it easier than a company to
raise money by borrowing. In practice, however, this is not so,
since a company is often able to grant a more effective charge to
secure the proposed indebtedness. The ingenuity of equity
practitioners led to the evolution of an unusual but highly
beneficial type of security known as the floating charge; i.e. a
charge which “floats” over all the assets of the company falling
within a generic description, but without preventing the chargor
from disposing of those assets in the usual course of business, at
least until something occurs to cause the charge to become
crystallised or fixed. This type of charge is particularly suitable
when a business has no fixed assets, such as land, which can be
included in a normal security, but carries a large and valuable
stock-in-trade. Since this stock needs to be turned over in the
course of business, a fixed charge is impracticable because the
consent of the chargee would be needed every time anything was
sold, and a new charge would have to be entered into whenever
anything was bought. A floating charge obviates these
difficulties; it enables the stock to be turned over, but (if defined
widely enough) attaches to whatever it is converted into and to
whatever new stock is acquired.
In theory, there is no reason why such charges should not be
granted by sole traders and ordinary partnerships as well as by
incorporated companies (and now, LLPs). But two pieces of
legislation have effectively precluded that. The first was the
“reputed ownership” provision in the bankruptcy legislation
relating to individuals.69 This provision never applied to the
winding-up of companies, and has now been repealed for
individuals by the Insolvency Act 1986.70 The second, which
still remains, is that the charge, insofar as it relates to chattels,
would be a bill of sale within the meaning of the Bills of Sale
Acts 1878 and 1882, which apply only to individuals and not to
companies.71 Hence it would need to be registered in the Bills of
Sale Registry,72 and, what is more important, as a mortgage bill
it would need to be in the statutory form,73 which involves
specifying the chattels in detail in a schedule. Compliance with
the latter requirement is obviously impossible, since in a floating
charge the chattels are, by definition, indeterminate and
fluctuating.
2–33
When, belatedly, we eventually get round to reforming, as many
common law countries have done, our antiquated law relating to
security interests in movables, we shall be able to repeal the Bills
of Sale Acts and thus make it practicable for unincorporated
firms to borrow on the security of floating charges,74 or some
comparable form of security on the lines of that provided by
art.9 of the American Uniform Commercial code. In the
meantime, use of this advantageous form of security is in
practice restricted to bodies corporate. By virtue of it the lender
can obtain an effective security on “all the undertaking and
assets of the company both present and future” either alone or in
conjunction with a fixed charge on its land.75 By so doing the
lender can place himself in a far stronger position than if merely
the personal security of the individual trader supported the loan.
It therefore happens not infrequently that a business is converted
into a company solely in order to enable further capital to be
raised by borrowing. And sometimes, as the Salomon case76
shows, a trader by “selling” his business to a company which he
has formed can give himself priority over his future creditors by
taking a debenture, secured by a floating charge, for the purchase
price.77
TAXATION
2–34
Once a company reaches a certain size, the attraction of limited
liability is likely to outweigh all other considerations when
business people are considering in what form to carry on their
activities. Investors are unlikely to be willing to put money into a
company where their liability is not limited, especially if they
are to have no or little control over the running of the company.
However, with small businesses, where it is feasible to give all
the investors a say in management, it is likely that tax
considerations will play a major part in determining whether the
business will be set up in corporate form or as a partnership,
especially as in such cases where, as we have seen, limited
liability may not be available in practice vis-à-vis large lenders.78
This is not the place to examine the tax considerations which
may cut one way or another at different times on this issue. What
should be noted, however, is that in the case of small companies,
the investors’ return on their capital may take the form of the
payment of directors’ fees rather than dividends, so that
participation in the management of the company may be the
means for the investor both to safeguard the investment and to
earn a return on it.79
FORMALITIES AND EXPENSE
2–35
Turning from advantages to costs, incorporation is necessarily
attended with formalities, loss of privacy (see below) and
expense greater than that which would normally apply to a sole
trader or partnership. A sole trader already exists. A partnership
arises out of the facts of a relationship, and does not need a
formal agreement provided the parties are carrying on a business
in common with a view of profit.80 An unincorporated firm can
conduct its affairs without any formality and publicity beyond
that which may be prescribed by the regulations (if any)
applying to the particular type of business. If the business is
carried on under a name different from the true name of the sole
trader or those of all the partners, it will have to comply with the
provisions on business names (as would a company trading
under a pseudonym)81 but these are not onerous. The business,
unless it is insolvent, can eventually be wound up equally
cheaply, privately and informally. An incorporated company, on
the other hand, necessarily involves formalities, publicity and
expenses at its birth, throughout its active life, and on its final
dissolution.
2–36
The costs of formation, at least of a private company (and most
companies are formed as private even if they become public later
in life), are very low, however. A competent incorporation agent
should be able to set up a basic company for less than £200.
British law does not require a private company, unlike a public
one, to have a minimum share capital.82 Consequently, the
incorporators can borrow what money they need to set the
company up and do not need to sink their own money into it,
which, indeed, they may not have. However, the combination of
no minimum capital and limited liability could be an invitation
to trading at the expense of the creditors, and so British law,
even if it has no ex ante minimum capital requirement, has
developed significant ex post controls on those who behave in
this way after the company has been formed.83
2–37
Once the company is set up, there are also ongoing formalities
and reporting requirements to meet. These ensure a degree of
transparency that is not demanded of sole traders or partnerships.
At the least, the documents on the public record remain accurate
(so, for example, changes to the company’s directors, and to its
constitution must be filed84), and the state of the company
business must be made visible, at least to some extent, to those
who might deal with the company in the future—so security
granted over the company’s assets should be registered,85 and
annual accounts may need to be filed.86
2–38
Finally, we have noted at a number of points in this chapter that
the requirement of two separate decision-making organs,
shareholders’ meeting and board of directors, may seem over-
elaborate for small companies, though something has now been
done to alleviate this problem without, however, going to the
extent of permitting small companies to adopt a single decision-
making body.87
PUBLICITY
The company’s affairs
2–39
As already noted, the costs of incorporation also come with the
much greater publicity required of a company as against a
partnership, since the former is required, but the latter is not, to
make their annual accounts available publicly through filing at
Companies House.88 Until recently, small companies were
required, in addition, to produce accounts in what was an over-
elaborate format and to have those accounts audited, but these
requirements have now been relaxed.89
The company’s members and directors
2–40
Further, since a company can only act through the individuals
behind the company—principally its board of directors, but also
its members in general meeting—it is probably not surprising
that there should be public registers of both the directors and the
members, with more details required of the former (although
now increasingly limited by concerns of privacy and personal
safety).90
2–41
Disclosure of a company’s members was never especially
reliable, however, for the simple reason that s.126 prohibits
trusts of any sort from being entered on the register of members.
This means that the “real” owners of shares are not necessarily
discoverable, even when the (disclosed) legal owner must
comply absolutely with their directions on voting and
distribution of the economic benefits of the shareholding. This is
now the subject of significant change, as outlined below.
“People with significant control”—the PSC Register
2–42
From 2016, almost all companies will be required to keep, open
to the public, a register of “people with significant control”,
called the company’s PSC Register (ss.790C(10), 790M).91 This
does not require the company to disclose every beneficial
interest in its shareholdings, but it does require disclosure of
every person (human or corporate) who is able to exert
“significant influence or control” over the company’s business,
with that phrase defined in the Act, amplified by Regulations,92
and then supplemented by formal statutory Guidance93—all seen
as necessary, given the potential breadth of the definition.
2–43
The government’s objectives in implementing these reforms on
transparency in corporate control is to ensure that the “UK is,
and is seen to be, an open and trusted place to invest and do
business. Knowing who ultimately owns and controls our
companies will contribute to that objective”; and, in addition, to
“deter and disrupt the misuse of companies,94 and identify and
sanction those responsible when illegal activity does take
place”.95
2–44
To these ends, the company must keep a register of people “with
significant control over the company” (s.790M(1)). Interestingly,
the information is not to be removed from the Register until 10
years after the person ceases to have such control (s.790U(1)). A
person is deemed to have such control (i.e. to be a PSC) if they
meet at least one of the following five conditions:
(i) directly or indirectly hold more than 25 per cent of the
nominal share capital; or
(ii) directly or indirectly control more than 25 per cent of the
votes at general meetings; or
(iii) directly or indirectly are able to control the appointment or
removal of a majority of the board; or
(iv) actually exercise, or have the right to exercise, significant
influence or control over the company; or
(v) actually exercise or have the right to exercise significant
influence or control over any trust or firm (which is not a
legal entity) which has significant control (under one of the
four conditions above) over the company.
Both the Act, the Regulations and the formal statutory Guidance
contain detailed provisions relating to the interpretation of these
five conditions.96
The real breadth in the disclosure rules is embraced by the
expression “significant influence or control”. The statutory
Guidance indicates that influence and control are alternatives,
and that neither needs to be in fact exercised by the PSC, nor
exercised by the PSC with a view to its own economic benefit.
“Control” indicates that the PSC is able to direct the company’s
activities, while “influence” indicates that the PSC can ensure (in
fact, rather than as a matter of legal right) that the company
generally adopts the activities which the PSC desires.97 As
illustrations of the latter, the Guidance suggests that such
influence could arise because the PSC owns intellectual
property, or was the company’s founder, or is indeed a shadow
director.98 If interests are held jointly, then the above tests are to
be applied to each person as if each joint holder held the entire
interest (Sch.1A regs 11, 12). The intended breadth is clear—the
goal is to identify exactly who is pulling the strings behind the
corporate veil.99
Of course, this definition is so wide that it embraces those
whose control or influence is far from sinister, and whose
identity ought not to be necessarily revealed as a PSC. Thus the
Guidance excludes parties who merely have the ability to
exercise the usual veto rights given to all members to protect
their personal interests (e.g. in amending the constitution,
preventing share dilution, limiting corporate borrowing, or
winding up the company). Similarly exempted are parties such
as the company’s professional advisers, third party suppliers etc.,
liquidators, the company’s own managing director, and any non-
executive directors with a casting vote.100
These inclusions and exclusions amply demonstrate the
tightrope being walked in articulating a satisfactory and
workable definition of PSCs.
2–45
Even with a watertight definition of a PSC, the next difficulty is
how the company is to collect the information it is required to
register. The company has a duty to gather the necessary
information and keep it up to date (ss.790D, 790E), and the
requested parties a corresponding duty to supply the information
and keep it up to date (ss.790G, 790H), with the company and
every officer or other party in default otherwise held to have
committed an offence (s.790F, 790I and Sch.1B). The
company’s arm is strengthened, in that failure by an individual
or legal entity to respond to the company’s enquiries will give
the company the ability (without a court order) to disenfranchise,
and impose other restrictions on, any shares held by the
individual.101 The risk of misinformation is not insignificant, and
the company is required to confirm all the details before they are
registered (s.790M), although quite how this is to be done is not
clear. In addition, given the possible risks associated with
disclosing these details of significant corporate “control or
influence”, there are extensive provisions on protecting both
information and individuals from relevant disclosures (s.790ZF,
Sch.1A Ch.5).
2–46
Once the details have been gathered, the company must make its
own PSC Register open to inspection by the public without
charge (ss.790N, 790O),102 or alternatively it may elect to have
the register kept by Companies House for this purpose (s.790W).
Access to the Register is not unrestricted, however. Those
seeking inspection must provide their name, address and the
purpose for which they seek access (ss.790O(4), with it being an
offence to knowingly or recklessly mislead in this regard, or to
pass on the information so gleaned to other parties—s.790R). It
is easy to see that without this restriction, access might be
abused, but at this distance it is difficult to predict quite which
purposes the courts might regard as proper, other than searches
by government agencies seeking evidence of identity when
pursuing suspected illicit activities. We will see these “proper
purpose” restrictions in operation in other contexts where access
to registers is sought,103 however, and here too the company is
given a time-limited right to apply to court to seek an order that
it need not make the requested disclosure (s.790P).
2–47
These provisions may seem unremarkable to those who are
unfamiliar with the history of companies in the UK, but they
represent one of the more radical departures from the status quo
seen for some time.104 No doubt they reflect the reality that
companies can be used for evil as well as good, and the
corporate form has to date provided an effective shield of
anonymity behind which those in real control can hide. Perhaps
these days there is in any event greater recognition that, even
when the corporate activities are all for the good, companies
wield such power and influence (over 95 per cent of businesses
are run through companies) that it is perhaps as well to have
some means of knowing who really lies behind the corporate
structure.
CONCLUSION
2–48
The balance of advantage and disadvantage in relation to
incorporation no doubt varies from one business context to
another, at least as far as small firms are concerned; for large
trading organisations, the arguments in favour of incorporation
are normally conclusive. This may reflect the firms’ respective
needs for expert centralised management and capital to finance
their operations. For large firms the division between board and
shareholders, transferable shares and the conferment of limited
liability on the shareholders are helpful for the raising of capital.
As for the large firm which does not have a large capital
requirement, such as large professional firms, these have happily
traded as partnerships in the past and were, indeed, often
required to do so by the rules of the relevant profession, most of
which have now been relaxed. Unlimited liability was seen as a
badge of professional respectability. However, the threat of
crippling damages awards for professional negligence led the
accountancy profession in particular to press for an appropriate
form of limited liability vehicle for the conduct of their
businesses. As we saw in Ch.1,105 this led to the creation of the
limited liability partnership, which combines the limited liability
of the company with the flat internal hierarchy of the
partnership. However, where the large firm means also a need
for a large amount of risk capital, the corporate form
predominates.
The main policy issue, therefore, has been how far small firms
should have easy access to the corporate form. Ever since the
decision in Salomon v Salomon,106 English law has leant in
favour of not restricting access, and the Company Law Review
endorsed that approach.107 As we shall see in Pt 2, the issue is
essentially about the access of small business to limited liability,
since that feature of incorporation has a major potential impact
on third parties who deal with the company, whilst separate legal
personality, management under a board structure and
transferable shares seem either benign, as far as third parties are
concerned, or of concern only to those within the company.
1 A company, even if it has only one member, is a “corporation aggregate” as opposed to
the somewhat anomalous “corporation sole” in which an office, e.g. that of a bishop, is
personified.
2 Salomon v Salomon [1897] A.C. 22 HL.
3
Salomon v Salomon [1897] A.C. 22 HL at 49, per Lord Macnaghten.
4 Salomon v Salomon [1897] A.C. 22 HL at 31.
5 Salomon v Salomon [1897] A.C. 22 HL at 51.
6
For an early statutory recognition of the same principle, see the House of Commons
(Disqualification) Act 1782, which disqualified those holding Government contracts
from election to Parliament but expressly provided (s.3) that the prohibition did not
extend to members of incorporated companies holding such contracts.
7
See further Ch.8.
8
See para.11–13. However, since Salomon was the only beneficial shareholder, it really
mattered little to him whether he was issued with 20,000 or 10 shares in exchange for
the business, for the value of the shares in aggregate (no matter how many or how few),
would be the same, i.e. they represent the economic value (if any) of the business.
However, independent valuation might protect creditors from being misled about the
value of the assets contributed to the company, and also enable any new shareholders to
ensure their relative financial inputs were reflected in the relative size of their
shareholding.
9 See below, Ch.21.
10 Insolvency Act 1986 s.245. See para.32–14.
11
But, in this particular case, Salomon seems to have been one of the victims rather than
the villain of the piece for he had mortgaged his debentures and used the money to try to
support the tottering company. However, the result would have been the same if he had
not, and even if he had been the only creditor to receive anything from the business,
which was “his” in fact though not in law.
12 See para.5–2 and paras 5–23 et seq.
13 Under what are now ss.423–425 of the Insolvency Act 1986.
14 See, e.g. O. Kahn-Freund, “Some Reflections on Company Law Reform” in (1944) 7
M.L.R. 54 (a thought-provoking article still well worth study) in which it is described as
a “calamitous decision”. For a more positive assessment see D. Goddard, “Corporate
Personality—Limited Recourse and its Limits” in R. Grantham and C. Rickett (eds)
Corporate Personality in the Twentieth Century (Oxford: Hart Publishing, 1998). On the
rationales for limited liability, see para.8–1.
15 Although there are undoubtedly many who think that “Ltd” is an indication of size
and stability (which “Plc” may be but “Ltd” certainly is not) rather than a warning of
limited access to assets (i.e. access confined to the company’s assets, however few, with
no access to the shareholders’).
16 And in the House of Lords no sympathy was wasted on those who do not search the
registers: “A creditor who will not take the trouble to use the means which the statute
provides for enabling him to protect himself must bear the consequences of his own
negligence”: [1897] A.C. 22 at 40, per Lord Watson.
17 Prest v Petrodel [2013] UKSC 34.
18
See Ch.8; and note also Antonio Gramsci Shipping Corp v Aivars Lembergs [2013]
EWCA Civ 730.
19 This sentence was quoted and relied on by Kerr LJ in Rayner (Mincing Lane) Ltd v
Department of Trade [1989] Ch.72 at 176 as an accurate statement of English law
although, as he pointed out, it is not accurate in relation to most Civil Law countries—
including Scotland so far as partnerships are concerned—or to international law: ibid. at
176–183.
21
See above, paras 1–8 and 1–11.
22
See Ch.9.
23
Partnership Act 1890 s.5. This applies equally to Scotland thus largely negativing the
consequence of recognising the Scottish firm as a separate person.
24
Partnership Act 1890 ss.5 and 8.
25
Re Sea, Fire and Life Insurance Co (1854) 3 De G.M. & G. 459.
26
Hallett v Dowdall (1852) 21 L.J.Q.B. 98.
27
Limited Liability Partnerships Act 2000. See para.1–4.
28
Unless and to the extent that they have a statutory preference, unsecured creditors are
in the worst possible world. Limited liability normally stops them suing the shareholders
or directors, whilst the fixed and floating charges of the big lenders often soak up all the
available assets of the company.
29See Council Directive 89/667 on single-member private limited liability companies
[1989] O.J. L395, 12 December 1989.
30See below, Ch.21, but note s.448 whereby the directors of unlimited liability
companies are not normally required to deliver accounts and reports to the registrar for
general publication.
31
See para.9–6.
32 See Ch.10.
33 See Partnership Act 1890 ss.20–22; Re Fuller’s Contract [1933] Ch. 652.
34
Partnership Act 1890 s.23, and the Insolvent Partnerships Order 1994 (SI 1994/2421),
as amended.
35“Shareholders are not, in the eye of the law, part owners of the undertaking. The
undertaking is something different from the totality of the shareholdings”: per Evershed
LJ in Short v Treasury Commissioners [1948] 1 K.B. 116, 122 CA; affirmed [1948] A.C.
534 HL.
36
R. Kraakman and H. Hansmann, “The Essential Role of Organizational Law” (2000)
110 Yale L.J. 387.
37 As we saw above (para.1–3) this problem seems to have lain behind the former
restriction of the number of partners to a maximum of 20.
38CPR 19.6, permitting representative actions. The provision is strictly interpreted:
Emerald Supplies Ltd v British Airways Plc [2010] EWCA Civ 1284.
39“An unincorporated association has certain advantages when litigation is desired
against them”: per Scrutton LJ in Bloom v National Federation of Discharged Soldiers
(1918) 35 T.L.R. 50, 51 CA.
40 Insolvency Act 1986 s.84(1)(a) envisages that the period of the company’s duration
may be fixed in the articles, but this is rarely done in practice and, even if it were, the
company would not automatically expire on the expiration of the term; the section
provides that expiration of the term is a ground on which the members by ordinary
resolution may wind the company up voluntarily. It is otherwise with chartered
companies: see para.1–31, fn.89.
41
cf. Daimler Co v Continental Tyre and Rubber Co [1916] 2 A.C. 307 HL.
42
As Greer LJ said in Stepney Corporation v Osofsky [1937] 3 All E.R. 289 at 291 CA:
a corporate body has “no soul to be saved or body to be kicked”. This epigram is
believed to be of considerable antiquity. G. Williams, Criminal Law: The General Part,
2nd edn (London: Steven & Sons), p.856, has traced it back to Lord Thurlow and an
earlier variation to Coke, cf. the decree of Pope Innocent IV forbidding the
excommunication of corporations because, having neither minds nor souls, they could
not sin: see C.T. Carr, The General Principles of the Law of Corporations (Cambridge:
CUP, 1905), p.73. In Rolloswin Investments Ltd v Chromolit Portugal SARL [1970] 1
W.L.R. 912 it was held that since a company was incapable of public worship it was not
a “person” within the meaning of the Sunday Observance Act 1677 so that a contract
made by it on a Sunday was not void (the court was unaware that before the case was
heard the Act had been repealed by the Statute Law (Repeals) Act 1969).
43During the Second World War all the members of one private company, while in
general meeting, were killed by a bomb. But the company survived; not even a nuclear
bomb could have destroyed it. And see the Australian case of Re Noel Tedman Holding
Pty Ltd (1967) Qd.R. 561 Qd Sup Ct where the only two members were killed in a road
accident.
44
And, in the absence of contrary agreement, as regards all the partners: Partnership Act
1890 s.33.
45 Also see below, para.2–23.
46
For an unsuccessful attempt to use the unfair prejudice provisions to secure the return
to the shareholder’s estates of the capital represented by his shares see Re A Company
[1983] Ch. 178; and see also the explanation of this case in Re A Company [1986]
B.C.L.C. 382 (para.20–8).
47
See para.13–17.
48
Robson v Drummond (1831) 2 B. & Ad. 303; cf. British Waggon Co v Lea (1880) 5
Q.B.D. 149.
49 Griffith v Tower Publishing Co [1897] 1 Ch. 21 (publishing agreement held not
assignable); Kemp v Baerselman [1906] 2 K.B. 604 CA (agreement not assignable if
question of one party’s obligation depends on the other’s “personal requirements”), cf.
Tolhurst v Associated Portland Cement [1902] 2 K.B. 660 CA.
50 Boulton v Jones (1857) 2 H. & N. 564.
51See Brace v Calder [1895] 2 Q.B. 253 CA where the retirement of two partners was
held to operate as the wrongful dismissal of a manager. And see also Partnership Act
1890 s.18. In practice such difficulties are often avoided by an implied novation.
52 Of course, even in relation to companies this proposition applies only to companies
limited by shares and not to guarantee companies.
53This assumes the member was, as a member, personally liable; this is not always the
case. See above, para.2–7.
54 Partnership Act 1890 s.31.
55
Partnership Act 1890 s.24(7).
56 Partnership Act 1890 s.17(2) and (3).
57
Companies Act 2006 s.544. Subject only to a possible liability under ss.74 and 76 of
the Insolvency Act 1986 if liquidation follows within a year and the shares were not
fully paid up or were redeemed or purchased out of capital. On the latter see para.13–18.
58
See para.25–15.
59
In recent years the courts have shown a welcome tendency to recognise this functional
reality in applying the legal rules to such incorporated partnerships: see especially
Ebrahimi v Westbourne Galleries Ltd [1973] A.C. 360 HL. See below, Ch.20.
60
See above, para.1–28 and below, Ch.15.
61
New York, 1933, reprinted in 1968 with a new preface.
62 For most people the investment is indirect, perhaps even not conscious, as in the case
of contributions to occupational pension schemes.
63 See above, fn.61 at p.284.
64
See P. Davies, “Institutional Investors in the United Kingdom” in D. Prentice and P.
Holland (eds), Contemporary Issues in Corporate Governance (Oxford: Oxford
University Press, 1993).
65 Companies Act 2006 s.154.
66
See below, Ch.14.
67
See para.14–69.
69 Bankruptcy Act 1914 s.38(1)(c).
70
This reform was a result of the Cork Committee (1982) Cmnd. 8558, Ch.23. Its repeal
had been recommended in the Report of the Blagden Committee 25 years earlier: (1957)
Cmnd.221.
71 This was always accepted in relation to mortgages in the light of s.17 of the 1882 Act.
It was later held, after an exhaustive review of the conflicting authorities, that both Acts
apply only to individuals: Slavenburg’s Bank v International Natural Resources Ltd
[1980] 1 W.L.R. 1076.
72For some reason registration of a bill of sale against a tradesman destroys his credit,
whereas registration of a debenture against a company does not. This can only be
explained on the basis that the former is exceptional, whereas the latter is usual and
familiarity has bred contempt.
731882 Act s.9. Nor could it cover future goods: see ss.5 and 6(2), ibid allows a limited
power of replacement but not anything as fluid as a floating charge.
74
Farmers can already do so under the Agricultural Credits Act 1928 which permits
individuals to grant to banks floating charges over farming stock and agricultural assets
and excludes the application of the former reputed ownership provision and the Bills of
Sale Acts: see ss.5 and 8(1), (2) and (4). Farming stock and agricultural assets are more
readily distinguishable from a farmer’s other assets (than, say, the stock of an antique
dealer who lives over his shop) thus meeting the difficulty referred to in the text.
75 The implications of floating charges are discussed more fully below, in Ch.32.
76
Salomon v Salomon [1897] A.C. 22 HL.
77
The ability of the fixed and floating chargeholder to “scoop the pool” of the
company’s assets has now been restricted, after long debate, by the Enterprise Act 2002,
which requires “a prescribed part” of the company’s assets to be kept available for the
unsecured creditors. See below, Ch.32.
78
As noted, in the case of professional businesses the rules of the governing
professional body may require the partnership form, though in fact many professional
bodies have become more flexible on this issue in recent years.
79
See Ch.20.
80
Partnership Act 1890 s.1(1). Typically there is an agreement, but this can be written
on a half-sheet of notepaper or be an informal oral agreement.
81
See para.4–20.
82 See para.11–8.
83 See Chs 9 and 10.
84
85
See para.32–26.
87 See Ch.15.
88
Public filing is seen to be a quid pro quo of limited liability. Thus, unlimited
companies are not required to file their accounts publicly (s.441) whereas the limited
liability partnership (above, para.1–4) is subject to the publicity regime applied to
companies: Limited Liability Partnerships Regulations 2001 (SI 2001/1090) Pt II.
89
See Chs 21 and 22.
90Companies Act 2006 Pt 10 Ch.1 (directors) and Pt 8 Ch.2 (members); and below, Chs
14 and 24 respectively.
91
The mechanics for achieving this objective are rather intricate. SBEEA 2015 inserts a
substantial new Pt 21A (ss.790A–790ZG) and SCh.1A into the Companies Act 2006,
and that is supplemented by Regulations and formal statutory Guidance. The new rules
will apply to all UK companies, except those subject to the disclosure requirements of
DTR 5 (e.g. LSE main market and AIM companies) (s.790C(7)), and legal entities with
voting shares admitted to trading on a regulated market in an EEA state other than the
UK, or in Japan, the USA, Switzerland and Israel (s.790C(7) and (draft) Regulations).
This is because these companies are already required to make details of major
shareholdings public. The provisions will also apply to LLPs and UK registered Societas
Europaea (on the latter, see also art.9 of Regulation 2157/2001 EC of 8 October 2001).
Generally, see
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/486520/BIS-
15-622-register-of-people-with-significant-control-consultation-response.pdf [Accessed
29 January 2016]. The EU has also introduced similar measures in the Fourth Money
Laundering Directive (EU 2015/849) which came into force on 25 June 2015 and must
be implemented by all Members States by 26 June 2017.
92 The Register of People with Significant Control Regulations 2016 (SI 2016/339):
http://www.legislation.gov.uk/uksi/2016/339/pdfs/uksi_20160339_en.pdf [Accessed 29
May 2016].
93
For the current (April 2016) Statutory Guidance, see
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/523120/PSC_statutory_guidance_com
[Accessed 29 May 2016].
94
For money laundering, tax evasion, corruption, terrorist financing, etc.
95
BIS, The Register of People with Significant Control (PSC Register) (October 2014),
as stated in the Foreword:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/395478/bis-
14-1145-the-register-of-people-with-significant-control-psc-register-register-final-1.pdf
[Accessed 29 January 2016].
96
See the sources cited in earlier footnotes.
97
But with this expressly being wider than the definition of a “shadow director” of the
company. As to the latter, see para.16–9.
98
See para.16–9.
99
See Guidance, Section 1.
100 See Guidance, paras 4.2–4.6.
101 The details are in the Regulations: see fn.91, above.
102
The information on the PSC Register will also need to be confirmed to Companies
House at least every 12 months and will be held by it on a publically searchable
database.
103 See para.19–11.
104
By comparison, other disclosure rules are considered in detail in Ch.26.
105
107 Developing, paras 9.61–9.71.
CHAPTER 3
SOURCES OF COMPANY LAW AND THE COMPANY’S
CONSTITUTION
Sources 3–1
Primary legislation 3–3
Secondary legislation 3–5
Delegated rule-making 3–7
Common law 3–10
Review and reform 3–11
The Company’s Constitution 3–13
The significance of the constitution 3–13
Model articles of association 3–14
What constitutes the constitution? 3–16
The legal status of the constitution 3–18
Shareholder Agreements 3–33
The European Company 3–36
SOURCES
3–1
As far as domestic companies are concerned, the immediate
sources of the rules applicable to them, and the hierarchy of
those sources, are the ones familiar to students of other bodies of
law. They are: primary legislation, secondary legislation, rule-
making by legislatively recognised bodies, the common law of
companies, and the company’s own constitution (in particular,
its articles of association). Of these, the last may perhaps appear
unfamiliar, but students of contract law are used to idea that the
rules applicable in any particular situation are as likely to be
found in the terms of the parties’ agreement as in legislative or
common law rules, and students of trade union law or of the law
of other types of association know that the particular
association’s rule-book is an important source of law, at least for
its members. As to the third category, legislation may delegate to
bodies outside the legislature the power to make rules relevant to
companies. These bodies may themselves be agencies created by
statute or they may be pre-existing bodies which the legislature
recognises for the purposes of rule-making.
Finally, and standing outside the above hierarchy but with
links to it, there may be examples of “self-regulation” where the
relevant rules have no legislative or common law foundation, but
are nevertheless observed in practice, as a result of non-legal
pressures, including the threat that government might intervene
with legislation if the self-regulatory rules were not obeyed.
Historically, the leading example of this phenomenon in our area
was the City Panel on Takeovers and Mergers, and the Code it
administers, but these were put on a statutory basis by the
Companies Act 2006, implementing the Community Directive
on takeovers, though its non-statutory methods of working have
survived to a considerable extent.1 Thus, self-regulation is a less
obvious feature of company law than it used to be.
3–2
Whatever the source of the rule, one should also note that its
content may be located on a spectrum running from “hard” to
“soft”. At the “hard” end, the obligation may be imposed by the
rule without giving those to whom it applies any choice as to
whether they comply with it (a “mandatory” rule). Moving along
the spectrum, the rule may permit those to whom it prima facie
applies to modify or remove the obligation. Such rules,
conventionally called “default rules”, are in fact quite common
in company law. What is the function of such a rule, given that
the parties themselves are apparently free to deprive it of
regulatory force? Where the obligees can easily remove the
obligation, the rule may nevertheless have the important function
of relieving parties of the task of working out the best rule for
themselves. In formulating the default rule, the legislature will
have tried to identify the rule which most parties in the relevant
situation would devise for themselves. Only if the particular
parties want something different from that normally adopted will
they have to go through the process of altering the rule. Thus, a
number of provisions in the Act on shareholder meetings apply
only “subject to any provision in the company’s articles”.2 Since
it is relatively easy for companies to make different provisions in
their articles upon formation of the company or later, these
provisions may be regarded as a pure type of default rule.
In other cases the procedure for amending the position
produced by the default rule may be more demanding and the
regulatory objectives of such a rule may also be more
sophisticated. For example, many rules relating to the duties of
directors may be disapplied by the shareholders, by majority
vote, either before or after the breach of duty.3 The purpose of
such a rule may be to induce the directors to bargain with the
shareholders over the handling of conduct which would
otherwise be in breach of duty. This rule contains a more
demanding procedure because those upon whom the obligation
is imposed (the directors) need to obtain the consent of another
group of people within the company (the shareholders) for the
modification of the rule, and are thus forced to disclose to the
shareholders their actual or potential wrongdoing. Such a rule
may be useful where the rule-maker cannot predict what the
result should be in a particular class of case (otherwise it could
use a mandatory rule) nor does it think it wise to leave it to the
directors themselves to modify the rule (because of their conflict
of interest).
Finally, the procedure for amending the rule may be so
demanding that in practice little use is made of it. In such a case,
it is doubtful whether the rule should be regarded as in substance
a default rule. This may be true of the example given in the
previous paragraph. Thus, if the only way in which directors can
secure shareholder modification of the default rule is to call a
meeting of the shareholders to discuss each case of breach of
duty as it arises, then in a large company they may regard such a
procedure as so cumbersome and unpredictable that they treat
the default rule as in fact mandatory.4 Whether they then choose
to comply with it or to break the rule and hide the breach is a
different question.
At the “soft” end of the spectrum are “rules” which are in fact
only recommendations or exhortations. No sanction is attached
to the breach of the rule. Each obligee decides for itself whether
and how far to comply with the recommendation. A possible
way of injecting some bite into recommendations is to put them
on a “comply or explain basis”. In this situation, the only formal
obligation imposed by the rule is to explain publicly how far the
recommendations have been complied with and the reasons for
any areas of non-compliance. Such disclosure meets all the
formal obligations of the rule, even if it shows that the
recommendations have not been complied with at all, but
publicity may generate extra-legal pressures on the company to
comply (or to comply more fully) with the recommendations.
The primary example of such a mechanism in British company
law is the UK Corporate Governance Code,5 in relation to which
a “comply or explain” obligation is imposed.
Primary legislation
3–3
The principal legislative source of rules is the Companies Act
2006, the latest in a line of Acts produced as the original
legislation of the mid-nineteenth century has been reformed
periodically. This latest effort involved the most comprehensive
review of the area since company law’s inception, and the
resulting legislation is said to be the longest ever to be passed by
Parliament.
The process began in 1998 with the then Secretary of State
commissioning an independent review of company law.6 This
Company Law Review (“CLR”) was carried out with the support
of DTI civil servants, a Project Director, a permanent Steering
Group7 and Consultative Committee, and a series of ad hoc
Working Groups.8 The Steering Group produced a number of
consultative documents, some very large, and a two-volume final
report. In its Final Report it declared its aims to have been to
produce a company law that was “primarily enabling or
facilitative” and to “strip out regulation that is no longer
necessary”. This would not mean an absence of statutory law, for
the framework of company law “should provide the necessary
safeguards to allow people to deal with and invest in companies
with confidence”.9
The immediate response of the Government was enthusiastic,
but developments were rather slow.10 A Bill was finally
introduced into Parliament in November 2005, received Royal
Assent a year later, and was then phased in over a period of time,
ending on 1 October 2009. The result is an Act of some 1,300
sections and 16 Schedules. This may seem an odd result for a
legislative process aimed to be facilitative. Two points can be
made in mitigation of its length. First, enabling legislation is not
to be confused with the absence of statutory law: often confining
law narrowly takes more statutory words than a sweeping
prohibition. Secondly, the Act is drafted in a lengthy way,
paradoxically to make it more user-friendly. Few people read an
Act from beginning to end. What they need to be able to do is to
find quickly the provisions relevant to their problem. Setting out
the provisions in a disaggregated form (for example, separate
provisions for public and private companies on a particular topic,
even if the provisions are similar) is helpful in that regard.
3–4
Other legislation is also important. Provisions relating to the
insolvency of companies were hived off into an Insolvency Act
of 1986, which also contains provisions dealing with the period
before the company enters insolvency and intended to protect
creditors in that period.11 In the same year, a Financial Services
Act (now replaced by the Financial Services and Markets Act
2000) took over the provisions relating to the public offering and
listing of shares, and the 2000 Act has been modified
subsequently to take account of the burgeoning EU law in this
area.12 These two examples illustrate perennial problems of
classification. Should rules on the insolvency of companies go in
a company law consolidation or an insolvency law
consolidation; equally, should rules on share issues by
companies go in a company law consolidation or a capital
markets or securities law consolidation? There are arguments
both ways, but it is the case that, functionally, important parts of
the law relating to companies are not to be found in Acts which
contain the word “company” in their title.13
Secondary legislation
3–5
One major difficulty attending legislation as long as the
Companies Act is that a major commitment of parliamentary
time by the- Government is required to get such legislation onto
the statute books. Once there, ministers are likely to take the
view that company law has had its turn for some while and will
be reluctant to devote additional parliamentary time to proposals
for its further reform. This can be a distinct disadvantage for
those parts of the Act which relate to matters where the technical
or economic context is changing rapidly and fairly frequent
updating of the legislation would be desirable. One solution to
this problem is greater use of subordinate legislation, amending
primary legislation but for which the process of parliamentary
scrutiny is much reduced and which therefore is much less time-
consuming.14 The 2006 Act contains important examples of this
technique in particular areas, for example, companies’ accounts15
or share capital,16 both areas likely to be affected by changes
occurring outside the UK (whether at EU or broader
international levels) to which it was desirable for the
Government to be able to respond quickly. The CLR proposed a
general power to use secondary legislation to amend the Act, but
this was dropped after opposition from Parliament.17
It is also the case that the EU obligations of the UK in relation
to company law may be implemented by secondary legislation
under general powers conferred by the European Communities
Act 1972, which powers are not confined to the company law
area. However, it is not absolutely clear how far this power
extends beyond the minimum necessary to transpose, for
example, a Directive into domestic law.
3–6
Although quicker to implement than primary legislation,
secondary legislation suffers from two defects. The first is that
the rules are subject to less democratic scrutiny than an Act of
Parliament. For this reason, the Company Law Review, whilst
proposing greater use of secondary legislation, also
recommended that “the basic principles and architecture of the
new framework would be set out in primary legislation”.18 The
second is that secondary legislation may not be as expert as rules
produced by rule-makers closer to the regulated, despite the
conscientious consultation process in which the relevant
Department engages before making secondary rules. This second
defect can be overcome by delegation of law-making powers to a
more expert body than the Department.
Delegated rule-making
The Financial Conduct Authority
3–7
A primary example of delegation beyond central government in
the current law is the rule-making power conferred upon the
Financial Conduct Authority (“FCA”). The FCA makes three
types of rules which are of particular interest to us. First, it took
over from the Stock Exchange the long-standing and originally
self-regulatory task of laying down Listing Rules (“LR”) for
companies whose securities have been entered onto the “official
list”.19 In exercising this function, it is referred to as the UK
Listing Authority (“UKLA”). Some of the EU obligations of the
UK are implemented through the LR, but, as we have noted in
Ch.1, they have also been used to promote purely domestic
policies and thus to introduce for listed companies an additional
set of core rules that are not applied to non-listed companies. It
has also introduced further sets of rules—Prospectus Rules
(“PR”) and Disclosure and Transparency Rules (“DTR”). These
are heavily driven by the need to transpose EU law in the UK,
however, the transposition has had the further impact of shifting
some topics from the companies legislation to the FCA’s rules.20
Here it is interesting that Parliament has proceeded with
transposition not primarily by way of direct amendment of the
FSMA, but by giving the FCA extended rule-making powers.
Finally, it was required in the FSMA to produce a Code of
Market Conduct (“MAR”) to flesh out the meaning of the
statutory prohibition on market abuse, which we consider in
Ch.30.
3–8
In short, the FCA has power to issue elaborate sets of rules,
without the need for formal approval by either Parliament or a
Governmental Department.21 The public interest is protected,
however, by the statutory requirement to publish a statement of
policy on the imposition of sanctions for breaches of the Rules.22
Thus, although the FCA is a private company formed under the
Companies Act, in fact a company limited by guarantee,23 and is
financed by a levy on those who engage in financial services
business, it has extensive public functions and is itself subject to
controls thought to be appropriate to a public body.
Financial Reporting Council
3–9
The second area where delegated rule-making is to be found on a
substantial scale in the present law is in relation to corporate
governance, accounting standards, the accuracy of accounts,
auditing standards and the regulation of auditors and
accountants. This is an area where the Financial Reporting
Council (“FRC”) and its various subsidiaries are immensely
important. Their functions were much enhanced as a result of
reforms implemented in the UK in the wake of the Enron and
related scandals in the US,24 and the impact of their rule-making
has grown further as a result of the 2008 financial crisis. These
functions are analysed in Chs 21 and 22, and that analysis need
not be anticipated here. What needs to be noted, however, is that,
like the FCA, the FRC acquires its powers by way of delegation
from the Secretary of State (who can therefore re-allocate
them).25 Like the FCA, the FRC and its subsidiaries are
companies limited by guarantee, but its directors are appointed
by the Secretary of State, so that the FRC, although more expert
than a Government Department (and partly financed by those it
regulates), is tied into the governmental machinery.
Common law
3–10
In spite of the bulk of the Companies Act and its satellite
legislation, it does not contain a code of company law. The
British Companies Acts have never aspired to lay down all the
rules which sustain the core features of company law, as
identified in the previous chapter. However, the 2006 Act goes
further in that regard than previous Acts. The Law Commissions
recommended that there should be a statutory statement of the
common law duties of directors (though not of the remedies for
breach)26 and the English Law Commission that the law relating
to the enforcement of those duties should be both reformed and
stated in legislative form.27 Both these sets of recommendations
were broadly endorsed by the Company Law Review, and were
included in the 2006 Act, thus effecting a major extension of
statutory company law.28
Although these reforms significantly altered the balance
between statute law and common law in company law, they may
have a much less pronounced effect upon the role of the judges
in developing company law. So far as directors’ duties are
concerned, although the statutory statement largely replaces the
existing common law and equitable rules, it is drafted as a
relatively “high level” statement. Consequently, the pre-existing
case law will remain relevant where the statement simply
repeats, rather than reforms, the common law; and recourse
throughout the statement to broad standards, rather than precise
rules, means the judges will have an important role in
developing and applying the standards, just as they have had in
respect of those standards which were embodied in statute from
the beginning.29 Indeed, in performing this task, s.170(4) of the
2006 Act specifically, and uniquely for a UK statute, requires
that “[t]he general duties shall be interpreted and applied in the
same way as common law rules or equitable principles, and
regard shall be had to the corresponding common law rules and
equitable principles in interpreting and applying the general
duties”. As to the enforcement of these statutory directors’
duties, the reform creates a greater judicial discretion to allow or
refuse derivative actions, so that the judges are, if anything,
more important under the Act than the prior common law.
Review and reform
3–11
It is clear that company law consists of a complex and diverse
body of rules. Keeping this law under review is now, in the
main, the task of the Department of Business, Innovation and
Skills (“BIS”),30 which is the Government Department currently
responsible for company and insolvency law, among many other
matters. As for financial services law, including public offerings
of securities and their listing, the Treasury is the leading source
of policy. As noted above, in recent years the Law Commissions
(English and Scottish) have also played an important part in
company law reform.
The Company Law Review, carried out by the DTI and
referred to above, may be seen as the latest in a series of reviews
of company law carried out by the various predecessors of BIS
since the introduction of incorporation by registration in the
middle of the nineteenth century. Its method of operation was
rather different from that of its predecessors, however. They had
consisted of small committees of enquiry which took formal
evidence but did not engage in widespread consultation; they
also tended to concentrate on particular aspects of the subject
thought to need reform, rather than upon a comprehensive
review. The two most recent Committee reports of this older
type which are still important for an understanding of the current
law are the Jenkins31 and Cohen32 Committee reports (so referred
to after the names of their chairmen).
3–12
In the long term, however, the CLR was unconvinced that ad
hoc, periodic, comprehensive reviews of the type it had
undertaken were the best way forward, because they depend so
heavily upon governmental commitment to devote the necessary
resources to the exercise. It recommended instead that a standing
Company Law and Reporting Commission should have the remit
of keeping company law under review and reporting annually to
the Secretary of State its views on where, if anywhere, reform
was needed. In addition, the Secretary of State would be obliged
to consult the Commission on proposed secondary legislation.33
In this way, it was hoped, company law reform would become a
continuing and expert process, so that less weight would need to
be placed on ad hoc, across-the-board reviews. This proposal
was, however, rejected by the Government,34 so the ad hoc
approach remains the order of the day.
THE COMPANY’S CONSTITUTION
The significance of the constitution
3–13
A remarkable feature of British company law is the extent to
which it leaves regulation of the internal affairs of a company to
the company itself through rules laid down in its constitution, in
particular in its articles of association (which prescribe the
regulations for the company35). In fact, the principle is that the
articles may deal with any matter which is not, or to the extent
that it is not, regulated through any of the sources mentioned
above. This is not stated explicitly in the Act, but is rather an
assumption upon which the Act is drafted, too obvious to be
worth stating. However, the crucial point is not just the formal
relationship between the articles and the other sources of
company law, especially the Act, but the extent to which
substantive matters, central to the company’s operation, are left
to be regulated by the articles. Examples of important matters
which are regulated mainly by the articles are the division of
powers between the shareholders and the board of directors, and
the composition, structure and operation of the board of
directors.36 Many jurisdictions regulate these matters through
their companies legislation, rather than the company’s
constitution, and this is true of systems as otherwise different as
those of Germany and the US.37
In the American case, it is true, the legislation often uses
default rules, which can be changed by appropriate provisions in
the company’s constitution, so that, where this is the case, the
shareholders can ultimately adopt the set of rules they want, as is
the case in Britain. For example, para.8.01 of the Model
Business Corporation Act gives a broad management power to
the board of a US company, but allows the shareholders, in the
constitution or by shareholder agreement, to cut down that
provision if they wish and allocate decisions to themselves;
whereas the directors of a British company have management
powers only to the extent that they are given to the board by the
articles (as, normally, they are, and the default model articles for
all companies are in this form38). The ultimate practical division
of powers between board and shareholders, in similar types of
company, may thus be equivalent in the two countries despite
their different starting points.
The German and, even, the American approach can be said to
be based on the principle that the allocation of powers to the
organs of the company is the result of a legislative act, even if,
within limits, the shareholders may alter the initial legislative
allocation. By contrast, since the shareholders control the
constitution (see below), the British approach can be said to
represent the view that the shareholders constitute the ultimate
source of managerial authority within the company and that the
directors obtain their powers by a process of delegation from the
shareholders, albeit a delegation of a formal type which, so long
as it lasts, may make the directors the central decision-making
body on behalf of the company.39 In each of these jurisdictions,
however, the practical allocation of power ultimately depends on
the ease with which the default rules may be overridden.40 If the
shareholders agree to override the default rules at the time the
company is formed, the barriers are often relatively low. On the
other hand, if they only decide later that the legislative default
rules (in the US) or the model articles (in the UK) should be
amended, then the process is inevitably more complicated: issues
of who is entitled to propose the necessary resolutions and call
the necessary meetings (the directors or a shareholder), and what
level of voting support is necessary to adopt the change (a
simple majority or some sort of super majority) will, in practice,
determine the ease with which changes can be effected.
Model articles of association
3–14
In the British scheme it is essential that a company have articles,
and this is reflected in the provisions in the Act authorising the
Secretary of State to promulgate model articles of association for
companies of different types41 and giving those statutory models
default status.42 This power is long standing, and from time to
time lettered “tables” of model articles were issued under it, with
those for companies limited by shares being invariably “Table
A”. Many companies still exist whose articles are based on the
Table A of 1985 or the earlier one of 1948 or, conceivably, even
earlier versions. The current statutory models are contained in
the Companies (Model Articles) Regulations 2008/3229, and are
applicable to companies incorporated on or after 1 October 2009.
These new models are no longer denoted by lettered tables, and
in addition, following the CLR,43 there are now separate model
articles for private and public companies limited by shares
(previously Table A articles applied to both), and also for
companies limited by guarantee.44 Given the range of companies
falling under the companies legislation, it is surprising that a
single model set of articles for companies limited by shares was
thought for so long to be adequate.45
3–15
When a limited company is formed, it will be treated as having
adopted the relevant model articles, except to the extent that it
chooses to have different articles, either in whole or in part.46
This means that those registering the company could say
nothing, in which case the model will apply in full.47 At the other
extreme, they could expressly exclude the model entirely and
adopt a set of articles which contains very different provisions.
Typically, however, companies adopt an intermediate position,
registering articles which adopt the default model subject to a list
of specific amendments. Section 20(1)(b) suggests that choice
may be expressed implicitly, by adopting articles which in one
or more respects are inconsistent with the model, and then the
model will apply to govern matters not dealt with by the
company, i.e. the model performs a gap-filling role in such a
case. This does mean that the full articles of the company can be
established only through the laborious process of taking the
model articles and applying the specified changes to it, which
hardly amounts to a transparent exposition of the company’s
regulations. Any different approach—despite the requirement
that the articles “must be contained in a single document”48—
would, however, lose the crucial gap-filling role of the model
articles mandated by s.20(1)(b).
The version of the model which is implied into the company’s
articles (unless excluded) is that which existed when the
company was formed. The subsequent promulgation of a revised
version of the model will not affect companies already
registered, but only those registered in the future.49 Hence the
fact, noted above, that there are many companies in existence for
whom the relevant model is Table A of 1948. For the
practitioner, therefore, the replacement of one model by another
is not a reason to forget the learning about former models.
Under the British structure the company cannot work
effectively without fairly elaborate articles, and the models aim
to supply that need for those who do not wish, or cannot afford,
to work out their own internal regulations.
What constitutes the constitution?
3–16
Unlike its predecessors, the 2006 Act defines the company’s
constitution. The term includes the articles of association but is
not limited to them. Also included are “any resolutions or
agreements to which Chapter 3 [of Pt 3] applies”.50 Chapter 3
applies to special resolutions of the shareholders (whether passed
as such or by virtue of unanimous agreement among the
members)51; any resolution or agreement of a class of members
binding all the members of the class (for example, a resolution
varying class rights)52; any unanimous resolution or agreement
adopted by the members of a class provided that it would not
otherwise be binding on them unless passed by a particular
majority or in a particular manner; and any other resolution or
agreement to which the chapter applies by virtue of any
enactment.53 In practice, the most important category is special
resolutions of the shareholders. Given its much reduced legal
status, it is not surprising that the memorandum of association no
longer features as part of the company’s constitution.54
3–17
As might be expected, shareholder agreements, considered
below, are not generally regarded as part of the company’s
constitution; but that rule has one important exception, noted in
passing here.55
The legal status of the constitution
3–18
The common law tends to classify the rule-books of associations,
whether they are clubs, trade unions, friendly societies or other,
as contractual in nature. The articles of association are no
exception to this principle, though in this case the classification
is done by the Act. Section 33 of the Act provides that “the
provisions of the 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 it”. The
wording of this important section can be traced back, with
variations, to the original Act of 1844.56 What is clear, however,
is that the articles constitute a rather particular form of contract,
and the peculiarities of that contract need to be noted here.
(i) The parties to the contract
3–19
It is clear from the express statutory wording of s.33 that the
articles constitute a contract between the company and each
member. It is thus a multi-party contract, like many other
contracts found in the commercial world, and is enforceable by
any one party against any other. This feature is commonly used
when there is breach or threatened breach of articles which
confer on members a right of pre-emption (or first refusal) when
another member wishes to sell his shares,57 or impose a duty on
the remaining members or the directors to buy the shares of a
retiring member (a less common provision).58 What makes this
contract different, as we shall see, is that not all of its provisions
will be enforced in the courts.59
(ii) The contract as a public document
3–20
Although the articles of association have a contractual status,
they are clearly more than a private bargain among the company
and its members. The company’s articles become a public
document at the moment of formation, either because the
relevant model articles, themselves a public document, will
apply or because the company supplies to the registrar for public
registration its own articles which amend or even fully replace
the statutory model.60 Publicity of the company’s constitution
has always been a requirement of British company law, and
since 1968 is in any event a requirement of EU company law.61
Thus, those who deal with the company have a legitimate
expectation that the registered articles represent an accurate
statement of the company’s internal regulations.
3–21
Because of this special feature, the courts have concluded that
standard contract law should apply to the articles only with
certain qualifications. In particular, the courts are reluctant to
apply to the statutory contract any contract law doctrines which
might result in the articles being held to have a content
substantially different from that which someone reading the
registered documents would have understood them to have.
Thus, the Court of Appeal has held that articles cannot later be
rectified to give effect to what the incorporators actually
intended but failed to embody in the registered document, since
the reader of the registered documents could have no way of
guessing that any error had been made in transposing the
incorporators’ agreement into the document.62
Equally, that Court has refused to imply terms into the
statutory contract from extrinsic evidence of surrounding
circumstances where that evidence would probably not be
known to third parties who would thus have no basis for
anticipating that any such implication was appropriate.63
Further, in this case Steyn LJ was of the view that for the
same reasons the statutory contract “was not defeasible on the
grounds of misrepresentation, common law mistake, mistake in
equity, undue influence or duress”.64
These decisions by the courts on the meaning of the
company’s constitutional documents support the policy
underlying the statutory provision on the conclusiveness of the
certificate of incorporation.65 Both conduce to protection of third
parties by enabling the third party to rely on what he or she finds
upon a search of the public registry.66
3–22
However, the policy behind these cases is somewhat undermined
by those decisions which have allowed the doctrine of informal,
unanimous shareholder consent to be applied to changes to the
company’s constitution. Under this doctrine, which is discussed
further in Ch.15, decisions taken informally by shareholders will
nevertheless be effective, if taken unanimously. Although the
Act requires informal resolutions altering the articles to be
communicated to the Registrar,67 the informality alone means
this is unlikely to happen, and then the registered constitution
will no longer reflect the actual set of articles.68 Failure to inform
the registrar is a criminal offence and may attract civil penalties,
but the validity of the alteration appears not to be affected by
non-compliance.69
(iii) Limits to the provisions which can be enforced:
only rights “as a member”
3–23
The standard answer to the question, at common law, of who can
enforce a contract is: the parties to the contract.70 Since it is
members who are party to the contract with the company, it
follows that non-members cannot enforce the contract, even if
they are intimately involved with the company, for example, as
directors. Suppose, however, a person is both a member of the
company and one of its directors. Can he or she enforce rights
conferred by the articles, even if that right is conferred upon the
claimant in his or her capacity as director of the company? The
answer appears to be in the negative. The decisions have
constantly affirmed that the section confers contractual effect on
a provision in the articles only in so far as it affords rights on a
member “qua member”, or as a member.71 As Astbury J said in
the Hickman case72:
“An outsider to whom rights purport to be given by the articles in his capacity as
such outsider, whether he is or subsequently becomes a member, cannot sue on
those articles, treating them as contracts between himself and the company, to
enforce those rights.”
The same applies to the contract between the members inter se.73
On the wording of the section it would be difficult to interpret
it as creating a contract with anyone other than the company and
the members. Furthermore, there is perhaps sense in restricting
the ambit of the section to matters concerning the affairs of the
company, although the Act itself is not explicitly worded
restrictively. The question is whether it is justified to restrict the
statutory wording still further, so that it applies only to matters
concerning a member in his capacity of member.74 As a
consequence of this interpretation, a promoter, who becomes a
member, cannot enforce a provision that the company shall
reimburse the expenses he or she incurred75 nor a solicitor, who
becomes a member, a provision that he or she shall be the
company’s solicitor.76 More important, this approach to the
section apparently prevents a member who is also a director or
other officer of the company from enforcing any rights
purporting to be conferred by the articles on directors or officers.
Only if he or she has a separate contract, extraneous to the
articles, will the director have contractual rights and obligations
vis-à-vis the company or fellow members. For this reason,
executive directors will be careful to enter into service contracts
with their company (into which it is entirely permissible to
incorporate provisions from the articles of association)77 in order
to safeguard their remuneration, and non-executive directors
would be well advised to do so also.78
3–24
It is somewhat anomalous to treat directors as “outsiders” since
for most purposes the law treats them as the paradigm “insiders”
(which members, as such, are not) and they will breach their
fiduciary duties and duties of care if they do not act in
accordance with the company’s constitution.79 It also produces
some strange results. Hickman’s case concerned a provision in
the articles stating that any dispute between the company and a
member should be referred to arbitration and this was enforced
as a contract. But in the later case of Beattie v Beattie Ltd,80
where there was a similar provision, the Court of Appeal, relying
on the dictum in Hickman, held that a dispute between a
company and a director (who was a member) was not subject to
the provision because the dispute was admittedly in relation to
the director qua director. In the still later case of Rayfield v
Hands,81 the articles of a private company provided that a
member intending to transfer his shares should give notice to the
directors “who will take the said shares equally between them at
a fair value”. A member gave notice but the directors refused to
buy. Vaisey J felt able to hold that the provision was concerned
with the relationship between the member and the directors as
members and ordered them to buy.82
3–25
However, academic argument has been made to the effect that
the Hickman principle can be side-stepped, in most or all cases,
by the identification of an appropriate membership right. In
1957, Lord Wedderburn, in his seminal article on Foss v
Harbottle,83 pointed out that, in Quinn & Axtens Ltd v Salmon,84
the Court of Appeal and the House of Lords allowed a managing
director, suing as a member, to obtain an injunction restraining
the company from completing transactions entered into in breach
of the company’s articles which provided that the consent of the
two managing directors was required in relation to such
transactions. This, in effect, showed that a member had a
membership right to require the company to act in accordance
with its articles, which right could be enforced by the member
even though the result was indirectly to protect a right which
was afforded to him as director. If this is correct, the supposed
principle, that there is a statutory contract between the company
and its members only in respect of matters affecting members
qua members, is effectively outflanked—and, if so, whether it
can then still apply to the statutory contact between members
inter se seems debatable.85
3–26
Despite the criticisms which can be levelled against the Hickman
principle, when the Company Law Review consulted on the
question of whether this aspect of the Act required reform,86 a
positive response was not forthcoming and the recommendation
from the CLR was accordingly to leave the law as it is.87 Perhaps
this indicates that, although the Hickman principle may not be
wholly desirable, the costs of contracting around it are not high.
Consequently, practice has accommodated itself to the rule. On
the other hand, when the common law of privity of contract was
reformed, it is perhaps easier to understand why there was no
pressure to change the current rule to one which would permit
non-members to enforce rights in their favour contained in the
articles.88
(iv) Further limits to the provisions which can be
enforced: not mere procedural irregularities
3–27
Although the Company Law Review was content to let the
“member qua member” aspect of the statutory contract remain
undisturbed, the same cannot be said of a related aspect of the
contract with which we must deal. Even though a member sues
as a member and even though he or she sues to enforce a
provision in the articles which appears to confer a right on the
member, he or she may nevertheless be defeated by the
argument that the provision does not confer a personal right on
the member but creates only an obligation on the company,
breach of which constitutes “a mere internal irregularity” on the
company’s part. The consequence of the categorisation of the
breach of the articles as an internal irregularity is that the
decision whether to sue to enforce the provision is a matter for
the shareholders collectively, whereas personal rights, not
surprisingly, can be enforced by individual shareholders.
The issue has tended to arise particularly in relation to those
provisions dealing with the convening and conduct of meetings
of shareholders or the selection of members of the board. These
are areas where there are statutory provisions, but they are of a
limited nature and much is left to be regulated in the company’s
articles.89 If, for example, the chairman of a shareholders’
meeting acts in breach of the provisions of the articles governing
meetings, is that an infringement of the shareholders’ personal
rights or a mere internal irregularity? There are a number of
decisions of the courts over the past 150 years putting such
breaches in one category or the other, but it is difficult to discern
the principled basis on which the classification was carried out.
The importance, if not the nature, of the distinction is shown by
two ultimately irreconcilable cases from the 1870s, MacDougall
v Gardiner90 and Pender v Lushington.91 In the former the
decision of the chairman of the shareholders’ meeting
wrongfully (i.e. in breach of the articles) to refuse a request for a
poll was held to be an internal irregularity, whilst in the latter the
refusal of a chairman to recognise the votes attached to shares
held by nominee shareholders was held to infringe their personal
rights. Each decision has spawned a line of equally
irreconcilable authorities. In truth, there is a conflict here
between proper recognition of the contractual nature of the
company’s constitution and the traditional policy of non-
interference by the courts in the internal affairs of companies.
3–28
As Smith has suggested,92 ultimately the only satisfactory
solution is to choose which policy is to have priority. Moreover,
it is surely clear today that it ought to be the former. It can
hardly be argued in modern law that it is an example of
excessive interference by the courts to hold a company (or any
other association) to the procedures which it itself has adopted in
its constitution for its internal decision-making (until such time
as it decides to change those internal rules according to the
procedures set down for that to occur).93 Indeed, it might even be
suggested that effective protection of this procedural entitlement
of members is basic to any satisfactory system of company
law.94
3–29
Part of the confusion may have arisen because of a failure to
appreciate that the same situation may give rise to wrongs both
by and against the company, and the individual shareholder’s
position will vary according to which wrong he seeks to redress.
Thus, the chairman of a shareholders’ meeting who breaches the
relevant provisions of the articles may both put the company in
breach of its contract with the members and him- or herself be in
breach of duty to the company for not observing the provisions.
An analogy is provided by the decision in Taylor v NUM
(Derbyshire Area).95 The plaintiff successfully sued his trade
union96 in a personal capacity to obtain an injunction restraining
the officials of the union from continuing a strike which it was a
breach of the union’s rule-book (in fact, beyond its capacity) to
conduct, but failed in his claim for an order requiring the same
officials to restore to the union the funds already expended on
the strike, because he did not have standing to bring a derivative
action on behalf of the union.97 The same analysis may often be
applicable to breaches of the articles.98 In other words, the
company may be regarded as breaching its contract with the
member if it seeks to act upon a resolution improperly passed
and should be restrainable by the member, but for the loss (say
the wasted costs of organising the meeting) caused to the
company by the chair of the meeting in not conducting it in
accordance with the company’s regulations, the company is the
proper plaintiff.99
3–30
An alternative line of attack on the above decisions might be
provided by the general membership right, postulated by
Professor Wedderburn and noted above, to have the affairs of the
company conducted in accordance with the articles, for that right
was also put forward by him as a personal right. Consequently,
this general right, if recognised by the courts or the legislature,
would defeat both the “outsider right” argument and the “mere
internal irregularity” argument against shareholder enforcement
of the articles of association. After some hesitation, the
Company Law Review decided to take a bold approach which
amounted, in effect, to the acceptance of Professor
Wedderburn’s argument, at least on the matter of the range of
provisions enforceable by the member as member. All duties
imposed in favour of members under the constitution should be
enforceable by individual shareholders.100 In principle, if the
company acted in breach of such duties, then the member would
be able to bring an action to enforce the company’s rule-book.
Or the member would be able to sue another member if the
obligation was laid by the articles on that member. This would
not mean that every breach of the articles by a corporate officer
would entitle each shareholder to sue the company for damages.
Damages would be an available remedy only if the shareholder
personally101 had suffered loss as a result of the breach. In the
case of a breach of procedure in the conduct of a meeting, a
remedy other than damages might well be more appropriate, for
example, an injunction preventing the company from acting on
an improperly passed resolution. In other cases no remedy at all
might be ordered. If the breach of procedure had been purely
technical and it was clear that the resolution would have been
passed even if the correct procedure had been followed, the court
should not grant any remedy at all and might even award costs
against the complainant shareholder. This proposal was subject
to one qualification: it would be possible for the shareholders to
opt, by an appropriate provision included therein, for some or all
of the articles not to be enforceable. In such a case, the relevant
articles would not be enforceable as a contract,102 even if they
would be under the current law. Thus, general contractual
enforcement of the articles would be the default rule, and in any
case it should be clear which articles were enforceable and
which not.
However, the 2006 Act does not take up this proposal and so
the uncertainties of the case law, discussed above, remain.
(v) Altering the contract
3–31
It is crucial that the articles, as part of the constitution of an
ongoing organisation, be capable of amendment from time to
time. Section 21 expressly provides that “a company may amend
its articles by special resolution”.103 Thus, a member enters into a
contract on terms which are alterable by the other party (the
company, acting through the shareholders collectively),104 rather
in the same way as a member of a club agrees to be bound by the
club rules as validly altered from time to time by the members as
a whole, or a worker agrees to be employed on the terms of a
collective agreement as varied from time to time by the
employer and trade union. That a majority of the members
should normally be able to alter the articles by following a
prescribed procedure and thus alter for the future the contractual
rights and obligations of individual shareholders is hardly
surprising. It reflects the fact that the company is an association
and that some process of collective decision-making is needed,
in relation to its constitution, if it is to be able to adapt to
changing circumstances in the business environment. The
alternative would be constitutional change only with the consent
of each individual shareholder, which would be very difficult to
obtain in many cases and which would give unscrupulous
individuals golden opportunities for disruptive behaviour.
3–32
On the other hand, the ability of the majority to bind the
minority through decisions which alter the articles of the
company creates the potential for opportunistic behaviour on the
part of the majority towards the minority. As we shall see in Chs
19 and 20, company law has developed some general standards
which address this problem, which arises in all situations where
the majority may bind the minority, whether the matter at issue
is an amendment to the articles or not.
Here we need note only two particular restrictions on the
majority’s power to alter the articles. One is highly precise. The
consent of the individual member is required if he or she is to be
bound by an alteration which requires members to subscribe for
further shares in the company or which increases liability to
contribute to the company’s share capital or pay money to the
company.105
The other restriction is of a procedural nature and enables the
shareholders to contract around the principle of majority rule for
alteration of the articles. The normal rule is that the company
cannot contract out of its power to alter the articles.106 However,
s.22 enables the shareholders to “entrench” provisions of the
company’s constitution, i.e. to make them capable of amendment
or repeal “only if conditions are met, or procedures complied
with, that are more restrictive than those applicable in the case of
a special resolution.”107 Those additional restrictions may not
make the articles completely unalterable108—probably a wise
provision, because even a member who insists on such a
provision may subsequently change his or her mind. However,
amendment or repeal could be made conditional on the consent
of a particular member or a higher percentage of the members
than a special resolution requires. Entrenched status can be
conferred upon provisions in the articles either upon the
formation of the company or subsequently, but in the latter case
only with the unanimous consent of the members.109 The
registrar must be given notice of the adoption of entrenchment
provisions and of their removal110; and the company must certify
compliance with the entrenchment provisions whenever it alters
its articles.111 Thus, the principle that the constitution of the
company can be altered by a three-quarters majority of the
members can in fact be set aside by using the entrenchment
provisions, though for most companies it would be unwise to do
so on a significant scale.112
SHAREHOLDER AGREEMENTS
3–33
The freedom of the shareholders to fashion the company’s
constitution facilitates the input of a significant element of
“private ordering” into the rules governing the company, but the
articles of association are not the only method whereby the
shareholders can generate their own rules for the governance of
their affairs. An alternative method is an agreement, concluded
among some or all the shareholders, but existing outside and
separate from the articles and to which the company itself may
or may not be a party. Such an agreement is not normally treated
as part of the constitution of the company, though it may have an
effect which is rather similar to a provision in the articles, and so
there are exceptions to this general rule.113
3–34
The main advantages of the shareholder agreement over the
articles are that the agreement is a private document which does
not have to be registered at Companies House and that it derives
its contractual force from the normal principles of contract law
and not from the Act, so that the limitations discussed above on
the statutory contract do not to apply to shareholder agreements.
3–35
The main disadvantages are that the shareholder agreement does
not automatically bind new members of the company, as the
articles do.114 A new member of the company will not be bound
by the agreement unless that person assents to it and so the
shareholder agreement may not continue to bind all the
members. Securing the assent of new members may or may not
be easy to bring about. Nor does the Act provide an overriding
mechanism for majority alteration to the shareholder agreement.
The parties to that agreement may provide such a mechanism,
but if they do not do so, then, under normal contractual rules, the
consent of each party to the agreement would be necessary to
effect a change. In addition, the protection provided by such an
agreement may be more limited than supposed, since remedies
for breach may be restricted to damages rather than an order for
specific performance, and indeed the company cannot agree to
be bound in matters which are contrary to the Companies Act. In
short, a shareholder agreement displays both the advantages and
disadvantages of private contracting.
We discuss shareholder agreements and other methods of
protecting minority shareholders, such as the issue of shares with
special rights attached to them, in Ch.19.
THE EUROPEAN COMPANY
3–36
As far as the European Company is concerned, a hierarchy of
sources of rules is set out in the European Company Statute.115
The primary source of rules for the SE is EU law, as one would
expect, in the shape of the European Company Statute, which
applies directly in the Member States without the need for
transposition, which a Directive requires.116 The second source
of law for the SE is its own statutes (or constitution or articles of
association, as we might term them), but only to the extent that
the Regulation expressly permits the SE through its statutes to
regulate a particular matter. In fact, some highly significant
choices are expressly given by the Regulation to the SE, to be
made through its statutes, for example, the choice between a
one-tier and a two-tier board.117 However, as we noted in Ch.1,118
the European Regulation does not aim to provide a
comprehensive code of company law for the SE. Much is
referred to the law of the state in which the SE is registered, and
so domestic law becomes an important source of rules for the
SE. The Regulation contemplates two types of domestic law as
being relevant. The third source is thus domestic law passed
specifically in order to embed the Regulation in the domestic
company law or to exercise choices conferred by the SE Statute
on the Member States in relation to the SE.119 For example,
Member States may, but need not, lay down rules about the
maximum and minimum number of members of a one-tier board
(if the SE chooses this system of governance)120 or a Member
State may reduce below 10 per cent the figure for the proportion
of shareholders who are entitled to insist that an item be added to
the agenda of a meeting of the SE’s shareholders.121
However, the more important domestic (and fourth) source of
rules for the SE is likely to be the rules applying to public
companies in the jurisdiction of registration. These rules will
apply to the SE automatically and without the need for special
national implementing legislation. Often, the SE Statute says in
relation to a particular subject-matter that these domestic rules
shall apply (for example, in relation to the legal capital of the
SE),122 but this is declared generally to be the principle in
relation to matters not governed, or to the extent not governed,
by the regulation itself.123 Thus, much of the law governing
domestic public companies limited by shares will apply to the
SE. Indeed, the main interest of the SE as a legal form can be
said to lie in those relatively limited areas where the domestic
rules are trumped by rules emanating from EU law and the EU
rules are significantly different from those which domestic law
applies to its public companies,124 and it is on those aspects that
the later chapters in this book will concentrate. An obvious
example is the requirement for the domestic legislature to make
a two-tier board model of governance available for the SE to
take up, if it so wishes.
The final source of rules for the SE under the regulation
brings the statutes of the SE back into the picture once again.
They are a source of law “in the same way as for a public
limited-liability formed in accordance with the law of the
Member State in which the SE has its registered office”.125 As
we have seen, the domestic law makes the articles a major
source for the rules governing the internal affairs of the public
company, and this will be the case also for the SE, except to the
extent that the regulation itself has occupied ground which the
domestic company law leaves to the articles of association. This
will probably mean that the statutes of a British-registered SE
will be an important source of rules, but a less important source
than for a domestic public company, because Title III of the
regulation governs the structure of the European Company
(board of directors and shareholders’ meeting) more extensively
than does the Companies Act or the common law in relation to a
domestic company.
However, the EU rules relating to the SE are not to be found
wholly in the regulation. The crucial issue of employee
involvement in the SE126 is dealt with at EU level by a
Directive.127 Directives do require transposition into domestic
law. Moreover, if the Directive is properly transposed, the
domestic law becomes the source of obligation in the national
legal system, not the Directive. Consequently, the employee
involvement Directive, despite the importance of its subject-
matter, has no greater impact on the sources of domestic
company law than do any of the many other EC Directives
which have played a part in shaping modern British company
law,128 and so it need not be considered further here.
1 See below, Ch.28.
2 See below, Ch.15.
3
See below, Ch.16.
4For an insightful discussion of default rules see S. Deakin and A. Hughes, “Economic
Efficiency and the Proceduralisation of Company Law” (1999) 3 C.F.I.L.R. 169.
5 See below, Ch.14.
6
DTI, Company Law Reform: Modern Company Law for a Competitive Economy
(1998).
7 The editors of this edition were involved, Paul Davies substantially, as a member of the
Steering Group from March 1999, and Sarah Worthington to a limited degree, as a
member of one of the Working Groups. Comments on the Review in this book should be
read in the light of that fact.
8
See Final Report II, Annex E for details.
9
Final Report I, para.9.
10
See Modernising Company Law, Cm. 5553, July 2002—also in two volumes; and
then Company Law Reform, Cm. 6456, March 2005.
11
See Ch.9.
12
See para.6–14 and Chs 25 and 26.
13
Other important examples of separate legislation are the Bribery Act 2010 (applying
not just to corporate businesses—see paras 7–46 and 16–107) and the Company
Directors Disqualification Act 1986 (see below, Ch.10), which at least has the word
“Company” in its title and seems to have become a separate Act because it consolidates
provisions previously found partly in the Companies Acts and partly in the Insolvency
Act.
14 Instead of three readings and a committee stage in each House of Parliament over
several months, as in the case of an Act, there will be only a single short debate, and in
the case of subordinate legislation subject to “negative resolution”, there will not even be
a debate unless MPs take the necessary steps to initiate one. See Companies Act 2006
ss.1288–1292.
15 2006 Act s.468.
16 2006 Act s.657.
17
Final Report I, paras 5.7 and 5.10 and Modernising, I, p.9. Some power to reform by
statutory instrument is now given to Government across legislation generally by the
Legislative and Regulatory Reform Act 2006.
18 Final Report I, para.5.4.
19
For the meaning of this term see para.25–5.
20
Mainly the rules on disclosure on interests in shares on the part of directors and
“major” shareholders. See Ch.26.
21 As ss.73A and 119 of FSMA 2000 contemplate.
22 FSMA 2000 ss.93–94.
24
The main legislative expression of these reforms was the Companies (Audit,
Investigation and Community Enterprise) Act 2004, some parts of which have survived
the 2006 Act.
25
2006 Act ss.457 and 1217 and Sch.10.
26Company Directors: Regulating Conflicts of Interest and Formulating a Statement of
Duties, Cm. 4436, 1999.
27 Shareholder Remedies, Cm. 3769, 1997.
28 See below, Chs 16 and 17.
29 For example, the unfair prejudice provisions, discussed in Ch.20.
30
Its predecessors were the Department for Business, Enterprise and Regulatory Reform
(“BERR”), and, before that, the Department of Trade and Industry (“DTI”), responsible
for the CLR.
31
Report of the Company Law Committee, Cmnd. 1749, 1962.
32
Report of the Committee on Company Law Amendment, Cmnd. 6659, 1945.
33
Final Report I, para.5.22.
34
Modernising, I, pp.48–49.
35
2006 Act s.18.
36
Although, for listed companies, the UK Corporate Governance Code now trespasses
upon the autonomy of the company, at least in the sense that it requires “comply or
explain” conformity with defined best practices. See below, Ch.14.
37
See for Germany the Aktiengesetz, Pt Four, subdivisions One and Two, and for the
US, the Model Business Corporation Act, Ch.8.
38 See SI 2008/3229 Sch.3, the model articles for public companies, art.3: “Subject to
the articles, the directors are responsible for the management of the company’s business,
for which purpose they may exercise all the powers of the company”. The model article
for private companies limited by shares is in similar terms.
39
See below, Ch.14.
40
41 2006 Act s.19.
42 2006 Act s.20.
43
Final Report II, Ch.17.
44
The model for private companies limited by shares is in Sch.1, and that for public
companies in Sch.3. The model for private companies limited by guarantee is in Sch.2.
45Probably the facility of company formation agents in developing their own standard
model articles for different classes of company met much of the need in practice.
462006 Act s.20(1). This presumption applies whatever the type of limited company. By
contrast, s.8(2) of CA 1985 created a default only in the case of companies limited by
shares.
47 2006 Act s.20(1)(a)—unless there is no model prescribed, in which case it must
register articles of association: s.18(2).
48 2006 Act s.18(3)(a).
49 2006 Act s.20(2).
50 2006 Act s.17.
51 See paras 15–15 and 15–44.
52
See Ch.19. This could be an ordinary resolution of the class, if it binds all the
members of the class.
53 2006 Act s.29.
54 For the residual function of the memorandum, see para.4–5.
55
They are included as part of the constitution for the purposes of s.40: see s.40(3)(b)
and para.7–14.
56
The current provision makes explicit the fact that the company too is bound by the
rules (important in giving members rights against the company). Practitioners had long
treated earlier versions of the articles as binding between member and company despite
the statutory wording making no reference to the company, although on the basis of only
a first instance authority: Hickman v Kent or Romney Marsh Sheepbreeders Association
[1915] 1 Ch. 881. The treatment of the articles as a deed has also been removed from the
current section, thus removing the consequence that a debt owed by the member to the
company was a “specialty” debt, with its special limitation period, rather than an
ordinary one. Contrast s.14(2) of CA 1985 and s.33(2) of CA 2006; and cf. Re
Compania de Electridad de Buenos Aires [1980] Ch. 146 at 187.
57
Borland’s Trustee v Steel [1901] 1 Ch. 279 (member seeking declaration that rights of
pre-emption in articles were valid); cf. Lyle & Scott v Scott’s Trustees [1959] A.C. 763
HL; and see para.27–7.
58
Rayfield v Hands [1960] Ch. 1, where Vaisey J was prepared to make an order in
effect for specific performance.
59 See below, paras 3–23 to 3–30.
60
2006 Act ss.9(5)(b) and 14.
61
Directive 68/151/EEC [1968] O.J. 41 art.2(1)(b).
62 Scott v Frank F. Scott (London) Ltd [1940] Ch. 794 CA.
63 Bratton Seymour Service Co Ltd v Oxborough [1992] B.C.L.C. 693 CA. In this case
the majority were in effect seeking to avoid the prohibition on alterations to the
constitution without individual shareholder consent which have the effect of increasing
the shareholder’s financial liability to the company (see s.25 and below, para.19–1). See
also Towcester Racecourse Co Ltd v Racecourse Association Ltd [2003] 1 B.C.L.C. 260,
where, in any event, the judge regarded the suggested implied terms as inconsistent with
the express terms of the articles. But contrast AG v Belize Telecom [2009] B.C.C. 433,
where the extrinsic evidence was known to the third parties. See also Re Coroin Ltd
[2011] EWHC 3466 (Ch) (affirmed [2012] B.C.C. 575), where the court was prepared to
admit the shareholder agreement pursuant to which the articles were adopted as extrinsic
evidence.
64 Bratton Seymour Service Co Ltd v Oxborough [1992] B.C.L.C. 693 at 698 CA. On the
other hand, investor protection was not inconsistent with the implication of terms based
on the construction of the language used in the articles, for here the basis of the
implication was available to those who read the company’s constitution.
65 See below, para.4–7.
66
A further and important restriction on the remedies available in respect of breaches of
the corporate constitution, namely the supposed rule that damages were not available to
a shareholder in an action against his company so long as he remained a member, seems
to have been removed by what is now s.655, originally inserted by the 1989 Act.
67
2006 Act ss.29 and 30. And see below, para.15–15.
68 Cane v Jones [1980] 1 W.L.R. 1451; Re Home Treat Ltd [1991] B.C.L.C. 705.
69 2006 Act ss.26 and 27.
70
The Contracts (Rights of Third Parties) Act 1999 does not apply to the company’s
constitution: s.6(2) of that Act.
71
While this restriction on the types of rights which can be enforced is well-supported
by precedent (even if difficult to explain), it is less clear whether the restriction also
limits enforcement to those provisions which impose obligations on a member “as a
member”. It seems not: see Rayfield v Hands [1960] Ch. 1, where the provision
concerned the liabilities of members qua directors; and Lion Mutual Marine Insurance v
Tucker (1883) 12 Q.B.D. 176 CA, where the provision concerned the liabilities of
members qua insurers.
72
Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915] 1 Ch. 881 at
897.
73
London Sack & Bag Co v Dixon & Lugton [1943] 2 All E.R. 763 CA.
74
The Hickman case may reflect the high regard in which the courts then held the
doctrine of privity of contract.
75 Re English & Colonial Produce Co [1906] 2 Ch. 435.
76 Eley v Positive Life Association (1876) 1 Ex. D. 88 CA.
77
Relatively little is needed for the court to conclude that the articles have been
incorporated into the service contract, but there must be something: see Globalink
Telecommunications Ltd v Wilmbury Ltd [2003] 1 B.C.L.C. 145.
78
On directors’ contracts see Ch.14.
79
2006 Act s.171. See paras 16–24 et seq.
80 Beattie v Beattie Ltd [1938] Ch. 708 CA.
81 Rayfield v Hands [1960] Ch. 1.
82 What he would have held had one of the directors not been a member is unclear.
83
See “Shareholders’ Rights and the Rule in Foss v Harbottle” in [1957] C.L.J. 193,
especially at 210–215. See also Beck in (1974) 22 Can.B.R. 157 at 190–193.
84 Quinn & Axtens Ltd v Salmon [1909] 1 Ch. 311 CA; affirmed [1909] A.C. 442 HL.
For subsequent dicta in support of this view see, e.g. Re Harmer Ltd [1959] 1 W.L.R. 62
at 85 and 89 CA; Re Richmond Gate Property Co [1965] 1 W.L.R. 335 (see (1965) 28
M.L.R. 347 and (1966) 29 M.L.R. 608 at 612); Hogg v Cramphorn [1967] Ch. 254;
Bamford v Bamford [1970] Ch. 212; Re Sherbourn Park Residents Co Ltd (1986) 2
B.C.C. 99 at 528; Breckland Group Holdings v London & Suffolk Properties [1989]
B.C.L.C. 100 (see (1989) 52 M.L.R. 401 at 407–408); Guinness Plc v Saunders [1990] 2
A.C. 663 HL; Wise v USDAW [1996] I.C.R. 691 at 702.
85For subsequent academic discussion of the principle, see Goldberg in (1972) 33
M.L.R. 362; Prentice in (1980) 1 Co. Law 179; Gregory in (1981) 44 M.L.R. 526;
Goldberg (replying) in (1985) 48 M.L.R. 121; Drury in [1989] C.L.J. 219; and
Worthington, (2000) 116 L.Q.R. 638.
86 Formation, paras 2.6–2.8.
87
Completing, paras 5.66–5.67.
88 See above, fn.70.
89
See Chs 14 and 15, below.
90
MacDougall v Gardiner (1875) 1 Ch.D. 13.
91
Pender v Lushington (1877) 6 Ch.D. 70.
92
R.J. Smith, “Minority Shareholders and Corporate Irregularities” (1978) M.L.R. 147.
93
This argument would lack force only if, as is not usually the case for companies or,
indeed, most associations, the procedure for amending the rules on how decisions are to
be taken was the same as the one for taking substantive decisions.
94
Such a statement would surely be regarded as uncontroversial if made in relation to
trade union law. cf. O. Kahn-Freund, Kahn-Freund’s Labour and the Law, 3rd edn
(Stevens, 1983), pp.286 et seq. The courts do not lack techniques for dealing with
members whose complaints are purely “technical”, i.e. where it is clear that the same
result would have been arrived at even if the proper procedure had been followed:
Harben v Phillips [1974] 1 W.L.R. 638.
95
Taylor v NUM (Derbyshire Area) [1985] B.C.L.C. 237. For the application of the
distinction between personal and derivative actions to companies in an ultra vires
context, see Moseley v Koffyfontein Mines [1911] 1 Ch. 73 CA.
96
To which this distinction between personal rights and mere internal irregularities also
applies.
97 See Ch.17 for a discussion of derivative actions in relation to companies.
98
But note Devlin v Slough Estates Ltd [1983] B.C.L.C. 497, refusing to recognise that
the particular article in question, relating to the preparation of the company’s accounts,
conferred a right upon individual shareholders (as contrasted with “the company”).
99 There is some suggestion in the language used in MacDougall v Gardiner and Pender
v Lushington (see above, fnn.90 and 91), respectively, that the decisions are to be
explained on the basis that the two courts simply fastened on two different legal aspects
of a single situation.
100
Completing, para.5.73; Final Report I, paras 7.34–7.40.
101 On the crucial distinction between corporate and individual loss, see para.17–34.
102Though they could still be used as the basis for an unfair prejudice remedy: see
Ch.20, below. That remedy today is probably the mechanism by which complaints of
breaches of the articles are most often litigated.
103 Changes in the articles must be notified to the registrar: s.26. In the case of charitable
companies the power to amend the articles is subject to the requirement of the charities
legislation operating in the three UK jurisdictions: s.21(2), (3).
104 Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 K.B. 9 at 26 CA, per
Atkin LJ; Malleson v National Insurance and Guarantee Corp [1894] 1 Ch. 200 at 205,
per North J.
105 2006 Act s.25(1).
106On the impact of this principle on contracts outside the articles, see paras 19–25 et
seq.
107
Under the prior law, entrenchment could be achieved by placing the provision in the
memorandum of association and subjecting it to restrictive alteration conditions—and
the prior law did seem to permit making a provision unalterable in any circumstances
(other than a court order). See CA 1985 s.17(2)(b). The new scheme follows that
proposed by the CLR: Formation, para.2.27.
108
2006 Act s.22(3)(a) expressly provides that entrenchment cannot prevent alteration
by agreement of all the members.
109
2006 Act s.22(2). On formation all the subscribers in effect agree to the contents of
the articles and subsequent members join on the basis of what those articles provide.
110
2006 Act s.23.
111
2006 Act s.24.
112
The entrenchment provisions can be overridden by a court order: s.22(3)(b), (4). See,
for example, ss.899–901 and Ch.29.
113Shareholder agreements are included within the meaning of the constitution of the
company for the purposes of s.40: see s.40(3)(b) and para.7–14.
114
2006 Act s.33(1) says that the articles bind the company and the members, meaning
those who at any one time are the members of the company.
115 Council Regulation 2157/2001/EC art.9.
116
However, since the provisions on worker involvement in the SE are contained in a
Directive, which needs transposition, the Regulation applies in the Member States only
together with the national provisions transposing the Directive. For the UK see European
Public Limited-Liability Company Regulations (SI 2004/2326) Pt 3 (hereafter European
Company Regulations).
117 Regulation 2157/2001/EC art.38. See further below, para.14–64.
119See the European Company Regulations Pt 4 (exercising options) and Pts 2 and 5–7
doing various types of “embedding”.
120 SE Statute art.43(2).
121
SE Statute art.56.
122 SE Statute art.5.
123 SE Statute arts 9(1)(c) and 10.
124
Of course, some of the mandatory rules to be found in the Regulation may in fact
track the domestic rules with perhaps minor changes.
125 Reg.2157/2001/EC art.9(1)(c)(iii).
126 See further below, Ch.14.
127 Directive 2002/14/EC [2002] O.J. L80/29.
128 Discussed generally in Ch.6.
CHAPTER 4
FORMATION PROCEDURES
Formation of Different Types of Company 4–1

Statutory companies 4–2
Chartered companies 4–3
Registered companies 4–4
Forming a Company by Registration 4–5
Registration documents 4–5
Certificate of incorporation 4–7
Purchase of a shelf-company 4–9
Choice of Type of Registered Company 4–10
Choice of Company Name 4–13
Warning the public about limited liability or other
status 4–14
Prohibition on illegal or offensive names 4–16
Names requiring special approval 4–17
Prohibition on using a name already allocated 4–18
Restrictions on use of a defunct company’s name—
phoenix companies 4–19
Use of a business name other than the corporate
name 4–20
Mandatory and Elective Name Changes 4–22
Requirements to change a name 4–23
Passing off actions 4–25
Company names adjudicators 4–27
Company’s election to change its name 4–30
Effect of a name change 4–31
Choice of Appropriate Articles 4–32
Challenging the Certificate of Incorporation 4–34
Commencement of Business 4–38
Re-Registration of an Existing Company 4–39
(i) Private company becoming public 4–40
(ii) Public company becoming private limited company 4–41
(iii) Private or public limited company becoming
unlimited 4–43
(iv) Unlimited company becoming a private limited
company 4–45
(v) Becoming or ceasing to be a community interest
company 4–46
Conclusion 4–47
FORMATION OF DIFFERENT TYPES OF COMPANY

4–1
As noted earlier,1 there are three basic types of domestic
incorporated company—statutory, chartered and registered—and
the formation rules vary fundamentally as between each type.
The last class, the class of registered companies, includes both
companies registered by the Registrar of Companies under the
Companies Act 2006 and Charitable Incorporated Organisations
(“CIOs”) registered by the Charity Commissioners under the
Charities Act 2011.2 In this chapter the focus is on companies
registered under the Companies Act, for these are
overwhelmingly the most common and important types of
companies. Recall that this category includes public companies
(limited by shares) and private companies (whether limited by
shares, by guarantee, or unlimited), and also the special
corporate forms (community interest companies (“CICs”, limited
by shares or by guarantee),3 and European Companies (“SEs”)4).
Formation of these registered companies is briefly compared
with the less common alternatives.
Statutory companies
4–2
These are formed by the passing of a Private Act of Parliament,
especially where an enterprise is required for public purposes or
requires special powers (e.g. to compulsorily purchase land for
public utilities). The procedure is that generally applicable to
Private Bill legislation. In practice the work is monopolised by a
few firms of solicitors who specialise as parliamentary agents
and by a handful of counsel at the parliamentary bar. The
numbers of such Acts and supporting specialist practitioners are
dwindling, given the move first to nationalisation and now to
privatisation, both of which are achieved under Public Acts.
Chartered companies
4–3
The creation of new chartered trading companies is now
unlikely, but the grant of charters to charitable or public bodies
is not uncommon. The procedure in such cases is for the
promoters of the body to petition the Crown (through the office
of the Lord President of the Council) praying for the grant of a
charter, a draft of which is normally annexed to the petition. If
the petition is granted the promoters and their successors then
become:
“one body corporate and politic by the name of—and by that name shall and may
sue or be sued plead and be impleaded in all courts whether of law or equity…and
shall have perpetual succession and a common seal.”
Sometimes a charter will be granted to the members of an

existing guarantee company registered under the Companies
Acts in which event the assets of the company will be transferred
to the new chartered body and the company wound up unless the
Registrar can be persuaded to exercise his power to strike it off
the register, thus avoiding the expense of a formal liquidation.5
Registered companies
4–4
Today, the vast majority of companies, whatever their objects,
are formed by registration under the Companies Act 2006 Pt 2.
The rest of this chapter is concerned with that registration
process, the decisions which have to be made to implement it,
and its immediate consequences.
The Act allocates specific functions to the Registrar of
Companies and to the Secretary of State, with such powers
typically exercised by their authorised delegates.6 For example,
most of the powers described in this chapter are exercised by
Companies House, which is an executive agency of the
Department of Business, Innovation and Skills (“BIS”).
For ease of explanation, those forming a company (the
“promoters”) are referred to as if they were natural persons,
though this need not be the case: an existing company is equally
capably of forming a new company. Indeed, this is common
practice, since all but the smallest businesses are carried on by
corporate groups rather than single companies.7
FORMING A COMPANY BY REGISTRATION
Registration documents
4–5
In order to form a registered company,8 the promoters must
deliver certain documents to the Registrar of Companies and pay
a registration fee.9 Listing these documents helps identify the
various decisions which promoters must take even earlier, before
registration is possible. In addition, and perhaps surprisingly, the
Companies Act is explicit that a company cannot be formed for
unlawful purposes.10 The documents which must be registered
are:
(i) A memorandum of association in prescribed form indicating
that those whose names are subscribed to the memorandum
wish to form a company and become its initial members.11
(ii) An application for registration, stating12:
(a) The company’s proposed name.13
(b) Whether the company’s registered office is to be in
England and Wales, Wales, Scotland or Northern
Ireland,14 and its address.15
(c) Whether the liability of the members is to be limited and,
if so, whether by shares or guarantee.16 In the latter case a
statement of guarantee must be part of the application17
and that must state the amount which each member of the
company agrees to contribute to the company on its
winding up18 and it must contain the names and addresses
of each of the subscribers to the memorandum (who, of
course, become its first members).19
In the case of a company having a share capital20 a
statement of capital and initial shareholdings must be part
of the application.21 This must give particulars of the
nominal value of and amount paid up on the shares taken
by the subscribers on formation (both in aggregate and
individually).22
(d) Whether the company is to be public or private.23
(e) A statement of the proposed officers of the company,24
meaning its first directors and secretary (if any25), and
containing a statement by the subscribers that each person
named has consented to act.26
(f) A statement of initial significant control,27 meaning
particulars of persons or legal entities who are considered
to exercise significant control over the company on
incorporation.28 This includes persons or legal entities
holding 25 per cent of the shares or voting rights in the
company, those who have the right to appoint or remove a
majority of the board of directors, and those who have the
right to exercise, or actually exercise, significant
influence or control over the company.29
(iii) A copy of the proposed articles of association, to the extent
that these are not supplied by the default model articles.30
(iv) A statement of compliance, which the Registrar may accept
as sufficient evidence that the requirements of the Act have
been complied with.31
4–6
Only if the company is to be a community interest company will
something more be required. First, in order to meet the
restrictions which the 2004 Act places on such companies,
especially in relation to the distribution of assets, the company’s
articles must include the provisions set out in the appropriate
Schedule to the Community Interest Company Regulations
2005.32 Further, the company may only be registered as a CIC if
the Regulator accepts that its objectives constitute the
furtherance of a community interest. The promoters must
provide the Registrar with a “community interest statement”,
being a document signed by each person who is to be a first
director of the company declaring that the company will carry on
its activities in order to benefit the community and indicating
how the company’s activities will benefit the community.33 Only
if the Regulator concludes that the community interest test is met
will the Registrar register the company as a CIC.34 This test is
rather open-ended—“a company satisfies the community interest
test if a reasonable person might consider that its activities are
being carried on for the benefit of the community”35—and so
there may be some scope for debate about its application and for
appeals from the Regulator to the Appeal Officer.36
Certificate of incorporation
4–7
In itself none of this is very demanding, although it disguises a
number of crucial decisions that the promoters must take, as
described below. If Companies House is satisfied that the
registration requirements have been met, then it must register the
company,37 allocate the company a “registered number”,38 and
provide the company with a certificate of incorporation39 which
is conclusive evidence that the requirements of the Act have
been met and that the company is duly registered under the
Act.40 This is so even if the registration had been procured by
fraud.41
4–8
The effect of incorporation is that “the subscribers to the
memorandum, together with such other persons as may from
time to time become members of the company, are a body
corporate by the name stated in the certificate of
incorporation”.42 Further, the subscribers to the memorandum
become the holders of the shares specified in the statement of
capital and the directors and secretary (if any) named in the
statement of proposed officers are appointed to their offices.43
Challenging the issue of a certificate of incorporation is
difficult, as discussed below.44
Purchase of a shelf-company
4–9
The majority of new companies are formed by specialist
company formation experts.45 Historically, these agents ran their
businesses by registering large numbers of companies and
holding them ready to sell “off the shelf” to promoters who
wanted to incorporate rapidly. The agents themselves (and
persons associated with them) were the original subscribers, first
members and officers of the company, and the promoters then
simply purchased the shares, voted in new officers, changed the
company name and registered office, and reported all these
amendments to Companies House. Now, however, with
electronic registration, company formation agents can meet
promoters’ specific requests very quickly and directly without
the use of shelf companies.
CHOICE OF TYPE OF REGISTERED COMPANY
4–10
One of the earliest decisions taken by the promoters is resolving
which of the several types of registered company they wish to
form, since this will certainly affect the contents of the
documents required to be registered.
First, they must choose between a limited and an unlimited
company.46 Both are fully liable to their creditors; the distinction
refers to the extent of the members’ liability (to their company,
not directly to their company’s creditors47) to meet the
company’s liability for its debts. In an unlimited company, the
members will ultimately be personally liable (jointly, severally
and to an unlimited extent) for the company’s debts in the event
of the company’s formal liquidation. For this reason promoters
are likely to steer away from this form, especially if the company
intends to trade. If the company is merely to hold land or
investments, however, then the absence of limited liability may
not matter and may confer certain advantages, for example, as
regards returning capital48 to the members and avoiding the need
for public disclosure of the company’s financial position49; the
absence of limited liability may also render the company more
acceptable in certain circles (for example, the turf).
If the promoters decide upon a limited company, they must
then make up their minds whether it is to be limited by shares or
by guarantee. As already explained,50 this is largely determined
by the purpose for which the company has been formed, and
only if it is to be a non-profit-making concern are they likely to
form a guarantee company, which is especially suited to a body
of that type.
4–11
Overlapping these distinctions, but closely bound up with them,
is the further point of whether or not the company should have a
share capital. If, as is most probable, the company is to be
limited by shares this question does not arise. Likewise, if it is to
be limited by guarantee.51 But if the company is unlimited it may
or may not have its capital divided into shares. Once more, the
decision is dependent on the company’s purpose: if the company
is intended to make and distribute profits, share capital will be
appropriate.
The promoters will further have to make up their minds
whether the company is to be public or private. As noted
earlier,52 public and private companies essentially fulfil different
economic purposes: the former to raise capital from the public to
run the corporate enterprise, the latter to confer a separate legal
personality on the business of a single trader or a partnership.
Once again, therefore, the choice will in practice be clear-cut,
and normally it will be to form a private company. The
incorporators may have the ultimate ambition of “going public”,
but rarely will they be in a position to do so immediately. If,
however, they are, then the company will have to be a company
limited by shares, the certificate of incorporation will have to
state that it is to be a public company, special requirements as to
its registration will have to be complied with,53 and it must
comply with prescribed minimum capital requirements.54 Any
other type of company will, perforce, be a private company.
4–12
Finally, and again cutting across the above distinctions, is the
question of whether the company’s objectives are to be restricted
to charitable purposes so as to make it a charitable company.55
Moreover, since 2004 it has been possible for a limited company
to be formed as a “community interest company” under the
provisions of Pt 2 of the Companies (Audit, Investigations and
Community Enterprise) Act 2004. Such companies must have
the pursuit of a community interest as their objective (but need
not be legal charities) and their articles must contain restrictions
on the payment of dividends and, generally, on the transfer of
corporate assets other than for full consideration.56
In practice, the vast majority of companies formed are private
companies limited by shares which are neither charitable nor
community interest companies.57
CHOICE OF COMPANY NAME
4–13
The incorporators must decide on a suitable name.58 This
identifies the artificial person,59 describes its status as a limited
public or private company,60 and over time becomes the name
associated with the reputation and goodwill of the company.
Given the importance of a company’s name, there are rules
governing the choice of names (including their length61), their
mandatory publicity,62 their protection from abuse, and their
alteration.63
Warning the public about limited liability or other
status
4–14
If the company is a limited company, its name must end with the
prescribed warning suffix—”limited” (or “Ltd”) if it is a private
company, or “public limited company” (or “Plc”) if it is a public
one.64 The purpose of this requirement is to warn a person
dealing with the company that it is a body with limited liability,
though whether it is very effective in this regard is another
matter.
In addition, the name must not include, except at the end, any
use of “public limited company”, “community interest company”
or “community interest public limited company” or their
abbreviations or Welsh equivalents; and the company may not
use “limited” or “unlimited” (or their abbreviations or Welsh
equivalents) anywhere in the name, unless the company is in fact
a limited or unlimited company.65 This is done primarily to
prevent any blurring of the warnings implied by “Ltd” or “Plc”.66
4–15
The Act provides some narrow exemptions to the above rules
requiring a private limited company to have “limited” at the end
of its name.67 Charitable companies are exempted from the
requirement.68 The Names Regulations are slightly wider,
exempting a company limited by guarantee and engaged in “the
promotion of commerce, art, science, education, religion, charity
or any profession”, the articles of which require its income to be
devoted to the promotion of these objects, forbid the payment of
dividends or any return of capital to members and require its
assets on a winding-up to be transferred to a body with like
objects or to a charity.69 In effect, the exemption is available to
charitable companies or those with public interest objectives
which cannot be used as vehicles for making a profit for their
members. Finally, certain companies are exempted under the
“grandfather” provision applying to companies which were
exempted from the requirement under earlier rules.70
Prohibition on illegal or offensive names
4–16
More important than what the name must contain is what it must
not. Certain expressions are banned. If, in the opinion of the
Secretary of State, the name is such that its use would constitute
a criminal offence or be “offensive”, it cannot be adopted.71
Names requiring special approval
4–17
Certain names may be adopted only with the express approval of
the Secretary of State. These are names which would be likely to
give the impression that the company is connected in any way
with the Government, a local authority or other specified public
authority.72 Further regulations specify other sensitive words or
expressions for which approval is required; the current
regulations list approximately 130 such words.73 In both cases,
the Secretary of State is empowered to require the person asking
for permission to seek comments from the government
department or other body which is thought to have an interest in
the matter and, in particular, to ask that body whether it objects
and, if so, why.74 The relevant regulations generally specify the
body which has to be invited to object.75 When a request is
made, the application for registration must contain a statement
that the body has been asked and a copy of any response.76
Prohibition on using a name already allocated
4–18
The name must not be the same as any name already on the
Registrar’s index of names.77 This is likely to present the
severest obstacle because there are over two million names on
that index. It is an index not just of names of companies
incorporated under the 2006 or earlier Companies Acts but also
of unregistered companies, overseas companies which have
registered particulars in the UK, limited liability partnerships,
limited partnerships, European Economic Interest Groupings
registered in the UK, open-ended investment companies and
registered societies under the Co-operative and Community
Benefit Societies Act 2014.78 Certain differences are to be
disregarded when judging whether a name is the same and
certain expressions are to be treated as the same,79 thus
expanding the scope of the prohibition. Hence a Smith, Jones,
Brown or Davies who has carried on an unincorporated business
under his or her name may have difficulty in finding an available
way of continuing to use that name on incorporating the
business.80
There is, however, power to permit registration of a name that
would otherwise be prohibited where the company seeking
registration is part of the same group as the body already
registered with the same name and the body already registered
agrees to the registration of the new company.81 Because of the
requirement that the two bodies with the same name be part of
the same group, the risk of confusion of the public is reduced82
and the consent required of the body already registered serves to
protect its interests.
Restrictions on use of a defunct company’s name—
phoenix companies
4–19
The restrictions just noted do not prevent a company adopting
the name of a defunct company. However, a person who was a
director or shadow director of a company that went into
insolvent liquidation must not be a director of or take part in the
management of a company with the same or a similar name for
the next five years.83 Breach of this prohibition attracts both civil
and criminal liability.
Use of a business name other than the corporate
name
4–20
Both companies and individuals may conduct their businesses
under their corporate or individual names.84 They may also adopt
“business names” (or “trading names”), but the choice of such
names, whether by companies or individuals, is now subject to
broadly all the same restrictions and permissions as corporate
names.85 In relation to the business name, however, the
convenient administrative sanction of refusing to register a
company with a non-compliant name is not available, since
unincorporated businesses do not need to be registered in order
to carry on business. Consequently, contravention of the rules on
business names is made a criminal offence.86 In addition, the
unincorporated business will have to observe the provisions of
Ch.2 of Pt 41, regarding disclosure of the identity of the
proprietors, which are the equivalent of the trading disclosure
rules applied to companies.87 However, there is nothing in Pt 41
which empowers the Secretary of State or an adjudicator to
direct the change of a business name because it is the same as, or
too like, the name of an existing business, corporate or
incorporate.
4–21
It will, therefore, be apparent that it may be difficult to find a
name acceptable to both the incorporators and the Registrar and
Secretary of State. But until it is achieved, it will be impossible
to complete the documents required to obtain registration and
unsafe to order the stationery which the company will need once
it is registered. We have never introduced a system, comparable
to that in some other common law countries, whereby a name
can be reserved for a prescribed period. Prior to 1981, however,
it was possible and usual to write to the Registrar submitting a
name (or two or three alternative names) and asking if it was
available. If the reply was affirmative it was usually safe to
proceed so long as one did so promptly. Now, however, the
incorporators or their professional advisers have to search the
index88 and make up their own minds.
MANDATORY AND ELECTIVE NAME CHANGES
4–22
Even if the promoters do secure registration of their company
under a particular name they cannot be certain that they will not
be forced to change it. The Secretary of State has power to direct
the company to change its name in certain circumstances.
Alternatively, a name change may be required following a
successful application to the company names adjudicator or to
the courts (in a passing off action), arguing that the chosen name
either exploits or damages the goodwill or reputation of another
business. Finally, the company may, of course, choose to change
its own name.
Requirements to change a name
4–23
The Secretary of State may require a company to change its
name if the company is no longer exempted from the
requirement to include “limited” in its name89;or if the name
harmfully misleads the public as to the company’s activities90; or
if the company provided misleading information or gave
unfulfilled undertakings in order to be registered with the chosen
name91; or if the name is “the same as, or in the opinion of the
Secretary of State, too like92…a name appearing at the time of
registration in the registrar’s index of company names…or
which should have appeared in that index at the time”.93
This last option enables the correction of errors made in
complying with the non-discretionary prohibition on using a
name that is the same as an existing company name94 (either
because the name had not then been entered on the index or
because the fact that it was the same as that of the new company
had escaped detection). More interestingly, and unlike the other
provisions, it also gives the Secretary of State a slightly broader
discretion to direct a name change where the company has not
simply breached the non-discretionary rules on names, but has a
name that, while not the “same as” an existing company name, is
“too like”, and therefore might cause confusion in the minds of
the public.95 The existing company does not have to prove likely
damage to its business goodwill, as is required in a passing off
action (see below), but this statutory route is only open for 12
months. After that, it might be thought that the new company,
too, is likely to have acquired goodwill in its name and will
suffer loss if it is later required to change it, so the complainant
should then be put to the more stringent tests of a passing off
action.
4–24
Note, however, that the power given to the Secretary of State is
to direct the company to act to change its name, not to direct the
Registrar to amend the register.96 The company may change its
name by special resolution or by other procedures specified in its
articles97 (or by resolution of the directors if the direction relates
to the exemption from using the word “limited”98). In every case,
the company and each of its officers commits an offence if the
Secretary of State’s direction is not complied with.
Passing off actions
4–25
The directed name changes just noted deal with a company’s
failure to comply with the statutory requirements in relation to
company names (with the added discretion in relation to names
which are “too like” existing names). But the complaint is more
typically that the chosen name meets all these statutory
requirements, but is deceptively similar to an existing company’s
name, with both companies carrying on the same of type of
business (broadly defined99), so that the newer company is, in
effect, cashing in on the reputation of the first and appropriating
its goodwill and connection. The claim in such circumstances is
for the tort of passing off. The newer company will be liable in
damages and may be restrained by injunction. The practical
effect of such an injunction is that the offending company must
either change its name100 or dissolve itself.101 Intention to pass
off is irrelevant.102 A similar claim can be advanced for use of
another’s registered trade mark.103
4–26
More recently, the courts have also been alert to pre-emptive
strikes, whereby entrepreneurs register companies with names
which existing traders or famous people may want to use in the
future, and then demand inflated sums for the sale of these
registered companies to the named individuals. The wrong is
seen as an abuse of the registration process,104 or the creation of
potential instruments of fraud105 (being names which can be used
for passing off, although this is rarely the objective of the initial
registrant).
Company names adjudicators
4–27
A passing-off action requires the claimant company to
demonstrate that the new company’s choice of name presents a
serious threat to the claimant’s business. The Company Law
Review, which thought the law on names broadly satisfactory,
was attracted by the idea that there should be a new statutory
basis for ordering a name change, namely, that the registration
constituted an abuse of the registration process (along the lines
of the expanded tort claim, noted above).106
The Act sets up a new procedure whereby a person (including
another company) may apply to a company names adjudicator,107
apparently at any time, for an order that a company’s name must
be changed because it is either the same as a name associated
with the applicant and in which the applicant has goodwill or it
is sufficiently similar to such a name that its use in the UK
would be likely to mislead by suggesting a connection between
the respondent company and the applicant.108 The mechanism
thus aids the applicant in protecting its goodwill in a name. If
either condition is made out, then the applicant will succeed
unless the respondent company can bring itself within one of
five categories.109
The first is that its name was registered before the
commencement of the activities upon which the applicant relies
to show goodwill. This does not necessarily mean the respondent
has to have been registered first. For example, the applicant may
have been registered first but may have remained dormant until
after the respondent was registered, and in such a case the
respondent would be able to bring itself within this category.
The second is that the respondent company is operating under
the name, or has formerly operated under it and is now dormant,
or is proposing to operate under it and has incurred substantial
start-up costs. This is an important defence for the respondent
because it means that operating under the name (or even
incurring substantial costs in preparation for so doing) protects
the respondent (subject to the qualification set out below) against
the requirement to change its name.
Thirdly, the respondent shows that the name was registered in
the ordinary course of a company formation business and is
available for sale to the applicant on the standard terms of that
business. In this case the applicant can solve its problem by
simply buying the respondent company for a modest sum.
The fourth category is that the respondent acted in good faith
and the fifth that the interests of the applicant have not been
affected to any significant extent. In the first three cases,
however, the applicant will succeed in any event if it shows that
the respondent’s main purpose was to obtain money or other
benefits from the applicant or to prevent the applicant from
registering the name.110 Thus, beginning to operate will not
protect the respondent from the applicant’s challenge if the main
purpose of the respondent’s activity was to extort a large sum of
money from the applicant in exchange for giving up its rights to
the name.
4–28
If the adjudicator upholds the complaint, an order must be made
requiring the respondent to change its name to an acceptable one
and to take all steps within its power to achieve that end,
including not forming another company with a similar offending
name.111 The adjudicator’s order may be enforced in the same
way as an order of the High Court (or decree of the Court of
Session)112 and, if the name is not changed by the respondent
within the specified time, the adjudicator can effect the
change.113 There is an appeal to a court from the adjudicator’s
decision.114
4–29
Even if the applicant fails under this statutory procedure, a
common law claim in passing off remains open. Indeed, the
statutory defences effectively demarcate the circumstances in
which the additional hurdles imposed in advancing a successful
common law claim are seen as warranted (see especially the
second and fourth defences, which exempt from the statutory
procedure occasions which do not of themselves suggest the
respondent is abusing the registration process, but which may
nevertheless fall foul of the tort of passing off).
Company’s election to change its name
4–30
As noted earlier, a company may, in general, change its name by
special resolution or by other procedures specified in its
articles.115 If the change also reflects a change in the company’s
status (from private to public, for example), then additional rules
apply, as described below.116
Effect of a name change
4–31
On a change of name, whether voluntarily or because of a
direction,117 the Registrar must be notified and will enter the new
name on the register in place of the old and issue an amended
certificate of incorporation.118 The change is effective from the
date on which that certificate is issued.119 But the company
remains the same corporate body and the change does not affect
any of its rights or obligations or render defective any legal
proceedings by or against it.120
CHOICE OF APPROPRIATE ARTICLES
4–32
The next decisions relate to the company’s constitution,
especially the company’s articles of association. As noted in the
previous chapter, the company’s articles are especially important
because they, not the general law, provide many of the rules
governing the internal operation of the company. The legislature
has provided model versions,121 and the promoters must
determine the extent to which the appropriate model is ousted or
adopted (whether explicitly or by default).122 Company
formation agents normally have their own standard forms, which
formally exclude the model altogether, though these standard
forms are themselves typically developed from the statutory
model and its predecessors. The other extreme, the option of not
registering any articles and relying entirely on the model,123 is
rarely chosen because most companies will wish to define their
own rules. For example, the model articles for private companies
limited by shares give the directors a discretion to refuse to
register share transfers,124 but the incorporators are likely to want
more elaborate provisions, such as ones requiring the shares to
be offered to existing shareholders if a member wishes to sell.
4–33
A significant change under the 2006 Act was the downgrading to
a vestigial role of the memorandum of association, which, under
the procedures introduced in the early days of modern company
law, had contained the most important information about the
company and had, originally, been largely unalterable after the
registration of the company.125 Under the 2006 Act the
memorandum, which must still be delivered to the Registrar as a
necessary step in the formation process,126 simply has to state
that the subscribers to it (of whom there need only be one)127
wish to form a company under the Act and agree to become
members of the company upon its formation and, in the case of a
company having a share capital, agree to take at least one share
each.128 The memorandum has to be authenticated by each
subscriber,129 the Registrar being empowered to specify the
method of authentication, but not in such a way as to impede
electronic delivery of the memorandum (and the other
registration documents) to the Registrar.130
CHALLENGING THE CERTIFICATE OF INCORPORATION
4–34
The functions of the Registrar in deciding whether or not to
register the company are administrative, rather than judicial, but
a refusal to register can be challenged by judicial review, albeit
with scant hope of success.131 Normally, the registration of a
company cannot be challenged because of the conclusive effect
of the certificate. This, happily, has rendered English company
law virtually immune from the problems arising from defectively
incorporated companies which have plagued the US and many
continental countries.132 But the decided cases on s.15(4) (or its
predecessors under earlier Acts), and the review of them by the
Court of Appeal133 in a case concerning the then comparable
provision relating to a certificate of registration of a charge on a
company’s property, show that this immunity is not complete.
4–35
Since s.15 and its predecessors in earlier Companies Acts are not
expressed to bind the Crown, the Attorney-General can apply to
the court and may obtain certiorari to quash the registration.134
This was successfully done in R. v Registrar of Companies, Ex p.
HM’s Attorney-General,135 where a prostitute had succeeded in
incorporating her business under the name of “Lindi St Claire
(Personal Services) Ltd” (the Registrar having rejected her first
preference of “Prostitutes Ltd” or “Hookers Ltd” and shown no
enthusiasm for “Lindi St Claire (French Lessons) Ltd”) and, with
scrupulous frankness, she specified its primary object in the
constitution as being “to carry on the business of prostitution”.136
The court, on judicial review at the instance of the Attorney-
General, quashed the registration on the ground that the stated
business was unlawful as contrary to public policy.137 It is
unlikely, however, that the Attorney-General (or any other
Crown servant) will take action unless public policy is thought to
be involved and will not do so if all that has occurred is a
technical breach of the formalities of incorporation.
4–36
Nevertheless, there is one other situation in which the certificate
does not seem to be conclusive of valid incorporation. This
results from what is now s.10(3) of the Trade Union and Labour
Relations (Consolidation) Act 1992 (repeating similar provisions
in earlier Acts) which declares that the registration of a trade
union under the Companies Acts shall be void. In the past,
parties other than the Crown have been held entitled to rely on
this; for example, as a defence to a claim by a registered
company whose objects make it a trade union. The reported
cases138 related to earlier versions of what is now s.15(4), which
were less comprehensive and which were not thought to cover
substantive matters but only ministerial acts leading to
registration.139 Hence, it seems doubtful that they would be
followed today. However, the researches of Mr Drury140 have
unearthed a more recent example of a company’s removal from
the register because its objects made it a trade union. The
company in question was one formed by junior hospital doctors
to represent their interests. It was later realised that its objects
made it a trade union within the statutory definition. The
Department of Trade took the view that the labour law provision
overrode what is now s.15(4) of the Companies Act and
accordingly the Registrar removed the company from the
register for “void registration”.141 This, apparently, was done
without any court order142 and without challenge by the doctors.
Presumably this action by the Registrar could be regarded as
having been taken on behalf of the Crown and as the correction
of a mistake which he, or one of his predecessors, had made and
therefore as rectifiable.143
4–37
Hence, it now seems probable, but not certain, that in no
circumstances can anyone other than the Crown plead the nullity
of a registered company unless and until it has been removed
from the register as a result of action by or on behalf of the
Crown. Removal as a result of that action is tantamount to a
declaration that it never existed as a corporate body. This is not
likely to be a satisfactory outcome if it has in fact been carrying
on business under the guise of what both its members and its
creditors believed to be a registered company; it should be
wound up144 rather than declared never to have existed.145
COMMENCEMENT OF BUSINESS
4–38
From the date of registration mentioned in the certificate of
incorporation, the company, if it is a private company, becomes
“capable of exercising all the functions of an incorporated
company”.146 However, it may choose not to do so. Indeed, in
the case of a shelf company it is inherent in the arrangement that
the company will remain dormant and begin trading only some
time after registration. In the case of a public company, there is
in any event a further legal obstacle to its beginning trading. It
needs to obtain a further certificate from the Registrar (a “trading
certificate”) certifying that the amount of its allotted share
capital is not less than the required minimum.147 Without it, the
public company must not do business or exercise any borrowing
powers unless it has re-registered as a private company. The
certificate of trading is “conclusive evidence that the company is
entitled to do business and exercise any borrowing powers”.148
However, by analogy with the decisions referred to above in
relation to the certificate of incorporation, it appears that, as this
section is not expressed to bind the Crown, the Registrar’s
decision could be quashed on judicial review at the instance of
the Attorney-General. This, in contrast with quashing
registration, would not have the undesirable effect of nullifying
the incorporation. A more likely course, however, would be for
the Secretary of State, if he had grounds for suspecting that the
share capital had not been properly allotted, to institute an
investigation149 and, if his suspicions proved well-founded,
petition the court to wind up the company under ss.124 or 124A
of the Insolvency Act.
RE-REGISTRATION OF AN EXISTING COMPANY
4–39
A company may, at some stage, wish to convert itself into a
company of a different type. In most cases it may do this without
the expense of effecting a complete re-organisation of the types
referred to in Ch.29, below, and without having to form a brand
new company. The circumstances and methods whereby
conversions may be achieved are now collected together in Pt 7
of the Act (although, as not every possible option is covered,
some conversions may have to be done in two steps).
(i) Private company becoming public
4–40
Under ss.90–96 a private company limited by shares can become
re-registered as a public company, by passing a special
resolution that it should be so re-registered, satisfying three
conditions and then making an application to the Registrar.150
The three conditions all relate to the legal capital rules which
apply in a much more onerous way to public than to private
companies. In brief they are, first, that the nominal value of the
company’s allotted share capital must be not less than the
authorised minimum (currently £50,000) and the associated rules
as to the payment for those shares must have been met.151
Secondly, the company must produce unqualified recent
accounts which show, as certified by the auditor, that its net
assets (assets less liabilities) are not less than the aggregate of its
called-up share capital and undistributable reserves.152 Although
there is no precisely equivalent rule applying to public
companies on formation, this will be the factual situation before
a company formed as public begins to trade.153 Thirdly, if the
company allots shares in the period after the accounts just
mentioned were drawn up and before the special resolution is
passed and those shares were issued wholly or partly other than
for cash, then the rules applicable to non-cash consideration
received by a public company have been complied with.154
If the Registrar is satisfied on the above matters on the basis
of the documents the company is required to include in its
application to re-register,155 then the company shall be re-
registered as a public company, with an amended certificate of
incorporation,156 the alterations in the articles take effect, and the
company becomes a public company.157 In effect, the certificate
is a combined certificate of incorporation and trading certificate
which would have been needed had the company been initially
registered as a public company.
Since it is more common for a public company to be formed
by conversion from private status than by direct formation as a
public company, the above rules are of some importance.
If the private company which wishes to convert to a public
one is an unlimited company it will have to become limited, that
being one of the essential elements of the definition of a public
company. This it is enabled to do in the conversion operation—
and rather more simply than if it first re-registered as limited
under (iv) below, and subsequently re-registered as a public
company. It merely has to add to the special resolution the
necessary changes to its articles.158
(ii) Public company becoming private limited
company
4–41
To convert from public to private (an operation which must not
be confused with ceasing to have securities traded on a public
market, which does not necessarily involve any change in the
company’s status under the Act, or with “privatisation” in the
sense of de-nationalisation) is comparatively simple unless there
is disagreement among the members. The company can convert
to a private company limited by shares or by guarantee159 by
passing a special resolution making the necessary alterations in
its name and its articles and applying, in the prescribed form, to
the Registrar.160 But special safeguards are prescribed since loss
of public status may have adverse consequences for the
members, especially as regards their ability to dispose of their
shares. Hence, members who have not consented to, or voted in
favour of, the resolution can, within 28 days of the resolution,
apply to the court for the cancellation of the resolution if they
can muster the support of:
(a) holders of not less than 5 per cent in nominal value of the
company’s share capital or any class of it; or
(b) if the company is not limited by shares,161 not less than 5 per
cent of the members; or
(c) not less than 50 members.162
The Registrar must not issue a new certificate of incorporation
until the 28 days have expired without an application having
been made or, if it has been made, until it has been withdrawn or
dismissed and a copy of the court order delivered to the
Registrar.163 The court has broad powers to cancel or confirm the
resolution, on such terms and conditions as it thinks fit,
including ordering the company to purchase the shares of any
members.164 Thus, the court may grant dissenting shareholders
an exit right rather than require them to accept the company’s
change of status. Unless the court cancels the resolution, the
Registrar issues a new certificate of incorporation with the usual
conclusive consequences.165
4–42
A public company will have to re-register as a private company
if, under s.648,166 the court makes an order confirming the
reduction of its capital which has the effect of reducing the
nominal amount of its allotted share capital below “the
authorised minimum”. In such circumstances that order will not
be registered and come into effect (unless the court otherwise
directs) until the company is re-registered as a private
company.167 The court may (and, in practice will) authorise this
to be done through an expedited procedure without the need to
resort to the provisions just discussed. Instead of the company
having to pass a special resolution, the court will specify in the
order the alterations to be made in the articles and, on
application in the prescribed form the Registrar will issue the
new certificate of incorporation. In this case there can be no
application to the court by dissenting members since the
company has no option but to become private.
(iii) Private or public limited company becoming
unlimited
4–43
The conversion which presents the greatest dangers to the
members is, obviously, that from a limited company to an
unlimited one. Nevertheless, it is not completely banned since
the members may legitimately conclude that forfeiting the
advantages of limited liability is worthwhile, as enabling them to
operate with much the same flexibility (particularly as regards
withdrawal of their capital) and privacy of their financial affairs
as a partnership, while yet retaining all the advantages of
corporate personality other than limited liability. Hence, the Act
provides that a limited company may re-register as an unlimited
company if all the members agree.168 The one condition which
must be met is that the private company has not previously been
re-registered as limited,169 or the public company has not
previously been re-registered as either limited or unlimited.170 As
with other conversions, an application, in the prescribed form,
has to be lodged with the Registrar, together with supporting
documents.171 Those documents must contain a statement by the
directors of the company that the persons by or on whose behalf
the application form is authenticated constitute the whole of the
membership of the company and that, in the case of
authentication through an agent, the directors have taken all
reasonable steps to satisfy themselves that the agent was
authorised to act on behalf of the member.172 The Registrar then
issues a new certificate of incorporation with the usual
conclusive effect.173
Ban on vacillation between limited and unlimited
4–44
What a company is not permitted to do is to chop and change
more than once between limited and unlimited. Once a limited
company has been re-registered as unlimited it cannot again re-
register as a public company174 or as a private limited
company.175 Once an unlimited company has been re-registered
as a limited company, it cannot be re-registered as an unlimited
company, whether it was immediately before the second
attempted re-registration a private176 or a public177 limited
company. There is, however, no ban on switching back and forth
between private limited company and public limited company
status.
(iv) Unlimited company becoming a private limited
company
4–45
In this, the converse of case (iii), it is not the members who need
special safeguards but the creditors. Surprisingly, however,
under the provisions under which this conversion is effected the
only protection afforded them is that the new suffix, “Ltd”, to
the company’s name should alert them to the fact that it has
become a limited company. Their real protection is afforded by
what is now s.77 of the Insolvency Act 1986. The effect of this
is that those who were members of the company at the time of its
re-registration remain potentially liable in respect of its debts
and liabilities contracted prior thereto if winding up commences
within three years of the re-registration. The Act permits re-
registration as a private limited company, whether limited by
shares or by guarantee, so long as the company has not
previously been re-registered as limited. As far as the members
are concerned the crucial requirement is the passing of a special
resolution stating which of these the company is to be and
making the necessary alterations to its name and articles.178
(v) Becoming or ceasing to be a community interest
company
4–46
A limited company, whether limited by shares or guarantee and
whether public or private, may convert to a community interest
company.179 This step requires a special resolution of the
members, making the probably quite extensive changes to its
constitution which are necessary for this purpose,180 and the
approval of the Regulator of Community Interest Companies,
who needs to be satisfied that the company satisfies the
community interest test.181 However, a CIC cannot simply revert
to not being a CIC. Unless it opts to be dissolved, the CIC’s
choices are limited to becoming a charity or a registered
society.182 Otherwise, the constraints on distributions to members
by a CIC could be easily avoided by shedding that status.
CONCLUSION
4–47
Despite the potential problems caused by the company names
rules, the process of registration of a company in the UK is both
speedy and cheap. The rules on changing company status are not
complex either, despite their detail, although they are probably
used on a large scale only for transfer from private limited to
public limited status and vice versa.
1
2
See above, para.1–29, and recall that the CIO status is optional; companies which are
charitable may, alternatively, be registered under the Companies Act (with all that
entails) and be obliged, in addition, to comply with the Charities Act. In addition,
specific types of association must be registered under specific Acts: see Building
Societies Act 1986, Friendly Societies Act 1992 and Co-operative and Community
Benefit Societies Act 2014.
3
4 See above, para.1–40. The European Company (“SE”), introduced in 2004, is formed
under the relevant EU Regulation, as supplemented by domestic law, but with
Companies House acting as the registration body for SEs registered in Great Britain.
Note, however, that the European Company cannot be formed by natural persons but
only by existing companies (or analogous bodies) in the ways specified in the
Regulation: merger, joint subsidiary, joint holding company, transformation. Recall also
the separate avenues for alternative forms of incorporation under the European
Economic Interest Grouping Regulations 1989 (SI 1989/638) and the European Public
Limited Liability Company Regulations 2004 (SI 2004/2326).
5
See below, Ch.33.
6 Contracting Out (Functions in Relation to the Registration of Companies) Order 1995
(SI 1995/1013) made under the Deregulation and Contracting Out Act 1994.
7
The establishment of a corporate group does not necessarily require the creation of a
new company, however. A group may also be formed if the original company acquires
the shares of an existing company, as it would likely do if the company is expanding by
acquiring an established business rather than by setting up its own new business from
scratch.
8 This describes the requirements under the Companies Act 2006. A “company” includes
companies registered under earlier Acts going back to 1856, even though the registration
requirements have changed over time: s.1(1).
9 Registrar of Companies (Fees) (Companies, Overseas Companies and Limited
Liability Partnerships) Regulations (SI 2012/1907) Sch.1 para.8 (ranging from £13–£30
for electronic registration, and £40–£100 for non-electronic registration). Registrations
are now overwhelmingly electronic.
10 2006 Act s.7(2): “A company may not be formed for an unlawful purpose”. This is
interpreted as banning both purposes which are criminal and those which are regarded as
contrary to public policy: R. v Registrar of Joint Stock Companies [1931] 2 K.B. 197
CA; R. v Registrar of Companies, Ex p. HM’s Attorney-General [1991] B.C.L.C. 476. In
the light of the decision in Yuen Kun Yeu v Attorney-General of Hong Kong [1988] A.C.
175 PC, it seems clear that a member of the public subsequently defrauded by the
company could not successfully sue the Registrar on the ground that he was negligent in
registering the company (or, in the case of a public company, issuing the trading
certificate).
11
2006 Act ss.7(1), 8 and 16(2). By contrast to this basic document, the memorandum
of a company registered before 1 October 2009 (an “old style memorandum”) was a
radically different important constitutional document, the provisions of which are now
treated as provisions of the company’s articles (s.28).
12
2006 Act s.9.
13
2006 Act s.9(2)(a), and see below, paras 4–13 to 4–21.
14
2006 Act s.9(2)(b). This place of registration will define the company’s domicile, and
a company cannot unilaterally abandon this domicile and adopt a new one (as a natural
person can): Carl Zeiss Siftung v Rayner and Keeler Ltd (No.3) [1970] Ch. 506, 544.
15
2006 Act s.9(5)(a).
16 2006 Act s.9(2)(c), and see below, paras 4–10 to 4–11.
17 2006 Act s.9(4)(b).
18
2006 Act s.11.
19
Companies (Registration) Regulations 2008/3014 (hereafter “Registration
Regulations”) reg.3.
20If the company has a share capital, it will normally be limited by shares but not
necessarily so. This would not be the case with an unlimited company having a share
capital.
21 2006 Act s.9(4)(a).
22
2006 Act s.10 and the Registration Regulations reg.3. The company’s power to issue
shares of various classes will be set out, of course, in the articles of association. See
Ch.24 for the rules governing the exercise of this power.
23
2006 Act s.9(2)(d).
24 2006 Act s.9(4)(c).
25 A private company need not have a secretary (s.270), but a public company must
(s.271).
26
2006 Act s.12. The Act has abolished the requirement for a private company to have a
secretary and so all that will probably be provided is the name of the first directors of the
company. This is the first expression of an obligation which will continue throughout the
company’s life periodically to inform the Registrar about these matters: see para.14–23.
272006 Act s.9(4)(d). This provision was introduced as part of the reforms under
SBEEA 2015 to improve transparency around who owns and controls UK businesses.
See above, paras 2–42 et seq.
28
As defined in Pt 1 of Sch.1A. See s.12A, s.790M, s.790C, s.890K, Pt 1 of Sch.1A.
29
This condition is potentially broad. See above, para.2–44.
30
2006 Act ss.9(5)(b) and 20, and see below at para.4–32.
31
2006 Act s.13.
32
Community Interest Company Regulations 2005 (SI 2005/1788). And for CIOs, see
above, para.1–30.
33
Community Interest Company Regulations 2005 (SI 2005/1788) regs 2 and 11. Note
the decision not to require an “objects clause” in the company’s constitution for this
purpose. See further para.7–29.
34
Companies (Audit, Investigations and Community Enterprise) Act 2004 s.36(3)–(6).
35
2004 Act s.35(2).
36
The Regulations give some further guidance (see regs 1–3), notably by excluding
political activities.
37 2006 Act s.14.
38
2006 Act s.1066.
39
2006 Act s.15—signed by the registrar and authenticated by the registrar’s official
seal (s.15(3)).
40 2006 Act s.15(4).
41
Bank of Beirut SAL v Prince El-Hashemite [2015] 3 W.L.R. 875.
42
2006 Act s.16(2)—thus making clear the company’s nature as an incorporated
association.
43 2006 Act s.16(5),(6).
44
45
Developing, para.11.32, estimating they are responsible for approximately 60 per cent
of registrations.
46An alternative, which in practice was very rarely adopted, was a limited company
with unlimited liability on the part of the directors (s.306 of CA 1985) but the 2006 Act
no longer provides for this.
47 Oakes v Turquand and Harding (1867) L.R. 2 H.L. 325; Insolvency Act 1986 s.74.
48The prohibition against a company acquiring its own shares applies only to limited
companies (s.658(1) and Ch.13).
49
An unlimited company is not required to file its annual accounts and reports (and so
make them publicly available): s.448 and Ch.21.
50 See Ch.1, above.
51Since the coming into force of the Companies Act 1980 no further companies limited
by guarantee and having a share capital can be formed: s.5.
52 See Ch.1, above.
53 2006 Act s.4(2).
54
A public company must have a nominal value of allotted share capital not less than
the statutory “authorised minimum” (s.761), currently £50,000 or its prescribed euro
equivalent (s.763), denominated in sterling or euros but not both (s.765), at least one-
quarter of which must be paid up before the company starts trading (s.586).
55
See para.1–30.
56
2004 Act ss.30 and 32 and the Community Interest Company Regulations 2005 (SI
2005/1788) regs 7–11.
57
According to Companies House, Statistical Release: Companies Register Activities
2014/15 p.8, as of 31 March 2015, private limited companies account for over 96 per
cent of all the corporate bodies on the register.
58
The application for registration must state the company’s proposed name: s.9(2)(a).
59 Though less so now that the Registrar has to allot each company a registered number
(s.1066) which it has to state on its business letters and order forms: s.82(1)(a) and
regulations made thereunder.
61 Under the 2006 Act, largely for reasons of convenience of the Companies House
computer system, a limit has been set on the number of characters of which a company’s
name may consist (no more than 160) and permitted characters have been prescribed as
well as matters relating to the format of the name: s.57 and the Company, Limited
Liability Partnership and Business (Names and Trading Disclosures) Regulations (SI
2015/17) reg.2. The DTI consultation document (DTI, Implementation of the Companies
Act 2006: Consultation Document, February 2007), para.2.38, revealed that the longest
registered name at that time had 159 characters. Like the famously long Welsh place
name, Llanfairpwllgwyngyllgogerychwyrndrobwllllantysiliogogogoch, it is more a
description than a name.
62 The Secretary of State has power to require companies to give appropriate publicity to
their names at their places of business and on business correspondence and related
documentation: s.82(2)(a). The name must also be on the company’s seal: s.45.
63 Each described below in paras 4–14 et seq.
64 2006 Act ss.58–59. In the case of a Welsh company (i.e. one which is registered on
the basis that its registered office is to be in Wales—see s.88(1) and below, para.4–14)
the Welsh equivalents (“cyfyngedig” (or “cyf”) or “cwmni cyfyngedig cyhoeddus” (or
“ccc”)) may (not must) be used instead. Similarly, in the case of a community interest
company that term (or its abbreviation “cic”) must be used as the suffix, if it is a private
company, and “community interest public limited company” (abbreviated to
“community interest plc”) in the case of a public company: 2004 Act s.33. The Welsh
equivalents are “cwmni buddiant cymunedol” (cbc) and “cwmni buddiant cymunedol
cyhoeddus cyfyngedig” (“cwmni buddiant cymunedol ccc”). And the name of an SE
must begin or end with “SE”, and no company or firm formed on or after 8 October
2004 may use that abbreviation otherwise in its name: Regulation 2157/2001 art.11.
652006 Act s.65(1) and the Company, Limited Liability Partnership and Business
(Names and Trading Disclosures) Regulations (SI 2015/17) regs 4–6. Nor may the
company use the terms “open ended investment company”, “investment company with
variable capital” or “limited liability partnership” (or their abbreviations or Welsh
equivalents).
66 However, the inclusion of “unlimited” (for which, incidentally, there is no authorised
abbreviation) would presumably prevent a moneylender from incorporating as
“Unlimited Loans Ltd”.
67
2006 Act s.60.
68
2006 Act s.60(1)(a).
69
2006 Act s.60(1)(b) and the Company, Limited Liability Partnership and Business
(Names and Trading Disclosures) Regulations (SI 2015/17) reg.3. The Department had
originally proposed to confine the exemption to statutory regulators established as
companies (for example, the Financial Services Authority) on the grounds that the
community interest company form catered for other companies for which exemption was
appropriate, but it changed its mind after consultation. See DTI, Implementation of the
Companies Act 2006: Consultation Document, February 2007, para.2.47; BERR,
Government Response to consultation on Companies Act 2006: Company and Business
Names, para.2.8 (URN 07/1244/GR).
70
2006 Act ss.60(1)(c) and 61, 62.
71 2006 Act s.53. An example of the use of a particular name being a criminal offence
would be where the name holds out the company as carrying on a business which
requires a licence or authorisation (for example, as a bank) which the company does not
have.
722006 Act s.54 and the Company, Limited Liability Partnership and Business (Names
and Trading Disclosures) Regulations 2015/17.
732006 Act s.55 and the Company, Limited Liability Partnership and Business Names
(Sensitive Words and Expressions) Regulations 2014/3140.
74 2006 Act s.56.
75
e.g. if the name includes “Charitable” or “Charity”, the Charity Commission or Office
of the Scottish Charity Regulator must be asked; if “Dental” or “Dentistry”, the General
Dental Council; and if “Windsor” (because of its royal associations), the Ministry of
Justice, the Welsh Assembly Government or the Scottish Executive.
76 2006 Act s.56(3).
77
2006 Act s.66.
78 2006 Act s.1099.
79 2006 Act s.66(3) and the Company, Limited Liability Partnership and Business
(Names and Trading Disclosures) Regulations (SI 2015/17) reg.7 and Schs 2 and 3. For
example, the words “company” and “cwmni” appearing at the end of the name are to be
disregarded in judging whether the name is the same (so that if the only difference
between the names is this one, they will be held to be the same) and “@” and “at” are to
be treated as the same.
80 Those with less common surnames can often surmount this difficulty by, for example,
inserting an appropriate place-name: e.g. Gower (Hampstead) Ltd.
812006 Act s.66(4) and Company, Limited Liability Partnership and Business (Names
and Trading Disclosures) Regulations (SI 2015/17) reg.8. If the body already registered
subsequently withdraws its consent, that will not affect the registration of the company.
82Though surely not eliminated, for example, where one of the two companies with the
same name is a well capitalised parent company and the other an undercapitalised
subsidiary.
83
Insolvency Act 1986 s.216; and see below, paras 9–16 et seq.
84 Corporate names are subject to all the restrictions noted here. An individual (or a
partnership) can trade under the individual’s (or individuals’) own names: s.1192(2) and
(3).
85
2006 Act Pt 41 (ss.1192–1199) (previously governed by the Business Names Act
1985).
86
See ss.1193(4), 1194(3), 1197(5), 1198(2) and 1207.
87
2006 Act Ch.2 of Pt 41. The same civil sanction is applied as in the case of
companies: s.1206 and para.9–3. The disclosure provisions of Ch.2 of Pt 41 apply only
to individuals and partnerships (s.1200), because s.82 (trading disclosure) performs the
same function for companies.
88And, ideally, also the Register of Trade Marks to ensure that the name proposed is not
someone’s registered trade mark.
89 2006 Act s.64. There is no time limit for giving such a direction.
90 2006 Act s.76. There is no time limit for giving such a direction. The company may
appeal to court within three weeks of the direction, but otherwise must comply with the
direction (or the court order) within six weeks: s.76(3)–(5). For example, in Association
of Certified Public Accountants of Britain v Secretary of State for Trade and Industry
[1998] 1 W.L.R. 164 the court confirmed the direction for a name change, identifying
the harm as persuading the public to pay more for the services of members by giving a
misleading impression of their qualifications because of the word “Certified”. In general,
however, little use is made of this power; undoubtedly the names of many companies
give totally misleading indications of the nature of their activities but this, on its own,
has apparently not been thought “likely to cause harm to the public”.
91 2006 Act s.75. A direction may given up to five years after registration: s.75(2)(a).
92
For a case where the names were not thought “too like” although they were
sufficiently alike to have caused a petitioning creditor to obtain a winding up order
against the wrong company with damaging consequences to it, see Re Calmex Ltd
[1989] 1 All E.R. 485.
93 2006 Act s.67. Any direction must be given within 12 months of registration: s.68(2)
(a).
94
2006 Act s.66.
95 Although an interlocutory application in a passing off action may provide speedier
relief: Glaxo Plc v Glaxowellcome Ltd [1996] F.S.R. 388.
96See Halifax Plc v Halifax Repossessions Ltd [2004] 2 B.C.L.C. 455 CA, a case
dealing with an action for trade mark infringement, but the wording of all these statutory
provisions indicates the same constraints will apply.
97 2006 Act s.77(1) and see below, para.4–30.
98
2006 Act s.64(3).
99 See Burge v Haycock [2001] EWCA Civ 900; [2002] R.P.C. 28 on the breadth of the
interests protected.
100
The company must change its name itself; the court cannot order the Registrar to
change the company’s name. Similarly, see (above) para.4–24, and (below) para.4–28.
101
See, e.g. Tussaud v Tussaud (1890) 44 Ch.D. 678 (an injunction was ordered
preventing a member of the Tussaud family from registering Louis Tussaud Ltd to carry
on a waxworks show, although the court would not restrain an individual from trading
under his or her own surname); Panhard et Levassor v Panhard Levassor Motor Co
[1901] 2 Ch. 513; Exxon Corp v Exxon Insurance Consultants International Ltd [1982]
Ch. 119.
102
British Diabetic Association v Diabetic Society Ltd [1995] 4 All E.R. 812.
103
Baume and Co Ltd v AH Moore Ltd [1958] R.P.C. 226; Parker-Knoll Ltd v Knoll
International Ltd [1962] R.P.C. 243.
104
Glaxo Plc v Glaxowellcome Ltd [1996] F.S.R. 388; Direct Line Group Ltd v Direct
Line Estate Agency Ltd [1997] F.S.R. 374.
105 British Telecommunications Plc v One In A Million Ltd [1999] 1 W.L.R. 903 (which
concerned registration of an internet domain name, not a company name, but the
principle is the same).
106
Completing, para.8.30.
107 Appointed by the Secretary of State: s.70.
108 2006 Act s.69(1).
109
2006 Act s.69(4).
110
2006 Act s.69(5).
1112006 Act s.73(1). Although the company is the primary respondent, the applicant
may make its directors or members respondents as well (s.69(3)), which will be
important for the range of persons caught by the adjudicator’s order.
112
2006 Act s.73(3)—including therefore by way of an order for contempt of court.
113
2006 Act s.73(4). Thus avoiding the problem which arose in Halifax Plc v Halifax
Repossessions Ltd [2004] 2 B.C.L.C. 455 CA, where, after a successful trade mark
infringement and passing-off action, the court was held to have no power of its own
motion to alter the defendant company’s name but only to order the shareholders to
secure such a change.
114 2006 Act s.74.
115 2006 Act s.77(1) and see below, para.4–31.
116 See paras 4–39 et seq.
117
2006 Act s.77.
118 2006 Act s.80.
119 2006 Act s.81(1).
120 2006 Act s.81(2),(3). Hence contracts entered into prematurely under the new name
will not be pre-incorporation contracts on which the individual who acted will be
personally liable (see paras 5–24 et seq.).
122
123
2006 Act s.9(5)(b).
124
Companies (Model Articles) Regulations 2008 Sch.1 art.26.
125
The CLR had recommended that the memorandum be abolished entirely (Final
Report I, para.9.4) but this was thought in some quarters, oddly, to raise the question of
whether it was intended to alter the nature of the company as an incorporated
association. Hence, apparently, the vestigial role for the memorandum.
126
2006 Act s.9(1).
127
2006 Act s.7(1).
128
2006 Act s.8(1). 2006 Act s.112(1) deems the subscribers to have agreed to become
members of the company and provides that, upon registration of the company, they do
become members of it.
129
2006 Act s.8. Bizarrely, for such a simple document, the memorandum is required to
be in the prescribed form, and very straightforward forms are prescribed for companies
with and without share capital respectively, in Schs 1 and 2 to the Registration
Regulations.
130
2006 Act s.1068(3),(5).
131
R. v Registrar of Joint Stock Companies [1931] 2 K.B. 197 CA where an application
for mandamus to order the Registrar to register a company formed for the sale in
England of tickets in the Irish Hospital Lottery was rejected on the ground that the
Registrar had rightly concluded that such sales were illegal in England.
132 See R. Drury, “Nullity of Companies in English Law” (1985) 48 M.L.R. 644. The
First Company Law Directive contains three Articles dealing with nullity.
133
R. v Registrar of Companies, Ex p. Central Bank of India [1986] Q.B. 1114 CA.
Reversing the decision at first instance, the Court of Appeal held that, even on judicial
review, the effect of s.98(2) of the Companies Act 1948, under which the certificate of
registration of a charge was “conclusive evidence that the requirements as to registration
have been satisfied”, was to make evidence of non-compliance inadmissible, thus
precluding the court from quashing the registration.
134
Bowman v Secular Society [1917] A.C. 406 HL where, however certiorari was
denied as the Society’s purposes were held not to be unlawful.
135
R. v Registrar of Companies, Ex p. HM’s Attorney-General [1991] B.C.L.C. 476.
136Had she been less frank, for example by stating the primary object as “to carry on the
business of masseuses and to provide related services”, she would probably have got
away with it.
137 Notwithstanding that, as she indignantly protested, she paid income tax on her
earnings. Since prostitution can be carried on without necessarily committing any
criminal offence and since she continued, without incorporation, to practise her
profession (for which she has become a well-known spokeswoman), some may think
that this was an example of the “unruly horse” of public policy unseating its judicial
riders.
138Edinburgh & District Water Manufacturers Association v Jenkinson (1903) 5
Sessions Cases 1159; British Association of Glass Bottle Manufacturers v Nettlefold
(1911) 27 T.L.R. 527 (where, however, the company was held not to be a trade union).
139
British Association of Glass Bottle Manufacturers, fn.138 above, at 529.
140 Drury, “Nullity of Companies in English Law” (1985) 48 M.L.R. 644 at 649–650.
141
See Companies in 1976, Table 10.
142
Notwithstanding that the First Company Law Directive provides by art.11.1(a) that
“Nullity must be ordered by a decision of a court of law”.
143
But, presumably, unless the company agreed, he could not take this action unless the
incorporation was void (as in the case of a trade union or where the purposes were
unlawful), rather than voidable (which would seem to be the case where, for example,
registration had been secured by fraudulent misrepresentations).
144
But as what? As a registered company, which it ostensibly is? Or as an unregistered
company under Pt V of the Insolvency Act 1986?
145
As the First Directive appears to envisage: see art.12.2.
146
2006 Act s.16(3).
147 2006 Act s.761. This is discussed further at para.11–8. In the more usual case where
original registration was as a private company but it later converts to a public one,
similar requirements will first have to be met, but there is no suspension of business
during the process of conversion.
148 2006 Act s.763(4).
149 See Ch.18.
150
2006 Act s.90(1).
151
2006 Act s.91. See Ch.11, below.
152 2006 Act s.92. Note that this is not a rule about minimum capital but about the
relationship between the company’s net assets and the legal capital it has chosen to raise.
153
All that s.831 provides is that a public company which is not in this position cannot
make a distribution to its members.
154
2006 Act s.93. In addition, the rules requiring independent valuation of transfers of
non-cash assets to a public company in the “initial period” (see para.11–16) apply to a
company re-registered as public, but with the members of the company being substituted
for the subscribers to the memorandum as the persons in respect of whom the rule
applies (see s.603(a) and para.5–3). These rules apply after re-registration and so are not
a condition of it.
155 2006 Act s.94 (including a statement of proposed secretary, if the company does not
already have one, which, as a private company, it was not required to: ss.94(1)(b) and
95).
156Which is conclusive evidence that the requirements have been met: s.96(5). On
“conclusiveness”, see paras 4–34 et seq., above.
157
2006 Act s.96.
158 2006 Act s.90(4).
159 For obvious reasons it cannot, by this simple process, convert to an unlimited
company: s.97(1).
160
2006 Act s.97.
161 The category (b) of objectors is somewhat puzzling since, until the Registrar issues a
new certificate, the company remains a public company which it could not be unless it
had a share capital. Presumably (b) is to cater for an “old public company” which has
still not re-registered under the transitional provisions, now in the Companies
Consolidation (Consequential Provisions) Act 1985 ss.1–9. As there can now be few, if
any, such companies that have not re-registered under the transitional provisions either
as Plcs or as private companies, this book ignores them.
162
2006 Act s.98.
163
2006 Act s.97(2).
164 2006 Act s.98(3)–(6).
165 2006 Act s.101.
166
See para.13–34, below.
167
2006 Act ss.650–651.
168 2006 Act s.102(1)(a) for private companies and s.109(1)(a) for public companies.
169 2006 Act s.102(2).
170
2006 Act s.109(2).
171
2006 Act s.102(1)(c) and s.109(1)(c) for private and public companies respectively.
172 2006 Act s.103(4) and s.110(4).
173 2006 Act s.104 and s.111.
174
2006 Act s.90(2)(e).
175
2006 Act s.105(2).
176
2006 Act s.102(2).
177 2006 Act s.109(2).
178 2006 Act s.105.
179 2006 Act s.37 of the Companies (Audit, Investigations and Community Enterprise)
Act 2004. Being limited is a necessary part of the definition of a CIC: s.26. However, if
the company wishing to convert to CIC status is unlimited, it can first become limited
under (iv) above. More important in this respect is the prohibition on a CIC re-
registering as an unlimited company: s.52(1).
180
See paras 1–7 and 1–10.
181 2006 Act s.38(2).
182 2006 Act s.53.
CHAPTER 5
PRE-INCORPORATION AND INITIAL CORPORATE
CONTRACTING
Introduction 5–1
“Promoters” and their Dealings with the Company 5–2
Meaning of “promoter” 5–2
Duties of promoters 5–6
Remedies for breach of promoters’ duties 5–15
Remuneration of promoters 5–21
Preliminary Contracts Entered Into by Promoters 5–23
Companies’ Pre-Incorporation Contracts 5–24
Conclusion 5–29
INTRODUCTION
5–1
In the earlier chapters we examined the advantages of
incorporation, the processes for achieving that status, and the
various sources of rules regulating the corporate form once
created.1 And in later chapters we look in detail at the law as it
applies to companies, paying particular attention to the sources
of a company’s capital and the various constraints on its use,2 as
well as the legal constraints on the powers exercised by the
company’s management, especially by its directors.3 All these
various legal rules are designed to ensure that the company is
run as a success, thus enabling the company’s shareholders,
creditors and other stakeholders to prosper.
Extensive though these rules are, they leave a window of time
which is potentially unregulated. This is the period during which
individuals with good ideas for a new business set to work on
creating a company and bringing it into existence ready to do
business. This may seem a relatively unimportant time in the
scheme of things, especially now that buying a company off the
shelf makes the process so quick.4 But two particular problems
are common. The first is the intuitive concern with the probity of
transactions between the newly formed company buying assets,
for example, from the very people who set the company up and
determine its first steps. The risk is that these deals overly
advantage the originators, or “promoters”, at the expense of the
company and those persuaded to become its members. Secondly,
there is the practical problem of how a company not yet in
existence can enter into contracts which bind the company once
it is formed. In agency terms, this is a case where the principal is
not “undisclosed” (indeed, its expected genesis is usually made
clear), but is “non-existent” at the time of the deal. This too may
seem an unlikely problem, but it is sometimes (although
increasingly rarely) simply the case that a time-sensitive
opportunity presents itself before the company can be formed,
and yet those involved do not want to be personally liable; they
want—for all the reasons we have already considered—to have
the deal pursued under a corporate umbrella.
We take each problem in turn. They raise quite different
issues, the first dealt with primarily by the common law, the
second by a combination of the common law and statute.
“PROMOTERS” AND THEIR DEALINGS WITH THE COMPANY
Meaning of “promoter”
5–2
Much of the current law on promoters emerged in the nineteenth
century, when there were no restrictions on inviting the public to
subscribe for shares in newly formed companies, and the
caricature “company promoter” was an individual of dubious
repute who made it his profession to form bogus companies and
foist them off on a gullible public, to the latter’s detriment and
his own profit. But even in those days a much more typical
example was the village grocer who converted his business into
a limited company.5 The motivations of each might be different,
and the grocer less likely than the professional to abuse his
position since he can be expected to remain the majority
shareholder in his company, whereas the promoter, if a
shareholder at all, usually intends to off-load his holdings onto
others as soon as possible. But both create, or help to create, the
company, and seek to sell it something, whether it be their
services or a business. Both are well-placed to take advantage of
their position by obtaining a recompense grossly in excess of the
true value of what they are selling.6 For that reason it has long
been held that both should be subjected to rather onerous
common law and equitable duties, given the power that they
wield over the company. The parallels with the rules applying to
directors of companies already in existence will be clear when
we come to consider those rules.7
5–3
But who should be subject to such tough rules? Both the
professional promoter and the village grocer are promoters to the
fullest extent, in that each “undertakes to form a company with
reference to a given project, and to set it going and takes the
necessary steps to accomplish that purpose”.8 But a person who
has taken a much less active and dominating role may also be a
promoter. Indeed, the potential activities of promoters are so
varied that no comprehensive definition has ever been
formulated, beyond confining it to activities related to bringing a
company into existence.9 The expression may, for example,
cover any individual or company that arranges for someone to
become a director, places shares, or negotiates preliminary
agreements.10 Nor need he or she necessarily be associated with
the initial formation of the company; one who subsequently
helps to arrange the “floating off” of its capital (in the manner
explained in Ch.25) will equally be regarded as a promoter.11 On
the other hand, those who act in a purely ministerial capacity,
such as solicitors and accountants, will not be classified as
promoters merely because they undertake their normal
professional duties12; although they may if, for example, they
have agreed to become directors or to find others who will.13
5–4
Who constitutes a promoter in any particular case is therefore a
question of fact,14 and the promoter’s role continues until the
particular functions of promotion come to an end.15 The
expression has never been clearly defined either judicially16 or
legislatively, despite the fact that it is frequently used both in
decisions and statutes; this vagueness is apt to be embarrassing
when legislation requires promoters to be named or transactions
with them to be disclosed.17
5–5
In many ways the risks of promotion are now lower. In private
companies the rules very easily merge with those applying to
corporate directors, since in this context the promoter usually
becomes, and was always intended to become, a director of the
newly formed company. And, as far as public companies are
concerned, these days, promoters cannot simply invite the public
to subscribe for shares in any proposed new venture: only a
public company can invite the public to subscribe for shares, and
before a public company is listed on the Main Market of the
Stock Exchange or quoted on the Alternative Investment Market,
it must be able to show some track record. Consequently, here
too the duties of the promoters are often swallowed up in such
cases in those of the directors.18 But corporate promotion
continues, even if on a smaller scale, and indeed more recently
there has been an increase in public offers of unlisted shares,
including shares in new start-up ventures, so the law on
promoters may become increasingly important again.
Duties of promoters
5–6
The problems which must be dealt with are clear. Promoters are
in a particularly advantaged position to sell their own assets or
services to the company at an inflated price; to mislead likely
investors into buying shares in the new company; and, once that
is done, perhaps to induce the company to confirm that all is
proper, and any breach might be waived.
(a) Statutory rules
5–7
The early Companies Acts contained no provisions regarding the
liabilities of promoters, and current legislation remains largely
silent on the subject, merely imposing liability for untrue
statements in listing particulars or prospectuses to which they are
parties.19 Since these rules apply only to public offers and not to
company formations unaccompanied by a public offer or the
introduction of the securities to a public market, discussion of
them is postponed to Ch.25.
5–8
There are also statutory rules relating to sales of assets to public
companies. Article 11 of the Second Company Law Directive
was intended to ensure that, when a public company acquired a
substantial non-cash asset20 from its promoters within two years
of its entitlement to commence business, an independent
valuation of that asset and approval by the company in general
meeting should be required. But, as we shall see,21 as
implemented by the UK this applies only to acquisitions from
the subscribers to the memorandum, who need not be the true
promoters and generally are not. However, when a private
company re-registers as a public one (a more common
occurrence than initial formation as a public company) a similar
requirement applies to such acquisitions from anyone who was a
member on the date of re-registration,22 and that may well catch
a promoter. This, therefore, affords an additional statutory
protection against the risk that promoters will seek to off-load
their property to the company at an inflated price, but one which
can be avoided by the promoters ceasing to be members prior to
the re-registration.
5–9
Finally, if the promoter exchanges his or her own assets for
shares, then there are also statutory rules designed to prevent
issues of shares at a discount. But these too are focused on
public companies rather than private ones, where it is largely left
to the common law and equitable rules to regulate the problem.23
(b) Common law and equitable rules
5–10
Thus, in the main, promoters’ duties have been developed by the
courts. Promoters are of course subject to the general law on
fraud, misrepresentation, negligence, unjust enrichment, and so
on, and in the right context these duties can be important. But
their most significant duties are equitable. In a series of cases in
the last quarter of the nineteenth century, the courts were alert to
the possibilities of abuse inherent in the promoter’s position, and
thus determined that promoters stand in a fiduciary position
towards the company,24 with all the duties of disclosure and
accounting which that implies. These fiduciary restrictions
profoundly affect three particular contexts: unless promoters
obtain the fully informed consent of the company, they cannot
enter into any sale or purchase transactions with the company
(the conflict between their personal interest in the transaction
and their duty to obtain the best price for the company is
obvious), or be remunerated, or take commissions from third
parties (absent consent, these both constitute secret profits).
These fiduciary duties have not been restated in the 2006 Act, as
directors’ fiduciary duties have been,25 and so they remain
regulated by the common law. However, the two sets of rules are
likely to continue to influence each other, and the detail of
promoters’ duties and their application can be gleaned from the
analogous cases concerning directors.26
(c) Full disclosure and consent
5–11
The main difficulty with promoters’ fiduciary duties has been
deciding how to effect proper disclosure to, and obtain approval
from, the company—the company being an artificial entity. As
we will see later, the powers of the company are generally
exercised by the board of directors or (where that is not possible
or where otherwise agreed) by the shareholders in general
meeting.27 But adopting either option typically raises a very real
practical problem: voting may in either case be dominated by the
promoter, thus allowing the promoter to be judge in his or her
own cause. That does not seem right, and here, as elsewhere, the
courts have struggled towards an effective solution to the
problem.28
5–12
The first leading case on the subject, Erlanger v New Sombrero
Phosphate Co,29 suggested that it was the promoter’s duty to
ensure that the company had an independent board of directors
and to make full disclosure to it. In that case Lord Cairns said30
that the promoters of a company:
“stand undoubtedly in a fiduciary position. They have in their hands the creation
and moulding of the company; they have the power of defining how, and when, and
in what shape, and under what supervision, it shall start into existence and begin to
act as a trading corporation…I do not say that the owner of property may not
promote and form a joint stock company and then sell his property to it, but I do
say that if he does he is bound to take care that he sells it to the company through
the medium of a board of directors who can and do exercise an independent and
intelligent judgment on the transaction.”
5–13
Such a decision would undoubtedly be effective, but will
anything less suffice? An entirely independent board would be
impossible in the case of most private and many public
companies, and since Salomon v Salomon31 it has never been
doubted that the fully informed consent of the members would
be equally effective. In that famous case it was held that the
liquidator of the company could not complain of the sale to it at
an obvious over-valuation of Mr Salomon’s business, all the
members having acquiesced therein. Note, however, that in this
case the shareholders’ consent was unanimous, and so it might
be thought irrelevant that Salomon himself held the
overwhelming majority of the shares: all who could agree on the
company’s behalf had done so; there was no dissent. But could
Salomon have carried such a vote against a unanimously
opposed independent minority? Logic suggests not, yet the cases
pull both ways.32 Even the older cases saw the problem. This
was evident in the speeches of the House of Lords in the second
great landmark case in the development of this branch of the
law, Gluckstein v Barnes.33 That case made it clear that a
promoter could not escape liability by disclosing to a few cronies
who constituted the company’s initial members, when it was the
intention immediately to float off the company to the public or to
induce some other dupes to purchase the shares. “It is too
absurd”, said Lord Halsbury with his usual bluntness:
“to suggest that a disclosure to the parties to this transaction is a disclosure to the
company. They were there by the terms of the agreement to do the work of the
syndicate, that is to say, to cheat the shareholders; and this, forsooth, is to be treated
as a disclosure to the company, when they were really there to hoodwink the
shareholders.”
The modern trend is in the same direction, and would seem to

favour denying Salomon—or any other director or promoter—
the right to be the person whose own votes determine the
outcome of the company’s decision when the question in issue is
forgiveness or waiver of his own wrongs to the company.34
5–14
Finally, still on disclosure and consent, a number of older cases
have suggested that a promoter cannot effectively contract out of
his or her fiduciary duties simply by inserting a clause in the
articles whereby the company and the subscribers agree to waive
their rights.35 This is clearly right if the articles purport to
exclude fiduciary duties entirely, or even to consent in advance
to their general waiver during the period of promotion.36 On the
other hand, if the articles provide full disclosure of the terms of a
material transaction with one of the promoters, and new
subscribers join the company on the basis that they confirm their
consent to that arrangement, then there seems no reason at all, on
general principles, why this should not meet the demands of full
disclosure and informed, and indeed unanimous, consent.
Remedies for breach of promoters’ duties
5–15
There are various remedies available against promoters, but the
most common is for breach of their fiduciary duties: the
company (to whom these duties are owed) brings proceedings
for recovery of any secret profits which the promoter has made,
or for rescission of contracts it has with the promoter.37
5–16
A promoter, being a fiduciary, is not entitled to make a secret
profit. Although the promoter’s profit is most likely to derive
from an over-priced sale of the promoter’s property to the newly
formed company (as to which, see below), if a profit has been
made on some ancillary transaction there is no doubt that this too
may be recovered. The classic illustrations are typically bribes or
secret commissions paid by third parties to the promoters for the
benefit of particular privileges in future engagements with the
company. But there are more complex cases too, as in Gluckstein
v Barnes38 itself.39 In that case a syndicate had been formed for
the purpose of buying and reselling Olympia, then owned by a
company in liquidation. The syndicate first bought up at low
prices certain charges on the property and then bought the
freehold itself for £140,000. They then promoted a company of
which they were the directors, and to it they sold the freehold for
£180,000, which was raised by a public issue of shares and
debentures. In the prospectus the profit of £40,000 was
disclosed. But in the meantime the promoters had had the
charges on the property repaid by the liquidator out of the
£140,000 original sale price, and had thereby made a further
profit of £20,000. This was not disclosed in the prospectus,
though reference was made there to a contract, close scrutiny of
which might have revealed that some profit had been made. Four
years later the new company went into liquidation and it was
held that the promoters must account to the company for this
secret profit of £20,000. Alternatively, the same facts may
permit the company to sue the promoter for damages for fraud
(deceit),40 or perhaps for misrepresentation.41
5–17
Far more common, however, is the scenario where the promoter
sells his or her property to the company without proper
disclosure, and the company may then rescind the contract.
Rescission must be exercised on normal contractual principles42;
that is to say, the company must have done nothing to show an
intention to ratify the agreement after finding out about the non-
disclosure43 and restitutio in integrum must still be possible.44
The restitutio requirement means the company must be in a
position to return the property,45 prima facie in its original state
(although it is immaterial if it is no longer of the same value46)
although the courts’ wide discretion to order financial
adjustments when directing rescission means the rule now
operates as much less of an impediment.47
5–18
If rescission of the contract between company and promoter is
no longer possible (because of delay, affirmation or inability to
effect restitutio), the alternative remedy of an account of profits,
designed to strip the defaulting fiduciary of the profits of the
breach, is not generally allowed.48 In principle, the court could of
course assess the market value of the asset at the date of sale and
on that basis force the promoter to account, but this, it has been
argued, would be to make a new contract for the parties.49 The
only exception, it seems, and a rare one at that,50 arises where the
very specific duties owed by the promoter at the time of the
initial purchase make it possible to say that this original purchase
by the promoter was, at least in equity, a purchase for the
company51; then the re-sale by the promoter to the company is
nugatory, and the company can accordingly recover the
difference between the two prices as a simple secret profit made
by the promoter.52
5–19
This restricted view of when an account of profits is available
can clearly work an injustice if restitutio in integrum has become
impossible, and the company then seems to have no remedy
against its defaulting promoter. In practice, the courts have
avoided this injustice by upholding other remedies against the
promoter, either finding that the promoter was fraudulent, and
accordingly liable for damages in a common law action for
deceit,53 or negligent in allowing the company to purchase at an
excessive price,54 the damages being the difference between the
market value and the contract price. It is not possible to reach
these same ends using the Misrepresentation Act 1967,55 since
the court’s discretionary jurisdiction to award damages in lieu of
rescission for innocent or negligent misrepresentations inducing
a contract56 does not, it seems, exist unless rescission is available
at the time the court exercises the discretion.57
5–20
The company is not, however, the only party able to bring claims
against the promoters. As already noted, promoter may be liable
to those who have acquired securities of the company in reliance
on misstatements in listing particulars or prospectuses to which
the promoter was a party. The remedies available against him are
the same as those against the officers of the company or others
responsible for the listing particulars or prospectuses and are
dealt with in Ch.25. In addition, other participants may have
claims at common law.58
Remuneration of promoters
5–21
A promoter is not entitled to recover any remuneration for his
services from the company unless there is a valid contract to that
end between promoter and company. Indeed, older cases have
suggested that without such a contract the promoter is not even
entitled to recover preliminary expenses or the registration
fees,59 but whether these decisions would survive modern unjust
enrichment analysis is perhaps moot. In this respect the promoter
is at the mercy of the directors of the company. Until the
company is formed it cannot enter into a valid contract60 and the
promoter therefore has to expend the money without any
guarantee of repayment. In practice, however, recovery of
preliminary expenses and registration fees does not normally
present any difficulty. The directors will normally be
empowered to pay them and will do so. It may well be, however,
that the promoter will not be content merely to recover his
expenses; certainly a professional promoter will expect to be
handsomely remunerated. Nor is this unreasonable. As Lord
Hatherley said,61 “The services of a promoter are very peculiar;
great skill, energy and ingenuity may be employed in
constructing a plan and in bringing it out to the best advantages”.
Hence it is perfectly proper for the promoter to be rewarded,
provided, as we have seen, that there is full disclosure to the
company of the rewards to be obtained.
5–22
The reward may take many forms. The promoter may purchase
an undertaking and promote a company to repurchase it at a
profit, or the undertaking may be sold directly by the former
owner to the new company, the promoter receiving a
commission from the vendor. A once-popular device was for the
company’s capital structure to provide for a special class of
deferred or founders’ shares which would be issued credited as
fully paid in consideration of the promoter’s services.62 Such
shares would normally provide for the lion’s share of the profits
available for dividend after the preference and ordinary shares
had been paid a dividend of a fixed amount. This had the
advantage that the promoter advertised his or her apparent
confidence in the business by retaining a stake in it; but all too
often the stake (which probably cost the promoter nothing
anyway) was merely window-dressing. And if, in fact, the
company proved an outstanding success the promoter might do
better than all the other shareholders put together. Today, when
the trend is towards simplicity of capital structures, founders’
shares are out of favour and, in general, those old companies
which originally had them have got rid of them on a
reconstruction.63 A more likely alternative is for the promoter to
be given warrants or options entitling him or her to subscribe for
shares at a particular price (e.g. that at which they were issued to
the public) within a specified time. If the shares have meanwhile
gone to a premium this will obviously be a valuable right.
PRELIMINARY CONTRACTS ENTERED INTO BY PROMOTERS
5–23
Until the company has been incorporated it cannot contract or do
any other act. Nor, once incorporated, can it become liable on or
entitled under contracts purporting to be made on its behalf prior
to incorporation,64 for ratification is not possible when the
ostensible principal did not exist at the time when the contract
was originally entered into.65 Hence, preliminary arrangements
will either have to be left to mere “gentlemen’s agreements” or
the promoters will have to undertake personal liability. Which of
these courses will be adopted depends largely on the demands of
the other party. If our village grocer is converting his business
into a private company of which he is to be managing director
and majority shareholder he will obviously not be concerned to
have a binding agreement with anyone. In such a case a draft
sale agreement will be drawn up and the main object of the
company will be to acquire the business as a going concern “and
for this purpose to enter into an agreement in the terms of a draft
already prepared and for the purpose of identification signed
by…”. When the incorporation is complete the seller will ensure
that the agreement is executed and completed.
If, however, promoters are arranging for the company to take
over someone else’s business, the seller certainly, and the
promoters probably, will wish to have a binding agreement
immediately. In this event the sale agreement will be made
between the vendor and the promoters, and it will be provided
that the personal liability of the promoters is to cease when the
company in process of formation is incorporated and enters into
an agreement in similar terms.
COMPANIES’PRE-INCORPORATION CONTRACTS
5–24
If the law described in the previous section is not appreciated,
then difficulties can easily arise: promoters may purport to cause
the as yet unformed company to enter into transactions with third
parties. As already noted, these contracts cannot bind the non-
existent entity, and the company, once formed, cannot ratify or
adopt the contract.66 Prior to statutory amendments driven by the
UK’s entry into the EU, the legal position as between the
promoter and the third party seemed to depend on the
terminology employed. If the contract was entered into by the
promoter and signed “for and on behalf of XY Co Ltd” then,
according to the early case of Kelner v Baxter,67 the promoter
would be personally liable. But if, as is much more likely, the
promoter signed the proposed name of the company, adding his
own to authenticate it (e.g. XY Co Ltd, AB Director) then,
according to Newborne v Sensolid (Great Britain) Ltd,68 there
was no contract at all. This was hardly satisfactory.
5–25
The statutory rule took a clear if rather dramatic stand. The
relevant provision is now CA 2006 s.51, which reads:
“(1) A contract which purports to be made by or on behalf of a company at a time
when the company has not been formed, has effect, subject to any agreement to the
contrary, as one made with the person purporting to act for the company or as agent
for it, and he is personally liable on the contract accordingly.”
The obvious aim of the provision is to increase security of

transactions for third parties by avoiding the consequences of the
contract with the company being a nullity. The provision
imposes contractual liability on the promoter, and applies even if
the new company is never formed.69 To avoid the promoter’s
personal liability under the statute, the third party must explicitly
agree to forego the protection—consent cannot be deduced
simply from details of the contract which, interpreted widely,
would be inconsistent with the promoter accepting personal
liability, such as the promoter signing as agent for the
company.70
5–26
The presence of the statutory provision has had an effect on the
courts’ perception of the common law in this area. In
Phonogram Ltd v Lane, Oliver LJ said that the “narrow
distinction” drawn in Kelner v Baxter and the Newborne case did
not represent the true common law position, which was simply:
“does the contract purport to be one which is directly between
the supposed principal and the other party, or does it purport to
be one between the agent himself—albeit acting for a supposed
principal—and the other party?”71 This question is to be
answered by looking at the whole of the contract and not just at
the formula used beneath the signature. If after such an
examination the latter is found to be the case, the promoter
would be personally liable at common law, no matter how he
signed the document.
5–27
On this analysis the difference between s.51 and the common
law is narrowed, but not eliminated. At common law, if the
parties intend to contract with the non-existent company, the
result will be a nullity and the third party protected only to the
extent that the law of restitution provides protection. Under the
statute, a contract which purports to be made with the company
will trigger the liability of the promoter, unless the third party
agrees to give up the protection. In other words, the common law
approaches the question of the third party’s contractual rights
against the promoter as a matter of the parties’ intentions, with
no presumption either way, whereas the statute creates a
presumption in favour of the promoter being contractually liable.
The common law is still important in those cases which fall
outside the scope of the statute.72
5–28
Despite the improvements which the statute has effected, there
are still some problems with its operation. First, perhaps as a
consequence of the legislature’s concern with the promotion of
third-party protection, the section did not make it clear whether
the promoter acquires a right under the statute to enforce the
contract, as well as the risk of being subjected to contractual
obligations. It was submitted in earlier editions of this book that
normal principles of contractual mutuality should lead to this
latter result and this conclusion has been confirmed by the Court
of Appeal.73
Secondly, the section bites only when the contract “purports”
to be made on behalf of a company which has not been formed.
Thus, where the parties thought the company existed, though it
had in fact been struck off the register, the Court of Appeal held
that their contract was not at the time one which purported to be
made on behalf of the company of the same name which was
hurriedly incorporated when the parties later discovered their
mistake.74 The contract in truth purported to be made on behalf
of the company which had been struck off, clearly not a
company of which it could be said it “has not been formed”.
Ensnared in this conundrum, the claimant failed. Thus, the
section has not been construed as protecting third parties in all
situations where they in fact attempt to contract with non-
existent companies, but 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.75
Thirdly, and undoubtedly the most serious,76 the reforms have
done nothing to make it simpler for companies to “assume” or
adopt the rights and obligations of a pre-incorporation
transaction. While one can understand that the Directive
preferred to leave that to each Member State, the UK has not got
round to doing anything about it. Many common law countries
have recognised, either by judge-made law or by statute, that a
company when formed can effectively elect to adopt pre-
incorporation transactions purporting to be made on its behalf
without the need for a formal novation, and that the liability of
the promoter ceases when the company adopts it. In 1962, the
Jenkins Committee recommended this reform but it still has not
happened.77 At present the only way in which the company can
adopt the contract is by entering into a post-incorporation
agreement in the same terms. Even if the company does so, that
will not relieve the promoters of personal liability (at any rate
while the new agreement remains executory)78 unless they are
parties to the new agreement, which expressly relieves them of
liability under the pre-incorporation agreement. The need for all
this is frequently overlooked. This may not matter much if all
those concerned remain able and willing to perform their
obligations under the pre-incorporation agreement. But it can be
calamitous if one or more of them becomes insolvent or wants to
withdraw because changes in market conditions have made the
transactions disadvantageous to him or them.
As pre-incorporation transactions are inevitable features of
every new incorporation, it ought to be made as easy as possible
to achieve what the parties intend (or would have intended if
they had realised that the company was not yet incorporated and
had understood the legal consequences). In this case, if not
generally, the legal technicality that ratification dates back to the
date of the transaction so that it is not effective unless, at that
time, the ratifying person existed and had capacity to enter into
the transaction, should not apply.
CONCLUSION
5–29
If this chapter reveals any surprises, it is that, despite all the
ambitions to simplify the law relating to companies and
streamline its operation, especially for small businesses, there
remains this relatively untouched territory—but nevertheless
territory which must inevitably be navigated by every single
company in its transition from pre-incorporation to post-
incorporation. Across this territory it is largely, although not
entirely, left to the common law to regulate the activities of the
company’s promoters, and their engagements with the company
and with third parties.
1
See Chs 1–4.
2
See Chs 11–13, 24–25, 31.
3
See especially Ch.16, but also Chs 15 and 19.
4 See para.4–9, and here using “off the shelf” to refer to the modern direct electronic
registration, including by promoters themselves.
5Or a bootmaker: see the discussion of Salomon v Salomon & Co Ltd [1897] A.C. 22
HL, at paras 2–1 et seq.
6
e.g. Re Darby [1911] 1 K.B. 95.
7 See below, Ch.16.
8 Per Cockburn CJ in Twycross v Grant (1877) 2 C.P.D. 469 at 541 CA.
9
Whaley Bridge Calico Printing Co v Green (1880) 5 Q.B.D. 109 at 111 (Bowen J).
10cf. Bagnall v Carlton (1877) 6 Ch.D. 371 CA; Emma Silver Mining Co v Grant
(1879) 11 Ch.D. 918 CA; Whaley Bridge Calico Printing Co v Green (1880) 5 Q.B.D.
109; Lydney & Wigpool Iron Ore Co v Bird (1886) 33 Ch.D. 85 CA; Mann v Edinburgh
Northern Tramways Co [1893] A.C. 69 HL; Jubilee Cotton Mills v Lewis [1924] A.C.
958 HL; and cases cited below.
11
Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch. 392 at 428 CA.
12
Re Great Wheal Polgooth Co (1883) 53 L.J. Ch. 42; Houghton v Saunders [2015] 2
N.Z.L.R. 74.
13
Lydney & Wigpool Iron Ore Co v Bird (1886) 33 Ch.D. 85 CA; Bagnall v Carlton
(1877) 6 Ch.D. 371 CA.
14
See J.H. Gross (1970) 86 L.Q.R. 493.
15As they will when the directors are appointed and take over the management: per
Cockburn CJ in Twycross v Grant (1877) 2 C.P.D. 469 at 541 CA.
16
For attempts, in addition to Cockburn CJ’s description (above), see those of Lindley J
in Emma Silver Mining Co v Lewis (1879) 4 C.P.D. 396 at 407; and of Bowen J in
Whaley Bridge Calico Printing Co v Green (1880) 5 Q.B.D. 109 at 111.
17 e.g. under s.762(1)(c) (in relation to obtaining a trading certificate: see para.4–38,
above). EU law seems to prefer the term “founders” which is not really any clearer:
Commission Regulation 809/2004 of 29 April 2004 (the Prospectus Regulation) Annex
I, para.14.1.
18 As pointed out in Ch.25, the handling of public issues is now virtually monopolised
by investment bankers whose activities are highly regulated, often by reference to
standards set these days by EU law.
19 FSMA 2000 s.90 (see para.25–32). But note s.90(8) which makes it clear that in
respect of the duty of disclosure a promoter is in no worse position than any other person
responsible for the prospectus.
20 One for which the consideration paid by the company was equal to one-tenth or more
of the company’s issued share capital.
21
2006 Act s.598. See para.11–17, below.
22 2006 Act s.603(a).
23 See below, paras 11–15 et seq.; and 2006 Act ss.593 et seq. Contrast that with the
situation in Salomon v Salomon & Co Ltd [1897] A.C. 22 HL, discussed at paras 2–5 et
seq.
24Erlanger v New Sombrero Phosphate Co (1878) 3 App.Cas. 1218 HL 1236 (Lord
Cairns). Since the duty is owed to the company, any action against the promoters must
be taken by the company, not by its members: Foss v Harbottle (1843) 2 Hare 461, 489.
25See Ch.16, below. Since promoters can adopt very different roles, their particular
duties and liabilities require close examination of the facts: Lydney and Wigpool Iron
Ore Co v Bird (1886) 33 Ch.D. 85, 93; Ladywell Mining Co v Brookes (1887) 35 Ch.D.
400, 407 and 411, per Cotton LJ.
26 See Ch.16.
27
28See paras 16–117 et seq. (directors), 19–4 et seq. (shareholders) and 31–30 et seq.
(bondholders).
29 Erlanger v New Sombrero Phosphate Co (1878) 3 App.Cas. 1218 HL.
30
Erlanger v New Sombrero Phosphate Co (1878) 3 App.Cas. 1218 at 1236 HL.
31
Salomon v Salomon & Co Ltd [1897] A.C. 22 HL: see para.2–1, above. Also see
Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch. 392 at 426 CA (Lindley MR).
32
Contrast two cases on directors, admittedly in different contexts, but both involving
breaches of fiduciary duty: North-West Transportation v Beatty (1887) 12 App.Cas. 589
PC; and Cook v Deeks [1916] 1 A.C. 554 PC.
33
Gluckstein v Barnes [1900] A.C. 240 at 247 HL.
34
See fn.28, above. Also see S. Worthington, “Corporate Governance: Remedying and
Ratifying Directors’ Breaches” (2000) 116 L.Q.R. 638, since the concerns are equally
applicable.
35
Gluckstein v Barnes [1900] A.C. 240 HL; Omnium Electric Palaces v Baines [1914] 1
Ch. 322 at 347, per Sargant J. Such “waiver” clauses used to be common, apparently,
and, except as regards actual misrepresentations (on which see Misrepresentation Act
1967 s.3), there is still no statutory prohibition of them: s.232 (invalidating exemption
clauses) applies only to directors.
36 Armitage v Nurse [1998] Ch. 241 CA.
37Note the critical comments in Bentinck v Fenn (1887) L.R. 12 App.Cas. 652 HL,
where the (unsuccessful) action was pursued—inappropriately is the suggestion—by a
contributor.
38Gluckstein v Barnes [1900] A.C. 240 HL. And see Jubilee Cotton Mills v Lewis
[1924] A.C. 958 HL.
39
See below, paras 16–86 et seq. for the analogous rules in relation to directors.
40 Whaley Bridge Calico Printing Co v Green (1879) 5 Q.B.D. 109, a successful action
to recover secret profits, with Bowen J noting at 110–111 that the company could
alternatively have succeeded in an action for fraud.
41
42S. Worthington, “The Proprietary Consequences of Rescission” (2002) Restitution
Law Review 28–68.
43Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch. 392 CA. Here again “the
company” must mean the members or an independent board; clearly ratification by
puppet directors cannot be effective.
44Re Leeds & Hanley Theatre of Varieties [1902] 2 Ch. 809 CA; Steedman v Frigidaire
Corp [1933] 1 D.L.R. 161 PC; Dominion Royalty Corp v Goffatt [1935] 1 D.L.R. 780
Ont CA; affirmed [1935] 4 D.L.R. 736 CanSC.
45 And, even then, note the dicta in Smith New Court Securities v Scrimgeour Vickers
(Asset Management) Ltd [1977] A.C. 254, 262 (Lord Browne-Wilkinson) suggesting
that if the law denied rescission where shares had been on-sold on the market by the
claimant, but an equivalent parcel could be repurchased for return to the defendant, then
the law needed review. However, the orthodox position is, and as yet remains, that
rescission is not available if the original asset cannot be returned: Re Cape Breton Co
(1885) 29 Ch.D. 795 CA; affirmed sub nom. Cavendish Bentinck v Fenn (1887) 12 App.
Cas. 652 HL; Ladywell Mining Co v Brookes (1887) 35 Ch.D. 400 CA.
46 Armstrong v Jackson [1917] 2 K.B. 822.
47
Erlanger v New Sombrero Phosphate Co (1878) 3 App. Cas. 1218 HL; Spence v
Crawford [1939] 3 All E.R. 271 HL.
48
Re Ambrose Lake Tin Co (1880) 14 Ch.D. 390 CA; Re Cape Breton Co (1885) 29
Ch.D. 795 CA; affirmed sub nom. Cavendish Bentinck v Fenn (1887) 12 App. Cas. 652
HL; Ladywell Mining Co v Brookes (1887) 35 Ch.D. 400 CA; Lady Forrest (Murchison)
Gold Mine [1901] 1 Ch. 582; Burland v Earle [1902] A.C. 83 PC; Jacobus Marler
Estates v Marler (1913) 85 L.J.P.C. 167n.; Cook v Deeks [1916] 1 A.C. 554 at 563, 564
PC; Robinson v Randfontein Estates [1921] A.D. 168 S.Afr.S.C.App.Div.; P & O Steam
Nav Co v Johnson (1938) 60 C.L.R. 189 Aust. HC.
49
Re Cape Breton Co (1885) 29 Ch.D. 795 CA.
50
See especially Omnium Electric Palaces v Baines [1914] 1 Ch. 332 CA; and also
[1914] 1 Ch. 332 at 347, per Sargant J. Also see Re Ambrose Lake Tin & Copper Mining
Co, Ex p. Moss (1880) LR 14 Ch.D. 390 CA.
51
cf. Cook v Deeks [1916] 1 A.C. 554 PC. There seems to be no objection in principle
to the establishment of a trust in favour of an unformed company—for there can
certainly be a trust in favour of an unborn child. By contrast, there cannot be an agency
relationship with an unformed principal, so this approach cannot alleviate the problem of
pre-incorporation contracts dealt with below at paras 5–4 et seq.
52See Lord Parker’s clear explanation in Jacobus Marler Estates Ltd v Marler (1913)
85 L.J.P.C. 167n. Also see above, para.5–10.
53
Re Olympia Ltd [1898] 2 Ch. 153; affirmed sub nom. Gluckstein v Barnes [1900]
A.C. 240 at 247 HL; Re Leeds and Hanley Theatre of Varieties [1902] 2 Ch. 809 CA
(and perhaps Vaughan Williams LJ takes an even wider view of when damages are
available, at 825).
54Note the restrictions described by Lord Parker in Jacobus Marler Estates v Marler
(1913) 85 L.J.P.C. 167n at 168.
55 Misrepresentation Act 1967 s.2(1) and s.2(2), allowing damages to be awarded in lieu
of rescission.
56And the mere non-disclosure of the amount of the promoter’s profit is not
misrepresentation; Lady Forrest (Murchison) Gold Mine [1901] 1 Ch. 582; Jacobus
Marler Estates Ltd v Marler (1913) 85 L.J.P.C. 167n.
57 Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745.
59
Re English and Colonial Produce Co [1906] 2 Ch. 435 CA; Re National Motor Mail
Coach Co [1908] 2 Ch. 515 CA.
60 See below.
61 In Touche v Metropolitan Ry Warehousing Co (1871) L.R. 6 Ch. App. 671 at 676.
62
The promoter should obtain a contract with the company prior to rendering the
services, for past services are not valuable consideration: Re Eddystone Marine
Insurance, Re [1893] 3 Ch. 9 CA. Hence if the services are rendered before the company
was formed the promoter will have to pay for the shares. Moreover, in the case of a
public company, an undertaking to perform work or supply services will no longer be
valid payment: s.585(1) and see para.11–15. But provided the shares are given a very
low nominal value this may not be a serious snag.
63
There have been many interesting battles between holders of founders’ shares and the
other members. If the holdings of founders’ shares are widely dispersed there is
obviously a risk of block being acquired on behalf of the other classes in the hope of
outvoting the remaining founders’ shareholders at a class meeting to approve a
reconstruction. To safeguard their position, in a number of cases the founders’
shareholders formed a special company and vested all the founders’ shares in it, thus
ensuring that they were voted solidly at any meeting.
64
See below.
65
Contrast the position when a public company enters into transactions after its
registration but before the issue of a trading certificate (see para.11–8) or when a
company changes its name (above, para.4–23).
66
Unless it enters into a new contract. This, of course, does not mean that, in the
absence of a new contract, the company or the other party can accept the delivery of the
goods or payment without being under any obligation.
67Kelner v Baxter (1866) L.R. 2 C.P. 174. See also Natal Land Co v Pauline Syndicate
[1904] A.C. 120 PC.
68
Newborne v Sensolid (Great Britain) Ltd [1954] 1 Q.B. 45 CA. In that case it was the
promoter who attempted to enforce the agreement but it appears that the decision would
have been the same if the other party had attempted to enforce it, as was so held in Black
v Smallwood [1966] A.L.R. 744 Aust. HC: see also Hawkes Bay Milk Corp Ltd v Watson
[1974] 1 N.Z.L.R. 218; cf. Marblestone Industries Ltd v Fairchild [1975] 1 N.Z.L.R.
529. The promoter should, it seems, be liable for breach of implied warranty of
authority: Royal Bank of Canada v Starr (1985) 31 B.L.R. 124.
69
Phonogram Ltd v Lane [1982] 1 Q.B. 938 CA.
70Phonogram Ltd v Lane [1982] 1 Q.B. 938 CA; Royal Mail Estates Ltd v Maples
Teesdale [2015] EWHC 1890 (Ch). See, however, the decision of the First-tier Tribunal
(Tax Chamber), obiter, in Hepburn v Revenue and Customs Commissioners [2013]
UKFTT 455, where an agreement to the contrary was inferred from conduct of the
parties, including the tendering of invoices to the company instead of the promoter. This
approach goes against the trend of earlier cases, and appears doubtful.
71 Phonogram Ltd v Lane [1982] 1 Q.B. 938 at 945 CA. This approach was applied by
the Court of Appeal in Cotronic (UK) Ltd v Dezonie [1991] B.C.L.C. 721; and in
Badgerhill Properties Ltd v Cottrell [1991] B.C.L.C. 805.
72 See below, para.5–28, for identification of such cases.
73
Braymist Ltd v Wise Finance Co Ltd [2002] Ch. 273 CA. However, since this means a
contract purportedly made by the company may be enforced by its agent (the promoter),
the third party may be able to resist enforcement where the identity of the counterparty is
important. See also Royal Mail Estates Ltd v Maple Teesdale [2015] EWHC 1890 (Ch)
(appeal pending), where the court held that an express agreement that the benefit of the
contract was personal to the company did not exclude the effect of the equivalent of s.51
of the Companies Act 2006, such that the agent may still be liable on the pre-
incorporation contract.
74 In Cotronic (UK) Ltd v Dezonie [1991] B.C.L.C. 721.
75 See also Badgerhill Properties Ltd v Cottrell [1991] B.C.L.C. 805. On the other hand,
it is submitted that the decision in Oshkosh B’Gosh Inc v Dan Marbel Inc Ltd [1989]
B.C.L.C. 507 CA, that s.51 does not apply to a company which trades under its new
name before completing the statutory formalities for change of name, is correct, since a
change of name does not involve re-incorporation. See para.4–23.
76
Also serious from the point of view of the harmonising objectives of the First
Directive was the decision of Harman J in Rover International Ltd v Cannon Film Sales
Ltd [1987] B.C.L.C. 540, that s.36C (now s.51) does not apply to companies
incorporated outside Great Britain, a view from which the Court of Appeal did not
dissent ([1988] B.C.L.C. 710). But this is now altered by reg.6 of the Overseas
Companies (Execution of Documents and Registration of Charges) Regulations 2009 (SI
2009/1917).
77
The CLR, curiously, left this issue untouched.
78
If the new contract has been fully performed by the company, after incorporation, and
by the other party, that clearly will end any liability under the pre-incorporation contract.
CHAPTER 6
OVERSEAS COMPANIES, EU LAW AND CORPORATE
MOBILITY
Overseas Companies 6–2

Establishment: branch and place of business 6–4
Disclosure obligations 6–5
Execution of documents and names 6–7
Other mandatory provisions 6–8
Company Law at EU Level 6–9
Harmonisation 6–9
A new approach and subsidiarity 6–12
EU forms of incorporation 6–13
The single financial market and company law 6–14
Corporate governance 6–15
Reform of the existing directives 6–16
Corporate Mobility 6–17
Domestic rules 6–18
EU law: initial incorporation 6–20
EU law: subsequent re-incorporation 6–24
EU law: alternative transfer mechanisms 6–27
Conclusion 6–28
Conclusion 6–30
6–1
This chapter discusses three main issues. First, how far are
companies incorporated outside the UK subject to British
company law if they carry on business within the UK? Secondly,
to what extent does the freedom of companies within the EU to
carry on business across borders suggest that the EU should take
action to harmonise the company laws of the Member States?
Thirdly, what is the extent of the freedom companies have to
choose the country in which their registered office is located or
subsequently to move it to another jurisdiction? The third issue
is closely related to the second. The effect of a change of the
jurisdiction in which the registered office is located is a change
in the company law to which the company is subject from the
transferor jurisdiction’s law to that of the transferee jurisdiction.
Free movement of a company’s registered office is a necessary
but not a sufficient condition for competition among the Member
States in the provision of company laws which companies find
attractive. If such competition develops, that may lead to
convergence among the company laws of the Member States,
even if there is no harmonisation of company law at EU level. In
other words convergence of Member States’ company laws may
result from “top-down” harmonisation by the EU or from
“bottom up” competition among the Member States (or, of
course, from a mixture of the two processes). The first issue is
also linked to the second, since it raises the question of whether
the UK is happy to allow the internal relations of companies
operating in the UK to be determined by foreign law.
OVERSEAS COMPANIES
6–2
British law might have refused to recognise companies not
incorporated in one of the UK jurisdictions,1 thus putting in
jeopardy the validity in those jurisdictions of transactions
entered into by non-UK incorporated companies and in effect
requiring companies which wished to carry on business in the
UK to do so through a British subsidiary. In fact, British law has
never adopted such an approach. As Lord Wright said in 1933:
“English courts have long since recognised as juristic persons
corporations established by foreign law in virtue of the fact of
their creation and continuance under and by that law”.2 Indeed,
as we shall see below, to adopt a different rule today would be a
breach of the Treaty on the Functioning of the European Union
(“TFEU”). Thus, as a general rule,3 a company incorporated
outside the UK, whether within the EU or not, need not form a
British subsidiary company in order to do business in the UK. It
may trade through an agency or branch in this country or,
indeed, simply contract with someone in the UK without
establishing any form of presence in this country.4 Of course,
when a company incorporated elsewhere intends to carry on a
substantial business in the UK, it is likely to form a British
subsidiary in order to do so. This might be regarded as a sign of
commitment to the British economy, and it also allows the
foreign parent company to ring-fence its British operations by
putting them in a separate subsidiary with limited liability.5 The
point, however, is that the foreign company is not obliged to take
this route; it can do business here in its own right, if it so wishes.
This long-standing stance of British law towards foreign
companies conducting business in the UK means that it is
broadly content to leave the regulation of the internal affairs of
such companies to the law of the jurisdiction in which they have
their registered office, even though those dealing with it may not
be aware of its jurisdictional location and the implications of this
fact for its governing company law. To combat this risk a
requirement is imposed on overseas companies with a significant
presence in the UK, to make public disclosures which match
those of required of domestic companies.
6–3
The rules on disclosure by foreign companies are to be found in
Pt 34 of the Act and regulations made under it. This Part is
entitled “overseas companies”,6 a term that might be thought to
conjure up a picture of companies formed in some distant and
exotic location, as they sometimes are, though in fact it may be
only the Straits of Dover or the Irish Sea which separate the
country of incorporation from the UK. An overseas company is
simply “a company incorporated outside the United Kingdom”.7
The regulatory objectives of this Part are relatively modest. They
are principally to ensure that there is available in the UK some
basic information about a company incorporated elsewhere
which has established a presence in this country from which it
does business. That information is, essentially, the information a
British company would have to provide on incorporation8 or as
part of its annual financial returns,9 plus some information
relating to those who represent the overseas company in the UK.
However, some provisions go beyond disclosure.
Immediately prior to the 2006 Act this was an area of law
which, despite its modest objectives, was overly complicated,
because there were two sets of provisions, each containing
slightly different disclosure requirements, for overseas
companies. This arose in part because the Act does not attempt
to regulate all overseas companies which do business in the UK
(for example, over the internet) but only those which have some
sort of base in the UK. However, two different connecting
factors emerged as ways of defining that base. One was the
result of the UK’s implementation of the Eleventh Company
Law Directive10 which used the concept of a “branch” to define
the connection which an overseas company needed to have with
the UK to fall within the overseas companies rules. The other
connecting factor was the traditional domestic one, based on the
company having a “place of business” in the UK. Even this
might not have been problematic if both connecting factors had
been linked to the same set of disclosure requirements. However,
the two connecting factors were linked to slightly different
disclosure requirements, so that companies could not simply
proceed on the basis that they did not need to decide whether
they operated a branch or a place of business. Rather, they had to
decide between the two, in order to determine which disclosure
regime applied.11 Although it was clear that a company subject
to both regimes must comply with the EU rules if they were
more demanding than the domestic ones (which was generally
the case), companies might be far from clear whether the EU
regime applied to them or only the domestic one.12
The CLR recommended,13 and the Government accepted and
eventually implemented,14 the re-establishment of a single
regime. This is based on a single set of disclosure requirements,
derived from the Eleventh Directive, but using a multi-pronged
connecting factor. The Overseas Companies Regulations 200915
are expressed to apply whenever an overseas company opens an
“establishment” in the UK; but “establishment” is defined to
mean a branch within the meaning of the Eleventh Directive or a
place of business which is not a branch.16 Thus, either a branch
or a place of business will trigger the operation of the provisions
relating to overseas companies, but the crucial point is that the
disclosure rules will not now vary according to whether the
“establishment” test is met on the basis of a branch or a place of
business.17
Establishment: branch and place of business
6–4
The terms “branch” and “place of business” obviously overlap to
a large extent, but it seems that both at the top and at the bottom
of the spectrum a place of business may exist even though a
branch does not. To take the bottom end, this situation may arise
because, it seems, activities ancillary to a company’s business
may constitute a place of business but not a branch. It is difficult
to be absolutely certain about this, because the Eleventh
Directive does not define a “branch” whilst the Regulations do
not define a “place of business”, but it seems to be the case. It
has been said in case law that establishing a place of business, as
opposed to merely doing business, in this country requires “a
degree of permanence or recognisability as being a location of
the company’s business”.18 However, it is not fatal to the
establishment of a place of business that the activities carried on
there are only subsidiary to the company’s main business, which
is carried on outside the UK, or are not a substantial part of the
company’s overall business.19 As to the meaning of a branch
some clues may be derivable from the EU legislation referring to
bank branches.20 This does contain a definition of a bank branch,
from which some guidance may be obtainable. That definition
refers to a place of business through which the bank “conducts
directly some or all of the operations inherent in the business”.21
So it may be that purely ancillary activities, such as warehousing
or data processing, do not constitute the establishment of a
branch though they could amount to a place of business. To like
effect is the definition of a branch adopted by the Court of
Justice for the purposes of the Brussels Convention: a branch has
the appearance of permanency and is physically equipped to
negotiate business with third parties directly.22 At the other end
of the spectrum, a company incorporated outside the UK but
which has its head office here,23 clearly has a place of business
in the UK, but it might be argued that this is not a branch, since a
branch supposes that the head office is elsewhere.24
Disclosure obligations
6–5
The Act and the Overseas Companies Regulations impose
disclosure requirements on an overseas company having an
establishment in the UK in all phases of its life. An overseas
company which opens an establishment must file with the
Registrar within one month information relating to both itself
and the establishment.25 Subsequent alterations in the registered
particulars must also be notified.26 Failure to do so constitutes a
criminal offence on the part of both company and any officer or
agent of the company who knowingly and wilfully authorises or
permits the default,27 but, apparently, does not affect the validity
of transactions the company may enter into through its
unregistered operation. There is no need in a book of this nature
to go into the detail of what is required, but it should be noted
that the requirements are more limited where the company is
incorporated in an EEA Member State than where this is not
so.28 This reflects the approach of the Eleventh Directive.29
Overall, the policy can be said to be to put the person dealing
with the overseas company through its establishment in a similar
informational position as would obtain if the company were one
incorporated under the Act.
A crucial concern of those who deal with overseas companies
is how to serve legal documents on the company. The particulars
relating to the establishment must give the name and service
address of every person resident in the UK authorised to accept
service on behalf of the company or a statement that there is no
such person.30 In addition, the information must state the extent
of the powers of the directors of the overseas company to
represent the company in dealings and in legal proceedings31 and
give a list of those authorised to represent the company as a
permanent representative of the company in respect of the
branch.32
6–6
On-going disclosure requirements fall into two categories. First,
the “trading disclosure” rules which apply to domestic
companies33 are adapted so as to apply to overseas companies
“carrying on business in the United Kingdom”.34 These rules are,
rightly, not confined to those overseas companies which have an
establishment in the UK, though doing business “in” the UK is
not defined. The aim of the rules is to provide third parties with
certain information at the point at which they deal—or are likely
to deal—with overseas companies. Thus, the company must
display its name and country of incorporation at every location at
which it carries on business35; its name on its business letters and
a wide range of analogous documents36; and, where it has an
establishment in the UK, a range of further information on these
documents.37 There are penalties for non-compliance,38 but non-
compliance also carries civil consequences on the same basis as
that applied to domestic companies.39
Secondly, annual reporting requirements are applied to
overseas companies, but, in this case, only if they have an
establishment in the UK.40 These requirements vary according to
whether the overseas company is required by the law of the
country in which it is incorporated (its “parent” law) to prepare,
have audited and to disclose annual accounts. If it is,41 the
overseas company discharges its disclosure obligations by
delivering to the Registrar a copy of the accounting documents
prepared in accordance with the parent law.42 The “accounting
documents” include not only the accounts themselves (including
the consolidated accounts, if relevant) and auditors’ report but
also the directors’ report.43 The company has the relatively
generous period of three months from the date the documents
were first disclosed under the parent law to file them with the
Registrar.44 If it is not so required, the overseas company is
subject to a version of the accounting and filing requirements
applied to domestic companies.45 In addition to the option,
available to domestic companies, to file accounts in accordance
with International Accounting Standards, the overseas company
may choose to prepare its accounts in accordance with its parent
law.46 However, the accounts of companies in this second
category are not subject to an audit requirement. Despite the
absence of an audit requirement, the obligation to produce
annual accounts is clearly a burdensome one for overseas
companies which are not required by their parent law to do so—
though there must now be few countries in the world which do
not require their companies to produce annual financial
statements.
Finally, if an overseas company closes an establishment in the
UK, it must give notice to the Registrar.47 As to the overseas
company itself, it must give information to the Registrar if it is
wound up or becomes subject to insolvency proceedings.48
The Act lays down a general rule that documents delivered to
the Registrar must be in English.49 However, the company’s
memorandum or articles of association may be delivered in
another language, provided they are accompanied by a certified
translation into English.50
Execution of documents and names
6–7
Although the overseas companies provisions are primarily
concerned with disclosure, there are two sets of further
provisions going beyond this. One set is largely facultative. It
applies, with appropriate modifications, the domestic rules about
execution of documents and seals to overseas companies,
whether or not that company has an establishment in the UK or
even whether or not it can be said to do business “in” the UK.51
The second set applies to company names and is regulatory in
intent.52 An overseas company is required to register, on
creation, the name of its establishment in the UK. That name
may be its corporate name or the name under which it proposes
to carry on business in the UK (its alternative name).53 In
principle, the domestic rules on company names54 are applied to
the overseas company’s registered name.55 Despite apparent
contravention of the domestic policy, however, an overseas
company which is registered in an EEA Member State is exempt
from the domestic name controls over its corporate name, except
those relating to permitted characters in a corporate name.56 The
Eleventh Directive does not provide for controls on the choice of
name by overseas companies and the virtual non-application of
such controls to the corporate names of EEA companies seems
to have been the result of a fear that to impose them would
infringe the freedom of establishment rules of the EU.57
Other mandatory provisions
6–8
In the final analysis, Pt 34 applies the equivalent of only a small
part of the British Act to overseas companies and, as we have
seen, where the home state requires the production of public,
audited accounts, even Pt 34 relies on the rules of the state of
incorporation rather than on the rules of the British Act. Some
further protection for third parties, based on British law, may
apply as a result of provisions in the Insolvency Act 1986. Thus,
the rules restricting the re-use by successor companies of the
name of a company which has gone into insolvent liquidation58
apply to overseas companies. This is achieved by use of the
formula that the relevant sections of the 1986 Act apply also to
companies “which may be wound up under Part V of this Act”.59
Part V of the 1986 Act permits the court in certain circumstances
compulsorily to wind up an unregistered company, the definition
of which is broad enough to include overseas companies.60 To
fall within Pt V the overseas company need not have an
established place of business in Great Britain nor, indeed, any
assets here at the time the application for winding up is made.61
The courts have also accepted that the jurisdiction to wind up
unregistered companies brings into play certain other sections of
the Insolvency Act, even though those sections do not in terms
apply to “Part V” companies.62 These include the important
provisions relating to fraudulent and wrongful trading.63
Important though these provisions may be, they apply only to
companies which are have been placed in an insolvency
procedure in the UK, which in the case of an overseas company
may well not happen.64 Finally, the Company Directors
Disqualification Act 198665 also applies to a company
incorporated outside Great Britain if it is a company capable of
being wound up under the Insolvency Act 1986.66
COMPANY LAW AT EU LEVEL
Harmonisation
6–9
The underlying policy of Pt 34 of the Act is to rely on the
company law of the state of incorporation when a foreign
company does business in the UK. When the European
Economic Community was founded in the middle of the 1950s, a
very different approach was taken in the Treaty of Rome. It was
expected that, in the Community, companies based in one
Member State would penetrate more readily the economies of
other Member States, without necessarily establishing
subsidiaries in those States. It was decided that this was
acceptable only if accompanied by a programme for the
mandatory harmonisation by the Community of the company
laws of the Member States.67 In other words, in the minds of the
drafters of the original EC Treaty, freedom of establishment for
companies and harmonisation of company laws in the EU were
closely linked. Consequently, what is today art.50(2)(g) TFEU
provides that the Council of Ministers by qualified majority vote,
on a proposal from the European Commission and with the
consent of the European Parliament,68 may adopt Directives69
which aim to protect the interests of members “and others”70 by
“co-ordinating to the necessary extent the safeguards which…are
required by Member States of companies and firms …with a
view to making such safeguards equivalent throughout the
Union”. Thus, reliance on other Member States’ company laws
was to be accompanied by EU legislation which made those laws
“equivalent”, at least in certain respects.
The proposed programme for extensive mandatory
harmonisation, from the top down, of Member States’ domestic
company laws got off to an impressive start, but by the middle
1990s, if not earlier, it had run out of steam, with only part of the
proposed programme of “company law directives” enacted. This
may have been because the theory linking freedom of
establishment with a need for harmonised company law was
never satisfactorily articulated. There was little empirical
evidence that “members and others” were suffering in the EU’s
single market from the lack of harmonised company laws. There
was also the criticism that, once a policy had been embodied in
EU company law, it was more difficult to change it than in the
case of domestic legislation, at least for the majority of Member
States. In other words, the EU legislative process was more
“sticky” than national ones.
6–10
In any event, for harmonisation to be fully successful, (a) there
must exist a common best rule for all the Members States; (b)
the EU Commission, which has a monopoly on the initiation of
Community legislation, must be able to identify it; and (c) the
participants in the Community’s legislative process must accept
the common rule. None of these characteristics was ever
completely in place. The structure of shareholding (dispersed or
concentrated) differs across the Member States, at least in
relation to large companies, so that the dominant problem in
some jurisdictions is the relationship between management and
shareholders as a class and in other jurisdictions that between
controlling and non-controlling shareholders. In some Member
States board level representation of employees is an important
part of the domestic industrial relations system, whilst in others
it is not. Both features made the identification of a single
common rule very difficult in the most sensitive areas of
company law. As to the EU Commission, it never had the time
or the resources to develop the highly sophisticated comparative
law analysis which legislating for an ever-growing block of
countries requires. Finally, since the adoption of legislation
requires a supermajority vote of the Member States, there is
plenty of scope for the states to defend national interests,
normally by watering down the proposals put forward by the EU
Commission. It may be difficult to say whether the resistance of
a Member States is driven by the fact that the EU Commission
has proposed an inefficient rule for that state or by pressure from
incumbent national interests which will lose out if the efficient
rule is adopted.
6–11
Nevertheless, some parts of the proposed programme of
company law directives were enacted by the middle of the
1990s. This period saw the adoption of the First (safeguards for
third parties),71 Second (formation of public companies and the
maintenance and alteration of capital),72 Third (mergers of public
companies),73 Fourth (accounts),74 Sixth (division of public
companies),75 Seventh (group accounts),76 Eighth (audits),77
Eleventh (branches)78 and Twelfth (single-member companies)
Directives,79 though they were not adopted in that precise order.
Subsequently, there have been significant directives on
takeovers, cross-border mergers and shareholders’ rights
(though, significantly, the twenty-first century directives are no
longer allocated a number in an overall proposed programme of
directives). However, the Directives are not equally important
for the UK. Some of them did not significantly alter the existing
national law, because the EU rule reflected existing national law
or because Member States were given a range of options in
implementing the Directive and could choose to preserve the
status quo or because the subject-matter of the Directive was not
important in the UK.80 As far as the UK is concerned, the most
important Directives have been the First (which triggered a
review of the common law rules on ultra vires and agency as
they applied to companies)81; the Second (which led to a
tightening of the rules on dividend distributions and legal capital
generally)82; and the Fourth (which led to a re-thinking of the
relationship between the law and accountancy practice).83 Of
lesser impact were the Eighth on audits84 and the Eleventh on
branches.85 Apart from the Second, which froze the law on legal
capital in an unideal position, the impact of the Directives on UK
company law has been beneficial overall.
By contrast, some proposals were never adopted by the
Community legislature because it proved difficult to obtain the
necessary level of Member State support for the more
controversial proposed harmonisation measures. This was true,
in particular, of the proposed Fifth Directive which dealt with
two sensitive topics upon which Member States are pretty
equally split: should the board be a one-tier structure (as is the
practice in the UK) or a two-tier one, consisting of separate
supervisory and management boards, and, even more
controversial, should employee representation on the board
(whether one-tier or two-tier) be mandatory?86 The Fifth
Directive was never adopted. For many years, the issue of
mandatory employee representation also held up agreement on
the European Company (see below) and on a Directive on cross-
border mergers, and the issue was resolved there only by
abandoning any significant commitment to uniformity, or even
equivalence, of rules on employee representation. Instead, the
matter is regulated, mainly though not exclusively, according to
the model required by the law of the state from which the
merging company with the highest level of representation
comes.87 Equally controversial has been the draft Ninth Directive
on corporate groups, where the majority of states deal with
group problems through general mechanisms of company law,
whereas Germany has developed a separate regime for
addressing issues of minority shareholder and creditor protection
in group situations.
A new approach and subsidiarity
6–12
Such was the state of uncertainty into which the company law
harmonisation programme had fallen by the end of the twentieth
century that, at the end of 2001, the Commission appointed a
High Level Group of Experts with the brief of providing
“recommendations for a modern regulatory European company
law framework”. The HLG’s Final Report88 proposed a “distinct
shift” in the approach of the EU to company law. Instead of the
emphasis being, as hitherto, on the protection of members and
creditors, the focus in future should be on what the Group saw as
the “primary purpose” of company law: “to provide a legal
framework for those who wish to undertake business activities
efficiently, in a way they consider to be best suited to attain
success”.89 Although the proper protection of members and
creditors was an element of an efficient system of company law,
those protections themselves should be subject to a test of
efficiency. The Commission responded to the Group’s Report in
2003 by producing a company law Action Plan which largely
accepted the Group’s recommendations.90
What were the main features of the new approach? First, the
role of the EU in the area of company law became a more
modest, though still significant, one. So long as the EU’s task
was viewed as one of harmonising Member States’ company
laws so as to produce equivalent protections across the Member
States, no serious question could be raised about the central role
of the EU in this process and the whole of company law was in
principle open to EU regulation. By definition, harmonisation of
national systems (if it is to be achieved by legislative fiat) is
something which only EU law can guarantee and national laws
cannot.91 However, once the goal is put in terms of identifying
an efficient framework for company law, the issue of
subsidiarity92 is clearly raised. It is not obvious that the EU, in
principle, is better equipped to identify an efficient system of
company law than the Member States, especially as national
contexts differ substantially. An important implication of this
new approach therefore was that the EU should concentrate, as
far as new Directives were concerned, on those areas of
company law where it has an especial legislative advantage,
principally in relation to cross-border corporate issues.93 The
most significant Directives adopted in the company law area
since the adoption of the Action Plan have fitted this pattern: the
Cross-Border Mergers Directive (2005)94 and the Directive on
Shareholder Rights (2007).95 However, it should be noted, in
relation to the latter, that although the driving concern of the
Commission was the difficulties facing a shareholder in Member
State A wishing to exercise voting rights in a company
incorporated and listed in Member State B, the Directive
approaches this issue by conferring minimum rights on all
shareholders in companies whose shares are traded on a
regulated market. It is the limitation of the Directive to
companies with publicly traded shares which really indicates the
cross-border impetus of the Directive.
EU forms of incorporation
6–13
An alternative approach to harmonisation is for the EU itself to
provide the corporate vehicle for businesses to adopt rather than
for this to be a purely national competence. Unlike with the
harmonisation of national company laws, there is no specific
Treaty power for the EU to engage in this activity, and so
proposals had to be put forward under the “gap-filling” powers
in the Treaty, which require unanimous Member State consent.96
This necessarily made progress difficult. After many years the
EU achieved success with the creation of an optional form of EU
incorporation, the European Company (“SE”),97 designed
essentially for large companies and aimed at providing a
mechanism for the cross-border amalgamation of public
companies. The proposals had been beset by the same two
problems as afflicted the Fifth Directive proposal (above). These
problems were solved by giving the SE a choice between one-
tier and two-tier board structures and by making employee
representation mandatory for the SE only if one of the founding
companies was already subject to such requirements under its
national law. More generally, the law applicable to the SE
depends heavily on the company law of the state in which it is
registered, so that the degree of uniformity achieved is limited.
However, it may have helped in securing adoption that the SE,
unlike the Fifth Directive, did not require changes in national
law but made available to national companies, if they wished to
use it, a form of EU re-incorporation. Those supporting the SE
proposal hoped it would encourage cross-border mergers (the
founding companies are normally required to be in different
Member States), either at top company level or within corporate
groups. In fact, there is little evidence that the SE has been used
extensively for this purpose—or, indeed, extensively used at all
except in a few Member States.98 Nevertheless, it has clearly not
been an outright failure.99
The EU was emboldened by the adoption of the SE later to
propose a European Private Company (“SPE”) form of EU
incorporation. This, however, is in effect a disguised
harmonisation measure (it was to be available to individuals and
had only a weak cross-border requirement). It constituted in fact
a direct challenge to national regimes for private companies and
it ran into predictable opposition from some of the Member
States and was abandoned by the EU.100 The effect of this defeat
was to push the EU into producing a reduced but hybrid proposal
for Single Person Company (“SUP”—societas unius personae).
This is based on art.50 TFEU, where only a qualified majority
vote of the Member States is required, and indeed it is formally
an addition to the Twelfth Directive mentioned above,101 but it
requires Member States in effect to introduce a new form of
incorporation into their national laws and to give that form of
incorporation a common EU name (the “SUP”).102
The single financial market and company law
6–14
An even more important conclusion which was drawn from
taking subsidiarity seriously was that the creation of a single
financial market in Europe was a more appropriate area for EU
activity than a harmonised company law. The integration of
national capital markets was seen as a crucial aspect of the
construction of the Single Market, more so than company law
harmonisation, which was, so to speak, the price for freedom of
establishment (also an essential feature of the Single Market)
rather than a direct contributor to the Single Market. One
consequence of the focus on securities law was to favour the
adoption of some Directives which had been regarded previously
as examples of the company law harmonisation process—the
line between company and securities law being inexact. Thus, a
Directive on takeover bids103 was adopted in 2004, which had
originally been proposed as the Thirteenth Directive in the
company law series, but it eventually emerged without that
formal designation. Equally, rules on disclosure of financial
information by companies, a traditional area of company law
when viewed through the lens of shareholder protection, could
be re-packaged in a securities market context and presented as
investor protection measures.
However, the focus of the EU on the single capital market did
not just operate as a way of taking forward what might be
regarded as “really” company law initiatives. Most financial
market measures at EU level were aimed mainly at companies in
their capacity as fund raisers on public markets. Clear examples
were the Directives dealing with initial process of raising capital
through public offers and the admission of securities to trading
on public markets; subsequent disclosure to the market by
issuers and, to some extent, their shareholders; and ensuring the
non-distorted functioning of securities and other markets. The
first two sets of Directives are discussed in more detail in Chs 25
and 26, below, and the third in Ch.30. All that need be noted
here is that the first area (public offers and admission to trading)
became a focus of EU action as long ago as the 1970s, so that for
some time the company law and securities law programmes of
the EU proceeded in parallel. However, a major change of gear
occurred with the adoption in 1999 of a Financial Services
Action Plan (“FSAP”),104 which led to a significant level of
legislative activity in the succeeding years and to the production,
in particular, of Directives on prospectuses,105 on disclosure by
issuers (the Transparency Directive),106 and on market
manipulation (the Market Abuse Directive).107 Not surprisingly,
after the financial crisis of 2007 onwards, an intensification of
regulation in this area occurred. A number of the earlier
Directives were re-cast in a stronger form. In addition, in many
cases the new EU instruments emerged as Regulations rather
than Directives, since the available legal base for financial
market legislation (art.114 TFEU) permitted the EU to adopt
“measures” (not just Directives) “for the approximation of the
provisions laid down…in Member States which have as their
object the establishment and functioning of the internal market”.
The FSAP was accompanied by a further innovation in
legislative procedure at EU level, known as the “Lamfalussy”
procedure for the regulation of European securities markets.108
Under this approach the EU Directive or Regulation will
sometimes contain only the principles of the legislation and the
detail is laid down subsequently by the Commission, after
consultation with (now) the European Securities Markets
Authority, but without the need to go through the full EU
legislative process.109 The Commission has two broad types of
secondary legislative powers: a narrower power relating to
“technical standards” and a broader power relating to “delegated
acts”.110 In both cases power to issue secondary legislation must
be specifically conferred on the Commission by the parent
Directive or Regulation. Where the Commission acts, the parent
Directives and Regulations have to be read along with various
implementing instruments (Directives or Regulations) issued by
the Commission, which constitute a very significant part of the
legislative process.
Corporate governance
6–15
A further implication of the new approach recommended by the
High Level Group was that EU law-making, where this was
required, should be less reliant on detailed Directives of the
traditional type and make more use of Recommendations111 and
of instruments which imposed disclosure requirements rather
than substantive rules.112 This approach was initially particularly
apparent in the sensitive area of corporate governance. Thus, the
topics of board composition113 and directors’ remuneration114
have been dealt with at EU level in this way—indeed through
Commission rather than EU recommendations—with the
recommendations again confined to publicly traded companies.
Further, the EU rules on corporate governance codes take the
form of a comply or explain obligation (as indeed is typical of
national corporate governance codes) but with the content of the
code being determined, not by the EU, but by national-level
bodies.115 However, nothing is stable in the battle over law-
making between central and national levels. At the time of
writing agreement is likely at EU level on an expansion of the
Shareholder Rights Directive,116 which will substantially extend
the mandatory EU rules in the area of corporate governance, so
that they are as much concerned with constraining shareholder
behaviour as giving shareholders’ rights.
Reform of the existing directives
6–16
Some minor steps have also been taken to address the point
about the “stickiness” of EU legislation. In fact, the Commission
moved on this front ahead of the High Level Group’s Report. It
adopted in 1996 the Simpler Legislation for the Single Market
(“SLIM”) initiative. This was a general initiative, not confined to
company law, but several of the initial company law directives
have been amended through the SLIM process, albeit with only
modest results.117 In 2015 the Commission proposed to “codify”
in a single document the core company law Directives on the
basis that this would make access to them easier.118
CORPORATE MOBILITY
6–17
Corporate mobility can mean a number of things, perhaps most
obviously the question of what constraints exist on a company’s
freedom to move its head office from one jurisdiction to another,
something it may want to do in order to obtain the benefit of a
more favourable tax regime. However, for the purposes of this
chapter corporate mobility refers to the constraints on the
freedom of a company to choose the jurisdictional location of its
registered office and, having made an initial choice, to move it
to another legal jurisdiction, without at the same time having to
locate its head office or any other aspect of its operations in the
jurisdiction of registration or to move them on a subsequent
change of jurisdiction. This is a significant question because,
under the British conflicts of law rules and those of most other
jurisdictions, the company law applicable to a company is
determined by the jurisdictional location of its registered office.
If a company can freely choose its initial jurisdiction for
incorporation and subsequently alter it, it is in a position to
choose and subsequently alter the company law to which it is
subject. However, that freedom will be constrained if its exercise
imposes requirements on the location of its operational activities.
If we assume that entrepreneurs are free to choose and
subsequently alter the law applicable to their company, then the
scene is set, potentially, for regulatory competition among states
as they seek to offer the law which is most attractive to
companies and for regulatory arbitrage by companies as they
move to the jurisdiction which offers the law which they favour.
Corporate mobility does not in itself ensure regulatory
competition by states and regulatory arbitrage by companies.
Regulatory competition also requires that states conceive it to be
in their interests to attract incorporations and regulatory arbitrage
requires that companies perceive that the advantages of choosing
the most favourable law outweigh any potential disadvantages.
Without corporate mobility, however, regulatory competition
will be weakened.
Nor does it follow that the result of competition would be that
companies (or companies of a particular type) incorporate
overwhelmingly in a particular state. This is certainly what has
happened in the US where regulatory competition has led a large
proportion of publicly traded companies to incorporate in the
state of Delaware. It might be, instead, that states all bring their
company laws in line with the model which companies prefer (in
order not to lose incorporations) so that what competition
produces is not migration of companies but convergence of
states’ company laws. In this perspective, the power to transfer
the registered office would put some pressure on those
responsible for company law in a particular jurisdiction to ensure
that it remained attractive to businesses. The CLR thought this
was the correct approach in principle: “In general, it is desirable
that businesses should remain in Great Britain because it is
attractive for them to do so, and not because company law in
some sense locks them in”.119 If Member States reacted in this
way to competition, then the result might be characterised as
harmonisation of company laws “from the bottom up” rather
than “from the top down”, as under the EU’s original
programme of company law Directives, discussed in para.6–9.
Alternatively, competition might lead not to harmonisation on a
single model but to a form of “specialisation” in which different
Member States offer somewhat different corporate laws, each
adapted to the dominant form of business organisation to be
found in their jurisdiction. Whatever the precise result, it would
be the operation of competitive pressures rather than legislative
fiat which determined the nature and extent of the harmonisation
process.120
As we shall see below, whilst corporate mobility has long
been freely available in the US, in the EU that is not (or not yet)
fully the case. Some jurisdictions (such as the UK ones) have
long made the choice of company law on initial incorporation
available and as a result of decisions of the Court of Justice of
the European Union (“CJEU”), interpreting the Treaty
provisions on freedom of establishment, this principle now
applies throughout the EU. Freedom subsequently to alter the
applicable company law by moving the registered office,
however, is much less securely available—even for UK-
incorporated companies or foreign-incorporated companies
which wish to move into a British jurisdiction. We begin with a
brief discussion of the purely domestic rules on corporate
mobility before moving onto the more challenging question of
how far they have been modified by EU law.
Domestic rules
6–18
As we have seen in para.6–2, British law recognises the
existence of companies validly formed under the law of a foreign
jurisdiction when they carry on business in the UK. This
principle is applied even if the company carries on no business
in its state of incorporation but operates entirely in the UK—and
it was always intended by its founders that it should do so. So,
the British rule of recognition of a foreign company is simply its
valid incorporation elsewhere (the “incorporation rule”). Thus, at
the point of initial incorporation of a company, the founders
have a free choice of the applicable company law. As far as
British law is concerned, they may choose any jurisdiction for
incorporation and then carry on business entirely in the UK. The
alternative recognition rule, used by some Member States of the
EU, is the “real seat” rule, which requires the registered office to
be in the same jurisdiction as the company’s headquarters (or
place of central management). Such a state would refuse to
incorporate a company whose central management is not present
in that state. Even more important, this state might well refuse to
recognise the existence of a company validly incorporated in
another jurisdiction under that jurisdiction’s rules, but carrying
out no or only insignificant activities there, thus putting its
contracts and property in jeopardy in the state where it operates.
If a company incorporated in a foreign jurisdiction, but
operating in the UK, wishes to move its registered office to
another foreign jurisdiction, that is a matter for the jurisdictions
involved. If the foreign jurisdictions allow this to happen, British
law will recognise the result. However, British law is directly
engaged if a company registered in one of the UK jurisdictions
wishes to move its registered office to a foreign jurisdiction—or
if a company registered in a foreign jurisdiction wishes to move
its registered office to the one of the UK jurisdictions. Curiously,
in contrast with its liberal stance at the point of incorporation,
British law provides no simple mechanism whereby a company
may make such a move, even as between the British
jurisdictions. When the founders apply to register a company in
the UK, they must state in which of the three UK jurisdictions its
registered office is to be situated: England and Wales, Scotland
or Northern Ireland.121 There is no simple mechanism provided
whereby the registered office can be changed subsequently from
the jurisdiction of incorporation to another.122 Thus, a company
which is formed with its registered office in England and Wales
cannot decide by resolution to transfer its registered office to
Scotland, still less to some other Member State of the EU or to a
state outside the EU.123 Nor will it accept an incoming company
on the basis of a simple resolution of its shareholders to move
the registered office to the UK.
6–19
However, it is possible to produce indirectly a transfer of
registered office into or out of the UK. The transferring company
might go into (solvent) liquidation in its current jurisdiction and
in that process transfer its assets to a company incorporated in
the new jurisdiction, but the tax consequences of such a way of
proceeding make that course of action unattractive. Within the
UK the company might use a scheme of arrangement to effect a
merger with another company located in the new jurisdiction.124
Or the transferring company might make use of the EU’s cross-
border merger Directive to move its registered office into or out
of the UK.125 But a simple transfer of the registered office is not
a technique which is made available. On the other hand, these
alternative mechanisms contain a reasonably high level of
protection for shareholders, creditors and perhaps other interests.
These protections are built into the scheme of arrangement and
cross-border merger mechanisms. When the liquidation
mechanism is used, the assets of the company are valued at the
time of transfer and that value is paid by the new company to the
former owner, thus protecting both existing shareholders and
existing creditors. The transferring company’s creditors are
protected because the transferring company will receive the
proceeds of the sale against which they can assert their claims,
and the liquidation gives the shareholders of the transferring
company an exit route from the company and some assurance
that the transferring company’s assets have been properly
valued.
However, it is difficult to believe that adequate protection for
members and creditors could not be provided through a set of
rules applying to a simple transfer of the registered office. The
Company Law Review proposed such a scheme for exit from a
UK jurisdiction,126 which was based on that laid down in the
European Company Statute.127 The SE is empowered to move its
registered office from one EU State to another (albeit provided it
moves its head office as well, which was not a feature of the
CLR’s proposals). Moreover, the CLR proposals envisaged the
possibility of transfer of the registered office outside the EU and
also within the UK (which is not a matter for EU regulation).
The basis of the proposal was that transfer in principle should be
permitted (i.e. the opposite of the present law) but subject to
adequate safeguards for shareholders and creditors. The main
elements of protection for members would be the requirement
that the board draw up a detailed proposal about the transfer, that
the proposal should require approval by special resolution of the
shareholders (thus requiring a three-quarters majority approval)
and that dissenting members should have the power to apply to
the court which might order such relief as it thought appropriate.
Thus, for shareholders, the protective techniques invoked were
disclosure, supermajority approval and court control. For the
protection of creditors, it was additionally proposed that the
directors would have to declare the company to be solvent and
able to pay its debts as they fell due for the 12 months after
emigration, the creditors would have the right to apply to the
court to challenge the proposal and the company would have to
accept service in the UK even after emigration in respect of
claims arising from commitments incurred before emigration.128
Transfer would have been permitted, on compliance with
these rules, to any EU or EEA Member State, but transfer to a
non-EU state would be dependent upon the Secretary of State
having approved that state for this purpose, the criteria for
approval being related mainly to levels of creditor protection,
especially for creditors resident outside the state. Finally, for
transfer within the UK a less detailed proposal would need to be
developed by the board and the right of dissenting shareholders
to apply to the court would be removed. The full range of
creditor protections, however, would apply since there are
significant differences in security and property law between the
three jurisdictions.129 However, the Government rejected the
CLR’s proposals for international migration, on grounds of
feared loss of tax revenues.130
EU law: initial incorporation
6–20
We now turn to the question of how far the above rules have
been modified by EU law. Corporate mobility is an area where
EU law has had a significant impact, but, unusually for company
law, law developed by the CJEU rather than the EU legislature
has been the driver of reform to date. The court has proceeded
mainly on the basis of its interpretation of the freedom of
establishment provisions of the Treaty. Article 49 TFEU
prohibits restrictions on the freedom of establishment of
nationals of one Member State in the territory of another
Member State and adds that such prohibition also applies “to
restrictions on the setting up of agencies, branches or
subsidiaries”.131 Just to make things absolutely clear, art.54
TFEU requires companies “formed in accordance with the law
of a Member State and having their registered office, central
administration or principal place of business within the
Community” to be treated in the same way as natural persons
who are nationals of a Member State. The EU has from time to
time mooted the adoption of a directive dealing with corporate
mobility and it may be that, after a period of not being interested
in the topic, it is about to return to the EU’s agenda.132 There is a
strong case for a Directive, since the CJEU has not been able to
resolve all the issues surrounding corporate mobility. To put it
briefly, the Court has established freedom for the founders to
choose the applicable corporate law at the point of incorporation
but has not yet established fully corporate mobility thereafter.
Since UK domestic law already provided choice of law at the
point of incorporation, the impact of the Court’s rulings to date
has been to benefit founders who wanted to operate in other
Member States of the EU through companies incorporated in one
of the UK jurisdictions where that other Member State applied
the “real seat” theory or in some way qualified its application of
the “incorporation” theory.
6–21
The first proposition which seems to have emerged from the
CJEU’s decisions is that a company validly established under the
law of Member State A must be recognised by Member State B,
even if B would not recognise the company as validly
established under its own rules. This is also the domestic UK
rule. As understood in the UK, its “incorporation rule” turns on
valid incorporation in another Member State but it does not seek
to evaluate the incorporation rules set by that state.133
Consequently, if B is a real seat state, the rules about the location
of operational activities would have to be respected for
incorporation to take place in B and, in consequence, for British
law to recognise the incorporation.
6–22
The starting point for the Court’s development of the law was its
decision in the Centros case.134 In Centros, the Court held that
Denmark had infringed a company’s freedom of establishment,
when that company was incorporated in England, but carried on
all its business in Denmark and the Danish authorities refused to
register its Danish operations as a branch. It was clear that the
British incorporation had been effected in order to avoid the
Danish minimum capital requirements. However, the Danish
position was perhaps weakened by the fact that the Danish
authorities admitted that the branch would have been registered,
if the company had carried on some business in the UK, even
though its main business was in Denmark, Denmark being an
incorporation rule state. This reduced the force of the argument
that the minimum capital rules were a necessary protection for
Danish creditors. More important was the decision in Inspire
Art,135 also involving an incorporation theory state, the
Netherlands. Dutch law thus had no difficulty about recognising
the existence of a company incorporated in another Member
State (again the UK) and so did not refuse to register its branch.
However, Dutch law did apply to “pseudo-foreign” companies
(i.e. those incorporated elsewhere but for the purpose of doing
business wholly in the Netherlands) certain rules of Dutch law,
notably its minimum capital rules. The CJEU held that creditor
protection did not justify the imposition of requirements
additional to those imposed by the state of incorporation:
creditors were sufficiently protected by the fact that the company
in question did not hold itself out as a Dutch company but as one
governed by English law.
6–23
These two decisions had a substantial impact in practice.
Entrepreneurs from other Member States, not intending to do
business in the UK, may choose to incorporate in the UK in
order to avoid minimum capital requirements and expensive
formation formalities in their home jurisdictions; and this
produced the expected response in the shape of other Member
States seeking to reduce or remove their minimum capital
requirements for private companies.136 This was a clear case of
corporate mobility leading to regulatory arbitrage by companies
to which the Member States affected responded by harmonising
their laws on or towards the British model, at least in the narrow
area of legal capital and, perhaps, formation procedures.
A particularly interesting aspect of the Inspire Art decision
was the implication that the Eleventh Directive on branches137
determined the maximum level of regulation a Member State
was permitted to impose on companies incorporated in other
Member States—subject, however, to one important exception.
Restrictions of freedom of establishment by national legislatures
are permitted, provided they meet the “Gebhard test”,138 that is,
they are non-discriminatory, pursue a legitimate objective in the
public interest, are appropriate to ensuring the attainment of that
objective and do not go beyond what is necessary to attain it.
This is the general formula used by the Court to determine the
extent to which Member States may constrain the fundamental
free movement provisions of the Treaty. The test, it can be seen,
sets out very general standards and it is not clear how much
freedom it gives to Member States to impose national rules on
pseudo-foreign companies. Would it be lawful, for example, for
the German legislature to require a pseudo-foreign company to
abide by its domestic rules on mandatory representation for
workers on the boards of large companies?
EU law: subsequent re-incorporation
6–24
The Court of Justice has not had to decide squarely a case
involving post-incorporation transfer of the registered seat alone.
All the litigation to date has involved companies which
transferred their headquarters or central administration to
another jurisdiction and either did not want to change the
applicable law or wished to change the applicable law at the
same time as moving the headquarters. Some transfer cases can
be disposed of under the proposition identified above about B
recognising valid incorporations in A. In Uberseering139 a
company transferred its centre of administration from an
incorporation theory state (in this case the Netherlands) to a real
seat theory state (in this case Germany). The German courts
refused to recognise the company’s legal personality and so it
could not sue to enforce its contractual rights in a German court.
The CJEU held that this was an infringement of the Dutch
company’s freedom of establishment. Since the company was
still validly incorporated under Dutch law, German law was
obliged to recognise its existence, even though the company did
not meet the standards for incorporation under German law.140
Although not a case about transfer of the registered office,
Uberseering does establish the proposition that, provided a
company acts in compliance with the rules of its state of
incorporation, it has a EU law, right to transfer its headquarters
to another state within the EU. For UK courts, the significance
of the proposition is limited, since in a UK jurisdiction transfer
of the headquarters would not cast doubt on the validity of the
incorporation in the UK. The importance of the proposition is
that the state receiving the headquarters must continue to
recognise the validity of the UK incorporation.141
However, it is unclear whether the first proposition relates
solely to compliance with company law rules of the state of
incorporation. UK company law places no obstacles in front of
transfer of the headquarters but what about tax law? An early
decision of the European Court suggested that the transferring
state had considerable freedom in this regard. In Daily Mail142 an
English-incorporated company wished to transfer its central
administration outside the UK, whilst keeping its registered
office in the UK, but was discouraged from doing so by a
swingeing domestic tax demand. The domestic restrictions were
upheld. Although some doubt on the validity of exit taxes under
the Treaty provisions on freedom of establishment was generated
in cases subsequent to Daily Mail,143 that decision has not been
overruled.
6–25
The second proposition which has emerged from the cases and
which does have significance for a company seek to transfer its
registered office is that the Member State’s incorporation rules,
whatever they may be, must be applied in an equal fashion to
domestic and foreign companies. However, implicit in this
proposition is acceptance that the state of current incorporation
remains in control of its rules for valid incorporation—subject to
any relevant EU Directives. In particular, if it is a real seat state,
the Treaty provisions on freedom of establishment do not require
it to abandon those rules. This illustrated by the decision in
Cartesio.144 Like Uberseering, this was a case where the
company transferred its headquarters (from Hungary to Italy)
and did not want to change its applicable law. Unlike
Uberseering, the question for the Court was the validity of the
company’s continued incorporation in the transferring state
(Hungary), not its recognition in the transferee state. Also, unlike
in Uberseering, the transfer of the headquarters out of Hungary
did affect the validity of its continued incorporation in Hungary,
whose officials refused to continue the company’s registration in
that state. The Court (Grand Chamber) upheld the Hungarian
decision, on the grounds that the determination of the factors
required for the validity or continued validity of incorporation in
a Member State was a matter for that state, not for EU law.145
However, the court did go out of its way to address the situation
which was not before it, i.e. where the company wishes to
transfer its registered office in order to change the applicable
law. Here, by contrast, the Courts approach was different. The
Cartesio facts were to be “distinguished from the situation where
a company governed by the law of one Member State moves to
another Member State with an attendant change as regards the
national law applicable, since in the latter situation the company
is converted into a form of company which is governed by the
law of the Member State to which it has moved”. Here the
Court’s view was that the national legislation of the transferor
state was not justified “by requiring the winding up or
liquidation of the company, in preventing that company from
converting itself into a company governed by the law of the
other Member State, to the extent that it is permitted under that
law to do so”.146
6–26
In Vale147 the situation arose which was in many ways the
converse of the situation in Cartesio. In Vale an Italian company
de-registered in Italy with a view to transferring both its
registered office and its business to Hungary, but the Hungarian
authorities refused to effect the transfer, on the grounds that the
domestic re-incorporation provisions did not apply to foreign-
incorporated companies. The Court held that this refusal was a
breach of arts 49 and 54 TFEU. The core of the reasoning was as
follows. Hungarian law did have provisions which allowed
domestic businesses to convert from one form of incorporation
to another (without loss of legal personality), just as UK law
allows provides for conversion from a private to a public
company and vice versa, for example. It appears that in this case
Vale proposed to re-incorporate in Hungary as the same type of
company as it had been in Italy. Nevertheless, the Court held
that the exclusion of a cross-border re-incorporation from the
domestic conversion provisions was in principle discrimination
against foreign companies. This meant that the national
authorities would have to adapt the domestic procedural rules to
deal with the situation of re-incorporation by a foreign company.
In particular, the Hungarian authorities would have to take
account of the documentation issued by the Italian authorities in
the course of the Italian de-registration proceedings. On the other
hand, there appears in the judgment to be no infringement of the
principle of national control of incorporation requirements. If the
Italian company had proposed not to transfer its headquarters to
Hungary and this was a requirement for incorporation in
Hungary (for all companies), the Hungarian authorities would
have been entitled to refuse registration.
On the other hand, these decisions can be said to have
implications for domestic law. The fact that the Court in Vale
required domestic re-incorporation provisions to be adapted for
use by companies incorporated in another Member State suggest
the UK should introduce some simple transferring in procedure.
Since the UK is an incorporation rule state, there would be no
need for the transferring-in company to move its operations to
the UK at the same time as it moved its registered office. Some
Member States, for example, Spain148 do permit a transfer in of
the registered office, but many, including the UK, do not.
Equally, the dictum in Cartesio suggests the UK should have
some simple procedure for transferring out the registered office.
EU law: alternative transfer mechanisms
6–27
There are other mechanisms available to a company which
wishes to change its applicable law. The obvious alternative
technique—though it is rather more costly—is to form a
subsidiary in the new jurisdiction and merge the existing
company into it. Unlike for the transfer of a registered office, EU
law does now provide a mechanism for a cross-border merger.149
This is potentially significant. For example, in the US the
standard mechanism for transferring incorporation to the state of
Delaware is the merger of the existing company into a Delaware
corporation. However, the crucial point to be made here is that
the company resulting from the merger (whether a new company
or an existing one) must be validly incorporated in the new
jurisdiction and the Directive, following the policy of the CJEU,
leaves criteria for valid incorporation to be determined by the
member states.150 Consequently, a real seat state may continue to
insist that, for valid incorporation in that state, the headquarters
of the resulting company be located in that state. This reduces
the attraction of the merger mechanism if what the company
seeks to achieve is a simple change in the applicable law—
unless it is prepared to incur the potentially substantial additional
costs of moving the company’s headquarters to the jurisdiction
of the resulting company. By contrast, the cross-border merger
directive does facilitate the choice by a company of the law of an
incorporation rule state.
A further mechanism which EU law makes available is the
European Company (“SE”).151 The companies which found an
SE may choose any Member State in which to incorporate the
new entity, whether or not any of the founding companies
operated in that jurisdiction.152 Furthermore, the SE does benefit
from a EU mechanism for the simple transfer of its registered
office to another Member State after formation.153 However, the
SE is currently required to have its headquarters in the same
jurisdiction as its registered office,154 thus reducing its
attractiveness as a mechanism for changing the applicable
company law alone. If this ceases to be the case, the state of
registration must take steps to require the SE either to move its
head office back to the state of registration or to move its
registered office to the State where its head office now is; failing
either of these things, the state of registration must have the SE
wound up.155 The SE Regulation required the Commission to
report on the functioning of the SE statute after five years of
operation and in particular on the appropriateness of maintaining
this requirement,156 but no reform resulted from the report.157
Even if this restriction were removed, the costs of establishing a
SE simply for the purposes of changing the applicable law might
deter significant use of this mechanism.
Finally, and most obviously, the EU might act to require all
Member States to amend their laws so as to provide to all
companies a simple mechanism for the transfer of their
registered office. Thus, the law of the state of current
incorporation would have to permit the transfer of the registered
office to transferee state and the law of the transferee state would
have to permit re-incorporation, in both cases without the
company in question being wound up, but subject to appropriate
safeguards for minority shareholders, creditors and employees.
But the EU appears reluctant to grapple with this issue.158
Conclusion
6–28
The changes in the rules governing corporate freedom to move
the registered office have produced regulatory competition at the
level of company formation. Whether providing an equivalent
level of corporate freedom at the stage of re-incorporation would
generate the same level of regulatory competition among states
and regulatory arbitrage by companies is much less clear. Even
if a convenient legal mechanism for transfer were provided,
would states compete for re-incorporations and would
companies wish to transfer their registered offices? The
particular revenue gains from reincorporation which the state of
Delaware obtains in the US are simply not available in the EU,
though there may be other incentives for states to attract re-
incorporations.159 As for the companies themselves, the
incentives for mature companies to change jurisdictions will be
very different from those operating at the time of initial
incorporation of small companies. They may not wish to litigate
their corporate law matters in a jurisdiction with which they are
not otherwise connected or, alternatively, have the courts of their
headquarters jurisdiction apply a foreign law with which those
courts may be unfamiliar.
However, it is not clear that there is a strong argument against
permitting freedom to transfer the registered office by way of re-
incorporation. On the contrary, if Member States, when
reforming corporate law, are influenced mainly by a desire to
provide efficient company law to their “own” companies rather
than to attract re-incorporations of foreign companies, then this
suggests that no element of “corporate dumping” is involved
when a company does decide to move to the law of another
Member State. Equally, if companies weigh all the relevant
factors before deciding to re-incorporate, this suggests that the
choice which is ultimately made will be the appropriate one.
6–29
The contrary argument to those put forward in favour of
regulatory competition, and which constitutes the basis of the
real seat theory, is that to allow a company to choose a
jurisdiction for incorporation, even though it carries on no
substantial economic activities in that state or perhaps even no
economic activities at all, weakens the power of the state where
those activities are carried on to impose mandatory rules on
companies for the benefit of members, creditors or employees. If
a company does not like the rules of the state where it has based
its operations, it will simply choose the law of another Member
State for its incorporation.160 What will then ensue is a “race to
the bottom” among the Member States of the EU as they
compete to provide company laws which companies find
attractive.
Although these fears are not fanciful, they can be exaggerated
and may even be misplaced. First, as a result of the EU’s initial
company law harmonisation programme (discussed above in this
chapter), there are minimum standards in place below which no
Member State’s company law can go. Secondly, and most
importantly, competition does not necessarily result in a
reduction of protection. In the case of financial markets,
competition among stock exchanges for investors’ funds has led
to a raising of standards, especially in areas such as insider
dealing, market abuse and corporate governance. The crucial
question is who decides on the distribution of the good (in this
case, the incorporation decision) for which the competition
exists. In the US, where incorporations are a matter for each
state, where the incorporation theory prevails and where a high
proportion of public companies choose to incorporate in
Delaware, even though their businesses may have no connection
with Delaware, the argument that this situation has produced a
race to the bottom seems to be based on the proposition that re-
incorporations are in practice the result of a board decision, so
that Delaware has a strong incentive to produce a corporate law
which is too favourable to management and which provides too
little protection for shareholders and creditors.161 One way of
addressing this problem is not to make the re-incorporation
decision a purely managerial one. It is relatively easy to build
into the re-incorporation decision a substantial role for
shareholders, creditors and employees, as the cross-border
mergers Directive does. Moreover, in the case of listed
companies, it is probably the rules and mechanisms of the
exchange which are more important for the protection of
shareholders than the provisions of company law as such.
CONCLUSION
6–30
British company law has traditionally adopted a welcoming
stance towards companies incorporated elsewhere. This is shown
both by the limited extent to which it applies the provisions of
the British Act to such companies and its acceptance of
incorporation as the connecting factor in its private international
law rules. However, it is much less open to transfers by British
companies of the registered office to other jurisdictions or the
simple transfer in of the registered office by companies already
incorporated in other jurisdictions (as opposed to their conduct
of business in the UK). However, to a substantial extent, it has
preferred the goals of maximising freedom of movement and
promoting a degree of competition among jurisdictions as
against ensuring that those dealing with foreign companies do so
on the basis of a framework of law with which they are familiar.
Within the EU these two objectives have been reconciled to
some degree through the programme for the harmonisation of
company laws, though that initiative never achieved all its
promoters wished and expected of it. However, free movement
and jurisdictional competition cannot be achieved by one state
alone, since the migrating company is dependent also on the
laws of the country to which or from which it moves. For this
reason, corporate migration is undoubtedly a proper subject for
the attention of the EU legislator, or failing that, of the Court of
Justice of the European Union.
1See Ch.1 for a discussion of the various forms of incorporation available in Great
Britain.
2 [1933] A.C. 289 at 297 HL.
3
In particular industries a company operating in the UK may be required to do so
through a British subsidiary. Thus, banks from (non-EU) countries with a poor record of
banking supervision were reported to have been required by the FSA (predecessor to the
FCA) to withdraw from the business of taking retail deposits in the UK, unless they
incorporated their branches as subsidiaries, which would be required to have their own
capital: Financial Times, 25 June 2002, p.2. However, such national requirements must
not infringe EU law on freedom of establishment. See Case C-221/89, Factortame
[1991] E.C.R. I-3905.
4
For example, where the contract is concluded over the telephone or the internet by
someone in the UK with a company established in another country.
5
See Ch.8, below. In the future the multinational parent might put all its European
operations (perhaps of a particular type) into an SE—see above, para.1–40—and the SE
might or might not be registered in the UK.
6
Before 2006 the even more quaint term “oversea” company was used.
7
2006 Act s.1044. This means that Channel Island and Isle of Man companies are
“overseas” companies as well.
8
See above, Ch.4.
9
See below, Ch.21.
10
Directive 89/666/EEC [1989] O.J. L395/36.
11
The situation seems to have arisen because the then Government was unwilling to
allocate parliamentary time for primary legislation on overseas companies (which would
have allowed for the integration of the two regimes) but decided instead to implement
the Eleventh Directive by secondary legislation under the European Communities Act
1972.
12 In this connection it is important to note that the Eleventh Directive applies, not only
to EU companies setting up branches in the UK, but to all foreign companies so doing.
Thus, its scope was parallel to that of the traditional domestic law.
13
Oversea Companies (1999) and Final Report I, paras 11.21–11.33.
14 Modernising Company Law, 2002, Cm 5553–1, para.6.17. The havering around the
implementation of this policy in the Act itself was described in the 8th edn of this book
at pp.122–123.
15 Overseas Companies Regulations 2009 (SI 2009/1801), as amended.
16 SI 2009/1801 regs 2, 3, 30 and 68.
17However, the trading disclosures requirements apply on an even broader basis: see
para.6–6.
18
[1986] 1 W.L.R. 180 at 184. See also [1990] B.C.L.C. 546.
19 South India Shipping Corp v Export-Import Bank of Korea [1985] 1 W.L.R. 585 CA;
Actiesselskabat Dampskib “Hercules” v Grand Trunk Pacific Railway Co [1912] 1 K.B.
222 CA. Registration in the UK of an establishment in order to carry on business
involves the creation of a place of business, even if business has not yet commenced at
the establishment: Teekay Tankers Ltd v STX Offshore & Shipping Co [2015] 2 B.C.L.C.
210. However, the business must be the business of the company, not of its agent or
subsidiary: Rakusens Ltd v Baser Ambalaj Plastik Sanayi Ticaret AS [2002] 1 B.C.L.C.
104 CA; Matchnet Plc v William Blair & Co LLC [2003] 2 B.C.L.C. 195.
20 This EU legislation is not otherwise dealt with here.
21 See, for example, Directive 94/19/EC on deposit guarantee schemes, art.1(5).
22 Case 33/78 Etablissements Somafer v Saar-Ferngas [1978] E.C.R. 2183.
23
In principle, British law accepts such an arrangement, though not all European
countries do: see paras 6–17 et seq., below.
24
However, in the Centros case (Case C-212/97 [1999] E.C.R. I-1459) the CJEU seems
to have treated as a branch, for the purposes of art.49 TFEU, the British company’s place
of business in Denmark, even though it carried on no business anywhere else, including
the UK, which was simply its place of incorporation. Putting the matter the other way
around, this might suggest that the British head-office of a company incorporated
elsewhere would also be a “branch” for the purposes of the Eleventh Directive.
25
2006 Act s.1046 and the Overseas Companies Regulations 2009 Pt 2. The information
about the company must include a certified copy of its constitution (reg.8(1)). The
residential addresses of directors or permanent representatives are subject to the same
protective provisions as in the case of UK-incorporate companies: Pt 4. Although the
disclosure obligation applies in principle each time the overseas company opens an
establishment in the UK (reg.4(2)), the company need not repeat the company-specific
information each time, but simply cross-refer to it (reg.5). This applies even though the
establishments are in different UK jurisdictions.
26
2009 Regs Pt 3.
27 2009 Regs regs 11 and 17.
28 2009 Regs reg.6.
29
cf. arts 2 and 8 of the Eleventh Directive. The theory, presumably, is that the more
extensive information about the company is available from the national registries of EU
Member States, under the provisions of the First Directive.
30 2006 Act ss.1056 and 1139(2)(a). In Teekay Tankers Ltd v STX Offshore & Shipping
Co [2015] 2 B.C.L.C. 210 the judge confirmed the traditional view that, despite the
apparently narrower wording of reg.7(1)(e), the service did not have to concern the
business of the establishment (as opposed to the business of the company more
generally). If there is no such person or if the registered person refuses to accept service,
then service can be effected at any place of business in the UK (s.1139(2)(b)).
31 2009 Regs reg.6(1)(e).
322009 Regs reg.7(1)(f). Part 4 of the regs applies provisions equivalent to those
operating in relation to domestic companies for the protection of directors’ residential
addresses from public disclosure. See para.14–23.
33
See para.9–20.
34 2006 Act s.1051 and 2009 Regs Pt 7.
35 2009 Regs regs 60–61 (and at the service address of every person authorised to accept
service on behalf of the company in respect of the branch).
36
2009 Regs reg.62.
37 2009 Regs reg.63.
38 2009 Regs reg.67.
39
2009 Regs reg.66. For a discussion of those civil consequences, see para.9–20.
40 2006 Act s.1049 and 2009 Regs Pt 5. Unlimited overseas companies are exempted (as
domestic ones are) from this obligation, and special rules (not considered here) apply to
credit or financial institutions (Pt 6).
41If the overseas company is incorporated in an EEA state, it falls within this category
even if it is exempted by its parent law from the requirements to have its accounts
audited or to deliver them (reg.31(1)(b)). Such exemptions are controlled by the relevant
EU law, which is discussed in Ch.21.
42
The most recent accounting documents have to be included with the initial return to
the Registrar (reg.9(1),(2)). Thereafter, Pt 5 applies (reg.32(5)). The accounts delivered
to the Registrar must identify the legislation under which the accounts have been
prepared, which GAAP has been used, if any; and whether they have been audited and,
if so, according to which Generally Accepted Auditing Standards (reg.33).
43
2009 Regs reg.31(2). The auditors’ report is not required if the company is exempted
from audit.
44
2009 Regs reg.34.
45
2009 Regs Pt 5 Ch.3. See Ch.21 below. This is a considerable improvement on the
previous law which applied to overseas companies in such cases a modification of an
out-dated set of accounting rules based on the 1948 Act.
46
2006 Act s.395, as applied to overseas companies by reg.38. This assumes, of course,
that the parent law does not require preparation, audit and filing of the accounts of the
overseas company, in which case it will fall within the first category of companies.
47
2006 Act s.1058 and reg.77—transfer of an establishment from one jurisdiction of the
UK to another counts as the closure of one establishment and the opening of another.
48
2006 Act s.1053(2) and 2009 Regs Pt 8.
49 2006 Act s.1103(1).
502006 Act s.1105 and the Registrar of Companies and Applications for Striking Off
Regulations 2009 reg.7.
51
2006 Act s.1045 and the Overseas Companies (Execution of Documents and
Registration of Documents) Regulation 2009/1917 Pt 2
52 The rules on company charges created by overseas companies (s.1052) are also
regulatory and are considered in paras 32–28 et seq. They were reduced in scope in
2011.
532006 Act ss.1047(1),(2) and 1048—and it may alter its alternative name and toggle
between its corporate and alternative names.
55 2006 Act s.1047(4),(5)—and to any alteration of the registered name.
56
2006 Act s.1047(3),(5). These controls are set out in s.57 and regulations made
thereunder.
57 Case C-167/01 Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art
Ltd [2003] E.C.R. I-10155, where the ECJ struck down Dutch “pseudo-foreign
company” requirements applied to an overseas (in fact, British) company which went
beyond the Eleventh Directive. However, the Court recognised the possibility of
justification which, one would have thought, would have been applicable in principle to
the domestic name requirements, on the grounds of third-party protection, not involving
a disproportionate cost to the company. However, this conclusion cannot be firmly
arrived at without knowing the nature and extent of the name controls applied in the
Member State of incorporation. The approach of the Act simply side-steps these
difficulties.
59 IA 1986 ss.216(8) and 217(6).
60
IA 1986 s.220 (“any company”, except, of course, those incorporated under the
British companies legislation). See Re Paramount Airways Ltd [1993] Ch. 223 at 240
CA. Voluntary winding-up of an unregistered company, however, is not permitted:
s.221(4).
61
Stocznia Gdanska SA v Latreefers Inc (No.2) [2001] 2 B.C.L.C. 116 CA. However,
the company must have some connection with Great Britain and there must be some
good reason for winding it up here.
62
See previous note.
63
See Stocznia Gdanska SA v Latreefers Inc (No.2) [2001] 2 B.C.L.C. 116 CA; and IA
1986 ss.213 and 214. See also Ch.9, below. It seems likely that the application of ss.213
and 214 to EU companies does not infringe the Treaty provisions relating to freedom of
establishment. See Case C-594/14, Kornhaas v Dithmar [2016] B.C.C. 116 and below
fn.135.
64
In the case of insolvent companies with the centre of their main interests in another
EU Member State, Council Regulation (EU) 2015/848 on insolvency proceedings
([2015] O.J. L141/19) favours the opening of insolvency proceedings in that other
Member State.
65 See Ch.10.
66 IA 1986 s.22(2). See also Re Seagull Manufacturing Co Ltd (No.2) [1994] 1 B.C.L.C.
273—Act applicable to foreigners outside the jurisdiction and to conduct which occurred
outside the jurisdiction, though presumably only in relation to a company falling within
the Act. In the case of undischarged bankrupts the connecting factor is instead whether
the company has an established place of business in Great Britain.
67 See J. Wouters, “European Company Law: Quo Vadis?” (2000) 37 C.M.L.R. 257 at
269; and G. Wolff, “The Commission’s Programme for Company Law Harmonisation”
in M. Andenas and S. Kenyon-Slade (eds), EC Financial Market Regulation and
Company Law (London, 1993), p.22. This position was adopted in particular by France.
68 Under the “ordinary” legislative procedure of the EU: art.294 TFEU.
69 Directives are binding on the Member States as to the principles to be embodied in
national legislation but give the states some flexibility in the transposition of the
Directive into national law: art.288 TFEU. Article 50 does not provide for the adoption
of Regulations, which are directly applicable in the Member States.
70 This includes creditors and, probably, employees. Basing the Directive on employee
involvement in the SE (see above, para.1–40) on what is now art.50 was controversial
and it was eventually adopted on the basis of what is now art.352 TFEU, which requires
unanimity. However, the controversy was as much about whether the SE rules could be
regarded as a harmonising measure as about the subject-matter of the Directive.
71
Council Directive 68/151 [1968] O.J. 68.
72 Council Directive 77/91 [1977] O.J. L26/1.
76
Council Directive 83/349 [1983] O.J. L193/1.
77
78
79
80
For similar reasons, the overall significance of the EU company law directives has
been questioned: L. Enriques, “EC Company Law Directives and Regulations: How
Trivial Are They?” (2006) 27 University of Pennsylvania Journal of International
Economic Law 1.
81
82
See Chs 11–13, below.
83
See Ch.21, below. The Seventh on group accounts was less important since domestic
law already recognised the principle of group accounting.
84See Ch.22, below, but the Eighth was revised in 2006 (Directive 2006/43/EC [2006]
O.J. L157/87) and the second version was more significant.
85
See para.6–2, above.
86 See Ch.14, below.
87 See paras 14–67 and 29–20, below.
88Final Report of the High Level Group of Company Law Experts on a Modern
Regulatory Framework of Company Law in Europe, Brussels, 4 November 2002.
89
Final Report, Ch.II.1.
90Communication from the Commission to the Council and the European Parliament,
COM(2003) 284, 21 May 2003.
91
On harmonisation “from the bottom up” see below para.6–25.
92 Article 5 TFEU. Where both the EU and the Member States have competence, the EU
should take action “only if and insofar as the objectives of the proposed action cannot be
sufficiently achieved by the Member States and can therefore, by reason of the scale or
effects of the proposed action, be better achieved by the Community”.
93 See above, fn.90, Ch.II.1.
94 Directive 2005/56/EC [2005] O.J. L310/1. See Ch.29, below.
95 Directive 2007/36/EC [2007] O.J. L184/17. See Ch.21, below.
96Article 308, TFEU. In Case C-436/03 Parliament v Council of the European Union
[2006] E.C.R. I-3733 the CJEU confirmed that proposals for EU forms of incorporation
could not be brought forward under art.50 TFEU because they were not harmonisation
measures.
97Council Regulation (EC) No 2157/2001 on the Statute for a European Company
[2001] O.J. L294/1 and the accompanying Directive on employee involvement in the SE
(Council Directive 2001/86/EC [2001] O.J. L294/22). See para.1–40.
98H. Eidenmuller, A. Engert and L. Hornuf, “Incorporating under European Law: The
Societas Europaea as a Vehicle for Legal Arbitrage” (2009) 10 European Business
Organization Law Review 1.
99
As at the end of March 2015 there were 44 SEs registered in the UK, though that was
decline of about 20 over the end March 2014 and 2013 figures: Companies House,
Company Registration Activity in the United Kingdom 2014-2015, Table E3.
100
[2014] O.J. C154/03. See P. Davies, The European Private Company (SPE):
Uniformity, Flexibility, Competition and the Persistence of National Laws (Oxford
Legal Studies Research Paper No.11/2011; ECGI—Law Working Paper No.154/2010.
Available at SSRN: http://ssrn.com/abstract=1622293 [Accessed 28 April 2016]).
101
102
At the time of writing the Directive had not been adopted.
103
Directive 2004/25/EC [2004] O.J. L142/12. See Ch.28, below.
104
Financial Services, Implementing the Framework for Financial Markets: Action
Plan, COM (1999) 232, 11 May 1999.
105 Directive 2003/71/EC [2003] O.J. L345/64.
106
Directive 2004/109/EC [2004] O.J. L390/38.
107
Directive 2003/6/EC [2003] O.J. L96/16.
108See the Final Report of the Committee of Wise Men on the Regulation of European
Securities Markets, Brussels, February 2001.
109
In EU jargon the subsequent procedure for law-making by the Commission is known
as “comitology”.
110 Articles 290 and 291 TFEU.
111
“Recommendations shall have no binding force”: art.288 TFEU.
112
See HLG, above, fn.88, Ch.II.2 and 3.
113 Commission Recommendation 2005/162/EC on the role of non-executive or
supervisory directors of listed companies and on committees of the (supervisory) board,
[2005] O.J. L52/51, supplemented by the recommendation of 2009 mentioned in the
following note.
114
Commission Recommendation 2004/913/EEC fostering an appropriate regime for
the remuneration of directors of listed companies [2004] O.J. L385/55, supplemented by
Commission Recommendation C(2009) 3177, 30 April 2009.
115
See art.46A of the Fourth Directive, inserted by Directive 2006/46/EC art.1(7).
116 Above fn.95.
117 See Directive 2003/58/EC [2003] O.J. L221/13 (amending the First Directive);
Directive 2006/68/EC [2006] O.J. L264/32 (amending the Second Directive); Directives
2007/63/EC [2007] O.J. L300/47 and Directive 2009/109/EC [2009] O.J. L259/14
(amending the Third and Sixth Directives); and Directive 2009/49/EC [2009] O.J.
L164/42 amending the Fourth and Seventh Directives. Others of the initial directives
have been substantially expanded over the years, notably the audit and accounts
directives, so that they now have a broader scope than when adopted.
118Proposal for a Directive relating to certain aspects of company law (codification)
(COM/2015/0616 final).
119 Completing, para.11.55.
120
For an extended analysis of the issues discussed in this paragraph see J. Armour,
“Who Should Make Corporate Law? EC Legislation versus Regulatory Competition”
(2005) 58 Current Legal Problems 369.
121
2006 Act s.9(2)(b).
122
The facility for companies whose registered office is in fact in Wales to alter the
statement so as to toggle between “Wales” and “England and Wales” does not involve a
change of legal jurisdiction. The change has an impact on the availability or otherwise
on the use of Welsh in the company’s official documents and in communications with
Companies House. See s.88.
123
Since British law adopts the incorporation theory, a UK company may freely move
its headquarters out of the UK without imperiling the validity of its incorporation in the
UK in the eyes of British law. This is useful for companies which wish to retain British
company law but does not address the issue of companies which wish to change the
applicable company law.
124 On schemes of arrangement see Ch.29.
125 Cross-border mergers are discussed below at para.6–27.
126
Completing, paras 11.54–11.70 and Final Report I, Ch.14.
127
Reg.2157/2001/EC art.8.
128 If the company, after emigration, maintained a place of business in the UK it would
become subject to the information provision rules for overseas companies (above); if
not, it would in any event have to file with Companies House contact details relating to
its new jurisdiction.
129 Immigration would also be permitted but there the regulatory burden would fall
mainly on the former state of registration. The British requirements would parallel those
for a domestic company which re-registers: Final Report I, para.14.12 and above, paras
4–20 et seq.
130
Modernising, pp.54–55.
131 The right of a company established in another Member State to set up an agency,
branch or subsidiary in Great Britain is normally referred to as the right of “secondary
establishment”. The right of a company to transfer its registered office to another
Member State is referred to as the right of “primary establishment” and is dealt with at
paras 6–22 et seq., below.
132The Commission has a long-standing proposal for a Fourteenth Directive in the
company law harmonisation series on the transfer of the registered office, on which
work has been intermittent. It ceased most recently in 2007 (Commission Staff Working
Document, Impact Assessment on the Directive on the cross-border transfer of
registered office, SEC (2007) 1707, 12 December 2007). However, in 2013 the
Commission again consulted on the topic.
133
See the quotation from Lord Wright, above para.6–2.
134 Case C-212/97 Centros Ltd v Erhverus-og Selkabsstyrelsen [1999] E.C.R. I-1459.
For an earlier and under-appreciated decision going in the same direction see Case 79/85
Segers v Bestuur Bedrijfsvereniging voor Bank-en Verzekeringswezen, Groothandel en
Vrije Beroepen [1986] E.C.R. 2375.
135
Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003]
E.C.R. I-10155. However, the state where the main centre of operations is located is free
to apply its insolvency law to a company registered elsewhere, since such provisions do
not infringe freedom of establishment: Case C-594/14, Kornhaas v Dithmar [2016]
B.C.C. 116.
136
See M. Becht, C. Mayer and H. Wagner, “Where Do Firms Incorporate?
Deregulation and the Costs of Entry” (2008) 14 Journal of Corporate Finance 241; W.
Bratton, J. McCahery and E. Vermeulen, “How Does Corporate Law Mobility Affect
Lawmaking? A Comparative Analysis” (2009) 57 American Journal of Comparative
Law 347.
137
Above, para.6–3.
138
Case C-55/94 Reinhard Gebhard v Consiglio dell’Ordine degli Avvocati e
Procuratori di Milano [1995] E.C.R. 1-4165.
139
Case C-208/00 Uberseering BV v Nordic Construction Company Baumanagement
GmbH [2002] E.C.R. I-9919.
140
“The requirement of reincorporation of the same company in Germany is tantamount
to outright negation of freedom of establishment” (at 81).
141 If the transferring state is a real seat state, then of course moving the headquarters to
another state does cast doubt on the validity of the company’s incorporation in the
transferring state and EU law does not seek to alter that result. See Cartesio, below.
142 Case C-81/87 Daily Mail and General Trust [1988] E.C.R. 5483.
143Case C-9/02 Hughes de Lasteyrie du Saillant v Ministère de l’Economie, des
Finances et de l’Industrie [2004] E.C.R. I-2409; Case C-196/04 Cadbury Schweppes Plc
v Commissioners of Inland Revenue [2006] E.C.R. I-4585.
144 Case C-210/06 Cartesio Oktató és Szolgáltató bt [2008] E.C.R. I-964.
145 “Thus a Member State has the power to define both the connecting factor required of
a company if it is to be regarded as incorporated under the law of that Member State and,
as such, capable of enjoying the right of establishment, and that required if the company
is to be able subsequently to maintain that status. That power includes the possibility for
that Member State not to permit a company governed by its law to retain that status if
the company intends to reorganise itself in another Member State by moving its seat to
the territory of the latter, thereby breaking the connecting factor required under the
national law of the Member State of incorporation” (at 110).
146 See at 111–112.
147 Case C-378/10 VALE Epitesi kft [2013] 1 W.L.R. 294.
148See art.94 of the Ley 3/2009 de Modificaciones estructurales de las sociedades
mercantiles (LME) and art.309 of the Reglamento del Registro Mercantil (RRM).
149 The UK transposing rules are discussed in Ch.29, below.
150
Directive 4.1(b) and Recital (3).
151 See para.6–13, above.
152 SE Reg art.7
153 SE Reg art.8. See para.6–19, above, for some of the details of this process.
154
SE Reg art.7.
155
SE Reg art.64, implemented by the Insolvency Act 1986 s.124B.
156
SE Reg art.69(a).
157
The Commission’s report might be said to favour the arguments for removing the
restriction, but the Commission did not positively recommend this course of action:
Report from the Commission … on the application of Council Regulation 2157/2001 on
the Statute for a European Company (SE), SEC(2010) 1391, 17 November 2010, 4.2.
158
See fn.132, above.
159
J. Armour, “Who Should Make Corporate Law? EC Legislation versus Regulatory
Competition” (2005) 58 Current Legal Problems 369. Whilst not disputing that the
revenue-raising incentives operating on the state of Delaware have no counterpart in the
case of the UK, he sees the incentive as located with the “magic circle” law firms based
in London, which would pressurise the government to provide laws which encourage re-
incorporations.
160 Of course, this is an existing risk for incorporation theory states whose company law
contains some feature which incorporators do not like and which some other available
jurisdiction does not insist on. See the Kamer van Koophandel en Fabrieken voor
Amsterdam v Inspire Art Ltd [2003] E.C.R. I-10155. Real seat theory states seek to
protect themselves against competitive pressures through a private international law rule,
whereas incorporation theory states will have to use some other technique to address the
threat, such as a “pseudo-foreign” company statute.
161It is much controverted whether the Delaware law maximises managerial freedom or
shareholder value. For a convenient short account of the, now very large, literature, see
R. Romano, The Foundations of Corporate Law (New York: Oxford University Press,
1993), pp.87–99.
PART 2
SEPARATE LEGAL PERSONALITY AND

LIMITED LIABILITY
We saw in Pt 1 that the separate legal personality of the

company is a necessary feature of the creation of a company and
that limited liability, although optional, is overwhelmingly
chosen by those who incorporate a company. Having created an
artificial person, the law has to decide how that person acts and
knows. This can be done only by attributing the acts and
knowledge of natural persons to the company in appropriate
situations. The delineation of those situations has proved to be a
taxing exercise, mainly because the rules of attribution need to
vary from one area of liability to another. There is no reason to
suppose that the rules should be the same in relation to, for
example, contractual and criminal liability—and in fact every
reason to suppose that they should not be. The first chapter in
this part analyses the rules of attribution.
The remainder of this part deals with limited liability.
Opinions continue to differ on the question of whether limited
liability is a natural consequence of separate legal personality or
a perversion of the ordinary and proper state of affairs.
Nevertheless, it is clear that British company law is firmly
committed to the principle and that it is only rarely that the
common law will set that principle aside. Statute law has shown
some greater willingness to do so in recent years (or to
disqualify directors from acting through the corporate form in
the future), where limited liability has been abused. These
innovations have had an important impact on small companies,
where the interposition of a company between the entrepreneur
and his or her creditors can seem, on occasion, artificial.
The traditional response of company law to the risks of
limited liability, however, has been not to set that principle aside
but rather to lay down rules on “legal capital”, which in British
law turn out to be mainly rules restricting the freedom of the
controllers of companies to move assets out of the company
when this might prejudice the company’s creditors. By contrast,
British law has traditionally shown little interests in rules on
minimum capital. Legal capital is an area where the British rules
have been particularly influenced by EU law in the shape of the
Second Company Law Directive. Again, opinions differ on the
efficacy of legal capital rules in protecting creditors and on
whether the statutory rules, mentioned in the previous paragraph,
are a better solution to the problem, though increasingly
penetrating criticisms of the concept of legal capital in general,
and of the Second Directive in particular, have been advanced in
recent years.
CHAPTER 7
CORPORATE ACTIONS
Introduction 7–1
Contractual Rights and Liabilities 7–4
Contracting through the board or the shareholders
collectively 7–5
Constructive notice and the rule in Turquand’s case 7–6
Statutory protection for third parties dealing with the
board 7–9
Contracting through agents 7–16
Agency principles 7–18
Establishing the ostensible authority of corporate
agents 7–20
Knowledge 7–24
Knowledge of the constitution as an aid to third
parties? 7–26
Ratification 7–27
Overall 7–28
The ultra vires doctrine and the objects clause 7–29
Tort and Crime 7–30
Tortious liability 7–31
Litigation by the company 7–47
Conclusion 7–48
INTRODUCTION
7–1
One consequence of the abstract nature of a company as a legal
person is that inevitably decisions for, and actions by, it have to
be taken by natural persons. Decisions on its behalf may be
taken either (a) by its primary decision-making bodies (the board
of directors or the members collectively); or (b) by officers
(including individual directors), agents or employees of the
company. Acts done on its behalf will perforce be by (b). Similar
problems of attribution arise where the question is simply
whether the company “knew” about a certain fact or situation.
The question is whether the decision taken, act done or
knowledge held by the natural persons can properly be attributed
to the company. There clearly needs to be some linkage between
the natural persons in question and the company for the
company’s legal position to be regarded as having been altered.
Much of this chapter is about identifying the linkages that the
law has accepted and those it has rejected. Those connections are
clearly easier to identify where the board or shareholders as a
body have purported to act as the company, but corporate life
would be difficult or inappropriately regulated if the company’s
legal position could be affected only by actions of the board or
the shareholders collectively. On the one hand, a large company
would find contracting a cumbersome activity if all contracts,
even relatively minor ones, had to be approved by the board or
the shareholders collectively. On the other, it would be
surprising if a company could escape all tortious or criminal
liability where the wrongful act was authorised or committed by
a senior manager who was neither a director nor a shareholder.
In this chapter we are concerned with the answers to these
questions primarily in two contexts. The first is where the
company purports to enter into a contract with an outside third
party. If a company could not acquire and enforce contractual
rights and subject itself effectively to contractual duties, it would
find the carrying on of its business a very difficult matter. This is
obviously true of companies with a commercial purpose, but the
statement is true of all companies which need to deal with third
parties. The company would find it difficult to plan its future in
the absence of enforceable contractual rights, and, in the absence
of contractual duties enforceable against the company,
counterparties would be unwilling to contract with companies or
would routinely require guarantees from individuals of the
company’s obligations. What is required is a simple and
straightforward set of rules whereby the company can contract
through the actions of individuals, for the benefit of both
companies and third parties.1 The law has developed two
principal approaches to providing those rules. Where the
company contracts through the decision-making bodies
established in its articles of association (board of directors,
shareholders collectively), the solution is provided by
organisational law and is straightforward. The company is bound
because its constitutionally established decision-making bodies
have committed it to the contract. Where, however, the contract
is entered into on the company’s behalf other than by these
bodies, some further set of rules is required. There was no need
to develop a company-specific set of overall rules to achieve this
goal. The common law of agency, applying to non-corporate as
well as corporate principals and their agents, furnished the bed-
rock structure. However, as we shall also see, agency and
organisational rules have had to be tweaked in order to deal with
some particular features of corporate structure and doctrine.
7–2
The second situation is where the individual acting on behalf of
the company commits a wrongful act. Is the company liable in
this situation? This question arises principally in the criminal
law and in tort, though it exists in other areas, such as
wrongdoing in equity. The company may seem to have an
obvious interest in not being liable for the wrongdoing of those
connected with it. However, on a more sophisticated view it is
doubtful whether this is true. If companies, some of which are
powerful economic actors and all of which contribute to the
functioning of the economy, are seen to be free of liability for
the wrongful acts of those acting for them, then there is likely to
be increased political pressure for rules which reduce the
freedom of action of companies.2 From the point of view of the
efficient enforcement of the law, it can be argued, further, that
corporate liability gives those in control of the company a strong
incentive to constrain wrongful action on the part of those acting
on its behalf and so corporate liability contributes to law
enforcement—an argument that has appealed to the legislature in
recent years.
With wrongdoing it is again appropriate to hold the company
liable where the constitutional decision-making bodes of the
company have committed the wrong. Normally, this means the
company is liable because board or shareholders collectively
have authorised the wrongdoing, though in the case of a
company with only a single shareholder or director, that person
might actually commit the wrongful act. Beyond those bodies,
general doctrines of the common law again provided a second
basis for corporate liability, without the need to establish a
company-specific set of rules. In the law of tort, the doctrine of
vicarious liability is available to provide a framework of
corporate liability and proved to be capable of dealing with most
cases of corporate principals as it did with non-corporate ones.
In criminal law and some cases of non-criminal liability,
however, vicarious liability has proved controversial, at least in
relation to serious crimes, whether the person sought to be made
vicarious liable was a company or not. Here the law developed a
third layer of rules for those areas where vicarious liability did
not “work” in relation to companies.
This third layer of rules, like the first, is company-specific, in
the sense that they require consideration of how a particular
liability rule relates to the processes whereby decisions are taken
and implemented within companies. Sometimes, these rules
were made by the legislature, sometimes by the courts. Thus,
from the beginning of the twentieth century the courts developed
the notion of corporate “direct” liability, whereby the actions and
states of mind of the person connected with the company were
attributed to the company so as to make it a wrongdoer. Unlike
with vicarious liability, where only the liability of the connected
person was visited on the company and the company itself was
not a wrongdoer, with direct liability the company itself becomes
a wrongdoer.3 As we shall see below, the courts had difficulty in
establishing the boundaries of direct liability and it has only
recently begun to be developed in a satisfactory way. Legislative
interventions to create direct liability have been uncommon. The
principal example is the Corporate Manslaughter and Corporate
Homicide Act 2007, which imposes criminal liability for this
serious crime in circumstances where the notion of common law
direct liability proved inadequate.
7–3
Overall, therefore, the broad answer to this fundamental question
—how does a company decide, act or know?—is provided
through a tripartite hierarchy of rules. At the top are the rules
setting up the constitutional structure of the company and its
decision-making bodies, i.e. its articles of association; then
general doctrines of the common law such as agency and
vicarious liability; and at the bottom, where neither of these
approaches is available, statutory or common law rules
attributing liability specifically to companies in some cases. The
top and bottom layers in this tripartite division involve analysis
of issues peculiar to companies (or at least corporations). The
middle (and practically very important layer) consists of general
common law doctrines, which are not company-specific, though
their application to companies raises some difficulties which do
not arise where companies are not involved. Following the
terminology developed by Lord Hoffmann in Meridian Global
Funds Management Asia Ltd v Securities Commission4 the first
layer can be referred to as company law’s “primary rules of
attribution” because of their location in the constitution of the
company; the second as its “general rules of attribution”—
general because they apply also to principals who are not
companies but natural persons; and the third as its “special rules
of attribution” because their function is to provide for corporate
liability in situations where such liability is thought to be
appropriate but neither of the first two approaches to attribution
is capable of achieving that result. The residual and ill-defined
function of the third approach no doubt explains why definition
of its scope has proved so controversial, both in the courts and
the legislature.
CONTRACTUAL RIGHTS AND LIABILITIES
7–4
As noted above, decisions can be taken by or on behalf of a
company to enter into a contract or other transaction with a third
party in two ways, either by the decision-making bodies
established under the Companies Act by the company’s articles
of association (i.e. its board of directors or the shareholders
acting collectively) or by persons (who may include individual
directors) acting as its agents. Where the board or the
shareholders collectively act, they constitute the company, i.e.
they act as the company. They are not its agents. For the same
reason, they will not be personally liable on any resulting
contract, which will exist only between the third party and the
company. Where the company contracts through an agent, the
law of agency, as we shall see, produces a similar result in the
standard case, i.e. that the contract exists only between the third
party and the company. Despite the similarity of the results in
the two cases, we need to examine them separately because the
rules applicable in the two situations are not identical. We will
begin with corporate contracting through the directors or
shareholders collectively5 and then move on to contracting
through agents. Although there is a good deal of similarity in the
law applicable in the two situations, it is suggested that the
complexity of the applicable law can better be understood by
dividing the subject-matter up as proposed. It is also necessary to
set out the common law agency rules, partly because they
explain the form of the modern rules on contracting via the
board and partly because they still largely determine legal
outcomes where third parties contract other than through the
board or the shareholders collectively.
Contracting through the board or the shareholders
collectively
7–5
Where the articles confer management powers on the board or
the shareholders collectively and the board or shareholders, in
the exercise of those management powers, enter into contracts
with third parties, the conclusion that an effective contract
results is straightforward. If the law rejected this proposition,
corporate contracting would become an unwarrantably
complicated matter. Where the board or the shareholders
collectively contract, the question of how authority to contract
was conferred upon them is easily answered: it is to be found in
the company’s constitution, principally its articles. The difficulty
which has exercised both the courts and the legislature since the
early years of modern corporate law is how to deal with
situations where either board or shareholders go beyond the
powers conferred upon them by the articles. As we have seen in
Ch.3, it is rare for the board and the shareholders each to have
unrestricted and equivalent management powers—though it
seems that the constitutional arrangements of the company could
be set up in this way. Normally, the articles of association divide
up the management powers of the company between the
shareholders and the directors, giving the greater part to the
directors. Thus, it is possible that a third party will contract with
the company via the board in an area where the board cannot act
or where the board’s powers are restricted. The same issue may
also arise in relation to contracting through the shareholders
collectively. Third parties probably expect the shareholders’
powers under the articles to commit the company to contracts to
be limited, but, by contrast, they normally expect that the board
will have wide management powers. Consequently, they are
likely to be surprised if, after apparently contracting with the
company through the board, they are met with the argument that
the board did not have power to bind the company.6
In any event, an immediate question thus arises: is the contract
binding on the company if the board (or shareholders) act
outside the powers conferred upon them by the articles of
association? From the point of view of the shareholders as a
whole in the case of a board decision or the non-assenting
shareholders in the case of a shareholder decision to contract,
there is an argument that the constitutional arrangements of the
company should be paramount. Either the articles are followed
or the company should not be contractually committed (until
such time as the articles are altered). Overall, the development of
the law in recent times has been in the opposite direction, i.e.
towards preserving third parties’ reasonable expectations that the
body purporting to contract as the company had power to do so,
even if that power was restricted by the articles. Given the
primacy of the board in relation to the allocation of management
powers under the articles of most companies, this policy was
implemented in relation to board contracting, and it is upon
board contracting that we will concentrate below. The modern
view is thus away from the notion that restrictions in the
company’s articles on the contracting powers of the board are
something with which third parties are expected to familiarise
themselves.7 However, this is not the position from which
company law started out.
Constructive notice and the rule in Turquand’s case
7–6
As the law developed in the nineteenth century the answer to the
question whether the company was bound by a transaction
entered into by the board (or shareholders)8 outside their powers
as laid down in the articles was perceived to turn principally on
whether the third party knew (or ought to have known) that the
board were acting outside their authority. If the third party knew
the board had so acted, then the transaction was not binding on
the company unless the company chose to ratify it.9 Thus, the
security of the third party’s transaction depended on the will of
the company in such a case. The view was taken that the third
party, knowing of the board’s lack of authority, had no
legitimate claim to hold the company to the contract against the
company’s wishes.
This potentially defensible position was rendered completely
indefensible, however, by the doctrine of constructive notice,
which deprived the third party of the security of the transaction,
even though that party had no actual knowledge of the board’s
want of authority and no practical means of finding it out, other
than a detailed study of the company’s constitution. The rule
developed by the courts in the nineteenth century was that
anyone dealing with a company registered under the companies
legislation was deemed to have notice of its “public documents”,
a term which certainly included its articles, which are required to
be filed at Companies House.10 By developing this rule the
courts substantially enhanced the restrictive impact of provisions
in the articles limiting the board’s authority. By treating third
parties as knowing that which they would have known had they
read and understood the articles, the courts in many cases
deprived the third party of a plausible claim to a reliance interest
which the law should protect. The company might choose to
ratify the contract but was not bound to do so, so that the third
party’s contractual rights and duties rested on the company’s
decision.
7–7
However, the nineteenth century position was not quite as harsh
as the above paragraph suggests. It was modified by the so-
called “rule in Turquand’s case”11—sometimes referred to as the
“indoor management rule”. This rule had the effect that, in some
cases, the third party could assume that the directors had
authority to act, even if a fair reading of the articles might lead a
third party to make further enquiries. In Turquand12 itself
security for a loan had been given by a company through its
directors, but the articles provided that the directors could
borrow only such sums as were authorised by the shareholders in
general meeting and the requisite authority had not been given.
Jervis CJ said that a third party reading the company’s articles
would discover “not a prohibition on borrowing, but a
permission to do so under certain conditions. Finding that the
authority might have been made complete by a resolution, he
would have a right to infer the fact of a resolution authorising
that which on the face of the document appeared to be
legitimately done”. This was a benign interpretation of the
constructive notice doctrine, since the courts might have said
that the constructive notice of the articles put the third party on
notice to enquire whether the shareholders had in fact given the
requisite authority. It should be noted this benign removal of the
duty to make further enquiries must apply, a fortiori, to a third
party who has actually read the articles.
In Mohoney v East Holyford Mining Co,13 the Turquand
doctrine was approved and applied by the House of Lords in an
even more difficult case. Here, a bank had honoured the
company’s cheques, signed by two of three named directors,
after having received from the company’s secretary a copy of a
board resolution giving cheque-signing powers to the three
directors, to which their signatures had been appended.
Unfortunately, neither “secretary” nor “directors” had been
appointed but had simply acted as such. Nevertheless, the bank
successfully resisted an action for the repayment of the money.
Provided nothing appeared which was contrary to the articles,
the bank was entitled to assume that the apparent directors had
been properly appointed. This protection for third parties was
partially re-affirmed by statute which originally provided14 that
the acts of a director were valid “notwithstanding any defect that
may afterwards be discovered in his appointment or
qualification”. However, in Morris v Kanssen15 the House of
Lords held that the section applied only when there had been a
defective appointment and not where there has been “no
appointment” at all. In the light of this, s.161 of the 2006 Act
provides a somewhat expanded protection, applying not only in
the case of the subsequently discovered defect in the
appointment but also where the director is disqualified from
holding office, has ceased to hold office,16 is not entitled to vote
on the matter in question or (which was already part of the
statutory protection) the appointment was in breach of the
requirement that appointments of directors be voted on
individually.17 However, the section does not render valid the
acts of a person who acts as director without ever purportedly
having been appointed. In this situation the decision in Mahoney
continues to provide protection.18 The Kanssen case also
establishes that the protection of what is now s.161 does not
apply to a third party who actually knows of the facts giving rise
to the invalidity of the director’s appointment.19
7–8
Although immensely important in keeping the doctrine of
constructive notice within some sort of bounds, the indoor
management rule has significant limitations. First, it does not
protect the third party if the constitution simply provides that a
particular type of contract cannot be entered into by board at all.
To vary the facts of Turquand slightly, if the articles had
provided that loans above a certain amount could not be
contracted for by the directors at all (i.e. third parties must
contract with the shareholders in such cases), the rule would not
have protected a lender whose contract was approved by the
board alone, even if the restriction on the board’s powers was an
unusual one.20
Secondly, and perhaps more important, the Turquand rule
does not apply if the third party has been put on notice or on
enquiry as to the board’s lack of authority. Obviously, this
exception cannot arise simply out of the third party’s
constructive or even actual notice of the company’s constitution,
for that would be entirely to negate the indoor management rule.
Something else is required. In the leading case on this point, B.
Liggett (Liverpool) Ltd v Barclays Bank,21 where the third party
bank had actual knowledge of the articles, the question was
whether the bank was entitled to assume that the appointment of
a third director had been properly made. Such appointment
required the consent of both existing directors. The letter
informing the bank of the appointment was signed by only one
existing director (L). The other existing director (M) had for a
long time made it clear to the bank that it should not meet
cheques which were not signed by himself, in line with the
articles’ requirement for two signatory directors, because he
thought that L was improperly withdrawing money from the
company’s account. Nevertheless, after the “appointment” of the
third director by L, the bank met cheques which carried the
signatures of L and the purported third director. The prior
dealing between M and the bank as to the signing of company
cheques was the “something else” which put the bank on enquiry
to establish whether M had in fact consented to the appointment
of the third director; the bank was not entitled to assume such
consent.
Statutory protection for third parties dealing with
the board
7–9
Despite the qualifications to the constructive notice doctrine
which the indoor management rule had introduced, from the
point of view of third parties the resulting state of the law was
unattractive. No third party could safely refrain from reading and
analysing the company’s articles before contracting with it, for
fear of finding a ban or restriction on the board’s contracting
powers which could not be removed by some internal corporate
procedure. In modern times the policy view has been taken that
commerce will be promoted by relieving third parties from the
need to check the company’s constitutional documents before
engaging with the company’s board. The company is free to
limit the authority of the board, but the constitution is no longer
seen as an obviously appropriate way to communicate such
limitations to third parties. Other and more direct methods must
be employed. In line with this policy, the legislature moved to
enact statutory provisions which extended the protection
afforded to third parties by the indoor management rule. The
reforms were introduced in 1972,22 revised in 1989, and the
current version is s.40 of the 2006 Act.23
Subsection (1) of s.40 provides:
“(1) In favour 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 company’s constitution.”
This provision overtakes the indoor management rule because it

simply removes all limitations on the powers of the board to
contract for the company which the articles impose, whether
those limitations are removable by shareholder resolution or are
absolute. It effectively repeals the constructive notice rule within
the scope of application of the section. But the section is subject
to some limitations.
(a) “In favour of a person dealing with a company in
good faith”
7–10
This phrase makes it clear that the section is for the benefit of
third parties, not the company. The company cannot rely on it to
make the contract binding as against a third party where the
agent lacked authority and the third party seeks to escape from
the contract. However, this point is not as important as it might
seem, since the company can often make the contract binding on
itself and the third party by ratifying it (see para.7–27 below).
More important, these words demonstrate that not all third
parties are to benefit from the section. Only “good faith” third
parties will do so. But other provisions make it clear that “bad
faith” is going to be difficult to establish. Section 40(2) provides
a three-tiered set of protections for third parties. First, it provides
that a person dealing with the company “is not bound to enquire
as to any limitation on the powers of the directors to bind the
company or authorise others to do so”.24 This sets aside the “put
on enquiry” qualification to the indoor management rule. The
fact that circumstances indicated that there might be some
limitation on the directors’ authority in the articles and the third
party failed to follow this up will not now by itself put the third
party in the “bad faith” category.
Secondly, the third party is presumed to have acted in good
faith, unless the contrary is proved, so that the burden of proof
falls on the company rather than the third party.25 Thirdly, and
most startling, the section provides that the third party 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 directors under the
company’s constitution”. This appears to contemplate that a
person dealing with directors with actual knowledge that they
are exceeding their powers will not necessarily be found to be in
bad faith. The section does not provide, of course, that actual
knowledge cannot be an ingredient in the establishment of bad
faith, but it does prohibit the simple equation of knowledge and
bad faith. As Nourse J said of the same phrase in s.9 of the
European Communities Act 1972:
“What it comes to is that a person who deals with a company in circumstances
where he ought anyway to know that the company has no power to enter into the
transaction will not necessarily act in good faith. Sometimes, perhaps often, he will
not. And a fortiori where he actually knows.”26
However, this dictum does not help enormously in working out

when a third party with knowledge will be deemed to lack good
faith. One might think that only little need to be added to
knowledge of lack of authority to produce bad faith.27
(b) “Dealing with a company”
7–11
Subsection (2) gives help in the interpretation of dealing. It
provides:
“(2) For this purpose—
(a) a person ‘deals with’ a company if he is a party to any

transaction or other act to which the company is a
party.”
A person deals with the company so long as he is a party to a
transaction (e.g. a contract) or an act (e.g. a payment of money)
to which the company is also a party. Despite this, the courts
remain reluctant to bring gratuitous transactions with the
meaning of the subsection.28
(c) Persons
7–12
Section 40 seems to apply quite generally to “persons” dealing
with the company in good faith. However, there is an obvious
policy question about whether corporate insiders (especially
directors) should be permitted to take advantage of the section
when they deal with the company. Are they truly third parties or
should they be treated as persons in relation to whom the
principle that they should know and understand the limitations
contained in the company’s constitution is a perfectly reasonable
and practicable one? The issue had already arisen at common
law in relation to the question of whether corporate insiders
could benefit from the indoor management rule. In Morris v
Kanssen29 the claimant seeking to rely on the Turquand rule had
assumed the functions of a director of the company at the time of
the disputed transaction. The House of Lords held that, as he was
thus under a duty to see that the company’s articles were
complied with, it would be inconsistent to allow him to take the
benefit of the rule. However, in Hely-Hutchinson v Brayhead
Ltd30 Roskill J interpreted the exclusion more narrowly: a
director was an “insider” only if the transaction with the
company was so intimately connected with his position as a
director as to make it impossible for him not to be treated as
knowing of the limitations on the powers of the officers through
whom he dealt.
However, in relation to s.40, the legislature seemed to have
answered the question in s.41. Where the company enters into a
transaction which exceeds a limitation on the powers of the
directors under the company’s constitution and the other parties
to the transaction include a director of the company or its
holding company or a person connected with such a director,31
the transaction, far from being enforceable against the company,
is voidable at the instance of the company.32 Furthermore,
whether or not the transaction is avoided, such parties and any
director who authorised the transaction on behalf of the company
are liable to account to the company for any gains made and to
indemnify the company against any loss resulting from the
transaction.33 Thus, the company might seek to stay with the
contract (perhaps because it is too late to obtain a substitute
performance elsewhere) but sue the director acting outside the
articles for damages (for example, where at the time of
contracting the substitute consideration was available at a lower
price). The transaction ceases to be voidable in any of the four
events34 set out in subs.(4) but this, in principle, does not affect
the company’s other remedies.35 The section does not affect the
operation of s.40 in relation to any party to the transaction other
than a director or a person with whom the director is connected
but where that other party is protected by s.40 and the director is
not, the court may make such order affirming, severing or setting
aside the transaction on such terms as appear to be just.36
Despite the presence of s.41, a majority of the Court of
Appeal (Robert Walker LJ, as he then was, dissenting on this
point) held in Smith v Henniker-Major37 that s.40 was not
available to the director, at least on the facts of that case, where
the director dealing with the company was also chairman of the
company (and therefore under an obligation to see that its
constitution was properly applied) and was responsible for the
error in the transaction with himself (a rare legal recognition of
the importance of the chairman of the board). The point may
seem an arcane one, since the director in that case clearly fell
within what is now s.41, but it has some importance, because a
transaction within s.40, but caught by s.41, is binding unless set
aside by the company, whereas, if the transaction is outside s.40
and governed by the common law, it will not be binding on the
company unless ratified by it. In other words, s.41 is more
favourable to third parties than the common law. It is submitted
that the reasons given by Robert Walker LJ are the more
convincing, i.e. that, in the light of the fact that the legislature
has expressly addressed the issue of corporate insiders in s.41,
there is no need for the courts to give the word “person” an
unnaturally limited meaning in s.40.38 In short, it is submitted
that corporate insiders, dealing with the company in good faith,
are within s.40 but that the protection they obtain is that laid
down in s.41.39
(d) The directors
7–13
The section removes limitations in the company’s constitution
on the powers of directors to bind the company or to authorise
others to do so.40 Thus, a person who deals with the company
through its shareholders in general meeting obtains no benefit
from the section, for example, where the company’s constitution
provides that the shareholders cannot commit the company to a
particular type of contract without the approval of X, who might
be a shareholder of the company, a director or neither. Here, the
limitation in the constitution relates to the power of the
shareholders, not the directors, to bind the company. So, those
who deal with the shareholders are still subject to the perils of
the common law, including constructive notice as modified by
the indoor management rule.
Of course, it is unusual for third parties to deal with
companies through the shareholders as a body, and hardly
feasible except in the case of small companies. Even where the
third party deals with the directors, all may not be plain sailing.
Suppose that the board has purported to act on behalf of the
company but is for some reason unable to act, for example,
because it is inquorate. Will the third party still have the
protection of the section? It was held at first instance under the
previous version of the section that the third party was not then
protected: if there were not enough members of the board
present under its rules to constitute a meeting of the board, the
directors could not be said to have done anything.41 However,
s.40, by substituting the word “directors” for the phrase “board
of directors” in the provision quoted in the previous paragraph,
seems designed to settle this point in the third party’s favour. If
the directors collectively have decided to contract, it does not
matter that their decision does not constitute a valid board
decision. Nevertheless, the underlying problem remains. It can
hardly be the case that third parties, dealing with persons with no
connection with the company, can claim the benefit of s.40 on
the grounds that the failure of those persons to be elected
directors by the company is a “limitation under the company’s
constitution” which third parties are entitled to ignore, provided
they are good faith third parties. As has been said, the
“irreducible minimum” for s.40 to operate must be “a genuine
decision taken by a person or persons who can on substantial
grounds claim to be the board of directors acting as such”.42
(e) Any limitation under the company’s constitution
7–14
The company’s constitution includes its articles of association,
which constitute, in fact, the principal element of the
constitution.43 The standard definition of the constitution in the
Act extends further to special and other supermajority
resolutions and their equivalents.44 But for the purposes of s.40
the constitution includes in addition ordinary resolutions of the
company or a class of shareholders and agreements among the
members of the company or any class of them.45 In short, the
constitution here means any formal rules laid down by the
shareholders generally (or any class of them) for the conduct of
the company’s affairs, whether taking the form of the adoption
or alteration of the company’s articles or not.
(f) The internal effects of lack of authority
7–15
As the opening words of s.40 make clear, the purpose of the
section is to protect good faith third parties dealing with the
company. Its aim is not to alter the internal effect of directors’
actions taken without authority, except insofar as such
amendment is needed to protect third parties. Consequently, the
Act preserves individual shareholders’ powers to bring an action
to restrain the directors from doing an act to which would be in
excess of their powers.46 Such relief cannot be granted, however,
if it would impede the fulfilment of the company’s legal
obligations to the third party. The provision thus operates in the
narrow window where the directors are proposing to exceed their
powers, but have not yet done so, or have exceeded their powers
without creating a legally binding obligation on the company
(e.g. creating a contractual option in the company’s favour).
Further, s.40(5) preserves the liability of directors “and any other
person” who causes the company to contract in breach of
limitations contained in its constitution. That liability may arise
under s.171, requiring directors “to act in accordance with the
company’s constitution”.47 Likewise, it seems likely that the
section does not affect the liability of a third party to return
property or its value to the company as a constructive trustee,
where corporate property is received knowing (to the appropriate
extent) that its transfer is in breach of directors’ duties.48
Contracting through agents
7–16
The second situation we need to consider is where the company
contracts through an agent acting on its behalf. As we have noted
above, it would be highly inconvenient for companies and their
counterparties if all contracts required board or shareholder
approval. A low-cost mechanism is needed whereby individual
managers within the scope of their duties can contract with third
parties on behalf of the company. In some cases the company
may wish to confer contracting authority even on outsiders. That
mechanism is provided by the law of agency, which is based on
the notion of authority. Under agency law a person, the principal
(P), who authorises another, the agent (A), to contract on his or
her behalf with a third party (T) will be bound by the contract
which results from A’s successful negotiations with T. The
resulting contract will exist between P and T. A will not be a
party to it and will normally owe no duties to T in relation to the
contract.49 Thus, if the company (P) authorises a manager (A) to
contract with third parties in a particular area of the company’s
activities, that manager will be able to bring about contracts
between the company and third parties without the need for
specific board consent for each contract.
The first and obvious question is, how does a corporate P
confer authority upon a managerial A? It is conceivable that the
articles will confer power upon a particular person to contract on
the company’s behalf, just as the articles normally confer broad
managerial powers on the board. However, such provisions in
the articles are rare. The articles are altered only infrequently
and through a procedure requiring shareholder consent,50 whilst
the allocation of contracting powers across the company’s
managerial hierarchy may require frequent adjustment. More
commonly, therefore, corporate agents are authorised through a
process of delegation and sub-delegation of managerial powers
by the board. The board will typically appoint the company’s
senior managers with wide managerial powers, which will
explicitly or implicitly include powers to contract with third
parties on the company’s behalf. Those managers may appoint
more junior managers with authority to contract within the scope
of their functions. And so on. The result is a highly flexible
system for the distribution of contracting powers across the
company. In companies with large businesses contracting
authority can be widely dispersed; in small businesses the
articles may allocate all contracting powers to the board or even
to the shareholders; and all manner of other patterns of
contracting authority can be created.
7–17
The system works smoothly so long as A in fact has authority to
contract. Legal dispute arises when A acts beyond the authority
conferred or the purported A was never given any authority. The
question arises whether the agreement negotiated by A with T
purportedly on behalf of P has resulted in a binding contract
between P and T. The underlying policy questions are the same
as with board contracting. Is priority to be given to the
company’s allocation of contracting authority (implying the
company is not bound if A has exceeded the authority conferred
by P or simply has no authority) or are T’s reasonable
expectations that A had authority to be protected (implying that
in some cases T should be able to enforce the agreement against
P despite A’s lack of authority)? A principal function of the law
of agency is in fact to protect the reasonable expectations of T.
However, identifying the appropriate balance between T and P is
not easy. There are two principal questions to be answered. First,
assuming ignorance on the part of T of A’s lack of authority,
was it reasonable for T to suppose that the unauthorised A did in
fact have authority to enter into the contract in question on
behalf of the company? Second, if T knew or could have found
out about A’s lack of authority, does that deprive T of the
protection that a positive answer to the first question would have
conferred upon T?
The first question does not arise in relation to board
contracting—or rather the answer to it is very straightforward—
because s.40 in effect embodies the proposition that it is
reasonable for good faith third parties to assume that the
contracting powers of board are unlimited. Formally, s.40
removes in favour of good faith T only limitations on the board’s
powers which are contained in the company’s constitution. Once
these are taken out of the picture, however, it is difficult to see
what other restrictions on the board’s powers might be set up
against T, since the board’s managerial powers are derived from
the constitution.51 However, there is no basis for making an
assumption of unlimited contracting powers in relation to sub-
board agents, and to do so would deprive the board of all control
over the allocation of contracting power within the company.
Thus, the first question to be answered is, assuming T’s
ignorance of the lack of authority, on what basis is T entitled to
treat (sub-board) A as authorised to contract, even though A had
no actual authority to enter into the contract in question? Then
follows the second question, which we have examined above in
relation to board contracting. Even if the contract would be
binding on P in the absence of T’s knowledge of the absence of
actual authority, should the opposite answer be given if T knew
or had the means of finding out about A’s lack of authority? The
answers to these questions are provided by the common law of
agency, though, as we shall see, there is some debate about the
relevance of s.40 to sub-board agents.
Agency principles
7–18
Since this is not a book on the law of agency, for our purposes
we can concisely state the main features of its rules of attribution
in relation to contracts as follows. P is bound by the transactions
on its behalf by A if the latter acted within either:
(a) the actual scope of the authority conferred upon them by P
prior to the transaction or by subsequent ratification; or
(b) the apparent (or ostensible) scope of their authority.
As far as (a) is concerned, this captures the process of delegation
and sub-delegation referred to above. All that needs be added is
that actual authority may be conferred expressly or impliedly.
Authority to perform acts which are reasonably incidental to the
proper performance of an agent’s duties will be implied unless
expressly excluded,52 so that actual authority to contract may be
inferred in appropriate cases from the allocation of managerial
tasks to a person where no explicit reference to contracting is
made. In addition, where A on previous occasions has been
allowed by P to exceed the actual authority originally conferred,
A may thereby have acquired actual authority to continue so to
act.
As far as (b) is concerned, this is the crucial concept which
agency law uses to hold P liable even in the absence of A’s
actual authority, in order to protect the legitimate interests of T.
Apparent authority consists of (i) the authority which a person in
A’s position and in the type of business concerned can
reasonably be expected by T to have; and (ii) the authority which
the particular A has been held out to T by P as having. The line
between apparent authority and implied actual authority may
thus seem a fine one, but the establishment of actual authority
focuses on the relationship between the P and A, whilst apparent
authority focuses on the relationship between the P and T.53
7–19
The doctrine of ostensible or apparent authority attempts to hold
a balance between the interests of the company and of the third
party. On the one hand, a company should not normally be liable
for the acts of persons whom it has not authorised to act on its
behalf. As a qualification to that starting point, however, it will
be reasonable to hold the company to the acts of an unauthorised
agent if the company has in some way misled the third party into
thinking the person is so authorised. It follows from this that A
cannot confer ostensible authority on himself by representing
that he has actual authority.54 That can be conferred only by
conduct of the company, acting through a primary decision-
making body or an agent of the company, such as a managing
director, with actual authority to make representations as to the
extent of the authority of the company’s officers or agents. The
position rather is that, if the company has made such
representations on which the third party has acted in good faith,
the company will be estopped from setting up the truth of the
relationship between the company and the agent as a ground of
non-liability.55
Establishing the ostensible authority of corporate
agents
7–20
The application of these general principles of the law of agency
to establish a corporate agent’s actual or apparent authority is a
fact-dependent exercise, focusing on the P/A or P/T relationship,
as the case may be. Nevertheless, certain broad lines of approach
have emerged. Individual non-executive directors have no
managerial responsibility unless the board specifically delegates
it to them, and the courts have accordingly been restrictive in
their approach to the apparent authority of such directors.56 Even
they, however, may be assumed to have some individual
ministerial authority, for example, to authorise the use of the
company’s seal.57 By contrast, if the person acting for the
company is its chief executive officer or managing director,
then, unless there are suspicious circumstances, or the
transaction is of such magnitude as to imply the need for board
approval, that person may safely be assumed to be authorised. In
practice, that person will probably have actual authority58 but,
even if not, he or she will have ostensible authority and his or
her acts will bind the company.59 Moreover, it is not uncommon
for the board of directors to allow one of their number to assume
the position of managing director even though never formally
appointed to that position and in these circumstances the courts
have treated that person as having the actual authority of a
managing director.60
7–21
Much the same applies to other executive directors, except that,
if the descriptions of their posts suggest particular areas of
responsibility (“finance director”, “sales director” or the like),
they cannot be assumed to have authority outside those areas.
Some decisions have even suggested that a non-executive
chairman of the board has, as such, individual authority equating
with that of a managing director.61 But why the right to take the
chair should imply a right to manage out of the chair is difficult
to understand and the proposition has been doubted.62 This is not
to deny that the chair of the board has important corporate
governance responsibilities63 but rather to question whether
those responsibilities involve contracting on behalf of the
company. Nor is it to deny that a company might appoint
someone to a chairman post with executive responsibilities,
though the corporate governance rules frown on the cumulation
of the positions of chief executive and chair of the board.64
7–22
A third party may deal with an officer or employee below the
level of director. For many years, the courts showed a marked
reluctance to recognise any ostensible authority even of a
manager.65 But this has now changed and it may be taken that a
manager, even if actual authority is lacking, will generally have
ostensible authority to undertake everyday transactions relating
to the branch of business which he or she is managing (though
probably not if they are really major transactions)66 and that the
secretary will similarly have such authority in relation to
administrative matters.67 Indeed, almost every employee of a
trading company must surely have apparent authority to bind the
company in some transactions, though the extent of that
authority may be very limited. For example, people behind the
counter in a department store clearly have ostensible authority to
sell the goods on display for cash and at the marked prices.
Whether their apparent authority extends beyond that (for
example, to take goods back if the customer returns them) we
shall probably never know, for it is unlikely to be litigated—at
any rate against the customer.68
7–23
In all the above cases the question has been whether the agent
had actual or apparent authority to contract on behalf of the
company. In a relatively recent line of cases, however, the
question has arisen whether the company is bound if the agent
has authority, not to contract, but to make representations on
behalf of the company about whether another person with actual
authority to contract has committed the company to the contract.
Can the company be bound on the basis of such a representation,
even if that representation is false? In First Energy (UK) Ltd v
Hungarian International Bank Ltd69 a senior manager was held
to have ostensible authority to communicate to a third party head
office approval of a loan application, even though he did not
have authority to contract on the bank’s behalf, as the third party
knew, and the head office had not in fact approved the loan.
Once the third party had accepted the “offer” communicated by
the manager, it could sue the bank on the resulting contract.
Again, it has been held that a company can be bound as a result
of a representation, made by an agent with ostensible authority
to make it, to the effect that another agent of the company was
authorised to contract with the third party on behalf of the
company. When the third party purported to contract with the
company through the second agent, the company was bound,
even though neither first nor second agent had actual or
ostensible authority to enter into the contract in question.70 This
new line of authority advances the security of third parties’
transactions but is capable, unless closely confined to the facts of
particular cases, of extending companies’ liability for
unauthorised contracts and of undermining the proposition that
an agent cannot create apparent authority for himself through his
own assertions.71
Knowledge
7–24
We now turn to the second question identified in para.7–17,
above. Even if A has apparent authority, it can be argued that T
has no legitimate claim to protection if T knows or ought to have
known that the agent was not actually authorised. Under the
agency rules the balance shifts decisively in favour of P, if T
knew A did not have actual authority to contract. The law will
also deprive T of the benefit of the doctrine of apparent authority
if T was put on enquiry as to whether A was acting within the
scope of authority. Thus, in one case, where T had contracted
with a single director rather than with the board as a whole, that
director was held not to have created a contract with the
company because the contracts were abnormal in relation to the
business of the company (implying no apparent authority) and
because the circumstances were such as to raise questions about
whether A was acting properly (T put on enquiry).72
In addition, at common law T may also be deprived of
transactional security on the basis of constructive notice of the
constitution, as discussed above in relation to board
contracting,73 i.e. where A has entered into a contract in breach
of a provision in the articles limiting A’s authority—even though
T has not read the articles. The rule in Turquand’s Case modifies
the constructive notice doctrine to some extent, as we have seem,
but otherwise the constructive notice doctrine (as modified by
Turquand) continues to operate at common law. It may well be
that this issue is less important in relation to sub-board agents,
because the restrictions on their authority are less likely to be
found in the company’s articles and more likely to be contained
in the internal decision whereby authority was delegated to the
agent. Since the constructive notice doctrine does not catch such
internal restrictions, which will not show up in the company’s
file in the public registry, T is less exposed to the risk of
constructive knowledge. Yet, it is not impossible to think of
cases where the articles might be relevant to sub-board agents’
contracting powers. Take our stock example. Suppose there is a
provision in the articles requiring shareholder approval for
contracts above a certain value. If this is couched as a
prohibition on anyone other than the shareholders contracting,
the constructive notice doctrine will defeat T contracting via a
sub-board agent. If, to vary the situation slightly, sub-board
agents are permitted to contract for high-value contracts
provided they have obtained the prior approval of the
shareholders, then the indoor management rule will probably
save T.
7–25
Thus, given the importance of knowledge in the law of agency,
there is some incentive for T dealing with sub-board agents to
try and bring themselves within s.40, even though that section
applies only to limitations on authority located in the company’s
constitution. The advantages T may seek are from s.40 are, in
relation to constitutional limitations, (i) escape from the doctrine
of constructive notice; (ii) where T has some knowledge, not
being put under a duty to enquire; and (iii) again where T has
some knowledge, benefitting from the wide definition of good
faith in the section. There are two situations where this question
may arise. First, assume T contracts with a single director (in the
case of a company having multiple directors) rather than the
board. Can T invoke s.40 in relation to authority limitations in
the articles? Before 2006 the answer was clearly in the negative
because the section referred to “the power of the board of
directors” whilst now it refers to “the power of the directors” to
bind the company. We have suggested in para.7–13, above a
reason why this change was made. That reason suggests the
change was intended to extend the section only to cases of the
directors acting collectively (but, for some procedural reason,
not as a board) rather than to cases of contracts with individual
directors, which the wording is not apt to cover. Even if s.40 can
be extended, it should be noticed that s.40 does not operate so as
to confer ostensible authority on a single director but only to
allow T potentially to rely on such ostensible authority as the
director has despite T’s actual or constructive knowledge. The
ostensible authority of the single director has to be established as
a prior step in the argument on the basis of the principles
discussed in para.7–20, above.
Secondly, the section protects from limitations in the articles
not only the power of the directors to bind the company but also
their power “to authorise others to do so”.74 Thus, if the articles
state that only the shareholders can enter into high-value
contracts, a good faith T can rely as against the company on an
agreement made either by the board or by someone who has
been specifically authorised by the board to enter into high-value
contracts. It is not clear whether s.40 goes beyond this base case.
First, does it apply only where the board gives express actual
authority to T or does it capture situations of implied actual
authority as well?75 In other words, must the board authorisation
expressly say that A may enter into high value contracts or is it
enough to appoint A to a managerial position incidental to which
is entering into high-value contracts? Second, must A have been
appointed by the directors or is it enough that A was appointed
by a senior manager who was appointed by the directors and
whose functions include the appointment of junior managers?
The underlying question is whether the extension in s.40 to
“authorising others” was intended to cover only situations where
the board approves the contract in principle but delegates the
actual contracting decision to a manager or whether the
extension is designed to exempt the management hierarchy as a
whole from the restrictions in the articles on their contracting
power. It seems likely that, if Parliament had intended the
broader result, it would have used clearer words. Overall,
therefore, it seems that A’s authority to bind the company, where
A is not the board of directors or an apparent board, will be
determined overwhelmingly by the common law of agency
coupled with constructive notice of the company’s public
documents as modified by Turquand.76
Knowledge of the constitution as an aid to third
parties?
7–26
So far, we have considered knowledge (actual or constructive) of
the company’s constitution as something negative from T’s point
of view, as something which could deprive T of the security of
the transaction with the company. Can T rely on knowledge of
the articles as a building block in a claim against the company?
As far as constructive knowledge of the constitution is
concerned, the courts have held that the fact that T was deemed
to have notice of the contents of the articles did not mean that T
could rely on something in those documents to estop the
company from denying the ostensible authority of an officer of
the company who would not otherwise have had authority of the
relevant type. Constructive notice was a negative doctrine
curtailing what might otherwise be the apparent scope of the
authority and not a positive doctrine increasing it.77 The position
might be different, however, if T had actual knowledge of the
articles and had relied on some provision in them. Even here,
however, what is clear is that mere knowledge that the board of
directors might have delegated authority to a particular person
does not estop the company from denying that it has done so. It
would be necessary for T also to establish that “the conduct of
the board, in the light of that knowledge, would be understood
by a reasonable man as a representation that the agent had
authority to enter into the contract sought to be enforced”.78
Thus, actual knowledge of the articles coupled with conduct of
the board might be enough to generate apparent authority, but
there seems to be no reported case in which that has occurred. If
estoppel is to arise in these circumstances, it will generally be
because of conduct by the company’s primary decision-making
bodies and not because of any provision in its articles.79
Ratification
7–27
We have already noted that the legal effect of lack of actual or
ostensible authority on the agent’s part is that the transaction is
not binding on the company unless it is ratified by the company.
The company thus has an option to take up the transaction or to
treat it as not binding on it. Determining who has the power to
ratify the transaction is a matter for the company’s constitution.
There is no requirement in the Act, as there is for breaches of
directors’ duties, that ratification must be by the shareholders,80
though it appears the shareholders will usually be able to ratify
unauthorised actions of the board or sub-board agents.81
Normally, it is a matter of finding who, under the company’s
constitution, has actual authority to enter into the transaction and
securing their approval of it. In addition, it is not necessary that
ratification should take the form of an express decision to
approve the transaction. Ratification can be implied from
conduct82 and the conduct may amount to ratification if the
company has knowledge of the essentials of what the agent has
done, even if it did not know that the agent had acted without
authority.83 If there is ratification, it has retrospective effect, i.e.
it renders the transaction with the company binding on it as from
the time it was entered into by the agent. It is sometimes difficult
to distinguish a subsequent ratification (which is a unilateral act
of the company) from the entering into by the company and the
third party of a new transaction which replaces the one entered
into by the agent without authority.84 There is also a time limit
on the ratification process in the sense that ratification will not
be permitted if it would unfairly prejudice a third party.85
Overall
7–28
A third party dealing with the company through its board of
directors has a higher level of security of transaction than a
person dealing with the company otherwise. In the former case,
the primary rules of attribution start from the position that the
board has power to bind the company—subject to the articles—
and s.40 goes on to protect a good faith third party (widely
defined) from attack based on limitations contained in the
articles. By contrast, where T deals with an agent, A’s authority
to bind the company needs to be established under the standard
agency rules and s.40 offers less (probably much less) protection
against attacks based on limitations contained in the articles,
throwing T in some cases back onto the indoor management
rule. This may not be an inappropriate result. The standard
division of powers within a company is one which allocates
general management powers to the board.86 So, the third party’s
expectations as to the security of the transaction will be
particularly high when that person deals with the company
through the board. The primary rules of attribution and s.40
recognise this. By contrast, where the company contracts
through an agent, it has a legitimate claim to be able to limit the
scope of its agents’ authority, just as a natural person can.
Otherwise, the directors would lose a significant method of
controlling the conduct of the company’s business and boards
would either have to run the risk of acquiring contractual
obligations through unauthorised means or devote a
disproportionate amount of board time to the contracting
process. T can have no legitimate expectation that the board
would routinely delegate all its powers to any particular person.
However, even in this case, the interests of the third party are by
no means neglected. The general rules of attribution—agency
rules—will protect the third party who has acted reasonably but
been misled by the company as to the authority of the corporate
agent, just as they do when P is not a company.
The ultra vires doctrine and the objects clause
7–29
Before finishing our consideration of corporate contracting, we
need briefly to consider the ultra vires doctrine and its
relationship with a particular clause often found in the articles,
namely, the objects clause. Although the ultra vires doctrine
caused a lot of anxiety to third parties during its history,87 that is
no longer the case because the third party is protected against its
effects by s.39 of the Act, whether the third party has acted in
good faith or not. The objects clause defines the capacity of the
company, i.e. it states what the company is legally capable of
doing, whether it acts through its board or via the shareholders
collectively or through an agent. A company was required by the
early legislation to include a statement of its objects in its
memorandum of association and from that the courts deduced
that the company did not have legal capacity to act outside its
objects. Any such action was in principle void. This was
normally referred to as the ultra vires doctrine.88 It had a major
and adverse impact on the security of third parties’ transactions
with the company. Not even ratification was available in relation
to ultra vires acts. So, it is not surprising that the doctrine was
the object of reform; what is surprising is that reform took so
long.
There is no longer a provision in the Act requiring a company
to set out its objects.89 Unless it chooses otherwise, the
company’s objects will be unrestricted, i.e. it will have unlimited
capacity.90 Even if a company chooses to adopt restrictions on its
capacity (which will appear today necessarily in the articles
rather than the memorandum of association),91 those restrictions
will not affect the validity of the acts of the company: s.39(1)
provides that “the validity of an act done by a company shall not
be called into question on the ground of lack of capacity by
reason of anything in the company’s constitution”. Thus, the
ultra vires doctrine, so far as it is based on the company’s objects
clause,92 no longer threatens the security of third parties’
transactions.93 A company may also amend or remove its object
clause by the same means as it can use for altering its articles,94
except in the case of charitable companies.95
Nevertheless, many existing companies will continue to have
objects clauses and some newly created ones may choose to
adopt them. The central point is that, whilst the ultra vires
doctrine is dead as a restriction on the capacity of the company,
objects clauses continue to limit the authority of the board, the
shareholders collectively or any of its agents to bind the
company, in the same way as any other provision in the articles.
The objects clause is part of the company’s constitution and the
rules discussed above, including s.40 of the Act, apply to it
accordingly. Equally, a director may be liable to the company for
exceeding the limits in the objects clause, as with any other
authority limitation in the articles. Indeed, it is precisely because
the rules on authority hold the balance between the interests of
the company and of third parties in what is now regarded as the
appropriate way that it was possible for s.39 to be cast in such
blunt terms.
TORT AND CRIME
7–30
We have suggested above that both companies and their
potential counterparties benefit from rules which facilitate
contracting between them. The rules discussed in the first part of
this chapter are designed to effect such facilitation. Since the
purpose of the rules is to produce a contract between P and T, it
is wholly acceptable that in the normal case those who act as or
on behalf of the company do not acquire any liability under the
contract. Whether the company contracts via its constitutional
bodies or via an agent, we have seen that this is the result which
is normally achieved. If the company contracts through the
board, the directors do not become parties to the contract. If the
company acts through an agent, once negotiations are
successfully concluded between A and T, A drops out of the
picture, becoming neither a party to the contract nor personally
liable under it, unless A chooses to accept liability under it
(something that may not be entirely easy to determine).96
Perhaps surprisingly, this rule also applies where a contract with
P fails to come into existence because of A’s lack of authority.97
Here, however, A may be liable to the third party on a “warranty
of authority” for the loss suffered by T through the failure of the
contracting process, if the agent has misrepresented the extent of
his authority, no matter how innocently.98
In the situations we discuss in the second part of this chapter,
however, the non-liability of the person acting as or on behalf of
the company cannot be the typical outcome. These are situations
of wrongdoing and it would be odd if the addition of corporate
liability removed liability from the individual. Thus, whereas
with contracting it is necessary to explain instances where those
contracting as or on behalf of the company become liable, with
wrongdoing the situation is the other way around: explanation is
needed if the addition of corporate liability appears to remove
liability from the individual.99 If responsibility for wrongdoing is
attributed to the company on the basis of vicarious liability, the
outcome is in accordance with this postulate. It will be the case
that both agent/employee and company are liable. The liability
of the agent is attributed to the company but not the wrongful
acts of the agent. The agent remains a wrongdoer; indeed, if the
agent does not, vicarious liability cannot arise.100 Where,
however, the basis of the principal’s liability is not vicarious
liability, the question will arise whether the company is liable
but not the agent. Sometimes, perhaps often, they will both be
liable but sometimes not.
Tortious liability
Vicarious liability
7–31
Actions against the company in tort (and for other forms of civil
liability) are overwhelmingly based on the vicarious liability of
the company for the wrongs of its agents and employees, so that
both employee/agent and company are liable. Nevertheless, the
mere fact of being an employee or agent of the company is not
enough to generate liability in tort for the company in relation to
torts committed by those agents or employees. There must be
some connection between the company’s activities and the acts
of the tortfeasor if the company is to be held liable as well.
Defining the nature of this link may be said to constitute the
central problem within the doctrine of vicarious liability. Over
the years, the nature of the link has been broadened by the
courts. From an early date, the courts were unwilling to confine
the scope of the company’s (or any principal’s) vicarious
liability to those actions actually authorised by the company.
Thus, it has been clear for some time that a company or other
employer does not escape vicarious liability simply because the
agent has done an act which the agent or employee has been
prohibited from doing or even because the agent has done a
deliberate act for his own benefit which has prejudiced the
employer.101 This led to the famous (but unclear) dichotomy
between doing an unauthorised act (no vicarious liability) and
doing an authorised act in an unauthorised way (vicarious
liability). In its more recent decisions on the doctrine,102 the
House of Lords/Supreme Court moved beyond that distinction
and imposed vicarious liability when there was a sufficiently
close connection between the wrongful acts of the agents or
employees and the activities which those persons were employed
to undertake. The fact that the wrongful acts were clearly
unauthorised and not for the employer’s benefit did not prevent
the imposition of liability, if this test was satisfied.
At a general level, the doctrines of a “sufficiently close
connection” in tort and of ostensible authority in the law of
agency perform a similar role, i.e. the protection of the
legitimate interests of third parties coming into contact with
businesses. However, they are by no means identical doctrines:
ostensible authority turns on a holding out by the principal of the
agent to the third party,103 whereas vicarious liability does not
depend upon what the third party understood to be the agent’s
connection with the company—the third party may not even
know of it at the time the tort was committed—but upon an
objective assessment of the relationship between the agent’s
actions and the company’s activities. In other words, the focus in
the case of vicarious liability is on the relationship between the
employee or agent and the company, not on the relationship
between the company and the third party. The approach is more
like that used by the courts to identify the actual authority of
agents,104 but the tort test is much broader since it may lead to
liability in tort for acts which were clearly unauthorised and,
indeed, may have been expressly forbidden.
Assumption of responsibility
7–32
However, difficult problems can arise when the law of tort and
the law of contract come together to regulate the process of
contracting. Suppose an agent acting for a company makes
negligent statements about the promised contractual performance
during the contracting process. If the third party subsequently
sues in contract, only the company will be liable; if the third
party sues in tort, the maker of the statement might be thought to
be primarily liable and the company liable only vicariously. The
company will be liable on either theory, but the choice of claim
will be important if the company is not available to be sued (for
example, because it is insolvent). The issue is particularly
important in small companies, for example, where the
shareholder, director and main employee are the same person. If
the suit is in contract, the personal assets of the
shareholder/director will be protected; if in tort, they will not be.
After some uncertainty, the House of Lords105 avoided that
adverse result for the one-person company106 by holding that a
person who makes negligent misstatements whilst contracting on
behalf of a company does not assume personal responsibility for
the truth of the statements made, assumption of responsibility
being a necessary ingredient for liability in the tort of negligent
misstatement. Responsibility is to be treated as assumed (in the
usual case) only on behalf of the company. Thus, it is the
company which has committed the tort (by making the false
statement through the agent) rather than the agent; the
company’s liability is thus direct, not vicarious.107 As the court
made clear, this approach applies not only to negligent
misstatements but also to cases of negligent delivery of services
due under a contract, where again contractual and tortious duties
coincide. However, two points should be noted about the scope
of this decision. First, it is a statement only of the starting point
for the courts’ analysis. A director or other agent of the company
may on the facts be treated as having assumed personal
responsibility for the negligent misstatement or the negligent
provision of services.108 Moreover, the test for assumption of
personal responsibility is not the subjective one of what the
agent believed to be the case; rather the test is objective,
something along the lines of whether it was reasonable for the
third party to conclude that the director or other agent had
accepted personal responsibility.109 The principle of Williams
may thus apply in different ways to different types of business.110
Secondly, the result in Williams was achieved, not by
applying any special doctrine of company law, but by relying on
the requirement for an assumption of responsibility as a
necessary ingredient of liability under the tort of negligence in
relation to the misstatements. It follows that a director or other
agent will not escape liability where assumption of responsibility
is not a necessary ingredient for tortious liability, for example, in
deceit.111 Thus, as far as tortious liability is concerned, the
personal liability of directors of companies is crucially
dependent upon the common law of tort rather than upon any
provisions in the Companies Act or even the common law of
companies. A negligent director will escape liability in tort only
on the basis of rules which apply also to all agents.
Fraud
7–33
At one stage, it seems to have been thought that a company
could not be held vicariously liable for fraudulent conduct on the
part of an employee or agent, at least where the fraud was
directed at benefiting the agent rather than the company.112
However, the clear view today is that such cases are to be
explained on the basis that the agent or employee was acting
outside the scope of their authority when carrying out the fraud
and that, had this not been the case, the company or principal
would have been liable for the fraud.113 As far as corporate
liability towards third parties is concerned, the tort of deceit and
other torts based on fraudulent conduct are thus to be treated in
the same way as other torts. There is no special exclusionary rule
for such conduct. It is still necessary, of course, to show that the
individual was acting in the course of his or her employment
when committing the fraud, but the introduction of the
“sufficiently close connection” test for establishing this
relationship has also made this task easier for the claimant.
Indeed, the denial of a special exclusionary rule for fraud and the
introduction of the “sufficiently close connection” test for
determining the scope of employment both point in the same
direction: the company or other employer carries (and thus has
an incentive to control) the risks to third parties generated by
fraud within its business activities, even if some of the risks in
question harm the company as well.114
Recovery by the company from the agent
7–34
Even if the third party successfully sues the company in tort, the
company may be able to recover from the agent at least some of
the amount it has to pay to the third party. In all cases of
vicarious liability, agent and company are joint tortfeasors,115
and so the company can claim a contribution from the agent
towards the damages payable to the third party. Since the
company is a wholly innocent party, that contribution will
usually be a complete one, i.e. an indemnity.116 Of course, there
may be good non-legal reasons for reluctance on the part of an
employer to seek a contribution from an employee. Equally,
where the employee has acted in a way required by the employer
in the discharge of his duties, the employee may have a claim for
an indemnity against the employer, so that the employer’s
contribution claim would be barred for circularity. However, this
will not be the case where commission of the tortious act
constituted a breach of duty or of the contract of employment on
the part of the agent or employee.117
Liability of non-involved directors
7–35
So far, we have discussed the respective liabilities in tort to third
parties of the company’s agents (who may be its directors or
who may be, and often are, more junior members of the
organisation) and the company, on the assumption that the agent
is a tortfeasor. However, the question has been raised in a
number of cases of whether a director of a company, who is not
the tortfeasor, can be liable in tort to a third party simply by
virtue of his directorship of the company. Many of the cases
concern tortious acts consisting of infringements by the
company’s agents of another person’s intellectual property
rights, such as patents or copyright. It seems clear that, in
principle, the answer is in the negative, even if the tortfeasors are
other directors of the company. As long ago as 1878, Fry J said
in a case of fraudulent misrepresentation118 that two classes of
person could be responsible for the fraud (the agent who actually
made the fraudulent misrepresentations and the principal on the
basis of vicarious liability) but that “one agent is not responsible
for the acts of another agent”. This principle has been confirmed
in a number of subsequent cases.119 It supports the proposition
that involvement in the management of the company does not
lead to personal liability, unless the director or manager himself
commits a wrong.
Accessory liability
7–36
However, there is an important qualification to be made to the
statement of Fry J. If a director, whilst not committing the tort
him- or herself, authorises or procures the commission of the
tortious act by someone else, whether that act constitutes deceit
or some other tort, there will be liability on the part of the
director as a joint tortfeasor with the person who commits the
tort. This liability arises under the normal rules applying to
accessory liability in the law of tort, but it is an important
extension of tort liability in the company context. Given the
managerial role of directors in companies’ affairs, they are more
likely to procure the commission of tortious acts than to commit
those acts themselves. It is not necessary that that the director
authorising or procuring the tortious acts should realise their
tortious nature or display any other particular mental element in
relation to the acts, unless this is a requirement of the tort being
so authorised or procured.120
The rules about accessory liability for directors who procure
tortious acts, together with the vicarious liability of the company
for unauthorised and forbidden acts sufficiently connected with
the company’s business, provide a strong incentive for directors
to acquaint themselves with, and to secure observance by the
company’s agents of, the tort rules which impinge upon the
company’s business. Nevertheless, the principle of personal
liability is still controversial in some quarters.121
Direct liability
7–37
Overwhelmingly, the tortious liability of companies is
approached by the courts through the doctrine of vicarious
liability, i.e. the company, like any other person, is liable for
torts committed by an agent or employee, provided that person’s
torts have a sufficiently close connection with the business of the
company. As with contractual liability, however, the company
can also be liable on the grounds that its constitutional bodies
(board or shareholders collectively) have committed a tort. In
this case, the company’s liability is direct,122 not vicarious.
Normally, this will be on the basis that the constitutional bodies
have authorised the tort and, unlike with contracting by the
board, the directors will also normally be tortiously liable for
authorising the wrongdoing.123 Given the width of the doctrine of
vicarious liability, it is rarely necessary to consider, in a claim by
a third party against the company,124 whether the company is
liable directly or vicariously. However, in some cases of
statutory civil liability, the drafting of the statute does make it
important to establish whether the company’s liability is direct
or vicarious, because the statute excludes vicarious liability. The
courts have also concluded that the same issue may arise in some
areas of civil liability at common law where vicarious liability is
not available.125 But above all, the issue has arisen in relation to
the criminal liability of companies, for in criminal law vicarious
liability is treated with some reserve, since it is a form of strict
liability, whether applied to companies or other principals. We
will therefore treat these instances together in the next section
where we deal with criminal liability. As we shall see, the
central question is how far liability should be imposed beyond
the actions of the company’s constitutional bodies.
Criminal liability
7–38
As we have just seen, vicarious liability provides the bedrock
upon which companies are held liable in tort. In criminal law, by
contrast, vicarious liability is regarded with suspicion in relation
to serious crimes involving mens rea. Consequently criminal law
has had to place greater reliance on the direct liability of the
company. On this approach, the acts and state of mind of officers
or employees are treated at those of the company. However, the
criminal law has had great difficulty in determining the criteria
for direct liability. If they are broadly set, there will be little
difference from the company’s point of view between vicarious
and direct liability; if narrowly set, companies will often escape
criminal punishment.
Regulatory offences
7–39
In the case of regulatory offences based on strict liability, it will
be relatively easy to convince the court that Parliament intended
to attribute the acts of even junior persons in the business to the
company.126 In an important decision the Court of Appeal was
prepared to go further and apply this approach in the case of a
hybrid offence, where the strict liability was qualified by a
“reasonably practical” defence.127 In this case, it was not a
defence for the company that the senior management had taken
all reasonable care to avoid a breach of the statutory duty; it was
necessary that those actually in charge of the dangerous
operation should have done so. Where liability is imposed, then
on usual principles the fact that the employees were acting
contrary to their instructions does not necessarily provide the
company with a defence.128
Identification
7–40
Outside the area of regulatory offences, the traditional approach
has been to impose liability on the company only on the basis of
an “identification” doctrine. This doctrine has its origins in the
area of statutory civil liability and was only later transferred to
the criminal law. The classic formulation is to be found in
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd,129
concerning corporate civil liability under the merchant shipping
legislation which required a finding of “actual fault or privity”
on the part of the company. This formulation was taken to
exclude vicarious liability as a technique for holding the
company liable. There, Lord Haldane based identification on the
concept of a person “who is really the directing mind and will of
the corporation, the very ego and centre of the personality of the
corporation”.130 This was both an anthropomorphic and limited
concept of attribution. Lord Haldane extended the directing mind
and will concept beyond the constitutional bodies of the
company only to include persons given the equivalent of board
powers by the articles or by the general meeting.131
In the period immediately after the Second World War the
same idea was applied in the criminal law and its use was
eventually approved and clarified by the House of Lords in 1972
in the case of Tesco Supermarkets Ltd v Nattrass.132 Their
lordships took a similar view of what constituted the directing
mind and will as in the earlier case, except that they added
persons to whom the board had delegated its functions.133 Of
course, the concept is needed only in circumstances in which the
formulation of the offence is thought to rule out the attribution to
the company of the acts and state of mind of persons not falling
within the “directing mind and will” concept. Where the crime is
more broadly formulated, the company can be held liable on the
basis of what those other employees thought and did, as Tesco
itself discovered in a later case.134
The third area where the directing mind and will theory was
accepted was accessory liability for breach of fiduciary duty.
This was a more surprising development since, for the purpose
of civil litigation by third parties against companies, the actions
and states of mind of agents are normally attributed to the
principal, so that the “directing mind and will concept” need not
be deployed. However, in El Ajou v Dollar Land Holdings
Plc,135 the knowledge of a director who had responsibility for a
particular category of transactions on the company’s behalf was
attributed to the company for the purposes of making the
company liable for knowing receipt of the proceeds of a fraud. It
has been disputed academically whether this result could have
been achieved on the basis of normal agency principles and that
criticism has received some judicial support.136
Beyond “directing mind and will”
7–41
However, the position reached in the Nattrass case in the early
1970s did not prove stable, for two reasons. First, the line
between regulatory offences where the liability of the company
could readily be inferred and other crimes where the much more
restrictive identification doctrine held sway proved difficult to
draw.137 Secondly, the use of a concept—the “directing mind and
will”—which has its origins in relation to natural person
provided very little guidance about the function and scope of this
concept in relation to an abstract person such as a company.138
Consequently, the definition of who counted as the directing
mind and will of the company continued to be uncertain. A
partial breakthrough came in Meridian Global Funds
Management Asia Ltd v Securities Commission,139 a case
involving administrative penalties for breaches of securities
legislation. Lord Hoffmann sought to take an approach based on
analysis of the rule in question rather than on the company’s
internal decision-making. Where statutory liability was imposed
on a company, then, where the company’s constitutional bodies
had not acted and the doctrine of vicarious liability was not
available for some reason, the question was who, for the
purposes of the statute, was to be treated as the company. Whilst
Lord Haldane’s phrase might have suited the statute and the
corporate structure he had to deal with, it did not define the
correct overall approach. “The question is one of construction
rather than metaphysics.” The true question in each case was
who, as a matter of construction of the statute in question, or
presumably other rule of law,140 is to be regarded as “the
company” for the purpose of the identification rule. In
appropriate cases, that might be a person who was less elevated
in the corporate structure than those Lord Haldane had in mind.
In Meridian itself, where the question was whether the company
was in breach of the New Zealand laws requiring disclosure of
substantial shareholdings knowingly held by an investor,141 the
relevant persons were held to be two senior investment managers
who were not members of the company’s board. Given the
purpose of the statute—speedy disclosure of shareholdings—it
was appropriate to treat those in charge of dealing in the markets
on behalf of the company as its “controllers” in this respect.
Welcome and more straightforward though the new approach
is, it inevitably still leaves uncertainty as to who will be regarded
as the relevant person within the corporate hierarchy for the
purposes of the identification rule in any particular case.
According to the statute, this might range from almost any agent
or employee of the company acting within the scope of his or her
authority to only those holding senior management positions,
perhaps in some cases only the board itself. Since, however, a
precise answer to the question of whose acts and knowledge are
to be attributed to the company depends ex hypothesi on an
analysis of the context of the particular rule with which the court
is dealing, it is doubtful whether more certainty can be provided
at a general level.142 In this respect it is helpful that these
“special” rules of attribution are needed only where the
“primary” and “general” rules of attribution are unavailable.143
Criminal liability of directors
7–42
Is a director exposed to criminal liability where he or she has not
committed the criminal act for which the company is vicariously
or directly liable? In principle, the answer is in the negative, but
criminal liability on the director may arise in some cases. The
common law normally treats as guilty of the offence those who
counsel or procure the commission of that offence, for example,
by a company. They are liable for the principal offence as well
as those who actually commit it, just as tort law treats persons as
joint tortfeasors in such cases.144 This common law liability will
arise even in relation to statutory offences, unless the statute
excludes it. Further, many statutes expressly impose a somewhat
similar liability expressly upon directors and managers where
they consent to or connive at the commission of an offence by
the company.145 Under this rule the director or manager can be
criminally liable personally where he or she is fully aware of or
approves the corporate criminal offence, even though that
awareness or approval do not encourage or assist the
commission of the offence by the company. The imposition of
criminal liability in this situation puts strong pressure on
directors and managers to intervene and prevent wrongdoing
within the company when they are aware of it.
Liability for the principal offence is also imposed under
another common statutory formula which, however, goes
considerably beyond consent or connivance. Under this second
statutory formula liability is imposed when neglect by a director
or manager has contributed to the commission of the offence by
the company.146 Here, a causal link between the neglect by the
director and the commission of the offence by the company must
be shown (an element not required under the “consent or
connivance” formula) but the director or manager is made liable
for the principal offence without necessarily being subjectively
aware of the wrongdoing within the company. The Law
Commission has suggested that it is unfair to impose liability
upon the director for the principal offence in this second case, if
the offence requires proof of fault or conviction carries a high
stigma. However, the Commission did accept that it is
appropriate in some circumstances to impose a separate liability
for negligently failing to prevent the commission of an offence
by the company.147
Finally, the director (or manager) might be civilly liable to the
company for the loss suffered by it as a result of the commission
of an offence, on the grounds that permitting or causing the
company to commit the offence was a breach of duty or breach
of contract by the director as against the company.148
Corporate manslaughter
7–43
The Meridian approach to corporate liability may come to
dominate the issue in relation to statutory crimes. However, the
Court of Appeal refused to adopt it in respect of the common law
crime of manslaughter by gross negligence. Accordingly, for this
important common law crime a company could be convicted
only if an identifiable human being could be shown to have
committed that crime and that individual met the strict test for
the identification of that person with the company (i.e. the
“directing mind and will” test).149 Consequently, in respect of
this important crime it was difficult to secure the conviction of
other than small companies when serious fatalities occurred in
the course of the company’s business. The gross negligence
required could rarely be located sufficiently high up in the
corporate hierarchy. As long ago as 1996, the Law Commission
proposed a solution to this difficulty in its recommendation that
a company should be criminally liable if management failure
was a cause of a person’s death, without the need to show that
any human being was guilty of manslaughter or, indeed, any
other crime.150 On this approach the company could be liable
criminally even though none of those whose actions were
attributed to it was criminally liable. The focus would be on the
quality of the operating systems deployed by the company rather
than the guilt of individuals.
After a remarkably tortuous legislative passage, extending
over a number of years, the Corporate Manslaughter and
Corporate Homicide Act 2007151 eventually reached the statute
book. It creates an offence for companies152 to cause a person’s
death as a result of the way its activities are organised or
managed where that organisation or management amounts to a
gross breach of a duty owed by the company to the deceased.
The new statutory offence replaces the common law as far as
companies are concerned.153 The requirement for a gross breach
of duty owed to the deceased154 reflects the common law of
manslaughter by gross negligence. From the point of view of the
above discussion the crucial point is that no individual has to be
identified whose acts constitute the offence of manslaughter and
whose acts and knowledge can then be attributed to the
company. The company can be convicted on its organisational
failings alone, irrespective of the guilt of any individual person.
However, some rule has to be provided to identify the persons
whose organisational failings are attributed to the company.
Here, the notion that the company should be found guilty only
for failings at a senior level is retained in the provision that
corporate guilt arises “only if the way in which its activities are
managed or organised by its senior management is a substantial
element in the breach”.155 If the failings are wholly at
subordinate level, the company will not be guilty. However,
significant failings at lower levels are bound to raise the question
of whether the senior levels of management should have picked
up these lower level failings.
Sanctions
7–44
If the company is found guilty under the Act, it is liable to an
unlimited fine.156 How is this supposed to further the deterrent
aims of the criminal law, either in the case of corporate
manslaughter or more generally? The financial penalty falls on
the shareholders rather than on the senior management whose
failings led to the criminal offence.157 It may be that this will
encourage the shareholders to take action which is adverse to the
interests of the directors (e.g. removing them) or put pressure on
them to avoid repetitions of the offence. Whether the imposition
of a penalty on the company will have such effects will depend
in part on the nature of the shareholder/management relations in
the company. It is perhaps least likely to operate in this way in
large companies for which the 2007 Act was particularly
designed. Greater pressure on the shareholders to take action
might arise if the consequence of a criminal conviction were the
exclusion of the company from a certain area of business, but
this raises even more strongly the question of the rationale for
imposing a penalty on shareholders for managerial wrongdoing.
A greater deterrent impact may result from the reputational
harm the management will likely suffer if the company is found
guilty of corporate manslaughter whilst they were in charge of it.
In this respect, the court’s power to order the company to give
publicity to the fact of its conviction may be helpful.158 At one
stage it had been mooted that convictions would be required to
be reported in the company’s Operating and Financial Review.159
Although neither the 2007 Act nor the provisions governing the
Business Review (which replaced the OFR) in terms require this,
such publication could be required as part of a court’s publicity
order.
The court has a further power—which may operate more
directly on the management of the company—to order a
convicted company to take steps, not only to remedy the breach
and any matter resulting from it which were a cause of the death,
but also “any deficiency, as regards health and safety matters, in
the organisation’s policies, systems or practices of which the
relevant breach appears to the court to be an indication”. The
application for the order may be made only by the prosecution,
which must consult the relevant enforcement authority (for
example, the Health and Safety Executive) about what should be
asked for. The order will set a time limit for the specified steps
to be taken and may require the company to provide evidence to
the relevant enforcement authority that those steps have been
taken.160 However, the enforcement authority is given no greater
monitoring role in relation to the management of the company
than this, though it may think it appropriate to use its general
inspection powers more vigorously in relation to a company
which has been convicted of corporate manslaughter than one
which has not.
Personal liability under the 2007 Act
7–45
Since the deterrent effect of the sanction turns on its impact on
the management of the company, one may wonder whether the
criminal liability of the company is something of a side-show,
unlike in tort law where the compensatory goals of tort law are
advanced by corporate liability. One might further wonder
whether the crucial issue rather is the personal criminal liability
of the directors or other senior managers, as discussed in para.7–
42, above, rather than the liability of the company. Thus, it is not
surprising that, during the passage of the 2007 Act, there was an
intensive debate about whether penalties—whether by way of
criminal sanctions or by way of disqualification—should be
imposed on those members of the senior management of the
company who were to blame for the organisational failings. In
this debate, the wheel thus came full circle: under the directing
mind and will doctrine the crimes of individual managers make
the company liable; now the question was how far corporate
crime should make individual managers liable. The Government
resisted strongly any moves in this direction. The 2007 Act
creates corporate offences only and excludes criminal liability
even in relation to the counselling and procuring form of the
offence, though disqualification is possible.161
Failure to prevent criminal acts
7–46
The Corporate Manslaughter and Corporate Homicide Act
creates strong incentives for companies to organise their
businesses so as not impose risks of serious harm on their
employees and outsiders. Criminal liability for failure to address
risks within the organisation could be imposed on a wider basis.
It appears to be becoming attractive to the legislature to impose
such liability where the risk in question is the risk of a criminal
act being committed within the organisation, presumably on the
basis that the senior management of the company are better at
discouraging criminal acts within it than are the ordinary law
enforcement bodies. A significant step was taken in the Bribery
Act 2010. This Act not only updates and extends the substantive
offence of bribery, but it also imposes (in ss.7 and 8) criminal
liability on companies for failing to prevent bribery by a person
associated with the company. In addition, s.14 imposes on
“senior officers” (not just directors) of the company “consent or
connivance” liability (see para.7–42, above) in respect of the
failure. The associated person could be simply an employee or
agent of the company. The liability arises only if the associated
person was intending to obtain a business advantage for the
company. More important, it is a defence for the company that it
has in place adequate procedures designed to prevent bribery by
employees and agents. In essence, the threat of criminal liability
is used to induce companies to put in place adequate internal
controls over bribery. This incentive rationale for imposing
criminal liability for failure to prevent crime could be used
extensively in relation to crime committed within the scope of a
company’s business. In its Anti-Corruption Plan162 the
government stated that it “will therefore examine the case for a
new offence of corporate failure to prevent economic crime and
look at the rules on establishing corporate criminal liability more
widely”.
Litigation by the company
7–47
We have been concerned in this part of the chapter with how a
company becomes liable in respect of wrongdoing when the
wrongful acts and states of mind must necessarily have been
those of natural persons. Our core case has been an action by the
third party against the company. But we have noticed at various
points that the company itself might sue in respect of the
wrongdoing, either against those whose acts or states of mind
made it liable or against third parties (in the case of companies,
typically its auditors) who ought to have discovered the
wrongdoing and notified it to the company. We discuss these
claims in other chapters, notably Ch.16 (actions against
directors) and Ch.22 (auditors). All we need note here is that the
rules on attribution which apply in actions by third parties are
not the same as those which apply in the case of actions against
the third party by the company. If they did, the company’s action
might be blocked on the grounds of consent or illegality. It is
now recognised, in both civil163 and criminal164 law, that to block
the company’s action against the director on the grounds that the
company was is some sense party to the illegality would be to
undermine the duties owed by directors to their companies and
that, except for rare cases, this is not the law. The position of the
auditor is less clearly settled, though it is moving in the same
direction.
CONCLUSION
7–48
As we observed at the beginning of this chapter, since the
company is a separate but abstract legal person, it can act only
through natural legal persons. From this trite proposition a
complex body of law has emerged to determine which people in
which circumstances can be regarded as having acted as or on
behalf of the company. Nevertheless, some lines on the map are
clear. In relation to contracting the modern tendency has been to
promote the security of third parties’ transactions by reducing
the impact of restrictions in the company’s constitution upon the
effectiveness of the contracting process. As far as directors are
concerned, the operation of the rules of agency normally means
they are not liable or entitled on the resulting contracts, but only
the company is. By contrast, in the area of tort and crime the
personal liability of those acting on behalf of the company is the
normal rule. The tendency has been to extend somewhat
corporate liability in tort and crime in recent years, through
expansion of the scope of vicarious liability, downgrading the
“directing mind and will” test and statutory interventions in the
area of criminal liability.
1
At least this is the “ex ante” position, i.e. before any contracting has taken place. Ex
post, i.e. once a “contract” has been made and has been broken, one or other party may
have an interest in arguing that the agreement was never effective as a contract. Ex ante,
however, where neither company nor counterparty will know whether it will wish to
enforce or avoid the agreement, it is suggested that both will be in favour of rules
facilitating contracting.
2
An analogy is provided by the application in the nineteenth century of the ultra vires
doctrine to companies (see para.7–29, below). In this case the externality which drove
the application of this restriction seems to have been fear of the negative impact of
limited liability on the position of creditors.
3
Jetivia SA v Bilta (UK) Ltd [2015] 1 B.C.L.C. 443 at [70] (Lord Sumption) and [186]
& [203] (Lords Toulson and Hodge). Thus, although Lord Sumption disagreed with the
approach of the other judges to the disposition of this case, both accepted this distinction
between vicarious and direct liability.
4 Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 A.C.
500 at 506 PC. In the nineteenth century the courts did often categorise the board as the
agent of the company, but this view seems not to have survived the early twentieth
century re-characterisation of the articles as a constitution, dividing the powers of the
company between the shareholders collectively and the board. See para.14–6 and the use
by the Act of the term “constitution” to refer to the articles of association (s.17). For a
discussion of this development whereby the board came to be seen as acting as the
company rather than on its behalf, see Lord Walker of Gestingthorpe NPJ in Moulin
Global Eyecare Trading Ltd v Comr of Inland Revenue [2014] 3 HKC 32 HKCFA at
[61]–[64].
5 The directors or shareholders may operate not by making a contractual offer to or
accepting an offer made to them by a third party but by approving the agreement in
principle and by authorising someone else to contract on behalf of the company when all
the details have been settled. So, board involvement in the contracting process does not
necessarily mean that the board contracts as the company; instead an agent may contract
on the company’s behalf acting within the authority conferred by the board. Where the
company contracts directly, its decision needs to be manifested in some way to the
counterparty. Until the last quarter of the nineteenth century, the company executed a
contract by having its seal attached to a written contract by a person authorised to attach
it, and that procedure is still available (s.43). Now the contract may be executed by a
company without a seal, normally by the signatures of two directors or of a director and
the secretary or of one director whose signature is attested by a witness (s.44) and a
company need no longer have a common seal (s.45). If, however, the company wishes to
execute the contract as a deed, rather than a simple contract, the rules are somewhat
more constraining: ss.44 and 46 (these sections do not apply in Scotland). For
benevolent interpretation of s.44 see Williams v Redcard Ltd [2011] 2 B.C.L.C. 350 CA.
6 Thus, even in relation to private companies, the model articles confer responsibility for
the management of the company on the board and provide that “for which purpose they
may exercise all the powers of the company” (Model Articles for private companies,
art.3). By implication the powers of the shareholders do not extend to management,
except to the extent that the articles of a particular company (or, of course, the Act)
explicitly confer management powers upon them. Under the model articles a major
qualification to art.3 is to be found in art.4 which gives the shareholders a reserve power
of intervention: the shareholders at any time by special resolution may instruct the
directors what action to take or refrain from taking in a specific situation.
7 This approach clearly favours third parties and reduces the transaction costs associated
with corporate contracting. But it does not turn the allocation of management powers in
the articles into a dead letter. The directors may still be liable to the company for acting
in breach of the articles (a liability expressly preserved by s.40(5) of the Act and then
identified by s.171—see paras 7–15 and 7–24, below). The directors may thus be liable
to make good to the company any loss it suffers as a result of unauthorised contracting
and, in the unlikely event the shareholders get wind of proposed unauthorised
contracting, they might be able to secure an injunction against the directors to restrain it.
8
In the nineteenth century the question arose really only in relation to the board because
the shareholders’ powers were then regarded as unlimited (except by the objects clause).
9
On ratification see para.7–27.
10
Ernest v Nicholls (1857) 6 H.L.C. 401 HL: “If [third parties] do not choose to
acquaint themselves with the powers of the directors, it is their own fault and if they give
credit to any unauthorized persons they must be contented to look to them only”, per
Lord Wensleydale.
11
Royal British Bank v Turquand (1856) 6 E. & B. 327 Exch.Ch.
12
The account in the text of the facts has been somewhat altered to relate the holding to
a modern company.
13 Mohoney v East Holyford Mining Co (1875) L.R. 7 H.L. 869.
14
See, for example, s.285 of the 1985 Act.
15
Morris v Kanssen [1946] A.C. 459; applied in Re New Cedos Engineering Co Ltd
[1994] 1 B.C.L.C. 797, a case decided in 1975.
16
This was the issue in Morris v Kanssen itself, where an originally valid appointment
had expired without being renewed and this was treated as “no appointment at all” when
the director continued to act as such.
17 The extensions result from the incorporation into the Act of provisions previously
found in art.92 of Table A, the current model articles containing no provisions of this
type. On the requirement for voting individually, see para.14–25.
18
It may be wondered how the shareholders are protected against the actions of rogues
unconnected with the company who manage to persuade a third party that they are the
directors of the company and can contract with him. In Mahoney it was an important part
of the reasoning that the shareholders had acquiesced in the activities of the de facto
directors.
19See also Channel Collieries Trust Ltd v Dover etc Light Railway Co [1914] 2 Ch.
506; and British Asbestos Co Ltd v Boyd [1903] 2 Ch. 439.
20
Irvine v Union Bank of Australia (1877) 2 App. Cas. 366 PC extended this
proposition. The directors’ authority to borrow was limited to a certain amount unless a
“special vote” of the shareholders had enlarged their powers. If there had been such a
special vote, it would have been required to be notified to the Registrar of companies
and be made publicly available in the same way as the articles. The court refused to
apply Turquand on the ground that inspection of the company’s registered documents
would have revealed whether the directors’ powers had been enlarged or not. This
suggests that Turquand is limited to cases where the necessary shareholders’ resolution
is one that does not need registration in the public registry.
21 B. Liggett (Liverpool) Ltd v Barclays Bank [1928] 1 K.B. 48. For a more modern
example see Wrexham Associated Football Club Ltd v Crucialmove Ltd [2007] B.C.C.
139 CA.
22
Somewhat surprisingly in s.9 of the European Communities Act of that year. It was
required upon the UK’s entry into the EU to comply with the First Company Law
Directive. Without this stimulus it is very unclear when this sensible reform would have
been introduced.
23
Section 40 does not apply to a charitable company, except in the cases set out in s.42,
principally where T (i) is unaware the company is a charity; or (ii) gives full
consideration in the transaction and is unaware of the directors’ lack of authority. In
addition, ratification of an unauthorised act requires the consent of the charity
commissioners. For Scotland see s.112 of the Companies Act 1989 which makes similar
provisions.
24
2006 Act s.40(2)(b)(i).
25
2006 Act s.40(2)(b)(ii).
26 Barclays Bank Ltd v TOSG Trust Fund Ltd [1984] B.C.L.C. 1 at 18.
27 In Ford v Polymer Vision Ltd [2009] 2 B.C.L.C. 160 the judge was prepared to send
to trial the issue of the third party’s good faith where the disputed transaction was so
one-sided against the company as to raise the question whether the claimant knew or
ought to have known the directors were acting in breach of duty in entering into it. Note
that the breach of duty was not the directors’ failure to observe the articles; to allow bad
faith to be established on the basis of breach of that duty would completely undermine
the section.
28
EIC Services Ltd v Phipps [2004] 2 B.C.L.C 589 CA at [35], excluding an issue of
bonus shares on the grounds that the subsection requires either a bilateral transaction or
an act to which both company and third person are parties and which is binding on the
company, if s.40 is to apply; and Re Hampton Capital Ltd [2016] 1 B.C.L.C. 374,
excluding restitutionary claim for money misappropriated from the company. See also
International Sales and Agencies Ltd v Marcus [1982] 3 All E.R. 551 at 560, but
decided on different wording.
29
Morris v Kanssen [1946] A.C. 459 (para.7–7, above). See also Howard v Patent Ivory
Manufacturing Co (1888) 38 Ch. D. 156.
30 Hely-Hutchinson v Brayhead Ltd [1968] 1 Q.B. 549.
312006 Act s.41(2), (7)(b). The meaning of “connected person” is discussed in para.16–
71.
32
2006 Act s.41(2).
332006 Act s.41(3). There is a defence for non-director defendants (i.e. connected
persons who are not directors) if they can show they did not know the directors were
exceeding their powers: s.41(5).
34 (a) restitutio in integrum is no longer possible; (b) the company has been indemnified;
(c) rights of a bona fide purchaser for value (other than a party to the transaction) would
be affected; or (d) the transaction is affirmed by the company.
35But note that actual indemnification is one of the situations in which the transaction
ceases to be voidable: s.41(4)(b).
36 2006 Act s.40(6). See Re Torvale Group Ltd [1999] 2 B.C.L.C. 605.
37
Smith v Henniker-Major [2002] 2 B.C.L.C. 655 CA.
38
For the same reason it is submitted that the dicta in EIC Services v Phipps [2004] 2
B.C.L.C. at [37] CA to the effect that even shareholders are not intended to be protected
by s.40, should not be followed. Since Parliament dealt with the position of directors in
s.41, it is unlikely it would not have dealt with that of shareholders, if it had wished to
qualify the protection conferred on them by s.40.
39
It is true that s.41(1) preserves “any rule of law by which the transaction may be
called in question” but the Smith decision proceeded on the basis of an interpretation of
s.40, not by application of an independent rule of law.
40
The significance of the extension of the section to those authorised by the directors is
discussed in para.7–25.
41
Smith v Henniker-Major & Co [2002] B.C.C. 544, upheld on appeal ([2002] 2
B.C.L.C. 655 CA), but with only Carnwath LJ fully supporting the judge’s reasoning on
this point and Robert Walker LJ taking the contrary view. In other words, in the latter’s
view the quorum requirement is to be treated as one of the limitations in the company’s
constitution which the section is designed to override.
42
Smith v Henniker-Major & Co [2002] 2 B.C.L.C. 655 at [41], per Robert Walker LJ.
Under the current law the word “directors” should be substituted for “board of
directors”.
43
2006 Act s.17(a).
44 2006 Act s.29.
45 2006 Act s.40(3).
46
2006 Act s.40(4).
47
See para.16–24. “Constitution” of the purposes of s.171 is defined in s.257. The
“other person” might be someone who assists the director in the breach of duty.
48International Sales and Agencies Ltd v Marcus [1982] 3 All E.R. 651; Re Hampton
Capital Ltd [2016] 1 B.C.L.C. 374.
49 The classic exception to this statement is where A does not disclose to T the fact of
the agency (the “undisclosed principal” case). On discovering the truth, T can choose to
continue to hold A to the contract or to treat the contract as one with P.
51An example might be thought to be where the shareholders have exercised their art.4
powers (above, para.7–14) to direct the board by special resolution not to exercise a
power that art.3 prima facie confers on the board. However, the definition of the
company’s constitution (s.17) includes special resolutions (s.29). Of course, the board’s
managerial powers might be limited by a mandatory rule of company law (as was
previously the case with the ultra vires doctrine) but such restrictions are rare.
52 Hely-Hutchinson v Brayhead Ltd [1968] Q.B. 549 CA, per Lord Denning.
53 See previous note. Suppose a person has just been appointed to a position within a
company, to which certain powers are normally attached, but the powers granted in the
particular case have been unusually restricted by the appointer and that restriction has
not been communicated to third parties. The person appointed would not have implied
actual authority to act within the restricted area, but might well have apparent authority
to do so. See Hopkins v T L Dallas Group Ltd [2005] 1 B.C.L.C. 543—fraud of agent
took his actions outside the scope of his implied actual authority but not his apparent
authority. Equally, where A has been permitted by P to act in excess of formal authority
in the past, A might acquire implied actual authority, even though persons in A’s
position do not normally have that authority and P had not signalled the extension to T.
54
Armagas Ltd v Mundogas SA [1986] A.C. 717 HL; Hudson Bay Apparel Brands LLC
v Umbro International Ltd [2011] 1 B.C.L.C. 259 CA.
55
Contrary to what was thought at one time, this is so even if the officer or agent has
forged what purported to be a document signed or sealed on behalf of the company:
Uxbridge Building Society v Pickard [1939] 2 K.B. 248 CA; explaining dicta in Ruben v
Great Fingall Consolidated [1906] A.C. 439 HL; Kreditbank Cassel v Schenkers [1927]
1 K.B. 826 CA; South London Greyhound Racecourses v Wake [1931] 1 Ch.496; Lovett
v Carson Country Homes Ltd [2009] 2 B.C.L.C. 196.
56 Rama Corp v Proved Tin & General Investments Ltd [1952] 2 Q.B. 147.
57 cf. Model articles for public companies, art.81. On the seal see fn.5, above.
58
Hely-Hutchinson v Brayhead Ltd [1968] 1 Q.B. 549 CA.
59
Freeman & Lockyer v Buckhurst Park Properties Ltd [1964] 2 Q.B. 480 CA,
especially the judgment of Diplock LJ at 506. However, within a corporate group a
senior executive of a subsidiary cannot be assumed to have authority to bind the parent,
though such authority may be established on the facts of the case: Hudson Bay Apparel
Brands LLC v Umbro International Ltd [2011] 1 B.C.L.C. 259 CA.
60See, e.g. Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch.93 CA; Clay Hill Brick Co v
Rawlings [1938] 4 All E.R. 100; Freeman & Lockyer v Buckhurst Park Properties Ltd
[1964] 2 Q.B. 480 CA.
61B.T.H. v Federated European Bank [1932] 2 K.B. 176 CA; Clay Hill Brick Co v
Rawlings [1938] 4 All E.R. 100.
62
In Hely-Hutchinson v Brayhead [1968] 1 Q.B. 549 CA, per Roskill J at first instance
at 560D, and per Lord Wilberforce at 586G.
63 See para.14–75, below.
65Houghton & Co v Nothard, Lowe & Wills [1927] 1 K.B. 246 CA; affirmed on other
grounds [1928] A.C. 1 HL; Kreditbank Cassel v Schenkers [1927] 1 K.B. 826 CA; South
London Greyhound Racecourses v Wake [1931] 1 Ch. 496; see also the observations of
Willmer LJ in Freeman & Lockyer v Buckhurst Park Properties Ltd [1964] 2 Q.B. at
494.
66
See Armagas Ltd v Mundogas SA [1986] A.C. 717 HL. There an employee who bore
the title of “Vice-president (Transportation) and Chartering Manager” was held not to
have authority to bind his company to charter back a vessel which it was selling. But
there were complicating factors in that case for the employee was colluding with an
agent of the other party in a dishonest arrangement and did not purport to have any
general authority to bind the company but merely alleged that he had obtained actual
authority for that particular transaction. MCI WorldCom International Inc v Primus
Telecommunications Inc [2004] 1 B.C.L.C. 42—in-house lawyer negotiating a contract
did not have apparent authority to give undertakings as to the future financial soundness
of a parent company.
67
Panorama Developments Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 Q.B. 711 CA.
How far, if at all, the secretary’s ostensible authority extends to the commercial side of
the company’s affairs is still unclear; see, per Salmon LJ at 718.
68
The issue might arise in litigation between salesperson and employer.
69
First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] B.C.L.C. 1409
CA. See also The Raffaella [1985] 2 Lloyd’s Rep. 36.
70
ING Re (UK) Ltd v R&V Versicherung AG [2007] 1 B.C.L.C. 108.
71
See the reservations expressed by the Singapore Court of Appeal in Skandinaviska
Enskilda Banken AB (Publ), Singapore Branch v Asia Pacific Breweries (Singapore) Pte
Ltd [2011] SGCA 22.
72
Hopkins v T L Dallas Group Ltd [2005] 1 B.C.L.C. 543.
73 See para.7–6.
74
2006 Act s.40(1). It is clear that the section creates no presumption that A has been
authorised by the board to contract. Only if A has been so authorised will the exclusion
of limitations in the articles on the board’s powers to authorise be removed in favour of a
good faith T. See Wrexham Associated Football Club Ltd v Crucialmove Ltd [2008] 1
B.C.L.C. 508 CA at [47]. But see fn.5 above on why it might be convenient for the
board to act in this way.
75 For this distinction see para.7–18.
76
The Companies Act 1989 contained a provision (inserted as s.711A into the
Companies Act 1985) which would have abolished generally the doctrine of constructive
notice arising from the public filing of corporate documents. However, the section was
never brought into force and the Companies Act 2006 contains no equivalent provision.
77
Any doubt on this point was finally dispelled by the Court of Appeal in Freeman &
Lockyer v Buckhurst Park Properties Ltd [1964] 2 Q.B., especially Diplock LJ at 504.
78per Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties [1964] 2 Q.B.
508. See also Atkin LJ in Kreditbank Cassel v Schenkers [1927] 1 K.B. 826 CA at 844.
79 Mercantile Bank of India v Chartered Bank of India [1937] 1 All E.R. 231 is
sometimes misunderstood in this regard. The headnote is misleading in suggesting that it
was the fact that the articles expressly empowered the board to delegate by powers of
attorney that brought about the estoppel. It was the actual exercise of that power by the
board that did so. The only relevance of the articles (of which third parties were deemed
to have notice) was that they did not preclude the grant of such powers of attorney.
81 Grant v United Kingdom Switchback Railway Co (1888) 40 Ch.D. 135 CA. If
ratification would involve a breach of the articles by the shareholders, then shareholder
approval, it seems, would need to be by a majority equivalent to that for a change in the
articles.
82
Re Mawcon Ltd [1969] 1 W.L.R. 78.
83 ING Re (UK) Ltd v R&V Versicherung AG [2007] 1 B.C.L.C. 108.
84This was the point upon which the “ratification” failed in Smith v Henniker-Major
[2002] 2 B.C.L.C. 655.
85
See the discussion ibid. and The Borvigilant [2003] 2 All E.R. (Comm) 736 CA.
86
87
For a brief history of the ultra vires doctrine and its reform in 1972 and again in 1989
see the fifth edition of this book (London: Sweet & Maxwell, 1992) at pp.166 et seq.
88
Ultra vires is a Latin expression which lawyers and civil servants use to describe acts
undertaken beyond (ultra) the legal powers (vires) of those who have purported to
undertake them. In this sense its application extends over a far wider area than company
law. For example, those advising a minister on proposed subordinate legislation will
have to ask themselves whether the enabling primary legislation confers vires to make
the desired regulations.
89
This is based on an interpretation of art.2(b) of the Second Directive (Directive
2012/30/EU) as requiring the company’s articles to state its objects (if it has them) but
not as requiring the company to have objects.
90 2006 Act s.31(1).
92For the possible deployment of the ultra vires doctrine from other doctrinal bases see
para.12–9, below.
93
2006 Act s.39 does not attempt to deal with the internal aspects of the ultra vires
doctrine, thus underlining that these are matters to be dealt with according to the
ordinary rules on directors’ duties or the enforcement of the articles as between
shareholder and company. A particularly complex issue of this sort is addressed in s.247,
concerning gratuitous payments by directors to employees where a company is closing
down or transferring a business. In Parke v Daily News [1962] Ch. 927 such payments
were held to be ultra vires the company. That issue is no longer relevant and the matter
is large dealt with in the section as one of directors’ duties. However, interestingly the
section does mandatorily extend the powers of the directors to make such payments,
even if the company’s constitution does not confer such powers. However, there are
strict controls over the exercise of the power in the interests of the shareholders and
other creditors of the company.
94 This provision applies equally to companies in existence when this reform was
introduced by the Companies Act 2006 and which necessarily had objects clauses in
their memorandum of association. Objects clauses set out in the memorandums of
existing companies are to be treated as provisions in the articles, by virtue of s.28(1), and
as such will benefit from s.39 and also from the new alteration/removal regime.
95
2006 Act s.31 preserves the operation of ss.197 and 198 of the Charities Act 2011,
applying in England and Wales. The broad effect of that section is that where a charity is
a company, no alteration which has the effect of the body ceasing to be a charity will
affect the application of any of its existing property unless it bought it for full
consideration in money or money’s worth. In other words, although the company is not
prevented from changing its objects (so long as it obtains the prior written consent of the
Charity Commission) in such a way that they cease to be exclusively for charity, its
existing property obtained by donations continues to be held for charitable purposes
only. In effect, the company will be in an analogous position to an individual trustee of a
charitable trust; part of its property will be held for charitable purposes only and part of
it not. And, presumably, it will have to segregate the former. Scotland and Northern
Ireland have separate legislation on this point.
96 For a discussion of this issue in the context of pre-incorporation contracts, see para.5–
25, above, where, however, the default position is that A is liable.
97
Lewis v Nicholson and Parker (1852) 18 Q.B. 503.
98 Collen v Wright (1857) 8 E. & B. 647.
99
Campbell and Armour, (2003) 62 Cambridge L.J. 290.
100
See Jetivia SA v Bilta (UK) Ltd [2015] 1 B.C.L.C. 443. “Such vicarious liability is
indirect liability; it does not involve the attribution of the employee’s act to the
company. It entails holding that the employee has committed a breach of a tortious duty
owed by himself, and that the company as his employer is additionally answerable for
the employee’s tortious act or omission”, per Lords Toulson and Hodge at [186].
101
Lloyd v Grace, Smith & Co [1912] A.C. 716 HL (fraud on client by solicitors’ clerk);
Morris v CW Martin & Sons Ltd [1966] 1 Q.B. 716 CA (theft by employee of
customer’s coat).
102 Lister v Hesley Hall Ltd [2001] 2 All E.R. 769 HL (sexual abuse of children in a care
home by the staff employed to look after them); Dubai Aluminium Company Ltd v
Salaam [2003] 1 B.C.L.C. 32 HL (firm vicariously liable for knowing assistance by a
solicitor partner in a breach of trust); Mohamud v WM Morrison Supermarkets Plc
[2016] UKSC 11 (assault by employee on a customer for reasons personal to the
employee). At the same time, the range of “employee like” relationships which may give
rise to vicarious liability of the government has been expanded: Cox v Ministry of Justice
[2016] UKSC 10 (vicarious liability for acts of a prisoner).
105
Williams v Natural Life Health Foods [1998] 1 W.L.R. 830 HL.
106
The decision applies, of course, to all sizes of company, but it is suggested that the
one-person company was the difficult case. With large companies, it will be even more
difficult to find that the agent assumes personal responsibility.
107
The decision is not explicit on whether the company was liable in the tort of
negligent misstatement, but it is submitted that it was in that case where the maker of the
statement was clearly its “directing mind and will”. However, since the court was
apparently laying down a general approach, it may be better to view the analysis as
being that the assumption of responsibility by any agent acting within his authority is
attributed to the company.
108
Thus, Fairline Shipping Corp v Adamson [1975] Q.B. 180 is now to be seen as a
case where the director did personally assume responsibility for the performance of the
services which the company had contracted to provide, despite the rather thin evidence
of such an assumption. See also para.28–64, below, for the application of this principle
to statements made by target boards in takeover bids.
109 Williams v Natural Life Health Foods [1998] 1 W.L.R. 830 HL.
110
Thus, the courts have been reluctant to exempt from personal responsibility agents
who are professionally qualified. See Merrett v Babb [2001] Q.B. 1174 CA (surveyor
employed by a partnership); Phelps v Hillingdon LBC [2001] 2 A.C. 619 HL
(educational psychologist employed by LEA). These cases, especially the first, may
contribute to the debate whether the Williams principle will be applied by the courts to
LLPs (see para.1–4, above). It is submitted that it will but perhaps not with the same
benefits for agents of LLPs running professional businesses as it provides for non-
professional businesses.
111
Standard Chartered Bank v Pakistan National Shipping Corp (No.2) [2003] 1 A.C.
959 HL; Contex Drouzhba Ltd v Wiseman [2008] 1 B.C.L.C. 631 CA.
112
See in particular Ruben v Great Fingall Consolidated [1906] A.C. 439 HL.
113
Uxbridge Permanent Benefit Building Society v Pickard [1939] 2 K.B. 248 CA;
Armagas Ltd v Mundogas SA [1986] 1 A.C. 717 HL; Credit Lyonnais Bank Nederland
NV v Export Credit Guarantee Department [2000] 1 A.C. 486 HL; and see the cases
cited in fn.101 above.
114
Note, however, the reluctance of the Singapore Court of Appeal, even under the
“sufficiently close connection” test, to hold the company vicarious liable for the self-
interested fraud of a manager which the third party was in a better position to discover
than the company: Skandinaviska Enskilda Banken AB (Publ), SingaporeBranch v Asia
Pacific Breweries (Singapore) Pte Ltd [2011] SGCA 22.
115 New Zealand Guardian Trust Co Ltd v Brooks [1995] 1 W.L.R. 96 PC.
116Civil Liability (Contribution) Act 1978 s.1; Lister v Romford Ice and Cold Storage
Co [1965] A.C. 555 HL.
117
The duties of directors are discussed in Ch.16. For non-director managers the
conduct might be a breach of their contracts of employment. See M.R. Freedland, The
Personal Employment Contract (Oxford: OUP, 2003), pp.146–147.
118
Cargill v Bower (1878) 10 Ch.D. 502 at 513–514.
119
Rainham Chemical Works Ltd v Belvedere Fish Guano Co Ltd [1921] 2 A.C. 465
HL; Performing Right Society Ltd v Ciryl Theatrical Syndicate Ltd [1924] 1 K.B. 1 CA;
British Thomson-Houston Co Ltd v Stirling Accessories Ltd [1924] 2 Ch. 33.
120
C Evans & Sons Ltd v Spritebrand Ltd [1985] 1 W.L.R. 317 CA; Mancetter
Developments Ltd v Garmanson Ltd [1986] Q.B. 1212 CA; MCA Records Inc v Charly
Records Ltd [2003] 1 B.C.L.C. 93 CA; Koninklijke Philips Electronics N V v Princo
Digital Disc GmbH [2004] 2 B.C.L.C. 50; cf. White Horse Distilleries Ltd v Gregson
Associates Ltd [1984] R.P.C. 61.
121
See the attempt by Nourse J in the White Horse case (see previous note) to restrict
the director’s personal liability to those situations where he acted “deliberately or
recklessly and so as to make [the tortious conduct] his own, as distinct from the act or
conduct of the company”. This approach seems to have been motivated by a desire to
preserve the benefits of limited liability, especially in a one-person company. In other
words, Nourse J proposed a general “assumption of responsibility” test (for all torts) in
the case of tortious conduct authorised by the directors. See also MCA Records (see
previous note) where the court drew a distinction between control exercised through the
constitutional organs of the company (e.g. voting at board meetings—not attracting
tortious liability) and control exercised otherwise (potentially attracting tortious
liability).
122 Jetivia SA v Bilta (UK) Ltd [2015] 1 B.C.L.C. 443 at [187].
123 See above para.7–36.
124 The point may become important where the company sues the director to recover the
loss suffered (see para.16–111) or a third party for failing to discover the directors’
wrongdoing (see para.22–41).
125
El Ajou v Dollar Land Holdings Plc [1994] 1 B.C.L.C. 464 CA; Royal Brunei
Airlines Bhd Shd v Tan [1995] 2 A.C. 378 PC.
126
This step was taken at an early stage. See Moussell Brothers Ltd v London & North
Western Railway Co [1917] 2 K.B. 836.
127
R. v British Steel Plc [1995] I.C.R. 586 CA. The doctrine used to achieve this result
was that the company had a “non-delegable duty” to produce a safe workplace. This case
only opens up the potential for imposing liability for hybrid offences. Whether a
particular statute does so is again a matter of construction.
128
Re Supply of Ready Mixed Concrete (No.2) [1995] 1 A.C. 456 HL.
129
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] A.C. 705 HL. See
also The Truculent [1952] P. 1; The Lady Gwendolen [1965] P. 294 CA.
130Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] A.C. 705 at 713. Lord
Haldane’s dictum was probably influenced by the clear distinction drawn between
agents and organs in German company law, Haldane having studied in his youth in
Germany.
131 In the case itself the defendant company was held liable on the basis of the actions of
the managing director of another company which managed the ship on behalf of the
defendant company, but this was on the basis that the defendant company had failed to
reveal the nature of the manager’s relationship with the defendant company.
132
Tesco Supermarkets Ltd v Nattrass [1972] A.C. 153. The earlier cases included DPP
v Kent & Sussex Contractors Ltd [1944] K.B. 146; R. v ICR Haulage Ltd [1944] K.B.
551 CCA; Moore v Bresler [1944] 2 All E.R. 515; and Bolton (Engineering) Co Ltd v
Graham & Sons [1957] 1 Q.B. 159—in some of which a very broad interpretation was
given to the concept of the directing mind and will.
133 Since the individual whose acts were in question was a lowly employee in the case,
the judges did not have to explore in detail what board delegation meant: was delegation
of board powers enough (as Lord Diplock suggested) or did the board need to delegate
in addition its responsibility for a certain area of the company’s business (as Lord Reid
indicated)?
134 Tesco Stores Ltd v Brent LBC [1993] 1 W.L.R. 1037 DC.
135 El Ajou v Dollar Land Holdings Plc [1994] 1 B.C.L.C. 464 CA.
136
Watts, (2000) 116 L.Q.R. at 529. See Jetivia SA v Bilta (UK) Ltd [2015] 1 B.C.L.C.
443 at [197].
137See in particular the decision of the CA in Tesco Stores Ltd v Brent LBC [1993] 2 All
E.R. 718 CA, not following the earlier Tesco case (previous note). See also Law
Commission, Criminal Liability in Regulatory Contexts, Consultation Paper 195, 2010,
paras 5.45–5.83.
138 Ferran, (2011) 127 L.Q.R. 239.
139 Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2
A.C. 500 at 509. The case is noted by Sealy, [1995] C.L.J. 507; Wells, (1995) 14
I.B.F.L. 42; and Yeung, [1977] C.F.I.L.R. 67.
140 See El Ajou v Dollar Land Holdings Plc [1994] 2 All E.R. 685 CA, where the Court
of Appeal, including Hoffmann LJ, as he then was, applied a similar approach to the
question of whether a company was in equity in knowing receipt of trust property. See
also Lebon v Aqua Salt Co Ltd [2009] 1 B.C.L.C. 540 PC—same approach used to
determine whether a director’s knowledge is to be attributed to the company under
Mauritian law.
141
For the equivalent British rules see Ch.26, below.
142
Despite the uncertainty, the Law Commission (above fn.137, paras 5.103–5.110) has
commended this approach to the courts in all cases where the statute does not itself deal
with the issue of corporate liability. On this approach the identification doctrine, at least
in its classic form, would be just one possible result of the exercise of statutory
construction. For an example of the traps inherent in this approach see St Regis Paper
Co Ltd v R. [2011] EWCA Crim 2527.
143
See para.7–3 for a description of these terms.
144
145
The standard formulation covers “a director, manager, secretary or similar officer”,
those who purport to act as such, and the members of the company if its affairs are
conducted by the members and the member had a membership function. See e.g. Fraud
Act 2006 s.12.
146
An example is s.400 of the Financial Services and Markets Act 2000—which
imposes consent or connivance liability as well.
147 Above fn.137, paras 7.41–7.52. This would avoid the stigma associated with
conviction for the principal offence, e.g. where the company has been convicted of an
offence involving dishonesty. See further para.7–46, below.
148 Safeway Stores Ltd v Twigger [2010] 2 B.C.L.C. 106; reversed ([2011] 2 All E.R.
841 CA) on the grounds that it would be inconsistent with the purpose of the particular
statute imposing liability on the company that the company should recover its loss from
the directors.
149 Re Attorney-General’s Reference (No.2 of 1999) [2000] Q.B. 796 CA.
150
Law Commission, Legislating the Criminal Code: Involuntary Manslaughter, Law
Com. No.237, H.C. 171, 1996.
151
The offence is corporate manslaughter in England, Wales and Northern Ireland;
corporate homicide in Scotland.
152 And for other corporate bodies, which need not concern us here, though the question
of how far public sector bodies should be the brought within the scope of the Act was
one of the most contentious in Parliament.
153 2007 Act s.20.
154 The existence of the duty is a question of law for the judge (s.2(5)); whether the
breach of the duty is “gross” a question for the jury (s.8). The duty in question must be a
duty under the law of negligence falling into one of the categories listed in s.2, though
these categories are widely defined.
155 2007 Act s.1(3).
156
2007 Act s.1(6).
157 The fine reduces the value of the shareholders’ equity. The share price fall may
further reflect the reputational harm suffered by the company as a result of the crime.
However, not all crimes reduce the willingness of customers to deal with companies nor
show that the directors were acting contrary to the interests of the shareholders. Possibly
even the reverse can be true. See J. Armour, C. Mayer and A. Polo, “Regulatory
Sanctions and Reputational Damage in Financial Markets”, Oxford Legal Studies
Research Paper No 62/2010; ECGI—Finance Working Paper No.300/2010. Available at
SSRN: http://ssrn.com/abstract=1678028 [Accessed 21 March 2016].
158
2007 Act s.10. Non-compliance with a publicity order is itself a criminal offence.
159
160
2007 Act s.9.
161
2007 Act s.18. Conviction for an indictable offence in connection with the
management of the company is a basis for disqualification, as is, even without
conviction, unfitness to be involved in the management of a company. See Ch.10.
162 HM Government, December 2014, Action 36.
163 Jetivia SA v Bilta (UK) Ltd [2015] 1 B.C.L.C. 443 at [7].
164
Attorney-General’s Reference (No.2 of 1982) [1984] Q.B. 624 CA; R. v Phillipou
(1989) 89 Cr. App. R. 290 CA; R. v Rozeik [1996] B.C.C. 271 CA.
CHAPTER 8
LIMITED LIABILITY AND LIFTING THE VEIL
The Rationale for Limited Liability 8–1

Legal Responses to Limited Liability 8–5
Disclosure of information 8–6
Lifting the Veil 8–7
Under statute or contract 8–8
At common law 8–10
Conclusion 8–17
THE RATIONALE FOR LIMITED LIABILITY

8–1
The company laws of all economically advanced countries make
available corporate vehicles through which businesses can be
carried on with the benefit of limited liability for their members.
For shareholders this means that their liability for the company’s
debts is limited to the amount they have paid or have agreed to
pay to the company for its shares. For most shareholders this
means that, once the shares have been paid for, whether they
were acquired directly from the company or from an existing
shareholder, the worst fate that can befall them if the company
becomes insolvent is that they lose the entire value of their
investment.1 However, their other assets—their homes, pension
funds, domestic goods—will be unaffected by the collapse of the
company in which they have invested. To put the matter from
the creditors’ perspective, their claims are limited to the assets of
the company and cannot be asserted against the shareholders’
assets. This can be regarded as a strong rule because, if the
opposite economic development occurs and the company is
highly successful, the shareholders are likely to receive all the
residual benefit of that success, once the creditors have been
satisfied, either through dividends or the capital appreciation of
their shares.2 So, there is an apparent asymmetry in the risks and
rewards which are allocated to shareholders: they benefit,
through limited liability, from a cap of their down-side risk,
whereas the chance of up-side gain is unlimited.
Why does the law treat shareholders in this favourable way?
During the battle for legislative acceptance of the principle of
limited liability in the middle of the nineteenth century,3 the
argument which seems to have weighed most heavily with the
legislator was that limited liability would facilitate the
investment by members of the public, who were not professional
investors, of their surplus funds in the many large capital
projects which companies were being set up to carry out at that
time, in particular the construction of a national network of
railways. Members of the public, whose primary activity and
expertise did not lie with the running of companies, would be
much less likely to be willing to buy shares in such companies, if
the full range of their personal assets were to be put at risk. They
might be prepared to become lenders of money to such
companies, but it was the flexibility of risk capital through
shares which those companies sought.4 The shareholders might
earn a big return if the company’s project was successful, but
equally, at least in the case of ordinary shares, the company
would be free to pay them nothing or very little, if the project
achieved only modest success, whereas debt holders would
normally be entitled to their fixed return by way of interest and
repayment of capital, no matter whether the project was
successful, provided the company stayed out of insolvency.
Halpern, Trebilcock and Turnbull5 have pointed out that
limited liability, in addition, facilitates the operation of public
securities markets, because it relieves the investor of the need to
be concerned about the personal wealth of fellow investors.
Under a rule whereby the shareholders were jointly and severally
liable for a company’s debts, my shares would be more valuable
to me if the wealth of my fellow investors increased (because I
would be less likely to have to pay more than the proportion of
the company’s debts which my shares constituted of the
company’s total share capital), and vice versa if the wealth of my
fellow shareholders decreased. So limited liability facilitates the
trading of the company’s shares at a uniform price on the public
exchanges and reduces shareholders’ monitoring costs. This
adverse effect of unlimited liability could be mitigated, of
course, by making the shareholders liable only on a
proportionate basis (i.e. liability on the part of each investor only
for his or her “share” of the company’s debts).6
Further, limited liability encourages equity investment by
those of modest means by facilitating diversification of
investment across a number of companies in different sectors
and perhaps countries, thus reducing the investor’s company-
specific and country-specific risks. Under a regime of unlimited
liability, investors would be incentivised to monitor closely the
companies in which they were invested and this would push
them towards reducing the range of their investments in order to
reduce monitoring costs.
8–2
The above arguments in favour of limited liability are stronger in
relation to companies which have offered their shares to the
public, but are less persuasive for companies which have not and
do not plan to do so, i.e. for all private companies (which
constitute the overwhelming number of companies on the
register)7 and even for some public companies. Yet, as we saw in
Ch.2, a great deal of effort was expended on the part of
practitioners in the second half of the nineteenth century in
securing the extension of limited liability to all companies,
including the smallest, a goal achieved when the House of Lords
handed down its decision in Salomon v Salomon,8 and the
legislature decided not to reverse that decision. That decision has
remained controversial,9 but so entrenched in our law is the
principle of limited liability for all companies, large or small,
that arguments for the reversal of Salomon have made no
progress with policy-makers.
During the Company Law Review at the turn of the last
century, the argument was made that the flexibility of
organisational rules, which those running small businesses seek,
should be provided outside company law, through a new and
optional organisational form with unlimited liability, whilst
those who seek limited liability should have to accept the
burdens of company law, which indeed might well be somewhat
enhanced, especially in relation to minimum capital
requirements.10 The Company Law Review, anxious not to place
barriers in the way of the organic growth of small companies and
to encourage entrepreneurship, rejected the arguments for a
separate form of incorporation and a reduction in the availability
of limited liability for small businesses,11 and in fact, under the
banner “Think Small First”, proposed some further deregulation
of company law as it applies to small companies.12 Moreover, as
we saw in Ch.1,13 the Government later did provide a separate
and highly flexible form of business organisation through the
limited liability partnership, introduced by the Limited Liability
Partnership Act of 2000, but crucially attached limited liability
to it. Indeed, the main object of the reform was to make a
partnership-like form available but with the benefit of limited
liability.
The rationales for limited liability, identified above, are more
persuasive, perhaps even assume, that the shareholders are
natural persons. However, very many businesses are today
carried on through a group of holding and subsidiary companies
rather than through a single company.14 This raises the question
of whether the doctrine of limited liability should apply only as
between the holding (or parent) company and its shareholders or
also within the group, i.e. between the holding company and the
subsidiaries and among the subsidiary companies. Whether or
not the parent benefits from limited liability as against its
subsidiaries, the shareholders of the parent cannot lose more than
the value of their investment provided the parent is subject to the
doctrine. In fact, the doctrine does apply within groups, a
conclusion which the courts have arrived at without any deep
consideration of the matter as an inevitable consequence of the
doctrine of separate legal personality. This could be justified on
the grounds that it encourages investment by “outside” investors
in the subsidiaries (as opposed to the parent), but this argument
does not carry weight in relation to wholly-owned subsidiaries,
which are the norm in the UK.
8–3
The rationales for limited liability so far identified equate the
societal benefit of limited liability with the greater ease with
which companies can raise risk capital. From the creditors’ point
of view, however, limited liability seems unattractive as it
confines their claims to the company’s assets. It might be argued
that this does not matter because creditors, as well, have limited
liability: their downside exposure is capped at the amount they
are owed by the company.15 Unlike shareholders, however,
creditors’ upside potential is meagre: their claim on the company
does not normally increase if the company does well—though
the probability of actually receiving that claim may improve.
However, limited liability may in fact decrease the probability of
repayment to creditors. Shareholders with their asymmetrical
awards may fail to constrain management engaged in taking
reckless risks, thus increasing the probability of corporate
failure. In response, creditors may monitor management more
closely, thus increasing the costs of providing credit. So,
creditors might prefer unlimited liability for shareholders
because that would throw the additional monitoring costs onto
the shareholders. From the point of view of corporate finance,
however, it may not matter where those costs are allocated,
provided that the costs of effective monitoring are roughly the
same in the two cases.
However, a rationale for limited liability has been advanced
which takes as its starting point the monitoring incentives of
creditors and provides a general justification for limited liability
precisely on the grounds that it reduces the costs of creditor
monitoring (and not only in relation to free-standing, publicly
traded companies). This is the “asset partitioning” rationale.16
What limited liability facilitates, together with the concept of
separate legal personality, is the segregation of collections of
assets between investors and the company, in the case of a single
company, or as among different companies in corporate groups.
Although the doctrines are normally presented as hindering the
enforcement of claims by corporate creditors, it can be argued
that they work to their benefit. Just as limited liability prevents
creditors of a company from asserting their claims against the
shareholders’ assets, so also the doctrine of the company as a
separate legal person prevents the creditors of a shareholder
from asserting their claims against the company’s assets. Within
a group the same argument applies in relation to the creditors of
subsidiary and of the parent company (or a fellow subsidiary). In
other words, a creditor of the company does not have to face
competition from the shareholder’s creditors, just as the
corporate creditor does not compete with the creditors of the
shareholder. Each set of creditors is thus safe in confining their
monitoring efforts to the company’s or the shareholder’s assets,
as the case may be, and creditors may be expected to specialise
in these different forms of monitoring. Overall, creditors’
monitoring costs can be expected to be reduced under a system
of asset partitioning. More generally, whilst the shareholder will
not normally be pushed into bankruptcy by the failure of the
company in which they have invested, because they lose only
their investment, so equally the creditors of the shareholders will
not be able to seize the company’s assets to satisfy their claims.
This is likely to be of overall benefit to society because it
protects the integrity of the assets which the company has
assembled to conduct its business and the benefits the company
generates, not only for its investors, but also for others by way of
employment and tax payments. This rationale for asset
partitioning is as powerful within groups as between the parent
and its shareholders.
8–4
An alternative or supplementary way of looking at limited
liability emphasises that it is not a mandatory rule. Limited
liability is, it might be said, a default rule and those who do not
like it can contract out of it. The incorporators themselves may
opt out of limited liability across-the-board, by forming an
unlimited liability company—though this occurs but rarely.17
Alternatively, particular creditors may contract with the
company and its shareholders on the basis that both will be liable
on the obligations undertaken. Where the rationales for limited
liability are most in question, in relation to groups and small
companies, it is in fact common for some creditors to contract
out of limited liability. Those setting up small companies, into
which they are not willing to inject a significant amount of share
capital, will usually find that a bank will not lend money to the
company unless the shareholders give a personal guarantee of
the loan to the company.18 In this way, the personal assets of the
shareholders become available to the bank if there is default on
the loan; the bank is not confined to the assets of the company.
Equally, those dealing with an undercapitalised company in a
group of companies may obtain a guarantee from the parent
company19 or, less securely, the parent company may issue a
“letter of comfort” to the subsidiary’s auditors, allowing them to
certify the subsidiary’s accounts on a going concern basis, or to a
third party contemplating contracting with the company.20 The
implication of the contractual approach might be thought to be
that there is no need for the law to control limited liability for it
lies in the hands of those contracting with the company to
protect their interests themselves. In the case of large or frequent
creditors this is very often true. But not all creditors can adjust
their contractual relations with the company so as to reflect the
riskiness of their situation and for such “non-adjusting”
creditors, notably tort victims, the default rule of the law is a
crucial determinant of the legal position.21
Finally, sight should not be lost of the argument that the
incentives to take risks, associated with the asymmetric position
of the shareholders, has a positive value. The purpose of
commercial companies is to embark on risky ventures. A
company dominated by risk-averse creditors might not add much
to the store of social wealth because they would put pressure on
the management to avoid risk.
LEGAL RESPONSES TO LIMITED LIABILITY
8–5
Of course, the supporters of limited liability do not deny that
there is a role for company law beyond the adoption of the
principle of limited liability. There are two potential roles for
company law to fulfil given the establishment of a doctrine of
limited liability. First, it might be able to promote creditor
monitoring (i.e. self-help on the part of the creditors); secondly,
it might be able to protect creditors against the opportunistic
conduct on the part of shareholders or directors to which the
doctrine of limited liability exposes them, for example, when
they move assets out of the company just before the creditor
assets its claim against the company. Monitoring by creditors
can operate effectively only if creditors have the tools available
to them to implement supervision. As we shall see at many
points in this Part, a crucial legal tool for creditors is simply the
law of contract, for example, terms inserted into loan contracts,
rather than company law. However, the focus in this Part is on
the contribution which company law makes to the promotion of
creditor monitoring beyond what creditors can achieve for
themselves via contract. Company law provides standardised
rules more cheaply than creditors can do through contract.
However, contract allows the rules to be adjusted to the specific
situation of each company and creditor and facilitates re-
negotiation of the rules as circumstances change. Consequently,
the role for the law here is subordinate to contract. In relation to
the second role, company law might be better able than contract
to protect creditors against opportunistic behaviour by directors
or shareholders because of the more powerful enforcement
mechanisms and remedies it has at its disposal. Here, the
potential role for standardised rules is somewhat larger.
Before we turn to company law, however, it is worth pointing
out that the major contribution of statutory law to creditor
protection is not provided by company law at all but by
insolvency law (which we discuss, but in outline only, in Ch.33,
below). When the company becomes insolvent, the directors
responsible to the shareholders are replaced by an insolvency
practitioner responsible to the creditors. At this point, the law
facilitates creditors’ access to the corporate assets in order that
those assets can be best deployed so as to meet their claims.
Disclosure of information
8–6
The techniques available to the law to achieve these two goals
are various. We discuss them in this Part of the book. Perhaps
the most obvious response of the law is to require publicity for
the fact that corporate creditors’ claims are confined to the assets
of the company, since knowledge of that fact is an essential pre-
requisite for any effective self-help action on the part of
creditors. The legislature has always made it an essential
condition of the recognition of corporate personality with limited
liability that it should be accompanied by wide publicity, starting
with disclosure that the company has limited liability through
mandatory attachment of the suffix “ltd” or “plc” to the
company’s name.22 Although third parties dealing with the
company will normally have no right of resort against its
members, they are nevertheless entitled to see who those
members are, what shares they hold and who holds the beneficial
interests in those shares, if substantial, so that they can know
who is in ultimate control of the company. They are also entitled
to see who its officers are (so that they know with whom to
deal), what its constitution is (so that they know what the
company may do and how it may do it), and what its capital is
and how it has been obtained (so that they know whether to trust
it). And unless it is an unlimited company they are also entitled
to see its accounts, or at least a modified version of them—again
in order to know whether to trust it. The exemption of the
unlimited company from the obligation to file accounts with the
Registrar23 is a particularly strong illustration of the link between
publicity and limited liability.
Normally, however, third parties are neither bound nor
entitled to look behind such information as the law provides
shall be made public; in addition to the veil of incorporation,
there is something in the nature of a curtain formed by the
company’s public file in the companies registry (or with the
regulator of the stock exchange), and what goes on behind it is
concealed from the public gaze.24 But sometimes this curtain
also may be raised. For example, inspectors may be appointed to
investigate the company’s affairs,25 in which case they will have
the widest inquisitorial powers; indeed they may even be
appointed for the purpose of going behind the company’s
registers to ascertain who are its true owners.
LIFTING THE VEIL
8–7
Disclosure is a fundamental regulatory tool, but its effectiveness
depends upon how well those receiving the information can
make use of it. At the opposite end of the spectrum, the law
might tackle the limited liability principle head-on and make the
shareholders liable for the debts and other obligations of the
company in certain cases, so that the need for creditors to
monitor is substantially reduced. This may happen as a result of
judicial creativity or explicit legislative policy. Legislative
breaches of the doctrine of limited liability tend to be few and
targeted. We discuss the principal examples of this targeted
approach in the following chapter. Judicial breaches are
potentially wide-ranging, under the doctrine of “lifting the
corporate veil”. As the phrase suggests, the discussion in these
cases tends to revolve around the applicability of the doctrine of
the separate legal personality of the company rather than that of
limited liability. The point is that, if the separate legal
personality of the company is ignored, there is no scope for the
doctrine of limited liability, because nothing now stands between
the creditors and the shareholders. There are in fact very few
cases where the courts have concluded that the wording and
policy of the statute require the separate legal personality of the
company to be ignored so that personal liability can be imposed
on shareholders. However, ignoring the separate legal
personality of the company may operate the other way around,
that is, permit those holding entitlements against the shareholder
to enforce those entitlements against the company, thus
undermining the asset partitioning function of company law. As
we shall see below, more of these cases can be found. In
particular, the courts are willing to constrain shareholders’ use of
the corporate form to escape pre-existing liabilities.
Under statute or contract
8–8
When analysing the judicial decisions on lifting the veil, it is
crucial to distinguish between those situations where the court is
applying the terms of a statute (other than the legislation relating
to companies) or, less often, a contract, from those where, as a
matter of common law, the veil is lifted. The reason is that the
justification for lifting the veil in the former group of cases is to
be found in the wording of the statute or the contract. As we
have noted, it is perfectly in line with the doctrine of limited
liability that parties should contract out of it and so there is
nothing remarkable in the courts’ deciding that this has occurred
in a particular case, provided the parties’ intention has been
accurately identified. Equally, Parliament is free to decide that
the policy of a particular statute requires that the doctrine of
limited liability needs to be overruled, though it is doubtless the
case that if Parliament took this step routinely, one would begin
to have doubts about its commitment to the doctrine of limited
liability.
In looking at the statutory cases, it is also crucial to
distinguish between those cases where the courts decide that the
separate legal personality of the company should be disregarded
and those where, in consequence of this disregard, the additional
consequence follows that the shareholders are made liable for
the company’s debts or other obligations or the company for the
shareholders’ obligations. Only in these latter cases is the
doctrine of limited liability set aside. Typically, as a result of
ignoring the separate legal personality of the company, some
legal issue other than the limited liability of the shareholders is
determined in a way which is different from the way in which it
would have been determined, had the separate legal personality
been maintained. Thus, in Re FG (Films) Ltd26 a US company
had incorporated a shell company in Britain for the purposes of
claiming a declaration that a film it produced was British. The
result of the failure by the courts to uphold the separation
between the British and US companies was that the film was not
classified as British, so that the subsidiary could not claim a
subsidy which was contingent on the film being British, but the
parent’s liability for the debts of its subsidiary was simply not an
issue in the case. In some cases, in fact, ignoring the separate
legal personality of the company has been for the benefit of its
shareholders.27
One statutory provision which does bring the company’s
liability home to its controllers is that which empowers the
courts to make a “non-party costs order” against corporate
controllers in favour of a successful party in litigation. This can
be used where the controllers of the company (normally the
persons who are both the shareholders and directors of the
company) have used the company as a vehicle for litigation
without considering whether the company had an independent to
make interest in the litigation and knowing that it would be
unable to meet the costs of failure.28 Although important in
practice, in principle this statutory provision needs little
comment, since it clearly implements a policy that liability for
costs should fall on the person in whose interests the litigation is
being conducted.
In deciding whether to lift the veil in statutory cases, the
courts are guided by their understanding of the statute in
question, and so the decision arrived at is likely to vary from
statute to statute. Nevertheless, it is difficult to avoid the
conclusion that the courts are slow to find that the statutory
wording has clearly overridden the separate legal personality
doctrine. Thus, in Prest v Petrodel Resources Ltd29 the Supreme
Court refused to hold that the Matrimonial Causes Act 1973
permitted the court routinely to treat an asset owned by the
company as the asset of its sole controlling shareholder simply
because it would further the policy of that Act. The court
achieved justice in that case by the alternative reasoning that, on
the facts of the case, the property was held by the company on
trust for the sole shareholder. A general doctrine of the law of
equity thus did the work of an expansive interpretation of the
wording of a statute.
8–9
Another example of a refusal to lift the veil, to the benefit of the
employee/shareholder, is afforded by Lee v Lee’s Air Farming
Ltd.30 There Lee, for the purpose of carrying on his business of
aerial top-dressing, had formed a company of which he
beneficially owned all the shares and was sole “governing
director”. He was also appointed chief pilot. Pursuant to the
company’s statutory obligations he caused the company to insure
against liability to pay compensation under the Workmen’s
Compensation Act. He was killed in a flying accident. The Court
of Appeal of New Zealand held that his widow was not entitled
to compensation from the company (i.e. from their insurers)
since Lee could not be regarded as a “worker” within the
meaning of the Act. But the Privy Council reversed that
decision, holding that Lee and his company were distinct legal
entities which had entered into contractual relationships under
which he became, qua chief pilot, an employee of the company.
In his capacity of governing director he could, on behalf of the
company, give himself orders in his other capacity of pilot, and
hence the relationship between himself, as pilot, and the
company was that of servant and master. In effect the magic of
corporate personality enabled him to be master and servant at the
same time and to get all the advantages of both (and of limited
liability). No doubt the court was influenced by the fact that Lee
had acted in pursuance of a purported statutory obligation and
had in fact paid the necessary contributions over a period of
time, thus forgoing the opportunity of making alternative
insurance arrangements. More recent cases in Britain have
accepted that in principle a person who is a 100 per cent
shareholder in a company may enter into a valid contract of
employment with that company, even though that person also
appears, in effect, on the other side of the employer/employee
relationship, so that the control element, normally inherent in the
employment contract, is missing.31
At common law
8–10
Challenges to the doctrines of separate legal personality and
limited liability at common law tend to raise more fundamental
questions, because they are formulated on the basis of general
reasons for not applying them, such as fraud, the company being
a “sham” or “façade”, that the company is the agent of the
shareholder, that the companies are part of a “single economic
unit” or even that the “interests of justice” require this result.
However, the courts seem, if anything, more reluctant to accept
such general arguments against the doctrines than arguments
based on particular statutes or the terms of particular contracts.
The decision of the House of Lords in Salomon v A Salomon and
Co Ltd,32 where the court refused to hold the sole owner of the
company’s shares liable for its debts, has stood the test of time.
The leading modern case is Adams v Cape Industries Plc.33 That
case raised the issues in a sharp fashion. It concerned liability
within a group of companies and the purpose of the claim was to
circumvent the separate legal personality of the subsidiary in
order to make the parent liable for the obligations of the
subsidiary towards involuntary tort victims. Thus, the case
encapsulated two features—internal group liability and
involuntary creditors—where limited liability is most
questionable. The facts of the case were somewhat complicated
but for present purposes it suffices to say that what the Court had
ultimately to determine was whether judgments obtained in the
US against Cape, an English registered company whose business
was mining asbestos in South Africa and marketing it
worldwide, would be recognised and enforced by the English
courts. In the absence of submission to the foreign jurisdiction
on the part of Cape, this depended on whether Cape could be
said to have been “present” in the US. On the facts, the answer
to that question turned on whether Cape could be said to be
present in the US through its wholly owned subsidiaries or
through a company (CPC) with which it had close business
links. The court rejected all the arguments by which it was
sought to make Cape liable.34
The “single economic unit” argument
8–11
The first of these, described as the “single economic unit
argument”, proceeded as follows: Admittedly there is no general
principle that all companies in a group of companies are to be
regarded as one; on the contrary, the fundamental principle is
unquestionably that “each company in a group of companies is a
separate legal entity possessed of separate rights and
liabilities”.35 Nevertheless, it was argued that, where the group
companies are operated as a single unit for business purposes,
the court will ignore the distinction between them, treating them
as one. For this proposition a number of authorities were cited,
but the court distinguished them all as turning on the
interpretation of particular statutory or contractual provisions.36
After reviewing these authorities the Court in Cape expressed
some sympathy with the claimants’ submissions and agreed that:
“To the layman at least the distinction between the case where a company trades
itself in a foreign country and the case where it trades in a foreign country through a
subsidiary, whose activities it has power to control, may seem a slender one.”37
It seems, therefore, that in aid of interpretation (of statute or

contract) the court may have regard to the economic realities in
relation to the companies concerned. But that now seems to be
the extent to which the “single economic unit” argument can
succeed.
Façade or sham
8–12
In Cape the court accepted that “there is one well-recognised
exception to the rule prohibiting the piercing of the ‘corporate
veil’”.38 This exception today is generally expressed (and was in
Cape) as permitting disregard of the company when the
corporate structure is a “mere façade concealing the true
facts”—“façade”39 or “sham” having replaced an assortment of
epithets40 which judges have employed in earlier cases. The
difficulty is to know what precisely may make a company a
“mere façade”.
In general, the court felt that it was “left with rather sparse
guidance as to the principles which should guide the court in
determining whether or not the arrangements of a corporate
group involve a façade…” but, unfortunately, it declined to
“attempt a comprehensive definition of those principles”.41 It
did, however, decide that one of Cape’s wholly owned
subsidiaries (AMC incorporated in Liechtenstein) was a façade
in the relevant sense. Scott J had found as a fact that
arrangements made in 1979 regarding AMC and other
companies concerned in the marketing of Cape’s asbestos “were
part of one composite arrangement designed to enable Cape
asbestos to continue to be sold into the United States while
reducing, if not eliminating, the appearance of any involvement
therein of Cape or its subsidiaries”.42 What seems to have been
regarded as decisive was the fact that AMC was not only a
wholly owned subsidiary of Cape but also no more than a
corporate name which Cape or its subsidiaries used on
invoices.43 However, the implications of that were not pursued
because all the court was concerned with was whether Cape
could be regarded as present in the US and “on the judge’s
undisputed findings AMC was not in reality carrying on any
business in the United States”,44 and therefore could not cause
Cape to be regarded as present there. Presumably, however,
those who, as a result of the invoices, thought they were dealing
with AMC would, if AMC failed to perform the contract, have
been able to sue Cape.
What mattered in relation to establishing that Cape was
present in the US was whether another company, CPC,
incorporated and carrying on business in the US, was a façade.
Despite the fact that CPC was a party to the same arrangement as
AMC and that it probably had been incorporated at Cape’s
expense, that did not in itself make it a mere façade. On the facts
the court was satisfied that it was an independent corporation,
wholly owned by its chief executive and carrying on its own
business in the States and not the business of Cape or its
subsidiaries. Moreover the court declared45 that it did not accept
that:
“as a matter of law the court is entitled to lift the corporate veil as against a
defendant company which is the member of a corporate group, merely because the
corporate structure has been used so as to ensure that the legal liability (if any) in
respect of particular future activities of the group (and correspondingly the risk of
enforcement of that liability) will fall on another member of the group rather than
the defendant company. Whether or not this is desirable, the right to use a corporate
structure in this manner is inherent in our corporate law.”46
The agency and trust arguments

8–13
A company having power to act as an agent (most companies)
may do so as agent for its parent company or indeed for all or
any of its individual members if it or they authorise it to do so. If
so, the parent company or the members will be bound by the acts
of its agent so long as those acts are within the actual or apparent
scope of the authority.47 But there is no presumption of any such
agency relationship between company and even a controlling
shareholder and, in the absence of an express agreement between
the parties,48 it will be very difficult to establish one. In Cape the
attempt to do so failed.49 While it was clear that CPC rendered
services to Cape and in some cases acted as its agent in relation
to particular transactions, that did not suffice to satisfy the
conditions which the Court had held to be necessary if Cape was
to be regarded as “present” in the US. The same analysis can be
applied to the argument that a company holds its assets on trust
for its shareholders. This is not the normal case, even if the
shares are held by a single shareholder, but on the facts of a
particular case a trust may be found.50
The interests of justice
8–14
Although the interests of justice may provide the policy impetus
for creating exceptions to the doctrines of separate legal
personality and limited liability, as an exception in itself it
suffers from the defect of being inherently vague and providing
to neither courts nor those engaged in business any clear
guidance as to when the normal company law rules should be
displaced. Consequently, it is difficult to find cases in which “the
interests of justice” have represented more than simply a way of
referring to the grounds identified above in which the veil of
incorporation has been pierced.51
Impropriety
8–15
In a number of recent cases the courts have considered the
principle that the corporate veil can be set aside on the grounds
that the company has been used in order to avoid the impact of a
legal obligation or an order of the court. The impact of ignoring
the separate legal personality of the company in such cases is
usually to allow the holder of a legal entitlement against a
shareholder to enforce it against the company, thus cutting
against the asset partitioning which separate legal personality
and limited liability together bring about.52 In Prest v Petrodel
Resources Ltd53 Lord Sumption engaged in an heroic effort to
identify the situations where this would be justified. On his
approach, ignoring the separate personality of the company
would be justified only where the corporate form had been
adopted in order to evade an existing legal obligation. In that
case the argument failed because the companies had been
established and had carried on business long before the legal
obligation in question had come into being.
He put forward as examples of his principle the decisions in
Gilford Motor Co Ltd v Horn54 and Jones v Lipman.55 In the
former a director of a company sought to avoid a personal post-
employment competition restraint by setting up the rival
business through a company which he controlled, rather than
carrying it on directly. The important point about the decision
was that the court extended the injunction to the company as
well as to Horne himself. Again, in Jones v Lipman a defendant
sought to avoid a decree of specific performance against himself
by conveying the land subject to the order to a company he
owned. The order was enforced against the company. In both
cases, however, the result could be explained without recourse to
the doctrine of lifting the veil, on the basis that the knowledge of
the sole shareholder was to be imputed to the company. By
contrast, ignoring the separate personality of the company in
order to create a liability on the shareholder which would not
otherwise exist was impermissible. So, in the Supreme Court’s
slightly earlier decision, VTB Capital Plc v Nutritek
International Corp,56 the court refused to ignore the legal
personality of the company where the purpose of so doing was to
make the controlling shareholders liable on a contract which the
company had entered into. To do so would be to create a liability
on the shareholders which had not previously existed rather than
to ensure that the shareholders could not avoid an existing
liability by use of the corporate form.
8–16
Lord Sumption distinguished this “evasion” principle from what
he identified as the “concealment” principle. Combatting
concealment did not involve ignoring the separate legal
personality of the company. Rather, “the interposition of a
company or perhaps several companies so as to conceal the
identity of the real actors will not deter the courts from
identifying them, assuming that their identity is legally relevant.
In these cases the court is not disregarding the ‘façade’, but only
looking behind it to discover the facts which the corporate
structure is concealing”. An example was Gencor ACP Ltd v
Dalby,57 where a director had diverted money in breach of
fiduciary duty to a company controlled by him which received it
as his nominee. The order against the director could be upheld
on the concealment principle and the order against the company
on the grounds that the shareholder’s knowledge about the
tainted source of the funds was to be attributed to it.
Impropriety, thus, has a very narrow meaning: adopting the
corporate form deliberately to avoid a liability which either has
arisen or is imminent. It does not embrace designing the
corporate structures so as to minimise the impact of future
liabilities on the firm’s business. After all, in Cape itself the
company was aware of the risk of negligence liability which was
inherent in its activities and took steps to quarantine the impact
of such liability within certain of the group companies. The court
took the view that, far from being improper, this was an entirely
legitimate use of the group corporate structure.58 However, even
this limited doctrine is more than some think is appropriate. In
the VTB case counsel for the defendants argued vigorously to the
Supreme Court that the doctrine of ignoring the legal personality
of the company does not exist at all in English law. In the Prest
case the Supreme Court seem to have been convinced, in Lord
Sumption’s words, that a limited exception to the separate legal
personality doctrine “is necessary if the law is not to be disarmed
in the face of abuse”.59
CONCLUSION
8–17
The doctrine of lifting the veil plays a small role in British
company law, once one moves outside the area of particular
contracts or statutes. Even where the case for applying the
doctrine may seem strong, as in the undercapitalised one-person
company, which may or may not be part of a larger corporate
group, the courts are unlikely to do so. As Staughton LJ
remarked in Atlas Maritime Co SA v Avalon Maritime Ltd, The
Coral Rose60:
“The creation or purchase of a subsidiary company with minimal liability, which
will operate with the parent’s funds and on the parent’s directions but not expose
the parent to liability, may not seem to some the most honest way of trading. But it
is extremely common in the international shipping industry and perhaps elsewhere.
To hold that it creates an agency relationship between the subsidiary and the parent
would be revolutionary doctrine.”
This is in contrast to the law in the US where the veil is lifted

more readily.61 However, even in the US it seems the courts have
never lifted the veil so as to remove limited liability in the case
of a public company and will not do so as a matter of routine in
private companies.62 Probably, the most significant addition to
the grounds for lifting the veil which US law adds to the
categories recognised by British law is that of inadequate
capitalisation. As we shall see in the next chapter, British law
has approached that problem through the statutory doctrine of
wrongful trading rather than through lifting the veil. Indeed, at a
more general level, the approach of British law to regulation of
the abuse of limited liability is a combination of facilitating self-
help and statutory constraints. The common law doctrine of
piercing the veil is a technique available to the courts but it has
not been developed in such a way as to be the central legal
strategy for addressing abuses of limited liability. Instead, the
burden of action has fallen on the legislature, which has
developed certain targeted rules to impose liability on
shareholders or directors of companies in the case of abuse of
limited liability, which we turn to in the next chapter.
1
Section 3 of the 2006 Act gives the shareholders/incorporators the option of limiting
shareholders’ liability in two ways via provisions in the articles: either to the amount, if
any, unpaid on the shares (company limited by shares) or to the (usually nominal)
amount the members agree to contribute in a winding up (company limited by guarantee
—a much less popular choice). Section 3 is reinforced by the Insolvency Act 1986 s.74.
In the absence of choice, the liability of the shareholders is unlimited.
2
Insolvency Act 1986 s.107.
3
For an account, see the sixth edition of this book at pp.40–46.
4
The distinction between equity and debt is discussed further in para.31–2, below.
5
“An Economic Analysis of Limited Liability” (1980) 30 University of Toronto L.J.
117.
6Though the current rule of insolvency law, if limited liability does not apply, is joint
and several liability: IA 1986 s.74(1).
7
See above, Ch.1.
8 Salomon v Salomon & Co Ltd [1897] A.C. 22; above, para.2–1.
9 In (1944) 7 M.L.R. 54, Otto Kahn-Freund described it as “calamitous”.
10
This case has been put in its most attractive form by A. Hicks, R. Drury and J.
Smallcombe, Alternative Company Structures for the Small Business, ACCA Research
Report 42 (1995). On minimum capital requirements see Ch.11, below.
11 Strategic Framework, Ch.5.2.
12
Final Report I, Ch.2.
13
14 See further below at paras 8–11 and 9–21.
15 It is possible to conceive of the law imposing liability upon a lender, beyond loss of
the amount of the loan or deposit, if the borrower becomes insolvent, but since the
lender has limited access to the up-side benefit of corporate success, such a rule would
be likely to choke off the supply of debt to companies. Debt investors are usually
seeking relatively modest returns for relatively modest risk. However, “lender liability”
is imposed if the lender involves itself in the running of the company to the extent of
becoming a “shadow” director (see para.9–7), but this is precisely because the lender has
moved out of that limited role and involved itself in the central management of the
company.
16
H. Hansmann and R. Kraakman, “The Essential Role of Organizational Law” (2000)
110 Yale L.J. 387; H. Hansmann, R. Kraakman and R. Squire, “Law and the Rise of the
Firm” (2005–6) 119 Harvard L.R. 1335.
18 cf. the facts of Regal (Hastings) Ltd v Gulliver [1942] 1 All E.R. 378 HL, one of the
leading cases on directors’ fiduciary duties, but where the underlying problem arose out
of the third party’s request for a personal guarantee which the directors were unwilling
to give.
19 See Re Polly Peck International Plc (In Administration) [1996] 2 All E.R. 433
(involving a single purpose finance vehicle which had no substantial assets of its own).
20
Re Augustus Barnett & Son Ltd [1986] B.C.L.C. 170; Kleinwort Benson Ltd v
Malaysia Mining Corp Bhd [1989] 1 W.L.R. 379 CA (letter of comfort not intended in
this case to create legal relations).
21
It has been suggested that limited liability should not apply to involuntary creditors:
H. Hansmann and R. Kraakman, “Towards Unlimited Shareholder Liability for
Corporate Torts” (1991) 100 Yale L.J. 1879.
22
Which we discussed above at para.4–14.
23
2006 Act s.448. On the general disclosure requirements see in particular paras 2-39 et
seq., 4-5, 11-11 and 26-9 et seq., and Ch.21.
24
As we saw in the previous chapter, this may sometimes benefit the third party: the
limitation of the outsider’s knowledge to what is stated in the constitution is the
foundation of the rule in Royal British Bank v Turquand (1856) 6 E. & B. 327 Exch.Ch.
25
See para.18–11, below. However, routine requirements for the disclosure of beneficial
ownership make investigations on this ground less common today. See paras 2-42 and
26-14.
26 Re FG (Films) Ltd [1953] 1 W.L.R. 483.
27
Trebanog Working Men’s Club and Institute Ltd v MacDonald [1940] K.B. 576
(incorporated club treated in the same way as an unincorporated one for the purposes of
an exemption from the liquor licence rules); DHN Food Distributors Ltd v Tower
Hamlets LBC [1976] 1 W.L.R. 852 CA (ignoring separate legal entity of subsidiary
permitted parent to claim compensation under the planning legislation); Smith Stone &
Knight Ltd v Birmingham Corp [1939] 4 All E.R. 116 (ditto); but cf. Woolfson v
Strathclyde Regional Council, 1978 S.L.T. 159 HL (DHN not followed in a case on
similar facts).
28Senior Courts Act 1981 s.51(3) and CPR 48.2(1). For recent examples see Systemcare
(UK) Ltd v Services Design Technology Ltd [2012] 1 B.C.L.C. 14 CA; Raleigh UK Ltd v
Mail Order Cycles Ltd [2011] B.C.C. 508; Europeans Ltd v HMRC [2011] B.C.C. 527.
29 Prest v Petrodel Resources Ltd [2013] UKSC 34.
30
Lee v Lee’s Air Farming Ltd [1961] A.C. 12 PC.
31Neufeld v Secretary of State for Business, Enterprise and Regulatory Reform [2009] 2
B.C.L.C. 273 CA.
32 Salomon v A Salomon and Co Ltd [1897] A.C. 22; see para.2–1, above.
33
Adams v Cape Industries Plc [1990] Ch. 433, Scott J and CA (pet. dis. [1990] 2
W.L.R. 786 HL).
34 Note, however, the alternative legal approach to the problem, by-passing the separate
legal personality issue by postulating a duty owed in tort by the parent company directly
to the asbestos victims (the employees of the subsidiary): Connelly v RTZ Corp Plc
[1998] A.C. 854 HL; Lubbe v Cape Plc [2000] 1 W.L.R. 1545 HL; Chandler v Cape Plc
[2012] EWCA Civ 525. Doctrinally, this approach leaves the separate legal personality
and limited liability concepts intact within groups but in fact imposes liability on the
parent towards tort victims of subsidiaries. Whether a duty of care will be imposed on
the parent turns on the degree of control exercised by the parent over the relevant
activities of the subsidiary. If developed extensively, the tort doctrine could in practice
remove limited liability within groups in relation to tort victims, not necessarily a matter
of regret since limited liability is most questionable in relation to non-adjusting
creditors. However, to date the courts have been cautious: for the parent company
simply to appoint the directors of the subsidiary will not attract liability to the parent nor
will running the subsidiaries as a division of the parent, if the separate legal personalities
of the companies are respected: Thompson v The Renwick Group Plc [2014] 2 B.C.L.C
97 CA.
35
Adams v Cape Industries Plc [1990] Ch. 433 at 532; quoting Roskill LJ in The
Albazero [1977] A.C. 744 CA and HL at 807.
36
The Roberta (1937) 58 L.L.R. 159; Holdsworth & Co v Caddies [1955] 1 W.L.R 352
HL; Scottish Co-operative Wholesale Society Ltd v Meyer [1959] A.C. 324 HL (Sc.);
DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 W.L.R. 852 CA (probably
the strongest case in the tort victims’ favour, because it was strongly arguable that the
court there did not base itself on the particular statutory provision but on a more general
approach founded on the idea of single economic entity); Revlon Inc v Cripp & Lee Ltd
[1980] F.S.R. 85; and the Opinion of the Advocate General in Cases 6 and 7/73 [1974]
E.C.R. 223.
37
Adams v Cape Industries Plc [1990] Ch. 433 at 536B.
38
Adams v Cape Industries Plc [1990] Ch. 433 at 539.
39Used, clearly, in its secondary meaning (the primary one being “the face of a
building”), i.e. “an outward appearance or front, especially a deceptive one”.
40
Such as “device”, “creature”, “stratagem”, “mask”, “puppet” and even (see Re Bugle
Press [1961] Ch.270 at 288 CA) “a little hut”.
41 Adams v Cape Industries Plc [1990] Ch. 433 at 543D.
42Adams v Cape Industries Plc [1990] Ch. 433 at 478F; approved by the Court of
Appeal at 541G–H, 544A and B.
43 Adams v Cape Industries Plc [1990] Ch. 433 at 479E and 543E. If the motives of
those setting up the companies are dishonest, that will make it easier for the court to
conclude that the company is a sham: Kensington International Ltd v Republic of the
Congo [2006] 2 B.C.L.C. 296.
44 Adams v Cape Industries Plc [1990] Ch. 433 at 543G.
45 Adams v Cape Industries Plc [1990] Ch. 433t 544D, E.
46 Hence Cape’s wholly owned American subsidiary NAAC which, prior to its winding
up, had performed a similar role to that undertaken thereafter by CPC had equally to be
regarded as a separate entity: see at 538.
47 See Ch.7, above.
48 As in Southern v Watson [1940] 3 All E.R. 439 CA, where, on the conversion of a
business into a private company, the sale agreement provided that the company should
fulfil existing contracts of the business as agents of the sellers, and in Rainham Chemical
Works v Belvedere [1921] 2 A.C. 465 HL where the agreement provided that the newly
formed company should take possession of land as agent of its vendor promoters.
49Both in relation to CPC (at 547–549) and to its predecessor, NAAC (fn.46, above)
despite the fact that it had been Cape’s wholly owned subsidiary (at 545–547).
50 As in Prest v Petrodel Resources Ltd [2013] UKSC 34; para.8–8, above.
51
See the rejection of this ground in Cape at 536.
52
53
Above fn.29. See also Yukong Line Ltd of Korea v Rendsburg Investments Corp of
Liberia (No.2) [1998] 1 W.L.R. 294. The majority seem to have agreed with Lord
Sumption’s analysis, but Lords Mance and Walker declined to commit themselves to
such a rigid view, thus preserving the potential for a wider role for the doctrine in the
future.
54
Gilford Motor Co Ltd v Horn [1933] Ch. 935 CA.
55
Jones v Lipman [1962] 1 W.L.R. 832.
56
VTB Capital Plc v Nutritek International Corp [2013] UKSC 5.
57 Gencor ACP Ltd v Dalby [2000] 2 B.C.L.C. 734.
58
59 Prest v Petrodel Resources Ltd [2013] UKSC 34 at [27].
60 Atlas Maritime Co SA v Avalon Maritime Ltd, The Coral Rose [1991] 4 All E.R. 769
at 779.
61See P. Blumberg, The Multinational Challenge to Corporate Law (Oxford: Oxford
University Press, 1993), especially Pt II.
62 See R. Thompson, “Piercing the Corporate Veil: An Empirical Study” (1991) 76
Cornell L.J. 1036. On these points the findings of Dr Charles Mitchell in a study of
English cases do not differ (“Lifting the Corporate Veil in the English Courts: an
Empirical Study” (1999) 3 C.F.I.L.R. 15). “No case was found in which the English
courts have even been asked to fix the shareholders of a public company with liability
for its obligations.” (pp.21–22) On the various factors influencing veil lifting in private
companies, see p.22 (Table 4), but in no case was it routine.
CHAPTER 9
PERSONAL LIABILITY FOR ABUSES OF LIMITED
LIABILITY
Premature Trading 9–3

Fraudulent and Wrongful Trading 9–4
Civil liability for fraudulent trading 9–5
Wrongful trading 9–6
Common Law Duties in Relation to Creditors 9–11
Phoenix Companies and the Abuse of Company Names 9–16
Exceptions 9–19
Misdescription of the Company and Trading Disclosures 9–20
Company Groups 9–21
Limited liability 9–21
Ignoring separate legal personality 9–24
Conclusion 9–25
9–1
From the beginnings of modern company law in the middle of
the nineteenth century, the legislature has been ready, in a small
number of cases, to remove the shield of limited liability and
impose responsibility for the company’s obligations on the
shareholders personally. More often it imposed the liability on
the directors of the company. Some of the examples which
survived into modern law were surprising, because the sanction
of personal liability seemed disproportionate to the importance
of the rules which the sanctions upheld. A good example was the
imposition of personal liability on the remaining shareholder
where the number of members was reduced below two, a
provision not repeated in the 2006 Act.1 This rule was the final
remnant of a legislative policy which attached significance to the
number of members of a company as a protection for those who
dealt with it. The Limited Liability Act 1855 applied only to
companies with at least 25 members, and as late as 1980 public
companies had to have at least seven members. But this policy
was effectively undermined by the decision in Salomon’s case2
in 1897, allowing nominee shareholders (e.g. those holding
shares as bare trustees for another person) to count towards the
required statutory number.
9–2
In fact, in modern law it is extremely difficult to find examples
of the companies legislation imposing personal liability on
shareholders in order to combat opportunistic behaviour
encouraged by the doctrine of limited liability. The target of the
anti-abuse legislation is rather those in charge of the company’s
central management, i.e. typically its directors. Directors,
responsive to shareholder interests, are much more likely to be in
a position to initiate such action on the company’s part than the
shareholders, because of the concentration of power and
authority in the board.3 Shareholders are not excluded from such
liability if they involve themselves in the central management of
the company (for example, as “shadow” directors) or in the
conduct which the law wishes to prohibit. But they are not liable
personally simply because they are shareholders.
PREMATURE TRADING
9–3
A public limited company, newly incorporated as such, must not
“do business or exercise any borrowing powers” until it has
obtained, from the Registrar of Companies, a certificate that it
has complied with the provisions of the Act relating to the
raising of the prescribed minimum share capital or until it has re-
registered as a private company.4 The link between this
provision and the doctrine of limited liability is that requiring a
company to hold assets to a certain value when it is formed is
arguably a protection for those whose claims are confined to the
assets of the company, though it is highly doubtful whether the
actual minimum capital rule found in the Companies Act
operates to confer any such protection.5 If the company enters
into any transaction in contravention of this provision, not only
are the company and its officers in default liable to fines,6 but if
the company fails to comply with its obligations in relation to
the transaction within 21 days of being called upon to do so, the
directors of the company are jointly and severally liable to
indemnify the counterparty in respect of any loss or damage
suffered by reason of the company’s failure to comply.7
Whether this is a true example of lifting the veil is
questionable; technically it does not make the directors liable for
the company’s debts but rather requires the directors to
indemnify creditors for any loss suffered as a result of the
company’s default in complying with the section. But the effect
is much the same. The section, however, is unlikely to be
invoked often since it is unusual for companies to be formed
initially as public ones. Usually, companies are formed as
private companies and later convert through re-registration to
public status. If this way of proceeding is adopted, however,
obtaining the required minimum share capital is made a pre-
condition to re-registration8 and so trading as a public company
without the authorised minimum is avoided in that way.
FRAUDULENT AND WRONGFUL TRADING
9–4
Of far greater practical importance are the provisions on
fraudulent trading. These provisions recognise that the separate
entity and limited liability doctrines generate an incentive for
company controllers to defraud creditors, knowing that the
creditors’ claims are limited to the company’s assets. The
fraudulent trading provisions aim to redress the balance. They
come in both a criminal9 and a civil liability form. Section 993
(constituting the single-section Pt 29 of the Act) creates a
specific, but widely defined, criminal offence of carrying on the
business of a company with intent to defraud the creditors10 of
the company or of any other person or for any other fraudulent
purpose. Every person knowingly party to the carrying on of the
business in this manner commits a criminal offence. So, here the
personal scope of the criminal liability is defined by reference to
being party to the fraud. Shareholders may be included in this
class but are not liable simply as shareholders. The civil liability
is imposed by ss.213 and 246ZA of the Insolvency Act 1986.11
These sections are analysed further below but, in essence, they
operate on the basis of the same test for liability as does the
criminal provision.
Abuse in the shape of hiding behind limited liability to effect
fraud is easy to identify as something the law should address, as
the long-standing provisions against fraudulent trading indicate.
More significant are the provisions on wrongful trading, added
initially in the 1980s. These seek to address the risk, when the
company is in the vicinity of insolvency, but has not yet entered
a formal insolvency procedure, that the directors will take
excessive risks with the business of the company, in the hope of
escaping from its financial troubles, but knowing that, if the
gamble is unsuccessful, limited liability will place most or all of
the additional losses on the creditors. If such action is taken
deliberately, it will probably fall within the fraudulent trading
provisions. The wrongful trading provisions of the Insolvency
Act give directors, contemplating this strategy—but without
fraud or at least provable fraud—an incentive to accord greater
consideration to the interests of the creditors. The creditors are
highly exposed to the downside risk of the strategy whilst the
benefits of it, if they occur, will accrue overwhelmingly to the
shareholders. This can been seen most clearly if, at the time the
strategy is adopted, the company’s assets are just enough to meet
its liabilities, but no more, so that, if the company then stopped
trading and were wound up, the creditors would be repaid but the
shareholders would receive nothing. If the directors continue
trading, the shareholders will be no worse off, but have a chance
(perhaps a small one) of being much better off, whilst the
creditors will be no better off but have a chance (perhaps a large
one) of being much worse off. Whilst continuing to trade is not
necessarily against the interests of the creditors, doing so in a
risky way in likely to be, whilst potentially benefitting
shareholders. The wrongful trading provisions attempt to re-set
the incentives of the directors by making them personally liable
for the increased liabilities of the company if the gamble fails
and the court adjudges the directors to have acted negligently.
Again, it is to be noted that the persons potentially made liable
are the controllers of the company (directors and shadow
directors) rather than its shareholders. The latter will fall within
the scope of the provisions only if they fall within the category
of a “shadow director” (see below). However, it is directors
responsive to the interests of the shareholders who are most
likely to fall foul of s.214.
The importance attached by the legislature to the provisions
on fraudulent and wrongful was demonstrated by their reform in
2015. Previously, they had applied only when the company was
in insolvent liquidation but they were extended to companies in
administration,12 a significant change since administration often
precedes, or even eliminates the need for, liquidation.13 The 2015
reforms also made it easier for liquidators and administrators to
obtain financing for litigation to enforce these liabilities, as is
discussed below.
Civil liability for fraudulent trading
9–5
The Insolvency Act mimics for the purposes of civil liability the
criteria laid down in s.993 of the Companies Act for criminal
liability, i.e. that the business of a company was carried on with
intent to defraud the creditors of the company or of any other
person or for any other fraudulent purpose. However, ss.213 and
246ZA require in addition that the company be in the course of
administration or winding up (which the criminal section does
not) before the liability can be enforced.14 Assuming this to be
the case, the court, on the application of the administrator or
liquidator, may declare the persons who were knowingly parties
to carrying on15 the business of the company in this way “liable
to make such contributions (if any) to the company’s assets as
the court thinks proper.”16 Since the company in winding up will
be in need of such a contribution only where its assets are
insufficient to meet its liabilities, this is in effect an indirect way
of making the persons in question liable for the company’s debts
(to at least some degree).17 As with criminal liability, the persons
liable are those party to carrying on the business of the company
in the fraudulent way; they need have no other connection with
the company, i.e. they do not need to be directors of or
shareholders in the company—though they often will be.18 It is
enough to establish liability that only one creditor was defrauded
and in a single transaction.19 However, in the case of a one-off
fraud there is a risk that the court will not be able to conclude
that the business of the company was carried on for fraudulent
purposes, in which case liability will not arise.20
Given the wide personal scope of the sections, banks and
parent companies (third parties) have at times felt inhibited from
providing finance to ailing companies, fearing that they may
thereby fall foul of these provisions as persons knowingly party
to the fraud. It is sometimes said that their fears are unfounded
so long as they play no active role in running the company with
fraudulent intent.21 However, the extent of the exposure of a
third party company to liability under the sections will depend in
part on what rule of attribution is used to determine the extent of
the knowledge the third party company possesses of the
activities within the fraudulently run company. In Re Bank of
Credit and Commerce International SA (No.15)22 the Court of
Appeal rejected the proposition that only the knowledge of the
board of the third party was to be attributed to it. Here, the court
attributed to the defendant company the knowledge of a senior
manager who had been given authority by the board to set the
terms of transactions with the company whose business was
being carried on fraudulently and to which fraud the manager
had turned a blind eye. Thus, as was already clear and as this
case illustrates, a third party can fall within the sections if it
participates, with knowledge,23 in the fraudulent activity of a
company, even though that party could not be said to have taken
a controlling role within the company.24 Overall, therefore, these
rules encourage third parties, whose dealings with a company
might assist the fraudulent running of that company’s business,
to have in place internal controls designed to identify at an early
stage and to deal with situations where relevant employees of the
third party have knowledge of the fraudulent activities. In this
way the third party may hope to avoid the risk that it will be
liable to contribute under the sections.25
As to whether those conducting business are doing so
fraudulently, it has been said that what has to be shown is
“actual dishonesty involving, according to current notions of fair
trading among commercial men, real moral blame”.26 That may
be inferred if “a company continues to carry on business and to
incur debts at a time when there is, to the knowledge of the
directors, no reasonable prospect of the creditors ever receiving
payment of those debts”,27 but it cannot be inferred merely
because they ought to have realised there was no prospect of
repayment. It was this need to prove subjective moral blame that
led the Jenkins Committee in 1962 vainly to recommend the
introduction of a remedy for “reckless trading”28 and the Cork
Committee, 20 years later,29 successfully to promote it under the
name of “wrongful trading”.
Wrongful trading
9–6
Sections 214 and 246ZB empower the court to make a
declaration similar to that under ss.213 and 246ZA where the
company has gone into insolvent administration or liquidation.
An insolvent is distinguished from a solvent procedure on a
balance-sheet test, i.e. were the assets of the company sufficient
to meet its liabilities and the costs of the procedure at the point
the company entered into it.30 The basis for imposing the
obligation to contribute is that the director (or shadow director)
knew, or ought to have concluded, at some point before the
administration or winding-up, that there was no reasonable
prospect that the company would avoid going into insolvent
administration or liquidation.31 A declaration will then be made
unless the court is satisfied that the person concerned thereafter
took every step with a view to minimising the potential loss to
the company’s creditors as he ought to have taken, on the
assumption that he knew there was no reasonable prospect of
avoiding insolvency.32 In judging what facts the director ought to
have known or ascertained, what conclusions the director should
have drawn and what steps should have been taken, the director
is to be assumed to be a reasonably diligent person having both
the general knowledge, skill and experience to be expected of a
person carrying out the director’s functions in relation to the
company33 and the general knowledge, skill and experience that
the director in fact has.34 This formulation heavily influenced the
general duty of care now imposed on directors by s.174 of the
Companies Act 200635. The wrongful trading provisions, s.174
of the 2006 Act and the director disqualification provisions
(discussed in the following chapter) constitute the three main
areas where sanctions are imposed on directors for negligent
discharge of their duties. In the case of ss.214/246ZB, however,
the beneficiaries of the duty to take care are the creditors rather
than the shareholders, whom s.174 of the 2006 Act protects.
Section 214 poses two questions which have to be answered,
both on an objective basis. Should the director have realised
there was no reasonable prospect of the company avoiding
insolvent liquidation and, once that stage has been reached, did
the director take all the steps he or she ought to have taken to
minimise the loss to the company’s creditors, especially, no
doubt, by seeking to have the company cease trading? Both these
judgments will depend heavily on the facts of particular cases:
what sort of company was involved, what were the functions
assigned to or discharged by the director in question, what
outside advice was taken and what was its content?36
Shadow directors
9–7
Section 214 applies to shadow directors as well as to directors,
i.e. a person, other than a professional adviser, in accordance
with whose directions or instructions the directors of a company
are accustomed to act.37 This considerably widens the class of
persons against whom a declaration can be made, though not as
widely as under s.213 which brings in any person who is party to
the fraudulent trading (see above). The shadow director
definition catches only the person who influences at least a
certain category of board decisions on a continuing basis.38 The
two potential defendants of greatest interest are, once again,
banks and parent companies. As far as the former are concerned,
the courts have so far taken a cautious line, initially on the
grounds that the definition of a shadow director required that the
board cede its management autonomy to the alleged shadow
director. This was not regarded as occurring as a result of the
bank taking steps to protect itself, provided the company
retained the power to decide whether to accept the restrictions
put forward by the bank, even though the company might be
thought to have no other practicable alternative.39
In relation to parent companies, such a degree of cession of
autonomy by the subsidiary may be more easily found, but much
will still depend upon how exactly intra-group relationships are
established. The degree of control exercised by parent
companies may vary from detailed day-to-day control to virtual
independence for the subsidiary’s board, with many variations in
between. It would seem that the establishment of business
guidelines within which the subsidiary has to operate would not
make the parent inevitably a shadow director of the subsidiary.40
However, the Court of Appeal has rejected the proposition that it
is necessary for the board to cast itself in a subservient role or
surrender its discretion in order for the alleged shadow director
to be found to be such, thus casting doubt on the “cessation of
autonomy” test and potentially broadening the scope of shadow
director liability.41 It is important to note that the shadow
director definition in s.251 of the Insolvency Act does not
exclude parent companies, in contrast to the exclusion in s.251
of the Companies Act which provides that a parent company is
not to be considered a shadow director “by reason only that the
directors of the subsidiary are accustomed to act in accordance
with [the parent’s] directions or instructions”. It would thus seem
that, so long as the subsidiary is a going concern, the parent
company may impose a common policy on the group companies
without being in danger of infringing their general duties in
relation to the subsidiary. Once insolvency threatens the
subsidiary, however, the interests of its creditors take priority
over the interests of the parent and the group policy.42 When
ss.214/246ZB are triggered, they will apply to the actions of the
boards of both the subsidiary and the parent company (provided
the latter falls within the definition of a shadow director).
The declaration
9–8
Section 215 contains certain procedural provisions common to
both fraudulent and wrongful trading. Those provisions are to
have effect notwithstanding that the person concerned may be
criminally liable.43 The court may direct that the liability of any
person against whom the declaration is made shall be a charge
on any debt due from the company to that person or on any
mortgage or charge in that person’s favour on assets of the
company. This enables the company to set off what it owes to
the director against what the director is declared liable to
contribute to the company, which may prove valuable in the
bankruptcy of the director.44 In addition, s.21545 provides that the
court may direct that the whole or any part of a debt, and interest
thereon, owed by the company to a person against whom a
declaration is made, shall be postponed to all other debts, and
interest thereon, owed by the company. Thus, even if, for
example, the court makes only a small contribution order, which
the director is able to meet, the director may suffer a further
financial loss by having his or her debts due from the company
subordinated to those of the company’s other creditors, a
potentially important provision since the company ex hypothesi
is insolvent.
The central question, however, is the amount of the
contribution, a matter with which s.215 does not deal. The
fraudulent and wrongful trading provisions simply say that the
amount of the contribution shall be “as the court thinks
proper”.46 It is now established that contribution orders in
relation to both wrongful and fraudulent trading are intended to
be compensatory in relation to the company.47 The outer
boundaries of the contribution are thus set by the amount by
which the company’s assets have been depleted by the director’s
conduct. Thus, the trading provisions will not replace the
Insolvency Act rules on preferences, which deal with the
situation where the company improperly pays one creditor ahead
of another. As far as the company is concerned, a preference is
balance-sheet neutral: assets are certainly paid out to the
preferred creditor but the company’s liabilities are reduced to the
same extent, so that overall the company is no worse off.
Preference rules are apt to deal with the improper distribution of
assets among creditors; trading rules with situations where the
creditors as a class are disadvantaged by the directors’ actions.
Within the parameter of the overall loss to the company, the
court has a discretion to fix the amount to be paid as it thinks
proper. The assessment is to be made against each defendant
individually rather than on some basis of collective
responsibility.48 Despite this method of calculating the upper
limit on the contribution, the contribution from the directors is to
the assets of the company generally and not for the particular
benefit of those who became creditors of the company during the
period of wrongful or fraudulent trading. Consequently, pre-
wrongful trading creditors may actually benefit from the
wrongful trading,49 a somewhat ironic result but one driven,
presumably, by a desire for simplicity.
Impact of the wrongful trading provisions
9–9
The wrongful trading provisions are capable of playing a central
role in re-orienting the duties of directors as the company’s
insolvency becomes overwhelmingly likely. However, the
drafters of the wrongful trading provisions were careful not to
specify the precise action directors are required to take to meet
its requirements. Instead, the provisions lay down a standard to
which the director must conform in order to avoid liability, i.e.
“to take every step with a view to minimising the potential loss
to the company’s creditors as (assuming him to have known that
there was no reasonable prospect that the company would avoid
going into insolvent liquidation or entering insolvent
administration) he ought to have taken”.50 A central question is
whether the section requires the directors, in all cases where
there is no reasonable prospect of avoiding insolvent liquidation,
to cause the company to cease trading and put the company into
an insolvency procedure. Certainly, one of the commonest forms
of wrongful trading is to keep the company’s business on foot
even after the accounts or other management information have
clearly revealed that the company is in a chronically loss-making
position.51 However, there are good reasons for not requiring this
response across the board. In the interests of both creditors
(higher recovery of their debts) and of shareholders and other
stakeholders (such as employees) it may well be better if the
company can be turned around or its business disposed of in
some other way, which an immediate cessation of trading might
jeopardise.
The courts can adjust the section to the needs of the “rescue
culture” either by postponing the point at which they conclude
the directors ought to have realised the company had no
reasonable prospect of avoiding insolvency or by taking a broad
view of the appropriate actions of the directors once that point is
reached. An example of the first approach can be seen in Re The
Rod Gunner Organisation Ltd,52 where the court refused to find
“no reasonable prospect” for a period of six months after the
company became unable to meet its debts as they fell due, on the
grounds that the directors reasonably thought an outside investor
was going to come in with substantial funding (though that
analysis no longer held once it became clear that the investor
would not live up to the directors’ expectations of him).
Similarly, in Re Continental Assurance Co of London Plc
(No.4),53 where a substantial insurance company had suffered
unexpected losses, the court refused to find “no reasonable
prospect” during a period of some six months in which the
directors commissioned a report as to the company’s solvency
and decided to continue trading on the basis of the report
received, until it later became clear that the company was in fact
insolvent. Park J was very aware of the dangers of judging the
directors’ conduct on the basis of hindsight, and he remarked
pithily in relation to the general issue that “ceasing to trade and
liquidating too soon can be stigmatised as the cowards’ way
out”. Once the point of “no reasonable prospect” is reached,
however, the section appears to shift the risk of continued
trading onto the directors. If the continued trading reduces the
company’s net deficiency, no contribution will be required of
them. But in the opposite case they will be exposed.54
9–10
However, any analysis of the impact of the wrongful trading
provisions also requires an assessment of the effectiveness of its
enforcement. In contrast to litigation under the disqualification
provisions discussed in the next chapter, where the public purse
pays for the cases and there has been a high level of activity,
litigation about wrongful trading seems to have been sparse and
certainly there are few reported cases. As we have seen, the Act
places the initiation of litigation in the hands of the liquidator or
administrator (“office holders”), who does not have access to
any public funds to support any litigation it is proposed to bring.
Assuming the insolvent company does have some realisable
assets, the office holder may contemplate using those to fund the
litigation in the hope of swelling the ultimate amount available
for distribution to the creditors. However, even if the office
holder can secure solicitors who will take the case on a
conditional fee basis—not always possible—the litigation is
likely to involve some costs (for example, for the insurance to
meet the other side’s costs if the litigation is unsuccessful), and
so the office holder is likely to be unwilling to risk the
company’s already inadequate assets on litigation unless there is
a very strong chance of success.55 The office holder might
conceivably seek funding for the litigation from a floating
charge holder, but there is little incentive for such a creditor to
provide funding, for the proceeds of fraudulent and wrongful
trading claims go to benefit the unsecured creditors, not the
holders of a floating charge.56
The obvious step for the office holder to take, faced with this
uncertainty, is either to sell the claim to a third party or to obtain
funding for the claim by assigning some part of the fruits of the
litigation to a third party. A third party whose business consists
of buying or funding such claims is in a position to take a more
adventurous view of which claims may be litigated, because it
spreads its risks across a number of such claims, unlike the
office holder who has only “one shot” on behalf of the unsecured
creditors of any particular company. However, until the reforms
of 2015 the office holder could not sell the wrongful trading
claim under the general power to dispose of the company’s
assets, because the right to claim under the section is vested in
the office holder personally, not in the company.57 The 2015
reforms sensibly cut through this difficulty by giving the office
holder an express statutory right to assign a wrongful or
fraudulent trading claim (or the proceeds of such an action).58
However, the rule that the proceeds of such an action are not the
property of the company is retained.59 This means that the
proceeds are not swept up by the holders of any floating charge
the company has issued, but rather remain available for the
benefit of the unsecured creditors.
COMMON LAW DUTIES IN RELATION TO CREDITORS
9–11
The wrongful trading reforms of the mid-1980s, discussed in the
previous section, create a statutory duty of care on the part of
directors towards creditors at the point when insolvency seems
unavoidable. Despite this statutory reform, the common law has
not entirely neglected the interests of creditors at this point in the
company’s life-cycle and we analyse that development in this
section. Although the statutory codification of the duties of
directors in s.172 of the Companies Act 200660 does not in terms
list creditors among those to whose interests the directors must
have regard when promoting the success of the company,
nevertheless it does recognise and preserve this common law
development. Section 172(3) provides that the duty the section
creates “has effect subject to any enactment or rule of law
requiring directors, in certain circumstances, to consider or act in
the interests of the creditors of the company”. This removes any
doubt that might otherwise have existed about whether the
wrongful trading rules had been in any way qualified or reduced
as a result of the enactment of s.172, but this provision also
preserves (“or rule of law”) the common law developments.61
9–12
Starting in Australia in the 1970s,62 the notion of a common law
duty upon directors to take account of the interests of creditors
as insolvency approaches has been widely accepted throughout
the common-law world. The principle was adopted by the Court
of Appeal in West Mercia Safetywear v Dodd.63 As with most
significant common-law developments in their relatively early
stages, there was and still remains considerable uncertainty
about the conceptual boundaries of this doctrine. There are still
uncertainties about when the duty bites, about its content, the
remedies available and, to a lesser extent, the mechanisms for
enforcing it. On the answer to these questions turns the broader
issue of what, if anything, the common law duty adds to the
statutory wrongful trading remedy.
9–13
Only the most imprecise indications have been given by the
courts as to when the duty is triggered, except that there appears
to be general acceptance that the duty can bite in advance of the
company being insolvent.64 In Brady v Brady, Nourse LJ said
that the interests of the company were really the interests of the
creditors when the company was “doubtfully solvent”,65 whilst
in Nicholson v Permakraft (NZ) Ltd66 the judge conceivably was
prepared to go a bit further by suggesting the duty was triggered
by “a course of action which would jeopardise solvency”. In any
event, while it is clear that the common law duty, like the
statutory one, may apply before the company is insolvent, it is
unclear whether the common law applies at a pre-insolvency
point which is earlier than under the statutory test of “no
reasonable prospect of avoiding insolvent liquidation or
administration”. This question is not made any easier to answer
by the fact that the statutory test itself carries a penumbra of
uncertainty (when does the reasonable prospect finally
disappear?).
9–14
Assuming the duty has been triggered, how does it require
directors to behave? There are some indications in the early
cases67 that the duty is akin to the duty of care under the statute.
It is a duty to protect the creditors from further harm rather than
a duty to promote the interests of the creditors in a more general
sense. For example, the directors of a financially troubled
company might adopt a course of action designed to advance the
interests of the shareholders, provided it did not increase the
riskiness of the creditors’ claims on the company.68 However,
the most recent cases treat the common law duty as a fiduciary
duty, by analogy with the core directors’ duty set out in
s.172(1).69 At first glance, this seems disadvantageous to
creditors since it is well established that this core duty is a
subjective one, i.e. the directors must act in what they consider
(not what a court would consider) to be the best way to further
creditor interests. By contrast, as we have seen, under the
statutory duty of care the minimum standard of care is set
objectively.70 Thus, the directors appear to have greater freedom
of action under the fiduciary approach. However, the contrast
may be more apparent than real, at least in the typical case.
These are cases where the court finds that the directors acted
without considering the creditors’ interests at all. The failure
itself may constitute a breach of duty or at least open the way for
the court to apply the objective test of whether a reasonable
director would have acted in the same way as the directors in the
instant case.71
Where directors do seek to fulfil their fiduciary duty to
creditors, there are uncertainties about what is required of them.
In some cases the interests of the creditors are described as
“paramount”, implying that creditor interests are to be the sole
concern of the directors, once the duty has been triggered.72
Other cases do not adopt this approach or even reject it,73
suggesting that directors may pursue the interests of the
shareholders as well as of the creditors once the duty is
triggered. Probably, the required action turns on the financial
condition of the company. Where the company is hopelessly
insolvent or the decision facing the directors, if taken a particular
way, will put the company into that position, only the creditors’
interests should be considered by the directors. If the company is
in financial difficulties of a less serious sort, there may be scope
for taking action to promote shareholder interests whilst still
protecting creditors.74 In this sense the creditors’ interests are
always “paramount” (they must always be protected) but,
depending on the company’s financial position, they may not
have to be the exclusive focus of directorial action.
This analysis may be particularly important when the duty is
triggered significantly in advance of insolvency, so that, whilst
the risk of future insolvency has increased substantially to the
detriment of the creditors, the shareholders still have some
equity in the business. Where the directors seek to keep the
company going rather than, as is typical in the decided cases,
extract assets from it, there is some scope for action which
advances both shareholder and creditor interests, provided the
duty is not one to maximise the welfare of the creditors. After
all, even from a purely creditor point of view, continued trading
is not necessarily contrary to their interests. As Scott VC
recognised in Facia Footwear Ltd v Hinchliffe75 “a continuation
of trading might mean a reduction in the dividend eventually
payable to creditors but it represented the creditors’ only chance
of full payment. It is, therefore, not in the least obvious that in
continuing to trade the directors were ignoring the interests of
the creditors”.
9–15
The remedies available for breach of fiduciary duty are superior
to those for breach of the duty of care. Both will provide
recompense for loss (equitable compensation, damages
respectively), but if assets extracted from the company have
ended up in the hands of the directors, as will often be the case,
the fiduciary claim may give the company a proprietary and not
just a personal claim for their return.76 As the previous sentence
implies, the creditor-regarding duty, like the other duties of
directors, is owed to the company and is therefore enforceable
by the company alone, not by individual creditors.77 As
Gummow J said in the Australian High Court, “the result is that
there is a duty of imperfect obligation owed to creditors, one
which the creditors cannot enforce save to the extent that the
company acts on its own motion or through a liquidator”.78
Typically, enforcement will be by the liquidator, as with
enforcement of the wrongful trading duty. However, in principle
the company or a shareholder suing derivatively could seek to
enforce breaches of the duty outside insolvency. This could
conceivably occur where the former creditors of the company
have taken control of it via a debt for equity swap as a means of
avoiding its liquidation. The main disadvantage of the common
law duty being owed to the company, not to individual creditors
—and it is a significant one—is that its proceeds would appear
not to go primarily to the unsecured creditors, but are typically
caught by any security interests the company has granted. As we
have seen, this result is avoided under the wrongful trading
provisions.79
However, breach of the creditor-facing duty may avail
litigants who bring personal actions against the company or its
directors, because the breach of duty displaces an answer to the
claim which the defendants would otherwise have. Thus, in
Colin Gwyer and Associates Ltd v London Wharf (Limehouse)
Ltd80 a shareholder challenge to the validity of a board resolution
succeeded because the breach of the creditor duty was held to
disqualify the director from being counted towards the quorum
required under the articles. Recognition of creditors’ interests in
advance of insolvency may also have an impact on litigation
brought against directors for breaches of their non-creditor
duties. Such breaches cannot be ratified by the shareholders in
the vicinity of insolvency because they are no longer the ones
primarily interested in the value of the company’s assets.81
PHOENIX COMPANIES AND THE ABUSE OF COMPANY NAMES
9–16
The Company Law Review described the “Phoenix company”
problem in the following terms:
“The ‘phoenix’ problem results from the continuance of a failed company by those
responsible for that failure, using the vehicle of a new company. The new company,
often trading under the same or similar name, uses the old company’s assets, often
acquired at an undervalue, and exploits its goodwill and business opportunities.
Meanwhile, the creditors of the old company are left to prove their debts against a
valueless shell and the management conceal their previous failure from the
public.”82
However, it also went on to point out that the actions just

described are not necessarily improper. They will be so where
their purpose is to deprive the creditors of the first company of
the value of that company’s assets by transferring them at an
undervalue to the second company; or where the purpose of the
actions is to mislead the creditors of the second company by
disguising the lack of success of the business when it was carried
on by the first company. In other cases, however, such purposes
may be lacking, The failure of the first company may be for
reasons outside the control of its directors and, further, “the only
way to continue an otherwise viable business and their own and
their employees’ ability to earn their livelihood may be for them
to do so in a new vehicle using the assets and trading style of the
original company”.83 Thus, the regulation of the Phoenix
company is not an easy matter: too light a regulation may permit
abuses to continue; too heavy a regulation may lead to the
cessation of otherwise viable businesses.
The prohibition
9–17
As will be clear, the Phoenix problem needs to be tackled from
two angles. One is the transfer of the assets of the first company
at an undervalue to a new company controlled by the same
persons. Since the claims of the creditors are confined, at least in
principle, to the assets of the first company, this is a problem
generated by limited liability. Within company law, the
regulation of such an event is primarily the function of ss.190 et
seq. (substantial property transactions with directors), which we
discuss in Ch.16. Here the CLR recommended reforms but they
were not taken up in the Companies Act 2006.84 So, the law
continues as before. The second angle is the re-use of the first
company’s name by the second company. This is perhaps the
converse abuse of limited liability. The company against which
the creditors’ claims lie is in this case the second company, but it
appears to be a more credit-worthy operation than it really is,
because it appears at first glance to be the first company, whose
demise is concealed.85 In this case, substantial reform, involving
the imposition of personal liability for the debts of the second
company, was brought about by s.216 of the Insolvency Act
1986. It proceeds by laying down a broad prohibition about the
re-use of the first company’s name or a name similar to it (to
which prohibition both criminal and civil sanctions are attached)
and then providing certain exceptions to it. Its primary objective
seems to be to prevent the creditors of the new company from
being misled about the history of the company with which they
are dealing. The prohibition is attached to the directors and
shadow directors of the first company and is triggered if the first
company goes into insolvent liquidation.
9–18
In somewhat more detail, s.216 of the Insolvency Act makes it
an offence (of strict liability)86 for anyone, who was a director or
shadow director of the first company at any time during the 12
months preceding its going into insolvent liquidation, to be in
any way concerned (except with the leave of the court or in such
circumstances as may be prescribed) during the next five years
in the formation or management of a company, or business, with
a name by which the original company was known or one so
similar as to suggest an association with that company (known as
a “prohibited name”). The prohibited name may be the first
company’s name or a name under which that company carried
on business; and the prohibition applies to both the second
company’s corporate and trading names.87 Whether the similarity
of names is made out is to be judged by the court by reference to
the circumstances in which the companies with the allegedly
similar names operate, and so it is a highly fact-specific
determination.88 It is clear that no person needs to have been
misled by the prohibited act; it is enough to show that the names
had a tendency to mislead.89 Finally, it should be noted that the
prohibition applies whether or not the first element of the classic
“Phoenix” syndrome is present, i.e. the transfer of assets from
first to second company. The syndrome may have provided the
rationale for the legislation but the section is not formally tied to
it and has a life of its own separate from the Phoenix rationale.90
In addition to the criminal offence, s.217 makes a person
acting in breach of s.216 personally liable, jointly and severally
with the new company and any other person so liable, for the
debts and other liabilities of the new company incurred while he
or she was concerned in its management in breach of s.216.91 In
this case, therefore, the defendant is personally liable in relation
to a specific set of debts rather than liable, as under the
fraudulent and wrongful trading provisions, to make a general
contribution to the assets of the company in order to help meet
the claims of all its creditors. This somewhat different approach
follows on from the fact that the liability arises under s.216
towards the creditors of the second company and arises whether
or not the second company is in insolvent liquidation or, indeed,
any particular form of financial difficulty, although it typically
will be. Also liable is anyone involved in the second company’s
management who acts or is willing to act on the instructions
given by a person whom he knows, at that time, to be in breach
of s.216.92 Use of s.217 seems somewhat higher than the use of
the wrongful trading provisions.93 This may be because s.217
can be triggered by a wider range of claimants than the wrongful
trading provisions, i.e. individual creditors rather than just the
liquidator or administrator. Not only does this rule generate more
potential claimants but the restrictions on the assignment of
claims which have affected liquidators in the past do not apply to
third-party creditors.94
Exceptions
9–19
The policy behind the provisions is perhaps most clearly
revealed in the three prescribed cases, set out in the Insolvency
Rules,95 where liability is not imposed. The first, and probably
most important, of the cases is where a successor company
purchases the whole of the insolvent company’s business from
an insolvency practitioner acting for the transferor company
(thus reducing the risk of a sale at undervalue) and gives notice
of the name the successor company intends to use to all the
creditors of the insolvent company. The Court of Appeal held
that this exception is available only where the directors of the
insolvent company were not already directors of or involved in
the management of the successor company at the time the notice
was given, on the grounds that the warning function (see below)
of the rules would otherwise be undermined.96 This ruling caused
difficulty in two situations. First, where the successor company
(with common directors) bought the business from a company
which, although insolvent, was not in liquidation, but, for
example, in administration, it was common for the successor
company to give the requisite notice in case, not in itself
unlikely, the first company should go into liquidation after the
administration. Secondly, and more limited, this first case, as
originally drafted, would not apply if the directors were already
directors of the successor company at the time notice was given,
even if at that time the successor company was not known by a
prohibited name (though it subsequently acquired one). In 2007
the Insolvency Rules were amended so as to extend the first
exception to these two situations.97
Overall, the first case might be thought to suggest that the aim
of the section is partly the protection of the creditors of the
insolvent company. This is because the insertion of the
insolvency practitioner is intended to ensure that the sale by the
insolvent company is not at an undervalue and the notice to the
creditors of that company ensures that they are not misled into
thinking that they may assert their claims against the new
company.98 However, if the requirements of this case are not
met, the liability of the directors is not to the creditors of the
insolvent company but to those of the successor company, as
indicated above. Nor is the successor company itself, which
simply falls outside s.216, liable for the debts of the insolvent
company. The CLR considered, but rejected, a proposal that the
liability of the successor company and those acting in breach of
s.216 should be extended to the creditors of the insolvent
company, but rejected it.99 So, the extent of the protection
afforded by s.216 to the creditors of the insolvent first company
is limited.
The third case100 excepts from s.216 the situation where the
“new” company has been known by the prohibited name for the
whole of the 12 months ending with the liquidation of the first
company.101 The purpose of this provision is, in particular, to
permit the transfer of businesses within an existing group of
companies. The risk of the creditors being misled, although it
exists, is not in this case the result of action taken after the
liquidation of the original company but of decisions taken in
advance of the liquidation by a period of at least one year—a
period thought to be enough to prevent opportunistic use of this
exception.102 This exception has been given a broad
interpretation by the courts: it is not necessary to show that the
company was known during the 12-month period by the
prohibited name it had at the time the debt arose (provided it was
known during that period by one or more prohibited names) or
that it used the prohibited name in relation to the whole of its
business.103
MISDESCRIPTION OF THE COMPANY AND TRADING DISCLOSURES
9–20
This is an area of creditor protection where personal liability is
no longer imposed after the 2006 Act, but the underlying
disclosure obligation still exists in the current legislation. The
notion is that a company should be required fully to disclose its
name when transacting so that a creditor who wishes to carry out
a search of the company’s records in Companies House (or
elsewhere) is put in a position to do so. By what was s.349(4) of
the Companies Act 1985, if the correct and full name of the
company did not appear on cheques and related instruments or
orders for goods signed by an officer (or even an employee) of
the company, the signatory would be personally liable to pay if
the company did not.104 It made no difference that the third party
concerned had not been misled by the description. The
requirement to state the company’s name correctly on cheques,
etc. is only one of a number of disclosure requirements imposed
by the legislation on companies in relation to those who deal or
might deal with them (known as “trading disclosures”), but it
was the only one in relation to which personal liability was
imposed. Those requirements are re-stated in Ch.6 of Pt 5 of the
2006 Act, where the Secretary of State is given power to make
regulations requiring the company to give specified information,
not only in “specified descriptions of documents or
communications” but also in specified locations (such as the
company’s place of business or its website) or to those who deal
with the company.105
Although the sanction of personal liability has been removed
for failure to state the company’s name correctly on cheques, etc.
such a failure is not devoid of civil consequences, though they
are now visited wholly on the company.106 Moreover, these civil
consequences now apply to any breaches of the trading
disclosure requirements, whether involving the misstatement of
the company’s name on a cheque, etc. or some other failure to
conform to them.107 Where a company seeks to enforce a right
arising out of a contract made in the course of business and the
company was in breach of the disclosure requirements at the
time, the court is required to dismiss the company’s claim if the
defendant shows that he or she has a claim against the company
which the defendant is unable to pursue because of the
company’s breach of the disclosure requirements or that he or
she has suffered a financial loss by reason of the company’s
breach. Even in these two cases, the court may permit the
company’s claim to continue if it thinks it just and equitable to
do so.108 Thus, not only are the civil consequences of
misdescriptions confined to the company but the company will
bear them only where the misdescription has caused harm to the
defendant and, even then, the court may permit the company’s
claim to proceed (for example, where the harm to the defendant
was out of proportion to the harm the company might suffer by
being denied its contractual rights and the defendant’s loss could
be taken into account in calculating the company’s damages).
Overall, the thrust of the disclosure rules is now on fostering
self-help on the part of those dealing with the company,109 rather
than with providing them with an additional avenue of civil
redress against company officers or employees, and on making
the company liable only where those dealing with it have
suffered harm as a result of the misdescription.
COMPANY GROUPS
Limited liability
9–21
The final area for consideration is the operation of the doctrine
of limited liability within groups of companies. Even relatively
modest businesses often operate through groups of companies
and large businesses invariably do so, and so the issue is one of
great practical importance. Where the companies in the group
are wholly owned, directly or indirectly, by the parent, only the
rationale of asset partitioning110 provides a reason for the
extension of limited liability to intra-group relations, since the
raising of equity capital and the trading of shares on public
exchanges could occur effectively with limited liability confined
to the shareholders of the parent company. Where the subsidiary
is only partly owned by the parent, and in particular where the
“outside” shares are traded on a public market, the other
rationales for limited liability also apply within groups.111 British
law does in fact apply the doctrine of limited liability to intra-
group shareholders as much as to extra-group shareholders and,
as we saw in the previous chapter,112 the courts will not pierce
the veil within a group of companies simply on the grounds that
the group constitutes a single economic entity. However, from
time to time there have been proposals for statutory provisions to
modify the veil within groups, both at EU level and
domestically, but, so far, without result.
How might creditors of a subsidiary be disadvantaged as a
result of the company becoming, or being, a member of a group
of companies? In general the answer is because, at least in a
group with an integrated business strategy,113 business decisions
may be taken on the basis of maximising the wealth of the group
as a whole (which usually means the value of the parent
company), rather than of the particular subsidiary of which the
claimant is a creditor. This phenomenon may show itself in a
variety of ways. Three examples may be given. Most obviously,
the parent may instruct the board of the subsidiary to do
something which is not in the best interests of the subsidiary,
because that decision will maximise the benefits of the group.
Secondly, the parent may allocate new business opportunities to
the subsidiary which can maximise the benefit for the group,
even though another subsidiary could develop the opportunity
effectively, if less profitably. Finally, if a subsidiary falls into
insolvency, the parent may refrain from rescuing it, even though
the group has sufficient funds to do so.
It is far from clear that the actions described above in the
second and third examples do, or ought to, involve any illegality
on the part of those involved. Unless the business opportunity
had been generated by a particular subsidiary,114 it is not clear
that it has, or ought to have, any claim to take all the
opportunities arising within the group which it could effectively
develop. Nor is it obvious that the descent into insolvency of a
properly capitalised subsidiary which has fully disclosed the
risks of its business should be allowed to threaten the economic
viability of the remainder of the group’s operations. In short, the
overruling of limited liability within corporate groups is likely to
require sophisticated and nuanced regulation if it is to make
sense in policy terms.
9–22
The strongest case for intervention is the first: directions to the
subsidiary to act in a way which is disadvantageous to it (and its
creditors and outside shareholders) in order to benefit the parent
(and its creditors and shareholders). Egregious cases of this type
are already caught by existing British law, for example, the
application of the rules against fraudulent trading to all those
party to it and of wrongful trading to shadow directors, both of
which extensions may bring in parent companies, at least in
some circumstances.115 These are examples of the overall
domestic approach to group problems, i.e. the extension of
general creditor-protection rules to deal with the particular
situation of group creditors. An alternative approach would be
the development of distinct rules for corporate groups. This
alternative approach is to be found in German law dealing with
public companies which contains a separate section dealing with
the issue of creditor and minority shareholder protection within
groups,116 though even these provisions do not purport to deal
comprehensively with group issues but focus predominantly on
the first example of disadvantageous behaviour given above.
Even within Germany, however, these provisions are not thought
to work effectively.117
The German statutory regulation of public companies
provides two models of regulation, one of which is contractual
and thus optional. Under the optional provision, in exchange for
undertaking an obligation to indemnify the subsidiary for its
annual net losses incurred during the term of the agreement, the
parent acquires the right to instruct the subsidiary to act in the
interests of the group rather than its own best interests. This
option has been taken up only by a small number of companies,
presumably because the incentive to do so (i.e. protection from
the potential liabilities for ignoring the separate legal personality
of the subsidiary) is too small. The Company Law Review
proposed something similar: in exchange for a guarantee by the
parent of the liabilities of its subsidiary, the subsidiary would be
freed from the obligation to publish separate accounts, thus
reducing the costs of running the group.118 However, the
proposal was not proceeded with, partly because it was again
thought that the incentive provided was not large enough to
induce a substantial take-up of the option and, partly and
conversely, because there were fears about loss of information
about subsidiary companies if the option were taken up,
especially where the subsidiary was the main British operating
company of a foreign parent.119
The second strand of the German statutory regime is
mandatory and applies to de facto groups. The core provision120
is that the parent is liable for the damage to the subsidiary if the
parent causes the subsidiary to enter into a disadvantageous
transaction, unless, within the fiscal year, the parent has
compensated the subsidiary for the loss or agreed to do so. The
provision has proved less effective than expected seemingly
because of difficulties of proof, both in relation to identifying
particular disadvantageous transactions (where there is a
continuous course of dealing between parent and subsidiary) and
to identifying the loss caused by those transactions. This
weakness of the de facto group regime undermines also the
contractual group rules, since it is escape from the former which
could provide a major incentive for companies to enter into the
optional regime.121
9–23
Nevertheless, the German model, which has been followed
within the EU only by Portugal and Croatia, was used by the
European Commission in its preliminary consideration of a draft
Ninth Company Law Directive on groups in the early 1980s.
However, so remote from the traditions of the other Member
States was this idea that the draft was never adopted by the full
Commission. The Report of the High Level Group of Company
Law Experts,122 whilst not proposing a revival of the Ninth
Directive, did propose that Member States should be required to
introduce into their company laws the principle that the
management of the parent company should be entitled to pursue
the interests of the group, even if a particular transaction was to
the disadvantage of a particular subsidiary, provided that, over
time, there was a fair balance of burdens and advantages for the
subsidiary.123 The modalities of the incorporation of this
principle into national law would be for each Member State to
decide. The Report thus put as much stress on the need for group
management to be able to run a coherent group policy as it did
on the protection of creditors and minority shareholders in the
subsidiary. In fact, British law has a somewhat similar approach,
but applies it to the directors of the subsidiary, not the parent.124
The directors of a subsidiary ought to consider whether it is in
the interests of the subsidiary to follow instructions from the
parent—though it is likely that the subsidiary directors, who will
often be employees of the parent, do not in fact go through this
exercise. It may well be in the interests of the subsidiary to do
what the parent requires, for example, where the business of the
subsidiary is dependent on inputs from other group companies.
The High Level Group also proposed greater disclosure of
information about the group, both of a financial and, more
important, of a non-financial kind, relating, in particular, to
control relations within the group and the types of dependency
created. Although the latter proposal has achieved some
legislative result in the Takeovers Directive,125 proposals for
action beyond disclosure have not been taken up at EU level.
Finally, in some jurisdictions, part of the solution to the group
problem, especially in the case of the third example given above,
is to be found in insolvency law, where the court may be given a
discretion in certain circumstances to bring a solvent group
company into the insolvency of another group company.126 The
High Level Group also supported this principle.
Ignoring separate legal personality
9–24
If it is rare for British law to ignore the principle of limited
liability within groups, it would be completely wrong to
conclude that the law is not prepared to override the separate
legal personality of companies within groups where this does not
involve any infringement of the principle of limited liability.
There are many instances in which domestic company law takes
account of group structures, though these instances tend to be
rather ad hoc, rather than the result of the application of a single
general principle.
Perhaps the best known example is in the area of financial
reporting. It has long been recognised that, in relation to
financial disclosure, the group phenomenon cannot be ignored if
a “true and fair” view of the overall position of the company is
to be presented, and that accordingly when one company (the
parent or holding company) controls others (the subsidiary and
sub-subsidiary companies) the parent company must present
group financial statements as well as its own individual
statements, thus avoiding the misleading impression which the
latter alone might give.127 The subordinate companies in the
group must also produce individual accounts. This is discussed
more fully in Ch.21.
The Companies Acts have also long used the concept of the
parent-subsidiary relationship in areas other than that of financial
disclosure. Clearly if one is to ban or control certain types of
transaction between a company and its directors it is essential to
ensure that this cannot be easily evaded by effecting the
transactions with or through another company in the group.
Hence many of the sections in Ch.4 of Pt 10 (Transactions with
Directors Requiring Approval of Members) contain such anti-
avoidance provisions.128 Similarly, the prohibition on financial
assistance for the purchase of a company’s own shares extends
to financial assistance by any of its subsidiaries.129
In non-legal and much legal discourse, the expressions
“parent” and “holding” company are used interchangeably. Until
the Companies Act 1989, UK company legislation used the
latter, but the EU Company Law Directives use the former,
which seems preferable, since “holding” suggests that the sole
function of the parent is to control the operations of subsidiaries
whereas it too may well be undertaking one or more of the
trading activities of the group. Now, in the Act, the two terms
have slightly different meanings, the definition of a “parent”
company being broader than that of a “holding” company; and
the term “parent” company being used in relation to company
accounts and that of “holding” company elsewhere where the
Act recognises group situations.130 This came about because,
when the Seventh Directive compelled a change in the definition
for the purposes of accounts, it was represented that to apply the
whole of the extended definition to other cases would introduce
an unreasonable degree of uncertainty.131 Hence it was decided
to adopt a narrower definition in the non-accounts area, albeit
one based on the EU definition. While it is a pity that it was
thought necessary to have different definitions for what is
essentially the same concept, there is no doubt that both are
considerable improvements on the previous definition132 since
they recognise that what counts is “control” and not majority
shareholding which, because of non-voting shares or weighted
voting, will not necessarily afford control.
Under s.1159 the definition of “holding” and “subsidiary”
company now is:
“A company is a ‘subsidiary’ of another company, its ‘holding company’, if that
other company
(a) holds a majority of the voting rights in it, or
(b) is a member of it and has the right to appoint or remove a majority of its board
of directors, or
(c) is a member of it and controls alone, pursuant to an agreement with other
members, a majority of the voting rights in it.
or if it is a subsidiary of a company which is itself a subsidiary of that other
company.”133
CONCLUSION
9–25
Since the Cork Committee134 reported in 1982, statutory
willingness to impose liability towards creditors on the directors
of companies which abuse the mechanism of limited liability has
significantly increased. Both the wrongful trading provisions and
those dealing with the re-use of corporate names were a response
to primarily small company problems. Together with the
provisions on the disqualification of directors,135 also aimed
primarily at small companies, they may be said to constitute the
legislature’s preferred alternative to compulsory minimum
capital requirements136 for dealing with the abuses of limited
liability in small companies. These provisions, however, are not
formally limited to small companies; and the wrongful trading
provisions, through the use of the idea of shadow directors, are
capable also of catching abuses outside small companies, in
particular within corporate groups. However, the issue of limited
liability within groups has not received the same degree of
legislative attention. Like the judges, whose decisions on lifting
the veil we examined in the previous chapter, the legislature has
touched on limited liability within groups only gingerly, whilst
showing itself perfectly able to recognise group structures in
other areas of company law.
1
Companies Act 1985 s.24—a provision applying initially to all companies but from
1992 only to public companies since private companies were then empowered to have a
single member. This is now the position for public companies as well: CA 2006 s.7.
2 Salomon v Salomon [1897] A.C. 22. See above, para.2–1.
4
See s.761 and para.11–8, below.
5
See below para.11–9.
6 2006 Act s.767(1),(2).
7 2006 Act s.767(3). The validity of the transaction, however, is not affected.
8
2006 Act ss.90 and 91.
9
Fraud is a general criminal offence, of course, but it has been regarded as less
confusing for juries to face them with a single charge of fraudulent trading rather than
with numerous charges of individual acts of fraud: see R. v Kemp [1988] Q.B. 645 CA.
(pet. dis. [1988] 1 W.L.R. 846 HL). The legislature thought so well of the offence that it
enacted in s.9 of the Fraud Act 2006 a similar offence in respect of those businesses
carried on by persons falling outside the scope of s.993, including sole traders. This
shows that the absence of limited liability is not a guarantee of the absence of fraud.
10
The section embraces fraud on future, as well as present, creditors: R. v Smith [1996]
2 B.C.L.C. 109 CA.
11 The shift of the civil liability provision out of the companies legislation and into the
insolvency legislation occurred as a result of the recommendations of the Cork
Committee on Insolvency Law (Cmnd. 8558 (1981), Ch.44).
12Insolvency Act 1986 ss.246ZA and ZB, inserted by s.117 of the Small Business and
Enterprise Act 2015.
13 For a discussion of the role of administration see paras 32–43 et seq, below.
14
The fraudulent trading will have occurred before the company went into
administration or liquidation. In fact, there is no limit in the section on the prior period
which may be scrutinised for evidence of fraudulent trading. The company being in
liquidation or administration is simply a condition for the claim being brought.
However, the longer-lived the fraudulent scheme, the less likely it is the early creditors
will have suffered a loss. So, older fraud is likely to be less relevant to the setting of the
amount of the contribution: see para.9–8, below.
15A business may be regarded as “carried on” notwithstanding that the company has
ceased active trading: Re Sarflax Ltd [1979] Ch. 592.
16
1986 Act ss.213(2)/246ZA(2).
17
Unlike the situation before 1985, it is no longer possible to impose liability under
ss.213 and 246ZA in respect of particular debts or in favour of particular creditors: cf.
Re Cyona Distributors Ltd [1967] Ch. 889 CA.
18
And it is no bar to inclusion within the section that the activities in question occurred
abroad: Jetivia SA v Bilta (UK) Ltd [2015] 1 B.C.L.C. 443 SC. This is on the basis that
the winding up of a company incorporated in the UK has effect, as far as domestic law is
concerned, in relation to all the assets of the company, no matter where situated. This
reasoning would seem equally applicable to liability for wrongful trading under
ss.214/246ZB of the Act.
19
Re Cooper Chemicals Ltd [1978] Ch. 262 (only one creditor defrauded). Indeed, for
criminal liability to arise it is not clear that it is necessary for any person actually to be
defrauded provided that the business of the company was carried on with intent to
defraud (R. v Kemp [1988] Q.B. 645 CA—only potential creditors defrauded).
20Morphitis v Bernasconi [2003] 2 B.C.L.C. 53 CA. The defrauded person will have
remedies under the general law of fraud.
21
In Re Maidstone Building Provisions Ltd [1971] 1 W.L.R. 1085 an attempt to obtain a
declaration against the company’s secretary, who was also a partner in its auditors’ firm,
failed because, although he had given financial advice and had not attempted to prevent
the company from trading, he had not taken “positive steps in the carrying on of the
company’s business in a fraudulent manner”. In Re Augustus Barnett & Son Ltd [1986]
B.C.L.C. 170 an attempt against its parent company (Rumasa) failed on the same
ground.
22
Re Bank of Credit and Commerce International SA (No.15) [2005] 2 B.C.L.C. 328
CA, following the lead given in Meridian Global Funds Management Asia Ltd v
Securities Commission [1995] 2 A.C. 500 PC (above, at para.7–41). This step was
facilitated by the separation of the criminal and civil liability for fraudulent trading, so
that there is no implication from this decision that the same attribution rule would be
applied if criminal liability were in question: at [107] and [129].
23
The required degree of knowledge is “blind eye” knowledge, i.e. “a decision to avoid
obtaining confirmation of facts in whose existence the individual has good reason to
believe” (Re Bank of Credit and Commerce International SA (No.15) [2005] 2 B.C.L.C.
328 CA at [14] quoting Lord Scott in Manifest Shipping Co Ltd v Uni-Polaris Shipping
Co Ltd [2003] 1 A.C. 469 at [116]). See also Re Bank of Credit and Commerce
International SA (No.14) [2004] 2 B.C.L.C. 236.
24 In Re Gerald Cooper Chemicals Ltd [1978] Ch. 262 it was held that a declaration
could be made against a creditor who refrained from pressing for repayment knowing
that the business was being carried on in fraud of creditors and who accepted part
payment out of money which he knew had been obtained by that fraud. Gerald Cooper
Chemicals was followed in Re Bank of Credit and Commerce International SA (No.14)
[2001] 1 B.C.L.C. 263.
25 In Re Bank of Credit and Commerce International SA (No.15) [2005] 2 B.C.L.C. 328
CA it was left open whether the third party’s liability could not be more simply and
widely established on the basis of the third party’s vicarious liability for breaches of
s.213 by its employees. See Dubai Aluminium Co Ltd v Salaam [2003] 2 A.C. 366 HL
and para.7–31. This approach would strength the incentives of third parties to control
participation by their employees in the fraudulent conduct of the company’s business.
26
Re Patrick Lyon Ltd [1933] Ch. 786 at 790, 791.
27
Re William C Leitch Ltd [1932] 2 Ch. 71 at 77, per Maugham J. See also R. v
Grantham [1984] Q.B. 675 CA, where the court upheld a direction to the jury that they
might convict of fraudulent trading a person who had taken an active part in running the
business if they were satisfied that he had helped to obtain credit knowing that there was
no good reason for thinking that funds would become available to pay the debts when
they became due or shortly thereafter. That dishonesty may be inferred in these cases
does not mean, of course, that it can never be established in other cases: Aktieselskabet
Dansk Skibsfinansiering v Brothers [2001] 2 B.C.L.C. 324 HKCFA.
28
Cmnd. 1749, para.503(b).
29
Above fn.11. For the argument that the Cork Committee overestimated the potential
role of the wrongful trading provisions, partly because existing Companies and
Insolvency Act provisions already cover much of the ground, partly because defendants
financially able to meet the liability are likely to be few, see R. Williams, “What can we
expect to gain from reforming the insolvent trading remedy?” (2015) 78 M.L.R. 55.
30
1986 Act ss.214(6)/246ZB(6). Section 213 formally applies in any winding up
(solvent or insolvent) but in practice it is needed only in insolvent winding up.
311986 Act ss.214(2)/246ZB(2). It appears it is sufficient that the directors should have
anticipated, for example, insolvent liquidation but the company ends up in insolvent
administration.
321986 Act ss.214(3)/246ZB(3). The burden of proof on knowledge is on the claimant,
on “every step” on the directors: Brook v Masters [2015] B.C.C. 661.
33
This includes functions entrusted to the director even if the director has not carried
them out: ss.214(5)/246ZB(5). If the director has failed the objective test he or she
cannot be excused by the court, under Companies Act 2006 s.1157, on the ground that
the director has acted honestly and reasonably: Re Produce Marketing Consortium Ltd
[1989] 1 W.L.R. 745.
34 1986 Act ss.214(4)/246ZB(4).
35 Below, para.16–15.
36 The directors are likely to be treated with a particular lack of sympathy by the court if
they have not abided by the statutory requirements for keeping themselves abreast of the
company’s financial position: Re Produce Marketing Consortium Ltd (No.2) [1989]
B.C.L.C. 520 at 550, which requirements Knox J referred to as the “minimum
standards”. See Oditah, [1990] L.M.C.L.O. 205; and Prentice, (1990) 10 O.J.L.S. 265.
37 Insolvency Act 1986 s.251.
38
Secretary of State for Trade and Industry v Becker [2003] 1 B.C.L.C. 565; Secretary
of State for Trade and Industry v Deverell [2000] 2 B.C.L.C. 133 CA.
39 Re Hydrodan (Corby) Ltd [1994] 2 B.C.L.C. 180; Re PFTZM Ltd [1995] B.C.C. 280;
cf. Re A Company Ex p. Copp [1989] B.C.L.C. 13.
40 In Re Hydrodan (Corby) Ltd [1994] 2 B.C.L.C. 180 the judge was prepared to treat
the indirect parent as a shadow director of a company, but that was because the directors
of the company in question were corporate bodies and so must have received their
instructions from elsewhere. Even here, the directors of the indirect parent were held not
to be shadow directors.
41
Secretary of State for Trade and Industry v Deverell [2000] 2 B.C.L.C. 133 CA,
where the precise definition of “shadow director” was determinative of the appeal. The
court also decided that the central question was whether the board in fact did what the
alleged shadow directors proposed and not whether those proposals were couched as
directors or instruction or mere “advice”; nor was it necessary to prove the subjective
expectations of the alleged shadow director and directors as to whether the advice would
be followed.
42
For the general duties see Ch.16, below.
43
1986 Act s.215(5), applied to administrations by s.246ZC.
44
Including any assignees from that person (other than a good faith assignee for value
without notice): IA 1986 s.215(2) and (3).
45
1986 Act s.215(4).
46
1986 Act ss.213(2)/246ZA(2) and 214(1)/246ZB(1).
47
See Re Produce Marketing Consortium Ltd [1989] 1 W.L.R. 745, for wrongful
trading and Morphitis v Bernasconi [2003] 2 B.C.L.C. 53 CA, for fraudulent trading, the
latter reversing the previous understanding in relation to fraudulent trading where a
penal element was thought appropriate in some cases.
48 See the dicta of Park J in Re Continental Assurance Co of London Plc (No.4) [2007] 2
B.C.L.C. 287 at [382]–[390] (s.214); and Re Overnight Ltd [2010] 2 B.C.L.C. 186
(s.213). The defendants’ liability may, but need not, be put on the basis of joint and
several liability.
49 Assume a pre-wrongful trading position of assets 50, liabilities 100, so creditors paid
50p in the pound. Assume wrongful trading which increases liabilities to 150 and a
contribution which raises assets to 100. Creditors now receive 66p in the pound
(assuming no transaction costs).
50 1986 Act s.214(3).
51
See Re Produce Marketing Consortium Ltd [1989] 1 W.L.R. 745; Re Brian D.
Pierson (Contractors) Ltd [2001] 1 B.C.L.C. 275.
52Re The Rod Gunner Organisation Ltd [2004] 1 B.C.L.C 110. Similarly, Roberts v
Frohlich [2011] 2 B.C.L.C. 501.
53 Re Continental Assurance Co of London Plc (No.4) [2007] 2 B.C.L.C. 287. See also
Re Sherborne Associates Ltd [1995] B.C.C. 40, in which the judge held that the
liquidator had to identify and then stick to a particular date by which it was argued the
directors should have realised the company had no reasonable prospect of avoiding
insolvent liquidation. Contrast Singla v Hedman [2010] 2 B.C.L.C. 61: causing a
company without any secure financing to begin contracting for production was a breach
of s.214.
54 Grant v Rails [2016] B.C.C. 293, where Snowden J held that continued trading in
favourable conditions did not afford the directors a defence under the “every step”
provision because new creditors would be worse off, i.e. “every step” was equated with
every creditor.
55
The issue that the costs of the s.214 litigation might not count as costs of the
liquidation was determined in favour of the liquidator by an amendment to r.4.218 of the
Insolvency Rules 1986/1925, made in 2002 and by s.176ZA of the IA 1986, inserted by
s.1282 of the Companies Act 2006, which gives liquidation expenses priority over both
preferential debts and assets secured by a floating charge (subject to exceptions to
prevent abuse), overruling the result of Buchler v Talbot [2004] 2 A.C. 298 HL. Thus,
the disincentive to liquidator litigation arising from the risk of the liquidator being left to
bear the litigation costs personally has been considerably reduced, if not eliminated.
56
Re Yagerphone Ltd [1935] 1 Ch. 395.
57
A liquidator or administer who sought to avoid this rule by assigning the fruits of the
litigation rather than the claim itself would find it difficult to give the funder sufficient
control of the litigation. See Grovewood Holdings Plc v James Capel & Co Ltd [1995]
Ch. 80; Re Oasis Merchandising Services Ltd (In Liquidation) [1998] Ch. 170 CA;
Ruttle Plant Ltd v Secretary of State for the Environment, Food and Rural Affairs (No.3)
[2009] 1 All E.R. 448; Rawnsley v Weatherall Green & Smith North Ltd [2010] 1
B.C.L.C. 658.
58
1986 Act s.246ZD.
59
1986 Act s.176ZD.
61 The CLR in fact proposed that the wrongful trading duty should be embodied in the
statutory statement of directors’ duties (CLR, Final 1, p.348 (Principle 9)), but the
Government rejected this proposal on the grounds that decoupling the substantive
provisions at present in s.214 from the remedies available under the 1986 Insolvency
Act would be “incongruous” (Modernising Company Law, Cm. 5533-I, July 2002,
para.3.12). Had this step been taken, the common law duties would have been wrapped
up into the statutory statement as well (CLR, Final I, para.3.17).
62
Walker v Wimborne (1976) 137 C.L.R. 1.
63
West Mercia Safetywear v Dodd [1988] B.C.L.C. 250 CA. In this case the payment by
the insolvent company to a particular creditor involved both a breach of fiduciary duty
by the director and also a fraudulent preference (being motivated by a desire to protect
the director from liability under a personal guarantee to the creditor).
64 Even then it is often unclear whether the court is using a balance sheet definition of
insolvency (liabilities exceed assets) or a cash-flow approach (company does not have
enough cash to pay its debts as they fall due).
65 Brady v Brady [1988] B.C.L.C. 20, 40 CA.
66 Nicholson v Permakraft (NZ) Ltd [1985] 1 N.Z.L.R. 242.
67
For example, Re Welfab Engineers Ltd [1990] B.C.L.C. 833.
68 Thus, the directors might continue the trading of an unprofitable but balance sheet
solvent company, in the hope of returning to profitability, without altering the risk
profile of the company’s business, even though the creditors’ interests would most
obviously be advanced by liquidating the company now and allowing them to crystallise
their claims against the company’s assets.
69
See para.16–37, below for a discussion of this duty.
70 See para.9–6.
71 Re HLC Environmental Projects Ltd [2014] B.C.C. 337 at [92]. The reasonable
director approach is based on Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch. 62
(see para.16–42, below).
72
Colin Gwyer and Associates Ltd v London Wharf (Limehouse) Ltd [2003] 2 B.C.L.C.
153 at [74]; Re HLC Environmental Projects Ltd [2014] B.C.C. 337.
73
Bell Group Ltd (In Liquidation) v Westpac Banking Corp (No.9) [2008] WASC 239 at
[4436]; Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch).
74
See fn.68.
75
Facia Footwear Ltd v Hinchliffe [1998] 1 B.C.L.C. 218 (an application for summary
judgment). For a similar approach to wrongful trading see above, para.9–9.
76
77
Yukong Line Ltd of Korea v Rendsburg Investments Corp of Liberia (The Rialto)
[1998] 1 W.L.R. 294; Kuwait Asia Bank EC v National Mutual Life Nominees Ltd
[1991] 1 A.C. 187, 217 (Lord Templeman); Spies v R [2000] HCA 43; [2000] 201
C.L.R. 603 Aust HC. In this respect the dictum of Lord Templeman in Winkworth v
Edward Baron Development Co Ltd [1986] 1 W.L.R. 1512 at 1517 goes too far. But in
the same vein see the decision of the Supreme Court of Canada, Peoples Department
Stores v Wise [2004] 3 S.C.R. 461, adopting the notion of direct duties to individual
creditors (criticised by Stéphane Rousseau, correctly it is submitted, on the basis that the
case involved a reversal of “a fundamental principle of corporate law”: “Directors’ Duty
of Care after Peoples: Would it be Wise to Start Worrying about Liability?” (2005) 41
Canadian Business Law Journal at 225).
78
Sycotex Pty Ltd v Baseler (1994) 122 A.L.R. 531, 550.
79 See para.9–10, above. Indeed, there is a broader question here of what the duty to the
creditors means when there are several classes of creditor. Junior creditors, who are “out
of the money” at the time of the relevant decision, may, like shareholders, have an
interest in taking on very risky projects, because only in that way have they any hope of
recovering anything. Senior creditors, by contrast, may be better off by stopping trading
at once.
80
Above fn.72.
81 Kinsela v Russell Kinsela Pty Ltd [1986] 4 N.S.W.L.R. 722.
82
83 Final Report I, para.15.56. The facts giving rise to the application to use a similar
name in Re Lightning Electrical Contractors Ltd [1996] 2 B.C.L.C. 302 might be
thought to be an example of this: the administrative receivership of a medium-sized
company was brought about by the failure of two large client companies to pay the
money due from them; the successor company’s use of the similar name was supported
by the receivers since it enable them to maximise the value of the first company’s assets.
84
CLR, Final Report I, paras 15.65–15.72. The problem with the existing law is perhaps
demonstrated by the background facts of Secretary of State for Trade and Industry v
Becker [2003] 1 B.C.L.C. 565.
85
If misleading the creditors as to the creditworthiness of the second business is the
rationale of the section, it is perhaps understandable that the prohibition extends even to
the carrying on of the second business in non-corporate form (i.e. potentially without
limited liability): (s.216(3)(c)). However, no personal liability is imposed in this case,
presumably on the basis that it is unnecessary: s.217(1). In many cases the defendant
will be liable as partner or sole trader, but it is conceivable that a person could “directly
or indirectly be concerned or take part in the carrying-on” of a non-corporate business
without attracting personal liability as a partner or sole trader, so that the absence of
personal liability under s.217 is important.
86
R. v Cole [1998] 2 B.C.L.C. 234 CA.
87
1986 Act s.216(6)—an important extension, for otherwise the prohibition could be
easily avoided by the transferee company’s registered name being quite dissimilar from
the transferor company’s but by the transferee then carrying on business under a similar
name. See R. (Griffin) v Richmond Magistrates Court [2008] EWHC 84 (Admin). The
CLR found that this was a practice used effectively to avoid the impact of the provisions,
even though ostensibly caught by them.
88
First Independent Factors and Finance Ltd v Mountford [2008] 2 B.C.L.C. 297.
89
Ricketts v Ad Valorem Factors Ltd [2004] 1 B.C.L.C. 1 CA; Revenue and Customs
Commissioners v Walsh [2005] 2 B.C.L.C. 455, though in the former case there was a
disagreement among the judges as to whether the facts needed only to “suggest” an
association or give rise to a probability that members of the public would associate the
two companies.
90
Ricketts v Ad Valorem Factors Ltd [2004] 1 B.C.L.C. 1 CA.
91
1986 Act s.217. That the liability is restricted to debts incurred by the company in the
period during which the person was in breach of s.216 (and did not extend to all the
debts incurred whilst that person was a director of the company) was accepted by Arden
LJ in ESS Productions Ltd v Sully [2005] 2 B.C.L.C. 547 at [75]. See also Glasgow City
Council v Craig [2009] 1 B.C.L.C. 742: liability confined to the debts of that part of the
business which was carried on under the prohibited name.
92
Though such a person does not commit a criminal offence. For the purpose of both
ss.216 and 217, “company” includes any company which may be wound up under Pt V
of the Insolvency Act, i.e. virtually any company or association: s.220.
93 The CLR reported that the Official Receiver was aware of 134 cases of breaches of
s.216 in 1999/2000, which led to 118 warning letters and nine convictions, but these
figures apparently relate only to criminal liability under the section: Completing,
para.13.105.
94 First Independent Factors and Finance Ltd v Mountford [2008] 2 B.C.L.C. 297—
claim brought by debt factor which had acquired the claims from two trade creditors at a
discount. cf. fn.57 above.
95Insolvency Rules (SI 1986/1925), rr.4.228 to 4.230; and the Insolvency (Scotland)
Rules (SI 1986/1915), rr.4.78 to 4.82.
96
First Independent Factors and Finance Ltd v Churchill [2007] 1 B.C.L.C. 293 CA.
97 The Insolvency (Amendment) Rules 2007 (SI 2007/1974).
98 See Penrose v Secretary of State for Trade and Industry [1996] 1 W.L.R. 482. In the
Churchill case (fn.96, above) the Court of Appeal put the function of the notice rather
differently: it was to help creditors of the first company make an informed assessment of
the risks of extending credit to the successor company, i.e. the focus was on protection
of the creditors of the successor company. This approach seems more consistent with the
drafting of the section. On the other hand, it is not then clear why the notice has to be
given before the directors of the first company become involved with the successor
company: it should be enough if notice is given before creditors of the first company
extend credit to the successor company.
99
100
The second case (r.4.229) is ancillary to the provision permitting a person to act in
breach of s.216 if the court gives permission. The second case permits a director, who
applies for leave within seven days of the first company going into liquidation, to
continue to act in breach of s.216 for a period of six weeks or until the court disposes of
the application for leave, whichever is the shorter.
101
Rule 4.230—and has not been a dormant company. Otherwise, a shelf company
could be formed purely for the purpose of triggering this exception.
102
Though cf. Morphitis v Bernasconi [2003] 2 B.C.L.C. 53 CA: scheme to avoid s.216
by the directors resigning from the company at least a year before it was liquidated.
103
ESS Production Ltd v Sully [2005] 2 B.C.L.C. 547 CA.
104See Atkins v Wardle (1889) 5 T.L.R. 734 CA; Scottish & Newcastle Breweries Ltd v
Blair, 1967 S.L.T. 72; Civil Service Co-operative Society v Chapman [1914] 30 T.L.R.
679; British Airways Board v Parish [1979] 2 Lloyd’s Rep. 361.
1052006 Act s.82(1) and the Company Limited Liability Partnership (Names and
Trading Disclosure) Regulations 2015 (SI 2015/17) Pt 6.
106
This is a more radical response than that recommended by the CLR which would
have kept personal liability but on a narrower basis: Final Report I, paras 11.55–11.57.
107 This is new: previously, other than as provided by s.349(4), the sanctions for breach
of the disclosure requirements were only criminal. However, the civil liability imposed
by s.83 is modelled on that imposed by s.5 of the Business Names Act 1985 which
already applied to companies trading other than under their corporate name. The
criminal sanctions are retained in s.84 of the 2006 Act.
108
2006 Act s.83(1),(2). The restriction does not apply if the company seeks to enforce
its contractual rights in proceedings brought by another person (for example, by way of
counter-claim): s.83(3).
109
Hence the importance of disclosure of the company’s name, not only in
correspondence, but on its website and at any place of business: Trading Regulations,
regs 4 and 6(2).
110 The rationales for limited liability are discussed at paras 8–1 et seq.
111This situation is not usual, but is certainly not unknown, in the UK: “Governance
concerns rise after London IPOs”, Financial Times, 16 June 2011.
112
At para.8–11, above.
113 This does not include all groups of companies: in conglomerate groups (i.e. groups
of diversified businesses) the advantages of common ownership may well reside in
something other than the imposition of a single business strategy (for example, access to
sources of finance or managerial expertise).
114 On “corporate opportunities” see para.16–86, below.
115 For an example of the use of the strategy of disqualifying directors (discussed in the
following chapter) see Re Genosyis Technology Management Ltd [2007] 1 B.C.L.C. 208
—directors disqualified for causing debts due to subsidiary to be paid to parent
company.
116 Aktiengesetz, Book Three.
117
For a discussion of German “Konzernrecht”, see K.J. Hopt, “Legal Elements and
Policy Decisions in Regulating Groups of Companies” in C.M. Schmitthoff and F.
Wooldridge (eds), Groups of Companies (London: Sweet & Maxwell, 1991), p.81; H.
Wiedemann, “The German Experience with the Law of Affiliated Enterprise”, in K.J.
Hopt (ed.), Groups of Companies in European Laws, Legal and Economic Analyses on
Multinational Enterprises, Vol. II (Walter de Gruyter, 1982) 21. For a comparative
perspective, see Forum Europaeum Corporate Group Law, “Corporate Group Law for
Europe” (2000) 1 European Business Organization Law Review 165; and V. Priskich,
“Corporate Groups: Current Proposals for Reform in Australia and the United Kingdom
and a Comparative Analysis of the Regime in Germany” in (2002) 4 I.C.C.L.J. 37; and
K.J. Hopt, “Groups of Companies” in J. Gordon and G. Ringe (eds), Oxford Handbook
of Corporate Law and Governance (OUP, online ed, 2015).
118
Completing, Ch.10. On parent and subsidiary company reporting requirements see
immediately below.
119Final Report I, paras 8.23–8.28. Nevertheless, a variant of the idea (exemption from
audit but not from producing accounts in exchange for a guarantee from the parent) has
been implemented in UK law: see para.22-7.
120 Aktiengesetz, s.317.
121
A possible partial solution, which the German courts have used for private
companies (GmbH), would be to use the contractual group model under which exercise
of influence to disadvantageous ends would make the parent liable for all the
subsidiary’s losses, whether they could be related to a particular disadvantageous
contract or not.
122Brussels, 4 November 2002, Ch.V. See above, para.6–12. For more detailed
consideration of the options, see Forum Europaeum, above fn.117. The proposal was
made again—this time for an EU Recommendation—in the Report of the Reflection
Group on the Future of EU Company Law, Brussels April 2011, Ch.4.
123This is often referred to as the Rozenblum doctrine, after the name of the French case
(Bulletin criminel 1985 No.54) in which the principle was articulated.
124
See further para.16–47, below. The potential liability of the parent company as a
shadow director of the subsidiary is largely excluded by s.251(3) of the CA 2006, unless
the subsidiary is in the vicinity of insolvency.
125 See para.28–25.
126 On New Zealand law and Australian proposals, see R.P. Austin, “Corporate Groups”
in R. Grantham and C. Rickett (eds), Corporate Personality in the Twentieth Century
(Oxford: Hart Publishing, 1998), especially at pp.84–87.
127 To take a simplified example: if a parent company A has two wholly-owned
subsidiaries, B and C, and in a financial year B makes a loss of £100,000 while C makes
a distributable profit of £10,000 all of which it pays to A by way of dividend, the
individual accounts of A (assuming it has broken even) will show a profit of £10,000
whereas in fact the group has made a loss of £90,000.
129 See para.13–47.
130“Parent company” is defined in s.1162 and Sch.7 (see para.21–10) and “holding
company” in s.1159 and Sch.6.
131
For purposes of consolidation a measure of uncertainty is acceptable because, when
in doubt, one can play safe and consolidate.
132
1948 Act s.154. Under the former s.154(10)(a)(ii) holding more than half in nominal
value of a company’s equity share capital (voting or non-voting) made it a subsidiary.
133
Unfortunately, this relatively simple definition requires additional refinement to
make it work (which is contained in Sch.6 to the Act) and, as Enviroco Ltd v Farstad
Supply A/S [2011] 2 B.C.L.C. 165, SC demonstrated, that refinement was not itself
sufficiently refined because it failed to take full account of the definition of a “member”
in s.112 of the Act.
134
See above fn.11.
135
Discussed in the next chapter.
CHAPTER 10
DISQUALIFICATION OF DIRECTORS
Disqualification Orders and Undertakings 10–2

Scope of disqualification orders and undertakings 10–3
Compensation 10–4
Disqualification on Grounds of Unfitness 10–5
The role of the Insolvency Service 10–7
The role of the court 10–8
Disqualification on Grounds other than Unfitness 10–12
Serious offences 10–12
Disqualification in connection with civil liability for
fraudulent or wrongful trading 10–13
Failure to comply with reporting requirements 10–14
Register of Disqualification Orders 10–15
Bankrupts 10–16
Other Cases 10–17
Conclusion 10–18
10–1
In the previous chapter we examined the provisions which, at the
instigation of those in charge of the insolvency of a company,
may lead to the imposition of a financial liability on directors
and shadow directors who, in the period preceding the
insolvency, engaged in conduct which exploited the
vulnerabilities of creditors and caused a diminution in the
company’s assets. The Cork Committee, which recommended
this reform in 1982, went further, however, and argued that
“proper safeguards for the public” required that wrongful trading
be supplemented by provisions which ensure that “those whose
conduct has shown them to be unfitted to manage the affairs of a
company with limited liability shall, for a specified period, be
prohibited from doing so”.1 In particular, they thought the law
should “severely penalise those who abuse the privilege of
limited liability by operating behind one-man, insufficiently
capitalised companies”.2 This recommendation is now embodied
in the Company Directors Disqualification Act 1986,3 as later
amended. Like the wrongful trading provisions, the central
provisions of the Act (disqualification on grounds of “unfitness”)
apply to shadow directors as well as directors.4 The law was here
to be used in general deterrence mode, for the protection of
future creditors of companies as a whole, rather than to seek
compensation for existing creditors. However, under the Small
Business and Enterprise Act 2015 a compensation power was
grafted onto the disqualification provisions, thus holding out
some prospect that the provisions will aid in addition the
creditors of the company whose directors have been disqualified.
A further significant feature of the Act is that initiation of
disqualification action lies exclusively in the hands of the public
authorities in the case of the most commonly used provisions,
i.e. where disqualification is based on “unfitness”.5 Initiation of
the disqualification process is assigned to the Secretary of State
(“SS”) (i.e. the relevant government minister), though the
minister may delegate that function, and normally does, to the
Insolvency Service, a government agency.6 The SS also has
exclusive control over the initiation of the new compensation
provisions.7 Outside the area of unfitness, the liquidator or any
past member or creditor may apply for a disqualification order,8
but it is unclear that they will have any great incentive to do so,
because the benefits of disqualification accrue to future
creditors. In other words, the forward looking disqualification
process and its initiation by the public authorities are linked
features of the legislation. When compensation was grafted onto
the legislation in 2015, the opportunity might have been taken to
open up the range of potential initiators, but it was not.
The introduction of a compensation mechanism was not the
only significant reform after 1986. In particular, reforms in the
Insolvency Act 2000 introduced the notion of an out-of-court
“disqualification undertaking” in cases of unfitness to
supplement the “disqualification order”, which only a court can
make.9 In addition, the 2015 Act10 made reforms aimed at taking
into account the cross-border environment in which many
companies now operate but which national prudential rules often
ignore. These changes make it possible for conduct of the
director in relation to overseas companies (i.e. companies
incorporated outside Great Britain)11 to be taken into account in
appropriate circumstances by the court or SS when considering
disqualification. However, powers already contained in Pt 40 of
the Companies Act 200612 have not been used to date. These
empower the SS to make regulations so that a person
disqualified in a foreign jurisdiction would or could be
prohibited from acting in relation to a company incorporated in
Great Britain. New s.5A (see para.10–12, below) gets close to
this principle, but is based on conviction abroad for a serious
offence, not disqualification abroad. The attraction of the more
general principle clearly depends upon the equivalence of the
foreign jurisdictions’ disqualification provisions to those in the
UK. It is an issue in which the EU is likely to show interest.
In addition to the general ground of unfitness, there are a
number of more specific cases in which disqualification can be
imposed on persons. Although these persons are typically
directors or shadow directors of companies, these
disqualification provision apply more broadly in some cases.
The specific instances can best be analysed as falling within the
following categories:
(a) commission of a serious offence, usually involving
dishonesty, in connection with the management of a
company;
(b) being found liable to make a contribution to the assets of the
company on grounds of fraudulent or wrongful trading;
(c) failure to comply with the provisions of the companies or
insolvency legislation relating to the filing of documents with
the Registrar.
Finally, there is a long-standing provision in the companies
legislation which disqualifies an undischarged bankrupt from
being involved in the management of companies, to which was
added in 2002 the notion of “bankruptcy restriction orders”.
DISQUALIFICATION ORDERS AND UNDERTAKINGS
10–2
The power to disqualify has generated a high level of activity. In
the years 1997–1998 to 2000–2001 between 1,250 and 1,500
directors were disqualified each year by court order and in 2001–
2002, when disqualification undertakings were introduced, the
total of orders and undertakings was nearly 2,000.13 Since then,
the total of orders and undertakings has fluctuated within a
slowly declining pattern. In 2014/15 there was a total of 1,227
(899 undertakings and 328 court orders)—about 4 per cent of the
total number of directors of failed companies in that year. Over
80 per cent of the orders and undertakings were on grounds of
unfitness.14 Thus, the Act has been the basis of a considerable
activity on the part of the public authorities. The rationale behind
the introduction of undertakings in unfitness cases by the
Insolvency Act 2000 was the fact that, under the previous
legislation, even where the public authorities and the director
could reach agreement on how the provisions of the Act should
apply in the particular case, it was necessary to go to court to
obtain an order and it was doubtful whether the court could
simply accept, and rubber-stamp, the agreement between them.15
The amended Act permits the SS and the director to reach an
agreement out-of-court on a disqualification undertaking, which
will restrict the director’s future activities in the same way as a
disqualification order, but without the need for a court hearing.16
The director can always trigger a court hearing by refusing to
agree terms for an undertaking, though he or she will normally
be liable for the SS’s costs, as well as his or her own costs, if the
court makes an order. Alternatively, a director who has accepted
an undertaking may subsequently apply to the court, apparently
at any time, for the period of the disqualification to be reduced
or for the undertaking to cease to apply.17 This is equivalent to
the power which the court has under the Insolvency Rules to
review, vary or rescind disqualification orders.18 Although the
power is broadly framed, the courts are likely to find it
appropriate to alter the undertaking for the future (the court has
no power to declare that it ought not to have been made) only in
limited circumstances. In particular, it would be likely to
undermine the undertaking procedure if directors, having entered
into an undertaking, were able freely to invoke the section.19
Scope of disqualification orders and undertakings
10–3
The scope of the disqualification order or undertaking is
obviously a crucial matter in the design of the legislation. It
would be too limited for such an order to prohibit a person from
acting only as director of a company, since there are many ways
of controlling a company’s management without being a director
of the company. A way forward might have been to extend the
prohibition to being a shadow director of a company but the Act
in fact avoids the difficulties of that definition and takes an even
broader approach. The prohibition imposed by a disqualification
order or undertaking extends to “in any way, directly or
indirectly, be[ing] concerned or tak[ing] part in the promotion,
formation or management of a company”.20 The courts have
taken a broad approach to what being concerned or taking part in
the management of a company may embrace.21 In addition, the
disqualified person is prohibited from acting as an insolvency
practitioner.22 Finally, the disqualified person is denied access to
limited liability through some corporate form other than a
registered company, such as a limited liability partnership, a
building society or an incorporated friendly society.23
Adherence to a disqualification order or undertaking is
secured by criminal penalties24 and, probably much more
important, by personal liability for the debts and other liabilities
of the company incurred during the time the disqualified person
was involved in its management in breach of the order or
undertaking.25 This demonstrates that it is misuse of the facility
of limited liability which lies at the heart of disqualification
orders. Personal liability is also extended to any other person
involved in the management of the company who knowingly
acts on the instructions of a disqualified person.26 Indeed,
entrusting the management of a company to someone known to
be disqualified might well be a basis for disqualifying the
entrusting director on grounds of unfitness.27
The temporal scope of the disqualification order is also
important in assessing its rigour. The approach of the Act is to
set maxima and then to leave the actual disqualification period to
be fixed in the order or undertaking. The maxima vary from one
disqualification ground to another, the longest being in the case
of disqualification on grounds of unfitness, where it is set at 15
years.28 There is also a minimum period of two years in the case
of unfitness in relation to insolvent companies.29 After some lack
of clarity in the cases the Court of Appeal has opted for setting
the actual period of disqualification on grounds of unfitness by
assessing how far below the conduct expected of a director the
respondent fell.30 In Re Sevenoaks Stationers (Retail) Ltd31 the
Court of Appeal divided the 2–15 year period for unfitness
disqualification into three brackets, reflecting different levels of
seriousness, though it cannot be said that it drew the dividing
line between them very clearly.32
The prohibition (except that part of it which relates to acting
as an insolvency practitioner) may be relaxed by the court,
which may give leave to the disqualified person to act in a
particular case. In the case of disqualification on grounds of
unfitness under s.6, it is the practice to consider such
applications at the same time as the disqualification order is
made (in those, now minority, cases in which the disqualification
is imposed by the court).33 The leave granted, which obviously
must not be so wide as to undermine the purposes of the Act,34
often relates to other companies of which the applicant is already
a director, which are trading successfully and whose future
success is thought to be dependent on the continued involvement
of the applicant. Often the leave is made conditional upon other
steps being taken to protect the public, such as the appointment
of an independent director to the board.35 Overall, what the court
has to do is to balance the need to protect the public, especially
future creditors, as demonstrated by the conduct which has
rendered the director unfit, with the interest of the director or
other persons dependent on the company in relation to which
leave is sought in the director having access to trading with
limited liability.36
Compensation
10–4
The compensation provisions introduced in 2015 mean that the
disqualification process may have significance for present as
well as future creditors. The provisions apply to all classes of
disqualification order or undertaking, provided that the company
has become insolvent, the conduct for which the person was
disqualified caused loss to one or more creditors and the
disqualified person was at any time a director of it.37 This
appears to mean that only present or former directors may be
subject to compensation orders (not shadow directors, for
example) but that the conduct leading to the disqualification
need not be conduct as a director (it might be conduct as a
shadow director provided that person was at some point a
director of the company). The initiation of the compensation
procedure lies in the hands of the SS, by way of application to
the court or acceptance of a compensation undertaking, who has
two years from the initial disqualification order or undertaking to
seek to add compensation to it—though both may be dealt with
at the same time.38 In effect, the company’s creditors piggy-back
on the efforts of the public authorities to enforce the
disqualification provisions. But the creditors have no
independent right of action. The utility of the new compensation
provisions thus depends on the SS’s willingness to use them.
Where there is clear loss to creditors and an available
mechanism for distributing the compensation, there is no reason
why the SS (or, rather, the Insolvency Service on his behalf)
should not use them.39 But a pre-condition of use of the
compensation power is the existence of a disqualification order
or undertaking. The Insolvency Service has power to seek these
on grounds of unfitness—the most widely deployed ground—
only where it regards this course of action as being “in the public
interest”.40 It is unclear whether the Service will regard simple
loss to creditors as a ground for seeking disqualification and then
compensation. The amount of the compensation is not specified
precisely, but is to be fixed (by the court or SS) having regard
“in particular” to the amount of the loss caused, the nature of the
conduct which led to the loss and any recompense already
made.41 This suggests that the loss suffered as a result of the
director’s conduct sets the outer boundary of the compensation
to be awarded and, within that, the seriousness of the conduct
will be crucial.
DISQUALIFICATION ON GROUNDS OF UNFITNESS
10–5
There are in fact two mechanisms in the 1986 Act for obtaining
disqualification on unfitness grounds, the initiative in both cases
lying with the SS. Under ss.6 and 7 the SS may apply to the
court to have a director42 or shadow director43 of an insolvent44
company disqualified where the SS thinks it is expedient in the
public interest to do so.45 Instead, the SS may accept a
disqualification undertaking from the director in such
circumstances.46 Secondly, under s.8 the SS may apply to the
court or accept an undertaking in relation to a similar range of
people, whether the company is insolvent or not, if he or she
decides it is in the public interest to do so.47 Under s.6
disqualification is mandatory for a minimum period of two
years, if unfitness is found; the maximum period is 15 years
under both sets of provisions.48 Thus, although in the wake of the
Cork Report business opposition fought off the idea of automatic
disqualification in the case of directors of insolvent companies,
the Government managed to avoid leaving the issue entirely to
the discretion of the courts.49
Once the company has become insolvent, the director is liable
to have the whole of his or her conduct as director of that
company scrutinised for evidence of unfitness. Unlike the
wrongful trading provisions considered in the previous chapter,
that scrutiny is not confined to the director’s conduct in the
period immediately before the insolvency. Moreover, ss.6(2) and
8(2) include within the scrutiny the director’s conduct of other
companies where that person was a director or shadow director.
These other companies may not have fallen into insolvency and
there need be no particular business or other link between the
“lead” company and the other companies in order for the
director’s conduct in relation to them to be taken into account.50
In short, once the unfitness provisions are triggered, the scrutiny
is capable of reaching out into the whole of the activities of the
directors of that company in their capacity as directors.51 In an
important extension made by the 2015 Act these additional
companies include companies incorporated outside Great
Britain, so that geography no longer confines the court’s
examination—though evidential difficulties may do so.52
10–6
Despite the fact that ss.6–8 apply to shadow directors, in 2015
the disqualification provisions were extended to other
“influencers” of directors’ “unfit” conduct. This means that a
disqualification order may be made against or a disqualification
undertaking accepted from a person in accordance with whose
directions or instructions the director has acted.53 These
additional provisions are ancillary in the sense that they may be
invoked, in the case of an order against the influencer,54 only if
there is a disqualification order or an undertaking on grounds of
unfitness in place against the director. In the case of an
undertaking given by the influencer, one or other of those two
situations must exist or the SS must be satisfied that an
undertaking could be accepted from the director.55 In many cases
the influencer will be a shadow director and so can be tackled
directly under ss.6–8. But the extension does not depend, as with
a shadow director, on the board as a whole being accustomed to
act in accordance with the non-director’s directions or
instruction. The focus is on the relationship between the
influencer and the person disqualified. Nor does the person
disqualified need to be accustomed to act as the influencer
wishes, provided the conduct forming the basis of the underlying
conduct was in fact influenced in the required way. The
extension seems to have been part of a general policy which was
being promoted in the run up to the 2015 Act of making
transparent where control of companies lies and bringing
responsibility home to the real controllers.56
The role of the Insolvency Service
10–7
When recommending what is now s.6, the Cork Committee57
said that its aim was to “replace by a far more rigorous system
the present ineffective provisions”. The effectiveness in practice
of s.6 can be said to depend upon two matters. The first is the
assiduity of the Insolvency Service, to which the SS normally
delegates disqualification powers, in enforcing the provisions of
the Act; and the second is the courts’ approach to s.6, especially
their interpretation of the central concept of unfitness and how
they set the period of disqualification.
In order to maximise the chances of applications being made,
the Cork Committee58 recommended that applications by
liquidators or, with leave, other creditors should be permitted,
and so confining applications to the SS was regarded at the time
of the passage of the Insolvency Act 1986 as a retrograde step.
There are two reasons why the Insolvency Service might not
prove effective. The first is lack of information about directors’
conduct, especially when the company is being wound up
voluntarily, so that the Official Receiver is not involved.59 This
is addressed by the imposition of a requirement on liquidators,
administrators and receivers to report to the SS on the conduct of
directors and shadow directors of companies for whose affairs
they are responsible though the quality of the information
provided is not always high.60 In 2015 the obligation was
strengthened to require a report of relevant information in all
cases and not only where the office holder believed there had
been a breach of s.6.61 Secondly, there was doubt about the
quantity and quality of the resources the government would
devote to the enforcement of the legislation. Although the early
efforts of the Insolvency Service were criticised,62 the
enforcement effort is now substantial, as we have noted, though
only a small percentage of the directors of failed companies are
disqualified. Nevertheless, it is clear that the Service still
experiences difficulties in commencing applications within the
two-year period originally permitted by the statute63 and in
prosecuting them with sufficient vigour to avoid striking out on
grounds of delay or infringement of the director’s human rights
(i.e. the right to have one’s civil rights and obligations
determined within a reasonable time, as required by art.6(1) of
the European Convention on Human Rights).64 The response of
the legislature in 2015 was to extend the period for commencing
proceedings to three years—though this does not help, but rather
exacerbates, the human rights issue.
There is an additional risk that the human rights of directors
will be threatened by the disparity between the state resources
available to the Insolvency Service and those available to the
director, who, in the case of a small company, may be virtually
bankrupt. In particular, there is a danger that the impoverished
director will give a disqualification undertaking because he or
she cannot afford the costs of a full-scale court examination of
the issues. So far, these issues have been addressed rather little
in litigation, though appreciation of the situation may lie behind
the courts’ unwillingness to impose too high a level of
competence on directors under the disqualification provisions.65
As far as the European Convention on Human Rights is
concerned, both the domestic courts and the European Court of
Human Rights seem agreed that disqualification proceedings are
civil in nature, not criminal, so that a lower, but not negligible,
standard of fairness is required in conducting them.66 In
particular, the domestic courts have concluded that the Human
Rights Convention does not require the automatic exclusion of
evidence against the director which was obtained from him or
her under statutory powers of compulsion.67 However, the
exclusion of such evidence has been achieved in fact, as a matter
of interpretation of the domestic law, in the case of the statutory
provisions most likely to be of use to the Insolvency Service.
Under ss.235 and 236 of the Insolvency Act 1986 the liquidator
of a company and the Official Receiver are empowered to
require answers to questions which they put to directors of
companies in insolvent liquidation and to require the production
of documents, but the Court of Appeal has held that these
provisions cannot be used for the purpose of supporting
disqualification applications.68
The role of the court
10–8
Turning to the role of the courts, some guidance is given in
Sch.1 on how the courts (and indeed the SS) should approach
disqualification determinations. The Schedule was revised in
2015 so as to set out the relevant matters at a higher level of
generality than previously, so as to emphasise the width of the
courts’ investigation. The applicability of the Schedule was also
widened since it now applies to all disqualification decisions, not
just to the determination of unfitness.69 In all cases the court
must take into account the extent to which the company was in
breach of legislative requirements (not necessarily just the
requirements of the companies legislation), the defendant’s
responsibility for the company70 becoming insolvent, the loss
actually or potentially caused by the defendant’s conduct and the
frequency with which a director has engaged in conduct caught
by the Schedule. Where the defendant is a director—the standard
case—the court must have regard to the director’s breach of
fiduciary duties or other duties applying specifically to directors.
Breach of commercial morality
10–9
It is possible to divide the cases in which the courts have found
unfitness into two rough categories: probity and competence.71
However, it must be remembered that the concept of unfitness is
open-ended, so that it cannot be claimed that all potential, or
even actual, disqualification applications can be forced into one
or other of these categories. Further, in the nature of things,
many disqualification cases display aspects from both categories.
Nevertheless, it is thought that identifying the two categories is a
useful starting point.
The first category, breach of commercial morality,72 has at its
centre the idea of conducting a business at the expense of its
creditors. A leading example, though only an example, of such
conduct is the Phoenix company described by the Cork
Committee in terms of a person who sets up an undercapitalised
company, allows it to become insolvent, forms a new company
(often with assets purchased at a discount from the liquidator of
the old company), carries on trading much as before, and repeats
the process perhaps several times, leaving behind him each time
a trail of unpaid creditors.73 More generally, the courts have been
alert to find unfitness where the directors have apparently
attempted to trade on the backs of the company’s creditors.74 It
was thought at one time that particular obloquy attached to
directors who attempted to trade out their difficulties by using as
working capital in the business monies owed to the Crown by
way of income tax, national insurance contributions or VAT, on
the grounds that the Crown was an involuntary creditor.
Although that view has been rejected by the Court of Appeal, the
same court has affirmed that, in relation to any creditor, paying
only those creditors who pressed for payment and taking
advantage of those creditors who did not, in order to provide the
working capital which the company needed, is a clear example
of unfitness.75 If the directors of the financially troubled
company are at the same time paying themselves salaries which
are out of proportion to the company’s trading success (or lack
of it) or making disguised distributions to themselves of
corporate assets, the likelihood of a disqualification order being
made is only increased.76
Recklessness and incompetence
10–10
In the previous section the cases considered highlighted
opportunistic behaviour by directors towards the creditors of the
company by failing to pay the creditors whilst continuing
trading. The cases considered in this section focus more
generally on the recklessness or incompetence of the directors’
conduct of the business. They may pay the creditors the money
due to them, as long as the company is able to do so, but the
directors may be regarded as responsible for bringing about the
situation where the company ultimately has to default on its
commitments because of the way they have chosen to run it. In
many cases, of course, both aspects of unfitness can be found.
The early cases put liability on the basis of recklessness,77 but
more recently it has been said that “incompetence or negligence
to a very marked degree”78 would be enough. The danger which
the courts have to avoid in this area is that of treating any
business venture which collapses as evidence of negligence. To
do so would be to discourage the taking of commercial risks,
which must be the life-blood of corporate activity. However,
creating a space for proper risk-taking is no longer thought to
require relieving directors of all objective standards of conduct.
In Re Barings Plc (No.5)79 the Court of Appeal gave guidance on
what constitutes a high degree of incompetence in the common
situation of the directors having properly delegated functions to
lower levels of management. Provided the articles of association
permit such delegation, as they inevitably will in large
organisations, delegation in itself is not evidence of unfitness.
However, the responsible director may be found to be unfit if
there is put in place no system for supervising the discharge of
the delegated function or if the director in question is not able to
understand the information produced by the supervisory system.
In other words, in large organisations directors must ensure there
are in place adequate internal systems for monitoring risk and
failure to do so may be grounds for disqualification.
However, the proposition that directors “have a continuing
duty to acquire and maintain a sufficient knowledge and
understanding of the company’s business to enable them
properly to discharge their duties as directors”80 applies not just
to duties delegated to sub-board level but also to reliance by
directors on their board colleagues to take responsibility for
particular functions and duties. Although such reliance is again
in principle acceptable, so that there can be a division of
functions on the board, most obviously between executive and
non-executive directors, all directors must maintain a minimum
level of knowledge and understanding about the business so that
important problems can be identified and dealt with before they
bring the company down. Thus, in Re Richborough Furniture
Ltd81 a director was disqualified for three years, on the basis of
“lack of experience, knowledge and understanding. She did not
have enough experience or knowledge to know what she should
do in the face of the problems of pressing creditors, escalating
Crown debts and lack of capital. It seems that she was not
sufficiently skilful as regards the accounts functions to see that
the records were inadequate.” Disqualification of incompetent
directors has thus become a crucial tool in the enforcement of
directors’ standards of competence, perhaps more so than actions
for breach of the director’s general duty of care,82 which must be
funded by private litigants. The two areas of law will no doubt
continue to influence each other.
10–11
In this area, particular importance is attached by the courts to
failure by directors to file annual returns or, in future,
confirmation statements, produce audited accounts and to keep
proper accounting records.83 These are the practical expressions
of a more general view that all directors must keep themselves
au fait with the financial position of their company and make
sure that it complies with the reporting requirements of the
companies legislation, for otherwise they cannot know what
corrective action, if any, needs to be taken.84 Although this duty
may fall with particular emphasis on those responsible for the
financial side of the company, all directors must keep themselves
informed about the company’s basic financial position.85 On the
other hand, seeking and acting on competent outside advice
when financial difficulties arise will be an indication of
competence, even if the plan recommended does not pay off and
the company eventually collapses.86 It should also be
remembered that, in the disqualification area, the courts have
required a “marked degree” of negligence87 before declaring a
director unfit. There is a contrast here with wrongful trading and
the standard of care under the directors’ general duties88 where
there is no suggestion that a low standard of care is to be applied
to directors.89 It is suggested that this contrast is explained by the
fact that a disqualification order can often have the effect of
depriving the director of his livelihood and that, once unfitness is
found, a two-year disqualification is mandatory.
DISQUALIFICATION ON GROUNDS OTHER THAN UNFITNESS
Serious offences
10–12
The remaining provisions of the 1986 Act permit, but do not
require, the court to disqualify a director, on various grounds.
With one exception, disqualification here is based on a court
order. Disqualification by means of undertaking is not generally
available. These other grounds of disqualification will be dealt
with briefly, partly because they have not generated as much
controversy as the unfitness ground. Disqualifications under s.2
(disqualification on conviction of an indictable offence)
apparently constitute the second most common source (after
unfitness) for disqualification orders.90
In relation to serious offences, there are two routes to a
disqualification order, depending upon whether the person
concerned has actually been convicted of an offence. If there has
been a conviction, a disqualification order may be made against
a person, whether a director or not, who has committed an
indictable offence in connection with the promotion, formation,
management, liquidation or striking off of a company or in
connection with the receivership or management of its
property.91 Usually, the disqualification will be ordered by the
court by which the person is convicted and at the time of his or
her conviction. However, if the convicting court does not
consider the issue, the SS or the liquidator or any past or present
creditor or member of the company in relation to which the
offence was committed may apply to any court having
jurisdiction to wind up the company to impose the
disqualification.92 Here, too, the courts have taken a wide view
of what “in connection with the management of the company”
means in this context.93 Where a person has been convicted of an
equivalent offence outside Great Britain the SS may seek a
disqualification order from the High Court or Court of Session or
accept an undertaking from that person.94
Where there has not been a conviction, but the company is
being wound up, then if it appears that a person has been guilty
of the offence of fraudulent trading95 or has been guilty as an
officer96 of the company of any fraud in relation to it or any
breach of duty as an officer, then the court having jurisdiction to
wind up the company may impose a disqualification order.97
Disqualification in connection with civil liability for
fraudulent or wrongful trading
10–13
In addition to the array of civil orders which the court may make
under ss.213 and 214 of the Insolvency Act 1986 when it finds
fraudulent or wrongful trading,98 s.10 of the Disqualification Act
adds the power to make a disqualification order. The court may
act here on its own motion, that is, whether or not an application
is made to it by anyone for an order to be made. Since there are
only low levels to litigation to recover contributions in cases of
fraudulent and wrongful trading, the number of disqualifications
is also low.99
Failure to comply with reporting requirements
10–14
Again, there are separate provisions according to whether the
person to be disqualified has been convicted or not. If he or she
has been convicted of a summary offence in connection with a
failure to file a document with or give notice of a fact to the
Registrar, then the convicting court may disqualify that person if
in the previous five years he has had at least three convictions
(including the current one) or default orders against him for non-
compliance with the reporting requirements of the Companies
and Insolvency Acts.100 If the current conviction is on
indictment, then the provisions of s.2 (above) apply, but, where
the current conviction is summary, the fact that the earlier
convictions were on indictment does not prevent the convicting
summary court from taking them into account.101
Where there has been no conviction, the SS and the others
mentioned in s.16(2)102 may apply to the court having
jurisdiction to wind up the companies in question for
disqualification orders to be made on the grounds that the
respondent has been “persistently in default” in complying with
the reporting requirements of the Companies and Insolvency
Acts.103 The “three convictions or defaults in five years” rule
applies here too, but without prejudice to proof of persistent
default in any other manner.104 Since the offences involved in
these sections may be only summary ones, the maximum period
of disqualification is limited to five, instead of the usual 15,
years. Nevertheless, the fact that these provisions are in the Act
at all is a testimony to the importance attached recently to timely
filing of accounts and other documents. However, the
improvement recorded in this area may be due more to the
introduction of late filing penalties than the disqualification
orders.
REGISTER OF DISQUALIFICATION ORDERS
10–15
Crucial to the effective operation of the disqualification
machinery is that publicity should be given the names of those
who have been disqualified. Thus, the Act requires the SS to
create such a register of orders and undertakings, which register
is open to public inspection.105 The register is also to contain
details of any leave given to a disqualified person to act despite
the disqualification. However, either because of doubts about the
accuracy of the register or to relieve the Registrar of the need to
check it, the 2006 Act contains a power for the SS to make
regulations about the returns which companies have to make to
the Registrar about the appointment of directors and secretaries.
The regulations may require the return to contain the statement
in relation to a disqualified person that the leave of the court to
act has been obtained.106
BANKRUPTS
10–16
The prohibition on undischarged bankrupts acting as directors or
being involved in the management of companies can be traced
back to the Companies Act 1928. Although bankruptcy does not
necessarily connote any wrongdoing, the policy against
permitting those who have been so spectacularly unsuccessful in
the management of their own finances taking charge of other
people’s money is so self-evident that it has not proved
controversial. The prohibition is now contained in s.11 of the
1986 Act, which makes so acting a criminal offence,107 and the
main point of interest about it for present purposes is that it is an
automatic disqualification, not dependent upon the making of a
disqualification order by the court. In 2002 the prohibition was
extended to include acting in breach of a bankruptcy restriction
order or undertaking, themselves creations of the legislative
reforms of that year.108 Bankruptcy restriction orders and
undertakings, clearly modelled to some extent on directors’
disqualification orders and undertakings, put restrictions on a
former bankrupt’s activities after discharge from bankruptcy, in
general an earlier event than had previously been the case.
However, the disqualification is not absolute, because the
bankrupt or previous bankrupt may apply to the court for leave
to act in the management of a company, other than as an
insolvency practitioner.109 In other words, the statute really
reverses the burden of taking action, by placing it upon the
bankrupt to show that he or she may be safely involved in the
management of companies rather than upon the state to
demonstrate to a court that the bankrupt ought not to be allowed
to act.
OTHER CASES
10–17
Disqualification has become a popular legislative technique in
recent years. The 1986 Act itself applies to those in charge of
other corporate bodies as if they were companies formed under
the Companies Acts, such as building societies, incorporated
friendly societies, NHS foundation trusts, registered societies
and charitable incorporated organisations.110 Another extension
is to apply disqualification to the directors of companies for
breaches of provisions other than company law rules. Thus,
ss.9A–9E make provision for disqualification orders and
undertakings in relation to directors (and shadow directors) of
companies which have broken competition law where a court or
regulator is of the opinion that the director is in consequence
unfit to be involved in the management of a company. Finally,
breaches of sector-specific rules, such as in the banking sector,
could form the basis for disqualification, for example, on
grounds of unfitness, but the Government stopped short of
giving sectoral regulators disqualification powers under the 1986
Act: instead, they have to operate through the Insolvency
Service. Of course, sector-specific legislation may give sectoral
regulators disqualification powers in relation to the areas of
economic activity they regulate, as is the case with financial
regulators—but such provisions are outside the scope of this
chapter.
CONCLUSION
10–18
For many years the disqualification provisions of the successive
Companies Acts seemed to make little impact. Important in
principle as a technique for dealing with corporate wrongdoing
of one sort or another, especially on the part of directors, the
practical consequences of the provisions were limited. The
combination of the substantive reforms recommended by the
Cork Committee and of acceptance by Government that the
promotion of small, and not-so-small, businesses needed to be
accompanied by action to raise the standards of directors’
behaviour and to protect the public from the scheming and the
incompetent, brought the disqualification provisions to the fore.
Further, as we have seen in Ch.7,111 controversy about whether
directors whose companies are convicted of the proposed new
corporate killing offence should be disqualified from acting in
connection with businesses delayed progress on that reform
proposal, though in the end the legislation did not make use of
the disqualification technique. As to disqualification orders in
company law, judged by the level of disqualification orders and
undertakings, the provisions now have a substantial impact. An
independent survey112 found a widespread consensus that the
provisions performed a useful role and should be retained,
although they were certainly capable of improvement, especially
at the level of securing compliance with the disqualification
orders made.113
However, it would be wrong to see disqualification as solely a
response to abuses of limited liability within small companies.
There is some evidence that the public authorities use
disqualification to inflict reputational harm on directors of
companies which have failed in circumstances giving rise to
public condemnation and where no other remedy is readily
available. We noted above the disqualification of directors of
Barings Bank which collapsed as a result of failure to identify
and prevent large foreign exchange bets being placed by a junior
trader.114 Another example is the disqualification undertakings,
offered by the four directors of MG Rover Group Ltd after its
well-publicised collapse, and accepted by the SS. The company
had gone into administration in April 2005, owing creditors
nearly £1.3 billion, causing many employees to lose their jobs
and ending large-scale, British-owned car manufacturing. In this
case, the ground work for the disqualification had been provided
through a lengthy and expensive public investigation into the
collapse of the company.115 The removal of the investigation pre-
condition to the use of s.8 by the SS may increase this use of the
provision in the future.
1Report of the Review Committee on Insolvency Law and Practice, Cmnd. 8558 (1982),
para.1808.
2
Cmnd. 8558, para.1815.
3 This is still the principal legislation and references in this chapter to sections will be to
that Act, as amended, unless otherwise indicated.
4 1986 Act ss.6(3C), 8(1).
5 1986 Act ss.6 and 8.
6 1986 Act s.7.
7
1986 Act s.15A(1).
8 1986 Act s.16.
9 1986 Act ss.1 and 1A. See further below, para.10–2.
10
For the policy behind the 2015 Act in the disqualification area see BIS, Transparency
& Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust
in UK Business: Government Response, April 2014 (BIS/14/672) Ch.5–9.
111986 Act s.22(2A). The reference is to “Great Britain” rather than the “United
Kingdom” because Northern Ireland has separate disqualification legislation—The
Company Directors Disqualification (Northern Ireland) Order 2002—though its scope is
similar.
12
2006 Act s.1184.
13
DTI, Companies in 2001–2002 (2002), Table D1.
14
Companies House, Statistical Tables on Companies Registration Activities 2014–
2015, Table D1.
15
Though the courts had developed a summary procedure for dealing with non-
contested cases: Re Carecraft Construction Co Ltd [1994] 1 W.L.R. 172; and Practice
Direction [1999] B.C.C. 717. The summary procedure has effectively been overtaken by
the out-of-court undertaking, though in principle it is still available.
16
1986 Act ss.1 and 1A.
17 1986 Act s.8A. This is separate from the director’s power to apply to the court for
leave to act notwithstanding the undertaking, a power which applies also to orders: s.17.
18 Insolvency Rule r.7.47(1).
19
Re INS Realisations Ltd [2006] 2 B.C.L.C. 239—director not normally able to use the
section to challenge the facts on which the undertaking was premised, but in the
particular circumstances of that case the power was used to cause the undertaking to
cease to operate. See also Re Morija Plc [2008] 2 B.C.L.C. 313.
20
1986 Act ss.1(1) and 1A(1). If a court makes a disqualification order, it must cover all
the activities set out in the statute, but the court could give the disqualified director
limited leave to act despite the order. See Re Gower Enterprises (No.2) [1995] 2
B.C.L.C. 201; and Re Seagull Manufacturing Co Ltd [1996] 1 B.C.L.C. 51 and below.
21 Management of a company is thought to require involvement in the general
management and policy of the company and not just the holding of any post labelled
managerial, though in small companies it may not be possible to distinguish between
policy-setting and day-to-day management: R. v Campbell (1983) 78 Cr. App. R. 95 CA
(acting as a management consultant); Drew v HM Advocate, 1996 S.L.T. 1062; Re
Market Wizard Systems (UK) Ltd [1998] 2 B.C.L.C. 282.
22
1986 Act ss.1(1)(b) and 1A(1)(b).
23 1986 Act ss.22A–C and E–F and the Limited Liability Partnership Regulations 2001
(SI 2001/1090), reg.4(2). The disqualified director is also prohibited from acting as the
trustee of a charitable trust, whether that trust is incorporated or not: Charities Act 2011
ss.178 et seq., though the charity commissioners may give leave to act.
24 1986 Act ss.13 and 14. The equivalent offence in relation to acting when bankrupt has
been held to be one of strict liability (R. v Brockley (1993) 92 Cr. App. R. 385 CA) and
the arguments used to support that conclusion would seem equally applicable to the
offence of acting when disqualified.
25 1986 Act s.15(1)(a).
26 1986 Act s.15(1)(b). The various people made personally liable by s.15 are jointly and
severally liable with each other and with the company and any others who are for any
reason personally liable: s.15(2).
27 See Re Moorgate Metals Ltd [1995] 1 B.C.L.C. 503.
28 1986 Act ss.6(4) and 8(4).
29 1986 Act s.1A(2) applies the minima to undertakings as well.
30
Re Grayan Building Services Ltd [1995] Ch. 241 CA. In this case the Court of Appeal
held that the respondent could not reduce the period of disqualification by showing that,
despite past shortcomings, he was unlikely to offend again. Such evidence, however,
could be taken into account on an application for leave. See also Re Westmid Packing
Services Ltd [1998] 2 All E.R. 124 at 131–132 CA.
31
Re Sevenoaks Stationers (Retail) Ltd [1991] Ch. 164 at 176 CA.
32
The court distinguished between a top bracket of over ten years for “particularly
serious” cases; a middle bracket of six to ten years for serious cases “which do not merit
the top bracket”; and a minimum bracket for “not very serious” cases. See also Re
Westmid Packing Services Ltd [1998] 2 All E.R. 124 CA: fixing of length of
disqualification to be done on the basis of “common sense”)—ibid. at 132.
33
Secretary of State for Trade and Industry v Worth [1994] 2 B.C.L.C. 113 CA, which
indeed puts the applicant under some costs pressure to apply then, if his application is
based on circumstances existing at the time of the order. If disqualification is by
undertaking, a separate application for leave will, of course, be necessary. Leave cannot
be given by the Secretary of State, only by the court.
34
Secretary of State for Trade and Industry v Barnett [1998] 2 B.C.L.C. 64; Re
Britannia Homes Centres Ltd [2001] 2 B.C.L.C. 63: leave refused where director with
history of insolvencies wished to incorporate a new and wholly-owned company to carry
on trading in same line of business.
35 Re Cargo Agency Ltd [1992] B.C.L.C. 686; Re Chartmore Ltd [1990] B.C.L.C. 673;
Re Clenaware Systems Ltd [2014] 1 B.C.L.C. 447. The practice has been followed in
Scotland despite doubts whether the power to give leave confers upon the courts the
power to specify conditions: Secretary of State for Trade and Industry v Palfreman
[1995] 2 B.C.L.C. 301. If the conditions attached by the court are not strictly complied
with, the director is in breach of the disqualification order and so exposed to personal
liability: Re Brian Sheridan Cars Ltd [1996] 1 B.C.L.C. 327.
36 Re Barings Plc (No.3) [2000] 1 W.L.R. 634; Re Tech Textiles [1998] 1 B.C.L.C. 259.
37
1986 Act s.15A(3)(4), insolvency being defined so as to include insolvent liquidation,
administration and administrative receivership.
38 1986 Act s.15A(5).
39
1986 Act s.15B(2) provides that the compensation may be ordered in favour of the
Secretary of State for distribution among the specified creditors (whoever they may be)
or, as with wrongful trading awards, take the form of a contribution to the assets of the
company. It is implicit in the second case that the company is in the hands of an
insolvency practitioner. It is likely that the Insolvency Service will favour the latter
method of distribution, if only because it avoids the costs of undertaking this task.
40 1986 Act s.7(1)(2A).
41
1986 Act s.15B(3).
42 Including a de facto director (s.22(4)), i.e. a person who acts as a director even though
he has not been validly appointed as a director or even though there has been no attempt
at all to appoint him as director: Re Kaytech International Plc [1999] 2 B.C.L.C. 351
CA.
431986 Act s.22(5). On the meaning of “shadow director” see the previous chapter at
para.9–7 and, below, Ch.16 at para.16–8.
44
A company is insolvent if it goes into liquidation with insufficient assets to meet its
liabilities, if an administration order has been made in relation to the company or if an
administrative receiver is appointed: s.6(2). Thus, the disqualification provisions, unlike
the wrongful trading provisions, are not confined to companies which go into insolvent
liquidation. The court is specifically given power to look at the director’s conduct post-
insolvency. Sections 21A–C apply the Act to the specialised mechanisms for bank
insolvencies and administrations.
45
1986 Act s.7(1).
46
1986 Act s.7(2A).
47
Until 2015 this power was exercisable only on the basis of information obtained via
official investigation into the company (under a variety of powers). The s.8 power was
previously rarely used; it remains to be seen whether the reform will change that.
48
1986 Act s.6(1)(4), 8(4) and 1A(2).
49See A. Hicks, “Disqualification of Directors—Forty Years On” [1988] J.B.L. 27 at 35
and 38–40.
50 Secretary of State for Trade and Industry v Ivens [1997] 2 B.C.L.C. 334 CA.
However, it would seem that a director cannot be disqualified on the basis of his conduct
of the non-lead companies alone.
51 And, indeed, post-insolvency activities: s.6(2).
52
The court may look at the conduct in relation to “one or more other companies or
overseas companies”: ss.6(1)(b),(1A) and 8(2),(2B).
53 1986 Act ss.8ZA(2), 8ZD(3).
54 1986 Act ss.8ZA(1), 8ZD(1).
55
1986 Act ss.8ZC(1), 8ZE(1).
56
BIS Ch.4 (“Opaque corporate control through irresponsible ‘front’ directors”).
57
See above, fn.1 at para.1809.
58 See above, fn.1 at para.1818.
59In Scotland, where there are no Official Receivers, even compulsory liquidations are
handled by insolvency practitioners and the potential scope of the problem is
accordingly greater.
60
See S. Wheeler, “Directors’ Disqualification: Insolvency Practitioners and the
Decision-making Process” (1995) 15 L.S. 283. Moreover, the statutory scheme does not
bite if the company is simply struck off the register (see below, paras 33–35 et seq.)
without going through any of these procedures.
61 1986 Act s.7A and SI 2016/180. The obligation is to provide any information about
conduct which may help the Insolvency Service decide whether to implement
disqualification proceedings. Previously, this information was to be provided by the
insolvency practitioner only if the Service asked for it. The request power now exists in
relation to all persons other than the insolvency practitioners (s.7(4)).
62National Audit Office, The Insolvency Service Executive Agency: Company Director
Disqualification (1993) H.C. 907.
63
1986 Act s.7(2). The court may give leave to commence the application out of time,
though the Secretary of State must show a good reason for any extension: Re Copecrest
Ltd [1994] 2 B.C.L.C. 284 CA; Re Instant Access Properties Ltd [2012] 1 B.C.L.C. 710.
64
Re Manlon Trading Ltd [1996] Ch. 136; Davies v UK [2006] 2 B.C.L.C. 351 ECtHR
(a case decided in 2002); Eastaway v UK [2006] 2 B.C.L.C. 361 ECtHR. However, in
the last of these cases the Court of Appeal refused to set aside the disqualification
agreement entered into by the director under the Carecraft procedure (above, fn.15),
even though the ECtHR had held the proceedings to have taken too long: Eastaway v
Secretary of State for Trade and Industry [2007] B.C.C. 550. The National Audit Office,
above, fn.62 para.18; found that the Insolvency Service in most cases took nearly the full
two-year period permitted to bring an application and that up to a further four years
might elapse before a disqualification order was made, during which period the director
was free to carry on business with limited liability.
65See para.10–10, below and the extra-judicial remarks of Lord Hoffmann, Fourth
Annual Leonard Sainer Lecture in (1997) Company Lawyer 194.
66
R. v Secretary of State for Trade and Industry Ex p. McCormick [1998] B.C.C. 379
CA; DC v United Kingdom [2000] B.C.C. 710 ECtHR.
67Official Receiver v Stern [2000] 1 W.L.R. 2230 CA. Contrast the decision in Saunders
v United Kingdom [1998] 1 B.C.L.C. 362 ECtHR.
68
Re Pantmaenog Timber Co Ltd [2001] 4 All E.R. 588 CA.
69 1986 Act s.12C (replacing the former s.9).
70This includes not just the “lead” company but all other companies, including overseas
ones, brought in under s.6(1)(b).
71
“Those who trade under the regime of limited liability and who avail themselves of
the privileges of that regime must accept the standards of probity and competence to
which the law requires company directors to conform” (per Neill LJ in Re Grayan
Building Services Ltd [1995] Ch. 241 CA).
72 Of course, simple fraud will be a basis for disqualification. As a proposition of
substantive law this is straightforward; the complications are procedural. See Secretary
of State v Doffmann (No.2) [2011] 2 B.C.L.C. 541.
73Cork Committee, para.1813. For the operation of the rule forbidding re-use of
corporate names in this situation, see Ch.9, above. For examples in the disqualification
case law, see Re Travel Mondial (UK) Ltd [1991] B.C.L.C. 120; Re Linvale Ltd [1993]
B.C.L.C. 654; Re Swift 736 Ltd [1993] B.C.L.C. 1.
74 Re Keypak Homecare Ltd [1990] B.C.L.C. 440.
75
Re Sevenoaks Stationers (Retail) Ltd [1991] Ch. 164 CA; Secretary of State for Trade
and Industry v McTighe (No.2) [1996] 2 B.C.L.C. 477 CA.
76Re Synthetic Technology Ltd [1993] B.C.C. 549; Secretary of State v Van Hengel
[1995] 1 B.C.L.C. 545; Secretary of State for Business Innovation and Skills v Doffman
(No.2) [2011] 2 B.C.L.C. 541.
77 Re Stanford Services Ltd [1987] B.C.L.C. 607.
78 Re Sevenoaks Stationers (Retail) Ltd [1991] Ch. 164 CA at 184.
79
Re Barings Plc (No.5) [2000] 1 B.C.L.C. 523 CA. The case involved the insolvency
of an old and respected merchant bank brought about by the huge losses generated by
the unauthorised trading activities of a junior employee whose activities were neither
well understood nor effectively monitored by his superiors.
80
Re Barings Plc (No.5) [2000] 1 B.C.L.C. 523 at 536. See also Re Westmid Packing
Services Ltd [1998] 2 All E.R. 124; and Re Vintage Hallmark Plc [2007] 1 B.C.L.C.
788.
81
Re Richborough Furniture Ltd [1996] 1 B.C.L.C. 507.
82
See para.16–15.
83
These may be ingredients in a finding of unfitness, even though, as we see below,
para.10–14, non-compliance with the reporting requirements of the legislation is a
separate ground of disqualification, albeit only for up to five years. For further
discussion of what is required in this area see Ch.21.
84
Re Firedart Ltd [1994] 2 B.C.L.C. 340; Re New Generation Engineers Ltd [1993]
B.C.L.C. 435.
85 Re City Investment Centres Ltd [1992] B.C.L.C. 956; Secretary of State v Van Hengel
[1995] 1 B.C.L.C. 545; Re Majestic Recording Studios Ltd [1989] B.C.L.C. 1; Re
Continental Assurance Co of London Plc [1977] 1 B.C.L.C. 48; Re Kaytech
International Plc [1999] 2 B.C.L.C. 351 CA.
86 Re Douglas Construction Services Ltd [1988] B.C.L.C. 397. Conversely, ignoring a
plan produced by outside accountants is likely to be characterised as “obstinately and
unjustifiably backing [the director’s] own assessment of the company’s business”: Re
GSAR Realisations Ltd [1993] B.C.L.C. 409.
88
See para.9–6, above, and para.16–16, below.
89
Of course, keeping an insolvent company going can be grounds for disqualification
for being unfit but only in strong cases. See, for example, Re Living Images Ltd [1996] 1
B.C.L.C. 348, where the directors were aware of the company’s parlous condition and
keeping it going was described as “a gamble at long odds” and “the taking of
unwarranted risks with creditors’ money”, so that there was a lack of probity involved
and not just negligence. cf. the refusal to make a disqualification order in Re Dawson
Print Group Ltd [1987] B.C.L.C. 601; Re Bath Glass Ltd [1988] B.C.L.C. 329; Re CU
Fittings Ltd [1989] B.C.L.C. 556; and Secretary of State v Gash [1997] 1 B.C.L.C. 341.
90 A. Hicks, Disqualification of Directors: No Hiding Place for the Unfit? (ACCA
Research Report 59, 1998), p.35, found that in 1996 about one quarter of those at that
time disqualified were in that position as a result of a s.2 disqualification. The proportion
has probably fallen since then, with the rise of unfitness disqualifications, especially via
undertakings. The Companies House figures (above, fn.14) do not distinguish among
disqualifications on any of the grounds laid down in ss.2–5 of the Act, but indicate that
in 2014/15 217 out of 1227 disqualifications took place under ss.2–5.
91 1986 Act s.2.
92 1986 Act s.16(2). If the criminal court does consider the matter and decide not to
impose disqualification, it is an abuse of process to pursue the same issue before a civil
court: Secretary of State v Weston [2014] B.C.C. 581. However, the courts have
permitted disqualification orders to be pursued in such cases under other grounds for
disqualification contained in the Act: Secretary of State v Rayna [2001] 2 B.C.L.C. 48;
Re Denis Hilton Ltd [2002] 1 B.C.L.C. 302.
93
R. v Goodman [1994] 1 B.C.L.C. 349 CA (insider dealing by a director in the shares
of his company); R. v Georgiou (1988) 4 B.C.C. 625; R. v Ward, The Times, 10 April
1997 (conspiracy to defraud by creating a false market in shares during a takeover bid);
R. v Creggy [2008] 1 B.C.L.C. 625 CA (facilitating criminal activity by third parties).
94
1986 Act s.5A introduced in 2015.
95
See para.9–5.
96
Also included are the usual cast of liquidators, receivers and administrative receivers
and also shadow directors: s.4(1)(b) and (2).
97
1986 Act s.4, upon application by those listed in s.16(2). It is unclear whether the
breach of duty referred to must involve the commission of a criminal offence, but the use
of the word “guilty” suggests so.
98 See para.9–8.
99
No disqualification order was made under s.10 in the period 2010–2015 (Companies
House, above, fn.14) though it is possible that disqualification in relation to fraudulent
trading was imposed in a few cases under s.4.
100
1986 Act s.5.
101
Contrast the wording of subs.(1) and (2) of s.5.
102 See above, text attached to fn.92.
103 1986 Act s.3.
104
1986 Act s.3(2).
105
1986 Act s.18 and the Companies (Disqualification Orders) Regulations 2009 (SI
2009/2471).
106 CA 2006 s.1189. At the time of writing no regulations have been made.
107 Acting in breach of the prohibition also attracts personal liability for the company’s
debts (s.15—though this may not be of much utility in relation to bankrupts) and could,
apparently, give rise to the making of a disqualification order under s.2 (above, para.10–
9): R. v Young [1990] B.C.C. 549 CA).
108These changes were effected by Sch.20 to the Enterprise Act 2002, introducing a
new Sch.4A into the Insolvency Act 1986.
109
IA1986 ss.11(1) and 390(4)(a).
110 1986 Act ss.22A–C, E–F.
112By A. Hicks; see fn.90, above. The report makes a number of interesting and
thought-provoking suggestions for reform. For a more sceptical account see R. Williams,
“Disqualifying Directors: a Remedy Worse than the Disease?” (2007) 7 J.C.L.S. 213.
113 Companies in 2005–2006 (above, fn.13) reveals that some 90 prosecutions for
breach of disqualification orders or of the prohibition on bankrupts acting as directors
were launched in that year, producing 81 convictions. More recent statistics appear not
to be available. It is difficult to know whether this relatively modest total indicates a
high level of compliance with the disqualifications or a low level of detection of
breaches.
114
See above, fn.79.
115
Department of Business Innovation and Skills, Press Release, 9 May 2011.
CHAPTER 11
LEGAL CAPITAL, MINIMUM CAPITAL AND
VERIFICATION
Meaning of Capital 11–1

Nominal Value and Share Premiums 11–3
Nominal value 11–3
No issue of shares at a discount 11–4
The share premium 11–6
Minimum Capital 11–8
Objections to the minimum capital requirement 11–9
Disclosure and Verification 11–10
Initial statement and return of allotments 11–11
Abolition of authorised capital 11–12
Consideration received upon issue 11–13
Share capital and choice of currency 11–19
Capitalisation Issues 11–20
Conclusion 11–21
MEANING OF CAPITAL
11–1
In the previous two chapters we saw how the law applies
sanctions to the controllers of companies who abuse the facility
of limited liability. In particular, personal liability for the
company’s obligations and disqualification from being involved
in the management of a company in the future are techniques
used by the law in these cases. Both are ex post techniques, i.e.
the sanctions are applied after the event, normally after the
company has fallen into insolvency. Sanctions are applied on the
basis, most often, that the court has concluded that the
controllers have infringed some broad and general standard laid
down for the assessment of their conduct, for example, engaging
in “wrongful” trading or displaying “unfit” conduct. In this
chapter and the next two, by contrast, we consider ex ante
approaches to controlling abuse of limited liability, i.e. the rules,
generally of a precise and detailed character, which apply before
the company is in insolvency or even in the region of insolvency.
Given that creditors’ claims are confined to the assets of the
company, the techniques now discussed seek to ensure that the
shareholders contribute to or maintain in the company an
appropriate level of assets for the benefit of creditors. A good
level of shareholder-contributed assets, it can be argued, will
both reduce the chances of the company falling into insolvency
and increase the likely size of the pay-out to creditors if
insolvency does occur. This idea can be given expression in a
number of ways, which will be explored in these chapters.
The traditional protective mechanism of company law in this
area, which is as old as limited liability itself, involves laying
down rules about the raising and maintenance of “capital”.
“Capital” is a word of many meanings,1 but in company law it is
used in a very restricted sense. It connotes the value of the assets
contributed to the company by those who subscribe for its
shares. By and large, the value of what the company receives
from investors in exchange for its shares constitutes its capital.2
One talks about the value of what is received, rather than the
assets themselves, because those assets will change form in the
course of the business activities of the company. If the company
receives cash in exchange for its shares, the directors will turn
that cash into other types of asset in order to promote its
business: indeed, if they did not, they would probably be in
breach of duty. So, the focus is on using the number in the
company’s accounts which indicates the value of what was
received by the company in the exchange for the shares to
constrain the actions of the company in various ways, in UK law
principally to constrain the company’s freedom to make
distributions to its shareholders.
The value of the assets which the company receives in
exchange for its shares (its legal capital) will normally be less
than the total value of the company’s assets. Even where the
company has not yet begun to trade, it may have raised money in
ways other than share issues. For example, it may have borrowed
money from a bank or a group of banks, which loan contributes
to the company’s cash assets. The value of such loans does not
count towards its legal capital, however. This is because the aim
of the capital rules is to protect creditors as a class and only
assets contributed by shareholders do this effectively.3 The cash
provided by the lender will be exactly counterbalanced by an
increase on the liabilities side of the company’s balance sheet, so
that the creditors as a whole are no better off. Once a company
has begun trading and if it has done so profitably, it will have
assets which represent the profits. These, too, do not count as
part of the company’s legal capital: they may have been earned,
at least in part, by deploying the shareholders’ contributions to
the business but the profits were not contributed by the
shareholders. Nevertheless, the totality of the surplus of assets
over the liabilities is a very important accounting concept and is
often referred to as “the shareholders’ equity” or the company’s
“net asset value”. The law distinguishes between the company’s
“net asset value” and the value of the assets contributed by the
shareholders (its legal capital). Broadly, the company is free to
distribute to the shareholders the difference between the net asset
value and the legal capital value—provided that is a positive
number! By contrast, therefore, if the company trades
unsuccessfully, it may run through any profits made in previous
years and begin to eat into the value of the assets contributed by
its shareholders. In this situation its net asset value may fall
below the value of its legal capital, and no distribution is
permitted to be made. In short, the value of the assets
contributed by the shareholders is not a measure of the
company’s net worth, which may be higher or lower than the
legal capital figure at any one time and only by chance will the
two figures be the same.
11–2
An alternative use of the legal capital figure is to use it to
identify the amount the shareholders must contribute to the
company’s assets before it is permitted to begin trading. Such
rules are called minimum or initial capital rules. British law has
never made much use of this concept. Minimum capital has been
required of public companies, since the implementation in the
UK of the Second European Company Law Directive of 1977,4
but private companies are not subject to the rule and,
historically, apart from a short period in the early years of
modern company law in the middle of the nineteenth century,
British law has not attached importance to minimum capital
requirements for any class of company.
However, and contrary to what is sometimes thought, British
law currently does make use of legal capital to constrain to a
significant extent distributions to shareholders. On this approach
the law leaves companies wholly or substantially free to decide
their own level of legal capital, but attaches legal consequences
to the amount of legal capital the company in fact chooses to
raise. This second policy has been central to British company
law since its origins and remains so. From the early days the
courts have laid down that, given limited liability, “it is clearly
against the intention of the legislature that any portion of the
capital should be returned to the shareholders without the
statutory conditions being complied with”.5 The rule against the
return of capital to shareholders is elaborated in a three main
ways. First, as noted, the value of the company’s legal capital is
used as a yardstick to measure the amount of a company’s assets
which may be returned to the shareholders by way of a dividend
or other form of distribution. We consider this aspect of the “no
return” policy in Ch.12. All modern jurisdictions place
constraints on distributions to shareholders but it is controversial
whether such rules should be based on the concept of legal
capital, as the British ones currently are. Secondly, the
repurchase or redemption of its shares by the company may
occur only through tightly controlled procedures which aim to
maintain the value of the company’s legal capital. Thirdly, the
company may reduce the value of its legal capital in its accounts
only through procedures which are designed to protect the
interests of the creditors. The second and third manifestations of
the “no return” policy are considered in Ch.13, together with the
rules prohibiting a company from giving financial assistance to a
person in connection with the acquisition by that person of its
shares. The second and third sets of rules are normally lumped
together under the heading of “capital maintenance”, though it is
debatable whether the financial assistance rules are linked to the
notion of legal capital.
In this chapter we elaborate some of the basic elements of the
concept of legal capital and consider in particular the role of the
minimum or initial legal capital rule.
NOMINAL VALUE AND SHARE PREMIUMS
Nominal value
11–3
We have talked so far about legal capital being the amount that
the company receives from those who subscribe for its shares.
Very broadly, this is true, but the law arrives at this result in a
surprisingly complex way. This is because the law distinguishes
between the “nominal” value of the share and any amount
received above the nominal or “par” value, which is referred to
as the “premium”. The Act stipulates that shares in a limited
company “must each have a fixed nominal value” and that an
allotment of shares not meeting this requirement is void.6 In
other words a monetary value needs to be attached to the
company’s shares. In consequence, one talks of the company
having issued a certain number of “£1 shares” or “10p shares”
and so on. The par value is a doubtfully useful concept because
it does not normally indicate the price at which the share is likely
to be issued to investors; still less the price at which the share is
likely to trade in the market after issue. The only linkage
between the nominal value of the share and the price the
subscriber pays for it is the rule that a share may not be issued at
less than its nominal value7—often referred to as the “no
discount” rule.8 However, the company, whilst being obliged to
attach a nominal value to the share, maintains full control over
its level. This freedom, coupled with the “no discount” rule,
gives the company an incentive to keep the nominal value of the
share low in relation to its issue price. The lower the nominal
value, the less likely the company is to find itself in the situation,
either now or in the future, where investors will be prepared to
buy its shares only at less than their nominal value.
If a further tranche of shares already in issue is offered to the
public, then the par value is likely to be even less related to the
purchase price. Suppose a company has initially issued shares at
par, has traded successfully, re-invested the profits and seeks
capital for further expansion. The second tranche of shares will
naturally be issued at a price higher than par; otherwise, the
second set of shareholders would obtain a disproportionately
large interest in the company. In effect, they would be obtaining
an interest in the profits earned in the past without having
contributed any of the capital which was used to earn them. The
situation can be rectified by setting the share price on the second
issue so that it reflects the total value of the shareholders’
interest in the company. In the case of publicly traded
companies, this will be what market price of the share reflects.
The CLR contemplated abolishing par value for private
companies,9 but eventually resiled from the proposal. The
Second Directive was thought to require the retention of par
value, or something very much like it,10 for public companies,
and the transitional difficulties likely to arise when a company
moved from private to public were thought to militate against
this reform.11 So, unless and until the Second Directive is
amended on this point, par values will remain part of the law.
No issue of shares at a discount
11–4
For investors the nominal value requirement is potentially
misleading because it tells them nothing about the market price
of the share or its value measured in any other way. Does the
rule, which was established by the courts in the nineteenth
century,12 that shares must not be issued at a discount to their
nominal par value act as a protection for creditors? The common
law rule is now stated in the Act,13 which specifically provides
that, if the shares should be so issued, the allottee is liable to pay
to the company the amount of the discount with interest.14 This
provision is of some value to creditors, but of only limited value,
given the company’s control over the setting of the nominal
value. The creditor is probably more interested in the actual
price at which the share was issued and in the total value of the
consideration received by the company from its share issue. In
fact, it could be argued that the rule against discounts to nominal
value harms creditors, at least where the company nears
insolvency. Suppose that, because of the unsuccessful trading of
the company, its shares are in fact trading on the market at less
than par. The company needs to raise new capital. No sensible
investor will pay more than the market price for the shares and
yet the Act seems to prevent the company from recognising the
economic reality of its situation in the pricing of any new issue,
which may help it back to solvency.15 Yet, in this situation
creditors will benefit if the legal capital of the company is
increased, no matter how little the company receives for any one
of its shares. Any contribution from shareholders increases the
amount available to satisfy the claims of the creditors.
In fact, there are a number of ways around this problem,
though it cannot be guaranteed that in every situation one will be
available. For example, a new class of share may be created with
a lower par value but otherwise with rights substantially the
same as the existing shares. This new class of share can be
issued without infringing the prohibition on issuing shares at a
discount.
Nevertheless, as noted, the risk that the par value rule will
hamper the company in the future gives companies some
incentive to fix low par values initially and to raise most of the
consideration for the shares by way of premium, so that the par
value displays an even more remote relationship to the issue
price than it might otherwise do.
11–5
It might be argued that the rule is better understood as a
protection for the shareholders. The rule, it might be said, was
intended to protect existing shareholders from directors who
proposed to devalue (or “dilute”) the existing shareholders’
interest in the company by issuing shares to new shareholders
too cheaply. However, dilution arises only if the shares are
issued to new investors at a price which is lower than the current
market price of the shares, so that the “no shares at a discount”
rule is not well adapted to shareholder protection either. It will
be under-protective of shareholders where the market price is
above nominal value and over-protective where it is below.
Indeed, what is surprising from a shareholders’ perspective is
that there is no precise statutory obligation laid on the company
to issue shares at a premium, where the market will bear one.16
This is probably because the company may have a number of
good reasons to contract on the basis that the share will be issued
at less than its full market price.17 However, the directors’ duty
to promote the success of the company for the benefit of its
members18 will normally require the directors to issue shares at
the best obtainable price; otherwise the company will be
overpaying for its capital, just as it would be if it bought raw
materials at above market price.19
The share premium
11–6
It is clear that the amount received by the company by way of
the nominal value of the shares issued constitutes part of its legal
capital. The amount (often much more significant) received by
way of premium is today treated in much the same way. Prior to
1948, when companies issued shares at a premium, the value of
the premium was treated differently from the par value. Legal
capital was regarded as determined by the nominal or par value
of the shares; if they had been issued at a price above par the
excess was not “capital” and, indeed, constituted part of the
distributable surplus which the company, if it wished, could
return to the shareholders by way of dividend.20 This was, of
course, a ridiculous rule, except on the basis that it might be an
indirect way of subverting the capital-based distribution rules. If
the price paid for the shares was £100,000, the amount received
by the company was also £100,000 (assuming no transaction
costs) and it should make no difference to the analysis whether
the £100,000 was obtained by issuing 100,000 £1 shares at par
or by issuing 100,000 1p shares at £1 (i.e. at a premium of 99p
per share). In either case, the issue price (£1 in both cases)
determined the amount raised by the company, whilst the par
value, set by the company, is a figure determined in order to give
the company maximum flexibility under the Act.21 This situation
was changed, however, by the 1948 Act. The rule, now stated in
s.610 of the 2006 Act, is that a sum equal to the aggregate
amount or value of the premiums shall be transferred to a “share
premium account” which, in general, has to be treated as if it
were part of the paid-up share capital. However, the Act does not
fully assimilate share capital and the share premium. It is still
necessary to refer expressly to both, and for the company, in its
annual accounts and reports, to distinguish between the share
capital account and the share premium account. What, if it were
not for arbitrary par values, would be a single item—capital—
has to be treated as two distinct items, albeit for most purposes
treated identically.
11–7
However, share capital and share premium are not treated as
wholly identical, though the 2006 Act has narrowed some of the
differences between them. Section 610 provides two
“exceptions” and two “reliefs” for the share premium account
which do not apply to the capital account. The first exception is
that a company may apply the share premium account in paying
up bonus shares.22 A bonus share is a share issued to the existing
shareholders, without requiring any payment from them, but is
paid for, in this case, by reducing the share premium account.23
Since the effect of this transaction is to reduce the share
premium account but to increase the share capital account by an
equivalent amount, it is wholly unobjectionable from the
creditors’ point of view,24 and it is hardly an exception to the
main rule laid down by s.610. It would, of course, be impossible
thus to apply share capital account but to apply share premium
account in this way is unobjectionable since the only effect is to
convert it, or a part of it, to share capital proper. The second
exception is that the share premium account may be applied in
writing off the expenses of or the commissions paid on the issue
of the shares which generated the premiums.25 This is a real
exception, but now is a relatively minor contrast with share
capital. Within limits, share capital may also be used to pay
commission.26 Although the rule in relation to the share premium
account is somewhat more broadly phrased than that relating to
the capital account, the share premium rule is now tighter than it
was previously.27
More important (and more interesting) are the “reliefs”.
Section 610 (as did its predecessors) expressly applies to issues
at a premium “whether for cash or otherwise”. The result of this
was held to be that if, say, on a merger one Company (A)
acquired the shares of another (B) in consideration of an issue of
A’s own shares and the value of B’s shares exceeded the
nominal value of those issued by A, a share premium account
had to be established in respect of the excess.28 The result of this
was that B’s undistributed profits formerly available for
distribution by way of dividend ceased to be distributable. This
caused something of a furore in commercial circles. However, in
1980 the question was again litigated and the earlier decision
fully upheld.29 In consequence, “merger relief” was introduced in
the Companies Act 1981. The general effect of the merger relief
provisions30 is that the premium does not have to be transferred
to the share premium account when, pursuant to a merger
arrangement, one company has acquired at least 90 per cent of
each31 class of equity shares32 of another in exchange for an
allotment of its equity shares at a premium.
The Act also modifies (rather than removes) the requirement
for a transfer to the share premium account in certain cases of
reconstruction within a group of companies.33 The relief applies
in the case of issues at a premium by a wholly-owned subsidiary
in consideration of a transfer to it of non-cash assets from
another company in the group comprising the holding company
and its wholly-owned subsidiaries. In this case the company
issuing the shares is permitted to value the assets received, not
by reference to their market value, but by reference to the cost of
their acquisition by the transferor company or their value in the
books of the transferor company. In this way, the value of the
assets received in exchange for the shares will often be
understated, but, to the extent that this understated value in fact
exceeds the nominal value of the shares issued, the excess must
still be transferred to the share premium account.34 If this relief is
available on the facts of a particular case, the more extensive
merger relief is not.35
Finally, the Secretary of State is empowered by s.614 to make
regulations providing further relief in relation to premiums other
than cash premiums or for modifying the reliefs in the Act (but
has not done so).
MINIMUM CAPITAL
11–8
With the above preliminaries, we can turn to an analysis of the
minimum capital rule. As we have noted, as a result of the
Second Directive,36 a minimum capital requirement was
introduced for public companies. Section 761 requires that the
nominal value of the company’s allotted share capital meet a
certain minimum level That was set at the derisory level (for a
public company) of £50,000 (or, currently, €57,100),37 though
that is double the amount required by the Directive.38 Moreover,
that £50,000 (or assets of equivalent value) does not have to be
handed over to the company at the time of issue of the shares. It
is enough, as with all share issues by public companies, that one
quarter of the nominal value of the shares be paid at the time of
issue.39 The rest may remain unpaid, though of course subject to
being called up by the company at a later date or in its
liquidation. Nevertheless, the minimum capital requirement puts
a little pressure on public companies not to issue shares at a
hefty premium (because the premium does not count towards the
required minimum). However, the Act retains its traditional
aversion to minimum capital requirements in respect of private
companies, where none is imposed. This is said to have been a
major factor behind the incorporation in England of companies
from other EU countries which applied minimum capital
requirements to their equivalents of private companies.40
In the relatively unusual case of a company being formed
directly as a public company, the minimum capital requirement
operates, not as a condition of its formation, but as a condition of
its commencing business.41 In order to commence business (or to
exercise any borrowing powers—an important addition) it must
apply to the Registrar for a “trading certificate”42 (in addition to
the formation certificate which it will already have obtained);
and the condition for the issuance of a trading certificate is that
the nominal value of the company’s allotted share capital must
be not less than the required or “authorised” minimum.43 The
company is under some pressure to obtain the trading certificate,
because if it does not do so within a year from incorporation, it
may be wound up by the Court and the Secretary of State may
petition for that to happen.44 A public company which trades or
borrows without a certificate is liable to a fine, as is any officer
of the company (including therefore its directors) who is in
default.45 However, the interests of third parties are properly
protected in this case. Transactions entered into by the company
in such a case are valid, and further, if the company fails to
comply with its obligations, the directors of the company are
jointly and severally liable to indemnify third parties in respect
of any loss or damage suffered.46 Thus, personal liability of the
directors, criminal and civil, operates to give them a strong
incentive not to trade without a trading certificate.
In the more usual case of a company becoming public upon
conversion from private status, the requirement that the
company’s allotted capital be not less than the authorised
minimum operates as a condition for the re-registration of the
private company as a public one.47
If the nominal value of the company’s allotted share capital
meets the authorised minimum, on either of the occasions
described above, it will normally remain at that level thereafter.
This is because the nominal value of the shares does not change,
no matter how much the value of the company may decline.
However, in relatively rare cases the nominal value of the
company’s allotted capital might subsequently fall below the
authorised minimum. There is no general provision in the Act
dealing with this eventuality. Rather, provision is made on an ad
hoc basis. Thus, if under the reduction of capital procedure48 the
company’s capital is reduced below the authorised minimum, the
normal requirement is that the company must re-register as a
private company before the reduction of capital order is
finalised.49 Further, the Secretary of State has power to alter the
authorised minimum by regulation (subject to affirmative
resolution).50 Were that alteration to be in an upward direction,
the Secretary of State also has the power to require existing
public companies to bring their nominal values into line with the
new authorised minimum or to re-register as a private
company.51
Objections to the minimum capital requirement
11–9
There are two objections which can be made to minimum capital
rules. First, company laws normally set only one (as in the UK)
or a small number of minimum capital rules (for example, one
for private and another for public companies), but in fact, to be
effective, the minimum capital requirement ought to be related to
the riskiness of the business which the company undertakes.
General minimum capital requirements tend either to be too low
effectively to protect creditors (as in the case of the current
British requirement) or too high, in which case they reduce
competition (by discouraging new entrants into the field) whilst
over-protecting creditors. However, adjusting capital
requirements to the riskiness of the company’s business would
be a complex and continuing activity, as is shown by the special
regulation necessary to implement such a principle in those
industries, for example banking and insurance, where capital
adequacy requirements are taken seriously (and also where
“capital” means net asset value, not “legal” capital). Thus, it is
not surprising that the approach of company laws to minimum
capital requirements is relatively crude; and in practice in
developed economies tends towards the “too low” end of the
spectrum, thus conferring no substantial protection on creditors
but conceivably discouraging the incorporation of companies.
If, therefore, the minimum capital requirement has no claim to
be a genuine assessment of the amount of risk capital the
company needs to survive the vicissitudes of its business, could
it nevertheless be justified as a “cushion” of assets provided by
the shareholders for the protection of the creditors? This is also a
difficult argument to sustain. The creditors need the protection of
an asset cushion when the company begins to trade unprofitably.
A minimum capital requirement imposed at the time the
company commences trading does not guarantee any particular
level of assets being available for the creditors at this later date
or when the company goes into an insolvency procedure. For
example, a minimum capital requirement of, say, £3,000 for a
private company, even if paid in cash, could soon be returned
quite legitimately to the incorporators by means of salary
payments for services rendered to the company52 or it could be
satisfied by the contribution to the company by the incorporators
of a depreciating asset, such as a second-hand car. Thus,
minimum capital rules are likely to be ineffective beyond a very
short initial period unless coupled with rules which require the
directors to take action if the net value of the company’s actual
assets declines below the value of its legal capital.
The Act does in fact contain a rule which requires action on
the part of the company if its net asset value falls below a certain
proportion of its legal capital. However, this rule is not linked to
the minimum capital requirement and would therefore survive
even if the authorised minimum were abolished. Nor does the
rule specify the substantive action the company should take in
this situation. Section 656 requires a public company to convene
an extraordinary meeting of the shareholders if the net value of
its assets falls below one half of its called-up share capital,
which may be, and typically will be, far in excess of the
authorised minimum.53 The section does not require the
shareholders or the directors to take any particular action in this
situation (for example, cause the company to cease trading or
raise further capital from the shareholders).54 This section seems
not to be very important in practice, probably because, before it
becomes operative, large lenders will have exercised rights
under their loan contracts to replace the failing management or
otherwise to redress the situation55 or the wrongful trading
provisions56 will have required the directors to take corrective
action. Consequently, it can be argued that, at the initial stage,
the minimum capital requirement is too low to confer substantial
protection on creditors and that subsequent adverse
developments in the company’s trading ability are dealt with
through mechanisms other than those which focus on the
minimum capital.57
DISCLOSURE AND VERIFICATION
11–10
Whether or not a legal system imposes a minimum capital
requirement, there are obvious arguments in favour of requiring
the company to disclose the amount it has raised by way of the
issuance of its shares and providing some assurance that the
amounts stated in the capital accounts are accurate. This
information will facilitate creditor self-help, i.e. making it easier
for creditors to decide whether to lend to the company and on
what terms. The extent of the facilitation should not be over-
estimated. It will perhaps be useful at the point of issuance of the
shares, but the creditor is really interested in the company’s
overall net asset position which, as the company trades, is likely
to be more and more divorced from its legal capital figure.58
Thus, the creditor is likely to pay more attention to the
verification of the company’s assets and liabilities as a whole,
not just the amounts raised through share issues; and that
assurance is provided, to the extent that it is, through the
company’s annual financial statements and their audit.59 In
addition, those who are shareholders at the time the shares are
issued will have an interest in knowing and verifying the
amounts raised through share issues, in order to be satisfied that
new shareholders are not being admitted to the company too
cheaply.60
UK company law has developed over time a number of rules
which address the above policies, and they were substantially
added to when the Second Directive was implemented in the
UK.
Initial statement and return of allotments
11–11
When a company is formed, assuming it is limited by shares, the
application for registration must contain a statement of capital
and initial shareholdings. This requires disclosure of information
relating to the totality of the shares to be taken by the subscribers
and to their individual subscriptions. In particular, the number of
shares, their aggregate nominal amount, the amounts, if any, to
be left unpaid and the prescribed rights attached to the shares
must be disclosed.61 In practice, the answer will often be one £1
share taken by each of two people, upon which nothing is paid
up, the two people being employees of a company formation
business, which has created a shelf private company. When more
serious amounts of shares are issued at a later date, similar
information has to be given to the Registrar of companies via a
“return of allotments”.62 Thus, data about those to whom shares
of various classes have been issued,63 the amounts paid for the
shares and the main rights and obligations attached to those
shares is public information, but this is a disclosure provision,
not a provision which regulates the amount or type of share the
company issues. Although it is a criminal offence knowingly or
recklessly to deliver a false statement to the Registrar,64 these
provisions do not otherwise provide verification of the
information delivered.
Abolition of authorised capital
11–12
The 2006 Act did away with the former concept of “authorised
capital”, as recommended by the CLR.65 This was a concept
which sounded important but which fulfilled no identifiable
creditor-protection role. Under the old law, a company with a
share capital (unless it was an unlimited company) was required
to state in its memorandum “the amount of the share capital with
which [it] proposes to be registered and the division of that share
capital into shares of a fixed amount”.66 Until the authorised
capital was allotted, i.e. an investor agreed to take some shares in
exchange for a consideration provided to the company, the
authorised capital in no way increased the company’s assets. The
company’s authorised capital might have been 10 million shares
of £1 each, but if only two of those shares had been issued, say
at par, then its legal capital was £2. If anything, authorised
capital served to confuse the potential investor.
In fact, the requirement for authorised capital had more to do
with relations between directors and shareholders than with
creditor relations. The directors could not issue more than the
amount of the company’s authorised capital without returning to
the shareholders for approval of an increase in the authorised
amount.67 However, if the authorised capital was set at a high
level, as it normally was, this was not a significant constraint on
the directors. Shareholder control of share issues is now effected
by other sections of the Act and shareholders, if they wish, can
put stronger controls in the company’s constitution, so that
authorised capital is not needed for the protection of
shareholders either.68
Consideration received upon issue
11–13
We next turn to the rules which focus on the quality and even the
reality of the consideration received by a company upon the
issuance of its shares, whether the shares are issued to satisfy the
minimum capital requirement or not and irrespective of whether
that consideration is referable to the nominal value of the share
or the premium payable. Before 1980 the domestic rules in this
area were exiguous, but they were strengthened as a result of the
Second Directive, which, however, was somewhat relaxed in
2006.69 As a result, there is a marked divergence between the
rules applying to all companies and to public companies only.
Rules applying to all companies
11–14
We should first note that the law does not require that the
consideration promised for the shares be immediately due to the
company. There is thus a distinction between paid-up capital and
uncalled capital, the former being, for example, the amount paid
on allotment and the latter the amount payable when the
company calls upon the shareholder for the payment in
accordance with the terms of the allotment.70 Long-term uncalled
capital could be a valuable indication of creditworthiness since,
in effect, it affords a personal guarantee by the members, but it is
doubtful whether it is extensively used in private companies.71
A potentially important creditor protection rule restricts the
use of capital to pay commissions etc. Payment by way of
commissions, brokerage or the like to any person in
consideration for subscribing or agreeing to subscribe is
prohibited,72 even if the shares are issued at a premium, except to
the limited extent to which they are explicitly permitted. Without
this rule, the amount actually received by the company from an
investor in exchange for its shares might be substantially less
than appears. However, the Act permits commission for
subscribing for shares (or procuring others to do so) to be paid
out of capital provided it is limited to 10 per cent of the issue
price and is authorised by the articles (which may set a lower
percentage).73 It would be logical if this restriction on the
payment of commission did not apply to payments out of
distributable profits, since creditors have no claim to limit what
the company does with such funds. This is what s.552 appears to
say, since it provides that a company “must not apply any of its
shares or capital money” in the payment of commissions etc.74
However, the section no longer attempts to do that which earlier
drafts of the statute attempted, i.e. to make clear the
consequences of infringing the prohibition. Those drafts
provided that, if there were an agreement to pay commission,
etc. in breach of the prohibition, the agreement was to be void; if
the payment had been made, the amount of the inducement was
to be recoverable, either from the person to whom it was paid or
any third party who knew of the circumstance constituting the
contravention and benefited from it.75 A court could deduce
these consequences from the prohibition contained in the current
section.
Payment does not have to be in cash; it can instead be made in
kind76 and very frequently is in private companies.77 But, except
in relation to public companies, it seems that the parties’
valuation of the non-cash consideration will be accepted as
conclusive78 unless its inadequacy appears on the face of the
transaction79 or there is evidence of bad faith.80 Hence on an
issue for a non-cash consideration it is possible to some degree
to “water” the shares by agreeing to accept payment in property
which is worth less than the value of the shares.
Public companies
11–15
Shares allotted by a public company must be paid up (in cash or
in kind) at least as to one quarter of their nominal value and the
whole of any premium due.81 If this does not occur, the share is
nevertheless to be treated as if this had happened and the allottee
is liable to pay the company that amount, with interest. This
provision reduces the company’s and creditors’ exposure to the
continuing solvency of its shareholders, although it is relatively
uncommon for companies not to require full payment upon
allotment. Where the company does want to stagger the
payments for the shares, this rule creates a disincentive to setting
the nominal value of the shares well below the issue price,82
because the whole of the premium must be paid up on allotment.
The remaining rules for public companies concern the
regulation of non-cash issues, but before turning to them it is
important to note the width of the definition of “cash
consideration” in s.583(3), for these rules do not apply where the
consideration is cash, as defined. The section includes within the
definition of “cash consideration” an undertaking to pay cash to
the company in the future, thus putting the company at risk of
the insolvency of the shareholder, but also the reducing the
disincentive mentioned at the end of the previous paragraph.83
Also treated as cash is the release of a liability of the company
for a liquidated sum.84 The latter is a useful provision in
facilitating equity for debt swaps whereby the creditors of an
insolvent company forgo their claims as debtors against the
company in exchange for the issue to them of equity shares. The
company is thereby released from an often crippling burden of
interest payments and the removal of the debt may even produce
by itself a surplus of assets over liabilities. This will be to the
immediate benefit of the shareholders and non-converting
creditors, though if the company prospers in the future, the
original shareholders will naturally find that their equity interest
has been extensively diluted. It seems that no infringement of the
rule forbidding issuing shares at a discount to par value occurs
where the face value of the debt is taken for the purposes of
paying up the new shares, even though the market value of the
debt at the time of the swap was less than its face value because
of the debtor’s insolvency.85
A public company may not accept, in payment for its shares or
any premium on them, an undertaking by any person that he or
another will do work or perform services for the company or any
other person.86 If it should do so, the holder of the shares87 at the
time they are treated as paid up (wholly or partly) by the services
is liable to pay the company an amount equal to the nominal
value of the shares plus the premium or such part of that amount
as has been treated as paid up by the undertaking.88 Nor may the
company allot shares as fully or partly paid-up if the
consideration is any sort of undertaking to provide a non-cash
consideration which need not be performed until after five years
from the date of the allotment.89 If the undertaking should have
been performed within five years but is not, payment in cash
then becomes due immediately.90 And (though this is of minimal
importance) shares taken by a subscriber to the memorandum of
association in pursuance of his undertaking in the memorandum
must be paid for in cash.91
Valuation of non-cash consideration
11–16
Finally, the possibility of “share-watering” by placing an inflated
value on the non-cash consideration is tackled in the case of
public companies by requiring that consideration to be
independently valued. Under Ch.6 of Pt 17 a public company
may not allot shares as fully or partly paid-up (as to their
nominal value or any premium) otherwise than in cash unless:—
(i) the consideration has been valued in accordance with the
provisions of the Part; (ii) a report is made to the company
during the six months immediately preceding the allotment; and
(iii) a copy is sent to the proposed allottee.92 To this there are
exceptions in relation to bonus issues93 and in relation to most
types of takeovers and mergers.94 But, in other cases, if the
allottee has not received the copy of the valuation report or there
is some other contravention of the Part, which he knew, or ought
to have known, amounted to a contravention, once again he or
she is liable to pay in cash with interest.95 These provisions
clearly protect existing shareholders as well as creditors.
However, if the correct valuation steps are taken, there is no
statutory prohibition on the company issuing shares in a
transaction which puts a higher valuation on the non-cash
consideration than has emerged in the valuation process. In that
situation the directors might well be in breach of their fiduciary
duties96 and the subscriber would be in a poor position to assert
that he or she was unaware of this.
The valuation has to be made by a person “qualified to be
appointed, or continue to be, an auditor of the company”97 and
that person must meet statutory tests of independence from the
company.98 The expert has a right, similar to that of an auditor,
to require from officers of the company the information and
explanations required to produce the valuation.99 The expert
may, however, arrange for and accept a valuation from another
person who appears to him to have the requisite experience and
knowledge and who is not an employee or officer of any
company in the group.100 In practice, therefore, the report will be
by the company’s auditor supported by another professional
valuation of any real property or other consideration which the
auditor does not feel competent to value on his own. The report
has to go into considerable detail101 and must support the
conclusion that the aggregate of the cash and non-cash
consideration is not less than the nominal value and the
premium.102
A private company proposing to convert to a public one
cannot evade these valuation requirements by allotting shares for
a non-cash consideration shortly before it re-registers as a public
one. In such a case, the Registrar cannot entertain the application
to re-register unless the consideration has been valued and
reported on in accordance with the above provisions.103
11–17
This relatively straightforward mandatory valuation procedure,
imposed where a public company issues shares for a non-cash
consideration, is extended by the Act to a category of cases
where the company acquires a non-cash asset in exchange for
something other than the issuance of shares.104 This extension
applies only during the period of two years after the company
has been issued with a trading certificate105; only to agreements
on the part of the company to acquire non-cash assets from
anyone who was a subscriber to the memorandum on the
company’s formation or a member of it on its conversion to a
public company106; and only where the consideration to be
provided by the company is at least equal to one tenth of its
issued share capital. This provision is aimed at a purchase by the
company of property from the promoters of the company at an
excessive price, though it seems relatively easy to avoid by
simply not becoming a member of the company until just after
either of the two dates which trigger the mandatory valuation
rule. Again, these controls protect both creditors and “outside”
shareholders, but a significant feature of the extended rule is that
it places greater emphasis on the protection of the shareholders
through the imposition of the additional requirement that the
shareholders approve of the proposed transaction.107
The valuation requirements, especially on a small issue of
shares, are potentially time-consuming and expensive. However,
they are required by the Second Directive.108 In 2006 the
Directive was amended so as to permit certain assets to be
valued without an independent expert’s report.109 Although the
Act contains a power for the Secretary of State to make
regulations to modify the independent valuation requirements,110
the Government did not propose to take up the options offered
by the amendment to the Directive, on the grounds it was not
clear the amendments did relax the provisions of the Directive
and, in any event, they would not simplify the legislation.111
Further provisions as to sanctions
11–18
The above provisions, both those relating to all companies and
those applying to public companies alone, impose civil liability
on the allottee (normally) towards the company, as we have
seen. However, by the time the company comes to enforce that
liability, it is not unlikely that the shares will be in the hands of
someone else. The general policy of the Act is to impose liability
jointly and severally with the allottee on the subsequent holder112
of the shares, but subject to a major defence.113 Following
normal equitable principles, that defence is that the holder is a
purchaser for value in good faith (i.e. without actual knowledge
of the contravention concerned) of the securities or someone
who derives title from such a purchaser.114 Consequently, if the
shares have been traded in the normal way on a public market,
the current holder will not be liable. On the other hand, a donee
of the shares would be jointly and severally liable.
The liability which the above provisions impose on the
allottee or the current holder of the shares is potentially
substantial, in respect of what might be only a technical breach
of the statute, for example, the allottee has not been sent a copy
of the valuer’s report, though the allottee is in fact aware of its
contents. Even where there has been a more than technical
breach, the liability imposed may be penal. For example, a
failure to have non-cash assets valued makes the allottee liable to
pay the whole of the consideration due for the shares in cash
with interest,115 without any account being taken of the actual
value of the non-cash assets transferred. Consequently, the court
has the power to grant relief against liability to make a payment
to the company in most cases,116 but that power to grant relief is
limited.117 In particular, the court must have regard to two
“overriding principles”, namely:
(a) that a company which has allotted shares should receive
money or money’s worth at least equal in value to the
aggregate of the nominal value of those shares and the value
of the premium or, if the case so requires, so much of that
aggregate as is treated as paid-up118; and
(b) that when the company would, if the court did not grant
exemption, have more than one remedy against a particular
person it should be for the company to decide which remedy
it should remain entitled to pursue.119
Share capital and choice of currency
11–19
The Act requires the minimum capital requirement for public
companies to be satisfied by shares denominated in either
pounds sterling or euros, presumably for some sort of
verification reason.120 However, apart from this, the company
has considerable freedom to denominate shares in such currency
as it wishes. It has never been doubted that this was possible in
relation to the share premium account (and other capital
reserves) but the issue was debated in relation to the share
capital account until it was decided in favour of giving the
company this freedom in Re Scandinavian Bank.121 The Act now
puts the point beyond doubt.122 Moreover, the Act adds to this
freedom by providing a simple procedure for re-denominating
share capital from one currency to another (into or out of sterling
or from one non-sterling currency to another), including the re-
denomination of the shares used to satisfy the minimum capital
requirement when trading began. Formerly, this could be
achieved only by the cumbersome and potentially expensive
procedure of a reduction of capital and an issue of new shares in
the desired currency.123 Now any limited124 company, subject to
contrary provision in its articles, may re-denominate its shares
by ordinary resolution of the members.125 Such re-denomination
does not affect the currency in which dividends are required to
be paid by the company or calls on shares smet by the
shareholder.126
Such re-denomination, which must be carried out at prevailing
rates of exchange,127 could produce new nominal values of a
rather awkward kind, for example, $2.24. The company may
respond in two ways: by capitalising distributable reserves so as
to increase the nominal values to a more acceptable level, for
which no special statutory permission is needed,128 or by
reducing the nominal values so as to achieve the same result,
which the statute permits without the need to follow the full
reduction of capital procedure. All that is required is a special
resolution of the members, provided the decision is taken within
three months of the re-denomination resolution and does not
reduce the company’s share capital by more than 10 per cent.129
Further, the amount of the reduction must be carried to a “re-
denomination reserve” which is a new undistributable reserve
created by the Act.130 It is also conceivable that the reduction
following re-denomination could produce the result that neither
the euro nor the sterling requirements for the authorised
minimum capital of a public company is met, in which case the
company will have to re-register as a private company.131
CAPITALISATION ISSUES
11–20
The net worth of a business will fluctuate from time to time
according to whether the company makes profits and ploughs
them back or suffers losses. But a company’s legal capital, i.e.
the issued share capital plus share premium account (if any) does
not automatically fluctuate to reflect this. It remains unaltered
until increased by a further issue of shares, which must be made
in conformity with the rules dealt with above, or reduced in
accordance with the rules dealt with in Ch.13. If, however, the
company has made profits and not distributed them as dividends,
a necessary consequence of the static nature of its capital
accounts is that its net asset value will exceed its legal capital.
This is not necessarily something either company or
shareholders need worry about—in fact, they should welcome
the profits—but an accounting device is needed to bring the
company’s books back into balance. This is to be found by
including a (notional) liability on the balance sheet in order to
balance the “assets” and “liabilities”. This is normally described
as a “reserve”, an expression which may confuse those
unaccustomed to accounting practice since it may suggest
(falsely) that the company has set aside an actual earmarked fund
to meet some potential or actual liability. The crucial point is
that this reserve is a distributable reserve, unlike the capital
accounts, i.e. the company can distribute assets to its
shareholders up to the value in the reserve, and keep its books in
balance by reducing the reserve accordingly.
Should a profit-rich company wish to bring its legal capital
more into line with its net worth, it can do so by making a
“bonus” or “capitalisation” issue132 to its shareholders. The
former expression is likely to be used by the company when
communicating with its shareholders (in the hope that they will
think that they are being treated generously by being given
something for nothing) and the latter when communicating with
the workforce (which might otherwise demand a bonus in the
form of increased wages). In fact, such an issue is merely a
means of capitalising reserves by using them to pay-up shares
newly issued to the shareholders.133 We have already noted one
form of bonus issue, where the shares are paid up out of the
share premium account, which is accordingly reduced to the
extent of the nominal value of the bonus shares, whilst the share
capital account is correspondingly increased. Here, however, the
bonus shares are paid up out of the distributable profits reserve.
For example, suppose that before the issue the net asset value
(taking book values) of the company was £2 million and the
issued capital one million shares of £1 each. The shares, on book
values, will be worth £2 each.134 The company then makes a one-
for-one bonus issue paid up out of the distributable profits
reserve. The immediate effect on a shareholder is that for each
former £1 share worth £2 he or she will now have two £1 shares
each worth £1.135 However, a more significant change has
occurred, which may have implications for the future. The
formerly distributable profit can no longer be distributed because
it has been converted into share capital. The company is thus
signalling a need to have greater permanent risk capital than
might previously have been understood to be the case. Further, it
is likely to stop short of capitalising undistributed reserves to an
extent which would impair its freedom to pursue an appropriate
dividend policy in the future. Thus, a bonus share paid up out of
distributable reserves is a potentially more significant event than
an issue of bonus shares paid up from the share premium
account, where the decrease in one undistributable account is
balanced by the increase in another.
CONCLUSION
11–21
The requirement that a public company have a minimum allotted
capital when it begins trading is of doubtful utility to creditors,
given the low level at which it is set. Protections of creditors
which take as their base the nominal value of the share (notably
the rule against issues at a discount to nominal value) are also of
doubtful utility, given the company’s freedom to set the nominal
value of the share, and may even be harmful to their interests in
certain circumstances. The rules designed to ensure that a
company receives assets of a value equal to the price at which it
has issued the shares are more useful to creditors and also
promote equal treatment of different groups of members holding
the same class of share. However, such rules do not depend for
their effectiveness on a concept of legal capital. Such rules could
equally well be formulated and enforced even if there were no
legal capital rules. The main claim that the legal capital rules
have to remain part of our company law must rest, therefore, on
their role in constraining the payment of distributions to the
members of the company to which we turn next.
1
cf. Capital punishment, capital letter, capital ship, capital city, capital of a pillar,
capital and labour, capital and income, and “capital!”.
2
In Kellar v Williams [2000] 2 B.C.L.C. 390, the Privy Council accepted that it was
possible for an investor to make a capital contribution to a company, other than in
exchange for the purchase of shares, in which case the contribution is to be treated in the
same way as a share premium (see below, para.11–8). Such a procedure is very unusual,
of course, since the contributor is left substantially in the dark as to what he or she is
getting in exchange for the contribution. However, one can see that an existing
shareholder in a company wholly controlled by him might act in this way. The difficulty
is to distinguish between such a capital contribution and a loan to the company.
3 Of course, a contribution made by a creditor may in fact benefit other creditors, for
example, a loan made to a company just before insolvency may mean the creditors as a
class obtain a larger percentage pay out than if the loan had not been made, but that
benefit to the earlier creditors is paid for by the later lender.
4 Council Directive 77/91/EC [1977] O.J. L26/1 (now replaced by Directive 2012/30/EU
[2012] O.J. L315/74, to which version the references in this chapter relate). See para.6–
11.
5 Re Exchange Banking Co, Flitcroft’s Case (1882) 21 Ch. D. 519, per Jessel MR.
6 2006 Act s.542(1),(2). This implements the requirements of the Second Directive,
although the requirement of a nominal value was not introduced into UK law by that
Directive.
7
2006 Act s.580.
8Note, however, the discount here is to the nominal value of the share, not to its market
value, which is the issue addressed by the pre-emption rules. See para.24–6.
9 Strategic, paras 5.4.26–5.4.33. The Gedge Committee, Cmd. 9112, had recommended
as long ago as 1954 that no-par equity shares should be introduced and the Jenkins
Committee (Cmnd. 1749, 1962, paras 32–34) recommended this reform in relation to all
classes of share. The reform has been widely introduced in common law jurisdictions
elsewhere, but now seems unlikely to be introduced here unless the Second Directive is
amended on this point. Introduction of no-par shares would require some matters to be
expressed differently or regulated differently in the contract of issue. For example, the
dividend on a preference share is normally expressed as a percentage of its nominal
value (but could as easily be expressed as so many pence per share) and surplus assets
are distributed on a winding in accordance with nominal values, so that a different
formula would have to be adopted. See Birch v Cropper (1889) 14 App. Cas. 525.
10
The Directive (art.8) refers to “accountable par” as a permitted alternative to “nominal
value” (but without defining it). The concept appears to be that one takes the total
consideration raised through the issue of shares and divides it by the number of shares in
issue at any time. Two consequences follow: the shares do not have a fixed nominal
value (because the accountable par would change on a new share issue at a different
price) but a par value does exist at all times; and the company has no freedom to set the
nominal value: it is simply the result of an arithmetical exercise. See Bank of England,
Practical Issues Arising From the Euro, Issue 8, June 1998, Ch.6 at paras 24–28.
12
Finally in Ooregum Gold Mining Co v Roper [1892] A.C. 125 HL.
13
2006 Act s.580(1).
14
2006 Act s.580(2).
15
See the facts of Ooregum Gold Mining Co v Roper [1892] A.C. 125 HL where the
“no discount” rule enabled the existing shareholders to act in a wholly opportunistic way
towards an investor who was willing to inject new money into the company at market
value (but less than the nominal value) of the shares at a time when the existing
shareholders were unwilling to advance further capital.
16 Hilder v Dexter [1902] A.C. 474 HL. The argument was there rejected that failing to
obtain the premium amounted to the payment of a commission, contrary to what is now
s.552 (see below). The decision was undoubtedly right on its facts, since the right to
purchase further shares at par was an explicit part of the contract under which the
investor had originally become a shareholder in a corporate rescue.
17
See the previous note and directors’ share option schemes, the essence of which is
that the director has the right to subscribe in the future for shares in the company at
today’s share price.
18 See para.16–64.
19
“If the share stands at a premium, the directors prima facie owe a duty to the company
to obtain for it the full value which they are able to get. It is true that it is within their
powers under the Companies Acts to issue it at par, even in such a case, but their duty to
the company is not to do so unless for good reason.” (per Lord Wright in Lowry v
Consolidated African Selection Trust Ltd [1940] A.C. 648, 679.) See also Shearer v
Bercain Ltd [1980] 3 All E.R. 295: “Those who have practised in the field of company
law for any length of time will have spent many hours convincing directors that it is
wholly wrong for them to issue to themselves and their friends shares at par when they
command a premium, however great the company’s need for capital may be.” (per
Walton J). See also Re Sunrise Radio [2010] 1 B.C.L.C. 367.
20Drown v Gaumont British Corp [1937] Ch. 402. See C. Napier and C. Noke,
“Premiums and Pre-acquisition Profits” (1991) 54 M.L.R. 810.
21
In some cases, the nominal value of the share has a more substantial significance. The
dividend entitlement of a preference share is normally set as a percentage of the nominal
value of the share, so that choosing a low nominal value for a preference share might
imply a high percentage dividend. To produce the equivalent of a 10 per cent dividend
on a £1 share, the dividend entitlement on a 1p share would have to be 1000 per cent! In
general with preference shares, given their bond-like characteristics (see para.23–7), the
nominal value will be set much closer to the issue price, since the nominal value will
also determine what the preference shareholder receives in a reduction of capital or
liquidation, at least if the holder has no right to participate in surplus assets.
22
2006 Act s.610(3).
23
The bonus issue could also be funded by distributable profits. See below at para.11–
20.
24
The issuance of a bonus share has little impact on the shareholders either in the
normal case. The shareholder now has more shares, but since the value of the company
is not increased by this exercise, the market price of each share in the expanded class
will fall. Sometimes bonus shares are issued precisely to achieve this result because it is
thought that the market value of the share has become so large that it is an obstacle to
trading them. See EIC Services Ltd v Phipps [2004] 2 B.C.L.C. 589 CA, where the
(botched) bonus issue was aimed at reducing the trading price of the shares. A similar
result can be obtained by effecting a “stock split” under s.618, an exercise which is
possible no matter whether the company has a share premium account of any size.
25
2006 Act s.610(2).
26
2006 Act s.553 and see below, para.11–14.
27 Under the 1985 Act the share premiums account could be written off against a wider
range of share issue expenses which, in particular, did not necessarily have to have been
incurred in relation to the shares generating the premiums.
28 Head & Co Ltd v Ropner Holdings Ltd [1952] Ch. 124.
29 Shearer v Bercain Ltd [1980] 3 All E.R. 295.
30
2006 Act ss.612–613.
31
2006 Act s.613(3).
32 Which will include preference shares if they have a right to participate in either
dividends or surplus on a winding up beyond a fixed amount: ss.616(1) and 548.
33
2006 Act s.611.
34
2006 Act s.611(2)–(5), defining the “minimum premium value”.
35
2006 Act s.612(4).
36 See above, fn.4, art.6.
372006 Act s.763 and the Companies (Authorised Minimum) Regulations 2009 (SI
2009/2425) reg.2.
38
Second Directive art.6: €25,000.
39 2006 Act s.586.
40See M. Becht, C. Mayer and H.F. Wagner, “Where do Firms Incorporate?
Deregulation and the Cost of Entry” (2008) 14 Journal of Corporate Finance 241.
41
2006 Act s.761.
42 The form of the application, containing a statement of compliance on the part of the
company, is set out in s.762. It is not demanding and the Registrar may accept the
company’s statement of compliance as sufficient evidence of the matters stated in it, and
the Registrar must issue the certificate if satisfied the minimum capital requirements are
met: s.765(2). The trading certificate, once issued, is conclusive evidence that the
company is entitled to commence business: s.761(4). However, by analogy with the
decisions referred to in para.4–35 in relation to the certificate of incorporation, it appears
that, as this section is not expressed to bind the Crown, the Registrar’s decision could be
quashed on judicial review at the instance of the Attorney-General.
43
2006 Act s.761(2). A company’s capital may be stated in euros in which case s.763
deals with the fixing of the equivalent prescribed euro amount. Where a company has
some share capital denominated in pounds and some in euros, the company’s application
for a certificate must be made by reference to the sterling capital or to the euro capital
alone and not by reference to a mixture of the two types of capital: s.765.
44
Insolvency Act 1986 ss.122(1)(b) and 124(4)(a).
45
2006 Act s.767(1),(2).
46
2006 Act s.767(3),(4).
47
2006 Act ss.90(1)(b), (2)(b) and 91(1)(a).
48 See Ch.13.
49
2006 Act.650(2). The court may order otherwise. Section 651 provides an expedited
procedure for re-registering as a private company in such cases. See also s.662(2)(b),
dealing with the consequences of a forced cancellation by a public company of its own
shares.
50
2006 Act s.764(1),(4).
51
2006 Act s.764(3)—no doubt through an expedited procedure.
52As we shall see below at para.12–9, directors’ remuneration would not normally be
caught by the rules controlling distributions by companies.
53
2006 Act s.547 makes it clear that called up share capital includes capital payments to
be made in the future if those future payment dates are laid out in the company’s articles,
the terms of allotment of the shares or other arrangements for the payment of the shares.
This section implements domestically art.19 of the Second Directive. Article 19 refers to
the company’s “subscribed” capital, which probably means the nominal value of the
issued share capital, thus reducing the impact of the rule.
54
As is the case in some continental European jurisdictions.
57
See Chs 9 and 10, above.
58 Above, para.11–1.
61 2006 Act s.10. Prescribed are details of the right to vote, to receive a distribution
either by way of dividend or capital, and provisions about redemption: Companies
(Shares and Share Capital) Order 2009/388 art.2.
62 2006 Act s.555 and see para.23–6.
63
As we see in para.26–18, those who take the shares may be nominees for others who
have the financial interest in them, but this is perhaps of less moment to the creditors
whose main interest is in the amount of shares issued, rather than data about their
holders. Since the shareholders’ liability is limited, it does not matter to the creditors
whether the shareholders are rich or poor, at least once the shares are fully paid up.
64
2006 Act s.1112.
65
Modernising, para.6.5.
66
1985 Act s.2(5)(a).
67
1985 Act s.121.
68
See Ch.24.
69
A set of relaxations to the original version of the Second Directive was made by
Directive 2006/68/EC ([2006] O.J. L264/32). However, in relation to the issues
discussed below the Government took the view that the permitted relaxations were so
minor and so hedged about with qualifications that it was not worth taking them up:
DTI, Implementation of the Companies Act 2006: A Consultation Document, February
2007, para.6.23.
70
2006 Act s.547 defines called-up capital so as to include that amount represented by
calls which have been made, whether or not they have been met, and the amount payable
under the articles or the terms of allotment on a specified future date, even though that
date has not arrived.
71
Or, indeed, by public ones. As the CLR proposed, the Act no longer contains
provisions which permit a company to determine by special resolution that any part of its
capital which has not been called up shall be incapable of being called up except in a
winding up.
72 2006 Act s.552.
732006 Act s.553. Section 552(3) also permits the payment of “such brokerage as has
previously been lawful”—an obscure and potentially wide permission. On the use of the
share premium account to pay commissions, etc. see above, para.11–7.
74Of course, for a company to make such a payment, even out of distributable profits,
might infringe the prohibition on a company giving financial assistance towards the
purchase of its own shares, but the latter rule no longer applies to private companies: see
para.13–55, below.
75 Modernising Company Law—Draft Clauses, Cm 5553-II, July 2002, cl.28.
76 2006 Act s.582(1) restates the general rule that “shares allotted by a company may be
paid-up in money or money’s worth (including goodwill and know-how)” but this is
followed by exceptions and qualifications relating to public companies only. Again,
bonus shares are specifically allowed.
77For example, when the proprietor of a business incorporates it by transferring the
undertaking to a newly formed company in consideration of an allotment of its shares.
78
Re Wragg [1897] 1 Ch. 796 CA; Park Business Interiors Ltd v Park [1992] B.C.L.C.
1034.
79 Re White Star Line [1938] Ch. 458.
80 Tintin Exploration Syndicate v Sandys (1947) 177 L.T. 412.
81
2006 Act s.586.
82
83
2006 Act s.583(3)(d). There is no apparent limit on the future date which may be
fixed for the actual payment, for the five-year limit in s.587 (see below) applies only to
non-cash payments, but the undertaking must be one given to the company in
consideration of the allotment of the shares: System Controls Plc v Munro Corporation
Plc [1990] B.C.C. 386. And the “cash” must be given to the company, not a third
person: s.583(5).
84
2006 Act.583(3)(c). So, if the company owes the investor a sum of money, the release
by the investor of the company from that obligation in exchange for the shares amounts
to the provision of a cash consideration for them: EIC Services Ltd v Phipps [2004] 2
B.C.L.C. 589 at [36] to [52] (Neuberger J).
85
Re Mercantile Trading Co, Schroeder’s Case, Re (1871) L.R. 11 Eq. 13; Pro-Image
Studios v Commonwealth Bank of Australia (1990–1991) 4 A.C.S.R. 586, though it
should be noted that in this case both the debt and the consideration for the new shares
were immediately payable. Independent valuation of the debt is not required because its
release constitutes a cash consideration.
86
2006 Act s.585. But this section (nor s.587 below) does not prevent the company from
enforcing the undertaking: s.591. If a private company wishes to convert to a Plc such
undertakings must first be performed or discharged: s.91(1)(d).
87
Including the holder of the beneficial interest under a bare trust: s.585(3).
88 2006 Act s.585(2).
892006 Act s.587(1). If contravened the consequences are similar to those for
contravention of s.585, except that the liability falls on the allottee: s.587(2). If a
contract of allotment does not offend s.587(1) but is later varied so as to produce this
consequence, the variation is void: s.587(3).
902006 Act s.587(4). And see s.91(1)(d) regarding a private company converting to a
Plc.
91 s2006 Act s.584.
92
2006 Act s.593(1).
93 2006 Act s.593(2).
942006 Act ss.594–595. The rules of the Act, the Takeover Panel or the FCA will
normally ensure that there has been professional assessment of value in such cases.
95
2006 Act s.593(3). As is a subsequent holder unless he is or claims through a
purchaser for value without notice: s.605(1),(3). See Re Bradford Investments [1991]
B.C.L.C. 224.
96
See para.11–5.
97 2006 Act ss.596(1) and 1150. For these qualifications, see Ch.22, below.
98 2006 Act ss.1151–1152.
99 2006 Act s.1153. Knowingly or recklessly making a false statement under the section
is a criminal offence: s.1153(2)–(4). Unlike the auditor’s right, the independent expert’s
does not extend to employees of the company. See para.22–30.
100 2006 Act s.1150(2).
101
2006 Act s.596(3)–(5).
102
2006 Act s.586(3)(d).
103
2006 Act s.93.
104
2006 Act s.598.
105
2006 Act.598(2)—the “initial period”. For the requirement for a public company to
obtain a trading certificate see above, para.11–4.
106
2006 Act ss.598(1)(a) and 603.
107
2006 Act ss.599(1)(c) and 601.
108
Second Directive arts 10 et seq.
109 Now arts 11 and 12.
110
2006 Art s.657(1).
111
DTI, above, fn.69, para.6.23.
112“Holder” is defined to include not just the registered holder of the share but also a
person who has the unconditional right to be included in the company’s register of
members or to have a transfer of the share executed in his favour: ss.588(3) and 605(4).
See Ch.27, below.
113 2006 Act ss.588 and 605.
114
2006 Act ss.588(2) and 605(3). The requirement for “actual notice” is favourable to
the subsequent holder. On the possible meanings of “actual knowledge” see Eagle Trust
Plc v SBC Securities Ltd [1991] B.C.L.C. 438.
115 2006 Act s.593(3).
116
There is no relief power in relation to the allottee in the case of issuance of shares at
a discount or breach of the paying-up requirements: s.589(1).
117
2006 Act ss.589 and 606.
118The importance of which is demonstrated in Re Bradford Investments Plc (No.2)
[1991] B.C.L.C. 688; cf. Re Ossory Estates Plc (1988) 4 B.C.C. 461.
119 2006 Act ss.589(5) and 606(4). For other matters which the court should take into
account, see ss.589(3),(4) and 606(2),(3). When proceedings are brought by one person
(e.g. a holder of the shares) against another (e.g. the original allottee) for a contribution
in respect of liability the court may adjust the extent (if any) of the contribution having
regard to their respective culpability in relation to that liability: ss.589(6) and 606(5).
And see s.606(6) for exemption from liability under s.604(3)(b).
120 2006 Act s.765(1).
121Re Scandinavian Bank [1988] Ch. 87. Of course, until the rules on share capital were
brought into line with those on share premium, the company was not in a position to
exercise freedom of choice in relation to currency.
122 2006 Act s.542(3): shares “may be denominated in any currency and different classes
of shares may be denominated in different currencies” (subject, of course, to s.765,
above, fn.120).
123
As happened in Re Scandinavian Bank [1988] Ch. 87. For the reduction of capital
procedure see para.13–30.
124
Unlimited companies had the freedom already.
125
2006 Act s.622(1). The section requires the actual conversion to take place within 28
days of the adoption of the resolution (s.622(5),(6)).
126
2006 Act s.624(1). Other rights and obligations of members under the constitution or
the terms of issue of the shares are also expressly preserved.
127
2006 Act s.622(3).
128
On capitalisation issues see below, para.11–20.
129
2006 Act s.626. Thus, in the example in the text, the company would not be able to
use this procedure to reduce the nominal value to $2, but it would be able to if the
unreduced nominal value were $2.20. There must also be notification to the Registrar:
s.627.
130
2006 Act s.628. For the significance of this for the payment of dividends see
para.12–2.
131 2006 Act s.766 and the Companies (Authorised Minimum) Regulations 2008/729
reg.5. A speedy method of re-registration is provided.
132
The two expressions mean the same thing and, indeed, so does a third (“scrip” issue)
which is sometimes used.
133 Technically, there is a two-stage process. First, the undivided profits of the company
are capitalised and then there is the appropriation to each member who would have been
entitled to a distribution of the profits by way of dividend of the amount needed to pay
up as fully paid the shares to be issued. See Topham v Charles Topham Group Ltd
[2003] 1 B.C.L.C. 123, especially at 139–141, where the failure of a parent company to
carry out the first step (because its accounts in fact showed no distributable profits,
though its subsidiary did have such profits) meant that the issue of the bonus shares was
ineffective to create any right in the shareholders to receive the shares. cf. Re Cleveland
Trust [1991] B.C.L.C. 424, where the company’s accounts erroneously showed a
distributable profit (in fact the profit so shown was repayable to a subsidiary) and the
issue of the bonus shares was held to have been effective, as far as the statute was
concerned, but rendered void by the common law doctrine of common mistake.
134
This does not mean that listed shares will be quoted at that price: that will depend on
many other factors, including in particular the expected future profits and dividends.
And the book values, of fixed assets in particular, may not reflect their present values.
135The quoted price is not likely to fall by a half because it is to be expected that the
company will seek to maintain approximately the same level of dividend per share as
before the issue.
CHAPTER 12
DIVIDENDS AND DISTRIBUTIONS
The Basic Rules 12–1

Identifying the Amount Available for Distribution 12–5
Interim and initial accounts 12–6
Interim dividends 12–7
Adverse developments subsequent to the accounts 12–8
Disguised Distributions 12–9
Intra-group transfers 12–11
Consequences of Unlawful Distributions 12–12
Recovery from members 12–12
Recovery from directors 12–13
Reform 12–15
The central issues 12–16
THE BASIC RULES

12–1
The rules on legal capital, discussed in the previous chapter,
have their main impact on companies through their role in
setting the maximum amount payable by way of dividend or
other form of distribution to shareholders. Whether the company
chooses to make the maximum distribution permitted by the
distribution rules is, in most circumstances, a matter for it.
Where a company has substantial distributable profits, it will
often not pay them all out to the shareholders but will keep some
for re-investment. The legal rules have their bite where the
company does in fact hold enough cash to pay a dividend but the
rules to be discussed in this chapter prevent a distribution at the
level the company would otherwise desire.
The distributions rules discussed in this chapter are aimed at
protecting creditors. This will be our main focus. However, there
may also be shareholder/board conflicts over the level of
distributions, managers perhaps preferring to re-invest surplus
cash in the business, the shareholders preferring cash in hand.1
The respective roles of the board and the shareholders in
determining the level of dividend are left to be determined in the
articles of association (subject, of course, to the constraints
imposed by the creditor protection rules). The model articles for
private and public companies limited by shares require both a
recommendation from the board and shareholder approval for a
dividend, but with the shareholders not permitted to approve a
level of dividend above that recommended by the directors.2 In
effect, this is a mutual veto arrangement.3 If the articles,
unusually, say absolutely nothing about the mechanism for
determining dividends, then on normal principles that decision
would rest with the shareholders alone. There is no apparent
reason why the articles should not give the dividend decision
entirely to the directors, though it is rare to do so (except in
relation to interim dividends). It is thought that it would require
very clear words to produce that result, i.e. the court would be
unlikely to deduce exclusive director control over dividends
from a general grant of management powers to the board, since
dividends are as much an investment as a management matter.
Public and private companies
12–2
Turning to creditor protection, the inter-relationship between the
legal capital rules and the rules on distributions appears most
clearly in the rule applicable to public companies only and set
out in s.831 of the Act.4 It applies a balance-sheet test for the
legality of a distribution. It is unlawful for a company to make a
distribution if its net assets (assets minus liabilities) are (or
would be after the distribution) less than its called up share
capital and undistributable reserves.5 Its undistributable reserves
include its share premium account.6 Thus, to take a simple
example, a company which has issued as fully paid up 200 £1
shares at an issue price of £1.50 will have a share capital of £200
and a value of £100 in its share premium account. Consequently,
for such a company it will not be enough to permit a distribution
of, say, 10p per share that it has positive net assets of £20, so
that it can pay the dividend and still have assets in balance with
its liabilities. Instead, it must have positive net assets of £320
before it pays the dividend. The legal capital rules thus lead to
greater conservatism in the payment of dividends than would a
“bare” net assets test for the legality of dividend payment. One
can also see from this example the significance of the share
premium account being classified as an undistributable reserve
in domestic law.7 If, as before 1948, the share premium account
were a distributable reserve, the company would need to have
positive net assets of only £220 before it made the dividend
payment. And had the company chosen to set the par value at
10p (but still issued the shares at the same price, generating a
premium of £1.40 per share), it would have needed positive net
assets of only £40 before it made the dividend payment.
Undistributable reserves include more than the share premium
account. Also added is the “capital redemption reserve” which
we shall consider in the following chapter.8 That is created when
a company re-purchases or redeems its shares, and it simply
replaces the reduction in the share capital account which the re-
purchase or redemption brings about. In other words, the capital
redemption reserve operates so as to hold legal capital constant
in this situation but it does not increase it. Further, there is added
any other undistributable reserve created by an enactment other
than Pt 23 of the Act (Disbributions).9 The company itself may
also add restrictions in its articles by creating an undistributable
reserve.10 There is one final item in the list of undistributable
reserves which, however, is best examined after looking at the
distribution rule which applies to all companies.
12–3
The general rule, applying to companies public or private, is set
out in s.83011 and states that a company may “make a
distribution only out of profits available for the purpose”. It then
defines “profits available for the purpose” as the company’s
“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”.12 This second rule, unlike
the first one, seems focused on the company’s profit and loss
account, rather than its balance sheet. The thrust of the rule is on
two points. First, the company needs to assess its accumulated
profits and losses over the years to determine whether, at the
point a dividend is under consideration, there are profits to
support it. Thus, what are sometimes called “nimble dividends”
are not permitted, i.e. the paying of dividends out of profits
earned in a particular year, even though in previous years the
company has made losses, which have not been replaced.13 More
fully, the company must subtract from the profits it has made
over the years any amounts already paid out by way of dividend
or any profits which have been capitalised,14 but it may also
deduct from its losses it has made over the years any amount
properly written off through a reduction or reorganisation of
capital.15 If the company’s aggregate profits over the years
exceed its aggregate losses over the years, it may make a
distribution under this rule to the extent of the surplus profit,
subject, however, to one further—and crucial—qualification.
The second feature of s.830 is that it applies to only “realised”
profits and “realised” losses. “Unrealised” profits and losses are
left out of account in the calculation required by s.830.16
“Realised” profits and losses are not defined in the Act which
delegates the solution to accounting practice.17 In fact, the
precise line between the two is a matter of some controversy,18
but for present purposes it is perhaps enough to give two clear
examples, one on each side of the line. Suppose a company has a
piece of real property which it acquired some years ago for £1
million. Because of inflation in asset prices, the property is now
worth £5 million. If the company sells the property at its current
valuation, receiving £5 million in cash in exchange, it will report
a profit of £4 million (assuming no taxes or transaction costs)
which it may distribute in whole to its shareholders (assuming it
has no accumulated realised losses from the past which it must
set against the profit). If, however, the company simply re-values
the property in its books at £5 million (but does not dispose of
it), which is something it might do in order to demonstrate that a
takeover bidder was offering too low a price for the company or
because it has adopted accounting principles which
systematically deal with its assets and liabilities on a “mark to
market” basis, it has recorded simply an unrealised profit.19
Since the property will be reflected in the balance sheet at this
higher value, under historic cost accounting a counterbalancing
entry is needed, which will probably take the form of a
“revaluation reserve”.20 The same principles apply to losses:
only realised losses count against the amount of distributable
profit.
12–4
What is the interrelationship between the two rules laid down in
ss.830 and 831? Since the former applies to all companies and
the latter to public companies alone, the latter presumably
prevents certain amounts contributing towards a distribution by a
public company which would count in the case of a private
company distribution. The general rule focusses on successive
profit and loss accounts and the public company rule on the
current state of the balance sheet. The profit and loss account
records the company’s financial success (or lack of it) over a
period of a year, the balance sheet its assets and liabilities at the
end of the year.21 Although the profit or loss in a particular year
inevitably feeds into the balance sheet at the end of the year, the
crucial difference between the two tests appears to be that the
public company test incorporates legal capital into its constraints
on distributions. The general rule, by contrast, requires only
cumulative profits to support a distribution. A public company,
therefore, must have both cumulative profits of the requisite size
and, after the distribution, net assets on its balance sheet at least
equivalent to its legal capital and undistributable reserves.
The further difference between ss.831 and 830 appears to be
that the latter takes no account of unrealised losses. Under the
test for all companies, a company with an accumulated positive
balance of realised profits and losses may lawfully distribute
them, even if it is carrying extensive unrealised losses (though it
may be a breach of directors’ duty or imprudent to do so). In the
case of public companies the unrealised losses must be taken
into account when establishing the amount available for
distribution, except to the extent that the unrealised losses are
covered by unrealised gains.22
IDENTIFYING THE AMOUNT AVAILABLE FOR DISTRIBUTION
12–5
It is apparent from the foregoing that, in determining whether
distributions can be made in accordance with the statutory rules,
what counts in most cases are the relevant figures in the
company’s accounts. This may seem an obvious way to proceed:
companies are normally required by the Act to produce accounts
annually and, except for small companies, to have them audited,
thus providing a degree of verification; and the declaration of a
dividend is normally one of the decisions for the annual general
meeting of the shareholders, at which the accounts will be
considered as well. At least for public companies, use of the
accounts is mandated by the Second Directive in respect of the
net asset restriction in s.83123 and it probably also applies—
though this is less clear from the wording of the Directive—to
the accumulated net profits rule of s.830. Certainly, the Directive
has been interpreted by the drafters in the UK as requiring both
tests to be applied by reference to the numbers in the accounts,
and that approach has been applied to private companies as well.
The statute calls the accounts which are to be used for
assessing the legality of the distribution the “relevant” accounts.
Since dividends are paid by individual, not groups of,
companies, it is the individual accounts of the paying company,
not the group accounts, which are the relevant ones.24 Beyond
that, the general rule is easy to state: the most recent statutory
accounts should be used.25 When that is so, the distribution is
lawful so long as it is justified by reference to those accounts and
the accounts have been properly prepared in accordance with the
Act, or have been properly prepared subject only to matters not
material for determining whether the distribution would be
lawful.26 These accounts must have been duly audited, if subject
to audit, and, if the auditors’ report is qualified, the auditors must
also state in writing whether the respect in which the report was
qualified is material in determining whether the distribution
would be lawful. This statement must have been laid before the
company in general meeting, or sent to the members where no
meeting is held.27
Interim and initial accounts
12–6
In two cases, however, special accounts will be needed. The first
is where the distribution would contravene the statutory
distribution rules if reference were made only to the last annual
accounts. In that event the company may be able to justify the
distribution by reference to additional “interim accounts”.28 The
second is where it is proposed to declare a dividend during the
company’s first accounting period or before any accounts have
been presented in respect of that period.29 In that event it will
have to prepare “initial accounts”. Initial accounts enable the
company to make a distribution before its first set of financial
statements is produced. Interim accounts allow the company to
take advantage of an improvement in its financial position since
the previous statutory accounts were produced. This might
occur, for example, when a realised profit had been made on the
sale of fixed assets after the date of the last annual accounts and
the company wanted to distribute part or all of it to its
shareholders without waiting for the next annual accounts. It
could also occur if the net trading profits in the current year are
seen to be running at a rate considerably higher than formerly
and the directors wished to give the shareholders early concrete
evidence of this by paying an immediate dividend. In both these
examples the previous year’s accounts might well not justify the
payment and would have to be supplemented by interim
accounts.30
Interim dividends
12–7
The term “interim accounts”, although now well established in
the Act, is potentially confusing because it might lead one to
suppose that such accounts are needed whenever it is proposed
to declare interim (which are very common) or special
dividends, in addition to the normal dividend for the year. That
is not so. So long as the company has duly complied with its
obligations under the Act in respect of its annual accounts for the
previous year, it can, in the current year, pay interim or other
special dividends in addition to the final dividend for the year so
long as these dividends are supported by those accounts.31 It is
only when the last annual accounts would not justify a proposed
payment that it is necessary to prepare interim accounts.
Normally, however, it will not be necessary to prepare interim
accounts merely because the company pays quarterly or half-
yearly interim dividends, in anticipation of the final dividend for
the year, to be declared by the company when that year’s
accounts are presented. The previous year’s accounts are used to
support the interim dividends. The articles normally provide for
interim dividends to be paid on the authority of the directors
alone, there not being any regularly scheduled meeting of the
shareholders to which the matter could be put.32
Adverse developments subsequent to the accounts
12–8
The need for interim accounts arises out of possible
improvements in the company’s financial position which may
have occurred since the last statutory accounts were drawn up.
What, however, about the opposite situation, where the
company’s financial position has deteriorated since the statutory
accounts were drawn up? If the directors have discovered that
the relevant accounts were so seriously inaccurate that they did
not in fact give a true and fair view of the state of the company’s
affairs and its profits or losses at the time the accounts were
signed, they clearly should not recommend a dividend, and
should withdraw any recommendation they have made; for the
dividend, if paid, would be unlawful on the part of the
company.33 If, however, the relevant accounts truly reflected the
position as at their date but there has occurred some financial
calamity thereafter, payment of the dividend would not,
seemingly, be unlawful under the statute. However, as we have
seen, a directors’ recommendation as to the level of the dividend
is, normally, an essential part of the dividend-setting process.
Consequently, the fiduciary duties of directors (discussed in
Ch.16) are relevant to this particular decision of the board, as to
any other. Payment in such circumstances might constitute a
breach of the directors’ fiduciary duties—for example, to
promote the success of the company—or an act of wrongful
trading.34 The Company Law Review recommended35 that the
statute itself should provide that subsequent losses, of which the
company was aware at the time of taking the decision to declare
a dividend, should be deducted from the distributable profits
shown in the relevant accounts, so that it would be unlawful for
the company to make a distribution above that amount.
However, this has not been implemented, and so the law on
directors’ duties fills the gap. One significant difference between
the two approaches is that a distribution not permitted by the
statutory distribution rules is an unlawful act of the company,
which the shareholders cannot ratify, whereas they can in
principle ratify a breach of duty by the directors—and may well
want to if the breach consists in the payment of a dividend.36
A related and more general issue is that, under modern
developments in accounting, there is an increasing emphasis on
using current market valuations, rather than historic ones, in the
accounts. Such an approach can produce considerable volatility
in companies’ profits from year to year.37 Even if no particular
calamity has struck the company but “mark to market”
accounting policies produce volatility in the company’s reported
profits, the directors’ fiduciary duties would require them to take
that fact into account in setting the level of dividend.38
However, it is possible that a failure to take post-accounts
events into consideration when making a distribution would
constitute, not simply a breach of duty on the part of the
directors, but an unlawful act on the part of the company. This is
because, despite the statutory restrictions on distributions, the
Act preserves “any rule of law” restricting dividends.39 Thus, the
common law rule prohibiting the return of capital to
shareholders40 continues in force in relation to distributions. In
principle, this is odd, since there is some uncertainty about the
scope of the common law principle and to have it running in the
background of the precise statutory rules creates a legal risk for
companies which is difficult to justify.41 Nevertheless, in the
particular situation under discussion, it may have a useful role to
play. Since the common law rule applies on the basis of the
financial position of the company at the time the distribution is
declared, it would be breached if company made a distribution
on the basis of profits shown in the accounts which had been
dissipated by the time the directors came to declare the
dividend.42
DISGUISED DISTRIBUTIONS
12–9
The above rules apply to “distributions” by companies. Beyond
making it clear that a distribution need not be in cash and that
the definition is intended to be extensive, the statutory definition
is not very helpful: “every description of distribution of a
company’s assets to its members, whether in cash or
otherwise”.43 No doubt, this is sufficient to catch the most
common form of distribution, the yearly or semi-yearly payment
of a dividend by a company to its shareholders, usually in cash
but sometimes with the alternative of subscribing for additional
shares in the company. The statutory definition is clearly
intended to go beyond that simple situation, by its reference to
non-cash dividends, but how far? Does it catch what are
sometimes referred to as “disguised distributions”, i.e.
transactions between a company and a shareholder on other than
an arm’s length basis, so that value is transferred from the
company to the shareholder? In many cases, the implementation
of such a transaction will be a breach of duty on the part of the
directors who authorised it, but, if the distribution rules apply,
the transaction will be an unlawful one (sometimes referred to as
an “ultra vires” transaction)44 on the part of the company as well.
Many, though not all, of the relatively few cases on disguised
distributions have been decided on the basis of the common law
rule, so it perhaps best to begin by setting it out. In Ridge
Securities Ltd v Inland Revenue Commissioners45 Pennycuick J
said:
“A company can only lawfully deal with its assets in furtherance of its objects. The
corporators may take assets out of the company by way of dividend, or, with the
leave of the court, by way of reduction of capital, or in a winding-up. They may of
course acquire them for full consideration. They cannot take assets out of the
company by way of voluntary distribution, however described, and if they attempt
to do so, the distribution is ultra vires the company.”46
This passage suggests that the common law rule is broader than
the statutory provisions on distributions, for it indicates that any
return of corporate assets to the shareholders, which is not
justified by a statutory provision or the pursuit of the company’s
objects, will be unlawful, even if the company has distributable
profits. However, if there are distributable profits the statutory
provisions discussed above provide a mechanism for making a
distribution which does not breach the common law rule.
Consequently, if there are no distributable profits, both the
statutory and common law rules will be broken, but the common
law rule will catch any improper return of assets to the
shareholders whether that return is classified as a distribution or
not.
12–10
The core element of a disguised contribution is that it is a
transaction between the company and a shareholder which does
not purport to be a distribution but which contains a transfer of
value to the shareholder47 because of a discrepancy between the
value provided to the company by the shareholder and the
greater value provided to the shareholder by the company. It is
not necessary that the transaction be a sham to be characterised
as a disguised distribution: it is the imbalance in the
considerations that is the focus of the courts’ concerns. The two
main issues arising are: (i) how rigorously will the courts
examine the discrepancy in the values provided to and by the
company; and (ii) what is the relevance of the good faith or
otherwise of the parties to the transaction? As we shall see, these
questions are to some degree interlinked.
In some cases the discrepancy is obvious, not necessarily
because the value transferred to the shareholder is large but
because the shareholder provides nothing or virtually nothing to
the company in exchange for the value transferred.48 These may
be thought of as virtually gratuitous transactions. Outside
gratuitous transactions, the courts are clearly reluctant to be put
in a position where they may have to scrutinise routinely the
exchange of values in commercial transactions between
shareholders and their companies. In Progress Property Co Ltd v
Moorgarth Group Ltd49 Lord Walker stated that the parties
should have a “margin of appreciation” in relation to the
assessment of the value of what was transferred under the
contract, at least where the transaction was entered into in good
faith. In other words, it would be necessary to show a very large
discrepancy between the values provided and received by the
company in such a case for the disguised contribution rule to be
triggered.
However, it is clear that good faith will not take the parties to
the transaction outside the scope of the disguised distribution
rule altogether. In Re Halt Garage (1964) Ltd50 the shareholder
and the company (in effect the same person, as is often the
situation in these cases) had acted entirely honestly, having been
misled by professional advice. However, the company had paid
for services which in effect had never been received and the
amount paid had to be accounted for to the company (now in
liquidation). This case might be distinguished as in effect a
gratuitous transaction. Certainly, in Aveling Barford Ltd v Perion
Ltd,51 which was not a gratuitous transaction but a case of a
transfer of corporate property to a controlling shareholder at a
considerable undervalue, Hoffmann J put some emphasis on the
fact that the parties (again in effect a single controlling
shareholder) knew and intended the sale to be at an undervalue.
In Progress Property Co Ltd v Moorgarth Group Ltd52 Lord
Walker thought that sometimes the parties’ subjective intentions
would be relevant and sometimes they would not, but he did
agree that an apparent distribution disguised as an arm’s length
commercial transaction was the “paradigm case” where
subjective intentions were relevant.
“If the conclusion is that it was a genuine arm’s length transaction then it will stand,
even if it may, with hindsight, appear to have been a bad bargain [for the company].
If it was an improper attempt to extract value by the pretence of an arm’s length
sale, it will be held unlawful. But either conclusion will depend on a realistic
assessment of all the relevant facts, not simply a retrospective valuation exercise in
isolation from all other inquiries.”53
It may be that a question which it will often be helpful to ask is

whether the company would have been willing to enter into the
same transaction with a non-shareholder. In Aveling Barford the
answer was clearly “no”, whereas in Progress Property, where
an honest mistake was made as the existence of a liability
between the parties, the answer was “yes” (i.e. the company
would not have altered the contractual price if the purchaser had
been a non-shareholder, assuming a similar mistake about the
liability existed). If the company would not have been willing to
enter into the transaction on the same terms with a non-
shareholder, it will be caught by the common law rule, but may
of course be justified in one of the ways mention by Pennycuick
J. Thus, a gratuitous payment to a shareholder will almost
always be caught the common law rule, but would be capable of
being justified as a distribution by a company with distributable
profits.
Intra-group transfers
12–11
In Aveling Barford Ltd v Perion Ltd54 the company, which was
solvent (in the sense that it could pay its debts as they fell due)
but had accumulated heavy losses, and so was not in a position
to meet the general rule requiring distributions only out of
accumulated profits, transferred to another company, controlled
by the same person as was its controlling shareholder, an
important asset at an undervalue as compared with its current
market value.55 The decision that the transfer was unlawful
caused considerable alarm in commercial circles about the
legality of intra-group transfers of assets, which are, of course, a
common occurrence as a result of the carrying on of business
through groups of companies.56 Such transfers are usually
effected on the basis of the value of the asset as stated in the
transferring company’s accounts (its “book” value), which may
not reflect the current market price of the asset.57 Advice was
given that the common law rule might strike down a transaction
where a company transferred an asset at book value to another
group company, if the asset was in fact worth more than its book
value, possibly even where the transferring company had
distributable reserves (which was not the case in Aveling Barford
itself).
The 2006 Act deals with this problem by laying down rules
about distributions in kind which apply to both the statutory
restrictions on distributions and any other rule of law restricting
distributions.58 The core new provision59 applies where the
transferring company has profits available for distribution.60
Where this is not the case, the common law will continue to
apply unamended, with the apparent requirement that the asset
would have to be transferred at market value to be sure of
avoiding the risk of infringing the common law rules on
distributions. Given the risk of opportunism on the part of
controlling shareholders where the company has no distributable
profits, this restriction in the new section is probably wise.
Assuming distributable profits, the amount of the distribution is
assessed under the section at zero, provided the consideration
received for the asset is at least equivalent to its book value, and
otherwise is restricted to the amount by which the book value
exceeds the consideration.61 If, by contrast, the consideration
received upon the transfer of the asset exceeds its book value,
the distributable profits of the transferring company are
increased by the amount of the excess.62 Of course, the rules
relating to directors’ fiduciary duties63 are unaffected by these
changes.
CONSEQUENCES OF UNLAWFUL DISTRIBUTIONS
Recovery from members
12–12
No criminal sanctions are provided in the Act in respect of
distributions which it renders unlawful, but something (though
precious little) is said about the civil consequences. This is done
by s.847 which provides that, when a distribution64 is made to a
member which the member knows, or has reasonable grounds
for believing, is made in contravention (in whole or in part) of
the statutory distribution rules, that person is liable to repay it or,
if the distribution was otherwise than in cash, its value.65 Thus,
by virtue of this section, the payment, though “unlawful”, is
neither void nor voidable but can nevertheless be recovered from
any recipient of it who knew or ought to have known that it was
unlawful.
This provision has been interpreted to mean that there is
liability to repay the dividend if the recipient knows it has not
been paid out of distributable profits, even if that person is
unaware that such distributions are illegal.66 The section is thus
potentially wide-ranging in its impact on shareholders if this
limited definition of what has to be known is coupled with a
broad approach to what “knowledge” consists of. This raises the
question of whether “reasonable grounds for believing” means
that a shareholder is treated as knowing those facts which would
have been discovered through proper enquiries (constructive
knowledge) or only those to which the recipient turned a blind
eye.67 On the former approach it might be argued that a
shareholder who had received the annual reports should be
treated as knowing, for example, that the company had no
distributable profits or that the auditor had not included the
required statement in the case of a qualified report,68 even if he
or she had not in fact read them, and that such knowledge is all
that is required to trigger the repayment obligation.69
However, this section does not constitute the only basis on
which a claim for repayment of dividend can be made against a
shareholder. The company may claim repayment at common
law.70 This is on the basis that the payment of an unlawful
dividend amounts to a misapplication by the directors of
corporate property and where “the transferee of the assets has
knowledge of the facts rendering the disposition ultra vires, that
party is under a duty to restore those assets to the company
because he is deemed to hold them as constructive trustee”.71
The common law claim, which may or may not be broader than
the statutory claim in terms of its definition of knowledge,72
operates by making the recipient a constructive trustee of the
distribution.73
Recovery from directors
12–13
The statute provides for no specific remedy against the directors,
who authorised the unlawful distribution, but here again the
common law provides a remedy.74 It has been clear since the
decision in Flitcroft’s case75 in the nineteenth century that
directors who cause the company to pay unlawful dividends are
under a duty to restore to the company the value of the assets
wrongfully paid away. In Bairstow v Queens Moat Houses Plc76
the principle was applied to hold directors liable where the
accounts failed to give a true and fair view77 of the company’s
financial situation as a result of accounting irregularities of
which the directors were aware. This rule applies whether the
distribution was unlawful under the statutory rules (as in
Bairstow) or by virtue of the common law (as in Flitcroft’s
case). The principle that the directors should restore the value of
corporate assets unlawfully paid away is potentially a much
broader one than the claim that a shareholder should return to the
company dividends improperly paid to that shareholder. The
director might have received no dividends him- or herself and
yet be liable, in principle, to restore the whole of the amount
wrongfully paid out of the company’s assets. However, in
Bairstow the court showed little interest in confining the scope
of the directors’ liability. The principle in Flitcroft’s case, the
court held, was not limited to companies which were insolvent at
the time of the claim against the director (where the directors’
payment would go to benefit the creditors) but applied also to
solvent companies, so that the directors might end up putting the
company in funds whereby it could pay the dividend all over
again.78
A long debated issue is whether the directors’ liability to
restore the value of the distribution is a strict one or is based on
fault, requiring dishonesty or at least negligence. In Re Paycheck
Services 3 Ltd79 Rimer LJ thought obiter that the liability was
strict, but subject to the court’s discretion to grant relief under
s.1157 of the Act, where the director had acted “honestly and
reasonably”.80 On appeal to the Supreme Court this view was
endorsed, again obiter, by three of the justices.81 Reliance on
court discretion to grant relief is obviously less attractive to a
director than a fault requirement for initial liability.
12–14
It follows from the principle that the director is liable to restore
to the company the assets wrongfully paid away that the amount
of that liability is not limited to the loss suffered by the company
as a result of the wrongful payment.82 If, for example, the
distribution was not supported by proper set of accounts, the
directors are in principle liable to restore the whole of it, even if
a properly drawn set would have allowed some lower level of
distribution to be made or even the level of distribution which
was actually made. However, this last point has been somewhat
qualified in subsequent cases. Where there is a properly drawn
set of accounts in existence which justify a distribution up to a
particular level but the company exceeds that level, it seems that
the requirement to make “a distribution out of profits available
for the purpose” means that the directors act improperly only to
the extent of the excess.83
The upshot of these rules is that directors who make improper
distributions are more likely to be held liable to compensate the
company than the shareholders, who receive them, to restore
them to the company. If directors cannot meet the requirements
of s.1157, it is probably right that they are liable to the company
for the full amount of the unlawful dividend, since the dividend
rules, being tied to the accounting numbers, are not difficult to
comply with. Although recovery of small amounts of dividend
from numerous shareholders is probably not practicable, it is not
clear that recovery should be confined to those who receive the
dividend with knowledge of its unlawfulness where this practical
objection does not apply.84
Finally, one should not forget the possibility of an action by
the company against its auditors if it can be shown that their
negligence led the directors to approve a defective set of
accounts.85
REFORM
12–15
This chapter has shown that that British law has developed a
complex set of rules for the purpose of setting the maximum
level of dividend (or other distribution) payable by a company in
respect of a particular financial period. Those rules take as their
central idea that, for public companies, a distribution should be
made only if, after it has been made, the company will retain
assets whose value exceeds its liabilities by the amount of the
company’s legal capital. It is not enough that, post the
distribution, the company’s assets should equal its liabilities. As
it has been put, the requirement is that the assets should exceed
the liabilities by a “margin” and that margin is set by the amount
of the company’s legal capital.86 It is clearly a sensible measure
of creditor protection that a company should be subject to
constraints on its freedom to transfer assets to shareholders by
way of a distribution (for which it receives nothing tangible in
return). There would be little point in giving the creditors
priority over the members in a winding up if there were no limits
on the company’s freedom to return assets to members whilst it
is a going concern, and the rules of insolvency law, operating
only in the vicinity of insolvency, can be argued not to fill the
whole of this regulatory need. The question, however, is whether
basing those constraints around the notion of legal capital is the
most appropriate technique.
It is sometimes said that the centrality of legal capital in the
distribution rules is the result of the Second Directive. This is
only partly true. British law adopted the notion of distribution
rules based on legal capital at a very early stage of its
development in the nineteenth century.87 And it was in 1948,
before the EU was created and long before the UK joined it, that
domestic law adopted the position that the share premium must
be treated in virtually the same way as the nominal value of the
share for the purposes of legal capital rules,88 probably the single
most important step in making the distribution rules an effective
constraint on companies. Whilst the Second Directive
undoubtedly did tighten the previously applicable distribution
rules, for example, by ruling out “nimble” dividends,89 it did not
introduce a fundamentally new approach into domestic law. The
inflexibility of the Second Directive relates rather to
fundamental reform of the distribution rules. As far as public
companies are concerned, it is not possible for the UK to move
away radically from the test of positive net assets plus a margin
represented by legal capital for the legality of dividends, without
a reform at EU level.90 Without reform of the public company
rules, there is little demand for reform of the rules for private
companies, since s.831 does not apply to them anyway.91 Reform
at EU level, of course, could take the form either of the adoption
by EU law of a test for distributions no longer based on legal
capital or of a decision that the setting of distribution rules is a
matter for the Member States, in which the EU has no or only a
limited interest.92
The central issues
12–16
Whether reform takes place primarily at EU or at domestic level,
the question still remains of the strength of the case for reform.
There are really three questions which need to be considered,
which can only be sketched out here. First, do the current rules
provide creditor protection effectively? There are reasons to
think that they do not, for the reason that many, perhaps all,
classes of creditor do not rely on them. Sophisticated (i.e. large-
scale and repeat) creditors, such as banks, place their trust in the
terms of their loan contracts, which deal with many risks other
than excessive distributions.93 Trade creditors use other
protective techniques, such as retention-of-title clauses or simply
not becoming heavily exposed to a single debtor. Finally,
involuntary creditors (notably tort victims) necessarily do not
rely on the company’s balance sheet and really need a guarantee
that their claims will be met, which the legal capital rules do not
provide (though they may help) but compulsory insurance would
—and does in some cases.94 In other words, it is not at all easy to
identify the beneficiaries of the current rules or, therefore, those
who would be harmed if those rules were substantially
amended.95
Secondly, however, it might be argued that, although the
distribution rules may not do much good, they cause little harm
and so should be left in place to pick up those cases where self-
help or mandatory insurance, for one reason or another, do not
deal with the problem. This approach would be acceptable if it
were clear that the current distribution rules carry with them no
costs—or at least fewer costs than benefits. The second question
therefore relates to the costs of the current distribution rules. The
argument that the current rules do carry considerable costs was
vigorously propounded in the Rickford Report.96 At the centre of
its argument was a change in the role of the company accounts to
which, as we have seen, the present distribution rules are tightly
linked. The trend from historic cost accounting to reporting on
the basis of current values for assets and liabilities, associated
with the adoption of International Financial Reporting
Standards,97 is designed to make the accounts more helpful for
shareholders and investors, but can be argued to have distorted
the creditor protection function of the accounts. Reported profits
have become more volatile, whilst retention of the “realised
profits” rule for distributions98 does not permit the company to
take advantage of the upward fluctuations in asset values when
considering distributions.
Even so, the case for reform is still not made out unless a
workable alternative test for the legality of distributions can be
advanced. As it happens, there is considerable comparative
experience with alternative tests, since the US jurisdictions
abandoned legal capital a long time ago and so have had to
devise alternative tests, and some Commonwealth countries,
notably New Zealand, have taken the same step. The Rickford
Report, which gives an account of alternatives, recommended an
approach based on a solvency test.99 This is not an entirely new
technique even in domestic law, where it is used in certain
limited areas.100 However, its adoption as the test for the legality
of distributions would be novel. In essence, the directors would
have to form a judgment about what level of dividend the
company could appropriately pay, without endangering its
solvency. The directors already take a similar decision when
deciding, within the limits set by the distribution rules, what
level of distribution it is appropriate to make to shareholders and
how much to keep in the company for investment in future
projects. Under the reform proposal the role of the directors’
judgment would be expanded to embrace creditors’ as well as
shareholders’ interests.
Since company law is structured so as to require the directors
to put the shareholders’ interests first, so long as the company is
a going concern, the obvious risk with this proposal is that the
directors will undervalue the interests of the creditors and
overvalue those of the shareholders when taking this new or
expanded decision. At present, the rule-based distribution test
gives directors no discretion about the maximum which is
distributable; under the reform proposal that issue would become
a matter of the directors’ judgment about the impact of the
proposed distribution on the company’s ability in the future to
meet its debts as they fall due. In order to counteract a pro-
shareholder bias the directors would be required to certify
(through a public “solvency statement”) that the proposed
distribution would not affect the company’s ability to meet its
debts, either immediately or for a period after the distribution
(probably one year). Sanctions (probably both criminal and civil)
would be attached to directors whose statement was made
negligently. Of course, the threat such liability might cause
directors to be cautious in their dividend decisions, in which case
the alleged pro-shareholder bias of the solvency test would be
counteracted, but it might also make directors unenthusiastic
about the proposed reform.101
1 Theoretically, it is far from clear that there is a real conflict here. If management
retains earnings to invest in good projects, which the market evaluates appropriately,
then the company’s share price will rise and a shareholder seeking income can sell part
of the (now more valuable) shareholding. So, the issue is simply the form of the income:
dividend or capital gain. But investors may not trust managers to make good investment
decisions or may have different time-frames from the managers for realisation of their
investments.
2 Model articles for private companies art.30; for public companies art.70. But directors
may unilaterally declare interim dividends. Dividends must be declared pro rata, which
is an important protection for minority shareholders. See further Ch.19.
3
Of course, the shareholders’ general governance rights (e.g. to remove directors) may
make the board responsive to the shareholders’ interests in relation to dividends, or
capital market pressures may produce a similar result.
4
The rule is derived from art.15(1)(a) of the Second Directive (77/91/EEC).
5 2006 Act s.831(1),(2).
6
2006 Act s.831(4)(a). On the share premium account see para.11–6.
7
2006 Act s.610 and para.11–6.
8
Below, para.13–11.
9
An example of an undistributable reserve created elsewhere in the Act is the re-
denomination reserve created by s.620 of the Act. See para.11–19. This operates in the
same way as the CRR.
10
Which was the cause of the problems in Re Cleveland Trust Plc [1991] B.C.L.C. 424
where the company’s constitution provided that certain realised profits “shall be dealt
with as capital surpluses not available for the payment of dividends”, which provision,
however, was overlooked.
11
Derived from art.15(1)(c) of the Directive.
122006 Act s.830(2). With one exception, the Act does not distinguish between trading
profits and capital profits, such as that made on the ad hoc disposal of the company’s
head office, and both are distributable. In the case of investment companies, however,
only revenue profits are in principle distributable: ss.832–835.
13This reverses the common law: Lee v Neuchatel Asphalte Co (1889) 41 Ch.D. 1 CA;
Ammonia Soda Co v Chamberlain [1918] 1 Ch. 266 CA.
14
See para.11–20.
15
See Ch.13.
16 This again reverses the English common law rule which allowed unrealised profits on
fixed assets to be distributed: Dimbula Valley (Ceylon) Tea Co Ltd v Laurie [1961] Ch.
353. Scots law took a stricter view: Westburn Sugar Refineries v IRC, 1960 S.L.T. 297.
17 2006 Act s.853(4): they are “such profits or losses of the company as fall to be treated
as realised in accordance with principles generally accepted at the time when the
accounts are prepared”. However, s.841 does lay down that provisions in the accounts
(other than revaluation provisions) should be treated as realised losses (for example,
depreciation provisions); s.844 requires development costs to be treated as a realised
loss, even if stated as an asset in the accounts; and s.843 makes provisions about the
realised gains and losses of long-term insurance businesses.
18See CLR, Capital Maintenance: Other Issues, paras 62–66; ICAEW, Guidance on the
Determination of Realised Profits and Losses in the Context of Distributions under the
Companies Act 2006, Tech 01/09.
19 If, however, the re-valued asset is later distributed in specie to its shareholders (a
perfectly possible, if not common, course of action, because distributions do not have to
be in cash) the amount of the unrealised profit is treated as a realised profit for the
purpose of determining the legality of the distribution: s.846. The purpose of this
provision is to make it possible for the company to distribute assets at book value, even
if the value to be found in the company’s accounts represents a revaluation of the assets.
See further below at para.12–11. The provision was driven initially by a perceived need
to facilitate de-mergers, in which assets or shares held by a company might be
distributed to its shareholders.
20
Which is a undistributable reserve unless it represents realised gains: Fourth Directive
(78/660/EEC) art.33(2)(c). Where assets are valued on a “mark to market” basis, there
will be no revaluation reserve, but the valuation will not add to distributable profits
unless the asset is readily convertible into cash (as with gilts or treasury bills).
21
See further, Ch.21 below.
22
2006 Act s.831(4)(c). “This means that, in calculating the amount available for
distributions, a public company must reduce the amount of its net realised profits
available for distribution by the amount of its net unrealised losses” (ICAEW, above
fn.18, at 2.31).
23
See art.17(1) but cf. art.17(3).
242006 Act s.836(2). For an example of the problems that ignoring this point can cause
see Inn Spirit Ltd v Burns [2002] 2 B.C.L.C. 780.
25
2006 Act s.836(2).
26 2006 Act s.837(2). If the directors knew or ought to have known of a serious defect in
the company’s accounts, they will not be “properly prepared” nor give a true and fair
view, so that any distribution by the company will be unlawful: Re Cleveland Trust Plc
[1991] B.C.L.C. 424. This may also be the case if the directors are non-negligently
ignorant of the defect, but they might then seek to protect themselves against liability by
invoking s.1157 (see para.12–13, below).
27
2006 Act s.837(3),(4). The auditor’s statement may be made whether or not a
distribution is proposed at the time when the statement is made and may refer to all or
any types of distribution; it will then suffice to validate any distributions of the types
covered by the statement: s.837(5). This rule also applies if the directors choose to have
an audit, although not obliged to do so. The need for the auditors’ statement where the
accounts are qualified is frequently overlooked and the resulting distribution will be
unlawful: Precision Dippings Ltd v Precision Dippings Marketing Ltd [1986] Ch. 447
CA; BDS Roof-Bond Ltd v Douglas [2000] 1 B.C.L.C. 401.
28
2006 Act s.836(2)(a).
29 2006 Act s.836(2)(b).
30 The requirements for interim and initial accounts are set out in ss.838 and 839. They
are onerous for public companies, though interim accounts need not be audited. Listed
companies probably meet the statutory requirements routinely since they are subject to
the FCA’s requirements for regular half-year financial statements. See para.26–3.
31 2006 Act s.840.
32
As do the model articles for both public (art.70) and private (art.30) companies.
33Re Cleveland Trust Plc [1991] B.C.L.C. 424. See fn.26, above. And the accounts
should be revised; there are now statutory provisions for this: see para.21–31.
35
Maintenance, para.38.
36 If the company is in the vicinity of insolvency, the creditors’ interests are dominant
within directors’ duties and the shareholders may not be allowed to ratify a breach. See
further para.9–15.
37
See J. Rickford, “Reforming Capital” (2004) 15 E.B.L.R. 1, especially Ch.4 dealing
with pension scheme deficits.
38
ICAEW, above fn.18, paras 2.3–2.5.
39
2006 Act s.851(1)—unless otherwise expressly provided, as discussed in para.12–11.
40
Trevor v Whitworth (1887) 12 App. Cas. 409 HL.
41
After some havering, the CLR proposed to reverse the position that the common law
and statutory regimes operate in tandem and to make the statute the exclusive source of
rules in this area (see Formation, para.3.66; Maintenance, Pt II; Completing, para.7.21),
but this proposal was not taken up in the Act.
42See Peter Buchanan Ltd v McVey [1955] A.C. 516 at 521–522, a decision of the High
Court of Justice of Eire.
43 2006 Act s.829(1). Certain transactions are specifically exempted from the term: an
issuance of bonus shares (for the reasons given at para.11–20); transactions regulated
elsewhere in the Act (reductions of capital and redemption or re-purchase of shares (see
the following chapter)); and distributions on a winding up (regulated by the Insolvency
Act 1986): s.829(2). The exclusion of bonus shares permits companies to capitalise
unrealised (and thus undistributable) profits, assuming they have power in the articles so
to do.
44 This is a different use of the term “ultra vires” from the one we examined in para.7–
29. There it meant a transaction outside the company’s own objects clause; here it means
a transaction not permitted by general company law. The directors’ duties implications
of self-dealing transactions are considered in paras 16–54 et seq.
45 Ridge Securities Ltd v Inland Revenue Commissioners [1964] 1 W.L.R. 479, 495;
approved by Lord Walker in Progress Property Co Ltd v Moorgarth Group Ltd [2010]
UKSC 55 at [1]. The relatively small number of cases on disguised dividends is
probably to be explained on the grounds that the greatest temptation to make such
payments is in the period immediately prior to insolvency when specific provisions of
the Insolvency Act 1986 (especially ss.238 and 242—transactions at an undervalue—
and 239 and 243—preferences) may be easier to use.
46 See also MacPherson v European Strategic Bureau Ltd [2000] 2 B.C.L.C. 683 CA.
“In my view, to enter into an arrangement which seeks to achieve a distribution of
assets, as if on a winding up, without making proper provision for creditors is, itself, a
breach of the duties which directors owe to the company; alternatively, it is ultra vires
the company” (per Chadwick LJ); and Barclays Bank Plc v British and Commonwealth
Holdings Plc [1996] B.C.L.C. 1 (replacement of obligation of an insolvent company to
redeem shares by an obligation to pay damages of like amount in respect of the failure to
redeem would have been ultra vires if it had not been approved by the court as part of a
statutory scheme of arrangement—see Ch.29).
47 Normally, that shareholder is a controlling shareholder (i.e. the controller is extracting
value from the company to the detriment of the non-controlling shareholders or the
company’s creditors) but the other party to the transaction may be all the shareholders in
the company. See Clydebank Football Club Ltd v Steedman, 2002 S.L.T. 109.
48 See Re Halt Garage (1964) Ltd [1982] 3 All E.R. 1016—payment of remuneration
where no services rendered held to be a disguised return of capital; Ridge Securities Ltd
v IRC [1964] 1 W.L.R. 479—payment of interest “grotesquely out of proportion” to the
amount lent.
49
Progress Property Co Ltd v Moorgarth Group Ltd [2010] UKSC 55 at [31]–[33].
50
Re Halt Garage (1964) Ltd [1982] 3 All E.R. 1016.
51
Aveling Barford Ltd v Perion Ltd [1989] B.C.L.C. 626.
52
Progress Property Co Ltd v Moorgarth Group Ltd [2010] UKSC 55 at [27]–[31].
53
Progress Property Co Ltd v Moorgarth Group Ltd [2010] UKSC 55 at [29]. This
relatively relaxed approach may have been encouraged by the specific statutory controls
which exist over substantial property transactions with directors. See paras 16–123 et
seq.
54
Aveling Barford Ltd v Perion Ltd [1989] B.C.L.C. 626.
55
The fact that the payment was made to a company controlled by its main shareholder
rather than to the shareholder directly was regarded as “irrelevant”.
56 The nature of the reaction to the decision is set out by the CLR in Maintenance, Pt II.
57 Since accounts are often, even today, constructed on a “historical” basis, an asset is
likely to be shown in the company’s balance sheet at the price paid for it (or perhaps
less, if it has been depreciated), rather than at its current market value, which might be
higher.
58
2006 Act s.851(2)—thus embracing not only the common law rules but also rules
contained in a statute other than the Act (unless that Act overrides the Act explicitly or
by necessary implication).
59 2006 Act s.846 (above, fn.19) is also added to the common law rules.
60
2006 Act s.845(1)—the amount of the distributable profits needs to be enough to
cover any discrepancy between the contract price and the book value but does not need
to cover the gap between the contract price and the market value. So, for a transfer at
book value, distributable profits of £1 will do.
61
2006 Act s.845(2).
62
2006 Act s.845(3).
63 On the duties of directors in self-dealing transactions, see paras 16–54 et seq., below.
64 Other than a distribution which constitutes financial assistance for the acquisition of
the company’s own shares given in breach of the Act (see para.13–44, below) or any
payment made in respect of the redemption or purchase of shares in the company
(para.13–7): s.847(4).
65 2006 Act s.847(2).
66
It’s A Wrap (UK) Ltd v Gala [2006] 2 B.C.L.C. 634 CA, a case which illustrates the
arbitrary nature of many of the legal capital rules. The defendants, who ran a small
business which was unsuccessful, paid themselves a modest remuneration, which they
could have received entirely lawfully as salary under their service contracts with the
company or as directors’ fees. See para.11–9, above. However, they were diverted from
this course of action by advice that it would be more tax efficient for the remuneration to
be paid by way of dividend.
67Arden and Chadwick LJJ were divided on this issue in It’s A Wrap (UK) Ltd v Gala
[2006] 2 B.C.L.C. 634 CA —the point not being relevant to the decision in that case.
The former is a more natural reading of the language of the section and conforms to the
approach of the common law (see below), whilst the latter is a more natural reading of
the language of the Directive (an irregularity of which the recipient “could not in view of
the circumstances have been unaware”), which the section implements in the UK.
68
Above, para.12–5 and see Precision Dippings Ltd v Precison Dippings Marketing Ltd
[1986] Ch. 447.
69
It seems fanciful to suppose that any court would hold that a small shareholder in a
listed company should study the relevant accounts and the documents accompanying
them and read them with an understanding of the Act to check that their dividends are
lawfully payable, no matter how much that court may be committed to the doctrine that
ignorance of the law is no excuse. In relation to an institutional investor, however, or a
“business angel” who has invested in a start-up company, the proposition is not so
fanciful.
70
This basis of claim is specifically preserved by s.847(3).
71
Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch. 246, 303–304,
per Browne-Wilkinson LJ. Not surprisingly, the principle applies equally where the
transferee is the director receiving the dividend as shareholder: see Allied Carpets Plc v
Nethercott [2001] B.C.C. 81; following the earlier case of Precision Dippings Ltd v
Precison Dippings Marketing Ltd [1986] Ch. 447. Indeed, a director of the company or
of another group company is the person in respect of whom the knowledge requirements
can most easily be met.
72 Constructive knowledge appears to suffice for liability at common law: see Rolled
Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch. 246 at 297–298, per Slade
LJ.
73
See further at para.16–106, below.
74 If the director is a recipient shareholder, then, of course, he or she may be liable in
that way. See fn.71.
75
Re Exchange Banking Co (1882) 21 Ch.D. 519 CA.
76 Bairstow v Queens Moat Houses Plc [2001] 2 B.C.L.C. 531 CA.
77 On the meaning of this phrase see para.21–14.
78 The so-called “windfall” objection to the principle of repayment. The objection
works, of course, only if the directors have the resources to repay the dividend and if the
company could lawfully pay out the money restored by the directors, for example, if
properly drawn accounts would reveal a distributable surplus. The court did leave open
the possibility that the repaying directors could claim an equitable contribution from the
shareholders who had received the improper dividend with notice of the facts.
79Re Paycheck Services 3 Ltd [2009] 2 B.C.L.C. 309 at [81]–[85] CA. There are two
competing lines of authority on the point, as laid out in the judgment in this case.
80 See para.16–125, below. If the company’s claim is brought, as it often is, by a
liquidator acting under s.212 of the Insolvency Act 1986 the court has a power to order
an account of such amount “as the court thinks just”. It is unclear whether this discretion
adds to what is available to the court under s.1157 of the Companies Act 2006. See the
debate among the judges in Re Paycheck Services 3 Ltd [2009] 2 B.C.L.C. 309 CA.
81Re Paycheck Services 3 Ltd [2011] 1 B.C.L.C. 141 at [45]–[47] (Lord Hope); [124]
(Lord Walker); and [146] (Lord Clarke).
82
Bairstow v Queens Moat Houses Plc [2001] 2 B.C.L.C. 531 at 548–550 CA;
distinguishing Target Holdings v Redferns [1996] A.C. 421 HL. Hence, the risk of a
windfall to the company if the directors restore the assets. See fn.78, above. See also Inn
Spirit Ltd v Burns [2002] 2 B.C.L.C. 780, where a subsidiary had paid a dividend
directly to the shareholders of the parent company and the court refused to entertain the
question of whether the same amount of dividend could have reached the shareholders’
pockets by way of a distribution to the parent and then a distribution by the parent.
83
Re Marini Ltd [2004] B.C.C. 172.
84
For an attractive argument that shareholders should always be liable to repay the
dividend, subject to a defence of change of position, see J. Payne, “Unjust Enrichment,
Trusts and Recipient Liability for Unlawful Dividends” (2003) 119 L.Q.R. 583.
85
86
J. Rickford, “Reforming Capital: Report of the Interdisciplinary Group on Capital
Maintenance” [2004] E.B.L.R. 1, 51.
87See, for example, Flitcroft’s Case, Re Exchange Banking Co (1882) 21 Ch. D. 519
CA.
88
Above, para.11–6.
90 Arguably, this statement is subject to the strong qualification that the Second
Directive does not require the share premium to be treated as part of legal capital, in
which case the impact of the current distribution rules could be heavily reduced by
reducing the margin to the amount of the nominal value of the shares. A legal capital test
for distributions would be left in place but it would be largely ineffective. See above,
para.11–6. On the pros and cons of such an approach see J. Rickford, “Reforming
Capital: Report of the Interdisciplinary Group on Capital Maintenance” [2004] E.B.L.R.
1, 51 at 70 et seq.
91
The one area where “private companies only” reform has occured is in relation to
financial assistance (see para.13–55, below), but the financial assistance rules are not a
necessary consequence of distribution rules based on legal capital.
92 The Commission carried out a feasibility study on alternatives to the current capital
maintenance regime, but concluded that reform of the Directive was unnecessary. See
KPMG, Feasibility Study on an alternative to the capital maintenance regime
established by the Second Company Law Directive, Berlin, 2008. For a critique of the
KPMG approach see K. Fuchs, “The Regulation of Companies’ Capital in the European
Union: What is the Current State of Affairs?” (2011) 22 E.B.L.R. 237.
94 The most pressing classes of claim (from road accident victims and employees) are
subject to mandatory insurance, which, suggestively, is required to be taken out by all
those engaged in the relevant activity, whether they operate with limited liability or not.
95See J. Armour, “Share Capital and Creditor Protection: Efficient Rules for a Modern
Company Law” (2000) 63 M.L.R. 355; and “Legal Capital: An Outdated Concept”
(2006) 7 E.B.O.R. 5; and the slightly more optimistic conclusions of D. Kershaw, “The
Decline of Legal Capital: An Exploration of the Consequences of Board Solvency-based
Capital Reductions” in D. Prentice and A. Reisberg (eds), Corporate Finance Law in the
UK and EU (Oxford: Oxford University Press, 2011) Ch.2.
96
Above, fn.86, especially Chs 3 and 4.
97
98
Above, para.12–3.
99
Above, fn.86, Ch.5. For counter-argument see W. Schön, “Comment: Balance Sheet
Tests or Solvency Tests—or Both?” (2006) 7 E.B.O.R. 181.
100
For the operation of such a scheme in relation to reductions of capital out of court by
private companies, see para.13–40, below.
101
That there is personal liability for directors even under the current rules is clear
(above, para.12–13) but directors might consider a rule-based system as easier to comply
with than one based on a standard.
CHAPTER 13
CAPITAL MAINTENANCE
Acquisitions of Own Shares 13–2

The general prohibition 13–2
Redemption And Re-Purchase 13–7
Introduction 13–7
Creditor protection: all companies 13–11
Private companies: redemption or purchase out of
capital 13–12
Protection for shareholders 13–19
Payments otherwise than by way of the price 13–23
Treasury shares 13–24
Failure by the company to perform 13–28
Conclusion 13–29
Reduction of Capital 13–30
Why are reductions of capital allowed? 13–30
The statutory procedures 13–33
Procedure applying to all companies 13–34
Procedure available to private companies only 13–39
Financial Assistance 13–44
Rationale and history of the rule 13–44
The exceptions 13–50
Exemption for private companies 13–55
Civil remedies for breach of the prohibition 13–56
Conclusion 13–59
13–1
In the previous chapter we analysed at some length the rules
limiting the maximum amount a company may make by way of
a distribution to its shareholders. There are two clear ways in
which a company might seek to circumvent this rule. First,
instead of making a distribution (for example, paying a dividend)
to its shareholders, it could offer to buy back some of the shares
held by them. In this way the company would be returning assets
to its shareholders (or some of them), as would occur in a
distribution, and so the interests of the creditors would be
engaged in such a move. However, the distribution rules would
not apply on the basis that this exercise was not a gratuitous
transaction (assuming shares repurchased at market price). In
addition, the company would be reducing the amount standing in
its share capital and, possibly, share premium accounts through
the repurchases. By returning assets to its shareholders in this
way a public company would be making it easier to carry out a
regular distribution to shareholders in the future. The reduction
of the amounts in the capital accounts would lessen the impact of
the distribution rule discussed in the previous chapter, i.e. that
after the distribution the company should have net assets at least
equal to its capital. Perhaps it is not surprising that, for both
these reasons, the nineteenth century view was that a company
could not acquire its own shares. However, a less draconian
approach—close to that eventually adopted in the modern
reforms—would have been to subject the acquisition, by
analogy, to the distribution rule.
Secondly, a public company could seek directly to reduce the
amounts standing in its share capital and other capital accounts,
thus facilitating distributions, either immediately after the
reduction or in the future. This might seem to be a
straightforward and unlawful manipulation by the company of its
accounts. Having insisted on the creation of capital accounts in
the first place and having imposed a distribution rule by
reference to the balance sheet, how could the law permit the
company to adjust downwards the amounts stated in those
accounts? The answer, of course, is that the company is
permitted no such general freedom. However, there are
circumstances in which it might be in the interests of all
involved—shareholders and creditors alike—to permit a
reduction of the amounts stated in the capital accounts. This
might be so even in the case of a private company, for example,
to avoid the rule about not issuing shares at a discount to
nominal value (see para.11–4, above). The law thus provided
from an early stage a procedure by which the capital figures
might be reduced, whilst protecting shareholder and creditor
interests, and in the 2006 reforms an additional and more
flexible procedure was added for use by private companies.
We look first at acquisitions by a company of its shares, then
at the capital reduction procedure and finally turn to the matter
of a company giving financial assistance for the purchase of its
own shares. This third issue seems only tangentially related to
the issue of legal capital, though it has traditionally been so
regarded, and so we take it last.
ACQUISITIONS OF OWN SHARES
The general prohibition
13–2
It was held by the House of Lords in the nineteenth century that
a company could not acquire its own shares, even though there
was an express power to do so in its memorandum, since this
would result in a reduction of capital.1 Assuming that on
acquisition by the company the shares were cancelled and
nothing put in their place this would necessarily reduce the
capital yardstick represented by issued share capital and it could
also be regarded as objectionable as a diversion of the
company’s assets to the shareholders whose shares were
acquired, possibly in circumstances in which an ordinary
dividend could not be paid because of the rules discussed in the
previous chapter. Today, however, acquisitions by companies of
shares held by their investors are common. Acquisitions may
occur because the company is able to meet its investment needs
from internally generated profit and so has less need of
externally provided equity finance, or because it wishes to give
investors who no longer rate the company an attractive
opportunity to exit it, whilst retaining those shareholders who
think the company’s prospects are good. Thus, the story of the
law’s development is from prohibition of acquisition to
specification of circumstances in which acquisition by a
company of its own shares is allowed. As we shall see, the Act
now legitimises two forms of acquisition: redemption and re-
purchase.
The 2006 Act begins by confirming the common law rule that
a limited company “shall not acquire its own shares whether by
purchase, subscription or otherwise”.2 If it purports to do so, the
company and every officer in default is liable to a fine and the
purported acquisition is void.3 In addition, a public company is
prohibited from taking a lien or charge over its own shares (that
is also treated as void), except to cover the unpaid liability on a
partly paid share.4 Moreover, this central prohibition is
buttressed by two further statutory restrictions.
Acquisition through a nominee
13–3
First, the prohibition could be avoided in certain cases if the
company acquired the shares through a nominee rather than
directly. Accordingly, in such a case the shares are treated as
held by the nominee on its own account and the company is
regarded as having no beneficial interest in them.5 Further, if the
nominee does not meet the financial obligations attached to the
shares, then that liability will fall on the other subscribers to the
memorandum (where the nominee is a subscriber) and in the
other cases it will fall on the directors of the company at the time
the shares were issued to or acquired by the nominee.6 In both
cases it is a joint and several liability.
However, this liability rule is applied only when the nominee
for the company acquires the shares as a subscriber to its
memorandum, where the shares are issued by the company to the
nominee, or when the nominee acquires the shares partly paid
from a third person.7 It does not apply if the nominee acquires
fully paid shares from a third party, even if the nominee does so
with funds provided by the company.8 This suggests that the
rationale of the nominee rules is to ensure that the company
receives the full price of the shares it issues, which price the
company will necessarily have received before the nominee’s
acquisition of the shares in the case of the acquisition of fully
paid shares by a nominee from an existing holder. Furthermore,
where shares are acquired by a nominee for the company rather
than by the company directly, the shares remain in the hands of
the nominee (i.e. are not cancelled) so that the company’s capital
accounts remain unaffected. This also helps to explain why the
general prohibition applies, by contrast, to direct acquisition by
the company of even fully paid shares in the company.
Company may not be a member of its holding company
13–4
Secondly, the prohibition on acquisition of own shares is
supplemented by s.136 which provides that a company cannot be
a member of its holding company, either directly or through a
nominee,9 and any allotment or transfer of shares in the holding
company from an existing shareholder in the parent to the
subsidiary or its nominee is void. Section 136 is aimed at
preventing the de facto reduction of capital which would result
from a subsidiary company acquiring shares in its holding
company. The holding company, through its subsidiary, would
be returning assets to the selling shareholder.10 Nevertheless,
s.136 does not apply where the subsidiary, at the time of
acquisition of the shares in the holding company, is not a
subsidiary of it, but later becomes so, for example, as a result of
a takeover.11 The upshot of the exception is that the resources of
the holding company may be expended in buying (in effect) its
own shares (i.e. when it completes the takeover), but it has been
held, nevertheless, that this result cannot be prevented by relying
on the general prohibition on a company acquiring its own
shares (s.658) rather than s.136.12 Presumably the desire to
permit a useful commercial transaction was thought, in this
instance, to outweigh the policy behind the prohibition on the
acquisition of own shares.
Specific exceptions to the general prohibition
13–5
This apparently comprehensive set of prohibitions is, however,
subject to a number of exceptions. Thus, a company may acquire
its own shares by way of gift13 or by way of forfeiture for non-
payment of calls.14 In the latter case, however, a public company
must cancel the shares and reduce its capital account accordingly
if the shares are not disposed of within three years of the
forfeiture.15 Both these exceptions are of long-standing. In 1983
there was added a further complex set of rules to deal with
possible problems faced by public companies in relation to
shares acquired by the trustees of a company’s employee share
scheme or pension scheme.16 These do not need to be further
analysed in a work of this kind. There are also scattered
throughout the Act provisions which permit the court to order
that a company acquire shares from a shareholder, as a remedy
for some wrong which has been done to that shareholder. The
best known example is a compulsory purchase order made by the
court under the unfair prejudice provisions, considered in
Ch.20.17 Finally, an acquisition of shares by the company under
a reduction of capital carried out under the provisions discussed
below is exempted from the prohibition.18
13–6
Where a public company is permitted to acquire its own shares,
whether directly or through a nominee, then so long as it holds
those shares (i.e. does not cancel or dispose of them) and decides
to show those shares as an asset in its balance sheet, an amount
equal to the value of the shares must be transferred out of profits
available for dividend to an undistributable reserve.19 In effect,
the amount available for distribution will be reduced by the
value of the purchase. Thus, suppose a public company acquires
through a nominee fully paid shares from a third party, providing
the nominee with the funds to effect the purchase. The
company’s net asset value will remain the same, the reduction in
cash being offset by the value of the shares acquired. However,
by virtue of the requirement to create an undistributable reserve,
the amount of the profit available for distribution will be
reduced, thus protecting creditors.20 To put the matter another
way, the purchase of the shares is treated as a distribution to the
shareholder whose shares the nominee acquired.
REDEMPTION AND RE-PURCHASE
Introduction
13–7
However, the developments in the modern law which most
directly qualify the “no acquisition” principle are those which
specify the conditions under which a company may redeem or
re-purchase its own shares. In these cases the legislature has
taken the view that the transactions could be structured in such a
way as not to endanger the interests of creditors and that the
nineteenth century prohibition was over-inclusive in its reach.
Redeemable shares are shares which are issued on the basis
that they are to be or may be redeemed (i.e. bought back) at a
later date by the company. The terms of issue may be that the
shares will be redeemed at a certain point or that they may be,
and in the latter case the option to redeem may be allocated to
the shareholder or the company or both. The process of
redemption is thus different from the process of re-purchase,
where the Act, under certain conditions, permits the company to
re-purchase shares, something which would otherwise be
unlawful. With re-purchase, however, there is no obligation
upon the company to make an offer to re-purchase or, if one is
made, upon the shareholder to accept it. The redemption
arrangement, by contrast, will always create some rights or
duties to redeem or be redeemed.
Redeemable shares thus involve an element of planning of its
financial structure by a company, because the terms of the
redemption have to be set at the time of issue. As compared with
non-redeemable shares, the holder of a right to have the shares
redeemed is not locked into the company and able to dispose of
the shares only to an investor who is prepared to buy them at the
prevailing market prices. An investor may welcome the right to
exit the company at a particular period in the future on terms set
out in advance. Such an arrangement makes the redeemable
share a hybrid between debt and equity, the debt holder also
being someone who normally has a repayment right at an
identifiable point in the future and on pre-set terms. Equally, the
company may wish to issue redeemable shares over which it has
a redemption right, perhaps as an alternative to standard
preference shares which can normally also be squeezed out
through a reduction of capital.21
However, the freedom of the company and the shareholder to
agree upon a re-purchase of shares is more useful than the
redemption procedure, precisely because it does not involve
commitment in advance. It is a mechanism which can be
resorted to as occasions arise, whilst the occasions when it is
desirable to redeem some of the company’s shares may be
difficult to identify in advance. It is true that the re-purchase
provisions do not create a mechanism whereby the shareholder
can be compelled to sell the shares back to the company or
whereby the company can be compelled to buy them, but there
are many instances where company and shareholder interests are
aligned so that the repurchase is likely to go ahead in those
cases, if the law permits it, as it now does. The company may
wish to return unwanted equity capital to the shareholders, either
because it has no need at all for the financing represented by the
shares repurchased or because it wishes to replace that financing
with an alternative, such as debt. More questionably, the
incumbent board may wish to buy out a group of shareholders
who are causing trouble for the incumbent management—a
process referred to in the US literature as “greenmail”,
presumably after the colour of the dollar bill. As we shall see,
there are features of the re-purchase mechanism aimed at
combating such opportunism. As for the shareholders, some may
welcome the chance to exit the company at an attractive price,
whilst those remaining may hope that the company’s earnings
per share will increase when some of the shareholders are paid
off, if indeed it was the case that the capital returned to them was
not earning a high reward or if it can be replaced by a cheaper
form of financing.
Some history
13–8
Redeemable shares have been permissible since the Companies
Act 1929. However, prior to the 1981 Companies Act, only
preference shares could be issued as redeemable.22 Now,
however, as s.684 provides, a company may issue shares of any
class which are to be redeemed or are liable to be redeemed,
whether at the option of the company or the shareholder.
However, the 1929 Act made the crucial breakthrough because it
introduced a method whereby redemption could take place
without prejudicing the interests of creditors and this method
was adopted again when, also in 1981, companies were
empowered to re-purchase their own shares, whether or not they
were issued as redeemable.23 This method has two crucial
creditor-protection features, which are discussed further below.
First, the shares may be redeemed or re-purchased only out of
distributable profits or (in most cases) out of the proceeds of a
fresh issue of shares made for the purposes of the redemption or
re-purchase. Insofar as distributable profits (as defined in the
previous chapter) are used to fund the redemptions or re-
purchases, the creditors have no cause to complain, since the
company could have used them to fund dividends instead.
Secondly, as far as the capital accounts are concerned, the capital
created by the fresh issue will replace the capital removed by the
redemption or re-purchase and so the level of protection afforded
to the creditors through the capital accounts will be the same. In
addition, provided it is disclosed that redemption or re-purchase
of existing shares is the reason for the fresh issue, creditors will
not be misled into thinking that the company is issuing shares in
order permanently to raise the amounts stated in its capital
accounts. However, the impact of a purchase on the company’s
capital accounts remains to be dealt with if the redemption or re-
purchase is funded out of distributable profits. Once the shares
are re-purchased the amount stated in the company’s capital
accounts will be reduced, thus lowering the level of creditor
protection. This problem was met by requiring the company to
establish an undistributable reserve of an amount equal to the
capital reduction when the redemption or re-purchase was
funded out of distributable profits. This is known as the “capital
redemption reserve” (“CRR”).
General restrictions on redeemable shares and on
repurchases
13–9
Redeemable shares may not be issued unless the company has
also issued shares which are not redeemable.24 This provision
eliminates the risk of the company ending up with no members if
and when all the redeemable shares are redeemed.25 However,
the Act makes no stipulation as to the number or value of the
non-redeemable shares which are required to have been issued,
and so the main form of equity financing for the company could
be via redeemable shares. Somewhat similarly, a re-purchase
cannot be made if the result would be that there were no longer
any members of the company holding non-redeemable shares or
only treasury shares remained.26
In the case of a public company redeemable shares may not be
issued unless the company is authorised in its articles to do so
and, in the case of a private company, the articles may exclude
or restrict the issue of redeemable shares.27 Thus, the default rule
is in favour of the private company having the power to issue
redeemable shares and against it in the case of public companies.
This requirement is additional to the provisions discussed in
Ch.24 which, in some cases, require the directors to seek the
authorisation of the shareholders before they take advantage of
the power to issue any type of share. The default rule addresses
the logically prior question of whether the company has power to
issue redeemable shares at all. Nevertheless, both sets of rules
create a requirement for shareholder consent. The main
difference between them appears to be that, in the case of a
public company, authority to issue shares can be given to the
directors by ordinary resolution.28 By contrast, a provision in the
articles conferring power on the company to issue redeemable
shares must either be there from the beginning, and thus be
consented to by all the subscribers to the memorandum, or be
introduced at a later date by special resolution of the members
altering the articles. This higher level of shareholder consent
might be thought to be justified by the drain on the company’s
cash resources that redemption is likely to entail, thus reducing
the cash available to pay dividends to the other shareholders or
to invest in projects for the benefit of the shareholders as a
whole.
A company may purchase its own shares (including
redeemable shares),29 subject to any restriction or prohibition in
the company’s articles.30 Thus, the default rule for both public
and private companies is that the company does have power to
re-purchase its shares. The contrast with the default rule for
public companies in relation to redeemable shares (no power to
do so) can be explained by the greater protection for
shareholders which exists in relation to the actual
implementation of the re-purchase, as we shall see below.31
13–10
Concern about the impact of the redemption on the non-
redeemable shareholders also lies behind a long-running debate
concerning the setting of the terms of the redemption. Under the
1985 Act, in order to protect the shareholders whose shares were
not to be redeemed (and indeed the offerees of the redeemable
shares), the terms and manner of the redemption were required
to be set out in the company’s articles, so that all would know
the position.32 However, this was thought to be an inflexible
requirement and the rule now embodied in the Act is somewhat
more flexible.33 Fixing the terms in the articles remains the
default rule,34 but, provided either the articles or an ordinary
resolution of the company permit it, the directors may fix the
terms and conditions of the redemption.35 Protection for the
shareholders is maintained by the requirement that the directors,
if they set the terms, must do so before the shares are allotted
and the company’s statement of capital provided to the Registrar
must include the terms of the redemption.36
The Act contains two further relevant provisions, one
restrictive, the other facultative. First, redeemable shares may
not be redeemed until they are fully paid37; and the same rule is
applied to re-purchases.38 This avoids the acquisition wiping out
the personal liability of the holders in respect of uncalled capital.
Secondly, the terms of redemption may provide that, by
agreement between company and shareholder, the amount due is
to be paid on a date later than the redemption date39; whereas the
requirement that the shares be paid for on re-purchase is
unqualified.40
Once the acquisition is effected, the Registrar must be
informed in the usual way and supplied with details of the
transaction.41
Creditor protection: all companies
13–11
The core of the nineteenth century objection to redemption and
re-purchase of shares was creditor protection. Therefore, the
crucial step in permitting these transactions was producing a
solution to the creditor protection issue. That solution, as now
embedded in the 2006 Act, consists of two sets of rules: one
applying to all companies and a set of relaxations which only
private companies can take advantage of. We will look first at
the rules applying to all companies and then at the private
company relaxations.
The general solution to the creditor protection issue consisted,
as noted, of providing that shares could be redeemed or re-
purchased only out of distributable profits or out of the proceeds
of a fresh issue of shares made for the purpose of the redemption
or re-purchase.42 Any premium payable on redemption or re-
purchase must be paid out of distributable profits alone, unless
the redeemed or re-purchased shares were issued initially at a
premium, in which case the redemption premium may be paid
out of the proceeds of a new issue, up to the amount of the
premium received on issue or the value of the company’s current
share premium account, whichever is the less.43 This rather
complicated rule ensures that the money received on the new
issue of shares is paid out only to the extent that it reflects the
reduction in the capital accounts arising out of the redemption or
re-purchase. If more is needed to redeem the shares, the excess
must be provided out of distributable profits.44
Once the shares have been redeemed, they are treated as
cancelled and the amount of the company’s issued share capital
is diminished by the nominal value of the shares redeemed.45
The company may also cancel its repurchased shares. In these
cases the company must create an (undistributable) CRR. The
amount of this reserve is equivalent to the amount by which the
company’s issued share capital is diminished by a purchase
wholly out of profits46 or, where the redemption is financed
partly by the proceeds of a new issue and partly by distributable
profits, the amount by which the proceeds of the new issue fall
short of the amount paid on redemption or re-purchase.47
However, since 2003 the company has had the option not to
cancel shares which have been re-purchased but instead to hold
them “in treasury”, usually for later re-issue. (Treasury shares
are considered further at paras 13–24 et seq., below.) This is a
significant difference between the redemption and re-purchase
procedures. Where shares are held in treasury, the creation of a
CRR is unnecessary, because the company’s capital accounts are
not altered.
Private companies: redemption or purchase out of
capital
13–12
In relation to both redemptions and re-purchases of shares,
special concessions are made to private companies. It is thought
often to be impossible for a private company to redeem or
purchase its own shares unless it could do so out of capital and
without having to incur the expense of a formal reduction of
capital with the court’s consent. There might not be sufficient
distributable profits, and there might be no available takers for a
fresh issue of shares. The whole concept of raising and
maintaining capital is, in relation to such companies, of
somewhat dubious value. Hence it was decided that, subject to
safeguards, they should be empowered to redeem or buy without
maintaining the former capital yardstick. In particular, the aim
was to permit entrepreneurs to withdraw assets from their
company to fund their retirement rather than by selling control to
a larger competitor.
There are in fact now two concessions. The first, introduced in
2013 and applying to repurchases only, simply allows a private
company to spend in any financial year up to (the lower of)
£15,000 or 5 per cent of the nominal value of its share capital on
re-purchases. There are no additional formalities to be met,
provided only that the company is authorised by its articles to
take this action.48 This provision is clearly crafted with small-
scale but potentially frequent re-purchases in mind, probably
linked to employee share schemes, rather than one-shot
retirement exercises.
13–13
The second set of provisions, which date back to 1981, are now
contained in Ch.5 of Pt 18 of the Act. They have been retained
even though there has now been provided to private companies a
non-court based method of reducing capital.49 These rules apply
to redemptions as well as repurchases, but, to shorten exposition,
the rules are stated here in relation to re-purchases.50
Section 709 provides that, subject to what follows, a private
company, unless restricted or prohibited by its articles from so
doing, may make a payment in respect of the purchase of its
shares otherwise than out of its distributable profits or the
proceeds of a fresh issue of shares. Such a payment is termed a
payment “out of capital”.51 This is a very wide definition and
may explain why it was thought there might be some cases
where re-purchase “out of capital” would be available, whereas a
reduction of capital would not. Suppose a company wishes to
acquire shares for a price above their nominal value but has no
share premium or capital redemption reserve. No matter how
much the share capital account is reduced, this will not free up a
sufficient amount of assets to be distributed so as to meet the
redemption premium. Assuming, however, that the company has
sufficient cash, it may be able to engage in re-purchase by
making a payment “out of capital” under s.709. This section
helpfully says that a payment other than out of distributable
profits or the proceeds of a fresh issue is a payment out of capital
(and so in principle permitted) “whether or not it would be
regarded apart from this section as a payment out of capital”.
Provided the company has the necessary cash and follows the
provisions of this part of the Act, that is all it needs to be
concerned with.52
The extent of any such payment out of capital is restricted,
however, to what is described as “the permissible capital
payment” (“PCP”).53 In brief, the rule is that any distributable
profits and any proceeds of fresh issue made for the purpose of
the re-purchase must first be used before resort may be had to a
payment out of capital. The rules for determining distributable
profits are those considered in the previous chapter in relation to
dividends, but there are certain amendments,54 perhaps the most
important of which is that the accounts by reference to which the
profits are calculated must be prepared within a period of three
months ending with the date of the statutory declaration which
the directors are required to make.55
The principal protective techniques used in the Chapter in
respect of the PCP are, in the case of creditors and shareholders,
the requirement for a solvency statement from the directors; in
the case of shareholders, the requirement for approval of the
proposed re-purchase by special resolution; and, in both cases,
the availability of a right of objection to the court.
Directors’ statement
13–14
As far as the solvency statement is concerned, the requirements
of the Act are similar to those applied in the case of a solvency
statement upon a reduction of capital out of court by a private
company, including the requirement for the directors to take into
account contingent and prospective liabilities.56 However, they
are not the same. In particular, the directors are apparently
unable to make the required forward-looking statement in the
case of a purchase out of capital, if they intend to wind the
company up within 12 months of the proposed payment.57 And
the forward-looking statement, applying to the immediately
following year, is required to be a little fuller. The form of the
required statement is that, having regard to the “the amount and
character of the financial resources” which will be available to
the company in the directors’ view, the directors have formed
the opinion that the company will be able to carry on business as
a going concern throughout that year (and accordingly will be
able to pay its debts as they fall due).58 The emphasis is thus on
an opinion which envisages a continuing business, not just the
ability of the company to pay its debts.59 Perhaps because of
these differences the statement required on a purchase is termed
a “directors’ statement” in the Act, whilst the term “solvency
statement” is reserved for the statement required of directors
under the out-of-court reduction procedure, though both
statements are, substantively, statements about the solvency of
the company.
The Act applies to the directors’ statement the same criminal
liability for negligence as is applied to the solvency statement.60
There is also a limited statutory civil liability in negligence to
the company if the company goes into winding up within one
year of the payment being made to the shareholder.61 However, a
major difference with the solvency statement is that the
directors’ statement needs to be accompanied by a report from
the company’s auditors stating their opinion that the amount of
the PCP has been properly calculated and that they are not aware
of any matters, after inquiry into the company’s affairs, which
renders the directors’ statement unreasonable in all the
circumstances.62
Shareholder resolution
13–15
The solvency statement can be said to protect both the creditors
of the company and the shareholders who will remain in the
company after the re-purchase. An additional protection for the
shareholders is the special resolution which is required to be
passed within a week of the directors’ statement and on the basis
of prior disclosure to the members of the directors’ statement
and auditors’ report.63 In this case it is explicitly provided that
the resolution is ineffective if these requirements are not
complied with.64 Further, the resolution will not be effective to
authorise the purchase out of capital if the shares to which the
resolution relates vote on the resolution and their votes were
necessary to secure its adoption.65
Appeal to the court
13–16
The final protective device (for both creditors and dissenting
members) is court scrutiny. The Act entitles any member of the
company, who has not consented to or voted for the resolution,
and any creditor of the company, to apply to the court for the
cancellation of the resolution, provided this action is taken
within five weeks of the passing of the resolution.66 The court is
given the widest powers. For example, it can cancel the
resolution, confirm it, or make such orders as it thinks expedient
for the purchase of dissentient members’ shares or for the
protection of creditors, and may make ancillary orders for the
reduction of the company’s capital.67
Legal capital consequences
13–17
If there is no court objection, the PCP must be made between
five and seven weeks after the adoption of the resolution.68 Upon
the re-purchase of the shares, the company’s share capital
account will be reduced accordingly, but, because this is a
permitted payment out of capital, there will be no need to
transfer a corresponding amount to the CRR, as would happen in
the case of a purchase out of distributable profits.69 A transfer to
CRR will be needed only to the extent that distributable profits
have been used in part to fund the purchase of the shares.70
Where the PCP is greater than the nominal value of the
purchased shares (i.e. they are being purchased at a premium),
the company is given permission to reduce its CRR, share
premium account and its revaluation reserve accordingly.71 In
other words, the company’s capital yardstick will in all
probability be reduced to the extent of the PCP.72 This is, after
all, the object of the exercise. Overall, indeed, the effect of the
foregoing provisions is that a private company may be able to
make a return to one or more of its members which will exhaust
its accumulated profits available for dividend and reduce both its
assets and its capital yardstick.
13–18
As far as the Companies Act is concerned, this is the end of the
procedure. However, the Insolvency Act contains a limited
mechanism for unscrambling the acquisition. If the company
goes into liquidation within one year of the payment being made
to the shareholder, that person is liable to return to the company
the amount of the payment out of capital, to the extent that this is
needed to meet any deficiency of the company’s assets in
relation to its liabilities.73
Protection for shareholders
13–19
We now turn to how the law handles intra-shareholder conflicts
arising in redemptions and re-purchases generally (i.e. beyond
the specific shareholder protection put in place for acquisitions
out of capital). This is particularly needed for re-purchases.
Redemptions, if not out of capital, tend not to raise issues for
shareholders because the terms of the redemption are set out at
the time of issue of the shares. By contrast, it is clear that re-
purchases have implications for the relations of shareholders
among themselves. Controlling shareholders—or shareholders
whom the management wish to see exit the company—may be
given the opportunity to sell their shares when other
shareholders are excluded, or may be given the opportunity to
sell on more favourable terms. The Act contains some provisions
aimed at controlling such abuses. These protections vary
according to whether the purchase is to be an “off-market” or a
“market” purchase. The essential distinction between the two
situations is whether the purchase takes place on a “recognised
investment exchange”, i.e. one authorised by the Financial
Conduct Authority.74 In broad terms this means that it is a
market purchase if it takes place on the main market of the
London Stock Exchange or on the Alternative Investment
Market.75 Market purchases create fewer risks of abuse since the
offer will be a public one and the purchases will be effected at an
objectively determined market price. If there is no market, the
opportunities for favouritism are much greater.
Off-market purchases
13–20
Under s.694 an off-market purchase can be made only in
pursuance of a contract the terms of which have been authorised
by a resolution of the shareholders before it is entered into.76
Until 2013 a special resolution was required, but now an
ordinary one will suffice.77 The contract so approved may take
the form of a “contingent purchase contract”, i.e. one where the
company’s obligation or entitlement to purchase shares is subject
to a contingency which may arise sometime in the future.78
Contingent purchase contracts may be particularly useful
because they enable the company to bind or entitle itself to
purchase the shares of a director or employee upon termination
of employment, or, as an alternative to the creation of a new
class of redeemable shares, to meet the requirements of a
potential investor in an unquoted company who wants assurance
that he or she will be able to find a purchaser if the investor
needs to realise his investment.79 The authorisation can
subsequently be varied, revoked or renewed by a like
resolution.80
In the case of a public company the authorising resolution
must specify a date on which it is to expire and that date must
not be later than five years after the passing of the resolution,81
so that directors may not subsequently act on a “stale” authority,
but no such rule applies to private companies.82 Moreover, on
any such resolution, whether of a public or private company, a
member, holding shares to which the resolution relates, may not
exercise the voting rights of those shares83 and if the resolution
would not have been passed but for those votes the resolution is
ineffective.84 This is an interesting example of the exclusion of
interested shareholders from voting on resolutions in which they
have a personal financial interest—a rule which normally does
not apply at common law.85 The resolution is also ineffective
unless a copy of the contract or a memorandum of its terms is
available for inspection by members, and in the case of a
resolution passed at a meeting it must be available at the
company’s registered office for not less than 15 days before it is
held.86 The same requirements apply on a resolution to approve
any variation of the contract87 or to an agreement whereby the
company releases its rights under the contract,88 since both
variation and release provide opportunities for favourable
treatment of insiders just as the initial off-market contract does.
Essentially, the shareholder protection technique deployed in
the case of an off-market purchase is the requirement for
approval by the shareholders in advance of the terms of the re-
purchase contract with the potential sellers excluded from
voting.
Market purchases
13–21
Under s.701 a company (necessarily a public one) cannot make a
market purchase of its own shares unless the making of such
purchases has first been authorised by ordinary resolution of the
company in general meeting.89 Those whose shares are to be
purchased are not excluded from voting, for the very good
reason that, with a market purchase, their identities will not be
known in advance. For the same reason, the shareholders are
asked to approve in this case, not a contract (even a contingent
one) for the purchase of the shares of specified members, but an
authorisation to the company (in practice, its directors) to go into
the market in the future and acquire its shares on certain terms.
The authorisation may be general or limited to shares of any
particular class or description and may be conditional or
unconditional90 but it must specify the maximum number of
shares to be acquired, the maximum and minimum prices,91 and
a date on which it is to expire, which must not be later than five
years after the passing of the resolution.92 Thus, the potential for
a re-purchase resolution to create uncertainty about the
appropriate market price of the share is reduced. Moreover, a
copy of the resolution required by the section has to be sent to
the Registrar within 15 days,93 so that the market is formally
aware of the company’s intentions or at least its powers. Thus,
the directors are given a re-purchase authority but one which is
exercisable only within the specified limits as to price, amount
and timing.
Companies with a premium listing
13–22
In the case of a re-purchase effected by a company with a
premium listing on the Main Market of the London Stock
Exchange, the Listing Rules add a further and significant set of
rules relating to the exercise by the company of the authority
conferred upon it under the statutory provisions, whether the re-
purchase is on- or off-market. In order to provide some degree of
equality of treatment of shareholders in relation to substantial
market re-purchases, which might affect the balance of power
within the company, the Listing Rules require re-purchases of
more than 15 per cent of a class of the company’s equity shares94
to be by way of a tender offer to all shareholders of the class (i.e.
to be on-market) or, alternatively, that the full terms of the re-
purchase have been “specifically” approved by the
shareholders.95 A standard tender offer is an offer open to all the
shareholders of the class on the same terms for a period of at
least seven days, capable of being accepted by the shareholders
pro rata with their existing holdings, and setting a fixed or
maximum price for the purchase.96 Thus, in a fixed price tender a
shareholder holding 2 per cent of the class may sell shares to the
company up to the amount of 2 per cent of the shares the
company acquires through the tender process. Where the tender
is at a maximum (but not a fixed) price, the shareholder has to
indicate the price at which it is prepared to sell its shares to the
company (a price not exceeding the maximum set by the
company) and the company will implement the tender by
accepting the lowest-priced offers first and continue up the price
curve until it has fulfilled its tender. Even where the purchase is
of less than 15 per cent, the company must either use the tender
offer procedure or limit the price it is offering to not more than 5
per cent above the market price of the shares over the five days
preceding the purchase.97 This limits the possibilities for
favoured shareholders to sell their shares to the company at an
above-market price.
Listing Rules also require the prior consent of any class of
listed securities convertible or exchangeable into equity shares of
the class to which the re-purchase proposal relates, unless the
terms of issue of the security provided that the company may re-
purchase the relevant equity shares.98 Thus, in principle, the
holders of convertible bonds will need to consent (by special
resolution in a separate meeting) to a re-purchase of the equity
shares into which the bonds are convertible. Further, where an
off-market transaction is contemplated, the Listing Rules apply
their rules concerning related-party transactions.99 These exclude
from voting on the resolution a wider range of persons than
would the statute, because the statute excludes only those whose
shares are to be re-purchased, whereas the Listing Rules also
exclude their associates.100 Finally, the FCA’s Rules not
surprisingly address market issues, such as the need for the
market to be informed immediately of all the stages of a share
re-purchase, from proposal to results101; and the need to avoid
insider trading by excluding, subject to exceptions, re-purchases
during prohibited trading periods.102 In addition, the Investment
Association guidelines103 propose that companies should always
act by special resolution even if the statute permits an ordinary
resolution, so that listed companies, or at least those with large
institutional shareholdings, will tend to follow this path, even if
the statute does not formally require it.
Payments otherwise than by way of the price
13–23
It is conceivable that a company might pay money to a
shareholder, not as the price for the shares purchased, but, for
example, by way of consideration for:
(a) acquiring any right (for example an option) to purchase under
a contingent purchase contract;
(b) the variation of any off-market contract; or
(c) the release of any of the company’s obligations under any
off-market or market contract.104
Although such payments are not strictly part of the purchase
price,105 none of them is normal expenditure in the course of the
company’s business but rather constitute a distribution to
members, and the payment would not have been made but for
the fact that the company was minded to agree to purchase its
shares. Such payments ought therefore to be treated, so far as
practicable, in the same way as the purchase price. It is highly
unlikely that a company would contemplate making a new issue
of shares for the purpose of financing any such payment.106
Hence, as a matter of creditor protection, the Act provides that
they must be paid for out of distributable profits only. If this is
contravened, in cases (a) and (b) above, purchases are not
lawful, and in case (c) the release is void.107
Treasury shares
13–24
The question of whether a company can itself hold the shares it
acquires is another issue that arises only in relation to re-
purchases of shares, since a cancellation rule is imposed in the
case of redemptions.108 Re-purchases of treasury shares were not
permitted under the original reforms of 1981, but the subsequent
history has been one of progressive liberalisation. In 1998, the
Government began consultation over the proposition that
companies should be able to retain re-purchased shares and re-
issue them, as required.109 The main argument in favour of this
reform was that it would permit companies to raise capital in
small lots but at a full market price by re-selling the re-
purchased shares as and when it was thought fit to do so. The
argument against was that the freedom to re-sell would give
boards of directors opportunities to engage in the manipulation
of the company’s share price, i.e. an argument based on investor
protection rather than creditor protection. In 2001, the
Government issued a further consultation document which
accepted the idea in principle, but only for companies whose
shares were traded on a public market, and consulted on further
issues related to its implementation.110 The manipulation danger
was thought to be addressed by the separate provisions,
contained in the FSMA 2000, dealing with market abuse,111 and
by the restriction on the amount of the treasury shares to 10 per
cent of any class (as then required by the Second Directive).
13–25
These proposals were implemented in 2003112 and Ch.6 of Pt 18
of the 2006 Act re-stated them without substantive change. In
2009, however, following amendments to the Second Directive,
the 10 per cent limit was removed.113 Under the 2003 reforms
only “qualifying shares”114 could be re-purchased. These were
publicly traded shares. In 2013, however, the restriction to
qualifying shares was removed from the legislation,115 so that all
shares subject to re-purchase may be held in treasury and all
companies may hold treasury shares (the previous approach
having necessarily excluded private companies from holding
shares in treasury).
The principal restriction today on holding treasury shares is
that their re-purchase must have been financed out of
distributable profits, even in the case of a private company.116
This limitation seems to have been imposed because it was
thought that there would be little demand for re-purchases out of
new issues. This approach also simplifies the legal capital issues.
Deployment of distributable profits has no impact on the
company’s capital accounts. Moreover, no balancing transfer to
the capital redemption reserve is required where the re-
purchased shares are not cancelled.
Sale of treasury shares
13–26
The underlying rationale of the treasury share scheme is
achieved by the provision that treasury shares may at any
subsequent time be sold by the company for cash.117 When this
happens, there is a sale by the company of existing shares, not an
allotment of new shares. Consequently, the rules requiring
shareholder authorisation of directors to allot shares do not
apply,118 thus facilitating speedy action by the directors. The
same argument could be advanced in relation to pre-emption
rights for shareholders on allotment, but the Act artificially
extends the statutory concept of allotment so as to make pre-
emption rights applicable on sales of ordinary shares held in
treasury.119 Although shareholders can waive pre-emption rights
in advance, the fact that treasury shares are in principle subject
to these rights is another example of the attachment of
institutional shareholders to pre-emption rights.120
Where the proceeds of the sale are equal to or less than the
purchase price paid by the company, the money received by the
company is to be treated as a realised profit and so potentially
distributable by the company.121 Since the shares will have been
acquired out of distributable profits, which were thereby
diminished, there can be no creditor-protection objection to the
proceeds of the sale being treated as a realised profit. Any excess
of the price received by the company over that paid by it,
however, must be transferred to the share premium account.122
This again seems correct. The increase in the price of the shares
presumably represents an increase in the value of the company
since the shares were purchased, so that the portion of the price
obtained on re-sale which represents that increase in value
should be treated as legal capital, just as the premium received
by the company on the initial issue of shares would be so
treated.123
Alternatively, the company may transfer treasury shares to
meet the requirements of an employees’ share scheme.124 Or it
may do what it could have done when it originally acquired the
shares, i.e. cancel them.125 In this latter case its share capital
account must be reduced by the amount of the nominal value of
the shares cancelled and an equivalent amount transferred to the
capital redemption reserve.126 In the usual way the company has
to inform the Registrar when it disposes of the shares (in either
of the permitted ways) or cancels them, giving the necessary
particulars.127
Whilst the shares are in treasury
13–27
Whilst the shares are still held by the company, it may not
exercise any of the rights attached to them (notably the right to
vote) and any such purported exercise is void,128 so that the
directors cannot strengthen their position in the general meeting
of the company through the use of the treasury shares. Nor may
a dividend be paid or any other distribution be made on the
treasury shares.129 However, the company may receive (fully
paid) bonus shares in respect of the treasury shares, for
otherwise the proportion of the equity represented by the
treasury shares would decline. The bonus shares so allotted are
to be treated as treasury shares purchased by the company at the
time they were allotted.130 On a subsequent sale of the bonus
shares their purchase price is to be treated as nil, so that the full
amount received for them must be transferred to the share
premium account.131 This seems correct, since the purpose of
issuing bonus shares is to capitalise profits and so the sale price
of the bonus shares needs to be added to the company’s capital
accounts and not be treated as a realised profit.132
Failure by the company to perform
13–28
So far, we have assumed that the company has discharged its
obligation to redeem shares under the terms of their issue or to
re-purchase shares as a result of a contract entered into with the
shareholder. Normally, this will be the case but it is conceivable
that the company will not fulfil its obligations. This may occur
because the company decides to break the contract or because it
cannot lawfully perform it since, for example, the new issue of
shares has not raised the proceeds expected and the company has
inadequate available profits.133 What are the remedies of a
shareholder if the company does not perform the contract to
redeem or purchase his shares? Section 735 provides that the
company is not liable in damages in respect of any failure on its
part to redeem or purchase.134 It was thought that damages were
not an appropriate remedy; it would result in the seller retaining
his shares in, and membership of, the company and yet
recovering damages (paid perhaps out of capital) from the
company.135 Any other right of the shareholder to sue the
company is expressly preserved, but, even then, it is provided
that the court shall not grant an order for specific performance
(perhaps a more appropriate discretionary remedy) “if the
company shows that it is unable to meet the costs of redeeming
or purchasing the shares in question out of distributable
profits”.136 Apart from this, the section gives no indication of
what “other rights” the shareholder might have. There is little
doubt that these would include the right to sue for an injunction
restraining the company from making a distribution of profits
which would have the effect of making it unlawful for the
company to perform its contract.
However, the ban on the recovery of damages can be
circumvented by using an indirect procedure to this end. In
British & Commonwealth Holdings Plc v Barclays Bank Plc137 a
consortium of banks had promised to take the shares from the
shareholder if the company could not redeem them and the
company had promised to indemnify the banks in respect of
actions by it which made it impossible for it to redeem. It was
held that the section did not prevent the banks suing the
company on its promises, even though the aim of the whole
scheme was to ensure that the shareholder would be able to
redeem even if the company had no distributable reserves. The
case strongly suggests, but does not finally decide, that s.735 is
concerned only with the range of remedies available to the
shareholder rather than with ensuring that a company never in
effect redeems shares out of capital.
A second issue which arises is the position if the company
goes into liquidation before the shares have been redeemed or re-
purchased. The Act provides that the terms of redemption or
purchase may be enforced against the company in winding up,138
but subject to the restriction on specific performance noted
above. However, the shareholder will gain little or nothing by
enforcing the contract if the winding up is an insolvent
liquidation since the member is a deferred creditor. Any claim in
respect of the purchase price is postponed to the claims of all
other creditors—and, indeed, to those of other shareholders
whose shares carry rights (whether as to capital or income)
which are preferred to the rights as to capital of the shares to be
redeemed or purchased.139 Moreover, even this limited right may
not be enforced in liquidation if the terms of redemption or
purchase provided for performance to take place at a date later
than that of the commencement of the winding-up; or if during
the period beginning with the date when redemption or purchase
was to take place and ending with the commencement of the
winding-up, the company did not have distributable profits equal
in value to the redemption or purchase price.140 In this case it
appears the member is treated in the winding-up as if there were
no obligation on the company to redeem or purchase the shares
and as if he or she were still a member of the company.
Conclusion
13–29
Even if one takes the view that legal capital is a central doctrine
of company law, the above discussion has shown that it is
relatively easy to reconcile it with the acquisition by a company
of its own shares, provided certain conditions are met. In
particular, acquisitions out of distributable profits, coupled with
an appropriate adjustment to the company’s capital accounts,
present no threat to the integrity of the doctrine of legal capital.
We should note, however, that the facility for a private company
to purchase shares out of capital, provided the decision is
supported by what is, in effect, a solvency statement, is a
legislative move towards the adoption of an alternative to legal
capital as the primary protection mechanism for creditors. In the
case of re-purchases, where the directors have a greater
discretion than in the case of redemptions, shareholder agency
problems emerge as an issue which has to be faced, but a
combination of the standard techniques of disclosure and
shareholder approval, plus in appropriate cases, reliance on the
functioning of a public market, ought to be sufficient to address
those problems as well.
REDUCTION OF CAPITAL
Why are reductions of capital allowed?
13–30
Acquisition by a company of its shares through redemption or
re-purchase is akin to a distribution to shareholders, discussed in
the previous chapter, to the extent that assets are returned by the
company to its shareholders. Unlike a distribution, which is a
gratuitous disposition by the company, in a redemption or re-
purchase the company receives shares in exchange for the assets.
However, if the shares are immediately cancelled, the acquisition
has a largely gratuitous character; and the cancellation generates
a reduction in the company’s legal capital yardstick. Only if the
re-purchased shares are held in treasury does the company obtain
value for the price paid, to the extent that the re-purchased shares
can be sold again to investors.
A reduction of capital, by contrast, does not necessarily
involve a return of assets to shareholders, though it may pave the
way for such action, either immediately or in the future. What is
reduced in a reduction of capital are the amounts stated in the
company’s capital accounts.141 The initial puzzle is why the
company should be permitted by the law to take this step at all.
Having built a creditor-protecting distribution rule, which turns
on the numbers in the company’s balance sheet, and especially
those in its capital accounts, why should the law allow the
company to reduce those numbers so as to facilitate a
distribution to shareholders, either immediately or in the future?
More generally, the creditors might conceivably rely on the
numbers stated in the capital accounts as an indication of its
creditworthiness, that is, as indicating the level of the
shareholders’ commitment to the company. In principle, the
company cannot reduce its capital, but the law has long
recognised that it is legitimate to do so in some circumstances,
subject to safeguards to protect creditors and to deal with intra-
shareholder conflicts, especially conflicts among different
classes of shareholder.
13–31
The following are examples of situations where a reduction of
the numbers in the capital accounts might be thought to be
legitimate. Suppose the company has traded unsuccessfully, so
that its net asset value (assets less liabilities) is less than its legal
capital. However, the company has found a new investor who is
prepared to inject funds into the company so that it can try an
alternative business plan. In return, however, the new investor
wants to make sure that any profits made in the future can be
paid out immediately and that he or she obtains the fair share of
those profits. Thus, the investor requires that, before the issue of
new shares is made, the value of the company’s legal capital
accounts is reduced to reflect the value of the existing
shareholders’ equity in the company. In short, the new investor
does not want his investment to fund the past losses of the
company nor that existing shareholders should participate in
future profits except to the extent that their investments have
survived the company’s previous trading misfortunes. Both these
aims can be achieved if the company’s legal capital is reduced to
the level of its current net asset value.142 For example, if the
company’s net asset value is half its legal capital, the shares
having all been issued at par, equilibrium could be achieved by
reducing the nominal value of the existing shares by half. The
new investor would then obtain twice the number of shares—
again assuming issuance at par—when the new money is
injected compared to the pre-reduction situation. This ensures
fairness as between old and new investors as well as allowing
future profits to be distributed immediately they are earned.
There is no particular reason for the creditors to object to this
procedure: any contribution by the new investor to the assets of
the company improves their position because their claims on the
company’s assets have priority over those of the shareholders
(old and new).
13–32
A situation at the opposite end of the spectrum is where the
company has more equity capital than it needs and wishes to
reduce its capital by repaying the holders of a particular class of
share. Here, the reduction of capital is indeed accompanied by a
return of assets to the shareholders. One might say that the return
of assets to the shareholders is the driving force behind the
transaction and the reduction of capital is the consequent
adjustment to the balance sheet which is necessary to reflect
what has been done. Here, reduction of capital appears as a
functional substitute for a redemption or re-purchase of shares,
as discussed in the previous section of this chapter. However,
there is one significant difference. The outcome of the reduction
procedure is a decision which is binding on all the shareholders
in question. This may also be the case in a redemption
(depending on how the terms of issue were drafted), but it is not
the case in a re-purchase where, as we have seen, the statutory
procedure simply makes it lawful for company and shareholder
to agree to the re-purchase.143 In this example, since assets are
being returned to shareholders, the interests of creditors can be
said to be engaged, whilst the decision as to which shareholders
are to be squeezed out of the company and on what terms may
provide fertile ground for intra-shareholder conflicts.
The statutory procedures
13–33
For many years successive Companies Acts have provided a
procedure through which the reduction can be effected and the
claims of shareholders and creditors that the proposed reduction
is adverse to their interests can be evaluated and protection
provided, if it is due.144 Before the passage of the 2006 Act there
was only one procedure. The general principle was that a
company might reduce its capital if the proposal was adopted by
a special resolution of the shareholders and confirmed by the
court. However, a private company rarely needed to resort to that
procedure. The main situation in which a private company may
wish to reduce capital is when it needs to buy out a retiring
member of the company or to return to the personal
representatives of a deceased member his share of the capital,
but has insufficient profits available for dividend to enable it to
do so except out of capital. As we have seen above,145 when
companies were empowered to purchase their own shares,
special concessions were made to private companies to enable
them to do so out of capital and without the need for a formal
reduction. This provided a substitute for capital reduction which
met the needs of private companies in many cases.146 However,
the 2006 Act introduced an alternative procedure for the
reduction of capital by private companies, for which court
confirmation is not needed, but it left in place the special rules
enabling private companies to re-purchase shares out of capital.
In the case of public companies, the 2006 Act left the previous
law unchanged.
Whichever procedure is used, the Act provides that a company
may reduce its share capital “in any way”147 but it then sets out
three typical situations, which are important because of their
different implications for creditor protection. The three situations
are: (a) by reducing or extinguishing the amount of any uncalled
liability on its shares148; (b) by cancelling any paid-up share
capital “which is lost or unrepresented by available assets”149; (c)
by paying off any paid-up share capital which is in excess of the
company’s wants.150 Situations (b) and (c) are exemplified by the
examples discussed in paras 13–31 and 13–32. In situation (a),
which arises only where the company has issued shares as not
fully paid up, a shareholder’s liability to the company is
terminated and so the interests of the creditors are engaged, as
are the interests of the shareholders whose commitments to the
company are fully paid up.151
Procedure applying to all companies
13–34
Under the procedure applying to all companies a reduction of
capital requires a special resolution of the members and
confirmation by the court.152 It is the requirement for court
approval which is supposed to provide the necessary protection
for creditors (as well as for minority shareholders insofar as the
supermajority vote requirement does not achieve that end). The
obtaining of shareholder consent is most likely to raise tricky
issues where there is more than one class of share and the
reduction does not affect all the classes rateably. If the rights of a
class of shareholders are affected by the reduction proposal, the
separate consent of that class will be required under the “class
rights” provisions discussed in paras 19–13 et seq.153 In
particular, companies have often wanted to cancel the shares
issued to preference shareholders, whose entitlement to a fixed
preference dividend has moved out of line with interest rates in
the market, so that the contribution of those shareholders can be
re-financed more cheaply. The courts have held that mere
cancellation of preference shares does not infringe their rights,
provided the preference shareholders are treated in accordance
with the rights they would have on a winding up of the
company.154 Thus, the question becomes whether the reduction
of the preference shares meets this test. Although the court
probably has discretion to approve a reduction of shares which
infringes class rights and which has not secured the consent of
that class, it is highly unlikely to do so.155 Where there is only
one class of share, the minority’s protections are less
extensive,156 though they do have the chance to oppose the
confirmation of the reduction by the court under the reduction
procedure.
Creditor objection
13–35
Creditor protection is provided solely through the mechanism of
court confirmation of the reduction proposal.157 The practical
pressure generated by the procedure used to be towards making
the company discharge or secure all the creditors’ claims
outstanding at the time of the reduction before application was
made to the court for confirmation. These were the remedies the
court could order in favour of an objecting creditor.158 In order to
avoid the difficulty of identifying every one of a fluctuating
body of trade creditors, companies often felt obliged to short-
circuit the objection procedure and arrange for a sufficient sum
to be deposited with or guaranteed by a bank or insurance
company to meet the claims of all the unsecured creditors before
applying for court confirmation. The Company Law Review
(“CLR”) thought that the interests of creditors were thus often
over-protected, because creditors obtained either payment of or
security for their previously unsecured debts, whether or not
their chances of repayment had been adversely affected by the
repayment of capital.159 However, its proposal for reform did not
make its way into the Act. Nevertheless, the story did not end
there. In 2006 the European Union amended the Second
Directive’s provisions on reduction of capital160 so as to make
them less protective of creditors. The Government’s initial
reaction was not to take advantage of this new flexibility,161 but
after consultation changed its mind.162 The reduction of capital
provisions of the 2006 Act were then amended by statutory
instrument163 so as to make the procedure less protective of
creditors, thus achieving, albeit by slightly different wording, the
policy recommended by the CLR.
The crucial change is that it is no longer the case that every
creditor is entitled to object to the reduction of capital who, at
the relevant date, has a debt or claim which would be admissible
in proof were the company being wound up.164 Under the prior
law this was the position where the reduction fell within cases
(a) or (c) above (para.13–33) or analogous cases.165 Now, in
order to obtain a right of objection the creditor, upon whom the
burden of proof lies, must demonstrate not only the existence of
situations (a) or (c) and an admissible debt or claim but, in
addition, “a real likelihood that the reduction would result in the
company being unable to discharge the debt or claim when it fell
due”.166 The list of objecting creditors will, in future, thus consist
of those who have demonstrated that their claim is subject to real
risk of non-payment if the reduction goes ahead, so that the
pressure on the company to settle the claims of all creditors
should be mitigated, if not eliminated.
Confirmation by the court
13–36
In principle, the court is required to settle a list of creditors and
to do so as far as possible without requiring an application from
a creditor to be included on the list.167 However, this rarely
happens.168 In the past this was because creditors were repaid or
secured before confirmation was sought, as indicated above. It
would be an unwanted side-wind of the introduction of the “real
likelihood” test if court consideration of the claims of objecting
creditors became routine. In fact, the court has power to order
that the creditor objection procedure shall not apply in a
particular case.169 Under the new test companies are likely to rely
on evidence about their business prospects over the next few
years as grounds for dispensing with the objection procedure.
This is a form of non-statutory solvency certification. To date
the courts have been disposed to accept such evidence as
grounds for disapplication, stressing in particular that the test is
whether the reduction of capital creates a “real risk” of non-
payment for the creditor, so that the creditor’s continued
exposure to the general risks of the company’s business is not as
such permissible ground for objection.170
Even if there are no objecting creditors or their objections
have been dealt with, it appears that the court must still have
regard to creditor interests when deciding whether to confirm the
reduction “on such terms and conditions as it thinks fit”. This is
shown by the case law concerning reductions of capital because
that capital was not represented by available assets (i.e. case (b)
above). Here, there is no right of objection for creditors, unless
the court so orders.171 Nevertheless, the courts might regard the
interests of creditors in such a case as requiring protection at the
confirmation stage. A standard situation falling within case (b) is
where a company is required to write down the value of an asset
in its accounts (for example, a loan which the company now
thinks is unlikely to be re-paid), thus extinguishing its
distributable profits. It then wishes to reduce its share capital
(and probably its share premium account) so as to permit the
distribution of future profits. However, a variation on this theme
is where, on the facts, it is possible (and foreseeable at the time
of the write-down) that the asset may recover in value. In that
case the court may impose a condition that any amount
recovered in the future should be put in an undistributable
reserve. However, it seems that this will be required only if
needed to protect the creditors existing at the time of the write-
down172 and that future creditors are regarded as sufficiently
protected by the publicity requirements for the reduction of
capital (below).
13–37
The court may make ad hoc publicity requirements part of its
order confirming the reduction, including the requirement that,
for a specified period, the company include the words “and
reduced” in its name.173 In addition, the company must deliver a
copy of the court order and a statement of its capital,174 as now
reduced, to the Registrar, who must register and certify them175;
the registration must be publicised; and the reduction takes effect
only upon registration.176 It is conceivable that the reduction in
capital would mean that the company no longer met the
minimum capital requirements for a public company, in which
case it must re-register as a private company before the Registrar
will register the reduction (unless the court orders otherwise).177
13–38
Minority shareholders as well may seek—or the court may
provide—protection at the confirmation stage, even if the
requirements for shareholder meetings have been met before
application to the court. The two main requirements for
shareholder protection which the court will insist on are that the
reduction treat the shareholders equitably and that the reduction
proposal be properly explained to the shareholders who
approved it. It is established that the court must be satisfied on
these matters, even if the petition for confirmation is unopposed,
as it often will be.178 However, before a conclusion of
inequitable treatment is reached, a significant risk to those
shareholders arising out of the reduction must be identified.
Thus, in Re Ransomes Plc179 a substantial reduction in share
premium account was permitted over the objections of
preference shareholders, in order to permit a distribution to the
ordinary shareholders, on the grounds that the preference
shareholders’ entitlements to dividend and return of capital (non-
participating in both cases) were not put at risk by the proposed
distribution. Even after the proposed distribution, the company
would have assets and projected profits well in excess of what
was required to meet the preference shareholders’ entitlements.
In other words, the protection for both creditors and shareholders
now revolves around the same general notion: their objections
will be plausible if the reduction is likely significantly to harm
their entitlements. The apparently strict procedural requirements
of proper explanation have been somewhat qualified by the
adoption of a “no difference” rider, i.e. the court may forgive
procedural inadequacies if convinced that following the correct
procedure would have led to the same result.180
Procedure available to private companies only
13–39
The provisions for reduction of capital without court
confirmation apply only to private companies. These were
introduced in 2006 to mitigate the delay and cost involved in
court confirmation. The CLR wished to make this procedure
available to public companies as well, but with the rider, needed
to meet the requirements of the Second Directive, that creditors
entitled to object to the reduction could invoke the court to veto
or modify the reduction.181 In place of court confirmation
reliance would be put on a solvency statement made by the
directors. For both types of company the procedure with court
confirmation (above) would be kept as an alternative, because it
allows directors to avoid the potential liabilities arising out of the
solvency statement.182 However, in the event the Act makes the
procedure of reduction without court approval available to
private companies only (which retain the option of using the
court-based procedure).183
Solvency statement
13–40
Under the procedure available to private companies only, a
special resolution of the shareholders is still required,184 as
discussed above, with the need to hold separate meetings of each
class of shares whose rights are varied by the proposed
reduction. However, the resolution of the members is to be
supported by a solvency statement from the directors rather than
confirmed by the court. The essence of the solvency statement is
that to some degree it transfers responsibility for the reduction
from the court to the directors of the company. This is a gain for
the company in terms of speed and cost, but a potential risk for
the directors, in so far as personal liability attaches to their
approval of the solvency statement.185 The solvency statement,
which must accompany the resolution, is not an entirely novel
device in British company law. It was required as part of the
(now repealed) “whitewash” procedure available to private
companies wishing to give financial assistance for the purchase
of their own shares.186 Something similar is also to be found in
the rules governing share re-purchases by private companies
from capital.187 However, unlike the re-purchase statement, the
solvency statement on a reduction of capital is not required to be
audited.
The solvency statement is a statement by each director of the
company, who must each sign it.188 Each director asserts in it
that he or she has formed an opinion on two matters. The first
relates to the company’s current financial position at the time the
statement is made and is to the effect that “there is no ground on
which the company could be found unable to pay (or otherwise
discharge) its debts”.189 The second relates to the future and
covers a period of one year after the date of the statement. The
second opinion comes in two alternative forms.190 If it is
intended to commence the winding up of the company within a
year,191 then the required opinion is that the company will be
able to pay or otherwise discharge its debts within 12 months of
the winding up. In any other case, it is that the company will
able to pay (or discharge) its debts as they fall due within the 12
months after the date of the statement. The required opinion
relates only to the payment or discharge of debts (i.e. claims on
the company to pay a liquidated sum). However, the directors
are required to take into account contingent and prospective
liabilities when forming their opinions.192 The obligation to take
into account prospective liabilities is hardly surprising, since
these are liabilities which will certainly become due in the future
(though it may not be clear precisely when). Contingent
liabilities are those which may arise in the future because of an
existing legal obligation or state of affairs. In other words,
directors have to take account of contingent and prospective
liabilities which may become debts payable by the company and
imperil its ability to pay its debts, either at the date of the
statement or, more likely, as they fall due over the 12-month
period required to be considered under the second opinion.193
13–41
The transfer of responsibility to the directors is most graphically
illustrated by the provision in the Act that it is a criminal offence
for a director to make a solvency statement without having
reasonable grounds for the opinions expressed in it—unless the
solvency statement is not delivered to the Registrar, so that the
reduction does not take effect.194 This criminalises purely
negligent conduct on the part of the director, an unusual step, for
the Act normally confines criminal sanctions to knowing or
reckless misstatements. The greater liability imposed by the Act
is an indication of the importance attached by the legislature to
the accuracy of the solvency statement. The Act is silent on the
civil liabilities of the directors for making an inaccurate solvency
statement. The CLR had recommended that there should be an
express civil liability on the directors to pay up the capital
reduced,195 but this suggestion is not taken up in the Act.
However, it seems clear, at least where the reduction involves a
return of assets to the shareholders, that the directors could be
liable to the company for the loss suffered on the grounds that
they are in breach of their general duties to the company; and
that those who receive the assets with knowledge of the breach,
whether directors or shareholders, would be liable to restore
them to the company, under the principles discussed in relation
to unlawful dividends.196 It is further arguable that the reduction
is ineffective where the directors have not made a solvency
statement in accordance with the requirements of the Act, in
particular where they do not have reasonable grounds for the
opinions expressed in it.197 In this case, the recipients could be
said to be liable to return the company’s assets, whether they
know of the breach or not, subject only to defences such as
change of position.198
13–42
A copy of the solvency statement must be provided to the
members voting on the reduction resolution (in different ways
according to whether the vote is at a meeting or by written
resolution),199 but it is expressly provided that failure to observe
these requirements does not affect the validity of the resolution
passed.200 The solvency statement must precede the date on
which the resolution is passed by no more than 15 days and, if
this is not the case, it appears the resolution cannot be said to be
supported by a solvency statement. Thus, if the date for passing
the resolution slips for one reason or another, the directors will
be required to review and re-issue their solvency statement.
After the passing of the resolution, the company has a further 15
days to file the copy of the resolution and the solvency statement
and a current statement of the company’s capital with the
Registrar.201 It is only with the registration of these documents
by the Registrar (thus making them publicly available) that the
reduction is effective.202 Failure to deliver the documents to the
Registrar on time does not affect the validity of the resolution
but it does constitute an offence on the part of every officer of
the company in default.203
Reduction, distributions and re-purchase
13–43
Provided a private company observes the requirements of the
Act, especially the requirement laid upon the directors to have
reasonable grounds for the beliefs stated in the solvency
statement, it is provided with an inexpensive and quick method
of reducing its capital. It is arguable that, in consequence, the
test for the legality of a distribution by such a company is a
solvency test. Although the cumulative profits test, discussed in
Ch.12, still applies to private companies, the impact of that rule
can be mitigated by reducing the company’s capital to write off
losses, provided the solvency test (and other requirements of the
private company procedure) are met. However, it may be that
this step does not generate profits for a distribution even after the
company’s capital has been reduced, even to near vanishing
point. Consequently, in this case the net accumulated profits rule
will still operate as a binding constraint on distributions,
especially if the private company was only thinly capitalised in
the first place.204
The simplified procedure for reduction of capital without
court approval also constitutes a functional substitute for a re-
purchase or redemption out of capital, as discussed above.205
Which will prove more popular where both mechanisms are
available? Re-purchase out of capital has the virtue of familiarity
and may continue to be used quite widely, at least initially, but
the procedure for reduction out of court seems simpler and
cheaper. No auditors’ report is required on the directors’
solvency statement, no special accounts have to be prepared206
and there is no right of objection to the court on the part of
creditors or non-approving members.
FINANCIAL ASSISTANCE
Rationale and history of the rule
13–44
Section 678 prohibits a public company (or its subsidiary) from
giving financial assistance to a person for the acquisition by that
person of the company’s shares, whether the assistance is given
in advance of or after the acquisition. The history of this rule
does not constitute one of the most glorious episodes in British
company law. The rationale for its introduction was under-
articulated; it has proved capable of rending unlawful what seem
from any perspective to be perfectly innocuous transactions; and
it has proved resistant to a reformulation which would avoid
these problems. The CLR eventually decided that, for private
companies, the only way forward was to take them out of the
scope of the rule altogether, which reform proposal was
implemented in the 2006 Act. The CLR also proposed a series of
amendments to the rule as it applies to public companies,207 but
most of these were not implemented in the 2006 Act. The
Government took the view that the Second Directive prevented
significant changes to the rule as it applies to public
companies.208 Since then, the Second Directive itself has been
amended,209 but the Government regarded the relaxations
introduced as not significant210 and pinned its hopes on a more
radical reform of the Directive in the future (which, however,
seems unlikely to occur).
The rule against financial assistance for acquisitions of the
company’s shares was not developed by the nineteenth century
judges as part of the capital maintenance regime. Rather, it was a
statutory reform introduced in the 1929 Act as a result of the
recommendations of the Greene Committee.211 Although
conventionally dealt with, as in this work, under the heading of
legal capital, it is clear that in formal terms financial assistance
may have no impact on the company’s legal capital. If a
company lends £100,000 to someone to purchase its shares from
another investor and that person does not act as a nominee for
the company but acquires the shares beneficially, the company’s
share capital, share premium account and capital redemption
reserve will not be in any way altered by that loan or the
subsequent purchase of the shares. The Greene Committee
seems to have thought that financial assistance offended against
the spirit, if not the letter, of the rule in Trevor v Whitworth
(company prohibited from acquiring its own shares),212 but the
Jenkins Committee commented that, had the ban “been designed
merely to extend that rule, we should have felt some doubt
whether it was worth retaining”.213
Nor does financial assistance necessarily reduce the
company’s net asset position. If in the above example the
borrower is fully able to repay the loan, the company is simply
replacing one asset (cash) with another (the rights under the
loan) and possibly the latter will earn the company a higher rate
of return. For obvious reasons, there is no general principle of
creditor protection in company law which prohibits the company
from altering the risk characteristics of its assets,214 and so it is
by no means clear that the rule against financial assistance be
justified on that ground.
13–45
In fact, the Greene Committee seems to have been heavily,
perhaps inappropriately, influenced by the use of financial
assistance in schemes which it disapproved of for more general
reasons. The Committee thought, in particular, that it was
abusive to finance a takeover by a loan and immediately repay it
by raiding the coffers of the cash-rich company which is taken
over or to use the assets of the new subsidiary as security for the
takeover loan.215 Now that highly leveraged takeovers are a
common event, this worry looks somewhat overdone. More to
the point, as it has operated in recent years, the financial
assistance rule has not proved a major hindrance to such
takeovers. In particular, the legislation has for some time
permitted a payment of cash from the new subsidiary to the
parent provided it is made by way of lawful dividend.216 This
suggests that, at least under the current law, the objection is not
to the use of the subsidiary’s cash balances to repay the loan but
rather that the aim is to allow repayment only in a way which
protects both creditors (by requiring the dividend to be paid in
accordance with the distribution rules)217 and minority
shareholders, since dividends are paid pro rata to the proportion
of the share capital held.218 In other words, the financial
assistance prohibition does not express a policy about desirable
and undesirable takeovers but more general concerns about
creditor and minority shareholder protection. However, the
financial assistance rule seems too broad to be supported on a
simple creditor or minority shareholder rationale, as the above
example of a loan to purchase shares suggests. For example, if
the loan were for some purpose other than the purchase of
shares, the rule would not bite, yet the borrower might be less
able to repay the loan than the borrower for the share purchase.
13–46
However, the Greene Committee’s recommendations were
enacted as s.45 of the 1929 Act, which was re-enacted with
amendments as s.54 of the 1948 Act. Section 45 immediately
revealed the difficulties involved in drafting a prohibition that
was properly targeted on the perceived abuses. That section,
despite its relative brevity, became notorious as unintelligible
and liable to penalise innocent transactions while failing to deter
guilty ones. The Jenkins Committee219 suggested an alternative
approach very similar to that eventually adopted in 1981 in
relation to private companies, but at the time no action was taken
on that suggestion and, when the Second Company Law
Directive was adopted, it became impracticable in relation to
public companies.220
However, in 1980 two reported cases221 caused considerable
alarm in commercial and legal circles, suggesting, as they did,
that the scope of the section was even wider, and the risk of
wholly unobjectionable transactions being shot down even
greater, than had formerly been thought. Hence it was decided
that something had to be done about it in the 1981 Act which
was then in preparation. Probably more midnight oil was burnt
on this subject than on all the rest of that Act, and the resulting
elaborate provisions were certainly some improvement on s.54.
However, they still did not produce the holy grail of a precisely
targeted prohibition and, after the controversy generated by the
House of Lords decision in Brady v Brady,222 the Government
made proposals for the further relaxation of the provisions.223
However, before these proposals could be implemented, the
CLR was established, with the results described above. In the
meantime, the difficulty of producing a targeted formula
continued to be demonstrated in litigation, for example, in the
decision of the Court of Appeal in Chaston v SWP Group Ltd224
in 2002.
The prohibition
13–47
Section 678 distinguishes between assistance given prior to the
acquisition and that given afterwards.225 Its subs.(1) says that,
subject to exceptions:
“where a person226 is acquiring or is proposing to acquire227 shares in a public
company, it is not lawful for that company, or a company that is a subsidiary of that
company,228 to give financial assistance directly or indirectly229 for the purpose of
that acquisition before or at the same time as the acquisition takes place.”
Subsection (3) provides that, subject to the same exceptions,

when a person has acquired shares in a company and any
liability has been incurred (by that or any other person) for that
purpose, it is not lawful for the company or any of its
subsidiaries to give financial assistance, directly or indirectly, for
the purpose of reducing or discharging that liability, if at the
time the assistance was given the company in which the shares
were acquired was a public company. Thus, if A (probably a
bank) lends B (a bidder) £1 million to enable B (an acquisition
vehicle) to make a takeover of a target company and C (probably
B’s parent company) guarantees repayment, it will be unlawful
for any financial assistance to be given by the target, when taken
over, to B or C towards the discharge of their obligations to A.
However, since private companies are now excluded from the
rule, it is important to know whether the target whose shares
were acquired and which is now giving the financial assistance is
a public company at the time the assistance is given by it. Thus,
in this example, if the target company were a public company, it
could nevertheless give financial assistance after the acquisition,
provided it had by then been re-registered as a private company.
This step is commonly taken in private equity buy-outs.
13–48
Section 683 provides that a reference to a person incurring a
liability includes:
“his changing his financial position by making an agreement or arrangement
(whether enforceable or unenforceable and whether made on his own account or
with any other person)230 or by any other means”
It adds that reference to a company giving financial assistance to

reduce or discharge a liability incurred for the purposes of
acquiring shares includes giving assistance for the purpose of
wholly or partly restoring the financial position of the person
concerned to what it was before the acquisition. This results in
an enormous extension of the normal meaning of “liability” and
seems to mean that, before a company can give any financial
assistance to any person (whether or not the acquirer), it must
assess his overall financial position before and after the
acquisition231 and if, afterwards, it has deteriorated, must refrain
from any form of financial assistance which is not covered by
one of the exceptions—at any rate if there is a causal connection
between the deterioration and the acquisition.
The scope of the prohibition depends crucially on what is
meant by “financial assistance”. Section 677 apparently defines
financial assistance, but in fact fails to do so. It defines the types
of financial assistance falling within the Act, without defining
what “financial” assistance is—as opposed to other forms of
assistance. Given that limitation, however, the section widely
defines the types of financial assistance which are covered. In
addition to such obvious assistance as gifts, loans, guarantees,
releases, waivers and indemnities,232 the definition includes any
other agreement under which the obligations of the company
giving the assistance are to be fulfilled before the obligations of
another party to the agreement,233 and the novation of a loan or
of other agreement; or the assignment of rights under it. If the
financial assistance is of one or more of these types, it is
irrelevant whether or not the net assets of the company providing
it are reduced by reason of the assistance.234
However, this is not all. The list of types of financial
assistance concludes with “any other financial assistance given
by a company, the net assets235 of which are thereby reduced to a
material extent, or which has no net assets”. The effect of this is
that, even if the financial assistance does not fall within the
specific types that the drafter was able to foresee, it will
nevertheless be unlawful if the company has no net assets or if
the consequence of the assistance is to reduce its net assets “to a
material extent”. Only in this last case, and where the company
has net assets, does it seem to be a requirement of the definition
of financial assistance that the company giving it should suffer a
financial detriment. Clearly “materiality” is to be determined to
some extent by the relationship between the value of the
assistance and the value of the net assets: assistance worth £50
would reduce the net assets materially if they were only £100 but
immaterially if they were £1 million. But how far is that to be
taken? A company with net assets of £billions might regard a
reduction of £1 million as immaterial, but it seems unlikely that
judges (most of whom are not accustomed to disposing of
£millions) would so regard it. At the other end of the scale, it
was held in Chaston236 that an expenditure of £20,000 by a
subsidiary, whose net assets were only £100,000, was material,
even though the assistance was in relation to the purchase of the
shares of the parent at a price of some £2.5 million.237
13–49
As noted, however, assistance will not be unlawful unless it is
“financial”. Merely giving information (even financial
information) is not financial assistance.238 Moreover, even if
financial, the assistance must fall within the admittedly wide
definition if it is to be unlawful. In other words, the definition of
the types of financial assistance which fall within the Act seems
intended to be exhaustive. Thus, timely repayment of a debt due,
even if done in order to assist the creditor in the purchase of the
debtor’s shares, would not seem to be caught,239 but it might be
if the debt were paid early because it could then be said to have
an element of gift in it.240
Finally, the impugned transaction must actually be capable of
assisting the acquirer to obtain the shares. In British &
Commonwealth Holdings Plc v Barclays Bank Plc,241 the
promises, made by the company to banks which could be
required to acquire the shares from the shareholder if the
company did not redeem them, were regarded as an
“inducement” to the shareholder to acquire the redeemable
shares in the first place but not as financial assistance to it to do
so. However, in Chaston242 this decision was explained on the
basis that the company did not expect to have to meet its
obligations at the time the promises were made and it was held
that there was no general rule that an inducement could not
constitute financial assistance. In Chaston the subsidiary of the
target had paid for an accountant’s report on the target, which
was an inducement to the potential bidder to make the offer, but
it was also financial assistance in the sense that it reduced the
costs the potential bidder incurred in investigating the worth of
the target.
Chaston is another example of the financial assistance
prohibition striking down an entirely innocuous transaction. The
company (or rather its subsidiary) spent a modest amount of
money to further a sale of the company to a purchaser—a sale
which was clearly in the shareholders’ interests (as the
subsequent litigation showed) and which carried no additional
risks (probably the opposite) for its creditors. For this exemplary
business decision the directors of the company were found to be
in breach of their fiduciary duties to the company (by providing
the unlawful financial assistance) and held personally liable to
restore the amount of the assistance to the company, i.e. to the
purchaser, which sued as assignee of the subsidiary’s claim.243
The exceptions
Specific exceptions
13–50
The Act provides a number of exceptions to the prohibitions.
Some are unconditional, i.e. always excepted. They include
allotment of bonus shares, lawful distributions, anything done in
accordance with a court order, reductions of capital or
redemptions or purchases of shares under the provisions
discussed above, and anything done under the reconstruction
provisions discussed in Ch.29.244 Others are conditional. In the
case of a public company the conditional exemptions apply only
to certain types of financial assistance, which are thought to be
harmless, for example, where lending money is part of the
ordinary business of the company and the financial assistance is
provided within that business or the assistance is provided in
connection with an employees’ share scheme.245 Even then, the
exemption applies only if the company’s net assets are not
thereby reduced or, if reduced, the reduction is financed out of
distributable profits.246
13–51
The interesting point about the conditional exceptions for public
companies is that they do link the financial assistance rules to
the underlying policy of creditor protection. If there is no
reduction in net assets or, even if there is, the creditors cannot
legitimately complain because the reduction is financed out of
distributable profits, the conditional exceptions apply. Article 25
of the Second Directive, in its current version247 no longer
contains a prohibition on financial assistance but allows (but
does not oblige) Member States to permit financial assistance,
subject to certain conditions. One of these is that the financial
assistance should be financed out of distributable profits if it
involves a reduction of net assets. It is thus open to the UK
government to remove the financial assistance prohibition
generally—not just in the specific cases mentioned above—
where the assistance is financed from distributable profits. This
would establish a firm link between the prohibition and the
capital maintenance rules. However, the government has not
chosen to take this step, because of the additional conditions set
out in art.25, which would also need to be met as part of such a
reform and which were regarded as onerous.248 In particular, it
would be necessary to impose liability upon the directors if the
assistance were not provided “under fair market conditions”, to
require the company to carry out due diligence on the
creditworthiness of the person receiving the assistance, and to
make the assistance subject to a special resolution of the
shareholders, acting upon a report from the directors.
General exceptions
13–52
As things stand, however, the main and most debated exception
to the prohibition is to be found in s.678 itself. This was intended
to allay the fears aroused by two decisions in 1980.249 The
section relates to the purposes for which the financial assistance
was given. It is a necessary pre-condition for liability under
s.678 that the financial assistance should have been given for the
purpose of the acquisition of the shares. In some cases the
company will be able to show that, although the financial
assistance was given in connection with an acquisition of shares,
it was not given for that purpose.250 However, the exceptions
come into play where that cannot be shown, i.e. where the
purpose of the financial assistance was to facilitate the
acquisition of shares. Under s.678(2) the prohibition on a
company from giving financial assistance before or at the time of
the acquisition nevertheless does not apply 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) if the giving of the assistance for that purpose is only an
incidental part of some larger purpose of the company; and
the assistance is given in good faith in the interests of the
company.
Subsection (4) provides similarly that the prohibition does not
apply to assistance given subsequently to the acquisition if:
(a) the company’s principal purpose in giving the assistance is
not to reduce or discharge any liability incurred by a person
for the purpose of the acquisition of shares in the company or
its holding company; or
(b) the reduction or discharge of any such liability is only an
incidental part of some larger purpose of the company; and
the assistance is given in good faith in the interests of the
company.
13–53
On the meaning of these difficult subsections there is an
authoritative ruling from the House of Lords in the case of Brady
v Brady,251 a case remarkable both because of the extent of the
judicial disagreement to which it gave rise and because it was
ultimately decided on a ground not argued in the lower courts. It
related to prosperous family businesses, principally concerned
with haulage and soft drinks. The businesses were run and
owned in equal shares by two brothers, Jack and Bob Brady, and
their respective families, through a parent company, T. Brady &
Co Ltd (Brady’s), and a number of subsidiary and associated
companies. Unfortunately Jack and Bob fell out, resulting in a
complete deadlock. It was clear that unless something could be
agreed amicably, Brady’s would have to be wound-up—which
was the last thing that anyone wanted. It was therefore agreed
that the group should be reorganised, sole control of the haulage
business being taken by Jack and that of the drinks business by
Bob. As the respective values of the two businesses were not
precisely equal, this involved various intra-group transfers of
assets and shareholdings which became increasingly complicated
as the negotiations proceeded. It suffices to say that, in the
eventual agreement, one of the companies had acquired shares in
Brady’s and the liability to pay for them thus incurred was to be
discharged by a transfer to it of assets of Brady’s. Bob, however,
contended that further valuation adjustments were needed and
refused to proceed further unless they were made. Jack then
started proceedings for specific performance which Bob
defended on various grounds among which was that it would
require Brady’s to give unlawful financial assistance.
It was conceded that the transfer of assets would be unlawful
financial assistance unless, in the circumstances, the prohibition
was disapplied by what is now s.678(4). On the face of it one
might have thought that the circumstances afforded a classic
illustration of the sort of situation that the above provisions were
intended to legitimate. At first instance, that view prevailed. In
the Court of Appeal,252 however, while all three judges thought
that the conditions relating to “purpose” were satisfied, the
majority thought that those relating to “good faith in the interests
of the company” were not. In contrast, in the House of Lords it
was held unanimously that the good faith requirements were
complied with but that the purpose ones were not. Hence the
contemplated transfer would be unlawful financial assistance if
carried out in the way proposed.
Lord Oliver, in a speech concurred in by the other Law Lords,
subjected the purpose requirements to detailed analysis.253 He
pointed out that “purpose” had to be distinguished from “reason”
or “motive” (which would almost always be different and wider)
and that the purpose requirements contemplated alternative
situations. The first is where the company has a principal and a
subsidiary purpose: the question then is whether the principal
purpose is to assist or relieve the acquirer or is for some other
corporate purpose. The second situation is where the financial
assistance is not for any purpose other than to help the acquirer
but is merely incidental to some larger corporate purpose.254 As
regards the first alternative, he accepted that an example might
be where the principal purpose was to enable the company to
obtain from the person assisted a supply of some product which
the company needed for its business.255 As regards the second,
he offered no example, merely saying that he had “not found the
concept of larger purpose easy to grasp” but that:
“if the paragraph is to be given any meaning that does not provide a blank cheque
for avoiding the effective application of [the prohibition] in every case, the concept
must be narrower than that for which the appellants contend.”256
13–54
The trial judge, and O’Connor LJ in the Court of Appeal,257 had
thought that the larger purpose was to resolve the deadlock and
its inevitable consequences; and Croom-Johnson LJ258 had found
it in the need to reorganise the whole group. But if either could
be so regarded, it would follow that, if the board of a company
concluded in good faith that the only way that a company could
survive was for it to be taken over, it could lawfully provide
financial assistance to the bidder—the very “mischief” that the
legislation was designed to prevent. The logic is, of course,
impeccable. But the result seems to reduce the purpose
exceptions to very narrow limits indeed and to make one wonder
whether the midnight oil burnt on the drafting of the two
subsections had achieved anything worthwhile.
The transaction was in fact saved by application of the special
provisions then applying to private companies (now repealed).
However, the (eventually) successful outcome in that particular
case did not get rid of the awkward issues raised by it. The
DTI259 floated the ideas of substituting “predominant reason” for
“principal purpose” or relying solely on the test of good faith in
the interests of the company. The CLR supported the first of
these suggestions.260 However, these suggestions do nothing to
address the arguments put forward in the House of Lords in
favour of giving the purpose requirements a strict interpretation,
if the prohibition is to remain a meaningful restriction. In any
event, the 2006 Act retains the established wording.
Exemption for private companies
13–55
In the reforms of 1981 a more relaxed regime for private
companies was introduced, allowing assistance if this did not
involve a reduction of the company’s net assets or if the
financial assistance was given out of distributable profits.261 The
effect of this provision was to tie the financial assistance rule
more clearly to the creditor protection concerns of the rules
applying to distributions.262 The 2006 Act went further and
removed the financial assistance prohibition from private
companies, as the CLR recommended. Section 678 applies only
to financial assistance given to a person who is proposing to
acquire shares in a public company or, in relation to an
acquisition which has occurred, where the company whose
shares have been acquired is at the time of the assistance a public
company. Consequently, where a public company is taken over
and then re-registered as a private company, it may give
financial assistance by way of reducing or discharging the
liabilities of the (new) parent incurred for the purpose of the
acquisition.263 The limitation in s.678 thus focusses on the
private status of the company whose shares are subject to the
acquisition. Consequently, if a private subsidiary gives financial
assistance for the purchase of the shares of its public parent, as
in the Chaston case,264 that situation will still be caught by the
prohibition. Moreover, the prohibition is extended by s.679 to
catch financial assistance given by a public company towards the
acquisition of shares in its private holding company—an unusual
but not impossible situation.265 In this case the status of the
provider of the assistance as a public company subsidiary is
enough to trigger the rule.
Civil remedies for breach of the prohibition
13–56
The only sanctions prescribed by the Act for breaches of the
prohibition are fining the company266 and fining or imprisoning
(or both) its officers in default.267 More important are the
consequences in civil law resulting from the fact that the
transaction is unlawful. Unfortunately, precisely what these
consequences are has vexed the courts both of England and of
other countries which have adopted comparable provisions and it
is a pity that the current Act did not attempt to clarify the
position.268
What has caused the courts to make heavy weather of this is
the somewhat curious wording of the prohibition down the years.
Since the object of the section is to protect the company and its
members and creditors, one would have expected it to say that it
is not lawful for any person who has acquired or is proposing to
acquire shares of a company to receive financial assistance from
the company or any of its subsidiaries. That would have pointed
the courts in the right direction to work out the consequences.
But instead it declares that it is unlawful for the company to give
the assistance, and follows that by imposing criminal sanctions
on the company and (the one thing that makes good sense) on
the officers of the company who are in default. This could be
taken to imply (and was so taken by Roxburgh J in Victor
Battery Co Ltd v Curry’s Ltd)269 that the object of the prohibition
was not to protect the company but to punish it and its officers
by imposing fines. This calamitous decision continued to be
accepted in England, and was cited with apparent approval by
Cross J (subsequently a Law Lord) 20 years later,270 though
rejected by the Australian Courts whose decisions helped those
in England eventually to see the light. The decision has now
been disapproved or not followed in a series of cases271 and is
accepted to be heretical.
13–57
Freed from the fetters of that heresy the courts have since given
the section real teeth and it is submitted that the following
propositions can now be regarded as reasonably well established:
(a) An agreement to provide unlawful financial assistance, being
unlawful, is unenforceable by either party to it. This
proposition is undoubted and authority for it is the decision of
the House of Lords in Brady v Brady.272 However, if the
contract could be performed legally (i.e. without giving
unlawful financial assistance), but unlawful financial
assistance is in fact provided, then the legality of the contract
depends on whether the other party to it was party to a
common design to act unlawfully.273
(b) However, the illegality of the financial assistance given or
provided by the company normally does not taint other
connected transactions, such as the agreement by the person
assisted to acquire the shares. It would be absurd if, for
example, a takeover bidder which had been given financial
assistance by the target company, or by a subsidiary of the
company, could escape from the liability to perform purchase
contracts which it had entered into with the shareholders of
the target. Clearly, it cannot.
(c) This, however, is subject to a qualification if the obligation to
acquire the shares and the obligation to provide financial
assistance form part of a single composite transaction. The
obvious example of this would be an arrangement in which
someone agreed to subscribe for shares in a company (or its
holding company) in consideration of which the company
agreed to give him some form of financial assistance. In such
a case the position apparently depends on whether the terms
relating to the acquisition of shares can be severed from those
relating to the unlawful financial assistance. If they can, those
relating to the acquisition can be enforced. If they cannot, the
whole agreement is void. The authorities supporting this
proposition are the decisions of Cross J in South Western
Mineral Water Co Ltd v Ashmore274 and of the Privy Council
in Carney v Herbert.275 In essence, the facts of both were that
shares of a company were to be acquired and payment of the
purchase price was to be secured by a charge on the assets of,
in the former case, that company and, in the latter, its
subsidiary. The agreed security was, of course, unlawful
financial assistance. In the former case, the shares had not
been transferred or the charge executed; in the latter, they
had. In the former it was held that unless the sellers were
prepared to dispense with the charge (which they were not)
the whole agreement was void and that the parties must be
restored to their positions prior to the agreement. In the latter
it was held that the unlawful charge could be severed from
the sale of the shares and that the sellers were entitled to sue
the purchaser for the price. Despite the different results, the
Privy Council judgment, delivered by Lord Brightman, cited
with approval the decision of Cross J in the earlier case. In
both cases a fair result seems to have been arrived at and
certainly one preferable to that for which the assisted
purchaser contended in Carney, namely that he should be
entitled to retain the shares without having to pay for them.276
It is therefore to be hoped that even in a single composite
transaction the courts will permit severance or order restitutio
in integrum unless there are strong reasons of public policy277
why the whole transaction should be treated as unlawful so as
to preclude the court from offering any assistance to any
party to it.
(d) If the company has actually given the unlawful financial
assistance, that transaction will be void. The practical effect
of that depends on the nature of the financial assistance. If it
is a mortgage, guarantee or indemnity or the like, the party to
whom it was given cannot sue the company upon it.278 It is
that party who suffers,279 and the company, so long as it
realises in time that the transaction is void, need do nothing
but defend any hopeless action that may be brought against it.
If, however, the unlawful assistance was a completed gift or
loan, the company will need to take action if it is to recover
what it has lost. And a long line of cases has established that,
in most circumstances, this it will be able to do.280 Its claim
may be based on misfeasance, when recovery is sought from
the directors or other officers of the company, or on
restitution, conspiracy, or constructive trust, when the claim
is against them or those to whom the unlawful assistance has
passed or who have otherwise actively participated in the
unlawful transaction. The most popular basis seems to be
constructive trust, the argument being that the directors
committed the equivalent of a breach of trust when they
caused the company’s assets to be used for the unlawful
purpose and the recipients became constructive trustees
thereof. The constructive trust is discussed further in Ch.16,
below.
(e) In the light of propositions (a)–(d) it would also seem to
follow that if the unlawful assistance given by the company is
a loan secured by a mortgage or charge on the borrower’s
property281 then, so long as the company has rights of
recovery from the borrower under proposition (d), it should
be able to do so by realising its security. This would certainly
be so if the mortgage or charge could be severed from the
unlawful loan—which, however, might be regarded as
impossible since the consideration given for the mortgage or
charge was the unlawful loan. But, since the effect of the
recent case law is to recognise that the object of the
prohibition, despite its wording, is to protect the company,
the courts ought not to boggle at the conclusion that the
security given to the company can be realised to recover what
is due to it by the borrower.
(f) The above points all go to the validity of the financial
assistance transaction and transactions associated with it. In
addition, the directors who cause the company to give the
unlawful finance assistance may be found to have been in
breach of their duties to the company and the company is not
prevented from enforcing those duties against the directors
(normally to recover any loss suffered) by virtue of the fact
that the company’s act in providing the assistance was
unlawful.282
13–58
It will therefore be seen that we have come a long way from the
time when it was believed that the only likely sanctions were
derisory fines on the company and its officers in default. These
developments have caused the banking community some alarm,
for there is no doubt that banks could find themselves caught out
—as indeed they have been in the past.283 The fact that money
passing in the relevant transactions is likely to do so through
banking channels inevitably exposes banks to risks.284 The
government proposed, in consequence, that transactions in
breach of the prohibition should no longer be void for that
reason alone,285 but the Act did not take up this proposal.
CONCLUSION
13–59
The elaborate rules on preservation of legal capital, discussed in
this chapter, can be justified only if the role of legal capital in
controlling distributions by companies is regarded as a valuable
one. This was discussed in Ch.12. If the concept of legal capital
were removed from the distribution rules, the Act could be
simplified substantially by largely removing the rules on
reduction of capital—or at least by confining them to their
shareholder protection aspects—and simplifying those on the
redemption and re-purchase of shares. Creditor protection would
then turn on other concepts. The financial assistance rules, by
contrast, are a candidate for reform even if the concept of legal
capital is maintained, since they have no necessary connection
with that doctrine in their current form. Further, the other goals
which the financial assistance rules might be thought to promote
are, these days, probably better targeted by other provisions with
less potential for disruption of innocuous transactions. For
example, where a target company in a takeover lends money to,
or indemnifies against loss, known sympathisers who buy its
shares or where, on a share-for-share offer, either or both of the
target and predator companies do so to maintain or enhance the
quoted price of their own shares, such practices are now
regulated by the provisions on market abuse or by the rules of
the Takeover Panel.286 Again, in the case of abuses in the period
prior to insolvency the provisions on wrongful trading may be
better targeted.287 Progress on either front, however, requires
changes to EU law in the shape of the Second Directive, since
that Directive is still committed to legal capital as a required
element in the test for distributions by public companies and its
relaxation in 2006 of the financial assistance rules did not go far
enough to encourage significant domestic reform.
1Trevor v Whitworth (1887) 12 App. Cas. 409 HL. Since at this stage in the
development of UK company law, there was no distinction between public and private
companies, the rule necessarily applied to all companies incorporated under the Acts.
2 2006 Act s.658(1)—the exemption of unlimited companies from this prohibition shows
the connection between the rule and creditor protection.
3
2006 Act s.658(2).
4 2006 Act s.670. There are also exceptions for companies whose ordinary business
includes the lending of money and the charge is part of that business, and for charges
taken by a private company before it re-registered as public.
5 2006 Act s.660(2). In effect, the nominee arrangement is unwound by the law.
6
2006 Act.661(2), but the court has the power to relieve a director or subscriber who
has acted honestly and reasonably from the whole or part of the liability: s.661(3)–(4).
7 2006 Act s.660.
8
Though the financial assistance rules, below, para.13–44, may apply.
9
2006 Act s.144.
10
However, if such a transaction were permitted, the parent’s legal capital account
would not be reduced by the fact that one of its members is a subsidiary—any more than
in the case of shares held by a nominee—so that it would not become easier for the
parent to make distributions.
11
2006 Act s.137(1)(b), (c). The company may not exercise the voting rights attached to
the shares, once it becomes a subsidiary (s.137(4)), but this does little to help creditors.
12 Acatos & Hutchinson Plc v Watson [1995] 1 B.C.L.C. 218. Technically, the basis of
the decision was that the bidder was acquiring the shares of the its new subsidiary, not
its own shares.
13
2006 Act s.659(1)—“otherwise than for valuable consideration”. This was held to be
permissible at common law in Re Castiglione’s Will Trust [1958] Ch. 549, where the
acquisition was through a nominee, but the Act permits direct acquisition in such a case.
14
2006 Act s.659(2)(c).
15 2006 Act s.662(1)(a),(2),(3)(a).
16 These problems were originally tackled by the Companies (Beneficial Interests) Act
1983: see now the 2006 Act ss.671–676. The acquisition of such shares is likely to be
financed by the company and the company may have a residuary beneficial interest in
them which, under these provisions, may be disregarded.
17 2006 Act s.659(2)(b), which also lists three other situations where the court may order
the purchase of shares, i.e. under ss.98, 721(6) and 759.
18 2006 Act s.659(2)(a).
19
2006 Act s.669.
20This result will be achieved as a result of the requirement in s.831 that a public
company may make a distribution only to the extent that its net assets (unchanged in this
example) exceed its legal capital and undistributable reserves (increased in the example
by the value of the share purchase).
21 See para.19–35.
22 Perhaps because they were already capable of being squeezed out through the
reduction procedure (see para.19–35, below) and the redemption mechanism allowed the
parties to contract about the handling of this process.
23The crucial policy document was The Purchase by a Company of its own Shares
(DTI, 1980, Cmnd. 7944).
24
2006 Act s.684(4).
25 Moreover, after issue, the non-redeemable shares cannot be re-purchased so as to
produce the result that the company has only redeemable or treasury shares in issue:
s.690(2). Nor may a private company reduce its share capital through the solvency
statement regime so as to produce the result that it has only redeemable shares in issue:
s.641(2). In the case of the court-centred reduction, the court could permit such a
reduction but, presumably, would be unlikely to do so.
26
2006 Act s.690(2). On treasury shares, see below para.13–24.
27
2006 Act s.684.
28
2006 Act s.551 and see para.24–4.
29Thus enabling the company to “redeem” them prior to a date fixed in the terms and
conditions if it can reach agreement with the holder.
30
2006 Act s.690. A purported re-purchase in breach of the articles would be void,
because the company would no longer be protected from the operation of s.658(2)
(above, para.13–2); cf. Hague v Nam Tai Electronics Inc [2007] 2 B.C.L.C. 194 PC.
31 See paras 13–19 et seq.—though that protection was somewhat reduced in 2013.
32
1985 Act s.160(3).
33
Though not as flexible as the CLR’s recommendation, which would have given the
directors an unconditional power to set the terms of the redemption: Final Report I,
para.4.5.
34
2006 Act s.685(4).
35
2006 Act.685(1),(2).
36 2006 Act s.685(3).
37 2006 Act ss.686(1).
38
2006 Act s.691(1).
39
2006 Act s.686(2)—otherwise the shares must be paid for on redemption: s.686(3).
402006 Act s.691(2)—except in relation to a private company purchasing shares
pursuant to an employee share scheme. For the problems to which this lack of flexibility
can give rise see Peña v Dale [2004] 2 B.C.L.C. 508; Kinlan v Crimmin [2007] 2
B.C.L.C. 67 (though in the latter case the judge managed to avoid requiring the
shareholder to return to the company the money received by resort to the defence of a
good faith change of position).
41 2006 Act ss.689 (redemption) and 707 (re-purchase).
42
2006 Act ss.687(2) and 692(2).
43 2006 Act ss.687(3), (4) and 692(2)(b), (3).
44 To see this, let us suppose that, immediately before the re-purchase, a public company
has net assets exactly equivalent to its then legal capital. Thus, it has distributable profits
of zero. It raises money by issuing 100 new shares at par at £2 per share. Its share capital
account will increase by £200. It uses the money to re-purchase 100 £1 shares at a
premium of £1, the shares having been originally issued at par. After cancellation of the
re-purchased shares, the company’s share capital will be reduced by £100 (the nominal
value of the shares). However, by raising the finance for the re-purchase in the way
indicated, the company has brought about a net increase in its legal capital of £100 (the
increase arising out of the new issue (£200) less the nominal value of the shares re-
purchased and cancelled (£100)). It cannot distribute the amount needed to finance the
redemption premium without reducing its net assets below the (newly increased) capital
yardstick. It must thus finance the premium on re-purchase out of distributable profits or
not pay a redemption premium at all.
45
2006 Act s.688.
46
2006 Act s.733(2).
47
2006 Act s.733(3).
48 2006 Act s.692(1ZA).
49
50
2006 Act s.709(1).
51
2006 Act s.709(2).
52
HL Debs, Grand Committee, Tenth Day, 20 March 2006, cols.31–32.
53 2006 Act s.710.
54 2006 Act s.711.
55
2006 Act s.712(6),(7). The available profits so determined have then to be treated as
reduced by any lawful distributions made by the company since the date of the accounts
and before the date of the statutory declaration: s.712(3),(4).
56 2006 Act s.714(4). On the requirements for a capital reduction see para.13–40, below.
57
Presumably on the grounds that a re-purchase to enable the founding entrepreneur to
retire is in those circumstances unnecessary: the withdrawal can take place as part of the
winding up. Section 714(3)(b) requires the statement to say that the directors’ opinion is
that the company will be able to carry on business as a going concern in the following
year “having regard to their intentions with respect to the management of the company
during the year”, so that they could not honestly make the required statement if they
contemplated a winding up.
58
2006 Act s.714(3)(b).
59 As to the opinion about the current position, that relates to the position “immediately
following” the date on which the PCP is proposed to be made (s.714(3)(a)) rather than
the date of the statement (cf. s.643(1)(a)), so that it requires a small degree of foresight.
60 2006 Act s.715 cf. s.643(4) (see below, para.13–41).
61
Insolvency Act 1986 s.76. See fn.73, below.
622006 Act s.714(6). The less demanding “solvency statement” approach is used for
payments out of capital for purchases under an employee share scheme (s.720A).
632006 Act s.718(1),(2)—the method of disclosure varying according to whether a
written resolution or a resolution at a meeting is contemplated.
64
2006 Act s.718(3), cf. s.642(4) applying to solvency statements, where the validity of
the resolution is expressly preserved (see para.13–42, below) and reliance is placed
instead on criminal sanctions to produce compliance with the disclosure obligation:
s.644(7).
65 2006 Act s.717, cf. s.695.
66
2006 Act s.721(1),(2). The shareholder should know about the resolution but the
creditor may not. Consequently, s.719 requires publicity to be given to the resolution,
within one week of its adoption, giving the relevant details, including the amount of the
PCP and naming a place where the directors’ and auditors’ reports may be consulted.
67
2006 Act s.721(3)–(7).
68
2006 Act s.723.
69
See para.13–12 above. Since this is a private company procedure, there is no question
of the company holding the shares in treasury. See para.13–24.
70
2006 Act s.734(4).
712006 Act s.734(3). Section 734(4) deals with the complication where the purchase is
partly by way of PCP and partly by way of the proceeds of a fresh issue.
72But note the example given above in para.13–13 where the PCP is greater than the
company’s CRR and share premium account.
73
Insolvency Act 1986 s.76. The directors of the company who signed the statement are
jointly and severally liable with the shareholders unless the director can show reasonable
grounds for the opinion set out therein.
74
2006 Act s.693(2),(5). See para.25–8, below.
75
However, even if the trade takes place on a RIE it will not count as a market purchase
if the market authorities have given only restricted permission for trading in the shares:
s.693(3)(b).
76
The contract may be entered into before approval, but in that case no shares may be
purchased in pursuance of it before approval is obtained: s.694(2)(b). Under s.693A the
requirements discussed in this section are somewhat modified in connection with
purchases under an employee share scheme, but these variations are ignored here.
77The Government’s reasons for downgrading minority protection were not particularly
persuasive: below, fn.82 at para.25 (“sufficient other safeguards” but none as effective).
78 2006 Act s.694(3).
79There is the potential small disadvantage to the contingent purchase contract that the
consideration for the contract or any variation of it must be provided out of distributable
profits (s.705). However, the actual acquisition of the shares may be funded in
accordance with the rules discussed in para.13–11.
80 2006 Act s.694(4).
81
2006 Act s.694(5). Until 2009 the period was 18 months.
82 BIS, Implementation of Nuttall Review – Recommendation V: Government response
to consultation February 2013, para.22, interprets s.694 as meaning that a private
company cannot give advance approval at all but it is far from clear that this is what the
section says.
83 Or, on a written resolution, vote any shares held: s.695(2).
842006 Act s.695 which also provides (a) that it applies whether the vote is on a poll or
by a show of hands; (b) that, notwithstanding any provision in the company’s articles,
any member may demand a poll; and (c) that a vote and a demand for a poll by a
member’s proxy is treated as a vote and demand by the member.
85
See also s.239 for the exclusion of shareholders from voting on the ratification of their
own wrongdoing as directors (para.16–193).
86
2006 Act s.696. In the case of a written resolution the information is sent to the
members at or before the copy of the proposed resolution: s.696(2)(a). In either case the
names of members holding shares to which the contract relates must be disclosed. These
rights, being for the benefit of the shareholders, may be waived by their unanimous
agreement: Kinlan v Crummin [2007] 2 B.C.L.C. 67; and see para.15–8.
87
2006 Act ss.697–699.
88
2006 Act s.700.
89
As in the case of off-market purchases, the authority may be varied, revoked or
renewed by a like resolution: s.701(4).
90 2006 Act s.701(2).
91 2006 Act s.701(3). The resolution may specify a particular sum or a non-discretionary
formula for calculating the price (for example, by reference to the market price of the
shares): s.701(7).
92 2006 Act s.701(5). Again, 18 months until 2009. But the purchase may be completed
after the expiry date if the contract to buy was made before that date and the
authorisation permitted the company to make a contract which would or might be
executed after that date: s.701(6).
93
2006 Act s.701(8), applying Ch.3 of Pt 3 of the Act to this ordinary resolution.
94
This includes preference shares which are participating in either dividend or
distributions on a winding up: LR, Glossary Definition, “equity share capital”.
95 LR 12.4.2.
96
LR, Glossary Definition, “tender offer”.
97
LR 12.4.1. If a higher limit is permitted under the market stabilisation rules (see
para.30–37), that will replace the 5 per cent figure.
98 LR 12.4.7–8.
99LR 12.3.1. The rule will catch on-market transactions as well if there was an
understanding at the time of the resolution to repurchase that a particular related party
would be able to take up the offer.
100LR 11.1.7(4)(b). “Associate” is defined widely in LR, Glossary Definition,
“associate”.
101LR 12.4.4–6. In addition the legislation requires ex post disclosure of the shares
purchased in the directors’ annual report: SI 2008/410 Sch.7 Pt 2.
102LR 12.2.1. The specific protections against liability for market abuse in the course of
share buy-backs are dealt with in para.30–44, below.
103
Investment Association, Share Capital Management Guidelines, 2014, 1.3.1.
104 These difficulties do not arise in relation to redemptions. Nor does the issue of
payment for a variation arise in relation to a market contract since these cannot be
varied.
105 Though, in case (a), the division of the total price between that paid for the option
and that paid on its exercise may be arbitrary.
106
Which, in case (a) and perhaps (b), would be made some time before any actual
purchase and which in cases (a) and (c) might never be made at all.
107
2006 Act s.705.
108
2006 Act s.688(a).
109
See DTI, Share Buybacks, URN 98/713 (1998).
110
DTI, Treasury Shares, URN 01/500 (2001).
111
FSMA 2000 Pt VIII, especially s.118 and the Financial Services and Markets Act
2000 (Prescribed Markets and Qualifying Investments) Order 2001 (SI 2001/996). See
Ch.30. Note also that a company cannot assign its rights under a contract to re-purchase
shares (s.704), whether the shares are to be held in treasury or not, and this rule reduces
the company’s ability to trade in its own shares.
112
By the Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003
(SI 2003/1116) and the No.2 Regulations (SI 2003/3031). See G. Morse, “The
Introduction of Treasury Shares into English Law and Practice” [2004] J.B.L. 303.
113 This was achieved through the repeal of s.725.
114
2006 Act s.724(1),(2), as originally enacted.
115
2006 Act s.741(1),(2), as amended.
116 2006 Act s.724(1)(b).
117 2006 Act s.727(1)(a). Cash is widely defined in s.727(2). There is one minor
restriction: where a company has been the subject of a successful takeover offer (which
included the treasury shares) and the bidder is using the statutory squeeze-out procedure,
the treasury shares can be sold only to the bidder: s.727(4) and see para.28–69, below.
118
119
2006 Act s.560(3).
121
2006 Act s.731(2).
122 2006 Act s.731(3). On the share premium account see para.11–6.
123Of course, what is transferred to the share premium account is the excess above the
nominal value of the share (see para.11–6), whereas what is being transferred here is the
excess above the purchase price.
124 2006 Act s.727(1)(b).
1252006 Act s.729. It may be obliged to cancel them if the shares cease to be
“qualifying shares”: s.729(2),(3).
1262006 Act ss.729(4) and 733(4). The directors may do this without following the
reduction of capital procedure: s.729(5).
127 2006 Act ss.728 and 730.
128
2006 Act s.726(1),(2).
129
2006 Act s.726(3)—including a distribution on a winding up.
130
2006 Act s.726(4)(a),(5). On capitalisation issues see para.11–20.
131
2006 Act.731(4)(b).
132
By the same token, the value treasury shares acquired by purchase will be reduced by
the bonus issue, thus reducing the amount of realised profit arising on their re-sale.
133
The company could, presumably, protect itself from being in breach by expressly
providing in the contract that the purchase is conditional upon its having the needed
proceeds or sufficient profits.
134
2006 Act s.735(2).
135
In any event, the section does not protect the company against paying damages in all
cases as a result of its failure to redeem. See British & Commonwealth Holdings Plc v
Barclays Bank Plc [1996] 1 W.L.R. 1 CA, below.
136
2006 Act s.735(2),(3). This ignores the possibility that it has adequate proceeds of a
fresh issue but has nevertheless decided to break the contract. Surely the seller should
then be entitled to specific performance?
137British & Commonwealth Holdings Plc v Barclays Bank Plc [1996] 1 W.L.R. 1 CA.
The case also raises issues about financial assistance which are discussed at para.13–49,
below.
138
2006 Act s.735(4). Hence in respect of these shares the seller will cease to be a
member or “contributory” and will become a creditor in respect of the price.
139
2006 Act s.735(6). In a solvent liquidation the shareholder may be worse off than if
shares had not been redeemed or purchased, if the share gave a right to participate in
surplus assets but the purchase or redemption price did not reflect the value of this right.
140
2006 Act s.735(5).
141
2006 Act s.641, introducing the reduction procedures, in terms applies only to the
share capital account, but the share premium account and capital redemption reserve are
treated as share capital for the purposes of the reduction procedure: ss.610(4) and
733(6).
142 There are other techniques which could be used to achieve the same result, such as
issuance at par of a new class of share to the new investor where the new class has a
lower par value than and priority as to dividends over the existing shares, but issuing
shares of the same class after a reduction may reduce the risk of intra-shareholder
disputes in the future.
144Reduction of capital is to be distinguished from the situation where the company
simply divides its share capital into shares of a smaller nominal value or consolidates
them into shares of a larger nominal value, but where the aggregate nominal value of the
shares (and thus the company’s share capital) remains the same, though there is a
smaller or a larger number of shares representing that aggregate. These steps present no
creditor protection issues and the matter is one for the shareholders alone (s.618).
However, there are potential issues of intra-shareholder conflict with divisions: see
Greenhalgh v Arderne Cinemas [1946] 1 All E.R. 512 CA; and para.19–18, below.
145
Above at para.13–13.
146
2006 Act s.617(5) makes it clear that a repurchase or redemption of shares in
accordance with the Act does not fall foul of the prohibition on altering share capital
contained in that section.
147
2006 Act s.641(3).
148
2006 Act s.641(4)(a)—in the unlikely event of its having uncalled capital.
149
2006 Act s.641(4)(b)(i). Technically share capital (a notional liability) cannot be
“lost” (see Ch.11, above) but may well be “unrepresented by available assets”. However,
this does not seem to have bothered the courts which have interpreted “lost” to mean that
the value of the company’s net assets has fallen below the amount of its capital (i.e. its
issued share capital, and, if any, its share premium account and capital redemption
reserve) and that this “loss” is likely to be permanent.
150
2006 Act s.641(4)(b)(ii).
151
Where there is a reduction of capital by means of extinguishing uncalled capital, it is
normal accounting practice to create a reserve to reflect the reduction. Section 654 says
the reserve is to be undistributable, but allows the Secretary of State to specify cases
where the prohibition does not apply. Making ample use of this power reg.3 of the
Companies (Reduction of Share Capital) Order 2008/1915 says the reserve is to be
treated as a realised profit under both procedures, unless the court order, the company’s
articles or a company resolution specify otherwise.
152
2006 Act s.641(1)(b). The previous requirement that the company have power under
its articles to reduce its capital has been removed.
153The issue of how to identify of the rights of preference shareholders is discussed in
Ch.23.
154
The proposition that the preference shareholders are treated in breach of their rights
by cancellation of their shares and deprivation of a favourable dividend entitlement was
decisively rejected by the Court of Appeal in Re Chatterly-Whitfield Collieries [1948] 2
All E.R.593, so that the issue has become whether the terms of the reduction are in
accordance with the rights which they would have on a winding up. The effect of the
decision was to make preference shares in effect redeemable by the company, even if not
formally issued as redeemable, provided the company could satisfy the requirements of
the reduction procedure. It is to be noted that a reduction in order to replace preference
shares with a cheaper form of financing does not clearly fall within any of the three
categories specified in s.641(4) but it does fall within s.641(3)—reduction “in any way”:
Re Hunting Plc [2005] 2 B.C.L.C. 211.
1552006 Act s.645 in terms requires only a resolution of the company, not of the class in
question.
156 These possibilities are also discussed in Ch.19.
157
2006 Act s.645(1).
158 2006 Act s.648(2).
159 Strategic, para.5.4.5.
160Directive 2006/68/EC amending art.32 of Directive 77/91/EEC (now art.36 of the
2012 version of that Directive).
161 DTI, Implementation of the Companies Act 2006, February 2007, Ch.6.
162
The Government response to the consultation on the implementation of amendments
to the 2nd Company Law Directive, 28 October 2007.
163
The Companies (Share Capital and Acquisition by Company of Own Shares)
Regulations 2009 (SI 2009/2022) reg.3. The Secretary of State has power under s.657 to
amend a number of the elements in Pt 17 of the Act, in addition to the usual powers
under s.2 of the European Communities Act 1972.
164
Not all claims a creditor might make in the future are provable: see Re Liberty
International Plc [2010] 2 B.C.L.C. 665 (debtor liable only if a third party exercises a
discretion so as to impose the liability).
165
See s.645(2). The court has a dispensing power under s.645(4), but this was rarely
used against creditors whose claims had not been secured. In case (b) there is no right of
objection, unless the court so orders: s.645(4).
166
2006 Act s.646(1)(b). That likelihood, “beyond the merely possible, but short of the
probable”, will be more difficult to demonstrate the further into the future the debt falls
due: Re Liberty International [2010] 2 B.C.L.C. 665 at [19]–[20].
167
2006 Act s.646(2)(3).
168
In Re Royal Scottish Assurance Plc, 2011 S.L.T. 264 Lord Glennie stated that this
had not been done, in either Scotland or England, since 1949.
169 2006 Act s.645(2)—this was the formal basis on which the prior practice avoided the
creditor objection procedure. Under s.645(3) the court may also order that the procedure
shall not apply to particular class or classes of creditor because of “the special
circumstances of the case”.
170Re Vodafone Group Plc [2014] 2 B.C.L.C. 422; Re Sportech Plc, 2012 S.L.T. 895;
Re Royal Scottish Assurance Plc, 2011 S.L.T. 264.
171 2006 Act s.645(4).
172Re Grosvenor Press Plc [1985] B.C.L.C. 286; cf. Re Jupiter House Investments
(Cambridge) Ltd [1985] B.C.L.C. 222.
173 2006 Act s.648(3)(4).
174
Equivalent to that required on an allotment of shares.
175 The certificate constitutes “conclusive evidence” that the statutory reduction
requirements have been complied with and that the company’s share capital is as stated
in the statement of capital: s.649(6).
176 2006 Act s.649. There is more flexibility about the effective date where the reduction
is part of a scheme of arrangement because that is normally upon delivery of the order to
the Registrar, a matter under the control of the company (see Ch.29 and CLR, Final
Report, para.13.11): s.649(3)(a).
177 2006 Act s.650. An expedited re-registration procedure, which dispenses with
shareholder authorisation, may be used if the court authorises it (s.651). The basis for
this provision is presumably the shareholder authorisation which was a necessary step in
the reduction procedure.
178 Re Ransomes Plc [1999] 2 B.C.L.C. 591, 602 CA.
179 Re Ransomes Plc [1999] 1 B.C.L.C. 775 (affirmed on appeal; see previous note). See
also Re Ratners Group Plc [1988] B.C.L.C. 685; and Re Thorn EMI Plc (1988) 4 B.C.C.
698 (reduction of share premium account to write off goodwill arising out of the same
transaction as generated the premium).
180
See previous note—a hypothetical and sometimes difficult judgment, which the
courts should use sparingly.
181
Company Formation and Capital Maintenance, para.3.27. However, in the absence of
creditor objection, court involvement would not be necessary.
182
183
DTI, Company Law Reform, Cm. 6456, para.4.8 rejected the application of the
alternative procedure to public companies. It was thought that the possibility of creditor
objection and thus court involvement would lead public companies to opt for the court-
confirmation route, though it is not clear that this is a strong argument against making
the option available to public companies.
184
2006 Act s.641(1)(a).
185
Under the court procedure, liability (for example, in negligence) could attach to the
directors for proposing the reduction, but they would be protected to a considerable
extent against such liability in practice by the subsequent examination of the scheme by
the court.
186Companies Act 1985 s.155. The financial assistance rules no longer apply to private
companies: see below, para.13–55.
187
188
2006 Act s.643(1),(3) and the Companies (Reduction of Share Capital) Order
2008/1915 reg.2. Although the section does not extend to shadow directors, the term
“director” does include de facto directors: see s.250. In Re In A Flap Envelope Co Ltd
[2004] 1 B.C.L.C. 64, a case arising under the financial assistance whitewash procedure,
a director who resigned for part of a day in order that the statement could be signed by
his replacement, was held to be a de facto director during this period and thus liable to
make the statement required under those provisions.
189 2006 Act s.643(1)(a).
190
2006 Act s.643(1)(b).
191So that the reduction of capital is a prelude to a winding up, as in Scottish Insurance
Corp Ltd v Wilsons and Clyde Coal Co Ltd [1949] A.C. 462 HL.
192 2006 Act s.643(2).
193
The language of s.643 reflects to some considerable degree the language to be found
in s.123(1)(e) of the Insolvency Act, on which see R. Goode, Principles of Corporate
Insolvency Law, Student Edn (London: Sweet & Maxwell, 2005) paras 4–15 to 4–23 and
4–28 to 4–29.
194
2006 Act s.643(4). The offence is punishable by imprisonment, whether tried
summarily or on indictment: s.643(5).
195 Company Formation and Capital Maintenance, para.3.35.
196 See para.12–12. However, the specific statutory rules on distributions will not be
relevant since a reduction of capital in cases (a) and (c) does not amount to a distribution
for the purposes of Pt 23 (s.829(2)(b)) and in case (b) no assets are returned to the
shareholders.
197
If a solvency statement is not made in accordance with s.643, the resolution for the
reduction of capital appears not to be “supported by a solvency statement” as s.642(1)
requires and no other provision of the Act explicitly saves the resolution from this
defect.
198
cf. MacPherson v European Strategic Bureau Ltd [2000] 2 B.C.L.C. 683 CA.
199
2006 Act s.642(2),(3). On these different methods of shareholder decision-making
see Ch.15.
200
2006 Act s.642(4). However, it is an offence on the part of every officer in default to
fail to comply with this requirement: s.644(7)–(8), but liability is restricted to a fine.
201
2006 Act s.644(1),(2) and the Shares Regulations reg.10.
202
2006 Act s.644(3),(4).
203 2006 Act s.644(6),(7).
204
For a discussion of the general test applying to distributions by private companies
see para.12–3.
205
See para.13–13.
206 Though the directors can hardly make the required statement unless they have at
least up-to-date management accounts.
207
Company Formation and Capital Maintenance, paras 3.42 and 3.43. These proposals
were derived in the main from proposals for reform made earlier by the DTI itself.
208 DTI, Company Law Reform, Cm. 6456, March 2005, paras 42–43.
209
Now arts 25 and 26 of the current version of the Second Directive (Directive
2012/30/EU).
210DTI, Implementation of Companies Act 2006: A Consultative Document, February
2007, para.6–26.
211
Cmnd. 2657 (1926).
212
See fn.1, above.
213 Cmnd. 1749 (1962), para.173. Of course, if the shares are held by the person to
whom the assistance is given, not beneficially, but as a nominee for the company, then
the provisions discussed above at para.13–3 will apply (so that the financial assistance
rules are not necessary to address the nominee situation).
214 Lenders may impose such constraints by contract, of course. See para.31–24.
215On variations on this theme see Selangor United Rubber Estates v Cradock (No.3)
[1968] 1 W.L.R. 1555; Karak Rubber Co v Burden (No.2) [1972] 1 W.L.R. 602; and
Wallersteiner v Moir [1974] 1 W.L.R. 991 CA (pet. dis.) [1975] 1 W.L.R. 1093 HL.
216 2006 Act s.681(2).
217 See paras 12–1 and 12–2.
218 See para.19–2.
219
Cmnd. 1749 (1962) paras 170–186.
220
See art.23 of Directive 77/91 [1977] O.J. L26/1.
221
Belmont Finance Corp v Williams Furniture Ltd (No.2) [1980] 1 All E.R. 393 CA;
Armour Hick Northern Ltd v Whitehouse [1980] 1 W.L.R. 1520.
222
Brady v Brady [1989] A.C. 755 HL.
223
DTI, Company Law Reform: Proposals for Reform of Sections 151–158 of the
Companies Act 1985 (1993); DTI, Consultation Paper on Financial Assistance
(November 1996).
224
Chaston v SWP Group Ltd [2003] 1 B.C.L.C. 675, helpfully considered by E. Ferran,
“Corporate Transactions and Financial Assistance: Shifting Policy Perceptions but Static
Law” (2004) 63 C.L.J. 225.
225
On the other hand, the drafters seem to have thought of financial assistance, whether
given before or after the event, as a one-off transaction. For the difficulties involved in
calculating the impact of the assistance on the company’s net assets where the assistance
is continuing, see Parlett v Guppys (Bridport) Ltd [1996] 2 B.C.L.C. 34 CA.
226The Government’s interpretation of the section is that the person must be someone
other than the company itself: HC Debs, Standing Committee D, 20 July 2006, cols.
856–857 (Vera Baird).
227 In contrast with s.54 of the 1948 Act, which used the expression “purchase or
subscription”, this section refers to “acquire” or “acquisition” thus extending the ambit
of the section to non-cash subscriptions and exchanges.
228
The sections do not apply to financial assistance by a holding company for the
acquisition of shares in its subsidiary; in such a case there is less likelihood of prejudice
to other shareholders or to creditors. The subsidiary must be a “company” within the
meaning of the Act (see s.1) so that foreign subsidiaries are not caught by the
prohibition. This was the view taken previously: see Arab Bank Plc v Merchantile
Holdings Ltd [1994] Ch. 755.
229
A charge given by a company to secure a loan to the company which both lender and
company knew was to be on-lent to the purchaser of a company’s shares to finance the
purchase constitutes indirect financial assistance: Re Hill and Tylor Ltd [2005] 1
B.C.L.C. 41; Central and Eastern Trust Co v Irving Oil Ltd (1980) 110 D.L.R. (3d) 257
Sup Ct. Can.
230 The words “or with any other person” are somewhat puzzling; one would have
expected “or that of any other person”. Can there be an agreement or arrangement which
is not made with some other person? And, if there can, would it not be covered by “or by
any other means”?
231 The difficulty of doing this after a takeover is mind-boggling.
2322006 Act s.677(1)(a)–(c)—other than an indemnity given in respect of the
indemnifier’s own neglect or default.
233
e.g. where a company which is a diamond merchant sells a diamond to a dealer for
£100,000, payment to be 12 months hence, the intention being that the dealer will sell
the diamond at a profit or borrow on its security thus putting him in funds to acquire
shares in the company.
234
In some cases (e.g. gifts) they will be; in others (e.g. loans or guarantees) they may
or may not.
235
Defined as “the aggregate of the company’s assets, less the aggregate of its
liabilities” and “liabilities” includes any provision for anticipated losses or charges:
s.677(2).
236
Above, fn.224.
237
If the assistance had been provided by the parent, as it could well have been, no
question of financial assistance would probably have arisen.
238
But reimbursement of the costs of digesting and assessing the information could be,
as in Chaston. Nor is assistance financial if it consists of the parent instructing its
subsidiary to pay money to the vendor of the shares, where no financial asset leaves the
parent and the assistance provided by the (foreign incorporated) subsidiary is lawful:
AMG Global Nominees (Private) Ltd v Africa Resources Ltd [2009] 1 B.C.L.C. 281 CA.
This is a surprising decision and the CA’s reliance on the Arab Bank case (above,
fn.228) seems misplaced, since the issue there was the legality of the assistance provided
by the subsidiary and not, as in AMG, the assistance provided by the parent.
239 cf. MT Realisations Ltd v Digital Equipment Co Ltd [2003] 2 B.C.L.C 117 CA—
enforcement of security rights was recovery of a legal entitlement rather than the receipt
of financial assistance.
240See Plaut v Steiner (1988) 5 B.C.C. 352, but note also the insistence by the Court of
Appeal in British & Commonwealth Holdings Plc v Burclays Bank Plc [1996] 1 W.L.R.
1 CA that the terms used in the definition must be given their technical meaning (in this
case in relation to the meaning of an “indemnity”).
242
Above, fn.224.
243
In Anglo Petroleum Ltd v TFB (Mortgages) Ltd [2007] B.C.C 407, a differently
constituted CA took a more commercially robust line, notably in rejecting the argument
that any payment by a company which “smoothed the path to the acquisition” of its
shares constituted financial assistance.
2442006 Act.681. There is no express exemption for the expenses of share issues (for
example, commissions—see para.11–14), but there clearly should be.
245 2006 Act s.682(2). There is also a conditional exception for financial assistance
given in connection with private company acquisitions, but this is of such importance
that it is treated separately in para.13–55 below.
246 2006 Act s.682(1). Distributable profits are defined in s.683(1), which essentially
tracks the rules governing distributions.
247 Directive 2012/30/EU [2012] O.J. L315/74
248 Above, fn.210, para.6.23. For trenchant criticism of the limited scope of the reforms
to art.23, see E. Ferran, “Simplification of European Company Law on Financial
Assistance” (2005) 6 E.B.O.L.R. 93.
249Belmont Finance Corp v Williams Furniture Ltd (No.2) [1980] 1 All E.R. 393 CA;
Armour Hick Northern Ltd v Whitehouse [1980] 1 W.L.R. 1520.
250 Dymont v Boyden [2005] 1 B.C.L.C. 163 CA.
251Brady v Brady [1989] A.C. 755 HL. This case is an illustration (of which
Charterhouse Investment Trust v Tempest Diesels Ltd ([1987] B.C.L.C. 1) is another) of
how, all too often, parties agree in principle to a simple arrangement which on the face
of it raises no question of unlawful financial assistance but then refer it to their
respective advisers who, in their anxiety to obtain the maximum fiscal and other
advantages for their respective clients, introduce complicated refinements which
arguably cause it to fall foul of the prohibition on financial assistance. In the
Charterhouse case, where the former s.54 applied, Hoffmann J, by exercising
commonsense in interpreting the meaning of “financial assistance”, was able to avoid
striking down an obviously unobjectionable arrangement. But the elaborate definition of
that expression in the present Act leaves less scope for commonsense.
252
Brady v Brady [1988] B.C.L.C. 20 CA.
253
Brady v Brady [1989] A.C. 755 at 778. Agreeing with O’Connor LJ in the Court of
Appeal ([1988] B.C.L.C. 20 at 25) he described the paragraph, with commendable
restraint, as “not altogether easy to construe”.
254The layout of ss.678(2) and (4) now reflects this analysis more clearly than did the
previous legislation.
255
A situation envisaged by Buckley LJ in his judgment in the Belmont Finance case
[1980] 1 All E.R. at 402, as giving rise to doubts under the former s.54 of the 1948 Act.
256 Brady v Brady [1989] A.C. 755 at 779.
257 Brady v Brady [1988] B.C.L.C. 20 at 26.
258
Brady v Brady [1988] B.C.L.C. 20 at 32.
259
Company Law Reform: Proposals for Reform of Sections 151–158 of the Companies
Act 1985 (1993).
260
261
1985 Act s.155(2). As we have seen, the Directive now adopts this criterion as one of
the conditions under which financial assistance may be permitted (above, para.13–51).
262 See Ch.12.
263
Of course, the directors of the (new) subsidiary will need to continue to comply with
their fiduciary duties to their company.
264
Above, fn.224.
265 2006 Act s.679. An example might be where a target public company in a takeover is
re-registered as a private company (to avoid the ban on its giving financial assistance to
its new parent) but still has subsidiary companies which are public companies. Section
679 prevents the subsidiaries giving financial assistance to their immediate parent
(unless an exception applies). At least this is what s.679(3) appears to say.
266 Since the prohibition is intended to protect the company and its members and
creditors it is difficult to conceive of a more inappropriate sanction than to reduce the
company’s net assets (still further than the unlawful financial assistance may have done)
by fining the company. The CLR had proposed that the criminal sanction on the
company be removed: Formation, para.343(d).
267
2006 Act s.680.
268The remedies for an unlawful distribution are specifically excluded from the area of
unlawful financial assistance: s.847(4)(a).
269
Victor Battery Co Ltd v Curry’s Ltd [1946] Ch. 242.
270
Curtis’s Furnishing Stores Ltd v Freedman [1966] 1 W.L.R. 1219. But he ignored it
in South Western Mineral Water Co Ltd v Ashmore [1967] 1 W.L.R. 1110.
271
Selangor United Rubber Estate Ltd v Cradock (No.3) [1968] 1 W.L.R. 1555; Heald v
O’Connor [1971] 1 W.L.R. 497; and Lord Denning MR in Wallersteiner v Moir [1974]
1 W.L.R. at 1014H–1015A. The modern view helped Millett J to conclude in Arab Bank
Plc v Mercantile Holdings Ltd [1994] Ch. 71 that the legislation applies to assistance
provided by a subsidiary of an English company only where the subsidiary is not a
foreign company, on the grounds that the protection of the shareholders and creditors of
a company is a matter for the law of the place of incorporation. By the same token, the
giving of assistance by the English subsidiary of a foreign parent ought to be regulated
by the Act, though it is by no means clear that it is.
272
Brady v Brady [1989] A.C. 755. See also Re Hill and Tyler Ltd [2005] 1 B.C.L.C.
41.
273 Anglo Petroleum Ltd v TFB (Mortgages) Ltd [2007] B.C.C. 407 CA: a contract to
lend money to a company where the contract did not require the sum advanced to be
used to provide unlawful financial assistance but where the lender knew the money lent
was to be used to repay monies due to the company’s former parent from the purchaser
of the company’s shares from the former parent. The CA thought there was no public
policy in forcing the lender to investigate whether the proposed use of the loan would
constitute unlawful financial assistance and so held the contract of loan enforceable
(though this view was, strictly, obiter).
274
South Western Mineral Water Co Ltd v Ashmore [1967] 1 W.L.R. 1110.
275
Carney v Herbert [1985] A.C. 301 PC, on appeal from the Sup. Ct. of N.S.W.
276Yet Lord Brightman seemed to think that this would be the consequence if severance
was not possible: see [1985] A.C. at 309.
277
In support of this caveat, see [1985] A.C. at 313 and 317.
278 See the cases discussed under (c) and Heald v O’Connor [1971] 1 W.L.R. 497,
where the unlawful assistance was a mortgage on the property of the company whose
shares were being acquired, the purchaser guaranteeing the payment of sums due under
the mortgage. The mortgage was unlawful. Hence the purchaser escaped liability on the
guarantee (though that was lawful) since no payments were lawfully due under the
mortgage. It would have been different had the guarantee been an indemnity.
279Since the mortgage is illegal and void (not merely voidable) presumably a bona fide
purchaser of it without notice could not enforce it either.
280Steen v Law [1964] A.C. 287 PC; Selangor United Rubber Estates v Cradock (No.3)
[1968] 1 W.L.R. 1555; Karak Rubber Co v Burden (No.2) [1972] 1 W.L.R. 602;
Wallersteiner v Moir [1974] 1 W.L.R. 991 CA; Belmont Finance Corp v Williams
Furniture Ltd (No.2) [1980] 1 All E.R. 393 CA; Smith v Croft (No.2) [1988] Ch. 114;
Agip (Africa) Ltd v Jackson [1991] Ch. 547 CA.
281 Unless the company is a public company and the charge is on shares in it, for then
the charge may be void under s.670: see above, para.13–2.
282 Steen v Law [1964] A.C. 287; Selangor United Rubber Estates v Cradock (No.3)
[1968] 1 W.L.R. 1555; Chaston v SWP Group Plc [2003] 1 B.C.L.C. 675 CA. The same
principle is applied to actions the company may have against third parties who are
implicated in the provision of the financial assistance: Belmont Finance Corp Ltd v
Williams Furniture Ltd [1979] Ch. 250 CA.
283
See, for example, Selangor United Rubber Estates v Cradock (No.3) [1968] 1
W.L.R. 1555; Karak Rubber Co v Burden (No.2) [1972] 1 W.L.R. 602.
284
But they are afforded special protection since the prohibition does not invalidate a
loan “where the lending of money is part of the ordinary business of the company” and
the loan is “in the ordinary course of its business”: s.682(2)(a). This recognises that it
would be absurd if, on a public issue of shares by one of the major High Street banks, its
branches had to refuse to honour applicants’ cheques if they were customers who had
been granted overdrafts.
285
DTI, Consultation Paper on Financial Assistance (1996), para.14.
286
See Chs 28 and 30, below. This example is particularly pertinent since the Greene
Committee (above fn.211 at para.30) specifically mentioned the undesirability of a
company “trafficking in its own shares” are a justification for the prohibition on
financial assistance.
287
See Ch.9, above.
PART 3
CORPORATE GOVERNANCE: THE BOARD

AND SHAREHOLDERS
Over recent decades, corporate governance has been a highly

fashionable topic in company law and has generated an
enormous literature.1 The subject came to prominence in the US
with the work leading to the publication of the American Law
Institute’s Principles of Corporate Governance in 1994 and in
the UK the topic is associated above all with the Cadbury
Committee Report of 1992 and its associated Code of Best
Practice,2 which has provided a focal point for the subsequent
spread of corporate governance codes throughout Europe.3 Best
practice is now subject to constant review.4
However, one could say that corporate governance, whether
recognised under that name or not, is a topic which is as old as
the large company. The fact which the corporate governance
debate takes as its starting point is the appearance, in large
companies, of a group of senior managers who are separate and
distinct from the shareholders. There are good reasons why, in
economically large companies with large groups of shareholders,
the functions of investment and management should be carried
out by separate, though possibly overlapping, groups of people.
Where there are large numbers of shareholders, taking
management decisions through the shareholders, meeting would
be impossibly cumbersome. Further, where the company’s
capital needs have led to a public offering of its shares, there is
no reason to suppose that those who buy the shares have the
necessary expertise or commitment to run a large business
organisation, and this is likely to be just as true of professional
fund managers as it is of individual members of the public. In
such a situation, the emergence of a specialist cadre of corporate
managers is a natural development, managers who do not simply
do as the shareholders say but who develop and implement
corporate strategy on their own responsibility. In order for such
managers to exercise these functions, it is necessary that a very
broad set of discretionary powers be conferred upon them. In
some jurisdictions this is done through the companies legislation
itself, but in the UK this result is achieved by the practice of
including provisions in the company’s articles of association
giving the board of directors extensive power to manage the
company’s business and to exercise the company’s powers.
Thus arises the central issue of the corporate governance
debate, which is the accountability of the senior management of
the company for the extensive powers vested in them. Since the
historical development was, or is perceived to have been, one of
a movement from a situation in which shareholders were both
investors and managers to one in which management became a
separate function from that of investment, it is natural to think of
the accountability issue as being one of the accountability of the
managers to the shareholders. This is the tradition in British
company law, tempered only by the qualification, which we
noted at several points in Pt 2 and will see again in Pt 3, that, as
the company nears insolvency, accountability to the creditors is
as important as, and even replaces, accountability to the
shareholders. However, the separation out of management as a
distinct function creates the possibility of imposing lines of
accountability on management towards other groups who have a
long-term interest in the company (usually referred to as
“stakeholders”). One group of such stakeholders, the employees,
has become the beneficiary of the accountability rules of
corporate law (mainly through board representation) in about
half of the Member States of the EU.5 Though once proposed by
an official committee for the UK,6 board representation is not an
idea which has taken root within British company law, though
traces of it can be found. In its detailed examination of company
law, the Company Law Review did not find sufficient support
for the stakeholder model to justify a major shift in the
accountability rules,7 and so it concentrated its efforts on
promoting a modernised and inclusive version of the tradition of
accountability to shareholders.8 That “enlightened shareholder
value” approach found its way into the Companies Act 2006.
Some (“managerialists”) have even gone so far as to argue
that elaborate accountability structures are not necessary because
management will function so as to adjudicate neutrally and
impartially among the competing claims of the various
stakeholder groups on the company. This vision, however,
ignores the fact that management itself is an important
stakeholder group and it is difficult to see why, in the absence of
accountability rules, managers would not give in to the
temptation to overvalue their own claims on the company and
undervalue those of other groups, for example, in the setting of
their own remuneration. However, the managerialists make a
better point when they argue that the accountability rules will be
self-defeating if they operate so as to prevent or discourage
managers from discharging effectively the tasks which the
institution of centralised management entrusts to them. In other
words, the accountability rules, no matter to whom the
accountability lies, must not be so restrictive as to stifle the
entrepreneurial talents of the managers, which talents constitute
the rationale for conferring the wide discretion upon them in the
first place.
Since the emergence of specialised management is not a
phenomenon of just the last 20 years—large companies with
such managements can be traced back at least as far as the late
nineteenth century—it is not surprising that company law has
always contained some mechanisms whereby the accountability
issue can be addressed. The very requirement that a company
appoint directors9 provides a rudimentary mechanism for
accountability. Unlike a partnership, where all the partners are
prima facie entitled to participate in the management of the
partnership,10 in a company the requirement for directors
presupposes that directors will play an important role, at least in
large companies. In short, the default rule in partnerships is
management by the partners; in companies, it is management by
the directors. However, since British company law, unlike the
corporate governance codes, says little or nothing about the
structure and composition of the board of directors, the board’s
position in company law is deeply ambiguous. The board is the
point of contact between the shareholders as a group and the
senior management of the company, but whether, in any
particular company or in companies generally, it acts
predominantly as a monitor of the management on behalf of the
shareholders or mechanism through which the managers
promote their control of the company is a matter for empirical
investigation—and the situation may vary from company to
company and from time to time. As we shall see in the following
chapter, in order to reduce the likelihood of boards acting purely
as instruments of management domination, modern corporate
governance codes have been concerned to restrict the proportion
of board seats held by the managers of the company by requiring
the presence of a proportion of “non-executive” directors on the
board.
Despite the ambiguous role of the board, it constitutes a
convenient focus for the legislature and the courts when
developing rules to constrain the exercise by management of the
discretion vested in them. Whether the board monitors
management or does the managing itself (or does a bit of each),
imposition of accountability rules on the board should have an
impact, directly or indirectly, on the way the management
function is discharged. The underlying aim of the law may be
control of the management function, but the subjects of the legal
rules are the directors. The issue of how far those controls extend
to managers who are not directors is, as we shall see,
controversial. By the same token, when the articles delegate a
wide discretion from the shareholders, they do so by conferring
power, not on the company’s managers as such, but on the board
of directors. The rules conferring the powers and the rules
constraining the exercise of the powers focus on the board rather
than on the senior management as a whole. Thus, although the
corporate governance debate starts from the functional
differentiation between investment and management, company
law operates by regulating the actions, not of managers in
general, but of the board of directors.
In this Part we look at three sets of rules which the courts, the
legislature and business bodies have created to constrain the
exercise by directors individually and the board collectively of
the discretion vested in them. The first set concerns the extent to
which the shareholders have the power to appoint or, more
importantly, remove the directors of the company. How easy is
it, for example, for the shareholders to remove directors who
exercise their powers in a way of which the shareholders
disapprove? The second concerns the structure and composition
of the board of directors, matters upon which the Companies
Acts and the common law have traditionally had little to say, but
which are a central focus for the corporate governance codes.
Should the board be structured in such a way as to facilitate
control over the managers of the company by the board? Thirdly,
we consider a set of rules which the common law and the
legislature have spent much effort in elaborating, from the very
beginnings of modern company law in the first half of the
nineteenth century. This is the law of “directors’ duties” and, as
important, the law relating to the enforcement of those duties.
These duties operate directly upon the directors so as to control
the ways in which they exercise their discretion. When these
duties are breached, the decision which the directors have taken
may be ineffective or at least capable of being set aside, or the
director may have to compensate the company for any harm it
has suffered, or account to the company for profits made from
the breach of duty, or some other remedy may be available.
Although the rules discussed in this Part are a central part of
company law and the subject of public controversy, it is
important to stress that the problem they aim to deal with is
premised upon a distinction between those who are shareholders
in the company and those who are its directors. In the case of
economically small companies—being the majority of
companies on the register—this situation does not obtain
because the shareholders and the directors are the same people.
For such companies, the rules analysed in this Part are of less
significance. It would be wrong to say that they are of no
significance, because those who are the owner/controllers of a
small company may fall out with one another and one faction
may be tempted to act in a way which is in breach of their duties
as directors, for example, by diverting corporate opportunities
away from the jointly-owned company to another controlled
wholly by themselves. However, even when there is a falling out
among the owner-controllers, the situation is probably better
analysed as a conflict between one group of
shareholder/directors and another group, rather than a conflict
between shareholders on the one hand and directors on the other.
We discuss this issue further in Pt 4 of the book.
Finally, even when one is dealing with an economically large
company with shareholders who are distinct from the managers,
the complexity of the problems thrown up by the
shareholder/director relationship depends significantly upon the
structure of the company’s shareholdings, in particular on
whether they are concentrated or dispersed. Where there is
concentrated shareholding (for example, one shareholder who
holds a block of shares which gives him or her de facto control
of the company), there will normally be little difficulty in that
shareholder ensuring that the directors do as the shareholder
wishes. The more problematic issue is likely to be whether the
controlling shareholder takes appropriate account of the interests
of the non-controlling shareholders. In this case, again, the
potential conflict is one between controlling and non-controlling
shareholders rather than between shareholders and directors,
although again some aspects of directors’ duties, for example,
those concerning related-party transactions, may be relevant
here. However, block-holder control of economically large
companies is relatively uncommon in the UK, where a more
dispersed pattern of shareholding still prevails, notwithstanding
the increasing power of institutional investors. Consequently, the
issue of shareholder and director relationships is a crucial one.
1It is too vast to cite, but for a representative sample of this work at its highest level see
K.J. Hopt et al. (eds), Comparative Corporate Governance (Oxford: Clarendon Press,
1998); K.J. Hopt et al. (eds), Corporate Governance in Context (Oxford: OUP, 2005).
And placing this endeavor in context, see B.R. Cheffins, “The History of Corporate
Governance” in M. Wright et al. (eds), The Oxford Handbook of Corporate Governance
(Oxford: OUP, 2013), 46; and “The Rise of Corporate Governance in the U.K.: When
and Why” (2015) C.L.P. 387.
2Report of the Committee on the Financial Aspects of Corporate Governance (1992).
See further below, paras 14–69 et seq.
3Such codes have become a standard feature in continental Europe: see Weil, Gotshal
and Manges (on behalf of the European Commission), Comparative Study of Corporate
Governance Codes Relevant to the European Union and its Members (January 2002).
For an index of codes, see http://www.ecgi.org/codes/all_codes.php [Accessed 23 April
2016].
4 See the BIS consultation, A Long Term Focus for Corporate Britain (2010)
http://www.bis.gov.uk/Consultations/a-long-term-focus-for-corporate-britain [Accessed
23 April 2016], and subsequent outcomes discussed below. Indeed, best practice now
extends to shareholder intervention, especially for institutional shareholders: see FRC,
The UK Stewardship Code (2012) https://www.frc.org.uk/Our-
Work/Publications/Corporate-Governance/UK-Stewardship-Code-September-2012.pdf
[Accessed 23 April 2016], below at para.15–30. For a list of all present and past
consultations on the topic of corporate governance, see
https://www.gov.uk/government/policies/corporate-governance [Accessed 23 April
2016].
5
Final Report on the Group of Experts on European Systems of Worker Involvement
(Davignon Report), Brussels, 1997, Table I. The split seems to have remained largely
the same even after the enlargement of the Community: N. Kluge and M. Stollt, Board-
level Representation in the EU-25 (Brussels, European Trade Union Institute, 2004).
The proportion of countries with board level employee-representation is greater if those
with representation only in public sector companies are taken into account.
6
Report of the Committee of Inquiry on Industrial Democracy, Cmnd. 6706 (1975) (the
“Bullock Report”).
7
Strategic, Ch.5.1; Developing, Ch.2.
8
Final Report, Ch.3. For what this might entail, see paras 16–37 et seq., below.
9
2006 Act s.154 (at least two for public companies and one for private companies).
10 Partnership Act 1890 s.24(5); LLP Regulations 2001 reg.7(3). However, the partners
are free to create, by agreement, delegation structures akin to those found in companies,
and in large partnerships normally do so.
CHAPTER 14
THE BOARD
The Role of the Board 14–1

The default provision in the model articles 14–3
The power of the board—the legal effect of the
articles 14–5
Default and confirmation powers of the general
meeting 14–11
The mandatory involvement of shareholders in
corporate decisions 14–18
The mandatory functions of the directors 14–21
Appointment of Directors 14–23
Remuneration of Directors 14–30
Composition of the remuneration committee 14–33
Mandatory shareholder approval of certain aspects
of the remuneration package 14–34
Mandatory and advisory shareholder votes on
remuneration policy and implementation 14–38
General disclosure: the directors’ remuneration
report 14–44
Removal of Directors 14–48
Shareholders’ statutory termination rights 14–49
Control of termination payments 14–56
Structure and Composition of the Board 14–63
Legal rules on board structure 14–64
Legal rules on board composition 14–67
The requirements of the UK Corporate
Governance Code 14–75
Enforcement of the UK Corporate Governance Code 14–77
Conclusion 14–81
THE ROLE OF THE BOARD

14–1
The board of directors is the most important decision-making
body within the company. The first Principle of the UK
Corporate Governance Code1 states: “Every company should be
headed by an effective board, which is collectively responsible
for the success of the company”, The Supporting Principles to
this main principle add the following explanation about the role
of the board:
“The board should set the company’s strategic aims, ensure that the necessary
financial and human resources are in place for the company to meet its objectives
and review management performance. The board should set the company’s values
and standards and ensure that its obligations to its shareholders and others are
understood and met.”
Even after making allowances for the fact that the UK Corporate
Governance Code applies formally only to companies with a
Premium Listing of equity shares on the London Stock
Exchange,2 and that in small companies things may appear very
differently, this is a formidable specification for the board’s role.
14–2
However, it would be difficult to glean any similar
understanding of the importance of the board from a reading of
the Companies Act. Although s.154 requires all public
companies to have two directors and private companies one,3 it
leaves the determination of the role of the board very largely to
the company’s constitution, which is, of course, under the
control of the shareholders. Unlike in many, perhaps most, other
jurisdictions, the division of powers as between board and the
shareholders is a matter for private ordering by the members of
the company rather than something to be specified mandatorily
in the companies legislation. This may reflect the partnership
origins of British company law (under partnership law the
partners are given a very broad freedom to arrange the internal
affairs of the partnership as they wish) and it certainly facilitates
the use of a single Act to regulate all manner and sizes of
company. Jurisdictions which specify the role of the board for
large companies in legislation often have a separate statute for
smaller companies which gives the members in the latter class of
company a freedom nearer to that enjoyed by the members of a
British company.4 It is also a point of some theoretical (even
ideological) importance: the directors’ authority is derived from
the shareholders through a process of delegation via the articles
and not from a separate and free-standing grant of authority from
the State. This helps to underline the shareholder-centred nature
of British company law.
The default provision in the model articles
14–3
Since the division of powers between board and shareholders is a
matter for the articles (subject to a limited range of matters
where the statute requires the participation of the shareholders in
the decisions, discussed below), it is difficult to generalise about
the patterns of division found in practice. However, some limited
help can be gained from the model sets of articles which apply
unless excluded by the incorporators in a particular case.5 For
both public and private companies, the default provision is the
same, and it is one which gives substantial authority to the
board: “Subject to the articles, the directors are responsible for
the management of the company’s business, for which purpose
they may exercise all the powers of the company”.6 This follows
quite closely the provision found in earlier sets of model articles.
It is perhaps surprising that the model article for public
companies refers to “management” quite generally, since it is
clear that, in a large company, the totality of its management is
something quite beyond the grasp of even the most talented set
of directors. The provision of the UK Corporate Governance
Code, quoted above, is more realistic for large companies when
it gives the board the functions of setting the corporate strategy
and reviewing management performance, thus indicating that the
task of executive management is otherwise not for it but rather
for the full-time senior employees of the company. This
approach causes no formal difficulty for the model set of
articles, since the model gives the board a wide power of
delegation of the powers conferred upon them by the articles “to
such person to such an extent and on such terms and conditions
as they think fit”.7 Thus, delegation of powers by the board to
the senior management of the company is provided for in the
model articles. The point rather is that the strategy followed in
the model set of articles for public companies of a broad grant of
management power to the board which is then permitted a wide
power of delegation does not tell one what pattern of division of
function is in fact adopted in large companies between the board
and senior (and, indeed, other) management.8 On that, the UK
Corporate Governance Code may be a better guide.
14–4
Turning to private companies, here discharge of the full
management function by the board is often in fact possible, but it
is equally possible in small companies for the shareholders to
play a larger role in decision-making than in large companies.
Often in such companies important shareholders who are not
also directors will expect to have such a role. In quasi-
partnership companies in particular the incorporators may wish
to reproduce the rule which would apply if the entity were a
partnership rather than a company. This rule is that “any
differences arising as to ordinary matters connected with the
partnership business may be decided by a majority of the
partners, but no change may be made in the nature of the
partnership business without the consent of all existing
partners”.9 Such a desire again creates no formal problem for the
model articles, since the grant of management authority to the
board is “subject to the articles”. It is thus possible for the
articles to provide that certain types of decision shall either not
be given to the board at all or shall be subject to the
shareholders’ consent (even though such consent is not required
by the Act). Again, however, the model articles provide no hint
as to the ways in which or the extent to which this power is in
fact used in small companies to move away from the default
rule.
Thus, in both public and private companies (though for
different reasons) the model articles provide only a starting point
in determining the role of the board which may be modified
substantially through either board decisions to delegate authority
to management (in public companies) or modifications of the
articles in the case of private companies so as to confer decision-
making authority on the shareholders. One may wonder how
useful such a default provision is, but the truth is that the
variations from the default are so many and so varied (depending
on the circumstances of the particular company) that it is
impossible to identify a better default provision.
The power of the board—the legal effect of the
articles
The board and shareholders
14–5
It is not possible to make general statements about the typical
division of authority between shareholders and the board and
management, because that is, in the main, open to being tailored
to suit the individual company in question. But it is possible,
nevertheless, to analyse the legal effect of the articles. That has
changed over time, with an evolution in the answer being given
to the key question of whether the effect of the delegation of
authority in the articles to the directors was simply to confer
authority on the directors or also, at the same time, to restrict the
authority of the shareholders in general meeting to take decisions
in the delegated area. Was the relationship between company
and shareholders simply one of principal and agent10 or did the
articles effect something in the nature of a constitutional division
of powers as between the shareholders in general meeting and
the board? At one level, this was simply a matter of choosing the
appropriate default rule. A principal conferring authority on an
agent does not normally restrict its own authority to act, but
there is no reason why the principal should not contract on the
basis that the agent has authority to the exclusion of the
principal. Equally, a constitution normally divides up authority
among the various relevant bodies, but there is no legal reason
why a constitution should not confer concurrent competence on
two or more bodies. However, the choice between these two
legal analyses did affect very strongly the way in which the
courts approached the interpretation of provisions in the articles
of particular companies.
14–6
Until the end of the nineteenth century, it was generally assumed
that the general meeting was the supreme organ of the company
and the board of directors was merely an agent of the company
subject to the control of the company in general meeting. It
followed that the shareholders could at any time by ordinary
resolution give the directors binding instructions as to how they
were to exercise their management powers. Thus, in Isle of
Wight Railway v Tahourdin,11 the court refused the directors of a
statutory company an injunction to restrain the holding of a
general meeting, one purpose of which was to appoint a
committee to reorganise the management of the company.
In 1906, however, the Court of Appeal in Automatic Self-
Cleansing Filter Syndicate Co v Cuninghame,12 made it clear
that in registered companies the division of powers between the
board and the company in general meeting depended entirely on
the construction of the articles of association and that, where
powers had been vested in the board, the general meeting could
not interfere with their exercise. The articles were held to
constitute a contract by which the members had agreed that “the
directors and the directors alone shall manage”.13 Hence the
directors were entitled to refuse to carry out a sale agreement
adopted by ordinary resolution in general meeting where that
decision fell within the management powers conferred upon the
board. Tahourdin’s case was distinguished on the ground that the
wording of s.90 of the Companies Clauses Act 1845 was
different—though that section does not in fact seem to have been
relied on in the earlier case.
The new approach did not secure immediate acceptance,14 but
since Quin & Axtens v Salmon15 it has been generally accepted
that where the relevant articles are in the normal form, as
exemplified by successive model sets of articles, the general
meeting cannot interfere with a decision of the directors unless
they are acting contrary to the provisions of the Act or the
articles.16
In Shaw & Sons (Salford) Ltd v Shaw,17 in which a resolution
of the general meeting disapproving the commencement of an
action by the directors was held to be a nullity, the modern
doctrine was expressed by Greer LJ as follows18:
“A company is an entity distinct alike from its shareholders and its directors. Some
of its powers may, according to its articles, be exercised by directors, certain other
powers may be reserved for the shareholders in general meeting. If powers of
management are vested in the directors, they and they alone can exercise these
powers. The only way in which the general body of the shareholders can control the
exercise of the powers vested by the articles in the directors is by altering their
articles, or, if opportunity arises under the articles, by refusing to re-elect the
directors of whose actions they disapprove.19 They cannot themselves usurp the
powers which by the articles are vested in the directors any more than the directors
can usurp the powers vested by the articles in the general body of shareholders.”
And, in Scott v Scott20 it was held, on the same grounds, that

resolutions of a general meeting, which might be interpreted
either as directions to pay an interim dividend or as instructions
to make loans, were nullities. In either event the relevant powers
had been delegated to the directors, and until those powers were
taken away by an amendment of the articles the members in
general meeting could not interfere with their exercise. As Lord
Clauson21 rightly said, “the professional view as to the control of
the company in general meeting over the actions of directors has,
over a period of years, undoubtedly varied”.22
14–7
From 1985 onwards the model set of articles sought to make the
position clear, for those companies adopting them, on the lines
indicated in the above cases. Thus, in the current model sets of
articles for both private and public companies, the grant of
authority to the board is qualified by the phrase “subject to the
articles” and there is now a specific article dealing with the
“members’ reserve power”.23 This makes it clear that the
members may by special resolution (i.e. as would be needed to
change the articles) instruct the directors “to take, or refrain from
taking, specified action”. By implication, any instruction given
by the shareholders by ordinary majority to the board within the
area of authority delegated to the directors is not binding on the
directors.
14–8
To some considerable extent, however, this development of the
case law has been overtaken by a change made to the statute in
1948 when the power, presently in s.168, was introduced, giving
the shareholders the ability to remove directors at any time by
ordinary resolution (as discussed below). Thus, at the very
moment when the new interpretation became fully accepted in
the case law, the legislature changed the rules so as to give
shareholders a removal power exercisable by ordinary majority.
Although a removal power is different from a power to give
instructions, the two overlap to a considerable extent, for the
disgruntled shareholders can say, in effect, to the directors: if
you choose not to follow our views, we will by ordinary majority
seek to remove you from office. That can be a powerful
inducement to the directors to follow the line of action preferred
by the shareholders.
The board and senior management
14–9
The directors’ power of delegation to senior management has not
given rise to any equivalent debate as to its legal effects. This
has a number of explanations. Partly it is because that power of
delegation is broadly drafted (see above) and includes an express
power to “revoke any delegation in whole or part, or alter its
terms and conditions”. As well, managers, unlike shareholders,
have no formal place in the company’s legal structure.24 Finally,
the initial division of power is not set out in the articles, so any
subsequent alteration does not require an alteration of the
articles; rather, when delegating, the board exercises a power
conferred upon it by the articles, and in practice powers will be
delegated on the basis that the delegation continues only at the
pleasure of the board. The board can normally revoke its grant of
authority as readily as it made it. However, although alteration or
revocation of authority by the board may be effective, as we
shall see below it may also constitute a breach (perhaps even a
de facto termination) of the service contract entered into by the
company with the manager, giving rise to claims for
compensation on the part of the manager against the company,
sometimes of a substantial character.
14–10
Nevertheless, in practice such delegation is of enormous
importance in large companies. In particular, there is normally a
very large grant of managerial power to the most senior of the
company’s managers, who will invariably be a member of the
board of directors as well. Such a person was traditionally
known in British parlance as the “managing director” but now
more often, following US terminology, as the “chief executive
officer” (“CEO”), is the driving force behind the formulation and
implementation of the company’s strategy. Of increasing
importance as well is the “chief financial officer” (“CFO”). As
we shall see below, the major motivation behind the
development of the UK Corporate Governance Code was the
desire to place the CEO within a framework of accountability to
the board, a problem created, but not solved, by use of the
extensive delegation power contained in the articles.
Default and confirmation powers of the general
meeting
14–11
Despite what has been said above about the powers of the board
and their impact on the powers of the shareholders, it seems that,
if for some reason the board cannot exercise the powers vested
in them, the general meeting may do so. On this ground, action
by the general meeting has been held effective where there was a
deadlock on the board25; where there were no directors26; where
an effective quorum could not be obtained27; or the directors
were disqualified from voting.28 These exceptions are
convenient, but difficult to reconcile in principle with the strict
theory of a division of powers. Their exact limits are not entirely
clear. However, there seems good sense in the proposition that
the shareholders may take the substantive decision only where
the articles do not give them some effective way of
reconstituting the board so as to remove the impediment to board
decision-making.29
14–12
In addition, if the directors have purported to exercise powers
reserved to the company in general meeting, their action can be
effectively ratified by the company in general meeting. And for
the purpose of ratifying past actions of the board, as opposed to
conferring powers on the board for the future, it is not necessary
to pass a special resolution altering the article; normally an
ordinary resolution will suffice.30
14–13
Finally, it is generally assumed that it is perfectly in order for the
board of directors, if it so wishes, to refer any matter to the
general meeting either to ratify what the board has done or to
enable a general meeting to decide on action to be taken. It is
quite clear, as was affirmed by the Court of Appeal in Bamford v
Bamford,31 that an act of the directors which is voidable because,
for example, it is in breach of their fiduciary duties, can be
ratified by the company in general meeting if (and all the
conditions are important) the act is within the powers of the
company and the meeting acts with full knowledge and without
oppression of the minority. It is, perhaps, less clear whether the
board, without taking a decision on a matter within its powers,
can initially refer it to the general meeting for a decision there.
In an elaborate discussion at first instance in the Bamford case,32
Plowman J had held that the general meeting then had power to
act under residual powers, but he suggested that this might
depend on the terms of the articles of the company concerned.
The Court of Appeal considered that this question was irrelevant
to the issue before them and expressed no view on it. It seems
absurd if the directors are forced to take a decision and then to
ask the general meeting to whitewash them, but perhaps the
safest course is for them to resolve on action “subject to
ratification by the company in general meeting”. Alternatively,
asking the general meeting to decide might be regarded as a
delegation by the board of their powers on the particular issue
(back) to the shareholders.
14–14
In short, the shareholders have power to act, despite provisions
in the articles apparently conferring exclusive authority on the
directors: they can take, or participate in the taking of, a
corporate decision if the board is unable to exercise its powers, if
the board’s decision is in some way defective or, perhaps, if they
are invited by the board to participate in the decision.
Unanimous consent of the shareholders
14–15
Established case law indicates that the shareholders may bind the
company by unanimous agreement—“unanimous” here meaning
all the shareholders entitled to vote, not just all those who turn
up at a meeting. The main function of this common law rule,
which is discussed below,33 is to permit shareholders in small
companies to take the decisions allocated to them without the
need to hold a meeting (for example, by circulating a resolution,
to which they individually indicate their consent) or without
observing all the formalities (for example, as to notice) which
shareholder meetings entail, though this common-law facility
has now been overtaken in the normal case by more extensive
statutory provisions.
14–16
However, there are also dicta in the cases which suggest that the
unanimous consent of the shareholders binds the company, even
on matters which the constitution allocates to the board.34
Nevertheless, none of the decided cases clearly present the
situation of the shareholders unanimously taking a decision
which had been allocated by the constitution to the board. The
nearest case is Re Express Engineering Works Ltd,35 where the
decision in question was the purchase of certain property and
thus would clearly have fallen within the clause conferring
general management powers on the board, but in fact all the
directors were disqualified from acting on the purchase, and so
the shareholders could be said to have had default powers to take
this decision, under the principle discussed above.
The Company Law Review proposed that the unanimous
consent rule should be codified and that this should be done on
the basis that “the members of the company may, by unanimous
agreement, bind or empower the company, regardless of any
limitation in its constitution”.36 However, the Government
decided against codification, though the new companies
legislation preserves the common law rule,37 so that it appears
that the question of whether the unanimous consent rule operates
within or outside the constitutional division of powers produced
by the articles will be left for the courts to decide.38
14–17
As to the merits of allowing the shareholders unanimously to
depart from the constitution, the requirement of unanimity
means that there is no issue of the protection of minority
shareholders, which was one of the factors which weighed with
the courts when they introduced the doctrine that shareholders,
by ordinary resolution, could not give directors instructions on
matters within their competence. Allowing unanimous
shareholder consent to override the articles would further
emphasise the primacy of shareholders as against the directors.
Shareholders would be able to tell the directors what to do, even
within the area of competence granted by the articles to the
board, provided only they acted unanimously. As against this,
however, even if it is conceded that the shareholders acting
unanimously are competent to act, the shareholders are not
subject to the same duties as directors, so the risk is then that
stakeholders other than the shareholders, perhaps especially the
creditors, will not be protected from adverse corporate decisions
in the same way that they are when those decisions are taken by
the board. Of course, since the shareholders have statutory
power to dismiss directors, as discussed below, this theoretical
conflict seems quite unlikely to emerge in practice.
The mandatory involvement of shareholders in
corporate decisions
14–18
Despite the flexibility which British company law gives the
company to divide decision-making powers between
shareholders and the board, there are a number of situations
where the legislation requires shareholder approval of the
board’s decision (and sometimes even permits the shareholders
to initiate a decision). The main category of such cases is where
decision is likely to have an impact upon the shareholders’ legal
or contractual rights, even if the practical impact of that change
on the member in a particular case is small (as with many
changes to the articles). Without giving an exhaustive list of
such situations, the following can be said to constitute the main
examples of this policy:
• alterations to the company’s articles39;
• alteration of the type of company, for example, from public
to private or vice versa40;
• decisions to issue shares41 or to disapply pre-emption rights
on issuance42;
• decisions to reduce share capital, re-purchase shares; redeem
or re-purchase shares out of capital in the case of private
companies or give financial assistance in the case of private
companies43;
• alterations to the class rights attached to shares44;
• adoption of schemes of arrangement45;
• decisions to wind the company up voluntarily.46
All these provisions place limits on the extent to which the
articles may authorise the board to proceed solely on its own
initiative. They probably reflect the view that shareholder
interests are potentially involved in such decisions, that
shareholders are probably as well-equipped to take the decisions
as the board, and that they are not decisions which occur
frequently in the life of the company, but, beyond that, the
provisions do not contribute directly to the development of good
corporate governance.
14–19
There are, however, four further cases where contributing
directly to good corporate governance underpins the requirement
of shareholder approval of:
• the appointment of the company’s auditors47;
• certain transactions entered into by directors or their
associates with their company48;
• ratification of the taking by directors of corporate
opportunities49;
• defensive measures to be taken once a takeover offer is
imminent—a requirement contained in the rules of the City
Code on Takeovers and Mergers, with those rules now
having statutory force.50
The first of these requirements is designed to promote the
independence of the company’s auditors from its management
(though it is far from clear that it always successful in doing so)
and the others deal with conflicts of interest between the director
and his or her company.
14–20
Finally, the Listing Rules, which apply to Premium Listed
companies quoted on the London Stock Exchange, introduce a
third basis for shareholder approval, namely the size of the
transaction. Under those Rules, significant transactions (both
acquisitions and disposals) which meet the test of being either
“Class 1” transactions or “reverse takeovers” require shareholder
approval. In brief, the Class 1 criteria are met if any one of four
financial ratios which compare the size of the transaction with
the size of the company is 25 per cent or more; and an
acquisition is a reverse takeover if any of the ratios is 100 per
cent or more, or if the transaction would result in a fundamental
change in the company’s business, board composition or voting
control. The financial ratios relate to the company’s gross assets,
profits, consideration and gross capital.51 The thought behind the
provisions seems to be that a big transaction is as much like an
investment decision as a management decision, and so the
shareholders are to be involved in the taking of the decision,
along with the management. This ground for insisting on
shareholder involvement in a decision has no counterpart in the
Act.
The mandatory functions of the directors
14–21
Just as the Act requires shareholders to be involved in some
corporate decisions, so, scattered throughout the Act, are
functions which are imposed on the directors of companies and
which therefore may not be given to the shareholders. It would
be too tedious to list them all. What needs to be noted, however,
is that they relate to two main areas of corporate life, the
production of the annual accounts and reports and the regular
administration of the company, in particular its communications
with Companies House. Thus, the directors are under a duty to
prepare accounts and reports each year; having done that, to
approve them and to send copies to the Registrar; and, in most
cases, to lay them before the shareholders in general meeting.52
What these statutory provisions do not purport to do is to
stipulate the division of decision-making about the company’s
business activities as between the shareholders in general
meeting, the board and the management. That is left for
stipulation in or under the company’s constitution. The statutory
provisions relate essentially to the administrative obligations of
the company.
14–22
One further point should be made about these obligations. In
many cases, the obligation is laid not only on the director, but
upon any “officer” of the company, and the sanction for non-
compliance, normally a minor criminal sanction, is laid on any
“officer who is in default”. Examples are where the company
fails to carry out its third task with respect to the annual
accounts, i.e. fails to send a copy to every shareholder,53 or
where the company fails to keep an accurate record of its
members.54 The Act defines “officer”55 as including “a director,
manager or secretary” and now goes on to add “any person who
is to be treated as an officer of the company for the purposes of
the provision in question”. These are thus cases where the Act
imposes liabilities on sub-board managers. This is sensible in
principle, given that such administrative tasks are likely to be
delegated to levels of management below the board.56 The CLR
recommended that the definition of manager should be restricted
normally to a person who “under the immediate authority of a
director or secretary is charged with managerial functions which
include the relevant function”57 but this limitation has not been
adopted. The CLR also recommended that, for all those covered
by the definition of officer, i.e. including directors, default
should be taken to have occurred only where the person had
authorised, actively participated in, knowingly permitted or
knowingly failed to take active steps to prevent the action in
question, and this recommendation is reflected in the Act.58
APPOINTMENT OF DIRECTORS
14–23
The Act itself says little about the means of appointing the
directors, leaving this to the articles of association. Its main
concern is to give publicity to those who are appointed rather
than to regulate the appointment process. On initial registration,
the company must send to the Registrar of Companies
particulars of the first directors59 and a statement that they have
consented to act. Thereafter the company must send particulars
of any changes, with corresponding statements that any new
directors consent to act.60 The company must also maintain a
register giving particulars of its directors.61 Both registers are
open to inspection by members of the public and so the public
can obtain information about who the directors are either from
Companies House or from the company’s registered office. This
is a crucial provision, enabling people to know who controls
what might otherwise appear to be faceless companies and
facilitating the enforcement of the obligations to which directors
are subject, whether by creditors, the public authorities or others.
However, as a result of the threats, or actual infliction, of
violence by protestors on the persons or property of the directors
of companies carrying on lawful activities to which the
protestors objected, the scope of the information on the public
registers has been reduced. No longer does the company’s public
register have to contain the director’s usual residential address
but only a service address (which might be the company’s
registered address), though the company must maintain a register
of the directors’ residential addresses which is not open to public
inspection. Moreover, the company is prohibited from
disclosing, except in limited circumstances, the residential
address of a director or former director.62 Equally, whilst the
company must give to the Registrar the information which is
contained in both its public and non-public registers, the
Registrar must omit this “protected information” from the
Registrar’s public register and not otherwise disclose it, except
in limited circumstances.63
14–24
As far as appointment is concerned, and contrary to popular
belief, the Act requires neither that directors be elected by the
shareholders in general meeting nor that they submit themselves
periodically to re-election by the shareholders. This may often be
the case, though it is far from universal practice, but, if it is, it is
a consequence of the provisions of the company’s articles, not of
the Act’s requirements. Equally, there is nothing to prevent
articles providing that directors can be appointed by a particular
class of shareholders, rather than the shareholders as a whole, by
debenture holders or, indeed by third parties. In the case of
community interest companies s.45 of the Companies (Audit,
Investigations and Community Enterprise) Act 2004 explicitly
empowers the Regulator of CICs to appoint a director of a CIC
and for that person not to be removable by the company. In fact,
the articles of public companies normally provide for retirement
of board members by rotation on a three-year cycle and for the
filling of the vacancies at each annual general meeting.64
14–25
The Act provides that each appointment in a public company
shall be voted on individually65 unless the meetings shall agree
nem. con. that two or more shall be included in a single
resolution. However, there are often provisions in the company’s
articles (as to notice to be given by shareholders to the company
of their proposed candidates, etc.) which make it difficult for
shareholders, if they are so minded, to put up candidates against
the board’s nominees. So, the crucial decisions for the
shareholders in public companies are normally whether to accept
the board’s nominees for election at the annual general meeting
and whether subsequently to exercise their removal rights, as
discussed below.
14–26
Unless the articles so provide, directors need not be members of
the company. At one time it was customary so to provide,66 but
now the possibility of a complete separation of shareholders and
directors is recognised and the model articles no longer provide
for a share qualification. Of course, it is common for directors of
public companies to become shareholders, often in a major way,
under a share-option or other incentive scheme (discussed
below), but even in these cases being a shareholder is not a
formal condition of being a director.
14–27
As to age requirements, the law has undergone a complete
reversal in recent years. The Cohen Committee tried to ensure
that directors should normally retire when they attained the age
of 70,67 but as finally enacted this provision was so riddled with
exceptions that it proved to have little impact. It no longer
appears in the Companies Act, as recommended by the CLR.68
However, the 2006 Act introduced a minimum age requirement
of 16, apparently because of evidence that appointment of young
directors was being used in order to exploit their immunity from
prosecution or the unwillingness of public authorities to
prosecute young persons.69 Any such appointment is void,
though the person appointed remains subject to the duties of
directors under the Act.70 This may mean that the company will
no longer be in compliance with the requirements as to the
minimum number of directors and thus be open to a direction
from the Secretary of State as to the action it must take to
remedy this situation.71 However, the Secretary of State has
power to make regulations permitting the appointment of classes
of person under the age of 16, which regulations may make
different provisions for different parts of the UK.72 Other than
this, no positive qualifications are required of directors—though,
as we saw in Ch.10, they may be disqualified on the ground of
misconduct or unfitness.
14–28
Sometimes the articles entitle a director to appoint an alternate
director to act for him at any board meeting that he is unable to
attend. The extent of the alternate’s powers and the answer to
such questions as whether he is entitled to remuneration from the
company or from the director appointing him will then depend
on the terms of the relevant article.73
14–29
Finally, it should be noted that not everyone who is a called a
director is a director in the terms of the Act and some people
who are not called directors are directors in terms of the Act.
The law does nothing to control the growing and potentially
misleading practice of giving employees the title of director,
even though they perform none of the central management
functions of a director and are thus not directors under the Act.
On the other hand, a person who is a director, as meant by the
Act, need not be so called, for the term director, as used in the
legislation, includes any person occupying the position of
director, by whatever name called,74 and directors of some
guarantee companies are still called “governors” or the like.
REMUNERATION OF DIRECTORS
14–30
The remuneration of directors comes from two sources: fees paid
to them for acting as directors and, in the case of executive
directors, money and other benefits receivable under the service
contract entered into by them as managers with the company.
The latter is by far the greater source of income of the executive
directors of companies, especially of large companies, and it has
been and continues to be a source of controversy and increasing
regulatory and indeed legislative action in recent years.75
Reflecting the trust origins of the company, a director is not
entitled to a fee for acting as such, unless the articles or a
resolution of the company makes provision for such payments,
as they invariably will. By contrast, a person who provides
additional services as a manager to the company, even if also a
director, is entitled to reasonable remuneration on a quantum
meruit basis for services actually accepted by the company, even
in the absence of a contract, although the two situations may not
be easy to distinguish.76 In practice, these difficulties rarely arise,
since the company will have express power under its articles to
remunerate directors and employ managers and an explicit
contract is made in both cases.
14–31
In either case, a director dealing with the company as to fees and
remuneration is in a stark position of conflict of interest, and the
traditional common law rule in such a case was that the sanction
of the shareholders was needed for the agreement between
director and company.77 However, directors found this rule
inconvenient and, for more than a century, it has been common
to provide in the articles that the board shall have power to set
directors’ remuneration as executives, though the director whose
remuneration is at issue is not usually permitted to vote on the
matter.78 The current model article applies this rule also to
directors’ fees, even though under the 1985 model articles the
default rule was that fees required shareholder approval.79
14–32
Setting remuneration in this way is a classic case where the risk
of “mutual back scratching” arises: directors may not scrutinise
too closely the remuneration of a fellow director in the
expectation of similar treatment in return when their cases are
considered. The increase in the levels of executive remuneration
has been a matter of considerable public controversy in recent
years, not simply because of the growing gap between executive
salaries and the average incomes of others in society, but also
because of the unsatisfactory negotiating process through which
executive salaries are set under the typical form of articles. If
directors, directly or indirectly, sit on both sides of the table
when their remuneration is determined, then the results cannot
be justified as emerging from a market process. Since this defect
may characterise pay-setting in most companies with large
shareholder bodies, it amounts to an example of a market failure,
which justifies regulatory intervention.
What sort of regulation, however, should be adopted? The
courts have been unwilling to scrutinise directors’ remuneration
decisions on grounds of excess or waste, refusing even to
prescribe that pay must be set by reference to market rates,
provided the decision on remuneration is a genuine one and not
an attempt, for example, to make distributions to
shareholders/directors where there are no distributable profits.80
This is probably a wise decision on the part of the courts, which
might otherwise find themselves saddled with developing a
general policy about the remuneration of directors of large
companies. Neither has the legislature shown any enthusiasm to
grasp the nettle of determining, substantively, what the level, or
rate of increase, of directors’ pay should be.
In this situation of abstention from settling the substantive
issue, attention focuses on the procedure within the company for
the setting of directors’ remuneration. Several options are
available, some now mandatory at least for larger companies.
Composition of the remuneration committee
14–33
One strategy is further to exclude executive directors from the
process of remuneration setting, so that, not only is the
individual executive whose remuneration is at issue forbidden
from voting on the decision, but executive directors are side-
lined in the remuneration-setting process. Under this strategy,
remuneration decisions are allocated principally to a committee
of the board consisting of non-executive directors. We examine
this strategy further when we look more generally at the role of
non-executive directors later in this chapter.81 The doubts about
it relate principally to the question of how independent even
non-executive directors are when it comes to the setting of
executive remuneration. Nevertheless, this approach is favoured
by the UK Corporate Governance Code for Premium Listed
companies,82 with associated calls for greater board diversity
although not for the more controversial inclusion on
remuneration committees of employee or shareholder appointees
who are not board members. It also warns the committee to
ensure that pay rates are not simply ratchetted up without any
necessary correlation with improved performance.83
Mandatory shareholder approval of certain aspects
of the remuneration package
General
14–34
A further, and perhaps complementary, strategy is to revive the
common law principle of shareholder approval of directors’
contracts.84 There has been an increasing regulatory and
legislative creep back to this earlier position. We shall see later
in this chapter that the companies legislation has reintroduced
the principle of shareholder approval in relation to certain
termination payments. In addition, focussing on larger
companies, shareholder approval is required under the Listing
Rules for certain share option schemes and other long-term
incentive plans (“ltips”) for directors of companies admitted to
Premium Listing on the London Stock Exchange.85 And, most
recently, shareholder approval of the company’s general
remuneration policy (plus an advisory vote on its
implementation) is required for all quoted companies.
Long-term incentive pay schemes
14–35
Under a share option scheme a director is given the right to
subscribe at some time in the future (normally after a period of
years) for shares in the company and to pay for them (the
“exercise price”) the price which the shares had at the time the
option was granted. The theory is that the director is thus
incentivised to increase the price of the shares over the
intervening period for the benefit of the shareholders. In order to
meet the obvious objection that the increase in the stock price
may have little to do with the efforts of the directors, ltips
substitute some other form of incentive to be provided by the
company in place of the shares.
14–36
Given these concerns about the alignment, or misalignment, of
incentives, the payment of performance-related remuneration to
executive directors (it is less typically paid to non-executive
directors86) is now regarded with far more caution than it was
only a few years ago, and instead simpler and more transparent
pay structures are favoured.87 The UK Corporate Governance
Code in its Main Principle on remuneration now includes the
statement: “Executive directors’ remuneration should be
designed to promote the long-term success of the company.
Performance-related elements should be transparent, stretching
and rigorously”.88 And, further, that “[p]erformance conditions,
including non-financial metrics where appropriate, should be
relevant, stretching and designed to promote the long-term
success of the company. Remuneration incentives should be
compatible with risk policies and systems. Upper limits should
be set and disclosed”.89 Moreover, packages should be sensitive
to pay and employment conditions elsewhere within the group,
especially in relation to rates of increase in salary; and, finally,
and by way of rejecting the popular argument of global
competition driving up pay, that companies should of course
benchmark against their peers, but not in a way that leads to an
upward ratchet without any improved performance.90
14–37
Originally because the granting of share options could dilute the
position of the other shareholders, the LR made the introduction
of such a scheme subject to shareholder approval.91 The principle
was later extended to other forms of ltip and it now provides a
convenient mechanism for the shareholders to express concerns
about whether, for example, the performance criteria attached to
the ltip are “challenging”. However, because obtaining
shareholder approval is time-consuming and leaves the director
in doubt as to what ltip the remuneration package will include,
the company is given permission to dispense with shareholder
approval where the option scheme or other ltip is “established
specifically to facilitate, in unusual circumstances, the
recruitment or retention of the relevant individual”. This
permission is subject to disclosure in the company’s next annual
report of the principal terms of the scheme and the reasons why
the circumstances in question were viewed as unusual.92
Mandatory and advisory shareholder votes on
remuneration policy and implementation
14–38
This ltip intervention, just described, might have been regarded
as the tip of the iceberg. Growing public sentiment against
escalating remuneration packages and perceived “payments for
failure” (discussed below, whereby poorly performing managers
are nevertheless contractually entitled to handsome rewards on
their departure) inevitably prompted renewed consideration of
whether shareholders should have a binding vote on some or all
aspects of general remuneration policy or particular
remuneration agreements.93 The policy tension is evident:
regulation of remuneration packages is fraught with difficulties,
practical, policy-based and political; and rewards for failure are
of course undesirable, but corporate ventures are inherently
risky, and not every risky venture will succeed however good the
management—in those circumstances, termination payments are
unfairly condemned as rewards for failure. This concern is
evident in the increasingly explicit focus in the CGC on possible
“claw-backs”, with the 2014 version now providing explicitly
that performance-related schemes “should include provisions
that would enable the company to recover sums paid or withhold
the payment of any sum, and specify the circumstances in which
it would be appropriate to do so”.94 Given this climate, and the
selective intervention adopted by the Listing Rules and the CGC,
increased Government intervention was inevitable. This has
happened in stages, beginning with simple disclosure rules in
2002. The current legislation, introduced in 2013, requires that
(a) directors of quoted companies produce an annual
remuneration report in prescribed form95 (as discussed below);
and (b) that shareholders be given a triennial binding vote on the
company’s “remuneration policy”, as laid out in that report; and
(c) an annual advisory vote on its implementation.96 Moreover,
the directors cannot lightly escape their obligations to put these
matters to the vote. Subject to very limited defences, s.440
makes it a criminal offence on the part of every officer in default
(but, rightly, not on the part of the company) to fail to give the
necessary notices of meetings or put the required resolutions to
the vote (as described in ss.439 and 439A, and discussed
below).97
14–39
By way of evidence of a public vote of confidence in this
model as being an attractive regime for regulating directors’
remuneration in large companies, it is possible to look to the
ongoing negotiations towards a reformed EU Shareholder Rights
Directive.98 This might be read as indicating the EU-wide appeal
of UK models, especially the UK Corporate Governance and
Stewardship Codes,99 but of particular relevance here is the EU
proposal for a shareholder “say on pay” which largely follows
the existing UK model.
14–40
The definition of a quoted company is wider than companies
incorporated in the UK and subject to the Listing Rules. The
statute also embraces Britishincorporated companies if they have
been included in the official list of any Member State of the
European Economic Area or if their securities have been
admitted to trading on the New York Stock Exchange or
Nasdaq.100 The purpose of this broader definition is to remove
any incentive for British companies to escape the new
requirements by listing their securities elsewhere than in
London. The Secretary of State has the power to alter the
definition of a quoted company by regulation,101 which,
presumably, he might do if admission to trading on an exchange
other than those mentioned above were to become a practical
possibility for British companies.
14–41
The crucial innovation in the current version of the legislation is
not mere disclosure, since much of the information was already
required to be disclosed under the LR.102 It is the requirement for
a triennial103 binding vote of the shareholders on the company’s
remuneration policy (s.439A), and an advisory vote on its
implementation (s.439). The remuneration policy must both
describe and justify: it must set out how the company proposes
to pay directors, including every element of the remuneration
package, and how the chosen approach supports the company's
long-term strategy and performance. In addition, the policy must
set out the company’s approach to recruitment and loss of office
payments. Once a remuneration policy has been approved, a
company may only make remuneration and loss of office
payments as permitted within the limits of the policy, unless the
payment has been approved by a separate shareholder resolution.
Failure to pass the remuneration policy would effectively block
the company’s right to pay its directors. Any arrangements made
contrary to approved policy are void (s.226E(1)),104 and any
payments received by the director are held on trust for the
company (ss.226E(2) and (3)). In addition, any director who
authorised such a payment is jointly and severally liable to
indemnify the company for loss, unless the director is shown to
have acted honestly and reasonably in the circumstances
(ss.226E(2), (3) and (5)).
14–42
Shareholders also have an annual advisory vote on the
implementation report, which sets out how the approved pay
policy has been implemented, including a single figure for the
total pay directors received that year (with this designed to allow
shareholders to make ready comparisons year-on-year, and
between companies). In this case, however, an adverse vote does
not affect director’s entitlements,105 although the failure will
trigger the need for the company to put the remuneration policy
to shareholders the following year. But failure to pass the report
would inevitably have significant practical effect because of
likely market reaction, so perhaps the real benefit of the annual
advisory vote is that it gives the shareholders a further
guaranteed opportunity to express their views on the directors’
remuneration, which, without s.439, they would be able to do
only if they requisitioned a resolution to be added to the agenda
of the accounts meeting or requisitioned an extraordinary
meeting of the shareholders, neither of which is necessarily easy
to arrange.106
14–43
In all of this, “remuneration” is defined very broadly: it includes
any form of payment or other benefit made to or otherwise
conferred on a person in return for them holding, agreeing to
hold or having held office as a director of the company (or any
other role in connection with the management of the affairs of
the company or its subsidiaries whilst a director of the company)
(s.226A). The restrictions on remuneration payments therefore
apply to payments such as those which might be made to new
directors to buy-out existing remuneration entitlements at their
existing company. The restrictions on payments for loss of office
extend to amounts paid to settle statutory or contractual claims
arising in connection with a director’s loss of office. In each
case, therefore, unless the remuneration policy contemplates
such remuneration payments or payments for loss of office, they
must be separately approved by the shareholders (although
where other legislation or a court requires a payment to be made,
the Act will not prevent the company from paying it).
General disclosure: the directors’ remuneration
report
14–44
Public disclosure—transparency—is commonly used to support
effective market control, especially in areas where targeted
regulation is difficult. The disclosure obligations imposed on
companies in relation to the remuneration of their directors vary
according to whether the company is a “small company”
(ss.381–384), an unquoted company, or a “quoted company”
(s.385). Section 412 gives the Secretary of State power to make
provision by regulations requiring information about directors’
remuneration to be given in notes to a company’s annual
accounts. Predictably the most onerous rules are imposed on
quoted companies, and we start with those. The necessary
information must be provided in the directors’ remuneration
report (“DRR”), with its contents now prescribed in enormous
detail by the Secretary of State in regulations.107 The regulations
divide the remuneration report into two parts: one, which is not
subject to audit, relates to the company’s remuneration policy,
and another, which is subject to audit, concerns payments
actually made to directors in the financial year in question.108
The approach to legislative requirement for the disclosure of
remuneration policy in the DDR is interesting: it requires the
board to justify, rather than simply report, the company’s
remuneration arrangements109; but it does that in a very detailed
way, requiring the company to provide standardised information,
often in tabular form, by which the policy might be assessed,
including details of specific remuneration components and the
objectives sought to be achieved by their inclusion, with
illustrative workings of the ramifications for current directors
over time. In addition, details are required explaining the way in
which the company’s overall pay policy has been derived, and
how the views of shareholders have been accommodated.
14–45
The audited part of the remuneration report concerns payments
actually made to persons who served as directors during the
financial year. The ambition is to require companies to provide
reports in a standardised way so that shareholders can compare
remuneration outcomes in a variety of ways, whether between
directors, across different years, and with other companies. To
that end, this part of the report requires the company to list its
directors by name and provide in a tabular display the “single
total remuneration figure” for each of them, along with its
component parts (as prescribed and defined in the regulations,
and including the total amount of salary and fees, all taxable
benefits, all money or other assets received by way of
performance bonus, and all pension benefits). Any sums subject
to claw back must be noted, and previous year comparisons of
all elements must be provided.110 All that must be audited. In
addition, the implementation report must also provide
performance graphs and tables which set out a number of
matters, including the percentage change in the remuneration of
the chief executive officer over his term in office, comparing
that with the percentage change in employee pay (with
provisions for considering corporate groups as a whole)111; the
total company spend, and the relative spend on remuneration and
distributions to shareholders. Other options, such as the
mandatory disclosure of top-to-bottom pay differentials, appear
now to be seen as uninformative and therefore as potentially
counter-productive112; and the mandatory capping of executive
pay has never attracted serious support. Finally, the report must
contain statements of how the directors’ remuneration policy of
the company will be implemented in the next financial year; the
consideration given by directors to the matter of remuneration;
and a statement of the detailed result of the voting on any
resolutions in respect of the directors’ remuneration report or
policy at the last general meeting of the company. To further
improve transparency, from 1 October 2013, whenever a director
leaves office, companies will need to publish a statement setting
out what payments the director has received or may receive in
future. This statement must be published as soon as reasonably
practicable. All of this provides an enormous amount of detail,
not just to shareholders, and it is difficult to say how it will be
used, or by whom.
14–46
Even unquoted companies cannot remain entirely silent on the
subject of directors’ remuneration. The matters about which
information may be required include gains on the exercise of
share options; benefits receivable under long-term incentive
schemes; compensation for loss of office (as defined in s.215);
contributions and benefits receivable with respect to past
services; and consideration receivable by third parties for
making available the services of a director (s.412(2)). The
information must also include benefits receivable by a person
“connected with” a director, or by a body corporate “controlled
by” a director (s.412(4), and see ss.254 and 255 for
interpretation of these terms). However, the relevant rules do not
require a binding shareholder vote on policy, and there is no
equivalent of the detailed implementation report. All that is
required is the disclosure of aggregate remuneration only, or,
where the data is further broken down, does not require
recipients to be identified by name.113 A small company can omit
this information from the accounts it files at Companies House.
14–47
In an extension of the usual role of the auditor, if the auditor
concludes that the information required, of either a quoted or
unquoted company, in relation to directors’ remuneration has not
been provided, then a statement giving the required particulars
must be contained in the auditor’s report, so far as the auditor is
reasonably able to provide it.114 This is presumably thought to be
a more effective remedy than fining the directors for failure to
produce proper accounts and reports, though that sanction is
available as well.
REMOVAL OF DIRECTORS
14–48
Accountability of the directors to the shareholders is obviously
enhanced if shareholders can influence directly the choice of
those who sit on the board. As we have seen above, company
law does little to enhance shareholders’ control over the
appointment process, which is regulated predominantly by the
company’s articles of association. As far as company law is
concerned, it would not be a breach of any mandatory rule for
the articles to provide that none of the directors should be
required to stand for re-election and that the existing directors,
again without shareholder sanction, should choose any
replacements for directors who resigned or were removed. In
other words, shareholders could be wholly written out of the
appointment process. In practice such extreme cases are rare,
though for reasons that reflect market rather than legal
constraints: large companies might find it difficult to sell their
shares to institutional investors on the basis of such articles. This
fact of life is reflected in the CGC whose “best practice”
provision is that “all directors should be submitted for re-
election at regular intervals, subject to continued satisfactory
performance”.115
Shareholders’ statutory termination rights
14–49
When we turn to the removal of directors, however, we find that
the legal rules are entirely different, although this has been the
case only for the past half century or so. Until 1948, the power
of the shareholders to remove directors depended, as with their
appointment powers, on the provisions of the articles of
association. However, under what is now s.168 of the
Companies Act 2006, a director can be removed by ordinary
resolution of the shareholders at any time. This expressly applies
notwithstanding anything to the contrary in any agreement
between the company and the director.116 The articles may
provide additional grounds for the removal of directors, the most
common being a request from fellow directors.117
In comparative terms, this is a very strong provision. It means
that the notion of a term of office for a director has little
meaning. The articles may in fact provide that directors shall be
appointed for three years at a time and things may be carefully
arranged so that no more than one third of the board comes up
for election in any one year,118 but these provisions cannot be
relied upon because the shareholders may intervene at any time
to secure a removal. It means also that there is little point in the
board securing the appointment of a director over the vigorous
opposition of the shareholders, since this may simply provoke
them to remove those of whom they disapprove. Finally, as we
have already noted,119 there is now a certain policy tension
between the common law decisions, discussed above, which
prevent the shareholders from giving directions by ordinary
resolution to directors on matters within their exclusive
competence, and the statutory provisions permitting the removal
of directors at any time by ordinary resolution. In practice,
presumably, the latter overshadows the former:
directors may commit no legal wrong if they refuse to obey such
instructions, but they will be aware that disobedience may
trigger their removal from office.
14–50
There are two principal qualifications to the powers contained in
s.168 which need to be noted: first, the courts have authorised
provisions in the articles which provide an indirect way around
the section, at least in relation to private companies; and the
section itself preserves certain rights for directors upon removal,
notably their right to compensation for breach of contract.
Weighted voting rights
14–51
On the first, it has been held by the House of Lords in Bushell v
Faith120 that the object of the section can be frustrated by a
provision in the articles attaching increased votes to a director’s
shares on a resolution to remove him, thus enabling him always
to defeat such a resolution. This apparently indefensible decision
can perhaps be justified on the ground that in a small private
company121 which is, in effect, an incorporated partnership, or in
a joint-venture company it is not unreasonable that each
“partner” should, as under partnership law, be entitled to
participate in the management of the firm in the absence of his
agreement to the contrary and to protect himself against removal
by his fellow partners. Moreover, it has been recognised that the
removal of a director in the case of such “quasi-partnerships” (as
they have come to be called) may so strike at the essential
underlying obligations of the members to each other as to justify
a remedy on grounds of unfair prejudice or even the compulsory
winding-up of the company on the ground that it is “just and
equitable” to do so.122 Nevertheless, the decision was much
criticised123 but has not been reversed in subsequent legislation.
In effect, for private companies s.168 is only the default rule.
Director’s procedural rights on termination
14–52
Even where the articles contain no provisions as to weighted
voting rights, the successful operation of the section requires
some pretty stringent conditions to be met. Special notice has to
be given of any resolution to remove a director (and to appoint
someone else instead, if that is proposed).124 This means the
proposer must give 28 days’ notice to the company of the
intention to propose the resolution.125 The company must supply
a copy to the director, who is entitled to be heard at the
meeting.126 Further, the director may require the company to
circulate any representations which that person wishes to
make.127 The object of these restrictions is to prevent a director
from being deprived of an office of profit on a snap vote and
without having had a full opportunity of stating the contrary
case.128
Director’s contractual rights on termination
14–53
A more serious restraint on the members’ powers of dismissal is
the provision that the section shall not deprive a director of any
claim for compensation or damages payable in respect of the
termination.129 This provision applies to both the termination of
the directorship as such and of “any appointment terminating
with that as director”. Thus, compensation for termination of the
executive director’s service contract is included where, as is
invariably the case, both directorship and service contract are
terminated at the same time. In fact, the continuation of the
service contract is often made conditional on the holding of the
directorship, so that the service contract terminates automatically
upon cessation of the directorship.
14–54
Thus, if there is a contract of service between the director and
the company, as will be the case with managing and other
executive directors, the probability is that the members will be
able to sack the director only at the risk of imposing on the
company liability to pay damages or a sum fixed by the contract
as compensation. This, it may be said, is also fair, because the
company has freely bound itself by contract. However, once
again, we encounter the risk that the director may have been
present on both sides of the bargaining table when the provisions
were negotiated which are now relied upon to provide
compensation at the point of termination.130 The members may
therefore find that the directors have entrenched themselves by
negotiating contracts of service by which the company has to
pay them substantial sums if it exercises its statutory power to
dismiss them by ordinary resolution—or indeed dismisses them
in any other way131—other than for serious misconduct, although
the disclosure and approval regimes noted earlier, especially for
quoted companies, work against this.132
14–55
It must be emphasised, however, that the dismissed director can
claim for damages for breach of contract only if a binding
contract entitles the director either to hold that position or a
related executive position for a fixed term, or to be dismissed
only after prescribed or reasonable notice and that notice
requirement is not observed by the company (as it rarely will
be). Similarly, the dismissed director will be entitled to a
contractual termination payment only if the relevant contract
specifically so provides. So the important question is whether the
dismissal of the director constitutes either a breach of a contract
with the director (giving rise to damages) or a termination
triggering specified contractual termination payments.
There are two broad classes of cases. First, if the director’s
contract (whether as director or as executive manager) simply
incorporates the provisions of the company’s articles,133 then—
like the articles themselves—the contract terms are usually
regarded as inherently subject to the Act (and its statutory
dismissal right) and to permissible variation if the shareholders
use their powers to alter the company’s underlying articles. In
these circumstances if the shareholders utilise their statutory
dismissal powers or change their articles to effect dismissal, then
neither will count as a breach of the director’s contract: they
will, rather, be dismissals in accordance with the terms of the
contract.134 This approach cannot, however, be used by the
company to escape past liabilities to the director: on ordinary
contract principles, the shareholders’ acts cannot have
retrospective effect.135
Alternatively, and typically, the director will have a separate
and independent contract with the company, whether formal or
informal.136 If this contract is for a fixed term or has a notice
period, or if termination triggers a compensation payment, then
such provisions will inevitably be breached or triggered if the
shareholders exercise their statutory dismissal powers or
exercise their power to amend the company’s articles, and do so
in a way which enables dismissal or prevents the director from
continuing as director where that is a condition of the director’s
independent contract. In those circumstances, although the
courts will not enjoin the shareholders from exercising their
statutory or constitutional powers, the company will thereby
become liable to the director either for damages for breach of
contract137 or for payment of the agreed termination payment.
Depending on the terms of the director’s contract, these sums
can be prohibitive, so much so that dismissal can become quite
impractical for the company. It is to this problem that we turn
next.
Control of termination payments
14–56
This issue of prohibitive termination payments (whether paid
under the contract or by way of compensation) has increasingly
occupied policy-makers in recent years, at least in relation to
public companies. The complaint is not only that the company’s
hands can be tied despite s.168 powers, but that the outcome
often seems to deliver “rewards for failure” to departing
directors.
A director’s contract can employ a number of devices to
enhance the levels of compensation payable upon termination, in
particular, entering into a long fixed-term contract, perhaps one
with a rolling fixed term138; including long notice periods for the
lawful termination of the contract by the company139; and
including express entitlements to compensation if the contract is
terminated.140 None of these provisions would operate to protect
a director were the company entitled to terminate the service
contract without notice on grounds of a serious breach of
contract on the part of the director. However, mere lack of
economic success on the part of the company is unlikely to
amount to such a fundamental breach of contract: economic
failure by the company does not necessarily betoken lack of
effort or commitment on the part of the directors. Indeed, if
directors were entitled to no contractual protection on
termination, they might take too cautious an approach to risky
business ventures. And even where there has been clear
wrongdoing by the director, the company may prefer to pay the
director to go quietly, rather than insist on its contractual rights.
Company law tries to steer a course between these competing
considerations by a combination of disclosure and shareholder
approval requirements, both advisory and binding, in relation to
agreed termination payments and other contractual terms.
Disclosure
14–57
Simple disclosure is a powerful tool. Formerly, the members
might know nothing about the directors’ service contracts,
especially the potential consequences of any decision to remove
the director. In this respect at least, their position was improved
quite some time ago: each director’s service contract, or a
memorandum of its terms if it is an unwritten contract, must be
available for their inspection at any time. This applies also to
shadow directors and to service contracts with subsidiary
companies.141 The previous exemptions for service contracts
with less than twelve months to run or for directors required to
work wholly or mainly outside the UK have been removed.
14–58
In relation to quoted companies, as noted earlier,142 the Act now
also requires that directors produce an annual remuneration
report (“DRR”), which, like the other annual reports, must be
provided to the members and the Registrar.143 The crucial
features of this report are, first, that the shareholders have a
binding vote on remuneration policy (s.439A), and that policy
must provide details, in a prescribed and accessible form, of the
company’s policy on the duration of directors’ contracts, on
notice periods, and on termination payments.144 Secondly, to
ensure the policy and practice are aligned, the company must
provide an annual implementation report, as part of the DRR,
detailing all payments actually made, again broken down into
accessible detail.145
Shareholder approval
(i) Remuneration packages—quoted companies
14–59
Failure to gain shareholder approval in advance of termination
payments made to directors of quoted companies can have
significant consequences. Any termination payments which are
not in compliance with the company’ agreed remuneration
policy, or have not been separately agreed by the shareholders,
cannot be made (s.226C). If they are, the company can recover
the payments from the recipient director; moreover, any director
who authorised the payments is jointly and severally liable to
indemnify the company (s.226E). On the other hand, if the
payment is in compliance with the policy, but contained in an
implementation report voted down by the shareholders, this will
have no effect on the validity of the payment (s.439(5)).
(ii) Terms governing the length of the contract—all
companies
14–60
More generally, the legislature has sought to limit excessive
termination payments by reducing the possible term for which a
director can be appointed, and making sure these provisions bite
whether those terms take the form of notice periods or fixed or
rolling contractual terms. If such a term has the effect that the
contract cannot be terminated by the company within a two-year
period (referred to as the “guaranteed term”), then prior approval
by a resolution of the general meeting is required.146 In the
absence of shareholder approval, the provisions establishing the
guaranteed term are void and the contract can be terminated at
any time by the company on reasonable notice.147 The section
applies to shadow directors and to service contracts with
subsidiaries.148
14–61
Despite the changes made, the sections are still open to criticism
on two grounds. First, by concentrating on the length of
employment, s.188 seems not to catch contractual provisions
which give the company the contractual right to terminate the
director’s employment at any time but then provide for
substantial payments to be made to the director under the
contract, if termination takes place. The CLR proposed that
contractual covenants for severance payments “should be void to
the extent that they provide for more compensation than would
be available by way of compensation for breach of contract”,149
but this suggestion was not taken up.
Secondly, it is arguable that for public companies the period
of two years is too long. The Greenbury Committee thought
there was a strong case of reducing the period to one year.150 As
a consequence, the Listing Rules151 now require boards to report
to the shareholders annually giving “the details of any director’s
service contract with a notice period in excess of one year or
with provisions for pre-determined compensation on termination
which exceeds one year’s salary and benefits in kind, giving the
reasons for such notice period”. This provision catches both
notice periods and contractual severance payments and applies a
one-year limit, but requires only disclosure and justification, not
shareholder approval. To similar effect, the UK Corporate
Governance Code, also applying to Premium Listed companies,
provides: “Notice or contract periods should be set at one year or
less. If it is necessary to offer longer notice or contract periods to
new directors recruited from outside, such periods should reduce
to one year or less after the initial period”.152 The CGC is
enforceable on a “comply or explain” basis, as discussed below,
and so its provisions are not mandatory, though they are
generally observed.
(iii) Termination payments
14–62
So far in our discussions, we have focused on compensation
payments received by directors because their dismissal
constituted a breach of contract by the company, typically
because dismissal under s.168 or under the company’s articles
also brought to an end some other contract the director had with
the company or a subsidiary, normally a service contract, and the
early termination of that contract amounted to a breach.
Alternatively, the contract itself may have provided for a defined
termination payment.
However, it is not impossible that the remaining members of
the board might choose to make a gratuitous payment to one of
their number removed from office by shareholder vote, perhaps
to ensure the director goes quietly, perhaps to encourage similar
treatment of themselves should they suffer the same fate in the
future. This, however, is a matter where the Act has required
shareholder approval since 1948. What is now s.217 makes it
unlawful for a company to give a director of the company (or of
its holding company) any payment by way of compensation for
loss of office or as consideration for or in connection with his
retirement from office,153 without particulars of the proposed
payment (including its amount) being disclosed to members of
the company and the proposal being approved by the members
(and the members of the holding company, where appropriate).
In other words, the directors cannot increase the cost of a
removal without the consent of the shareholders. The section
does not apply, however, to payments by way of compensation
for breach of contract, to payments to which the director is
contractually entitled (unless the contract was entered into in
connection with the termination), or to pension payments in
respect of past services, apparently whether contractually
required or not.154
An unauthorised payment to the director is held by the
recipient on trust for the company and any director who
authorised the payment is jointly and severally liable to
indemnify the company for any loss suffered (for example,
where the payment is not recoverable from the recipient).155
STRUCTURE AND COMPOSITION OF THE BOARD
14–63
When we looked at the role of the board in the first section of
this chapter, we saw that, broadly, the range of business
decisions to be conferred upon the board is left by the law to be
determined by the company’s articles of association. By contrast,
in the fourth section we saw that the law plays a crucial role in
setting the rules governing the removal of board members. In
this fifth and final section of the chapter we look at the rules on
board structure and composition. Here again the law leaves
matters to be determined by the company’s constitution, but this
is an area in which the “corporate governance” movement of the
past two to three decades has made a significant impact on listed
companies, but through “soft law”, in the shape of the UK
Corporate Governance Code, rather than through legislation.
Legal rules on board structure
14–64
Before turning to the composition of the board, let us look at its
structure. An important difference between legal systems is
whether they require one-tier or two-tier boards. In Germany, for
example, as we have already noted, a two-tier board is
mandatory for public companies (Aktiengesellschaften), and so
the relevant statute (Aktiengesetz), besides requiring both a
supervisory and a managing board, stipulates the functions of
each and the methods of appointment of each board. The task of
running the company (in the sense of setting and executing its
strategy) is entrusted to the managing board, and the supervisory
board monitors the discharge by the managing board of its
functions. A person may not be a member of both boards.
14–65
By contrast, in Britain, the US and the Commonwealth, the one-
tier board is the norm, with managing and supervisory functions
being discharged by a single body. Although this is the norm, it
is not obvious that the law in Britain requires a single board. The
Act does not require the directors to act as a board, and so it
hardly needs to address the further question of whether the board
is to be a one-tier or a two-tier board.156 In fact, the CLR found
some evidence that “the practice of delegating [from ‘the board’]
day to day management and major operational questions to a
‘management board’ is becoming increasingly common in this
country”.157 This infringes no provision of the statute, and,
provided the articles permit such further delegation by the board
and provided the board monitors effectively the functioning of
the “management board”, it involves no breach by the directors
of their duties or risk of disqualification on grounds of
unfitness.158
14–66
Domestic law does however formally recognise the possibility of
a two-tier structure for one class of company. This is the SE
(European Company) which opts to register in Britain. Under the
SE Regulation of the EU, which is directly applicable in the UK,
an SE may choose in its statutes (as its equivalent of the articles
are termed) whether to have a one-tier board or a two-tier board
consisting of a supervisory organ and a management organ.159
Where the latter structure is adopted a German-style division of
function between the two boards is applied: the management
organ (“MO”) “shall be responsible for managing the SE”160; and
the supervisory organ (“SO”) “shall supervise the work of the
management organ”, but the SO may not “itself exercise the
power to manage the SE”.161 However, the statutes of the SE
must list the categories of transaction (which may be extensive
or limited) which require the authorisation of the SO.162 Thus,
there is some flexibility in fixing the line between supervision
and management, since an extensive list of matters requiring SO
authorisation would give that body a significant influence over
the management of the company. Further, the SO itself (or its
individual members) may require the MO to provide the
information it requires for the discharge of its functions and may
arrange for investigations to the same end.163 Thus, the SO has
some flexibility as to how vigorously it discharges its functions.
With one small exception, no person may be a member of
both bodies.164 The members of the MO are appointed by the SO,
whose members, in the absence of employee representatives,
will be appointed by the general meeting.165 What goes for
appointment must apply to removal. Consequently, the
shareholders’ power of removal under s.168 applies to members
of the SO alone, so that the members of the MO will be
removable by the shareholders only indirectly.
These provisions in the regulation relating to the two-tier
board provide only a skeleton of the structure, however. The
detail has to be fleshed out by reference to national law. Where
the regulation does not deal with a matter, or deals with it only
partly, then the rules of the Member State in which the SE is
registered, as they apply to public limited companies, will apply
to the SE. Hence the relevance of s.168 of the 2006 Act, just
mentioned. This will be the case unless the Regulation requires
or empowers the Member States to adopt implementing
legislation specifically for the SE, in which case that
implementing legislation will prevail over general public
company rules as regards the matters it deals with.166
There are relatively few areas where specific implementing
legislation is required or permitted, but one of them is in relation
to the two-tier board. Where in the domestic law of a Member
State “no provision is made for a two-tier board system”, that
Member State “may adopt the appropriate measures in relation
to the SE”.167 It might be thought that the UK was
quintessentially such a atate and that specific implementing
measures for the two-tier board were thus required. However,
the Government took the view that, since the domestic
companies legislation does not require the directors to form a
board in any particular way, the law permitted domestic
companies to establish one-tier or two-tier boards, as they
wished. The fact that UK boards were one-tier rather than two-
tier in form was a result of practice, rather than legal
requirement, as the CLR’s evidence could be taken to suggest.
By contrast, the Government moved a little way away from
this stance in relation to the duties laid on directors by statute,
including now their general duties under the 2006 Act. The
domestic implementing regulations do make specific provisions
in relation to such duties. Their general approach is to apply the
statutory duties of directors indifferently to the members of both
the organs in a two-tier system, but not so as to impose on the
SO a function which is managerial and so within the sole
competence of the MO.168 An example might be the production
of the annual accounts, although other duties might be more
difficult to classify.
It remains to be seen whether the adoption by SEs registered
in the UK of two-tier board structures will create a practical
“spill over” effect into domestic law. To date that seems unlikely
however, since so far few SEs have been registered in the UK.
Legal rules on board composition
Employee representatives
14–67
If the division between one-tier and two-tier board structures is
an important dividing line in European jurisdictions, an even
more crucial one is the requirement for employee representatives
on the board. There is an inaccurate view that most continental
European company laws require employee representation on the
model adopted for large companies in Germany (that is, an equal
division between employee and shareholder representatives),
whereas that model is unique to Germany. Nevertheless, about
half the Member States of the EU require minority shareholder
representation on the boards of private sector companies.169 The
UK, of course, is among the half which does not have mandatory
board representation for employees, i.e. does not use company
law to regulate the process of contracting for labour but leaves
that task to labour law and contract law. In this context, the SE is
again of interest, since EU law requires SEs, even when
registered in the UK, in some situations to have employee
representatives at board level. This will arise when at least one
of the companies forming the SE was subject to mandatory
employee representation rules under its domestic laws.170 The
experience of UK-registered companies operating a system of
employee representation at board level might be instructive, but
again the low level of SE registrations in the UK—with or
without employee representation—makes this possibility not of
immediate interest.
Gender diversity—women on boards
14–68
In 2010, Lord Davies of Abersoch was commissioned to review
gender diversity on boards. His report, published in February
2011,171presented a business case for diversity: improving
performance; accessing the widest talent pool; being more
responsive to the market; and achieving better corporate
governance. He rejected the use of “quotas”, at least for the time
being, but set out recommendations designed to achieve 25 per
cent female representation on boards by 2015. The effect has
been positive and the target achieved,172 with the threat of
mandatory quotas no doubt providing its own incentive for
action.173 However, it is notable that most of the increase has
come in non-executive board appointments, not executive ones,
and in what are anecdotally described as “more junior” roles.
But the pressure continues in the UK, perhaps enhanced by the
EU’s decision to launch its own consultation and investigation
on gender imbalance as a cross-EU issue.174 This makes rising
targets increasingly likely.
Corporate governance codes, The Cadbury Report and
non-executive directors
14–69
In contrast to the lack of change in the UK in the area of board
representation for employees, or the slow change in gender (or
other) diversity, there has been a lively debate over the past two
decades about board composition, at least of listed companies.
That debate has focused on the proportion and role of non-
executive directors on the board, and the regulatory results have
shown themselves in what is now the UK Corporate Governance
Code (“CGC”) rather than in legislation. Before these changes,
the non-executive director held a not especially active,
prestigious or powerful role, for which he (and it generally was
he) was only modestly rewarded by directors’ fees.175 The
executive directors were the dominant force within the company,
with the CEO as the embodiment of managerial authority. All
that has now changed, at least for companies subject to the CGC,
although whether the changes have improved the business
success of companies is still debated.176
14–70
The corporate governance movement in the UK can be said to
have begun with the report of the Cadbury Committee in 1992.177
As is often the case with company law reform, this committee
was constituted as a result of scandal, in this case the sudden
descent into insolvency of major companies which had only
recently issued annual financial statements which revealed
nothing of the horror to come.178 The Cadbury Committee
concluded, however, that the causes of these problems were not
to be found in the narrow area of accounts and auditing, though
it gave attention to the role of auditors, but reflected more
widespread defects in the corporate governance systems of large
British companies. In consequence, its proposed reforms (in the
“Cadbury Code” of best practice) heralded a general reform of
board composition and functioning in large UK companies, for
which the scandals constituted the precipitating factor but to
which they did not set a limit.
14–71
What was the corporate governance problem which Cadbury
sought to address? Although it identified a number of problems,
the central one might be thought to have been the domination of
companies, not just by top management, but by a single over-
powerful managing director or CEO. The fact that other
executives may take up seats on the board gives, of course, only
the illusion of constraint on the CEO in such a company, because
the other directors are the latter’s managerial subordinates,
whilst non-executive directors may equally owe their board
positions to the patronage of the CEO. Whilst not taking the
view that all or even a majority of large British companies were
governed in this way, the thrust of the Committee’s proposals
was towards putting in place a board structure which would
render such dominance by a single person less likely, through
the introduction of various counter-balances to the executive
management of the company. From the point of view of top
management, therefore, the Cadbury Code might be presented as
an attack on their discretion.179
14–72
Indeed, in that context the subsequent review by the Hampel
Committee,180 delivered six years later, can be seen as a failed
attempt by management to win back some of the ground which it
had conceded to the Cadbury Committee. The Preliminary
Report of the Hampel Committee181 struck a distinctly sceptical
note, asserting that “there is no hard evidence to link success to
good governance”, a phrase which was not repeated in the Final
Report, and implicitly criticising Cadbury for giving rise to a
“box ticking” approach to corporate governance. Past debate on
corporate governance, it said, had focused too much on
accountability and not enough on the governance contribution to
business prosperity, and the Committee wished to “see the
balance corrected”.182 Only in the final report could the Hampel
Committee bring itself to say that it endorsed the “overwhelming
majority”183 of the recommendations of the Cadbury Committee
(and of the Greenbury Committee184 which had reported in the
interim on the particular and still controversial subject of
directors’ remuneration). Hampel’s main contribution was to
propose, as indeed happened, that the recommendations of the
Cadbury and Greenbury Committees, as refined by Hampel,
should be brought together in a “Combined Code”.
14–73
Following a further set of corporate failures, this time in the US
and forever to be associated with the name of the Enron
company, the Government commissioned another review of the
Combined Code, which was carried out by Derek Higgs. The
Government’s overt role in the appointment of Mr Higgs was an
innovation, since the earlier bodies had been appointed by
private associations, such as the Confederation of British
Industry and the accounting bodies, although they were
generally observed or even serviced by civil servants. The Higgs
report constituted a ringing endorsement of the approach of the
Cadbury committee and contained recommendations for the
strengthening of the Combined Code, but along the lines already
established by that Committee.185 For example, it contained
proposals, later implemented, for an increase in the proportion of
non-executive directors (“NEDs”) on the board from one third to
one half, at least in the largest listed companies.
14–74
Developments did not stop there, but, remuneration apart (which
remains under close scrutiny, as discussed earlier), the current
principles of corporate governance in the UK are in essence the
product of the Cadbury Committee whose recommendations,
without much violation of the truth, are often treated as a proxy
for all the corporate governance reforms in the UK since the
1990s.186 The most important requirements of the current CGC
are described below, and then we consider the special
mechanism by which the Code is enforced.
The requirements of the UK Corporate Governance
Code
14–75
What particular practices does the UK Corporate Governance
Code recommend to listed companies as far as board structure is
concerned? The principal suggestions are as follows, and they
revolve around two central ideas. The primary idea is
enhancement of the role of NEDs; the subsidiary one is splitting
the roles of CEO and chair of the board.
• At least one half of the board as a whole should be comprised
of NEDs, all of whom should be independent.187 As well, the
board “should include an appropriate combination of
executive and non-executive directors (and, in particular,
independent non-executive directors) such that no individual
or small group of individuals can dominate the board’s
decision taking”.188 As with the board as a whole, the NEDs
have a role both in setting the company’s strategy and
supervising its implementation.189 In the case of the non-
executive directors, however, “supervising” also includes
monitoring the performance of the company’s executive
directors.190 The CGC provides a definition of independence,
which is essentially conceived of as independence from the
management. Thus, a person who has been an employee of
the company within the previous five years, or has had a
material business relationship with it in the previous three
years, or holds cross-directorships, or represents a significant
shareholder, or has been on the board for more than nine
years is not categorised as independent.191
• The qualities and qualifications of the individuals appointed
to the board are clearly crucial, and the CGC provides that
there should be “a formal, rigorous and transparent procedure
for the appointment of new directors to the board”,192 with
the search for board candidates being conducted, and
appointments made, “on merit, against objective criteria and
with due regard for the benefits of diversity on the board,
including gender”.193 To increase accountability and keep the
board refreshed, directors of FTSE 350 companies should be
subject to annual re-election, and directors of smaller
companies to re-election at least every three years.194 A
measure of the perceived workload of executive directors,
NEDs and chairs is evident in the CGC rule that boards
“should not agree to a full time executive director taking on
more than one non-executive directorship in a FTSE 100
company nor the chairmanship of such a company”.195
• The board should have remuneration196 and audit197
committees on which the NEDs should be the only members,
and a nomination committee on which they should be the
majority of the members.198 These three committees clearly
deal with the three most sensitive governance matters. The
whole scheme will fail if the executive directors can control
the appointment of the NEDs; remuneration decisions place
the executive directors in a position of acute conflict of
interest; and assessment by the shareholders of the
performance of the management will be impossible in the
absence of accurate financial data about the company but, by
the same token, this is an area where the management has the
greatest incentive to put an unduly optimistic interpretation
on the company’s position.
• The CEO and the chair of the board should not be the same
person.199 Their roles are seen as quite distinct. The chair of
the board, whose role is unspecified and indeed hardly
recognised in statutory company law, “is responsible for
leadership of the board, ensuring its effectiveness on all
aspects of its role”.200 The chairman is also responsible for
“setting the board’s agenda and ensuring that adequate time
is available for discussion of all agenda items, in particular
strategic issues. The chairman should also promote a culture
of openness and debate by facilitating the effective
contribution of nonexecutive directors in particular and
ensuring constructive relations between executive and non-
executive directors”.201 The chairman is responsible for
ensuring that the directors receive accurate, timely and clear
information.202 The chairman should ensure effective
communication with shareholders.203
The CGC recognises that the chair will have such
extensive contact with the executive management that his or
her independence will inevitably be compromised.204 On the
other hand, the chair should be independent upon
appointment.205 From this follows one of the most
contentious, and disregarded, provisions of the CGC, namely,
that a retiring or recently retired CEO should not move on to
become chair of the board, although exceptionally the board
may so decide, subject to consulting major shareholders in
advance and setting out the relevant reasons at the time of the
appointment and in the next annual report.206
• The chairman should meet the NEDs without the executives
being present (it is not stipulated how often) and once a year
the NEDs should meet without the chair to appraise the
latter’s performance.207
• A senior independent director should be identified and be
available as a sounding board for the chair, as an
intermediary for the other directors, and as a person for
shareholders to contact if they think that contact through the
CEO or chair of the board would be inappropriate.208 All non-
executive directors should be offered the opportunity to
attend meetings with shareholders (and should attend them if
requested by the shareholders). However, a particular
obligation falls on the senior NED to “attend sufficient
meetings with a range of major shareholders to listen to their
views in order to help develop a balanced understanding of
the issues and concerns of major shareholders”.209
• There should be a formal statement of the matters on which
the board’s decision is necessary (i.e. of matters which are
not simply left for management to decide and subsequently
report to the board).210
• The NEDs should have access to appropriate outside
professional advice and to internal information from the
company.211
14–76
There are two points to be made about these provisions of the
UK Corporate Governance Code. The first is that the stress on
the monitoring role of the independent NEDs has the effect of
reproducing within the single-tier board the distinction between
management and supervision (or monitoring) that is to be found
within the two-tier board system, except that in the single-tier
system the NEDs are necessarily involved in the formulation of
company strategy. Whether it is better to extend this functional
distinction into a structural division between managing and
supervisory boards depends on whether one thinks that
monitoring is carried out more effectively if the executives set
strategy together with the monitors or separately from them. The
former provides the monitors with more information, but
facilitates their capture by the executive directors.212 In any
event, one can conclude that the functions performed by one-tier
and two-tier boards are not fundamentally different from one
another.213
Secondly, although independent NEDs may no longer be the
cat’s-paws of the CEO, which in the past they often were, it is
far from clear that the UK Corporate Governance Code
provisions provide the independent NEDs with effective
incentives to exercise control over strong-minded CEOs. Since
executive management is unlikely easily to accept supervision
by the non-executives, the non-executives may well have a battle
on their hands to impose their will where there is a divergence of
view. Even when explicitly trained, as Higgs recommended, why
should the non-executives fight this battle rather than opt for a
quiet life? Self-esteem will provide some incentive to this end,
no doubt, as does the NEDs’ increasingly explicit accountability
to the shareholders under the CGC.
But the potentially insoluble shortcomings here are, more
recently, being addressed in quite a different way, by making
shareholders, especially the institutional shareholders, more
accountable for the exercise of their own powers over the
governance of their companies.214 The explicit linking of these
two powerful governance strands was promoted in the 2012 Kay
Report,215 which highlighted the serious problems of short-
termism and consequential lack of trust in UK equity markets,
with both executive remuneration packages and institutional
investor practices coming into focus as needing reform.216
Enforcement of the UK Corporate Governance
Code
14–77
We referred above to the UK Corporate Governance Code as
“soft law”. This is perhaps misleading. At the centre of the CGC
there is a perfectly “hard” obligation. The Listing Rules require
both UK-registered and overseas-registered companies with
Premium Listing in the UK to disclose in their annual report the
extent to which they have complied with the UK Corporate
Governance Code in the previous 12 months and to give reasons
for areas of non-compliance (if any).217 More precisely, the
company must explain how it has applied the Main and
Supplementary Principles set out in the CGC (i.e. compliance at
the level of principle is obligatory), and must also state whether
it has complied with the lower-level specific “provisions” of the
CGC and explain any areas of non-compliance. The sanctions
which can be applied to both companies and directors for non-
compliance with the listing rules are extensive.218
14–78
The “softness” of the law is a result of the lack of legal
consequences if compliance with the disclosure obligation
imposed by the LR reveals non-compliance with the CGC. It
would be perfectly in compliance with the listing rules for the
company to report that it has not complied with the CGC in any
respect, provided it also gave reasons for its wholesale rejection.
Any further action on the basis of the reported non-compliance is
for the shareholders, as the recipients of the annual reports, not
for the FCA or any other Governmental body. This has been
called the principle of “comply or explain”. It suggests that, even
in relation to the relatively small group of Premium Listed
companies, UK regulators still feel hesitant about their ability to
devise governance structures which will be suitable for all the
companies in the identified population. The possibility of not
complying fully with the Code gives the companies in question
flexibility in adapting the provisions of the UK Corporate
Governance Code to their particular circumstances, whilst the
need to “explain” gives the Code a somewhat greater force than
a recommendation which companies are free to accept or reject.
The freedom to explain rather than comply in full with the Code
has been used in particular by small listed companies.219
“Comply or explain” clearly puts shareholders in a pivotal
position in determining whether the Code’s requirements will
bite in practice, and much of its impact is due to the support
which institutional shareholders have given to the Code.220 In
short, “softness” is not the same as self-regulation, with its risk
of being merely self-interested: the compulsory disclosure
regime, backed by the statutory right given to shareholders to
dismiss directors, gives the CGC far greater bite.
14–79
How effective is this regime? There is evidence of some non-
compliance with even the “hard” obligation of the LR; and some
companies fail to explain areas of non-compliance and rather
greater numbers give explanations which can hardly be
considered as adequate.221 The level of enforcement by the FCA
is relatively low. Non-compliance with the CGC itself is a more
slippery concept, since there is no obligation to abide by it
provided non-compliance is adequately explained. But in general
companies have chosen to comply; and indeed the move has
often been from inadequate explanation of non-compliance to
full compliance rather than to adequate explanation.222 In this
sense, the comply or explain mechanism is clearly changing
corporate behaviour, although some companies do make proper
use of the explanation mechanism to give good reasons why in
their particular case one or more provisions of the CGC is
inappropriate.223
14–80
The CGC is subject to both praise and criticism. For example, its
application only to Premium Listed companies can be seen as
too narrow. Certainly, the Cadbury Committee recommended
that its Code of Practice should be observed by all large
companies.224 The restriction to listed companies seems to have
arisen because the Listing Rules provided a convenient
enforcement mechanism, not because this category aptly defines
the companies for whom such rules are most appropriate.225
Within this limited class, however, the regime surely succeeds in
putting pressure on companies to adopt higher standards of best
practice, standards which would generally be seen as to onerous
to be adopted as mandatory legislative minima (the composition
of audit and remunerations committees is an illustration).
Moreover, these standards can be regularly and flexibly
reviewed in ways not possible with statutory or regulatory rules.
The best evidence of these benefits might be seen in the
widespread adoption of similar regimes internationally.
CONCLUSION
14–81
The board of directors has long been the “black box” of British
company law. In large companies, with numerous and dispersed
shareholding bodies, the central management of the company’s
business is necessarily in the hands of the board. Yet company
law has traditionally specified very little about how this body
should operate. That the board is central to the operation of
companies was recognised from the beginning by the
development of a wide range of duties (considered in Ch.16)
which apply to directors who undertake to act on behalf of the
company. However, the questions of which functions should be
assigned to the board and of how the board should organise itself
for the effective discharge of those duties were ones that
company law did not seek to answer. All that constituted the
“internal management” of the company which it was for the
shareholders to design.
That still remains largely the case, though the case law on the
disqualification of directors (considered in Ch.10), conceived
with the interests of creditors in mind, has begun to lead to the
formulation of more demanding principles about the proper
conduct of directors of all companies. For listed companies,
however, things have changed over the past quarter of a century.
Now there is not only a small-scale corporate governance
industry in existence, but the central tenets of its beliefs have
been given regulatory expression in the UK Corporate
Governance Code which, with the support of the institutional
shareholders, exerts a real, although not completely inflexible,
pressure on companies to conform to a particular model of board
composition and operation. A company whose business is
producing outstanding profits can probably afford to ignore the
CGC to large extent, but should its business performance falter,
it is likely to find the pressures to conform to that model
irresistible.
1
Financial Reporting Council, UK Corporate Governance Code, September 2014 (and
similarly the draft April 2016 version).
2
For the meaning of “Premium Listing” see below at paras 25–6 and 25–15.
3
After the 2006 Act at least one of those directors must be a natural person (s.155)—as
opposed to a corporate director—in order to improve the enforceability of directors’
obligations. The requirement however will be expanded so as to require all company
directors to be natural persons, subject to certain yet-to-be-defined exceptions, as a result
of s.87 of the Small Business, Enterprise and Employment Act 2015,
https://www.gov.uk/government/news/the-small-business-enterprise-and-employment-
bill-is-coming [Accessed 28 April 2016]. The Act also contains a mechanism for dealing
with the situation where the company does not comply with ss.154 or 155. The Secretary
of State may issue a direction to the company, specifying the action the company must
take and failure to comply with the Secretary of State’s direction constitutes a criminal
offence on the part of the company and any officer in default, including a shadow
director: s.156.
4
Contrast, for example, Pt 4, Divisions One and Two of the German Aktiengesetz for
large companies and of the statute for the Gesellschaft mit beschränkter Haftung (private
company).
5 See para.3–14.
6 Article 3 of the model articles in each case.
7 Article 5 of the model articles for public companies. The same provision is included
for private companies limited by shares: art.5.
8 Exercise of the delegation power also raises questions of compliance by directors with
their general duties, notably in relation to the degree of supervision they should maintain
over delegated functions. See paras 16–16 and 16–33, below.
9 Partnership Act 1890 s.24(8).
10 i.e. in legal terms. It is clear that, in terms of the functional analysis of economists,
directors are agents and shareholders principals because the former have the factual
power to affect the well-being of the latter. But this does not mean the authority of the
directors is conferred upon them in such a way as to make them the legal agents of the
shareholders.
11 Isle of Wight Railway v Tahourdin (1883) 25 Ch.D. 320 CA, esp. at 329.
12
Automatic Self-Cleansing Filter Syndicate Co v Cuninghame [1906] 2 Ch. 34 CA.
13
per Cozens-Hardy LJ at 44. Also see Gramophone & Typewriter Ltd v Stanley [1908]
2 K.B. 89 CA; see especially, per Fletcher Moulton LJ at 98, and per Buckley LJ at 105–
106 (despite the fact that the then current edition of his book took the opposite view).
14
Marshall’s Valve Gear Co v Manning Wardle & Co [1909] 1 Ch. 267.
15
Quin & Axtens v Salmon [1909] 1 Ch. 311 CA; [1909] A.C. 442 HL.
16
But for contrary views, see G. Goldberg in (1970) 33 M.L.R. 177; M. Blackman in
(1975) 92 S.A.L.J. 286; and G. Sullivan in (1977) 93 L.Q.R. 569.
17
Shaw & Sons (Salford) Ltd v Shaw [1935] 2 K.B. 113 CA. See also Rose v McGivern
[1998] 2 B.C.L.C. at 604.
18 Shaw & Sons (Salford) Ltd v Shaw [1935] 2 K.B. 113 at 134 CA.
19
They can now remove the directors by ordinary resolution: s.168, below.
20 Scott v Scott [1943] 1 All E.R. 582. See also Black White and Grey Cabs Ltd v Fox
[1969] N.Z.L.R. 824 NZCA; where the cases were reviewed, as they were by Plowman J
at first instance in Bamford v Bamford [1970] Ch. 212 CA.
21
Scott v Scott [1943] 1 All E.R. 582 at 585D. Lord Clauson was sitting as a judge of
the Chancery Division.
22
This is clearly seen if the judgments in the above cases are compared with that in Foss
v Harbottle (1843) 2 Hare 461; see below, para.17–4. The modern view was reiterated at
first instance in Breckland Group Holdings Ltd v London and Suffolk Properties Ltd
[1989] B.C.L.C. 100, noted by K. Wedderburn in (1989) 52 M.L.R. 401; and L. Sealy in
[1989] C.L.J. 26.
23 Article 4 in each case. However, the special resolution altering the articles or giving
instructions to the directors does not have the effect of invalidating anything done by the
directors before the passing of the resolution: art.4(2). If the directors have merely
resolved to take course X before the shareholders resolve by special resolution to take
contradictory course Y, then presumably the shareholder resolution constitutes a binding
instruction to the directors not to implement their prior resolution. However, if in
implementation of their prior resolution the directors have contracted on behalf of the
company with a third party, that third-party contract would remain binding on the
company. If extensive powers of direction are exercised by the shareholders, it is
conceivable that they might come to be regarded as de facto or shadow directors of the
company. See para.16–8, below.
24 Unless the “manager” can be classified as a shadow or de facto director: see para.16–
8. Contrast the position in other jurisdictions, such as Australia, where the general
statutory duties apply not only to directors but also to “officers”.
25
Baron v Potter [1914] 1 Ch. 895. Contrast situations in which a board cannot do what
the majority of the directors want because of the opposition of a minority acting within
its powers under the articles: see, e.g. Quin & Axtens v Salmon [1909] A.C. 442 HL; and
the decision of Harman J in Breckland Group Holdings v London & Suffolk Properties
[1989] B.C.L.C. 100.
26Alexander Ward & Co v Samyang Navigation Co [1975] 1 W.L.R. 673 HLSc, per
Lord Hailsham at 679 citing the corresponding passage from the 3rd edn of this book.
27
Foster v Foster [1916] 1 Ch. 532.
28 Irvine v Union Bank of Australia (1877) 2 App. Cas. 366 PC.
29
Massey v Wales (2003) 57 N.S.W.L.R. 718 NSWCA.
30
Grant v UK Switchback Rys (1888) 40 Ch.D. 135 CA.
31
Bamford v Bamford [1970] Ch.D. 135 CA.
32
Bamford v Bamford [1970] Ch.D. 135 CA.
33
Ch.15.
34
See, for example, Salomon v Salomon & Co Ltd [1897] A.C. 22 at 57, per Lord
Davey.
35
Re Express Engineering Works Ltd [1920] 1 Ch. 466 CA. To similar effect is Euro
Brokers Holdings Ltd v Monecor (London) Ltd [2003] 1 B.C.L.C. 506 CA, where the
decision in question (under a shareholders’ agreement) required a resolution of the board
but unanimous shareholder agreement was treated as a substitute. Again, however, the
board was disabled from acting and so the case could be seen as one in which the
shareholders had a default power to act.
36
Final Report I, para.7.17. The Report states that this is how the rule is recognised at
common law, though this may rather overstate things.
37 Modernising, paras 2.31–2.35; CA 2006 s.281(4).
38
Of course, the model articles make this issue irrelevant (other than in avoiding the
formalities of a special resolution), since they impose a lower threshold, empowering the
shareholders to direct the directors by special resolution (art.4).
39 As discussed in Ch.3, above. The adoption of the initial constitution is also an act of
the shareholders, since the incorporators become members of the company: above,
para.4–5.
40 Discussed in Ch.4, above.
41 2006 Act s.549 (below, Ch.24).
42
2006 Act ss.569 et seq. (below, Ch.24).
43 All these matters are discussed in Ch.12, above.
44
2006 Act ss.630 et seq., discussed below in Ch.19.
45 2006 Act ss.895 et seq., discussed below in Ch.29.
46 Insolvency Act 1986 s.84.
47 2006 Act Pt 16, Ch.2, discussed below at paras 22–7 et seq.
48 2006 Act Pt 10, Ch.3, discussed below at paras 16–67 et seq.
49
Discussed below at paras 16–117 et seq. See also the mandatory role of shareholders
on board remuneration: below at paras 14–30 et seq.
50
51 LR 10. The FCA has the power to dispense from the strict application of this rule.
52 2006 Act Pt 16, discussed further in Ch.21, below.
53 2006 Act s.425.
54
2006 Act s.113.
55
2006 Act s.1121. Where the director or officer is itself a company, there is no liability
unless one of the latter’s officers is in default, in which case he or she is criminally liable
as well as the corporate officer or director: s.1122.
56
To some extent the statute is following the lead given by the decision in Meridian
Global Funds Management Asia Ltd v Securities Commission [1995] 2 A.C. 500 PC.
The CLR reported that, under the previous law, the uncertainty as to who was a manager
meant that prosecution of sub-board managers was rarely attempted: Final Report,
Ch.14, fn.296.
57
Final Report, para.15.54, though for particular offences it would be possible to cast
the net wider. It would not be necessary for such a manager to be employed by the
company, as where the particular administrative function had been out-sourced to an
independent organisation.
58
2006 Act s.1121(3).
59 2006 Act s.12.
60 2006 Act s.167.
61
2006 Act ss.162 et seq.
62
2006 Act ss.163, 165 and 241. The company, on the application of a member,
liquidator or creditor or other person with a sufficient interest, may be ordered by the
court to disclose the residential address if there is evidence that service of documents at
the service address is ineffective or it is necessary or expedient to do so in connection
with the enforcement of a court order: s.244.
63
2006 Act ss.240 and 242. The Registrar may use protected information for the
purposes of disclosure to a public authority specified in regulations or, again subject to
regulations, a credit reference agency, for otherwise the company might not be able to
obtain credit: s.243 and the Companies (Disclosure of Address) Regulations 2009 (SI
2009/214). Further, the Registrar may put the director’s address on the public record if
communications sent to the director by the Registrar remain unanswered or there is
evidence that service of documents at the director’s service address is ineffective. The
director and the company must be consulted before this step is taken. If it is, the
company must alter its public record as well: ss.245 and 246.
64Model public company articles, art.21. The model for private companies makes no
such provision. The board also has power to appoint directors (arts 17 (private) and 20
(public))—this is a useful power for filling vacancies arising unexpectedly between
annual general meetings—and again, directors of public companies appointed by the
board come up for re-election at the next AGM (art.21), with private companies having
no equivalent.
65
2006 Act s.160. This is designed to prevent the members being faced with the
alternative of either accepting or rejecting the whole of a slate of nominees.
66 Companies Act 1929 Table A art.66.
67 Cmnd. 6659, para.131.
68
69 2006 Act s.157.
70
2006 Act s.157(4),(5). Existing under-age directors ceased to be directors on the
section coming into force (s.159(2)).
71
See above, fn.3.
72
2006 Act s.158. This particular aspect of the regulation-making power is necessary
because, under devolution, the age of criminal responsibility could vary within the UK.
73
See the model articles for public companies, arts 13 and 25–27, which go far to clarify
the alternate’s position. The model articles for private companies make no provision for
alternates.
74
2006 Act s.250.
75 See the work of High Pay Centre, an independent non-party think tank established
specifically to monitor pay at the top of the income distribution which emanated from a
year-long independent review: High Pay Commission (now High Pay Centre), Cheques
with Balances: Why tackling high pay is in the national interest (Final Report, 22
November 2011) http://highpaycentre.org/files/Cheques_with_Balances.pdf [Accessed
27 April 2016]; the government consultation on the issue: BIS Discussion Paper:
Executive Remuneration http://www.bis.gov.uk/Consultations/executive-remuneration-
discussion-paper [Accessed 27 April 2016] which resulted in a series of reforms through
both primary and secondary legislation applicable to quoted companies; and the review
produced by the Hay Group on the current state of play: What’s your next move?
Executive reward: review of the year 2011 (Hay Group)
http://www.haygroup.com/downloads/uk/Whats_your_next_move.pdf [Accessed 27
April 2016]. Also see the 2015 government report:
https://www.gov.uk/government/publications/2010-to-2015-government-policy-
corporate-accountability/2010-to-2015-government-policy-corporate-accountability
[Accessed 27 April 2016].
76
Craven-Ellis v Canons Ltd [1936] 2 K.B. 403 CA, cf. Re Richmond Gate Property Co
Ltd [1965] 1 W.L.R. 335, which is probably based on a misunderstanding of the earlier
case. See also Diamandis v Wills [2015] EWHC 312 and less directly, the decision of the
Supreme Court in Benedetti v Sawiris [2013] UKSC 50; [2014] A.C. 938 on the general
interaction between contract and a claim in restitution for quantum meruit.
77
78Model articles for public companies, arts13 and 23 (a widely expressed power).
Similar provisions are to be found for private companies (arts 14, 19). For the problems
which arise if the company seeks to fix the terms of executive remuneration without
complying with its articles, see Guinness v Saunders [1990] 2 A.C. 662 HL; UK Safety
Group Ltd v Hearne [1998] 2 B.C.L.C. 208; and below, para.16–24.
79 Table A, art.82.
80 Re Halt Garage (1964) Ltd [1982] 3 All E.R. 1016. This case involved a decision by
shareholders as to the remuneration to be paid to themselves as directors. It seems likely
that the same principle would be applied to a directors’ decision, except that the
directors would also have to meet their core duty of loyalty (see below at paras 16–52
and 16–84). In the context of unfair prejudice petitions (that is, in cases of disputes
between shareholders) the courts have struck out more boldly and have been willing to
assess whether the remuneration paid to the controllers as directors was appropriate: see
below at para.20–10.
82
Principle D.2.1, and note the 2014 (and draft 2016) version of D.2.4.
83
Principle D.1.
84
Though one should note the argument of Professors Cheffins and Thomas that such
approval is more likely to be effective in relation to sudden leaps in executive pay in a
particular company than in controlling a steady, general upward drift in pay across all
companies: “Should Shareholders Have a Greater Say over Executive Pay? Learning
from US Experience” (2001) 1 J.C.L.S. 277.
85
LR 9.4.
86
Principle D.1.3.
87 See High Pay Commission (now High Pay Centre), Cheques with Balances: Why
tackling high pay is in the national interest (Final Report, 22 November 2011)
http://highpaycentre.org/files/Cheques_with_Balances.pdf [Accessed 27 April 2016];
and more recently, an attack by the High Pay Centre on performance-related
remuneration: High Pay Centre, No Routine Riches: Reforms to Performance-Related
Pay (13 May 2015) http://highpaycentre.org/files/No_Routine_Riches_FINAL.pdf
[Accessed 19 April 2016]; and The Metrics Re-Loaded: Examining Executive
Remuneration Performance Measures (10 June 2015)
http://highpaycentre.org/files/Metrics_Reloaded.pdf [Accessed 27 April 2016].
88 Principle D.1.
89
Sch.A.
90
Principle D.1. and Sch.A.
91 It should be noted that the statutory pre-emption rights of shareholders (see below at
para.24–6) might lead to a similar requirement for shareholder approval, but the
statutory rights (a) do not apply to an allotment of securities under an employees’ share
scheme (s.566), which might include a scheme for executive directors; and (b) can be
disapplied in advance by shareholder vote (ss.569–571), whereas the rights under the LR
may not be. It should also be noted that the LR do not require shareholder approval for
share option schemes or other long-term incentive plans which are open to all or
substantially all the company’s employees (provided that the employees are not
coterminous with the directors), presumably on the grounds that the wide scope of the
scheme is protection against directorial self-interest: LR 9.4.2.
92 LR 9.4.2–3.
93 See BIS Discussion Paper: Executive Remuneration
http://www.bis.gov.uk/Consultations/executive-remuneration-discussion-paper
[Accessed 27 April 2016], and Discussion paper: summary of responses (ibid),
indicating the problems with binding votes, although the possibility remains live.
94 Principle D.1.1.
95 2006 Act s.420 et seq., noting especially ss.421(2A) and 422A.
96 2006 Act ss.439 and 439A.
97
Finally, it is noteworthy that the FCA has in place four Remuneration Codes tailored
to different types of firm, each directed at enhancing awareness of risk and ensuring that
risk is better managed and better aligned with individual reward: see https://www.the-
fca.org.uk/remuneration [Accessed 27 April 2016].
98
Please see
http://ec.europa.eu/internal_market/company/docs/modern/cgp/shrd/140409-
shrd_en.pdf [Accessed 27 April 2016], proposing amendments to the existing
Shareholder Rights Directive (Directive 2007/36/EC) and Directive 2013/34/EU. On
issues relating to corporate governance reporting (“comply or explain”), the UK
(through the FRC) has responded to the Commission on its progress in implementing
those recommendations: https://www.frc.org.uk/News-and-Events/FRC-
Press/Press/2015/July/UK-responds-to-European-Commission-s-Recommendatio.aspx
99
On the UK Stewardship Code, see para.15–30.
100
2006 Act s.385.
101
2006 Act s.385(4)–(6).
102
For the current requirements see LR 9.8.8.
103 Or more frequently if the policy changes, even in a minor way.
104 The very limited transition exception is that legal obligations made before the
legislation introducing these reforms was published on 27 June 2012 and which have not
been amended or renewed since, will not be subject to the restrictions in 2006 Act
Ch.4A: Enterprise and Regulatory Reform Act 2013 s.82.
105 2006 Act s.439(5). The director and company could agree of course that some item
of the remuneration package should be so conditional.
106
107Large and Medium-Sized Companies and Groups (Accounts and Reports)
Regulations 2008 (SI 2008/410) Sch.8, as amended by the Large and Medium-Sized
Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (SI
2013/1981) Sch.8.
108See Large and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 (SI 2013/1981) Sch.8 Pt 5.
109 SI 2013/1981 Pts 4 and 6.
110
See Large and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 (SI 2013/1981) Sch.8.
111 This represents an obvious attempt to persuade directors and shareholders to focus
on the issue of widening pay dispersal within companies, with the multiples by which
executive directors’ remuneration exceeds the average remuneration of employees
increasing dramatically.
112 The mooted mandatory disclosure of the ratio between top executive salaries and the
mean or median salaries in the company seems generally to be regarded as too
dependent on the size of the company, the nature of its business, and its geographical
spread to provide helpful data for cross-company comparisons.
113
Large and Medium-Sized Companies and Groups (Accounts and Reports)
Regulations 2008 (SI 2008/410) Sch.5 para.1 requires the disclosure of aggregate
remuneration (a rule applied to quoted companies as well), para.2 of the amount paid to
the highest paid director (but without naming that person) if the aggregate remuneration
exceeds £200,000, and paras 3–5, the aggregates paid by way of early retirement
benefits, compensation for loss of office and to third parties by way of directors’
services.
114
2006 Act s.498(4). On the role of the auditor see Ch.22.
115 CGC, Main Principle B.7. Even as late as 1985 the model set of articles (Table A)
provided that “a managing director and a director holding any other executive office
shall not be subject to retirement by rotation” (art.84). The current set of model articles
for public companies contains no such provision (that for private companies contains no
provision for regular re-election at all, whether for executive or non-executive directors).
116
2006 Act s.168(1). The previous version of the section (s.303 of the 1985 Act) also
explicitly overrode anything to the contrary in the articles. This is not repeated in s.168,
presumably on the grounds that it was unnecessary so to provide. The statute will
override the articles, unless otherwise provided in the statute, although one would have
thought that the same was true of a private agreement. In the case of a community
interest company the Regulator is empowered to remove a director at any time, but not
apparently so as to give the director a claim for compensation against the company.
Instead, the director can appeal to the court against the Regulator’s decision, apparently
with the effect of reinstating the director if the appeal is successful: Companies (Audit,
Investigations and Community Enterprise) Act 2004 s.46.
117 The current model articles for public and private companies do not include such a
provision, but see Bersel Manufacturing Co Ltd v Berry [1968] 2 All E.R. 552 HL
(power of life directors to terminate the appointment of ordinary directors); Lee v Chou
Wen Hsien [1984] 1 W.L.R. 1201 PC (power of majority of directors to require a
director to resign).
118
Such arrangements are what in the US are referred to as “staggered boards”.
119
120 Bushell v Faith [1970] A.C. 1099 HL. The shares in a private company were held
equally by three directors and the articles provided that in the event of a resolution to
remove any director the shares held by that director should carry three times their normal
votes, thereby enabling him to outvote the other two. It was held that: “There is no fetter
which compels the company to make voting rights or restrictions of general application
and—such rights or restrictions can be attached to special circumstances and to
particular types of resolution”: per Lord Upjohn at 1109.
121
A similar article would scarcely be practical in most other cases.
122 See Re Westbourne Galleries Ltd [1973] A.C. 360 HL, and Ch.20, below. It also
seems that the court could enjoin the breach of a binding agreement between members
and a director on how they should vote on any resolution to remove a director, thus, in
effect, affording another method of circumventing s.168. See Walker v Standard
Chartered Bank Plc [1992] B.C.L.C. 535 CA. Such an agreement would not be caught
by s.168(1) which refers only to agreements between the director and the company.
123
See the forthright dissenting opinion of Lord Morris of Borth-y-Gest at 1106 and D.
Prentice (1969) 32 M.L.R. 693 (a note on the Court of Appeal’s judgments). The
development of the unfair prejudice protection further reduces the need for the decision
—but it equally reduces its adverse consequences, since the exercise of the legal right to
remove a director may nevertheless constitute unfairly prejudicial conduct. See para.20–
7.
124 2006 Act s.168(2). This gives rise to a potential ruse for avoiding the impact of
s.168. Shortly before the meeting the directors whose removal is sought resign, having
added to the board new members under their gap-filling powers (see above fn.64). The
removal resolution is now unnecessary in relation to the directors who have resigned and
will be ineffective in relation to their replacements (even if the resolution states as one of
its objectives the removal of the replacements) because special notice will not have been
given by the proposers to the company about the removal of the replacements, since the
proposers will not have known who the replacements were to be at the time they served
notice on the company: Monnington v Easier Plc [2006] 1 B.C.L.C. 283.
125
2006 Act s.312. The company must then give notice to the members in the notice
convening the meeting or, if that is not practicable, by newspaper advertisement or other
mode allowed by the articles, normally not less than 14 days before the meeting: ibid.
126
2006 Act s.169(1),(2). In this case a private company cannot use the written
resolution procedure: a meeting has to be held.
127
2006 Act s.169(3). If those representations are not received in time to be circulated,
the director can require them to be read out at the meeting (s.169(4)). The same rule
applies if the company does not comply with its obligations under s.169(3), but the
resolution is not invalidated in such a case. This would provide an easy way for the
company to avoid the director’s removal.
128
But apparently the director can be deprived of this protection if the articles contain
an express power to remove a director by ordinary resolution and the company acts
under that power. Section 169 is expressly limited to removals “under section 168” and
s.168(5)(b) provides that s.168 does not “derogate from any power to remove a director
that may exist apart from this section”.
129
2006 Act s.168(5)(a). Although those terms themselves can be subject to statutory
bars: see, e.g. ss.226B–C for quoted companies.
130
131The board of directors can normally terminate a director’s contract of service as an
executive, and, under the usual provision in the articles, so can the general meeting by
removing him as a director: see ibid.
132 See above, paras 14–34 et seq.
133
Recall that the articles do not operate as an enforceable contract between the director
and the company: see above, paras 3–23 et seq. Instead, they define the terms of the
separate contract between director and company: Re Peruvian Guano Co, Ex p. Kemp
[1894] 3 Ch. 690, 701; Re New British Iron Co, Ex p. Beckwith [1898] 1 Ch. 324, 326–
327; Swabey v Port Darwin Gold Mining Co (1889) 1 Meg. 385, 387 CA.
134Swabey v Port Darwin Gold Mining Co (1889) 1 Meg. 385 CA; Read v Astoria
Garage (Streatham) Ltd [1952] Ch. 637 CA.
135
Swabey v Port Darwin Gold Mining Co (1889) 1 Meg. 385 CA; Bailey v Medical
Defence Union (1995) 18 A.C.S.R. 521 H Ct Australia.
136For the complications which are liable to occur in the latter event, see James v Kent
[1951] 1 K.B. 551 CA; and Pocock v ADAC Ltd [1952] 1 All E.R. 294n.
137 Southern Foundries v Shirlaw [1940] A.C. 701 HL; Shindler v Northern Raincoat
Co Ltd [1960] 1 W.L.R. 1038, per Diplock J. In the light of the observations in the
earlier case it seems that the court will not grant an injunction to restrain the alteration of
the articles.
138 Under a rolling fixed-term contract, the fixed term is renewed from day to day, so
that the full length of the term always remains to run. Under an ordinary fixed term, a
director removed, for example, in the last three months of a fixed three-year term, would
not receive much benefit from the fixed term; under a “three-year roller” the director
will always have the full protection of the three-year term. Moreover, it is possible to
structure the contract so that, although the company is bound by the fixed term, the
director is permitted to terminate the contract by giving relatively short notice.
139
In Runciman v Walter Runciman Plc [1992] B.C.L.C. 1084 the directors’ service
contracts required five years’ notice for lawful termination, a provision which had been
increased from three years in the face of the prospect of a takeover bid. The CGC
recommends contract and notice periods of no more than one year, or at least reducing to
one year even if something more is required initially to attract the director (D.1.5).
140
This express provision may be, but need not be, a liquidated damages clause. It may
give the director an entitlement which goes far beyond any compensation which would
otherwise be payable to him for breach of contract. The CGC provides, however, that
“the aim [when agreeing provisions which determine termination payments] should be to
avoid rewarding poor performance” (D.1.4).
141
2006 Act ss.228 and 229. Failure to comply constitutes a criminal offence on the part
of every officer of the company who is in default. Section 228 refers to “service
contracts”, unlike its predecessor (s.318 of the 1985 Act) which referred to “contracts of
service”. It is suggested that this change makes it clear that both contracts of service and
contracts for services are covered. Section 230 brings in shadow directors (on the
meaning of which see para.16–8, below).
142 Above, at para.14–44.
143
2006 Act ss.423(1) and 441(1).
144
SI 2013/1981 Sch.8 Pt 4.
145 SI 2013/1981 Sch.8 Pt 3.
146 2006 Act s.188. Section 188(3) sets out a complex definition of the “guaranteed
period” so as to prevent a company circumventing the legislative policy through a
combination of fixed terms and notice periods, each shorter than two years but
cumulatively longer. Section 188(4) performs the same role for guaranteed terms made
up of more than one contract. Under the previous legislation the relevant period was the
very long one of five years, but both the Law Commission and the CLR had
recommended a reduction.
147 2006 Act s.189. That period of reasonable notice might be less than two years. Thus,
the director pays a potential penalty for failing to secure shareholder approval, in that the
contract may become subject to a notice period shorter than the two years which the
contract could have contained without shareholder approval.
148 2006 Act ss.188(1) and 223.
150
Directors’ Remuneration, Report of a Study Group (Gee, 1995), para.7.13.
151 LR 9.8.8(8).
152 CGC, para.D.1.5.
153
The circumstances in which the section bites are widely defined in s.215. There are
specific provisions in ss.218 and 219 dealing with compensation payments made in
connection with takeover bids or transfers of the company’s assets, which are discussed
in para.28–28.
154
2006 Act s.220. The exclusion of covenanted payments, in the standard case, is in
line with the previous law (Taupo Totara Timber Co v Rowe [1978] A.C. 537 PC;
Lander v Premier Pict Petroleum, 1997 S.L.T. 1361) and was recommended by the Law
Commission (Company Directors: Regulating Conflicts of Interests and Formulating a
Statement of Duties, Cm. 4436 (1999), para.7.48). But, given the requirement for
approval of contracts of more than two years’ duration, it makes all the more peculiar the
exemption from shareholder approval of covenanted termination payments equivalent to
more than two years’ salary.
155
2006 Act s.222(1), thus at last implementing the report of the Cohen Committee:
Report of the Committee on Company Law Amendment, Cmnd. 6659 (1945), p.52. The
recipient will normally be the director but the legislation covers compensation payments
to persons connected with the director or at the direction of the director or a person
connected with the director: s.215(3).
156For the same reason the Act says nothing about the division of function between the
board and its committees nor about the role of the chair of the board.
157
158 See above at para.10–5 and below at paras 16–34 et seq.
159 Council Regulation 2157/2001/EC art.38 and Recital 14 (see above at para.1–40).
160
Council Regulation 2157/2001/EC art.39(1).
161
Council Regulation 2157/2001/EC art.40(1).
162 Council Regulation 2157/2001/EC art.48. The UK Government decided not to take
up the option available under the Regulation for the SO itself to determine the list of
matters requiring its authorisation.
163
Council Regulation 2157/2001/EC art.41(3), (4). The right of individual members of
the SO to information is a Member State option which the UK has exercised. See the
European Public Limited-Liability Company Regulations 2005 (SI 2005/2326) reg.63
(as amended by The European Public Limited-Liability Company (Amendment)
Regulations 2009 (SI 2009/2400)).
164Council Regulation 2157/2001/EC art.39(3). The exception is where the SO
nominates one of its members to fill a vacancy on the MO, during which period that
person’s supervisory functions are suspended.
165
Council Regulation 2157/2001/EC arts 39(2) and 40(2). There is a Member State
option for members of the MO to be appointed directly by the shareholders, but the UK
felt unable to take it up. Article 47(4) preserves appointing rights under national law of
minority shareholders or other persons.
166 Council Regulation 2157/2001/EC art.9(1)(c).
167 Council Regulation 2157/2001/EC art.39(5).
168 European Public Limited-Liability Company Regulations 2005 (SI 2005/2326)
reg.78(3) and (5). Nor must the application of the statutory duties require the SO and
MO to take a decision jointly: reg.78(4)—both as amended by The European Public
Limited-Liability Company (Amendment) Regulations 2009 (SI 2009/2400). For the
Government’s views on whether domestic rules were required at all and their extent see
DTI, Implementation of the European Company Statute: A Consultative Document,
October 2003, pp.22–23 and 25; and DTI, Implementation of the European Company
Statute: Results of Consultation, July 2004, pp.2–4.
169
Group of Experts, European Systems of Worker Involvement: Final Report, Brussels,
May 1977, Annex III. The subsequent enlargement of the EU has not affected this
statistic.
170
Council Directive 2001/86/EC supplementing the Statute for a European Company
with regard to the involvement of employees, implemented in the UK by the European
Public Limited-Liability Company Regulations 2005 (SI 2005/2326) Pt 3 (as amended
by The European Public Limited-Liability Company (Amendment) Regulations 2009 (SI
2009/2400)). The provisions of this directive are notoriously complex and include an
option for the employee representatives not to take up their representation rights. For an
analysis see Davies, “Workers on the Board of the European Company?” (2003) 32
I.L.J. 75. Despite the attempt to protect countries with mandatory employee
representation requirements from having them undermined by the formation of an SE, it
seems that some German companies have found the SE attractive because it enables
them to escape some aspects of their domestic laws. Although the proportion of
employees may be the same, the size of the board may be reduced for the SE, as
compared with, the domestic German rules, (small boards being regarded as more
efficient than large ones) and all the SE’s employees will be represented at board level,
not just the German ones, thus arguably diluting the employees’ influence. Thus, when
Allianz merged with its Italian subsidiary to form an SE its supervisory board was
reduced from 20 to 12 and, of the six board members for employees, four were German,
one French and one British.
171The “Davies Report” available at http://www.bis.gov.uk/assets/biscore/business-
law/docs/w/11-745-women-on-boards.pdf [Accessed 27 April 2016].
172
Women on FTSE 100 boards number 23.5% as at March 2015, up from 12.5% in
2010: https://www.gov.uk/government/publications/women-on-boards-2015-fourth-
annual-review [Accessed 27 April 2016].
173
The Equality and Human Rights Commission has issued guidance on such
appointments: “Appointments to Boards and Equality Law”,
http://www.equalityhumanrights.com/en/publicationdownload/appointments-boards-
and-equality-law [Accessed 27 April 2016].
174See http://ec.europa.eu/justice/newsroom/gender-equality/news/121114_en.htm
175 See para.14–30.
176 S. Bhagat and B. Black, “The Uncertain Relationship between Board Composition
and Firm Performance” (1999) 54 Business Lawyer 921. More recently, see C. Weir et
al, “An Empirical Analysis of the Impact of Corporate Governance Mechanisms on the
Performance of UK Firms”, available at SSRN: http://ssrn.com/abstract=286440
[Accessed 19 April 2016] or http://dx.doi.org/10.2139/ssrn.286440 [Accessed 19 April
2016], suggesting—rather depressingly—that neither the independence of the committee
membership nor the quality of the committee members had any significant effect on
performance.
177 Report of the Committee on the Financial Aspects of Corporate Governance, 1992.
178
Report of the Committee on the Financial Aspects of Corporate Governance,
Preface.
179 Which, however, can be seen as a general trend in corporate law and regulation and
by no means a British peculiarity: G. Hertig, “Western Europe’s Corporate Governance
Dilemma” in T. Baums, K.J. Hopt and N. Horn (eds), Corporations, Capital Markets
and Business in the Law (Kluwer Law International, 2000), pp.276–278.
180
The Hampel Committee was set up, as recommended by the Cadbury Committee, to
review the operation of the Cadbury Code of Best Practice which that earlier committee
had put in place. Their report is Final Report of the Committee on Corporate
Governance (Gee, 1998).
181
Committee on Corporate Governance, Preliminary Report (August 1997).
182
This sentiment does survive to the Final Report: see Final Report of the Committee
on Corporate Governance (Gee, 1998), para.1.1.
183
Final Report, para.1.7.
185 D. Higgs, Review of the Role and Effectiveness of Non-Executive Directors (London:
The Stationery Office, January 2003). In the preface to his report Mr Higgs stated:
“From the work I have done, I am clear that the fundamentals of corporate governance in
the UK are sound, thanks to Sir Adrian Cadbury and those who built on his
foundations”. For a review of the Higgs Report (and of the contemporaneous Report by
Sir Robert Smith on the role of the audit committee), see P. Davies, “Enron and
Corporate Governance Reform in the UK and the European Community” in J. Armour
and J. McCahery (eds), After Enron (Oxford: Hart Publishing, 2006).
186 In addition to the Reports already mentioned, there are also important Reports from
Turnbull (1999, updated 2005, on financial reporting,
https://www.frc.org.uk/getattachment/5e4d12e4-a94f-4186-9d6f-
19e17aeb5351/Turnbull-guidance-October-2005.aspx [Accessed 27 April 2016]);
Myners (2001, on institutional investors, http://uksif.org/wp-
content/uploads/2012/12/MYNERS-P.-2001.-Institutional-Investment-in-the-United-
Kingdom-A-Review.pdf [Accessed 27 April 2016]); and Davies (2011, on women on
boards, http://www.bis.gov.uk/assets/biscore/business-law/docs/w/11-745-women-on-
boards.pdf [Accessed 27 April 2016]).
187CGC, B.1.2. In companies below the FTSE 350 the requirement is only for two
independent NEDs. Also note B.2.4 on diversity.
188 CGC, B.1—Supporting Principle. However, there is some evidence of British boards
now going in the same direction as in the US and having only one or two executive
directors on them: Financial Times, UK edition, 31 December 2007, p.2.
189 CGC, A.1—Supporting Principle.
190
CGC, A.4—Supporting Principle.
191 CGC, B.1.1.
192 CGC, B.2—Main Principle.
193
CGC, B.2—Supporting Principle. Gender diversity has attracted increasing concern:
see the 2011 Davies Report, Women on boards
http://www.bis.gov.uk/assets/biscore/business-law/docs/w/11-745-women-on-boards.pdf
[Accessed 27 April 2016], and amended B.2.4.
194
CGC, B.7.1.
195
CGC, B.3.3.
196
CGC, D.2.1. The committee may have the chair of the board as a member, provided
he or she was independent upon appointment, but must otherwise consist of two or three
independent NEDs.
197
CGC, C.3.1. In smaller companies, the committee may have the chair of the board as
a member, provided he or she was independent upon appointment, but must otherwise
consist of at least two independent NEDs (three in larger companies).
198
CGC, B.2.1. The chair should be either the chair of the board (unless the nomination
committee is considering the chair’s successor) or the senior independent NED.
199
CGC, A.2.1.
200
CGC, A.3—Main Principle.
201 CGC, A.3—Supporting Principle.
202
Also see CGC, B.5—Supporting Principle.
203
Also see CGC, E.1—Main Principle.
204 CGC, B.1.2.
205 CGC, A.3.1.
206 CGC, A.3.1.
207
CGC, A.4.2.
208
CGC, A.4.1.
209 CGC, E.1.1.
210CGC, A.1.1 cf. the similar provision relating to the role of the SO in an SE (above,
para.14–66).
211
CGC, B.5.1.
212 See P. Davies, “Board Structure in the United Kingdom and Germany: Convergence
or Continuing Divergence” (2000) 2 I.C.C.L.J. 435.
213 What will change board methods of operation is the presence of employee
representatives on them, whether on a one-tier or a two-tier board.
214
See FRC, The UK Stewardship Code (2012), which applies on a “comply or explain”
basis (see below) to institutional investors. Also see para.15–30.
215
12-917-kay-review-of-equity-markets-final-report.pdf [Accessed 27 April 2016].
216 For the 2014 BIS Report on implementation, see
14-1157-implementation-of-the-kay-review-progressreport.pdf [Accessed 27 April
2016]. See also para.15–30.
217LR 9.8.6(5) and (6), and LR 9.8.7 and 9.8.7A. UK-registered and overseas-registered
companies with Standard Listing do not have to comply with the CGC, but do have to
provide a statement on their corporate governance regime that meets the somewhat
lower EU corporate governance standards: LR 14.3.24.
218
See para.25–41.
219Pensions and Investment Research Consultants Ltd, Compliance with the Combined
Code (September 1999).
220
On the role of institutional shareholders see paras 15–25 et seq.
221
See FRC, Developments in Corporate Governance and Stewardship 2015 (2016,
https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-
Corporate-Governance-Code.aspx [Accessed 27 April 2016]). Also see S. Arcot and V.
Bruno, In Letter but not in Spirit: An Analysis of Corporate Governance in the UK
(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=819784 [Accessed 27 April
2016]). And see the enhanced demands in CGC, “Comply or Explain”, para.3.
222 See previous note.
223 And such companies do not suffer in market terms from using such an approach and
seem in fact to perform well: S. Arcot and V. Bruno, One Size Does Not Fit All After
All: Evidence from Corporate Governance (http://ssrn.com/abstract=887947 [Accessed
27 April 2016]).
224
See above fn.177.
225
Although the Code does not apply to companies with Standard Listed securities, nor
to companies whose securities are traded on a public market but are not admitted to the
Official List (for example, companies traded on the Alternative Investment Market).
CHAPTER 15
SHAREHOLDER DECISION-MAKING
The Role of the Shareholders 15–1

Shareholder Decision-Making without Shareholder
Meetings 15–6
The nature of the problem 15–6
Written resolutions 15–8
Unanimous consent at common law 15–15
Improving Shareholder
Participation 15–22
Analyses of shareholder participation 15–22
The role of institutional investors 15–25
The role of indirect investors 15–31
The Mechanics of Meetings 15–42
What happens at meetings? 15–43
Convening a meeting of the shareholders 15–48
What is a meeting? 15–55
Getting items onto the agenda and expressing views
on agenda items 15–56
Notice of meetings and information about the
agenda 15–60
Attending the meeting 15–67
Voting and verification of votes 15–73
Miscellaneous matters 15–82
Conclusion 15–87
THE ROLE OF THE SHAREHOLDERS

15–1
The previous chapter demonstrated that most decisions about the
company’s business will be taken by the board. Nevertheless,
shareholders’ decision-making still has an important, indeed
crucial, role to play in the governance of companies. Quite apart
from those decisions for which the Act requires shareholder
consent,1 the traditional model of directorial accountability to the
shareholders depends heavily upon the ability of the
shareholders to review the performance of the board (notably
when the annual report and accounts are presented to them) and
to take decisions if they think that performance has not been
adequate, for example, by removing the existing directors and
installing a new board.2
15–2
Shareholder activism depends on individual motivation,
certainly, but is also crucially underpinned by the rights of
shareholders at general meetings. Although most intervention by
substantial shareholders will take place in private, moving into
the public arena of the general meeting only if private pressure is
unsuccessful, the pressure which such shareholders can bring to
bear privately depends in large part upon the prospect of their
being able to get their way in the public meeting if the private
pressures are unsuccessful. Without doubt, the crucial factor, if it
comes to a public fight between the incumbent management and
these shareholders, is the ability of an ordinary majority of the
shareholders at any time to remove the directors under the
provisions of s.168.3
15–3
Nevertheless, the shareholder meeting has had a bad press in
recent years. In small companies it is argued that the meeting is
an unnecessary encumbrance, because the shareholder/directors
frequently meet together informally. And in large companies
shareholders do not show sufficient interest in using the general
meeting, often allowing it to be captured by single-issue pressure
groups whose primary objective is to advance the policies they
stand for rather than any interests as shareholders. The Act has
been amended incrementally over recent years to address the
first set of concerns. The second, and more intractable, set of
problems can only be addressed with “a sharper focus on the
shareholder”.4 A “more effective machinery for enabling and
encouraging shareholders to exercise effective and responsible
control” was one of three core policies of the CLR in the
corporate governance area,5 an approach which increasingly
chimes with current government policy initiatives.6
15–4
Before we consider these problems, it is important to be alert to
one preliminary issue, which is the question of who is entitled to
vote on shareholder decisions. It should not be supposed that all
shareholders, not even all ordinary shareholders, necessarily
have the right to vote on shareholder resolutions or, even if they
do, that they have voting rights as extensive as those attached to
other shares which apparently carry the same level of risk. As we
shall see,7 the rights attached to classes of shares, including the
number of votes per share, are matters for the company to
determine in its articles of association or in the terms of issue of
the shares. The exclusion of preference shareholders from voting
rights, except in limited circumstances, is common, and the
issuance of non-voting ordinary shares is not unknown, though it
is fiercely opposed by institutional shareholders.8 Thus,
“shareholder democracy”, which is in any event a democracy of
shares rather than of shareholders, is, or may be, an imperfect
one. Company law does not require equal voting rights for
shares carrying the same risk nor equivalent rights for shares of
different classes of risk.9
15–5
In these circumstances, there is a risk, where voting and cash-
flow rights are not proportionate, that the controlling shareholder
(controlling in terms of votes but not necessarily in terms of
capital committed to the company) will take excessive risks with
the company’s business at the expense of the non-controlling
shareholders (who may be the majority contributors to the
company’s capital) since the controller does not bear a
proportionate part of the downside if the strategy is unsuccessful.
Disproportionate voting structures may alternatively be used to
maintain the existing directors of the company in office, because
the controllers elect themselves or their nominees to the board
and are reluctant to abandon their control.10 In most cases,
however, since the price of the non-controlling shares (at least
where these are traded on public markets) adjusts to reflect these
risks, regulatory intervention is directed at disclosure rather than
prohibition.11
SHAREHOLDER DECISION-MAKING WITHOUT SHAREHOLDER
MEETINGS
The nature of the problem
15–6
In small companies where shareholders and directors are the
same people, requiring them to distinguish between the decisions
they take as directors and those which they take as shareholders
can seem unduly burdensome. They will tend in fact to take all
decisions as directors, since the rules about board meetings are
largely under their control, whereas the Act contains some
mandatory rules about shareholder meetings, for example, as to
the length of notice required.12 However, this approach generates
legal risks, because the rules for the two types of meeting are not
the same. For example, voting is normally on the basis of “one
person, one vote” on the board, but on the basis of “one share,
one vote” at a shareholders meeting. If the shares are not equally
divided among the directors, the outcomes in the two situations
may not be the same. Normally, this does not matter as long as
all is going well, because decisions will in fact be taken
unanimously. However, if relations between the entrepreneurs
begin to deteriorate, as in small companies they often do,13 clear
decision-making mechanisms are required.
15–7
One straightforward way of resolving this problem would be to
permit companies where shareholders and directors are the same
people to operate with only a single decision-making organ,
probably the board. This facility is provided by many state laws
in the US, but when the CLR consulted on this proposal,14 it did
not find enough support for the idea to take it forward in Britain.
Instead, the 2006 Act simply makes it easier for small companies
to operate, but still with two decision-making bodies. If
incorporators wish, formally, to roll the board and the
shareholders’ meetings into one whilst still retaining limited
liability, they will have to operate as a Limited Liability
Partnership.15
Written resolutions
15–8
By amending earlier statutory rules, the 2006 Act now provides
for much simpler decision-taking within private companies. The
default obligation on private companies to hold an AGM has
been abolished, and resolutions of the members of a private
company may now be taken either as a written resolution or by
adoption at a meeting of the members.16 Both forms of taking
shareholder decisions are of equal validity and (with two limited
but important exceptions, discussed below) any decision may be
taken in either manner. Indeed, s.300 makes it clear that the
articles may not deprive the company of its right to take
statutory decisions (other than the two exceptions just noted) by
written resolution, though the articles could require a meeting for
decisions which are wholly within the jurisdiction of the articles.
A written resolution needs to be adopted by the same percentage
of support as would be needed for a resolution adopted at a
meeting.17 The necessary consequence has been a greater
formalisation of the rules governing written resolutions.
15–9
This approach renders decision-taking in private companies far
less cumbersome, although if a member wishes to have a
meeting of members and the board is unwilling to convene one,18
then—now that a formal AGM is not required—a meeting can
only be demanded if the general provisions on the calling of
meetings by members have been observed. These provisions
normally require the requisitionists to hold 5 per cent of the
company’s voting share capital.19
Where written resolutions not available
15–10
There are only two situations where the written resolution
procedure is not available to private companies, and where the
company must instead proceed by means of a meeting of its
members. These are decisions for the removal of either a
director20 or an auditor21 before the expiration of their period of
appointment.22 With directors, if the Act did not insist on a
meeting, the director’s entitlement23 to be heard on the removal
resolution at the meeting would be nugatory. An auditor does not
have the same right to be heard, but only to make written
representations to the meeting.24 Here, the rationale for
insistence upon a meeting seems to be to subject those
shareholders who favour the removal to face-to-face questioning
by the other shareholders, if they wish to put questions,
presumably on the grounds that this will lead to more considered
outcomes in relation to potentially significant changes of
personnel in central parts of the company’s corporate
governance structure.
The procedure for passing written resolutions
15–11
Written resolutions require the same show of approval as would
be needed to pass the resolution if it were proposed at a
meeting.25 This means either 50 per cent or 75 per cent,
depending upon whether the resolution required is an ordinary or
a special resolution.26 Of course, in the case of a meeting the
percentage figures refer to those who vote, whether in person or
by proxy, whereas in the case of a written resolution it refers to
those entitled to vote.27 In practice, therefore, the consent of a
higher percentage of the members is normally needed for the
passing of a written resolution than for a resolution at a meeting
where typically fewer than half the members attend either in
person or by proxy. Nevertheless, the advantages of not having
to call a meeting outweigh this potential disadvantage.
15–12
The Act requires a copy of the proposed written resolution to be
sent at the same time (as far as is reasonably practical) to every
member entitled to vote. However, if this can be done without
“undue delay”, the company may submit the same copy to each
member in turn (or different copies to each of a number of
members in turn) or employ a combination of simultaneous and
consecutive circulation.28 It is submitted that the courts should
take a rather strict view of what constitutes “undue delay”. Near-
simultaneous circulation is important because it prevents the
proposers circulating the resolution first to its likely supporters
or those with no strong view on the matter, thus securing their
support before the opponents have had the opportunity to put
their case to the other members. This is important, because the
written resolution is passed at the point at which it secures the
requisite majority of the members, whether or not all those
members to whom the resolution has been sent have voted at that
time, whether the period for voting has expired or whether,
indeed, all the members have been sent copies of the resolution
at that point.29 If a proposed ordinary resolution is sent to a 51
per cent shareholder and he or she signifies assent to it, before
any of the other shareholders have opened their emails, the
resolution will be adopted at that point.
A member signifies agreement to a proposed resolution when
the company receives from the member or someone acting on
the member’s behalf a document indicating agreement, the
method of signifying agreement having been indicated when the
resolution was circulated.30 Once given, the consent cannot be
revoked.31 This is another consideration in favour of
simultaneous circulation. Despite the importance of
simultaneous circulation, non-compliance with the provisions of
s.291 (which includes the requirements for informing the
members of the method of signifying consent and the final
voting date) does not affect the validity of the resolution, if it is
passed, though it does constitute a criminal offence on the part of
every officer in default.32
Written resolutions proposed by members
15–13
Resolutions may be proposed as written resolutions by directors
or members.33 Members holding at least 5 per cent (or some
lower percentage if so fixed by the articles) of the total voting
rights exercisable on the resolution in question may request
circulation of a resolution,34 along with a statement of up to
1,000 words in support of the resolution.35 Once such a request
has been made, the company must, within 21 days, initiate the
written resolution procedure in the manner described above.36
This requirement is subject to three exceptions:
(i) The requisitionists must tender a sum necessary to cover the
costs of the circulation, unless the company has resolved
otherwise.37 These should not be large if electronic
circulation is possible.
(ii) The resolution must not be ineffective “whether by reason of
inconsistency with any enactment or the company’s articles
or otherwise”.38 There is no point in securing a resolution for
the company to do something which the company may not
lawfully do, but, in the case of inconsistency with the
articles, this may simply affect the level of support the
resolution needs, i.e. it must be enough to alter the articles.39
Nor need the company circulate the resolution if it is
defamatory of any person or is frivolous or vexatious.40
(iii) The company or any other aggrieved person may apply to
the court for an order that the company is not obliged to
circulate the members’ statement on the grounds that the
members’ circulation rights are being abused.41
Wider written resolution provisions under the articles
15–14
The 1985 Act explicitly preserved the power of companies to
adopt provisions in their articles on the taking of resolutions, and
art.53 of Table A 1985 contained a procedure for consenting to
written resolutions unanimously without a meeting. Although the
2006 Act does not retain this explicit authorisation,42 and
although the current model sets of articles do not deal with
written resolutions, it is difficult to see why the 2006 Act should
be construed as taking this power away from companies which
do not fall within the statutory provisions. The facility may be
useful to those few public companies with small shareholding
bodies. For private companies, the incentive to create a special
procedure in the articles is now much less, since the 2006
statutory procedure has dropped the requirement of unanimous
consent.
Unanimous consent at common law
15–15
We touched on the common law rule on unanimous consent in
the previous chapter,43 where we saw that its main purpose is to
allow shareholders to decide informally on matters within their
competence. The common rule is preserved under the 2006
Act,44 and applies to public as well as private companies,
although it might be thought less necessary in relation to the
latter given the revised and relaxed statutory provisions allowing
for non-unanimous written resolutions. The written resolution
procedure allows shareholders to adopt resolutions outside
meetings; the unanimous consent rule permits wholly informal
methods of giving shareholder consent, but requires that consent
(being of all those entitled to vote) to be unanimous, regardless
of the level of support that would have been required in a formal
meeting or if the written resolution procedure been followed.
The accepted explanation for this is that it would be inequitable
to allow the company, or its members, to assert that they are not
bound by a decision or an act which all those competent to effect
have decided should be effected.45 From this rationale follow the
answers to the two issues which have most concerned the courts:
what counts as informal consent and how must it be manifested;
and which issues lie within the competence of the shareholders
to determine in this way.
15–16
On the first of these issues, Neuberger J (as he then was)
summarised the principle in the following terms in EIC Services
Ltd v Phipps46:
“The essence of the Duomatic principle, as I see it, is that [certain specified
formalities, here in the company’s articles] can be avoided if all members of the
group [being the group entitled to determine the matter in issue], being aware of the
relevant facts, either give their approval to that course, or so conduct themselves as
to make it inequitable for them to deny that they have given their approval.
Whether the approval is given in advance or after the event, whether it is
characterised as agreement, ratification, waiver, or estoppel, and whether members
of the group give their consent in different ways at different times, does not
matter.”
This statement is supported by earlier authorities, and has been

followed subsequently. It highlights a number of important and
distinct matters.
15–17
First, who must consent? Buckly J in Re Duomatic held that only
those entitled to vote on the issue must consent, not all members
regardless of that entitlement. This is especially material when,
for example, the informal procedure is applied to class
meetings.47 The necessary consents can be inferred even from
occasions where the shareholders wear a different hat: for
example, in companies where all the shareholders are directors,
these individuals can act as directors in a board meeting and
simultaneously act as shareholders unanimously and informally
approving or ratifying their own unauthorised act as directors
provided, as shareholders, they are competent to do that.48 In
similar vein, individuals representing corporate shareholders
(usually by virtue of being the CEO of the corporate
shareholder), can give the necessary consent on behalf of their
company, if competent to so act.49 And trustees holding shares
on trust can, as the registered holder, validly consent. However,
here the informality of the necessary consent generates
complications. If the trustee holds some of the shares personally
and some as trustee, his or her consent is only taken as applying
to those shares held personally unless it is expressed to apply to
the other shares as well.50 On the other hand, and in line with the
justifications given for the informal consent rule, if the trustee
could be compelled to vote in accordance with the wishes of the
beneficial owners, then their consents are effective for the
purpose of the rule.51
15–18
Secondly, the requirement that the consenting shareholders be
aware of the relevant facts simply repeats the orthodox common
law requirement that consent counts as such only when it is
“fully informed”. In this context, the “relevant facts” would, it
seems, prima facie include any information made mandatory by
statute in order for shareholders to take formal decisions on
certain matters52: there is no reason to suppose that informal
decision-making should be successful if less well informed. But
it can be strongly argued that these information provisions are
inserted solely for the protection of shareholders and can
therefore be waived by them (although perhaps only on an
informed basis or at least in a conscious fashion). Put another
way, there seems no reason to suppose that the informal
procedure specifically endorsed by statute would somehow be
excluded in these contexts where the statute has specified
information requirements, even if its application needs to be
addressed thoughtfully.53
15–19
Finally, what is needed to signify the necessary consent? The
passage already cited from Neuberger J (as he then was) in EIC
Services Ltd v Phipps54 illustrates the breadth of what will count
as consent, as amply supported by decided cases.55 Despite this
breadth, however, the necessary consents must be objectively
established,56 and this necessarily means that they must be
expressed in some way by each member (even if only by
acquiescence57): the fact that the person would have consented if
asked is not enough,58 nor is a decision that is merely internal,59
and of course express objection negates any possibility of
inferring consent.60
In all of this, the cases which rely on something less than
assent (albeit informal assent), and instead rely on the interplay
of acquiescence, estoppel and laches, are perhaps the most
difficult. Re Bailey Hay & Co Ltd61 illustrates the problems.
There, a resolution was passed by two votes in favour and three
abstaining at a meeting attended by all the members of the
company but of which the requisite length of notice had not been
given, unbeknown to all present (it was one day short of the 14
days required). That information came to light within the next
few months. The court denied a challenge to the validity of the
resolution brought over three years later (and, it seems, for
technical reasons as a means of defeating a counter-claim),
holding that in the circumstances the shareholders should be
taken as unanimously assenting to, or acquiescing, in the
winding-up,62 or, alternatively, that their delay (or “laches”) in
making the claim made it “practically unjust” now to upset the
resolution (which had been for the appointment of a liquidator).63
It might have been preferable to confine the finding of
acquiescence to one that the non-voting shareholders could, in
the circumstances, be taken to have acquiesced in the shorter
period of notice. That would have produced the same result, and
was perhaps better supported by Brightman J’s analysis of the
facts. Nevertheless, the case is instructive in this difficult area.64
15–20
The second principal issue which has troubled the courts is
defining which matters may be determined by the unanimous
consent rule. The rule, it seems, applies whenever the
shareholders are competent to act. It follows that the
shareholders cannot, even by unanimous agreement, overcome
prohibitions on the company’s activities imposed by the general
law or the Companies Act. They cannot, for example, make
illegal gifts out of capital, or distribute the company’s assets in
ways not authorised by law, or take decisions which are not
theirs to take because that right has been given to a named
individual or group.65
Typically, then, the rule is applied when the shareholders have
the power to act, but have not followed the necessary formal
decision-making requirements, whether these are found in the
Act or the company’s articles or a shareholders’ agreement.66
The rule then appears to be that unanimous consent can operate
to waive formalities required for the protection of shareholders,
but not those required for the protection of other parties, notably
creditors. Thus, in Precision Dipping Ltd v Precision Dipping
Marketing Ltd67 the requirement of auditor approval of a
dividend, where the company’s accounts were qualified, could
not be waived by unanimous consent of the shareholders,
because the provision was clearly one aimed at protecting
creditors (and possibly shareholders as well). By contrast, in the
Atlas Wright case,68 the Court of Appeal was prepared to permit
unanimous shareholder consent to override the procedural
requirements set out above for the approval of a long service
contract.69 However, it may not always be easy to categorise the
function of particular statutory requirements.70 For example, it
seems unlikely that the courts would permit the unanimous
consent rule to operate in the two cases excepted from the
written resolution procedure (removal of a director or auditor
from office before the expiration of their term), since, it might be
said, the purpose of these rules is to protect the director or
officer by permitting him or her to make representations against
the proposal.71
15–21
Finally, there are certain post-decision formalities which have to
be complied with in relation to shareholder resolutions, most
importantly the notification of certain resolutions to the Registrar
and the making a record of them in the company’s minute book.
The obligation to notify the Registrar seems to apply to informal
decisions,72 but the requirement as to recording in the minute
book seems not to.73 Non-compliance involves a criminal
sanction but the decision itself is not invalidated.
IMPROVING SHAREHOLDER PARTICIPATION
Analyses of shareholder participation
15–22
Ever since Berle and Means wrote their classic study of patterns
of share ownership in large American corporations in the
1930s,74 it has been common to think that shareholders, at least
those in listed companies, are not in general interested in using
the rights which the law or the company’s articles confer upon
them to hold the management of their company to account. This
has not always been true. Although the exact historical
development is still unclear,75 there is general agreement that
three distinct periods of shareholder structure in such companies
can be identified. There was an initial period, beginning with the
development of the large company in the nineteenth century,
when the shareholdings were held mainly by the founding
entrepreneurs and their families. At this time, therefore, the
shareholdings were in “concentrated” form and establishing the
wishes of the shareholders was relatively easy. However, as the
capital needs of such companies grew, some shares were offered
to the public, with the outside shareholders being, however, in
the minority and with most of them holding only small stakes.
By the middle of the last century, family shareholdings had
declined and the small outside shareholders, collectively, made
up the bulk of the shareholders. This is the second period, so
brilliantly analysed by Berle and Means (see below), where the
shareholdings in large companies were typically “dispersed”, so
that the shareholders’ ability to act together in a meaningful way
was doubtful.
15–23
The thesis advanced by Berle and Means was that, in large
companies where shareholdings had become widely dispersed, it
was not worthwhile for most shareholders to devote time, effort
and resources to seeking to change the policies of the
managements which they thought were ineffective. Any return
on their relatively small investment which success might bring
would be outweighed by the certain costs of seeking to achieve
such change in a large company where co-ordination of
shareholder action would be intensely difficult. Since these large
companies were likely to be listed on a stock exchange, the
alternative and cheaper responses of accepting a takeover offer
or simply selling in the market were likely to prove more
attractive. Shareholders in large companies were thus “rationally
apathetic” towards their general meeting rights.
15–24
Whether this was ever an entirely correct picture is controversial,
but in any event it had to be modified in the third recognisably
distinct historical period. Since the 1960s, there has been a
partial re-concentration of shareholdings, not into the hands of
entrepreneurial families, but into the hands of “institutional”
shareholders, especially pension funds and insurance companies.
These different patterns of shareholding have significant
implications for the ability, and perhaps the willingness, of
shareholders to exercise effectively the governance rights which
the law confers upon them.76 In the early 1990s, when much of
the regulatory work on this issue was first conceived,
institutional shareholders held about 60 per cent of the equity
shares of companies listed on the London Stock Exchange.
Although it would be unusual for a single institution to hold
more than 5 per cent of the equities of the largest quoted
companies, nevertheless the situation is one in which a small
group of institutional shareholders could often bring decisive
influence to bear on the management of ailing companies. Of
course, they may not always wish to do so. Even institutional
shareholders will not exercise their general meeting rights
simply for the sake of it. If a takeover offer provides a cheaper
remedy for the problem, they may be inclined to accept that,
rather than take on the incumbent management of the under-
performing company themselves. Nevertheless, “shareholder
activism” on the part of the institutions became a bigger part of
the corporate scene than it had been, say, 20 years earlier.
However, the make-up of the institutional investors and their
associated attitudes towards activism have not remained the
same. For reasons which do not need to be explored here, over
the past two decades UK institutional shareholders have tended
to reduce their exposure to UK equities, whilst foreign
institutions and hedge funds have been increasing them.77 Some
of these investors may be expected to be more passive; others,
certain types of hedge fund in particular, might be expected to be
even more interventionist in relation to their portfolio
companies, often identifying specific business decisions which
they wish the board to take.78
The role of institutional investors
15–25
Given the scale of institutional investment, the role of such
investor-shareholders merits attention. Both the Company Law
Review (“CLR”) and the Myner’s Report,79 commissioned by
the Treasury, and the more recent Walker Report80 and Kay
Review,81 all concluded that the level of institutional
intervention in the affairs of their portfolio companies82 was less
than was optimal in the interests of those on whose behalf the
institutions invested. This was, the CLR thought, not only a
matter of concern to those investors, but also “a matter of
corporate governance, impinging on the properly disciplined and
competitive management of British business and industry”.83
In order to understand the possible reasons for sub-optimal
intervention and the reforms which have eventually been
adopted, it is instructive to take a specific illustration. Pension
funds provide a useful case study, especially as early reform
proposals focused in particular upon pension funds, even though,
as we shall see, they are not the only significant form of
institutional investment. In simplified form,84 a pension scheme
is normally promoted by an employer, who sets up a trust into
which both employer and, normally, employees pay regular
contributions and out of which pensions are paid.85 Both the
pensioners and the contributing employees may be seen as
beneficiaries of the trust. The trustees see to the investment of
the contributions, but normally do not discharge that task
themselves, but contract it out to one or more specialist fund
managers. The fund managers may be freestanding institutions,
but, today, they are likely to be part of larger financial groups
(for example, investment banks) which offer other services in
addition to fund management. The contract between the pension
fund and the fund manager is likely to give the manager the right
to vote the shares it purchases on behalf of the fund, although the
trustees may reserve the right to take voting decisions
themselves, either generally or in specific classes of case.
Finally, for reasons of both efficiency and prudence, the
manager is not likely itself to hold the shares it purchases on
behalf of the fund, but to have them held by a separate custodian
company, which may well be part of a different group of
companies from that in which the fund manager sits.
15–26
There are three main types of argument which have been put
forward to explain the under-use by pension funds or, more
often, their fund managers of the corporate governance rights
which the law gives them: conflicts of interest; a desire for a
quiet life; and technical difficulties of voting.
Conflicts of interest and inactivity
15–27
Conflicts of interest arise mainly where the group of which the
fund manager is part provides other financial services to
corporate clients. The management of a portfolio company may
be unwilling to buy, or continue to buy, these other financial
services, for example in connection with public share offerings,86
if some part of the same group is using its corporate governance
rights on behalf of a pension fund to make life difficult for that
management.87 Indeed, the management of the portfolio
company may actively threaten to withdraw its custom from the
group if the intervention on behalf of the pension fund continues.
In extreme cases, such conduct may amount to the offence of
corruption, but that is likely to be very difficult to prove. After
floating a number of proposals, the best the CLR could come up
with was a requirement that quoted companies be required to
disclose in annual reports the identity of their major suppliers of
financial services. This would reveal potential conflicts of
interest within financial services groups, though it would not
eliminate them nor, by itself, guarantee the appropriate handling
of the conflicts.88
Inactivity on the part of fund managers may, as we have just
seen, result from conflicts of interest, but it may also result, the
Myners Report thought,89 from a lack of incentives for the fund
managers to be active, for example, because the costs of
intervention would depress the manager’s short-term
performance whilst the benefits of intervention would be reaped
only in the medium term, or because the benefits of intervention
would accrue to all shareholders, whether they participated in the
intervention or not, including rival fund managers. A similar
conclusion can be drawn from the Kay Review, where
appropriate intervention was seen as compromised by market-
driven short-termism, lack of trust, and the easier risk-reducing
options of portfolio diversification and, if called for, “exit”
rather than “voice”.90 The CLR’s response to Myners’ findings
was a proposed requirement that managers disclose to trustees
their voting record in portfolio companies on demand and a
reserve power for the Secretary of State to require the
publication of the voting record, so that the beneficiaries of the
pension fund would be aware of it as well.91 This proposal was
controversial, to the point where the clauses were removed from
the Bill in the House of Lords against the Government’s wishes,
but were reinstated in the Commons and are now to be found in
ss.1277–1280. In line with the CLR’s recommendation, the
power is one to make regulations, in relation to which the
Government said that it was “willing to see how market practice
evolves before choosing whether and how to exercise the
power”.92 Those regulations may require institutional investors
(broadly defined in s.1278) to disclose, either to the public (a
particularly controversial point) or specified persons only,
information about the exercise or non-exercise of voting rights
by the institution or any person acting on its behalf, about the
voting instructions given by the institution or person on its
behalf and about the delegation of voting functions (s.1280) in
relation to shares which are publicly traded and in which the
institution has an interest (s.1279).
15–28
The Myners Report was bolder, proposing a substantive
obligation, derived from US law, on the fund manager to
monitor and attempt to influence the boards of companies where
there is a reasonable expectation that such activity would
enhance the value of the portfolio investments.93 This would
include, but not be limited to, the exercise of the right to vote at
shareholder meetings. This would not amount to an obligation to
vote the shares in portfolio companies on each and every
occasion. On the one hand, voting on routine proposals might be
neither here nor there in corporate governance terms; on the
other, merely to vote might be an inadequate form of
intervention, if, for example, a private meeting with the
management might solve the problem at an earlier stage and
avoid an adverse vote.
Of course, it is strongly arguable that the fiduciary duties of
pension fund trustees already require them to exercise their
corporate governance rights actively if they judge that this will
enhance the value of the trust’s assets and, therefore, to secure
that a similar obligation is laid upon those to whom they contract
out the exercise of their corporate governance rights. However, it
may be very difficult to show that any particular piece of
inaction or even a course of inaction over a period of time
reduced the value of the trust’s assets.
The Myners Report did not propose the embodiment of these
rules in legislation, but only in voluntary Statements of
Investment Principles, which the fund management industry was
to observe on a “comply or explain” basis,94 with the threat of
legal regulation if voluntarism did not work. The Government,
however, committed itself to legislation on the point,95 but, for
the time being, this has now been overtaken by the more general
UK Stewardship Code,96 discussed below, derived in large part
from the voluntary code of practice adopted by a wide range of
institutional investors (not just pension funds) in response to the
Myners Report,97 and now further strengthened in response to
the Kay Review.98
“Fiduciary investors”
15–29
The generation of an obligation of activism in the case of
pension funds takes as its starting point, as we have seen, the fact
that the trustees of pension funds owe fiduciary obligations to
the beneficiaries of the fund.99 However, outside pension fund
trust structures, the relationship between investors and those who
invest the money on their behalf is not usually a fiduciary one.
For example, the relationship between investors and insurance
companies, which are as important as pension funds in the
collective investment area, is predominantly contractual.
Insurance companies also play an important role in the provision
of pensions, especially to those who are not part of occupational
schemes, although the Myners Report made no
recommendations about the activism responsibilities of
insurance companies.100
If the value of investments will be increased by voting, or
other forms of exercise of their governance rights, by
institutional shareholders, it is difficult to see why this should
not be required of all intermediaries, whether established as
trusts or not, which acquire funds on the basis that they can
manage them more effectively on behalf of investors than the
investors can themselves. Indeed it was just this suggestion
which the Kay Review advanced, suggesting that all
intermediaries in the investment chain should be subject to
fiduciary obligations in the performance of their functions.101
However, the Law Commission, when asked to look into the
possibility, came down strongly against such a rule, suggesting
that it would add further confusion to an area of law which was
not easily transposed to these different circumstances. Moreover,
although there was a clear need for the enhanced protection of
investors, the Law Commission also concluded that alternative
routes, such as statutory enhancement of the provisions in FSMA
s.138D to give private investors direct claims against
intermediaries, were equally unworkable, especially given the
potential for indeterminate liability to an indeterminate class of
claimants.102
In short, although the objective is clear, and conceded by
many to be valuable, the means of achieving it is fraught. In that
climate, the task has fallen to the UK Stewardship Code, which
applies—currently on a voluntary basis—to all institutional
investors, whether pension funds or not, as does the reserve
disclosure power contained in the 2006 Act. That regime is
considered next.
The UK Stewardship Code
15–30
Given the UK’s success with “soft law”, it was perhaps
inevitable that this would be the outcome here, and in 2010 the
UK Stewardship Code, now revised, was promulgated by the
FRC, applying, like the UK Corporate Governance Code, on a
“comply or explain” basis.103 The Code is addressed in the first
instance to fund managers—that is, firms who manage assets on
behalf of institutional shareholders such as pension funds,
insurance companies, investment trusts and other collective
investment vehicles.104 It sets out good practice on engagement
with investee companies, with the goal of helping to improve
long-term returns to shareholders and the efficient exercise of
governance responsibilities. The FRC expects firms subject to
the Code to disclose on their websites how they have applied the
Code. However, the responsibility for monitoring company
performance does not rest with fund managers alone, and to that
end the Code refers to “institutional investors” generally, and the
FRC strongly encourages all institutional investors to report if
and how they have complied with the Code. For example,
pension fund trustees and other owners can comply directly, or
indirectly through the mandates given to fund managers.105
The Code adopts a similar format to the UK Corporate
Governance Code: it sets out seven Main Principles, each with
supporting Guidance elaborating best practice. It indicates that
institutional investors should:
1. Publicly disclose their policy on how they will discharge their
stewardship responsibilities (Principle 1) and robustly manage
any conflicts of interest (Principle 2). “Stewardship activities”
are widely defined to include “monitoring and engaging with
companies on matters such as strategy, performance, risk,
capital structure, and corporate governance, including culture
and remuneration. Engagement is purposeful dialogue with
companies on those matters as well as on issues that are the
immediate subject of votes at general meetings” (Principle 1,
Guidance).
2. Effectively monitor their investee companies (Principle 3),
including keeping abreast of the business and its general
concerns, appraising their board and committee structures
(especially in the light of any departures from the UK
Corporate Governance Code), meeting the chairman and
directors, and, where appropriate and practicable, attending
general meetings of the companies in which they have a major
holding and maintaining an audit trail of their formal and
informal interventions.
3. Establish clear guidelines on when and how they will escalate
their stewardship activities, privately or publicly (Principle 4).
4. Be willing to act collectively with other investors where
appropriate (Principle 5).
5. Have a clear policy on voting and disclosure of voting
activity, seeking generally to vote all shares held and not
automatically to support the board (Principle 6).
6. Report periodically on their stewardship and voting activities,
maintaining a clear record of their activities (Principle 7).
While the ambition is clear, it is also evident from the FRC’s
own assessment of progress that there is still some way to go in
enticing greater participation, encouraging closer adherence to
best practice, and ensuring more informative reporting
generally.106 Perhaps as a result, the FRC has now adopted a
policy of public assessment of Code signatories as either “Tier
1” (where reporting expectations are met), or “Tier 2” (where
they are not).107 This strategy of rewarding success (or naming
and shaming failure) is designed to apply market pressure to
resolve the problem.
The role of indirect investors
15–31
Under the typical arrangement for pension funds, described
above, the shares in the portfolio company are held by a
custodian company. That custodian company will appear on the
portfolio company’s share register as the holder of the shares,
even though it holds them as a nominee, either for the fund
manager or for the pension fund. Clearly, the custodian has no
interest in voting the shares in question. Rather, the law is that, if
the custodian is a bare nominee for a beneficial owner, the
beneficial owner can instruct the nominee how to deal with the
shares.108 In order to bring this about, however, the custodian
must confer with the fund manager and, perhaps, through the
fund manager with the trustees. However, the registered holder
is not placed under any obligation by company law to engage in
this process, which, in any event, may not prove to be possible
within the notice period for the meeting,109 though there may be
contractual arrangements in place between the member and
others with an interest in the shares which require this
consultation. It can be argued that this process would operate
more smoothly if the company communicated directly with the
beneficial owner or, going further, if the governance rights
attached to the shares could be exercised by the beneficial (or
“indirect”) owner.
15–32
The CLR proposed to remove any impediments which existed to
the creation of contractual arrangements for giving non-members
an input into the exercise of the governance rights attached to the
shares, together with a fall-back power for the Government to
require such transfers of governance rights if contractual
arrangements did not continue to develop on an adequate
scale.110 The Companies Bill followed this formula but in the
debates in Parliament the position of institutional investors was
linked to that of many private investors who also hold shares
through nominee accounts, partly as a result of the
dematerialisation of shares and partly because government tax
relief on private investment is often available only in relation to
shares held in this way.111 Thus, the governance rights of indirect
investors became a politically much more significant matter than
had been initially anticipated. The Government’s fall-back
proposals were defeated in the Lords.112 The Government then
consulted with those affected on alternative provisions, which
contain an element of compulsion, and still have a significant
fall-back element. They were introduced at a very late stage in
the parliamentary process and received little debate.113
15–33
The reforms now contained in Pt 9 fall into two groups. As
recommended by the CLR, some are purely facultative. They
help companies to reassign governance rights to indirect
shareholders, but do not require it. These provisions apply to all
companies. The other group contains the element of compulsion,
which at present relates only to shareholders’ information rights
in companies whose securities are traded on a regulated market,
in effect the Main Market of the London Stock Exchange.114
However, the Secretary of State has power by regulation to
expand the scope of this second class of provisions so as to
expand the rights provided or the types of company covered by
the Act.115
Governance rights—voluntary transfer arrangements
for all companies
15–34
Turning first to the facultative provisions applying to all
companies, the view was taken in some quarters that s.126,116 by
providing that “no notice of any trust shall be entered on the
register [of members] or be receivable by the registrar”,117 and a
parallel provision in the articles dealing with the position of the
company,118 prevented the transfer of governance rights between
the company and the holders of the beneficial interests in the
shares. The CLR proposed that, if this was so, what is now s.126
be amended so as to make clear that it permits the transfer of
corporate governance rights to third parties.119 Such transfers
would not be compulsory, but were to be left to contractual
arrangements between those holding shares on behalf of others
and the persons on whose behalf the shares were held.
15–35
The drafters of the Act clearly took the view that s.126 was not
an impediment to the transfer of governance rights, for it does
not deal with the issue. However, s.145(1) is drafted on the basis
that a company in its articles may (and always has been able to)
make provision enabling a member to nominate another person
to enjoy all or any of the governance rights of the member in
relation to the company. That other person need not in fact be
the holder of the beneficial interest in the shares, so that, for
example, a custodian could nominate a fund manager as entitled
to vote the shares, even though the beneficial interest is held by
the pension trust. The person to whom the rights are transferred
is the “nominated person”.120
15–36
The section does not in any way require such a transfer of
governance rights to be made. Its purpose rather is to ensure that
the statutory provisions discussed below in relation to meetings
(and, indeed, those discussed above in relation to written
resolutions) work properly where contractual governance rights
are held by a nominated person. In other words, where rights
under the articles are transferred to a nominated person, so are
the linked statutory rights. A good example is the right to vote.
As we have seen above,121 voting rights in a company are not
allocated by the statute but by the company, normally through its
articles. If the articles permit or require122 those voting rights to
be transferred to a nominated person and the right to vote is so
transferred by a particular member, then s.145(3)(f) ensures that
the statutory right to appoint a proxy to vote at the meeting on
behalf of the voter123 is also transferred to the nominated person.
Precisely which statutory rights are transferred under the
section to a nominated person will depend upon which
contractual rights have been transferred to the nominated person
under the articles. The section potentially transfers eight
statutory rights,124 but operates only “so far as necessary to give
effect to” a transfer of rights effected under the company’s
articles.125 Where the right to vote is transferred, it seems that
most of the listed statutory rights will also be transferred. Even
so, if the company is a public company, the rights in relation to
written resolutions will not be transferred and if the company is
a private company, the right to propose a resolution at an AGM
will not be transferred, since these rights are specific to private
or public companies.126
If the linked statutory right is transferred to the nominated
person, then anything the member might have done may instead
be done by the nominated person and any duty owed by the
company to the member is owed instead to the nominated
person.127 Thus, there is a genuine transfer of statutory powers
and rights to the nominated person and away from the member,
not the creation of a parallel set of provisions. However, no
rights enforceable against the company by anyone other than the
member are so created by the section or by the provisions in the
articles creating the transfer system.128 In fact, the primary
sanction for many of the rights covered by the section is a
criminal one, to which this provision is irrelevant, but civil rights
could arise also, for example, to challenge the validity of a
resolution because of an inaccuracy in the circular sent out in
support of it.129 Although the section is not absolutely crystal
clear on the point, presumably its implication is that the right of
the member to enforce a right against the company is not
affected by the fact that the right has been transferred to a
nominated person. To hold otherwise would mean a reduction in
the enforceability of members’ rights where there was a transfer
to a nominated person.
15–37
Whether s.145 will mean much in practice will depend on the
willingness of companies to adopt articles permitting or
requiring the transfer of governance rights, that of nominee
shareholding organisations to exercise the power of transfer (if it
is permissive) and that of beneficial shareholders to put pressure
on nominee shareholders to transfer rights to them and to pay for
any associated costs.130
15–38
A further piece of apparent facilitation is to be found in s.152.
This makes it clear that a member of a company holding shares
on behalf of more than one person (as will typically be the case
with nominees, whether they hold on behalf, ultimately, of
institutional or private investors) need not exercise all the
shareholders’ rights (whether given under the contract of issue or
provided by statute) in the same way—nor indeed need all of
them be exercised on any particular occasion. Thus, the holder is
enabled to give effect to the different views which the various
beneficial owners may hold on the issue in question. It is
doubtful whether this provision changes the previous law,
although it can create its own problems.131 What may be new,
therefore, is the further provision that, if the member exercising
its rights does not inform the company that not all the rights are
being exercised or that some are being exercised in one way and
some in another, the company is entitled to assume that all are
being exercised and all in the same way.132 Thus, this section
may be more protective of the company than anything else.
15–39
An example of this form of governance contract can be found in
some companies in relation to “American Depositary Receipts”
(“ADRs”). A UK company acquiring a US company in a share
exchange deal may not wish to issue its shares directly to the US
investors, partly in order to avoid some of the complications of
US securities laws and partly in order to give the US investors a
security denominated in dollars. One way of achieving these
consequences is the ADR, the shares being issued to a depositary
institution, which in turn issues to the US investors a “depositary
receipt”—one for each share—denominated in dollars, which
becomes the security which is traded in the US. In some cases,
the company’s articles may then require the depositary
institution to appoint the ADR holder as its proxy,133 possibly
just for voting purposes but possibly for all governance
purposes, including the receipt of communications from the
company.134 In such a case, one sees the company using its
contracting power through the articles, as facilitated by s.145, to
overcome the limitations of reliance on mere conferment of
information rights (which are considered below). However, there
is no legal obligation upon companies to treat the holders of
ADRs in this way.
Information rights—mandatory transfer options in
traded companies
15–40
A member of a company whose shares are admitted to trading on
a regulated market may nominate another person to enjoy those
information rights, whether the company has provided in its
articles for this to happen or not. This means that the rules on
transfer of information rights are mandatory as against listed
companies, although of course it is not mandatory for the
shareholder to confer this right on someone else. Further, the
rights conferred upon the other person do not deprive the
nominating shareholder of his or her right to the same
information.135 The fact that the provisions are mandatory as
against the company and increase, at least marginally, the
company’s costs in relation to the circulation of information was
a strong argument in the Government’s eyes against introducing
them, and the provisions are crafted so far as possible to reduce
those costs. Those costs are confined to the largest companies
because the provisions, at present, apply only to companies
listed on a regulated market.136 However, there are a number of
other provisions which aim to cut down the cost implications of
the new rule, even for these large companies.
First, the right to nominate a recipient of information rights is
restricted to those members who hold shares on behalf of another
person and where the recipient is that other person.137 Secondly,
the only rights which may thus be conferred are “information
rights”, i.e. essentially the right to receive the communications
which a company sends to its members (including its annual
accounts and reports) or any class of them which includes the
nominating shareholder.138 No other governance rights may be
transferred compulsorily as against the company. Thirdly, a
company need not accept the conferment of only some of the
shareholder’s information rights.139 The company can thus insist
on an “all or nothing” conferment of information rights.
Fourthly, unless the shareholder, on behalf of the nominated
person, requests circulation in hard copy and provides the
company with an address, the company may meet its obligation
to the nominated person through website publication.140 Fifthly,
all nominations are suspended when there are more nominations
in force than the nominator has shares in the company, so that
the burden of sorting out the errors is moved away from the
company.141 Sixthly, the company may enquire of a nominated
person once every 12 months whether it wishes to retain
information rights and the nomination will cease if the company
does not receive a positive response within 28 days. Seventhly,
to relieve the company of the burden of staying on top of things,
if the nomination is terminated or suspended for any reason,142
the company may continue to abide by it “to such extent or for
such period as it thinks fit”.143 Eighthly, the rights conferred
upon the nominated person are enforceable only by the member,
the rights to be treated for this purpose as if they were conferred
by the company’s articles.144
The right to enjoy information rights is thus, it may be said,
rather grudgingly conferred. The main non-restrictive provision
is the one which tracks s.145 and provides that any enactment or
anything in the company’s articles relating to communications
with members has corresponding effect in relation to
communications with nominated persons.145
15–41
The compulsory information provisions discussed above do not
in any way touch on the relationship between the nominated
person and the member after the information has been received.
As we have seen above, the nominated person, having received
notice of a meeting, for example, has power to instruct the
member how to vote, if the member holds the share on a bare
trust for the nominated person.146 But there is no legal obligation
upon the member, in this case or more generally, to seek the
views of the nominated person before voting, in the absence of
an instruction, contrary to the position in some other legal
systems. Such an obligation may be created by contract,
however, either between the nominated person and the member
or, conceivably, between the company and the member. This is
then a governance issue, as discussed earlier.
THE MECHANICS OF MEETINGS
15–42
We turn now to the various issues arising where a meeting is
sought to be held, so that resolutions of the shareholders can be
voted upon. This is the only method s.281 provides for the
adoption of resolutions by public companies and it is open to
private companies to use it instead of the written resolution
method, which it may wish to do where it has a large
shareholding body. These issues appear in their sharpest form
where a group of shareholders wish to use the shareholders’
meeting to challenge some aspect of the management of the
incumbent directors. Therefore, we shall generally adopt this
perspective in our analysis of the rules, though, of course, those
rules may also be relevant in the more usual case where the
meeting is called by the board to discuss a matter which the
shareholders find relatively uncontentious.
What happens at meetings?
15–43
It is a rare shareholders’ meeting which does not end up passing
a resolution on some matter or another. As we saw in Ch.14, the
Act requires the shareholders’ consent before certain decisions
can bind the company, and the articles may add to that list. By
assenting to a resolution the shareholders give the consent which
is necessary to make the act an act of the company. Once the
shareholders have adopted an effective resolution on a particular
matter, the board is empowered, and normally obliged, to take
the necessary steps to put the resolution into effect. Some
decisions are routinely required of shareholders, even especially
important ones such as the re-appointment of directors147 or of
auditors148 or the granting of powers to directors to issue a
certain amount of shares without pre-emption rights.149 Others
occur irregularly. However, the business of general meetings
does not consist entirely of the consideration of proposals for
resolutions. For example, the Act requires the annual reports and
accounts to be laid before the company in general meeting,150 but
does not require the meeting to consider any resolution in
relation to them. The exercise is not pointless, however, because
it gives the shareholders an opportunity to question the board
generally on the progress of the company and to express their
views on the matter. Often, this item on the agenda provides the
opportunity for a wide-ranging debate which specific resolutions
would not permit. Indeed, there is no reason why an item should
not be placed on the agenda simply for the purposes of having a
debate, without any resolution being proposed. Nevertheless,
apart for the consideration of the annual reports and accounts, it
is the consideration of resolutions with which the general
meetings of the shareholders largely deal.
Types of resolution
15–44
For decisions required under the 2006 Act, the Act has reduced
the types of resolution which the members may take to two: an
ordinary resolution and a special resolution.151 Usually the Act
specifies which type is required, and the Act then governs, but
where the Act is silent about the type of resolution required, then
an ordinary resolution is required unless the articles specify a
higher level of approval, up to and including unanimity.152 An
ordinary resolution is one passed by a simple majority of those
voting.153 A special resolution is one passed by a three-fourths
majority,154 and the notice of the meeting must specify the
intention to propose the resolution as a special resolution.155 For
example, special resolutions are required before important
constitutional changes can be undertaken. The higher majority
required for special resolutions obviously constitutes a form of
minority protection, as compared with the simple majority
required for an ordinary resolution. It means, for example, that a
person with more than 25 per cent of the votes, and indeed in
practice often with many fewer votes, can block the adoption of
a special resolution.156
This s.282 definition of an ordinary resolution has had the
(seemingly unintended157) effect, according to the government,158
of making void an ordinary resolution passed at a company
meeting by use of the casting vote of the chairman. This
mechanism was routinely inserted in company articles to save
general meeting resolutions from deadlock,159 and has appeared
in all the earlier versions of the Table A model articles, although
not in the 2006 model articles. In response to adverse reaction,
the government enacted a saving provision allowing those
companies which had such a provision in their articles prior to 1
October 2007 to continue with it, or to revert to it if they had
removed it (assuming it was ineffective).160 This limited saving
means that for all other companies the chairman’s casting vote in
shareholder meetings is abolished. There might be good reasons
of shareholder democracy for outlawing this practice, although
this instance would surely rank as a minor target. Indeed, it
might be wondered whether s.282 does render this practice
invalid: the section would clearly embrace as valid a resolution
passed as a result of weighted voting rights given in the articles
to a director in defined circumstances161; there seems little
dividing such a case from that of the chairman’s casting vote,
except possibly an assumption that the chairman is a member,
entitled to vote at the shareholders’ meeting (an assumption
which generally holds true).
15–45
As we shall see below, many votes at meetings are taken on a
show of hands, and may never proceed further if no one
challenges the result. The statute facilitates the continued use of
such votes, though they are controversial, by providing that the
majorities are then to be calculated by reference to the
individuals entitled to and actually voting, rather than to the
votes attached to their shares.162 By contrast, if a poll163 is
demanded, then the requisite majority on a poll is that of the
votes attached to the shares voted by members entitled to vote
and actually voting either in person or by proxy, where proxy
voting is allowed.164 In the case of a meeting of a class of
shareholders, where the same rules apply, this means the
appropriate majority is of the votes of the class in question.165
15–46
For decisions other than those specified in the Act, the
company’s articles may make their own specific provision for
the required voting entitlements and majorities, requiring higher,
lower, weighted or even conditional (for example, conditional on
the consent of a nominated person) voting requirements.166
Wording and notice of proposed resolutions
15–47
In order for shareholders to decide whether to attend meetings
and vote, they will need to receive notice of the meeting and of
“the general nature of the business to be dealt with”.167 A
resolution is only validly passed if the proper notice has been
given and the meeting is conducted according to the rules in the
Act and the company’s articles.168 The Act adds protections. If
special notice of any resolution has to be given (as is sometimes
specified in the Act or the articles), then notice of “it” or “any
such resolution” must be given to the company at least 28 days
before the meeting.169 Section 283(6) imposes even stricter rules
for special resolutions, reflecting their more serious nature,
requiring that “the resolution is not a special resolution unless
the notice of the meeting included the text of the resolution and
specified the intention to propose the resolution as a special
resolution”, and, further, that “if the notice of the meeting so
specified, the resolution may only be passed as a special
resolution”.
All of this is clearly intended to protect those who decide not
to attend the meeting, even more so than those who do attend.170
The question then arises as to whether the meeting can vary in
any way the resolution which is proposed to be passed. This, one
might have supposed, would be entirely legitimate so long as the
amendment was not such as to take the resolution beyond the
scope of the business notified to the members in the notice of the
meeting. Instead, however, the rules developed by the courts,
and now reflected in both the Act and the model articles for
public companies (those for private companies are silent), are far
stricter in relation to special resolutions. The model articles for
public companies, in art.40, allow amendments by ordinary
resolution in limited circumstances: an ordinary resolution can
be amended if proposed by a member and “the proposed
amendment does not, in the reasonable opinion of the chairman
of the meeting, materially alter the scope of the resolution”
(art.40(1)(b)); while a special resolution can only be amended if
the chairman so proposes and “the amendment does not go
beyond what is necessary to correct a grammatical or other non-
substantive error in the resolution” (art.40(2)(b)).
The potential impact of these provisions is readily illustrated
by the decision of Slade J in Re Moorgate Mercantile Holdings
Ltd,171 from which the statutory and model article rules are
clearly derived. This case suggests that, in relation to special
resolutions, no amendment can be made if it in any way alters
the substance of the resolution as set out in the notice.
Grammatical and clerical errors may be corrected, or words
translated into more formal language, and, if the precise text of
the resolution was not included in the notice,172 it may be
converted into a formal resolution, provided always that there is
no departure whatever from the substance as stated in the
notice.173
The learned judge thought that his decision was desirable on
policy grounds,174 as well as being demanded by the terms of the
Act,175 and that it would prevent the substantial embarrassment
to the chairman of the meeting and to any persons holding “two-
way” proxies on behalf of absent members,176 that any less strict
rule would cause. Slade J emphasised that his decision had no
relevance to ordinary resolutions and that in relation to them the
criteria for permissible amendments might well be wider.177 This
is clearly so if the precise terms of the resolution are not set out
in the notice but come within a statement of “the general nature
of the business to be dealt with at the meeting”.178 But even if the
terms of an ordinary resolution are set out in the notice it seems
that some amendments may be made at the meeting, and perhaps
even that if the chairman refuses to allow a permissible
amendment to be moved the resolution will be invalid.179 It is
submitted that an amendment is permissible if, but only if, the
amended resolution is such that no member who had made up
his mind whether or not to attend and vote and, if he had decided
to do so, how he should vote, could reasonably adopt a different
attitude to the amended version.180 The criticisms of that test by
Slade J181 apply equally to an ordinary resolution but it is
difficult to find any other test short of applying to ordinary
resolutions that applied to special resolutions, i.e. that no
amendment of substance, however trivial, may be made. And
does the suggested test really face the chairman and two-way
proxy-holders with the substantial embarrassments that Slade J
foresaw?182
There may, nevertheless, be one type of ordinary resolution to
which the stricter rule applies. This is when “special notice” of
the ordinary resolution is required. Special notice is defined by
s.312 as notice to be given to the company by the proposers of
the resolution (not by the company to the members in general)
and the length of the notice is at least 28 days before the meeting
at which the resolution is to be moved. The wording of s.312(1)
bears a close resemblance to that considered in Re Moorgate
Mercantile Holdings and makes it arguable that no amendment
of substance, however trivial, can be made to the resolution
stated in the special notice. Hence, if, say, special notice has
been given of a single resolution to remove all the directors183
(under s.168) or both of two joint auditors (under s.510), an
amendment seeking to exclude from the resolution some or one
of them may be impermissible. If so, this seems a regrettable
emasculation of such powers as members have (and which the
relevant sections were intended to enhance) and also seems
unfair to the directors or auditors whom the members may wish
to retain.184 Even where an amendment to an ordinary resolution
may be proposed on the above principles, the company’s articles
may aim to restrict the shareholders’ freedom, say, by providing
that, where the text is fully set out in the notice of the meeting,
the chairman has a discretion not to consider amendments of
which at least 48 hours’ notice in writing has not been given to
the company.
Convening a meeting of the shareholders
15–48
However, in the above discussion of amendments to resolutions
we are getting rather ahead of ourselves. No resolution can be
debated until there is a meeting. Clearly, therefore, the
shareholders’ meeting is not of much value as a vehicle of
shareholder control if the meeting cannot easily be convened.
The law distinguishes between annual general meetings
(“AGMs”) and any other meeting of the shareholders.185 The
advantage of the former from our perspective is that, in
principle, it must be held on a regular annual basis, whereas the
Act provides procedures for the convening of other meetings but
says nothing about their frequency. Even the AGM is not
compulsory if the company is a private one.186
Annual general meetings
15–49
The law, rather oddly, whilst requiring the holding of AGMs by
public companies and private companies which are traded
companies, does not prescribe the business which has to be
transacted at the AGM and in particular does not say that the
annual directors’ report and the accounts must be laid before the
AGM187 or that the directors due for re-election must be
considered then. In fact it is normal for these matters to be taken
at the AGM, and for the shareholders to have an opportunity to
question the directors generally on the company’s business and
financial position. This customary practice has been encouraged
by the UK Corporate Governance Code and its predecessors,188
which recommends that in Premium Listed companies (i.e. those
companies subjected to the requirements of the CGC) “boards
should use the AGM to communicate with investors and to
encourage their participation”.189
This is now substantially strengthened by the Act: if there is
enough member support,190 s.338A allows members of traded
companies to require the company to add new matters to the
agenda of the AGM191; and at all general meetings of traded
companies, the company must provide answers any question put
by a member attending the meeting on any matter relating to the
business being dealt with at the meeting.192 It follows that there
now seems to be no limit on the business which may be
transacted at an AGM of a traded company, assuming only that it
is business properly to be put before the shareholders.193
15–50
Following the recommendations of the CLR, the timing of the
AGM is tied to the company’s annual reporting cycle. The AGM
must be held yearly within the six-month period (for public
companies) or nine-month period (for private traded companies)
following its accounting reference date,194 which determines the
beginning and end of its financial year.195 If a company fails to
comply with the requirement to hold an AGM, every officer in
default is liable to a fine.196 This puts pressure on the directors,
but the power, previously contained in the legislation,197 for the
Secretary of State, on the application of any member, to call or
direct the calling of a meeting where the directors had failed to
do so has been removed. Thus, the member has no direct and
easy way of securing compliance with the AGM requirement,
but must rely on the indirect impact of the criminal sanctions.
Other general meetings
15–51
As for the convening of meetings other than the AGM of a
public company, such meetings are not required at any specific
time. The board may convene a meeting of the members of a
private or public company at any time.198 And the Act provides
that the directors must convene a meeting on the requisition of
holders of not less than five per cent of the paid-up capital
carrying voting rights.199 The request must state the general
nature of the business to be dealt with at the meeting. It may
include the text of a resolution intended to be moved at the
meeting, which facility the members will normally be well
advised to take up.200 However, the resolution must be one which
may be “properly moved” at the meeting and, if it is not, it
appears the directors are under no obligation to circulate it.201
If the directors fail to convene a meeting within 21 days of the
deposit of the requisition, the meeting to be held within a further
28 days of the notice convening it, the requisitionists, or any of
them representing more than half of the total voting rights of all
of them, may themselves convene the meeting, and their
reasonable expenses must be paid by the company and recovered
from fees or remuneration payable to the defaulting directors.202
These provisions for requisitioning a meeting work reasonably
well in private companies and also in public companies where,
for example, the co-operation of only two or three institutional
shareholders is required to get across the 5 per cent threshold.203
However, small individual shareholders in public companies are
likely to find it a matter of considerable difficulty and expense to
enlist the support of a sufficient number of fellow members to be
able to make a valid requisition.
15–52
The articles may make further provision for the calling of
meetings, but they are unlikely to give the members an extensive
right to do so, for the management would like nothing better than
to be able to call meetings when it suited them, but to be under
no obligation to do so when it did not. In fact, the model set of
articles for public companies provides for members to convene
meetings only where the number of directors falls below two and
the remaining director (if any) is unwilling to appoint a further
director so as to restore the board’s power to act in this area204;
and no provision for members to convene meetings is made in
the model articles for private companies.
Meetings convened by the court
15–53
Finally, s.306(1) gives the court power to convene a meeting “if
for any reason it is impracticable to call a meeting in any manner
in which meetings of that company may be called or to conduct
the meeting in manner prescribed by the articles or this Act”.
This power may be exercised by the court “of its own motion or
on the application—(a) of any director of the company or (b) of
any member who would be entitled to vote at the meeting”.205
The meeting can be “called, held and conducted in any manner
the court thinks fit” and the “court may give such ancillary or
consequential directions as it thinks expedient and these may
include a direction that one member of the company present in
person or by proxy be deemed to constitute a meeting”.206
15–54
Most of the litigation brought under this section has revolved
around responding to quorum requirements for shareholder
meetings. In the absence of a required quorum, no resolution can
be effectively passed. In contrast to many other jurisdictions, the
quorum requirements set by the British Act are not demanding,
except in relation to class207 meetings: two members only are
required for meetings of the shareholders as a whole, unless the
company’s constitution sets a higher figure,208 and only one
member in the case of a single-member company.209 It is not
even clear that the Act requires the quorum to be present
throughout the meeting.210 However, staying away can in
principle be an effective way of preventing a meeting from being
held in a private company with only two shareholders. If the
board consists of the same two persons (or their nominees) and
also has a quorum requirement of two, the company may
become completely deadlocked. The question the courts have
had to address is whether the provisions of s.306 can be used to
overcome this deadlock.
After a certain amount of litigation in recent years, the
position which the courts seem to have reached as to the exercise
of their discretion under the section is as follows. In principle,
the section is available to break a deadlock created by quorum
requirements, because, where the shareholdings are not held
equally, the normal principle of majority rule is being frustrated
by the quorum requirement.211 However, it may be that the
quorum requirements have been deliberately adopted in order to
produce deadlock if the parties cannot agree, and in that case the
section should not be used to overrule the parties’ agreement.
The court is likely to conclude that this is the purpose of the
quorum requirement where that takes the form of a class right
attached to the shares of one of the parties.212 Other than that
perhaps unusual situation, the question of whether the quorum
provision was intended to create deadlock in the case of
disagreement is a matter of construction of the articles or
shareholders’ agreement so as to provide a context for an
understanding of the quorum provisions, whether contained in
the articles or shareholders’ agreement or applied by the Act.213
It might be noted that, in future, the quorum requirement will
not be effective in private companies in producing deadlock
where the shareholdings of the two contestants are not equal
(and, of course, the quorum provision is unnecessary if they are).
This is because the holder of the majority will be able to secure
the passing of at least an ordinary resolution through the written
resolution procedure, discussed above, without the need for a
meeting. Some different protection in the articles will be
required, such as a requirement for the consent of all
shareholders to some or all resolutions of the company.
On the other hand, where the court takes the view that the
provisions of the articles or the Act are being cynically exploited
by a group of shareholders to block an effective meeting, it may
exercise its s.306 powers in the broadest way. Thus, in Re British
Union for the Abolition of Vivisection214 a company whose
articles required personal attendance in order to vote had had a
general meeting badly disrupted by a minority of members, and
the committee feared that other members would in future be
deterred from attending. On an application by a majority of the
committee the court ordered that a meeting be held to consider a
resolution for the abolition of the personal attendance rule, at
which meeting the personal attendance rule itself would not
apply and personal attendance would be permitted only to the
members of the company’s committee.
What is a meeting?
15–55
Thanks to modern technology it is no longer necessary that a
meeting should require all those attending to be in the same
room. If more turn up than had been foreseen, a valid meeting
can still take place if proper arrangements have been made to
direct the overflow to other rooms with adequate audio-visual
links enabling everyone to participate in the discussion to the
same extent as if all had been in the same room.215 This is now
explicitly supported by the Act and model articles.216 However, a
meeting requires two-way, real time communication among all
the participants. If relaxation of the real-time requirement is
sought, it is necessary for the company, if a private one, to take
decisions through the use of written resolutions.217
Getting items onto the agenda and expressing views
on agenda items
15–56
Rather than going through the process of requisitioning a
meeting in order to discuss a particular piece of business, the
shareholders may wish simply to add an item to the agenda of a
meeting which the board has called in any event. This is most
likely to be attractive in relation to the AGM, which, as we have
seen, a public company is obliged to hold.
Placing an item on the agenda
15–57
As we have seen, the AGM is normally convened by the board
and, as part of that process, the board will be able to stipulate the
items which it wishes to have discussed at the meeting. Under
s.338 members representing not less than one-twentieth of the
total voting rights of the members entitled to vote on the
proposed resolution,218 or 100 members holding shares on which
there has been paid up an average sum per shareholder of not
less than £100, may require the company to give notice of their
resolutions which can then be considered at the next AGM. In a
company with a large shareholding body shareholders with small
shareholdings may find this second criterion easier to meet than
the first, whereas a small number of institutional shareholders
(perhaps even one) may be able to meet the first criterion. The
second criterion for requiring a resolution to be placed on the
agenda has also benefited from the steps which the Act has taken
to protect the interests of “indirect” investors, i.e. those who hold
their shares through nominees. Subject to safeguards, the 100
“members” may include those who are not members of the
company but whose interest in the shares arises from the fact
that a member of the company holds the shares on their behalf in
the course of a business and—a very important limitation—the
indirect investor has the right to instruct the member how to
exercise the voting rights.219
However, the company is not bound to give notice of the
proposed resolution unless certain conditions are met. First, the
standard conditions, discussed above in relation to member’s
written resolutions, about the effectiveness of the resolution and
so on must be met.220 Secondly, the requisition, identifying the
resolution of which notice is to be given, must be received by the
company at least six weeks before the AGM or before the
company gives notice to the members of the AGM.221
The third condition relates to the costs of circulating the
resolution. In principle, those requesting the circulation must pay
for it (unless the company resolves otherwise).222 This was the
previous law. However, the CLR proposed that members’
resolutions received in time to be circulated with the notice of
the AGM should be circulated free of charge.223 The Act does
not accept that proposal and makes only the limited concession
that circulation shall be free if the request is received before the
end of the financial year preceding the meeting, which may be
up to six or nine months before the meeting is held.224 The
limited nature of this concession can be more fully understood
when put in the context of a further reform proposal from the
CLR which was rejected entirely.
15–58
One major problem with the members’ resolution procedure is
that it is all too likely that something in the AGM circulation
from the board will trigger the wish to place a shareholders’
resolution on the agenda, but, since the minimum period of
notice for calling the AGM is 21 days,225 though the company
may in fact give longer notice, there may well not be time for the
members to respond to the AGM documentation and get their
resolution to the company within the six week limit. In addition,
the company’s costs of circulation would be much greater in the
case where the AGM documentation has already gone out, for
the proposed resolution would have to be circulated separately.
The CLR proposed to address the problem, at least in part, by
requiring quoted companies to put their annual reports and
accounts on their website within 120 days of the end of the
financial year, after which there would be a “holding period” of
15 clear days, during which the company would be obliged to
accept a members’ resolution (having the support presently
required) for circulation with the notice of the AGM and at the
company’s cost.226 However, this opportunity for enhanced
debate over the annual reports and accounts of large companies
proved too much for management interests, who secured that this
reform was not adopted.
For meetings other than AGMs there is no statutory procedure
whereby members can add an item to the agenda of a meeting
called by the board. However, as we have noted above, the
members do have a statutory power to convene a meeting at any
time (without costs to themselves) and to require circulation of a
resolution to be considered at that meeting, though normally
shareholders holding 5 per cent of the voting rights are needed to
secure the convening of such a meeting.227 The fact that a
statutory procedure is not available for adding an item to the
agenda of a meeting, other than an AGM, convened by the board
probably reflects the impracticability of so doing, when the
minimum notice period for convening such a meeting is only 14
days and such meetings are often held urgently.
Circulation of members’ statements
15–59
However, it is not enough for the shareholders to have their
resolution circulated in advance of the AGM. It will have much
more effect if it is accompanied by a statement from the
proposers setting out its merits. Alternatively, the shareholders
may wish to circulate only a statement and not a resolution, for
example, where they wish to oppose a resolution from the board
rather than to propose one of their own. The directors will
undoubtedly make use of their power to circulate statements in
support of their resolutions. Even if the directors do not directly
control many votes, they are for the moment in control of the
company and they can get their say in first and use all the
facilities and funds of the company in putting their views across.
They will have had all the time in the world in which to prepare
a polished and closely reasoned circular and with it they will
have been able to dispatch stamped and addressed proxy forms
in their own favour.228 And all this, of course, at the company’s
expense.229
Until the 1948 Act, members opposing the board’s resolution
or proposing their resolutions had none of these advantages and,
even now, only timid steps have been taken towards
counteracting the immense advantage enjoyed by those in
possession of the company’s machinery. Such steps as have been
taken are included in ss.314–316. These sections track the
provisions of ss.338–340 dealing with members’ requests for the
circulation of resolutions and add the right, under similar
conditions,230 to have a statement of up to 1,000 words circulated
to the members.
In practice, however, this provision is of limited value, except
where the statement is in support of a shareholders’ resolution
and is dispatched with it. The expense still has to be borne by the
members—unless the company otherwise resolves231—and no
substantial saving will result from the use of the company’s
facilities. In other cases (for example, when the circulars are
designed to oppose proposals already forwarded by the board),
little extra cost will be incurred by acting independently of the
company and this will have a number of advantages. It will
avoid any difficulty in obtaining sufficient requisitionists and
will prevent delay, which may be fatal if notices of the meeting
have already been dispatched. It will also obviate the need to cut
the circular to 1,000 words and will enable the opposition to
accompany it with proxies in their own favour.232 Moreover, and
from a tactical point of view this is vital, the board will not
obtain advance information about the opposition’s case, nor be
able to send out at the same time a circular of its own in reply.
Moreover, in the case of large companies the institutional
investors will have mechanisms for communicating with each
other which are not dependent upon the company’s good offices
and the financial press will often report the shareholders’
concerns, thus encouraging prior communication among the
shareholders and attendance at the meeting.
Notice of meetings and information about the
agenda
15–60
In most cases, as we have seen, shareholder meetings are
convened by the board. The main protection for the shareholders
in such a case lies in the information made available to them in
advance of the meeting and the length of notice required. On the
basis of this information and during this period, they should be
able to form a view whether the matter is sufficiently important
for them to vote at the meeting or to attend it, and perhaps even
to form an alliance with other shareholders to oppose the board,
though, as we have noted, the shareholders start off on the back
foot and will not have much time to organise their opposition.
Naturally, these rules apply also to meetings convened by the
members, for the requsitionists may not represent a majority of
the members, who, in such a case, need to be protected against
being “rail-roaded” into unwise decisions, whether the proposal
emanates from the board or a minority of the members.
Length of notice
15–61
Prior to the 1948 Act, the length of notice of meetings, and how
and to whom notice should be given, depended primarily on the
company’s articles. The only statutory regulation which could
not be varied was that 21 days’ notice was required for a meeting
at which a special resolution was to be proposed. In other cases
the Act of 1929 provided that, unless the articles otherwise
directed (which they rarely did) only seven days’ notice was
needed. This left far too short a time for opposition to be
organised.233 Hence, it is now provided by s.307 of the 2006 Act
that any provision of a company’s articles shall be void insofar
as it provides for the calling of a meeting by a shorter notice than
21 days’ notice in the case of an annual general meeting or 14
days’ notice in other cases. The company’s articles may provide
for longer notice but they cannot validly provide for shorter.234
And s.307A requires traded private companies to give 21 days’
notice for all meetings (not just the AGM), unless the company
offers the facility of voting by electronic means, in which case
the shareholders in general meeting may decide to reduce the
period to 14 days for meetings other than the AGM.235 In
practice, neither of these statutory provisions has much
significance for the AGMs of listed companies, since the UK
Corporate Governance Code236 suggests 20 working days’ notice
(in effect, 28 days’ notice in statutory terms) for the AGM.
However, the rules in s.307A will be significant for other
meetings of listed companies.
15–62
However, if a meeting is called on shorter notice than the Act or
the articles prescribe, it is deemed to be duly called if so agreed,
in the case of an AGM, by all the members entitled to attend and
vote.237 In other cases a somewhat lower level of agreement will
suffice.238 This is a majority in number of those having the right
to attend and vote239 who must also hold the “requisite
percentage” of the nominal value of the shares giving the right to
attend and vote. That percentage is 95 per cent in the case of a
public company and 90 per cent in the case of a private company
(unless the article increases the percentage, which they may do
but not beyond 95 per cent).240 The effect of requiring, other than
for AGMs where unanimity is the rule, the agreement of both a
majority in number of members as well as a high percentage of
the voting rights is that, where there is one or a small number of
major shareholders and a number of small ones, at least some of
small shareholders will need to concur in the major
shareholders’ view that short notice is appropriate.
Special notice
15–63
As we have seen, in certain circumstances a type of notice,
unimaginatively and unhelpfully designated a “special notice”,
has to be given, the principal examples being when it is proposed
to remove a director or to remove or not to reappoint the
auditors.241 In the light of the discussion of these examples in
Chs 14242 and 22243 respectively, little more needs to be said here
except to emphasise that special notice is a type of notice very
different from that discussed hitherto in this chapter. It is not
notice of a meeting given by the company but notice given to the
company of the intention to move a resolution at the meeting.
Under s.312, where any provision of the Act requires special
notice of a resolution, the resolution is ineffective unless notice
of the intention to move it has been given to the company at least
28 days before the meeting.244 The company must then give
notice (in the normal sense) of the resolution, with the notice of
the meeting or, if that is not practicable,245 either by newspaper
advertisement or by any other method allowed by the articles, at
least 14 days before the meeting.246
All this achieves in itself is to ensure that the company and its
members have plenty of time to consider the resolution, but in
the two principal cases where special notice is required,
supplementary provisions enable protective steps to be taken by
the directors or auditors concerned.
15–64
Under this heading it is also to be noted that the company’s
articles may require notice of certain types of resolution to be
given to the company in advance of the meeting, and this
requirement may limit shareholders’ freedom of action at the
meeting itself. For example, the articles may provide that no
person shall be appointed as a director at a meeting of the
company unless he or she is a director retiring by rotation, a
person recommended by the board or a person of whose
proposed appointment the company has been given at least 14
days’ (and not more than 35 days’) notice, together with the
proposed appointee’s consent.247 At the general meeting of such
a company it is thus not open to dissenting shareholders to put
forward an alternative candidate for director on the spur of the
moment, though it appears that the board could do so.
The contents of the notice of the meeting and circulars
15–65
Having previously left this matter to the articles,248 statute now
lays down some basic requirements. The notice of the meeting
must give the date, time and place of the meeting; a statement of
the general nature of the business to be transacted at the meeting;
and any other matters required by the company’s constitution.249
The second of these three requirements is obviously the crucial
one, for the member is entitled to be put in receipt of sufficient
information about the business of the meeting to determine
whether he or she will attend it.250 But how specific must the
notice be? If the meeting is an AGM at which all that is to be
undertaken is what former Tables A described as “ordinary
business”,251 all that is necessary is to list those matters. If,
however, resolutions on other matters are to be proposed it is
customary to set out the resolutions verbatim and to indicate that
they are to be proposed as special or ordinary resolutions as the
case may be. In the case of special resolutions, s.283(6) requires
that the notice of the meeting contains the text of the resolution
and indicates the intention to propose it as a special resolution.
The notice may also indicate that the resolution shall not be
passed unless passed as a special resolution. This apparently
curious provision follows from the further provision that
anything that may be done by ordinary resolution may also be
done by special resolution.252 In effect, this gives the proposers
of the resolution an ad hoc method of raising the majority
required for the passing of an ordinary resolution to that required
for a special resolution.
The CLR proposed that the requirement to set out the text of
the resolution should be applied to all resolutions,253 but this
suggestion was not taken up. In all cases, the directors should
ensure that, if the effect of the proposed business will be to
confer a personal benefit on the directors, that should be made
clear either in the notice or in a circular sent with it.254
In practice, the notice of a meeting will be of a formal nature
but, if anything other than ordinary business is to be transacted,
it will be accompanied by a circular explaining the reasons for
the proposals and giving the opinion of the board thereon.
Indeed, it is arguable that the common law principle that
members should be put in a position to determine whether to
attend the meeting requires such circulars, except where the
nature of the business will be obvious to all the members from
what is said in the notice of the meeting. Normally, therefore, the
circular will be a reasoned case by the directors in favour of their
own proposals or in opposition to proposals put forward by
others. In deciding whether the nature of the business has been
adequately described, the notice and circular can be read
together.255 But the circular must not misrepresent the facts;
there have been many cases in which resolutions have been set
aside on the ground that they were passed as a result of a
“tricky” circular.256 Misleading circulars may not only influence
the vote at the meeting but also the decisions of the members
whether to attend. For this reason, the fault in the circular should
not be capable of cure even if the truth emerges at the meeting.
For the same reason, it has been suggested that the notion of a
“tricky” circular should embrace all misleading documents,
whether the misinformation is the result of opportunism on the
part of those putting it out or a genuine error on their part; and
that the same principles should be applied to communications
from shareholders to fellow members seeking their support for
the requisition of a meeting of the company.257
If there is opposition to the board’s proposals, the opposers
will doubtless wish to state their case and a battle of circulars
will result. It is here, however, that the superiority of the board’s
position becomes manifest. Even if the directors do not directly
control many votes, they are for the moment in control of the
company and they can get their say in first and use all the
facilities and funds of the company in putting their views across.
Even institutional shareholders, who may be able to stand the
cost of the circulation, may find themselves on the back foot,
whilst smaller shareholders may be unable to respond effectively
at all. As we have seen,258 the statutory provisions permitting 5
per cent of the members to require the company to send a
statement of their views to all the members are singularly
ineffective in practice.
Communicating notice of the meeting to the members
15–66
Having prescribed the basic content of the notice, the Act then
goes on to specify to whom it should be given, thus giving
statutory form to something previously contained in the model
articles.259 Those entitled to receive notice of the meeting are
every member of the company (whether entitled to vote or not)
and every director.260 Members include those entitled to a share
on the death or bankruptcy of a member, if the company has
been notified of their entitlement.261 However, these statutory
provisions are subject to any provision in the company’s articles
(for example, excluding non-voting members from entitlement to
receive notice). This also enables companies which need to, to
deal with exceptional cases (such as that where holders of share-
warrants to bearer are entitled to attend and vote).262 The articles
may also contain more prosaic matters, such as the rules
identifying the address which the company will use to
communicate with the members and removing the member’s
entitlement to be notified if the address so identified proves
ineffective.263 Accidental failure to give notice to one or more
members shall not affect the validity of the meeting or
resolution, and the company’s articles can expand this
relaxation, except for meetings or resolutions required by the
members.264
Attending the meeting
Proxies
15–67
One of the important features of company meetings is that the
members do not have to appear at the meeting in person; they
may appoint another person (a proxy) to attend and vote on their
behalf.265 At common law attending and voting had to be in
person,266 but early on it became the normal practice to allow
these duties to be undertaken by an agent or “proxy”.267 It should
be noted that the system of proxy voting is not the same as that
of postal voting. With postal voting the vote is cast directly by
the member who holds the vote and he or she votes without
attending a meeting. With proxy voting, the proxy votes on
behalf of the member and at a meeting. In practice, there may
not be much difference between the two when the proxy is given
precise instructions and follows them, for then the member in
effect makes up his or her mind on how the vote is to be cast in
advance of the meeting. The Shareholders’ Rights Directive
requires Member States to permit companies to offer voting “by
correspondence in advance of the general meeting” to their
shareholders, but does not require companies to adopt this
procedure.268
Until the 1948 Act, however, the right to vote by proxy at a
meeting of a company was dependent upon express authorisation
in the articles. In practice this was almost invariably given; but
not infrequently it was limited in some way, generally by
providing that the proxy must himself be a member. Where there
was such a limitation the scales were further tilted in favour of
the board, for a member wishing to appoint a proxy to oppose
the board’s proposals might find difficulty in locating a fellow
member prepared to attend and vote on his behalf. It was also
customary to provide that proxy forms must be lodged in
advance of the meeting. While this is a reasonable provision, in
as much as it is necessary to check their validity before they are
used at the meeting, it too could be used to favour the board if
the period allowed for lodging was unreasonably short.
Moreover, as already pointed out, it had become the practice for
the board to send out proxy forms in their own favour with the
notice of the meeting and for these to be stamped and addressed
at the company’s expense.
For all these reasons, although proxy voting gave an
appearance of stockholder democracy, this appearance was
deceptive and in reality the practice helped to enhance the
dictatorship of the board. In recognition of this, the Stock
Exchange required that listed companies should send out “two-
way” proxies, i.e. forms which enable members to direct the
proxy whether to vote for or against any resolution. The FCA’s
listing rules currently require “three-way” proxies (i.e. for,
against or abstain).269
15–68
The statutory provisions relating to proxies are now to be found
in ss.324–331 of the Act. They show a further development in
the movement of the proxy provisions from the articles to the
Act. The effect is in many cases to make the proxy rules
mandatory. Unless the Act expressly allows derogation from its
provisions, the articles cannot reduce the statutory entitlements,
though the Act gives the articles a general permission to improve
them.270 Any member is entitled to appoint another person
(whether a member of the company or not) as his proxy to
attend, speak and vote instead of himself at a meeting of the
company.271 In the case of a company having a share capital the
member may appoint more than one proxy, provided each proxy
is appointed to exercise rights attached to different shares.272
Previously, this facility was subject to the articles of the
company permitting it. It is now mandatory and is useful in the
case for fund managers or nominee custodians273 who may hold
shares on behalf of a number of different beneficial owners who
may hold different views on the matters at issue.
The members must be informed of their statutory rights to
attend, speak and vote by proxy (and of any more extensive
rights provided under the company’s articles) in the notice
convening the meeting.274 Moreover, if proxies are solicited at
the company’s expense the invitation must be sent to all
members entitled to attend and vote.275 Thus, the board cannot
invite only those from whom it expects a favourable response.
Finally, the articles may not require that proxy forms (or other
documents required to validate the proxy) must be lodged more
than 48 hours before a meeting or adjourned meeting.276
15–69
It cannot be said, however, that these provisions have done much
to curtail the tactical advantages possessed by the directors. They
still strike the first blow and their solicitation of proxy votes is
likely to meet with a substantial response before the opposition
is able to get under way. Even if their proxies are in the “two-
way” form, many members will complete and lodge them277 after
hearing but one side of the case, and only the most intelligent or
obstinate are likely to withstand the impact of the, as yet,
uncontradicted assertions of the directors.
It is perhaps easy to recognise that management might give
biased advice, but the same concern is also voiced in relation to
proxy advisers. These firms provide voting advice, especially to
institutional investors, and may therefore have considerable
influence on their voting behaviour. Although taking advice is
often sensible, especially given the increasing complexity of the
equity markets and the large number of (cross-border) holdings
of shares, two shortcomings are typically noted: the advisors
may have serious conflicts of interest, given that they often
provide other services to issuers; and their methodologies may
not be robust. Perhaps predictably, codes of best practice have
been developed, with suggestions that they be adopted on a
“comply or explain” basis.278 The issue is also likely to form part
of the proposed new Shareholder Rights Directive.279
15–70
It is, of course, true that, once opposition is aroused, members
may be persuaded to cancel their proxies, for these are merely
appointments of agents and the agents’ authority can be
withdrawn,280 or change their instructions, since s.324A requires
the proxy to vote in accordance with the member’s instructions.
But in practice this rarely happens.
The issue of termination of the proxy’s authority is now partly
addressed in s.330. The aim of the provisions is to protect things
done by the proxy from being brought into question if the
company281 has not received notification of the termination of
the proxy’s authority before the meeting. Thus, the proxy’s vote
will still be valid and the proxy will still count towards the
quorum and can still validly join in demanding a poll, unless the
company receives notice of termination of the authority before
the commencement of the meeting.282 The company’s articles
may set an earlier time for the notification of the termination, but
not so as to make it earlier than 48 hours before the meeting
(excluding non-working days).283 However, the section deals
only with the termination of the proxy’s authority by “notice of
termination”. It has been held that a member may attend and
vote in person and the company must then accept his vote
instead of the proxy’s,284 i.e. that the proxy’s authority may be
terminated by a personal vote. However, two points should be
noted about that case. First, it was based on the construction of
the particular articles of the company in question, and so does
not purport to lay down a general rule. Secondly, the company
was aware the shareholder had voted in person and that the votes
held by the proxy were accordingly reduced—indeed the
company in that case wished positively to insist on the proxy’s
votes having been reduced. Thus, outside the matters covered by
the section, the terms of the articles and the company’s
knowledge seem to be the crucial determinants of the ability of
the proxy to exercise his or her voting rights as against the
company, despite the withdrawal of the member’s authority.
15–71
As between the member and the proxy, on ordinary agency
principles a revocation is always effective if notified to the proxy
before he has voted.285 And during the term of appointment of
the proxy, s.324A (surprisingly, only since 2009) requires the
proxy to vote in accordance with any instructions given by the
appointing member. This would seem to overcome the problem
addressed in older cases of whether there was any positive
obligation on the proxy at all (or merely a negative one not to
vote contrary to the principal’s instructions),286 and whether the
answer depended upon whether there was a contract or a
fiduciary relationship between member and proxy.287 But failing
any such statement or definite instructions from the principal, the
proxy will have a discretion, and if this is exercised in good faith
the proxy will not be liable, whichever way he votes or if he
refrains from voting.
Corporations’ representatives
15–72
Since a company or other corporation is an artificial person
which must act through agents or employees, it might be
supposed that, when a member is another company, it could
attend and vote at meetings only by proxy. This, however, is not
so. Section 323 provides that a body corporate may, by a
resolution of its directors or other governing body,288 authorise
such person or persons as it thinks fit to act as its representative
at meetings of companies of which it is a member (or creditor)
and that the representative may exercise the same powers as
could the body corporate if it were an individual.289 With the
expansion of the powers of the proxy, on the one hand, and the
removal of the previous restriction that a company could appoint
only a single corporate representative, it is unclear whether the
proxy or the corporate representative is the more attractive
mechanism for the corporate shareholder. The representative
may have the slight advantage that, unlike a proxy, he or she can
simply turn up at the meeting and is not subject to any
requirement for documentation to be lodged with the company in
advance of the meeting, as a proxy is. This may be particularly
valuable where institutional investors are in discussion with the
company’s management right until the last minute about the
acceptability or otherwise of a resolution to be proposed at a
meeting and, if those discussions break down, where it will be
too late to appoint a proxy.290
Voting and verification of votes
Voting as a governance issue
15–73
Company law has traditionally proceeded on the basis that
voting at a general meeting is a property right for those
shareholders who have voting shares. This gives rise to two
problems. Shareholders may choose not to exercise their votes at
all; or they may vote at the behest of a non-shareholder. Both
responses are capable of undermining the legitimacy of
shareholder decisions, in the first case because the result is not
representative of the shareholding body as a whole and in the
second because it may reflect the interests of non-shareholders.
15–74
As to the first problem, we have seen above that for “fiduciary”
investors the law of trusts may impose a duty to give
consideration to the question of whether voting rights should be
exercised in order to promote the interests of the beneficiaries of
pension trusts. Under government pressure, the institutional
shareholders generally have supported the UK Stewardship
Code, which embodies best practice rules on active engagement,
including voting, so that for such shareholders voting is coming
close to being a duty.291 This is not a duty enshrined in the law,
but a “duty” resulting from the need to ward off proposals to
enshrine such a duty in the law—the typical set of factors which
produces what is often referred to as “self-regulation”, though
that is arguably an inappropriate term. Nevertheless, these
developments address to some degree the problem of non-
voting. Voting levels at general meetings of large companies
improved from one-half to over 60 per cent in the three years
2004 to 2007,292 but then levelled out to just over 70 per cent by
2015.293
Votes on a show of hands and polls
15–75
This development has naturally led institutional shareholders to
look closely at the rules on voting and to criticise rules which
make their task difficult. Companies’ articles normally provide
for voting to be on a show of hands, unless a poll is demanded
under the provisions discussed below, i.e. those present indicate
their views by raising their hands. Proxies may vote on a show
of hands,294 although a proxy holding instructions both for and
against a resolution may find it very difficult to know how to act.
The result on a show of hands may give a very imperfect picture
of where the majority of the voting rights lie.
The alternative voting mechanism is that of the poll in which
members and proxies vote the shares which they represent,
though a person is not obliged to vote all the shares represented
or to vote them all the same way.295 The voting process usually
involves signing slips of paper indicating how many votes are
being cast in each direction and the number of abstentions. This
is a more cumbersome, if more accurate, voting process, and in
large meetings it may not be practical to complete it during the
meeting, because of the need to check proxy forms and the votes
cast, though there must be scope for increasing the speed of the
voting process by use of electronic technology.296 What is not
permitted, unless the articles specifically provide for it, is voting
by postal ballot.297 The latter may be thought strange since
clearly such a referendum would be a better way of obtaining the
views of the members. But the fiction is preserved that the result
is determined after oral discussion at a meeting, although
everybody knows that in the case of public companies the result
is normally determined by proxies lodged before the meeting is
held.298
Given the potential inaccuracy of the vote on the show of
hands, its retention requires some explanation, especially as it is
not common in other jurisdictions and so is often misunderstood
by foreign investors.299 The main argument in its favour is its
speed and simplicity, enabling the company to take
uncontroversial decisions quickly, though for completely
uncontroversial decisions other techniques would do equally
well, such as taking decisions without a vote, if no person
present demands one. Where the resolution is controversial and
where the voting process therefore comes under the strongest
pressure, the show of hands has two main defects. The first is
that it may disguise the level of opposition to the resolution,
even if the show of hands produces the same result as a poll
would have done. For example, a resolution may be passed on a
show of hands by 80 to 20, but if a poll had been taken it might
have been revealed that 500 votes were in favour of the
resolution and 400 against. It is particularly likely that the
chairman of the meeting will not vote on a show of hands and
yet he or she may have been appointed the person to receive the
proxies solicited by the company. Such situations in particular
discourage institutional shareholders from voting by proxy,
because they feel their votes have no impact. In the case of
companies subject to the UK Corporate Governance Code these
adverse consequences are somewhat mitigated by the
recommendation that companies should display on their websites
the proxies lodged for and against a resolution where the vote
was taken on a show of hands.300
The second, and more serious, defect in the show of hands is
that it may produce a result different from that which would be
revealed by a poll. This situation is addressed by the legislation
through rules dealing with the question of who can demand that
a poll be taken, even though a result has been achieved on a
show of hands, or can demand a poll even before a decision on a
show of hands has been taken.301 The articles of companies
invariably direct that a demand by the chairman shall be
effective.302 This again strengthens the position of the directors,
for they run no risk of not being able to use their full voting
power. Further, the Act provides that the articles must not
exclude the right to demand a poll on any question, other than
the election of a chairman or the adjournment of the meeting.
Nor may the articles make ineffective a demand by not less than
five members having a right to vote on the resolution; or by
members representing not less than one-tenth of the total voting
rights on the resolution; or by members holding shares having a
right to vote on which a sum has been paid up equal to not less
than one-tenth of the total sum paid up on all the shares
conferring that right.303 Further, a proxy may demand or join in
demanding a poll.304 This makes it difficult for the articles to
hamstring a sizeable opposition by depriving them of their
opportunity to exercise their full voting strength. Moreover, it is
the duty of the chairman to exercise his right to demand a poll so
that effect is given to the real sense of the meeting, and, if he
realised that a poll might well produce a different result, it seems
that he would be legally bound to direct that a poll should be
taken.305
Verifying votes
15–76
The Company Law Review received evidence that the reliability
of the results produced on a poll might not always be all it
should be, because votes are “lost” somewhere in the chain
between the person holding the voting power giving instructions
as to how the votes are to be cast and the recording of those
votes at the meeting.306 Following this, the Act gives the same
percentage of the members (including indirect members) as can
place a resolution on the agenda or demand a meeting of an
AGM the right to requisition an independent assessor’s report
(normally from the company’s auditors) on a poll at a general
meeting of the company (but without any cost to the
requisitionists).307 This right applies only within “quoted
companies”, i.e. companies incorporated in one of the
jurisdictions of the UK and listed on the Main Market of the
London Stock Exchange or listed on a regulated market in
another Member State of the EEA or having their shares traded
on the New York Stock Exchange or Nasdaq.308 The report must
give the assessor’s opinion, with supporting reasons, on a
number of matters, notably whether the procedures adopted in
connection with the poll were adequate, whether the votes
(including proxy votes) were fairly and accurately recorded and
whether the validity of the members’ appointment of proxies
was fairly assessed.309 The context in which the right is set
strongly suggests that the assessor is required to look only at the
company’s practices and procedures, so that defects in the
passing of voting instructions down the chain before those
instructions reach the company will not be picked up.
Certainly, the rights which the assessor is given to support the
discharge of the reporting function are all rights against the
company and associated persons. The assessor has the right to
attend the meeting of the company at which the poll is to be
taken or any subsequent proceedings if the poll is not taken at
the meeting itself and to be given copies of the documentation
sent out by the company in connection with the meeting.310 The
assessor has a right of access to the company’s records relating
to the meeting and the poll and a right to require directors,
officers, employees, members and agents of the company
(including the operators of its share register) to provide
information and explanation (unless this would involve a breach
of legal professional privilege).311 Non-compliance with the
request for information or giving knowingly or recklessly
misleading information in response to a request is a criminal
offence.312 The company must put on its website a copy of the
report as soon as is reasonably practicable and keep the
information there for two years and, at an earlier stage, must post
some information about the appointment of the assessor.313
Non-compliance with the requirements for an assessor’s
report appears to have no impact on the validity of the resolution
passed, though it is a criminal offence on the part of every
officer in default for the company not to respond within one
week of receiving a valid request by appointing an independent
assessor to produce the report.314 The request will normally be
made before the meeting at which the poll is likely to be
requested or conducted but a valid request may be made up to
one week after the date on which the poll is held.315 The
appointed person must meet the statutory requirements for
independence, which, however, are drawn so as not to exclude
necessarily the company’s auditors,316 and the assessor must not
have any other role in relation to the poll upon which a report is
to be made.317
Establishing who is entitled to vote
15–77
One final issue which should be mentioned is the fundamental
one of establishing who is entitled to vote. There are two
potential problems. The first arises when the shares in a
company are constantly traded. In this case, establishing who
can vote can only sensibly be done by establishing some date
prior to, but not too far in advance of, the meeting as the “record
date”. Those who are members on that date may vote, even if by
the date of the meeting they have disposed of their shares, and
those who have acquired shares since that date may not (except
by instructing the shareholder on record how to vote). This is not
an entirely satisfactory situation and in some continental
European countries it is dealt with by “share-blocking”, i.e.
prohibiting trading between the record date and the date of the
meeting. However, the disadvantages of this device, in terms of
loss of liquidity, outweigh the advantages, and it has not been
used in the UK and is now in any event prohibited by art.7 of the
Shareholders’ Rights Directive.318 The alternative is to set the
record date close to the meeting date, so as to minimise the
effect of trading post the record date, but to accept that some
misallocation of voting rights will inevitably occur. This is the
UK approach where the record date is set at not more than 48
hours before the meeting by the Uncertificated Securities
Regulations, which are determinative in the case of publicly
traded companies.319
The second problem is one which has emerged as a practical
issue only recently. Directors of public companies have powers
under ss.793–797 to issue statutory disclosure notices calling for
information about the persons interested in its shares. If there is
non-compliance with the notice, the company can seek a court
order restricting the rights attached to the relevant shares,
including barring the right to vote. Given the powerful sanction,
the company’s right to seek to exercise the power to bar voting is
subject to “proper purposes” constraints.320
Publicity for votes and resolutions
15–78
Whether or not an independent assessor is requested by the
members, a quoted company is required to post on its website
the text of any resolution voted on through a poll at a general
meeting and give the details of the votes cast in favour of or
against it.321 This will include resolutions which are not passed.
Again, failure to do so does not affect the validity of the
resolution but does constitute a criminal offence on the part of
every officer in default. The UK Corporate Governance Code
goes a little further and suggests website publication of votes
directed to be withheld and of the number of shares in respect of
which valid proxy appointments were made.322 The purpose of
the latter piece of information is presumably to indicate how
important or, more likely, unimportant attending the meeting
actually was.
15–79
Apart from this new requirement for quoted companies, the
publicity requirements for the results of meetings are of a more
traditional kind. Section 355 requires every company to keep
records containing the minutes of all proceedings of general
meetings and copies of resolutions passed otherwise than at
meetings (for example, as written resolutions or by unanimous
consent), and to keep those records for 10 years.323 Those
records must be open to inspection by any member of the
company (but not by the public) free of charge, who, for a
prescribed fee, may require a copy of them.324 The place of
inspection is the company’s registered office or some other place
permitted under regulations made by the Secretary of State.325
However, some resolutions of the company will be available
publicly because they have to be supplied to the Registrar. This
is true in particular of special resolutions, including such
resolutions passed by unanimous consent.326
15–80
The minutes of the meetings and the records of the resolutions
have some legal significance. A record of a resolution passed
other than at a meeting, if signed by a director or the company
secretary, is evidence of the passing of the resolution, and the
minutes of a meeting, if signed by the chair of that meeting or
the following one, are evidence of the proceedings at the
meeting. A record of proceedings at a meeting is deemed, unless
the contrary is proved, to establish that the meeting was duly
held, was conducted as recorded and all appointments made at it
were valid. A record of a written resolution produces the same
effect as to the requirements of the Act for passing written
resolutions.327
“Empty” voting
15–81
The second problem identified above was that of members
voting at the behest of non-members. In some cases this is
entirely legitimate. We have noted, for example, that a nominee
shareholder must vote as instructed by the beneficial owner.328
This is unproblematic because the effect of the rule is to reunite
the voting right with the person who has the economic interest in
the share.329 The issue with “empty” voting is that the right to
vote is in fact exercised by a person with no or only a limited
economic interest in it, to the exclusion of the person with the
greater economic interest. There are two principal ways in which
voting by those with no or only a limited economic interest in
the shares can come about: contracts for differences (“CfDs”)
and stock “lending”.330 Both are fairly sophisticated market
arrangements, which do have a legitimate role, but whose impact
on the allocation of voting rights has not been fully thought
through.
In the first case, a person typically contracts with a
counterparty for the difference in the price of a security at two
points in time, and the counterparty, at least in a “long” CfD,
will purchase the security in question as a hedge against its
exposure under the CfD. In practice, though not as a matter of
law, the holder of the CfD can often determine the way in which
the counterparty exercises the votes attached to the shares
acquired as a hedge. In this way a non-owner with a limited
economic exposure to the share becomes in practice able to vote
it. We discuss CfDs further below when dealing with takeovers,
which is the one area where regulation (relating to disclosure of
interests in shares) has addressed them.331
The second main form of “empty” voting arises out of stock
“lending”. This is a misnomer. With stock lending the shares are
not lent by their holder to someone else but are transferred to
that person on the basis that the transferee undertakes to re-
transfer an equivalent number of shares (together with any
dividend paid on them in the interim) upon demand to the
transferor. The economic result may be near that of a loan of
securities but because the legal form is an outright transfer of the
shares to the other person, the right to vote is transferred to that
other person as well. By the same token, because the economic
effect of the transaction is that of a loan, for the transferee to
exercise the voting rights leads to a disjunction between the
voter and the person with the long-term economic interest in the
shares (i.e. the lender). Again, there is no formal regulation of
the voting rights issues arising with stock lending. The Myners
Report 2007332 reiterated its earlier recommendation that in the
case of contentious votes the transferor should exercise its right
to have shares re-transferred to it in order to be able to exercise
the right to vote. However, it noted that, in the case of
institutional shareholders, where, often, the shares were held by
a custodian under a direct contract with the institution, whilst the
right to vote the shares was delegated to a fund manager under a
separate contract with the institution, the fund manager might be
unaware whether the shares held by the custodian had been
“lent” (perhaps under an automatic stock lending programme)
and so would not be in a position to ask for the re-transfer of
their equivalent.333
Miscellaneous matters
Chairman
15–82
Every meeting needs a person to preside over it, if it is not to
descend into chaos. The Act lays down the default rule that a
member may be elected at the meeting by resolution to be its
chair, but states that this provision is subject to any provisions in
the articles as to how that person is to be chosen.334 The articles
invariably do deal with the matter. The model articles for public
companies335 sensibly take the view that the chairman ought to
be a member of the board and accordingly provide that the
chairman of the board shall also be the chairman of the meeting,
which is what normally happens. However, if the chairman of
the board is not present with 10 minutes of the time appointed
for the start of the meeting, the directors present must appoint a
director or member to preside and, if there are no directors
present, then those constituting the meeting do that job.
The position of chairman is an important and onerous one, for
he or she will be in charge of the meeting and will be responsible
for ensuring that its business is properly conducted. As
chairman, he owes a duty to the meeting, not to the board of
directors, even if he is a director.336 He should see that the
business of the meeting is efficiently conducted and that all
shades of opinion are given a fair hearing. This may entail taking
snap decisions on points of order, motions, amendments and
questions, often deliberately designed to harass him, and upon
the correctness of his ruling the validity of any resolution may
depend.337 He will probably require the company’s legal adviser
to be at his elbow, and this is one of the occasions when even the
most cautious lawyer will have to give advice without an
opportunity of referring to the authorities.
Adjournments
15–83
One situation in which it may be necessary to adjourn is when
the meeting is inquorate, but this is a rare situation in public
companies, because the quorum requirement is so low, i.e. two
persons. What may present problems is the converse case where
those attending the meeting are too many rather than too few,
and the meeting becomes chaotic. It should be emphasised that
an adjournment of a meeting is to be distinguished from an
abandonment of it. In the latter case the meeting ends. If a new
meeting is convened, new business, as well as any unfinished at
the abandoned meeting, may be undertaken so long as proper
notice is given of both. In contrast, if a meeting is adjourned, the
adjourned meeting can undertake only the business of the
original meeting338 or such of it which had not been completed at
that meeting. Indeed, it was thought necessary specifically to
provide by what is now s.332 of the Act that where a resolution
is passed at an adjourned meeting it shall “for all purposes be
treated as having been passed on the date on which it was in fact
passed and is not to be deemed to be passed on any earlier
date”.339
The grounds for adjournment are normally set out in the
articles. Article 33 of the model set for public companies340
provides for adjournment if those present agree, either at the
chairman’s suggestion or by adopting a resolution to that effect
off their own motion. Basically this gives effect to the common
law rule under which the chairman has no general right to
adjourn a meeting if there are no circumstances preventing its
effective continuance.341 However, responding to the difficulties
demonstrated in the Byng case,342 the model article now further
provides that the chairman may unilaterally adjourn a meeting if
“it appears to the chairman of the meeting that an adjournment is
necessary to protect the safety of any person attending the
meeting or ensure that the business of the meeting is conducted
in an orderly manner”. However, this part of the model article
does no more than reflect the position at common law. Helpfully,
in the Byng case343 this element of the common law power was
held to continue to operate, even though the company’s articles,
reflecting the earlier model sets of articles, contained an express
power to adjourn only with the consent of the meeting. But the
power and duty must be exercised bona fide for the purpose of
facilitating the meeting and not as a ploy to prevent or delay the
taking of a decision to which the chairman objects344; and the
chairman’s exercise of the common law power must be a
reasonable one.345
Finally, under art.33 no notice has to be given if a meeting is
adjourned for less than 14 days; otherwise, seven days’ clear
notice must be given. Clearly if the adjournment is a temporary
one and the meeting is resumed at the same place on the same
day, this is fair enough; but otherwise it seems unfair to
members who may, perhaps through no fault of their own, have
found themselves unable to attend the meeting as they had
intended. As a result they may not know that it has been
adjourned and may be prevented from exercising their rights to
attend the adjourned meeting.
Class meetings
15–84
In addition to general meetings it may be necessary to convene
separate meetings of classes of members or debenture-holders
(for example, to consider variation of rights) or of creditors (for
example, in connection with a reconstruction or in a winding
up). Here again, the rules to be observed will depend on the
company’s articles construed in the light of the general law
relating to meetings. However, the Act does provide that, for
meetings of classes of shareholder, the statutory rules apply as
they apply to general meetings, with some modifications.346 The
most important of the shareholder protections which are not
applied are the members’ power to require the directors to
convene a meeting and the power of the court to order a
meeting.347 As we see in Ch.19, the company, if it wishes to take
certain steps, may be obliged to seek the consent of a class of
shareholders and convene a meeting for that purpose, but the
class has no general right on its own to meet to consider issues
which concern it. On the other hand, some protections are more
extensive at class meetings called to vary the rights of the class
members: the two people constituting the quorum must represent
at least one-third of the nominal value of the class of shares in
question, except at an adjourned class meeting348; and any one
member may demand a poll.349
In practice, very similar arrangements are incorporated in
debenture trust deeds to regulate the conduct of meetings of
debenture-holders.
At class meetings all members other than those of the class
ought to be excluded, but if for convenience a joint meeting is
held of the company and all separate classes, followed by
separate polls, the court will not interfere if no objection has
been taken by anyone present.350
Forms of communication by the company
15–85
Much of this chapter has concerned information (about
meetings, for example) which is required to be supplied by the
company to its members. In the case of AGMs of public
companies that material will typically include the company’s
annual accounts and reports (considered in more detail in Ch.21)
which are today quite bulky documents. One important issue,
therefore, is the form that the communication takes. That may be
by traditional hard copy, electronically or by publication on the
company’s website. The Act takes some tentative steps towards
encouraging the use of the latter two forms of communication,
whilst not depriving members of their traditional supply of hard
copy, if they wish to have it. Thus, s.1145 provides that where a
member has received a communication otherwise than in hard
copy (i.e. electronically or via a website), that member is entitled
to be sent, without charge, a hard copy version of the document
upon request within 21 days.
More generally, before a company can validly communicate
with a member351 otherwise than in hard copy, the consent or
deemed consent of that member must be obtained. Electronic
communication of documents is permitted only if the member
has consented to that form of communication, either generally or
for a specific class of documents.352 As to website
communication, that is permitted only if there has been actual
agreement by the particular member,353 as for electronic
communication, or there has been deemed agreement. Deemed
agreement arises where (a) the company’s articles provide for
website communication or the members have resolved to permit
it; and (b) the particular member has been asked by the company
to agree to website communication for all or a particular class of
documents and the company has not received a response within
28 days.354 The deemed agreement may be revoked at any time
by the member, but the burden is on the member to take this
step.355 To the extent that the deemed consent provisions apply to
website communication only, it can be said that the Act puts
more pressure on members to accept that form of
communication than to accept electronic documents.
However, website communication has a number of
disadvantages for the member over receiving an electronic
document, which the Act aims to redress. First, unless the
member constantly monitors the relevant website, he or she may
not be aware of the availability of the document. Thus, the
company is required to notify the member of the availability of
the document, the address of the website and how to access the
document.356 This communication could be via an electronic
document, if the member has consented to that form of
communication. (Self-evidently, notification via the website
itself will not do!) Secondly, hard copy or electronic
communication gives the member their own copy of the
document, whereas, unless downloaded, the member will lose
access to the document when it is removed from the website.
Thus, minimum rules are set for the period during which the
document must be available on the website. This is 28 days from
the date on which the member was notified, as above, unless a
specific section of the Act sets a different period.357 There are a
number of such specific provisions relating to the passing of
resolutions.358
Forms of communication to the company
15–86
Where the company is the communicator, it is likely to be
anxious to move away from the obligation to supply hard copy.
When it is the potential receiver of communications, it may not
be as anxious to facilitate the members’ task. With members’
communications to the company, we are necessarily concerned
with their freedom to use electronic communications, rather than
website based communication. The general rule in the Act is that
the company is not obliged to accept electronic communications
from other persons unless it has actually consented to this
method of communication or is deemed to have accepted it.359
Important for our purposes is that s.333 provides, where a
company gives an electronic address in a notice calling a
meeting or in a document from the company inviting the
appointment of proxies, it is deemed to have agreed that any
document relating to the meeting or proxy solicitation may be
sent to it electronically at that address. In some other cases, the
Act simply imposes a mandatory obligation on the company to
accept communication in electronic form, for example, with
regard to communication of assent to a written resolution.360 Of
course, a difficulty with electronic communications is
authentication. What is the equivalent of a signature on a hard
copy? Section 1146 provides that an electronic communication is
authenticated if the identity of the sender is confirmed in the
manner specified by the company or, in the absence of such
specification, the document contains a statement of the identity
of the sender and the company has no reason to doubt the truth
of the statement.
CONCLUSION
15–87
At the beginning of this chapter we pointed out that the CLR
recommended reforms to improve the governance rights of
shareholders, as part of its policy of making a shareholder-
centred system of company law operate properly. The exercise
of governance rights by shareholders may not be the only or
even the most effective way of providing accountability on the
part of management to shareholders—the threat of a takeover bid
is probably more potent—but governance rights are certainly an
important element of the accountability structure of company
law. Having looked at the detail of the current law, how have the
proposals of the CLR fared?
There has certainly been a great deal of tidying up and
modernisation, notably the facilitation of electronic
communication. Beyond that, in relation to private companies
the written resolution provisions are now much simpler and
likely to be more attractive, especially with the abandonment of
the requirement of unanimity. For public companies, a major
focus of concern was voting by the institutional shareholders, in
terms of both the importance institutions attached to voting and
the technical difficulties faced by indirect shareholders in casting
their votes. The CLR proposed to rely mainly upon market
developments and governmental suasion, rather than mandatory
legal rules, to deal with both problems. Thus, there were to be
fall-back powers only for the Secretary of State to require
disclosure of voting by institutional shareholders361 or to
facilitate voting by indirect shareholders. As a result of pressure
in Parliament, the fall-back powers designed to overcome the
technical barriers to voting by indirect shareholders were given a
slightly harder edge, in relation to information provision by
quoted companies, but remain otherwise of a fall-back nature.362
Meanwhile, policy-makers’ understanding of the technical
problems of voting has expanded with the development of the
idea of “empty voting”, a topic hardly touched on by the CLR,
but it is not clear, even to the Shareholder Voting Working
Party, consisting of those professionally involved in the area,
what the correct solution should be.363
Finally, the CLR placed great store on the alignment of the
AGM cycle with that for company reporting. Formally, that has
been achieved, but the Government did not implement the
further reform intended to take advantage of the alignment. This
was the statutory “pause” of two weeks after circulation of the
accounts and reports, during which members would be able to
formulate resolutions, to be circulated by the company free of
charge, to be debated at the AGM. This was undoubtedly a lost
opportunity to turn the AGM into a more significant event.
1
5Final Report I, para.3.4. The other two were the proposed statement of directors’
duties, discussed in the following chapter, and improved disclosure and transparency
provisions, discussed in a number of places in this work but especially in Ch.21.
6 See below, para.15–22. From a governmental point of view, putting pressure on
shareholders to regulate boards of directors reduces the pressure on the Government to
regulate substantively in the contested area. See the example of the recent re-regulation
of directors’ remuneration, discussed in the previous chapter at paras 14–30 et seq.
7 See below, Ch.23.
8 On whom, see below. Additional voting rights may be confined to certain types of
resolution, for example, the “golden share” held by the Government after some recent
privatisations may operate so as to allow the Government to out-vote all other
shareholders on certain specified resolutions: see Graham (1988) 9 Co. Law. 24.
92006 Act s.284 lays down a rule of “one share, one vote” (for all shares, whether
ordinary or preference), except where the vote is taken on a “show of hands” (see below,
para.15–75), but allows the articles to make alternative provisions, so that the
distribution of voting rights (including the creation of classes of non-voting ordinary
shares) is under the control of the shareholders: s.284(4). See Re Savoy Hotel Ltd [1981]
Ch. 351 (discussed at para.29–7) where the company had created A and B shares,
ranking pari passu except in relation to voting rights, with the effect that the holders of
the B shares, who owned 2.3% of the equity, could exercise 48.55% of the votes.
10
The European Commission expressed concern with the management entrenchment
qualities of disproportionate capital structures, but only introduced proposals into the
Takeovers Directive on an optional basis, and its general study of the issues leans
towards enhanced disclosure of voting arrangements, rather than more detailed
regulation of them. For the “break-through rule” in relation to takeovers, see paras 28–
22 et seq.
11
Contrast the minority report of the Jenkins Committee in 1962 which recommended a
ban on nonand restricted-voting shares: Report of the Committee on Company Law
Amendment, 1962, Cmnd. 1749, “Note of Dissent”, cf. the main report at paras 123–136.
The dissentients were mainly influenced by the inconsistency between the development
of a market for corporate control and the issuance of non- or restricted-voting shares.
13
See Ch.20, below.
14
Developing, paras 7.95f et seq.; Completing, paras 2.35–2.36.
162006 Act s.336, requiring an AGM, applies only to public companies and to private
companies which are “traded companies” (s.336(1A)—these are defined in s.360C as
companies admitted to trading on a regulated market in an EEA State by or with the
consent of the company) (AGMs are discussed below at para.15–49); and s.281(1)
provides for private companies to take resolutions in either way.
17
2006 Act s.296(4), discussed below at para.15–11.
18 2006 Act s.302 makes it clear that the directors may always call a general meeting of
the company.
192006 Act ss.303–306, discussed below at para.15–51. The rule for demanding that a
written resolution be circulated also requires 5 per cent, or some lower threshold as
specified in the articles: s.292.
20 2006 Act s.168. See the previous chapter at para.14–52.
21 2006 Act s.510. See para.22–19.
22 2006 Act s.288(2).
23 2006 Act s.169(2).
24
2006 Act s.511(3)–(6).
25 2006 Act s.296(4).
27
Referred to in s.292(4) as the “eligible” members, but s.289 defines the eligible
members as those members who would have been entitled to vote on the date the
resolution was circulated. The written resolution provisions do not alter the rules on the
distribution of voting rights, discussed above at para.15–4.
28
2006 Act s.291(3) for resolutions proposed by directors and s.293(2) for resolutions
proposed by members.
29
2006 Act s.296(4). The period for voting is 28 days from the date of circulation or
whatever other period is fixed in the company’s articles: s.297. If the requisite support is
not achieved by that date, the resolution lapses. The circulation date is the first date on
which a copy of the resolution is sent or submitted to a member: s.290.
30
2006 Act s.291(2)(a). The statement accompanying the proposed resolution must also
indicate the final date for voting: s.291(2)(b). Voting may be electronic: ss.296(1),(2)
and 298.
31
2006 Act s.291(6),(7).
32 2006 Act s.296(3).
33 2006 Act s.288(3).
34
2006 Act s.292(4),(5). The 5 per cent figure tracks that for requiring a public
company to add a resolution to the agenda of its AGM (see below, para.15–57), for
which s.292 is the functional substitute, since it is not expected that private companies
will typically hold AGMs. However, the original Draft Clauses had proposed that any
member might require the company to initiate the written resolution procedure:
Modernising Company Law—Draft Clauses, Cm. 5553-II, July 2002, cl.174.
35
2006 Act s.292(3).
36
2006 Act s.293(1),(3). Non-compliance is a criminal offence on the part of every
officer in default but again the validity of the resolution, if passed, is not affected by
non-compliance: s.293(6),(7).
37
2006 Act s.294.
38 2006 Act s.292(2)(a).
40 2006 Act s.292(2)(b),(c).
41 2006 Act s.295. The requisitionists may have to pay the company’s costs (s.295(2))
and presumably the normal rules as to costs will apply if the application is by a person
aggrieved, i.e. the requisitionists will have to pay if they lose. This is a new section,
though it mirrors the provision which now appears in relation to meetings (see s.317).
422006 Act s.300 is, by contrast, concerned with restraining the (private) company’s
power to exclude a written resolution procedure rather than its power to have a more
generous one than the statutory procedure.
44 2006 Act s.281(4)(a): “nothing in this Part affects any enactment of rule of law as to
things done otherwise than by passing a resolution”. Section 281(4)(c) also preserves the
estoppel-based version of the common law rules, discussed below: “nothing in this Part
affects any enactment or rule of law as to cases in which a person is precluded from
alleging that a resolution has not been duly passed”.
45
Baroness Wenlock v River Dee Co (1883) 36 Ch. D. 675n, 681-2n (Cotton LJ); Re
Duomatic Ltd [1969] 2 Ch. 365, 373 (Buckley J); Re New Cedos Engineering Co Ltd
[1994] 1 B.C.L.C. 797, 814 (Oliver J); Wright v Atlas Wright (Europe) Ltd [1999] 2
B.C.L.C. 301, 314-5 CA (Potter LJ, with whom other members of the CA agreed); Euro
Brokers Holdings Ltd v Monecor (London) Ltd [2003] EWCA Civ 105; [2003] 1
B.C.L.C. 506 at [62] (Mummery LJ).
46
EIC Services Ltd v Phipps [2004] 2 B.C.L.C. 589 at [122].
47
Re Torvale Group Ltd [1999] 2 B.C.L.C. 605.
48
Re Express Engineering Works Ltd [1920] 1 Ch. 466 CA. The qualification is
important: for example, the shareholders cannot consent (whether formally or
informally) to the directors making illegal gifts out of capital: this is now taken to be the
ratio of Re George Newman and Co [1895] 1 Ch. 674. Also see below, paras 15–20 and
16–117 et seq.
49
Wright v Atlas Wright (Europe) Ltd [1999] 2 B.C.L.C. 301 CA; Multinational Gas Co
v Multinational Gas Services [1983] 1 Ch. 258; see also Madoff Securities International
Ltd v Raven [2013] EWHC 3147 (Ch).
50Re Tulsesense Ltd, Rolfe v Rolfe [2010] EWHC 244 (Ch); [2010] 2 B.C.L.C. 525 at
[40] (Newey J). By contrast, joint holders of shares are only entitled to one vote per
share, and the assent of the “senior” holder is sufficient: Re Gee & Co (Woolwich) Ltd
[1975] Ch. 52.
51 Shahar v Tsitsekkos [2004] EWHC 2659 (Ch) at [67]. But the “control” limitation is
important. More generally, the Australian case of Jalmoon Pty Ltd (In Liquidation) v
Bow (1997) 15 A.C.L.C. 230 limits consent to the registered owner. See too Secretary of
State for Business, Innovation and Skills v Hamilton [2015] CSOH 46 at [59], obiter,
simply noting the uncertainty. If there are two or more beneficial owners, then of course
all must consent: Re Tulsesense Ltd, Rolfe v Rolfe [2010] EWHC 244 (Ch); [2010] 2
B.C.L.C. 525 at [43] (Newey J).
52
See, for example, ss.181(5) (directors’ long-term service contracts), 696(5) and 699(6)
(on repurchases of company’s own shares).
532006 Act s.281(4). Also see Wright v Atlas Wright (Europe) Ltd [1999] 2 B.C.L.C.
301 CA, and the discussion below at para.15–20.
54 EIC Services Ltd v Phipps [2004] 2 B.C.L.C. 589 at [122]. See above, para.15–16.
55 See, in addition to the cases already cited, Re Oxted Motor Co Ltd [1921] 3 K.B. 32;
Parker & Cooper Ltd v Reading [1926] Ch. 975; Re Pearce Duff & Co Ltd [1960] 1
W.L.R. 1014; Re Duomatic Ltd [1969] 2 Ch. 365; Re Bailey Hay & Co Ltd [1971] 1
W.L.R. 1357; Re Gee & Co (Woolwich) Ltd [1975] Ch. 52; Cane v Jones [1980] 1
W.L.R. 1451; Re Moorgate Mercantile Holdings Ltd [1980] 1 W.L.R. 227 at 242G;
Multinational Gas Co v Multinational Gas Services [1983] 1 Ch. 258 especially at 289
CA. The unanimous consent rule is often referred to as “the Duomatic rule”, although
that case was not the first to formulate it.
56Schofield v Schofield [2011] EWCA Civ 154; [2011] 2 B.C.L.C. 319 at [32] (Etherton
LJ, with whom the other members of the CA agreed).
57 Re Bailey Hay & Co Ltd [1971] 1 W.L.R. 1357, 1367 (Brightman J).
58
Re D’Jan [1994] 1 B.C.L.C. 561; it suffices where the only inference that can be
drawn is indicative of assent and acceptance: Hussain v Wycombe Islamic Mission and
Mosque Trust Ltd [2011] EWHC 971 (Ch) at [37] (HHJ David Cooke).
59 Re Tulsesense Ltd, Rolfe v Rolfe [2010] EWHC 244 (Ch); [2010] 2 B.C.L.C. 525; see
also Bonham-Carter v Situ Ventures Ltd [2012] B.C.C. 717 (Ch) in which the filing of
relevant forms and notices was found to be insufficient to make out a Duomatic decision
to remove the director (the decision was reversed on appeal in [2014] B.C.C. 125 but no
permission to appeal had been given on this point).
60
Schofield v Schofield [2011] EWCA Civ 154; [2011] 2 B.C.L.C. 319.
61
Re Bailey Hay & Co Ltd [1971] 1 W.L.R. 1357. See also Peña v Dale [2004] 2
B.C.L.C. 508 at [120].
62
Re Bailey Hay & Co Ltd [1971] 1 W.L.R. 1357 at 1366F–1367B.
63
Re Bailey Hay & Co Ltd [1971] 1 W.L.R. 1357 at 1367D–E.
64
See Phosphate of Lime Co v Green [1871] L.R. 7 C.P. 43, where it was held that
“acquiescence” by members of a company could be established without proving actual
knowledge by each individual member so long as each could have found out if he had
bothered to ask; and Ho Tung v Man On Insurance Co [1902] A.C. 232 PC, where
articles of association, which had never been adopted by a resolution but had been acted
on for 19 years and amended from time to time, were held to have been accepted and
adopted as valid and operative articles.
65
Madoff Securities International Ltd v Raven [2013] EWHC 3147 at [288]; Oxford
Fleet Management Ltd v Brown [2014] EWHC 3065 at [102]–[104]. In this context, see
above, paras 14–11 to 14–16 (on shareholders’ residual and confirmation powers).
66
Re Torvale Group Ltd [1999] 2 B.C.L.C. 605; Euro Brokers Holdings Ltd v Monecor
(London) Ltd [2003] 1 B.C.L.C. 505 at [62] CA.
67Precision Dipping Ltd v Precision Dipping Marketing Ltd [1985] B.C.L.C. 385 CA.
See Ch.12, above, at para.12–5.
68
Wright v Atlas Wright (Europe) Ltd [1999] 2 B.C.L.C. 301 CA.
69
This was a strong decision because s.319(3) of the Companies Act 1985 could be read
as requiring a resolution in any event in this case, so that the principle of informal
unanimous consent had no operation at all. See also Bonham-Carter v Situ Ventures Ltd
[2012] B.C.C. 717 (Ch), in which it was held obiter that informal consent of
shareholders could not waive the requirements under s.169 as these were, at least in part,
for the benefit of director(s) whose removal was sought.
70Note the contrasting approaches of Lindsay J in Re RW Peak (King’s Lynn) Ltd
[1998] 1 B.C.L.C. 183; and Park J in BDG Roof-Bond Ltd v Douglas [2000] 1 B.C.L.C.
401 to the construction of the rules relating to the purchase of own shares. See further
Kinlan v Crimmin [2007] 2 B.C.L.C. 67.
71 See the discussion above, para.14–52. By contrast, the CLR recommended that the
unanimous consent rule should also operate here, since it could be argued that the
purpose of these provisions is solely to promote the interests of the members (enabling
them to be better informed about the reasons for the proposed removal): Final Report I,
para.7.22.
72See s.29(1)(b): “any resolution or agreement agreed to by all the members of the
company” that would otherwise need to be a special resolution.
73 2006 Act s.356(2), referring only to “a resolution”.
74
A.A. Berle and G.C. Means, The Modern Corporation and Private Property, revised
edn (New York: Transaction Publishers, 1968).
75
Interesting work on the issue has been carried out by B. Cheffins. See Corporate
Ownership and Control: British Business Transformed (Oxford: Oxford University
Press, 2008).
76
See P. Davies, “Institutional Investors in the United Kingdom” in T. Baums et al.
(eds), Institutional Investors and Corporate Governance (1994); E. Boros, Minority
Shareholder Remedies (Oxford, 1995), Ch.3; and G.P. Stapledon, Institutional
Shareholders and Corporate Governance (Oxford, 1996), Ch.2.
77
See B. Cheffins, “The Stewardship Code’s Achilles’ Heel” (2010) 73 M.L.R. 1004,
1017–18, indicating an increase in foreign investment from 16% to 42%, and a decrease
in the holdings of UK pension funds and insurance companies from 52% to 26%
between 1993 and 2008.
78
See M. Kahan and E. Rock, “Hedge Funds in Corporate Governance and Corporate
Control”, ECGI Law Series 76/2006 (suggesting that some hedge funds make
investments in order to become activists rather than in order to protect an investment
which has turned out not to perform as expected) and W. Bratton, “Hedge Funds and
Governance Targets”, ibid., 80/2007.
79
Institutional Investment in the United Kingdom: A Review (London, 2001).
80 Sir D. Walker, A Review of Corporate Governance in UK Banks and Other Financial
Industry Entities: Final Recommendations (26 November 2009) at
http://webarchive.nationalarchives.gov.uk/+/http:/www.hm-
treasury.gov.uk/d/walker_review_261109.pdf [Accessed 27 April 2016].
81 J. Kay, The Kay Review of UK Equity Markets and Long-Term Decision Making (July
2012) at
12-917-kay-review-of-equity-markets-final-report.pdf [Accessed 30 January 2016].
82
For example, companies in which the institution has investments.
83
84 More detail can be found in Ch.5 of the Myners Report, above, fn.79.
85
The fund may promise a certain level of benefits on retirement (“defined benefit”
schemes) or only that the pensioner will be entitled to his or her share of the fund at
retirement in order to purchase an annuity (“defined contribution” schemes). The
distinction, though enormously important for employees in terms of the allocation of
investment risk, is not significant for present purposes, though the present trend is firmly
away from DB and towards DC. The proposed “activism” obligation (see below) is the
same for both types of scheme.
87 Even a stand-alone fund manager may suffer from conflicts of interest, for example,
where it manages the pension fund of a company in which another pension fund under
its management is invested.
88 In any event, the Government was not minded to pursue this particular
recommendation: Modernising, para.2.47.
89
See above, fn.79 at paras 5.83–5.88.
91
Final Report, I, para.6.39.
92
HL Debs, vol. 682, col. 787, 23 May 2006 (Lord Sainsbury).
93
See above, fn.79 at para.5.89.
94
See para.14–69.
95
HM Treasury and Department for Work and Pensions, Myners Review: The
Government’s Response, para.11.
96
https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-
Stewardship-Code-September-2012.pdf [Accessed 28 April 2016], as revised in
September 2012.
97
Institutional Shareholders’ Committee, The Responsibilities of Institutional
Shareholders and Agents—Statement of Principles (2002). In December 2004 the
Treasury published Myners principles for institutional investment decision-making:
review of progress, concluding that progress had been made, that more needed to be
done but that legislation was not required at that stage.
98 See above, fn.81. Also see the Government’s Implementation of the Kay Review:
Progress Report (October 2014) at
14-1157-implementation-of-the-kay-review-progress-report.pdf [Accessed 30 January
2016].
99
Though the Myners Committee seems to have forgotten this for it proposed to impose
its obligation on the fund managers only. The mistake was corrected by the Government:
see above, fn.93, para.60.
100
See above, fn.79, Ch.9.
101
See above, fn.81, Recommendation 7.
102 Law Commission, Fiduciary Duties of Investment Intermediaries (Law Com No.350,
June 2014), especially paras 11.10–11.33, at
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/325508/41342_HC_368_LC350_acce
[Accessed 30 January 2016].
103
FRC, The UK Stewardship Code, 2012, https://www.frc.org.uk/Our-
Work/Publications/Corporate-Governance/UK-Stewardship-Code-September-2012.pdf
[Accessed 28 April 2016]. These principles are similar to those adopted by the ISC
(above, fn.97), and in Europe by the European Fund and Asset Management
Association, EFAMA Code for External Governance: Principles for the exercise of
ownership rights in investee companies, 2011, http://www.ecgi.org/codes/code.php?
code_id=336 [Accessed 28 April 2016].
104 FSA, Conduct of Business Sourcebook COBS 2.2.3 (presumably to become the FCA
rule).
105But for a critical assessment of the likely impact, see B. Cheffins, “The Stewardship
Code’s Achilles’ Heel” (2010) 73 M.L.R. 1004. For its proposed broader 2012
application, see above fn.98.
106 See FRC, Developments in Corporate Governance and Stewardship 2015, at
https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/Developments-
in-Corporate-Governance-and-Stewa-%281%29.pdf [Accessed 30 January 2016].
107
The system has a start date of July 2016: https://www.frc.org.uk/News-and-
Events/FRC-Press/Press/2015/December/FRC-promotes-improved-reporting-by-
signatories-to.aspx [Accessed 6 February 2016].
108
Kirby v Wilkins [1929] 2 Ch. 444. If the nominee votes the shares without
instructions, that right must be exercised in the interests of the beneficiary.
109
110
Final Report I, paras 7.1–7.4.
111
See para.27–12.
112
HL Debs, vol. 681, cols. 813 et seq., 9 May 2006.
113
HC Debs, Standing Committee D, Twenty First Sitting, cols. 875 et seq., 21 July
2006.
114 For the meaning of a “regulated market” see para.25–8.
115 2006 Act s.151. The regulations are subject to affirmative resolution by Parliament.
116
The register of members is discussed below, at para.27–16.
117
This section does not apply in Scotland.
118 Thus art.45 of the model set of articles for public companies: “Except as required by
law, no person shall be recognised by the company as holding any share upon any trust,
and except as otherwise required by law or the articles, the company is not in any way to
be bound by or recognise any interest in a share other than the holder’s absolute
ownership of it and all the rights attaching to it”.
119
Completing, paras 5.2–5.12 and Final Report I, paras 7.3–7.4.
120
An obvious, but perhaps potentially confusing, term to employ, since the nominator
will often be a nominee shareholder! Any custodian of relevant shares may use the
power, whether in a pension-fund context or otherwise.
121
At para.15–4.
122
Although the section is permissive as to the adoption of “transfer” articles by the
company, there seems no reason why the articles should not be mandatory as against the
member in appropriate cases.
123 On proxies see below, para.15–67.
124 The rights to be sent a proposed written resolution; to require circulation of a written
resolution; to require directors to call a general meeting; to require notice of a general
meeting; to require circulation of a statement; to appoint a proxy; to require circulation
of a resolution for the AGM of a public company; to be sent the annual report and
accounts. And, in addition, in relation to “traded companies” (defined in s.360C), the
right to ask questions at a meeting; and the power to include matters in the business dealt
with at the AGM.
125
2006 Act s.145(2).
126 2006 Act s.145(4)(b) makes it clear that the section does not affect the requirements
relating to the transfer of the shares themselves.
127 2006 Act s.145 (2).
128
2006 Act s.145(4)(a). Thus, the articles may not confer enforceable rights on third
parties, even if the company wishes to do so, a somewhat strange restriction. This was
tested in In re DNick Holding Plc [2014] Ch. 196, where the claimants, being the
ultimate economic owners of certain beneficial interests in the ordinary shares, applied
for relief under s.98 in respect of a special resolution for re-registration as a private
company. Norris J held that they were not “holders” of the shares and therefore had no
standing to make an application under s.98. Moreover, s.145 could not be read as
conferring rights enforceable against the company on anyone other than the registered
members: the section does not mean that “if the effective exercise of the transferred right
produces a result that is not to the taste of the nominated person then the nominated
person can, in order to bring about his desired outcome, himself use any of the
provisions of the 2006 Act available to the transferring member” at [29]. Norris J
however recognised that this result would “deprive the claimants as indirect investors of
the sort of protection which those who formulated the 2006 Act thought ought to be
extended to minority shareholders. That is not a particularly comfortable conclusion at
which to arrive: but I consider that I would have to embark upon…an ‘impermissible
form of judicial legislation’ to reach any other conclusion” at [31].
129
130
For an excellent survey of practice as of a few years ago and proposals for reform
going beyond what the CLR recommended, see R.C. Nolan, “Indirect Investors: A
Greater Say in the Company?” (2003) 3 J.C.L.S. 73.
131
In In re DNick Holding Plc [2014] Ch. 196, it was noted obiter that the right of a
nominee to vote both for and against particular resolutions under s.152(1) created
problems, since then—for the purposes of s.98—the registered holder was “a person
who has consented to or voted in favour of the resolution”, and so had no standing to
complain despite the partial dissenting vote [32].
132 2006 Act s.152(2)–(4). The provision does not specifically require the company’s
assumption to be a reasonable one, although the assumption only arises when the
member does not inform the company otherwise, and presumably the company will need
to determine this in a reasonable manner.
133 Such provisions also prevent the depositary institution becoming a significant holder
of voting rights at the company’s meetings.
134 Nolan, above, fn.130, analyses such a set of provisions in the articles of BP.
135 2006 Act s.150(5)(a).
136
2006 Act s.146(1). That regulated market may be located in any Member State but
the company must be one subject to the domestic companies legislation. In other words,
a company registered in any jurisdiction of the UK will not escape this obligation by
listing on a regulated market in, for example, France or Germany, but a company
incorporated in Germany and listed on a regulated market in the UK will not be subject
to the obligation.
137 2006 Act s.146(2). As we saw above, s.145 is not restricted in this way, though the
articles are most likely to provide for transfers of rights in such a case.
138 2006 Act s.146(3)(a),(4). Rights to require copies of the accounts and reports or to
require hard copies of documents are also included within the notion of “information
rights”: s.146(3)(b).
139 2006 Act s.146(5).
140
2006 Act s.147. The right to request hard copy will also give way if the company has
adopted electronic communication as its way of communicating with its members
generally: s.147(4) and see below, para.15–85.
141
2006 Act s.148(6). Section 148(7) deals with the class right variation of this
problem.
142
Besides the two situations just described, the nomination will be terminated at the
request of the member or nominated person, and will cease to have effect on the death or
bankruptcy of an individual or the dissolution or the making of a winding-up order of a
corporate shareholder: s.148(2)–(4).
143
2006 Act s.148(8).
144
2006 Act s.150(2).
145 2006 Act s.150(3)—and even that provision is subject to qualifications in s.150(4).
146 Above, fn.108.
147
148
151
2006 Act ss.282 (ordinary resolutions) and 283 (special resolutions).
152
2006 Act s.281(3).
153 2006 Act s.282.
154 2006 Act s.283. Confusingly, this was previously the definition of an extraordinary
resolution, a special resolution being one for which a “special” notice period was
required. Thus, in effect, the category of special resolution has been abolished and the
extraordinary resolution re-named a special resolution.
1552006 Act s.283(6). And include the text of the proposed special resolution. In the
case of a written resolution the text of the resolution must state that it is proposed as a
special resolution (s.283(3)).
156 See further, Ch.19, below.
157 Since early versions of the model articles included provision for the chairman’s
casting vote.
158
Please see http://www.bis.gov.uk/policies/business-law/company-and-partnership-
law/companylaw/company-law-faqs/resolutions-and-meetings#8 [Accessed 31 January
2016].
159
And still appears in the model articles in relation to directors’ meetings: art.13
(private companies) and art.14 (public companies).
160 SI 2007/3495 Sch.5 para.2(1) and (5). But note that this exemption does not apply to
traded companies: SI 2007/2194 Sch.3 para.23A(4), inserted by SI 2009/1632 reg.22.
161 See Bushell v Faith [1970] A.C. 1099.
162
2006 Act ss.282(3) and 283(4). On a show of hands, it is not known how many
shares each voter represents.
163
On a poll the votes attached to the shares are counted (see below, para.15–75) so that
a single shareholder with 100 shares will outvote 99 shareholders with one vote each.
164
2006 Act ss.282(4) and 283(5). On proxy voting see below, para.15–67.
165
2006 Act s.281(1) and (2) make it clear that the same rules apply to voting at class
meetings.
166 For an interesting discussion on the construction of the company’s bespoke article on
voting entitlement and how this interacts with the corresponding Model Article
regulation, see Sugarman v CJS Investments LLP [2014] EWCA Civ 1239 CA at [28]–
[40] (Floyd LJ) and [45]–[50] (Briggs LJ).
167
2006 Act s.311(2), and see below, para.15–65.
168 2006 Act s.301.
169
2006 Act s.312.
170
Tiessen v Henderson [1899] 1 Ch. 861, 866–7 and 870–1 (Kekewich J) recognises
this as part of the purpose of notice rules.
171 Re Moorgate Mercantile Holdings Ltd [1980] 1 W.L.R. 227. The case concerned the
confirmation of a special resolution reducing the company’s share premium account
which had been “lost”. The notice of the meeting proposed that the whole of it
(£1,356,900.48) “be cancelled”. Before the meeting was held it was realised that
£327.17 resulting from a recent share issue could not be said yet to have been “lost”.
Accordingly, at the meeting the resolution was amended and it was resolved that the
share premium account be reduced to £327.17. Confirmation was refused on the ground
that the resolution had not been validly passed. But in a later case (Unreported, but see
(1991) 12 Co. Law. at 64, 65), where the facts were virtually identical, a reduction was
confirmed because the “substance” (i.e. the amount of the reduction) remained
unchanged.
172
As is now in any event required by s.283(6).
173 Re Moorgate Mercantile Holdings Ltd [1980] 1 W.L.R. 227 at 242C.
174 Re Moorgate Mercantile Holdings Ltd [1980] 1 W.L.R. 227 at 242A–243.
175
Which was worded in terms similar to s.312 rather than the stricter s.283(6).
176 Re Moorgate Mercantile Holdings Ltd [1980] 1 W.L.R. 227 at 243F.
177Re Moorgate Mercantile Holdings Ltd [1980] 1 W.L.R. 227 at 242H; citing Betts &
Co Ltd v Macnaghten [1910] 1 Ch. 430.
178
2006 Act s.311(2).
179Henderson v Bank of Australasia (1890) 45 Ch. D. 330 CA. although contrast the
explicit provision in the model articles for public companies, art.40(3).
180
This was the advice given to the chairman in the Moorgate case; see [1980] 1
W.L.R. at 230A.
181 Re Moorgate Mercantile Holdings Ltd [1980] 1 W.L.R. 227 at 243D–G.
182 If the articles say (as did Table A 1985, art.82) that directors’ fees shall be such as
“the company may by ordinary resolution determine” and the directors give notice of an
ordinary resolution to increase the fees by £10,000 p.a., surely a member should be
entitled to move an amendment to reduce the increase (though the directors clearly
should not be permitted to move an amendment to increase it further)?
183
This seems to be permissible—the singular “director” includes the plural—and s.160
relates only to voting on appointments, not to removals.
184
Nor should proxy-holders have any doubts on how they should vote. If instructed to
vote for the resolution they would vote against the amendment but, if that was passed,
for the amended resolution. If instructed to vote against, they would vote for the
amendment but against the resolution as amended. If given a discretion they would
exercise it.
185
The law used to distinguish between AGMs and extraordinary general meetings
(EGMs) but the Act no longer uses the latter term, no doubt because in the case of a
private company it is the only type of meeting that can be held.
186
2006 Act ss.336–340, concerning AGMs, apply only to public companies. See
s.336(1).
187
But see s.437, which requires public companies to lay before the company, in a
general meeting, copies of its reports and accounts.
189 Main Principle E.2. In particular the Code suggests that companies propose a
resolution in relation to the report and accounts (Supporting Principle E.2.1). The Code
envisages that the company’s relationship with institutional investors will take the form
of continuing dialogue which will extend beyond the general meeting: Main Principle
E.1 and also see UK Stewardship Code, above, para.15–30.
190
2008 Act s.338A(3) requires the company “to include such a matter once it has
received requests that it do so from—(a) members representing at least 5 per cent of the
total voting rights of all the members who have a right to vote at the meeting, or (b) at
least 100 members who have a right to vote at the meeting and hold shares in the
company on which there has been paid up an average sum, per member, of at least
£100.” Section 338A(4) and (5) then set out the required format and timing (six weeks’
notice, or if later, the time at which notice is given of the meeting).
1912006 Act s.338A(1), and any matters may properly be added unless they are
defamatory of any person or frivolous or vexatious (s.338A(2)).
192 2006 Act s.319A(1), with s.319A(2) relaxing the requirement slightly by providing
that no such answer need be given: “(a) if to do so would—(i) interfere unduly with the
preparation for the meeting, or (ii) involve the disclosure of confidential information; (b)
if the answer has already been given on a website in the form of an answer to a question;
or (c) if it is undesirable in the interests of the company or the good order of the meeting
that the question be answered.”
193 In particular, the fact that a special resolution is required to transact a particular piece
of business does not mean that that business cannot be considered at an AGM.
194 2006 Act s.336(1) and (1A) respectively.
195
2006 Act s.391. See below, para.21–8. Subsection (2) deals with the situation where
the company changes, as is permitted, its accounting reference date.
196 2006 Act s.336(3),(4).
197
CA 1985 s.367.
198
2006 Act s.302.
199
2006 Act s.303. In the case of a company without shareholders the threshold is
members holding at least one-tenth of the voting rights of the members: s.303(2)(b).
200
2006 Act s.303(4). This is because (a) that makes their intentions clearer and (b) if
what is proposed is a special resolution, notice of it has to be given to the shareholders
(see above, para.15–63). The company must then give the notice to the shareholders
required for a special resolution: s.304(4).
201
The resolution is not “properly moved” if it falls within any of the three categories of
resolution which the directors may refuse to circulate as a written resolution: s.303(5)
and also see above, para.15–10. For an example of the operation of this principle under
the prior legislation see Rose v McGivern [1998] 2 B.C.L.C. 593. Here a proposed
resolution “to elect a new board of not more than ten members” was held to be
ineffective on the grounds that it did not provide for the removal of the existing board
and there were otherwise no vacancies to which the ten could be elected (quite apart
from the failure to state whether the number was in fact to be ten or some lesser number
and to state who the ten were to be). The leaders of the requisition subsequently
submitted 25 individual resolutions to the company, removing each of the 16 existing
directors and appointing nine new ones, but the company refused to circulate the
individual resolutions on the grounds they were too late.
202 2006 Act s.305(1),(6),(7). The effect of this is that, if more than 5 per cent
requisitioned the meeting, the percentage needed to call a meeting directly is itself
increased. The requisitionists may act not only where the directors fail to act in time but
also where they fail to include a proposed resolution in the notice of the meeting or fail
to give notice of the proposed resolution as a special resolution, if such it is: ss.304(3),
(4) and 305(1)(b).
203
Activist shareholders seeking to obtain changes in the board’s policy have made use
of it.
204
Model articles for public companies, art.28.
205 2006 Act s.306(2). The section does not make the addition originally proposed of the
personal representative of a deceased member of the company who would have had the
right to vote at the meeting.
206 2006 Act s.306(2)–(4).
208 2006 Act s.318(2).
209
2006 Act s.318(1) (in this case, the rule overrides anything to the contrary in the
articles).
210Table A 1985 art.41 made it clear that this was required. The present model articles
revert to ambiguity.
211Re El Sombrero Ltd [1958] Ch. 900 where the applicant shareholder held 900 of the
company’s 1,000 shares, the remaining 100 being held by the two directors whom the
applicant wished to remove in exercise of his statutory powers under what is now s.168
and who refused to attend the meeting. The court directed that one member present in
person or by proxy should constitute a quorate meeting. See also Re Opera
Photographic Ltd [1989] 1 W.L.R. 634; Re Sticky Fingers Restaurant Ltd [1992]
B.C.L.C. 84; and Smith v Butler [2012] B.C.C. 645 CA at [49]–[55] (Arden LJ).
212
Harman v BML Group Ltd [1994] 1 W.L.R. 893 CA. On class rights generally see
below, para.19–13.
213
Ross v Telford [1998] 1 B.C.L.C. 82 CA; Union Music Ltd v Watson [2003] 1
B.C.L.C. 453 CA; Re Woven Rugs Ltd [2002] 1 B.C.L.C. 324; Vectone Entertainment
Holding Ltd v South Entertainment Ltd [2004] 2 B.C.L.C. 224.
214
Re British Union for the Abolition of Vivisection [1995] 2 B.C.L.C. 1. Contrast
Monnington v Easier Plc [2006] 2 B.C.L.C. 283, where the judge took the view that a
meeting to remove a director could be convened and conducted in accordance with the
Act, but the result, as a consequence of the drafting of the removal section, would be
ineffective. In that case the court had no jurisdiction to use its s.306 power to reform the
Act.
215
Byng v London Life Association [1990] Ch. 170 CA. The Company Law Review
proposed that this be made clear in legislation, if there was any doubt about the
principle: Final Report, para.7.7.
216
2006 Act s.360A; model articles for private companies, art.37, and for public
companies, art.29.
218 Thus, the section operates on the basis of the distribution of voting rights in the
company. Non-voting shares do not count, and multiple voting shares will make the 5
per cent target easier or more difficult to reach according to whether or not their holders
support the requisition.
219 2006 Act.153. The right to instruct the member as to the exercise of voting rights is
most likely to arise by way of contract between the registered and beneficial owners.
The safeguards are designed to verify that the non-members are indirect investors and
that there is no double-counting of shares.
220
2006 Act ss.338(2), 338A(1) and (2). See above, para.15–13. Besides being
effective, the resolution must not be defamatory or frivolous or vexatious.
221 2006 Act ss.338(4), 338A(4). Thus, the board cannot frustrate the requisitionists by
convening a meeting on less than six weeks’ notice after the receipt of the request or by
giving very long notice of the AGM.
222 2006 Act ss.340(2), 340B(2).
223
224 2006 Act ss.340(1), 340B(1), 437 and 442. However, the costs of circulation should
not be large if the members’ resolution can be circulated along with the general
circulation for the AGM. The company is obliged to circulate the resolution with the
notice if this is possible: ss.339(1).
2252006 Act s.307(2). For listed companies the recommended period is rather longer (20
working days), but still not long enough to obviate the problem under discussion: CGC
Provision.E.2.4. On notice periods see below, para.15–61.
226 Final Report, paras 8.66 and 8.100–101. One can find only a pale reflection of this
idea in the provisions enabling 5 per cent of the shareholders to require the company to
place on its website a statement about the audit of the company’s accounts or an
auditor’s ceasing to hold office for discussion at the company’s accounts meeting
(normally its AGM): ss.527–531, discussed at para.22–22.
227
228 On proxies, see below.
229
Peel v LNW Railway [1907] 1 Ch. 5 CA. For an excellent description of the relative
weakness of the opposition, see per Maugham J in Re Dorman Long & Co [1934] Ch.
635 at 657–658.
230 Including the extension of the “100 member” right to indirect investors: s.153(1)(a).
The main differences are that the request for the circulation has to be received only one
week before the meeting: (s.314(4)(d)) and the company, or any person aggrieved, can
make an application to the court for exemption from the obligation to circulate on
grounds of abuse (s.317), as in the case of members’ statements in support of written
resolutions (above, para.15–13).
231
2006 Act s.316—subject to the limited concession where the request is received
before the end of the financial year preceding the meeting. The company is likely so to
resolve if the members’ resolution is passed (which is unlikely) and may conceivably do
so even if it is lost. In cases where it has not so resolved, there have sometimes been
disputes on precisely what are properly to be regarded as “the company’s expenses in
giving effect” to the requisition—e.g. does it include the costs of a circular opposing the
members’ resolution? It ought not to.
232
There is clearly no reason why the members’ circular should not invite recipients to
cancel any proxies previously given to the board but it seems that the company could
refuse to despatch the members’ proxy forms unless, perhaps, the words in them were
counted against the 1,000 words allowed.
233Particularly as the period might be reduced still further by provisions requiring proxy
forms to be lodged in advance of the meeting: see below, para.15–67.
234 2006 Act s.307(3). The previous requirement of 21 days’ notice in the case of special
resolutions has been removed. Section 360 makes it clear that in this and related contexts
“days” means “clear days”, i.e. excluding the day of the meeting and the day on which
the notice is given.
2352006 Act s.307A does not apply to meetings of shareholders called to approve
defensive measures proposed by management in a takeover. See s.307(1A)(b).
236
Supplementary Principle E.2.4. On the CGC, see above, para.14–69.
237 2006 Act s.337(2).
238 2006 Act s.307(4),(7). See also Schofield v Schofield [2011] 2 B.C.L.C. 319 CA,
where the court held there was no agreement to a shorter notice period, and so the
resolutions (dismissing the minority shareholder as director and appointing the majority
shareholder in his place) were not validly passed, in circumstances where the minority
shareholder had attended and voted at the meeting on the clearly maintained basis that
the meeting had not been validly convened by reason of falling short of the 14-day
requirement pursuant to s.307 (Etherton LJ).
239 2006 Act s.307(5).
240 2006 Act s.307(5),(6). In the case of companies without share capital the percentages
relate to the total voting rights of all the members at the meeting.
241 2006 Act ss.168 and 510. See for instance Bonham-Carter v Situ Ventures Ltd [2012]
B.C.C. 717 (Ch).
242
At paras 14–48 et seq.
243 At paras 22–19 et seq.
244
2006 Act s.321(1). This applies whether the resolution is proposed by the board or
by a member. But the notice is effective if the meeting is called for a date 28 days or less
after special notice has been given, so that the board can, in effect, forgive its own
tardiness: s.312(4).
245
e.g. if notices of the meeting have already been despatched.
246
2006 Act s.312(2),(3). But it seems that this notice has to be given only if the
resolution is to be put on the agenda and that the mover cannot compel the company to
do this unless he can and does invoke s.338, above: Pedley v Inland Waterways Ltd
[1971] 1 All E.R. 209.
247 Such a provision was included in Table A 1985 art.76, but it no longer appears. See
the difficulties caused for the requisitionists by such a provision in Rose v McGivern
[1998] 2 B.C.L.C. 593, above, fn.201.
248 See, for example, Table A 1985 art.38.
249
2006 Act s.311, with additional requirements specified in ss.311(3) and 311A in
relation to traded companies where the rights and responsibilities of members at
meetings must be further elaborated.
250
Contrast Choppington Collieries Ltd v Johnson [1944] 1 All E.R. 762 CA; with
Batchellor & Sons v Batchellor [1945] Ch. 169.
251The distinction between “ordinary” and “special” business of an AGM disappeared
from Table A of 1985.
252
2006 Act ss.283(6)(b) and 282(5).
253
254 On circulars and the cases applying this principle to circulars, see below.
255
Tiessen v Henderson [1899] 1 Ch. 861 at 867; Re Moorgate Mercantile Holdings Ltd
[1980] 1 W.L.R. 227 at 242F.
256 Kaye v Croydon Tramways Co [1898] 1 Ch. 358 CA; Tiessen v Henderson [1899] 1
Ch. 861; Baillie v Oriental Telephone Co [1915] 1 Ch. 503 CA; and see Prudential
Assurance v Newman Industries Ltd (No.2) [1981] Ch. 257; [1982] Ch. 204 CA. The
circular must be construed in a commonsense way. In the case of listed companies there
is a further safeguard in the requirement that non-routine circulars have to be approved
in advance by the FCA: see Listing Rules 13.2 but also the exceptions set out in LR
13.8.
257Rose v McGivern [1998] 2 B.C.L.C. 593; on the former point following the
Australian case of Bain and Co Nominees Pty Ltd v Grace Bros Holdings Ltd [1983] 1
A.C.L.C. 816.
259
2006 Act s.310. For the former model provision see Table A 1985 art.38.
260 2006 Act s.310(1).
261
2006 Act s.310(2).
262
The usual practice is to give notice by a newspaper advertisement. The Listing Rules
require this form of communication. On bearer shares see para.24–22, below.
263
See arts 79–80 of the model articles for public companies.
264
2006 Act s.313. The “accidental omission” provision, of course, would not cover the
deliberate omission to give notice to a troublesome member, nor does it cover a
deliberate omission based on a mistaken belief that a member is not entitled to attend the
meeting: Musselwhite v Musselwhite & Son Ltd [1962] Ch. 964. But, if the omission is
“accidental”, it applies even if the meeting is called to pass a special resolution: Re West
Canadian Collieries Ltd [1962] Ch. 370.
265
For a discussion of the problems in this area, see Shareholder Voting Working
Group, Discussion Paper on Shareholder Proxy Voting (July 2015) at
http://uk.practicallaw.com/9-616-7485 [Accessed 15 June 2016].
266
Harben v Philips (1883) 23 Ch.D. 14 CA; and see Woodford v Smith [1970] 1
W.L.R. 806 at 810, per Megarry J.
267 The word “proxy” is used indiscriminately to describe both the agent and the
instrument appointing him.
268 The Shareholders’ Rights Directive (Directive 2007/36/EC) art.12. The Directive
was implemented in the UK by the Companies (Shareholders’ Rights) Regulations 2009
(SI 2009/1632). The articles may already provide for postal ballots under domestic law:
see fn.297, below.
269 LR 9.3.6. Notwithstanding recommendations that this should be a statutory
requirement in all cases (e.g. by the Jenkins Committee, Cmnd. 1749, para.464) it still is
not. An abstention from supporting a management proposal on the part of a larger
shareholder is taken as a significant event in the case of listed companies. See also CGC
Provision E.2.1.
270
2006 Act s.331.
271
2006 Act s.324(1). The restrictions under the previous law as to (a) the proxy’s right
to speak at meetings of public companies; (b) the proxy’s right to vote on a poll; or (c)
the member’s right to appoint a proxy at all in a company not having a share capital,
have all been swept away. The proxy may also demand a poll (s.329) and may even be
elected the chair of the meeting (s.328).
272 2006 Act s.324(2).
274 2006 Act s.325. Failure to comply does not affect the validity of the meeting or
anything done at it, but does constitute a criminal offence on the part of every officer in
default: s.325(2)–(4). This notice is not given to the person nominated under s.146 to
receive communications from the company (see above, para.15–40). That person is told
that he or she may have a right to appoint a proxy or to instruct the member how to vote,
depending on the agreement between the nominated person and the member (s.149).
This is not a very useful notice but it is the best that can be provided.
275
2006 Act s.326(1), unless a proxy form or other information is issued at the request
of the member and is available to all members upon request: s.326(2). As with s.325
(previous note) non-compliance is a criminal offence. Nothing is said about the impact
of non-compliance on the validity of what is done at the meeting, presumably because
s.326, unlike s.325, does not concern the content of the notice of the meeting.
276
2006 Act s.327. Hence proxies may now validly be lodged between the original date
of the meeting and any adjournment for more than 48 hours. In the case of votes taken
on polls, which are sometimes delayed, the relevant time is the time the poll is
demanded or, if the poll is not to be taken within 48 hours of being demanded, 24 hours
before the time appointed for the taking of the poll.
277
Encouraged by the fact that postage is prepaid. Most two-way proxies provide that if
neither “for” nor “against” is deleted the proxy will be used as the proxy thinks fit (i.e.
as the board wish). LR 9.3.6 requires this to be expressly stated.
278
Following ESMA’s report into the role of the proxy advisory industry, a group of six
proxy advisers published a set of best practice principles for the industry in March 2014.
The three main principles, which are supplemented by additional guidance, are service
quality, conflicts of interest, and communications, and they apply on a “comply or
explain” basis. The group will monitor implementation of the principles and will
formally review them within the next two years. ESMA is currently conducting a review
of the operation of the best practice principles. See https://www.esma.europa.eu/press-
news/esma-news/esma-publishes-report-proxy-advisors%E2%80%99-best-
practiceprinciples [Accessed 31 January 2016].
279
In April 2014, the European Commission published a draft Directive to revise the
Shareholder Rights Directive (2007/36/EC). This includes a wide variety of different
proposed measures, including a number of new provisions relating to identifying
shareholdings and facilitating the exercise of shareholder rights such as shareholder
voting, and enhancing the transparency of proxy advisors. Please see: http://eur-
lex.europa.eu/legal-content/EN/TXT/?qid=1398680488759&uri=COM:2014:213:FIN
[Accessed 31 January 2016]. Although mandatory rules are proposed, these seem likely
to emerge in the form of “comply or explain” requirements.
280 Unless it is an “authority coupled with an interest” (e.g. when given to a transferee
prior to registration of his transfer) or is an irrevocable power of attorney under the
Power of Attorney Act 1971 s.4.
281
Or someone other than the company if the articles require or permit the notice to be
given to someone else: s.330(4).
282 2006 Act s.330(2),(3). In the case of voting at a poll to be held more than 48 hours
after it is demanded the relevant time is the time appointed for the poll (s.330(3)(b)).
283 2006 Act s.330(5)–(7) (noting that s.330(6)(c) has been repealed from 26 May 2015).
284
Cousins v International Brick Co [1931] 2 Ch. 90 CA.
285 Unless the agency is irrevocable, see fn.280, above.
286 This was discussed, but not decided, in Oliver v Dalgleish [1963] 1 W.L.R. 1274,
which also left open the question of how far the company is concerned to see whether
the proxy is obeying his instructions.
287 See, e.g. Second Consolidated Trust v Ceylon Amalgamated Estates [1943] 2 All
E.R. 567 at 570; Re Dorman Long & Co [1934] Ch. 635 (this case contains an admirable
discussion of the general problems of proxy voting). But in both the cases the proxy-
holders were present at the meeting: quaere whether (in the absence of mandatory
instruction now, as per s.324A) they can be compelled to attend: see [1934] Ch. 664 at
665.
288
e.g. its liquidator: Hillman v Crystal Bowl Amusements Ltd [1973] 1 W.L.R. 162.
289
2006 Act s.323(2). This is really a statutory example of an officer acting as an organ
of the company rather than as a mere agent.
290
2006 Act s.323 (3) and (4) deal with the situation where more than one
representative is authorised to act on behalf of the company. It has been suggested that
these provisions, as revised by the Companies (Shareholders’ Rights) Regulations (SI
2009/1632), now make it clear that representatives can be assigned voting rights in
respect of different parcels of shares held by the corporate shareholder in the way that is
explicitly provided for in the case of a proxy. See s.324(2).
291
See paras 15–27 et seq. Since December 2010 all UK-authorised Asset Managers are
required under the FCA’s Conduct of Business Rules (r.2.2.3) to produce a statement of
commitment to the Stewardship Code or explain why it is not appropriate to their
business model.
292
Review of the impediments to voting UK shares, Report by Paul Myners to the
Shareholder Voting Working Group, July 2007 (hereafter Myners 2007 Report). The
issue of “empty” voting is considered at para.15–81, below.
293
See FRC, Developments in Corporate Governance and Stewardship 2015, at
https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/Developments-
in-Corporate-Governance-and-Stewa-%281%29.pdf [Accessed 31 January 2016], citing
figures from European Voting Results Report; ISS; September 2015.
294 2006 Act s.324(1). Previously this was a matter left to be regulated by the articles.
295 2006 Act s.322. See also s.152. Thus, the chairman of the meeting, under a typical
three-way proxy, will hold some votes for and some against the resolution to be voted on
and some instructions to abstain, and can give effect to each set of instructions.
296If proxies have been gathered only by the company and have been lodged with, for
example, the chairman of the meeting, calculating the vote will be easy. It is where there
have been multiple proxy solicitations that the process can extend beyond the meeting.
297McMillan v Le Roi Mining Co [1906] 1 Ch. 338. The articles rarely do so provide
except in the case of clubs or other associations formed as companies limited by
guarantee.
298 As was well said in an American case (Berendt v Bethlehem Steel Corp (1931) 154
A. 321 at 322), statements made to a meeting of proxy-holders fall “upon ears not
allowed to hear and minds not permitted to judge: upon automatons whose principals are
uninformed of their own injury”.
299Nevertheless, the second sub-paragraph of art.14 of the Shareholders Rights
Directive (above, fn.268) appears to permit the UK to keep it.
300 CGC Provision E.2.2. For the coverage of the CGC see para.14–69, above.
301 It is a question of construction of the relevant article whether a poll can be demanded
before there has been a vote on a show of hands: Carruth v ICI [1937] A.C. 707 at 754–
755 HL; Holmes v Keyes [1959] Ch. 199 CA. The model set of articles for private
companies (art.44) and for public companies (art.36) provide for a poll to be demanded
in advance of the meeting or at the meeting but before the show of hands decision has
been taken, as well as immediately after the result has been declared of the show of
hands vote.
302 The model articles for private and for public companies, arts 44 and 36, respectively,
also allow the directors to call for a poll, which facilitates the calling for a poll by the
company in advance of the meeting.
303
2006 Act s.321. In the absence of anything in the articles any member may demand a
poll (R. v Wimbledon Local Board (1882) 8 Q.B.D. 459 CA), and, of course, the articles
may be more generous than s.321: see arts 44 and 36 of the model private and public
company articles, which entitles two members, rather than the statutory five, to demand
a poll.
304
2006 Act s.329.
305
Second Consolidated Trust v Ceylon Amalgamated Estates [1943] 2 All E.R. 567. In
this case the chairman held proxies (without which there would have been no quorum)
which, if voted, would have defeated the resolutions passed on a show of hands.
306
Final Report, para.6.25. See also the Myners Report 2007 (above fn.292) pp.1–4.
307
2006 Act s.342. The right extends to class meetings at which it is proposed to vary
the rights of any class of member: s.352. On variation of class rights see para.19–14.
308 2006 Act s.385. Section 354 gives the Secretary of State the power by regulations,
subject to affirmative resolution in Parliament, to extend the types of company to which
the assessor’s report requirement applies (but also to limit them).
309 2006 Act s.347(1).
310 2006 Act s.348.
311
2006 Act s.349.
312
2006 Act s.350.
313 2006 Act ss.351 and 353.
314 2006 Act s.343.
315
2006 Act s.342(4)(d).
316
2006 Act s.344. See notably s.344(2).
317 2006 Act s.343(3)(b).
318
Above, fn.268.
319 The Uncertificated Securities Regulations 2001 (SI 2001/3755) reg.41(1). See below
at para.27–4.
320
See the extended discussion of Eclairs Group Ltd v JKX Oil & Gas Plc [2015]
UKSC 71, at paras 16–26 et seq.
3212006 Act s.341. This meets the requirements of art.14 of the Shareholders’ Rights
Directive.
322 E.2.2.
323 The provisions apply also to class meetings: s.359.
324
2006 Act s.358(3).
325 2006 Act ss.358(1) and 1136.
326 2006 Act ss.29–30.
327
2006 Act s.356.
328
Above, fn.108.
329
Though perhaps less clear, other rules conferring voting rights on non-members can
be justified as giving the vote to the person with the primary economic interest in the
share. See, for example, the unpaid vendor of shares (Musselwhite v CH Musselwhite &
Sons Ltd [1962] Ch. 964; but cf. Michaels v Harley House (Marylebone) Ltd [2000] 1
Ch. 104). Or the law may be indifferent as to the allocation by contract of the voting
right as between two people each with an economic interest in the share: Puddephatt v
Leith [1916] 1 Ch. 200 (mortgagor and mortgagee).
330
ADRs (above, para.15–39) can also give rise to empty voting unless the depository is
required to pass the governance rights onto the holder of the depository receipt.
331
See para.28–45 and, generally, paras 26–20 et seq.
332
Above, fn.292. The Commission has consulted on a provision to be included in a
Commission Recommendation which would say that “borrowed” shares should be voted
only on instructions from the “lender”.
333This situation could also lead to the fund manager purporting to vote shares the
custodian did not hold at the relevant time and to the manager’s proxy instructions to the
company being rejected by the company on the grounds that they related to more shares
than were held.
334
2006 Act s.319.
335
Model articles for public companies art.31. The model articles for private companies
are in the same form (art.39).
336
See Second Consolidated Trust v Ceylon Amalgamated Estates [1943] 2 All E.R.
567. Conversely, it seems a director may act as chairman of the meeting even though a
resolution to be debated is critical of the board’s policy: Might SA v Redbus Interhouse
Plc [2004] 2 B.C.L.C. 449.
337
For the sort of situation with which the chairman may have to cope if the members of
a public company turn up in far larger numbers than the board has foreseen, see the case
of Byng v London Life Association Ltd [1990] Ch. 170 CA (below) where his well-
meaning efforts were in vain and the company had to convene a new meeting.
338Model articles for public companies, art.33(6); and for private companies, art.41(6).
But a meeting can be adjourned despite the fact that it was not a meeting at which any
substantive resolution could be passed: see Byng v London Life Association Ltd [1990]
Ch. 170 CA. This must be right for otherwise an inquorate meeting could not be
adjourned, as all Tables A have provided that they can.
339
Were it otherwise, the company might unavoidably contravene the obligation to
deliver to the Registrar a copy of the resolution within 15 days of its passage, as
required, in the case of a considerable number of resolutions, under s.380.
340
And similarly art.41 for private companies.
341National Dwellings Society v Sykes [1897] 3 Ch. 159; John v Rees [1970] Ch. 345
(which concerned, not a company meeting, but one of a Divisional Labour Party); Byng
v London Life Association [1990] Ch. 170 CA.
342 Byng v London Life Association [1990] Ch. 170 CA.
343
Byng v London Life Association [1990] Ch. 170 CA.
344
If the chairman purports to adjourn for such a reason, the meeting may elect another
chairman and continue.
345
Byng v London Life Association [1990] Ch. 170 CA.
346
2006 Act ss.334 and 352 (and s.335 deals with class meetings of companies without
share capital).
347 2006 Act ss.334(2) and 335(2) and above, paras 15–48 to 15–54.
348
2006 Act ss.334(4) and 335(4). At an adjourned meeting one person holding shares
of the class or his proxy suffices. This makes sense only if the adjournment is because
there was no quorum at the original meeting.
349
2006 Act ss.334(6) and 335(5).
350 Carruth v ICI [1937] A.C. 707 HL.
351 “Person” is the term used in Sch.5 in relation to actual consent, so that its provisions
embrace not just members but also those to whom governance rights have been
transferred or information rights have been given (see above, para.15–31). The deemed
consent provisions (see below) apply only to “members” but that term is expanded to
include the two groups mentioned in the previous sentence: Sch.5 para.10(1).
352
2006 Act Sch.5 para.6.
353 2006 Act Sch.5 para.9(a).
354 2006 Act Sch.5 para.10(2),(3). The request may be repeated at twelve-monthly
intervals if it does not produce acceptance or deemed acceptance. Similar provisions
exist for debenture-holders: para.11.
355 2006 Act Sch.5 para.9(b).
356
2006 Act Sch.5 para.13(1).
357
2006 Act Sch.5 para.14. The Act does often require a longer period, for example,
quoted companies being required to maintain website availability of the annual accounts
and reports until the next set is available: s.430. There are also minimum standards set
for the quality of the website: para.12.
358 For example, s.299 (written resolutions: period is from date of circulation to date
resolution lapses); s.309 (general meetings: date of notification to date of conclusion of
meeting, which would include any adjournment of it). The latter section is also a little
more prescriptive about the detail of the notification to be given when it concerns
website documents for a general meeting.
359 2006 Act Sch.4 para.6.
360 2006 Act s.296(2).
361 Now ss.277 et seq. See above, paras 15–25 et seq.
363
See the Myners Report 2007, above, fn.292. Also see Shareholder Voting Working
Group, Discussion Paper on Shareholder Proxy Voting (July 2015) at
http://uk.practicallaw.com/9-616-7485 [Accessed 15 June 2016].
CHAPTER 16
DIRECTORS’ DUTIES
Introduction 16–1
To Whom and by Whom are the Duties Owed? 16–4
To whom are the general duties owed and who can
sue for their breach? 16–4
By whom are the general duties owed? 16–8
Directors’ Duties of Skill, Care and Diligence 16–15
Historical development 16–15
The statutory standard 16–16
Remedies 16–20
Introduction to Directors’ Various Duties of Good Faith and
Loyalty 16–21
Historical background 16–21
Categories of duties 16–22
Duty to Act within Powers 16–23
Acting in accordance with the constitution 16–24
Improper purposes 16–26
Remedies 16–30
Duty to Exercise Independent Judgment 16–33
Taking advice and delegating authority 16–34
Exercise of future discretion 16–35
Nominee directors 16–36
Duty to Promote the Success of the Company 16–37
Settling the statutory formula 16–37
Interpreting the statutory formula 16–40
Overview of the No-Conflict Rules 16–52
Transactions with the Company (Self-Dealing) 16–54
The scope of the relevant provisions 16–54
Approval mechanisms 16–55
Duty to declare interests in relation to proposed
transactions or arrangements 16–57
Duty to declare interests in relation to existing
transactions or arrangements 16–64
Transactions between the Company and Directors
Requiring Special Approval of Members 16–67
Relationship with the general duties 16–68
Substantial property transactions 16–70
Loans, quasi-loans and credit transactions 16–78
Directors’ service contracts and gratuitous payments
to directors 16–84
Political donations and expenditure 16–85
Conflicts of Interest and the Use of Corporate Property,
Information and Opportunity 16–86
The scope and functioning of section 175 16–86
A strict approach to conflicts of interest 16–87
Identification of “corporate” opportunities 16–89
Competing and multiple directorships 16–99
Approval by the board 16–103
A conceptual issue 16–105
Remedies 16–106
Duty not to Accept Benefits from Third Parties 16–107
The scope of section 176 16–107
Remedies 16–108
Remedies for Breach of Duty 16–109
(a) Injunction or declaration 16–110
(b) Damages or compensation 16–111
(c) “Restoration” of property 16–112
(d) Avoidance of contracts 16–113
(e) Accounting for profits: disgorgement of disloyal
gains 16–114
(f) Summary dismissal 16–116
Shareholder Approval or “Whitewash” of Specific Breaches
of Duty 16–117
What is being decided? 16–118
Who can take the decision for the company? 16–119
Disenfranchising particular voters 16–121
Voting majorities 16–123
Non-ratifiable breaches 16–124
General Provisions Exempting Directors from Liability 16–125
Statutory constraints 16–125
Conflicts of interest 16–126
Provisions providing directors with an indemnity 16–128
Pension scheme indemnity 16–132
Relief Granted by the Court 16–133
Liability of Third Parties 16–134
Limitation of Actions 16–138
Conclusion 16–140
INTRODUCTION
16–1
In Ch.14 we saw that it is common for the articles of large
companies to confer extremely broad discretionary powers upon
the boards of such companies. The arguments in favour of giving
the centralised management a broad power to run the company
are essentially arguments of efficiency. At the same time, the
grant of a broad discretion creates a real risk that the powers will
be exercised by the directors other than for the purposes for
which they were conferred, and in particular will be exercised
more in the interests of the senior management themselves than
of anyone else. A central part of company law is thus concerned
with providing a framework of rules which, on the one hand,
constrains the potential abuse by directors of their powers, whilst
on the other hand does not so constrain the directors that the
efficiency gains from having a strong centralised management
are dissipated. This is an age-old problem for company law and
one that is constantly re-visited by successive generations of
rule-makers, for no one approach can be shown to have struck
the balance in an appropriate manner. It was a major issue in the
debates leading up to the passage of the Companies Act 2006.
On the part of the rule-makers a number of distinct responses
to this intractable problem can be identified. In Ch.14 we
examined the extent to which rules relating to the structure and
composition of the board itself and to the power of the
shareholders to remove members of the board are used to
constrain the exercise by the board of its powers and to produce
accountability to the members of the company. In the previous
chapter, we analysed the opportunities which the shareholders
have to intervene directly in the management of the company by
securing the passing at general meetings of resolutions binding
the company or by subjecting the performance of the
management to critical review. The taking of managerial
decisions by the shareholders themselves is necessarily an
activity of limited potential in large companies, since it flies in
the face of the efficiency arguments for centralised management
in the first place. Indeed, well-directed criticism of board
performance may be more effective, especially if accompanied
by an implicit or explicit threat of removal if performance is not
improved.
In addition to rules on board structure and the governance
rights of the members of the company, there is a third set of rules
of great longevity in our law which are intended to operate so as
to constrain the board’s exercise of its powers. These are the
duties which company law lays directly on the members of the
board as to limits within which they should exercise their
powers. These rules for directors were developed by the courts at
an early stage, often on the basis of analogy with the rules
applying to trustees. The substantial corpus of learning on the
nature and scope of these general fiduciary or equitable duties
and duties of skill and care has remained until very recently
largely within the common law. Both the Law Commission and
the Company Law Review (“CLR”),1 however, recommended a
“high level” statutory restatement of the common law principles.
This recommendation, controversial though it was, made its way
into the Companies Act 2006 Ch.2 of Pt 10 of which is headed:
“General Duties of Directors”.
16–2
The main aim behind the proposal for a “high level” statutory
statement of directors’ duties was to promote understanding of
the basic principles underlying this area of law, especially
among directors themselves. It was thought that this objective
would be furthered if there was a relatively brief statutory
statement of those principles in place of the previous situation
whereby those principles had to be deduced from an elaborate
body of case law. The behavioural premises upon which this
view was based were never extensively investigated. And indeed
the CLR and the Law Commission differed on whether the
statutory statement should be comprehensive, in the sense of
setting out at a high level all the duties to which directors were
subject (the CLR’s view) or only the principal duties, leaving the
courts to develop duties which had not yet been clearly
formulated in the cases (the Law Commissions’ view).2 In the
end, and despite the initial behavioural premises, the Act
probably comes closer to the Law Commissions’ view: s.170(3)
makes it clear that that only “certain” duties are set out in the
statute, and so, for example, the issue of directors’ duties to
consider the interests of creditors is not dealt with
comprehensively in Pt 10 of the 2006 Act and the courts remain
free to develop this aspect of the law, even at the level of general
principle.3 But the likelihood of significant common law
additions is small: the seven general duties set out in Ch.2 of Pt
10 have been long established at common law, and the courts
have been able to deal with new problems by development of
those general duties rather than by seeking to create new ones.
There were strong objections to codification. One, which was
strongly advocated in particular by the Law Society and some of
the leading commercial firms of solicitors in the City of London,
was that such a reform was in danger of “freezing” the law of
directors’ duties and impeding its further development as
circumstances changed. This contention could be refuted on two
fronts. First, the statutory statement was intended to be, and in
the Companies Act 2006 is, a “high level” statement, which
gives the courts plenty of interpretative scope when applying the
principles to the changing circumstances of commercial life. In
addition, s.170(4) adds two propositions: first, the statutory
general duties “shall be interpreted and applied in the same way
as the common law duties or equitable principles”, so that the
existing case law on the common law duties will remain, in most
cases, relevant to the interpretation of the statutory duties; and
secondly, “regard shall be had to the corresponding common law
rules and equitable principles in interpreting and applying the
general principles”. This second proposition is less obvious in its
purpose, which seems, however, to be as follows. The law
relating to directors was often developed by the courts by
analogy with the rules relating to the duties of trustees to their
beneficiaries and agents to their principals. Those rules continue
to be embodied largely in the common law. The second
proposition enables the courts, in developing the statutory duties
of directors, to take into account developments in the equivalent
common law duties applying to trustees and agents.4 Thus, there
was no desire on the part of the legislature to cut the law of
directors’ duties off from its historical roots in the duties
applying to other persons acting in a fiduciary character.
A second objection to codification was that a high-level
statutory statement would cause confusion or uncertainty about
the relationship between the statutory statement and existing or
future decisions of the courts at common law. These matters are
dealt with in subss.170(3) and (4). The first subsection
establishes the proposition that the general duties replace (“have
effect in place of”) the common law principles on which they are
based. Consequently, in future, any allegation of breach of duty
by the director to the company needs to be identified as a breach
of one or more of the general duties set out in the statute, except
insofar as the statutory statement preserves, as it does in relation
to creditors’ interests, the common law duties. And s.170(4)
indicates, as described earlier, how the common law cases are to
be used.
16–3
However, there is a difficulty underlying subss.170(3) and (4),
arising from the fact that, as we shall see, the statutory statement
is more than simply a restatement of the common law. In some
cases it clarifies areas of uncertainty in the common law, for
example, in relation to the standard of care expected of directors,
whilst in other cases it adopts a different approach from that of
the common law, for example, in relation to the authorisation by
independent directors of conflicts of duty. Where there is a
departure in the statutory statement from the previous common
law, it will obviously be inappropriate for the courts to refer to
that common law in the interpretation of the statutory duties.5
Since, however, the Act does not on its face reveal where it is
confirming and where it is departing from the common law, it
will be necessary to understand when the statute departs from the
common law in order to determine the relevance of common law
decisions to the interpretation of the statute.
The seven duties set out in Ch.2 of Pt 10 cover only the
substantive content of the directors’ duties. The CLR hoped to
be able to recommend codification of the remedies for breaches
of duty as well, but did not have enough time to produce a
workable schema. The Government initially continued with this
work after the CLR’s final report but eventually abandoned the
idea. However, the considerable work done in this direction has
not been entirely lost since the work of Professor Richard Nolan,
written for the CLR, has been published.6 The failure to carry
through this project is regrettable, since the remedies for breach
of duty constitute an area where the law is confused and
inconsistent and where practitioners as well as business people
would have benefited from reform and restatement. In the result,
the Act simply provides in s.178 that the civil consequences of
breaches of the statutory duties are to be those which would
apply at common law.
TO WHOM AND BY WHOM ARE THE DUTIES OWED?
To whom are the general duties owed and who can
sue for their breach?
The company
16–4
Before turning to the substance of directors’ duties, we need to
ask who are their beneficiaries, i.e. to whom are they owed? The
answer in British law is clear: the common law formulation was
that the duties of the directors were owed to “the company” and
that is repeated in s.170(1) in respect of the statutory duties. The
importance of this point arises mainly in relation to the
enforcement of those duties. First, it tells us that those duties are
not owed to persons other than the company, for example,
individual shareholders or employees. Secondly, it tells us that
only those who are able to act as or on behalf of the company
can enforce the duties. As we shall see in Ch.17, the issue of
who can act on behalf of the company to enforce its rights, and
in particular the question of whether an individual shareholder
can do so through the so-called “derivative action”, has caused
considerable controversy ever since the emergence of modern
company law in the nineteenth century. That is also an area
where the Companies Act 2006 has introduced a major reform.
But even the seemingly straightforward notion that the
company itself can enforce these duties has been subjected to
some recent perturbations. The straightforward alignment
between directors’ duties being owed to the company and the
company being able to sue for their breach is clearly crucial in
maintaining the incentive structures underpinning directors’
duties. This requires some careful thought about the rules of
attribution in company law. In particular, even though a
director’s wrongdoing is commonly attributed to the company to
make the company a wrongdoer and subject to claims brought by
third parties, those same attribution rules do not necessarily
apply when the company sues its directors. If they did, the
company’s action might be blocked on the grounds of consent or
illegality. It is now recognised, in both civil7 and criminal8 law,
that to block the company’s action against the director on the
grounds that the company was is some sense party to the
illegality, or knew of and consented to the wrong, would be to
undermine the duties owed by directors to their companies and
that, except for rare cases,9 this is not the law. Although the fact
that it is not the law seems so sensible as not to merit debate, the
reason why this is so is less clearly articulated than might be
hoped. When, if ever, is a director’s act, knowledge, or intention
to be attributed to a claimant company? In Bilta (UK) Ltd (In
Liquidation) v Nazir, Lord Neuberger put it this way10:
“the question is simply an open one: whether or not it is appropriate to attribute an
action by, or a state of mind of, a company director or agent to the company or the
agent’s principal in relation to a particular claim against the company or the
principal must depend on the nature and factual context of the claim in question.”
A little more guidance will undoubtedly become necessary as

more cases test the boundaries, especially in the face of the
contrary findings in Safeway Stores Ltd v Twigger.11 A workable
rule of attribution is ideally one which applies generally to
individuals, not exclusively to directors, and applies whether the
company is a claimant or a defendant. One suggestion is simply
that no individual can benefit from claims which rely on their
own acts counting as corporate acts so as to give them either a
claim or a defence against the company.12 This would explain
most of the decided cases, but not all.13
Individual shareholders
16–5
We shall leave the derivative action until Ch.17. However, we
need to touch briefly on the question of duties owed by directors
directly to individual shareholders. It is clear that the statutory
duties are owed only to the company, but equally clear that the
Act does not purport to answer the question whether fiduciary or
other duties are owed by the directors to shareholders
individually. That issue is left to the common law. Traditionally,
and still today, the common law has been reluctant to recognise
directors’ general duties as being owed to shareholders
individually. This is hardly surprising. Recognition of duties
owed individually would undermine the collective nature of the
shareholders’ association in a company. It would also undermine
the rule that the duties are owed to and are enforceable by the
company. If the directors owed to individual shareholders a set
of duties parallel to those owed by them to the company, the
restrictions on the derivative action could easily be side-stepped
by means of the individual shareholder suing to enforce, not the
company’s rights, but his or her own rights.14
However, the precept that directors’ duties are not owed to
individual shareholders applies only to those duties which
directors are subject to simply by virtue of their appointment and
actions as directors. There may well be in a particular case
dealings between one or more directors and one or more of the
shareholders as a result of which a duty of some sort becomes
owed by a director to one or more shareholders. This principle is
now fully accepted in English law as a result of the decision of
the Court of Appeal in Peskin v Anderson,15 where Mummery LJ
distinguished clearly between the fiduciary duties owed by
directors to the company which arise out of the relationship
between the director and the company, and fiduciary duties owed
to shareholders which are dependent upon establishing “a special
factual relationship between the directors and the shareholders in
the particular case”.
The crucial question, therefore, is what sort of dealing needs
to take place between director and shareholder in order to trigger
a fiduciary or other duty owed to an individual shareholder by
the directors. Such a duty will certainly arise where, on the facts,
the directors place themselves, as against shareholders
individually, in one of the established legal relationships to
which fiduciary duties are attached, such as agency. This may
arise, for example, where the shareholders authorise the directors
to sell their shares on their behalf to a potential takeover
bidder.16 If, in the course of such a relationship, the directors
come across information which is pertinent to the shareholders’
decision whether or on what terms to sell the shares, they would
normally be obliged to disclose it to the shareholders on whose
behalf they are acting. On the other hand, in Percival v Wright,17
which is the leading authority for the proposition that the
directors’ duties as directors are not owed to the shareholders
individually, the directors purchased shares from their members
without revealing that negotiations were in progress for the sale
of the company’s undertaking at a favourable price. They were
held not to be in breach of duty through their non-disclosure.
Here, though, the shareholders approached the directors directly
and sought to persuade the directors to purchase their shares
themselves rather than to act as the shareholders’ agents to sell
the shares to third parties.
16–6
Nevertheless, there is no doubt that the directors of a company
are likely to have much more information at their disposal about
the company and so are likely to be at an advantage when
dealing with the members. The law of agency, as we have just
seen, will cover some, but not all of this ground. Can the
doctrine of a “special factual relationship” be extended beyond
the law of agency? Commonwealth authority established some
time ago that it can. In Coleman v Myers18 the New Zealand
Court of Appeal found that a fiduciary duty of disclosure arose,
even in the absence of agency, in the case of a small family
company where there was a gross disparity of knowledge
between the directors and the shareholders and where the
shareholders of the company had traditionally relied on the
directors for information and advice. When the directors
negotiated with the shareholders for the purchase of their shares
and, therefore, were clearly not acting on behalf of the
shareholders, they were nevertheless held to be subject to a
fiduciary duty of full disclosure of relevant facts about the
company to the shareholders. The New Zealand decision was
approved by the English Court of Appeal in Peskin v Anderson,19
though the English decision also reveals the limits of the rule. In
the English case, directors were not obliged to disclose to
shareholders their plans for the company, even though the
shareholders’ decision on the sale of their shares would have
been affected by the knowledge, where the directors were not
parties to or otherwise involved in the sale of the shares, and the
company’s interests arguably required the directors’ plans to be
kept secret until they matured.20
This means that, despite the recent significant developments
in English law based on a “special relationship” exception to the
general proposition that directors do not owe duties directly to
the shareholders, the exception is essentially one of significance
for family or small companies, and does not substantially reduce,
within companies with large shareholder bodies, the significance
of the general proposition. The cases already noted affirm that
this is true even where advice is given by directors in the course
of a takeover bid. In Re A Company21 Hoffmann J held that
directors were not obliged to offer their shareholders advice on
the bid, but, if they did so, they must do so “with a view to
enabling the shareholders to sell, if they so wish, at the best
price” and not, for example, in order to favour one bid, which
the directors supported, over another, which they did not.22 This
identifies two strands: the directors’ advice must be careful, and
must also be given so as to achieve its (proper) purposes, and not
the directors’ own (improper) purposes.23 Neither strand imports
a “fiduciary” duty of loyalty to the shareholders.
Other stakeholders
16–7
If British company law has been reluctant to recognise general
duties owed by directors to individual shareholders, it perhaps
goes without saying that it has not recognised such duties owed
to individual employees or creditors24 or other groups25 upon
whom the successful functioning of the company depends. It is
important to distinguish this issue (duties owed directly to
stakeholder groups) from the question of how far directors’
duties owed to the company require the directors to take into
account the interests of stakeholder groups. Explicit duties of
this latter kind were recommended by the CLR and were
embodied in the 2006 Act. We shall deal with them below in our
analysis of the statutory duties.
By whom are the general duties owed?
De facto and shadow directors
16–8
The general statutory duties to be discussed in this chapter are
clearly owed by those who have been properly appointed as
directors of the company. From the early days, however, the
courts have applied the common law and statutory duties also to
persons who act as directors, even though they have not been
formally appointed as such—normally referred as “de facto
directors”. There seems to be no doubt that the general statutory
duties apply to de facto directors,26 whatever the debate over
whether a person is indeed a de facto director or is merely
performing some lower-level management role.27 Although there
is no single test for de facto directors, the central question which
the courts seek to answer is whether the individual was “part of
the corporate governing structure”28 or has “assumed the status
and functions of a company director”29 so as to attract
responsibility under the Act as if he or she were a de jure
director.
This factual question is often difficult to answer, but the
problem is exacerbated where the issue is whether a de jure
director of one company can, in the course of acting in that role,
become a de facto director of another company. Does the formal
role with one company protect against liability to the other
company? In answering this question, the Supreme Court in
Commissioners of HM Revenue and Customs v Holland30
divided 3:2 over what Lord Collins described as differences over
matters of law and principle.31 The issue was whether an
individual who was the only active director of the sole corporate
director32 of the principal companies was, in those
circumstances, also a de facto director of the principal
companies, held to be part of the corporate governance of them
and having fiduciary and other directors’ duties imposed on him
in relation to them. Those in the majority thought that such a
finding would contradict the principle of separate legal
personality, and reflect a failure to recognise the distinction
between a company and its directors, where, as here (so they
held), the individual had done nothing other than discharge his
duties a director of the corporate director, and in circumstances
where the law condones corporate directorships.33
This argument has its attractions. Indeed, it follows, although
not explicitly, the approach adopted in determining the
individual liability of company directors to third parties in
contract and in tort in circumstances where the company, by
virtue of the acts of its directors, is also liable to the same
parties.34 In the fiduciary arena it is suggested that the question
to ask is not whether the purported director assumed fiduciary
responsibilities to the company; the answer to that, at least from
the director, is likely to be precisely not (and hence the corporate
directorship structure). Better to ask, as in negligent
misstatement cases,35 whether, in the circumstances, and looking
at what the purported director did, the company is entitled to
demand that the individual be subjected to fiduciary obligations.
Where the formal structure of a corporate directorship has been
transparently erected, the answer is surely no, even though,
absent that structure, it would perhaps equally certainly have
been yes.
The practical effect in Holland was that the principal
companies’ acknowledged liability to the Inland Revenue was
not met by the principals, which were insolvent, nor by the
corporate director, which though liable was an undercapitalised
intermediary, nor by Holland, since he was not a de facto
director of the principal companies.36 In the circumstances it is
difficult not to feel some sympathy for the views of the
dissenting minority: Lords Walker and Clarke would have
preferred a conclusion that, while a de facto director is not
formally invested with office, if what he actually does amounts
to taking all the important decisions affecting the relevant
company, and seeing that they are carried out, he is acting as a
director of that company.37 Lord Walker even suggested that the
majority’s contrary characterisation of Holland’s activities
amounted to “the most arid formalism”,38 adding that if on these
facts Holland could not be found to be both the de jure director
of the corporate director and, at the same time, the de facto
director of the principal companies, then it was difficult to
imagine facts which would ever give rise to such a conclusion;
the result, Lord Walker thought, would be to make it “easier for
risk-averse individuals to use artificial corporate structures in
order to insulate themselves against responsibility to an insolvent
company’s unsecured creditors”.39 This, clearly, is not the goal,
although nor too is riding roughshod over legitimate corporate
risk allocation structures.
16–9
As well as rules on de jure and de facto directors, some years
ago the legislature created a third category of director—the
“shadow director”. This is a person, not formally appointed as a
director, but in accordance with whose directions or instructions
the directors of a company are accustomed to act.40 A number of
specific statutory duties which supplement the general duties,
and are to be found in Chs 3 and 4 of Pt 10, are expressed to
apply also to shadow directors. In relation to the general duties
contained in Ch.2, s.170(5) initially unhelpfully provided that
they apply to shadow directors “to the extent that the
corresponding common law rules or equitable principles apply”;
this has now been amended to provide that shadow directors will
equally be subject to the general duties “where and to the extent
that they are capable of so applying”.41
This legislative change conclusively confirms the slow
judicial working towards the same position. In the early case of
Ultraframe (UK) Ltd v Fielding,42 Lewison J had taken the view
that directors’ fiduciary duties did not automatically apply to
shadow directors, on the grounds that a shadow director, unlike a
de facto or properly appointed director, had not undertaken to act
on behalf of the company and so had not put him- or herself in a
fiduciary relationship with the company. This decision showed
the continuing influence of the trustee analogy in the
development of directors’ duties, although earlier editions of this
book had suggested that the analogy was an unfortunate one,
since it provided a relatively easy route for the true mover
behind the company’s strategy to distance him- or herself from
liability for the decisions taken, by appointing a compliant board
and giving it instructions at crucial points.43 By contrast, almost
a decade later the equally careful analysis of Newey J in Vivendi
SA v Richards44 doubted this approach and concluded that, by
definition of the role,45 a shadow director’s self-appointed
involvement in influencing governance decisions must at law
inevitably mean that shadow directors commonly owed fiduciary
duties to at least some degree.46 This judicial and statutory
change is welcome. If the purpose of the law of directors’ duties
is to constrain the exercise of the discretion vested in the board,
it would be unfortunate if those rules did not reach all those
involved in that exercise.
The early source of this definitional difficulty probably lay in
the firm distinction which the courts sought to draw between a
de facto and a shadow director. Although the language used to
define a shadow director is of some antiquity,47 the term
“shadow director” was applied as a short-hand way of referring
to the definition only in the Companies Act 1980. As we have
indicated, this was done in order to make clear the scope of
application of the specific duties created by that Act which
applied to certain transactions entered into by directors with their
companies, the modern forms of which we discuss below. The
1980 Act set the courts off on the task of defining the difference
between a de facto and a shadow director. In Re Hydrodam
(Corby) Ltd48 Millett J took the view that in nearly all cases the
two categories were mutually exclusive:
“A de facto director…is one who claims to act and purports to act as a director,
although not validly appointed as such. A shadow director, by contrast, does not
claim or purport to act as director. On the contrary, he claims not to be a director.
He lurks in the shadows, sheltering behind others who, he claims, are the only
directors of the company to the exclusion of himself.”
16–10
This view that the categories are mutually exclusive is
increasingly doubted,49 but nevertheless it remains important to
draw some distinction in a statutory context because certain
statutory provisions apply to both shadow directors and directors
whilst others apply only to directors, in which category the
courts have long included de facto directors. Nevertheless, the
modern view, especially given the statutory change in
terminology in s.170(5), is that the differences between the two
categories of directors should not be the main focus of attention
when deciding the applicability of the general statutory duties of
directors. As Robert Walker LJ pointed out in Re Kaytech
International Plc,50 “the two concepts do have at least this much
in common, that an individual who was not a de jure director is
alleged to have exercised real influence in the corporate
governance of a company”.51 In principle, the general duties
should apply to all these people with “real influence”. If there is
a difference, it is practical, and likely to be that the general rules
should be applied to shadow directors only to the extent that they
have exercised control over the board: it is not inherent in the
definition of a shadow director that he or she should have
controlled all the activities of the board52; by contrast, most de
facto directors assume general directorial responsibilities.
Finally, in the context of shadow directors, two statutory
exceptions are provided. First, it is recognised that boards are
very likely—indeed are well-advised—to act in accordance with
the directions, advice or guidance of their professional advisers
or of parties acting under statutory or Ministerial authority.
These advisers are not thereby to be regarded as shadow
directors (s.251(2)). Secondly, and perhaps more controversially,
a company is not to be regarded as the shadow director of its
subsidiary for the purpose of the general duties by reason only
that the directors of the subsidiary are accustomed to act on the
instructions of the parent (s.251(3)).53 And, although the Act is
silent on this, the parent is also unlikely to be classified as a de
facto director, rather than a shadow director, if it is not involved
in a direct way in the central management of the subsidiary. A
parent company can thus impose a common policy on the group
of companies which it controls without placing itself in breach of
duty to the subsidiary (for example, because the group policy is
not in the best interests of the subsidiary). Note, though, that
s.251(3) does not answer the separate question of whether the
directors of the subsidiary can agree to implement the group
policy without placing themselves in breach of duty to the
subsidiary, which is discussed in para.16–36, below.
Senior managers
16–11
The general statutory duties set out in Ch.2 of Pt 10 clearly do
not apply to managers who are not directors of the company.
However, it is important to note that, when applying the law
relating to directors’ duties, the courts do not distinguish
between the actions of the director as director and actions as
manager, where the director is an executive director of the
company. Those duties will apply to both aspects of the
director’s activities.54 In consequence, some actions by senior
managers of the company, provided they are also directors of the
company, will be subject to the controls of the general statutory
duties. Although management theory may posit that it is the role
of the board in large companies to set the company’s strategy
and to oversee its execution, rather than to execute it itself, the
law of directors’ duties does not make this distinction in the case
of a director who has both a board position and a non-board
executive function. This is consonant with the traditional
provision in companies’ articles that the management of the
company is a matter for the board of directors.
However, it can also be asked whether these general statutory
duties (or common law fiduciary duties) apply to the senior
managers of the company who are not formally appointed as
directors. In Canadian Aero Services Ltd v O’Malley the
Canadian Supreme Court approved a statement from an earlier
edition of this book that directors’ common law fiduciary duties
(as they then were) apply to those “officials of the company who
are authorised to act on its behalf and in particular to those
acting in a senior management capacity”.55 That view has not
been adopted expressly in any English court. Moreover, it is
clear that, in principle, the employment relationship is not a
fiduciary relationship, so that it would be inappropriate to apply
the full range of fiduciary or directors’ duties even to senior
employees. However, this proposition is subject to a number of
qualifications. First, a senior employee who does in fact
discharge the duties of a director may be classed as a de facto
director, under the principles discussed above. Secondly, the
courts have held that, as a result of the specific terms of an
employee’s contract and of the particular duties undertaken by
him or her, a common law fiduciary relationship may arise
between employee and employer, even in the case of employees
who are not part of senior management, though the fiduciary
duty may be restricted to some part of their overall duties.56 The
view of the Canadian Supreme Court is not inconsistent with
these developments, since it too was derived from an analysis of
the functions of the employees in question as senior management
employees, though there will be scope for argument on the facts
of each case about how extensive the fiduciary aspects of the
employee’s duties are. It goes without saying that, should a
senior manager place him- or herself in an agency relationship
with the company, then the normal fiduciary incidents of that
relationship would arise. Thirdly, the implied and mutual duty of
trust and confidence which is imported into all contracts of
employment can in some cases operate in substantially the same
way as certain directors’ general duties.57 This is particularly the
case in relation to competitive activities on the part of an
employee or the non-disclosure by senior managers of the
wrongdoing of fellow employees and in some cases their own
wrongdoing.58
16–12
The exclusion of senior managers as such from the statutory
general duties of directors probably depends upon the
continuation of the UK practice, as recommended in the UK
Corporate Governance Code,59 that the board should contain a
substantial number of executive directors. If British practice
were to move in the US direction of reducing the number of
executive directors on the board, sometimes to one (the CEO),
and there are indications of a move in that direction, then
confining the statutory duties to members of the board might
become a policy which needed to be re-considered.60
Finally, the above discussion has concerned the fiduciary
duties of employees and directors. In relation to the statutory
duty of care (see below), which equally applies only to directors,
the common law duty of care required of employees seems to
come very close to that now required of directors (taking account
of the fact that the application of the reasonable care standard
will produce different results in different circumstances).61
Former directors
16–13
At common law the general duties of directors attach from the
date when the director’s appointment takes effect62 but do not
necessarily cease when the appointment ends. The second part of
the common law position is explicitly confirmed by s.170(2)
which provides that a person who ceases to be a director
continues to be subject to two of the seven general duties,
namely those relating to corporate opportunities of which he had
become aware whilst still a director and the taking of a benefit
from a third party in respect of acts or omissions whilst still a
director. However, those two duties are to be applied by the
courts to former directors “subject to any necessary adaptations”,
for example, to take account of the fact that the former director
may no longer have up-to-date knowledge of the conduct of the
company’s affairs. In this way it can be said that liability is
imposed in respect of actions which straddle the time before and
after the director ceased to hold office.63
Particularly difficult issues can arise in relation to the analysis
of actions by directors, whilst still directors, but after they have
given notice of resignation. In such cases the director is not (yet)
a former director and the issue is discussed below at para.16–94.
Directors of insolvent companies
16–14
When a company enters into an insolvency procedure
(liquidation, administration or receivership), the situation under
British law, unlike that in the US, is that the powers of the
directors are substantially curtailed and the direction of the
business passes into the hands of the insolvency practitioner
appointed to act in one or other of these roles and who acts in the
interests of the creditors. This is likely to have a substantial
impact on what the law of directors’ duties requires of the
directors in practice, but does not in principle relieve the
directors of their obligations to the company.64
DIRECTORS’ DUTIES OF SKILL, CARE AND DILIGENCE
Historical development
16–15
We turn now to the substance of the duties which directors
assume when they take up office. It is common in comparative
analysis of company law systems to divide those duties into
duties of loyalty and duties of care. Although the line between
these two sets of duties is not absolutely clear, they broadly
correspond to the two main risks which shareholders run when
management of their company is delegated to the board. The
board may be active, but not in the direction of promoting the
shareholders’ interests; or the board may be slack or
incompetent. We shall adopt this division here, for it
corresponds also to the two basic common law sources of the
rules on directors’ duties in English law: duties of loyalty based
on equitable principles, developed initially by courts of equity,
and duties of skill and care which now rest, with some particular
twists, on the principles of the law of negligence. However, it
should be noted that the general duties laid out in Ch.2 of Pt 10
are not divided in this way. The duty of care appears as the
fourth of the seven duties. It is nevertheless with this duty that
we begin.
The issue in this area which has long been debated is that of
the appropriate standard of care to be required of directors.
Historically, the common law was based upon a very low
standard of care, because it was subjectively formulated. The
traditional view is to be found in a stream of largely nineteenth-
century cases which culminated in the decision in 1925 in Re
City Equitable Fire Insurance Co.65 Those cases seem to have
framed the directors’ duties of skill and care with non-executive
rather than executive directors in mind and, moreover, on the
basis of a view that the non-executive director had no serious
role to play within the company but was simply a piece of
window-dressing aimed at promoting the company’s image.66
The result was a conceptualisation of the duty in highly
subjective terms. The proposition was famously formulated by
Romer J in the City Equitable case that “a director need not
exhibit in the performance of his duties a greater degree of skill
than may reasonably be expected from a person of his
knowledge and experience”.67 The courts were also influenced
by a model of corporate decision-making which gave the
shareholders effective control over the choice of directors. If the
shareholders chose incompetent directors, that was their fault
and the remedy lay in their hands. As we have seen,68 that is no
longer an accurate picture of the degree of control exercised by
shareholders over boards of directors in most public companies.
Furthermore, the proposition formulated by Romer J was highly
inappropriate for executive directors, appointed to their positions
and paid large, sometimes very large, sums of money for the
expertise which they assert they can bring to the business. The
implicit view of the role of the non-executive director also
became anachronistic after the development of the corporate
governance codes in the 1990s, which allocated a major role to
the non-executive directors in the monitoring of the executive
directors.69
Even before the enactment of the Companies Act 2006 this
was an area of the law of directors’ duties which was beginning
to change. The courts were influenced by the development of
more demanding and objective statutory standards for directors
whose companies were facing insolvency70 and began to develop
the common law requirements by analogy with those specific
statutory provisions. The beginnings of the modern approach at
common law can be found in Dorchester Finance Co v
Stebbing,71 but it was a pair of first instance decisions by
Hoffmann J72 in the 1990s which marked a move towards a fully
objective approach. He explicitly adopted as an accurate
expression of the common law the test contained in s.214(4) of
the Insolvency Act in relation to wrongful trading.73 This
inchoate change in the common law was endorsed by both the
Law Commissions and the CLR and now finds expression in
s.174 of the 2006 Act. This section first requires that “a director
of a company must exercise reasonable care, skill and diligence”
and then goes on to define what is meant by reasonable care,
using a formulation which tracks very closely s.214 of the
Insolvency Act 1986:
“This means the care, skill and diligence that would be exercised by a reasonably
diligent person with (a) the general knowledge, skill and experience that may
reasonably be expected of a person carrying out the same functions carried out by
the director in relation to the company, and (b) the general knowledge, skill and
experience that the director has.”
However, it should be noted that in one particular area the

statute has exempted directors from liability for negligence. In
the case of misstatements in or omissions from the directors’
report and the directors’ remuneration report liability arises on
the part of directors to the company only on the basis of
knowledge or recklessness.74
The statutory standard
16–16
The crucial difference between the statutory formulation and that
of Romer J is that in the latter the director’s subjective level of
skill sets the standard required of the director, whereas under the
2006 Act the director’s subjective level does so only if it
improves upon the objective standard of the reasonable director.
Limb (a) of the statutory formula sets a standard which all
directors must meet and it is not one dependent on the particular
director’s capabilities; limb (b) adds a subjective standard which,
however, can operate only to increase the level of care required
of the director.75 Whether the statutory provision is to be
regarded as simply endorsing the current common law or,
probably better, as effecting a change in the common law which
was under consideration but not fully developed by the courts,
this is clearly an area where a court applying s.174 should be
cautious in its use of the older common law authorities as an aid
to interpretation under s.170(4).
What does this all mean or not mean for directors? First,
although directors, executive and non-executive, are subject to a
uniform and objective duty of care, what the discharge of that
duty requires in particular cases will not be uniform. As the
statutory formulation itself recognises, what is required of the
director will depend on the functions carried out by the
director,76 so that there will be variations, not only between
executive and non-executive directors77 but also between
different types of executive director (and equally of non-
executives) and between different types and sizes of company.
Secondly, the imposition of an objective duty of care does not
necessarily require a directorship to be regarded as a profession.
The vexed issue of what constitutes a profession does not have
to be addressed; all that is required is an assessment of what is
reasonably required of a person having, as the statute puts it, the
knowledge, skill and experience which a person in the position
of the particular director ought to have. Given the enormous
range of types and sizes of companies, it would be odd if all
directors were to be regarded as professional. On the other hand,
as was pointed out by the Court of Appeal of New South Wales,
an objective approach does require even non-executive directors,
as a minimum, to “take reasonable steps to place themselves in a
position to guide and monitor the management of the
company”.78 The days of the wholly inactive or passive director
would thus seem to be numbered—or, at least, a director who is
so runs a high risk of being held negligent.
16–17
Thirdly, directors are permitted to engage in substantial
delegation of management functions to non-board employees.
This is an inevitable reflection of the fact that companies are
organisations, sometimes very big organisations, the running of
which may require a large staff. In City Equitable Romer J put
this point in very robust terms. He said that “in respect of all
duties that, having regard to the exigencies of business, and the
articles of association, may properly be left to some other
official, a director is, in the absence of grounds for suspicion,
justified in trusting to that official to perform such duties
honestly”.79 In the more recent cases of Daniels v Anderson and
Norman v Theodore Goddard,80 where objective tests were
applied, at least some of the directors escaped liability as a result
of the application of this proposition. However, insofar as this
dictum suggests that, once an appropriate delegate has been
chosen and the task delegated to that person, the director is under
no further duties, it cannot stand with recent developments in the
law, as the next point indicates.
Fourthly, an objective standard of care is not inconsistent with
extensive delegation nor, however, does it permit the directors to
escape from the second requirement of always being in a
position to “guide and monitor” the management. These two
things are to be reconciled by the directors ensuring that there
are in place adequate internal control systems which will throw
up problems in the delegated areas whilst there is still time to do
something about them. As it has been put, the freedom to
delegate “does not absolve a director from the duty to supervise
the discharge of the delegated functions”.81 The need for
adequate internal control systems was stressed by the Report of
the Turnbull Committee,82 one of the lesser known of the reports
which contributed to the Combined Code, and its successor the
UK Corporate Governance Code, but arguably the most
important for what it has to say about directors’ responsibility
for sub-board structures of control. Although neither the
Turnbull Report nor the UK Corporate Governance Code are
legislative instruments binding the courts, it is likely that, in
appropriate cases, the courts’ view of what an objective standard
of care requires will be influenced by these provisions. Indeed,
that process is already evident in the area of disqualification of
directors on grounds of unfitness. Thus, in Re Barings Plc
(No.5)83 directors were disqualified for failing to have such
internal controls in place in relation to trading activities in an
overseas subsidiary, whose losses eventually caused the demise
of the bank.
Fifthly, the principles relating to delegation to sub-board
managers apply also to the division of functions among the
directors themselves. Inevitably, executive directors will carry a
greater load of management responsibility than non-executive
directors and, even within the executive directors, there will be
specialisation (for example, the chief financial officer will carry
particular responsibility in that area). However, all directors
“have a continuing duty to acquire and maintain a sufficient
knowledge and understanding of the company’s business to
enable them properly to discharge their duties as directors” and
certainly no board may permit itself to be dominated by one of
their number.84
16–18
Further, however, it follows from the inevitable acceptance of
extensive delegation, at least in large companies, that directors
cannot be guarantors that everything is going well within the
company. Subordinate employees may be fraudulent or negligent
and the directors may not discover this in time, but this does not
necessarily mean that the directors have been negligent. That
conclusion will depend on the facts of the situation, including
the quality of the internal controls.85
Sixthly, although nearly all decided English cases have arisen
out of alleged failures by directors to act or to act effectively,
negligence suits can equally arise where the directors have
indeed acted, but their actions have delivered disastrous
consequences for their company. Here too, however, since
companies are in business to take risks, the fact that a business
venture does not pay off and even leads the company into
financial trouble does not necessarily indicate negligence,
though it may encourage the shareholders to replace the
directors. In the US, where an objective standard for directors’
competence is well-established, the “business judgment” rule
generally operates to relieve the directors of liability in such
cases (i.e. cases where the directors have acted, not those where
they have failed to act). The business judgment rule involves the
specification of a set of procedural steps, which, if followed, will
give the directors the benefit of a presumption that they were not
negligent. The Law Commissions thought such a rule
unnecessary in the UK;86 and there is certainly a risk with the
business judgment rule that the courts will come to regard cases
where the procedural standards have not been met as
presumptively negligent.87 The Commissions thought that one
could expect the courts to be alive to the probability that they are
better at dealing with conflicts of interest than with the
assessment of business risks and to the desirability of avoiding
the luxury of substituting the courts’ hindsight for the directors’
foresight.88
Finally, as with auditors,89 showing breach of a duty of care is
one thing; showing that the loss suffered by the company was a
consequence of the breach of duty may be quite another. Thus,
the true explanation of the finding of no liability in Re Denham
& Co90 is only in part that the director was entitled to rely on
others. Equally important was the judge’s view that, even if the
director had made the inquiries he should have made, he would
probably not have discovered the fraud.
16–19
Overall, it can be said that the recent developments at common
law and, now, in the Act, have brought the standard of care, skill
and diligence required of directors into line with that required
generally in other areas of social life by the law of negligence.
However, an inevitable result of the move from a subjective to
an objective test will be to give the courts a greater role in
defining the functions of the board, no matter how sensitive the
courts are to the need to avoid the use of hindsight. For example,
the courts’ decisions on the rigour with which the board has to
supervise the discharge of delegated tasks will help to define the
monitoring role of the board, whilst decisions about whether the
audit committee of the board has sufficiently scrutinised the
tasks carried out by the external auditors will help to define the
relationships between audit committee, auditors and
management. Twenty years ago one might have predicted that
the courts would either be ineffectual in the discharge of these
responsibilities (through a desire to avoid reliance on hindsight)
or produce undesirable interventions. However, today, as a result
of developments associated with the emergence of the UK
Corporate Governance Code, discussed in Ch.14, there is a body
of best practice available, on which the courts can draw, though
not be bound by, at least in the case of large companies. A
striking example of the creative use of such material is to be
found in the judgment of Austin J in ASIC v Rich91 in which the
Australian court had recourse to a wide range of “best practice”
material, including corporate governance reports from the UK, in
holding that the duties of the chair of the board of a listed
company extended beyond responsibility for simply chairing
meetings of the board.
Remedies
16–20
The standard remedy for breach of a director’s duty of care is
compensation for the harm caused to the company by the
director’s negligence. Section 178(2), specifying the remedies
for breach of the general duties, may suggest that the remedy for
this breach of duty (s.174) will be assessed on common law, not
equitable, principles, thus laying to rest the debates in that area.92
In any event, the better view, it is suggested, is that the remedy is
not assessed differently merely because the director is a
fiduciary. As Millett LJ said in Bristol and West Building Society
v Mothew,93 “it is inappropriate to apply the expression [breach
of fiduciary duty] to the obligation of a trustee or other fiduciary
to use proper skill and care in the discharge of his duties”. Nor
does it matter that the duty of care to which the director is
subject was developed, historically, by the courts of equity
before the common law developed its own more widely
applicable version. This history led to the use of different
terminology (“compensation” in equity; “damages” at common
law), and different appropriately contextual explanations of
issues of standards of care, rules on causation, remoteness and
measure of damages. But even in equity the breach gave access
only to compensatory remedies, and the modern tendency has
been to assimilate the requirements for liability for breach of the
duty of care in equity and at common law.94
INTRODUCTION TO DIRECTORS’ VARIOUS DUTIES OF GOOD
FAITH AND LOYALTY
Historical background
16–21
As noted earlier, the duties of good faith and loyalty which the
law requires of directors were developed by the courts by
analogy with the duties of trustees. It is easy to see how,
historically, this came about. Prior to the Joint Stock Companies
Act 1844 most joint stock companies were unincorporated and
depended for their validity on a deed of settlement vesting the
property of the company in trustees. Often the directors were
themselves the trustees and even when a distinction was drawn
between the passive trustees and the managing board of
directors, the latter would quite clearly be regarded as trustees in
the eyes of a court of equity in so far as they dealt with the trust
property. With directors of incorporated companies, the
description “trustees” was less apposite because the assets were
now held by the company, a separate legal person, rather than
being vested in trustees. However, it was not unnatural that the
courts should extend it to them by analogy. For one thing, the
duties of the directors should obviously be the same whether the
company was incorporated or not; for another, historically the
courts of equity tended to apply the label “trustee”
indiscriminately to anyone in a fiduciary position. Nevertheless,
to describe directors as trustees is today neither strictly correct
nor invariably helpful.95 In truth, directors are agents of the
company or (when acting together) one of its organs, not trustees
of its property. But, as agents, the directors stand in a fiduciary
relationship to their principal, the company. The duties of good
faith and loyalty which this relationship imposes are in material
respects identical with those imposed on trustees. Moreover,
when it comes to remedies for breach of duty, the trust analogy
can provide a strong remedial structure. Directors who dispose
of the company’s assets in breach of duty, for example, are
regarded as committing a breach similar to a breach of trust, and
those persons (including the directors themselves) into whose
hands the assets come may find that they are under a duty to
restore the value of the misapplied assets to the company.96
The analogy of directors as agents of the company is also less
than perfect, however. As we saw in Ch.7, the authority of the
directors to bind the company as its agents normally depends on
their acting collectively as a board, unless authority has (or can
be assumed to have) been further delegated under the company’s
constitution upon an individual director.97 By contrast, their
duties of loyalty are owed by each director individually. One of
several directors may not as such be an agent of the company
with power to saddle it with responsibility for his acts, but he
will invariably be a fiduciary of it, and will also owe separate but
related equitable duties. To this extent, directors again resemble
trustees who must normally act jointly but each of whom
severally owes duties of loyalty towards the beneficiaries.
Moreover, as noted earlier, when the directors act collectively as
a board, the modern view is not so much that they are agents of
the company but that, so long as they act within their powers,
they act as the company.98
Given the modern statutory statement of the general duties
owed by directors, these analogies and their various limitations
are of less substantive importance than they once were.
Nevertheless, an eye must be kept on them for two reasons: the
statutory duties themselves are subject to interpretation in the
light of analogous common law cases (s.170(4)); and the
remedial consequences of statutory breaches remain to be
determined by the appropriate corresponding common law rules
(s.178).
Categories of duties
16–22
Turning now to the main elements of the directors’ duties of
good faith and loyalty, we divide them as below into six
categories, following the scheme of the Act. The first three
categories describe distinct duties, all being concerned with the
manner in which directors exercise their powers, being that the
directors must:
(1) act within the scope of the powers which have been
conferred upon them, and for proper purposes;
(2) exercise independent judgment; and
(3) act in good faith to promote the success of the company.
The final three categories are all examples of fiduciary duties of
loyalty, and in particular the rule against directors putting
themselves in a position in which their personal interests (or
alternatively their duties to others) conflict with their duty to the
company. However, it is useful to sub-divide this “no conflict”
principle further because the specific rules implementing the
principle differ according to whether the conflict arises:
(4) out of a transaction with the company (self-dealing
transactions);
(5) out of the director’s personal exploitation of the company’s
property, information or opportunities; or
(6) out of the receipt from a third party of a benefit for
exercising their directorial functions in a particular way.
For the purposes of statutory enactment and analysis it is
inevitable that the duties are separated out in some way such as
that adopted in the 2006 Act. However, s.179 specifically
provides that, except where a duty is explicitly excluded by
something in the statute, “more than one of the general duties
may apply in any given case”. This provision applies also to the
duty of care. In practice, here as in other areas of the law, the
facts will frequently suggest breach of more than one of the
duties and, where this is so, the claimant can choose to pursue all
or any of them.99
DUTY TO ACT WITHIN POWERS
16–23
Requiring the directors to act only within the powers that have
been conferred upon them is an obvious duty for the law to
impose. Indeed, this is not a duty confined to directors, or even
to fiduciaries; later on we shall examine similar restrictions as
they apply to shareholders.100 As regards the directors, however,
s.171 deals with two manifestations of this principle: the director
must “act in accordance with the company’s constitution” and
must “only exercise powers for the purposes for which they are
conferred”. We look at each in turn.
Acting in accordance with the constitution
Constitutional limitations
16–24
As we saw in Ch.3,101 in contrast to many other company law
jurisdictions, the main source of the directors’ powers is likely to
be the company’s articles, and the articles, therefore, are likely
also to be a source of constraints on the directors’ powers. The
articles may confer unlimited powers on the directors, but they
are likely in fact to set some parameters within which the powers
are to be exercised, even if the limits are generous, as they
typically will be. So, it is perhaps not surprising that s.171
contains the obligation “to act in accordance with the company’s
constitution”. And it should be noted that the term “constitution”
helpfully goes beyond the articles. It includes resolutions and
agreements which are required to be notified to the Registrar and
annexed to the articles, notably any special resolution of the
company.102 It also embraces any resolution or decision taken in
accordance with the constitution and any decision by the
members of the company or a class of members which is treated
as equivalent to a decision of the company.103 Thus, the duty
includes an obligation to obey decisions properly taken by the
shareholders in general meeting, for example, giving instructions
to the directors without formally altering the articles.104
This duty was recognised in the early years of modern
company law and is reflected in a number of nineteenth-century
decisions, usually involving the purported exercise by directors
of powers which were ultra vires the company105 or payments of
dividends or directors’ remuneration contrary to the provisions
in the company’s articles.106 The remedies for this type of breach
are considered below.107
Other situations?
16–25
Besides limitations on the directors’ powers suggested by s.171
(i.e. limitations found in the company’s constitution or in the
general limitation on the exercise of powers for improper
purposes), the general law may also limit what directors may do
(or what companies may do, which will necessarily control the
actions of the board), or limitations may be found in the
Companies Act or in the common law relating to companies.
Often these provisions will suggest that liability is strict, in that
the motivations of the director are immaterial. As well, these
provisions may set out the consequences of any failure to abide
by the relevant rules, and, where this is the case, those rules will
prevail. But where no remedies are specified, the law of
directors’ duties may provide an answer, directly or by analogy.
Improper purposes
The rule
16–26
The second proposition contained in s.171(b) is that a director
must “only exercise powers for the purposes for which they are
conferred”. Often the improper purpose will be to feather the
directors’ own nests or to preserve their control of the company
in their own interests, in which event it will also be a breach of
one or other of the various duties, considered below, to act avoid
conflicts and to act in good faith to promote the success of the
company. Indeed, the particular wording of the s.172(1)
statutory duty to act in good faith to promote the success of the
company can be seen as assisting generally in defining proper
purposes.108 But even if no other breach is committed, directors
may nevertheless be in breach of this particular duty if they have
exercised their powers for a purpose outside those for which the
powers were conferred upon them. The improper purposes test,
like the requirement to act in accordance with the company’s
constitution, is an objective test.109 Or, more precisely, the
question of whether a particular purpose is proper or not is a
question of law, decided objectively, while the question of which
purposes actually motivated the particular director in question is,
of course, subjective.110 Notice the narrow limits to the proper
purposes rule: if the directors have acted for purposes which are
objectively proper, not improper, then the court will not, in
addition, review the decision as also being either reasonable or
unreasonable,111 with the potential for substituting their own
view as to the judgements the directors should have reached in
managing the company.112
The leading authority in this area is the 2015 Supreme Court
decision in Eclairs Group Ltd v JKX Oil & Gas Plc,113 but it is
helpful to begin discussion with an earlier decision. The
statutory formulation of the proper purposes duty reflects the
prior common law case law. That case law was reviewed by the
Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd,114
which considered the decisions on this subject of courts
throughout the Commonwealth. It concerned, as have many of
the cases, the power of directors to issue new shares, but the duty
is by no means so confined.115 In this case a majority shareholder
(Ampol) in a company called Millers made an offer to acquire
the shares in Millers it did not already own. However, the
directors of Millers preferred a takeover offer from Howard
Smith, which could not succeed so long as Ampol retained a
majority holding. Consequently, the directors caused the
company to issue sufficient new shares to Howard Smith that
Ampol was reduced to a minority position and Howard Smith
could launch its offer with some hope of success, since its bid
price was higher than Ampol’s.
It was argued that the only proper purpose for which a share-
issue power could be exercised was to raise new capital when
the company needed it.116 This was rejected as too narrow.117
There might be a range of purposes for which a company may
issue new shares—a view reflected in the statutory reference to
proper purposes in the plural. It might be a proper use of the
power to issue shares to use that power in order to secure the
financial stability of the company118 or as part of an agreement
relating to the exploitation of mineral rights owned by the
company.119 Provided the purpose of the issue was a proper one,
the mere fact that the incidental (and desired) result was to
deprive a shareholder of his voting majority or to defeat a
takeover bid would not be sufficient to make the purpose
improper. But if, as in the instant case, the purpose of the share
issue was to dilute the majority voting power so as to enable an
offer to proceed which the existing majority was in a position to
block,120 the exercise of the power would be improper despite the
fact that the directors were acting in what they considered to be
the best interests of the company, and were not motivated by a
desire to obtain some personal advantage.
Which purposes are improper?
16–27
Perhaps the greatest puzzle in this area is to know by what
criteria the courts judge whether a particular purpose is proper.
This is generally stated to be a matter of construction of the
articles of association.121 That is all very well if the articles are
prescriptive, but this is rarely the case. In Howard Smith v
Ampol, for example, the clause giving the directors power to
issue shares was drawn in the widest terms. The “purposes”
limitation which the Privy Council read into the directors’
powers derived not from a narrow analysis of that clause, but
from placing the share issue power within the company’s
constitutional arrangements as a whole, as demonstrated in
particular by the terms of its articles of association. In essence,
to do what the directors did in that case was regarded as
undermining the division of powers between shareholders and
the board which the articles had created122; and in that context
the case comes close to deciding that it is always a breach of the
directors’ duties to exercise their powers to promote or defeat a
takeover offer, which decision should be left to the existing body
of shareholders. This is certainly the proposition upon which the
City Code on Takeovers and Mergers (the Takeover Code) is
based, which provisions will prevail once a bid for a listed
company is imminent.123 In Criterion Properties Plc v Stratford
UK Properties LLC,124 however, neither Hart J nor the Court of
Appeal ruled out the possibility that in some cases it might be a
proper purpose of the exercise of directors’ powers for them to
be used to block or discourage a takeover, but the issue was not
presented in a sharp fashion in that case, since both courts were
agreed that the “poison pill” adopted by the directors in that case
was disproportionate to the threat faced by the company. It
follows from this approach, however, that in a different type of
company with a different constitution, in which, say, ownership
and control were not separated, a broader view might be taken of
the directors’ powers under the articles.
In other words, the context is all-important. This seems to be
the explanation of the expansive approach taken in Re Smith and
Fawcett Ltd,125 where the clause in question (regarding the
admission of new members to a small company) was widely
construed so as to produce the effect equivalent to the
partnership rule of strict control by the board over the admission
of new members.
But these illustrations indicate the difficulty, and provide little
by way of real guidance when the context is novel, as it was in
Eclairs Group Ltd v JKX Oil & Gas Plc.126 The opposing
judgments as the case made its way up to the Supreme Court are
instructive. JKX suspected a hostile takeover by Eclairs, one of
its shareholders, whom it alleged was seeking to destabilise it
and ultimately acquire it at less than its proper value. The
directors of JKX had the power127 to request details of the parties
who held interests in Eclairs’ shares, and to disenfranchise
Eclairs if it failed to respond adequately to the request. This the
company did. It was not disputed that the power to
disenfranchise had been exercised so as to disentitle these
shareholders from voting at JKX’s AGM, thus ensuring the
passage of certain resolutions, rather than for the purpose of
enforcing the company’s demand for information. At first
instance,128 Mann J held this to be an improper purpose, so the
purported restrictions on voting were held ineffective. The Court
of Appeal allowed the appeal (Briggs LJ dissenting),129
distinguishing previous cases of improper purposes on three
overlapping grounds130: that here the purported “victim” was a
“victim of his own choice, not a victim of any improper use of a
power of the board of directors” since it was his choice how to
respond to the questions properly raised131; that since no
restrictive purposes had been expressed in the statute or the
articles, none should be implied unless that was necessary to
their efficacy; and, in any event, a restricted proper purpose test
would essentially frustrate the purpose or utility of the
provisions in question. Although the Court of Appeal did not put
it so strongly, their expansive approach could essentially denude
the proper purposes doctrine of any substantive role whenever a
power was expressed in wide terms—as powers typically are.
The Supreme Court disagreed, holding unanimously that the
proper purpose doctrine had a central role to play in controlling
the exercise of power by directors. But they too provided little
guidance as to how these “proper purposes” should be
discovered. Lord Sumption SCJ, with whom the other judges
agreed, suggested that the relevant improper purposes would
“usually [be] obvious from [the] context”, and should be inferred
from the “mischief” which might follow from exercise of the
power.132
16–28
That is not much to go on, but, taking the cases together, perhaps
two broad categories of “improper purpose” can be identified as
operating quite generally, even when powers are expressed in the
widest possible terms: use of a power for the purpose of
“feathering the director’s nest” (these are the easy cases) or for
influencing the outcome of existing constitutional balances of
power in the company (the harder cases) will typically be
regarded as improper.133 Note that it is not the incidental, or even
inevitable, delivery of these ends which is outlawed: many
perfectly proper actions by directors will deliver such results.
Rather, it is this being the motivation for the exercise of the
power, where that motivation has been deemed improper. But
even this is not the end of the analysis; there is a further
question.
When is a power exercised for improper purposes?
16–29
Directors are rarely actuated by a single purpose. This was true
in the Howard Smith case, where the company did have a
genuine need for fresh capital. If the directors are motivated by a
variety of purposes, some proper and some improper, how
should the courts determine whether the exercise of power is
tainted? Section 171(b) indicates that a director must “only
exercise powers for the purposes for which they are conferred”.
This suggests that any improper motivating purpose will
constitute a flaw. Nevertheless, and perhaps for very pragmatic
reasons, that has never been the rule applied in the corporate
context except where the exercise of power is motivated by the
director’s dishonesty or self-interest.134 Otherwise the courts
have typically suggested that a decision will be considered
flawed only if the proven improper purpose is the “primary” or
dominant purpose for the decision,135 or if the decision would not
have been taken “but for” the improper purpose (even if the
improper purpose was not the dominant purpose),136 or perhaps
an either/or version of these two tests137 if it is thought that they
are likely to lead to different answers on the facts. Each
alternative poses enormous forensic difficulties, since all require
proof of matters peculiarly within the minds of the directors and
in relation to which the directors’ evidence is “likely to be both
artificial and defensive”.138 But in Eclairs Group Ltd v JKX Oil
& Gas Plc, Lord Sumption SCJ (with whom Lord Hope SCJ
agreed) put forward a principled preference for the “but for”
test139:
“The fundamental point [in selecting the right test], however, is one of principle.
The statutory duty of the directors is to exercise their powers ‘only’ for the
purposes for which they are conferred. … If equity nevertheless allows the decision
to stand in some cases, it is not because it condones a minor improper purpose
where it would condemn a major one. … The only rational basis for such a
distinction is that some improprieties may not have resulted in an injustice to the
interests which equity seeks to protect. Here, we are necessarily in the realm of
causation. … One has to focus on the improper purpose and ask whether the
decision would have been made if the directors had not been moved by it. If the
answer is that without the improper purpose(s) the decision impugned would never
have been made, then it would be irrational to allow it to stand simply because the
directors had other, proper considerations in mind as well, to which perhaps they
attached greater importance. … Correspondingly, if there were proper reasons for
exercising the power and it would still have been exercised for those reasons even
in the absence of improper ones, it is difficult to see why justice should require the
decision to be set aside.”
However persuasive that might seem, and whatever the practical

advantages of a single simple test, the majority of the Supreme
Court declined to commit themselves to this as a statement of the
law, given that the issues surrounding mixed purposes had not
been argued before the Supreme Court.140 The matter thus
remains unsettled. But it is hard to fault the logic that a decision
should be held improper only if it would not in fact have been
taken the way it was but for the improper consideration. If that
test is not met, then—as Lord Sumption put it—no injustice has
been done, and the decision should stand.
The only troubling element is the hypothetical rider aired by
the court. The problem raised was this: assume the directors in
fact decided the way they did only because of the presence of an
improper purpose, but they might still have decided the same
way had that improper purpose not been present. Should their
decision then be allowed to stand? The answer, surely, is no, it
should not stand. Principle suggests the court’s task is simply to
determine whether the decision actually taken by the directors
should stand. It is not to hypothesise about what the directors
might have done for exclusively “proper” motivating purposes.
The focus of the court’s intervention is not on judging the
practical outcome reached, but on judging the directors’
motivations in reaching it. And in any event, in practice the
question would seem impossible to contemplate sensibly on
most facts before the court: JKX and Howard Smith are surely
illustrative of that—the directors could insist they would have
taken the same decisions if acting only for proper purposes, but
their targets and timing make that seem unlikely.
Despite this, in the early stages of the JKX litigation, Mann J
raised this question himself, and also held that the facts
supported the conclusion that the JKX directors would indeed
have taken the same decision if they were acting for exclusively
proper purposes, but he declined to let the company take the
argument at that late stage in the litigation.141
Remedies
16–30
The directors necessarily breach the duty in s.171 if they act
contrary to its provisions; it is irrelevant that the contravention
was in the interests of the company, or that the directors were
not subjectively aware of their breach of s.171.142 In other words,
directors are under a duty to acquaint themselves with the terms
of the company’s constitution and its limits, and to abide by
them. A breach by the directors of s.171 affects the validity of
any decision so made, and that in turn may affect third parties
relying on the decision. In addition, if the flawed decision causes
loss to the company, the company may seek compensation from
its defaulting directors. The relevant remedies map the common
law and equitable rules (s.178).
Starting with the validity of the flawed decision: at common
law different legal consequences follow for acts done without
power (or “in excess” of power, s.171(a)) and acts done within
power but in abuse of it (s.171(b)). At common law, where an
act or decision of the directors is beyond their constitutional
capacity as set out in the company’s constitution (and subject to
claims of ostensible authority) (i.e. in breach of s.171(a)), it is
void, i.e. of no effect. Moreover, this is also one of the situations
where the trust analogy is used to strong effect. If the
contravention of the constitution has involved the improper
distribution of the company’s assets, the directors are regarded
by analogy as if in breach of trust and are liable to replace the
assets, whether or not they were the recipients of them.143 This
gives the directors a strong incentive to remain within the
company’s constitution.144
Where the directors act for an improper purpose (in breach of
s.171(b)), however, then at common law their act is voidable by
the company (i.e. valid until set aside by the company, and
incapable of being set aside if third party rights have
intervened),145 not void as in the case where the directors purport
to exercise a power they do not have. Thus, bona fide third
parties are safe if they act before the shareholders (or liquidator,
or other) set aside the directors’ decision.146
16–31
In both cases, however, the impact of these common law rules
on third parties’ interests has now been substantially softened by
the statutory protections (especially s.40) for those dealing with
the company in good faith.147 In favour of such persons the
powers of the directors to bind the company are treated as free of
any limitation contained in the company’s constitution. Helpful
as this is to third parties, it does not help the directors, for s.40(5)
makes it clear that liability on the part of the director to the
company may be incurred under s.171, even if—perhaps
especially if—the third party with whom the directors dealt on
behalf of the company is able to enforce the transaction against
the company.148 In fact, to the extent that s.40 protects the
position of third parties as against the company it increases in
importance the company’s potential remedy against the director.
Companies that are now restricted in their ability to escape from
transactions with third parties on the grounds that the directors
have exceeded their powers may be tempted to look to the
directors to recover compensation for the loss suffered as a result
of entering into them.
It is also worth recalling at this point the related provisions of
s.41, which apply where the third party contracting with the
company is a director of the company or a person connected
with the director. Then the protection afforded by s.40 does not
apply and instead s.41 imposes liability both on directors who
authorise such transactions (as s.171 does)149 and on the
director150 (or connected person) who enters into the transaction
with the company.151 Both sets of directors are liable to account
to the company for any gain made from the transaction and to
indemnify the company for any loss which it suffered as a result
of the transaction. Section 41 in its specific area of operation
thus reinforces the principle underlying s.171 that directors
should observe the limitations on their constitutional powers.
The jurisdiction to bring claims is worth further comment. It is
clear that both duties stated in s.171 are owed to the company, as
are the other statutory duties, and so may be pursued by the
company directly, or by shareholders in a derivative claim. But
can the defaulting directors be sued by parties other than the
company? A failure on the part of the directors to observe the
express limits on their powers contained in the company’s
constitution (i.e. s.171(a) breach) may also put the company in
breach of the contract with the shareholders created by the
articles. As we saw in Ch.3,152 at least some breaches of the
articles by the company can be complained of by a shareholder,
who might, for example, obtain an injunction to restrain the
company from continuing to act in breach of the articles—in
effect restraining the directors from causing the company to act
in breach of its articles. Equally, such acts by the directors may
form the basis of a claim in unfair prejudice.
Where the breach is of the duty to act for proper purposes (i.e.
s.171(b)), however, then allowing a wider class of people to
complain has been more poorly defended; no case seems to have
turned on standing. In some cases, minority shareholders have
been allowed to sue but the question of their standing has often
not been argued nor its basis explained.153 As a matter of logic
and of equitable precedent, this duty to act for proper purposes,
owed by directors to the company, may also be owed (at
common law only, since there is no enacted statutory equivalent)
by the directors to a wider class of people, entitling this wider
class to seek common law or equitable remedies from the
directors for breach.154 Alternatively, or in addition, and as
described above, the directors’ wrongs to the company may
entitle the shareholders to pursue related or parasitic remedies,
such as for breach of the contract in the articles (although note
the arguments against),155 or a claim in unfair prejudice.156
16–32
Finally, as noted earlier, these remedies are sometimes applied
by analogy when directors act, not contrary to the company’s
constitution, but contrary to some other statutory or common law
rule which constrains the powers of directors to act in particular
ways.157 If the rule itself does not set out specific consequences
of failure, then the law of directors’ duties may provide an
answer, directly or by analogy. We have already seen an
example of this situation in Ch.12 where the directors, in breach
of the Act, made a distribution to shareholders otherwise than
out of profits. In the absence of statutory specification of the
liabilities of the directors to the company in that situation, the
courts have had recourse to the notion that if directors, “as quasi-
trustees for the company, improperly pay away the assets to the
shareholders, they are liable to replace them”.158 Another
example is to be found in Ch.13,159 where directors are regarded
as having acted in breach of trust when they used the company’s
assets to give financial assistance for the purchase of the
company’s shares in breach of the statutory prohibition. In this
way, directors who apply the company’s assets in breach of
restrictions contained in the Act are made liable to replace them.
It is not thought that these liabilities, derived from the trustee-
like duties imposed on directors in the handling of the
company’s assets, have been overtaken or displaced by the
statutory duties set out in Ch.2 of Pt 10 and in s.171 in particular.
What is even more typical in this area is that different
potential routes lead to the same remedial ends. An illustration is
found in the decision of the Court of Appeal in MacPherson v
European Strategic Bureau Ltd.160 Here the directors of an
insolvent company caused it to enter into a number of contracts
which, the court found, amounted to an informal winding up of
the company. Under the contracts, the directors as creditors were
the primary beneficiaries rather than the creditors of the
company as a whole, as would have been the case had the
company been wound up formally under the provisions of the
Act and the insolvency legislation. Chadwick LJ said that it was
a breach of the duties which directors owe to the company for
them to attempt such a scheme161:
“It is an attempt to circumvent the protection which the 1985 Act aims to provide
for those who give credit to a business carried on, with the benefit of limited
liability, through the vehicle of a company incorporated under that Act.”
In consequence, the contracts were not enforceable by the

directors (who were obviously aware of the facts giving rise to
the breach of duty) against the company. This case can thus be
seen as demonstrating a limitation on the directors’ powers
derived from the statutory rules on limited liability and payments
to shareholders out of capital. It could also be seen as a breach of
the directors’ core duty of loyalty (discussed immediately below)
as it applies in the vicinity of insolvency where the creditors’
interests are predominant.
DUTY TO EXERCISE INDEPENDENT JUDGMENT
16–33
At common law, this issue is typically described as a duty not to
fetter the exercise of discretion. In s.173, this is put in positive
terms, as a duty to exercise independent judgment. At the level
of principle the requirement is uncontroversial. However, there
are four points relating to the practical working of this principle
which need to be considered.
Taking advice and delegating authority
16–34
First, and perhaps most obviously, the principle does not prevent
directors seeking and acting on advice from others. Indeed, the
board might well infringe its duty to take reasonable care if it
proceeded to a decision without appropriate advice from
outsiders (investment bankers, lawyers, valuers). What the board
cannot do is treat the advice as an instruction, although in
complex technical areas the advice may leave the board with
little freedom for manoeuvre, for example, where lawyers advise
that the board’s preferred course of action would be unlawful.
The board must regard itself as taking responsibility for the
decision reached, after taking appropriate advice.
Secondly, just as the duty of care does not prevent a board
from delegating its functions to non-board employees (provided
it has in place appropriate internal controls—see above), so the
duty to exercise independent judgment does not prohibit such
delegation.162 However, it seems that s.173 was not intended to
overrule the common law rule that delegatus non potest
delegare, i.e. that a person to whom powers are delegated (as
powers are to directors under the articles) cannot further delegate
the exercise of those powers, unless the instrument of delegation
itself authorises further delegation.163 In practice, wide powers of
further delegation are conferred on the directors by the articles,
and it is indeed difficult to see how the board of a large company
could otherwise effectively exercise its powers of management
of the company. However, this rule means that the articles may
effectively prevent further delegation beyond the board by
simply not providing for this.
Exercise of future discretion
16–35
Thirdly, it was debated at common law whether the non-fettering
rule prevented a director from contracting with a third party as to
the future exercise of his or her discretion. The answer
ultimately arrived at was that this was permissible in appropriate
cases. The starting point at common law, despite the paucity of
reported cases on the point,164 seems to be that directors cannot
validly contract (either with one another or with third parties) as
to how they shall vote at future board meetings or otherwise
conduct themselves in the future.165 This is so even though there
is no improper motive or purpose and no personal advantage
reaped by the directors under the agreement. This, however, does
not mean that if, in the bona fide exercise of their discretion, the
directors have entered into a contract on behalf of the company,
they cannot in that contract validly agree to take such further
action at board meetings or otherwise as is necessary to carry out
that contract. As was said in a judgment of the Australian High
Court166:
“There are many kinds of transaction in which the proper time for the exercise of
the directors’ discretion is the time of the negotiation of a contract and not the time
at which the contract is to be performed…If at the former time they are bona fide of
opinion that it is in the best interests of the company that the transaction should be
entered into and carried into effect, I can see no reason in law why they should not
bind themselves to do whatever under the transaction is to be done by the board.”
The principle in Thorby v Goldberg was applied by the English

Court of Appeal in Cabra Estates Plc v Fulham Football
Club,167 so as to uphold an elaborate contract which the directors
had entered into on behalf of the company for the redevelopment
of the football ground and under which, inter alia, the club was
entitled to some £11 million and the directors agreed to support
any planning application the developers might make during the
coming seven years. This is surely correct: if individuals may
contract as to their future behaviour in these matters, it is
desirable that companies should be able to do so too. The
application of the “no fettering” rule would make companies
unreliable contracting parties and perhaps deprive them of the
opportunity to enter into long-term contracts which would be to
their commercial benefit.
Section 173(2)(a) now provides that the duty to exercise
independent judgment is not infringed by a director acting “in
accordance with an agreement duly entered into by the company
that restricts the future exercise of discretion by its directors”. In
the parliamentary debates this provision was described as
enshrining the Cabra Estates decision,168 including presumably
the rider that the agreement must be one entered into by the
directors in the bona fide opinion that it is in the best interests of
the company to do so (i.e. “duly” entered into). Section 173(2)
(b) goes on to state that no breach of the independent judgment
rule arises if the director acts “in a way authorised by the
company’s constitution”. Thus, the articles may authorise
restrictions on the exercise of independent judgment, which
might be a useful facility in private companies.
However, s.173(2)(a) protects the directors only from the
argument that they have failed to exercise independent judgment
by entering into the agreement which restricts their future
freedom of action. Can the subsequent exercise of their powers
as the contract demands be said to be a breach of their core duty
of loyalty, if at that time they no longer believe it to be in
accordance with their core duty to act in accordance with the
contract? There are a number of cases in which, where
shareholder consent has been required for a disposal of assets or
for a takeover, the courts have been reluctant to construe
agreements on the part of the directors not to co-operate with
rival suitors or to recommend a rival offer to the shareholders as
binding the directors, if they come to the view that the later offer
is preferable from the shareholders’ point of view.169 This line of
cases might be justified on the basis that shareholders are
peculiarly dependent upon the advice of their directors and that
they might find themselves in a poor position to take the
decision which had been put in their hands, if they were given
advice by the directors which did not reflect the situation as the
directors saw it at the time it fell to the shareholders to take their
decision. The continuing validity of the no fettering rule in this
context could be reconciled with the provisions of s.173 on the
basis that that section deals only with the fiduciary duties owed
by the director to the company (see s.170(1)), whereas the
situation just mentioned triggers the duty owed by directors to
the shareholders to give them advice in the shareholders’ best
interest, if they choose to give them advice at all.170
Nominee directors
16–36
Finally, the independent judgment principle could cause
difficulties for “nominee” directors, i.e. directors not elected by
the shareholders generally but appointed by a particular class of
security holder or creditor to protect their interests. English law
solves such problems by requiring nominee directors to ignore
the interests of the nominator,171 though it may be doubted how
far this injunction is obeyed in practice. The Ghana Companies
Code 1973 adopted what might be regarded as the more realistic
line by permitting nominee directors to “give special, but not
exclusive, consideration to the interests” of the nominator, but
even this formulation would not permit the “mandating” of
directors and thus the creation of a fettering problem.
DUTY TO PROMOTE THE SUCCESS OF THE COMPANY
Settling the statutory formula
16–37
The duty to promote the success of the company is the modern
version of the most basic of the duties of good faith or fidelity
owed by directors. It is the core duty to which directors are
subject, in the sense that it applies to every exercise of
judgement which the directors undertake, whether they are
testing the margins of their powers under the constitution or not
and whether or not there is an operative conflict of interest.
Together with the non-fiduciary duty to exercise care, skill and
diligence, the duty to promote the success of the company
expresses the law’s view on how directors should discharge their
functions on a day-to-day basis. Thus, it is not surprising that its
proper formulation has always been controversial, and perhaps
never more so than during the deliberations of the CLR and the
passage of the 2006 Act through Parliament, since this was an
area of directors’ duties where it was not proposed that the
statute should simply repeat the common law. The common law
duty was typically formulated as one which required the
directors to act in good faith in what they believed to be “the
best interests of the company”. This, predictably, follows the
equivalent formulation in relation to trustees, who are required to
act bona fide in the best interests of their beneficiaries.
That historical common law formulation differs in significant
ways from what is now found in s.172(1) of the Act. This section
requires the director to act “in the way he considers, in good
faith, would be most likely to promote the success of the
company for the benefit of its members as a whole”; and then
sets out a non-exhaustive list of six matters to which the
directors must “have regard” when deciding on the appropriate
course of action.
The common law formulation made it clear that the duty was
owed to the company, so that only those who could claim to act
as, or on behalf of, the company could enforce the duty. Section
170(1) repeats that. But, that aside, the common law formulation
that directors must act in the interests of “the company” was
seen by many a being close to meaningless in providing
guidance to directors. Because the company is an artificial legal
person, it was seen as impossible to assign interests to it unless
one goes further and identifies the company with the interests of
one or more groups of human persons. As Nourse LJ remarked,
“The interests of a company, as an artificial person, cannot be
distinguished from the interests of the persons who are interested
in it”.172 In practice, the common law normally identified the
interests of the company with those of its shareholders, current
and future if that was appropriate,173 and thus took the further
step envisaged by Nourse LJ. In addition, at common law it was
seemingly permissible for the directors to take into account
stakeholder interests when acting in the interests of the company.
The point was made a long time ago, albeit in the context of ultra
vires, by Bowen LJ, who famously said: “The law does not say
that there are to be no cakes and ale, but there are to be no cakes
and ale except such as are required for the benefit of the
company”.174 It is in this sense that the view of the Law
Society,175 opposing any statutory reformulation as being
unnecessary, can be understood; they urged instead that “the
concept of the company as a legal entity separate from its
members, and in whose interests the directors must act, is well
understood”.
16–38
If the old test of “the interests of the company” was too vague,
what should a clearer statutory version require? Given the
concentration of economic power in large companies, the
question of which interests the directors were required to pursue
when exercising their powers was of considerable interest and
controversy across the political spectrum. Should the directors
be required to act in the interests of the shareholders (the
shareholder primacy model), or should they perhaps give equal
status to all the company’s various stakeholders, including not
simply the shareholders but also employees, customers,
suppliers, and indeed even the local community and the
environment (the pluralist model)? The different interests ranged
on either side added heat to the debate. The final outcome was,
perhaps predictably, something between these two extremes,
although undoubtedly closer to the first and so also to the old
common law test. The statutory formulation clearly rejects the
“pluralist” approach, at least to the extent that it might have
given all stakeholders some sort of equivalent status, allowing all
to have the right to enforce directors’ duties. But, at the other
end of the spectrum, shareholder primacy was refined: the
shareholders or members are certainly to be the primary object
of the directors’ efforts, hence the current formulation that the
director must act “in the way he considers, in good faith, would
be most likely to promote the success of the company for the
benefit of its members as a whole”; but the directors are also
subject to an obligation (not merely a power), although clearly a
subordinate obligation, to “have regard to” the interests of other
stakeholders. The subordinate nature of this second duty is made
clear by the words “in doing so”, i.e. in discharging the central
duty. Put another way, the shareholders’ position as the object of
the directors’ efforts is not shared with other groups of persons
upon whose success the company’s business may be thought to
depend, for example, its employees or other stakeholders. To this
extent, the rule of shareholder primacy is reiterated in the
section.
The strategy of rejecting pluralism but adopting a modernised
version of shareholder primacy emerged from the CLR, and was
described there as a philosophy of “enlightened shareholder
value (ESV)”.176 Thus, in promoting the success of the company
for the benefit of its members as a whole, s.172(1) requires that
the director:
“in doing so [must] have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers,
customers and others,
(d) the impact of the company’s operations on the community and the
environment,
(e) the desirability of the company maintaining a reputation for high standards of
business conduct, and
(f) the need to act fairly as between members of the company (s.172(1))”
The ESV approach can be said to embody the insight that the
success of the company or the interests of the shareholders are
not likely to be advanced if the management of the company
conducts its business so that its employees are unwilling to work
effectively, its suppliers and customers would rather not deal
with it, it is at odds with the community in which it operates and
its ethical and environmental standards are regarded as
lamentable. However, it is crucial to note that the interests of the
non-shareholder groups are to be given consideration by the
directors only to the extent that it is desirable to do so in order to
promote the success of the company for the benefit of its
members as a whole. The non-shareholder interests do not have
an independent value in the directors’ decision-making, as they
would have under a pluralist approach. For this reason, it seems
wrong in principle to regard the section as requiring the directors
to “balance” the interests of the members with those of the
stakeholders. The members’ interests are paramount, but the
interests of stakeholders are to be taken into account when
determining the best way of promoting the members’ interests.
16–39
It may be asked whether the ESV approach amounts to a
development or a repetition of the common law. The answer is
that it represents a development, but a modest one. What the Act
adds to the common law is a duty on the part of the directors to
take account of stakeholder interests when it is in the interests of
the success of the company for the benefit of members to do so
(but not a corresponding right in the stakeholders to enforce that
duty). However, the statutory restatement may nevertheless have
an impact, if only by disabusing those directors and their
advisers who might have been inclined to take an unduly narrow
interpretation of the duty previously held.
If the move from permission to well-described obligation is
what lies at the root of the ESV approach, it becomes of great
importance to know how the duty will be enforced. As argued
immediately below, s.172 imposes a mainly subjective test,177 so,
as with the predecessor common law duty, litigation is likely to
be relatively uncommon and probably even less often successful.
This is because it is very difficult to show that the directors have
breached this duty of good faith, except in egregious cases or
cases where the directors have, obligingly, left a clear record of
their thought processes leading up to the challenged decision.178
Instead, the major role in giving some degree of practical
substance to the ESV duty will lie in the extended reporting
requirements to shareholders by directors, as described in
Ch.21.179 This was as envisaged by the CLR, which saw the ESV
approach to directors’ duties and enhanced reporting
requirements as closely linked.180
Finally, and for the avoidance of doubt, the duty of the
directors to promote the success of the company for the benefit
of its members does not exempt the company from compliance
with its other legal obligations, for example, health and safety or
discrimination legislation, even if it could be shown that non-
compliance would promote the company’s overall success.
Interpreting the statutory formula
Defining the company’s success
16–40
Several important points arise on the interpretation of the
language contained in this section. First, it is to be noted that
corporate success for the benefit of the members is the word
used to identify the touchstone for the exercise of the directors’
discretion. Success is a more general word than, for example,
“value”, which it might have been thought was what the
shareholders are interested in. However, the more general word
is clearly the appropriate one, because not all companies formed
under the Act are aimed at maximising the financial interests of
their members. Companies may be charitable; they may have
non-profit-making objectives without being charities, as in the
case of a company formed by leaseholders to hold the freehold
of a block of flats; they may be companies set up within a
corporate group simply to hold a particular asset rather than to
exploit it, even though the overall purpose of the group is to
make profits; or they may be commercially-oriented but without
aiming to distribute profits, in which case the company may, but
is not obliged to, be incorporated as a CIC. In all these cases,
maximising the value of the company is not the primary
objective of its members and perhaps not even an objective at
all. Section 172(2) makes it clear that:
“where or to the extent that the purposes of the company consist of or include
purposes other than the benefit of its members, subsection (1) has effect as if the
reference to promoting the success of the company for the benefit of its members
were to achieving those purposes.”
The underlying thrust of the section is that it is the members who

are to define the purposes of the company against which the
directors can give meaning to the requirement to promote its
success. The definition of the purpose of the company may be
set out in its constitution. This is less likely to be the case now
that the company is no longer required to have an objects clause,
but certainly in the case of companies with non-commercial or
non-profit objectives this fact is likely to appear clearly enough
from the company’s articles. In other words, the position may
turn out to be that the company is to be regarded as a
commercial company, unless its constitution indicates otherwise,
and so in the typical case the directors will define success in
commercial terms.
A more important underlying question is the extent to which
the section is intended to constrain directors’ decisions about
precisely how to pursue the success of the company. Should the
company aim for expansion through a series of takeovers or by
organic growth? Should the company aim for expansion at all or
for exploitation of a niche position? It seems clear that the
section does not intend to address this sort of issue at all. This is
to be left to the directors, who in turn are accountable to the
shareholders for their decisions through the company’s corporate
governance mechanisms rather than through the courts. To this
end, the section imposes a subjective test for compliance: the
director must act “in the way he considers, in good faith, would
be most likely to promote the success of the company”. This
aspect of the statutory duty is one shared with the previous
common law formulation, and that was interpreted by the courts
in such a way as to leave business decisions to the directors. As
Lord Greene MR put it in Re Smith & Fawcett Ltd, directors
were required to act “bona fide in what they consider—not what
a court may consider—is in the interests of the company”.181 In
most cases, it is true, compliance with the rule that directors
must act in good faith was tested on commonsense principles,
the court asking itself whether it was proved that the directors
had not done what they believed to be right, and normally
accepting that they had unless satisfied that they had not behaved
as honest men of business might be expected to act. However,
even where the director had not acted as an honest business
person might be expected to act, this is not necessarily a
demonstration of breach of the duty of good faith. Thus, in one
case where the directors’ decision had caused substantial harm to
the company it was held that this was merely a piece of
evidence, perhaps a strong piece, against their contention that
they had acted in good faith, rather than proof absolute that they
had not.182 These decisions on the meaning of good faith in the
context of the core duty of fidelity at common law seem equally
applicable to the statutory duty.
Failure to have regard, or due regard, to relevant
matters
16–41
The concept of ESV enshrined in the statutory duty imposes an
obligation on directors to “have regard” to the list of factors set
out in subs.172(1)(a)–(f). Does this give rise to a corresponding
power in the courts to scrutinise the decisions of directors to
establish whether they have indeed taken account of these
factors, or perhaps even whether, on an objective basis, they
have taken appropriate account of these factors? The answers to
these questions seem inextricably linked to the “improper
purposes” issues discussed earlier (s.171(b)); the older common
law rule similarly juxtaposed the two requirements.183
On the first question, a proper reading of the section does
suggest that a failure by directors to have regard to each item on
the list of factors would constitute a breach of duty and render
the directors’ decision challengeable. This principle was already
established at common law, although perhaps in a more limited
form: although much was left to the directors’ discretion (as
described below) in determining what was in the interests of the
company, the directors might breach that duty where they failed
to direct their minds at all to the question of whether a
transaction was in the interests of the company, even though a
board which had considered the question might well have acted
in the same way. A good illustration of the principle is afforded
by Re W&M Roith Ltd.184 There the controlling shareholder and
director wished to make provision for his widow. On advice, he
entered into a service agreement with the company whereby on
his death she was to be entitled to a pension for life. On being
satisfied that no thought had been given to the question whether
the arrangement was for the benefit of the company and that,
indeed, the sole object was to make provision for the widow, the
court held that the transaction was not binding on the
company.185
In this case it might be said that the straightforward financial
success of the company was clearly compromised by the
decision, since the widow was unlikely to provide the company
with any corresponding corporate benefit. In such circumstances,
the directors needed to be able to demonstrate that their decision
was based on due consideration of the corporate benefit, and this
they could not do.186 However, had they been able to do that, the
court would have been unlikely to second-guess their
conclusions even if the court itself might not have reached the
same decision.
16–42
But this strict approach might be thought impractical. By
contrast, in Charterbridge Corp v Lloyds Bank,187 the directors
of a company forming part of a corporate group had considered
the benefit of the group as a whole, but without giving separate
consideration to that of the company alone, when they caused
the subsidiary company of which they were directors to give
security for a debt owed by the parent company to a bank. It was
held, perhaps surprisingly given the accepted common law
formulation of the requirement on directors, that “the proper test
in the absence of actual separate consideration must be whether
an intelligent and honest man in the position of a director of the
company concerned could have reasonably believed that the
transactions were for the benefit of the company”. Here the
collapse of the parent company would have been “a disaster” for
the subsidiary.188 The decision perhaps suggests that although
directors must act in ways they consider would be most likely to
promote the interests (or the success) of the company, it is also
true that where, objectively, on balance, their decision can be
seen to do that, it will not be overturned; the directors will not be
held to be in breach of their duty at common law to act in the
interests of the company (or, under the statute, their duty to
promote the success of the company) merely because they did
not give explicit thought to the question, at least in the absence
of proven detriment.189
On the other hand, and despite the Charterbridge decision, it
must be said that the core duty of good faith does not recognise a
duty “to the group” or to other companies in the group. It insists
that the main focus of directors must be on the interests of their
subsidiary, even if it accepts that the interests of the subsidiary
are in many cases intimately related to the continuing existence
of the group.190 Directors in corporate groups must guard against
their inevitable inclinations to promote the interests of the group
as a whole (or some part of it).
16–43
These cases all concern the common law duty. Their analysis is
in principle equally applicable to breaches of the statutory
provisions, and indeed finding a breach of the core statutory duty
of good faith on the ground that not all the required interests
have been taken into account is perhaps more likely under the
ESV approach because the statute is so much clearer about the
precise range of matters to which directors must have regard in
the discharge of their duty to promote the success of the
company for the benefit of its members. To that extent, the
retreat from the strict approach in Re W & M Roith Ltd191 is
welcome. Moreover, since the statutory list of factors is non-
exhaustive, it would follow that a director would be in breach of
duty in failing to take account of any matter which he or she
considered relevant to the decision in question. However, in
truth the statutory formulation largely makes explicit what was
already implicit in the earlier common law, so it does not require
boards to approach decision-making, or to document their
decisions, in a totally novel fashion. Of course, to the extent that
boards might previously have ignored potential adverse impacts
on shareholders’ interests by failing to analyse the impact of a
proposed decision on non-shareholders, the section should
produce a change of practice.
On the second question, of whether the directors have not
simply taken account of the listed factors but have taken
appropriate account of them, the earlier common law cases
suggest that the courts will generally resist any request to
second-guess the directors’ judgement of how best to act in the
interests of the company.192 The only exception is perhaps when,
in the court’s view, no reasonable director could have considered
the chosen course of action to be in the company’s interests (by
analogy with the public law “Wednesbury unreasonableness”
test). Such facts as raise this concern are often seen to go to the
question of whether the court believes that the director did in
fact consider the relevant matter at all (and so is part of the
analysis of the first question just considered), but to the extent
that the court’s determination is not simply evidential, but
judgemental, the resulting judicial oversight of directors’
management decisions has remained very restrained, and in any
event is limited to overturning the impugned decision, not
substituting the courts’ decision (except to the extent that this is
implicit in the courts’ unravelling of what has been done).
Indeed it is notable that the architect of the public law
Wednesbury principle, Lord Greene MR, was also the judge who
in Re Smith & Fawcett (quoted earlier) was concerned to stress
the freedom of directors from control by the courts in the
exercise of their good faith judgement, while also adding a
“proper purposes” limitation analogous to the public law
principle and to the statutory principle now found in s.171(b).
The most authoritative statement of this approach to judicial
review is that of Lord Woolf in Equitable Life Assurance Society
v Hyman,193 although his approach was not part of the arguments
of the other two judges in that case (or in the House of Lords on
appeal). The complaint in this case was between groups of
corporate creditors each complaining about the effect of the
directors’ decision; in other cases where the Wednesbury
principle has been invoked, the disputes have typically been
among members of the company about their rights and interests
as shareholders rather than disagreements about the setting of the
company’s business strategy.194 It might be thought, therefore,
that the inclusion in subs.(1)(f) of “the need to act fairly as
between the members of the company” as one of the factors of
which the directors need to have regard could turn out to be
significant, although the shareholders typically have more
amenable avenues for complaint than reliance on a duty the
directors owe to the company.
Indeed, it might be better, analytically, to see this type of
objective judicial review, where relevant, as situated under
s.171(b), with s.172 merely providing an explicit list of proper
considerations required to be taken into account in directors’
decision-making. Such an approach would effectively align
s.171(b) “improper purposes” with the mandatory considerations
listed in s.172, but would remind complainants of the inherent
limitations in the claim being advanced. And to the extent that
unfair treatment of minorities by controlling persons is the chief
mischief to be dealt with, a remedy can alternatively often be
provided under the unfair prejudice provisions discussed in
Ch.20.
16–44
Whatever the better classification of these claims, it seems clear
from the course of parliamentary debates on the Bill that the
Government did not intend in its formulation of s.172 to
introduce a wide-ranging judicial review of the decisions of
directors. In an earlier version of what became s.172, the duty to
act in good faith was set out in subs.1 and the list of ESV factors
in subs.3. Later they were brought together in subs.1. As the
Minister for Industry and the Regions explained in the
parliamentary debates:
“In [the House of Lords], the clause was amended to bring together what are now
its subsections and make even clearer—I hope to hon. Members and certainly to
those outside who will have to use the law—our intention that, while a director
must have regard to the various factors stated, that requirement is subordinate to the
overriding duty to promote the success of the company.”
In addition, the Minister continued, the bringing together of the
two previously separate subsections involved the deletion “from
the clause of a second ‘must’, which we considered could be
perceived as creating a separate duty”. Finally, and most
importantly:
“we believe it essential for the weight given to any factor to be a matter for a
director’s good faith judgment. Importantly, the decision is not subject to the
reasonableness test that appears in other legislation ….That is in sharp contrast to,
for example, decisions on public law, to which courts often apply such a test.”195
For all these reasons, it appears that the deferential approach of

the common law to directors’ judgements in relation to the core
duty of good faith and fidelity was intended to be applied also to
its statutory reformulation.
A duty to disclose wrongdoing
16–45
In an interesting decision, in Item Software (UK) Ltd v Fassihi196
the Court of Appeal held that a director was under a duty to
disclose his own breaches of fiduciary duty, an obligation
apparently derived from, i.e. was an aspect of, the core duty of
good faith and loyalty.197 At first sight this is a draconian duty.
However, in many cases it will add little to the director’s
potential liability for breaches of fiduciary duty, though in some
cases, as in this one, it will. The director had committed a breach
of the corporate opportunity rule (discussed below) by
attempting to persuade a client of the company to renew a
contract with him personally rather than with the company. In
the end, the client renewed the contract with neither the director
nor the company. Against orthodoxy, the company sued for
damages (not profits) for breach of the corporate opportunity
doctrine, but failed because the trial judge had held that the
client did not take the director’s offer seriously. However, the
court also found that, had the company known of the director’s
activities, it would have accepted an offer to renew from the
client which it in fact rejected. Thus, the company’s loss was the
profit it would have made on this admittedly not favourable
contract, but that loss could be recovered only if the director
should have told the company of his underhand activities, a duty
which the court found to exist.
The case has been thought in some quarters to create a new
and free-standing “duty of disclosure” on directors, but it is
submitted that this is not the case. In fact, seen as a part of the
core duty of good faith and loyalty, rather than as a free-standing
duty of disclosure, the decision seems unproblematic. The core
duty must require a director to bring to the attention of the board
threats to its business of which the director becomes aware. The
twist in this case was that the duty was imposed even though the
threat arose out of the director’s own wrongdoing, but it would
be odd if the director’s wrongdoing could relieve him or her
from a course of action which would otherwise have to be
taken.198 The main obstacle in reaching this result was the earlier
decision of the House of Lords in Bell v Lever Bros Ltd,199 which
had been interpreted by some as laying down a general principle
that a director’s own wrongdoing never had to be disclosed. The
court was able to accept the result in that case by confining it to
the situation where the director was negotiating compensation
for the termination of his or her services with the company or an
improvement in the terms of his or her employment, on the
grounds that disclosure in such a case would be “contrary to the
expectations of the parties”.200 However, outside the context of
the director negotiating terms of service with the company, a
duty to disclose others’ or one’s own wrongdoing can be
regarded as a normal incident of the core duty of fidelity, where
the director is aware that the facts of which he or she is in
possession should be given to the company if it is to protect and
further its own interests.
The problem of “short-termism”
16–46
The common law focus on shareholders led to a widespread but,
it is submitted, erroneous view that the law required directors
acting in the interests of shareholders to prioritise their short-
term interests. The better view, it is suggested, is that the
directors were not bound to any particular timeframe; on the
contrary, they must take into account both the long- and the
short-term interests of the shareholders and strike a balance
between them.201 The CLR proposed in its draft statement of
directors’ duties to specify an obligation on the directors to take
into account “the likely consequences (short and long term) of
the actions open to the director”.202 As we have seen, s.172 refers
merely to “the likely consequences of any decision in the long
term”. If anything, the omission of the reference to short-term
interests in the non-exhaustive list emphasises the importance of
long-term consequences. That bias is repeated in the UK
Corporate Governance Code.203
Corporate groups
16–47
We have already considered the potential problem faced by
directors within corporate groups, where their instinct may be to
look to the overall success of the group, whereas their duty of
good faith and loyalty is owed only to their appointing
company.204
Employees
16–48
Among the factors to which a director of a company must have
regard under s.172(1) are “the interests of the company’s
employees”. This is as one would expect: any comprehensive list
of stakeholder interests will necessarily include the employees.
But the practical impact of this on employees is limited. Indeed,
it was said of the predecessor provision205 that its real impact
was to dilute directors’ accountability to shareholders rather than
strengthen accountability to employees. This is because
employees cannot use the section offensively, whilst directors
can use it defensively when sued by shareholders, by arguing
that a decision apparently unfavourable to the shareholders is
unchallengeable because it was taken in the interests of the
employees.206 Writ large, this illustrates the argument against the
pluralist approach to this core duty of good faith. So long as the
duty is perceived subjectively, increasing the number of equal-
status groups whose interests the directors must promote makes
proof of breach difficult, almost to the point of impossibility.
Correcting that defect by making the duty objective, however,
paves the way for excessive judicial intervention in the taking of
board-level decisions, thus inducing caution on the part of those
who ought to be risk-takers. The best view is probably that any
broadly-formulated pluralist provision could not by itself operate
so as to alter the decision-making processes of a board unless
coupled with further changes in company law, such as board-
level representation for the relevant stakeholder groups.
There is, however, one particular derogation from the core
duty which is made in favour of employees. This is to be found
in s.247, involving the power to make gratuitous payments to
employees on the cessation of the company’s business, as
discussed at para.7–29.
Creditors
16–49
There is one surprising omission from the statutory list of
matters to which the directors must have regard, namely, the
interests of the creditors, except to the extent it is embraced by
subs.172(1)(c). Of course, so long as the company’s business is
flourishing, the creditors’ position is not prejudiced by such an
omission. Their contractual rights against the company plus the
company’s desire to preserve its reputation and thus access to
future credit will act so as to protect the creditors. However,
once the company’s fortunes begin to decline, conflict between
the interests of the shareholders and the creditors may emerge in
a strong form; the directors have an incentive to take excessive
risks to protect their own and the shareholders’ position,
knowing that, if the company is in the vicinity of insolvency, the
downside risk will fall wholly on the creditors, whilst the upside
benefit will get the company out of trouble. We have already
seen in Ch.9 how this problem is dealt with, both by statutory
insolvency laws operating in the lead up to insolvency, and by
common law rules operating still earlier. The CLR considered
whether these statutory and common law rules should be
reiterated, or even expanded, in s.172,207 but in the end the many
perceived difficulties were all avoided by the simple strategy of
providing, expressly, in s.172(3), that the duty imposed under
that section “has effect subject to any enactment or rule of law
requiring directors, in certain circumstances, to consider or act in
the interests of creditors of the company”. The detail thereby
comprehended is covered in Ch.9.208
Donations
16–50
In the abstract, a decision on the part of the directors to give the
company’s assets away would appear to be a clear example of a
decision not taken in good faith to promote the success of the
company for the benefit of its members. On the other hand,
companies are always being approached to support various
causes, worthy or less worthy, and do in fact make donations of
various sorts. Company law has sought to distinguish between
donations which promote the company’s business (legitimate)
and those which do not (illegitimate). Traditionally, that
distinction was drawn by the law relating to ultra vires, but now
the focus is on directors’ powers: in the absence of an express
provision in the articles or elsewhere conferring upon directors
the authority to make donations, is there an implied power to do
so in order to further the company’s business?209 And if there is
such a power, has it been exercised appropriately?210 This second
question has various strands. Thus, in Re Lee, Behrens and Co
Ltd,211 where the company’s constitution conferred an express
power on the directors to make the gift in question, Eve J
identified the relevant tests as follows: “(i.) Is the transaction
reasonably incidental to the carrying on of the company’s
business? (ii.) Is it a bona fide transaction? and (iii.) Is it done
for the benefit and to promote the prosperity of the company?”
In practice, the courts have tended not to examine very closely
the link between the donation and the company’s business when
it seemed to them that the donation was in the public interest, so
that a substantial donation by a large chemical company to
promote scientific tertiary education was upheld even though the
gift might not be used to promote the study of chemistry in
particular and the company had no greater claim on the
graduating students than any of its rivals.212 It seems unlikely
that this approach will change in the future, in the light of
pressures on companies to be “good citizens” in their
communities and of the recognition that companies may secure
“reputational” advantages from supporting activities which seem
remote from their businesses, for example, a bank sponsoring an
opera production (presumably thus enhancing its reputation
among wealthy potential customers).213 By contrast, donations
which shift assets away from shareholders in the direction of
other stakeholders in the company have traditionally been treated
with suspicion, but that attitude may also be undergoing a
change and, in any event, it is normally possible to present such
apparent gifts as part of an exchange where the company is a
going concern.214
The upshot of the law in this area is that directors probably
have some leeway to steer donations or other similar
arrangements (such as sponsorship) in the direction of their
favourite charities or pastimes, without serious threat of legal
challenge, provided such donations are not of excessive size and
provided there is some link with the company’s business.
16–51
However, in one area, that of corporate political donations, such
leeway is arguably constitutionally objectionable. Consequently,
in that area, as we shall see, the law has required shareholder
approval of donations since reforms made in 2000.215
OVERVIEW OF THE NO-CONFLICT RULES
16–52
As fiduciaries, directors must not place themselves in a position
in which there is a conflict between their duties to the company
and their personal interests or duties to others.216 This
fundamental common law principle was perhaps most famously
stated by Lord Herschell in Bray v Ford217:
“It is an inflexible rule of a court of equity that a person in a fiduciary position is
not, unless otherwise expressly provided,[218] entitled to make a profit; he is not
allowed to put himself in a position where his interest and duty conflict. It does not
appear to me that this rule is founded upon principles of morality. I regard it rather
as based on the consideration that, human nature being what it is, there is a danger,
in such circumstances, of the person holding a fiduciary position being swayed by
interest rather than by duty, and thus prejudicing those he was bound to protect. It
has, therefore, been deemed expedient to law down this positive rule.”
It can be argued that this common law “no conflict” principle

(often separated, as here, into no-conflict and no-profit rules)
underlies all three of the remaining general duties of directors set
out in the Act: the self-dealing transaction rules discussed
immediately below (ss.175(3) and 177, and Pt 10, Chs 3 and 4,
the latter provisions all dealing with specific and invariably
substantial types of property transactions with directors); the
principle that a director must not make personal use of the
company’s property, information or opportunities (s.175(1) and
(2)); and, finally, the requirement that directors must not receive
benefits from third parties in exchange for the exercise of
directorial powers (s.176). In the first case (self-dealing), the
conflict arises because the director is, in a very practical sense,
on both sides of a transaction with the company, and so
motivated perhaps by self-interest rather than by duty.219 In the
case of directorial exploitation of corporate property or
opportunity, by contrast, the director uses, for his or her own
ends, the company’s property or opportunities, to the exclusion
of the company. Finally, in the case of what the common law
calls, generically, “bribes”, the risk is that the director exercises
his or her powers in the interests of the third party rather than the
company because of the personal benefit conferred on the
director by that third party.
16–53
Although, at a broad level, it is undoubtedly true that the purpose
of all three duties is to discourage directors from putting their
personal interests ahead of their duties to the company, it is also
true that the more specific rules under each duty have now
developed sufficiently separately, especially, as we shall see, in
terms of the action required of the director to comply with the
duty, that it is sensible to consider them separately, as the Act
does.220
These various “no conflict” rules are probably the most
important of the directors’ various duties of good faith and
loyalty. As we have seen, the core good faith rule is
overwhelmingly subjective and so difficult to enforce, whilst,
given the width of the powers conferred upon directors by the
articles, the requirement that they stay within their powers under
the constitution, and use those powers for proper purposes, tends
to have only a marginally constraining impact upon directors’
activities.
TRANSACTIONS WITH THE COMPANY (SELF-DEALING)
The scope of the relevant provisions
16–54
The structure of the Act is a little more complex than the above
might suggest. Section 175 is the apparently general section
dealing with, as the side-note says, “the duty to avoid conflicts
of interest”. However, self-dealing transactions are excluded
from s.175 by s.175(3): “this duty does not apply to a conflict of
interest arising in relation to a transaction or arrangement with
the company”. A number of other provisions are instead brought
into play.
If we were to summarise their general effect, the general
strategy adopted by the Act in managing these problematic self-
dealing transactions is to put in place a fairly lenient default rule,
requiring only that the self-interest of the self-dealing director be
disclosed to the board in advance of the transaction being agreed
to by the company (regardless of whether that agreement is then
by the board or by some delegated manager). But then the Act
goes on to identify particular specific categories of self-dealing
transactions as being especially vulnerable to inadequate
oversight by the board (either simply because of their size, or
because of their commonality amongst the directors which might
then risk mutual back-scratching221), and with these the Act
requires not only disclosure to the board but also approval by the
general meeting. Perhaps predictably, the protective regime is
even stricter with listed companies, with particular ex ante
approval rules for related party transactions, and strict ex post
disclosure rules demanded by modern accounting standards. All
of these various rules are examined in this section, but their
significance is far more easily understood if we start with the
common law rules from which these variations are derived.
As far as self-dealing transactions are concerned, by the
middle of the nineteenth century it had been clearly established
that the trustee-like position of directors was liable to vitiate any
contract which the board entered into on behalf of the company
with one of their number. This principle received its clearest
expression in Aberdeen Railway Co v Blaikie Bros,222 in which a
contract between the company and a partnership of which one of
the directors was a partner was avoided at the instance of the
company, notwithstanding that its terms were perfectly fair. Lord
Cranworth LC said on that occasion223:
“A corporate body can only act by agents, and it is, of course, the duty of those
agents so to act as best to promote the interests of the corporation whose affairs
they are conducting. Such agents have duties to discharge of a fiduciary nature
towards their principal. And it is a rule of universal application that no one, having
such duties to discharge, shall be allowed to enter into engagements in which he
has, or can have, a personal interest conflicting, or which possibly may conflict,
with the interests of those whom he is bound to protect ….So strictly is this
principle adhered to that no question is allowed to be raised as to the fairness or
unfairness of a contract so entered into.”
It is important to note that, provided there is a conflict of

interest which is not just fanciful, a director is in breach of this
duty whether or not the conflict had an effect upon the terms
negotiated between the parties to the transaction and whether or
not the terms of the transaction could be regarded as fair in any
event. It is therefore a strict liability rule. Strict though this rule
is from the director’s point of view, it makes the task of the
courts somewhat easier. In the British jurisdiction, the courts do
not scrutinise self-dealing transactions, as they do in some
jurisdictions, to see if they are fair. If there is a conflict of the
type covered by the self-dealing rules, there is a breach of duty
on the part of the director.
Approval mechanisms
16–55
However, the lesson likely to be drawn from Lord Cranworth’s
statement that directors should not contract with their company
was not necessarily correct or wise, even from the company’s
point of view. The director may in fact be the best source of a
particular asset which the company wishes to acquire, and so an
outright ban on self-dealing would cut against the company’s
interests. An obvious example is a contract between a director
and the company for the provision of the full-time services of the
director to the company.224 The crucial issue underlying the rule
thus became, even at common law, the identification of the
procedure which the director needed to observe in order to rid
him- or herself of the taint of conflicted contracting. At common
law the rule was that disclosure of the conflict in advance to, and
approval of the contract by, the shareholders was the appropriate
procedure whereby an interested director could enter into a
contract with the company. This was because the shareholders,
acting as the company and thus as the beneficiaries of the
directors’ duty, could waive compliance with it, if they wished.
This search for the appropriate internal decision-maker to
approve the self-dealing transaction is shared with the other no-
conflict rules, as we shall see. Moreover, this approach had a
further consequence. If the shareholders did approve the
transaction, it would then be virtually impossible for the
company later (via a new board, or a liquidator) to challenge it in
court. In other words, shareholder approval (or “whitewash” as it
is sometimes called) was a robust technique for protecting the
director. Shareholder approval did not, for example, simply
create a presumption of fairness which a court might overturn, as
it does in some other systems. The robustness of the
“whitewash” provisions is again a feature of the other no-
conflict rules, as we shall see, although it is not without some
limits.
Nevertheless, directors found shareholder approval an
inconvenient rule and one which they regarded as in many cases
tantamount to a prohibition on contracting with the company.
Just as the normal restraints on trustees can be modified by
express provisions in the will or deed under which they were
appointed,225 so (at common law) can the normal fiduciary duties
of directors be modified by express provision in the company’s
articles, which of course bind all the members of the company.
Directors therefore sought through provisions in the articles to
substitute the more congenial requirement of mere disclosure,
rather than disclosure and approval; and disclosure to the board
rather than to the shareholders in general meeting. Such
provisions became common-form in the articles of registered
companies. Indeed, in some cases the articles gave directors
permission to engage in self-dealing transactions without any
form of disclosure. This practice caused the legislature to step in
and require (in a provision which was introduced in 1929 and
became s.317 of the 1985 Act) that directors disclose conflicts to
the board, irrespective of any provisions in the articles. Thus, the
board would be aware of the conflict and could decide what to
do about it.
16–56
Section 177 of the 2006 Act adopts this approach and imposes a
rule of disclosure to the board. Thus, the modern rule on self-
dealing has become, in principle, and subject to some crucial
exceptions,226 simply a requirement of disclosure to the board.
There is no duty to avoid such dealings (hence s.175(3)). And
approval by others, whether shareholders or fellow directors, is
not formally required, although presumably it could be imposed
by the articles.227
Notice, further, that the 2006 Act deals in separate places with
disclosure of interests in proposed transactions (s.177, Ch.2 of Pt
10) and disclosure in relation to existing transactions (s.182,
Ch.3 of Pt 10). The former is one of the general duties imposed
on directors; the latter is not. Beyond doctrinal elegance,
however, the division is important in relation to the sanctions for
breach of the two disclosure duties, for the categories of
directors who are bound by the two duties, and to some extent
for the methods of disclosure. Whether there is any merit, in
remedies, in this split is questionable.
In what follows, we shall look at each of these two rules in
turn, and then at the crucial exceptions noted earlier where the
tougher requirement of shareholder approval is made
compulsory.
Duty to declare interests in relation to proposed
transactions or arrangements
16–57
A director who is “in any way, directly or indirectly” interested
in a proposed transaction or arrangement with the company must
declare to the other directors the “nature and extent” of that
interest and do so before the company enters into the transaction
or arrangement (s.177(1)). If the declaration, once made,
becomes or proves to be inaccurate or incomplete, a further
declaration must be made (s.177(3)).
Purpose of the disclosure requirement
16–58
The aim of s.177 is to put the other directors on notice of the
conflict of interest, so that they may take the necessary steps to
safeguard the company’s position. What steps the other directors
should take, once put on notice, is not dealt with in the section
nor, indeed, in precise terms elsewhere in the Act. No doubt,
they will be in breach of their duties of care and, perhaps, good
faith if they take no or inadequate steps, but such a conclusion
would require analysis of the other directors’ actions (or
inaction) under the principles discussed above. It is not difficult
to envisage a board culture in which the steps taken on the basis
of the declaration are minimal, especially if all the directors from
time to time make such disclosures and trust that their disclosure
will be readily accepted if they readily accept disclosures by
others.
It is also to be noted that the Act leaves to the company’s
articles the task of deciding whether, if the proposed transaction
is to be entered into by the board, the interested director is
entitled to vote or count towards the quorum at the meeting at
which the decision is taken.228
Who is subject to this duty?
16–59
Since s.177, dealing with proposed transactions, is one of the
general duties of directors, it applies also to shadow directors,
although only “where and to the extent that [it is] capable of so
applying”: s.170(5).229 By contrast, s.182, in relation to
disclosure of interests in existing transactions, applies explicitly
to shadow directors: s.187(1). There would seem to be no
argument that s.177 is “incapable” of applying to shadow
directors, all the more so in the light of the absolute rule in s.187.
And the practical arguments for requiring disclosure of interests
in relation to proposed transactions are even stronger than those
relating to existing transactions, since in relation to the former
the company has the luxury of being legally free to withdraw
from negotiations if the terms seem unfavourable.230
The interests to be disclosed
16–60
The director must disclose interests in a “transaction or
arrangement”. This clearly includes contracts, which will be the
paradigm example of a transaction or arrangement, but it also
embraces non-contractual arrangements,231 and it matters not
whether the transaction or arrangement is entered into by the
company through its board or through a subordinate manager.232
Both direct and indirect interests must be disclosed. The
extension of the section to “indirect” interests means that the
director need not himself be the other party to the transaction. It
is enough, for example, that he is a shareholder in the company
which is the other party, or is a member of a contracting
partnership. This is not a novel development: the common law
had recognised indirect conflicts of interest during the nineteenth
century.233
The director must disclose not only the nature but also the
extent of the relevant interest.234 It is obviously more informative
to be told, not simply that X is a shareholder in the contracting
party, but also whether X is a 1 per cent shareholder or holds a
controlling interest.
The section includes a number of restrictive clarifications of
the scope of the disclosure principle. The words of Lord
Cranworth, quoted above, that the common law embraced
personal interests “which possibly may conflict” with the
director’s duty were thought to be too broad, and in consequence
s.177(6)(a) provides that a director does not have to declare an
interest “if it cannot reasonably be regarded as likely to give rise
to a conflict of interest”.235 This probably does no more than re-
state the common law.236
Section 177(5) does not require the director to disclose an
interest in relation to a transaction unless he or she is aware or
ought reasonably to be aware of both the interest and the
transaction. A director might be excusably unaware of an interest
he or she has in a third party who is contracting with the
company (for example, where the managers of a unit trust in
which the director holds units have recently bought a large stake
in the third party) or in the transaction (for example, where it is
to be entered into at sub-board level).
Nor need the director disclose interests of which the other
directors are or ought reasonably to be aware, on the grounds
that such disclosure is or ought to be unnecessary (s.177(6)(b)).
In particular, s.177 does not require disclosure in the case of
single-member boards.237
Also excluded is the need for a director to disclose an interest
in the terms of his service contract that is being or has been
considered by a meeting of the directors or the appropriate
committee of the board (s.177(6)(c)). It might be thought that
this last exception is covered by the previous one, and in most
cases this will be so. However, where the service contract is to
be decided on by a committee of the board, for example, its
remuneration committee, it is conceivable that not all the other
directors would be aware of the director’s interest.
Methods of disclosure
16–61
Assuming the duty to disclose does bite, s.177(2) lays down
three non-exhaustive methods of making the disclosure.238 These
are (i) at a meeting of the directors; (ii) by written notice to the
directors (as per s.184); or (iii) by a general notice (as per s.185).
The first two options provide methods of giving notice in
relation to an identified transaction. Notice given outside a
meeting must be sent to each director and the notice is deemed to
be part of the proceedings of the next directors’ meeting and so
must be included in the minutes of that meeting.239 A general
notice, by contrast, is given in the absence of any specific
identified transaction, and is notice by which the director
declares that he is to be regarded as interested in any transaction
or arrangement which is subsequently entered into by the
company with a specified company, firm or individual because
of the director’s interest in or connection with that other
person.240 As usual, the nature and extent of the interest has to be
declared. Unlike a specific notice, however, a general notice
must either be given at a meeting of the directors or, if given
outside a meeting, the director must take reasonable steps to
ensure that it is brought up and read out at the next meeting after
it is given.241 Thus, in relation to a general notice, the board must
positively be given the opportunity to discuss the notice, though
there is no obligation on the board actually to do so. The giver of
a general notice is not exempted from the requirement to provide
a further declaration if the first notice becomes inaccurate, as it
might if the nature or extent of the director’s interest in the third
party altered, for example, if the director’s shareholding in the
third party increased significantly. Thus, even a general notice
cannot simply be given once and forgotten.
Remedies
16–62
Breach of s.177 (failure to declare interest in proposed
transactions) is subject to civil sanctions, not criminal ones, but
those sanctions are defined only generally. They are “the same
as would apply if the corresponding common law rule or
equitable principle applied”.242
Those civil sanctions seem to be as follows. Where the self-
dealing director acts in breach of the statutory disclosure rule,
but subject to what is said next on special provisions in the
company’s articles, the transaction is voidable at the option of
(i.e. not binding on, at the election of) the company, unless third
party rights have intervened. On orthodox principles, avoidance
(i.e. rescission) is the only remedy,243 unless the director has also
infringed some other rule that will deliver an alternative
remedy.244 And if rescission is no longer possible for any reason,
then the court will decline to intervene. This may seem odd,
especially since self-dealing transactions are illustrations of the
“no conflicts” duty, for which directors are typically required to
disgorge the profits they have made. But the courts in these self-
dealing cases say that the director’s profit is “unquantifiable”,
since that would involve the courts fixing a new contract price
for the parties. Given all the other situations in which courts are
content to make commercial assessments of value, this seems
unduly reticent.
A continuing role for the articles in setting tighter
constraints
16–63
We know from s.170(3) that the duties laid out in Ch.2 of Pt 10
“have effect in place” of the common law rules and equitable
principles on which they are based. Consequently, in a self-
dealing transaction, a director must comply with the provisions
of s.177 and disclose his or her interests to the board. If the
director does this, then s.180(1) provides that “the transaction or
arrangement is not liable to be set aside by virtue of any
common law rule or equitable principle requiring the consent or
approval of the members of the company”. Thus, in the standard
case, compliance with s.177 disclosure rules will mean that the
director is not in breach of the relevant duty of loyalty, and that
the transaction is therefore binding on the company.
However, s.180(1) specifically operates without prejudice to
any “provision of the company’s constitution requiring such
consent or approval”. Thus, the company’s articles may reinstate
the common law principle of shareholder approval and, where
this is done, a transaction entered into without such approval will
not be binding on the company, subject to the protections for
third parties contained in s.40 (to the limited extent that these
rules may be relevant in a self-dealing transaction).245 As we
have seen already, the impact of restrictions in the articles upon
the validity of the transaction will vary according to whether the
restriction requires a particular organ or group within the
company to take the decision on the self-dealing transaction with
the director, or merely to approve it. Breach in the first case
renders the transaction void; in the second, voidable only.246
These provisions cannot, however, oust the disclosure
requirements in s.177.
In short, the shareholders remain masters of the rules on self-
dealing transactions but now the onus is on those who want to
move away from board disclosure and require shareholder
approval or some other additional control, whereas under the
prior law the burden of action lay on those who wished to
introduce into the articles provisions modifying the common law
requirement of shareholder approval.
Duty to declare interests in relation to existing
transactions or arrangements
16–64
Section 182 requires the compulsory disclosure to the board of
existing self-dealing transactions, unless the interest has already
been declared in relation to a proposed transaction.247 This
section catches situations such as the interests of a newly
appointed director in the company’s existing transactions or
interests in existing contracts which an established director has
just acquired, for example, because he or she has become a
shareholder in one of the company’s suppliers.
But why should a board wish to know about the interests of its
directors in concluded transactions? What practical use can it
make of the information? An example might be where the
company has a power under an existing contract (for example, to
terminate it unilaterally) to which knowledge of the director’s
interest is relevant.
Methods of disclosure
16–65
The details on what must be disclosed, and how, are broadly
those applicable to proposed transactions (discussed immediately
above), with the following amendments and exceptions. First,
the disclosure must be made “as soon as is reasonably
practicable”.248 Secondly, the statutory methods of giving notice
discussed earlier in the non-mandatory context of s.177 are the
only ones permitted in relation to existing transactions.249 It
presumably follows that a failure to make a declaration in the
prescribed manner will render the declaration either a nullity or
incomplete, and a further declaration will be required
(s.182(3)).250 Thirdly, a sole director is required to make a
declaration only where the company is required to have more
than one director but that is not the case at the time of the
disclosure. That declaration must be recorded in writing and is
deemed to be part of the proceedings at the next meeting of the
directors after it is given.251 Fourthly, the obligation applies
explicitly to shadow directors.252 However, not surprisingly, the
method of giving notice at a meeting of the directors is not
available to a shadow director nor is a general notice required to
be given or brought up at a meeting of directors. Instead a
general or specific notice is to be given in the case of a shadow
director by notice in writing to the directors, though that will
then cause the notice to be treated as part of the proceedings of
the next directors’ meeting and minuted accordingly.253
Remedies
16–66
Finally, only a criminal sanction (a fine) is provided in respect of
breaches of this statutory duty to disclose.254 This duty, being
found in Ch.3, is not one of the general duties in Ch.2, and so the
various common law remedies imported by virtue of s.178 do
not also apply here to breaches of s.182. Nevertheless, these
demands of compulsory disclosure certainly contribute, like the
general duties, to aiding better corporate governance.
TRANSACTIONS BETWEEN THE COMPANY AND DIRECTORS
REQUIRING SPECIAL APPROVAL OF MEMBERS
16–67
The move over the years from shareholder approval of self-
dealing transactions (as required by the common law) to mere
board disclosure amounted to a significant dilution of the legal
controls over this class of no-conflict cases. The move, which
had been substantially achieved by the first quarter of the last
century, was later shown to have weaknesses in those areas
where the temptation to give way to conflicts of interest was
high and scrutiny of the terms of the self-dealing transaction by
the other members of board could not be relied upon to be
effective. Consequently, not only did the legislature introduce
what is now s.177 of the 2006 Act, but it also went further and,
at various times, introduced statutory provisions which restored
the common law principle of shareholder approval in certain
specific classes of case. These provisions are now gathered
together in Chs 4 and 4A of Pt 10 of the 2006 Act.
Consequently, a complete understanding of the law relating to
self-dealing transactions requires knowledge not only of s.177
and Ch.3 of Pt 10 of the 2006 Act but also of Chs 4 and 4A.
Relationship with the general duties
16–68
Where either Ch.4 or Ch.4A applies, then compliance with the
general duties is not enough to put the director in compliance
with the requirements of the Act (s.180(3)). Indeed, without this
rule, Chs 4 and 4A would have little point. In the interests of
avoiding having to obtain multiple approvals, however, s.180(2)
provides that securing shareholder approval under those
Chapters will relieve the director from having to comply with
ss.175 (the duty to avoid conflicts of duty and interest) and 176
(duty not to accept benefits from a third party).255 The subsection
also applies even if the situation is one which in principle falls
within Chs 4 or 4A but no shareholder approval is in fact
required under that Chapter, for example, because the transaction
is one of small value. In such a case neither Chs 4 or 4A, nor
ss.175 and 176 apply. However, since the paradigm transaction
falling under Chs 4 and 4A is a transaction with the company, in
the usual case ss.175 and 176 would not bite, even if applicable.
Shareholder approval is to be given by ordinary resolution of the
shareholders unless the articles of association require a higher
level of approval, which might extend to unanimity (s.281(3)).256
However, the other general duties will apply to transactions
falling within Chs 4 and 4A (s.180(2)). Thus, the duty of the
directors to promote the success of the company and to act
within their powers will still apply, and crucially will apply to all
the directors, not just the self-dealing one. This is important
because transactions within Chs 4 and 4A will typically require
both board and shareholder decisions. The board in the exercise
of its powers under the articles takes the decision whether to
enter into the proposed transaction and the shareholders then
decide whether to approve the proposal as required by statute.257
Thus, it is important that directors taking the decision whether to
enter into the proposed transaction should be under the core duty
of loyalty and be required to act within their powers. Further, the
self-dealing director will remain under the duty to disclose the
nature and extent of his or her interest to the board under s.177.
This may seem unnecessary because such disclosure will be part
of the process of seeking shareholder approval. However, the
board decision may well precede the shareholder decision by
some time. In any event, the board decision will be the only one
in the case of a transaction falling within Chs 4 or 4A but not
requiring shareholder approval under its provisions. In either
case, disclosure of the conflict to the board in advance of the
board decision, as s.177 requires, is obviously desirable.
Chapter 4 of Pt 10 brings within its scope three types of
transaction: (a) substantial property transactions; (b) loans and
analogous transactions; and (c) two sets of decisions affecting
the remuneration of directors, namely, decisions about the length
of directors’ service contracts and decisions about gratuitous
payments to directors upon loss of office. These situations were
reviewed by the Law Commission which made various proposals
for reform, mainly in matters of detail.258 A number of these
provisions contain financial limits. These are capable of being
altered by statutory instrument as the Secretary of State sees fit,
subject to negative resolution in Parliament (s.258). Chapter 4A
of Pt 10 contains special provisions dealing with the
remuneration of directors of quoted companies. Its requirements
were considered in Ch.14.259 In outline, remuneration and loss of
office payments are not to be made to directors of such
companies unless they are consistent with an approved directors’
remuneration policy, or alternatively have been specifically
approved by the members (ss.226B and 226C). These additional
requirements do not negate any necessary Ch.4 requirements,
although approval by the members under Ch.4 will satisfy the
equivalent need for Ch.4A approval (s.226F).
16–69
Unlike the position with the general duties, the statute expressly
applies all the provisions of Ch.4 to shadow directors (s.223),
though with the qualification that a company is not to be
regarded as the shadow director of its subsidiary simply because
the directors of the subsidiary are accustomed to act in
accordance with its instructions or directions (s.251(3)).260
A further and helpful characteristic of Chs 4 and 4A, in
comparison with the general duties of Ch.2, is that they stipulate
not only the duties to obtain shareholder approval, but also the
consequences of failure to obtain it, in terms of both the directors
(and others) being in breach of duty and of the validity of the
transaction in question.
The provisions of Ch.4 apply only to “UK registered
companies”.261 These are defined as companies registered under
the 2006 Act or its predecessors, but excluding overseas
companies.262 The exclusion of companies registered in other
jurisdictions is not surprising. However, confining the statutory
provisions to companies registered under the Companies Acts
excludes also companies incorporated in the UK but in some
other way than under the Companies Acts, for example,
companies formed by royal charter or Act of Parliament.263 The
provisions of Ch.4A extend more broadly, to companies quoted
domestically, or officially listed in an EEA State, or on the New
York or Nasdaq stock exchange (s.385).
The scope of the requirement for shareholder approval
16–70
Section 190 requires prior shareholder approval of a substantial
property transaction between the company and its director. It
was said of the predecessor of s.190:
“The thinking behind that section is that if directors enter into a substantial
commercial transaction with one of their number, there is a danger that their
judgment may be distorted by conflicts of interest and loyalties, even in cases of no
actual dishonesty … It enables members to provide a check … It does make it
likely the matter will be more widely ventilated, and a more objective decision
reached.”264
Given the motivations for oversight with this type of self-

dealing, it is perhaps not surprising that the definition of the
transactions caught is very wide, so wide indeed that the section
imposes substantial inroads on the default rule in s.177, where
disclosure to the board is all that is required.
16–71
A substantial property transaction is an arrangement (note the
vagueness of this term) in which the director acquires265 from, or
has acquired from him or her by, the company a substantial non-
cash asset266 of a value which exceeds either £100,000 or 10 per
cent of the company’s net assets (provided the latter figure
exceeds £5,000) (s.191).267 The approval must be given either
before the director enters into the transaction or the transaction
must be conditional upon the approval being given, i.e.
everything can be agreed between the parties but the transaction
must not become binding on the company until the shareholders
give their consent.268 If this principle is not followed, then the
director in question, the contracting party (if different) and the
directors who authorised the transaction are all potentially liable
to civil sanctions (as set out in s.195). However, the company
itself is not subject to any liability by reason of the failure to
obtain the necessary approval (s.190(3)), a necessary provision
since the purpose of the rules is to protect the company’s assets.
Although s.190 requires prior approval of the transaction,
nevertheless approval by the members of the company within a
reasonable period after the transaction has been entered into will
mean that the transaction can no longer be avoided by the
company, but the other civil consequences of breach of s.190
will follow (s.196). Those civil consequences are dealt with
below.
It will be noted that the section does not in its terms preclude
the self-dealing director from voting as a member at a general
meeting to approve or affirm the transaction, although the
common law rules relating to the propriety of this will still
apply.269
Approval is also required if the contracting party is a director
of the company’s holding company or a person connected with
the director (of the company or the holding company). The
extension of the section in this way is in order to pre-empt rather
obvious avoidance devices. In the case of the director of a
holding company (and a person connected with that director), the
section requires the approval of the members of the holding
company as well as of the members of the company, unless the
company is a wholly-owned subsidiary of the holding company,
in which case, for obvious reasons, the authorisation of the
subsidiary’s members is dispensed with (s.190(2) and (4)(b)).270
The policy here appears to be that the director of the holding
company may be in an institutional position to influence the
actions of the subsidiary, so that the risk of unfair dealing with
the subsidiary’s property arises here as well. On the other hand,
such a policy explains why the section is not extended to
transactions between the company and a director of its
subsidiary or of a sister company in the group, because those
directors have no institutional position of influence over the
company. If, in the particular case, such a situation of influence
does exist, then it may be that the director of the subsidiary will
fall within the definition of a shadow director in relation to the
parent or will be regarded as a connected person in relation to a
director of the parent.
The provisions on connected persons deal with a different set
of avoidance devices, applicable to free-standing companies as
well as companies which are members of groups, whereby the
contract is diverted to a person with whom the director is
connected, such as the director’s spouse. However, to cover all
possibilities, the resulting definition of a “connected person” is
highly complex. Section 252 puts into that category members of
the director’s family, as widely defined in s.253. It adds
companies (in fact, “bodies corporate”)271 with which the
director is “connected”, and s.254 defines the necessary
connection as being where the director and persons connected
with him or her are interested in at least 20 per cent of the equity
shares of the company or control at least 20 per cent of the
voting power at a general meeting. Section 252 then adds a
person who is a trustee of a trust the beneficiaries (including
discretionary beneficiaries) of which include the director or a
person who is connected with the director under the above
provisions and, finally a (business) partner of the director or of a
person connected with the director. The detail need not be
further examined here, but it will provide many hours of delight
for those trying to avoid the provisions of Ch.4 of Pt 10 of the
Act.
Exceptions
16–72
Because of the width of the connected person definition, certain
transactions have to be taken out of the requirement for
shareholder approval, notably certain transfers of property
between group companies. Here, no director or indeed any other
individual is a party to the transaction, but one of the companies
might be a person connected with the director, for example,
where a holding company, in which a person has a 20 per cent
shareholding, enters into a substantial transaction with a
subsidiary company of which that person is a director (s.192(b)).
To provide a safe harbour, also excluded from s.190 are
transactions between a company and a person in his character as
a member of the company (even if that person is also a director
of the company), thus protecting substantial distributions in
specie to its members by the company (s.192(a)). Also excluded
are transactions by a company in insolvent winding up or
administration (s.193—though not transactions by a company in
administrative receivership), presumably because the directors
are no longer in control of the company; and certain transactions
on a recognised stock exchange effected through an independent
broker (s.194), presumably because the broker and the market
provide the assurance that the terms of the trade are fair. Finally,
s.190 does not apply to anything the director is entitled to under
his or her service contract or any payment for loss of office
falling under the provisions discussed below (s.190(6)).
Remedies
16–73
Section 195 provides an extensive suite of civil remedies for
breach of s.190, which operate in addition to any common law
remedies,272 and which at one stage looked likely to provide a
template for the remedies to be made available for breach of the
general duties.273 The transaction or arrangement is voidable at
the instance of the company unless restitution of the subject-
matter of the transaction is no longer possible, third party rights
have intervened, an indemnity has been paid (s.195(2)) or the
arrangement has been affirmed within a reasonable time by a
general meeting (s.196). It should be noted that a third party is
one who “is not a party to the arrangement or transaction”
entered into in contravention of s.190 (s.195(2)(c)). So, a
connected person who is a party to the transaction will not count
as a “third party” even if that person did not know of the
connection with the director. Consequently, the connected
person will not be able to prevent the transaction being avoided
by the company by claiming to be a good faith third party
without actual knowledge of the contravention—even though
such a connected person may be relieved of liability to the
company, as we see below. This statutory regime is therefore
broader than its common law equivalents.
16–74
The same is true of the financial liability of those involved in the
transaction. As we saw earlier, the orthodox equitable rule in
relation to self-dealing transactions is that they are simply
voidable.274 Section 195(3), by contrast, contemplates liability
both to account to the company for any gain which has been
made by the defendant (directly or indirectly)275 and (jointly and
severally with any others liable under the section) to indemnify
the company from any loss resulting from the arrangement or
transaction. This has perhaps been interpreted more narrowly in
some ways, and more widely in others, than might have been
expected from the statutory words themselves. In the normal
case, it has been held, a gain will be made by the director where
the director acquires an asset from the company, and a loss
suffered by the company where the company acquires an asset
from the director276: regarded this way, the statutory provisions
provide a mechanism for effecting notional rescission of the self-
dealing transaction, but doing so in money rather than by re-
delivery of the assets originally exchanged. This seems sensible.
So too is the notion that s.195(3) makes the remedy of
accounting of profits additional to the right to avoid the
transaction. Thus, any profit made by the director, but not
captured by the company through avoidance of the transaction,
can still be sought by the company; or the company may seek an
accounting of profit even though the transaction cannot any
longer be avoided. This is wider than the common law, but the
advantages are clear.
In the case of losses, actual payment of an indemnity, by any
person, removes the power to avoid the transaction. However, if
the transaction has been avoided, the company could still sue for
an indemnity against any losses not recovered by the reversal of
the transaction. Further, and more surprisingly, the Court of
Appeal has deduced from the fact that an indemnity deprives the
company of its power to avoid the transaction that the indemnity,
in relation to assets acquired by the company, must include
losses incurred after the completion of the transaction in
question, even if those losses were not caused by the absence of
shareholder consent, provided the losses result from the
acquisition. This means that the director is at risk of having to
indemnify the company for losses caused by post-transaction
adverse movements in the market.277 Where a transaction is
avoided, the company, by restoring the situation prior to the
transaction, protects itself against both transaction losses and
post-transaction losses, and it was held that an indemnity must
go as far.
Finally, s.195(8) preserves any other remedy the company
may have against the director or to avoid the transaction, for
example, under the common law or any other provisions of the
Act. It might be wondered what common law remedies would
not be covered by the comprehensive provisions of s.195. One
answer is that the remedies created by s.195 are not proprietary,
because the section applies to Scotland which does not recognise
proprietary remedies in this situation. However, so far as the
common law applying in other parts of the UK confers a
proprietary character on the company’s remedies against
directors,278 s.195 preserves it.
16–75
A further notable feature of the section is the range of persons
made potentially liable. Under s.195(4)(a) and (b) liability is
imposed upon the director who entered into the transaction
(including the director of the holding company where the
transaction is with him or her) and on the connected person if
that person was the party to the transaction. This is to be
expected. However, s.195(4)(c) extends liability to a director (of
the company or the holding company) with whom the party to
the arrangement is connected, where the transaction was with the
connected person. In other words, by using a connected person
to effect the transaction the director does not escape personal
liability to indemnify the company against losses or to account
for profits, if the director made a profit thereby—though the
subsection is not confined to such instrumental cases. Finally,
and this is most important, s.196(4)(d) extends liability to any
director of the company who authorised the arrangement, or any
transaction in pursuance of it, even if neither that director nor a
person connected with him entered into the arrangement. Thus,
s.195 creates incentives not only for directors not to breach s.190
but also for directors to monitor compliance with the
requirements of that section on the part of their fellow directors
and, even more difficult, of persons connected with fellow
directors. These liabilities arise whether or not the arrangement
has been avoided by the company, and—perhaps oddly—they
are not expressly discontinued even if the company confirms the
arrangement under s.196.
16–76
This is therefore an extremely wide-ranging remedial scheme.
First, the potential defendants are not just the director who was
in a position of conflict of duty and interest and entered into the
transaction, but also the person connected with him or her and
the director so connected (where the transaction was with the
connected party) and the non-self-dealing directors of the
company who authorised the transaction. And secondly, the
remedies range exceptionally broadly—rescission, account of
profits, compensation for losses. For these reasons, two defences
are provided against the liabilities created by s.195(3) and (4).
Where the arrangement is entered into by a connected person,
the director with whom the connection exists is not liable if the
director shows that he or she took “all reasonable steps to secure
the company’s compliance” with s.190 (s.195(6)). This defence
does nevertheless require the director to be active, by taking
“reasonable steps”. For example, a director with a controlling
holding in another company, which might engage in substantial
property transactions with the company, would appear to be
required at least to disclose to the company of which he is a
director the existence of the connection and to warn of the need
for shareholder approval, should a transaction be contemplated.
Moreover, the director would seem required to take reasonable
steps to monitor developments in both business and personal life
which might give rise to “connections” of a statutory kind, so as
to be able to disclose them.279
A further defence is provided for the connected person and an
“authorising” director. They are not liable if they show that they
“did not know the relevant circumstances constituting the
contravention” (s.195(7)), which, given the width of the
connected person definition, is not a fanciful situation. This
wording does seem wide enough to cover the situation where the
connected person (an estranged step-son, for example) does not
know of the step-father’s directorship. In this case, the connected
person does not appear to be under any legal pressure to monitor
the activities of the person with whom he or she is connected so
as to ascertain, for example, of which companies the other
person has become a director. The defence in s.195(7) is one
based on simple ignorance. However, if the connected person
does know of the connection, it does not appear that he or she
escapes liability on the basis that there was a failure to
understand that the law requires shareholder approval in such a
case.
Additional rules for listed companies
16–77
In the case of companies whose shares are Premium Listed on
the London Stock Exchange, there are further requirements for
shareholder approval in the Listing Rules280 drawn up by the
Financial Conduct Authority (“FCA”). Such approval is required
for all “related-party” transactions, a term which includes
transactions with a director or shadow director of the listed
company or of another company within the same corporate
group (not just of the holding company) or a person who has
been such a director within the previous 12 months or an
associate of such a director, or a person with significant
influence.281 On the other side of the transaction is the listed
company or any of its subsidiaries. In addition, the category also
includes transactions between the listed company and any
person, the purpose and effect of which is to benefit a related
party.282 The requirement for shareholder approval applies to any
related-party transaction (other than a transaction of a revenue
nature in the ordinary course of business, small transactions and
certain specified types of transaction),283 so that the FCA rules
have a wider range than those contained in Ch.4 of Pt 10 of the
2006 Act. The Listing Rules make every effort to ensure that the
shareholders are well-advised, including requiring an
independent expert’s report to support the directors’ statement
that the transaction or arrangement is fair and reasonable as far
as the security holders are concerned (LR 13.6.1(5)). Crucially,
on the approval resolution the related party may not vote and the
related party must also take all reasonable steps to ensure any
associates do not vote either.284 The principle of shareholder
approval and disinterested voting is thus taken much further in
the Listing Rules than in the Act.
Loans, quasi-loans and credit transactions
Arrangements covered
16–78
As in other areas of life—a recent example being the funding of
political parties—loans constitute an easy way of avoiding the
rules governing the disposition of assets. A transaction can be
presented as a loan when it is in effect a gift, either because the
loan is never expected to be re-paid or because the terms of the
loan are non-commercial. Given their control over the
company’s day-to-day activities, the directors are in a good
position to effect such transactions for their own benefit, thus
indirectly increasing their remuneration; and history has shown
that from time to time they give into the temptation to do so.
Consequently, loans have long been subject to special regulation
by the Companies Acts. In 1945 the Cohen Committee285
recommended that the legislation move beyond requiring
disclosure of the loans to directors to prohibiting them. It said:
“We consider it undesirable that directors should borrow from
their companies. If the director can offer good security, it is no
hardship for him to borrow from other sources. If he cannot offer
good security, it is undesirable that he should obtain from the
company credit which he would not be able to obtain
elsewhere”. The 1948 Act thus introduced a prohibition on loans
to directors.
Now in the 2006 Act the prohibition has been re-cast in terms
of a requirement for prior shareholder approval (s.197).286 At the
same time, the criminal sanctions previously attaching to these
provisions were removed so that the sanctions are now purely
civil. The result is to produce a much greater degree of
parallelism between the provisions on loans and those on
substantial property transactions, discussed above. On the other
hand, the change arguably downgrades the protection available
to creditors. In owner-controlled companies making a loan to the
directors can be used as a way of siphoning assets out of the
company to the shareholders where the company does not have
distributable profits. If the company becomes insolvent, the
administrator or liquidator will not be able to sue the directors
for the recovery of the loans under the 2006 Act, unless either
the controllers, acting as shareholders, have forgotten to approve
their decision to make the loans, taken as directors (which may
happen), or the insolvency practitioner can discharge the greater
burden of showing a breach of the directors’ core duty of good
faith or some other duty, such as the wrongful trading provisions
or the common law creditor-regarding duties or can impugn the
shareholder approval whitewash.287
16–79
As with substantial property transactions, a headache for the
legislature has been the need to predict and pre-empt avoidance
devices on the part of directors. With various exceptions and
exemptions, the 2006 Act brings within its compass simple loans
(s.197), loans to both the directors of holding companies288 and
persons connected with directors (of both the company and its
holding company),289 and also extends the rules to transactions
analogous to loans. Thus, the provisions extend to what are
called “quasi-loans” (s.198), to “credit transactions” (s.201) and
to “related arrangements” (s.203). These provisions are hardly
simple.
Sections 197 and 203 apply to any company; ss.198 and 201
only apply to a public company or a company, even if private,
which is “associated with” a public company. Two companies
are associated if one is subsidiary of the other or both are
subsidiaries of the same body corporate.290 It does not matter
which is the public and which the private company.
16–80
A loan is a well-known concept. A quasi-loan is not. Essentially,
quasi-loans are transactions, to which the company is a party,
resulting in a director or a connected person obtaining some
financial benefit for which the director is liable to make
reimbursement to the company.291 An example might be the
company providing a credit card to the director, the company
undertaking the obligation to meet the payments due to the credit
card issuer and the director having an obligation to reimburse the
company. This is not a loan because no funds are advanced by
the company to the director, but the effect is the same as if the
director took out the credit card in his or her own name and the
company lent the director the money to pay the card issuer. The
sections require disclosure to the shareholders of the core
elements of the proposed transaction and approval from the
members before the company enters into a loan or quasi-loan
transaction with a director or director of the holding company or
a person connected with such a director. Approval is also
required if the company, instead of making the loan or quasi-
loan, gives a guarantee or provides security in relation to loan or
quasi-loan made by a third party. Thus, if an unconnected bank
makes a loan to the director, but the company guarantees the
loan, approval will be required.
Section 201 deals with credit transactions. A credit transaction
is one in which goods, services or land are supplied to the
director but payment for them is left outstanding, including hire-
purchase, conditional sale, lease or hire agreements (s.202).
Again, such a transaction is not a loan, because no funds are
advanced to the director, but the economic effect is the same as
if the company had made a loan to the director and the director
had then used those funds to obtain the goods, land or services in
question. The section applies to both credit transactions entered
into by the company with the director (i.e. the company provides
the goods, services or land) and transactions entered into by a
third party with the director but the company gives a guarantee
or security to the third person (s.201(2)).
Finally, s.203(1) requires shareholder approval for a further
set of “arrangements” entered into, not by the company, but by a
third party with or for the benefit of a relevant director or
connected person. In order for such an arrangement to be caught
it must be one which (a) would have required shareholder
approval if it had been entered into by the company; and (b) the
third party acquires a benefit from the company or a body
corporate associated with it. Thus, the company cannot induce a
third party to do without shareholder approval something which,
if done by the company, requires such approval, where the third
party obtains a benefit from the company for doing that thing.
Section 203(1) also brings within the shareholder approval
requirement situations where the company assumes
responsibility under an arrangement previously entered into by a
third party which, if entered into by the company, would have
required the shareholders’ approval. Thus, if a bank makes a
loan to the director, but later the company assumes the
obligation to repay the loan, the assumption of obligation by the
company will require shareholder approval. By virtue of s.203
the company cannot avoid shareholder approval by doing
indirectly what it cannot do directly.
Method of approval and related disclosures
16–81
Shareholder approval is by ordinary resolution, unless the
articles impose a higher requirement.292 Because of the potential
complexity of the transactions covered by the provisions, it is
not surprising that the Act requires full details of the proposed
arrangement to be disclosed to the shareholders in writing in
advance of their consideration of the approval resolution. Those
details must disclose in particular the value the director will
receive under the transaction and the amount of the company’s
liability.293 As usual, approval is not required of the members of
a wholly-owned subsidiary.294
Additional disclosure is required in the annual accounts issued
at the end of the relevant financial year (s.413). Section 413
applies to “advances and credits” granted by the company to its
directors and “guarantees of any kind” entered into by the
company on behalf of its directors. The wording does not map
easily onto the transactions dealt with in Ch.4 of Pt 10 of the Act
and is in fact derived from the Directives on companies’
accounts.295 Given that shareholders will already have approved
these arrangements, there is perhaps no need for the accounts
provisions to mimic the provisions of the sections discussed
above. Indeed, it is possible that nothing specific about
disclosure of the above transactions in the accounts would have
been required by the Act had the Directives not required
otherwise.
Exceptions
16–82
Having brought a wide range of transactions within the net of
those needing shareholder approval, the statute then proceeds to
provide “safe harbours”, i.e. to identify certain situations where
the member approval requirement is not required because the
transaction is thought to be legitimate or to raise only a small
risk of abuse. First, the requirement does not apply to anything
done by the company to put the director or connected person in
funds to meet expenditure incurred for the purpose of the
company or to perform properly the duties of an officer of the
company or to enable the person to avoid incurring such
expenditure. However, a cap of £50,000 is placed on the value of
arrangements falling within the exemption (s.204).296 Thus, if the
credit card mentioned above is confined to business
expenditures, and has an appropriate credit limit, it will not
require shareholder approval.
Secondly, shareholder approval is not required for
arrangements designed to put the director of the company or
holding company in a position to defend civil or criminal
proceedings alleging breach of duty, to apply for relief in
relation to such an action,297 or to defend regulatory proceedings,
in relation to the company or any associated company (ss.205–
206). However, other than in the case of regulatory proceedings,
the arrangement must be reversed (for example, the company
repaid a loan) if the defence is not successful.
Thirdly, certain minor value arrangements are exempted
(under £10,000 for loans and quasi-loans; under £15,000 for
credit transactions) (s.207(1),(2)). Fourthly, credit transactions
entered into by the company in the ordinary course of its
business on no more favourable terms than it is “reasonable to
expect” the company would offer to an unconnected person are
exempted (s.207(3)). Fifthly, loans and quasi-loans by money-
lending companies are exempted if made in the ordinary course
of the company’s business and no more favourable terms298 than
it is “reasonable to expect” the company would offer to an
unconnected person (s.209).299 Finally, arrangements for the
benefit of associated companies300 are permitted, even if they are
connected persons, in order to facilitate intra-group transfers
(s.208).
Remedies
16–83
The civil remedies provided under s.213 are similar to those
under s.195 in relation to substantial property transactions, i.e.
avoidance of the transaction,301 recovery of profits made and an
indemnity against loss, the latter two remedies being exercisable
against the director receiving the loan, etc. those connected with
that director and the directors authorising the loan.302 The same
defences are provided.
Directors’ service contracts and gratuitous
payments to directors
16–84
A director contracting with his or her company in relation to the
remuneration to be received constitutes a paradigm example of a
conflict of interest, which is likely to exist in a very strong form.
However, Ch.4 of Pt 10 does not in general require shareholder
approval of directors’ remuneration. It does so only in two
specific areas. Approval is required for directors’ service
contracts of more than two years’ duration (s.188) and of
gratuitous payments for loss of office (ss.215 et seq.). These
provisions are discussed elsewhere in the book, as part of our
more general discussion of the control of directors’ remuneration
and in relation to takeovers.303 In addition, there are the more
demanding requirements of shareholder approval of the
remuneration policies of all quoted companies, or, alternatively,
specific approval of particular remuneration or loss of office
payments.304
Political donations and expenditure
16–85
It may be convenient here to deal briefly with a final situation
where shareholder approval of directors’ acts is required, namely
for political donations and expenditure. These provisions are to
be found in Pt 14 of the Act, rather than Pt 10, although they can
be presented as aiming to control a potential conflict of interest.
That conflict is between the personal interests of the directors in
promoting a particular political party and the interests of the
shareholders as a body in not having corporate assets spent in
ways which do not help to promote the success of the company.
Of course, the provisions also have a wider constitutional
significance, which is not a concern for this book, especially in
the light of the long-standing regulation of the use by trade
unions of their funds for political purposes.305 What is required is
not shareholder approval of a particular transaction, but
shareholder approval of a company policy. The shareholder
resolution approving political expenditure “must be expressed in
general terms” and in fact “must not purport to authorise
particular donations or expenditure”.306 If passed, the resolution
has effect for four years, though the articles may impose a
shorter period.307
The Act requires an authorising resolution for (a) corporate
donations to political parties registered under the relevant British
legislation or those which participate in elections to public office
in other EU Member States, to other political organisations and
to independent candidates308; and (b) other political
expenditure.309 The latter is expenditure of a promotional type
and other corporate activities which are “capable of being
reasonably regarded as intended to affect public support for a
political party or other political organisation”,310 even though
there is no direct donation to a political party. A resolution is
required of the shareholders (by ordinary resolution unless the
articles impose a higher standard) in the case of a free-standing
company; and of the shareholders of the (ultimate) holding
company as well if the company is part of a group. However, in
a group situation some relief is provided from the need to obtain
multiple authorisations in that a resolution is not required of the
company itself if it is a wholly-owned subsidiary.311 There is one
exception to this relief: even a wholly-owned subsidiary requires
a resolution of its shareholders, if the parent company is not “UK
registered”, i.e. registered under the Act or any of its
predecessors.312 This is because a holding company which is not
UK registered is not required to pass a resolution conferring
approval on the political expenditure of its UK subsidiaries, so
that, in such a case, the obligation on the wholly-owned
subsidiary revives.313 This may often be a rather pointless
formality, but at least it will require the directors of the UK
subsidiary to explain to the foreign parent the provisions of the
Act on political donations.
The resolution may give authority for political expenditure
generally or confine it to one or more of the following: donations
to political parties and independent candidates, donations to
other political organisations and political expenditure. In any
event, the resolution must set a monetary limit for the
expenditures during the period to which it applies.314
Where a free-standing company makes a political payment or
incurs expenditure without the required shareholder approval,
the directors of the company making the payment will be jointly
and severally liable to restore to the company the expenditure
(with interest) and to compensate the company for any loss or
damage it has suffered in consequence, though this second head
of loss might be difficult to show.315 The liability provisions of
Pt 14 also extend to shadow directors.316 Where the company in
default is a subsidiary, the directors of the ultimate UK holding
company will also be liable (to the subsidiary) but only if they
failed to take all reasonable steps to prevent the breach by the
subsidiary.317
There is anecdotal evidence that the effect of these provisions
of the Act (introduced in 2000) has been to persuade the
directors of many companies not to make political donations
from corporate funds, rather than to seek to shareholder approval
to do so. Of course, wealthy business figures make large
donations to political parties, but do so out of their personal
wealth, which may be derived from the activities of businesses
they control.
CONFLICTS OF INTEREST AND THE USE OF CORPORATE
PROPERTY, INFORMATION AND OPPORTUNITY
The scope and functioning of section 175
16–86
Section 175(1) states that “a director must avoid a situation in
which he has, or can have, a direct or indirect interest that
conflicts, or possibly may conflict, with the interests of the
company”.318 Section 175(7) makes it clear that a conflict of
interests includes a conflict of duties. Subject to a restriction in
relation to charitable companies,319 s.175(3) excludes from the
scope of the section one central type of situation involving
conflict of interest, namely, “a conflict of interest arising in
relation to a transaction or arrangement with the company”.
These self-dealing transactions are covered by s.177, as
discussed above, rather than by s.175.320 However, it should be
noted that s.175(3) has the effect of excluding self-dealing
transactions even if s.177 does not apply its normal rule of
disclosure to the board of the self-dealing transaction in
question, for example, decisions on directors’ remuneration
(s.177(6)(c)). Having excluded self-dealing transactions, s.175
applies, as is expressly stated in s.175(2), “in particular to the
exploitation of any property, information or opportunity” of the
company. However, this is simply an inclusive assertion: it is
important to note that s.175 imposes a general obligation to
avoid conflicts of interest. Any conflict situation, not excluded
by s.175(3), will fall within its scope, whether or not it involves
the exploitation of property, information or opportunity of the
company. The example of a person acting as a director of
competing companies is discussed below. Deciding whether a
situation does indeed involve the necessary conflict is often the
most difficult question in this area. If anything, recent
developments in the case law seem to have brought an even
wider range of situations within the conflicts category.321
As with the self-dealing transactions discussed above, the
secondary aim of the rules in this area is to identify the
appropriate body or bodies to handle the conflict situation on
behalf of the company. As with self-dealing transactions, again,
the common law rule was shareholder approval.322 Section 175
introduces, as we shall see, the mechanism of approval by the
uninvolved members of the board, as an alternative to
shareholder approval. However, unlike s.177 which imposes
simply an obligation of disclosure to the board for self-dealing
transactions, s.175 requires the board, assuming it wishes to act,
to approve the director putting him- or herself in a position of
conflict of duty and interest. This difference in the roles of the
board is necessary because, unlike with self-dealing transactions,
situations falling within s.175 will not necessarily generate a
transaction to which the company is party. An example would be
where a director diverts a corporate opportunity for personal
benefit. The decision for the board thus becomes not whether to
enter into the transaction (the typical question in the self-dealing
case), but whether to approve what would otherwise be the
director’s breach of duty. Nevertheless, the statute has clearly
made it easier for directors to obtain approval for the
exploitation of a conflict personally, by permitting the non-
involved members of the board to give approval (subject to
safeguards).
There are two crucial questions to be answered in the area of
corporate opportunities: first, how does the law identify an
opportunity as a “conflicted” one and, secondly, what processes
does it specify for the company to give authority for the taking
of the corporate opportunity by the director personally? The
statute deals with the second issue in part but with the first issue
hardly at all, where reliance is placed on the common law. We
look at each of these two issues in turn.
A strict approach to conflicts of interest
16–87
The reason for depriving a director of a profit made from
unauthorised exploitation of a corporate opportunity is not an
objection to directors making profits as a result of or in
connection with or whilst holding their office, but rather that the
prospect of a personal profit may make the director careless
about promoting the company’s interest in taking the
opportunity. If taking the opportunity personally does not
involve any conflict with the interests of the company, there is
no reason to deprive the director of his or her profit. It follows
that some of the prior case law on corporate opportunity, which
seemed to be based on a free-standing “no profit” rule, is to be
regarded with caution under the new statutory provisions.
However, as we shall see below, there is a high degree of
overlap between a “no conflict” approach and a “no profit”
approach if both are given a rigorous interpretation.
16–88
That the approach of s.175 to the “no conflict” principle is
rigorous is suggested by two features of the section. First,
s.175(1), echoing Lord Cranworth LC in Aberdeen Rly Co v
Blaikie Bros,323 includes within the principle a personal interest
which “possibly may conflict” with that of the company.
Secondly, s.175(2), referring to corporate opportunities, etc. says
that “it is immaterial whether the company could take advantage
of the property, information or opportunity”. On the other hand,
the primacy of the conflict approach is asserted by s.175(4)(a),
which provides that the section is not infringed if “the situation
cannot reasonably be regarded as likely to give rise to a conflict
of interest”. These parts of the section are to some degree in
tension with one another. One thing is clear: it is certainly not
enough for the director to escape liability under this section that
he or she acted in good faith (i.e. had honestly formed the view
that the company’s interests were not capable of being harmed
by what was done), for the question of whether an actual or
potential conflict of interest has arisen is one for the court.
In identifying situations as involving a conflict, s.175 applies
“in particular” to exploitation by the director of “property,
information or opportunity” of the company. Misuse of
corporate assets generally presents no particular problem324; even
the most unsophisticated directors should realise that they must
not use the company’s property as if it was their own (although
even this is frequently overlooked or ignored in a “one-man”
company). It is misuse of corporate information or a corporate
opportunity—in practice the two are likely to overlap—which
gives rise to difficulties. The main difficulty in the law relating
to the misuse of corporate information and opportunities
(hereafter referred to simply as corporate opportunities) is
isolating the criteria for the identification of a corporate
opportunity (as opposed to one the director is free to exploit
personally without seeking any authorisation from the company).
To put it another way, what sorts of linkages between the
opportunity and the company are needed to make the
opportunity a “corporate” one, for which exploitation personally
the director needs the authorisation of the company? In two
relatively recent decisions, the Court of Appeal has taken a
broad view of the criteria, but we need to put those decisions in
the context of the prior case law.
Identification of “corporate” opportunities
16–89
In a famous decision during the Second World War, Regal
(Hastings) Ltd v Gulliver,325 the House of Lords, following the
law relating to trustees,326 held directors liable to account to the
company for the profit made from their personal exploitation of
a corporate opportunity once it was established:
“(i) that what the directors did was so related to the affairs of the company that it
can properly be said to have been done in the course of their management and in
utilisation of their opportunities and special knowledge as directors; and (ii) that
what they did resulted in a profit to themselves.”327
Although this case is based on a “no profit” rationale which the

Act now expressly rejects, it is not difficult to re-cast it in
conflict terms. The facts, briefly, were as follows: company A
owned a cinema and the directors decided to acquire two others
with a view to selling the whole undertaking as a going concern.
For this purpose they formed company B to take a lease of the
other two cinemas. But the lessor insisted on a personal
guarantee from the directors unless the paid-up capital of
company B was at least £5,000 (which in those days was a large
sum). Company A, the directors concluded, was unable to
subscribe more than £2,000 and the directors, although initially
willing to do so, changed their minds about giving personal
guarantees. Accordingly the original plan was changed; instead
of company A subscribing for all the shares in company B,
company A took up 2,000 and the remaining 3,000 were taken
by the directors and their friends. Three weeks later, all the
shares in both companies were sold, a profit of nearly £3 being
made on each of the shares in company B. The new controllers
then caused company A to bring an action against the former
directors to recover the profit they had made.
Issues of scope
16–90
It is not difficult to see a conflict of interest in these facts. It was
the directors who decided not to give personal guarantees, thus
creating the opportunity for them to participate personally in the
financing of the acquisition and to share in the profits from the
re-sale and depriving the company of the ability to take the
whole of the profit on the sale of the subsidiary. It was the
directors who, with the same result, decided not to obtain
additional finance for the company to capitalise the subsidiary at
the required level, even though the subsequent sale three weeks
later was in contemplation when the additional cinemas were
being acquired, so that it is difficult to believe that it would have
been impossible for the company to obtain bridging finance for
such a short period. These facts were emphasised in the
judgment of Lord Russell of Killowen, even though he, like the
other judges, based his reasoning on the “no profit” principle
noted above.
Thus, it is submitted that a modern court, applying the “no
conflict” principle, could come to the same result as the House
of Lords in this case, especially as s.175(2) provides that “it is
immaterial whether the company could take advantage of the
property, information or opportunity”.328 This seems at first sight
a very odd provision: was it not the possibility that the company
could have taken up the opportunity itself which in Regal
provided the basis for the conflict of interest, so that the
existence of that possibility can hardly be characterised as
“immaterial”? However, the rule can be justified as relieving the
court of having to make a judgement it was not well-placed to
make, i.e. whether the company was genuinely unable to raise
the finance itself. It may also be justified as a prophylactic rule.
It is the duty of the director to obtain the opportunity for the
company. If the director is to be relieved of this duty and made
free to take the opportunity personally where there is only a low
chance of the company obtaining the opportunity itself, this will
give the director an incentive not to strive as hard as he or she
might to promote the company’s interests. Section 175(2)
removes this incentive.
16–91
It will be observed, however, that the claim in Regal was wholly
unmeritorious. Recovery by the company benefited only the
purchasers, who in this way received an undeserved windfall
resulting, in effect, in a reduction in the price which they had
freely agreed to pay. It also appears that the directors had held a
majority of the shares in company A so that there would have
been no difficulty in obtaining authorisation or ratification of
their action by the company in general meeting329; but acting, as
it was conceded they had, in perfect good faith and in full belief
in the legality and propriety of their actions, it had not occurred
to them to go through this formality. Nor does this account
exhaust the anomalies inherent in the decision. The chairman
(and, apparently, the dominant member) of the board, instead of
agreeing himself to subscribe for shares in company B, had
merely agreed to find subscribers for £500. Shares to that value
had, accordingly, been taken up by two private companies of
which he was a member and director, and by a personal friend of
his. It was accepted that the companies and friend had
subscribed beneficially and not as his nominees and,
accordingly, neither he nor they were held to be under any
liability to account for the profit which they had made.330
The company’s solicitor also escaped; though he had
subscribed for shares and profited personally, he could retain his
profit because he had acted with the knowledge and consent of
the company exercised through the board of directors. The
directors themselves could avoid liability only if a general
meeting had approved,331 but the solicitor, not being a director,
could rely on the consent of the board. And this despite the fact
that the board had acted throughout on his advice. Hence the two
men most responsible for what had been done escaped liability,
while those who had followed their lead had to pay up. What
seems wrong with the application of the basic principle in this
case is that recovery was not from all the right people and, more
especially, was in favour of quite the wrong people.332 Had it not
been for the change of ownership it might well have been
equitable to order restoration to the company, thus, in effect,
causing the directors’ profits to be shared among all the
members. As it was, the case can be seen as one in which
equitable principles were taken to inequitable conclusions.
16–92
Of the many subsequent decisions that have followed or
commented on the Regal case, four are of particular interest:
Industrial Development Consultants v Cooley,333 Canadian Aero
Service v O’Malley334 (a decision of the Canadian Supreme
Court in which the judgment was delivered by Laskin J—later
the CJ), Bhullar v Bhullar335 and Allied Business and Financial
Consultants Ltd v Shanahan (also known as O’Donnell v
Shanahan).336
The facts in the first two cases were very similar. In both, the
companies concerned had been eager to obtain, and were in
negotiation for, highly remunerative work in connection with
impending projects. In both, it was unlikely that the companies
would have obtained the work, but in each there was a director
whose expertise the undertaker of the project was anxious to
obtain. Accordingly, each of the directors concerned resigned his
office and later joined the undertaker of the project, in Cooley
directly, in Canadian Aero Service indirectly through a company
formed for the purpose which entered into a consortium with the
undertaker. In both the directors were held liable to account for
the profits which they made.
In neither case is it difficult to analyse the facts through a
conflict-of-interest prism, since both directors were under a duty
to obtain the opportunity for the company, unlikely though it
was that they would succeed, though the reasoning of the courts
involved was not expressed exclusively in this way. In Cooley,
liability was based on misuse of information,337 the defendant,
while managing director, had obtained information and
knowledge that the project was to be revived and had
deliberately concealed this from the company and taken steps to
turn the information to his personal advantage. It was irrelevant
that the approach had been made to him and that his services
were being sought as an individual consultant and would be
undertaken free from any association with the company.338
“Information which came to him while he was managing
director and which was of concern to the plaintiffs and relevant
for the plaintiffs to know, was information which it was his duty
to pass on to the plaintiffs.” It might seem remarkable that the
plaintiffs should receive a benefit which “it is unlikely that they
would have got for themselves had the defendant complied with
his duty to them” but “if the defendant is not required to account
he will have made a large profit as a result of having deliberately
put himself into a position in which his duty to the plaintiffs who
were employing him and his personal interests conflicted”.339
This is an expression of the policy, as noted above, which now
finds expression in s.175(2) of the Act. The quotation also
demonstrates that the basis of the decision was not a mere
misuse of information but the conflict of interest and duty to
which the use gave rise.
16–93
In Canadian Aero Service, the decision was based firmly on
misuse of a corporate opportunity, conceived of as generating a
conflict of interest. On this Laskin J said340:
“An examination of the case-law shows the pervasiveness of a strict ethic in this
area of the law. In my opinion this ethic disqualifies a director or senior officer[341]
from usurping for himself or diverting to another person or company with whom or
with which he is associated a maturing business opportunity which his company is
actively pursuing; he is also precluded from so acting even after his resignation
where the resignation may fairly be said to be prompted or influenced by a wish to
acquire for himself the opportunity sought by the company, or where it was his
position with the company rather than a fresh initiative which led him to the
opportunity which he later acquired.”
Effect of director’s resignation

16–94
Another feature of the Cooley and O’Malley cases was that the
directors in question resigned, but were nevertheless held liable
to account to the company for the profits subsequently made.
The issue was considered by Lawrence Collins J in CMS
Dolphin Ltd v Simonet,342 who concluded that the answer lay in
the proposition that the opportunity is treated as the property of
the company, so that a director who resigns after learning about
such an opportunity “is just as accountable as a trustee who
retires without properly accounting for trust property”. As we
have seen above,343 this approach to the issue of resignation has
been confirmed in s.170(2)(a) of the Act, and without the need
for dubious characterisation of the opportunity as the property of
the company. It follows, of course, that if what the director has
learned before his or her resignation does not fall within the
category of a corporate opportunity, it is no breach of this aspect
of fiduciary duties to exploit the information personally
thereafter; the line can be difficult to draw.344 This means that,
beyond the boundaries of these statutory rules, or any
contractual345 or equitable restraints on the director (for example,
rules on breach of confidence), he or she is otherwise free to
exploit his or her enhanced knowledge, talents and skills after
resignation as a director.346
Effect of board determinations of scope
16–95
The last two cases of the four noted earlier are in many ways the
more interesting. In Bhullar v Bhullar,347 in contrast to Cooley
and Canaero, the defendants did not seek to divert to themselves
an opportunity which their company was actively pursuing. On
the contrary, the two families which had set up the company to
acquire properties having fallen out, the family which
constituted the claimant side of the litigation informed the family
which formed the defendant side of the litigation that it did not
want the company to acquire further properties. Subsequently,
the defendant directors, by chance and without reliance on any
information confidential to the company, discovered that a
property adjacent to one of the company’s properties was for
sale and purchased it themselves. The claimants nevertheless
succeeded in their argument that the opportunity to purchase the
property should have been made available to the company,
whose property would have been much more valuable if joined
with the adjacent property, and that the defendants accordingly
held the property on trust for the company.348 This is a notable
decision on two grounds.
First, it seems to move English law in the direction of the US
“line of business test”, i.e. if the opportunity falls within the
company’s existing business activities, not simply where the
company is actively pursuing a particular opportunity, then an
opportunity the director comes across is a corporate one, even if
no property or information of the company was deployed by the
director to obtain the opportunity. There was no suggestion in
Bhullar that the directors had used their position in the company
to bring the opportunity to maturity and then diverted it for
themselves, as in Canaero. For this reason, the decision can be
seen as affecting a significant extension of the criteria for
identifying a corporate opportunity. This is probably a desirable
development. It recognises that, for the purpose of the conflict of
interest and duty rule, the duties of a director are pervasive, not
ones arising only in specific and limited circumstances.
Secondly, however, the application of the extended
understanding of a corporate opportunity to the facts of the case
was questionable, for the court attached no weight to the fact
that, before the opportunity arose, the board decided, albeit
informally, at the initiative of the claimants and for reasons
which were apparent, not to acquire any more properties.349
Nevertheless, the claimants were, in effect, able to reverse their
decision once a particularly attractive opportunity arose. It is not
clear why the claimants should have been permitted to act in
such an opportunistic way. In Regal, where the claimants’
behaviour was also opportunistic, as we have seen, it could be
said that it was the directors who decided that the company
could not afford the opportunity who were the ones who later
took it themselves, and that such behaviour is necessarily
suspect. In Bhullar it was found as a fact that the claimants, not
the defendants, took the initiative to restrict the scope of
company’s future activities.350
16–96
This second point is not unrelated to the first. If the courts are,
rightly it is submitted, to extend liability beyond the maturing
business opportunity so as to embrace opportunities within the
company’s line of business, a director needs to be able to
establish what the company’s business actually is. Of course,
this may not be simple, and it is probably right that any
ambiguity ought to be resolved against the director and in favour
of the company, so requiring the director to act with undeviating
loyalty in furthering the company’s possible wider interests.351
On the other hand, it would seem undesirable to extend the
corporate opportunity doctrine to any business opening which a
director comes across and which the company could exploit,
even though the company was neither already exploiting that
type of opportunity nor seeking to do so.352 To do so would come
close to restoring the “no profit” rule which the section does not
adopt, and indeed to do so without the usual limitations inherent
in that common law rule.353 This sort of rule would increase the
costs of being a director (the director is at risk of losing the
opportunity to the company) and in the case of non-executive
directors in particular this might seem a high cost as against the
potential rewards of the directorship.
In particular, an answer needs to be provided to the question
posed in Regal: does the equitable principle involve “the
proposition that, if the directors bona fide decide not to invest
their company’s funds in some proposed investment, a director
who thereafter embarks his own money therein is accountable
for any profits he may derive therefrom?”354 The reason this
question is unresolved, it is suggested, is to be found in the
underdeveloped state of the law on the role of the board in the
area of corporate opportunities, for the board performs two
closely linked but conceptually distinct roles. It may authorise
the taking by the director of an opportunity which is a corporate
one, as s.175 contemplates, but, through its direction of the
company’s business strategy, its decisions may, or ought, to have
the effect of taking some opportunities out of the category of
being corporate, with the consequence that authorisation is not
required, because there is no conflict of interest. As s.175(2)
says, it may indeed be “immaterial” whether the company could
take advantage of the opportunity, but if it is an opportunity
outside the range of the company’s business activities, present or
in contemplation, can the situation “reasonably be regarded as
likely to give rise to a conflict of interest”, as s.175(4)(a)
requires? It is suggested that the line of business test provides a
way of reconciling these two provisions of the section, with due
regard being accorded to decisions of the board in determining
the company’s business strategy.
16–97
This “scope of business” reasoning has, however, been dealt an
unexpected and it is suggested rather unfortunate blow in the last
and most recent case on our list. In O’Donnell v Shanahan,355 the
deputy judge held that there had been no breach of fiduciary
obligations because the impugned opportunity (which concerned
a property development) arose outside the scope of the business
of the principal company (which focussed upon the provision of
loans, mortgages and financial advice356), and further there had
been no use of the company’s property or information in
acquiring the benefit.357 The Court of Appeal took the opposite
view. The company operated as a quasi-partnership with three
members, the petitioner and the two defendants (the latter also
ran a property development partnership on the side). Although
not part of the company’s usual business, the company had, in an
ad hoc fashion, agreed to procure finance for and advise one
particular investor who was interested in purchasing a
development property. In return, the company would earn fees
and a commission. Valuation reports were obtained and other
work done, but the deal did not proceed. After further
negotiations, the two defendants and a third party procured the
opportunity for themselves, and did so on the basis that no
commission would be paid to the company. The defendants did,
nevertheless, pay the petitioner a sum representing her notional
share of the lost commission. Later, after the falling out, the
petitioner claimed that the investment in the development
property was made in breach of the “no conflict” and “no profit”
rules, without her consent, and that she was entitled to a share in
the profits.
The Court of Appeal agreed, holding that the opportunity had
arisen in the course of the directors’ activities as company
directors and therefore it should have been disclosed to the
company which should have been given a chance to decide
whether or not it wished to exploit the opportunity itself. It was
immaterial that property development was not the focus of the
company’s activities. The “scope of business” test, described in
Aas v Benham358 (and heavily relied upon by the deputy judge),
was held inapplicable: it was, the court held, a partnership
precedent; its application was limited to partnerships where the
partnership activities were clearly defined in restrictive
partnership deeds; by contrast, in companies (even, it seems,
quasi-partnership companies, as here) and trusts, Aas v Benham
had no application—directors were simply fiduciaries in
whatever activities they engaged. According to Rimer LJ359:
“I would regard it as correct to characterise the nature of a director’s fiduciary
duties as being so unlimited and as akin to a ‘general trusteeship’. In my judgment,
the decision in Aas v Benham provides no assistance in determining the nature and
reach of the ‘no profit’ rule so far as it applies to trustees and directors. In
particular, in the present case, the scope of the company’s business was in no
manner relevantly circumscribed by its constitution: it was fully open to it to
engage in property investment if the directors so chose.”
And later, given this, he reached the same conclusions on the

“no conflict” rule. It followed that the two directors had
breached their fiduciary duties and were required to account for
the profits earned on the development project (should the facts
establish there were any). This would, in turn, boost the assets of
the company, which would in turn increase the share price, and
thus improve the return to the petitioner who was seeking to
have her shares repurchased as her remedy under the unfair
prejudice petition.
Moreover, the court dismissed without discussion as
seemingly irrelevant the fact that the petitioner had accepted her
share of the notional commission from the defaulting directors,
and had at least implicitly acquiesced in the purchase of the
development property by the defendants.
Finally, although it is true that unfair prejudice claims can be
pursued successfully without proof of matters that would
constitute legal wrongs, here the entire focus of the Court of
Appeal’s reasoning was on the question of whether there had
been a breach of the no-conflict fiduciary duties.
16–98
Where does this leave directors? It is easy to explain that it is,
and ought to be, irrelevant to the question of fiduciary breach
whether the company could, or would, exploit the opportunity in
question. Those questions are more relevant when the alleged
breach is of the good faith duty (s.171), or even the care and skill
duty (s.174). But the gist of the “no conflict” rule is to compel,
so far as possible, unwavering loyalty to the corporate
endeavour. Both the duty and its remedies are geared to this end.
This, it is suggested, implicitly and inevitably requires the courts
to pay some regard to the scope of that endeavour. Instead, the
two cases just described (Bhullar v Bhullar360 and O’Donnell v
Shanahan361) adopt a broad approach that, taken only a little
further, verges on a finding that any opportunity that is at all
interesting financially will be seen as of interest to the company.
This raises the risks for directors, and increases the chances of
pure windfall gains to the company and its shareholders: the
trend is towards there being no safe harbour other than to present
every entrepreneurial idea to the board before pursuing it
individually, notwithstanding the nature of the corporate
business or whether there is a real, sensible prospect of a
conflict. This effectively gives the company a right of first
refusal on opportunities seen by the directors as worth pursuing.
Within the company’s scope of business, broadly interpreted,
this is precisely the goal of the no-conflict rule, but outside that
context the broader rule needs some justification. It raises the
fiduciary “no-conflict” rule from pragmatic prophylaxis to
something far more draconian.
Since all these cases were determined under the common law,
it remains to be seen how far the statutory encapsulation has
imposed its own pressure in s.175(4) to deny a breach if “the
situation cannot reasonably be regarded as likely to give rise to a
conflict of interest”. However, recent authorities do not appear to
deviate from these common law authorities on the tests for
determining the scope of the director’s duty.362
Competing and multiple directorships
16–99
It is common for directors to hold directorships in more than one
company, certainly where the companies are part of a group but
also where they are independent of one another. In such cases an
issue arises in relation to the compatibility of this practice with
the no-conflict rule set out in s.175, whether conceived of as a
conflict of interest and duty (s.175(1)) or a conflict of duty and
duty (s.175(7)). There are two situations which need to be
looked at: the first is where directorships are held in companies
which are in business competition with one another, or indeed
where the director in any other way enters into competition with
the company; and, secondly and more commonly, where the
companies are not competitors but where nevertheless their
interests may conflict from time to time.
Competing with the company
16–100
One of the most obvious examples of a situation which might be
expected to give rise to a conflict between two sets of a
director’s duties363 is where the director carries on or is
associated with a business competing with that of the company.
Certainly fiduciaries without the consent of their principals are
normally precluded from competing with them, and this is
specifically stated in the analogous field of partnership law.364
For a while, and strangely therefore, it was supposed that a
similar rule did not apply to directors.365 However, the one
definite, if inadequately reported, decision that a director could
not be restrained from acting as a director of a rival company
appears to be based on the conclusion that competing
directorships were not unconstitutional (i.e. not contrary to the
articles or the director’s contract) rather than that they were not
in breach of the director’s fiduciary duty.366 It has been held that
the duty of fidelity flowing from the relationship of employer
and worker may preclude the worker from engaging, even in his
spare time, in work for a competitor,367 notwithstanding that the
worker’s duty of fidelity imposes lesser obligations than the full
duty of good faith owed by a director or other fiduciary agent. It
seems impossible to suggest, therefore, that a director can
compete whereas a subordinate employee cannot.
In the light of the above it was not surprising that in In Plus
Group Ltd v Pyke368 the Court of Appeal expressed unease with
the state of the law as set out above, but resisted the temptation
to engage in a wholesale review of the case law in this area in
the situation facing them where the defendant director had been
wholly, and probably wrongfully, excluded from any influence
over the operation of the claimant companies, in which he was
also a substantial shareholder. The Court held that in these
circumstances the claimant companies could not obtain an
account of the profits made by the director as a director of a
competing company which he had established. In taking this
approach, the court has indicated that the logical way forward is
simply to examine the rule against competition in the
circumstances of each case. The Mashonaland case must then be
seen, not as one laying down a rule that competition is in
principle permitted, but as one where, as in the Pyke case, it was
inappropriate to apply the no-competition rule.369
It can also be argued that s.175 has made it much easier for
directors to deal with such conflicts of duty. If both companies
consent to the situation, there is no breach of fiduciary duty
arising simply from taking up directorships in competing
companies, but so long as consent at common law required the
approval of the shareholders, directors would regard the process
of obtaining consent as a burdensome one. Under s.175, by
contrast, the non-conflicted directors of the companies involved
will normally be in a position to give their consent (subject to the
different default rules for private and public companies noted
below).
16–101
Two difficulties remain, however. First, the section does not
contemplate, in the way that s.177 does, a general declaration of
interest. The director must seek approval from the non-involved
directors for taking up the position as a director of the competing
company and, should the nature of that situation change—for
example, should the competing company start an additional line
of business in competition with the other company—a further
consent would apparently be required. However, it may not
always be easy to judge when a situation has arisen which
requires further consent. Secondly, even if consent is given to
the taking up of the directorship, the director is likely to be faced
with constant difficulties in avoiding breaches of the core duty of
loyalty to the companies concerned as he or she performs the
duties of the directorships. The director would be required to
treat both companies equally, which might reduce his or her
utility to both companies.370 It has been recognised that one who
is a director of two rival concerns is walking a tight-rope and at
risk if he fails to deal fairly with both.371 However, it should be
noted that the legal problem here arises not so much from the no-
conflict rule as from the fact that, by becoming a director of two
companies, the director owes a core duty of loyalty to each.
In practice, it is in fact rare for a director to act for competing
companies, except in the very problematic case where the
director forms a new company for the purpose of competing with
the current company when, as he plans, he ceases to be
associated with it. The tension then is to balance the freedom of
individuals to exploit their talents after their association with a
company ceases, and the obligations of fiduciary loyalty
intended to protect the company from misuse of the company’s
business opportunities or trade secrets. The company cannot, of
course, prevent the departing director from applying his acquired
general (and non-confidential) knowledge and experience of the
company’s line of business and its markets for the benefit of his
new employer. And, moreover, simply forming an intention to
leave the company and compete with it, and indeed taking
preparatory steps towards that end but without actually engaging
in any competitive activity, has been held not to constitute any
breach of the director’s duty of loyalty, however much it may
seem to be lacking in merit.372 But actual competitive activity
(such as recruiting the company’s employees to work in the new
business) will not only be a breach of the no-conflict rule, but
the director’s core duty of good faith and fidelity will require
disclosure of this threat to the company’s business to its board,
even if it involves the director disclosing his or her own
wrongdoing.373 The rigour of the fiduciary principles is,
however, somewhat abated in those cases where the resignation
of the directors has been forced upon him or her and the director
has not actively sought to seduce the company’s customers away
or to exploit an opportunity belonging to it.374 Beyond that, the
courts seem to have adopted rather pragmatic solutions based on
common sense and the merits of the case. This is an area in
which context is all. So in Foster Bryant Surveying Ltd v
Bryant,375 Rix LJ summarised the existing cases as follows:
“At one extreme (In Plus Group v Pyke376) the defendant is director in name only.
At the other extreme, the director has planned his resignation having in mind the
destruction of his company or at least the exploitation of its property in the form of
business opportunities in which he is currently involved (IDC,377 Canaero,378
Simonet,379 British Midland Tool380). In the middle are more nuanced cases which
go both ways: in Shepherds Investments v Walters381 the combination of disloyalty,
active promotion of the planned business, and exploitation of a business
opportunity, all while the directors remained in office, brought liability; in
Umanna,382 Balston,383 and Framlington,384 however, where the resignations were
unaccompanied by disloyalty, there was no liability.” (citations added)
After resignation, however, the director will be able to compete

freely subject to any contractual restraints, the law relating to
trade secrets and the rules relating to conflicts which arose
before resignation (see s.170(2)).
Multiple directorships
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The law relating to multiple directorships of a non-competing
type is basically as set out above, though obviously a
directorship of another non-competing company creates a lesser
conflict problem. Indeed, in the case of a non-executive director
of a company (i.e. one who is not bound to devote all his time
and efforts to the company) taking a non-executive directorship
in another, non-competing company can be said not to raise a
conflict issue at all. However, it is no doubt good practice to
obtain the consent of each board to the position, and in the case
of an executive director such consent would seem to be
necessary.
When conflicts of interest arise at a later date, for example,
where the director is on the boards of two companies which are
on opposite sides of a transaction, it is common for the director
simply to withdraw from a role on the board of either company.
Provided the articles make provision for this solution, the Act
appears to relieve the director of liability in such a case, even
liability arising under the core duty of loyalty.385 In the absence
of appropriate provisions in the articles, however, the director’s
position is precarious. If a person is a director of two non-
competing companies but one makes a takeover bid for the
other, how can the director discharge the core duty of loyalty to
both in such a situation? Withdrawal may ensure equal treatment
but can hardly be said to amount to a discharge of the duty to
promote the success of the (each) company. In that situation,
resignation from one of the involved companies may be the only
possible step. However, where the conflict is less pressing, the
strategy of withdrawal may seem appropriate.
Approval by the board
16–103
We now reach discussion of the second of the two principal
issues arising under s.175. Assuming the impugned transaction
does involve an unacceptable conflict, whose permission must
the director obtain for personal exploitation of it? Section 175
introduces the possibility of board approval, supplementing the
orthodox common law doctrine of shareholder approval which
we discuss below in relation to directors’ duties as a whole.386
Previously the common law had never condoned mere board
approval in these circumstances,387 and its use by the statute in
this way is a major innovation.
By virtue of s.175(4)(b), authorisation may be given by the
board itself for a conflict of interest on the part of one of their
number, so that no breach of duty is committed.388 The
conflicted director him- or herself is excluded in the calculation
of the quorum needed for the directors’ meeting at which
authorisation is given, and the director’s vote is disregarded in
determining whether board approval has been given (s.175(6)).
Any “interested” director is also similarly excluded, but when a
director can be said to be interested in another director’s
authorisation to take a corporate opportunity is left to the courts
to decide. Any other director participating in the opportunity
would clearly be interested, but how far the concept of interest
goes beyond that is not clear.
Notably, if there is no authorisation in advance of the taking of
the opportunity, subsequent ratification of the director’s breach
of duty by the company requires a decision of the
shareholders.389
Nevertheless, it might be asked whether this is a wise
innovation. On the one hand, a requirement of shareholder
approval is a heavy one, and may deter directors from
proceeding with courses of action which, if asked, shareholders
would approve, thus imposing unnecessary restrictions on
directors’ entrepreneurial activities. On the other hand, the risk
with board approval is that, although the approving directors
may have no interest in the particular case, they may have an
underlying interest in a culture of easy conflict approvals (“you
scratch my back and I’ll scratch yours”). No doubt, such conduct
would be a breach of the other duties imposed on directors,
discussed above, but such breaches may be difficult to detect and
to prove in court.
16–104
It may be for this sort of reason that the statute allows or requires
the company’s constitution (notably the articles) to have some
control over whether uninvolved directors can authorise conflicts
of interest. In the case of private companies, the board can act as
the authorising body unless something in the company’s articles
or other parts of its constitution restricts the board from so
acting. In the case of public or charitable390 companies, the
company’s constitution must positively empower the directors to
act in this way, and the articles might (but need not) then
regulate in further detail the scope or manner of exercise of the
authorisation power. Compliance with the articles would in
either case be a pre-condition for the valid exercise of the
directors’ powers of authorisation (s.178(5)). The more
restrictive rule applied to public companies reflects the fact that
their shareholding bodies tend to be more dispersed than those in
private companies and their collective action problems are
accordingly greater. Hence, in public companies the burden of
introducing the rule of director authorisation is placed on those
who want it (normally the directors themselves) rather than the
burden of removing it on those who do not want it (presumably
the shareholders).391 However, the statute, surprisingly, does not
adopt a proposal of the CLR that board authorisations should be
reported to the shareholders in the subsequent directors’
report.392
We shall see below that, in relation to shareholder approval,
the common law developed a doctrine that certain breaches of
duty are not capable of approval by the company, the case of
Cook v Deeks393 being a leading authority in this area. Does such
a restriction apply to authorisation given by the independent
members of the board? There is no mention of such a restriction
in s.176 and, since independent board approval is an invention of
the statute, it would seem that this limitation cannot be imported
into the board’s power of authorisation. Is this surprising? There
are two controls over board authorisation which do not exist in
relation to shareholder authorisation at common law. First,
interested directors are excluded by the statute from voting on a
board resolution, whereas at common law interested directors
were entitled to vote as shareholders to authorise the taking of a
corporate opportunity (the modern statutory rule on shareholder
voting is now different394). The exclusion of interested directors
from voting might be thought to reduce the danger of biased
corporate decisions or unfair treatment of minority shareholders,
although it does not eliminate it. Secondly, the non-involved
voting directors, unlike shareholders, are subject to fiduciary
duties when exercising their votes. The core duty of loyalty
requires directors to give priority to the promotion of the success
of the company when deciding whether to authorise, for
example, the taking of a corporate opportunity, though such a
breach might be difficult to prove.395
Where the board does not have approval power (because it is
explicitly removed by the articles in a private company, or not
granted in a public or charitable company, or not practically
possible because all the directors are conflicted), then approval
will need to be obtained in accordance with any specific rules set
out in the company’s articles, or in accordance with the common
law default rule which requires the approval of the shareholders
in general meeting, as discussed below.
A conceptual issue
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Section 175 is based on the existence of a conflict of duty and
interest (or a conflict of duties).396 In the area of corporate
opportunity, this conflict arises because of the conflict between
the interest of the director in personal exploitation of the
opportunity and his or her duty to offer the opportunity to the
company (or pursue it on behalf of the company). The duty to
offer the opportunity to the company arises because it has been
characterised as a corporate one: that is why the identification of
the criteria for making the opportunity a corporate one is so
central to this body of law, and why the uninhibited approach of
the most recent cases seems questionable.397
However, one can ask, what is the nature of this duty? It is
generally accepted that, if the director does not wish to exploit
the opportunity personally, no breach of s.175 arises because
there is then no personal interest conflicting with the director’s
duty to the company. In other words, a director who does
nothing can never be found liable under s.175. Might the
director, however, be liable for breach of some other duty, for
example, the duty of care or good faith? In principle, this
possibility exists. In the case of the core duty of loyalty the
director would have to form the view that the promotion of the
success of the company required the opportunity to be
communicated to the company, and then fail to do so. The duty
of care seems a more promising avenue of approach because it is
based on an objective test. However, it would not necessarily be
correct to infer from the existence of a duty for the purposes of
the no-conflict rule a duty for the purposes of the duty of care.
The courts have traditionally developed far more demanding
standards of loyalty than of care and that approach may continue
under the statute.398
Remedies
16–106
The detail of the remedies available to the company for breach
by directors of their duties to the company are dealt with later,399
but it is useful at this stage to note their broad outline in relation
to the conflicts cases, as their key characteristic differs
fundamentally from the remedies so far encountered. For all
breaches of directors’ duties, if discovered at the planning stage,
it is true that the court may be persuaded to order an injunction
to prevent the plan being implemented. But, once the breach is
committed, we have seen that by and large the remedy has been
compensation to the company for the loss thereby caused,
whether that compensation is assessed using common law or
equitable rules (the former for the duty of care, it is suggested;
the latter otherwise).
The only exception so far has been with the self-dealing rule,
where the orthodox remedy is rescission of the contract,400 not
compensation for loss or an account of profits.401 In these cases,
as with all the “no-conflict” duties here, the aim of the remedy is
to strip the defaulting director of the benefits of his or her
disloyal distraction from undeviating focus on the company’s
interests, but the courts have typically declined to value the
contract between the company and the director, and have
therefore required the remedy to be solely by way of putting the
parties back into their pre-contracting status.
With the conflicts of interests cases just considered, however,
this difficult valuation problem does not arise. Where the
conflict arises not from any self-dealing, but typically from the
director’s misuse of the company’s property, information or
opportunity, then, too, the remedy aims to strip the defaulting
fiduciary of the profits of his or her disloyal activities. If the
disloyal venture is not profitable, then it follows that the
company does not have a remedy under this head; if it is
profitable, the director must account for the profit. This seems
straightforward. The point to note, however, is that the focus of
these no-conflict remedies is profit-stripping; the company is not
entitled, under this head, to recover losses: to recover those, the
company must, and very often can on the same facts, sue its
disloyal fiduciary for some other failure, be it failure to act
within powers, or breach of the duty of good faith or care and
skill, provided it can prove the elements of those quite different
claims.402
DUTY NOT TO ACCEPT BENEFITS FROM THIRD PARTIES
The scope of section 176
16–107
Section 176 provides that a director “must not accept a benefit
from a third party conferred by reason of (a) his being a director,
or (b) his doing (or not doing) anything as a director”.403 A “third
party” means a person other than the company, an associated
body corporate or a person acting on behalf of such companies.
The connection of this rule with the no-conflict principle is
underlined by the provision that the duty is not infringed if the
benefit “cannot reasonably be regarded as likely to give rise to a
conflict of interest” (s.176(3)).404 This being so, it may be
wondered what the purpose of s.176 is, for could not the
situations it deals with be handled under the general no-conflict
section (s.175)? The answer, and it is an important one, is that
there is no provision in s.176 for authorisation to be given by
uninvolved directors for the receipt of third-party benefits. The
risk of such benefits distorting the proper performance of a
director’s duties is so high that it is rightly thought to be proper
to require authorisation from the shareholders in general meeting
(even though that turns the rule into a near-ban on the receipt of
third-party benefits). Although the point is not expressly dealt
with in s.176, the availability at common law of shareholder
authorisation is preserved by s.180(4)(a).405 Finally, the fact that
s.175 applies to a situation does not prevent s.176 being relied
upon as well, i.e. the sections are cumulative rather than
mutually exclusive in their operation.406
The common law termed such payments “bribes”, although
that seems a misnomer as it is enough at common law that there
has been the payment of money or the conferment of another
benefit upon an agent whom the payer knows is acting as an
agent for a principal in circumstances where the payment has not
been disclosed to the principal.407 There is no need to show that
the payer of the bribe acted with a corrupt motive; that the
agent’s mind was actually affected by the bribe; that the payer
knew or suspected that the agent would conceal the payment
from the principal; or that the principal suffered any loss or that
the transaction was in some way unfair. None of these matters
seem to be requirements of s.176 either. Thus, the term “third
party benefits” is more appropriate than the term “bribe”.
On the other hand, so far as true bribes are concerned,
enormous changes have been introduced by the Bribery Act
2010, as we have seen. This Act was designed to bring the UK in
line with international norms on anti-corruption legislation. It
makes it a criminal offence to give or receive a bribe, but, most
significantly, it also introduces a corporate offence of failing to
prevent bribery.408
Remedies
16–108
At common law the remedies available in the case of third party
benefits were extensive. These common law remedies, so far as
they give the company remedies against the defaulting director,
continue to apply by virtue of s.178, despite the change of
nomenclature in s.176. Although that section imposes a duty
only on the director, the common law also imposed obligations
on (and provided remedies against) the third party, and these are
presumably unaffected. Thus, where such a benefit has been paid
to a director, the company may rescind the contract between it
and the third party (provided the third party knew the recipient
was a director of the company), and it matters not whether the
payer is the third party or the third party’s agent.409 In addition,
or instead, both the third party and the director are jointly and
severally liable in damages in fraud to the company, the amount
of the recovery depending upon proof of actual loss.410
Alternatively, the company may hold both the director and the
third party jointly and severally liable to pay the amount of the
benefit to the company as money had and received to its use, this
liability being naturally not dependent upon proof of loss.
Against the director, such a personal liability to account is
straightforward: the bribe is akin to a secret profit made out the
director’s position. Against the third party it is a rather peculiar
remedy, though one which seems to be established.411 However,
the company must choose between the remedies of damages and
account, the choice no doubt depending on the amount of the
provable loss which the company suffered as a result of the
bribe, though it need not do so until judgment.412
In Attorney-General for Hong Kong v Reid,413 the Privy
Council took the further step of recognising a proprietary
remedy by way of a constructive trust in favour of the company
(or other principal) against the director (or other agent) in respect
of the bribe. The significance of this remedy being available, in
addition to the personal remedy to account, is that the company
may then make further tracing claims to any investment profits
made by the defaulting director through the use of the original
benefit (whilst falling back on the personal claim if the
investment has been unprofitable); the company may also follow
the benefit (and its traceable substitutes) into the hands of third
parties who are not bona fide purchaser for value; and,
importantly, all these proprietary claims will prevail over the
claims of the unsecured creditors in the event of the director’s
(or the third party’s) insolvency. After a great deal of academic
and judicial debate, the Privy Council’s conclusions in this case
have now been confirmed by the Supreme Court in FHR
European Ventures LLP v Cedar Capital Partners LLC,414 as
discussed in more detail below.415
REMEDIES FOR BREACH OF DUTY
16–109
As we have already noted, although there is a statutory statement
of the general duties owed by directors, the remedies for breach
of these duties is not similarly stated. Rather, s.178 simply
provides that “the consequences of a breach (or threatened
breach) of ss.171 to 177 are the same as would apply if the
corresponding common law rule or equitable duty applied”; and
that the duties contained in the sections (other than s.174) are
“enforceable in the same way as any other fiduciary duty owed
to a company by its directors”. It should be noted that s.178
applies only to the general duties laid out in ss.171–177, not to
the provisions to be found in Ch.3 of Pt 10 dealing with
disclosure of interests in existing transactions (for which the
statute provides only criminal sanctions)416; nor to the provisions
contained in Chs 4 or 4A of Pt 10, requiring shareholder
approval for certain transactions with directors, for which a self-
contained statutory civil code of remedies is provided.417 It
should also be noted that the second proposition in s.178 is not
applied to the duty to exercise reasonable care, skill and
diligence, in line with the modern view that this is not a
fiduciary duty. The remedy for that breach is normally confined
to damages.418
We have sought to indicate the principal remedies available
for each of the duties as we have gone along. Nevertheless, it
may be useful to bring them together here, since it is important
to appreciate both the areas of overlap and the areas of
difference. The main remedies available are: (a)injunction or
declaration; (b) damages or compensation; (c) restoration of the
company’s property; (d) rescission of the contract; (e) account of
profits; and (f) summary dismissal.
(a) Injunction or declaration
16–110
These are primarily employed where the breach is threatened but
has not yet occurred.419 If action can be taken in time, this is
obviously the most satisfactory course. However, if the remedy
is to be used effectively by an individual shareholder, suing
derivatively,420 he or she will need to be well-informed about the
proposals of the board, which in all but the smallest companies
will not often be the case. An injunction may also be appropriate
where the breach has already occurred but is likely to continue,
or if some of its consequences can thereby be avoided.421
(b) Damages or compensation
16–111
Damages are the appropriate remedy for breach of a common
law duty of care, or non-compliance with the terms of the
director’s contract or the company’s constitution; compensation
is the analogous equitable remedy for breach of the (originally)
equitable duty of good faith (acting to promote the success of the
company) or acting for improper purposes. In practice, the
common law/equity distinction has become blurred,422 and
probably no useful purpose is served by seeking to keep them
distinct.423 Both are inevitably personal remedies. All the
directors who participate in the breach424 are jointly and
severally liable with the usual rights of contribution inter se.425
(c) “Restoration” of property
16–112
Although the directors are not trustees of the company’s
property (which is held by the company itself as a separate legal
person), we have noted at a number of points in this chapter that
the courts sometimes treat directors as if they were such trustees.
In particular, where a director disposes of the company’s
property in unauthorised ways, and in consequence the
company’s property comes into his or her own hands, the
director will be treated as a constructive trustee of the property
for the company.426 This means that the property, or its proceeds,
can be recovered by way of proprietary claim against the
director, so far as traceable427; and that the company’s claim
against its defaulting director will have priority over any
competing claims of the director’s unsecured creditors (since the
property is the company’s property, not the director’s). The
doctrinal underpinnings of these conclusions are rarely unpicked,
but they must surely rely more on analysing the claim as a
profitable breach of the conflicts rules (the conflict being
obvious),428 for which proprietary disgorgement of the gains is
available,429 rather than analysing the claim as merely an
unauthorised (and therefore potentially void) contract and indeed
one where the identity of the counterparty is irrelevant.430 Where
these proprietary disgorgement claims are available against the
defaulting directors, they can be enormously valuable to the
company.
Alternatively, if the director no longer has the company’s
assets or their traceable proceeds, or if their use did not generate
a profit, or if the company’s assets were initially, and without
authority, paid away to third parties rather than to the director,431
then the company may, in the alternative, sue the director for
compensation for the losses suffered by the company as a result
of the director’s initial unauthorised disposition of the
company’s property. One aspect of this is straightforward: the
remedy is necessarily personal, and so the company’s claim
against its defaulting director will rank equally with the claims
of the directors’ general creditors.
But beyond that, this remedy has proved enormously
controversial. It was long argued that the claim in issue was for
“restoration of property” (albeit in money), and not for
compensation. This had the enormous advantage, so it was said,
that the claim was not dependent upon proof of loss on the part
of the company, as a damages claim would be.432 It was further
suggested that it then followed that if, for example, £1 million
was paid out by the director in the unauthorised purchase of X
when it should have been paid out in the authorised purchase of
Y,433 then the appropriate remedy was effectively for the director
to restore to the company the misappropriated £1 million.434 By
contrast, if the remedy were simply compensation, then the
director would be required to restore to the company what
effectively it should have had absent the breach, i.e. Y, if
possible, or the monetary value of Y.435 Moreover, this former
claim to a “restoration” remedy was regarded as being available
in addition to, and by way of an alternative option to, the usual
compensation remedy. The effect was thus to enable a company
to claim either £1 million (adjusted, as noted above) if the
authorised investment had crashed, or Y (or, more accurately, it
or its value, again adjusted) if the proper investment was a
winner. This gave the company a “heads I win, tails you lose”
remedial menu.
In fact few cases went so far, and we now seem to have
reached the preferable and far more defensible position that
choice between “£1 million” or “Y” is only available when the
recipient of the £1 million is the defaulting director him- or
herself. In these circumstances, the claim to the £1 million is
better viewed as not for “restoration” as a self-standing option,
but as a claim for disgorgement made out under one or other of
the various conflicts rules. Otherwise, however, the company’s
claim is merely one for compensation, and—equitable or
otherwise—this compensation is directed solely at reversing
loss, not at some sort of free-standing “restoration” where no
loss (or some far smaller loss) has been suffered.436
(d) Avoidance of contracts
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An agreement between the director and the company that
breaches the no-conflict rules may be avoided, provided that the
company has done nothing to indicate an intention to ratify the
agreement after finding out about the breach of duty,437 that
restitutio in integrum is possible,438 and that the rights of bona
fide third parties have not supervened.439 It might now be
doubted how strong a bar restitutio in integrum really is, given
the wide powers the court has to order financial adjustments
when directing rescission.440
Equally, a contract entered into by the company in breach of
the directors’ duties to exercise their powers for a proper purpose
is in principle avoidable by the company, but again subject to the
considerations noted above and the rights of good faith third
parties.441 Where, however, the directors have simply acted
without power, the contract will be void, not voidable.442
(e) Accounting for profits: disgorgement of disloyal
gains
16–114
This liability arises as a response to profitable contracts or
arrangements between the director and a third party which are
held to be in breach of the conflict of interest rules443 or the duty
not to accept benefits from third parties.444 In such cases there
can be no question of rescinding the contract at the instance of
the company, since the company is not party to it, and an
account of profits to strip the defaulting fiduciary of any benefits
will be the sole remedy.
As we have seen, recovery of the profit by the company is not
conditional on proof of any loss suffered by the company; the
profit is recoverable not as damages or compensation but
because the company is entitled to call upon the disloyal director
to account to it.445 All the profits made by the director446 and
attributable to the breach must be disgorged, but not those
attributable to other sources.447 This is sometimes ameliorated in
the case of trustees, but only where their bona fides are not in
question; then the courts have sometimes permitted the trustee
an allowance in the accounting process to provide a reasonable
remuneration (including a profit element) for the work carried
out in effecting the profitable deal.448 The fact that the director
could have made the same profit without breaching his or her
duty449 or that the company, if asked, would have given its
consent to the director’s activities,450 is irrelevant.
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Moreover, if the disloyal gain is identifiable in the director’s
hands, then the director will hold that asset on constructive trust
for the company; in short, the disgorgement remedy is
proprietary.451 This conclusion has been confirmed in England
only relatively recently,452 even though it has long been the
position in other common law jurisdictions.453 In those
jurisdictions, however, the courts claim to have a discretion as to
whether or not to award a constructive trust on the facts before
the court: they have what is described as a “remedial
constructive trust”, while the English courts insist that the
constructive trust is “institutional” only, so that if the facts
support its existence then there is not discretion in the court to
deny it to a successful claimant. This latter approach seems
preferable, and indeed the practice in other jurisdictions—
despite their asserted flexibility—is overwhelmingly the same.
The constructive trust, being proprietary, carries with it
significant advantages.454 There seems little merit in asserting
that these follow from the wrong, and then denying the claimant
their benefits, usually just when they are most needed.455
(f) Summary dismissal
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The right which an employer has at common law to dismiss an
employee who has been guilty of serious misconduct has no
application to the director as such, not being an employee.456
However, it could be an effective sanction against executive
directors and other officers of the company, since it may involve
loss of livelihood rather than simply of position and directors’
fees. However, it tends to be used only in the clearest cases.
Generally, the company prefers the director to “go quietly”,
which means that his or her entitlements on departure are
calculated as if the contract were unimpeachable, even if there is
scope for arguing that the company has the unilateral right to
remove the director for breach of contract.457
SHAREHOLDER APPROVAL OR “WHITEWASH” OF SPECIFIC
BREACHES OF DUTY
16–117
It is a normal feature of the law, including the law relating to
directors, that those to whom duties are owed may release those
who owe the duties from their legal obligations. Thus the
company ought in principle to be able to release the directors
from their general duties. But in deciding how this might be
achieved in practice, a number of difficult issues emerge.
What is being decided?
16–118
The company will normally act by resolution, either of the board
of directors or of the general meeting, and it is important to ask
precisely what their resolution seeks to achieve. This is the first
issue. Decisions to authorise or ratify a breach, where effective,
have the result of putting the directors in a position where either
they do not commit a breach of duty to the company or are
treated as not having been in breach. Where such approval is
given in advance of the breach of duty, it is normally referred to
as authorisation and where it is given afterwards it is referred to
as ratification.458 Both these decisions should be distinguished
from affirmation, where the shareholder resolution has the effect
of making binding on the company a transaction which is
otherwise voidable by the company because of the director’s
breach of duty, and from adoption where the transaction is one
the director had no power at all to enter into, but the
shareholders do,459 and they decide the company should enter
into it.460 Affirmation or adoption does not of itself constitute
implicit forgiveness, and the company may (the context is
important) nevertheless still enforce its remedies against the
director, for example, for compensation. However, a single
resolution may be intended to deliver more than one end, for
example to both forgive the directors and make the transaction
binding on the company, and it is a matter of interpretation
whether any particular resolution does this. Finally, ratification
must also be distinguished from a mere decision not to sue the
director. Such a decision has no effect on the director’s legal
position as being in breach of duty, and unless the decision not
to sue constitutes a binding contract or waiver, the company can
always change its mind later and sue the director, subject to the
statute of limitations.461
Ratification is inevitably given in respect of an identified
wrong already committed. Authorisation, by contrast, may be
given in relation to a specific breach of duty or generally, i.e.
where no specific breach of duty is in contemplation or has yet
occurred. The obvious mechanism to use to provide general ex
ante authorisation of the release from a category of duties is an
appropriate provision in the articles of association. It is also
obvious that such authorisation in the articles (or elsewhere) may
be regarded with more suspicion than a specific release (whether
authorisation in advance or ratification after the event) because,
provided that full disclosure of the relevant facts is made to the
shareholders in advance of their decision,462 they will, in the
latter case, know precisely the nature of the infringement of the
company’s rights to which they are consenting. By contrast, a
general waiver of the benefit of a nominated duty in advance is
necessarily a less informed waiver, and shareholders, when
voting on a change to the articles, may underestimate the
chances of situations arising in the future where they would not
want to give approval.463 In other words, a provision in the
articles may be less reliable an indication of shareholder
preferences than specific authorisation of a particular breach. In
this section we are concerned with the particular cases of what
might be called “ad hoc” approval by the company, i.e. approval
of a particular actual or proposed breach of duty. In the next
section we discuss whether approval can be given in advance for
broad categories of future breaches, where no or little detail is
available concerning the particular breaches which may occur in
the future.
Authorisation and ratification are recognised in the Act.
Section 180(4)(a), recognising but not seeking to amend the
common law rules on authorisation, states that the directors’
general duties “have effect subject to any rule of law enabling
the company to give authority … for anything to be done (or
omitted) by the directors … that would otherwise be a breach of
duty”.464 And s.239 recognises the common law doctrine of
ratification, but also seeks to regulate and modify it in certain
important respects. This regulation is welcome by way of
clarification, but one undesirable side-effect is that the rules
applying to ratification are no longer in all respects the same as
those applying to authorisation, so that it may matter, oddly, if
the company gives its approval the day before or the day after
the directors breach their duty. And it will be interesting to see if
the common law on authorisation develops so as to align more
with the revised statutory rules.
Who can take the decision for the company?
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The next concern is which corporate organ should take the
decision for the company. If the company were deciding whether
or not to pursue its legal claims against third parties, or affirm
voidable contracts, or waive breaches of duty committed by third
parties dealing with the company, then in the ordinary course it
would be the board of directors (or its delegates) who would take
these decisions. But where the claims in issue are the company’s
claims against one or more of its directors, the common law has
typically assumed that the decision will be taken by the general
meeting (subject to one important qualification, noted below465).
This appears to track the approach taken in trusts cases, where it
is the beneficiaries who decide whether or not to pursue claims
against wrongdoing trustees. But of course in these trusts cases
the claim in issue is the beneficiaries’ claim, whereas in the
corporate scenario it is the company’s. Nevertheless, there are
sound and rather obvious reasons for adopting a parallel general
rule, and so it has persisted.
But, whatever the advantages of such a default rule, the
underlying question is simply which corporate organ should take
the decision in issue, and the answer to that is not—and need not
be—set in stone. The articles may make different provisions.
And we have already seen that the Act itself ousts the common
law default rule in certain circumstances, and hands the relevant
decision to the directors. For example, advance authorisation of
self-dealing transactions is determined by the board of directors
(ss.177, 180(1)(b))—indeed authorisation in this context is a
misnomer; mere disclosure to the board is all that is required,
and the company will then go ahead with the transaction if it
approves, or call it off if it does not. So too in relation to
breaches of the conflict of interest rule (ss.175, 180(1)(a)), where
the default rule of shareholder authorisation is again replaced by
board authorisation (subject to the articles not
prohibiting/permitting this for private/public companies
respectively). In both these contexts, the risk profile supporting
the common law default rule is considered too low to warrant the
cost and inefficiency of its use here. By contrast, there are no
statutory alternatives for advance authorisation of proposed
breaches of the other general duties (ss.171–174 and 176): there
the common law default rules would apply.
Again, by contrast, note that there are no parallel statutory
provisions for ratification decisions: if a breach is to be forgiven
after the event, then the Act does not in its terms recognise a
reason to relax the protections afforded by the common law
default rule, which gives the decision to the general meeting.
Indeed, as we will see in the next few paragraphs, the Act rather
goes the other way, and stiffens the relevant restrictions.
As a result of these statutory inroads, there is no necessary
alignment in the approval mechanisms for prior authorisation
and for subsequent ratification, even at the level of which organ
is to take the decision in question. The company’s own articles
might further complicate the picture. This reinforces the need
identified at the outset to be clear about what the company is
purporting to decide.
16–120
There is one important qualification to the preceding analysis.
The underlying assumption has been that the shareholders in
general meeting constitute the appropriate expression of “the
company” for the purpose of approval. However, this is not
always true. As we have seen,466 when the company is in the
vicinity of insolvency, the common law takes the view that the
creditors are the persons with the primary economic interest in
the company. One important consequence of this is that the
general meeting in such a situation may no longer approve
breaches of the directors’ duties: that is a matter for the creditors
who, however, have no means of acting until the company goes
into an insolvency procedure and an insolvency practitioner is
appointed to act on their behalf.467
Disenfranchising particular voters
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Settling the appropriate corporate organ to take the company’s
decision is not the end of the analysis. Whichever organ makes
the decision for the company, there is an obvious concern to see
that the decision is a good one for the company. If the decision is
to be taken by the board of directors, the directors’ general
duties, especially those in ss.171–174, go a long way to ensuring
that their deliberations are appropriately focused on the
corporate benefit. Even so, where the decision is one concerning
authorisation or ratification of a breach of duty by one of their
number, the niceties are obvious. The Act deals with these head
on. In those rare cases where the authorisation decision is given
to the board of directors, as it is in the s.175 conflicts cases, then
conflicted directors are excluded in the calculation of the
quorum, and their votes are disregarded in determining whether
board approval has been given (s.175(6)).468 This straightforward
statutory disenfranchisement effectively eliminates the moral
dilemma of “asking turkeys to vote for Christmas”.469
The Act does not stop there. A similar approach is taken to
ratification decisions, notwithstanding that these are decisions
for the general meeting. Section 239(4) indicates that the
ratification resolution is to be regarded as passed “only if the
necessary majority is obtained disregarding the votes in favour
of the resolution by the director … and any member connected
with him”.470 This may not capture every member whose
motivations might be thought suspect, but it certainly goes some
distance towards that.
Given these two very substantial inroads, both directed rather
sensibly at disenfranchising the defaulting directors (along with
certain associated parties), it is perhaps surprising that the Act
did not continue in the same vein and apply the same rule to
authorisation decisions taken by the general meeting. The same
mischief is equally in issue in both cases. But instead these are
left to the common law default rules, with the Act merely
acknowledging this approach in s.180(4)(a). This reticence is
seemingly repeated in the provisions of Chs 4 and 4A of Pt 10,
which, as we have seen, appear to permit interested directors to
vote on the resolutions required by those Chapters (subject to
any stricter rules applying to listed companies). This difference
in approach to authorisation and to ratification is both odd and
undesirable, especially since controlling directors will generally
be able to choose the timing of the necessary shareholder
resolution, and thus whether it is to be a resolution of
authorisation or ratification.471
16–122
The common law default rules on authorisation (and, prior to the
Act, equally applicable to ratification) have long been a source
of concern. Starting from the unexceptional position that the
appropriate organ for making these decisions was the general
meeting, the common law view was that it then followed that
directors who were in breach of duty were entitled to cast their
votes as shareholders in favour of the forgiveness of their own
wrongs to the company.472 This conclusion was seen as justified
because shareholders, unlike directors, were not subject to
fiduciary duties, and indeed their shares, and the rights attached
to them, were to be regarded as their property, with all the
inherent rights to use that property in their own interests. There
is much to be said for the view that the law in this area should—
and indeed, properly analysed, does—start from a different
point. Property and fiduciary obligation do not come into it. At a
most basic level, the shareholders hold, and exercise, a power on
behalf of the company. All such powers come with constraints
requiring that they be exercised “in good faith and for proper
purposes”, as it is typically put.473 However broadly this
particular approval power is conceived, it would not seem to
cover use by interested members to deliver to themselves
forgiveness by the company for their wrongs and relief from
their need to provide the company with appropriate remedies.474
Voting majorities
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The next issue to consider is the necessary majority for approval
decisions. Subject to what is said in the next paragraph, the
common law default rule, unaffected by any of the statutory
interventions noted earlier, is for company authorisation or
ratification to be by an ordinary majority of either the directors
or the shareholders (depending on the appropriate organ for the
decision in question). The company’s articles may, of course,
make other provision. The Act is silent on the matter so far as
authorisation is concerned, merely preserving the common law.
And so far as ratification is concerned, the Act again preserves
the common law, with s.239(2) stipulating that the ratification
decision “must be taken by the members” and “may” be taken by
ordinary majority, unless the company’s articles or some
common law or statutory rule requires a higher level of
approval.475
But that is not necessarily the end of the matter. The majority,
especially the majority shareholders, may approve a breach of
duty by the directors and, in so doing, act unfairly towards the
minority, most obviously where they themselves are the
directors in question. This could be seen simply as an example of
majority unfairness towards the minority which can be handled
through the general mechanisms for dealing with such
unfairness, and which we discuss in Pt 4. However, the issue is
perhaps better dealt with—despite the precedents to the contrary
—by straightforwardly addressing the core problem of the
validity of the decision being taken, and to that end
disenfranchising the interested directors/shareholders, as
discussed earlier.476 Perhaps because this was not the common
law approach, and yet the difficulties in this area were plain to
see, an alternative tack was taken: certain breaches of directors’
duties were regarded as “unratifiable”. This is a difficult
approach to explain or defend, and we address it briefly in the
next paragraphs.
Non-ratifiable breaches
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A further question which has bedevilled the common law, and
which the Act acknowledges but does not answer,477 is whether
all breaches of duty by a director are capable of being ratified.
At common law it has long been held that some breaches of
directors’ duties are not ratifiable, but it is much less clear how
wide that rule is. Moreover, it is assumed that the doctrine of the
non-ratifiable breach restricts the scope of authorisation as much
as it does that of ratification. Since the Act does not address
either aspect of the issue, there is at least the benefit of retained
equivalence, so far as non-ratifiability is concerned, between the
approval rules applying before and after the breach.478
But which breaches are not ratifiable? The most commonly
formulated proposition is that a majority of the shareholders may
not by resolution expropriate to themselves company property,
because the property of the company is something in which all
the shareholders of the company have a (pro rata) interest.
Consequently, a resolution to ratify directors’ breaches of duty
which would offend against this principle of equality is
ineffective (unless, presumably, all the shareholders of the
company agreed to the resolution and any relevant capital
maintenance rules were complied with).479 But this is a principle
easier to formulate than to apply. The principle was applied in
Cook v Deeks,480 where the directors had diverted to themselves
contracts which they should have taken up on behalf of the
company. By virtue of their controlling interests they secured the
passing of a resolution in general meeting ratifying what they
had done. It was held that they must nevertheless be regarded as
holding the benefit of the contracts on trust for the company, for
“directors holding a majority of votes would not be permitted
[by the law] to make a present to themselves”.481 The same may
apply when the present is not to themselves but to someone else.
Where, then, is the line to be drawn between those cases
where shareholder approval is ineffective, and those in which
shareholder approval has been upheld? How, in particular, can
one reconcile Cook v Deeks with the many cases in which the
liability of directors has been held to disappear as a result of
ratification in general meeting, notwithstanding that the voting
majority has been carried by the interested directors?482 Why, in
Regal (Hastings) Ltd v Gulliver,483 did the House of Lords say
that the directors would not have been liable to account for their
profits had the transaction been ratified, while, in Cook v Deeks,
the Privy Council made the directors account notwithstanding
such ratification? A satisfactory answer, consistent with common
sense and with the decided cases, is difficult (and perhaps
impossible) to provide.484
Beyond the proposition that ratification is not effective where
it would amount to misappropriation, or expropriation, of
corporate property, it is difficult to formulate any further
limitations which command general consent. But even this
general consent might be misplaced. Every approval decision
amounts to a prospective or retrospective appropriation of
corporate property: in every case the company is giving up a
valuable claim, typically to compensation for losses or
disgorgement of gains from the director. It is not a
misappropriation of corporate property for the company to do
this; it is an inherent aspect of the company’s legal autonomy
that it can. In Cook v Deeks, it was surely not the nature of the
corporate opportunity, or its value, or any other attribute related
to the type of breach or the nature of the corporate opportunity,
which denied the directors their claim to valid ratification. Had
all the shareholders approved the ratification deal, it would have
stood. What could not be tolerated was the suggestion that the
three defaulting directors could themselves take this decision in
the face of a dissenting minority holding a contrary view. If this
is right, then the directors’ breaches were not un-ratifiable; they
were simply not effectively ratified by the wrongdoers
themselves. The same conclusion is equally true when the
company is on the brink of insolvency, or where the directors’
breach consists in acting against the creditors’ interests. The
directors’ breaches in these circumstances are not un-ratifiable;
but they can only be ratified by the appropriate corporate organ,
and, exceptionally, that is not the general meeting—even a
general meeting governed by a majority of disinterested
shareholders.485 Despite the pervasiveness of the notion of un-
ratifiable breaches, the relevant precedents all arguably incline
more to expressing concern with the validity and appropriateness
of the vote and the voting organ taking the approval decision
rather than to the nature of the breach as being un-ratifiable.
If this is right, then the issue may largely disappear, since the
Act has in large measure addressed the concern with interested
parties voting. Section 239, by depriving the directors in breach
of the right to vote, avoids the result which the Privy Council
was so desirous of avoiding in Cook v Deeks, and does so
without the need to resort to the concept of a “non-ratifiable
wrong”. In other words, the rule against making presents of the
corporate assets seems much less strong (provided the creditors’
interests are not affected) if the non-involved shareholders
approve. This consideration may lead the courts in future to
narrow, and maybe even eliminate,486 the class of non-ratifiable
wrongs.487
GENERAL PROVISIONS EXEMPTING DIRECTORS FROM LIABILITY
Statutory constraints
16–125
Although directors may secure specific authorisation or
ratification of their actions from the shareholders, they are likely
to regard that route to legal absolution as uncertain and unduly
public. Historically, they have sought to use the articles to obtain
general shareholder approval for certain categories of, or even
all, breaches of duty. We have seen above that the articles were
widely used in this way in respect of self-dealing transactions,
and in fact the legislature in the 2006 Act accepted that outcome
by re-writing the statutory duty in relation to self-dealing
transactions as a duty to disclose to the board rather than as a
duty to obtain the approval of the shareholders.
However, in some cases the articles went further, and included
provisions exempting the directors from liability for all breaches
of duty (unless fraud was involved). Parliament responded in the
Companies Act 1929.488 In the current version of that reform
(s.232(1)) the principle is laid down that “any provision that
purports to exempt a director489 of a company (to any extent)
from any liability that would otherwise attach to him in
connection with any negligence, default, breach of duty or
breach of trust in relation to the company is void”.
This is a very important statutory provision. Subject to its
exceptions, the section turns the directors’ duties provisions into
mandatory rules. Although the common law may regard those
duties as existing for the benefit of the shareholders and thus to
be waivable by the shareholders in the articles, the section takes
a different view, perhaps reflecting doubt about the reality of the
consent expressed in approvals given in advance of the event.
Conflicts of interest
16–126
Despite the general prohibition in s.232, s.232(4) then provides
that “nothing in this section prevents a company’s articles from
making such provision as has previously been lawful for dealing
with conflicts of interest”. Thus it is clear that some inroads are
permitted in the articles in relation to the “no conflict” duties.
This conclusion is reinforced by the provisions of s.180(4)(b) to
the effect that “where the company’s articles contain provisions
for dealing with conflicts of interest, [the general duties] are not
infringed by anything done (or omitted) by the directors, or any
of them, in accordance with those provisions”.490 The test for the
legality of such provisions which s.232 adopts is whether the
provision had “previously been lawful for dealing with conflicts
of interest”; and it seems that s.180(4)(b) must be interpreted as
subject to a similar restriction.
What is the meaning of this Delphic phrase? What could the
articles previously (i.e. before the 2006 Act) do in relation to
conflicts of interest? In order to answer this question one needs
to know the history of judicial interpretation of the predecessor
of s.232, namely, s.310, later s.309A, of the 1985 Act. This was
a highly debated question, arising previously mainly in relation
to self-dealing transactions, because that was where the problem
arose in practice. The debated question was whether articles
substituting informing the board for shareholder approval were
compatible with the predecessors of s.232. That particular
question is no longer relevant because s.177 adopts outright the
principle of disclosure to the board.491 However, the answer
given to the question under the former law may tell us how to
approach under the 2006 Act an article dealing with any other
conflict of interest.
The only intellectually respectable answer in that debate was
given by Vinelott J in Movitex Ltd v Bulfield.492 His explanation
drew a distinction between (1) “the overriding principle of
equity” that “if a director places himself in a position in which
his duty to the company conflicts with his personal interest or
duty to another, the court will set aside the transaction without
enquiring whether there was any breach of duty to the
company”; and (2) the director’s “duty to promote the interests
of [the company] and when the interests of [the company]
conflicted with his own to prefer the interests of [the company]”.
While any proposed modification of (2) would infringe s.310 of
the 1985 Act, the shareholders of the company in formulating
the articles could modify the application of (1), “the overriding
principle of equity”, provided that in doing so they did not
exempt the director from, or from the consequences of, a breach
of that duty to the company.493
16–127
But even this is not as clear as it might be. In unravelling the
issues, it seems important to recognise that “the overriding
principle of equity” in (1) requires, or enables, courts to set aside
self-dealing transactions whenever there is a potential conflict,
without requiring investigation of whether the alleged conflict is
real. So it might simply be this evaluative step which the articles
can legitimately introduce, although if a real conflict exists they
cannot go further and exempt the director from the obligation to
prefer the company’s interests. Movitex implicitly, and perhaps
explicitly, takes this line. And that evaluative step could
legitimately be taken by any appropriately qualified organ of the
company. Again, in Movitex, it seemed important that the
decision, allocated to the board of directors, was conditional on
full disclosure and on disenfranchising the interested director
from both quorum and voting numbers.494 But to regard the
board’s decision as limited to this evaluative function denies
reality. Indeed, the limitation seems unnecessary. We have seen
that the company can prospectively authorise what would
otherwise be a breach of the conflicts rules; there is no limitation
to a mere evaluation that what is proposed would not constitute
an actual breach. Although the common law default rule holds
that this decision is for the general meeting, it must surely be
open to the articles to settle an alternative but appropriately
qualified organ of the company for the purposes of making this
decision. This, more realistically, was what was done in Movitex.
It is also what is now done in the current Act in ss.175 and 177.
But this approach, recognising the possibility of advance
authorisation, then lays bare the question at the outset: given the
rigours of s.232, can ss.232(4) and 180(4)(b) legitimately permit
the articles to make any inroads into the conflicts rules beyond
specifying the appropriate corporate organ for any necessary
evaluations, authorisations and ratifications?
Moreover, given that the duty in relation to self-dealing
transactions has become, under the 2006 Act, a simple duty of
disclosure, where will there be an incentive for provisions in the
articles to be deployed in future which provide further inroads
relating to directors’ liability for conflicts of interest? The
obvious areas are corporate opportunities and multiple
directorships. Translated into corporate opportunity terms,
however, the Movitex approach indicates that the articles cannot
exempt the director from obtaining the company’s authorisation
(and note the difficulties in determining whether that is
appropriately given495) before taking personally an opportunity
the company was actually pursuing (as in Cook v Deeks496 and
Industrial Development Consultants v Cooley497) or probably one
which the company had an interest in considering because it falls
within its current line of business (as in Bhullar v Bhullar498),
because in that situation there would be an actual conflict of
interest. However, the articles might conceivably exempt the
director from taking without authorisation an opportunity which
the company (normally the board) had rejected in good faith (as
in Regal499), but the better argument here is that such a decision
by the board puts the opportunity outside the scope of conflicts
which are caught by the equitable or statutory rule, so nothing
more would need to be said in the articles, and indeed if
anything were said it would be otiose.500 Similarly, the Movitex
case would suggest that an article permitting multiple
directorships would be upheld by virtue of s.232(4) only if there
is no actual conflict of duties for the director in consequence of
the taking up of additional directorships. Given this, there would
once again seem to be little point to such a provision.
Provisions providing directors with an indemnity
16–128
The ban, contained in s.232, on provisions exempting directors
from liability extends (subject to important exceptions) to any
provision by which the company provides, directly or indirectly,
an indemnity to a director or a director of an associated company
in respect of these liabilities (s.232(2)). Under an indemnity
arrangement the director remains in principle liable but the
company picks up the financial consequences of that liability.
The indemnity prohibition applies also to indemnities provided
in favour of directors of associated companies, thus preventing
evasion of the section in group situations, whereby all the
directors have the benefit of indemnity provisions, but in no case
is the indemnity provided by the company of which they are a
director. The provisions referred to in the section are those
“contained in a company’s articles or in any contract with the
company or otherwise”.501 The indemnity might be provided by
means of the company promising to indemnify the director or,
indirectly, by the company taking out insurance on the director’s
behalf, so that the indemnity is to be provided by the insurance
company. As we shall see, the legislation is less strict in relation
to permitted insurance than in respect of permitted direct
indemnities (labelled “third party” indemnities in the Act).
Insurance
16–129
Since 1989 a company has been free (but of course not obliged)
to buy insurance against any of the liabilities mentioned in s.232
for the benefit of its directors (s.233) and it is in fact common
practice to do so, at least in large companies. At first sight, this is
very odd. Insurance certainly means, assuming the policy limits
are large enough, that the company receives compensation for
any loss it suffers as a result of the breach of duty. On the other
hand, the company pays for the insurance and so, over time at
least, the insurance premia will roughly equal the losses inflicted
on the company by the directors, so that the company ends up
paying for the directors’ breaches of duty. This seems to deprive
the directors’ duties rules of any deterrent effect as against the
directors and to mean that the insurance simply operates as a
way of smoothing the losses inflicted on the company by the
directors.
This argument has considerable force, but needs to be
assessed subject to the following qualifications. First, the impact
of s.233 depends upon the extent of the cover which the
insurance market is prepared to make available at any particular
time. It is unlikely that insurance is available against the
consequences of a breach of duty involving fraud or wilful
default, because of the moral hazard problem for the insurance
company in providing such cover.502 And it may be difficult to
obtain cover against the liability to account for profits made as
opposed to losses inflicted on the company. In any event, the
policy is likely to be subject to monetary limits, so that liability
remains to some extent personally with the director in the case of
large claims.
Secondly, it is conceivable that insurance companies will
adjust their premia according to the claims experience of the
company so that a financial incentive is generated for the
company to monitor the actions of its directors or refuse to
insure those with a bad claims record, or insurance companies
may even engage in more general monitoring of the corporate
governance arrangements in the company, thus somewhat
restoring the deterrent effect of the duties.503
Finally, it may be that qualified persons will be unwilling to
take on board positions without the benefit of such insurance.
This might be true particularly of non-executive directors, whose
financial benefits from the company may be modest (at least in
comparison with the remuneration of executive directors) and
whose knowledge of and control over the company is necessarily
limited. They could buy such insurance themselves, for the
section does not restrict the taking out of insurance against
directors’ liabilities by the directors themselves.504 However,
they would no doubt expect the cost of such insurance to be
reflected in their fees, and it may be cheaper and more effective
for the company to provide that insurance itself.
Third party indemnities
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Despite the term “third party indemnities” the indemnity under
discussion here is one provided by the company in favour of the
director. It is a “third party” indemnity because it relates to
litigation which might be brought by a third party (i.e. someone
other than the company) against the director.505 Under an
indemnity provision the company promises that the director will
not be out of pocket in relation to the claim made against him or
her (whether by way of a judgment against the director, a
settlement of the litigation or by the incurring of legal costs), so
that, to the extent of the indemnity, the cost of the director’s
breach of duty is borne directly by the company. As we have
seen, it will be rare for breaches of the duties discussed in this
chapter to lead to liability other than to the company, but this
may not be the case where the liability arises under a foreign
system of law, notably US law, and s.232 is not in terms
confined to liabilities arising under the law of a UK jurisdiction.
A director may prefer insurance to a promise of an indemnity by
the company, because on insolvency the company’s promise
may not be worth very much, but an indemnity may be regarded
by the director as better than nothing, and the company may
prefer, in effect, to self-insure by promising an indemnity.
Note, however, that the company may not promise an
indemnity against liability or costs incurred in an action brought
by the company. This may be provided for only through the
purchase of insurance by the company, as discussed above. Why
is this? It may have been thought, on the one hand, that a
complete indemnity would come very close to an exemption
from liability, thus defeating the purpose of s.232. On the other
hand, despite the failings of the insurance market, insurance
requires an assessment of the extent of and the costs of the risks
involved by another commercial organisation, which will
exclude some risks from those it is prepared to underwrite. This
provides some external control over the liabilities from which
directors can be exempted, for example, where they have acted
deliberately in breach of duty. Equally, the need to buy insurance
will bring the cost of the protection home to the board which is
arranging for it, whilst an indemnity, which carries no immediate
costs for the company, might be too easy a provision to slip into
the articles.
The Act prohibits provision of certain forms of indemnity
(s.234(3), as elaborated in s.234(4)–(6)), in particular in relation
to:
— a fine imposed on a director in criminal proceedings;
— the costs of defending criminal proceedings in which the director is convicted;
— a penalty payable to a regulatory authority;
— costs incurred in connection with an application for relief (see below) which is
unsuccessful; or
— the costs of defending civil proceedings brought by the company or an associated
company in which judgment is given against the director.
The last category of exclusion may seem surprising, given that

liability to the company or associated company is not within the
definition of a “third party indemnity” (s.234(2)) but it is to be
noted that what s.234(3) deals with is not the director’s liability
to the company or associated company but the director’s liability
for costs incurred in defending civil proceedings brought by such
a company, which liability may be incurred to a third party, i.e.
the director’s legal team. The exclusion thus completes the
policy objective of preventing the indemnity from operating in
respect of any aspect of a claim brought by the company or an
associated company, but only if the company is successful in the
claim. If no judgment is given against the director, either
because the director is successful or because the case is settled, a
provision requiring the company to indemnify the director
against legal costs is permitted. The section achieves the same
result in relation to criminal proceedings against the director:
only the costs of successfully defending a criminal charge may
be the subject of an indemnity provision. However, it appears
that the costs of an unsuccessful defence in a regulatory
procedure (for example, one brought by the Financial Conduct
Authority) may be the subject of an indemnity provision (though
not the cost of any penalty imposed by the FCA).
However, the real importance of the section is not revealed by
what it says by way of exclusion but what it does not exclude. In
the case of a civil action brought by a third party (for example,
shareholders in a class action) the indemnity provision may
cover both the liability of the director and the costs of defending
the action, whether successfully or unsuccessfully.
16–131
An indemnity provision which meets the requirements of s.234
is termed a “qualifying indemnity provision”. A qualifying
indemnity provision506 must be disclosed to the shareholders in
the directors’ annual report (s.236); and must be made available
for inspection in the usual way by any shareholder of the
company without charge, who may also require a copy of it to be
provided upon payment of the prescribed fee (ss.237 and 238).
It should finally be noted that what s.234 creates is a
permission for the company, not an obligation, and it is a
permission to have a provision (in the company’s articles or in a
contract with a director, for example) which provides for an
indemnity of the relevant type. The section does not deal with ad
hoc decisions by boards of directors to pay an indemnity in a
particular case, where there is no existing provision dealing with
this matter. Such a decision is governed by the directors’ duties
discussed above and by the general law of the land.507 It is also
possible that a company might wish to lend the director money
in advance to defend proceedings brought against him or her,
whether criminal, civil or regulatory. We have already seen that
a company is exempted from the normal rules on shareholder
approval if it decides to make such a loan, or enter into an
analogous transaction, for this purpose. However, the loan must
be on terms that it is repayable if the director is unsuccessful in
the proceedings.508 A loan on different terms or for a different
purpose (for example, to meet a liability in a judgment rather
than to defend proceedings) would need shareholder approval.
Pension scheme indemnity
16–132
Where a company runs an occupational pension scheme (a less
frequent situation these days than previously), the company may
be a trustee of the trust through which the scheme is organised
and the director may act on behalf of the company in its capacity
as such a trustee.509 Section 235 permits provisions indemnifying
the director against any liability incurred in connection with the
company’s activities as trustee of the scheme, subject to the
same restrictions as in s.234 in relation to criminal and
regulatory proceedings. However, s.235 permits indemnity
arrangements in relation to civil suits, whether brought by a third
party or by the company, which indemnity may extend to both
costs and liability. In other words, as far as the director’s
activities on behalf of the company as trustee are concerned, a
complete indemnity arrangement is permissible in relation to
civil liability. The same reporting and copy requirements apply
in relation to a qualifying pension scheme indemnity provision
as in relation to a third-party indemnity provision.
RELIEF GRANTED BY THE COURT
16–133
Whether or not the director is able to secure forgiveness from the
company, the director, and any officer of the company
(including auditors and liquidators), has the possibility of
appealing to the court to prevent the full application to him or
her of the statutory duties included in Pt 10 or indeed any
analogous duties arising, for example, at common law. Under
s.1157 the court has a discretion to relieve, prospectively or
retrospectively, against liability for negligence, default, breach
of duty or breach of trust, provided that it appears to the court
that the director has acted honestly and reasonably and that,
having regard to all the circumstances, he or she ought fairly to
be excused. The court may relieve on such terms as it thinks fit.
The requirement of reasonableness might suggest that s.1157 is
not available in relation to the directors’ duties of care, skill and
diligence but this appears not to be the case.510 However, the
section is not available in respect of third-party (as opposed to
corporate) claims against the director,511 and, more important for
present purposes, will not be applied even to corporate claims
where that would be inconsistent with the purposes underlying
the rule imposing the liability against which relief is sought.512
LIABILITY OF THIRD PARTIES
16–134
Despite the wide range of civil remedies which exist to support
the substantive law of directors’ duties, it is often the case that
the directors are not in fact worth suing, at least if they are
uninsured. They may once have had property belonging to the
company but, by the time the company finds this out, may have
it no longer. They may have made large profits which they
should account for to the company, but may well have spent
them by the time the writ arrives. Companies are therefore likely
to want to identify some more stable third party, often a bank,
which is worth powder-and-shot, either instead of or in addition
to the directors.513
But under what conditions may the company hold a third party
liable in connection with a breach of duty by the directors? This
is not a matter dealt with in the Act in relation to the general
duties of directors. It is left to the common law, which is rather
complex, although it is an area which recent decisions of the
Privy Council and House of Lords have helped to clarify. Only
the briefest sketch of the relevant principles is attempted here.
16–135
It has long been recognised that there are two bases of third-
party liability, one resting on receipt by the third party of
company property (“knowing receipt” claims) and the other
resting on complicity on the part of the third party in the
director’s breach of duty (“dishonest assistance” claims). The
main conceptual contribution of the Privy Council in Royal
Brunei Airlines Sdn Bhd v Tan514 was to make it clear that the
principles supporting the imposition of liability in these two
situations are different from one another.
In the case of dishonest assistance claims, which the court
helpfully termed “accessory” liability, the liability is a reflection
of a general principle of the law of obligations. This imposes
personal liability upon third parties who assist in or procure the
breach of a duty or obligation owed by another, the liability of
the third party being enforceable by the person who is the
beneficiary of the duty whose performance has been interfered
with. Provided there has been a breach of duty by the director,
whether committed knowingly or not, the third party accessory
will be liable to the company if the third party has acted
dishonestly. After some to-ing and fro-ing, it seems, rightly, to
be agreed that the test of dishonesty is objective: the accessory is
dishonest if, by ordinary standards, the defendant’s mental state
would be characterised as dishonest, and it is irrelevant that the
defendant him- or herself takes a different view.515 The third
party is often said to be obliged to account “as a constructive
trustee”. This label is uninformative, and indeed confusing, and
should be discarded, but the cases confirm that the accessory is
liable to compensate the principal (the company, here) for losses
caused by the director’s breach of fiduciary duty and, it seems,
for any profits generated personally by the accessory from that
breach.516
16–136
Given the dishonesty element in accessory liability, such claims
are unlikely against solvent and respectable third parties.517 The
alternative is the personal claim based on “knowing receipt” of
the company’s property,518 at least if the term “knowing” is
given a wide enough connotation. The essence of this claim is
restitutionary, being the return of the value of the company’s
property that was received as a result of the director’s breach,
and regardless of the fact that the third party may no longer have
the property or its identifiable proceeds in its hands.519 A
common situation found in the cases is one where the directors
have used the company’s assets in breach of the statutory
prohibition on the provision of financial assistance towards the
purchase of its shares, and the assets in question have passed
through the hands of a third party.520
The scope of knowing receipt liability depends heavily upon
the degree of knowledge on the part of the third party which is
required to trigger it, an issue which has been much discussed in
the courts over recent decades. Although the issue remains
unsettled, the tendency in recent decisions has been to resist
imposing liability on the basis of constructive knowledge in
ordinary commercial transactions, on the grounds that the
doctrine of constructive knowledge presupposes an underlying
system of careful and comprehensive investigation of the
surrounding legal context, which is typical of property
transactions but atypical of commercial transactions (including
the non-property aspects of commercial property transfers).521
This probably misconceives the notion of constructive notice,
which is inherently supremely context sensitive, so that in
commercial contexts the right question would be, what would a
reasonable commercial party know in this context (given the
usual and reasonable enquiries that such a party would—or
would not—have made)?
In any event, in Bank of Credit and Commerce International
(Overseas) Ltd v Akindele522 the Court of Appeal struck out on a
new tack. Whilst confirming that dishonesty is not a requirement
for liability under the “knowing receipt” head, the Court
abandoned the search for a single test for knowledge in this area.
Instead, the question to ask was whether the recipient’s state of
knowledge was such as to make it unconscionable for him or her
to retain the benefit of the receipt. The Court thought this would
enable judges to “give common sense decisions in the
commercial context”, though it has to be said that the test is a
very open-ended one and not likely to conduce to a common
approach on the part of the courts.
16–137
Third-party liability may also arise in relation to corporate
opportunities. Here, the question again arises of how far a
corporate opportunity constitutes an asset of the company. We
have seen above523 that this question is relevant to the question
of whether the director’s taking of the opportunity can be ratified
by a simple majority of the shareholders. It arises again here:
does receipt by a third party either of the opportunity itself or of
assets arising out of its exploitation fall within the “knowing
receipt” principle? What is clear is that merely entering into a
contract with the company which remains executory does not put
the third party in a position in which he or she can be said to be
in receipt of corporate assets.524 Where the corporate opportunity
is regarded as an asset of the company, however, it follows that
the company will be able to seek to recover profits made out of
exploitation of the opportunity by the third party (provided of
course that the important requirement of knowledge is met),
even if the defaulting director does not him- or herself make any
personal profit.525
Whether in such a case the director can be held liable, with
the third party, for the third party’s profits is much debated. In
principle this should not be possible unless the director can in
some way be made personally liable for the defaults of the third
party. This may be possible if the third party is a partnership of
which the director is a member, but logic suggests that generally
the director’s own liabililty will be restricted to his or her
allocated share of the profits. It will also be possible, on
orthodox principles, in the narrow circumstance where the third
party is a company but the company is a sham, hiding the
director.526 But where the third-party company is not a sham, it
might still be disputed whether the director can be liable with the
company for the company’s profits on the grounds that director
and company are jointly in breach of trust or whether the
position is that each is liable only for the profits made
personally.527
LIMITATION OF ACTIONS
16–138
The question of whether directors acting in breach of their
fiduciary duties have the benefit of the Limitation Acts is
another area where the analogy between the director and the
trustee is to the fore, the specific provisions of the Limitation
Act 1980 dealing with actions by a beneficiary against a trustee
being applied to actions by a company against a director.528 The
crucial question is whether there is any limitation period in such
cases, for until the late nineteenth century trustees did not have
the benefit of a limitation period in actions by beneficiaries.529
Under s.21 of the 1980 Act a limitation period of six years is
applied to such actions (unless some other section of the Act
applies a different limitation period), but there are two
exceptions where the old rule of no limitation continues to
operate. These are (a) where the claim is based upon “any fraud
or fraudulent breach of trust to which the trustee was a party or
privy”; and (b) where the action is to recover “from the trustee
trust property or the proceeds of trust property in the possession
of the trustee or previously received by the trustee and converted
to his use”. In a standard case, therefore, of an action against a
director to recover a profit made in breach of his fiduciary duties
or for equitable compensation, the limitation period will be six
years. Only where the claimant can go further and bring himself
within either the (a) or (b) exception will the Act not apply.530
As to (a), it should be noted that it is a strong rule, since
defendants in actions based on fraud are not generally deprived
by the Limitation Act of the benefit of a limitation period. To
benefit from this exception the claimant has to show not simply
that the director acted in breach of duty, but that he or she
intended to act either knowing that the action was contrary to the
interests of the company or recklessly indifferent as to whether it
was.531
As to (b), it means that there is no limitation period in those
cases where a director has misapplied company property which
has come into his or her hands and the company is seeking
restoration of that property. This rule applies even though the
company’s property is no longer in the hands of the director.532
As it was put some hundred years ago, the rule is intended to
prevent the director from “coming off with something he ought
not to have”.533
16–139
However, in recent years the scope of both (a) and (b) has been
debated in relation to third parties who are often called
“constructive trustees” by the courts under the doctrines of
accessory liability and knowing receipt discussed above and in
other circumstances too. The courts have drawn a distinction
between two types of constructive trustee, constructive trustees
properly so-called and those in respect of whom the term would
better be abandoned.534 The first case is the case of the person
who, though not expressly appointed as a trustee, has assumed
the duties of a trustee by a lawful transaction which was
independent of and preceded the breach of trust now in issue.
Such a person falls within cases (a) (if the facts fit) and (b). So a
director who receives company property in breach of fiduciary
duty holds that property on constructive trust, and the limitation
defence is not available.
The second case is where the trust obligation arises as a direct
consequence of the unlawful transaction which the claimant
challenges and where the constructive trust is imposed simply to
provide an effective proprietary remedy in equity.535 Such a
person does not fall within cases (a) or (b). The Supreme Court
in Williams v Central Bank of Nigeria536 has held, by majority,
that third parties who are dishonest assistants or knowing
recipients are in this fortunate position (for them), and can
therefore rely on the normal limitation periods. The analysis
remains controversial, however, with doctrinal and policy
considerations pulling in both directions.
CONCLUSION
16–140
This is a long chapter, and its detailed rules on directors’ duties
are an enormously important and frequently used tool in
regulating the management of companies by their directors. The
most substantial reform in this area in recent times has
undoubtedly been the statutory enactment of the general duties
in the 2006 Act, replacing their earlier common law
counterparts. This in itself was reform of a unique sort, with its
careful management of the inevitable ongoing interplay between
the statutory rules and their common law counterparts (see
especially s.170(4)). But what can be said of the consequences?
At this short distance down the track, no seismic shifts have
occurred, either for good or for ill. This should come as no
surprise, since what was done was largely intended to be a
restatement of the past, with a few relatively minor added tweaks
to improve rules and practices where problems were already well
known and aired.
Section 172, imposing a general duty on directors to promote
the success of the company, might be thought of as one
exception to that minimal-change approach, especially as it
contains an explicit recognition of stakeholder interests for the
first time in British company law, which had previously referred
only to members and employee interests.537 However, those
stakeholder interests are to be pursued by directors only where
such action is needed to promote the success of the company for
the benefit of its members. The core duty of loyalty is thus still
shareholder-centred. Further, it seems clear that the prior
common law permitted directors to take into account stakeholder
interests where promoting the interests of the company
(shareholders) required it.538 Consequently, the novelty of the
statutory formulation of the core duty of good faith and fidelity
may be the added obligation—rather than entitlement—of
directors to take stakeholder interests into account where the
promotion of the success of the company requires this. This is
only a marginal change in legal obligation, however, and there is
as yet nothing to suggest that this revised statutory articulation of
the need to take into account stakeholder interests in this way
has had much impact, even when coupled with larger changes in
legal rules and the social and economic context within which
companies operate.539
The statutory rules are explicitly more constraining than the
common law in their provisions on negligence (s.174), the core
duty of loyalty (s.172) and the rules on ratification (s.239). The
changes to the core duty of loyalty (s.172) have already been
noted. So far as the duty of care is concerned, the objective
standard of care introduced by s.174 is undoubtedly a strong
contrast with the subjective formulation of that duty to be found
in the nineteenth-century negligence cases. But common law
decisions were already well-advanced in moving the law in an
objective direction, and so it might be said that s.174 merely
confirmed what was already emerging in the case law.540
Equally, s.239541 introduced important changes to the rules on
who may vote on a shareholder resolution to ratify a breach of
directors’ duties by excluding the votes of the directors in
question and those connected with them. But this trend too was
evident in a trickle of cases, and clearly easily justified on policy
grounds. It is undoubtedly an important reform in closely held
companies, but its real impact will only be felt, even there (or
especially there), if these rules also trigger a parallel change in
the common law authorisation rules and their approach to
disenfranchising interested voters. This, it is suggested, is a far
better approach than tinkering further with the difficult notions
of “un-ratifiable wrongs”.542
16–141
Going in the other direction, and tending to relax rather than
tighten the constraints on directors, perhaps the most significant
statutory changes were those that allowed the independent
members of the board to authorise breaches of the directors’ duty
not to place themselves in a position of conflict of duty and
interest (or of duty and duty).543 Although the principle of board
decision-making was already established under the prior law in
relation to self-dealing transactions (at least as a matter of
practice, via provisions in the articles), its extension to corporate
opportunities and other conflicted situations was a new step. The
argument in favour of the extension is that shareholder
authorisation, as the sole method of authorisation permitted by
the prior law, was in practice too uncertain and too public to be a
practical form of permission, so that the prior law operated in
fact so as to allow directors to pursue corporate opportunities
only at the risk of the company later deciding to take from the
director the profit earned from the exploitation of the
opportunity. The argument against the extension is that the
dynamics of board relationships mean that the uninvolved
members of the board may not exercise a genuinely independent
judgment on whether to release the corporate interest in the
opportunity, even if this is what the law requires of them. This
argument may be less strong in companies listed on the main
market of the London Stock Exchange and so required to comply
with the provisions of the UK Corporate Governance Code as to
independent non-executive directors, but that is a very small
proportion of the companies incorporated under the Companies
Acts. In the result, outside the area of benefits received by
directors from third parties,544 the board is now the guardian of
the company’s position in situations of conflict, contrary to the
wisdom of the common law that only the shareholders could be
relied upon for this purpose.
1
Company Directors: Regulating Conflicts of Interest and Formulating a Statement of
Duties, Law Com. No.261 and Scottish Law Com. No.173, Cm. 4436 (1999); CLR,
Final Report, Ch.3 and Annex C. Other jurisdictions have codified directors’ duties,
Australia being one of them: see the major litigation in ASIC v Healey [2011] FCA 717
(the Centro litigation) and ASIC v Macdonald (2009) 256 ALR 199 (the James Hardie
litigation).
2
cf. Developing, para.3.82 and Completing, para.3.31, on the one hand, and Law
Commissions, above, fn.1 at para.4.28, on the other.
3
4 HL Debs, vol.678, col.244, 6 February 2006 (Grand Committee), Lord Goldsmith.
5 “The courts should continue to refer to existing case law on the corresponding
common law rules and equitable principles, except where it is obviously irreconcilable
with the statutory statement.” (HC Debs, Standing Committee D, Thirteenth Sitting, 6
July 2006, col.536 (The Solicitor-General)).
6 R.C. Nolan, “Enacting Civil Remedies in Company Law” (2001) 1 J.C.L.S. 245.
7 Bilta (UK) Ltd (In Liquidation) v Nazir [2015] UKSC 23; [2016] A.C. 1 SC at [7].
8 Attorney-General’s Reference (No.2 of 1982) [1984] Q.B. 624 CA; R. v Phillipou
(1989) 89 Cr.App.R. 290 CA; R. v Rozeik [1996] B.C.C. 271 CA.
9 The standout exception is Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472 CA,
which looks increasingly difficult to justify. The question the court had to answer, and
one it conceded was difficult, was whether, if a company had been fixed with the
improper intentions of its company officers and subjected to a regulatory sanction (under
the Competition Act), could it then seek an indemnity from those same defaulting
officers? The answer might seem simple: that the breach of duty by the officers had
caused the company a loss, for which it could seek compensation. But this possibility
was decisively rejected by the Court of Appeal. The policy underpinning the
Competition Act 1998 was to impose “personal” sanctions on firms, the court held, and
this liability could not then be offloaded onto individuals. To reach this end, the court
relied on the illegality defence (i.e. the disqualifying principle of ex turpi causa). This
decision was considered by the Supreme Court in Bilta (UK) Ltd (In Liquidation) v
Nazir [2015] UKSC 23; [2016] A.C. 1, and although its correctness was not seriously
challenged, its relevance and effect seem now very much confined to the statutory
competition code (and its underlying policy): see [83] (Lord Sumption JSC) and [157]–
[162] (Lords Toulson and Hodge JJSC), with whom Lord Neuberger PSC seemingly
agreed though not expressing any conclusive view ([31]).
10
Bilta (UK) Ltd (In Liquidation) v Nazir [2015] UKSC 23; [2016] A.C. 1 SC at [9],
expressly agreeing with agree with Lord Mance’s analysis at [37]–[44].
11
Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472 CA, and also see fn.9, above.
In Bilta (UK) Ltd (In Liquidation) v Nazir [2015] UKSC 23; [2016] A.C. 1 SC, Lord
Neuberger said, at [31], that he “would take a great deal of persuading that the Court of
Appeal did not arrive at the correct conclusion in [the Safeway] case”. However, Lords
Toulson and Hodge were more critical: paras [157]–[162].
12
See S. Worthington, “Corporate Attribution and Agency: Back to Basics” (2017) 133
LQR (forthcoming).
13
In particular, it does not explain Safeway Stores Ltd v Twigger [2010] EWCA Civ
1472 CA, already discussed; nor the case of Stone & Rolls Ltd v Moore Stephens [2009]
UKHL 39; [2009] 1 A.C. 1391, discussed below at para.22–41, where the House of
Lords concluded by a narrow majority that the illegality defence (ex turpi causa) applied
to prevent a company from suing its auditors for their failure to detect fraud in
circumstances where the fraud had been perpetrated by the very person who had
formerly controlled the company. See however Moulin Global Eyecare Trading (In
Liquidation) v The Commissioner of Inland Revenue [2014] HKCFA 22 Hong Kong
Court of Final Appeal at [101] (Lord Walker NPJ); and Bilta (UK) Ltd (In Liquidation) v
Nazir [2015] UKSC 23; [2016] A.C. 1 at [24]–[30] (Lord Neuberger PSC); [46]–[50]
(Lord Mance JSC); [79]–[81] (Lord Sumption JSC); and [136]–[154] (Lords Toulson
and Hodge JJSC). For comment on both cases, see fn.12.
14
On similar grounds the court rejected an attempt to create a parallel set of duties owed
by directors to individual shareholders via implied terms in the articles of association:
Towcester Racecourse Co Ltd v The Racecourse Association Ltd [2003] 1 B.C.L.C. 260.
15
Peskin v Anderson [2001] 1 B.C.L.C. 372 at 379. To the same end, see Sharp v Blank
[2015] EWHC 3220 (Ch).
16 Briess v Woolley [1954] A.C. 333 HL; Allen v Hyatt (1914) 30 T.L.R. 444 PC.
17
Percival v Wright [1902] 2 Ch. 421. This applies even if all the shares are owned by a
holding company with which the directors have service contracts: Bell v Lever Bros
[1932] A.C. 161 HL.
18
Coleman v Myers [1977] 2 N.Z.L.R. 225 NZCA. In the Supreme Court (ibid.) Mahon
J had held that Percival v Wright was wrongly decided but the Court of Appeal
distinguished it. See also Brunningshausen v Glavanics (1999) 46 N.S.W.L.R. 538
CANSW.
19
Peskin v Anderson [2001] 1 B.C.L.C. 372 at 397, following the decisions of Browne-
Wilkinson VC in Re Chez Nico (Restaurants) Ltd [1991] B.C.C. 736 at 750 and, though
not cited, of David Mackie QC in Platt v Platt [1999] 2 B.C.L.C. 745 (the Court of
Appeal in that case did not deal with the point: [2001] 1 B.C.L.C. 698).
20 Similarly, see Sharp v Blank [2015] EWHC 3220 (Ch), with Nugee J denying the
directors owed a fiduciary duty to the shareholders in the context of Lloyds Banking
Group’s acquisition of Halifax Bank of Scotland Plc.
21
Re A Company [1986] B.C.L.C. 382. The case involved an application under s.459
(see Ch.20, below), but the judge’s analysis appears to have related to the common law.
22
See also Re Charterhouse Capital Ltd [2014] EWHC 1410 (Ch) at [276] in particular
(Asplin J), as affirmed in [2015] EWCA Civ 536 CA (in particular, [50]). In addition,
takeover bids for public and listed companies will be governed by the City Code on
Takeovers and Mergers (below, Ch.28), which both requires directors to give advice and
attempts to ensure that that advice is given to serve the shareholders’ needs. These more
demanding provisions of the Code will in practice overtake those of the common law.
23
On proper purposes requirement, see below, para.16–26.
24
Yukong Line Ltd v Rendsburg Investments Corporate (No.2) [1998] 1 W.L.R. 294;
and see above at para.9–11.
25
e.g. the beneficiaries of a trust which the company, as trustee, is managing: Bath v
Standard Land Co Ltd [1911] 1 Ch. 618; Gregson v HAE Trustees Ltd [2008] EWHC
1006 (Ch); [2008] 2 B.C.L.C. 542, confirming that although the beneficiary could not
pursue a claim against the director directly (since the director’s duty was owed to the
trustee company, not to the beneficiary, although the beneficiary was in turn owed duties
by the trustee company), the beneficiary would, in any event, be protected by the
liquidator’s ability to pursue the insolvent trustee company’s claim against its defaulting
director.
26
There is some statutory support for this view in the definition of a director in s.250 as
including “any person occupying the position of director, by whatever name called”.
27 The easy cases are those such as Re Canadian Land Reclaiming and Colonizing Co
(1880) 14 Ch. D. 660 concerning a director not properly appointed because of his failure
to take up shares in the company which action its articles stipulated to be a condition for
appointment as director. For a more detailed discussion in a modern context of what
makes a person a de facto director see Secretary of State for Trade and Industry v Tjolle
[1998] 1 B.C.L.C. 333; and Re Gemma Ltd v Davies, Gemma Ltd (In Liquidation)
[2008] EWHC 546 (Ch); [2008] 2 B.C.L.C. 281. This latter case, at [40], shows that the
important question is whether the person is factually engaged in the central management
of the company on an equal footing with the other directors and performing tasks that
can only properly be discharged by directors, regardless of whether the person is held
out as a director of the company (although holding out may provide important
supporting evidence that the individual is acting as a director). Also see Commissioners
of HM Revenue and Customs v Holland [2010] UKSC 51; [2010] 1 W.L.R. 2793,
discussed below, declining to identify a single defining test ([26], [39], [93]) but
supporting the focus on finding real influence in the central governance of the company
(paras [36], [91]). See also Elsworth Ethanol Co Ltd v Hartley [2014] EWHC 99 (IPEC)
at [54], and, as an illustration of the highly factual nature of the question, [58]–[85]
(Judge Hacon); and Smithton Ltd v Naggar [2014] EWCA Civ 939; [2014] B.C.C. 482
at [33]–[44] (Arden LJ). See also generally Secretary of State for Business, Innovation
and Skills v Chohan [2013] EWHC 680 (Ch) (Hildyard J); Vivendi SA v Richards [2013]
EWHC 3006 (Newey J).
28 Secretary of State for Trade and Industry v Tjolle [1998] B.C.C. 282, 290 (Jacob J).
29 Re Kaytech International Plc [1999] B.C.C. 390 at 402 CA (Robert Walker LJ).
30
Commissioners of HM Revenue and Customs v Holland [2010] UKSC 51; [2010] 1
W.L.R. 2793 SC.
31
W.L.R. 2793 SC at [53].
32
This is no longer permitted: every company must now have at least one human
director (s.155); and corporate directorships will be fully prohibited (subject to
exceptions) as a result of new ss.156A–156C, introduced by s.87 of the Small Business,
Enterprise and Employment Act 2015 (commencement expected October 2016).
33
W.L.R. 2793 SC at [25], [28]–[29], [39]–[40], [42]–[43], [94]–[96]. Also see previous
note. This follows the trend in other jurisdictions where the legislature has intervened to
require that all directors be natural persons: e.g. as under the Corporations Act 2001
s.201B (Australia), the Canada Business Corporations Act 1985 s.105(1)(c), the New
York Business Corporation Law s.701, and the Delaware General Corporate Law
s.141(b) (see [2010] UKSC 51; [2010] 1 W.L.R. 2793 SC at [96], Lord Collins).
34
See above, paras 7–34 and 7–37 et seq. By contrast, see [2010] UKSC 51; [2010] 1
W.L.R. 2793 SC, [117]–[118] (Lord Walker) on the approach in tort cases.
35 Where, again, the question is often said to be simply whether the adviser “assumed”
responsibility for the advice being given, although the court, taking a more objective
approach, seems to search for whether the advisee is entitled to insist that the adviser did
so do that.
36 Although perhaps the desired remedy might be achieved in two steps, with the
principal companies suing the corporate director, liquidating it, and it (through its
liquidators) then suing Holland for the liabilities his management failings had caused to
it, with the proceeds of this second claim then passed down the chain to meet the
corporate director’s primary liability to the principal companies. The issue in Holland is
that the wrong in the first step was wrongly paying away dividends (a strict liability
claim); in the second step it would perhaps have to have been negligently advising that
the payments were permissible in the circumstances, and the facts may not have readily
supported such a claim (given the legal advice, etc. obtained by Holland).
37
W.L.R. 2793 SC at [114]–[115], [129]–[134], [139], [144]–[145].
38
W.L.R. 2793 SC at [115].
39
W.L.R. 2793 SC at [101] and [115].
40 2006 Act s.251(1).
41 See Small Business, Enterprise and Employment Act 2015 s.89(1).
42
Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) at [1279] et seq.—the case
went on appeal but the CA did not consider this issue. cf. Yukong Line Ltd v Rendsburg
Investments Corp of Liberia [1998] 1 W.L.R. 294, in which Toulson J, in a brief and
unargued dictum, took the opposite view.
43
The judge did accept that the shadow director might attract liability under the rules
relating to the involvement of third parties in breaches of directors’ duties (see below,
para.16–134), but these provisions are relatively restrictive.
44
Vivendi SA v Richards [2013] EWHC 3006; [2013] B.C.C. 771.
45 Sukhoruchkin v Bekestein [2014] EWCA Civ 399 CA [39]–[41], notes the differences
in approach between Ultraframe and Vivendi without preferring one or other, but also
notes that any conclusions are necessarily built on the foundation of the UK statutory
definition of a shadow director, and so may not be appropriate in the context of other
statutory definitions (as in the instant case).
46
See [2013] EWHC 3006 [133]–[145], especially [142]. See also Smithton Ltd v
Naggar [2014] EWCA Civ 939 CA at [33]–[45] (Arden LJ). The Law Commissions also
took the view that the shadow director was subject to the common law duties (as they
then were) and certainly ought to be “where he effectively acts as a director through the
people he can influence”: Law Commission and Scottish Law Commission, Company
Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties, A
Joint Consultation Paper, 1998, para.17.15. The CLR took a similar view: Completing,
para.4.7.
47
It seems to have been introduced by the Companies (Particulars as to Directors) Act
1917 s.3.
48
Re Hydrodam (Corby) Ltd 1994] 2 B.C.L.C. 180, 183.
49
As well as the cases which follow, see too McKillen v Misland (Cyprus) Investments
Ltd [2012] EWHC 521, which describes de facto and shadow directors at [19]–[31],
concluding at paras [32]–[34] that there is no sharp dividing line between the two classes
(David Richards J); similarly, see Smithton Ltd v Naggar [2014] EWCA Civ 939 CA at
paras [33]–[45] (Arden LJ).
50
Re Kaytech International Plc [1999] 2 B.C.L.C. 351, 424 CA.
51
Also see Commissioners of HM Revenue and Customs v Holland [2010] UKSC 51;
[2010] 1 W.L.R. 2793 at [110] and [127]—Lords Walker and Clarke respectively,
although both dissenting on the majority’s finding that the defendant was not a de facto
director.
52 Secretary of State for Trade and Industry v Deverell [2001] Ch. 340 at [35] CA. The
conclusion to be drawn from all these cases is perhaps that it is often possible to
conclude that the shadow director owes all the general duties of de jure directors in
relation to any decisions where he or she directed the outcome, but whether the shadow
director is also subject to other duties, e.g. on pursuing corporate opportunities (see
below, para.16–86), needs to be more carefully determined on a case by case basis. See
also Vivendi SA v Richards [2013] EWHC 3006 at [133]–[145] (Newey J); and Smithton
Ltd v Naggar [2014] EWCA Civ 939 CA at [33]–[45] (Arden LJ).
53
A non-corporate controlling shareholder does not have the same protection.
54 For an illustration, see Item Software (UK) Ltd v Fassihi [2005] 2 B.C.L.C. 91 CA,
where the consequence of this approach was to subject the director to a higher standard
of fiduciary duty than would have been applicable had he only been an employee, albeit
a senior one.
55 Canadian Aero Services Ltd v O’Malley (1973) 40 D.L.R. (3d) 371 at 381.
56University of Nottingham v Fishel [2000] I.C.R. 1462; Shepherds Investments Ltd v
Walters [2007] I.R.L.R. 110; Helmet Integrated Systems Ltd v Tunnard [2007] I.R.L.R.
126 CA; Ranson v Customer Systems Plc [2012] EWCA Civ 841. The issues remain
controversial: see the disagreement in Generics (UK) Ltd v Yeda Research &
Development Co Ltd [2012] EWCA Civ 726 at [19]–[36] (Sir Robin Jacob) contrasted
with [41]–[84] (Etherton LJ), with whom Ward LJ was persuaded to agree ([91]–[121]).
Generally, see Airbus Operations Ltd v Withey [2014] EWHC 1126 QB; Halcyon House
Ltd v Baines [2014] EWHC 2216 QB.
57
Note, however, that the employee’s duty of “mutual trust and confidence” finds its
roots in contract rather than the law of fiduciary obligations, as emphasised by Lewison
LJ (with whom Lloyd and Pill LJJ agreed) in Ranson v Customer Systems Plc [2012]
EWCA Civ 841 CA, at [36]–[40]; and the distinction between the contractual duty of
fidelity and the duties of a fiduciary are discussed at [41]–[43].
58
Shepherds Investments Ltd v Walters [2007] I.R.L.R. 110 at [129]–[130]; Sybron
Corp v Rochem Ltd [1984] Ch. 112 CA; Tesco Stores Ltd v Pook [2004] I.R.L.R. 618.
On disclosure of wrongdoing, the main difference between a senior manager and a
director concerns the extent to which they are obliged to disclose their own wrongdoing:
see Bell v Lever Bros [1932] A.C. 161 HL (suggesting an employee is never under a
duty to disclose his own wrongdoing); and Item Software (UK) Ltd v Fassihi [2005] 2
B.C.L.C. 91 CA, taking a narrower view. However, all may depend on the employee’s
contract: in Ranson v Customer Systems Plc [2012] EWCA Civ 841 CA, it was held that
an employee can have an obligation to disclose his own wrongdoing, but that this can
only arise out of the terms of the contract of employment, not by any analogy with the
fiduciary duties owed by company directors (see [44]–[61]). The analysis may matter:
Threlfall v ECD Insight Ltd [2012] EWHC 3543 at [111]–[126] (Lang J); Haysport
Properties Ltd v Ackerman [2016] EWHC 393 (Ch).
59 See para.14–69.
60
Contrast the Australian Corporations Act 2001, which defines an “officer”, in s.9, as a
person “(i) who makes, or participates in making, decisions that affect the whole, or a
substantial part, of the business of the entity; or (ii) who has the capacity to affect
significantly the entity’s financial standing”, and then makes officers subject to many of
the statutory duties applying to directors (see ss.179 et seq.). CA 2006 does not take this
approach with directors’ duties (ss.170 et seq.), although elsewhere it does make rules
which apply more generally to “officers” (defined inclusively in s.1173), typically in
connection with reporting requirements (see, e.g. s.113(7)). Even though corporate
directors are to be abolished (see above, fn.32), it remains possible, it seems, to have
“corporate officers” (see s.1122).
61
For employees see Lister v Romford Ice and Cold Storage Co Ltd [1957] A.C. 555
HL; and Janata Bank v Ahmed [1981] I.C.R. 791 CA and for the duty of care required of
directors, see the following section. For a case where the defendant was sued for breach
of his duty of care both as a director and as an employee, see Simtel Communications
Ltd v Rebak [2006] 2 B.C.L.C. 571.
62
In Lindgren v L & P Estates Ltd [1968] Ch. 572, the Court of Appeal rejected an
argument that a “director-elect” is in a fiduciary relationship to the company.
63This point is discussed further below in relation to the taking of corporate
opportunities, which is where it most often arises. See the approach in Thermascan Ltd v
Norman [2011] B.C.C. 535.
64 Directors cannot, for example, be held liable for the failure to exercise powers which
they no longer have. In Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 at [1330]
Lewison J suggested the “no conflict” rule would not apply either (though the “no
profit” and basic loyalty duties would continue to bite). Also see paras 9–4 et seq. and
9–11 et seq., above.
65
Re City Equitable Fire Insurance Co [1925] Ch. 407, a decision of the Court of
Appeal but always quoted for the judgment of Romer J at first instance, because the
appeal concerned only the liability of the auditors.
66
The most famous example of this is perhaps Re Cardiff Savings Bank [1892] 2 Ch.
100, where the Marquis of Bute, whose family, despite its Scottish antecedents, owned,
indeed had largely rebuilt, Cardiff Castle, was appointed president of the Bank at the age
of six months and attended only one meeting of the board in his whole life. He was held
not liable.
67
Re City Equitable Fire Insurance Co [1925] Ch. 407 at 427 (emphasis added). This
test also contains an objective element, because the director could be held liable for
failing to live up to the standard which a person of his or her skill is reasonably capable
of reaching, but the strong restriction in the proposition is the subjective one, since the
director can never be required to achieve a standard higher than that which he or she is
personally capable of reaching.
68
See above, Ch.15.
69
70
Principally the wrongful trading provisions to be found in s.214 of the Insolvency Act
1986, above, para.9–6. For a modern elucidation of this provision, see Brooks v
Armstrong [2015] EWHC 2289 (Ch); [2015] B.C.C. 661.
71 Decided in 1977 but fully reported only in 1989: [1989] B.C.L.C. 498.
72 Norman v Theodore Goddard [1991] B.C.L.C. 1027 (where the judge was “willing to
assume” that s.214 of the Insolvency Act represented the common law); and Re D’Jan of
London Ltd [1994] 1 B.C.L.C. 561 where the director was found negligent on the basis
of an objective test, though it has to be said that the director could probably have been
found liable on the facts on a subjective test of diligence (he signed an insurance
proposal form without reading it). See also Cohen v Selby [2001] 1 B.C.L.C. 176 at 183
CA; and Brumder v Motornet Service and Repairs Ltd [2013] 1 W.L.R. 2783 CA at
[45]–[47] (Beatson LJ).
74 2006 Act s.463. See below, para.21–28. It should be noted that this clause exempts
the director only in respect of statements in the relevant reports and not in respect of any
negligent conduct to which the statements inaccurately refer.
75 The section attributes to the director the knowledge, skill and experience of both the
reasonable person and the particular director in question, so the latter is important only
when it adds to the attributes of the reasonable person.
76One potentially significant omission from s.174 of the Companies Act in comparison
with the Insolvency Act is that s.214(5) of the latter explicitly extends the meaning of
“carried on” to include functions entrusted to the director as well as those actually
carried out, if that should be thought necessary.
77
Note how in the Australian case of Daniels v Anderson (1995) 16 A.C.S.R. 607 the
Court of Appeal of NSW, applying an objective test, found that the non-executive
directors were not liable for the failure to discover the foreign exchange frauds being
committed by an employee, but the chief executive officer was so held.
78
Daniels v Anderson (1995) 16 A.C.S.R. 607 at 664. The language of monitoring fits
in well with the views of the Cadbury and Greenbury Committees and their successors
on the proper role for the board of directors.
79
Re City Equitable Fire Insurance Co [1925] Ch. 407 at 429. See also Dovey v Cory
[1901] A.C. 477 HL. But the matter must not be delegated to an obviously inappropriate
employee or official, as was the case in City Equitable itself.
80 See above.
81
Re Barings Plc (No.5) [2000] 1 B.C.L.C. 433, 489 (per Jonathan Parker J), approved
by the CA at 536. See also Equitable Life Assurance Society v Bowley [2004] 1 B.C.L.C.
180, 188–189. Also see Brumder v Motornet Service and Repairs Ltd [2013] 1 W.L.R.
2783 CA at [55] (Beatson LJ).
82
Institute of Chartered Accountants in England and Wales, Internal Control: Guidance
for Directors on the Combined Code (1999). The Report fleshes out the bare principles
now contained in the UK Corporate Governance Code (Principle C.2) that boards should
maintain sound systems of risk management and internal control, should review them
annually, and should report to the shareholders that they have done so. See too the
Financial Reporting Council’s revised Guidance on Risk Management, Internal Control
and Related Financial and Business Reporting, at https://www.frc.org.uk/Our-
Work/Publications/Corporate-Governance/Guidance-on-Risk-Management,-Internal-
Control-and.pdf [accessed 1 February 2016].
83 Re Barings Plc (No.5) [2000] 1 B.C.L.C. 523 CA. See above, para.10–10.
84 Re Barings Plc (No.5) [2000] 1 B.C.L.C. 523 CA; and Re Westmid Packaging
Services Ltd [1998] 2 B.C.L.C. 646, 653. Also see Weavering Capital (UK) Ltd (In
Liquidation) v Peterson [2012] EWHC 1480 (Ch), as affirmed in [2013] EWCA Civ 71
at [173]–[174] (Proudman J); and Madoff Securities International Ltd v Raven [2013]
EWHC 3147 (Comm) in which the Court held that some directors were entitled to rely,
and therefore had not failed to exercise reasonable care and skill by relying, on the
expertise and experience of other members on the board. On the other hand, the failure
of the directors with the appropriate experience to apply their minds to the question as to
whether the transactions were in the interests of the company constituted a breach of the
duty to exercise reasonable skill and care (Popplewell J).
85 See, e.g. Lexi Holdings Plc v Luqman [2009] EWCA Civ 117; [2009] 2 B.C.L.C. 1
CA: the managing director of a company was found liable for stealing £59.6 million
which had been lent by banks to the company. Overturning the trial judge, the Court of
Appeal also held his two sisters jointly liable (with their brother) for the stolen money on
the basis that the state of the company’s accounts should have aroused their suspicions,
given their knowledge of their brother’s earlier imprisonment for deception, and they
should have acted accordingly; their inactivity was a breach of duty.
86Law Commission and Scottish Law Commission, Company Directors: Regulating
Conflicts of Interest and Formulating a Statement of Duties, Cm. 4436, 1999, Pt 5.
87
cf. Smith v Van Gorkam (1985) 488 A. 2d 858.
88For a critique see C.A. Riley, “The Company Director’s Duty of Care and Skill: the
Case for an Onerous but Subjective Standard” (1999) 62 M.L.R. 697.
90
Re Denham & Co (1883) 25 Ch. D. 752. See also Cohen v Selby [2001] B.C.L.C. 176
CA, stressing the need at common law to show that the negligence caused the loss
suffered by the company. The classic statement of the problem is that by Learned Hand J
in Barnes v Andrews (1924) 298 F. 614 at 616–617.
91
ASIC v Rich [2003] NSWSC 85. The judge referred in particular to Annex D of Mr
Derek Higg’s review of the role of non-executive directors: above, para.14–73.
92
See Henderson v Merrett Syndicates Ltd [1995] 2 A.C. 145; Bristol & West Building
Society v Mothew [1998] Ch. 1.
93 Bristol and West Building Society v Mothew [1998] Ch. 1, CA. The case provides a
good example of the difference between a compensatory and a restitutionary remedy. A
building society had advanced money to a purchaser after receiving negligent
information from its solicitor. The purchaser defaulted, and the building society sued the
solicitor. A restitutionary claim would have required the solicitor to put the building
society back in the position in was in before it made the loan (i.e. to meet the whole of
the society’s loss), whereas the compensatory claim required him only to compensate the
society for the loss caused to it by his negligence. This might have been nil if the
solicitor’s negligence had not affected the building society’s assessment of the ability of
the purchaser to keep up the repayments on the loan.
94
In the Mothew case (see previous footnote) Millett LJ referred to the distinction
between equitable compensation and common law damages for breach of the duty of
care as “a distinction without a difference”. Now see AIB Group (UK) Plc v Mark Redler
& Co Solicitors [2014] UKSC 58; [2015] A.C. 1503, especially at [47]–[77] (Lord
Toulson JSC) and [90]–[138] (Lord Reed JSC); and Libertarian Investment Ltd v Hall
(2013) 16 HKCFAR 681 Hong Kong Court of Final Appeal at [84]–[96] (Ribeiro PJ)
and [166]–[175] (Lord Millett NPJ).
95 Re City Equitable Fire Insurance Co [1925] Ch. 407 at 426 (Romer J).
96 “It follows from the principle that directors who dispose of the company’s property in
breach of their fiduciary duties are treated as having committed a breach of trust that a
person who receives that property with knowledge of the breach of duty is treated as
holding it upon trust for the company. He is said to be a constructive trustee of the
property”, per Chadwick LJ in JJ Harrison (Properties) Ltd v Harrison [2002] 1
B.C.L.C. 162, 173. Also see Madoff Securities International Ltd v Raven [2013] EWHC
3147 (Comm) at [292] (Popplewell J); and Fern Advisers Ltd v Burford [2014] EWHC
762 (QB) at [18] (HH Judge Mackie QC). In this situation the trustee-like nature of the
directors’ duties affects also the legal position of third parties. See further below, at
para.16–134.
98
99
Note Charities Act 2011 s.105(9): an order under this section may authorise an act
even though it involves a breach of one or more of the general duties just described.
102
2006 Act ss.17, 29–30.
103 2006 Act s.257.
104
As we saw at para.14–7, under the model articles the shareholders by special
resolution may give directors instructions as to how they should conduct the
management of the company, even in areas where the articles confer managerial powers
upon the directors.
105 Re Lands Allotment Co [1894] 1 Ch. 616 CA. On ultra vires see above at para.7–29.
106 Re Oxford Benefit Building and Investment Society (1886) 35 Ch.D. 502 (an early
example of a company’s accounts recognising profits which had not been earned); Leeds
Estate Building and Investment Co v Shepherd (1887) 36 Ch.D. 787. It might be said
that the requirement upon the directors to repay the dividends was based on the illegality
of their payment as a matter of statute or common law, but the directors were also
required to repay their remuneration, the payment of which was objectionable only
because it was done in breach of the company’s articles. (The articles entitled the
directors to remuneration only if dividends of a certain size were paid, a rule which,
perhaps naturally, encouraged the directors not to be too careful about observing the
restrictions on their dividend payment powers.)
107
See below, paras 16–30 and 16–109 et seq.
108
109
See Howard Smith Ltd v Ampol Ltd [1974] A.C. 821 at 834 PC; citing Fraser v
Whalley (1864) 2 H.C.M. & M. 10; Punt v Symons & Co Ltd [1903] 2 Ch. 506; Piercy v
S Mills & Co Ltd [1920] 1 Ch. 77; Ngurli v McCann (1954) 90 C.L.R. 425 Aust. HC;
Hogg v Cramphorn Ltd [1967] Ch. 254 at 267. The “improper purpose” test, as a
requirement distinct from good faith in the common law test, has been rejected,
however, in British Columbia: Teck Corp Ltd v Millar (1973) 33 D.L.R. (3d) 288.
110
But see Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71 at [15] (Lord
Sumption SCJ), it seems confining himself to the latter point.
111
Although it may of course review them as being negligent or not: s.174, above
para.16–15.
112The best analysis of this is probably in the trusts case, Edge v Pensions Ombudsman
[2000] Ch. 602 CA at 627E–630G; but also see Equitable Life Assurance Society v
Hyman [2002] 1 A.C. 408 HL at [17]–[21]. And see immediately below and also paras
16–40 et seq.
113Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71. Noted, Worthington
[2016] C.L.J. 202.
114
Howard Smith Ltd v Ampol Petroleum Ltd [1974] A.C. 821 PC.
115 The principle applies generally. For examples in relation to other powers, see
Stanhope’s Case (1866) L.R. 1 Ch. App. 161; and Manisty’s Case (1873) 17 S.J. 745
(forfeiture of shares); Galloway v Halle Concerts Society [1915] 2 Ch. 233 (calls);
Bennett’s case (1854) 5 De G.M. & G. 284; and Australian Metropolitan Life
Association Co Ltd v Ure (1923) 33 C.L.R. 199 Aust. HC (registration of transfers);
Hogg v Cramphorn Ltd [1967] Ch. 254 (loans); Lee Panavision Ltd v Lee Lighting Ltd
[1992] B.C.L.C. 22 CA (entering into a management agreement); Equitable Life
Assurance Society v Hyman [2002] 1 A.C. 408 HL; Criterion Properties Plc v Stratford
UK Properties LLC [2003] B.C.C. 50 CA (giving joint venture partner an option to be
bought out at a favourable price); Re HLC Environmental Projects Ltd (In Liquidation)
[2014] B.C.C. 337 (payments made when the company was in financial distress).
116This has often been assumed and the directors had apparently been so advised and
sought, unsuccessfully, to show that this was their purpose.
117 Howard Smith Ltd v Ampol Petroleum Ltd [1974] A.C. 821 at 835–836 PC.
118
Harlowe’s Nominees Pty Ltd v Woodside Oil Co (1968) 121 C.L.R. 483 Aust. HC.
119 Teck Corp Ltd v Miller (1972) 33 D.L.R. (3d) 288 BC Sup.Ct.
120Or, conversely, to block a bid: Winthrop Investments Ltd v Winns Ltd [1975] 2
N.S.W.L.R. 666 NSWCA.
121
Re Smith and Fawcett Ltd [1942] Ch. 304 at 306.
122
Howard Smith Ltd v Ampol Petroleum Ltd [1974] A.C. 821 at 837 PC: “The
constitution of a limited company normally provides for directors, with powers of
management, and shareholders, with defined voting powers having to appoint the
directors, and to take, in general meeting, by majority vote, decisions on matters not
reserved for management. Just as it is established that directors, within their
management powers, may take decisions against the wishes of majority shareholders,
and indeed that the majority of shareholders cannot control them in the exercise of these
powers while they remain in office so it must be unconstitutional for directors to use
their fiduciary powers over the shares in the company purely for the purpose of
destroying an existing majority, or creating a new majority which did not previously
exist. To do so is to interfere with that element in the company’s constitution which is
separate from and set against their powers”. This principle was applied by the Court of
Appeal in Lee Panavision Ltd v Lee Lighting Ltd [1992] B.C.L.C. 22, where the
incumbent directors entered into a long-term management agreement with a third party
knowing that the shareholders were proposing to exercise their rights to appoint new
directors.
124 Criterion Properties Plc v Stratford UK Properties LLC [2002] 2 B.C.L.C. 151 (Hart
J); [2003] 2 B.C.L.C. 129 CA. The issue was not analysed by the House of Lords, which
focused on the logically prior question of the director’s authority (actual or apparent) to
enter into the contract on behalf of the company: [2004] 1 W.L.R. 1846. The “poison
pill” arrangement entitled the joint venture partner of the potential target company
(Criterion) to require Criterion to buy out its interest in the venture on terms which were
very favourable to the partner and thus very damaging economically to Criterion.
However, this arrangement was capable of being triggered not only by a takeover but
also by any departure of the existing management of Criterion, even in circumstances,
which in fact arose, which were wholly unconnected with a takeover.
125
Re Smith and Fawcett Ltd [1942] Ch. 304 CA, where in a quasi-partnership company
it was held that the directors, in exercising a power to refuse to register a transfer of
shares, could “take account of any matter which they conceive to be in the interests of
the company … such matters, for instance, as whether by their passing a particular
transfer the transferee would obtain too great a weight in the councils of the company or
might even perhaps obtain control” (at 308). Similarly, see Gaiman v National
Association of Mental Health [1971] Ch. 317. In modern law the position would now
have to be considered in the light of any “legitimate expectations” enforceable under
s.994. See below, Ch.20.
126 Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71.
127 Under Pt 22 of the 2006 Act (see ss.793 et seq.) and the company’s articles.
128 Eclairs Group Ltd v JKX Oil & Gas Plc [2013] EWHC 2631 (Ch).
129 Eclairs Group Ltd v JKX Oil & Gas Plc [2014] EWCA Civ 640.
130
As summarised by Lord Sumption SCJ at [2015] UKSC 71 at [28].
131 Eclairs Group Ltd v JKX Oil & Gas Plc [2014] EWCA Civ 640 at [136].
132 Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71 at [31] and [30]
respectively. For earlier academic considerations, see Completing, para.3.14; and R.C.
Nolan, “The Proper Purpose Doctrine and Company Directors” in B. Rider (ed.), The
Realm of Company Law (Kluwer Law International, 1998).
133 In the same vein, it would be improper for a director to act for the purpose of
favouring his or her nominator, with the cases again suggesting, if only by inference,
that a “but for” test is appropriate: see, e.g. Kuwait Asia Bank EC v National Mutual Life
Nominees Ltd [1991] 1 A.C. 187 PC.
134
Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71 at [17] (Lords Sumption
and Hodge SCJJ); citing Mills v Mills (1938) 60 C.L.R. 150 at 185–186 Aust. HC, where
Dixon J indicated the difficulties.
135
Howard Smith Ltd v Ampol Petroleum Ltd [1974] A.C. 821 at 832 PC (Lord
Wilberforce).
136
Mills v Mills (1938) 60 C.L.R. 150 at 186 Aust. HC; Whitehouse v Carlton House
Pty (1987) 162 C.L.R. 285 at 294 Aust. HC: although this interpretation, supported in
Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71 by Lord Sumption SCJ (with
whom Lord Hope SCJ agreed) (at [21]–[22]) was doubted by Lord Mance SCJ (with
whom Lord Neuberger PSC agreed) (at [53]). See also Hirsche v Sims [1894] A.C. 654
PC; Hindle v John Cotton Ltd (1919) 56 S.L.T. 625.
137 Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71 at [49].
138
Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71 at [20] (on the “primary”
purpose test), and see too [54] (on both).
139Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71 at [21], but see generally
[21]–[23].
140
Lord Mance SCJ (with whom Lord Neuberger PSC agreed) set out his doubts at
[2015] UKSC 71 at [51]–[54].
141 Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71 at [42]–[43].
142
See the cases cited in fnn.106 and 109.
143
See the cases cited in fnn.106 and 109. The most recent Supreme Court authority on
quantification of this form of compensation comes from the non-company case of AIB
Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 SC.
144
They might escape liability, however, where, for example, the provisions of the
constitution were not clear; and see also the discussion of s.1157, below, para.16–133.
145 See the analysis of the cases in Hunter v Senate Support Services Ltd [2004] EWHC
1085 (Ch); [2005] 1 B.C.L.C. 175, [173]–[179]. Note the importance of the
absence/excess of authority versus abuse of authority distinction in Hogg v Cramphorn
[1967] Ch. 254—a decision to attach multiple voting rights to shares issued to the
company’s pension fund, in breach of the company’s articles, was ineffective, whereas
the issue itself, for improper purposes, was voidable only; Guinness v Saunders [1990] 2
A.C. 663 HL—fixing of directors’ remuneration by a board committee, rather than the
full board, in breach of the articles, meant that the decision was void and the recipient
director had to repay the money; Smith v Henniker-Major Co [2003] Ch. 182 at [48]—
inquorate board meeting. cf. Hely-Hutchinson v Brayhead Ltd [1968] 1 Q.B. 549, where
the correct body acted but the director was in breach of his obligation under the articles
to comply with disclosure provisions: here the decision was voidable but not void.
146 Bamford v Bamford [1970] Ch. 212 CA (ratification by shareholders of decision
taken for an improper purpose); and Criterion Properties Plc v Stratford UK Properties
LLC [2004] 1 W.L.R. 1846 (on the application of the statutory protection for the benefit
of third parties).
147 See above, at para.7–9. Unless the third party is a director of the company or a
person connected with the director. See s.41 and above, para.7–13.
148
2006 Act s.40(1).
149Liability under s.171 is preserved by s.41(1) but it would seem more attractive to
proceed under s.41 where this is possible.
150
Including a director of the company’s holding company.
151
The transaction itself is voidable by the company (s.41(2) and (4)), but not void, as it
would be at common law. It will cease to be avoidable if (a) restitution of the subject-
matter of the contract is not possible; (b) the company has been indemnified for the loss
suffered; (c) the rights of bona fide purchasers without notice have intervened; or (d) the
shareholders in general meeting have ratified the transaction.
152
153See many of the cases cited earlier, including the leading case of Howard Smith v
Ampol [1974] A.C. 824 PC. By contrast, in Eclairs Group Ltd v JKX Oil & Gas plc
[2015] UKSC 71 SC, the shareholders would be expected to have jurisdiction to
complain.
154For an attempted defence of this, see S. Worthington, “Directors’ Duties, Creditors’
Rights and Shareholder Intervention” (1991) 18 Melbourne University Law Review 121,
125–30. Also see Equitable Life Assurance Society v Hyman [2002] 1 A.C. 408 HL.
155 But for the perhaps preferable view that acting for an improper purpose is an abuse
of power but not a breach of the articles see Winthrop Investments Ltd v Winns Ltd
[1975] 2 N.S.W.L.R. 666 NSWCA. Also see Rolled Steel Products (Holdings) Ltd v
British Steel Corp [1986] Ch. 246.
156
Re Sherborne Park Residents Co Ltd (1986) 2 B.C.C. 528.
157
158Per Sir George Jessel MR in Flitcroft’s case (1882) 21 Ch. D. 519; quoted with
approval by the Court of Appeal in Bairstow v Queen’s Moat Houses Plc [2001] 2
B.C.L.C. 531. See above, para.12–13.
159
At para.13–56. See also the discussion of Re Duckwari (No.2) [1998] 2 B.C.L.C. 315
CA, below at fn.277.
160
MacPherson v European Strategic Bureau Ltd [2000] 2 B.C.L.C. 683.
161 MacPherson v European Strategic Bureau Ltd [2000] 2 B.C.L.C. 683 at 701.
162See Madoff Securities International Ltd v Raven [2013] EWHC 3147 (Comm) at
[191] (Popplewell J).
163
Cartmells’ case (1874) L.R. 9 Ch. App. 691. On the Government’s intention to
preserve this rule see HC Debs, Standing Committee D, Company Law Reform Bill,
Fifteenth Sitting, 11 July 2006 (Afternoon), col. 600 (the Solicitor-General).
164
But see Clark v Workman [1920] 1 Ir.R. 107; and an unreported decision of Morton J
in the Arderne Cinema litigation, below, at paras 19–10 et seq.; and the Scottish decision
in Dawson International Plc v Coats Paton Plc 1989 S.L.T. 655 (1st Div.) where it was
accepted that an agreement by the directors would be subject to an implied term that it
did not derogate from their duty to give advice to the shareholders which reflected the
situation at the time the advice was given.
165
Contrast the position of shareholders who may freely enter into such voting
agreements: below, paras 19–25 et seq. What if the directors and the members enter into
an agreement which fetters the directors’ discretion? This was discussed, but not clearly
settled, by the Canadian Supreme Court in Ringuet v Bergeron [1960] S.C.R. 672, where
the majority held the voting agreement valid because, in their view, it related only to
voting at general meetings. The minority held that it extended also to directors’ meetings
and was void, but they conceded that the position might have been different had all the
members originally been parties to the agreement: see ibid., at 677. But cf. Fulham
Football Club Ltd v Cabra Estates Plc [1994] 1 B.C.L.C. 363 at 393.
166
Thorby v Goldberg (1964) 112 C.L.R. 597 Aust. HC, per Kitto J at 605–606.
167
Cabra Estates Plc v Fulham Football Club [1994] 1 B.C.L.C. 363 CA; noted by
Griffiths [1993] J.B.L. 576.
168
See HC Debs, Standing Committee D, Company Law Reform Bill, Fifteenth Sitting,
11 July 2006 (Afternoon), col. 600 (the Solicitor-General).
169John Crowther Group Plc v Carpets International [1990] B.C.L.C. 460; Rackham v
Peek Foods Ltd [1990] B.C.L.C. 895; Dawson International Plc v Coats Paton Plc,
1989 S.L.T. 655. The correctness of these decisions was left open by the Court of
Appeal in Cabra Estates. Even here it must be accepted that the shareholders may in
consequence lose a commercial opportunity which would otherwise be open to them.
See the discussion below at paras 28–36 et seq.
171Boulting v ACTT [1963] 2 Q.B. 606 at 626, per Lord Denning MR; Kuwait Asia
Bank EC v National Mutual Life Nominees Ltd [1991] 1 A.C. 187 PC. The latter case
shows that this principle has the advantage of not making the nominator liable for any
breaches of duty to the company by the nominee director. Also see Thompson v The
Renwick Group Plc [2014] EWCA Civ 635 CA, where the Court rejected the view that a
parent assumes a duty of care to employees of its subsidiary in health and safety matters
by virtue of that parent company having appointed an individual as director of its
subsidiary company with responsibility for health and safety matters.
172
Brady v Brady [1988] B.C.L.C. 20 at 40 CA.
173Gaiman v National Association for Mental Health [1971] Ch. at 330: “both present
and future members”. Also see below, para.16–46.
174 Hutton v West Cork Railway (1883) 23 Ch. D. at 673, the “cakes and ale” being in
this case gratuitous benefits for the employees. For this reason directors can normally
justify modest, business-related political or charitable donations on the part of their
companies, though the broader public policy issues arising out of such donations are
recognised in the requirement that such donations be disclosed in the directors’ report
and in some cases approved by the shareholders: see below, paras 16–50 and 21–23.
175 The Law Society, Company Law Reform White Paper, June 2005, p.6.
176 See Developing, Ch.3 and Completing, Ch.3.
177LNOC Ltd v Watford Association Football Club Ltd [2013] EWHC 3615 (Comm) at
[64] (HH Judge Mackie QC).
178The classic case where the directors did all too clearly reveal their reasoning is
Dodge v Ford Motor Co (1919) 170 N.W. 668. Henry Ford openly took the view that the
shareholders had been more than amply rewarded on their investment in the company
and so proposed to declare no further special dividends but only the regular dividends
(of some 60 per cent per annum!) in order to reduce the price of the cars, to expand
production and “to employ still more men, to spread the benefits of this industrial system
to the greatest possible number, to help them build up their lives and their homes” (at
683). This was held to be “an arbitrary refusal to distribute funds that ought to have been
distributed to the stockholders as dividends” (at 685).
179
See the current regulations on narrative reporting (which apply to financial years
ending on or after 30 September 2013) as set out in the Companies Act 2006 (Strategic
Report and Directors’ Report) Regulations 2013. These followed from a BIS
consultation on narrative reporting, The Future of Narrative Reporting—A further
consultation (2011) and The Future of Narrative Reporting: The Government Response
(2012) https://www.gov.uk/government/consultations/the-future-of-narrative-reporting-
a-further-consultation [Accessed 5 May 2016].
180 Developing, para.2.22.
181 “and not for any collateral purpose” [this closing phrase seeing its statutory parallels
in s.171(b)]: [1942] Ch. 304 at 306 CA.
182
Regentcrest Plc (In Liquidation) v Cohen [2001] 2 B.C.L.C. 80. See also Extrasure
Travel Insurances Ltd v Scattergood [2003] 1 B.C.L.C. 598 at [90]. It is to be noted that
in neither the formulation of Lord Greene MR nor in s.172 is there a requirement upon
the director to act “honestly” as well as “in good faith”, though the word “honestly” is
used in a number of court decisions in this area. However, the CLR did not believe that
the adverb “honestly” added anything of importance to the requirement of good faith and
its use might create uncertainty, and so it did not recommend its use either here or
elsewhere in the statutory restatement: Completing, para.3.13.
183 Re Smith and Fawcett Ltd [1942] Ch. 304 at 306 CA (Lord Greene MR).
184
Re W&M Roith Ltd [1967] 1 W.L.R. 432.
185
Following Re Lee, Behrens & Co Ltd [1932] 2 Ch. 46; but cf. Lindgren v L&P
Estates Ltd [1968] Ch. 572 CA, where it was held that there had been no failure on the
part of the directors to consider the commercial merits.
186
Similarly, see Scottish Co-operative Wholesale Society Ltd v Meyer [1959] A.C. 324
HL.
187Charterbridge Corp v Lloyds Bank [1970] Ch. 62. A similar approach has been
adopted in the area of unfair prejudice. See Nicholas v Soundcraft Electronics Ltd
[1993] 1 B.C.L.C. 360 CA.
188 cf. Extrasure Travel Insurances Ltd v Scattergood [2003] 1 B.C.L.C. 598, accepting
the law as stated in the Charterbridge case, but coming to a different conclusion on the
facts because (a) the directors of the subsidiary never considered whether the survival of
the parent was crucial to the subsidiary; and (b) no reasonable director would have
concluded that the steps taken by the directors would lead to the survival of the parent.
189Re HLC Environmental Projects Ltd (In Liquidation) [2014] B.C.C. 337 at [92]–[93]
(John Randall QC); Green v El Tai [2015] B.P.I.R. 24 Ch D at [110] (Registrar Jones);
Madoff Securities International Ltd v Raven [2013] EWHC 3147 (Comm) at [194].
190See also Lindgren v L & P Estates Co Ltd [1968] Ch. 572, 595, per Harman LJ (no
duty owed by director of holding company to subsidiary); and Bell v Lever Bros Ltd
[1932] A.C. 161 at 229, per Lord Atkin (no duty owed by director of subsidiary to the
parent company). The statutory qualification to the definition of a “shadow director” in
s.250(3) (above, para.16–8), excluding a company in relation to its subsidiaries, supports
this approach. The cases do not distinguish between wholly-owned subsidiaries and
those with outside minority shareholders. Only in the latter case does the imposition of a
group policy potentially have an adverse effect on the interests of the shareholders, for
which the unfair prejudice provisions may now provide a remedy (see Ch.20). It should
also be noted that it is apparently legitimate for the company’s articles to permit or
require the directors to take into account the interests of other companies in the group,
because in that way it could be said that the articles have defined what is to be regarded
as “success” for the company in question.
191
Re W & M Roith Ltd [1967] 1 W.L.R. 432.
192
See above, para.16–40; and Edge v Pensions Ombudsman [2000] Ch. 602 at 627E-
630G CA; Equitable Life Assurance Society v Hyman [2002] 1 A.C. 408 at [17]–[21]
HL.
193 Equitable Life Assurance Society v Hyman [2000] 2 All E.R. 331 at [17]–[21] CA
(per Lord Woolf). In the House of Lords ([2002] 1 A.C. 408) Lord Steyn dealt with the
case as a matter of an implied term in a contract, whilst Lord Cooke, dealing with it as a
matter of the exercise of a discretion for a proper purpose, did not cite the Wednesbury
principle but confined himself to mention of the Howard Smith v Ampol case (see
fn.109, above). See also Hunter v Senate Support Services Ltd [2005] 1 B.C.L.C. 175 at
[165]–[232].
194See the previous note and the cases referred to therein. However, it should also be
noted that Re Smith & Fawcett Ltd was itself an intra-member dispute.
195
HC Debs, Standing Committee D, Company Law Reform Bill, Fifteenth Sitting, 11
July 2006 (Afternoon), all quotations from cols 591–592. At one stage the duty of the
director to take into account the listed factors was qualified by the phrase “so far as
reasonably practicable” but this was deleted, perhaps because of the suggestion in the
phrase of an objective test for review of the directors’ decision. See also HL Debs,
vol.681, cols 845–846, 9 May 2006 (Lord Goldsmith, on Report).
196
Item Software (UK) Ltd v Fassihi [2005] 2 B.C.L.C. 91. Also see GHLM Trading Ltd
v Maroo [2012] EWHC 61 (Ch); IT Human Resources Plc v Land [2014] EWHC 3812
(Ch).
197 See Stupples v Stupples & Co (High Sycombe) Ltd [2012] EWHC 1226 (Ch) at [59]
(HHJ David Cooke). Further, in First Subsea Ltd v Balltec Ltd [2014] EWHC 866 (Ch),
Norris J emphasised (at [191]) that the duty to “self-report” is “not a discrete and free-
standing duty. It is one aspect of a bundle of interrelated obligations which together
constitute ‘good faith’ and ‘loyalty’.”
198 See Shepherds Investments Ltd v Walters [2006] I.R.L.R. 110 at [132].
199 Bell v Lever Bros Ltd [1932] A.C.161.
200
Bell v Lever Bros Ltd [1932] A.C.161 at [57]—presumably because the parties were
on opposite sides of a negotiation.
201
See Counsel’s Opinion quoted in the Report by Mr Milner Holland of an
investigation under s.165(b) of the Companies Act 1948 into the affairs of the Savoy
Hotel Ltd and the Berkeley Hotel Company Ltd, Board of Trade, 1954. This somewhat
obscure source has long been regarded as the locus classicus on this point. See also
Gaiman v National Association for Mental Health [1971] Ch. at 330: “both present and
future members”.
202
CLR, Final Report I, p.345 (Principle 2, Note (1)).
203
CGC, A.1-Main Principle. See too BIS, A Long-Term Focus for Corporate Britain:
A Call for Evidence (2010). Responses were published, but then nothing more was done:
see https://www.gov.uk/government/consultations/a-long-term-focus-for-corporate-
britain-a-call-for-evidence [Accessed 13 February 2016].
204
205
Companies Act 1985 s.309, although expressed in different terms to s.172(1)(b).
206
cf. Re Saul D. Harrison & Sons Plc [1995] 1 B.C.L.C. 14 at 25 CA, where resort was
had to the Companies Act 1985 s.309 to undermine the shareholder petitioning under
s.459 against the board/majority shareholders of the company.
207
See CLR, Final 1, para.3.17 and p.348 (Principle 9); Modernising Company Law,
Cm. 5533-I, July 2002, paras 3.11-3.12.
209
The courts are likely to give a positive answer to this question.
210
Thus, in Evans v Brunner, Mond & Co Ltd [1921] 1 Ch. 359, where the question was
whether a shareholders’ resolution expressly conferring power on the directors to make a
certain class of donation was ultra vires, Eve J said obiter of the authority conferred by
the resolution that it “is certainly impressed with this implied obligation on those to
whom it is given, that they shall exercise the discretion vested in them bona fide in the
interests of the company whose agents they are”.
211
Re Lee, Behrens and Co Ltd [1932] 2 Ch. 46. Also see MSL Group Holdings Ltd v
Clearwell International Ltd [2012] EWHC 3707 (QB) (Sir Raymond Jack) at [41]–[42],
[45].
212
Evans v Brunner, Mond & Co Ltd [1921] 1 Ch. 359.
213The donation can then be presented as a contract: a payment in exchange for
exposure of the company’s name before a valued target audience, in fact a form of
advertising.
214 Thus, in Parke v Daily News Ltd [1962] Ch. 927 the payments to the employees
failed because it could not be argued that a company about to enter liquidation any
longer had a (shareholder) interest in fostering good relations with its employees. The
specific decision in that case was reversed, within limits, by what is now s.247, which
confers a power on the company, if it would otherwise not have it, to make provisions
for the benefit of employees on the cessation or transfer of its business, which power is
exercisable “notwithstanding the general duty imposed by s.172 (duty to promote the
success of the company)”.
216
Overwhelmingly, the conflict is between the director’s personal interest and his duty
to the company of which he is director, but where the same person is director of two
competing companies, he or she may then be subject to competing duties. See Clark
Boyce v Mouat [1994] 1 A.C. 428; Bristol and West Building Society v Mothew [1998]
Ch. 1; Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co
[1914] 2 Ch. 488.
217 Bray v Ford [1896] A.C. 44 at 51–52 HL.
218
The rules on who needs to provide such consent differ as between the different
statutory categories of conflicts, as discussed below.
219
Or the danger of “being swayed by interest rather than driven by duty”: Breitenfeld
UK Ltd v Harrison [2015] EWHC 399 (Ch) at [68] (Norris J).
220
On the importance of distinguishing between self-dealing transactions and personal
exploitation of corporate opportunities see Bell v Lever Bros Ltd [1932] A.C. 161 HL,
per Lord Blanesburgh; Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd
[2011] EWCA Civ 347 CA (which has however, on the issue of proprietary remedies,
been overruled by the Supreme Court in the next case); FHR European Ventures LLP v
Cedar Capital Partners LLC [2014] UKSC 45; [2015] A.C. 250.
221
Loans to directors and directors’ service contracts are the obvious examples.
222
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq. H.L. 461 HL Sc.
223
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq. H.L. 461 at 471–472 HL Sc.
224
See above at para.14–30.
225 The most common example is a “charging clause” enabling professional trustees and
their firms to charge fees for acting as trustees or executors.
226
227
228 The model articles for both public and private companies (arts 14 and 16
respectively) exclude the director from both, but subject to important exceptions where
the director can both be counted and vote.
230 The argument that disclosure to the board is pointless in the case of a shadow
director, because the board by definition does what the shadow director wants, needs to
be qualified because (a) the definition of a shadow director requires only that the board
be accustomed to do what the shadow director wants, not that it does it on every
occasion (see s.251); and (b) because, if the argument is correct, it is not clear why
shadow directors are required to disclose interests in relation to existing transactions.
231 cf. Re Duckwari (No.2) [1998] 2 B.C.L.C. 315, 319, interpreting the word
“arrangement” in what is now s.190. The predecessor to s.177 was s.317 of the 1985
Act, which made this point clear (see s.317(5)—“whether or not constituting a
contract”). However, it is not thought that the omission of the words “whether or not
constituting a contract” from s.177 indicates an intention to confine the section to
contractual transactions or arrangements. See also Financial Conduct Authority v
Capital Alternatives Ltd [2014] EWHC 144 (Ch) at [51].
232
The arguments in favour of this view, given in the fifth edition of this book at p.577,
in relation to Companies Act 1985 s.317 seem equally applicable to s.177. Those
arguments were approved by the judge in Neptune (Vehicle Washing Equipment) Ltd v
Fitzgerald [1996] Ch. 274, whose decision was treated as authoritative by the Law
Commissions, above, fn.1, at para.8.38 and was approved on consultation.
233 See, for example, Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq. H.L. 461 HL
Sc; Transvaal Lands Co v New Belgian Land Co [1914] 2 Ch. 485 CA; and more
recently, Newgate Stud Co v Penfold [2008] 1 B.C.L.C. 46, suggesting the common law
rule catches transactions between the company and any person whose relationship with
the director is such as to create “a real risk of conflict between duty and personal
loyalties”.
234
The courts when interpreting provisions in companies’ articles have long required
disclosure of the extent as well as the nature of interests. See, for example, Imperial
Mercantile Credit Association v Coleman (1873) L.R. 6 H.L. 189.
235
A similar provision is to be found in s.175(4)(a) in relation to the statutory duty to
avoid conflicts of interest.
236
cf. Boardman v Phipps [1967] 2 A.C. 46 at 124 per Lord Upjohn: “In my view [the
phrase] means that the reasonable man looking at the relevant facts and circumstances of
the particular case would think that there was real sensible possibility of conflict”.
237
In the case where there is a single member who is also a director of the company
(and may be the only director) and the company contracts with that member other than
in the ordinary course of the company’s business, s.231 requires that the terms of the
contract are either set out in a written memorandum or recorded in the minutes of the
first meeting of the directors following the making of the contract. This section aims to
reduce the uncertainties which might later arise about the terms of the contract if there
were to be no contemporaneous written record of it and no other person had been
involved in its approval on the part of the company. This could be important, for
example, if the company subsequently went into liquidation and a liquidator had to
establish the extent of the company’s liabilities. The section is enforced by a summary
criminal sanction but breach of it does not affect the validity of the contract (s.231(4)
and (6)). However, the requirement is applied expressly to shadow directors, i.e. where
the sole member is a shadow director, in which case some other person(s) will constitute
the board (s.231(5)). The section implements in domestic law the requirements of art.5
of Directive 89/667 on single-member private limited-liability companies ([1989] O.J.
L395/40).
238 cf. s.177(2) (“may (but need not)”). It thus appears that an oral declaration of interest
to other directors outside a directors’ meeting, for example, is permissible in respect of
proposed transactions.
239
2006 Act ss.184 and 248.
240 2006 Act s.185. It should not be necessary to say so, but note that it is insufficient to
give general notice pursuant to ss.177(2)(b) and 185 where the transaction in question is
not one which is entered into with the company (and therefore falls outside the remit of
s.175(3)): Re Coroin Ltd [2012] EWHC 2343 (Ch) at [582]–[583] (David Richards J).
241 2006 Act s.185(4).
242 2006 Act s.178.
243This is especially evident in older cases dealing with promoters: Erlanger v New
Sombrero Phosphate Co (1878) 3 App. Cas. 1218 HL; Re Cape Breton Co (1887) 12
App. Cas. 652 HL.
244 And this may well be possible: for example, a misuse of the company’s property
(and a self-dealing transaction may fall into that category) may involve a conflict of duty
and interest (for which rescission is potentially available); and a breach of the duty to act
bona fide and for proper purposes (for which equitable compensation is recoverable,
even if the director has not made a profit from the misuse (Gwembe Valley Development
Co Ltd v Koshy (No.3) [2003] EWCA Civ 1478; [2004] 1 B.C.L.C. 131 CA)); and
perhaps also negligence (in that the advice to the company in favour of the self-
interested deal may have been poor and caused loss, for which common law damages are
available). See Costa Rica Railway Co Ltd v Forward [1901] 1 Ch. 746; Imperial
Mercantile Credit Association v Coleman (1873) L.R. 6 H. L.189; JJ Harrison
(Properties) Ltd v Harrison [2001] 1 B.C.L.C. 158 Ch.D.; and [2002] 1 B.C.L.C. 183
CA; Madoff Securities International Ltd v Raven [2013] EWHC 3147 (Comm); Airbus
Operations Ltd v Withey [2014] EWHC 1126 (QB).
245
246
See Guinness Plc v Saunders [1990] 2 A.C. 663 HL, where the wrong body under
the company’s articles (a committee of the board rather than the full board) acted to pay
a bonus to the director so that the decision to pay the bonus was void, the committee
being without power to act, and the money repayable by the director. cf. Hely-
Hutchinson v Brayhead Ltd [1968] 1 Q.B. 549, where the correct body acted, but the
director was in breach of his fiduciary obligations unless the right approvals were given:
here the decision was voidable but not void.
247 2006 Act s.182(1).
248 2006 Act s.182(4). The formulation in s.177(4)—before the company enters into the
transaction—is clearly not available.
249
2006 Act s.182(2).
250How this requirement will be reconciled with s.182(6)(b), indicating that the duty
does not apply if the other directors are already aware of the interest, or ought to be
aware of the interest, is unclear.
251 2006 Act s.186. In the case of a proposed transaction the declaration has no point (if
a further director is appointed before the transaction is completed, the s.177 obligation
will arise at that point) but an interest in an existing transaction will be of continuing
relevance and the declaration will be available to the new director immediately when
appointed. Indeed, in most cases the sole director will have to make disclosure as soon
as the proposed transaction is completed.
252
2006 Act.187(1).
253 2006 Act s.187(2)–(4).
254 2006 Act s.183. The disputes in relation to the remedies for breach of the
predecessor provision, CA 1985 s.317 (see ninth edition of this book, p.568), have been
laid to rest in the current Act.
255 Both duties discussed below.
256
If approval is required under more than one of the sets of statutory provisions
discussed below, the requirements of each must be met, but not so as to require separate
resolutions for each: s.225.
257
The shareholders’ meeting could in principle both approve the transaction and
instruct the board to enter into it, but if the transaction falls within the managerial
powers of the directors, such an instruction would have to take the form of a special
resolution. See above, para.14–7.
258
Law Commissions, above, fn.1.
260The statute leaves it up to the courts to decide how far the general duties apply to
shadow directors, but does exclude holding companies in the circumstances set out in
s.251, if the shadow director principle applies at all. See above, para.16–8.
261
2006 Act ss.188(6)(a), 190(4)(b), 197(5)(a), 198(6)(a), 201(6)(a), 203(5)(a), 217(4)
(a), 218(4)(a), and 219(6)(a).
262
2006 Act ss.1158 and 1.
263
Above, para.1–31.
264
British Racing Driver’s Club Ltd v Hextall Erskine & Co (A Firm) [1996] 3 All E.R.
667 at 681–682. The case is a good illustration of the operation of both the dangers and
their remedy. Technically, the transaction is not between the directors and one of their
number but rather between a director and the company, but of course the decision on
behalf of the company is taken by the other directors. See also Granada Group Ltd v The
Law Debenture Pension Trust Corp Plc [2015] EWHC 1499 (Ch) in which Andrews J
provides an extension discussion of the predecessor to s.190 (appeal outstanding); and
Smithton Ltd v Naggar [2014] EWCA Civ 939; [2015] 1 W.L.R. 189 CA.
265 Defined in s.1163 to include the creation or extinction of an estate or interest in, or
right over, any property and the discharge of any person’s liability other than for a
liquidated sum.
266
Also defined in s.1163 and meaning “any property or interest in property other than
cash”. See Re Duckwari Plc (No.1) [1997] 2 B.C.L.C. 713 CA; and Ultraframe (UK) Ltd
v Fielding [2005] EWHC 1638, where the term was held to include a lease, a licence to
exploit intellectual property, a supply of assets, and a sale of stock, but not a supply of
services.
267The value of the net assets is to be determined by the latest accounts or, if none have
been laid, by reference to its called-up share capital: s.192(2). Non-cash transactions
need to be aggregated to test for their compliance with the statutory thresholds: s.191(5).
268 Some degree of certainty of entering into the transaction or arrangement is needed
despite the fact that a conditional arrangement may otherwise fall within s.190: Smithton
Ltd v Naggar [2014] EWCA Civ 939; [2014] B.C.C. 482 at [110] (Arden LJ, with whom
Elias and Tomlinson LJJ agreed).
269
See below paras 16–117 et seq.
2702006 Act s.190(4)(a) dispenses with the requirement for shareholder approval if the
company is not a UK-registered company. So, if the only British company is a wholly-
owned subsidiary of a foreign company, the requirements for shareholder approval, if
any, will be determined by the system of company law governing the foreign company.
271 2006 Act s.1173(1), so that bodies incorporated outside the UK are included.
272 2006 Act s.195(8).
273
See fn.6, above.
274 Although see above, fn.244, for possible alternative claims.
275 Thus, the duty to account is confined to the profit made by the person who is so
accountable (though indirect profit is taken into account): there appears to be no duty on
a director to account, for example, for a profit made solely by a connected person,
though the connected person may be liable to account.
276NBH Ltd v Hoare [2006] 2 B.C.L.C. at [44]–[49]: when a director (or a connected
person) sold an asset to the company at an undervalue (i.e. without loss to the company,
here with that fact reinforced by the company’s subsequent sale of the asset for a profit),
the director was not liable for his own profits on the sale of the asset (and indeed their
measurement might be difficult, and certainly could not be assumed to be the difference
between the price at which the director acquired the asset, perhaps years ago, and the
price for which it was later sold to the company). Also see Re Duckwari Plc (No.2)
[1999] Ch. 253, 261 (Nourse LJ). cf. the quite different situation described in fn.277
immediately below.
277
See Re Duckwari (No.2) [1999] Ch. 253; [1998] 2 B.C.L.C. 315 CA; and Re
Duckwari (No.3) [1999] Ch. 268; [1999] 1 B.C.L.C. 168 CA. In these cases, the
company recovered by way of indemnity the loss (with interest) suffered after the
acquisition of a piece of land (at a fair price) from a director without shareholder
approval when the property market subsequently collapsed, but not the higher rate of
interest actually paid by the company on the funds borrowed to effect the purchase. The
court in the former case based its decision that the post-acquisition loss was recoverable
also on the argument that, if the statute had not made express provision for the
company’s remedies, the director would have been liable to restore to the company the
money paid for the property (less its residual value) on the grounds that the payment
amounted to receipt of corporate assets paid to the director in breach of trust on the part
of the directors; and there was no suggestion in the statute that Parliament wished to give
the company remedies inferior to the common law ones.
279
It would not seem a legitimate reading of the section to interpret it so as to require
the taking of reasonable steps only in relation to connections of which the director is
actually aware, though the more remote the connection, the less the taking of reasonable
steps would require.
280
LR 11.1.
281 LR 11.1.4.
282 LR 11.1.5.
283
LR 11.1.5–6. The specific exemptions are set out in LR 11 Annex 1.
284 LR 11.1.7.
285Report of the Committee on Company Law Amendment, Cmnd. 6659, 1945,
para.94. It is interesting to note that one of the corporate governance reforms made in
US federal law in the aftermath of the Enron affair was to introduce in the Sarbanes-
Oxley Act 2002 a ban on loans by companies to their directors: s.402(a).
286This has removed a doubt arising under the old law about whether the company
could seek to enforce its rights of civil recovery under the statute, on the grounds that it
was seeking to rely on an illegal transaction.
287 See above, paras 9–4 et seq. and below, paras 16–117 et seq.
288
2006 Act ss.197(1). See also ss.198(2) and 201(2).
289 See ss.200 and 201(2).
290 2006 Act s.256. The reference to “body corporate” brings in companies incorporated
outside the UK (s.1173(1)), so two British subsidiaries of a foreign company will be
associated. If one is public and the other private, both will be caught by the quasi-loans
provisions, even though the rules on quasi-loans do not apply to the holding company
(see s.198(6)).
291
2006 Act s.199.
292
2006 Act s.281(3).
293
2006 Act ss.197(3),(4), 198(3),(5), 200(4),(5), 201(4),(5), and 203(3),(4).
294
2006 Act ss.197(5)(b), 198(6)(b), 200(6)(b), and 203(5)(b).
295
Arts 43(1) and (13) of Directives 78/660/EEC and 83/459/EEC.
296
In practice, this is likely to be a heavily used exception. Transactions have to be
aggregated for the purpose of determining whether monetary thresholds have been
crossed (s.209) and s.210 gives some guidance on the valuation of different types of
arrangement.
297
298
However, a loan to purchase or improve a main residence for the director may be on
non-commercial terms if the company has a home-loan scheme for its employees, it
regularly makes such loans to its employees and the terms of the loan are the standard
ones under the scheme: s.208(3),(4).
299
2006 Act s.208(2). This is a somewhat narrower exception than that for credit
transactions because credit transactions are exempted when entered into by any company
(provided this is done in the ordinary course of the company’s business) whereas the
loan exception applies only to money-lending companies, i.e. those whose ordinary
business includes the making of such loans. So, if the ordinary course of a company’s
business requires it to enter into a one-off credit transaction, it may make use of
s.206(3), whether or not its ordinary business includes entering into this class of
transaction.
300
301
And s.214 makes the same provision as s.196 in relation to affirmation.
302 It has been held that it is sufficient to impose liability on the director who authorised
the loan (s.213(4)(d)), jointly and severally with the director who received it, that the
director was aware from the annual accounts of the practice of making loans to the
recipient director, even if he was unaware of the precise amounts. See Neville v
Krikorian [2007] 1 B.C.L.C. 1 CA; followed in Queensway Systems Ltd v Walker [2007]
2 B.C.L.C. 577. In that case the authorising director was also held to be in breach of his
general duties to the company by not seeking to recover the loans (which were repayable
on demand) as soon as he knew of their existence.
303 See para.14–30, above, and para.28–28, below.
305See now the Trade Union and Labour Relations (Consolidation) Act 1992 Part I
Ch.VI.
306 2006 Act s.367(5).
307 2006 Act s.368.
3082006 Act s.364. A donation to the political fund of a trade union is included, but not
any other type of donation to a union: s.374.
3092006 Act s.366. There is an exemption for small donations (no more than £5,000
over any period of 12 months): s.378.
310
2006 Act s.365. Also included is expenditure on activity designed to influence
voters’ attitudes in referendums.
311
2006 Act s.366(3),(4). Provision is made for a single resolution to be passed in
groups of companies, for example, covering donations by a holding company and any of
its subsidiaries (even where those subsidiaries change during the period of the validity of
the resolution): s.367(1), (2),(4),(7).
312
2006 Act ss.1158 and 1.
313
2006 Act s.366(4)(b). The 1985 Act had a series of more complex provisions
attempting to deal with non-UK holding and subsidiary companies, but these have been
abandoned.
314
2006 Act s.367(3),(6).
315 2006 Act s.369(1),(2),(3). If the donation is repaid by the recipient, presumably the
first head of loss falls away. This was made explicit under the previous law.
316
2006 Act.379(1).
317 2006 Act s.369(3)(b),(4).
318Subject to the exception—“not reasonably regarded as likely” to give rise to a
conflict—in s.175(4)(a), which parallels the provision in s.177(6)(a). See para.16–60,
above.
319 In the case of charitable companies self-dealing transactions fall within s.175, unless
the articles permit the s.175 duty to be disapplied and, even then, the articles may not
effect a blanket disapplication but may do so only “in relation to descriptions of
transactions or arrangements specified” in the articles (s.181(2)). Thus, for charitable
companies, board or shareholder authorisation will be required in many cases for
directors’ conflicted transactions with the company. The tougher rules for charitable
companies are probably based on the premise that monitoring of the directors by the
members of a charitable company is generally less effective than in the case of a non-
charitable company and that the Charity Commission cannot make up the whole of the
monitoring deficit.
320
The provisions are thus described as “mutually exclusive”: Re Coroin Ltd [2012]
EWHC 2343 (Ch) at [583] (David Richards J).
321Notably Bhullar v Bhullar [2003] 2 B.C.L.C. 241 CA; and Allied Business and
Financial Consultants Ltd v Shanahan (also known as O’Donnell v Shanahan) [2009]
EWCA Civ 751; [2009] 2 B.C.L.C. 666 CA. Also see, recently, Sharma v Sharma
[2013] EWCA Civ 1287; [2014] B.C.C. 73 CA; and Pennyfeathers Ltd v Pennyfeathers
Property Co Ltd [2013] EWHC 3530 (Ch).
322
In Queensland Mines Ltd v Hudson [1978] 52 A.L.J.R. 379 the Privy Council
appeared to accept a board decision as releasing the corporate interest in an opportunity,
but in that case the only members of the company were two other companies, each
represented on the board of the company in question.
323 Aberdeen Rly Co v Blaikie Bros (1854) 1 Macq. 461 HL.
324 Except the problem of knowing when “corporate assets” end and “corporate
information” or “corporate opportunity” begin. The present law does not draw a clear
distinction between them and the decisions frequently treat the latter as “belonging” to
the company, i.e. as being its “property” or “asset”. The modern law on remedies tends
to encourage this, as precise distinction seems irrelevant for those purposes.
325
Regal (Hastings) Ltd v Gulliver [1942] 1 All E.R. 378; [1967] 2 A.C. 134n.
326
Notably Keech v Sandford (1726) Scl. Cas. Ch. 61.
327
per Lord Macmillan at [1967] A.C. 153.
328
More difficult to explain in this way might be the trusts case of Boardman v Phipps
[1967] 2 A.C. 46 HL, where two of their lordships found against liability on the grounds
that there was no conflict of interest on the part of the trustees, who made a profit out of
confidential information obtained from the trust, which the trust itself was prohibited
from acting on, whilst the majority found in favour of liability on the basis of
confidential information plus profit. However, Lord Cohen (in the majority) also found
that there was a conflict of interest, so that it might be argued that the majority view was
that a conflict needed to be found for liability to be established. Lord Upjohn, dissenting,
said that for a conflict of interest to arise there must be “a real sensible possibility of
conflict” in the eyes of a reasonable person, a dictum which seems to be reflected in
s.175(4)(a) of the Act.
329 See the cogent editorial note in [1942] 1 All E.R. at 379. It was conceded that had
this been done, there could have been no recovery: see further on this question, paras
16–117 et seq., below.
330 The companies and friend had not been sued. Recovery might have been obtained
from them if they had fallen within the rules relating to third parties’ involvement in
breaches of directors’ duties. And in that case could the director be made liable for the
third party’s profits? See below, para.16–137.
331This would continue to be the case even under the Act because there appear to have
been no uninvolved directors who could have given authorisation.
332Some American jurisdictions, in like circumstances, allow what is there known as
“pro rata recovery” by those shareholders who have not profited. We, unfortunately, lack
any such procedure.
333
Industrial Development Consultants v Cooley [1972] 1 W.L.R. 443, per Roskill J.
334 Canadian Aero Service v O’Malley [1973] 40 D.L.R. (3d) 371 Can. SC.
335
Bhullar v Bhullar [2003] 2 B.C.L.C. 241 CA.
336Allied Business and Financial Consultants Ltd v Shanahan [2009] EWCA Civ 751;
[2009] B.C.C. 822 CA.
337Roskill J presumably chose this rather than the more obvious loss of opportunity
because the chance that the company could have secured the opportunity was minimal:
Roskill J assessed it at not more than 10 per cent: [1972] 1 W.L.R. 443 at 454.
338 So that, “in one sense, the benefit did not arise because of the defendant’s
directorship: indeed, the defendant would not have got this work had he remained a
director”: [1972] 1 W.L.R. 443 at 451.
339 Industrial Development Consultants v Cooley [1972] 1 W.L.R. 443, at 453.
340
Canadian Aero Service v O’Malley (1973) 40 D.L.R. (3d) 371 at 382.
341 See above, para.16–11 on the question of how far English fiduciary principles apply
to non-board senior managers.
342 CMS Dolphin Ltd v Simonet [2001] 2 B.C.L.C. 704 at 733. Alternatively, it can be
said that the conflict of personal interest and duty to the company arises at the moment
the opportunity emerges and that subsequent resignation does not operate retrospectively
to cure the breach (indeed, it is often an expression of the director’s preference for his or
her personal interest). It is true that the profit arising out of the breach is made after
resignation, but there is no reason why the company should not recover this if the breach
occurred before resignation, just as a director who takes a decision adverse to the
company in breach of the core duty of loyalty or duty of care does not reduce his or her
liability to the company by resigning immediately after taking the decision. cf. Lindsley
v Woodfull [2004] 2 B.C.L.C. 131 at [28]–[30] CA. See also FHR European Ventures
LLP v Mankarious [2013] EWCA Civ 17; [2014] Ch. 1 at [56]–[59] CA (not affected by
the appeal at [2014] UKSC 45; [2015] A.C. 250).
343
344
Island Export Finance Ltd v Umunna [1986] B.C.L.C. 460; Balston Ltd v Headline
Filters Ltd [1990] F.S.R. 385; Framlington Group Plc v Anderson [1995] 1 B.C.L.C.
475; Halcyon House Ltd v Baines [2014] EWHC 2216 (QB); First Subsea Ltd v Balltec
Ltd [2014] EWHC 886 (Ch) (appeal outstanding); Weatherford Global Products Ltd v
Hydropath Holdings Ltd [2014] EWHC 2725 (TCC); [2015] B.L.R. 69. Also see Imam-
Sadeque v Bluebay Asset Management (Services) Ltd [2012] EWHC 3511 (QB); [2013]
I.R.L.R. 344 (in the context of a former employer-employee relationship).
345
See, e.g. Dranez Anstalt v Hayek [2002] EWCA Civ 1729; [2003] 1 B.C.L.C. 278
CA, finding a restraint of trade clause too wide and therefore unenforceable.
346See generally Odyssey Entertainment Ltd v Kamp [2012] EWHC 2316 (Ch);
Halcyon House Ltd v Baines [2014] EWHC 2216 (QB); First Subsea Ltd v Balltec Ltd
[2014] EWHC 886 (Ch) (appeal outstanding).
347Bhullar v Bhullar [2003] 2 B.C.L.C. 241 CA. In the same vein, also see Towers v
Premier Waste Management Ltd [2011] EWCA Civ 923; [2012] 1 B.C.L.C. 67 CA,
requiring the company to be given the option to reject the opportunity.
348
Thus, they could be obliged to convey it to the company, subject to the company’s
payment to them of the costs of purchase.
349
The issue is hardly touched upon in the reasoning of the court.
350 It is possible that the court thought that the purchase of the adjacent property did not
fall unambiguously within the decision not to purchase new properties.
351 Companies’ business models change from time to time, often quite rapidly, and the
obvious place for a director to look for a current definition is in the decisions of the
board setting its business strategy, but it also seems right that the company’s interests
might legitimately be seen as extending more widely to encompass at least those broader
but related corporate endeavours that any proactive directors ought at least periodically
to consider and critically review as possible new corporate endeavours. These too should
be included within the compass of the directors’ duties of loyalty.
352
For example, the non-executive director of a company providing business services
learns on the golf course from a friend who does not know of his directorship of an
opportunity to invest in a restaurant project. Does the director need the authorisation of
the company to make the investment, simply because his company is financially able to
take it up? It is suggested that the answer is in the negative. For some recognition of the
force of this argument see Wilkinson v West Coast Capital [2007] B.C.C. 717.
353 That being, as stated in Regal, that the opportunity came to the directors “by reason
and only by reason of the fact that they were directors of Regal, and in the course of
their execution of that office”: per Lord Russell at [1967] 2 A.C. 134, 147.
354
per Lord Russell (quoting Greene MR) at [1967] 2 A.C. 152. cf. the answer given in
Peso Silver Mines v Cropper (1966) 58 D.L.R. 2d 1 and the criticism of that decision by
Beck in (1971) 49 Can. B.R. 80.
355
Allied Business and Financial Consultants Ltd v Shanahan (also known as
O’Donnell v Shanahan) [2008] EWHC 1973 (Ch); [2009] B.C.C. 517; overturned in
[2009] EWCA Civ 751; [2009] 2 B.C.L.C. 666 CA. The case was brought as an unfair
prejudice petition under CA 1985 s.459 (now CA 2006 s.994). See below, para.20–14.
356
This was as defined in the company’s constitution, although there was also the
common broader power to carry on any other business considered by the directors to be
advantageous.
357
Any use of the valuation report (see below) was, if anything, in breach of the rights
of the first potential buyer, not the company.
358
Aas v Benham [1891] 2 Ch. 244.
359
O’Donnell v Shanahan [2009] EWCA Civ 751; [2009] 2 B.C.L.C. 666 at [68]–[69]
CA.
360 Bhullar v Bhullar [2003] 2 B.C.L.C. 241 CA.
361
Allied Business and Financial Consultants Ltd v Shanahan (also known as
O’Donnell v Shanahan) [2008] EWHC 1973 (Ch); [2009] B.C.C. 517; overturned in
[2009] EWCA Civ 751; [2009] 2 B.C.L.C. 666 CA.
362
See Towers v Premier Waste Management Ltd [2011] EWCA Civ 923; [2012]
B.C.C. 72 CA at [51]; Sharma v Sharma [2013] EWCA Civ 1287; [2014] B.C.C. 73 at
[51]–[52] CA; Richmond Pharmacology Ltd v Chester Overseas Ltd [2014] EWHC
2692 (Ch); [2014] Bus. L.R. 1110 at [69]–[72]. Also see generally Pennyfeathers Ltd v
Pennyfeathers Property Co Ltd [2013] EWHC 3530 (Ch); and Invideous Ltd v
Thorogood (judgment reversed on other grounds in [2014] EWCA Civ 1511 CA).
363 2006 Act s.176(7) makes it clear that the section applies to a conflict of duties.
364
Partnership Act 1890 s.30.
365It clearly does not apply to members, even in a private company, for members, as
such, are not fiduciaries, though such conduct might give rise to a remedy under the
unfair prejudice provisions. See Ch.20, below.
366 London & Mashonaland Exploration Co v New Mashonaland Exploration Co [1891]
W.N. 165; approved by Lord Blanesburgh in Bell v Lever Bros [1932] A.C. 161 at 195
HL. By contrast, the dicta in Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244
at [63], per Arden LJ, suggests, it seems, that although a finding that directors could not
hold multiple directorships would be a “substantive extension” of the duties of directors,
there was—as in this case—no suggestion that those multiple directorships would not be
subjected to the full panoply of fiduciary restrictions. See also First Subsea Ltd v Balltec
Ltd [2014] EWHC 866 (Ch), in which the former directors were found to have breached
their duties of loyalty even though the setting up of a competing business itself was not a
breach (appeal outstanding).
367Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch.169 CA. If correct it
must apply to an executive director: see Scottish Co-op Wholesale Society Ltd v Meyer
[1959] A.C. 324 HL, per Lord Denning at 367. Also see Allfiled UK Ltd v Eltis [2015]
EWHC 1300 (Ch) (the granting of an interim injunction restraining the use of
confidential information and intellectual property in a new company pending trial, but
allowing the new company to continue trading in the meantime).
368
In Plus Group Ltd v Pyke [2002] EWCA Civ 370; [2002] 2 B.C.L.C. 201 CA,
especially the judgment of Sedley LJ. Also see, recently, Halcyon House Ltd v Baines
[2014] EWHC 2216 (QB) at [220]–[227]; and First Subsea Ltd v Balltec Ltd [2014]
EWHC 866 (Ch) at [193]–[203] (appeal outstanding).
369
As Brooke LJ pointed out, the Mashonaland case was a “startling” one, but the
director there had never acted as a director of the claimant company nor attended a board
meeting. As for the In Plus Group case, Lewison J in Ultraframe (UK) Ltd v Fielding
[2005] EWHC 1638 suggested that the “no conflict” principle applied only to the powers
a director has, so that a director excluded from exercising powers, even if wrongfully,
was no longer subject to the principle—and certainly not at the suit of those who
excluded him.
370
For example, if the director came across a corporate opportunity, might he not have
to offer it at the same time to both companies? Consent to acting as a director of
competing companies would not of course involve consent to personal exploitation of
any corporate opportunity the director might come across.
371
See, per Lord Denning in Scottish Co-op Wholesale Society v Meyer [1959] A.C. 324
at 366–368 HL. This concerned an application under what is now the unfair prejudice
provisions (on which see Ch.20, below) but Lord Denning obviously had doubts whether
the Mashonaland case was still good law. See also Bristol and West Building Society v
Mothew [1998] Ch. 1, 18 (per Millett LJ); and, more recently, Global Energy Horizons
Corp v Gray [2012] EWHC 3703 (Ch).
372
Balston Ltd v Headline Filters Ltd [1990] F.S.R. 385 at 412 (Falconer J); Halcyon
House Ltd v Baines [2014] EWHC 2216 (QB).
373 British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2 B.C.L.C. 523
at [77]–[92]; CMS Dolphin Ltd v Simonet [2001] 2 B.C.L.C. 704. On the “duty to
disclose” see above, para.16–45. Also see Allfiled UK Ltd v Eltis [2015] EWHC 1300
(Ch); Habro Supplies Ltd v Hampton [2014] EWHC 1781 (Ch); First Subsea Ltd v
Balltec Ltd [2014] EWHC 866 (Ch).
374 Foster Bryant Surveying Ltd v Bryant [2007] 2 B.C.L.C. 239 CA (no breach of duty
where director, forced to resign, agreed in notice period on the initiative of a major
customer to work for it after the notice ran out). The case contains a full discussion of
the authorities. Also see Allfiled UK Ltd v Eltis [2015] EWHC 1300 (Ch); Harbo
Supplies Ltd v Hampton [2014] EWHC 1781 (Ch); and Towers v Premier Waste
Management Ltd [2011] EWCA Civ 923 CA.
375 Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200; [2007] 2 B.C.L.C. 239
at [76]–[77].
376 In Plus Group v Pyke [2002] EWCA Civ 370; [2002] 2 B.C.L.C. 201 CA.
377
Industrial Development Consultants Ltd v Cooley [1972] 1 W.L.R. 443.
378 Canadian Aero Service Ltd v O’Malley (1973) 40 D.L.R. (3d) 371.
379 CMS Dolphin Ltd v Simonet [2001] 2 B.C.L.C. 704.
380
British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2 B.C.L.C.
523.
381 Shepherds Investments v Walters [2006] EWHC 836 (Ch).
382
Island Export Finance Ltd v Umunna [1986] B.C.L.C. 460.
383
Balston Ltd v Headline Filters Ltd [1990] F.S.R. 385.
384
Framlington Group Plc v Anderson [1995] 1 B.C.L.C. 475.
385
2006 Act s.180(4)(b): general duties not infringed “where the company’s articles
contain provisions for dealing with conflicts of interest” and the director acts in
accordance with them. Again, it will be interesting to see what types of provision are
thought acceptable by the institutional shareholders in respect of listed companies.
386
387
See Benson v Heathorn (1842) 1 Y. & C.C.C. 326, per Knight-Bruce VC at 341–
342; and Imperial Mercantile Credit Association v Coleman (1871) L.R. 6 Ch. App. 558
at 567–568 CA, per Hatherley LC. As a matter of principle, it might be asked why the
board, acting properly as the company (so with the conflicted directors undoubtedly
excluded from voting), could not give such informed consent: see S. Worthington,
“Corporate Governance: Remedying and Ratifying Directors’ Breaches” (2000) 116
L.Q.R. 638. The new statutory rule adopts precisely this approach.
388 Nor is any transaction or arrangement with the company liable to be set aside on the
grounds that the shareholders have not given their approval: s.180(1). This provision
applies to conflicts of interest generally under s.175, although the present discussion
relates to corporate opportunities.
389
Section 239(2)(a), on which see below at para.16–117. It is submitted that the
standard use of the word “authorise” in company law is to refer to ex ante permission,
whilst ratification refers to permission given after the breach. It is clear that the CLR’s
proposal, on which s.175 is based, contemplated the non-involved members of the board
giving permission only in advance. See Final 1, p.346, cl. 6 where the phrase adopted is
“the use [of the corporate opportunity] has been proposed to and authorised by the
board”.
390
2006 Act s.181(2)(b).
391 Of course, the provision may be inserted in the company’s articles upon
incorporation, but at least those who become its shareholders then know what they are
letting themselves in for. In the case of subsequent amendments to the articles it will be
interesting to see what sorts of board approval provisions institutional investors are
prepared to accept in the articles of listed companies.
392 CLR, Final Report I, para.3.25.
393 Cook v Deeks [1916] 1 A.C. 554 PC.
394 In relation to ratification, s.239(3),(4) now excludes interested directors from voting
as shareholders, but it seems they are still entitled to do so on authorisations. On
ratification, see para.16–118, below.
395cf. the discussion of Regentcrest Plc v Cohen [2001] 2 B.C.L.C. 80 in para.16–41,
above.
396 This notwithstanding that the wording of the section itself pitches the conflict as one
between the director’s and the company’s interests, not the duty of one and the interests
of the other. This, it is suggested, does not evince an intention to alter the underlying
premises of the common law. Rather, the director’s duty is seen to be to act in the
interests of the company (at common law, or, under s.171, to act to promote the success
of the company—see above, paras 16–37 et seq.).
397
398
It is difficult to believe that the directors in Regal, having concluded that the
company could not finance the project, would have been held liable in negligence for not
putting additional money of their own into the company so that it could take up the
opportunity, whereas in Cooley it might be said that failing to follow up for the company
an opportunity of the very type the director had been hired to pursue would seem to
constitute a plausible case of negligence.
399
400
With all the limitations inherent in that option if the company is no longer able to
return the property acquired from the director. We noted earlier that the option of
“pecuniary rescission”, which, while requiring the court to value the assets transferred,
might enable better justice to be done between the parties. This is, effectively, what the
statute allows in those cases governed by statutory provisions. Indeed, where the statute
has intervened, the remedies are both more varied and more extensive.
401Unless the facts allow reliance on the statutory remedies: see paras 16–73 and 16–83,
above.
402
For example, if the director has diverted the company’s property into a loss-making
conflicting opportunity, then there will be no account of profits for breach of the conflict
rule (there are no profits), but the director may be compelled to restore the company’s
property which has been used in an unauthorised fashion, or to compensate the company
for its negligent or unfaithful use.
403 Benefits from associated companies are excluded as are benefits received by the
director from a company which supplies his or her services to the company: s.177(2) and
(3).
404 This might be contrasted with the predominant view under the earlier common law
rules that the “no profit” rule (which would catch such benefits) did not necessarily
involve a conflict of duty and interest, although of course in practice it very often might:
see the earlier discussion of Regal (Hastings) Ltd v Gulliver at para.16–89.
405 “The general duties have effect subject to any rule of law enabling the company to
give authority for anything to be done by the directors that would otherwise be a breach
of duty.”
406
“Except as otherwise provided, more than one of the general duties may apply”:
s.179.
407
Industries and General Mortgage Co Ltd v Lewis [1949] 2 All E.R. 573; Taylor v
Walker [1958] 1 Lloyd’s Rep. 490; Logicrose Ltd v Southend United FC Ltd [1988] 1
W.L.R. 1257. Also see, recently, Pullan v Wilson [2014] EWHC 126 (Ch); [2014]
W.T.L.R. 669; FHR European Ventures LLP v Cedar Capital Partners LLC [2014]
UKSC 45; [2015] A.C. 250 SC.
408
409 Taylor v Walker [1958] 1 Lloyd’s Rep 490; Shipway v Broadwood [1899] 1 Q.B.
369 CA. There is not space here to explore the complications which may arise when the
payer is also the director of a company and makes unauthorised use of that company’s
assets to effect the bribe. See also Airbus Operations Ltd v Withey [2014] EWHC 1126
(QB) in relation to the position of employees.
410
Mahesan v Malaysia Government Officers’ Co-operative Housing Society Ltd [1979]
A.C. 374 at 381 PC. The cause of action appears to lie in fraud.
411
A.C. 374 at 383.
412
A.C. 374; and United Australia Ltd v Barclays Bank Ltd [1941] A.C. 1 HL. Where the
briber is or acts on behalf of a supplier, the damages are unlikely to be less than the
amount of the bribe, but could be more.
413
Attorney-General for Hong Kong v Reid [1994] 1 A.C. 324 PC; declining to follow
Metropolitan Bank v Heiron (1880) 5 Ex. D. 319 CA; and Lister & Co v Stubbs (1890)
45 Ch. D. 1 CA. The decision was controversial among academic writers but was mostly
followed by the courts, although see Sinclair Investments (UK) Ltd v Versailles Trade
Finance Ltd (In Administrative Receivership) [2011] EWCA Civ 347 CA. See the
judgment of Lawrence Collins J in Daraydan International Ltd v Solland International
Ltd [2005] Ch.119; Sinclair Investments (ibid.); and FHR European Ventures LLP v
Cedar Capital Partners LLC [2013] EWCA Civ 17 CA; affirmed [2014] UKSC 45;
[2015] A.C. 250 SC for a review of both the subsequent court decisions and the
academic writings. Now see para.16–115.
414FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45;
[2015] A.C. 250 SC.
415
419
United Pan-Europe Communications NV v Deutsche Bank AG [2000] 2 B.C.L.C.
461 CA.
420 See Ch.17.
421
For example, to enjoin the delivery up of confidential documents improperly taken
away by a former director: Measures Bros v Measures [1910] 2 Ch. 248 CA; Cranleigh
Precision Engineering Ltd v Bryant [1965] 1 W.L.R. 1293; Allfiled UK Ltd v Ellis
[2015] EWHC 1300 (Ch).
422 This is especially so where the “wrong” involves a fiduciary—such as a director—
failing to comply with contractual mandates. By way of illustration, see the latest
authorities on quantifying equitable compensation: Libertarian Investment Ltd v Hall
(2013) 16 HKCFAR 681 Hong Kong Court of Final Appeal at [84]–[96] (Ribeiro PJ)
and [166]–[175] (Lord Millett NPJ); and AIB Group (UK) Plc v Mark Redler & Co
Solicitors [2014] UKSC 58; [2015] A.C. 1503 SC at [47]–[77] (Lord Toulson JSC) and
[90]–[138] (Lord Reed JSC).
423 Although see the paragraph immediately following.
424
Either actively or by subsequent acquiescence in it: Re Lands Allotment Co [1894] 1
Ch. 616 CA. Merely protesting will not necessarily disprove acquiescence: Joint Stock
Discount Co v Brown (1869) L.R. 8 Eq. 381.
425
Civil Liability (Contribution) Act 1978. The application of the principle of joint and
several liability is discussed more fully below at paras 22–31 et seq. in relation to
auditors.
426
JJ Harrison (Properties) Ltd v Harrison [2002] 1 B.C.L.C. 162 CA For an early
recognition of the principle see Re Forest of Dean Coal Co (1878) 10 Ch. D. 450.
427
For a recent discussion on the use of the tracing remedy, see Relfo Ltd (In
Liquidation) v Varsani [2014] EWCA Civ 360 CA; [2015] 1 B.C.L.C. 14.
428
Whether under s.177 (if the director has contracted with the company) or under s.175
(if not).
429
See para.16–62 (where the self-dealing transaction is voidable); and paras 16–106
and 16–108 et seq. (on accounting for gains derived from other unauthorised conflicts).
430
See, e.g. the void remuneration contract in Guinness v Saunders [1990] 2 A.C. 662
HL. Although the proprietary nature of the remedy was not in issue here (there being no
insolvency risk), Westdeutsche Landesbank Girozentrale v Islington LBC [1996] A.C.
669 HL, is authority for it being unavailable to reverse a void contract, at least where the
defendant is not a fiduciary. Although against this, see the trustee case, Foskett v
McKeown [2001] 1 A.C. 102 HL, where the proprietary claim to stolen trust funds was
considered to be “part of our law of property” (Lord Millett), not dependent on either
unjust enrichment (the HL holding so explicitly) or on fiduciary disloyalty (implicitly, as
the suggestion was not raised).
431The company may also have claims against the third parties: see below, paras 16–
134 et seq.
432
The cases typically cited are Bishopsgate Investment Management Ltd (In
Liquidation) v Maxwell (No.2) [1994] 1 W.L.R. 261 at 265a–266a (Hoffmann LJ);
Bairstow v Queens Moat Houses Plc [2001] 2 B.C.L.C. 531 at [49]–[54] CA (Robert
Walker LJ); Re Loquitur [2003] S.T.C. 1394 at [135]–[137] (Etherton J); Revenue and
Customs Commissioners v Holland, In Re Paycheck Services 3 Ltd [2010] 1 W.L.R.
2793 at [96]–[98] (Rimer LJ) and at [46], [48], [49] (Lord Hope).
433
Or, alternatively, should have been retained by the company as part of its own assets.
434
Less an allowance for the value of X, being the benefit the company did receive.
435Again with the company giving allowance for what it had in fact received, being the
value of X.
436See the detailed analyses in Libertarian Investment Ltd v Hall (2013) 16 HKCFAR
681 Hong Kong Court of Final Appeal at [84]–[96] (Ribeiro PJ) and [166]–[175] (Lord
Millett NPJ); and AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58;
[2015] A.C. 1503 SC at [47]–[77] (Lord Toulson JSC) and [90]–[138] (Lord Reed JSC).
Also see HLC Environmental Projects Ltd [2013] EWHC 2876 (Ch) at [136]–[145];
Madoff Securities International Ltd v Raven [2013] EWHC 3147 (Comm) at [292]–
[293], [296]–[306].
437 Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch. 392 CA, a case concerning
promoters’ liability, but the operative principles are the same. The right to rescind will
be lost if the company elects not to rescind or is too late to do so: Re Ambrose Lake Tin
Co (1880) 11 Ch. D. 390 CA; Re Cape Breton Co (1885) 29 Ch. D. 795 CA (affirmed
sub nom. Cavendish Bentinck v Fenn (1887) 12 App. Cas. 652 HL); Ladywell Mining
Co v Brookes (1887) 35 Ch. D. 400 CA; Gluckstein v Barnes [1900] A.C. 240 HL; Re
Lady Forrest (Murchison) Gold Mine [1901] 1 Ch. 582; Burland v Earle [1902] A.C. 83
PC; Jacobus Marler v Marler (1913) 85 L.J.P.C. 167n; Hely-Hutchinson v Brayhead Ltd
[1968] 1 Q.B. 549 CA; Salt v Stratstone Specialist Ltd t/a Stratstone Cadillac Newcastle
[2015] EWCA Civ 745 CA.
438
Erlanger v New Sombrero Phosphate Co (1878) 3 App. Cas. 1218 at 1278 (Lord
Blackburn); Bentinck v Fenn (1887) 12 App. Cas. 652, where rescission was not
possible because the company had already re-sold the properties.
439
Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2
Ch. 488 CA.
440
This is certainly the case when fraud is involved and perhaps even when it is not:
Erlanger v New Sombrero Phosphate Co (1873) 3 App. Cas.1218 HL; Spence v
Crawford [1939] 3 All E.R. 271 HL; Armstrong v Jackson [1917] 2 K.B. 822;
O’Sullivan v Management Agency and Music Ltd [1985] Q.B. 428 CA; Salt v Stratstone
Specialist Ltd t/a Stratstone Cadillac Newcastle [2015] EWCA Civ 745 CA.
441
Hogg v Cramphorn [1967] Ch. 254; Bamford v Bamford [1970] Ch. 212 CA;
Criterion Properties Plc v Stratford UK Properties LLC [2004] B.C.C. 570 HL.
442
Guiness Plc v Saunders [1990] 2 A.C. 663 HL. A void contract is much more
threatening to the position of third parties, though in the case of third parties contracting
with companies the provisions of s.40 (above, para.7–9 et seq.) may save the day.
443
For example, in relation to the use of corporate information or opportunity discussed
above, paras 16–87 et seq.
444See the “bribe” cases above, para.16–107, and also the secret/undisclosed
commission case of Imperial Mercantile Credit Association v Coleman (1873) L.R. 6
H.L. 189, where the defaulting director proposed to the company a contract from the
execution of which he stood to derive a secondary undisclosed profit. Also see, recently,
Airbus Operations Ltd v Withey [2014] EWHC 1126 (QB).
445
Murad v Al-Saraj [2005] EWCA Civ 959 CA.
446
In general the director is not jointly liable for profits made by others (e.g. the
company with which the director is associated, although such third parties may
themselves have secondary liability, see below, para.16–134): Regal (Hastings) Ltd v
Gulliver [1967] 2 A.C. 134; Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) at
[1550]–[1576], cf. CMS Dolphin Ltd v Simonet [2001] 2 B.C.L.C. 704. By contrast, a
director may be jointly liable for the whole of the profits made by his partnership as a
result of his breach: Imperial Mercantile Credit Association v Coleman (1873) L.R. 6
H.L. 189. Also see, more recently, Airbus Operations Ltd v Withey [2014] EWHC 1126
(QB) at [451]–[465]; and Northampton Regional Livestock Centre Co Ltd v Cowling
[2015] EWCA Civ 651 CA.
447 This can sometimes raise nice questions: Murad v Al-Saraj [2005] EWCA Civ 959
CA; Warman International Ltd v Dwyer (1995) 182 CLR 544 Aust HC (account of
profits limited to first two years of operation of diverted business opportunity). Notice,
too, the argument that the causal test may either be different, or at least have different
outcomes, when applied to a third party “dishonest assistant” rather than a
director/fiduciary: Novoship (UK) Ltd v Mikhaylyuk [2015] Q.B. 499 at [111]–[115] CA.
448 Phipps v Boardman [1967] 2 A.C. 46 HL; O’Sullivan v Management Agency and
Music Ltd [1985] Q.B. 428 CA. In Guinness v Saunders [1990] 2 A.C. 663 their
lordships were very reluctant to entertain the possibility of an allowance for work done,
but in the event the action was not decided as a breach of the conflict rules, but as a
contract not properly authorised according to the terms of the articles, so the defaulting
director was required to return the company’s property, not account for profits made.
See above, fn.246. The same hard line was taken in Quarter Master UK Ltd v Pyke
[2004] EWHC 1815 (Ch); [2005] 1 B.C.L.C. 245 at [76]–[77].
449
Murad v Al-Saraj [2005] EWCA Civ 959 at [67] CA (Arden LJ).
450
Regal (Hastings) Ltd v Gulliver [1967] 2 A.C. 134 at 150 (Lord Russell); Murad v
Al-Saraj [2005] EWCA Civ 959 at [71] CA (Arden LJ).
451
FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45;
[2015] A.C. 250 SC. Applying this analysis, see FHR European Ventures LLP v
Mankarious [2016] EWHC 359 (Ch).
452
The proprietary approach had been taken in Attorney General of Hong Kong v Reid
[1994] 1 A.C. 324 PC, the court there declining to follow Metropolitan Bank v Heiron
(1880) 5 Ex. D. 319 CA; and Lister & Co v Stubbs (1890) 45 Ch. D. 1 CA. The decision
was controversial amongst academic writers but was mostly followed by the courts,
although see Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In
Administrative Receivership) [2011] EWCA Civ 347 CA. For a review of both the
subsequent court decisions and the academic writings, see Lawrence Collins J in
Daraydan International Ltd v Solland International Ltd [2005] Ch. 119; Sinclair
Investments (ibid.); and FHR European Ventures LLP v Cedar Capital Partners LLC
[2013] EWCA Civ 17 CA; affirmed [2014] UKSC 45; [2015] A.C. 250 SC.
453
FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45;
[2015] A.C. 250 SC at [45] (Lord Neuberger PSC). Chan v Zacharia (1984) 154 C.L.R.
178 Aust HC, is typically cited.
454
These were noted earlier at para.16–112.
455 One of the rare examples where the court’s jurisdiction to do just this was both
asserted and utilised is Grimaldi v Chameleon Mining NL (No.2) [2012] FCAFC 6, see
especially [583]. But a close reading of the complicated facts of that case suggest an
English court might well have reached precisely the same conclusion on orthodox
“institutional” constructive trust grounds.
456
The right which the shareholders have under s.168 to remove a director at any time
by ordinary resolution (see above, paras 14–48 et seq.) could be prayed in aid, and the
articles sometimes provide that a director must resign if called upon by a majority of the
board to do so.
457 Hence the importance of regulating the contractual entitlements of the director when
the contract is concluded. See above, para.14–56.
458
This terminology seems to be adopted by the Act. For example, s.263, dealing with
derivative actions, distinguishes between whether a breach is likely to be “(i) authorised
by the company before it occurs, or (ii) ratified by the company after it occurs”: s.263(2)
(c) and (3)(c). See below, para.17–20.
459
If this is to be effective, the general meeting must have the necessary authority to
take the decision.
460
For an example of affirmation see ss.196 and 214 (above, paras 16–73 et seq. and
para.16–83): shareholders making substantial property transactions and loan transactions
binding on the company, but not relieving the directors of their breach of duty.
461 This can be difficult. Section 239(6)(b) preserves “any power of the directors to
agree not to sue, or to settle or release a claim made by them on behalf of the company”
but does not tell us anything about the extent of that power. Suppose the directors in
good faith enter into a contract with one of their number on behalf of the company not to
sue him or her for breach of duty. Can the director obtain an injunction to stop the
litigation if the shareholders in general meeting or an individual shareholder in a
derivative action later institutes litigation? Since the contract gives the director nearly
the whole of what is obtainable by ratification, but ratification requires shareholder
approval or may not be available at all (see below), it might be thought odd policy to
allow the board to enter into such a contract on behalf of the company, and yet clearly
they can. The problem is discussed in H. Hirt, The Enforcement of Directors’ Duties in
Britain and Germany (2004), pp.95–96.
462
See, for instance, Sharma v Sharma [2013] EWCA Civ 1287; [2014] B.C.C. 73 CA;
and Pennyfeathers Ltd v Pennyfeathers Property Co Ltd [2013] EWHC 3530 (Ch).
463
A fortiori if the change has already been made and the question for an investor is
whether he or she should acquire shares in that company.
464
This does not necessarily mean that the doctrine of authorisation is confined to
breaches of the general duties.
465
467 See West Mercia Safetywear Ltd v Dodd [1988] B.C.L.C. 250 CA; Aveling Barford v
Perion Ltd [1989] B.C.L.C. 626; Re DKG Contractors Ltd [1990] B.C.C. 903; Official
Receiver v Stern [2002] 1 B.C.L.C. 119 at 129. Also see, more recently, Madoff
Securities International Ltd v Raven [2013] EWHC 3147 (Comm) at [272]–[288]
(Popplewell J); Goldtrail Travel Ltd (In Liquidation) v Aydin [2014] EWHC 1587 (Ch)
at [113]–[118] (Rose J).
468 Any “interested” director is also similarly excluded, although when a director can be
said to be so interested is left to the courts to decide.
469 There are other illustrations of a similar approach. For example, where the board is
required to decide whether the company should enter into a transaction with one of its
directors (i.e. a s.177 transaction), the model articles for both public and private
companies (arts 14 and 16 respectively) exclude the self-dealing director from both the
quorum and vote head counts, but subject to important exceptions where the director can
both be counted and vote.
470
Section 239(4). An equivalent provision is made for written resolutions in s.239(3).
Those “connected with” the director are defined by the sections discussed above in the
context of substantial property transactions: see above, para.16–70, except that here a
fellow director can be a connected person if he or she otherwise meets the criteria:
s.239(5)(d). Also see Goldtrail Travel Ltd (In Liquidation) v Aydin [2014] EWHC 1587
(Ch) at [116]–[118] (Rose J).
472
North-West Transportation v Beatty (1887) 12 App. Cas. 589 PC; Burland v Earle
[1902] A.C. 83 PC; Goodfellow v Nelson Line [1912] 2 Ch. 324; Northern Counties
Securities Ltd v Jackson & Steeple Ltd [1974] 1 W.L.R. 1133. The contrary views of
Vinelott J in Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1981] Ch.
257, to the effect that interested shareholders may not vote on ratification resolutions,
was regarded as heretical by many (see Wedderburn, (1981) 44 M.L.R. 202), but in the
light of modern developments might be seen as prescient.
473See paras 16–117 et seq. (directors), 19–4 et seq. (shareholders), and 31–30 et seq.
(bondholders).
474 See Worthington, (2000) 116 L.Q.R. 638. Pursuing a similar line, see Completing,
paras 5.85 and 5.101. The Bill preceding CA 2006, as originally introduced, also
disqualified from voting those “with a personal interest, direct or indirect, in the
ratification”.
475
2006 Act s.239(7). The shareholders may also act informally by unanimous consent:
s.239(6)(a).
476
477
2006 Act s.239(7) says it does not “affect any rule of law as to acts that are incapable
of being ratified by the company”. Those rules would seem to apply equally to prior
authorisation by the shareholders. Section 180(4)(a) does not require otherwise, since it
preserves existing powers of authorisation only.
478
Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch); [2009] 1 B.C.L.C. 1.
479See Re Halt Garage (1964) Ltd [1982] 3 All E.R. 1016; Aveling Barford Ltd v
Perion Ltd [1989] B.C.L.C. 626; Rolled Steel Products (Holdings) Ltd v British Steel
Corp [1986] Ch. 246 at 296; Madoff Securities International Ltd v Raven [2013] EWHC
3147 (Comm) at [268]–[269]. Similarly, see s.239(6)(a).
480Cook v Deeks [1916] 1 A.C. 554 PC. See also Menier v Hooper’s Telegraph Works
(1874) L.R. 9 Ch. App. 350; cf. Azevedo v Imcopa Importacao [2013] EWCA Civ 364;
[2015] Q.B. 1 CA at, in particular, [66] and [71].
481 Cook v Deeks [1916] 1 A.C. 554 at 564. Followed by Templeman J in Daniels v
Daniels [1978] Ch. 406, where he refused to strike out a claim alleging that the majority
had sold to themselves property of the company at a gross undervalue. In that case, the
majority had not actually sought to ratify their actions, but the question was whether the
wrong was ratifiable so as to prevent the minority from suing in a derivative action by
virtue of the rule in Foss v Harbottle. Today such a transaction might well be caught by
s.190 of the Act (see above, para.16–70).
482e.g. NW Transportation Co v Beatty (1887) 12 App. Cas. 589 PC; Burland v Earle
[1902] A.C. 83 PC; A Harris v Harris Ltd, 1936 S.C. 183 (Sc.); Baird v Baird & Co,
1949 S.L.T. 368 (Sc.).
483
Regal (Hastings) Ltd v Gulliver [1942] 1 All E.R. 378; [1967] 2 A.C. 134 HL, above,
paras 16–87 et seq.
484 It has troubled a number of writers: see, in particular, Wedderburn [1957] C.L.J. 194;
[1958] C.L.J. 93; Afterman, Company Directors and Controllers (Sydney, 1970), pp.149
et seq.; Beck, in Ziegel (ed.), Studies in Canadian Company Law, Vol. II (Toronto,
1973), pp.232–238; Sealy [1967] C.L.J. 83 at 102ff.
485
486 A wrong is only truly un-ratifiable if there is no corporate organ with the capacity to
act. It is difficult, perhaps impossible, to conceive of circumstances where this would be
the case.
487 For further elaboration, see S. Worthington, “Corporate Governance: Remedying and
Ratifying Directors’ Breaches” (2000) 116 L.Q.R. 638, suggesting that the common law
resolution (and so for authorisation as well as for ratification) is, as in the statute, to
exclude from voting those parties who are unquestionably seen as likely to vote for
improper purposes.
488Responding to the decision in Re City Equitable Fire Insurance Co Ltd [1925] Ch.
407, where a provision in the company’s articles exempted the directors from liability
except in cases of “wilful neglect or default”.
489
The earlier provisions applied also to any auditor or officer of the company. Since
the enactment of the 2006 Act the provisions on auditors have developed in a separate
direction and are discussed below at para.22–42, whilst officers have now disappeared
from the section as well—and have not been replaced, it should be noted, by shadow
directors.
490
See Bilta (UK) Ltd v Nazir [2015] UKSC 23; [2016] A.C. 1 at [104].
491
492
Movitex Ltd v Bulfield [1988] B.C.L.C. 104.
493
Movitex Ltd v Bulfield [1988] B.C.L.C. 104 at 120–121d.
494
See above, paras 16–55 et seq., for discussion of the issues.
496 Cook v Deeks [1916] 1 A.C. 544 PC.
497
Industrial Development Consultants v Cooley [1972] 1 W.L.R. 443.
498
Bhullar v Bhullar [2003] EWCA Civ 424; [2003] B.C.C. 711.
499Regal (Hastings) Ltd v Gulliver [1967] 2 A.C. 134n. Although there may be nice
questions on disclosure at the board rejection stage.
500
501
2006 Act s.232(3). In Burgoine v Waltham Forest LBC [1997] 2 B.C.L.C. 612 it was
held that the phrase “or otherwise” did not extend the section beyond indemnities, etc.
given by the company (as opposed to a third party), though that is now subject to the
extension of the indemnity prohibition to the directors of associated companies.
Presumably, the force of these words is to ban such provisions in members’ or directors’
resolutions.
502
The provisions to be found in such insurance contracts are analysed by C. Baxter,
“Demystifying D&O Insurance” (1995) 15 O.J.L.S. 537, now a somewhat dated, but
nevertheless useful, article. The insurance may extend, of course, to protection against
liabilities beyond those discussed in this chapter.
503 Evidence from the US suggests that neither form of control by insurance companies
is strong, probably because the directors, who control the decision where to place the
insurance, would not welcome it. See T. Baker and S. Griffin, “Predicting Governance
Risk: Evidence from the Directors’ and Officers’ Liability Insurance Market” (2007) 74
Chicago L.R. 487; and “The Missing Monitor in Corporate Governance: The Directors’
and Officers’ Liability Insurer” (2007) 95 Georgetown L.J. 1795. This view is concurred
in by Baxter, above, fn.502.
504 This seems to be the implication of the Burgoine decision, above, fn.501.
505
2006 Act s.234(2).
506Whether made by the company or not, so that the directors of an associated company
must report it as well; and copies must be available for inspection by the shareholders of
both companies.
507 It has been suggested in a trade union case that, whereas a once-off ex post decision
to indemnify an officer against a fine was unobjectionable (if authorised by the union’s
rules), “continued resolutions authorising the refunding of fines might fairly be said to
lead to an expectation that a union would indemnify its members against the
consequences of future offences” and that would be against public policy: Drake v
Morgan [1978] I.C.R. 56, 61.
508
509
Of course, the director may be appointed personally by the company to be a trustee
of the scheme, but it may have been thought that, in such a case, any liability would not
be incurred in the capacity of director but as trustee or appointee, so that any indemnity
provision would not fall within s.232.
510
Equitable Life Assurance Society v Bowley [2004] 1 B.C.L.C. 180 at [45]; Re D’Jan
of London Ltd [1994] 1 B.C.L.C. 561 at 564. For recent application, see, for instance,
Northampton Regional Livestock Centre Co Ltd v Cowling [2014] EWHC 30 (QB)
(reversed in part by the Court of Appeal) at [159]–[170]; and Re HLC Environmental
Projects Ltd [2013] EWHC 2876 (Ch); [2014] B.C.C. 337 at [108]. And see Re
Powertrain Ltd [2015] EWHC 3998 (Ch) (concerning liquidators).
511
Customs and Excise Commissioners v Hedon Alpha Ltd [1981] 1 Q.B. 818 CA.
512 Re Produce Marketing Consortium Ltd [1989] 1 W.L.R. 745 (wrongful trading
liabilities excluded).
513
See, for example, Selangor United Rubber Estates v Cradock (No.3) [1968] 1
W.L.R. 1555.
514 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 A.C. 378 PC, noted by Birks, [1996]
L.M.C.L.Q. 1 and Harpum, (1995) 111 L.Q.R. 545. The facts of the case did not raise an
issue of directors’ duties. In fact, the fiduciary duty in question was owed by the
company and the principle of accessory liability was used to make the director liable to
the claimant for the company’s breach of duty. But the principle of the case is clearly of
general application.
515 Barlow Clowes International Ltd v Eurotrust Ltd [2005] UKPC 37; [2006] 1 W.L.R.
1476 at [15] PC (Lord Hoffmann), also excusing, at [15], as “ambiguous” the earlier
majority views, including his own, in favour of subjective dishonesty in Twinsectra Ltd
v Yardley [2002] UKHL 12; [2002] 2 A.C. 164 HL (Lord Millett dissenting vigorously),
which had in turn varied the views of Lord Nicholls in Royal Brunei Airlines Sdn Bhd v
Tan [1994] UKPC 4; [1995] 2 A.C. 378 PC, who favoured an objective test. The final
position represents a return to orthodoxy, and Starglade Properties Ltd v Nash [2010]
EWCA Civ 1314; [2011] 1 P. & C.R. D.G. 17 confirms that the Barlow Clowes decision
represents the law in England. Also see, more recently, Bank of Ireland v Jaffery [2012]
EWHC 1377 (Ch) (in the context of a bank’s former senior executive).
516 See Fyffes Group Ltd v Templeman [2000] 2 Lloyd’s Rep. 643; Ultraframe (UK) Ltd
v Fielding [2005] EWHC 1638, holding that the accessory’s liability was not confined to
damages but included a liability to account for profits which the accessory had made
(but not profits made by the director); Charter Plc v City Index Ltd [2007] EWCA Civ
1382; [2008] Ch. 313; Novoship (UK) Ltd v Mikhaylyuk [2015] QB 499 CA; Williams v
Central Bank of Nigeria [2014] UKSC 10; [2014] A.C. 1189. Notice in particular the
argument that the causal test may either be different, or at least have different outcomes,
when applied to a third party “dishonest assistant” rather than a director/fiduciary:
Novoship (UK) Ltd v Mikhaylyuk [2015] QB 499 at [111]–[115] CA.
517Which is not to say that the first basis of liability is never available: see Canada
Safeway Ltd v Thompson [1951] 3 D.L.R. 295.
518
If the third party does still have the property or its identifiable proceeds to hand, then
a proprietary constructive trust or tracing claim may be possible, subject only to the bona
fide purchaser defence.
519
El Ajou v Dollar Land Holdings Plc [1994] 2 All E.R. 685 at 700, per Hoffmann LJ.
520
See above, para.13–57; and Belmont Finance Corp v Williams Furniture Ltd (No.2)
[1980] 1 All E.R. 393 CA.
521See Eagle Trust Plc v SBC Securities Ltd [1993] 1 W.L.R. 484; Cowan de Groot
Properties Ltd v Eagle Trust Plc [1992] 4 All E.R. 700; Eagle Trust Plc v SBC
Securities Ltd (No.2) [1996] 1 B.C.L.C. 121.
522
Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch.
437 CA. See also the use of this test in Criterion Properties Plc v Stratford UK
Properties LLC [2003] B.C.C. 50 CA.
523 Above at para.16–124.
524
Criterion Properties Ltd v Stratford UK Properties Ltd [2004] 1 W.L.R. 1846 HL.
525
As in the case of the chairman in Regal (Hastings) Ltd v Gulliver [1967] 2 A.C.
134n, although in that case the language of the court was not noticeably proprietary in
tone.
526
For the third-party partnership see Imperial Mercantile Credit Association v
Coleman (1873) L.R. 6 H.L. 189; and on the sham third-party company see Trustor AB v
Smallbone (No.2) [2001] 1 W.L.R. 1177; Glencor ACP Ltd v Dalby [2000] 2 B.C.L.C.
734, but note the modern analysis of these latter cases as set out in Prest v Petrodel
Resources Ltd [2013] UKSC 34; [2013] 2 A.C. 415 SC and discussed above in paras 8–
15 et seq.
527
Contrast CMS Dolphin Ltd v Simonet [2001] 2 B.C.L.C. 704 at [98] et seq.; and
Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 at [1516] et seq. See also Novoship
(UK) Ltd v Mikhaylyuk [2015] QB 499 CA.
528
But not to claims by third parties against a director, where the normal limitation
periods apply.
529 The position was changed by the Trustee Act 1888.
530
Gwembe Valley Development Co Ltd v Koshy (No.3) [2004] 1 B.C.L.C. 131 at [111]
and [118] CA.
531
Gwembe Valley Development Co Ltd v Koshy (No.3) [2004] 1 B.C.L.C. 131 at [131]
CA.
532JJ Harrison (Properties) Ltd v Harrison [2002] 1 B.C.L.C. 162 CA; Re Pantone 485
Ltd [2002] 1 B.C.L.C. 266.
533 Re Timmis, Nixon v Smith [1902] 1 Ch. 176 at 186.
534
Paragon Finance Plc v D B Thackerar & Co [1999] 1 All E.R. 400 CA.
535These are the definitions set out by Millett LJ in Paragon Finance Plc v DB
Thackerar & Co [1999] 1 All E.R. 400 CA.
536Williams v Central Bank of Nigeria [2014] UKSC 10; [2014] A.C. 1189 SC. But
note the strong dissent of Lord Mance. The issues are clearly difficult. The court’s
conclusions rely heavily on the judgment of Millett LJ in Paragon Finance Plc v DB
Thackerar & Co [1999] 1 All E.R. 400 CA, although interestingly his analysis is used by
both sides, and even Millett LJ, in Paragon at 414, had noted that “there is a case for
treating a claim against a person who has assisted a trustee in committing a breach of
trust as subject to the same limitation regime as the claim against the trustee”.
537
See above, paras 16–37 et seq. and for the prior statutory law see Companies Act
1985 s.309.
538
Hutton v West Cork Ry Co (1883) 23 Ch.D. 654, per Bowen LJ: “Most businesses
require liberal dealings”.
539
For example, changes within company law about narrative reporting (see paras 21–
22 et seq.) or outside company law the increasing legal and political significance of
environmental issues.
540
541 Above, para.16–121.
543 2006 Act s.175 and see above, paras 16–103 et seq.
544
CHAPTER 17
THE DERIVATIVE CLAIM AND PERSONAL ACTIONS
AGAINST DIRECTORS
The Nature of the Problem and the Potential Solutions 17–1

The board and litigation 17–2
The shareholders collectively and litigation 17–3
Derivative claims 17–4
Other possible solutions 17–7
The General Statutory
Derivative Claim 17–11
The scope of the statutory derivative claim 17–11
Deciding whether to give permission for the
derivative claim 17–17
Varieties of derivative claim 17–22
The subsequent conduct of the derivative claim 17–25
The Statutory Derivative Claim for Unauthorised Political
Expenditure 17–29
Shareholders’ Personal Claims 17–32
Against Directors
Reflective loss 17–34
Conclusion 17–39
THE NATURE OF THE PROBLEM AND THE POTENTIAL SOLUTIONS

17–1
The duties discussed in the previous chapter are not likely to
play a significant role in the governance of British companies if,
for one reason or another, they are rarely enforced, either in
actual litigation or in the threat of it. However, it is important not
to jump from that banality to the conclusion that in every case
where it is arguable that a director has infringed his or her duties
to the company, the company should be contemplating litigation.
The test, it is submitted, is whether “the interests of the
company” require that litigation be instituted, and that question
can be answered only on the facts of a particular case. It is easy
to imagine many reasons why litigation would actually leave the
company worse off than it was before. There may be doubts
about whether a judgment in favour of the company will be
obtained, either because of disputes about the law or because of
difficulties of proving the events said to constitute the breach of
duty. Or the defendants may not be in a position to meet the
judgment even if the litigation is successful. Or the senior
management time spent on the litigation might more profitably
be used elsewhere or, finally, whilst winning the legal arguments
and obtaining an enforceable remedy, the company may suffer
collateral reputational harm which outweighs the gain from the
litigation.1 In other words, the decision whether to initiate
litigation in respect of an alleged breach of directors’ duty will
not always be an easy one, and a negative decision is not
necessarily a sign that the company is being too lax towards its
directors.
On the other hand, a decision not to sue a director may indeed
be heavily influenced by that director’s personal interests, rather
than those of the company. The conflicts of interest which we
analysed in the previous chapter are not magically excluded
from corporate decision-making on litigation. Thus, the need is
to distinguish between litigation decisions (especially decisions
not to sue) which are in the interests of the company and those
which are not. Given that such decisions require a close analysis
of particular cases, it is impossible to specify in advance
categories of case in which litigation should always be brought
and categories where it should never be. The role of the law is
thus to determine the person or persons who can safely be
entrusted with taking the decision whether in a particular case
litigation to enforce the company’s rights should be initiated or
not.
The board and litigation
17–2
One possible solution to this question would be to say that the
litigation decision is like any other decision the company might
take and so should be left to the normal decision-making
processes of the company. In most cases this approach would
have the consequence of putting the litigation decision
exclusively in the hands of the board. That the board will have
the power under the constitutions of most companies to initiate
litigation against wrongdoing directors seems clear, for it will be
part of its standard management powers.2 That the board may be
unwilling always to sue the wrongdoing director even when it is
in the best interests of the company to do so, however, seems
equally clear. The wrongdoers may be a majority of the board or
may be able to influence a majority of the board, and the same
incentives which operated to cause the directors to breach their
duties in the first place may cause them to utilise their board
positions so as to suppress litigation against them.
Of course, this is not always the case. The board may act in an
independent-minded way3 or, perhaps more likely, the directors
may have lost the influential positions on the board which they
had when they committed the original wrongdoing. Thus, the
previous board may have been replaced by a new set of directors
as a result of a takeover4 or, the company having become
insolvent, the board has been replaced by an insolvency
practitioner, acting in one capacity or another on behalf of the
creditors.5 Indeed, the importance of litigation against
wrongdoing directors (and other officers of the company) in this
situation is recognised in s.212 of the Insolvency Act 1986,
which gives liquidators (and others) in a winding up the benefit
of a summary procedure for the enforcement of, inter alia,
breaches of fiduciary duty and of the duty of care on the part of
directors and to recover compensation by way of a contribution
to the company’s assets of such amount as the court thinks just.
Under s.212 the liquidator sues in his or her own name but in
substance on behalf of the company, which will be the recipient
of any recovery.6 Crucially, however, the courts regard the
section as purely procedural so that it does not extend the range
of the duties to which directors are subject.7
The shareholders collectively and litigation
17–3
Despite these examples of litigation against wrongdoing
directors being initiated by those in charge of its management, it
would obviously be unsound policy to leave such decisions
exclusively with the board of the company. If the board decides
to sue, all well and good, but it may result in less litigation than
is optimal (i.e. than the interests of the company would dictate)
if the board has exclusive control over the initiation of litigation
in the company’s name. In recognition of this argument, the
common law seems to take the view that, even if the board does
not wish to sue, it is open to the shareholders collectively by
ordinary resolution to decide to do so.
Although sensible enough in policy terms, the reasoning by
which the shareholders collectively come to have concurrent
powers with the board to initiate litigation against wrongdoing
directors is something of a mystery, since, as we saw in Ch.14,
the allocation of a power to the board by the articles operates, in
the absence of an express reservation, to remove that power from
the shareholders. Consequently, in the absence of an express
provision in the articles conferring upon the shareholders the
power to initiate litigation, a shareholder decision to that effect
would need to be passed by a special resolution, because that is
the equivalent of a resolution to alter the articles. However, the
common law appears to regard an ordinary resolution to initiate
litigation as sufficient. This result can be rationalised on the
basis that there is a rule of law, designed to promote shareholder
control of the litigation decision, which overrides in this limited
respect the allocation of functions by the articles. So, despite
what the articles may say about the directors having general
powers of management, it may be that the decision to sue may
still be taken by an ordinary majority of the shareholders.8
However, it is still not obvious that the test of promoting the
interests of the company will always be correctly applied to the
litigation decision by the shareholders collectively. It is not
impossible that the directors will control the general meeting
through their own shareholdings, whether alone or in
combination with those other shareholders whose decisions they
can influence. Although the CLR proposed9 to discount the votes
of interested directors and those under their influence on
decisions to sue, the Act applies that rule only to ratification
decisions. If the shareholders do not purport to forgive the
director’s wrongdoing, but simply decide not to sue him or her
(an inherently temporary commitment, unless the decision
amounts to a waiver), it appears at first blush that the director in
question is free to vote on that question.
Further, even in the absence of wrongdoer control of the
general meeting, it is not obvious that the general meeting will
come to consider the exercise of its power to initiate litigation.
The wrongdoing directors, presumably, will not take steps to put
the matter before the general meeting, unless they think the
general meeting will support them, and so the shareholders as a
whole may simply remain in ignorance of the fact that there is an
issue for them to discuss. One or more shareholders may know
of at least some of the relevant facts, and may seek to use their
powers, discussed in Ch.15, to have the matter put on the agenda
of an AGM or to have a meeting called to discuss the issue. In
both cases, the support of substantial numbers of fellow
shareholders will be required to force the company to take these
steps and the support of half the shareholders present and voting
at the meeting actually to pass a resolution in favour of litigation.
Derivative claims
17–4
In these circumstances, it is hardly surprising that provision was
eventually made for giving individual shareholders standing to
pursue litigation on behalf of the company against the alleged
wrongdoing directors, although subject to appropriate
safeguards. Indeed, the principle just articulated can be said to
have been accepted since 1843, when the Foss v Harbottle
principle was formulated, because the substance of the
controversy ever since has centred, not on whether such
litigation should be permitted, but on the definition of the
“appropriate safeguards”.
On the one hand, relatively free access to the courts for
individual shareholders suing on behalf of the company (or
“derivatively”, as the term is) will increase the levels of
litigation against wrongdoing directors. If it is thought that the
levels of such litigation are sub-optimal, because of the ability of
the wrongdoers to influence litigation decisions at either board
or shareholder level, then such an increase in litigation is likely
to be welcomed. On the other hand, it is difficult to demonstrate
that such litigation brought derivatively by individuals will
invariably be brought in the interests of the company. It may be
initiated more to promote the personal interests of the
shareholder than the interests of the company (i.e. the
shareholders as a whole). This is especially a risk since, as we
shall see further below, in a derivative claim, recovery in the
litigation goes to the company, not to the individual shareholder
bringing the litigation. A person with a small shareholding thus
has little financial incentive to sue on behalf of the company,
because the return to that person will be, at most, a percentage of
the recovery which reflects the percentage of the shares of the
company that person holds.10 So, litigation brought by such a
person runs a risk of being motivated by concerns other than to
increase the value of the company’s business.11 Of course, the
larger the shareholder, the less this particular risk, but, by the
same token, the lower the obstacles are which prevent such a
shareholder from using the mechanism of the general meeting.
17–5
The English common law had always been more impressed by
the risk of derivative claims being motivated by personal
objectives than by the risk that confining derivative claims
would lead to less litigation than the company’s interests
required. Accordingly, the common law, whose cumulative
decisions in this area were referred to as “the rule in Foss v
Harbottle”,12 permitted individual shareholder access to the
courts on behalf of the company on only a very limited basis.
The question which the rule in Foss set itself to answer was
whether the individual shareholder should be allowed to sue
derivatively or whether the litigation question would be better
left to the shareholders as a whole.13 Unfortunately, the rule was
one-sided in its operation, i.e. it was effective to exclude the
derivative suit if the law took the view that the decision of the
shareholders as a whole should be relied upon, but it contained
no mechanism whereby a meeting of such shareholders could be
summoned to consider the question, and nor did it deprive
interested directors of their votes.14 Consequently, the rule did
nothing to correct the deficiencies of group decision-making by
the shareholders, as identified above, but simply made it difficult
for the individual shareholder to sue instead.
17–6
These problems with the rule in Foss v Harbottle had become
increasingly apparent over time and in 1997 the Law
Commission advanced proposals for taking the law in a new
direction by allocating the litigation decision to someone
external to the company, namely, the court.15 These proposals
were largely endorsed by the CLR and are now embodied in
somewhat different form in the Companies Act 2006. The Act
now provides that derivative claims cannot be brought at
common law but can only be brought under the statute (at least
where the statute applies16), and so, to that extent at least, the
rule in Foss v Harbottle need no longer be examined—to the
relief of almost all those involved in company law.
Other possible solutions
17–7
Before turning to an analysis of the statutory provisions on the
derivative claim, it is perhaps worth noting that the three
mechanisms noted above—to have litigation decisions taken by
the board, by the shareholders as a whole, or by individual
shareholders—do not exhaust the possible mechanisms for
handling this problem, even within the company. There are other
obvious options, and to some extent the final form of the current
statutory derivative action cherry-picks the better aspects of each
of them.
17–8
One alternative might be to give the litigation decision to a sub-
set of the members of the board, such as the uninvolved board
members or its independent NEDs. As we have seen,17 this is the
approach taken in the Act to the authorisation of conflicts of
interest, but not to the ratification of breaches of duty, where a
shareholder decision is required. However, since the decision not
to sue defaulting directors is akin to a ratification decision, it
seems consistent not to use a sub-set of the board to take the
litigation decision either. On the other hand, there are benefits to
having director-input, especially given the powerful duties owed
by directors to their companies. Recognising this, the statutory
derivative framework makes it mandatory for the court itself to
have regard to the likely approach of a disinterested director,
acting in compliance with the good faith duty in s.172, to the
litigation question (s.263(2)(a)). Equally, however, the
ratification model, too, has its attractions, and, backing both
horses, the statutory derivative claim also requires the court to
consider the actual or likely views of the non-involved
shareholders (i.e. those who could have voted to ratify)
(ss.263(2)(b) and (c) and (3)(c) and (d)). All this is explored
further below.
17–9
A further alternative would be to entrust the litigation decision to
some group of shareholders, lying between the shareholders as a
whole and the individual shareholder. The common law has not
used this device and, although it has been used extensively in
German law, the common law was perhaps right to reject it,
since fixing the appropriate percentage has proved difficult.
However, the strategy has been introduced into British law by
the legislature in one specific context, as we will see later.18
Where the company’s claims arise in consequence of
unauthorised political donations or expenditures made by the
company’s directors, then the right to sue in the name of the
company is conferred, not on individual shareholders, but on an
“authorised group” of members, defined by statute to be a
minority of a particular size, but then at the same time excluding
individual shareholders from suing, on the basis presumably that
they might be motivated by reasons which did not relate to the
company’s interests.
17–10
A final and more radical approach would be to give the right to
commence a derivative action to someone outside the company
altogether. This is unlikely to be a sensible approach to the
general run of companies, where it is difficult to identify anyone
outside the company with a legitimate interest in commencing
litigation on its behalf. However, some vestiges of this technique
might be thought evident in the ability of a liquidator or
administrator to bring all manner of claims on behalf of the
company,19 or the Secretary of State specifically to seek
compensation orders against directors and other persons who are
the subject of disqualification orders or undertakings where their
conduct has caused loss to one or more creditors of their
insolvent company.20 Similarly, the Regulator of Community
Interest Companies (“CIC”) may bring proceedings (subject to a
right of appeal by any director of the CIC to the court, which
then has broad powers to confirm, discontinue or set terms for
the litigation).21 If the Regulator takes this step, the company
must be indemnified by the Regulator against the costs and
expenses of the litigation, unless, presumably, the court orders
the costs should be borne by the company. This perhaps
highlights a further concern with this approach in the context of
viable companies.
THE GENERAL STATUTORY DERIVATIVE CLAIM
The scope of the statutory derivative claim
The court’s gatekeeper role
17–11
The novelty of the general statutory derivative claim, contained
in Pt 11 of the 2006 Act, is that it places the gatekeeping
decision about whether it is in the interests of the company for
litigation to be commenced in any particular case in the hands of
the court, i.e. an outsider to the company.22 True, a shareholder
must take the first initiative, but after the claim form has been
issued, a shareholder seeking to bring a derivative claim must
seek the permission of the court to take any substantive steps in
the litigation (other than, in the normal case, informing the
company that the claim has been issued and that the shareholder
is applying to the court for permission to continue the claim).23 It
was already the case that the court had a role in the early stages
of derivative claims at common law, but this was to check that
the claimant had standing to sue under the rule in Foss v
Harbottle.24 Under the new general derivative claim the court
has a broader role, namely, to exercise a constrained discretion
to decide whether it is in the best interests of the company for
the litigation to be brought. This new procedure has the
advantages, on the one hand, that the individual shareholder can
easily obtain a decision on the central question (whether it is in
the interests of the company for the litigation to be brought),
whilst, on the other hand, the individual shareholder’s
enthusiasm for derivative litigation is subject to the filter of a
judge having to be convinced that this particular litigation on
behalf of the company is desirable.
17–12
Whilst it is true that many of the policy issues which underlay
the rule in Foss v Harbottle reappear under the statutory
procedure,25 they appear now not as absolute bars to a derivative
claim, but as factors the court must take into account in deciding
whether to allow the litigation to proceed. Thus, a claimant who
is turned away by the court will receive a judgment explaining
why a derivative claim in the particular case is not in the
company’s interests, whereas previously the court’s decision
said nothing about the desirability of the litigation from the
company’s point of view, but simply that the litigation decision
was a decision for the shareholders generally rather than the
individual shareholder.
The types of claims covered by the statutory regime
17–13
There are a good number of limitations to the statutory
jurisdiction. The statute applies only to derivative claims or
derivative proceedings, i.e. claims brought in respect of a cause
of action vested in the company and seeking relief on its
behalf.26 Since the individual shareholder has no power to
initiate litigation in the company’s name, but the company is to
be bound by and is the potential beneficiary of any judgment or
order made in the derivative litigation, the Civil Procedure Rules
require the company to be made a defendant in the litigation,
even though it is the company’s rights which are being enforced.
Thus, the claim appears in the form of “Shareholder v Director
and Company”.27 This can be a cause of confusion, unless it is
remembered that the company is only a nominal defendant and
that the real defendants are the directors.28
17–14
Most derivative claims can now be brought only under the Act,29
either under the Pt 11 provisions discussed here or as a result of
a court order made in unfair prejudice provisions discussed in
Ch.20. The rule in Foss v Harbottle is thus almost entirely
consigned to the dustbin. On the other hand, not all claims a
shareholder might want to bring on behalf of the company may
be brought under Pt 11 of the Act. The Act contemplates as
derivative claims only claims “arising from an actual or
proposed act or omission involving negligence, default, breach
of duty or breach of trust by a director of the company”.30 Where
the company has a cause of action arising in some other way (for
example, a claim against a non-directorial employee), the policy
seems to be that a derivative claim is not available, and the
litigation decision should be taken according to the division of
powers contained in the company’s articles of association (i.e.
normally exclusively by the board). It is only where the directors
themselves are in breach of duty that the statutory derivative
procedure is available, because that is when the risk of conflicted
decision-making by board or shareholders generally arises.
However, although the company’s cause of action must arise out
of breach of duty, etc. by the directors, the defendants are not
necessarily limited to and may not even include the directors
themselves.31 We have seen above32 that third parties may
become liable to the company as a result of their involvement in
directors’ breaches of duty and, in such cases, the derivative
claim may be used against the third party, even if no director is
sued.
17–15
Directors for the purpose of Pt 11 include former and shadow
directors,33 but this is less significant than it may seem. The Pt
11 rules do not alter the circumstances in which former or
shadow directors owe duties to the company; they merely ensure
that, where such duties are owed, the derivative claim can be
used to enforce them. We have discussed in the previous chapter
the circumstances in which the general duties of directors do in
fact fall upon former or shadow directors.34
Shareholder claimants
17–16
A shareholder may bring a derivative claim in respect of a cause
of action which arose before he or she became a member of the
company.35 On the other hand, only members of the company
can bring derivative claims: a former member cannot sue even in
respect of a matter which occurred when he was a shareholder.36
This reflects the legal position of shareholders generally: the
shareholder has an interest in the assets of the company as they
stand during his or her membership. That interest is not confined
to assets acquired during the shareholder’s membership. On the
other hand, once membership is relinquished, so is the interest in
the company’s assets, including in assets the shareholder or even
the company was unaware were possessed during the period of
membership (for example, the shareholder who sells the week
before oil is discovered below land owned by the company just
has to accept that loss).
However, there is one useful statutory extension of the notion
of a “member”. This term is not confined to those who have
been entered on the company’s register of members—which is a
standard requirement for membership37—but is extended to
those to whom shares have been transferred or transmitted by
operation of law, even if not entered on the register of
members.38 The usual example of transmission is on death or
bankruptcy. The extension of the meaning of membership to
include mere transferees is especially useful in quasi-partnership
companies where the directors normally have power under the
articles to refuse to admit new members and are often prepared
to use the power to keep out of the company those with whom
they do not wish to work. Making the derivative claim available
may enable them to challenge their exclusion or, at least, to
challenge action by the controllers of the company—for
example, siphoning assets out of the company to the detriment of
the would-be member—designed to induce the would-be
member to transfer the shares to the other members at a low
price. Such action by the controllers carries the risk that the
would-be member will bring a derivative action to restore the
company’s position. A similar and even more important
extension of the term “member” is to be found in the unfair
prejudice provisions, discussed in Ch.20.
Deciding whether to give permission for the
derivative claim
17–17
The central issue under the new statutory procedure is the nature
of the discretion vested in the court to approve or not the
continuance of the derivative claim. That discretion is broad but
not unconstrained. The statute proceeds in three stages by
requiring the claimant, first, to make out a prima facie case; then
identifying three situations in which leave must be denied39; and
then, assuming the case does not fall within any of those three
situations, laying down a number of factors the court must take
into account when deciding whether to give permission to
proceed with the derivative claim.
The prima facie case and judicial management of
proceedings
17–18
The decision whether to grant permission for the derivative
claim to proceed will potentially generate a wide-ranging
enquiry before the court. Although the company is a potential
beneficiary of the derivative action, there is a risk that
companies might find themselves subjected to overly-high levels
of proposed derivative claims by shareholders who have a
fanciful or even self-interested view of the likely benefits to the
company from such litigation. Companies would then be
distracted from more important tasks by having to explain in
court why such claims should not be allowed to proceed further.
In partial recognition of this issue, the statute contains a
procedure whereby the court’s initial consideration of the claim
is on the basis of the evidence submitted by the member alone. If
the court does not at this stage think the applicant has established
a prima facie case for permission to be granted, the application
will be refused. At this initial stage, the company is not a
respondent to the application to the court for permission to
continue the claim and so is not required to file evidence or be
present at any hearing. Only if the application survives this
initial examination will the company be invited to file evidence
as to whether permission should be granted or not.40
Mandatory refusal of permission
17–19
Two of the situations where permission must be denied are
obvious: where the actual or proposed breach of duty has been
authorised or ratified in accordance with the rules set out in the
previous chapter.41 In such a case, there is no, or is no longer,
any wrong by the director to the company, and, just as the
company cannot complain of it, neither can the shareholder
suing derivatively. The important prohibition is thus the third
one. The court must deny permission to continue the derivative
claim where a person acting in accordance with the directors’
core duty of loyalty (to promote the success of the company for
the benefit of its members) “would not” seek to continue the
claim.42 Since the core duty of good faith, set out in s.172, is the
modern version of the notion of acting “in the interests of the
company”, it is sensible to use it as the test in relation to the
derivative claim, and indeed it is used both at this mandatory
dismissal stage and again at the permissive stage. At this
mandatory stage, the words have been interpreted as meaning no
director would seek to pursue the claim.43 At the permissive
stage, more flexibility is both warranted and inevitable, as noted
below.
Discretionary grant of permission
17–20
If the proposed litigation passes the negative test (i.e. will it fail
to promote the success of the company?), one might have
thought that whether it should be allowed to proceed should
depend on whether it can pass that test put positively, i.e. will
the litigation promote the success of the company?—or, rather,
that all that is required is the positive version of the test.
However, the tests which are to be applied to the proposal if it
passes the negative test are more varied than that.
The statute sets out seven factors44 which the court must take
into account in deciding whether to allow the litigation to
proceed once it is considered to have passed the negative test.45
To be sure, one of those tests is “the importance that a person
acting in accordance with section 172 would attach to continuing
it”46 (see below), but that is only one of the tests. The thinking
behind the drafting may have been that the court should not be
under pressure to allow the litigation to proceed where its
financial contribution to the company was likely to be small and
there were other factors pointing against the litigation,47 though
it is doubtful if the term “success” in s.172 is to be construed
solely in financial terms. Alternatively, it may have been thought
desirable to give the court more guidance on the factors to be
considered than a single general test would provide.
17–21
The further tests, which are explicitly stated not to be exhaustive
of the considerations the court should take into account,48 are as
follows:
• Whether the shareholder seeking to bring the derivative claim
is acting in good faith—or whether, for example, the
litigation is motivated by personal interests.
• The importance that a person acting in accordance with s.172
would attach to continuing it. In that vein, it should be noted
that there is one crucial difference between the court’s role
when it is hearing an allegation that a director has breached
the core duty of loyalty and its role in the statutory derivative
claim. In the former case, provided the director has properly
formed a good faith view as to what promoting the success of
the company requires, the court has no power to interfere.
Under the statutory procedure, however, it does not appear
that such deference is to be accorded at the permissive stage
to the individual shareholder’s decision to initiate derivative
proceedings. Rather, the court will have to formulate its own
view about whether the proposed litigation will fail to
promote the success of the company.49 This is difficult: as
Lewison J noted in Iesini v Westrip Holdings Ltd,50 it is
“essentially a commercial decision, which the court is ill-
equipped to take, except in a clear case.”
• Whether the act or omission which constituted the breach of
duty is likely to be ratified by the company (i.e. by the
shareholders collectively) or—expressed as a separate test—
whether in the case of a proposed breach of duty the act or
omission is likely to be authorised or ratified by the
company. Authorisation, as we saw in the previous chapter,51
can sometimes be given by the non-involved members of the
board. These two tests reflect a factor which was very
important under the rule in Foss v Harbottle, but, whereas at
common law the possibility of shareholder approval
(normally referred to as ratifiability) of the wrong normally
barred access to the derivative claim,52 under the statutory
procedure the prospect of either authorisation or ratification53
is not a bar to the derivative claim but simply a factor
weighing against giving permission. The removal of
ratifiability as a bar to the derivative claim is one of the most
important changes brought about by the statutory procedure.
Under the common law the derivative claim was largely
excluded as a mechanism for the enforcement of ratifiable
breaches of duty, and that perhaps goes some way to
explaining the rise of the concept of “un-ratifiable
breaches”.54
• Whether the company (whether through a decision of the
board or of the shareholders) has decided not to pursue the
claim. What is at issue here is a board or shareholder
resolution which, whilst not seeking to ratify the directors’
breach of duty, nevertheless contains a decision not to sue the
directors.55 Such a resolution may constitute an argument
against allowing the derivative claim to continue, provided
the decision was not influenced by the alleged wrongdoers,56
but it is only a factor to be taken into account. Again, this is a
significant change from the common law. Under the common
law regime, even a non-ratifiable wrong could not be pursued
derivatively unless the alleged wrongdoers were in control of
the general meeting. Under the statutory procedure,
permission to continue the litigation can be granted by the
court even if the alleged wrongdoers are not in control of the
shareholders’ meeting.57 No doubt, however, a decision by
the shareholders, uninfluenced by the wrongdoers, not to
initiate litigation will count heavily against the derivative
claim.
• Whether the facts give rise to a cause of action which vests in
the member personally and which he or she could pursue as
such rather than through a derivative claim on behalf of the
company. Perhaps the most obvious claim a shareholder
might bring is a petition based on unfairly prejudicial
conduct by the controllers of the company, dealt with in
Ch.20.58 Apart from that, the possibilities for a personal
action will be limited, since, normally, directors’ duties are
owed to the company, not to shareholders individually.59 The
shareholder may prefer a derivative claim because the costs
of it will fall on the company (see below), but, given the
courts’ firm view that, outside the area of unfair prejudice,
recovery cannot be obtained in a personal claim for loss to
the shareholder which reflects the company’s loss, the
availability of the personal claim may not be a strong
argument against allowing the derivative claim to proceed,
even where both causes of action exist.60
• Finally, and by way of separate subsection, the court is
required to have “particular regard” to any evidence before it
of the views of the other shareholders who have no personal
interest in the matter.61 Again, this reflects an important
element of the rule in Foss v Harbottle, which, however,
appeared to say that the individual shareholder did not have
standing to bring a derivative claim if a majority of the
independent shareholders were against the litigation.62 Now
those views are only a factor, but are likely to be a powerful
factor for or against the derivative claim where reliable
evidence of those views can be provided to the court.
Varieties of derivative claim
Taking over existing claims
17–22
The discussion so far has assumed a derivative claim being
brought where the company itself has failed to initiate litigation.
No doubt this is the core case. However, the statute also
specifically provides for a shareholder to apply to the court for
permission to take over as a derivative claim litigation which the
company has commenced.63 The reasoning, perhaps, is that
without this protection the directors of a company might stultify
potential derivative claims by instituting litigation in the
company’s name but then failing to pursue it with vigour. The
statute deals with this problem by allowing a shareholder to
apply to take over the company’s litigation in derivative form.
Of course, the company’s claim must be one which falls
within the scope of the derivative claim and the court must apply
to the shareholder’s application for permission to take over the
claim the same criteria it would have applied had the litigation
been commenced in derivative form.64 In addition, the
shareholder must show why he or she should be allowed to take
over the company’s claim. The permitted grounds are that the
proceedings have been conducted by the company in a way
which constitutes an abuse of the process of the court or that the
company has not prosecuted the litigation diligently or that for
other reasons it is “appropriate” for the shareholder to be
substituted for the company.65 However, if the company has
already settled the case against the directors, there would appear
to be no basis upon which the section could operate.
17–23
The statute even provides a mechanism for a shareholder to
apply to the court to take over an existing derivative claim. The
point seems to be to prevent the directors from stultifying
litigation against themselves by securing a friendly shareholder
to commence litigation in derivative form but then not prosecute
the claim effectively.66 The grounds for taking over a derivative
claim are the same as for taking over a claim begun in the
company’s name, but of course the tests for giving permission to
commence a derivative claim do not have to be applied to the
claim to take over an existing derivative claim, since they will
have been met at an earlier stage. It should be noted that a claim
to take over an existing derivative claim can be made whether
the claim was originally commenced in derivative form or was
commenced by the company but later taken over derivatively;
and whether the shareholder from whom the applicant wishes to
take over the litigation is the originator of the litigation, took the
litigation over from the company or is someone later down the
chain of shareholders who have been pursuing the claim
derivatively.67
Multiple derivative claims
17–24
The statute does not, however, cater for the possibility of
“multiple derivative claims”, being claims brought by a member
of a corporate member of the wronged company, contrary to the
suggestion of the Company Law Review.68 A restrictive
construction of the exclusive nature of the statutory scheme
would mean that such actions could not be brought either under
the statutory scheme (not falling within the s.260(1) definition of
a derivative claim) nor at common law, but this construction has
been rejected in recent cases, which have instead held that such
claims can still be brought under the common law and that the
court’s jurisdiction in that respect has not been taken away by
the statutory scheme.69
The subsequent conduct of the derivative claim
General issues
17–25
The statutory provisions governing the general derivative claim
say nothing about the subsequent conduct of the derivative
claim, except that the court is given a general power to give
permission for the claim to continue “on such terms as it thinks
fit”.70 It is perhaps odd that the subsequent conduct of the
general derivative claim is less clearly regulated than that of the
special derivative claim for unlawful political donations
discussed next. In particular, there is no counterpart in the statute
or Civil Procedure Rules to the duties of care and loyalty which
are imposed on those bringing a derivative claim in respect of
unauthorised political donations.71 It may be that the courts could
develop such provisions on the basis of the quasi-agency
position in which a person bringing a general derivative claim is
placed.
Information rights
17–26
Those bringing general derivative claim also lack the specific
information right conferred by CA 2006 s.373 in favour of those
seeking derivatively to recover an unauthorised donation from
the directors. It is possible that the court might deal with this
matter when setting the conditions for the conduct of the general
claim. However, another avenue may be open to secure the
board’s co-operation with those responsible for the general
derivative claim. By permitting the derivative action, the court
will have determined that a director acting in accordance with
the core duty of loyalty would bring the litigation and that there
are no other factors which outweigh that conclusion. In that
situation it will be difficult for the board, consistently with their
duties, not to co-operate fully with the shareholder who has
charge of the derivative claim. Indeed, it may be wondered
whether its duties do not require the board to give serious
consideration to bringing the claim in the company’s name,
though presumably the court’s permission would be needed for
the derivative claim to be superseded by a corporate one and the
court might be reluctant to so agree if the board’s previous
attitude towards the claim had been one of unmitigated hostility.
Costs
17–27
The important case of Wallersteiner v Moir (No.2)72 established
that a consequence of the derivative claim being to enforce the
company’s rights is that, where permission is given, the
company should normally be liable for the costs of the claim,
even, in fact especially, where the litigation is ultimately
unsuccessful. This decision is now reflected in the Civil
Procedure Rules which provide that “the court may order the
company … to indemnify the claimant against any liability for
costs incurred in the permission application or in the derivative
claim or both”.73 This is a very important provision because,
without it, the financial disincentive for a shareholder to bring a
derivative claim would be very strong, no matter how relaxed
the standing rules. On these rules, however, if a shareholder can
obtain permission from the court to bring a derivative claim,
there should be no financial disincentive to proceed.74
Restrictions on settlement
17–28
The Civil Procedure Rules (“CPR”) also deal with one further
post-permission issue. The derivative litigation is brought to
enforce the company’s rights for the company’s benefit, but a
common perversion of the procedure, known in some quarters as
“greenmail”, involves the shareholder being primarily interested
in obtaining some private benefit from the litigation, normally as
part of the terms on which the company’s claim against the
directors is settled. To discourage such behaviour, the CPR
empower the court to order that the claim may not be
“discontinued, settled or compromised without the permission of
the court”, thus giving the court the opportunity to scrutinise the
terms of any settlement.75
THE STATUTORY DERIVATIVE CLAIM FOR UNAUTHORISED
POLITICAL EXPENDITURE
17–29
As noted earlier, minority group shareholder action on behalf of
the company has been introduced into British law by the
legislature in one specific area. Under what is now Pt 14 of the
Act, a company’s policy to make political donations and incur
political expenditure is subject to approval by the shareholders in
general meeting.76 If this requirement is contravened, every
director (and shadow director) of the company at the relevant
time is liable to pay to the company the amount of any donation,
or expenditure and damages in respect of any loss or damage
suffered by the company in consequence of the unauthorised
donation or expenditure.77 Section 370 then provides for a
statutory derivative claim in order to enforce the directors’
liability. However, this right to sue in the name of the company
is conferred, not on individual shareholders, as in the general
derivative action, but on an “authorised group” of members,
meaning, in the case of a company limited by shares, the holders
of not less than 5 per cent of the nominal value of the company’s
issued share capital or any class thereof; in the case of a
company not limited by shares by not less than 5 per cent of its
members; or, in either case, by not less than 50 members of the
company.78 It seems that the aim of confining the right to sue to
a small group of shareholders was to provide a realistic chance
of enforcement action being brought whilst at the same time
excluding individual shareholders from suing, who might be
motivated by reasons which did not relate to the company’s
interests. There is no added role for the court to act as gatekeeper
giving permission to proceed.
17–30
Having conferred a statutory right of action in relation to
donations upon the approved group of members, the Act also
takes some steps to facilitate the use of the power by the
minority but also to ensure that the power is exercised by the
group in the interests of the shareholders as a whole. In
particular, the fact that the statutory derivative claim is brought
on behalf and in the interests of the company is emphasised by a
number of features of the legislation:
(i) The same duties (of care and loyalty) are owed to the
company by the authorised group as would be owed to the
company if the claim had been brought by the directors of
the company. However, action to enforce these duties against
the minority cannot be taken without the leave of the court,
presumably so as to protect the minority from the tactical use
of counter-litigation by the alleged wrongdoing directors.79
(ii) Proceedings may not be discontinued or settled by the group
without the leave of the court and the court may impose
terms on any leave it grants.80 This provision reduces the risk
of “gold digging” or “greenmail” claims where the purpose
of the claim is to extract from the company a private benefit
for the group in exchange for the settlement of the claim
rather than to advance the interests of the shareholders as a
whole.
(iii) The group may apply to the court for an order that the
company indemnify the group in respect of the costs of the
litigation and the court may make such order as it thinks fit.
The group is not entitled to be paid its costs out of the assets
of the company other than by virtue of an indemnification
order or as a result of a costs order made in the litigation in
favour of the company.81 These provisions both recognise the
principle that the company in appropriate circumstance
should pay for derivative litigation which is brought for its
benefit (as is the case with the general statutory derivative
claim)82 and make it less easy for the group to pursue “gold
digging” claims in the guise of generous payments by the
company to the group by way of recompense for costs
incurred in the litigation.
(iv) On the other hand, there is conferred upon the group an
express right to all information relating to the subject-matter
of the litigation which is in the company’s possession, so that
the group can better decide in what way to prosecute the
litigation. This right extends to information which is
reasonably obtainable by the company (for example, from
another group company). The court may enforce this right by
order.83
17–31
This is quite a different model from that applying to the general
derivative claim. Section 370(5) provides that the existence of
the specific procedure here does not bar access to the general
statutory derivative procedure. The general procedure will
normally be available because payment of an unauthorised
donation or the incurring of unauthorised expenditure by the
director will usually constitute a breach of the director’s general
duties. Whether the specific or the general statutory derivative
claim will be more attractive is not clear.
SHAREHOLDERS’PERSONAL CLAIMS AGAINST DIRECTORS
17–32
The above description of the problem underlying the rule in Foss
v Harbottle has been couched in terms of the enforcement by
individual shareholders of duties owed by directors to their
company. Where the duty is owed by the director to the
shareholder personally, the above analysis ought to be irrelevant.
If the shareholder is also the right-holder, it would seem in
principle to be entirely a matter for his or her discretion whether
the right is enforced. So much is indeed recognised in the statute,
Pt 11 of which applies only to claims to enforce “a cause of
action vested in the company”.84
17–33
However, there are two points which call for comment. First, the
range of rights owed by directors to shareholders personally is
limited. We saw in the previous chapter that the general duties of
directors are only rarely owed to individual shareholders rather
than to the company.85 In addition, however, the directors may
owe duties to shareholders under the general law. In either case,
the duties typically arise where the directors give advice to the
shareholders or otherwise take action in relation to the exercise
by the shareholders of the rights attached to their shares,
including the sale of the shares. So although these duties, under
the general law or under company law, should be freely
enforceable, it is not often that shareholders have such rights to
enforce.
Reflective loss
17–34
Secondly, even where the shareholder has a personal claim, the
shareholder’s claim may be restricted by the “no reflective loss”
principle. What is required to trigger the principle is that both the
company and the shareholder should have a claim against the
directors arising out of the same set of facts, and part or all of the
shareholder’s loss can be seen as mimicking the loss caused by
the directors to the company. Notice that the rule does not
merely prevent potential double recovery by the shareholder:
that would be unexceptional. Rather, it prevents the
shareholder’s claim, insisting that in these circumstances the
shareholder’s rights will be satisfied, if at all, through the
company’s recoveries. Perhaps predictably, there are exceptions.
But we look to the general rule first. The rule applies equally to
claims which the shareholder may have against the director other
than in his or her capacity as a member of the company (so that
the rule applies to claims the shareholder brings as unsecured
creditor or employee86). In this respect a creditor or employee
who is also a shareholder is worse off than if this were not the
case. The no reflective loss rule applies whether or not a
derivative claim is available to enforce the company’s rights and
whether or not the shareholder chooses to bring a derivative
claim against the director as well as a personal claim.87
17–35
The principle can be illustrated by the decision of the Court of
Appeal in Prudential Assurance Co Ltd v Newman Industries
Ltd (No.2),88 where the directors in breach of duty to the
company had sold assets at an undervalue to a third party and
had then obtained the shareholders’ consent to the transaction by
issuing a misleading circular convening a meeting of the
shareholders, thus committing a wrong by way of
misrepresentation against the shareholders. The Court of Appeal
held that the personal claim should lead (in effect) to no
recovery for the shareholder on the facts, because the only
relevant loss suffered by them consisted in a diminution in the
value of their shares, which was simply a reflection of the loss
inflicted on the company by the sale of its assets at an
undervalue, which was a wrong only to the company. The
principle that a shareholder cannot recover a loss which is
simply reflective of the company’s loss, even though the
shareholder’s cause of action is independent of the company’s,
was confirmed by the House of Lords in Johnson v Gore, Wood
& Co.89
17–36
Several rationales could be put forward for this rule limiting
recovery. It might be thought to be justifiable on the grounds of
preventing double recovery, i.e. to prevent the wrongdoer having
to compensate both the shareholder and the company for, in
effect, the same loss. However, this result could be avoided
simply by preventing the company from recovering if the
shareholder has recovered, and vice versa. However, the rule in
fact goes further than that by always subordinating the
shareholder’s claim to that of the company. It applies whether or
not the company has recovered from the directors. Why should
this be? It might be said that it addresses the following issue: if
the shareholder is allowed to recover first, he or she effectively
moves assets out of the company, to the potential detriment of
the creditors of the company, who can sue the company but not
the shareholders. This seems a good reason for often giving the
company’s claim priority, but, where the company has
distributable assets, the creditors cannot be said to be prejudiced
by this indirect form of distribution to the shareholders. A
further argument might be that the initiation of a decision to
distribute is normally entrusted by the articles to the board and
certainly is not given to individual shareholders. The “no
reflective loss” principle thus supports the principle of
centralised management of the company’s assets through the
board.
17–37
The strength of these arguments has to be weighed against the
fact that, where the principle applies, the shareholder’s recovery
is limited even though the company may not recover its loss
from the directors, so that the shareholder’s loss is not made
good through the company either. Thus, the rule applies even
where the company is incapable of enforcing its claim, for
example, because it has been compromised or is subject to
limitation or simply because the defendant has a good defence to
the company’s, but not to the shareholder’s, claim.90 This point
led the Court of Appeal in Giles v Rhind91 to refuse to apply the
“no reflective loss” principle at least in the case where it was the
wrongful act of the defendant himself which had put the
company in a position where it could not pursue its claim. Here,
by exception, if the shareholder has a separate cause of action,
he or she should be able to recover damages in full, even for
reflective losses.
17–38
However, the “no reflective loss” principle does not prevent the
shareholder from suing to recover a loss which is separate and
distinct from that suffered by the company. The distinction
between reflective and separate losses is illustrated in Heron
International Ltd v Lord Grade,92 where, in the context of a
proposed takeover, the board preferred the lower bidder to the
higher bidder and, unusually, was able to take action to enforce
its choice on the shareholders. The Court of Appeal
distinguished between the harm inflicted on the company’s
assets by this decision (because it was unclear that the relevant
regulator would allow the lower bidder to operate in the industry
in question) and the harm suffered directly by the shareholders
individually though their inability to accept a higher takeover
offer for their shares (assertable in a personal claim). However,
although the principle is clear, the distinction between reflective
and independent losses is not always easy to draw.
CONCLUSION
17–39
Although the new statutory derivative claim is doctrinally very
different from the common law it replaces, it is still not clear
what its impact on the levels of derivative litigation will be. In
the early days, the Law Commission was rather downbeat in its
assessment. In its Consultation Paper it made the following
remarks about the policy which underlay its proposed reforms:
“a member should be able to maintain proceedings about wrongs
done to the company only in exceptional circumstances” and
“shareholders should not be able to involve the company in
litigation without good cause … Otherwise the company may be
‘killed by kindness’, or waste money and management time in
dealing with unwarranted proceedings”.93 Whilst the latter
remark is undoubtedly true, it is unclear whether this should lead
to derivative claims being available only in exceptional
circumstances, because the ability of wrongdoing directors to
block decisions in favour of litigation is a matter of empirical
fact which has not been extensively investigated—though the
unfair prejudice cases discussed in Ch.20 below suggest it is a
not uncommon feature of small companies. In its final report the
Law Commission stated that “we do not accept that the
proposals will make significant changes to the availability of the
action. In some respects, the availability may be slightly wider,
in others it may be slightly narrower. But in all cases the new
procedure will be subject to tight judicial control”.94
If the common law led to sub-optimal levels of derivative
litigation, one would hope that the statutory changes would have
a significant impact, even whilst the judges remain fully alive to
the fact that the statute, rightly, creates no entitlement in the
shareholder to bring a derivative claim. All depends on how the
courts exercise their discretion. The statute does not suggest the
rule in Foss v Harbottle should rule the courts from its grave and
in due course the courts may strike out more boldly. There is
some indication of this trend; as of September 2013, in the 13
reported cases where permission to continue a derivative claim
was the central issue, permission was granted in just over a third
of cases, suggesting that the court is not taking an unduly
restrictive approach in its exercise of discretion.
1
Taylor v National Union of Mineworkers (Derbyshire Area) [1985] B.C.L.C. 237,
254–255 (Vinelott J).
2 See art.3 of the model articles for both private and public companies limited by shares.
3cf. John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 K.B. 113 CA, where the
company’s articles had allocated the litigation decision to a committee of the board from
which the wrongdoers were excluded. This case shows that, where the board has the
power under the articles and does decide to sue, the shareholders cannot by ordinary
majority countermand its decision.
4 See Regal (Hastings) Ltd v Gulliver [1942] 1 All E.R. 378 HL; above, para.16–89.
5 Indeed, the replacement of the board by an insolvency practitioner was regarded under
the previous law as a good reason for not allowing the individual shareholder to sue on
behalf of the company. See Ferguson v Wallbridge [1935] 3 D.L.R. 66 PC; Fargro Ltd v
Godfroy [1986] 1 W.L.R. 1134. In Barrett v Duckett [1995] 1 B.C.L.C. 243 CA the
principle was even extended to deny to a shareholder who turned down the opportunity
to put the company into liquidation the possibility of bringing a derivative claim: “As
the company does have some money which might be used in litigating the claims, it is in
my opinion manifest that it is better that the decision whether or not to use the money
should be taken by an independent liquidator rather than by [the shareholder]” (at 255,
per Peter Gibson LJ). These are still factors the court could take into account under s.263
(see below) but they would no longer be absolute bars to the derivative claim.
6
Note that the court has a discretion under IA 1986 s.212 to reduce the amount that the
defendant has to pay, but not to excuse liability altogether: Revenue and Customs
Commissioners v Holland [2010] UKSC 51; [2010] 1 W.L.R. 2793 SC.
7
Cohen v Selby [2001] 1 B.C.L.C. 176 at [20] CA. Nor does it allow the liquidator to
escape from any limitation period to which the claim by the company would be subject:
Re Lands Allotment Co [1894] 1 Ch. 616; Re Eurocruit Europe Ltd [2007] 2 B.C.L.C.
598.
8
See Alexander Ward & Co Ltd v Samyang Navigation Co Ltd [1975] 1 W.L.R. 673 at
679, per Lord Hailsham LC, quoting with approval a passage from the third edition of
this book at pp.136–137. Unless this is the case, the rule in Foss v Harbottle (see below)
made no sense, because the question that rule posed was whether the individual
shareholder should be allowed to sue on behalf of the company or whether the matter
should be left to a simple majority of the shareholders. On the other hand, the abolition
by the 2006 Act of the rule in Foss v Harbottle, as far as derivative claims are
concerned, reduces the force of this argument. The power of the shareholders to initiate
litigation may not apply in the situation identified in the cases mentioned in fn.5, i.e.
where the board has been replaced by an insolvency practitioner acting on behalf of the
creditors. The not fully considered decision of Harman J in Breckland Group Holdings
Ltd v London and Suffolk Properties [1989] B.C.L.C. 100 might seem to point in the
direction of exclusive board control of the litigation, but there was in that case a
shareholders’ agreement in effect requiring the only two shareholders (or rather their
board nominees) to support a decision to commence “material litigation”.
9 CLR, Completing, para.5.101 but contrast s.239 (above, para.16–119).
10Even then, the directors may choose not to pay out the recovery by way of dividend
and instead to invest it in some perhaps unsuccessful venture.
11
For an example of a derivative claim brought for what appears to be a collateral
purpose, see the rather unusual case of Konamaneni v Rolls-Royce Industrial Power
(India) Ltd [2002] 1 All E.R. 979. In the US, where derivative claims can be brought
much more freely, it is sometimes argued that the drivers of the litigation are the firms of
lawyers who stand to take a handsome percentage of awards obtained under contingent
fee arrangements, if the derivative litigation is successful.
12 Foss v Harbottle (1843) 2 Hare 461.
13See in particular the classic judgment of Jenkins LJ in Edwards v Halliwell [1950] 2
All E.R. 1064 CA.
14 The technique endorsed in Danish Mercantile Co Ltd v Beaumont [1951] Ch. 680 CA,
of commencing litigation in the name of the company (i.e. not derivatively) but without
authority to do so and the court referring the issue to the shareholders for decision when
the authority issue is raised, has not been used in practice (perhaps because the solicitors
are personally liable in costs if the shareholders do not ratify the decision to sue), though
it is consistent with the notion that, in the area of litigation, the shareholders have
authority to decide, parallel to that of the board.
15 Law Commission, Shareholder Remedies, Cm. 3769, 1997.
16 The common law rules are still relevant for multiple derivative claims (see below,
para.17–24) and claims concerning foreign registered companies (see Abouraya v
Sigmund [2014] EWHC 277 (Ch); and Novatrust Ltd v Kea Investments Ltd [2014]
EWHC 4061).
17
18
See below, paras 17–29 et seq.
19
See Ch.33.
20 See CDDA 1986 ss.15A–15C, introduced by SBEEA 2015 s.110 from 1 October
2015. The application must be made within two years of the disqualification order or
undertaking (s.15A(5)). The compensation will be payable either: (i) to the Secretary of
State for the benefit of a creditor or creditors specified in the order, or a class or classes
of specified creditors; or (ii) as a contribution to the assets of the company (s.15B). See
generally Ch.10.
21
Companies (Audit, Investigations and Community Enterprise) Act 2004 s.44.
22
The earlier history and the purpose of the new statutory derivative claim are
considered in Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch); [2011] 1 B.C.L.C.
498 at [73]–[83] (Lewison J).
23
CPR 19.9(4), 19A(2).
24
In Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch. 204 CA
the court insisted that the question of standing to bring the derivative claim should be
decided in advance of and separately from the decision on the merits of the case. This
approach is embodied in CPR 19.9. Under this provision the courts recently began to
take a broader look at the value to the company of the proposed derivative claim:
Portfolios of Distinction Ltd v Laird [2004] 2 B.C.L.C. 741 at [51]–[68]; Airey v Cordell
[2007] B.C.C. 785.
25 See ss.263 and 268, discussed below.
26 2006 Act s.260(1): derivative claims (for England and Wales and Northern Ireland).
Section 265(1) provides similarly for derivative proceedings in Scotland. Because of the
intimate connection between derivative claims and civil procedure, the Act contains
separate provisions for Scotland (ss.265–269) and the rest of the UK (ss.260–264).
However, the underlying policies are the same.
27CPR 19.9(3). The reason for this oddity seems to be that anyone can make another
person a defendant to a claim but making a person a claimant requires that person’s
consent.
28If the shareholder has a personal claim against the directors, the statutory procedure
has no application. Personal claims are dealt with below and, as we shall see, there are
great complexities about remedies where both the company and the shareholder
personally have claims against a director.
29 The exceptions are those claims against directors falling outside the statutory
definition of a derivate claim, in particular multiple derivative claims and claims against
foreign registered companies: for the former, see below, para.17–24; for the latter, see
Abouraya v Sigmund [2014] EWHC 277 (Ch); Novatrust Ltd v Kea Investments Ltd
[2014] EWHC 4061 (Ch).
30 2006 Act ss.260(3) and 265(3).
31 2006 Act ss.260(3) and 265(4).
32
33
2006 Act ss.260(5) and 265(7).
34
35
2006 Act ss.260(4) and 265(5).
36
2006 Act ss.260(1) and 265(1).
37
2006 Act s.112. For further discussion see para.27–5.
38
2006 Act ss.260(5)(c) and 265(7)(e).
39
2006 Act ss.263(1) and 268(1).
40
2006 Act ss.261(2) and 266(3). In England and Wales this procedure is fleshed out in
CPR 19.9A. In some cases, the court has been inclined to merge the first two stages into
one: Mission Capital Plc v Sinclair [2008] EWHC 1339 (Ch); Franbar Holdings Ltd v
Patel [2008] EWHC 1534 (Ch); Stimpson v Southern Private Landlords Association
[2009] EWHC 2072 (Ch); and Bridge v Daley [2015] EWHC 2121 (Ch).
41
2006 Act ss.263(2)(b), (c) and 268(1)(b), (c). See above, paras 16–55, 16–67 et seq.,
16–103, 16–117 et seq.
422006 Act ss.263(2)(a) and 268(1)(a). On the director’s core duty of good faith see
above, paras 16–37 et seq.
43
Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch); [2011] 1 B.C.L.C. 498,
where the court held that the strength of the claim against the board was so weak that no
director, acting in accordance with s.172, would seek to continue the claim.
44
To which the Secretary of State may add by regulation: ss.263(5) and 268(4).
45
2006 Act ss.263(3),(4) and 268(2),(3).
462006 Act ss.263(3)(b) and 268(2)(b). Iesini v Westrip Holdings Ltd [2009] EWHC
2526 (Ch); [2011] 1 B.C.L.C. 498 failed this test.
47Although, conversely, if the potential financial gain is high, a more uncertain case
might be worth pursuing: Stainer v Lee [2010] EWHC 1539 (Ch); [2011] 1 B.C.L.C.
537.
48 See the words “in particular” in ss.263(3) and 268(2).
49 See Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch); [2011] 1 B.C.L.C. 498,
finding that, under s.263(3)(b), a person acting in accordance with s.172 would attach
little weight to continuing the action. Also see Re Seven Holdings [2011] EWHC 1893;
and Kleanthous v Paphitis [2011] EWHC 2287 (Ch).
50 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch); [2011] 1 B.C.L.C. 498 at
[85], noting that the decision required consideration of factors which included “the size
of the claim; the strength of the claim; the cost of the proceedings; the company’s ability
to fund the proceedings; the ability of the potential defendants to satisfy a judgment; the
impact on the company if it lost the claim and had to pay not only its own costs but the
defendant’s as well; any disruption to the company’s activities while the claim is
pursued; whether the prosecution of the claim would damage the company in other ways
(e.g. by losing the services of a valuable employee or alienating a key supplier or
customer) and so on”.
51
Above, para.16–103.
52
See Edwards v Halliwell [1950] 2 All E.R. 1064 CA.
53
The statute specifies that this is “by the company”, thus importing the mechanisms
and their qualifications discussed at various stages in Ch.16, especially paras 16–117 et
seq.
54
On the common law’s distinction between ratifiable and non-ratifiable breaches of
duty, see the previous chapter at para.16–124.
55
Bridge v Daley [2015] EWHC 2121 (Ch).
56
A decision by the company not to pursue the claim should be given very little weight
where the defendant directors constitute the majority of its directors: Cullen Investments
v Brown [2015] EWHC 472 (Ch).
57See Bamford v Harvey [2012] EWHC 2858 (Ch). However, this is likely to be rare:
Cinematic Finance Ltd v Ryder [2010] All E.R. (D) 283.
58
See Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch); [2009] 1 B.C.L.C. 1,
where the shareholder’s concurrent unfair prejudice claim was seen as delivering almost
all the shareholder wanted, so the right to pursue the derivative claim was, to that extent,
denied. Similarly, see Kleanthous v Paphitis [2011] EWHC 2287 (Ch); Singh v Singh
[2014] EWHC Civ 103. The unfair prejudice alternative is important even where the
shareholder does not want to be bought out.
59
See above at para.16–5. Also see Cullen Investments Ltd v Brown [2015] EWHC 473
(Ch).
60See below, para.17–32. Also see Cullen Investments Ltd v Brown [2015] EWHC 473
(Ch), where the “no reflective loss” principle was one of the factors considered by the
court in reaching its conclusion that no alternative remedy was available in that case.
61
2006 Act ss.263(4) and 268(3). Moreover, unlike the other matters to which the court
must have regard, this one cannot be altered by the Secretary of State by regulation:
s.263(5)(b).
62Smith v Croft (No.2) [1988] Ch. 114; cited with approval in Franbar Holdings Ltd v
Patel [2008] EWHC 1534 (Ch); [2009] 1 B.C.L.C. 1.
63
2006 Act ss.262 and 267.
64 2006 Act ss.262(1),(3), 263(1), 267(1),(3), 268(1).
65 2006 Act ss.262(2) and 267(2).
66
2006 Act ss.264 and 269.
67 2006 Act ss.264(1) and 269(1).
69 See Re Fort Gilkicker Ltd [2013] EWHC 348 (Ch); Bhullar v Bhullar [2015] EWHC
1943. The same argument also permits common law derivative claims concerning
foreign registered companies: Abouraya v Sigmund [2014] EWHC 277 (Ch); Novatrust
Ltd v Kea Investments Ltd [2014] EWHC 4061.
70
2006 Act ss.261(4)(a), 262(5)(a), 264(5)(a), 266(5)(a), 267(5)(a) and 269(5)(a).
Contrast the provisions relating to the derivative claim arising out of unauthorised
political donations or expenditure, below, at paras 17–29 et seq.
71
72 Wallersteiner v Moir (No.2) [1975] Q.B. 373 CA.
73
CPR 19.9. However, the court is not likely to give the claimant a blank cheque but to
review the company’s obligation to pay stage-by-stage as the litigation proceeds. See
McDonald v Horn [1995] 1 All E.R. 961, 974–975 CA; Stainer v Lee [2010] EWHC
1539 (Ch); [2011] 1 B.C.L.C. 537 (capped at £40,000). Moreover, such an order does
not give the shareholder priority over the unsecured creditors of the company (Qayoumi
v Oakhouse Property Holdings Plc [2003] 1 B.C.L.C. 352) so that the shareholder may
be unwilling to pursue a derivative claim on behalf of a doubtfully solvent company.
74
Indeed, even greater security is given in that, in leave proceedings, the court can make
a declaratory conditional order as to costs of the main litigation, requiring the company
to indemnify the member at least to a certain extent: Wishart v Castlecroft Securities Ltd
[2009] CSIH 65; [2010] B.C.C. 161. And costs might also cover the application for
leave: [2010] CSIH 2. However, the court has to exercise considerable care when
deciding whether to order a pre-emptive indemnity: Bhullar v Bhullar [2015] EWHC
1943 (Ch).
75 CPR 19.9F.
76 See the previous chapter at para.16–85.
77
2006 Act s.369. In some cases, as we saw in the previous chapter at para.16–85, the
liability may fall upon a director of a holding company and be a liability to the
subsidiary. In such a case the derivative claim to enforce the subsidiary’s rights may be
brought by an authorised group of the shareholders of the holding company as well as by
an authorised group of the shareholders of the subsidiary: s.370(1)(b). This will be a
useful facility where the subsidiary is wholly owned by the parent.
78 This mechanism seems to have been chosen in the original legislation of 2000 on the
basis of a somewhat bizarre analogy with the group of shareholders who have the right
to complain to the court about a resolution on the part of a public company to re-register
as a private one: s.98. The analogy is odd because the claim arising under s.98 is not
derivative.
79 2006 Act s.371(4).
80
2006 Act s.371(5).
81 2006 Act s.372.
832006 Act s.373. However, the right to information does not arise until proceedings
have been instituted, and so the right seems not to aid the minority at the stage when it is
considering whether to institute litigation.
84 2006 Act s.260(1)(a). Section 265, applying in Scotland, is less explicit but, it is
submitted, equally clear. More than one shareholder may have their rights infringed by
the directors’ claims, in which case the litigation may be brought in representative form
by one shareholder as a representative of all shareholders who have the same interest in
the matter (under CPR 19.6).
85
Above, para.16–5. The cases below suggest that the shareholders’ agreement adopts
some or all of the general duties of directors and so makes them binding as between the
director/shareholders parties to the agreement.
86
Gardner v Parker [2004] 2 B.C.L.C. 554 CA.
87 It used to be thought that it was not possible to combine a personal and a derivative
claim in the same litigation, but in Prudential Assurance Co Ltd v Newman Industries
Ltd (No.2) [1981] Ch. 257, 303–304 Vinelott J permitted it a first instance. The Court of
Appeal ([1982] Ch. 204, 222–224) did not dissent from this view.
88
Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1981] Ch. 257.
89
Johnson v Gore, Wood & Co [2002] 2 A.C. 1 HL. For a critique see Mitchell, (2004)
120 L.Q.R. 457. For the potential breadth of the excluded (i.e. “reflective”) losses, see:
Webster v Sandersons Solicitors [2009] EWCA Civ 830; [2009] 2 B.C.L.C. 542 CA.
Also see Waddington Ltd v Chan Chun Hoo Thomas [2009] 2 B.C.L.C. 82 HKCA.
90 Day v Cook [2002] 1 B.C.L.C. 1 CA; Barings v Coopers & Lybrand (No.1) [2002] 1
B.C.L.C. 364; Stein v Blake [1998] 1 All E.R. 724 CA (this last containing the probably
erroneous suggestion that the rule does not apply to claims by former shareholders).
91 Giles v Rhind [2003] Ch. 618 CA. The defendant’s wrongful act had destroyed the
company’s business, so that it had no funds for litigation. This was followed in Perry v
Day [2005] 2 B.C.L.C. 405, where the directors’ wrongful act (as against both
shareholder and company) consisted in accepting a settlement giving up the company’s
claim against the defendant directors (as vendors to the company). Contrast Gardner v
Parker [2004] 2 B.C.L.C. 554 CA where the directors’ allegedly wrongful acts as
against the company had put the company into administrative receivership (not by itself
enough to prevent the company commencing litigation) and where the compromise of
the company’s claim against the directors, although on generous terms, was not
improper.
92 Heron International Ltd v Lord Grade [1983] B.C.L.C. at 261–263.
93Law Commission, Shareholders’ Remedies, Consultation Paper No.142, 1996,
para.4.6.
94 Law Commission, Shareholder Remedies, Cm. 3769, 1997, para.6.13.
CHAPTER 18
BREACH OF CORPORATE DUTIES: ADMINISTRATIVE
REMEDIES
Introduction 18–1
Informal Investigations: Disclosure of Documents and
Information 18–2
Formal Investigations by Inspectors 18–5
When inspectors can be appointed 18–5
Conduct of inspections 18–7
Power of Investigation of Company Ownership 18–11
Liability for Costs of Investigations 18–12
Follow-Up to Investigations 18–13
Conclusion 18–15
INTRODUCTION
18–1
A distinctive feature of British company regulation for many
years has been the conferment of powers of investigation on the
relevant Government Department, currently the Department of
Business Innovation and Skills (“BIS”).1 Those provisions are
still contained in Pt XIV of the Companies Act 1985 (rather than
the 2006 Act),2 as amended by the Companies Act 1989 and
strengthened by the Companies (Audit, Investigations and
Community Enterprise) Act 2004.3 The 1985 Act, as amended,
empowers the Department to launch inquisitorial raids on
corporate (and even unincorporated) bodies, and BIS now has a
sizeable Companies Investigation Branch (“CIB”), which in
2006 became part of the Insolvency Service Agency of the
Department. The departmental powers are draconian, despite the
acknowledged need to ensure that the investigatory and
inspection powers comply, in both design and use, with the
Human Rights Act 1998, and with the fairness standards of
domestic public law, and it is perhaps the Government’s desire
not to spend public money on matters which should be the
concern purely of the company’s members or creditors which
has tended to limit the scale of their use.4
Originally, appointment of outside inspectors (usually a QC
and a senior accountant) was the only form of investigation
power that the Secretary of State had. But an announced
appointment of inspectors is likely in itself to cause damage to
the company. Hence the Department was reluctant to appoint
unless a strong case for doing so could be made out, and it
normally made inquiries of the board of directors before doing
so. Though such inquiries might cause the board to take remedial
action, they might equally well provide an opportunity for
evidence to be destroyed or fabricated. Hence, on the
recommendation of the Jenkins Committee,5 power to require the
production of books and papers was added in 1967, a power
which can be exercised with less publicity6 and which may
suffice in itself or may lead to a formal appointment of
inspectors if the facts elicited show that that is needed. This
power, now conferred by s.447 of the 1985 Act, is by far the one
most commonly exercised.7 It is sometimes referred to as the
power of (informal or confidential) investigation, by way of
contrast with the far more formal and public powers of
inspection (by appointment of inspectors). It is undoubtedly the
primary form of intervention, and we consider it first.
INFORMAL INVESTIGATIONS: DISCLOSURE OF DOCUMENTS AND
INFORMATION
18–2
Under s.447, the Secretary of State may require or, more likely,
authorise an investigator from the CIB to require a company to
produce, at such time and place as are specified, such
documents8 and information as may be specified. Authorising an
investigator to impose the requirement avoids the risk of the
documents being destroyed or doctored; the officer will arrive
without warning9 at the company’s registered office (or
wherever else the documents are believed to be held).10 The
investigator may be authorised further to impose the same
requirements on “any person”,11 a power to be used where, for
example, the documents concerned are in the possession of some
person other than the company. The power of an investigator to
impose a requirement on “any person” in relation to the
production of “information” as well as documents means that,
for example, an officer or employee of the company may be
required to provide an explanation of a document or, if a
document is not produced by the person asked, to state to the
best of his or her knowledge where it is.12
Failure to comply with the requirements of s.447 on the part
of any person may be certified by the Secretary of State or the
investigator to the court and the court may treat that person as
guilty of contempt of court if, after a hearing, it concludes that
the defendant did not have a reasonable excuse13 for non-
compliance with the requirement.14 In addition, providing
information known to be false in a material particular, or doing
so recklessly, is a criminal offence, punishable by imprisonment
or a fine.15 Criminal sanctions are also imposed on any officer of
the company who is privy to the falsification or destruction of a
document relating to the company’s affairs, unless the officer
shows there was no intention to conceal the affairs of the
company or to defeat the law.16 In addition, fraudulently to part
with, alter or make an omission in such a document is a crime.17
These various provisions are all aimed at extracting
information from those who may be unwilling to provide it
without compulsion. It may happen, however, that a person
wishes to volunteer information to an investigator, but feels
constrained from so doing because the information has been
imparted to him or her in confidence and so disclosure might
trigger an action for breach of confidence on the part of the
person who provided the information to the informer. The Act
now gives a limited protection against such actions. The
information must be of a kind which the person making the
disclosure could be required to disclose under the Act, the
disclosure must be in good faith and in the reasonable belief that
it is capable of assisting the Secretary of State, must be no more
than is necessary for this purpose, and must not be a disclosure
prohibited by or under statute or by a banker or lawyer in breach
of an obligation of confidence owed in that capacity.18
18–3
An investigator appointed under s.447 is not confined to turning
up at premises to ask questions and demand documents, running
the risk that admittance will be denied. The Act provides for the
investigator to be given compulsory powers of entry and
search.19 These come in escalating tiers. A Justice of the Peace,
if satisfied on information given on oath by the Secretary of
State or by a person appointed or authorised to exercise powers
under Pt XIV, that there are on any premises documents,
production of which has been required under that Part and which
have not been produced, may issue a search warrant.20 Under
that provision a search warrant cannot be issued unless there has
first been a requirement to produce the documents sought. The
company, thus forewarned, could destroy the documents before
the search took place, even if such action might be a crime.21
Hence, the 1989 Act added a further provision under which a
warrant may be issued if a J.P. is satisfied: (a) that there are
reasonable grounds for believing that an indictable offence has
been committed and that there are on the premises documents
relating to whether the offence has been committed; (b) that the
applicant has power under Pt XIV to require the production of
the documents; and (c) that there are reasonable grounds for
believing that if production was required it would not be
forthcoming but the documents would be removed, hidden,
tampered with or destroyed.22 Though narrowly circumscribed
by the need to satisfy a J.P. of conditions (a)–(c), this enables the
search for the documents to be undertaken by the police rather
than by the (possibly self-interested) officers of the company.
Although the search warrant power introduced in 1989
undoubtedly increased the investigators’ powers, in many cases
it is not available, particularly given conditions (a) and (c)
above. Where it is not, the investigator might still be left
standing on the doorstep. Consequently, in the 2004 Act a right
of entry to premises was introduced which was not dependent on
a warrant issued by a J.P., nor subject to onerous conditions.
Whenever authorised by the Secretary of State to do so, and
provided the investigator23 thinks it will materially help in the
exercise of his or her functions, the investigator may require
entry to premises believed to be used wholly or partly for the
purpose of the company’s business and may remain there for
such time as is necessary to discharge those functions.24 The
power of entry extends to accompanying persons whom the
investigator thinks appropriate.25 The section does not give the
investigator powers of search but it does potentially give him or
her access to relevant persons from whom the production of
documents or information can be demanded. Intentional
obstruction of the exercise of this power of entry is an offence,
punishable with imprisonment or a fine,26 and non-compliance
with a requirement imposed under the section may be certified to
the court to be dealt with as a contempt of court.27 The power is
subject to some procedural safeguards, notably a requirement
that the investigator and accompanying persons identify
themselves,28 and the investigator must give a written statement
as soon as practicable after entry to the occupiers of the premises
about the investigator’s powers and the rights and obligations of
the persons on the premises.29
18–4
The powers discussed above are cumulatively very considerable,
but it is worth remembering that over three-quarters of the
investigations initiated are prompted by allegations of fraudulent
trading,30 so that attempts to side-step the investigation are
likely. Despite the width of the power to appoint investigators,
this fact also illustrates the reluctance of the Department to use it
unless wrongdoing and a strong public interest in taking action
are present.
Part XIV also contains further provisions common to both
departmental investigations and to inspections, but these are left
until after a description of the latter. What should be emphasised,
however, is that an investigation by the Department’s officials
under s.447 is very far from being merely a preliminary step
towards the appointment of inspectors if the documentary
evidence thus discovered justifies that. On the contrary, in most
cases it will be the only investigation undertaken and will lead
either to a decision that no further action is needed or that some
non-inspection follow-up action should be taken.31 The time
taken to decide may vary from a few days to several months and,
while the investigation continues, the officials will probe deeply
and in a way which from the viewpoint of the company is just as
traumatic as a formal inspection.
FORMAL INVESTIGATIONS BY INSPECTORS
When inspectors can be appointed
18–5
Sections 431 and 432 set out circumstances in which the
Secretary of State is empowered to appoint one or more
competent inspectors32 to investigate the affairs33 of a company
and to report the result of their investigations to him; and one
situation where the Secretary of State is obliged to do so. This
last is where the court by order declares that the affairs of the
company ought to be so investigated.34 The courts rarely make
use of this power. As to those situations in which the Secretary
of State has a discretion, s.431 deals with cases where the
company, formally, takes the initiative to suggest the
appointment (almost never used) and s.432 with cases where the
Secretary of State acts of his or her own motion (as it turns out,
rather rarely used).
Under s.431, the Secretary of State may appoint on the
application of: (a) in the case of a company with a share capital,
not less than 200 members or members holding not less than
one-tenth of the issued shares; (b) in the case of a company not
having a share capital, not less than one-fifth of the persons on
the company’s register of members; or (c) in any case, the
company itself.35 However, appointments under this section
hardly ever occur.36 This is due not only to the fact that, before
appointing under the section, the Secretary of State may require
applicants to give security to an amount not exceeding £5,000
for payment of the costs of the investigation,37 but also because
the application has to be supported by evidence that the
applicants have good reason for the application.38 If they have,
the Secretary of State will normally have power to appoint of his
own motion under s.432(2), below, and it is far better for those
who have good reasons to draw them quietly to the attention of
the Department, requesting that there should be an appointment
under that section. Proceeding thus avoids the danger, inherent
in s.431, that the malefactors in the company will tamper with
the evidence once they learn of possible action under that section
and thus frustrate effective intervention by the Department,
whether by the appointment of inspectors or the appointment of
an investigator under s.447 (see above).
Section 432(2) empowers the Secretary of State to appoint
inspectors39 if it appears that there are circumstances suggesting
one (or more) of four grounds, the first two of which are:
“(a) that the company’s affairs are being conducted or have been conducted with
intent to defraud creditors or the creditors of any other person or otherwise
for a fraudulent or unlawful purpose or in a manner which is unfairly
prejudicial to some part of its members;40 or
(b) that any actual or proposed act or omission of the company (including an act
or omission on its behalf) is or would be so prejudicial, or that the company
was formed for any fraudulent or unlawful purpose.”
These, it will be observed, in part adopt the wording of s.994 on

unfair prejudice petitions,41 but in addition they enable the
Secretary of State to appoint where the company has been
operated with intent to defraud creditors or was formed or
conducted for a fraudulent or unlawful purpose.
In addition an appointment may be made on the ground:
“(c) that persons concerned with the company’s formation or the management of
its affairs have in connection therewith been guilty of fraud, misfeasance or
other misconduct towards it or towards its member; or
(d) that the company’s members have not been given all the information with
respect to its affairs which they might reasonably expect.”42
18–6
Given the availability of the more attractive, cheaper and
speedier option of investigations (considered earlier),
appointments of formal inspectors under s.432(2) have become
far less common, except in major cases where there are
circumstances suggesting malpractice (such as companies
formed or used in unlawful, dishonest, fraudulent or improper
ways) and a strong public interest in having an inspection. Had
the reforms proposed in 2001 been implemented, this would
have become the sole basis for the s.432(2) discretion.43
Conduct of inspections
Extent of the inspectors’ powers
18–7
The Act itself contains a number of sections on the conduct of
inspections. Under s.433, if inspectors appointed to investigate
the affairs of a company think it also necessary for the purposes
of their investigation to investigate the affairs of another body
corporate in the same group, they may do so and report the
results of that so far as it is relevant to the affairs of the
company.44 Under s.434 inspectors have powers similar to those
of investigators under s.447 (above) entitling them to require the
production of documents and information. They may also
require any past or present officer or agent of the company to
attend before them and otherwise to give all assistance that he is
“reasonably” able to give.45 In addition, they may examine any
person on oath.46 If any person fails to comply with their
requirements or refuses to answer any question put by the
inspectors for the purposes of the investigation, the inspectors
may certify that fact in writing to the court which will thereupon
inquire into the case and, subject to the important defence of
reasonableness, may punish the offender in like manner as if he
had been guilty of contempt of court.47
Control of the inspectors’ powers
18–8
This topic can be looked at from two points of view: control over
the inspectors by the Secretary of State and control over the
inspectors in the interests of third parties. The former control
was considerably strengthened by Pt 32 of the Companies Act
2006, inserting new provisions in the 1985 Act, although to
some extent they reflect what was probably already
administrative practice. In any event, the inspectors are now
under a statutory obligation to comply with any direction given
to them by the Secretary of State as to the subject-matter of the
investigation, the steps to be taken in the investigation, and
whether to report or not report on a particular matter or in a
particular way.48 The Secretary of State may also terminate an
investigation.49
Perhaps anticipating that exercise of these powers may lead to
dissatisfaction among inspectors, they are given an express
statutory right to resign, and the Secretary of State a
corresponding power to revoke an appointment as inspector.50
However, former inspectors are under an obligation to produce
to the Secretary of State or a replacement inspector the
documents and information obtained or generated in the course
of the inspection.51 These provisions make it very clear that the
inspector is a creature of the Department.
As to control in the interests of the investigated, a number of
matters have been established by practice and case law. The
process of inspection is undoubtedly an inquisitorial one.
However, as noted, since the aim of the inspection is to establish
facts rather than to determine legal rights, in domestic law the
process has been characterised as administrative rather than
judicial, so that the inspectors are obliged to act fairly but are not
subject to the full requirements of natural justice. The European
Court of Human Rights has adopted a similar stance in relation
to the applicability of art.6 of the European Convention (right to
a fair trial) to inspections.52 Consequently, it would seem that the
use of compulsion in investigations and inspections to secure
information from those investigated, including compulsion to
answer questions put by inspectors, is not in principle unlawful,
as a matter of either domestic or European Convention law.
However, as we shall see below, European Convention law has
had a significant impact on what can be done subsequently, for
example by the prosecuting authorities, with compelled
testimony obtained by inspectors, and the Act was amended by
the Criminal Justice and Police Act 2001 to take account of the
jurisprudence of the European Court of Human Rights.
Although the full rules of “natural justice” do not apply, the
inspectors must act fairly. This involves letting witnesses know
of criticisms made against them (assuming that the inspectors
envisage relying on, or referring to, those criticisms in their
report) and giving them adequate opportunity of answering. But
the inspectors are not bound to show them a draft of the parts of
their report referring to them, so long as they have had a fair
opportunity of answering any criticisms of their conduct.
Inspectors are free to draw conclusions from the evidence about
the conduct of individuals, but should do so only with restraint.53
18–9
Inspectors sit in private (and probably do not have the power to
sit in public),54 but allow witnesses to be accompanied by their
lawyers—although the latter’s role is limited, since the
questioning is undertaken by the inspectors and neither the
witness nor his lawyers can cross-examine other witnesses.
Although the range of persons whom the inspectors may
question is very wide, the Act provides that such persons cannot
be compelled to disclose or produce any information or
document in breach of legal professional privilege, except that
lawyers must disclose the names and addresses of their clients.55
A banker’s duty of confidentiality is protected more narrowly.56
In particular, it may be overridden by the Secretary of State.57
Reports
18–10
The inspectors may, and if so directed by the Secretary of State
shall, make interim reports, and (subject to what is said below)
on the conclusion of the investigation must make a final report.58
If so directed by the Secretary of State, they must also inform the
Minister of matters coming to their knowledge during their
investigation.59 The Secretary of State may, if thought fit,
forward a copy of any report to the company’s registered office
and, on request and payment of a prescribed fee, to any member
of the company or other body corporate which is the subject of
the report, any person whose conduct is referred to in the report,
the auditors, the applicants for the investigation60 and any other
person whose financial interests appear to be affected by matters
dealt with in the report.61 And the Secretary of State may (and
generally will, though not until after any criminal proceedings
have been concluded62) cause the report to be printed and
published.63
There is one exception to this, however. Under s.432(2A),
inspectors may be appointed under s.432(2) on terms that any
report they make is not for publication, in which case s.437 does
not apply. Since, under that section, a report does not have to be
published unless the Secretary of State thinks fit, it might be
thought that subs.(2A) was unnecessary. But it has two
advantages: it protects the Secretary of State from pressure to
publish even though advised that that might prejudice possible
criminal prosecutions; and, since it is an ex ante rule, it makes it
clear to the proposed appointees that they will not be able to
bask in publicity resulting from their efforts.64
POWER OF INVESTIGATION OF COMPANY OWNERSHIP
18–11
The above provisions relate to the appointment of inspectors or
investigators to examine the affairs of the company in general
(even if in particular cases they may be given a more limited
remit). There is, however, one situation in which the Secretary of
State’s powers to appoint inspectors or investigators are limited
by the statute to a particular topic. This is the power of
investigation into company ownership.65 This may be a
controversial issue and the facts may not be clear, because,
although the name of the shareholder has to be entered on the
company’s share register, that shareholder may be a nominee
rather than the beneficial owner of the share. The circumstances
in which large beneficial shareholders are required to disclose
their positions or in which a company may require a person to
reveal the extent of a beneficial holding in the company are
discussed in Chs 2,66 2667 and 28.68 The Secretary of State’s
investigatory powers are essentially supplementary to these
provisions.
In the first instance, if the Secretary of State is persuaded that
there may be good reasons for intervening, he or she will
probably institute preliminary investigations under the powers
conferred by s.444. Under this provision, the Secretary of State
can require any person whom he or she has reasonable cause to
believe to has, or is able to obtain, information as to the present
and past interests in a company’s shares or debentures to
disclose this information.
If this fails to produce a satisfactory answer the Secretary of
State may then appoint inspectors under s.442.69 The Secretary
of State may do so at will and must do so if application is made
by members sufficient to instigate an appointment of inspectors
under the general powers.70 A fully-fledged investigation may
afford the best chance of getting at the truth, but it is expensive
and time-consuming.71 Hence, the amendments to the section
made by the 1989 Act provide that the Secretary of State shall
not be obliged to appoint inspectors if satisfied that the
members’ application is vexatious and, if an appointment is
made, may exclude any matter if satisfied that it is unreasonable
for it to be investigated72; and the applicants may be required to
give security for costs as in a general investigation initiated by
the members.73
The inspectors’ powers in this area are supported by the
sanctions mentioned above74 but what makes the foregoing
sections more effective than they would otherwise be is that, if
there is difficulty in finding out the relevant facts on an
investigation under ss.442 or 444, the Secretary of State may by
order direct that the securities concerned shall, until further
notice, be subject to restrictions on their transfer and the exercise
of rights attached to them. These restrictions are discussed
further in Ch.28.75
LIABILITY FOR COSTS OF INVESTIGATIONS
18–12
Under s.439, the expenses of any investigation under Pt XIV of
the Act76 are to be defrayed in the first instance by the
Department, but may be recoverable from persons specified in
that section. These expenses include such reasonable sums as the
Secretary of State may determine in respect of general staff costs
and overheads. The persons from whom costs are recoverable
include: anyone successfully prosecuted as a result of the
investigation; the applicants for the investigation where
inspectors were appointed under s.431, to the extent that the
Secretary of State directs77; any body corporate dealt with in an
inspectors’ report when the inspectors were not appointed on the
Secretary of State’s own motion, unless the body corporate was
the applicant, or except so far as the Secretary of State otherwise
directs.78 Thus, in the case of investigations under s.447, the only
persons at risk of costs are those subsequently prosecuted and,
even where inspectors are appointed, the same is true if the
Secretary of State takes the initiative to appoint the inspectors.
FOLLOW-UP TO INVESTIGATIONS
18–13
Following an investigation, whether by inspectors or otherwise,
the Secretary of State has a number of powers. Apart from the
obvious one of causing prosecutions to be mounted against those
whose crimes have come to light, which prosecutions may be
mounted by the Department itself or by others such as the
Serious Fraud Office, the Secretary of State may petition under
s.8 of the Company Directors Disqualification Act 1986 for the
disqualification of a director or shadow director on grounds of
unfitness.79 The Secretary of State may also petition the court for
an appropriate order if unfair prejudice to all or some of the
company’s members has been revealed.80 Alternatively, or in
addition, he or she may petition for the winding-up of the
company under s.124A of the Insolvency Act 1986. Under that
section, if it appears to the Secretary of State as a result of any
report or information obtained under Pt XIV of the Companies
Act that it is expedient in the public interest that a company
should be wound up, he or she may present a petition for it to be
wound up if the court thinks it just and equitable. In 2014–15,
102 companies were wound up on the Secretary of State’s
petition, and 58 disqualification orders obtained as a result of
investigations.81
What the Secretary of State can no longer do is initiate
proceedings in the name and on behalf of the body corporate,
indemnifying it against any costs or expenses incurred by it in
connection with the proceedings. This power was removed by
the 2006 Act,82 perhaps on the basis that remedies for the benefit
of the company should be a matter for its members.83 By
contrast, taking companies off the register and disqualifying
unfit persons from future involvement in the management of
companies may well be steps which no member has an interest
in taking.
Since the majority of investigations and inspections are driven
by allegations of potentially serious wrongdoing on the part of
those involved in companies, it is hardly surprising that the
Department does not simply receive the information produced by
the investigation machinery, but makes use of the possibilities
just described to take remedial steps of one sort or another. That
this is contemplated by the Act is revealed by s.449, which
contains a long list of exceptions to the starting proposition that
information obtained under the s.447 investigation powers is
confidential to the Department and cannot be disseminated more
widely without the consent of the company.84 These so-called
“gateways” permit the information to be provided to those who
are best placed to take the consequential action.
18–14
However, this possibility of subsequent action brings into sharp
focus the rules which permit investigators and inspectors to
secure information compulsorily. Although the domestic courts
had held to the contrary (before the enactment of the Human
Rights Act 1998), the European Court of Human Rights, in
litigation arising out of the Guinness affair, concluded that
evidence given to inspectors under threat of compulsion cannot
normally be used in subsequent criminal proceedings against
those investigated, on the grounds that this would infringe their
privilege against self-incrimination.85 The Act now provides that
compelled testimony (but not documents produced under
compulsion) may not be used in either primary evidence or
cross-examination in a subsequent criminal trial of the person
providing the testimony, unless the defendant him- or herself
brought the compelled testimony in, or unless the offence in
question is giving false evidence to the investigator or certain
offences under the general perjury legislation.86
However, this restriction does not apply to subsequent use of
the testimony in proceedings for disqualification under s.8 of the
Company Directors Disqualification Act. Indeed, s.441
specifically provides that an inspectors’ report can be evidence
as to the opinion of the inspectors in such an application, and the
courts have come to the same conclusion in respect of a report
by investigators under s.447.87 Both the domestic courts and the
ECHR seem to be in agreement that disqualification applications
are not criminal proceedings.88 However, disqualification
applications, if not criminal proceedings, clearly are proceedings
falling within art.6 of the European Convention, because they
determine the legal rights of the person to be disqualified. Unlike
the investigation process itself, which lies outside art.6,89
disqualification proceedings will have to comply with
Convention standards appropriate for civil proceedings. These
standards do not specifically include a privilege against self-
incrimination, but they do involve general standards of fairness.
Especially since disqualification has a penal element, the
presumption of innocence might be relevant.90 Presumably, the
same considerations will apply where it is proposed to use
compelled testimony in purely civil litigation91: there will be no
ban in principle, but the court conducting the civil trial will need
to have regard to general fairness issues. One such issue, already
identified by the English courts in the context of the Insolvency
Act powers of compulsory examination, is the undesirability of
allowing statutory powers to give one party a litigation
advantage over another in purely civil litigation, which it would
not have were the company not insolvent.92
CONCLUSION
18–15
Since the scheme of administrative remedies under the Act is
dominated by the power of investigation, and this power is
predominantly used in cases of suspected fraudulent trading or
breach of the disqualification provisions, it is far from clear that
these remedies constitute an important element in the British
system of corporate governance, if that is defined as the
accountability of the senior management to the shareholders as a
whole. These provisions might be better seen as seen as
supporting the provisions analysed in Part Two of this book,
dealing with the abuse of limited liability. It would seem that the
Department leaves allegations of breaches of the duties
discussed in Ch.16 to be pursued by companies or shareholders
themselves, perhaps now through the reformed derivative action
procedure,93 unless either there is a strong public interest in
favour of intervention by the Department or the misconduct of
the directors has been egregious. Nevertheless, administrative
remedies are an important part of corporate law, and
shareholders may benefit from them indirectly, as where
inspectors’ reports reveal matters which lead to the reform of
company law.94
1And in earlier guises the Department of Business Enterprise and Regulatory Reform
(BERR), the Department of Trade and Industry (DTI) and the Board of Trade (BoT).
2 Unless indicated otherwise, the references below are to the 1985 Act.
3Although not to the extent recommended by the Department’s own review: see DTI,
Company Investigations: Powers for the Twenty-First Century (2001).
4 DTI, Company Investigations: Powers for the Twenty-First Century (2001), gives
details of the costs and length of the then most recent formal s.432 inspections. For
example, the inspection into Mirror Group Newspapers Ltd took nearly nine years and
cost £9.5 million. However, nearly half that time was taken up with waiting for criminal
trials to be completed or with dealing with challenges in the courts to the inspectors by
those sought to be inspected. See fn.45, below.
5
Cmnd. 1749 (1962), paras 213–219.
6
The Department does not normally announce that it has mounted such an investigation
and all information about it is regarded as confidential. This has its disadvantages. If a
team of officials is going through the company’s books and papers, this cannot be
concealed from its employees and will soon become known to the Press, thus putting the
company under a cloud which may never be dispersed because the ending of the
inquiries will not normally be announced nor their results ever be published,
notwithstanding that the conclusion may be that all is well with the company.
7
The various powers to appoint inspectors are used only very infrequently. And the
number of informal investigations has remained relatively constant at about 150
investigations per year: see Insolvency Service Annual Report 2013–14, at p.18; and
Insolvency Service Annual Report 2014–15, at p.15.
8
1985 Act s.447(8). “Document” is defined as “information recorded in any form”. The
requirement to produce documents includes the power, if they are produced, to take
copies of them or extracts from them: s.447(7).
9
The investigation is an administrative act to which the full rules of natural justice do
not apply: Norwest Holst Ltd v Secretary of State [1978] Ch. 201 at 224 CA. But
“fairness” must be observed and directions to produce should be clear and not excessive:
R. v Trade Secretary Ex p. Perestrello [1981] 1 Q.B. 19 (a case which illustrates the
problems that may be met if the documents are not held in the UK). See also R. (on the
application of 1st Choice Engines Ltd) v Secretary of State for Business, Innovation and
Skills [2014] EWHC 1765.
10
The officer may be accompanied by a policeman with a search warrant: s.448.
11
1985 Act s.447(3). But this is without prejudice to any lien that the possessor may
have.
12
See Re Attorney-General’s Reference No.2 of 1998 [1999] B.C.C. 590 CA, decided
on an earlier version of s.447 where this power was stated explicitly. The current version
of the power is not confined to officers and employees.
13 1985 Act s.453C. cf. Re An Investigation under the Insider Dealing Act [1988] A.C.
660 HL, dealing with an analogous provision, where the court took a narrow view of
reasonable excuse in the case of a journalist refusing to answer questions in order to
protect his sources. This was because the information was needed for the prevention of
crime, which is likely to, but need not, be the case under s.447.
14 One effect of proceeding in this way is that the defendant is deprived of the automatic
protection of legal professional privilege, which applies if, as previously, failure to
comply is treated as an offence (s.1129 of the CA 2006), though the court might regard
legal professional privilege as reasonable grounds for non-compliance.
151985 Act s.451. Prosecution requires the consent of the Secretary of State or DPP in
England and Wales and Northern Ireland (CA 2006 s.1126(2),(3)).
161985 Act s.450(1). The same restriction on prosecution applies as under s.451: see
previous note.
17
1985 Act s.450(2).
18 1985 Act s.448A.
19 These powers apply also to inspectors, discussed below: s.448(1). Note also that there
is a power under CA 2006 s.1132 whereby (on application of the DPP, the Secretary of
State or the police) a High Court judge, if satisfied that there is reasonable cause to
believe that any person, while an officer of a company, has committed an offence in its
management and that evidence of the commission is to be found in any books or papers
of, or under the control of, the company, may make an order authorising any named
person to inspect the books and papers or require an officer of the company to produce
them: see Re A Company [1980] Ch. 138 CA (reversed by the House of Lords sub nom.
Re Racal Communications Ltd [1981] A.C. 374, because, under the express provisions
of subs.(5), there can be no appeal from the judge and it was held that this included cases
where he had erred on a point of law—and, having discovered that other judges had
taken a different view, had volunteered leave to appeal!).
20
1985 Act s.448(1).
21
See fn.6 above.
22
1985 Act s.448(2).
23
Or inspector (see below).
24 1985 Act.453A(1)–(3).
25 1985 Act s.453A(4).
26
1985 Act s.453A(5),(5A).
27
1985 Act s.453C(1); and see para.18–2, above.
28 1985 Act s.453B(3).
291985 Act s.453B(4)–(10); and the Companies Act 1985 (Power to Enter and Remain
on Premises: Procedural) Regulations 2005 (SI 2005/684), which, together, go into
considerably more detail than is indicated in the text.
30 The two other main grounds for appointing an investigator after fraudulent trading are
the involvement of a disqualified person or an undischarged bankrupt in the
management of the company and using the company to promote an unlawful pyramid
selling scheme.
31
32 As already mentioned, the usual appointees are a QC and a chartered accountant but
less expensive mortals may be appointed in the rarer case when the Department appoints
in relation to a private company.
33 i.e. its business, including its control over its subsidiaries, whether that is being
managed by the board of directors or an administrator, administrative receiver or a
liquidator in a voluntary liquidation: R. v Board of Trade Ex p. St Martin Preserving Co
[1965] 1 Q.B. 603.
34 1985 Act s.432(1). This seems to make the Secretary of State’s refusal to appoint
reviewable by the court if an application is made to it by anyone with locus standi, and
to enable a court, in proceedings before it (e.g. on an unfair prejudice petition), to make
an order declaring that the company’s affairs ought to be investigated by inspectors. A
copy of the inspectors’ report will be sent to the court: s.437(2).
35
1985 Act s.431(2)(c).
36 It is believed that there have been no appointments since 1990.
37 1985 Act s.431(4). The £5,000 can be altered by statutory instrument. In the 1948 Act
it was only £100 which, even then, would not have kept a competent QC and chartered
accountant happy for the time that most inspections take.
38
1985 Act s.431(3).
39
Even if the company is in the course of being voluntarily wound up: s.432(3).
40
“Member” includes a person to whom shares have been transmitted by operation of
law: s.432(4).
41 See Ch.20. Although s.432(2)(a) refers only to “some part of the members”, rather
than using the CA 2006 s.994 wording of “members generally or some part of the
members”, this is unlikely to have the absurd result that, strictly speaking, the Secretary
of State should not appoint inspectors if it is thought that all the members are unfairly
prejudiced. This is especially so since the precise grounds for action do not have to be
stated (see Norwest Holst v Trade Secretary [1978] Ch. 201 CA).
42
This wording implies that members may “reasonably expect” more information than
that to which the Act entitles them. But it seems that s.432(2) does not entitle the
Secretary of State to appoint merely because the directors or officers of the company
appear to have breached their duties of care, skill or diligence: see SBA Properties Ltd v
Cradock [1967] 1 W.L.R. 716 (which, however, was concerned with an action by the
Secretary of State under what is now s.438, below).
43 DTI, Company Investigations: Powers for the Twenty-First Century (2001), para.97.
44
Most major corporate scandals involve the use of a network of holding and subsidiary
companies, the extent of which may only become apparent during the course of the
investigation: s.433 avoids the need for a formal extension of the inspectors’
appointment each time they unearth another member of the group. The extended power
applies to bodies corporate (i.e. not just Companies Act companies) but does not extend
to unincorporated bodies, which, however, may be subjected to investigation on the
grounds that associated unincorporated bodies are part of the affairs of the corporate
body with which they are associated.
45 1985 Act s.434(1) and (2). On the use of the “reasonableness” defence to protect a
director against oppressive use by the inspectors of their powers, see Re Mirror Group
Newspapers Plc [1999] 1 B.C.L.C. 690. Agents include auditors, bankers and solicitor
(s.434(4)).
46 1985 Act s.434(3).
47 1985 Act s.436.
48 1985 Act s.446A.
49 1985 Act s.446B(1)—though in the case of inspectors appointed as a result of a court
order, only if matters have come to light suggesting the commission of a criminal
offence and those matters have been referred to the appropriate prosecuting authority:
s.446B(2).
50 1985 Act s.446C—and the Secretary of State can fill any vacancy: s.446D.
51
1985 Act s.446E. The inspector is under a duty to comply but no sanction is specified
—presumably in extremis the Department could obtain a court order.
52
Fayed v United Kingdom (1994) 18 E.H.R.R. 393.
53 Re Pergamon Press Ltd [1971] Ch. 388 CA; Maxwell v DTI [1974] Q.B. 523 CA; R.
(on the application of Clegg) v Secretary of State [2003] B.C.C. 128 CA.
54
Hearts of Oak Assurance Co Ltd v Attorney-General [1932] A.C. 392 HL.
55 1985 Act s.452(1),(5). This applies to Departmental investigations as well as to
inspections: s.452(2).
56
1985 Act s.452(1A),(1B).
57
1985 Act s.452(1A)(c). The bankers’ protection in relation to s.447 investigations is
differently worded. It can be overridden by the Secretary of State only when it is thought
necessary for the purpose of investigating the affairs of the person carrying on the
banking business, or the customer is a person upon whom a s.447 requirement has been
imposed: s.452(4).
58
1985 Act s.437(1).
59 1985 Act s.437(1A).
60
This is not relevant to inspections under s.432(2) when the Secretary of State appoints
of his or her own motion.
61
1985 Act s.437(3).
62For an unsuccessful attempt to force the Secretary of State to publish while criminal
proceedings were still being considered: see R. v Secretary of State Ex p. Lonrho [1989]
1 W.L.R. 525 HL.
63 1985 Act s.437(3)(c). Thus making the reports available for purchase from HMSO by
any member of the public so long as the reports remain in print. They often make
fascinating reading for anyone interested in “the unacceptable face of capitalism”.
64 It may also tend to make the officers of the company more co-operative.
65 There was also a power of investigation into share dealings (s.446), but this was
repealed by the Companies Act 2006 from October 2007, but the Financial Conduct
Authority has a like investigatory power and is now regarded as the more appropriate
body to exercise this type of power. See para.30–48.
66 At para.2–42.
67 At para.26–17.
68 At para.28–51.
69 This section is directed not merely to determining share and debenture ownership but
“the true persons who are or have been primarily interested in the success or failure (real
or apparent) of the company or able to control or materially to influence its policy”:
s.442(1).
701985 Act s.442(3) and see above, para.18–2, though under s.442(3) the appointment is
mandatory.
71 It is believed that no appointments have been made since 1992.
72
1985 Act s.442(3A).
74 1985 Act s.443.
75
At para.28–53.
76
Which in the case of inspections are likely to be heavy; the Atlantic Computers
investigation cost £6.5 million and the Consolidated Goldfields one nearly £4 million:
DTI, Company Investigations: Powers for the Twenty-First Century (2001), Annex A.
And the total costs to the companies and their officers were probably as great or greater.
77
Or the equivalent provisions relating to ownership investigations: s.439(5).
78
1985 Act s.439(4). Inspectors appointed otherwise than on the Secretary of State’s
own motion may, and shall if so directed, include in their report a recommendation
about costs: s.439(6). Note also the provisions regarding rights to indemnity or
contribution (s.439(8) and (9)).
79
See para.10–5.
80 See para.20–1.
81Insolvency Service Annual Report 2014–5, at pp.14 and 15. The winding-up
application cannot be made on the basis of information supplied under the voluntary
method (see para.18–2, above): Insolvency Act s.124A(1)(a).
82 1985 Act s.438 was repealed by s.1176 of the CA 2006 as from April 2007.
83
For the same reason the Department seems to make little or no use of its power to
bring unfair prejudice petitions.
84 The gateways are set out in Schs 15C and 15D of the Act. The same provisions apply
to information provided voluntarily: see para.18–2, above.
85
Saunders v United Kingdom [1998] 1 B.C.L.C. 362 ECtHR; IJL v United Kingdom
(2001) 33 E.H.R.R. 11 ECtHR. For a sceptical assessment, see P. Davies, “Self-
incrimination, Fair Trials and the Pursuit of Corporate and Financial Wrongdoing” in B.
Markesinis (ed.), The Impact of the Human Rights Bill on English Law (Oxford: OUP,
1998). The House of Lords refused to quash the convictions of those involved despite
the breach of the Convention: R. v Saunders, Times Law Reports, 15 November 2002.
86
1985 Act s.447A. Nor do the amendments specifically exclude evidence to which the
prosecuting authorities were drawn as a result of the compelled testimony, where the
answers themselves are not used in the criminal trial.
87
Re Rex Williams Leisure Plc [1994] Ch. 350 CA.
88R. v Secretary of State for Trade and Industry Ex p. McCormick [1998] B.C.C. 379
CA; DC v United Kingdom [2000] B.C.C. 710 ECHR.
89 Fayed v United Kingdom (1994) 18 E.H.R.R. 393.
90Albert and Le Compte v Belgium (1983) 5 E.H.R.R. 533 ECHR. The Court of Appeal
remains of the view that general fairness does not in principle require the exclusion of
compelled testimony: Re Westminster Property Management Ltd [2000] 2 B.C.L.C. 396
CA.
91 Where the inspectors’ report is also admissible: s.441.
92 Cloverbay Ltd v BCCI SA [1991] Ch. 90 CA.
93 See Ch.17.
94
Substantial elements in Pt X of the Act (see Ch.16) are the response to abuses
revealed in inspectors’ reports.
PART 4
CORPORATE GOVERNANCE—MAJORITY
AND MINORITY SHAREHOLDERS
An important determinant of behaviour in a company is the

structure of its shareholding along the continuum between highly
dispersed and atomised shareholdings to one person holding all
the shares. Where there are many shareholders, each with only a
very small shareholding, the risk to the shareholders is that the
management will be the true controllers of the company and they
may not give the shareholders’ interests proper consideration.
We looked at the legal mechanisms which may address those
issues in Part Three. On the other hand, where there is a
controlling shareholder—or a small group of shareholders who
can exercise control—the management will certainly be
accountable to the controlling shareholders, but the latter may
act opportunistically towards the non-controlling shareholders.
(Where there is only one shareholder, then neither problem
exists.) Some consequences of majority control do not merit
legal intervention. For example, in most cases the non-
controlling shareholders will have to accept that the controlling
shareholders will set the company’s business policy. In return,
the minority may benefit from being able to “free-ride” on the
majority’s efforts to ensure that its chosen policy is effectively
implemented by the management of the company.
However, the majority shareholders may also use their power
to divert to themselves a greater part of the company’s earnings
than their contribution to the company’s share capital justifies.
Such “private benefits of control” are probably impossible to
eradicate without interventionist rules whose costs would
probably outweigh the rewards—and, in any event, some
benefits constitute legitimate returns for the majority’s
monitoring efforts. Nevertheless, if the law is to encourage
investors to place their money in companies controlled by a
small group of shareholders, then it must deal with the more
outrageous examples of majority opportunism. Apart from the
unfairness of majority exploitation of the minority, there is a
strong efficiency argument in favour of minority protection. If
the holders of minority stakes of ordinary shares in companies
are not so protected, they will protect themselves, probably by
being prepared to buy such shares only at a lower price, thus in
effect buying insurance against the majority’s unfair treatment of
them. This will raise the company’s cost of capital, so that the
cost of the unfair treatment is ultimately transferred back to the
controllers of the company. On this argument, it is as much in
the interests of the majority as it is of the minority shareholders
that effective legal limits should be placed on the freedom of the
majority to act opportunistically towards the minority.
Unfair treatment of the minority by the majority most
obviously occurs through decisions taken by shareholders in
general meeting. Thus the general meeting is one focus of the
rules designed to protect the minority, and these rules are
examined in the next chapter. However, the majority of
shareholders has the power to replace the members of the board
at any time and for any reason (see Ch.14), so the majority’s
influence may equally be articulated through decisions of the
board. In fact, given the division of powers between the board
and the general meeting, generally favouring the former in all
but small companies, majority shareholder influence over the
company is very likely to involve some element of board
decision-making. Sometimes the rules on directors’ duties will
catch action by directors aimed at diverting corporate assets to
themselves, for example, the rules on self-dealing.1 However,
effective control of the majority clearly requires rules which
operate on the “controllers” of the company, whether they act
through the board or through shareholder decision-making. In
recent times the legislature has tried to provide such a remedy in
the shape of the “unfair prejudice” provisions. We shall examine
these rules in Ch.20.
1 Above, paras 16–54 et seq.
CHAPTER 19
CONTROLLING MEMBERS’ VOTING
Introduction 19–1
Review of Shareholders’ Decisions 19–4
The starting point 19–4
Resolutions where the company’s interests are
centre stage 19–6
Resolutions more generally 19–7
Resolutions to expropriate members’ shares 19–8
Other resolutions 19–10
The future 19–11
Voting at class meetings 19–12
Class Rights 19–13
The procedure for varying class rights 19–14
What constitutes a “variation” 19–16
The definition of class rights 19–18
Other cases 19–21
Self-help 19–22
Provisions in the constitution 19–23
Shareholder agreements 19–25
Conclusion 19–29
INTRODUCTION
19–1
In any company law system a number of techniques are in
principle available to control the unfair exercise of voting power
by the majority of shareholders. We have encountered several
such techniques already, and it is useful to draw them together
briefly, before going on to discuss in more detail some
techniques not previously dealt with.
Perhaps most obviously, the law could identify specific
decisions which the majority is simply not permitted to take.
There are one or two examples of this approach in the Act and at
common law. For example, s.251 provides that a member is not
bound by an alteration of the articles after the date upon which
he or she became a member if its effect is to require the member
to take more shares in the company or in any other way increases
the member’s liability to contribute to the company’s share
capital or otherwise pay money to the company. In other words,
the size of a shareholder’s investment in the company is a matter
for individual, not collective, decision. Another is the admittedly
controversial common law rule may be that certain majority
shareholders cannot ratify wrongdoing by a director which
involves the appropriation by the director of corporate property.2
However, it is impossible for the legislature or the judges to
identify in advance very many substantive decisions which
should be prohibited on the grounds that they will always be
unfair to the minority. Normally, fairness and unfairness are
fact-specific assessments and therefore not appropriate for ex
ante decision-making on the part of the rule-maker.
An obvious response of the rule-maker in this situation is to
move from substance to procedure, and in fact the legislature
does make much greater use of rules which determine how the
shareholders are to decide than it does of rules which determine
what they shall decide. Chapter 143 provides a list of decisions
which the Act requires to be taken by the shareholders. Often
those decisions must also be taken by a three-quarters majority
of those voting (a “supermajority”) rather than a simple majority
(an “ordinary majority”). The statutory categorisation of
decisions as requiring ordinary or supermajority voting is not
entirely consistent in policy terms, but decisions affecting the
rights of the shareholders under the constitution generally
require a supermajority. Of course, a three-quarters majority
requirement does not obviate all cases of unfair prejudice of the
minority, but it reduces the incidence of such problems because,
under a supermajority requirement, only a quarter of the votes is
needed to block the resolution.
19–2
An approach lying in between the substantive and the procedural
is to leave the shareholders largely free to take what substantive
decision they will, but to control those elements of the decision
which are most likely to cause prejudice to the minority. This
policy is often effected through an equal treatment or sharing
rule. Thus, when a company repurchases its shares and does so
through market purchases,4 the Listing Rules insist on equality
of treatment of the shareholders, either by controlling the price at
which the repurchase is made or by requiring the repurchase to
be made by way of a tender offer to all shareholders.5 This does
something to prevent insiders from taking undue advantage of
the repurchase exercise or the repurchase having an effect on the
balance of power within the company to the benefit of the
majority. In the same vein, the common law requires dividends
to be paid equally to shareholders according to their
shareholdings. The common law took as its test for equality the
nominal value of the shares, though the articles normally adjust
this so as to use the amount paid up on the shares where the
nominal value differs from the amount paid up.6 This makes it
difficult for the majority to use the mechanism of dividend
distribution to allocate a disproportionate share of the company’s
earnings to themselves.7
Three further minority protection techniques are worth
mentioning at this stage. The new statutory derivative action
procedure makes it more difficult for a controlling
shareholder/director to block access to the courts by the minority
to enforce the company’s rights against the controller acting as
director.8 The derivative action allows the minority to side-step
the majority’s control of the board or shareholder decision-
making and to seek court (rather than corporate) approval to
initiate litigation. Of course, the derivative action is not available
if the shareholders have ratified the wrongdoing. However, the
statute now prevents interested directors from voting on a
shareholder resolution to ratify the wrongdoing.9 Thus, two
techniques are used. One is the essentially procedural one of
structuring the vote at shareholder level by excluding the votes
of those interested in the decision. The other is novel, i.e.
shifting the litigation decision to an outside authority free of
majority influence.
Excluding the controllers, when interested, from voting on the
decision in question is a technique taken further by the Listing
Rules of the Financial Conduct Authority and applying to
companies listed on the Main Market of the London Stock
Exchange. More importantly, those Rules impose a requirement
for shareholder approval of transactions with significant
shareholders which is not to be found in general company law.
Under the rules for “related party” transactions, the Listing Rules
exclude the related party from voting on the decision in question
and require that party to take all reasonable efforts to ensure that
associates do not vote either. Crucially, the term “related party”
is widely defined so as to include a person who can control 10
per cent or more of the voting rights in the company or who can
exercise substantial control over the company. “Associate” is
widely defined, rather in the manner of a “connected person” in
s.252 of the Act. Finally, a “related party transaction” is widely
defined so as to include not only transactions between the
company and the related party but also transactions in which the
company and related party together finance a transaction or
project and any other similar transaction which benefits the
related party.10
19–3
The final technique to be mentioned is that of giving the
minority the right to exit the company at a fair price if certain
decisions with which they disagree are taken by the majority.
Such exit rights are usually referred to as “appraisal” rights.
Crucially, they are not simply rights to exit the company, which
in a listed company the shareholder hardly needs, but rights to
leave at a fair price. Although in some company law systems this
is a rather well-developed minority protection remedy,11 the
British legislation uses it only very sparingly. This is perhaps
because, whether the right is to be bought out by the company or
by the majority shareholder, the effect is to place a potentially
substantial financial hurdle in the way of the decision which
triggers the appraisal right. Nevertheless, an appraisal right can
be found in ss.110 and 111 of the IA 1986 (reflecting provisions
introduced in the nineteenth century) which deal with the
reorganisation of companies in liquidation.12 More important, it
is also to be found in both the Companies Act and the Takeover
Code where it provides an exit right at a fair price where there
has been an acquisition or transfer of a controlling block of
shares in the company. In this second situation, the exit right is
not tied to the taking of a business decision but rather to a shift
in the composition of the shareholder body, though the basis of
the exit right is, in part, that the shift in the identity of the
controller of the company may well have an adverse impact
upon the minority shareholders.13
In this chapter, however, we shall look at two further minority
protection techniques. The first consists of giving power to the
court to review the decision of the majority on the grounds that it
is in some sense unfair to the minority. In specific instances we
have seen that the Act gives such a right of appeal to the
minority. The question now is whether the common law gives
such a general right. The second is treating the shareholders
whose interests are at risk from the decision as a separate group
whose consent is needed for the decision to go ahead, whether or
not under the company’s constitution the separate consent of that
group would be required. The first of these two techniques
obviates the difficulty of having to predict in advance which
decisions are acceptable and which not, for the decision is
subject to ex post scrutiny on a case-by-case basis by the courts.
The second technique is an extension of the policy of excluding
interested parties from voting on a decision. Sometimes this
negative technique is enough by itself. In other cases, however,
the law may need to go further and specify those who are
entitled to vote as well as those who are not, rather than leaving
the determination of those entitled to vote to the rules contained
in the company’s articles.
REVIEW OF SHAREHOLDERS’DECISIONS
The starting point
19–4
Scattered throughout the reports are statements that members
must exercise their votes “bona fide for the benefit of the
company as a whole”,14 a statement which, read casually, might
suggest that shareholders are subject at common law to precisely
the same basic principle as directors. This would be highly
misleading, however, and the decisions do not support any such
parallel. Indeed, to the contrary, it has also been repeatedly laid
down that votes are proprietary rights, like other incidents of
shares, which the holder may exercise in his or her own selfish
interests even if these are opposed to those of the company.15 A
shareholder may even enter into a contract to vote or not vote in
a particular way, and that contract may be enforced by
injunction.16 Moreover, as we have seen, directors themselves,
even though personally interested, can vote in their capacity as
shareholders at that general meeting,17 unless the Act or the
Listing Rules specifically deprive them of the right to vote.18
And this is so also as regards the transactions which, under Chs
4 and 4A of Pt 10 of the Act, require the prior approval of the
company in general meeting.
Thus, it is wrong to see the voting powers of shareholders as
being of a fiduciary character. Unlike directors’ powers,
shareholders’ voting rights are not conferred upon them in order
that they shall be exercised in the way which prefers the interests
of others over the interests of the voting shareholder where the
two are in conflict (as the fiduciary rule requires), and this is so
whether those others are seen to be “the company” or the
minority shareholders or, indeed, any other group.
However, to deny the fiduciary character of shareholders’
voting rights and to assert their proprietary nature is not to say
that the exercise of shareholders’ voting powers is, or should be,
unconstrained by the law. The controlling shareholders may not
be required to exercise their powers in the best interests of the
non-controlling shareholders, but this does not mean they may
trample over the interests of the latter with impunity. There are
many situations in the modern law, and not just within company
law, where the exercise of property rights or personal powers is
subject to some sort of review by the courts. The issue which
arises, therefore, is not the one of principle, but whether it has
proved possible for the courts or the legislature to develop a set
of criteria for the effective review of majority shareholders’
decisions. As we shall see below, this task was addressed by the
courts at an early stage in the development of British company
law, but the results of that exercise have not been spectacularly
successful. The courts have hovered uncomfortably between an
unwillingness to determine how businesses should be run and an
equally deeply felt unease that simple majoritarianism would
leave the minority exposed to opportunistic treatment by the
majority.
19–5
The principle which the courts have found so difficult to develop
and apply to shareholder decisions was articulated as early as
1900 by the Court of Appeal in Allen v Gold Reefs of West
Africa Ltd19 in the context of a vote to alter the company’s
articles. The Court of Appeal held that because the power to alter
the articles was a power which enabled the majority to bind the
minority, it must therefore be exercised “not only in the manner
required by law, but also bona fide for the benefit of the
company as a whole, and it must not be exceeded. These
conditions are always implied, and are seldom, if ever,
expressed”. This explanation might be thought to embrace the
ideas of absence of power, good faith, and abuse of power.
Despite that, for much of the early development in this area, the
focus was almost exclusively on “bona fide for the benefit of the
company as a whole”, and the difficult task of deciding what this
required.
In examining the case law, it is useful to divide the cases into
those where the shareholders’ decision clearly concerns and
affects the company’s rights and those where it does not, but
merely affects the members’ rights as between themselves; and,
with the latter, subdividing those cases into alteration of the
articles involving an expropriation of the member’s shares, and
those not having that effect, although all these distinctions are
becoming less marked in light of recent cases.
Resolutions where the company’s interests are
centre stage
19–6
We have already seen the tension in reviewing voting decisions
brought to the fore in Ch.16. The company, like any legal
person, can forgive directors for the wrongs they do to the
company. This inevitably comes at a financial cost to the
company, since it gives up an otherwise valuable claim.
Nevertheless, the decision, typically taken by the general
meeting on behalf of the company, can be taken for perfectly
proper reasons. But we rightly doubt that the reasons are
“perfectly proper” when the decision is carried by the votes of
the wrongdoing directors themselves. This is true even if the
range of “perfectly proper” reasons is very much at large; there
is something unpalatable about forgiveness driven by the
wrongdoers themselves. In this context we have seen the
common law’s struggle between holding certain decisions “un-
ratifiable” (i.e. the general meeting simply does not have the
power to act) and, alternatively, disenfranchising the interested
shareholder directors (i.e. focusing on the propriety of their
decision-making).20 We have also seen the modern statutory
preference for the latter approach.21 The same approaches are
evident in other contexts: denying shareholders the right to
dispose of corporate assets when the company is insolvent has
parallels with “un-ratifiable” decisions22; occasionally
disenfranchising shareholders thought to be inevitably conflicted
is an example of the latter approach.23
Resolutions more generally
19–7
However intuitively compelling these approaches, they are rarely
defended on the basis of principle. That makes it difficult to
settle on the appropriate approach in the more difficult, and more
common, cases. These are the cases where the general meeting
has the undoubted power to take decision, but their objective is
not straightforwardly to advance the interests of the company
(although sometimes it can be framed that way), but merely to
determine relative rights as between the shareholders. In this
context, it is inevitable that the majority’s preferences will be
favoured, even in circumstances where there can be no rational
complaint that the decision was somehow inappropriate or
improper: consider decisions to sack directors, or change the
articles. When are these decisions reviewable? It is clear that
they are reviewable, but, as one judge put it with some
understatement, the current British law is “somewhat untidy”.24
Resolutions to expropriate members’ shares
19–8
In expropriation (or compulsory transfer) cases, the arguments
for judicial intervention might seem to be at their strongest, but
the law falls far short of prohibiting changes in the articles aimed
at introducing such clauses. On the contrary, it is clear that
compulsory transfer articles may be introduced into the
company’s articles, and the debate is about the level of judicial
scrutiny to which such amendments will be subject. The relevant
authorities start with Brown v British Abrasive Wheel Co,25 a
decision at first instance in which a public company was in
urgent need of further capital which shareholders, holding 98 per
cent of the shares, were willing to put up but only if they could
buy out the 2 per cent minority. Having failed to persuade the
minority to sell, they proposed a special resolution adding to the
articles a provision to the effect that any shareholder was bound
to transfer his shares upon a request in writing of the holders of
90 per cent of the shares. Although such a provision could have
been validly inserted in the original articles,26 and although the
good faith of the majority was not challenged, it was held that
the addition of a general provision enabling the majority to
expropriate the minority could not be for the benefit of the
company as a whole but was solely for the benefit of the
majority. Hence an injunction was granted restraining the
company from passing the resolution.
This decision, however, was almost immediately
“distinguished” by the Court of Appeal in Sidebottom v
Kershaw, Leese & Co Ltd.27 There, a directorcontrolled private
company had a minority shareholder who had an interest in a
competing business. Objecting to this, the company passed a
special resolution adding to the articles a provision empowering
the directors to require any shareholder who competed with the
company to sell his shares at a fair value to nominees of the
directors. This was upheld on the basis that it was obviously
beneficial to the company. In contrast, shortly thereafter in
Dafen Tinplate Co v Llanelly Steel Co,28 it was held at first
instance that a resolution inserting a new article empowering the
majority to buy out any shareholder as they thought proper, was
invalid as being self-evidently wider than could be necessary in
the interests of the company.
So far, all these decisions suggest that adding to the articles a
provision enabling the shares of a member to be compulsorily
transferred will be upheld only if passed bona fide in the
interests of the company, with that judged not just by the
members but also reviewable by the court, on a basis which in
some ill-defined way goes beyond the general meeting merely
showing good faith and rationality. However, in Shuttleworth v
Cox Bros Ltd,29 a case concerning not the expropriation of shares
but the removal of an unpopular life director, the Court of
Appeal, in upholding the validity of a resolution inserting in the
articles a provision that any director should vacate office if
called upon to do so by the board, held that it was for the
members, and not the court, to determine whether the resolution
is for the benefit of the company and that the court will intervene
only if satisfied that the members have acted in bad faith.30 If the
same applies to expropriation of shares, it is difficult to
understand why what is now s.979 of the Act was needed. That
section31 enables a takeover bidder who has acquired 90 per cent
or more of the target company’s shares to acquire compulsorily
the remainder. There would have been no need for that section if
a bidder, having acquired a controlling interest, could then cause
the target company to insert in its articles a similar power. That
might suggest that mere bona fides, directed to the benefit of the
company, does not quite capture the approach being applied by
the court. And yet going further has proved controversial.
19–9
An issue akin to the Brown facts was considered by the High
Court of Australia in Gambotto v WCP Ltd,32 where it was
proposed to alter the articles to allow a 90 per cent shareholder
to acquire the shares of minority shareholders at an objectively
fair price (the majority holder in fact holding 99.7 per cent of the
shares). The motivation for the change was to convert the
company into a wholly owned subsidiary, which would bring
enormous tax advantages for the company. Nevertheless, the
court refused to allow the change, holding explicitly that the
majority’s decision could only be upheld if it were taken in good
faith and for proper purposes. In the court’s view, the general
meeting’s power to expropriate shares could legitimately be used
to save the company from “significant detriment or harm” (as in
Sidebottom v Kershaw, Leese and Co Ltd) but not to advance the
commercial interests of the majority (as in this case, where the
tax advantages to the company would indirectly, but greatly,
benefit its controlling shareholders). “English authority”,
presumably Shuttleworth v Cox Bros Ltd, was disapproved on
the grounds that “it does not attach sufficient weight to the
proprietary nature of a share”.33 On one view, there is something
of this same approach implicit in Brown, in Astbury J’s
judgment, where he too could be seen as denying the majority
the right to use their power to expropriate the minority to their
own corresponding advantage.34 And yet English courts have on
occasion explicitly distanced themselves from the objective
“proper purposes” approach in Gambotto, even in the context of
expropriation decisions.35
However, the recent decision of Re Charterhouse Capital
Ltd36 perhaps puts suggestions of continuing adherence to a more
relaxed British test in doubt. The Court of Appeal approved an
amendment of the articles to permit expropriation of shares, and
affirmed the broadly subjective test in Shuttleworth, but, in
setting out the full detail of the appropriate test, the court
consistently referred to the test as embracing not only bona fides
but also the intended proper purpose of the power,37 here being a
tidying-up exercise designed to implement the agreed terms of a
shareholder agreement which was expressed to take priority over
the articles.
In such circumstances it would seem difficult for any minority
shareholder to argue that the amendment was either irrational or
for improper purposes, or in bad faith.
Other resolutions
19–10
If it is not clear what English law requires in cases of
compulsory transfer of shares, where the arguments can typically
be framed in terms of corporate benefit even if there are also
substantial benefits to the majority, then how much more
difficult is the issue likely to be where that claim cannot be
made, and it is simply a battle of wills between the majority and
minority as to how their relations should be regulated by the
articles? In these circumstances, many cases appear to adopt the
view that the only test can be good faith, as in Shuttleworth,
since the courts can have no objective standard of their own to
judge whether a decision is for the benefit of the company (other
than shareholder irrationality, perhaps, and even that requires
some conception of “the interests of the company”). In the
difficult case of Greenhalgh v Arderne Cinemas Ltd,38 where the
proposed amendment was to remove a pre-emption clause so as
to facilitate a sale of control to a third party, Sir Raymond
Evershed MR tried to preserve the application of the traditional
test by saying that in such cases “the company as a whole” did
not mean the company as a corporate entity but “the corporators
as a general body”, and that it was necessary to ask whether the
amendment was, in the honest opinion of those who voted in
favour, for the benefit of a hypothetical member. Since the case
was before the court precisely because of a division of opinion
on the issue, this test is hardly illuminating. As was pointed out
by the High Court of Australia in its famous inter-war decision,
Peter’s American Delicacy Co Ltd v Heath,39 it is “inappropriate,
if not meaningless” to ask whether the shareholders had
considered the amendment to be in the interests of the company
as a whole. Some other test of validity is required.
On what that might be, little progress has been made over the
intervening 75 years. Thus, in Citco Banking Corp NV v
Pusser’s Ltd40 the Privy Council upheld a change in the articles
which entrenched the existing controller of the company (who
before the change controlled 28 per cent of the company’s
shares) by permitting the conversion of his existing shares
(carrying one vote per share) into a new class of share carrying
50 votes per share. This was said by those who supported the
alteration to be a bona fide decision in the interests of the
company because it enabled the company to raise further finance
for expansion, the financiers requiring that the existing controller
remain in charge. The genuineness of this belief on the part of
the majority was not challenged by the other party to the
litigation and the court found that a reasonable shareholder could
have held this view about the proposed alteration. Applying the
Shuttleworth test and reiterating that the burden of proof is on
those who challenge the resolution, the court found the test of
bona fide in the interests of the company to have been met.
This may all seem unexceptional, yet working through the
potential ramifications must give some cause for concern. At
face value, it appears to suggest that a majority could use its
power to deliver differential benefits to itself to the exclusion of
the minority (here, conversion of a tranche of A shares carrying
one vote per share to a tranche of B shares carrying 50 votes per
share). If that can be done, would it not be equally permissible to
reclassify the majority’s tranche of ordinary shares to give
differential dividend rights, or rights to capital on winding up?
Even if it is thought that does not offend the rules on amending a
company’s articles—which is doubted—it must surely fail the
statutory requirements for protection of shareholders’ class
rights and pre-emptive rights. The minority would effectively be
reduced to advancing s.994 complaints of unfair prejudice. The
remedies there are typically that the minority is bought out, and
thus excluded completely from further participation in the
company. Looking back to the problem, notice that what is
intuitively objectionable is not that the minority is overpowered;
that is inevitable with majority rule. It is that the majority can
use its power for the purpose of delivering differential benefits to
itself to the exclusion of the minority. Lord Hoffmann, in Citco,
would not disenfranchise the interested shareholder (here one
Tobias), especially as there was no attack on his bona fides, but
he did note that, even without his votes, the resolution would
still have been carried by 78 per cent of the shareholders. In
these circumstances, there seems little cause for complaint by the
losing minority. But absent these circumstances, and despite the
prevailing analysis in the cases, surely there is a justifiable
concern?41
The future
19–11
But perhaps, finally, the future is looking a little more certain.
All the cases so far illustrate a set of common concerns in this
area. Of itself, this suggests a common approach is warranted:
there is little point in different tests for different sub-categories
of shareholder decision-making, although of course, whatever
the test, the particular power and the context for its exercise will
be a material consideration.42 In determining the appropriate
tests for judicial review, there seem to be three broad ways
forward in this area. The first is to demand little of shareholders
in their decision-making other than rationality and bona fides.
Many cases are illustrative,43 but so too their problems. The
second is to adopt a safe mid-way point, permitting an objective
element in the test applied by the court, and keeping that test
focused on “the interests of the company”, but not going so far
as to allow the court to substitute its own commercial view of
what might have been best in the circumstances. Brown v British
Abrasive Wheel Co,44 discussed earlier, might be illustrative.45
Whatever the merits, such an approach seems difficult to justify
in principle and impossible to administer with certainty. The
third, and certainly the most interventionist approach, is to
embrace the twin tests of subjective bona fides and objective
proper purposes, as in Gambotto. Despite the criticisms visited
on that case, this does increasingly appear to be the modern
approach, both with shareholder decision-making and more
generally.46 It has a respectable pedigree: it is evident in the
explicit language of the much-cited Allen v Gold Reefs of West
Africa Ltd,47 as well as in the more controversial Gambotto, and
is also evident in all the most recent considered English
decisions.48 Moreover, although it was not the language used, it
might be seen as a better explanation of some of the earlier
English cases.49
Its starting point is the perfectly general one that no grant of
power is absolute, at least when its exercise binds dissenting
parties. The minimum constraints are that the power must be
exercised rationally, in good faith, and for the purposes for
which the power is granted. It is this last feature which typically
provides the potential tripwire in authorisation and ratification
decisions, in expropriation decisions, and in governance
decisions such as Citco. But in different contexts the concerns
(or “purposes”) are different; for example, the relevant “proper
purposes” might give free rein to shareholders in their
appointment and dismissal of directors.50 This variability might
not make the relevant distinctions much easier to solve when
presented in terms of improper purposes (or fraud on the power),
rather than in terms of “bona fide in the interests of the
company”, but at least the principles being pursued are clearer.
As evidence of this trend, Sir Terence Etherton C in Re
Charterhouse Capital, indicated, obiter, that he preferred the
formulation in Peters’ American Delicacy Co Ltd v Heath,51 that
in the case of an amendment in which the company as an entity
has no interest, the test should be whether the amendment
amounts to oppression of the minority or is otherwise unjust or is
outside the scope of the power. This is the sort of test which also
applies more broadly, to decision-making by other power-
holders.52
Voting at class meetings
19–12
The rules discussed above apply not only to decisions by the
shareholders at large but also to votes at meetings of classes of
shareholders. These rules and their use are described in the next
section, but we might immediately note that here, too, the cases
adopt the same approach to decision-making as described
immediately above. Sometimes this is very clearly so. Re
Holders Investment Trust53 concerned a capital reduction scheme
requiring the confirmation of the court. Megarry J approached
the matter on the basis that he had to be satisfied, first, that the
resolution of the preference shareholders had been validly passed
bona fide in the interest of that class; and then that, in the court’s
view, the scheme was fair to all classes.54 The application failed
at the first step. By analogy with the cases considered earlier, the
law required members voting in class meetings to use their votes
for the purpose of—or in the interests of—the class. Here,
confirmation was refused because the resolution of the class
meeting of the preference shareholders had been passed as a
result of votes of trustees who held a large block of the
preference shares but a still larger block of ordinary shares. In
casting their votes, the trustees had deliberately voted in the way
best designed to favour the ordinary shareholders, since that was
what would best serve the interests of their beneficiaries (as of
course their trustee obligations required). The court held that use
of their power in this way was not permitted. We might now say
it was contrary to the protective purposes underpinning the
required class meetings.
CLASS RIGHTS
19–13
We have already noted that the principle discussed in the
previous section applies to class meetings as well as to general
meetings of the shareholders. Now we need to turn to the
question of when separate meetings of classes of shareholders
are required and how the class in question is defined. The
separate consent of shareholders particularly affected by a
proposed resolution may be required by statute or by the
company’s own constitution. For example, as we shall see, the
principle of separate consent is well-established in relation to
proposed alterations of the articles where these alterations affect
the “rights” of a class of members.
The procedure for varying class rights
19–14
Where a proposed alteration of the articles involves “the
variation of the rights attached to a class of shares”, the Act
supplements the general supermajority provisions of s.21 with
additional protective mechanisms for members of the affected
class. The technique deployed in ss.630 and 631 is to require the
separate consent of the class, usually by way of a 75 per cent
majority, to any proposal to alter the articles in such a way as
would vary the class rights. Without this important protective
technique, the class might be swamped by the votes of other
classes of shareholders. Indeed, the class in question might not
otherwise have any say in the matter at all, if, for example, it was
a class of non-voting shareholders. Preference shares are often
non-voting, at least if their dividends are being paid on time, and
classes of non-voting ordinary shares are not unknown. The
alteration of their rights would otherwise be a matter entirely for
the voting shareholders. The Act thus provides the class in
question with a veto over the proposed change, even if the
company’s constitution gave the class members no right to vote
on the issue. Of course, the alteration must also be approved in
the normal way under s.21 (approval by a three-quarters majority
of those shareholders entitled to vote under the company’s
articles), but that is not normally a problem in the cases
considered in this section.
The statutory provisions on variation in the 2006 Act are
considerably simpler than their predecessors. Section 630 in
effect lays down a single default rule,55 with equivalent provision
being made in s.631 for companies without shares. Variation of
the rights attached to a class of shares requires the consent of
three-quarters of the votes cast at a separate meeting of that class
or a written resolution having the support of holders of three-
quarters of the nominal value of the class (excluding treasury
shares) (s.630(4)). That default rule may be displaced by explicit
provisions in the company’s articles, which may set a higher or a
lower standard. This is very straightforward and is enough to
deal with most cases which will arise.
The complexity of the section, such as it is, derives from its
attempt to answer the question of what rules should govern any
attempt to amend the procedure in the articles for the variation of
class rights, if the articles contain such a procedure. If the
variation procedure in the articles could be freely amended in the
same way as any other article of the company, the protection
intended to be afforded by the articles to the class could easily be
undermined. The section begins by stating that any amendment
to the variation procedure contained in the articles itself attracts
the provisions protecting class rights (s.630(5)).56 Without this
provision, a variation procedure in the articles requiring a higher
level of consent could be reduced to, or even below, the level of
the statutory default by simply following the requirements of
s.21 for general alterations to the articles (for example, no class
meeting). This is now not possible as a result of s.630(5), unless,
presumably, the articles themselves expressly provide a less
demanding way of amending the variation procedure than the
default rule in the statute.
In the same vein, the subsection also treats as a variation of
class rights the introduction of a variation procedure into the
articles, for that might set a lower standard than the statutory
default rule previously applicable. Finally, the section is without
prejudice “to any other restrictions on the variation of rights”.57
This appears to mean that a company could use the entrenchment
mechanism of s.2258 to set an even higher requirement for
amendments to the variation procedure contained in the articles
than that otherwise required by s.630. For example, the articles
could provide that amendments to the variation procedure
require the consent of all the members of the class.
19–15
So far, we have observed that the statutory provisions on class
rights use two protective techniques, at least on a default basis: a
separate meeting of the class (the main protection) and the
supermajority protection of a three-quarters majority to obtain an
effective decision of the class meeting. However, s.633 also
makes use of a third technique analysed in the first part of this
chapter, namely, court review of the majority’s decision.59 This
acknowledges the fact that, even within a class meeting, it is
possible for the majority of the class to act opportunistically
towards the minority of the class. Section 633 may be
particularly useful where the articles adopt a variation procedure
considerably less demanding than the default statutory one. As
we have seen,60 those voting at class meetings are subject to the
general common law requirements as to proper decision-making,
but s.633 (with equivalent provisions in s.634 for companies
limited by guarantee) goes further. It affords a dissenting
minority of not less than 15 per cent of the issued shares of a
class,61 whose rights have been varied in manner permitted by
s.630, a right to apply to the court to have the variation
cancelled. Application must be made within 21 days after the
consent was given or the resolution passed, but can be made by
such one or more of the dissenting shareholders as they appoint
in writing. Once such an application is made, the variation has
no effect unless and until it is confirmed by the court. If, after
hearing the applicant “and any other persons who apply to be
heard and appear to the court to be interested”,62 the court is
satisfied that the variation would “unfairly prejudice”63 the
shareholders of the class represented by the applicant, it may
disallow the variation but otherwise must confirm it.64 It is
expressly provided that “the decision of the court is final”,65
which presumably means that it cannot be taken to appeal.66
The dearth of reported cases on s.633, and earlier versions of
it, suggests that applications under it are made rarely if at all.
Nevertheless, it probably serves a useful purpose in specifically
drawing the attention of boards of directors to the need to ensure
that variations of class rights treat classes fairly. But, should they
ignore that warning, they are more likely to face an application
under the unfair prejudice rules in Pt 30 rather than under s.633.
The sections analysed above provide a procedure whereby the
company can vary class rights. Sometimes, a variation of class
rights is effected by an order of the court. Section 632 makes it
clear that the courts’ powers under Pt 26 of the Act (dealing with
arrangements and reconstructions (see Ch.29)) and Pt 30 (unfair
prejudice—see the following chapter) and, less importantly, s.98
(cancellation of resolution of public company to re-register as
private) are not affected by ss.630 and 631.
What constitutes a “variation”
19–16
Although the Act deals at some length with the procedure for
varying class rights, it says very little, if anything, about what a
variation of class rights is or, indeed, what a class right is. Both
these matters are defined principally by the common law. As a
matter of logic, however, the statutory or constitutional
procedure is only relevant once it is clear that there is to be a
variation of a class right. We will look first at “variation” and
then at “class right”.
Prior to the enactment of statutory provisions in this area, it
was commonly assumed that rules specified in the articles
required class consent only of the class whose rights were being
altered in a manner adverse to that class. But the statutory
provisions on “variation” (even if coupled with the statement
that it includes “abrogation”) cannot reasonably be construed as
meaning only “adverse variation”, and, to avoid any subsequent
attack on the validity of the resolution, the formal consent of the
benefited class should be obtained, even though it might appear
a foregone conclusion.
However, the real problem lies where a class is adversely
affected by what is proposed, but the courts, by placing a narrow
technical construction on what constitutes a variation of rights,
have declined to hold that the proposal falls within the class
rights provisions of either the statute or the articles. Thus a
subdivision67 or increase68 of one class of shares has been held
not to vary the rights of another class notwithstanding that the
result was to alter profoundly the voting equilibrium of the
classes. Similarly, where preference shares were non-
participating as regards dividend but participating as regards
capital on a winding-up or reduction of capital, a capitalisation
of undistributed profits in the form of a bonus issue to the
ordinary shareholders was not a variation of the preference
shareholders’ rights notwithstanding that the effect was to deny
them their future participation in those profits on winding up or
reduction.69 In the contrary situation, where the shares were
participating as regards dividends but not in relation to return of
capital on a winding-up, a reduction of capital by repayment of
irredeemable preference shares in accordance with their rights on
a winding-up (i.e. at their nominal value) was not regarded as a
variation or abrogation of their rights, even though the
shareholders were deprived of valuable dividend rights.70 Even if
the dividend rights of the preference shareholders were fixed,
those rights might be valuable, if interest rates had fallen after
the issuance of the preference shares. The obvious unfairness of
this led to a contractual solution: the practice of providing, on
issues by public companies of preference shares which are non-
participating in a winding-up, that on redemption or any return
of capital the amount repaid should be tied to the average quoted
market price of the shares in the months before (the market price
reflecting the value of the dividend rights rather than the nominal
value of the shares). This, so-called “Spens formula”, named
after its inventor, affords reasonable protection in the case of
listed companies but preference shareholders in unquoted
companies still remain at risk.
Finally, an issue of further shares ranking pari passu with the
existing shares of a class was not regarded as a variation of
rights.71 And, where there were preference and ordinary shares,
an issue of preferred ordinary shares ranking ahead of the
ordinary but behind the preference was not a variation of the
rights of either existing class.72 The principle applied in all the
above cases was that the formal rights of the complaining
shareholders had not been varied, even if the change had
adversely affected the value of those rights.
19–17
However, just as it is possible for the articles to require a
variation procedure which is more demanding than the statutory
default procedure in terms, for example, of the level of approval
required, so it is possible for the articles to require a wider range
of variations to be subject to the procedure than the statute
requires. Thus, in the wake of the decisions on reduction of
capital referred to in the previous paragraph, it became common
to introduce special provisions into a company’s articles to
protect preference shareholders. In Re Northern Engineering
Industries Plc73 a clause in the articles deeming a reduction of
capital to be a variation of rights was upheld and enforced when
the company proposed to cancel its preference shares. But very
clear wording will have to be used if such a provision is to be
construed as affording any greater safeguards. In White v Bristol
Aeroplane Co74 and Re John Smith’s Tadcaster Brewery Co,75
the relevant clauses referred to class rights being “affected,
modified, dealt with or abrogated”. At first instance Danckwerts
J76 held that bonus issue to the ordinary shareholders could not
be made without the consent of the preference shareholders
because, although their rights would not be abrogated or varied,
they would be “affected” since their votes would be worth less in
view of the increased voting power of the ordinary shareholders.
But the Court of Appeal reversed his decision. They said that the
rights of the preference shareholders would not be affected; the
rights themselves—to one vote per share in certain
circumstances—remained precisely as before. All that would
occur was that their holders’ enjoyment of those rights would be
affected. If that eventuality was to be guarded against, more
explicit wording would have to be used, making it clear that the
clause was intended to protect economic interests as well as
rights.
It seems, therefore, that if s.630 is effectively to prevent class
rights from being “affected as a matter of business”,77 it is
necessary to find a formula for a variation of rights clause which
will expressly operate in relation to an alteration which affects
the enjoyment of their rights (as opposed to the rights
themselves). In the absence of such a clause in the model
articles, however, such rights are likely to be granted by
companies only if it is thought that the securities on offer would
not otherwise be acceptable to potential purchasers or, at least,
not acceptable at the price the company wishes to issue them at.
The definition of class rights
19–18
Before it is possible to decide whether a class right has been
varied, it is necessary to know what a class right is. This is a
matter upon which there is a surprising degree of doubt. Section
629 tells us that shares are to be regarded as of one class if the
rights attached to them “are in all respects uniform”, so that
merely attaching different names to groups of shares does not
turn them into different classes of share if the rights attached to
them are the same.78 This definition of a class of shares applies
to the Act generally, not just in relation to the variation of class
rights.
Beyond that, the statute gives no help. It does not even state
expressly, as s.127(1) of the 1985 Act did, that class rights can
arise only if there is more than one class of share. It seems likely
that no change was intended on this point, since, where there is
only one class of share, s.21 (alteration of the articles) and s.630
(variation of class rights) would overlap to an unacceptable
extent, if s.630 applied in this case as well. However, assuming
two or more classes of share, what then counts as a class right?
The choices range from only the rights attached to any one of the
classes which are unique to it (i.e. not held in common with any
of the other classes of share) to all the rights attached to any of
the classes. An intermediate position adds to the first group the
core rights of shareholders (relating to voting, dividends and
return of capital on a winding-up) whether or not those rights are
unique to the class in that particular case. There is little authority
on the choice to be made, although in Cumbrian Newspapers
Group Ltd v Cumberland and Westmoreland Newspaper and
Printing Co Ltd79 Scott J seemed to favour the first and
narrowest view. The second view might be thought to protect
more adequately the expectations of shareholders. On the first
and narrowest view a shareholder seeking protection of
dividend, voting and return of capital rights which were not
unique to the class would have to ensure that there was a
variation of rights clause in the articles and that that clause
defined class rights in an appropriately broad way. This seems
undesirable. The right to class consent at least for the variation
of core rights would be what companies and, for example,
preference shareholders would expect and the law should give
effect to that expectation.
19–19
Whilst this basic issue about the definition of a class right
continues unresolved, a more sophisticated aspect of the same
question has been considered judicially and has received a
surprisingly liberal response. The question is whether there are
class rights where nominally the shares are of the same class but
special rights are conferred on one or more members without
attaching those rights to any particular shares held by that
member or members. This was the question facing Scott J in the
Cumbrian Newspapers case.80 Two companies, publishing rival
provincial weekly newspapers in an area where it had become
apparent that only one was viable, entered into an arrangement
designed to ensure that one of the companies (Company A)
would publish that one newspaper but that it would issue 10 per
cent of its ordinary share capital81 to the other company
(Company B). Company B was anxious to ensure that the paper
should remain locally owned and controlled, and to this end the
articles of Company A were amended in such a way as to confer
on Company B pre-emptive rights in the event of any new issue
of shares by Company A or on a disposal by other shareholders
of their shares in Company A. These rights were not attached to
any particular shares but conferred on Company B by name.
Further, another new article provided that: “If and so long as
[company B] shall be the holder of not less than one-tenth in
nominal value of the issued ordinary share capital of” Company
A, Company B “shall be entitled from time to time to nominate
one person to be a director of” Company A. Company A’s
articles contained a variation of rights clause. Eighteen years
later, Company A’s directors proposed to convene a general
meeting to pass a special resolution deleting the relevant articles.
Company B thereupon applied to the court for a declaration that
Company B’s rights were class rights that could not be abrogated
without its consent.
Scott J pointed out that special rights contained in articles
could be divided into three categories.82 First, there are rights
annexed to particular shares. The classic example of this is
where particular shares carry particular rights not enjoyed by
others, e.g. in relation to “dividends and rights to participate in
surplus assets on a winding up”.83 These clearly were “rights
attached to [a] class of shares” within the meaning of what is
now s.630. He also held that this category would include cases
where rights were attached to particular shares issued to a named
individual but expressed to determine upon transfer by that
individual of his shares.
The second category was where the articles purported to
confer rights on individuals not in their capacity as members or
shareholders.84 Rights of this sort would not be class rights, for
they would not be attached to any class of shares.85 But
Company B’s rights did not fall within this class; the articles in
question were “inextricably connected with the issue to the
plaintiff86 and the acceptance by the plaintiff of the ordinary
shares in the defendant”.87
This left the third category: “rights that, although not attached
to any particular shares were nonetheless conferred upon the
beneficiary in the capacity of member or shareholder of the
company”.88 In his view, rights conferred on Company B fell
into this category.89 But did they come within the words in the
then equivalent of s.630(1) as “rights attached to any class of
shares”? After an analysis of the various legislative provisions
and of the anomalies which would result if they did not,90 he
concluded that the legislative intent must have been to deal
comprehensively with the variation or abrogation of
shareholders’ class rights and that he should therefore construe
what is now s.630 as applying to categories one and three. He
accordingly granted the declaration sought.91
19–20
This decision of Scott J might have been easier to reach under
the 2006 Act. In effect, the learned judge treated the expressions
“the rights of a class of members” and the “rights…attached to a
class of shares” as synonymous. The 2006 Act, by contrast, deals
explicitly with variations of the former type in s.631, and the
latter in s.630. In short, Scott J may have anticipated by a few
decades the position now provided for by statute.
Other cases
19–21
There are some statutory procedures for taking corporate
decisions which explicitly require the separate consent of each
class of shares, for example, Pt 26 dealing with schemes of
arrangement, but there the definition of a “class” of shares is
interpreted functionally rather than literally, in contrast with the
variation of rights cases.92
SELF-HELP
19–22
It is wrong to think that protection for minority shareholders is to
be found only in mandatory provisions of company law.
Provided the minority shareholder has sufficient bargaining
power, for example at the point a much-needed investment is
made in the company, that shareholder may be able to negotiate
for protections over and above those to be found in company
law. These contractual protections may then be reflected in the
company’s constitution or in an agreement existing separately
from and outside the constitution.
Indeed, across the board there is a considerable incentive for
shareholders themselves to provide, in advance of a dispute
arising, for a substantive or procedural rule which will govern
the case. Individuals reading the previous pages would be
justified in feeling somewhat gloomy about the extent to which
minority shareholder interests are truly protected by the rules
there analysed, and so might well feel that such contractual
protections would be essential. Where class rights are not
involved, the scope of the objective controls upon the voting
decisions of the majority is still very unclear. Even where class
rights are involved, the protection afforded still has its
weaknesses, notably the limited view taken by the courts of what
constitutes the variation of a class right. Indeed, the statutory
class-rights procedure encourages self-help because it sets out
only default rules and limited ones at that.93
As an added advantage, the techniques described below may
be used quite generally to exert control in the interests of
minority shareholders in any corporate decision, regardless of
whether that decision needs to be taken by the shareholders or
may be taken by the board of the company. As such, the
following discussion constitutes a bridge to the statutory unfair
prejudice provisions discussed in the following chapter.
Provisions in the constitution
19–23
The articles provide an obvious place in which to locate any
agreements reached for the protection of minority shareholders,
because the articles bind the company and its members as they
exist from time to time (s.33) so that future members are bound
by the provisions of the articles protecting the minority without
further ado.
Protective provisions in the articles will be an effective way of
safeguarding minorities only if they can be enforced. Often the
minority shareholder will want to assert that a decision taken in
breach of the protective provisions is not binding on the
company and that an injunction should be granted to enjoin the
company and its directors from acting on the invalid resolution.
In principle, such an action should be available since, as we saw
in Ch.3, the articles are enforceable as a contract, although the
discussion in Ch.3 also set out several important and probably
unexpected limits to the general principle.94
The weakness with protective provisions in the articles,
however, is that they are alterable by special resolution of those
entitled to vote on shareholder resolutions (s.21). This may
provide a way to defeat the expectations of non-voting
shareholders or even those of minority voting shareholders,
because a previous protection may simply be removed from the
articles, at least provided no class rights have been created.
The Act itself suggests one possible solution to the risk of
future amendment, namely, use of the entrenchment powers
contained in s.22. Under this section a provision in the articles
can be declared to be alterable only through a more restrictive
procedure than that required for a special resolution under s.21.
The entrenchment provision may go so far as to require
unanimity for a particular change, although it cannot render the
provision unalterable if all the members agree to the change
(s.22(3)). Thus, s.22 provides a mechanism whereby a provision
protective of the minority can be included in the company’s
articles and that protective provision can be declared to be
alterable only in the desired way, most obviously only if those it
is intended to protect agree to the change. However, the
entrenchment provision may have a powerful and adverse effect
on those it does not benefit and so s.22(2) provides that
entrenchment provisions may be included only in the company’s
articles on formation or, subsequently, with the consent of all the
members of the company. Entrenchment is, thus, essentially a
small company facility.
19–24
Consequently, it may be more attractive to provide the required
minority protection in a company already in existence by
creating a new class of shares carrying the relevant protection,
issuing those shares to the shareholder to be protected, and then
including a broad variation of rights clause in the articles, so
that, for example, the consent of the protected shareholder
becomes necessary for the alteration of the protection.
Alternatively, the shareholder may be given in effect control
over the taking of any resolutions by the shareholders through
provisions which in principle are alterable but in practice cannot
be. An example would be a rule that the quorum for a meeting of
the shareholders cannot be constituted unless the minority
shareholder is present, either in person or by proxy. Thus, the
shareholder would be given a veto over decisions of the
shareholders, exercisable by refusing to participate in the
meeting.95 This provision would be ineffective where the
shareholders decide by written resolution, but in that case it
might be possible to provide a solution by requiring the
particular shareholder’s consent for a written resolution or
through weighted voting rights.96
Shareholder agreements
19–25
Alternatively, the parties may prefer to proceed by way of an
agreement existing outside and separate from the articles. This
has the advantage of privacy because such an agreement, unlike
the company’s constitution, does not have to be filed at
Companies House. However, an issue immediately arises as to
whether the company can effectively be made party to such an
agreement, as it would be if the agreement were embodied in the
company’s articles. Here, there are two apparently conflicting
principles: first, that a company, like any other person, cannot
with impunity break its contracts and, secondly, that a company
cannot contract out of its statutory power under s.21 to alter its
articles by special resolution.
The second proposition was favoured by the House of Lords
in Russell v Northern Bank Development Corp Ltd.97 It was clear
to their lordships that “a provision in a company’s articles which
restricts its statutory power to alter those articles is invalid”98 and
they applied that principle to the agreement before them, existing
outside the articles among the shareholders and to which the
company purported to be a party. That agreement provided that
no further share capital should be created or issued in the
company without the written consent of all the parties to the
agreement. Consequently, it would seem that the company
cannot validly contract independently of the articles not to alter
those articles.99 However, that proposition is heavily qualified by
two further propositions which may render the initial proposition
ineffective in practice, at least for those who are well advised.
Prior contracts
19–26
The first qualification is that the principle of invalidity, laid
down in Russell, does not apply where the company has entered
into a previous contract on such terms that for the company to
act upon its subsequently altered article would involve it in a
breach of the prior contract. In this situation the term of the
earlier contract, which would be breached if the company acted
upon the altered article, is not invalid. The Russell principle is
not relevant here because the term in the earlier contract is not
broken when the company alters its articles, but only when it
acts upon the altered article. Although the case law has tended to
focus on directors’ service contracts, its implication for
shareholder agreements is that a company would be a party to
them and agree not to act in a particular way in the future,
provided it did not agree to refrain from amending its articles.
Thus, in Southern Foundries (1926) Ltd v Shirlaw100 the
company altered its articles so as to introduce a new method of
removing directors from office and then used the new method to
dismiss the managing director in breach of his 10-year service
contract. The managing director successfully obtained damages
for wrongful dismissal. The provision as to the term of the
service agreement was thus clearly held by the House of Lords
to be valid. Lord Porter said: “A company cannot be precluded
from altering its articles thereby giving itself power to act upon
the provisions of the altered articles—but so to act may
nevertheless be a breach of contract if it is contrary to a
stipulation in a contract validly made before the alteration”.101 In
this case the contract protected a manager but the principle is
equally applicable to a contract protecting a shareholder.
19–27
The unresolved issue in relation to this first qualification is
whether a claimant seeking to enforce his or her contractual
rights against the company is confined to the remedy of damages
or whether and, if so, how far, injunctive relief is available to
enforce the earlier contract. In Baily v British Equitable
Insurance Co,102 the Court of Appeal granted a declaration that
to act on the altered article would be a breach of the plaintiff’s
contractual rights. More surprisingly, in British Murac Syndicate
Ltd v Alperton Rubber Co Ltd103 Sargant J went so far as to grant
an injunction to restrain an alteration of the articles which would
have contravened the plaintiff’s contractual rights. Although
Sargant J’s decision is generally regarded as based upon a
misunderstanding of the previous authorities, some sympathy
with this approach was expressed by Scott J in the Cumbria
Newspapers case,104 where he said that he could “see no reason
why [the company] should not, in a suitable case, be injuncted
from initiating the calling of a general meeting with a view to the
alteration of the articles”. To the extent that injunctive relief is
made available in this way not simply to restrain acting upon the
altered article but to restrain the operation of the machinery for
effecting the alteration itself, the notion that the company cannot
validly make a direct contract not to alter its articles becomes
hollow. Such an extension of injunctive relief would also
contradict the dictum of Lord Porter in Shirlaw105: “Nor can an
injunction be granted to prevent the adoption of the new
articles”. However, injunctive relief merely to prevent the
company acting upon the new articles would not fall foul of this
principle.
Binding only the shareholders
19–28
The second qualification is that an agreement among the
shareholders alone as to how they will exercise the voting rights
attached to their shares is not caught by the principle that a
company cannot contract out of its statutory powers to alter its
articles. This rule was applied to save the agreement in Russell,
the House of Lords benignly severing the company from the
agreement in question. Lord Jauncy said that “shareholders may
lawfully agree inter se to exercise their voting rights in a manner
which, if it were dictated by the articles, and were thereby
binding on the company, would be unlawful”.106 The claimant
was granted a declaration as to the validity of the agreement, and
it seems that their lordships would have been happy to grant an
injunction had the claimant objected substantively to the course
of action proposed by the company, as against wishing to
establish the principle that his consent to the change was
required.107 This conclusion flows from the more general
proposition that the vote attached to a share is a property right
which the shareholder is prima facie entitled to exercise and deal
with as he or she thinks fit.108 Since the company can act only
through its members to alter the articles, an agreement binding
all the members is as effective as one to which the company is
party as well.
However, in one respect a members’ agreement is less secure
than one which binds the company as well. On a subsequent
transfer of a shareholding covered by the agreement the new
shareholder will not be bound without his or her express
adherence to the agreement among the other shareholders.109
Nevertheless, the shareholders’ agreement does play an
important role in establishing the requirement for minority
shareholder consent to important changes in the company’s
financial or constitutional arrangements in situations such as
management buy-outs, venture capital investments and joint
ventures.110
Finally, a device analogous to the voting agreement should be
noted. Closely associated with, but more sophisticated than, the
voting agreement is the voting trust, not uncommon in the US
but less common in the UK. Under this, in effect, voting rights
are separated from the financial interest in the shares, the former
being held and exercisable by trustees while the latter remains
with the shareholders. Voting policy then becomes a matter for
the trustees, who may use their powers to protect minority
shareholders, though the voting trust may be driven by other
considerations, such as a desire to make a takeover bid more
difficult and thus protect the incumbent management.111
CONCLUSION
19–29
The mandatory protections for minority shareholders identified
in this chapter are rather patchy. They apply only to voting at
general meetings and not to majority control exercised via the
board and, even then, only to certain types of shareholder
decision. In the case of the requirements for shareholder voting,
the protection provided manages to be, at once, both limited and
uncertain in scope. It is perhaps not surprising that shareholders
have resorted to private means, and that the legislature has
attempted make more far-reaching protections available. The
development and current status of these alternative means are
considered in the next chapter.
1
3 See above, at para.14–18.
4
See above, at para.13–19.
5
Listing Rules 12.4.1–2.
6 Birch v Cropper (1889) 14 App. Cas. 525 HL; cf. art.71 of Model Articles for Public
Companies. The Model Articles for Private Companies Limited by Shares needs no
equivalent since art.21 requires all shares (other than those initially subscribed) to be
fully paid as to nominal value and any premium.
7 This provides a possible rationale for the exemption of dividends from the rules on
financial assistance, especially as creditors are also protected by the rule that dividends
are payable only out of profits. See above at para.13–45.
8
See above, Ch.17.
10 See Listing Rules 11.1 et seq. The closest the general law comes to requiring
shareholders’ approval of transactions with significant shareholders is where that
shareholder falls within the category of “shadow director” and thus is subject to the
statutory rules on self-dealing contained in Ch.4 of Pt 10 (above, paras 16–54 et seq.).
11For example, the US (see R. Clark, Corporate Law (Little Brown, 1986) pp.444 et
seq.
12
13See paras 28–41 and 28–75. The statute recognises the exit right only if the new
controller holds 90% of the voting rights after a takeover bid; the Code gives an exit
opportunity at the 30% level, no matter how the 30% has been acquired and so goes
much further than the statute.
14
The original source of this oft-repeated (but potentially misleading) expression seems
to be Lindley MR in Allen v Gold Reefs of West Africa [1900] 1 Ch. 671–2, and merits
full citation: “The power thus conferred on companies to alter their articles is limited
only by the provisions contained in the statute and the conditions contained in the
company’s memorandum of association. Wide, however, as the language of [the Act] is,
the power conferred by it must, like all other powers, be exercised subject to those
general principles of law and equity which are applicable to all powers conferred on
majorities enabling them to bind minorities. It must be exercised, not only in the manner
required by law, but also bona fide for the benefit of the company as a whole, and it
must not be exceeded. These conditions are always implied, and are seldom, if ever,
expressed”.
15
North-West Transportation Co v Beatty (1887) 12 App. Cas. 589 PC; Burland v Earle
[1902] A.C. 83 PC; Goodfellow v Nelson Line [1912] 2 Ch. 324.
16 Greenwell v Porter [1902] 1 Ch. 530; Puddephatt v Leith [1916] 1 Ch. 200—in which
a mandatory injunction was granted. Contrast the rules on directors’ fettering their
discretion: above, para.16–35.
17 NW Transportation Co v Beatty (1887) 12 App. Cas. 589 PC; Burland v Earle [1902]
A.C. 83 at 93 PC; Harris v A Harris Ltd (1936) S.C. 183 (Sc); Baird v Baird & Co, 1949
S.L.T. 368 (Sc). And see the remarkable case of Northern Counties Securities Ltd v
Jackson & Steeple Ltd [1974] 1 W.L.R. 1133 where it was held that, although to comply
with an undertaking given by the company to the court the directors were bound to
recommend the shareholders to vote for a resolution, they, as shareholders, could vote
against it, if so minded.
18 See, for example, s.239 excluding the interested director from voting on a resolution
to ratify his or her wrongdoing (above, para.16–119) or the Listing Rules provisions on
related-party transactions, discussed above.
19 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch. 656 CA. See fn.14, above, for the
full quotation.
20
Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1981] Ch. 257; Smith
v Croft (No.3) [1987] B.C.L.C. 365, neither adopted with great vigour in subsequent
cases, although clearly influential.
22 See West Mercia Safetywear Ltd v Dodd [1988] B.C.L.C. 250 CA; Aveling Barford v
Perion Ltd [1989] B.C.L.C. 626; Re DKG Contractors Ltd [1990] B.C.C. 903; Official
Receiver v Stern [2002] 1 B.C.L.C. 119 at 129. Also see, more recently, Madoff
Securities International Ltd v Raven [2013] EWHC 3147 (Comm) at [272]–[288]
(Popplewell J); Goldtrail Travel Ltd (In Liquidation) v Aydin [2014] EWHC 1587 (Ch)
at [113]–[118] (Rose J).
23Bamford v Bamford [1970] Ch. 212 CA. The directors had issued shares for improper
purposes. In a ratification by shareholders of this decision, it was conceded that the
holders of the newly issued shares could not vote.
24
Constable v Executive Connections Ltd [2005] 2 B.C.L.C. 638, the judge refusing to
dispose of an expropriation claim summarily.
25
Brown v British Abrasive Wheel Co [1919] 1 Ch. 290. For a stimulating analysis of
these cases see Hannigan, “Altering the Articles for Compulsory Transfer” [2007] J.B.L.
471.
26
Phillips v Manufacturers Securities Ltd (1917) 116 L.T. 209; in Borland’s Trustees v
Steel Bros [1901] 1 Ch. 279 an even wider article was inserted with the agreement of all
the members. Presumably too a compulsory transfer article could be introduced by
majority vote which would affect only shares acquired in the future.
27
Sidebottom v Kershaw, Leese & Co Ltd [1920] 1 Ch. 154 CA.
28
Dafen Tinplate Co v Llanelly Steel Co [1920] 2 Ch. 124.
29
Shuttleworth v Cox Bros Ltd [1927] 2 K.B. 9 CA.
30
The court conceded that if the resolution was such that no reasonable man could
consider it for the benefit of the company as a whole that might be a ground for finding
bad faith, [1927] 2 K.B. 9 at 18, 19, 23, 26 and 27. This exception was affirmed in Re
Charterhouse Capital [2015] EWCA Civ 536. Another, it is submitted, would be if the
majority was trying to acquire the shares of the minority at an obvious undervalue.
31
Dealt with in Ch.28 at paras 28–68 et seq., below.
32
Gambotto v WCP Ltd (1995) 182 C.L.R. 432.
33 Gambotto v WCP Ltd (1995) 182 C.L.R. 432 at 444.
34 Brown v British Abrasive Wheel Co [1919] 1 Ch. 290, 296, per Astbury J: “The
defendants contend that it is for the benefit of the company as a whole because in default
of further capital the company might have to go into liquidation. The plaintiff is willing
to risk that. The proposed alteration is not directly concerned with the provision of
further capital, nor does it insure that it will be provided. It is merely for the benefit of
the majority. If passed, the majority may acquire all the shares and provide further
capital. That would be for the benefit of the company as then constituted. But the
proposed alteration is not for the present benefit of this company”. It may be that the
decision can be put on the basis, as found by the judge, that the majority did not think
about the benefit to the company’s business at all, but only their own benefit, for
example, because financing was available on equivalent terms from those who did not
require complete control.
35See Citco Banking Corp NV v Pusser’s Ltd [2007] UKPC 13; [2007] 2 B.C.L.C. 483
PC.
36Re Charterhouse Capital Ltd [2015] EWCA Civ 536, especially at [90], [92], [96]–
[108] (Etherton C for the court).
37
Re Charterhouse Capital Ltd [2015] EWCA Civ 536, see especially [90].
38Greenhalgh v Arderne Cinemas Ltd [1951] Ch. 286 CA; and [1950] 2 All E.R. 1120
where the judgment of Evershed MR is reported more fully.
39 Peter’s American Delicacy Co Ltd v Heath (1939) 61 C.L.R. 457, 512 (Dixon J). Here
the amendment provided that shareholders should thenceforth receive dividends rateably
according to the amounts paid up on their shares rather than, as previously, according to
the number of shares (fully or partly paid) which they held. A fortiori the test is not
useful if the group in question is made up of a number of distinct sub-groups: Redwood
Master Fund Ltd v TD Bank Europe Ltd [2006] 1 B.C.L.C. 149, not an expropriation
case and involving a “class” of creditors rather than of shareholders, but applying the
same principles.
40
Citco Banking Corp NV v Pusser’s Ltd [2007] UKPC 13; [2007] 2 B.C.L.C. 483 PC.
41 Note the different approach in Rights & Issues Investment Trust Ltd v Stylo Shoes Ltd
[1965] Ch. 250, cited in Citco, although not followed in its detail. In Stylo, along with a
substantial increase in the issued ordinary share capital, the articles were amended to
double the number of votes attached to special management shares so as to maintain the
control of the existing management. In upholding the shareholders’ resolution,
Pennycuick J noted, at 255–256, that the rules on class rights needed to be followed, and
that here the resolution was effective because the management shares had not voted, and
yet nevertheless 92 per cent of the ordinary shareholders, being those with no personal
interests to gain in the matter, had voted in favour.
42 See also Completing, para.5.98.
43
There is some indirect support for this approach in English law in Citco Banking Corp
NV v Pusser’s Ltd [2007] UKPC 13; [2007] 2 B.C.L.C. 483 at [20] PC, where a
subjective approach was endorsed even in what came close to an expropriation case.
44
Brown v British Abrasive Wheel Co [1919] 1 Ch. 290.
45
And was criticised on precisely that basis in Shuttleworth and (perhaps) Citco.
46 Any number of cases might be cited. The rule does not depend on the identity of the
power-holder, and in particular does not depend on the power-holder being a fiduciary.
See as illustrative Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71 SC
(directors); Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd
(formerly Anglo Irish Bank Corp Ltd) [2012] EWHC 2090 (Ch) (creditors); Burry &
Knight Ltd v Knight [2014] EWCA Civ 604 (shareholders).
47 Allen v Gold Reefs of West Africa [1900] 1 Ch. 671.
48See especially the earlier discussion of Re Charterhouse Capital Ltd [2015] EWCA
Civ 536. See also fn.46, above.
49
In particular, the test applied by the courts is not to look at the controlling director-
shareholder’s actual bona fides, nor even to assert that no reasonable director-
shareholder could have thought the decision to be bona fide in the interests of the
company (i.e. either an irrationality test, or an indication that he court was simply not
persuaded that bona fides were proven). Rather, it is, it seems, to apply a more objective
test, and to assume an improper motivation, or a use of the power for improper ends.
50 Although even here there are some constraints: the potential pay-back for
appointment of a board of directors intended to serve as the appointer’s puppet is
classification of the appointer as a shadow director.
51 Peters’ American Delicacy Co Ltd v Heath (1939) 61 C.L.R. 457, 512 (Dixon J).
52See paras 16–26 et seq. (directors); and Redwood Master Fund Ltd v TD Bank Europe
Ltd [2006] 1 B.C.L.C. 149; and Assénagon Asset Management SA v Irish Bank
Resolution Corp Ltd [2012] EWHC 2090 (Ch) (bondholders).
53 Re Holders Investment Trust [1971] 1 W.L.R. 583.
55
The Model Articles for private and public companies contain no variation of rights
procedure, so, in effect, the statute is the default model.
56 Both in relation to variation of rights and amendments to variation procedures,
variation includes abrogation: s.630(6). Class rights and variation procedures contained
in the memorandums of existing companies are treated as being contained in the articles:
s.28.
57
2006 Act s.630(3).
58
Discussed below at para.19–23.
59
This court review applies to all variation procedures, whether specified in the Act or
in the company’s articles: s.633(1).
60
61
Provided that they have not consented to or voted in favour of the resolution—an
unfortunately worded restriction which effectively rules out nominees who have not
exercised all their votes in one way.
62
This clearly includes representatives of other classes affected and of the company.
63
This is the same expression as that used in Pt 30 (see Ch.20, below), which would
seem to provide a better alternative remedy not demanding 15 per cent support and strict
time limits and with a wider range of orders that the court can make.
64
2006 Act s.633(5). The company must within 15 days after the making of an order
forward a copy to the Registrar: s.635.
65
2006 Act s.633(5).
66 This was certainly the intention of the Greene Committee on whose recommendation
the section was based: Cmnd. 2657, para.23. But the need for speedy finality seems no
greater than on an application under the general unfair prejudice provisions where there
is no such provision and cases can be taken to the House of Lords. But if the application
under s.633 is struck out on the ground that the time-limit was not complied with, that
can be taken to appeal and was in Re Suburban Stores Ltd [1943] Ch. 156 CA. See also
Re Sound City (Films) Ltd [1947] Ch. 169 which seems to be the only officially reported
case on the predecessors to s.633. Cases in which it might have been invoked (e.g.
Rights & Issues Investment Trust v Stylo Shoes Ltd [1965] Ch. 250) have been taken
instead under the unfair prejudice sections or earlier versions of those sections.
67 Greenhalgh v Arderne Cinemas [1946] 1 All E.R. 512 CA, where the result of the
subdivision was to deprive the holder of one class of his power to block a special
resolution.
68White v Bristol Aeroplane Co [1953] Ch. 65 CA; Re John Smith’s Tadcaster Brewery
Co [1953] Ch. 308 CA.
69 Dimbula Valley (Ceylon) Tea Co v Laurie [1961] Ch. 353. On the meaning of
“participation” in this context see para.23–7 and on bonus shares see para.11–18. And
see the startling decision in Re Mackenzie & Co Ltd [1916] 2 Ch. 450 which implies that
a rateable reduction of the nominal values of preference and ordinary capital (which
participated pari passu on a winding up) did not modify the rights of the preference
shareholders notwithstanding that the effect was to reduce the amount payable to them
by way of preference dividend while making no difference at all to the ordinary
shareholders.
70
Scottish Insurance Corp v Wilson & Clyde Coal Co [1949] A.C. 462 HL; Prudential
Assurance Co v Chatterly Whitfield Collieries [1949] A.C. 512 HL; Re Saltdean Estate
Co Ltd [1968] 1 W.L.R. 1844; House of Fraser v AGCE Investments Ltd [1987] A.C.
387 HL (Sc.); Re Hunting Plc [2005] 2 B.C.L.C. 211. But contrast Re Old Silkstone
Collieries Ltd [1954] Ch. 169 CA, where confirmation of the repayment was refused
because it would have deprived the preference shareholders of a contingent right to
apply for an adjustment of capital under the coal nationalisation legislation.
71
See the cases cited above, but contrast Re Schweppes Ltd [1914] 1 Ch. 322 CA,
which, however, concerned s.45 of the 1908 Act, which forbade “interference” with the
“preference or special privileges” of a class.
72
Hodge v James Howell & Co [1958] C.L.Y. 446 CA; The Times, 13 December 1958.
73
Re Northern Engineering Industries Plc [1994] 2 B.C.L.C. 704 CA.
74
White v Bristol Aeroplane Co [1953] Ch. 65 CA.
75 Re John Smith’s Tadcaster Brewery Co [1953] Ch. 308 CA.
76
Only his judgment in the latter case is fully reported: see [1952] 2 All E.R. 751.
77
The words are those of Greene MR in Greenhalgh v Arderne Cinemas [1946] 1 All
E.R. 512 at 518.
78
This definition does not solve all the problematic cases. Suppose the only difference
between the classes is a difference in par values (thought by the Court of Appeal in
Greenhalgh v Arderne Cinemas Ltd [1946] 1 All E.R. 512 CA, to be enough to create
separate classes); or suppose the par values are the same but some shares are fully paid-
up and others only partly. The statute provides that its definition is satisfied even if the
rights to dividends of shares in the 12 months after allotment are different from those of
other shares with otherwise similar rights—as they might be if additional shares were
issued part-way through a financial year.
79Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland Newspaper and
Printing Co Ltd [1987] Ch. 1 at 15. Earlier editions of this book have argued for the
second view. For a full discussion see E. Ferran and L.C. Ho, Principles of Corporate
Finance Law, 2nd edn (Oxford: OUP, 2014), Ch.6.
80
Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland Newspaper and
Printing Co Ltd [1987] Ch. 1 at 15.
81
It also had preference shares but nothing turned on that. Clearly an attempt to vary
their class rights would have been subject to the equivalent of s.630.
82
Printing Co Ltd [1987] Ch. 1 at 15A–18A.
83
84 He instanced Eley v Positive Life Assurance Co (1875) 1 Ex.D. 20, on which see paras
3–16 and 3–23, above. It seems clear that in such a case the individual will have no
enforceable rights in the absence of an express contract with the company additional to
the articles.
Printing Co Ltd [1987] Ch. 1 at 16A–E.
86 i.e. Company B.
Printing Co Ltd [1987] Ch. 1 at 16G.
88
Printing Co Ltd [1987] Ch. 1 at 16A–17A.
89 Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland Newspaper and
Printing Co Ltd [1987] Ch. 1 at 17. He instanced as other examples, Bushell v Faith
[1970] A.C. 1099 (above, para.14–51); and Rayfield v Hands [1960] Ch. 1 (above,
para.3–24).
90
Printing Co Ltd [1987] Ch. 1 at 18A–22B.
91
Printing Co Ltd [1987] Ch. 1 at 22F–G. But he refrained from granting an injunction on
the ground that this would “prevent the company from discharging its statutory duties in
respect of the convening of meetings” (instancing s.368—though there had not in fact
been any requisition by its members under this section). The result was therefore that
Company A could hold the meeting if it wished but, if the resolution was passed, it
would nevertheless be ineffective in the light of the declaration unless Company B
consented.
94
See especially para.3–27 on “mere internal irregularities”.
95
As we have seen at para.15–53, the courts have been unwilling to undermine such
arrangements through use of their powers under s.306 of the Act.
96 See Bushell v Faith (above, para.14–51).
97
Russell v Northern Bank Development Corp Ltd [1992] 1 W.L.R. 588 HL. See Sealy,
[1992] C.L.J. 437; Davenport, (1993) 109 L.Q.R. 553; Riley, (1993) 44 N.I.L.Q. 34;
Ferran, [1994] C.L.J. 343.
98
Russell v Northern Bank Development Corp Ltd [1992] 1 W.L.R. 588 at 593.
99
In this case what was proposed was an increase in the company’s authorised capital
laid down in the memorandum. Whether the quoted principle applies to all powers
conferred on the company by the statute is unclear.
100
Southern Foundries (1926) Ltd v Shirlaw [1940] A.C. 701 HL.
101 Southern Foundries (1926) Ltd v Shirlaw [1940] A.C. 701 at 740–741.
102
Baily v British Equitable Insurance Co [1904] 1 Ch. 373 CA.
103British Murac Syndicate Ltd v Alperton Rubber Co Ltd [1915] 2 Ch. 186. The case
concerned the right of the plaintiff, under both the articles and a separate contract, to
appoint two directors to the board so long as he held 5,000 shares in the company.
Today, after the Cumbria Newspaper decision (see para.19–18, above) the claimant
might be protected as the holder of a class right.
105 Southern Foundries (1926) Ltd v Shirlaw [1940] A.C. 701 HL.
106 Russell v Northern Bank Development Corp Ltd [1992] 1 W.L.R. 588 at 593.
107 Russell v Northern Bank Development Corp Ltd [1992] 1 W.L.R. 588 at 595.
108On the enforcement of shareholder agreement see Greenwell v Porter [1902] 1 Ch.
530; and Puddephatt v Leith [1916] 1 Ch. 200, where a mandatory injunction was
granted to compel a shareholder to vote in accordance with his agreement. Some
shareholder agreements may make their adherents “concert parties”, thus triggering
provisions which impose obligations on a member of the shareholder group because of
the size of the group interest. See paras 26–19, 28–44 and 28–54, below.
109
cf. Greenhalgh v Mallard [1943] 2 All E.R. 234 CA. Of course, the selling
shareholder may be contractually bound to secure the adherence of the acquiring
shareholder, but even so it is difficult to make the arrangement completely water-tight by
purely contractual means, especially at the remedial level.
110
See, for example, Growth Management Ltd v Mutafchiev [2007] 1 B.C.L.C. 645;
and, generally, K. Reece Thomas and C. Ryan, The Law and Practice of Shareholders’
Agreements, 4th edn (London: LexisNexis, 2014). If the power which it is sought to
control is one which is exercisable by the board of directors, it may in addition be
necessary to alter the articles so as to shift the power in question to the general meeting
or to provide for its exercise by the board only with the consent of the general meeting
or to provide that the shareholders shall take all appropriate action to prevent the
company taking the steps to which a shareholder, exercising its rights under the
agreement, objects.
111 An offeror, where a trust is in operation, may acquire the majority of the shares but
still not be able to dismiss the incumbent management. Such trusts are common in the
Netherlands. See Ch.28, below.
CHAPTER 20
UNFAIR PREJUDICE
Introduction 20–1
Scope of the Provisions 20–4
Independent Illegality and Legitimate Expectations or
Equitable Considerations 20–6
Informal arrangements among the members 20–7
The balance between dividends and directors’
remuneration 20–10
Other categories of unfair prejudice 20–12
Prejudice and Unfairness 20–13
Unfair Prejudice and the Derivative Action 20–14
Reducing Litigation Costs 20–18
Remedies 20–19
Winding Up on the Just and Equitable Ground 20–21
Conclusion 20–23
INTRODUCTION
20–1
The statutory unfair prejudice provisions are surprisingly wide-
ranging, especially viewed against the patchy protections
considered in the previous chapter. Section 994(1),1 the first of
the six sections which constitute Pt 30 of the Act, provides that
any member may petition the court for relief on the ground:
“(a) that the company’s affairs are being or have been conducted in a manner which
is unfairly prejudicial to the interests of members generally or some part of its
members (including at least himself), or (b) that an actual or proposed act or
omission of the company (including any act or omission on its behalf) is or would
be so prejudicial.”
This provision repeats rather than reforms the provisions

previously found in s.459 of the Companies Act 1985, so the
older cases remain relevant.
Controlling shareholders are not in terms excluded from using
the section, although normally any prejudice they are subject to
will be remediable through the use of the ordinary powers they
possess by virtue of their controlling position, and so the conduct
of the minority cannot be said in such a case to be unfairly
prejudicial to the controllers.2 The section thus operates
primarily as a mechanism for minority protection—or, at least,
for the protection of non-controlling shareholders, for petitions
are often brought where there is an equal division of shares in
the company.
By referring to the conduct of the company’s affairs, the
section is clearly wide enough to catch the activities of
controllers of companies, whether they conduct the business of
the company through the exercise of their powers as directors or
as shareholders or both. The section can even apply to the
conduct of corporate groups. Although the conduct of a
shareholder, even a majority shareholder, of its own affairs is
excluded from the section, nevertheless, where a parent company
has assumed detailed control over the affairs of its subsidiary
and treats the financial affairs of the two companies as those of a
single enterprise, actions taken by the parent in its own interest
may be regarded as acts done in the conduct of the affairs of the
subsidiary; and in some cases conduct of the subsidiary’s
business may amount to conduct of the business of the parent.3
The “outside” shareholders in the subsidiary may thus use the
section to protect themselves against exploitation by the
majority-shareholding parent company.
20–2
The right to petition for relief under s.994 is conferred upon the
members of the company,4 but s.994(2) extends this right to non-
members to whom shares have been transferred5 or transmitted
by operation of law.6 As in the case of the derivative action,
where a similar extension applies, this provision is useful in
small companies where the directors of the company may
exercise the power they have under the articles to refuse to
register as a member a person to whom shares have been
transferred, especially as s.771 now requires directors to give
reasons for their refusal. If not within this extension, however, a
non-member will not be able to petition under the section.7 For
example, if the registered shareholder is a nominee, the person
with the beneficial interest in the shares cannot petition; the
nominee will, however, be a legitimate petitioner and the
interests the nominee may seek to protect include those of the
beneficiary.8
Section 995 permits the Secretary of State to petition if, as a
result of an investigation carried out into a company,9 he
concludes that the affairs of the company have been carried on in
a way that is unfairly prejudicial to the members (or some part of
them).
Finally, when an administration order is in force, s.994 is
supplemented by para.74 of Sch.B1 to the Insolvency Act 1986,
permitting any creditor or member to apply to the court on the
grounds that the administrator has acted in a way which has
unfairly harmed the interests of the applicant (or proposes to do
so) or on the grounds that the administrator is not performing his
or her functions as quickly or as efficiently as is reasonably
practical.10
20–3
When this section was first introduced in its modern form in
1980, it posed a considerable challenge to the traditionally non-
interventionist attitudes of judges in relation to the internal
affairs of companies.11 The extent to which the modern judges
have thrown off that traditional attitude emerges very clearly in
this chapter. The statutory remedy is capable of ranging very
widely over the conduct of corporate affairs; it can address
control of both shareholders’ voting powers, examined in the
immediately preceding chapter, and directors’ powers, examined
in Ch.14, as well as more subtle forms of unfairly prejudicial
management.
SCOPE OF THE PROVISIONS
20–4
Since the right to petition is drafted in deliberately wide terms,
the first problem for the courts has been to define its scope. It is
suggested that three main questions have arisen, all requiring the
court to decide whether to give the section (or, more accurately,
its predecessors) a wide or narrow operation.
First, should the reference to conduct which is unfairly
prejudicial to “the interests of members” be interpreted as
referring only to their interests “as members”, as with the
jurisprudence on the statutory contract in the articles?12
Decisions under very early predecessors to s.994 transposed this
restriction with full effect,13 but modern courts now take a more
flexible view. The point is an important one, since one very
common form of minority oppression is the expulsion of the
minority shareholder from a position on the board. Under a
narrow interpretation, this could not give rise to a remedy, since
it amounts to oppression qua director, not qua member.14 Now,
however, although the qua member restriction remains as part of
the unfair prejudice provisions, it is much more flexibly
interpreted, and its practical significance is therefore much
reduced. It is now accepted that the interests of a member, at
least in a small company, may be affected by his or her
expulsion from the board, whether because it was expected that
the return on investment would take the form of directors’ fees
or because a board position, even in a non-executive role, may
be necessary to monitor and protect the member’s investment.15
This approach is now settled, and not considered further.
Secondly, should the sections be seen simply as aimed at
providing a more effective way of remedying harms which,
independently of the unfair prejudice provisions, are in any case
unlawful, or should the remit be wider? This may be termed the
“independent illegality” issue. Once the modern statutory
wording had been adopted, the courts opted quite early on for the
wider approach,16 holding that the provisions are not concerned
simply with greater access and better remedies but, in addition,
are designed to render unlawful some types of conduct which,
apart from the sections, are not in any way unlawful. In many
ways this constitutes one of their most important judicial
contributions to the development of these provisions, although
the move creates its own problems. Deprived of the familiar
landmarks of established illegalities, what criteria should the
courts deploy in determining whether conduct is unfairly
prejudicial, i.e. unlawful in s.994 terms? This is the second main
issue which has faced the courts and it is the one which has
absorbed the greatest amount of judicial thought and effort. It is
considered in more detail below. In the courts’ handling of this
issue we see most clearly what amounts to a partial revolution in
judicial attitudes to becoming involved in the internal affairs of
companies.
20–5
Finally, whether or not the courts had extended the range of
unfairly prejudicial conduct beyond conduct which is
independently unlawful, there remains an important issue of the
relationship between the unfair prejudice remedy and the
derivative action. When a wrong has been committed against the
company, may a shareholder leap over the restrictions on
bringing a derivative action, formerly contained in the rule in
Foss v Harbottle and now set out in the statute,17 by presenting a
petition founded upon unfair prejudice and obtaining in this way
a remedy for the company? Or is the petitioner under s.994
confined to the recovery of personal losses? In other words, are
the unfair prejudice petition and the derivative action aimed at
redressing different wrongs and, if so, how does one distinguish
between them? This is the third issue which we shall consider in
more detail after taking a closer look at the second.
INDEPENDENT ILLEGALITY AND LEGITIMATE EXPECTATIONS OR
EQUITABLE CONSIDERATIONS
20–6
In modern law, giving courts the power by statute to control the
exercise of discretion by persons or institutions on grounds of
“unfairness” is hardly novel.18 Yet such open-ended legislation,
which in effect involves a sharing of the legislative function
between Parliament and the courts, always presents the courts
with the challenge of how to develop on a case-by-case basis
criteria by which the imprecise concept of “fairness” can be
given operational content. As we remarked above, the challenge
was particularly acute for the courts in relation to the unfair
prejudice remedy, for the tradition of the courts was not to
interfere in the internal affairs of companies.
The important steps taken by the courts can be characterised
by saying that the courts recognised that s.994 protects
expectations and not just rights. Borrowing from public law, it is
sometimes said that the section protects the “legitimate
expectations” of the petitioner, though more recently the courts
have preferred the private law phrase “equitable
considerations”.19 Whatever the language used, the difficult issue
is to distinguish those expectations of the petitioner which are to
be classified as “legitimate”, and so deserving of legal
recognition and protection, from those expectations which the
petitioner may harbour as a matter of fact but which the courts
will not protect. Put in more modern terms, the task is to
distinguish those equitable considerations which merit a judicial
response from those which do not. It is suggested that the
decisions of the courts to date have succeeded in identifying one
clear class of legitimate expectation or equitable consideration,
and have hinted at a range of other situations where s.994 may
be prayed in aid, but without developing any of them in a
comprehensive way. We begin with the clearly established
category.
Informal arrangements among the members
20–7
This category of legitimate expectation or equitable
consideration has been described as follows: it “arises out of a
fundamental understanding between the shareholders which
formed the basis of their association but was not put into
contractual form”.20 What this principle recognises is that the
totality of the agreement or arrangements among the members of
the company may not be captured in the articles of association.
This may be so for a number of reasons, but predominantly, it is
suggested, because of a desire to avoid transaction costs when
establishing a company or when admitting a new person to
membership of the company. It will be cheaper to adopt some
standard, or only slightly modified, form of articles rather than to
bargain out in detail and then incorporate into the articles a
customised set of rules dealing with every aspect of the
company’s present and likely future method of operation, the
future being in any case inherently unpredictable. This is
especially likely to be the case for small “quasi-partnership”
companies where the incorporators21 know each other well and
may have worked out a successful method of operation when
trading in unincorporated form whose translation into a formal
document they would see as a needless expense. However, it
would seem that the correct analysis is that a company is a quasi-
partnership because of the particular understandings among its
members, not that the understandings exist because the company
is a quasi-partnership.
When things eventually go wrong—and small companies
emulate marriages in the frequency and bitterness of their
breakdown—the precise provisions of the articles may seem
almost irrelevant to the petitioner’s sense of grievance. The
unwritten understandings upon which the members of the
company operate will come to the fore. Adding to the
complications, these understandings will also include
assumptions that, where powers are exercised, they are exercised
within the law—for example, powers conferred upon the board
will be exercised in accordance with the fiduciary duties of
directors—with the result that breaches of fiduciary and other
duties may be tied into the shareholders’ arrangements as well.22
The range of expectations which may be protected in this way
is open-ended, although the most common is undoubtedly the
petitioner’s expectation that he or she would be involved in the
management of the company through having a seat on the
board.23
20–8
It is important to grasp, however, that this category of legitimate
expectation depends crucially upon the factual demonstration
that an informal agreement or arrangement, generating the
expectation relied upon, did exist outside the articles and
supplementing them. The “starting point”24 of the court’s
analysis will be the articles of association and “something more”
will be required to move the court from the view that “it can
safely be said that the basis of association is adequately and
exhaustively laid down in the articles”.25 If that factual
demonstration cannot be made, the petitioner’s case will fail,26
For example, in Re Coroin Ltd,27 David Richards J refused to
recognise legitimate expectations where the founding members
of the company were a group of highly sophisticated and
experienced investors with little by way of prior relationship,
investing in a project worth many hundreds of millions of
pounds, and governed by lengthy and complex formal
documentation. As he put it, “I find it hard to imagine a case
where it would be more inappropriate to overlay on those
arrangements equitable considerations of the sort discussed by
Lord Wilberforce[28] and Lord Hoffmann[29]”. It follows from
this that this category of protected expectations is almost wholly
confined to companies with small, even very small, numbers of
members, probably with relatively unsophisticated governance
arrangements. Beyond such companies it becomes increasingly
difficult to demonstrate, first, that there was any relevant
informal arrangement; and, secondly, that all the members of the
company were parties to it.30
This approach on the part of the courts was confirmed, indeed
re-emphasised, in the first decision of the House of Lords on
what is now s.994, O’Neill v Phillips.31 The leading judgment
was given by Lord Hoffmann, whose own rise through the
judicial hierarchy has roughly coincided with that of the unfair
prejudice case law and who has had a particular influence upon
its development. Their lordships’ endorsement of the dominant
approach in the lower courts was accompanied, however, by a
shift in terminology from the public law language of “legitimate
expectations” to the more traditional private law phraseology of
constraining the exercise of legal rights by reference to
“equitable considerations”.
Although on its face not obviously more restrictive than
“legitimate expectations”, the purpose of the phrase “equitable
considerations” was to anchor more firmly the courts’
assessment of what might constitute unfair conduct in the face of
the formal and informal bargain struck by the shareholders of the
company. Their lordships feared that lower courts might treat the
legitimate expectations test as a licence to “do whatever the
individual judge happens to think fair”32 in the light of the
petitioner’s expectations. Instead, the correct approach was to
ask whether there were equitable considerations which required
the exercise of the majority’s undoubted powers under company
law or the company’s constitution to be constrained in any way
by reference to the bargain which the members of the company
had struck, a bargain which, in its totality, might be located in
informal, non-legally enforceable understandings between the
members as well as in the company’s formal constitution.33 This
more “contractual” approach to the assessment of unfairness
under s.994 might admit not only of an approach based on
analogy with breach of contract but also with other doctrines for
the discharge of contracts, for example, frustration, where the
majority used its legal powers to keep the association on foot in
circumstances in which the original agreement between the
parties had become fundamentally changed.34
Their lordships thought that legal certainty would be promoted
by the expulsion from this area of “some wholly indefinite
notion of fairness”35 and the costs of litigation would be reduced
by discouraging lengthy and expensive hearings which ranged
over the full history of the company and the relationships among
its members. They rejected the view of the Law Commission36
that the contractual definition of unfair prejudice would unduly
limit the scope of the section, but seemingly more on the
grounds that some limitation was a price worth paying for legal
certainty than on the grounds that all deserving cases would in
fact fall within the section on the contractual approach.37 The
CLR endorsed the policy balance struck by the House of Lords,38
and the 2006 Act thus seeks to repeat rather than to reform the
unfair prejudice provisions previously contained in the 1985 Act.
20–9
In O’Neill itself, the not-uncommon situation arose in which the
founding entrepreneur, who had built up the business,
increasingly handed over control to a trusted employee (the
petitioner), allowing him to acquire a quarter of the shares in the
company. Later the petitioner became managing director of the
company, receiving half its profits, and there were talks about
his acquiring one-half of the share capital. However, an
economic downturn occurred and the company began to falter;
the founder removed the petitioner from his managing
directorship, taking back the reins himself, and paid the
petitioner only a salary and the dividends due on his 25 per cent
shareholding. This treatment of the petitioner, who resigned, was
held not to be unfairly prejudicial because there was no
agreement between the parties, even at an informal level, that the
petitioner should be entitled to receive half the profits, except for
so long as he acted as managing director, or that he should be
entitled to increase his shareholding to one-half.
The result is that the strict legal rights of the majority,
deriving from the articles of association or the Companies Act,
may be subject to “equitable considerations”39 which channel
and restrict the discretion which the majority would otherwise
have, where it can be shown that the members came together on
the basis that those legal rights should not be entirely freely
exercisable. It is suggested that putting the proposition in this
way enables us to explain both the vigour with which the courts
have developed this aspect of unfair prejudice and the limited
conceptual nature of the development. As we have already said,
the difficulty for the courts, when they abandon illegality as the
touchstone of unfairness, is that the choice of criteria for judging
whether s.994 has been breached seems to be at large. The
“informal arrangement” category of unfair prejudice provides a
partial answer to this problem. The courts can claim to be, and
indeed are, using as the criteria for judging unfairness the
standards laid down, albeit informally, by the members
themselves, and the judges can thus avoid the more challenging
task of developing their own criteria. These considerations
explain, it is suggested, the emphasis in the Ebrahimi case40 that
the equitable considerations do not flow simply from the nature
of the company as a quasi-partnership but require “something
more” in the shape of proof of the existence of an informal
agreement concerning, say, the participation by the minority in
the management of the company. As we have seen, this
requirement has been fully absorbed into the unfair prejudice
case law. The company’s formal constitution is the “starting
point” for judicial analysis because “keeping promises and
honouring agreements is probably the most important element of
commercial fairness”.41 Informal qualifications and supplements
to the written constitution must be proved to have been agreed.
And even when they are proved, the “extended” agreement sets
the boundaries of the courts’ intervention. Thus, in Re JE Cade
and Son Ltd,42 Warner J denied the proposition that:
“where such equitable considerations arise from agreements or
understandings between the shareholders dehors the constitution
of the company, the court is free to superimpose on the rights,
expectations and obligations springing from those agreements or
understandings further rights and obligations arising from its
own concept of fairness. There can in my judgment be no such
third tier of rights and obligations.”
The balance between dividends and directors’
remuneration
20–10
Where the petitioner has never been, or has ceased to be, a
director of the company, a frequent cause of dispute is the
payment of excessive remuneration to the directors of the
company and the failure to declare dividends payable to all the
shareholders. However, absent any special agreements (whether
formal or informal), minority shareholders have no legitimate
expectation that dividends will be paid just because they are
shareholders, even shareholders in a quasi-partnership
company.43 On the other hand, there may be particular
circumstances in which the payment of no or only derisory
dividends (or the failure to consider properly whether or not
dividends should be declared44) will amount to unfair prejudice,
for example, where there was an arrangement that all the profits
of the company would be taken out of the company in one way
or another; that the fiscally efficient way of doing this had been
to pay large remuneration to the directors; and that the fact that
the petitioner was not a director deprived the petitioner of any
share of the profits.45 The court has also refused to strike out a
petition alleging that the non-payment of dividends produced a
disparity between the petitioner and the respondents as far as
their participation in the profits of the company was concerned,
because the respondents obtained their return through the
payment of directors’ remuneration and other benefits provided
by the company to the directors, whilst the petitioners were
excluded from any substantial return.46
As far as the payment of directors’ remuneration to the
controllers is concerned, which is often the other side of the coin
of the non-payment of dividends, it is perhaps obvious that it
may be a ground for a successful petition if the directors have
fixed their remuneration in disregard of the provisions of the
articles governing that matter.47 Where the controllers have
executive positions within the company and the petitioner does
not, it may well be fair that the returns which the controllers
receive via directors’ salaries and perks exceed those of the
petitioner, obtained via dividends. However, where the proper
procedures for fixing the directors’ remuneration have not been
followed, the courts, perhaps surprisingly, have not shrunk from
embarking on the exercise of determining whether the directors’
remuneration package is excessive in order to establish whether
the petitioner has suffered from unfair prejudice. The appropriate
level of remuneration for the directors is to be determined by
reference to “objective commercial criteria” in order to see
whether the remuneration was “within the bracket that
executives carrying that sort of responsibility and discharging
the sort of duties [the respondent] was would expect to
receive”.48
As described in the previous section, any consideration of
breaches of the articles or general law in the context of unfair
prejudice petitions must inevitably be modified in the light of the
parties’ own private agreements, both formal and informal. It
seems that there are no special rules about unfair prejudice
applicable in this situation, but rather that the principles
discussed above should be applied.
20–11
Any charge of unwarranted intervention by the courts in the
internal affairs of companies can be easily rebutted, because it is
the members’ own standards which the courts are purporting to
enforce.49 On the other hand, because, at least in small
companies, the articles systematically fail to capture the full
agreement between the members, the development of this case
law has brought company law into much greater touch with
corporate reality and, as the amount of litigation shows, has
addressed a previously unmet legal need.
Other categories of unfair prejudice
20–12
Although the case law is dominated by the informal arrangement
category of unfair prejudice, the wording of the section in no
way permits the courts to confine its scope to such cases.
However, beyond informal arrangements and the linked
argument that the controllers have committed breaches of their
fiduciary duties, the issue of how to set the bounds of the courts’
intervention arises in an acute way. Probably for this reason
alone, no further, clearly defined categories of unfair prejudice
can be found in the case law, though one can find a number of
cases where allegations of unfair prejudice have been accepted
outside the categories mentioned above. An examination of these
cases is of particular importance in assessing the significance of
s.994 outside the small company field.
A feature of some of them is reasoning by analogy from
established standards, that is, using the unfair prejudice
provisions to extend established rules into related areas where
the provisions do not formally apply. Thus, in Re A Company50
the court used the provisions of the City Code on Takeovers and
Mergers as a guide to what s.994 requires the directors of a
target company to do by way of communication with their
shareholders, even though the target was a private company and
so outside the formal scope of the Code.51 In McGuinness v
Bremner Plc52 the judge found a useful analogy in art.37 of the
then current version of Table A, even though the company in
question had not adopted that version, when deciding whether
delay on the part of the directors in convening a meeting
requisitioned by the petitioners was unfairly prejudicial. Again,
such reasoning by analogy plays a useful role in defending the
courts against the charge of unwarranted or inexpert
interference.
However, an appropriate analogy will not be available in all
cases. Then the court may have to face the task of developing its
own criteria of fairness. For example, the company may have
adopted a policy of paying only low dividends, although
financially able to do better and even though the controllers have
been able to obtain an income from the company by way of
directors’ fees. Is that unfairly prejudicial to the interests of the
non-director shareholders, even in the absence of any informal
understanding as to the level of dividend pay-outs or as to the
participation of the petitioner in the management of the company
as a director (thus entitling him to directors’ fees)? The courts
have shown themselves willing to entertain such claims under
s.994, but have not yet had to adjudicate on their merits in cases
where there is otherwise no breach of general duties or private
arrangements.53 The issue could be approached on the basis that
the court undertakes the task of working out the appropriate
distribution policy for the company (or for companies of that
type), which seems unlikely, or by asking the question whether
the policy in question unfairly discriminated between the
insiders with their directorships and the outsiders who were only
shareholders.54
PREJUDICE AND UNFAIRNESS
20–13
In a number of cases the courts have stressed that the section
itself requires prejudice to the minority which is unfair, and not
just prejudice per se. Sometimes what was done to the petitioner
was unfair, but it caused him or her no prejudice, for example,
because no loss was inflicted: in these cases s.994 is not open.55
Usually, however, prejudice, typically of a financial sort, is
obvious in these cases.56
More commonly, it is the unfairness requirement which
debated. In many cases “unfairness” is simply another way of
putting the point that only legitimate expectations are protected
by the section, not every factual expectation which the petitioner
may entertain. Thus, a shareholder who needs the money may be
prejudiced by the failure of the company to adopt a scheme for
the return of capital to its shareholders, but it does not follow
that there was anything unfair in the company’s decision to
retain the capital in the business, in the absence of a formal or
informal understanding that the company’s capital would be
returned at a certain point in its life.57
In other and more interesting cases the petitioner appears to
have a prima facie case for the protection of s.994, but the
petitioner’s own conduct means that he or she is not granted
relief. There is no requirement that the petitioner come to the
court with clean hands, but the petitioner’s conduct might mean
that the harm suffered was not unfair or that the relief granted
should be restricted. Thus, in Grace v Biagioli58 the petitioner
had been removed from his directorship, contrary to the
agreement between himself and the three other persons involved
when the company was set up, which would normally be a clear
example of unfair prejudice. However, the petitioner had put
himself in a position of conflict by seeking to purchase a
competing company, which act was held by the Court of Appeal
to justify his removal in breach of the agreement, so that the
prejudice to the petitioner could not be said to be unfair to him.
Again, the petitioners may have consented to, and even benefited
from, the company being run in a way which would normally be
regarded as unfairly prejudicial to their interests59; or they might
have shown no interest in pursuing their legitimate interest in
being involved in the company.60
The test of whether the prejudice was unfair is an objective
one, but this means no more than that unfair prejudice may be
established even if the controllers did not intend to harm the
petitioners.61 The question is whether the harm which the
petitioner has suffered is something he or she is entitled to be
protected from. It has been suggested that a fall in the value of
the petitioners’ shares is a touchstone of unfairness, but this
seems to be incorrect. The exclusion of petitioners from the
management of the company in breach of their legitimate
expectation of involvement would not necessarily have any
impact upon the value of the company’s shares, whilst, on the
other hand, those shares might fall in value as a result of a
managerial misjudgement which was in no way unfair to the
petitioners.
UNFAIR PREJUDICE AND THE DERIVATIVE ACTION
20–14
It may seem odd at first sight that a right of petition vested in the
individual member might potentially be used to secure the
redress of wrongs done to the company, especially those
committed by its directors. Directors’ duties are owed, normally,
to the company, not to individual shareholders. However, the
unfair prejudice provisions are drafted so as to protect the
interests of the members and not just their rights,62 and it cannot
be denied that a wrong done to the company may affect the
interests of its members. Before the introduction by the 1989
Companies Act of the words “of its members generally” into
s.459 of the 1985 Act, there was an argument that a wrong done
to the company, which affected all the members equally, fell
outside the section,63 but that argument is no longer available.
The Jenkins Committee, whose report recommended the
introduction of the unfair prejudice remedy, envisaged that it
would have a role in relation to wrongs done to the company:
“In addition to these direct wrongs64 to the minority, there is the type of case in
which a wrong is done to the company itself and the control vested in the majority
is wrongfully used to prevent action being taken against the wrongdoer. In such a
case the minority is indirectly wronged.”65
However, there is an ambiguity here: did the Committee mean

simply that, where a wrong done to the company has also
inflicted harm on the shareholder, the member should be able to
use s.994 to obtain redress for that personal harm? If so, that
seems uncontroversial: there are a number of reported cases
under the current legislation in which petitions have been
entertained by the courts where the wrongdoers’ conduct
consisted wholly or partly of wrongs done to the company.66 The
courts have even gone so far as to refuse to accept that the actual
availability of a derivative action constitutes a bar to an unfair
prejudice petition.67 As Hoffmann LJ (as he then was) has said:
“Enabling the court in an appropriate case to outflank the rule in
Foss v Harbottle was one of the purposes of the section”.68
Alternatively, the Committee may have meant that the court
could award relief to the company in a s.994 petition to redress
the harm done to it. This approach raises a difficulty in the light
of the reforms to the derivative action made by the 2006 Act and
discussed in Ch.17. Thus, the question is, what sort of
“outflanking” of the derivative action rules is envisaged?
Whereas it may just possibly have been legitimate to view the
unfair prejudice remedy as designed to overcome the excessively
strict limitations on the derivative action imposed by the
common law, it will hardly conduce to a coherent reading of the
statute to allow the unfair prejudice provisions to be interpreted
so as routinely to side-step the reformed statutory regime
governing the derivative action.
The problem is not material if the “outflanking” is merely that
s.994 provides another route to a court-ordered derivative claim
seeking a remedy for wrongs done to the company. This is
expressly acknowledged in the Act.69 In addition, the court, in
the exercise of its remedial discretion under s.996, may have
regard to the range of factors listed in Pt 11 of the Act as
applying to the standard statutory derivative action. These
recognise it is not always in the company’s interests to enforce
its legal rights, even when enforcement is likely to be successful.
And in any event, it will not normally be attractive for a
shareholder to bring a petition to obtain authority to commence a
second piece of litigation as opposed to seeking permission
directly under Pt 11 to commence derivative litigation.
20–15
But even in this regard, notice that the pre-requisites for success
on each route are different. An attempt to address this difficult
problem by distinguishing between corporate and personal loss
was made by Millett J in Re Charnley Davies Ltd (No.2),70
which involved a petition under the Insolvency Act claiming that
the administrator had breached his duty of care to the company
by selling its business at an undervalue and ought to pay
compensation to the company. Whilst holding that on the facts
there had been no breach of duty, he nevertheless went on to
consider in dicta the relationship between a petition based on
unfair prejudice and the derivative action. The learned judge
thought that an allegation that the controllers as directors had
breached their duties to the company was not sufficient to found
a petition. What needed to be shown was that there was also
conduct on the part of the controllers which was unfairly
prejudicial to the minority. If the shareholder wished to complain
simply of the breach of duty by the directors, this could not be
done by petition. The shareholder must sue instead on behalf of
the company and subject to the standing restrictions of the
derivative action. In the petition the gist of the action is not the
wrong done to the company but the disregard by the controllers
of the interests of the minority.
This suggests that the answers to the difficult questions of
which complaint the petitioner is seeking to make and of
whether the petition is the appropriate vehicle turn very largely
on the nature of the remedy sought. In Re Charnley Davies the
petition sought compensation for the company, for which, it was
said, an unfair prejudice petition was inappropriate, whereas a
claim that the controllers purchase the petitioners’ shares at an
appropriate price would have indicated that the gist of the
complaint was unfair prejudice to the minority.71 In short, the
suggestion was that, whilst an unfair prejudice petition might
arise out of breaches of duty owed by directors to the company,
unfair prejudice to the petitioner was the ground for any relief
granted; and the relief that might be claimed in a petition was
confined to personal remedies and might not include corporate
relief. This approach might be thought to fit in well with the
view of the Jenkins Committee72 that the harm to the
shareholders in such cases is “indirect” and that the wrong to
them consists, not in the wrong done to the company, but in the
controllers’ use of their position to prevent action being taken to
redress the wrong done to the company. The remedy in the
petition should thus address the indirect wrong to the
shareholder, not the direct wrong to the company. Admittedly
this might be done very straightforwardly by ordering pursuit of
a derivative claim, but the analysis delivering this conclusion
does rather suggest that the claimant has selected the wrong
starting point, and should have commenced the claim under Pt
11. And this in turn seems to contradict the explicit inclusion in
s.996(2)(c) of the remedial option of a derivative claim.
Whatever the answer to the previous question, it deals with
process more than substance. On substance, the crucial questions
in this area are two: first, in a s.994 petition, can the court order
a remedy in favour of the company rather than the petitioner?
And, secondly, if it does not do that, can it order a remedy in
favour of the petitioner which might be characterised as
representing an impermissible claim to recover reflective losses?
73
20–16
Given the breadth of the courts’ discretion as set out in s.996, the
answer to the first question is surely yes. Despite initial caution,
there have been a number of cases at appeal court level in which
corporate remedies have been granted in an unfair prejudice
petition. In Anderson v Hogg74 the Inner House of the Court of
Session (Lord Prosser dissenting) awarded relief to the company,
where the unfair prejudice was based on an unlawful payment by
the respondent director of remuneration to himself. Without
detailed consideration of the point, the director was ordered to
return the money to the company. More important, perhaps, the
court came close to rejecting Millett J’s proposition in Re
Charnley Davies that proof of illegality on the part of the
director as against the company is not by itself enough to
demonstrate unfair prejudice to the petitioning shareholder.
Since that case involved in essence a two-person company which
was in course of solvent liquidation, the distinction between
illegality to the company and unfairness to the shareholder was
in that instance very fine. Clark v Cutland75 was a somewhat
similar case involving a petition about a two-person company
where the controlling director had made large and unauthorised
payments to himself, this time by way of contributions to his
pension fund. Although the decision was principally about other
matters, the Court of Appeal did order the unauthorised
payments to be restored to the company and indeed was prepared
to contemplate that, as in a derivative action,76 the costs of the
litigation should be borne by the company. However, this
decision may not be as dramatic as it seems, since the litigation
began as separate derivative and unfair prejudice cases, which
were later consolidated into the unfair prejudice application.77
Thus, at an early stage in the derivative action the then
applicable standing rules were presumably satisfied, so that
granting corporate relief in the unfair prejudice petition would
not be objectionable on the ground identified above.
In the corporate opportunity case, Bhullar v Bhullar,78 which
we considered in Ch.16 and which again concerned a two-person
—or, at least, a two-family company—the litigation was always
in the form of an unfair prejudice petition and, indeed, the
petitioners sought the traditional personal relief in such a
petition, namely, the compulsory purchase of their shares at a
fair price by the respondents. However, the initial petition also
sought permission to bring a derivative action in the company’s
name. The trial judge refused the compulsory purchase order but
ordered direct corporate relief by declaring the property in
question to be held on trust for the company. The Court of
Appeal did not demur from this way of proceeding. It may be
that in this case the court took the view that the facts upon which
a derivative suit would be based and the petitioner’s standing to
sue derivatively had been clearly established in the petition and
that it would be simply a waste of time and money to have a
further action commenced by writ, and so corporate relief was
granted immediately. However, it is notable that the Court of
Appeal did not think it necessary to address this issue.
The most extensive discussion of the principles at issue in this
area is to be found a decision of only persuasive authority, Kung
v Kou, a decision of the Court of Final Appeal of Hong Kong.79
Although petition in the case was ill-conceived and there were
some differences of emphasis in the judgments of Bokhary PJ
and Lord Scott of Foscote NPJ, the issue of whether an unfair
prejudice petition could be used to avoid the standing rules of
Foss v Harbottle was addressed head-on and answered in the
negative. This answer did not mean that allegations of breaches
of duty by directors are irrelevant in unfair prejudice
proceedings, for example, as a basis for making out a claim for
relief to be granted to the member. Nor did it mean that the court
can never at the end of an unfair prejudice petition hearing grant
a remedy in the company’s favour. However, in order to do that
the court would have to hear both the company’s claim and the
member’s claim together. This would be appropriate only in
“rare and exceptional” circumstances (per Bokhary PJ) or where
at the pleading stage of the petition it was clear that “the
director’s liability at law to the company can conveniently be
dealt with in the hearing of the petition” (per Lord Scott of
Foscote). Otherwise, the petitioner should seek an order in the
petition to bring a derivative action on behalf of the company or,
under the new Act, make such an application directly to the court
rather than through the unfair prejudice petition.
20–17
It is submitted that the decision in Kung v Kou is based on the
correct principles and that the unfair prejudice petition is
normally confined to relief in respect of harm personal to the
minority shareholder.
As to the second question, and whether personal remedies in
favour of the petitioner are subject to the “no reflective loss”
principle, the answer is less clear. The most common remedy in
s.994 cases is an order for the compulsory purchase of the
petitioner’s shares. The purchase price may indeed contain an
element which would otherwise constitute reflective loss, but
that is by way of delivering a clean break to the petitioner in
circumstances where it is the proven unfairly prejudicial conduct
which has reduced the value of the petitioner’s shares. The cases
are considered below.80
REDUCING LITIGATION COSTS
20–18
A major issue which has emerged under the unfair prejudice
jurisdiction is the length and, therefore, the cost of trials of these
petitions. Although the decision of the House of Lords in O’Neill
v Phillips81 has done something to reduce the scope of the issues
to be explored, the court may still find itself trawling through a
great deal of the history of the relations between petitioner and
respondent, to establish, first, the existence of any informal
understandings and, secondly, whether they have subsequently
been breached. All this will typically occur in relation to small
companies, whose net value may not be large. Both the Law
Commission and the CLR investigated a number of ways of
reducing the costs of unfair prejudice litigation, but all were
ultimately rejected as ineffective, either by the Commission or
the Review,82 except for a suggestion that an arbitration scheme
be developed as an alternative to litigation before the High
Court,83 plus reliance on the newly introduced general system of
case management in the civil courts for those cases not going
down the arbitral route.
However, the courts themselves have developed a technique
for encouraging an agreed solution to unfair prejudice claims.
Where it is clear, as it will normally be, that the relationship
between the petitioner and the remainder of the members cannot
be reconstituted by the court and that the only effective remedy
available to the minority is to have their shares purchased at a
fair price, then if a suitable ad hoc offer is made to the petitioner
for the purchase of the shares or there is a suitable mechanism to
this effect in the company’s articles, but the petitioner decides to
proceed with the petition, rather than to accept the offer or use
the mechanism, that will be seen to be an abuse of the process of
the court and the petition will be struck out. In O’Neill v
Phillips84 Lord Hoffmann was as keen to endorse and encourage
this procedure as he was to set out the basis of the unfair
prejudice claim itself. His lordship thought that a petitioner
could not be said to have been unfairly prejudiced by the
respondent’s conduct if:
(a) the offer was to buy the shares at a fair price, which normally
would be without a discount for their minority status (see
below);
(b) there was a mechanism for determination of the price by a
competent expert in the absence of agreement;
(c) to encourage agreement the expert should not give reasons
for the valuation;
(d) both sides should have equal access to information about the
company and equal freedom to make submissions to the
expert; and
(e) the respondent should be given a reasonable time at the
beginning of the proceedings to make the offer and should
not be liable for the petitioner’s legal costs incurred during
that period.
Cases where an offer from the respondent has not blocked a
petition have usually involved offers which did not give the
petitioner all he or she would get if successful at trial85 or have
involved valuation by a non-independent expert.86 The offer
which the court has to evaluate may be an ad hoc one or may
result from the application of provisions in the company’s
articles laying down a mechanism to be used where a
shareholder wishes to dispose of his or her holding. Although the
courts once took a different view, it does not now appear that an
offer arising out of the mechanism contained in the articles is to
be treated differently from an ad hoc offer, in terms of its effect
in excluding an unfair prejudice provision.87
REMEDIES
20–19
Section 996 gives the court a wide remedial discretion to “make
such order as it thinks fit for giving relief in respect of the
matters complained of”. In addition to this general grant, five
specific powers are given to the court by s.996(2), of which
undoubtedly the most commonly used is an order that the
petitioners’ shares be purchased by the controllers or the
company.88 The reason for the popularity of this remedy, with
both petitioners and courts, is readily explained. Unfair prejudice
jurisprudence is most firmly established in relation to quasi-
partnership companies. When business and, often, personal
relations between quasi-partners have broken down and are
incapable of reconstitution by a court, the only effective remedy
is the minority’s exit. A share purchase order gives the petitioner
an opportunity to exit from the company with the fair value of
his or her investment, a result which is usually impossible in the
absence of a court order, since often no potential purchasers of
the shares are available or, even if they were, the purchase price
a third party would be willing to pay would reflect, rather than
remedy, the harm inflicted on the seller by the unfairly
prejudicial conduct.89
The crucial question in this buy-out process is how the court is
to assess the fairness of the price to be paid for the shares. Two
important issues have emerged in the valuation process. The first
is whether the petitioner’s shareholding should be valued pro
rata to the total value of the company or whether its value should
be discounted on the basis that it is ex hypothesi a minority
holding and so does not carry with it control of the company. In
this context the notion of a “quasi-partnership” company has
become important. Although many unfair prejudice proceedings
concern such companies, the statutory provisions are not
confined to them. However, in relation to whether a minority
shareholding should be discounted, the courts have developed a
presumption that it should not in a quasi-partnership company,
whereas no such presumption applies for other categories of
company.
In Re Bird Precision Bellows Ltd90 it was established that the
principle was pro rata valuation where the company could be
characterised as a quasi-partnership. This is because, in a true
partnership, upon dissolution of the partnership the court orders
a sale of the partnership business as a going concern and divides
the proceeds among the partners according to their interests in
the former partnership.91 However, the normal principle in
company law of discounting a minority shareholding applies if
the company is not a partnership carried on in corporate form or
if the petitioner had bought the shareholding at a price which
reflected its minority status or it had devolved upon him or her
by operation of law.92 The concept of a quasi-partnership
involves more than simply the company having a small number
of members. The members must have set up their association on
the basis of mutual trust and confidence, expect to be involved in
the management of the company (though the existence of clearly
defined “sleeping partners” would not defeat this requirement),
and there must be some degree of lock-in of the members to the
company,93 although these are cumulative preconditions and the
presence of one or more of these factors may suffice.94
20–20
The second question is whether the valuation should be on the
basis that the company will continue as a going concern, or on a
liquidation or break-up basis, which would normally yield a
lower value for the company. The going concern basis will
normally be appropriate, but this will depend to some degree on
the facts of the case, as will the precise method to be adopted for
valuing the going concern.95
A further issue concerns timing. The value put on shares,
whether on a pro rata or a discounted basis, will often depend
crucially on when the value of the company is assessed. The
courts have given themselves the widest discretion to choose the
most appropriate date. The competing dates are usually a date
close to when the shares are to be purchased or the date when the
petition was presented. In Profinance Trust SA v Gladstone,96 the
Court of Appeal thought that the former had become the
presumptive valuation date, but that there were many
circumstances when an earlier date might be chosen, for
example, where the unfairly prejudicial conduct had deprived the
company of its business, where the company had reconstructed
its business or even that there had been a general fall in the
market since the presentation of the petition. In Re KR Hardy
Estates Ltd,97 however, the court held that on the particular facts
of that case, the date of the order was the most appropriate date
since it had the advantage of certainty and seemed to be the most
fair.
Although a buy-out of the minority is the most common
remedy, it is not always the most appropriate one, and s.996
gives the courts a wide range of other possible remedies. These
include compensation, to which it is not yet clear whether the
“no reflective loss” principle applies.98
WINDING UP ON THE JUST AND EQUITABLE GROUND
20–21
Legal protection for minority shareholders is now dominated by
the unfair prejudice remedy, but, despite its remedial flexibility,
the court cannot thereby order the winding-up of the company in
question. The Law Commission recommended that this power
should be added to the range of remedies available to the court
for the redress of unfair prejudice,99 but the CLR rejected this on
the ground that it was open to abuse for the reasons discussed
below.100 There is, instead, a separate procedure by which a
minority shareholder may seek to have the company wound up.
A company may be wound up compulsorily by the court on a
petition presented to it by a contributory101 if the court is of the
opinion that it is “just and equitable” to do so. This provision,
now contained in s.122(1)(g) of the Insolvency Act 1986, has a
long pedigree in the law relating to companies, and the power
can be traced back to the Joint Stock Companies Winding-up
Act 1848. The provision was influenced by (then uncodified)
partnership law and was originally used mainly in cases where
the company was deadlocked. In the course of the twentieth
century it has been moulded by the courts into a means of
subjecting small private companies to equitable principles
derived from partnership law when they were in reality
incorporated partnerships. The apotheosis of this use of the
section, the decision of the House of Lords in Ebrahimi v
Westbourne Galleries Ltd,102 was also highly influential in the
courts’ development of their powers under the predecessors of
s.994.
Despite its remarkable substantive development, the winding
up provision always suffered from a weakness at the remedial
level: if the company was prospering, presenting a “just and
equitable” petition was tantamount to killing the goose that
might lay the golden egg (although the threat of liquidation
might induce the parties to negotiate an alternative solution to
their dispute). So long as the oppression remedy was hobbled by
the restrictive wording and interpretation associated with s.210
of the Companies Act 1948, the winding-up petition was better
than nothing. But, with the introduction of the unfair prejudice
remedy, one might argue that the role of the winding-up remedy
should now be restricted.
A winding-up petition triggers s.127 of the Insolvency Act
1986, which requires the court’s consent for any disposition of
the company’s property after the petition is presented. This
ability to paralyse, or at least disrupt, the normal running of the
company’s business adds to the negotiating strength of the
petitioner, but is hardly legitimate if an unfair prejudice petition
could give him or her all that is warranted. Consequently, a
Practice Direction103 seeks to discourage the routine joining of
winding-up petitions to unfair prejudice claims, unless a
winding-up remedy is what is genuinely sought. The force
behind the Practice Direction is provided by s.125(2) of the
Insolvency Act 1986, to the effect that the court need not grant a
winding-up order if it is of the opinion that some alternative
remedy is available to the petitioners and that they have acted
unreasonably in not pursuing it.104 It would seem an appropriate
use of this power for the courts to insist that, where a more
flexible s.996 remedy is available, the petitioner should be
confined to it. That would be a natural consequence of the fact
that the statutory alternative to a winding-up order has finally
come of age.
20–22
On the other hand, there are situations where a winding up order
is the only option. This observation is sometimes taken as proof
that the grounds of unfairness upon which a company can be
wound up under s.122(1)(g) of the 1986 Act are wider than those
which will found an unfair prejudice remedy under s.994 of the
2006 Act. Certainly the grounds do not overlap completely, but
this in itself does not determine which has greater width. The
cases, it is suggested, roundly accord that accolade to the unfair
prejudice petitions. But the important point here is that there are
reported cases in which the court has denied a petition based on
unfair prejudice, because the conduct of the petitioner did not
merit it, but has granted a winding-up order on the grounds that
mutual confidence among the quasi-partners had broken
down,105 or that the substratum had failed.106 In other words, in
these cases the mere fact of breakdown or deadlock is sufficient
to ground a winding-up order, whereas an unfair prejudice
petition is seen as requiring some assessment of the comparative
blame-worthiness of petitioners and controllers. This simply
reinforces the legislative sense in providing two distinct options,
expressed in different terms and designed to deliver remedies in
different circumstances.107
CONCLUSION
20–23
Part 30 of the Act does not provide, and on no conceivable
interpretation could provide, a unilateral exit right for minority
shareholders, i.e. a right for minority shareholders at any time to
withdraw their capital from the company. Indeed, it might be
thought that such a right would be inconsistent with the nature of
shareholding in companies. The shareholder is locked into the
investment in the company unless he or she is able to find
someone else to purchase the shares and thus stand in the
shareholder’s shoes in relation to the company.108 Compulsory
purchase appears under Pt 30, not as a right for the minority, but
as a remedy—and not even a remedy the minority can insist
upon, though it is the most common—in respect of unfair
prejudice committed by the company’s controllers. Thus in Re
Phoenix Office Supplies Ltd109 the Court of Appeal refused a
shareholder’s petition to have his shares acquired at a non-
discounted value, even though he had been removed from his
directorship by the other two incorporators in breach of their
common understanding. The reason for the decision was that the
conduct of the others had been a response to the petitioner’s
unilateral decision to sever his relations with the company,
which could be seen as a prior and more fundamental breach of
the original understandings among the three people involved. Of
course, members may bargain for rights of unilateral exit to be
incorporated in the articles of particular companies110; but they
are rare, since a general right for minority shareholders to
withdraw their capital when they will would seem likely wholly
to undermine the financing function of shares.
Finally, there is some evidence that the unfair prejudice
remedy, whatever its imperfections, has successfully “crowded
out” alternative techniques of controlling the exercise of
majority power through board decisions. Thus, the Law
Commissions’ draft statement of directors’ statutory duties111
included a requirement that directors act fairly as between
shareholders, a duty reflected at least at first instance in the
current case law.112 The CLR’s initial draft statement contained
the same duty,113 but fairness between shareholders was later
reduced to one of the factors to be taken into account by the
directors when discharging their duty to promote the success of
the company for the benefit of its members.114 The explanation
given for this development was a desire to “make it clear that
fairness is a factor in achieving success for the members as a
whole, rather than an independent requirement which could
override commercial success”.115 It is difficult to believe that this
argument would have been accepted in the absence of Pt 30 as
an overriding instrument of minority protection.
1
The procedure for petitions is governed mainly by the Companies (Unfair Prejudice
Applications) Proceedings Rules 2009 (SI 2009/2469), but also by the Civil Procedure
Rules and the practice of the High Court, where not inconsistent with the 2009 Rules.
Section 994(1A), somewhat bizarrely, specifically states that the removal of an auditor
in certain circumstances falls within (a). The reasons for this provision are dealt with at
para.22–18. Such claims should generally be heard in public open court: Global Torch
Ltd v Apex Global Management Ltd [2013] EWCA Civ 819 CA.
2 Re Legal Costs Negotiators Ltd [1999] 2 B.C.L.C. 171 CA; cf. Parkinson v
Eurofinance Group Ltd [2001] 1 B.C.L.C. 720—majority shareholder, removed from the
board, not able to use his shareholding to obtain redress in respect of a sale of the
company’s assets by the directors to a company controlled wholly by them, and so able
to use the unfair prejudice provisions.
3 On conduct of the parent as conduct of the subsidiary see Nicholas v Soundcraft
Electronics Ltd [1993] B.C.L.C. 360 CA; expanding upon the approach taken in Scottish
Co-operative Wholesale Society Ltd v Meyer [1959] A.C. 324 HL, by not confining the
principle to companies engaged in the same type of business. See also Re Dominion
International Group (No.2) [1996] 1 B.C.L.C. 634. On conduct of the subsidiary as
conduct of the parent see Rackind v Gross [2005] 1 W.L.R. 3505.
4
And, accordingly, members can agree to waive or vary those rights, or, as in Fulham
Football Club (1987) Ltd v Richards [2011] EWCA Civ 855; [2012] Ch. 333, have
disputes determined by arbitration instead.
5
An agreement to transfer is not enough; a proper instrument of transfer must have been
executed and delivered to the transferee: Re a Company (No.003160 of 1986) [1986]
B.C.L.C. 391; Re Quickdome Ltd [1988] B.C.L.C. 370. However, the fact that the
directors have refused to register the transfer does not deny the transferee standing: Re
McCarthy Surfacing Ltd [2006] EWHC 832 (Ch).
6 See Re a Company (No.007828 of 1985) [1986] 2 B.C.C. 98,951 at 98,954 (Harman J):
“In my view, transmission by operation of law means some act in the law by which the
legal estate passes even though there be some further act (such as registration) to be
done; and in my view the mere allegation that there arises a constructive trust cannot
possibly amount to a transmission by operation of law”.
7Exceptionally, in Re I Fit Global Ltd [2013] EWHC 2090 (Ch), the court held that a
person whose name was not entered in the company’s register as required under s.112
was a shareholder and could bring a petition. This was because during the trading of the
company, there had been wholly inadequate formal corporate documentation and
records.
8
Atlasview Ltd v Brightview Ltd [2004] 2 B.C.L.C. 191. Also, the conduct of which a
petitioner may complain embraces conduct occurring before the petitioner became a
member, even if that conduct is not continuing (though it must prejudice the petitioner),
so that the beneficial holder will be able to petition if the shares are transferred to him by
the nominee: Lloyd v Casey [2002] 1 B.C.L.C. 454.
9
See Ch.18, above. A petition under s.995 may be instead of, or in addition to, a petition
by the Secretary of State to have the company wound up under s.124A of the Insolvency
Act (see para.18–13, above), but it is notable that the Companies Act power does not
require the Secretary of State to be of the opinion that the public interest would be
furthered by the bringing of an unfair prejudice petition. The Secretary of State’s power
of petition also applies to any company capable of being wound up under the Insolvency
Act (including in some cases companies not incorporated in the UK), whilst the general
right to petition under s.994 applies only to companies incorporated under the
Companies Acts and statutory water companies: s.994(3) and (4).
10 The Insolvency Act provision is not considered in any detail in this chapter. For
administration in general, see para.32–43. An unfair prejudice challenge may also be
made to proposals adopted by way of a company voluntary arrangement (see s.6 of the
Insolvency Act 1986) but the court’s powers here are confined to setting aside the
proposals adopted at the creditors’ meeting and ordering meetings to consider revised
proposals.
11
See the lament of the Lord President (Cooper) in Scottish Insurance Corp v Wilsons &
Clyde Coal Co, 1948 S.C. 376.
13
Re A Company [1983] Ch. 178, decided under s.210 of the 1948 Act. Section 210
referred to “oppression” rather than “unfair prejudice”, and was generally interpreted
very narrowly, hence the statutory amendments delivering the form we now have, first in
s.459 of the 1985 Act, and now s.994 of the 2006 Act.
14Re Lundie Bros [1965] 1 W.L.R. 1051; Ebrahimi v Westbourne Galleries Ltd [1973]
A.C. 360 HL.
15
Re A Company [1986] B.C.L.C. 376; Re Haden Bill Electrical Ltd [1995] 2 B.C.L.C.
280.
16
Under s.210 of the 1948 Act, the House of Lords had defined “oppression” as conduct
which was “burdensome, harsh and wrongful” (emphasis added): Scottish Co-operative
Wholesale Society Ltd v Meyer [1959] A.C. 324. This was the point which gave rise to
the notion that the oppression section was aimed only at providing better remedies for
existing wrongs. The Jenkins Committee recommended that the restriction, if it existed,
should be removed (Report of the Company Law Committee, Cmnd. 1749 (1962), paras
203–206), and the courts, from an early stage, interpreted the substitution of the words
“unfairly prejudicial” for “oppressive” as intended to achieve that result: see Hoffmann J
in Re A Company (No.8699 of 1985) [1986] B.C.L.C. 382 at 387. The courts had already
arrived at this position some years previously in the case of petitions to wind up the
company. See Ebrahimi v Westbourne Galleries Ltd [1973] A.C. 360 HL; below,
para.20–21.
17 Analysed in Ch.17, above.
18 See, for example, the law relating to unfair dismissal of employees by employers,
introduced in 1971 and now contained in the Employment Rights Act 1996.
19
“Legitimate expectations” was the phrase endorsed by the Court of Appeal in Re Saul
D Harrison & Sons Plc [1995] 1 B.C.L.C. 14 at 19, per Hoffmann LJ; but in O’Neill v
Phillips [1999] 1 W.L.R. 1092; [1999] 2 B.C.L.C. 1 HL, the same judge led the House
of Lords to adopt the phrase “equitable considerations” for fear that the former phrase
carried connotations which were too wide.
20
Re Saul D Harrison & Sons Plc [1995] 1 B.C.L.C. 14 at 19.
21
Though the legitimate expectation often arises when the company is formed, it may
arise at a later date, for example, when the petitioner becomes a member: Tay Bok
Choon v Tahanson Sdn Bhd [1987] 1 W.L.R. 413 PC; Strahan v Wilcock [2006] 2
B.C.L.C. 555 CA. Equally, a legitimate expectation based on informal agreement among
all the members is most often recognised in a quasi-partnership company, but may arise
in any small company, whether the company is to be operated as an incorporated
partnership or not: Re Elgindata Ltd [1991] B.C.L.C. 959.
22Re Saul D Harrison [1995] 1 B.C.L.C. 14 at 18. This aspect of unfair prejudice is, of
course, not peculiar to small companies but applies across the full range of companies.
Hence, it is suggested, the importance of the question, discussed above at para.20–14,
whether s.994 provides corporate or only personal relief to the petitioner.
23
So that s.994 may qualify not only the formal articles, but also the statutory powers of
the majority under s.168. In this respect the s.994 decisions reinforce the decision of the
House of Lords in Bushell v Faith, above, para.14–51.
24 Re Saul D Harrison [1995] 1 B.C.L.C. 14 at 18.
25
Ebrahimi v Westbourne Galleries Ltd [1973] A.C. 360 at 379 HL.
26
See Re Saul D Harrison [1995] 1 B.C.L.C. 14 itself; but also Re Posgate and Denby
(Agencies) Ltd [1987] B.C.L.C. 8; Re A Company [1987] B.C.L.C. 562; Re A Company
(1988) 4 B.C.L.C. 80; Re Ringtower Holdings Plc (1989) 5 B.C.C. 82; Currie v
Cowdenbeath Football Club Ltd [1992] B.C.L.C. 1029; Re JE Cade & Sons Ltd [1992]
B.C.L.C. 213; Murray’s Judicial Factor v Thomas Murray & Sons (Ice Merchants) Ltd
[1993] B.C.L.C. 1437 at 1455; Khoshkhou v Cooper [2014] EWHC 1087.
27Re Coroin Ltd [2012] EWHC 2343 (Ch) at [636] (the point not disturbed on appeal,
[2013] EWCA Civ 781; [2013] 2 B.C.L.C. 583).
28
In Ebrahimi v Westbourne Galleries Ltd [1973] A.C. 360 HL.
29 In O’Neill v Phillips [1999] 1 W.L.R. 1092; [1999] 2 B.C.L.C. 1 HL.
30Re Blue Arrow Plc [1987] B.C.L.C. 585; Re Tottenham Hotspur Plc [1994] 1
B.C.L.C. 655; Re Astec (BSR) Plc [1998] 2 B.C.L.C. 556.
31
O’Neill v Phillips [1999] 1 W.L.R. 1092; [1999] 2 B.C.L.C. 1 HL.
32 O’Neill v Phillips [1999] 2 B.C.L.C. 1 at 7e HL.
33 O’Neill v Phillips [1999] 2 B.C.L.C. 1 at 10–11 HL. In Re Guidezone Ltd [2000] 2
B.C.L.C. 321 at 356 Jonathan Parker J took the equitable analogy a stage further by
requiring that non-contractual understandings be relied upon by the minority before they
could form the basis of an unfair prejudice petition.
34 O’Neill v Phillips [1999] 2 B.C.L.C. 1 at 11b–d HL.
35
O’Neill v Phillips [1999] 2 B.C.L.C. 1 at 9a HL.
36
Shareholders’ Remedies, Cm. 3769 (1997), para.4.11. An example might be
mismanagement of the company not amounting to a breach of directors’ duties (see Re
Elgindata [1991] B.C.L.C. 959; but cf. Re Macro (Ipswich) Ltd [1994] 2 B.C.L.C. 354);
but with the rise in the standard of care required of directors (above, para.16–16) it may
be that this is a declining problem, because such cases will fall within the category of
“indirect” wrongs (below, para.20–14).
37
O’Neill v Phillips [1999] 2 B.C.L.C. 1 at 8g–h HL.
38
Final Report I, para.7.41; Completing, paras 5.77–5.79.
39
Ebrahimi’s case [1973] A.C. 360 HL.
40
Ebrahimi’s case [1973] A.C. 360 at 379. This was a winding-up case, but, as we shall
see below at para.20–21, similar considerations apply there too and the winding-up case-
law has strongly influenced the development of this category of unfair prejudice.
41
Re Saul D Harrison [1995] 1 B.C.L.C. 14 at 18.
42
Re JE Cade and Son Ltd [1992] B.C.L.C. 213.
43 Irvine v Irvine (No.1) [2007] 1 B.C.L.C. 349, 421.
44 Re McCarthy Surfacing [2008] EWHC 2279 (Ch); [2009] B.C.L.C. 622; Re J&S
Insurance & Financial Consultants Ltd [2014] EWHC 2206 (Ch).
45
Irvine v Irvine (No.1) [2007] 1 B.C.L.C. 349, 421; Re McCarthy Surfacing [2008]
EWHC 2279 (Ch); [2009] B.C.L.C. 622; Sikorski v Sikorski [2012] EWHC 1613 (Ch).
46 Re Sam Weller & Sons Ltd [1990] B.C.L.C. 80.
47
Irvine v Irvine (No.1) [2007] 1 B.C.L.C. 349; Re Ravenhart Services (Holdings) Ltd
[2004] 2 B.C.L.C. 375.
48Irvine v Irvine (No.1) [2007] 1 B.C.L.C. 349, 420. Guidance can be taken from
guidelines on the remuneration of directors in listed companies: Re Tobian Properties
[2012] EWCA Civ 998 at [36].
49
This is not to deny that the degree of proof which the court requires of the informal
arrangement may vary according to whether the alleged arrangement is usual or unusual
in the type of company in question.
50Re A Company [1986] B.C.L.C. 382. See also Re St Piran Ltd [1981] 1 W.L.R. 1300;
but cf. Re Astec (BSR) Plc [1998] 2 B.C.L.C. 556 at 579. Also see Re Phoenix Contracts
(Leicester) Ltd [2010] EWHC 2375 (Ch).
51 See below, para.28–15. The Code was used only as a guide. In particular, the judge
borrowed from the Code the proposition that any advice given by the directors should be
given in the interests of the shareholders, but he did not borrow the further proposition
that the directors were obliged to give the shareholders their view on the bid.
52 McGuinness v Bremner Plc [1988] B.C.L.C. 673. See also Bermuda Cablevision Ltd v
Colica Trust Co Ltd [1998] A.C. 198 PC (analogy with the criminal law, though the
directors were acting, presumably, in breach of fiduciary duty). However, the courts
have not in general been prepared to use the unfair prejudice petition as a way of curing
defects in the statutory protections conferred upon minorities: see CAS (Nominees) Ltd v
Nottingham Forest FC Plc [2002] 1 B.C.L.C. 613 (avoidance of minority power to block
share issue—see below, para.24–4); and Rock Nominees Ltd v RCO (Holdings) Plc
[2004] 1 B.C.L.C. 439 CA (avoidance of minority’s power to reject a “squeeze out”
after a takeover—see below, para.28–69).
53
Re Sam Weller Ltd [1990] Ch. 682, where the judge refused to strike out the claim.
The case was largely concerned with the now irrelevant issue of whether the dividend
policy affected all the shareholders equally: cf. Re A Company Ex p. Glossop [1988] 1
W.L.R. 1068. Where the decisions on policy are in breach of the general law, see
para.20–10, above, and Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch); [2009]
B.C.L.C. 622.
54
Re A Company (No.004415 of 1996) [1997] 1 B.C.L.C. 479.
55
Guinness Peat Group Plc v British Land Co Plc [1999] 2 B.C.L.C. 243 CA—
exclusion of petitioner from an interest in a company where the shareholder’s equity was
negative. However, the case was mainly concerned with the inappropriateness of making
such a determination at the strike-out stage of litigation where the experts on each side
were in sharp disagreement as to the applicable valuation methodology.
56
Some guidance on the broad meaning of “prejudice”, and its possible financial and
non-financial aspects, is usefully discussed in the judgment of David Richards J in Re
Coroin Ltd [2012] EWHC 2343 (Ch) at [630]–[631] (affirmed on appeal, [2013] EWCA
Civ 781).
57 Re A Company [1983] Ch. 178; as explained in Re A Company [1986] B.C.L.C. 382
at 387; Re Guidezone Ltd [2002] 2 B.C.L.C. 321; Re J&S Insurance & Financial
Consultants [2014] EWHC 2206 (Ch).
58Grace v Biagioli [2006] 2 B.C.L.C. 70 CA; following Re London School of
Electronics [1986] Ch. 211. Also see Re Home & Office Fire Extinguishers Ltd [2012]
EWHC 917.
59Jesner v Jarrad Properties Ltd [1993] B.C.L.C. 1032 Inner House; but note the
qualifications in Re J&S Insurance & Financial Consultants [2014] EWHC 2206 (Ch).
60 Re RA Noble & Sons (Clothing) Ltd [1983] B.C.L.C. 273.
61
Bovey Hotel Ventures Ltd, Re unreported, but this view is set out and approved in
[1983] B.C.L.C. 290; Re Saul D. Harrison & Sons Plc [1995] 1 B.C.L.C. 14 at 17.
62 A point to which the courts have attached some importance. See above, para.20–6.
63The argument was accepted by Vinelott J in Re Carrington Viyella Plc (1983) 1
B.C.C. 98, 951, though the exact scope of the point was never finally settled.
64
“Direct wrongs”, i.e. where the harm is inflicted directly on the minority and not via a
diminution in the value of their stake in the company.
65 Report of the Company Law Committee, Cmnd. 1749 (1962), para.206.
66 Re Stewarts (Brixton) Ltd [1985] B.C.L.C. 4; Re London School of Electronics [1986]
Ch. 211; Re Cumana Ltd [1986] B.C.L.C. 430 (all involving various forms of diversion
of the company’s business to rival companies in which the majority were interested, i.e.
situations of the type found in Cook v Deeks [1916] 1 A.C. 553 PC, above, at para.16–
124); Re A Company Ex p. Glossop [1988] 1 W.L.R. 1068; and McCarthy Surfacing Ltd
[2009] B.C.L.C. 622 (both involving exercise of directors’ powers for an improper
purpose); Re Saul D. Harrison & Sons Plc [1995] 1 B.C.L.C. 14 (failure of directors to
act bona fide in the interests of the company). In not all these cases was the allegation in
question made out on the facts. Indeed, so long as the “independent illegality” theory
held sway, proving breaches of directors’ duties was a way of bringing the controllers’
conduct within the unfair prejudice provisions.
67
Re A Company (No.5287 of 1985) [1986] 1 W.L.R. 281; Re Stewarts (Brixton) Ltd
[1985] B.C.L.C. 4; Lowe v Fahey [1996] 1 B.C.L.C. 262.
68
Re Saul D Harrison & Sons Plc [1995] 1 B.C.L.C. 14 at 18.
69
Note that Pt 11 of the Act makes it clear that derivative actions can be brought only
under its provisions or “in pursuance of an order of the court in proceedings under
section 994”: s.260(2). The provision for Scotland is in s.265(6)(b).
70
Re Charnley Davies Ltd (No.2) [1990] B.C.L.C. 760.
71
This is, of course, a remedy very commonly sought by s.994 petitioners (see below,
para.20–19).
72 See above.
73
See Atlasview Ltd v Brightview Ltd [2004] 2 B.C.L.C. 191, para.20–20, below, and
the discussion of reflective loss at paras 17–34, above.
74
Anderson v Hogg, 2002 S.L.T. 354, Inner House.
75
Clark v Cutland [2004] 1 W.L.R. 783 CA (considered by Payne, (2004) 67 M.L.R.
500 and [2005] C.L.J. 647).
76 See above at para.17–13.
77 Clark v Cutland [2004] 1 W.L.R. 783 at [2] CA.
78
Bhullar v Bhullar [2004] 2 B.C.L.C. 241. The early stages of the litigation are
recounted at [3]–[4]. See above at paras 16–95 et seq.
79 Kung v Kou (2004) 7 HKCFAR 579. The decision was mentioned by the Privy
Council in the case of Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] B.C.C.
272 PC, where the judgment of the PC, delivered by Lord Scott of Foscote, makes no
reference to the restrictive conditions set out in the Hong Kong decision and seems to
treat it as a general permission to award damages to the company. Even stranger, the
company being hopelessly insolvent, the benefit to the petitioner from any payment by
the directors to the company would be obtained only as lender to the company, whose
loans would achieve a higher percentage recovery.
80See below, para.20–19, and the discussion of reflective loss, above, at paras 17–34 et
seq.
81
O’Neill v Phillips [1999] 1 W.L.R. 1092 HL.
82 These were (a) a new unfair prejudice remedy for those excluded from the
management of small companies (rejected by the Law Commission, Shareholders’
Remedies, Cm. 3769 (1997), at para.3.25, as likely to lead to “duplication and
complication of shareholder proceedings”; (b) a presumption of unfairness in certain
cases of exclusion from management (recommended by the Commission but rejected by
the CLR after the proposal received little support from consultees: Developing,
para.4.104); (c) the development of a model exit article (recommended by the Law
Commission, above, Pt V, but rejected by the CLR, Developing, para.4.103, on the
grounds that it was not likely to be used by the well-advised and would be a trap for the
ill-advised).
83 Final Report I, para.2.27 (this proposal was not confined to unfair prejudice petitions).
84See above, fn.81 at pp.16–17. This approach was applied to the winding-up remedy
(below, para.20–21) in CVC/Opportunity Equity Partners Ltd v Demarco Almeida
[2002] B.C.C. 684 PC.
85
North Holdings Ltd v Southern Tropics Ltd [1999] 2 B.C.L.C. 624 CA; Harbourne
Road Nominees Ltd v Kafvaski [2011] EWHC 2214 (Ch).
86
Re Benfield Greig Group Plc [2002] 1 B.C.L.C. 65 CA, where, in fact, the non-
independence of the expert constituted the alleged unfair prejudice.
87
On the original approach see Re A Company Ex p. Kremer [1989] B.C.L.C. 365; and
on the later developments Virdi v Abbey Leisure Ltd [1990] B.C.L.C. 342; Re A
Company Ex p. Holden [1991] B.C.L.C. 597; Re A Company [1996] 2 B.C.L.C. 192.
88
2006 Act s.996(2)(e). In the latter case the company’s share capital must be reduced.
The statutory power is widely enough drawn to include an order that the minority
purchase the majority’s shares, which has occasionally been ordered: Re Brenfield
Squash Racquets Club Ltd [1996] 2 B.C.L.C. 184. The other specific powers are the
authorisation of proceedings to be brought in the company’s name (s.996(2)(c) and
above, para.20–14); requiring the company to do or refrain from doing an act (s.996(2)
(b)); requiring the company not to make alterations to its articles of association without
the leave of the court (s.996(2)(d)); and regulating the conduct of the company’s affairs
in the future (s.996(2)(a)). Whatever remedy is contemplated, the court must choose
what is appropriate at the time it is granted: Re A Company [1992] B.C.C. 542. Indeed,
the court is not limited to ordering the remedy requested by the petitioner: Hawkes v
Cuddy (No.2) [2009] EWCA Civ 291; [2009] 2 B.C.L.C. 427 (although in this case, and
as is specified now in the Companies (Unfair Prejudice Applications) Proceedings Rules
(SI 2009/2469), the petitioner specifically requested particular remedies or “that such
other order may be made as the court thinks fit”). Sections 757 and 758 give the court a
further specific power in the case where the unfair prejudice consists of a public offer of
shares by a private company: see para.24–2.
89
See Grace v Biagioli [2006] 2 B.C.L.C. 70 CA, for a good example of the court’s
preference for a “clean break” via a share purchase as against a compensation order,
which might have remedied the specific harm suffered by the petitioner but would have
left him exposed in the future.
90
Re Bird Precision Bellows Ltd [1984] Ch. 419, per Nourse J, approved on appeal
[1986] Ch. 658.
91 CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] 2 B.C.L.C. 108 at
[41]–[42]; Strahan v Wilcock [2006] 2 B.C.L.C. 555. The court might instead work out
what the former partner’s interest would be worth upon the hypothesis of a sale, without
actually holding one.
92 Irvine v Irvine (No.2) [2007] 1 B.C.L.C. 445; Re Elgindata Ltd [1991] B.C.L.C. 959
at 1007. See also Re DR Chemicals (1989) 5 B.C.C. 37.
93 These criteria are taken from Ebrahimi v Westbourne Galleries Ltd [1973] A.C. 360,
371 (a winding-up case considered further below, para.20–21) and applied by the Court
of Appeal to unfair prejudice valuations in Strahan v Wilcock [2006] 2 B.C.L.C. 555.
What was initially a quasi-partnership may have ceased to be one by the time the facts
supporting the petition take place, thus changing the basis of valuation: Re McCarthy
Surfacing Ltd [2008] EWHC 2279 (Ch); [2009] B.C.L.C. 622.
94 Khoshkhou v Cooper [2014] EWHC 1087 (Ch) at [25], where a company with no
restriction on the transfer of shares was nevertheless held to be a quasi-partnership
company since it was closely dependent on the personal relationship between the
original members.
95
CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] 2 B.C.L.C. 108;
Parkinson v Eurofinance Group Ltd [2001] 1 B.C.L.C. 720; Guinness Peat Group Plc v
British Land Co Plc [1999] 2 B.C.L.C. 243 CA; Re Planet Organic Ltd [2000] 1
B.C.L.C. 366. See also Re Annacott Holdings Ltd [2013] EWCA Civ 119 CA, where it
was held that there is no rule that a going-concern valuation can only be adopted for
quasi-partnerships.
96
Profinance Trust SA v Gladstone [2002] 1 B.C.L.C. 141 CA, where the earlier
authorities are reviewed. Also see Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch);
[2009] B.C.L.C. 622, for a valuation taking into account the depreciation due to the
wrongs complained of.
97
Re KR Hardy Estates Ltd [2014] EWHC 4001 (Ch) at [89]–[93].
98
Atlasview Ltd v Brightview Ltd [2004] 2 B.C.L.C. 191. This case, rightly it seems,
suggests that proper quantification of remedies would be alert to double recovery. If so,
the principle underpinning the rules on reflective loss would be upheld. This principle is
discussed above at para.17–34.
99
Shareholders’ Remedies, Cm. 3769 (1997), paras 4.24–4.49.
100
101 2006 Act s.124(1). Petitions may also be brought by creditors, directors or the
company itself, though such applications are rare. The Secretary of State may petition
under s.124A in the public interest on the basis of information received as a result of an
investigation into the company’s affairs. See above, para.18–13. However, public
interest grounds for a winding-up are not available other than to the Secretary of State:
Re Millennium Advanced Technology Ltd [2004] 2 B.C.L.C. 77. The term “contributory”
includes even a fully paid-up shareholder provided he or she has a tangible interest in the
winding-up, which is usually demonstrated by showing that the company has a surplus
of assets over liabilities, though that will not be required if the petitioner’s complaint is
that the controllers failed to provide the financial information from which that
assessment could be made: see Re Rica Gold Washing Co (1879) 11 Ch. D. 36; Re
Bellador Silk Ltd [1965] 1 All E.R. 667; Re Othery Construction Ltd [1966] 1 W.L.R.
69; Re Expanded Plugs Ltd [1966] 1 W.L.R. 514; Re Chesterfield Catering Ltd [1977]
Ch. 373 at 380; Re Land and Property Trust Co Plc [1991] B.C.C. 446 at 448; Re
Newman & Howard Ltd [1962] Ch. 257; Re Wessex Computer Stationers Ltd [1992]
B.C.L.C. 366; Re A Company [1995] B.C.C. 705. The Jenkins Committee recommended
(para.503(h)) that any member should be entitled to petition, presumably on the grounds
that this remedy was aimed primarily at protecting minorities rather than at winding up
companies.
102
Ebrahimi v Westbourne Galleries Ltd [1973] A.C. 360 HL.
103 CPR Practice Direction, Applications under the Companies Act and Other
Legislation Relating to Companies, para.9(1). See Re A Company (No.004415 of 1996)
[1997] 1 B.C.L.C. 479 where the judge struck out the alternative petition for winding up
on the just and equitable ground on the basis that there was no reasonable prospect that
the trial judge would order a winding up as against a share purchase under what is now
s.996.
104
The alternative remedy need not be a legal one. For example, it may be an offer to
purchase the petitioner’s shares on the same basis as the court would order on an unfair
prejudice petition: Virdi v Abbey Leisure Ltd [1990] B.C.L.C. 342. See also Maresca v
Brookfield Development & Construction Ltd [2013] EWHC 3151 (Ch), where the
alternative remedy was for the shareholder to demand repayment of her interest from the
company.
105
Re RA Noble & Sons (Clothing) Ltd [1983] B.C.L.C. 273; and Jesner v Jarrad
Properties Ltd [1993] B.C.L.C. 1032 Inner House; Loch v John Blackwood Ltd [1924]
A.C. 783 PC; and Re Brand & Harding Ltd [2014] EWHC 247 (Ch). See also Re Full
Cup International Trading Ltd [1995] B.C.C. 682, where the judge found himself in the
presumably unusual position of being unable to fashion an appropriate remedy under
s.996 but of being prepared to wind up the company.
106
Re Kitson & Co Ltd [1946] 1 All E.R. 435 CA.
107
Hawkes v Cuddy (No.2) [2009] EWCA Civ 291; [2009] 2 B.C.L.C. 427 CA;
overruling on this point, Re Guidezone Ltd [2000] 2 B.C.L.C. 321 at 357.
108
Of course, if the company and the shareholder wish expressly to bargain for
“redeemable” shares, they are free to do so (above, para.13–2).
109
Re Phoenix Office Supplies Ltd [2003] 1 B.C.L.C. 76 CA.
110
111Company Directors: Regulating Conflicts of Interest and Formulating a Statement of
Duties, Cm. 4436 (1999), Appendix A.
112
See especially Mutual Life Insurance Co of New York v Rank Organisation Ltd
[1985] B.C.L.C. 11.
114Final Report I, Annex C, Sch.2. On the nature of the general duty see para.16–37,
above.
115 Final Report I, Annex C, Explanatory Notes, para.18.
PART 5
ACCOUNTS AND AUDIT
It has been accepted since the early days of modern company

law that mandatory publicity about the company’s affairs was an
important regulatory tool. For shareholders in large companies
with dispersed shareholdings it operates to reduce the risk of
management incompetence or self-seeking. The non-director
shareholders of a company will have a difficult task to judge the
effectiveness of the management of the company if they do not
have access to relevant data about the company’s financial
performance. For creditors it operates to reduce the risks of
dealing with an entity to whose assets alone the creditors can
normally look for re-payment. In fact, mandatory disclosure has
long been seen as something which could legitimately be asked
for in exchange for the freedom to trade with limited liability,1
though there has been controversy throughout the history of
company law about how extensive the disclosure rules should
be. Today, therefore, there is a major difference between the
disclosure rules applicable to ordinary partnerships (without
limited liability) and those applicable to companies, with limited
liability partnerships being rightly placed in the company
category for these purposes, because they benefit from limited
liability.2 Given this range of interests in disclosure of
information by companies, it is not surprising that successive
company scandals have provoked demands for ever more far-
reaching mandatory disclosure of information, and such
demands have often been successful.
As far as the companies legislation is concerned, the main
instrument for delivering mandatory disclosure has been the
annual accounts and reports—which the directors are required to
produce, have verified by the company’s auditors (in most
cases), lay before the members in general meeting (or otherwise
distribute to them in the case of private companies) and register
in a public registry. This development over the years has
produced an elaborate body of rules. The desire of the Company
Law Review to use mandatory disclosure to promote an
“enlightened shareholder value” approach to company law has
led to reforms which require disclosure of information which is
not directly financial, but concerns the quality of the company’s
relationships with those who are capable of making a major
contribution to the success of the business or about the impact of
the company’s operations upon the community in which it
operates. Further, at EU level the impact of various corporate
scandals in the early years of this century only served to make
those rules even more elaborate, especially in relation to the
verification of the accounts through the process of audit. The
recent financial crisis has ensured that these concern remains at
the centre of public policy discussions. Accounts and audit are
the subject of the two chapters in this Part.
However, mandatory disclosure can be seen as an instrument,
not only of corporate law (for the benefit of shareholders,
creditors and other stakeholders) but of financial services or
securities law (for the benefit of investors and the efficient
functioning of the capital markets). Consequently, we shall
return to the issue of mandatory disclosure in Pt 6, where we
analyse the additional disclosure requirements which apply to
companies whose securities are traded on a public securities
market.
1 An unlimited liability company is not normally required to make its accounts available
to the public: see para.21–36, below.
2
See G. Morse et al., Palmer’s Limited Liability Partnership Law, 2nd edn (London:
Sweet & Maxwell, 2012), Ch.3.
CHAPTER 21
ANNUAL ACCOUNTS AND REPORTS
Introduction 21–1
Scope and rationale of the annual reporting
requirement 21–1
The classification of companies for the purposes of
annual reporting 21–2
The Annual Accounts 21–7
Accounting records 21–7
The financial year 21–8
Individual accounts and group accounts 21–9
Parent and subsidiary undertakings 21–10
Form and content of annual accounts 21–13
Narrative Reporting 21–22
Directors’ report 21–23
The strategic report 21–24
Verification of narrative reports 21–26
Approval of the Accounts and Reports by the Directors 21–29
The Auditor’s Report 21–30
Revision of Defective Accounts and Reports 21–31
Filing Accounts and Reports with the Registrar 21–33
Speed of filing 21–34
Modifications of the full filing requirements 21–35
Other information available from the Registrar 21–37
Other forms of publicity for the accounts and reports 21–39
Consideration of the Accounts and Reports by the Members 21–40
Circulation to the members 21–40
Laying the accounts and reports before the members 21–42
Conclusion 21–43
INTRODUCTION
Scope and rationale of the annual reporting
requirement
21–1
On the basis that “forewarned is forearmed” the fundamental
principle underlying the Companies Acts has always been that of
disclosure. If the public and the members were enabled to find
out all relevant information about the company, this, thought the
founding fathers of our company law, would be a sure shield.
The shield may not have proved quite so strong as they had
expected and in more recent times it has been supported by
offensive weapons. However, disclosure still remains the basic
safeguard on which the Companies Acts pin their faith, and
every succeeding Act since 1862 has added to the extent of the
publicity required, although, not unreasonably, what is required
varies according to the type of company concerned. Not only
may disclosure by itself promote efficient conduct of the
company’s business, because the company’s controllers
(whether directors or large shareholders) may fear the
reputational losses associated with the revelation of
incompetence or self-dealing, but the more interventionist legal
strategies, going beyond disclosure, depend upon those who hold
the legal rights being well-informed about the company’s
position. For example, those in a position to enforce the
company’s rights against directors for breach of duty1 or to bring
claims of unfair prejudice2 or shareholders holding rights to
remove directors,3 if rational persons, will not turn their minds to
the exercise of those rights unless they think there are grounds
for so doing. Finally, self-help, such as taking contractual
protection or altering the pricing of credit, depends upon good
knowledge of risks embedded in the company’s operations.
Thus, disclosure is the bed-rock of company law.
This chapter is focused on what has always been the central
disclosure mechanism of the British companies legislation,
namely, the obligation laid on the directors to produce annual
accounts (referred to in EU law as annual financial statements)
relating to the financial position of the company and to
accompany those accounts with a report on the company’s
activities, including their own stewardship of the company.
Those accounts and reports are then typically considered by the
shareholders at an annual general meeting of the company,
though, as we have seen, only public companies are now
required to hold an AGM.4 Over the years, what is required of
large companies by way of accounts and reports has expanded.
By contrast, the recent tendency has been to reduce the reporting
requirements of small companies.
The production of the annual accounts has generated an
industry of professionals to help the company meet its statutory
obligations. Notably, the accounting profession has played a
major role in developing the standards which determine how the
raw financial data is to be analysed and presented in the
accounts, the law having rightly shied away from doing more
than setting the broad parameters for this task.5 That profession
then re-appears in the guise of auditors to verify that the
accounts do meet those standards and the applicable legal rules
and, in particular, present a “true and fair view” of the
company’s financial position.6
This is an area where the harmonisation programme of the EU
has had a significant impact. This is hardly surprising since the
utility of accounts is enhanced if they are comparable across
companies and increasingly investors (shareholders and
creditors) and others are interested in the financial position of
non-domestic companies. The first EU rules related to the
presentation of accounts,7 and were extended later to the use of
accounting standards8 and to the provision of non-financial
information.9 In 2013 the core provisions were modernised and
consolidated into Directive 2013/34/EU.10 References to the
“Directive” in this chapter are to the 2013 Directive as
amended11 (unless the context indicates otherwise). Since the
leading EU instrument in this area is a Directive (rather than a
Regulation), it needs to be transposed into domestic law. This is
done partly by amendments to the Companies Act 2006 and, to a
significant extent, by secondary legislation. Both the Act and the
secondary legislation were recently amended by the Companies,
Partnerships and Groups (Accounts and Reports) Regulations
2015/980, in order to implement the 2013 Directive.
The classification of companies for the purposes of
annual reporting
21–2
As we have hinted, the accounting rules have developed a
classification of companies which is more sophisticated than the
core division deployed in the Act between public and private
companies. That distinction turns on whether the company is
permitted to offer its shares to the public or not.12 The
accounting classification turns mainly on the economic size of
the company. However, the public/private distinction still plays a
role because public companies are excluded from the two
smallest categories of company (micro and small) for (most)
accounts purposes.13 Since the ramifications of the classification
run throughout the substantive rules on accounts, it is important
to set it out at the beginning. The criteria upon which the
classification is based are set out principally in the Directive and
the Member States have only limited freedom to amend them.
There are five categories of company for accounts purposes:
micro, small,14 medium-sized, large and “public interest entities”
(“PIE”). The criteria for identifying the first four categories are
quantitative indicators of the economic size of the company and
are designed to be capable of application in a fairly mechanistic
way. The PIE category is a cross-cutting category but, for the
general run of companies in the UK, it will form a sub-set of the
large company category. The criteria used refer to the company’s
“balance sheet total”, a perhaps not entirely clear phrase which
refers to amount of the company’s assets (without subtracting
liabilities)15; its net turnover16; and the number of persons
employed by it on average over the year.17 In order to classified
as micro, small or medium-size the company has to meet two of
the three applicable criteria; the “large” category is a residual
one into which companies otherwise fall; and the PIE
classification turns on a different approach.
Micro companies
21–3
Micro companies are private companies18 for which the balance
sheet maximum is £316,000; the maximum net turnover
£632,000 and the maximum number of employees is 10.19
However, a micro company will not have access to the reporting
relaxations if it is a member of a corporate group,20 presumably
because those relaxations might undermine the group accounts.
In short, the micro exemptions are available to stand alone
companies only, which reinforces their focus on very small
businesses.
Companies on the borderline of the criteria might find
themselves drifting in and out of qualification as micro
companies. This problem is addressed, as it is with the other
categories, by requiring that companies meet the criteria for two
years in order to qualify as micro and equally by providing that
micro status will not be lost unless the criteria are not met for
two consecutive years.21 As is to be expected, the micro
company benefits from the least demanding reporting regime.
The category was the result of an EU level initiative in 2012.22 It
operates by giving Member States the option to remove from
micro companies requirements that would otherwise apply to
them under the regime for small companies. The UK chose to
take up most of the options made available in the Directive.23 Of
course, the directors of micro companies may choose to report
more fully.
Small companies
21–4
The criteria for small companies are also set out in the Directive,
but, unlike with micro companies, Member States may increase
the monetary criteria by up to 50 per cent. The UK chose to take
advantage of this flexibility (i.e. to include more companies in
the small category). The resulting numbers are: £5.1 million for
balance sheet; £10.2 million for turnover; and 50 employees (this
last being a number fixed in the Directive).24 A company which
qualifies as small can normally benefit from the “small
companies regime” for the accounts and reports, which is less
stringent than that for larger companies. Moreover, having
qualified in a particular year, the company retains its status as
“small” unless it fails to meet the criteria for two successive
years.25 Some 3 million of the approximately 3.5 million
companies in the UK fall within either the “small” or “micro”
categories, so that in numerical terms the relaxations for small
companies are very important and the full accounting regime is
of concern only to the numerical minority of companies.26
A company which meets the numerical criteria nevertheless
cannot count as a small company if it is a public company or
carries on insurance, banking or fund management activities or is
a member of a group which contains an “ineligible” member.27
The thought here appears to be that such companies (or groups
of which they are members) are engaged in sufficiently sensitive
activities that full disclosure is required, especially for the
benefit of the relevant regulators, and, in the case of public
companies, the fact that they are free to offer their shares to the
public suggests that a full financial record should be available.
Medium-sized companies
21–5
Somewhat misleadingly placed some 80 sections away from the
provisions on small companies is to be found, in the
“supplementary provisions” to Pt 15, the definition of a medium-
sized company. The criteria here are: balance sheet total of not
more than £18 million, turnover not more than £36 million and
not more than 250 employees.28 There are similarly-motivated,
but not identical, exclusions from this category as we saw in the
small category, amongst which, crucially, are public
companies.29 In some ways, however, placing these definitions
in the “supplementary provisions” of the Part dealing with
accounts is appropriate, for medium-sized companies and groups
benefit from rather fewer relaxations from the full accounts
requirements, as compared with small companies. The CLR
recommended the removal of this category on the grounds that it
was neither much used nor valued, but this suggestion was not
taken up.30
Large companies and public interest entities
21–6
Large companies are simply those which not meet the
quantitative criteria needed to fall within the medium-sized
category.31 Public interest entities are companies whose
securities are admitted to trading on a regulated market in the
EU,32 which the Act terms a “traded company”.33 In addition, the
category includes any bank or insurance company (whether so
traded or not), plus any other category of company added to the
list for its jurisdiction by a Member State (the UK has not done
so). PIEs are already subject to special audit treatment, as we
shall see in the next chapter. As for core accounting, the
principal requirement is that PIEs should always report as large
companies even if otherwise qualified as medium-sized.34 It is
seriously open to doubt whether in the UK any PIE would
qualify as medium-sized even without this express exclusion.
The PIE category is, in fact, of most interest in the context of
non-financial reporting, as we shall see below.
There is a further dimension to financial reporting by
companies traded on public markets. Those who introduced the
annual reporting obligation in the nineteenth century probably
saw it as informing two groups of people: the shareholders of the
company, so that they could assess whether the company’s
management was doing an acceptable job; and the creditors of
the company, whose claims are confined to the company’s assets
(except in the rare case of an unlimited company). However, the
modern view includes a further group as having an interest in
this matter. At least with companies whose securities are traded
on a public market, disclosure of information about the company
is crucial for the accurate pricing of the companies’ securities
and hence for the efficient operation of the securities market.
This is true both of equity securities (shares) and debt securities
(bonds) which are traded on public markets.
So strong is the markets’ demand for information that it is not
satisfied by the annual reporting obligations discussed in this
chapter. As we shall see in Ch.26, publicly traded companies are
now subject to extensive disclosure requirements which operate
throughout the company’s financial year. Such rules include
more frequent periodic reporting than the annual requirements of
the Companies Act, as well as significant requirements for the
episodic or ad hoc reporting of particular events. Even in relation
to the annual reports, which remain a very significant reporting
occasion, it is the point at which the company makes a
preliminary announcement to the market of its financial results
for the previous year (the “prelims”)35 which moves the market.
Such announcements—and the later full accounts and reports,
though they are somewhat stale news by then—are pored over
by analysts, whose task it is to generate advice for investors.
THE ANNUAL ACCOUNTS
Accounting records
21–7
The statutory provisions relating to the annual accounts begin by
imposing on the company a continuing obligation to maintain
accounting records.36 This is logical enough, because, although
these records are not open to inspection by members or the
public, unless they are kept it will be impossible for the company
to produce verifiable annual accounts. Hence, s.386 provides
that every company—no matter how categorised for other
accounting purposes—shall keep records sufficient to show and
explain the company’s transactions, to disclose with reasonable
accuracy at any time its financial position and to enable its
directors to ensure that any balance sheet and profit and loss
account will comply with the relevant accounting standards.37
A company which has a subsidiary undertaking to which these
requirements do not apply38 must take all reasonable steps to
secure that the subsidiary keeps such records as will enable the
directors of the parent company to ensure that any accounts
required of the parent company comply with the relevant
requirements.39
Failure to comply with the section renders every officer of the
company (but not the company itself) who is in default guilty of
an offence40 unless he shows that he acted honestly and that, in
the circumstances in which the company’s business was carried
on, the default was excusable.41 More effective in practice is
probably the duty laid on the auditor to check whether adequate
accounting records have been kept and to reveal failure to do so
in the auditor’s report.42
Section 388 provides that accounting records are at all times
to be open for inspection by officers of the company.43 If any
such records are kept outside the UK,44 there must be sent to the
UK (and be available for inspection there by the officers) records
which will disclose with reasonable accuracy the position of the
business in question at intervals of not more than six months and
which will enable the directors to ensure that the company’s
balance sheet and profit and loss account comply with the
statutory requirements.45 All required records must be preserved
for three years if it is a private company or for six years if it is a
public one.46
The financial year
21–8
The first step in the production of the annual accounts is to fix
the company’s financial year. Sections 390–392 prescribe how
this is to be done. Despite its name the financial year is not a
calendar year nor, necessarily, a period of 12 months. What
period it is depends on its “accounting reference period”
(“ARP”), which in turn depends on its “accounting reference
date” (“ARD”), which is the date in each calendar year on which
the company’s ARP ends. For companies incorporated after 1
April 1996, the company’s ARD will be the anniversary of the
last day of the month in which it was incorporated.47 However,
the company may choose a new ARD for the current and future
ARPs and even for its immediately preceding one.48 This it may
well want to do for a variety of reasons; for instance, if the
company has been taken over and wishes to bring its ARD into
line with that of its new parent.49 The new ARD may operate
either to shorten or to lengthen the ARP within which the change
is made,50 but in the latter case the company may not normally
extend the ARP to more than 18 months51 and may not normally
engage in the process of extending the ARP more than once
every five years.52 These are necessary safeguards against
obvious abuses, for constantly changing ARPs make
comparisons across the years difficult. The company’s financial
year then corresponds to its ARP, as fixed according to the
above rules, except that the directors have a discretion to make
the financial year end at any point up to seven days before or
seven days after the end of the ARP.53
Individual accounts and group accounts
21–9
Subject to a very limited exception54 s.394 imposes on the
directors of every company the duty to prepare for each financial
year a set of accounts of the company (its “individual
accounts”). This duty applies even to the directors of small and
micro companies, though the requirements as to what the
accounts have to contain in those cases are less onerous. Section
399 imposes a duty on directors of a company which is a parent
company additionally to prepare a consolidated balance sheet
and profit and loss account (“group accounts”). Those group
accounts must deal with the state of affairs of the parent
company and its “subsidiary undertakings”—taken together.55
However, the obligation to produce group accounts is
qualified by one very significant exception: it does not apply to
parents of groups subject to the small companies regime. Many
businesses, even quite small ones, operate as groups. However,
that exemption could undermine the requirement for group
accounts, for example, where those in control of the business
ensured that the operations of the group were carried on and its
employees were employed principally in companies below the
parent which itself was a small company. Consequently, in order
to benefit from the small company group exemption, the test is
not whether the parent is small, but whether the group as a whole
meets the relevant criteria.56 The size tests for a small group are
the same as for a stand-alone company except that intra-group
transactions may be eliminated when calculating turnover and
balance sheet totals; alternatively, the parent company may
choose instead to benefit from higher levels (by one fifth)
without eliminating intra-group transactions.57 However, the
legislature recently expanded the group accounts exemption in
one significant way, by extending it to small public companies.
Provided the size criteria are met, it does not matter that the
parent or the subsidiaries are public companies, provided none of
them is a traded company.58
There is no special exemption for micro companies in relation
to group accounts. Indeed, if a micro company is part of a group,
the micro relaxations are not available for its individual
accounts.59 However, since, by definition, a micro company will
also be a small company, it will be able to benefit from the small
company regime when producing its individual accounts as a
member of a group and will benefit from the small company
exemption from the requirement to produce group accounts if it
is the parent company.
There is a similar approach to the definition of a medium-
sized group to that used for a small group—except, of course,
that a medium-sized group is not exempted from the obligation
to produce group accounts, but it may report less fully.60
Parent and subsidiary undertakings
21–10
The obligation to produce group accounts does not relieve the
directors of the parent company from the obligation to produce
individual accounts for the parent61 nor, subject to one exception,
the directors of the other companies in the group from that
obligation in relation to their company.62 The individual and
group accounts of companies within a group should be produced,
in principle, using the same financial reporting framework.63 The
exception relates to subsidiaries which have been dormant
throughout the relevant financial year (unless the subsidiary is a
traded company—a rare situation). They are not required to
produce individual accounts, subject to certain conditions, in
particular that all the members of the subsidiary agree (easy
enough if the subsidiary is wholly owned), that the parent is
incorporated in the EEA and that the parent guarantees the
liabilities of the subsidiary as they existed at the end of the year
in relation to which the exemption applied (and all this is
disclosed).64 The principle that the production of group accounts
should not normally remove the obligation to render individual
accounts is as it should be. Creditors, in particular, may well
have claims only against particular companies in the group,
unless they have contracted for guarantees from other group
members, and so the group picture alone might be misleading.
By contrast, the shareholders of the parent have an economic
interest in the performance of the group as a whole, since
subsidiary profits may eventually come to them as dividends
from the parent company, and so are interested primarily in the
group accounts.65
The obligation to produce group accounts gives rise to the
need to define a subsidiary undertaking. The situation may be
clear when Company A holds all the voting shares in Company
B, but suppose it holds only 30 per cent of them. What is then
the position? The answer is provided by ss.1161 and 1162 and
Sch.7. The term “undertaking” is used rather than “company”
because consolidation of the accounts is required even if the
subsidiary business does not take the form of a company or some
other body corporate, but is a partnership or other
unincorporated body.66 Thus, although group accounts are
required by the Act to be compiled only by entities which are
companies,67 the shareholders and creditors of and investors in
those companies are to be provided with financial information
relating to all the businesses the parent controls, no matter what
legal form they may take.
But what is control? The Act, building on art.22 of the
Directive, sets out five situations where control will be found to
exist. Briefly summarised, these situations are where the parent
company:
(a) holds a majority of voting rights in the undertaking68;
(b) is a member of the other undertaking and has the right to
appoint or remove a majority of its board of directors69;
(c) by virtue of provisions in the constitution of the other
undertaking or in a written “control contract”, permitted by
that constitution, has a right, recognised by the law under
which that undertaking is established, to exercise a “dominant
influence” over that undertaking (by giving directions to the
directors of the undertaking on its operating and financial
policies which those directors are obliged to comply with
whether or not the directions are for the benefit of the
undertaking)70;
(d) has the power to exercise or actually exercises dominant
influence or control over the undertaking or the parent and
alleged subsidiary are actually managed on a unified basis71;
(e) is a member of another undertaking and alone controls,
pursuant to an agreement with other members, a majority of
the voting rights in that undertaking72; and sub-subsidiaries
are to be treated as subsidiaries of the ultimate parent also.73
Despite the complexities of this definition, which arise partly
out of the need to address control structures across the EU, it is
clear that the most important case in the UK is (a). Thus, the
answer to our question is that a holding of 30 per cent by
Company A in Company B will not, by itself, make Company B
its subsidiary. However, companies are not permitted to remain
entirely silent about their significant relationships with
companies other than subsidiaries. Companies have to disclose
in their individual or group accounts certain information about
companies, not being subsidiaries, in which they have
nevertheless a significant holding.74 However, such affiliated
companies do not have to be consolidated into the group
accounts.
Parent companies which are part of a larger group
21–11
A parent/subsidiary relationship will exist even where the parent
(the “intermediate parent”) is itself the subsidiary of another
company. In groups of companies this situation often exists.
There may be a chain of companies in which all but the bottom
company meet the statutory definition for being a parent of the
company (or companies) below them in the chain. The resulting
proliferation of group accounts of varying scope is not likely to
be helpful. Consequently, there are exemptions which apply in
such cases. The terms of the exemption vary according to the
level of the parent’s shareholding in the intermediate parent,
since the “outside” shareholders in the intermediate parent have
an economic interest in that company’s subsidiaries and so may
wish to have intermediate group accounts.
Subject to certain further conditions, an intermediate parent
which is a wholly-owned subsidiary of another company is
relieved of the obligation to produce group accounts.75 Where
the parent of the intermediate parent holds 90 per cent or more of
the subsidiary’s shares, the exemption needs the approval of
(presumably a majority of) the remaining shareholders of the
intermediate parent.76 Where the parent of the intermediate
parent holds more than 50 per cent of the allotted shares77 (but
less than 90 per cent), exemption is the default rule. However, if
the holders of at least 5 per cent of the total allotted shares in the
intermediate parent serve a notice, within six months of the end
of the financial year in question, requiring the production of
group accounts by their company, then those group accounts
must be produced.78 The higher level of protection where the
“outside” shareholders constitute 10 per cent or less of the
shareholders is perhaps explicable by reference to the fact that
the governance rights of such shareholders are very limited. For
example, they are unable to block a special resolution. None of
the above exemptions is available, however, if the intermediate
parent is a traded company.79 This is particularly important in
relation to the default exemption. For such companies, there will
necessarily be a significant block of the company’s shares which
are not held by that company’s parent but are in the hands of
public investors. Their interests dictate that the traded company
should produce accounts which cover its position together with
the position of the undertakings it controls, for that is the
economic entity in which the public have invested.80
Even where the exemption is available in principle, certain
other conditions have to be met. First, the intermediate parent
must actually be included in the accounts of a larger group; those
accounts must be drawn up in accordance with the standards
contained in the Directive or equivalent standards, and must be
audited.81 Secondly, the individual accounts of the intermediate
parent must disclose that it is exempt from the obligation to
produce group accounts and give prescribed information in order
to identify the parent undertaking that draws up the group
accounts.82 Thirdly, the intermediate parent must deliver the
group accounts to the Registrar, translated into English, if
necessary.83
Companies excluded from consolidation
21–12
Even if a company is in principle subject to the obligation to
produce group accounts, nevertheless some subsidiary
companies may be omitted from the consolidation. Subsidiaries
may be omitted if (a) their inclusion is not material for giving a
true and fair view of the group (for example, if they are inactive
companies); (b) “severe long-term restrictions” substantially
hinder the exercise of the parent’s rights over the assets or
management of the company (a situation most likely to arise
from restrictions in foreign legal systems); (c) the necessary
information cannot be obtained “without disproportionate
expense or undue delay”; and (d) the parent’s interest is held
exclusively with a view to resale.84 If all the subsidiaries fall
within one or other of these categories, no group accounts need
be produced—no doubt a rare situation.85
Form and content of annual accounts
Possible approaches
21–13
Broadly, there are two model approaches for the legislature to
take to the rules governing the financial analysis of the
transactions the company has engaged in during the year and the
presentation of the results of that analysis in the company’s
individual or group accounts. It could lay down one or more very
general principles and leave it to the accounting profession to
develop more specific rules (usually referred to as “accounting
standards”), to which, however, legal force might or might not
be attached; or the legislature could try to set out a detailed set of
rules itself. The British tradition is closer to the former model.
However, the continental European tradition, which is closer to
the second model, had an impact on British law in the 1980s,
because that tradition influenced the Fourth and Seventh
Directives on companies’ accounts,86 though not to the extent by
any means of a complete shift to the latter approach. However,
in a later development, the EU moved towards giving standard
setters a bigger role in the setting of the detailed rules, through
the adoption of International Accounting Standards (“IAS”),
though with the rider that standard-setting should no longer be
purely a matter for the professions and the public interest should
be represented in the standard-setting exercise.
The result is that the current rules are a mixture of legislative
provision and accounting standards, to which different degrees
of legal recognition are accorded. Moreover, there are two sets
of rules, with different mixtures. Here lies the significance of the
term “accounting framework”. A company which is under an
obligation to produce individual accounts is free to do so either
by reference to the rules contained in the Companies Act and
regulations made thereunder or by reference to IAS.87 These
accounts are called, helpfully if unimaginatively, “Companies
Act individual accounts” and “IAS individual accounts”
respectively. The same choice is available to companies under an
obligation to produce group accounts, except that companies
which in domestic terminology are traded companies88 must use
IAS for their group accounts, as required by EU law.89 Thus,
there are also “Companies Act group accounts” and “IAS group
accounts”.
The IAS Regulation permits Member States to permit or
require domestic companies to use IAS more widely.90 The UK
adopted the permissive approach but made it widely available,
for even small companies may use IAS.91 Having switched to
IAS, a company may change back to Companies Act accounts
provided it has not changed to Companies Act accounts during
the five-year period leading up to the most recent year of IAS
accounts. This rule is clearly aimed at preventing chopping and
changing, which would reduce the comparability of the accounts.
If the company wishes to change back to Companies Act
accounts within that period, it must show that “there is a relevant
change of circumstance”.92 Similar rules apply on a reconversion
to IAS.93
We will now look at Companies Act accounts and IAS
accounts in turn, but first it is necessary to look at a two
provisions which applies to both Companies Act and IAS
accounts.
True and fair view
21–14
The traditional British approach to the accounts has long focused
around the general principle that the accounts must “give a true
and fair view of the assets, liabilities, financial position and
profit or loss”94 of the individual company or the companies
included in the consolidation in the case of group accounts. For
many years this was virtually all the companies legislation said
about the content of the accounts. It remains an overriding
principle, no matter which accounting framework is used for the
presentation of the accounts. The directors must not approve
accounts unless they provide a true and fair view.95 The
overriding nature of the requirement is reflected in art.4 of the
Directive.
If compliance with the Act or provisions made under it would
not be sufficient to give a true and fair view, the necessary
additional information must be given in the accounts or notes to
them.96 Further, if in “exceptional” or “special” circumstances
compliance with the statutory provisions would put the accounts
in breach of the “true and fair” requirement, the directors must
depart from the statute or subordinate legislation to the extent
necessary to give a true and fair view.97 What this qualification
seems not to permit, though standard-setters have sometimes
taken a different view, is the issuance of a standard which gives
a general dispensation to companies to depart from a provision
in or made under the Act, on the grounds that a true and fair
view requires this. These provisions of the Directive and of the
Act contemplate only ad hoc departures from the statutory
requirements in the case of particular companies in particular
circumstances.
The prohibition on signing accounts which do not give a true
and fair view applies equally to IAS accounts as to Companies
Act accounts. However, with IAS accounts, domestic law says
nothing about what must or may be done to produce that view if
the applicable standards by themselves do not achieve it.98
Nevertheless, the position is probably the same, since the
provisions of the Directive apply to all accounts, no matter what
accounting framework is employed. IAS 1 requires that the
accounts “present fairly” the company’s or group’s financial
position, which presumably may be equated with a “true and fair
view”.99 The application of IAS (or rather International Financial
Reporting Standards (“IFRS”), as they have now become) is
presumed to lead to fair presentation, but IAS 1 recognises that
further disclosure may be necessary to achieve this result.
Departure from IFRS in order to achieve fair presentation is
recognised as permissible but only “in extremely rare
circumstances”.
Going concern evaluation
21–15
Much less obvious in the domestic legislation than the true and
fair requirement, but often as important, is the requirement that
directors form a view, when they draw up the accounts, whether
the company is a going concern. Article 6 of the Directive lays
down as one of its “general financial reporting principles” that
“the undertaking shall be presumed to be carrying on its business
as a going concern”, so that, if the company is in danger of
ceasing to be a going concern, this fact must disclosed and
appropriate valuations made. This principle is important because
the numbers in the accounts are likely to look very different
where a company may have to sell assets off on a break-up basis.
Both the national and international accounting standards
(discussed below) require that the directors make this assessment
when preparing financial statements.100 In addition, the Listing
Rules require the directors of a company with a premium listing
on the Main Market101 of the London Stock Exchange to insert in
its annual financial report a statement that the company is a
going concern, together with any assumptions underlying that
statement and any qualifications to it.102 In the recent financial
crisis, and especially when liquidity was in short supply, the
issue came to the fore. The Financial Reporting Council (see
below) established a committee to examine the lessons to be
drawn from how this matter was handled in the crisis and later
issued revised guidance.103
Companies Act accounts
21–16
At the core of Companies Act accounts are a traditional balance
sheet and a profit and loss statement.104 The balance sheet
provides a statement of the company’s assets and liabilities, as at
a particular point in time, i.e. the last day of the financial year. If,
as is to be hoped, the former are greater than the latter, the
difference between the figures is sometimes referred to as the
shareholders’ equity. It is the theoretical amount which the
shareholders would receive if the company’s business were then
sold as a going concern.105 If the assets are less than the
liabilities, the shareholders have no equity in the company and
the people with the strongest interest in its economic
performance are its creditors.106 The profit and loss account
indicates the company’s performance over the financial year: has
it generated more value than it has consumed? Profit is different
from cash flow. A profitable company may have a negative cash
flow over a particular period, for example, where it has used a
previously large cash balance to buy a new (and profitable)
business. Although the new business may have generated cash
during the financial year in which it was bought, it is highly
unlikely that this cash income will come anywhere near the
amount expended to acquire the business. Conversely, a
company which has been unprofitable over the year but has
managed to dispose of a large fixed asset during that year may
end the year with more cash than at the beginning of it.
What does the Act say about the format of these two
accounts? With the enactment of the Fourth and Seventh
Directives, UK law also adopted the Continental practice of
dealing with matters of form and content to some extent in the
legislation itself, and so the domestic legal provisions dealing
with the accounts were expanded. Those provisions are now in
the Large and Medium-Sized Companies and Groups (Accounts
and Reports) Regulations 2008,107 and the Small Companies and
Groups (Accounts and Reports) Regulations 2008,108 both as
subsequently amended. This account of the Regulations is
necessarily brief and we shall omit entirely the special
provisions applying to banking and insurance companies.
Following the Directive, Pt 1 of Sch.1 to both sets of
Regulations109 provides two alternative formats in which the
balance sheet may be presented and four possible formats for the
profit and loss account. However, the directors cannot shift from
the formats adopted in the previous year “unless in their opinion
there are special reasons for a change”.110 The formats concern
simply the questions of how the accounting information is
grouped and the order in which the information, so grouped, is
presented to the reader. More important, therefore, are the
provisions of the Schedule which go into issues relating to the
proper accounting treatment of transactions carried out by the
company or contain rules about the valuation of assets and
liabilities. These are contained in Pt 2 of the Schedule under the
heading “Accounting Principles and Rules”. This is where the
“going concern” principle of the Directive is transposed into
domestic law. However, these rules are (strong) default rules, for
the directors may depart from them if there are “special reasons”
for so doing, provided the nature of the departure, the reasons for
it and its effect are stated.111 Furthermore, the Schedule explicitly
provides a choice to the directors as to the fundamental
accounting approach which will be adopted. No longer is a
historical cost approach mandatory (under which, for example,
assets are carried in the books at their original acquisition price,
less depreciation, even though their current market price is much
higher) but rather various forms of “marking to market” are
permitted.112
Finally, it is clear that the “Accounting Principles and Rules”
contained in the Schedule are not sufficient to produce a set of
accounts for any particular company, except perhaps one of the
simplest character. More detailed accounting standards need to
be deployed, which are not to be found in the Regulations
implementing the Directives but in standards developed by the
standard-setters, to which we now turn.
Accounting standards
21–17
In the UK the professional accountancy bodies had begun as
early as 1942113 to issue accounting standards. At that time and
for a long while thereafter they provided the only authoritative
guidance on what the “true and fair” requirement meant in
particular situations. Those standards covered ever more topics
and became ever more sophisticated over time; and, as we have
seen, their centrality to the accounts-producing exercise was not
ended by the transposition in the UK of the Fourth and Seventh
Directives. Two important developments have accompanied the
expansion of the role of accounting standards. These two
developments are probably not unconnected with one another,
their common feature being a recognition of the quasi-public
role played by accounting standards. First, accounting standards
have achieved legal backing; secondly, the professional bodies
have lost their previously complete control over the standard-
setting process.
Although the 1942 standards were termed
“Recommendations”, it became accepted in the accounting
profession that compliance with the legal obligation to present a
“true and fair” view of the company’s financial position required
in principle adherence to accounting standards – even if on rare
occasions that legal obligation had the contrary effect of
requiring directors to override the requirements of a particular
standard.114 A good example of this reasoning in action was
provided on the occasion of the introduction of a set of extensive
reporting relaxations for micro companies (see below). The
Directive provides that where advantage is taken of these
relaxations, the micro company’s annual financial statements
“shall be regarded as giving the true and fair view required by
Article 4(3)115 [which refers to the provision of additional
information to give a true and fair view]”. This was argued to
rule out the application of accounting standards to the relevant
items in the micro company’s accounts, because these typically
would require additional information. But, if accounting
standards could not be applied, directors and auditors would be
in danger of not meeting the “true and fair” obligation.
Consequently, the Act’s formulation of the directors’ true and
fair obligation was amended specifically to require directors of
micro companies to ignore accounting standards when making
that judgement if those standards would require the provision of
further information.116
This process described in the previous paragraph was
supported by the courts’ acceptance of the professional standards
as the best evidence of the standard of care required by the law
of negligence in relation to accountants performing their
professional duties, especially when acting as auditors, though
the courts are not bound by the professionally developed
standards.117 In the case of large companies the resulting position
was recognised legislatively in a provision added in 1989. This
provides that “it must be stated whether the accounts have been
prepared in accordance with applicable accounting standards and
particulars of any material departure from those standards and
the reasons for it must be given”.118 This in effect puts
accounting standards on a “comply or explain” basis, and it was
probably the first example of the use of this technique in
company law.119
The second development—the injection of a public element
into the standard-setting bodies—occurred when the Companies
Act 1989 conferred on the Secretary of State the power to
determine which body or bodies have authority to issue
accounting standards which have statutory recognition.120 Under
the current arrangements the Secretary of State has delegated
this power to the Financial Reporting Council Ltd (“FRC”). The
FRC is a private company (limited by guarantee), but the Chair
and Deputy Chair of the FRC are appointed by the Secretary of
State; the remaining directors, executive and non-executive, are
appointed and removed by the board itself. Those who have
practised in the accounting profession within the previous five
years are excluded, so that the board appears to be weighted
towards the users of accountants’ services. Some of the work of
the FRC in the accounting standards area is delegated to a Codes
and Standards Committee. The FRC is funded in its accounting,
audit and corporate governance activities by the accountancy
profession and the preparers of financial statements, though the
“preparers’ levy” paid by public traded and large private (i.e.
non publicly traded) companies.121 Overall, the public
authorities, despite no longer making any significant
contribution to the funding of the FRC, can be said to have
considerable potential control over its activities. On the other
hand, the governmental bodies do not interfere in the day-to-day
running of the FRC. Thus, the current structure can be said to
combine the technical competence and flexibility of setting rules
through expert bodies exercising delegated powers with the
safeguarding of the public interest through ultimate public
control.
IAS accounts
21–18
If the Directive represents the use by the EU of (partial)
legislative specification of the form of the accounts, the IAS
Regulation122 represents the EU’s adoption of the alternative
strategy of reliance on the standard-setters. Companies subject to
the IAS, whether mandatorily or by their own choice, are to
prepare their accounts in conformity with international
accounting standards as laid down by the International
Accounting Standards Board and as adopted by the
Commission.123 True it is that such companies remain subject to
the Directive, but the predecessors of the current Directive, the
Fourth and Seventh Directives, were amended so as to ensure
that they permitted companies to adopt the IAS approach. A
good example is the fact that IAS 1 does not require the
production of a profit and loss account but rather of income and
cash flow statements, which necessitated an adjustment of the
Fourth Directive.124 At domestic level, since the IAS Regulation
applies directly in the UK, the national provisions dealing with
the form and content of the accounts are applied only to
companies producing Companies Act accounts.125 For IAS
accounts, these matters are dealt with in the international
standards themselves.
The effect of the IAS Regulation is to give the standards
produced by the IASB (now called International Financial
Reporting Standards (“IFRS”)) an even more explicit legal
position than domestic standards. The appropriate IAS and IFRS
must be followed under the terms of the IAS Regulation.126 Not
surprisingly, and in line with the domestic developments, the
more prominent role afforded to the international standards was
accompanied by the loss of purely professional control over the
setting of those standards. The IASB became an independent
body in 2001, having been founded in 1973 by the professional
accountancy bodies of nine leading countries. However, close
ties with a particular government, on the model of the FRC, were
hardly feasible for the IASB, which adopted a different path
away from professional control. In brief, its members are
appointed by the trustees of a foundation,127 which trustees are a
self-perpetuating body (i.e. they appoint their own successors).
However, this arrangement was subject to criticism, notably
from the European Commission, and was modified by the
addition of a Monitoring Board consisting of representatives of
the public authorities (mainly regulators, including the European
Commission).128
21–19
The IASB is not a European but an international organisation, as
its name suggests. Given its wider scope, the obligation of
companies within the IAS Regulation to apply IAS and IFRS,
and the reluctance of the European Commission to lose all
control over this important area, it is perhaps not surprising that
there is a filter in place between the adoption of a standard by
the IASB and its becoming mandatory for European companies
subject to the IAS Regulation. The filter is that the standard
produced by the IASB must have been adopted by the
Commission of the European Union, which is advised by a
technical committee (European Financial Reporting Advisory
Group (“EFRAG”)) and a committee consisting of
representatives from the Member States (Accounting Regulatory
Committee (“ARC”)) before it endorses an international
standard.129 The nature of the filtration process is perhaps less
clear. Adoption is not permitted if the IASB standard is contrary
to the “true and fair view” principle,130 but if the “fair
presentation” principle of IAS 1 is the same as a true and fair
view,131 then that judgment will have been made already by the
IASB. Nor may the Commission adopt an IASB standard if it
fails to “meet the criteria of understandability, relevance,
reliability and comparability” required of such standards.
However, it is highly unlikely that the IASB would adopt a
standard which it considered infringed this principle either. In
effect, the filter operates as an opportunity for the same issues to
be debated again at EU level as were considered internationally
in the adoption of the initial IAS or IFRS. Such a re-hashing of
the arguments occurred in relation to the IAS standard on the
market valuation of financial instruments. After a long debate
IAS 39 was adopted but with two significant carve outs.132 The
other IAS and IFRS have been adopted straightforwardly,
though not always on time.133 It is clear that extensive use of the
blocking power by the Commission would be likely to lead to a
collapse of the IASB venture.
It may be wondered why the EU threw its weight behind the
IAS and the IASB rather than keeping closer control over
accounting standards itself. It seems to have recognised that
producing accounting standards for the largest companies is
necessarily a global rather than a regional activity.134
Globalisation has led multinational companies to acquire not
only cross-border business activities, but also cross-border
groups of investors. Both investors, seeking to compare
companies from different jurisdictions, and companies, seeking
to raise money in more than one country, have generated a
demand for international uniformity in accounting standards, so
that accounts do not have to be constantly restated according to
different countries’ “generally accepted accounting principles”
(“GAAP”). The only other contender for a global role is the US
national standards (US GAAP). The IASB provides a platform
from which convergence may be pursued with the US standards
rather than a simple adoption of them.135
Applying the requirements to different sizes of
company
21–20
We have seen that the form and content of the accounts result
from a complex interaction of rules set out in legislation (which
itself may be national or EU legislation and primary or
secondary legislation) and accounting standards (which may be
national or international). This is a far cry from the days when
there was only national legislation, when that legislation
confined itself to the requirement of a true and fair view, and the
rest was national accounting standards. It does not help that the
balance between legislation and standards varies somewhat
according to whether national or international standards are used
by the company. There is one further cross-cutting set of
divisions which we need to notice. This is the varying intensity
of the rules and standards across companies of different sizes.
We need to consider this point only briefly, since this is not a
textbook on accounting. The rules we consider here relate to the
different requirements for the production of accounts. As we
shall see later, differences in economic size are also relevant a
number of other accounting matters: what goes into the notes to
the accounts and into narrative reporting or the level of publicity
to be given to those accounts once produced (through their filing
in a public registry). The full force of the rules and standards
applies only to large companies and groups and PIEs which are
required to report as large companies, even though they are only
medium-sized.136 Medium-sized companies and groups benefit
from a modest set of derogations from the requirements for large
companies. In particular, the UK has not taken up the permission
in art.23 of the Directive to exempt the parent of medium-sized
groups from the obligation to draw up group accounts.
For small companies the derogations are more substantial. As
we have seen above, a small company is not required to produce
group accounts, though it may choose to do so. Further, the
Directive (art.14) permits Member States to allow small
companies to produce only “abridged” profit and loss accounts
and balance sheets. This means that some items normally
required to be shown separately may be combined in a single
heading. So, the accounts are less granular, but equally cheaper
to produce and less helpful to competitors. Until recently,
domestic law has permitted small companies to publish
abbreviated accounts.137 Drawing up abridged accounts raises
additional issues because the accounts are then less useful for
shareholders as well as outsiders (shareholders receive the
accounts as drawn up and are not reliant on the published ones).
The UK decided to take up the option to permit abridged
accounts to be drawn up only where all of the members of the
company consent to this course of action.138 This is designed to
allow the company to cut costs when all the shareholders are
insiders but to allow outside shareholders to protect themselves
by withholding consent. Finally, the accounting standards
applying to small companies have been simplified, both by the
FRC and the IASB.139
The largest set of derogations is reserved for the smallest
companies, i.e. micro companies. The permissible derogations
from the accounts preparation requirements are set out in art.36
of the Directive, and the UK has taken advantage of nearly all of
them140 for free-standing micro entities.141 Accounting standards
are further simplified for micro entities.142
Notes to the accounts
21–21
Although the British tradition has been for the legislature not to
specify the form and content of the accounts, but to leave that to
standard-setters, the legislature has long seen the accounts as a
useful place to require the disclosure of specific pieces of
information. These are not required to be part of the accounts
proper but are to be given in “notes” to the accounts.143 The
notes requirements apply whether the company has produced
Companies Act or IAS accounts.144 The information required to
be disclosed is often designed to make the information contained
in the accounts complete.145 We have seen above the example of
the requirement to give information in the notes about non-
subsidiary companies in which the reporting company has a
significant holding.146 Another example is the requirement for
companies (other than small ones) to disclose ‘off balance-sheet’
transactions, without knowledge of which the balance sheet may
be entirely misleading.147
Most of what is required by way of notes in arts 16–18 of the
Directive falls into the “completeness” category. However, in
this context there is again room for debate about whether the
notes requirements should apply uniformly across all sizes of
company. The Directive requires compliance with the art.16 list
by all companies, except that Member States may choose to
exempt micro companies from nearly all of them, as the UK
did.148 Small companies are in principle exempted from the more
advanced disclosures required by art.17. However, Member
States may choose to apply five of the more advanced
disclosures to small companies, but may not impose notes
requirements on small companies beyond this level.149 The UK
decided to apply all five additional disclosures to small
companies, on the grounds that they were not burdensome and
were needed to understand properly the financial position of the
company, e.g. material post-balance sheet events.150 Finally,
art.18 (disclosure of turnover by reference to different
geographical markets) applies only to large companies and
PIEs.151
However, the information provided in the notes may reinforce
the shareholders’ governance rights as well as supplying
potentially useful financial information. We have seen that the
issue of transactions between companies and those who are in a
position to influence the terms of those transactions or their
associates is a central regulatory problem in relation to both
directors and controlling shareholders. Transactions between
directors and their companies are subject to special rules about
disclosure to the board or even shareholder approval,152 whilst
similar transactions by controlling shareholders, though in
general less well policed by British company law, may give rise
to claims of unfair prejudice.153 Article 17(1)(r) requires
disclosure of information about material related party
transactions not concluded under normal market conditions, and
this is one of the provisions of art.17 which the UK has applied
to small companies.154 Shareholders reading the notes are thus in
a better position to decide whether to seek to invoke their
remedies in this area.
NARRATIVE REPORTING
21–22
The company’s financial statements, naturally, are dominated by
numbers. But the annual circulation by the directors to the
shareholders includes some predominantly non-numerical
documents. This is now conventionally referred to as “narrative
reporting”. Until about a quarter of a century ago, the only
statutorily required narrative report was the directors’ report, the
content of which was determined largely by the directors
themselves. Since then, the mandatory content of narrative
reporting has expanded enormously and, as part of that process,
further reports have been added to the directors’ report. Just as
important, the notion of the audience to whom the narrative
reports are addressed has expanded. Originally, directors thought
of their report as addressed to shareholders and, perhaps,
potential investors in the company. Today, it is common to say
that the narrative reports are addressed to all “stakeholders” in
the company—though the term “stakeholder” is usually
undefined and the action which stakeholders might take in
response to the information provided left unspecified.155
In consequence, the disclosures required are sometimes only
indirectly linked to the financial interests of the shareholders.156
Indeed, in some cases narrative reporting may be intended to
induce changes in corporate behaviour which the shareholders
might not wish to induce, if left to themselves. Thus, the recent
addition of “extractive industry” reporting requires the directors
of large companies and PIEs active in those industries to produce
an annual report which discloses payments made to foreign
governments. The purpose of this requirement is so that “we can
provide citizens [of foreign countries] with the detailed
information they need to hold their governments to account”.157
The implication is that such payments are often bribes to local
politicians or senior officials. The shareholders’ interests are not
placed centre-stage in this case, but rather those of the foreign
citizens. Indeed, if because of corruption or lack of democratic
process in those countries, no such accountability occurs, the
reporting companies will find themselves at a competitive
disadvantage as against companies from jurisdictions which do
not impose (or effectively enforce) this reporting requirement. If,
on the other hand, the foreign citizens are successful, the benefits
will accrue mainly to them rather than the company’s
shareholders.158 Perhaps for this reason, the Directive and the
domestic regulations, whilst requiring the payment report to be
made public (through filing at Companies House), do not require
it to be laid before the shareholders.159 Narrative disclosure can
thus be used to bolster policies whose drivers are located outside
company law, as conventionally conceived.
In this section we consider the various items that contribute to
narrative reporting, with the exception of the directors’
remuneration report, important though that is. This has been
dealt with in Ch.14160 and need not be further considered here.
Directors’ report
21–23
The directors’ report (“DR”), to accompany both the individual
and group accounts, has long been a statutory requirement in the
UK. However there is no longer a requirement for micro
companies to produce a directors’ report161 and small companies
benefit from a lower disclosure regime.162
The statute requires the report to contain some fairly
straightforward information, for example, a list of those who
were directors of the company at any time during the year.163 It
must also state the amount the directors recommend to be paid
by way of dividend to the shareholders.164 However, this latter
requirement does not apply to companies entitled to the “small
company exemption”. Presumably, this is because in small
companies public disclosure of dividend recommendations may
reveal the income of easily identifiable individuals, for example,
where the directors are the only shareholders. This exemption is
available not only to small companies falling within the small
companies regime for the accounts but also to small companies
which would so fall but for the fact that they are members of a
group of companies which contains an ineligible member.165
Thus, the relaxations for small companies in relation to the DR
go somewhat wider than in relation to the accounts. More
generally, the DR must state any important events which have
affected the company since the end of the financial year and
indicate the likely future development of its business.166
None of the above is very demanding. However, when one
turns from the Act to Sch.7 of the Large Companies Regulations,
one finds a number of disclosure requirements which are not
closely related to the financial interests of the shareholders.167
Thus Pt 3 requires information to be given about the
employment, training and promotion of disabled persons.168 Part
4 requires information about “employee involvement”, i.e. the
extent to which employees are systematically given information,
consulted, and encouraged to join employee share schemes. Part
7 requires traded companies169 to disclose their greenhouse gas
emissions. These provisions seek to co-opt large companies to
support (usually laudable) non-corporate policies which the
government is pursuing.
Even the requirement in Pt 1 for separate disclosure of the
amounts of political donations is not generally necessary to form
a view on the financial position of large companies in view of
the minimal amounts needed to trigger this requirement and the
modest amounts normally donated. However, this disclosure
clearly facilitates the operation of the controls over political
donations laid down in Pt 14 of the Act.170 One can say the same
of the buy-back disclosures required in Pt 2, which reinforce the
rules in Pt 18 of the Act. One might even take the same view of
Pt 6 of the Schedule, implementing for traded companies art.10
of the Takeover Directive on the disclosure of a company’s
control structures.171 Such disclosures facilitate takeover bids.
The strategic report
Rationale and history
21–24
Section 414A requires all companies, other than those benefiting
from the small companies regime,172 to produce an annual
strategic report (“SR”). The requirement for a SR reflects the
perception that shareholders and investors need more than
financial data to understand fully the prospects of the company.
They need also to be able to gauge the quality of the company’s
relationships with those upon whose contributions or
cooperation the success of the company depends (sometimes
called “stakeholders”). For stakeholders, as well, this
information may be useful, even if company law itself gives
them no particular platform from which to take action on the
basis of the information.173 As the CLR put it, “companies are
increasingly reliant on qualitative and intangible assets such as
the skills and knowledge of their employees, their business
relationships and their reputation. Information about future
plans, opportunities, risks and strategies is just as important as
the historical review of performance which forms the basis of
reporting at present”.174
The second argument for a broader review of the company by
the directors was the need to provide a check on the discharge by
directors of their “inclusive” duty175 to promote the success of
the company for the benefit of its members but on the basis of
taking into account the company’s need to foster its relationships
with stakeholders, its impact upon communities affected and
environmental and reputational concerns. This duty is
specifically referred to in s.414C(1). Thus, there was a close link
between the shareholder-centred statement of directors’ duties
recommended by the CLR and the desire to provide some
mechanism whereby its “enlightened” elements meant
something significant in practice and were not just self-serving.
Despite broad agreement on these principles, producing a
steady-state set of rules to implement them proved surprisingly
controversial. There have been three iterations of the rules,
which have come close to going around in a circle. The first set
of rules was recommended by the CLR under the name of an
Operating and Financial Review. At first, all seemed to be going
well with the OFR proposal. In fact, it was introduced by
regulation in 2005 under powers contained in the Companies Act
1985 in advance of the enactment of the 2006 Act,176 after
extensive consultation among those affected.177 Whilst the
companies affected were preparing their first OFRs, the then
Chancellor of the Exchequer, in a speech to the Confederation of
British Industry,178 and apparently after exiguous consultation
with the Department of Trade and Industry (the then name of the
governmental department responsible for company law),179
announced the repeal180 of the OFR on the grounds it was “a
gold-plated regulatory requirement”—but without showing any
appreciation of its place in the wider scheme of reforms
proposed by the CLR. The DTI, re-stating its commitment to
“strategic forward-looking narrative reporting”, then undertook
consultation on how far this commitment could be implemented
within what it called a Business Review requirement without
imposing on companies “unnecessary burdens”. However, the
coalition agreement of the government which took office in 2010
included a commitment to “reinstate” the OFR. The
implementation of that commitment gave us the current strategic
review. In the meantime, the EU legislature became more
involved in the area. The “management report” (in effect a DR)
required by arts 19 and 29 of the Directive (for individual and
group accounts respectively) contains some non-financial
requirements and in 2014 those requirements were strengthened
by an amending Directive, adding arts 19a and 29a to the 2013
Directive.181
Contents of the Strategic Review
21–25
Section 414C states that the purpose of the SR is to “inform
members of the company” and to help them assess whether the
directors have performed their duty under s.172 of the Act to
promote the success of the company for the benefit of its
members.182 Although placing the emphasis on the members ties
in well with the shareholder-centred focus of s.172, the CLR
proposed that the OFR should not be so narrowly targeted.183
Section 414C(2) requires the directors to produce a SR
containing a fair review of the company’s business and a
description of the principal risks and uncertainties facing it—or
them in the case of group accounts.184 The review required is “a
balanced and comprehensive” analysis of the development and
performance of the company’s business during the financial year
and of its position at the end of the year.185 To the extent that it is
necessary for an understanding of the business the review must
make use of “key performance indicators”, both financial and
non-financial.186 This is an attempt to inject some quantitative
analysis into what might otherwise be a set of generalities. These
parts of the section simply track art.19(1) the Directive, whose
requirements are indeed rather general.
For quoted companies187 the SR must deal with further
matters, largely as a matter of domestic law. At the most general
level, the company is required to describe its strategy and its
business model.188 Then the SR must address “to the extent
necessary for an understanding” of the company’s business189—
with KPIs where necessary—certain specific issues. The phrase
in quotes does not give the directors a discretion whether to deal
with a matter: it simply recognises that not all the additional
matters will be relevant to the businesses of all companies,
though few will not have to comment, for example, on the
employees. The list of additional matters potentially to be
commented on is:
(a) “the main trends and factors” likely to affect the future of the
company’s business;
(b) the impact of the company’s business on the environment;
(c) the employees;
(d) social, community and human rights issues.190
Finally, whether or not this is necessary to an understanding
of the company’s business, the SR must disclose the number of
persons of each sex who were (i) directors; (ii) senior managers;
and (iii) employees of the company. This is an example of
disclosure being used to promote the government’s diversity
policies, this time at senior levels in companies. The amending
Directive of 2014, operative from January 2017, requires some
expansion of the additional information to be provided by public
interest entities employing on average 500 employees over the
financial year, but it will not bring any novel departures from the
existing categories of additional disclosure. At the time of
writing the government is consulting on the potentially
significant move of confining all the additional elements of SR
reporting to companies with this number of employees.191
None of these provisions requires disclosure of impending
developments or matters in the course of negotiation if, in the
directors’ opinion, disclosure would be seriously prejudicial to
the interests of the company.192 Matters of strategic significance
which are required by regulation to be included in the DR may
be included instead, at the directors’ choice, in the SR, a move
likely to make discussion of strategic issues more coherent.193
Verification of narrative reports
21–26
There is a risk that narrative reporting requirements will produce
only self-serving and vacuous descriptions rather than analytical
material which is of genuine use to those who read the report.
There are two traditional ways of dealing with this issue in
relation to financial statements: audit and accounting standards.
The risk with applying audit to the DR and SR is that it will take
away from the desirability of those reports constituting the
directors’ view of the business rather than that of its auditors.
Consequently, the Act formerly restricted the audit requirement
for the DR and SR to certification that the reports were
consistent with the accounts (which are required to be audited).
Under the current version of the Act194 the auditor must state in
addition whether he has identified material misstatements in the
SR or DR (and describe their nature) in the light of the
knowledge of the company acquired in the course of the audit.
The auditor must also state whether the SR and DR have been
prepared in accordance with “applicable legal requirements”.
This phrase obviously covers statutory provisions but it also
raises the question whether there are professional standards for
these reports just as there are for the financial statements. The
OFR Regulations in fact contained the familiar requirement from
the accounts provisions that the Review must state whether it
had been prepared in accordance with the relevant reporting
standard and give reasons for any departure195; and a “reporting
standard” was defined, as with an accounting standard, as a
“statement of standard reporting practice” relating to OFRs and
issued by a body authorised by the Secretary of State, i.e. (then)
the Accounting Standards Board.196 The ASB duly produced its
reporting standard (RS 1) in May 2005. However, the Business
Review provisions contained no statutory underpinning for
reporting standards and so the ASB turned RS 1 into Reporting
Statement of best practice, changing its language so as to reflect
its new voluntary status, and that situation has continued with
the SR.197
Liability for misstatements in narrative reports
21–27
An alternative approach to verification is to impose liability ex
post for misstatements in narrative reports. There are two areas
of potential negligence liability to be considered. First, there is
liability on the part of the directors to the company under what is
now s.174 of the Act. Secondly, there is liability on the part of
the directors or the company (and conceivably others) to third
parties, including investors in the market, under the general law
on misstatements, whether negligent or fraudulent. However, the
extension of narrative reporting prompted reforms, now to be
found in s.463, whose aim is not to strengthen the ex post
liability regime but to circumscribe it. The case for providing a
“safe harbour” in relation to directors’ forward-looking
statements is that no one can predict the future with certainty and
if directors were to be exposed to litigation, or the threat of it,
whenever their forward-looking statements turned out to be
untrue, they would be very cautious in the statements they made
This caution might undermine the value of narrative reporting to
its users.198
Section 463, in fact, goes well beyond forward-looking
statements, apparently on the grounds that it would be difficult
to distinguish them from other types of statement. The section
applies to the entire content of the three narrative reports: DR,
SR and the directors’ remuneration report.199 The effect of s.463
is to exclude directors’ liability in negligence to the company
entirely. The director is so liable in respect of untrue or
misleading statements in the reports or omissions from them
only if the director has been fraudulent.200 Fraud is defined in the
way it is in the common law of deceit: the maker of the
statement must know it is untrue or misleading or be reckless as
to whether this is the case.201 Thus, a genuine belief in the truth
of the statement, no matter how unreasonable, will save the
director from liability.
21–28
If the directors’ liability to the company is preserved in the case
of fraud, their liability to other persons is excluded entirely, even
in the case of fraud.202 Moreover, the liability which is excluded
is the liability of “any person”, not just of the directors, provided
it is not a liability to the company. Thus, investors (including
existing shareholders) cannot impose liability on the company in
respect of unsuccessful investment decisions which are based on
inaccurate information in the narrative reports. It is in fact very
unclear whether, even without the section, liability in negligence
towards investors on the part of the company or the directors
would exist under the general law. The issue has been tested at
the highest levels only in respect of auditors, where, as we shall
see, the starting point of the courts is one of non-liability.203 The
exclusion of liability towards third parties in the case of fraud in
narrative reports is more questionable, since the common law
does impose liability in principle for fraud and it is unclear why
fraud should be condoned. In fact, however, the exclusion of
liability to third parties is qualified by the provisions of s.90A of
and Sch.10A to FSMA 2000, applying to companies with
securities traded on a regulated market, which imposes liability
in fraud on the company in relation to certain statements made to
the market (which might include the narrative reports).204
Section 463 excludes the third-party liability of “any person”,
but it is not clear who might be liable beyond the directors and
the company in respect of errors in the narrative reports. A
number of professionals may be consulted and have a hand in
the compilation of the reports but they are not normally
identified in those reports as responsible for particular parts of it
and thus as having particular statements attributed to them, since
the reports are the reports of the directors. However, if this did
occur, s.463 would protect these persons (other than in respect of
their liability to the company). The auditors are required to
report on the narrative reports to some extent, as we have seen,
but the auditor’s report is a separate document and so would not
be covered by s.463.
APPROVAL OF THE ACCOUNTS AND REPORTS BY THE DIRECTORS
21–29
That the narrative reports are the reports of the directors is
clear.205 The accounts as well are the product of the directors: the
directors must draw them up,206 although in this case, because of
the role played by the auditors in verifying the accounts and, in
practice, in drawing them up, they are often misconceived as the
auditors’ accounts. With the collapse of the Enron Company and
other companies renewed emphasis was placed on the directors’
responsibility for the accounts. At EU level the Fourth and
Seventh Directives were amended so as to impose on directors a
“collective duty” to ensure that the annual financial statements
and management report are drawn up in accordance with the
Directive or the IAS Regulation.207 The Government took the
view that this requirement was met by the existing domestic
provision that the annual accounts and narrative reports must be
approved by the directors and signed on behalf of the board by a
director or the secretary.208 If the directors approve accounts or
reports that do not comply with the Act, every director who
knows that they do not comply or is reckless as to whether or not
they comply and who fails to take reasonable steps to secure
compliance or to prevent the accounts being approved is guilty
of an offence.209
The Member States are also required to ensure that their
“laws, regulations and administrative provisions on liability” to
the company apply to the directors who breach their collective
duty.210 This provision does not require the Member States to
have any particular liability regime in place. In the case of the
UK this requirement is met presumably through the general law
on directors’ duties and, in the case of the narrative reports, by
the preservation of the directors’ liability in fraud to the
company.211
THE AUDITOR’S REPORT
21–30
The final document that has to accompany the annual accounts is
the auditor’s report thereon—assuming the company is one
which is required to have its accounts audited or has chosen to
do so. This has to be addressed to the company’s members212 and
to state whether in the auditors’ opinion on a number of matters,
notably whether the annual accounts have been properly
prepared in accordance with the Act or the IAS Regulation, as
appropriate and whether they give a true and fair view of the
company’s financial position.213 The rights and duties of the
auditor in the preparation of the audit report are considered more
fully in the following chapter. The auditors’ report must state the
names of the auditors and be signed by them.214 However, those
names need not appear on the published copies of the report or
on the copy filed with the Registrar (see below) if the company
has resolved that the names should not be stated on basis that
there are reasonable grounds for thinking that publication would
create a serious risk of violence to or intimidation of the auditor
or any other person, and has provided that information instead to
the Secretary of State.215
REVISION OF DEFECTIVE ACCOUNTS AND REPORTS
21–31
Despite the requirements for director and auditor approval, noted
above, it is not inconceivable that accounts and reports will be
produced by the company which are later discovered to be
incorrect. Until the passing of the Companies Act 1989 there
were no statutory provisions for revising incorrect accounts and
reports. However, it has never been doubted that, if directors
discover such defects, they can, and should, correct them.
Section 454 makes it clear that the directors may revise the
accounts and narrative reports on a voluntary basis. Where the
accounts have not yet been sent to the Registrar or the members
(see below), the directors have a pretty free hand as to revisions,
but if either of those events has occurred, as is likely, the
corrections must be confined to what is necessary to bring the
accounts and reports into line with the requirements of the Act or
the IAS Regulation.216 Regulations made under the section
provide that the revised accounts or reports become, as nearly as
possible, the reports and accounts of the company for the
relevant financial year, to which the other provisions of the Act
apply. For example, they will be subject to audit.217
More significant are the statutory powers to compel revision
of defective accounts. The Secretary of State has power to apply
to the court for a declaration that the accounts or the DR or SR
(but not, it seems, the remuneration report) do not comply with
the Act or the IAS Regulation and for an order that they be
brought into line, with consequential directions.218 The court
may order the costs of the application and of the production of
the revised accounts to be borne by the directors in place at the
time of the approval of the accounts or report, unless a director
can show that he or she took all reasonable steps to prevent
approval, though the court also has power to exclude from
liability a director who did not know and ought not to have
known of the defects.219 Notice of the application and of its
result must be given to the Registrar.220
However, in practice this is not an activity the Secretary of
State undertakes. There is power under s.457 for authorisation to
make applications to the court to be conferred upon persons
appearing to the Secretary of State “to have an interest in, and to
have satisfactory procedures directed to securing, compliance by
companies” with the Act and the IAS Regulation and “to have
satisfactory procedures for receiving and investigating
complaints” about annual accounts and the DR and SR and
otherwise to be “fit and proper”. Such authorisation is now
conferred on the Conduct Committee of the Financial Reporting
Council (“FRC”).221 In practice, the task of dealing with
defective reports is discharged by the Conduct Committee, rather
than by the Department, except in relation to small companies.222
The Committee has statutory authority to require the production
of documents, information and explanations if it thinks there is a
question-mark over the compliance of a company’s accounts or
reports with the Act or IAS Regulation.223 It must keep the
information received confidential, except for disclosure to a list
of approved recipients (relevant Government Departments and
Regulators).224
21–32
The FRRP, predecessor of the Conduct Committee, was
criticised for being reactive, i.e. acting only on complaints or
media revelations that a particular set of accounts was defective
rather than checking or investigating of its own motion. Partly
because of EU pressure to produce equivalent mechanisms in the
Member States for the enforcement of international accounting
standards, the FRRP agreed in 2002 to adopt a proactive review
policy,225 though it did not have to resort to a court order to
secure the necessary changes, a threat of an application being
enough. In 2014/15 the Conduct Committee reviewed the reports
of some 252 companies, sent letters raising queries to 76, and in
nine cases there was a restatement of the numbers in the
accounts or a significant change in disclosure policy.226
With regard to companies with securities traded on a regulated
market, the obligation to secure compliance with the periodic
reporting requirements of such companies (which include but
extend beyond the annual reports and accounts)227 is allocated by
EU law to the Financial Conduct Authority (“FCA”), but the
relevant Directive permits the FCA to delegate the tasks
conferred upon it.228 Accordingly, the Conduct Committee has
been authorised229 by the Secretary of State to keep under review
not only the accounts and reports required by the Act but also
those required under the provisions of the Transparency
Directive to be produced by companies whose securities are
traded on regulated markets. In this case, there is an obvious
need for close liaison with the FCA.230 The Conduct Committee
is under a duty to report its findings to the FCA in appropriate
cases and the FCA may expand the Conduct Committee’s
remit.231
FILING ACCOUNTS AND REPORTS WITH THE REGISTRAR
21–33
The statutory requirement to produce accounts and reports would
be of little use if there were no provisions for the information so
generated to reach the hands of those who might make use of it.
This is done in two ways under the Act: circulation to the
members (discussed below) and delivery of the accounts to the
Registrar.232 By delivery to the Registrar, the accounts and
reports become public documents.
Speed of filing
21–34
A source of complaint in the past has been the length of the gap
between the end of the financial year and the date laid down for
filing the accounts and reports with the Registrar. The CLR
thought that modern technology permitted speedier filing than
had been required in the past and recommended that the period
be reduced from seven to six months for public companies and
ten to seven for private companies.233 Section 442 implements
the former reform but only marginally reduces the private
company period (to nine months), which is a pity.234 For public
companies whose securities are traded on a regulated market235
the period for publication of the annual accounts and reports is
four months from the end of the financial year,236 though the
core elements in the accounts may have been made available
earlier through a preliminary public announcement of the results.
A linked source of complaint has been non-compliance with
the filing time-limits, though the UK’s record in this area is
superior to that of some Member States of the EU. The formal
sanctions are criminal liabilities on the directors and civil
penalties on the company. If the filing requirements are not
complied with on time, any person who was a director
immediately before the end of the time allowed is liable to a fine
and, for continued contravention, to a daily default fine, unless
the director can prove that he took all reasonable steps for
securing that the accounts were delivered in time.237
Furthermore, if the directors fail to make good the default within
14 days after the service of a notice requiring compliance, the
court, on the application of the Registrar or any member or
creditor of the company, may make an order directing the
directors or any of them to make good the default within such
time as may be specified and may order them to pay the costs of
and incidental to the application.238
To these criminal sanctions against directors, the Act adds
civil penalties against the company.239 The amount of the
penalty, recoverable by the Registrar, varies according to
whether the company is private or public and to the length of
time that the default continues; the minimum being £150 for a
private company and £750 for a public company when the
default is for not more than one month, and the maximum
£1,500 for a private and £7,500 for a public company when the
default exceeds six months.240 There are obvious attractions in
affording the Registrar an additional weapon in the form of a
penalty recoverable by civil suit to which there is no defence
once it is shown that accounts have not been delivered on time.
Presumably, the thought is that civil sanctions on the company
will put pressure on shareholders to intervene and secure
compliance on the part of the directors, but it is not clear how
effective this mechanism is. It may be that the shareholders
simply lose dividends as well as suffer from a failure on the part
of the directors to perform a duty intended to protect them.241 In
2014/15 the compliance rate was nearly 99 per cent across the
UK but nevertheless some 2,100 convictions for failure to file
accounts were obtained and late filing penalty worth over £81
million were issued (mainly in relation to private companies),
but it is not clear how much was collected.242
Modifications of the full filing requirements
21–35
Filing with the Registrar is such a sensitive issue precisely
because the information in the accounts and reports thus
becomes publicly available. The Act itself makes some
concessions to the fear of publicity in the case of small, medium-
sized and unlimited companies, by way of derogations from the
full filing regime. The full regime requires filing of the annual
accounts, the directors’ report, the strategic report and (in the
case of a quoted company) the directors’ remuneration report
and conceivably a corporate governance statement, and the
auditor’s report on those accounts and reports (assuming the
company is subject to audit).243 If the company has been required
to produce group accounts, then the full regime applies to both
the group and individual accounts.244 The balance sheet must
contain the name of the person who signed it on behalf of the
board.245 As we have noted along the way, some categories of
company are not required to produce the full range of these
accounts and reports, especially small and micro companies.
Naturally, they are not required to file a document they are not
required to produce. The issue here is whether directors are
required to give publicity to, i.e. file or file in full, a document
they are required to produce for their shareholders.
21–36
Unlimited companies are in principle exempt from filing any
accounts and reports, provided the unlimited company is not part
of a group containing limited companies and is not a banking or
insurance company.246 This is a good example of the link
between limited liability and public financial disclosure, i.e. the
latter is dispensed with if the former is not present.247 Of course,
the unlimited liability company still has to produce and circulate
accounts to the members, who have perhaps an even bigger
interest in the proper running of the company if their liability is
unlimited.
Small companies (and thus also micro companies) subject to
the small company regime are required to produce only
individual accounts and, in addition, they may choose to file
only a balance sheet and not the profit and loss account and
directors’ report though they may make more publicly available,
if they wish.248 Until recently, there was a further relaxation for
small companies in that the filed copy of the balance sheet (and
the filed copy of the profit and loss account, if one was filed at
all) were permitted to be less detailed than the accounts made
available to the members, at least where the company produces
Companies Act accounts. These were the so-called
“abbreviated” accounts.249 However, in 2015 changes were made
which withdrew this facility.250 The CLR would have required
small companies to file both balance sheet and profit and loss
account as prepared for the members. It took the view that the
filed accounts of small companies were “not meaningful”.251 The
general conclusion that little insight into the financial position of
a company subject to the small company regime will normally
be obtained from consulting its filed accounts probably remains
true, given that the option not to file a profit and loss account is
still available.
Other information available from the Registrar
21–37
The annual accounts and reports are probably the most important
documents filed with the Registrar252 and thus made public,
because they give reasonably current (though by no means
completely up-to-date) information about the company’s
financial position.253 However, the accounts and reports do not
constitute the whole of the information about the company
which is publicly available from the Registrar, as we see at
various points in this work. The next most important document
thus made available is probably the company’s constitution,
mainly its articles of association.254 After that is the list of the
company’s directors, which must be updated as changes occur.255
Amongst the other information available through the Registrar
are the list of those with significant economic interests in the
company,256 the address of its registered office,257 the amount of
its issued share capital258 and details of charges on its property.259
“Any person” has the right to inspect the register maintained
by the Registrar, subject to certain limited limitations imposed in
the interests of privacy.260 There is also a right to obtain a copy
of material on the register, subject to a fee,261 and a copy duly
certified by the Registrar is evidence in legal proceedings of
equal validity to the original.262 The applicant has the choice in
relation to the most central items of information to make the
request for inspection or copy electronically or in hard copy, and
to receive the information in either way.263
Confirmation statement
21–38
This document used to be called the “annual return” until the
current term was substituted by the Small Business, Enterprise
and Employment Act 2015. As the former name suggested, the
confirmation statement is produced each year by the company. It
is delivered to the Registrar by the company,264 but, unlike the
accounts and reports considered above, it is not a document sent
to the members. The Registrar is the principal addressee of the
annual return265 (though, of course, any member may access it
under the provisions discussed in the previous paragraph).
Nevertheless it is convenient to consider it here. Moreover, it is a
document required to be submitted by every company, whatever
its obligations as to accounts and reports.
The 2015 Act reduced the significance of the previous annual
return, which was already a rather historical document. The
annual return collated much information that should have been,
and probably had been, delivered to the Registrar when the
relevant transactions occurred, so that an enquirer might find it
unnecessary to search back beyond the latest annual return on
the file. Since the annual return was often reduplicative of
information already provided, the advantage to the company of
the confirmation statement is that it simply requires the company
to confirm to the Registrar that the information which the
company is under a duty to supply to the Registrar has already
been provided or is being provided along with the confirmation
statement. In the first case, the statement will be a bare
confirmation statement. Since we have noted at the appropriate
points in the book when information must be supplied by the
company to the Registrar, such as the statement of capital or the
statement of persons with significant control, we need not
rehearse those matters again here. With the 2015 reform, the
confirmation statement ceases to be a significant piece of
disclosure by the company and its main function is to jog the
corporate memory about its filing obligations. Despite the
criminal sanctions266 for non-compliance with the obligation to
provide a confirmation statement and provision by the Registrar
of electronic means for submitting it, companies are not always
prompt in complying with this obligation. In fact, failure to file
the annual return (or, in future, the confirmation statement) often
alerts the Registrar to more fundamental issues with the
company and may lead to the taking of steps which culminate in
the company’s removal from the register.
Other forms of publicity for the accounts and
reports
21–39
Although filing with the Registrar is the only form of publicity
for the annual accounts and reports mandated for all companies
by the Act, in fact large companies often, and other companies
sometimes, make their annual statements available more
generally; and quoted companies are now required to provide
website publication.267 Where a company chooses to make its
annual statements available in a way which is calculated to invite
members of the public generally, or a class of them, to read it,
then the Act requires the name of the person who signed the
balance sheet or the narrative reports on behalf of the company
to be stated.268 If a company publishes its accounts in this way,
they must be accompanied by the auditor’s report (if there is
one) and a company preparing group accounts cannot publish
only its individual accounts.269 In short, a non-quoted company is
not required to publish its annual accounts other than via the
Registrar, but if it does so, it must do so in full.
The accounts described above are known as the company’s
“statutory accounts”. A company is not prohibited from
publishing other accounts dealing with the relevant financial
year, thought this is in fact rare. If the company does so, it must
include with them a statement that these accounts are not the
statutory accounts and disclose whether the statutory accounts
have been filed and whether the auditors have reported on them
and, if so, whether the auditors’ report was qualified. Nor may
an auditors’ report on the statutory accounts be published with
the non-statutory accounts.270 If the company is listed on a
regulated market in the EU, it will be required by the
Transparency Directive271 to produce a set of (less elaborate)
accounts and a management report six months into the financial
year, as well as annual ones, though such accounts do not fall
into the category of “non-statutory accounts” because they do
not cover an entire financial year.
CONSIDERATION OF THE ACCOUNTS AND REPORTS BY THE
MEMBERS
Circulation to the members
21–40
Since the accounts and reports are communications from the
directors to the members, it is not surprising that the Act requires
their circulation to the members.272 However, not only the
members but also the company’s debenture-holders (i.e. its long-
term lenders holding the company’s debt securities)273 must
receive copies, since their chances of being repaid depend upon
the financial health of the company. Thirdly, so must anyone
who is entitled to receive notice of general meetings of the
company be sent the accounts and reports, a category which
includes the directors themselves (hardly a necessary
requirement) and anyone else entitled to notice under the
particular company’s articles.274 This obligation arises only if the
company has a current address for the person in question.275
Finally, those nominated to enjoy information rights will receive
copies of the accounts and reports.276 Just to make sure, the Act
also provides that shareholders and debenture-holders can at any
time demand copies of the most recent annual accounts and
reports and the company must comply with the request within
seven days.277
Circulation of the Strategic Report only
21–41
There are two linked problems with the circulation requirements.
First, the full accounts and reports may be grist to the mills of
the analysts, but lots of individual shareholders find the full set
more daunting than useful. Secondly, the circulation requirement
is an expensive one for the company to meet.278 Both these
concerns are addressed by the provisions which allow companies
to circulate something less than the full accounts and reports.
Initially, that something less was a “summary financial
statement”, but with the introduction of the strategic report,279
that document became the substitute.
This facility was previously available only to companies
whose securities were traded on certain public markets, but now
it is in principle open to all companies.280 Moreover, the burden
is on the recipient to ask to continue to receive the full accounts
and report. If, after being sent an appropriate notice from the
company, the recipient does not respond with a contrary
statement within 28 days, he or she will be deemed to have opted
for the summary, though that “choice” can be reversed at any
time.281 The provisions are, however, default rules, in the sense
that the company in its constitution or the instrument creating the
debentures may deprive itself of this facility. The right to make
use of the summary is also dependent on the company observing
the relevant provisions of the Act relating to the audit, filing and
approval of the full accounts and reports.282 The SR must be
accompanied by a warning that it is only part of the annual
accounts and reports; informing the reader how to obtain full
copies; stating whether any of the required auditor certifications
was qualified; and containing one (clearly important) figure from
outside the strategic report, i.e. the “single total remuneration”
figure from the directors’ remuneration report in the case of
quoted companies.283
An alternative, or additional, way, of addressing circulation
costs is to encourage members to receive communications
(whether full accounts and reports or only the SR) from the
company in electronic form or via the company’s website. This
has been discussed in Ch.15.284 A quoted company is in any
event required to put its current annual accounts and reports on
its website and to maintain it there throughout the following
financial year.285
Laying the accounts and reports before the
members
21–42
Circulating the accounts and reports to the members and others
allows them to consider them on an individual basis, but such
consideration is not likely to lead to significant action in the case
of companies with larger bodies of shareholders, unless there is
some facility for collective consideration of the accounts and
reports. As far as private companies are concerned, there is no
longer any statutory requirement for such collective
consideration, no matter how large a shareholding body that
company may have. A private company is required by the statute
to circulate its annual accounts and reports at the time it delivers
them to the Registrar,286 and any further action is a matter for the
shareholders or the company’s articles. The shareholders might
seek to convene a meeting287 or the articles might require annual
consideration of the accounts and reports at a meeting, which the
directors would be obliged to convene.
As far as public companies are concerned, the traditional
obligation “to lay the accounts and reports before a general
meeting” still applies.288 This formulation implies that the
shareholders are not required to consider a resolution to approve
the accounts and reports (as is the case in many countries), but
they must be afforded an opportunity to discuss them. Indeed,
this item on the agenda is normally used to allow a wide-ranging
discussion of the company’s business.289 The meeting at which
the accounts and reports are considered is termed the “accounts
meeting”290 and it is in fact normally the company’s annual
general meeting. The accounts and reports must be circulated at
least 21 days before the accounts meeting and the accounts
meeting itself must be held not later than the end of the period
for the filing of the accounts and reports with the Registrar, i.e.
six months after the end of the financial year in the case of a
public company. As we noted in Ch.15,291 the Government
backed away from the CLR’s proposal that, after circulation,
there should be a pause of two weeks, during which shareholders
could formulate, if they wished, resolutions on the accounts and
reports to be considered at the meeting.
CONCLUSION
21–43
Part 15 of the Act, dealing with the annual accounts and reports,
constitutes a substantial part of the Companies Act 2006, long
though that Act is. Part 15 contains nearly 100 sections, and this
is an indication of the central role played by annual reporting in
the structure of the companies legislation. Excessive though the
detail of the Act, subordinate legislation and accounting
standards is to anyone not an accountant, an understanding of the
central principles of the annual reporting process is central to
understanding the philosophy of company law.
The developments in this part of company law reflect very
well a broader trend in the subject towards greater refinement of
the applicable rules according to the economic importance of
different types of company. This classification proceeds broadly
by reference to direct indicators of economic size (turnover,
balance sheet total and number of employees) or by reference to
the divorce between ownership and control (i.e. whether the
shares are publicly traded) though this indicator is also
correlated with economic size. For the largest publicly traded
companies,292 not only is financial reporting increasingly
demanding, as International Financial Reporting Standards
expand their scope, but so are the demands of narrative
reporting. This expansion of reporting requirements is driven
substantially by investor demand but also in part by a
governmental desire to encourage investors (and in some cases
pressure-groups) to engage with the management of their
investee companies, even beyond what they might themselves
do, if left to their own devices. At the other end of the scale,
micro companies have obtained a further relaxation of the
relaxed rules which apply to small companies. In between,
medium-sized companies benefit from some relaxations whilst
large, but not publicly traded, companies are subject to broadly
the same reporting regime as publicly traded companies, but
have to cover less in their strategic report.
1 See Chs 16 and 17, above.
2
See Ch.20, above.
3 See Ch.14, above.
4 See para.15–8.
6 See Ch.22.
7
Notably the Fourth Council Directive on the Annual Accounts of Certain Types of
Companies, Directive 78/660/EEC ([1978] O.J. L222/110), as amended (hereafter
“Fourth Directive”) and the Seventh Council Directive on Consolidated Accounts,
Directive 83/349/EEC ([1983] OJ L193/1), as amended (hereafter “Seventh Directive”)
—both repealed by the 2013 Directive.
8
Regulation (EC) No.1606/2002 on the Application of International Accounting
Standards ([2002] O.J. L243/1) (hereafter “IAS Regulation”).
9
Directive 2003/51/EC ([2003] O.J. L178/16) (hereafter the “accounts modernisation
directive”), which amended the Fourth and Seventh Directives.
10
Directive 2013/34/EU [2013] O.J. L182/19.
11
As it was by Directive 2014/95/EU ([2014] O.J. L330/1) on the disclosure of non-
financial information.
12
See para.1–8.
13
2006 Act ss.384(1)(a) and 384B(1)(a).
14 Small Business Enterprise and Employment Act 2015 ss.33 and 34 envisage the use
of the micro and small business definitions in subordinate legislation to relieve these
categories of regulatory duties beyond the accounting area. If and when such regulations
are made, the domestic definitions might shift from the Act to these regulations, but the
controlling definitions would still be in the Directive.
15
2006 Act s.306(5) of the Act: “The balance sheet total means the aggregate of the
amounts shown as assets in the company’s balance sheet”, implementing art.3(11) of the
Directive.
16
“‘net turnover’ means the amounts derived from the sale of products and the provision
of services after deducting sales rebates and value added tax and other taxes directly
linked to turnover” (Directive art.2; Act s.474(1)). The Directive (art.3(12)) allows
Member States to add other items of income to the net turnover but the UK has chosen
not to do so.
17
Employed means only those employed under a contract of service (s.306(6)).
18 Other than charities and financial companies which are excluded from the micro
regime: s.384B.
19 2006 Act s.384A. The slightly odd amounts result from the translation into pounds of
the more rounded figures set out in art.3 of the Directive, i.e. €350,000 and €700,000
respectively. The Member State not using the euro can adjust the figure upwards or
downwards by 5 per cent when translating into their own currencies. The UK
government chose to increase the number resulting from a strict application of the
exchange rate, i.e. so as to increase the number of companies covered.
20 2006 Act s.384B(2). On group accounts see below para.21–9.
21 2006 Act s.384A(3). By way of qualification to this, in its first year of operation the
company’s status is determined by whether it meets the criteria at the end of that year
(s.384A(2)), so that a small start-up does not have to wait for a second year to benefit.
22 Directive 2012/6/EU [2012] O.J. L81/3, whose provisions are now incorporated into
the 2013 Directive.
23
BIS, Simpler Financial Reporting For Micro-Entities: The UK’s Proposal To
Implement The “Micros Directive”: Government Response, September 2013
(BIS/13/1124).
24
2006 Act s.382.
25
2006 Act s.382(2).
26
BIS, UK implementation of the EU Accounting Directive: Chapters 1-9: Impact
Assessment, 2014 (BIS/14/1055).
272006 Act s.384(1). The definition of ineligibility for groups includes a somewhat
wider range of financial companies (s.384(2)).
28
2006 Act s.465(3).
29
2006 Act s.467(1).
30
31 Directive art.3.
32 Directive 2013/34/EU art.2. For the meaning of a “regulated” market see para.25–8.
In the UK the principal such market is the Main Market of the London Stock Exchange,
but a company will be a PIE if it is traded on such a market anywhere in the EU.
33 2006 Act s.474(1).
34 This is achieved by excluding “traded companies” from medium-sized status
(s.467(2)(a)). Since public companies may not be small or micro companies (above,
para.21–2) and private companies may not offer their securities to the public, explicit
exclusion from only medium-sized status is necessary.
35
Such a preliminary statement used to be obligatory for listed companies, but ceased to
be so in January 2007, in the light of the implementation of the Transparency Directive,
though companies continue to make such announcements and the Listing Rules regulate
the form they must take, if made. See LR 9.7A.1 and Ch.26, below.
36
2006 Act ss.386–389.
372006 Act s.386(3) adds certain specific requirements the records must meet, but,
except for unsophisticated businesses, the general standards are likely to be more
important.
38 e.g. because it is a foreign subsidiary or a partnership.
39 2006 Act s.386(5).
40
Punishable by fine or imprisonment or both: s.387(3).
41 2006 Act s.387(2).
422006 Act s.498(2). Failure to keep adequate accounting records could also form the
basis of a disqualification of a director under the general heading of unfitness (Re
Galeforce Pleating Co Ltd [1999] 2 B.C.L.C. 705).
43 For this reason, accountants may not exercise a lien for unpaid fees over such
documents: DTC (CNC) Ltd v Gary Sargeant & Co [1996] 1 B.C.L.C. 529. Of course,
other persons may also have the right of access to the records, for example, the
company’s auditors: s.499.
44 e.g. because the company has a branch outside Great Britain.
45
2006 Act s.388(2),(3). The six-monthly requirement seems remarkably lax in the light
of both modern management practice and modern electronic technology.
46
2006 Act s.388(4). An officer of the company is liable to imprisonment or a fine or
both if he fails to take all reasonable steps to secure compliance with the preservation
requirement or intentionally causes any default: s.389(4). If there has been villainy,
destroying all record of it is all too likely.
47
2006 Act s.391(4). For companies in Northern Ireland the relevant date is 22 August
1997. For methods of determining the ARD for earlier incorporations see s.391(2),(3).
48
2006 Act s.292. This section applies no matter when the company was incorporated.
49
Indeed, in this particular situation, in order to promote the production of group
accounts, the directors of the parent company are under a presumptive duty to ensure
that the financial years of subsidiaries coincide with that of the parent: s.390(5).
50
2006 Act s.392(2).
51
2006 Act s.392(5), unless an administration order is in force in relation to the
company, presumably because the administrator, who is responsible to the court, can be
trusted in a way the directors cannot.
52
2006 Act s.392(3), unless an administration order is in force (see previous note) or the
step is taken to make the ARD coincide with that of an EEA undertaking which is the
company’s parent or subsidiary company, or the Secretary of State permits it.
53
2006 Act s.390(2),(3).
54
The exception for dormant subsidiaries is discussed in para.21–10.
55 2006 Act s.404(1).
56 2006 Act s.383(1).
57 2006 Act s.383(4)–(7). The choice is available separately in relation to each of the
turnover and balance sheet tests: s.383(6).
58
2006 Act ss.399(2A) and 384(2)(a). For the meaning of a “traded company” see
para.21–6, above. The other accounting advantages of being a “small” company
continue to be unavailable to “small” public companies.
59 2006 Act s.384B(2).
60 2006 Act s.466.
61
2006 Act s.399(2)—“as well as producing individual accounts”. Section 408 permits
certain relaxations for the individual accounts of a company which produces group
accounts, notably that the company’s individual profit and loss account need not be
circulated to the shareholders or filed with the Registrar, if notes to the group accounts
show the profit and loss of the company for the financial year.
62 2006 Act s.394—“the directors of every company”.
63
2006 Act s.407. However, this section does not apply if the parent uses IAS for both
the consolidated and its individual accounts. For the meaning of “financial reporting
framework” see para.21–13.
64
2006 Act ss.394A–C. Even so, the usual financial companies cannot take advantage
of the exemption nor may a dormant subsidiary which at any time in the relevant
financial year has been a traded company (see para.21–6, above). All this may seem
rather elaborate for exempting a company from producing individual accounts when, by
definition (see s.1169), it has engaged in no significant accounting transactions during
the financial year. At times the authorities have considered a wider policy of exempting
subsidiaries generally from producing individual accounts in exchange for a parent
company guarantee. However, the policy has always failed on the basis that it would
reduce the amount of information available about the activities of potentially
economically important subsidiaries.
65 Nevertheless, it is crucial to remember that dividends are paid on the basis of only
individual accounts alone. If the profits of a subsidiary are paid directly to the
shareholders of the parent, all sorts of legal problems arise. See Ch.12, fn.24.
66
2006 Act s.1161(1).
67
2006 Act s.399(2).
68
2006 Act s.1162(2)(a).
692006 Act s.1162(2)(b). Membership includes “indirect” membership, i.e. where a
subsidiary of the parent is a member of the undertaking in question: s.1162(3).
70
2006 Act s.1162(2)(c) and Sch.7 para.4. This situation of “contractual subordination”
is probably never found in the UK, though it is provided for in Germany, where,
however, it is rarely found in practice. See paras 9–21 et seq. There would be great
difficulties with the legality of such a contract under the law of the UK.
712006 Act s.1162(4). This is a reference to actual domination and the qualifications
needed to establish contractual domination do not apply here: Sch.7 para.4(3).
72 This brings in shareholder agreements which are an established way of exercising
control over companies in some continental European jurisdictions, but note that the
effect of the agreement must be to give the alleged parent sole control.
732006 Act s.1162(5). For this reason it is important that the section refers to parent
undertakings, since the immediate parent of the indirect subsidiary might not itself be a
company.
74 See, for example, paras 4–6 of Sch.4 to the Large and Medium-Sized Companies and
Groups (Accounts and Reports) Regulations 2008 (SI 2008/410, as amended) requiring a
company’s individual accounts to give certain information about companies in which the
reporting company has a “significant holding”—defined as 20 per cent or more of any
class of shares in the other company. Similar rules apply to group accounts (para.20–22)
with more detail being required in the cases where the “significant holding” makes the
other company an “associated” undertaking or a joint venture with the reporting
company (paras 18–19).
75 2006 Act ss.400(1)(a) and 401(1)(a).
76 2006 Act ss.400(1)(b) and 401(1)(b).
77 It does not matter whether the allotted shares carry voting rights or not, but unless the
“parent” undertaking controls 50 per cent of the voting rights, it will not be under an
obligation to produce consolidated accounts in any event. See below. In effect, the
requirement to hold 50 per cent of the allotted share capital means that the parent
company, which passes the 50 per cent figure by holding weighted voting rights in the
subsidiary, will have access to the exemption only if the parent also holds non-voting
shares in sufficient quantities.
78
2006 Act ss.400(1)(c) and 401(1)(c).
79
80
Of course, those investors may also be strongly interested in the traded company’s
relations with its parent, for fear that the parent may seek to take a disproportionate share
of the company’s earnings. But that is a different issue.
81
2006 Act ss.400(2)(a)–(b), 401(2)(a)–(c). The requirement for audit is stated
expressly in relation only to non-EEA parent companies, but in the case of EEA
companies this requirement follows from the provisions of the Audit Directive (see
Ch.22, below).
82
2006 Act ss.400(2)(c)–(d), 401(2)(d)–(e).This is not necessarily its immediate holding
company, since that company, by operation of the same rules, might be exempt from the
need to produce consolidated accounts. Thus, where there is a chain of three wholly-
owned subsidiaries, only the top company will normally have to produce consolidated
accounts.
83 2006 Act ss.400(2)(e)–(f), 401(2)(f)–(g).
84 2006 Act s.405.
85
2006 Act s.402.
86
See fn.7, above.
87 2006 Act s.395. A company which is a charity must provide Companies Act
individual and group accounts: ss.395(2) and 403(3).
88
See para.21–6. By virtue of s.407 (above, fn.63) there is some pressure to use IAS for
the individual accounts of group companies as well.
89 IAS Regulation art.4. Since the Regulation is directly applicable in the Member
States, the provisions of art.4 are not reproduced in the Act, though s.403(1) refers to the
EU obligation. In fact, IAS accounts are mandatory on a wider basis than the Regulation
suggests because the London Stock Exchange requires EEA-incorporated companies
traded on the Alternative Investment Market to use them as well: LSE, Aim Rules for
Companies, 2014, r.19.
90
IAS Regulation art.5.
91 2006 Act s.403.
92 2006 Act ss.395(3)–(4B) and 403(4)–(5B). The changes identified in the Act, and
they are apparently exclusive, are becoming a subsidiary of a company which does not
prepare IAS accounts and the company or its parent ceasing to have securities traded on
a regulated market: ss.395(4) and 403(5). Until 2012 the company always had to show a
relevant change of circumstance in order to revert to Company Act accounts.
93 2006 Act ss.395(5) and 403(6).
94
2006 Act s.393(1).
95 2006 Act s.393(1). The strength of UK commitment to this principle is demonstrated
by the modifications to it which were thought necessary when micro companies were
relieved of compliance with many standards. See para.21–17.
96 2013 Directive art.4(3) and, for Companies Act accounts, ss.396(4) and 404(4) (for
individual and group accounts respectively).
97
2013 Directive art.4(4) and ss.396(5) and 404(5).
98
2006 Act s.393(1) applies but not ss.396 and 405.
99
If this is not the case, then there is a flat contradiction between the requirements of
s.393 and art.4 of the Directive, on the one hand, and the obligations of companies under
the IAS accounting framework. Furthermore, the Commission is to endorse an IAS for
use in the EU only if it considers it will result in a true and fair view (Regulation, Recital
9). The FRC strongly argues that “true and fair” remains fully applicable to IAS
accounts: FRC, True and Fair, June 2014.
100
See International Accounting Standard 1 and Financial Reporting Standard 18.
101
For the definition of these terms see para.25–6 and 25–9.
102
LR 9.8.6(3).
103FRC, Guidance on Risk Management, Internal Control and Related Financial and
Business Reporting, September 2014.
104
2006 Act s.396. See the similar s.404(1) for group accounts.
105
Theoretical because what the shareholders will actually receive is what a buyer of the
business is willing to pay for it.
106
We saw at para.9–6 that this situation may induce directors responsive to shareholder
interests to embark on projects with a low chance of a high return and high chance of
making a loss.
107SI 2008/409 (hereafter the “Large Accounts Regulations”). They were previously in
Schedules to the 1985 Act.
108 SI 2008/410 (hereafter the “Small Accounts Regulations”).
109 Schedule 6 makes some additional provisions in relation to group accounts.
110
Regulations Sch.1 para.2.
111
Regulations Sch.1 para.10.
112
See Sch.1 Pt 2 ss.C and D. The introduction of “fair value accounting” into the
Fourth and Seventh Directives was effected by Directive 2003/53/EC ([2003] O.J. L178)
as a direct result of the adoption by the EU of the IAS for companies on regulated
markets, where this approach was required. See now art.8 of the 2013 Directive. In this
way, IAS have expanded as well the scope of action of purely domestic standard-setters.
113
In that year the Institute of Chartered Accountants in England and Wales began to
issue Recommendations on Accounting Principles.
114
115 Ibid. The implementing domestic provision is s.396(2A).
116 2006 Act s.393(1A).
117 Lloyd Cheyham & Co v Littlejohn & Co [1987] B.C.L.C. 303; but cf. Bolitho v City
and Hackney Health Authority [1998] A.C. 232 HL (court not bound by professional
standards where “in a rare case” it is convinced they are not reasonable or responsible).
118Large Accounts Regulations Sch.1 para.45. Medium-sized companies are exempt
from this obligation (see reg.4(2A)) and the Small Accounts Regulations 2008 do not
contain a impose a similar rule.
119
For its use in relation to the Corporate Governance Code, which was developed only
in the 1990s, see above at para.14–69.
120
Now s.464 of the 2006 Act. The current arrangements are set out in the Statutory
Auditors (Amendment of Companies Act 2006 and Delegation of Functions etc) Order
2012/1741. Previously, the delegation was directly to an Accounting Standards Board
which was a subsidiary of the FRC.
121
See FRC, Plan and Budget and Levies 2015/16, March 2015. Section 17 of the
Companies (Audit, Investigation and Community Enterprise) Act 2004 gives the
Secretary of State the power to make the levy binding, but currently the levy is paid on a
“voluntary” basis.
122
Above, fn.8.
123
IAS Regulation art.2.
124
Thus, in the current Directive art.13(2) permits the use of a “statement of
performance”, as required by IAS, rather than a profit and loss account, whilst art.8(6)
permits derogations from the Directive’s fair value rules in order to facilitate compliance
with IAS.
125 Both Large (regs 3 and 9) and Small (regs 3 and 8) Accounts Regulations exempt
companies from the operation of their Schs 1 (individual accounts) and 6 (group
accounts) if they use IAS. Of course, a small company need not produce group accounts
at all (see para.21–9) but may choose to do so.
126 Companies using IAS shall produce their accounts “in conformity with the
international accounting standards”: Regulation arts 4 and 5.
127
Currently termed the IFRS Foundation.
128
The role of the Monitoring Board is described at:
http://www.iasplus.com/en/resources/ifrsf/governance/monitoring-board [Accessed 27
April 2016].
129 IAS Regulation arts 3 and 6.
130 IAS Regulation art.3(2).
131
132 Commission Regulation (EC) No.2086/2004. The IASB later amended IAS 39 and
one of the carve outs was dropped (Commission Regulation (EC) No.1864/2005), the
hedge fund carve out remaining. The economic crisis has continued to keep this issue at
the forefront of regulators’ attention.
133 The current state of play on endorsement is given by EFRAG, The EU endorsement
status report, April 2012.
134Among the countries, outside the EU, which allow or require their companies to use
IFRS are Australia, India, Japan and South Korea.
135 The FRC also has a policy of producing convergence with IAS, so that in the end
there may be relatively little difference between Companies Act and IAS accounts,
though the IASB would be in the lead.
136 See above, para.21–6
137
138
Small Accounts Regulations Sch.1 Pt 1 para.1A.
139
The FRC’s had previously operated a separate Financial Reporting Standard for
Smaller Entities (“FRSSE”). The Directive required a change of approach but not of
principle. See FRC, Accounting Standards for Small Enterprises: Consultation
Document, September 2014 and Consultation Overview, February 2015. For the IASB,
see IFRS for SMEs (“International Financial Reporting Standards for Small and
Medium-sized Enterprises”).
140
See BIS, Simpler Financial Reporting For Micro-Entities: The UK’s Proposal To
Implement The “Micros Directive”: Government Response, September 2013. The
exception was the decision not to take up the option to relieve micro companies from the
obligation to use accrual accounting. Cash accounting was thought to be potentially
misleading: for example, pre-payments received in year 1 would show up without off-
setting costs where the supply of the good or service was not due until year 2 (when the
costs would show up without the associated income). The Directive itself prohibits
micro companies benefitting from the derogations from using fair value accounting:
art.36(3).
141 2006 Act s.394B(2)(b); see para.21–3, above.
142
For the FRC see Draft FRS 105 The Financial Reporting Standard applicable to the
Micro-entities Regime, discussed in the documents cited in fn.139, above.
143Unless it is a micro company, the company may, but is not required to, put them in a
separate document annexed to the accounts: s.472.
144
The Directive makes no derogation for IAS accounts, but in that case the notes
requirements may be found in the international standards themselves rather than in
domestic law transposing the Directive.
145Much of the information required to be disclosed in notes under Pt 3 of Sch.1 to the
Large and Small Accounts Regulations 2008 is of this character.
146Above, fn.74. This part of the Regulations is made under ss.409 and 410 of the Act
and extends to information about subsidiaries as well as about affiliates.
1472006 Act s.410A, introduced in 2008, in the wake of the Enron collapse in the US
which was in part brought about by the acquisition of liabilities by Special Purpose
Vehicles (“SPVs”) connected with Enron but not counting as its subsidiaries.
148The option is provided by art.36(1)(b). It is implemented in the UK in the Small
Regulations reg.5A. The matters still required to be disclosed in the notes to micro
companies’ accounts relate to contingent liabilities and capital commitments: Sch.3
para.57.
149 2013 Directive art.16(2) and (3).
150BIS, UK Implementation of the EU Accounting Directive, August 2014
(BIS/14/1025).
151For smaller companies such disclosure might give competitors valuable information
which could be used to undermine the company’s business.
152 Above, paras 16–54 et seq.
153
Above, Ch.20.
154
Small Companies Regulations Sch.1 para.66; Large Companies Regulations Sch.1
para.72. The requirements are applied more stringently to large than medium or small
companies. These provisions apply formally only to companies preparing Companies
Act accounts, but those preparing IAS accounts are under a similar obligation because of
the provisions in IAS 24 (Related Party Disclosures). The two are further tied together
by the adoption in paras 66 and 72 of the same definition of “related party” as in the IAS
—though unhelpfully it does not reproduce it. IAS 24.9 defines a related party widely so
as to include controlling shareholders as well as directors.
155 A typical statement (in this case from BIS, The Future of Narrative Reporting:
Consultation, September 2011 (BIS/11/945)) is: “Narrative reporting provides an
important link between companies and their investors and wider stakeholders. It is a key
element in the framework that allows investors to hold companies to account, both in
terms of achieving sustainable long term returns and on the impact of the business to
society and the environment.” So, reporting is presented as addressed to stakeholders as
well as investors, but only investors are mentioned in relation to accountability.
156
157
BIS, UK Implementation of the EU Accounting Directive, Chapter 10: Consultation,
March 2014, p.4 (BIS/14/622).
158
On the assumption that bribes do not increase the overall costs of the company but
rather are recovered by a lower formal contractual payment to the foreign government.
There may be some marginal gains to the company from operating in countries which
have less corruption.
159
See the Reports on Payments to Government Regulations 2014/3209, implementing
Ch.10 of the Directive.
160 At paras 14–44 et seq.
161
2006 Act s.415(1A).
162
2006 Act s.415A and contrast Sch.5 to the Small Companies Regulations with Sch.7
to the Large Companies Regulations.
163 2006 Act s.416(1).
164 2006 Act s.416(3).
165 2006 Act s.415A. For the meaning of “ineligible” companies see above, para.21–4.
166 Large Companies Regulations Sch.7 para.7.
167
This information may be laid out in the strategic report (below) instead.
168This disclosure and disclosure of political donations are required also of small
companies: Small Companies Regulations Sch.5.
170
See para.17–29, above. Until recently the amount of charitable donations had to be
stated as well.
172 The requirements are relaxed for medium-sized companies, but not excluded
entirely. A small company excluded from the small company regime because a member
of an ineligible group may also take advantage of this exemption: s.414B.
173
Trade unions might use the information in collective bargaining with the company or
they and other stakeholders might use it in making representations to government or
taking other sorts of political action.
174
175
See above at paras 16–37 et seq.
176
Companies Act 1985 (Operating and Financial Review and Directors’ Report etc.)
Regulations 2005 (SI 2005/1011).
177
DTI, The Operating and Financial Review and Directors’ Report: A Consultative
Document, May 2004 (URN 04/1003).
178
Speech by the Rt. Hon. Gordon Brown MP, Chancellor of the Exchequer, at the CBI
Annual Conference in London, 28 November 2005.
179Somewhat more is known about the internal workings of government on this issue
than might be expected as a result of documents produced in judicial review proceedings
brought by Friends of the Earth over the abolition decision. See Financial Times, UK
Edition, 8 March 2006.
180Effected by the Companies Act 1985 (Operating and Financial Review) (Repeal)
181
Directive 2014/95/EU [2014] O.J. L330/1.
182 Above at para.16–37.
183Completing, para.3.33. Thus, non-shareholders would have been included among the
addresses of the OFR.
184 2006 Act s.414C(13).
185 2006 Act s.414C(3).
186
2006 Act s.414C(4)(5), unless the company qualifies as medium-sized, or would do
were it not for the fact that it is a member of an ineligible group, in which case it need
not use KPIs in relation to non-financial matters: ss.414C(6) and 467(4).
187 2006 Act s.385. This definition includes not only companies included on the “official
list” in an EU state (see para.25–9) but also those UK-incorporated companies traded on
the New York Stock Exchange or Nasdaq. Nevertheless, this is a narrower set than
proposed by the CLR which wished to apply the OFR requirement to most public and
some large private companies as well.
188 2006 Act s.414C(8)(a)(b).
189 2006 Act s.414C(7).
190
The BR required information about supply chains and out-sourcing arrangements
(s.417(5)(c)). This was highly controversial because it was introduced only at a very late
stage in Parliament, though it had been part of the OFR. It has not made its way into the
SR.
191
BIS, The Non-Financial Reporting Directive, BIS/16/35, February 2016. Since
companies traded on a regulated market fall within the definitions of both “quoted
company” and “public interest entity”, the main impact of the change would be to
remove the higher level reporting requirement from quoted companies with fewer than
500 employees. The consultation document also floats the proposal to allow some of the
non-financial reporting to be released on a more relaxed time-table than that for the
annual accounts.
192
2006 Act s.414C(14).
193
2006 Act s.414C(11).
194
2006 Act s.496. This tracks art.35 of the Directive. The expanded audit requirement
is more in line with what the CLR proposed: Final Report I, para.8.63.
195 OFR Regulations reg.8.
196
OFR Regulations reg.11.
197
FRC, Guidance on the Strategic Report, June 2014. The question of developing
reporting standards for the DR seems never to have been actively pursued.
198
CLR, Final Report I, para.8.38.
199 2006 Act s.463(1). The inclusion of the remuneration report is particularly bizarre,
since it requires statements of policies but very little in the way of forward-looking
statements. See paras 14–44 et seq.
2002006 Act s.463(2),(3). The liability excluded is only the liability to compensate the
company, though it will be rare for any other liability to be in issue.
201Recklessness means making the statement not caring whether it is true or untrue,
accurate or misleading: Derry v Peek (1889) L.R. 14 App. Cas. 337 HL. In the case of
omissions there must be “a dishonest concealment of a material fact”.
2022006 Act s.463(4),(5). The liability here excluded is not confined to liability to
compensate but embraces any civil remedy, including self-help remedies.
203
See para.22–44.
204 See below at para.26–25.
205 See ss.414A, 415 and 420: directors’ duties to prepare narrative reports.
206 2006 Act ss.394 and 399.
207 Now art.33 of the Directive.
208 2006 Act ss.414(1), 414D(1) and 419(1). Section 419A imposes the same duty in
relation to the corporate governance report, if it is a separate document, but lays down
no specific penalties for non-compliance.
2092006 Act s.414(4),(5), 414D(2)(3) and 419(3)(4). This re-states the previous law
somewhat more simply by dropping the requirement that the director be a party to the
approval and presuming the existing directors to be parties.
210 2013 Directive art.33(2).
212 2006 Act s.495(1).
213
See para.22–3 for more detail.
214 2006 Act s.503.
215 2006 Act s.506. The reasons for this measure or secrecy in relation to the auditors are
the same as those which led to the suppression of public information about directors’
residential addresses: see above at para.14–23.
216
2006 Act s.454(2).
217
Companies (Revision of Defective Accounts and Reports) Regulations 2008/373 (as
amended).
218
2006 Act s.456(1)–(3).
219 2006 Act s.456(5)–(6).
220
2006 Act s.456(2)–(7).
221
Supervision of Accounts and Reports (Prescribed Body) and Companies (Defective
Accounts and Directors’ Reports)(Authorised Person) Order 2012/1439 reg.4.
Previously, the task was delegated to the Financial Reporting Review Panel.
222 Where Companies House takes the lead: CLR, Completing, para.12.48.
223 2006 Act s.459.
224
2006 Act ss.460–462.
225
DTI, Final Report of the Co-ordinating Group on Audit and Accounting Issues, URN
03/567, paras 4.11 et seq. Such a policy, including the identification of “priority sectors”
for review, has been developed and since 2006 the FRRP included the directors’ report,
and so the business review, in its activities.
226 FRC Corporate Reporting Review 2014, pp.7–9. The restatement occurs in the
following year’s accounts.
227
These requirements are discussed in Ch.26, below.
228
Directive 2004/109/EC art.24 (the Transparency Directive).
229 See fn.221, made in part under s.14 of the Companies (Audit, Investigations and
Community Enterprise) Act 2004. The tests laid down in s.14 of the 2004 Act are similar
to those contained in s.457 of the 2006 Act.
230The FRRP concluded a “memorandum of understanding” with the FSA in 2005
about their joint working, which is available on the FRRP website. Indeed, there was
some debate at the time as to whether these powers should not be retained by the FCA.
231 2006 Act s.14(2),(7). The Conduct Committee’s power to apply for a court order
appears to be limited to annual accounts and reports only (s.456(1)), so that it would fall
to the FCA to take action in respect of the semi-annual reports required of companies on
regulated markets.
232 2004 Act s.441.
233
CLR, Final Report I, paras 4.49–4.32 and 8.80 et seq.
234 2006 Act s.442 deals with some exceptional cases as well.
235See para.25–8, essentially those traded on the Main Market of the London Stock
Exchange.
236
See FCA, Disclosure and Transparency Rule 4.1.3, implementing art.4 of the
Transparency Directive 2004/109/EC. See Ch.26, below.
237
2006 Act s.451. But, to spike the guns of barrack-room lawyers, it is expressly stated
that it is not a defence to prove that the documents required were not in fact prepared in
accordance with the Act!
238
2006 Act s.452. If they fail to do so, they will be in contempt of court and liable to
imprisonment. The subsection does not say who may serve such a notice so presumably
anyone can: but in practice it is likely to be the Registrar who does so—though the
subsection makes it pretty clear that a member or creditor could.
239
2006 Act s.453 and the Companies (Late Filing Penalties) and Limited Liability
Partnerships (Filing Periods and Late Filing Penalties) Regulations 2008/497.
240
The Scheme withstood judicial review in R. (Pow Trust) v Registrar of Companies
[2003] 2 B.C.L.C. 295.
241
The company could, presumably, sue the directors to recover its loss resulting from
their default. But unless the company goes into liquidation, administration or
receivership this is unlikely to happen.
242Companies House, Statistical Tables on Companies Registration Activities 2014/15,
Tables A7, A8 and D2. Curiously, late filing does not appear to be prosecuted in
Scotland.
243 2006 Act ss.446 and 447.
244 2006 Act s.471.
245
246
2006 Act s.448. There are certain other disqualifications set out in the section.
247The same distinction can be found between partnerships (accounts need not be made
public) and limited liability partnerships (public disclosure required).
248
2006 Act s.444(1). On the exemption from group accounts see para.21–9. Small
companies excluded from the small companies regime because a member of an
ineligible group may choose not to file a directors’ report, but must file a profit and loss
account: s.444A.
249 2006 Act s.444(3)—as originally enacted.
250 Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015/980
reg.8. This step was less radical than it might seem at first sight, since a small company
may prepare (and therefore publish) abbreviated accounts if all shareholders agree (see
para.21–20) and, even if they do not, the disclosure requirements of the Small
Regulations are much less demanding than those of the Large Regulations. These
regulations also removed the facility for medium-sized companies to file an abbreviated
profit and loss account (previously in s.445(3)(4)).
251
CLR, Developing, paras 8.32–8.34. Although using the term “abbreviated accounts”,
the CLR appears to include in it the option not to file a profit and loss account at all. The
CLR would have dealt with small company sensitivities through the simplified format
rules for the accounts prepared for the members.
252
Actually, there are three Registrars—one for each of the UK jurisdictions—though
their functions are similar: s.1060.
253 Hence with companies whose securities are traded on a regulated market the
obligation on the company (a) to produce reports more often than annually and (b) to
report material changes as they occur. See Ch.26, below.
254
See para.3–13.
255 See para.14–23. Also to be disclosed is the identity of the company’s secretary, if
there is one: s.276.
256
See para.2–42.
257
See ss.9(5)(a) and 86–87. This is important because it is there that legal process can
be served on it.
258
See para.11–11. The returns of allotments will show to whom the shares were
initially issued but not who now owns them.
259
See Ch.32. This is likely to be more up-to-date than the filed accounts and so a better
indicator of creditworthiness.
260 See ss.1085 and 1087, the latter excluding access, for example, to directors’
residential addresses (see para.14–23).
261
2006 Act s.1086.
262 2006 Act s.1091(3).
263 2006 Act ss.1089 and 1090. The information in relation to which this right exists is
set out in s.1078, which implements art.3 of the First Company Law Directive
(68/151/EEC) as amended by Directive 2003/58/EC art.1.
2642006 Act s.853A. The return date is normally the anniversary of the company’s
incorporation.
265
Hence the provisions about the confirmation statement are set out in a separate Part
of the Act (Pt 24).
266 2006 Act s.853L: offence by company, every director, shadow director and secretary,
and every other officer who is in default. Compliance with the annual return requirement
was about one percentage point less than for the accounts filing requirement. Some
1,200 directors were convicted of this offence in 2014/15 in England and Wales: above
fn.242, Tables A7 and D2.
267 2006 Act s.430 and para.21–40.
268 2006 Act ss.433 and 436.
269 2006 Act s.434.
270
2006 Act s.435.
271See Ch.26, below. This aspect of the Directive is implemented in the UK by
Disclosure and Transparency Rule 4.2, made by the Financial Conduct Authority.
272 2006 Act s.423(1). The content of the “annual accounts and reports” is specified in
s.471(2) separately for unquoted and quoted companies.
274 2006 Act s.307. In the case of companies without share capital only this third
category need be circulated: s.423(4).
275 2006 Act s.423(2),(3).
276
2006 Act s.146. See para.15–40.
277
2006 Act ss.431 (unquoted companies) and 432 (quoted companies). This right is
also extended to those nominated to enjoy information rights: s.146(3)(b).
278
It is reported that in 2006 postmen in the UK were restricted as to the number of sets
of the annual accounts and reports of HSBC bank they were permitted to carry at any
one time, because of the weight of the document.
279
280
2006 Act s.426.
281
2006 Act s.426(2)(3) and Companies (Receipt of Accounts and Reports) Regulations
2013/1973. The consultation may take place as part of the circulation of the annual
accounts and reports (and relate to future years) or be a free-standing consultation.
Requesting to continue with the full set must be made easy, depending simply on ticking
a box on a form, postage on which has been pre-paid by the company, at least if the
recipient has an address in the EEA. Those who enjoy information rights are within this
procedure as well: s.426(5).
282 Receipt Regulations reg.5.
283
2006 Act s.426A. On the “single total remuneration” figure see para.14–45.
284
At para.15–85.
285 2006 Act s.430.
286 2006 Act s.424(2). For delivery to the Registrar, see above, para.21–33. Of course,
the company cannot evade this obligation simply by not filing the accounts and report
with the Registrar: s.424(2)(a).
287 See para.15–48.
288 2006 Act ss.437–438.
289
See para.15–43.
290 2006 Act s.437(3).
291
At para.15–58.
292A particular feature of the rules applying to these companies is the differences in the
range of publicly traded companies caught by different rules. In descending order of
breadth, sometimes the rules apply on to companies traded on “regulated” markets,
sometimes to “quoted” companies and sometimes to companies on “prescribed”
markets.
CHAPTER 22
AUDITS AND AUDITORS
Introduction 22–1
Sources of audit law 22–2
The duties of the auditor 22–3
Overarching issues 22–4
Audit Exemption 22–5
Subsidiaries 22–7
Dormant companies 22–8
Non-profit public sector companies 22–9
Auditor Independence and Competence 22–10
Regulatory structure 22–11
Direct Regulation of Auditor Independence 22–12
Non-independent persons 22–12
Non-audit remuneration of auditors 22–13
Auditors becoming non-independent 22–14
Auditors becoming prospectively non-independent 22–15
The Role of Shareholders and the Audit Authorities 22–16
Appointment and remuneration of auditors 22–17
Removal and resignation of auditors 22–18
Failure to re-appoint an auditor 22–20
Whistle blowing 22–21
Shareholders and the audit report 22–22
The Role of the Audit Committee of the Board 22–23
Introduction 22–23
Composition of the audit committee 22–24
Functions of the audit committee 22–25
Auditor Competence 22–26
Qualifications 22–27
Auditing standards 22–28
Quality assurance, investigation and discipline 22–29
Empowering auditors 22–30
Liability for Negligent Audit 22–31
The nature of the issue 22–31
Providing audit services through bodies with limited
liability 22–34
Claims by the Audit Client 22–36
Establishing liability 22–36
Limiting liability 22–38
Claims by Third Parties 22–44
The duty of care in principle 22–44
Other issues 22–52
Conclusion 22–53
INTRODUCTION
22–1
The statutory accounts and reports discussed in the previous
chapter are the responsibility of the directors. However, all
modern company law systems have long accepted the principle
that the reliability of the accounts and reports will be increased if
there is in place a system of independent third-party verification
of them. The temptation to present the accounts in a light which
is unduly favourable to the management is one likely to afflict
all boards of directors at one time or another—and the
temptation is likely to be at its strongest when the financial
condition of the company is at its weakest and shareholders,
creditors and investors are most in need of access to the truth. To
provide such third-party verification is the traditional role of the
audit.
Sources of audit law
22–2
We saw in the last chapter that the global nature of modern large
businesses creates a strong pressure for global accounting
standards (though a single set of such standards is still some way
off) and for regulation of accounts within the EU to be
something which takes place to a significant extent at EU level.
Equally this is the case with auditing, as an essential
complement to accounts. Global auditing standards are being
developed, as we shall see below, and auditing is a matter which
has been regulated to an increasing degree at EU level. The
process began with Directive 84/253 on auditors’ qualifications,
but in the wake of various corporate scandals at the beginning of
the century (in the US as much as in Europe) that Directive was
replaced by one which regulated in addition the process of
auditing. Directive 2006/43/EC was in turn amended after the
financial crisis in 2013 by Directive 2013/34/EU and, again, by
Directive 2014/56/EU.1 However, in 2014 an additional crucial
step was taken. In respect of the largest companies, i.e.
companies whose securities are traded on regulated markets,
termed “public interest entities” (“PIEs”),2 an extended
supplementary set of rules was introduced. As important, that
supplementary set of rules was laid down in a Regulation,3
whose provisions are, therefore, directly applicable in the UK
(though domestic rules are needed to exercise any choices which
the Regulation specifically gives to Member States). Domestic
rules are still needed to transpose the amended Directive and to
deal with matters not dealt with by either the Regulation or the
Directive.4 Domestic rules on auditing are contained in the
Companies Act 2006, as amended, and the Statutory Auditors
Regulations but also in rules (“standards”) made by the Financial
Reporting Council or by the relevant professional bodies.5 The
structure of the domestic institutional arrangement was changed
(and simplified) in the light of the requirements of the
Regulation and, to a lesser extent, the Directives, so that the
2014 EU level reforms were significant for structural as well as
substantive reasons.
The duties of the auditor
22–3
To summarise briefly the role of the auditor, the core element of
it is the production of a report to the members of the company
which gives the auditor’s opinion on a number of issues. The
core opinion is whether:
(a) the annual accounts give a true and fair view of the financial
position of the company (or the group in the case of group
accounts)6; have been properly prepared in accordance with
the relevant financial reporting framework7; and have been
prepared in accordance with the requirements of the Act or
the IAS Regulation8;
(b) the directors’ report is consistent with the accounts, has been
prepared in accordance with the applicable legal requirements
and whether any material misstatements have been identified9
(the same or similar duties arise in relation to the strategic
report and the separate corporate governance statement, if the
company has produce either)10; and
(c) the auditable part of the directors’ remuneration report
(DRR) has been properly prepared in accordance with the
Act.11
The auditor’s report must be either “qualified” or
“unqualified”.12 An unqualified report is one where the auditor is
able to give the opinions mentioned above; a qualified report
(which is a serious thing for the company and its members) is
one where one or more of the opinions mentioned above cannot
be given.13 The auditor’s report to the members must contain
opinions on matters (a)–(c) above. In addition:
(d) In relation to PIEs the Regulation requires discussion in the
report of the risks of fraud or misstatement in the company’s
accounts.14 This falls short of requiring an opinion on
whether there has been fraud or misstatement, but the report
must “explain to what extent the statutory audit was
considered capable of detecting irregularities, including
fraud”.
Under domestic law and according to the circumstances, the
auditor’s report may also have to deal with further items. The
most important potential matters that may need discussion are:
(e) those “which cast significant doubt about the company’s
ability to continue as a going concern”.15
In addition, certain matters may need to be mentioned arising
out of the auditor’s duty, in preparing the report, to carry out
investigations so as to be able to form a view as to whether:
(f) adequate accounting records have been kept by the company;
(g) the company’s individual accounts are in agreement with the
accounting records; and
(h) the auditable part of the DRR is in agreement with the
accounting records.16
If all is well in relation to the above three issues, the auditor
need say nothing in the report. If it is not, the auditor must state
this fact.
(i) in addition, if the auditor has failed to obtain all the
information and explanations which he or she believes to be
necessary for the purposes of the audit, that fact must be
stated in the report.17
Finally, there are two specific provisions relating to the small
company accounts and the DRR:
(j) Where the directors have taken advantage of the relaxations
for small companies when preparing the company’s accounts
or the directors’ report, the auditor must state in the report his
opinion that they were not entitled to do so, if he forms such
an opinion.18
(k) If the auditor finds that the statutory provisions on the
disclosure of directors’ remuneration have not been complied
with, there is a duty upon the auditor, so far as he or she is
reasonably able, to provide the particulars which should have
been given in the directors’ report or the DRR.19 Apart from
this, however, the auditor is not under an obligation the revise
the accounts and reports so as to bring them into line with the
applicable requirements: that is the task of their authors, the
directors.
In the not uncommon case where more than one person is
appointed auditor, it must be disclosed whether they all agree on
the matters contained in the report and the reasons for any
disagreement must be given.
Undoubtedly, the most important and time-consuming of the
auditor’s tasks is that listed at (a) above, because it amounts to a
general endorsement of the accuracy of the accounts, though (d)
is likely to add considerably to the auditor’s burdens (and the
company’s costs) in the case of a PIE. In some cases, the auditor
may also be required to report facts uncovered to third parties,
especially regulators, though this development has been
controversial, as we shall see.20
Overarching issues
22–4
There are three main issues of principle about audits and
auditors. First, is the benefit of the audit greater than its costs for
all companies? If not, is there a case for exempting some classes
of company from the requirement21 to have an audit? Secondly,
once an audit is required, the temptation on management to
present the accounts in an unduly favourable light can be given
effect only if they can persuade the auditors to accept such an
unduly favourable presentation. What steps, then, can and should
be taken to ensure the independence of the auditors from the
management of the company? Thirdly, even if the auditor is
independent, what steps should be taken to ensure that a good
job will be done, in particular what role should be played by
civil liability in damages on the part of the auditor towards those
who relied on the reports? We shall look at these issues in the
remainder of this chapter.
The auditor today, at least in large firms, is not an individual
practitioner but a member of a firm, often of international scale,
and the audit is carried out by a team of auditors under the
leadership of one or more partners in the firm. Where necessary,
the text below will refer to these realities. Otherwise, the word
“auditor” is used, but to cover both firms and sole practitioners,
individuals and teams of auditors.
AUDIT EXEMPTION
Small companies
22–5
Over a little more than a decade a very substantial set of audit
exemptions has been introduced, to the point where some 88 per
cent of non-dormant companies are exempt from audit of their
annual accounts (both individual and group).22 Of course, one
must not exaggerate the economic significance of the companies
so exempt, because the exemption is applied to small companies.
Nevertheless, the definition of what counts as “small” for this
purpose has been progressively enlarged over this relatively
short period of time. This was a significant change of policy on
the part of Government, for previously it had been committed to
a universal audit requirement.23 What triggered the reversal
seems to have been the additional costs generated by the
implementation in the Companies Act 1989 of Directive 84/253
on auditors’ qualifications,24 which was alleged to have a
disproportionate impact on the audit costs of very small firms.
Once begun, the exemption process seems to have acquired a life
of its own. Despite the opposition from some users of accounts,
notably the HM Revenue and Customs and some banks, the
deregulatory pressure was successful.
An indication of the spread of the small company exemption
from audit can be gained from looking at how the upper turnover
figure for exemption has increased over the years. In 1994, this
was set at £90,00025; it was raised to £300,000 in 199726; and in
2000 to £1 million.27 The CLR recommended a further increase,
namely, to the level of the requirement for being a small
company for accounts purposes, and that at the same time the
UK’s definition of a “small” company should be revised
upwards to the level permitted by EU law.28 This raised the
turnover figure to £4.8 million. With a further raising of the EU
limit, we reach the current number of £10.2 million.29 Thus,
there has been a move from a very cautious approach to audit
exemption, where the domestic rules remained well within the
upper limit set by EU law, to one of taking full advantage of the
exemption permitted at EU level.30 In consequence, over a short
period a very substantial process of removal of third party
assurance in relation to the accounts of small companies has
taken place.31
22–6
After a period in which access for small companies to the audit
exemption was somewhat more restricted than access to the
small company accounting regime, the government decided in
2012 to adopt the simple rule that companies which are small for
accounts purposes are also entitled to the audit exemption.32
Even if the company meets this condition, it may be excluded
from the audit exemption, on grounds which parallel the loss of
small company status for accounts purposes.33 In particular, the
company must not be a public company.34 In addition, if the
company is a member of a group, it will qualify for the
exemption only if the group qualifies as small and is not an
ineligible group.35
Further, even if a company is exempt from audit on the
ground of its size (or the ground of dormancy, discussed below)
members representing at least 10 per cent of the nominal value
of the company’s issued share capital (or any class of it)36 may
demand an audit for a particular financial year, provided the
notice is given after the financial year commences and within
one year of its end.37 Thus, notice must be given on a year-by-
year basis and the members cannot make a demand relating to
future financial years (when they might not meet the size
threshold).
Where the exemption applies and is used, the directors must
confirm in a statement attached to the balance sheet that the
company was entitled to the exemption, that no effective notice
has been delivered requiring an audit and that the directors
acknowledge their responsibilities for ensuring that the company
keeps accounting records and for preparing accounts which give
a true and fair view of the state of the company’s affairs.38
However, none of this means that small companies will not
have their accounts audited in fact. If a company sees value in
providing such assurance to members, creditors or investors, it
may choose to have an audit. More likely, banks or other large
creditors may insist on an audit as part of the process of
considering whether to make a loan to the company. Where the
company which chooses to have an audit is a “micro” company,
however, the audit will not cause the company to reveal more
information where it has chosen to stick to the minimum
standards for such companies.39
Subsidiaries
22–7
Subsidiary companies, of any size, are exempt from the audit
requirement, under reforms introduced in 2012, subject to certain
conditions.40 The central requirement is that the parent company
guarantees all the liabilities of the subsidiary as they stand at the
end of the financial year, until they are satisfied, and that the
guarantee is enforceable against the parent.41 Apart from
extensive publicity requirements, this exemption is confined in
various ways. It is available only where the parent is
incorporated in the EEA; it is not available to subsidiaries whose
securities are traded on a regulated market—a rare, but not
unknown, situation in the UK; all the members of the company
must agree to forego the audit; and the subsidiary’s accounts
must be included in the consolidated accounts of the parent.42 It
is thus most easily available to wholly-owned subsidiaries of
EEA parents. The underlying policy argument is that the audit of
the subsidiary’s accounts in such case adds little by way of value
to the audit of the consolidated accounts—though, equally, given
the requirement for audit at group level, the savings from
omitting the subsidiary audit are probably not enormous.
Dormant companies
22–8
A further and less controversial type of company which is
exempt from audit is the so-called “dormant” company.43 A
company is dormant during a period when there is “no
significant accounting transaction” in relation to it, an
accounting transaction being one which needs to be recorded in
the company’s accounting records.44 Where the company has
been dormant since its formation, no other conditions need be
met before the exemption is granted.45 The most obvious and
common example of such a company is a “shelf company”46
while it remains on the shelf (though there may be legitimate
reasons for incorporating a company which is intended to remain
dormant indefinitely). If the company becomes dormant after a
period of activity, then its audit exemption is more
circumscribed. It depends on the company not being a parent
company required to produce group accounts and its being
entitled to produce its individual accounts under the small
companies regime47 or being entitled to do so but for the fact that
it is a public company or a member of an ineligible group.48 In
practice, the most important extension which the dormant
company exemption makes to that already provided for small
companies is that it extends to small public companies.49
Non-profit public sector companies
22–9
This exemption does not need detailed consideration because the
companies entitled to it, although incorporated under the
Companies Acts, are part of the public sector and are subject to
public sector audit.50 A company is non-profit making if it is so
for the purpose of art.54 of the Treaty on the Functioning of the
European Union—though that article in fact contains no
definition of “non-profit making”. Such companies are excluded
from audit because they are outside the scope of art.50(1) TFEU,
under which the audit Directives were made.
AUDITOR INDEPENDENCE AND COMPETENCE
22–10
Although the issue of small company exemption from audit has
been important over the past two decades, the most important
policy issue relating to auditors concerns their independence.
This was an issue brought to the fore by the collapse of the
Enron Company and others in the US in the early years of this
century, which collapses were thought to reveal weaknesses in
the provisions on auditor independence.51 At least in the eyes of
the EU, the same issue arose out of the experience of the
financial crisis 2007–9.52 The essence of the independence issue
is that the auditor is appointed and remunerated by the company
whose accounts and reports are to be audited. Although
companies are required to have their accounts audited (unless
exempted), they are not required to employ any particular
auditor or to pay that auditor any particular level of
remuneration. There thus develops the possibility that auditors
will compete for mandates on the basis that they will engage in
only a cursory scrutiny of the company’s accounts or that they
will act in this way in return for excessive remuneration (which
might be disguised as remuneration for the provision of non-
audit services to the company). The traditional response to this
argument is that in the long- or even the medium-term such a
business model is self-destructive. The auditor will obtain a
reputation for laxness, which will, perversely, destroy its
business. Whilst the company’s management may want a lax
audit, it is crucial that those who rely on the audit believe that
the appropriate checks have been carried out. A lax audit by an
auditor known to be lax is no good, even for evasive
management, because the management will not obtain the
benefit it desires from the audit opinion. Whilst the reputation
argument may have much force, recent experience suggests that
it does not operate at all times and in all circumstances so as to
guarantee an appropriate level of audit scrutiny. Individuals
within the audit firm may have perverse short-term incentives
which outweigh the firm’s longer term incentive to do a good
job or the investors may move away from attaching much
importance to the audited accounts in periods of market
exuberance.
Consequently, there is a case for regulation to reinforce the
market incentives supporting auditor independence. Much the
same arguments can be made in relation to auditor competence.
An audit firm has reputational reasons for providing a good
service in general but in particular cases there may be incentives
on individuals to operate inefficiently. Nor should the
independence and competence issues be viewed as completely
separate: a non-independent auditor displays dependence on
management precisely by carrying out an inadequate audit.
However, the fact the market cannot guarantee independence
and competence does not mean that regulation can (some aspects
of the problem might be insoluble) nor that all types of
regulation are equally appropriate.
There are eight strategies which have been deployed by the
law to address these problems.
(1) Laying down specific rules disqualifying persons from
acting as auditor of a particular company on grounds of
conflict of interest.
(2) Constraining the provision of non-audit services to audit
clients.
(3) Requiring the mandatory rotation of auditors.
(4) On the basis that the board is the body within the company
which has the greatest interest in a lax audit, increasing the
role of the shareholders in relation to audit decisions.
(5) On the basis that, within the board, it is the executive
directors who have the greatest interest in a lax audit and
that shareholders have serious collective action problems,
increasing the role of the non-executive directors in relation
to auditor decisions, notably via an audit committee
consisting wholly of independent non-executive directors.
(6) Attacking the problem not from the side of the company but
from the side of the auditor by subjecting auditors to greater
regulatory control and more effective disciplinary
mechanisms.
(7) Increasing the powers of the auditors as against the
company.
(8) Imposing civil liability on auditors to those who rely on the
audited accounts and reports where the auditors have been
negligent and imposing criminal liability for false statements
in audit reports.
Each has been deployed with greater vigour in recent years,
except civil liability, where indeed the tendency has been to
restrict liability.
Regulatory structure
22–11
Before we do so, however, a short word is necessary about the
structure of the regulation. The Directive requires Member
States to appoint a “competent authority” with the function of
approving auditors and putting in place a system of “public
oversight” of the work of those auditors who have been
approved.53 In the UK that competent authority is the Financial
Reporting Council.54 Whilst the competent authority has ultimate
responsibility for the tasks assigned to it, the Directive permits
delegation of its tasks to other bodies “authorised by law” to
carry out the delegated tasks—though in the case of PIEs the
Regulation forbids the delegation of many tasks beyond the
FRC.55 This delegation is subject to the condition that the
competent authority may reclaim the delegated power on a case-
by-case basis. Under the Statutory Auditors Regulations, the
FRC must itself oversee the creation of the standards which
auditors are required to meet and the manner of their application
in practice, but “must consider whether and how” other aspects
of the public oversight function (for example, quality assurance
and discipline) can be delegated to “recognised supervisory
bodies” (“RSBs”).56 The RSBs are, in brief, the professional
accounting bodies which meet the standards set in the Act for
recognition.57 An elaborate system of regulation of auditors and
auditing is thus envisaged. Some matters are determined in the
Act or the Statutory Auditors Regulations (or in the EU
Regulation in the case of PIEs), some in standards developed by
the FRC and some matters by the RSBs. However, the division
of powers between the FRC and the RSBs is not a novel feature
of EU Regulation. It was in place before the recent elaboration
of the EU requirements and, in fact, the impact of those
requirements has been somewhat to simplify the domestic
relationships. However, it is still the case that the obligation to
comply with the FRC’s standards flows from the requirements
that a statutory auditor be a member of a RSB58 and that the
RSB’s rules require compliance with standards laid down by the
FRC.59
DIRECT REGULATION OF AUDITOR INDEPENDENCE
Non-independent persons
22–12
A person may not act as an auditor if he is an officer or
employee of the company to be audited or a partner or employee
of such an officer or employee or, in the case of the appointment
of a partnership, if any member of the partnership is ineligible on
these grounds.60 Nor may a person act if any of these grounds
apply in relation to any associated undertaking61 of the company.
An auditor who comes within these provisions must immediately
resign and give notice to the company of the reason for the
resignation.62 Failure to do so is a criminal offence. Further, the
appointment or continuation in office of an auditor who is not
independent within the statutory section triggers a power in the
Secretary of State to require the company to appoint a proper
person to conduct a second audit or to review the first audit, and
the company may recover the costs of the additional audit work
from the first auditor, provided that person knew he or she was
not independent.63
Clearly, however, an employer-employee relationship with the
company being audited is far from being the only type of
relationship which might impair the independence of the auditor,
e.g. a debtor-creditor relationship or a substantial shareholding64
in the company might do so. The prohibition is clearly not a
sufficient compliance with the requirements of art.22 of the
Directive which imposes a general requirement upon Member
States to ensure the independence of auditors and to exclude a
person from acting as auditor if there is any relationship between
the auditor and audited company “from which an objective,
reasonable and informed third party would conclude that the
statutory auditor’s independence is compromised”. To meet this
requirement, the Statutory Auditors Regulations65 require the
FRC to make standards aimed at ensuring auditor independence
on appointment and during the audit. This mandate is discharged
by the FRC through its ethical standards.66
Non-audit remuneration of auditors
22–13
Apart from remuneration for the audit itself, the most common
conflicted relationship which an auditor may have with the audit
client arises from the fact that the auditor is normally a member
of a firm of accountants which is capable of providing a wide
range of services—well beyond audit or even accountancy
services—to clients. These non-audit revenues from audit clients
of accountancy firms have increased substantially in recent
years.67 Disclosure of the amount of these payments is provided
for under regulations requiring companies to disclose on a
disaggregated basis in notes to the accounts the non-audit
remuneration received by their auditors. The Regulations68
divide the auditor’s potential sources of remuneration into eight
categories (including remuneration from the audit itself), require
separate disclosure of remuneration earned from the company
(and its subsidiaries) and from associated pension schemes,69 and
require disclosure of amounts paid to the auditor’s “associates”
as well as to the auditor.70 The disclosure obligation imposed on
small or medium-sized71 companies extends only to the audit fee.
However, regulation of this issue extends beyond disclosure.
For PIEs a long list of non-audit services is simply prohibited
from the beginning of the period subject to audit to the
completion of the audit. These are non-audit services where the
risk of conflict of interest is thought to be high. They may not be
provided by the auditor or any member of its network72 or to a
PIE or any member of its group, if incorporated in the EU.73
Even permitted non-audit services are subject to controls. Their
provision must be approved by the company’s audit committee
(see below).74 In addition, the amount that is permitted to be paid
for the non-audit services is capped at 70 per cent of the average
audit fees paid over the previous three years.75
For non-PIEs the Directive applies its general principle that
auditors must assess and handle appropriately threats to their
independence, into which category non-audit remuneration falls.
In the UK this requirement is implemented via ethical standards
made by the FRC. However, these standards go beyond the
essentially procedural requirements of the Directive and make
the provision of certain high-risk non-audit services inconsistent
with an audit engagement.76 This approach on the part of the
FRC, which was in place before the most recent EU reforms,
essentially follows, but makes binding, the recommendations
contained in Commission Recommendation 2002/590/EC on
statutory auditors’ independence in the EU.77
Auditors becoming non-independent
22–14
It may be that, although the auditor may have no other
relationship with the company, over a period of time the auditor
relationship itself becomes a threat to independence. The auditor
may build up personal relationships with the management of the
audited company which make him or her reluctant to challenge
the management’s picture of events. The watchdog may have
become a lap dog. This argument is accepted at EU level in
relation to PIEs. The “key audit partners” are required to rotate
every seven years and not to take up appointment again for three
years.78 The notion of a “key audit partner” is one derived from
the Directive and it means the auditor designated by the audit
firm as primarily responsible for carrying out the audit (normally
referred to in the UK as the “engagement auditor”) but also the
auditor who signs the report, if different.79 In fact, the FRC’s
rules take up the option to make the rotation rules more
demanding and impose a five-year rotation and a five-year gap.80
In addition, the Regulation requires the phased rotation of all the
senior personnel in the audit team.
Rotation of the key audit partner has been required since 2006
Directive,81 but the Regulation introduces in addition a
requirement for the rotation of the audit firm of a PIE. The
argument against mandatory rotation of firms is that it means the
loss of the expertise of the whole of the existing audit team,
which occurrence would be likely to reduce the quality of the
audits immediately following a change of firm (unless, of
course, the audit team simply changed firms, thus defeating the
object of the exercise). In its 2011 proposals for an Audit
Regulation the Commission put forward, nevertheless, a rule
requiring for PIEs rotation of the audit firm every six years (or a
little longer in some cases).82 As enacted, the firm rotation
proposal survived but with considerably longer intervals. The
provisions are complex, reflecting their heavy negotiation in the
EU’s legislative process. In principle, rotation of the firm is
required every ten years, but Member States may opt for a 20-
year rule, as the UK has done, provided a public re-tendering
process is carried out after ten years.83
Firm rotation can be looked at as a competition issues as well
as an independence issue. Since a mere four firms dominate the
global accounting market, choice for large companies is
necessarily limited. In an attempt to address this issue, the
Competition and Markets Authority made an order in 2014
requiring mandatory re-tendering of audit engagements at least
every ten years for the largest 350 companies on the Main
Market of the London Stock Exchange.84 The aim was to give
second-tier audit firms an opportunity to break into the market
for the provision of audit services to this class of company and to
make it worthwhile for those firms to gear up to provide the
audit services. The Regulation now goes further than the order in
that it requires a change of auditor after 20 years, not just a re-
tendering process, and matches the order’s requirement of re-
tendering within the first ten years.
Both independence and competition goals might be hindered
if there were contractual restrictions in place on the choice of
auditor. The Regulation renders such clauses “null and void”;85
the Statutory Auditors Regulations treats them as of “no
effect”.86
Auditors becoming prospectively non-independent
22–15
An auditor may have no current relationship with the company
which creates a conflict of interest (nor may he or she have a
long association with the company as auditor) but there may be
an understanding, falling short of a contract, that the auditor will
resign in due course and take up a role in the management of the
company. Since accountancy skills are much prized in some
areas of management, movement from professional practice to
management is quite common. Article 22a of the Directive,
however, imposes a two-year “cooling off” period between
ceasing to be the statutory auditor or key audit partner and the
taking up of a “key” management position in a PIE and a one-
year period in any other case. The same periods are applied if the
new post is as a non-executive director of the client company or
a member of its audit committee (without being either a key
manager or a non-executive director—a rare situation). This rule
too is implemented via ethical standards in the UK.87
THE ROLE OF SHAREHOLDERS AND THE AUDIT AUTHORITIES
22–16
The traditional regulatory strategy deployed by the domestic
legislation to reinforce auditor independence has been to
enhance the role of the shareholders. In many ways this is an
obvious strategy. The accounts and reports are statements from
the directors to the members and so putting control over those
who verify those statements in the hands of the recipients rather
than the originators of the statements appears to be an
appropriate strategy. The auditor’s relationship with the
shareholders is underlined by the provision which gives him or
her a right to be sent all notices and other communications
relating to general meetings, to attend them and to be heard on
any part of the business which affects or concerns the auditor.88
In the case of a private company which takes its decision by
written resolution, the right transmogrifies into a simple right to
receive the communications relating to the written resolution,
but there is no general right to make representations to the
shareholders before they decide.89 This is a pretty ineffective
provision—though it needs to be recognised that many private
companies will be exempt from audit on grounds of being
“small”. However, the shareholders have limited opportunities to
exercise control, since they meet infrequently, and in addition
may face co-ordination problems in large companies over the
exercise of the powers which are conferred on them. Perhaps for
this reason, the auditor’s information obligations to the
shareholders are often extended to the audit authorities.
Appointment and remuneration of auditors
22–17
The normal rule is that the appointment of the auditors must be
done at each accounts meeting, normally the annual general
meeting,90 and the appointment is from the conclusion of that
meeting until the conclusion of the next such meeting.91 There
are only exceptional circumstances in which the directors may
appoint auditors.92 However, the proposal to appoint the
auditors, to re-appoint them or to appoint others in their place
comes normally from the board (though it need not) and the
meeting, almost invariably, will agree with the board’s proposal.
This is an example of a situation where the shareholders’ co-
ordination problems make it difficult, though not impossible, for
them to generate a proposal of their own. They might do so if
they had reason to believe that the auditor was in the board’s
pocket, but they rarely have grounds for so thinking, in which
case accepting the board’s proposal seems the rational course of
action. In the case of PIEs the audit committee (see below) is
required to put forward recommendations to the shareholders.93
This both recognises shareholders’ potential co-ordination
problems and attempts to shift the de facto nomination role out
of the hands of the executive directors of the company.
Where the auditors are appointed by the members in general
meeting, their remuneration shall be fixed by the company in
general meeting or in such manner as the general meeting shall
determine.94 This, too, is intended to emphasise that the auditors
are the members’ watchdogs rather than the directors’ lapdogs.
But in practice it serves little purpose since the members
normally adopt a resolution proposed by the directors to the
effect that the remuneration shall be agreed by the directors—as
the provision permits them to do. Even if the shareholders
actually fixed the auditor’s remuneration, rather than fixing the
method for fixing it, they would invariably act on a
recommendation from the board. A more effective protection,
perhaps, is that the amount of the remuneration, which includes
expenses and benefits in kind (the monetary value of which has
to be estimated) has to be shown in a note to the annual
accounts, thus enabling the members to criticise the directors if
the amount seems to be out of line.95
For private companies shareholder meetings are not required
to be held, but, assuming the company is subject to audit, the
principle of shareholder appointment and determination of
remuneration still applies, except that the shareholders may act
by written resolution and the rules are re-drafted so as to apply
with reference to, not the accounts meeting, which will probably
not be held, but the period of 28 days beginning with the day on
which the accounts and reports were circulated to the members
or, if later, the last day for circulating them.96 Suppose, however,
that no resolution with regard to the auditors is circulated to the
shareholders, a not inconceivable situation in a private company.
The Act provides that, unless the auditor was appointed by the
directors under their exceptional powers,97 failure to re-appoint
or to appoint someone else at the end of the year will mean the
auditors in place are deemed to be re-appointed.98 This process
of deemed re-appointment in private companies, which may
otherwise continue indefinitely, can be excluded by the
company’s articles.99 More important in practice, the auditor in
post may be required to undergo re-election as a result of a
resolution adopted by the members100 or a notice received from
members holding at least five per cent of the voting rights
entitled to be cast on a resolution that the auditor should not be
re-appointed.101 The last of these is the least demanding method
of preventing deemed re-appointment.
Removal and resignation of auditors
Requirement for shareholder resolution
22–18
As in the case of directors,102 a company may by ordinary
resolution passed at a meeting at any time remove an auditor
from office.103 However, the auditor, unlike a director, may not
be removed prior to the expiration of the term of office other
than by resolution of the shareholders.104 In this way the auditor
is given some protection against management pressure. If
management wish to remove the auditor prematurely, they must
do so by means of a proposal to the shareholders. If management
goes down that route, further provisions of the Act come into
play designed to permit or even require the auditor to put the
contrary case to the shareholders. Hence, not only has special
notice (28 days)105 to be given to the company of a resolution to
remove an auditor, but notice of the proposed resolution has to
be given to the auditor.106 The auditor is entitled to make written
representations which, if received in time, have to be sent to the
members with the notice of the meeting, and which, if not
received in time, have to be read out at the meeting.107 If the
resolution is passed, the auditor still retains the right to attend the
general meeting at which the term of office would otherwise
have expired or at which the vacancy created by the removal is
to be filled.108 Nor does removal deprive the auditor of any right
to compensation or damages, arising, for example, under the
contract between auditor and company, in respect of the
termination of the appointment as auditor or any appointment
terminating with that as auditor.109
A feature of the above rules is that, whilst protecting the
auditor to some degree against management pressure, they give
the shareholders a free hand over the removal of the auditor. If,
for example, the shareholders of their own motion wish to
remove an auditor they regard as too friendly with management,
they are free to do so, provided the special notice and auditor
statement provisions are complied with. However, art.38 of the
Audit Directive requires Member States to ensure that auditors
may be removed only on “proper grounds”. It provides that
“divergence of opinion on accounting treatments or audit
procedures shall not be proper grounds for dismissal”. The aim
is clearly to give the auditor further protection against
management pressure where the auditor has fallen out with the
management, but the provision appears to be general and makes
it less easy for the shareholders to act where they think the
auditor has become too cosy with the management.
In countries with controlling shareholders as the predominant
form of shareholding even in large companies (common in
continental Europe), it may have been thought unrealistic to
regard the directors and the (majority of the) shareholders as two
separate groups. However, it is not unrealistic in dispersed
shareholding jurisdictions such as the UK, and the Government
was clearly reluctant to implement the Directive in the obvious
way, i.e. by building a “proper grounds” qualification into the
shareholders’ removal power in s.510.110 Instead the Government
opted to amend s.994 dealing with unfair prejudice.111 Removal
of an auditor on ground of divergence of opinion or any other
improper ground is deemed to be conduct unfairly prejudicial to
the interests of some part of the members.112 This approach has
the merit of addressing the policy issue probably underlying the
Directive, i.e. unfair treatment of minority shareholders.
However, it is difficult to see that it transposes the Directive’s
formal requirement that the auditor “may be dismissed” only on
proper grounds. The dismissal, even if challengeable under the
unfair prejudice provisions by a shareholder, still seems to be
effective as far as the auditor is concerned nor, whether the
dismissal is effective or not, does the new provision give the
auditor any rights as against the company. Further, there is no
requirement that the court exercise its remedial powers under
s.996 to secure the reinstatement of the auditor. Whether this
way of proceeding meets the Directive’s requirements must be
open to doubt.
In the case of PIEs the Directive113 requires that 5 per cent of
the shareholders or the competent authority should be able to
bring proceedings before a court for the dismissal of the auditor
on proper grounds. Unlike the provision just discussed, this
expands the powers of (minority) shareholders though in a rather
cumbersome way.
A breakdown in relations between auditor and management is
more likely to reveal itself in the resignation of the auditor rather
than an attempt by the management to persuade the shareholders
to remove the auditor. Few auditors will want to retain office if
relations with the management of the company have become
seriously strained. At first glance the Act makes resignation an
easy matter: the auditor resigns by sending a notice to that effect
to the company.114 In this case what is needed are provisions
which make it difficult for the auditor to “go quietly”, i.e. to
resign office without ensuring that any matters which have
caused concern will be ventilated. The Act contains two sets of
notice provisions designed to achieve this objective, requiring
notice to be given to the company, on the one hand, and the
regulatory authorities on the other. The information may put
these bodies on the alert about possible mismanagement of the
company. However, the Act also imposes notification
requirements in the case of dismissal. We therefore discuss the
notification requirements together in the following sub-section.
Notifications
22–19
An auditor of a PIE who leaves office at any time and for any
reason must send the company a statement of reasons for this
occurrence.115 In the case of a non-PIE such a statement may be
required. It will not be required where the departure from office
occurs in circumstance which the legislature has determined in
advance raise no concerns.116 Nor will it be required of an
auditor who leaves office at the end of an accounts meeting,117
i.e. the rule here is aimed a departures during a financial year.
For both PIEs and non-PIEs the statement must include
reference to matters connected with the departure from office
which the auditor thinks should be brought to the attention of the
company’s members or creditors.118 This is the “section 519
statement”.
Having produced the statement, an auditor resigning from a
PIE can seek to replicate the situation in relation to a dismissal
by requiring the directors to convene a meeting of the
shareholders to consider it,119 though if “going quietly” was the
motivation behind the resignation, the auditor is pretty unlikely
to take this step.120 Whether or not the resigning auditor triggers
this right, the company must send circulate any s.519 statement
received from a departing auditor to those entitled to receive
copies of the company’s accounts.121 This too is unlikely to
generate action on the part of dispersed shareholders, unless the
statement reveals egregious conduct.
Of greater significance is the obligation to inform a regulator
of the s.519 statement. The auditor must send the statement to
the Registrar,122 so that it gets onto the company’s public file at
Companies House, and to the appropriate audit authority,123 both
obligations being sanctioned by criminal sanctions. The
appropriate audit authority for a PIE is the FRC and for a non-
PIE a RSB. Where the s.519 statement is made by an auditor
who is ceasing office other than at the end of an accounts
meeting (or its private company equivalent), the company must
forward to the appropriate audit authority a statement of its
reasons for the occurrence of this event, though the company
may simply say that it agrees with the reasons given by the
departing auditor. Thus the regulator is informed of both sides of
the dispute, if there is one, and is perhaps more likely to take
action than dispersed shareholders, at least where the dispute
reveals a public interest element. Overall, the management
cannot remove an auditor prematurely, whether by dismissal or
forced resignation, without facing a serious risk of a row at the
general meeting (and, in the case of a listed company, adverse
press publicity) and with the auditing and accounting authorities.
Failure to re-appoint an auditor
22–20
Finally, a management which has fallen out with its auditors
may simply wait until the end of the term of office and replace
them. As we have seen, in the case of a public company this is
an annual opportunity, since the term of office of the auditor
runs, normally, from one accounts meeting to the next, and in the
case of a private company the deemed re-appointment
mechanism can be brought to an end by appointing substitute
auditors during the annual period for appointing them.124
Moreover, since a change of auditors, for good reasons, is not an
uncommon event and is now encouraged by the authorities,
failure to re-appoint may not be suspicious. Alternatively,
auditors who have fallen out with the management may simply
not seek re-appointment. However, the Act does take steps to
flush out information about failures to re-appoint which are
questionable. First, a resolution to appoint someone other than
the existing auditors must be a resolution of which special notice
(at least 28 days)125 has been given to the company, and the
company must make use of the advance notice to inform the
outgoing auditor and the proposed replacement of the
resolution.126 The outgoing auditor then has the right to have
representations circulated in advance of the meeting or read out
at the meeting, similar to the rights arising on a resolution to
dismiss.127 If, in the case of a private company, the decision is to
be taken by written resolution, the right is to have the
representations circulated to the members of the company.128
More important, because obligatory, the rules applying to
PIEs concerning the auditor’s duty to deposit a statement of
circumstances with the company apply to the outgoing auditor.129
Following on from that, the auditor must supply a copy of the
statement to the Registrar and the FRC130 and the company must
circulate the statement to those entitled to receive the
accounts,131 but the company is not required to supply a
statement of its reasons to the FRC.132
Whistle blowing
22–21
The auditor’s relationship with the authorities is strengthened,
possibility to the detriment of the quality of its relationship with
the company, by whistle-blowing provisions, meaning a duty
laid on the auditor to report certain categories of facts discovered
in the course of the audit to the relevant authorities. In the case
of PIEs the Regulation not surprisingly requires auditors to
report suspected fraud or other irregularities to the company, but
if the company does not investigate the suspicions, the auditor
must report them to the relevant authorities.133 This is
supplemented by an obligation to report directly to the
authorities evidence discovered in the course of the audit about
“material” breaches of the law or regulation or which throws
doubt on the continuous functioning of the PIE or which lead the
auditor to form the intention not to issue an opinion on the
financial statements or to issue a qualified opinion.134 In the
latter two cases the auditor is not necessarily reporting any
wrongdoing to the authorities, but is giving them advanced
notice of something which will necessarily become public in due
course. Disclosure under the above provisions does not make the
auditor liable under any contractual or legal restriction on the
disclosure of information.135 The relevant authority in the UK
will often be the FRC but might be different body in some cases,
such as the Serious Fraud Office.
Although general whistle-blowing provisions of this kind
were previously not part of UK law, UK auditing standards have
for some time required auditors to consider whether the public
interest requires such action,136 and on the basis of this
professional guidance it has been held that the auditor’s legal
duties to the company could embrace, as a last resort, a duty to
inform relevant third parties of suspected wrongdoing.137
Shareholders and the audit report
22–22
The focus on the shareholder role in relation to the appointment
and removal of auditors rather obscures the fact that the audit
report is a report to the shareholders, to which they might be
expected to react. Until recently, the Act provided no specific
channels for these reactions. It was assumed that the
shareholders would use their general governance powers (for
example, to remove directors) or impose market pressure on the
company by selling their shares. We have seen above138 that the
Government did not take up the CLR’s general proposal for a
“pause” between the delivery of the annual accounts and reports
to the members and the holding of the annual general meeting,
during which period shareholders would have an opportunity, at
no cost to themselves, to require the company to circulate
resolutions for consideration at the AGM in relation to those
documents. However, a weak form of that proposal is to be
found in ss.527–531 of the Act. Shareholders of a quoted
company139 may require the company to post on its website a
shareholder statement about the audit of the company’s accounts
or about the circumstances in which an auditor has ceased to
hold office, for consideration at the company’s accounts meeting
(normally its AGM). The tests for defining the members entitled
to require website publication are the same as those for requiring
circulation of a resolution to be considered at an AGM,140 that is,
members representing at least 5 per cent of the total voting rights
of those entitled to vote at the accounts meeting or 100 voting
members holding shares upon which an average of at least £100
has been paid up.141 The company is required to post the
statement on its website within three working days of its receipt
and to keep it there until after the accounts meeting,142 unless the
company persuades a court that the shareholders are abusing
their rights.143 A copy of it must be sent to the auditor at the
same time as it is posted.144 The company may not charge the
shareholders for the costs of website publication, which will
normally be negligible.145 Finally, when it gives notice of the
accounts meeting, the company must draw attention to the
existence of this facility and that it is without cost to the
members, which may encourage them to take it up.
THE ROLE OF THE AUDIT COMMITTEE OF THE BOARD
Introduction
22–23
The argument in favour of conferring a greater role on directors
in relation to the audit is that the board is able to give more
continuous attention to the audit than are the shareholders,
whose contribution is naturally episodic, normally at the annual
general meeting when the auditors’ report is considered and the
auditors appointed or re-appointed. The conflict of interest
which the board may have on audit matters can be dealt with, it
is argued, by entrusting this supervisory role not to the board as
a whole but to an appropriate committee of the board. Audit
committees are now common among UK companies traded on
public securities markets. This is partly because successive
versions of the UK Corporate Governance Code (“CGC”) have
recommended, on a comply or explain basis, that companies
with a premium listing146 on the Main Market of the London
Stock Exchange establish such committees of the board, along
with remuneration and appointment committees.147 However, in
relation to public interest entities there is now a mandatory
requirement for audit committees contained in the Directive. The
provisions of the Directive in relation to audit committees are
transposed into domestic law via rules made by the Financial
Conduct Authority (“FCA”), notably its Disclosure and
Transparency Rule (“DTR”) 7.148 Present practice is thus an
amalgam of these two streams of rules, though their coverage is
not exactly the same. Premium listing is a voluntary choice on
the part of the listed company, whereas the definition of ‘public
interest entities’ embraces all companies with securities traded
on a regulated market.
Composition of the audit committee
22–24
Article 39 the Directive is headed “audit committee” and
art.39(1) appears to require most PIEs149 to establish an audit
committee, so that this is no longer a “comply or explain”
obligation for companies with securities listed on the Main
Market of the London Stock Exchange. In fact, art.39(4) allows
Member States to dispense with the audit committee if there is
some other body within the company performing equivalent
functions. Consequently, DTR 7.1.1 is drafted in terms of
requiring a listed company to have a “body” which discharges
the functions assigned to the audit committee by the Directive.
However, since the UK Corporate Governance Code (C.3.1)
recommends the establishment of an audit committee of the
board, we assume in this account that the “body” will take the
form of such a committee.150 It is possible, however, that in
small companies the task could be discharged by the board as
whole, since the drafting of DTR 7 permits this and the company
could explain its non-compliance under the CGC.151 Under the
Directive the committee is to be composed of non-executive
members of the board or of appointees of the shareholders, of
whom the majority (including the chair) are to be independent of
the company. The UK CGC does not envisage members of the
audit committee being directly appointed by the shareholders but
rather that the members should all be members of the board.
Shareholder appointments directly to board committees is not
part of UK practice and it is unlikely that the Directive will
encourage the adoption of this approach.152 However, the CGC
recommends that all members of the audit committee be
independent, and this is likely to continue to be UK practice.
Both sets of rules agree that at least one member of the
committee “shall have competence in accounting and/or
auditing” (Directive) or “recent and relevant financial
experience” (CGC).
Functions of the audit committee
22–25
The Regulation indicates the importance it attaches to the audit
committee by conferring on it a list of functions which, together,
make the audit committee the central focus for dealings between
the auditor and the PIE:
(a) The appointment of the auditor is a process run by the audit
committee.153 That committee makes a recommendation for
the appointment of the auditor and, except for the renewal of
an existing engagement, that recommendation must contain at
least two choices, with a reasoned statement of the
committee’s preference among them. The choices must have
resulted from an open and transparent tendering process
organised by the committee.154 Although the detail of the
procedure are left up to the committee to determine, the
selection is required to be made according to publicised
selection criteria and to be capable of justification according
to those criteria. The aim appears to be to avoid “sweet heart”
deals between auditor and the company. Although the
committee’s recommendations go to the full board and the
full board makes the final recommendations to the
shareholders, it is likely that the board will simply follow
what the committee recommends. If the full board makes a
different proposal, it must justify its departure from the
committee’s proposals and, in any event, the board’s list may
not include an auditor who has not participated in the
selection process.155
(b) Whilst the appointed auditor reports to the members of the
company,156 the audit committee must receive at the same
time or earlier a more detailed report which delves into some
sensitive matters.157 These include the methodology
underlying the audit, the quantitative criteria used to
determine materiality,158 the valuation methods used in the
financial statements and the judgements underlying the
auditor’s ‘going concern’ conclusions. The report to the audit
committee must also give details of any significant
deficiencies in the financial statements and of any areas of
non-compliance (actual or suspected) with the applicable
legal rules or the articles of association, explain the grounds
on which companies were included in or excluded from the
consolidated accounts, report any significant difficulties
arising during the conduct of the audit and, finally, describe
the extent of the auditor’s interaction with the management of
the company. It is clear that this list adds considerably to the
auditor’s standard reporting duties but also that the audit
committee will require a significant level of expertise to
understand and evaluate the report it receives.
(c) The approval of the audit committee is required for the
provision to the PIE of permitted non-audit services.159
(d) Where the audit fee received from the PIE exceeds 15 per
cent of the auditor’s total fee income over a period of three
years, the audit committee must decide whether the audit
engagement should continue (in any case it may not continue
for more than two years) and whether the audit report should
be subject to review by another statutory auditor.160 The
danger here is perceived to be that the auditor has become too
dependent on a single client and so is less likely to be
rigorous in its scrutiny. Given the adverse consequences for
the auditor of exceeding the 15 per cent threshold over the
three year period, it is likely that auditors will not allow this
situation to arise. Ironically, the risk of exceeding the
threshold is greater for small auditors trying to break into the
PIE market than it is for the established “big four” global
auditing networks.
(e) In addition to the Directive’s general independence
requirements for auditors,161 the Regulation requires a PIE
auditor annually to confirm its independence in writing to the
audit committee and to discuss with the committee any
threats to its independence and potential safeguards.162
(f) Finally, audit committees are themselves subject to periodic
review of their effectiveness by the FRC.163
In addition to these specific duties the Directive adds a group of
more general duties to the list of the audit committee’s tasks.
These are to monitor the financial reporting process, the
company’s internal quality assurance and risk management
systems and the conduct of the statutory audit and to report to
the board as a whole on the outcomes of the statutory audit.164
The inclusion of internal risk management review is a significant
addition to the committee’s tasks, since it gives the committee a
very important internal governance role.
Despite this formidable list of tasks, it is doubtful whether the
Regulation and the Directive substantially upgrade what has
been expected from audit committees in the UK for some years.
The UK CGC covers a lot of the same ground.165 In addition the
Code recommends that a separate section of the annual report to
the shareholders should explain how the audit committee has
discharged its obligations during the year and that the chair of
the audit committee should be available at the AGM to answer
shareholders’ questions.166 In 2002, as a result of the efforts of a
committee chaired by Sir Robert Smith, extensive extra-Code
guidance for audit committees was produced, which, whilst
having no formal status, even on a “comply or explain” basis,
strongly indicates the enhanced importance of the audit
committee.167 The FRC has also produced guidance on risk
management which stresses the potential role of the audit
committee.168 Nevertheless, the embodiment of these
requirements in hard law may lead to greater regulatory, and
potentially litigation, focus on these matters.
AUDITOR COMPETENCE
22–26
So far in this chapter we have focused on the issue of auditor
independence. But competence is important as well.
Shareholders, investors and creditors may suffer if the auditor,
whilst not beholden to management, just does not do a good job
and produces accounts which are not reliable. Moreover, as
noted, one sign of lack of independence may be a lax audit
which does not meet professional standards, so that tackling
competence is an indirect way of tackling lack of independence.
Rules aimed at increasing competence may be aimed at
controlling those permitted to carry out audits, at controlling
how audits are carried out or at sanctioning those who have
carried out incompetent audits. The sanctions may be criminal,
administrative or civil. Competence may also by enhanced by
extending the auditor’s powers.
Qualifications
22–27
An early concern of the EU law on auditors was to require that
they be appropriately trained and qualified and continue to be
so.169 We do not need to go into the details in this book. It is
enough to note that the rules of the recognised supervisory
bodies (i.e. normally the professional institutes)170 must provide
for appointment as statutory auditor to be confined to those who
hold appropriate qualifications (or in the case of appointment of
a firm that each individual responsible on behalf of the firm is so
qualified and that the firm is controlled by such persons).171
Schedule 11 then lays out in some detail the terms on which
bodies may award professional qualifications. The discharge by
the RSBs of this function is overseen by the FRC.172 Since a
person who acts as an auditor without the appropriate
qualifications is ineligible to do so,173 the POB has the power to
require a second audit in such cases and the ineligible auditor
may be liable for its costs.174 An auditor may also be
appropriately qualified by virtue of a qualification granted in
another EEA State and of having passed an aptitude test and
spent an adaptation period in the UK.175 The FRC also has power
to recognise qualifications obtained outside the EEA where it is
thought that they are equivalent and where the country in
question would provide reciprocal treatment of persons qualified
in the UK.176 The names of statutory auditors must be entered
into a public register, which must include an indication of the
other Member States (if any) in which the auditor is registered. It
must also contain the names of third country auditors who sign
the audit reports of third country companies whose securities are
traded on a regulated market in the EU.177
Auditing standards
22–28
Auditing standards play a similar role in relation to the function
of auditing as accounting standards play in relation to drawing
up the accounts. An auditor is necessarily concerned with both
sets of standards: the auditor must establish that the accounts
have been drawn up properly (including in accordance with the
relevant accounting standards) and he or she must carry out the
job of checking the financial statements in a proper manner (in
accordance with auditing standards). In the case of a negligence
claim against the auditor, compliance with both accounting and
auditing standards is likely to be a matter to which the courts
attach great weight.178 As with accounting standards, auditing
standards are becoming internationalised. Article 26 of the
Directive requires Member States to secure compliance on the
part of statutory auditors (in all cases, not just the audits of PIEs)
with international standards issued by the International Auditing
and Assurance Standards Board (“IAASB”), based in New York,
once these have been adopted by the Commission. In default of
adoption of international standards, Member States apply
national standards though only “to the extent necessary to add to
the credibility and quality of financial statements”. However, the
process of adoption of auditing standards for the EU lags behind
that of adopting accounting standards, and, at the time of
writing, none has been adopted. In the UK, this delay is of little
consequence since the approach of the FRC to auditing standards
has been to adopt those laid down by the IAASB, but with
additional explanatory material.
Quality assurance, investigation and discipline
22–29
A central function of the FRC is to oversee the monitoring of
audit quality in general and to carry out investigations into
particular cases of suspected inadequate audit and to secure
(subject to appeal) disciplinary sanctions.179 This has been so
since the substantial domestic reform of auditor regulation
initiated by the Companies (Audit, Investigation and Community
Enterprise) Act 2004, which effectively did away with
professional self-regulation in these areas. In respect of PIEs the
Regulation requires these functions to be carried out by the FRC
itself.180 In other cases, the task may be delegated by the FRC to
or shared with the RSBs. Quality assurance means the periodic
inspection of audits carried out in particular companies
accompanied by possible recommendations for improvement—a
process now familiar in many walks of life. Both the Directive181
and the Regulation182 require quality assurance arrangements to
be put in place but the latter, applying to PIEs, is more
prescriptive about the nature of the process, requires quality
assurance reviews more frequently (every three years rather than
every six) and makes the “recommendations” of the inspectors
binding. In order to facilitate this work of the FRC the
Regulation requires an “annual transparency report”183 by the
auditor to the authority, setting out information such as the PIEs
for whom it acts, the firm’s governance and remuneration
structure and its practices designed to ensure independence.
In the case of suspected inadequate audits the Directive
contains a series of provisions requiring effective investigation
powers and a range of potential sanctions to be available, and
lays down criteria for determining the severity of the sanction in
particular cases.184 The Regulation adds information and access
rights in the case of PIEs.185 The disciplinary sanctions range
from private censure, through public censure to a prohibition on
acting as an auditor and imposing a financial penalty.186 In
important cases the disciplinary proceedings are commenced in
the UK by the FRC, which initiates proceedings before
Disciplinary Tribunal, established by but independent of the
FRC. The Tribunal is chaired by an experienced lawyer, and
appeal lies to an Appeal Tribunal.
Empowering auditors
22–30
Even if the statutory and professional rules produce loyal and
competent auditors, auditors may fail to detect impropriety in the
company if they are not given the co-operation of those who
work for it. If an auditor does not receive the co-operation
needed to assess the company’s accounts, that fact can be
reflected in the ultimate report to the shareholders,187 but it is
obviously more desirable that the auditor should be able obtain
the necessary information. The issue of the auditor’s powers as
against the audited company and its management is one to which
the legislature has given increasing attention in recent years.
Auditors have a right of access at all times to the company’s
books, accounts and vouchers.188 They are entitled to require
such information and explanations as they think necessary for
the performance of their duties. Those under the obligation to
provide the information and explanations now go beyond the
company’s officers and embrace (present or past): employees of
the company; persons holding or accountable for the company’s
accounts (for example, where the company has outsourced this
function); subsidiary companies incorporated in the UK; and
persons falling within the above categories in relation to the
subsidiary and the subsidiary’s auditor (if different).189 More
problematic, though of great importance, is the position of
subsidiaries incorporated outside the UK and the relevant
persons connected with them. Here the problem of comity of
legal systems is dealt with by putting an obligation on the parent,
if required by its auditors to do so, to take such steps as are
reasonably open to it to obtain such information and
explanations from the subsidiary and the relevant persons.190 A
failure to respond “without delay” to a request for information is
a criminal offence, unless compliance was not reasonably
practicable. Also criminal is knowingly or recklessly making to
the auditors a statement which conveys or purports to convey
any information or explanation which is misleading, false or
deceptive in any material particular.191
The above rights for the auditor depend upon the auditor
knowing which questions to ask. Since the auditor is by
profession an investigator, it is reasonable to suppose that he or
she will often be in a position to ask the right questions.
However, the CLR192 thought there was a good argument for
requiring directors to “volunteer” information rather than leaving
the auditor to find everything out. This reform was implemented
via an addition to the matters required to be disclosed in the
directors’ report.193 That report must contain a statement on the
part of each director to the effect that (a) so far as the director is
aware, there is no information needed by the auditor of which
the auditor is unaware; and (b) the director has taken all steps he
ought to have taken to make him- or herself aware of such
information and to establish that the auditor is aware of it.194
This may require the director to reveal his or her wrongdoing or
that of fellow directors to the auditor.195 The full extent of what
is required of the director is to be assessed by reference to the
director’s objective duty of care,196 but the Act specifically
recognises that making enquiries of fellow directors and the
auditor might be enough to discharge the duty (i.e. that the
director can rely on satisfactory answers from such sources to
appropriate questions).197 A director is criminally liable if the
statement is false but only if the director knew of the falsity or
was reckless as to whether the statement was true or false and if
he or she failed to take reasonable steps to prevent the
(inaccurate) directors’ report from being approved.198 However,
as we shall see below, failure to comply with this provision may
also limit the auditor’s civil liability towards the company by
virtue of the doctrine of contributory negligence.
LIABILITY FOR NEGLIGENT AUDIT
The nature of the issue
22–31
Imposing civil liability on an auditor towards the company in the
case of a negligent audit is an obvious way of encouraging
diligence on the part of auditors. It is also a liability which arises
naturally out of the law of tort, once negligence liability was
extended to misstatements. If an auditor produces an audit report
which is misleading and the inaccuracy can be traced to a lack of
care, skill or diligence on the part of the auditor, then those to
whom the auditor owed a duty to take care will be in a position
to sue the auditor for damages, if they can show that the
inaccurate report caused them loss. In the case of a single
auditor, the liability will lie with that person; in the more
common case of a firm being appointed auditor, then the
individuals who were negligent will be liable but so also will the
firm, either because the negligence of the individuals is regarded
as the negligence of the firm or because the firm is vicariously
liable for the negligence of the individuals. Nevertheless, as we
shall see below, the question of how wide that liability should be
(both in terms of the range of potential claimants and the
quantum of liability) raises difficult policy issues.
The rules for determining the underlying liability of the
auditor rests, even after the 2006 Act, with the common law,199
though statute has played a role in fashioning the way that
common law liability applies to auditors. It is important to
distinguish among the potential claimants against the auditor
between the audit client and everyone else. That the audit client
in principle has a claim against the negligent auditor is well-
established, that claim being based either on the contract
between the auditor and the company or on the tort of
negligence.200 In relation to claims by persons other than the
audit client, however, the question of how widely the duty of
care in tort is owed has been, as we shall see, fiercely debated in
the courts and the upshot of the litigation is a rather restricted
duty of care. Of course, the matter might be decided by contract
even in relation to non-clients, but there is less likely to be an
explicit contract between the auditor and the non-client upon
which the claimant can rely. However, as we shall see, the thrust
of the court decisions on the tortious liability of auditors is that
liability exists in relation to non-clients only where a relationship
akin to a contract has arisen.
The formulation of the duty of care owed by auditors to non-
client claimants is but one example of a generally cautious
attitude on the part of legislators towards auditors’ civil liability.
One might have thought that increasing the civil liability of the
auditor would be an effective way of providing incentives to
auditors to be both independent and competent. However, unlike
all the legal strategies discussed above, which in one way or
another have seen some expansion in recent years, judicial
decisions and legislative rules have ensured that there has been
no such expansion in relation to civil liability; in fact, the
tendency in recent years has been to rein in civil liability.
22–32
As regards liability to non-clients, there is a particular problem
that liability arises out of the fact that the accounts and reports
and the auditor’s report thereon are placed in the public
domain.201 It is therefore possible that a very large number of
people will rely on them in order to carry out a wide range of
transactions. Unrestricted liability on the part of auditors to third
parties who rely on the accounts thus raises the prospect, as it
was once famously described, of “liability in an indeterminate
amount for an indeterminate time to an indeterminate class”.202
We discuss this problem further below in relation to the decision
of the House of Lords in Caparo Industries Plc v Dickman,203
but, at its worst, the liability rules might cause the audit market
to unravel through the withdrawal of financially sound auditors.
22–33
Even in relation to actions by audit clients, there are difficult
issues about the proper scope of the liability rules. Thus, the
general tort doctrine of joint and several liability may
significantly increase the tort exposure of auditors. Under this
doctrine, if two or more tortfeasors are liable in respect of the
same loss, the injured party may recover from any one of them
for the whole of the loss, leaving the defendant to seek
contributions from the other tortfeasors. In the classic case,
where the misstatements in the company’s accounts result from
the fraud or negligence of someone within the company and the
failure of the auditors to discover the wrongdoing, the
claimant204 may recover the whole of the loss from the auditor,
leaving the auditor to bear the risk that the original wrongdoers
(usually directors or employees of the company) are judgment
proof. Thus, claimants are encouraged to sue the defendants with
“deep pockets” for the recovery of the whole of their loss, even
though the auditor may be only the minor party at fault. Again,
there is a risk the audit market will unravel in these
circumstances.
The above problems are only partially addressed (and may
even be exacerbated) by the professional indemnity insurance (or
equivalent arrangements) which audit firms are obliged to
carry.205 That insurance may be very expensive and so increase
the cost of audits and it may not be available for the full extent
of the claim, so that the liability risk is only partially
collectivised through the insurance mechanism. More
problematically, the presence of insurance may actually
encourage litigation against auditors, since claimants will know
that auditors are worth suing and auditors will have an incentive
to settle quietly rather than fight the issue in court provided they
keep the liability within the insurance limits. There has been
some movement in the common law world towards the
substitution of “proportionate” liability for joint and several
liability for auditors (i.e. the auditor is liable only for the share of
the loss which is fairly attributable to the auditor’s
negligence).206 However, in the UK, despite pressure from the
accounting profession, there has been resistance to such a move
on the grounds that it simply shifts the risk of insolvency from
the auditor to the wholly innocent claimant.207 Nevertheless, a
British solution has emerged in the 2006 reforms permitting a
“liability limitation agreement” between auditor and audit client,
as discussed below. A restriction of liability to the auditor’s
proportionate share of the loss is a permissible type of
agreement. This reform, of course, does not address third party
claims against auditors.
Providing audit services through bodies with
limited liability
22–34
Where the auditor is an audit firm taking the form of a traditional
partnership, further issues are raised. The assets of the firm as a
whole become available to satisfy the claimant in the case of loss
caused by a partner (or employee) acting in the ordinary course
of the business of the firm.208 In addition, given the absence of
limited liability in the traditional partnership, the personal assets
of both the negligent partner and fellow partners may be called
on to meet the claim.209 The prospect of personal liability
(uncovered by insurance) might induce such defensive action on
the part of auditors that utility of the audit is reduced, because,
for example, auditors began to give qualified audit opinions
based on trivial grounds. Something has been done to address
the issue of personal liability. Audit services may now be
provided to a company by an accounting firm which is not a
partnership. The Act provides that both individuals and firms are
eligible to be appointed as auditors210 and then defines a “firm”
as “any entity, whether or not a legal person, that is not an
individual”.211 Thus, the old idea that it was the hallmark of a
professional that he or she provided services on the basis of
personal liability for their quality has gone. Some accounting
firms have set up their auditing arms as limited companies, but,
by and large, the company form of internal organisation is not
attractive to professional partnerships. The accounting firms
therefore pressed for, and ultimately obtained in 2000, a new
corporate vehicle, the limited liability partnership,212 which has
the internal structure of a partnership but benefits from limited
liability in its external dealings. The origins of this new vehicle
are demonstrated by the fact that, when originally proposed, it
was to be confined to professional businesses, but in the end it
was made generally available.213
Conducting the audit through a vehicle with limited liability
certainly protects the personal assets of the non-negligent
partners. Whether the personal assets of the negligent partner are
so protected depends on whether the negligent misstatement in
the audit report is analysed as having been made by the member,
for whose tort the corporate body is vicariously liable (personal
assets of the negligent member not protected), or whether the
negligent misstatement is analysed as having been made by the
corporate body through the auditor, in which case the personal
assets of the negligent member are not at risk. The decision of
the House of Lords in Williams v Natural Life Health Foods214
suggests the latter analysis (personal assets not at risk) but it is
unclear whether the Williams rationale extends to statements by
professionals.215
22–35
Even if Williams does apply, the benefits of corporate
personality and limited liability are restricted to the personal
assets of the members: the business of the corporate body itself
could still be destroyed by a large claim which exceeded the
insurance cover and pushed the body into insolvency. This is,
indeed, the public policy crux. If there were many competing
firms of auditors, the occasional insolvency of one of them
might not matter in public policy terms. However, there are now
only four international networks of firms capable of carrying out
the audits of the largest multinational firms, and the collapse of
Arthur Andersen in the aftermath of the Enron scandal in the US
is a reminder of how quickly such international firms can
disintegrate.216 The disappearance of another such firm would
further reduce competition in the market for the audit of
multinational companies from its already low level. However,
this fear should not push legislators into hasty acceptance of
arguments for the reduction of auditors’ liability without
rigorous scrutiny of the likely impact. For example, it was
argued that a cap on auditors’ liability would increase
competition in the audit market, especially for large firm audits,
on the grounds that a cap would encourage medium-sized audit
firms to move up into the “big league”. However, an analysis by
the Office of Fair Trading concluded that such a result was not a
likely impact of the reform.217 A more robust approach might be
to seek to open up the audit market, especially the market for the
audit of the largest companies, to a wider range of firms. As we
have seen above, rules relating to mandatory re-tendering of
audit contracts were driven as much by competition concerns as
by concerns for auditor independence.218
We now turn to the ways in which the current liability rules
reflect the above concerns, looking separately at claims by the
audit client and by others.
CLAIMS BY THE AUDIT CLIENT
Establishing liability
22–36
As we have already noted, the audit client’s cause of action in
negligence is easily established in principle. Thus, the litigation
is likely to focus on the question of whether the auditor has in
fact been negligent and, if so, whether and how much loss has
been caused to the claimant. As far as the standard of care is
concerned, it is clear in law, though often not accepted in the
commercial world, that the auditor is not a guarantor of the
accuracy of the directors’ accounts and reports. Indeed, in an old
case the auditor was given a broad discretion to rely on
information provided by management, so long as no suspicious
circumstances had arisen which should have put the auditor on
inquiry.219 However, the modern law is different. As Lord
Denning once put it, the auditor, in order to perform his task
properly, “must come to it with an inquiring mind—not
suspicious of dishonesty, I agree—but suspecting that someone
may have made a mistake somewhere and that a check must be
made to ensure that there has been none”.220 Auditor scepticism
is now firmly established in audit regulation. The Directive
requires Member States to ensure that the auditor “maintains
professional scepticism throughout the audit”.221 As to what
“scepticism” will require, the existence of accounting and
auditing standards helps the courts to concretise the duty of care
in any particular situation, even though they are not formally
binding on the courts.222 A court which relies on these standards
can be sure that it is not imposing unexpected standards of care
on auditors and that there has been some ‘public interest’ input
into the formulation of the standards.
As to the quantum of liability, the auditor’s failure to detect
error in the company’s financial statements deprives the
directors (or shareholders) of knowledge which could have
afforded them an opportunity to take remedial action or to
prevent the company from proceeding with some action on a
false basis (for example, by declaring a dividend or making
representations and warranties in a contract for the sale of the
company’s business). That remedial action might take a number
of forms, ranging from preventing a continuance of
mismanagement or fraud to deciding to sell a company whose
business model a proper audit would have shown to be under
serious threat from changing economic circumstances. However,
the auditor is not liable on a simple “but for” test for the
company’s failure through ignorance to take such action. For
liability to arise, the action which the company might have taken
or avoided must be one that was within the scope of the auditor’s
duty of care. This principle will embrace liability in respect of
decisions that companies normally take on the basis of the
accounts, such as declaring dividends or paying bonuses,
whether to staff or policy-holders.223 Thus, the auditor’s liability
will embrace losses caused to the company where the directors
would have acted differently in these areas if they had known the
full facts, even if the decision actually taken was perfectly
lawful. Beyond such decisions, the auditor’s duty of care will
depend in large part on the scope of the audit engagement. The
auditor’s liability may extend to wider classes of decision,
including strategic corporate decisions, if it is clear that the audit
engagement contemplated that the company needed the audit
information to make such decisions.224
22–37
In many cases, for example where the remedial action was the
possible sale of the company’s undertaking, what the company
will have lost is really the chance to take a particular step, i.e. to
find a purchaser at an acceptable price—who might or might not
have been forthcoming. The pecuniary value to be placed on that
lost opportunity depends upon the degree of likelihood that
action would have been taken and that it would have led to the
outcome the company alleges would have been reached. The
court will have to assess the value of that chance, awarding the
chance no value if it thinks it purely speculative.225 Even where
there was a course of action the directors could have taken which
was wholly within their own control, liability will depend on its
being shown that the step would have been taken. Often this will
be difficult to do, especially in the case of fraud or
mismanagement, when those involved included the directors.
Then, it would seem, to establish any loss the claimant would
have to show on the balance of probabilities that, had the
auditors’ report been properly qualified, action would have been
taken by the shareholders which would have led to the removal
of the directors. To recover any substantial damages, the
claimant would have to establish, further, a probability that the
ill-consequences of the former directors’ negligent or fraudulent
reign would have been effectively remedied by the steps which
would have been taken. The difficulties of establishing all this
are obvious.
Limiting liability
22–38
Even if the claimant can establish liability and substantial loss,
there are two types of argument available to the auditors to
reduce their liability for the whole of that loss, one based on
general defences (full or partial) to tortious liability and the other
on contract.
General defences
22–39
The most obviously available defence is contributory negligence,
whereby a claimant, who suffers loss as a result partly of his or
her own fault and partly of the defendant’s fault, will have the
damages payable by the latter reduced by such amount as the
court thinks just and equitable, having regard to the claimant’s
share of the responsibility for the damage.226 Thus, where harm
has been inflicted on the company through fraud committed by
its employees which the directors failed to discover because they
had inadequate internal controls in place and which the auditors
failed to discover because they did not realise the internal
controls were inadequate, the failures of the directors are the
failures of the company which the auditors can pray in aid to
reduce the damages payable. The disclosure statement now
required of directors in the directors’ report is likely to increase
the incidence of this defence being run by the auditors.227
In fact, a somewhat similar result seems to have been obtained
before this reform through the use by auditors of “representation
letters”, which auditors require companies to sign before the
auditors will certify the accounts. In these letters the company
typically promises “to the best of its knowledge and belief” that
certain important matters concerning the company’s financial
situation are in a particular state.228 If such a representation letter
is signed negligently on behalf of the company, the auditors will
have the partial defence of contributory negligence if
subsequently sued by the company and it can be shown that the
auditors would not have certified the accounts, or not certified
them without further investigation, had they known the true
facts. If the representation letter is signed fraudulently, the
auditors have a complete defence, because any damages due
from the auditors to the company can be wholly set off in the
claim the auditors have against the company for deceit
committed by the company against the auditors.229
In the above cases the situation is one where the both the
auditors and the directors or senior management of the company
failed to discover the fraud or negligence of a subordinate
employee and where both are at fault in failing to do so.
Reducing the company’s recovery seems acceptable in this
context for otherwise the existence of auditor liability would
provide an incentive for companies not to manage their internal
risk systems effectively. What is much less clear is whether the
auditors should be permitted to build a defence of contributory
negligence directly on the actions of the subordinate employee,
i.e. in a situation where the only failure to discover the fraud or
negligence is that of the auditors. The argument against allowing
contributory negligence on this basis is that it reduces the
incentive of the auditors to discover wrongdoing within the
company—sometimes put as the argument that contributory
negligence should not be based on conduct within the company
which was “the very thing” (or one of those things) the auditors
were under a duty to discover.
22–40
In Barings Plc (In Liquidation) v Coopers & Lybrand230 the
judge took account of both management failings and the
undiscovered fraud of the employee (which was attributed to the
company) in assessing the level of the company’s contributory
negligence. Applying this approach the judge assessed the
company’s contributory negligence at a high level, varying over
the time of the fraud, beginning at a 50 per cent contribution and
ending at 95 per cent. However, the judge did recognise some
force in “the very thing” argument,231 for it appears that he
would otherwise have attributed the employee’s fraud to the
company so as to allow the auditors to avoid all liability. We
need thus to consider again the rules on attribution, which we
looked at in Ch.7, but here in a different context. In Ch.7 we
considered attribution in the context of litigation by third parties
against the company; here we consider litigation by the company
against third parties. It is not obvious that the attribution rules
should be the same, at least where the third party is the auditor,
precisely because of the protective function of the auditors as
against the company, which a broad set of rules on attribution
might undermine.
22–41
The issue arose in an extreme form in Stone & Rolls Ltd v Moore
Stephens232 where the defendant auditors sought to raise the
defence of illegality as a complete defence to liability. In this
case a person who was the sole beneficial shareholder and
controlling shadow director of a company established it for the
purpose of committing large-scale fraud on banks. The company,
in liquidation, sought compensation through its liquidator (acting
in the economic interests of the creditors) for the allegedly
negligent failure the defendant auditor to discover the fraud. The
defendant sought to strike out the claim on the basis of an
illegality defence usually referred to by its Latin name: ex turpi
causa non oritur actio (roughly translated as “disgraceful conduct
does not give rise to a cause of action”). This is a rule of public
policy that the court will not allow its processes to be used by a
claimant to benefit from its own illegal conduct. In this case, the
majority by three to two allowed the defence, because of the
controller’s fraud, though on rather different grounds. As the
Supreme Court itself said in a later case, Jetivia SA v Bilta (UK)
Ltd,233 “it is very hard to derive much in the way of reliable
principle from the decision” in the earlier case.
In the later case, however, all the judges seemed to agree on
one proposition, namely, that the ex turpi defence is available
only if there are no “innocent” (i.e. uninvolved in the fraud)
shareholders or directors in the company. The decision thus
affects only a limited number of claims by companies against
their auditors. There was disagreement, however, on whether the
defence was always available in the absence of innocent
shareholders (and, perhaps, directors).234 This was the most
significant dividing line among the judges in Stone & Rolls
itself. Since the company was in liquidation at the time of the
litigation, the persons with an economic interest in the success of
the claim were its creditors (i.e. the defrauded banks), who were
“innocent”. If the presence of innocent shareholders would have
been enough to prevent use of the ex turpi defence by the
auditors, presumably on the grounds that a public policy defence
should not be deployed to deprive non-involved persons of the
value of their interest in the company, it can be argued that the
presence of innocent creditors of a company in liquidation
should have the same negative impact on the availability of the
defence. This argument does not involve acceptance of the
proposition that auditors’ duties are owed to the company’s
creditors (an argument which, as we see in the next section, the
courts have accepted only in limited situations). The duty here is
still one owed by the auditors to the company; the litigation is
brought by the body which has the management of the company
—the liquidator in this case; and the basis of the auditor’s
liability remains restoration of the company’s assets to the level
they would have enjoyed had the auditors not been negligent.
The point rather is that, so long as the company is a going
concern, the residual economic interest in the company’s assets
lies with the shareholders, so that excluding liability where all
the shareholders are involved in the fraud is understandable.
However, once the company is in the vicinity of insolvency, the
residual economic interest shifts to the creditors, as the law now
clearly recognises.235 If the interests of non-involved
shareholders trump the ex turpi defence when the company is a
going concern, it would be consonant with recent developments
in company law that the interests of non-involved creditors
should be taken into account in the same way.236
Limitation by contract
22–42
It was formerly impossible for auditors to limit their liability to
the company by means of a contract with it or by provision in
the company’s articles, or to obtain an enforceable promise of an
indemnity from the company in respect of such liability,237 but
one of the main changes in the 2006 Act was to permit such
contracts, subject to safeguards.238 The indemnity prohibition did
and does not apply if it relates to an agreement or provision to
indemnify the auditor against a liability incurred in defending
proceedings, criminal or civil, in which the auditor is successful
or in making a successful application for relief under s.1157 of
the Act.239 This is a limited qualification to the prohibition which
does no more than track the provisions relating to directors.240
The innovation is the permission for the auditor and company
to contract to limit the amount of a liability the auditor owes to
the company arising out of a breach of duty in the conduct of the
audit. The section is widely enough drafted to permit the parties
to introduce proportionate liability by agreement. This reform
was recommended by the CLR but it is subject to reasonably
strict safeguards. The principal ones are as follows:
(a) The agreement is effective to limit the auditor’s liability only
to the amount that is fair and reasonable in the circumstances,
having regard, amongst other things, to the auditor’s
responsibilities under the Act and the professional standards
expected of the auditor.241 If the agreement goes further than
is permitted by this provision, then it operates so as to limit
liability to the permitted level, i.e. the agreement does not fail
altogether.242 The agreement is exempted from the control
provisions of the Unfair Contract Terms Act 1977,243 which
applies a reasonableness standard to similar limitations of
negligence liability in many contracts. In short, the auditor
limitation clause is subject to ex post court control by
reference to a broad standard, as under UCTA, but the
significance of the exclusion from UCTA 1977 is that a
clause which fails the test under the 2006 Act still operates,
but at a lower level of substantive protection.
(b) The agreement may relate to only a single financial year, i.e.
a new agreement is needed for each set of annual reports and
accounts.244
(c) The agreement must be approved by the members, though in
the case of a private company the members, before the
company enters into the agreement, may pass a resolution
waiving the need for approval.245
To provide a check that these requirements have been met, a
note to the companies accounts must set out the principal terms
of the liability limitation agreement and the date on which it was
approved by the members (or approval was waived).246
The FRC produced guidance on the operation of these
provisions,247 which contemplates three main types of
agreement: proportionate liability, a “fair and reasonable” test
and a cap on liability, which could be expressed in a number of
ways, but most obviously as a multiple of the audit fee.
However, institutional shareholders have indicated that they will
normally vote in favour only of proportionate liability
agreements and, in particular, will be opposed to caps on
liability.248 Further, they will expect an improvement in audit
quality in exchange for the agreement, in particular, less
defensive auditing.
Criminal liability
22–43
The 2006 Act reform, permitting auditor liability limitation
agreements, was accompanied by an increase of criminal
liability for an auditor who knowingly or recklessly makes a
statement in the audit report which is misleading, false or
deceptive.249 In other words, the deterrent effect of unlimited
liability in damages for negligence was to some extent replaced
by a narrower criminal liability for intentional or reckless
misstatements.250 The liability applies to the statement that the
accounts give a true and fair view251 and to statements in the
audit report about the compliance of the company’s accounts
with its accounting records, about whether the necessary
information and explanations were forthcoming from
management and others, and about whether the company was
entitled to prepare accounts under the small companies
regime.252 Curiously, however, the liability applies only to that
part of the auditor’s report which deals strictly with the accounts.
Thus, it does not apply to the auditor’s report on the directors’ or
strategic report, the separate corporate governance statement or
the auditable part of the directors’ remuneration report. In this
respect, the criminal liability of auditors is narrower than that of
directors, which extends to knowing or reckless authorisation of
publication of non-compliant directors’ reports as well as of
accounts.253 There was much pressure in Parliament from the
auditing profession to remove the liability for recklessness, but
the Government stoutly resisted it.254
CLAIMS BY THIRD PARTIES
The duty of care in principle
22–44
The issues discussed above relating to breach of duty and loss
arise in relation to third-party claims (i.e. claims by anyone other
than the audit client) as well, but the prior and most controversial
issue has been to define the circumstances in which a duty of
care will be owed at all by the auditors to third parties. Here the
courts have applied in the auditing context the general common
law rules governing the duty of care in relation to economic loss
caused by negligent misstatement. Until less than 50 years ago,
this was not a live issue, because until the decision in Hedley
Byrne & Co Ltd v Heller & Partners Ltd255 the law of negligence
did not recognise a general duty to take care to avoid
misstatements causing economic loss. Liability in damages
could, and still can, be based on the tort of deceit, as had been
recognised in the nineteenth century, but that liability is subject
to two major restrictions. First, liability arises only if the maker
of the statement knows that it is false or makes it not caring
whether it is true of false, so that an honest, even if
unreasonable, belief in the truth of the statement protects its
maker from liability in deceit (or fraud).256 Secondly, the maker
of the statement must intend the claimant (or a class of persons
of whom the claimant is one) to rely on the statement.257 The
effect of the first limitation is to restrict the circumstances in
which liability in deceit will arise and the effect of the second is
to restrict the range of potential claimants if it does arise. The
impact of the decision in Hedley Byrne was to side-step both
these limitations, which are not part of the tort of negligence.
However, it was not at all clear from Hedley Byrne (which was
not a case concerning the audit) when the new duty of care to
avoid misstatements258 causing economic loss would be imposed
on auditors.
22–45
The answer to these questions, at least in broad outline, was
provided by what is undoubtedly the leading case on the
application of these rules to auditors, the decision of the House
of Lords in Caparo Industries Plc v Dickman,259 and was
provided in a way which gave greater comfort to auditors than to
investors. The facts of the case are worth recounting briefly.
Like many of the cases decided around this period, the factual
background of Caparo involved the purchase of a company
whose economic prospects were discovered after the purchase to
be less promising than the purchaser had thought beforehand.
The purchaser then looked around for someone to sue in respect
of what was alleged to be the misleading information about the
company which had been made available. In Caparo the
purchase was of a target company listed on the London Stock
Exchange by another such company through a takeover offer
preceded by share purchases in the market. The target company
had issued a profit-warning in March 1984, which caused its
share price to halve. In May 1984 the directors of the target
made a preliminary announcement of its annual results for the
year to March 1984, which confirmed that profits were well
short of expectations. This caused a further, though less
dramatic, fall in the share price. In June the annual accounts
were issued to the shareholders. Shortly before the June date,
Caparo, which had previously owned no shares in the target,
began acquiring shares in tranches until it reached a
shareholding of 29.9 per cent, at which point (after the accounts
had been circulated) it made a general offer for the remaining
shares, as the Takeover Code required it to do if it was to acquire
any more of the target’s shares.260 Caparo asserted that the 1984
accounts, although gloomy, in fact overvalued the company and
that the auditors had been negligent in not detecting the
irregularities or fraud which had led to the overstatements in the
accounts and in certifying the accounts as representing a true and
fair view of the company’s financial position.
The House of Lords’ examination of the statutory framework
for company accounts and audits led them to the following
conclusions. The statutory provisions establish a relationship
between those responsible for the accounts (the directors) or for
the audit report (the auditors), on the one hand, and some other
class or classes of persons, on the other, and this relationship
imposes a duty of care owed by the directors or auditors to those
persons. Among these “persons” is the company itself, to which,
apart altogether from the statutory provisions, the directors are in
a fiduciary relationship and the auditors in a contractual
relationship by virtue of their employment by the company as its
auditors. However, the statutory provisions do not establish such
a relationship with everybody who has a right to be furnished
with copies of the accounts or report or, a fortiori, with
everybody who has a right to inspect or obtain copies of them
from the Registrar of companies (i.e. the world at large).261 If a
relationship other than with the company is to be established so
as to give rise to a duty of care, it can be only with the members
of the company (and perhaps debenture-holders) and, even in
their case, the scope of the resulting duty of care extends only to
the protection of what may be described as the members’
corporate governance powers to safeguard their interests in the
company. Not within the scope of the duty are shareholders’
decisions to buy further shares in the company even if it is a
perusal of the annual accounts and reports that led them to do
so.262
22–46
To establish a duty of care to members which is greater in scope
than this, or to establish any duty of care to other persons, there
must be an additional “special” relationship with the person who
suffered loss as a result of relying on the accounts or report. To
succeed in establishing that additional relationship, the claimant
must show that the auditors (or directors) contemplated that the
accounts and report:
“would be communicated to the plaintiff either as an individual or as a member of
an identifiable class, specifically in connection with a particular transaction or
transactions of a particular kind (e.g. in a prospectus inviting investment)263 and
that the plaintiff would be very likely to rely on it for the purpose of deciding
whether or not to enter upon that transaction or upon a transaction of that kind.”264
Caparo thus represented a firm rejection by the House of Lords

of the proposition that negligent auditors were liable to those
who it was reasonable to foresee would rely on the audited
accounts and who suffered loss as a result of such reliance.265
Instead, the House confined the common law duty of care more
narrowly. For the reasons given below this policy has much to
commend it. However, deducing it from the statutory framework
set by the Companies Act for company accounts and their audit
is not straightforward.266 Their lordships’ analysis of that
framework gives very little weight to the purposes Parliament
might have had in mind when steadily requiring ever greater
levels of public disclosure of financial reports rather than just
their circulation to members and other current investors in the
company.
22–47
Not surprisingly, the case law after Caparo has concentrated on
seeking to determine the basis or bases upon which it will be
possible for claimants to establish a “special relationship” or, as
it is now often called in the light of subsequent general
developments in the law of negligence, an “assumption of
responsibility” on the part of the auditors towards the claimant.
Third parties naturally seek to point to facts from which liability
could be inferred; auditors to include statements in their report
which disclaim any liability to third parties. A crucial initial
issue is that the special relationship does not require that the
auditor should consciously have assumed responsibility. The test
is an objective one and the question for the court is whether, in
all the circumstances, it is appropriate for the auditors to be
treated as having assumed responsibility.267
22–48
In Barclays Bank Ltd v Grant Thornton UK LLP268 the judge
held that a disclaimer in an audit report of liability to third
parties was effective to negative269 liability on the part of the
auditor towards a sophisticated third party. The disclaimer was
clear270 and its inclusion in a short audit report was enough to
bring it to the attention of the sophisticated third party. The main
issue was whether the disclaimer satisfied the “reasonableness”
requirement of s.2 of the Unfair Contract Terms Act 1977, from
which a disclaimer, unlike a limitation of liability agreement,271
is not exempted. The judge thought that the bank’s argument that
the clause was unreasonable had no real hope of success and so
struck out the claim. Not only was Barclays in general terms a
sophisticated third party, but it was aware of the practice of
auditors’ disclaiming liability to third parties. Indeed, in other
aspects of the same transaction the bank had expressly
contracted with the auditors to accept liability, which the
auditors had agreed to do, subject to a cap on their liability. The
bank was in effect seeking to be better off for not having
contracted (because liability would be uncapped) than it was in
the situations where it had expressly contracted with the auditors
to accept liability.
22–49
A number of different situations have been considered by the
courts where no disclaimer has been present, though one may
imagine that express disclaimers are becoming routine. First,
within groups of companies, the courts have accepted that it is
arguable that the auditors of a subsidiary company owe a duty of
care to the parent company, since the production of individual
accounts is an integral part of the process of producing both the
parent’s accounts and consolidated accounts.272 However, the
losses for which the auditors are potentially liable in such a case
will be restricted by the uses to which it can be contemplated the
accounts will be put by the parent. Thus, in the standard case the
subsidiary’s auditors should contemplate that the parent will use
the consolidated or parent’s accounts for the purposes to which
parent companies normally put them (payment of dividends to
shareholders of the parent or bonuses to senior staff), but this
will not necessarily lead to the auditors being liable for other
types of loss, in this case loss flowing from the parent’s decision
to continue to fund the subsidiary.273 It is less obvious that, on
the above argument, the auditors of the parent will owe a duty of
care to subsidiary companies of which they are not the auditors,
but the Court of Appeal refused to strike out such claim where,
because of the way the group was run in practice, the auditors of
the various group companies co-operated to a high degree.274
A second established area of tortious duty to “third” parties
involves the directors of the company by which the auditors have
been engaged. Although the Act presents the compilation of the
accounts by the directors and their audit as consecutive and
separate events, in practice the two overlap, with the directors
finalising the accounts at the same time as the audit is in
progress on the basis of draft accounts. On this basis, it has been
held to be arguable that the auditors are under a duty to alert the
directors immediately if the auditors form the view that the
directors’ approach to the accounts is misconceived in some
respect. The directors are not obliged to accept the auditors’
views but are entitled to be informed before they commit
themselves, with the risk that their approach may lead to the
accounts being qualified by the auditors.275
22–50
However, the most obvious strategy suggested by the Caparo
decision for investors in or lenders to the company (or,
sometimes, its regulator), who do in fact propose to rely on the
company’s accounts, is to seek to make the auditors aware of
their intentions in advance of the transaction and to secure from
the auditors an ad hoc assumption of responsibility for the
accounts in relation to the contemplated transaction. Where such
an approach is made explicitly and openly and the auditors
accept responsibility, there is little to be said against holding the
auditors liable for negligent audit. The auditors have the
opportunity not to accept wider responsibility or to do so on
explicit terms, which may limit their liability and involve
compensation being paid to them for assuming the additional
risk. The question is whether the auditors can or should be made
liable on the basis of anything less than a near-explicit bargain
with the lender or investor. It has been held that it is not enough
to attract liability to the third party that the auditor repeated its
conclusions to that person. The crucial question is whether the
terms of the request from the third party can be said to have
made it clear to an auditor in the defendant’s position the
purpose for which the repetition was required and the fact that
the auditor’s skill and judgment were being relied upon.276
Although this approach falls short of an explicit bargain, it does
require that the auditor be made aware of the nature of its
commitment before liability in tort is imposed for the benefit of
the third party.
22–51
Although the Caparo decision was controversial amongst those
interested in the general theory of the law of tort (because of its
rejection of the foreseeability test in the area of negligent
misstatements) and although the court’s reliance on the statutory
structure for the accounts seems overblown, the line drawn in
that case has been followed by other top-level courts in the
common law world, notably Australia and Canada.277 Its effect,
in the core case where no duty arises, is to insulate the audit
transaction (and thus the fee charged by auditors to companies
for carrying it out) from having to bear the investigation costs of
other transactions which third parties may wish to carry out
(whether by way of loan or equity purchase) with the company.
Since the auditors are in a very poor position to estimate the
risks associated with those other transactions, about which they
will have little, if any, information, exclusion of liability is
probably necessary for the maintenance of the market in audit
services. The burden thrown on third parties by this approach is,
by contrast, relatively slight. If the state of the company’s
finances is important to their transaction, as it often will be, they
can either pay someone else to replicate the due diligence which
the auditors have carried out or, more likely, seek through the
special circumstances exception to persuade the auditors to
accept responsibility for their report in the context of the third
party’s transaction. This gives the auditors the opportunity to
assess the risks of the particular transaction and to respond
appropriately.278 In principle, there seems to be no reason why
the audit should subsidise investigation activities necessary for
transactions between third parties and the company in the
absence of near-express agreement by the auditors to accept the
potential liability.279
Other issues
22–52
Even if duty is established, the claimant will still have to satisfy
the other ingredients for tortious liability which have been
discussed above in relation to claims by the audit client. Thus in
JEB Fasteners Ltd v Marks Bloom & Co,280 which would today
be regarded as a “special circumstances” case, Woolf J held that,
although all the conditions necessary for success other than
causation had been established, the claimant failed on that since
it would have entered into the transaction (a takeover) even if the
accounts on which it had relied had presented a wholly true and
fair view of the company’s financial position, its main object
having been to secure the managerial skills of two executive
directors.281
CONCLUSION
22–53
The audit has been subject to two very different legislative
policy influences in recent years: on the one hand, a desire to
relieve small companies of the need to have one and, on the
other, a desire to make the audit of large, especially listed,
companies a more effective check on the financial probity and
corporate governance standards of management. The former is
easy to effect as a matter of legal technique, though conclusive
cost/benefit analysis of the audit of small companies is not
available to demonstrate where the line should be drawn and the
audit should remain mandatory. The latter policy drive has had a
positive consequence so that the status of company auditors has,
in the course of the past century, been transformed from that of
somewhat toothless strays given temporary house-room once a
year, to that of trained rottweilers, entitled to sniff around at any
time and, if need be, to bite the hands that feed them. However,
even rottweilers may learn that biting the hand that feeds you is
not a policy conducive to happiness for the biter. Through a
combination of domestic and EU initiatives a substantial
structure has been put in place aimed at addressing issues of
independence and competence, using a wide range of legal
techniques, some more firmly located in company law than
others. In the course of this process EU law has come to play an
increasingly central role.
1In this chapter references to the “Directive” are to the 2006 Directive as amended;
where it is necessary to mention the other directives, they are referred to as the “2013
Directive” and the “2014 Directive” respectively.
2 Regulation art.1, cross-referring to art.1(2)(f) of the Directive. The PIE definition
embraces in addition banks and insurance companies, whether their securities are traded
on a regulated market or not, but the special rules for financial institutions are ignored in
this chapter. For the definition of regulated markets see para.25–8. In the UK one can
think of the term as referring to the Main Market of the London Stock Exchange.
3
Regulation (EU) No.537/2014. Some rules specific to PIEs had been included in the
2006 Directive. References in this chapter to the “Regulation” are to the 2014
Regulation.
4
The 2014 Directive was transposed by the Statutory Auditors and Third Country
Auditors Regulations 2016, which made changes to the Companies Act 2006 (hereafter
“Statutory Auditors Regulations”). In addition, the domestic Regulations embedded the
EU Regulation in domestic law and exercised the choices given to the UK under the
Regulation. At the time of writing only a draft of this statutory instrument was available.
5
6
For the distinction between individual and group accounts see para.21–9.
7
On the meaning of this term see para.21–16.
8 2006 Act s.495(3). On the role of the IAS Regulation see para.21–18. For micro-
company accounts the requirement about accounting standards is qualified by s 495(3A)
for the reasons explained in para.21–20.
9 2006 Act s.496. On the directors’ report see para.21–23.
10 2006 Act ss.496 and 497A. On the strategic report see para.21–24, and on the
corporate governance statement Disclosure and Transparency Rules 7.2, made by the
FCA. In the case of the latter the auditor must report whether the DTR of the FCA have
been complied with. The mandatory report on this statement indicates, among other
things, the increased importance attached to internal control and risk management, as
does the requirement on the auditors to state whether a separate corporate governance
statement has been prepared if the directors have not chosen to include in their report
(s.498A).
11
2006 Act s.487. The auditable part of the DRR is that set out in Pt 3 of Sch.8 to the
Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations
2008/410 (see reg.11(3)). On the directors’ remuneration report see para.14–44.
12
2006 Act s.495(4).
13
The auditor may refer to matters to which attention needs to be drawn without
necessarily qualifying the report: s.495(4)(b).
14 Regulation art.10.
152006 Act s.495(4)(c). This is a new requirement in the Act (as from 2016) but
auditing standards previously required such discussion.
16
2006 Act s.498(1),(2).
17 2006 Act s.498(3).
18 2006 Act s.498(5). On the small business definition see para.21–4.
19 2006 Act s.498(4).
20 Below, para.22–21.
21
The basic principle of a mandatory audit of the statutory accounts is laid down in
s.475.
22
BIS, Consultation on Audit Exemptions and Change of Accounting Framework,
October 2011 (URN 11/1193), para.32.
23
DTI, Accounting and Audit Requirements for Small Firms: A Consultative Document
(1985) and Consultative Document on Amending the Fourth Company Law Directive on
Annual Accounts (1989). The Fourth Directive, however, permitted Member States to
exempt small companies from the audit.
24
Repealed and replaced by Directive 2006/43/EC as from June 2006.
25
Companies Act 1985 (Audit Exemption Regulations) 1994 (SI 1994/1935).
26
Companies Act 1985 (Audit Exemption) (Amendment) Regulations 1997 (SI
1997/936).
27
Companies Act 1985 (Audit Exemption) (Amendment) Regulations 2000 (SI
2000/1430).
28
Final Report I, paras 4.29–4.31 and 4.43–4.45.
29 See para.21–4.
30
Exemption from audit for small companies is permitted by art.34 of the 2013
Directive.
31
However, all but the smallest charitable companies remain subject to audit under the
Charities Act 2011. The reason for these more stringent requirements for charities
appears to be that the persons with the strongest financial interest in whether a charitable
company uses its money properly are its donors, but they are not typically members of
the company and so do not have access to the control rights over the management of the
company which members have. Thus, there is a stronger case for third-party verification
than in the case of the accounts on non-charitable small companies. No doubt for this
reason as well one sees in the charities legislation full use made of the technique of
requiring auditors or reporting accountants to make reports to the regulator, the Charities
Commission.
32 2006 Act s.477(1) and see para.21–4.
33 2006 Act ss.478–479.
34
2006 Act ss.478(a),(b). Also excluded are companies in the financial services sector.
352006 Act s.479(1). The concept of an “ineligible group” we have analysed at para.21–
10.
36 Or 10 per cent in number of the members if there is no share capital.
37 2006 Act s.476.
382006 Act s.475(2)–(4). This provision applies to the exemption on grounds of
dormancy as well.
392006 Act s.495(3A). On the accounting standards for micro companies see para.21–
20.
40 2006 Act s.479A.
41
2006 Act s.479C(3).
42 2006 Act ss.479A(1)(2) and 479B(a).
43 2006 Act s.480(1).
44 2006 Act s.1169.
45
2006 Act s.480(1)(a).
46
47
48
2006 Act s.480(2).
49
The dormant company exemption is not available to companies whose securities are
traded on a public market, but it is rare for such a company to be dormant (s.481(za)).
50
2006 Act s.482(1).
51
See J. Coffee Jr, Gatekeepers (Oxford: OUP, 2006), especially Ch.5.
52
European Commission, “Proposal for a Regulation… on specific requirements
regarding statutory audit of public interest entities”, COM(2011) 779 final, 30
November 2011, p.2.
53 Directive art.32.
54 On the FRC see para.21–17.
55 Directive art.32(4b) and Regulation art.24(1).
56
Statutory Auditors Regulations reg.3(1)(2)
57
2006 Act s.1217 and Sch.10 Pt 1.
58 2006 Act s.1212(1)(a).
59 2006 Act Sch.10 para.9.
60
2006 Act s.1214(1)–(3). Section 1214(5) expressly states that, for this purpose, an
auditor is not to be regarded as an “officer or employee”. This hardly needs saying, for if
he were, he would become ineligible immediately upon appointment! The definition of
“officer” in the Act (“officer—includes a director, manager or secretary or, where the
affairs of the company are managed by its members, a member”: s.1261(1)) might seem
in any event to exclude auditors. Nevertheless, they have been held to be “officers” in a
number of corporate contexts: Mutual Reinsurance Co Ltd v Peat Marwick Mitchell &
Co [1997] 1 B.C.L.C. 1 CA; Re London & General Bank (No.1) [1895] 2 Ch. 166 CA;
Re Kingston Cotton Mills (No.1) [1896] 1 Ch. 6 CA.
612006 Act s.1214(6); i.e. a parent or subsidiary undertaking of the company or a
subsidiary undertaking of any parent undertaking of the company.
62 2006 Act s.1215(1).
63
2006 Act ss.1248–1249. The provisions also apply—and in practice are probably
more important—where the auditor is ineligible to be appointed (for example, because
not qualified) rather than prohibited from acting on grounds of lack of independence:
s.1248(3). The sections appear not to apply to lack of independence solely under the
FRC’s standards discussed below.
64Though the shareholding might make the auditor a more diligent watchdog over the
members’ interests—but members are not the only people whose interests he should
protect.
65 Statutory Auditors Regulations Sch.1 paras 3–6.
66 FRC, Ethical Standard, 2016, §2, which devotes some twenty pages to the topic.
67
See D. Kershaw, “Waiting for Enron: The Unstable Equilibrium of Auditor
Independence Regulation” (2006) 33 Journal of Law and Society 388, 394. This is a
valuable article on the whole issue of auditor independence.
68
The Companies (Disclosure of Auditor Remuneration and Liability Limitation
Agreements) Regulations 2008/489 (as amended by SI 2011/2198) reg.5(3) and Sch.2A,
made under s.494 of the Act.
69
Remuneration and Liability Regulations reg.5(4).
70
Remuneration and Liability Regulations reg.5(1)(b)(ii) and Sch.1.
71
Remuneration and Liability Regulations reg.4. For the definition of medium-sized,
see para.21–5, above.
72
The major accounting firms are organised as more or less closely linked partnerships
operating under a single brand.
73 Regulation art.5. Examples are tax advice and services involving taking management
decisions. If the group member is incorporated outside the EU, the requirement is that
the auditor assess the level of conflict and be able to justify the continued provision of
the non-audit services—but some of the services prohibited within the EU are regarded
as incapable of justification (art.5(5)).
74 Regulation art.5(4).
75 Regulation art.4(2). This constraint applies only if the auditor has supplied both types
of service over a period of three consecutive years.
76
FRC, Ethical Standards, §5.
77 Commission Recommendation 2002/590/EC on statutory auditors’ independence in
the EU [2002] O.J. L191/22.
78
Regulation art.17(7).
79
Regulation art.2(16), apparently translated in the Act as “senior statutory auditor”:
s.504.
80 FRC, Ethical Standards, para.3.10.
812006 Act Sch.10 para.10c(1) reflects the original Directive requirements but note
para.10(1A) requiring compliance with the stricter rules of the FRC, taking up an option
under the Regulation.
82Above fn.52, para.3.3.3. In 2012 the FRC amended the CGC to recommend that
FTSE 350 companies put their audit business out to competitive tender at least every 10
years. In the light of the EU Regulation this recommendation has been removed from the
2016 CGC.
83 Regulation art.17. The tendering process is governed by art.16. This Member State
choice is implemented in the UK by s.491(1A)(1B). Although not absolutely clear from
the Regulation, the UK rules allow a re-tendering process to occur after less than ten
years and for the incumbent auditors, if successful, to remain for ten years after that
process.
84
The Statutory Audit Services for Large Companies Market Investigation (Mandatory
Use of Competitive Tender Processes and Audit Committee Responsibilities) Order
2014.
85
86
Statutory Auditors Regulations reg.12.
87
Statutory Auditors Regulations Sch.1 para.7; FRC, Ethical Standards, paras 2.47 et
seq.
88
2006 Act s.502(2).
89
2006 Act s.502(1).
90
See para.21–42.
91
2006 Act ss.489(4) and 491(1)(b).
92
2006 Act s.489(3)—to fill a casual vacancy, after a period in which the company has
not been required to have an audit, before its first accounts meeting.
93
Regulation art.16.
94 2006 Act s.492(1).
952006 Act s.493 and the Companies (Disclosure of Auditor Remuneration and Liability
Limitation Agreements) Regulations 2008/489 regs 4 and 5 (hereafter the
“Remuneration and Liability Regulations”). Generally, they criticise only if the amount
seems abnormally high; they should perhaps be more alarmed if it is abnormally low.
962006 Act ss.485, 487. We ignore the special rules which apply to private companies
which are PIEs because this categories embraces only financial institutions (and
probably very few of them). See fn.2, above.
97 2006 Act s.485(3).
98
2006 Act s.487.
99
2006 Act s.487(2)(b).
100 2006 Act s.487(2)(d).
101
2006 Act ss.487(2)(c) and 488.
102 See para.14–49.
1032006 Act s.510. A meeting is required, as for the removal of a director, even in the
case of a private company: s.288(2).
104
2006 Act s.510(4). The articles often provide for directors to be removed by
resolution of the board.
105 2006 Act s.511.
106 2006 Act s.511(2).
107
2006 Act s.511(3)–(5). The auditor should ensure that it is received in time since
otherwise members may return proxy forms before they see his representations. But see
subs.(6) regarding restraint by the court if the section is being abused “to secure needless
publicity for defamatory matter”. The auditor also has a general right to attend and speak
at shareholder meetings. See para.22–24, below.
108 2006 Act ss.513 and 502(2).
109 2006 Act s.510(3).
110
DTI, Implementation of Directive 2006/43/EU: A Consultation Document, March
2007, at paras 3.34 et seq.
111
See Ch.20.
112
2006 Act s.994(1A).
113
Directive art.38—an example of a PIE provision being contained in the Directive.
This is implemented in the UK by 2006 Act s.511A.
114 2006 Act s.516(1).
115
2006 Act s.519(1). The statement must be virtually contemporaneous with the
departure.
116
These circumstance are set out in s.519A(3).
117
2006 Act s.519(2A)—or its equivalent in the case of a private company.
118 2006 Act s.519(3A). In the case of a dismissal this obligation to the company may be
overtaken in practice by the auditor’s entitlement (discussed above) to circulate
representations to the meeting at which the dismissal is to be considered (an opportunity
which arises before the dismissal whilst the statement of circumstances is to be made
only after dismissal). A statement by a non-PIE auditor must state that there are no
matters to be drawn to the attention of shareholders and creditors, if this is the case.
119
2006 Act s.518—or, without requisitioning a special meeting, the auditor might
require the statement to be read out at the next regular accounts meeting: s.518(3).
120 The section might be used by a resigning auditor who does not want to go quietly,
but wishes to avoid the ignominy of being sacked.
121 2006 Act s.520—unless the statement says that there are no matters to be drawn to
the attention of members or creditors. The company may alternatively apply to the court
to be relieved of the circulation obligation if the auditor is using the provision to secure
publicity for defamatory matter. The company must then send to members or debenture-
holders a statement setting out the effect of the order. There is a risk that a company will
use the appeal procedure simply to delay circulation of the auditor’s statement,
discontinuing the application just before it is due to be heard. Such action places the
company at risk of having to pay the auditor’s costs on an indemnity basis: Jarvis Plc v
Pricewaterhouse Coopers [2000] 2 B.C.L.C. 368.
122 2006 Act s.521.
123
2006 Act s.522.
125 2006 Act s.312.
126 2006 Act s.515(2),(3). The provisions of the section apply also where the period for
re-appointment has passed without an appointment being made and the company later
decides to appoint someone other than the outgoing auditors. Otherwise the section’s
requirements could be easily avoided.
127 2006 Act s.515(4)–(7).
128 2006 Act s.514.
129
2006 Act s.519(1), which applies where an auditor “ceases for any reason to hold
office”.
130
2006 Act ss.521(1) and 522(1).
131 2006 Act s.520(1). All this is somewhat pointless if the auditor is ceasing to hold
office as the result of a re-tendering exercise.
132
2006 Act s.523(1) applies only where the auditor is ceasing to hold office other than
at the end of an accounts meeting (or its private company equivalent).
133 Regulation art.7.
134
Regulation art.12. These provisions are reflected in International Standard on
Auditing (UK and Ireland) 210, issued by the FRC.
135
136
See International Standards on Auditing (UK and Ireland) No.110, Fraud and Error;
and No.250A, Consideration of Laws and Regulations in an Audit of Financial
Statements, both 2009. In the financial services area extensive reporting obligations are
imposed on auditors in favour of the regulator: FSMA 2000 Pt XXII.
137
Sasea Finance Ltd v KPMG [2000] 1 All E.R. 676 CA, where the court refused to
strike out a claim for loss suffered by the company where the auditors discovered fraud
on the part of those in control of the company and failed to report it to the relevant
authorities.
138 Ch.15 at para.15–58.
139One listed in the UK or any other EEA state or on the New York Stock Exchange or
Nasdaq: ss.531 and 385.
141 2006 Act s.527(2),(3). This is one of the sections where those to whom governance
rights have been transferred may act: s.153(1)(d) and above, para.15–34.
142
2006 Act s.528(4). Failure to do so is a criminal offence on the part of every officer
in default.
143
2006 Act s.527(5),(6).
144 2006 Act s.529(3).
145 2006 Act s.529(2).
146
See para.25–6.
147 See para.14–75.
148 The core obligation to “comply or explain” in relation to the CGC is also embodied
in FCA rules (Listing Rule 9.8.6(5)(6)). Since PIEs are essentially listed companies, use
of FCA rules is a convenient way of focusing on the correct sub-set of companies as far
as their governance structure is concerned.
149 There are some exceptions in art.39(3), of which the most important for our purposes
is a subsidiary where the requirements of the Directive are met at group level.
150
Under art.39(1) it could be a “stand-alone” committee, but we ignore this possibility
as unrecognised in UK practice.
151
Because of the flexibility inherent in the “body” requirement the UK has not taken
up the specific Member States option (art.39(2)) to assign to the board as a whole the
audit committee’s functions in small and medium-sized companies and companies with
small market capitalisation.
152
Shareholder appointment to the audit committee fits more naturally with systems
where the audit committee is a stand-alone committee.
153
Regulation art.16.
154
Except in the case of PIEs which are small or medium-sized or have a market
capitalisation of less than €100 million. “Small or medium-sized” has a special meaning
here which is not the same as for the accounts directives (see para.21–4) but is a more
expansive set of criteria derived from the prospectus directive, involving meeting two of
the following three criteria: an average number of employees during the financial year of
fewer than 250, a total balance sheet not exceeding €43 million and an annual net
turnover not exceeding €50 million (art.16(4)).
156
157
Regulation art.11.
158 Many accounting rules require the disclosure of only “material” items.
159 Regulation art.5(4). See para.22–13, above.
160
161
163Regulation art.27(1)(c), though this provision is placed in an article dealing
predominantly with the operation of the market for audit services.
164
Directive art.39(6).
165 UK CGD, C.3.2-7.
166
C.3.8 and E.2.3.
167For the present version of that guidance see FRC, Guidance on Audit Committees,
2012, likely to be revised soon in the light of the Directive and Regulation.
168FRC, Guidance on Risk Management, Internal Control and Related Financial and
Business Reporting, 2014.
169 Directive, Ch.2.
171 2006 Act Sch.10 para.6.
172
Statutory Auditors Regulations reg.3(1)(f)–(j).
173 2006 Act s.1212(1)(b).
175 2006 Act Sch.10 para.6.
176
2006 Act s.1221.
177
2006 Act ss.1239–1247 and the Statutory Auditors Regulations Pt 4.
178
For accounting standards see, above, at para.21–16.
179
Statutory Auditors Regulations reg.3(1)(l)(m).
180
181
Regulation art.29.
182
Regulation art.26.
183
Regulation art.13.
184
Regulation arts 30–30b. The investigation provisions are transposed into domestic
law by Sch.2 to the Statutory Auditors Regulations.
185
186
Regulation art.30a, reflected in the Statutory Auditors Regulations reg.5.
187 As the Act requires: s.498(3).
188 2006 Act s.499(1).
189
2006 Act s.499(2). Statements so made may not be used in subsequent criminal
proceedings against the maker (except in respect of offences connected with the making
of the statement) and the requirement is subject to an exception for legal professional
privilege: s.499(3),(4).
190
2006 Act s.500.
1912006 Act s.501. However, for the foreign subsidiary or those connected with it to
make an inaccurate statement is not a criminal offence (s.501(1) applies only to s.499),
probably an unavoidable loop-hole, since otherwise British law would be criminalising
conduct committed abroad.
192
CLR, Final Report I, paras 8.119–8.122.
193 See para.21–22.
194 2006 Act s.418(2). Wilfully suppressing relevant information may be a ground for
disqualification—potentially lengthy—of a director. See Re TransTec Plc (No.2) [2007]
2 B.C.L.C. 495; and Ch.10.
195A result which, as we have seen, the director’s core duty of loyalty may also
produce: above, para.16–78.
196
See para.16–24.
197 2006 Act s.418(4).
1982006 Act s.418(5),(6). For the process of approving the directors’ report, see
para.21–30.
199
In the case of the appointment of a firm as auditor, the senior statutory auditor must
sign the report (s.503(3)), but s.504(3) provides that the person identified as the senior
statutory auditor is not thereby subject to any civil liability to which he or she would not
otherwise be subject. Nor would it seem that members of the audit team who would
otherwise be liable are protected from liability by the signature of the senior statutory
auditor.
200
It makes little difference which way the claim is put, since the implied term in the
contract to provide audit services will be, as in tort, only a duty to take reasonable care.
In particular, the defence of contributory negligence is available whichever way the
claim is put: Forsikringsaktieselskapet Vesta v Butcher [1989] A.C. 852 at 858–868 CA.
Of course, the parties could by contract seek to increase the level of the duty (for
example, to a warranty that the audit report was accurate), but their freedom to lower the
duty is subject to the statutory provisions discussed below.
201
See para.21–33.
202
Ultramares Corp v Touche (1931) 174 N.E. 441 at 441, per Cardozo CJ.
203
Caparo Industries Plc v Dickman [1990] 2 A.C. 605 HL.
204
In the case of actions by the company, this position is significantly qualified by the
defence of contributory negligence (see para.22–39), but the point provides a potential
rationale for restricting auditor liability to third parties.
205 2006 Act Sch.10 para.17.
206
See, for example, R. Austin and I. Ramsay, Ford’s Principles of Corporations Law,
12th edn (Australia, 2005) pp.609–610.
207DTI, Feasibility Investigation of Joint and Several Liability by the Common Law
Team of the Law Commission, (1996); CLR, Final Report I, para.8.138. As to situations
where the claimant is not wholly innocent, see below, para.22–39.
208 Partnership Act 1890 s.10.
209 Partnership Act 1890 s.12. Joint and several liability operates again, this time among
the partners.
210 2006 Act s.1212(1).
211 2006 Act s.1173(1).
213For the origins of the LLP see G. Morse et al. (eds), Palmer’s Limited Liability
Partnership Law, 2nd edn (London: Sweet & Maxwell, 2012), Ch.1.
214
Williams v Natural Life Health Foods [1998] 1 W.L.R. 830; above, para.7–32.
215
Merrett v Babb [2001] Q.B. 1171 CA; Phelps v Hillingdon LBC [2001] 2 A.C. 619
HL. For discussion see Whittaker, [2002] J.B.L. 601.
216 Arthur Andersen did not collapse because of a large liability claim but because of
loss of reputation resulting from its being charged with and convicted of criminal
offences (even though these convictions were overturned on appeal).
217OFT, An Assessment of the Implications for Competition of a Cap on Auditors’
Liability, OFT 741, July 2004.
218
See para.22–14.
219 Re Kingston Cotton Mill (No.2) [1896] 2 Ch. 279 CA, where the auditors relied on
certificates as to levels of stock which were provided by the managing director who for
years had grossly overstated the true position. cf. Re Thomas Gerrard & Son Ltd [1967]
2 All E.R. 525, where the discovery of altered invoices, it was held, should have caused
the auditors to carry out their own check on the stock.
220
Formento (Sterling Area) Ltd v Selsdon Fountain Pen Co Ltd [1958] 1 W.L.R. 45
HL; and see also the remarks of Pennycuick J in Re Thomas Gerrard (cited in previous
note).
221
Directive art.21. Transposition in the UK is via standards made by the FRC:
Statutory Auditors Regulations reg.2. Scepticism means “an attitude that includes a
questioning mind, being alert to conditions which may indicate possible misstatement
due to error or fraud and a critical assessment of audit evidence”. Standards issued by
the FRC already recognised the importance of professional scepticism before this
change, made in 2014, to the Directive.
222
Lloyd Cheyham & Co Ltd v Littlejohn & Co [1987] B.C.L.C. 303.
223
Leeds Estate, Building and Investment Co v Shepherd (1887) 36 Ch.D. 787; Barings
Plc (In Liquidation) v Coopers & Lybrand (No.1) [2002] 2 B.C.L.C. 364; Equitable Life
Assurance Society v Ernst & Young [2003] 2 B.C.L.C. 603 CA; cf. MAN Nutzfahrzeuge
AG v Freightliner Ltd [2007] B.C.C. 986 CA.
224
Equitable Life Assurance Society v Ernst & Young [2003] 2 B.C.L.C. 603 CA;
Sayers v Clarke-Walker [2002] 2 B.C.L.C. 16.
225 Equitable Life Assurance Society v Ernst & Young [2003] 2 B.C.L.C. 603 CA.
226
Law Reform (Contributory Negligence) Act 1945 s.1(1).
227
Above, para.22–30. Although misleading disclosure is not a civil wrong under the
Act, it can still constitute “fault” on the part of the company for the purposes of the
contributory negligence rule.
228
The representations may include, for example, that “there have no irregularities
involving management or employees who have a significant role in the system of
internal control”.
229
Barings Plc (In Liquidation) v Coopers & Lybrand (No.2) [2002] 2 B.C.L.C. 410,
where an example of a representation letter can be found.
230
Barings Plc (In Liquidation) v Coopers & Lybrand [2003] EWHC 1319 (Ch); [2003]
Lloyd’s Rep. I.R. 566 (the trial of the action whose interlocutory proceedings are cited in
the previous note).
231
Basing himself on Reeves v Commissioner of Police of the Metropolis [2000] 1 A.C.
360 HL.
232 Stone & Rolls Ltd v Moore Stephens [2009] A.C. 1391 HL.
233Jetivia SA v Bilta (UK) Ltd [2015] 1 B.C.L.C. 443 at [46], per Lord Neuberger, a
case involving attribution in a third context, i.e. where the company sues a director. “We
conclude that Stone & Rolls should be regarded as a case which has no majority ratio
decidendi” (per Lords Toulson and Hodge at [154]).
234 Lords Mance and, less strongly, Neuberger thought the point was still open; Lords
Sumption, Toulson and Hodge thought the defence was always available in this
situation.
235 See para.9–11.
236
This was essentially the reasoning of Lord Mance in Stone & Rolls, except that he
attached significance to the fact that the company was insolvent at the time of the
negligent audit. It might be that a better test is the presence of innocent creditors or
shareholders at the time of the litigation. It would be odd if the presence of an innocent
shareholder at the time of the negligence should facilitate an action by the company
against the auditors even though that shareholder had left the company by the time of the
litigation; and equally odd if the defence were available despite the fact that the
fraudsters had sold out to a new set of shareholders by the time of the litigation.
237
This is still the starting point of the Act: s.532.
238
Limitation of liability is also promoted at EU level: see Commission
Recommendation concerning the limitation of the civil liability of statutory auditors and
audit firms ([2008] O.J. L162/39). However, in the US the Securities Exchange
Commission opposes agreements on limitation, whilst accepting mandatory limits on
auditors’ liability, thus making the 2006 Act provisions unusable by UK-incorporated
companies which are cross-listed in the US (Financial Times, 10 May 2009). The SEC
fear apparently is that the need to negotiate a limitation undermines the independence of
auditors (rather than giving clients the opportunity to obtain improvements in audit
quality). This is somewhat ironic in view of the fact that the liability of auditors is
limited by statute to proportionate liability in the US.
239
Essentially, the auditor may rely on a promise by the company to pay the costs of a
successful defence.
240 See para.16–130.
241
2006 Act s.537(1). In determining what is fair and reasonable the court must ignore
matters occurring after the loss or damage has been incurred (an attempt to restrain
hindsight) and the possibility of recovering compensation from other persons.
242 2006 Act s.537(2).
243
2006 Act s.534(3).
244
2006 Act s.535(1).
2452006 Act s.536. Approval may be given before or after the company enters into the
agreement; in the former case only the “principal terms” of the agreement need to be
approved. In the case of public companies approval is likely to be sought at the AGM
which also functions as the “accounts meeting” for the previous year.
246
The Companies (Disclosure of Auditor Remuneration and Liability Limitation
Agreements) Regulations 2008 (SI 2008/489) reg.8.
247 FRC, Guidance on Auditor Liability Limitation Agreements, June 2008.
248Institutional Shareholders’ Committee, Statement on Auditor Liability Limitation
Agreements, June 2008.
249 2006 Act s.507.
250 HL Debs, Grand Committee, Eighth Day, col. 407, 14 March 2006 (Lord Sainsbury
of Turville).
251 And associated matters set out in s.495.
252 2006 Act s.507(1)–(3).
253See ss.414(4) (accounts), 414D(2) (strategic report), 419(3) (directors’ report),
422(2) (directors’ remuneration report).
254
2006 Act ss.508–509 provide for the Secretary of State or, in Scotland, the Lord
Advocate to give guidance to the regulatory and prosecuting authorities about how
misconduct should be handled which appears to fall both within the criminal prohibition
and the regulatory provisions discussed above.
255
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465 HL.
256
Derry v Peek (1889) 14 App. Cas. 337 HL. The terms “deceit” and “fraud” (in the
civil sense) seem to be used interchangeably.
257
Bradford Equitable BS v Borders [1941] 2 All E.R. 205 HL.
258
The auditors’ public statement is contained in their report (above, para.22–3) but in
that they opine about the accuracy of the accounts and reports generally, so that their
failure to pick up inaccuracies in those documents is inevitably in issue.
259 Caparo Industries Plc v Dickman [1990] 2 A.C. 605 HL. The litigation concerned
the preliminary issue whether on the facts pleaded a claim against the auditors could
succeed. What the facts of the case actually were was never decided.
260 See below at para.28–41.
261On the circulation and filing of the company’s annual reports and accounts, see paras
21–33 et seq.
262
This was the specific point that had to be determined in Caparo. The Court of
Appeal had held unanimously that auditors owed no duty of care to members of the
public who, in reliance on the accounts and reports, bought shares (in the absence of a
special relationship—see below) but, by a majority, that they did owe such a duty to
existing shareholders who, in such reliance, bought more shares. The House of Lords
thought the distinction between liability for investment decisions made by shareholders
and investment decisions made by non-shareholders unsustainable.
263 As pointed out below at para.25–32 the statute law on prospectus liability has gone
beyond the common law which will normally be irrelevant. But it remains highly
relevant where the statute does not apply. See Al-Nakib Investments Ltd v Longcroft
[1990] 1 W.L.R. 1390; and the comment thereon at para.25–37, below.
264
Per Lord Bridge at 621E–F. This was clearly the unanimous view, adopting the
dissenting judgment of Denning LJ in Candler v Crane Christmas & Co [1951] 2 K.B.
164 CA; and affirming the decision of Millett J in Al Saudi Banque v Clark Pixley
[1990] Ch. 313; but rejecting the wider views expressed in JEB Fasteners Ltd v Marks
Bloom & Co [1981] 3 All E.R. 289; and in Twomax Ltd v Dickson, McFarlane &
Robinson, 1982 S.C. 113; and by the majority of the New Zealand Court of Appeal in
Scott Group Ltd v McFarlane [1978] N.Z.L.R. 553.
265 The case concerned only the purchase of shares and the court left open the question
of whether sales of shares (for example, where the accounts negligently undervalued the
company) were within the scope of the duty, on the grounds that only shareholders could
sell shares so that sales were necessarily a shareholder activity. However, the judges
showed little enthusiasm for this argument; and a thorough-going governance analysis
would seem to exclude sales as well as purchases on the grounds that both are
investment, not governance, decisions.
266 For a similar refusal to use the common law to supplement the statutory framework
but within an analysis of the statutory purposes which seems more faithful to the
legislative intent (in this case the New Zealand Securities Act 1978) see Deloitte
Haskins & Sells v National Mutual Life Nominees [1993] A.C. 774 PC.
267
Electra Private Equity Partners v KPMG Peat Marwick [2001] 1 B.C.L.C. 589 CA;
Caparo Industries Plc v Dickman [1990] 2 A.C. 605 at 638 HL, per Lord Oliver.
268
Barclays Bank Ltd v Grant Thornton UK LLP [2015] 2 B.C.L.C. 537.
269
Because the clause operated to negative liability (rather than being an exemption
clause) it was not subject to the convention that it should be construed narrowly.
270
“To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company’s directors … for our audit work, for
this report, or for the opinion we have formed.” Although given in the context of an
audit of the company’s accounts for non-statutory purposes, the clause was a variation of
the formula recommended by Institute of Chartered Accountants in England & Wales for
statutory audit reports (with the substitution of “members” for “directors”).
271
See para.22–42. In particular, if the disclaimer is caught by s.2 it fails entirely.
272
Barings Plc (In Administration) v Coopers & Lybrand [1997] 1 B.C.L.C. 427 CA.
273
Barings Plc (In Liquidation) v Coopers & Lybrand (No.1) [2002] 2 B.C.L.C. 364;
MAN Nutzfahrzeuge AG v Freightliner Ltd [2008] 2 B.C.L.C. 22 at [56].
274 Bank of Credit & Commerce International (Overseas) Ltd v Price Waterhouse
[1998] B.C.C. 617 CA, where, as is often the case in groups, the group’s activities were
arranged and carried on along lines which cut across the separate companies in the group
and their respective auditors.
275
Coulthard v Neville Russell [1988] 1 B.C.L.C. 143 CA. The claimant directors, who
were subsequently disqualified, sought compensation from the auditors for the losses
caused by the disqualification. The court refused to strike out the claim. If the loss as a
result of the failure to inform the directors is suffered by the company, then no issue of
liability to a third party arises.
276 Andrew v Kounnis Freeman [1999] 2 B.C.L.C. 641 CA (where the tests were held to
have been satisfied); James McNaughton Papers Group Ltd v Hicks Anderson & Co
[1991] 2 Q.B. 113 CA (where they were not); Galoo Ltd v Bright, Grahame Murray
[1994] 1 W.L.R. 1360 CA (claims partly struck out and partly allowed to proceed). For
the application of this approach to circulars issued in the course of takeover bids, see
para.28–64.
277 Essanda Finance Corp Ltd v Peat Marwick Hungerford (1997) 188 C.L.R. 241 High
Court of Australia; and Hercules Management Ltd v Ernst & Young (1997) 146 D.L.R.
(4th) 577 Supreme Court of Canada.
278 This analysis depends, of course, on the courts not expanding the special
circumstances exception so as to swallow up the Caparo rule. Contrast the sophisticated
approach in Peach Publishing Ltd v Slater & Co [1998] B.C.C. 139 CA with the rather
easy way in which assumption of responsibility was found in ADT Ltd v BDO Binder
Hamlyn [1996] B.C.C. 808.
279If those costs were imposed on auditors, it is likely companies would end up paying
them (by way of higher audit fees), so that, for example, the company would be
subsidising the due diligence efforts of a potential acquirer. In some cases, the company
might want to do so (see for an example para.13–49) but that can again be done through
express contract.
280JEB Fasteners Ltd v Marks Bloom & Co [1981] 3 All E.R. 289; affirmed on other
grounds [1983] 1 All E.R. 583 CA.
281
Who, in fact, resigned!
PART 6
EQUITY FINANCE
In the course of the book we have referred frequently to the

rights of shareholders but less often to the function which they
perform in the company. In Part Four, for example, we discussed
the accountability of management to the shareholders, but did
not investigate in any detail what the shareholders contribute in
return for that ultimate control over the company. In very small
companies, the purpose of issuing shares may indeed be simply
to give the shareholders control over the company. In a two-
person quasi-partnership, for example, the founders of the
company may take one low-value share each, and no other
shares may be issued by the company. The issue of shares in
such a case operates to give the partners complete control over
the running of the company, for, in all likelihood, they will use
their voting rights as shareholders to appoint themselves as
directors of the company. Financing for the company will come
from elsewhere, probably in the form of a bank loan secured on
the partners’ personal assets.
However, in larger companies the purpose of share issues is
not simply, or even primarily, to allocate control over the
company but also to raise finance for it, and it is on that function
of the share issue that we concentrate in this part. As we have
seen,1 ordinary shares constitute a particularly flexible form of
finance for companies, because, so long as the company is a
going concern, the shareholders are entitled to no particular level
of return by way of dividend and cannot withdraw the
contribution made in exchange for their shares without the
company’s consent, given either at the time of issue of the shares
(e.g. where the shares are issued as redeemable at the option of
the shareholder) or later (e.g. where the company offers to re-
purchase some of its shares). During periods of economic strain
the company can hang on to the finance provided by the
shareholders but reduce or eliminate its dividends, whilst the
shareholders hope that things will turn around eventually and
they will be well rewarded for their patience. Even where the
company is wound up and the shareholders obtain rights to
repayment of their investment, they stand at the end of the queue
after the creditors and so may find that their rights are in fact
worthless.2 The economic exposure of the ordinary shareholders
goes a long way to explain the traditional practice of allocating
control rights over the management to those shareholders.
However, not all shares are “ordinary” or “equity” shares,
though it is rare for a company not to issue some shares of this
type. The economic and control rights of shareholders are a
matter largely of contract between company and investor, rather
than of statutory stipulation, so that a company may issue several
classes of share, with differing rights attached to them. As we
have already seen,3 this can create risks of oppression of one
class of shareholder by another, to combat which the statute has
developed special protective mechanisms. More important for
this Part, the rights conferred upon “preference” shares may
make it difficult to distinguish in practice between share-based
finance of companies and debt-based finance, considered in the
final Part of this book. A preference shareholder may have a
right under the terms of issue of the share to a particular level of
dividend each year (assuming the company has profits to cover
the dividend entitlement). This makes the preference shareholder
look in some ways like a lender, entitled to interests on a loan
(though that interest is payable whether or not the company has
profits to cover it). However, a lender to a company does not
become a member of it and thereby obtain control rights over it.
Nevertheless, since the terms of a loan contract can be structured
so as to give the lenders considerable control over what the
management of the company does, whilst preference
shareholders may have limited voting rights, the line between
debt and equity is sometimes difficult to identify. Even the
feature that a loan is normally repayable after a fixed period may
be replicated by making the preference shares redeemable, and
even if the preference share is, at least on the surface, a
permanent contribution to the company’s capital, the preference
shareholders can usually be squeezed out if the company (ie the
management and the ordinary shareholders) so wishes.4
Since the ordinary shareholder’s contribution to the company
is normally “locked in” until the point of winding up, an investor
is likely to look more favourably shares which can easily be sold
to another investor if the holder of them wishes to exit from the
shareholding. Thus, large companies, contemplating a public
offer of shares, are likely to ensure that the public offer is
accompanied by an introduction of the shares to trading on a
public securities market. This will restore liquidity to investors
by enabling them to dispose of the shares to another investor at
any time through the “stock exchange” (if not necessarily at an
attractive price). This has generated a demand for rules
regulating public offerings of shares. In addition, it has
generated a strong interest in the proper regulation of secondary
trading on public markets (i.e. trading among investors, not with
the company), especially continuing disclosure requirements.
This regulatory impulse extends to the “market for corporate
control”, whereby control of a company passes into new hands
through the acquisition by a bidder of a majority of the shares
traded on a public exchange. Finally, the price at which the
shares trade in the secondary market may reveal important
information about the company’s prospects, which may not only
influence investors’ decisions, but also the exercise of
governance rights by shareholders or directors. At the same time,
with the goal of creating a single market, much of the regulatory
initiative has passed from domestic bodies to the EU. In fact, the
EU has had a much bigger impact on the laws governing the
public share markets than it has had on general company law. As
a result of both domestic and European initiatives there has been
a not insignificant revolution in the structure and content of the
relevant rules, to which the financial crisis of 2007 onwards has
given further impetus. By contrast, shareholders in non-publicly
traded companies must rely for protection on the mechanisms
discussed in Chs 19 and 20.
1
Chs 12 and 13.
2 IA 1986 ss.107 and 143. See generally Ch.33.
4
On the ability to the company to squeeze out unwanted preference capital see para.19–
16.
CHAPTER 23
THE NATURE AND CLASSIFICATION OF SHARES
Legal Nature of Shares 23–1

The Presumption of Equality Between Shareholders 23–4
Classes of Shares 23–6
Preference shares 23–7
Ordinary shares 23–9
Special classes 23–10
Conversion of shares into stock 23–11
LEGAL NATURE OF SHARES

23–1
What is the juridical nature of a share? At the present day this is
a question more easily asked than answered. In the old deed of
settlement company, which was merely an enlarged partnership
with the partnership property vested in trustees, it was clear that
the members’ “shares” entitled them to an equitable interest in
the assets of the company. It is true that the exact nature of this
equitable interest was not crystal clear, for the members could
not, while the firm was a going concern, lay claim to any
particular asset or prevent the directors from disposing of it.
Even with the modern partnership, no very satisfactory solution
to this problem has been found, and the most one can say is that
the partners have an equitable interest, often described as a lien,
which floats over the partnership assets throughout the duration
of the firm, although it crystallises only on dissolution. Still,
there is admittedly some sort of proprietary nexus (however
vague and ill-defined) between the partnership assets and the
partners.
At one time it was thought that the same applied to an
incorporated company, except that the company itself held its
assets as trustee for its members.1 But this idea has long since
been rejected. Shareholders have ceased to be regarded as having
equitable interests in the company’s assets; “shareholders are
not, in the eyes of the law, part owners of the undertaking”.2 As
a result, the word “share” has become something of a misnomer,
for shareholders no longer share any property in common; at the
most they share certain rights in respect of dividends, return of
capital on a winding up, voting, and the like.
Today it is generally stated that a share is a chose in action.3
This, however, is not helpful, for “chose in action” is a
notoriously vague term used to describe a mass of interests
which have little or nothing in common except that they confer
no right to possession of a physical thing, and which range from
purely personal rights under a contract to patents, copyrights and
trade marks.
It is tempting to equate shares with rights under a contract, for
as we have seen4 the articles of association constitute a contract
of some sort between the company and its members and it is this
document which directly or indirectly defines the rights
conferred by the shares. But a share is something more than a
mere contractual right in personam. This is suggested by the
rules relating to infant shareholders (minors), who are liable for
calls on the shares unless they repudiate the allotment during
infancy or on attaining majority,5 and who cannot recover any
money which they have paid unless the shares have been
completely valueless.6 As Parke B said7:
“They have been treated, therefore, as persons in a different situation from mere
contractors for then they would have been exempt, but in truth they are purchasers
who have acquired an interest not in a mere chattel, but in a subject of a permanent
nature.”8
23–2
The definition of a share which is, perhaps, the most widely
quoted is that of Farwell J in Borland’s Trustee v Steel9:
“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 second,
but also consisting of a series of mutual covenants entered into by all the
shareholders inter se in accordance with [s.33]. The contract contained in the
articles of association is one of the original incidents of the share. A share is not a
sum of money …but is an interest measured by a sum of money and made up of
various rights contained in the contract, including the right to a sum of money of a
more or less amount.”
It will be observed that this definition, though it lays

considerable stress on the contractual nature of the shareholder’s
rights, also emphasises the fact that the holder has an interest in
the company. The theory seems to be that the contract
constituted by the articles of association defines the nature of the
rights, which, however, are not purely personal rights but instead
confer some sort of proprietary interest in the company though
not in its property. The company itself is treated not merely as a
person, the subject of rights and duties, but also as a res, the
object of rights and duties.10 It is the fact that the shareholder has
rights in the company as well as against it, which, in legal
theory, distinguishes the member from the debenture- or bond-
holder whose rights are also defined by contract (this time the
debenture itself and not the articles) but are rights against the
company and, if the debenture or bond is secured, in its property,
but never in the company itself.
Farwell J’s definition mentions that the interest of a
shareholder is measured by a sum of money. Reference has
already been made to this11 and it has been emphasised that the
requirement of a nominal monetary value is an arbitrary and
illogical one which has been rejected in certain other common
law jurisdictions. The nominal value is meaningless and may be
misleading, except insofar as it determines the minimum
liability. Even as a measure of liability, it is of less importance
now that shares are almost invariably issued on terms that they
are to be fully paid-up on or shortly after allotment and are
frequently issued at a price exceeding their nominal value. But
reference to liability is valuable in that it emphasises that
shareholders qua members may be under obligations to the
company as well as having rights against it.
23–3
This analysis may seem academic and barren, and to some extent
it is, for a closer examination of the rights conferred by shares
and bonds or debentures will show the impossibility of
preserving any hard and fast distinction between them which
bears any relation to practical reality. Nevertheless, the matter is
not entirely theoretical, for in a number of cases the courts have
been faced with the need to analyse the juridical nature of a
shareholder’s interest in order to determine the principles on
which it should be valued. The most interesting of these cases is
Short v Treasury Commissioners12 where the whole of the shares
of Short Bros were being acquired by the Treasury under a
Defence Regulation which provided for payment of their value
“as between a willing buyer and a willing seller”.13 They were
valued on the basis of the quoted share price, but the
shareholders argued that, since all the shares were being
acquired, stock exchange prices were not a true criterion and that
either the whole undertaking should be valued and the price thus
determined apportioned among the shareholders, or the value
should be the price which one buyer would give for the whole
block, which price should then be similarly apportioned. The
courts upheld the method adopted and rejected both the
alternatives suggested, the first because the shareholders were
not “part owners of the undertaking” and the second because the
regulation implied that each holding was to be separately valued.
It is the rejection of the first argument which supports the view
that the shareholder has no proprietary interest in the company’s
assets.14
One thing at least is clear: shares are recognised in law, as
well as in fact, as objects of property which are bought, sold,
mortgaged and bequeathed. They are indeed the typical items of
property of the modern commercial era and particularly suited to
its demands because of their exceptional liquidity. To deny that
they are “owned” would be as unreal as to deny, on the basis of
feudal theory, that land is owned—far more unreal because the
owner’s freedom to do what he likes with his shares in public
companies is likely to be considerably less fettered.
Nor, today, is the bundle of rights making up the share regarded
as equitable only. On the contrary, as Ch.27 will show, legal
ownership of shares is recognised and distinguished from
equitable ownership in much the same way as a legal estate in
land is distinguished from equitable interests therein. Nor must
this emphasis on the proprietary and financial aspects of a
shareholder’s rights obscure the important fact that shares cause
their holder to become a member of an association, with rights,
at least in relation to ordinary shares, to take part in its
deliberations by attending and voting at its general meetings.
THE PRESUMPTION OF EQUALITY BETWEEN SHAREHOLDERS
23–4
A company limited by shares must necessarily issue some
shares, and the initial presumption of the law is that all shares
issued by the company confer the same rights and impose the
same liabilities. As in a partnership15 equality prevails in the
absence of agreement to the contrary. Normally the
shareholders’ rights will fall under three heads: (i) dividends; (ii)
return of capital and participation in surplus assets on a winding
up (or authorised reduction of capital); and (iii) attendance at
meetings and voting. Unless there is some indication to the
contrary, all the shares will confer the like rights to all three. So
far as voting is concerned this is a comparatively recent
development, for, on the analogy of the partnership rule, it was
felt in the early days that members’ voting rights should be
divorced from their purely financial interests in respect of
dividend and capital, so that the equality in voting should be
between members rather than between shares. A stage
intermediate between these two ideas was reflected in the
Companies Clauses Act 184516 which provided that, in the
absence of contrary provision in the special statute, every
shareholder had one vote for every share up to ten, one for every
additional five up to a hundred and one for every ten thereafter,
thus weighting the voting in favour of the smaller holders.
However, attempts to reduce the proportion of voting rights as
the size of holdings increased were doomed to failure since the
requirement could be easily evaded by splitting holdings and
vesting them in nominees. Whilst “voting caps” may still be
inserted into the articles, it is today more usual to create separate
classes of shares if voting rights are to vary, so that the different
number of votes can be attached to the shares themselves and not
to the holder. Even today, however, the older idea still prevails
on a vote by a show of hands, when the common law rule is that
each member entitled to vote has one vote irrespective of the
number of shares held; a rule which, although it can be altered
by the constitution, is normally maintained, because it provides a
speedy, if somewhat inaccurate, way
of establishing the views of the meeting.17
There is in fact a strong argument in favour of applying the
equality rule to the voting rights attached to shares which
otherwise have the same rights and duties, because a
shareholder’s influence in the company is then linked to the size
of his or her investment in it. Governance rights are then
coterminous with the financial risk to which each holder is
exposed. In 1962 the Jenkins Committee on Company Law
considered the adoption of a rule which would have prohibited
non- or restricted-voting ordinary shares. The majority rejected
the proposition as an interference with freedom of contract, but
three members of the committee, including the original author of
this book, dissented.18 More recently, the EU tried, but failed, to
build support for the principle of “one share one vote”.19 So, the
equality rule is not mandatory and companies are free to issue
shares with no, restricted or, even, weighted voting rights. It is
relatively rare for listed companies to do so because institutional
shareholders have traditionally been reluctant to buy shares
whose votes do not reflect the financial risk. The solution to the
problem in the UK is thus a market driven rather than a
regulatory one.
23–5
There is a similar presumption of equality in relation to
shareholders’ liabilities but it too can be altered by provisions in
the articles. In the case of a company limited by shares, normally
the only liability imposed on a shareholder as such will be to pay
up the nominal value of the shares and any premium insofar as
payment has not already been made by a previous holder. This,
however, does not mean that all the shares, even if of the same
nominal value and of the same class, will necessarily be issued at
the same price, or that, even if they are, all shareholders will
necessarily be treated alike as regards calls for the unpaid part.
Section 581 provides that a company, if so authorised by its
articles, may: (a) make different arrangements between
shareholders on an issue of shares as to the amounts or times of
payments of calls; (b) accept from any member the whole or part
of the amount remaining unpaid although it has not been called
up; or (c) pay a dividend in proportion to the amount paid up on
each share where a larger amount is paid up on some shares than
on others.20 Subject to that, however, calls must be made pari
passu.21
CLASSES OF SHARES
23–6
As will have become apparent, the prima facie equality of shares
can be modified by dividing the share capital into different
classes with different rights as to dividends, capital or voting or
with different nominal values. Even this way of proceeding was
once open to doubt. For many years it was thought that, in the
absence of express provision in the original constitution, the
continued equality of all shares was a fundamental condition
which could not be abrogated by an alteration of the articles so
as to allow the issue of shares preferential to those already
issued.22 This idea was, however, finally destroyed in Andrews v
Gas Meter Co23 where a company, whose original constitution
provided for only one class of shares, was permitted to alter it so
as to issue a second class of shares with rights which ranked to
some extent ahead of the existing shares.
Today, the number of possible classes is limited only by the
total number of shares issued by the company, since the number
of available combinations of the incidents attached to shares is
infinite. On the whole, however, it is not the present fashion for
publicly traded companies to complicate their capital structures
by having a large number of share classes. But, both in the case
of public and private companies, there may well be two or three
different classes and sometimes more. The division of shares
into classes and the rights attached to each class will normally be
set out in the company’s articles but, in contrast with the
Companies Acts of some other common law countries, that is
not compulsory.24 However, steps have been taken to ensure that
the classes and their rights can be ascertained from the
company’s public documents. For this purpose the “return of
allotments” (i.e. the information which the company has to
provide to the Registrar of companies within one month of the
allotment of shares)25 is used. This must give the “prescribed
particulars” of the rights attached to the shares in relation to each
class of shares.26 If the company assigns a class a name or other
designation or changes an existing one, that too must be
notified.27 The same applies if and when there is any variation of
the class rights.28
Preference shares
23–7
Where the differences between the classes relates to financial
entitlement, i.e. to dividends and return of capital, the likelihood
is that the classes will be given distinguishing names, though
these may be no more informative than “preference” and
“ordinary” (perhaps, in the case of the former, preceded by
“first” or “second” where there are two classes of preference
shares). The preference normally is that the preference
shareholder receives a fixed dividend and/or a return of capital
before (in preference to) any payment to the ordinary
shareholders. If a potential investor should assume that
“preference” means that he should prefer them to the ordinary
shares he would be sorely in need of professional advice. The
advice received would probably not be couched in terms of
relative merits and de-merits of preference and ordinary shares
but of security and levels of risk. And if the client’s needs
suggested the former, the investor would probably be advised to
invest not in shares but in bonds or debentures. For preference
shares may often be virtually indistinguishable from bonds
except that they afford less assurance of getting one’s money
back or a return on it until one does. On the other hand, if in
addition to being “preferential” the shares are also
“participating” (i.e. have a right, beyond the preference, to share
in the profits of the company after the ordinary shareholders
have received a specified return), they may be regarded rightly
as a form of equity shares with preferential rights over the
ordinary shares (and in consequence should be, and often are,
designated “preferred ordinary”). The Act defines the company’s
equity share capital as all its issued share capital except that part
which “neither as respects dividends nor as respects capital,
carries any right to participate beyond a specified amount in a
distribution”.29 Participating preference shares will thus normally
fall within the definition of equity capital, even if the right to
participation is confined to surplus assets when the company is
wound up, whilst the shareholders’ dividend right is limited to a
fixed (and perhaps not very generous) amount.
The truth of the matter is that an enormous variety of different
rights, relating to dividends, return of capital, voting, conversion
into ordinary shares,30 redemption and other matters, may be
attached to classes of shares, all of which are conventionally
described as “preference” shares. What these rights are in any
particular case and whether any particular issue of preference
shares is located more at the debenture end or the ordinary share
end of the spectrum will depend on the construction of the
articles or other instrument creating them. Unfortunately, in the
past the drafting of these documents has often been deplorably
lax.31 Hence the courts had to evolve various “canons of
construction” of the documents which, even more unfortunately,
have themselves fluctuated from time to time, with the courts
overruling earlier decisions and defeating the legitimate
expectations of investors who purchased preference shares in
reliance on the construction adopted earlier.32 In former editions
of this book the story of these vacillations was traced in some
detail,33 starting with the virtually irreconcilable decisions of the
House of Lords34 and the Court of Appeal35 relating to the
winding-up of the Bridgewater Navigation Company in 1889–
1891. Since, at long last, a reasonably clear finale now appears
to have been reached, there is no longer a justification for that
indulgence. It suffices to summarise what the present canons of
construction appear to be.
Canons of construction
23–8
1. Prima facie all shares rank equally. If, therefore, some are to
have priority over others there must be provisions to this
effect in the terms of issue.
2. If, however, the shares are expressly divided into separate
classes (thus necessarily contradicting the presumed equality)
it is a question of construction in each case what the rights of
each class are.36
3. If nothing is expressly said about the rights of one class in
respect of (a) dividends, (b) return of capital, or (c) attendance
at meetings or voting, then, prima facie, that class has the
same rights in that respect as the residuary ordinary shares.
Hence, a preference as to dividend will not imply a preference
as to return of capital (or vice versa).37 Nor will an exclusion
of participation in dividends beyond a fixed preferential rate
necessarily imply an exclusion of participation in capital (or
vice versa) although it will apparently be some indication of
it.38
4. Where shares are entitled to participate in surplus capital on a
winding-up, prima facie they participate in all surplus assets
and not merely in that part which does not represent
undistributed profits that might have been distributed as
dividend to another class.39
5. If, however, any rights in respect of any of these matters are
expressly stated, that statement is presumed to be exhaustive
so far as that matter is concerned. Hence if shares are given a
preferential dividend they are presumed to be non-
participating as regards further dividends,40 and if they are
given a preferential right to a return of capital they are
presumed to be non-participating in surplus assets.41 The same
clearly applies to attendance and voting42; if shareholders are
given a vote in certain circumstances (e.g. if their dividends
are in arrears), it is implied that they have no vote in other
circumstances. It is in fact common to displace the preference
shareholders’ presumed equality in relation to voting by
expressly restricting their voting rights to situations in which
their dividends have not been paid for a period of time, on the
basis that only in such cases will the preference shareholders
need to assert their voice in the management of the
company.43
6. The onus of rebutting the presumption in 5 is not lightly
discharged and the fact that shares are expressly made
participating as regards either dividends or capital is no
indication that they are participating as regards the other—
indeed it has been taken as evidence to the contrary.44
7. If a preferential dividend is provided for, it is presumed to be
cumulative (in the sense that, if passed in one year, it must
nevertheless be paid in a later one before any subordinate
class receives a dividend).45 This presumption can be rebutted
by any words indicating that the preferential dividend for a
year is to be payable only out of the profits of that year.46
8. It is presumed that even preferential dividends are payable
only if declared.47 Hence arrears even of cumulative dividends
are prima facie not payable in a winding-up unless previously
declared.48 But this presumption may be rebutted by the
slightest indication to the contrary.49 It may thus be
advantageous to specify that the dividend is automatically
payable on certain dates (assuming profits are available) rather
than upon a resolution of the directors or shareholders. When
the arrears are payable, the presumption is that they are to be
paid in the winding up provided there are surplus assets
available, whether or not these represent accumulated profits
which might have been distributed by way of dividend,50 but
that they are payable only to the date of the commencement of
the winding-up.51
The effect of applying these canons of construction has been,
as Evershed MR pointed out,52 that over the past 100 years:
“the view of the courts may have undergone some change in regard to the relative
rights of preference and ordinary shareholders and to the disadvantage of the
preference shareholders whose position has …become somewhat more
approximated to [that] of debenture holders.”
Unless preference shareholders are expressly granted

participating rights they are unlikely to be entitled to share in
any way in the “equity” or to have voting rights except in
narrowly prescribed circumstances. Yet they enjoy none of the
advantages of debenture-holders; they receive a return on their
money only if profits are earned53 (and not necessarily even
then), they rank after creditors on a winding-up and they have
less effective remedies against the company. Suspended midway
between true creditors and true members they may get the worst
of both worlds, unless the instrument creating the preference
shares is carefully drafted.
Ordinary shares
23–9
Ordinary shares (as the name implies) constitute the residuary
class in which is vested everything after the special rights of
preference classes, if any, have been satisfied. They confer a
right to the “equity” in the company and, insofar as members can
be said to own the company, the ordinary shareholders are its
proprietors. It is they who bear the lion’s share of the risk and
they who in good years take the lion’s share of the profits (after
the directors and managers have been remunerated). If, as is
often the case, the company’s shares are all of one class, then
these are necessarily ordinary shares, and if a company has a
share capital it must perforce have at least one ordinary share
whether or not it also has preference shares. It is this class alone
which is unmistakably distinguished from debentures both in law
and fact.
But as we have seen, the ordinary shares may shade off
imperceptibly into preference, for, when the latter confer a
substantial right of participation in income or capital, or a
fortiori both, it is largely a matter of taste whether they are
designated “preference” or “preferred ordinary” shares.
Moreover, distinctions may be drawn among ordinary shares,
ranking equally as regards financial participation, by dividing
them nevertheless into separate classes with different voting
rights. In this event they will probably be distinguished as “A”
“B” “C” (etc.) ordinary shares. Some public companies have
issued non-voting A ordinary shares. Alternatively, both classes
of ordinary share may have voting rights but the votes of a share
of one class may be a high multiple of the votes attached to a
share of another. In either case, control may be retained by a
small proportion of the equity leading to a further rift between
ownership and control.54
Special classes
23–10
Although in most cases the shares of a company will fall into
one or other of the primary classes of preference or ordinary, it
is, of course, possible for the company to create shares for
particular purposes and containing terms which cut across the
normal classifications. An example of this is afforded by
employees’ shares. Frequent references have already been made
to “employee share schemes”. Under the present definition of
such schemes,55 the beneficiaries of them may include not only
present employees of the company concerned, but also
employees, or former employees, of it or any company in the
same group, and the spouses, civil partners, children or
stepchildren under the age of 18, of any such employees. When
employees’ share schemes first came to be introduced, the
normal practice was to create a special class of shares with
restricted rights regarding, in particular, votes and
transferability; only in relation to share option schemes,
designed as incentives to top management, were ordinary voting
equity shares on offer. Now, however, that is usual in all cases56
in order that employees’ share schemes may enjoy the special
tax concessions conferred on “approved” schemes. Hence, today
such schemes will rarely lead to the creation of a special class of
share; it is only in relation to their allotment, financing, and
provision for re-purchase by the company or the trustees of the
scheme that there will be special arrangements which the Act
facilitates by exclusions from the normal restrictions on purchase
of own shares and on the provision of finance by a company for
the acquisition of its shares.57
Conversion of shares into stock
23–11
Shares may no longer be converted into stock.58 This is a change
made by the 2006 Act, though one of minor, almost
undetectable, significance, since companies had abandoned the
practice for the reason that, today, stock has no advantage over
shares. In the case of shares the size of a person’s holding in the
company is measured by the number of shares held, whereas
with stock the person’s holding is measured by the total par
value of the stock held, the stock not being divided into separate
units. From the stockholder’s point of view this makes it easier
to transfer very small proportions of the holding, whereas a
shareholder can never transfer less than one share. However, this
is a small advantage since companies tend to take steps to keep
the market value of the shares to a manageable size (for
example, through bonus issues59 if the market value becomes
large). From the company’s point of view there were until the
1948 Act some administrative savings associated with stock.60
The 2006 Act still permits stock to be re-converted to shares by
ordinary resolution of the shareholders, but this is now an
irreversible decision.61 Thus, the phrase “stock exchange”
becomes even more of a misnomer than it was previously.
However, turning debentures into debenture stock does retain
some advantages and may still be done.62
1 Child v Hudson’s Bay Co (1723) 2 P. Wms. 207. As in the case of partnerships it was
clear long before the express statutory provisions to this effect (see now s.541) that
shares were personalty and not realty even if the company owned freehold land.
2
per Evershed LJ in Short v Treasury Commissioners [1948] 1 K.B. 122 CA. See also
the discussion of “asset partitioning” in para.8–3, above.
3
See, per Greene MR in [1942] Ch. 241; and Colonial Bank v Whinney (1886) 11 App.
Cas. 426 HL.
4
See above, at paras 3–18 et seq.
5
Cork & Brandon Railway v Cazenove (1847) 10 Q.B. 935; N.W. Railway v M’Michael
(1851) 5 Exch. 114. If they repudiate during infancy it is not clear whether they can be
made liable to pay calls due prior thereto: the majority in Cazenove’s case thought they
could, but Parke B in the later case (at 125) stated the contrary.
6
Steinberg v Scala (Leeds) Ltd [1923] 2 Ch. 452 CA.
7
N.W. Railway v M’Michael (1851) 5 Exch. at 123.
8 Later he suggested that the shareholder had “a vested interest of a permanent character
in all the profits arising from the land and other effects of the company” (at 125). This
can hardly be supported in view of later cases.
9 Borland’s Trustee v Steel [1901] 1 Ch. 279 at 288. Approved by the Court of Appeal in
Re Paulin [1935] 1 K.B. 26, and by the House of Lords ibid., sub nom. IRC v Crossman
[1937] A.C. 26. See also the other definitions canvassed in that case.
10
“A whole system has been built up on the unconscious assumption that organisations,
which from one point of view are considered individuals, from another are storehouses
of tangible property”: T. Arnold, The Folklore of Capitalism (New Haven, Conn., 1959),
p.353. The proprietary analysis of the share (even if it does not extend to the company’s
assets) sometimes makes courts resistant to compulsory acquisition of shares, even at a
fair price. See Gambotto v WCP Ltd (1995) 127 A.L.R. 417 High Ct, Australia, above
para.19–9.
12Short v Treasury Commissioners [1948] 1 K.B. 116 CA; affirmed [1948] A.C. 534
HL.
13 This popular formula is much criticised by economists who argue with some force
that the willingness of the buyer and seller depends on the price and not vice versa.
14
The rejection of the second argument illustrates the expropriatory nature of the
legislation. Had the willing buyer been characterised as a buyer of control, there is no
doubt that a premium to the market price would have been payable, even though no
individual seller had control, because some sharing of the benefits of control would have
been necessary to induce the shareholders to sell. See Ch.28, below.
15 Partnership Act 1890 s.24(1).
16
Companies Clauses Act 1845 s.75.
17As we have seen above (para.15–75), the rule has been criticised, and it is tolerated
only because it is easy for a shareholder who thinks the result would be different on a
poll to trigger the poll process.
18Report of the Company Law Committee, Cmnd 1749, paras 123–140 and pp.207–
210.
19See Commission of the European Communities, Impact Assessment on the
Proportionality between Capital and Control in Listed Companies, SEC(2007) 1705, 12
December 2007.
20
Table A 1985 appeared to authorise (a) only (see art.17) probably rightly in view of
the complications which (b) and (c) would cause a public company.
21
Galloway v Halle Concerts Society [1915] 2 Ch. 233.
22
Hutton v Scarborough Cliff Hotel Co (1865) 2 Dr. & Sim. 521.
23
Andrews v Gas Meter Co [1897] 1 Ch. 361 CA.
24
This is now true even in relation to redeemable shares, provided the articles or a
resolution of the company authorises the directors to determine the terms of redemption:
s.685. See para.13–10. Shareholders’ rights are sometimes set out on the back of the
share certificate (where such is issued) but a misstatement of the rights on the certificate
will not override the statement in the articles or in the offer document: Re Hunting Plc
[2005] 2 B.C.L.C. 211.
25 On allotment see the following chapter at para.24–18.
26
2006 Act ss.555(4)(c) and 556(3), applying to limited and unlimited companies
respectively, and the Companies (Shares and Share Capital) Order 2009/388.
27 2006 Act s.636.
28
2006 Act s.637. The question of how class rights may be varied is discussed in Ch.19,
above.
29 Thus, a limitation on either dividends or a return of capital on a winding up will take
the share out of the ordinary class.
30
The apparently simple matter of converting preference shares into ordinary shares can
become one of considerable complexity, at least where the nominal value and number of
the ordinary shares into which the preference shares are to be converted differ from
those of the preference shares to be converted, so that there is a danger that the
transaction will involve an unauthorised return of capital, on the one hand, or the issue
of shares at a discount, on the other. For a clear explanation of the ways of avoiding this
result, see (1995) VI Practical Law for Companies (No.10) at p.43.
31 Even to the extent of simply providing that the share capital is divided into so many X
per cent Preference Shares and so many Ordinary Shares and issuing them without
further clarification.
32The classic illustration is the overruling, by the House of Lords in Scottish Insurance
v Wilsons & Clyde Coal Co [1949] A.C. 462, of the Court of Appeal decision in Re
William Metcalfe Ltd [1933] Ch. 142.
33
4th edn (1979), pp.414–421.
34 Birch v Cropper (1889) 14 App. Cas. 525 HL.
35 Re Bridgewater Navigation Co [1891] 2 Ch. 317 CA.
36
Scottish Insurance v Wilsons & Clyde Coal Co [1949] A.C. 462; Re Isle of Thanet
Electric Co [1950] Ch. 161 CA.
37Re London India Rubber Co (1868) L.R. 5 Eq. 519; Re Accrington Corp Steam
Tramways [1909] 2 Ch. 40.
38 This is implied in the speeches in Scottish Insurance v Wilsons & Clyde Coal Co
[1949] A.C. 462; and in Dimbula Valley (Ceylon) Tea Co Ltd v Laurie [1961] Ch. 353.
39
Dimbula Valley (Ceylon) Tea Co Ltd v Laurie [1961] Ch. 353; Re Saltdean Estate Co
Ltd [1968] 1 W.L.R. 1844. These cases “distinguished” Re Bridgewater Navigation Co
[1891] 2 Ch. 317 CA (on the basis that the contrary decision of the Court of Appeal
depended on the peculiar wording of the company articles) but it is thought that
Bridgewater can now be ignored; in Wilsons & Clyde Coal Co Lord Simonds pointed
out the absurdity of supposing that “parties intended a bargain which would involve an
investigation of an artificial and elaborate character into the nature and origin of surplus
assets”: [1949] A.C. at 482.
40
Will v United Lankat Plantations Co [1914] A.C. 11 HL.
41
Scottish Insurance v Wilsons & Clyde Coal Co [1949] A.C. 462; Re Isle of Thanet
Electric Co [1950] Ch. 161 CA.
42
Quaere whether attendance at meetings and voting should not really be treated as two
separate rights. It seems, however, that express exclusion of a right to vote will take
away the right to be summoned to (or presumably to attend) meetings: Re MacKenzie &
Co Ltd [1916] 2 Ch. 450. If, under this canon shareholders have votes but the articles do
not say how many, the effect of s.284 appears to be that they have one vote per share or,
if their shares have been converted to stock (on which see para.23–11, below) per each
£10 of stock and that if the company has no share capital each member has one vote.
43
See, for example, Re Bradford Investment Ltd [1991] B.C.L.C. 224.
44 Re National Telephone Co [1914] 1 Ch. 755; Re Isle of Thanet Electric Co [1950] Ch.
161 CA; and Re Saltdean Estate Co Ltd [1968] 1 W.L.R. 1844. This produces strange
results. If, as the House of Lords suggested in the Scottish Insurance case, the fact that
shares are non-participating as regards dividends is some indication that they are
intended to be non-participating as regards capital (on the ground that the surplus profits
have been appropriated to the ordinary shareholders), where the surplus profits belong to
both classes while the company is a going concern, both should participate in a winding-
up in order to preserve the status quo.
45
Webb v Earle (1875) L.R. 20 Eq. 556.
46 Staples v Eastman Photographic Materials Co [1896] 2 Ch. 303 CA.
47 Burland v Earle [1902] A.C. 83 PC; Re Buenos Ayres Gt Southern Railway [1947]
Ch. 384; Godfrey Phillips Ltd v Investment Trust Ltd [1953] 1 W.L.R. 41. Semble,
therefore, non-cumulative shares lose their preferential dividend for the year in which
liquidation commences: Re Foster & Son [1942] 1 All E.R. 314; Re Catalina’s
Warehouses [1947] 1 All E.R. 51. But, if the terms clearly so provide, a prescribed
preferential dividend may be payable so long as there are adequate distributable profits
in accordance with Ch.12, above: Evling v Israel & Oppenheimer [1918] 1 Ch. 101.
48
Re Crichton’s Oil Co [1902] 2 Ch. 86; Re Roberts & Cooper [1929] 2 Ch. 383; Re
Wood, Skinner & Co Ltd [1944] Ch. 323.
49Re Walter Symons Ltd [1934] Ch. 308; Re F de Jong & Co Ltd [1946] Ch. 211 CA;
Re E.W. Savory Ltd [1951] 2 All E.R. 1036; Re Wharfedale Brewery Co [1952] Ch. 913.
50Re New Chinese Antimony Co Ltd [1916] 2 Ch. 115; Re Springbok Agricultural
Estates Ltd [1920] 1 Ch. 563; Re Wharfedale Brewery Co [1952] Ch. 913; not following
Re W.J. Hall & Co Ltd [1909] 1 Ch. 521.
51 Re E.W. Savory Ltd [1951] 2 All E.R. 1036.
52
Re Isle of Thanet Electric Co [1950] Ch. 161 at 175.
53
This necessarily follows from the principle laid down in s.830(1) that “a company
shall not make a distribution except out of profit available for the purpose”. See above,
para.12–2.
54
See para.23–4.
55
2006 Act s.1166.
56But it would be rare indeed for this to have led to employees controlling a large public
company—as has occurred in the USA.
57
See paras 13–5 and 13–50. And note also the special treatment in relation to pre-
emptive rights: below, para.24–7.
58
2006 Act s.540(2). See also the prohibition in s.617 on a company altering its share
capital, except as permitted by that section, which permissions no longer include
conversion into stock.
59
See para.11–59.
60
This was the requirement that, throughout its life, each share had to have a distinctive
number, thus creating some bureaucratic work for the company, whilst stock did not.
However, this is no longer required of shares which are fully paid up and rank pari passu
(s.543).
61 2006 Act s.620.
62 See para.31–12.
CHAPTER 24
SHARE ISSUES: GENERAL RULES
Public and Non-Public Offers 24–2

Directors’ Authority to Allot Shares 24–4
Pre-emptive Rights 24–6
Policy issues 24–6
The scope of the statutory right 24–7
Waiver 24–10
Sanctions 24–12
Listed companies 24–13
Pre-emption guidelines 24–14
Criticism and further market developments 24–15
The Terms of Issue 24–17
Allotment 24–18
Renounceable allotments 24–19
Failure of the offer 24–20
Registration 24–21
Bearer shares 24–22
Conclusion 24–23
24–1
In the previous chapter we examined how the company attaches
rights to shares. We now need to look at the process by which a
company issues shares to those who wish to invest in it. The
crucial regulatory divide is between offers to the public to
acquire the company’s shares and offers which are non-public.
The regulatory regime is much more elaborate in the former
case. In addition, since a public offer is often combined with the
provision of a trading facility for the shares on a stock exchange
or other trading platform (though it need not be), the rules
governing that process become of crucial importance as well.
Where there is no public offer, the relevant rules are still to be
found mainly in the Companies Act and the common law of
companies, rather than in the Financial Services and Markets Act
2000 and in rules made by the FCA. In this chapter we deal with
the rules that apply to offers of securities, whether the offer is a
public one or not. The additional requirements applying only to
public offers are treated in the following chapter. However,
some of the rules discussed in this chapter, for example, the pre-
emption rules, have their greatest impact when the offer is a
public one. The domestic law considered in this chapter has been
substantially influenced by the Second Company Law Directive
of the Community,1 but, in contrast with its provisions on legal
capital, its rules on share issuance have generally been
welcomed by shareholders as strengthening their position,
though, often, not as strongly as they would wish.
PUBLIC AND NON-PUBLIC OFFERS
24–2
A public company has a choice whether to make a public offer
of its shares. It is not obliged to do so and if it refrains from
making a public offer, it will escape the regulation analysed in
the following chapter, although it will find that its fund-raising
possibilities are much constrained. Hence arises an ambiguity in
the meaning of the term “public company”. By those concerned
with capital markets the term is used to refer to companies which
have indeed made a public offering of their securities and
introduced those shares to trading on a public market. However,
under the Companies Act a public company is simply one that
may lawfully make a public offering of its securities, whether it
has actually done so or not. In this book, the term “public
company” means one that is public in the Companies Act sense
of the term, whilst one which has actually made a public offer of
its securities is referred to as a “publicly traded”2 company or
one which has “gone public”. Under the Companies Act the
contrast between a “public” and a “private” company is that a
private company is prohibited from offering securities3 to the
public, either directly or through an offer for sale via an
intermediary.4 Thus, a private company may make only a non-
public offer of its shares, and, indeed, this is the defining
characteristic of a private company; but a public company (under
the Companies Act) may or may not have made a public offer.
If a private company does make a public offer, the validity of
any agreement to sell or allot securities or of any sale or
allotment is not affected by breach of the prohibition, thus
protecting innocent third parties who wish to enforce their rights
under the contract of issuance of the shares,5 and the criminal
sanctions which previously underlay the prohibition have been
removed. Nevertheless, the court has a wide range of powers to
deal with the consequences of a breach or potential breach, on
application of any member or creditor of the company or the
Secretary of State or on its own motion in an unfair prejudice
application. The court may enjoin the proposed issue6; require
the company to re-register as a public company (the statute’s
preferred ex post remedy)7; and, if it decides against re-
registration, it may wind the company up or make a remedial
order.8 The purpose of the remedial order is to put the person in
whose favour it is made (who may be a subsequent holder of the
share) in the position they would have been in had the breach of
the prohibition not occurred.9 The court has a wide discretion as
to the contents of the remedial order, including the power to
order the company and any others “knowingly concerned” in
contravention of the prohibition to offer to purchase the
securities at a price determined by the court.10 For a private
company to contemplate breaching the prohibition is, thus, a
highly risky business, both for it and its officers and advisers. On
the other hand, the requirements for becoming a public company
are not onerous and the company can even leave conversion until
after the issue has succeeded, provided conversion is part of the
terms of issue.11
24–3
The definition of what is a public offer for the purpose of the Act
is in s.756. This section makes it clear that “public” includes a
section of the public (“however selected”).12 On the other hand,
the definition excludes an offer which “can properly be regarded,
in all the circumstances, as not being calculated to result, directly
or indirectly, in the shares or debentures becoming available for
subscription or purchase by persons other than those receiving
the offer or invitation”.13 Also excluded are offers which are of
“domestic concern” to the company, into which category fall,
presumptively, offers to the company’s existing members or
employees, their families, debenture-holders of the company or a
trustee for any of the above.14
The main issue with this definition is that it does not
correspond exactly to the definition of a “public offer” used for
the purposes of determining the applicability of the additional
regulation discussed in the next chapter. In particular, it does not
replicate the definition of a public offer in the Prospectus
Directive,15 which determines whether a prospectus is required
(and regulates its contents, if it is). On the one hand, some offers
regarded as private under the Act might be public under the
Directive. This is because the “offerees only” exemption of the
Act appears to set no limit on the number of people who receive
the offer nor to impose any qualification as to their experience or
qualifications as investors, whilst the central exemptions in the
Directive are based on one or other of these limitations.16 In
other words, a private company might make what is a public
offer for the purposes of the Directive without contravening the
prohibition in the Act. In such a case, of course, the private
company will have to comply with the requirements of the
Directive, as transposed into domestic law, and so no real
conflict arises, provided those concerned realise that private
companies may fall within the prospectus rules in some cases.
On the other hand, a private company may be prevented by
the Act from making an offer in respect of which, if it were a
public company, it would not need to produce a prospectus,
because the offer would fall within one of the exemptions
contained in the Directive. The Company Law Review, whilst
recommending that some alignment of the definition of “public
offer” in the Act with that in the Directive, did not think that the
lack of fit was in principle objectionable, because different
policies were being pursued by the two sets of rules. There might
be good reasons for preventing a private company from making
a public offer, even if such an offer would not attract the
requirement for a prospectus under EU law. The CLR’s view
was that some of these exemptions from the prospectus
requirement were “wholly inappropriate” for a private company,
because they might allow the private company to reach “very
large economic scale”. This should be permitted only if the
company were prepared to undertake the burdens of a public
company.17 Of course, most share issues by private companies
come nowhere near being classified as public for the purposes of
either the Act or the Directive.
DIRECTORS’AUTHORITY TO ALLOT SHARES
24–4
Issuance of shares by a company involves essentially three steps.
First, the company must decide to make an offer of shares,
public or non-public, and set the terms of the offer. Secondly,
some person or persons must agree with the company to take the
shares (at which point the shares are said to have been
“allotted”). Thirdly, in implementation of that contract, those
persons must take the shares and be made members of the
company, thus completing the process of issuance. We shall look
at each stage in turn.
The first question is whether the decision to allot shares18 is
one for the board alone or whether the shareholders’ concurrence
is required. We have seen that the company’s decision to allot
shares ranking along with or even ahead of the company’s
existing shares does not normally amount to a variation of the
rights of the existing shareholders, so that their consent will not
be required under the variation of class-rights procedure,19 even
though the practical value of those rights may well be affected
by such an issue. Even if the new shares are to rank behind the
existing shares, the shareholders may still have doubts about the
directors’ plans for the use of the finance which will be raised.
Thus, it is a matter of some importance whether the Act requires
the shareholders’ consent to a share issue or whether the matter
is left entirely to the company’s articles of association. If the Act
does not intervene, the situation is likely to be that the board has
power to issue shares as part of its general management powers,
and the articles may or may not give the shareholders a role in
the decision-making process. Thus, the question becomes
whether the Act should make shareholder consent mandatory or
leave this issue to be determined by the company’s articles.
The Second Company Law Directive20 contains the principle
that consent of the shareholders is required. The Directive
applies only to public companies, although the Government,
when transposing it into domestic law in 1980, chose to apply
the principle to private companies as well, albeit in a more
flexible way. However, the CLR proposed21 to remove the
requirement of shareholder authorisation for the issuance of
shares by private companies, except where the company already
had or the directors’ proposal would create more than one class
of shares. This would be a default rule, for private companies’
articles might restore the requirement of shareholder approval.
This reform was implemented in the 2006 Act.22 The
requirement for shareholder consent was thought to be an
unnecessary formality in private companies, with their greater
overlap of directors and members. However, such overlap would
not necessarily obtain, and there would be the risk of greater
opportunism, if the company had, or was about to create, more
than one class of share.
24–5
Except in relation to the private company with only one class of
share, however, shareholder consent, in one form or another, is
still required for the allotment of shares. Not to obtain it is a
criminal offence on the part of the directors knowingly
involved,23 although such failure does not affect the validity of
the allotment.24 The requirement is applied not only to the
allotment of shares but also to the grant of rights to subscribe for
or to convert a security into shares in the company in the future,
for example, a convertible bond.25 Otherwise, the requirement of
shareholder consent could be avoided easily, for example, by
issuing a debt security convertible at a later stage into shares. In
this case, the requirement for shareholder approval is imposed at
the stage of issuance but is not repeated at the conversion stage.26
However, if, unusually, a convertible bond is convertible into
existing, rather than new, shares of the company, then
shareholder consent would not be needed at the allotment stage
either.27
Shareholder authorisation may take the form of the directors
putting before the shareholders a proposal for the issuance of a
particular amount of shares to fund a specific project, with full
details of how the finance raised will be used. This is
authorisation for “a particular use of the power”.28 However,
authorisation can be given generally, either in the articles or by
(ordinary) resolution, for (renewable) periods of up to five
years.29 With general authorisation, where no specific use of the
power may be under contemplation at the time, information
about how the funds raised will be used will necessarily be very
general and will be phrased so as to give management maximum
freedom of action. However, the authority, whether general or
particular, must state the maximum number of securities which
can be allotted under it and the date at which the authority will
expire.30 Moreover, the authorisation may be made conditional,31
and it may be revoked or varied at any time by resolution of the
company, even if the original authority was contained in the
articles.32 Institutional shareholders do attach importance to the
general requirement for shareholder authorisation of share issues
by the board. Guidance from the Association of British Insurers
indicates that its members will not vote in favour of resolutions
giving authority above a certain size. That size used to be one
third of the company’s existing issued share capital. In 2008 the
limit was increased, under the pressures discussed in the next
section, to two thirds, provided that the second third could be
issued only on a pre-emptive basis and the authorisation for the
second third was renewed yearly.33
PRE-EMPTIVE RIGHTS
Policy issues
24–6
Whether or not collective shareholder consent is required for
allotment of shares, there is a further issue whether the existing
shareholders individually should have a “right of first refusal”
over the new shares or, in company law terms, whether the
shares should be issued on a pre-emptive basis. The basic
principle underlying the pre-emption rules is that a shareholder
should be able to protect his or her proportion of the total equity
by having the opportunity to subscribe, in proportion to the
existing holding, for any new issue for cash of equity capital or
securities having an equity element.34 There are two main
reasons why a shareholder might wish to exercise this right and
thus to prevent the “dilution” of his or her holding of equity
shares. First, if new voting shares are issued and a shareholder
does not acquire that amount of the new issue which is
proportionate to the existing holding, that person’s influence in
the company may be reduced because he or she now has control
over a smaller percentage of the votes. In listed companies this is
likely to be of concern only to large, often institutional,
shareholders, but in small companies the issuance of new shares
may well have a significant impact upon the balance of power
within the company, and perhaps be motived by a desire to bring
this change about. Here, pre-emptive rights operate as a potential
limit on the freedom of the directors to affect a shift in the
balance of control in the company by issuing new equity shares
carrying voting rights to new investors.35
Secondly, large issues of new shares by a publicly traded
company are likely to be priced at a discount to the existing
market price, in order to encourage their sale. Once the new
shares are allocated, all the shares of the relevant class, new and
old, will inevitably trade on the market at the same price. This
new price will be somewhere between the issue price of the new
shares and the previous market price of the existing shares,
depending upon the size of the discount and the size of the new
issue. In the absence of protective regulation, if an existing
shareholder does not acquire the relevant proportion of the new
shares, the loss of market value of the existing holding will be
uncompensated. The new shareholders, in effect, will have been
let into the company too cheaply, and the existing shareholders
will have paid the price for that decision.36
The protection against voting dilution afforded by a bare pre-
emptive right is only partial. The shareholder must also be in a
position financially to take up the shares on offer.37 A financially
constrained existing shareholder is thus not protected against
voting dilution by pre-emption. The same might seem to be true
of financial dilution. However, here the addition of a further
feature to the basic pre-emption model can help. If the
shareholder is able to sell his or her pre-emptive rights in the
market, that will provide compensation for the loss suffered. The
rights will have a value equal to the difference between the issue
price of the new shares and the (higher) price at which the whole
class will trade after the issue, which will compensate the
shareholder for loss caused by the difference between the pre-
issue value of that person’s holding and the (lower) value it will
have after the new issue.38 However, for the rights to be
marketable they must be transferable to third parties. There is an
established way of providing this facility. The company issues a
“renounceable” letter of allotment, which gives the shareholder
the option to subscribe for the new shares or to transfer the right
to subscribe to a third party, the overall process being known as
a “rights issue”.39 Provided the shareholder transfers the right to
acquire the new shares before the time for exercising it expires
(i.e. “renounces” it) the third party will pay the company for the
new shares, having paid the shareholder for the acquisition of the
right to subscribe.40
The scope of the statutory right
24–7
The Act creates a pre-emptive right in favour of existing
shareholders, but it does not require companies to add the
additional feature of a rights issue.41 The company may simply
make what is usually termed an “open” offer to its existing
shareholders: the shareholder either takes the shares at the price
asked or passes up the offer altogether. It is, however, common
practice in listed companies for pre-emptive offers to be made on
a renounceable basis.42 We will first examine the shareholder’s
legal entitlements and then see how institutional pressure has
moved practice beyond the statute in many cases.
The ambit of the statutory pre-emptive provisions extends
only to issues for cash of “equity securities”. These are defined
as ordinary shares (and rights to subscribe for or convert
securities into ordinary shares); and an ordinary share is any
share other than one where the holder’s right to participate in a
distribution (whether by way of dividend or return of capital) is
limited by reference to a fixed amount.43 It does not matter
whether the existing shares carry votes or not, and in fact it can
be argued that pre-emptive rights are particularly important for
the holders of non-voting shares, who will obtain no protection
from the rules on shareholder authorisation discussed in the
previous section. Certain types of share issue are excluded from
the pre-emption rules, even if they arguably involve the issue of
equity shares for cash: bonus shares (where the pre-emption
problem does not arise)44 or shares to be held under an
employees’ share scheme.45 Nor do the rules apply to shares
taken by subscribers on the formation of a company.46
Moreover, pre-emptive rights will be triggered only if the
proposed issue is exclusively for cash.47 For example, if a
company wishing to acquire a business proposed to allot
ordinary shares as consideration to the vendor, it would be
impracticable to make a pre-emptive offer to the existing
shareholders on the same terms. Nevertheless, the restriction of
the statutory pre-emptive provisions to cash issues, even if
compelled by necessity, does make a severe hole in the principle
of protecting shareholders against dilution, especially dilution of
their voting position. In relation to financial dilution some
alternative protection is provided by Ch.6 of Pt 17 of the Act,
requiring an independent valuation report in the case of share
issues by public companies for a non-cash consideration,48 but,
even so, that section does not confer individual rights upon
shareholders in the way that the pre-emption rules do.
24–8
Futhermore, the exclusion of share issues which are wholly or
partly other than for cash gives rise to possibilities of
manipulation so as to avoid the pre-emption rules. For example,
if any part of the consideration, even a minor part, is not cash,
then it appears that the pre-emption rules are excluded. This may
be of particular interest to private companies. In other cases it
may well be possible to restructure the transaction so that the
cash is provided otherwise than to the issuer in exchange for its
shares. Thus, where Company A wishes to acquire part of the
business of Company B, the latter wishing to receive cash,
Company A might issue new shares to raise the necessary
money, if it does not have sufficient available cash, thus
attracting the pre-emption provisions in relation to its
shareholders. Instead, however, Company A might issue its
shares to Company B, in exchange for the latter’s assets and thus
without attracting the pre-emption provisions, Company A
having previously arranged for an investment bank to offer to
buy the shares from Company B at a fixed price and to place
them with interested investors. Such a “vendor placing” gives
Company B the cash it wanted, whilst relieving Company A of
the need to abide by the pre-emption rules.49
24–9
Assuming none of the above limitations apply, the pre-emption
obligation requires the company not to allot equity securities to
any person unless it has first offered, on the same or more
favourable terms, to each person who holds shares covered by
the right a proportion of those equity securities which is as
nearly as practicable equal to the shareholder’s existing
proportion in nominal value of the existing shares.50 Only if the
period for the existing shareholders to accept the offer has
expired (now at least 14 days)51 without the offer being accepted
(or if it was positively rejected within this period) may an offer
be made to outsiders. If the pre-emptive offer is not accepted in
full, shares not taken up may be allotted to anyone; accepting
existing shareholders do not have further pre-emptive rights in
respect of those unaccepted shares.
Waiver
24–10
The shareholders collectively can forego their statutory pre-
emption rights: they can be excluded or disapplied. Exclusion
means the statutory provisions do not operate at all;
disapplication may mean that but it also embraces the situation
where the statutory provisions apply “with such modifications as
the directors may determine”52 or such modifications as are
specified in the disapplication resolution.53 Not surprisingly,
both exclusion and disapplication are easier for private than for
public companies. A private company may exclude the
obligation to offer pre-emptive rights (or a provision relating to
the method of offering, most likely the time during which the
offer must be open) through a provision in its articles—either
generally or in relation to allotments of a particular description.54
As for disapplication, if the private company has only one class
of shares, so that the directors do not need shareholder authority
to issue new shares, its articles or a special resolution of the
shareholders may remove the pre-emptive obligation or give the
directors power to modify the statutory scheme.55
In relation to public companies exclusion is available only
where the articles provide a pre-emptive alternative to the
statutory scheme. This provision is designed to deal with
situations where the company has more than one class of
ordinary share.56 The statutory pre-emptive obligation57 is
drafted in such a way as not to differentiate among different
classes of ordinary shares, so that an offer of ordinary shares of
one class would have to be made pre-emptively to all classes of
ordinary shareholder. Section 568 permits a company to
substitute an alternative pre-emption scheme in its articles which
operates on a class basis. Non-compliance with the procedure in
the articles carries the same consequences as non-compliance
with the statutory procedure.58
As for disapplication, the provisions applicable to public
companies (and private companies with more than one class of
share) are built onto the rules on directors’ authority to issue
shares, discussed above. Where such authorisation is needed and
has been given “generally”,59 the articles or a special resolution
may disapply the pre-emption rights entirely or give the directors
a discretion to apply them with such modifications as they may
determine.60 The disapplication lasts only so long as the general
authority and, if the authority is renewed, the disapplication will
need renewal as well. In other words, the disapplication can be
for a maximum period of five years.
Alternatively, where authorisation is required, and it has been
given either generally or specifically, a special resolution may
disapply the statutory provisions in relation to a particular
issuance of shares or determine that they shall apply only with
such modifications as are specified in the resolution.61 Again, the
disapplication lasts only so long as the authorisation to which it
relates, though this is a less important provision in relation to
specified allotments. Unusually for British company law, a
special resolution in relation to a specified allotment may not be
proposed unless it has been recommended by the directors, and
there is circulated a written statement by the directors of their
reasons for making the recommendation, the amount to be paid
to the company in respect of the proposed issue, and the
directors’ justification of that amount.62 A person, director or
otherwise, who knowingly or recklessly authorises or permits the
inclusion in the statement of information which is misleading,
false or deceptive commits a criminal offence.63
24–11
It is relatively common for public companies to make use of the
disapplication provisions, even where the directors have every
intention of respecting the principle of pre-emption, because
greater flexibility can be built into the arrangements. A common
desire is to exclude from the offer shareholders in foreign
jurisdictions whose securities laws are regarded as excessively
burdensome in relation to the number of the company’s investors
located there.64 Even if the statutory rules have been disapplied,
however, a publicly traded company is likely to be subject to the
Listing Rules,65 but these specifically permit pre-emptive offers
to exclude holders whom the company considers “necessary or
expedient to exclude from the offer on account of the laws or
regulatory requirements of” another country.66 Finally, there may
be disapplication in relation to treasury shares, whether held by a
public or a private company.67 The directors do not require
shareholder consent to sell treasury shares (since they are
already in issue) but such sales are caught in principle by the
statutory pre-emption right.68 However, the directors may be
given power to allot free of that right, either generally (by the
articles or by special resolution) or in relation to a specified
allotment (by special resolution).69 One of the arguments for
permitting treasury shares was that it gave companies freedom to
raise relatively small amounts of capital quickly, which a pre-
emption right would hinder, so that it seems correct policy to
facilitate the disapplication of the pre-emption right to treasury
shares.70
Sanctions
24–12
A civil (but not a criminal) sanction is provided by the Act.
When there has been a contravention of the pre-emption right
(either by not providing it all or by not providing it in the way
required by the Act), the company and every officer of it who
knowingly authorised or permitted the contravention are jointly
and severally liable to compensate any person to whom an offer
should have been made for any loss, damage, costs or
expenses.71 Where under the provisions discussed immediately
above, the statutory provisions are applied in a modified way,
these sanctions will equally apply to a contravention of the
modified provisions.72 The Act does not invalidate an allotment
of shares made in breach of the pre-emptive provisions, no doubt
in order to protect the legitimate interests of third parties.
However, in Re Thundercrest Ltd73 the judge was prepared to
rectify the register74 as against the directors of a small company,
with only three shareholders, where the directors responsible for
the breach of the pre-emptive provisions had allotted the shares
in dispute to themselves.
Listed companies
24–13
Institutional shareholders (pension funds and insurance
companies in particular) have traditionally held a very
significant proportion of the shares of publicly traded
companies.75 For a long time they have placed a high value on
pre-emptive rights. Consequently, market practice, influenced by
the institutional shareholders, goes beyond the statutory rights
embodied in the Act. Indeed, pre-emptive rights were a feature
of market practice in London before the statutory pre-emption
right was introduced into legislation in 1980. There are two
channels through which the institutional shareholders have been
able to advance their views. First, they have been able to
influence effectively the rules made by the FCA relating to the
listing76 of companies and the rules made by the London Stock
Exchange relating to the admission of securities to trading
(though the former are the more important source of rules).
Secondly, they have taken collective action to draw up rules to
govern what action they will or will not support as shareholders
in the pre-emption area. We will look first at the Listing Rules.
The most important Listing Rule in this area is probably the
one which limits the discount at which a company may issue
shares, other than by way of a rights issue, to 10 per cent of the
prevailing market price, unless the shareholders approve a higher
discount.77 This means that, if the company sticks to the bare
pre-emptive entitlement set out in the statute, those shareholders
who cannot afford to take up their rights face only a limited
financial loss, as a result of the cap on the discount. To put the
matter from the company’s point of view, if the success of the
pre-emption offer is thought to require a greater discount than 10
per cent, the directors will need the shareholders’ consent to
proceed with the issue other than as a rights issue.78 The rule is
thus an important restraint on the directors’ powers to proceed
with an open offer and pushes them instead in the direction of a
rights issue, where the shareholders’ financial interests are
protected.
Pre-emption guidelines
24–14
The overall picture which emerges of the above analysis is that
existing shareholders’ right to pre-emption, which the Act
creates, and to pre-emption on a rights basis, which the Listing
Rules indirectly create, may be removed by collective decision
of the shareholders. So the impact in practice of both the statute
and the Listing Rules turns on shareholders’ willingness (or
otherwise) to forego their rights. Since institutional shareholders
are strongly opposed to dilution of their positions, they have
sought to agree guidelines determining the circumstances in
which consent to disapplication will be given. Originally, the
institutions acted alone in drawing up the guidelines but, given
their importance for the financing of companies and the
operation of the capital markets, an element of public interest
has been injected by conducting the discussions under the
auspices of, first, the Bank of England, then the London Stock
Exchange and, now, the Financial Reporting Council.79
Institutionally, this development has resulted in the creation a
Pre-emption Group,80 which issues the guidelines which
determine institutional shareholders’ attitudes to disapplication
resolutions, whether under the statute or the Listing Rules. The
guidelines have no legal status but they articulate a strongly held
and practically significant attitude on the part of the institutions
about the value of pre-emptive rights. This policy of the
institutional investors has turned pre-emption on a rights basis
into an example of a “strong” default rule whose alteration
creates a significant hurdle for the management of the company.
Thus, the statutory provisions and the Listing Rules have much
more bite because of the difficulty of securing shareholder
consent to their disapplication other than in accordance with the
guidelines. On the other hand, if there were no default rules in
the statute and Listing Rules, the institutional shareholders
would face the more demanding task of securing an amendment
to a company’s articles of association, introducing a pre-emption
right.81
The guidelines, currently in the form of a Statement of
Principles,82 distinguish between general and specific
disapplication resolutions. The institutional investors will vote in
favour of general disapplication resolutions where the authority
is limited to no more 5 per cent of the ordinary share capital of
the company in any one year (plus a further 5 per cent for an
acquisition or capital investment which is identified at the time
the resolution is put forward). When acting under the general
disapplication resolutions, the company should raise no more
than 7.5 per cent in any rolling period of three years (excluding
the capital investment addition), without consulting with its
shareholders. Authority should not be sought for more than 15
months or until the next AGM, whichever is the sooner.83 In
consequence, disapplication resolutions have become a common
feature of the AGM agenda.
Controversy has raged over the rules relating to specific, non-
routine (often large-scale) disapplication resolutions, where the
institutions need to be persuaded to vote in favour of the
disapplication resolution and so need to be presented with the
business case for proceeding on a non-rights basis. It used to be
thought in some corporate circles that institutions would
normally vote against specific disapplication resolutions, but
after criticism from a government review,84 the rules were re-
drafted to make it clear this was not the case. What is abundantly
clear from the Principles, however, is that, where the
institutional shareholders hold sway, the company will have no
chance of securing a general, large-scale disapplication of the
pre-emption requirement. The Principles envisage specific
resolutions being supported only in the context of a specific
project, where the need for non-pre-emptive finance can be
demonstrated and justified.85
Criticism and further market developments
24–15
The pre-emptive right, and the rights issue in particular, have
always been unpopular amongst management, just as it has been
popular amongst shareholders. Two main criticisms are
advanced. First, that it reduces the pool of investors to whom a
company may turn for additional equity finance and so it pushes
up the cost of equity finance. Secondly, a rights issue takes
longer to carry out than either an open offer or a placing (i.e.
raising finance from a small number of investors without making
a public offer) and so exposes the company to market risk during
the offer period. The arguments in principle for and against the
rights issue were examined in the Myners Review of 2005.86
Paul Myners came out in favour of rights issues. He was
particularly impressed by the corporate governance argument in
favour of pre-emption. This is that this doctrine makes it difficult
for a management, which has failed its existing shareholders, to
obtain finance from a new group of investors, letting them into
the company cheaply (and at the expense of the existing
investors) as part of an implicit bargain to back the existing
management against the complaints of the first group of
investors. By contrast, pre-emption makes management seeking
further equity finance sensitive to the views of the existing
investors from whom it must be raised.
In 2008, the first full year of the financial crisis, the issue
came to fore again as a number of banks had to raise large sums
of fresh capital. All succeeded in doing so, but often only after
great difficulties. The Rights Issue Review Group87 was
appointed to see if the principle of rights issues could be
maintained whilst mitigating the associated fund-raising
difficulties. The main issue was perceived to be one of timing. If
the length of the rights issue process could be reduced, the
issuer’s exposure to market risk (possibly even to market
manipulation)88 would also be reduced, an important
development in turbulent markets.89
24–16
An obvious first step, already implemented, was to reduce the
period for shareholders to decide whether to take up their rights
from 21 to 14 days, the minimum specified in the Second
Directive.90 However, the main timing problem was seen to flow
from the need to both secure shareholders’ consent and to
provide the (now) 14-day period for shareholders to decide
whether to take up their rights, and the inability to have those
two activities running concurrently. It may not be clear why
shareholder consent should be needed if what is proposed is a
rights issue. There are three possible answers. First, the directors
may not have in place a large enough authority to issue shares
(in any way) without shareholder consent, though the changes
recently made to the Investment Association Guidance91 make
that now less likely. Second, the directors may wish to make a
non-statutory pre-emption offer and so need shareholder consent
to disapply the statutory pre-emption provisions.92 Thirdly, the
Pre-emption Group’s Principles suggest, though not clearly, that
institutional shareholders expect shareholder approval for deeply
discounted rights issues (above 5 per cent), even though the
statute does not specify any cap on the level of discount nor does
the Listing Rules cap apply if a rights issue is proposed.
Assuming shareholder approval is required, the difficulty
about making the offer to the shareholders before that approval
is obtained is that trading in the rights (so-called “trading in nil
paid form”) necessarily begins as soon as the offer is made
(since the trading must be completed within 14 days). If,
however, shareholder approval for the issue is not ultimately
obtained, unscrambling the trading may prove very difficult.
Consequently, practice is to obtain approval before making the
offer. An open offer does not suffer from this difficulty and so
the offer can be launched and shareholder approval sought at the
same time, the offer being conditional upon shareholder
approval being obtained. However, the open offer gives no
protection against dilution to the shareholder who cannot take up
the offer. Consequently, market practice has developed recently
the “compensatory open offer”, under which any shares not take
up by the shareholder are sold by the company (or its
underwriters) into the market and any premium obtained over
the offer price is paid to the shareholder who did not take up the
offer.93 In effect, the burden of trading the rights to the new
shares passes from the shareholder under a rights issue to the
company under the compensatory open offer, but the economic
impact on the shareholder should be very similar.94 This may be
a burden the company is happy to accept in order to speed up the
fund raising process.95
THE TERMS OF ISSUE
24–17
As noted in the previous chapter,96 the rights attached to the
shares to be issued are likely to be set out in the company’s
articles. What will not be set out there is the price or other
consideration to be asked in exchange for the shares. Here the
directors have a free hand, subject to the rules on capital raising
discussed in Ch.11.97 As far as private companies are concerned,
these rules are not demanding, consisting mainly of the rules on
commissions and requiring shares not to be issued at a discount
to their nominal value (not to be confused with a discount to the
market price, against which the pre-emption right, as we have
just seen, aims to provide protection). With regard to public
companies, the rules, implementing the Second Directive, are
more constraining, though they have recently been relaxed
somewhat.
ALLOTMENT
24–18
The process by which the company finds someone who is
willing to become a shareholder of the company is not
something about which the law says very much if there is no
offer to the public of the company’s shares98—although, as we
shall see in the next chapter, this is in fact now a very heavily
regulated area, if there is a public offer. What the Act does
assume is that the process of becoming a shareholder is a two-
step one, involving first a contract of allotment and then
registration of the member. As Lord Templeman said in 1995:
“The Act of 1985 preserves the distinction in English law between an enforceable
contract for the issue of shares (which contract is constituted by an allotment) and
the issue of shares which is completed by registration. Allotment confers a right to
be registered. Registration confers [legal] title.”99
This is consistent with the 2006 Act which defines the point at
which shares are allotted as the time when a person acquires the
unconditional right to be included in the register of members, but
does not require actual entry in the register.100
Renounceable allotments
24–19
In the case of a private company the processes of agreement and
registration will be achieved with little formality and without the
issue of allotment letters. If someone wants to become a
shareholder and the company wants him to, he will be entered on
the register and issued with a share certificate without more ado.
However, the advantage of constituting the agreement to become
a member in a formal letter of allotment is that it facilitates the
process described above in relation to rights issues101 of
“renouncing” the entitlement to be registered as a member in
favour of someone else, though the technique is not confined to
rights issues. Printed on the back of the letter there will be forms
enabling, for a short specified period, the allottee to renounce the
right to be registered as a member and the person to whom they
are ultimately renounced to confirm that he or she accepts the
renunciation and agrees to be entered on the register. Normally
the original allottee will not insert the name of the person to
whom they are to be renounced and the effect is then to produce
something similar to a short-term share-warrant to bearer.102 It is
not a negotiable instrument but once the renunciation is signed
by the original allottee, the rights can be assigned by manual
delivery of the allotment letter without a formal transfer. Before
the stated period ends, however, it will be necessary for the
name of the ultimate holder to be inserted, a signature obtained,
and the allotment letter lodged with the company or its
registrars.
Failure of the offer
24–20
Implementing art.32 of the Second Directive, the Act lays down
a default rule for public companies that no allotment of shares
shall be made pursuant to an offer to subscribe103 for shares
(whether the offer is to the public or not) unless the shares on
offer are taken up in full.104 This rule is designed to prevent an
investor ending up holding shares in a company which is less
fully capitalised than was expected when the offer was accepted.
If a full take-up of the shares is not achieved within 40 days of
making the offer, the money105 received from the offerees
becomes repayable in full, though without interest,106 and must
actually be repaid within a further eight days. The sanction for
this latter requirement is that the directors then become jointly
and severally liable to repay the money, with interest.107 If the
company actually proceeds with an allotment in breach of the
Act then the allotment is voidable by the offeree within one
month of the allotment (even if the company is in course of
winding up),108 and any director who knowingly contravenes or
permits the contravention of the prohibition on allotment
becomes liable to compensate the allottee and the company for
any loss, damages, costs or expenses.109 Despite these fearsome
sanctions, the rule is not enormously important in practice, for
two reasons. First, if the offer in terms says that the allotment
will proceed, even if not fully subscribed, or will proceed if
conditions falling short of full subscription are met, the
prohibition on allotment does not apply.110 So, the rule is really
one which requires only that the investors be told what risk they
run in relation to the take-up of the offer. Secondly, in relation to
offers to the public, failure to achieve a full take-up of the offer
is a serious matter, not only for the investors, but also for the
issuer, so that companies will arrange for the offer to be
“underwritten” in some way (i.e. normally an investment bank
agrees to take up the shares which are not bought by the
public).111
Once the shares have been allotted, the company must make a
return of allotment to the Registrar of companies, as discussed in
the previous chapter.112
REGISTRATION
24–21
As Lord Templeman indicated, allotment does not make a
person a member of the company. Entry in the register of
members is also needed to give the allottee legal title to the
shares. Section 112(2) says explicitly that a person “who agrees
to become a member of the company and whose name is entered
on the register of members is a member of the company”.113 The
Act now requires registration “as soon as practicable” and in any
event within two months of the date of allotment.114 Even when
registered, the shareholder will find difficulty in selling the
shares, if they are to be held in certificated form, until a share
certificate is received from the company. If the shares are to be
held in uncertificated form,115 then by definition no share
certificate will be issued. Instead, the company, by computer
instruction, will inform the operator of the electronic transfer
system of the identity of those to whom the shares have been
allotted and of the number of shares issued to each person.116
The lapse of time between allotment and registration in the share
register by informing the operator of the electronic transfer
system of what the company has done should be very much
shorter than the gap between allotment and the issue of share
certificates, where the Act gives the company up to two months
to complete the process.117
Bearer shares
24–22
A major exception in principle, though much less so in practice,
to the requirement of entry on the register in order to become a
member of the company was created by share-warrants to bearer.
Section 779 provided that a company, if so authorised by its
articles, could issue with respect to any fully paid shares a
warrant stating that the bearer of the warrant is entitled to the
shares specified in it. If similarly authorised, it could provide, by
coupons attached to the warrant or otherwise, for the payment of
future dividends.118 Title to the shares specified then passes by
manual delivery of the warrant,119 which is a negotiable
instrument.120 On their issue, the company removed from its
register of members the name of the former registered holder and
merely states the fact and date of the issue of the warrant and the
number of shares to which it relates.121 The bearer of the warrant
from time to time was unquestionably a shareholder but to what
extent, if at all, he was a member of the company depended on a
provision to that effect in the articles.122 Hence shareholding and
membership are not necessarily coterminous if share warrants
are issued. However, again subject to the articles, the bearer of
the warrant was entitled, on surrendering it for cancellation, to
have his name and shareholding re-entered on the register.123 In
practice this exception was unimportant because bearer
securities have never been popular with British investors or
British companies and are rarely issued and hardly ever in
respect of shares, as opposed to bearer bonds (i.e. debt securities
which are sometimes issued to attract continental investors who
have a traditional liking for securities in bearer form). It is
fortunate that bearer shares were such a rarity for, if they became
common, it would play havoc with many provisions of the Act.
In the end, amendments made by the Small Business, Enterprise
and Employment Act 2015 prohibited companies from issuing
share warrants in the future and made provision for the
mandatory conversion of existing warrants back into shares,
precisely because they were thought likely to undermine that
Act’s enhanced provisions on disclosure of share ownership.124
CONCLUSION
24–23
Where a company makes a non-public offer of shares, a situation
which will necessarily include most share offers by private
companies, the rules discussed above are all that the company
will need to concern itself with. Where, however, a public offer
of shares is to be made, the extensive regulation considered in
the next chapter will come into play. Even then, the relevant
regulation is additional to the rules considered in this chapter
and, though it may supplement, does not replace them. In fact,
rules discussed in this chapter, for example those relating to pre-
emptive rights, can be very important in public offers, but the
point is that such rules are not confined to public offers but apply
to share issues of a non-public type as well. Protection of the
position of existing shareholders through pre-emption is as
important in a private as in a public company, indeed arguably
more so in the absence of a market upon which the shares of a
disgruntled shareholder can be disposed of.
1 Directive 77/91/EEC ([1997] O.J. L26/1), subsequently amended and re-stated as
Directive 2012/30/EU ([2012] O.J. L315/74). The references in this chapter are to the re-
stated Directive.
2 Even this term is not fully precise, since a company may make public offer of its
shares without securing their admission to a trading facility.
32006 Act s.755. The prohibition applies to both shares and debentures: s.755(5). Nor
may a private company secure admission of existing securities to the official list without
making a public offer: FSMA 2000 s.74 and the Financial Services and Markets Act
2000 (Official Listing of Securities) Regulations 2001 (SI 2001/2956) reg.3. On the
“official list” see the following chapter at para.25–9.
4 See para.25–12 for a discussion of direct and indirect share offerings.
5
2006 Act ss.755(1) and 760.
6 2006 Act s.757.
7 2006 Act s.758(2)—but not if it is “impracticable or undesirable” to do so.
8 s2006 Act s.758(3). The remedial order may be make whether or not the company is
ordered to be wound up.
9
s2006 Act s.759(1).
102006 Act s.759(3) and (5). Those involved could include advisers, such as investment
banks. Where the company is ordered to re-purchase, the court may reduce its capital.
11
2006 Act s.755(3)(b)(4). On the requirements of converting to a public company see
para.4–40.
12 2006 Act s.756(2).
13
2006 Act s.756(3)(a). If the securities do in fact end up in public hands within six
months of their initial allotment or before the company has received the whole of the
consideration for the shares, the company is presumed to have allotted them with a view
to their being offered to the public: s.755(3).
142006 Act s.756(3)(b)–(6). Such offers may be renounceable in favour of other
persons, provided such persons also fall within the “domestic” category.
15
Discussed at paras 25–18 et seq.
16
See para.25–19.
17Completing, paras 2.77–2.82; Final Report I, paras 4.57–4.58. Examples of
exemptions under the Directive which might be thought inappropriate for private
companies were offers to professional investors, as part of takeovers, and of large
denomination shares.
18 The rules discussed in this section, unlike those relating to public offers, do not apply
to debt securities which have no equity element.
19 See para.19–16.
20 Directive art.29. Even then, only the consent of shareholders with voting rights under
the company’s articles.
21
Developing, paras 7.28–7.33.
22 2006 Act s.550.
23 2006 Act s.549(3)–(4).
24
2006 Act s.549(6).
25 2006 Act s.549(1). This may help to explain in part why the “shareholder rights plan”
or “poison pill” against takeovers is uncommon in the UK, for the effectiveness of the
plan depends heavily upon the directors being able to issue warrants to subscribe for
shares without shareholder approval.
26 2006 Act s.549(3).
27When the section talks about rights to “convert any security into shares in the
company” it means newly created shares, not shares already in existence.
28 2006 Act s.551(2). The section does not in terms require details of the use to which
the funds will be put to be given to the shareholders. However, if the directors are also
seeking authority in relation to a specific allotment to remove pre-emption rights, they
are obliged to put forward a justification: see s.571(6) and fn.62, below. Moreover, the
general rules on resolutions at meetings of shareholders may require it. See para.15–47.
The resolution need only be an ordinary resolution, even if it amends the company’s
articles (s.551(8)), but the resolutions must be notified to the Registrar (s.551(9)).
Authorisation can be given in the articles, but this is unlikely in the case of “particular”
authorisation.
29
2006 Act s.551(2), (3), (4). Renewals of authority are to be given by resolution, even
if the original authority was contained in the articles: s.551(4)(a). As s.551(7) makes
clear, the time limit relates to the directors’ authorisation of the share offer, not to the
allotment of the shares (which might occur after the time limit had expired). A time limit
is required even for particular exercises of the power.
30
2006 Act s.551(3). In relation to allotments of rights to subscribe or to convert, what
has to be stated is the maximum number of shares that can be allotted pursuant to the
rights: s.551(6).
31
2006 Act s.551(2).
32
2006 Act s.551(4)(b). This will be a case of an ordinary resolution amending the
articles. See fn.28, above.
33 See now Investment Association, Share Capital Management Guidelines, 2014, 1.1
(available at https://www.ivis.co.uk/media/11164/Rebranded-Share-Capital-
Management-Guidelines-3-June-2015-.pdf [Accessed 26 January 2016].
34 This principle is also to be found in the Second Directive (art.33) but has again been
applied in the UK to private as well as public companies. Pre-emption in relation to new
shares issued by the company should be sharply distinguished from pre-emption on the
transfer of shares by a shareholder, common in private companies, but entirely a matter
for private contracting through the articles. See para.27–7.
35
See also para.16–26 on the collateral purposes doctrine which has a similar effect but
operates only when the directors’ predominant purpose is an improper one, and Ch.20 on
the unfair prejudice remedy.
36See the distinction drawn between the loss suffered by the company and that by the
shareholders when shares are issued for an inadequate consideration in Pilmer v Duke
Group Ltd [2001] 2 B.C.L.C. 773 Aus. HC.
37
In the case of small companies, the shareholder may be able to challenge the decision
to issue new shares under the unfair prejudice procedure. See Re A Company [1986]
B.C.L.C. 362; and Re Sam Weller Ltd [1990] Ch. 682.
38
For a worked example of this analysis see Bank of England, Guidance on Share
Issuing, 1999, Technical Annex, showing that the total value of the rights will always
match the loss of value on the holding, no matter the size of the discount or the
proportion of the existing shares to be issued on a discounted basis. At the time of the
trading of the rights the actual post-issue price is unknown but a “theoretical ex rights
price” can be easily calculated.
39 See para.25–14.
40
A third course of action is for the shareholder to sell part of the rights and to exercise
the other part, so as to maintain the value of his or her shareholding in the company (but
not the proportion of the shares held), rather than simply to receive compensation for
that drop in value by selling all the rights. This action is called, obscurely, “tail-
swallowing”. The “discount” referred to in this discussion is, of course, a discount to the
prevailing market price of the shares, not to their par value, which is not permitted (see
para.11–4, above).
41
It recognises, of course, that a rights issue is a permissible way of providing the pre-
emptive right. See the reference to renouncement of rights to allotment in s.561(2).
42
For further discussion see E. Ferran, “Legal Capital Rules and Modern Securities
Markets” in K.J. Hopt and E. Wymeersch (eds), Capital Markets and Company Law
(Oxford: OUP, 2003).
43
2006 Act s.560(1). There is no upper limit to this amount (and it would be
impracticable to set one) with the result that it is possible to fix a dividend limitation so
high that the holders would in fact be entitled to the whole or the lion’s share of profits
without affording existing shareholders pre-emptive rights.
44
2006 Act s.564. See para.11–20. Since issuance of a bonus share involves the
capitalisation of the company’s reserves, no payment by shareholders is involved and the
shares must be allotted pro-rata to those entitled to the reserve, were it distributed, or, in
the case of an undistributable reserve, whose contributions constituted the reserve (as in
the case of the share premium account).
45 2006 Act s.566. Even if those scheme members may be entitled to renounce or assign
their rights so that, if they do, the shares when allotted will not be “held in pursuance of
the scheme”. Employees’ share schemes would be unworkable if every time a further
allotment was to be made pursuant to them all equity shareholders had to be offered pre-
emptive rights. If, however, equity shares have been allotted under the scheme, the
employee holders should have the same rights to protect their proportion of equity as
any other shareholder.
46
2006 Act s.577. Indeed, it is difficult to see how the rules could be so applied.
47
2006 Act s.565.
48See above, para.11–16. But the chapter does not apply to private companies or to
share issues even by public companies in connection with takeover offers or mergers,
where there is in fact a considerable risk of financial dilution. Listed company
shareholders are better protected, for the rule restricting discounts to 10 per cent (see
para.24–13) applies also to a “vendor consideration placing”.
49 It is difficult to regard this scheme with great disapprobation, since, if Company B
had been prepared to take the shares of Company A in exchange for its assets, and then
immediately sold them, no question of pre-emption would have arisen. A legitimate
concern of the existing shareholders in such a case arises if the shares are placed with
their new holders at a discount to the market price. For listed companies, the Listing
Rules restrict the discount to 10 per cent, unless the shareholders have approved
something larger: LR 9.5.10.
50 2006 Act s.561. Treasury shares are excluded from the calculations required by this
section: s.561(4). The details of how communication is to be made with the shareholders
are set out in s.562.
51 2006 Act s.562(5). Nor can the offer be withdrawn, once made: s.562(4).
52 2006 Act ss.569(1), 570(1).
53 2006 Act s.571(1).
54 2006 Act s.567. A provision in the memorandum or articles which is inconsistent with
ss.561 or 562 has effect as an exclusion of that subsection: s.567(3).
552006 Act s.569. On shareholder authority to issue in private companies see para.24–4,
above.
56
2006 Act s.568. The problem does not arise if the other classes of share are not
ordinary but preference shares, because they will not benefit from a pre-emption right.
57
2006 Act s.561.
58
2006 Act ss.568(4),(5), on which see below.
59
See para.24–5, above, for the meaning of “general” authorisation.
60
2006 Act s.570.
61
2006 Act ss.571.
62
2006 Act ss.571(5)–(7). These provisions track art.33.4 of the Directive, but the
common law would produce a similar disclosure requirement.
63
2006 Act s.572.
64
A Report to the Chancellor of the Exchequer by the Rights Issue Review Group,
November 2008, 6.5.
65 See para.24–13.
66 LR 9.3.12. This is primarily designed to deal with the situation where a company has
shareholders resident in the USA. Under the Federal securities legislation it may have to
register with the SEC if it extends the offer to such shareholders. Hence the present
practice is to exclude such shareholders and to preclude those to whom the offer is made
from renouncing in favour of a US resident. This practice was upheld in Mutual Life
Insurance of N.Y. v Rank Organisation [1985] B.C.L.C. 11, but a fairer arrangement
would surely be for the rights of the American shareholders to be sold for their benefit?
67
On which see para.13–26, above.
68
2006 Act s.560(2)(b).
69 2006 Act s.573.
70 However, existing shareholders in listed companies are protected against dilution by
the imposition of a limit of 10 per cent to any discount applied on the sale of the treasury
shares: LR 9.5.10.
71
2006 Act s.562. Proceedings must be commenced within two years of the filing of the
relevant return of allotments or, where rights to subscribe or convert are granted, within
two years from the grant: s.563(3). As noted, the same applies to contraventions of the
substitute right in the company’s articles relating to classes of ordinary shares: s.568(4),
(5).
72 2006 Act ss.569(2), 570(2), 571(2), 573(3),(5).
73
Re Thundercrest Ltd [1995] 1 B.C.L.C. 117.
74 See para.27–19.
75 See para.15–25.
76 On listing see para.25–9.
77LR 9.5.10. This rule applies only to companies with a premium listing, on which see
para.25–6.
78
Since the requirement is that “the terms of the offer or placing at that discount have
been specifically approved by the issuer’s shareholders”, the shareholder approval
cannot be given in practice in advance of the decision to issue.
79
On which see para.21–17.
80
http://www.pre-emptiongroup.org.uk [Accessed 26 January 2016]. The first
guidelines were adopted in 1987. The Principles are supported by the National
Association of Pension Funds and the Investment Association.
81
Hence the reported opposition of the institutional investors to the removal of the pre-
emption requirement from the Second Directive: Financial Times, UK edn, 22 October
2007, p.18 and ibid. 23 October 2007, p.23. Of course, the removal of the right from the
Second Directive would not prevent the UK from maintaining the statutory default.
82
The latest version dates from 2015 and is available on website identified in fn.80. The
Principles are said to apply formally only to companies listed on the Premium Listing
segment of the Main Market of the London Stock Exchange, but standard listing
companies and those on the Alternative Investment Market are “encouraged” to apply
them.
83
Principles, Pts 2A and 2B.
84
DTI, Pre-Emption Rights: Final Report, February 2005 (URN 05/679). It was in this
re-drafting process that the “Guidelines” became “Principles”, perhaps to emphasis this
point.
85
Principles, Pt 3.
86
See fn.84.
87 Above, fn.64.
88 On which see para.30–39.
89
The discussion below focuses on speeding up the formal offer process.
90
2006 Act s.562(5). The change was made in 2009. Similar changes were made to LR
9.5.6 to cater for non-statutory rights issues and to the AIM Rules for Companies (notes
to rr.24 and 25).
91 Above para.24–5.
92 See para.24–11.
93
See above para.24–6 as to why the market price can be expected to be higher than
offer price. LR 9.5.4 already imposed this rule in favour of offerees in a rights issue who
did not take up the offer, so that those unfamiliar with the rights issue procedure were
not disadvantaged.
94
However, a shareholder cannot engage in tail swallowing (above fn.40) under the
compensatory open offer.
95 Because of these market developments the FSA recommended against some of the
more radical suggestions from the RIRG which would allow offer and approval periods
to run simultaneously. See FSA, Report to HM Treasury on the implementation of the
recommendations of the Rights Issue Review Group, April 2010.
96
98
The general common law rules on fraud, misrepresentation and negligence will
provide some protection to investors: see paras 25–31 et seq., below.
99
National Westminster Bank Plc v IRC [1995] 1 A.C. 111 at 126 HL. From this, Lord
Templeman reasoned that shares were not “issued” (the Companies Act does not define
the term) for the purposes of a taxing statute until the applicants for the shares were
registered as members of the company.
100
2006 Act s.558.
101
See above, para.24–7. Of course, a private company may not want to grant this
facility, which might be inconsistent with its articles (see para.27–7, below). The
statutory scheme of pre-emption rights does not require renouncing to be made
available.
102
103
The section thus does not apply to offers for sale of shares (see para.25–12) and does
not need to because the issue has been in effect underwritten.
104 2006 Act s.578(1). In fact, however, the rule has a much longer pedigree: CA 1948
s.47.
105
The rule applies, mutatis mutandis, where the consideration for the offer is wholly or
partly otherwise than in cash: s.578(4),(5).
106 2006 Act s.578(2).
107
2006 Act s.578(3). A director can escape liability if it can be shown that the failure
was not due to misconduct or negligence on the director’s part. If the company promises
to keep the monies advanced by a subscriber in a separate bank account and does so, it
seems that the monies will be held on trust by the company in favour of the investors: Re
Nan wa Gold Mines Ltd [1955] 1 W.L.R. 1080.
108
2006 Act s.579(1),(2). This means the assets contributed by the allottee are taken out
of the insolvent company’s estate, but only if the allotee acts within the one-month
period.
109 2006 Act s.579(3), subject to a two-year limitation period: s.579(4).
110
2006 Act s.578(1)(b)—or if the offer is stated to be subject only to certain conditions
(such as a 75 per cent acceptance) and those conditions are met.
111 See para.25–11.
112 At para.23–6.
113
On which, see Re Nuneaton Football Club [1989] B.C.L.C. 454 CA, holding that
“agreement” requires only assent to become a member. The subscribers to the
memorandum of association (above, para.4–5) are the first members of the company and
should be entered on its register of members, but in their case it appears that they
become members, whether this is done or not: Evans’ Case (1867) L.R. 2 Ch. App. 247;
Baytrust Holdings Ltd v IRC [1971] 1 W.L.R. 1333 at 1355–1356.
1142006 Act s.554. Failure to register is a criminal offence on the part of the company
and every officer in default.
115 See Ch.27.
116 Uncertificated Securities Regulations 2001 (SI 2001/3755) reg.34.
117
2006 Act s.769.
118
2006 Act s.779(3). Share-warrants to bearer must be distinguished from what is
perhaps the more common type of warrant, which gives the holder the right to subscribe
for shares in the company at a specific price on a particular date or within a particular
period. Such warrants are a form of long-term call option over the company’s shares.
They may be traded, but their transfer simply gives the transferee the option and does
not make him or her a member until the option is exercised.
119
2006 Act s.779(2).
120
Webb, Hale & Co v Alexandria Water Co (1905) 21 T.L.R. 572.
121
2006 Act s.122(1).
122
2006 Act s.122(3).
123 2006 Act s.122(4)—now repealed.
124
2006 Act s.779(4), as added; 2015 Act s.84 and Sch.4. The prohibition operated from
May 2015; the period for mandatory reconversion ended a year later.
CHAPTER 25
PUBLIC OFFERS OF SHARES
Introduction 25–1
Public offers and introductions to public markets 25–2
Regulatory goals 25–3
Listing 25–5
Types of public market 25–7
The regulatory structure 25–10
Types of public offer 25–11
Admission to Listing and to Trading on a Public Market 25–15
Eligibility criteria for the official list 25–15
Exchange admission standards 25–16
The Prospectus 25–17
The public offer trigger 25–18
Exemptions from the prospectus requirement on a
public offer 25–19
The admission to trading trigger 25–20
The form and content of prospectuses 25–22
Verifying the prospectuses 25–26
Publication of prospectuses and other material 25–30
Sanctions 25–31
Compensation under the Act 25–32
Civil remedies available elsewhere 25–36
Criminal and regulatory sanctions 25–41
Cross-Border Offers and Admissions 25–44
De-listing 25–45
INTRODUCTION
25–1
This chapter is concerned with a subject that takes us into the
area of securities regulation or capital markets law. Nevertheless,
it is not a subject which books on company law can ignore; how
public companies go about raising their capital from the
investing public and the legal regulations that have to be
complied with when they do are central to the operations of large
companies. An elaborate discussion of this specialised branch of
legal practice is inappropriate in a book of this sort but an outline
is essential. The rules considered in this chapter generally apply
to “securities”, i.e. both to shares and debt instruments (for
example, bonds). The focus of this chapter will be on share
issues but we will notice the major divergences when debt
securities are issued, as and when is relevant. Debt securities are
the lesser subject in this chapter, because they are less often
offered to the public even by companies which issue shares to
the public and because bonds are less frequently traded on public
markets (as opposed to “over the counter”). Nevertheless, to an
extent, this chapter crosses the divide between Pts 6 and 7 of the
book.
Public offers and introductions to public markets
25–2
There are two distinct, though usually combined, operations
which may take place when a large company seeks to raise
finance from the investing public. In the first place, it needs to
make its case to those people who may be interested in investing
in it by purchasing its securities. As we shall see below, the
company may choose among a number of different ways of
putting itself before investors. The most heavily regulated of
these methods is the public offer of securities, simply because
the company addresses its publicity to a wide range of persons
who may include the ill-informed and the gullible as well as the
experienced and well-informed. When a company makes a
public offer of its shares for the first time, that is usually termed
an “initial public offering” (“IPO”), and this is often a major
event in the life of the company. But it may well make further
public offerings at a later stage (“secondary” offers). The
document (the “prospectus”) through which public offers are
made is regulated heavily by the law. From this perspective, the
law relating to prospectuses can be viewed as a branch of
consumer protection legislation, but concerning a product which
is very difficult to evaluate. The value of shares depends heavily
upon the future performance of the company and cannot be
ascertained, as with a motor car, for example, by visual
inspection and a test drive.
It will normally be the case that a company seeking to raise
substantial funds from investors will also secure that the
securities to be issued will be admitted to trading on a public
securities market, such as one of the markets operated by the
London Stock Exchange. The reason the company will normally
take this extra step is that the willingness of investors to buy its
securities will be increased if there is a liquid market upon which
those securities can be traded after they have been issued. As we
have seen, a shareholder is normally “locked into” the company
after the shares have been purchased, in the sense that the
investor, short of winding up, cannot require the company to buy
back the shares, even at the later prevailing market price, except
in the case of some types of redeemable share. Equally, bonds
are not normally redeemable at the request of the investor until
after some specified period has elapsed and perhaps not before
they reach their maturity date. Therefore, a person who wishes to
withdraw from an investment will normally be constrained to
find another investor willing to purchase the securities. A liquid
securities market will facilitate this operation, to the benefit of
both investors and the company, which is likely to be able to sell
its securities at a higher price if they have access to the liquidity
afforded by a public market.
However, the mere admission of securities to trading on an
public market also involves putting those securities before the
investing public, even if there is no concomitant public offer,
since it is now open to the public to acquire the company’s
securities, this time not directly from the company but from
those who already hold them. Hence, there is a strong argument
for having the same information disclosure upon admission of
securities to a public market as when the company offers its
securities directly to the public. The argument is even stronger if,
as is usual, both events occur at the same time. However, there is
no legal requirement that this should be so. A company may
offer its securities to the public without securing their admission
to public market (for example, where it does not expect or want
the securities to be traded to any significant degree and so is
content to rely on sellers seeking out potential purchasers
privately). Or the driving force1 behind the admission of the
securities to the market may be an existing large shareholder (for
example, the Government in a de-nationalisation issue) which
wishes to liquidate or reduce its holding, but the company does
not intend at that time to raise additional finance.
Our main concern in this chapter is with the financing of the
company and the public offer of securities as a form of corporate
finance. Consequently, the core transaction which we examine is
one in which the company both makes a public offer of its shares
and, at the same time, secures the admission of the shares to
trading on a public market.
Regulatory goals
25–3
We have referred above to the law relating to public offers as
consumer law and that is a very strong strand in the thinking of
those responsible for the rules in this area. However, it would be
wrong to see the regulation as nothing but a form of consumer
protection. In fact, scholarship today stresses the function of
regulation in this area as a way of promoting “allocative
efficiency”, that is, of promoting investment on the basis of an
accurate understanding of the risk and reward profile of
particular projects which the issuance of the shares will finance.
This objective furthers the interests not only of investors but of
companies and of the economy generally, for effective
regulation promotes the allocation of scarce investment
resources to the projects with the highest returns. But what sort
of regulation will best facilitate the accurate assessment of
different projects?
It is conventional in this branch of law to make a distinction
between “merit” regulation and disclosure of information. Under
the former approach, a regulator permits an offer to be made to
the public only if the securities on offer or the company issuing
them (“the issuer”) pass certain quality tests, whereas the latter
simply puts information in the hands of investors and leaves it
up to them to make up their own minds about investing.
Although the early regulation of public offers (at state level in
the US) adopted the merit regulation approach,2 the disclosure
approach has been the predominant one in all jurisdictions since
its adoption by federal US law in the great reforms of 1933 and
1934.3 However, disclosure has never driven out all elements of
merit regulation. Although what is required varies from market
to market, disclosure is never all that is required. As a Canadian
committee once remarked, with heavy irony, “it would be
improbable that a securities commission in a disclosure regime
would approve a prospectus that said, truthfully, that the
promoters of the company intended to abscond with the proceeds
of the public offering, or that the company’s business enterprise
had no hope of success”.4 Thus, elements of merit regulation,
referred to in the UK as “eligibility requirements”, survive in
even the most disclosure-oriented regime.
The triumph of disclosure as the predominant regulatory
philosophy in this area is probably a reflection of the decision
the investor has to make. Prospective subscribers to the ordinary
shares to be issued by a company normally obtain no legal
entitlement to a return on their investment and so they are
essentially making a judgment about the company’s business
prospects in the future and the appropriate price to pay in the
light of those prospects. If the company makes good profits, the
ordinary shareholders will benefit; if it makes heavy losses,
those will fall first on the same people. The prospective
purchaser of shares has to take a view about how the industry in
which the company is active will evolve and about the qualities
of the company’s management.5 Nobody can be sure about the
future. Using merit regulation to exclude certain public offers
risks excluding a company whose track record is not good but
which has a perfectly decent story to tell about its future.
Further, heavy merit regulation may carry the implication that
those offers that are permitted to proceed benefit from some sort
of public guarantee of the company’s future success, something
the public authorities are unlikely to wish to provide. Merit
regulation thus tends to play a limited role. Even disclosure of
information does not make the investor’s task easy, because the
one piece of hard information the investor requires—what will
be the issuer’s financial results in the future?—is by definition
not available. However, information about the company’s
present and recent activities, its proposals for the future and the
terms of the securities on offer can help to guide the investment
decision, even if it cannot take all risk out of the process. Indeed,
if all risk could be eliminated, there would be no need for equity
finance in the first place.
25–4
A further question about the disclosure regime, which has been
hotly debated, is whether production of the requisite level of
information requires mandatory disclosure rules. It can be
argued that, a prospectus being a selling document, those
companies with good stories to tell would make full disclosure
of information and use private “bonding” mechanisms (such as
certification by independent third parties) to convince investors
of the truth of what they say. Companies with less good stories
would follow suit, for fear that investors would deduce from
inadequate disclosure that the prospects for the company were
dire. Only companies with truly dire prospects would make
inadequate disclosure and investors would draw the correct
conclusions from such inadequate prospectuses. Whether this
theory works in practice seems never to have been tested
satisfactorily, but even if self-interest would generate extensive
disclosure, mandatory disclosure rules have certain advantages
over leaving it to the issuers to decide for themselves the extent
of the disclosure. First, the state sanctions available for breaches
of the mandatory rules (criminal, civil and regulatory sanctions)
may be more credible to investors than the private bonding
mechanisms companies themselves could produce. Secondly,
mandatory rules may produce more uniformity in disclosure than
disclosure decisions taken by issuers on an individual basis (thus
helping investors to compare different public offerings). Thirdly,
mandatory rules may overcome forces acting against full
disclosure even when, from one point of view, disclosure is in
the company’s interest. An example is the disclosure of
information which, whilst it would make the company attractive
to investors, would also help the company’s competitors.6
In any event, the detail required by the disclosure rules
applicable on public offerings is now staggering. Since, as we
have noted, the information available is only indirectly relevant
to the future-oriented decision the investor has to make, there
comes a point where the marginal gain from more information
may outweigh the costs of providing it. This issue has been
debated especially in relation to small and medium-sized entities
(“SMEs”) since the financial crisis. SMEs traditionally relied on
bank funding, which became difficult to obtain post the crisis.
Many advocated greater use by SMEs of the financial markets to
raise capital. However, the largely fixed costs of capital raising
from the public markets absorb a relatively high proportion of
the funds raised in the case of small offerings. So, the question
of a relaxed disclosure regime for SMEs moved centre stage, as
we discuss below.
Turning to the admission of securities to trading on public
markets, a regulatory goal has been to ensure that those who
control the operation of public markets exercise their admission
and expulsion powers fairly. This might be thought necessary to
protect the interests of both issuers which wish to make public
offerings and investors who have bought the securities on the
basis that they would continue to be publicly traded. In practice,
this has turned out to be a less important regulatory objective,
since competition among public markets for offerings has itself
constrained any impulse to act unfairly.
Listing
25–5
The meanings of a public offer and admission to trading on an
exchange are easy enough to grasp. Somewhat less obvious is
the concept of “listing”. This is partly because of the varying
ways in which the term is used. Sometimes it is used to refer to
any security which is traded on a public market (i.e. it is on the
“list” of securities traded on that market), in which case it adds
nothing to what we have already said. In this book, however, we
use the term in a narrower sense: a listed security is one which
has been admitted to the “official list”. The first point to note is
that inclusion in the official list is not a pre-requisite for
admission to trading on all public markets. For example, it is
possible to make a public offer of “unlisted” securities and to
secure the admission of those securities to trading on the
Alternative Investment Market (“AIM”) of the London Stock
Exchange (“LSE”). On the other hand, the Main Market of the
LSE is a market for listed securities only. So, the question arises
as to why a company should wish its securities to be included in
the official list. The answer to that is that admission to the
official list constitutes a quality mark, which companies may be
anxious to have in order to encourage investors to acquire their
securities.7 For this reason, admission to the official list is an
important element in the public offer and admission to trading
process.
Inherent in the concept of an official list is the idea that
somebody controls admission to it in order to ensure that the
standards for admission are met. That task used to be discharged
by the LSE itself, but, with the demutualisation of the LSE, the
Exchange no longer wished to carry out this regulatory function,
which was transferred,8 in consequence, to what is now the
Financial Conduct Authority (“FCA”),9 established under the
Financial Services and Markets Act 2000,10 as amended. Section
74 of FSMA requires the FCA to maintain the “official list” and
to include securities in it only in accordance with the provisions
of the Act and it gives the FCA the power to make listing rules
(“LR”) for the purpose of governing admission to the official list
and the subsequent conduct of listed companies.11 However, as is
generally true in the area of public offers of securities, much of
the controlling legislation is now made at EU level. Under art.5
of the Consolidated Admissions Requirements Directive12 (or
“CARD”) Member States are required to “ensure [that] securities
may not be admitted to official listing” on a stock exchange
operating in their territory “unless the conditions laid down by
this Directive are satisfied” and it is from this Directive that
certain “merit” or “eligibility” requirements flow, as we shall see
below. Article 105 requires that Member States appoint a
“competent authority” for the purposes of the Directive, and in
the UK that authority is the FCA, acting as the UK Listing
Authority (“UKLA”).
Premium and standard listing
25–6
However, it would be wrong to think that the FCA’s Listing
Rules exist only for the purpose of implementing the CARD
Directive in the UK. The Listing Rules are of some antiquity and
deal with many matters falling outside the scope of CARD or
any other EU Directive or add to the requirements of those
Directives.13 For example, the LR contain corporate governance
rules and rules on related-party transactions which, as we have
seen, add significantly to the Companies Act requirements.14
These additional requirements substantially contribute to the
“quality mark” impact of admission to the official list. On the
other hand, the additional requirements add to the regulatory
burdens on a company and may discourage it from listing in
London—as opposed to New York or Hong Kong.
Consequently, in 2010 the FCA’s predecessor introduced two
classes of listing. Companies may choose between “standard”
and “premium” listing for equity shares, standard listing
requiring compliance only with the minimum EU standards and
not with the additional domestic rules.15 Those additional rules
concern predominantly corporate governance requirements to be
observed after listing, but to a lesser extent they relate to the
process of listing itself. Companies may choose a premium share
listing for reputational reasons or under investor pressure.
Types of public market
25–7
Most people, if asked, would probably say that there is one stock
market in the UK and that is the LSE. However, this is not the
case. The LSE itself runs two separate markets for shares,
namely the “Main Market” and the “Alternative Investment
Market” (“AIM”)16 for well-established and less well-established
companies respectively; and two separate markets for bonds (the
Gilt-edged and Fixed-Interest Market (“GEFIM”) and the
Professional Securities Market (“PSM”)).17 However, the LSE
has no monopoly on the operation of public markets in
securities, even in the UK, and there exist a number of smaller
share markets, of which the best known are probably those
operated by ICAP Securities & Derivatives Exchange (“ISDX”),
which operates partly in competition with those run by the LSE
and partly to provide a market for companies needing to raise
smaller sums of money than is usual on AIM. However, there is
no legal reason why a British registered company should not
have its securities traded on a public market in another country.
A number of large British companies have primary listings in
London and secondary listings elsewhere, usually in continental
Europe or the US, and some non-British companies equally have
secondary listings in London. More interestingly, a small
number of British companies have their primary listings outside
the UK and a somewhat larger number of foreign companies
have their primary listings in London. Indeed, there has been a
certain international competition in recent years among the
exchanges to secure such listings, notably from Chinese and
Russian companies. Bonds issued by UK-incorporated
companies are often listed in Luxembourg.
Regulated markets and multi-lateral trading facilities
25–8
Carrying on the business of operating a stock market is, not
surprisingly, one of the activities regulated under the FSMA.
Those who operate the exchange must either be persons
authorised to carry on financial business in the UK or the
investment exchange must be a “recognised” investment
exchange (“RIE”).18 Applications for recognition can be made
under Pt XVIII of FSMA to the FCA, which is the primary
regulator in the area covered by this chapter. The requirements19
which have to be met relate to both the initial setting up of the
exchange and its continued operation. Thus, any public market
in securities operating in the UK will be subject to the regulation
of the FCA.
The purpose of the above regulation of investment exchanges
is to ensure the security of their operation. Thus, the recognition
requirements deal with matters such as the suitability of the
persons running the exchange and the level of financial
resources available to them. As with the minimum requirements
for listing, the underlying rules for exchange regulation are set
out in EU law, in this case the Directive on Markets in Financial
Instruments (“MIFID”).20 This Directive distinguishes a
regulatory point of view between “regulated” markets and
“multilateral trading facilities” (“MTF”). The Community
requirements for a regulated market are now set out in Title III
of MIFID. Article 44 states that “Member States shall reserve
authorisation as a regulated market to those systems which
comply with the provisions of this Title”. The Title then sets out
a number of requirements for acquiring the status of a regulated
market, many of which cover the same ground as is to be found
in the domestic rules governing the award of recognised
investment exchange status.
It might therefore be thought that all RIEs would seek to have
all the markets they run characterised as regulated markets.21
However, there is no obligation on an RIE to apply for regulated
status for all or any of its markets and not having regulated status
does not prevent that market from continuing to operate in the
UK, provided it continues to meet the domestic law
requirements. In the language of MIFID a market which is not a
regulated market is a MTF.22 On the other hand, a market which
does not obtain regulated status under MIFID loses the benefits
and the burdens placed by EU law on regulated markets, those
benefits and burdens being found across the EU law governing
securities. For RIEs, therefore, the question is whether the
benefits EU law attaches to a regulated market outweigh the
burdens. The LSE decided not to seek regulated status for
AIM,23 but the Main Market of the LSE is a regulated market.
For bonds, GEFIM is a regulated market and PSM is not.24
Listing and regulated markets
25–9
Although official listing is a concept which refers to the quality
of the securities and the issuer, whilst regulated markets are
markets of a particular quality, there is a close link between
them, at least in the case of shares. The Listing Rules provide
that “equity shares must be admitted to trading on a regulated
market for listed securities operated by a RIE”.25 Thus, the
listing process is not complete unless the shares have been
admitted to trading on a regulated market. On the other side, it is
only companies whose shares are in the official list which will
be admitted by the LSE to its Main Market.26 Thus, listed shares
must be traded on a regulated market and the Main Market of the
LSE will admit only listed securities. The FCA (or the
competent authority in some other EEA State in the case of
companies incorporated there) controls inclusion in the official
list and the LSE controls admission of the securities to trading
on the Main Market.27 The company has to satisfy both sets of
requirements in order to give its securities the status of being on
the official list and its shareholders the facility to trade in those
securities.
By contrast, listed debt securities must be admitted to trading
on a market for listed securities operated by a RIE, but that
market need not be a regulated market. On the LSE, GEFIM is a
regulated market and the PSM is exchange-regulated, but
nevertheless trades listed debt securities.
The regulatory structure
25–10
The document containing the information which must be put
before potential investors in a public offering is termed a
prospectus. Domestic statutory law regulating prospectuses has a
long history: the Directors’ Liability Act 1890,28 imposing
liability for negligent misstatements in prospectuses, was an
advanced piece of legislation for its time and significantly
influenced the US Securities Act 1933. However, over the past
30 years EU law has gradually occupied the legislative space in
relation to public offers, admission of securities to public
markets and listing, as part of a broader strategy to create a
single European financial market29—though remedies for
breaches of the rules still remain substantially in the hands of the
Member States. The result of EU occupation of the field,
together with the additional rules adopted at national level, has
been a multi-layered regulatory structure, where six distinct
layers can be identified: primary community law; secondary
community law; primary domestic legislation; secondary
domestic legislation; FCA rules; and rules generated by stock
exchanges.
The modern EU legislative instruments aimed at regulating
this area were proposed in the Financial Services Action Plan
(“FSAP”),30 adopted in 1999 for the period up to 2005 and
substantially achieved in that period. We shall look at some of
the FSAP instruments in this and the following chapter. As far as
disclosure of information in prospectuses is concerned the
central piece of EU law is currently Directive 2003/71/EC on
prospectuses (the “Prospectus Directive” or “PD”) as amended
in 2010,31 whilst admission to listing is regulated by CARD.32
As far as the PD is concerned, it has two features which need
to be noted. First, it is what is inelegantly referred to as a
“maximum harmonisation” Directive. This means that it sets out
not only standards below which the Member States may not fall
but also standards above which they may not rise. Since it is also
a very detailed Directive, especially when taken with the
subordinate EU legislation—see below—the Member States
have rather little discretion over its implementation in domestic
law and it functions more like a Regulation than a Directive.33
The reason for this approach was the EU’s desire to produce a
prospectus which, without changes other than translation, could
be used simultaneously in more than one Member State in a
cross-border offer. We shall look at this “EU passport” concept
in more detail below.34
The second notable feature of the PD results from an
adaptation of the EU legislative process introduced for FSAP
instruments and known as the “Lamfalussy process”, after the
name of the chairman of the committee which put forward this
proposal. An important part of this process is that the European
Commission obtained the power to make what we would call
subordinate legislation (through Commission Directives or
Regulations), without going through the full EU legislative
process but after consulting the Member States,35 where the
parent Directive provides for such “second-tier” legislation. In
fact, in the case of disclosure of information in public offers the
detailed information required is to be found in Commission
Regulation (EC) No.809/2004,36 as amended, a document of
some 100 pages and being, as a Regulation, directly applicable37
in the Member States and so not requiring transposition by them.
The purpose of this shift of legislative power to the Commission
was said to be to enable the details of the FSAP legislation to be
adapted more quickly to changing market practices than would
be the case if the full EU legislative process had to be used.
Law-making by the Commission thus constitutes the second
layer of rules in this area, after the adoption of the parent legal
instrument by the EU legislature.
However, the PD, the parent EU instrument in our area, and
Commission instruments taking the form of a Directive do
require transposition into national law. This gives rise to the
third level of law-making, i.e. by the British legislature (which
itself may take the form of primary or secondary legislation).
The most obvious expression of the domestic law-making
process is FSMA 2000, as subsequently amended, especially its
Pt VI. FSMA 2000 contains three broad types of rules: those
simply transposing the EU law, those both transposing and
adding to the EU requirements (where EU law permits this) and
those dealing with matters not subject to EU regulation.
However, from the outset of domestic financial services
regulation, the policy of embodying all the relevant rules in a
statute or even in statutory instruments was rejected in favour of
conferring broad rule-making and enforcement powers on a
regulator, now the FCA. This is a statutory body38 but funded by
market participants and designed to be more attuned to the needs
of the markets than would be a governmental department. It has
a very wide remit in the financial services area but for the
purposes of this chapter we concentrate on its role in public
offerings. Rules made by the FCA or its predecessor thus
constitute the fifth level of rule-making. For the purposes of this
chapter particularly important are its Prospectus Rules (“PR”),
though on some matters its Listing Rules (“LR”) are relevant as
well.
The sixth layer of regulation is that done by the exchanges
themselves, as a matter of private contract with the issuers which
seek to have their securities traded on a securities market.
It is likely that the balance within the above structure will
change in the future. In November 2015 the European
Commission proposed to replace the PD with a Prospectus
Regulation, as well as making some changes to the substantive
rules, which we note as appropriate below.39 This proposal was
part of a more general scheme to create a “capital markets
union” within the EU. To the extent that this proposal is
successful, EU rules would become relatively more important
and domestic rules relatively less so, since a Regulation does not
need transposition into domestic law.
Types of public offer
25–11
The EU and domestic rules discussed in this chapter are
concerned with public offers of transferable securities. The
whole of this body of regulation can be avoided by offering non-
transferable securities to the public.40 However, the illiquidity
embodied in non-transferable securities is likely to make them
unattractive to investors. Assuming an issue of transferable
securities, the company’s choices appear to be as follows. On an
initial public offering of shares, a company’s choice of method
will be severely restricted. If the issue is large it will have to
proceed by way of an offer for sale or subscription coupled with
admission to listing (or admission to AIM), whilst smaller
amounts may be raised via a placing plus an introduction to a
public market. (A placing is an offer to a selected group of
investors and so is not a general offer.) In the case of bonds,
even large amounts are normally raised by means of a placing,
because bonds are traditionally bought by institutional, not retail,
investors. In the case of shares, a third way of proceeding may
be available. Where the company’s shares have somehow
become sufficiently widely held (which is unlikely without a
public offer but conceivable) it may be possible to raise the new
money needed by a rights or open offer to its existing
shareholders, but this course of action is normally available only
on subsequent offers, not on an IPO. We shall look briefly at
each type of offer.
Offers for sale or subscription
25–12
A full-blown public offer will prove to be an expensive and
time-consuming operation. The company’s finance director (and
probably other executives) and representatives of the advising
investment bank and their respective solicitors will for weeks or
months devote most of their time to working as a planning team.
At a later stage the services of a specialist share registrar will
generally be needed to handle applications and the preparation
and dispatch of allotment letters. The offer will have to be made
through a lengthy prospectus which will have to be published.
To ensure that the issue is fully subscribed, arrangements will
have to be made for it to be underwritten. Today this is normally
achieved by the sponsoring investment bank agreeing to
subscribe for the whole issue and for it, rather than the company,
to make the offer. Thus, large public offers are normally in the
form of offers for sale not offers for subscription, the investment
bank having already subscribed for all the shares on offer.41 In
major offerings, such as the privatisation issues,42 a syndicate of
investment banks may be employed. The banks will endeavour
to persuade other financial institutions to sub-underwrite.
Ultimately the cost of all this, including the commissions
payable to underwriters and sub-underwriters,43 will have to be
borne by the company.
The most ticklish decision that will have to be made is the
price at which the securities should be issued and, for obvious
reasons, this is normally left to the last possible moment. If it
proves to have been set too low, so that the issue is heavily over-
subscribed, the company will be unhappy, while, if it is set too
high so that much of the issue is left with the underwriters, it is
they who will be unhappy since their commission rates will have
assumed that they will end up with a handsome profit and not be
left with securities that, initially, they cannot sell except at a loss.
Nor, probably, will the company be best pleased since it is
generally believed that an under-subscribed issue will reduce the
company’s prospects of raising further capital in the future. The
nightmare of all concerned is that there will be an unforeseen
stock market collapse between the date of publication of the
prospectus and the opening of the subscription list.44 The sweet
dream is that the issue will be modestly over-subscribed and that
trading will open at a small premium.
If the issue is over-subscribed it will obviously be impossible
for all applications to be accepted45 in full. The issuer decides
how to deal with this situation and the prospectus will need to
say how it intends to do so. Normally this will be by accepting in
full offers for small numbers of shares and scaling down large
applications, balloting sometimes being resorted to. The
company will probably wish to achieve a balance between
private and institutional investors. To succeed in that aim
multiple applications by the same person will probably be
expressly prohibited.46 An abuse which also needs to be guarded
against is that “stags” will apply but seek to withdraw and stop
their cheques if it seems likely that dealings will not open at a
worthwhile premium to the offer price. However, offer
documents will require applications to be accompanied by
cheques for the full amount of the securities applied for, the
cheques being cleared immediately on receipt and any refund
sent later. This means that an applicant may not only fail to get
all or any of the shares he hoped for but may, for a period, lose
the interest that he was earning on his money.47
The offer price is normally stated as a fixed and pre-
determined amount per share. It can however, be determined
under a formula stated in the offer, though this is uncommon
except in offers addressed to professional investors.
Alternatively applicants can be invited to tender on the basis that
the shares will be allocated to the highest bidders. This,
however, is rarely used in relation to issues of company
securities.
Placings
25–13
Obviously, the expense of an offer for sale plus introduction to
listing is prohibitive unless a very large sum of money is to be
raised. For lesser amounts the placing may be more attractive
(and may be used for large amounts in the case of bonds). Under
this method the investment bank or other adviser to the issuer
obtains firm commitments, mainly from its institutional investor
clients (instead of advertising an offer to the general public),
coupling this with an introduction to trading. The absence of the
need for newspaper advertisements, “road-shows” and the like
makes this a much less expensive procedure. On the other hand,
it prevents the general public from acquiring shares at the issue
price. Another way of proceeding is the “intermediaries offer”,
whereby financial intermediaries take up the offer for the
purpose of allocating the securities to their own clients. This way
of proceeding should be only marginally more expensive than a
straightforward placing, but has the advantage that it is more
likely to result in a wide spread of shareholders and a more
active and competitive subsequent market. Although these are
not “public” offers as far as the financial community is
concerned, unless carefully controlled they may end up being
public offers under the prospectus rules (as we see below).
Rights offers
25–14
Once a company has made an initial public offering of shares it
will have additional methods whereby it can raise further capital
and, even if it proceeds by an offer for sale, this will be less
expensive if the securities issued are of the same class as those
already admitted to listing or to the AIM. More often, however,
it will make what is called a “rights issue” and, if it is an offering
of equity shares for cash, it will generally have to do this, or
make an open offer, unless the company in general meeting
otherwise agrees. This is because of the pre-emptive provisions
discussed in the previous chapter.48 In one sense a rights issue is
considerably less expensive than an offer for sale: circulating the
shareholders is cheap in comparison with publishing a lengthy
prospectus in national newspapers and mounting a sales pitch to
attract the public. But in another sense it may be dearer: if the
issue price is deeply discounted the company will have to issue
far more shares (on which it will be expected to pay dividends)
in order to raise the same amount of money as on an offer. In
any event, as we shall see, a rights issue will normally be a
public offer for the purposes of the prospectus rules.
Other methods of issue, which can be used in appropriate
circumstances, include exchanges or conversions of one class of
securities into another, issues resulting from the exercise of
options or warrants, and issues under employee share-ownership
schemes—though these will not necessarily raise new money for
the company. Nor, of course, will capitalisation issues, dealt
with in Ch.13, above. We do not discuss them further in this
chapter.
ADMISSION TO LISTING AND TO TRADING ON A PUBLIC MARKET
Eligibility criteria for the official list
25–15
We have already noted that admission to trading on a public
market is a normally a concomitant feature of a public offer.
Although it might seem logical to look at the rules on disclosure
of information in relation to offers before looking at the rules
governing admission to trading, there are good reasons for the
opposite approach. First, the admission rules are generally less
elaborate. Secondly, the admission rules contain merit
requirements, i.e. rules permitting securities resulting from only
certain types of public offer to be publicly traded. The admission
requirements therefore feed back into decisions about the types
of public offers than can considered and the public markets
available for the resulting securities to be traded.
The principal source of admissibility requirements are the
Listing Rules made by the FCA, partly transposing into domestic
law the EU rules from CARD on admission to the official list
and partly adding to those minimum requirements. Chapter II of
Title III of CARD lays down certain conditions for the
admissibility of shares to the official list, and Ch.III lays down a
lesser set of requirements for debt securities.49 Since securities
admitted to the official list must also be admitted to trading on a
regulated market,50 the rules on admission to the official list in
effect control admission to trading as well. However, the
operators of any market may lay down conditions for the
admission of securities to trading on that market, though
competition considerations constrain operators from going very
far in controlling admissions. We look first at the rules on
admission to the official list.
The admissibility conditions may be divided into those related
to the issuer and those related to the securities on offer. In
relation to both equity and debt securities one of two major
policy concerns of CARD and the LR is to ensure that there
should be a liquid market in the securities in question after
listing, so that subsequent trading in the securities is not
unacceptably volatile.51 The following requirements promote this
goal.
(i) The expected market value of the securities to be admitted
must be at least £700,000 for shares and £200,000 for debt
securities.52
(ii) All the securities of the class in question must be admitted to
listing.53
(iii) The securities must be freely transferable.54 Without this
requirement the development of a market in the securities
would clearly be inhibited.
(iv) In the case of shares a “sufficient number” of the class of
shares in question must be distributed to the public (as
opposed to being held in non-trading blocks by insiders),
which is translated as a rule of thumb into 25 per cent of the
shares for which admission is sought.55
The other main driver of the CARD rules is that the issuer
should have a certain quality. These requirements apply to
the issue of shares only.
(v) The company must produce audited accounts for a period of
three years, ending not earlier than six months before the
application for admission.56
(vi) Going beyond CARD, for premium listing the company
must show that “at least 75% of the applicant’s business is
supported by a historic revenue earning record” for the three
years in question and that it will be carrying on an
independent business as its main activity.57 The aim of these
requirements is not that the applicant show that it has been
profitable over the three years (though it may not find takers
for its shares if it has not been) but that its current business
has a three-year track record and is not contingent on some
other person’s consent.58 As a result of opportunistic
behaviour on the part of controllers of certain listed
companies, the LR were modified in 2015 so as to require
controlling shareholders (30 per cent of more of the voting
rights) to enter into a written and legally binding agreement
with the company, designed to safeguard its independence,
especially in relation to related-party transactions and the
election of independent directors, in the absence of which the
LR’s standard related-party transactions are applied to the
issuer with particular rigour.59
(vii) Again going beyond CARD and for premium listing, the
applicant must show, subject to exceptions, that it will have
sufficient working capital to meet its requirements for the
12 months after listing.60 This is some protection against the
company suffering a “cash crunch” in the short-term after
listing. Of course, where the admission is coupled with a
public offer, the working capital is likely to be raised in that
offer. The purpose of this requirement is that the applicant
shows it has made a realistic forecast of what needs in the
near term.
In addition to these specific requirements in relation to the
company and its securities, there is a general power in art.11 of
CARD for Member States to reject an application for listing “if,
in their opinion, the issuer’s situation is such that admission
would be detrimental to investors’ interests”. This is transposed
into domestic law by FSMA 2000 s.75(5), which gives the
power of rejection to the FCA as the competent authority. It is
unclear in what circumstances this power might be used, though
no doubt it is a useful back-stop to deal with the unexpected.
Exchange admission standards
25–16
Since admission to listing requires admission to a market for
listed securities, the admission standards of the exchange are
also relevant to the listing process. Taking the admission
standards of the LSE for its Main Market as an example, these
largely track the eligibility requirements of the LR but add to
them in some ways. Thus, the shares sought to be traded “must
be capable of being traded in a fair, orderly and efficient
manner” and the Exchange may refuse an application for listing
if the applicant’s situation is such that admission “may be
detrimental to the orderly operation of the Exchange’s markets
or to the integrity of such markets”.61
In the case of unlisted securities, the eligibility rules of the
exchange to which admission is sought are naturally central,
since the LR have no application. For the AIM, run by the LSE,
the exchange in fact lays down no general eligibility
requirements for admission other than the appointment of a
“nominated adviser”.62 This is because the responsibility for
assessing the suitability of the applicant for AIM is placed by the
Exchange on the adviser (usually referred to as the “nomad”).63
However, eligibility requirements are laid down in certain
specific cases. For example, r.7 of the AIM Rules for Companies
stipulates:
“Where an applicant’s or quoted applicant’s main activity is a business which has
not been independent and earning revenue for at least two years, it must ensure that
all related parties and applicable employees as at the date of admission agree not to
dispose of any interest in its securities for one year from the admission of its
securities.”
This rule obviously reflects in a muted way the independence

requirements of the LR. The Exchange has also reserved to itself
the power to subject any applicant for admission to a special
condition.64
THE PROSPECTUS
25–17
The core mechanism by which the law achieves its disclosure
objectives is the prospectus. The relevant EU rules are in the PD,
a maximum harmonisation Directive,65 and in subordinate EU
law made by the Commission. They are transposed, as
necessary, into domestic law by amendments to FSMA, statutory
instruments and through rules made by the FCA—the Prospectus
Rules (“PR”). There are two triggers for the requirement to
produce a prospectus: a public offer and the admission of shares
to trading on a regulated market.66 Where, as is usual, shares are
both offered to the public and at the same time admitted to
trading on a regulated market, both triggers will be pulled, but
either will do. We have also noted that AIM is not a regulated
market and so simple admission to trading on AIM will not
trigger the prospectus requirement. However, the PD rules will
be triggered if the admission is accompanied by a public offer.
To escape the PD the issuer must both avoid admission to
trading on a regulated market and make an offer which falls
outside the definition of a public offer, as certain types of
placing, for example, will.
Even in this case the issuer must normally meet some
disclosure requirements. For example, the LSE’s own rules for
AIM have disclosure obligations built into them. Those rules
require an applicant for admission to AIM to produce a publicly
available “admission document”. This document is a slimmed
down version of what is required under the PD: in fact the
information required for the admission document is defined by
express reference to the annexes of Commission Regulation
which contain the detailed requirements for disclosure under EU
law.67
The same two-trigger mechanism applies in relation to bonds.
Thus, if the bonds are admitted to the PSM (an MTF or
exchange regulated market), rather than the GEFIM (a regulated
market), and there is no public offer, then no prospectus is
required. However, there is a twist here. The PSM, although
exchange-regulated, is a market for listed securities only, and the
process of listing entails disclosure obligations under CARD for
the applicant.68 The disclosure is effected not through a
prospectus but through listing particulars.69 However, the detail
of what is required for particulars, laid down in the LR,70 is in
general less demanding than that required for a prospectus.
FSMA makes it clear that listing particulars are the more junior
instrument, for the FCA has no power to require listing
particulars in any situation where a prospectus is required.71
Consequently, where shares are admitted to the official list as
part of a public offer, it is the prospectus rules which count, not
those governing listing. The same is true if bonds are to be
admitted to the official list as part of a public offer. However,
because bonds are often offered in a placing which does not
constitute a public offer and then admitted to trading on the PSM
(an exchange-regulated market), the disclosure obligations
attached to listing are more important for bonds than shares. In
this chapter, however, the core of our analysis will be the
prospectus, because our focus is on capital raising through share
issues.72
The public offer trigger
25–18
Producing an acceptable definition of a public offer has long
proved a difficult exercise. The predecessor of the current PD73
did not even attempt the exercise, noting rather disarmingly in its
preamble that “so far, it has proved impossible to furnish a
common definition of the term ‘public offer’ and all its
constituent parts”. It was lauded as one of the achievements of
the current PD that it does contain such a definition. That
definition is as follows:
“‘offer of securities to the public’ means a communication to persons in any form
and by any means, presenting sufficient information on the terms of the offer and
the securities to be offered, so as to enable an investor to decide to purchase or
subscribe to these securities.”
This, it will be observed, is not a great example of the drafter’s

art, for it is hardly helpful to define the trigger for a disclosure
obligation in terms of the information which is in fact disclosed.
Thus, as before, one has to proceed by taking an essentially
broad and imprecise concept (“communication to persons in any
form and by any means”) and then seeking to give meaning to it
by examining the specific provisions in the Directive which state
when something is not a public offer, even though on the general
approach it might otherwise be.
Of central importance, therefore, are the reasons for excluding
some types of offer from the category of a “public” offer.
Producing and verifying the information required for a
prospectus is a costly and time-consuming business. There is
therefore a strong argument for not requiring a prospectus if its
recipients do not need the information it contains. This could be
for a number of reasons. Even if the information would be of
benefit to the recipients, the costs of providing it may outweigh
the benefits of having it provided. This is likely to be true of
small offers. The provisions of the PD can be seen to reflect
these concerns.
Exemptions from the prospectus requirement on a
public offer
25–19
The policies underlying the various exemptions from the
requirement to produce a prospectus can be roughly categorised
as follows.
First there are exemptions which seek to identify the investors
who can look after themselves and so do not need the mandatory
prospectus information:
(i) Offers addressed to “qualified investors” only.74 These are
defined so as to include legal entities authorised to operate in
the financial markets (for example, fund managers or
investment banks); governmental bodies at both national and
international level; institutional investors and, large
companies.75 Member States are also given the power to
include in the category of qualified investors individuals who
satisfy two of the following criteria and who ask to be
considered as qualified investors. The criteria are: having
carried out at least ten transactions of significant size per
quarter over the previous four quarters; having a securities
portfolio of at least half a million euros; working or having
worked for a year in the financial sector in a position
requiring knowledge of securities investment.76 Member
States may also apply the exemption to SMEs which asked to
be so considered, the criteria then applying to those taking
financial decisions on behalf of the SME. A register of these
last two categories of qualified investor has to be kept by the
competent authority. The UK has taken up both these
options.77 The British legislation makes an important
clarification that included in the category of qualified
investor is the offeree who is not qualified but whose agent
is, provided the agent has authority to accept the offer
without reference to the client.78 To avoid a rather obvious
way around the prospectus requirements, it is provided that,
if there is a subsequent resale of the securities by a qualified
investor, the question of whether that resale counts as a
public offer is to be tested afresh.79
(ii) Offers of securities where each investor is to pay at least
€100,000 in response to the offer.80 The idea is that such a
large consideration will deter all but investors who can look
after themselves.
(iii) Offers of securities in denominations of at least €100,000—
another way of expressing the same point.81
A second category of those who, it can be said, do not need
the prospectus information, are those who will receive the
relevant information through some other mechanism. The PD
identifies82 on this basis the target’s shareholders in a share-
exchange takeover bid83 and the shareholders of companies
involved in a merger.84 Controversy has surrounding the
question whether rights issues85 should fall into this category. In
principle an offer to existing shareholders is a public offer, but it
is argued that the continuing disclosure obligations of listed
companies, discussed in the following chapter, make a
prospectus unnecessary in this case. Initially, the PD made no
concessions to this argument but in 2010 the full prospectus
requirement was reduced to a “proportionate level”86 (fixed in
secondary EU legislation). However, there is continued debate
about what that proportionate level should be.87
The third category where a prospectus is not regarded as
useful is where those who receive the offer do so other than as
part of a fund-raising exercise by the company. The PD
identifies88 on this basis those receiving new shares in
substitution for their existing shares, if there is no increase in the
issued share capital; bonus shares and script dividends89; and
shares issued under employee or directors’ share schemes.
The fourth and most contentious case is where the prospectus
information is admittedly useful to potential recipients but the
cost of providing it is thought to be out of proportion to the
benefits flowing from it. The Directive as a whole does not apply
where the total amount to be raised in the offer is no more than 5
million over a period of 12 months.90 Somewhat oddly, there is
then a separate exemption from the definition of a public offer
for “an offer of securities with a total consideration of less than
EUR 100,000” over a period of 12 months.91 The policy seems
to be to leave the Member States free to impose or not their
domestic prospectus rules on offers below the 5 million limit,
but to prohibit them from so doing in the case of offers below
100,000.92 A further important example of this policy is the
exclusion from the prospectus requirement of offers addressed to
fewer than 150 persons (natural or legal) per EEA State, and any
qualified investor offerees do not count against this number.93
A contentious issue has been how far SME offerings fall
within the category of “useful but too expensive” information.
Initially, no concession was made to SMEs but in 2010 the size
of the issuer was made a criterion for determining the extent of
the required disclosure.94 This is a difficult issue: provision of
what investors regard as inadequate information might reduce
their willingness to subscribe for the securities of such issuers,
even if the reform cuts down the costs of making public offers,
so that SMEs overall could be worse off. The Commission’s
reform proposals of 201595 propose to solve the problem by
offering substantial relaxations to SMEs but only where the
securities are not to be listed on a regulated market. Those using
MTFs are thought to better understand the risks they run.
Probably the most practically significant of these exemptions,
to date, are those for offers to qualified investors and to small
numbers of investors. An offer made by a company to
institutional investors and brokers operating discretionary
portfolios for clients, followed by admission to trading on AIM,
can escape the statutory prospectus requirements, though not the
Exchange’s own disclosure rules.
The admission to trading trigger
25–20
The second trigger for the prospectus is a request for admission
of securities to a regulated market.96 Thus, if shares are to be
introduced onto the Main Market of the LSE, even though there
is no offer to the public by the company, a prospectus will
normally be required. However, there are exemptions from the
second trigger as well. Consequently, if an issuer can bring itself
within both the public offer and the admission to trading
exemptions, it may avoid the need for a prospectus even though
it appears to have pulled both triggers. Some of the admission
exemptions97 repeat those available in relation to public offers,
mainly those noted in categories two and three above. Thus, the
takeovers and mergers exceptions to the public offer trigger
appear again in relation to the admission trigger. Otherwise, in
the case of share-exchange takeover, a prospectus would often
have to be produced because the securities offered in the bid are
to be admitted to trading on a regulated market.
25–21
On the other hand, the first category of exemptions for public
offers (qualified investors) is missing in the case of admission to
trading, presumably because, once the securities are admitted,
they are in fact freely available to everyone. The fourth category
(burdens outweigh benefits) is present in the case of admission
but formulated in a rather different way. Again a limitation on
the number of offerees will not work effectively once there is
trading on a public market. Instead, the exemption applies to the
admission of shares representing less than 10 per cent of the
number of shares of the same class already admitted to trading
on that regulated market (measured over a 12-month period).98
The policy argument is that, if the class of share is already traded
on the market, there will be a lot of information about them and
the issuer in the market99 and a relatively small offering of
additional shares will not mark a dramatic change of direction
for the company. Combined with the qualified investor
exception for public offers, the 10 per cent rule enables
companies to raise relatively small amounts of new capital via a
carefully structured placing, even if the shares in question are
admitted to trading on a regulated market.100
In order to encourage a single financial market in the EU,
securities already admitted to trading on one regulated market to
be admitted to trading on another without the production of a
prospectus.101 This facility is subject to conditions, notably that
securities of the same class shall have been traded on the other
market for at least 18 months102 and that the ongoing obligations
for trading on that other market have been complied with.
The form and content of prospectuses
25–22
Subject to the exemptions discussed above, a prospectus must be
made available before an offer is made to the public or a request
is made for admission of securities to trading on a regulated
market.103 The prospectus is a disclosure document and the
overriding rule to which it is subject is that it “shall contain all
information which is necessary to enable investors to make an
informed assessment of the assets and liabilities, financial
position, profit and losses, and prospects of the issuer and of any
guarantor, and of the rights attaching to [the] securities”.104
However, the PD does not content itself with this important
general rule: far from it. This is an area where the Commission is
given law-making powers in relation to the format and content of
the prospectus and in pursuance of this power has produced a
Regulation,105 containing more than 40 articles (more than the
PD itself) and, remarkably, some 19 annexes. The Regulation is
directly applicable in Member States (and so does not need
transposition).106 The purpose of the “sweeping up” rule in the
Directive is thus to require those drawing up a prospectus, after
they have complied with the detailed rules in the Regulation, to
ask themselves, as a final check, whether overall it gives the
investors all the information they require. In some cases the
competent authorities may—or must—add to the minimum
disclosure requirements if this is necessary to meet the standard
of “all information necessary”.107
In a work of this nature the Commission Regulation does not
need to be analysed in detail. Despite its formidable size it is not
quite as fearsome as it seems. First, it contains rules which to
some extent were previously to be found in Directives108 and so
it is not as big a regulatory extension as it seems. Indeed, one of
the purposes of giving the Commission law-making powers in
this area was to remove a lot of the detail from EU Directive to
Commission subordinate law, which could more easily be
adjusted to changing needs. Secondly, the annexes contain
“building blocks” to be used in the construction of the
prospectus, but only some, often a small number, of those
building blocks will be relevant to any one prospectus.109
Despite these disclosure requirements, there is likely to be one
crucial piece of information which it may not be possible to
insert into it, namely, the price of the security. For the reasons
given above,110 those involved will want to leave this to the last
possible moment, in order to be able to react to late changes in
the market. Connected with the price uncertainty, it may not be
possible to say how many securities will be on offer. Omission
of these matters is permissible provided either the prospectus
contains the criteria by which these matters will be determined
or anyone who has accepted the offer before the final price and
amount of securities on offer have been published is allowed to
withdraw their acceptance during the following two working
days.111
Summary
25–23
Overall, a prospectus is likely to be a forbiddingly long and
detailed document, a tendency to which the civil liability rules,
discussed below, only contribute. It is doubtful whether many
retail investors read it in full or at all before deciding whether to
invest. Professional investors and analysts may pore over it, but
most retail investors will not find it a user-friendly document,
despite the requirement that the information in it “shall be
presented in an easily analysable and comprehensible form”.112 It
is therefore sensible that a summary is required to be part of the
prospectus, conveying “the essential elements of the securities
concerned” but with a warning that it should be read only as an
introduction to the prospectus.113 The significance of the
summary was underlined in the 2010 revisions which require the
summary to be drawn up in a common form and to contain “key
information” (both to be determined by subordinate EU
legislation)114 and impose civil liability for the omission of key
information.115
Supplementary prospectus
25–24
It is also not a rare event that information becomes available
after the prospectus has been published which requires the
published information to be qualified. Article 16 of the PD
requires “every significant new factor, material mistake or
inaccuracy” relating to the information contained in the
prospectus which “arises or is noted” after its approval and
before the closing of the offer to be the subject of a
supplementary prospectus, if the new information is capable of
affecting the investors’ evaluation of the offer. In the case of an
offer to the public investors have a right of withdrawal during
the two working days after the supplementary prospectus is
published. The transposing British legislation puts any person
responsible for the prospectus who knows of the change under a
duty to notify it to the company or the applicant for admission, if
different.116 It is unclear whether duty to produce a supplement
arises if the issuer is unaware of the event and it cannot be said
that it should have been.117
Registration statement and securities note
25–25
The traditional British prospectus has been a single document
containing all the relevant information. Under the Directive it
may consist of two documents (the summary is in addition) and
incorporate some information by reference. Where there are two
documents, the prospectus will consist of a “registration
statement” and a “securities note”.118 The registration statement,
containing information about the issuer, can be filed with the
relevant authority and, if approved, be valid for 12 months. This
is sometimes termed “shelf registration”. The securities note can
then be produced later and contain the information about the
securities on offer plus updated information, if any is needed,
about the issuer. When the securities note and the summary are
produced they can be put together with the registration statement
to form a valid prospectus (which will in turn be valid for 12
months).119 The purpose of this facility is to cut down the time
needed between the decision to raise capital and the making of
the public offer by obtaining approval in advance for part of the
required information.120
Incorporation of information by reference was not previously
permitted in the UK, on the grounds that it makes the
information less accessible to the reader of the prospectus.
Article 11 of the PD now requires Member States to allow
certain information to be incorporated in this way (other than in
the summary) and art.28 of the Commission Regulation spells
out which information may be incorporated by reference. The
list is reasonably long, though most of it ought to be available
electronically, for example, the company’s audit reports and
financial statements and earlier approved prospectuses.
Verifying the prospectuses
25–26
As we shall see below, the law provides ex post remedies for
those who suffer loss as a result of omissions or inaccuracies in a
prospectus or supplementary prospectus. However, it is
obviously more desirable if the law or regulation can provide ex
ante mechanisms designed to ensure that the information as
provided is complete and accurate before it is published. A
number of such mechanisms are to be found in the PD or
domestic rules.
Reputational intermediaries
25–27
A first mechanism, long relied on in the UK, not regulated by the
PD but evidently not regarded as prohibited by it, is the use of a
“sponsor” as a reputational intermediary. The sponsor guides the
applicant for admission to trading through the applicable rules
and certifies that there has been compliance. Certification of
compliance with the requirements by the intermediary may be
more reliable than that by the company alone because of the
intermediary’s greater experience in the field and because the
intermediary’s business model depends on its certifications
being accurate, for otherwise future issuers will not have an
incentive to use that intermediary, as opposed to one of its
competitors and the intermediary may be removed from the list
of sponsors. Use of an intermediary in this way involves in effect
a partial delegation by the FCA or the Exchange of its
supervisory powers to an adviser to the company, who is of
course paid for by the company.
A company applying for a premium listing of its equity
securities on the Main Market of the LSE must appoint a
sponsor121 whose role is defined in general as being to “(1)
provide assurance to the FCA when required that the
responsibilities of the listed company or applicant under the
listing rules have been met”; (2) to provide the FCA with any
requested explanation or confirmation to the same end; and (3)
guide the listed company or applicant in “understanding and
meeting its responsibilities” under the FCA’s rules.122 The
sponsor thus owes duties to both its client (to use reasonable care
in guiding it through the application process) and to the FCA
when providing assurance to the regulatory body that those
requirements have been met. It is the sponsor (normally an
investment bank) which submits the application for listing to the
FCA and accompanies it with a “sponsor’s declaration” that it
has fulfilled its duties and provides information to the FCA
about the outcome of the offer.123 In the case of an application
for listing of equity securities where the production of a
prospectus is required, the sponsor must not submit such an
application “unless it has come to a reasonable opinion, after
having made due and careful enquiry” that the applicant has
satisfied all the requirements of the Listing and Prospectus
Rules.124
Secondly, certain specific items of information in the
prospectus may be subject to third-party verification. We have
already noted the requirement on applicants for admission to the
official list to produce three years’ of accounts which have been
audited.125 However, backward-looking information is less
useful to—or at least less likely to impress itself upon—
investors than future-regarding statements, which directly
address their concerns about how well is the company likely to
do in the future. On the other hand, a requirement to state the
company’s prospects gives the directors a golden opportunity to
present the company in a rosy light for the future, without the
check which historical data provides on their descriptions of the
past. Accordingly, the Commission Regulation is keen to expose
to public light and professional scrutiny the assumptions upon
which statements about the future are based. This is especially
true of profit forecasts, which are likely to be especially
influential with unsophisticated investors. The assumptions
underlying profit forecasts contained in prospectuses must be
stated and a distinction made between assumptions directors can
influence and those outside their control. The assumptions must
be specific and precise and readily understandable by investors.
The company’s auditors or reporting accountants must confirm
that the forecast has been properly compiled on the basis stated
in the forecast; that the accounting presentation used in the
forecast is compatible with the issuer’s general accounting
policies; and that the forecast is compatible with the company’s
historical accounts.126
Vetting by the FCA
25–28
Before publication, the prospectus must be vetted by the FCA.127
Submission of a draft prospectus, and indeed various other
documents, to the FCA must occur at least 10 business days
prior to the intended publication date.128 The purpose of the
vetting is to put the FCA in a position to assure itself that the
information is complete before it is published.129 Inevitably,
given the time and resources available, the FCA can concern
itself only to a limited extent with the accuracy of the
information put forward by the company, for example, it should
spot glaring inaccuracies appearing on the face of the document.
Nor can the FCA guarantee even completeness, except to the
extent of seeing that something is said on all the matters upon
which the Commission Regulation requires information and that,
once again, the information is not obviously inadequate.
Nevertheless, the obligation to obtain the prior approval of the
FCA is, no doubt, a valuable discipline upon the issuer and its
professional advisers, especially the sponsor. It should also be
noted in this regard that the FCA and its officers are protected
from liability in damages for acts and omissions in the discharge
of the functions conferred upon them, unless bad faith is shown
or there has been a breach of the Human Rights Act 1998 s.6
(unlawful for a public authority to act in a way incompatible
with a convention right), so that it will be rare for the FCA to be
worth suing if the prospectus turns out to be incomplete or
inaccurate.130 A refusal of approval on the part of the FCA must
be accompanied by reasons and the applicant may appeal to the
Tribunal (see below) against the decision.131 The regulator is
more likely simply to require that information be corrected or
provided and to refuse approval only if that is not
forthcoming.132
Authorisation to omit material
25–29
A particularly important part of the approval role of the FCA is
the power given it by, to authorise omissions from the
prospectus of information which would normally be required to
be included.133 Given the range of information which the
Commission Regulation requires to be included, it is likely that
the applicant will regard some disclosure to be commercially
harmful, because, for example, it will aid competitors. Apart
from omission of information “in the public interest” on a
certificate from the Treasury,134 however, the grounds for
omission are limited, in the sense that the interests of investors
are given predominant weight in the balance over the interests of
the issuer and its current shareholders. Omissions may be
authorised only if (a) the disclosure would be “seriously
detrimental” to the issuer and the omission would be unlikely to
mislead the public over matters “essential” for an informed
assessment of the offer; or (b) if the information is only of minor
importance for the offer and unlikely to influence an informed
assessment of the offer.135 One might summarise the policy
underlying these rules as being that, where the information is
important to investors, they should be provided with it, despite
the harm to the company.
Publication of prospectuses and other material
25–30
All the effort involved in drawing up a prospectus and having it
approved by the FCA is, of course, simply a prelude to its
publication when the securities are offered to the public. The
issuer is given a choice of methods of publication to the public
(except that some form of electronic publication is mandatory):
insertion in a widely circulating newspaper; in hard copy
available free of charge to the public from the issuer, its financial
advisers or the regulated market in question; in electronic form
on the website of the issuer, financial adviser or regulated
market. Where publication is in electronic form, any member of
the public is entitled to a hard copy upon request.136
Despite the requirement that the prospectus include a
summary, designed to be more easily accessible to
unsophisticated investors, it is likely that an issuer will want to
publish documentation in addition to the prospectus, designed to
generate interest in the offer. Such “advertisements”, as the PD
terms them, run the risk of subverting all the careful regulation
of the prospectus, if unsophisticated investors read only the
advertisements and those documents are carelessly constructed.
Consequently, any advertisement137 must be clearly recognisable
as such; must state that a prospectus is or will be available and
how it may be obtained; must not contain inaccurate or
misleading information; and the information in it must be
consistent with the prospectus.138 However, unlike previously,139
advertisements do not need to be submitted to the FCA in
advance or to be approved by it. On the other hand, s.85 makes it
unlawful to offer securities to the public before publication of
the prospectus required by FSMA, so any “warm-up” material
will have to stop short of actually offering the securities to the
public.140
SANCTIONS
25–31
The rules examined above aim to put at the disposal of investors
a considerable amount of information about companies and their
securities when the latter are offered to the public. Although
there may be adverse market consequences for companies which
issue misleading prospectuses (their future fundraising efforts
are likely to be greeted with scepticism), nevertheless an
effective prospectus regime is likely to require legal sanctions as
well. There are three categories of sanctions in principle
available for breach of the disclosure regime: criminal, civil and
administrative or regulatory. However, the criminal and
regulatory sanctions are today effectively in the hands of the
FCA and so can be looked at together. We start with an analysis
of the civil sanctions.
Compensation under the Act
25–32
Before turning to the statutory provisions which create a
compensation remedy for those who have suffered loss as a
result of misstatements in or omissions from prospectuses, we
should note that the Act provides a civil remedy also for a person
who has suffered loss as a result of a breach of the prohibition on
offering shares to the public before a prospectus is published.
The contravention is treated as a breach of statutory duty.141 As
for misstatements and omissions in the prospectus, art.6 of the
PD requires Member States to apply “their laws, regulations and
administrative provisions on civil liability” to those responsible
for the information contained in the prospectus, but it does not
seek to stipulate what that liability regime shall be.
Consequently, despite the maximum harmonisation
characteristic of the PD, the impact in practice of the rules may
vary from Member State to Member State, because of
differences in their enforcement regimes. The same point can be
made in relation to enforcement by the “competent authority”:
art.21(3) of the PD stipulates the powers each regulator must
have but not the sanctions available to enforce them.
In relation to compensation the UK has long had a strong
regime in place, basing liability on negligence and, indeed,
reversing the burden of proof on this matter. That regime dates
back to the Directors’ Liability Act 1890, passed in reaction to
the decision of the House of Lords in Derry v Peek142 which, by
insisting upon at least recklessness, exposed the inadequacy of
the common law tort of deceit as a remedy for investors who
suffered loss as a result of misleading prospectuses. The modern
version of liability under the 1890 Act is now located in s.90 of
FSMA.
(a) Liability to compensate
25–33
Subject to the exemptions in (b), below, those responsible for the
prospectus (or supplementary prospectus)143 are liable under s.90
to pay compensation to any person who has acquired any of the
securities to which it relates and suffered loss as a result of any
untrue or misleading statement in it or of the omission of any
matter required to be included under the Act.144 This is a
considerable improvement on the former provisions, contained
most recently in the Companies Act 1985, which applied only in
favour of those who subscribed for shares and therefore
excluded from protection those who bought on the market when
dealings commenced. Now anyone who has acquired145 the
securities whether for cash or otherwise and whether directly
from the company or by purchase on the market and who can
show that he or she suffered loss as a result of the misstatement
or omission will have a prima facie case for compensation.146
This may seem at first sight an unreasonable extension of
liability from the company’s point of view, but in fact the
prospectus is normally intended to influence not only
applications to the company for shares but also the initial
dealings in them in the market (the “after market”), since the
company has an interest in the securities not trading at below the
offer price after issue.147 In addition, whereas the former version
applied only to misleading “statements”, the new provisions
specifically include omissions. Furthermore, the provisions do
not require the claimant to show that he or she relied on the
misstatement in order to establish a cause of action: it is enough
that the error affected the market price, even if the claimant
never read the prospectus. This is sometimes referred to as the
“fraud on the market” theory of liability.148 Obviously, however,
a causal connection between the misstatement or omission and
the loss will have to be proven. So, for example, market
purchasers who buy after such a lapse of time that the prospectus
would no longer have a significant influence on the price of the
securities will not be able to satisfy this causal test. Finally, the
statute does not require the maker of the statement to have
“assumed responsibility” towards the claimant, a requirement
that limits the operation of the common law of negligent
misstatement.149
On the other hand, as far as public offers are concerned, the
statutory provisions under discussion apply only to
misstatements in prospectuses. This will now include the
summary, which is part of the prospectus, but here liability is
restricted to situations where the summary is misleading when
read together with the rest of the prospectus or where liability is
based on the omission of key information.150 However, the
section does not apply to advertisements issued in connection
with a public offer but separately from the prospectus. Nor, it
seems, does the section apply to the Admission Document
required for an AIM admission (assuming no public offer
triggering the requirement for a prospectus, even for admission
to AIM). In such cases compensation might be available at
common law or under the Misrepresentation Act but, as the
origins of the current legislation suggest, investors in that
situation will in all likelihood benefit from a lower level of
protection than if they could invoke the civil liability provisions
of FSMA.151
(b) Defences
25–34
Schedule 10 provides persons responsible for the misstatement
or omissions with what the headings in the schedule describe as
“exemptions”, but which are really defences that may be
available if a claim for compensation is made. The purpose of
Sch.10 is to implement the policy of imposing liability on the
basis of negligence but with a reversed burden of proof. The
overall effect152 of these defences is that defendants escape
liability under s.90, if, but only if, they can satisfy the court (a)
that they reasonably believed that there were no misstatements
or omissions and had done all that could reasonably be expected
to ensure that there were not any, and that, if any came to their
knowledge, they were corrected in time; or (b) that the claimant
acquired the securities with knowledge of the falsity of the
statement or of the matter omitted. Defence (a) disproves
negligence and defence (b) disproves a causal link between the
defendant’s conduct and the claimant’s loss. Where the
statement in question is made by an expert and is stated to be
included with the expert’s consent, the rules are that a non-
expert escapes liability on the basis of a reasonable belief that
the expert was competent and had consented to the inclusion of
the statement. The expert will be subject to the same test for
liability as any other responsible person, but what is
“reasonable” is likely to be assessed at a higher standard.
(c) Persons responsible
25–35
The sensitive question of who are “persons responsible” and thus
liable to pay the compensation is now dealt with by the PR.153 In
the case of an offer of equity shares, they are154:
(a) the issuer—a further improvement on earlier versions which
did not afford a remedy against the company itself;
(b) directors of the issuer, unless the prospectus was published
without the director’s knowledge or consent;
(c) each person who has authorised himself to be named, and is
named in the prospectus, as having agreed to become a
director, whether immediately or at a future time;
(d) each person who accepts, and is stated as accepting,
responsibility for, or for any part of, the prospectus, but only
in relation to the part to which the acceptance relates155;
(e) each other person who has authorised the contents of the
prospectus or any part of it, but again only in relation to the
part authorised; and
(f) the offeror of the securities or the company seeking
admission and its directors where it is not the issuer.156
In the case of offers of other types of security,157 directors of the
issuer or offeror are excluded, unless they fall within one of the
other categories (stated as accepting responsibility for the
prospectus, for example), whilst the guarantor (if there is one, as
there might be for offers of debt securities) is made liable for
information relating to the guarantee. However, nothing in the
rules is to be construed as making a person responsible by reason
only of his giving advice in a professional capacity.158
A crucial problem facing misled investors is to identify all the
“persons responsible” so as to be in a position to decide whether
any of them is worth powder-and-shot. The PD requires those
responsible to be identified in the prospectus and it must also
contain a declaration by them that, to the best of their
knowledge, the prospectus is not misleading. Somewhat
stealthily, the Commission Regulation requires the declaration to
state that it is made after “having taken all reasonable care to
ensure that such is the case”.159 In some Member States this by
itself might be used to ground liability, but in the UK s.90 of
FSMA would seem to be a more secure basis for liability.
Civil remedies available elsewhere
25–36
The liability created by s.90 is not exclusive. Section 90(6) says
that the section “does not affect any liability which any person
may incur apart from this section”, but s.90(8) limits the
disclosure obligations of promoters and other fiduciaries to those
required under the statutory regime.160
As explained above, the damages remedy available under the
Act is superior to that available under the general law. However,
there may be cases where the legislation does not apply. The
most obvious examples are non-prospectus material issued in
connection with public offers or, where there is no public offer,
an Admission Document issued in connection with an
application for admission to AIM, which Document does
require, as we have seen,161 significant disclosure by applicants,
even if less than under the PD. Alternatively, the claimant may
want a remedy other than damages, such as rescission. Thus, a
brief examination of the law relating to misrepresentation as it
applies to issue documents is in order, but only a sketch of the
relevant principles will be provided.
(a) Damages
25–37
The common law provides civil remedies for misrepresentations
which have caused loss to those who have relied upon them. A
misrepresentation is understood at common law as being a
misstatement of fact rather than an expression of opinion or a
promise or forecast. There must be a positive misstatement
rather than an omission to state a material fact. However, this
requirement is heavily qualified by a further rule that an
omission which causes a document as a whole to give a
misleading impression or falsifies a statement made in it is
actionable.162
Historically, the common law has provided a damages remedy
only for fraudulent misstatements through the tort of deceit. This
requires the maker of the statement to know that it is false or at
least to be reckless as to its truth. An honest, even if wholly
unreasonable, belief in the truth of the statement will not amount
to deceit. As we have seen, it was the decision of the House of
Lords to this effect in Derry v Peek163 which led to the
introduction of the predecessor of the statutory provisions
relating to misstatements in prospectuses which we discussed
above. In addition, the tort of deceit requires reliance by the
recipient on the statement and, further, that the maker of the
statement should have intended the recipient to rely on it. These
are formidable hurdles to liability.
Since then, however, there have been two significant
developments. Section 2(1) of the Misrepresentation Act 1967
introduced a general statutory remedy for negligent
misstatement, which also reverses the burden of proof. The 1967
Act was in effect a generalisation of the principle contained in
the statutory provisions relating to prospectus liability, and will
therefore be of use where the misstatement was not contained in
a prospectus but in some other document issued in connection
with the offer. However, the generalisation in s.2(1) extends only
to misstatements made by a party to the subsequent contract164
and the section gives a cause of action only to the other party to
it, so that it would seem impossible to use it to sue directors or
other experts or advisers who are involved in public offers of
shares by the company.
The company itself may be sued, certainly in an offer for
subscription or a rights issue or an open offer and perhaps even
on an offer for sale, since a new contractual relation between a
purchaser and the company comes into existence when the
purchaser is registered as the holder of the securities. Where the
subsection applies, it makes the misrepresentor liable as if
fraudulent. This had led the Court of Appeal to conclude that the
measure of damages under s.2(1) is a tortious, rather than a
contractual, one, but that the rules of remoteness are those
applicable to actions in deceit, so that the person misled can
recover for all losses flowing from the misstatement.165
25–38
Because of these limitations on the new statutory cause of
action, it can be said that the more significant development in
recent times has been the acceptance of liability for negligent
misstatement at common law following the decision of the
House of Lords in Hedley Byrne & Co Ltd v Heller & Partners
Ltd.166 This is a general principle of liability, not confined within
the precise words of a statutory formulation, and so capable of
being used against directors and advisers as well as the company
itself in the case of negligent misstatements in prospectuses and
other documents associated with public offers. Nevertheless, the
burden of proof is not reversed under the common law rule, so
that the FSMA provision will be more attractive where it is
available; and in the case of individual defendants it will be
necessary to show that they accepted personal responsibility for
the statements made.167
There is also uncertainty, which emerged in the nineteenth
century fraud cases, about the range of possible claimants, in
particular whether there is a firm rule that only subscribers may
sue168 or whether this is only a presumption, perhaps not a very
strong one, capable of being rebutted on the facts.169 The issue
continues to trouble modern judges. In Al-Nakib Investments Ltd
v Longcroft170 it was held that allegedly misleading statements in
a prospectus issued in connection with a rights issue could form
the basis of a claim by a shareholder who took up his rights in
reliance upon the prospectus but not when the (same)
shareholder purchased further shares on the market. By contrast,
in Possfund Custodian Trustees Ltd v Diamond171 the judge
refused to strike out a claim that an additional and intended
purpose of a prospectus issued in connection with a placing of
securities was to inform and encourage purchasers in the
aftermarket, so that such purchaser could sue in respect of
misstatements. Drawing a distinction between subscribers and
market purchasers in the immediate period after dealings
commence is, in commercial terms, highly artificial. Companies
have an interest not only in the issue being fully subscribed but
also in a healthy aftermarket developing so that subscribers can
easily dispose of their shares, if they so wish.172 The statutory
provisions on liability for misstatements recognise the force of
this argument.173 Perhaps the way forward in the common law
would be for the courts to take a more inclusive view of the
issuer’s purposes.
(b) Rescission
25–39
The common law has traditionally permitted rescission (i.e.
reversal) of contracts entered into as a result of a
misrepresentation, whether that misrepresentation be fraudulent,
negligent or wholly innocent (so that no damages remedy is
available). This remedy is a potentially useful supplement to the
right to claim damages, even when an extensive damages
remedy is provided through the special statutory provisions
relating to prospectuses. In many cases, all the investor may
wish or need to do is to return the securities and recover his or
her money. However, there are two significant limitations on its
use. First, s.2(2) of the Misrepresentation Act 1967 gives the
court a discretion in appropriate cases to substitute damages for
the rescission, a provision included largely for the benefit of
misrepresentors.174 This subsection might be invoked, for
example, where the court thought that the rescission was
motivated by subsequent adverse movements in the stock market
as a whole rather than the impact of the misrepresentation as
such.
Secondly, and more important, the right to rescind expires in
practice much more quickly than the right to damages, which is
subject only to a long limitation period. By contrast, the right to
rescind is quickly “barred”. If, after the truth has been
discovered, an investor accepts dividends, attends and votes at
meetings or sells or attempts to sell the securities, the contract
will be taken to have been affirmed,175 and even mere delay may
defeat the right to rescind. The reason for this strictness is that
the company may well have secured loans from third parties who
have acted on the basis of the capital apparently raised by the
company, which appearance the rescission of the shareholder’s
contract would undermine. A rescission claim is also defeated by
the liquidation of the company (at which point the creditors’
rights crystallise), or even perhaps by its becoming insolvent but
before winding up commences,176 so that the shareholder must
have issued a writ or actually had his name removed from the
register before that event occurs.177 Finally, inability to make
restitutio in integrum will bar rescission, though in the case of
shares that principle would seem to be relevant mainly where the
shareholder has disposed of the securities before discovering that
a misrepresentation has been made.178
(c) Breach of contract
25–40
Finally, in the general law of contract it not uncommonly occurs
that the courts treat a misrepresentation as having been
incorporated in the subsequent contract concluded between the
parties. The advantage of establishing this would be that the
misrepresentee would have a claim to damages to be assessed on
the contractual basis, rather than on a tortious basis as is the
position with claims based on the statutory prospectus
provisions, the Misrepresentation Act or, of course, the Hedley
Byrne principle. In particular, the shareholder might be able to
claim for the loss of the expected profit on the shares. However,
a difficulty facing such claims against the company is that the
processes of allotment of shares and entry in the register entail a
complete novation, i.e. the substitution of a new contract with
the company upon registration for the old contract based on the
prospectus.179 It has to be said, too, that prospectuses normally
stop short of making explicit promises about future value or
performance, so that the basis for finding a promise to be
enforced may not be available.
Criminal and regulatory sanctions
25–41
Criminal sanctions play a rather limited role in the area of public
offers, but it is to be noted that the central obligation in this area
—not to make a public offer of securities or to request admission
of securities to a regulated market unless an approved prospectus
has been made publicly available—is supported not only by civil
but also by criminal sanctions.180 The principal non-civil
sanctions, however, are regulatory ones in the hands of the FCA,
which also has power to invoke the criminal law just
mentioned.181 The FCA’s sanctions vary considerably according
to whether or not the breach of the rules is discovered before or
after the public offer or introduction has been completed.
Ex ante controls
25–42
The FCA has two veto powers relevant to the public offering
process. It must refuse admission to listing where the applicant
does not meet the eligibility requirements and may or must do so
in certain other cases.182 The decision must be taken by the
Authority normally within six months of the application and
failure to do so may be treated by the applicant as a refusal to
admit. If the FCA proposes not to accept an application for
listing, it must give the applicant a “warning notice”, giving the
applicant a reasonable period within which to make
representations, and if the proposal is confirmed, the matter may
be referred to the Upper Tribunal.183 Secondly, the FCA must not
approve a prospectus if it does not contain the required
information or other breaches of the applicable rules are
detected, thus preventing the public offer or admission to a
regulated market from proceeding.184 These are both potentially
significant enforcement powers, though, as suggested above, it is
probably easier for the FCA to determine whether the eligibility
criteria for listing have been met than to make a comprehensive
determination at the vetting stage whether the prospectus
contains any misrepresentations or omission.
Admission to listing is a binary decision. If the securities are
admitted to listing, but should not have been because, for
example, they did not meet the eligibility requirements, it
appears that the admission is effective. However, the Authority
may discontinue listing “if it is satisfied that there are special
circumstances which preclude normal regular dealings in
them”,185 but it may need to proceed carefully if the securities
subsequently have been offered to the public and admitted to
trading, since investors will find themselves holding an illiquid
security as a result of the cancellation.186 By contrast, approval
of a prospectus is a step in a process of making a public offer
and it may be possible to halt the process, even after the
prospectus has been approved, if breaches of the rules are later
discovered. Thus, even after approval, the FCA has power to
suspend the offer for a period of up to 10 days, if it has
reasonable grounds for suspecting that a provision of Pt VI of
FSMA (the relevant Part for most of the sections considered in
this chapter) or of the PR or any other provision required by the
PD has been infringed. If it finds that such a provision has been
infringed or even if it concludes that such infringement is likely,
it may require the offer to be withdrawn or the market operator
to prohibit trading in the securities.187 The suspension or
prohibition decision of the FCA may take effect immediately,
without the issuer or other involved person having the
opportunity to make representations, for such action may be
urgent. However, in these cases, or where the FCA refuses to
approve the prospectus, the FCA must issue a notice, stating the
reasons for the action and giving the applicant or other person
involved the possibility of making representations (which may
cause the FCA to vary or revoke its decision).188 The notice must
also notify the person of the right to refer the FCA’s decision to
the Tribunal.
Where admission to trading is refused under the LSE’s own
rules,189 an appeal process is also provided. There is now a fairly
elaborate system for appeals against both disciplinary and non-
disciplinary decisions of the Exchange. This tracks the FCA
arrangements but with an Appeal Committee, established by the
Exchange, acting as the final appeal body instead of the Upper
Tribunal.190 Further, judicial review of the Exchange’s exercise
of its powers is a possibility and the elaboration of the
Exchange’s disciplinary and appeals procedures in recent years
constitutes an obvious response to that legal risk.191
Ex post sanctions
25–43
The sanctions discussed in the previous paragraph can be applied
effectively only to breaches of the rules which the FCA picks up
in advance of completion of listing, the public offer or admission
to trading. The FCA will obviously be reluctant to use its powers
to prohibit trading once admission has been secured, and cannot
do anything about a public offer which has been carried through
to the point of the allotment of securities. Furthermore, it can be
said that the regulatory sanctions considered so far impose costs
on the issuer (i.e. its shareholders) rather than on the officers of
the company who may be those responsible for the non-
compliance. It is therefore of some significance that the FCA has
the power to impose monetary penalties where there has been a
breach of Pt VI of FSMA or the prospectus or listing rules.192
The FCA may impose a penalty of such amount as it considers
appropriate on the corporate bodies involved. Significantly, this
penalty-imposing power extends to any person who was a
director of the company where the director was “knowingly
concerned” in the contravention.193 The FCA may engage in
public censure in lieu of imposing a penalty.194 In the case of
suspected breaches of Pt VI of FSMA or of the PR or LR the
FCA also has formal investigatory powers which may help it to
uncover the truth.195
This penalty-imposing power is naturally surrounded by some
safeguards. The FCA is required to develop outside the context
of a particular case a policy about the circumstances in which it
will exercise its powers and the amount of the penalty it will
impose.196 A proposal to impose a penalty must be
communicated to the person in question by means of a “warning
notice”, giving at least 28 days for representations to be made,
and a decision to impose a penalty may be appealed to the
Tribunal.197
CROSS-BORDER OFFERS AND ADMISSIONS
25–44
We have noted above that the EU’s strong drive to remove
obstacles to cross-border offers and admissions to regulated
markets led to the maximum harmonisation character of the PD.
The notion is that an issuer should be able to use the same
documentation (subject in some cases to translation
requirements) when it makes offers or seeks admission to trading
in more than one Member State. Since there is not currently a
single EU regulator, an immediate question which arises is
where regulatory responsibility should be allocated in cross-
border offers. The basic choice in the PD is to allocate
responsibility to the state in which the company is incorporated
(has its registered office) in the case of companies incorporated
within the EU (the “home state”). The competent authorities of
“host states”, i.e. states in which an offer to the public is made or
admission to trading is sought, “shall not undertake any approval
or administrative procedures relating to prospectuses”.198
This choice, which applies even if there is to be no public
offer or admission in the home state, is controversial. It
potentially puts regulatory responsibility in the hands of
inexperienced regulators in countries with undeveloped markets
and prohibits the authority in the jurisdiction where the offer or
trading will occur from taking action, even though the latter has
the stronger incentive to discharge its regulatory functions
effectively. If the host state regulator finds that breaches of the
relevant rules have occurred or are taking place, it is obliged to
refer the matter to the home state authorities, and, only if this is
ineffective, may the host state regulator act, informing the
Commission at the same time.199 Equally, if the host state
authority forms the view that a supplementary prospectus is
needed, it is the home state authority which must require it and
the host state authority is permitted simply to draw the home
state authority’s attention to the need.200 Consequently, FSMA is
drafted so that the obligation to seek FCA approval of a
prospectus is applied only to issuers whose home state is the
UK,201 and most of the PR apply only to offers and admissions
involving issuers whose home state is the UK.202 It follows as
well that the regulatory sanctions for breach of the PR apply
only to issuers incorporated in the UK, but the domestic
statutory and common law compensation regimes may apply
(subject to the relevant conflicts of law rules).
There are two exceptions to the rule of home state regulation.
First, a home state has to be attributed to companies incorporated
outside the EEA, and this is the state in which securities are first
offered to the public or where the first admission to trading on a
regulated market is made, at the issuer’s choice.203 For non-EEA
issuers, therefore, the home state is what would be the host state
for an EEA issuer. However, third-country issuers may also
benefit from a further relaxation. The chosen EU regulator may
permit the third-country issuer to draw up a prospectus under the
third country’s laws if the information is equivalent to that
required by the PD and the third country rules meet international
standards.204 No doubt this is done in the expectation that EEA
issuers will be treated similarly, so that international offerings
will be promoted. Secondly, even for EU-incorporated issuers,
issuers of debt securities denominated in amounts of at least
€1,000 may choose as regulator the state of incorporation, the
state of offer or the state of admission to trading.205
The second contentious issue with cross-border offerings is
that of language. If a translation is required in all the official
languages of the states in which the offering is to take place and
where the securities are to be admitted to trading and in the
language of the state of incorporation, then the additional costs
of the cross-border offer are likely to be substantial. On the other
hand, the Member States can hardly be expected to agree a
single language in which alone prospectuses need be circulated.
The result, however, is a complex set of rules. The language
issue is solved in the following way in art.19. Where the offer or
admission takes place in the home state only, then the competent
authority of the home state determines the appropriate language.
Where the offer or admission takes place in one or more
Member States not including the home state, then the offeror or
person seeking admission has a choice between a language
acceptable to each the competent authorities in those Member
States or “a language customary in the sphere of international
finance” (though the competent authorities of the host states can
require the summary to be translated into its official language).
How far this Delphic phrase goes to embrace languages other
than English is anyone’s guess—and, indeed, that was probably
the primary virtue of the phrase in the EU legislator’s mind. Of
course, the issuer will need home state approval of the
prospectus, even if it is not issuing there, and for that purpose it
may choose either a language acceptable to the home state
authority or a customary language. Thus, where the offer is not
made in the home state, the incentive created by these rules is
clearly for the offeror, etc. to use “a language customary in the
sphere of international finance”, since that language can be used
for both home and host state purposes (unless home and host
states share a language which does not fall within the
“customary” category).
Where the offer or admission to listing is to take place in two
or more Member States, including the home state, then the
prospectus must be produced in a language acceptable to the
home state competent authority and, in addition, in either a
language acceptable to each host state or a language customary
in the sphere of international finance. Here, therefore, the burden
of translation costs turns on the home state’s willingness to
accept a “customary” language.
However, in the case of admission to trading of heavy-weight
debt securities (i.e. those denominated in amounts of €100,000
or more), the offeror, etc. always has the choice of using a
customary language only, even where admission will occur in
the home state, or it may instead choose a language acceptable to
both home and host state competent authorities.
DE-LISTING
25–45
This chapter has focused on the processes by which the
securities of a company become publicly held and traded on a
public market. Whilst a completed public offering cannot easily
be reversed,206 admission to trading is a reversible process.
Companies may seek voluntarily to retire from a market upon
which their securities are traded, notably after a successful
takeover bid (discussed in Ch.28), as a result of which the
majority of its shares are held by the bidder. If the securities of
the company are all held by one person as a result of the bid, this
is a straightforward exercise. If, however, there are some outside
shareholders, they may oppose the proposal to de-list because it
will reduce the liquidity of the securities even further. Indeed,
the proposal to de-list may be part of an attempt by the
controllers of the company to squeeze out the minority in a
situation where the statutory squeeze-out provisions (also
discussed in Ch.28) would not operate. The requirement
previously was that companies simply inform their shareholders
of the decision to de-list, but the LR now require requests from
companies with a premium listing for the cancellation of a
primary listing of equity shares to be approved by a three-
quarters majority at a meeting of the class of shareholders in
question and, where there is a controlling shareholder, a majority
of the non-controlling shares, after the circulation to them of a
statement, approved by the FCA, of the reasons for this step.207
This is a significant increase in minority shareholder protection
and should increase the willingness of investors to take minority
stakes in companies that are controlled by a single investor or
are likely to become so.
1
Securities cannot be admitted to the official list (see below) without the consent of the
issuer (FSMA 2000 s.75(2)), but the impetus for the listing may come from the
shareholder.
2
Often referred to as “blue sky laws” because the securities on offer were backed, it was
said, only by the blue sky. The first significant State law in the US seems to have been
that of Kansas in 1911.
3 The Securities Act 1933 and the Securities Exchange Act 1934.
4
Toronto Stock Exchange, Toward Improved Disclosure, Interim Report of the
Committee on Corporate Disclosure, 1995, para.3.9.
5 For debt issues the investor’s concern is whether the debt will be re-paid on time and in
full. Because debt has priority over equity in an insolvency and because debt has no
exposure to the up-side of a company’s performance, less disclosure is generally
required for bond issues in comparison with share issues. See para.25–17.
6J. Coffee Jr, “Market Failure and the Economic Case for a Mandatory Disclosure
System” (1984) 70 Virginia L.R. 717.
7
Indeed, some investment institutions may be permitted only to acquire listed securities
or may be restricted in the proportion of unlisted securities they may hold in their
portfolio.
8
By the Official Listing of Securities (Change of Competent Authority) Regulations
2000 (SI 2000/968). In other European countries the exchange typically still acts as the
competent authority.
9 Previously the Financial Services Authority.
10 This is the primary piece of domestic legislation considered in this chapter.
11 FSMA s.73A.
12
Directive 2001/34/EC ([2001] O.J. L184).
13 CARD art.8 makes it clear it is a “minimum harmonisation” Directive, to whose
requirements the Member States may add.
14 Above, paras 14–77, 16–77 and 19–6.
15
LR 1.5. This choice, which had previously been available only to foreign-incorporated
issuers, was made available to domestic issuers in 2010. The choice may be changed
subsequently, but subject to supermajority shareholder approval in the case of transfer
from premium to standard listing (LR 5.4A). Bonds will always be listed on the standard
basis.
16AIM replaced the previous and more usefully entitled Unlisted Securities Market
(USM) in 1995.
17
There are also a number of other markets or segments of markets run by the LSE
which, however, need not concern us here.
18
Otherwise they will fall foul of the “general prohibition” in s.19 of FSMA 2000 on
carrying on regulated financial activities in the UK.
19
Set out in more detail in the Financial Services and Markets Act 2000 (Recognition
Requirements for Investment Exchanges and Clearing Houses) Regulations 2001 (SI
2001/995).
20
2014/65/EU ([2014] O.J. L173/349). This is “MIFID II” replacing “MIFID I”
(Directive 2004/39/EC) as from January 2017.
21
Especially as the requirements for recognition were upgraded in response to Title III
of MIFID: see subs.(4A) to (4E) inserted into FSMA 2000 s.286 by SI 2006/2975.
22
See MIFID, Title II. Where trading takes place outside both a regulated market and a
MTF, it is generally called “over the counter” trading (OTC).
23
This decision was taken in 2004 under the then applicable Directive concerning
regulated markets, i.e. Directive 93/22/EEC, the investment services Directive, which
was repealed by MIFID.
24
MIFID also identifies “organised trading facilities” (“OTF”), but since these are not
venues for share trading, we shall ignore them: MIFID art.4(23).
25 LR 2.2.3.
26
LSE, Admission and Disclosure Standards, June 2013, para.1.1 note.
27
Just to complicate things further, the fact that a listed security has been admitted to a
regulated market does not mean that trading has to take place on that market. It was
reported that less than 50 per cent of the trading in FTSE 100 companies (all listed) had
taken place in certain weeks in the middle of 2011 on the Main Market of the LSE, the
main competitors being the MTFs (above, para.25–8) or private markets organised by
large investment banks (“dark pools”) (Financial Times, 19 September 2011, p.20 (UK
edn)).
28 The modern version of that law can be found in FSMA 2000 s.90.
29
For an excellent general analysis of this process see E. Ferran, Building an EU
Securities Market (Cambridge: CUP, 2004).
30COM(1999) 232, 11 May 1999. It was succeeded by a less ambitious White Paper on
Financial Services Policy 2005–2010, which is also less relevant to the concerns of this
book than its predecessor.
31Directive 2003/71/EC on prospectuses [2003] O.J. L345/64, as amended by Directive
2010/73/EU ([2010] O.J. L327/1).
32Above, fn.12. This Directive consolidated Directives going back to 1979, when the
EU first became interested in regulating the admission of securities to public markets.
Substantial parts of the 2001 Directive have now been themselves replaced by Directives
adopted under the FSAP.
33The PD is thus some distance from the description of a Directive in art.288 TFEU as
an instrument “which is binding as to the result to be achieved but shall leave to the
national authorities the choice of form and methods”.
34 See para.25–44.
35
This consultation takes place through the European Securities and Markets Authority
(“ESMA”). In fact, directives today make a distinction between “delegated acts”, where
ESMA only gives advice to the Commission, and “technical standards”, where ESMA
draws up draft rules.
36
Commission Regulation (EC) No.809/2004 [2004] O.J. L215/3.
37
Article 288 TFEU.
38
Established under FSMA 2000, as amended by the Financial Services Act 2012 Pt IA.
39
COM(2015) 583 final.
40
As Caxtonfx did in September 2011 when it offered to the public non-transferable
debt securities with a four-year maturity, but paying a high interest rate. The main
regulation in such a case lies in FSMA s.21, which requires the offer document to be
approved by a person authorised by the FCA. The authorised person will need to be
concerned with the adequacy of the disclosures contained in the invitation document.
41
In an offer for subscription the underwriters simply take up the shares for which the
public have not subscribed. Even if there is no underwriting, large offers are often
distributed to the public by financial intermediaries, perhaps over a period of weeks.
Even in an offer for sale the prospectus is normally drawn up by the issuer and then
relied on by the intermediaries, but some difficult issues have to be resolved to bring this
result about. See ESMA, Consultation Paper 2011/444, Pt 3 and art. 5 of the
Commission’s 2015 reform proposals (above, fn.39).
42 Most of the UK privatisation offers were not primary distributions (i.e. offers of
securities by the company) but secondary distributions (i.e. offers by a large or sole
shareholder of its shares to the public). This chapter is concerned mainly with the raising
of capital by a public offer by the company.
43 On which see para.11–14, above.
44 Which came true in the case of one of the privatisation issues in the “Crash of 1987”.
Yet thousands of small investors continued to put in applications notwithstanding that
the media were warning them that trading would open at a massive discount.
45
The so-called “offer” by the issuer is normally not an offer (as understood in the law
of contract) which on acceptance becomes binding on the offeror. It may be in the case
of a rights issue (see below) but on an offer for sale or subscription it is an invitation to
investors to make an offer which the company may or may not accept.
46 Breaches are difficult but not impossible to detect where applications are made in
different names.
47 This causes bona fide applicants who are unsuccessful understandable resentment.
48 Discussed at paras 24–6 et seq., above.
49
The merit requirements are less for debt securities presumably because the security
itself will normally give the investor greater contractual protections than in the case of
an equity security.
50
See para.25–9.
51Where there is only a thin market in a security, the prices at which those securities can
be traded may be volatile.
52 CARD arts 43 and 58; LR 2.2.7. This rule does not apply if the shares on offer are of
a class already listed; and, in any event, the FCA may grant a derogation if satisfied that
nevertheless there will be “an adequate market for the securities concerned”.
53
CARD arts 49, 56, 62; LR 2.2.9. The LR do not avail themselves of the exemption in
art.49(2) for the non-admission to listing for “blocks serving to maintain control of the
company”.
54
CARD arts 46, 54, 60; LR 2.2.4. The FCA may make arrangements to accommodate
the transfer of partly paid shares. In exceptional cases where it is convinced the market
in the shares will not be disturbed the FCA may list shares whose transfer needs the
consent of the issuer (rare in listed companies but found in some denationalised
companies in order to subject control transfers to scrutiny).
55
CARD art.48; LR 6.1.19, 14.2.2. The rule applies on an EU-wide basis.
56
CARD art.44; Commission Regulation (EC) No.809/2004 Annex 1, 20.1; LR 6.1.3
(premium listing only). For premium listing the accounts must normally have an
unqualified audit certificate (not a requirement of CARD).
57 LR 6.1.3B, 6.1.4.
58 The FCA may dispense with the requirements of LR 6.1.3 and 6.1.4 where it thinks
this desirable in the interests of investors and that investors have the necessary
information to arrive at an informed judgment: CARD art.44 and LR 6.1.13.
59LR 6.1.2A, 6.1.4B & D, 11.1.1A & C. The related party transactions are discussed in
para.16–77.
60
LR 6.1.16. This is a more effective protection for investors than the minimum capital
rule for public companies. See para.11–9.
61
LSE, Admission and Disclosure Standards, April 2013, 1.4 and 1.5.
62
LSE, AIM Rules for Companies, May 2014, r.1.
63 LSE, AIM Rules for Nominated Advisers, 2014, especially Sch.3.
64 Above, fn.61, r.9.
66PD art.3; FSMA s.85(1),(2). The meaning of a regulated market is discussed above at
para.25–6.
67
Above, fn.62, r.3, Sch.2 and Glossary.
68This is by way of contrast with AIM, to which non-listed securities are admitted,
which explains why the LSE has to stipulate its own disclosure requirements for AIM.
69 CARD art.20; FSMA s.80(1).
70
Notably LR4.2.
71 FSMA s.79(3A).
72 In any event, the admission of bonds to listing and to trading on a public market is a
somewhat artificial exercise, driven by the fact that many institutions are unable to
purchase non-listed securities. Much of the trading in bonds is done between institutions
over the counter. So, this is an example of listing and admission being driven by a
regulatory requirement rather than a need for liquidity.
73
Directive 89/228/EEC.
74
PD art.3(2)(a); FSMA s.86(1)(a). Even though no prospectus is required, information
given to some qualified investors must be given to them all: PD art.15(5). Bond issues
are often directed only at financial institutions which fall within this category. Offers to
the public of debt securities are relatively rare, though not unknown.
75
This is a default classification; such investors may ask to be treated as non-
professional investors. This exemption was originally stated in arts 2(1)(e) and 2(2) of
the PD but now that directive operates by reference to the (slightly wider) definition of
“professional investors” in the Markets in Financial Instruments Directive (2004/39/EC),
Annex II Part 1. This is to be replaced from January 2017 by MIFID II (2014/65/EU) but
with only minor changes in relation to the definition of a professional investor.
76
ibid.
77
FSMA ss.86(7) and 87R and PR 5.4.
78 FSMA s.86(2).
79 PD art.3(2).
80PD art.3(2)(c); FSMA s.86(1)(c). The original figure of 50,000 was increased to
100,000 by Directive 2010/73/EU as from July 2012.
81
PD art.3(2)(d); FSMA s.86(d). But the Commission’s 2015 proposals (above, fn.39)
seek to remove this exemption on the grounds it has had a distorting effect on the size of
issued securities (especially debt securities) which has reduced market liquidity.
82
PD art.4(1)(b),(c); FSMA s.85(5)(b); PR 1.2.2.
83 See below at para.28–61. Where, as is common, the offer is in cash, the issue does not
arise, because the target’s shareholders are not acquiring any securities.
84
See below at para.29–7. The provision introduced in 2010 ensuring that only a single
prospectus is required for “retail cascades” falls within this category as well: PD art.3(2).
85 See para.24–6.
86 PD art.7(2)(g).
87 For the Commission’s latest contribution see above fn.39, p.16.
88 PD art.4(1)(a),(d),(e); FSMA s.85(5)(b); PR 1.2.2.
89
See para.11–20.
90 PD art.1(2)(h); FSMA s.85(5)(a) Sch.11A para.9. In the UK this figure was raised to
its present level from 2.5 million in July 2011.
91 PD art.3(2)(e); FSMA s.86(1)(e),(4).
92
This interpretation is confirmed in the Commission’s 2015 reform proposals (above,
fn.39) which propose to increase the relevant amounts to €500,000 and €10 million
respectively.
93PD art.3(2)(b); FSMA s.86(1)(b). Section 86(3) treats as an offer to a single person as
an offer made to the trustees of a trust, the members of a partnership as such and two or
more persons jointly.
94 PD art.7(2)(e), implemented by Commission Delegated Regulation (EU)
No.486/2012.
95
Above, fn.39, p.16.
96 PD art.3(3); FSMA s.85(2).
97
PD art.4(2); PR 1.2.3.
98
PD art.4(2)(a); PR1.2.3(1). The 2015 reform proposals (above, fn.39, p.7) are to raise
the percentage to “at least 20%”.
99
As we have noted above, this argument has now been extended to justify reducing the
level of disclosure on pre-emption issues.
100
The LSE does not normally require an admission document for a further issue of
shares of any size on AIM (above, fn.61 at r.26) and so in the case of an AIM company
only the exceptions to the public offer trigger are relevant in the standard case.
101 PD art.4(2)(h); PR 1.2.3(8).
102 Reflecting the EU’s traditional fear that otherwise there would be a regulatory “race
to the bottom” with a companies securing admittance to the laxest market and then
immediately moving to the market of choice. Given that the PD is a maximum
harmonisation Directive, this may be thought an over-blown worry.
103
PD art.3; FSMA s.85(1),(2).
104
PD art.5(1); FSMA s.87A(2). Although this sounds like a strict liability provision,
the rules governing civil liability for omissions and misstatements (see below paras 25–
33 et seq.) are negligence based (albeit with the burden of proof reversed).
105
Commission Regulation (EC) No.809/2004, as amended.
106
In a number of places the PR (made under powers conferred by FSMA s.84) repeat
rules from the Commission Regulation but do not seek to transpose it into domestic law.
107
Commission Regulation arts 3 and 4a.
108
Most recently in Directive 2001/34/EC Annex 1 (now repealed).
109 Commission Regulation art.3. For example, the Regulation distinguishes between
offers of equity and debt securities and has special provisions for asset-backed securities,
depository receipts, derivative securities, closed-end collective investment schemes and
public authority offerors, some or all of which will be irrelevant in many cases.
110 At para.25–12.
111
PD art.8; FSMA s.87Q. In practice, companies will structure matters so that
acceptances are received only after the final price has been announced. However, they
will probably have given an indicative price range to investors whilst drumming up
support for the offer. Somewhat similar reasoning underlies the notion of a “base
prospectus” which, however, is confined to the issuance of debt securities on “a
continuous and repeated manner”: art.5(4).
112 PD art.5(1); FSMA s.87A(3). This is not to say that the prospectus may not influence
retail investors’ decisions indirectly, for example, through the comments of financial
journalists or financial advisers who, one hopes, have read it.
113PD art.5(2); FSMA s.87A(5),(6). The Directive does not require the production of a
summary in the case of “heavy weight” debt securities (denominations of €100,000 or
above) except in cross-border offerings where Member States may require a summary in
their official language if the prospectus is not in that language. The argument,
presumably, is that these securities are likely to be bought only by professional investors
who can be expected to read the whole prospectus. Although offers of such securities do
not count as public offers (see above, para.25–19), a prospectus is required if they are to
be admitted to trading on a regulated market.
114
Nevertheless, the Commission’s 2015 proposals (above, fn.39) are based on the
proposition that the summary provision have not been a success and a further, and more
elaborate attempt, is to be made to standardise them, using an approach which is to be
applied across all packaged retail investment and insurance products (the so-called
“PRIIPS” products).
115
PD arts 5(2) and 6(2); FSMA s.90(12). On civil liability generally see below.
116
FSMA s.87G.
117
The phrase “is noted” might suggest knowledge is required but “arises” does not.
Section 81 creates a similar obligation to produce supplementary listing particulars, but
s.81(3) makes it clear that knowledge of the new event is required to trigger the
obligation.
118 PD art.5(3).
119 PD arts 12 and 9(3); PR 2.2–6.
120
This two-part arrangement is particularly convenient for “programme” sales, i.e.
where similar securities are offered in relatively small batches on a relatively frequent
basis. Short- and medium-term debt instruments (“commercial paper” and “notes”) are
often offered in this way. The Commission’s 2015 proposals aim to increase the speed
advantages of the registration statement, renaming it the “universal registration
document”.
121 LR 8.2.1, made under FSMA s.88. Since the sponsor is a purely domestic
requirement, the relevant rules are found in the LR rather than the PR. The “nominated
adviser” (or “nomad”) plays a similar role in relation to the admission document (see
above, para.25–17) required for admission to AIM. A sponsor is also required on certain
other occasions, for example, when the company issues a “Class 1” circular (see
para.14–20), but a listed company is not required to have a sponsor at all times, unlike a
company admitted to AIM where a condition for continued admission of the company is
that it always has a nomad: LSE, AIM Rules for Companies 2014, r.1. The nomad has
similar responsibilities to the sponsor at admission stage and must give the Exchange the
same assurance: AIM Rules for Nominated Advisers, 2014, Sch.2.
122 LR 8.3.1.
123LR 8.4.3. Given the importance of sponsors, provisions have to be made for their
independence, qualifications and supervision. See, for example, LR 8.6 and 8.7, but
those matters do not need to be considered further in this book.
124LR 8.4.2 and 8.4.8. And has procedures in place to facilitate compliance with the
Transparency and Disclosure Rules discussed in the following chapter.
126 Commission Regulation (EC) No.809/2004, Annex 1, para.13.
127 PD art.13; FSMA s.87A.
128
FSMA s.87C: 20 days if the issuer has no securities traded on a regulated market and
has never previously made a public offer. This follows from the fact that s.87C
determines the periods within which the FCA must make its decision. The submitted
information must include the documents which the prospectus incorporates by reference:
PR 3.1.1.
129
PD art.13(4).
130
PD art.13(6); FSMA Sch.1ZA para.25.
131
FSMA s.87D.
132
FSMA s.87J, following art.21(3)(a)–(c) of the PD.
133 PD art.8(2); FSMA s.87B.
134
FSMA s.87B(1)(a),(2).
135 FSMA s.87B(1)(b),(c). The same two exemptions are found for AIM admissions
documents: AIM Rules for Companies, r.4. A similar exemption power also exists in
relation to listing particulars (s.82).
136
PD art.14; PR 3.2.4–5. There is further detail in arts 29, 30 and 33 of the
Commission Regulation.
137
Widely defined in art.34 of the Commission Regulation.
138
PD art.15; PR 3.3.2–3. The FCA’s guidance is that the advertisement should state
that it is not a prospectus and contain the warning that investors should not subscribe for
securities without reading the prospectus.
139
FSMA s.98, requiring prior approval, was repealed in 2005 when the PD was
transposed in the UK. The wide definition of “advertisement” makes such a requirement
impractical.
140 FSMA s.102B. This is not necessarily straightforward, since the Commission does
not accept that merely refraining from inviting offers removes the advertisement from
the category of prospectus. The 2015 reform proposals (above fn.39) give the
Commission power to issue delegated legislation in this area.
141 FSMA s.85(4). There is no equivalent in relation to listing particulars.
142 Derry v Peek (1889) 14 App. Cas.337 HL. At this time, of course, liability in the tort
of negligence for purely economic loss caused by misstatements was not accepted either
(and that remained in effect the case until the House of Lords’ decision in Hedley Byrne
& Co Ltd v Heller & Partners Ltd [1964] A.C. 465), so that the tort of negligence could
not be used to circumvent the restrictions on liability under the tort of deceit.
143 The rules discussed in this section also apply to misstatements and omissions in
listing particulars. Indeed, the section is drafted in terms of listing particulars and only
s.90(11) makes it clear that it covers prospectuses.
144
FSMA s.90(1). Where the rules require information regarding a particular matter or a
statement that there is no such matter, an omission to provide either is to be treated as a
statement that there is no such matter: s.90(3).
145
“Acquire” includes contracting to acquire the securities or an interest in them:
s.90(7).
146 To be assessed presumably on the tort measure, i.e. to restore the claimant to his or
her former position: Clark v Urquart [1930] A.C. 28 HL, i.e. normally the difference
between the price paid and the value of the securities received.
147
For the difficulties the common law has had with this point, see below, para.25–38.
148
This is the securities litigation term deployed in the US. It is not really apt in this
context: “negligence on the market” would be more accurate if less resonant.
149
See above, para.22–44 in relation to auditors, and below, para.25–38.
150 PD art.6(2); FSMA s.90(12). On key information see para.25–23.
151
The common law rules are discussed briefly below. It is not entirely unarguable that
s.90 applies to an AIM admission document, which is a cut-down version of the PD
prospectus. The function of the two types of document is the same. The section does not
in terms say that it applies only to prospectuses required by the PD. Nor is it clear that a
“prospectus” (not defined for the purposes of s.90) is confined to the documentation
accompanying a public offer of shares. Nevertheless, s.90 is probably understood by
most people to be limited in the way stated in the text.
152 This sentence merely summarises the very complex drafting of Sch.10.
153PR 5.5. In the case of listing particulars the persons responsible are set out in FSMA
2000 (Official Listing of Securities) Regulations 2001 (SI 2001/2956) reg.6.
154
PR 5.5.3.
155 For example, the reporting accountant and any other “experts”.
156 This takes account expressly of secondary offers (above, fn.42), but the offeror will
not be liable if it is making the offer in association with the issuer and the issuer has
taken the lead in drawing up the prospectus.
157 PR 5.5.4.
158 PR 5.5.9. This clearly does not exclude the main functions of sponsor required by the
Listing Rules.
159 PD art.6; Commission Regulation, Annex I para.1.
160
No person, by reason of being a promoter or otherwise, is to incur any liability for
failing to disclose in a prospectus information which would not have had to be disclosed
by a person responsible for the prospectus or which a person responsible would have
been entitled to omit by virtue of the Act.
162 R. v Kylsant [1932] 1 K.B. 442 CCA.
163 Derry v Peek (1889) 14 App. Cas. 337.
164
Or his agent, but even then not so as to make the agent liable but only the principal:
The Skopas [1983] 1 W.L.R. 857—though presumably the agent’s state of mind is
relevant in establishing the reasonableness of the belief in the truth of what was said. In
the case of statements in the prospectus, even by experts, it seems that the company will
be prima facie liable for them and that it carries a heavy burden to disassociate itself
from them. See Mair v Rio Grande Rubber Estates Ltd [1913] A.C. 853 HL; Re Pacaya
Rubber Co [1914] 1 Ch. 542 CA.
165 Royscot Trust v Rogerson [1991] 2 Q.B. 297 CA. However, in Smith New Court
Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] A.C. 254, a case of
deceit, where the consequences of adopting the fraud measure were particularly onerous
for the defendant, the House of Lords refused to commit themselves to acceptance of the
proposition laid down in the Royscot Trust case.
166
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465.
167
This last requirement is discussed further in para.28–64.
168
As suggested by Peek v Gurney (1873) L.R. 6 H.L. 377 HL.
169
As suggested by Andrews v Mockford [1892] 2 Q.B. 372 CA, where the jury were
held to be entitled to conclude that the false prospectus was only one of a series of false
statements made by the defendants, whose purpose was not simply to induce
subscriptions but also to encourage purchases in the market when dealings began.
170 Al-Nakib Investments Ltd v Longcroft [1990] 1 W.L.R. 1390.
171 Possfund Custodian Trustees Ltd v Diamond [1996] 1 W.L.R. 1351. At the time the
relevant provisions of the companies legislation conferred a statutory entitlement to
compensation only upon subscribers.
172 “The issue of a prospectus establishes a basis for valuation of the securities and
underpins the development of a market in them, irrespective of the precise circumstances
of the initial offer”: DTI, Listing Particulars and Public Offer Prospectuses:
Consultative Document (July 1990), para.10.
173
174
However, in Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All E.R. 573 there is a
dictum of Jacob J to the effect that the court’s power to award damages under s.2(2) is
not limited to situations where the misrepresentee still has the right to rescind, thus
opening up the possibility of damages under the statute for non-negligent misstatements,
a development which would benefit misrepresentees. This dictum was not followed in
Government of Zanzibar v British Aerospace (Lancaster House) Ltd [2000] 1 W.L.R.
2333.
175Sharpley v Louth and East Coast Railway Co (1876) 2 Ch. D. 663; Scholey v Central
Railway of Venezuela (1869) L.R. 9 Eq. 266n; Crawley’s Case (1869) L.R. 4 Ch. App.
322.
176 Tennent v The City of Glasgow Bank (1879) 4 App. Cas. 615.
177
Oakes v Turquand (1867) L.R. 2 H.L. 325; Re Scottish Petroleum Co (1882) 23 Ch.
D. 413. Whether this would apply in the case of rescission as against a transferor (rather
than the company) is less clear, but the liquidator’s consent would be needed for the re-
transfer: Insolvency Act 1986 s.88.
178
Even in this context one should note the dictum of Lord Browne-Wilkinson in Smith
New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] 4 All
E.R. 769 at 774: “if the current law in fact provides that there is no right to rescind the
contract for the sale of quoted shares once the specific shares purchased have been sold,
the law will need to be carefully looked at hereafter. Since in such a case other, identical
shares can be purchased on the market, the defrauded purchaser can offer substantial
restitutio in integrum which is normally sufficient”. However, this comment was made
in the context of a purchase from a shareholder, not a subscription to shares issued by
the company.
179 The possibilities and problems arising out of breach of contract claims against the
company are illustrated by Re Addlestone Linoleum Co (1887) 37 Ch. D. 191 CA,
which, however, must now be read in the light of the abolition of the rule that a
shareholder cannot recover damages against the company unless the allotment of shares
is also rescinded. See CA 2006 s.655.
180
FSMA s.85(3): on indictment the maximum penalty is a prison term of not more than
two years or a fine or both.
181
FSMA s.401.
182
FSMA s.75(4). See para.25–15, above. Other cases include issues of securities by
private companies (s.75(3) and FSMA 2000 (Official Listing of Securities) Regulations
2001/2956 reg.3) and securities already listed in another EEA state where the issuer is in
breach of those listing rules (s.75(6)).
183
The warning notice procedure is laid down in s.387 of FSMA 2000 and fleshed out
in the following provisions of Pt XXVI of the Act. In 2010 the Upper Tribunal replaced
the Financial Services and Markets Tribunal, which had previously discharged this
function. Appeal lies on a point of law to the Court of Appeal or Court of Session.
184
FSMA s.87A.
185
FSMA s.77(1). A more common use of this power is where the “free float” has fallen
below 25 per cent (above, para.25–15) and is not likely to return to that level in the near
future. See further, LR 5.2.2.
186
The issuer may refer the cancellation to the Upper Tribunal (s.77(5)), but the
shareholder has no right of appeal, nor even to be consulted by the Authority before the
decision is taken, even though his or her financial position is crucially affected. In R. v
International Stock Exchange Ex p. Else (1982) Ltd [1993] Q.B. 534 CA it was held that
the EU Directives did not require that access to the courts be granted to the shareholders.
The Court was influenced by the argument that to decide otherwise would enormously
slow down decision-taking by the competent authority.
187
FSMA ss.87K and 87L. In the case of admission to trading, there is no withdrawal
power where the FCA concludes only that it is likely a requirement will be infringed.
This is presumably because of the adverse impact of ending trading on those who have
invested in the company’s securities, whereas if an offer is withdrawn, the securities on
offer are simply not taken up. These provisions follow those of art.21(3)(d)–(h) of the
PD.
188 FSMA ss.87D and O. The “person” (other than the offeror) could be, for example,
the operator of the market.
189 See para.25–16.
190
LSE, AIM Disciplinary and Appeals Handbook, 2014.
191cf. R. (on the application of Yukos Oil Co) v Financial Services Authority and
London Stock Exchange [2006] EWHC 2044.
192FSMA s.91(1) and (1A). Section 91(1) includes breaches of the listing rules other
than at the public offer stage, as we shall see in the next chapter. Section 91(1A)
implements art.25 of the PD. It will be recalled that an FCA penalty is one of the matters
against which a company may not agree in advance to indemnify the director: above,
Ch.16 at para.16–130.
193 FSMA s.91(2). Since 2012 sponsors are also subject to FCA disciplinary powers:
s.88A.
194
FSMA s.91(3).
195
FSMA s.97 and Pt XI. The investigatory powers are not confined to authorised
persons, as they normally are under Pt XI.
196
FSMA s.93.
197
FSMA s.92 and s.387 on warning notices.
198
PD arts 17(1) and 2(1)(m)(n). There are procedures to be followed by the home State
to certify to the FCA its approval of the prospectus: PD art.18; FSMA s.87H.
199
PD art.23.
200
PD art.17(2).
201
FSMA s.87A(1)(a).
202
PR 1.1.1. However, the FCA does have the task of applying the eligibility
requirements (above, para.25–15) to all applicants, for CARD does not insist on home
state regulation.
203
PD art.2(1)(m)(iii).
204
PD art.20; PR 4.2. See Commission Regulation (EC) No.1569/2007. An issuer using
IFRS will always be in the clear since this is the EU requirement.
205 PD art.2(1)(m)(ii). This rule applies to non-EU incorporated issuers as well, who,
however, cannot choose the State of incorporation because they are not within the EU.
The advantage for them of being within (ii) rather than (iii) appears to be that the choice
arises each time a relevant issue of debt securities is made, under (iii) the choice is
otherwise a once-and-for-all one.
206
See the constraints on companies’ acquisition of their own shares discussed in Ch.13.
207 LR 5.2.5. For the meaning of a controlling shareholder see text attached to fn.59,
above. There are certain exceptions to the requirement for shareholder approval, for
example, where the shares are already traded on a regulated market in another EEA State
(though this may be a significant event for shareholders); if the company is in severe
financial difficulties; or the securities in question are debt securities; or the controller has
reached a 75 per cent holding as a result of a takeover bid in which the offer document
made clear the offeror’s intention to de-list.
CHAPTER 26
CONTINUING OBLIGATIONS AND DISCLOSURE OF
INFORMATION TO THE MARKET
Introduction 26–1
Periodic Reporting Obligations 26–3
Episodic or Ad Hoc Reporting Requirements 26–5
Disclosure of Directors’ Interests 26–9
Who has to disclose? 26–11
What has to be disclosed, to whom and when? 26–12
Disclosure of Major Voting Shareholdings 26–14
The scope of the disclosure obligation 26–16
Sanctions 26–24
Compensation for misleading statements to the
market 26–25
Compensation via FCA action 26–28
Administrative penalties for breaches 26–29
Criminal sanctions 26–32
Conclusion 26–33
INTRODUCTION
26–1
Even after a company has been admitted to a public market, in
accordance with the rules discussed in the previous chapter, the
law imposes “continuing obligations” in relation to disclosure by
publicly traded companies. These obligations are discussed in
the first half of this chapter. In addition, however, the law
requires those associated with the company, as directors or major
shareholders, to make certain disclosures to the company and,
through the company, to the market. We turn to them in the
second half.
26–2
The continuing obligations laid on the company largely reflect
the disclosure philosophy which dominates the rules on public
offerings and admission to trading,1 but that theory is applied
now to the post-admission period so as to inform trading among
investors in the securities of the company. Investor protection
and allocative efficiency are most obviously advanced by
continuing disclosure when a traded company returns to the
market to raise further capital, especially in cases where it may
do so without issuing a new prospectus.2 More generally,
investors’ willingness to purchase securities in publicly traded
companies (whether on a public offering or from existing
shareholders) is likely to be enhanced if they think that market
prices reflect the true state of the company’s business.3 In
addition, the prompt disclosure of significant information by the
company will reduce the opportunities for insiders to trade in the
securities before the market is aware of new developments.
Further, disclosure rules may benefit shareholders, whether or
not they contemplate trading in the company’s securities. The
market price of the stock may indicate to shareholders (or
independent directors acting on their behalf) whether all is well
with the company’s business and whether the exercise of their
governance rights would be appropriate—though it would be
unwise for shareholders to react to short-term movements in
share prices. Continuing disclosure by the company thus has
both market and corporate governance implications, which we
will explore in this chapter.4
Insider trading may also be discouraged by requiring those
closely associated with the company’s central management
(notably its directors) to make disclosures to the company and to
the market about their trading in the company’s securities, since
directors are structurally well placed to acquire inside
information. Finally, within the shareholder body disclosure of
beneficial ownership of shares may also reveal who is really in a
position to influence decisions in shareholder meetings and so to
determine the future course of the company (for example,
through the selection of directors). So, the rules about disclosure
to the company and the market have market “cleanliness” and
corporate governance objectives as well as the rules on
disclosure by the company.
As with the disclosure rules operating at the time of admission
to the market, the structure of domestic law is now heavily
influence by EU law, notably the Transparency Directive
(“TD”)5 and the Market Abuse Regulation (“MAR”).6 The TD
has generated the same multi-layered rule-making structure
which we identified in relation to the Prospectus Directive.7 At
the bottom of the structure, but very important in practice, are
the Transparency Rules (“TR”) made by the FCA. Under the TD
the domestic rules are somewhat more important than under the
PD because, unlike the PD, the TD is not a maximum
harmonisation instrument. In principle Member States can add to
its provisions, which the UK, because of its long history of
regulating continuing obligations, has often done. Market abuse
was previously dealt with at EU level through directives,
generating the same multi-layered structure. However, in the
post-crisis reforms the EU moved to a Market Abuse Regulation8
which, as a regulation, does not require transposition into
domestic law but operates directly as part of UK law. However,
it too provides largely minimum standards to which domestic
law may add.
PERIODIC REPORTING OBLIGATIONS
26–3
We saw in Ch.21 that all companies must report on an annual
basis to their shareholders and that such reporting is now
extensive, especially for “quoted” companies.9 However, for a
long time companies with securities10 traded on public markets
have been subject to more frequent reporting requirements, for
the market’s appetite is not satisfied by yearly reporting. Such
companies may be required to report half-yearly and even
quarterly. In the case of regulated markets11 these obligations
currently stem from the TD.
Article 4 of the TD requires the publication of audited annual
accounts and reports. By and large, the requirements of this
article are met by the rules contained in the Companies Act 2006
and considered in Chs 21 and 22.12 However, the Directive’s
requirement for speedier publication of accounts than the 2006
Act requires (four, rather than six, months from the end of the
financial year) is implemented domestically in the DTR.13
Further, TD art.4 requires a more explicit “responsibility
statement” than is to be found in the case of accounts approved
by the directors and signed by a director on behalf of the board
under the Act.14 The TD requires the names of all those
responsible within the issuer for the accounts and reports to be
stated and the responsibility statement must certify that, to the
best of their knowledge, the accounts have been prepared in
accordance with the relevant standards and give a true and fair
view of the company’s financial position, and the management
report includes a fair review of the company’s business.15
More significant is the TD’s requirement for half-yearly
reports, to which there is no Companies Act equivalent, to be
published within two months of the end of the half year. The
half-yearly reports are required to be less detailed than the
annual ones and are not required to be audited (though if they are
audited or reviewed, the audit report or review must be
published).16 The accounts required to be produced are a
condensed set of financial statements, the directors’ report is an
“interim review” and the responsibility statement is adjusted
accordingly.17
26–4
The issue of quarterly reporting has been contentious. Some
argue that it adds to the efficiency of securities markets; others
than it encourages management to focus on the short-term. The
original TD required, not a set of quarterly accounts but only a
quarterly “interim management statement”, giving an
explanation of material events and transactions which had taken
place and their impact on the issuer and a general description of
the company’s financial position and performance.18 However,
in the 2013 amendments the short-termism argument won out
and the quarterly reporting requirement was removed.19
As we have noted in Ch.21, the power to review the accounts
and reports of companies for compliance with the relevant
requirements is one which has been delegated by the
Government to the Financial Reporting Council; and that body’s
powers extend to all the periodic reports required to be produced
by listed companies, whether annual or otherwise.20
EPISODIC OR AD HOC REPORTING REQUIREMENTS
26–5
In addition to the requirement to make reports every six months,
publicly quoted companies are required to report events as they
occur. There are two main arguments behind this requirement.
First, it can be seen as a way of keeping shareholders and
investors up-to-date about developments in the business of the
company or about other factors which affect its business. The
information should be disclosed because it is relevant to
investors and shareholders. The second argument, reflected in
the fact that at EU level this disclosure obligation is located in
MAR rather the TD, is that the information should be disclosed
publicly in order that it shall no longer be known only to a small
group of persons who may be tempted to trade on the basis of
the information to their profit precisely because it is not known
to the market in general. On this rationale disclosure is a way of
reducing opportunities of “insider trading”, i.e. trading in
securities on the basis of price-sensitive information which is not
generally available. On both arguments, the purpose of the rules
is to have the information disclosed to the market, but, in the
first argument because market participants and shareholders
need the information to inform action they might take and, on
the second argument, because disclosure is the way of depriving
the information of its “inside” character.
26–6
The current version of these disclosure requirements is to be
found in art.17 of MAR, applying to companies whose securities
are traded on a multi-lateral trading facility as well as on a
regulated market.21 The emphasis in MAR is on disclosure by
the company of inside information “as soon as possible”. The
essence of inside information is that it is information which is
not known to the market but, if it were known, would have a
significant effect on the price of the company’s securities.22 This
is discussed further in Ch.30.
In the design of any rules relating to the disclosure of events
“as soon as possible”, there are two problems which have to be
faced. One is to define the point at which the event has
crystallised and so triggers the disclosure obligation. If
impending developments or matters under negotiation are
disclosed too soon, their completion may be jeopardised and the
market possibly be given information whose value is difficult to
assess because it relates to inchoate matters. The injunction to
act “as soon as possible” gives the issuer some leeway, for
example, where it receives unexpected information whose ambit
is not clear and which it needs to clarify. Beyond that, MAR
permits issuers “on their own responsibility” (i.e. they cannot
require the national regulatory authority to give advance
clearance of non-disclosure, though the regulator must be
informed of the decision not to disclose)23 to delay disclosure to
protect their “legitimate interests”, but subject to the riders that
the non-disclosure must not be likely to mislead the public and
that the company can ensure the confidentiality of the
information on the part of those to whom it will have to be
disclosed.24 This permission is particularly important since
art.7(2) states that, in principle, “an intermediate step in a
protracted process shall be deemed to be inside information if,
by itself, it satisfies the criteria of inside information as referred
to in this Article”.25
MAR provides for the European Securities Markets Authority
(“ESMA”) to produce guidelines on the tricky issues of what
constitutes a legitimate interest and action likely to mislead,
though some examples of legitimate interest are given in Recital
50 to the Regulation. The indicative list of such legitimate
interests produced in the draft guidance from ESMA26 focuses
on the negotiation or implementation of transactions which are
likely to be prejudiced if they are revealed, for example,
negotiations for a major contract or negotiations to sell a major
holding in the company. However, even where the issuer has a
legitimate interest in non-disclosure, it may refrain from
disclosing only if non-disclosure is not likely to be misleading to
the market. Here the indicative list suggests non-disclosure will
be misleading if (i) the information is inconsistent with some
prior public statement by the issuer to the market; (ii) casts doubt
on the issuer’s prospects of meeting its financial objectives
where these have been the subject of prior public guidance from
the company; or (iii) the information goes against the market’s
current expectations where these have been set by signals from
the issuer. As is to be expected, investors’ interests appear to
receive more weight than issuers’ concerns.27
26–7
The second problem is that public disclosure of adverse
developments may make it more difficult for the issuer to handle
them. In principle, this situation is also handled under the above
rules, but in one case the balance is re-weighted in favour of the
issuer. Where the issuer is a financial institution and disclosure
of the information would threaten the financial viability of the
issuer and of the financial system, disclosure can be delayed,
subject to the confidentiality test and a public interest test and
the consent of the competent financial regulator.28 The reason for
downgrading investors’ interests in this case is that instability in
the financial system is likely to be more costly to society as a
whole than the costs to investors of non-disclosure. This
provision reflects experience in the financial crisis where, at
least in the UK, the regulators interpreted the prior EU law
strictly so as to require immediate disclosure of the existence of
banks’ liquidity problems whilst permitting non-disclosure only
of the state of the negotiations to solve them—arguably the
worst of both worlds.29
26–8
Where information is required to be disclosed the Regulation
requires that to be done in a way which “enables fast access and
complete, correct and timely assessment of the information by
the public”.30 It also requires it to be displayed on the company’s
website for an appropriate period, but this is not in fact a very
good way of disclosing information simultaneously to all market
participants. In practice, Dissemination will occur in the UK via
a “Primary Information Provider” (“PIP”), i.e. one approved by
the FCA, which carries news about all companies in the market
and so does not favour those who happened to be logged onto a
particular company’s website at the time the information was
posted. Further, information required to be disclosed under
art.17 of MAR constitutes “regulated information” which, by
virtue of art.21 of TD, is subject to additional requirements,
notably that it be disseminated to the public simultaneously, as
nearly as possible, in all EEA Member States.31
Somewhat bureaucratically, art.18 of MAR32 requires issuers
to draw up and keep updated, lists of those working for them
(whether as employees or self-employed persons) who have
access to inside information; and to send the lists to the relevant
national regulator, if so requested. Each list must be kept for five
years. Those acting on behalf of the issuer (for example, an
investment bank or law firm) must also draw up such a list.33
The list must give the reason why a particular person is on the
list. All those on the list must be acknowledge in writing their
duties under the insider dealing rules and of their awareness of
the sanctions for breaking them.
DISCLOSURE OF DIRECTORS’ INTERESTS
26–9
In the previous sections we have examined the disclosure
obligations imposed on publicly traded companies. We now turn
to the obligations imposed on those associated with the company
as either directors or major shareholders.
Since shortly after the Second World War the Companies Acts
required directors to disclose to their companies their interests in
the securities of the companies of which they are directors, an
obligation which was later extended so as to impose upon the
director the duty to disclose the interests of spouses, civil
partners and children. In the case of a company with securities
listed on a recognised investment exchange34 the company was
then under an obligation to notify the exchange, which was
permitted to publish the information to the market. Following the
implementation of the Market Abuse Directive35 in the UK, these
disclosure obligations were transferred wholly to rules made by
the FCA36 and confined to companies whose securities were
admitted to trading on a regulated market (or where an
application for admission has been made). With the adoption of
MAR37 to replace the Directive the controlling obligation is now
to be found in art.19 of that instrument and, as we have noted,
MAR applies to multi-lateral trading facilities as well as to
regulated markets.38 However, the substantive provisions of the
Regulation are not enormously different from the prior
combination of EU and domestic law.
29–10
The principal, though not the exclusive, rationale behind this
disclosure requirement is to combat insider trading. Although
directors are not the only people under a temptation to engage in
insider dealing, they are particularly at risk because their
relationship with the company will routinely generate inside
information, i.e. information which, at least for a short while, is
known to them but not outside the company. The original
provisions requiring disclosure of directors’ securities dealings
were introduced following a recommendation from the Cohen
Committee (1945), which identified the insider dealing rationale
for requiring the disclosure:
“The best safeguard against improper transactions by directors and against
unfounded suspicions of such transactions is to ensure that disclosure is made of all
their transactions in the shares or debentures of their companies.”39
Insider dealing is now a prohibited activity,40 but the disclosure

provisions still operate to supplement the operation of the
prohibition, by making detection of improper transactions easier.
However, these disclosure rules should not be regarded as aimed
solely at insider trading. As the Law Commissions put it:
“the interests which a director has in his company and his acquisitions and
disposals of such interests convey information about the financial incentives that a
director has to improve his company’s performance and accordingly these
provisions form part of the system put in place…to enable shareholders to monitor
the directors’ stewardship of the company”.41
So, there are two rationales for director disclosure, insider

dealing and corporate governance.
Who has to disclose?
26–11
The disclosure obligation is imposed on any “person discharging
managerial responsibilities” (“PDMR”) and those “closely
associated” with them. PDMRs are defined so as to go somewhat
wider than just directors so as to include senior (but non-
directorial) executives who (i) have regular access to inside
information relating to the issuer; and (ii) have power to make
managerial decisions affecting the future development and
business prospects of the issuer.42 This is a welcome recognition
of the importance of senior executives, though condition (ii) will
bring only a small number of non-directorial executives within
the definition. In this respect the current law goes beyond the
scope of the former companies legislation. On the other hand,
the prior law applied the disclosure obligation to shadow
directors,43 who would not seem to fall within the definition of a
PDMR, since they will not typically be executives of the
company. For example, a large shareholder will not fall within
this definition, though its transactions may be caught by the less
demanding rules on “vote holder” disclosure, discussed below.
“Closely associated” persons are, in relation to natural persons,
spouses and partners, dependent children and any relative who
has shared the same household for at least twelve months at date
of the transaction. A complex definition of connected artificial
persons adds any legal person, trust or partnership, which is
managed by a PDMR or a connected natural person and which is
directly or indirectly controlled by the PDMR or connected
person or which is set up for that person’s benefit.44 The
notification obligation is imposed on the person who engages in
a relevant transaction (see below); a director who does not
transact is not obliged to disclose the information relating to
connected person’s transactions. However, the PDMR must
inform connected persons of their obligations under the
Regulation, which means the PDMR must identify them, but the
connected person’s disclosure obligation is not expressly
conditioned upon such notification. Equally, the issuer must
notify the PDMRs of their obligations, which again involves
identifying them, a useful exercise in relation to non-board
PDMRs in particular.45
What has to be disclosed, to whom and when?
26–12
MAR requires those subject to it to disclose “transactions on
their own account relating to the shares or debt instruments” of
the issuer. Transactions “relating to” securities clearly embraces
much more than their purchase of sale. In addition, transactions
relating to “derivatives or other financial instruments linked to”
those securities are covered—an important extension.
Nevertheless, this is narrower in one respect than the former
domestic rules. Those required disclosure of interests in the
securities of other companies in the same corporate group by a
person who was a director of any one group company.46
The Commission is required47 to produce “delegated acts”
specifying what constitutes a transaction on own account,
although art.19(7) already includes pledging or lending of
securities and the execution of transactions by a third party
where that third party acts on behalf of the PDMR or connected
person. ESMA’s advice48 devotes a lot of attention to the
situation where the director or connected person buys or sells
units or otherwise invests in a fund which itself has invested in
securities of the issuer. In principle, such transactions should be
disclosed, unless information about the fund’s investments is not
available to the PDMR. Assuming access to this information,
transactions are to be disclosed where the issuer’s securities
constitute at least 20 per cent of the value of the fund. This
means that most retail fund investments are excluded, because
such funds are not normally allowed such a high degree of
investment concentration. Moreover, the test is applied at the
point of investment or disinvestment by the PDMR. If the test is
not met on acquisition, for example, the PDMR will not have to
disclose if the fund manager later buys securities which take the
fund over the threshold, unless the situation is an unusual one
where the PDMR can influence the managers’ investment
decisions.
In addition to funds, the ESMA advice suggests the disclosure
obligation should apply, amongst others, to contracts for
differences (equity swaps),49 options under directors’
remuneration schemes, gifts and donations and share borrowing.
The transactional scope of the disclosure obligation is in fact
very wide, though Member States are free to add to it. However,
the Regulation contains one limitation not previously present in
UK law. If the value of the transactions in a calendar year does
not exceed €5,000, then no disclosure is required and, once that
threshold is reached, only transactions above it are disclosable.50
26–13
The Regulation51 requires information about the transaction to be
disclosed to the company (issuer) and, normally, to the
competent authority of the issuer’s state of registration (in the
UK the FCA).52 The information to be given to the issuer
includes “the price and volume of the transaction” (so that the
director cannot simply say that he or she has bought some shares
in the company).53 Given the complexity of the connected
persons definition the information is wisely required to specify
“the reason for the notification”, which both requires the
notifying person to work out how the definition applies to them
and enables the company to check the reasoning. The financial
instrument and the nature of the transaction must also be
described. The transaction must be notified to the FCA and the
issuer not later than three business days after the day of the
transaction, and the issuer must release the information to the
market (throughout the EU) within the same time-scale (unless
national law transfers that obligation to the competent
authority).54 The information disclosed by directors and others
under the above mechanism, is regulated information under
art.21 of TD and so Member States must ensure it is held in a
central database.55
DISCLOSURE OF MAJOR VOTING SHAREHOLDINGS
Rationale and history
26–14
This is a further area where British law has long required
disclosure but where EU legislation (via the TD) has now
become dominant, leading to a transfer of a substantial part of
the disclosure requirements from the Companies Acts to FSMA.
There is an initial puzzle about why these provisions are
necessary at all. It is rare for companies in the UK to issue
“bearer” shares, and the Small Business, Enterprise and
Employment Act 2015 now prohibits their issuance,56 so that
shares are issued instead in the name of a person (natural or
corporate) and are referred to as “registered” shares. The names
of the holders of such shares, as we have seen,57 must be entered
in a register, which is kept by the company, and reported to
Companies House in the confirmation statement, so that the
names of the shareholders are public knowledge. It may be
wondered why further provision is required. However, the
requirement that the shareholder’s name be registered in the
company’s share register does not mean that the name of the
beneficial owner needs to be registered. The use of nominee
names has long been popular among big investors and now the
dematerialisation of shares58 has put some pressure upon even
small investors to use nominees. Thus, inspection of the share
register will not necessarily, perhaps not even typically, reveal
who has the beneficial interest in the share.59 Finally, the list of
shareholders in the confirmation statement may not be up-to-
date.
Granted this, it is still necessary to say why holders of large
shareholdings should be required to reveal their interests
publicly. In part, but only in small part, these provisions aim to
deter insider dealing, as with those discussed in the previous
section. However, the main purpose of these provisions is better
put as follows:
“A company, its members and the public at large should be entitled to be informed
promptly of the acquisition of a significant holding in its voting shares in order that
existing members and those dealing with the company may protect their interests
and that the conduct of the affairs of the company is not prejudiced by uncertainty
over those who may be in a position to influence or control the company.”60
This statement explains the concentration in the successive legal

regimes on disclosure of holdings of voting shares, because it is
disclosure of actual or potential control of the company that is
aimed at, rather than interests in its securities in general.
However, the statement might also be thought to run together
two rationales for the disclosure provisions. One is protection of
the management of the company and its members, by making
them aware of who is building up a stake in the company.
Disclosure here operates as an early-warning device about
potential takeover bids in particular. But the statement refers also
to the protection of “the public”. Public disclosure may be said
to be promoting the conceptually separate goal of “market
transparency”. The argument here is that disclosure of the
identity of those with important share stakes in the company is
(or could be) an important element in the market’s assessment of
the value of the company. Obviously, a single set of disclosure
rules might aim to promote both policies.
26–15
The current law in fact contains two different types of disclosure
rule. One requires the disclosure of shareholdings once a certain
size threshold has been crossed. This is an obligation generated
automatically by the law once the appropriate threshold has been
reached. The second, still contained in the Companies Act, is
triggered by the company asking any person to reveal the extent
of their interest in the company’s voting shares. This latter set of
disclosure rules we discuss not in this chapter but in Ch.28
dealing with takeovers, because their main impact is in that
context.
The principle of automatic disclosure of major shareholdings
was introduced as a result, again, of the recommendations of the
Cohen Committee61 in 1945 that the beneficial ownership of
shares be publicly disclosed. Over time, the starting threshold
has been lowered, the speed of the required disclosure increased
and the range of interests to be disclosed made more
sophisticated. EU law also showed an interest in this topic at an
early stage.62 The current EU principles are laid down in the
TD.63 The main impact of the TD in the UK was, once again, to
spark off a fundamental review of the purposes of these
disclosure rules. In particular, the emphasis in the Directive upon
disclosure as an instrument to improve the functioning of the
securities markets64 led the DTI to propose65 that the “market
transparency” rationale be given pre-eminence over the others.
This policy was implemented by the removal of the automatic
disclosure requirements from the companies legislation whilst at
the same time the Companies Act 2006 Act amended FSMA so
as to permit the area to be regulated by FCA rules, thus giving
rise to the current regulatory structure.66 The result, as with
directors’ disclosures, was an overall narrowing of the range of
companies covered by the regime. At this point the domestic
rules still went beyond the minimum EU requirements in a
number of ways, but that gap has been substantially narrowed by
the TD amendments of 2013.67
The scope of the disclosure obligation
Which companies are subject to the regime?
26–16
The 1985 Act regime applied to all public companies (in the
company law sense of that term—Plcs).68 The Directive applies
only to companies (issuers) whose securities are admitted to
trading on a regulated market.69 The domestic regime
implementing the Directive applies to all companies with
securities traded on a prescribed market, which includes any
market operated by a Recognised Investment Exchange, on the
grounds that transparency of shareholding is as important on
exchange-regulated as on regulated markets.70 Thus, both the
Main Market of the LSE and AIM are covered by the current
domestic disclosure obligation, but not Plcs which are not
publicly traded.
When does the disclosure obligation arise?
26–17
The rules are concerned with disclosure of the percentage of
voting rights held in a company, as certain thresholds are passed,
rather than just holdings of shares. For that reason DTR 5 is
entitled “Vote Holder Notification”. Holdings of non-voting
shares do not have to be disclosed, because they do not
contribute to the ability to exercise control over the company.
Nor do holdings of shares which are entitled to vote only in
particular circumstances have to be disclosed, for example, non-
voting preference shares whose shareholders can nevertheless
vote when class rights are being varied under the statutory
procedure71 or which are entitled to vote if their preference
dividend has not been paid, provided, of course, that the event
has not occurred which gives the class of shares general voting
rights.72 By contrast, those exercising managerial responsibilities
do have to disclose holdings in non-voting shares under the rules
discussed in the previous section, because opportunities to
engage in insider dealing can easily arise in relation to such
shares, and holdings of non-voting equity shares may provide
economic incentives for directors to act in particular ways,
despite the absence of a vote.
The disclosure thresholds are three percent of the total voting
rights in the company and every 1 per cent increase thereafter.
Decreases must also be notified on the same scale.73 These
disclosure triggers are more demanding than those in the TD,74
but reflect the prior domestic law. Almost as important as the
definition of the threshold is the question of how soon after the
threshold has been crossed does the notification obligation have
to be discharged. A notification obligation which did not have to
be discharged until, for example, a month after the threshold had
been crossed would be of very little use to the company, its
shareholders or the market in general. In fact, the current regime,
following the 1985 Act, imposes a “two-day” rule, i.e. disclosure
as soon as possible but in any event by the end of the second
trading day following the day on which the obligation to disclose
arose.75
26–18
In the simple case, the event giving rise to the obligation to
disclose will be the purchase or sale of the voting shares of the
issuer by an investor who is then obliged to make the
notification. However, if the disclosure rule did not extend
beyond this, it would be inadequate. For example, Company A,
holding 2 per cent of the voting shares of Company X, acquires
control of Company B, which also holds two per cent of the
shares. Neither company had a notifiable interest in Company X
beforehand, but after the acquisition Company A will have a
notifiable interest. The notification obligation in relation to X’s
shares is thus triggered by the acquisition of B’s shares by A, not
the acquisition of X’s shares by A or B, which could have
occurred much earlier. Much more complex cases are possible to
imagine, which is why, no doubt, the obligation to disclose is
imposed on a person who “learns of the acquisition or disposal
or the possibility of exercising voting rights” or “having regard
to the circumstances, should have learned of it”, rather than the
date on which the acquisition, disposal or possibility actually
occurred or arose.76
The obligation to disclose might even arise as a result of
events with which the person upon whom it falls is wholly
unconnected. For example, a company engages in a share buy-
back programme in relation a class of voting shares. The
shareholder does not participate in the buy-back, but as a result
of other shareholders’ decisions the shareholder finds that his or
her holding now exceeds one of the notification thresholds. The
opposite development could occur if the company issued new
voting shares other than to the existing shareholders. The scheme
of the FCA rules on this point is that the company is required at
the end of the month in which there has been an increase or
decrease in the number of its voting shares to give details of the
resulting voting structure; and that is the event which causes the
disclosure obligation to arise.77
Indirect holdings of voting rights
26–19
In order to bring in situations other than the simple acquisition or
disposal the Directive contains two provisions extending its
scope. First, art.10 brings in certain holdings of shares of the
issuer where the holding is indirect. Among them are78:
(i) Voting rights held by an undertaking controlled by a person
are to be treated as voting rights of that person.79 The FCA
rules suggest the use of the definition of parent and
subsidiary in the 2006 Companies Act to identify a
controlled undertaking, with the extension that the controller
can include a natural person and not be confined to a
controlling company.80 The controlled undertaking would
also have to notify its holding, if one of the triggering events
applied.
(ii) Voting rights attached to shares held by a nominee on behalf
of another will constitute an indirect holding of voting rights
by that other person.81 The nominee will be a direct holder of
the voting rights unless, as will often be the case, the
nominee may exercise those rights only on the instructions of
the beneficial owner.82
(iii) Voting rights attached to shares deposited with someone are
to be treated as voting rights of the depositee, if the depositee
has the right to exercise the votes at its discretion in the
absence of instructions from the shareholder.83 In the same
way, a person engaged in investment management is to be
treated as the holder of voting rights if it can effectively
determine the manner in which voting rights attached to
shares under its control are exercised, in the absence of
specific instructions from the shareholders.84 One or other of
provisions (ii) and (iii) is likely to be applicable in the
common situation in the UK where an institutional
shareholder has outsourced the management of its investment
portfolio to a fund manager, though the shares themselves
may be vested in a custodian.85 The fund manager will be an
indirect holder of voting shares, assuming, as will usually be
the case, the relevant discretion. The custodian will not have
to disclose if, as is usual, it can vote only upon instruction
(see (ii) above).
A further issue arises where, as is common, the investment
management company is part of a larger financial
conglomerate. The rules on controlled undertakings ((i)
above) would suggest the parent of the group must aggregate
the fund-management subsidiary’s indirect holdings with its
own. However, art.12(5) of the TD provides an exemption
from this further aggregation, subject to certain conditions,
notably that the fund management subsidiary exercises its
voting rights independently of the parent.86 This seems
correct in principle, since the fund manager will be required
to exercise the voting rights attached to the shares it controls
in the interests of the beneficial owner (the institutional
shareholder) and not those of its parent.
(iv) Where there is an agreement between two or more people
under which they are obliged to implement “a lasting
common policy” towards a company through a concerted
exercise of voting rights, then each of the parties to the
agreement will have the voting rights of the other parties
attributed to it.87 Such “concert parties” are a common
feature of the long-term governance of companies in some
continental European jurisdictions. Although they are less
popular in the UK, they do arise, for example in connection
with takeover bids, where the Takeover Panel has developed
its own sophisticated and more far-reaching definition of
“acting in concert”.88
(v) A person will be regarded as an indirect holder of voting
rights if he or she has concluded an agreement with the
shareholder for the temporary transfer of voting rights.89 A
linked question concerns disclosure obligations in relation to
stock lending,90 which does not fall conceptually within this
category (because the shares are transferred as well as votes),
but which serves a similar function. The borrower will be
treated as acquiring voting rights if such are attached to the
stock borrowed. However, will the lender of the stock be
regarded as disposing of voting rights, thus potentially
triggering a disclosure obligation? When implementing the
original TD the FSA was anxious to continue the prior rules
which relieved the lender of the duty to notify on the grounds
that its right to call for the re-delivery of the stock was an
acquisition of voting rights and that acquisition could be
netted off against the loss of voting rights arising out of the
stock-lending agreement, thus producing no overall change
in its position. However, the ESMA indicative list of
financial instrument under the amended art.13 of the TD
(discussed below) made it clear that “the right to recall lent
shares” was a notifiable event which must be disclosed.91
Financial Instruments
26–20
The second extension, contained in the revised art.13, relates to
interests in the voting shares of the issuer acquired via holdings
of other types of financial instrument which are linked to the
issuer’s securities. The operation of some of these linked
instruments is easy to grasp because they generate rights to
acquire or dispose of the issuer’s voting rights. Thus an option to
buy from or sell the issuer’s voting shares to a third party must
be disclosed at the time the option is acquired, even though it has
not been exercised (and my never be).92 However, whilst
financial instruments generating “an unconditional right to
acquire a share carrying voting rights” have been within the
scope of the TD from the beginning,93 more recent debate has
focussed on instruments which do not give a right to acquire or
dispose of the issuer’s voting shares but rather which, in the
words of ESMA, “exposes the holder to the benefits of an
upward movement and/or the damages of a downward
movement of the price of these shares (i.e., the value of the
financial instrument is positively correlated with the underlying
equity instrument)”.94 In this case, the holder of the financial
instrument does not have the right to acquire (dispose of)
ownership of the underlying voting shares, but does have the
economic exposure of an owner.
The classic example of such a financial instrument are
“contracts for differences” (“CfDs”). In these contracts, as more
fully explained in Ch.28,95 the subject-matter of the contract is
the difference in the price of a security at two points in time,
rather than the actual security itself. As such, it would seem to
give rise to no disclosable issue at all, since the holder of the
CfD does not acquire a share and, in particular, its voting rights
but only an economic interest in it. However, in relation to
“long”96 CfDs the counterparty to the contract (usually an
investment bank) will often hedge its position under the contract
by buying the underlying security. In some cases this will enable
the other person entering into the CfD contract to influence the
way the votes attached to those shares are exercised by the bank
or to acquire the shares from the bank when the CfD is settled. If
that person has a contractual right to either of these things under
the CfD, then there is no doubt that there is a potentially
disclosable interest, assuming the CfD relates to voting shares.
The debate concerned the much more common situation where
no such contractual right exists, but in practice the CfD holder
can either acquire the shares or influence the exercise of voting
rights.
26–21
The UK decided to include CfDs before this step was taken by
the EU in the amending Directive of 2013. Consulting on the
issue the FSA, noting that today some 30 per cent of equity
trades are by way of CfDs, usually in order to increase leverage
or to avoid stamp duty, concluded that investment banks
normally require the CfDs to be “closed out” with cash (rather
than the delivery of the underlying shares) and are resistant to
CfD holders seeking to influence voting rights attached to the
shares bought as a hedge. Nevertheless:
“There are some instances of CfDs being used in ways which the intention of the
current regulatory regime is designed to catch …Specifically, we conclude that
CfDs are sometimes being used, firstly, to seek to influence votes and other
corporate governance matters on an undisclosed basis and, secondly, to build up
stakes in companies, again without disclosure. We have therefore decided that we
should take action now to address these failures.”97
After some havering about how to implement this policy, the

FSA changed the rules so as the require disclosure of all “long”
positions under CfDs.98 The amended TD followed suit. Article
13(1) includes not only financial instruments giving an
entitlement to acquire or dispose of ownership of voting shares
(“point (a) instruments”) but also “financial instruments which
are not included in point (a) but which are referenced to shares
referred to in that point and with economic effect similar to that
of the financial instruments referred to in that point, whether or
not they confer a right to a physical settlement”. ESMA had no
difficulty in concluding that this included CfDs.99 The contrary
argument is that, since most CfDs are settled for cash and the
bank’s voting behaviour is usually not influenced by the CfD
holder, requiring disclosure of all CfDs potentially gives the
market a great deal of useless information. However, no one has
been able to find a reliable method of distinguishing between
those CfDs which will and those which will not be used to build
up a stake in the issuer.
Exemptions
26–22
Given the range of notifiable interests, some exemptions needed
to be provided, in the interests of both disclosers and recipients
of disclosures. We have already noted the one relating to
custodians.100 Another is the acquisition of shares for the
purposes of clearing and settlement, i.e. of completing a bargain
to buy and sell shares.101 Probably the most significant is that
relating to “market makers”, i.e. those who hold shares (usually
in a particular range of companies) on their own account in order
to be able to offer continuous trading opportunities to those who
want to buy or sell those shares.102 Market makers enhance the
liquidity of public securities markets but they do not provide this
service for altruistic reasons but in the hope of making a profit
overall out of the difference between the prices at which they
acquire and dispose of the securities. If they were obliged to
disclose the details of their purchases and sales, their ability to
make this profit and so their willingness to offer their services as
market makers would be reduced. Even this exemption is
limited: it does not apply when the market maker’s holding in a
particular company reaches 10 per cent and it is conditional upon
the market maker not intervening in the management of the
company or exerting any influence over the company to acquire
its shares. There is a similar exemption for financial instruments
held in the trading books of banks and related institutions, but in
this case the disclosure obligation bites at the 5 per cent level.103
The amendments of 2013 added an exemption for acquisitions
during the price stabilisation process after a new issue.104
The disclosure process
26–23
Assuming a disclosure obligation has arisen, the person upon
whom it falls must act within the time limits discussed above
and give the required information. In the case of a direct
acquisition or disposal of voting shares the required information
is straightforward: simply the “resulting situation in terms of
voting rights”, i.e. the percentage of shares now held and the
date upon which the threshold was crossed. Unlike in the case of
disclosure by directors there is no obligation to disclose
information about the terms upon which the shares were
acquired or disposed of. In the case of indirect holdings of
shares, some further information is required. For holdings via
controlled companies the chain of control must be identified,
partly, no doubt, to encourage disclosers to give their mind to
this issue. The identity of the shareholder must be given (even if
that shareholder has no notification obligation, for example a
custodian voting only under instructions) and that of the person
entitled to exercise the voting rights, if not the shareholder.105
For voting rights exercisable through financial instruments, some
basic information about those instruments must also be given,
notably, the name of the underlying issuer and details about the
exercise period (if any) and the date of maturity or expiry of the
instrument.106
This information must be given to the company. However, the
purposes of the disclosure rules can be met only if the
information given to the issuer is publicised further. The DTR
require issuers on a regulated market to make public the
information received as soon as possible and, in any event, by
the end of the following trading day, as is the rule for directors’
notifications. In the case of issuers whose securities are traded
on a prescribed (but not a regulated) market the maximum period
for the further disclosure is the end of the third trading day
following.107 There must be a single national storage point for
the information and, in due course, the national registers will be
linked up via an EU portal.108
Overall, it can be said that the rather simple objective of
achieving disclosure of vote-holdings at and above the three per
cent level has generated a fearsomely complex set of rules.
SANCTIONS
26–24
Although EU law is the controlling law in relation to the
continuing obligations discussed in this chapter, enforcement
action is still a matter for national authorities and litigants. The
link between the substantive obligations and national
enforcement is made through provisions in the TD and MAR
which require certain sanctions to be made available in national
law, though those provisions do not purport to determine when
the sanctions should be deployed. Broadly, sanctions may be
private or public. Private remedies are sought by persons who
have suffered loss as a result of the breaches of the disclosure
obligations (and so are usually aimed at compensation). Public
sanctions are initiated by the public authorities, notably national
regulators (the FCA in the case of the UK), normally seeking to
punish infringers.109 Those sanctions may be administrative or
criminal.
Compensation for misleading statements to the
market
26–25
The most obvious basis for a private claim for compensation is
where an issuer is required to make a disclosure to the market
but fails to disclose, delays disclosure in circumstances where it
is not legitimate to do so or makes a misleading disclosure.
Assuming full disclosure would have moved the price of the
security, those who bought or sold shares110 during the period
before the emergence of the truth might have a claim for the
difference between the actual price and the price the securities
would have had if the disclosure obligations had been complied
with.111 The EU instruments actually say rather little about
private actions for compensation. The TD states, but only in
relation to its periodic reporting requirements, that Member
States “shall ensure that their laws, regulations and
administrative provisions on liability apply to the issuers, [the
administrative, management or supervisory bodies of the issuer]
or the persons responsible within the issuers”.112 The reference to
the “laws” of the Member States means that they must enable
private litigants to sue on the basis of their domestic civil
liability rules, but does not require any alteration to the domestic
liability regime. Moreover, the TD gives the Member States a
choice in relation to the defendants against whom the liability
may be asserted. Furthermore, this provision on civil liability in
the TD does not apply to the disclosure of major shareholdings
under that Directive. Nor is there any equivalent to it in MAR,
i.e. in relation to episodic disclosures and disclosure of interests
by directors and others. Member States are thus have
considerable freedom in fashioning civil liability rules.
After extensive policy debate, the UK introduced an explicit
liability regime (in Sch.10A to the FSMA) but for issuers only
and only for intentional or reckless statements. The statutory
liability applies to information notified or communicated to the
market by issuers through a PIP113 or other recognised
communication service.114 It thus embraces communications to
the market by issuers of information communicated to them by
PDMR or major vote-holders and to the market-moving episodic
disclosures required by MAR as well as to the issuer disclosures
required by the TD. However, the issuer is unlikely to attract
liability if it accurately passes on the information communicated
to it, unless it is aware of the inaccuracy of the information it
received. The main focus of the debate was in relation to
communications where the issuer is both the generator and
communicator of the information, i.e. in relation to periodic and
episodic disclosures by the issuer.
26–26
It is a controversial issue whether compensation should be
available to investors in relation to misleading periodic or
episodic statements put out by companies. Until 2006, FSMA
2000 made no specific provision for compensation to be
available directly to investors as a result of misleading
statements or non-disclosure to the market—in contrast to the
extensive statutory liabilities created in the case of misstatements
in prospectuses.115 It was possible to bring an action in the
common law of deceit, but the requirements for that head of
tortious liability are particularly demanding, notably the
requirements for knowledge of the falsity of the statement or
recklessness as to its truth on the part of the maker of the
statement, for reliance on the statement by the claimant and that
the defendant should have intended the claimant to rely on the
statement. An action in common law negligence for purely
economic loss reduces the first and third requirements, but
brings with it an additional high hurdle for liability, namely, that
the defendant should have assumed responsibility to the claimant
for taking care in relation to the truth of the statement.116 Thus,
actions for compensation by investors who had taken investment
decisions on the basis of false statements to the market were
extremely rare.117
By and large, government was content with this situation, and
it moved to legislate only in the light of art.7 of the TD, which
was thought capable of undermining the “assumption of
responsibility” requirement in the domestic law of negligence.
After enacting a stop-gap measure in 2006, a more considered
solution was put in place as from October 2010.118 The purpose
of the new regime was slightly to relax the requirements for
liability in fraud (for fear that the domestic remedies would not
otherwise meet the EU requirement for “effectiveness”), whilst
confirming the virtual absence of a role for negligence liability
in this area.119 The new statutory scheme applies to statements
made on multi-lateral trading facilities as well as regulated
markets and covers statements required by MAR as well as the
TD.120 The aim was to put in place a comprehensive statutory
regime for misstatements to the market.
As far as liability on the part of the company for knowing or
reckless misstatements is concerned, it is enough under the
statutory scheme that the claimant’s reliance on the statement
was reasonable.121 It does not matter whether the company
intended to induce reliance. Furthermore, the scheme imposes
liability for dishonest delay in making a required announcement,
even though at common law failure to speak would not normally
trigger liability.122 The other requirements for the common law
of deceit are, however, maintained under the statutory scheme.123
In principle, the issuer is liable for misleading statements to the
market only under the special statutory regime, whilst any other
person (e.g. a PDMR who was responsible within the company
for the statement) is relieved of all responsibility, except to the
company.124 However, certain other liabilities are preserved.125
Liability for negligent misstatement is maintained provided there
has been an assumption of responsibility on the part of the issuer
or PDMR for the truth of the statement (thus preserving the
common law of tort). Liability will also arise where the issuer
(or, much less likely, the PDMR) has contractually promised the
truth of its statement to the claimant, where the requirements of
liability under the Misrepresentation Act 2007126 are satisfied, or
where the statement falls within the prospectus liability
provisions and in certain other limited cases.127 In short, the idea
is the issuer and a PDMR should not be liable in negligence to
an investor unless they have promised, formally or informally, to
that investor to take care in making statements.
26–27
The principal argument for excluding liability on the part of the
issuer for misstatements to the market is that shifting the loss
from claimant to issuer (i.e. its shareholders) has very little
social utility. A generous liability rule in effect shifts the loss
from a sub-set of the shareholders to the shareholders as a whole,
i.e. from the investors who bought shares on the basis of a false
statement to the market and were still holding the shares when
the truth emerged to the shareholders as a whole.128 A regular
investor in the market is as likely, over the long term, to find
itself a shareholder in the company who did not buy shares in the
company whilst the misstatement was operative in the market as
among those who did. That investor would rationally favour a
rule which leaves the loss where it lies rather than transfers it, at
considerable transaction costs (the costs of litigation), from one
group of shareholders to the shareholders as a whole. This
argument might be thought to apply as much to liability in fraud
as to liability in negligence, and yet the statutory scheme shifts
the loss in the case of fraud. One response might be that the TD
does not permit Member States to remove liability completely; a
more principled response might be that fraud has a corrosive
effect on markets and the deterrent impact of imposing liability
for fraud is useful addition to the law’s armoury against fraud.
A striking feature of the new statutory scheme is that, whilst it
makes the company liable in fraud to investors, it removes
liability to third parties entirely, including for fraud, from PDMR
who were involved in making the false statement or were
responsible for the dishonest delay.129 At first sight this seems
odd, for the argument against transferring loss does not apply if
the loss is transferred from investors to PDMR, rather from
investors to shareholders as a whole. Why not make the PDMR
liable for both fraudulent and negligent misstatements to the
market so as to encourage them to provide accurate statements
on behalf of the company? There are two arguments against
negligence liability to investors on the part of PDMR in respect
of misstatements to the market. First, liability might encourage
the PDMR to be excessively cautious in what they say to the
market and thus deprive investors of useful information.130
Secondly, given the prevalence of insurance bought by
companies to protect their directors against negligence claims,131
liability for PDMR would again shift the loss to the shareholders
as a whole, through the cost of the insurance premiums payable
over the years. There is probably a stronger case for maintaining
individual liability to investors in the case of fraud. The statutory
scheme does impose that liability, but it lies only to the
company.132 Deterrence of misleading statements is thus to be
achieved, not under the statutory compensation scheme, but, if at
all, as a result of penalties imposed by the FCA, as discussed
below.
Compensation via FCA action
26–28
An alternative route to compensation for investors is via FCA
action on their behalf. FSMA 2000 appears to provide such a
mechanism. Under ss.382 and 383 the FCA has the power to
apply to the court for an order, in cases of market abuse or
contravention of its rules,133 where profits have accrued to the
person in breach, or loss or other adverse consequences were
suffered by other persons.134 The order may be sought against the
issuer itself or individuals, including directors of the company.135
The court may order the person in breach to pay to the FCA such
amount as it thinks just, having regard to the profits made or loss
suffered. That amount is to be paid out by the FCA to such
persons as the court may direct who fall within the categories of
those who have suffered loss or are the persons to whom the
profit is “attributable”.136 This provision is potentially important.
It constitutes a form of class action for investors, with the costs
paid by the FCA. However, the FCA’s Enforcement Guide
suggests that it will not use its powers to seek restitution
whenever they are available but only when it regards their use as
more effective than alternative courses of action, open to the
FCA or to the potential beneficiaries of FCA action. In
particular, “instances in which the [FCA] might consider using
its powers to obtain restitution for market counterparties are
likely to be very limited.”137
Were the FCA to use its restitution powers in this area, the
court would be faced with two difficult questions: how much
should be paid and to whom should it go? Depriving the issuer
of the profit made may be uncontroversial, but losses may have
been suffered on a wide scale in the market which go far beyond
the profit made. For example, where a company makes an
inaccurate statement to the market which moves the market price
upwards, but the price later falls when the truth emerges, losses
may well have been suffered by all those who bought shares in
the market after the statement and still held them at its
correction. Making the company or individuals provide
compensation for all those losses might be disproportionate to
the wrong involved. As to who should share in the restitution,
here the difficulties are the other way around. Those who have
suffered loss should presumably share in the pay-out, but where
there are no losses but only profits made, to whom are those
profits “attributable”? If all those who traded in the market at the
relevant time, whether with the defendant or not, share in the
profits, then the share of any individual beneficiary will be
limited, thus reducing the FCA’s incentives to make use of the
procedure in the first place.
The above powers to seek restitution extend to the situation
where the defendant has committed the criminal offence of
making an intentionally or recklessly misleading statement
considered below.138 If such conduct leads to an actual
conviction, a further avenue to compensation may be opened up,
namely compensation orders made under the general criminal
law provisions.139
The Act also gives the FCA power to seek injunctions from
the courts in respect of apprehended or repeated violation of its
requirements.140
Administrative penalties for breaches
26–29
The TD and the MAR are more prescriptive in relation to
administrative sanctions for breaches of their provisions, though
not to an extent which adds significantly to the sanctions already
developed domestically. The original TD required competent
national authorities to have certain essentially investigative
powers,141 but the amending Directive added requirements as to
sanctions. These relate to all breaches of the TD, not just the
periodic disclosure requirements, and by all persons, not just
issuers, but the required penalties are of an administrative
nature.142 The general principle underlying the extended
sanctioning powers is now expressed as follows:
“Member States shall lay down rules on administrative measures and sanctions
applicable to breaches of the national provisions adopted in transposition of this
Directive and shall take all measures necessary to ensure that they are implemented.
Those administrative measures and sanctions shall be effective, proportionate and
dissuasive.”143
MAR follows a similar approach. “Member States shall, in

accordance with national law, provide for competent authorities
to have the power to take [sic] appropriate administrative
sanctions and other administrative measures”,144 though it goes
into considerable detail about the required minimum. It should
be noticed that, even though MAR is a Regulation, this part of it
requires transposition by the Member States because it is
addressed to them.
26–30
The rules and procedures governing the imposition of penalties
and the FCA’s investigatory powers145 have been described in
the previous chapter in relation to breaches of LR and PR.146 The
FCA’s powers are further discussed in Ch.30 on market abuse.
In this chapter we note only those provisions which are
particularly relevant to misstatements to the market.
First, where the issuer or a PDMR has contravened the FCA’s
transparency and disclosure rules, they are liable to the
imposition of penalties147 or to public censure by the FCA.148
Moreover, even where the breach is the issuer’s alone, directors
may be penalised where they were knowingly concerned in the
contravention by the issuer.149 Thus, directors and PDMR are
more exposed to liability under the administrative regime than
they are under the rules on compensation.150
Secondly, the standard for liability is lower for breaches of the
FCA rules than under the “intention or recklessness” standard
for compensation under Sch.10A. Breach of the rules might
involve the company not disclosing on time or disclosing on
time but inaccurately or incompletely (or, of course, both).
Whereas complete non-disclosure seems to be subject to strict
liability under the FCA’s rules, in relation to inaccurate or partial
disclosure the standard is one of negligence:
“An issuer must take all reasonable care to ensure that any information it notifies to
[the market] is not misleading, false or deceptive and does not omit anything likely
to affect the import of the information.”151
The FCA makes relatively light use of its penalty-imposing

powers.152 However, it has used them to pick up egregious cases
of misleading statements to the market153 or of failure to disclose
market-moving information.154
26–31
Thirdly, in relation to breaches of the major vote-holding
disclosure obligation, the 2013 amendments to the TD
introduced an additional sanction not previously available to the
FCA. This is the sanction of suspension of the voting rights
attached to the shares whose beneficial ownership has not been
revealed.155 As we shall see in Ch.28, a similar, in fact somewhat
broader, power exists under domestic law in relation to non-
disclosure under the company-triggered provisions there
discussed. In relation to major vote-holding disclosure, the FCA
now has power to apply to the court (High Court or Court of
Session) for a suspension of voting rights, which the court may
impose in the case of a “serious” breach of the disclosure
provisions.156
Fourthly, the TD applies only to companies with securities
admitted to trading on a regulated market, for example, the Main
Market of the LSE.157 The same was true of the Market Abuse
Directive, repealed by MAR. However, the AIM rules impose
similar disclosure obligations in relation to market-moving
information (episodic disclosures) and a negligence standard of
care in relation to the disclosure, but enforcement of that
obligation is a matter for the LSE, as the market operator, rather
than the FCA.158 The implementation of MAR will change this:
the disclosure rules of MAR will apply directly to AIM-listed
companies, thus displacing the AIM rules, and enforcement will
move to the FCA.
Fifthly, we have discussed MAR in this chapter because it
contains specific disclosure rules, notably in relation to market-
moving information. However, quite apart from the specific
disclosure requirements, supplying misleading information to the
market may constitute conduct which amounts to breach of the
substantive market abuse provisions of MAR (discussed more
fully in Ch.30). The definition of market abuse includes
“disseminating information…which gives, or is likely to give,
false or misleading signals as to the…price of a financial
instrument”.159 This reflects the prior substantive law on market
abuse, which, in contrast to the disclosure requirements, the UK
had applied to AIM as well as to regulated markets.160 Thus,
AIM securities were covered by the substantive market abuse
rules, but not by the MAD disclosure rules. A striking example
of the operation of the substantive market abuse provisions can
be seen in the fine of £17 million imposed by the then FSA on
Shell in August 2004 in relation to misstatements made to the
market over a number of years about the extent of its oil and gas
reserves.161
Criminal sanctions
26–32
In extreme cases non-disclosure or inaccurate disclosure might
also constitute the offence now contained in s.89 of the Financial
Services Act 2012. Breaches may be prosecuted by the FCA.162
This offence can be traced back to s.12 of the Prevention of
Fraud (Investments) Act 1939 and consists of making a
statement knowing it to be false or misleading or reckless
whether it is so, or dishonestly concealing material facts. The
statement or concealment must be for the purpose, among others,
of inducing someone163 (or reckless whether it may induce
someone) to deal in securities (whether as principal or agent).164
The section is a useful weapon in the prosecutor’s armoury since
only recklessness (not intent) needs to be established.165
However, the misleading disclosure must be made for the
required purpose: the fact that a recipient of the statement makes
an investment decision on the basis of a statement which its
maker knows to be false would not be enough to secure a
conviction. Conviction on indictment may lead to a sentence of
imprisonment of up to seven years.166 All the ingredients for
criminal liability were found in R. v Bailey and Rigby,167 where
the chief executive and chief financial officers of a company
were convicted of issuing a misleading trading statement168
which caused its share price to rise and investors to purchase its
shares when the contracts on which the trading statement had
been based had not been concluded and in fact never were. The
basis of the conviction was recklessness, both as to the truth of
the statement and as to whether investors would rely on it. When
the truth emerged the share price fell to one-fifth and then one-
tenth of its pre-correction level.
CONCLUSION
26–33
There is more than one way in which the efficient functioning of
the market is promoted by the requirements discussed in this
chapter. The reduction of insider trading opportunities is
promoted by rules requiring price-sensitive information about
the company to be made public or revealing directors’ trading in
the shares of their companies. However, continuous disclosure of
information about companies also helps the accuracy of the
price-formation process in securities markets, whilst information
about directors’ holdings helps shareholders assess the financial
incentives to which the management is subject—and perhaps
reveals information about the company’s prospects. Thus, both
market efficiency and corporate governance objectives are
promoted by the disclosure requirements. The vote-holder
disclosure rules address a different need of investors: to know
who is in a position to control the company or, perhaps more
importantly, who may be building up a stake in the company as a
prelude to effecting a change in the current control position. As
so often in company law, the substance of the legal requirement
may be the modest one of disclosure, but the underlying
objectives, which the disclosure requirements are aimed to
promote—it is unclear how effectively—are fundamental.
1 See para.25–3.
2
See para.25–21.
3
The “semi-strong” version of the efficient capital market hypothesis states that all
publicly available information about the company is immediately incorporated into
market prices. The ongoing mandatory disclosure rules are a crucial mechanism whereby
corporate information becomes public. See R. Gilson and R. Kraakman, “The
Mechanisms of Market Efficiency” (1984) 70 Virginia L.R. 549, and see later by the
same authors on the same topic: (2003) 28 Journal of Corporation Law 215 and (2014)
100 Virginia L.R. 313.
4
But we shall not deal in any detail with companies incorporated in other EEA States or
outside the EU whose securities are traded on a London market or with UK-incorporated
companies whose sole or primary listing is outside the UK.
5
Directive 2004/109/EC ([2004] O.J. L390/38), as amended, notably by Directive
2013/50/EU ([2013] O.J. L294/13). The necessary changes to the FSMA 2000 were
made by the Transparency Regulations 2015/1755.
6 Regulation (EU) No.596/2014 ([2014] O.J. L173/1), in effect in part from July 2016
and in part from January 2017. The non-disclosure aspects of this Regulation are
discussed in Ch.30.
7 See para.25–10.
8 One impact of this change is that the FCA loses its power to make Disclosure Rules
(though it may provide guidance) so that “DTR” will come to stand for “Disclosure
Guidance and Transparency Rules” rather than, as previously, “Disclosure and
Transparency Rules”.
9
“Quoted companies” are those officially listed in any EEA State or admitted to trading
on the New York Stock Exchange or Nasdaq: CA 2006 s.385.
10 The provisions discussed in this section normally apply whether the traded securities
are equity or debt instruments.
11
For the meaning of a “regulated market” see para.25–8. In the case of shares, the term
can be equated in the UK, with some degree of inaccuracy, with the Main Market of the
LSE. The Alternative Investment Market (“AIM”) is not a regulated market, but the
LSE’s own rules for that market require half-yearly statements (but not quarterly
reports): LSE, AIM Rules for Companies, 2014 r.18.
12 The CA contains some rules specific to quoted companies, for example, the
requirement for website publication: s.430.
13 DTR 4.1.3. Some statutory material is repeated in the DTR in order to make it
applicable to companies not incorporated in the UK but which have their securities
traded on a regulated market in the UK.
14 See para.21–29.
15 DTR 4.1.12.
16 TD art.5(4). The FRC has produced guidance on the review of interim statements.
17
TD art.5(2). Some detail about what is required in the half-yearly accounts and reports
is set out in Commission Directive 2007/14/EC ([2007] O.J. L69/27) art.3. The
transposing domestic legislation is in DTR 4.2.
18
Original art. 6.
19
The UK might have chosen to retain the requirement as a domestic rule but in fact
opted not to do so.
20
See para.21–32.
21
MAR art.2. The domestic provisions on insider trading, however, have always applied
to public, not just regulated, markets. For the meaning of MTF and regulated market see
para.25–8.
22
MAR art.7.
23
In addition to the fact of delay art.17(4) states that the national competent authority
must require the notification to be accompanied by an explanation of how the conditions
set out in the text are met or require the issuer to provide the explanation upon request of
the regulator. The UK seems likely to take the second option: FCA, Policy proposals
and Handbook changes related to the implementation of the Market Abuse Regulation,
November 2015, 2.8. The definition of the relevant competent authority is likely to give
somewhat greater role to the authority of the state in which the securities are traded than
under the PD (see para.25–44). Unless the issuer has securities traded in the state of
registration, the competent authority will be (one of the) the states where trading occurs
even if that is different from the state of registration: ESMA, Technical advice on
possible delegated acts concerning the Market Abuse Regulation: Final Report, 2015,
§4.
24
MAR art.17(4). Where confidentiality has been breached, the withheld information
must be disclosed as soon as possible, including in some cases of market rumours
relating to the information: 17(7).
25
Following the prior CJEU decision in Case C-19/11 Geltl v Daimler AG, decision of
28 June 2012.
26ESMA, Draft guidelines on the Market Abuse Regulation, Consultation Paper,
January 2016. This follows the guidance issued under the pre-MAR law.
27
The third category is the most controversial since inside information, if it is to move
the market, will necessarily alter the market’s expectations, so much depends on what is
understood by “signals from the issuer”.
28 MAR art.17(5)(6).
29 The strongest case in point was the run on the Northern Rock Building Society in
2007, when it appeared that the immediate cause of the run was the required disclosure
by Northern Rock that it had approached the Bank of England for liquidity support, after
it was no longer able to fund itself in the inter-bank market, even though, logically, the
provision of the Bank support increased the Rock’s stability. See HM Treasury,
Financial Stability and Depositor Protection, Cm 7308, January 2008, paras 3.41 and
3.43. Article 17(5) does not in terms appear limited to liquidity problems, though that is
the only example of a threat to financial stability which it gives.
30
MAR art.17(1).
31 DTR 6.3.4. “Regulated information” is any information required to be disclosed under
art.6 of MAD, the TD, the LR or the DTR (FSA Handbook, Glossary). There must also
be a central storage system for regulated information: TD art.21; FSMA s.89W.
32 SMEs whose securities are traded on a SME growth market need draw up a list only if
requested by the regulator to do so (art.18(6)).
33 ESMA, Final Report: Draft technical standards on the Market Abuse Regulation,
2015, §8 and Annex XIII.
34
For the meaning of this term see para.25–5.
35 Directive 2003/6/EC ([2003] O.J. L96/16).
36
Or rather the FSA, as it then was.
37
At the time of writing the Commission and domestic rules required to fully implement
the Regulation exist only in draft form.
38
Above, para.26–5. So, it will apply to companies traded on AIM, which, however,
already imposed a disclosure obligation in respect of directors’ dealings: Aim Rules for
Companies, 2014, r.17 and Sch.5.
39
Board of Trade, Report of the Committee on Company Law Amendment, Cmd. 6659,
June 1945, para.87.
41Law Commission and Scottish Law Commission, Company Directors: Regulating
Conflicts of Interest and Formulating a Statement of Duties: A Joint Consultation Paper
(1998), para.5.2.
42 MAR art.3(1)(25).
43Companies Act 1985 s.324(6). However, a de facto director is probably within the
definition.
44MAR art.3(1)(26); or, the definition Delphically adds, “the economic interests of
which are substantially equivalent to those of such a person”.
45
46
Companies Act 1985 s.324(1). A director of a parent company may well be able to
influence what a subsidiary does, even though s/he is not an executive of the subsidiary.
However, unless the subsidiary’s shares are publicly traded, the point is not important.
47
48 Above fn.23, 5.2.
49
See para.26–23.
50Regulation art.19(8). National competent authorities may raise the threshold to
€20,000, but the FCA does not propose to do so: FCA, above fn.23, 2.16.
52
Regulation art.19(2), assuming the company is registered in the EEA.
53 Regulation art.19(6)(g).
54 Regulation art.19(2)(3).
55 Above para.26–8.
56 See para.24–22.
57
See above, at paras 21–37 et seq.
59
We have discussed in Ch.15, above, the problems which this causes in relation to
shareholders’ governance rights.
60
Department of Trade, Disclosure of Interests in Shares (1980), p.2.
61
Report of the Committee on Company Law Amendment, Cmd. 6659 (1945), pp.39–
45. It is to be noted that the domestic legislation has still not been lowered to the one per
cent threshold recommended by that Committee.
62
Its first Directive on disclosure of major shareholdings was Directive 88/627/EEC,
[1988] O.J. L348/62 (17 December 1988), later consolidated into Directive 2001/34/EC,
arts 89–97.
63
Chapter III, as amended. The fact that the major shareholding rules are in the TD and
not MAR perhaps shows that insider trading is the lesser rationale for the required
disclosure.
64
See especially the preamble to the TD.
65
DTI, Proposals for Reform of Part VI of the Companies Act 1985 (April 1995). The
CLR touched only lightly on this topic, largely endorsing the 1995 proposals:
66
Companies Act 2006 s.1266, introducing new FSMA 2000 s.89A–G.
67
By Directive 2013/50/EU. This directive required relatively little in the way of
substantive amendment to the UK rules. See Treasury and FCA, Implementation of the
Transparency Directive Amending Directive (2013/50/EU) and other Disclosure Rule
and Transparency Rule Changes, March 2015.
69 TD art.2(1)(d).
70
FSMA 2000 s.89A(1),(3)(a); DTR 5.1.1(3); Glossary, Issuer (2B); Financial Services
and Markets Act 2000 (Prescribed Markets and Qualifying Investments) Order 2001 (SI
2001/996) art.4. For the distinction between “regulated” and “prescribed” markets see
para.25–8.
71 See para.19–25.
72 DTR 5.1.1(3).
73
DTR 5.1.2.
74 TD art.9(1), which has triggers only at 5, 10, 15, 20, 25, 30, 50 and 75 per cent. Only
these triggers are used by the British law in relation to non-UK incorporated companies
on a regulated market for which the UK is nevertheless the Home State.
75 DTR 5.8.3. This applies to UK incorporated companies only; for non-UK companies
the rule is the Directive minimum “four-day” rule (i.e. the end of the fourth trading day
following—art.12(2)).
76 DTR 5.8.3, following art.12(2) of the TD.
77
DTR 5.8.3, 5.1.2(2), 5.6, following TD arts 12(2), 9(2) and 15.
78 Article 10 of the TD is “copied out” in DTR 5.2.1.
79 TD art.10(e). See the example given above.
80
FSA, Handbook, Glossary; FSMA 2000 s.420.
81
TD art.10(g).
82
DTR 5.1.3(3).
83
TD art.10(f).
84
TD art.10(h).
85
86
These provisos are fleshed out in Commission Directive 2007/14/EC art.10. Both
art.12 of TD and art.10 of the implementing Directive are transposed in DTR 5.4.
87
Directive art.10(a). The requirement for a “lasting common policy” means that this
disclosure rule will not apply to temporary coalitions of shareholders designed to bring
about specific changes in the running of the company.
88 See para.28–44. “Acting in concert” is defined in the Code so as to include
“understandings” as well as agreements and the Code contains an extensive list of
“presumed” cases of acting in concert (see The Takeover Code, C1). On the other hand,
the Code only applies where the common policy towards the company is to obtain or
consolidate control of it.
89
Directive art.10(b).
90
91See ESMA, Indicative list of financial instruments that are subject to notification
requirements according to Article 13(1b) of the revised Transparency Directive,
December 2015. The ESMA list is produced under the provisions of art.13(1)(b).
92
However, options to subscribe to new shares to be issued by the company appear to
be excluded from art.13(1), though actual acquisition would need to be notified (subject
to the thresholds).
93
Commission Directive 2007/14/EC art.11(1), containing “second level” implementing
rules.
94ESMA, Consultation Paper on Draft Regulatory Technical Standards on major
shareholdings and indicative list of financial instruments subject to notification
requirements under the revised Transparency Directive, 2014, para.178.
95 At para.28–45.
96
If the investment bank has to pay the CfD holder any increase in the value of the
share, the holder can be said to have a “long” position and the bank can protect itself by
buying the underlying share; if the bank has to pay the holder the decrease in the value
of the share, the holder can be said to have a “short” position, but purchasing the
underlying share does not protect the bank in that case. It must hedge its exposure in
some other way.
97 FSA, Disclosure of Contracts for Difference, CP 07/20, November 2007, para.1.24.
98
DTR 5.3.3(2). For its earlier preference see previous note at paras 1.28 and 5.32–5.34.
99ESMA, Final Report on draft Regulatory Technical Standards on major
shareholdings and an indicative list of financial instruments subject to notification
requirements under the revised Transparency Directive, 2014, Part IV. This involved
minor changes to ss.89A, 89C and 89F of FSMA. The interests falling within art.13
must be aggregated with those falling within arts 9 and 10 for the purpose of calculating
thresholds (art.13a).
100
101
Directive art.9(4); DTR 5.1.3(1). On clearing and settlement see para.27–2. This is a
limited exemption since it applies only to acquisitions made for the sole purpose of
settlement and is limited to acquisitions made during the three trading days following the
striking of the bargain to which it relates.
102
Directive art.9(5); DTR 5.1.3(3) and 5.1.4.
103
Directive art.9(6) (as amended); DTR 5.1.3(4). This exemption will normally permit
the bank party to the CfD (see above, para.26–22) which buys the underlying shares as a
hedge not to disclose its holding of the shares. The FCA had previously included a free-
standing “client-serving intermediary” exception, not subject to a cap, but art.13(2)
makes no mention of it and so it was deleted in the post-amendment UK reforms.
104 Directive art.9(6a); DTR 5.1.3(7). On stabilisation see para.30–45, below.
105 DTR 5.8.1.
106
DTR 5.8.2. For some types of CfDs calculating the number of shares the
counterparty would buy for hedging purposes may not be straightforward and may
involve an excursion into option pricing. See art.13(1a) and Commission Regulation
(EU) 2015/761 art.5.
107
DTR 5.8.12 (the period for prescribed markets is that required by the TD art.12(6)).
108 Directive arts 21, 21a, 22.
109 There is, however, some overlap. See para.26–28, below.
110
Whether buyers or sellers would sue would depend on the direction of the price
movement had the information been disclosed.
111 There are also issues of causation here. If I buy at an artificially high price (because
the issuer has concealed adverse information) but sell before the truth emerges, I have
suffered no loss. If I sell at an artificially low price (because the issuer has concealed
positive information), it can be argued that I have suffered a loss only if the price was
the main motivation for my sale (rather than some personal financial emergency).
112 TD art.7.
113 Above para.26–6 and FSMA s.89P.
114 2006 Act Sch.10A para.2.
115
See paras 25–32 et seq.; and, at least at first instance, the courts refused to find a
breach of statutory duty on the basis of FSMA’s disclosure rules: Hall v Cable and
Wireless Plc [2010] 1 B.C.L.C. 95.
116
Caparo Industries Plc v Dickman [1990] 2 A.C. 605. See para.22–36.
117The pre-2006 position is described in HM Treasury, Davies Review of Issuer
Liability: Discussion Paper, March 2007.
118 2006 Act s.90A and Sch.10A.
119
See HM Treasury, Davies Review of Issuer Liability, Final Report (June 2007).
120
2006 Act Sch.10A paras 1 and 2.
121
2006 Act Sch.10A para.3(4)(b).
122
Unless the failure to speak rendered a previous statement misleading. The statutory
provision is in para.5. It was a controversial decision to impose liability for delay, but,
since liability is confined to dishonest delay, defined narrowly (para.6), it is unlikely to
be widespread.
123
For the purpose of the issuer’s liability the attribution rule (see para.7–2) used is
whether “a person discharging managerial responsibilities” within the company knew of
the falsehood, was reckless as to its truth or was dishonest as to the concealment (paras
3(2) and 8(5)).
124
2006 Act Sch.10A para.7(1)(2).
125 2006 Act Sch.10A para.7(3).
126 See para.25–37.
127
2006 Act Sch.10A paras 7(1) and (3).
128
If the investor disposes of the shares before the truth emerges, then of course no loss
is suffered by that investor. See Hall v Cable and Wireless Plc [2010] 1 B.C.L.C. 95 at
[43]–[46]. This argument assumes the typical situation, i.e. that the company’s statement
was falsely optimistic.
1292006 Act Sch.10A para.7(2). Of course, individuals will be liable if they have
assumed responsibility to the claimant for the truth of their statement or contractually
bound themselves in that respect.
130 See the similar argument developed in para.21–27.
131 See para.16–129.
132 For these arguments in greater detail see P. Davies, “Liability for Misstatements to
the Market: Some Reflections” (2009) 9 J.C.L.S. 295; and for comment Ferran, ibid.,
315.
133 FSMA 2000 s.382 applies to breaches of the FCA’s rules or a “qualifying EU
provision” (s.382(9)(a)) and s.383 to market abuse. The powers conferred are similar as
far as the company’s liability for non-disclosure is concerned.
134
FSMA 2000 s.384 empowers the FSA to make a restitution order under its own
authority, but only in relation to persons authorised by it to carry on financial business, a
category into which neither issuer nor director is likely to fall.
135
In respect of directors, liability for breach of the FCA’s rules is imposed on a person
“knowingly concerned” in the company’s contravention (s.382(1)), whereas for market
abuse the liability is on the basis that a person “has required or encouraged” another
person [the company] to engage in behaviour which, if engaged in by the person would
amount to market abuse (s.383(1)(b)).
136 FSMA 2000 ss.382(3),(8), 383(5),(10).
137 FCA, Enforcement Guide (EG) 11.2.
139
See R. v Rigby and Bailey [2006] 1 W.L.R. 3067 (though the FSA’s attempted use of
general confiscation powers was unsuccessful). Some £200,000 was paid to Morley
Fund Management and £120,000 to Standard Life.
140
FSMA 2000 ss.380 and 381.
141
TD art.24.
142
New TD arts 28–28b.
143
TD art.28(1), but there is a list of more specific requirements for the core obligations
under the TD (arts 28a and 28b).
144
TD art.30(1).
145
Under s.97.
146
147
Both the TD (art.28(1)(c)) and MAR (art.30(2)(i)(j)) lay down substantial maximum
penalties, whose purpose seems to be, not to protect infringers, but to ensure that
competent authorities have sufficiently deterring penalty powers available to them.
148
FSMA 2000 s.91(1ZA),(1B),(3). The implementation of MAR will require the
Disclosure Rules to be replaced with Disclosure Guidance (above fn.8) but it assumed
that the FCA’s penalty-imposing powers will be amended so as to refer to breaches of
MAR. However, this has not been done at the time of writing.
149
FSMA s.91(2A)(2B).
150 The civil penalty liability is expressly preserved in Sch.10A para.10(3)(b).
151DTR 1.3.4 and 1A.3.2. Again with the change from disclosure rules to disclosure
guidance, the latter obligation will need to be reformulated. See FCA above fn.[44],
4.100.
152See HM Treasury, Davies Review of Issuer Liability: Discussion Paper, March 2007,
Table 1: nine cases over four years, including the cases on breach of s.397, discussed
below. The FCA increased its enforcement activity after the financial crisis and adopted
a much stronger approach to the size of penalties (see FCA, Decision Procedures and
Penalties Manual, Pt 6).
153For example, FSA, Cattles Ltd, Final Notice, March 2012 (and its directors) for
misleading statements in the annual report, penalties imposed on directors but not on the
company because of its parlous financial state.
154 For example, FSA, Entertainment Rights Plc, January 2009, delay of 78 days, fine of
£224,000 on the company; FSA, Photo-Me International Plc, Final Notice, June 2010,
delay of 44 days, fine of £500,000.
155
TD art.28b(2). This is most likely to happen where an intermediary states that it is
holding the shares on behalf of another person but refuses to reveal the identity of that
other person, possibly because the laws of the jurisdiction in which the intermediary is
situated prohibit disclosure without the consent of the other person.
156 FSMA s.89NA. The criteria for assessing seriousness are set out in subs.(4).
157 DTR 1.1.1.
158
AIM Rules for Companies, February 2014, rr.10, 11 and 42; and AIM Rules for
Nominated Advisers, February 2014, r.17.
159
MAR art.12(1)(c).
160
FSMA 2000 s.118(1); Financial Services and Markets Act 2000 (Prescribed Markets
and Qualifying Investments) Order 2001 (SI 2001/996) reg.4.
161
In the Shell case (FSA, Final Notice, 24 August 2004, The “Shell” Transport and
Trading Company Plc and The Royal Dutch Petroleum Company NV) that company was
fined for misleading disclosures to the market on the basis that its actions constituted
market abuse, the DTR not being in force at the relevant time. Clearly Shell is a listed
company but the analysis would seem equally applicable to an AIM company.
162
FSMA s.401 (except in Scotland).
163
The person thus persuaded to act need not be the same person as the one to whom the
statement is made: s.89(2).
164FSA 2012 s.89(2) and the Financial Services Act 2012 (Misleading Statements and
Impressions) Order 2013/637 art.2.
165
Where the statement is true, but designed to create a false or misleading impression,
it may fall within s.90 of FSA 2012. This section is discussed in Ch.30.
166 FSA 2012 s.92.
167
R. v Bailey and Rigby [2006] 2 Cr. App. R.(S.) 36. Although custodial sentences
were upheld, the CA reduced them from three-and-a-half years to 18 months and from
two-and-a-half years to nine months. The case was decided on an earlier version of the
prohibition.
168
A statement updating the market on the company’s trading performance.
CHAPTER 27
TRANSFERS OF SHARES
Certificated and Uncertificated Shares 27–3

Transfers of Certificated Shares 27–5
Legal ownership 27–5
Estoppel 27–6
Restrictions on transferability 27–7
The positions of transferor and transferee prior to
registration 27–8
Priorities between competing transferees 27–10
The company’s lien 27–11
Transfers of Uncertificated Shares 27–12
Title to uncertificated shares and the protection of
transferees 27–14
The Register 27–16
Rectification 27–19
Transmission of Shares by Operation of Law 27–21
27–1
Once shares have been issued by the company, it is only
infrequently that the company will buy them back. Moreover,
this cannot happen without the company’s consent, either at the
time the shares were issued (as with shares which are issued as
redeemable at the option of the shareholder)1 or at the time of re-
acquisition (as in the case of shares redeemable at the option of
the company or a re-purchase of shares).2 In any event, the re-
acquisition cannot occur unless the rules on capital maintenance,
imposed for the benefit of creditors, are observed.3 Although
companies occasionally use surplus cash to re-purchase shares
rather than to pay a dividend, a shareholder who wishes to
realise his or her investment in the company will normally have
to find, or wait for, another investor who will purchase the
shares and take the shareholder’s place in the company. This is
precisely the reason why a company which secures the
admission of its shares to a public market is likely to find it
easier to persuade investors to buy the shares in the first place.
Although the above principle is true of all types of company,
there is a major difference between companies with large and
fluctuating bodies of shareholders whose shares are traded on a
public exchange (“listed” companies) and companies with small
bodies of shareholders whose composition is expected to be
stable and where the allocation of shares is as much about the
allocation of control in the company as it is about its financing
(“non-listed” companies). In the former case, the law or the rules
of the exchange will require the shares to be freely tradable as
far as the issuer is concerned,4 so that except in a few cases the
transfer of the shares will be simply a matter between the
existing shareholder and the potential investor. Free
transferability tends to be taken for granted in listed companies,
but it does become controversial when what is proposed is the
wholesale transfer of the shares to a single person, in the shape
of a takeover bidder, because in that situation, even in an open
company, the transfer of the shares has clear implications for the
control of the company. We shall examine takeovers in the
following chapter.
In non-listed companies, by contrast, even the transfer of
shares by a single shareholder may have implications for the
control of the company and often also for its management, since
a shareholding in such a company may be perceived as giving
rise to a formal or informal entitlement to membership of the
board of directors and participation in the management of the
company.5 In those companies, therefore, it is common for the
articles of association to contain some restrictions on the
transferability of the shares, perhaps by making transfers subject
to the permission of the board or requiring the shares to be
offered initially to the other shareholders before they can be sold
outside the existing shareholder body. The latter obligation is
normally referred to as giving the other shareholders pre-
emption rights, but these are pre-emption rights arising on
transfer and are to be distinguished from pre-emption rights
arising on issuance, which are discussed in Ch.24. The latter
bind the company; the former the selling shareholder.
27–2
Share transfers involve a two-step process. In the first step the
buyer and the seller conclude a sales contract where they agree
on the price which the shares are sold for and on other terms of
the transaction. Bankers sometimes refer to this first step as
“trading”. In the second step the transfer is carried out. At the
end of the second step the buyer becomes the owner of the
shares that formed part of the sales transaction. This second step
is sometimes referred to as “settlement”. Settlement is a process
which in itself consists of two or more stages depending on
whether certificated or uncertificated shares are sold.
When shares in private companies and non-listed public
companies are sold the buyer and the seller frequently know
each other’s identity and are often personally involved in
negotiating the terms of the transaction. Sales transactions are
completed by way of delivery of certain transfer documents from
the seller to the buyer and by way of registering the buyer’s
name on the shareholder register.
When listed shares are sold, the transaction is frequently more
standardised. In most cases, the seller does not go out to find a
buyer him- or herself, but enlists the services of a broker who
sells the shares for him or her. The broker does this either
through the electronic trading system operated by a stock
exchange or by making a contract with another financial services
provider directly. In both cases buyer and seller rarely know
each other’s identity. After the contract has been concluded, the
buyer’s name is also entered on the shareholder register, but this
settlement process is carried out electronically through a
settlement system known as CREST.
In this chapter we will focus on the second step of the transfer
process, the completion of the sales transaction. We shall
examine the difference between certificated and uncertificated
shares, transfers of certificated and transfers of uncertificated
shares as well as the rules governing the shareholder register and
transmission of shares by operation of law. We shall first address
the difference between uncertificated and certificated shares.
CERTIFICATED AND UNCERTIFICATED SHARES
27–3
In the UK, shares are predominantly issued in registered form.
Companies issuing registered shares keep a register of the names
of their shareholders. Until 1996 all registered shares were
issued in what is now called the “certificated form”. This means
that, in addition to having his or her name noted on the
shareholder register, every shareholder receives a paper
certificate evidencing his or her shareholding. When shares are
transferred the seller completes and signs a transfer form and
delivers this together with the share certificate to the buyer. The
buyer then lodges the certificate with the company to have his or
her name entered on its shareholder register.
This paper-based transfer process still applies to non-listed
shares. These are shares in private companies and shares in
public companies which are not listed on the London Stock
Exchange (“LSE”).
Until 1996 listed shares were also transferred by means of
paper documents. The LSE operated a transfer system entitled
TALISMAN. Under the TALISMAN regime, the LSE received
transfer forms and share certificates from buyers and ensured
that the sellers’ names would be registered on the shareholder
register. There was a gap of two to three weeks between trading
and settlement. If shares were sold in the meantime,
TALISMAN would keep track of that transaction and arrange
for the name of the ultimate buyer to be registered.
In the years leading up to the introduction of CREST in 1996,
the UK privatised a large number of previously state-owned
enterprises. The number of listed shares and with that the
number of share transactions increased significantly. When share
prices fell sharply on 19 October 1987, trading volumes soared
and substantial delays in settlement occurred. Delays in
settlement pose a significant risk to a share market. The longer
the delay between trading and settlement the greater the risk that
parties suffer loss by transactions not completing successfully. In
many cases, the law will provide remedies if the transaction
comes to a halt part way through, but the enforcement of those
rights will be expensive and in some cases, for example, in the
insolvency of an involved party, the rights may not have any
value.
27–4
In the discussion following the 1987 market crash, it became
apparent that the paper-based transfer process was unable to
cope with large volumes of share transactions. It was decided
that paper transfers should be phased out for listed shares and
that a new electronic share transfer system should be introduced.
This process of replacing paper with electronic shares transfers
is referred to as dematerialisation. Listed shares were
dematerialised in the UK in 1996 when the CREST system went
live. Since then, all UK shares listed on the LSE must be
compatible with electronic settlement.6 CREST operates on the
basis of ss.784–790 of the 2006 Act and of the Uncertificated
Securities Regulations 2001 (USR 2001).7 These Regulations
have termed electronic shares as uncertificated shares and paper
shares as certificated shares.8
The introduction of uncertificated shares requires the consent
of a number of parties. CRESTCo, as the operator of the
electronic system, must agree to admit the securities of the
company in question to the system, though it clearly has a strong
commercial incentive to do so, if the shares are heavily traded.
Moreover, since an operator of an electronic system of share
holding and transfer requires the approval of the Treasury and
that approval requires the operator’s rules not to distort
competition,9 it will not be in a position to set rules which
discriminate improperly among companies.
In addition, the company itself must agree to permit its
securities to be held in uncertificated form. Shares or individual
classes of shares are in principle admissible to the electronic
system only where the holding of shares in uncertificated form
and their transfer electronically is permitted by the company’s
constitution.10 The standard constitution requires the company to
issue shareholders with a certificate of their holding.11 To
facilitate the change-over to uncertificated shares, USR 2001
reg.16 permits such provisions in the articles to be disapplied by
resolution of the directors, rather than by the normal route for
altering the articles by resolution of the shareholders,12 provided
the shareholders are given prior or subsequent notice of the
directors’ resolution. The Regulations then provide that the
shareholders by ordinary resolution may vote to overturn the
directors’ resolution, but, unless they do so, the articles will be
modified pro tanto without the shareholders’ positive approval.
Thus, the Regulations encourage uncertificated shares by putting
the burden of objection on the shareholders.
For the time being shareholders can opt to have uncertificated
shares converted into certificated shares. If a shareholders
exercises this option conversion is recorded on the central
CREST register, the company is notified, updates the register
and issues the shareholders with a share certificate.13 On July
2014 the EU adopted a Regulation requiring all securities that
are transferable on a regulated market to be issued in book entry
form.14 The Regulation will come into force on 1 January 2023
by which point the UK will have to abolish the option to convert
shares into certificated form for those shares who are
transferable on regulated markets.15
Having briefly looked at the characteristics of certificated and
uncertificated shares in this section, we shall examine transfers
of certificated shares in the following section. After that transfers
of uncertificated shares will be addressed.
TRANSFERS OF CERTIFICATED SHARES
Legal ownership
27–5
To transfer certificated shares, the seller needs to complete a
transfer form and deliver that form together with the share
certificate to the buyer. The transfer form needs to comply either
with the requirements contained in the company’s constitution or
with the simplified requirements put in place by the Stock
Transfer Act.16
This, however, is not enough to make the transferee a member
of the company. Neither the agreement to transfer nor the
delivery of the signed transfer form and share certificate will
pass legal title to the transferee (though it may pass an equitable
interest in the shares to the transferee).17 The normal rule is that
a person becomes a member of a company and the legal owner
of the shares when they have agreed to this and their name has
been entered into the company’s register of members. The
company enters the transferee’s name on the register of members
in place of the transferor’s name.18 It is precisely this
requirement which gives a closed company the opportunity to
control the process of transfer of shares to new holders.
It also follows from this analysis that a share certificate is not
a negotiable instrument. Legal title does not pass by mere
delivery of the certificate to the transferee but upon registration
of the transferee by the company. In fact, even registration is not
conclusive of the transferee’s legal title. Section 127 provides
that the register of members is only “prima facie evidence” of
matters directed or authorised to be inserted in it and s.768
correspondingly says that a share certificate issued by the
company (for example, to the transferee) is “prima facie
evidence” of the transferee’s title to the shares.19 Where there is
a conflict between the register and the certificate, the former is
stronger prima facie evidence than the latter but neither is
decisive. Ownership of the shares depends on who is entitled to
be registered. Suppose, say, that A, who is registered and is
entitled to be registered, loses his certificate, obtains a duplicate
from the company20 and transfers to B who is registered by the
company. Subsequently A finds the original certificate and,
either because he has forgotten about the sale to B or because he
is a rogue, then purports to sell the shares to C. The company
will rightly refuse to register C whose only remedy will be
against A (who may by this time be a man-of-straw).
More importantly, suppose D loses the certificate to E, a
rogue, who forges D’s signature and secures entry on the register
in place of D. D will nevertheless be entitled to have the register
rectified21 so as to restore D’s name, because D is still the holder
of the legal title to the shares and so is entitled to be entered on
the register. This appears to be so, even if D’s conduct has been
such as to provide the opportunity for E to commit the fraud, for
example because D had deposited the certificate with E.22
Furthermore, D will be entitled to insist on rectification if, as is
all too likely, E has made a further transfer of the shares to a
wholly innocent third party, F, who is registered before D learns
of the fraud. D may still rectify the register against F. This
system of rules provides a high level of protection of D’s legal
rights, but is hardly conducive to the free circulation of shares.
Estoppel
27–6
However, the position of people such as F is ameliorated by the
doctrine of estoppel by share certificate, which may give F a
right to an indemnity against the company, if D insists on
rectification of the register. In other words, the risk of fraud (or
other unauthorised transfer) falls on the company, which is
perhaps defensible on the grounds that it is the company which
benefits from legal rules which encourage the free circulation of
shares.23 The doctrine of estoppel by share certificate produces
what has been termed “quasi-negotiability”.24
A share certificate contains two statements on which the
company knows that reliance may be placed. The first is the
extent to which the shares to which it relates are paid up. The
second is that the person named in it was registered as the holder
of the stated number of shares. The company may be estopped
from denying either statement if someone in reliance upon it has
changed his position to his detriment. This may afford a
transferee who, in reliance on the transferor’s share certificate,
has bought what he believed, wrongly, to be fully paid shares a
defence if the company makes a call upon him.25 The company
will also be estopped if the transferee has relied on a false
statement in his transferor’s certificate that the transferor was the
registered holder of the shares on the date stated in the
certificate.26 Thus, F, the transferee from the rogue, will be
entitled to an indemnity from the company if the company
rectifies the register in favour of D, the legal owner, because F
will have relied upon the certificate issued by the company to the
rogue.
However, this argument will rarely27 benefit an original
recipient of the incorrect certificate because receipt of the
certificate normally marks the conclusion of the transaction and
is not something which was relied on in deciding to enter into it.
In the example above, E, the rogue, is the original recipient of
the incorrect certificate and we need have no regrets about the
weakness of E’s legal position. However, suppose E, instead of
transferring the shares fraudulently into his own name and then
disposing of them to F, in fact, as is all too likely, short-circuited
this procedure by transferring them directly to F, and the
company then issued a new certificate to F. F could not claim to
have relied on the new certificate when entering into the
transaction which pre-dated its issue. F did rely on the certificate
issued to D but E’s fraud did not turn on a denial of D’s
ownership of the shares but rather upon E pretending to be D. In
this situation, only a transferee from F would be able to rely on
the doctrine of estoppel by share certificate. Perhaps this result
may be justified on the basis that D is in a better position to
detect E’s fraud than is the company.
Restrictions on transferability
27–7
The directors of non-listed companies are frequently empowered
by the articles to refuse to register transfers or there will be
provisions affording the other members or the company28 rights
of pre-emption, first refusal or even compulsory acquisition.
This does not apply to listed shares because the Listing Rules
require there to be no restrictions of the transfer of shares.29
Provisions restricting share transfers require the most careful
drafting if they are to achieve their purpose; and have not always
received it, thereby facing the courts with difficult questions of
interpretation. The following propositions can, it is thought, be
extracted from the voluminous case law:
(a) The extent of the restriction is solely a matter of construction
of the company’s constitution. But, since shareholders have a
prima facie right to transfer to whomsoever they please, this
right is not to be cut down by uncertain language or doubtful
implications.30 If, therefore, it is not clear whether a
restriction applies to any transfer or only to a transfer to, say,
a non-member,31 or to any type of disposition or only to a
sale32 the narrower construction will be adopted.
(b) However, this does not help the courts much when faced with
a common provision in the articles that a shareholder
“desirous” or “intending” or “proposing” to transfer his or her
shares to another must give notice to the company to trigger
pre-emption procedures. On the one hand, the provision
would be unworkable if the courts had held that as soon as a
shareholder formed the relevant intention, the provision in the
articles was triggered, especially as the shareholder is
normally permitted to withdraw the notice, if he or she does
not wish to sell to the person who comes forward to buy the
shares. There must be something in addition to the required
intention. On the other hand, a shareholder who enters into an
agreement with an outsider to sell the shares to that person or
to give that person an option to buy them will fall within the
provision in the articles, even if the outsider has not
completed the agreement (and so has only an equitable
interest in the shares) or has not taken up the option to
purchase.33 Drafters have spent much ingenuity on producing
agreements which do not fall within the second category and
have been rewarded. The courts have held that agreements do
not trigger the notice provision if they transfer only the
beneficial interest in the shares and entitle the transferee to be
registered as the legal owner of the shares only once the pre-
emption right has been removed from the articles.34 The
execution of a transfer form and its deposit with the
company’s auditor, however, can amount to a transfer which
triggers pre-emption rights contained in the company’s
constitution.35
(c) Where the regulations confer a discretion on directors with
regard to the acceptance of transfers, this discretion, like all
the directors’ powers, is a fiduciary one36 to be exercised
bona fide in what they consider—not what the court
considers—to be in the interest of the company, and not for
any collateral purpose. But the court will presume that they
have acted bona fide, and the onus of proof of the contrary is
on those alleging it and is not easily discharged.37
(d) Prior to the Companies Act 2006 it was possible for the
articles of association to stipulate that the directors shall not
be bound to state their reasons for not registering a transfer.38
The Companies Act 2006 now states in s.771 that the
company must provide the transferee with such further
information about the reasons for the refusal as the transferee
may reasonable request. This, however, does not include
minutes of the meetings of directors. The CLR hopes that this
will make it possible to apply the fiduciary tests and s.994 on
unfair prejudice in a transparent way to such refusals.39
(e) If, on the true construction of the articles, the directors are
entitled to reject only on certain prescribed grounds and it is
proven that they have rejected on others, the court will
intervene.40 If the directors state their reasons (as they are
now obliged to do) the court will investigate them to the
extent of seeing whether they have acted on the right
principles and would overrule their decision if they have
acted on considerations which should not have weighed with
them, but not merely because the court would have come to a
different conclusion.41 If the regulations are so framed as to
give the directors an unfettered discretion the court will
interfere with it only on proof of bad faith.42
(f) If, as is normal, the regulations merely give the directors
power to refuse to register, as opposed to making their
passing of transfers a condition precedent to registration,43 the
transferee is entitled to be registered unless the directors
resolve as a board to reject. Hence in Moodie v Shepherd
(Bookbinders) Ltd44 where the two directors disagreed and
neither had a casting vote, the House of Lords held that
registration must proceed. The directors have a reasonable
time in which to come to a decision,45 but since s.771(1)
imposes an obligation on them to give to the transferee notice
of rejection within two months of the lodging of the transfer,
the maximum reasonable period is two months.46
The positions of transferor and transferee prior to
registration
27–8
It may be of importance to determine the precise legal position
of the transferor and transferee pending registration of the
transfer which, if there are restrictions on transferability, may
never occur. As we have seen, only if and when the transfer is
registered will the transferor cease to be a member and
shareholder and the transferee will become a member and
shareholder. However, notwithstanding that registration has not
occurred, the beneficial interest in the shares may have passed
from the transferor to the transferee. In the case of a sale of
certificated shares the transaction will normally go through three
stages: (1) an agreement (which, particularly if a block of shares
conferring de facto or de jure control is being sold, may be a
complicated one); (2) delivery of the signed transfer form and
the certificate by the seller and payment of the price by the buyer
and; (3) registration of the buyer’s name on the shareholder
register.
Notwithstanding that the transfer is not lodged for registration
or registration is refused, the beneficial interest in the shares
will, it seems, pass from the seller to the buyer at the latest at
stage (2) and, indeed will do so at stage (1) if the agreement is
one which the courts would order to be specifically enforced.47
The seller then becomes a trustee for the buyer and must account
to him for any dividends he receives and vote in accordance with
his instructions (or appoint him as his proxy).48 This, however,
begs several questions. The first arises because at stage (2)
delivery of the documents may not necessarily be matched by
payment of the full price; the agreement may have provided for
payment by instalments49 and the seller will then retain a lien on
the shares as an unpaid seller. This will not prevent an equitable
interest passing to the buyer but the court will not grant specific
performance unless the seller’s lien can be fully protected,50 and
until paid in full he is entitled to vote the shares as he thinks will
best protect his interest.51 Instead of being a bare trustee his
position is analogous to that of a trustee of a settlement of which
he is one of the beneficiaries.
The second begged question is whether the foregoing can
apply when the articles provide for rights of pre-emption or first
refusal when a shareholder wishes to dispose of his shares. In
such a case the transferor (perhaps with the full knowledge of
the transferee52) has breached the deemed contract under s.33
between him and the company and his fellow shareholders.
There are observations of the House of Lords in Hunter v
Hunter53 to the effect that accordingly the transfer is wholly
void, even as between the transferor and transferee.
However, in later cases54 courts have refused to follow this
and, it must surely be right (at any rate if the price has been paid)
that the buyer obtains such rights as the transferor had. This will
not benefit the buyer if all the shares are taken up when the
transferor is compelled to make a pre-emptive offer, but it does
not follow that all of them will be taken up and, if not, the
transferee has a better claim to those shares not taken up than has
the transferor.
27–9
When the transaction is not a sale but a gift, there need be no
agreement. Even if there is, it will not be legally enforceable
under English law because there will be no valuable
consideration and because, under the so-called rule in Milroy v
Lord,55 “there is no equity to perfect an imperfect gift”. One
might have supposed, therefore, that if the donor has chosen to
make the gift by handing to the donee a signed transfer and the
share certificate, rather than by a formal declaration of trust in
favour of the donee, the gift would not be effective unless and
until the transfer was registered. In modern cases,56 however, it
has been held that so long as the donor has done all he needs to
do, or there has been detrimental reliance by the donee, the
beneficial interest passes from him to the donee.57
Priorities between competing transferees
27–10
Questions may also arise in determining the priority of purported
transfers of the same shares to different people. In answering
these questions the courts58 have relied on two traditional
principles of English property law: i.e. (1) that as between two
competing holders of equitable interests, if their equities are
equal the first in time prevails; and (2) that a bona fide purchaser
for value of a legal interest takes free of earlier equitable
interests of which he has no notice at the time of purchase.
In applying these principles to competing share transfers, a
transferee prior to registration is treated as having an equitable
interest only but registration converts his interest into a legal
one.59 Hence if a registered shareholder, A, first executes a
transfer to a purchaser, B, and later to another, C, while both
remain unregistered B will have priority over C. If, however, C
succeeds in obtaining registration before B, he will have priority
over B so long as he had no notice, at the time of purchase, of
the transfer to B. If C did have notice, although he has been
registered, his prima facie title will not prevail over that of B,
who will be entitled to have the register rectified (assuming that
there are no grounds on which the company could refuse to
register B) and in the meantime C’s legal interest will be subject
to the equitable interest of B.60 If both transfers were gifts, the
position would presumably be different; the gift to B61 would
leave A without any beneficial interest that he could give to C
and, not being a “purchaser”, C could not obtain priority by
registration; his legal interest, on his becoming the registered
holder, would be subject to the prior equity of B.
It should perhaps be pointed out once again that even
registration affords only prima facie evidence of title. If the
registered transferor, A, was not entitled to the shares, what will
pass when he transfers to B or C is not, strictly speaking, either a
legal or equitable interest but only his imperfect title to it, which
will not prevail against the true owner. If, for example, the
transfer to A was a forgery the true owner will be entitled to be
restored to the register.62 Hence a transferee can never be certain
of obtaining an absolute title in the case of an off-market
transaction. But his risk is slight so long as he promptly obtains
registration of the transfer. And this he can do unless there are
restrictions on the transferability of the shares or unless there are
good reasons for failing to apply for registration.
The principal example for the latter occurs when the
shareholder wants to borrow on the security of his shares. This
can be done by a legal mortgage, under which the shareholder
transfers the shares to the lender (who registers the transfer)
subject to an agreement to retransfer them when the loan is
repaid. Generally, however, this suits neither party; the lender
normally has no wish to become a member and shareholder of
the company and the borrower does not want to cease to be one.
Hence a more usual arrangement is one whereby the shareholder
deposits with the lender his share certificate and, often, a signed
blank transfer, this usually being accompanied by a written
memorandum setting out the terms of the loan. The result is to
confer an equitable charge which the lender can enforce by
selling the shares if he needs to realise his security. Custody of
the share certificate is regarded as the essential protection of the
lender.63 In the case of shares, dealt with through CREST,64 its
rules provided for uncertificated shares to be held in “escrow”
balances, which provision appears to give the bank an equivalent
security.65
The company’s lien
27–11
As we have seen,66 a public company is not permitted to have a
charge or lien on its shares except (a) when the shares are not
fully paid and the charge or lien is for the amount payable on the
shares; or (b) the ordinary business of the company includes the
lending of money or consists of the provision of hire-purchase
finance and the charge arises in the course of a transaction in the
ordinary course of its business.67 Neither exception is of much
importance in the present context.
Hence it is only in respect of private companies that problems
are still likely to arise when their articles provide, as they
frequently do, that “the company shall have a first and
paramount lien on shares, whether or not fully-paid, registered in
the name of a person indebted or under any liability to the
company”. Since the decision of the House of Lords in Bradford
Banking Co v Briggs, Son and Co68 it appears to be accepted that
the effect of such a provision is that:
(a) once a shareholder has incurred a debt or liability to the
company, it has an equitable charge on the shares of that
shareholder to secure payment which ranks in priority to later
equitable interests and, it seems, to earlier ones of which the
company had no notice when its lien became effective; and
(b) in determining whether the company had notice,69 s.126 has
no application; if the company knows of the earlier equitable
interest (because, for example, a transfer of the shares has
been lodged for registration even if that is refused) it cannot
improve its own position to the detriment of the holder of that
known equitable interest.
An interesting modern illustration is afforded by Champagne
Perrier-Jouet v Finch & Co.70 There the company’s articles
provided for a lien in the above terms. One of its shareholders71
had been allowed to run up substantial debts to the company
resulting from trading between him and the company and it had
been agreed that he could repay by instalments. Another creditor
of the shareholder subsequently obtained judgment against him
and a charging order on the shares by way of equitable
execution. It was held that the company’s lien had become
effective when the debts to it were incurred (even though they
were not then due for repayment) and as this occurred before the
company had notice of the charging order,72 the company’s lien
had priority.73
As this case shows, an equitable charge on shares in a private
company with articles conferring a lien on the company is likely
to be an even more undesirable form of security than shares in
private companies always are. It may, however, be the only
security obtainable, for an attempt to obtain a legal charge will
almost certainly be frustrated by the refusal of the directors to
register the transfer. If, faute de mieux, it has to be accepted,
notice should immediately be given to the company, making it
clear that this is a notice which it cannot disregard in relation to
any lien it may claim, and an attempt should be made to obtain
information about the amount, if any, then owed to the company.
TRANSFERS OF UNCERTIFICATED SHARES
27–12
We have seen in the previous section that certificated shares are
transferred by way of delivery of certain transfer documents to
the company. The company being so notified of a transfer then
registers the transferee’s name on the shareholder register. When
uncertificated shares are sold, the register is updated through
electronic instructions.
For a transfer of uncertificated shares to be possible, both the
seller and the buyer need to have access to the CREST system.
There are three ways in which investors can access CREST.
They can either hold an account with CREST themselves and
acquire the hard- and software necessary to establish a safe
connection with CREST. The cost involved in doing this makes
this option unappealing to small scale private investors. An
investor can also have his or her account with CREST operated
by a broker who accesses the system or his or her behalf. This
option is referred to as personal membership in the CREST
documentation. With both options, the account is operated in the
name of the investor who holds legal title to the shares. The third
option for an investor is not to hold an account with CREST but
to instruct a broker to act as a nominee on his or her behalf. In
that case, the investor’s name does not appear on the company’s
register. The nominee rather than the investor has an account
with CREST and holds legal title to the shares. This form of
holding shares has recently come under scrutiny (BIS Research
Paper 261, Exploring the Intermediated Shareholding Model,
January 2016).
When uncertificated shares are transferred, both the selling
and the buying account holder need to instruct the system to
carry out the transfer. When shares are sold through the Stock
Exchange’s electronic trading system, the sales information is
transferred into the CREST system automatically and the selling
and the buying account holder have an opportunity to verify the
data before the transfer is effected.
Upon receiving transfer instructions, CREST verifies them,
matches them and carries them out on the day specified by the
parties. On that day CREST transfers the shares from the seller
to the buyer and causes the purchase price to be paid over to the
seller. The buyer becomes the legal owner of the shares when
they are credited to his or her account. This is because, since
2001, CREST not only operates an electronic transfer system,
but also keeps the shareholder register for all UK uncertificated
shares.74 Having updated the register, CREST needs to
immediately inform the issuing company which keeps a record
of all transfers relating to uncertificated shares.
27–13
In order to preserve the integrity of the shareholder register, the
USR 2001 stipulates that the Operator must not amend the
shareholder register, except on completion of a trade in
uncertificated units, unless ordered to do so by a court75 or unless
shares have been transferred by operation of law.76 Equally,
there are only limited circumstances in which the Operator may
or must refuse to alter the operator register if it has received
appropriate instructions from system members. Of course, the
Regulations recognise that, in rare cases, events outside the
system may impinge on the Operator’s freedom of action in
relation to the Operator register, just as they do on the issuer
register kept by the company (for the uncertificated shares) or
the share register, also kept by the company, for companies
which have not entered the electronic transfer system. Thus,
unless it is impracticable to stop it, CREST must not make a
change in the Operator register which it actually knows is
prohibited by an order of a court or by or under an enactment or
involves a transfer to a deceased person.77 There are further
cases where CREST may refuse to make a change, for example,
where the transfer is not to a legal or natural person or is to a
minor.78 Section 771(1)79 applies in cases where CREST refuses
to register a transfer,80 but a two-month limit for notifying
transferees of a failure to register hardly seems an appropriate
one for an electronic system.
Title to uncertificated shares and the protection of
transferees
27–14
The CREST system has reduced the time that lapses between
trade and settlement. It has also caused transfers of uncertificated
shares to be carried out almost simultaneously with payment of
the purchase price. This has significantly reduced the
transactional risk investors in shares are exposed to. The risk
involved in shares transaction has, however, not been eliminated
completely. In particular, the Regulations do not introduce a rule
to the effect that entry on the Operator register confers title to the
shares on the person registered. On the contrary, reg.24(1)
provides, in the same way as the Act,81 that “a register of
members” is simply prima facie evidence of the matters directed
or authorised to be stated in it, and “register of members” is
defined to include both the issuer and Operator register of
members.82 In principle, therefore, a legal owner of shares may
seek rectification of the Operator register if CREST removes his
or her name from it without cause, and a court order restoring
the legal owner to the register would be, as we have seen,
something to which the Operator is obliged to respond.83 In fact,
it is doubtful whether the statutory provision under which the
Regulations were made is wide enough to effect a general
change in the rules as to the status of the register.
This is not to say, however, that the protection of transferees
is provided in the same way or to the same extent under the
Regulations in relation to uncertificated shares as it is in relation
to certificated shares. As we have seen, that protection in relation
to the latter class of shares depends heavily upon the doctrine of
estoppel by share certificate. Since, by definition, there is no
share certificate in relation to uncertificated shares, the
immediate position seems to be that the third party cannot be
protected by this doctrine. Is this in principle a problem for the
transferee of shares? The answer is that, if the matter were not
dealt with in the Regulations, it would be. There are obvious
risks that either an unauthorised person obtains access to the
system or a person with authorised access uses the system in an
unauthorised way, in both cases sending an instruction to
transfer shares not belonging to him or her to an innocent third
party. Can the former holder of the shares secure the restoration
of his or her name to the Operator register to the detriment of the
third party?
One technique for protecting the third party might be to
transfer the doctrine of estoppel by share certificate to the entry
on the register, but it is no accident that, in relation to
certificated shares, the doctrine is based on the certificate, not on
the register entry, even though both are available. This is
because it is rare for a transferee to rely on the register entry
before committing him- or herself to the transaction. This is true
of both the Operator register and the issuer register, and so
estoppel does not seem an effective protective device as against
either the company or CREST.
27–15
In fact, the Regulations take an entirely different approach to the
protection of transferees. If the unauthorised instruction in the
situations above is sent in accordance with the rules of the
Operator, the recipient of the instruction is entitled, subject to
very few exceptions, to act on it and the person by whom or on
whose behalf it was purportedly sent may not deny that it was
sent with proper authority and contained accurate information.84
Unlike at common law, where even careless conduct does not
prevent the legal owner from asserting his or her title to the
shares,85 even a legal owner who was in no way to blame for the
fraud may find that title to the shares has been lost. The
transferor may have a remedy in such a case against the system
participant whose equipment was used to send the unauthorised
instructions.86 There may also be a liability of the Operator in
such a case, but only if the instruction was not sent from a
system computer or the system computer it purported to be sent
from. Thus, purely unauthorised activity by a broker’s employee
is not caught.87 In any event, the liability is capped at £50,000 in
respect of each instruction88 and falls away entirely if the
Operator identifies the person responsible, even if the transferor
is not able to recover any compensation from that person.89
Thus, it seems right to conclude that transferees are somewhat
better protected under the Regulations than under the common
law doctrine of estoppel, since even first transferees from the
rogue are protected. However, that protection is provided at the
expense of the transferor, rather than of the company, as at
common law, and it is certainly arguable that company liability
is the better principle because of the benefit companies obtain
from effective markets.90
Because the transfer of legal ownership is so closely linked to
payment, the rules on beneficial ownership have less practical
relevance in relation to transfers of uncertificated shares.91 When
uncertificated securities are used as collateral, however, equity
continues to play an important role. Moreover, the Financial
Collerateral Directive,92 which aims at reducing the formalities
required to create a security interest over securities, has had
significant impact on English law.93
THE REGISTER
27–16
We have already seen that companies issuing registered shares
must keep a register containing the names of their members.94
We shall now examine the rules governing the shareholder
register more closely. The register of companies which issue
only certificated shares is subject to the 2006 Act. Companies
which issue only uncertificated shares or both certificated and
uncertificated shares are subject to the Uncertificated Securities
Regulation 2001 (USR 2001).95
Under both regimes, the register contains the name and
address of each member and the date on which each person was
registered as a member and the date on which any person ceased
to be a member.96 It also states the number and class97 of shares
held by each member and the amount paid up on each share.98 In
the case of a private company there must also be noted on the
register the fact and the date of the company becoming, or
ceasing to be a single member company.99
The register of members of both certificated and uncertificated
shares constitutes prima facie evidence of any matters which are
by the respective regulatory regime directed or authorised to be
inserted in it.100
In order to become a member or shareholder of a company an
investor has to have his or her name entered on that shareholder
register. A buyer normally acquires legal title to shares at the
point in time at which his or her name is entered on the
shareholder register.101 This rule applies irrespective of whether
shares are held in the certificated or in the uncertificated form.
27–17
Certificated and uncertificated shares differ in terms of who
maintains the shareholder register. The register for certificated
shares is maintained by the company itself or by a registrar on
behalf of the company. The register for uncertificated shares is
maintained by the Operator of the uncertificated transfer system,
CREST. The register of companies which issue certificated
shares and uncertificated shares consists of two parts. Entries
relating to certificated shares are maintained by the company.
They are referred to as the “issuer register of members”. Entries
relating to uncertificated shares are maintained by the Operator
of the uncertificated transfer system, and are referred to as
“Operator register of members”. The company maintains a
“record” relating to uncertificated shares. This record does not
constitute a shareholder register. It must be regularly reconciled
with the Operator register of members.102 In relation to
uncertificated shares, the Operator register prevails over the
record kept by the company.103 The record does not provide for
prima facie evidence. It enables the company to inform those
inspecting the register about entries that have been made on the
register maintained by CREST.
The issuer register may be kept at the company’s registered
office or at a place specified in regulations under s.1136.104 If
kept otherwise than at the company’s registered office, notice
must be given to Companies House (and thus to the public) of
the place where it is kept and of any change of that place.105
If a company has more than 50 members then, unless the
register is kept in such a form as to constitute an index of names
of members, such an index must be kept at the same place as the
register.106
27–18
The shareholder register and the index are available for public
inspection. Any member of the company may inspect the register
free of charge.107 Any other person may inspect the register on
payment of such fee as may be prescribed.108 In the case of
uncertificated shares, the inspection right is granted against the
record held by the company rather than against the Operator
register itself.109 This exposes the searcher to the risk that the
company’s record will not accurately reflect the Operator
register. Provided the company regularly reconciles its record
with the Operator register, except insofar as matters outside its
control prevent such reconciliation, the company is not liable for
discrepancies between the record and the register.110
The right to inspect the register is a legitimate help to a
takeover bidder and makes it possible for members to
communicate with each other. It also has, in the past, been
abused by traders who advertised their wares by unsolicited mail
or telephone calls and who were able to obtain more cheaply
than in any other way a list of potential victims by buying a copy
of the shareholder register of, say, British Telecom or British
Gas. With a view to putting an end to this illegitimate use of the
shareholder register, the 2006 Act revised the right to inspect the
register. The right to inspect the register may now be denied by
the Court if it is satisfied that the request was not sought for a
proper purpose.111
Under s.358 of the 1985 Act a company had the power to
close the shareholder register for any time or times not
exceeding in total 30 days in any year. The provision enabled
companies to draw up a list of those who are entitled to attend
the annual general meeting or to receive dividends. The 2006
Act does not contain a power to that effect.
Under the USR 2001, companies participating in CREST are
entitled to specify a time not more than 48 hours before a general
meeting by which a person must have been entered on the
register in order to have the right to attend and vote at the
meeting and may similarly choose a day not more than 21 days
before notices of a meeting are sent out for the purposes of
determining who is entitled to receive the notice.112 This way of
proceeding enables transfers to continue in the period before the
meeting (thus reducing the risk to transferees) without landing
the company in the position of having to deal with a constantly
changing body of shareholders.
Rectification
27–19
The register is “prima facie evidence of any matters which are
by this Act directed or authorised to be inserted in it”.113 It is not,
however, conclusive evidence for, as we have seen, membership
is dependent both on agreement to become a member and entry
in the register, and it may be that other requirements in the
company’s articles have to be met. If they are not, it seems that
the registered person does not become a member.114 In any
event, if the entry does not truly reflect the agreement or other
requirements, the register ought to be rectified. Hence s.125
provides a summary remedy whereby:
“(a) the name of any person is without sufficient cause entered in or omitted from a
company’s register of members, or
(b) default is made or unnecessary delay takes place in entering on the register the
fact of any person having ceased to be a member, the person aggrieved or any
member of the company, or the company may apply to the court for
rectification of the register.”115
This wording is defective because it ignores the fact that the

register is not just a register of members but also a register of
shareholdings and that a likely error is in the amount of a
member’s shareholding. However, common sense has prevailed
and in Re Transatlantic Life Assurance116 Slade J felt able to
hold that “the wording is wide enough in its terms to empower
the court to order the deletion of some only of a registered
shareholder’s shares”.117 It must follow that it is similarly
empowered to order an addition to the registered holding.
On an application the court may decide any question relating
to the title of any person who is a party to the application
whether the question arises between members or alleged
members,118 or between members or alleged members on the one
hand and the company on the other hand,119 and may decide “any
question necessary or expedient to be decided for
rectification…”.120 A rectification may also be carried out with
retrospective effect.121 Moreover, the court may order payment
by the company of “damages sustained by any party
aggrieved”.122
27–20
There is some uncertainty as to the extent to which the company
can rectify the register without an application to the court. But in
practice here again commonsense prevails. Sections 113, 115
and 122 envisage, and indeed demand, alterations without which
the register could not be kept up-to-date and fulfil its purpose,
and although there is no express provision for alterations of
members’ addresses that takes place all the time. Indeed it would
be quite absurd if companies could not correct any mistake if all
interested parties agree.
The USR 2001 also contemplate that a company may rectify
the issuer register other than by order of a court, but, in order to
preserve the integrity of the electronic transfer system, require
the company in such a case to have the consent of the Operator
of the system if the change would involve rectification of the
Operator register. Equally, the Operator may rectify the Operator
register, but must inform the issuer and the system-members
concerned immediately when the change is made.123
It must be emphasised, however, that although the register
provides prima facie evidence of who its members are and what
their shareholdings are, it provides no evidence at all, either to
the company or anyone else, of who the beneficial owners of the
shares are.124
TRANSMISSION OF SHARES BY OPERATION OF LAW
27–21
The Act125 recognises that shares may be transmitted by
operation of law and that, when this occurs, the prohibition on
registering unless a proper instrument of transfer has been
delivered does not apply.126 The principal examples of this are
when a registered shareholder dies or becomes bankrupt. As
regards the death of a shareholder, the Act further provides that a
transfer by the deceased’s personal representative, even if he is
not a member of the company, is as valid as if he had been.127
The company is bound to accept probate or letters of
administration granted in any part of the UK as sufficient
evidence of the personal representative’s entitlement.128
However, he or she does not become a member unless he or she
elects to apply to be registered and is registered as a member. In
the meantime, the effect is that he has the “same rights as the
holder had”.129
“But transmittees do not have the right to attend or vote at a general meeting, or
agree to a proposed written resolution, in respect of shares to which they are
entitled by reason of the holder’s death or bankruptcy or otherwise unless they
become the holders of those shares.”130
If the shares are those of a listed company, this anomalous

position can be ended rapidly because, unless the shares are not
fully paid, there will not be any restrictions on transferability and
the personal representative will either obtain registration of him-
or herself or execute a transfer to a purchaser or to the
beneficiaries. In relation to a private company, however, it may
continue indefinitely and prove detrimental to the personal
representative, the deceased’s estate and, sometimes, the
company. The personal representative may suffer because it may
not be possible for him fully to wind up the estate and to obtain a
discharge from his fiduciary responsibilities. The estate may
suffer because it may be impossible for the personal
representative to sell the shares at their true value, especially if
any attempt to dispose of them would trigger rights of pre-
emption or first refusal.131 The company may suffer because, as
we have seen,132 unless such rights have been most carefully
drafted, they will not come into operation so long as no action
regarding registration is taken by the personal representative. In
order to assist personal representatives, the statute has extended
the remedies afforded to members so that they can be invoked by
personal representatives of members.133 It is also now obligatory
for the company to give reasons explaining the refusal to register
a transferee.134
The position on bankruptcy of an individual shareholder135 is
broadly similar. His rights to the shares automatically vest in the
trustee in bankruptcy as part of his estate.136 But, as in the case of
a personal representative, until he elects to become registered
and is so registered, he will not become a member of the
company entitled to attend meetings and to vote. In contrast,
however, with the position on the death of a member, the
bankrupt will remain a member and be entitled to attend and
vote—though he will have to do so in accordance with the
directions of the trustee. As in the case of personal
representatives, the company’s articles will probably provide
that any restrictions on transferability apply on any application
to be registered and to any transfer by him or her137 and these
restrictions may handicap the trustee in obtaining the best price
on a sale of the shares, particularly if the articles confer pre-
emption rights.138 If a personal representative or trustee in
bankruptcy elects to be registered, and is, he becomes personally
liable for any amounts unpaid on the shares and not merely
representationally liable to the extent of the estate. Trustees in
bankruptcy, but not personal representatives, may disclaim
onerous property,139 which the shares might be if they were
partly paid or subject to an effective company lien.
2
3
4 Listing Rules r.2.2.4 as of April 2016.
5 In the case of an informal entitlement, it may be protected by the unfair prejudice
remedy: above, Ch.20.
6 Listing Rules rr.6.1.23–6.1.24.
7
USR 2001 (SI 2001/3755).
8Certificated and uncertificated shares do not constitute separate classes of shares (Re
Randall ad Quilter Investment Holdings Plc [2013] EWHC 4357 (Ch)).
9 USR 2001 Sch.1.
10
USR 2001 reg.15.
11 The Companies (Model Articles) Regulations 2008 Sch.1 reg.24 and Sch.3 reg.46.
13 USR 2001 reg.28.
14Regulation (EU) No.909/2014 of the European Parliament and of the Council on
improving securities settlement in the European Union and on central securities
depositaries (CSDs) (CSDR) ([2014] O.J. L257/1) art.3(1).
15
CSDR art.76(2).
16
Stock Transfer Act s.770(1).
17
18
And, it seems, what then occurs is a novation (i.e. the relationship between the
company and the transferor is ended and is replaced by a new relationship between the
company and the transferee) rather than an assignment of the transferor’s rights to the
transferee (Ashby v Blackwell (1765) 2 Eden 299 at 302–303; 28 E.R. 913 at 914; Simm
v Anglo-American Telegraph Co (1879) 5 Q.B.D. 188 at 204; E. Micheler, “Legal Title
and the Transfer of Shares in a Paperless World—Farewell Quasi-Negotiability” [2002]
J.B.L 358). If this is the rule, it is favourable to transferees, for in general on assignment
the assignee is in no better position than was the assignor.
19
Or in Scotland “sufficient evidence unless the contrary is shown”. It is not thought
that the reference in s.768 to a certificate “under the common seal of the company”
requires the use of the common seal, if it instead uses an official seal which is a
facsimile of its common seal (see s.50) or has the certificate signed by two directors or
one director and the secretary (see s.44). Section 768 (2) makes the position clear for
Scotland.
20Companies do this readily enough so long as the registered holder makes a statutory
declaration regarding the loss and supplies the company with a bank indemnity against
any liability it may incur.
21 On rectification, see below, para.27–19.
22Welch v Bank of England [1955] Ch. 508; Simm v Anglo-American Telegraph Co
(1879) 5 Q.B.D. 188.
23
The company may in turn be entitled to an indemnity from the person who asked it to
register the transfer which led to the issuance by the company of the misleading
certificate. An indemnity against the fraudster is likely to be worthless, but the
entitlement embraces also the broker who acted on behalf of the fraudster, who may well
be worth suing. See Royal Bank of Scotland Plc v Sandstone Properties Plc [1998] 2
B.C.L.C. 429, where the earlier cases are reviewed. Presumably, the rationale for the
company’s entitlement is that the broker is in a better position to detect unauthorised
transfers than is the company. No liability arises, however, if the broker who instructed
the issuer to amend the register did so in reliance on genuine but inaccurate share
certificates issued by the issuer or its registrar (Cadbury Schweppes Plc v Halifax Share
Dealing Ltd [2007] 1 B.C.L.C 497).
24E. Micheler, “Farewell to Quasi-negotiability? Legal Title and Transfer of Shares in a
Paperless World” [2002] J.B.L. 358.
25 Burkinshaw v Nicholls (1878) 3 App. Cas. 1004 HL; Bloomenthal v Ford [1897] A.C.
156 HL. If the reason why the shares were not fully paid up is a contravention of the
provisions regarding payment in ss.553 et seq. of the Act (see Ch.11, above, at para.11–
14) a bona fide purchaser and those securing title from him will be exempted from
liability to pay calls by virtue of s.588(2) and s.605(3) and will not have to rely on
estoppel.
26Cadbury Schweppes Plc v Halifax Share Dealing Ltd [2007] 1 B.C.L.C 497; Dixon v
Kennaway & Co [1900] 1 Ch. 833; Re Bahia and San Francisco Railway Co (1868)
L.R. 3 Q.B. 584. This, in contrast with resisting a call, may seem to be committing the
heresy of using estoppel as a sword rather than a shield. The justification is that a
purchaser who has bought from the registered owner has a prima facie right to be
registered in his place and that the company is estopped from denying that the transferor
was the registered owner.
27
But in exceptional circumstances it may do so: Balkis Consolidated Co v Tomlinson
[1893] A.C. 396 HL; Alipour v UOC Corp [2002] 2 B.C.L.C. 770 (where the holder was
even held entitled to be registered as a member, since no innocent party was thereby
prejudiced).
28
Acquisition by the company itself will, of course, be lawful only if it is able to comply
with the conditions enabling a company to buy its own shares: see above, at para.13–7.
Less usually, the provision may impose an obligation on other members to buy.
29
Except for any restrictions imposed for failure to comply with a notice under CA 2006
s.793 (notice by company requiring information about interests in its shares): Listing
Rules r.2.2.4.
30
per Greene MR in Re Smith & Fawcett Ltd [1942] Ch. 304 at 306 CA. See also Re
New Cedos Engineering Co Ltd [1994] 1 B.C.L.C. 797 (a case decided in 1975);
Stothers v William Steward (Holdings) Ltd [1994] 2 B.C.L.C. 266.
31
Greenhalgh v Mallard [1943] 2 All E.R. 234 CA; Roberts v Letter “T” Estates Ltd
[1961] A.C. 795 PC; see also Rose v Lynx Express Ltd [2004] 1 B.C.L.C. 455.
32 Moodie v Shepherd (Bookbinders) Ltd [1949] 2 All E.R. 1044 HL.
33Lyle & Scott Ltd v Scott’s Trustees [1959] A.C. 763 HL; distinguished in Re Coroin
Ltd McKillen v Misland (Cyprus) Investment Ltd [2013] EWCA Civ 781; [2013] 2
B.C.L.C. 583.
34 Re Sedgefield Steeplechase Co (1927) Ltd, Scotto v Petch [2000] All E.R. (D) 2442
CA (Lord Hoffmann sat as an additional judge of the Chancery Division, where the
previous cases are reviewed); Theakston v London Trust Plc [1984] B.C.L.C. 390; see
also Safeguard Industrial Investments Ltd v National and Westminster Bank Ltd [1980]
3 All E.R. 849.
35
Hurst v Crampton Bros (Coopers) Ltd [2003] 1 B.C.L.C. 304; Re Claygreen [2006] 1
B.C.L.C. 715.
36 For the application of the fiduciary principle to the transfer of shares in the context of
takeover bids, see paras 28–26 to 28–36, below.
37 In Re Smith & Fawcett Ltd [1942] Ch. 304 CA, the directors refused to register but
agreed that they would register a transfer of part of the shareholding if the transferor
agreed to sell the balance to one of the directors at a stated price. It was held that this
was insufficient evidence of bad faith but it might today be “unfairly prejudicial” under
s.994; see Ch.20. See also Village Cay Marina Ltd v Acland [1998] 2 B.C.L.C. 327 PC.
38Berry & Stewart v Tottenham Hotspur Football Co [1935] Ch. 718; see also
Sutherland v British Dominions Corp [1926] Ch. 746.
39 Final Report I, paras 7.42–7.45.
40
Re Bede Steam Shipping Co [1917] 1 Ch. 123; see also Village Cay Marina Ltd v
Acland (Barclays Bank Plc third party) [1998] 2 B.C.L.C 327 PC; and Sutherland v
British Dominions Corp [1926] Ch. 746.
41
Re Bede Steam Shipping Co [1917] 1 Ch. 123; Re Smith & Fawcett Ltd [1942] Ch.
304 CA. Indeed, if there are rights of pre-emption at a fair price to be determined by the
auditors the court can investigate the adequacy of this price only if the auditors give a
“speaking valuation” stating their reasons: Dean v Prince [1954] Ch. 409 CA; Burgess v
Purchase & Sons Ltd [1983] Ch. 216.
42
Re Smith & Fawcett Ltd [1942] Ch. 304 CA; Charles Forte Investments Ltd v
Amanda [1964] Ch. 240; Village Cay Marina Ltd v Acland (Barclays Bank Plc third
party) [1998] 2 B.C.L.C 327 PC.
43
It is common to state that transfers have to be passed by the directors but under
normal articles that is not so (the Companies (Model Articles) Regulation 2008 Sch.1
reg.26) and in the light of s.771 it is doubtful if the articles could make the directors’
approval a condition precedent.
44
Moodie v Shepherd (Bookbinders) Ltd [1949] 2 All E.R. 1044 HLSc.
45
Shepherd’s case (1866) L.R. 2 Ch. App. 16.
46Re Swaledale Cleaners Ltd [1968] 1 W.L.R. 1710 CA; Tett v Phoenix Property and
Investment Co Ltd [1986] B.C.L.C. 149; Re Inverdeck Ltd [1998] 2 B.C.L.C. 242. And
normally it seems that they will not be treated as acting unreasonably if they take the full
two months: Re Zinotty Properties Ltd [1984] 1 W.L.R. 1249 at 1260.
47 The fact that the agreement is subject to fulfilment of a condition beyond the control
of the parties will not prevent it from being specifically enforceable, notwithstanding
that the condition has not been fulfilled, if the party for whose benefit the condition was
inserted is prepared to waive it. In Wood Preservation Ltd v Prior [1969] 1 W.L.R. 1077
CA, where the condition was for the benefit of the buyer, the court was prepared to hold
that the seller ceased to be “the beneficial owner” on the date of the contract
notwithstanding that the buyer did not become the beneficial owner until he later waived
the condition. In the interim, beneficial ownership was, apparently, in limbo! See also
Michaels v Harley House (Marylebone) [1997] 2 B.C.L.C. 166; Philip Morris Products
Inc v Rothmans International Enterprises Ltd [2001] All E.R. (D) 48 (Jul); Re Kilnoore
Ltd (In Liquidation) Unidare Plc v Cohen [2006] 1 Ch. 489.
48
Hardoon v Belilios [1901] A.C. 118 PC; distinguished in Wise v Perpetual Trustee Co
[1903] A.C. 139 PC.
49The normal practice then is to provide that the transfer and share certificate shall be
held by a stakeholder and not lodged for registration until released to the buyer on
payment of the final instalment.
50 Langen & Wind Ltd v Bell [1972] Ch. 685; Prince v Strange [1977] 3 All E.R. 371.
51Musselwhite v Musselwhite & Son Ltd [1962] Ch. 964; JRRT (Investments) Ltd v
Haycraft [1993] B.C.L.C. 401; Michaels v Harley House (Marylebone) [1997] 2
B.C.L.C. 166; Stablewood v Virdi [2010] EWCA Civ 865; [2010] All E.R. (D) 204.
52
As in Lyle & Scott Ltd v Scott’s Trustees [1959] A.C. 763 HLSc.
53 Hunter v Hunter [1936] A.C. 222 HL.
54Hawks v McArthur [1951] 1 All E.R. 22; Tett v Phoenix Property Co [1986] B.C.L.C.
149, where the Court of Appeal was not required to rule on this point because the
appellants did not argue that the decision on it at first instance was wrong. Re Walls
Properties Ltd v PJ Walls Holdings Ltd [2008] 1 I.R. 732; Cottrell v King [2004] 2
B.C.L.C. 413; but see Re Claygreen Ltd; Romer-Ormiston v Claygreen Ltd [2006] 1
B.C.L.C. 715.
55 Milroy v Lord (1862) 4 De G.F. & J. 264.
56
Re Rose [1949] Ch. 78; Re Rose [1952] Ch. 499 CA; Pennington v Waine [2002] 2
B.C.L.C. 448 CA; Kaye v Zeital [2010] 2 B.C.L.C. 1; Curtis v Pulbrook [2011] 1
B.C.L.C. 638.
57
Thus, until the transfer is registered, placing the donee in the same position as if the
donor had instead made a declaration of trust.
58
The leading cases are Shropshire Union Railway v R. (1875) L.R. 7 H.L. 496; Société
Générale v Walker (1885) 11 App. Cas. 20 HL; Colonial Bank v Cady (1890) 15 App.
Cas. 267 HL. For more recent decisions, see Hawks v McArthur [1951] 1 All E.R. 22;
Champagne Perrier-Jouet v Finch & Co [1982] 1 W.L.R. 1359; Macmillan Inc v
Bishopsgate Investment Trust Plc (No.3) [1995] 3 All E.R. 747.
59
Notwithstanding a suggestion by Lord Selbourne (in Société Générale v Walker
(1885) 11 App. Cas. 20 HL) that “a present absolute right to have the transfer registered”
might suffice, it seems that nothing less than actual registration will do. In Ireland v
Hart [1902] 1 Ch. 521 the transfer had been lodged for registration and the directors had
no power to refuse but it was held that the legal interest had not passed.
60
France v Clark (1884) 26 Ch.D. 257 CA; Earl of Sheffield v London Joint Stock Bank
(1888) 13 App. Cas. 332 HL; Rainford v James Keith & Blackman [1905] 2 Ch. 147
CA.
61
So long as it has been “perfected”—as interpreted in the cases following Re Rose
[1949] Ch. 78; and Re Rose [1952] Ch. 499 CA.
62 The transferee will have no remedy against the company based on estoppel by share
certificate: it made no false statement: see para.27–6, above. The Forged Transfers Acts
1891 and 1892 enabled companies to adopt fee-financed arrangements for compensating
innocent victims of forged transfers but this is purely voluntary and seems to have been
virtually a dead-letter since its inception.
63
Banks usually grant their clients overdrafts on the security of an equitable charge by a
deposit of share certificates without requiring signed blank transfers.
64 Shares not listed or dealt with on the AIM are rarely accepted as security for loans
because of their illiquidity and, usually, restrictions on their transferability. Banks will
instead want a charge on the undertaking and assets of the company itself plus, probably,
personal guarantees of the members or directors.
65
See Evans, (1996) 11 J.I.B.F.L. 259; see also in relation to the Financial Collateral
Directive and its implementation in the UK: Ho, [2011] J.I.B.L.R. 151; and Cukurova
Financial International Ltd v Alfa Telecom Turkey Ltd [2009] 3 All E. R. 849 PC; Mills
v Sportsdirect.com [2010] 2 B.C.L.C. 143.
66
67 2006 Act s.670; for listed companies see also Listing Rules r.2.2.4.
68 Bradford Banking Co v Briggs, Son and Co (1886) 12 App.Cas.29, HL.
69
It is not altogether clear why notice should be relevant. Since the company’s lien is
merely an equitable interest, its priority over another equitable interest should depend on
the respective dates of their creation. But the decisions seem to assume that the
company’s lien will have priority over an equitable interest if the company has not
received notice of the latter.
70 Champagne Perrier-Jouet v Finch & Co [1982] 1 W.L.R. 1359.
71
He had also been a director and it was argued that the debt he incurred to the company
was a loan unlawful under what is now s.197 so that the company could not have a valid
lien. It was held that it was not a loan; it would, however, today be “a quasi-loan” as
defined in s.198 and as such unlawful if the company was a “relevant company” (e.g. a
subsidiary of a public company) as defined in s.198.
72
It also ante-dated the charging order but the court seems to have regarded the date of
notice as decisive: see at s.1367B–E.
73
It was also held that if the company enforced its lien by selling the shares it would
have to comply with provisions in the articles conferring pre-emptive rights on the other
members of the company.
74
USR 2001 reg.27(1) obliges the Operator upon settlement of the transfer to amend the
operator register (unless the shares thereafter are to be held in certificated form). The
Operator must also, immediately after making the change, notify the company:
reg.27(7).
75 USR 2001 reg.27(5)—for example, upon rectification of the register. Or unless it
receives an issuer instruction to the effect that the shares have been converted into
uncertificated form or there has been a compulsory acquisition of shares after a takeover
(see para.28–69): reg.27(1).
76
USR 2001 reg.27(6). On transfer by operation of law, see below, para.27–21.
77
USR 2001 reg.27(2) and (3).
78 USR 2001 reg.27(4).
80
USR 2001 reg.27(8) and (9).
81
2006 Act s.127; below, para.27–16. Naturally, s.768 (certificate to be evidence of
title) has no application to uncertificated shares, though the section seems still to apply
to certificated shares of participating companies.
82
USR 2001 reg.3(1).
83 USR 2001 reg.27(5).
84 USR 2001 reg.35.
85
86The Regulations do not create such a liability but do preserve it if it exists under the
general law (USR reg.35(7)), for example, as between the transferor and his or her
broker.
87 See the definition of “forged dematerialised instruction” in USR reg.36(1). In effect,
the Operator is liable for security defects in its system but not for unauthorised use of the
system.
88 USR reg.36(6).
89
USR reg.36(4), unless the Operator has been guilty of fraud, wilful neglect or
negligence (USR reg.36(9)).
90
E. Micheler, fn.18, above.
91 Equitable ownership arises, however, when uncertificated securities are transferred to
a person who opts to have them converted in to certificated securities (USR 2001
reg.31(2)).
92
Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002
on financial collateral arrangements [2002] O.J. L168/43 implemented in the UK by the
Financial Collateral Arrangements Regulation (No.2) 2003 SI 2003/3226.
93
Ho, [2011] J.I.B.L.R. 151; Mills v Sportsdirect.com [2010] EWHC 1072 (Ch); [2010]
2 B.C.L.C. 143; see also Cukurova Financial International Ltd v Alfa Telecom Turkey
Ltd [2009] 3 All E.R. 849 PC.
94
2006 Act s.113; The Small Business, Enterprise and Employment Act 2015 (2015 c.
26) s.94 and Sch.5 amend the Companies Act 2006 to give private companies the option
of keeping the register of members on the register kept by the registrar instead of
keeping it on their own register. This will come into force at a date to be appointed
(SBEE Act 2015 s.164(1)). Companies House’s website contains information suggesting
that this will be in June 2016 (https://www.gov.uk/government/news/the-small-business-
enterprise-and-employment-bill-is-coming [Accessed 26 May 2016].
95
The USR 2001 (SI 2001/3755) was introduced to bring forward the point in time at
which an investor acquires legal title to uncertificated shares from the moment at which
the company amends the shareholder register to the moment at which the Operator of the
uncertificated transfer system credits the shares to the buyer’s securities account (HM
Treasury, Modernising Securities Settlement, 2001; Bank of England, Securities
Settlement Priorities Review, September 1998 and March 1998). This was done by
entrusting the Operator of the uncertificated transfer system with the maintenance of the
shareholder register for uncertificated shares.
96 2006 Act s.113; USR 2001 Sch.4 paras 2(1), (2) and 4(1).
97In the case of a company without a share capital but with different classes of
membership the register has to state the class to which each member belongs (s.113(3);
USR 2001 Sch.4 para.2(2)). This fills the lacuna revealed in Re Performing Right
Society Ltd [1978] 1 W.L.R. 1197.
98
2006 Act s.113(3); USR 2001 Sch.4 paras 2(2), (3), 4(1) and 5(1). In the case of the
amount paid up, this appears only on the issuer’s record.
99
s2006 Act s.123(2); USR 2001 Sch.4 para.3. It is rather unlikely that a company
issuing uncertificated shares would fall into the state of having only one member, but it
might do if it became part of a group of companies.
100
2006 Act s.127; USR 2001 reg.24(1).
1012006 Act s.112; J Sainsbury Plc v O’Connor (Inspector of Taxes) [1991] 1 W.L.R.
963 at 977 CA; Re Rose [1952] Ch. 499 at 518–519 CA; Kaye v Zeital [2010] 2
B.C.L.C. 1 at [40].
102 USR 2001 reg.23 and Sch.4 para.5(2).
103
USR 2001 reg.24(2).
104 Companies (Company Records) Regulations 2008 (SI 2008/3006).
105 2006 Act s.114(2); USR 2001 Sch.4 para.6(3) and (4). The place must be in England
or Wales if the company is registered in England and Wales or in Scotland if it is
registered in Scotland. But if the company carries on business in one of the countries
specified in s.129(2) it may cause keep an “overseas branch register” in that country
(s.129(2)). This, in effect, is a register of shareholders resident in that country, a
duplicate of which will also be maintained with the principal register (s.132). This
provision is not affected by the Uncertificated Securities Regulations (USR 2001 Sch.4
paras 2(7) and 4(4)).
106
2006 Act s.115.
107
2006 Act s.116.
108
2006 Act s.116.
109 USR 2001 Sch.4 para.9.
110
USR 2001 Sch.4 para.5(3).
111
2006 Act s.117; For examples of this see: Burry & Knight Ltd v Knight [2014]
EWCA Civ 604; [2014] 1 W.L.R. 4046 where it was held that the communication with
fellow shareholders about the manner in which company shares are proposed to be
valued was a proper purpose, but the communication to fellow shareholders of
unsubstantiated allegations about directors’ remuneration was not. See also Burberry
Group Plc v Fox-Davies [2015] EWHC 222 (Ch) where an application of a tracing agent
attempting to find “lost” shareholders was refused because the real motive was to extract
a fee from these shareholders and that was not a proper purpose.
112
USR 2001 reg.40.
113
2006 Act s.127; USR 2001 reg.24. In case of conflict between the issuer and
Operator registers, the latter prevails (USR 2001 reg.24(2)). The rule applies to the
Operator register provided the transfer has occurred in accordance with the Regulations.
114
POW Services Ltd v Clare [1995] 2 B.C.L.C. 435; Domoney v Godinho [2004] 2
B.C.L.C. 15. The issue of restrictions in the articles is not one which arises in relation to
listed companies or companies whose shares are held in uncertificated form, since the
Listing Rules and the rules of CREST require such shares to be freely transferable.
115
2006 Act s.125(1). This power operates equally in relation to shares held in
uncertificated form (USR 2001 reg.25(2)(b)).
116
Re Transatlantic Life Assurance [1980] 1 W.L.R. 79. The case arose because the
allotment of some shares was void because Exchange Control permission had not been
obtained as at that time was necessary. See also Re Cleveland Trust Plc [1991] B.C.L.C.
424.
117 Re Transatlantic Life Assurance [1980] 1 W.L.R. 79 at 84F–G.
118 e.g. when A and B are disputing which of them should be the registered holder.
119
e.g. when there is a dispute between the company and A or B on whether either
should be.
1202006 Act s.125(3). Despite this wide wording, it has been held the summary
procedure of CA 1985 s.359 should not be used where there was an unresolved and
substantial dispute as to the entitlemet to shares (Nilon Ltd v Royal Westminster
Investment SA [2015] UKPC 2 rejecting the view expressed by the Court of Appeal in
Re Hoicrest Ltd [2000] 1 B.C.L.C. 194 CA).
121
R I Fit Global Ltd [2013] EWHC 2090 (Ch); [2014] 2 B.C.L.C. 116.
1222006 Act s.125(2). “Compensation” would be a better word than “damages” and
“party aggrieved” is an expression which courts have constantly criticised, but
apparently without convincing Parliamentary Counsel responsible for drafting
Government Bills.
123
USR 2001 reg.25.
124For the rules dealing with the disclosure of beneficial interests, see paras 26–14 to
26–22, above.
125
And see the Companies (Model Articles) Regulations 2008 Sch.1 reg.27.
126
2006 Act s.773; for uncertificated shares see USR reg.27(6).
127
2006 Act s.773.
128
2006 Act s.774. If it does so without such production of the grant it may become
liable for any tax payable as a result of the transmission (NY Breweries Co v Attorney-
General [1899] A.C. 62 HL) but in the case of small estates, companies may be prepared
to dispense with production of a grant if the Revenue confirms that nothing is payable. If
the deceased was one of a number of jointly registered members, the company, on
production of a death certificate, will have to recognise that he has ceased to be a
member and shareholder and that the others remain such. But the whole beneficial
interest in the shares will not pass to them unless they and the deceased were beneficial
owners entitled jointly rather than in common.
129
The Companies (Model Articles) Regulations 2008 Sch.1 reg.27(2).
130
The Companies (Model Articles) Regulations 2008 Sch.1 reg.27(3).
131 If there are any restrictions on transfers all the articles relating to restriction on
transfers apply both to a notice that the personal representative wishes to be registered
and to a transfer from him (The Companies (Model Articles) Regulations 2008 Sch.1
reg.28(3)).
133
See, in particular, s.994(2) which makes it possible for personal representatives to
invoke the “unfairly prejudicial” remedy which might well be effective if it could be
shown that the directors were exercising their powers to refuse transfers in order to
enable themselves or the company to acquire the shares of deceased members at an
unfair price: see Ch.20, above.
134 2006 Act s.771.
135
On winding up of a corporate shareholder there is no transmission of the company’s
property; it remains vested in the company but most of the directors’ powers to manage
it pass to the liquidator.
136
Insolvency Act 1986 ss.283(1) and 306. But not if the shareholder held his shares as
a trustee for another person: ibid., s.283(3)(a).
137 The Companies (Model Articles) Regulations 2008 Sch.1 reg.28.
138 In Borland’s Trustee v Steel Bros [1901] 1 Ch. 279, a provision in the articles that in
the event of a shareholder’s bankruptcy (or death) his shares should be offered to a
named person at a particular price was held to be effective and not obnoxious to the
bankruptcy laws; for this see most recently Belmont Park Investment Pty Ltd v BNY
Corporate Trustee Services and Lehman Brothers Special Financing Inc [2012] 1 All
E.R. 505 SC.
139 Insolvency Act 1986 s.315. Disclaimer puts an end to the interest of the bankrupt and
his estate and discharges the trustee from any liability: ibid., s.315(3).
CHAPTER 28
TAKEOVERS
Introduction 28–1
The Takeover Code and Panel 28–3
The Panel and its methods of operation 28–4
The Scope of the City Code 28–13
Transactions in scope 28–14
Companies in scope 28–15
The Structure of the Code 28–18
The Allocation of the
Acceptance Decision 28–19
Post-bid defensive measures 28–20
Defensive measures in advance of the bid 28–21
Target Management Promotion of an Offer 28–26
Disclosure and independent advice 28–27
Compensation for loss of office 28–28
Competing bids 28–33
Equality of Treatment of Target Shareholders 28–37
Partial bids 28–38
Level and type of consideration 28–39
Mandatory offers 28–41
To whom must an offer be made? 28–47
Wait and see 28–48
The Procedure for Making a Bid 28–49
Before the approach to the target board 28–50
Before a formal offer is made to the target
shareholders 28–55
The formal offer 28–58
The post-offer period 28–68
Conclusion 28–77
INTRODUCTION
28–1
A takeover bid consists of an offer from A (an acquirer—usually
another company) made generally to the shareholders of T Co
(the “target” company) to acquire their shares for a consideration
which may be cash or securities of the offeror or a mixture of
both. The legal mechanism at the heart of the bid is thus a
contractual transfer of shares, but the rules on transfers of shares,
discussed in the previous chapter, although relevant, do not
capture the significance of the takeover bid. A takeover offer has
the aim not simply of a transfer of shares but a shift in the
control of the T Co—or at least a consolidation of control.
Previously, T Co may have been under the control of its board
(for example, where its shareholdings were widely dispersed) or
of one or a few shareholders with a controlling block of shares.
After a successful bid (i.e. one where all or most of the T Co’s
shareholders accept A’s offer) T Co will be controlled by A.
Depending upon who previously had control of the company,
that change of control will therefore be a matter of some moment
to the board of T Co (who will have lost control) or the minority
shareholders1 of T Co (who will be faced with a new controller,
unless they themselves have accepted a cash offer). The change
of control may also affect other stakeholders in the company (for
example, employees) because bidders do not normally expend
large resources to obtain control of companies simply to run
them in the same way as previously. The change of control of T
Co may thus have wide ramifications for those who have
interests in the businesses run by T Co.
This little description reveals the two main issues which
takeover regulation has to address. First, should it seek to
prevent the management of the target company from taking any
steps to discourage a potential bidder from putting an offer to its
shareholders or from discouraging those shareholders from
accepting it? In other words, is the takeover bid to be analysed as
a transaction purely between bidder and target company
shareholders or as one in the outcome of which the management
of the target company also has a legitimate self-interest which it
may take steps to defend? As we shall see, the rules in the UK
have traditionally been based on the former view (no frustration
of the bid by the target management). This rule is expressed in a
strong form once a bid is imminent, and somewhat less strongly
and more diffusely in relation to defensive action taken by target
management in advance of any specific offer. This policy gives
the acquirer or offeror a free run at the target shareholders and
prevents the board from using its management powers so as to
frustrate the bid. It is a policy which can be justified on the
grounds that it supports the principle of free transferability of the
shares of listed companies and, more importantly, on the
grounds that it is a significant element in the British system for
disciplining management and reducing the agency costs of
dispersed shareholders. A board, it is argued, which is at risk of
an unwelcome takeover bid will be sure to promote the interests
of its shareholders, in order to decrease the chances of a bid
being made (because the share price will be high) and increase
the chances that those shareholders will reject an offer if one is
made (because they think they will be at least as well off with
the current management). In this way, the accountability of the
board to the shareholders is promoted by the threat of takeovers,
especially “hostile” ones, i.e. offers not recommended by the
target board to its shareholders but rather made over the heads of
the incumbent management to the shareholders.2
The second major issue for takeover regulation concerns the
steps to be taken to protect non-controlling shareholders if a bid
is launched. Obviously, the transfer of shares could be left, like
any other commercial transaction, to be regulated by the
ordinary law of contract. In the case of controlling shareholders,
who are well-placed to take care of themselves, this is probably
sensible policy. However, in the typical case in the UK, where
the shareholdings in the target are dispersed, the shareholders
may lack information needed to evaluate the offer which has
been made to them (especially information about the likely
benefits of the takeover to the acquirer). Moreover, if left to its
own devices, the offeror may be able to put pressure in various
ways on the shareholders of the target company to accept the
bid, often by proposing to treat some groups of target
shareholders more favourably than others. To counter these risks
we shall see that takeover regulation puts considerable emphasis
on two policies: disclosure of information (by both bidder and
target) to the shareholders of the target, and equality of treatment
of the target shareholders. Equality means that some
shareholders of the target cannot be offered a better deal than is
available generally. As we shall see below,3 this second policy is
taken even to the point of requiring a bid to be launched where
an offeror company has acquired in the market or by private
treaty a sufficient shareholding in the target to give it control.
The “mandatory bid” permits non-controlling shareholders to
exit the company at a fair price upon a change of control, even
though the bidder would prefer not to acquire any further shares.
28–2
Thus, the two central tenets of the British regulation of takeovers
are that the shareholders alone decide on the fate of the offer and
equality of treatment of shareholders. The regulation is both
orthodox and rigorous in putting the target shareholders centre
stage, and in this respect it differs from takeover regulation in
both the US and some, though not all, continental European
countries (for example, Germany). However, these are not the
only objectives of takeover regulation. A takeover offer is
disruptive of the normal running of the target company’s
business and it is therefore politic that this period of disruption
should be minimised by the setting of a firm timetable for the
bid. Thus, a bidder which has indicated it might make a bid is
required to do so or to withdraw within a relatively short period
(“put up or shut up”); the offer, if made, remains open only for
fixed period; and a bidder whose offer fails is not permitted
immediately to come back with another bid. Thus, the bid is a
relatively quick and self-contained event and is not capable of
infinite repetition.
We shall look at these and other aspects of the substantive
rules for the regulation of takeover bids below, but we begin by
examining the rather special machinery which exists in the UK
for the creation and application of those rules.
THE TAKEOVER CODE AND PANEL
28–3
Since the takeover does not require a corporate decision on the
part of the target company,4 there is no obvious act of the target
upon which company law can fasten for the purposes of
regulating the transaction.5 For this reason, most European
countries treat takeover regulation as part of their securities laws,
i.e. they rightly take the transfer of the shares as the central act.
The UK follows this pattern, but it developed takeover
regulation long before statutory regulation of the securities
markets was established, and so the regulation of takeovers took
initially a quasi self-regulatory approach. In the 1950s and
1960s, bidders took full advantage of the absence of regulation.6
Alarmed by what was happening,7 a City working party
published in 1959 a modest set of “Queensberry Rules” entitled
Notes on Amalgamation of British Businesses, which was
followed in 1968 by a more elaborate City Code on Takeovers
and Mergers and the establishment of a Panel on Takeovers and
Mergers to administer and enforce it. It is this Code, in its
various editions, which has since constituted the main body of
rules relating to takeovers, with the Companies Act and the
Financial Services and Markets Act, and rules and regulations
made thereunder, performing an accessory role. However, the
element of self-regulation in this arrangement could easily be
overestimated. Although the Panel had no statutory authority, its
success as a regulator depended largely on the recognition on the
part of those routinely involved in advising on takeovers (mainly
investment banks and large law firms) that to flout its authority
would probably induce Parliament to replace the Code and Panel
with something they liked even less.
The Panel and its methods of operation
The status and composition of the Panel
28–4
In any event, discussion of the self-regulatory status of the Panel
is now rather beside the point. The regulation of takeovers is a
further area where EU Law has come to be a significant source
of the relevant rules. After a very long gestation period the EU
eventually adopted Directive 2004/25/EC on takeover bids
(hereafter the “takeover directive”).8 One of the requirements of
the Directive is that Member States should “designate the
authority or authorities competent to supervise bids” (art.4(1)),
so that the UK was required to place the takeover rules on some
sort of a statutory footing. In fact, the proposed change in the
legal status of the Panel was the basis for the UK Government’s
initial opposition to the Directive, despite the fact that the
Directive’s substantive content was heavily influenced by the
City Code.9 During the EU legislative process changes were
made in the draft Directive so as to allay, as far as possible, the
Government’s fears that the Panel’s flexible way of working
would be undermined by the statutory basis required by the
Directive. The Government’s goal when implementing the
Directive was to produce a situation in which the Panel could
carry on in practice much as before, even though now with its
powers derived from statute. Article 4 of the Directive makes it
clear, which might otherwise be in doubt, that the designated
authorities may be “private bodies recognised by national law”.10
Thus, s.942 of the Companies Act 2006 simply confers certain
statutory powers upon the Panel but does not seek to regulate the
constitution of the Panel, in contrast to the way in which, for
example, the constitution of the FCA is regulated by FSMA
2000. The composition of the Panel is to be found, not in
legislation, but in the Code itself.11 It consists of a Chairman and
up to three Deputy Chairmen appointed by the Panel itself, up to
a further 20 members appointed by the Panel, and individuals
appointed by representative bodies of those involved in
takeovers, such as the Association of British Insurers, the
National Association of Pension Funds, the Association of
Investment Companies and other investor groups, the British
Bankers’ Association, the Institute of Chartered Accountants and
the Confederation of British Industry. The Panel appointees
come from similar backgrounds as those of the representative
appointees, though they include a former general secretary of a
large trade union.
Internal appeals
28–5
However, the Panel’s and the Government’s central concern,
when implementing the Directive, was not with the formal status
of the Panel but with preserving in the statutory framework its
way of working, in particular its freedom to give flexible and
speedy binding rulings in the course of the bid, which could not
be easily challenged in litigation before the ordinary courts. A
particular concern was to discourage “tactical litigation”, i.e.
litigation designed to disrupt the bid timetable or to delay the
operation of a decision of the Panel which is against the interests
of a particular party, but at the same time providing a method of
appeal for those with a genuine grievance. Before the
implementation of the Directive, this result was achieved
through a system of speedy appeal within the Panel itself,
coupled with the courts’ adoption of a limited and after-the-
event approach to judicial review of the Panel’s decisions.
Article 4(6) of the Directive does its best to preserve the viability
of this system by providing that:
“this Directive shall not affect the power of the Member States to designate judicial
or other authorities responsible for dealing with disputes and for deciding on
irregularities committed in the course of bids or the power of Member States to
regulate whether and under which circumstances parties to a bid are entitled to
bring administrative or judicial proceedings. In particular, this Directive shall not
affect the power which courts may have in a Member State to decline to hear legal
proceedings and to decide whether or not such proceedings affect the outcome of a
bid.”
Thus fortified, the relevant government department decided to

maintain the Panel appeal system rather than seek to devise a
new system.12 The Panel Executive (i.e. its full-time employees,
some of whom are seconded from investment banks, law firms,
accountancy firms and similar bodies) gives rulings on the Code
in the course of a bid, either on its own initiative or at the request
of one or more parties to the bid.13 Rulings of the Executive may
be referred to the Panel’s Hearing Committee (or the Executive
may refer a matter to the Hearing Committee itself), and
disciplinary proceedings for breach of the Code or a ruling may
be initiated before the Hearing Committee by the Executive. The
Executive may require any appeal to the Hearing Committee to
be lodged within a specific period, possibly a period as short as a
few hours. The Hearing Committee normally sits in private and
operates informally, but does issue public statements of its
rulings.
A party to the hearing before the Hearing Committee may
appeal to the Takeover Appeal Board, normally within two
business days of receipt in writing of the ruling of the Hearing
Committee. The Board was formerly known as the “Appeal
Committee” and the change of name indicates that the Board is
now an organisation independent of the Panel.14 This is a rather
wider right of appeal than existed previously when many appeals
required leave of the Appeal Board. The Appeal Board is an
independent body, whose chairman and deputy chairman,
appointed by the Master of the Rolls, will usually have held high
judicial office15 and whose other members (normally four) are
experienced in takeovers. The Appeal Board operates in a
similar way to the Hearing Committee, including the publication
of its decision. It may confirm, vary, set aside or replace the
ruling of the Hearing Committee. This was, broadly, the system
in operation before the Act came into force and s.951 requires
that system to be maintained. The section requires, as was the
previous practice, that a Panel member who is or has been a
member of its Code Committee (responsible for drawing up the
Code) may not be a member of the Hearing Committee or
Appeal Board. The separation of the Code Committee from the
committees involved in administering the Code and the
organisational separation of the Appeal Board were responses to
the Human Rights Act 1998.16
Judicial review
28–6
The second limb of the pre-Directive system for dealing with
tactical litigation consisted of restraint by the courts in
exercising their powers of judicial review. Article 4(6) (above)
of the Directive permits the British courts to maintain their
restraint, but, of course, does not require it. The Act does not
seek explicitly to regulate the process of judicial review of the
Panel by the courts, probably wisely, and so the matter is left to
the domestic courts themselves. It was perhaps surprising that
the pre-Directive Panel, as a body which, as it was put in R. v
Panel on Take-overs and Mergers, Ex p. Datafin Ltd,17
performed its functions “without visible means of legal support”,
was made subject to judicial review at all. However, that was the
step taken in the Datafin case on the grounds that the Panel,
although then a private body, was performing a public function.
Its susceptibility to judicial review is now beyond doubt. Having
taken that decision of principle, the then Master of the Rolls set
out his “expectations” as to how judicial review of the Panel
would operate, emphasising its limitations.
First, it was expected that the Panel would require obedience
to its rulings and the parties would abide by them, even if one of
them had signalled it was intending to seek judicial review.
Secondly, the grounds for review would be limited: an argument
that the Panel had propounded rules which were ultra vires was
“a somewhat unlikely eventuality”; the Panel in its interpretation
of its rules must be given “considerable latitude”; attacks on the
Panel’s dispensing powers would be successful only in “wholly
exceptional circumstances”; and the Panel’s exercise of its
disciplinary powers would not be open to attack “in the absence
of any credible allegation of lack of bona fides”. Thirdly, and
most importantly, the expectation was that the courts would only
intervene after the bid was concluded (“the relationship between
the panel and the court [would] be historic rather than
contemporaneous”), perhaps to relieve individuals of
disciplinary sanctions, perhaps to deliver a declaratory judgment
to guide the Panel in the future. Thus, a party involved in a bid
(most obviously the board of the target company) was given
little incentive to seek judicial review during the offer in order to
secure a tactical advantage (most obviously delay, during which
the target’s defences could be better organised), but the Panel
was not given an entirely free hand in interpreting the Code or its
own jurisdiction.
It seems likely that this attitude of deference on the part of the
courts to the Panel (and especially the Takeover Appeal Board)
will continue, despite the statutory framework within which the
Panel is now placed. The statute does one or two things to
encourage the courts in that direction. The Panel is given power
to “do anything that it considers necessary or expedient for the
purpose of, or in connection with, its functions”, thus protecting
the Panel’s vires in its new statutory guise; it is given a wide
rule-making power; it is explicitly given a dispensing power; and
it is explicitly given the power to make rulings and give
directions.18 Overall, the Government’s policy seems to have
been to fit the requirements of the Directive to the existing
practice of the Panel, rather than vice versa.19
Nevertheless, the fact of putting the Panel on a statutory
footing potentially opens up avenues of civil litigation not
previously available. The Act seeks to block off these paths to
the courts. This seems to be permitted by the further sentence in
art.4(6) of the Directive that “this Directive shall not affect the
power of the Member States to determine the legal position
concerning the liability of supervisory authorities or concerning
litigation between the parties to a bid”. Consequently, no action
for breach of statutory duty lies in respect of contravention of a
requirement imposed by or under the Panel’s rules or a
requirement imposed by the Panel to produce information or
documents.20 Contravention of a rule-based requirement does not
render the transaction in which it occurs void or unenforceable
or affect the validity “of any other thing” (unless the rules so
provide).21 However, civil litigation between the parties is not
entirely excluded by these provisions. A claim based on
fraudulent or negligent misstatement, for example, arising out of
the documentation put out by bidder or target, is not excluded,
but, as we shall see below, such claims were in any event
possible before the Directive, though they were, and are,
constrained by the general law of misstatement.
Finally, the Panel itself is not liable in damages in connection
with the discharge of its functions, unless it was acting in bad
faith or there is a claim against it for breach of s.6(1) of the
Human Rights Act 1998 (which in the circumstances laid down
in s.8 of that Act could lead a court to award damages for breach
by a public authority of the rights guaranteed by the European
Convention on Human Rights).22 This protection extends to
members, officers and employees of the Panel and any person
authorised by the Panel to act under its information disclosure
powers. Thus, the risk of tactical litigation is minimised, but
cannot be entirely eliminated (see below).
Powers of the Panel
28–7
This and the following section deal with the areas where there
has been the biggest formal change in the Panel’s position as a
result of its being put on a statutory basis. At least the basic
elements of the Panel’s powers and the sanctions to support them
had to be set out in, or provided for by, the legislation, since
art.4(5) of the Directive requires that “supervisory authorities
shall be vested with all the powers necessary for the purpose of
carrying out their duties, including that of ensuring that the
parties to a bid comply with the rules made or introduced
pursuant to this Directive”. Again, however, the aim of the
legislation was to reflect, rather than substantially to alter, the
Panel’s existing methods of working. The main powers of the
Panel are as follows.
First, the Panel is given both an obligation and a power to
make rules to govern the conduct of bids.23 Thus, the legislation
does not purport to discharge that rule-making function itself but
requires or empowers the Panel to do so. The Panel is required to
make rules in those areas where the Directive requires Member
States to introduce rules, thus ensuring that the UK is not in
breach of its obligations under the Directive, but the Panel is
empowered to make rules more generally, a power which is very
widely formulated.24 In consequence, the whole of the Panel’s
regulatory activity is placed on a statutory basis. It would have
been possible to confine the statutory structure to the bids and
topics covered by the Directive, leaving the remainder of the
Panel’s activities to continue on a non-statutory basis, but that
was thought likely to cause confusion.25 The Panel is permitted
to arrange for its rule-making power (and, indeed, any of its
functions) to be discharged by a committee of the Panel, so that
there can be a further stage of delegation before the power to
make rules is actually exercised.26 This reflects the fact that,
since the enactment of the Human Rights Act 1998,
responsibility for the rules has been assigned to a Code
Committee of the Panel and that membership of the Hearing
Committee (see above) and of the Code Committee does not
overlap. Thus, the “legislative” and “judicial” functions of the
Panel have been separated.
Secondly, the Panel “may give rulings on the interpretation,
application or effect of rules”, in the way described in above,
such rulings having binding effect.27 This is the Panel’s
“judicial” function. Giving the Panel’s rulings binding effect is,
of course, new, and the sanctions available to support this
provision are discussed below. Further, art.4(5) of the Directive
permits Member States to give supervisory authorities powers to
waive national rules, either to “take account of circumstances
determined at national level” or “in other specific circumstances,
in which case a reasoned decision must be required”, provided in
either case that the derogation does not contravene the general
principles laid down in art.3(1) of the Directive (see below).
Section 944(1)(b) takes up the former option by authorising the
Panel to make rules which are “subject to exceptions or
exemptions” in the rules themselves. Section 944(1)(d) takes up
this latter option by authorising the Panel “to dispense with or
modify the application of rules in particular cases and by
reference to any circumstances”, subject to the requirement to
give reasons. This reflects the Panel’s traditional practice to use
its dispensing power where a rule “would operate unduly harshly
or in an unnecessarily restrictive or burdensome, or otherwise
inappropriate, manner”.28
The rules may, and do, also confer upon the Panel the power
to give directions to secure compliance with the rules. In
practice, this is a very important power for the Panel. Having
identified a breach of the rules, its focus in practice is on
requiring remedial action which will enable the bid to continue
in the normal way.29 This is the great virtue of having a regulator
which can give rulings during the course of a bid, as contrasted
with a body which comes to the matter only after the bid has
succeeded or failed and so no longer has the possibility of
getting the transaction back on track.
28–8
Thirdly, the Panel may require a person by notice in writing to
produce to it specified documents or to provide specified
information, where such disclosure is “reasonably required in
connection with the exercise by the Panel of its functions”.30
This again is a new legal power for the Panel, which in the past
has been able to survive without it. There is the usual protection
for legal professional privilege (or confidentiality of
communications in Scotland).31 There is also the usual
requirement that the Panel keep confidential information
disclosed to it (whether under the compulsory disclosure power
or not) which relates to the private affairs of an individual or to
any particular business. A person who breaches this requirement
is guilty of a criminal offence unless that person had no reason to
suspect that the information had been provided to the Panel in
connection with its functions or that the person took all
reasonable steps and exercised all due diligence to avoid
disclosure in breach of the statute. However, this confidentiality
provision is subject to the usual long list of permitted
“gateways” for disclosure of the information to other official
bodies, and to disclosure by the Panel itself for the purpose of
facilitating the carrying out of any of its functions (so that some
such information may be found in the public rulings of the
Hearing Committee or Takeover Appeal Board).32
Sanctions
28–9
Thus, the Act confers upon the Panel three core powers: to make
rules for takeover bids, to interpret those rules and to require the
disclosure of information. None of these functions is new for the
Panel: all were previously carried on, though without legislative
support. Having put those powers in place, the statute was
required by the Directive to go on and provide sanctions for non-
compliance with them on the part of bid participants. As a self-
regulatory body and, in particular, as a body with not even a
contractual relationship with those involved in takeovers,
whether as participants or advisers, the Panel’s formal sanctions
were previously extremely limited. The Panel itself could
administer only a private reprimand or public censure if there
was non-compliance with the Code. For more pressing measures
it was dependent on the action of other regulatory authorities,
such as the Department of Trade and Industry, the FCA or the
Stock Exchange. However, these bodies, even if willing to act,
might not have appropriate sanctions at their disposal.33 In the
early days of the Panel such problems threatened the Panel’s
credibility and even its future, but gradually the Panel gained
acceptance for its rulings, partly because of a realisation among
advisers in particular that an ineffective Panel was likely to lead
to the transfer of its functions to a statutory regulator.34 Further,
the Panel’s relationship with the FSA in particular was placed on
a more explicit footing when FSMA was enacted in 2000.35
Perhaps the strongest expression of the new policy of giving
the Panel statutory sanctions is to be found in s.955 which
confers upon the Panel a power to apply to the court (High Court
or Court of Session) where a person has contravened or is likely
to contravene a requirement imposed by or under a Code rule or
has failed to comply with a disclosure requirement under the
statutory provisions just discussed. The court may then make
such order as it thinks fit to secure compliance with the
requirement, which order will be backed by the sanctions for
contempt of court. The Panel, no doubt, expects not to have to
make use of this new power, just as it has operated effectively in
the past without it.
One important question which arises is whether this section
will provide an avenue whereby a party can obtain judicial
scrutiny of the Panel’s or Appeal Board’s rulings during the
course of the bid. Of course, the decision to apply to the court
for an enforcement order is in the hands of the Panel, so that a
party cannot trigger the procedure.36 However, if the Panel does
so apply, the question will be whether the courts in this new
context will maintain the after-the-event approach which has
been adopted for judicial review and simply enforce the Panel’s
ruling without scrutinising its legality or without scrutinising it
rigorously. This may be a more difficult line for the court to take
where the court’s order is backed by the sanctions for contempt
of court than when the Panel’s rulings lacked extensive formal
sanctions. Further, if the question is raised whether the Panel’s
ruling is compatible with the Directive, the court would have to
consider making a preliminary reference to the Court of Justice
of the European Union (with all the delay that implies).
28–10
The statute places at the disposal of the Panel two other
important sanctions, relating to compensation and discipline, but
they both require adoption by Panel rules in order to be brought
into force. Section 954 provides that the rules may confer power
on the Panel to order a person to pay such compensation as it
thinks just and reasonable if that person is in breach of a rule
“the effect of which is to require the payment of money”. This
power thus falls short of a general remit to require compensation
for breaches of the rules, but it covers the situations where in the
past the Panel has required monetary payments.37 The Code now
applies this section to those rules which determine the price at
which an offer has to be made or the form of the consideration
(for example, where cash or a cash alternative is required).38
As to discipline, there is a general provision in s.952 that the
rules may give the Panel the power to impose sanctions on a
person who has acted in breach of the rules or of a direction
given by the Panel to secure compliance with the rules (see
above). This is the section on which the Panel now bases its
disciplinary powers, which are exercised, except in case of
agreement with the offender, by the Hearings Committee (with
appeal to the Takeover Appeal Board). The Code sets out the
Panel’s disciplinary powers and they are the established ones of
private or public censure, reporting the offender’s conduct to
another body for that body to take action against the offender if
thought appropriate, and triggering the “cold shouldering” of the
offender.39 It is clear that s.952 permits the rules to adopt a wider
range of penalties, notably financial penalties of the type
available to the FCA. However, where the Panel adopts a
sanction of a kind not previously provided for by the Code, it
must produce, again following the FCA model, a policy
statement with respect to the imposition of that sanction and, in
the case of a financial penalty, the amount of the penalty.40 So
far, the Panel has not ventured into this territory.
The “cold shoulder” and criminal sanctions
28–11
Where the Panel reports conduct to a third party, it is up to that
regulator (domestic or overseas) or a professional body to decide
whether it is appropriate to take further action. The most likely
recipient of such a report from the Panel is the FCA. The FCA
might conclude that a person who has broken the Takeover Code
is also in breach of its obligations under the FCA’s rules and
impose sanctions upon that person. The persons most obviously
within the FCA’s scope are those who need its authorisation to
carry on their professional activities within the financial services
sector. This will cover the principal advisers to bidders and
target companies (notably investment banks) but not bidder and
target companies themselves or their directors. To deal with this
lacuna, a system of FCA-required “cold shouldering” was
introduced in FSMA 2000 and is carried forward under the new
arrangements. Cold shouldering involves advisers within the
scope of the FCA’s powers being required not to deal with those
who are likely not to observe the Code. In this situation, there is
no suggestion that the adviser is in breach of the Code. Indeed,
the “cold shoulder” operates generally and covers all those who
might act for persons likely not to observe the Code, whether
they have acted for that person in the past or not. In this way, the
range of the FCA’s sanctions is extended to companies and their
directors: if they act, or are likely to act, in breach of the Code,
they may find that they are denied the facilities of the City of
London in relation to takeover bids. The FCA’s rules, as
contained in its Code of Market Conduct (“MAR”), require firms
not to act in connection with transactions to which the Takeover
Code applies if they have reasonable grounds to believe that the
person in question is not likely to act in accordance with the
Takeover Code.41 The Hearing Committee has the power, as a
disciplinary sanction under the Code, to make a public statement
that a person is, in its view, not likely to comply with the Code.
In such a case the FCA “expects” that the above rule will require
the firm not to act for the person in question.
28–12
Apart from the sanctions which the Act places in the hands of
the Panel, the legislation creates a criminal offence in addition to
the one we have already discussed in relation to the disclosure of
confidential information. This concerns non-compliance with the
Code’s rules on bid documentation. As we shall see below, much
of the Code is concerned with specifying the information a
bidder or target must provide, and failure to comply with these
rules will clearly fall within the powers and sanctions of the
Panel, discussed above. It is also the case that there might be
civil litigation between those involved in the bid in the case of
misstatements in the bid documentation. Despite this, the
Government was convinced that the Directive’s (standard)
requirement that the sanctions provided for breaches of the
transposing national rules should be “effective, proportionate
and dissuasive” (art.17) necessitated an additional criminal
sanction to be provided in domestic law. The Government feared
that inadequacies in the bid documentation might emerge only
after the bid had been completed (and when the Panel might be
reluctant to involve itself again) so that the Panel’s sanctions
could not be relied upon, whilst the possibilities of civil
litigation were uncertain. Consequently, s.953 creates a narrow
criminal offence. It applies only to offers for companies whose
voting securities are quoted on a regulated market (which is the
scope of the Directive) and it imposes liability on a person only
if he knew the offer documentation did not comply with the
Code’s requirements (or was reckless as to that) and failed to
take all reasonable steps to secure compliance. In the case of a
response document, the liability falls on any director or officer
of the target company; in the case of an offer, which need not be
made by a company, on the person making the bid and, in the
case of a bid by “a body of persons”, any director, officer or
member of the body who caused the document to be published.
Typically, this will be the directors and officers of the bidder
company.42
Overall, the policy of the Act in relation to the Panel and the
Code can be said to have been that of “replicating, to the greatest
extent possible, the Panel’s current jurisdiction, practices and
procedures within a statutory framework”.43
THE SCOPE OF THE CITY CODE
28–13
The scope of application of the City Code (i.e. the types of
companies and types of transactions to which it applies) is wider
than that of the Directive. The latter applies to public offers to
the holders of securities in the target company, where those
securities are traded on a regulated market in the EEA and where
the objective of the offer is to secure control of the target
company.44 For present purposes it is enough to equate a
“regulated market” in the UK with the Main Market of the
London Stock Exchange. The Code is not confined to companies
whose securities are traded on a regulated market (and thus
covers companies whose securities are traded on AIM) and it
takes in certain transactions which are analogous to public
offers. The expanded scope of the Code (or, alternatively put, the
narrow scope of the Directive) would raise no particular
problems in the light of the decision (discussed above) to put the
whole of the Panel’s operations on a statutory footing, were it
not for the fact that the two take a different approach to the
regulation of takeovers which have a cross-border element. The
approach of the Directive, as laid down in art.4, is to divide
jurisdiction in such cases among the relevant regulators. By
contrast, the Panel’s approach, as a national body, is either to
accept jurisdiction over all aspects of the offer or not to accept it
at all. Consequently, it is necessary to identify not only the offers
to which the Code applies (anything outside this set is not
regulated at all by the Code) but also the narrower set of offers
to which the Directive applies, at least in cross-border takeovers,
in order to establish the precise jurisdiction of the Panel (is it all
or only some aspects of the bid process?).45
Transactions in scope
28–14
Let us turn first to the range of transactions covered. The crucial
point here is that the Directive applies only to the core method of
implementing a takeover, namely a public offer by the bidder to
the holders of the securities of the target, which “follows or has
as its objective” the acquisition of control of the offeree
company (art.2.1(a)). This is, at bottom, a contractual
mechanism. The Code traditionally has applied more widely, i.e.
beyond takeover offers, though obviously it includes them. It is,
in fact, not uncommon for non-hostile takeovers to be
implemented in the UK via a scheme of arrangement, to which
the Code in principle applies.46 The scheme of arrangement,
which is not confined to control-shift transactions, is discussed
in Ch.29, but the essence of the scheme, when used as a
substitute for a takeover offer, is that the company, through a
decision of its shareholders in general meeting, adopts a proposal
the end result of which is the same as that achieved by the
contractual offer (the shares in the target company end up with
the bidder and the shareholders receive a consideration in
exchange). The scheme has certain advantages in the case of a
non-hostile offer (notably that all the shareholders are bound
once the scheme is adopted and approved by the court), so that
the squeeze-out mechanism referred to later in this chapter does
not have to be used. However, technically the offer is
implemented not through each individual shareholder’s decision
to accept a contractual offer made for the transfer of their shares
but by the shareholders collectively, acting as the company,
voting to adopt a scheme of arrangement. In this case, a
mechanism of corporate law is used to effect the takeover. For
this reason, a takeover effected by a scheme of arrangement
appears not to fall within the Directive’s definition of a
takeover,47 so that a scheme is outside the scope of the Directive,
even if it involves companies whose securities are traded on a
regulated market. For this reason, the jurisdiction splitting
provisions of the Directive will not apply to a takeover effected
by a scheme of arrangement which has a cross-border element,
which may itself be regarded as an advantage by the parties
involved.
The Code also applies to offers by a parent company to
acquire outside shares in its subsidiary. It is unclear whether this
transaction is within the Directive because it is not clear how
closely the Directive requires the public offer to “follow” the
acquisition of control. The Code applies as well to other
mechanisms which have “as their objective or potential effect
(directly or indirectly) obtaining or consolidating control”. This
covers a wide range of possible methods, not involving a general
offer to acquire securities, such as the issue of new shares and
share capital reorganisations, which, if structured appropriately,
could shift control of the company into new hands. Although not
much invoked in practice, the inclusion of these analogous
control-shift mechanisms removes any temptation for the parties
to seek to avoid the Code’s provisions by adopting one or other
of them.
Companies in scope
Full jurisdiction to the Panel
28–15
The range of companies within scope of the Directive or the
Code is defined by focusing on the status of the target company.
Let us look first at the cases where the Panel will be the sole
regulator, i.e. where the target is what might be called a purely
UK company. The Code divides such companies into two
categories.48 The first category consists of those companies
incorporated in the UK (i.e. they have their registered offices in
the UK) and having any of their securities admitted to trading on
a regulated market or multilateral trading facility (such as AIM)
in the UK.49 The second category consists of companies
registered in the UK, which do not have their securities traded on
a public market in the UK but do have their place of central
management and control within the UK. Whereas the first
category is necessarily confined to companies which are public
in the Companies Act sense of the term, the second category is
capable of embracing private companies. However, private
companies are brought within the Code only where in the
previous decade their securities have been traded in a public or
semi-public way or a prospectus has been issued in relation to
them. In quantitative terms, the second category is subject to
takeover offers, but their inclusion at least means the Code’s
provisions cannot be evaded by first de-listing the target
company from a public market.
Thus, the Panel’s sole jurisdiction extends far beyond
companies traded on regulated markets. Before the adoption of
the Directive, the Code applied only to companies “resident” in
the UK, i.e. both incorporated in the UK and having their central
management in the UK. That requirement for jurisdiction was
ruled out by the Directive in the case of UK companies traded on
regulated markets and the Code has now abandoned it in respect
of companies traded on multilateral trading facilities. To this
extent, the Directive expanded the jurisdiction of the Panel
compared to the pre-Directive position. However, the residence
requirement has been retained in relation to the second category
of companies.50
Divided jurisdiction
28–16
In the above cases Panel has jurisdiction over all aspects of the
bid. In the cases now to be examined the Panel’s jurisdiction will
be shared with another regulator, because there is some “cross-
border” element in the target. This division results from the
approach adopted by art.4 of the Directive. Because division of
competence is a Directive concept, it applies only to bids for
target companies whose securities are traded on a regulated
market. The issue arises where the two factors the Directive uses
to identify its scope (incorporation in the EU; trading on a
regulated market in the EU) are satisfied in different
jurisdictions, for example, a target incorporated in one Member
State but having its securities traded on a regulated market in
another Member State. The Directive could have allocated
jurisdiction wholly to the State of incorporation, as is done with
the Prospectus Directive,51 but this is hardly feasible with
takeover regulation, which involves much more than information
disclosure and is in parts intimately related to the operation of
the market on which the target’s securities trade. Alternatively,
jurisdiction could have been allocated wholly to the State where
the target’s securities trade. In fact, art.4 of the Directive appears
initially to proceed in this way by identifying the competent
authority to supervise the bid as the one in the Member State
where the company’s securities are admitted to trading on a
regulated market (even if the company is incorporated
elsewhere). If the securities are admitted to trading on a
regulated market in more than one Member State, the competent
authority is the State where the securities were first admitted. If
the securities are admitted to markets in more than one Member
State (other than the State of incorporation) simultaneously, the
company makes the choice of competent authority from among
the various Member States, but must do so in advance, that is,
the choice must be made on the first day of trading, and the
choice seems subsequently to be unalterable.52
However, art.4(2)(e) then proceeds to say, not simply that the
takeover rules of the Member State of incorporation shall be the
operative ones for certain matters, but also that in respect of
those matters the competent authority shall be that of the State of
incorporation. In this way, the Directive does end up with a
divided jurisdiction. In particular, what the Directive refers to as
“company law” matters are allocated to the competent authority
of the State of incorporation. These include the definition of the
threshold at which a mandatory bid shall be launched and any
derogations from the obligation to launch such a bid, the rules
governing frustrating action by the directors of the target
company and the provision of information to employees. By
contrast, the competent authority of the Member State where the
securities are traded will deal with the rules relating to the price
to be offered, bid procedure, disclosure and the contents of the
offer document.
For the Panel this means that (a) where a company is
incorporated in the UK but traded on a regulated market in
another EEA Member State, the Panel will deal with the
“company law” aspects of the bid, including the rules on
information to be provided to employees. (b) Where the
company is incorporated in an EEA Member State (other than
the UK) but traded only on a regulated market in the UK, the
Panel will deal with the “bid procedure” aspects of the offer. (c)
Where the company is incorporated as in (b) but traded on
regulated markets in more than one Member State of the EEA,
including the UK but excluding its state of incorporation, the
Panel will be the competent authority to deal with the “bid
procedure” aspects of the offer, provided the UK is the state of
first admission or has been chosen by the target in the case of
multiple first admissions.53
28–17
The division of applicable rules and competent authorities is
very important, both because the Directive itself gives the
Member States significant choices about how they implement
the Directive’s provisions and because Member States are free to
add to those provisions in many cases. For example, as we have
noted,54 the UK has a strong “no frustration” rule, which a
company incorporated in the UK will be subject to even if its
shares are listed and its shareholders mainly located in a
jurisdiction where this rule is not applied; whereas a company
incorporated in a Member State which does not impose the “no
frustration” rule will not become subject to it by listing its
securities on a regulated market in the UK.
Finally, it should be noted that, for the Directive to apply the
target company must be both incorporated in a Member State of
the EEA and have some of its securities traded on a regulated
market in the EEA.55 However, the Code, as we have seen, does
apply to target companies incorporated and having their central
management and control in the UK, no matter where, or indeed
whether, their securities are publicly traded. Thus, a bid for a
company incorporated outside the EEA will escape British
regulation even if its securities are listed on a public market in
the UK; whilst a bid for one which is incorporated in and has its
central management in the UK will be regulated by the Panel,
even if its securities are traded on a public market outside the
EEA or, even, on a non-regulated market within the EEA (but
outside the UK). For this reason, no doubt, s.950 requires the
Panel to co-operate not only with foreign national authorities
designated for the purposes of the Directive but also with any
foreign regulator that appears to exercise functions similar to
those of the Panel.
THE STRUCTURE OF THE CODE
28–18
The Code consists, in its eleventh edition of 2013 (as amended),
and always has consisted, of a small number of General
Principles and a larger number of Rules. Currently, there are six
General Principles (“GPs”) and 38 rules. Before the amendments
made in 2006 to accommodate the Directive, there were 10
General Principles and the same number of rules as currently.
The current six GPs are simply a copy out of the general
principles laid down in art.3 of the Directive. The decision
simply to substitute the Directive’s GPs for those previously in
place seems to have been driven in part by the consideration that
the Panel’s derogation powers must be exercised in such a way
as not to contravene the Directive’s GPs. It was thought that the
cleanest way of implementing this requirement was to simply
adopt the Directive’s list of GPs.56 The original notion behind
the GPs was that they constituted high-level standards,
compliance with which was required even though no specific
rule of the Code had been broken. This was thought to be a
desirable regulatory technique because, as it was put in the
seventh edition of the Code, “it is impracticable to devise rules
in sufficient detail to cover all the circumstances which can arise
in offers”.57 However, the reduction in the number of GPs in the
current Code has somewhat reduced the force of this regulatory
argument, not simply because the current GPs cover less ground
than those previously in place and because, where they cover the
same ground, the Directive’s GPs are in general more weakly
expressed, but also because the Rules have been amended to take
account of the loss of coverage at GP level.58 This movement of
material between GPs and Rules casts some doubt on the
significance of the distinction between those two types of norm.
In any event, it is also the case that, over successive editions
of the Code, the Rules had become more detailed and elaborate,
so that the gap-filling rationale given for the GPs had become
less convincing. The Rules acquired sub-rules and both acquired
“notes”, some of which are prescriptive and not just explanatory.
It is perhaps not surprising that the view just quoted about the
role of GPs is not repeated in the current version of the Code.
The best view is probably now that the GPs are there because the
Directive requires them to be and that they serve to highlight
some, but not all, of the fundamental principles underlying the
Code. It seems likely in the future that the Rules will continue to
grow in importance in comparison with the GPs. Both Rules and
GPs are interpreted by the Panel purposively,59 so that no penalty
in terms of rigidity of interpretation is paid by dealing with a
matter in the Rules. Further, if the content of the GPs is
effectively controlled by the Directive, the responses to domestic
pressures for change or elaboration of takeover regulation will
have to be revealed in changes to the Rules. Such changes in the
Rules can be readily made through the Code Committee of the
Panel, whose task it is to keep the Code under review and to
propose changes, after public consultation,60 whereas, on the
Panel’s current approach, changes to the GPs would require
legislation at EU level.
The current General Principles are as follows:
1. All holders of securities in the offeree company of the same
class must be afforded equivalent treatment. Where a person
acquires control of a company, the other holders of securities
must be protected. These are the two limbs of GP 1 and they
constitute a partial expression of a more elaborate notion of
equality which underlies the Code and which is discussed
below.
2. Holders of securities in the offeree company must have
sufficient time and information to enable them to reach a
properly informed decision on the bid. When advising the
shareholders, the board of the offeree company must give its
views on the effects of the implementation of the bid on
employment, conditions of employment and the location of
the company’s place of business. The first part of GP 2 is
clearly central to any takeover regulation; the second part,
specifically requiring the provision of employee-related
information, constitutes a relatively minor protection of the
interests of the employees. They or their representatives are
given no formal role in the takeover decision, but the
provision of the required information may enable them to
apply pressure outside the formal requirements of the Code.
Although the second part of the GP is conditional upon the
board of the offeree company giving advice to the
shareholders of the target company, in fact, as we shall see,
the Code requires such advice to be given.
3. “The board of an offeree company must act in the interests of
the company as a whole and must not deny the holders of
securities the opportunity to decide on the merits of the bid.”
The phrase “the company as a whole” is, as ever, ambiguous
as to whether it means only the shareholders as a whole or
includes stakeholder interests.61 The answer to that question
may not be very significant since the second part of the
principle puts the decision on the bid in the hands of the
shareholders, to whom the “company as a whole” duty does
not apply. As already noted, the allocation of the decision on
the bid as between target board and target shareholders is a
crucial question for takeover regulation. The City Code has
always allocated that decision to the shareholders, though,
somewhat oddly, the Directive permits Member States to opt
out of art.9 of the Directive, which gives effect to GP 3 (see
below).
4. False markets should not be created, whether in the securities
of the offeror, offeree or any other company concerned in the
bid.
5. An offeror may announce a bid only if has ensured that it can
meet in full any cash consideration payable and after taking
“all reasonable steps” to secure the implementation of any
other type of consideration. Thus, offers may be opportunistic
in some ways (for example, a bid for a target which is
suffering from a temporary set-back) but not in terms of
financing.
6. The offeree company should not be hindered in the conduct of
its affairs by the bid for longer than is reasonable. This is a GP
not expressed in the Code before the transposition of the
Directive, though the policy underlying it was certainly
implemented in the Code, and so it was rather odd that it was
not there. The point is that a bid is likely to cause the senior
management of the target to divert their attention wholly to
the bid from the moment it is imminent to the point where it
succeeds or fails, so that there is a strong argument that this
distraction from the other aspects of company’s activities
should be subject to limits.
THE ALLOCATION OF THE ACCEPTANCE DECISION
28–19
As already indicated at the beginning of this chapter, a, perhaps
the, crucial question for takeover regulation is whether the
decision on the bid should be that of the shareholders alone or
one to which both shareholders and the target board must
consent. Allocating the decision to the shareholders alone
facilitates the creation of a market in the control of companies,
which acts as a powerful incentive for the managements of
companies, at all times and not just when a bid is imminent, to
act in the interests of the shareholders. Bidders are able to make
“hostile” takeover offers, i.e. offers which the board of the target
opposes but which it is not able to prevent being put to the
shareholders. The market in corporate control is probably a
much more powerful mechanism for the promotion of the
interests of shareholders than all the corporate governance
techniques discussed in Part Three of this book, including the
law of directors’ duties. On the other hand, some have argued
that the threat of a takeover makes management too responsive
to shareholder needs, in particular by inducing management to
take a short-term view of the company’s success, which may be
detrimental to the longer term development of its business and
thus to the long-term interests of the shareholders themselves.
Those taking this latter view would wish to permit management
to have some say in whether the bid is successful and would not
allocate the decision wholly to the shareholders. Those
concerned about the impact of takeovers on non-shareholder
groups, notably employees, tend to support this managerialist
stance, as being the best protection they can secure in the
absence of a stakeholder input into the acceptance decision.62
Since the standard takeover transaction is necessarily one
between the bidder and the shareholders of the target company
(there is no corporate decision), how can the board of the target
company, which is not a party to the transaction, have a say on
whether the bid is to succeed? The answer is that the board has
many possibilities to exercise its general powers of management
so as to discourage an offeror from making or continuing with a
bid. Thus, the question is whether, in the particular context of a
takeover bid, the board should be permitted to use its normal
management powers, for example by issuing new shares to a
friendly investor or by disposing of assets the bidder is anxious
to acquire. This is usually referred to as the issue of whether
takeover regulation should adopt a “no frustration” rule, i.e.
whether the board of a target is to be prohibited from taking
action which constrains the freedom of the shareholders as a
whole to decide to accept an offer, even though such action
would normally be within the scope of the board’s powers of
management. This issue needs to be addressed at two different
points of time: when a bid is imminent and when no bid is in
prospect. The reason for this distinction is that the imposition of
a strict no frustration rule is feasible once a bid is imminent,
because it will operate only so long as the bid is current. The
imposition of a strict “no frustration” rule where no bid is
imminent (i.e. at all times) would limit the board’s powers of
management in a way which is undesirable even from the
shareholders’ point of view (because it reduce the benefits
shareholders obtain from centralised management), whilst the
risk of self-serving decisions by management is less severe when
a bid is not imminent. Thus, even those in favour of the “no
frustration” principle would not necessarily want the same rules
to apply both pre- and post-bid. In the UK this distinction in
point of time is reinforced by a division in terms of regulatory
responsibility, for the Takeover Code applies only once a bid is
imminent.
Post-bid defensive measures
28–20
The Code has always adopted a strong “no frustration” rule, thus
helping to make the UK a very active takeover market. The
principle used be expressed in GP 7, which said that after a bona
fide offer had been communicated to the board of the target or
the board had reason to believe that such an offer was imminent,
no action might be taken by the board without the approval of
the shareholders in general meeting which could result in the
offer being frustrated or to shareholders being denied an
opportunity to decide on its merits.63 This language no longer
appears in the GPs, though there is a paler version of it in the
current GP 3. In a strong example of the GP to Rule transfer
brought about by the Directive, however, this exact formulation
can be found in r.21.1(a) of the current Code. This rule makes it
difficult for the existing controllers to erect any of the defences
against being ousted from control by an unwelcome takeover
unless they have succeeded in doing so in advance of a
threatened takeover. Even then, the pre-bid defence must be one
that does not require board action post-bid, for the post-bid
action will be caught by r.21.64 It is a particularly strict rule.
Unlike the common law relating to improper purposes,65 r.21
requires shareholder approval for any action proposed by the
directors of the target company which could have the result of
preventing the shareholders of the target company from deciding
on the merits of the bid. Whether the directors of the target had
this purpose in mind or whether it was their predominant
purpose in proposing the action in question is beside the point
under the rule. The rule looks to consequences, not to purposes.
Equally important, the rule requires shareholder approval to be
given for the specific defensive measure proposed by the target
board and thus to be given in the context of the bid; it cannot be
given in general and in advance of the bid.
Rule 21.1(b), together with r.37.3, spells out some common
specific situations where the approval of the shareholders will be
required, for example, in relation to share issues; acquisition or,
more likely, disposals of target company assets of a “material
amount”66; entering into contracts other than in the ordinary
course of business (which may include the declaration and
payment of interim dividends); and the redemption or purchase
of shares.67 But r.21.1(a) covers any frustrating action, whether
specifically mentioned in the rules or not, and it has been held by
the Panel to cover even the initiation of litigation on behalf of
the target once an offer is imminent.68 The overall effect of the
rule is to reduce the defensive tactics available to the
management of the target company to three general categories:
convincing the shareholders that their future is better assured
with the incumbent management than with the bidder;
persuading the competition authorities, at national or EU level,
that the bid ought to be referred on public interest grounds; and
encouraging another bidder to come forward as a “white knight”
and make an alternative offer to the shareholders. In all three
situations the directors of the target are thrown back on their
powers of persuasion: in all three cases the final decision on the
success of these defensive moves rests with others. However, the
board of the target company is not required as a general rule to
co-operate with the bidder and to smooth its path. Rule 21 is
framed by way of stipulations about what the board must not do,
not about how it should act positively. Thus, the board may find
itself in a stronger negotiating position than r.21 might suggest if
either (a) a recommendation in favour of the offer from the
target board is, for one reason or another, important to the
bidder; or (b) the bidder needs the target board’s cooperation to
launch the bid. We discuss such situations below under “bid
procedure”.
The requirement for shareholder approval for frustrating
action is reflected in art.9 of the Directive, but this is one of the
articles out of which Member States are permitted to opt by
choosing not to apply the “no frustration” rule to companies
within their jurisdiction. Not surprisingly, the UK chose not to
opt out, since art.9 reflects the established policy of the Code.
However, there is a further issue about opt outs from the no-
frustration rule. Although not completely clear on the point,
art.12(3) can be interpreted so as to permit Member States to
permit companies to opt out of the no-frustration rule of art.9 in
limited circumstances, namely, when faced with a bid from a
company to which art.9 does not apply (for example, because the
bidder is from a Member State which has opted out of art.9).
This is the so-called “reciprocity” principle, i.e. a target should
be subject to the ban on frustrating action only where the bidder
is subject to it. However, the UK chose not to adopt this more
limited form of company-level opting-out either, on the grounds
that it was not part of the existing Code structure and that the
benefits to the UK of an open market for corporate control
obtained even if the bidder is not an available target.69
In short, r.21 is a mandatory rule out of which companies may
not opt, either generally or on a reciprocity basis. It is arguable
that a strictly mandatory “no frustration” rule does not fit well
with policies to encourage shareholder engagement, as discussed
in paras 15–30 et seq. There may be a case for permitting the
shareholders of the company, by an appropriate majority, to opt
out of the “no frustration” rule for a period of time. This would
enable the management of a company to embark on the
implementation of a strategy which might not benefit the share
price in the short-term, secure in the knowledge that they would
be free from the risk of an opportunistic takeover offer, at least
where the shareholders also conferred upon the board the power
to put in place an effective takeover defence.
Defensive measures in advance of the bid
28–21
This is an area where the Code does not operate. Rule 21 applies
only once the “board has reason to believe that a bona fide offer
might be imminent”. Before that point regulation is left to
general company law,70 which, however, has not developed a
single rule to deal with pre-bid defensive tactics. Rather, a
number of rules may be relevant, depending upon the precise
action the directors of a potential target company wish to take.
The most general of these company law rules is s.171 of the
Companies Act requiring the directors to exercise their powers
for a proper purpose or to obtain shareholder approval of action
not proposed for a proper purpose. As we have noted in relation
to pre-bid defences, however, because that section focuses on the
directors’ purpose, rather than on the effects of their acts, and
indeed on their predominant purpose, where there is more than
one, the section is a weaker control than r.21. Provided there is a
commercial justification which the directors can plausibly put
forward as the predominant purpose of their action, it will be
difficult for a shareholder to challenge it on the grounds that an
effect of the decision will be to make the company less attractive
to a bidder or less easy to acquire. In the absence of a current
bid, there is also less incentive for a shareholder to seek to
challenge the directors’ action through a derivative action. An
example of a board decision, having the effect of making the
company less easy to take over but having also a plausible
commercial justification, might be the creation of a joint venture
with another company, to which each commits part of its
existing assets, on terms that a change of control in either partner
permits the other partner to buy the first partner out.71
Alternatively, the board of a company might seek to make it less
attractive to a bidder by gearing up its balance sheet (i.e. altering
the ratio of debt to equity in the company’s financial structure)
and distributing the immediate gains of that exercise to the
shareholders, on the basis that the opportunity of carrying out
this exercise is what makes the company attractive to a private
equity bidder. It is not surprising that s.171 is less stringent than
r.21. Rule 21 is very restrictive of managerial initiative, because
of its requirement for shareholder consent. This is a policy which
may be sustainable for the short period after a bid has been
launched and before its fate is decided, but applied to corporate
decision-making across the board it would subvert the delegation
in the articles of managerial powers to the board whenever a
decision might have the effect of making the company a less
attractive bid target.72
Other rules can be pointed to which require shareholder
consent in specific circumstances for pre-bid defences. Thus,
s.551 requires shareholder authorisation for decisions by the
directors of public companies to issue shares or to grant rights to
subscribe for or convert any security into shares.73 This section,
together with the improper purposes doctrine, makes it much
more difficult for a British company to adopt a US-style “poison
pill” or “shareholder rights plan”. In the US the efficacy of that
device depends crucially on the board being able to adopt the
plan without the consent of the shareholders and upon the courts
not regarding the adoption of such a plan as a breach of fiduciary
duty on the part of the directors. Section 551 lays down the
principle of shareholder consent for the conferment of such
rights, and a poison pill might well be regarded by British courts
as falling foul of the proper purposes doctrine, since the pill has
no commercial rationale except in the context of the bid and its
role then is simply to make it very unattractive for a bidder to
put an offer to the shareholders of which the target board does
not approve.74 However, s.551 is again a less rigorous provision
than r.21 of the Code, because it allows shareholders to approve
the issuance of shares by directors up to five years in advance,
though institutional shareholders are in fact reluctant to give a
blank cheque to the directors for such a long period. Asking
shareholders to approve share issues in advance, for which
permission there may well be good commercial reasons, does not
focus shareholders’ attention as sharply on the potential costs to
them as where approval is required, as under r.21, in the course
of a bid, when the shareholders know the terms of the offer they
will be rejecting if they adopt the defensive measures.75
However, it should be noted that pre-bid and post-bid
defensive measures do not fall into fully separate categories. For
example, a pre-bid defensive tactic (obtaining authority to issue
shares to defeat a bidder) which requires action by the directors
post-bid (actually to issuing the shares) will be caught by r.21 at
the point of exercise of the share-issue power. Thus, r.21 has
some chilling effect on pre-bid defensive measures despite its
post-bid operation.
The break-through rule
28–22
The drafters of the Takeover Directive, however, were
concerned with a different form of pre-bid defensive measure.
This was the creation by companies of capital structures in
which the voting rights attached to equity shares are not
proportionate to the economic interests held by the equity
shareholders, or where there were restrictions on the
transferability of the shares. Both arrangements make future bids
less likely to succeed, in the former case because the voting
shares may be concentrated in the hands of those, for example
members of the founding family, who oppose a change of
control in principle; and in the latter because it may simply not
be possible for shareholders to accept the bidder’s offer. A
disjunction between voting and economic rights can be achieved
in a number of different ways, of which the most obvious are the
creation of a class of non-voting equity shares or a class of
shares with multiple voting rights. Let us assume that in each
case there is also a class of equity shareholder having one vote
per share, but with rights and obligations otherwise the same as
those of the other class of equity shareholder. In the case of non-
voting shares, the class with one vote per share will control the
company, even though they have contributed only a part of the
company’s equity share capital. In the case of multiple vote
shares, this class will have a disproportionate influence over
(perhaps even control) the company, even though the holders of
the shares with multiple votes have not contributed a proportion
of the company’s equity capital that is equivalent to their votes.
In either case, by ensuring that the voting or multiple voting
shares are in “friendly” hands, no bid will succeed, even if a
majority of the equity shareholders (by capital contributed)
would wish it to.
In the discussions on the drafts of the Takeover Directive the
concern was with deviations from the proportionality principle in
the specific context of takeovers. The “Winter group”,76 to
whom the issue was referred by the EU, wished, putting the
matter broadly, to assert the mandatory operation of a “one
share, one vote” rule in two bid situations. These were: (a) any
vote by shareholders called to approve or not post-bid defensive
measures; (b) at a general meeting called after the bidder has
acquired a specified proportion of the company’s equity for the
purpose of installing its own nominees as directors of the target
or changing the target’s articles of association. This so-called
“breakthrough” rule would also apply to restrictions on the
transferability of shares, whether to be found in the company’s
articles or in contracts with or among shareholders. The aim of
the break-through rule was to render nugatory the defensive
qualities of the capital structures or of the transfer restrictions
once a bid emerged. This was a controversial proposal, which
was ultimately implemented in art.11 of the Directive only in an
optional form.
28–23
There is no doubt that the issue identified in art.11 of the
Takeover Directive is an important one. To take an extreme
example, r.21 of the Code, requiring shareholder approval of
post-bid defensive measures, would be of little value if the
company’s articles allocated the voting rights on such a question
entirely to the board of the target company. However, this
theoretical problem has never loomed large in British policy-
making. As we have seen in Ch.23 there is nothing in British law
that prohibits or regulates such capital structures. Nevertheless,
they are uncommon, mainly because of the opposition of
institutional shareholders to acquiring non- or limited-voting
equity shares. This is not to say that such capital structures do
not exist in British companies, but that, broadly, where they
continue, institutional shareholders have been convinced that
there is a good reason for that situation. In other words, the
solution to the problem in the UK has traditionally been market-
led rather than to be found in the law, and British law, in
consequence, has not regulated disproportionate voting
arrangements, either generally or in the context of a takeover
bid, for example, through a break-through rule. In those Member
States which make extensive use of disproportionate capital
structures or restrictions on transfer, there was strong opposition
to an EU rule which would set them aside, even in the limited, if
important, context of a takeover bid. The result was that art.11 of
the Directive, like art.9, was made optional for the Member
States at the final point in the EU’s legislative process.
The British Government decided to opt out of art.11 (not to
apply it to UK companies), contrary to its decision in relation to
art.9. However, in policy terms the reasoning was consistent, i.e.
the choices made in relation to both articles reflected the prior
position in UK law.77 One might think, therefore, that the break-
through rule needs no further attention in this book.
Unfortunately, art.12, which provides for the opt-out, also
stipulates that where a Member State has opted out, it must
permit opting back in on a company-by-company basis.78 In
short, a company may override the decision of the Member State
to opt out of art.11, so far as that particular company is
concerned. Article 12 further provides that Member States may
permit companies, which have opted back in, to opt out again on
the reciprocity principle, i.e. when faced with a bid from a
company that is not subject to art.11. Here, as with art.9, the
British Government decided not to permit opting out at company
level on the basis of the reciprocity principle, though, as we shall
see, the decision on the part of a company to opt into the break-
through rule is reversible under certain conditions. Thus, the
choice for a company incorporated in the UK and having its
securities traded on a regulated market is, during any single
period of time, to be wholly within or wholly outside the break-
through rule. This choice, which the Directive requires to be
provided, is given not in the Code, but in the Companies Act (in
Ch.2 of Pt 28), since it involves the amendment of vested rights,
and the choice is made available only to companies falling
within the Directive’s scope, i.e. companies with voting shares
admitted to trading on a regulated market.
28–24
The eighth edition of this book dealt with the break-through rule
in some detail.79 However, it appears that no UK company has
chosen to opt into the break-through rule and so a shorter
treatment is justified in this edition. A number of reasons could
be put forward for this lack of take up of the break-through rule
by individual companies. First, the incentives to do so are not
strong. As already indicated, disproportionate voting rights are
not a major issue in the UK. A company which has them has
presumably managed to convince its shareholders (at least when
it raised new capital) that it is useful to retain them. If the
shareholders cease to be convinced, they are likely to press the
board to remove them entirely and not just in the context of a
takeover. A company which has proportionate voting rights and
an absence of restrictions on the transfer of shares might still
wish to opt into the break-through rule in order to prevent a
target in another Member State from taking defensive measures
against it on the reciprocity basis. However, since most Member
States have opted out of the break-through rule and apparently
no companies in those states have opted back in, this incentive is
very weak.80
Secondly, the break-through rule deals with restrictions in
both the articles and restrictions in private contracts. As far as
restrictions in the articles are concerned, the Act deals with them
by simply making their removal a pre-condition for a company
to opt into the break-through rule.81 However, this puts those
shareholders likely to lose from the removal of restrictions in the
articles in a strong position to prevent the necessary changes. If
the necessary changes to the articles involve an amendment of
the rights of any class of shareholder (for example, reducing the
votes attached to their shares to one from some higher number),
the separate consent of that class by supermajority resolution
will be required—and may not be obtainable.82 If the necessary
changes to the articles cannot be obtained, the company will not
be in a position to opt into the rule.
Thirdly, while the removal of restrictions on voting rights or
on the transfer of shares which are contained in contracts (either
contracts with the company or contracts wholly among the
shareholders) is not a pre-condition for opting into the rule,
nevertheless compensation is required to be paid when those
contractual rights are infringed by the company’s adherence to
the break-through rule. For the purposes of compensation,
therefore, the contractual provisions are not in fact broken
through. The significance of the break-through rule is thus that it
excludes the possibility of a contracting party seeking an
injunction to prevent the transfer of shares or the argument that a
shareholder decision is void because not taken in accordance
with the agreed arrangements for voting. Section 968(6) deals
with compensation by providing a right to compensation for loss
(of such amount as the court thinks just and equitable) from
those persons who, but for the statutory break-through, would be
liable to the claimant in contract for breach of contract or in tort
for inducing breach of contract. The “just and equitable” formula
for the assessment of the compensation renders the extent of the
liability uncertain and will thus act as a disincentive to opting in.
In practice, the compensation may be offered by the bidder, but
the bidder is not formally liable to pay compensation unless it is
a party to the contract or has committed the tort of inducing
breach of contract.
However, the Act does provide one incentive for opting in.
This is that it is not an irreversible decision. Subject to a
minimum period of one year, a company which, by special
resolution of its shareholders, has opted into the break-through
rule may opt out of it, again by special resolution—and
presumably opt back in again and out again as many times as it
wishes.83
Disclosure of control structures
28–25
Given the optional nature of the break-through rule, it may well
be in practice that art.10 of the Directive turns out to be more
important than art.11. The purpose of this article, as Recital 18
of the Directive recounts, is to make “defensive structures and
mechanisms” more transparent. Consequently, companies within
the scope of the Directive (i.e. with securities admitted to trading
on a regulated market) are required to give information on them
as part of their annual report and the board must give an
“explanatory report” on them, though it is rather unclear what
sort of explanation is called for and how far it should include
elements of justification. In the UK the mechanism used for this
disclosure is the directors’ report.84 The domestic rules,
following the Directive, require a wide range of information to
be given, though some of it will either not be relevant to British
companies or is already required to be disclosed. The main items
to be covered are:
(a) the structure of the company’s capital, notably the rights and
obligations of each class of share, whether all those classes of
capital are traded on a regulated market or not;
(b) restrictions on the transfer of securities (i.e. both shares and
debentures);
(c) the identity of persons with significant direct or indirect
holdings of securities in the company and the size and nature
of that holding, so far as known to the company85;
(d) similar information about a person with “special rights” with
regard to the control of the company;
(e) how control rights are exercised under employee share
schemes, where the rights are not exercisable by the
employees directly;
(f) restrictions on voting rights, notably voting caps (restricting
the percentage of total votes a shareholder has, no matter that
the shareholding exceeds that percentage) or arrangements
for splitting the financial and control rights of securities and
placing them in different hands, where the company
cooperates in making these arrangements;
(g) agreements between holders of securities, if known to the
company, which contain restrictions on transfer or the
exercise of voting rights86;
(h) powers of the board to issue or buy back shares in the
company87;
(i) significant agreements to which the company is party which
will operate differently if there is a change of control (such as
loans containing repayment covenants upon a change of
control—sometimes referred to as “poisoned debt”), but
subject to the exception that disclosure is not required if that
would be “seriously prejudicial” to the company;
(j) agreements between the company and its directors or
employees for compensation payments to be made upon a
change of control.88
TARGET MANAGEMENT PROMOTION OF AN OFFER
28–26
In the previous section we have proceeded on the assumption
that the target board’s conflict of interest in relation to a bid
leads them to seek to maintain the independence of the target
company and thus of their positions within it, and hence the “no
frustration” rule. This does indeed constitute the most obvious
expression of the target board’s conflict of interest, but it is not
the only one. The board might perceive its future interests as
being best served by the company coming under a new
controller, especially, for example, where the bidder is a private
equity group which wishes to retain the existing senior
management of the target and give them a much larger financial
stake in the company than they had when it was in public
ownership and traded on a stock market.89 It is thus incorrect to
think that the conflict of interest of the target board will always
take the form of resisting the bid, to the detriment of the interests
of the shareholders. The board may promote the bid—or, if there
are competing bids, one of the bids—to the shareholders, again
possibly to their detriment. The Code and the general law use a
number of different techniques for addressing the problem of
conflicted promotion of a bid by target management.
Disclosure and independent advice
28–27
One technique is to inject an element of independence into the
advice which the board is required to give to the shareholders on
any offer made to the shareholders by a bidder. Under r.3.1 the
board is required to obtain competent independent advice90 on
any offer and the substance of that advice must be made known
to the shareholders.91 Independent advice is regarded as of
particular importance on a management buyout or an offer by
controlling shareholders.92 However, r.25 requires the board to
circulate its own opinion on the offer to the shareholders (that is,
they cannot simply hide behind the independent advice). If there
is a divergence of views within the board or between the board
and the independent adviser, this must be disclosed and the
arguments for and against acceptance given.93
Where directors have a conflict of interest, they should not
normally join with the other members of the board in expressing
a view on the offer. In the case of a management buy-out, the
director will normally be regarded as having a conflict of interest
if he or she is to have a continuing role in either offeror or
offeree company.94 Thus, where the whole of the executive
director team of the target is to be taken on by the bidder, the
conduct of the target company’s response falls on the non-
executive directors and if, as happened in a one case, the non-
executives are conflicted because they are involved with the
bidder as well, the chair of the board may become largely
responsible for the target board’s response to the bid. Some help
is provided to the independent directors by r.20.3, which requires
the offeror to provide to the independent directors, on request, all
the information which the offeror has furnished to the potential
external providers of finance in relation to the buy-out. This does
something to equalise the information available to the
independent directors and the executive directors who are part of
the bidding team. Overall, the distinction between executive and
independent non-executive directors, which has become
formalised in the Corporate Governance Code, is used by the
Takeover Code to handle the most pressing examples of conflict
of interest which might lead the board to promote a bid, though
at the cost of the non-executive directors suddenly finding
themselves more heavily involved in the affairs of the company
than they probably contemplated when taking on that role.
Looking at these matters from the bidder’s point of view,
r.24.6 requires the bidder to disclose in its offer document “any
agreement, arrangement or understanding” between it (or any
person acting in concert with it) and any of the target’s directors
or recent directors which are connected with or dependent on the
offer, giving full particulars of them. This would clearly include
the details of any proposed arrangement concerning employment
of the directors of the target in either the target or the offeror
after the bid. Rule 16 requires Panel consent for special deals
offered by the bidder to some shareholders where that deal is not
being extended to all shareholders. This rule creates a potential
problem for management buy-outs, where, as will be usual, the
target management holds shares in the target company but is also
part of the bidding entity and is being offered the special deal
that it will continue to be involved in the running of the target if
the bid is successful or if only the management shareholders in
the target company are being offered shares in the acquirer (the
other shareholders being offered cash). In practice, the Panel will
give its consent so as to facilitate management buy-outs where
the management of the target can be regarded as a joint bidder
with the other bodies which are financing the bid. For this reason
“joint offerors may make arrangements between themselves
regarding the future membership, control and management of the
business being acquired”.95
Compensation for loss of office
28–28
A much cruder form of conflict of interest which gives rise to
managerial promotion of a bid arises out of the compensation
which a director may expect to receive if the bid is successful
and he or she is removed from office. The anticipation of a large
windfall may shape the directors’ response to the bid,
consciously or unconsciously. Moreover, a part of the
consideration which the bidder is willing to pay for the target
may be diverted to the directors in such a case. In those
jurisdictions which allocate to the target board a major role in
the determination of the fate of an offer, such monetary
incentives to accept the bid may well be viewed with favour, as
aligning shareholder and directors’ interests. However, in the
UK, where the decision on the fate of the bid is allocated
primarily to the shareholders, such financial incentives for target
directors have been viewed as distorting the direction of the
consideration the bidder is willing to pay and the incentives of
the target management to advise the target shareholders
dispassionately.
The Act has long contained provisions which require
shareholder approval for payments in respect of loss of office.96
These clearly catch “gratuitous” payments for loss of office (i.e.
payments to which the director has not contractual entitlement)
where the risks of distortion are significant. In the past,
contractual entitlements to loss of office compensation were
excluded from the member approval requirement, but the Act
has now taken modest steps to include some of these within the
principle as well.
Gratuitous payments
28–29
The provisions on gratuitous transfers apply to takeovers of both
public and private companies. Where the loss of office
accompanies a takeover bid, two features of the shareholder
approval requirement show that the offeree shareholders are the
persons the Act aims to protect. First, approval is required from
the holders of the shares to which the offer relates (“relevant”
shareholders), and the bidder and associates are excluded from
voting in respect of any shares they hold.97 Obtaining such
consent may be problematic indeed in the case of payments
made under an arrangement entered into after the transfer of the
shares to the bidder and in such cases the requirement for
shareholder consent may operate in practice as a prohibition on
such payments.98 Even in the course of the bid the bidder and
target management may regard holding a meeting to obtain
shareholder approval as a very unwelcome distraction, although
it is possible for the approval to be sought by way of a written
resolution where the target company is a private company.
Information about the proposed payment, notably its amount,
must be made available to the shareholders in advance of the
vote.99 Secondly, if approval is not obtained but a payment is
nevertheless made, it is treated as held on trust by the recipient
for those who have sold their shares as a result of the offer and
the expenses of making the distribution to those entitled to it are
to be borne by the recipient.100 Here, therefore, the legislation
has avoided the absurdity illustrated in Regal (Hastings) Ltd v
Gulliver,101 by providing restitution to those truly damnified,
rather than to the company when, in effect, that would result in
an undeserved reduction of the price that the successful offeror
has paid.
28–30
These provisions apply also to payments made in connection
with a takeover bid for the shares of a subsidiary of the paying
company. This extension might be important where there are
outside minority shareholders in the subsidiary.102 “Takeover
bid” is not defined for the purpose of this section, and so it is
unclear whether the section embraces a takeover effected by
means of a scheme of arrangement. The requirements ought to
apply, since the risks are the same, and they are easier to comply
with in a takeover by way of a scheme since a shareholder
meeting is an essential part of the scheme procedure. However,
“payment for loss of office” is defined. Among other things,
s.215(1) includes payments for loss of any other office or
employment held in conjunction with the directorship which
involves the management of the company or its subsidiaries.
This is a very important provision, since compensation payments
are often made to executive directors in connection with the loss
of their management positions in the company, rather than in
connection with the loss of the directorship itself. For this
reason, it is also sensible to bring shadow directors within the
scope of s.219. Although loss of the status of shadow director
itself is not within the section, compensation payments for the
loss of other offices or employment within the company held by
the shadow director will be caught.103
28–31
Although the payer is typically the target company after the
takeover has succeeded, the requirement for shareholder
approval applies to payments for loss of office made by “any
person”.104 This will clearly include payments by a parent
company (i.e. the successful bidder) or a subsidiary of the target.
Payments to a director include payments to a person connected
with a director and payments to any person at the direction or on
behalf of the director or connected person.105 Payments are
rebuttably presumed to be payments for loss of office if made in
pursuance of an arrangement (not necessarily a contract) made
within the period extending from one year before to two years
after the transfer of the shares and either bidder or target is privy
to the arrangement.106 So, the provisions cannot be avoided
simply by waiting for the transaction to be concluded. If the
price paid to the director for his or her shares is in excess of that
available to other shareholders or if, in connection with the
transfer of the shares, any valuable consideration is given to the
director by any person, the excess is irrebuttably treated as a
payment for loss of office.107 Finally, compensation is treated as
including benefits otherwise than in cash, though cash is in fact
the typical form of compensation provided.108 On the other hand,
there is a de minimis exception for payments by the company or
its subsidiaries where the amount or value of the payment does
not exceed £200, a very small amount.109
Contractual compensation
28–32
Although r.25.5 of the Code requires disclosure in the target’s
first circular to the shareholders of particulars of the directors’
service contracts and of any earlier contract which has been
replaced in the six months preceding the circulation, it contains
no shareholder approval requirement for contractual payments.
Nor does the Act, as a matter of general principle, but there are
two situations where it does require shareholder approval.
First, the contract might explicitly say that upon a takeover the
director is entitled to the payment of a sum of money by the
company. These are sometimes referred to as “covenanted
payments”.110 Whilst payments “in discharge of an existing legal
obligation”111 are in principle excluded from the approval
requirements of Ch.4 of Pt 10, this is so only if the obligation
“was not entered into for the purpose of, in connection with or in
consequence of’ the takeover”.112 Thus, covenanted payments
entered into in the face of a bid (even, in appropriate
circumstances, before the bid is formally announced) will need
shareholder approval under the provisions discussed above. The
Act accurately assesses the risks to the offeree shareholders in
this case to be substantially the same as with a gratuitous
payment.
Secondly, payments to directors by way of damages for
breach of an existing legal obligation or by way of settlement of
a claim arising in connection with the termination of a director’s
office or employment were and remain excluded from the
provisions discussed above. Thus, payments to directors,
especially executive directors, representing compensation for
dismissal without the proper notice due to them under their
service contract or settlements of claims for such payments fall
outside the provisions of Ch.4.113 This is a significant exemption,
since large sums may be payable to an executive director by way
of breach of a fixed-term or long-notice service contract, even if
it contains no “covenanted payments”. In addition, payments “by
way of pension in respect of past services” are exempted from
the need for shareholder approval,114 apparently even if they are
gratuitous. Directors towards the end of their careers may
positively welcome compensation payments which take the form
of a pension.
However, under the provisions of Ch.4A, introduced in
2013115 and applying only to “quoted companies”,116 payments
for loss of office must either be “consistent with” the company’s
remuneration policy, as approved by the shareholders,117 or
receive specific shareholder approval.118 Thus, if the director’s
contractual notice period or contractual term exceeds that stated
in the remuneration policy, payment of damages for breach will
need shareholder approval, at least in relation to the “excess”
period, as will the payment of a pension beyond what the policy
contemplates. The new rule applies in principle to all payments
for loss of office, but it is made clear that, if the payment falls
within Ch.4, Ch.4A does not apply.119 So the relevance of Ch.4A
is for payments excluded from Ch.4. The detailed provisions of
Ch.4A largely track those of Ch.4. In particular, the recipient of
an inconsistent and unauthorised payment holds it on trust for
those who sold their shares into the offer.120
Competing bids
28–33
One post-bid defensive measure which the Code does permit is
the search by the target board for an alternative bidder. Such
action is not held to breach the non-frustration rule, because the
decision on the bids still rests with the shareholders of the target
company, whose choices have in fact been widened by the
presence of the so-called “white knight”. The Directive makes it
clear that “seeking alternative bids” is not caught by the
prohibition on post-bid defensive action.121 However, conflicts of
interest on the part of the target board may arise here also, either
because the board wishes to discourage a competitor because its
interests will be better served by the initial bidder or, vice versa,
where the target board seeks a competitor because it does not
favour the initial bidder. Of course, in either case the board’s
decisions may be driven by a desire to promote the interests of
the shareholders of the target, rather than the directors’ interests,
and so the Code and other rules need to focus on this problem
with some degree of sophistication. Another troublesome
question is whether it is, in fact, in the interests of the
shareholders to encourage competing bids. In the context of a
particular offer, that is clearly so, since the competitor drives up
the price and may even trigger an auction. However, the initial
bidder often loses out in the auction, thus throwing away the
costs it has incurred in identifying a target and mounting a bid.
Knowing of this risk, companies may be less willing to bid
initially than if they could be sure that there would be no
competitor, thus reducing the incidence of bids, arguably to the
detriment of shareholders. It is thus conceivable that the
encouragement of competing bids would mean fewer bids
overall. In this situation, devising an appropriate policy for
competing bids is not easy.
A duty to auction or a duty to be even-handed?
28–34
A conceivable policy would be to require the target board to
seek out any available competing offers. In bid situations there
will often be pressure from shareholders on the board of the
target to do this. However, the Code itself contains no such
obligation, only a permission for the target board to take this
step. In the case law on fiduciary duties the question has
sometimes arisen, but the upshot of that limited case law seems
to amount to no more than the proposition that, if a competing
bid does in fact emerge, the directors may not obstruct the
shareholders from accepting the bid the latter prefer, but the
directors are not obliged to further that offer by, for example,
assenting their own shares to it. In Heron International Ltd v
Lord Grade122 there were two competing bids for a company
whose directors held over 50 per cent of the shares and where,
unusually for a public company, the consent of the directors was
required for the transfer of shares. The directors had given
irrevocable undertakings to accept what turned out to be the
lower bid and stood by those undertakings, so that the higher
bidder was defeated. The Court of Appeal declared that:
“Where directors have decided that it is in the best interests of a company that the
company should be taken over and there are two or more bidders the only duty of
the directors, who have powers such as those in [the company’s articles], is to
obtain the best price. The directors should not commit themselves to transfer their
own voting shares to a bidder unless they are satisfied that he is offering the best
price reasonably available.”123
This dictum clearly suggests that the directors’ freedom to assent

their own shares to the bidder favoured by them is restricted by
their duty as directors to the other shareholders. In Re A
Company,124 where a similar issue arose in the context of unfair
prejudice petition but involving this time a small private
company, Hoffmann J, however, refused to accept “the
proposition that the board must inevitably be under a positive
duty to recommend and take all steps within their power to
facilitate whichever is the highest offer”, especially where that
alleged duty restricted the directors’ freedom of action in
relation to their own shares. Their duty went no further than
requiring them not to exercise their powers under the articles so
as to prevent those other shareholders, who wished to do so,
from accepting the higher offer, and requiring them, if they gave
advice to the shareholders, to do so in the interests of those
shareholders and not in order to further the bid preferred by the
directors. The view of Hoffmann J seems more in accord with
generally accepted principles of fiduciary law and with the Code
which, as we have seen above, requires the directors to give
advice to the shareholders in order to promote the interests of the
latter, but stops short of requiring directors to take decisions in
relation to their shares other than in their own interests.
More generally in relation to the exercise of directorial
discretion, the Code can be said to adopt the policy of requiring
the directors to be even-handed as between competing bids: they
are not required to seek out alternative offers but, if such
emerge, the choice between them should be one for the
shareholders. This can be seen as an application or, perhaps,
extension of the “no frustration” principle in the context of
competing bids. The central provision here is r.20.2 which
requires the target board to provide information to an offeror or
potential offeror which it has made available to another offeror
or potential offeror “even if that other offeror is less welcome”.
This is an important provision, because, as we shall see below,
the target board is not normally under an obligation to provide
information to a potential bidder to help it decide whether to
make an offer or on what terms. However, if the board decides to
do so for one offeror or potential offeror, it cannot refuse this
facility to a competitor. This principle is applied not only to the
information itself but also to the terms on which it is made
available (for example, confidentiality requirements). However,
the rule does not permit the competitor to ask simply for all the
information given to the initial offeror: the competitor has to
specify the questions to which it wants answers, and the target
company must answer them if it has done so for the other
bidder.125 There is an obvious difficulty in applying this rule in
relation to a management buy-out, because the existing
management element of the bidder will have comprehensive
knowledge of the target company. Note 3 to r.20.2 confines the
disclosure obligation in such a case to the information provided
to the external providers of finance for the buy-out bid.
28–35
Quite apart from regulation of the conduct of the target board
towards competing bidders, the question can be asked whether
the design of the takeover Code facilitates the emergence of
competitors. In many ways it does, though mainly as a side-wind
from the implementation of policies designed to further other
goals. Thus, as we shall see below, the timetable for the offer
(the gap between the initial approach and the formal offer, the
need for the formal offer to be open for a minimum period of
time) does create a space in which competing bidders have the
opportunity to put together an alternative offer. The offeror may
seek to dilute this risk by buying shares in the target on the
market in advance of the public announcement of the approach
or offer. The insider dealing legislation is so drafted as not to
catch a bidder who buys shares in the market knowing that it
intends to make a bid at a higher price in the near future.126
Nevertheless, market purchases on any scale are likely to drive
up the price of the potential target’s shares very rapidly as they
become disclosable under the major shareholdings rules.
Alternatively, the bidder may deal privately with the larger
shareholders in the target (if there are any) and seek their
agreement, in advance of the bid, to accept an offer if one is
made (i.e. to give what are known as “irrevocable
commitments”). However, those who give such commitments
normally in fact reserve the right to withdraw the acceptance if a
competitor emerges. More simply, the bidder might simply seek
to buy the shares of any large shareholders in advance of the bid,
but their willingness to sell might be forthcoming only in
situations where they think the company is unlikely to attract
rival bids.127 Moreover, as we shall see below, pre-bid purchases
may restrict the freedom of the bidder to determine the level of
its offer. Overall, the Code does expose a bidder to a significant
risk that a rival bid will emerge.128
Binding the target board by contract
28–36
Given the risks just alluded to, the initial bidder may well seek,
by contract, to enlist the directors of the target on its side in
dealing with any future competitor. There are two main
contractual techniques which have been used to this end, though
obviously they are potentially available only where the target
board approves of the proposed bid. First, the initial bidder may
wish to secure from the directors of the target company a legally
binding undertaking to recommend the bid to the shareholders of
the target in any event and not to seek, encourage or co-operate
with any “white knight”. Such an agreement with the directors is
not necessarily against the interests of the target’s shareholders,
for the initial bidder may not be willing to make a bid at all for
the target unless such undertakings are forthcoming. The courts,
however, have been unwilling to give full effect to such
agreements, especially the commitment always to recommend
the initial offer, even if a better one emerges. They have
subjected the contractual undertaking to recommend the bid to
an implied limitation, which in fact deprives the undertaking of
most of its utility to the offeror, that the directors should be free
to recommend the competing bid if they form the view that it
would be in the best interests of the shareholders that the bid be
accepted.129 There is in fact a lot to be said for this approach, for
to hold otherwise would be to undermine both the basic
allocation of decision-making power on the fate of the bid to the
shareholders and General Principle 2 of the Code that the
shareholders must be given the information necessary to enable
them to reach a properly informed decision on the bid.
Given the uncertainties surrounding agreements which seek to
control the target board’s actions towards competing bidders, it
is not surprising that alternative contractual arrangements were
developed. A common form of agreement was the “break fee” or
“inducement fee”, i.e. an agreement between the target company
(through its directors) and the initial bidder that, if the bidder’s
offer is not accepted for one of a number of reasons, which
might include the shareholders’ acceptance of an alternative
offer, the target company becomes liable to pay a sum of money
to the disappointed bidder. In this way, the initial bidder seeks to
protect itself against the financial costs of its failed bid.
However, the effect of a large break fee may be to discourage a
competing bidder, since it effectively reduces the value of the
target in the hands of the competitor, but not in the hands of the
bidder which has negotiated the break fee.
The break fee was always regarded with some suspicion by
the Code, which imposed a cap on the level of the fee (or similar
inducement) at 1 per cent of the offer price. However, in the
course of the Panel’s 2010 review of the Code it was concluded
that break fees and other “deal protection measures”, including
“no cooperation” agreements, should be prohibited, except in
very limited cases. The Code Committee was sceptical about the
benefits to target shareholders of inducement fees and other deal
protection devices, which it regarded as often imposed by the
acquirer for its benefit.130 Rule 21.2 now prohibits in most
situations “offer-related arrangements”,131 a term which includes
but goes beyond inducement fees and embraces commitments by
the offeree board not to cooperate with competing bidders.132
However, the potentially adverse impact upon shareholder
choice of prohibiting inducement fess is recognised in two
situations. Subject to the 1 per cent cap and disclosure, the target
company may agree an inducement fee with a competing offeror
where an initial, but not recommended, bid has been launched
(so that a competitor can be encouraged). Further, where the
board of the target had initiated a formal sale of the company
before any firm offer for the target was announced, and sought
bidders in that context, it will normally be permitted to agree an
inducement fee (and perhaps other arrangements) with a bidder
who participated in that process in order to encourage it to make
a formal bid.133 Here, the formal sale process operates as the
assurance that all serious offers have been flushed out.
EQUALITY OF TREATMENT OF TARGET SHAREHOLDERS
28–37
Since the UK Code places the decision on the offer firmly in the
hands of the target shareholders, it follows that there is a strong
regulatory interest in protecting the target shareholders from
being manipulated by the offeror into accepting an offer they
think is sub-optimal. The possibility of manipulation arises, on
the one hand, from the bidder’s freedom under the law of
contract to formulate the offer as it wishes (in the absence of
regulation) and, on the other, from the dispersed nature of the
shareholders in a typical UK target company, so that
coordination amongst them is too costly to be effective.
Although “the Code is not concerned with the financial or
commercial advantages or disadvantages of a takeover”,134 it
does contain a wide range of rules designed to preserve the
integrity of the target shareholders’ decision-making and these
rules do shape the substantive content of the offer. The most
obvious (but not the only) technique the bidder might deploy to
manipulate the target shareholders’ decision-making is unequal
treatment of the offerees. For example, a bidder might make an
attractive offer for target shares, but only for a certain percentage
of them, with the offer being open only for a short-time. Once
this offer is satisfied, the bidder might make a lower offer to the
remaining shareholders or no offer at all. Although the
shareholders collectively might be better off if they all refused
the offer and forced the acquirer to bid for all the target shares
on the same terms, any individual shareholder will maximise his
returns by accepting the partial offer. Or the inequality strategy
may be implemented the other way around. The acquirer makes
a low-level bid for all the shares. Having picked up the
unsophisticated shareholders in this way, it makes a higher offer
to those who hold out. From the beginning the Code has
addressed these “divide and rule” issues though the requirement
for equal treatment of target shareholders, a notion which has
now been developed to a considerable degree of sophistication.
Reflecting the Directive, GP 1 of the Code stipulates that “all
holders of the securities of an offeree company of the same class
must be afforded equivalent treatment” but the Rules in fact go
beyond this. The equality principle, in all its manifestations, is
another demonstration that, whilst the Code facilitates takeovers,
it does not make the maximisation of the number of bids its goal,
for otherwise it would permit differential offers. However, this
policy is not without its costs. Some of the bids which are
discouraged by the equality rules would come from financially
constrained bidders who nevertheless would run the company
more efficiently than the current controllers.
Partial bids
28–38
Perhaps the most obvious way of implementing the equality
principle is to prohibit partial bids, i.e. offer for only some of the
outstanding shares in the target. Through a partial bid the offeror
acquires sufficient shares to obtain control of the company, but
not all the shares are acquired. If the offer is made on a “first
come, first served” basis, offerees may rush to accept it, either
because it is pitched at an attractive level or, even though it is
not, offerees wish to exit the company because of doubts about
how well the acquirer will run it in the future. As we shall see in
para.28–58 a floor is put under the partial bid strategy by the
requirement that the bidder must end up with at least 50 per cent
of the voting rights in the target; otherwise the bid will be
ineffective. However, the Code goes much further: by r.36 the
Panel’s consent is needed for partial offers. Consent will
normally be given if the offer could not result in the offeror
being interested in shares carrying 30 per cent or more of the
voting rights of the target company, since at this level the
acquirer is not regarded as having control.135 If the partial offer
could result in the offeror holding more than 30 per cent but less
than 100 per cent, consent will not normally be granted if the
offeror or its concert party has acquired, selectively or in
significant numbers, interests in shares in the target company
during the previous 12 months or if any shares were acquired
after the partial offer was reasonably in contemplation.136 Nor,
without consent, may any member of the concert party purchase
any further interests in shares within 12 months after a
successful partial bid.137 Both rules promote equality of
treatment, since the sellers outside the offer may have been able
to dispose of the entirety of their shareholdings and at a better
price.
If the Panel does give its consent to a partial offer, some
restrictive conditions apply to it. First, all the accepting
shareholders must be able to dispose of the same proportion of
their holdings.138 Secondly, the offer must state the precise
number of shares bid for and the offer must not be declared
unconditional unless acceptances are received for not less than
that number.139 Thus, the offeror does not have freedom to relax
the acceptance condition, which is normally possible in a full
offer. More interestingly, where the partial offer could result in
the offeror being interested in more than 50 per cent of the votes,
shareholders are asked to vote on two questions. The first is, as
ever, whether to accept the offer for their shares; and the second
is whether they approve of the offer, irrespective of their
decision to sell their shares. Given the “same proportion” rule,
the existing shareholders will remain members of the target
company, at least as to part of their shareholdings, even if the bid
is successful. They may well regard this as unsatisfactory: hence
the requirement that shareholders should have a double
opportunity to vote. Shareholders may vote to accept the offer in
relation to the relevant proportion of their shares, thus enabling
them to benefit from the disposal of part of their holding if the
bid does go through, whilst voting not to approve the bid. The
partial bid will be successful only if the acquirer obtains at least
50 per cent approval for the bid as well the number of shares bid
for. Finally, to induce shareholders to exercise both voting
opportunities, an offer which could result in the offeror holding
shares carrying over 50 per cent of the votes must contain a
prominent warning that, if the offer succeeds, the offeror will be
free, subject to the twelve-month post bid prohibition, to acquire
further shares without incurring an obligation to make a
mandatory offer.140
These Rules of the Code display an obvious antipathy to
partial offers, even though formal equality of treatment is
maintained by the requirement that all shareholders who accept
the offer must have the same proportion of their holdings
acquired by the bidder. In consequence, partial bids are
infrequent, though not unknown.
Level and type of consideration
28–39
In pursuit of the equality principle the Code contains rules which
determine the minimum level of consideration which is required
to be offered for the shares, even when the offer is made to all
target shareholders. The purpose of these equality rules is to
prevent the offeror from distorting the decision of the target’s
shareholders by offering an attractive price to some shareholders
to gain control whilst offering an inadequate price to the
remainder, who then have the choice of accepting the low offer
or being locked into the company under a new controller. The
first and most obvious expression of the equality principle is to
be found in the requirement that, if the offer is revised upwards
after an initial offer at a lower price, the original acceptors are
entitled to the higher consideration.141 This rule probably does
more to protect inexperienced shareholders (who accept early)
than to prevent opportunistic behaviour on the part of offeror
companies.142 The function of the rule giving an entitlement to
offer increases is supported by r.16.1, whereby, except with the
consent of the Panel, the offeror may not make any special
arrangements, either during an offer or when one is reasonably
in contemplation, whereby favourable conditions are offered to
some shareholders which are not extended to all of them.143
A more significant expression of the equality principle is
between those who accept the offer and those who sell their
shares to the offeror outside the offer, either before the offer is
made or during the offer period. Again, r.6 of the Code seeks to
prevent private and favourable deals being done with a few
shareholders. An offeror (or person acting in concert) which
purchases shares of a relevant class in the three months before
the offer period144 or during that period145 must make or raise the
level of the offer for that class to that paid outside it, if it is
higher.146 However, r.6 distinguishes between purchases made
before the offer period begins and those made after a firm
intention to make an offer has been announced. In relation to
purchases made beforehand, it is clear that the rule does not
necessarily require that the offer be in cash even if the prior
acquisitions have been for cash. To that extent, r.6 permits
inequality: the offer later made may be on a share-exchange
basis but the securities offered by the bidder must have the value
equal to the highest consideration paid outside the offer.
However, if the post-announcement acquisitions at above the
offer price are for cash, the offer will have to be (or become) a
cash offer or be accompanied by a cash alternative.147
28–40
However, even in respect of acquisitions made before the offer
period, the subsequent offer will have to be in cash (or
accompanied by an alternative cash offer, probably provided by
the offeror’s investment bank rather than the offeror itself), if the
conditions of r.11.1 are met. Where the offeror and persons
acting in concert acquire “for cash” shares of a class in the target
company, which carry at least 10 per cent of the voting rights of
the class, in the 12 months prior to the offer, the subsequent offer
must be in cash or be accompanied by a cash alternative at the
highest level of the prices paid outside the offer.148 In this rule
“cash” has an extended meaning in its application to acquisitions
“for cash”, though it bears its ordinary meaning in relation to the
requirement that the offer be “in cash”. In relation to acquisitions
the phrase includes acquisitions by the offeror company in
exchange for securities, unless the exiting shareholder is not free
to dispose of the securities until the offerees in the general bid
receive their consideration (or the offer lapses).149 The thinking
is that, since securities are saleable, they are the equivalent of
cash. The overall effect of r.11.1 is that the offer must be in cash
or accompanied by a cash alternative because the sellers prior to
the bid have received cash (or its equivalent). The rule is
triggered only at the 10 per cent level and so it can be argued
that r.11.1 is not a full implementation of the equality principle.
Beneath the 10 per cent threshold, r.6.1 applies, not normally
requiring a cash offer and applying only in the three-month
period before the bid. The contrary argument is that a stronger
rule would discourage bids because bidders would either have to
forgo pre-bid acquisitions or always launch cash bids where they
had made previous acquisitions for cash. Building up a pre-bid
stake is a way of obtaining some degree of protection against a
competing offer, either because the stake will deter a competitor
or because, if the initial bidder fails, it can recoup some of its
costs by selling its stake at a profit to the successful bidder.
Rule 11.1 does not deal with the converse case, i.e. where the
prior acquisitions were in exchange for securities but the bid is
in cash and the target shareholders claim they should be offered
the securities provided in the prior acquisitions. This is a rarer
situation than the one where the general offerees claim cash,
because cash is in general more attractive than securities, but
there might be exceptional circumstances where the securities
were attractive but not readily available on the market. In the
light of this, a new rule was introduced in 2002, similar, but not
identical, to r.11.1, but requiring securities to be offered in the
general bid. Under r.11.2, if, during the three months prior to the
commencement of the offer and during the offer period, the
offeror has acquired shares of a class in the target which carry 10
per cent of the voting rights of the class in exchange for
securities, then the general bid must offer the same number150 of
securities to the target shareholders. However, this will not
displace the obligation to offer cash or a cash alternative under
r.11.1, if the securities accepted outside the bid have triggered
r.11.1.151 Rule 11.2 is less far-reaching than the combined effect
of rr.6.2 and 11.1 because it is triggered only by the 10 per cent
threshold (even if the securities have been offered during the
bid) and because it reaches back only to the three months before
the bid.
Mandatory offers
28–41
The strongest expression of the equality rule, however, is to be
found in the mandatory bid rule. Here, a bidder is obliged to
make an offer in a situation where it has obtained without a
general offer what the Code regards as effective control of the
company and might not therefore wish to make a general offer to
the shareholders of a company it already controls. However,
because the sellers to the new controller were able to exit the
company upon a change of control, the Code requires the
remaining shareholders to be given the same opportunity. A
mandatory bid rule is now required of Member States by art.5 of
the Takeover Directive. This led to some minor changes to the
Code rules, though in general the mandatory bid rule contained
in the Code is tougher than that required by the Directive.
Under r.9.1 a mandatory bid is required when:
(a) Any person acquires an interest in shares which (with any
shares held or acquired by any persons acting in concert)
carry 30 per cent or more of the voting rights of a company.
(b) Any person who, with persons acting in concert, already
holds not less than 30 per cent but not more than 50 per cent
of the voting rights and who, alone or with persons acting in
concert, acquires an interest in additional shares.
In those cases, unless the Panel otherwise consents, such a
person must extend offers, on the basis set out in subsequent
provisions of r.9, to the holders of any class of equity share
capital, whether voting or non-voting, and also to the holders of
any other class of transferable securities carrying voting rights.
Offers for the different classes of equity share capital must be
comparable and the Panel should be consulted in advance.
The effect of this Rule is that, once acquirers have secured
“control” (circumstance (a)) or acquisitions have been made to
consolidate control152 (circumstance (b)), a general offer must be
made, thus giving all equity shareholders an opportunity of
quitting the company and sharing in the price paid for the control
or its consolidation. However, the force of the requirement lies
not in the obligation to make an offer by itself, but in the
supplementary rules which determine the level and nature of the
offer which has to be made. After all, an obligation to make an
offer which none of the offerees would find attractive would be a
futile gesture on the part of the rule-maker. Crucial here are the
requirements that a mandatory offer must be a cash offer, or with
a cash alternative, and be pitched at the highest price paid by the
offeror or a member of his concert party within the 12 months
prior to the commencement of the offer.153 As we have seem, in
a voluntary offer this level of consideration is required only if
shares carrying 10 per cent or more of the voting rights of that
class were purchased in the previous 12 months. An acquirer
cannot escape the cash requirement for a mandatory bid by
waiting a year before acquiring the shares which carry it over the
30 per cent threshold. In addition, a mandatory bid must not
contain any conditions other than that it is dependent on
acceptances being such as to result in the bidder holding 50 per
cent of the voting rights;154 on a voluntary offer, there may well
be further conditions.155
Furthermore, where directors of the target company (or their
close relatives and family trusts) sell shares to a purchaser as a
result of which the purchaser is required by r.9 to make a
mandatory offer, the directors must ensure that, as a condition of
the sale, the purchaser undertakes to fulfil its obligations under
the rule and, except with the consent of the Panel, the directors
must not resign from the board until the closing date of the offer
or the date when it becomes wholly unconditional, whichever is
the later. Further, whether the directors have been involved on
the sell side of the acquisition or not, a nominee of the new
controller may not be appointed to the board of the target
company nor may it exercise the votes attached to any shares it
holds in the target company until the formal offer document has
been posted.156
28–42
The mandatory bid requirement of the Code is one of its
outstanding features, even if relatively few mandatory bids are
made. Being aware of the rule, acquirers normally sit just below
the 30 per cent threshold and then make a voluntary bid when
they want to go further. This is because, as we have just seen, the
acquirer has more flexibility with the formulation of a voluntary
bid, so that it is normally desirable to avoid triggering a
mandatory one. Even so, a bid made in these circumstances is
not truly “voluntary”: the acquirer might really have wanted to
go to 40 per cent and then rest satisfied that it had enough votes
to control the company, but that option is not open to it. The
effect of the mandatory bid rule is, usually, to require a person
who wishes to obtain control of a company to do so by offering
to acquire all or most of the equity share capital of the company.
This discourages acquirers who aim to extract benefits from the
company personally (“private benefits of control”) rather than
increase the value of the company for the benefit of all
shareholders. The personal benefit strategy clearly has little
attraction for someone who in any event owns all or most of the
company. On the other hand, it discourages acquisitions by those
who would increase the value of the company for the benefit of
all shareholders but who are wealth constrained and so cannot
raise the finance needed to bid for all the outstanding shares.
Non-controlling shareholders might be better off if the latter sort
of partial bid were allowed to proceed.157
Exemptions and relaxations
28–43
Given the major financial consequences for an acquirer of
triggering a mandatory bid, one can expect acquirers to take
great pains to avoid it. In some cases this may discourage
activities which are viewed as entirely legitimate. In this
situation, a great deal of attention comes to be focused on the
Panel’s discretion to exempt acquirers, wholly or partly, from
the mandatory bid obligation, which the notes to r.9 indicate it is
prepared to do in certain circumstances, sometimes on its own
decision and sometimes only if a majority of the shareholders of
the potential target company agree, though these notes do not
constrain the Panel’s discretion to grant exemptions in other
cases. For example, if a shareholder envisages that a particular
financial operation, such as a share issue via a placing,158 will
take it over the 30 per cent limit, it may escape the obligation to
bid if it adopts in advance firm arrangements to off-load the
shares to non-connected parties within a very short period after
their acquisition.159 Otherwise, the company’s capital raising
abilities might be reduced. Again, a redemption or repurchase by
a company of its shares may take a shareholder over the 30 per
cent mark without the shareholder having taken any action at all.
This situation is given a rule of its own (r.37), in which the Panel
states that it will normally160 waive the bid obligation, provided
the Panel is consulted in advance and the independent
shareholders of the target agree and the stringent “whitewash”
procedure (set out in App.1 to the Code) is followed. Finally, a
Note on Dispensations from r.9, appended to the Rules, lists six
situations where a mandatory bid is not normally required, either
because the policy behind the rule has not in truth been infringed
or because it is subordinated to other policies regarded as of
greater value to the company and its shareholders than the
equality policy. Into the first category fall (a) inadvertent
mistakes, provided the holding is brought below the threshold
within a limited period; and (b) situations where, in addition to
the person who would otherwise be required to launch a
mandatory bid, another single person holds 50 per cent of the
voting rights (so that the acquisition of the 30 per cent or more
does not in fact confer control on the acquirer).161
Into the second category fall situations where the 30 per cent
threshold is breached as a result of (c) a rescue operation of a
company in a serious financial position, even if the independent
shareholders of the target have not approved the acquisitions,
since insolvency is a more serious threat to shareholder
wellbeing than a new controller; (d) where a lender enforces its
rights and acquires shares given as security (for otherwise the
value of shares as collateral would be undermined); (e) where a
holding of more than 30 per cent of the voting rights results from
an enfranchisement of previously non-voting shares (showing
that enfranchisement is to be encouraged); and (f) where a
company issues new shares either for cash or in exchange for an
acquisition, provided a majority of the independent shareholders
agree to removal of the bid obligation, through what is known as
the “whitewash” procedure.162 This last covers a variety of
situations, including that where an offeror company makes a
share exchange offer as a result of which a large shareholder in
the target, who is perhaps already a significant shareholder in the
offeror, ends up with more than 30 per cent of the combined
entity.163 Thus, the mandatory bid rule, although strictly
formulated in r.9, is applied with some flexibility by the Panel.
Acting in concert
28–44
Although the definition of “acting in concert” is relevant to the
percentage tests used in all the rules which implement the
equality principle, the consequences of the mandatory bid rule
focus particular attention on the concept in this context. Indeed,
in its introduction to the notes on r.9.1 the Code states that “the
majority of questions which arise in the context of r.9 relate to
persons acting in concert”, and the notes then provide five pages
of guidance on the concept in the context of r.9, in addition to
what is said in the “Definitions” section of the Code about the
concept in general. When a group of persons act in concert to
acquire control of a company, r.9.2 and the note thereto impose
the obligation to make a general offer on the person whose
acquisition takes the group’s holding over the relevant threshold,
but also extend the obligation to each of the “principal members”
of the group, if the triggering acquirer is not such a member. It
appears that the offer need not be made to the other members of
the concert party, but only to the outside shareholders.
The “Definitions” section lays down the following general
principle:
“Persons acting in concert comprise persons who, pursuant to an agreement or
understanding (whether formal or informal) co-operate to obtain or consolidate
control of a company or to frustrate the successful outcome of an offer for a
company.”
The “Definitions” section then goes on to provide that six

categories of persons are presumed to be acting in concert unless
the contrary is proved.164 In the context of r.9, a troublesome
question has been the relationship between shareholder activism,
which the Government encourages,165 and acting in concert and
the mandatory bid obligation. Shareholders are likely to be
deterred from coming together to influence the board if they fear
that they will be required by the Code to make a general offer for
the company’s shares. In principle r.9 does apply to shareholders
who obtain control of a company by pooling their existing
shares. However, there is one limitation on the pooling rule.
Note 1 makes it clear that shareholders are not caught by the
mandatory bid obligation at the moment they come together in
order to obtain control of a company, even if at that point their
prior and independently acquired shareholdings together exceed
the 30 per cent threshold. What will trigger the mandatory bid is
their subsequent acquisition of further interests in shares.
However, it may discourage institutional shareholders from
coming together to exercise their rights as shareholders if the
price of so doing is their inability to acquire further shares in the
company. Since successful activism will increase the share price,
an important method for the activists to gain some reward for
their activism is to invest in the company in advance of their
intervention but after they have decided to intervene. If they are
prohibited from making such acquisitions, a greater part of the
benefits of intervention will simply go to the non-intervening
shareholders who free ride on the activists’ actions.
The relationship between shareholder activism and the
mandatory bid rule has received explicit attention from the Code
Committee166 and the results of its deliberations are now
reflected in Note 2 to r.9.1. The Panel’s prior position was that
shareholders who come together to seek control of a company’s
board are presumed to be acting in concert in respect of their
subsequent actions. (If the intervention contemplated falls short
of seeking control of the company’s board, for example, voting
against the Directors’ Remuneration Report, then the issue of
conflict with r.9 does not arise.) The Panel was clearly under
some pressure not to place obstacles in the way of an important
government policy and the new Note means that “the Panel will
be less likely than it has been in the past to rule that activist
shareholders are acting in concert”.167 Although not altering its
fundamental approach in this area, the Panel through the new
Note makes the crucial clarification that, even where the
shareholder coalition seeks to change the whole of a company’s
board, their efforts will not be classified as “board control
seeking” if there is no “relationship” between the activist
shareholders and the proposed directors. Thus, voting a new
management team into place, or even finding it as well, will not
trigger a finding of acting in concert if the new directors’
relationship with the activists does not go beyond the normal
board/shareholder relationship. Even if such a relationship does
exist, the acting in concert rule may not be triggered, depending
on the circumstances.
Interests in shares
28–45
A second notable feature of the percentage tests to be found in
the equality rules of the Code is that they apply, not just to the
acquisition of shares, but to the acquisition of “interests in
shares”. A definition of “interests in shares” was introduced as
part of a major reform of the Code in 2005. The “Definitions”
section of the Code sets out a list of situations which will be
regarded as involving the acquisition of an interest in a share.
Some of them are quite obvious, such as the acquisition of the
right to control the exercise of voting rights attached to shares,
without actually owning them, as where a shareholder agrees, as
is permissible, to vote in the way the other party to a contract
directs.168 However, the main impetus for the 2005 changes was
to deal with the issue of derivatives, and, in particular, with the
form of derivative known as a “contract for differences” (CfD),
the only form of derivative which will be discussed here. The
essence of the problem of the CfD is that it is a contract which,
on its face, gives the holder of it only an economic interest in the
movement of the market price of the security over a period of
time and not an entitlement to exercise any of the rights attached
to the share. On this basis, a CfD is irrelevant to control of a
company. In practice, however, the holder of a CfD is often able
to control the exercise of voting rights attached to the shares in
question and sometimes even to acquire them at the end of the
contract. In brief, the holder of a “long” CfD contracts to receive
from the counterparty any upward difference between the market
prices of the security at two points in time (or the contract may
be based on a starting “reference” price, which is something
other than the then current market price). The counterparty,
usually an investment bank or securities house, will normally
hedge its position, but is not obliged to do so, by acquiring a
corresponding number of underlying securities at around the
“start” price of the CfD. It is this action on the part of the
counterparty, usually found but not legally required, that
generates the problem for control rights. The counterparty holds
the shares only for hedging, and will normally be prepared to
exercise its voting rights as the holder of the CfD requires (if
only to obtain repeat CfD business from the holder) and at the
end of the contract may well be happy to close out its position by
transferring the shares to the holder of the CfD, if the holder so
requires.169
Thus, a person seeking to exercise control over a company,
but being aware of the restrictions in the Code, could have
sought to circumvent its restrictions by exercising some or all of
its control rights via CfDs. The changes made prevent that step.
The definition of “interests in securities” now provides,
generally, that “a person who has long economic exposure,
whether absolute or conditional, to changes in the price of
securities will be treated as interested in those securities”, and, in
particular, that a person will be regarded as having an interest in
securities if “he is party to any derivative: (a) whose value is
determined by reference to their price; and (b) which results, or
may result, in his having a long position in them”. It should be
noted that the Panel’s rules contain no “safe harbour” for a
person who does have a purely economic interests in shares
arising out of CfDs, for example, where the counterparty has not
bought the shares in question as a hedge. A person might trigger
the mandatory bid rule purely on the basis of such interests, and
would be reliant on the consent of the Panel to escape the
consequences of that rule.
Conclusion
28–46
The mandatory bid rule is a very strong expression of the Code’s
principle that all shareholders in the target company must be
treated equally upon a change of control. Without it, those to
whom the offeror makes approaches when building the
controlling block might be under pressure to sell for fear that no
comparable later general offer will be forthcoming. From a more
corporate law point of view the mandatory bid rule might be
seen as a form of minority shareholder protection. The prospects
of minority equity shareholders in a company depend crucially
upon how the controllers of the company exercise their powers
and the provisions of company law proper, even after the
enactment of the new “unfair prejudice” provisions of the
Companies Act (discussed in Ch.20), could be seen as incapable
of providing comprehensive protection of minority shareholders
against unfair treatment. Consequently, when there is a change
of control of a company, it could be said that all the shareholders
should be given an opportunity to leave the company and to do
so on the same terms as have been obtained by those who have
sold the shares which constitute the new controlling block.170
It should be noted that there are two aspects of the policy
underlying r.9. The first is the opportunity for all shareholders to
exit the company upon a change of control by selling their shares
to the new controller, and the second is the opportunity to do so
on the most favourable terms that have been obtained by those
who sold to the holder of the 30 per cent block. Of these two
aspects it is the second which is the more controversial. In
particular, the latter aspect of the Rule makes it impossible for
the holder of an existing controlling block of shares to obtain
any premium for control upon the sale of the shares. Since the
purchaser of the block will know that the Code requires it to
offer the same price to all shareholders, the purchaser is forced
to divide the consideration for the company’s securities rateably
among all the shareholders. In the UK, where shareholdings in
listed companies are widely dispersed, this is probably not an
important issue, but in countries where family shareholdings in
even listed companies are of significant size, the Rule might
operate as a disincentive to transfers of control.
To whom must an offer be made?
28–47
A final form of equality is as between voting and non-voting
shares in all types of bid. Where the target company has more
than one class of equity share capital, r.14 requires a
“comparable” offer171 to be made for each class, including non-
voting classes, if the acquirer decides to offer for at least one of
the classes. Thus, an offeror company may not bid only for
equity shares carrying voting rights but must bid for all classes
of equity share. This reflects the policy that a change of control
in a company is a significant event for equity shareholders
(whose returns depend on the discretion and success of the
controllers) and so all such shareholders should be given the
opportunity to exit the company on fair terms when a change of
control is in prospect.172 The rule is a protection of non-voting
shareholders rather than aimed at controlling coercive offers.
Separate offers must be made for each class of equity share. The
offer for the non-voting equity must not be made conditional
upon any particular level of acceptances by that class, unless the
offer for the voting shares is conditional upon that same level of
acceptances by the non-voting equity shareholders. In other
words, the non-voting equity shareholders may not be left locked
into the target if the offeror company obtains control through
acceptance from the voting shareholders. Either there will be no
acceptance condition for the non-voting shares or, if there is and
it is not met, the offer for the voting shares will lapse as well.
However, the offeror can protect itself against ending up with a
majority of the non-voting equity but too little of the voting
equity by inserting identical conditions, relating to the voting
equity, into both (or all) offers.
In a voluntary bid, classes of non-equity shares need not be
the subject of an offer, even if they carry voting rights.173 Of
course, an offeror company may wish to make an offer for non-
equity shares carrying voting rights, but an offer is not required,
presumably on the theory that the non-equity shareholders are
normally protected by their contractual entitlements.174 However,
r.15 requires that, on an offer for voting equity share capital, an
appropriate offer or proposal must be made to holders of
securities convertible into equity shares (who clearly are
potentially affected by the change of control).
Wait and see
28–48
It is possible to create pressure on shareholders to accept an
offer, even though the same offer is made to all the shareholders.
From the point of view of an offeror, there are only two possible
outcomes: the offer is accepted by the majority of the
shareholders or it is not. From the point of view of an individual
shareholder, considering whether to accept an offer and unable
to predict the actions of fellow shareholders, there are three
possible outcomes. First, the bid may not be accepted by the
majority, in which case it does not matter how the individual
votes. Secondly, it may by accepted by the majority and the
individual is among the accepting majority. Thirdly, the bid is
accepted by the majority and the individual is among the non-
accepting minority. Where the bid is not particularly attractive in
the eyes of the individual but that shareholder has misgivings
about how the bidder will run the company if it obtains control,
the individual’s preferences may be ranked in the same order as
the outcomes just listed. But since that shareholder has only one
decision (accept/not accept) he or she cannot rank those
preferences fully. In order to avoid the worst outcome (three), he
or she may vote for the second outcome, even though the first
outcome is the preferred one. If many shareholders considering
the offer have the same set of preferences and reason in the same
way, the offer may be accepted, even though their first choice is
rejection.
There is in fact a simple procedural solution to this problem,
which the Code adopts. As we see in para.28–75, the Code
requires the bidder to keep the offer open for a further 14 days
after it has achieved the level of acceptances the bidder requires
and this fact has been publicly announced. During that period
those who had previously not accepted the bid can change their
minds. Since the offeree shareholders now have two decisions,
they can rank the three preferences fully. When the offer is first
made, it is not accepted (decision 1); if and when it becomes
clear the majority are in favour of the bid, the offer is accepted
(decision 2). Decision 1 gives effect to the first preference; when
it becomes clear that the first preference is not available,
decision 2 gives effect to the second preference.
THE PROCEDURE FOR MAKING A BID
28–49
Having dealt with the two central features of the Code, the
allocation of decision-making on the bid to the shareholders of
the target company and equal treatment of target shareholders,
we now turn briefly to the procedure for making the offer. Much
of this is concerned with putting the shareholders of the target in
a position in which they can effectively take the decision which
has been allocated to them, but other policy goals are also
evident, such as that the company should not be subject to a bid
or bid speculation for an excessive period of time or that false
markets in the securities involved should not be created.
However, since the Code applies only once a potential acquirer
has decided it wishes, or might wish, to put an offer to the
shareholders of the target company, there is a prior period which
may be important for the success of the bid but where the
relevant rules are not to be found in the Code. We divide the bid
process into three periods: before an approach is made by the
bidder to the target board; before a firm offer is made to the
target shareholder; and after a firm offer has been made to the
target shareholders.
Before the approach to the target board
28–50
The main issues here relates to the acquisition of shares in the
potential target company. A potential acquirer, although not yet
committed to making a bid, may want to increase the chances of
the bid ultimately succeeding by building up as large a stake in
the company as possible before hand. As we have seen, the
mandatory bid rule puts a cap of 30 per cent on this strategy, but,
in fact, long before that stage is reached, the potential bidder’s
stake in the company will have become public knowledge in the
market and the share price will have responded appropriately. A
more important question, therefore, may be how far the potential
bidder can go in acquiring shares in the company without
knowledge of the acquisitions seeping into the market. Such
shares may be particularly valuable to the potential bidder, not
only because they are acquired cheaply but also because, if the
bidder is defeated in the event by a “white knight” competitor,
the defeated bidder can assent these shares in the competitor’s
bid and make a profit, which may help to off-set some of the
costs of its failed bid.175 So, the central question is one of
disclosure of acquisitions of shares. Conversely, the board of a
potential target company will want to keep a close eye on its
share register, both in order to see if a potential bidder is
building up a stake in the company and to see if shareholders are
appearing who are likely to be susceptible to an offer, if one is
made (for example, certain types of hedge fund). Most of these
events are likely to take place before the Takeover Code applies
and so the relevant rules are to be found in the Companies Act
and other legislation.
An initial apparent advantage for the board and disadvantage
for the acquirer is that the names of those who are on its register
of shareholders are known both to the company and the public.176
However, the registered shareholder is often not the beneficial
owner of the share,177 and so the appearance of a new name on
the register does not necessarily reveal much useful information,
whilst large shareholdings can be split up across a number of
registered nominee holders. Information about beneficial holders
of shares is obtainable under two sets of provisions. First,
beneficial holdings at the 3 per cent level and above are required
to be disclosed under the vote-holding disclosure rules discussed
in Ch.26.178 It is not intended to repeat that discussion here but
its importance should be noted. In effect, a cap of 3 per cent is
set on the shares an acquirer can obtain cheaply in order to offset
the costs of a failed bid, so that there must be doubts about the
financial adequacy of this method of combating the disincentive
effect of permitting competing bids.
Company-triggered disclosures
28–51
The second set of disclosure provisions contain no threshold
requirements, and so are potentially more extensive than the
general vote-holder disclosure rules, but they do not operate
automatically but must be triggered by the company on each
particular occasion it requires information and in relation to each
potential holder. These rules are in Pt 22 of the Companies Act
2006. They enable the directors of a public company to serve a
notice upon persons suspected of being interested in its voting
shares seeking information about that interest and permitting the
company to apply to the court for restrictions on the voting and
transfer of the shares if that information is not forthcoming. The
statutory provisions are often supplemented by provisions in the
company’s articles which expand the board’s powers, for
example, by permitting the directors to impose the restrictions
without application to the court and to impose them in a wider
range of situations.179
Section 793 provides that a public company (whether its
shares are traded on a public market or not) may serve notice on
a person whom it knows to be, or has reasonable cause to believe
to be, or to have been at any time during the three years
immediately preceding the date of the notice, interested in voting
shares of the company. The notice may require that person to
confirm that fact and, if so, (a) to give particulars of his own past
or present interest; (b) where the interest is a present interest and
any other interest subsists or subsisted during the three-year
period at a time when his own interest did, to give particulars
known to him of that other interest; or (c) where his interest is a
past interest, to give particulars of the identity of the person to
whom that interest was transferred.180 In cases (a) and (b) the
particulars to be given include the identity of persons interested
and whether they were members of a concert party or there were
any other arrangements regarding the exercise of any rights
conferred by the shares.181 The notice must require a response to
be given in writing within such reasonable time as may be
specified in the notice.182
The initial notice will normally be sent to the person named
on the shareholder register and, if he is the sole beneficial owner
of the shares, he will normally say so (at any rate once the likely
consequences of refusing to respond are explained to him). But
in other cases the notice may merely be the beginning of a long
and often abortive paper-chase. If the recipient of the notice is a
nominee it may well decline to say more than that, claiming that
a duty of confidentiality forbids disclosure or, if the nominee is,
say, a foreign bank, that the foreign law makes it unlawful to
disclose the name of the person on whose behalf the nominee
holds the shares. In principle, this is a breach of the duty under
s.793 (since the nominee is bound to give details of the “other
interests” known to it, i.e. that of the person upon whose behalf
the nominee holds the shares). Alternatively, the nominee may
disclose the nominator’s identity, but the latter, if resident
abroad, may refuse to provide any further information.
Ultimately, as a result of the possibility of the freezing and
disenfranchisement of the shares (see below), the true ownership
may be disclosed—but not always.183 Such information
regarding interests in the shares as may be elicited as a result of
the notice (or a succession of notices as the company follows the
trail) must be entered on a public register, with the information
being entered against the name of the present holder of the
shares.184 The rules applying to this register, including court
control of public access for a non-proper purpose, are the same
as those applying to the company’s register of members, and
most companies will use the share register for this purpose as
well.185
28–52
The Act recognises that members of the company may have a
legitimate interest in securing that the company exercises its
powers under s.793, even if the board does not want it to
(perhaps because the directors or some of them may fear that it
may bring to light breaches by them of their obligations to notify
their dealings under the rules discussed in Ch.26). Hence, under
s.803, members holding not less than one-tenth of the paid-up
voting capital—a very high threshold in the case of a publicly
traded company—may serve a requisition stating that the
requisitionists require the company to exercise its powers under
s.793, specifying the manner in which those powers are to be
exercised186 and giving reasonable grounds for requiring the
powers to be exercised in the manner specified.187 It is then the
company’s duty to comply.188 If it does not, every officer of the
company who is in default is liable to a fine.189 On the
conclusion of a shareholder-initiated investigation, the company,
under s.805, has to prepare a report of the information received
which has to be made available at the company’s registered
office within a reasonable time190 after the conclusion of the
investigation.191 If it is not concluded within three months
beginning on the day after the deposit of the requisition, an
interim report on the information already obtained has to be
prepared in respect of that and each succeeding three months.192
Any report has to be made available for inspection by any person
at a place notified to the registrar, unless the company chooses to
make it available at its registered office193 and the requisitionists
must be informed within three days of the report becoming
available.194
Sanctions
28–53
A person who fails to comply with a s.793 notice, whether
initiated by board or shareholders, or, in purported compliance
with the notice, knowingly or recklessly makes a false or
misleading statement commits an offence, which can be
sanctioned by imprisonment, unless the defendant shows the
requirement was frivolous or vexatious.195 What, however,
makes the foregoing sections more effective than they would
otherwise be is that, if a notice is served on a person who is or
was interested in shares of the company and that person fails to
give any information required by the notice, the company may
apply to the court for an order directing that the shares in
question be subject to restrictions.196 However, it should be noted
that the information a company may require under the notice is,
perhaps not surprisingly, limited by what the person asked
knows. If the company obtains no useful information, because
the person asked does not have it, there is no breach of s.793 and
restrictions cannot be imposed on the shares.197
The restrictions are that:
(a) any transfer of the shares is void;
(b) no voting rights are exercisable in respect of them;
(c) no further shares may be issued in right of them or in
pursuance of an offer made to their holder; and
(d) except in a liquidation, no payment by the company, whether
as a return of capital or a dividend, may be made in respect of
them.198
Thus, although the company may never track down the
ultimate beneficial owner of the shares, it can take them out of
consideration with regard to a takeover bid through the
restrictions imposed by the court or under the articles.
Nevertheless, the restrictions constitute a draconian penalty,199
which may be detrimental to wholly innocent parties, for
example bona fide purchasers of, or lenders on the security of,
the shares. Although the court has a discretion whether to make
the order imposing the restrictions, an order should normally be
made if that knowledge has not been obtained, since “the clear
purpose [of Pt 22 of the Act] is to give public companies, and
ultimately the public at large, a prima facie unqualified right to
know who are the real owners of its voting shares”. If an order is
made, it has to impose all four restrictions without any
qualifications designed to protect innocent parties.200 However,
an application can be made to the court by the company or any
aggrieved person for the restrictions to be relaxed on the grounds
that they “unfairly affect” the rights of third parties, and the
court is given a broad power to do so.201 The court also has the
power to remove the restrictions altogether,202 but this normally
can be done only if the court is “satisfied that the relevant facts
about the shares have been disclosed to the company and no
unfair advantage has accrued to any person as a result of the
earlier failure to make that disclosure”.203 To this there are two
exceptions. If the shares are to be transferred for valuable
consideration and the court approves the transfer,204 an order can
be made that the shares should cease to be subject to the
restrictions.205 Further, the court, on application by the company,
may order the shares to be sold,206 subject to the court’s approval
as to the terms of the sale,207 and might then also direct that the
shares should cease to be subject to the restrictions.208
Interests in shares and acting in concert
28–54
As is usual in the disclosure area, what has to be disclosed is not
just ownership of shares but “interests in shares”. However, the
legislation does not use the Code’s definition of “interests in
shares” but has its own, set out in ss.820 to 823. It is widely
formulated so as to include an interest in shares “of any kind
whatsoever”, but it is not so wide as to include interests in shares
of a purely economic character, such as CfDs.209 Part 22 also
contains a “concert party” provision, again not that of the Code,
but set out in ss.824 and 825, under which the interests of one
concert party can be attributed to all members. The agreement
must relate to the acquisition of interests in shares and indeed the
agreement is not caught by the section until an interest in
securities is in fact acquired by one of the parties to it in
pursuance of the agreement.210 Thus, the section does not apply
to a simple voting agreement between existing shareholders.
Further, the agreement must include provisions imposing
restrictions on dealings in the interests so acquired211: an
agreement to acquire shares which the acquirer is then free
immediately to dispose of is not caught by the section. The
“agreement” need not be an enforceable contract, but the section
does not apply to an agreement which is not legally binding
“unless it involves mutuality in the undertakings, expectations or
understandings of the parties to it”.212 Each member of the
concert party is taken for the purposes of the disclosure notice to
be interested in all shares in which any member of the concert
party has an interest, whether or not those interests were
acquired in pursuance of the agreement.213 Any notification
which a party makes with respect to his interest must state that
he is a party to a concert party agreement, must include the
names and (so far as known to him) the addresses of the other
parties and must state whether or not any of the shares to which
the notification relates are shares in which he is interested by
virtue of the concert party provision and, if so, how many of
them.214
Before a formal offer is made to the target
shareholders
28–55
Once a bid is imminent, the Takeover Code rules become the
dominant source of obligation, though the rules discussed in the
previous section continue to operate. Rule 1(a) of the Code
prohibits an offeror from simply putting its offer directly to the
shareholders of the target: it must “notify a firm intention to
make an offer in the first instance to the board of the offeree
company or its advisers”. This is to enable the board of the target
to form a view on the merits of the offer and to advise the
shareholders accordingly. As we have seen above, the Code
requires the board to give such advice to the shareholders and,
indeed, to obtain independent advice on the bid and make it
known to the shareholders. Rule 1 facilitates this process:
without it, the board of the target might be left scrambling
around trying to fulfil its duties under r.3.
Apart from this, there are two different timing problems
relating to the public disclosure of the bid proposal with which
the Code has to deal. The bidder may delay disclosure, perhaps
in order to continue acquiring shares in the target company.
Alternatively, the bidder may be eager to put the possibility of a
bid into the public domain. As r.1(b) recognises, what the board
of the target often first receives is not so much the details of a
firm offer proposed to be made to the shareholders as “an
approach with a view to an offer being made”. There are a
number of good reasons why this should be. First, the offeror
may wish to obtain the target board’s recommendation of the
offer and so wishes to indicate that there is some flexibility in
the terms of its offer and that it is prepared to negotiate with the
board for its support. Secondly, the offeror may genuinely be in
doubt about the value of the target and may wish to secure
access to the target’s books in order to be able to formulate a
precise offer to be put to the shareholders. Especially in the case
of highly leveraged bids, it is crucial for the offeror not to find
any unpleasant surprises after it has obtained control which
would jeopardise its ability to pay the interest on or repay the
often very large loans it has taken out to finance the bid. Offers
by private equity bidders, accordingly, are rarely hostile. This
puts the target board in a negotiating position, because there is
nothing in the Code or the general law which requires the board
to give the potential bidder such access. Thirdly, the bidder may
make an informal approach, but also let it be known publicly that
such an approach has been made, in order to induce the larger
shareholders to put pressure on their board to co-operate with the
bid, notably by granting access to the company’s books. This
third situation caused the Panel some concern in its 2010 review,
on the grounds that it created a “virtual bid” period of uncertain
duration, i.e. one in which the company is effectively “in play”
but no firm offer for the company has been announced. We
begin with discussion of this problem.
Put up or shut up
28–56
Where a public but non-firm approach, which puts the company
“in play”, has been made, senior management of the potential
target will concentrate on little else until the acquirer walks away
or a firm offer is made and is either accepted or rejected.
However, no firm intention to make an offer having yet been
announced, the time limit contained in the Code for posting the
offer to the target shareholders is not triggered. On the other
hand, the announcement of a possible offer triggers the Code’s
definition of the “offer period”, at which point the ban on
defensive action by the target board without shareholder
approval is triggered.215 So, the target board is stymied, but the
acquirer used to be under no obligation to push on with its offer.
To meet this concern, the Code for some time contained a “put
up or shut up” (PUSU) provision, enabling the potential target to
request the Panel to set a time limit within which the bidder had
either to make an announcement of a firm intention to make an
offer or to state that it did not intend to make a bid, and in the
latter case the bidder (and a person acting in concert) would not
normally be able to bid until six months had passed. Such
applications to the Panel by potential targets were not infrequent,
but in its 2010 review the Code Committee concluded that
boards were often reluctant to make such applications,
presumably for fear of shareholder ire, even though the
company’s management was “destabilised” by the possible offer
announcement. Consequently, it recommended shifting the
burden of action under the PUSU rule.216 Except with the
consent of the Panel, a possible offeror, who must be named in
the possible offer announcement, must make a further
announcement one way or the other within four weeks of the
possible bid announcement, with the consequence noted above if
the further announcement is that it will not proceed with an
offer.217 However, the Panel will normally extend the deadline
for the further announcement if the target board requests this.
This amendment clearly promotes the policy underlying GP 6
that “an offeree company must not be hindered in the conduct of
its affairs for longer than is reasonable by a bid for its
securities”.
Faced with the PUSU requirement, a potential bidder might
move on to make an announcement of a firm intention to make
an offer, but hedge that offer about with conditions, so that it can
react appropriately to any negative information about the target
which subsequently emerges. Where a bidder seeks to make an
actual offer subject to conditions, its freedom to do so is severely
constrained by the provisions of r.13, but originally that rule did
not apply to announcements of a firm intention to make an offer,
where, in consequence, the bidder had a freer hand. However, in
2004 the Panel decided to apply the provisions of r.13 (discussed
below) to “firm intention” statements as well.218 This Rule
promotes certainty, for both the shareholders and the board of
the target company. Thus, the “PUSU” rule forces the potential
bidder to clarify its intentions since r.13 now constrains the
bidder’s freedom to avoid PUSU by employing a heavily
conditional firm intention statement.
Once a “firm intention” announcement is made, whether
because of the operation of the PUSU rule or not, the offeror
becomes obliged in the normal case to proceed with its bid and
to post the formal offer document to the shareholders within 28
days of the announcement.219 Moreover, at the firm
announcement stage a good deal of information about the
forthcoming bid must be provided.
Initial announcements
28–57
The bidder strategy discussed above depends on an
announcement of a possible offer being made at an early stage.
However, there are incentives for potential bidders to delay
announcements in some situations. A possible bid creates
tempting opportunities for insider trading on the part of those
privy to the bid preparations, not only those within the bidder
itself but those involved as financial or legal advisers. We have
seen that the acquisition of shares in the target by or on behalf of
the bidder itself does not normally amount to insider trading, but
acquisitions by or on behalf of other persons would.220 Insider
dealing also constitutes market abuse under the Market Abuse
Regulation, in respect of which the FCA can impose civil
penalties, including, in this case, on corporate bodies involved.
In spite of the frequent and unexplained rises in the share prices
of target companies in the period before takeover
announcements are made, the FCA has not had great success in
identifying the culprits.221
The Code approaches this problem by, first, insisting on the
“vital importance of absolute secrecy before an announcement of
a bid” (r.2.1) and, secondly and probably more effectively, by
requiring a public announcement if that secrecy is not or is not
likely to be maintainable, for example, where the target is
subject to “rumour and speculation” or where the bidder is
taking its discussions about a possible bid beyond “a very
restricted number of people” (r.2.2). Once an approach has been
made to the board of the offeree company, the primary
responsibility for making an announcement rests with that board,
but what is announced will depend upon how far matters have
progressed when an announcement has to be made. As we have
seen, it may be no more than a statement that an offer may
possibly be forthcoming (but with no guarantee that it will). Rule
13 about conditions does not apply to announcements which are
not firm.222
The formal offer
Conditions
28–58
Once a company posts its formal offer documents to the
shareholders of the target, the bid is open to acceptance by the
shareholders to whom it is addressed. One aim of the Code in
this situation is that the shareholders should have a clear
proposition to accept or reject. As we have noted already, r.13 of
the Code imposes restrictions on the conditions which the bidder
can attach to its offer. An offer must not be subject to conditions
which depend solely on subjective judgments by the directors of
the offeror or the fulfilment of which is in their hands.
Otherwise, offerors would be free to decide at any time to
withdraw an offer, whereas one purpose of the Code is to ensure
that only serious offers are put forward for consideration. The
note to r.13.4 makes it clear that this means that normally the
bidder cannot make its offer subject to satisfactory financing
being available for the offer: the bidder must not make an offer,
or even announce a firm intention to make an offer, if the
financing is not already in place.223 This implements GP 5. The
main exception to this principle arises where the bidder intends
to raise the cash for the bid through a new issue of shares and its
shareholders’ approval is required for the share issue, either by
the Act or under the rules applicable to the market on which the
shares are traded. In this case, the offer must be made
conditional on the necessary consent and the condition is not
waivable by the bidder.224 Even if the inclusion of the condition
does not fall foul of the above restriction, the condition must not
actually be invoked by the bidder unless the circumstances
which have arisen are of “material significance” to the offeror in
the context of the bid.225
However, some conditions are common in offers, and are even
required by the Code. The offeror is required by r.10 to make its
offer for voting securities conditional on acceptances of a
sufficient level to give it, together with securities already held,
50 per cent of the voting rights in the offeree company. Thus, the
bidder must either end up with legal control of the target
company or the bid must lapse and the bidder acquires none of
the shares which have been assented to the offer. This is
regarded by the Panel as a very important provision, as the
extensive notes to r.10 make clear, dealing with the operation of
the Rule in a variety of circumstances likely to arise in practice.
As r.9.3 makes clear, it also applies to mandatory bids. The
offeror may choose to, and often does, make a voluntary offer
conditional upon a higher level of acceptances, though it will
normally also reserve to itself the right to waive the higher
condition during the bid. The offer may be conditional upon the
offeror achieving 75 per cent of the voting rights, so as to be able
to pass a special resolution; or even on achieving 90 per cent of
the shares bid for (so as to be able to avail itself of the statutory
squeeze-out procedure discussed below). Hence, an important
stage in the progress of a bid is when it becomes or is declared
“unconditional as to acceptances”.
Rule 12 requires a condition to be inserted in the offer to deal
with the fact that a competition authority consent may be needed
for the offer to be consummated. The condition is to the effect
that the bid will lapse if there is a reference to the competition
authorities before the offer becomes unconditional as to
acceptances. Except for a mandatory bid, where reinstatement is
mandatory, the offeror has a choice whether to reinstate its bid,
if the competition authorities ultimately clear it.226
Timetable
28–59
We have already seen that r.30.1 imposes a 28-day-limit for the
posting of the offer document after a firm intention to bid has
been announced. That is a maximum limit in order not to leave
the target board and shareholders in a state of uncertainty. Once
the offer is posted, the Code is still concerned with the overall
length of the process and r.31.6 stipulates that the offer may not
remain open for acceptances once the 60th day after the offer
was posted has passed. There are some exceptions, in particular
that the “60th day” is set by reference to the competing bidder’s
timetable if there is a competing offer or can be adjusted where
the board of the target company agrees to a longer period.
However, within the offer period, the Code is also concerned
with setting minimum time periods, in order that the
shareholders have an opportunity to properly consider the offer
and are not pushed into a “snap” decision on it. An offer must
initially be open for acceptance for at least 21 days, as required
by r.31.1. This date is referred to as the “first closing date” of the
offer. If this is later extended, as it normally may be, a new date
must be specified, but there is no obligation to extend an offer
(rr.31.2 and 31.3). Moreover, if it is stated that the offer will not
be extended, only in exceptional cases will the Panel allow it to
be so. This is laid down in r.31.5, not merely because the offeror
should not break its promises but in order to prevent
shareholders being pressurised into accepting before the current
closing date by false statements that they will lose all chance of
availing themselves of the offer unless they accept before that
date.
In some cases the offer may be revised (i.e. improved),
sometimes more than once. This is particularly likely to occur if
there is a contested takeover. In such circumstances each rival
bidder, having already incurred considerable expense, is likely to
go on raising its bid and trying to get its new one recommended
by the board of the target. Even if it loses the battle, the defeated
bidder will at least be able to recover part of the expenses out of
the profit it will make by accepting the winner’s bid in respect of
its own holdings.227 Moreover, even if there is no contest, an
offeror may be forced to increase its bid if proves unattractive to
the target shareholders or if the bidder or its associates or
members of its concert party acquire shares outside the offer at
above the price of its offer, as we have seen above. If an offer is
revised, it must be kept open for at least 14 days after the revised
offer document is posted (r.32.1). All shareholders who have
accepted the original offer are entitled to the revised
consideration (r.32.3) and new conditions must not be introduced
except to the extent necessary to implement an increased or
improved offer and with the prior consent of the Panel (r.32.4).
“No increase” statements are treated by r.32.2 in essentially the
same way, and for the same reasons, as “no extension”
statements, i.e. the bidder is allowed to go back on them only in
“wholly exceptional” circumstances, unless the bidder has
specifically reserved its freedom in the “no increase” statement
to increase the offer in the circumstances which have arisen.
28–60
In general, as r.33.1 makes clear, the foregoing rules apply
equally to alternative offers in which the target’s shareholders
are given the option to choose between different types of
consideration (e.g. shares or cash). In other words, the
shareholders retain their options so long as the offer remains
open. But where the value of a cash alternative provided by a
third party is more than half the maximum value of the primary
share option, the offeror is not obliged to keep that offer open, or
to extend it, if not less than 14 days’ written notice to
shareholders is given reserving the right to close it on a stated
date.228 This “shutting off” of the cash alternative provided by a
third party is permitted because underwriters will be reluctant to
agree to remain at risk for an indeterminate period. However, the
bidder’s freedom to “shut off” a cash alternative does detract
from the offeree’s freedom to wait and see what the other
shareholders do before accepting the offer. It is significant that it
is not permitted in mandatory bids, where a cash offer or a cash
alternative is required, and there is no danger of bidders
responding to the lack of a “shut off” opportunity by simply not
arranging for a cash alternative to be available.
The combination of the maximum period for the formal offer
(normally 60 days) and the minimum period for revised offers to
remain open (14 days) means that an offer cannot normally be
revised after the 46th day. However, where there are competing
bidders still in the field at this point, the Panel has come to the
conclusion that this freezing of the offers on the 46th day is an
unacceptably inflexible rule. It will therefore conduct an auction,
with revisions being announced into the final period, according
to a procedure determined ad hoc for the particular bid (r.32.5).
Bid documentation
28–61
The offer will, of course, be a longer and more detailed
document than the announcement of the firm intention to make a
bid. After a general statement in r.23 that shareholders must be
given sufficient information and advice to enable them to reach a
properly informed decision as to the merits or demerits of an
offer and early enough to decide in good time, r.24 (divided into
16 sub-rules) states what financial and other information the
offer document must contain and r.25 (divided into nine sub-
rules) what information must be contained in circulars giving
advice from the target company’s board. The information
required is extensive but need not be considered in detail here,
beyond saying that it is very much what one would expect in the
light of the nature of the documents. It is worth noting that the
documentation issued by a bidder on a share-exchange offer
need no longer comply with the FCA’s rules, since it does not
constitute a prospectus.229
Employees’ interests
28–62
Following the adoption of the Directive, the interests of
employees received slightly more explicit consideration in the
Code than before, mainly at the level of information provision,
and these provisions were further strengthened in the 2010
review. Rule 24.2 requires the bidder to state in its offer
document “its intentions with regard to the future business of the
offeree company and explain the commercial justification for the
offer” as well as its intentions with regard to continued
employment of the employees and management of the offeree
company, material changes in working conditions, strategic
plans for the offeree company and their likely impact on
employment, and the redeployment of the fixed assets of the
company. It must also state its intentions on these matters in
relation to the business of the offeror company. So, much more
is required to be stated about intentions vis-à-vis employees than
previously. Rule 25.2 requires the board of the target, when
giving its opinion on the offer, to include its views, and the
reasons for those views, on the implications of the bid for the
employees and its views on the offeror’s strategic plans. These
documents, and any revised offer and a target board opinion
thereon, must be made available to the representatives of the
employees or, in their absence, to the employees themselves230;
and the offeree board must attach the opinion of the employee
representatives to its response circular or publish it on its
website.231 None of this gives the employees any formal say in
the bid decision, though it may give them information upon
which to organise political or social pressure in relation to the
offer. For a more formal input to the bid decision, the employees
or their representatives must look elsewhere. Thus, where a
statutory information and consultation arrangement is in place,
both bidder and target may need to consult employee
representatives on the employment consequences of the bid or of
defensive measures.232
In the takeover of Cadbury by Kraft in 2009 the bidder
unwisely committed itself not to close a factory in the UK which
the target management had decided to shut down. Having
obtained control, the bidder discovered there were very good
reasons for the previous management’s decision and reneged on
its commitment. This caused a political storm, as a result of
which r.19 was amended to deal with “post offer” statements and
undertakings, i.e. statements made during an offer about how a
party (typically the bidder) intends to act after the end of the
offer period. The amendments apply generally to post-offer
statements and undertakings, but these will often be given in
relation to employment matters in order to defuse employee or
public opposition to the bid. The amendments first require the
party to be clear whether it is making a statement of intention
(r.19.8) or giving an undertaking (r.19.7) about its post-offer
conduct. The requirements on intention statements are less
demanding than those on undertakings. For intention statements
the statement must accurately reflect the party’s intentions at the
time it is made and be made on reasonable grounds. For 12
months after the offer has closed (or such other period given in
the statement), a party intending to depart from its statement
must consult the Panel and, having done so, it must publicly
announce its change of heart and explain the reasons for it. The
intention statement rules recognise that intentions may genuinely
change but they impose a form of “comply or explain” rule, first
in relation to the Panel and then in relation to the market and
public opinion, in an attempt to control opportunistic changes of
mind.
The rules on undertakings are, not surprisingly, more robust.
The Panel must be consulted in advance of the undertaking being
given and the undertaking must be precisely formulated. In
particular, qualifications or conditions attached to the
undertaking must be capable of objective assessment (ie not be
dependent on the subjective judgement of those giving the
undertaking). Even if these conditions are met, a person seeking
to invoke a condition or qualification post-bid must obtain the
Panel’s consent. The giver of the undertaking must report
periodically to the Panel on progress, or lack of it, towards its
implementation, which reports the Panel may publish. If the
Panel has doubts about the quality of these reports, it may
appoint an independent supervisor to monitor compliance and to
report to the Panel. The regulation of intention statements and
undertakings was not an easy issue for the Panel, because it
required regulation of post-offer behaviour. Once the offer
period is over the Panel’s role has traditionally been limited, as
discussed below, essentially confined to enforcing its rules on
when a failed bidder may bid again. It is notable that in
extending its regulatory reach the Panel did not put in the
forefront the use of its new legal powers,233 but relied instead on
the domestic remedies of Panel consultation and approval and
disclosure.
Curiously, however, the strongest mechanism for the
protection of employee interests may found in the pensions
legislation. Where a highly leveraged bid for a target company is
successful, the level of risk in the target company increases,
including the risk that the company will default on its obligations
under an occupational pension scheme. In that situation, the
Pensions Regulator has a, still somewhat ill-defined, power to
require the bidder to make extraordinary payments into the fund,
which the bidder may either do, and so give the pensioners
greater financial protection, or refuse to do and decide not to
make an offer. The potential power of the Regulator puts the
pension scheme trustees in a position to negotiate with the bidder
as to the terms upon which they will regard it proper not to seek
the Regulator’s intervention.234
Profit forecasts and valuations
28–63
In the case of an agreed recommended takeover with no rival
bidders, no more may need stating than the Code requires. But,
in the case of a hostile bid or where there are two or more rival
bids, each of the companies involved will probably want to make
optimistic profit forecasts about itself235 and to rubbish those of
the others. All profit forecasts are unreliable and those made in a
takeover battle more unreliable than usual. Hence, r.28 (with
eight sub-rules) lays down stringent conditions about them. In
particular, the forecast “must be compiled with due care and
consideration by the directors whose sole responsibility it is” but
“the financial advisers must satisfy themselves” that it has been
so compiled.236 The assumptions on which the forecast is based
must be stated both in the document and in any press release.237
Except for a bidder’s forecast in a pure cash offer, the forecast
must be reported on by the auditors or consultant accountants
(and sometimes by an independent valuer238) and the report sent
to the shareholders239 and, if any subsequent document is sent
out, the continued accuracy of the forecast must be confirmed.240
All this is wholly admirable but the evidence does not suggest
that it has made such forecasts significantly more reliable.
Somewhat similar requirements apply when a valuation of
assets is given in connection with an offer.241 These valuations
tend to vary according to whether it is in the interests of the
company which engages the “independent” valuer that the value
should be high or low; but at least the valuer of real property is
likely to have more objective evidence in the form of prices
recently paid for comparable properties. Rule 19.1 lays down a
general principle that all documents, advertisements and
statements made during the course of an offer “must be
presented with the highest standards of care and accuracy and
the information given must be adequately and fairly presented”.
Note 9 makes it clear that statements about the expected
financial benefits of a takeover to the bidder (often referred to as
“synergies”), which fall short of constituting profit forecasts, are
nevertheless regulated in a similar manner, with assumptions
stated and reports from financial advisers.
Liability for misstatements
28–64
Although there has not been space here to discuss the details, it
is clear that the Code attaches the highest importance to the
provision to shareholders of complete and accurate information
about the bid and any defence to it. Without such guarantees, the
Code’s purpose of placing the decision on the commercial
acceptability of the offer in the hands of the shareholders of the
target company might seem unrealistic, as might the Panel’s own
refusal to make any assessment of the commercial merits of the
bid.242
Suppose, however, an inaccuracy is present in the information
put out by the bidder or target companies and a person later
wishes to claim compensation for the loss said to have been
suffered thereby. The Panel now has the power to award
compensation but this is not one of the areas in which it has
sought to implement the power, nor will compensation under
FSMA normally be available.243 However, this is an area in
which the Code intersects with the general law, in the sense that
there may well be legal remedies available to shareholders who
have suffered loss as a result of inaccurate or incomplete
information provided in the course of a takeover bid.244 Applying
generally, that is, to both bidder and target documentation, is the
common law liability for negligent misstatement, which, even
after the decision of the House of Lords in Caparo Industries Plc
v Dickman,245 would seem capable of imposing liability upon the
issuers of documentation in the course of takeover bids towards
the shareholders of the target company, to whom it is clearly
addressed, where such shareholders act in reliance upon the
information to either reject or accept the offer made.246 Indeed,
in the post-Caparo case of Morgan Crucible & Co v Hill Samuel
& Co247 the Court of Appeal refused to strike out a claim by the
bidding company against the directors of the target that
inaccurate statements made by the target company in the course
of a bid had been intended to cause the bidder to raise its bid,
which it had done to its detriment.
Dealings in shares
28–65
General Principle 4 states that “false markets must not be created
in the securities” of the offeror or offeree company. The Code
has always sought, however, to permit dealings in the securities
of companies involved in a bid to continue during the bid period.
Apart from the insider dealing laws, already discussed, the main
restrictions are these. Once the “offer period” starts (triggered by
the first public announcement about the bid, even if it is only
about a possible offer) and has not ended (with the first closing
date or, if later, the offer becoming or being declared
unconditional as to acceptances),248 the offeror and persons
acting in concert with it must not sell any securities in the target
company without the consent of the Panel.249 Moreover, during
that period requirements for disclosure of dealings, additional to
and stricter than that required by the Act, come into operation.250
Solicitation
28–66
There is an obvious temptation for both bidder and target to
engage in high-pressure salesmanship in the case of a hostile or,
especially, a contested takeover. There are firms specialising in
the art of persuading reluctant shareholders. It is increasingly
common for the services of such firms to be recruited by the
parties or their financial advisers. Rule 19 of the Code is
designed to curb the excesses which may result (and sometimes
have done). The sub-rules of particular interest include r.19.4
which prohibits the publication of an advertisement connected
with an offer unless it falls within one of nine categories, and,
with two exceptions,251 it is cleared with the Panel in advance.
The Panel does not attempt to verify the accuracy of
statements,252 but if it subsequently appears that any statement
was inaccurate the Panel may, at least, require an immediate
correction.253 This pre-vetting, however superficial, is a powerful
disincentive to window-dressing and to “argument or
invective”.254 The rule applies not only to press advertisements
(which must not include acceptance or other forms255) but also to
advertisements in any of the ever-expanding media available256
and in each case the advertisement must “clearly and
prominently” identify the party on whose behalf it is being
published.257
The Rule, however, covers only advertising material of which
there will be a record. The greater danger arises from unrecorded
oral communications, which cannot be vetted in advance or
scrutinised afterwards. However, an attempt is made to control
these. Rule 19.5 provides that, without the consent of the Panel,
campaigns in which shareholders are contacted by telephone
may be conducted only by “staff of the financial advisers who
are fully conversant with the requirements of, and their
responsibilities under, the Code”, and it adds that only
previously published information which remains accurate and
not misleading may be used, and that “shareholders must not be
put under pressure and must be encouraged to consult their
financial advisers”. However, in recognition, no doubt, that the
parties will have selected their financial advisers on the basis of
their financial expertise and reputation rather than their ability to
woo, the Panel may consent to the use of other people, subject to
the Panel’s approval of an appropriate script which must not be
departed from, even if those rung up ask questions which cannot
be answered without doing so, and to the operation being
supervised by the financial adviser.258
28–67
The telephone campaign rules focus on solicitations in favour of
or against a bid which is on the table. But campaigning may
begin before this. Rule 4.3 provides that any person proposing to
contact a private individual or small corporate shareholder with a
view to seeking an irrevocable commitment consult the Panel in
advance. An irrevocable commitment is an undertaking to accept
the offer, if one is made, though they often contain qualifications
which release the promisor if a rival bid emerges at a higher
price. A Note to r.4.3 states that the Panel will need to be
satisfied that the proposed arrangements will provide adequate
information as to the nature of the commitment sought and a
realistic opportunity to consider whether or not it should be
given and with time to take independent advice. It adds that the
financial adviser will be responsible “for ensuring compliance
with all relevant legislation and other regulatory
requirements”.259 Furthermore, Note 3 to r.19.5 stipulates that
the Panel must be consulted before a telephone campaign is
conducted with a view to gathering irrevocable commitments in
connection with an offer. Short of a total ban on cold-calling this
seems to regulate it in this context as satisfactorily as is
reasonably possible—assuming that financial advisers can be
relied on to observe the Rules.
Rule 19.6 says that parties, if interviewed on radio or
television, should seek to ensure that the interview, when
broadcast, is not interspersed with comments or observations
made by others. It also provides that joint interviews or public
confrontations between representatives of the contesting parties
should be avoided.
The more serious problem, arising from meetings with
shareholders or those who are likely to advise them, is dealt with
in r.20.1 which provides that “information about companies
involved in an offer must be made equally available to all
offeree company shareholders as nearly as possible at the same
time and in the same manner”.260 Despite this, meetings with
institutional shareholders, individually or through their
professional bodies, are likely to be held, as, often, are meetings
with financial journalists and investment analysts and advisers.
Note 3 to the Rule permits this, “provided that no material new
information is forthcoming and no significant new opinions are
expressed”. If that really is strictly observed, one wonders why
anybody bothers to attend such meetings.261 But many do, and
when a representative of the financial adviser or corporate
broker of the party convening the meeting is present (as must be
the case unless the Panel otherwise consents), the representative
generally seems able to confirm in writing to the Panel (as the
Note requires) that this Rule was observed. If such confirmation
is not given, a circular to shareholders (and, in the later stages, a
newspaper advertisement also) must be published giving the new
information or opinions supported by a directors’ responsibility
statement.
The post-offer period
Bidding again
28–68
If the first offer fails, the Code’s policy is that the target should
be given some respite before the acquirer makes a second offer.
Rule 35.1 provides that, except with the consent of the Panel,
when an offer262 has not become wholly unconditional within the
bid timetable or has been withdrawn or has lapsed, neither the
offeror nor any person who has acted or now is acting in concert
with it, may, within the next 12 months: (a) make or announce
another offer for the target company; (b) acquire any shares of
the target company which would require a mandatory bid on the
part of the acquirer; (c) be a member of a concert party which
acquires 30 per cent or more of the voting rights in the offeree
company263; (d) make any statement which raises the possibility
that an offer might be made for the offeree company; (e) take
any preliminary steps in connection with an offer (to be made
after the end of the 12 months) which might become known
outside the immediate circle of the company’s top management
and its advisers. Similar restrictions apply following a partial
offer, if one is permitted. Interestingly, the restrictions apply to a
partial bid for between 30 and 50 per cent of the target, even if
that bid is successful. In other words, having had one bite at the
cherry, the bidder cannot come back for a second within 12
months: if the bidder wants to obtain a legally controlling
interest through a partial bid, it must try for this the first time
around.264 Furthermore, if a person or concert party following a
takeover offer holds 50 per cent or more of the voting rights it
must not, within six months of the closure of the offer, make a
second offer, or acquire any shares from the shareholders on
better terms than those under the previous offer.265 This is
another expression of the equality principle. Overall, these
provisions prevent the offeror from continuously harassing the
target and, while the maximum waiting period is only 12
months, that may be long enough to enable the target’s board to
strengthen its defences against further hostile bids by the offeror.
The bidder’s right to squeeze out the minority
28–69
Here we deal with the post-bid consequences of a successful
offer. These are regulated by the Act rather than the Code, since
they involve the compulsory acquisition of shares. It is virtually
unknown for even a well-supported offer to achieve 100 per cent
acceptance. As we have seen above, although a bidder is
normally required to offer for all the equity shares, it may
declare the offer “unconditional as to acceptances” at a less than
full acceptance, provided it ends up with at least 50 per cent of
the voting rights. However, where it is important to the bidder to
obtain complete control of the target (for example, where it
wishes to conduct its business in a way which will not
necessarily be in the interests of the minority shareholders of the
target), it will seek to get to a position where it can squeeze out
any dissenting (or simply non-responsive) minority shareholders.
This may be particularly true of private equity bidders, which
will want to use the target’s assets to secure the loans made to
the bidder to finance the bid. Moreover, the existence of the
squeeze-out removes to some degree the incentive for target
shareholders not to accept an offer from a bidder who they think
will run the target well, so that a target shareholder will be better
off not accepting the bid (provided the majority do so).
Since 1929, the Companies Act has contained a provision
enabling the bidder to squeeze out a minority after a successful
bid. Article 15 of the Takeover Directive now requires Member
States to provide a squeeze-out right, and the Directive’s
provisions led to some amendments in the 2006 Act to the
previous legislation, though the report of the Company Law
Review was a more significant source of reforms.266 Despite the
number of statutory provisions devoted to the squeeze-out, its
practical importance is less extensive as it constitutes only one
way of ejecting an unwanted minority. One attraction of the
scheme of arrangement mechanism (discussed in the following
chapter) for effecting a takeover is that, once the scheme has
been approved by a resolution of the shareholders and approved
by the court, dissenting minorities (or those who simply do not
accept the offer as a result of inertia) will be bound to transfer
their shares, though a scheme is not attractive in a competitive
situation.267 Moreover, the majority required for a scheme is 75
per cent of those voting on the resolution, rather than 90 per cent
of those to whom the offer is addressed required (see below) for
a post-bid squeeze-out. Not only is a higher percentage required
for the squeeze-out, but under that mechanism apathy always
counts against the bidder. A de-listing of the company from the
public equity markets will also act as a strong incentive for the
minority to throw in the towel. Again, this step requires only a
75 per cent vote in favour and, indeed, no vote at all if the
intention to de-list has been stated in the offer document and the
offeror reaches the 75 per cent figure as a result of the offer.268
28–70
The current rules on squeeze-outs are set out in Ch.3 of Pt 28 of
the Act. The basic principle is quite straightforward, though its
implementation gives rise to some complicated provisions.
Assuming a single class of shares has been bid for, the offeror is
entitled to acquire compulsorily the shares of the non-acceptors
if the offer has been accepted by at least 90 per cent in value of
the shares “to which the offer relates” and, if the shares are
voting shares, those shares represent at least 90 per cent of the
voting rights carried by those shares.269 Note that the 90 per cent
figure relates to the shares bid for, not to the total number of
shares of the class, some of which may be held by the offeror
before the bid is launched. These shares are to be excluded from
both the numerator and the denominator when working out
whether the appropriate fraction of the shares has been acquired
as a result of the bid.270 Where there is more than one class of
shares bid for, the 90 per cent test is applied to each class
separately, so that a bidder could end up in a position to squeeze
out the minority of one class but not that of another.271
In contrast to the Code, Ch.3 applies to takeovers of any type
of company within the meaning of the Act whether it is public or
private.272 The offeror need not be a company though in practice
it will usually be a body corporate273 (or in some cases two or
more such bodies).274 The definition of “takeover offer” is one to
acquire (a) all275 the shares of the company (or all the shares of a
class) which on the date of the offer the offeror does not already
hold276; and (b) to do so on the same terms for all the shares (or
all the shares of a particular class).277
28–71
All the apparently simple terms used above are capable of
raising questions of interpretation, most, though not all, of which
are expressly addressed now in the legislation. What, for
example, is an “offer”? In Re Chez Nico (Restaurants) Ltd,278
Browne-Wilkinson VC held that this definition had to be
construed strictly, since the provisions enabled a bidder who had
acquired 90 per cent of the shares to expropriate the remaining
shares, and that accordingly they operated only if the bidder had
made an “offer” in the contractual sense of the word. In the
instant case two directors of the company who were its major
shareholders had circulated the other shareholders inviting them
to offer to sell their shares to them and indicating the price that
those directors would be prepared to pay if they accepted the
offers. As a result, the directors succeeded in acquiring over 90
per cent and then sought to acquire the remainder. On an
application by one of the remaining shareholders, the court
declared that the directors were not entitled to do so, since they
had not made any “offer” but instead had invited the
shareholders offer to them. While this produced the right result
in the instant case,279 the importation into company law of the
subtle distinctions drawn by the law of contract seems
regrettable; in company law many transactions are described as
“offers” or “offerings” when strictly they are invitations to make
offers.280 Moreover, the decision has adverse consequences for a
minority shareholder who, instead of wanting to remain a
shareholder in the taken-over company, wishes to exercise his
rights to be bought out (see below); the effect of the decision is
that he will not be entitled to do so if the bidder has proceeded as
the directors did in this case.
The requirement that the offer be on the same terms is relaxed
in two minor respects by s.976. If the difference simply reflects
differences in the dividend entitlements (for example, because
later allotted shares carry a lower dividend entitlement in that
particular financial year as contrasted with shares allotted
earlier), the offer is nevertheless on the same terms. This is
deemed to be the case also where an offer is made of
“substantially equivalent” consideration to those outside the UK
whose law either prohibits or subjects to unduly onerous
conditions the consideration offered to the main body of the
shareholders.281
A similar problem to this second one arises with the
requirement that the offer be made to all the shareholders (of the
relevant class) where the target has a few shareholders resident
in countries with elaborate securities laws and where the
inclusion within the offer of such shareholders is likely to trigger
the need to comply with those laws. An established technique for
dealing with this situation is to make the offer capable of
acceptance by the foreign shareholders but to take elaborate
steps to ensure that the formal offer documentation is not
addressed to them. When challenged in court, this practice was
upheld with some unease by the Court of Appeal on the specific
facts of the case.282 Section 978 now gives specific statutory
cover to this technique, where the offer was not communicated
in order to avoid contravention of local law. In order to deal with
the difficulty that the foreign resident might never know of the
offer until it receives the compulsory acquisition notice from the
offeror, the offer is normally placed on a website and the website
address given in the Gazette.283 Section 978(2) also saves from
failure under the squeeze-out provisions an offer which is
communicated but whose acceptance is made impossible or
difficult as a result of local law. Finally, s.978(3) makes it clear
the courts should not deduce from the section that, in all other
cases, a failure to communicate the offer to each holder or an
offer which it is impossible or more difficult for some
shareholders to accept fails to be a “takeover offer” within the
meaning of the Act: the courts will decide on a case-by-case
basis.
28–72
Further, there is the question of which are the shares “already
held by the offeror” at the date of the offer.284 In general, the
larger the stake held by the offeror before the bid, the more
difficult it is for it to achieve the 90 per cent, since the smaller
becomes the proportion of the class as a whole which is needed
to stop it reaching the threshold.285 In consequence, it becomes
important to know how one determines whether a share is
acquired before or after the offer is made. Section 975(2) states
that shares conditionally acquired before the offer do not count
towards the 90 per cent except where the promise by the existing
holder is to accept the offer when and if it is made (“irrevocable
undertakings”) and the undertaking is given for no significant
consideration beyond, if this is the case, a promise to make the
offer.286
Finally, the bidder’s ability to reach the 90 per cent threshold
will be enhanced if it can count shares acquired after the date of
the offer but outside the bid. The effect of the Act is that such
shares count towards the 90 per cent but only if the price paid
does not at that time exceed the value of the consideration
specified in the offer or the offer is subsequently revised so that
it no longer does so.287 As we have seen, where the Code applies,
inequality of consideration is unlikely to arise.
There are also potentially tricky issues about shares which are
allotted after the bid is made (for example, as a result of a
conversion of another security into shares of the class in
question) and about treasury shares, which may be held in
treasury throughout the bid or become or cease to be treasury
shares during the bid period. The statute handles this point by
giving the bidder a choice whether it includes in the shares to
which the offer relates after-allotted shares or treasury shares of
different categories.288 If it decides to include them in the offer, a
cut-off date must be specified in the offer beyond which such
shares will not be regarded as being within the offer. If any of
those categories of shares are included within the offer, then the
90 per cent threshold is calculated by taking into the account the
shares allotted or which have ceased to be treasury shares on the
date on which the bidder triggers the compulsory acquisition
procedure (s.979(5)). Subsequently allotted shares or shares
subsequently ceasing to be treasury shares do not affect that
determination, once made, though if the offeror gives a
subsequent notice (for example, because the first is defective in
some way) the 90 per cent figure will have to be calculated on
that second date. If the offeror chooses not to make an offer for
after-allotted or treasury shares, then, naturally, the compulsory
transfer provisions will not apply to them.
Challenging the squeeze-out
28–73
Given the demanding nature of the 90 per cent threshold, the
above detailed provisions may well be of practical importance in
particular cases in establishing whether the threshold has been
exceeded. Assuming it has, the successful bidder triggers the
compulsory acquisition process by giving notice to the non-
accepting shareholders, with a copy to the target company,
accompanied by a statutory declaration of its entitlement to serve
the notice.289 That notice must normally be given within three
months of the last day on which the offer could be accepted.290
The effect of the notice is, under s.981(2), that the offeror
becomes entitled and bound to acquire the shares on the final
terms of the offer. If the offer gave shareholders alternative
choices of consideration (e.g. shares or a cash alternative), the
notice must offer a similar choice and state that the shareholder
may, within six weeks from the date of the notice, indicate the
choice by a written communication to the offeror and must also
state which consideration will apply in default of a choice. This
applies whether or not any time limit or other conditions relating
to choice contained in the offer itself can still be complied with
and even if the consideration was to have been provided by a
third party who is no longer bound or able to provide it.291 The
remainder of ss.981 and 982 prescribes in detail the procedures
that have to be adopted to ensure that the shares which the
offeror is bound to acquire are transferred to it and that the
consideration that it is bound to pay reaches the shareholders
concerned.292
The dissenting shareholder does not have to take the notice
lying down. He or she can appeal to the court under s.986(1) for
an order either (a) that the offeror shall not be entitled to acquire
the shares; or (b) that the terms of the acquisition shall be
amended “as the court thinks fit”.293 The shareholder must act
within six weeks of the date on which the acquisition notice was
given by the bidder, but the application has the effect of
suspending the bidder’s rights until the appeal is disposed of.
Section 986(4) provides that, where the petitioner seeks relief of
type (b), the court may not increase the level of consideration to
be provided by the bidder beyond that available in the offer,
unless “the holder of the shares shows that the offer value would
be unfair” (but it cannot in any event require a consideration of
lower value). Thus, the burden of showing unfairness is on the
challenger.
28–74
What are the petitioner’s chances of success? They will be
excellent if the petitioner can show that the statutory
requirements for a “takeover offer” have not been met or that the
90 per cent threshold has not been reached, under the provisions
discussed above, because then the court will have no jurisdiction
to make an order for the compulsory acquisition of the shares.294
However, it should not be thought that the merits are always on
the side of the non-accepting minority. They may simply be
interested in exploiting to the full the position of power which
the bidder’s desire for complete control has given them. If the
court cannot order a compulsory acquisition because the
statutory requirements have not been met, the bidder may think
of other devices to achieve the same result.
In Rock Nominees Ltd v RCO (Holdings) Plc295 the bidder,
faced with highly opportunistic conduct on the part of a
shareholder which narrowly blocked achievement of the 90 per
cent threshold, caused the newly acquired subsidiary to sell its
business to another company in the same group (at a fair price)
and then put the seller into voluntary liquidation, for which only
a special resolution is required, distributing the price received on
the sale to the shareholders (including the minority) and thus
achieving the same result as a compulsory acquisition. The Court
of Appeal refused to hold that this was unfairly prejudicial
conduct on the part of the majority.296
Where the court has jurisdiction, the petitioner will have a
more uphill struggle. Section 986(4) (above) indicates the nature
of the difficulty: if 90 per cent of the shareholders have accepted
the offer, that is normally strong evidence that it is a fair one.
Indeed, that subsection, introduced as a result of the Directive,
appears to put a very high burden on the petitioner seeking to
amend the bid terms: the petitioner must show, not simply that
the offer value is unreliable, but that it was too low and, by
implication, what the right price should be.297 Consequently, the
petitioner may have a better chance of success if he or she
simply seeks an order that there should be no compulsory
acquisition, for there the requirement to show that the offer value
is unfair does not apply. Even in relation to simple denial of the
compulsory purchase request, however, the British courts have
traditionally relied on the high level of acceptances achieved to
conclude that they should exercise their discretion in favour of
the compulsory acquisition.298 However, in more recent times the
courts have been prepared to refuse compulsory acquisition
where, unusually, the acceptances are an unreliable indicator of
fairness, without requiring the petitioner to establish what the
correct level of consideration should have been. Two such
indicators of unreliability have emerged in particular in the
cases. If the acceptors of the offer are not independent of the
bidder or if the acceptors were not given adequate information
upon which to take their decision, the court will not necessarily
draw the conclusion that a 90 per cent acceptance indicates a fair
offer.299 In practice, this means the petitioner’s chances of
success are much greater if the bid was not governed by the
Code than if it was.
The sell-out right of non-accepting shareholders
28–75
The squeeze-out provisions introduced in 1929 were not
originally accompanied by a right on the part of the non-
accepting minority to have their shares bought by the bidder.
This right was added only in 1948. Although formally
reciprocal, in fact the two rights perform very different
functions. The sell-out right permits the shareholder, who does
not wish to accept the bid, but who, if the majority do accept,
would rather leave the company as well, to give effect to that set
of preferences. He or she can refuse to accept the offer, but then
change his or her mind, once the results of the other
shareholders’ decisions have become clear. However, as we have
noted, the Code already provides a more effective mechanism
for giving the shareholder that facility. Rule 31.4300 requires the
offeror to keep the offer open for a further 14 days after it has
become unconditional as to acceptances. Since the Code rule is
not dependent upon the 90 per cent threshold and it operates
without a court order, it is a much more attractive mechanism for
those who are quick enough to use it. This perhaps explains why
there has been little litigation on the sell-out right provided by
the statute.
The sell-out right, like the squeeze-out right, depends upon
there having been a takeover offer which relates to all the shares
in the company, as those terms are defined for a squeeze-out.301
However, the 90 per cent threshold is calculated in relation to a
different set of shares. The question is whether the shares
acquired through the offer together with other shares which the
offeror (or an associate of the offeror) held before the offer or
acquired during the offer but outside it constitute 90 per cent of
the shares in the company (and, where relevant, 90 per cent of
the votes). If there is more than one class of share, this rule is
applied class by class.302 In other words, unlike in the squeeze-
out, the question is not whether there has been a 90 per cent level
of acceptance of the offer, but rather whether the bid has left the
offeror holding 90 per cent of the shares. This seems the correct
test: the mischief which is sought to be remedied is the minority
position into which the bid has put the applicant shareholder and
the precise degree of enthusiasm displayed by the other
shareholders for the offer is of secondary importance.303 It is
probably rather easier for the sell-out threshold to be attained
than the squeeze-out threshold, because, in a sell-out, a lower
level of acceptances might be compensated for by a higher level
of pre-bid holdings on the part of the bidder or its associates.
28–76
The offeror must give each of the non-accepting shareholders
notice of their entitlement to be bought out within one month of
the end of the offer period. The shareholder wishing to take up
this right must give notice to the offeror, either within three
months of the end of the offer period or, if later, as it usually will
be, of the notice given by the offeror.304 Provisions apply as to
the consideration to be provided which are equivalent to those
for a squeeze-out.305 It is in this case, rather than in relation to a
squeeze-out, that the need to provide a choice of all the original
alternatives (including a cash underwritten alternative) is so
unpopular with offerors and their advisers. And it is, perhaps,
rather remarkable and not altogether easy to reconcile with the
provisions of the Code. As we have seen, under the Code an
offer has to remain open for at least 14 days after it becomes
unconditional as to acceptances. However, an offeror is not
obliged to keep most types of cash underwritten alternatives
open if it has given notice to shareholders that it reserves the
right to close them on a stated date being not less than 14 days
after the date on which the written notice is given.306 The effect
of the Act is virtually to keep the offer open for considerably
longer than is required under the Code in all cases where the
offer has achieved 90 per cent success. And clearly the parties
cannot contract out of the statutory provisions. Nor can the Panel
or the Code waive them. The CLR endorsed this position.307
However, it is sometimes argued that what is now s.985 does
not apply if the cash alternative is described in the offeror’s offer
document as a separate offer by the underwriting investment
bank. In the light of the section that argument seems
unsustainable. The fact is that, as the section and the Code
clearly recognise, the offeror’s “offer” may and probably will
contain a number of separate offers and that some of those offers
may be made by third parties. All fall within the phrase “the
terms of the offer”. The only way, it is submitted, in which
offerors and their investment banks might be able to achieve
their aim is by making no mention at all of a cash underwritten
alternative hoping that an independent investment bank, not
acting on behalf of, or paid for its services by, the offeror will
come forward and make an offer on its own account to the
target’s shareholders to buy the shares of the offeror received on
the takeover. That is a somewhat unlikely scenario.
Under s.986(3), when a shareholder exercises his sell-out
rights by notice to the offeror, an application to court may be
made either by the shareholder or the offeror and the court may
order that the terms on which the offeror shall acquire the shares
shall be such as the court thinks fit. The parties may be in
disagreement about whether there is an obligation on the offeror
to acquire the shares at all or they may be in disagreement about
the terms. The same provisions about raising or lowering the
consideration in relation to the bid value apply as in a squeeze-
out, since art.16 of the Directive requires Member States to
provide a sell-out right; and the shareholder will be in the same
difficulty when arguing that the sell-out should be at a higher
level than was provided for in the bid.
CONCLUSION
28–77
UK takeover regulation is committed to the principle that the
decision on the offer should lie in the hands of the shareholders
rather than the management of the target company (assuming no
competition concerns). Especially important in this regard are
the restrictions imposed by the Code on the defensive steps
which are open to the management of the target company and its
insistence that the shareholders of the target should not be denied
the opportunity to decide on the merits of the bid. In other
countries, it is easier for the incumbent management to take
steps to defend itself against unwelcome bids, though not
necessarily to the point of preventing them entirely. The
argument in favour of the regime adopted by the Code is that it
provides a cheap and effective method of keeping management
on their toes and protects shareholders from management
slackness or self-dealing—or, in any event, provides a method
for the shareholders to exit the company on acceptable terms if
such managerial misbehaviour produces a takeover bid. Further,
this rule makes it less easy for target management to resist offers
driven by the potential benefits of combining the businesses of
offeror and target companies, where target management are
nevertheless likely to lose their jobs in the process. The potential
disadvantages of this stance are that it deprives the board of the
target of full-scale role in either negotiating on behalf of the
shareholders or protecting them from coercive bids. The latter
concern is addressed by other provisions of the Takeover Code
regulating the format in which offers may be put, in particular,
the requirements for equal treatment and the Panel’s reluctance
to sanction partial bids. The board’s negotiating role is not
entirely removed by the “no frustration” rule but the board
cannot in the end insist that its valuation of the company is
correct and the shareholders’ mistaken, if the target shareholders
take a different view.
The Code’s orientation seems to reflect the dominance of the
institutional shareholders in the UK which naturally favour a set
of rules which maximise their gains from bids but which also
reduce their managerial agency costs. Thus, the institutions have
also set their faces against the adoption in pre-bid situations,
where the Code does not apply, of defensive devices by the
management of potential takeover targets. However, it is perhaps
easy to overestimate the beneficial effect upon management
performance of the threat of the takeover bid, which is not to say
that the takeover bid has no role to play in the British system of
corporate governance. The core decision to side-line target
management in the decision on the takeover offer also makes it
difficult to build any protection for non-shareholders, notably
employees, into the Takeover Code—though in this respect the
Code simply imitates the general orientation of British company
law.308
1
Where T Co was previously controlled by one or more large shareholders, they too will
have lost control to A, but that is the result of a voluntary transaction between them and
A. In so far as issues arise on this aspect of the takeover they can probably be resolved
by the law of contract.
2
This is a crucial and highly controversial proposition. For a balanced assessment see J.
Coffee Jr, “Regulating the Market for Corporate Control” (1984) 84 Columbia Law
Review 1145. See also P. Davies, K.J. Hopt and G. Ringe “Control Transactions” in R.
Kraakman et al. (eds), The Anatomy of Corporate Law, 3rd edn (Oxford: OUP, 2016).
3
Below, para.28–41.
4
Sometimes the approval of the offeror company’s shareholders is required under the
Listing Rules if the proposed transaction is a very large one: above, at para.14–20.
However, the relationship between acquirer and its shareholders is not dealt with by
takeover regulation in the UK, though it has sometimes been suggested that it should be.
Rather, that relationship is left to the general rules concerning shareholder approval of
transactions, notably the “significant transactions” requirements of the Listing Rules.
Other than the Listing Rules, general company law, notably the rules on directors’
duties, is rather weak: it would be a bold court which concluded that an offeror board’s
decision to launch a takeover offer constituted a breach of duty. See A. Kouloridas, The
Law and Economics of Takeovers: An Acquirer’s Perspective (Oxford: Hart, 2008).
5
As we shall see below, where the takeover is effected by means of a scheme of
arrangement (Ch.29), a corporate decision of the target, which company law can
regulate, is required, but the scheme is in practice available only where acquirer and
target board are in agreement on the desirability of the takeover, so that at least the first
main issue in takeover regulation (see para.28–1) will not be present.
6 A. Johnston, The City Take-over Code (Oxford: OUP, 1980), Chs 1–4.
7
Which, in some cases, was horrendous, with rival bidders badgering each of the
target’s shareholders by night and day telephone calls offering him a special price
because, so it was falsely alleged, only his holding was needed to bring that bidder’s
acceptances to over 50 per cent. In one case the result was that the bidder who
eventually succeeded paid prices ranging from £2 to £15 per share.
8For an excellent early analysis of the impact of the Directive on the UK see J.
Rickford, “The Emerging European Takeover Law from a British Perspective” [2004]
E.B.L.R. 1379.
9 Reflecting the fact that a very high proportion of the EU’s total of takeover bids
(especially “hostile” ones) takes place in the UK.
10 The competent authority may be, of course, a public body of a more traditional kind.
The Government did toy, probably not very seriously, with the idea of giving takeover
regulation to the FCA, or alternatively keeping the Panel on a non-statutory basis but
treating breaches of the Code as breaches of the FCA’s rules, but rejected both ideas.
See DTI, Company Law Implementation of the European Directive on Takeover Bids: A
Consultation Document (January 2005, URN 05/11) paras 2.7 and 2.17—hereafter “DTI
Consultation Document”. That idea does demonstrate, however, that the Government
was not obliged to give these functions to the Panel nor is it obliged to leave them there,
should the Panel act in a way the Government finds unacceptable.
11
See The Takeover Code, 11th edn, 2013, Introduction, A8 (hereafter the “Code”).
This perhaps illustrates better than anything the self-created nature of the Panel, since it
is circular for the Code, which is the responsibility of the Panel, to determine the
composition of the body which creates the Code. Under earlier editions of the Code the
chair and two deputies of the Panel were appointed by the Governor of the Bank of
England, which reflects the historical reality of how the self-regulatory process was
initiated, but he no longer has a formal role in the Panel’s composition. Sections 957–
959 also maintain the Panel’s present funding arrangements. It is not supported out of
taxation, but by fees for its services and a levy on share transactions, but of course a
statutory body could be funded in a similar manner, as the FCA is.
12
DTI Consultation Document, paras 2.35–36. The system is set out in the Code,
Introduction, §§6–8.
13
Delegation by the Panel of functions to officers or members of staff is specifically
provided for by s.942(3)(b). In practice, the Panel’s efficiency depends upon the parties
or their advisers bringing issues to the Panel at an early stage and disclosing full
information. The obligation to do so is laid down in the Introduction to the Code, paras
6(b) and 9(a). See Panel Statement 2015/15, Asia Resource Minerals plc (Formerly
Bumi plc).
14
With its own website: http://www.thetakeoverappealboard.org.uk/ [Accessed 26 April
2016]. For an instructive example of its operating methods see Takeover Appeal Board,
Principle Investment Capital Trust Plc, decision 2010/1.
15Currently Lord Collins of Mapesbury as chairman and Sir John Mummery as deputy
chairman.
16 The Takeover Panel, Report on the Year Ended March 31, 2001, pp.8–9.
17R. v Panel on Take-overs and Mergers, Ex p. Datafin Ltd [1987] Q.B. 815 CA. See
Cane, “Self Regulation and Judicial Review” [1987] C.J.Q. 324. See also R. v Takeover
Panel, Ex p. Guinness Plc [1990] 1 Q.B. 146 CA.
18 See ss.942(2), 943, 944(1) and 945.
19 “It is intended that the implementing legislation should neither undermine nor be
inconsistent with the principles established in the Datafin case.” (DTI Consultation
Document, para.2.38.)
20
2006 Act s.956(1). The definitions of “rule-based requirement” and “disclosure
requirement” are given in s.955(4), the latter referring to the Panel’s disclosure powers
in s.947, which are discussed below.
21
2006 Act s.956(2).
22 2006 Act s.961. The provisions of the Convention most likely to affect that Panel are
those of a procedural nature, for example, art.6 relating to the fair trials in civil disputes.
The liability of the Panel under the Human Rights Act 1998 is not new.
23 2006 Act s.943. It is not absolutely clear that art.4 of the Directive contemplates that
the supervisory authority shall make the rules, but the Directive does not explicitly
forbid it, which one would have expected it to do if its authors had wanted to bring about
such a major change in British practice, which was very much to the forefront in the
formulation of art.4.
24 2006 Act s.943(2),(3). Section 944(1) permits the Panel to make rules in a flexible
form.
25
DTI Consultation Document para.2.10. The Directive applies only to bids for
companies whose shares are traded on a regulated market, whilst the Code applied more
broadly (see below), and even in relation to regulated markets the Code covers a number
of topics not touched on by the Directive.
26
2006 Act s.942(3)(a).
27
2006 Act s.945, but binding effect only “to the extent and in the circumstances
specified in the rules”.
28
City Code, Introduction, 2(c).
29
2006 Act s.946 and City Code, Introduction, 10.
30 2006 Act s.947(1)–(3). This section can also be seen as implementing art.6(5) of the
Directive. The Code itself requires those dealing with it to disclose any known and
relevant information (Code, Introduction, 9(a)) and the Panel expects this to be the
power it normally relies on rather than the statutory one. Those firms subject to the
jurisdiction of the FCA are required under its rules to provide information and
documents to the Panel and to provide such other assistance which the Panel requests in
the performance of its functions and the firm is reasonably able to provide: see MAR
4.3.5 and below, fn.41. This disclosure obligation is also subject to an exemption
relating to legal professional privilege: see s.413 of FSMA.
31 2006 Act s.947(10).
32
2006 Act ss.948 and 949 and Sch.2. In the parliamentary debates it was controversial
that the Panel has no responsibility for the further disclosure of the information by a
body which receives it through one of the gateways, though it is difficult to see how in
practice the Panel could have exercised such supervision.
33
In one notorious case, concerning St Piran Ltd, such action by the Exchange proved
singularly ineffective, despite belated undertakings by the guilty party to behave in
future. See the Annual Reports of the Panel for 1981 and 1984. See also Re St Piran Ltd
[1981] 1 W.L.R. 1300 CA, where intervention by the Secretary of State was saved from
futility only because a shareholder in the company was prepared to bring a petition for
the winding-up of the company on the just and equitable ground.
34Thus, in R. v Takeover Panel, Ex p. Guinness Plc [1990] 1 Q.B. 146 CA, the bidder
agreed to pay £85 million to the shareholders of the target company in order to comply
with a ruling of the Panel.
35 See in particular ss.138 and 143 of FSMA 2000. The current provisions are discussed
further below.
362006 Act s.955(2) makes it clear that only the Panel can so apply and not, for
example, the party to the bid which stands to benefit from the Panel’s ruling.
37 See fn.17, above, where the company had been in breach of a Code rule requiring the
bidder to increase the price offered to the target shareholders because shares had been
purchased in the market at that higher price. For the current version of that requirement,
see below at para.28–39.
38 Code, Introduction, 10(c).
39
Code, Introduction, 11(b). The Panel may also withdraw or qualify any special status
or exemption it has granted the offender, for example, as an “exempt principal trader”.
40 2006 Act s.952(2)–(8). For a discussion of the FCA’s penalty powers, see above at
para.25–41.
41
The FCA rules discussed in this paragraph are set out in MAR 4.3. These rules were
made by the FSA under what is now FSMA 2000 s.137A. The range of prohibited
services in connection with a bid is widely defined (MAR 4.3.3–4), though it does not
extend to the giving of legal advice. S.143, dealing with formal endorsement of the City
Code by the FSA, was repealed in the light of the statutory sanctions given to the Panel.
42
2006 Act s.953(2),(4). In the parliamentary debates the Solicitor-General gave an
assurance that the provision was not intended to reach investment banks when they make
offers as agents of bidders—though it must be said that it would be a pretty poor
investment bank which knew of the defect in the documentation and did not take
reasonable steps to correct it. See HC Debs, Standing Committee D, Nineteenth Sitting,
18 July 2006, cols 804–806.
43
DTI Consultation Document para.2.18. See also Panel on Takeovers and Mergers,
Implementation of the Takeover Directive, Consultation Paper, PCP 2005/5, November
2005, (hereafter “Panel Consultation Document”) para.2.4: “Overall, the Panel remains
confident that while its status and the status of the Code will be different under the new
statutory regime, there will be little material substantive change either to its procedures
or to the Rules of the Code”.
44
Directive, arts 1(1) and 2(1)(a). On the definition of a “regulated market” see above at
para.25–7.
45We have also noted above that the criminal sanctions for inaccuracies in the bid
documentation apply only to offers within the scope of the Directive. See para.28–12.
46
The Code’s provisions, discussed in this and the following paragraph, are set out in its
Introduction, 3(b). Although a control shift by means of a scheme of arrangement has
long fallen within the Panel’s jurisdiction, only in 2008 was the Code amended to
indicate more fully how it applies to schemes (because of the “significant increase in
recent years in the use of schemes of arrangement in order to implement transactions
which are regulated by the Code”). See Panel Consultation Paper, PCP 2007/1, Schemes
of Arrangement, and App.7 to the current Code. For a more detailed analysis see J.
Payne, Schemes of Arrangement (2014), Ch.3.
47 A takeover bid is defined in art.2(1)(a) as “a public offer (other than by the offeree
company itself) made to the holders of the securities of a company to acquire all or some
of those securities, whether mandatory or voluntary, which follows or has as its
objective the acquisition of control of the offeree company in accordance with national
law”.
48 Introduction, 3(a)(i) and (ii). The starred note makes it clear that “company” for the
purposes of the Code includes UK unregistered companies, to which, in addition, the
statutory provisions of Chs 2 and 3 of Pt 28 are applied by regulation. See para.1–16.
The term also embraces European companies which are incorporated in the UK.
49References to the UK include the Channel Islands and the Isle of Man. This is
necessary to meet the EU obligations of the UK, but we do not further refer to this
extension.
50 For a good example of the significance of the residence requirement see Xstrata Plc,
Panel Statement 2002/7: company incorporated in the UK and to be listed on the Main
Market of the LSE not within the jurisdiction of the Panel under the pre-Directive rules
because the place of its central management was Switzerland. The Panel’s insistence on
the central place of management being in the UK seems to have been linked to the
question of whether that management would be amenable to its authority.
51
See para.25–44.
52
Directive art.4(2)(b) and (c). If the simultaneous listing had occurred before the
Directive came into force, the relevant competent authorities must agree within four
weeks of that date which of them is to be the competent authority for that company or, in
default of agreement, the company chooses on the first day of trading after that four-
week period.
53
If, on the date for transposition of the Directive (20 May 2006) there were already
multiple first admissions, either the regulators have to agree who has jurisdiction or the
target chooses.
54
At para.28–1.
55
Directive art.1(1).
56Panel Consultation Document para.2.1. On the Panel’s derogation and waiver powers,
see above at para.28–7. Of course, the Directive restricts the Panel’s derogation powers
only by reference to its GPs and not by reference to any additional GPs which a Member
State chooses to adopt, but copying out the Directive’s GPs at least removes a source of
possible confusion about which of the domestic GPs simply implement the Directive’s
GPs and which add something beyond the Directive’s requirements.
57 City Code, 7th edn, 2002, B1.
58 Panel Consultation Document para.2.1.
59
City Code, Introduction, 2(b).
60
City Code, Introduction, 4(b).
61 See para.16–65.
62For an analysis of the competing views see R. Kraakman et al. (eds), The Anatomy of
Corporate Law, 3rd edn (Oxford: OUP, 2016), Ch.8.
63
This prohibition, however, seems to be restricted to internal corporate action of the
sort specified in r.21 and it is not regarded as breached by lobbying the competition
authorities seeking to persuade them to take action to prohibit the bid or subject it to
conditions unacceptable to the offeror.
64Thus, a power conferred by shareholders pre-bid upon the board to issue shares or
warrants post-bid would not escape r.21, because that rule would catch the post-bid
decision by the board to make the issue.
65 See paras 16–26 et seq., above.
66 On which see Note 2 to r.21.1.
67 Of course, the management of the target company may, and often do, promise as part
of their defence to the bid to carry out one or more of these actions after their
shareholders have rejected the offer.
68 See Panel Statement 1989/7, Consolidated Gold Fields and Panel Statement 1989/20,
BAT Industries, which explore the complications which arise when the litigation is
initiated in a foreign jurisdiction by a partially owned subsidiary or when the “litigation”
takes the form of enthusiastic participation in regulatory hearings.
69 DTI Consultation Document para.3.12. The most prominent country which does not
apply the board neutrality rule in takeovers is Germany, though even there defensive
measures need (a) the approval of the shareholders which can be given in general and for
periods of up to eighteen months and need not be given in the face of the bid, as the
Code demands; or (b) the approval of the supervisory board. See W. Underhill and A.
Austmann, “Defensive Tactics” in J. Payne (ed.), Takeovers in English and German Law
(Oxford: Hart Publishing, 2002), pp.95–98.
70
These rules apply to post-bid defensive tactics as well, but there their impact is
normally hidden beneath that of r.21 of the Code. They might be important, even post-
bid, in the exceptional case where the Code did not apply to the target company, for
example, where it was a private company or a public company whose securities were not
publicly traded in the UK and whose central management was outside the UK. See
para.28–15, above.
71
For an example of the legal pitfalls which can be created if the drafters of the joint
venture agreement are overly ambitious see Criterion Properties Plc v Stratford UK
Properties LLC [2004] 1 W.L.R. 1846 HL.
72
On the division of powers between shareholders and the board see para.14–1.
73
See para.24–4.
74 The shareholder rights plan, which comes in many varieties, in its core version gives
shareholders other than the bidder the right to subscribe for shares in the target company
at a very attractive price. Given the discrimination between the bidder and non-bidder
shareholders a rights plan would also cause difficulties for the target board under
s.172(1)(f).
75
Pre-emption rights, which might also stand in the way of rights plans, suffer from the
same weakness of disapplication in advance. See s.570 and, above, at para.24–6.
76Report of the High Level Group of Company Law Experts on Issues Related to
Takeover Bids, Brussels, 10 January 2002, Ch.1, especially pp.28–36.
77
DTI Consultation Document para.3.9. In opting out of the breakthrough rule the UK
followed the “vast majority” of the Member States: see Commission of the European
Communities, Report on the implementation of the Directive on Takeover Bids, SEC
(2007) 268, February 2007, para.2.1.4 (hereafter “Commission Report”).
78Directive art.12(2). This provision applies to opt-outs from both arts 9 and 11, though
only the latter is relevant in the UK, because the UK did not opt out of art.9. Article
12(3) provides for the reciprocity exception.
79 At paras 28–19 to 28–26.
80
The extent to which such defensive measures on the part of the target are permitted
and the extent to which opting back into art.11 by the UK company would be effective
against such defensive measures depends upon some difficult issues in the interpretation
of the singularly ill-drafted art.12(3) of the Directive. First, it is not clear whether
reciprocity is permitted to companies to which either arts 9 or 11 applies on a mandatory
basis. The strict wording of the Directive suggests not, but this seems an odd result and
the Commission seems to take a different view. See Commission Report para.2.1.3.
Secondly, it is not clear on what precise basis the equivalence of the positions of the
bidder and target companies is to be assessed, so as to exclude retaliatory measures. See
Rickford, above, fn.8 at pp.1406–1408.
81
2006 Act s.996(3).
82
For the variation of class rights procedure, see para.19–13.
83
2006 Act ss.966–7.
84
The Large and Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008 (SI 2008/410) Sch.7 Pt 6. The information might conceivably be set
out in the strategic report instead: s.414C(11).
85
In the case of “vote-holding” such disclosure by the vote-holder to the company and
then by the company is required by the Transparency Directive (see para.26–14), but this
disclosure obligation goes wider to embrace not just voting shares, though it is not
accompanied by any obligation of disclosure on the security-holder.
86
Shareholder pacts are particularly important in some continental European countries
in giving groups of investors holding a substantial, but nevertheless minority, stake in
the company complete control of it. See Financial Times, 28 March 2007, UK edition,
p.15 (discussing Italy).
87These are likely to be the subject of annual shareholder resolutions in any event: see
paras 13–19 and 24–10 et seq.
88Which in the UK will often be required as part of the directors’ remuneration report:
see para.14–43.
89 It does not necessarily follow that a private equity group will want to keep the
existing management of the target in place. Conversely, a public bidder may be happy to
keep the existing management, where it is buying the target for synergy reasons rather
than because it thinks the target badly run.
90 Normally from an investment bank not disqualified under r.3.3. A similar obligation
applies to the board of the offeror when the offer is made in a “reverse takeover” (i.e.
one in which the offeror may need to increase its issued voting equity share capital by
more than 100 per cent: see fn.2 to r.3.2) or when the directors are faced with a conflict
of interests: r.3.2.
91
In its 2010 review of the Code following the politically controversial takeover of
Cadbury Plc by Kraft, the Panel considered the suggestion that independent advice
should be required to be given to the shareholders directly, but this was not thought to
add significantly to the existing r.3 requirements. See Code Committee of the Takeover
Panel, Review of Certain Aspects of the Regulation of Takeover Bids, 2010/22, paras
6.10–6.12.
92 Note 1 to r.3.1.
93 Note 2 to r.25.2.
94 Notes 4 and 5 to r.25.2.
95 Panel Statement 2003/25, Canary Wharf Ltd, para.12.
96
Now set out in Pt 4 of Pt 10 of the Act.
97 2006 Act s.219(1)(2)(4). Non-bidder holders of shares of the class may vote, even if
their shares are not subject to the offer—a rare situation given the Code’s equality rules.
98 The Act does not require shareholder approval before the transfer of shares to the
bidder under the offer but only before the payment is made. However, failure to achieve
a quorum at two successive meetings triggers the rule that the payment is deemed to
have been approved: s.219(5).
99
2006 Act s.219(3). The director is no longer under a statutory obligation, as was the
case with the 1985 Act, to take all reasonable steps to secure that details of the proposed
payment are included in the offer document, though r.24.5 (above) of the Code requires
the offeror to include such information.
100
2006 Act s.222(3).
101
102
2006 Act s.219(6) makes it clear that approval is not required where compensation is
paid in relation to the takeover of a wholly-owned subsidiary. The requirement for
shareholder approval also applies only to payments by UK-registered companies.
103
2006 Act s.223. This might seem to mean that a company could escape the statutory
controls by paying a shadow director compensation for loss of the shadow directorship.
However, since the shadow directorship is not a formal position, payment for loss of it is
likely to be a breach of duty on the part of the non-shadow directors and recoverable
from the shadow director who has received it, knowing of the facts which make its
payment improper.
104
2006 Act s.219(1).
105
2006 Act s.215(3). The definition of a connected person is given in s.252 and
discussed above at para.16–71.
1062006 Act s.219(7). The date of the transfer of the shares is presumably the date upon
which the bid became unconditional as to acceptances.
107
2006 Act s.216.
108 2006 Act s.215(2).
109 2006 Act s.221. The Secretary of State has power to raise the figure: s.258.
110
Taupo Totara Timber Co v Rowe [1978] A.C. 537 PC; Lander v Premier Pict
Petroleum, 1997 S.L.T. 1361. In the former case the director’s service contract provided
that, if the company were taken over, he could within 12 months resign from the
company and become entitled to a lump-sum payment of five times his annual salary.
111 2006 Act s.220(1)(a).
112 2006 Act s.220(3).
113
2006 Act s.220(1)(b), (c). Such payments must be made “in good faith” and so the
parties to the transaction run a legal risk if they use a damages claim to inflate the
compensation payable to the director beyond his or her contractual or statutory
entitlements.
1142006 Act s.220(1)(d). Again the payment must be made “in good faith”, which may
constrain egregious use of this provision. For an unsuccessful attempt to use s.320 of the
1985 Act (now s.190 of the 2006 Act, see para.16–70) to impose a requirement for
shareholder approval in relation to pensions, see Granada Group Ltd v Law Debenture
Pension Trust Corp Plc [2015] 2 B.C.L.C. 604.
115 By the Enterprise and Regulatory Reform Act 2013.
116
i.e. companies with equity quoted on a top-tier public market: s.385.
117 See para.14–44.
118
2006 Act s.226C.
119
2006 Act s.226F.
120
2006 Act s.226E(4).
121
Directive art.9(2).
122
Heron International Ltd v Lord Grade [1983] B.C.L.C. 244 CA.
123
Heron International Ltd v Lord Grade [1983] B.C.L.C. 244 at 265.
124
Re A Company [1986] B.C.L.C. 382.
125
Note 1 to r.20.2.
126
127 Code r.5 forbids pre-bid purchases (at least once a bid is in contemplation) which
would take the bidder over the 30 per cent threshold, which triggers a mandatory bid
(see below), or over the 50 per cent threshold, giving de jure control of the company,
except purchases from a single shareholder (and in certain other cases). The purpose of
r.5 is to ensure that “the board of the company has a sufficient opportunity to make the
company’s shareholders aware of all relevant matters before control of the company
passes”. See Panel Consultation Paper 2005/5, para.6.1. (However, the rules on
Substantial Acquisitions of Shares, which previously formed an addendum to the Code
and prevented, or at least slowed down, market raids, were repealed in 2006.)
128 However, the Code does not encourage competing bids, as some systems do, by
automatically releasing those who have accepted the offer if a competing bidder
emerges, but only if the offer has not become unconditional as to acceptances within 21
days of the first closing date of the initial offer (r.34). For this reason, experienced
investors do not accept an offer until the final moment, so as to be able freely to consider
competing offers, whilst those who find the terms of the offer attractive may simply sell
their shares in the market. On the other hand, once a competing bidder emerges, the bid
timetable is re-set for both offerors according to that appropriate for the competitor (see
fn.4 to r.31.6) so that the offer period is extended to give target company shareholders
adequate time to consider both offers.
129 Dawson International Plc v Coats Paton Plc [1991] B.C.C. 278; Rackham v Peek
Foods Ltd [1990] B.C.L.C. 895; John Crowther Group Ltd v Carpets International Plc
[1990] B.C.L.C. 460. See also the decision of the Inner House in the interlocutory
proceedings in the Dawson case: (1989) 5 B.C.C. 405. This is sometimes called the
“fiduciary out” though it is to some degree unclear in these cases whether the result was
arrived at as a matter of interpretation of the contract in question or of the application of
a mandatory rule of the law of directors’ duties.
130
Above fn.91 at para.5.15.
131 Code r.21.2(b) contains a list of agreements which are permitted because they do not
infringe substantially the principle of shareholder choice. This new approach also
renders less important, but does not remove, the difficult question of whether a break fee
constitutes financial assistance under the statute (para.13–44): Paros Plc v Wordlink
Group Plc [2012] EWHC 394 (Comm).
132
The Code Committee review (above fn.91 at para.5.16) makes it clear that the
intention was to include undertakings “to refrain from taking any action which might
facilitate a competing transaction” as well as commitments to positive action in relation
to the initial bid. The prohibition on agreements to take positive action might be thought
to impede the implementation of agreed takeovers by way of schemes because the
scheme arrangements are in the hands of the offeree (see para.29–5) and offeror will
want the target to commit to propose the scheme. However, the necessary obligation is
now laid on the offeree by the Code itself: App.7.3(f).
133
Notes 1 and 2 to r.21.2.
134
Code, Introduction, 2(a).
135
Code r.36.1. In fact, where the other shares are very dispersed, less than 30 per cent
could in fact give control. However, the Code is constructed on the basis of equating a
30 per cent holding with control. See the discussion of the mandatory bid below.
136
Code r.36.2.
137
Code r.36.3.
138 Code r.36.7.
139
Code r.36.4.
140
Code r.36.6.
141 Code r.32.3.
142 The pressures in favour of thoughtless acceptance are further mitigated by the
procedural rules requiring the initial offer to be open for acceptance for at least 21 days
(r.31.1) and revised offers to be open for at least 14 days (r.32.1).
143 Note 1 makes it clear that this bans the not-unknown practice of buying a
shareholding coupled with an undertaking to make good to the seller any difference
between the sale price and the higher price of any successful subsequent bid. It also
covers (Note 3) cases where a shareholder of the target company is to be remunerated
for the part he has played in promoting the offer (“a finder’s fee”).
144Code r.6.1 or even earlier if the Panel thinks this is necessary to give effect to
General Principle 1: r.6.1(c).
145 Code r.6.2.
146
Before an announcement is made of a firm intention to make an offer the Panel has a
discretion to relax the rule, though it will do so only rarely, but not thereafter. Compare
rr.6.1 and 6.2.
147
Note 3 to r.6. For this reason some systems prohibit post-offer purchases outside the
bid if the offer is on a share-exchange basis.
148 The Panel has a discretion to apply the cash rule even if fewer than 10 per cent of the
voting rights have been acquired (see r.11.1(c)), something Note 4 to r.11.1 suggests it
might do, and at a considerably lower level than 10 per cent, if the vendors were
directors of the target.
149 See Note 5 to r.11.1.
150 Which may not now have the same value as when offered prior to the offer: see Note
1 to r.11.2.
151 Or under the mandatory bid rule, see below.
152In the case of consolidation, the holder will necessarily have been able to cross the
30 per cent threshold without triggering the mandatory bid, notably where it falls into
one of the exceptions discussed below. The Code used to allow consolidation of control
at the rate of 1 per cent a year without imposing a mandatory bid requirement. However,
this facility was removed, seemingly in response to the decision in Re Astec (BSR) Plc
[1998] 2 B.C.L.C. 556, in which the court took a narrow view of the application of the
unfair prejudice remedy in relation to future actions of a shareholder which had obtained
“creeping control” of a company under this facility. In this case the target company was
non-resident in the UK, and so not subject to the Code when it acquired 45 per cent of
the target, but it then entered into an agreement with the other investors under which it
made itself subject to the Code. Today, the company’s initial purchase would be subject
to the Code since the company was incorporated in the UK and its shares were traded on
the Main Market of the LSE, and the fact that its headquarters were in Hong Kong
would not put it outside the Code. See above, para.28–15.
153
Code r.9.5. Unless the Panel agrees to an adjusted price in a particular case: see Note
3 to r.9.5 for the factors the Panel will take into account in considering whether to grant
a dispensation from the highest price rule. For a strong example of the application of the
“highest price” rule, even in the face of a serious market decline triggered by the terrorist
bombings in New York, see Panel Statement 2001/15 (WPP Group Plc).
154 Code r.9.3. But, when the mandatory offer comes within the provisions for a possible
reference to the competition authorities, it must be a condition of the offer that it will
lapse if that occurs. But, in contrast with voluntary offers (r.12), it must be revived if the
merger is allowed and, if it is prohibited, the Panel may require the offeror to reduce its
holdings to below 30 per cent: r.9.4, Note 1.
155
e.g. on a share for share offer that it is conditional on the passing of a resolution by
members of the offeror to increase its issued capital.
156 Code rr.9.6 and 9.7.
157
For discussion of the mandatory bid see fn.62, above, Ch.8.3.5.
158
See para.25–13.
159Note 7 to r.9.1. Notes 8 to 15 deal with a number of other cases where dispensation
may be granted, for example, indirect acquisitions of controlling interests, convertible
securities, further acquisitions after a reduction of the holding below 30 per cent; share
lending arrangements.
160
But not if the person seeking the waiver bought shares in the target company after
the point at which it had reason to believe that a redemption or repurchase would take
place: Note 2 to r.37.1.
161
Dispensation Notes 4 and 5. Note 5 also waives the bid where the holders of 50 per
cent of the voting rights indicate they would not accept the bid, no matter by how many
people those rights are held.
162
Dispensation Notes 3, 2, 6 and 1 respectively. In the case of (d) the security must not
have been taken at a time when the lender had reason to believe that enforcement was
likely, and of (e) the shares must not have been purchased at a time when the purchaser
had reason to believe that enfranchisement was likely. The “whitewash” procedure is set
out in App.1 of the Code, which involves tight Panel control over the procedure.
163 In the case of entities of equal size, this could occur if a person held 15 per cent of
the voting rights of both offeror and target companies.
164
This definition reflects art.2(1)(d) of the Directive. The presumed categories of
acting in concert are: (i) a company with any others in the group and associated
companies (widely defined, so as to make a company an associated company if another
company controls 20 per cent of its equity share capital); (ii) a company with any of its
directors and their close relatives and related trusts; (iii) a company with any of its
pension funds or the pension funds of other group or associated companies; (iv) a fund
manager with any of its discretionary managed clients; (v) a connected adviser with its
client; (vi) the directors of the target company.
165
166
Shareholder Activism and Acting in Concert, Consultation Paper 10, issued by the
Code Committee of the Panel (2002).
167
Shareholder Activism and Acting in Concert, para.1.6.
168
Puddephat v Leith [1916] 1 Ch. 200.
169 Panel Consultation Papers 2005/1–3, Dealings in Derivatives and Options, set out
the nature of the problem (see in particular PCP 2005/1, section A) and the Panel’s
proposals for reform of the Code. The CfD may work in the opposite way (i.e. the holder
obtains the downward difference in the market prices) but then the counterparty will
protect itself by selling “short”, which does not create the control problems noted in the
text. Why should anyone enter into such a contract? Essentially, it allows the derivative
holder to speculate in relation to the price of the underlying shares without having to
spend the money to acquire them. The fee paid to the investment bank for entering into
the contract is a form of recompense to the bank for making the acquisition instead of
the derivative holder (a sort of interest payment).
170 Of course, 30 per cent is only a rough approximation of the point at which a change
of de facto control of a company occurs. In the early versions of the Code the figure was
set at 40 per cent, but it was reduced to 30 per cent in 1974. However, a precise
percentage makes the Rule easier to operate than would a case-by-case examination of
whether a particular shareholder had acquired sufficient shares in a particular company
to enable it to control that company.
171 Notes to r.14 make it clear that comparable is not the same as identical and that
normally the difference between the offers should reflect the differences in market prices
over the previous six months. “Equity share capital” seems to be as defined in CA 2006
s.548. See para.23–7.
172
See in relation to mandatory bids, para.28–46, above.
173 The implication from Note 3 to r.14.1 is that equity share capital is defined in the
same was as in the Companies Act 2006 s.548, so that preference shares are not
included.
175 On the disincentives of potential bidders to bid because of the wasted costs point, see
para.28–33 above. As we have seen, the insider dealing rules are formulated so as to
allow defeated bidders to profit in this way. See para.28–35. However, the shares the
bidder “acquires” through acceptance of its offer cannot be used in this way, because, if
the initial bidder does not obtain the level of acceptances it seeks, its offer will lapse and
so the assenting shareholders, rather than the initial bidder, will be able to accept the
competing bid.
176 See para.27–16.
177 As we have seen in para.15–31, above.
178
179
Where the directors impose the restrictions, their freedom of action is limited by the
“proper purpose” doctrine applying generally to the exercise by directors of their powers
under the articles (see para.16–26). In particular, the purpose of the power to impose
restrictions is to further the purpose underlying the statutory provisions (revelation of
beneficial interests in shares). Failure to disclose does not give the directors a general
power to impose restrictions, for example, for the purpose of defeating a resolution to
remove the directors: Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71.
180
2006 Act s.793(2) and (6).
181
2006 Act s.793(5). In the light of the complications of the statutory provisions
defining “interests” and “concert party agreements” (see below) a lengthy explanation
accompanying the notice may be needed if the recipient (particularly if a foreigner) is to
understand precisely what is being asked.
182
If the time allowed is unreasonably short, the notice will be invalid: Re Lonrho Plc
(No.2) [1989] B.C.L.C. 309.
183
In some cases the information sought has never been obtained and the shares have
remained frozen.
184 2006 Act s.808. Assuming there is a present holder and assuming the holder’s
identity is known. If not, the information must be entered against the name of the holder
of the interest. The entry must state the fact that, and the date when, the requirement was
imposed.
185 2006 Act ss.808–819. For discussion of the share register, see paras 27–16 et seq.
186 In particular, of course, in respect of which persons they require notices to be served.
187
2006 Act s.803(2) and (3).
188
2006 Act s.804.
189 2006 Act s.804(2).
190 Not exceeding 15 days: s.805(1).
191 2006 Act s.805(1). On the meaning of “concluded”, see s.805(7).
192 2006 Act s.805(2).
193 2006 Act ss.805(5) and 807. Not to give notice to the registrar is an offence on the
part of the company and any officer in default, as is a failure to make the report available
for inspection: ss.806 and 807. There is no “proper purpose” control over public access
to the report.
194 2006 Act s.805(6) and it must remain available for inspection at the registered office
for at least six years: s.805(4).
195 2006 Act s.795. After consulting the Governor of the Bank of England, the Secretary
of State may exempt persons from compliance with a s.793 notice where for “special
reasons” an undertaking is substituted for the obligation to comply with the section:
s.796.
196 2006 Act s.794.
197
It appears to be open to companies—and some have taken this step—to make
provisions in their articles entitling the board to impose restrictions in a wider range of
circumstances, including where information is not forthcoming following a request, even
if the person asked does not have the information.
198
2006 Act s.797(1).
199
Made the more so since any attempt to evade the restrictions may lead to a heavy
fine: s.798.
200
Re Lonrho Plc (No.2) [1990] Ch. 695.
201
2006 Act s.799.
202
2006 Act s.800: on the application by the company or any person aggrieved.
203
2006 Act s.800(3)(a).
204
2006 Act s.800(3)(b).
205 But the court has a discretion whether to allow the transfer and whether or not also to
remove the restrictions; in particular it may continue restrictions (c) and (d) either in
whole or in part so far as they relate to rights acquired or offered prior to the transfer: see
s.800(4).
206 2006 Act s.801. The only transaction that can be ordered is a sale. The word is used
in conscious contradistinction to “transferred for valuable consideration” in s.800(3),
which would include a share exchange takeover offer: cf. Re Westminster Group Plc
[1985] 1 W.L.R. 676 CA.
207 2006 Act s.801(1). The court may then make further orders relating to the conduct of
the sale: s.800(3). The proceeds of sale have to be paid into court for the benefit of the
persons who are beneficially interested in the shares who may apply for the payment out
of their proportionate entitlement: s.802.
208
Though it appears that it does not have to remove them.
209
2006 Act s.820(1). For a discussion of CfDs, see para.28–45, above.
210 2006 Act s.824(2)(b). Though, see below, once an agreement is triggered by an
acquisition, the notification requirements extend beyond interests acquired in pursuance
of it.
211 2006 Act s.824(2)(a).
212
2006 Act s.824(5)(6). Of course, the presence of mutuality will normally make the
agreement legally binding, but the subsection deals with the doctrine of intention to
create legal relations, which the parties might use to declare an agreement not binding at
law. The subsection also excludes an underwriting or sub-underwriting agreement
provided that that “is confined to that purpose and any matters incidental to it”.
213 2006 Act s.825(1)–(3).
214 2006 Act s.825(4).
215 The “Definitions” section of the Code makes it clear that the offer period is triggered
by an announcement of a possible offer (not necessarily a firm one) and the possible
offeror can make that announcement itself or easily put the offeree company in a
position where it is required to make an announcement under rr.2.2 and 2.3.
216 Above fn.91, paras 3.1 and 5.7.
217
Code rr.2.6 and 2.8. The deadline is set much later if a competing offeror announces
a firm bid for the company before the deadline expires. And the rule will not normally
apply to participants in a formal sale process which the company is conducting,
presumably because any destabilising effect has been precipitated by the company’s
management itself.
218
PCP 2004/4, Conditions and Pre-Conditions, especially s.7. The “pre-conditions” to
an offer are the conditions attached in the “firm intention” statement. See now r.2.7.
219
Code rr.2.7 and 30.1.
220
Above, para.28–35. Even those acting on behalf of the bidder may find themselves
caught by the insider trading prohibition, if as a result of being granted access to the
target’s books, they obtain, as is likely, price-sensitive but non-public information. This
is because the exemption in Sch.1 to the CJA 1993 is confined to “market information”
which is information about the acquisition or disposal of securities. Thus, to take an
extreme example, if the bidder’s due diligence reveals the company has just made a
potentially very lucrative discovery, the fact that the bidder is now prepared to pay more
for the target’s shares is market information, but the fact of the discovery would appear
not to be.
221 FSA, Market Watch, No.21, July 2007.
222
Code rr.2.3 and 2.4 and n.1 to r.2.4, though the Panel must be consulted in advance if
it is proposed to include conditions and there are some requirements in the note designed
to make the potential bidder’s intentions clear. The Panel (above, fn.218) took the view
that, since a “possible bid” announcement was not binding on the bidder in any event,
more information was preferable to less.
223
In the case of pre-conditions the Code shows a little more flexibility, notably where a
regulatory condition must be satisfied for the bid to proceed and that is likely to take a
long time, and it would thus not be “reasonable” for the potential offeror to have to
maintain, and pay for, committed financing throughout this period.
224 In fact, this concession may enable the company to escape having to proceed with
the bid. The shareholders (including the directors in their capacity as shareholders) will
not be obliged to approve the share issue (especially if they think conditions have
changed since the offer was first announced): Northern Counties Securities Ltd v
Jackson & Steeple Ltd [1974] 1 W.L.R. 1133. And it is not even clear that the Code can
require the directors to recommend approval to the shareholders if the directors think it
would be a breach of their core fiduciary duty to do so: see above, para.28–36. (In the
Jackson & Steeple case the contrary was held, but on the basis that the directors had
already given an undertaking to the court to recommend positively.) Perhaps for this
reason, the Code attempts to prevent this situation arising in the case of a mandatory bid:
r.9.3(b).
225 Code r.13.5 and see the WPP case, above, fn.153.
226Normally a lapsed bid cannot be revived within 12 months: see r.35 below.
However, the bidder must decide whether to re-offer within 21 days of the clearance:
note on r.35.1 and 35.2. The new offer need not be on the same terms as the lapsed one.
For the mandatory bid, see note on r.9.4.
227By contrast, the successful bidder may suffer from the “winner’s curse” of having
overpaid for the target.
228Code r.33.2. But such a notice must not be given if a competing offer has been
announced until the competitive situation ends. For the exclusion of mandatory offers
see fn.2 to r.33.2.
229
PR 1.2.2(2) and 1.2.3(3).
230 Code rr.23.2. The same obligation is imposed in relation to bid announcements:
r.2.12.
231
Code r.25.9. Rule 32.6 makes the same provision in relation to the offeree’s circular
on any revised offer.
232 Information and Consultation of Employees Regulations 2004 (SI 2004/3426)
reg.20. The FCA’s rules indicate that it will not be market abuse for a company involved
in a bid to disclose information to an employee representative in fulfilment of an
obligation imposed by the Regulations, provided the information is subject to a
confidentiality requirement: MAR 1.4.5(2)(e). Equally, disclosure of inside information
to an employee representative will not be a criminal offence on the part of a manager
under s.52 of CJA 1993 if the disclosure is “in the proper performance of the functions
of his employment”, though it might be for the representative to trade on the information
or to further disclose it. See C-384/02 Criminal Proceedings against Gröngaard [2006]
I.R.L.R. 214 ECJ.
233
234 Pensions Act 2004 ss.43–51 (“financial support directions”). The point is that the
pension deficit revealed in the accounts may no longer be an accurate indication of the
amount of money needed to secure the pension obligations, if the bidder’s risk profile
changes significantly. A better test might be the amount an insurance company would
require to transfer to itself the company’s pension obligations. In the case of the takeover
of Boots by a private equity bidder in 2007 the trustees negotiated additional payments
of £418 million over 10 years into the pension fund: Financial Times fm, 25 June 2007,
p.6. In the earlier case of WH Smith it appears that a potential bidder decided not to
make a bid because of the target’s pension fund deficit.
235
The offeror will not need to do so on a pure cash offer for all the shares; but the
target will.
236 Code r.28.1.
237 Code r.28.2 (and see the Notes thereto).
238 Code r.28.3.
239 Code r.28.4.
240
Code r.28.5.
241 Code r.29.
242 Code, Introduction, 2(a).
243
On the Panel’s powers to award compensation, see above, para.28–9.
244In addition to the liabilities discussed in the text, the bidder might also be liable in
damages under s.2(1) of the Misrepresentation Act 1967 (unless it could disprove
negligence) or to have its contract with the accepting shareholders rescinded in equity,
though in both cases this could apply only between the bidder and the target company
shareholders and where the shareholders had accepted the bidder’s offer.
245 Caparo Industries Plc v Dickman [1990] 2 A.C. 605. See paras 22–36 et seq., above.
246
Proving that the negligent misstatement caused the plaintiff the loss in question may
be, of course, a very difficult matter. See JEB Fasteners Ltd v Marks Bloom & Co
[1981] 3 All E.R. 289 (above, para.22–52).
247
Morgan Crucible & Co v Hill Samuel & Co [1991] Ch. 295 CA. However, this
decision has to be read in the light of subsequent developments on assumption of
responsibility. See Partco Group Ltd v Wragg [2002] 2 B.C.L.C. 323 CA, where a
successful bidder sued the directors of the target on the basis of statements made to the
bidder in the course of due diligence carried out by the bidder prior to making a
recommended offer. The CA refused to strike out the claim but were clearly sceptical as
to whether it would ultimately succeed, because the directors could be said to have
assumed responsibility for the accuracy of the statements only on behalf of the target
(now owned by the bidder) and not personally. See also above, at para.22–44. See
further the refusal to strike out in a claim by the bidder against the target’s auditors on
special facts in Galoo Ltd v Bright Grahame Murray [1994] 1 W.L.R. 1360 CA.
248 See Code, “Definitions”.
249
Code r.4.2. Such action is likely to cause great confusion in the market. If the Panel
does consent, it will require 24 hours’ notice to be given to the market and will require
the sale to be at above the offer price. Not abiding by the Code’s provisions on sales
might well be a criminal offence under Pt 7 of the Financial Services Act 2012, if the
object was to rig the market by causing a fall in the quoted price of the target’s shares,
thus making the offer more attractive; or under the insider dealing legislation if
information available to the offeror suggested that its offer would not succeed and it
wanted to “make a profit or avoid a loss” by selling before the quoted market price fell
back when the offer lapsed. See Ch.30, below.
250 In brief, “Opening Disclosures” must be made by any person at the 1 per cent level
(instead of 3 per cent) and full disclosure by the parties to the bid or their “associates”
(as defined in “Definitions”) and “Dealing Disclosures” must be made daily by those
parties. Dealings in derivatives must also be disclosed. See rr.8.1–8.3 and notes.
However, in the case of cash offers, dealings in the shares of the offeror do not have to
be disclosed.
251 A product advertisement, not bearing on the offer (which is not really an exception),
and advertisements in relation to schemes of arrangement (when the relevant regulator is
the court): see Ch.29, below.
252
Time constraints do not permit this to be done; the Panel requires only 24 hours to
consider the proof of the advertisement which must have been approved by the
company’s financial adviser: r.19.4, Note 1.
253
Code r.19.4, Note 2.
254 Specifically excluded from exceptions (iii) and (iv) to r.19.4.
255 Code r.19.4, Note 5.
256 Code r.19.4, Note 4.
257 Code r.19.4, Note 3.
258
Code r.19.5, Note 1. It is difficult to see how the financial adviser can supervise
effectively unless it insists upon all calls made being recorded; but the rules and notes do
not require or suggest that.
259
This warning ought to frighten the financial adviser!
260
This does not preclude the issue of circulars to their own investment clients by
brokers or advisers provided that the circulars are approved by the Panel.
261
The risk of new information being given out on a partial basis in such cases
materialised in the Kvaerner bid for AMEC, where a financial public relations company
employed by the target made statements in closed meetings about the target’s future
profits which had not been contained in the defence document: Panel statement 1995/9.
The PR company was censured by the Panel and dismissed by the target.
262
Or even if no offer has been made but a firm announcement of an intention to bid has
been made. A bidder is not normally free simply to withdraw a bid, but may do in some
limited circumstances.
263
As we have seen above (para.28–42), the obligation to bid might not fall to the
particular member of the concert party who is the former bidder.
264
Code r.35.2.
265 Code r.35.3.
266 Final Report I, pp.282–300. However, that report rejected the argument that a
squeeze-out right should be extended so as to operate whether the 90 per cent holding
results from a takeover or not, largely on the grounds that valuation in such a case would
be difficult. Nevertheless, the functional arguments for the squeeze-out from the 90 per
cent holder’s point of view are just as strong in such a case. The European Commission
included such a proposal in its draft Directive amending the Second Directive (see
COM(2004) final, 21 September 2004, proposed new art.39a) but it was later dropped.
267 See para.29–3.
268 See para.25–46. This is a situation where non-acceptors are likely to change their
minds once the acceptance level is known. See para.28–60, above. In companies with a
small number of shareholders there are sometimes contractual provisions (in the articles
or a shareholder agreement) requiring the minority to accept on the same terms an offer
which the majority have accepted (“drag along” provisions). See Re Charterhouse
Capital Ltd [2015] B.C.C. 574 CA.
269 2006 Act s.979(2). If, as is usual, the voting rights are on a one vote per share basis,
the two requirements amount to the same thing.
270 See further below.
271
2006 Act s.979(4). In the case of a company with voting shares or debentures
admitted to trading on a regulated market, debentures carrying voting rights are treated
as shares of the company: s.990. This provision is necessary because art.15 of the
Directive refers to “securities” (not just to shares), though art.2(1)(e) makes it clear that
the Directive includes only securities carrying voting rights. Voting debentures are
uncommon in the UK.
2722006 Act s.974(1); and see Fiske Nominees Ltd v Dwyka Diamond Ltd [2002] 2
B.C.L.C. 123.
273 But it could be an unincorporated body, e.g. the trustees of a pension fund.
274 See s.987 on joint offers, which deals with the problem identified in Blue Metal
Industries v Dilley [1970] A.C. 827 PC, that the legislation at the time of that case was
not well-adapted to deal with joint offers.
275 Hence it does not apply to “partial offers”: but, where the Code applies, the Panel
would not be likely to allow a partial offer which might lead to the acquisition of 90 per
cent.
276
“Shares” here means shares allotted at the date of the offer and excludes treasury
shares (s.974(4)) but see below for the handling of these shares.
277
2006 Act s.974(2) and (3). “Shares” here means shares allotted at the date of the
offer but the offer may include shares to be allotted before a specified date: s.428(2).
278
Re Chez Nico (Restaurants) Ltd [1992] B.C.L.C. 192.
279
Since the directors had failed to make proper disclosure to the other shareholders.
280
Browne-Wilkinson VC emphasised that his decision was only on the meaning of
“takeover offer” for the purposes of the squeeze-out and sell-out provisions and that he
had no doubt that what had occurred would be a takeover offer for the purposes of many
statutory or non-statutory provisions. This is certainly true of the non-statutory Code.
Indeed, the Panel had treated the Chez Nico takeover as subject to the Code (the
company had been a Plc at the time of the circularisation and remained subject to the
Code after its conversion to a private company since, while a public company, it had
made a public offering) but the only penalty that the Panel had imposed was to criticise
the two directors for their ignorance of, and failure to observe, the Code: see p.200.
281 For example, local securities laws might make a share-exchange offer in a particular
jurisdiction “unduly onerous”. The requirement for “equivalent consideration” is a better
solution than that adopted by the directors in Mutual Life Insurance Co of New York v
The Rank Organisation Ltd [1985] B.C.L.C. 11, in order to avoid US securities laws,
which was simply to exclude the US shareholders from any pre-emption entitlements in
a public offering.
282 Re Joseph Holt Plc [2001] 2 B.C.L.C. 604 CA.
283 Final Report I, paras 13.24 and 13.43–13.45.
284 2006 Act s.974(2).
285
This is not compensated for by the fact that the number of shares which the bidder
has to acquire to reach 90 per cent acceptances is also reduced. Thus, if there are 200
allotted shares and the bidder holds none of them at the outset, it takes a holding of 21
shares to block the squeeze-out, but if the bidder holds 100 at the outset, 11 objectors are
enough to block it, i.e. the blocking percentage falls from just over 10 per cent of the
class to just over five per cent of the total shares in issue. This would not matter if the
bidder could rely on having acquired shares pre-bid rateably from acceptors and non-
acceptors, but, in the nature of things, the non-acceptors are likely to be
underrepresented among those who have sold out voluntarily to the bidder.
286
The reason for insisting on no significant consideration is to maintain the rule that
the offer must be on the same terms to all the shareholders. In general, shares
conditionally acquired ahead of the bid do count as shares already held: s.975(1).
287
2006 Act ss.977, 979(8)–(10). This rule is also applied to acquisitions by associates.
288 2006 Act s.974(4)–(7). A decision to exclude all or any such shares from the offer
does not cause it to fail to meet the requirement that the offer be for all the shares or all
the shares of a class: s.974(4), which excludes such shares from the universal obligation.
Convertible securities, so long as they remain unconverted into shares, are treated as
shares of the company but as a class of shares separate from the class into which they
can be converted: s.989. Rule 15 of the Code normally requires the bidder to bid for
convertible shares. For the problems caused by convertible shares before the
introduction of these statutory reforms see Re Simo Securities Trust [1971] 1 W.L.R.
1455. Rule 4.5 prohibits an offeree company from accepting an offer in respect of shares
still held in treasury until after the offer is unconditional as to acceptances. On treasury
shares, see above at para.13–27.
289
2006 Act ss.979(2), 980. This requirement is buttressed by criminal sanctions for
failing to send a notice to the company or for intentionally or negligently making a false
statement in the declaration. Section 986(9),(10) provide a limited exemption from the
90 per cent threshold: if the failure to reach it is due entirely to the non-response of
untraceable shareholders, the court may permit the bidder to serve a compulsory
acquisition notice, provided it is satisfied (a) the consideration is fair and reasonable and
(b) it is just and equitable to do so (taking into account in particular the number of
untraceable shareholders).
290 Where the offer is not governed by the Code, so that there is no fixed closing date for
the offer, the period is six months from the date of the offer.
291
2006 Act s.981(4),(5). Normally the alternative which was to have been provided by
a third party will have been cash, in which case the bidder now has to supply it. If the
consideration which cannot now be provided, whether by bidder or third party, was a
non-cash one, a requirement for equivalent cash applies. This adopts and codifies the
effect of the decision of Brightman J in Re Carlton Holdings Ltd [1971] 1 W.L.R. 918.
292 The main problem that has had to be solved is that many of the non-acceptors of the
offer will probably be untraceable. The solution adopted causes the offeror little trouble
(see ss.982(4) et seq.), but the target company, now a subsidiary of the offeror, may have
to maintain trust accounts for 12 years or earlier winding-up and then pay into court.
293 It seems that the offeror cannot deprive the court of its jurisdiction to amend the
terms of the squeeze-out by accepting the petitioner’s right not to be squeezed out, at
least where the petitioner has not indicated he or she seeks only the right not to be
compulsorily acquired: Re Greythorn [2002] 1 B.C.L.C. 437. In this case the petitioner
had reasons for thinking that the closely-held target company had been taken over at a
gross undervalue, and the bidder evidently preferred to allow the petitioner to remain in
the company than to have that issue examined in court.
294 Formally, this will not help a petitioners who want a higher price, but they may be
able to negotiate one if the bidder cannot squeeze them out at the offer price.
295
Rock Nominees Ltd v RCO (Holdings) Plc [2004] 1 B.C.L.C. 439 CA.
296This way of proceeding was undoubtedly more expensive for the bidder than a
compulsory acquisition. On unfair prejudice, see Ch.20, above, and on voluntary
winding up, para.33–9, below.
297 For the courts’ traditional reluctance to fix a price (as opposed to simply ratifying or
not the bid price) see Re Grierson, Oldham & Adams Ltd [1967] 1 W.L.R. 385.
298 Re Hoare & Co Ltd (1933) 150 L.T. 374; Re Press Caps Ltd [1940] Ch. 434.
299
Re Bugle Press Ltd [1961] Ch. 270 CA; Re Chez Nico (Restaurants) Ltd [1992]
B.C.L.C. 192; Re Lifecare International Plc [1990] B.C.L.C. 222; Fiske Nominees Ltd v
Dwyka Diamond Ltd [2002] 2 B.C.L.C. 123.
300 Subject to the shut-off of cash alternatives: see above, para.28–60.
301 2006 Act s.983(1).
302
2006 Act s.983(2)–(4),(8). “Associate” is broadly defined in s.988. If conditionally
acquired shares are not in fact ultimately acquired and that would mean the threshold
would not be met if they were excluded, there is a standstill procedure which may result
in the shareholder losing the right to be bought out: s.983(6),(7).
303
As with the squeeze-out right, however, this is not a general right for a minority to be
bought out: if the final step in the process whereby the majority acquires 90 per cent of
the shares is not a takeover bid, the right to be bought out does not arise in the UK,
unlike in some other jurisdictions.
304
2006 Act s.984(1)–(4). The offeror’s obligation is supported by criminal sanctions on
the bidder and any officer in default: s.984(5)–(7).
305
2006 Act s.985.
306
307
308
For a general review of these issues see P. Davies, “Control Shifts via Contracting
with Shareholders” in G. Ringe and J. Gordon (eds), The Oxford Handbook of
Corporate Law and Governance (Oxford: OUP, 2017 (forthcoming publication)).
CHAPTER 29
ARRANGEMENTS, RECONSTRUCTIONS AND
MERGERS
The Function of Schemes of Arrangement 29–1

Mergers 29–2
Takeovers 29–3
Other cases 29–4
Creditors’ schemes 29–5
The Mechanics of the Scheme of Arrangement 29–6
Proposing a scheme 29–7
Convening and conducting meetings 29–8
The sanction of the court 29–11
Additional requirements for mergers and divisions
of public companies 29–12
Cross-Border Mergers 29–16
Employee participation 29–20
Further uses of cross-border mergers 29–22
Reorganisation under Sections 110 and 111 of the
Insolvency Act 1986 29–24
Conclusion 29–26
THE FUNCTION OF SCHEMES OF ARRANGEMENT

29–1
Part 26 of the Act applies “where a compromise or arrangement
is proposed between a company and its creditors or any class of
them or its members or any class of them” (s.895). Proposals
made under this Part are normally referred to as “schemes of
arrangement”. Schemes are frequently used to effect
“gamechanging” transactions as a company’s business strategy
develops, especially in the case of public and publicly-traded
companies. They are very important in practice. Yet, someone
who comes to the statute without any knowledge of how
schemes can be used finds the language of the statute
uninformative. This is mainly because the scheme provisions are
very widely drawn and can be used to carry through a number of
different types of transaction which, in other jurisdictions, are
often made the subject of separate statutory procedures. It is
therefore useful to begin by identifying the principal types of
activity for which schemes are or could be used.
Mergers
29–2
In most countries’ companies legislation there is to be found a
section headed “Mergers” which will contain language
somewhat along the following lines:
“Any two or more corporations existing under the laws of this State may merge into
a single corporation, which may be any one of the constituent corporations, or may
consolidate into a new corporation formed by the consolidation, pursuant to an
agreement of merger or consolidation, as the case may be, complying and approved
in accordance with this section.”1
The assets of the merging companies will end up in the

“resulting company” (which may be a new company formed for
the purpose of the merger or one of the merging companies). As
to the shareholders of the merging companies, traditionally they
too end up as shareholders of the resulting company, each of the
previously separate bodies of shareholders holding, more or less,
the proportion of shares in the resulting company which reflects
the respective valuations of the companies which came together
to form that company. In liberal jurisdictions, such as the UK,
cash may be permitted as merger consideration. In that case,
some or all of the shareholders of a merging company exit the
company rather than transfer to the combined enterprise. If, in
addition, one merging company is already wholly owned by the
controlling shareholder of the second merging company and only
cash is offered to the non-controlling shareholders of the second
company, then the merger constitutes a method of squeezing out
the minority shareholders in the second company.
Although it is perhaps not obvious that s.895 contemplates the
use of a scheme of arrangement to effect a merger, later sections
make it clear that this is the case. Section 900 deals specifically
with compromises or arrangements under s.895 “proposed for
the purpose of or in connection with a scheme for the
amalgamation of two or more companies” and involving the
transfer of the undertaking or property of one company involved
in the scheme to another.2 Section 900 gives the court the power
to make ancillary orders so as to transfer the undertaking from
transferor to transferee company (without the parties having
make arrangement to do this themselves by contract) and to
dissolve the transferor company without winding it up.3 Equally,
the scheme can be used for a “de-merger” or division of a
company, whereby part of its undertaking is transferred to
another company, again either one formed for the purpose of the
de-merger or an existing company.4 In certain merger and de-
merger cases, the transaction will have to comply in addition
with the provisions of Pt 27 of the Act, which implements in the
UK the Third and Sixth Company Law Directives of the EU.5
In addition to the scheme of arrangement under the
Companies Act, it is possible to effect a merger under provisions
of the Insolvency Act 1986. Sections 110 and 111 of that Act are
precisely targeted at the transfer of a company’s undertaking to
another company, in exchange for shares “or other like interests”
in the transferee company, which are distributed to the
transferor’s shareholders. However, the transferor must be in
voluntary winding up to take advantage of this procedure.6
Takeovers
29–3
As we shall see,7 it is in fact relatively uncommon for the
scheme to be used to effect a merger. More often, what is
produced is the scheme equivalent of a takeover, as discussed in
the previous chapter. A simple example is the “transfer scheme”
whereby the shares in the target not already held by the bidder
are transferred to it in exchange for a consideration in cash or
shares, provided by the bidder.8 A scheme can be used in this
way to replicate all of the outcomes of a successful takeover
bid.9 The resulting position is, formally, different from a merger.
The target company ends up as a subsidiary of the bidder (i.e. the
separate legal personality of the two companies is maintained),
though a single legal entity may be produced ultimately through
a squeeze out merger of the parent and its new subsidiary. As we
have seen above, effecting an agreed takeover through a scheme
is an increasingly popular move, so that the Takeover Panel,
which has always applied its rules to takeovers through schemes
(where its rules are not displaced by statutory rules specific to
schemes), has now set out on a systematic basis how its rules
apply to schemes.10
An advantage of the scheme is that it becomes binding on all
the shareholders in question if approved by three-quarters of the
shares (and a majority in number of them),11 whereas, as we
have seen,12 a takeover offer becomes binding on all
shareholders only if accepted by 90 per cent of the shares offered
for (which allows the company compulsorily to acquire the
shares of the non-accepting shareholders). For this reason, it was
argued that, if the scheme procedure was used where a takeover
offer could be made, the court should insist on 90 per cent
approval of the scheme by the shareholders. However, the
argument was rejected on the grounds that in the scheme
procedure the shareholders have the protection of the
requirement of prior court approval of the scheme, an element
not present in the contractual takeover offer.13 A crucial step in
this reasoning is that the court must form its own judgment on
the merits of the scheme when it comes to consider its approval
and not grant approval simply because the appropriate
proportion of the members have approved it. Whether this is in
fact the case we shall consider below.
In the case of a hostile offer, the disadvantages of the scheme
normally outweigh its advantages as against the takeover offer.
The main disadvantage is that the shareholders are not bound
until they have voted in favour of the scheme or, even, until the
court has sanctioned it, and the necessary delays involved in
calling a shareholder meeting give rival bidders the time to
organise a competing bid. By contrast, in a takeover offer the
bidder can start soliciting “irrevocable commitments”14 even
before the formal offer is made, and those who accept the offer,
whether before or after it is formally launched, are not released
from their acceptances simply because a rival offer has
appeared.15 It is also easier to make use of the scheme procedure
if the cooperation of the target board is forthcoming, though that
cooperation is not a formal condition for a successful scheme,
whereas one of the advantages of the contractual offer is that the
legal transaction is solely between acquirer and target
shareholder. Therefore, a scheme is likely to prove attractive
only where the takeover is agreed with the board of the target
and is not likely to precipitate a rival offer and the offeror is
keen to achieve complete ownership of the target.
Other cases
29–4
Although a merger (potentially) and a take-over (actually)
constitute important uses of the scheme of arrangement, the
width of the statutory language means that many other uses are
possible. The scheme may be particularly convenient where UK
company law does not appear to offer a customised procedure
for carrying out the transaction in question. Besides the merger,
another example is use of the scheme to shift the jurisdiction of
incorporation of the company or of the parent of a corporate
group—usually termed “redomiciling” the company. As we have
noted,16 British company law does not provide a simple
mechanism for transferring jurisdictions, not even between the
jurisdictions which constitute the UK. Forming a new company
in the preferred jurisdiction which acquires the assets of the
existing company at a market price is likely to prove expensive
in tax terms. However, a transfer scheme whereby the court uses
its powers to transfer the assets of the existing company makes
this transaction fiscally feasible.17 It should be noted that the
scheme provisions do not require that the transferee company be
incorporated in the same jurisdiction as the transferor or in a UK
jurisdiction at all.
Overall, whether the scheme involves just a single company or
more than one company, the courts have construed
“arrangement” as a word of very wide import and as not to be
read down by its association with the word “compromise” in the
section, so that an arrangement involving members need not, and
usually does not, involve an element of compromise.18 The term
covers almost every type of legal transaction, and, as the
takeover example shows, in substance the transaction may be
between the shareholders and a third party, though a scheme will
only be available if the company is formally a party to the
transaction. Only the case of unvarnished expropriation of the
shareholders has so far been excluded by the courts from the
scope of the term.19
Creditors’ schemes
29–5
The arrangement may not be with the company’s members at all
but with its creditors. In fact, when the scheme provisions were
introduced by the Joint Stock Companies Arrangement Act
1870, they applied only to arrangements with creditors (and
indeed only to arrangements proposed by companies in the
course of being wound up). The members were added in 1900
but not until the Companies (Consolidation) Act 1908 was the
winding-up requirement dropped and the forerunner of the
modern provisions emerged. In practice, a very common use of
the provisions today is to secure compromises with creditors of a
company in financial trouble—and perhaps at the same time
with its shareholders.20 In some cases the getting in and
distribution of the company’s assets can be effected more
quickly and expeditiously through a scheme than a winding-up,
in which case the scheme will operate alongside the winding-up,
but in effect be determinative of most of the substantive issues;
or the company may be able to reconstruct itself as a viable
going concern under a scheme without entering formal
insolvency.21 We do not consider creditors’ interests in schemes
in any detail in this book, since they are better located in works
on insolvency. It is worth noting, however, that where the
company is in financial difficulty the English courts have been
willing to accept jurisdiction over schemes proposed by
companies which are not incorporated in the UK and even have
no assets here, for example, where the creditors’ rights are
governed by English law. However, such reasoning would have
no application to solvent companies where the scheme concerns
wholly or primarily the members’ rights.22 Even in members’
cases, creditors’ interests may possibly be affected and, if so,
their consent will be needed.
THE MECHANICS OF THE SCHEME OF ARRANGEMENT
29–6
Given the significance of the scheme for the company’s future
development, it is not surprising that the scheme procedure is
designed with the aim of ensuring that the shareholders of the
company or companies involved in the scheme are content with
it. Special resolution approval of the scheme is required, to be
given separately by each class of affected shareholders. But
since even a supermajority approval requirement may not protect
minority shareholders, court approval of the scheme is also
required—though the effectiveness of this piece of minority
protection depends on the rigour of the court’s scrutiny of the
scheme. Thus, there are three main steps in a scheme of
arrangement:
(a) A compromise or arrangement must be proposed between the
company and its members.23
(b) Meetings of the members must be held to seek approval of
the scheme by the appropriate majorities. These meetings are
convened by the court on application to it.24
(c) The scheme is sanctioned by the court.25
Proposing a scheme
29–7
This first stage, which is often overlooked, is important because,
in practice, it is difficult to use the scheme procedure unless the
scheme is approved by the board, which then proposes it on
behalf of the company. Formally, it would seem that the general
meeting could propose a scheme on behalf of the company,26 but
the shareholders’ co-ordination problems make this course of
action often difficult. The point is illustrated by the decision in
Re Savoy Hotel Ltd,27 which is instructive in a number of ways.
The company, which had survived a hostile takeover bid in the
early 1950s,28 introduced a dual-class share structure, consisting,
at the time of the litigation, of some 28 million A shares and
some 1.3 million B shares, with identical financial entitlements,
but with the B shares having (in effect) 20 times the number of
votes attached to the A shares. The board held directly or
indirectly some two-thirds of the B shares. Such a degree of
voting leverage may have been thought to have rendered the
company impregnable to a takeover. However, this distribution
of voting rights did mean that the A shareholders held just over
half the votes in the company. This did not create the risk of an
ordinary takeover offer succeeding, because it was reasonable to
assume that enough holders of the A shares would oppose a bid
to prevent the bidder obtaining 50 per cent of the total votes, as
required by the Takeover Code,29 given that the B shareholders
would be solidly against an offer.
Instead, the bidder (THF) sought to put forward a scheme for
the transfer to it of the A and B shares in exchange for cash, the
scheme providing that if one class of shareholders did not
approve of it (the B shareholders), the scheme could proceed in
favour of the other class alone (the A shareholders). It was
reasonable to suppose that three-quarters in value and a majority
in number of the A class shareholders30 might approve the
scheme. The dissentient A class shareholders would then be
bound by it (subject to court sanction) and the bidder would end
up with just over half the voting shares in the company, even if
the scheme were rejected by the B class shareholders. THF,
which held a few A class shares, applied to the court as a
member31 under step (b) above for an order for separate meetings
of the A and B shareholders to be held to consider the scheme.
Nourse J held that he had power to order such meetings but
declined to do so, on the grounds that they would be futile. This
was because the scheme had not been proposed by the company
but by a shareholder (THF). Thus, step (a) was not satisfied and
so the court would not have jurisdiction to sanction it at stage
(c).32
Convening and conducting meetings
29–8
When the proposed scheme has been formulated, the first step is
an application (normally ex parte) to the court by or on behalf of
the company (or companies) to which the compromise or
arrangement relates for the court to order meetings of the
members or classes of members to be summoned.33 This the
court will generally do and will give directions about the length
of notice, the method of giving it and the forms of proxy. In the
case of shareholders—unlike with creditors where the question
has generated endless difficulty—this is a relatively easy task,
since the practice of splitting shares into different classes in the
articles is a general feature of company law. However, the fact
that the members in question have the same rights as against the
company does not necessarily mean that they are part of the
same class for scheme purposes, because the scheme may
propose to treat different groups of those members differently
Equally, the fact that shareholders are in different classes under
the articles does not necessarily mean they should not be put
together for the purposes of voting on the scheme.
The general test for determining whether the members should
meet as a whole or in one or more separate classes is whether the
rights of those concerned “are not so dissimilar as to make it
impossible for them to consult together with a view to their
common interest”.34 However, it is easier to state this test than to
apply it. In general, it can be said that, the greater the number of
classes, the greater the chances the scheme will fail to obtain the
consent of one or more of those classes.35 Further, the tests for
determining classes should be reasonably simple and applicable
by the company without extensive investigation into the position
of particular members. For this reason, the courts have used the
rights of shareholders (as against the company and under the
scheme) as the touchstone for determining the class issue, rather
than their interests. Interests, it is said, can be taken into account
by the court at the third stage when it decides whether to
sanction the scheme. However, the courts cannot take a radically
different approach at the third stage without affecting the way
classes are defined at the second stage. Thus, in Re BTR Plc,36 a
case of a takeover being effected through a scheme, the judge
sanctioned the scheme which had been approved in a single
meeting of the target’s shareholders and rejected the argument
that those shareholders of the target company who already held
shares in the bidder should have been put in a separate class. The
judge distinguished the earlier case of Re Hellenic and General
Trust,37 where the judge had refused sanction because the
ordinary shares already held by a subsidiary of the bidder in the
target had been voted in favour of the scheme at a meeting of the
ordinary shareholders. The explanation of Re Hellenic was that
the subsidiary’s shares had been excluded because the scheme
did not concern them: in effect, they were already held by the
bidder.
29–9
The issue of how classes should be composed for scheme
purposes was rendered particularly acute by the former practice
of the courts of leaving the decision about class meetings at
stage (b) almost wholly to the company (i.e. of simply accepting
what the company proposed) and taking a view whether that
decision was correct only at stage (c), by which time it was too
late to do anything about it and the court could only refuse to
sanction the scheme on the grounds it had no jurisdiction to do
so, since the proper meetings had not been held!
This approach was roundly criticised by Chadwick LJ in Re
Hawk Insurance Co Ltd38 and, as far as creditors are concerned,
where identifying the correct classes is often particularly
difficult, a Practice Direction was subsequently issued designed
to produce substantive consideration of the classes issue at stage
(b). Although a creditor may still challenge the way the meetings
were convened at stage (c), the court “will expect them to show
good reason why they did not raise a creditor issue at an earlier
stage”.39 The CLR proposed that the court should have the
general discretion to determine the appropriate classes at stage
(b), when asked to do so by the company, and that, if it exercised
its discretion at this stage, it should be bound by it when it came
to consider sanctioning the scheme after member or creditor
approval (stage (c)).40 It further proposed that the court should
have a discretion to sanction the scheme even if the appropriate
class meetings had not been held, provided the court was
satisfied that the incorrect composition of the meetings had not
had any substantive effect on the outcome, i.e. it would no
longer be a matter going to the jurisdiction of the court.41
However, these proposed reforms were not taken up in the Act
and so the procedure in relation to classes of members remains
somewhat obscure. It seems likely that the courts will adapt the
creditor procedure so that members who think the company’s
class proposals are inappropriate should object at stage (b) and
not wait until (c).
29–10
Section 897 requires any notice sent out summoning the
meetings to be accompanied by a statement explaining the effect
of the compromise or arrangement and in particular stating any
material interests of the directors (whether in their capacity of
directors or otherwise) and the effect on those interests of the
scheme in so far as that differs from the effect on the interests of
others.42 Where the scheme affects the rights of debenture-
holders, the statement must give the like statement regarding the
interests of any trustees for the debenture-holders.43 If the notice
is given by advertisement,44 the advertisement must include the
foregoing statements or a notification of where and how copies
of the circular can be obtained, and on making application a
member or creditor is entitled to be furnished with a copy free of
charge.45
The level of approval required at the meeting is a majority in
number,46 representing three-fourths in value,47 of its creditors or
members present and voting in person or by proxy.48 The
question of whether the approval of both creditors and members
or of a particular class of member or creditor is required in any
case is to be answered by determining with whom the company
proposes to effect a compromise or arrangement. If members or
creditors or any class of them are not included within the
scheme, their consent is not required, but the company runs the
risk that the implementation of the scheme may later be held to
infringe the rights of those left out of it.49
The sanction of the court
29–11
The application for the court’s approval is made by petition of
the applicants and may be opposed by members and creditors
who object to the scheme. In the oft-quoted words of Maugham
J,50 the duties of the court are twofold:
“The first is to see that the resolutions are passed by the statutory majority in value
and number …at a meeting or meetings duly convened and held. The other duty is
in the nature of a discretionary power…[W]hat I have to see is whether the proposal
is such that an intelligent and honest man, a member of the class concerned and
acting in respect of his interest, might reasonably approve.”
The first of these duties involves not only ensuring that the
meeting was given the information the statute requires and that
the requisite majority was obtained, but also that the class was
fairly represented at the meeting. Thus, the sanction of the court
can be refused if the meeting was unrepresentative of the class as
a whole or if those whose votes were necessary to secure the
required level of approval did so in order to promote some
special interest which they did not share with the ordinary
members of the class.51 This seems to involve something akin to
the “bona fides” test applied to majority decisions to change the
articles.52 The second part of the test is relatively weak, since it
is a rationality rather than a reasonableness test. The court
should not differ from the majority view “unless something is
brought to the attention of the Court to show that there has been
some material oversight or miscarriage”.53
The scheme becomes binding on the company and all
members (or all members of the class concerned) and, if the
company is in liquidation, on the liquidator, once it is sanctioned
by the court and a copy of the court’s order is delivered to the
Registrar (so that knowledge of the scheme is publicly
available).54 Indeed, the binding effect of schemes on minorities
is one of its attractions over a takeover bid.55 In addition,
implementation of an approved scheme will not lead to liability
for any unlawful act contained in the scheme, for example,
unlawful financial assistance for the purchase of shares.56
Additional requirements for mergers and divisions
of public companies
29–12
Under British practice, amalgamations of domestic companies
are rarely carried out by means of transfers of undertakings (as
opposed to shares) using a scheme of arrangement. For this,
there are said to be two reasons. First, there are limitations on
what s.900 can achieve. It was held in Nokes v Doncaster
Amalgamated Collieries57 that the section does not operate to
transfer contracts of employment and that principle has been
applied to any rights which as a matter of general law are not
transferable. Even if the contract is in principle transferable, the
counterparty may have negotiated a right to terminate the
contract or to insist on different terms of business if the
transferor is replaced by the transferee as the contracting party.
Any court order under s.900 (transferring property) will not
override these third-party rights and so transferor and transferee
will have to negotiate an acceptable set of arrangements with the
third party. However, it should be noted that contractual
restrictions can easily be drafted so as to apply where control of
the company changes without there being any transfer of assets
(as in a takeover, whether effected by a scheme or not), so that in
this respect a merger may put the company in no worse a
position. Whether or not the third party has negotiated
contractual protection, s.900(2)(e) gives the court power to
require protection for any creditor (or, indeed, member) who
dissents from the transfer. This issue will not arise in the case of
a takeover, since the court is not involved in approving it.
A second part of the explanation may be that a merger
effected by a scheme is very likely to trigger Pt 27 of the Act,
which imposes extra requirements and costs on the
implementation of schemes for reconstruction58 or amalgamation
involving a public company, in order to meet the requirements of
the Third Company Law Directive on mergers of public
companies.59 Part 27 does not apply where a scheme is used to
effect a takeover, because bidder and target remain separate
companies after the scheme has been effected. There are three
major additional requirements,60 of which the most important is
the third, which deploys the protective device, not otherwise
found in the domestic rules on schemes of arrangement, of an
independent expert’s report. However, although no formal
independent expert’s report may be required of the bidder in the
case of a proposed takeover by means of a scheme, the Takeover
Code lays down extensive rules on the provision of information
to the “target” shareholders, including an independent expert’s
opinion on the fairness of the offer and the Code’s rules will
apply to takeovers by way of a scheme.61 Thus, Pt 27 may not
add much in substance to the bidder’s costs. Perhaps the truth is
that tax rules make amalgamations through schemes unattractive
or that British practitioners have become so familiar with the
takeover that alternative means of amalgamation are not
seriously explored. In any event, the scheme-based domestic
merger seems to be rare.
29–13
The additional requirements of Pt 27 are:
1. Normally, a draft scheme has to be drawn up by the boards of
all62 the companies concerned and publicised via the Gazette
or, more likely, the company’s website. All this must be done
at least one month before the meetings are held.63
2. What has to be stated in the board’s circulars is considerably
amplified as compared with the rules for a standard scheme,
but perhaps not as compared with the Takeover Code rules.64
3. In addition, generally65 separate written reports on the scheme
have to be provided to the members of each company by an
independent expert appointed by that company or, if the court
approves, a single joint report to all companies by an
independent expert appointed by all of them.66
However, the Directive, although widely framed, does not apply
to all forms of merger, and Pt 27 goes no wider. Hence, there is
some considerable scope for framing a merger scheme which
avoids the additional requirements. In particular, Pt 27 applies
only where the consideration for the transfer is or includes shares
in the transferee, so that a merger for a purely cash consideration
is excluded.67 Secondly, in the case of a merger “by absorption”
(see below), where the transferee company already holds all, or
in some cases 90 per cent, of the securities carrying voting rights
in the transferor, the requirements mentioned above are
substantially reduced.68 This facilitates mergers within corporate
groups and, in particular, a merger of parent and new subsidiary
following a successful takeover bid. Thirdly, Pt 27 does not
apply if the transferor company is being wound up,69 rather than
being dissolved without winding-up after the merger. Thus, the
requirements of Pt 27 can be avoided by incurring the expense of
putting the transferor into liquidation—probably not an attractive
course of action.
29–14
Finally, the merger must fall within one of two “Cases” specified
in the Directive. The two “Cases” are:
1. Where the undertaking, property and liabilities of the public
company are to be transferred to another public company,
other than one formed for the purpose of, or in connection
with, the scheme (“merger by absorption”).70
2. Where the undertakings, property and liabilities of each of two
or more public companies, including the one in respect of
which the arrangement is proposed, are to be transferred to a
new company, whether or not a public company, formed for
the purpose of, or in connection with, the scheme (“merger by
formation of new company”).71 Thus, a transfer to a new
company, public or private, by a single public company
escapes from both 1 and 2, and equally a reconstruction of a
single company can be carried out purely under Pt 26.72
3. There is a third Case, which applies to divisions. Where,
under the scheme, the undertaking, property and liabilities of
the public company are to be divided among, or transferred to,
two or more companies each of which is either a public
company or a company formed for the purposes of, or in
connection with, the scheme (“division by acquisition” or
“division by formation of new company”).73
29–15
Despite the discouraging history of the use of schemes to effect
true mergers, the CLR consulted on the issue of whether there
should be introduced into the Act a statutory merger procedure,
as in many other jurisdictions.74 For the CLR the crucial element
of a statutory merger procedure was that the merger should not
require approval by the court, though in appropriate cases those
adversely affected by the proposal should have a right of appeal
to the court. Its goal of providing a “court free” merger
procedure was thus in line with what it recommended in the case
of reductions of capital.75 However, it also took the view that,
where the Third Directive applied, it would be impractical to
implement a proposal except under the supervision of the court.76
The result of the restrictions in effect imposed by the Directives
was that the statutory merger procedure seemed to the CLR to be
feasible only in two cases. The first was the merger of wholly-
owned subsidiaries of a parent company. The CLR thought this a
useful reform, and it was supported on consultation, because
“many groups of companies include subsidiaries which are kept
alive for no good reason other than to avoid the expense and
problems associated with getting rid of them”.77 The second and
somewhat more general area for the operation of a statutory
merger procedure was where a company formed a new wholly-
owned subsidiary, into which the assets and liabilities of an
existing company were transferred, the transferor being
dissolved. On consultation a majority thought the new procedure
should be made available in this situation as well.78 However,
neither of these proposals was taken up in the Act.
CROSS-BORDER MERGERS
29–16
Despite the limited utilisation of the scheme of arrangement to
produce true mergers between domestic companies, the merger
procedure has begun to be used by UK companies involved in
cross-border mergers since the adoption by the EU of the Cross-
Border Mergers Directive.79 The objective is often to simplify
the structure of a multi-national corporate group, The Directive
is implemented in the UK by the Companies (Cross-Border
Merger) Regulations 2007.80 Thus, for cross-border mergers UK
law does now have a customised merger procedure, i.e. one not
tied to the scheme of arrangement. Given their EU origin, the
Directive and Regulations reflect the approach of the Third
Directive, but subject to the important extension that they cover
mergers involving private as well as public companies. They
provide a mechanism to effect both mergers by absorption and
mergers by formation of a new company. Within the absorption
category a distinction is made between standard absorptions and
absorption of a wholly-owned subsidiary.81
Even before the adoption of the Directive, the CJEU had held
that the blanket exclusion of a company incorporated in another
EU state from the domestic merger procedure of a Member State
was an infringement of a company’s freedom of establishment
under the Treaty.82 However, an effective cross-border merger
procedure requires the coordination of the laws of different
Member States, which is difficult to achieve via decisions of the
CJEU, but which EU legislation is uniquely well-placed to bring
about. The Regulations apply only to mergers involving both a
UK and a non-UK company incorporated in the EEA, so that
purely domestic mergers are excluded.83 Equally, the
Regulations are not available for cross-border mergers involving
a non-EEA company.84
29–17
Subject to the always thorny issue of employee representation on
the board of the resulting company (see below), the scheme of
the Directive and the Regulations is simple and relatively
elegant. Each company in the cross-border merger is subject to
its national merger procedure, on the basis of a common merger
plan, drawn up by the directors.85 That merger plan must be
accompanied by a report from the directors, setting out, amongst
other things, the rationale for the merger and its likely impact on
members, creditors and employees.86 As under the Third
Directive, a report by an independent expert is normally also
required.87 An expert is one who is eligible to be appointed as a
statutory auditor and is independent if he meets the statutory
tests for independence as an auditor.88 This report is concerned
principally with the exchange ratio proposed as between the
shares in the transferor company (or companies) and in the
transferee company involved in the merger.89 The consideration
for the merger will often be shares in the transferee company but
the UK regulations take up the option to make cash available as
consideration without restriction.90 In the case of merger by
absorption of a wholly owned subsidiary, the Regulations
anticipate that no consideration at all will be provided91 (since
consideration has no function in this situation). In the other types
of merger it has been held that, within a wholly-owned group
structure, the members of the transferor company can waive their
right to shares in the transferee, so that here, as well,
consideration is dispensed with.92
29–18
Publicity is to be given to these documents in various ways, for
the benefit of members, creditors and employees, but normally
in practice by their publication on the company’s website.93
Publicity is a necessary part of the process whereby consent is
sought from these groups for the merger proposal. As far as
members are concerned, in principle consent is required from
each of the UK companies involved in the merger. The approval
level, as under a scheme, is 75 per cent in value and a majority in
number of each class of members.94 Again, as under a scheme,
the court has power to order meetings of the members or classes
of them, and the same issues are likely to arise in relation to the
definition of classes as under schemes.95 Creditor approval does
not appear to be mandatory, but any creditor of a UK merging
company may apply to the court to summon a meeting of
creditors or classes of creditors, and the transferor company
itself will normally do so, if the rights of creditors are affected
(for example, because their claims will lie in future against a
foreign company).96 The level of creditor approval required at a
meeting is again 75 per cent in value and a majority in number.97
Employee consultation is considered below.
29–19
After the relevant procedure has been followed (including the
employee aspects—below), the UK court performs one of two
roles, depending on whether the transferee company is a UK
company or not. If it is not, the UK transferor company or
companies may apply to the court for a certificate (a “pre-merger
certificate”) that the UK procedure has been followed.98 The UK
company may use that certificate before the competent authority
in the jurisdiction where the transferee company is incorporated
in order to complete the merger in that jurisdiction. If the
transferee company is a UK company, the UK court may order
the completion of the cross-border merger on the basis of the
pre-merger certificates provided by the UK court and by the
competent authority of the jurisdictions in which the non-UK
merging companies are incorporated.99 The core function of the
court at this stage is to ensure that the merging companies have
all approved the same draft merger terms and that the employee
participation arrangements have been determined, where this is
necessary. However, it has been said that the court also has a
more general power to review the merger substantively to see
whether it will adversely affect any member, creditor or
employee in a material way and whether there is any other good
reason not to approve it.100 Upon approval and notification to the
registrar of companies, all the assets and liabilities of the
transferor companies go across to the transferee company,101 the
members of the transferor companies receiving securities
become members of the transferee company and the merging
companies cease to exist.102
Employee participation
29–20
The Directive and domestic Regulations become complicated
over the issue of whether the transferee company is required to
have in place a system of worker participation in relation to its
board. Participation includes not only the right to elect or
appoint members of the board but also rights to recommend or
oppose board members.103 No more than a sketch of the
provisions can be offered here, but in general the rules follow
those for the SE (European Company).104 However, there is one
very important difference from the scheme contained in the SE
Regulations: the default system of representation which applies
in the absence of agreement between company and employee
representatives may be capped by the transferee company at one
third of the seats for the employees, even if a more extensive
system applied to one of the constituent companies.105 There is
no such cap in the SE rules and so there may be some incentive
for cross-border mergers to take place via the Directive rather
than under the SE Regulation.
29–21
The following additional points can be made about the employee
participation rules, looking at the matter from the point of view
of a UK-incorporated transferee company:
(1) The general rule (though it has significant exceptions) is that
the transferee is subject to the participation rules applying in
its State of registration.106 On this basis a resulting company
registered in the UK would not be subject to participation
rules.
(2) However, participation is the default rule even in UK
transferee companies in three situations,107 of which the
most important is probably that where any merging
company in the six months prior to the publication of the
draft terms of the merger had an average number of
employees exceeding 500 and operated a system of
employee participation. The default rule covers any merging
company (not just a UK one) and any system of employee
participation, whether based on board level representation or
some other form of influence over the composition of the
board. In this way, a UK transferee company may
exceptionally become subject to mandatory employee
participation rules.
(3) Where participation rules apply to the UK transferee, the
merging companies (unanimously) may choose unilaterally
to apply to the transferee company the “standard rules” (set
out in the Regulations) on participation, i.e. without any
negotiation with the employee representatives and without
the loss of time such negotiation entails.108 In that case, the
employees of the transferee company obtain participation
rights in relation to that number of board members which is
equal to the highest proportion to be found in any of the
merging companies in which participation rights existed.
Thus, the strongest system applying in any of the merging
companies will apply to the transferee company, where
“strength” is measured by the number of board seats subject
to employee influence, not the form of that influence. The
right to oppose the appointment of three members trumps
the right to elect two.
(4) Alternatively, the merging companies may choose to
negotiate with representatives of the employees of the
merging companies with the aim of agreeing on some
alternative to the standard rules. This involves the creation
of a “Special Negotiating Body” (“SNB”) of employee
representatives to negotiate on behalf of the employees of all
the merging companies.109 The parties have six months
(extendable by agreement once to 12 months) to reach a
participation agreement, which agreement will then
determine the participation arrangements in the company.110
That agreement may increase or reduce the participation
rights of the employees.111 The SNB can even decide not to
negotiate participation arrangements, in which case the
employees of the transferee company are subject to the rules
on participation of the Member State in which that company
is incorporated.112 In the case of a UK transferee this would
mean no mandatory participation rights.
(5) If the parties either do not reach agreement within the
specified period or agree that the standard rules shall apply,
then the resulting company will be subject to those rules.113
In this case, however, the transferee company may impose
the cap mentioned above.
(6) The employee participation system applied by the Directive
to the first transferee company must be applied to a
subsequent domestic merger by that company for a period of
three years, so that the second transferee company cannot
escape the participation rules imposed on the first transferee
company.114 However, after three years it would appear to
be open to the first transferee company, in a jurisdiction
which does not require employee participation, to merge
with a domestic company under the domestic merger
procedure and thus escape from the Directive’s participation
requirements.
Further uses of cross-border mergers
29–22
In addition to the simplification of the structure of cross-border
groups, the Regulations could be used to effect an amalgamation
between two or more separately owned companies, in place of a
cross-border takeover bid. For the reasons given in relation to
schemes of arrangement,115 the cross-border merger is unlikely
to replace the cross-border hostile bid, especially as the directors
of the merging companies are even more strongly entrenched in
the case of cross-border merger than a scheme.116 However, the
cross-border merger could perform a role in relation to agreed
takeovers, where a competing offer is unlikely to emerge,
especially where the bidder is from a culture less committed to
the takeover form of amalgamation. On the other hand, the
takeover avoids the creation of novel employee participation
rights: the bidder and target remain subject to whatever, if
anything, their national laws provide in this regard.117
29–23
A rather different potential use of the cross-border merger is to
change a company’s jurisdiction of incorporation. The cross-
border merger Directive and Regulations appear to give the
merging companies a free choice as to the Member State
jurisdiction in which the transferee company is incorporated. If a
jurisdiction is desired which is not one in which any of the
merging companies is currently incorporated, then a new
transferee company can be incorporated in the desired
jurisdiction and the existing companies merged into it. However,
if the desired jurisdiction is a “real seat” state, then the Directive
appears to permit the authorities of that state not to register the
resulting entity, if the company’s “central administration” is not
also in that state.118 This is a significant obstacle to a merger
based solely on choice of law considerations.
Finally, it is worth noting that it is possible to produce a cross-
border merger through a “dual-listed structure”. In this
arrangement the companies remain formally independent (i.e.
they do not merge) nor does the one become a subsidiary of the
other, as in a takeover. Instead, by contract, including provisions
in their respective constitutions, the companies produce a unified
management (i.e. the same people sitting on the boards of
directors of the two companies or, normally, top companies of
the two groups of companies which are coming together). The
shareholder bodies remain separate but each body is given
voting rights in the meetings of the other, so as to produce a
single decision from the two votes; and the profits of the two
companies are equalised. Such structures are complex to create
(and to understand) but may have advantages over a merger, for
example, where national susceptibilities are involved. There are
not many such companies but a number of well-known
multinational companies take this form (Unilever, BHP Billiton,
Reed Elsevier) and others did so for a substantial period of time
before moving to a more conventional single company (or
group) structure (Shell, ABB).
REORGANISATION UNDER SECTIONS 110 AND 111 OF THE
INSOLVENCY ACT 1986
29–24
Under this type of reorganisation the company concerned
resolves first to go into voluntary liquidation119 and secondly to
authorise by a special resolution the liquidator to transfer the
whole or any part of the company’s business or property to
another company120 or a limited liability partnership (“LLP”) in
consideration of shares or like interests in that company (or
membership in the LLP) for distribution among the members of
the liquidating company. This procedure affords a relatively
simple method of reconstructing a single company or of
effecting a merger of its undertaking into that of another. It is
often used as a tax-efficient way of effecting a demerger or
division of a business.
Use of this method has the advantage, over a scheme, that
confirmation by the court is not required,121 and the advantage
over a takeover that all the shareholders of the company are
bound by the decision. But what it can achieve is somewhat
limited. Creditors of the transferor will be entitled to prove in its
liquidation and the liquidator must ensure that their proved
claims are met and cannot rely upon an indemnity given by the
acquiring company.122A high level of member agreement on the
use of the sections is also desirable. This is because s.111
provides that, in the case of a members’ voluntary winding-up,
any member of the company who did not vote in favour of the
special resolution may, within seven days of its passing, serve a
notice on the liquidator requiring the liquidator either to refrain
from carrying the resolution into effect or to purchase the
member’s shares at a price to be determined either by agreement
or by arbitration.123 It is normally essential if advantage is to be
taken of stamp duty concessions that the membership of the old
company and the new should be very largely the same. If a
number of the members elect to be bought out, there is a grave
risk that the reorganisation will have to be abandoned as
prohibitively expensive.
29–25
The CLR found the Insolvency Act procedure to be a popular
method for reconstructing private or family-controlled
companies or groups and also for reconstructing investment trust
companies.124 It therefore recommended its retention with,
however, the modernisation of the arbitration procedure which
operates when a member exercises the appraisal right and a
valuation of the member’s interest cannot be agreed. The
procedure under the current law is antiquated, invoking as it
does the arbitration provisions of the Companies Clauses
Consolidation Act 1845 or its Scottish equivalent,125 doubtfully
in compliance with the Human Rights Act and unclear about the
basis upon which the member’s interest should be valued. The
CLR proposed that the valuation should be based on the
dissentient’s proportionate share of the consideration offered by
the transferee for the transferor’s business.126 However, these
provisions being in the Insolvency Act 1986, they were not
touched by the Companies Act 2006.
CONCLUSION
29–26
We remarked at the beginning of this chapter that the Companies
Act does not contain a statutory merger procedure of the type
typically found in other jurisdictions. Whilst this statement is
true, somewhat oddly a true merger procedure is now provided
for cross-border mergers within the EU as a result of the Cross-
Border Merger Directive and implementing Regulations. For
purely domestic mergers, however, the scheme of arrangement is
available for this purpose, but that procedure is available also to
achieve a number of other objectives which have nothing to do
with mergers of two or more companies. Indeed, since the
scheme procedure, although available, is rarely used to achieve a
true merger, it would be odd to use the term statutory merger
procedure to refer to the scheme of arrangement. Just to confuse
things further, the alternative to the merger—the takeover bid—
can be, and increasingly is, affected by means of a scheme. The
scheme of arrangement is thus an immensely flexible instrument.
However, because it is as much an instrument of insolvency law
as of corporate law and because it elides what is regarded in
other jurisdictions as the fundamental difference between a
takeover bid and a merger, the scheme of arrangement has a
rather uncertain image. There can be almost as many types of
schemes of arrangement as there are inventive corporate and
insolvency lawyers, which indicates both the significance of the
scheme procedure and the impossibility of identifying such a
thing as a typical scheme of arrangement.
1
Delaware General Corporation Law s.251.
22006 Act s.900(1). The section also applies to the “reconstruction” of a company by
way of the transfer of its undertaking or property to another company.
3 2006 Act s.900(2)(a),(d).
4 That a de-merger is a valid scheme is clear, but the courts’ powers under s.900 apply
only to de-mergers which count as “reconstructions”. From this the courts have reasoned
that a reconstruction requires that the shareholding structure of the transferee company
must substantially reflect that of the transferor company (but liabilities may be left with
the transferor): Re South African Supply and Cold Storage Co [1904] 2 Ch. 268, 281–
282; Re MyTravel Group Plc [2005] 2 B.C.L.C. 123 (Mann J).
6
8This way of proceeding under what is now Pt 26 was sanctioned a century ago: Re
Guardian Assurance Co Ltd [1917] 1 Ch. 431, despite the fact that the element of
“arrangement” between the target company and its shareholders is vanishingly small,
consisting of no more than the company facilitating the transfer of their shares to the
bidder. See also Re Jelf Group Plc [2016] B.C.C. 289.
9
Popular in the past, because it avoided the payment of stamp duty on the transfer of the
shares from target shareholders to the “bidder”, was the “reduction” scheme, under
which the shareholders of the target agreed to the cancellation of their shares in the
target company; the reserve so created in the target was used by the target to pay up new
shares which were issued to the offeror; and the shareholders of the target received in
exchange for their cancelled shares cash or shares in the offeror company. The
company’s role in a reduction scheme is thus more significant. However, the Treasury
removed the stamp duty advantage in 2015 by prohibiting the first step (cancellation of
the shares) when this is part of scheme to allow the bidder to obtain all the shares in the
target company. However, the reduction scheme is still available for the equivalent of
share exchange bid. See the Companies Act 2006 (Amendment of Part 17) Regulations
2015/472, inserting new s.641(2A) and (2B).
10Above, at para.28–14. On the complications which can arise when competing bids are
put through the scheme mechanism see Re Allied Domecq Plc [2000] 1 B.C.L.C. 134;
and Re Expro International Group Plc [2010] 2 B.C.L.C. 514. For this reason acquirers
proceeding by way of a scheme often reserve the right to revert to a contractual offer if a
competing bidder emerges.
11
2006 Act s.899(1).
12
See above at paras 28–69 et seq.
13 Re National Bank [1966] 1 W.L.R. 819; Re BTR Plc [2000] 1 B.C.L.C. 740 CA.
14 See above, at para.28–67.
15
See para.28–35 at fn.128—though those accepting may contract for this right.
16
See para.6–18.
17In this case the problems mentioned in fn.4, relating to the use of courts’ ancillary
powers, are unlikely to arise.
18
Re National Bank Ltd [1966] 1 W.L.R. 819 at 829; Re Calgary and Edmonton Land
Co [1975] 1 W.L.R. 355 at 363; Re Savoy Hotel Ltd [1981] Ch. 351 at 359D–F; Re T&N
Ltd (No.3) [2007] 1 B.C.L.C. 563 at [46]–[50].
19 Re NFU Development Trust Ltd [1972] 1 W.L.R. 1548: held that the court had no
jurisdiction to sanction a scheme whereby all the members were required to relinquish
their financial rights without any quid pro quo. However, the decision in Re MyTravel
Group Plc [2005] 2 B.C.L.C. 123, makes it less easy for companies to use the scheme to
effect a debt-for-equity swap. The lack of congruence between the transferor and
transferee companies’ shareholding structures was brought about in that case by the fact
that, under the scheme, the existing shareholders were to be heavily diluted and most of
the shares in the transferee were to be held by the former creditors of the transferor.
However, the scheme did in fact proceed in that case but without the exercise of the
court’s ancillary powers (see the decision of the CA in that case). It is unclear why the
ancillary powers are not made available for all schemes which get through the statutory
procedure.
20 See the debt-for-equity swap discussed in the previous note.
21 For a modern example see Re T&N Ltd (No.3) [2007] 1 B.C.L.C. 563.
22Re Drax Holdings Ltd [2004] 1 B.C.L.C. 10, where Lawrence Collins J (as he then
was) said obiter at [29]: “It is almost impossible to envisage circumstances in which the
English court could properly exercise jurisdiction in relation to a scheme of arrangement
between a foreign company and its members, which would essentially be a matter for the
courts of the place of incorporation”.
23
2006 Act s.895(1).
24
2006 Act ss.896–899(1).
25
2006 Act s.896.
26The possibility of shareholder proposal was recognised in Re Savoy Hotel Ltd [1981]
Ch. 351.
27
See previous note.
28
See para.15–4 at fn.9.
29
See para.28–58.
30 The required level of approval of a scheme. See below.
31 2006 Act s.896(2) contemplates applications under step (b) by a creditor or member
as well as by the company or its liquidator or administrator.
32
THF would not be able to get around this problem by seeking to convene a general
meeting to propose the scheme, because at a general meeting both A and B shareholders
would vote together and the reasons given in the text why a bid would fail would apply
also to a shareholder resolution to adopt a scheme.
33 2006 Act s.896(1). Sensibly, the courts will recognise that a meeting can occur even if
the company has only one shareholder, for otherwise schemes would be less freely
available within groups (Re RMCA Reinsurance Ltd [1994] B.C.C. 378), but no meeting
can be said to have occurred when in a multi-member class only one member in fact
attends: Re Altitude Scaffolding Ltd [2006] B.C.C. 904.
34 Sovereign Life Assurance Co v Dodd [1892] 2 Q.B. 573 at 583, per Bowen LJ.
35
Re Equitable Life Assurance Society [2002] 2 B.C.L.C. 510.
36Re BTR Plc [1999] 2 B.C.L.C. 675. The decision and reasoning were upheld on
appeal: [2000] 1 B.C.L.C. 740 CA. See also Re Industrial Equity (Pacific) Ltd [1991] 2
H.K.L.R. 614.
37 Re Hellenic and General Trust [1976] 1 W.L.R. 123. On the view of this case adopted
in BTR it was not fatal to the scheme that the subsidiary’s shares were voted at the class
meeting, but they were to be discounted at the third stage when deciding whether to
approve the scheme.
38 Re Hawk Insurance Co Ltd [2001] 2 B.C.L.C. 480. He thought it particularly
unfortunate that the court should feel obliged to raise the issue of its own motion at stage
(c), even though no member or creditor sought to argue that class meetings should have
been held.
39
Practice Direction [2002] 1 W.L.R. 1345. For an account of modern practice, see Re
T&N Ltd (No.3) [2007] 1 B.C.L.C. 563 at [18]–[20].
40The court does already decide at stage (b) issues relating to the jurisdiction of the
court to sanction a scheme at stage (c), though not issues going to the fairness of the
scheme: Re Savoy Hotel [1981] Ch. 351; Re Telewest Communications Plc (No.1)
[2005] 1 B.C.L.C. 752 at [14]–[15]; Re My Travel Group Plc [2005] 2 B.C.L.C. 123.
41
Final Report I, paras 13.6–13.7. This would not otherwise affect the tasks to be
performed by the court at the sanctioning stage, on which see below.
42
2006 Act s.897(1),(2).
43
2006 Act s.897(3). If the interests of the directors or the trustees change before the
meetings are held, the court will not sanction the scheme unless satisfied that no
reasonable shareholder or debenture-holder would have altered his decision on how to
vote if the changed position had been disclosed: Re Jessel Trust Ltd [1985] B.C.L.C.
119; Re Minster Assets [1985] B.C.L.C. 200.
44
Which will be the only way of notifying holders of bearer bonds. It may also be
necessary to advertise in this way to creditors.
45
2006 Act s.897(1)(b),(4). A default in complying with any requirement of the section
renders the company and every officer, liquidator, administrator, or trustee for
debenture-holders liable to a fine unless he shows that the default was due to the refusal
of another director or trustee for debenture-holders to supply the necessary particulars of
his interest: s.897(5)–(8). In that case the criminal offence is committed by that director
or trustee: s.898.
46
The CLR recommended the removal of the number requirement, which does indeed
appear anomalous in the context of the Companies Act approach to shareholder
approval: Final Report I, para.13.10. However, the “number” requirement does
constitute an additional element of minority protection where 75 per cent of the shares
are concentrated in one or a few persons.
47 In relation to creditors further difficulties may arise in valuing their claims and thus
determining whether the majority does represent three-fourths in value. This is a
problem met whenever this formula is employed in respect of creditors—as it is
throughout the Insolvency Act.
48
2006 Act s.899(1).
49
Re MyTravel Group Plc [2005] 2 B.C.L.C. 123 CA; Re Bluebrook Ltd [2010] 1
B.C.L.C. 338.
50In Re Dorman Long & Co [1934] Ch. 635, 655 and 657. See also Re National Bank
Ltd [1966] 1 W.L.R. 819, 829.
51Re BTR Plc [2000] 1 B.C.L.C. 740 at 747. For an extreme case, see Re PCCW Ltd
[2009] 3 HKC 292 Hong Kong Court of Final Appeal.
52Above, at para.19–7. At this point the first and second parts of the test began to
overlap.
53per Lindley LJ in Re English, Scottish, and Australian Chartered Bank [1893] 3 Ch.
385. See also Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891]
1 Ch. 213, per Fry LJ; Re Telewest Communications Plc (No.2) [2005] 1 B.C.L.C. 772;
Re Apcoa Parking Holdings GmbH [2014] EWHC 3849 (Ch). These were all creditors’
cases but the same principle applies to members’ schemes.
54 2006 Act s.899.
55 The courts have rejected arguments that a scheme which satisfies the requirements of
the Act might nevertheless amount to deprivation of possessions contrary to art.1 of the
First Protocol of the European Convention on Human Rights: Re Equitable Life
Assurance Society [2002] 2 B.C.L.C. 510; Re Waste Recycling Group Plc [2004] 1
B.C.L.C. 352.
56
British and Commonwealth Holdings Plc v Barclays Bank Plc [1996] 1 W.L.R. 1 CA;
Re Uniq Ltd [2012] 1 B.C.L.C. 783—though it is unlikely that the judges will give
wholesale exemptions from the financial assistance rules just because the assistance is
embodied in a scheme.
57
Nokes v Doncaster Amalgamated Collieries [1940] A.C. 1014 HL; Re TSB Nuclear
Energy Investment UK Ltd [2014] B.C.C. 531—though the Transfer of Undertakings
(Protection of Employment) Regulations 2006/246 largely solve the employment issue.
58
See fn.4, above.
59
Directive 78/855/EEC (now Directive 2011/35/EU ([2011] O.J. L110/1)). The
requirements of this Directive were somewhat reduced by two subsequent amending
directives: Directives 2007/63/EC and 2009/109/EC, both of which have been
implemented in the UK. Directive 82/891/EEC (the “Sixth” Directive) deals with the
division of public limited companies.
60
The details differ somewhat according to the “Case” (see below) within which the
scheme falls, the main differences being between those within Case 1 or 2 (mergers) and
Case 3 (divisions).
61
See para.28–14.
62 This includes the transferee company, whose consent is not required under a scheme
governed purely by Pt 26, unless the rights of the shareholders or creditors of the
transferee are proposed to be changed. However, it is enough that the members of the
transferee are given the option to call a meeting (on the basis of a five per cent threshold:
ss.918 and 932) so that the burden of action falls on the shareholders rather than the
company in such a case. Of course, if the transferee is a UK listed company, the large
transaction provisions of the Listing Rules might require it to obtain shareholder
approval. See para.14–20.
63
2006 Act ss.905–6A, 920–921A.
64
2006 Act ss.908, 910, 923, 925.
65 As a result of amendments to the Directives introduced by Directive 2007/63/EC the
requirement for an independent report can be dispensed with if all the shareholders
agree. See s.918A.
66 2006 Act ss.909, 924 and 935–937. The matters to be dealt with in the report are
specified in some detail. In some respects it resembles the report required (also as a
result of an EU Directive) when a public company makes an issue of shares paid-up
otherwise than in cash: see paras 11–16 et seq., above.
67 2006 Act s.902(1)(c).
68
2006 Act ss.915 and 915A. In these cases, as well, the requirement for a meeting of
members is relaxed: ss.916–917 and 931.
69 2006 Act s.902(3).
70 2006 Act ss.904(1)(a) and 902(2)(b).
71
2006 Act ss.904(1)(b) and 902(2)(a).
72 See the scheme proposed in Re MyTravel Group Plc [2005] 2 B.C.L.C. 123.
732006 Act ss.919 and 902(2). The Sixth Directive applies to divisions. See fn.59,
above.
74
75
76
77
Completing, para.11.50. A potential use for the SE (above, para.1–40) is to achieve a
similar result within multinational groups.
78
79
Directive 2005/56/EC on cross-border mergers of limited liability companies ([2005]
O.J. L310/10).
80
SI 2007/2974, as amended, a self-standing set of regulations made under the European
Communities Act 1972 and constituting a major piece of corporate law which is not
located in the 2006 Act at all.
81 SI 2007/2974 reg.2.
82TFEU art.49. See Case C-411/03 SEVIC [2005] E.C.R. I-10805, concerning German
merger procedure.
83 SI 2007/2974 reg.2. In the case of merger by formation of a new company the
diversity requirement is applied to the transferor companies (reg.2(4)(a)).
84 See art.1 of the Directive.
85
SI 2007/2974 reg.7. It thus appears that the merger cannot proceed unless the
directors of all the companies involved approve the idea.
86 SI 2007/2974 reg.8.
87
SI 2007/2974 reg.9. An expert’s report is not required where the merger is between a
wholly-owned subsidiary and its parent and where the transferee holds 90 per cent of the
securities of the transferor carrying voting rights and an exit right on fair terms is
afforded to the minority: regs 9 and 9A.
88
Reg.9(7)–(8), invoking ss.1212 and 1214 of the Act, on which see para.22–12.
89
The transferor company or companies will have their assets and liabilities transferred
if the merger goes through and the transferee company is the company which will
receive those assets and may be an existing company or one formed for the purposes of
the merger.
90
SI 2007/2974 reg.2.
91 SI 2007/2974 reg.2(3).
92 Re Olympus UK Ltd [2014] EWHC 1350 (Ch)—an interesting example of the
interpretation of the English version of the Directive so as to maximize its harmonising
effect, despite an ill-advised use of words in that version.
93 SI 2007/2974 regs 10, 12–12A.
94 SI 2007/2974 reg.13. Transferor member approval is not required in the case of
merger by absorption of a wholly owned subsidiary and, where the transferee company
is an existing company, approval of its members is required only if the holders of 5 per
cent or more of the voting rights call a meeting to consider the merger.
95 SI 2007/2974 reg.11, and see para.29–8, above.
96
SI 2007/2974 reg.11. The transferor company may pay off or secure the creditors’
claims in advance of the merger.
97
SI 2007/2974 reg.13.
98
SI 2007/2974 reg.6. The court’s role here is presumably similar to that under a
scheme.
99
SI 2007/2974 reg.16. The court may order completion even where the merger
agreement is conditional, provided the court has a high degree of confidence that the
conditions will be met, that the conditions are aimed at facilitating the merger which the
shareholders approved and that they do not amount to giving a party other than the court
a discretion whether the merger goes ahead: Re International Game Technology Plc
[2015] 2 B.C.L.C. 45; Nielsen Holdings Plc [2015] EWHC 2966 (Ch); Re Livanona Plc
and Sorin SpA [2015] B.C.C. 914. This reflects practice under domestic schemes
(Lombard Medical Technologies Plc [2015] 1 B.C.L.C. 656).
100
Re Diamond Resorts (Europe) Ltd [2013] B.C.C. 275. The judge also held that the
rigor of that enquiry would also depend on the extent of the investigations undertaken by
the competent authority (which may not be a court) in the other EEA jurisdictions
involved.
101Including the rights and obligations of the merging companies under contracts of
employment: reg.17(1). It seems likely that reg.17 will be interpreted as transferring all
contractual rights and liabilities, no matter whether they are transferable under general
law. See fn.57, above.
102
SI 2007/2974 reg.17, widely construed in Re Lanber Properties LLP and Lanber II
GmbH [2014] EWHC 4713.
103 SI 2007/2974 reg.3(1).
104 See para.14–67.
105SI 2007/2974 reg.39. This follows art.16(4)(c) of the Directive, which permits, but
does not require, Member States to adopt a cap and confines that cap to one-tier boards.
106
Directive art.16(1) and reg.22.
107 Directive art.16(2) and reg.22.
108
Directive art.16(3)(h), (4)(a) and regs 36 and 38. However, the one third cap can be
imposed only if there have been negotiations with the employee representatives.
Completion of the employee participation arrangements is a condition for the
registration of the resulting company: reg.39.
109 Regulations Ch.2 of Pt 4.
110 SI 2007/2974 regs 28 and 29.
111 But if at least one-quarter of the employees of the merging companies had
participation rights, any decision by the SNB on an agreement which reduces
participation rights below the highest proportion previously operating requires a two-
thirds majority of the members of the SNB: reg.30.
112 SI 2007/2974 reg.31. This requires not only a two-thirds vote of the SNB, but also
that those voting in favour should represent two-thirds of the employees of the merging
companies.
113 SI 2007/2974 reg.36. However, failure to agree will trigger the standard rules where
fewer than one-third of the employees of merging companies were subject to
participation only where the SNB has positively opted (by a majority of its members) for
them. Thus, a majority of representatives, perhaps from countries not having a
participation system, could block its imposition on the resulting company, perhaps in
exchange for some different type of concession from the companies.
114
SI 2007/2974 reg.40.
115
Above, para.29–3.
116
Above, fn.85. Re International Game Technology Plc [2015] 2 B.C.L.C. 45
concerned a genuine cross-border merger, not just an intra-group restructuring.
117
This is in fact highly unsatisfactory in one respect. Where a German company,
subject to co-determination, takes over a British company, the British workers will have
no right to participate in board level representation arrangements of the German parent,
even though the strategy of both companies is probably determined at that level, unless,
as sometimes happens, voluntary arrangements are made to accommodate the interests
of the non-German workers.
118
Directive art.4(1)(b). For discussion of this issue, and a number of other pertinent
observations on the Directive, see J. Rickford, “The Proposed Tenth Company Law
Directive on Cross Border Mergers and its Impact in the UK” [2005] E.B.L.R. 1393.
119 Under former versions of these provisions it had to be a members’ voluntary
liquidation, i.e. one in which the directors have made a “declaration of solvency”
declaring that all the company’s debts will be paid in full within 12 months. It can now
be employed also in a creditors’ voluntary liquidation so long as it is sanctioned by the
court or the liquidation committee (Insolvency Act s.110(3)) but that sanction is unlikely
to be given unless all creditors are paid in full.
120 Whether or not the latter is a company within the meaning of the Companies Act
(Insolvency Act s.110(1)) so that it could be a company registered in another
jurisdiction.
121Though the court’s sanction may be needed if the company is to be wound up in a
creditors’ winding-up.
122 Pulsford v Devenish [1903] 2 Ch. 625. But the sale of the undertaking will be
binding on the creditors who will not be able to follow the assets transferred to the
transferee company: Re City & County Investment Co (1879) 13 Ch. D. 475 CA.
123 This is an example, rare under UK law (but more widely used in some other common
law jurisdictions) of protecting dissenting members by granting them “appraisal rights”.
The courts will not permit the company to deprive members of their appraisal rights
under the section by purporting to act under powers in its articles to sell its undertaking
in exchange for securities of another company to be distributed in specie: Bisgood v
Henderson’s Transvaal Estates [1908] 1 Ch. 743 CA.
125 Clauses Consolidation Act 1845 s.111(4).
CHAPTER 30
MARKET ABUSE
Introduction 30–1
Approaches to Regulating Insider Dealing 30–5
Disclosure 30–5
Prohibiting trading 30–6
Relying on the general law 30–7
Prohibiting insider dealing 30–11
The Criminal Justice Act 1993 Part V 30–12
Regulating markets 30–13
Regulating individuals 30–15
Insiders 30–22
Mental element 30–24
Prohibited acts 30–25
Defences 30–26
Criminal Prohibitions on Market Manipulation 30–29
Regulatory Control of Market Abuse 30–30
Background 30–30
Insider dealing 30–31
Market manipulation 30–39
Safe harbours 30–43
Enforcement and Sanctions 30–47
Investigation into market abuse 30–48
Sanctions for market abuse 30–51
Sanctions for breach of the criminal law 30–54
Conclusion 30–57
INTRODUCTION
30–1
With these topics we reach the margins of company law. Market
abuse can occur in all markets and the relevant rules apply
equally widely. We are concerned in this book, however, only
with abuse in the markets for company securities (shares and
bonds) and their derivatives. Our analysis will accordingly be so
confined.
Market abuse is conventionally regarded, at least within the
EU, as covering two rather different activities: insider dealing
and market manipulation. Insider dealing (or trading)1 occurs
when a person in possession of price-sensitive information about
a company buys or sells securities in that company and so
obtains better terms in the transaction than would have been the
case had the counterparty been aware of the information in
question. In that way, the insider can either make a profit or
avoid a loss, depending on whether the information, once public,
will drive the price of the security up or down.2 The issue is at
the margins of company law because the insider dealer does not
have to be an insider of the company, for example a director,
though he or she very often is. A governmental official may
know that the agency for which he or she works is about to issue
an adverse report on a particular company which will affect the
price of its shares and then trade in the company’s shares before
the report is published.
Market manipulation involves conduct which moves the price
of the securities to a position which is different from that which
the market would have set in the absence of the conduct.
Penalising such behaviour thus involves drawing a distinction
between legitimate and illegitimate behaviour within markets. If
a company announces a bid for another company at a price
above the prevailing market price for the shares, that
announcement will move the price in an upward direction, but
such behaviour is not only regarded as legitimate, it may also be
required by takeover rules (as we saw in Ch.28). On the other
hand, if I move the market price by making statements which I
know to be false, that will be regarded as illegitimate behaviour.
In a very early example of market manipulation, from the
beginning of the nineteenth century, the fraudsters pretended to
be soldiers returning from France with news of the defeat of
Napoleon (before this event actually came to pass some time
later). The false rumours which they spread caused the price of
British government bonds to rise, thus enabling the accused to
dispose of their holdings of those bonds at a profit.3 However, as
we shall see below, distinguishing legitimate from illegitimate
behaviour in more marginal cases is not easy.
In the case of manipulation it is clear that market participants
may suffer loss as a result of the behaviour. They will have
acquired or disposed of shares on the basis of an artificial price
and may suffer loss when the truth emerges.4 Equally, the
allocative efficiency of the market may suffer. Investors use
market prices to determine how to target their resources and so
manipulated prices may produce a misallocation of those
resources. In the case of insider dealing the harm to the market
and its participants is less clear. The insider dealing may not
move the share price very much, if at all, and, in so far is it does,
it moves the price towards, not away from, its “true” value (i.e.
towards the value it will have when the full information is
eventually publicly disclosed). Since insider dealing can be
avoided by not trading and in public markets many of the other
market participants would have traded, whether or not the insider
traded, the harm to them is difficult to identify.5 It is easier to see
the harm if there are rules, as is now the case, requiring inside
information to be disclosed.6 If the information had been in the
market, the prices would have been different and this can be
used as a starting point for calculating loss.7 On this basis, the
harm-causing event is not the insider dealing as such but the
non-disclosure of the inside information, but non-disclosure is an
inherent part of the insider dealer’s strategy.8
30–2
In insider dealing rules a crucial task is distinguishing between
information which the insider cannot use privately and
information which can be used privately. This is not an easy
task. It cannot be said, though it often is, that the aim of the
insider dealing rules is to put all market participants in
possession of the same information, because then there would be
no incentive for analysts (and others) to seek out information
about companies which is not known to the market in general.
Analysts fulfil an important function in keeping the market
informationally efficient because they provide information to the
market after, or often as, they trade on the information for their
profit.9 If they had to disclose the information before trading,
their incentive to acquire it in the first place would disappear. As
with market manipulation, it can be argued that the key objective
is to distinguish legitimate from illegitimate means of acquiring
information which is not generally known to the market. Only
information acquired by illegitimate means should count as
“inside” information. So, for example, an analyst who carefully
pieces together public but not easily accessible information to
arrive at new facts about the company should not be classified as
a holder of inside information. On the other hand, a director,
who routinely acquires information about the company before
the market does because of his or her position in the company,
has no socially valuable claim to be allowed to trade on the basis
of that information.
30–3
The above arguments provide reasons why securities market
authorities would wish to control market abuse. But they do not
tie the regulation very closely to the objectives of corporate law.
It is possible to make this connection by focusing on the interests
of the company (the issuer) in having effective regulation in
place. If insider dealing is rife in the market, the non-insider will
know that the market prices will systematically fail to reflect all
the available information about the company and will do so in a
way which is unfavourable to the outsiders. In the absence of
regulation, this will be an inherent risk of holding shares in
companies and outsiders will build this risk into their investment
decisions, by lowering the price they are prepared to pay for
companies’ shares. This in turn will increase companies’ cost of
capital because they will be able to issues shares on less
favourable terms than if investors could be assured that there
was no or little insider trading in the market. Thus, companies
have an interest in effective insider dealing legislation or
regulation.10
The same general argument can be made in relation to market
manipulation.11 If extensive, such behaviour may systematically
produce prices which are unfavourable to outsiders, thus again
causing them to re-assess the riskiness of corporate securities as
a class.
30–4
The law on market abuse has developed rapidly over the past 40
years. The first sanctions against insider dealing were criminal
and were introduced by the Companies Act 1980. Those
sanctions are now in Pt V of the Criminal Justice Act 1993.
Market manipulation was criminalised (beyond the common
law) a little later in the Financial Services Act 1986. The present
provisions are in Pt 7 of the Financial Services Act 2012. The
Financial Services and Markets Act 2000 added administrative
sanctions against market abuse (of both types) and widened the
definitions of the behaviour which was open to sanction.
Enforcement of both the administrative penalties and the
criminal law lies in the hands of the Financial Conduct Authority
(“FCA”), previously the Financial Services Authority (“FSA”).
Market manipulation is an area where EU law has played an
important role. Initially, the EU operated via Directives which
required transposition into domestic law by the domestic
legislator. After the financial crisis, in the name of greater
uniformity, the EU adopted a Market Abuse Regulation
(“MAR”),12 most of whose provisions do not require
transposition.13 However, in the case of the UK, the EU rules
tended to lag behind the reforms made at domestic level, so that
their impact on the rules applicable to the UK markets was also
limited. Even the extensions contained in the new Regulation
relate primarily to markets other than the markets in corporate
securities. Consequently, for the matters considered in this
chapter, the impact of the Regulation has been more on the
structure of the law and less on its substantive content. Its impact
on the structure or sources of the law is profound. EU rules, in
the shape of the Regulation and “secondary legislation” made by
the Commission under the Regulation, become the important
first-line sources of law in relation to market abuse in securities
markets and domestic sources, whereas rules made by
Parliament or the FCA, become less important than in the past.
This is the position in relation to administrative sanctions
against market abuse. In relation to criminal law, the position is
different. There is a new Market Abuse Directive on criminal
sanctions,14 but this is a Directive out of which the UK may opt
and it has chosen to do so. In the criminal law, therefore, the
domestic rules remain in the front line.
We analyse first the rules on insider dealing and then those on
market manipulation.
APPROACHES TO REGULATING INSIDER DEALING
Disclosure
30–5
A number of approaches to the regulation of insider dealing are
to be found in the current law. Mandatory disclosure has long
been used, but disclosure may be used to control insider dealing
in a number of different ways. For example, as we saw in Ch.26,
directors, as potential insider dealers, may be required to
disclose dealings in their company’s securities on the theory that,
if they know that their dealings will be public knowledge, they
will be less likely to trade on the basis of inside information.15
Indeed, this is the oldest anti-insider dealing technique, having
been introduced upon the recommendation of the Cohen
Committee of 1945.16
Alternatively, or in addition, the disclosure rules may aim at
those who have the inside information and require them to
disclose it, whether or not they are likely to trade on the basis of
it. The point here is that putting the information into the public
domain reduces the opportunities of others to engage in insider
dealing. This, too, we have discussed above in the shape of the
obligation laid upon issuers to disclose inside information
promptly to the market.17 Even the obligation to disclose the
beneficial ownership of shares at the 3 per cent level and above18
may constitute a disclosure obligation of this type, for it shows
who is accumulating a stake in a company, perhaps preparatory
to a bid.19
Prohibiting trading
30–6
At the other end of the spectrum, the law could ban trading by
potential insiders, irrespective of whether they are in possession
of inside information or not. This is a blunt instrument, since it
deprives those without inside information of trading
opportunities. However, this approach is used in a targeted way
in relation to particular “high risk” groups. The clearest example
of this strategy was the requirement of the Model Code that
directors, subject to exceptions, should not deal in securities of
the company within a period of two months preceding the
preliminary announcement of the company’s annual results and
similar limitations were imposed in relation to the announcement
of the half-yearly and quarterly20 reports. In addition, clearance
to deal at any time had to be obtained in advance from the
chairman of the board, the CEO or the company secretary, as
appropriate.21 Compliance with the Code was not required by
legislation but was one of the continuing obligations imposed
upon companies with a premium listing by the Listing Rules.22
Such companies were required to ensure that those discharging
managerial responsibilities complied with the Code or such
stronger requirements as the company might impose. Thus, the
Code was not directly binding on directors but was a model
which premium listed companies were required to adopt with
such refinements as were thought desirable. In practice it was
normally adopted virtually verbatim. The company was required
to take “all proper and reasonable” steps to secure compliance
with the Code by those discharging managerial responsibilities
within it.23
The notion of a prohibition on trading during a closed period
preceding the company’s required regular reports was taken up
in MAR, though with a lesser closed period of 30 days.24 The
prohibition now applies to all companies traded on the Main
Market, whether with a premium listing or not, and companies
traded on AIM. MAR covers “persons discharging managerial
responsibilities” as well as directors (but not “closely associated”
persons25); extends to trading on the account of a third party as
well as to own account trading; and brings in trading in
derivatives and other financial instruments as well as directly in
the company’s securities. As under the Model Code, the issuer
may allow trading in this period in “exceptional circumstances,
such as severe financial difficulty”, as further elaborated in
Commission delegated acts.26 Since the MAR provisions overlap
with the Model Code, the FCA proposes to remove it from the
Listing Rules.27 However, this leaves two areas where the Model
Code applied more widely than MAR. First, it applied to
preliminary announcements of annual results, which are not
required, and so fall outside MAR, but are market practice in the
UK and are in effect the market moving event rather than the
later full publication. Secondly, MAR has no equivalent to the
clearance rules which applied whenever a director proposes to
deal (not just during the closed period). On the second issue the
FCA proposed to provide guidance for issuers in place of the
present obligation to have clearance rules.28 Its policy on the first
issue is unclear: it may take the view that the provisions of MAR
cannot be added to.29
Relying on the general law
30–7
A third approach is to not to legislate specifically for insider
dealing but to rely instead on established doctrines of the
common law to deal with it. Company law offers its fiduciary
duties for this purpose, and more general doctrines of the
common law may also have a role. For one reason or another,
however, these doctrines fail to capture the problem of insider
dealing comprehensively. Yet they need to be borne in mind
because they offer civil remedies under the control of private
parties, whereas, as we shall see, the specific insider dealing
rules rely wholly on criminal or regulatory sanctions which are,
in effect, under the control of the FCA.
Directors’ fiduciary duties
30–8
As pointed out in Ch.16,30 if directors make use of information
acquired as director for their personal advantage they may
breach their fiduciary duties to the company and be liable to
account to it for any profits they have made. A great advantage
of the civil suit brought by the company for breach of fiduciary
duty is that it does not have to show that it has suffered loss as a
result of the insider dealing, simply that the insider fiduciaries
have made a profit in breach of the rules on conflicts of
interest.31 In practice, however, it is unlikely that the company
will call them to account unless and until there is a change of
control. If only one director has committed the breach, the others
may cause the company to take action against him but most
public companies are likely to avoid damaging publicity by
persuading the errant director to resign “for personal reasons”
and to go quietly.
It is also possible that, for example, in relation to a takeover of
a small company,32 the directors may place themselves in the
position of acting as agents negotiating on behalf of the
individual shareholders and thereby, despite Percival v Wright,33
owe fiduciary duties to the shareholders. If so, they would
breach those duties if they persuaded any shareholder to sell at a
price which they knew (and the shareholders did not) was
materially lower than their likely value on the basis of full
disclosure of the information the directors hold about the
company. It is, however, highly unlikely that the directors of a
listed company would create such a relationship. If they did
engage in insider dealing, it would be by dealing impersonally
on a stock exchange so that no fiduciary relationship was
created.
Hence, the general equitable principle is, on its own, rarely an
effective deterrent. Moreover, the law relating to directors’
fiduciary duties is simply incapable of applying to the full range
of insiders and, except in the rare case where the decision in
Percival v Wright can be overcome, it has the demerit of
concentrating on the relationship between the director and the
company rather than on the relationship between the director and
other traders in the market.
Breach of confidence
30–9
Somewhat similar criticisms can be made of the second source
of equitable obligation which is relevant here, namely that
imposed by the receipt of information from another person
where the recipient knows or ought to have known that the
information was imparted in confidence. However, the range of
persons potentially covered by this obligation is much wider that
those covered by the fiduciary duties applying to directors of
companies. It will extend to the professional advisers of
companies who, say, are involved in preparing a takeover bid
which the company is contemplating, and to the employees of
such advisers, since no contractual link between the confider and
the confidant is necessary to support this fiduciary obligation.
Indeed, the obligation extends to anyone who receives
information knowing that they are receiving it in breach of a
duty of confidentiality imposed upon the person communicating
the information.34
If the duty attaches, the holder of the information may not use
it (for example, by trading in securities) or disclose it (for
example, to another person so that that person may trade)35
without the permission of the confider. Breach of the duty gives
rise to a liability to account for the profits made, potentially the
most useful civil sanction in the case of insider dealing on
securities markets. The confidant may have to pay damages to
the confider but it is far from clear that the confider actually
suffers any loss if the confidant uses the information for the
purposes of insider dealing and does not, in so doing,
communicate the information to other persons. However, the
cause of action again lies in the hands of the person to whom the
fiduciary obligation is owed (i.e. the confider), not in the hands
of the person with whom the confidant has dealt in the securities
transaction or other participants in the market at the time. This
might not matter if in fact the duty of confidence was routinely
used to deprive insiders of their profits,36 but, although much
inside information must also be received in confidence and
although the law in this area has achieved much greater
prominence in recent years than it had previously, there are no
reported cases of its use against insider dealers. This may be
because the difficulties of detection and proof, which abound in
this area, operate so as to deprive confiders of the incentive to
use their private law rights to secure the transfer of insider
dealing profits from the insiders to themselves.
Misrepresentation
30–10
When in 1989 the Government was considering its response to
the EU’s first Directive on insider dealing, it decided to continue
its policy of not providing civil sanctions under the insider
dealing legislation partly on the grounds that these worked
satisfactorily only in face-to-face transactions and that the
general law already provided remedies in that situation.37 Apart
from the insider’s liability to the company, discussed above, the
Government referred to liability for fraudulent
misrepresentation. Misrepresentation-based liability, however,
whether for fraudulent, negligent or innocent misrepresentation,
faces a formidable obstacle in relation to insider trading. This is
the need to demonstrate either that a false statement has been
made or that there was a duty to disclose the inside information
to the other party to the transaction. As to the former, the insider
can avoid liability by not making any statements to the other
party relating to the area of knowledge in which he holds the
inside information. Liability might arise if the other party to the
transaction has the good luck or the right instinct to extract a
false statement from the insider by probing questions, but
liability on this basis is unlikely to be widespread.
As to non-disclosure, the current legislation does not adopt the
technique contained in some earlier proposals for insider dealing
legislation: requiring insiders in face-to-face transactions to
disclose the information before dealing.38 Consequently, the
potential plaintiff has to fall back on the common law, which
imposes a duty of disclosure in only limited circumstances. The
most relevant situation would be where the insider was in a
fiduciary or other special relationship with the other party, but,
as we have seen above, even as between directors and
shareholders, the current law recognises such a relationship only
exceptionally, whilst many insiders and their counterparties are
simply not in the relationship of director and shareholder at all.39
There is also little evidence at present of a willingness on the
part of the courts to expand the categories of fiduciary or other
special relationships in this area40 or to bring securities contracts
within the category of contracts uberrimae fidei.
Prohibiting insider dealing
30–11
The above analysis leaves only the approach of prohibiting
dealing by those who actually possess inside information. This
can be said to constitute the core of the current law. However,
the prohibition can take two forms. The first involves the
criminalisation of insider dealing and certain associated acts.
The original criminal legislation was contained in Pt V of the
Companies Act 1980 and was later consolidated in the Company
Securities (Insider Dealing) Act 1985. As a result of the adoption
by the European Community of the Insider Dealing Directive in
1989,41 some amendment of the British law became necessary,
and the Department of Trade and Industry also took the
opportunity to simplify the 1985 Act in some respects. However,
Pt V of the Criminal Justice Act 1993, the current law, is still
recognisably in the mould established by the 1980 Act, though it
contains some interesting new features and has abandoned some
old obfuscations.42 Experience showed, however, that it was
difficult to secure convictions for this offence, partly because of
difficulties of detection but partly also because of the standards
of evidence and proof required in criminal trials. The legislature
responded in the market abuse provisions of the FSMA 2000,
which allow the FCA to impose administrative penalties upon
those who engage in this activity, which is defined so as to
include insider dealing. Thus, the second main form of the
prohibition on trading is the deployment of regulatory sanctions
against insider dealing, which is the area where EU law has been
most influential.
THE CRIMINAL JUSTICE ACT 1993 PART V
30–12
Section 52(1) of the 1993 Act defines the central offence which
it creates in the following terms: “An individual who has
information as an insider is guilty of insider dealing if, in the
circumstances mentioned in subs. (3), he deals in securities that
are price-affected securities in relation to the information”. This
definition, however, conceals as much as it reveals, for it is
much elaborated and qualified in the remaining sections of the
Part. It is proposed in the following sections to try to elucidate
the central elements of the offences created and of the defences
available.
Regulating markets
30–13
Pursuing the reference to s.52(3), contained in the above
definition, reveals at once that the Act does not aim to control all
dealings in shares where one of the parties has price-sensitive,
non-public information in his or her possession. On the contrary,
it is only when the dealing takes place “on a regulated market”
and in certain analogous situations does the Act bite. If, say, the
transaction occurs face-to-face between private persons, then the
situation is outside the control of this particular legislation. The
Act leaves regulated markets to be identified by statutory
instrument and that instrument includes any market established
under the rules of the London Stock Exchange (thus including
AIM).43
However, the legislation has always applied to certain “off-
market” deals and these are now defined as those where the
person dealing “relies on a professional intermediary or is
himself acting as a professional intermediary”.44 Section 59
makes it clear that the profession in question must be that of
acquiring or disposing of securities (for example, as a market
maker45) or acting as an intermediary between persons who wish
to deal (for example, as a broker46), and that a person does not
fall within the definition if the activities of this type are merely
incidental to some other activity or are merely occasional.
30–14
Despite this extension, which was in any event required by the
1989 Directive,47 the main thrust of the legislation is the
regulation of dealings on formalised markets, and the extension
was designed to prevent the evasion of such regulation, which
might occur if trading were driven off formalised markets into
less efficient, informal arrangements. The concentration of the
prohibition on formal markets also makes it much easier to
justify the restriction of the sanctions for breaches of the Act to
the criminal law. In addition to the other difficulties which
surround the creation of a coherent civil remedy in this area, the
fact that the trading has occurred on a public exchange means
that the identity of the counterparty to the transaction with the
insider is a matter of chance. In any liquid stock many thousands
of persons may be trading in the market at the same time as the
insider. To give a civil remedy to the person who happened to
end up with the insider’s shares and not to the others who dealt
in the market at the same time in the security in question would
be arbitrary, whilst to give a civil remedy to all relevant market
participants might well be oppressive of the insider.48 By
confining the sanction to the criminal law, Parliament avoided
the need to address these difficulties. Moreover, if the main
argument against insider trading is that it undermines public
confidence in the securities markets, the criminal law is capable
of expressing the community’s view of that public interest,
provided it can be effectively enforced.49
Finally, in this section on the definition of markets a few
words should be said about the international dimension of
insider dealing. It is now extremely easy, technically, for a
person in one country to deal in the shares of a company which
are listed or otherwise open to trading in another country; or for
a person to deal in shares of a company quoted on an exchange
in his or her own country via instructions placed with a foreign
intermediary. For the domestic legislator not to deal with this
situation runs the risk that the domestic legislation will be
circumvented wholesale. To apply the domestic sanctions
irrespective of the foreign element, on the other hand, is to run
the risk of creating criminal law with an unacceptable extra-
territorial reach. The latter risk is enlarged by the 1989
Directive’s requirement that the Member States must prohibit
insider dealing in transferable securities “admitted to a market of
a Member State”50 and not just those admitted to its own
markets. In line with this requirement, the 1994 Order extends
the application of the Act to securities which are officially listed
in or are admitted to dealing under the rules of any investment
exchange established within any of the states of the European
Economic Area.51
This clearly should not mean, however, that a French citizen
dealing on the basis of inside information on the Paris Bourse or
even on the Milan Exchange in the shares of a British company
(or a company of any other nationality) is guilty of an offence
under UK law. Consequently, s.62(1)52 of the Act lays down the
requirement of a territorial connection with the UK before a
criminal offence can be said to have been committed in the UK.
This requires the dealer or the professional intermediary to have
been within the UK at the time any act was done which forms
part of the offence or the dealing to have taken place on a
regulated market situated in the UK.53 Consequently, our French
citizen will commit a criminal offence in the UK only if the deal
is transacted on a regulated market located in the UK,54 unless
the trader or the professional intermediary through whom the
deal is transacted is in the UK at the time of the dealing.55 This
approach does not eliminate all potential of the insider dealing
legislation for extra-territorial effect, but it does limit it to
situations where there is some substantial connection between
the offence and the UK.
Regulating individuals
30–15
A striking feature of the 1993 Act is that it regulates insider
dealing only by individuals. The Act does not use the more usual
term “person” to express the scope of its prohibition, so that
bodies corporate are not liable to prosecution under the Act.
Corporate bodies were excluded, not because it was thought
undesirable to make them criminally liable but because of the
difficulties it was thought would be faced by investment banks
when one department of the bank had unpublished price-
sensitive information about the securities of a client company
and the dealing department had successfully been kept in
ignorance of that information by a “Chinese Wall”56 or
otherwise. If someone in the dealing department entered into a
trade, it was thought to be arguable that the bank as a single
corporate body would have committed an offence, had the Act
applied to corporate bodies, the act of one employee and the
knowledge of the other being attributed to the bank. However, it
should be noted that these arguments were not regarded as
decisive by those who drafted the various versions of the
administrative sanction regime. Their policy was to bring insider
dealing, even by corporate bodies, within the scope of the
regulatory prohibitions but then to deal expressly with the
problem of attributed knowledge.57
In any event, it should be noted that an individual can be
liable under the Act even if the dealing in question is done by a
company. Companies can act only through human agents, and,
as we shall see below,58 the Act’s prohibition on dealing extends
to procuring or encouraging dealing in securities. Thus, if the
individuals who move the company to deal do so on the basis of
unpublished price-sensitive information, they may well have
committed the criminal offence of procuring or encouraging the
company to deal, even if the company itself commits no offence
in dealing. These extensions embrace encouraging and procuring
“persons” to deal—though, of course, the encourager or procurer
must be an individual.
Inside information
30–16
The definition of inside information is a core feature of the Act
and has always been controversial. The general principle stated
in the preamble to the 1989 Directive was: investor confidence
in security markets depends inter alia on “the assurance afforded
to investors that they are placed on an equal footing and that they
will be protected against the improper use of inside
information”. However, it is much easier to state this general
principle than to cast it into precise legal restrictions. As we have
noted, placing investors “on an equal footing” cannot mean that
all those who deal on a market should have the same
information.59 The aim of the legislation is not to eliminate all
informational advantages, but to proscribe those advantages
whose use would be improper, often because their acquisition is
not the result of skill or effort but of the mere fact of holding a
particular position. This general issue will be seen to recur in
relation to all four of the limbs of the statutory definition of
“inside information”.
Section 56 defines inside information as information which:
(a) relates to particular securities or to a particular issuer of
securities and not to securities generally or to issues of
securities generally;
(b) is specific or precise;
(c) has not been made public;
(d) if it were made public would be likely to have a significant
effect on the price of any securities.
Particular securities or issuers
30–17
The first limb of the definition is the subject of a crucial
clarification in s.60(4) that information shall be treated as
relating to an issuer of securities “not only where it is about the
company but also where it may affect the company’s business
prospects”. This makes it clear that the definition of inside
information includes information coming from outside the
company, for example, that the Government intends to liberalise
the industry in which the company previously had a monopoly,
as well as information coming from within the company, for
example, that the company is about to declare a substantially
increased or decreased dividend or has won or lost a significant
contract. This casts the net very wide, but it is difficult to see
that any narrower formulation would have been appropriate.
Whatever the source of the information, it must relate to
particular securities or a particular issuer60 or particular issuers
of securities and not to securities or issuers generally. So
information relating to a particular company or sector of the
economy is covered, but not information which applies in an
undifferentiated way to the economy in general. This is not an
entirely easy distinction; nor is its policy rationale self-evident. It
would seem to mean that knowledge that the Government is,
unexpectedly, to increase or decrease interest rates would fall
within the definition in relation to bank shares (because interest
rates are central to the bank’s business of borrowing and lending
money) but not in relation to the shares in all companies (where
the implication of the rate rise is simply a less rapid future
growth of the economy).
Specific or precise
30–18
The second limb of the definition restricts the scope of inside
information further: the information must also be specific or
precise.61 The 1989 Directive required simply that the
information be “precise”,62 but this was thought by Parliament to
be possibly too restrictive, so the alternative of “specific” was
added. The example was given of knowledge that a takeover bid
was going to be made for a company, which would be specific
information, but might not be regarded as precise if there was no
knowledge of the price to be offered or the exact date on which
the announcement of the bid would be made.63 However, the
crucial effect of this restriction is that it apparently relieves
directors and senior managers of the company and analysts who
have made a special study of the company from falling foul of
the legislation simply because they have generalised
informational advantages over other investors. Having a better
sense of how well or badly the company is likely to respond to a
particular publicly known development does not amount to the
possession of precise or specific information.
Made public
30–19
The tension between the policy of encouraging communication
between companies and the investment community and of
stimulating analysts and other professionals to play an
appropriate role in that process, on the one hand, and that of
preventing selective disclosure of significant information to the
detriment of investors who are not close to the market, on the
other, is further revealed in s.58 of the Act, which deals with the
issue of when information can be said to have been “made
public”. The Government initially proposed to leave the problem
to be solved by the courts on a case-by-case basis, but came
under pressure in Parliament to deal with the issue expressly.
The pressure probably reflected the accurate perception that,
with the broadening of the definition of “insider”,64 more weight
would fall on the definition of “inside information” and
especially this limb of the definition. Section 58 is not, however,
a comprehensive attempt to deal with the issue. It stipulates four
situations where the information shall be regarded as having
been made public and five situations where the court may so
regard it; otherwise, the court is free to arrive at its own
judgment.65
The most helpful statement in s.58 from the point of view of
analysts is that “information is public if it is derived from
information which has been made public”.66 It is clear that this
provision was intended to protect analysts who derive insights
into a company’s prospects which are not shared by the market
generally (so that the analyst is able to out-guess competitors)
where those insights are derived from the intensive and
intelligent study of information which has been made public. An
analyst in this position can deal on the basis of the insights so
derived without first disclosing to the market the process of
reasoning which has led to the conclusions, even where the
disclosure of the reasoning would have a significant impact on
the price of the securities dealt in. This seems to be the case even
where the analyst intends to and does publish the
recommendations after the dealing, i.e. there is what is called
“front running” of the research.67
30–20
The utility of this subsection to the analyst and others is
enhanced by the other provisions of s.58(2). Section 58(2)(c)
comes close to providing an overarching test for whether
information is “made public” by stating that this is so if the
information “can readily be acquired” by those likely to deal in
the relevant securities. In other words, the public here is not the
public in general but the dealing public in relation to the
securities concerned (which is obviously sensible) and, more
controversially, the issue is not whether the information is
known to that public but whether it is readily available to them.
This is a more relaxed test than that applied under the previous
legislation, which required knowledge of the information on the
part of the public.68 The former test in effect required those close
to the market to wait until the information had been assimilated
by the investment community before trading. Now it appears that
trading is permitted as soon as the information can be readily
acquired by investors, even though it has not in fact been
acquired. In other words, a person who has advance knowledge
of the information can react as soon as it can be “readily
acquired” and reap a benefit in the period before the information
is in fact fully absorbed by the market. This consequence of
s.58(2)(c) is strengthened by the express provisions that
publication in accordance with the rules of a regulated market or
publication in records which by statute are available for public
inspection mean that the information has been made public.69
However, the extent of the move away from actual public
knowledge in the current legislation should not be exaggerated.
The test laid down in s.58(2)(c) is not that information is public
if it is available to the relevant segment of investors but whether
it “can readily be acquired” by them. That information could be
acquired by investors, if they took certain steps, is surely not
enough in every case to meet the test of ready availability. One
can foresee much dispute over what in addition is required to
make information readily available. Section 58(3) helps with this
issue to the extent of stating that certain features of the
information do not necessarily prevent it from being brought
within the category of information which “can be readily
acquired”. Thus, information is not to be excluded solely
because it is published outside the UK, is communicated only on
payment of a fee, can be acquired only by observation or the
exercise of diligence or expertise, or is communicated only to a
section of the public. However, in the context of particular cases,
information falling within these categories may be excluded
from the scope of “public information”, for instance because the
information is supplied for a (high) fee or is supplied to a very
restricted number of persons. To this extent, the legislation has
necessarily ended up adopting the Government’s initial
standpoint that much would have to depend upon case-by-case
evaluation by the courts in the context of particular prosecutions.
Impact on price
30–21
The final limb of the definition is the requirement that the
information should be likely to have “a significant effect” on the
price of the securities, if it were made public.70 The law has
chosen not to pursue those who will reap only trivial advantages
from trading on inside information. At first sight, the test would
seem to present the court (or jury) with an impossibly
hypothetical test to apply. In fact, in most cases, by the time any
prosecution is brought, the information in question will have
become public,71 and so the question will probably be answered
by looking at what impact the information did in fact have on the
market when it was published. However, it would seem
permissible for an insider to argue in an appropriate case that the
likely effect of the information being made public at the time of
the trading was not significant, even if its actual disclosure had a
bigger effect, because the surrounding circumstances had
changed in the meantime.
Insiders
30–22
We have already noted72 the important restriction in the
legislation that insiders must be individuals. Beyond that, it
might be thought that nothing more needs to be said other than
that an insider is a person in possession of inside information. In
other words, the definitional burden should fall on deciding what
is inside information and the definition of insider should follow
as a secondary consequence of this primary definition. The
Government’s consultative document on the proposed
legislation73 rejected this approach as likely to cause “damaging
uncertainty in the markets, as individuals attempted to identify
whether or not they were covered”. This is not convincing.
Either the definition of inside information is adequate or it ought
to be reformed. If it is adequate, so that it can be applied
effectively to those who are insiders under the Act, then it is not
clear why it cannot be applied to all individuals, whether they
meet the separate criteria for being insiders or not. If the
definition of inside information is not adequate, it is not proper
to apply it even to those who clearly are insiders under the
legislation and it should be changed. In fact, the proposal that
insiders should be defined as those in possession of inside
information would to some extent reduce uncertainty, because
the only question which would have to be asked is whether the
individual was in possession of inside information and the
additional question of whether the individual met the separate
criteria for being classed as an insider would be irrelevant.
However, the Government stuck to its guns whilst simplifying
the criteria which had been used in the earlier legislation and,
following the Directive, expanding the category of insiders quite
considerably.74 By virtue of s.57(2)(a) two categories of insider
are defined. The first are those who obtain inside information
“through being” a director, employee or shareholder of an issuer
of securities.75 Although it is not entirely clear, it seems that the
“through being” test is simply a “but for” test. If a junior
employee happens to see inside information in the non-public
part of the employer’s premises, he or she would be within the
category of insider, even if the duties of the employment do not
involve acquisition of that information. On the other hand,
coming across such information in a social context would not
make the junior employee an insider, even though the
information related to the worker’s employer. In other words,
there must be a causal link between the employment and the
acquisition of the information, but not in the sense that the
information must be acquired in the course of the employee’s
employment (though the latter remains a possible interpretation
of the subsection). It may be thought that shareholders, who
were excluded from the definition of insider in the previous
legislation, are unlikely to obtain access to inside information
“though being” shareholders, but this is in fact a likely situation
in relation to large institutional shareholders, which may, either
as a general practice or in specific circumstances, keep in close
touch with at least the largest companies in their portfolios.
The second category of insider identified by s.57(2)(a) is the
individual with inside information “through having access to the
information by virtue of his employment, office or profession”,
whether or not the employment, etc. relationship is with an
issuer. Thus, an insider in this second category maybe, or be
employed by, a professional adviser to the company76; an
investment analyst, who has no business link with an issuer; a
civil servant or an employee of a regulatory body; or a journalist
or other employee of a newspaper or printing company.77 Again,
the question arises about the exact meaning of the phrase “by
virtue of”: is it again a simple “but for” test or does it mean “in
the course of” (perhaps a slightly stronger suggestion in this
second situation)? Even if the latter interpretation is ultimately
adopted, this second category would be wide enough to embrace
partners and employees of an investment bank or solicitors’ firm
retained to advise an issuer on a particular matter, employees of
regulatory bodies who are concerned with the issuer’s affairs,
journalists researching an issuer for a story and even employees
of a printing firm involved in the production of documents for a
planned but unannounced takeover bid.78 If the broader “but for”
test is adopted, then employees of these organisations, not
employed on the tasks mentioned, but who serendipitously come
across the information in the workplace, would be covered too.79
Recipients from insiders
30–23
In practice, the need to define the exact scope of the second
category of insider is reduced by the third category, created by
s.57(2)(b). In the US persons in this third category are
distinguished from primary insiders by the use of the graphic
expression “tippee”,80 but the British legislation lumps them in
with primary insiders. This third category consists of those who
have inside information “the direct or indirect source of” which
is a person falling within either of the first two categories. Thus,
subject to the point about mens rea made in the next paragraph,
the employee of an investment bank who overhears a colleague
talking about a takeover bid on which the latter is engaged
would be in all probability an insider in the third category if he
or she does not fall within the second category. This example
also makes it clear that the more striking American terminology
might be somewhat misleading. It does not matter whether the
primary insider has consciously communicated the information
to the secondary insider (i.e. “tipped the latter off”). Provided the
latter has acquired the information from an inside source, even
indirectly, he or she will fall within the scope of the Act; indeed,
as in the example, the “tipper” may be entirely unaware that
inside information has been communicated to anyone else.81
Furthermore, a certain type of tipping will not in fact make the
tippee liable for dealing. If the insider within the first two
categories encourages another person to deal without
communicating to that other person any inside information, the
latter can deal without being exposed to liability under the Act—
though the tipper would be liable for encouraging the dealing.82
Mental element
30–24
Finally, the requirement of having information “as an insider” in
s.57 was used by the drafters to put a crucial limitation on the
scope of the offence created by the Act. This is the required
mental element, a not surprising precondition for criminal
liability, but nevertheless one which has made enforcement of
the legislation often difficult.83 The requirement in this regard is
a two-fold one: the accused must be proved to have known that
the information in question was inside information and that the
information came from “an inside source”, i.e. accused knew the
information was obtained in one of the three ways discussed
above. The requirement of knowledge is likely to be difficult to
meet, especially in the case of recipients of information from
insiders via a chain of communications. Proving that a “sub-
tippee” or even a “sub-sub-tippee” knew that the ultimate source
of the information was a primary insider could be fraught with
problems.
Prohibited acts
30–25
What is an individual with inside information and who is an
insider and meets the required mental element prohibited from
doing? There are four prohibitions and, before describing them,
it should be pointed out that it is not necessary that the accused
should be an insider at the time he or she does the prohibited act.
Once inside information has been acquired by an insider, the
prohibitions apply even though the accused resigns the
directorship or employment through which he obtained the
information.84 On the other hand, if by the time of the dealing the
information enters the public domain, the prohibitions of the Act
will cease to apply. It should also be noted that the prohibitions
apply not only to the company’s securities but also to futures
contracts85 and contracts for differences,86 where the reference
security is a security issued by the company.87
First, and most obviously, there must be no dealing in the
relevant securities.88 The relevant securities are those which are
“price-affected”, i.e. those upon the price of which the inside
information would be likely to have a significant effect, if made
public.89 Dealing is defined as acquiring or disposing of
securities.90 Thus, a person who refrains from dealing or cancels
a deal on the basis of inside information is not covered by the
legislation.91 In principle, it is difficult to defend this exclusion
since the loss of public confidence in the market will be as
strong as in a case of dealing, if news of the non-dealing
emerges. The exclusion was presumably a pragmatic decision
based on the severe evidential problems which would face the
prosecution in such a case. The dealing prohibition is broken
quite simply by dealing; the Act does not require the prosecution
to go further and prove that the dealing was motivated by the
inside information, though the accused may be able to put
forward the defence that he would have done what he did even if
he had not had the information.92 The Act covers dealing as an
agent (not only as a principal) even if the profit from the dealing
is thereby made by someone else, for one can never be sure that
the profit made by the third party will not filter back to the trader
in some form or other. And it covers agreeing to acquire or
dispose of securities as well as their actual acquisition or
disposal, and entering into or ending a contract which creates the
security93 as well as contracting to acquire or dispose of a pre-
existing security.
Secondly, the insider is prohibited from procuring, directly or
indirectly, the acquisition or disposal of securities by any other
person. Technically, this result is achieved by bringing procuring
within the definition of dealing.94 Procurement will have taken
place if the acquisition is done by the insider’s agent or nominee
or a person acting at his or her direction, but this does not
exhaust the range of situations in which procurement can be
found.95 Since the person procured to deal may well not be in
possession of any inside information and the procurer has not in
fact dealt, without this extension of the statutory meaning of
“dealing” there would be a gap in the law.
Thirdly, there is a prohibition on the individual encouraging
another person to deal in price-affected securities, knowing or
having reasonable cause to believe that dealing would take place
on a regulated market or through a professional intermediary.96
Again, it does not matter, for the purposes of the liability of the
person who does the encouraging, that the person encouraged
commits no offence, because, say, no inside information is
imparted by the accused. Indeed, it does not matter for these
purposes that no dealing at all in the end takes place, though the
accused must at least have reasonable cause to believe that it
would. The existence of this offence is likely to discourage over-
enthusiastic presentations by company representatives to
meetings of large shareholders or analysts.
Finally, the individual must not disclose the information
“otherwise than in the proper performance of the functions of his
employment, office or profession to another person”.97 Unlike in
the previous two cases, the communication of inside information
is a necessary ingredient of this offence, but no response on the
part of the person to whom the information is communicated
need occur nor be expected by the accused. However, in effect,
this element is built into the liability, for the accused has a
defence that “he did not at the time expect any person, because
of the disclosure, to deal in securities” on a regulated market or
through a professional intermediary.98 So, even if it occurs
outside the proper performance of duties, disclosure which is not
expected to lead to dealing will not result in liability, but the
burden of proving the absence of the expectation falls on the
accused. This prohibition helps to put the issuer in the position
of being the sole source of the disclosure of internally generated
inside information to the market.99
Defences
30–26
The Act provides a wide range of defences,100 which fall within
two broad categories. First, there are two general defences which
carry further the task of defining the mischief at which the Act is
aimed.101 Secondly, there are the special defences, set out mainly
but not entirely, in Sch.1 to the Act, which frankly accept that in
certain circumstances the policy of prohibiting insider trading
should be overborne by the values underlying the exempted
practices. These special defences, which were foreshadowed in
the recitals to the 1989 Directive, will be dealt with only briefly
here.102
General defences
30–27
The more important of the general defences is that the accused
“would have done what he did even if he had not had the
information”.103 This defence benefits liquidators, receivers,
trustees, trustees in bankruptcy and personal representatives who
may find themselves in the course of their offices advised to
trade when in fact themselves in possession of inside
information.104 Thus, a trustee, who is advised by an investment
adviser to deal for the trust in a security in relation to which the
trustee has inside information, will be able to do so, relying on
this defence. But the defence applies more generally than that
and would embrace, for example, an insider who dealt when he
did in order to meet a pressing financial need or legal obligation.
However, the accused will carry the burden of showing that his
or her decision to deal at that particular time in that particular
security was not influenced by the possibility of exploiting the
inside information which was held.
The other general defence is that the accused did not expect
the dealing to result in a profit attributable to the inside
information.105 Although the defence is general in the sense that
it is not confined to particular business or financial transactions,
the range of situations falling within it is probably quite narrow.
The Government’s attempts in the parliamentary debates to
produce examples of situations for which this defence was
needed and which were at all realistic were not entirely
convincing.106
Special defences
30–28
The Act provides six special defences, two in the body of the
Act and four in Sch.1. One of those provided in the body of the
Act appears to be a general defence and is to the effect that
dealing is not unlawful if the individual “believed on reasonable
grounds that the information had been disclosed widely enough
to ensure that none of those taking part in the dealing would be
prejudiced by not having the information”.107 In fact, however,
this defence is aimed particularly at underwriting
arrangements,108 where those involved in the underwriting may
trade amongst themselves on the basis of shared knowledge
about the underwriting proposal but that information is not
known to the market generally. The other defence provided in
the body of the Act109 concerns things done “on behalf of a
public sector body in pursuit of monetary policies or policies
with respect to exchange rates or the management of public debt
or foreign exchange reserves”. So reasons of state, relating to
financial policy, trump market integrity.110
The four special defences provided in the Schedule do not
extend to the disclosure of inside information. Where these
defences apply, those concerned may trade or encourage others
to do so but may not enlarge the pool of persons privy to the
inside information. In all four cases, what are judged to be
valuable market activities would be impossible without the
relaxation of the insider dealing prohibition. Thus, market
makers111 may often be in possession of inside information but
would not be able to discharge their undertaking to maintain a
continuous two-way market in particular securities if they were
always subject to the Act. So para.1 of Sch.1 exempts acts done
by a market maker in good faith in the course of the market-
making business. More controversially, para.5 does the same
thing in relation to price stabilisation of new issues.112
The final two special defences relate to trading whilst in
possession of “market information”, which is, in essence,
information about transactions in securities being contemplated
or no longer contemplated or having or not having taken place.
First, an individual may act in connection with the acquisition or
disposal of securities and with a view to facilitating their
acquisition or disposal where the information held is market
information arising directly out of the individual’s involvement
in the acquisition or disposal.113 An example is where the
employees of an investment bank advising a bidder on a
proposed takeover procure the acquisition of the target’s shares
on behalf of the bidder but before the bid is publicly announced,
in order to give the bidder a good platform from which to launch
the bid. This defence would not permit the employees to
purchase shares for their own account, because they would not
then be acting to facilitate the proposed transaction out of which
the inside information arose. Even so, permitting a bidder to act
in this way is somewhat controversial for those who procure the
purchase of the shares know that a bid at a price in excess of the
current market price is about to be launched and those who sell
out to the bidder just before the public announcement may feel
that they have been badly treated.114 Another situation covered
by the provision is that of a fund manager who decides to take a
large stake in a particular company. The manager can go into the
market on behalf of the funds under management and acquire the
stake at the best prices possible, without announcing in advance
the intention to build up a large stake, which would immediately
drive up the price of the chosen company’s shares.
Under the second and more general “market information”
defence the individual may act if “it was reasonable for an
individual in his position to have acted as he did” despite having
the market information.115 This is so broadly phrased that it
would seem wide enough to cover the situations discussed in the
previous paragraph. The more specific provisions were included
as well presumably in order to give comfort to those who would
otherwise have had to rely on the general reasonableness
provision and who might have wondered whether the courts
would interpret it in their favour.
CRIMINAL PROHIBITIONS ON MARKET MANIPULATION
30–29
The criminal prohibitions on market manipulation are now to be
found in Pt 7 of the Financial Services Act 2012. Section 89
creates an offence in relation to misleading statements made in
order to induce trading in securities. It can clearly be used to
catch egregious cases of market manipulation116 and has been
discussed in Ch.26.117 The second offence is more interesting
and was introduced by s.47(2) of the Financial Services Act
1986 (now repealed). As reformulated by s.90 of the 2012 Act,
this criminalises an act or course of conduct118 which creates a
false or misleading impression as to the market in or price or
value of any investment (as widely defined), if done for one or
other (or both) of two purposes. The first is where the defendant
intends by creating the impression to induce a person to acquire
or dispose of investments or to refrain from doing so or to
exercise or not to exercise rights attached to investments.119 It is
to be noted that the offence is complete whether or not the
accused knew that, or was reckless whether, the impression
created was misleading: all that has to be shown is that he acted
for the purpose of creating an impression which was in fact
misleading. However, a defence is provided where the accused
can show that he reasonably believed that the impression was not
misleading.120 In effect, negligence as to the misleading nature of
the impression is made a crime and the burden of disproving
negligence is placed upon the maker of the impression.
The second purpose does depend upon the creator of the
impression knowing that it is false or misleading or being
reckless as to whether this is the case. If the defendant intends
through the impression to make a gain for himself or another or
cause loss (or the risk of loss) to another, that person commits an
offence, as will also be the case where the defendant is aware
that these consequences are likely to result.121 Thus, if in the De
Berenger case,122 the fraudsters had acted somewhat more subtly
and refrained from openly stating that Napoleon had been killed
but had allowed that impression to arise (for example, through
their joyous behaviour as if by soldiers released from a
successful army), they would be caught by this version of the
second offence.
Some basic forms of manipulative behaviour are offences at
common law,123 but the statute extends and makes clearer the
reach of the criminal law in this area. This offence is rarely
prosecuted,124 but the following examples of contraventions can
be given. The promoters of a company fund the underwriters of a
share issue to buy shares in the market when dealings begin in
order to give the impression that there is a greater market interest
in the shares than is in fact the case125; or the directors of a
company, believing the market price of its shares not to reflect
the net tangible asset value of the company, persuade its brokers
to buy shares in the market at some four times the previous
market price, in order to move the market price closer to what
the directors believe to be the “true” value of the shares.126
REGULATORY CONTROL OF MARKET ABUSE
Background
30–30
So far, we have looked at the criminal prohibitions on insider
dealing and market manipulation. We now turn to the practically
more important form of control of market abuse, namely, that
administered by regulators, which do not require resort to the
criminal law and the criminal courts. In fact, with the enactment
of the FSMA 2000, the main thrust of the legal rules controlling
market abuse, in which term is to be included both insider
dealing and market manipulation, shifted from the criminal law
to administrative sanctions which have been placed in the hands
of the FCA. At this point, the main source of the rules was Pt
VIII of FSMA which was used later to transpose the first EU
Directive on market abuse,127 but in significant ways went
beyond that Directive. From the beginning the regulatory
sanctions were applied to companies as well as to individuals.
Moreover, they applied to all those whose actions had an effect
on the market, whether they were persons authorised to carry on
financial activities or not. They thus applied as much to
industrial companies and their directors, for example, as to
investment banks and their directors and employees. These
statements are true also of the MAR, now the central legal
instrument on administrative control.
Part of the reason for the emphasis on administrative penalties
from 2000 onwards was that successful deployment of the
criminal law on a wide scale against insider dealing and market
manipulation proved difficult. Only after the financial crisis of
2007/8 did the FSA/FCA put substantial resources into the
enforcement of the relevant criminal laws. Even so, between
2009 and mid-2015 there were only 27 successful prosecutions
for insider dealing (about four a year), of which 23 resulted in
custodial sentences (in no case for more than four years).128 The
move towards a regime based on administrative penalties was
driven by the desire to address two of the obstacles raised by the
criminal offences, namely the need to show intention, at least in
relation to insider dealing,129 and the high evidential
requirements of the criminal law. Even so, in the 12 years to
March 2015 the FSA/FCA issued only 85 “Final Notices” in
relation to market abuse, i.e. about seven a year.130
However, the proposals which were eventually embodied in
the FSMA 2000 proved highly controversial during the
parliamentary debates on the Bill, those opposing it claiming that
it would infringe rights conferred by art.6 of the European
Convention on Human Rights (right to a fair trial).131 The central
claim of the opponents was that the penalty regime proposed by
the Government, although clearly not part of the domestic
criminal law, would be classified as criminal by the European
Court of Human Rights, whose classification criteria are
independent of those used domestically. Without ever conceding
the correctness of this claim, the Government nevertheless did
make substantial amendments to its proposals in order to
promote the fairness of the new regime, the regime being subject
in any event to a general fairness test under the European
Convention, even if regarded as civil rather than criminal in
nature. These amendments involved in particular the elaboration
by the then FSA of a Code on Market Abuse in order to give
guidance on the scope of the prohibitions, and the creation of
rights of appeal to an independent tribunal (now the Upper
Tribunal) to be granted to persons penalised by the FCA.132
In the aftermath of the financial crisis, the debate turned on its
head. Now, it was argued that the market abuse provisions were
inadequate. This was an argument advanced at EU level as well
as at domestic level. It led to the replacement of the EU
Directive by a Regulation on market abuse (MAR). MAR both
expanded the scope of the substantive EU laws on market abuse,
but also removed the need for domestic transposition of those
laws, thus bringing about a major change in the structure of the
domestic law. In fact, with regard to the securities markets
aspects of market abuse, which are the focus of this chapter, the
structural changes were probably more important than the
substantive ones. In particular, MAR led to the removal of the
FCA’s power to make a Code in this area.133
Insider dealing
30–31
The definition of insider dealing in MAR is somewhat more
simply phrased than under the CJA.
“For the purposes of this Regulation, insider dealing arises where a person
possesses inside information and uses that information by acquiring or disposing of,
for its own account or for the account of a third party, directly or indirectly,
financial instruments to which that information relates.”134
As to inside information, as far as trading in corporate securities

is concerned, this is:
“information of a precise nature, which has not been made public, relating, directly
or indirectly, to one or more issuers or to one or more financial instruments, and
which, if it were made public, would be likely to have a significant effect on the
prices of those financial instruments or on the price of related derivative financial
instruments”135
Since these definitions, not surprisingly, are substantially similar

to those to be found in the CJA, it is proposed only to highlight
the main features of the regulatory prohibition.
Dealing
30–32
First, the crucial difference between the MAR approach to
insider dealing and that of the CJA is that there is no requirement
for a mental element, i.e. no equivalent to the requirement in
s.57(1) of the CJA that the person know the information is inside
information and know that he or she has it through being an
insider.136 This was the case also under FSMA. Article 14 of
MAR simply says that “a person shall not engage in insider
dealing” and the definition of insider dealing (above) contains no
requirement as to a mental element. The lack of mental element
was further emphasised by the CJEU when it held that a person
who “possesses” inside information and trades is presumed to
“use” it, i.e. to trade on the basis of the information—though that
presumption is rebuttable.137
30–33
Secondly and new in the UK, art.14 prohibits attempts to engage
in insider dealing, so that even if no dealing occurs, there is
exposure to penalties if the person attempted to deal (for
example, placed an order with a broker which, for some reason,
the broker failed to implement).
30–34
Thirdly, again new in the UK, MAR catches a limited number of
decisions not to trade or to trade differently, i.e. where the
person cancels or amends an order for trading already given after
receiving the inside information. A simple addition to a trading
order would seem to be caught in any event by the prohibition on
trading but an alteration of the price at which a person is
prepared to trade might not be and is picked up by the provision
on amending an existing order. However, a person who is
contemplating an order but has not placed one before receiving
the inside information is still outside the prohibition.
30–35
Fourthly, the definition of insider dealing in art.8(1), unlike the
CJA,138 appears not to contain a requirements that the possessor
of the inside information be, in addition, an insider. However,
art.8(4) says that the prohibition applies only to those who
acquire the information “as a result of” being a director or
shareholder of the company, having access to the information
“through the exercise of an employment, profession or duties” or
through criminal activities. So, art.8(4), like the CJA, in fact
builds in a requirement of being an insider into its prohibition—
though the extension of the insider concept to criminals is novel.
In addition to the above categories, art.8(4) imposes liability on
any person “who possesses inside information under
circumstances…where that person knows or ought to know that
it is inside information”. In this final case, a mental element is
required to bring the person within the category of insider: either
knowledge or negligence as to the inside quality of the
information. Subject to that mental element, however, a person
with inside information is an insider, and how that person
acquired the information is relevant only to the assessment of the
holder’s mental state.
30–36
Fifthly, like the CJA, the prohibition extends beyond dealing. It
extends to the situation where the person with inside information
“recommends” or “induces” another person to trade (or cancel or
amend an order), irrespective of whether the inside information
was communicated to the person who trades or, in the case of a
recommendation, irrespective of whether trading occurs.139 If the
third party actually responds by trading, etc. that person will also
be liable provided that he knows or ought to know that the
recommendation or inducement is based on inside
information.140 Mere disclosure of inside information,
unaccompanied by any recommendation or inducement, is also
prohibited, unless this occurs “in the normal exercise of an
employment, a profession or duties”.141 The onward transmission
by its recipient of a recommendation or inducement also falls
within this prohibition where the recipient knows or ought to
know that the recommendation or inducement was based on
inside information.142 This prohibition does not seem confined to
the first recipient of the recommendation or inducement.
Inside information
30–37
Sixthly, the definition of inside information is slightly broader
than its CJA equivalent in that the information does not have to
relate to particular securities or particular issuers of securities, so
that information which has an impact on the securities markets
generally could be inside information for the purposes of MAR.
As with the prior domestic law (under FSMA), the likely impact
of the information on the market is tested by reference to what “a
reasonable investor” would regard as relevant information.143
The CJEU has held that the “market impact” test can be satisfied
even if the direction of the impact (upwards or downwards)
cannot be predicted at the time of trading.144 Whilst this seems
odd at first sight, in situations of market volatility a particular
piece of information might predictably move the market without
the direction of the movement being clear in advance. A person
holding the information could then profit from it by acquiring
appropriate financial instruments one of which will pay off in
either event, for example, both call and put options over the
issuer’s securities, only one of which would be exercised
depending on the direction of the market impact.145
The headline definition of inside information requires that it
be “precise” but, unlike the CJA,146 does not say that it is enough
that it is specific, even if not precise. However, art.7(2) says that
information about events or circumstances “shall be deemed to
be of a precise nature…where it is specific enough to enable a
conclusion to be drawn as to the possible effect of that set of
circumstances or event on the prices of the financial
instruments”. This does not in terms say that specific but not
precise information may always be inside information, but
comes close to it.
As with disclosure of information,147 knowing when
information about a developing situation becomes inside
information raises difficult issues. The CJEU held under the
prior EU law that the information might cross that threshold
before the situation was fully developed and MAR reflects that
view.148 Article 7(2) states that “an intermediate step in a
protracted process shall be deemed to be inside information if,
by itself, it satisfies the criteria of inside information as referred
to in this Article”. More generally, art.7(2) treats information as
inside information where it relates to circumstances or events
which “which may reasonably be expected” to occur as well as
circumstances which already exist or have occurred. That same
CJEU decision equated a reasonable expectation with a realistic
prospect, not a high probability, of occurrence.
MAR does not contain one extension beyond inside
information which was part of the prior domestic regime. This
covered “information which is not generally available” (RINGA)
and not just to “inside information”,149 provided a “regular user
of the market” would regard the information as relevant to the
transaction in question. The effect was to extend the prohibition
to information which would not meet the definition of inside
information, because it was not specific or precise, but which
market users would regard as an illegitimate basis for trading.
Domestically, this was a controversial extension, which was kept
going from year-to-year until the end of 2014, when it was
allowed to expire under the latest version of its “sunset”
provision.150 The Commission proposed a more rigid version of
RINGA in its initial proposals for MAR, but in the end the
uncertainties thought to be generated by the concept led to its
exclusion from MAR.151
Persons covered and exemptions
30–38
Seventhly, like the prior FCA rules but unlike the CJA, MAR
imposes liability on the company as well as on natural persons,
but makes it clear that corporate liability does not remove the
liability of the persons who traded on behalf of the company.152
The problem of over-extensive attribution is addressed by
removing liability from the company if it has effectively
instituted a “Chinese wall” between those within the company
who traded and those who held the inside information.153
Eighthly, inevitably a range of exemptions from the
prohibition is provided in order to deal with situations where the
otherwise prohibited activity is thought to have a higher value
than reducing the incidence of insider trading. Besides the usual
exemptions from liability for market makers and brokers acting
in the normal course of their business, MAR pay a lot of
attention to insider trading in the course of takeovers and
mergers. Article 9(5) provides that a person’s knowledge that it
has decided to acquire or dispose of securities, where that fact is
not known to the market, does not “of itself” constitute the use
of inside information when that person implements its decision.
This provision applies generally (for example, to fund managers
who have decided to take a major position in a company) but
would appear to permit a bidder to build up a stake in the
potential target before announcing a bid, at least to the point
where the rules on disclosure of major shareholding are
triggered.154 Article 9(4) applies specifically to inside
information obtained “in the conduct of” a merger or public
takeover. A person holding such information is not “deemed”
from the mere fact of its possession to have used it when
proceeding with the merger or takeover, provided the inside
information has ceased to be such by the time the shareholders
accept the takeover offer or approve the merger. The purpose of
this provision, which is expressly said not to apply to “stake-
building”, might be to deal with the situation where a bidder or
potential merger partner obtains information in private
discussions with the target company before making an offer or
putting forward a merger proposal. The offer or proposal, when
made, might constitute a recommendation or inducement to
acquire shares (in the bidder) or dispose of shares (in the target),
even though that offer or proposal, when initially announced as
required by MAR itself, might not be accompanied by all
relevant information.
An exemption from the obligation not to disclose inside
information is provided, subject to extensive safeguards, in
relation to “market soundings”, i.e. discussion with selected
market participants about a possible course of action in order to
establish the market’s likely reaction to it. The most common
situation is where those acting on behalf of an issuer wish to
establish whether the market would absorb a public offering of
shares within a price range the issuer would find acceptable.
However, market soundings also embrace talks by a potential
bidder with large shareholders in the target in order to establish
the likelihood of their accepting an offer, if one were made.155
The information in question here is clearly likely to constitute
inside information of the utmost salience. Indeed, unusual
trading in advance of a bid announcement is a common feature
of securities markets. MAR seeks to address this risk by
requiring the discloser to assess whether it will be disclosing
inside information during the market soundings (and to keep a
written record of its assessment and of the inside information
disclosed, if any). If so, the consent of potential recipients of the
information to receive it must be obtained (a process sometimes
called “[Chinese] wall crossing”) and the implications for the
recipients of being put in possession of inside information must
be explained. The recipients must themselves assess whether
they are in possession of inside information.156 Finally, the
Commission is to adopt regulatory technical standards and
ESMA guidelines for market soundings.157
Market manipulation
Transactions and orders to trade
30–39
Market manipulation is defined very broadly in art.12 of MAR,
as it was under the previous regime. Many of its manifestations
have little relevance to the public markets in securities, with
which we are primarily concerned. We concentrate on the forms
of manipulation which are relevant to such markets. The first
two aspects of the definition both arise out of effecting
transactions or orders to trade (for example, in securities). The
first covers trades which give or are likely to give a false
impression as to the market supply or demand or price of a
financial instrument or secure the price of the financial
instrument at an abnormal or artificial level.158 As we have seen
above, such behaviour constitutes a criminal offence if done for
the purpose of inducing investment decisions,159 but MAR
applies on the basis simply of engaging in the proscribed
behaviour (subject to the defences discussed below).160 Indeed,
as with insider dealing, attempting to engage in the behaviour is
also prohibited. The second covers transactions or orders which
employ some form of deception.161 Annex 1 to MAR gives a
non-exhaustive list of the matters national regulators should take
into account when applying these two aspects of the prohibition.
The market itself has developed graphic terms to refer to some
of the forms of behaviour falling within these prohibitions.
Examples are “wash trades” (where a person trades with himself
or two persons acting together trade between themselves, but so
that there is no real transfer of beneficial ownership or market
risk) and “painting the tape” (entering into a series of
transactions that are publicly reported for the purpose of
suggesting a level of activity or price movement which do not
genuinely exist) fall within the first type of behaviour.162
Dissemination of information
30–40
Given the reliance of markets on information, it is not surprising
that a common form of market manipulation consists of
supplying misleadingly good or bad information to the market.
Colourful examples are “pump and dump” (taking a long
position in an investment, disseminating misleading positive
information about it, and then selling out) and its opposite, “trash
and cash” (taking a short position in a security and disseminating
misleading negative information before closing out the short
position) fall within this type of market manipulation.163 The
third aspect of prohibited manipulation thus consists of
disseminating information which gives or is likely to give a false
or misleading impression as to the demand for, supply of or the
price of a financial instrument where the disseminator knew or
ought to have known that the information was false or
misleading.164 In this case, a negligence standard is built into the
definition of the prohibited conduct.165 In effect, a person who
makes a negligent misstatement to the market about a financial
instrument is exposed to the FCA’s penalties, but without it
being a requirement for liability that the maker of the statement
should have intended or expected that any particular person or
class of person should rely on it, still less that any such reliance
should have occurred.166 As we have seen,167 there is liability
under s.91 of FSMA to the FCA’s penalties on the part of an
issuer (and its directors) which negligently make a misleading
disclosure required by the Transparency Rules. However,
liability under the market abuse provisions (which was invoked
in the Shell case)168 is a useful supplement because MAR, unlike
the TD, is not confined to regulated markets.169
Misleading behaviour and market distortion
30–41
The final forms of market manipulation identified in MAR target
various forms of behaviour which may mislead the market but
which are not central to the manipulation of securities markets.
An example is securing a dominant position in the market for a
financial instrument (“cornering” it) so as to establish unfair
trading conditions.170 This can happen in securities markets but
is difficult and expensive in a deep and liquid market. More
common perhaps is trying to influence the opening or closing
prices of certain financial instruments, in order to influence the
settlement terms of derivatives linked to those prices171 or
placing artificial orders which make it difficult for market
participants to identify genuine orders or for the market to
establish the price of the financial instrument.172
Accepted market practices
30–42
The principal difficulty with prohibitions on market
manipulation is that any effective definition is likely also to
catch some behaviour which market participants regard as
legitimate. MAR recognises this by exempting from the
prohibition on manipulation acts which are done “for legitimate
reasons, and conform with [sic] an accepted market practice”.173
A further issue here is that accepted market practices (“AMP”)
are specific to particular markets and so need to be defined at
that level. This created a particular problem for the drafters of
MAR, whose objective is uniformity of regulation across the
EU. One can see their reluctance to delegate an important
regulatory power, not just to Member States, but to the
regulators of particular markets. Having accepted therefore the
principle that AMP are to be established by the relevant market
regulators,174 MAR constrains the decisions of those regulators
to a considerable extent. Seven criteria are laid out which
competent authorities have to take into account when
establishing an AMP and those criteria are supplemented by
regulatory technical standards adopted by the Commission.175
None of the criteria is surprising but setting them creates a
framework of EU law within which competent authorities must
operate. That framework is enforced through the requirement
that a competent authority, before establishing an AMP, must
notify ESMA, giving its analysis justifying the establishment of
an AMP under the criteria.176 ESMA then carries out its own
analysis at the EU level to determine whether the AMP would
“threaten the market confidence in the Union’s financial
market,” publishing that opinion on its website.177 The
competent national authority is not bound to accept ESMA’s
view but must publish on its website within 24 hours of
establishing the AMP what is in effect a rebuttal of ESMA’s
analysis.178 This very public “comply or explain” procedure is
clearly designed to give ESMA a major oversight role in the
establishment of an AMP: a national competent authority which
wants a quiet life will clearly consult informally with ESMA
before it provides its initial analysis in order to maximise the
chances of that analysis being acceptable to ESMA.
However, this is not an end to ESMA’s role. Other competent
authorities (from other Member States) are co-opted into the
scrutiny process. Another competent authority may complain
that the AMP has been established in breach of the criteria laid
out in MAR. In that case ESMA is to assist the competent
authorities to reach an agreement, but, if this does not occur,
ESMA may give a decision which is binding on the competent
authorities involved in the dispute.179 Enforcement of the
decision may lead ESMA to give instructions directly to market
participants. Although this procedure is dependent on complaint
by the competent authority of another Member State, no doubt
there are ways and means of informally encouraging such
complaints.
Safe harbours
30–43
MAR provides safe harbours, for two types of activity, in
relation to both the insider trading and market manipulation
manifestations of the prohibition on market abuse. These
activities are share buy-backs and stabilisation occurring in the
period after a public offer of securities. In both cases, the
exemptions are tightly drawn and must comply with regulatory
technical standards drawn up by ESMA and adopted by the
Commission.180 Both exemptions were contained in the prior law
and were there subject to Commission second-level rules. The
UK has chosen to extend the protection to the criminal
provisions181 on misleading statements.
Share buy-backs
30–44
The creditor and shareholder protection aspects of share buy-
backs have been considered in Ch.13.182 It is by no means
impossible for a company to effect a buy-back programme for its
shares without falling foul of the market abuse prohibition,
especially as issuers in any event must disclose inside
information to the market “as soon as possible”183 and so should
not be holding it when effecting the buy-back. However, it
seems to have been thought that buy-backs were an important
corporate tool, so that companies should be given a “safe
harbour” for their implementation.
The conditions laid down for access to the safe are not
particularly novel in the UK, where the Listing Rules have
contained similar provisions for permissible buy-backs some
time.184 Putting together the provisions of MAR and the likely
content of the technical standards, the following main points
emerge:
(a) The purpose of the buy-back programme must be to reduce
the company’s capital or to meet its obligations under a debt
instrument convertible into equity or an employee share
scheme. This appears to mean that the shares bought back
will be required to be either cancelled or re-issued for the
permitted purposes (rather than held in treasury subject to the
board’s discretion). And the safe harbour applies only to
behaviour directly related to the purpose of the buy-back
programme.
(b) Apart from meeting the requirements for shareholder
approval and so on,185 details of the buy-back programme
must be disclosed to the market in advance of any purchases
and the issuer must report purchases actually made to the
competent authority within seven working days, giving
amounts acquired and prices. Thus, the acquisitions cannot
occur clandestinely and the market will know what may
happen and what has happened.
(c) The acquisitions must not be at a price higher than the
prevailing market price (even if the authorisation from the
shareholders permits a higher price) and, normally, not more
than one quarter of the average daily volume of the shares
may be bought in any one day. This rule reduces the impact
of the acquisitions on the trading price of the share.
(d) The issuer may not sell its own shares (presumably those
held in treasury) during the programme, thus removing an
incentive to pay an above-market price. Nor may it effect
acquisitions under its programme at a time when it is making
use of the permission not to disclose otherwise disclosable
inside information. Finally, it may not make purchases under
the programme during a “closed period”.186 However, the
issuer can avoid all three restrictions by either adopting a
programme under which the amounts and times of the
acquisitions are set out in the public disclosure required
above (a “time-scheduled” programme) or by outsourcing the
programme to an investment bank which makes the trading
decisions independently of the issuer.
Price stabilisation
30–45
Share or price stabilisation is, as its name suggests, a somewhat
more questionable procedure from the point of view of market
abuse than share repurchases, since the very purpose of the
behaviour is to set the market price of the security at a different
level from that which would otherwise prevail. However, it is
permitted in connection with new shares issues, for reasons
which have been put as follows:
“Because new securities are usually issued at irregular intervals, they may result in
a temporary oversupply of those securities leading to an artificially low market
price during and immediately after issue. Such short-term price fluctuations may be
to the detriment of both issuers and investors. Price stabilising activity involves the
lead managers of a new issue of securities supporting the price of those securities
for a limited period, thereby reducing the risk of price falls.”187
30–46
Putting together the provisions of MAR and the technical
regulatory standards of the Commission developed under the
prior EU law, the main conditions to be met for the price
stabilisation safe harbour are likely to be, briefly, as follows:
(a) The stabilisation may be carried out only within a limited
period of time, for example, in the case of shares, within 30
calendar days of the date on which shares offered in an initial
offer commence trading.188
(b) The market must be informed before the shares are offered to
the public that stabilisation may be undertaken (but that there
is no guarantee that it will or that it will be at any particular
level) and of the period during which it may be undertaken
and who will be undertaking it.189 Stabilisation activity must
be reported to the FCA within seven working days of its
taking place, and within one week of the end of the
stabilisation period the market must be informed of what
stabilisation activity occurred, including the dates and
prices.190
(c) The price at which the stabilisation activity took place must
not be above the offer price.191
ENFORCEMENT AND SANCTIONS
30–47
Although the substantive rules on market abuse are set at EU
level, enforcement and sanctions are in the hands of national
competent authorities. However, this does not mean that MAR
ignores these topics. Rather, it proceeds by requiring Member
States to confer on their national authorities at least the
investigatory and sanctioning powers specified in Chs 4 and 5 of
MAR and by imposing obligations to cooperate on those
authorities. Although the range of powers and sanctions
contained in these chapters is wide, by and large they are not
new powers for the FCA. The current investigation and penalty
powers of the FCA in relation to market abuse are set out in Pts
VIII and XI of FSMA but will need some amendment to deal
with the provisions of MAR.
Investigation into market abuse
30–48
MAR requires competent authorities to have 13 powers so that
they may police and enforce the prohibition on market abuse
effectively.192 Among the more notable ones, are access to data
in any form, the right to summon persons and demand answers
to questions, to carry out on-site inspections (other than
residences), to enter premises and seize documents (subject to
judicial control if the Member State requires it), to require
recordings of telephone conversations and copies of emails from
financial institutions, to require traffic data from telecom
operators (if national law permits this) and, crossing the border
into remedies, to impose various interlocutory remedies and to
require the correction of misstatements to the market.
Information obtained must be subject to confidentiality
requirements and be governed by national data protection
laws.193
In order to maximise the chances of national regulators
learning of potential infringements of MAR, Member States are
required to ensure that “whistle-blowing” procedures exist, both
for the provision of information to the competent authority and
for the provision of information to the employer concerned,
where the employer is engaged in providing regulated financial
services.194 However, there is no obligation on the whistle-
blower to report first to the employer before approaching the
competent authority. In relation to reporting to the competent
authority the Commission Implementing Directive195 provides
that there should be a dedicated function within the authority to
receive the reports, that its operation should be explained on the
authority’s website and that, in all normal circumstances, the
identity of the reporting person should not be revealed and that
that person should be protected against discriminatory acts of the
employer, if the identity does become known. MAR permits the
provision of financial inducements to make reports, provided the
informer is not under an existing legal or contractual duty to
report and that the report leads to the imposition of a penalty or
sanction.196
30–49
Since market manipulation is often a cross-border activity, MAR
requires national competent authorities to cooperate both with
ESMA (mainly in the communication of information)197 and
with other national authorities and ESMA for the purposes of
investigation, supervision and enforcement.198 The latter form of
cooperation is likely to involve the provision of information but
may go much further. For example, cooperation requests from
other national competent authorities, which may be refused on
only limited grounds,199 may extend to initiating on-site
investigations in the country receiving the request.200
Investigation requests assume that the requesting state is itself
already knows or suspects some potential wrongdoing in its own
jurisdiction and is seeking to investigate it, but knowledge of
that wrongdoing might first emerge as a result of the activities of
a competent authority in another Member State. The Member
State with the knowledge must report the facts to the Member
State where the activities appear to be located and to ESMA and
both Member States are under an obligation to coordinate their
subsequent actions.201 What gives bite to these requirements is
the role afforded to ESMA where a Member State’s request for
information or assistance is rejected by another Member State’s
competent authority or not accepted within a reasonable time.
ESMA may either deal with the matter as an example of a
disagreement between national authorities, as discussed above,202
or, if it believes one of the competent authorities is acting in
breach of EU law, take action against it on that basis. In either
case ESMA may end up requiring the recalcitrant national
authority to take specific action or to refrain from action or, if
that fails, itself requiring market participants to take specific
action or to refrain from action.203
30–50
Since financial activity is often a global matter, cooperation
among EU regulators, although highly desirable, is unlikely to
be enough. MAR therefore envisages cooperation agreements
with the supervisory authorities of third countries. Reflecting
prior practice, but somewhat out of tune with MAR’s objectives,
the conclusion of such agreements is a matter for national
competent authorities. However, ESMA is inserted into the
process. It is “where possible” to facilitate and coordinate the
third-party agreements and is to draft regulatory technical
standards, to be adopted by the Commission, aimed at producing
a “template” for such agreements, which national competent
authorities are to use, again “where possible”.204
Under the pre-MAR rules the UK signed Memoranda of
Understanding relating to co-operation with regulators from
other leading countries in the financial services field, such as the
US, Japan, Hong Kong, Switzerland and Australia. These
international agreements and the pre-MAR EU obligations are
underpinned by s.169 of FSMA, which authorises or, in the case
of the EU obligation, requires the FCA to appoint investigators
at the behest of a non-British regulator to investigate “any
matter”. The FCA may permit a representative of the overseas
regulator to be present and ask questions, provided the
information obtained is subject to the same confidentiality
requirements in the hands of the overseas regulator as it would
be under the FSMA.205 Where assistance is not obligatory, the
overseas regulator may be required to contribute to the costs of
the investigation and the FCA considers, before granting the
request, whether similar assistance would be forthcoming from
the overseas regulator if it were requested by a British regulator,
whether the breach of the law to be investigated has no close
parallel in the UK, whether the matter is of importance to people
in the UK and whether the public interest requires that the
assistance be given.206 In the case of insider dealing, it seems
likely that these criteria could easily be satisfied, so that
assistance should normally be given, even where there is no EU
obligation to provide it, subject to the matter of cost. The Court
of Appeal has interpreted the section liberally, notably by not
requiring the FCA investigate the genuineness or validity of the
foreign regulator’s request and by permitting the investigators to
require the production of any documents which are relevant to
their investigation.207
Sanctions for market abuse
30–51
MAR requires a wide range of administrative sanctions to be
available for breach of the prohibitions on market abuse.208
These are expressly stated to be minimum requirements to which
Member States may add, both by making sanctions available
other than those listed in MAR and by making the listed
sanctions more powerful.209
In relation to companies and individuals other than investment
firms and their managers and employees, the sanctions required
to be made available are:
• injunctions requiring the conduct constituting the market
abuse to cease;
• disgorgement of profits made or losses avoided through the
market abuse “insofar as they can be determined”210;
• a maximum administrative penalty of ‘at least’ three times
the profit made or loss avoided under the previous item211;
• public warnings;
• financial penalties up to a maximum of €5,000,000 in the
case of individuals and €15,000,000 or 15 per cent of annual
turnover in the case of companies.212
In the case of investment firms and those employed within them
there are additional sanctions consisting of temporary or
permanent (i) withdrawal of the authorisation of the firm to carry
on financial business; and (ii) bans on the individual from
discharging managerial responsibilities within such a firm or
dealing on their own account.
These sanctions are already available in principle to the FCA.
Penalties
30–52
The penalty provisions were another of the human rights battle
grounds in the parliamentary debates preceding the passing of
FSMA 2000 and a number of restrictions on the FCA’s powers
are the result. First, although there is no statutory restriction on
the size of penalty the FCA may impose, the FCA is required to
produce a statement of policy on the factors which will
determine its approach to penalties.213 That policy now appears
in the Decision Procedure and Penalties Manual (“DEPP”)
which contains a list of the factors the FCA considers relevant to
the decisions whether to seek a financial penalty, whether to
substitute public censure for a monetary penalty and to
determining the level of penalty. The FCA’s views on the
appropriate level of penalties were significantly strengthened as
from March 2010, under the impact of the financial crisis.
Secondly, the FCA may not impose a penalty upon a person
without sending him first a “warning notice” stating the level of
penalty proposed or the terms of the proposed public
statement.214 Thirdly, if the FSA does impose a penalty or make
a public statement, it must issue the person concerned with a
decision notice to that effect,215 which triggers the person’s right
to appeal to the Upper Tribunal.216 That right must normally be
exercised within 28 days.217 The Tribunal, consisting of a legally
qualified chair and one or more experienced lay persons,
operates by way of a re-hearing of the case, and so can consider
evidence not brought before the FCA, whether it was available at
that time or not,218 and must arrive at its own determination of
the appropriate action to be taken in the case,219 which,
presumably, could be a tougher penalty than the one the FCA
had proposed. There is a legal assistance scheme in operation for
proceedings before the Tribunal, funded by the FCA, which
recoups the cost from a levy on authorised persons.220 Appeals
lie on a point of law from the Tribunal to the Court of Appeal or
Court of Session.221
Fourthly, a prohibition on the use of compelled testimony
applies not only to subsequent criminal charges but also to
proceedings for the imposition of a penalty, whether before the
FCA or the Tribunal.222
Injunctions
30–53
The FCA may apply to the court under s.381 for an injunction to
restrain future market abuse, whether such abuse has taken place
already or not, and the court may grant an injunction where there
is a “reasonable likelihood” that the abuse will occur or be
repeated.223 The court has two further and independent powers
under s.381. If, on the application of the Authority, the court is
satisfied that a person may be, or may have been, engaged in
market abuse, it may order a freeze on all or any of that person’s
assets. This helps to ensure that any later restitution order has
something to bite on. Secondly, if the court is satisfied that the
person is or has been engaged in market abuse, it may, on the
application of the Authority, order the person to take such steps
to remedy the situation as the court may direct. Finally, in an
injunction (or restitution) application the court may impose a
penalty of such amount as it considers appropriate.224
Sanctions for breach of the criminal law
30–54
The Criminal Justice Act 1993 places exclusive reliance upon
criminal sanctions for its enforcement. Section 63(2) states that
no contract shall be “void or unenforceable” by reason only of
an offence committed under the Act, a provision which was
redrafted in 1993, it would seem, in order to close the loophole,
as the Government saw it, identified in Chase Manhattan
Equities v Goodman.225 Although the Act does not deal expressly
with the question of whether a civil action for breach of statutory
duty could be built on its provisions, it seems unlikely that the
Act would be held to fall within either of the categories
identified for this purpose in the case law.226
The criminal sanctions imposed by the Act are, on summary
conviction, a fine not exceeding the statutory maximum and/or a
term of imprisonment not exceeding six months, and on
conviction on indictment an unlimited fine and/or imprisonment
for not more than seven years.227 The power of the judge on
conviction on indictment to impose an unlimited fine means that,
in theory at least, the court could ensure that the insider made no
profit out of the dealing.228 Prosecutions in England and Wales
may be brought only by or with the consent of the Secretary of
State or the Director of Public Prosecutions. In England and
Wales prosecutions may be brought by the FCA as well as by the
usual prosecution bodies, the Crown Prosecution Service, the
Serious Fraud Office and the relevant government department.229
Indeed, the FCA has the prime responsibility for bringing
criminal prosecutions for breach of the criminal laws in the area
of market abuse. As we have noted above, the number of
criminal prosecutions brought by the FCA is small, but
increasing.230
The FCA is also the lead prosecutor under Pt 7 of FSA 2012.
This section is less used than the CJA provisions, but will be
invoked in what the FCA regards as serious cases.231
Restitution orders and injunctions
30–55
On the application of the FCA or the Secretary of State, the court
may impose a restitution order or an injunction where a breach
has occurred or is threatened of Pt 7 of FSA 2012.232 In practice,
it is unlikely this adds anything significant to the court’s and
FCA’s powers to seek restitution or an injunction on grounds of
market abuse, since the criminal law is narrower than the civil
penalty regime.
Disqualification
30–56
In addition to the traditional criminal penalties which may be
visited upon those engaging in market abuse, the disqualification
sanction is available against them in some cases, the effect of
which is to disable the person disqualified from being involved
in the running of companies in the future.233 In R. v Goodman234
the Court of Appeal upheld the Crown Court’s decision to
disqualify, for a period of 10 years, a managing director
convicted of insider dealing. The Crown Court had invoked s.2
of the Company Directors Disqualification Act 1986 which
enables a court to disqualify a person who has been convicted of
an indictable offence in connection with the management of a
company. The Court of Appeal took a liberal view of what could
be said to be “in connection with the management of the
company”, so as to bring within the phrase the managing
director’s disposal of his shares in the company in advance of
publication of bad news about its prospects. It would seem, too,
that a disqualification order could be made on grounds of
unfitness under s.8 of the 1986 Act upon an application by the
Secretary of State in the public interest. In that case, conviction
by a court of an indictable offence would not be a pre-condition
to a disqualification order, but the court would have to be
satisfied that the person’s conduct in relation to the company
made him unfit to be concerned in the management of a
company and this section, unlike s.2, is capable of applying to
market abuse only by directors and shadow directors.
CONCLUSION
30–57
Regulation of market abuse has been an area of enormously
rapid growth in recent years, to which the adoption of MAR has
most recently added. Before 1980 insider dealing was tackled
mainly through statutory disclosure requirements, whilst broader
forms of market abuse received at best a shadowy control in the
common law of crimes. Today, both insider dealing in particular
and market abuse in general are the subject of detailed criminal
and regulatory rules. Why should this have happened? It may
well reflect a deterioration in standards of market conduct as a
result of powerful financial incentives to “do the business”.
Probably, it also an example of the growth of shareholder (or, in
this case, investor) power as financial markets have come to play
a more important role in national and international business.235 In
general, the regulation discussed in this chapter aims to protect
investors, individual and collective, against opportunistic
behaviour by corporate and market insiders and thus make
securities markets more attractive places in which to participate.
Of course, it is another question whether the law is as
effective in practice as it could be. Research published by the
FSA suggests there is still a high level of abnormal price
movements ahead of takeover announcements, though in recent
years there has been a decline in such movements ahead of
trading statements.236 Until recently, whilst the FCA’s budget
was not out of line with that of its US equivalent, the Securities
Exchange Commission, when adjusted for market capitalisation,
it seemed to devote a lower proportion of its budget to
enforcement and to impose lower penalties when it did take
action.237 The FCA has up-graded the resources it devotes to
enforcement and changed its view about the appropriate level of
penalties since the financial crisis, but the effects of this policy
re-orientation remain to be seen.
1
The Criminal Justice Act 1993 Pt V and the Market Abuse Regulation (Regulation
(EU) No.596/2014) (MAR) use the word “dealing”.
2 Clearly, the insider buys in the former case and sells in the latter.
3 R. v De Berenger (1814) 3 M. & S. 68. This was long before there was specific
legislation on market manipulation but the defendants were convicted of the common
law offence of fraud. The case was also an example of manipulation in the government
bond, rather than the corporate securities, market.
4 Of course, those who buy and sell before the truth emerges may suffer no loss but may
actually benefit from the manipulation, so the loss is normally suffered by those holding
the securities at the moment of truth.
5 The analysis might be different in face-to-face transactions but in fact the market abuse
rules apply only to securities which are publicly traded.
7 The loss is in fact crystallised only when the truth emerges. See fn.4.
8
So, the distinction between trading and non-disclosure may seem trivial. However,
without the disclosure rule, the insider could plausibly say that s/he could have complied
with the insider trading provisions by simply not dealing.
9
The very act of trading will reveal some information to the market about the analysts’
position.
10
See H. Schmidt, “Insider Dealing and Economic Theory” in K.J. Hopt and E.
Wymeersch (eds), European Insider Dealing (Butterworths, 1991).
11
For an example see R. v De Berenger (1814) 3 M. & S. 68. For the specific statutory
definition of market abuse in the current legislation, see para.30–29, below.
12
Above fn.1. MAR is in force, for the most part, as from July 2016, but at the time of
writing not all the Commission’s delegated legislation was in place.
13 The area of enforcement and sanctions is the most important one where Member State
transformation is required, because there the Regulation is formulated as a direction to
the Member States to introduce specified powers.
14 Directive 2014/57/EU. But the Government has committed itself to the principle that
the UK criminal sanctions should be at least as tough as those in the Directive. See
Treasury, Bank of England, FCA, Fair and Effective Markets Review: Final Report,
June 2015, 6.3.1.
16
Report of the Company Law Committee, Cmnd. 6659 (1945), paras 86–87.
17
19Though note that for the prospective bidder itself to buy shares on the basis of its
knowledge that it is going to launch a bid is not regarded as insider trading (see below,
para.30–28), but it would be for a person in the know to do so for his or her own
account.
20 Which are, of course, no longer mandatory. See para.26–4.
21 Nor might the company or any other company in the group trade in its securities at a
time when the director was prohibited from trading, unless this was done in the ordinary
course of securities dealing or at the behest of a third party: LR 9.2.7.
22LR 9.2.8. The code itself was appended to Ch.9. On listing and premium listing see
para.25–6.
23
LR 9.2.8. On the meaning of those “discharging managerial responsibilities”, which
term includes both directors and senior executives, see para.26–11.
24 MAR art.19(11).
25 See para.26–11 for the meaning of these two terms.
26
MAR art.19(12)(13). Certain limited routine trading is permitted, for example, in
relation to employee share schemes. ESMA’s advice is that a narrow view be taken of
“exceptional circumstances”, embracing only situations which are “extremely urgent,
unforeseen and compelling and where their cause is external to the person discharging
managerial responsibilities who has no control over them” (ESMA, Final Report:
ESMA’s technical advice on possible delegated acts concerning the Market Abuse
Regulation, 2015, 5.4).
27
FCA, Policy proposals and Handbook changes related to the implementation of the
Market Abuse Regulation (2014/596/EU), November 2015, paras 4.130 et seq.
28
FCA, Policy proposals and Handbook changes related to the implementation of the
Market Abuse Regulation (2014/596/EU), November 2015, paras 4.130 et seq.
29
Of course, the insider trading prohibition itself will apply during the run-up to the
preliminary announcement, but that is hardly an adequate response if one thinks the
blanket ban on trading is a valuable technique during pre-result periods.
30
See paras 16–86 et seq., above.
31
The leading case is the decision of the New York Court of Appeals in Diamond v
Oreamuno (1969) 248 N.E. 2d 910. The precise situation has not yet arisen in an English
court.
32 For an early example of the directors constituting themselves agents in this way, see
Allen v Hyatt (1914) 30 T.L.R. 444 PC. Or the court may find a fiduciary relationship in
a small company even in the absence of agency: see para.16–6, above.
33 Percival v Wright [1902] 2 Ch. 421: see para.16–5, above.
34
For both these propositions see Schering Chemicals Ltd v Falkman Ltd [1982] Q.B. 1
CA.
35 And by virtue of the Schering Chemicals case (see previous note) the recipient of the
information (the “tippee”) would also be in breach of duty by using or disclosing the
information if aware that it had been communicated in breach of the duty of confidence
imposed on the tipper.
36That is, one might be more concerned with depriving the insiders of their profits than
with working out who precisely are the best persons to receive them.
37 DTI, The Law on Insider Dealing: A Consultative Document (1989), paras 2.11–2.12.
38 Companies Bill, Session 1978/79, H.C. Bill 2, cl.59. As we saw in Ch.26 those with
management responsibilities in companies traded on regulated markets are obliged to
disclose inside information, but this requirement is likely to pick up a few face-to-face
transactions.
39
For example, where the director is selling shares in the company to a person who is
not presently a shareholder or where the insider is not a corporate fiduciary at all.
40 See Chase Manhattan Equities v Goodman [1991] B.C.L.C. 897, where the judge
passed up the opportunity to use the FCA’s Model Code as the basis of an extended duty
of disclosure.
41 Directive 89/592/EEC [1989] O.J. L334/30. This Directive was replaced by Directive
2003/6/EC (the Market Abuse Directive) in 2003, but the Government took the view that
the criminal law provisions of domestic law did not require amendment as a result,
though the 2006 Directive had a substantial impact on the administrative sanction
regime. The 2006 Directive was repealed by MAR.
42
For an analysis of the changes see Davies, (1991) 11 O.J.L.S. 92.
43Insider Dealing (Securities and Regulated Markets) Order (SI 1994/187) art.10, as
amended. Confusingly, the term “regulated market” in the 1993 Act does not have the
meaning attached to the term in the EU instruments: see para.25–8. In particular, trading
on AIM does fall within the CJA (AIM being a market established under the rules of the
LSE), even though AIM is not a regulated market for EU law purposes but a multi-
lateral trading facility.
44
1993 Act s.52(3).
45
A firm which has undertaken to make a continuous two-way market in certain
securities, so that, in relation to those securities, it will always be possible to buy from or
sell to the market maker, though, of course, at a price established by the market maker.
46
Following the “Big Bang” on the Stock Exchange in 1986 it is no longer required that
market makers and brokers be entirely distinct functions, though equally it is not
required that brokers make a continuous two-way market in any particular securities.
Some broking firms act as market makers as well; others are only intermediaries.
47
1989 Directive art.2(3).
48
In some cases it might not even be possible to identify the counterparty.
49
See further below, para.30–30.
50 1989 Directive art.5.
51 Above fn.43, arts 4 and 9 and Schedule.
52
1993 Act s.62(2) provides that in the case of the offences of encouraging dealing or
disclosing inside information (see para.30–25, below) either the encourager or discloser
must be in the UK when he did the relevant act or the recipient of the encouragement or
information must be.
53
54If French law adopts the same territorial rules as the UK, the citizen would also
commit a criminal offence under French law if he gave the instructions to deal from
France. His liability in the UK would not depend, of course, upon the nationality of the
company in whose shares on a UK regulated market the trading occurred.
55 If the French citizen is in the UK at the relevant time, he will commit a criminal
offence in the UK even if the trading occurs on a regulated market outside the UK but
within the EEA. However, if the market is outside the EEA (say, New York or Tokyo)
and involves no professional intermediary who is within the UK it would seem that the
offence of dealing is not committed in the UK even if the instruction to deal is given by
a person in the UK. This is because the dealing will not have taken place on a regulated
market within s.52(3) and the 1994 Order and will not have involved a professional
intermediary who is within the scope of s.62. However, the offence of encouraging
dealing may have been committed, the encourager being in the UK even if the person
encouraged is not. See fn.52, above.
56
An arrangement designed to prevent information in one part of a firm from being
available to individuals working elsewhere in the firm.
58See below, para.30–25. Otherwise a person could avoid the prohibition on insider
dealing simply by setting up a company to do the trading.
60The Act uses the term “issuer” rather than “company” because the Act applies not
only to securities issued by companies but also to government securities or even, though
this is unlikely, securities issued by an individual: s.60(2).
61
1993 Act s.56(1)(b).
62 1989 Directive art.1.
63
HC Debs, Session 1992–93, Standing Committee B, col. 174 (10 June 1993). It seems
that, on this argument, precise information will always be specific.
64
65
In the permissive cases the situation is, presumably, that the facts described in the
subsections do not prevent the court from holding the information to have been made
public, but whether the court in a particular prosecution will so hold will depend on the
circumstances of the case as a whole.
66
1993 Act s.58(2)(d).
67 Query whether front-running a recommendation, not based upon any research but
where its publication will have an impact on the price of the securities because of the
reputation of the recommender, would be protected by s.58(2)(d). cf. US v Carpenter
(1986) 791 F. 2d 1024. The trader might have a defence under para.2(1) of Sch.1 to the
Act, but that would depend upon his having acted “reasonably”: see para.30–28, below.
Such conduct might in extreme cases even be a breach of Pt 7 of the FSA 2012. See
para.30–29, below.
68 Company Securities (Insider Dealing) Act 1985 s.10(b).
69
1993 Act s.58(2)(a) and (b) respectively. The former would cover publication on a
Regulatory News Service and the latter documents field at Companies House or the
Patents Registry.
70 1993 Act s.56(1)(d).
71
Insiders have little incentive to trade on the basis of inside information which will
never become public or will do so only far into the future.
73 DTI, The Law on Insider Dealing (1989), para.2.24.
74In particular, the requirement of “being connected with the company” was removed.
See the Company Securities (Insider Dealing) Act s.9.
75
The relationship does not have to exist with the issuer of the securities which are dealt
in. So a director of Company A who is privy to his or her company’s plans to launch a
bid for Company B is an insider in relation to the securities of Company B (as well as
those of A).
76
In the course of their professional duties such individuals may well obtain inside
information in relation to a company other than the instructing company. Thus,
employees of an investment bank preparing a takeover bid would become insiders in
relation to both the proposed bidder (i.e. the bank’s client) and in relation to the target
company.
77Of course, the journalist’s employer may be a listed company, in which case he would
seem to fall within the first category as well.
78
cf. US v Chiarella (1980) 445 U.S. 222.
79
An even more restrictive test would be in the course of an employment which is likely
to provide access to inside information. Such a test would exclude the famous, if
unlikely, example of the cleaner who finds inside information in a waste-paper basket.
However, there seems to be no warrant in the Act or the Directive for such a restrictive
test, which would come close to reinstating the clearly discarded test of s.9(b) of the
1985 Act.
80
The guru of securities regulation, Professor Louis Loss of Harvard Law School, first
used this expression and the Oxford English Dictionary has credited him with this fact.
81
Moreover, since it is enough that the individual in the third category “has” the
information from a source falling within the first or second categories, it does not matter
either whether the “tippee” has solicited the information. Inadvertent acquisition of
inside information is covered. This was a point of controversy under the previous
legislation until cleared up by the House of Lords, in favour of liability. See Attorney-
General’s Reference (No.1 of 1988) [1989] A.C. 971.
83
84
This is the significance of prohibiting acts by a person who has information “as an
insider”, which s.57 makes clear refers to the situation at the time of the acquisition of
the information, rather than the simpler formulation of prohibiting acts by an insider,
which might well refer to the accused’s status at the time of the prohibited acts.
85 A contract of the sale or purchase of securities at a future date.
86A contract not involving an agreement to transfer an interest in the underlying
securities but simply to pay the difference between the price of the securities on a
particular date and their price on a future date. For discussion of the problems which
CfDs have created in relation to disclosure obligations, see above at para.26–20 and at
para.28–45.
87
Certain types of security are omitted, perhaps most notably the purchase or sale of
units in unit trusts, though shares in companies which operate investment trusts are
within the scope of the Act. Presumably, the former were excluded on the pragmatic
grounds that it was unlikely that a person would have inside information which would
significantly affect the price of the units, which normally reflect widely diversified
underlying investments, though query whether this is always the case with more focused
unit trusts. See para.26–12. In any event, the Treasury has power to amend the list of
securities contained in Sch.2 (see s.54(2)).
88 1993 Act s.52(1).
89
See s.56(2) and para.30–21, above.
90 1993 Act s.55.
91 Ditto an individual who discovers good news and decides not to dispose of its shares.
92
93 As is the case with derivatives.
94 1993 Act s.55(1)(b).
95 1993 Act s.55(4) and (5).
96 1993 Act s.52(2)(a).
97
1993 Act s.52(2)(b).
98
1993 Act s.53(3)(a).
99
100
We have already dealt, in the previous paragraph, with one of the defences relevant
to the disclosure offence.
101
Though s.53 makes it clear that the burden of proof falls on the accused, thus
obviating a possible ambiguity which was found by some in the previous legislation. See
R. v Cross [1991] B.C.L.C. 125.
102
Sch.1 may be amended by the Treasury by order (s.53(5)), presumably so that it may
be kept current with developments in financing techniques.
103
1993 Act s.53(1)(c) and (2)(c). This defence does not apply to the disclosure offence,
though it is an essential ingredient of that offence that the disclosure should not have
occurred in the proper performance of the accused’s functions.
104
Previously they were covered by more targeted provisions: 1985 Act ss.3(1)(b) and
7.
105 1993 Act s.53(1)(a). The same defence is provided, mutatis mutandis, in relation to
the other offences by s.53(2)(a) and (3)(b). Making a profit is defined so as to include
avoiding a loss: s.53(6). This is considerably narrower than the defence in the 1985 Act
s.3(1)(a), which applied when the individual traded “otherwise than with a view to the
making of a profit”.
106
HC Debs, Session 1992–93, Standing Committee B (10 June 1993). A suggestion
was where the insider sold at a price which took into account the impact the (bad)
information would have on the market when released.
107
1993 Act s.53(1)(b),(2)(b) provide a similar defence in relation to the encouraging
offence.
108 On underwriting, see para.25–12, above.
1091993 Act s.63, applying to all offences under the Act. Technically, s.63 does not
provide a defence but rather describes a situation where the Act “does not apply”.
110 As art.2(4) of the Directive permits.
111
See above, fn.45.
112 This is discussed further below at para.30–45.
113 See para.3.
114
Nevertheless, the Code on Takeovers and Mergers adopts the same approach as the
Act. See r.4.1. However the potential bidder would have to comply with the statutory
provisions on the disclosure of shareholdings. See paras 26–17 et seq.; and P. Davies,
“The Takeover Bidder Exemption and the Policy of Disclosure” in K.J. Hopt and E.
Wymeersch (eds), European Insider Dealing (London, 1991). Even so, the bid
facilitation argument ought not to be employed to justify the purchase of derivatives
where the aim of the purchase is simply to give the bidder a cash benefit rather than to
take a step towards the acquisition of voting control.
115 See para.2(1). Some guidance on what is reasonable is given in para.2(2).
116
As in R. v De Berenger (1814) 3 M. & S. 68.
117
118
2012 Act s.90(1). The act or course of conduct must occur in the UK or the
misleading impression must be created in the UK: s.90(10).
119
2012 Act s.90(2).
120
2012 Act s.90(9)(a).
121
2012 Act s.90(3)(4).
122
R. v De Berenger (1814) 3 M. & S. 68 (see para.30–1, above).
123
Scott v Brown Doering & Co [1892] 2 Q.B. 724.
124 Though there has been recent interest in relation to the manipulation of interest-rate
or foreign exchange benchmarks, topics outside the scope of this chapter.
125 As in Scott v Brown Doering & Co [1892] 2 Q.B. 724. There is a defence in s.90(9)
(b) for such behaviour carried out in accordance with the price stabilisation rules. See
para.30–45.
126
North v Marra Developments (1981) C.L.R. 42 HCA. Both this and the case
mentioned in the previous note were civil actions in which the criminal nature of the
activity was used to defeat a contractual claim on grounds of the illegality of the
contract.
127Directive 2003/6/EC on insider dealing and market manipulation (market abuse)
[2003] O.J. L96/16.
128
Treasury, Bank of England, FCE, above fn.14, Chart 11. In general those convicted
were not sophisticated criminals.
129 As we have seen, in relation to misleading impressions, mens rea is required only in
an attenuated form under what is now the Financial Services Act 2012.
130
Above, fn.128, p.85.
131
See Joint Committee on Financial Services and Markets, First Report, Draft
Financial Services and Markets Bill, Vol. I, Session 1998/99, HL 50-I/HC 328-I, pp.61–
67 and Annexes C and D; Second Report, HL 66/HC 465, pp.5–10 and Minutes of
Evidence, pp.1–27.
132
The Financial Services and Markets Tribunal, the predecessor to the Upper Tribunal,
tended to view the penalty proceedings as being criminal in nature for the purposes of
the Convention. However, the standard of proof required by the Convention is not
necessarily that of “beyond reasonable doubt”. The standard will depend, as is the case
with the civil burden in domestic law, on the seriousness of the allegation which has to
be proved. See Davidson & Tatham v FSA, FSM Case No. 31; Parker v FSA [2006]
UKFSM FSM037; Mohammed v FSA [2005] UKFSM FSM012.
133 FCA, above fn.27, para.3.15.
134
MAR art.8(1).
135 MAR art.7(1).
136 See above, para.30–24. However, knowledge or negligence might to relevant to the
size of the penalty imposed: art.31.
137
Case C-45/08 Spector Photo Group NV v CBFA [2010] 2 B.C.L.C. 200. Rebuttable
presumably involves showing that the insider would have traded whether he had the
inside information or not. A specific defence of this sort is provided in art.9(3)—trading
carried out under an obligation which had come into effect before the inside information
was acquired.
138
139
MAR art.8(2).
140
MAR art.8(3). MAR inelegantly talks about the third party ‘using’ the
recommendation or inducement.
141
MAR art.10(1). The CJEU has indicated that this exception is to be construed
narrowly: Case C-384/02 Criminal Proceedings against Grongaard [2005] E.C.R. I-
9939.
142MAR art.10(3). Unless the transmitter knows the information underlying the
recommendation or inducement, that person would not otherwise fall within the
prohibition because not in possession of inside information.
143 MAR art.7(4).
144
Case C-628/13 Lafonta v Autorité des marchés financiers [2015] Lloyd’s Rep FC
113. This was in fact a disclosure case, but its rationale seems equally applicable to
trading. The Upper Tribunal had taken a different view: Hannam v Financial Conduct
Authority [2014] UKUT 0233 (TCC).
145
In this respect it is important to note that the definition of insider trading quoted
above embraces “financial instruments” and not just the securities issued by the
company.
146
148 Case C-19/11 Geltl v Daimler AG, decision of 28 June 2012, also a disclosure case.
149 FSMA s.118(4).
150 FSMA s.118(9).
151 The FCA’s Code of Market Conduct gave the following example of RINGA: “An
employee of B Plc is aware of contractual negotiations between B Plc and a customer.
Transactions with that customer have generated over 10 per cent of B Plc’s turnover in
each of the last five financial years. The employee knows that the customer has
threatened to take its business elsewhere, and that the negotiations, while ongoing, are
not proceeding well. The employee, whilst being under no obligation to do so, sells his
shares in B Plc based on his assessment that it is reasonably likely that the customer will
take his business elsewhere”. Query whether this situation would fall within art.7(2) of
MAR (above).
152MAR art.8(5). “National law” is left to determine how these natural persons are
identified. In the UK the rules of agency and employment will presumably be used, in a
form of “reverse” vicarious liability.
153 MAR art.9(1).
154 See para.26–14.
155
MAR art.9(1)(2).
156
MAR art.9(5)(7).
157
ESMA, Final Report: Draft technical standards on the Market Abuse Regulation,
2015, §4 and Annex VIII; ESMA, Consultation Paper: Draft guidelines on the Market
Abuse Regulation, 2016.
158
MAR art.12(1)(a).
159 FSA 2012 s.90. Above, para.30–29.
160
MAR art.15.
161
MAR art.12(1)(b).
162
See FCA, Code of Market Conduct, 1.6.2.
163
FCA, Code of Market Conduct, 1.7.2.
164 MAR art.12(1)(c). See also art.12(2)(d) dealing with statements (not required to be
false or misleading) about a financial instrument where the maker of the statement
already has a position in the instrument but has not disclosed it.
165
Though the defences discussed below are still available.
166 The breadth of the prohibition was thought to put financial journalists at particular
risk and so art.21 provides that the liability of journalists is to be assessed on a basis
which takes into account the codes of conduct governing that profession, provided the
journalist derives no direct or indirect benefit from the dissemination of the information
and did not intend to mislead the market.
167
See Ch.26 at para.26–29, above.
168
See above, Ch.26 at para.26–31.
169 MAR art.2(1) applies the Regulation to MTFs as well as regulated markets and to
derivatives referencing securities so traded.
170 MAR art.12(2)(a).
171 MAR art.12(2)(b).
172
MAR art.12(2)(c). There is considerable debate about the extent to which high
frequency or algorithmic trading can or bring about such distortions.
173 MAR art.13.
174 MAR art13(2).
175
MAR art.13(2) and ESMA, above fn.157, §5 and Annex X.
176 MAR art.13(3).
177 MAR art.13(4).
178 MAR art.13(5).
179 MAR art.13(6). ESMA’s procedure for giving a binding decision is set out more
fully in art.19 of Regulation (EU) No.1095/2010, which establishes ESMA. ESMA’s
power to give binding decisions in inter-Member State disputes is not confined to this
instance, but it must be specifically provided for in the relevant EU instrument dealing
with the subject in question.
180
MAR art.5; ESMA, above fn.157, §3 and Annex 7.
181 FSA 2012 ss.89(3),90(9).
182
At paras 13–11 et seq.
183
See para.26–6.
184
See, for example, FSA, The Listing Rules, May 2000 edition, Ch.15.
185
186
187
FSA, The Price Stabilising Rules, CP 40, January 2000.
188Commission Regulation (EC) No.2273/2003 issued under the former Market Abuse
Directive art.8.
189
This matter is currently covered in the Commission Regulation (EC) No.809/2004,
Annex III para.6.5, implementing the Prospectus Directive.
190
Commission Regulation implementing the Market Abuse Directive art.9.
191
Commission Regulation implementing the Market Abuse Directive art.10.
192 MAR art.23(2).
193 MAR arts 27 and 28.
194 MAR art.32.
195
Commission Implementing Directive (EU) 2015/2392.
196
MAR art.32(4).
197 MAR art.24.
198 MAR art.25(1).
199 MAR art.25(2).
200MAR art.25(6). That request may be given effect to in a variety of ways, ranging
from the requested state carry it out itself to the requesting state doing so. ESMA may
coordinate the cross-border investigation if one of the participating states so requests.
201 MAR art.25(5).
203
MAR art.25(7) and arts 17 and 19 of Regulation (EU) No.1095/2010.
204 MAR art.26.
205 FSMA s.169(7) and (8).
206 FSMA s.169(4).
207R. (on the application of Amro International SA) v Financial Services Authority
[2010] 2 B.C.L.C. 40 CA.
208 MAR art.30. A Member State may choose not to have administrative sanctions in an
area where criminal sanctions are available, for example, in the UK under FSA 2012 Pt
7. The UK seems unlikely to take advantage of this provision since it traditionally has
made both types of sanction available to the FCA in the area of market abuse. On the
FCA’s policy about the choice between criminal and administrative sanctions, see FCA,
Enforcement Guide, paras 12.7–12.10.
209
MAR art.30(3).
210
On the potential difficulties with this remedy see para.26–28, above.
211
In other words Member States may set the maximum penalty at a higher level but not
at a lower level than three times the profit or loss. Although the actual penalty imposed
will often be below the maximum, the thought is that the higher the maximum, the
higher the range of penalties actually imposed.
212
See previous note.
213
FSMA ss.124 and 125.
214
FSMA s.126. Sections 392 and 393 extend the warning notice procedure to third
parties, but only if the third party is identified in the FCA’s decision notice: Watts v
Financial Services Authority [2005] UKFSM FSM022.
215
FSMA s.127. MAR art.34 requires decisions to impose sanctions normally to be
published.
216 FSMA s.126.
217
FSMA s.133(1).
218
FSMA s.133(4). Although the hearing function was transferred to the Upper Tribunal
in 2010, the statutory provisions in FSMA, as amended, governing the appeal hearing
continue to apply.
219
FSMA s.133(4). The action must be one the FCA could have taken: s.133A.
220
FSMA ss.134 and 135, even though in the case of market abuse appeals, the
appellant may not be an authorised person. The details of the assistance scheme are set
out in Financial Services and Markets Tribunal (Legal Assistance) Regulations 2001 (SI
2001/3632) and the Financial Services and Markets Tribunal (Legal Assistance—Costs)
221
Now by virtue of the general provisions applying to appeals from the Upper
Tribunal.
222 FSMA s.174(2).
223 FSMA s.381(1).
224
FSMA s.129; FCA v Da Vinci Invest Ltd [2016] 1 B.C.L.C. 554, where Snowden J
examines fully the scope of this power.
225Chase Manhattan Equities v Goodman [1991] B.C.L.C. 897 at 930–935, where the
judge held that the previous legislative formulation did not prevent the court from
holding a contract unenforceable when it had been concluded in breach of the 1985
Act’s provisions.
226
See especially Lonrho Ltd v Shell Petroleum Co Ltd (No.2) [1982] A.C. 173 HL.
227 1993 Act s.61.
228
The Crown Court has power under the Criminal Justice Act 1988, as amended by the
Proceeds of Crime Act 1995, to make an order confiscating the proceeds of crime, which
could also be used to this end.
229
FSMA s.402(1)(a). This implies that some cases which might previously have been
dealt with through regulatory sanctions will now be subject to criminal prosecution, but
the courts have refused to treat this change of policy as a ground for special leniency
when sentencing offenders: R. v McQuoid [2010] 1 Cr. App. R. (S.) 43.
230
See para.30–30.
231
See para.26–32.
232
FSMA ss.382(9) and 380(6).
233
See Ch.10, above. These powers are in addition to the powers of (probably more
important) the FCA to disqualify persons from operating within the financial services
industry.
234
R. v Goodman [1993] 2 All E.R. 789 CA.
235 cf. the increased importance of shareholder interests in corporate governance, above,
Pt 3.
236
FSA, Updated Measurement of Market Cleanliness, Occasional Paper 25, March
2007.
237J. Coffee Jr, “Law and the Market: The Impact of Enforcement” (2007) 156
University of Pennsylvania L.R. 229.
PART 7
DEBT FINANCE
At various points in this book we have referred to the

comparative advantages of equity and debt finance for
companies. Even more so than with the rights of shareholders,
the rights of lenders to the company depend heavily on the terms
upon which they contract with the company. Nevertheless, one
can say that, in general, debt is both cheaper and more flexible,
but is also more demanding as a form of finance for companies
than equity shares. It is cheaper because insolvency priority1 and
contractual flexibility may reduce the risk to lenders, who can
therefore be persuaded to lend on more advantageous terms; but
it is more demanding because those terms create an entitlement
(usually to payment of a fixed or narrowly fluctuating rate of
interest, plus repayment of principal), whether the company is
doing well or badly, whereas the declaration of a dividend on
ordinary shares is usually a matter for the discretion of the
directors. Clearly, the rate of interest a company has to pay for
its debt depends to some considerable extent on the financial
standing of the company and, if that is not enough, on whether it
can offer a lender personal or proprietary security for its loan,
and the quality of the security offered. Much of the law
applicable here is the general law relating to lenders and
borrowers, and does not have to be analysed in a book on
company law. However, three aspects of the relevant law do
deserve discussion in a company law text.
First, as part of its debt-raising activities, a company may
issue debt securities and those securities may be traded on a
public market, in the same way as equity securities are.2 Indeed,
the line between the two forms of investment in a company can
be quite blurred, and—whether the debt securities are traded on
the public market or not—debt-holders can play a significant
role in the indirect governance of companies. We thus need to
say something about the nature of a company’s debt obligations.
Secondly, although the issue of granting valid security is a
general problem in the law of secured lending, Companies Acts
have long included their own rules governing the registration of
charges granted by companies. These rules have been the subject
of attention of various review groups, including the Law
Commission, and are examined here. Thirdly, in the creation of
one form of security, company lawyers took the lead in the
nineteenth century. This was with the floating charge, still a
controversial mechanism because of the way it can operate to
crowd out the interests of unsecured creditors, in terms both of
the scope of the charge and the mechanisms for enforcing it.
Thus, the floating charge is the third topic we need to look at in
some detail.
1
On insolvency, a company’s creditors are repaid before the shareholders: see Ch.33.
2
Thus, some reference to such securities has already been made in Ch.25 (public offers).
CHAPTER 31
DEBTS AND DEBT SECURITIES
Introduction 31–1
Difference between debt (loans), equity (shares) and
hybrid instruments 31–2
Should a company use debt or equity in its
financing? 31–4
Different Structures in Debt Financing 31–5
Terminology 31–5
Defining a “debenture” 31–6
Small and large scale loans 31–8
Debts and “debt securities” 31–9
Single and Multiple Lenders 31–10
Single lenders 31–10
Syndicated loans 31–11
Debt securities: distinguishing “bonds” and “stocks” 31–12
Debt securities: trustees for the bondholders or
stockholders 31–14
Issue of Debt Securities 31–15
Private issues 31–15
Public issues of debt securities 31–17
Special rules: covered bonds 31–19
Transfer of Debts and Debt Securities 31–21
Transfer of simple debts 31–21
Transfer of debt securities 31–22
Protective Governance Regimes in Debts 31–24
General 31–24
Defining repayment terms 31–25
Protecting the debt holder against the borrower’s
possible default 31–26
Protecting multiple lenders from their lead
intermediary 31–28
Protecting multiple lenders from each other 31–30
Conclusion 31–32
INTRODUCTION
31–1
A company will inevitably finance itself not only through
issuing shares (of various classes) but also by taking loans or,
alternatively, by making use of credit. Given that around 77 per
cent of UK registered companies have an issued share capital of
£100 or less,1 the need for this sort of alternative funding is
clear.2 Of these options, taking loans, i.e. debt financing,
including its more sophisticated variants, is the main source of
non-equity finance for companies, and is the focus of this
chapter. Nevertheless, most companies (small and large) will
also make use of various forms of credit, including quite
sophisticated forms of asset-based financing.3
One basic divide in all debt financing is between simple debts
(not always so simple in their documentation, and including
large syndicated loans) and marketable “debt securities”4 (with
their obvious parallels with equity securities, i.e. shares).5 As
with shares, debt securities may be issued and traded privately or
on public markets, with the latter being more tightly regulated.
With the terminology, context is important: the terms “debt” and
“debt financing” can be used perfectly generally to embrace all
the options open to a company; only as the terms become more
specific, and “debt” and “debt securities” are contrasted, do they
reveal anything of the nature of the underlying debt instrument.
Some elements of debt financing turn out to be especially
important in the corporate context. We focus on these, especially
the regulated use of marketable corporate debt contracts (i.e.
debt securities), including the transfer of these interests; the
protective creditor-imposed governance constraints common in
all debt financing; and—at various points—the similarities and
differences between debt and equity financing. But some
introductory points are necessary before we can address that
detail. We start with the basic differences between debt and
equity, and the various structural choices in debt financing.
Difference between debt (loans), equity (shares) and
hybrid instruments
31–2
Often the expected sharp differences between debt and equity
are blurred or non-existent. Take the financing decision itself.
The choice is for the directors, and is subject to all their general
duties. At first blush the constraints on directors, and the controls
given to members, seem greater with share issues than with debt:
recall the decisions on “proper purposes” in share issues, and the
statutory rules on pre-emption rights.6 There are no direct
general law parallels when the decision concerns debt, but in
practice many lenders will impose even greater constraints in
their own loan agreements, insisting on contractual terms
prohibiting further corporate borrowing, or at least further
secured borrowing (i.e. negative pledge clauses), unless the
consent of the lender is first obtained.
The same blurring is true of the contrast between members
and creditors: in law a member of the company has rights in it,
while a creditor has rights against it. In reality, however, the
difference between the debt-holder and the share-holder may not
be anything like as clear-cut, for the debt instrument may give
the holder contractual rights akin to those of a shareholder, e.g.
to appoint a director; to receive a share of profits (whether or not
available for dividend)7; to repayment at a premium; to attend
and vote at general meetings.8 Covenants in the loan instrument
may also, as we shall see, give debt holders considerable
influence over the way in which the company is managed.9
Moreover, where the debt instrument is secured by a floating
charge on all the assets and undertaking of the company, the
holder will have a legal or equitable interest in the company’s
business, albeit of a different kind from that of its shareholders.
The line between the holder of a debt instrument and a share is
particularly narrow if the contrast is made with a preference
shareholder, who is a member of the company, but a member
whose share rights may limit the shareholder’s dividend to a
fixed percentage of the nominal value of the share and give that
shareholder no right to participate in surplus assets in a winding-
up, and perhaps only limited voting rights.10 The main difference
between the two in such a case may then be that the dividend on
a preference share is not payable unless profits are available for
distribution,11 whereas the debt holder’s interest entitlement is
not subject to this constraint; and that the debt holder will rank
before the preference holder in a winding-up. Thus, the legal
rules operate with a binary divide between debt and equity, but
the accounting rules and general practice leads to the creation of
securities whose classification in accordance with this divide is
problematic.
31–3
These difficulties of classification are magnified in relation to
securities which are “hybrid” in character, in that the terms of
the issue provide for conversion, whether from a preference
share convertible into debt, or a debt convertible into equity12 at
a later date and on fixed terms. A simple way of looking at such
securities is to say that they are simply one form until
conversion, at which point they become the other. However,
where the bond is required to be converted into equity at a
certain future date, for example, it may be possible to classify it
as equity in the company’s accounts from the beginning, whilst
nevertheless treating the interest payable on the debt before
conversion as deductible for tax purposes, so that the same
security is equity for one purpose and debt for another.13
Notably, these hybrid securities do not provide a mechanism
for avoiding the statutory rules regulating shares. They do not,
for example, provide a way around the prohibition on issuing
shares at a discount to their nominal value.14 And in takeover
situations, debts that are convertible to shares, or debts that have
voting rights, are treated as if they were shares for the purposes
of the squeeze-out and sell-out provisions in the Act.15
Should a company use debt or equity in its
financing?
31–4
How does a company decide what mix of debt and equity is
appropriate for its operations? Clearly its aim is to access the
necessary funds at the least cost to the company. The options
available will depend on the size of the company, the funding
purpose, and the riskiness of the endeavour.16 The choice can be
difficult, since the similarities between corporate debts and
shares are often strong, and can be made even stronger in
“hybrid” securities, as we have seen. With both debts and shares,
the investor has limited liability (limited to the sum invested by
way of loan or share price); with both, the rate of return likely to
be demanded is reduced if the security is highly liquid; and with
both, the desire for some form of governance control is present,
and increases with the risk of the investment. True, the return to
the debt-holder is a binding and quantified commitment made in
advance, and if not met according to its terms the company risks
insolvency.
Despite this, financial economists have suggested that the cost
of capital is unaffected by the debt to equity ratio: this is based
on the Modigliani-Miller propositions that no combination of
debt and equity is better than any other, and that a company’s
total market value is independent of its capital structure.17 This,
as with many economic theories, is based on an “ideal” market.
When real market frictions are included, it seems that companies
may add some debt without reducing the return to shareholders
because the interest payable on debt is tax deductible for the
company, whereas dividends payable to shareholders are not.
But there is a tipping point: too much debt raises the risk of
corporate default, and continuing default on debt obligations
will, in the end, lead to corporate insolvency, whereas for
shareholders it would simply lead to no payment of dividends.
As well as the negative financial pressures of the debt-equity
mix, there are however also advantageous pressures the mix puts
on directors in their management of the company: managers can
be over-inclined to prefer the interests of either themselves or
their shareholders, and debt provides a disciplining effect
because it requires directors to find the funds to make principal
and interest repayments.
DIFFERENT STRUCTURES IN DEBT FINANCING
Terminology
31–5
The literature on debt financing quickly makes it plain that a
wide variety of terms are used to describe different debt
financing arrangements, although none constitute terms of art.
Perhaps because the debt instrument is simply a creature of
contract, and the relationship between debt-holder and company
creates no particular conceptual puzzles—the relationship is
simply the contractual relationship of debtor and creditor,
coupled, if the debt is secured on some or all of the company’s
assets, with that of mortgagor and mortgagee or chargor and
chargee—different terms have come to be used in commercial
practice as a matter of fashion, and changing fashion at that.
Many of the terms now in popular current usage emerge in the
discussions which follow.
Defining a “debenture”
31–6
By contrast, instead of any of the modern terms in use in the
market, the rather old-fashioned term “debenture” is the only one
used in the Act. And even there it is not defined: s.738 merely
says that the term “includes debenture stock, bonds and any
other securities of a company,[18] whether or not constituting a
charge on the assets of the company”.19 This is helpful in
indicating that a debenture need not be secured on the
company’s assets, but not for much else; and indeed commercial
practice rather contradicts this, typically using the word
“debenture” to refer precisely to the proprietary security
agreement which secures the debt owed by the company to its
lender.20
This lack of clear definition is despite the fact that the Act
contains a (short) Pt 19, headed “Debentures”, as well as
frequent references throughout the Act to debentures and
debenture holders.21 The question this raises is whether the term
“debenture”, as defined in s.738, is wide enough to include all
debts (i.e. all loan agreements), or whether it is implicitly limited
to “issues” of debt which have parallels of some sort with issues
of shares, noting of course that the latter embraces private issues
as well as issues to the public.22 The answer matters because of
the particular statutory rules which then apply to “debentures”.
Outside the statutory context, the term is certainly wide
enough to include simple loans. In Fons HK (In Liquidation) v
Corporal Ltd, Pillar Securitisation Sàrl,23 the Court of Appeal
had to decide whether an unsecured debt was a debenture, thus
sweeping it into the assets subjected to a charge. The court
reviewed and accepted earlier authorities which had held that
simple loan agreements could be considered as debentures, and
then held that, in the absence of other contractual terms or
circumstances limiting the definition of debentures in the
contract before them, the term simply meant an
acknowledgement of debt recorded in a written document,
whether or not secured. In doing so, the court rejected the
approach of the lower court which had adopted a criterion of
business common sense in contractual interpretation, and had
held that, since an ordinary businessman would be surprised to
hear a simple loan agreement described as a debenture, the
contractual term did not cover unsecured debts.24
Although this case raised uncertainties in the market about
similar breadth being assumed in the statutory definition, that
seems misplaced. The case itself makes it clear that the
necessary interpretation of agreements (and, by analogy,
statutes) is contextual, and in the statutory context the term
“debenture” is most often used in contexts where the analogy is
with other issued securities.25
31–7
This is especially true of the statutory provisions requiring
registration of “an allotment of debentures” (s.741), the keeping
of a register of “debenture holders” (ss.743 et seq.), and the
prohibition on private companies offering “securities” to the
public, with “securities” meaning shares or debentures
(s.755(5)).26 These provisions are quite inapt for general
application to all loan contracts.
The issue is perhaps less clear in two further contexts, where
the statute overrides equity’s traditional rules. First, s.740
provides that contracts to take up and pay for debentures may be
specifically enforceable, thus overriding the normal contractual
rule that the lender is liable only in damages.27 The arguments
for enforcing subscriptions and underwriting obligations when
an “issue” of debt securities is made may be strong, but they do
not seem to apply to a single creditor who, in breach of contract,
fails to make an advance. Then, damages would seem a perfectly
adequate remedy. The issue does not seem to have troubled
modern courts,28 but giving s.740 a more limited remit could be
achieved either by defining “debentures” more narrowly,
especially since s.740 refers to a contract to “take up and pay
for” debentures (terminology which seems inapt for general loan
agreements); or by relying on the use of “may” in s.740, and
interpreting it as merely conferring a discretion on the court.
Secondly, s.739 specifically excludes irredeemable and long
term debentures from the protective equitable doctrine
prohibiting such “clogs on the equity”. This, too, seems more
appropriately applied to “issues” of debentures, but the statutory
predecessor to s.739 was applied very generally, in 1940, in
Knightsbridge Estates Ltd v Byrne.29 The House of Lords held
that an ordinary mortgage granted by a company was a
debenture,30 and so subject to the statutory provision disentitling
the mortgagor from insisting on its equitable right to make early
repayment. However, even a narrow application of the statutory
provision, holding it inapplicable in this context, might not have
prevented the same outcome on these facts: we might now
simply say that a mortgagor has no right to early repayment
unless the contract provides for it, and that a long but properly
agreed maturity term is not itself sufficient to attract equitable
relief.31
Despite these concerns, the absence of a precise statutory
definition of “debenture” has given rise to surprisingly few
problems, and to even fewer reported cases. In addition, modern
financial markets regulation is typically directed at the product
being issued rather than at the issuer or the investors, and it then
defines its focus more clearly than by use of the broad term
“debenture”. Nevertheless, in what follows we have tried to
avoid the use of the term “debenture” in favour of either more
specific descriptions of the contracts in issue or, by contrast,
when breadth is intended, the more generic term, “debt”.
Small and large scale loans
31–8
Small and medium size companies tend to rely on loans from
banks and, especially in very small companies, loans from
directors and shareholders.32 Salomon33 is an old and typical
illustration. Invariably the loan terms will be individually
negotiated to reflect the risk, and, as we shall see, can be quite
demanding in terms of the ongoing obligations imposed on the
borrower, the potential consequences of any “event of default”,
and the various forms of security (proprietary and personal)
required to support the company’s primary obligation to repay
the debt.
Large-scale debt financing for bigger companies is more
varied. It comes in two main forms: from banks (perhaps by way
of “indirect financing”, so called because the banks in turn need
to seek investment funds from third parties) and from the capital
markets (“direct financing”, because the relationship is directly
with the lender). Here, too, the terms of the debt security are
individually negotiated, even if against industry models.
Sizeable transactions may involve both types of debt. The initial
debt finance for a major acquisition may, for example, be
provided wholly by banks, often under a syndicated loan
agreement34 involving several banks and providing for a variety
of types of senior and junior (or “mezzanine”) debt, the terms
“senior” and “junior” referring to the order in which the debt
falls to be repaid (the ranking of their claims on the assets of the
debtor).35 The banks may, subsequently, offload that debt (in a
wide variety of ways) to third parties so as to realise the value of
the asset earlier than the debt’s maturity date (i.e. capitalise the
debt) or so as to shed some of the risk. On the company’s side,
sometimes this form of bank debt is too short-term and is
provided on such financially unattractive terms that the company
itself has a strong incentive to finance differently or to re-finance
the bank loan as soon as possible.
Debts and “debt securities”
31–9
So far the distinction has been between small and large-scale
loans, and single and multiple lenders. But lenders are likely to
be persuaded to accept a lower rate of return if their loans are
highly liquid. This is not to say that traditional loans cannot be
transferred, as we shall see, but there is no organised secondary
market for their transfer. Thus, as with shares, the company has
an incentive to arrange for its debts, as “debt securities”, to be
traded on a secondary public market, so enabling a lender to
liquidate its investment easily by selling it to a third party.36 It
follows that a company might make an offer of “debt securities”
(analogous in many ways to “equity securities”) on the public
(retail or wholesale) markets, much like a company might offer a
new issue of its equity securities (shares) so as to raise funds. It
might also make similar issues privately. As with shares, public
offers are strictly regulated; private offers less so. This is
considered below, along with the different and rather more
complicated structures used for different debt security issues,
although otherwise many of the applicable rules are those which
have already been dealt with in relation to shares.37
SINGLE AND MULTIPLE LENDERS
Single lenders
31–10
In the simplest of cases, the company borrows from a single
lender. The loan contract between the parties will define their
rights and obligations. As we will see later, their contract will
undoubtedly include covenants restricting the company’s power
to act completely autonomously,38 and may include terms
providing for the debt to be secured against the company’s
assets, or for “equity-like” features (such as voting rights for the
lender), or for conversion from debt to equity in defined
circumstances.
The company may repeat this borrowing process as it grows,
entering into sequential loans agreements with different lenders,
with the general law then governing any competition between
the lenders seeking to have their secured or unsecured loans
repaid. The general law outcome is often varied by agreement
between the lenders (a “subordination agreement”), although the
limitations inherent in these subordination agreements should be
noted: the borrower cannot agree with lenders that the general
insolvency law rules will not apply to the distribution of its own
assets, but that itself some other distribution will be effected; the
lenders, by contrast, can agree amongst themselves to share their
different insolvency entitlements in any way they wish. Thus a
lender who might otherwise have had priority may agree with
other lenders to be deferred; or a secured or unsecured lender
may agree to take nothing until other lenders have been paid in
full.39 It may be wondered why lenders would agree to this, but it
is relatively common for insiders (whether the company’s
directors or other members of the same corporate group) to agree
to be subordinated so as to enable the company to attract further
external financing, or at least to attract it on commercially
acceptable terms.
This all works well for smaller scale financing needs, but if
the company has more substantial needs, then it is likely to need
to access a number of different lenders simultaneously. This can
be achieved either by means of a syndicated loan or by the issue
of marketable debt securities. The underlying contracts for such
loans come in as many varieties as individual loans, with
covenants and security interests as agreed by contract, but each
must also of necessity be overlaid by some sort of organisational
structure which enables the different lenders to co-ordinate their
information and decision needs in relation to the borrower and,
importantly, to control hold-out or independent-mover problems
within the group. These problems are not unlike the various co-
ordination problems which exist between shareholders.40 As
well, it will be in the interests of the lenders themselves that their
chosen structure does not inhibit their rights to transfer their
interests, although only debt securities are deliberately designed
as marketable securities. We discuss these transfer and
governance features later, but first say a little more about the
structures themselves.41
Syndicated loans
31–11
Syndicated loans are typically embodied in a single contract,
signed by all parties, although usually put together by a lead
bank or underwriter of the loan, known as the “arranger”,
“agent”, or “lead lender”.42 This lender may put up a
proportionally bigger share of the loan, or perform duties like
dispersing cash flows amongst the other syndicate members, and
other administrative tasks. But the syndicated lenders are
explicitly not partners, and their interests are deliberately
several, not joint, although, as perhaps one mark of the joint
endeavour, their agreement is likely to provide for “no-action
clauses” and for pari passu recovery should the borrower
become insolvent,43 thus denying any one lender a first-mover
advantage if the debt looks risky.44 As with all agreements
involving multiple lenders, the lenders’ own internal governance
arrangements are often subject to decision by majority rule (as
with shareholders), and to various exclusions of liability by the
arranger: these are considered below.45
It can be seen even from this brief outline that syndicated
loans are essentially scaled up versions of single bank loans (or
loans from non-bank entities), and are likely to contain similar
sorts of detailed protective covenants, although with the
advantage that one lender is not required to carry the entire risk.
As with single bank loans, it is also generally true that these
transactions are not motivated by the lenders’ desire to acquire
marketable securities46; the lenders’ interests may be transferable
under general law provisions, and there is a good private market
in such interests, but these lenders are quite likely to remain
engaged in the deal for its full term.
Debt securities: distinguishing “bonds” and
“stocks”
31–12
By contrast, where marketability of the underlying debt is a
material consideration, the company usually attracts loans from
multiple lenders, again typically financial institutions and
specialist investors, by issuing either “bonds” (or “notes” or
“commercial paper”)47 or “loan stock” (often labelled “debenture
stock” if the loan is secured on a pool of assets, although neither
term is a term of art, and both are often used more broadly).48
Such issues are often tradeable on a public secondary market,49
although this is not essential.50 There was, historically, a
fundamental structural difference between bonds and stock,
although in modern practice both the structure and co-ordination
problems turn out to be rather similar.
Bonds (or notes) are, in theory, individual debt obligations
owed by the company to each of the bondholders, whether they
are registered holders or holders of bearer bonds,51 with the latter
being far more common. Historically, each individual lender
(bondholder) purchased a number of bonds from the company,
denominated in appropriate amounts, much as shareholders
purchase equity interests by buying different numbers of issued
shares. In the same way, too, each bondholder became the legal
owner of its own bonds.52 Co-ordination problems between the
bondholders were, and are still, typically resolved by appointing
an appropriately authorised agent, or, more commonly, a trustee
for the bondholders,53 and also requiring, in certain
circumstances, majority votes of the bondholders themselves.54
However, as with shares, bonds are now typically held via an
intermediary, whether or not they are traded on public markets.
So a “global note” is issued by the company to the intermediary
(representing the debt due from the company to the
intermediary), and the intermediary, as legal owner (of either a
registered or a bearer bond, again with the latter being more
common, except when intended for the US market) holds its
interest on trust for a number—often a large number—of
account holders.55 The intermediary can then perform a number
of important services for the account holders, including holding
any security for the bond, and, at least from a functional
perspective, the resulting organisational structure ends up being
similar to that operating with loan stock.56
Loan or debenture stock, by contrast, consists of a single debt
obligation issued by the company and typically held by a trustee
on behalf of the various stockholders.57 If the loan is secured, the
trustee will also hold the security on trust. The stockholders
therefore have only an equitable interest in the debt (secured or
not), held as tenants in common in proportion to the amount of
the debt they own (with no limit on how the fractions are
denominated, in contrast to bonds). Even as beneficiaries under
the trust, however, the stockholders are nevertheless entered on
the company’s register of debenture holders (in contrast to
equitable owners of shares, who are not recognised in the
company’s register of shareholders58). These debenture holders
receive a certificate (if the stock is certificated); if it is
dematerialised, a similar register is kept in the CREST system.59
It follows that, unlike the largely meaningless distinction
between “shares” and “stock”,60 the similar distinction between
“debentures” and “debenture stock” is far from meaningless and
debenture stock has considerable practical advantages. Thus, in
this structure, the stockholders have all the advantages of a
protective trustee structure, but with the (relatively few)
disadvantages of only having equitable interests in the
underlying asset.61
31–13
One clear difference between bonds (and notes) and stock is that
the former can be transferred only in complete units, whereas
stock is expressed in terms of an amount of money and may be
transferred in any fraction of that amount. This is an attribute of
the transferable interest being merely a fractional equitable
interest in a debt. Thus, if a public company wishes to raise £1
million, it could create £1 million of debenture stock, and then
issue it62 to subscribers in such amounts as each wants,63 giving
each a single certificate of an appropriate denomination,64 and
each subscriber can in turn sell and transfer any fraction of it. By
contrast, the company could issue a series of bonds, say £1, £10,
£100, or £1,000 bonds, each representing a separate debt
totalling in aggregate £1 million. This would result in an
enormous bundle of paper for the company to process and
subscribers to handle. And, if a subscriber for a single bond
wanted to sell half of it, that would not be possible at law, only
in equity.
Debt securities: trustees for the bondholders or
stockholders
31–14
As we have already noted, it is now almost invariable practice
for an issue of marketable loans to interpose a trustee, normally a
trust corporation,65 between the company and the bondholders or
stockholders. The loan contract is then between the company and
the trustee, and any security over the company’s assets can be
made out in favour of the trustees, who hold it on trust for the
benefit of the debt security holders. Such an arrangement has
many advantages.
First, it greatly simplifies the security arrangements.66 A legal
mortgage can be vested in the trustees, on trust for the debt
security holders, and the trustees retain custody of the title
deeds; a charge can be granted in favour of the trustees, and the
rights under the charge document exercised by the trustees for
the benefit of the debt security holders. This is difficult,
sometimes impossible, with multiple parties.
Secondly, the primary enforcement of the loan (and any
security) will be between the company and the trustees, being
the parties to the loan agreement.67 A practical side-effect of this
is to impose equality amongst the debt security holders, although
their own governance arrangements generally reinforce that.68
Finally, it will provide a single trustee corporation or a small
body of persons charged with the duty of monitoring the debt
security holders’ interests and of intervening if they are in
jeopardy. This is obviously far more satisfactory than leaving it
to a widely dispersed class of investors, each of whom may lack
the skill, interest and financial resources required to take action
alone.69 It will also be possible, by the trust deed, to impose on
the trustee company or its directors additional obligations,
regarding the submission of information and the like, which
might not otherwise be practicable.70 Similarly, the trustees can
be empowered to convene meetings of the holders in order to
acquaint them with the position and to obtain their instructions.
ISSUE OF DEBT SECURITIES
Private issues
31–15
The act of issuing debt securities (assuming no public offer) is
not much regulated by the Act. The one significant provision is
to the effect that a contract with a company to “take up and pay
for debentures” is specifically enforceable, as noted earlier.71
Otherwise, in the absence of a public offer, the Act is notable for
the absence of regulation of the issuing process, assuming
instead that debenture holders will themselves make appropriate
provision for their own protection.72
In addition, and unlike the rule applying to shares,73 there is
no rule in the Act, even for public companies, requiring the
authorisation of either the shareholders or the existing debt
security holders for a new issue of debt, although this matter
may well be one of the matters regulated in the trust deed of the
existing debt securities.74 In some ways this is surprising, since a
large increase in the company’s debt could have a significant
impact—positive or negative depending on whether the venture
in which the new funds are embarked is successful—on the
prospects of the shareholders and debt holders.75 Nor does the
Act create pre-emption rights76 on an issue of debt, probably
because the rights of the existing debt holders are not affected by
a new issue, although their value might be, since a company seen
to be overburdening itself with debt would cause the market
value of its existing debt instruments to fall. Again, however,
this matter can be dealt with in the trust deed governing the
existing debt.
Finally, since debt does not count as legal capital, the rules
relating to issue at a discount and to the quality of the
consideration received, which apply to shares,77 are not extended
to debt generally or debt securities in particular.78 For the same
reason, the distribution and capital maintenance rules79 do not
apply to loans, so that interest may (normally must) be paid on
loans even though no profits have been earned, and debts may be
freely repurchased by the company (subject to the loan terms
themselves), assuming in both cases it has the cash to do so. The
only specific statutory provision in this area in fact facilitates
repurchases of debt by providing that redeemed debt securities
may be reissued with their original priority, rather than
cancelled, unless the company’s articles contain provisions to
the contrary or the company in some other way resolved to
cancel them.80
31–16
Of course, the general duties of directors will still apply to their
decisions relating to the issue of debt securities, even, perhaps
especially, in the absence of specific statutory regulation in the
area.
Although all this is left unregulated, the Act does contain a
number of largely administrative provisions relating to the issue
of debt securities. Section 741 requires companies to register an
allotment of debentures with the Registrar of companies, as is
required for shares, so that the existence of the debentures is
public knowledge (unless the debentures are issued as bearer
debentures). A company is not obliged itself to keep a register of
debenture holders, but, if it does, it must locate it and make it
available for inspection by debenture holders and members of
the public in the same way as the register of shareholders.81 This
includes the power, applicable also to the share register, to apply
to the court for an order not to comply with the request for
inspection.82 Probably more important in practice is the
provision which entitles a debenture-holder to be provided at any
time (on payment of the appropriate fee) with a copy of the trust
deed on which the debentures are secured, if, as is normal, there
is such a trust.83 This provision is perhaps the functional
equivalent of the public availability of the articles in the case of
shareholders.
Finally, as we shall see in Ch.32, where debentures are
secured against the company’s assets, it is often necessary to
register those security instruments at Companies House, on pain
of invalidity against the liquidator on the company’s insolvency.
Public issues of debt securities
31–17
Matters change radically, however, if there is a public offer of
debt securities. In that case, much of the law discussed in Ch.25
will be applicable. As with shares, this is to ensure that those
buying debt securities on the primary or secondary markets have
the appropriate information necessary to assess the risks. One
difference, though, is that it might be thought that the risks are
inherently smaller with debt securities, since the holder of a debt
has the ultimate right to sue for the sum due under the debt, and
is also commonly protected by powerful contractual and perhaps
proprietary provisions to assist on that front, whereas the holder
of the share has a mere expectation of benefit and therefore
perhaps requires a wider range of information upon which assess
the relevant risks. This is perhaps the explanation for the
hierarchy of information requirements,84 which puts equity
securities ahead of debt securities issued to the retail market, and
then debt securities issued to the wholesale market,85 and leaves
the private syndicated loan market completely unregulated by
the Act.
The prohibition on private companies offering their shares to
the public extends to a public offer of any securities, including
debt securities.86 If public companies do offer their debt
securities to the public, the required disclosure varies depending
upon whether the offer is general, or is, on the other hand, either
explicitly directed only to sophisticated (“qualified”) investors or
is of such large denomination (i.e. at least €100,000) that it can
be assumed to be addressed only to such a sophisticated
(“wholesale”) market.87 And if the issued securities are then to
be traded on a secondary market, as would be typical for reasons
already discussed,88 the continuing disclosure rules again depend
upon the sophistication of the market participants, with securities
listed on the Professional Securities Market (“PSM”) attracting a
less onerous regime.89
It might be thought that if companies already have listed
shares, then they would automatically opt for the more onerous
regime, since it opens the debt issue to wider markets and the
companies are already subject to onerous disclosure regimes in
respect of their equity securities. However, the specific
disclosure required for a new issue is substantial, and debt
security issues are typically put together in quick order, so
companies will make use of whatever exemptions are possible,
while still ensuring they have access to the most fruitful
markets.90
31–18
All this may change quite substantially in the near future,
however, with the European Commission proposing to remove
these heavy-weight debt exemptions, in the interest of opening
up this exclusive market to smaller investors,91 and achieving
this by removing the incentive to create large-denomination debt
securities, and at the same time putting in place an appropriate
information regime for general investors.
Otherwise, many of the rules on public issues of shares also
apply equally to public issues of debt securities, and for similar
reasons. One notable difference however, is that there is no
limitation on the payment of underwriting commissions, and an
allotment may be made no matter how small a response there is
to the offer.92 This is no doubt because the rights of the
debenture-holder are comprehensively specified in the debt
contract, whereas with shares, the expected returns may depend
very materially on these two features.
Finally, note that an issue may begin as a private issue to an
underwriter or other financial institution, and those institutions
may then themselves provide the necessary disclosure to enable
the securities to be traded on either wholesale or retail markets.
Special rules: covered bonds
31–19
A further means of regulation is focused not broadly on all
public offers, but more narrowly on specifically defined types of
transactions. We see this in evidence in the regulatory regime
which has been put in place relating to financial collateral,93 and
to the credit derivatives market.94 Similarly, specific regulation
has been implemented related to covered bonds, in the form of
the Regulated Covered Bonds Regulations 2008.95 A “covered”
bond (sometimes called a “structured covered bond”) is a
particular form of bond which is payable by the issuer (typically
a bank or building society96), but is also backed by a specific
pool of high quality assets, in the UK held by a special purpose
vehicle (“SPV”), so that the assets are ring-fenced with the result
that, if the issuer becomes insolvent, the repayments on the bond
can continue to be made by recourse to the those assets, and in
priority to the issuer’s general creditors.
The regulations are designed to ensure that the asset pool is
high quality97; that its value is maintained throughout the life of
the bond at a high enough figure to ensure that the bond is 8 per
cent “over-collateralised”,98 thus guaranteeing sufficient
resources to cover realisation costs and bondholder repayment in
full; that there is regulated oversight of the collateral by the
issuer and the “Asset Pool Monitor” (analogous to an external
auditor)99; and that there is consistent and frequent reporting to
investors. These additional reporting and oversight requirements
aside, a covered bond differs from a normal securitisation
principally in that the issuer of a covered bond remains liable to
the bondholder, whereas a securitisation is typically non-
recourse; and the pool of assets associated with a covered bond
is regulated so that the issue is compulsorily “over-
collateralised”.
What has this structure achieved? From the company’s point
of view, it has turned (illiquid) mortgages into cash which it can
use to expand its business. And, conversely, from the investors’
point of view, they have made a loan to the company but of a
highly secure type. Provided the SPV has been set up in such a
way that the assets purchased by the SPV cannot be clawed back
by the issuer in the latter’s liquidation and provided the issuer is
obliged to maintain the quality and value of the mortgages held
by the SPV, the note-holders can remain unconcerned about such
an event because their security will remain intact. This is why
the bond is “covered”.100 Overall, the issuer is incurring debt
through the covered bond in order to further the business of itself
making secured loans to others, its business model turning on its
ability to borrow money through the bond at a lower rate of
interest than it itself charges when lending to others.
31–20
It will be apparent that the above structure can be created by
contract and so it may be wondered how the need for the
Regulations arises. Such bonds were not brought into existence
by the Regulations, though they are a relatively recent
development in the UK. In fact, the purpose of the Regulations is
to create a more ready market for covered bonds rather than to
bring them into existence. The market for them is restricted, in
the absence of the Regulations, by provisions in EU law and,
equally, EU law indicates the way forward to the expansion of
that market. In particular, the UCITS (undertakings for collective
investment in transferable securities) Directive 2009/65/EC (as
amended by Directive 2014/91/EU), which governs what are or
used to be referred to in the UK as unit and investment trusts,
contains the prudential rule that such a body may invest no more
than 5 per cent of its assets in the securities issued by the same
body.101 However, this limit may be raised to 25 per cent in the
case of bonds meeting certain quality standards, set out in the
Directive.102 A similar restriction on investment by insurance
companies and relaxation of that restriction in the case of
UCITS-compliant bonds are also to be found in EU law. Finally,
UCITS-compliant bonds are less heavily weighted in banks’ risk
profiles than non-compliant bonds.103
However, producing a UCITS-compliant covered bond
requires the use of legislation. Article 52(4) of the UCITS
Directive requires (a) that the issuer (which may only be a
“credit institution”, i.e. a bank or similar deposit-taking body) be
“subject by law to special public supervision designed to protect
bond-holders”—presumably additional to the supervision to
which it is already subject by virtue of being a bank—and (b)
that the law control the assets in which the proceeds of the bond
may be invested and ensure the priority of the investors’ claims
in the event of the insolvency of the issuer. It is perfectly lawful
to continue to issue covered bonds which do not comply with the
new regulations, but in this case they will not benefit from the
additional market possibilities, noted above. The Regulations
implement the above principles by creating registers of
“recognised” issuers and issues of covered bonds, access to
which is controlled by the Financial Conduct Authority.104 An
applicant must have its registered office in the UK and be a body
already authorised under the Financial Services and Markets Act
to carry on activities as a deposit-taker and the FCA must also be
satisfied that the applicant issuer and the owner of the asset pool
(i.e. the SPV), will comply with the requirements imposed on
them by the Regulations.105 To claim to issue recognised covered
bonds without issuer and issue being on the registers is a breach
of the Regulations and makes the issuer liable at a minimum to
monetary penalties imposed by the FCA.106
The proceeds of the issue may be used only to acquire
“eligible assets” which term goes beyond mortgages on
residential or commercial real property to include public sector
loans, loans to a registered social landlord which may be secured
on the income arising from letting of the properties as well as
loans secured on the properties themselves, and loans to project
companies under certain types of public-private partnerships.
The property must be situated in any EEA State or in one of a
limited number of other designated States.107 Those assets must
be transferred to an asset pool which must be capable throughout
the life of the bond of covering the bond-holders’ claims and the
costs of administering the pool.108 Priority is given to the claims
of bond-holders in insolvency of the owner.109
TRANSFER OF DEBTS AND DEBT SECURITIES
Transfer of simple debts
31–21
Although the rules on legal capital do not stand in the way of re-
purchase by a company of its debts, unlike its shares,110 it may
well be financially extremely inconvenient for the company to
do so (or indeed it may be prohibited by the lender111). However,
it is normally possible for the lender to find liquidity in other
ways. There may be a private market in the loans, and indeed
many banks lending to private equity funds aim to have only a
small, if any, proportion of the loans made on their books six
months after the transaction completes.112 These loans can be
transferred by outright sales, such as invoice discounting to a
financier (of distressed debt if the rating of the debt security is
poor), or by securitisation transactions (real or synthetic),113 or in
other ways.
The ability to transfer debt in this way helps persuade lenders
to agree to provide finance, but, on the other side, it may also
tempt lenders to worry less about the repayment risks, knowing
that they can shift those risks to third parties. The financial crisis
in 2008 presents clear evidence of this. Where debt securities are
traded on public markets, the compulsory disclosure rules are
designed to minimise those risks for secondary purchasers,
although their effectiveness in this regard might be questioned;
otherwise, as elsewhere, the rule is, “buyer beware”.
Transfer of debt securities
31–22
Turning from transfers of debt generally to transfers of debt
securities, these can be absolute (whether at law or in equity) or
by way of security interest (see Ch.32, below). We do not say a
great deal about the legal rules here,114 since the legislation
clearly assumes that debt securities will be transferred in much
the same way as shares, and so reference can simply be made to
the discussion in Ch.27. Hence, initial allotments and subsequent
transfers of registered debt securities must be registered (s.741,
as s.554 for shares; and s.771 for transfers of both), and the
register must be open for inspection with the right to obtain
copies of it (ss.743, 744); as with shares, the bond
documentation or certificates of debenture stock must be issued
by the company to the holder within two months, unless the
issue is to a clearing house or its nominee (ss.769, 776, 778,
although for debt securities there is no equivalent of s.768
providing for the certificate to be evidence of title); and, as with
shares, the transfer, unless by operation of law or by CREST,
must be in writing using an appropriate instrument of transfer
(s.770). Equally, the Uncertificated Securities Regulations 2001
(as amended) uses the word “securities”, and so permits the
transfer of title to debt securities held in uncertificated form.115
And in relation to these debt securities held in uncertificated
form, the Operator is now required to maintain in the UK a
register of the names and addresses of those holding debt
securities in this way, together with a statement of the size of the
individual holdings.116
Transferees could also be faced with problems, similar to
those in relation to shares, regarding equitable and legal
ownership of debt securities and the priority of competing
transferees. On general principles relating to assignments of
choses in action, a transfer of legal title to a debt security should
be an equitable assignment only, until it becomes a legal
assignment when the company receives notice of it. But, as with
shares, and given that registration is compulsory under the 2006
Act, it seems the legal title should pass from transferor to
transferee only at the later date of actual registration. But it is
now usually only the trustee for the debt security holders who
has legal title to the debt. The question is different, of course,
and can involve nice matters of law, where the transferor’s
interest is only ever equitable, as it invariably is with debenture
stock (notwithstanding that the holders must be registered) and
also with other intermediated securities, as is now common
practice with most marketable debt securities.117
Other differences flow from the fact that, whereas the rights of
shareholders depend mainly on the provision of the company’s
articles, which will have been drafted in the interests of the
company, those of debt holders depend upon the terms of a
contract between lender and borrower and its terms will have to
be acceptable to the lender as well as the borrower. Some debt
securities will, like shares, include non-assignability clauses, or
clauses restricting assignment subject to conditions.118 This
might seem an odd clause to include in a debt, but it will protect
the corporate debtor from losing potentially valuable post-
assignment rights of set-off against the creditor, or protect
against possible transfer of the debt to a third party who may not
be quite so generous in deciding when and how to enforce the
agreed debt covenants. The question then arises, precisely as
with shares, whether a purported assignment in breach of the
anti-assignment clause is effective to give the assignee any rights
at all. The answer, as with shares, depends upon the precise
terms of the clause, but the analysis can be difficult.119
31–23
With marketable debt securities, by contrast, there will be no
problems arising from restrictions on transferability or from a
company’s lien; debt securities will invariably provide that the
money expressed to be secured will be paid, and that the debt
securities are transferable, free from any equities or claims
between the company and the original or any intermediate
holder.120 It is possible that the terms of issue of the debt
securities will be inconsistent with their being held in
uncertificated form, in which case they will need to be altered if
the company wishes to make this form of holding debt securities
available.121 The Regulations do not provide a simple shortcut to
the necessary amendments, as they do in the case of shares, but
they do something to encourage trustees to agree to such
amendments without holding a meeting of the debt security
holders. A trustee for debt security holders is not to be
chargeable with breach of trust by reason only of his assenting to
changes in the trust deed necessary to enable the debt security
holders to hold the debt securities in uncertificated form or to
transfer them or exercise any rights attached to them
electronically.122
The great contrast, however, between debt and equity
securities is that debt securities secured by charges on the
company’s property throw up problems regarding the priority
between conflicting charges. These problems are dealt with in
the next chapter.
PROTECTIVE GOVERNANCE REGIMES IN DEBTS
General
31–24
The terms on which debt financing is agreed will depend upon
the risk-reward calculations between the lender and borrower.
Higher interest rates and greater restrictions on the debtor’s
autonomy, as well as proprietary security, are typical if the risk
is high. As well, where there are multiple lenders, the lending
parties need to put in place co-ordination rules. These aspects are
considered briefly; they are not peculiar to companies.
Defining repayment terms
31–25
A debt security issued by a company (or indeed any debt) is
primarily a matter of contract between lender and company. The
legislature does not specify one, or even a number, of forms that
the debt security must take, any more than it does with shares.
Nor, however, does it even provide any equivalent of the model
articles. It is thus difficult to describe a “typical” debt security.
However, the security will normally have, unlike a share, an
end-date, i.e. a point at which the amount still outstanding has to
be repaid (its “maturity date”)—though it is possible to make the
loan totally irredeemable (s.739). That maturity date can be set
as the parties wish, but may be quite long, for example, 40 years.
The instrument also typically requires the amount lent to be
repaid in regular instalments over the life of the loan (in which
case it is called “amortising” debt), although it is also possible
for the parties to provide that nothing needs to be repaid either
until maturity (which is unlikely in the case of long maturities,
unless the loan is backed by very high quality assets) or only
after a considerable period of time has passed (say, eight to ten
years), at which point the amount becomes repayable which
would have been paid over this period through a normal
amortisation arrangement. Such debt is sometimes called
“bullet” debt, perhaps because of its likely impact on the
borrower.123
The instrument will normally provide for the periodic
payment of a fixed rate of interest at fixed points in time, but
there is no reason why the interest rate so specified should not
vary (provided there is a clear mechanism for working out what
it is at any one time) nor, as we have seen, why interest should
not be “rolled up” and be payable at a later date (sometimes on
the maturity of the loan). In such a case the lender earns a return
by buying the security at a discount to its face (or nominal or
principal) value (i.e. the amount the company promises to repay)
and takes the return as a capital gain rather than income, but only
at maturity or, if the price of security in the market rises, upon
sale to a third party.
The lender may have the right to recall or the borrower to
repay the loan ahead of the repayment schedule,124 or they may
be specifically prohibited from so doing. Section 739 recognises
that the security may be made irredeemable by the borrower, or
redeemable only in certain circumstances, “any rule of equity to
the contrary notwithstanding”. This removes any doubt about the
validity of such a restriction.125
Protecting the debt holder against the borrower’s
possible default
31–26
None of the above clauses provide the lender with ongoing
reassurance that the borrower remains able to repay the debt.
Accordingly, it is common to insert a variety of covenants in the
loan documentation with this objective in mind. Through such
covenants, lenders become part of the corporate governance
structure of the company, and may have a far more significant
impact on management than the shareholders if the company is
near to breaching its loan covenants.
Of course, the extent to which lenders are able to insert such
covenants in their loans depends upon the level of competition in
the market for such loans. For a period in the early 2000s up
until the middle of 2007, competition among banks for the
opportunity to fund private equity buy-outs was so great that
“covenant-light” loans became common, i.e. bank loans with
little by way of restrictive covenants inserted. In more normal
circumstances, however, substantial loans are typically issued
subject to important constraints on management.126
The best protection is proprietary security. That is discussed in
the next chapter. If the lender does not have the bargaining
power to insist on security, or if the company has no further
assets over which security might be granted, then alternative
contractual protections become increasingly important. They are,
however, typically included even when security is taken.
31–27
Loan covenants typically require the borrowing company to
provide the lender with periodic accounting information, perhaps
including credit ratings, to conduct its operations so as to
maintain pre-determined financial ratios between assets and
liabilities, and to refrain from certain defined acts or activities, or
at least refrain from them without the prior consent of the lender.
The list of prohibitions typically includes disposing of
substantial assets, changing the primary business activities of the
company, taking on additional loans, granting further security,
distributing dividends above a nominated level of return, or
changing the management or ownership structure.127 The list of
possibilities does not end there, but their objective is clear. In
addition, the debenture may provide for the lender to be part of
the management of the company by giving it the right to appoint
a director.128
If any of these covenants is breached, the debenture usually
defines this as “an event of default” upon which the lender is
given various rights, usually including the right to accelerate
repayment, to take new security, to enforce existing security, to
impose repayment penalties (drafted, of course, to avoid
invalidity as a “penalty clause”129), and such like. From this list,
the lender can elect the most appropriate course of action. It is
not usual to make the consequences of default automatic, as
undoing their automatic effect can be very difficult if the breach
is, for example, merely technical and one which the lender is
inclined to ignore.
It might be asked what consequences would follow if the
company decided unilaterally to exercise its powers, either at
board level or in general meeting, to subvert these covenants—
for example by the general meeting dismissing the debenture
holder’s nominee director,130 or effecting other significant
changes to the articles. But this is hardly a live issue: the breach
would invariably constitute an event of default, normally
entitling the debenture-holder to require the debt to be repaid
immediately and, if it was secured by a charge on the company’s
property, to enforce the security. This is a far more effective
remedy—and disincentive—than a claim for damages for the
breach. Thus, while the value of the lender’s rights may depend
on the continued prosperity of the company, particularly if the
loan is unsecured, lenders (including debt security holders) are
not normally subject, as is a shareholder, to any serious
possibility that the agreed rights will be varied by the company
by corporate action without the lender’s consent.
Protecting multiple lenders from their lead
intermediary
31–28
With both syndicated loans and debt securities, there is a
“leader” in the collaboration between the multiple lenders, with
the leader typically being the person to whom the corporate
debtor is to make the necessary loan repayments, and who can
enforce the debt, or implement acceleration provisions, or agree
to modifications of the terms of the debenture. Thus, by contract,
the parties provide for collective enforcement of their debt.131
But when things go wrong and the debt is not repaid
according to its terms, or negotiations seem to go awry, these
leaders are especially likely to come in for criticism. Different
obligations are owed depending on the selected debt structure
and the terms of the contractual engagement, but a brief outline
gives the general features.
In syndicated loan agreements, the arranger, in putting the
deal together, will clearly owe a duty of care to the other
participants, although this duty can be expressly excluded in
large measure,132 especially in relation to misrepresentations as
to the features of the loan and the standing of the debtor.133
Whether, during the term of the loan, the arranger also owes the
other lenders general fiduciary duties seems unlikely, unless the
particular facts are such as to call into play such a relationship,134
but otherwise the general rules of contract and tort apply, with
no special statutory overlay.
31–29
By contrast, there is less flexibility with debt securities using
trustees as intermediaries,135 as is now the practice. The debt
security holders are dependent on the trustees for the proper
protection of their interests, and their remedies are primarily
against the trustees, rather than the company. This is made all
the more attractive since these trustees are likely to have deep
pockets, although note that in modern structures with account
holders and a string of sub-trusts, the beneficiary’s only claim is
against the immediate trustee—there is a “no look through” rule
preventing access to trustees higher up the chain. The trustees
are subject to all the general common law, equitable and
statutory duties imposed on trustees, and the extent to which
these can be relaxed by the trust deed is limited, not only by the
common law,136 but more importantly by what is now s.750,
which invalidates provisions in trust deeds (or elsewhere) which
purport to exempt a trustee from, or to indemnify him against,
“liability for breach of trust where he fails to show the degree of
care and diligence required of him as a trustee having regard to
the provisions of the trust deed conferring on him any powers,
authorities or discretions”.137 As a result, the powers and
obligations of trustees are likely to be set out fairly fully in the
trust deed, and to be supplemented, typically, by arrangements
for debt holder voting on difficult issues, so as to protect the
trustee against internal complaints and potential litigation
concerning the exercise of its powers.138
Even so, trustees can be excessively cautious in fulfilling their
obligations. In Concord Trust v Law Debenture Trust Corp
Plc,139 the House of Lords found that the debtor company had
“terrified the trustee” into declining to implement a valid
instruction given to it by the requisite majority of the
bondholders unless the trustee was given an indemnity by the
bondholders against what the court thought was a fanciful
liability to the company on the part of the trustee should the
trustee’s action of declaring a default and accelerating the bond
(i.e. requiring it to be repaid) turn out to be ill-founded.
Protecting multiple lenders from each other
31–30
As well as settling the boundaries for the relationship between
the multiple lenders and their leader, the lenders need some
protection from each other. Typical trust deeds therefore include
“no action” and “pari passu” provisions, expressly prohibiting
individual debt holders from seeking to enforce any rights
against the debtor company, or to recover any more individually
than would be recovered under collective action. In addition, in
syndicated loans, there can be complicated subordination
agreements between the different parties. All these, added to the
formal collective action structure, are designed to prevent any
one party gaining “first mover advantage”.140
But these days the more difficult governance issue concerns
the possible judicial review of voting at meetings of debt
security holders. There has to be a decision-making process, but
it must be such that it does not oppress minorities. The trust deed
typically provides for the security holders to give directions,
often by majority vote (perhaps a simple majority or some
special majority, in number or in value or both, depending on the
issue under review, or perhaps some other agreed regime that
seems, at the time of the agreement, to afford the participants the
necessary protection of their personal interests). This decision is
commonly required to be reached at a meeting of the security
holders, called in an agreed way, with specified notice, and
typically allowing representation by proxies. The parallels
between this contractually agreed regime for debt securities and
the combined statutory and contractual regime for equity
securities is obvious, and so too the legal issues in its
resolution.141
In these circumstances the debt holders do not have the
protection of the unfair prejudice provisions which apply only to
“members”.142 The issues are left to the common law. The first
requirement is that any decision must be fully informed. It is
usually left to the trustee to ensure that proposals are fully and
fairly explained in the circulars seeking the needed consents.143
Further, the courts have applied to decisions of a majority of the
debenture holders binding on the minority the same common law
doctrine applied to decisions by shareholders to alter the
articles,144 i.e. the decision must be made bona fide145 in the
interests of the debenture holders,146 and for the purposes for
which the power is granted.147 Taking each of these requirements
in turn (although in older cases they are often regarded as
comprehending a single test), the limits of the controls become
readily apparent. It is usually impossible to prove absence of
bona fides. Further, as we saw with shareholders, it is often
equally difficult to prove that a decision is not “in the interests of
the debenture holders”, especially if—as with shareholders—this
is taken to mean that the decision is one which the debenture
holders themselves subjectively view as in their interests, subject
only to a rationality test. Indeed, proof that a decision is not in
their interests is generally even more difficult than with
shareholders, since the voting requirement is often designed
precisely to resolve issues where the different debtholders’
interests may be in conflict. Faced with these facts, it is
necessarily the final strand in the test—the proper purposes
aspect—which is to the fore in determining whether the majority
decision should stand.
31–31
However, even a “proper purposes” test does not give the courts
much leverage to intervene, especially where the various
interests of the debenture holders are in conflict, and the vote is
designed (i.e. its purpose is) to resolve the outcome in favour of
one or other side, and there is nothing in the facts which suggests
more than a predictable difference of opinion.148
On the other hand, there are a small number of cases which
show that the rule has some teeth.149 Thus, in British America
Nickel Corp Ltd v O’Brien150 a decision of the majority of the
bondholders, modifying their rights, was invalidated on the
grounds that one of the bondholders, whose support was
necessary for the passing of the resolution, was to receive under
the scheme a block of ordinary shares, with that opportunity not
available to the other bond-holders.151 In the O’Brien case,
Viscount Haldane said that the power of alteration “must be
exercised for the purpose of benefiting the class as a whole”, and
the courts have often been quick to conclude that the purpose is
self-interest, not class interest, where there are particular and
exclusively personal benefits hanging on the voting outcome
(beyond those, of course, which are inherently and necessarily
delivered by the vote itself).
This same approach was adopted by Briggs J in Assénagon
Asset Management SA v Irish Bank Resolution Corp Ltd,152 with
more modern, and more explicit, reference to the equitable
requirement of proper purposes in the exercise of power, and the
need to ensure powers were not used to oppress minorities. This
case involved a more complicated inducement from the debtor
company to the debt holder to vote in a particular way,153
adopting an apparently common technique of requesting “exit
consents”, which offered the debt holder a lower denomination
bond in exchange for a commitment to vote in a way which
would, effectively, destroy or extinguish the existing bond. Of
course, the bondholders who did not accept this inducement
before the pre-meeting deadline (thinking it priced their bonds
too conservatively) ran the risk—the prisoner’s dilemma—of the
vote going against them, and being left with an old bond
rendered almost worthless. Gamesmanship was clearly an
essential part of the debtor company’s strategy,154 and its
effectiveness was ensured because the timing went against
effective co-ordination by the bondholders. But in legal terms,
the real question is what distinguishes Assénagon from
Azevedo.155 In both cases there was an inducement offered to all
bondholders, but accepted only by some; in both the vote
reduced the value of the old bonds. The legal difference cannot,
it seems, lie merely in the size of the inducement or the
magnitude of the devaluation. But quite where it lies is not clear.
These cases reinforce the conclusion that although this
protection is important to debt security holders, and although the
principles in play may be readily stated, they are anything but
easy to apply with confidence.
Where there is some doubt as to the legitimacy of a decision
taken in this way, the parties may feel more secure seeking the
sanction of the court via a scheme of arrangement if the
company is solvent,156 or a company voluntary arrangement if
the company is insolvent.157
CONCLUSION
31–32
From the above analysis it will be clear that the terms and
structure of debt which companies take on are left very much to
be bargained out between lenders and borrowers. Consequently,
most of the law in this area consists of the principles of the law
of contract and the law of property, with relatively little in the
way of special company law regulation, except where the
company wishes to issue its debt securities to the public, or
enable those securities to be traded on a secondary market
(where the rules are similar to those applying to equity
securities), or where the company agrees to give a charge over
its property to secure the loan, which is the topic for the
following chapter.
1
2012/13, Table A6.
2
Apple is perhaps one of the few companies that may not need loans to fund its
operations (although it chose to do so to maximise returns); it can rely on operating
profits, especially as it has also had, until 2012, a policy of not paying dividends on
shares.
3
These forms of financing are not discussed here, but include, e.g. the familiar
mechanisms of hire-purchase, retention of title, conditional sales, sale and leaseback,
finance leases, supply-chain financing, debt/receivables factoring and “repos” (sale on
terms providing for repurchase). These are all well-covered in specialist texts such as L.
Gullifer and J. Payne, Corporate Finance Law: Principles and Policy, 2nd edn (Oxford:
Hart Publishing, 2015). With all of these, proper characterisation can be problematic,
raising the risk that the courts will instead characterise the arrangement as a charge,
which may be void for want of registration: see below, paras 32–24 et seq.
4 With these further subdivided into “bonds” and “stock”, although with the use of
global notes and intermediation, the modern differences between these have become
rather slender.
5 Or—looking at the transaction from the other end of the telescope—we might speak
not of debts and debt securities, but “loans” and “marketable loans”. The latter perhaps
gives a clearer sense of the similarities and distinctions in issue.
6 See paras 16–26 et seq. and 24–6 et seq. respectively.
7 Lemon v Austin Friars Investment Trust Ltd [1926] Ch. 1 (instrument not prevented
from being a debenture because interest payable only out of profit, which might or might
not be earned in any particular year).
8But the debt-holder’s vote should not be counted if the Act requires the resolution to be
passed by “members”.
10 On whether they should be treated as debt or equity, see W. Bratton and M. Wachter,
“A Theory of Preferred Stock” (2013) 161 University of Pennsylvania L.R. 1815. The
classification may be different for different purposes, e.g. accounting purposes, or tax
purposes.
11
See para.12–1. Whether the preference shareholder is entitled by contract to the
dividend, even if the company cannot lawfully pay it, is a separate question. And a
potentially important one, because non-payment of the contractually due dividend may
trigger voting rights for the preference shareholders or affect the amount due to the
preference shareholders when the company returns to profit or is wound up: Re Bradford
Investments Plc (No.1) [1991] B.C.L.C. 224.
12 An alternative to conversion is to issue debt securities with attached warrants which
give the lender the option to subscribe for shares. The debt is then not swapped—it
continues—but the lender has the added benefit of an equity interest in the company.
13 See generally P. Pope and A. Puxty, “What is Equity? New Financial Instruments in
the Interstices between Law, Accounting and Economics” (1991) 54 M.L.R. 889.
14
To issue at a discount debt instruments which can be immediately converted into
shares of the full par value would be a colourable device to evade the prohibition on
issuing shares at a discount (Moseley v Koffyfontein Mines [1904] 2 Ch. 108 CA) but
appears to be unobjectionable if the instrument is convertible only when the debentures
are due for repayment at par since the shares will then be paid up in cash “through the
release of a liability of the company for a liquidated sum”: s.583(3)(c). See also, above
at para.11–15 on debt/equity swaps.
15
See ss.989, 990 (but see ss.983(2)(b) and (3)(b) ignoring such debentures in
calculating the 90 per cent threshold for the exercise of the sell-out right).
16
See the summary in BIS, Financing a Private Sector Recovery (Cm 7923, July 2010),
Ch.3.
17
F. Modigliani and M.H. Miller, “The Cost of Capital, Corporation Finance and the
Theory of Investment” (1958) 48 American Economic Review 433; and also see Miller,
“The Modigliani-Miller Propositions After Thirty Years” (1988) 2 Journal of Economic
Perspectives 99.
18
And, with unhelpful circularity, “securities” are then defined to “mean shares or
debentures” (s.755(5)).
19See below, para.31–13, for more detail on debenture stock and bonds, neither of
which are defined in the Act.
20See below, Ch.32. And unsecured loans are sometimes referred to as “loan stock”, in
contradistinction to “debenture stock”.
21The courts have not done much better: Levy v Abercorris Slate & Slab Co (1887) 37
Ch. 260 at 264; British India Steam Navigation Co v IRC (1881) 7 Q.B.D. 165 at 172;
Lemon v Austin Friars Trust [1926] Ch. 1 at 17 CA; Knightsbridge Estates Co v Byrne
[1940] A.C. 613 HL.
22
See above, Chs 24 and 25.
23Fons HK (In Liquidation) v Corporal Ltd, Pillar Securitisation Sàrl [2014] EWCA
Civ 304 CA.
24 Fons HF (In Liquidation) v Corporal Ltd [2013] EWHC 1801 (Ch).
25 See Tijo, (2014) 73 C.L.J. 503; Roberts, [2014] J.I.B.F.L. 431.
26 Where the difficult issue, if there is one, is usually whether there has been an offer to
the public, rather than whether what is offered falls within the exceptionally wide and
inclusive definition of a debenture.
27Thus overcoming the decision in South African Territories Ltd v Wallington [1898]
A.C. 309 HL.
28
Perhaps because the claim would in any event be regarded as one in debt, not
damages; or perhaps that damages, assessed in context, would in any event give the
company full recovery.
29
Knightsbridge Estates Ltd v Byrne [1940] A.C. 613 HL.
30 Whilst also accepting that the mortgage would not be a “debenture” for the purposes
of some of the other sections of the Act: Viscount Maugham at 624. Clearly such a
mortgage does not have to be registered in the company’s register of debenture holders
under s.743 in addition to registration of the mortgage under Pt 25.
31
See Hooper v Western Counties and South Wales Telephone Co Ltd (1892) 68 L.T.
78; Hyde Management Services (Pty) Ltd v FAI Insurances (1979–80) 144 C.L.R. 541
Aust HC. And in the Knightsbridge Estates case, Viscount Maugham suggested as
much, at least between competent and well-advised contracting parties: at 626.
32
Care must be taken with these transactions. Often, it is true; the insiders provide loans
on very favourable terms. But sometimes the terms are exploitative, and the risk is that
they may then be held to amount to an unlawful return of capital: Ridge Securities Ltd v
IRC [1964] 1 W.L.R. 479; Progress Property Co Ltd v Moore [2010] UKSC 55; [2011]
1 W.L.R. 1 SC.
33
Salomon v Salomon & Co Ltd [1897] A.C. 22 HL. See above, para.2–1.
34
With the various banks using either agency or trust structures to manage their
relationship with each other: see below, paras 31–10 et seq.
35 For a description of typical funding arrangements see FSA, Private Equity: a
discussion of risk and regulatory engagement, DP 06/6, November 2006, paras 3.52 et
seq.
36
So, as with shares, the Stock Exchange can provide a primary market for the issuance
of debt securities and a secondary market for trading in them.
37 See above, Chs 24 and 25 and below, paras 31–17 et seq.
38
39
40 See above, Ch.19.
41See L. Gullifer and J. Payne, Corporate Finance Law: Principles and Policy, 2nd edn
(Oxford: Hart Publishing, 2015), Ch.8.
42
On the related duties, see below, para.31–28.
43Assuming there is no pragmatic reason for some alternative explicit subordination
agreement.
44See P. Rawlings, “The Management of Loan Syndicates and the Rights of Individual
Lenders” (2009) 24 J.I.B.L.R. 179.
45
See below, paras 31–28 and 31–30.
46 And thus typically are not rated by credit rating agencies.
47 The difference between the two used to be that bonds had longer maturities than notes
or commercial paper, although it was never clear precisely where the line was drawn.
Both terms are now used far more indiscriminately.
48
As already noted, the definition of “debenture” in s.738 includes both “bonds” and
“debenture stock”.
49
In the future, all traded securities will be obliged to be either dematerialised, or
immobilised and held through intermediaries, in order to improve the efficiency and
integrity of the market: Regulation (EU) No.909/2014, recital 11 and arts 3 and 79 (form
1 January 2023 for new issues after that date, and from 1 January 2025 for all
transferable securities).
50
Some would have the necessary characteristics, but nevertheless be traded “over the
counter” (“OTC”).
51
See above, Ch.24, for the equivalent terminology in relation to shares.
52
This was essential if the bond was a bearer bond, and thus intended to be a negotiable
instrument.
53
Although then there is the nice question of what, precisely, is the subject-matter of the
trust: see L. Gullifer and J. Payne, Corporate Finance Law: Principles and Policy, 2nd
edn (Oxford: Hart Publishing, 2015), pp.383–390.
54
55 For details of the transfer of intermediated securities, see Ch.27.
56
57Alternatively, the company can create loan stock by deed poll, i.e. by unilaterally
executing a deed which promises to pay those registered as stockholders, which is
enforceable by anyone who is a stockholder. This structure is less common, usually
confined to larger issues with few holders and no active market.
58 2006 Act s.126.
59
60
See above, para.23–11 where it is noted that conversion of shares into stock is no
longer permitted.
61 Made especially few because the competing interests are also typically equitable, e.g.
sale of stock by a stockholder is sale of an equitable interest, so does not raise the spectre
of competition with a bona fide purchaser for value. But also see Re Dunderland Iron
Ore Co [1909] 1 Ch. 446, 452, and noted below, fn.67.
62 Debenture stock can be created de novo; there is no need to create debentures and
then to convert them to debenture stock as there is in relation to shares and stock.
63
In practice there is likely to be a prescribed minimum amount which can be
subscribed for or transferred. If this minimum amount is equal to the nominal value of
any bonds which the company might otherwise issue, then, of course, this particular
advantage of debenture stock disappears.
64
A simple document of one sheet, similar to a share certificate, in contrast with a bond
which will, unless there is a trust deed (see below, and now almost invariably the case),
have to set out all the terms.
65
Formerly it was common for banks to undertake this work but they have tended to
fight shy of it since Re Dorman Long & Co [1934] Ch. 635 drew attention to the conflict
of interest and duty which might arise when the bank was both a creditor in its own right
and a trustee. Today, therefore, the duties are generally undertaken by other professional
trust corporations.
66 Such securities are, nevertheless, subject to all the rules considered in Ch.32. Note
that it is uncommon for major publicly traded companies today to give security over
their assets in public issues of debentures.
67 Re Uruguay Central and Hygueritas Railway Co of Monte Video (1879) 11 Ch. D.
372; Re Dunderland Iron Ore Co Ltd [1909] 1 Ch. 446. Theoretically, although there are
trustees, an individual security-holder could take steps to enforce the security (using the
Vandepitte procedure: Vandepitte v Preferred Accident Insurance Corp of New York
[1933] A.C. 70 PC), but trust deeds typically contain a “no action” clause. And, in other
respects, the security-holder will not be regarded as a creditor of the borrowing
company, so, for example, cannot petition for its winding up if there is default: Re
Dunderland Iron Ore Co [1909] 1 Ch. 446, 452.
68
69
Although the governance arrangements typically prohibit this in any event: see below,
para.31–30.
70
See the facts which gave rise to the litigation in New Zealand Guardian Trust Co Ltd
v Brooks [1995] 1 W.L.R. 96 PC.
71
2006 Act s.740. See above, para.31–7.
72 See below, paras 31–24 et seq.
73 See para.24–4.
74
See below, at para.31–26.
75
Even the “Class 1 transaction” rule of the Listing Rules, requiring shareholder
consent, does not apply to an issue of securities, unless the transaction involves the
acquisition or disposal of a fixed asset of the company or a subsidiary: LR 10.1.3.
76
On pre-emption rights for shareholders see para.24–6.
77 See Ch.11.
78 Re Anglo-Danubian Steam Navigation and Colliery Co (1875) L.R. 20 Eq. 339.
79
See Chs 12 and 13.
80
2006 Act s.752. On treasury shares, see para.13–24. Note also s.753 which is
designed to remove the technical difficulties revealed in Re Russian Petroleum Co
[1907] 2 Ch. 540 CA when a company secures its overdraft on current account by
depositing with the bank a debenture for a fixed amount.
812006 Act ss.743–748. Less detail is required in the register of debentures, if there is
one, than in the share register. On the share register, see para.24–21.
82 2006 Act s.745.
832006 Act s.749. Non-compliance is a criminal offence on the part of any officer of the
company in default.
84
See Commission Regulation (EC) No.809/2004 art.21(2).
85 Compare Commission Regulation (EC) No.809/2004 Annexes I, IV and V.
86 2006 Act s.755. See para.24–2.
87 See Prospectus Directive art.3(2)(d) (no prospectus on a public offer of heavy-weight
debt) and art.7(2)(b) (less detail in a prospectus if one is nevertheless needed on an
introduction to trading). FSMA 2000 ss.102B, 86(1), (1A), (1B).
88 Often bonds are traded over the counter (“OTC”), even though the bonds are listed.
Many institutional investors are not permitted to invest in unlisted securities, so listing
sometimes simply provides a necessary quality kitemark (as backed by the requirements
of the LSE for listing).
89
This is the exchange-regulated market, requiring only listing particulars (unless the
securities are initially offered to the public generally). The LSE’s regulated market for
debt securities is the Gilt-Edged and Fixed Interest Market (sometimes also referred to
as the Main Market, as is the analogous market for equity securities, although all debt
security listings are “Standard”, not “Premium”; for this market, a full Prospectus
Directive prospectus is required: see above, para.25–17).
90
This is unless the passporting of the prospectus to other EEA Member States is
important: see Prospectus Directive 2003/71/EC art.17 and above, para.25–44.
91
In November 2015, the European Commission proposed replacing the Prospectus
Directive (an odd Directive in any event) with a Prospectus Regulation as part of its
move to create a “capital markets union” within the EU: see above, para.25–10. The
proposal is to remove the heavy-weight debt exemptions in PD arts 3(2)(d) and 7(2)(b),
so that a prospectus is required for a public offer and more burdensome disclosure is
required for an introduction to trading.
92 i.e. for marketable loans, there is no equivalent of CA 2006 ss.552 and 578.
93
For an informative description, see L. Gullifer, “What Should We Do About Financial
Collateral?” (2012) C.L.P. 1.
94See S. Firth, Derivatives Law and Practice (London, Sweet & Maxwell, 2012); A.
Hudson, The Law on Financial Derivatives, 5th edn (London, Sweet & Maxwell, 2012).
95
SI 2008/346, as amended by SI 2008/1714, SI 2011/2859 and SI 2012/2977. Also see
Review of the UK’s Regulatory Framework for Covered Bonds—FSA and HM Treasury
Consultation Paper, April 2011 (Consultation Paper).
96
There are, in 2015, only 12 UK issuers registered to issue covered bonds.
97
Public sector or residential or commercial mortgages, with the register indicating the
class or the mixture, which cannot then be changed over the life of the bond. In order to
maintain investor confidence, securitisations do not constitute eligible collateral.
98
With the FCA having the right to impose over-collateralisation requirements on a
case-by-case basis.
99
2008 Regulations reg.17A.
100 The structure would be even simpler if the notes were issued by the SPV and the
investors’ money paid directly to it. However, investors may have good reasons for
preferring the loans to be made to the issuer, so that the investors have the benefit of
both the issuer’s promise to repay and the claim on the asset pool held by the SPV.
Where the note or bond is issued by the SPV itself, the arrangement is referred to as an
“asset-backed” or “mortgage-backed” security, but is non-recourse and does not count as
a covered bond. Equally, in the UK, if the issuer merely secures the bond against a ring-
fenced pool of its own assets, without transferring them to a SPV, the arrangement is
certainly a secured bond (assuming the security is properly registered), but it cannot be a
covered bond in the UK (although other European jurisdictions have more relaxed rules
in this regard, adopting what is called an “integrated model” covered bond), but the UK
rules are designed to be as protective as possible to attract the greatest number of market
participants.
101 Directive 2009/65/EC, as amended, art.52(1)(a).
102 2009 Directive art.52(4).
103 HM Treasury and FSA, Proposals for a UK Recognised Covered Bonds regulatory
framework, July 2007, para.1.7. The third advantage, as with the other two, accrues, of
course, to a bank which purchases the bonds, not to the issuer bank.
104
The Regulated Covered Bonds Regulations 2008/346 (as amended) Pts 2 and 3.
105
2008 Regulations reg.9. The owner is not an applicant for registration, though
various obligations are laid on it by the Regulations. The proposals (above, fn.103) did
not envisage a requirement for UK registration, but in this and in a number of other
respects, the “credit crunch” of 2007 caused the Regulations to be more tightly drawn.
106
The enforcement powers of the FCA are set out in Pt 7 of the Regulations and follow
those normally available to it. See para.25–41.
107
2008 Regulations reg.2. Partly, this definition is achieved by cross-reference to
art.129 Regulation (EU) 575/2013 (the requirements regulation), which determines
which assets may be used to collateralise a covered bond, if a bank investing in such
bonds is to benefit from a lower risk rating. However, a recognised covered bond is not
limited to such collateral, though an issuer which uses the wider type of collateral will
not be able to confer the benefit of the lower risk rating on banks which purchase the
bonds.
108
2008 Regulations reg.17(2), imposing the obligation on the issuer; reg.23(1)
imposing it on the owner of the asset pool.
109 2008 Regulations reg.27. The proposals (above, fn.103) envisaged an alternative
model (the “integrated” model) in which the assets remained with the issuer but were
ring-fenced. Insisting on a SPV made the priority issue somewhat simpler to deal with.
110See paras 13–2 et seq. The capital maintenance rules do not apply to debt because
debt is not legal capital: above, para.11–1.
111
Knightsbridge Estates Ltd v Byrne [1940] A.C. 613 HL.
112 FSA, above, fn.35, paras 3.67 et seq.
113 The detail is not examined in this book, but the basic structure is that the bank sells
the securities to a SPV, so that the bank obtains immediate cash (inevitably discounted)
in return for the debts which were due for repayment in the future, and the sale also
ensures that those debts are no longer on the bank’s balance sheet. The SPV then in turn
issues debt securities to third parties on the basis that their repayment is to come
exclusively from the original assets (the debts) now held by the SPV (with the securities
repayable on the basis of this non-recourse liability being, more positively, described as
“asset-backed securities” (“ABS”)). This basic structure has been developed in various
ways. One of these is “synthetic securitisation”, where the debts are not sold to the SPV,
but the SPV instead makes a loan to the bank, secured on the pool of debts, and then the
SPV, as before, issues securities to fund that loan. It is crucial to the success of this
synthetic structure that the SPV can easily enforce its security against the pooled assets,
and to that end the IA 1986 ss.72B–72D enables such floating charge security holders to
continue to be able to appoint an administrative receiver provided the debt is over £50
million, and despite the abolition of administrative receivers generally in the Enterprise
Act 2002 (see below, para.32–34). The credit rating of these bonds then depends upon
the quality of the secured assets, not the overall credit rating of the company.
114 Although there are some difficult conceptual problems, especially with transfer of
intermediated securities: see L. Gullifer and J. Payne, Corporate Finance Law:
Principles and Policy, 2nd edn (Oxford: Hart Publishing, 2015), Ch.9. As a result, the
trust deeds of debenture stock issues or the documentation associated with bond issues
typically provide explicitly that the holder takes free of all equities affecting the current
and previous holders (including the account holder for bond issues). The effectiveness of
these provisions is not guaranteed, and clear wording is essential: see Re Kaupthing
Singer and Friedlander Ltd; Newcastle Building Society v Mill [2009] EWHC 740 (Ch).
115
Reg.19 and the definition of “security” in reg.3(1). See generally Ch.27, above.
116
Uncertificated Securities Regulations 2001 reg.22(3). If the terms of issue of the
debentures require the company to maintain a register of holders in the UK, then this
rule still applies but the company’s register reflects that of the Operator: reg.22(1) and
(2).
117
The details are not discussed here, but the difficult issues of analysis are well
described in L. Gullifer and J. Payne, Corporate Finance Law: Principles and Policy,
2nd edn (Oxford: Hart Publishing, 2015), Ch.9.
118
In Barbados Trust Co Ltd v Bank of Zambia [2007] EWCA Civ 148, where consent
of the debtor was required, such consent not to be unreasonably withheld.
119See Barbados Trust Co Ltd v Bank of Zambia [2007] EWCA Civ 148; Linden
Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1 A.C. 85; Morris v Royal
Bank of Scotland Plc unreported 3 July 2015 No. HC-2014-001910 Norris J; R. Goode,
“Inalienable Rights?” (1979) 42 M.L.R. 553; M. Bridge, “The Nature of Assignment and
Non-Assignment Clauses” (2016) 132 L.Q.R. 47; L. Gullifer and J. Payne, Corporate
Finance Law: Principles and Policy, 2nd edn (Oxford: Hart Publishing, 2015), pp.434–
443.
120 Without this, debenture holders and their transferees would be in grave danger, for a
debenture, unless in bearer form and thus a negotiable instrument (Bechuanaland
Exploration Co v London Trading Bank Ltd [1898] 2 Q.B. 658), would, as a chose in
action, be transferable only subject to the state of the account between the company and
the transferor. As stressed in Ch.27, neither shares (unless in the form of share warrants
to bearer) nor debentures (unless bearer bonds) are negotiable instruments like bills of
exchange. Although CARD (above, para.25–15) requires listed shares and debt
securities to be “freely negotiable” (arts 46 and 60) this is interpreted as “freely
transferable” and not as prescribing that they must be “negotiable instruments” in full
sense.
121 See Ch.27, above.
122
2008 Regulations reg.40(2), provided notice is given to the holders at least 30 days
before the changes become effective.
123
Where such debt is part of a private equity transaction, it is a strong candidate for
early re-financing.
124 And, for example, bank overdrafts are typically repayable on demand and regardless
of breach (unless the facility agreement provides otherwise), with the bank not required
to refrain from making a demand simply because it will tip the company into insolvency:
Williams and Glyn’s Bank Ltd v Barnes [1981] Com. L.R. 205.
126 Bratton, “Bond Covenants and Creditor Protection” (2006) 7 E.B.O.R. 39.
127
However, since these are contractual restrictions, they will not bind third parties (in
whose favour, for example, assets have been pledged in breach of covenant), unless
equity will intervene (see above, para.16–134), or the ingredients of the tort of inducing
breach of contract have been established, notably knowledge on the part of the third
party of the contractual restrictions: Swiss Bank Corp v Lloyds Bank Ltd [1979] Ch. 548.
128
Of course, such nominee directors owe their duties to the company, not the nominee:
see the discussion above, para.16–63.
129
Lordsvale Finance Plc v Bank of Zambia [1996] Q.B. 752; although now see
Cavendish Square Holding BV v Talal El Makdessi; ParkingEye Ltd v Beavis [2015]
UKSC 67.
130
See above, para.19–25. It seems clear that an injunction could not be granted to
restrain the general meeting from removing a nominated director under s.168.
131
Elektrim SA v Vivendi Holdings 1 Corp [2008] EWCA Civ 1178.
132
IFE Fund SA v Goldman Sachs International [2007] EWCA Civ 811 at [28];
Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc [2010] EWHC 1392
at [65].
133 Peekay Intermark v ANZ Banking Group [2006] EWCA Civ 386.
134
Although see the dicta in UBAF Ltd v European American Banking Corp [1984]
Q.B. 713, 728.
135 It is possible, although now less common, for the company to issue bonds directly to
the bondholders, and for the bondholders then to appoint an agent to act as their point of
contact. Such an appointed agent will have whatever powers are expressly agreed by the
parties, and these may well be fewer than those typically enjoyed by a trustee for the
bondholders in a structure where the trustee holds the global note and any associated
security on trust for the bondholders. But such an agent is nevertheless subject to
common law and equitable duties, providing the bondholders with fairly extensive
protection.
136
Armitage v Nurse [1998] 1 Ch. 241. Although see the pro-trustee approach to
restrictive clauses in Citibank NA v MBIA Assurance SA [2006] EWHC 3215. Also see
M. Bryan, “Contractual Modification of the Duties of a Trustee” in S. Worthington,
(ed.), Commercial Law and Commercial Practice (Oxford, Hart Publishing, 2003),
p.513.
137 But note the exceptions and qualifications in subss.(2)–(4) permitting 75 per cent in
value of the debenture holders present and voting to give a release from liability to the
trustee in respect of prior specific acts or omissions of the trustee (or on the latter’s death
or ceasing to act). In addition, reg.40(2) of the Uncertificated Securities Regulations
2001 (above, Ch.27) exempts the trustees from liability simply for assenting to
amendments of the trust deed to enable title to debentures to be held and transferred
under the electronic system and for rights attached to debentures to be exercised in that
way.
138Especially if the trustee’s opinion differs: see Citibank NA v MBIA Assurance SA
[2006] EWHC 3215 (Ch); [2007] EWCA Civ 11 (see “Issue 2” in the Court of Appeal);
and Law Debenture Trust Corp Plc v Concord Trust [2007] EWHC 1380.
139Concord Trust v Law Debenture Trust Corp Plc [2006] 1 B.C.L.C. 616 HL. The
event of default was a failure to maintain on the board of the borrowing company a
nominee of the lenders, who had been placed there to protect the bond-holders’ interests.
Having accelerated the bond, as a consequence of the HL judgment, and secured
substantial payments from the company, the trustee then took an overly cautious line
about how much of the monies recovered it could distribute to the bond-holders: Law
Debenture Trust Corp Plc v Concord Trust [2007] EWHC 1380 (Ch).
140
The aim is to achieve, by contract between the multiple lenders alone, at least the
level of protection that the IA 1986 attempts to deliver between all unsecured creditors,
despite the fact that they are often strangers to each other. See below, Ch.33. See above,
141
142
See para.20–1. Nor, of course, will the class rights provisions afford protection as
they too apply only to members. See para.19–13.
143
The Listing Rules require that any circular must include an explanation of the effect
of proposed amendments: LR 17.3.10.
144
See the detailed discussion at paras 19–4 et seq., much of which is equally relevant
here.
145 Goodfellow v Nelson Line (Liverpool) Ltd [1912] 2 Ch. 324, 333.
146 British America Nickel Corp Ltd v MJ O’Brien [1927] A.C. 369, 371; Redwood
Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703; [2006] 1 B.C.L.C. 149 at
[84], a case concerning syndicated lenders, relying on the shareholder case of
Greenhalgh v Ardene Cinemas Ltd [1951] Ch. 286, 291; and Law Debenture Trust Corp
Plc v Concord Trust [2007] EWHC 1380 at [123]; Assénagon Asset Management SA v
Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch).
147Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703; [2006] 1
B.C.L.C. 149 at [101]–[105]; Assénagon Asset Management SA v Irish Bank Resolution
Corp Ltd [2012] EWHC 2090 (Ch) at [85]–[86].
148
See the detailed analysis in Redwood Master Fund Ltd v TD Bank Europe Ltd [2002]
EWHC 2703; [2006] 1 B.C.L.C. 149.
149
R. Peel, “Assessing the Legality of Coercive Restructuring Tactics in UK Exchange
Offers” (2015) 4 UCL Journal of Law and Jurisprudence 162.
150 British America Nickel Corp Ltd v O’Brien [1927] A.C. 369 PC.
151
There appears to be no problem if the opportunity to benefit by voting in a particular
way is fully disclosed and available to all members of the class: Azevedo v IMCOPA —
Importacao, Exportaacao e Industria de Oleos Ltda [2013] EWCA Civ 364.
152
Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC
2090 (Ch). Briggs J also held, as an alternative, that the vote belonged beneficially to,
and was exercised by, the debtor company, in contravention of the trust deed, so the
decision of the majority could not stand because the majority had no power to exercise,
i.e. on these facts, the same result could be delivered by an analysis based on absence of
power, or, alternatively (as discussed here), on abuse of power.
153As in Azevedo v IMCOPA – Importacao, Exportaacao e Industria de Oleos Ltda
[2013] EWCA Civ 364.
154Otherwise the same outcome might have been achieved by a straightforward vote to
devalue the old bond to the value of the offered inducement.
155
See above, fnn.146 and 151.
156 2006 Act s.895; see above, paras 29–1 et seq. But note Re Lehman Brothers
International (Europe) (In Administration) [2009] EWCA Civ 1161, indicating that
beneficial owners (as opposed to creditors, even those with security) cannot avail
themselves of these provisions.
157
2006 Act s.899; see below, para.29–24.
CHAPTER 32
COMPANY CHARGES
Introduction 32–1
Security Interests 32–2
The legal nature of security interests 32–2
The benefits of taking security 32–4
The Floating Charge 32–5
The practical differences between fixed and floating
charges 32–5
Crystallisation 32–8
Priority accorded to floating charges 32–10
Statutory limitations on the floating charge 32–13
Distinguishing between fixed and floating charges 32–21
Registration of Charges 32–24
The purpose of a registration system 32–24
The reformed registration system 32–26
Reform proposals and registration systems
elsewhere 32–33
Enforcement of Floating Charges 32–34
Receivers and administrators 32–34
Receivership 32–37
Administration 32–43
Conclusion 32–51
INTRODUCTION
32–1
Borrowers are often obliged to provide security for the
repayment of their debts. In this respect a company is no
different from any other borrower. However, there are
sufficiently unique features associated with the granting of
security by a company to justify it being treated here as a
separate topic. In particular, one type of security (the floating
charge) is practicable only if created by a body corporate,1 there
is a separate system for the registration of company charges,2
there are distinct statutory procedures for the enforcement of the
floating charge,3 and certain provisions of the Insolvency Act
1986 affecting company charges apply on corporate insolvency.
Coupled with these, the granting of security by a company is
subject to the law relating to corporate capacity and directors’
duties,4 although compliance in that regard is assumed in what
follows.
SECURITY INTERESTS
The legal nature of security interests
32–2
Some knowledge of this general topic is essential in order to
understand the particular nature of the rights conferred on a
secured charge holder, the priorities of charges, and the system
for the registration of company charges.5 Some understanding is
also needed of nomenclature. Various forms of security are
possible, as described below, but the most common form granted
by a company is a charge. “Charge” has a restricted technical
meaning in equity, although this technical distinction is not
always maintained in the literature or in the Act,6 and, unless the
context indicates otherwise, the terms “charge”, “security” or
“security interest” are often used interchangeably.
Browne-Wilkinson VC, without claiming that it was
comprehensive, accepted the following as a description of a
security interest7:
“Security is created where a person (‘the creditor’) to whom an obligation is owed
by another (‘the debtor’) by statute or contract, in addition to the personal promise
of the debtor to discharge the obligation, obtains rights exercisable against some
property in which the debtor has an interest in order to enforce the discharge of the
debtor’s obligation to the creditor.”
More recently in Smith (Administrator of Cosslett (Contractors)

Ltd) v Bridgend CBC, Lord Scott remarked that8:
“a contractual right enabling a creditor to sell his debtor’s goods and apply the
proceeds in or towards satisfaction of the debt is a right of a security character. [It is
important to note that] the conclusion does not depend on the parties’ intention to
create a security. Their intention, objectively ascertained, is relevant to the
construction of their contract. But once contractual rights have, by the process of
construction, been ascertained, the question whether they constitute security rights
is a question of law that is not dependent on their intentions.”
These two statements highlight the essential features of a

security interest. First, the classification of security interests is a
matter of law, and depends upon the rights agreed between the
parties, not on their intention to create one form of security
rather than another, nor on the economic effect of their
agreement. Secondly, every security interest ultimately gives the
holder of the security a proprietary claim over assets, normally
the debtor’s, to secure payment of the debt. The position of a
secured creditor is to be contrasted with that of an unsecured
creditor who merely has a personal claim to sue for the payment
of his debt and to invoke the available legal processes for the
enforcement of any judgment that he may obtain.
Security interests can be divided broadly into consensual and
non-consensual securities. We are interested in the former—i.e.
securities agreed by companies to be granted in favour of their
creditors. English law recognises only four types of security
interest (mortgages, charges, pledges and common law liens9),10
although these can be used in a wide variety of ways to give
sophisticated protection to lenders.
32–3
It is not possible in a text of this nature to describe security
interests in any great detail, but a number of questions typically
arise with respect to the creation of such interests by a company:
(i) First, is the interest created by the security equitable or
legal? This has a bearing on the priorities of different charges
and of course an equitable charge holder can be defeated by a
bona fide purchaser for value.11
(ii) Secondly, is the security interest possessory in the sense that
possession, either actual or constructive, of the property
subject to the security is necessary in order to confer a
security interest on the security holder? Obviously, if all
security interests had to be possessory it would make secured
borrowing virtually impossible since the debtor would be
unable to use the secured assets in the course of business.
The classic example of a possessory security is the pledge,
which involves the pledgee (the security holder) taking
possession of the goods of the debtor (the pledgor) until the
debt is paid or the pledgee takes steps to enforce the pledge.
The common law lien is also possessory. In the interests of
commercial vitality, English law has thankfully long
recognised non-possessory security interests, by way of
mortgages and charges.
But it can be important to decide just what sort of
arrangement the parties have entered into. “Stock lending”,
from its label, suggest a mere pledge of the underlying
collateral: it is “on loan” from the borrower to the lender for
the purposes of security, and recoverable on repayment of
the loan; more importantly, should the lender become
insolvent, the securities belong to the borrower, not the
lender. But typically these arrangements also give the lender
the enormously valuable commercial advantage of being able
to deal freely with the underlying securities, and an
obligation to return to the borrower, when the time comes,
not the precise securities lent, but simply equivalent
securities.12 The courts have held, perhaps unsurprisingly,
that in these cases it is the lender who has title to the
securities, not the borrower, with all the insolvency
consequences that attracts.13
(iii) Thirdly, what type of “proprietary” interest is vested in the
chargee by the charge? This has a direct bearing on remedies.
The remedies of charge holders will be dealt with later. But
some brief comment is needed as to the remedies available to
the holders of other types of security interests. First to be
contrasted is the mortgage and the charge. Although the
words are often used interchangeably, there is technically an
essential difference between them: “a mortgage involves a
conveyance of property subject to a right of redemption,
whereas a charge conveys nothing and merely gives the
chargee certain rights over the property as security for the
loan”.14 This essential difference has an impact on remedies:
unless the charge document expressly provides otherwise
(which it now invariably does15), the remedy of a chargee is
to apply to the court for an order for sale or for the
appointment of a receiver; this is because a charge, unlike the
mortgage, does not involve conveyance of title to the asset,
so a chargee cannot automatically foreclose or take
possession. The principal remedy of a pledgee is sale of the
pledged goods; they can also be sub-pledged, with
restrictions,16 even before the right to sell arises. By contrast,
a common law lien holder merely has the right to detain the
goods subject to the lien until the debt has been paid.17
(iv) Fourthly, is the security interest one that is created by the act
of the parties or is it one created by operation of law? This is
of critical importance with respect to the registration of
company charges, since charges created by a company over
its assets are registrable, whereas charges (or, more correctly,
equitable liens) arising by operation of law are, of course,
not.
(v) Fifthly, if the charge has been created by the company, has it
been registered as required by the Act? Registration is dealt
with later.
(vi) Finally, is the charge created by the company fixed or
floating? This will have a significant impact on the rights
and remedies available to the chargee, and to other third
parties associated with the failing company. It too is dealt
with later.
To complicate the picture further, there are a number of other
devices which do not constitute legal security (because they do
not involve the debtor granting an interest in its property to the
secured creditor), but which nevertheless function in a similarly
protective fashion, and so are referred to as quasi-security
devices. Negative pledge clauses in unsecured lending, and
retention of title by sellers of goods, are two common
illustrations. The first involves an agreement by the debtor
company and its unsecured creditor that the company will not
create any securities which have priority to the creditor’s claim.
Although this does not vest a security interest in the creditor, it
“behaves” like a security interest in that it precludes the debtor
from using its assets freely and thus, as with a security interest, it
provides the creditor with a measure of protection. In retention
of title arrangements, the seller of goods simply retains title to
the goods until the buyer has paid for them (or until some later
time defined by the contract).18 Some of the problems raised by
this type of security are considered later in the discussion on
registration.19
The benefits of taking security
32–4
There are a number of compelling reasons for a creditor to take
security rather than rely solely on its personal claims against the
debtor company. First, in the event of the debtor company’s
insolvency, a secured creditor will have priority over unsecured
creditors (at least to the extent that the secured assets are of
sufficient value to fund repayment of the secured debt), and may
also, depending on the seniority of its claim, have priority over
less senior security holders. This is a direct consequence of the
fact that a security interest confers some type of proprietary
interest on its holder. Priority on insolvency is one of the
principal reasons for taking security.
Secondly, the secured creditor has the right to trace. If the
debtor company wrongfully disposes of the charged property,
the creditor is entitled to enforce its security against any
identifiable proceeds of the disposition.20
Thirdly, a security interest gives its holder particular rights of
enforcement depending on the nature of the security interest.
Charge become enforceable in circumstances determined by the
agreement itself, and the chargee may then take steps to enforce
the charge. English law has traditionally placed few
impediments in the way of enforcement of a charge: liberal
rights are given by statute21 and can be enhanced by contract.
These rights allow the chargee to remain largely outside any
concurrent insolvency proceedings and to enforce the charge
independently of such proceedings,22 although, as discussed
later, this principle is substantially modified in the case of
floating charges. Then various statutory rules give priority to
preferential debts and to liquidation expenses,23 and provide for a
defined proportion of the floating charge realisations to be ring-
fenced for the unsecured creditors.24 Further rules operate in
relation to the administration procedure (and its accompanying
moratorium).25
Lastly, a charge affords a chargee a measure of control over
the business of the debtor company. The terms of the security
agreement may require the debtor company to report regularly to
the chargee and, if the company gets into financial difficulties,
the chargee may be made privy to management decisions.26 In
addition, the charge may be so all-embracing that there is no
scope for the debtor company to obtain further secured credit.27
In any event, a charge will obviously deter a second financier
from providing funds where its charge would rank after a charge
that the company has already created over its assets. Finally,
unsecured creditors may see little advantage in seeking a
winding-up where it appears that the secured creditors are
entitled to all the company’s assets.28
THE FLOATING CHARGE
The practical differences between fixed and floating
charges
32–5
Subject to the issue of registration, discussed in the next section,
the creation of a charge by a company is no different from the
creation of a charge by any other debtor. And the creation of a
floating charge, although devised for companies and still
confined to them and to analogous vehicles, is no more difficult
than the creation of a fixed charge.
A charge is an equitable proprietary security interest. It is
created whenever parties agree that certain property belonging to
the debtor (or some third-party guarantor) will be appropriated to
the discharge of the debt or other obligation (e.g. the machinery
in a factory may be charged in favour of repayment of the loan
that funded its purchase, or, alternatively, a loan granted for an
entirely separate purpose). The agreement is by contract, without
any transfer of title. The proprietary interest created in this way
is less than an ownership interest (either legal or equitable), but
it allows the secured property to be appropriated and sold, with
the proceeds of sale dedicated to the repayment of the
outstanding secured obligation.29 On the debtor’s insolvency,
this arrangement removes the secured property from any
insolvency proceedings,30 and so the secured creditor is more
likely to be repaid in full when compared with the unsecured
creditors who have to share pari passu in the proceeds derived
from sale of the remaining unsecured assets.
All charges created in this way are either fixed or floating. A
fixed (or “specific”) charge expressly or impliedly restricts the
debtor’s power to dispose of, or otherwise deal with, the
property without the creditor’s consent. By contrast, a floating
charge leaves the chargor free to deal with the charged property
in the ordinary course of business without reference to the
chargee. A floating charge thus has the very practical advantage
that it allows a company to give security over assets which are
continually turned over or used up and replaced as a matter of
routine trading; a business can thus raise money on secured loans
without removing any of its property from routine business
activities.31 The charge remains floating and the company is free
to use the assets subject to the charge until the charge is
converted into a fixed charge. This is referred to as
“crystallisation” of the charge. The normal crystallising event is
the taking of steps to enforce the charge, but there are others and
these are dealt with later.32
32–6
No particular form of words is necessary to create a floating
charge. From the earliest cases, it was recognised as sufficient if
(a) the intention is shown to impose a charge on assets both
present and future; (b) the assets are of such a nature that they
would be changing in the ordinary course of the company’s
business; and (c) the company is free to continue to deal with the
assets for its own benefit in the ordinary course of its business.33
Recent authorities make it clear that only the last of these three
attributes is crucial.34
Interestingly, at the same time that courts in the UK were
confirming the legitimacy of floating charges, courts in the US
were moving in the opposite direction. According to US courts,
allowing such freedom to the debtor/chargor was incompatible
with the creation of a genuine security interest and was a fraud
on the creditors; if the creditor did not exercise reasonable
dominion over the secured asset, then the security was illusory
and void,35 and any rights created could only be contractual, not
proprietary.36
Despite this early judicial acceptance in the UK, the floating
charge has always been treated by the legislature with something
approaching suspicion, and successive Companies Acts and
Insolvency Acts have adopted a variety of rules designed to
restrict its full impact, which is potentially to sweep up all the
company’s resources (by securing “the undertaking” or “all the
assets and undertaking” of the company) and dedicate them to
securing the debt of one of the company’s creditors,37 leaving all
the other creditors unprotected, able only to share pari passu in
whatever remains of the proceeds from the secured assets (if
anything) after the secured creditor has been paid in full.
32–7
Because of these various statutory incursions, floating charges
(i.e. all charges created as floating charges38) are now subjected
to more, and more onerous, invalidating provisions (including
specific invalidity rules), and are also subjected to prior payment
of administrator’s and liquidator’s costs and expenses, and then
prior payment of claims from preferential creditors, and then
compulsory distribution of a prescribed part to unsecured
creditors. This differential treatment of floating charges,
discussed in more detail below,39 gives creditors an incentive to
ensure their charges are classified as fixed, not floating.40
Given the vulnerability of floating charges, the question arises
as to why a creditor should bother to obtain one. While
obviously the fixed charge accords superior protection, there are
sound reasons for taking a floating charge. First, where a
subsequent holder of a registrable charge is deemed to have
notice of the negative pledge clause which typically
accompanies a floating charge,41 then this accords priority to the
floating charge holder. Secondly, the charge provides security
against unsecured creditors. Thirdly, the floating charge holder
will be able to take steps to enforce the charge and, as will be
seen, this accords him considerable control over the company’s
affairs. Fourthly, the holder of a floating charge will have some
measure of control over the company, even without taking any
steps to enforce its security.42 Lastly, the holder of a floating
charge may be able to block the appointment of an administrator,
although now only in a limited range of cases.43
Crystallisation
32–8
As indicated above, a floating charge (unlike a fixed charge)
leaves the debtor company free to use the secured assets in the
ordinary course of its business until some point at which the
charge is converted into a fixed charge. “Crystallisation” is the
term used to describe this transition point.44 Crystallisation is an
important event, since it enables definition of the pool of assets
available to the chargee as security for the obligation: a
crystallised charge bites on all the assets that are presently in, or
in the future come into, the hands of the chargor and are properly
within the description of the charged assets.45
The effect of crystallisation is to deprive the company of the
autonomy to deal with the assets subject to the charge in the
normal course of business.46 The events of crystallisation, on
which there is general agreement, are: (i) the making of a
winding-up order47; (ii) the appointment of an administrative
receiver48; (iii) the company’s ceasing to carry on business49; (iv)
the taking of possession by the debenture-holder50; and (v) the
happening of an event expressly provided for in the debenture,
often referred to as “automatic crystallisation”. Events (i)–(iii)
are implied as crystallising events in every floating charge
agreement unless explicitly excluded.
Automatic crystallisation
32–9
Automatic crystallisation is not a term of art. It covers at least
two situations which at first blush appear dissimilar. One is
where the charge is made to crystallise on the happening of an
event provided for in the charge agreement without there being
any need for a further act by the chargee,51 and the other is where
the charge is made to crystallise on the serving of a notice of
crystallisation on the company. However, these events have one
important common feature, in that they will normally not be
known to a person dealing with the company and therefore it
seems appropriate to treat them together.
Initially there was some doubt about both the validity and the
desirability of automatic crystallisation provisions. On validity,
the matter is now settled beyond dispute, following acceptance
of the judgment of Hoffmann J in Re Brightlife Ltd52 upholding
the validity of a provision enabling the floating charge holder to
serve a notice of crystallisation on the company. Hoffmann J
saw crystallisation as being a matter of agreement between the
parties. On this reasoning there can be no objection to a charge
being made to crystallise on the happening of a specified event.
On the desirability of automatic crystallisation clauses, their
acceptance as a matter of law indicates at least tacit approval that
the benefits outweigh the detriments. The earlier arguments
against such clauses focused on the disadvantages suffered by
third parties. For example, insofar as insolvency law is
committed to the principle that property within the apparent
ownership of the company should be treated as the company’s in
the event of its insolvent liquidation, permitting party autonomy
to effect automatic crystallisation clearly undermines this policy,
but then English insolvency law is littered with similar
exceptions.53 Similarly, it has been argued that automatic
crystallisation may prejudice subsequent purchasers and
chargees who do not know, and indeed who may have no way of
knowing, that the charge has crystallised.54 Whether this is
indeed the case is not clear cut. The matter is usually resolved as
one of priorities,55 and subsequent purchasers or chargees will
not necessarily be defeated by the earlier equitable charge.56 In
addition, Professor Goode has pointed out that the fact that the
charge has crystallised will affect the relationship between the
chargee and the company, but it does not necessarily affect a
third party since, if the company is left free to deal with the
assets in the normal course of its business, then the chargee
(under the prior, now crystallised, floating charge) should be
estopped from denying the company’s authority to do so.57
The events implied as crystallising events in every floating
charge agreement have already been mentioned. For the
avoidance of doubt, there are no further implied terms defining
events that cause crystallisation. In particular, default in the
payment of interest or capital are not implied crystallising
events,58 nor (more controversially59) is the crystallisation of
another floating charge, whether created earlier or later than the
charge in question.60 Of course, given the validity of automatic
crystallisation clauses, these events could be nominated as
crystallising events.
Note that even where default does not result in crystallisation,
the company will be in breach of contract and the chargee will
have appropriate contractual remedies. For example, the holder
of an uncrystallised charge may apply for an injunction to
prevent the company dealing with its assets otherwise than in the
ordinary course of its business.61
Priority accorded to floating charges
32–10
Since a floating charge gives the debtor company management
autonomy over the secured assets, the most serious risk facing
the charge holder is that the assets will be dissipated, without
replacement, leaving no security to support the outstanding
obligation. Subject to any specific restrictions in the charge
agreement, the debtor company is free to deal with the charged
assets in the ordinary course of business. Of course this means
that the chargor may sell the assets in the ordinary course of
business, and purchasers take free of the security.
In addition, the company may grant subsequent security
interests, and the earlier floating charge will be deferred to any
subsequent fixed legal or equitable charge created by the
company over its assets,62 or any subsequent floating charges
provided they are not over precisely the same assets,63 but are
over only part of the pool of assets64 where the first charge
contemplates the creation of the later charge.65 In Scotland,
however, it has been proposed that where the same property (or
any part of the same property) is subject to two floating charges
they rank according to the time of registration unless the
instruments creating the charges otherwise provide.66
Similarly, if debts due to the company are subject to a floating
charge, the interest of the floating charge holder will be subject
to any lien or set off that the company creates with respect to the
charged assets prior to crystallisation,67 since a floating charge is
not to be regarded as an immediate assignment of the chose in
action,68 but is subject to dealings in the ordinary course of
business up until crystallisation.69 In the same vein, if a creditor
has levied and completed execution,70 the debenture-holders
cannot compel him to restore the money, nor, unless the charge
has crystallised, can he be restrained from levying execution.71
Put another way, the floating charge holder will take the
company’s property subject to the rights of anyone claiming by
paramount title, and if the incursions into the secured asset arise
in the ordinary course of business, then it matters not that they
occur after the charge was created but before the charge
crystallises.
However, once the floating charge crystallises,72 this ability to
deal with the charged assets in the ordinary course of business
ceases, and the usual priority rules apply to determine whether
the (now fixed) equitable charge has priority over any
subsequently created legal or equitable interests.73
Negative pledge clauses
32–11
In an effort to enhance the security offered by a still floating
charge as against subsequent security interests that would
otherwise have priority, floating charge agreements almost
invariably contain a provision that restricts the right of the
company to create charges that have priority to or rank equally
with the floating charge (called a negative pledge clause). Such
restrictions are strictly construed,74 but because they limit the
company’s actual authority to deal with its assets in the ordinary
course of business, they remove the basis described above on
which floating charges are automatically postponed to later
charges. Instead, orthodox priority rules must be applied (e.g. an
earlier equitable (floating charge) interest is deferred to a
subsequent legal interest obtained bona fide and without notice
of the earlier interest).
Notice (actual or constructive) of the terms of the floating
charge and any negative pledge, is thus crucial in determining
priority disputes.75 Actual notice is easy enough. But
constructive notice raises two problems: which matters are
deemed noted, and who has such notice? The Act does not
answer either question. On the first, the cases indicate that
registration provides constructive notice only of those particulars
which are required to be included on the register.76 Since those
particulars now include whether or not there is a negative
pledge, it would seem that parties will be taken to have
constructive notice of such clauses, thus doing away with a great
deal of earlier uncertainty when the registration requirements
were more limited.77 But uncertainty remains over whether there
will also be constructive notice of matters beyond the particulars,
since the whole charge document must also be registered; and
what will happen if the particulars do not accurately reflect the
terms of the registered charge.78
On the second question, as to who will have such constructive
notice, there is even less clarity. Registration might be taken to
be notice to all the world, but the better view, consistent with the
role of constructive notice elsewhere in the law, seems to be that
registration is notice only to those who could reasonably be
expected to search the register.79 The boundaries of that rule are
not certain, but it should include most lenders, especially secured
lenders.
Finally, and despite the foregoing, subsequent interests that
can be classed as purchase money security interests may have
priority over an earlier floating charge which appears to cover
the same assets, although that priority will only extend to the
newly purchased assets. This follows, since the company’s later
purchase, secured by a mortgage, means that all that the
company acquires from the purchase is an equity of redemption
subject to the mortgage, so the later mortgagee will take priority,
even if it has actual notice of the negative pledge.80
Subordination agreements
32–12
Finally, in Cheah v Equiticorp Finance Group Ltd,81 Lord
Browne-Wilkinson made it clear that where there were two
charges over the same property, the chargees could agree
between themselves to alter the priority of their security interests
without the consent of the debtor. These types of subordination
agreements do not affect the interests, even on insolvency, of
either the debtor company or its other creditors; they merely
redistribute what would otherwise be allocated to the chargees.82
Statutory limitations on the floating charge
32–13
Certain statutory provisions add further to the vulnerability of
the floating charge. These provisions relate to (i) defective
floating charges—which affects the validity of the charge; (ii)
preferential creditors—which affects the priority of the charge;
(iii) compulsory sharing of the security proceeds with other
creditors—which diminishes the assets available for the floating
charge holders; (iv) costs of the liquidation—which again
diminishes the assets available for the floating charge holders;
(v) the right of an administrator to override a floating charge—
which affects the enforcement rights of the charge. These
matters are dealt with in turn.
(i) Defective floating charges
32–14
An unsecured creditor with advance notice that insolvent
liquidation is imminent may well be tempted to seek security to
cover the outstanding obligation, thereby obtaining priority over
the other unsecured creditors. Directors, perhaps more than
most, are likely to have early warning of such danger in
repayment of their own unsecured loans.83 And the only security
likely to be available when the company is distressed is a
floating charge security—the company’s fixed assets will
usually have been secured much earlier.
To prevent this, s.245 of the Insolvency Act 198684 provides
that a floating charge created in favour of an unconnected person
within 12 months85 of the commencement of the winding-up or
the making of an administration order86 shall be invalid, except
to a prescribed extent, unless it is proved that the company was
solvent immediately after the creation of the charge.87 If these
conditions are not satisfied, the charge is valid only to the extent
of any new value in the form of cash, goods or services supplied
to the company,88 or the discharge of any liability of the
company, where these take place “at the same time as, or after,
the creation of the charge”.89 It has been held that the phrase in
quotations requires the new value to be provided
contemporaneously with the creation of the charge.90 Any delay,
no matter how short, in the execution of the debenture after the
advance has been made will result in the new value falling
outside s.245.91 Hence those who take a floating charge from a
company which cannot be proved to be solvent,92 and which
does not survive for a further year, cannot thereby obtain
protection in respect to their existing debts, but only to the extent
that they provided the company with new value93 and thus
potentially increased the assets available for other creditors.
Where the floating charge is in favour of a “connected
person”, the rules are even more restrictive: the charge is
vulnerable for two years after its creation,94 and there is no need
to show that at the time the charge was created the company was
insolvent. The definition of connected person is complex, but
includes a director, the director’s relatives, and companies within
a group.95
These provisions cannot be avoided by sleight of hand, for
example by advancing further money on a floating charge on the
understanding that this is to be used to repay existing loans
specifically to the connected or unconnected person: a creditor
cannot by use of the floating charge transmute an unsecured debt
into a secured debt by manipulating the saving provisions of
s.245.96 In addition, it is important to note that not all value is
“new value” for the purpose of s.245, as the latter is confined to
money, goods or services and excluded are, for example,
intellectual property rights and rights under a contract.97
These rules apply to floating charges and not to fixed charges.
The policy justification for this has been questioned. The Cork
Committee considered that these rules should not be extended to
fixed charges since such charges would relate to the company’s
existing assets, whereas the floating charge could cover future
assets.98 This distinction is not in fact true,99 but why it should
make a critical difference in any event is far from clear. The
exclusion of fixed charges from IA 1986 s.245 arguably reflects
the favouritism shown to secured creditors in English company
law. A fixed charge may of course be attacked as a preference
where it is given to secure past value,100 although not as a
transaction at an undervalue since the assets of the company are
not diminished by the creation of the charge.101
(ii) Preferential creditors
32–15
The general rule on insolvency is that pre-insolvency rights are
respected, and the company’s unsecured creditors share the
losses pari passu. However, this general rule has been varied by
statute, giving certain classes of creditors added protection102 by
according them a statutory preference over some or all of the
company’s creditors. Perhaps surprisingly, the enforcement of a
floating charge is to some extent treated as an insolvency
proceeding whether or not the company is in the course of being
wound up,103 and these preferential creditors are given a similar
priority out of the pool of floating charge assets (although only
to the extent that the general assets of the company are
insufficient to meet their claims).104 To this extent, floating
charge holders are treated a little like unsecured creditors (whose
repayments are deferred in this way on the company’s
insolvency) rather than like other secured creditors with
mortgages or fixed charges (who are entitled to realise the
secured assets outside this insolvency regime).
There are various reasons supporting the adoption of this
policy. It had been a strong criticism by the Cork Committee that
banks, through a combination of fixed and floating charges,
could scoop the asset pool and, in many cases, leave unsecured
creditors with nothing in an insolvency. In addition, as already
pointed out, some large-scale debt-financing arrangements are
structured so that the ranks of debenture-holders (with floating
charge security) closely resemble shareholders, forming a class
that is interested in the company rather than merely one with
claims against it. Consequently, it has been thought unjust that
they should obtain priority over employees (one of the categories
of preferential creditor) who have priority over the shareholders
in the event of the company’s liquidation.105
The preferential debts of the employees are set out in Sch.6 to
IA 1986 and include four months’ wages per employee up to a
maximum prescribed by the Secretary of State and accrued
holiday remuneration.106 In the case of a floating charge, the
relevant date for quantifying the preferential debts is the date of
the appointment of the receiver by the debenture-holders.107
Anyone who has advanced money for the payment of the
employee debts which would have been preferential is
subrogated to the rights of the employee.108 It is important to
note that the preferential creditors are given priority where a
receiver is appointed with respect to a charge “which, as created,
was a floating charge”109; thus the fact that the charge has
crystallised at the time a receiver is appointed does not result in
preferential debts being denied their statutory priority.110
32–16
Employees have other protections. Where the company becomes
insolvent, an alternative and speedier route for the employee to
recover monies due is by way of application to the Secretary of
State. Under Pt XII of the Employment Rights Act 1996, the
Secretary of State is obliged to pay certain amounts due and then
is subrogated to the employee’s position in the employer’s
insolvency, including the employee’s preferential rights, insofar
as the debts discharged would have preferential status against the
company.111 This provision and its associated priority have
remained, despite the more recent abolition of Crown priorities
in the Enterprise Act 2002 (see below). In practice, the National
Insurance Fund is probably the main beneficiary from this
preference.
Prior to 2002, there were other preferential creditors on the
statutory list, but these have now been all but eliminated by the
Enterprise Act 2002 s.251, which abolished Crown preferences
entirely, leaving only employee remuneration and contributions
to pension schemes with a preference in insolvency, together
with levies on coal and steel production, derived from EU law,
which the UK is not free to repeal.
(iii) Sharing with unsecured creditors—the
“prescribed part”
32–17
Employees are not the only preferential creditors to eat into the
assets available to the floating chargee, however. There is also
now limited preferential treatment of general unsecured
creditors. IA 1986 s.176A requires that when the assets of a
company subject to a floating charge are realised, a certain
proportion (the “prescribed part”) must be set aside for the
unsecured creditors.112 The percentage is defined as follows113:
(i) 50 per cent of the first £10,000; plus (ii) 20 per cent of the
remainder; up to a maximum of £600,000.114 The rule does not
apply where (i) the company’s net property is less than
£10,000115; or (ii) the costs of distribution to unsecured creditors
would be disproportionate and the court makes an order
accordingly.116
This segregation of the prescribed part is made at the outset,
and if what remains for the floating charge holder is insufficient
to meet the debt due, the chargee is nevertheless not entitled to
share in the prescribed part, notwithstanding that the outstanding
debt is now unsecured: s.176A(2)(b).117 This provision is
interpreted as confining the prescribed part to the unsecured
creditors until they are paid in full, and only returning any excess
for the benefit of the floating chargeholder once that has
happened, even though the debt secured by the floating charge
may remain only partly paid.
These rules may affect companies other than those registered
under the Act if, but only if, they are being wound up under it.118
(iv) Costs of liquidation
32–18
None of these statutory incursions alters the fact that the first
payments to come out of the floating charge realisations are the
costs and expenses of liquidation (if the company goes into
liquidation),119 in priority even to the receivership expenses.120
This can be a substantial drain on the funds eventually available
to the floating chargee. Then come the costs and expenses of
receivership,121 and only then the preferential creditors, finally
leaving a pool (if the parties are lucky) that is split between the
floating chargee and the unsecured creditors according to the
formula outlined above.
The position of fixed charge holders is quite different. Their
asset pool is not subjected to claims from liquidators to fund
liquidation expenses, nor from preferential or unsecured
creditors. Any change to these rules would obviously affect both
the terms of credit and the amount of credit available to
chargors, but it is not clear that this adequately or rationally
justifies the present position.
Chargees no doubt expect the expenses of their own
receivership proceedings to be paid in priority to their secured
debt, but the rather odd decision that liquidation expenses
constitute a prior claim on floating charge receipts (but not on
fixed charge receipts) was first reached by the Court of Appeal
in Re Barleycorn Enterprises Ltd122 on the basis that such
receipts were assets of the company, and it is a principle of
insolvency law that the expenses of a company’s liquidation are
payable out of the assets of the company123 in priority to all other
claims.124 This decision was only overruled 35 years later by the
House of Lords in Buchler v Talbot (also known as Re Leyland
Daf),125 which held that liquidation expenses are not payable out
of floating charge assets, those being the property of the chargee
and not the chargor. But the Government then almost
immediately reversed this decision by inserting s.176ZA into IA
1986.126
32–19
So the current position, determined by statute, is that assets
subject to a floating charge (i.e. assets subject to a charge that
was created as a floating charge, even though it will have
crystallised on liquidation) are available for payment of
liquidation expenses. Where several charges have been granted
over the same asset, this rule can lead to nice questions about the
priority as between the various charges: if the charge with first
priority is a floating charge, then the proceeds are subject to
claims for liquidation expenses, but if the first charge (or equal
ranking charge) is a fixed charge, the fixed chargee can realise
the charged assets without making any such provision (either for
the liquidation expenses or for the preferential creditors). This
outcome advantages those many creditors who typically take a
“fixed and floating charge” over all the company’s assets: to the
extent that a fixed charge is possible, it ranks equally with the
floating charge and is protected from these expenses.127 On the
other hand, if the charge with priority is a floating charge, even
if priority was gained by crystallisation, then the assets are
subject to these rules relating to liquidation expenses and
preferential debts.128 These costs, combined with the claims of
the preferential creditors, entail a substantial erosion of the
entitlement of the floating charge holder.129
(v) Powers of the administrator
32–20
The final statutory limitation on the right of a floating charge
holder is para.70 of Sch.B1 to the Insolvency Act 1986 which
empowers an administrator to sell property subject to a charge
which as created was a floating charge without the need to
obtain a court order.130 As protection, the floating charge holder
is given the same priority with respect to any property
representing directly or indirectly the property disposed of as he
would have had with respect to the property subject to the
floating charge.131
Distinguishing between fixed and floating charges
32–21
The previous sections (on priority, preference and invalidity
rules) demonstrate why chargees prefer to have fixed rather than
floating security over the assets of a corporate debtor. Prior to
1986, it was possible to achieve this status simply by showing
that the charge had crystallised (and thereby become a fixed
charge) before the commencement of the liquidation or other
relevant statutory date.132 This loophole was eliminated by IA
1986 s.251, which provides that “floating charge” means “a
charge which, as created, was a floating charge”. This means
that lenders must now ensure that their security, as created, is
categorised as a fixed charge, not a floating charge, if they are to
avoid the disadvantages outlined earlier.
Given the consequences that follow the categorisation of a
charge as fixed or floating, the courts do not simply accept the
labels attached by the parties. The fact that a charge is called a
“fixed” charge by the parties does not necessarily make it so. As
Lord Millet indicated in the Privy Council decision, Agnew v
Commissioner for Inland Revenue (also known as Re
Brumark)133:
“in deciding whether a charge is a fixed charge or a floating charge, the court is
engaged in a two-stage process. At the first stage it must construe the instrument of
charge and seek to gather the intentions of the parties from the language they have
used….The object of this stage of the process…is to ascertain the nature of the
rights and obligations which the parties intended to grant to each other in respect of
the charged assets. Once these have been ascertained, the court can then embark on
the second stage of the process, which is one of categorization, [which] is a matter
of law.”
In Re Spectrum Plus Ltd,134 the House of Lords approved this

approach and held that in characterising a charge as fixed or
floating, the crucial element is the freedom of the company to
use the assets in the ordinary course of its business, not the
nature of the assets charged.135 The House of Lords had to
consider a charge over book debts expressed in the same terms
as that in Siebe Gorman136 (which had been accepted as a fixed
charge: see below). In a decision that overruled Siebe Gorman
and reversed the Court of Appeal below, the House of Lords
held that the charge was floating. This was so, despite the fact
that the debenture prohibited the chargor from charging or
assigning the debts, and required it to pay the proceeds of
collection of the debts into an account with the lending bank (i.e.
despite following the recipe prescribed in Siebe Gorman),
because the debenture did not go on to specify any restrictions
on the chargor’s operation of the account. This very restrictive
definition of a fixed charge removes the element of judgement
permitted by earlier cases: a charge is fixed if and only if the
chargor is legally obliged to preserve the charged assets, or their
permitted substitutes, for the benefit of the chargee. In all other
cases, the charge is floating and therefore subject to the
disadvantageous statutory regime already described.137
32–22
The change effected by this approach can be seen most clearly
by comparing earlier decisions.138 The easy cases remain easy.
Suppose the charge holder is a bank with a charge over a
company’s book debts: if use of the proceeds of the book debts
is not controlled at all, then the charge is floating139; and if use of
the proceeds is completely restricted, then the charge is fixed.140
But if neither the freedom nor the control is absolute, then a
judgement used to be required. In Siebe Gorman & Co Ltd v
Barclays Bank Ltd,141 Slade J (as he then was) held that a
debenture over the borrower’s book debts and its proceeds was
correctly classified by the parties as a fixed charge. The charge
agreement provided that the company could not assign or charge
the secured book debts, and that the proceeds of the debts had to
be paid into a designated bank account with the lending bank,
although the chargor was then free to use the funds in the
account.142 On the basis of Slade J’s decision, this form of
debenture became a precedent and was widely used by most
banks. The mere fact that the assets sought to be charged were a
fluctuating class of present and future assets was not by itself a
fatal objection to the creation of a fixed charge.143 This decision
has now been overruled by Spectrum.
In Re New Bullas Trading Ltd,144 the agreement provided for a
fixed charge over the book debts while they remained
uncollected, but, when collected and paid into a designated
account (unless written instructions to the contrary were given
by the chargee), the monies so received were released from the
fixed charge and became subject to a floating charge. No
directions were ever given. The Court of Appeal, reversing Knox
J, held that the parties were contractually able to reach such an
agreement, and the arrangement constituted a fixed charge over
the (uncollected) book debts, and a floating charge over their
(collected) proceeds in the bank account. This case, too, was
overruled by the House of Lords in Spectrum on the basis that,
since the chargor was free to deal with the charged assets (the
book debts), for its own benefit and without the consent or
interference of the chargee, by collecting the debts and using
their proceeds at will, the charge over the book debts was
therefore floating.
32–23
The restriction on the chargor’s ability to deal with the assets
must be legally binding. In Royal Trust Bank v National
Westminster Bank Plc,145 for example, an instrument creating a
charge over book debts gave the chargee bank the right to
demand that the company should open a dedicated account and
pay all monies received on the collection of the debts into that
account, but the bank never exercised this right, and in practice
monies collected went into the company’s ordinary trading
account. The charge was held by Millett LJ to be floating.146
Similarly, in Re Double S Printers Ltd,147 the chargee, as a
director of the company, had de facto control over the proceeds
of the charged book debts since he had actual control of the bank
account, but this was not backed by any contractual restraint on
their disposal in the instrument itself. As in the Royal Trust Bank
case, it was held that the company’s freedom to deal (at least in
law) led to the conclusion that the charge was floating. And a
legally binding arrangement to create a fixed charge that is in
fact ignored by the parties, who operate as if the charge is
floating, will be treated by the courts as a sham.148
The Spectrum decision has substantially affected the rights of
companies to grant fixed charge securities over what must
remain, for good commercial reasons, their circulating assets,
whether these are physical assets used or manufactured by the
company or the company’s book debts.149 It remains to be seen
what techniques enterprising commercial parties will find to set
up effective substitute security that attracts fewer of the
disadvantages associated with floating charges.
REGISTRATION OF CHARGES
The purpose of a registration system
32–24
Part 25 of the Companies Act 2006 contains provisions relating
to the registration of particular details in relation to certain
charges with the Registrar of Companies. Following a major
reform in 2013, the registration system has now changed from a
mandatory one (and backed by criminal sanctions) to one which
is optional and registration lies at the discretion of the
Company.150 The 2013 changes came about following multiple
rounds of failed attempt to reform the system. To understand
how we have come to where we are today, it may be helpful to
understand the registration requirement, which has been a
feature of the Companies Acts since 1900. What are the possible
purposes of such a registration requirement?
First, and most obvious, the aim might be to give potential
lenders to the company more accurate information about the
company’s apparent wealth by revealing the true extent of any
earlier secured lending151 that may rank ahead of their own
contemplated advances. Such information may also be of interest
to credit analysts, insolvency practitioners appointed upon the
company’s insolvency, shareholders and investors. Secondly
(and for reasons aligned with the first objective), registration
might be treated as an essential part of the process whereby a
person obtains a security interest against the company. Without
registration, the security interest would be void, and could not be
relied upon as against the unsecured creditors of the company in
the latter’s insolvency.152 The usual terminology is that
registration is necessary for the “perfection” of the security.
Thirdly, registration might determine priority among secured
creditors. For example, priorities among secured creditors could
be determined simply by the date of the registration of the
security (and not, for example, by reference to the date of
creation of the security, or by whether the later taker of a
security knew of the earlier one): such a system is generally
referred to as a system of “notice filing”.
32–25
As the law stood before the 2013 changes, not one of these
objectives was delivered. The first failed, since not all security
interests needed to be registered, only those listed in the now-
repealed s.860(7). The second failed for the same reason of
limited application, although within that limited range any
charges that ought to have been registered, but were not, were
void as against the liquidator, administrator and any creditor.153
And the third failed, as it was simply not part of the rules of the
system: instead, if the security was valid (including properly
registered, if it needed to be), then priority was judged according
to the usual common law rules, generally based on the time of
creation, the type of interest created, and the notice to
subsequent security holders.
What is remarkable about this area of law is that proposals for
radical change have been made by highly respected official
bodies for over 40 years, but no change of either a radical or a
tinkering kind was put in place until 2013 (and even that might
be described as merely tinkering).154 Radical change was
proposed by the Crowther Committee in 1971,155 endorsed by
the Cork Committee in 1983,156 and re-proposed by Professor
Diamond in 1989.157 The CLR began in tinkering mood,158 partly
because consultation on the previous radical proposals had not
produced an enthusiastic response, but concluded by advocating
radical reform.159 In this positive spirit, the issue was handed
over to the Law Commission,160 which produced a consultation
paper and a “consultative report”, both favouring radical change,
proposing a comprehensive scheme of notice-filing and
associated priority rules that would extend to all securities and
quasi-securities, whether granted by companies, unincorporated
businesses or individuals.161 Despite the early support, further
consultation on this detailed proposal produced a more cautious
response, and the Law Commission’s final Report on Company
Security Interests in 2005 recommended a less radical scheme,
preserving its recommended notice-filing and priority rules for
charges and outright sales of receivables, but not including
quasi-securities nor, at least to start with, unincorporated
debtors.162
In July 2005, the Department of Trade and Industry (the
predecessor to the Department of Business, Innovation and
Skills) considered these various recommendations and published
a consultation document.163 The results of all this effort can only
be seen as disappointing. CA 2006 has now been amended,
repealing the original Chs 1 and 2 of Pt 25 and replacing them
with Ch.A1, but all to rather minimal effect.
The reformed registration system
What has to be registered
32–26
As already mentioned, there is no longer any requirement to
register security interests. But any charge created by the
company164 may be registered, save for four exceptions,165 and
s.859A(2) compels the registrar to register the charge if a
statement pursuant to s.859D is submitted within the stipulated
time period. In keeping with this general change of direction, the
criminal sanction for non-registration is removed, although it
remains the case that failure to register a registrable charge will
render it void against the administrator, liquidator or any creditor
of the company.166 There is thus a very powerful practical
sanction for non-registration.
It might be thought that the move away from a prescribed list
of charges which were required to be registered (under the now
repealed s.860(7)) would eliminate much of the argument about
whether or not the charge was one that required registration. But
given the invalidity consequences just noted, and in any event as
was very largely the case under the previous rules, all the debate
will simply be about whether the creditor’s interest is a charge at
all,167 not whether it falls within or outside some prescribed list
of charges.
The mechanics of registration
32–27
Registration may be effected by the company itself or by any
person interested in the charge. The chargee is the person most
motivated to register, so as to protect its security.
The period allowed for registration is 21 days beginning with
the day after the date of creation of the charge (s.859A(4)),
unless an order granting an extension can be obtained from the
court, having regard to the restrictive requirements laid down in
s.859F.168 Section 859E defines the “date of creation of the
charge”, with ss.(1) stipulating the date of creation, in respect of
three different types of charge, depending on whether it is a
“standard security” and whether or not it is “created or
evidenced by an instrument”.
Where the debt is satisfied or the charged property or
undertaking has been fully or partially released, a statement to
that effect,169 together with the relevant particulars,170 should be
submitted to the registrar. Upon receipt of such statement and
particulars, the registrar must include in the register a statement
of satisfaction or a statement recording the release of the
charge.171
The register is accessible to the public. Reflecting concerns
for confidentiality and privacy, certain personal information is
not required to be included in the certified copy of the
instrument delivered to the registrar.172
In addition to this registration at Companies House, the
company is no longer required to keep a register of charges on
its undertaking and property.173 However, companies are still
required to keep copies of instruments creating and amending
charges available for inspection.174
Geographical reach of the registration provisions
32–28
The reformed system provides a single scheme for registration
irrespective of the place of incorporation of the company within
the UK (the previous scheme had one system for England, Wales
and Northern Ireland, and a separate one for Scotland). The wide
scope of s.859A means that a charge is registrable whether or not
it is created in the UK, and whether or not the property being
charged is located in the UK, with no special provisions or
exceptions for these types of security.
Despite this, if the secured property is located outside the UK,
then the effectiveness of any security is likely to depend upon
the property law rules applying within that jurisdiction, and not
simply on whether the charge should have been registered in the
UK.175
If the debtor company is not one that is registered in England,
Wales or Scotland, then special rules used to apply. The
requirements under the Overseas Companies (Execution of
Documents and Registration of Charges) Regulations 2009,176
which effectively imposed the same registration requirements on
registered overseas companies, are now repealed.
The effect of failure to register
32–29
As already noted, failure to register is no longer a criminal
offence, although any registrable but unregistered charge created
by the company will be void against the administrator, liquidator
or any creditor of the company.177 The person disadvantaged is
the chargee, not the company; hence the rule allowing any
person with an interest in the charge to register it. If the charge is
not registered,178 the chargee effectively loses its security. To
reduce this hardship, the Act provides that if the charge is void
to any extent for non-registration, then the whole of the sum
thereby secured becomes immediately repayable on demand.179
This, of course, also provides the company with an incentive to
register. In addition, the unregistered charge is not void against
the company (if still solvent), and there is nothing to prevent the
chargee enforcing it (although often to little advantage if the
company is solvent).180 An unsecured creditor has no standing to
prevent the holder of an unregistered but registrable charge from
enforcing it.181
Late registration
32–30
Section 859F enables the company or a person interested in a
charge that has not been registered within 21 days of its creation
to apply to the court for an order extending the time for
registration. This can be done if the court is satisfied that the
failure to register was accidental or inadvertent and not likely to
prejudice creditors or shareholders, or it is satisfied on other
grounds that such relief is just and equitable.182 This repeats
earlier provisions, so older cases remain useful. The jurisdiction
of the court is very wide,183 but the court will not normally make
an order once a winding-up has commenced.184 This is because
winding up is a procedure for the benefit of unsecured creditors,
and registering a charge after the commencement of winding up
would defeat their interests. The court may also refuse to
exercise its discretion if the company is insolvent,185 or if the
company is in administration and it is inevitable that this will
proceed to insolvent liquidation.186
If the court does exercise its discretion, the charge is normally
registered on terms that do not prejudice the secured rights
acquired by third parties prior to the actual date of registration.187
Since a charge does not become ineffective until the normal time
limit has expired, this standard proviso only protects third parties
acting between the date when the charge ought to have been
registered and its actual registration.188 Unsecured creditors are
not protected by such a proviso, and are not part of the court’s
considerations.189
Defective registration
32–31
Section 859M allows applications for rectification of omissions
or misstatements in the registered particulars. The jurisdiction is
defined in the same way as s.859F (see above). The particulars
may, for example, fail to state accurately the property subject to
the charge or the amount secured by the charge.190 Note that the
court’s power is limited to correcting omissions or misstatements
within an entry. The court cannot order the removal of an
entry,191 nor can it order the removal of information that the
company would prefer not to be there,192 and nor does the court’s
jurisdiction extend to particulars which are not required to be
registered.193
Effect of registration
32–32
Where a charge is registered, the Registrar has to issue a
certificate of registration and this is made conclusive evidence
that the requirements of CA 2006 Pt 25 Ch.1A have been
complied with.194 This provides assurance to any transferees of
the security that the validity of its registration cannot be
challenged. The conclusiveness of the certificate means that the
charge will be treated as validly registered even if it was not, but
was registered by mistake195; and even if the registered
particulars are inaccurate.196 Note, however, that where there is
such inaccuracy, registration validates the charge, but the
operative terms are those agreed between the parties
notwithstanding that third parties may have been misled197 by
incorrect particulars.198 Because the certificate is conclusive
evidence of registration, there can be no judicial review of the
Registrar’s decision to register.199
On the other hand, registration does not cure any flaw in the
charge itself as between the parties, so the validity of the charge
remains challengeable by the company.200 In addition,
registration does not determine priority as between competing
security interests (although failure to register renders the charge
void, and therefore registration is a necessary, although not
sufficient, condition to obtaining priority). Priority is determined
by the usual common law and equitable rules of property.
Indeed, the register does not necessarily provide accurate
information to chargees about earlier charges that may rank
ahead of any charge currently being negotiated. This is because
of the “21 day invisibility problem”, whereby if A registers a
charge on 21 January, for example, there is no guarantee that the
company has not created a charge shortly prior to this which
may be registered within 21 days201 and thus have priority. In
applying the normal priority rules as between competing
interests, any person taking a registrable charge over the
company’s property (and perhaps other persons202) will have
constructive notice of any matter that requires registration and
has been disclosed. To take an example, a person taking a
contractual lien is probably not affected by constructive notice of
the register, but a person taking a floating charge would be.
Reform proposals and registration systems
elsewhere
32–33
The fate of recent and not so recent proposals for reform of the
UK registration system has already been described.203 Although
some commentators doubt the need for a registration system at
all,204 most developed countries have one. Indeed, the major
reform proposals most recently rejected in England and Wales
had strong parallels with the systems already operating in the US
(Uniform Commercial Code art.9), Canada, New Zealand and
Australia, and under consideration elsewhere. The most
disappointing feature of the current position in England and
Wales is not simply that the UK has been left with an outdated
regime, but that it missed an opportunity to provide the first draft
for a model European scheme. The work being done by the
EBRD, UNCITRAL and UNIDROIT indicates the demand for
sophisticated input on this front.205 Older editions of this book
provided some detail on the Law Commission’s various 2002–
2005 proposals, assuming that they had not quite been laid to
rest,206 but that detail is not repeated here.207
ENFORCEMENT OF FLOATING CHARGES
Receivers and administrators
32–34
The methods of enforcing a security interest depend upon the
nature of the rights which it confers, and are often in no way
peculiar to company law. However, company law has
traditionally provided a distinct proceeding for the enforcement
of a floating charge by the appointment of a receiver—termed,
since the insolvency reforms of the 1980s, an “administrative
receiver”.208 In this section, therefore, we return to our
preoccupation with the floating charge. A major reform brought
about by the Enterprise Act 2002 was substantially to restrict use
of receivership in the future and to channel the enforcement of
floating charges into the administration procedure, which is a
general procedure for the handling of insolvent companies and
thus not specific to the enforcement of the floating charge.
The main driver behind this reform was the desire to produce
an enforcement mechanism for the floating charge in which the
relevant insolvency practitioner owed duties to all the creditors
of the company and not primarily to the floating charge
holder.209 Consistently with the case law origins of the floating
charge in the nineteenth century, the receiver is a person
appointed out of court by the charge holder under the provisions
of the instrument creating the charge, and who takes
management control of the company in order to realise sufficient
assets to repay the appointor (the charge holder) and then hands
the company back to its directors or to a liquidator,210 depending
on the financial state of the company at the end of the
receivership.
Compared with receivership, administration is a much more
recent mechanism, introduced as a result of the
recommendations of the Cork Committee.211 Ironically, the
statutory administration procedure was based on the common
law receivership. Although the Cork Committee had criticisms
to make of receivership, it took the view that it had one
inestimable advantage over the then principal alternative way of
dealing with an insolvent company, namely winding up. This
was because the receivership was structured on the basis that the
receiver would normally continue to run the company and in the
process save the viable parts of its business (though often by
selling them off to others). Such a “rescue culture” was thought
to be more protective of the interests of all stakeholders in the
business than a winding-up, and so the Committee recommended
that the benefits of receivership be made available where there
was no floating charge, so that the rescue culture could be
extended to such cases.
32–35
Of course, the receivership rules could not simply be applied in
total to a situation where there was no floating charge. In the
absence of a charge holder to appoint the insolvency practitioner,
that task was given to the court, on application by the company
or its creditors. Further, the opportunity was taken of giving the
statutory administrator the benefit of an institution which the
receiver, as a product essentially of private law, had not had,
namely, a moratorium during the administration on the
enforcement of creditors’ rights against the company. Finally,
and in line with the notion of the administration as an extension
of the receivership, the floating charge holder, if such had been
created, was initially given, in effect, a veto over the
appointment of an administrator.212 This last feature was
subsequently removed by the Enterprise Act 2002 and, going in
the opposite direction, is supplanted by a prohibition in the
normal case on the appointment by the floating charge holder of
an administrative receiver.213 Thus under the Enterprise Act
2002, it is not possible to appoint an administrative receiver
under a floating charge created on or after 15 September 2003,
except as in the cases specified in IA 1986 ss.72B–72H. Instead,
the chargee is given the right to appoint an administrator: see IA
1986 Sch.B1 para.14(1). Chargees of charges created prior to
this date may appoint an administrator, but retain the right to
appoint an administrative receiver. The aim, stated in the White
Paper preceding the Enterprise Act 2002, was that
“administrative receivership should cease to be a major
insolvency procedure”.214 The administrative receiver would
instead be replaced by an administrator, who is an officer of the
court, and must “perform his functions in the interests of the
company’s creditors as a whole”.215
Note that a chargee whose charge does not cover the whole or
substantially the whole of the assets of the company can still
appoint a receiver (who will not be an administrative receiver),
and cannot appoint an administrator.
32–36
This policy of statutory patricide was subject, however, to two
qualifications which concern us. First, the White Paper
recognised that the procedure for appointing a receiver had the
advantages for the floating charge holder of being quick, cheap
and entirely under the charge holder’s control. It was further
recognised that the earlier administration procedure would need
to be reformed so as to reproduce those advantages, as far as
possible, within the new structure. “Secured creditors,” said the
White Paper, “should not feel at any risk from our proposals”.216
Accordingly, the current administration procedure is not simply
one that applies more generally, but is itself reformed, a new Pt
II being inserted into the IA 1986 by the Enterprise Act 2002.217
Secondly, the common law administrative receivership system
is retained in certain exceptional cases as mentioned above.218
Most of these do not need to be discussed in a work of this
nature, but one is of crucial importance to us. Under the new IA
1986 s.72B, as interpreted in the new Sch.2A,219 a receiver may
still be appointed where a company issues secured debentures220
and where (a) the security is held by trustees on behalf of the
debenture-holders221; (b) the amount to be raised is at least £50
million222; and (c) the debentures are to be listed or traded on a
regulated market.223 In terms of enforcement, therefore, an
important distinction is drawn between two common forms of
corporate finance. Where the debt is raised from the public by
way of a large-scale offering of securities, the administrative
receivership procedure will continue to be available. Where the
debt is raised from a bank (or syndicate of banks), administration
will be the enforcement procedure, unless one of the other
exceptions contained in IA 1986 ss.72C–72G applies.224 For this
reason it is necessary to discuss briefly both the receivership and
administration methods of enforcing the floating charge.225 We
begin with the older procedure.
Receivership
Appointment of an administrative receiver
32–37
Where an appointment of an administrative receiver remains
possible, because the case falls within one of the exceptions
noted above and the necessary power is contained in an existing
debenture, almost invariably the first step in the enforcement of
a charge is for the debenture-holders or their trustee to obtain the
appointment of a receiver.226 This appointment will normally be
made by the debenture-holder under an express or implied227
power in the debenture, or by the court. Where the appointment
is pursuant to a provision in the debenture then it must be clear
that the conditions justifying the appointment have arisen,
otherwise the receiver will be a trespasser and also liable for
conversion.228
Once the conditions for the enforcement of a charge have
arisen, English law places few constraints on the rights of the
security holder to enforce the charge, and in this respect the
regime is pro-security holder. For example, if the chargee is
entitled to payment on demand, it is only necessary to give the
company reasonable time to put into effect the mechanics of
payment, not reasonable time in which to raise the funds to make
payment.229 Indeed, if the debtor makes it clear that funds are not
available, this constitutes a sufficient act of default and there is
no need to allow the debtor any time before treating it as being
in default.230 In addition, the chargee is not under any duty to the
debtor company to refrain from exercising its rights merely
because by doing so it could avoid loss to the company,231 nor to
exercise its rights promptly because the security is declining in
value.232
If the security is not yet enforceable, but the debenture-
holder’s position is in jeopardy, the court may exercise its
inherent discretion to appoint a receiver.233 This is now very rare,
but can be done by a debenture-holder’s action, taken by one of
the debenture-holders, on behalf of himself and all other holders.
“Jeopardy” is established when, for example, execution is about
to be levied against the company,234 or when the company
proposes to distribute to its members its one remaining asset.235
“Jeopardy” is not assumed whenever the circumstances make it
unreasonable, in the interests of the debenture-holder, that the
company should retain power to dispose of the property subject
to the charge. This is the statutory definition under Scottish
law,236 but the English decisions hardly go so far, and the fact
that the assets on realisation would not repay the debentures in
full has been held insufficient.237
Despite this option, appointment out of court is certainly
preferable. The procedure in a debenture-holders’ action is
lamentably expensive and dilatory, since the receiver, as an
officer of the court, will have to work under its closest
supervision and constant applications will have to be made in
chambers throughout the duration of the receivership, which
may last years if a complicated realisation is involved. Since the
1986 Act allows a receiver, even though appointed out of court,
to obtain the court’s directions,238 it is difficult to envisage
circumstances in which an application to the court can be
justified if the cheaper alternative is available, and the
professional adviser who recommended it would be laying
himself open to grave risk of criticism. In the discussion which
follows, it will be assumed that what is being referred to is a
receiver appointed out of court.
Function and status of the receiver and administrative
receiver
32–38
The 1986 Insolvency Act views the appointment of an
administrative receiver as being in some respects similar to
insolvency proceedings and regulates it accordingly.239 Thus
administrative receivers must be qualified to act as insolvency
practitioners240 and can only be removed from office by the
court.241 Also, like the liquidator, the administrative receiver can
compel those involved in the affairs of the company to provide
him or her with information relating to the company’s affairs,242
and is also obliged to report to the Secretary of State if he or she
forms the opinion that the conduct of the directors makes any of
them unfit to act as director of a company.243 The effect of the
appointment of a receiver upon the company directors is that
they no longer have any authority to deal with the company
property. They do however officially remain in office and
continue to be liable for the submission of documents to
Companies House, and may still institute proceedings in the
company’s name. In other ways, too, the appointment of a
receiver must not be equated with that of a liquidator: (i) where a
receiver is appointed, the company need not go into
liquidation,244 and if it does, the same person who acted as
receiver will normally not be appointed liquidator; (ii)
liquidation is a class action designed to protect the interests of
the unsecured creditors, whereas, as we shall see, receivership is
designed to protect the interests of the security holders who
appointed the receiver and it is for this reason that a receiver can
be appointed even where the company is in liquidation245; (iii)
liquidation terminates the trading power of the company,246
whereas this is not the case with receivership; (iv) a liquidator
has power to disclaim onerous property,247 something not
possible in the case of receivership; (v) a liquidator in a
compulsory winding-up is an officer of the court,248 whereas this
is not the case with a receiver unless appointed by the court249;
(vi) lastly, it is easier to obtain recognition of liquidation as
opposed to receivership in proceedings in foreign courts.250
These are the most important differences but there are others,
particularly with respect to liability on contracts.251
An administrative receiver might be assumed to be the agent
of those who appointed him but this is not the case; IA 1986 s.44
makes him the agent of the company.252 The reason for this is to
avoid those who appointed the administrative receiver being
treated as mortgagees in possession253 or being held liable for the
receiver’s acts, which would be the case were the receiver to be
treated as their agent.254 As many have pointed out, the
receiver’s agency is a peculiar form of agency. This is because
the primary responsibility of the receiver is to protect the
interests of the security holders and to realise the charged assets
for their benefit.255 Nevertheless, the way the receiver carries out
these responsibilities will profoundly affect parties other than the
chargee. If the secured assets are not realised for their full value
and there is a shortfall in paying the secured debt, the shortfall
may become payable by a guarantor who might feel aggrieved to
be called upon if the shortfall seemed unnecessary. Equally, the
company—and, if it is insolvent, its creditors—will feel
aggrieved if the value of secured asset has been in some way
wasted on meeting only the secured creditor’s claims when a
more careful exercise might have generated a surplus for the
benefit of the company. For these reasons, there are a number of
parties interested in the various duties the receiver owes in the
exercise of his or her role.
This has been a fraught question. The powers of
administrative receivers are extensive and they will have
complete control over the assets subject to the charge under
which the appointment was made.256 In addition they may apply
to the court for an order empowering them to dispose of property
subject to a prior charge.257 In the exercise of these extensive
powers, the courts have struggled with the standards that ought
to be imposed. The low water mark was probably the decision of
the Privy Council in Downsview Nominees Ltd v First City
Corp,258 of course much welcomed by insolvency practitioners.
Lord Templeman in that case held that the receiver owed no
general common law duty of care to interested parties; his duties
lay exclusively in equity, which required him merely to act in
good faith, although if he did decide to sell the property (as he
invariably would), then he was required to take reasonable care
to obtain a proper price. Nevertheless, and predictably, the
receiver’s role could not withstand the onslaught in the
development of common law principles of the duty of care. The
position now is that receivers are under a duty to the debtor
company to take reasonable care to obtain the best price
reasonably possible at the time of sale259; this duty is also owed
to a guarantor of the company’s debts.260 However, as the
receiver in exercising a power of sale is in a position analogous
to that of a mortgagee, receivers are not obliged to postpone sale
in order to obtain a better price or to adopt a piecemeal method
of sale.261 If they delay the sale, they are also under a duty, while
they manage the property, to manage it with reasonable care and
due diligence.262
32–39
The basis of the receiver’s duty set out above was initially
considered to involve a controversial extension of the common
law of negligence to supplement equity,263 but the courts now
tend to treat it as something which flows directly from the
special nature of the relationship between the chargee and
chargor.264 The result is that the receiver must act in good faith,
and not for improper purposes, and must have regard to the
chargor’s interests while at the same time allowing that the
chargee’s interests are paramount. The most recent significant
English authority, Medforth v Blake,265 treats the standard of care
required in equity as the same as that required at common law,
and in that case held the receivers, who negligently conducted
the business of which they had taken control, to be liable to the
mortgagor, who suffered loss when (after the secured debt had
been discharged) the business was handed back to him in a less
good state than if it had been properly run by the receivers.
Although this decision goes some way towards protecting debtor
companies, and, by extension, their unsecured creditors, from the
incompetence of receivers, the Court of Appeal made it clear
that it was not purporting to overturn the principle that the
primary duty of the receiver is to bring about the repayment of
the debt owed to the secured creditor. In this particular case,
there was no conflict of interest between the mortgagor and
mortgagee, since both potentially suffered harm as a result of the
receivers’ incompetence.266 The case, thus, is not authority for
the proposition that it is negligent for the receivers to give
primacy to the appointor’s interests as against those of the
mortgagor (or the company and its unsecured creditors).
A person dealing with an administrative receiver in good faith
and for value is not bound to enquire if the receiver is acting
within his or her powers.267 Unlike a winding-up, the board of
directors is not discharged on the appointment of a receiver, but
the directors’ powers are substantially superseded since they
cannot act so as to interfere with the discharge by the receiver of
his or her responsibilities and accordingly their powers are
suspended “so far as is requisite to enable a receiver to discharge
his functions”.268 Given the extent of the powers of the
administrative receiver, the directors will have a miniscule
aperture within which they are free to exercise their powers.
However, they do possess certain residual powers and, for
example, it has been held that they can bring proceedings in the
company’s name.269 This authority has been doubted because of
the conflict that would arise were the receiver and the directors
to have different views on whether an action should be brought,
and also on the handling of any counterclaim.270 Whatever the
status of the Newhart decision,271 it is clear that it will be
confined to very narrow limits, since to allow every such action
would interfere with the primary duties of the receiver to protect
the interests of the security holder.272 On the other hand, the
directors can certainly take proceedings to challenge the validity
of the receiver’s appointment,273 or sue the receiver for breach of
duty,274 or oppose a petition to wind up the company.275
Finally, as the directors remain in office, the receiver is under
an obligation to provide the directors with the information that
they request to enable them to comply with their reporting
obligations under the Companies Act.276 The receiver is also
obliged at the end of his receivership to hand over to the
company any documents belonging to the company other than
those brought into existence for the discharge of his own
professional duties or his duties to the chargee.277
The receiver’s liability with respect to contracts
32–40
An administrative receiver taking over the management of a
company will need to manage the company’s existing (partly
performed) contracts, and will need to enter into new contracts
on behalf of the company. These raise separate issues.
Consider first the contracts already in existence when the
receiver is appointed. As an administrative receiver is the agent
of the company, the appointment does not of itself affect existing
contracts. If, in the interests of the chargee, the receiver causes
the company to repudiate these contracts, the injured parties will
be left to their normal contractual remedies in damages, but with
the company unlikely to be left with the funds to pay such
claims.278 Since, in doing this, the receiver acts as an agent of the
company, he cannot be liable for the tort of inducing a breach of
contract.279 The only exceptions to this general rule are the
normal exceptions applying with contracts that are specifically
enforceable280 or subject to injunctions: the appointment of an
administrative receiver makes no difference to the court’s
response in these cases. On the other hand, if the receiver does
not repudiate the contract, he is said to “adopt” it.281 This is
rather misleading terminology: the contract is not a new contract
at all; it remains the contract entered into by the company on the
terms agreed by the company. Indeed, this itself can cause
problems for receivers where adoption brings into play
contractual liens282 or set-offs.283
As a matter of policy, it seems desirable to impose a limited
duty on the receiver to continue to trade or otherwise act
positively where this would not jeopardise the chargee’s interests
and a failure to do so would impose gratuitous damage on the
company.284 Not to extend his duty in this way would stretch the
pro-creditor bias of receivership to ridiculous lengths. But, as
described below, this obligation is limited: the primary purpose
of receivership is to realise the assets for the benefit of the
secured creditor.
32–41
Special mention should be made of contracts of employment.
These contracts are not automatically terminated by the
receiver’s appointment unless the receiver does something which
is inconsistent with the continuation of the contract,285 for
example by selling the company’s business.286 If the receiver
sees no hope of selling the business as a going concern, then he
is likely to dismiss the employees forthwith. Such dismissal will
likely be because of redundancy, and will almost certainly not be
unfair dismissal (provided there is no unfair selection of the
persons to be dismissed). The receiver may take some time to
decide what to do. Nothing that is done or omitted to be done in
the first 14 days of the receiver’s appointment is taken as
showing that the receiver has adopted a contract of
employment.287 After that, if nothing is done, the receiver will be
taken to have impliedly adopted these contracts.288 Once
adopted, the administrative receiver is, by statute, personally
liable for the company’s liability for wages or salary,
contributions to an occupational pension scheme, holiday and
sick pay, and deductions for income tax and national
insurance,289 from the date of adoption of the contract.290 The
administrative receiver cannot contract out of this liability for
adopted employment contracts,291 but is entitled to an indemnity
out of the assets of the company.292
Where the receiver enters into new contracts, this is done as
agent for the company, and the contracts will therefore be
binding on the company. More importantly, however, the
receiver is also personally liable by statute on any contract
entered into on behalf of the company unless the contract
provides otherwise.293 Exclusion of liability may be express or
implied. Administrative receivers will invariably try to contract
out of liability. They will in any event have a statutory indemnity
out of the company’s assets294 and will usually also have an
indemnity from the chargee.
Publicity of appointment and reports
32–42
Where a receiver or manager is appointed then this must be
stated in various business documents relating to the company.295
All receivers also have to make prescribed returns to the
Registrar,296 and the administrative receiver has to report to
creditors, including unsecured creditors, but will not have to
report to those who have opted out of receiving notices.297 A
receiver who fails to comply with his reporting obligations can
be ordered to do so298 and, more importantly, can be disqualified
from acting as a receiver or manager.299 There is no similar
obligation to report where a debenture-holder enters into
possession and it has been recommended that this omission be
corrected.300
Administration301
Function
32–43
The “rescue” goals of the revised administration procedure are
clearly displayed in the current definition of the objectives of
administration, set out in Sch.B1 to the IA 1986. Three
objectives are listed but are put into a clear hierarchy. Priority is
given to “rescuing the company as a going concern”,302 which is
the objective which the administrator must pursue unless he or
she thinks it is not practicable to achieve it or that the second
objective would better serve the creditors’ needs.303 That second
objective is “achieving a better result for the company’s
creditors as a whole than would be likely if the company were
wound up”.304 Thus, preservation of the company as a going
concern, to the benefit, for example, of employees, is not
essential if the creditors would be worse off as a result. The third
objective is “realising property in order to make a distribution to
one or more secured or preferential creditors”.305 The
administrator may pursue this objective only if it is not
reasonably practicable to achieve the other two objectives, and it
must be pursued in such a way that it will “not unnecessarily
harm the interests of the other creditors of the company as a
whole”.306 Subject to the qualification implied where the
administrator legitimately pursues the third objective, the
administrator must act “in the interests of the company’s
creditors as a whole”.307
Although on an application to the court, the purpose of the
proposed administration has to be stated, that purpose does not
have to be confined to a single goal. It is more likely, therefore,
that the statutory purposes will simply control the way in which
the administrator, after appointment, exercises his or her powers.
The floating charge holder may read these provisions with some
gloom, for the priority given to the second objective over the
third appears to mean that if the creditors as a whole would be
better off than in a winding-up, the administrator should pursue
that course of action, even if the charge holder will be worse
off.308
Appointment
32–44
As is now generally required in the insolvency area, only a
qualified insolvency practitioner may be appointed as an
administrator.309 An administrator may be appointed by the
court, on application by the company, its directors or one or
more creditors,310 where the company is or is likely to become
unable to pay its debts311 and the appointment is “reasonably
likely” to achieve one of the specified purposes.312 This seems to
put into statutory form the position at which the courts had
arrived under the old law, which used a different form of
wording, namely, that there must be a “real prospect” that the
purpose or purposes will be achieved.313 The change is
important, for a higher hurdle materially increases the costs (as
well as decreasing the chances) of securing an administration
order, especially by encouraging applicants to commission an
extensive report by an independent person in support of the
application.314
An administrator may also be appointed out of court, and this
now is the preferred route in the interest of saving costs. The
ability to do this315 was one of the important changes introduced
by the Enterprise Act 2002, to reduce opposition to the proposals
from banks.316 The holder of a “qualifying floating charge”,317
being a charge or charges which relate to the whole or
substantially the whole of the company’s property, may appoint
an administrator out of court where the instrument creating the
charge gives the holder the power to do so.318 Such an
administrator will still be an officer of the court,319 and what has
been said above about the objectives of the administration still
applies. Notice and other documents have to be filed with the
court after the appointment.320 If it turns out that the appointment
was invalid (for example, because the appointor did not hold a
valid floating charge),321 the court may order the appointor to
indemnify the person appointed against liability arising (for
example, to the company in trespass or conversion).322
The company or the directors may also appoint an
administrator out of court,323 but not if a receiver is in office,324
and five days’ notice of the intention to appoint has to be given
to any floating charge holder, whose consent to the appointment
is required.325 This has two consequences. First, it gives the
floating charge holder the opportunity to act first and appoint an
administrator of its own choosing.326 Secondly, in those cases
where the charge holder still has the right to appoint an
administrative receiver,327 such an appointment may be made
instead. Alternatively, the floating charge holder could simply
block the appointment proposed by the company or its directors
by not giving consent. In such a case the company or its
directors would presumably apply to the court for an
appointment. Indeed, it appears that the court can appoint an
administrator even though a receiver has already been
appointed,328 but the situations in which the court may exercise
this power are limited.329 Thus, where the appointment of an
administrative receiver is still allowed under the new regime, it
is logically given priority over the appointment of an
administrator.
Powers and duties
32–45
The first task of the administrator is to produce a set of proposals
for the future of the company’s business, which are put before its
creditors for their approval. This must be done within eight
weeks of appointment, and sooner if possible.330 The time limit
may be extended by the court on application by the
administrator.331 Notice of the proposals has to be given to
members as well as creditors who have not opted out of
receiving notice,332 since in some cases the members may have a
financial interest in the success of the rescue. A wide range of
outcomes is possible in the case of an administration. They do
not need to be examined in detail here. They may be successful,
as in acceptance by the creditors of proposals for a restructuring
of their rights under a scheme of arrangement333 that enables the
company to come out of administration and be returned to its
previous management, although perhaps with the former
creditors now owning a majority of the shares. They may be
unsuccessful, as in rejection of the administrator’s plans by the
creditors and the company being put into liquidation. And there
are many variations in between. Whatever the decision reached,
the administrator must report the outcome to the court and to the
Registrar. Failure to do so attracts a fine.334 It is worth noting
that amendments brought about by the Small Business,
Enterprise and Employment Act 2015 has simplified the
insolvency procedure by removing the need for creditors’
meetings as the default means of decision making.
Between appointment and approval of the proposals, the
administrator may exercise all the powers conferred by IA 1986
Sch.B1 para.59 and Sch.1, and this includes the power to dispose
of the company’s property if an attractive offer is made.335
During the administration process, the company benefits from
a moratorium on both winding up336 and legal proceedings for
the enforcement of claims against it, except, in the latter case,
with the consent of the administrator or the court.337 A somewhat
more limited moratorium also applies from the moment any
formal step is taken to seek an administration order.338 The
administrator has general authority to manage the company’s
business, acting as its agent,339 as well as the powers specified in
Sch.1 to the Act340; may appoint and remove directors341; and, as
we have noted,342 may dispose of property subject to the floating
charge343 and, with the consent of the court, even property
subject to a fixed charge.344 However, the court may so order
only if the court thinks the disposal would be likely to promote
the purposes of the administration and there is applied to
discharging the security the net proceeds of the disposal and any
additional amount needed to bring that amount up to the market
value of the asset. Since the moratorium will prevent the charge
holders (fixed or floating) from enforcing their security, the
position may be that charge holders not only cannot repossess
their property but that the administrator has disposed of it.
However, the floating charge holder will have his or her security
transferred to the proceeds of the sale,345 whilst the conditions
attached to the court’s power to sanction a sale over property in
relation to which a fixed charge obtains mean the only detriment
to the fixed charge holder is that he cannot control the timing of
the realisation of his security, which will be undertaken by the
administrator, probably as part of a larger disposal, instead of by
the security holder as a single transaction.
32–46
Overall, the administrator has all the powers normally vested in
the board of directors,346 now supplemented by some of those
given to liquidators, specifically the power to bring actions
against directors claiming compensation on behalf of the
company for fraudulent or wrongful trading.347 In contrast with
an administrative receiver,348 he or she is not personally liable on
contracts entered into on the company’s behalf. However, the
Act contains an alternative mechanism for ensuring that the
administrator secures the discharge of the obligations he or she
causes the company to incur. When the administrator
relinquishes office, undischarged liabilities are charged on the
company’s assets and rank ahead of any floating charge or the
administrator’s own remuneration.349
The moratorium, which, as we have noted, was not available
to the administrative receiver, may prove an important means of
reconciling the banks to the use of the administration. Although
it prevents them from enforcing their security, it also keeps
unsecured creditors at bay and may promote the sale of the
company’s business at a higher price, from which those with
security will be the first to benefit financially. However, the
impact of the moratorium depends in part on how willing the
courts are to grant leave. Some guidance on this was given by
the Court of Appeal in Re Atlantic Computer Systems (No.1)350
of which the following is a summary. Since the prohibitions in
s.11 are intended to assist the administrator to achieve the
purpose of the administration, it is for the person who seeks
leave (or consent) to make out a case for being granted it. If
leave is unlikely to impede the achievement of that purpose,
leave should normally be given. In other cases it is necessary to
carry out a balancing exercise, weighing the legitimate interests
of the applicant and those of the other creditors of the company.
In carrying out that exercise the underlying principle is that an
administration should not be conducted at the expense of those
who have proprietary rights which they are seeking to exercise,
except to the extent that this may be inevitable if the purpose of
the administration is to succeed and even then only to a limited
extent. Thus, it will normally be a sufficient ground for granting
leave if significant loss would otherwise be suffered by the
applicant, unless the loss to others would be significantly
greater. In assessing the respective losses all the circumstances
relating to the administration should be taken into account and
regard paid to how probable they are likely to be. The conduct of
the respective parties may sometimes also be relevant. Similar
considerations apply to decisions regarding imposing terms.
Of course, an unpaid creditor of a company in administration
does not have an obligation to continue with supplies or to make
further advances unless contractually or statutorily required to do
so.351 Thus, the moratorium may protect the company in
administration from pressure from its existing creditors, but it
falls far short of guaranteeing that the administrator will be able
to carry on the business effectively during the administration.
That is likely to require fresh funding and the availability (or
not) of such funding is one of the matters the court needs to
consider when deciding whether to appoint an administrator.
Protections for creditors and members as against the
administrator
32–47
It is clear that an administration may give rise to many of the
same agency problems which we have examined in previous
chapters in relation to companies that are going concerns. There
may be conflicts between majority and minority creditors, and
administrators may exercise their wide powers unfairly or
incompetently. The Schedule provides some remedies aimed at
such conduct. First, administrator proposals to the creditors may
not involve downgrading the rights of secured or preferential
creditors, without their consent or use of a scheme of
arrangement or a company voluntary arrangement (which
contain mechanisms for the protection of minorities).352 Thus,
although the secured creditor is put into a collective insolvency
procedure, it is given specific protection that the administrator
may not propose action which “affects the right of a secured
creditor to enforce his security”.353 Secondly, and more
generally, protection against unfair prejudice354 is extended to
actions of the administrator, so that any member or creditor of
the company can apply to the court for relief355 on the grounds
that the administrator is acting, has acted or proposes to act in a
way which is “unfairly harms” the interests of the applicant.356 It
is not clear whether the substitution of the phrase “unfairly
harms” for the phrase “unfairly prejudicial”, which is used in the
equivalent CA provision357 and was used in the original version
of the IA 1986358 is intended to produce a substantive change.
Thirdly, an application can also be made on the grounds that the
administrator “is not performing his functions as quickly or
efficiently as is reasonably practicable”,359 thus giving members
and creditors an uncomplicated route to complain about
negligence on the part of the administrator.360 Fourthly, the
misfeasance provisions from IA 1986 s.212361 are elaborated in
their application to administrators.362 Together, these last three
provisions lay down standards by which the creditors and
members can challenge conduct of the administrator which
either falls below the standard of competence they are entitled to
expect or which does not give appropriate weight to their
interests.363
Publication of appointment
32–48
A newly appointed administrator must notify the company, the
Registrar, and the company’s creditors of the appointment.364
While the company is in administration, every business
document must state that fact and name the administrator.365
Administration expenses
32–49
Debts or liabilities arising out of contracts entered into by the
administrator have priority (often called “super-priority”) over
the administrator’s own remuneration and expenses.366 This can
amount to a hefty liability. The expenses of administration,
including the administrator’s remuneration, then have priority
over a debt secured by a floating charge.367 After this, the normal
priority rules apply.368
End of administration
32–50
Under IA 1986 s.76, the appointment of an administrator ceases
to have effect at the end of the period of one year beginning with
the date on which the appointment took effect, unless the term of
office is extended by the court or with the consent of the
creditors. The term may be extended by consent only once369 and
by no more than one year.370
Alternatively, on the application of the administrator, the court
may provide for the appointment of the administrator to cease to
have effect, if the purpose of the administration has been
sufficiently achieved in relation to the company.371
Administrators are often keen for these provisions to be
interpreted pragmatically in order to enable them to escape
accruing business liabilities; the courts have generally
complied.372 The administrator may now also be obliged to make
such an application if the company’s creditors decide that he
must do so.373
CONCLUSION
32–51
A company must be able to raise debt finance, and so it must be
able to grant effective security to lenders. It is possible to
conceive of a legal regime in which the position of companies
giving security is in essence no different from that of any other
borrower. There would inevitably be some company law aspects
to security transactions—for example, are the directors
authorised to enter into the particular transaction contemplated?
—but those company law aspects would not be unique to
security transactions. As we saw in Ch.7, the issue of directors’
authority can easily arise in relation to transactions that do not
involve a grant of security.
In fact, however, as this chapter has shown, the current law on
the granting of security does have two features that are specific
to the corporate nature of the debtor. These are the availability of
the floating charge and the system of registration of charges
granted by companies. We have also seen, however, that the
modern tendency is to whittle away these uniquely corporate
features. Thus, the unique enforcement mechanism for the
floating charge by means of the appointment of an
administrative receiver has been substantially replaced by the
general insolvency mechanism of the appointment of an
administrator, as introduced by the Enterprise Act 2002. Going
further, the Law Commission has queried the justification for
retaining the provisions in the Bills of Sales Acts which prevent
non-corporate businesses granting floating charges (as have
other bodies before them).374 Equally, in its proposals for radical
reform of the companies charges system, the Law Commission
clearly regards the optimal solution as being a registration
system applying to charges (and quasi-securities) granted by all
debtors,375 although its proposals were not adopted. Could it be
that, like corporate insolvency and public offers of corporate
securities before them, security interests granted by companies is
a topic which is on its way out of core company law, in order to
join up with the rules that apply where a company is not
involved?
2
See paras 32–24 et seq., below.
3
See paras 32–34 et seq., below.
4 See Chs 7 and 16.
5 For more detail, see H.G. Beale, M. Bridge, L. Gullifer and E. Lomnicka, The Law of
Security and Title-Based Financing, 2nd edn (Oxford: OUP, 2012); L. Gullifer, Goode
on Legal Problems of Credit and Security, 5th edn (London: Sweet & Maxwell, 2015);
E. McKendrick, Goode on Commercial Law, 4th edn (London: LexisNexis, 2010), Pt 4,
especially Ch.25; P. Ali, The Law of Secured Finance (Oxford: OUP, 2002); F. Oditah,
Legal Aspects of Receivables Financing (London: Sweet & Maxwell, 1991), Ch.1; and
M. Bridge, L. Gullifer, G. McMeel and S. Worthington, The Law of Personal Property
(London, Sweet & Maxwell, 2013), Ch.7.
6 See s.859A(7), defining “charge” to include mortgage, and any other form of security.
7
Bristol Airport Plc v Powdrill [1990] Ch. 744 at 760. Note that the property of a third
party can also be made available by way of security, without any associated personal
promise by the third party to meet the secured obligation: Re Bank of Credit and
Commerce International SA (No.8), Re [1998] A.C. 214. See also Re Curtain Dream Plc
[1990] B.C.L.C. 925 at 935–937; Welsh Development Agency v Export Finance Co Ltd
[1992] B.C.L.C. 148; IA 1986 s.248. A charge can be created not only to secure the
payment of a monetary obligation but also to secure other types of obligations: Re
Cosslett (Contractors) Ltd [1998] Ch. 495.
8 Smith (Administrator of Cosslett (Contractors) Ltd) v Bridgend CBC [2002] 1 A.C.
336, [53].
9
A common law lien arises when possession of goods is given to a creditor otherwise
than for security—for example, so that the goods can be stored, repaired or transported
—and the creditor is given, by custom, statute or contract, a right to retain the goods
(and only that right, unless the parties expand upon it by contract) if the debt is not
satisfied.
10
Re Cosslett (Contractors) Ltd [1998] Ch. 495 at 508 (Millett LJ).
11
Most securities created by companies are charges (using that term in its technical
sense). A legal mortgage is created if the borrower transfers legal title to the property to
the lender on the condition that it will be given back when the obligation is met. An
equitable mortgage is created in the same way, but where the transfer is of equitable title
rather than legal title; an equitable mortgage is also created by a specifically enforceable
contract to create a legal mortgage. Note that a legal mortgage of land is no longer
possible: these arrangements are now deemed by statute to create a legal charge (LPA
1925 ss.85(1) and 86(1)). All other charges, using “charge” in its technical sense, are
equitable charges. These arise where, by contract, a specific item of property is
appropriated to, or made answerable for, meeting the debtor’s obligation.
12 “Repos”, or sale and repurchase agreements, may equally be subjected to this
analysis: on the surface they appear to be much like mortgages, but if the lender has the
right to deal with the underlying securities and return only their equivalent, then the
agreement is a true sale (plus an agreement the other way to sell equivalent securities),
not a mortgage: Lehman Bros International (Europe) (In Administration) [2011] EWCA
Civ 1544 CA.
13Beconwood Securities Pty Ltd v ANZ Banking Group Ltd [2008] FCA 594 Aust.
Fed.Ct.; Lehman Bros International (Europe) (In Administration) [2011] EWCA Civ
1544 CA.
14
Re Bond Worth Ltd [1980] Ch. 228 at 250. These rights are, however, proprietary, and
protected as such. For some of the difficulties in distinguishing an equitable charge from
a mortgage in terms of the quality of the security granted, see Oditah, above, fn.5,
pp.94–96. Also see Re Leyland Daf Ltd; Buchler v Talbot [2004] 2 A.C. 298, where
Lords Hoffmann (at [29]) and Millett (at [51]) used the language of mortgages, not
charges, in describing the chargor of a crystallised charge as having only an equity of
redemption.
15
The usual provision is that, in the event of specified types of default by the chargor,
the chargee is entitled to appoint a receiver to act as the agent of the chargor to sell the
charged assets and use the proceeds to repay the outstanding debt to the chargee, after
first paying those with statutory priorities, as discussed later.
16
To ensure that the pledgee does not breach obligations to the pledgor.
17Although the right to sell is often expressly granted by contract. Subsequent security
holders of course take subject to the lien: George Barker (Transport) Ltd v Eynon [1974]
1 W.L.R. 462.
18 Functionally, but not legally, these arrangements operate much like a chattel mortgage
(Welsh Development Agency v Export Finance Co Ltd [1991] B.C.L.C. 936 at 950;
[1992] B.C.L.C. 148), and as a result, there have been several attempts to align their
treatment at law with the treatment of other security interests, but so far unsuccessfully.
19 See below, paras 32–26 et seq.
20
The secured creditor is, alternatively, also be able to follow the original secured
property into the hands of third parties, and assert its property rights against them, unless
the property is acquired by a bona fide purchaser for value without notice of the earlier
equitable interest.
21
IA 1986 s.42(1) and Sch.1, for example.
22
Sowman v Samuel (David) Trust Ltd [1978] 1 W.L.R. 22; Re Potters Oils Ltd [1986]
1 W.L.R. 201.
23
See paras 32–15 and 32–18, below.
24
26
Although the chargee has to be careful not to become a shadow director and thus, e.g.,
potentially liable under the IA 1986 s.214. The chances of this are, on the whole,
minimal: see Re Hydrodam (Corby) Ltd [1994] 2 B.C.L.C. 180.
27
For an unsuccessful attempt to challenge a charge precluding the creation of charges
in favour of third parties as being in violation of arts 85 and 86 of the EC Treaty, see
Oakdale Richmond Ltd v National Westminster Bank Plc [1996] B.C.C. 919.
28
Although see below, paras 32–15 to 32–17, for the rules on preferred creditors and on
the prescribed fund to be dedicated to unsecured creditors from floating charge
realisations.
29
And if the proceeds are more than sufficient to repay all the secured debts (and other
claims on the secured assets—see below, paras 32–13 to 32–19 (preferred creditors,
etc.)), then the excess is returned to the debtor/chargor.
30 Although see para.32–14, below, for particular rules relating to floating charges.
31
See paras 2–16 and 2–31, above. For valuable analyses of the floating charge see J.
Getzler and J. Payne, Company Charges: Spectrum and Beyond (Oxford: OUP, 2006);
E. McKendrick, Goode on Commercial Law, 4th edn (London: Penguin, 2010), Ch.25;
W.J. Gough, Company Charges, 2nd edn (London: LexisNexis, 1996), Ch.5. Floating
charges and receivers in Scotland are dealt with by CA 2006 Pt 25 Ch.2, and IA 1986 Pt
III Ch.II.
32
33 Re Yorkshire Woolcombers’ Association Ltd [1903] 2 Ch. 284 at 295 (Romer LJ);
Illingworth v Houldsworth [1904] A.C. 355 HL. In practice, it is usual to state
specifically that the charge is “by way of floating charge” but it suffices if it is expressed
to be on the “undertaking” or the like: Re Royal Mail Co (1870) L.R. 5 Ch. App. 318; Re
Florence Land and Public Works Co (1879) 10 Ch.D. 530 CA; Re Colonial Trusts Corp
(1880) 15 Ch.D. 465.
34
Re Spectrum Plus Ltd [2005] 2 A.C. 680 HL.
35Geilfuss v Corrigan, 95 Wis. 651, 70 N.W. 306 (1897); Benedict v Ratner, 268 U.S.
354, 45 S.Ct. 566, 69 L.Ed. 991 (1925).
36The commercial inconvenience of this judicial approach probably contributed to the
early adoption of an alternative mechanism to achieve similar ends by way of the
Uniform Commercial Code art.9.
37 Re Panama, New Zealand and Australian Royal Mail Co (1870) 5 Ch. App. 318 CA,
provided early confirmation that this is possible.
38
IA 1986 s.251 provides that “floating charge” means “a charge which, as created, was
a floating charge”. See below, para.32–14.
39
40
See paras 32–21 et seq. for the way the courts classify charges as fixed or floating.
41
And this can be a fraught question given the current registration requirements. See
below, para.32–11.
42
43
44
The language is often muddled: crystallisation is described as operating as an
equitable assignment (by way of charge): George Barker (Transport) Ltd v Enyon
[1974] 1 W.L.R. 462 at 467, 471, 475; or as conversion to a specific (fixed) charge: Re
Griffin Hotel Co Ltd [1941] Ch. 129. And see the assertion that the company has an
equity of redemption: Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) at
[1401].
45 A floating charge agreement does not usually provide for crystallisation over part only
of the assets to which it relates. There is no doctrinal reason for this. Partial
crystallisation could, theoretically, be provided for by agreement, so long as the class of
assets to be affected could be specified with certainty so as to define those which the
chargor can and cannot deal with. This practicality creates the problem. It is submitted
that Robson v Smith [1895] 2 Ch. 118 is not authority against partial crystallisation since
the floating charge in that case did not confer any such right. In any event, such a
provision is unlikely to be attractive in practice: it confers no significant benefit on the
chargor, since the essence of security is that it only secures the outstanding debt, and any
surplus (in cash or kind) is returned to the chargor; and it reduces the rights of the
chargee in ways that may turn out to be unnecessarily detrimental when the event
occurs.
46 At the time the event of crystallisation occurs, there must be: (a) an outstanding
obligation which the charge secures; (b) a valid and subsisting charge agreement; (c)
identifiable charged assets in which the chargor has an interest or rights.
47 Wallace v Universal Automatic Machines [1894] 2 Ch. 547 CA; Re Victoria
Steamboats Ltd [1897] 1 Ch. 158. Even if the winding-up is for purposes of
reconstruction: Re Crompton & Co [1914] 1 Ch. 954. It is the making of the order and
not, for example, the presentation of the petition since there is always the chance that the
court will decline to make the winding-up order. In Scotland the charge crystallises on
the commencement of the winding-up of the company: Bankruptcy and Diligence etc.
(Scotland) Act 2007 s.45 (not yet in force).
48Evans v Rival Granite Quarries Ltd [1910] 2 K.B. 979. The same applies to the
appointment of a receiver by the court. See para.32–38 on administrative receivership.
49 This occurs because the cessation removes the raison d’être of the floating charge,
which is to permit the company to carry on business in the ordinary way insofar as the
class of assets charged is concerned. Re Woodroffes (Musical Instruments) Ltd [1986]
Ch. 366 (it is the cessation of business and not ceasing to be a going concern assuming
the latter is different). Express provisions for crystallisation will only exclude this
implied provision for crystallisation if they expressly do so: Re The Real Meat Co Ltd
[1996] B.C.C. 254.
50
Evans v Rival Granite Quarries Ltd [1910] K.B. 979 at 997.
51
The crystallising event could, for example, be the failure by the debtor to pay any
monies due or to insure the charged property.
52
Re Brightlife Ltd [1987] Ch. 200.
53
English insolvency law achieves this policy to some extent by requiring registration of
non-possessory securities. It does not, however, require registration of title retention
clauses or trusts, and any assets in the possession (and apparent ownership) of the
company but which are subject to these arrangements do not form part of the company’s
assets in a winding-up.
54
It is common when taking a fixed charge or purchasing a substantial asset of the
company to serve on it inquiries as to whether any floating charge has crystallised. This
provides limited protection since the company can lie or, more likely, it may not
appreciate that the charge has crystallised. In an early effort to overcome this problem,
provisions were inserted into CA 1989 s.102, that empowered the Secretary of State to
pass regulations whereby events of crystallisation would have no effect until notified to
the Registrar; however, these provisions were never brought into effect and have not
been included in CA 2006.
55Where the subsequent interest-holder (purchaser or chargee) may have no actual or
constructive notice that the earlier floating charge has crystallised. See E. McKendrick,
Goode on Commercial Law, 4th edn (London: Penguin, 2010), pp.733–736.
56The interests that lose out to the crystallised floating charge are the subsequent
equitable charge (provided the equities are equal), the common law lien over chattels
and the interests of execution creditors: see W.J. Gough, “The Floating Charge:
Traditional Themes and New Directions” in Finn (ed.), Equity and Commercial
Relationships (Sydney, 1977), p.262.
57
E. McKendrick, Goode on Commercial Law, 4th edn (London: Penguin, 2010),
pp.734–735; a similar point is made by W.J. Gough, Company Charges, 2nd edn
(London: LexisNexis, 1996), pp.255–256.
58Government Stock and Other Securities Investment Co Ltd v Manila Railway Co Ltd
[1897] A.C. 81.
59
See H.G. Beale, M. Bridge, L. Gullifer and E. Lomnicka, The Law of Security and
Title-Based Financing, 2nd edn (Oxford: OUP, 2012).
60 Re Woodroffes (Musical Instruments) Ltd [1986] Ch. 366.
61 Re Woodroffes (Musical Instruments) Ltd [1986] Ch. 366 at 378: “it is a mistake to
think that the chargee has no remedy while the charge is still floating. He can always
intervene and obtain an injunction to prevent the company from dealing with its assets
otherwise than in the ordinary course of its business. That no doubt is one reason why it
is preferable to describe the charge as ‘hovering’, a word which can bear an undertone of
menace, rather than as ‘dormant’”.
62 Wheatley v Silkstone and Haigh Moor Coal Co (1885) 29 Ch. D. 715; Robson v Smith
[1895] 2 Ch. 118 at 124 (any dealing with the property subject to a floating charge “will
be binding on the debenture holders, provided that the dealing be completed before the
debentures cease to be merely a floating security”); Re Castell and Brown Ltd [1898] 1
Ch. 315. Although note that if B has actual notice that A’s charge prohibits the creation
of a later charge having priority, then A’s charge will prevail: Siebe Gorman & Co Ltd v
Barclays Bank Ltd [1979] 2 Lloyd’s Rep. 142 (overruled by Re Spectrum Plus Ltd
[2005] 2 A.C. 680, but not on this point): see below, para.32–11, on negative pledges.
63
If the subsequent floating charge is over the same assets, then, the equities being
equal, the first in time prevails: Re Benjamin Cope & Sons Ltd [1914] 1 Ch. 800.
64
Re Automatic Bottle Makers Ltd [1926] Ch. 412 CA.
65
Re Automatic Bottle Makers Ltd [1926] Ch. 412 CA, implies that this depends on the
wording of the charge and of the express provision, if any, relating to the creation of
further charges.
66
Bankruptcy and Diligence etc. (Scotland) Act 2007 ss.40, 41 (not yet in force). But
when the first chargee receives written notice of the registration of the later charge his
priority is restricted to present advances and future advances which he is legally required
to make plus interest and expenses: s.40(5) and (6).
67 Even though, if George Barker (Transport) Ltd v Eynon [1974] 1 W.L.R. 462 CA is
rightly decided, the lien or set off has not actually accrued.
68
Biggerstaff v Rowatt’s Wharf [1896] 2 Ch. 93 CA; Rother Iron Works Ltd v
Canterbury Precision Engineers Ltd [1974] Q.B. 1 CA; George Barker (Transport) Ltd
v Eynon [1974] 1 W.L.R. 462 CA.
69
See Cretanor Maritime Co Ltd v Irish Marine Management Ltd [1978] 1 W.L.R. 966
CA, where the company’s assets were subject to an injunction against their removal
from the jurisdiction, obtained by an unsecured creditor. On the application of the holder
of the debenture whose charge had crystallised, the court discharged the injunction. See
also Capital Cameras Ltd v Harold Lines Ltd [1991] 1 W.L.R. 54 (successful
application of a receiver to dismiss a Mareva injunction).
70 Seizure alone does not suffice: Norton v Yates [1906] 1 K.B. 112 CA.
71
Evans v Rival Granite Quarries [1910] 2 K.B. 979 CA.
72
On crystallisation, see paras 32–8 et seq.
73 Re ELS Ltd [1994] 1 B.C.L.C. 743.
74
Brunton v Electrical Engineering Corp [1892] 1 Ch. 434; Robson v Smith [1895] 2
Ch. 118.
75
Re Portbase Clothing Ltd [1993] Ch. 388 at 401. Contrast Griffiths v Yorkshire Bank
[1994] 1 W.L.R. 1427, which must be doubted: see H.G. Beale, M. Bridge, L. Gullifer
and E. Lomnicka, The Law of Security and Title-Based Financing, 2nd edn (Oxford:
OUP, 2012), para.15.24.
76
English & Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 Q.B. 700 CA;
Wilson v Kelland [1910] 2 Ch. 306.
77See, e.g. English & Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 Q.B.
700 CA; Re Castell & Brown Ltd [1898] 1 Ch. 315; Re Valletort Sanitary Steam
Laundry Co Ltd [1903] 2 Ch. 654.
78 P. Graham, “Registration of Company Charges” [2014] J.B.L. 175, 191-192.
79 See the discussion in L. Gullifer, Goode on Legal Problems of Credit and Security,
5th edn (London: Sweet & Maxwell, 2015), paras 2–25 to 2–31.
80
Re Connolly Bros Ltd (No.2) [1912] 2 Ch. 25 CA; Abbey National Building Society v
Cann [1991] 1 A.C. 56 HL. This of course presumes that the second security is properly
registered, and thus enforceable on insolvency: see Tatung (UK) Ltd v Galex Telesure
Ltd (1989) 5 B.C.C. 325 at 327; Stroud Architectural Systems Ltd v John Laing
Constructions Ltd [1994] 2 B.C.L.C. 276.
81
Cheah v Equiticorp Finance Group Ltd [1992] 1 A.C. 472.
82
83
In some cases the company has been deliberately floated with the intention of
defrauding creditors by granting floating charges to the promoters and then winding the
company up, with the charge attaching to goods which the company has purchased on
credit: see Cohen Report, Cmnd. 6659, para.148.
84
This applies to Scotland: IA 1986 s.245(1).
85
The period was three months in the 1908 Act and six months in the 1929 Act: each
was found to be inadequate in view of the ingenuity displayed in staving off liquidation.
86 IA 1986 s.245(3)(b) and (5).
87
The test of solvency is that laid down in s.123 of the 1986 Act: IA 1986 s.245(4).
88
The value of the goods or services is their market value: IA 1986 s.245(6).
89 IA 1986 s.245(2)(a) and (b).
90 Power v Sharpe Investments Ltd [1994] 1 B.C.L.C. 111.
91
Power v Sharpe Investments Ltd [1994] 1 B.C.L.C. 111 at 123a–b. If the delay is de
minimis, for example, a coffee-break, it can be ignored: ibid. The inconvenience of this
can be avoided by the parties creating a present equitable right to security rather than a
promise to create security in the future: see Re Jackson & Bassford [1906] 2 Ch. 467.
92
There is nothing in the section to displace the normal rule that he who asserts must
prove, and thus the burden of proof would be on the liquidator or administrator. This
should cause no great hardship as they will normally have sufficient information to
found their action.
93 For interesting illustrations of the way in which the rule in Clayton’s case ((1816) 1
Mer. 572) may protect a bank when the charge secures a current account, see Re Thomas
Mortimer Ltd (1925) now reported at [1965] Ch. 186n; Re Yeovil Glove Co Ltd [1965]
Ch. 148 CA. The Cork Committee recommended that Re Yeovil Glove Co Ltd be
reversed by statute (paras 1561–1562) but why this should be so is far from clear since
the bank by permitting the company to continue to draw on its overdrawn account is
providing it with new value: see Goode, (1983) 4 Co.L. 81.
94
IA 1986 s.245(3)(a).
95 See ss.249 and 435 of the 1986 Act.
96 Re Destone Fabrics Ltd [1941] Ch. 319 (this would now be a transaction with a
connected person, on which see below); Re GT Whyte & Co Ltd [1983] B.C.L.C. 311. It
is submitted that the transactions in these cases would not fall within s.245(2)(b) as there
would be no discharge as a matter of substance of the debts at the time of the creation of
the charge. Contrast Re Matthew Ellis Ltd [1933] Ch. 458 CA. The test seems to be
whether the company receives what is genuinely new value.
97See E. McKendrick, Goode on Commercial Law, 4th edn (London: LexisNexis,
2010), p.919.
98
Cmnd. 8558 at paras 1494 and 1553. The other reason given was that the extension of
IA 1986 s.245 to fixed charges would compel creditors to seek repayment if fixed
security could not be granted. This argument could also be applied to obtaining a
floating charge.
99
A company can create a fixed charge of accounts receivables, or a mortgage of future
property, for example. The critical distinction between a fixed and a floating charge is
that assets can be removed from the latter, and not from the former, without the specific
consent of the chargee. Whether assets can be added (or not) is immaterial to the
characterisation of the charge, and possible with both forms of charge: see below, paras
32–21 et seq.
100
One important difference between the rules relating to preferences and to defective
floating charges is that the time within which a preference in favour of an unconnected
person can be challenged is six months (not 12 months). Also note that a preference will
involve a diminution in the company’s assets (giving one creditor a preference in
repayment), whereas a floating charge constitutes a preferential claim on them.
101
Re MC Bacon Ltd [1990] B.C.L.C. 324.
102
The same policy decisions have to be made with respect to bankruptcy: see, e.g.
Insolvency Act 1986 s.336 dealing with the matrimonial home.
103
e.g. the enforcement of the floating charge is dealt with in Pt III of IA 1986;
administrative receivers have to be qualified insolvency practitioners (s.230(2)); and
s.247(1) defines insolvency as including the appointment of an administrative receiver.
IA 1986 ss.40, 175, 386–387 and Sch.6, and CA 2006 s.754 are the most relevant for the
subordination of the floating charge. For the ability of these provisions to reach through
earlier contractual engagements, see Re Oval 1742 Ltd (in CVA) v Royal Bank of
Scotland Plc [2007] EWCA Civ 1262. Of course, if realisation of the security and
application of the priority rules leaves the chargee carrying a loss, the floating chargee
then ranks with the other unsecured creditors to the extent of any outstanding debts.
104 IA 1986 s.175(2)(b).
105
Another argument made in favour of employees is that they have no way of
obtaining security for the payment of their salary which is normally made after the
provision of the services. This is not strictly correct since money to pay employees could
be placed in a trust account to be paid on the appropriate date. But this would be
cumbersome and as a matter of practice does not happen.
106See IA 1986 Sch.6 paras 9 and 10. Para.8 brings in contributions to occupational
pension schemes.
107 IA 1986 s.387(4)(a). For the date of the appointment see IA 1986 s.33.
108 IA 1986 Sch.6 para.11. This enables the company to be kept going where it is in
financial difficulties but there is some chance that it can trade out of its difficulties. For
case law on the previous statutory provisions see Re Primrose (Builders) Ltd [1950] Ch.
561; Re Rutherford (James R) & Sons Ltd [1964] 1 W.L.R. 1211; Re Rampgill Mill Ltd
[1967] Ch. 1138.
109 IA 1986 s.40(1).
110 Under the old law the crystallisation of the charge prior to the appointment of a
receiver resulted in the preferential creditors being denied their priority: see Re Brightlife
Ltd [1987] Ch.200. This alteration of the old law has made automatic crystallisation
clauses less attractive.
111
Employment Rights Act 1996 s.189. The Pt XII rights of the employee as against the
Secretary of State are in some respects wider and some respects narrower than the
preferences accorded by the Insolvency Act against the company. Theoretically, the
employee might want to pursue the preferential claim against the company in so far as it
does not fall within Pt XII.
112
Which category does not include the charge holder in relation to that part of the debt
which has not been satisfied by the security, unless the unsecured debts have been fully
met: IA 1986 s.176A(2).
113
Insolvency (Prescribed Part) Order 2003 (SI 2003/2097).
114
It is possible to vary this rule by means of a voluntary arrangement: IA 1986
s.176A(4).
115
IA 1986 s.176A(3)(a); SI 2003/2097 art.2.
116
IA 1986 s.176A(3)(b) and (5).
117
Re Permacell Finesse Ltd [2007] EWHC 3233 (Ch); Re Airbase (UK) Ltd [2008]
EWHC 124 (Ch); [2008] 1 W.L.R. 1516.
118 i.e. a floating chargee who appoints a receiver of a statutory or chartered company
will not be subject to the claims of preferential creditors unless the company goes into
compulsory liquidation under Pt V of the 1986 Act.
119 Also see below, paras 33–24 et seq.
120
And to the extent that the floating chargee is unable to recoup the outstanding debt
from the floating charge proceeds, that shortfall becomes an unsecured debt, repayable
pari passu with all the other unsecured debts owed by the company.
121 Justifying the super-priority of receivership costs (but subject to what follows on the
statutory priority, even over these, of liquidation costs), see Batten v Wedgwood Coal
and Iron Co (1884) 28 Ch. D. 317. But a receiver has a duty not to incur expenses if to
do so would lessen the amount otherwise available to pay the preferential creditors:
Woods v Winskill [1913] 2 Ch. 303; Westminster Corp v Haste [1950] Ch. 442, both
cases concerning the expenses in carrying on the company’s business.
122 Re Barleycorn Enterprises Ltd [1970] Ch. 465.
123
The assets must, however, be the assets of the company and not, for example, assets
held on trust. In certain limited circumstances, however, the court may order liquidation
expenses to be paid out of assets the beneficial interest in which is not vested in the
company: e.g. Re Berkeley Applegate (Investment Consultants) Ltd (No.3) [1989] 5
B.C.C. 803, where the activities and efforts of the liquidator were essential in
establishing and preserving the rights of the trust beneficiaries, and to that extent (only)
his fees were payable out of the trust assets.
124 For voluntary winding up see IA 1986 s.115; this section has been held to be a
priority section and does not deal with the question of what constitute properly incurred
expenses in a liquidation: see Re MC Bacon Ltd [1991] Ch.127. The position as regards
court-ordered winding up is not so explicit but a combination of s.156 and Insolvency
Rules 1986 rr.4.218 and 4.220 produces this effect.
125
Buchler v Talbot [2004] 2 A.C. 298.
126See L.C. Ho, “Reversing Buchler v Talbot—The Doctrinal Dimension of Liquidation
Expenses Priority” (2006) 3 J.I.B.F.L. 104. Note that IA 1986 s.176ZA(3) may allow
these expenses to be restricted to expenses either approved by the chargee and
preferential creditors, or by the court. See too Re Premier Motor Auctions Leeds Ltd
[2015] EWHC 3568 (Ch) in which the effects of s.176Z were briefly discussed.
127
Re Lewis Merthyr Consolidated Collieries Ltd [1929] 1 Ch. 498; Re GL Saunders
Ltd [1986] 1 W.L.R. 215.
128
Re Portbase Clothing Ltd [1993] Ch. 388 at 407–409. A more difficult problem
arises where the two successive charges are floating charges, the second one crystallises
first and so has priority over the first, but the receiver is not appointed under the second
charge but under the first one. Griffiths v Yorkshire Bank Plc [1994] 1 W.L.R. 1427 may
be technically correct in deciding that since no receiver is appointed under the second
charge, the assets are not subject to the claims of preferential creditors. But this leaves
the way open for floating chargees to avoid the operation of these provisions, and so the
more strained analysis in Re H and K (Medway) Ltd [1997] 2 All E.R. 321, which
concluded that the preferential debts had priority over both charges, may be preferable.
129 Attempts to extend the Portbase principle decision have not been successful. In Re
MC Bacon Ltd [1991] Ch. 127 the court held that the costs of the liquidator in bringing
an action under s.214 of the 1986 Act and to challenge a transaction as a preference were
not costs of realising the company’s assets and thus did not enjoy the priority accorded
to such expenses in a winding-up.
130
IA 1986 s.15(1) and (3).
131Where the charge has crystallised, the priority will be that of a fixed equitable
charge.
132
This was the case in Re Brightlife Ltd [1987] Ch. 200, where the debenture-holder
had given the company a notice converting the floating charge into a fixed charge a
week before a resolution for voluntary winding up was passed. The court held that the
preferential creditors no longer had any right to be paid in priority to the charge.
133
Agnew v Commissioner for Inland Revenue [2001] 2 A.C. 710 PC at [32].
134Re Spectrum Plus Ltd [2005] 2 A.C. 680. Also see Re Armagh Shoes Ltd [1984]
B.C.L.C. 405 Ch. D. (NI).
135Thus clarifying the relevance of the description of a floating charge advanced by
Romer LJ in Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch. 284 at 295 (see
above, para.32–6).
136 Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep.142.
137S. Worthington, “An ‘Unsatisfactory Area of the Law’—Fixed and Floating Charges
Yet Again” (2004) 1 International Corporate Rescue 175–184 (adopted by the House of
Lords in Spectrum); and “Floating Charges: Use and Abuse of Doctrinal Analysis”, in J.
Getzler and J. Payne, above, fn.31, p.28.
138 Although also see Gray v G-T-P Group Ltd [2010] EWHC 1772, where the charge
was held void as an unregistered floating charge, since the agreement between the
parties entitled the chargor to draw on the relevant bank account proceeds effectively at
will.
139
Re Brightlife Ltd [1987] Ch. 200, although in this case the chargee was not itself a
bank.
140Re Keenan Bros Ltd [1986] B.C.L.C. 242, where the chargee bank stipulated that the
account could not be drawn against without the counter-signature of one of its officers.
141
Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep.142.
142
On this last point, Slade J may have interpreted the arrangement otherwise, assuming
the bank was required to give permission for each release of funds; on that basis the
decision was accepted in Agnew, but, on the contrary interpretation, was overruled in
Spectrum.
143
Of course, in many cases, the fluctuating nature of the assets, especially of physical
assets, means that managerial control of them can be given to the company only in a way
which is inconsistent with a fixed charge: Smith v Bridgend CBC [2002] 1 A.C. 336.
144
Re New Bullas Trading Ltd [1994] 1 B.C.L.C. 485 CA.
145
Royal Trust Bank v National Westminster Bank Plc [1996] 2 B.C.L.C. 699 CA.
146
All three members of the court concurred in the result; Nourse LJ on other grounds,
and Swinford Thomas LJ without giving reasons.
147 Re Double S Printers Ltd [1999] 1 B.C.L.C. 220.
148
Agnew v CIR [2001] 2 A.C. 710.
149
Although see Russell Cooke Trust Co Ltd v Elliott [2007] EWHC 1443 (Ch); [2007]
2 B.C.L.C. 637, where a charge described as floating was held to be fixed.
150
CA 2006 s.859A.
151
Registration for this purpose is confined to registration of non-possessory securities.
An obligation secured by a possessory security necessarily entails transfer of the secured
asset into the possession of the security-holder, so that it does not remain on site as part
of the “apparent wealth” of the borrowing company.
152 This rule does not avoid the underlying obligation, and if the loan fell for repayment
whilst the company was a going concern, for example, then it could simply be repaid by
the company without any question of enforcement of a security arising. The problem
arises on insolvency, when the protection of a security interest is most needed.
153 Companies Act 2006 s.874, and see the discussion below at paras 32–29.
154 Some tinkering reform was included in the Companies Act 1989, but never brought
into force.
155 The Report of the Committee on Consumer Credit, Cmnd. 5427 (1971).
156 Insolvency Law and Practice, Cmnd. 8558 (1982).
157
A Review of Security Interests in Property, HMSO (1989).
158 CLR, Registration of Company Charges, (October 2000) URN 00/1213.
159 Final Report I, Ch.12.
160
Reference was also made to the Scottish Law Commission, but in narrower terms:
now see Report on Registration of Rights in Security by Companies (Scot Law Com
No.197, 2004).
161Law Commission, Registration of Security Interests: Company Charges and
Property other than Land, Consultation Paper 164 (2002); Company Security Interests:
A Consultative Report (Law Com Consultation Paper No.176, August 2004).
162 Law Commission, Company Security Interests (Law Com No.296, Cm 6654, August
2005), especially paras 1.31, 1.46–1.57, and 1.60–1.66.
163
DTI, The Registration of Companies’ Security Interests (Company Charges): The
Economic Impact of the Law Commissions’ Proposals Consultative Document (July
2005).
164
Defined in s.859A(7).
165
2006 Act ss.859A(1) and (6).
166 2006 Act s.859H. It is the security which is void, not the underlying obligation
(s.859(3) and (4)), and so for this purpose, creditor means secured creditor: Re
Teleomatic Ltd [1994] 1 B.C.L.C. 90 at 95. Of course, if the company goes into
liquidation or administration and the charge is unenforceable, this pro tanto protects the
interests of the unsecured creditors: see R. v Registrar of Companies, Ex p. Central Bank
of India [1986] Q.B. 1114 at 1161–1162. The previous provision, in similar terms, but
applying only to the listed charges which required registration, was 2006 Act s.874 (now
repealed).
167 Or is, instead, e.g. a retention of title agreement or some other quasi-security. See,
e.g. Re Cosslett (Contractors) Ltd [1997] Ch. 23; and [1998] Ch. 495 CA; and the failed
retention of title cases, Re Bond Worth [1980] 1 Ch. 228; and Borden (UK) Ltd v
Scottish Timber Products Ltd [1981] Ch. 25. The one exception to this is that,
previously, not all fixed charges required registration, although all floating charges did,
and so that particular characterisation could be especially important for validity (see
paras 31–21 et seq. on the distinction), as well as for all the reasons discussed above at
168
See below para.32–30.
169 2006 Act s.859L(1)–(3).
170 2006 Act s.859L(4).
171 2006 Act s.859L(5).
172
2006 Act s.859G.
173 2006 Act s.876(1)(b) (repealed).
174 2006 Act ss.859P and 859Q.
175
H.G. Beale, M. Bridge, L. Gullifer and E. Lomnicka, The Law of Security and Title-
Based Financing, 2nd edn (Oxford: OUP, 2012), paras 22–72 et seq.
176Overseas Companies (Execution of Documents and Registration of Charges)
Regulations 2009 (SI 2009/1917) Pt 3.
177 2006 Act s.859H. See above, fn.166.
178 This happens surprisingly often; e.g. because of failure to realise that the charge is of
the registrable class, or because both the company and the lender assume that the other
will register.
179 2006 Act s.859H(4).
180If the chargee does so then the charge is spent and a liquidator or administrator
cannot retrospectively challenge the enforcement of the charge.
181 Re Ehrmann Bros Ltd [1906] 2 Ch. 697 CA.
182
2006 Act s.859F(2).
183
2006 Act s.859F(3). Once a failure to register is discovered, the charge must act
expeditiously: the court will not exercise its discretion favourably where the chargee
hangs back to see which way the wind blows: Re Telomatic Ltd [1994] 1 B.C.L.C. 90.
184
Re S Abrahams and Sons [1902] 1 Ch. 695. In exceptional circumstances, however,
the court may make such an order: Re RM Arnold & Co Ltd [1984] B.C.L.C. 535. See
Barclays Bank Plc v Stuart London Ltd [2001] 2 B.C.L.C. 316 CA, for conditions
imposed where liquidation was imminent.
185
See Re Ashpurton Estates Ltd [1983] Ch. 110.
186
Re Barrow Borough Transport Ltd [1990] Ch. 227.
187
Re IC Johnson and Co Ltd [1902] 2 Ch. 101. The proviso will also preserve any
agreements about priorities already made by the late-registering chargee with other
creditors: ibid.
188
Watson v Duff Morgan and Vermont (Holdings) Ltd [1974] 1 W.L.R. 450.
189 Re MIG Trust Ltd [1933] Ch. 524 at 569–572 (Romer LJ).
190 See generally, Prentice, “Defectively Registered Charges” (1970) 34 Conv. (N.S.)
410. The company’s registered number is a detail required to be supplied but not a
particular of the charge, so that an error in that regard cannot invalidate the charge:
Grove v Advantage Healthcare (TIO) Ltd [2000] 1 B.C.L.C. 611.
191
Exeter Trust Ltd v Screenways Ltd [1991] B.C.L.C. 888.
192
Igroup Ltd v Ocwen [2004] 1 W.L.R. 451.
193 Igroup Ltd v Ocwen [2004] 1 W.L.R. 451.
194 2006 Act s.859I.
195
Ali v Top Marques Car Rental Ltd [2006] EWHC 109 (Ch).
196
National Provincial and Union Bank v Charnley [1924] 1 K.B. 431 CA (where the
property charged was incorrectly stated); Re Mechanisations (Eaglescliffe) Ltd [1966]
Ch. 20 (amount secured misstated); Re Eric Holmes (Property) Ltd [1965] Ch. 1052; Re
CL Nye Ltd [1971] Ch. 442 (date of creation misstated).
197Given this feature, then, on those rare occasions where the mistake is that of the
Registrar, it seems unlikely the Registrar would be liable to anyone suffering damages,
despite Ministry of Housing and Local Government v Sharp [1970] 2 Q.B. 223: see
Davis v Radcliffe [1990] 1 W.L.R. 821 HL and the cases cited therein; Banque Keyser
Ullmann SA v Skandia (UK) Insurance Co Ltd [1990] 1 Q.B. 665 at 796–798 (on appeal
[1991] 2 A.C. 449). But (in a quite different context) see Serby v Companies House
[2015] 1 B.C.L.C. 670.
198 See the illustrative cases cited above, fn.196.
199 R. v Registrar of Companies, Ex p. Central Bank of India [1986] Q.B. 1114;
followed in Forthouse Development Ltd (In Administration), Re [2013] NICh 6.
200 Most usually on the grounds of capacity or authority, especially in dealings between
the company and its directors.
201
2006 Act s.859A(4).
202
203
204
U. Drobnig, “Present and Future of Real and Personal Property” (2003) European
Review of Private Law 623 at 660: “If all the information it [the register] offers is a
notice that there may exist a security interest, so that intending creditors are put on
notice but have to turn to the debtor in order to verify the true state of affairs is not
nearly the same effect achieved in countries without a registration system where the
courts proceed from a general presumption that business people must know that any
major piece of equipment is bought on credit?”
205
H.G. Beale, M. Bridge, L. Gullifer and E. Lomnicka, The Law of Security and Title-
Based Financing, 2nd edn (Oxford: OUP, 2012), paras 23–22 et seq. Fundamental
changes for UK in the longer term are being considered by the Secured Transactions
Law Reform Project: see http://securedtransactionslawreformproject.org/ [Accessed 27
February 2016].
206 Also see above, paras 32–24 et seq.
207
See the 9th edn, paras 32–53 to 32–56.
208
The distinction is typically made between a person who has control of all, or
substantially all, the assets of a company (an administrative receiver: IA 1986 s.29(2))
and a person who simply has control of a single asset or limited class of secured assets (a
receiver). The former is in a position to manage the company as a going concern; the
latter is not. Both hold their positions in order to realise the rights of the secured creditor
(and other creditors, if the charge is floating—see above, paras 32–13 et seq.).
209
Insolvency Service, White Paper, Productivity and Enterprise: Insolvency—A
Second Chance, Cm. 5234 (July 2001), para.2.2.
210 On winding up and liquidation, see Ch.33.
211 See above, fn.98, Ch.9. The Committee’s proposals were not implemented precisely
in the way the Committee had envisaged. See V. Finch, Corporate Insolvency Law, 2nd
edn (Cambridge: CUP, 2009), pp.16–18.
212
IA 1986 s.9(2) and (3), repealed by the Enterprise Act 2002.
213 IA 1986 s.72A, introduced by the 2002 Act s.250. The prohibition does not apply to
appointments under floating charges in existence before the date on which the new rules
are brought into operation: s.72A(4).
214 See above, fn.209, para.2.5.
215 IA 1986 Sch.B1 para.3(2).
216 See above, fn.209, para.2.6.
217Enterprise Act 2002 s.248. The operative provisions are contained mainly in a new
Sch.B1 to the IA 1986, set out in Sch.16 to the 2002 Act.
218 IA 1986 ss.72A–H.
219 Set out in Sch.18 to the 2002 Act.
220 IA 1986 s.72B(1)(b) and Sch.2A para.2(1)(a)—which makes a further reference to
art.77 of the FSMA 2000 (Regulated Activities) Order 2001 (SI 2001/544), where the
inclusion of debentures and debenture stock can be found.
221
IA 1986 s.72B(1) and Sch.2A para.1(1)(a).
222
IA 1986 s.72B(1)(a).
223
IA 1986 Sch.2A para.2.
224
Note Feetum v Levy [2006] Ch. 585: a right to appoint an administrative receiver
does not amount to step-in rights.
225
The use of administration generally is not discussed in this book.
226
If the state of the company is so parlous that it is doubtful whether there will be
enough to cover the receiver’s remuneration it may be necessary for the trustees to take
possession. If the “debenture” is just an ordinary mortgage of particular property, the
debenture-holder may, of course, exercise its power of sale without the preliminary step
of appointing a receiver.
227 i.e. under LPA 1925 s.101 when applicable.
228
Where the appointment is defective, the court can order the person making the
appointment to indemnify the receiver: IA 1986 s.34. See also IA 1986 s.232, which
deals with the validity of acts of a defectively appointed administrative receiver, and IA
1986 s.234 dealing with the seizure or disposal by an administrative receiver of property
that does not belong to the company, and generally see Re London Iron and Steel Co Ltd
[1990] B.C.L.C. 372; Welsh Development Agency v Export Finance Co Ltd [1992]
B.C.L.C. 148.
229
Bank of Baroda v Panessar [1987] Ch. 335; Quah Su-Ling v Goldman Sachs
International [2015] EWHC 759 (Comm); this is normally a matter of hours during
normal banking hours. In addition, the company may be estopped by its conduct from
challenging the validity of the appointment of a receiver, and the appointment of a
receiver on invalid grounds may be subsequently cured if grounds justifying the
appointment are subsequently discovered: Bank of Baroda at 352–353 and Byblos Bank
SAL v Al-Khudairy [1987] B.C.L.C. 232 respectively. There is no need for the
debenture-holder to specify the exact sum due in any demand: see NRG Vision Ltd v
Churchfield Leasing Ltd [1988] B.C.L.C. 624.
230Sheppard & Cooper Ltd v TSB Bank Plc [1996] 2 All E.R. 654; Quah Su-Ling v
Goldman Sachs International [2015] EWHC 759 (Comm).
231Re Potters Oils Ltd [1986] 1 W.L.R. 201; Standard Chartered Bank Ltd v Walker
[1982] 1 W.L.R. 1410. Also see Alpstream AG v PK Airfinance Sarl [2015] EWCA Civ
1318 CA.
232 China and South Sea Bank Ltd v Tan [1990] 1 A.C. 536 PC; of course it will always
be in the commercial interests of the chargee to exercise his rights if the security is
declining in value. On other aspects of the receiver’s duties to the company and others,
see para.32–38, below.
233 But the court will not normally have any power to appoint a receiver unless the
debentures are secured by a charge: Harris v Beauchamp Bros [1894] 1 Q.B. 801 CA;
Re Swallow Footwear Ltd, The Times, 23 October 1956. Also the court will not imply a
term into a debenture empowering a chargee to appoint a receiver where his security is
in jeopardy: see Cryne v Barclays Bank Plc [1987] B.C.L.C. 548 CA.
234McMahon v North Kent Co [1891] 2 Ch. 148; Edwards v Standard Rolling Stock
[1893] 1 Ch. 574; and see Re Victoria Steamboats Co [1897] 1 Ch. 158.
235 Re Tilt Cove Copper Co [1913] 2 Ch. 588.
236
IA 1986 s.52(2) (for the purpose of appointing a receiver), s.122(2) (for the purpose
of making a winding-up order).
237
Re New York Taxicab Co [1913] 1 Ch. 1.
238
IA 1986 s.35.
239
See IA 1986 s.247(1) for the definition of “insolvency”.
240
IA 1986 s.388(1). A body corporate, an undischarged bankrupt, or a person
disqualified to act as a director may not act as an insolvency practitioner: see IA 1986
s.390(1) and (4).
241
IA 1986 s.45(1); they can resign, ibid.
242
IA 1986 ss.47 and 236; Re Aveling Barford Ltd [1989] 1 W.L.R. 360; Cloverbay Ltd
(Joint Administrators) v BCCI SA [1991] Ch. 90.
243 Company Directors Disqualification Act 1986 s.7(3)(d).
244 See IA 1986 s.247(2). Although generally a receiver should not be seen as a doctor
but rather as an undertaker.
245 Re Potters Oils Ltd [1986] 1 W.L.R. 201.
246Also without the leave of the court legal proceedings cannot be brought against the
company: see IA 1986 s.130.
247
See IA 1986 s.178.
248
Parsons v Sovereign Bank of Canada [1913] A.C. 160.
249 It is contempt of court to interfere with the exercise of power by a court-appointed
receiver without the leave of the court.
250
IA 1986 s.72 permits an English or Scottish receiver to act throughout Great Britain
provided local law permits this. The White Paper (above, fn.209 at para.23) suggested
that an advantage of greater use of administration was that it would receive easier
international recognition.
251
252Also the debenture will invariably provide that irrespective of the type of receiver
appointed by the charge holder he is to be the agent of the company. A receiver
appointed by the court is not an agent of anyone but an officer of the court: see Moss SS
Co v Whinney [1912] A.C. 254 HL.
253The duties of a mortgagee in possession are onerous: see H.G. Beale, M. Bridge, L.
Gullifer and E. Lomnicka, The Law of Security and Title-Based Financing, 2nd edn
(Oxford: OUP, 2012), para.18.39.
254 If the chargee interferes with the receiver’s discharge of his duties this could,
provided the interference is sufficiently pervasive, result in the receiver being treated as
the agent of the chargee: see American Express International Banking Corp v Hurley
[1985] 3 All E.R. 564.
255The receiver would not, for example, be considered to be participating in the
management of the company since he is not managing the company but the assets of the
company: Re B Johnson & Co (Builders) Ltd [1955] Ch. 634; Re North Development Pty
Ltd (1990) 8 A.C.L.C. 1004. Although contrast the analysis in Buchler v Talbot [2004] 2
A.C. 298, above, para.32–18.
256
IA 1986 s.42 confers on an administrative receiver the powers set out in Sch.1 to the
Act in so far as they are not inconsistent with the terms of the debenture. There are 23
powers enumerated and they are very wide; for example, number 14 confers on an
administrative receiver “Power to carry on the business of the company”.
257
IA 1986 s.43. The rights of the security holder are protected in the same way as they
are in the case of administration: see para.32–20, above.
258
Downsview Nominees Ltd v First City Corp [1993] A.C. 295 PC.
259
Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch. 949 CA; Bishop v Bonham
[1988] 1 W.L.R. 742; AIB Group (UK) Plc v Personal Representative of James Aiken
(Deceased) [2012] N.I.Q.B. 51.
260 Standard Chartered Bank Ltd v Walker [1982] 1 W.L.R. 1410; American Express
International Banking Corp v Hurley [1985] 3 All E.R. 564; AIB Group (UK) Plc v
Personal Representative of James Aiken (Deceased) [2012] N.I.Q.B. 51.
261 Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch. 949 CA; Alpstream AG v
PK Airfinance Sarl [2015] EWCA Civ 1318 CA. And if the receiver does wait, he is not
liable if the market declines: Tse Kwong Lam v Wong Chit Sen [1983] 1 W.L.R. 1349.
262 Medforth v Blake [2000] Ch. 86.
263
See G. Lightman and G. Moss, The Law of Administrators and Receivers of
Companies, 5th edn (London: Sweet & Maxwell, 2011), Ch.7.
264
Parker-Tweedale v Dunbar Bank Plc [1991] Ch. 12 CA (mortgagee owes no duty to
beneficiary of mortgaged property); Downsview Nominees Ltd v First City Corp [1993]
A.C. 295 PC; Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013]
UKPC 2; [2015] 2 W.L.R. 875.
265
Medforth v Blake [2000] Ch. 86 CA; thus somewhat back-tracking on the decision of
the Privy Council in Downsview Nominees Ltd v First City Corp [1993] A.C. 295. See
also Knight v Lawrence [1993] B.C.L.C. 215; and, recently, Purewal v Countrywide
Residential Lettings Ltd [2015] EWCA Civ 1122 CA.
266
On the facts, the appointor suffered no loss because the business, even in its
damaged state, generated enough profit to satisfy the appointor’s claims.
267IA 1986 s.42(3). If an administrative receiver is seen as being an organ of the
company, then this provision is arguably not in compliance with art.9(2) of the First
Directive. See Ch.7, above.
268Re Emmadart Ltd [1979] Ch. 540 at 544; see also Gomba Holdings UK Ltd v Homan
[1986] 1 W.L.R. 1301.
269 Newhart Developments Ltd v Co-operative Commercial Bank Ltd [1978] Q.B. 814
CA (it is important to note that in that case the company was indemnified for any costs
that it might incur and the receiver had decided not to bring any action against his
appointor).
270Tudor Grange Holdings Ltd v Citibank NA [1992] Ch. 53. As Browne-Wilkinson VC
pointed out in that case, it would be more appropriate for receivers or their appointor to
use IA 1986 s.35. Tudor Grange has itself come in for criticism: see Re Geneva Finance
Ltd (1992) 7 A.C.S.L.R. 415 at 426–432.
271
It could be argued that the right to bring an action against the debenture-holder could
not be an asset covered by the charge. This, however, proves too much since it would
mean that the directors would always be in a position to bring an action against the
debenture-holder even when the special factors in Newhart were not present. And while
this argument rightly emphasises the scope of the receiver’s authority it fails to give
effect to his functions. Also the agency of the receiver may have sufficient content to
impose on him a duty to seek redress against a debenture-holder in appropriate cases.
272
See also Gomba Holdings UK Ltd v Homan [1986] 1 W.L.R. 1301; Watts v Midland
Bank Plc [1986] B.C.L.C. 15 (a case which illustrates that since the power to use the
corporate name in litigation is normally vested in the directors, a shareholder will
normally be precluded from bringing a derivative action against a receiver, none of the
usual reasons for the exceptions applying on these facts).
273
Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1969) 92 WN
(NSW) 199.
274 Watts v Midland Bank Plc [1986] B.C.L.C. 15.
275
Re Reprographic Exports (Euromat) Ltd (1978) 122 SJ 400.
276
Gomba Holdings UK Ltd v Homan [1986] 1 W.L.R. 1301; see also at 1305–1306
where Hoffmann J points out that equity may impose on a receiver a duty to account
which is wider than his statutory obligations.
277
Gomba Holdings UK Ltd v Minories Finance Ltd [1988] 1 W.L.R. 1231 CA. Once a
receiver has sufficient funds to pay off the debt and his own expenses he should cease
managing the company’s assets: Rottenberg v Monjack [1993] B.C.L.C. 374.
278
Airline Airspares Ltd v Handley Page Ltd [1970] Ch. 193.
279
Said v Butt [1920] 3 K.B. 497; Welsh Development Agency v Export Finance Co Ltd
[1992] B.C.L.C. 148; Belcher v Heaney [2013] EWHC 4353 (Ch).
280Freevale Ltd v Metrostore (Holdings) Ltd [1984] Ch. 199; AMEC Properties Ltd v
Planning Research and Systems Plc [1992] B.C.L.C. 1149; and cf. Ash & Newman Ltd v
Creative Devices Research Ltd [1991] B.C.L.C. 403.
281
Powdrill v Watson [1995] 2 A.C. 394.
282 George Barker (Transport) Ltd v Eynon [1974] 1 W.L.R. 462 CA.
283 Rother Iron Works Ltd v Canterbury Precision Engineers Ltd [1974] Q.B. 1.
284
Knight v Lawrence [1991] B.C.C. 411; Medforth v Blake [2000] Ch. 86. See below,
para.32–47. Contrast the two obiter comments that a receiver does (R. v Board of Trade,
Ex p. St Martins Preserving Co Ltd [1965] 1 Q.B. 603) and does not (Re B Johnson and
Co (Builders) Ltd [1955] Ch. 364) have a duty to preserve the goodwill of the company.
Also see Purewal v Countrywide Residential Lettings Ltd [2015] EWCA Civ 1122 CA.
285
Griffiths v Secretary of State for Social Services [1974] Q.B. 468. The appointment
of the receiver by the court does terminate contracts of service: Reid v Explosives Co Ltd
(1887) 19 Q.B.D. 264; cf. Sipad Holding v Popovic (1995) 19 A.C.S.R. 108.
286
Re Foster Clark’s Ltd’s Indenture Trusts [1966] 1 W.L.R. 125.
287 IA 1986 s.44(2).
288 Powdrill v Watson [1995] 2 A.C. 394.
289
Re FJL Realisations Ltd [2001] I.C.R. 424.
290
IA 1986 s.44.
291
But contrast newly negotiated contracts, below.
292
IA 1986 s.44(1)(c).
293
IA 1986 s.44(1)(b) as amended by the Insolvency Act 1994 s.2. He is entitled to
indemnification out of the assets of the company (s.44(1)(c)), and can also contract for
indemnification by those who appointed him (s.44(3)).
294
IA 1986 s.44(1)(c).
295
IA 1986 s.39.
296
IA 1986 s.38 (receivers) and s.48 (administrative receivers).
297
IA 1986 s.48.
298 IA 1986 s.41. Also of relevance are the Insolvency Rules 1986 Pt 3.
299Company Directors Disqualification Act 1986 ss.1(1)(a), 3 and 22(7); see Re Artic
Engineering Ltd (No.2) [1986] 1 W.L.R. 686.
300
Jenkins Committee, para.306(k).
301
This discussion will concentrate on the appointment of an administrator where the
company has granted a floating charge, though, as we have seen (above, para.32–34)
administration is not confined to such situations.
302
IA 1986 Sch.B1 para.3(1)(a).
303 IA 1986 Sch.B1 para.3(3).
304 IA 1986 Sch.B1 para.3(1)(b).
305
IA 1986 Sch.B1 para.3(1)(c).
306 IA 1986 Sch.B1 para.3(4).
307
IA 1986 Sch.B1 para.3(2).
308 This is subject to the “unfair harm” protection discussed below.
309 IA 1986 Sch.B1 para.5.
310 IA 1986 Sch.B1 para.12 (or by the chief executive of a magistrates court in the case
of fines imposed on companies).
311 In one context (see IA 1986 Sch.B1 para.35) this is not a requirement: this is where
the application is made to the court by a floating charge holder who has the power to
make an appointment out of court (see below). As we have seen above (para.31–26), the
terms of debentures may give charge holders the power to appoint even though the
company is able to pay its debts.
312 IA 1986 Sch.B1 para.11.
313Re Harris Simmons Ltd [1989] 1 W.L.R. 368; Re Primlaks (UK) Ltd [1989] B.C.L.C.
734; cf. Re Consumer & Industrial Press Ltd [1988] B.C.L.C. 177.
314 Provision is made for such reports by r.2.2 but they are not mandatory and the
Chancery Division judges have sought to encourage concise reports not based on
protracted and expensive investigation: Practice Note [1994] 1 W.L.R. 160.
315
Though, as we have seen (above, para.32–34), the floating charge holder is not
excluded from applying to the court for an appointment.
316
Banks feared not only the cost of court applications, but, more so, the delay
involved, during which desperate directors might spirit assets out of the company, once
they knew of the petition.
317
A floating charge over a company’s property is a qualifying floating charge if it
alone, or in conjunction with other floating or fixed charges, covers the whole, or
substantially the whole of the company’s property and the contract creating the floating
charge states that the chargee may so appoint an administrator (IA 1986 s.72A and
Sch.B1 para.14).
318
IA 1986 Sch.B1 para.14. He or she must give two days’ notice of the intention to
appoint to the holder of any prior floating charge (so that that person may take action, if
desired), but the intention does not have to be advertised generally, which would defeat
one of the objectives of this power.
319
IA 1986 Sch.B1 para.5.
320 IA 1986 Sch.B1 para.46.
321 This means that the charge must be enforceable when the notice of appointment is
filed under para.18, as that is when the appointment is made: Fliptex Ltd v Hogg [2004]
EWHC 1280 (Ch); [2004] B.C.C. 870.
322 IA 1986 Sch.B1 para.21.
323
324
IA 1986 Sch.B1 para.25(c).
325 IA 1986 Sch.B1 para.28.
326 In addition, on an application to the court by a non-floating charge holder, the charge
holder has a presumptive right to have its nominee for administrator appointed in place
of the applicant’s: para.36.
327
328IA 1986 Sch.B1 para.12(1)(a) clearly contemplates that a receiver may be in place
when the application to the court for an administrator is made, as does para.41, which
provides for an administrative receiver to vacate office when an administrator is
appointed.
329 IA 1986 Sch.B1 para.39—essentially where the charge holder consents or the charge
is thought to be subject to challenge, for example under s.245 (above, para.32–14).
330 IA 1986 Sch.B1 para.49(5).
331
IA 1986 Sch.B1 paras 49(8) and 107.
332 IA 1986 Sch.B1 para.49(4).
334 IA 1986 Sch.B1 para.53(2) and (3).
335
Re Transbus International Ltd [2004] 1 W.L.R. 2654 at [12]–[14].
336
But not winding up under IA 1986 s.124A on public interest grounds: see para.18–
13. See para.42(4)(a).
337
IA 1986 Sch.B1 paras 42 and 43. Paragraph 43(4) includes the landlord’s right of
forfeiture by peaceable re-entry, which had been an issue disputed in the pre-2002 case-
law. This extension was made initially by the Insolvency Act 2000 s.9. However,
intervention by regulators appears to remain outside the moratorium. See Air Ecosse Ltd
v Civil Aviation Authority (1987) 3 B.C.C. 492; Re Railtrack Plc [2002] 2 B.C.L.C. 755.
338
339
IA 1986 Sch.B1 para.69, so that the company, not the appointor, is liable for
unlawful acts of the administrator.
340 IA 1986 Sch.B1 para.59.
341 IA 1986 Sch.B1 para.61.
342
343
344 IA 1986 Sch.B1 para.71.
345IA 1986 Sch.B1 para.70(2), thus in effect putting the charge holder in the position
which obtained before the charge crystallised.
346 The directors, although still in place, may not exercise management power without
the consent of the administrator: para.64.
347
IA 1986 ss.246ZA–246ZC, added by SBEEA 2015. See discussion of the parallel
provisions for liquidators, in IA 1986 ss.213–215, at paras 9–4 et seq.
348 Who, despite the fact that he too acts as an agent is personally liable on contracts he
enters into unless they provide to the contrary. See above, para.32–40.
349
IA 1986 Sch.B1 para.99(4). For the application of this rule in relation to adopted
employment contracts, see Powdrill v Watson [1995] 2 A.C. 394 HL; partially reversed
by the Insolvency Act 1994; and Pollard, (1995) 24 I.L.J. 141.
350Re Atlantic Computer Systems (No.1) [1992] Ch. 505. See also Bristol Airport Plc v
Powdrill [1990] Ch. 744 CA.
351
Leyland DAF Ltd v Automotive Products Plc [1994] 1 B.C.L.C. 245 CA.
352IA 1986 Sch.B1 para.73. Thus, in creditor meetings to approve a scheme secured and
unsecured creditors would be put in separate classes: above, paras 29–8 et seq.
353It is important not to overestimate the extent of this specific protection. It applies
only to the right to enforce the security; it would not apply to action which fails to
maximise the value of the assets to which the security attaches.
355 The court has broad relief powers (para.74(3) and (4)), but there is no specific
mention of a power to order litigation in the name of the company (though presumably
the court could do so under its general authority to “grant relief”) or the compulsory
purchase of shares (hardly likely to be an appropriate order in an administration).
356
IA 1986 Sch.B1 para.74. This applies whilst the company is “in administration”. If it
is not, the creditor may no longer petition; if it is, this paragraph effectively replaces CA
2006 s.994 as far as members are concerned, for the administrator’s or court’s consent
would be needed under the moratorium provisions for a s.994 petition to be launched.
357
Now CA 2006 s.994.
358
IA 1986 s.27, now repealed.
359
IA 1986 Sch.B1 para.74(2).
360
cf. the uncertainties surrounding the use of CA 2006 s.994 (previously CA 1985
s.459) against negligence, above, paras 20–14 et seq.
362
363 The risk that these provisions will be used by particular creditors or members
opportunistically to block a resolution of the company’s problems is somewhat reduced
by para.74(6) which says that no order by way of relief may be made by the court if it
would “impede or prevent the implementation of a scheme agreed under the CA or a
company voluntary arrangement agreed under Pt I of the IA or administrator proposals
approved by creditors, unless, in the last case, the application is made within 28 days.
However, a fixed charge holder can use this procedure even when the court has
authorised the administrator to dispose of the property (see para.74(5)(b)), presumably
lest the administrator carry out the disposal in an unfair or negligent way”.
364
365 IA 1986 Sch.B1 para.45.
366IA 1986 Sch.B1 para.99. But the provisions are strictly construed, and damages for
wrongful dismissal or other payments in lieu are not entitled to super-priority: Re Leeds
United Association Football Club Ltd (In Administration) [2007] I.C.R. 1688 at 1761
(Ch).
367
369 IA 1986 Sch.B1 para.78(4).
370
IA 1986 Sch.B1 para.76(2)(b), as amended by s.127 of the Small Business,
Enterprise and Employment Act 2015.
371 IA 1986 Sch.B1 para.79(3)(b).
372Re TM Kingdom Ltd [2007] B.C.C. 480; Re GHE Realisations Ltd [2006] B.C.C.
139.
373 IA 1986 Sch.B1 para.79(2)(c).
374 See above, Law Commission CP 164 (2002), fn.161, Pt IX. In one limited area, that
of farmers, the problem was addressed as long ago as 1928 in the Agricultural Credits
Act of that year.
375 See each of the Law Commission documents noted above in fnn.160 and 161.
PART 8
INSOLVENCY AND ITS CONSEQUENCES

CHAPTER 33
WINDING UP, DISSOLUTION AND RESTORATION
Introduction 33–1
Types of Winding Up 33–2
Winding up by the court 33–3
Voluntary winding up—general 33–9
Members’ voluntary winding up 33–11
Creditors’ voluntary winding up 33–13
Powers and Duties of the Liquidator 33–16
Collection, Realisation and Distribution of the Company’s
Assets 33–17
Maximising the assets available for distribution 33–17
Proof of debts and mandatory insolvency set off 33–22
Distribution of the company’s assets 33–24
Dissolution 33–27
After winding up 33–27
Striking off of defunct companies 33–29
Voluntary striking off 33–30
Resurrection of Dissolved Companies 33–31
Administrative restoration 33–32
Restoration by the court 33–33
Conclusion 33–34
INTRODUCTION
33–1
Where a company no longer has the funds to function, or its
members no longer wish it to function, then there needs to be a
process for bringing the existence of the legal entity to an end.
This is achieved by winding up, or liquidation (the two terms can
be used interchangeably).1 The process of winding up, or
liquidation, is designed to ensure that, before the company
ceases to exist, all its outstanding obligations are met (so far as
they can be) and any surplus assets (if there are any) are
distributed to the members according to their agreed
entitlement.2 For reasons which might be obvious, especially
given the competing interests which may need to be balanced,
this process is not undertaken by the company’s own directors,
but by independent appointees who are qualified insolvency
practitioners and who act professionally as company liquidators
(alternatively, in some circumstances, the process is carried out
by the Official Receiver). When this process is completed, the
company is removed from the register: it is “dissolved”. Clearly
this is a dramatic step, and, as we have seen already, there are
less terminal alternatives which may provide avenues for the
successful rescue of failing companies: recall the use of
administration, administrative receivership and company
voluntary arrangements and reconstructions, often also making
use of professional outsiders.3
The provisions relating to winding up and dissolution are now
to be found almost exclusively4 in the Insolvency Act 1986 and
Pt IV of the Insolvency Rules,5 and not in the Companies Act:
and rightly so where the company is insolvent. But, although
insolvency is the most common reason for winding up, it is far
from being the only one and, when the company is fully solvent,
it seems, on the face of it, somewhat illogical to treat the process
as part of insolvency law rather than company law. The reason
why the legislation relating to liquidation of solvent companies
is in the Insolvency Act is probably to avoid duplicating those
many provisions that apply whether or not the company is
insolvent—to repeat them in the Companies Act would have
added substantially to the length of the combined legislation. But
it can also be justified as realistic. Once a company goes into
liquidation, the distinction between shareholders and creditors
becomes more than usually difficult to draw: the members’
interests will, in effect, have become purely financial interests
deferred to those of the creditors.
TYPES OF WINDING UP
33–2
The basic distinction is between voluntary winding up and
compulsory winding up by the court.6 But voluntary winding up
is subdivided into two types—members’ voluntary winding up
and creditors’ voluntary winding up. In relation to companies
registered under the Companies Acts which are dealt with in Pt
IV of the Insolvency Act, Chs I and VII–X of that Part relate to
all three types, except where it is otherwise stated; Chs II and V
relate to both types of voluntary winding up; Ch.III relates only
to members’ voluntary winding up; Ch.IV only to creditors’
voluntary winding up; and Ch.VI only to winding up by the
court. This arrangement of the sections is not exactly “user
friendly” for it means that, to grasp which sections apply to the
type of winding up with which one is concerned, it is necessary
to refer to various chapters of Pt IV. Nor is life made easier
because other Parts of the Act may also be relevant: for example
Pt VI on “miscellaneous provisions” and Pt VII on
“interpretation for first group of Parts”.
As their names imply, an essential difference between
compulsory winding up by the court and voluntary winding up is
that the former does not necessarily involve action taken by any
organ of the company itself, whereas voluntary winding up does.
The essential difference between members’ and creditors’
winding up is that the former is possible only if the company is
solvent, in which event the company’s members appoint the
liquidator, whereas, if it is not, its creditors have the whip hand
in deciding who the liquidator shall be. In all three cases, the
winding up process is not exclusively directed towards realising
the assets and distributing the net proceeds to the creditors and,
if anything is left, to the members, according to their respective
priorities; it also enables an examination of the conduct of the
company’s management to be undertaken. This may result in
civil and criminal proceedings being taken against those who
have engaged in any malpractices thus revealed7 and in the
adjustment or avoidance of various transactions.8
Winding up by the court
Grounds for winding up
33–3
Under s.122 of the Insolvency Act, a company may be wound up
by the court9 on one or more of eight specified grounds. Of these
grounds, by far the most important is ground (f), that the
company is unable to pay its debts, and the next most important
is ground (g), that the court is of the opinion that it is just and
equitable that the company should be wound up. The latter has
been dealt with in Ch.20 (where we saw that it may be used as a
remedy in cases where members are being unfairly prejudiced or
there is a deadlocked management) and in Ch.18 (where we saw
that it may be invoked by the Secretary of State following the
exercise of his or her investigatory powers). The presence of a
minority protection remedy in the Insolvency Act is, in fact,
something of an anomaly.
Who may petition for a court ordered winding up?
33–4
It should be noted that the company itself can opt for winding up
by the court, since ground (a) is that the company has by special
resolution resolved that the company be so wound up. But
normally that is the last thing that those controlling the company
will want: winding up by the court is the most expensive type of
winding up and the one in which their conduct is likely to be
investigated most thoroughly.10 Alternatively, s.124 makes it
clear that a wide range of people may, in different and
sometimes specifically limited circumstances, petition for the
winding up of a company by the court; the list includes the
company’s directors, its members,11 its creditors (including
prospective and contingent creditors), and various parties with
official public status.12
Proof that a company is unable to pay its debts
33–5
Creditors are among those who may petition for a winding up13
and this they are likely to do once it becomes widely known that
the company is in financial difficulties14; like a petition for the
bankruptcy of an individual, a petition for winding up is the
creditors’ ultimate remedy. Indeed, about 95 per cent of petitions
for court ordered winding ups are by creditors. And although the
company itself or its directors15 or members16 may petition, the
court will be reluctant to grant it on ground (f) if it is opposed by
a majority of the creditors.
The Insolvency Act s.123 affords creditors owed more than
£750 a simple means of establishing ground (f), that the
company is unable to pay its debts, by serving a “statutory
demand”.17 Because of the presumption of insolvency inherent in
this, the courts are astute to prevent creditors relying on the sub-
section if the debt itself is disputed,18 or if the sum is disputed so
that £750 may not be owed,19 or if the statutory demand has not
been properly put together or properly served.20 Otherwise, it is
usually necessary for the creditor to prove “to the satisfaction of
the court that the company is unable to pay its debts as they fall
due”.21
The court’s discretion
33–6
The court has a statutory discretion to refuse to order a winding
up on a contributor’s petition if some other remedy is available
and it seems that the petitioners are acting unreasonably in
seeking this rather drastic option.22 In addition, the court has an
inherent jurisdiction to refuse to make the order if it considers
the petition to have been brought for improper or extraneous
purposes,23 and may simply strike out as an abuse of process any
petition which is bound to fail.24
Liquidators, provisional liquidators and official
receivers
33–7
If a winding up order is made, the first step needing to be taken
will be to appoint a liquidator to whom, as in all types of
winding up, the administration of the company’s affairs and
property will pass. In contrast with an individual’s trustee in
bankruptcy, the company’s property does not vest in the
liquidator25; but the control and management of it and of the
company’s affairs do, and the board of directors, in effect,
becomes functus officio.26 A liquidator may, indeed, be
appointed before a final order for winding up is made, for at any
time after the presentation of a winding up petition the court may
appoint a provisional liquidator, normally the official receiver
attached to the court.27
The important role played by official receivers in compulsory
liquidations in England and Wales28 is perhaps the major
difference between compulsory and voluntary liquidations.29
Official receivers are officers of the Insolvency Service, an
Executive Agency of BIS, attached to courts having bankruptcy
jurisdiction.30 Not only will an OR normally be the provisional
liquidator (if one is appointed) but he or she will generally be the
initial liquidator and often will remain the liquidator throughout
in a court ordered winding up. On the making of a winding up
order31 the OR automatically becomes liquidator by virtue of his
or her office and will remain so unless and until another
liquidator is appointed.32 The OR may succeed in getting rid of
the office by summoning separate meetings of the creditors and
of the members for the purpose of appointing another
liquidator.33 And if that does not succeed,34 the OR may decide
to refer the need to appoint another liquidator to the Secretary of
State who may appoint.35 But, whenever any vacancy occurs, the
OR again becomes the liquidator until another is appointed.36
The liquidator, provisional liquidator and official receiver are
all officers of the court, required to behave as such, if they have
been appointed by the court to execute a court ordered
compulsory liquidation.
Whether or not the official receiver becomes the liquidator,
the OR has important investigatory powers and duties. When the
court has made a winding up order, the OR may require officers,
employees and those who have taken part in the formation of the
company to submit a statement as to the affairs of the company
verified by affidavit.37 It is the duty of the OR to investigate the
causes of the failure, and to make such report, if any, to the court
as he or she thinks fit.38 The OR may apply to the court for the
public examination of anyone who is or has been an officer,
liquidator, administrator, receiver or manager of the company, or
anyone else who has taken part in its promotion, formation or
management, and must do so, unless the court otherwise orders,
if requested by one-half in value of the creditors or three-
quarters in value of the members.39 And if the OR is not the
liquidator, the person who is must give the OR all the
information and assistance reasonably required for the exercise
of these functions.40
Once a liquidator is appointed, the process of the winding up
proceeds very much as it would in the case of a voluntary
liquidation since the objective is identical and the liquidator’s
functions are the same as those in voluntary windings up,
namely “to secure that the assets of the company are got in,
realised, and distributed to the company’s creditors41 and, if
there is a surplus, to the persons entitled to it”.42 The main
difference is that, in a winding up by the court, the liquidator in
the exercise of powers given under Sch.4 to the Insolvency Act
will more often be required to obtain the sanction of the court
before entering into transactions, and that throughout the
liquidation process the liquidator will be subject to the
surveillance of the OR, acting, in effect, as an officer of the
court.
In a court-ordered winding up where the liquidator is not the
OR, the creditors may appoint a “liquidation committee”, so that
they have some formal voice in the liquidation proceedings.43
Timing of commencement of winding up
33–8
On the making of a winding up order the winding up is deemed
to have commenced as from the date of the presentation of the
petition (or, indeed, if the order is made in respect of a company
already in voluntary winding up, as from the date of the
resolution to wind up voluntarily).44 This dating back is
important since it can have the effect of invalidating property
dispositions45 and executions of judgments46 lawfully undertaken
during the period between the presentation of the petition and the
order,47 and of affecting the duration of the periods prior to “the
onset of insolvency” in which, if certain transactions are
undertaken, they are liable to adjustment or avoidance in the
event of winding up or administration.48
Voluntary winding up—general
Instigation of winding up
33–9
In contrast with winding up by the court, voluntary winding up
always starts with a resolution of the company. In the unlikely
event of the articles fixing a period for the duration of the
company49 or specifying an event on the occurrence of which it
is to be dissolved,50 all that is required is an ordinary resolution
in general meeting.51 Otherwise, what is required is a special
resolution that the company be wound up voluntarily.52 In either
case the resolution is subject to the requirement that a copy of it
has to be sent to the Registrar within 15 days53 and the company
must give notice of the resolution by advertisement in the
Gazette within 14 days of its passing.54
Timing of commencement of winding up
33–10
A voluntary winding up is deemed to commence on the passing
of the resolution55; there is no “relating back” as there is in the
case of winding up by the court. As from the commencement of
the winding up, the company must cease to carry on its business,
except so far as may be required for its beneficial winding up,56
and any transfer of shares, unless made with the sanction of the
liquidator, is void, as is any alteration in the status of the
members.57
Members’ voluntary winding up
Declaration of solvency
33–11
The most important question which the directors of the company
will have had to consider prior to the passing of the resolution is
whether they can, in good conscience and without dire
consequences to themselves, allow the voluntary winding up to
proceed as a members’, as opposed to a creditors’, winding up.
In order for that to occur they, or if there are more than two of
them, the majority of them, must, in accordance with IA 1986
s.89, make at a directors’ meeting58 a statutory declaration (the
“declaration of solvency”) to the effect that they have made a
full inquiry into the company’s affairs and that, having done so,
they have formed the opinion that the company will be able to
pay its debts in full, together with interest at the “official rate”,59
within such period, not exceeding 12 months from the
commencement of the winding up, as may be specified in the
declaration.60 This was the origin of the declaration of solvency
now used in the out-of-court procedure for a reduction of
capital61 and in respect of an acquisition of shares out of
capital.62
The declaration is ineffective unless:
(a) it is made within five weeks preceding the date of the passing
of the resolution; and
(b) it embodies a statement of the company’s assets and
liabilities as at the latest practicable date before the making of
the declaration.63
If a director makes the declaration without having reasonable
grounds for believing that the company will be able to pay its
debts with interest within the period specified in the declaration,
he or she is liable to a fine and imprisonment,64 and if the debts
are not so paid it is presumed, unless the contrary is shown, that
the director did not have reasonable grounds for that opinion.65 It
therefore behoves the directors to take the utmost care and to
seek professional advice before they make the declaration.
Especially is this so because, even if the winding up is a
members’ one, a licensed insolvency practitioner will have to be
appointed as liquidator and the liquidator is likely to detect
whether the declaration was over-optimistic long before the
expiration of the 12 months. Formerly, small private companies
could, and often did, appoint as liquidator one of the directors
and, in effect, continued to proceed much as they would have
when a partnership was being dissolved. This is no longer
possible66: despite the efforts begun by the 1989 Act to reduce
the burdens on private companies, the Insolvency Act has
increased their burdens as regards winding up even if they are
quasi-partnerships.
If the professional liquidator, appointed as described below,
forms the opinion that the company will not be able to pay its
debts within the stated period, he or she must summon a meeting
of the creditors and supply them with full information in
accordance with IA 1986 s.95 and, as from the date when the
meeting is held, the winding up is converted under s.96 from a
(solvent) members’ to a (insolvent) creditors’ voluntary winding
up.67 So long, however, as the liquidator shares the view of the
directors (and if they are wise they will have consulted him, as
their proposed nominee, before they made the declaration) all
should proceed smoothly as a members’ winding up.
Appointment and obligations of liquidator
33–12
The company in general meeting will appoint one or more
liquidators for the purpose of winding up the company’s affairs
and distributing its assets68 whereupon “all the powers of the
directors cease except so far as a general meeting or the
liquidator sanctions their continuance”.69 If a vacancy in the
office of liquidator “occurs by death, resignation or otherwise”
the company in general meeting may fill the vacancy,70 subject
to any arrangement with the creditors.71 If the winding up
continues for more than a year,72 the liquidator must summon a
general meeting at the end of the first and any subsequent year,
or at the first convenient date within three months from the end
of the year or such longer period as the Secretary of State may
allow.73 The liquidator must lay before the meeting an account of
his or her acts and dealings, and of the conduct of the winding up
during the year.74
When the company’s affairs are fully wound up the liquidator
must draw up an account of the winding up, showing how it has
been conducted and the company’s property disposed of, and
must call a final meeting of the company for the purpose of
laying before it the account and giving an explanation of it.75 The
fact that this meeting is being called is something which is of
wider interest than to members alone for, as we shall see,76 it will
lead to the final dissolution of the company. The Insolvency Act
provides that it shall be called by advertisement in the Gazette,
specifying its time, place and object and published at least one
month before the meeting.77 Within one week after the meeting
the liquidator must also send the Registrar a copy of the account
and make a return of the holding of the meeting.78
Creditors’ voluntary winding up
Instigation of winding up
33–13
Here, in contrast with members’ winding up, the company is
assumed to be insolvent and it is the creditors in whose interests
the winding up is undertaken and they who have the whip hand.
If no declaration of solvency has been made, the company must
cause a meeting of its creditors to be summoned for a day not
later than the 14th day after the resolution for voluntary winding
up is to be proposed. It must cause notices to be sent by post to
the creditors not less than seven days before the date of the
meeting and must advertise it once in the Gazette and once at
least in two newspapers circulating in the locality in which the
company’s principal place of business in Great Britain was
situated during the previous six months.79 This must state either
(a) the name of a qualified insolvency practitioner80 who, before
the meeting, will furnish creditors with such information as they
may reasonably require; or (b) a place where, on the two
business days before the meeting, a list of the company’s
creditors will be available for inspection free of charge.81
Further, the directors must prepare a statement of the company’s
affairs verified by affidavit and cause it to be laid before the
creditors’ meeting. The directors must also nominate one of their
number to preside at the creditors’ meeting—an unenviable task
which it is the nominee’s duty to perform.82
Appointment of liquidator
33–14
At their respective meetings, the creditors and the members may
nominate a liquidator, and if the creditors do so their nominee
becomes the liquidator, unless, on application to the court by a
director, creditor or member, the court directs that the
company’s nominee shall be liquidator instead of, or jointly
with, the creditors’ nominee, or it appoints some other person
instead of the creditors’ nominee.83 Provisions, similar in effect,
apply when a members’ winding up is converted to a creditors’
winding up because the liquidator concludes that the company’s
debts will not be paid in full within the 12 months, except that
the obligations of the directors have to be undertaken by the
incumbent liquidator.84
“Liquidation committee”
33–15
In a creditors’ voluntary winding up,85 or in a winding up by the
court,86 the creditors may decide at their initial or a subsequent
meeting to establish what used to be called a “committee of
inspection” but which the Insolvency Act now calls a
“liquidation committee”, and, in the case of a creditors’ winding
up, may appoint not more than five members of it.87 If they do
so, the company in general meeting may also appoint members
not exceeding five in number.88 However, if the creditors resolve
that all or any of those appointed by the general meeting ought
not to be members of the committee, the persons concerned will
not be qualified to act unless the court otherwise directs.89
The functions of a liquidation committee are to be found in
the Insolvency Rules rather than the Insolvency Act, and for
present purposes can be summarised by saying that they give the
liquidator the opportunity of consulting the creditors and the
members without having to convene formal creditors’ and
company meetings, and indeed the committee has substantial
powers to agree to matters on behalf of the creditors or the
company.90 They also provide additional means whereby the
creditors and members can keep an eye on the liquidator. In the
latter respect, liquidation committees are, perhaps, likely to be
more valuable in creditors’ voluntary windings-up (rather than in
windings-up by the court) owing to the lesser role played by
official receivers.
It may be thought somewhat anomalous that, when the
company is insolvent, the members should have equal (or any)
representation on the liquidation committee. But the Cork
Committee rejected the argument that they should not, because
“it is rarely possible to assess the interest of shareholders at the
outset of proceedings”.91 This is certainly true. What at the
commencement of the winding up would seem to be a clear case
of the company’s liabilities greatly exceeding its assets (so that
the shareholders have no prospective stake in the outcome of the
winding up) may turn out otherwise if the winding up is
prolonged.92
In other respects a creditors’ winding up proceeds up to and
including the final meeting in much the same way as in a
members’ winding up, although notably SBEEA 2015 and the
proposed new Insolvency Rules 2016 now much reduce the
requirements for, and formalities of, any creditors’ meeting,
including the largely pointless final meeting.93
If the required procedures are not followed, the court can give
directions under IA 1986 s.166. This was done in Re
WeSellCNC.Com Ltd,94 where it was discovered by the
appointed liquidator that no declaration of solvency had been
made; this was therefore necessarily a “creditors’ voluntary
winding up” pursuant to IA 1986 s.89, but no creditors’ meeting
had been summoned (and no statement of affairs prepared).
Accepting that the company was in fact well and truly solvent
with a considerable surplus, and with all creditors having been
paid and distributions made to shareholders, the judge declared
that the liquidation was a creditors’ voluntary winding up, but
dispensed with the requirement of a creditors’ meeting (and the
laying before it of a statement of affairs).
POWERS AND DUTIES OF THE LIQUIDATOR
33–16
In order to make possible the orderly winding up the company,
the Insolvency Act confers a wide range of powers on the
liquidator (ss.165 et seq.), and Sch.4 sets out an extensive list of
specific powers, including the power to carry on the company’s
business, to borrow and grant security over the company’s
property, and to bring and defend proceedings. Importantly,
ss.178 et seq. empowers the liquidator to “disclaim any onerous
property”, meaning that the liquidator can terminate the
company’s obligations under any unprofitable contracts, and the
contracting counterparty is then left to claim damages as a
creditor in the company’s insolvency. This power is typically
used to terminate the company’s leases of premises and other
property, on the basis that otherwise the company’s available
assets would be disproportionately appropriated to the creditor
holding the onerous right.95
In exercising these powers, the liquidator typically acts in the
company’s name96 (the company retains its separate legal
personality until the winding up is completed and the company is
dissolved).97
The liquidator’s duties are owed to the company,98 not to
individual creditors or members, and the liquidator may
therefore be sued in misfeasance proceedings under IA 1986
s.212 and held personally liable for misapplication of the
company’s assets,99 negligence100 or breach of fiduciary duties
(conflicts and profits rules) owed to the company.
COLLECTION, REALISATION AND DISTRIBUTION OF THE
COMPANY’S ASSETS
Maximising the assets available for distribution
33–17
The task of the liquidator in winding up the company is to
finalise the company’s affairs, and to get in the company’s assets
so as to maximise the return to those entitled to the assets on a
winding up.101 In getting in the assets, the liquidator will take
control of all the assets owned beneficially102 by the company
and, crucially, will seek to “claw back” assets which the
company should not have disposed of (or should not have
disposed of on the terms actually agreed) and will also pursue
claims against any officers or third parties who may be liable to
the company for breach of their duties or for other wrongs.103 In
this way, the asset pool available for distribution will be
maximised, to the benefit of those entitled to share in it.
In all of this, a word ought to be said about the position of
secured creditors in order to draw attention to the difference
between their position and that of general creditors on a winding
up, and also the different between their position on a winding up
compared with that during an administration. As we saw, so far
as the latter is concerned, unless the secured creditors have taken
steps to enforce their security prior to the administration, they
may be in difficulties in doing so while it lasts.104 In contrast, on
a winding up, a secured creditor is in the enviable position of
having the choice of realising its security and, if this does not
raise sufficient to pay what is due in full, to prove for the
balance, or to surrender its security for the benefit of the general
body of creditors and prove for the whole debt.105 Normally, of
course, the former option will be adopted.106
Statutory “claw back” and avoidance provisions
33–18
From the date of commencement of the winding up,107 transfers
of shares are avoided,108 and, for compulsory liquidations,
dispositions of the property by the company (unless the court
otherwise orders)109 and attachments, distress and execution
which have not been completed110 are void. This can prove
awkward, unless the court is minded to approve what has
happened. For example, in Re Gray’s Inn Construction Co
Ltd,111 the company continued to trade unprofitably after the date
the winding up petition had been presented; counsel conceded
that both sums credited and debited to the company’s bank
account were “dispositions” which, in the exercise of its
discretion, the court mostly declined to validate in the interests
of preserving rateable distributions to all creditors rather than
enabling some to be paid in full. The banking community has,
however, since been reassured that its potential exposure to
restitutionary liability of this sort is rather less, with the
important Court of Appeal decision in Hollicourt (Contracts) Ltd
v Bank of Ireland,112 to the effect that where a bank meets a
cheque drawn by the company as its customer (whether the
account is in credit or overdrawn), it does so merely as the
company’s agent; as a result, while there is clearly a disposition
in favour of the payee, there is no disposition to the bank itself.
Where, on the other hand, the company merely pays sums into
its bank account, if the account is overdrawn, then the payment
is a disposition to the bank,113 whereas if the account is in credit
then it has been held that the payment is not a disposition,114
which is perhaps a pragmatic conclusion since the transaction
simply converts the company’s cash receipts into an equivalent
claim against the bank.
Far more significantly, however, the liquidator is also given
the right to look backwards, and unwind transactions entered
into within prescribed periods before the commencement of an
insolvent winding up. We have seen this already in relation to
avoiding floating charges created within 12 months (or, in the
case of connected persons, two years) of that date.115 Similar
rules enable the liquidator to unwind transactions entered into at
an undervalue (s.238) within two years of the onset of
insolvency, at a time where the company was already
insolvent116 or became so as a result of the transaction.117 The
court has wide powers in framing its orders to effect restitution
of the company’s estate.118 Another provision with the same
timing restrictions avoids transactions motivated by the desire to
prefer one creditor over other (s.239).
A leading case on both these provisions remains Re MC
Bacon,119 the first decided case on s.239. The company, a bacon
importer and wholesaler, went into liquidation some time after
losing its principal customer. The liquidator challenged a
debenture granted to the company’s bank during the period
where the company was attempting to stay afloat, and when it
was probably insolvent or almost so, and could not have
continued without the support of its bank. Millett J declined to
strike down the debenture, holding that it was not a voidable
preference, since the company had not been motivated by a
desire to prefer the bank but merely by a desire to avoid their
overdraft being recalled; and it was not a transaction at an
undervalue,120 since the granting of security had neither depleted
the company’s assets nor diminished their value (although the
unsecured creditors may well have taken a rather different view
of this).
This outcome, although clearly defended in the judgment,
raises starkly the substantial practical shortcomings of these claw
back provisions. The fact that a preference is only voidable if
motivated by the insolvent debtor’s desire to prefer creates the
rather odd result that if the creditor aggressively demands early
repayment under threat of refusing further supplies or services,
the payment is unlikely to be caught, to the distinct advantage of
the creditor who has now been paid in full and the corresponding
disadvantage of the remaining unsecured creditors. By contrast,
in both the US and Australia, a disposition is voidable if it has
the effect of preferring one creditor, whatever the debtor’s
motivation. And the practical consequences for unsecured
creditors where valid late security is granted (presumably
security not otherwise caught by the floating charge provisions
in s.245) is obvious on the face of it. Interestingly, this odd
outcome has been the subject of some attention, obiter only, with
Arden LJ suggesting that the grant of a legal mortgage could in
the right circumstances be classified a transaction at an
undervalue121; this then raises the nice question of whether the
property disposition required to effect a legal mortgage merits a
different treatment from the granting of a security interest by
way of charge.
Whatever their shortcomings, however, these claw-back
provisions can provide vital additional reserves for creditors, and
occasionally for members, but, in conclusion, it might also be
noted that their backdated effect sits uneasily with the aims of
the protective notice rules which require notice of the winding
up to be published in the Gazette.122
Statutory provisions requiring wrongdoers to make
contributions
33–19
We have in earlier chapters already considered the provisions in
the Insolvency Act which enable the liquidator to pursue the
directors, and sometimes others, making them liable to account
or pay compensation or contribute to the assets of the company
by way of remedy for their breach of duty (s.212, a purely
procedural provision, but one which does give the court a
discretion to require compensation to be paid in full or in part
“as the court thinks just”, although the wrong being pursued is
necessarily a general law wrong, either statutory or common
law), fraudulent trading (s.213), or wrongful trading (s.214, also
allowing the court a discretion to order “such contribution (if
any) as the court thinks proper”).123
The common law “anti-deprivation principle”
33–20
When a company is insolvent, the widely accepted objective of
regulated insolvency distribution, and the clear goal of the
statutory rules just considered, is to ensure that the company’s
assets are preserved for distribution, and that the distribution,
when effected, is for the collective benefit of the company’s
creditors. Put another way, although it is accepted that some
businesses will inevitably fail, even when run without fault,124
and that innocent parties will then have to bear the resulting
losses, the general consensus is that the losses should then be
borne rateably.125
This then raises the question of whether there is common law
support for this endeavour, or whether the task falls entirely to
statute. A number of old cases and one House of Lords authority
suggest the common law has a role. In British Eagle
International Airlines Ltd v Cie Nationale Air France,126 the
House of Lords, by a 3:2 majority, overruled both the Court of
Appeal and the trial judge to hold that a contractual netting-out
agreement between international airline companies could not
operate on Air France’s insolvency so as to prevent Air France
from collecting in full the sums owed to it by certain airlines,
even though sums which it owed to different airlines would
obviously not be met in full.127
Perhaps predictably, the 2008 financial crisis generated
litigation which tested the breadth of this common law
restriction. The difficult case of Belmont Park Investments Pty
Ltd v BNY Corporate Trustee Services Ltd and Lehman Brothers
Special Financing Inc128 is the only case to reach the Supreme
Court to date. The clause under review was not a British Eagle
“contracting out” provision (operating against the pari passu
rule),129 but a clause which effected an insolvency-triggered
deprivation to the pool of assets available for distribution (as
outlawed in Ex p. Mackay130).131 The Supreme Court did not
follow the analysis in Mackay, but gave powerful backing to
freedom of contract, and unanimously upheld these “flawed
asset” depletion provisions, denying that they offended the
common law anti-deprivation principle. The derivatives markets,
and perhaps financial markets more generally, applauded the
outcome and the freedom it provides to parties to organise their
affairs at will, although the result stands in stark contrast to the
strict approach still favoured in British Eagle type arrangements,
and also to the broader approach to protecting creditors against
flawed asset provisions that is favoured in US bankruptcy
legislation.
Benefit of the statutory claw backs and wrongdoer
contributions
33–21
Money that is ordered to be paid under most of the sections just
discussed (ss.238, 239, 213 and 214, but not s.212) typically
goes into the general assets of the company in the hands of the
liquidator, not to individual victims of the wrongs, and not,
importantly, into the clutches of floating charge holders. This is
because the right to sue belongs exclusively to the liquidator, not
the company. Receipts from s.212 actions, by contrast, are
regarded as the products of a chose in action which belonged to
the company before liquidation, and so will be caught by an
appropriately worded floating charge.132
Proof of debts and mandatory insolvency set off
33–22
The liquidator will only pay those debts which are provable in
the insolvency, and proved. The rules specifying which debts
these are and how they are proved are contained in the
Insolvency Rules 1986.133 All claims by creditors are provable,
whether the debts are present or future, certain or contingent,
ascertained or sounding only in damages,134 provided the
company was, on that basis, subject to the claim at the time the
winding up commenced.135 The liquidator has the power to
estimate the value of contingent or uncertain debts,136 and may if
necessary apply to the court for assistance.137
In a compulsory winding up, the creditors must submit written
“proof” or their debts, and in a voluntary winding up the
liquidator usually elects to impose the same requirement. The
liquidator then examines the proofs and decides whether to
admit all or part of the debt or reject it; aggrieved creditors may
apply to the court for review.138 This all sounds eminently simple
and sensible, and generally it is, although more complicated
facts can throw up conceptually difficult problems. One rule
which helps solve some of these problems is the “rule against
double proof”, which prevents more than one creditor suing the
insolvent company for the same debt. This is not as unlikely as it
might at first seem. For example, consider the situation where A
guarantees a debt which B owes to C. Although this looks like a
problem where there are two debtors, not two creditors, looked
at the other way it is also true that the primary creditor (C) has a
right to sue B on the debt, and the guarantor (A) has a contingent
right to sue B to enforce its indemnity rights under the guarantee.
If B is insolvent, can A and C both prove in the insolvency? The
answer is no, and the rule against double proof prevents this,
denying creditors whose rights relate to the same underlying
debt the possibility to prove together. Were it otherwise, it would
follow that if a debt were guaranteed by several parties, they
could all prove in the liquidation; this makes it clear that the
logic delivering this conclusion is flawed. So held the Supreme
Court in Kaupthing Singer & Friedlander Ltd (In
Administration); sub nom Mills v HSBC Trustee (CI) Ltd.139
As already noted, secured creditors often elect to stand outside
this process.140
33–23
A further limitation on the amount for which creditors may
prove is imposed by the mandatory insolvency set off rules,141
which require the sums due from the creditor to be set off against
the sums due from the company where those sums arise from
mutual credits, mutual debts or other mutual dealings between
the company and the creditor proving in the liquidation. In
practice, this arrangement invariably benefits the creditor,
because at least some part of the debt due to the creditor from
the company is effectively paid off in full by virtue of the set off,
and the creditor only has to prove for the remaining balance
(which balance will constitute a claim against the insolvency
pool, with the inevitable risk of being paid very little, as we shall
see).
It is quite hard to find a compelling justification for this rather
generous exception to the strict pari passu rule of insolvency
distribution, which generally insists that losses are shared
rateably, and that all unsecured creditors are only paid pro rata.
True, the rule is longstanding,142 and perhaps it simplifies the
work required to be done by the liquidator in accepting proof of
debts,143 and perhaps it reduces exposure and therefore total risk
in the financial markets,144 but it is quite hard to find reasons of
fairness145 which explain why creditors with mutual dealings
with the insolvency debtor should effectively be preferred in the
sharing of losses by all the debtor’s unsecured creditors.146
Whatever the justifications for the rule, because it is so
advantageous to creditors, they will be keen to classify their
dealings as mutual. Often this can be relatively easy to prove.
The 1990s litigation surrounding the collapse of the Bank of
Credit and Commerce International147 illustrated that customers
who both saved with and borrowed from the bank came within
the rules, and so were protected from having to repay their loans
in full while only recovering a fraction of their savings as
unsecured creditors in the insolvency. The same was true of
companies who had borrowed on the security of their own
deposits with the Bank. But where these types of corporate loans
were secured not on the borrowing company’s own Bank
deposits, but on deposits belonging to third parties, typically
those of the borrowing company’s director, the outcome was
different. The directors, so it was held, had not undertaken any
personal liability to the Bank; they had merely allowed their
assets to be used as security; there was therefore no debt owed
by the director to the Bank which could be set off against the
debt owed by the Bank to the director in relation to the director’s
deposit.148 The net result was that the borrowing companies
would have to repay their loans in full (the Bank could not be
forced to rely on the director’s secured guarantee), and the
directors by contrast would recover only minimal sums in the
Bank’s insolvency. The seeming injustice of the outcome did not
escape Lord Hoffmann.
And of course, no set off is possible if the creditor’s claims
against the company arose after the commencement of winding
up,149 or if the creditor’s obligations to the company arose by
way of liability for misfeasance (that not being a mutual
“dealing” with the company).150
Distribution of the company’s assets
33–24
Once the liquidator has gathered in the company’s assets, they
must be distributed in an orderly fashion to those entitled to
them. The basic rules are clear. The funds are devoted first, to
paying the expenses of liquidation; then to the preferred
creditors; then the general unsecured creditors; then the deferred
creditors; then, if there is anything left, the members, according
to the entitlements associated with their class rights. If the funds
are not sufficient to pay all of a particular class in this hierarchy
in full, then they share pro rata. It then follows, necessarily, that
the classes below that class will receive nothing. It is common
knowledge that the unsecured creditors often secure almost
nothing in an insolvent liquidation; the banks take the lion’s
share, as secured creditors, and the preferential creditors take
most of the little that remains.
In examining in more detail the order of distribution of the
company’s assets, recall, first, that the pool of assets includes
only assets owned beneficially by the company.151 Moreover, the
claims of secured creditors to the assets specifically secured rank
ahead of any claim in the winding up to those secured assets,
including even the costs of liquidation,152 but with the significant
exception noted in Ch.32 in relation to floating charge holders,
who must cede priority to quite an astonishing number of
preferred claims.153
The first call for payment from the company’s assets are the
proper expenses of liquidation, as defined authoritatively by the
classes of debts set out in the IR 1986 r.4.218, which also
defines the priorities as between these classes of expenses.154
There is no additional implicit requirement that to be classed as
an expense, the expenditure must also have been, or have been
intended to be, for the benefit of the company.155 These
liquidation expenses include the liquidator’s remuneration
(without which guarantee no liquidator would be persuaded to
act), post-liquidation debts and certain pre-liquidation debts.156
The total size of these claims can be enormous, but perhaps the
greatest recent surprise was delivered by Re Nortel GmbH and
Lehman Bros International (Europe) Ltd,157 which held that a
Financial Support Direction (an order to pay) issued by the
Pensions Regulator to a holding company after the
commencement of that company’s liquidation, was a liquidation
expense, and therefore, with the other liquidation expenses, had
to be paid in priority to all the company’s other unsecured
claims. This would clearly have had a dramatic impact on the
likely payout to claimants further down the chain, and so it came
as some relief when the Supreme Court overturned this decision,
in Bloom v Pensions Regulator,158 to hold that the debt was
simply one of the company’s general unsecured debts, provable
and payable in the ordinary course.
33–25
Costs of litigation can also be recovered as an expense. After
several contrary judicial determinations, the statutory rules have
now been changed to make it clear that a liquidator who is
sanctioned to bring proceedings directed at clawing back assets
or pursuing wrongdoers to compel them to make contributions to
the company’s assets will be able to recover the costs of such
litigation as a proper expense of the liquidation.159
Finally, in the context of expenses, the 1986 Insolvency Act
introduced protective provisions to prevent public utilities from
putting pressure on liquidators to pay their outstanding pre-
commencement debts as a condition of further supply,160 which
effectively enabled such companies to extract preferential
repayment of their pre-winding up debts. Any supply which
comes after the commencement of winding up will normally
rank as a liquidation expense, and so is likely to be paid in full,
but suppliers are nevertheless permitted to require the liquidator
personally to guarantee payment.161
The second call on the pool is to pay the preferential creditors,
as defined in IA 1986 s.386 and Sch.6.162
33–26
The third call on the funds is to pay the general unsecured
creditors, unless their debts are deferred, as described next
below. Recall that the unsecured creditors may also receive a
boost to the pool dedicated to them as a result of compulsory
contributions of a “prescribed part” from floating charge
realisations.163
The fourth call on the funds is to pay deferred debts to
creditors. There are three classes of such deferred debts. First,
interest on all debts payable in the winding up, calculated from
the date of commencement of the winding up until the date of
payment of the interest, with all relevant debts treated as ranking
equally for this purpose.164 Secondly, money due to a member on
a contract to redeem or repurchase shares which was not
completed before the winding up.165 And, thirdly, debts due to
members in their character as members, whether by way of
dividends, profits or otherwise.166 The House of Lords had cause
to consider the scope of this last category in Soden v British and
Commonwealth Holdings Plc,167 and held that it embraced only
claims by members based on the statutory contract between the
company and its members, and that debts due to members in
other capacities, such as lenders to or trade creditors of the
company, are not deferred in the same way, but are typically
general unsecured debts. In the case in question, the member was
claiming damages for misrepresentations which allegedly
induced the member to acquire shares in the company. The
House of Lords held this was a claim arising outside the context
of what is now the Companies Act 2006 s.33 contract, so would
not be a deferred debt.
And, finally, whatever remains then goes to the members.
Typically the class rights as between shareholders will ensure
that the preferential shareholders get preferential rights to the
return of their capital, then capital is returned to the ordinary
shareholders, and then any surplus after that is usually only for
the ordinary members (the preferential shareholders often not
being entitled to share in any surplus on a winding up).
It is tolerably clear that the objective behind these distribution
rules, so far as they apply on insolvency, is for the company’s
creditors and members to share the inevitable losses roughly
according to pari passu rules, whilst marginally adjusting those
rules to specially favour those who have contractually pre-agreed
security rights168 or who are non-adjusting creditors with little
wherewithal to negotiate for their own priority (e.g. employees),
and, by contrast, to disfavour those with debts that are truly of
second order importance (e.g. interest only on all provable debts)
or with debts that reflect the claims of members to the
company’s capital (at least as the position appears on
insolvency), which claims should, in the natural order of things,
be deferred to the claims of the company’s creditors.
DISSOLUTION
After winding up
The normal process
33–27
In contrast with the formalities attendant on the birth of a
company,169 its death takes place with a singular absence of
ceremony. In the case of voluntary liquidations, once the
liquidator has sent to the Registrar the liquidator’s final account
and return,170 and on the expiration of three months from their
registration, the company is deemed to be dissolved,171 unless the
court, on the application of the liquidator or any other person
who appears to the court to be interested, makes an order
deferring the date of dissolution.172
Normally, the position is much the same where the winding
up is by the court. Once it appears that the winding up is for all
practical purposes complete, the liquidator must currently
summon a final meeting of creditors173 (although this is expected
to be abolished in late 2016174) which receives the liquidator’s
report on the winding up and determines whether the liquidator
shall be released.175 The liquidator then gives notice to the court
and to the Registrar that the meeting has been held and of the
decisions (if any) of the meeting. When the Registrar receives
the notice, it is registered and, unless the Secretary of State, on
the application of the official receiver or anyone else who
appears to be interested, directs a deferment,176 the company is
dissolved at the end of three months from that registration.177
If the official receiver is the liquidator, the procedure is the
same except that registration is of a notice from the official
receiver that the winding up is complete.178
Early dissolution
33–28
However, there is a sensible procedure whereby the OR may
bring about an early dissolution if it appears that the realisable
assets are insufficient to cover the costs of the winding up179 and
that the affairs of the company do not require any further
investigation.180 Before doing so, the OR must give at least 28
days’ notice of the proposal to the company’s creditors and
members and to an administrative receiver if there is one,181 and,
with the giving of that notice, the OR ceases to be required to
undertake any duties other than to apply to the Registrar for the
early dissolution of the company.182 On the registration of that
application, the company becomes dissolved at the end of three
months183 unless the Secretary of State, on the application of the
official receiver or any creditor, member or administrative
receiver,184 gives directions to the contrary before the end of that
period.
The grounds upon which the application to the Secretary of
State may be made are (a) that the realisable assets are in fact
sufficient to cover the expenses of the winding up; or (b) that the
affairs of the company do require further investigation185; or (c)
that for any other reason the early dissolution of the company is
inappropriate.186 And the directions that may be given may make
provision for enabling the winding up to proceed as if the
official receiver had not invoked the procedure or may include a
deferment of the date of dissolution.187
There are no similar provisions for early dissolution on a
voluntary winding up; once the company has resolved on
voluntary winding up it is expected to go through with it. But if
there is a vacancy in the liquidatorship and no one can be found
who is willing to accept the office because there is clearly not
enough left to pay the expenses of continuing it (no insolvency
practitioner will accept office in such circumstances unless
someone is prepared to pay the costs), it is difficult to see how
the Registrar could do other than to strike the company off the
register as a defunct company (see below)—as, indeed, that
section specifically recognises.
Striking off of defunct companies
33–29
The striking off of defunct companies affords a method whereby
a small company can, in practice, often be inexpensively
dissolved without the expense of any formal winding up.
Although the rules are contained in Pt 31 of the Companies Act,
rather than in the Insolvency Act, they are an integral part of the
machinery by which companies cease to exist.
Under s.1000 of the Companies Act 2006, if the Registrar has
reasonable cause to believe that a company is not carrying on
business or is not in operation, the Registrar may send to the
company a letter inquiring whether that is so. If within a month
of sending the letter a reply is not received, the Registrar shall,
within 14 days thereafter, send a registered letter referring to the
first letter and stating that no answer to it has been received and
that, if an answer to the second letter is not received within one
month from its date, a notice will be published in the Gazette
with a view to striking the company’s name off the register.188 If
the Registrar receives a reply to the effect that the company is
not carrying on business or is not in operation, or if, within one
month of sending the second letter, no reply is received, the
Registrar may publish in the Gazette and send to the company by
post a notice that at the expiration of three months from the date
of the notice the name of the company will, unless cause to the
contrary is shown, be struck off the register and the company
will be dissolved.189 At the expiration of the time mentioned in
the notice, the Registrar may, unless cause to the contrary is
shown, strike the company off the register and publish notice of
this in the Gazette, whereupon the company is dissolved.190
This section is most commonly used when what has afforded
the Registrar reasonable cause to believe that the company is not
carrying on business or in operation is the fact that it is in arrears
with the lodging of its annual returns and accounts.191 When so
used by the Registrar, it is both a method of inducing those
companies that are operating in breach of their filing obligations
to mend their ways, as well as a method of clearing the register
of companies which are indeed defunct.
A problem discovered by the CLR arises out of the fact that
the section requires the Registrar to communicate with the
company at its registered address192 which, for a variety of good
and not-so-good reasons, might be an ineffective form of
communication. The CLR encouraged the Registrar to
experiment with writing also to the directors of the company at
their last known residential address, where correspondence to the
company’s address was returned, before striking the company
off, and it appears that this measure has had some success and is
now part of the Registrar’s administrative practice.193 The
advantage is that it may avoid striking off companies which are
in fact still operational, and thus avoid the expense of seeking to
restore them to the register when they discover they have been
struck off (see below). From 11 July 2014 onwards, the Registrar
may now send communications electronically, as opposed to
communicating via letters by post.194
However, the above procedure can also be used to deal with
the situation referred to above when winding up proceedings
have been started but insufficient resources are available to
complete them.195 If the Registrar has reasonable cause to
believe either that no liquidator is acting or that the affairs of the
company are fully wound up and, in either case, that the returns
required to be made by the liquidator have not been made for a
period of six consecutive months, the Registrar shall publish in
the Gazette and send to the company or the liquidator (if any) a
like notice which causes the company to be dissolved.196
Voluntary striking off
33–30
Further, the predecessor to the above sections used to provide
companies with a method of dissolving without the expense of a
formal winding up and especially without the appointment of an
insolvency practitioner to oversee the process: the directors of a
company which had ceased trading would simply write to the
Registrar inviting the Registrar to exercise the statutory power to
strike it off. Under the Deregulation and Contracting Out Act
1994,197 perhaps somewhat ironically, this practice was
formalised in the statute and it is understood that the Registrar
discontinued the old practice and will now only entertain formal
applications for striking off under the new procedure. The new
sections in large part replicated the old practice, so the change
helped to make this course of action more transparent.
The statutory procedure enables a company,198 which has not
traded or carried on business199 during the previous three
months, to apply by its directors (or a majority of them)200 to the
Registrar for the company to be struck off. The directors must
ensure that notice of the application is given to a list of persons,
who include, notably, its creditors (contingent and prospective
creditors being embraced within the term),201 its employees, the
managers and trustees of any pension fund and its members.202
On receipt of the application the Registrar publishes a notice in
the Gazette stating that the company may be struck off and
inviting any person to show cause why it should not be.203 Not
less than three months later the Registrar may strike the
company off and, on publication of a notice to this effect in the
Gazette, the company is dissolved.204
The purpose of requiring notice to be given by the directors is
obviously to see if the people most likely to object to the
striking-off in fact oppose this course of action, but the
legislation lays down no particular procedure which the
Registrar must follow in dealing with objections. The fact that
the company has creditors clearly does not debar it from using
this procedure (otherwise the Act would not require notice to be
given to creditors) but it is not intended to be used in place of
liquidation where the company has substantial assets or
liabilities outstanding at the time of application.205 Nor may an
application be made for striking off where the company is
currently the subject of an application to the court for consent to
a compromise or arrangement under the Companies Act206 or
other procedures for handling insolvent companies contained in
the Insolvency Act 1986.207
The range of matters which the Registrar must keep in mind
upon an application under s.1003 is much reduced by the
provision that dissolution under the procedure does not inhibit
the enforcement of any liability of the erstwhile company’s
directors, managing officers or members, so that these people
cannot escape their common law or statutory duties by causing
their company to be dissolved.208 Moreover, a company
dissolved under the new procedure, like companies dissolved in
other ways, may be restored to the register in certain
circumstances, a topic to which we now turn.
RESURRECTION OF DISSOLVED COMPANIES
33–31
A contrast between the death of an individual and that of a
company is that, without divine intervention, a dissolved
company can be resurrected. Following the CLR,209 the Act
made two innovations in this area. First, it introduced a limited
form of administrative restoration to the register, a result which
had previously required a court order. Secondly, a single method
of court restoration replaced the formerly existing two methods,
which the courts had found some difficulty in making sense of
and which overlapped to a considerable extent.
Administrative restoration
33–32
The new form of administrative restoration applies only where
the company was dissolved by the Registrar under the provisions
relating to defunct companies.210 Thus, it does not apply to either
dissolution after winding up or to voluntary striking off. The
conditions for administrative restoration to the register confine it
to situations where the company was carrying on business or in
operation at the time it was struck off.211 Thus, the main purpose
of administrative restoration is to deal more cheaply with
reversing a striking off which, ideally, should not have occurred
in the first place. For probably the same reason, the application
for restoration may be made only by a former director or former
member of the company,212 but no application for restoration
may be made more than six years after its dissolution.213 If any
of the company’s property is vested in the Crown as bona
vacantia,214 the Crown’s representative must consent and the
applicant must offer to pay any costs of the Crown in relation to
the application and, more importantly, dealing with the property
during the period of dissolution.215 Finally, the applicant must
deliver to the Registrar such documents as are necessary to bring
the company’s public records up-to-date and to pay any penalties
outstanding at the time the company was dissolved.216
If these conditions are met, the Registrar is under a duty to
restore the company to the register.217 Notice of the decision
must be given to the applicant and the restoration takes effect
when that notice is sent.218 Public notice must be given of the
restoration.219 The effect of restoration is that the company is
deemed to have continued in existence as if it had not been
struck off.220 However, any consequential directions, if
necessary, for placing the company and all other persons in the
position (as nearly as possible) as they would have been in, had
the company not been struck off, are to be given, not by the
Registrar, but by a court, to which application may be made
within three years of the restoration.221
Restoration by the court
33–33
The two court-based restoration methods previously provided
were contained in ss.651 and 653 of the 1985 Act. The current
provisions are based on those of s.653, the somewhat simpler
procedure. The court-based procedure applies to all forms of
dissolution222 and a much wider range of persons may apply for
restoration. These include not just former directors or members,
but any creditor of the company at the time of its dissolution,
anyone who but for the dissolution would have been in a
contractual relationship with it, any person with a potential legal
claim against the company, any manager or trustee of an
employee pension fund, any person interested in land in which
the company had an interest, and the Secretary of State.223 This
caters for a much wider range of reasons for wanting to have the
company restored to the register, a common one being in order
to sue or assert a right against it. Normally, such persons must
act within six years of the date of dissolution,224 but a claim for
restoration in order to bring a claim for damages for personal
injury against the company may be made at any time.225
The court has power to order restoration if (a) in the case of
striking off of a defunct company, it was carrying on business or
in operation at the time; (b) in the case of voluntary striking off,
the conditions for such a striking off were not complied with;
and (c) in any other case the court thinks it just to do so.226
Restoration, if ordered, takes effect from the time the court’s
order is delivered to the Registrar and the Registrar must give
publicity to the order in the usual way.227 The effect of
restoration by the court is the same as with administrative
restoration,228 and the court may give the necessary directions to
effect the principle that the company should be treated as if
never dissolved.229
CONCLUSION
33–34
This final chapter has considered the means by which the lives
of companies are deliberately brought to an end, against their
natural characteristic of perpetual succession. The overview has
been brief, especially given the great complexities and doctrinal
and policy difficulties in the current structure. The source of
those difficulties is, at root, the result of a simple problem:
mostly when companies are wound up, they are insolvent; their
liabilities exceed their assets. In such circumstances, innocent
parties will inevitably face losses, whatever efforts are made to
protect them (and we have seen the lengths to which the winding
up regime goes in that regard). Perhaps then the best the law can
do is try to minimise obvious unfairness and ensure the rules,
even if not perfect, are at least certain. Given the entrepreneurial
imagination of commercial parties and our flexible and
sophisticated mix of statute, contract and property law rules, this
is a challenge, but one against which the current winding up
regime might be judged to be doing tolerably well.
1
And, more rarely, simply by striking the company off the register: see below, paras
33–29 and 33–30 et seq.
2
See Ch.23, above.
3 See above, Chs 29, 32.
4
But see Pt 31 of CA 2006, noted below, paras 33–29 and 33–30.
5
Insolvency Rules 1986 (SI 1986/1925), amended on numerous occasions, and with the
Insolvency Service planning a revised and consolidated version for 2016, to take effect
from 1 October 2016. The details of these new Rules can be found at
https://www.gov.uk/government/news/draft-insolvencyrules-sent-to-the-insolvency-rules-
committee-for-statutory-consultation [Accessed 27 February 2016]. The Explanatory
Notes indicate that the new Rules (i) consolidate existing rules; (ii) modernise and
simplify the language; and (iii) incorporate various changes in the law intended to
reduce the burden of red tape (especially in relation to creditors’ meetings, which will
become the exception, rather than the default rule). To the extent that the rules are
consolidated and recast, this is not intended to change the law. Both IA 1986 and the
Rules eschew the use of the word “members” and substitute “contributories”, thus
perhaps giving the misleading impression that it means only members who are called
upon to contribute because their shares are partly paid (or in the case of guarantee
companies because of the minimal amounts that they have agreed to contribute on a
winding up). To avoid this impression, here “members” has been substituted; but this too
is not wholly accurate, for “contributories” also includes past members unless they
ceased to be members more than 12 months before the commencement of the winding
up: see IA 1986 ss.74 and 76; and Re Anglesea Collieries (1866) L.R. 1 Ch. 555 CA;
and Re Consolidated Goldfields of New Zealand [1953] Ch. 689. On the other hand, the
benefits of participating as a contributory are denied to those whose obligation to
contribute arises from a misfeasance to the company: see IA 1986 s.79(2) in respect of
liability under IA 1986 ss.213, 214 (fraudulent and wrongful trading respectively); and
Re AMF International Ltd [1996] 1 W.L.R. 77 in respect of liability under IA 1986
s.212.
6
In relation to the winding up of “unregistered companies” (on which see paras 1–31 et
seq., above) winding up by the court is the only method allowed: see IA 1986 Pt V. A
company incorporated outside Great Britain which has been carrying on business in
Britain may be wound up as an unregistered company notwithstanding that it has ceased
to exist under the law of the country of incorporation: IA 1986 s.225.
7 See IA 1986 Pt IV Ch.X.
8
See IA 1986 Pt VI ss.238–246.
9 Normally the High Court, but the county court of the district in which the company has
its registered office has concurrent jurisdiction if the company’s paid-up capital is small
and if that county court has jurisdiction in relation to bankruptcy of individuals: IA 1986
s.117.
10
But it might be used if the court is already involved because the liquidation of the
company is part of a scheme requiring its sanction in accordance with the provisions
discussed in Ch.29, above.
11
Notwithstanding anything to the contrary in the articles: Re Pervil Gold Mines Ltd
[1898] 1 Ch. 122 CA.
12
And, as we have noted earlier, the Secretary of State (also see ss.124A, 124B), the
FCA (also see s.124C), the Regulator of Community Interest Companies, the Official
Receiver of the court, and designated officers of the magistrates court, each in specified
circumstances.
13
IA 1986 s.124.
14
Until then each may try to obtain judgment and levy execution thus getting ahead of
the pack.
15 Prior to the 1985/86 statutory reforms, it was held, somewhat surprisingly, that
directors could not apply: Re Emmerdart Ltd [1979] Ch. 540. Now they can. For the
interpretation of “the directors” see Re Equiticorp International Plc [1989] 1 W.L.R.
1010.
16 But unless the membership has been reduced below two, a member cannot apply
unless his (or her) shares were originally allotted to him or have been held and registered
in his name for at least 6 months during the 18 months prior to the commencement of the
winding up (on which see below) or have devolved on him through the death of a former
holder: IA 1986 s.124(2). This is designed to prevent a disgruntled person (e.g. an ex-
employee) from buying a share and then bringing a winding up petition (or threatening
to do so).
17 In accordance with IA 1986 s.123(1)(a).
18
Indeed, a creditor whose debt is bona fide disputed cannot petition at all: Stonegate
Securities Ltd v Gregory [1980] Ch. 576 CA; Re Selectmove Ltd [1995] 1 W.L.R. 474.
19 Re A company (No.003729 of 1982) [1984] 1 W.L.R. 1090.
20Re A company (No.008790 of 1990) [1991] B.C.L.C. 561; Stylo Shoes Ltd v Prices
Tailors Ltd [1960] Ch. 396.
21
IA 1986 s.123(1)(e). See BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-
3BL Plc [2013] UKSC 28; [2013] 1 W.L.R. 1408 SC. While discrediting the “point of
no return” test, the Supreme Court affirmed the decision of the Court of Appeal that the
ability of a company to meet its liabilities, both prospective and contingent, was to be
determined on the balance of probabilities with the burden of proof on the party
asserting “balance-sheet insolvency”.
22IA 1986 s.125(2). This is typically relied on to resist orders made on the “just and
equitable” ground, where the unfair prejudice alternative may seem preferable.
23
Re Surrey Garden Village Trust Ltd [1995] 1 W.L.R. 974 Ch; Re JE Cade & Sons Ltd
[1992] B.C.L.C. 213. On the other hand, if the purpose of the petition is legitimate, it
does not matter if the petitioner’s motive is malicious: Bryanston Finance Ltd v De Vries
(No.2) [1976] Ch. 63 CA.
24 Charles Forte Investments Ltd v Amanda [1964] Ch. 240 CA.
25
Unless the court so orders, as it may: IA 1986 s.145(1).
26
By common law, even though not made explicit in the IA 1986 for compulsory
winding ups: Re Farrow’s Bank Ltd [1921] 2 Ch. 164 CA (contrast the statutory
provision in voluntary winding up (s.90(2)).
27
IA 1986 s.135.
28
Scotland manages without them but when the Government, in a desire to reduce civil
service manpower and public expenditure, proposed to remove their role in individual
bankruptcy there was bitter opposition (not least from the Cork Committee: see Cmnd.
8558, Ch.14) and the proposal was dropped.
29
In the latter, their role is principally in relation to disqualification of directors under
the Directors Disqualification Act (on which see Ch.10, above).
30Official receivers have the unique distinction of being entitled to act as liquidators
notwithstanding that they are not licensed insolvency practitioners under Pt XIII of the
IA 1986: ss.388(5) and 389(2).
31 Except when it is made immediately upon the discharge of an administration order or
when there is a supervisor of a voluntary arrangement under Pt I of the Act, when the
former administrator or the supervisor of the arrangement may be appointed by the court
as liquidator: IA 1986 s.140.
32 IA s.136(1) and (2).
33
See IA 1986 s.136(4) and (5). The nominee of the creditors prevails unless, on
application to the court, it otherwise orders (s.139) which it is unlikely to do if the
company is insolvent.
34
Which it may not since both creditors and members may be happy to leave the
liquidation to the official receiver since that may prove less expensive.
35
IA 1986 s.137.
36 IA 1986 s.136(3).
37IA 1986 s.131. See also ss.235 and 236. See Re Chesterfield United Inc [2012]
EWHC 244 (Ch); [2013] 1 B.C.L.C. 709; Re Comet Group Ltd [2014] EWHC 3477
(Ch); Re Corporate Jet Realisations Ltd [2015] EWHC 221 (Ch).
38 IA 1986 s.132.
39IA 1986 ss.133 and 134. It is this public examination that is the most dreaded ordeal,
particularly if the company is sufficiently well known to attract the attention of the
general public and the Press.
40 IA 1986 s.143.
41 Giving priority, of course, to preferred creditors as set out in Sch.6 to IA 1986.
42IA 1986 s.143(1). Normally the members (except in the case of non-profit-making or
charitable companies) in accordance with their class rights on a winding up.
43
44 IA 1986 s.129.
45 IA 1986 s.127.
46
IA 1986 s.128.
47
Which may be considerable if hearings are adjourned, as is not infrequent.
48
See IA 1986 ss.238–245.
49
This is rare but charters of incorporation of limited duration are not uncommon.
50
It is possible to conceive of circumstances in which this might be done: e.g. when a
partnership converts to an incorporated company because its solicitors and accountants
advise that this would be advantageous tax-wise, the partners might wish to ensure that it
could be dissolved by a simple majority if they were later advised that it would be better
to revert to a partnership.
51 IA 1986 s.84(1)(a).
52
IA 1986 s.84(1)(b).
53 IA 1986 s.84(3).
54 IA 1986 s.85(1).
55
IA 1986 s.86. And CA 2006 s.332, which provides that a resolution passed at an
adjourned meeting is treated as passed on the day it was in fact passed, prevents
companies backdating the commencement of winding up.
56 IA 1986 s.87(1).
57
IA 1986 s.88. Contrast the wording of the comparable IA 1986 s.127, above, in
relation to winding up by the court: that avoids also any disposition of the company’s
property (unless the court otherwise orders) which IA 1986 s.88 does not.
58
This, on the face of it rather curious, use of a board meeting as a venue for the making
of statutory declarations ensures that all the directors know what is going on.
59i.e. whichever is the greater of the interest payable on judgment debts or that
applicable to the particular debt apart from the winding up: IA 1986 ss.189(4) and 251.
60
IA 1986 s.89(1). In practice the declaration will play safe and not specify a shorter
period than 12 months even if the directors expect that it will be shorter.
61
See above, para.13–39 et seq.
63IA 1986 s.89(2). The declaration must be delivered to the Registrar within 15 days
immediately following the passing of the resolution: IA 1986 s.89(3) and (4).
64
IA 1986 s.89(4).
65 IA 1986 s.89(5).
66But see below at paras 33–30 et seq. for the possible resort to s.1003 of the
Companies Act.
67
Indeed, it may become a winding up by the court, for a winding up order may be
made notwithstanding that the company is already in voluntary winding up and an
official receiver, as well as the other persons entitled under IA 1986 s.124, may present a
petition: IA 1986 s.124(5). But unless the court, on proof of fraud or mistake, directs
otherwise, all proceedings already taken in the voluntary winding up are deemed to have
been validly taken: IA 1986 s.129(1).
68
IA 1986 s.91(1).
69
IA 1986 s.91(2).
70
IA 1986 s.92(1). The meeting to do so may be convened by any continuing liquidators
if there was more than one or by a member: IA 1986 s.92(2).
71
This reference to “creditors” is presumably to cover the case where the members’
voluntary winding up forms part of a reorganisation of one of the types dealt with in
Ch.29, above, in which creditors are involved.
72
Which it may, because although the creditors should be paid within 12 months the
subsequent distribution of the remaining assets or their proceeds does not have to be
completed within any prescribed time.
73
IA 1986 s.93(1).
74 IA 1986 s.93(2).
75
IA 1986 s.94(1).
76
77 What is surprising is that neither the IA 1986 nor the Insolvency Rules seem to
require the liquidator to give written notice to the members. If this is not done, it is not
surprising that the final meeting is frequently inquorate.
78
IA 1986 s.94(3) and (4). If a quorum is not present the liquidator must send instead a
return that the meeting was duly summoned and that no quorum was present.
79 IA 1986 s.98(1).
80
In practice he or she will probably be the person that the directors intend to propose to
the company meeting for appointment as liquidator.
81 IA 1986 s.98(2).
82 IA 1986 s.99.
83 IA 1986 s.100.
84 IA 1986 ss.95 and 96.
85
IA 1986 s.101, and, when a members’ is converted to a creditors’ winding up, IA
1986 s.102.
86 IA 1986 s.141.
87 IA 1986 s.101(1). In the case of windings-up by the court the position under IA 1986
s.141 and Ch.12 of Pt IV of the Rules is somewhat different and is designed to ensure
that, when the official receiver is the liquidator, the committee’s functions are performed
instead by the Insolvency Service and that, if the liquidator is some other person, it is left
to that person to decide whether to convene a meeting of creditors to establish a
liquidation committee (unless one-tenth in value of the creditors require him to do so).
88 IA 1986 s.101(2).
89 IA 1986 s.101(3).
90
See, e.g. IA 1986 ss.103, 110, 165(2)(b) and (6), and the Insolvency Regulations 1986
(SI 1986/1994), reg.27(2), and Insolvency Rules 1986 (as amended), r.4.151ff.
91
Cmnd. 8558, para.939.
92
But, unless it is, the reverse is at present likely to be the case, resulting in members’
windings-up having to be converted into creditors’ (or to winding up by the court).
93
See IA 1986 ss.246ZE and 246ZF, and Insolvency Rules 2016 Explanatory Notes
(https://www.gov.uk/government/news/draft-insolvency-rules-sent-to-the-insolvency-
rules-committee-for-statutory-consultation [Accessed 27 February 2016]).
94
Re WeSellCNC.Com Ltd [2013] EWHC 4577 (Ch).
95
Re Celtic Extraction Ltd [1999] 2 B.C.L.C. 555 at 568 CA.
96
With the exception of the exercise of certain statutory powers given specifically to the
liquidator: e.g. IA 1986 ss.212, 213 and 214.
97
But the liquidator may nevertheless sometimes incur personal liability if costs exceed
the company’s assets: Re Wilson Lovatt & Sons Ltd [1977] 1 All E.R. 274.
98
Knowles v Scott [1891] 1 Ch. 717.
99
Re Home and Colonial Insurance Co Ltd [1930] 1 Ch. 12; Pulsford v Devenish [1903]
2 Ch. 625.
100 Re Windsor Steam Coal Co (1901) Ltd [1928] Ch. 609.
101 This will be the creditors only, and perhaps not even all of them, if the company is
insolvent; and both creditors and members if the company is solvent. Special rules
govern the order of distribution, as described below.
102 Thus excluding assets in the company’s possession but, e.g. held on hire purchase, or
subject to retention of title agreements; or assets which the company does own, but
which are held on trust for the benefit of third parties or are subject to valid security
interests in favour of third party creditors.
103 This latter option for enhancing the asset pool has largely been examined already in
earlier chapters: see Ch.9 on fraudulent and wrongful trading.
104
See paras 32–44 et seq., above.
105Insolvency Rules 1986 (as amended) r.4.88. If the winding up follows an
administration in which the administrator has exercised his or her powers under Sch.B1,
paras 70 and 71 (para.32–45, above) it would seem that the effect of paras 70(2) and
71(3) will be to preserve the security holder’s rights by treating the sums mentioned in
those subsections as the security in the winding up.
106Unless the secured creditor is unusually altruistic or wants to maximise his or her
votes at a creditors’ meeting.
107 i.e. presentation of the petition (compulsory winding up, s.129) or passing of the
resolution (voluntary winding up, s.86).
108 IA 1986 ss.88, 127.
109
IA 1986 s.127.
110 IA 1986 s.128, and see ss.183–184 for all winding ups.
111 Re Gray’s Inn Construction Co Ltd [1980] 1 W.L.R. 711 CA.
112 Hollicourt (Contracts) Ltd v Bank of Ireland [2001] Ch. 555 CA.
113
On this point it seems Re Gray’s Inn Construction Co Ltd [1980] 1 W.L.R. 711 CA,
is still good authority.
114
Re Barn Crown Ltd [1995] 1 W.L.R. 147.
115
IA 1986 s.245, and see above, para.32–14.
116
On the s.123 test.
117
IA 1986 s.240(2). There is a rebuttable presumption that this is the case if the
transaction is with a connected person.
118
IA 1986 s.241.
119
Re MC Bacon [1990] B.C.L.C. 324 Ch.
120
Also see Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 W.L.R. 143 HL.
121
Hill v Spread Trustee Co Ltd [2006] EWCA Civ 542 (a case on IA 1986 s.423).
124
But where there is fault, the defaulters should contribute to the insolvent company’s
assets, as we have already seen.
125
With some minor exceptions for identified vulnerable creditors (see below, at
para.33–24), and of course the major exception accorded to secured creditors who often
escape the burden of shared loses entirely, and in doing so disproportionately reduce the
assets available for those who are unsecured (see above, Ch.32).
126British Eagle International Airlines Ltd v Cie Nationale Air France [1975] 1 W.L.R.
758 HL.
127
By contrast, had the issue been mutual debits and credits been between Air France
and a single third party airline, insolvency set off would have allowed offsetting.
128Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd and
Lehman Brothers Special Financing Inc [2011] UKSC 38. Commented on in
Worthington, “Good faith, flawed assets and the emasculation of the UK anti-
deprivation rule” (2012) 75 M.L.R. 112.
129 The existing approach to which the Supreme Court supported.
130 Ex p. Mackay (1873) L.R. 8 Ch. App. 643.
131It achieved this by clauses which altered net liability and flipped non-recourse
security arrangements so that third parties were preferred, not the insolvent company
(and therefore its general creditors).
132Re Anglo-Austrian Printing & Publishing Union [1895] 2 Ch. 891. Also see Re
Oasis Merchandising Services Ltd [1998] Ch. 170.
133 Insolvency Rules 1986 rr.4.73–4.94.
134 Insolvency Rules 1986 r.12.3(1).
135 Insolvency Rules 1986 r.13.12(1).
136 Insolvency Rules 1986 r.4.86.
137
IA 1986 s.168(3),(5).
138
Insolvency Rules 1986 rr.4.73, 4.82, 4.83.
139
Kaupthing Singer & Friedlander Ltd (In Administration); sub nom Mills v HSBC
Trustee (CI) Ltd [2011] UKSC 48; [2011] 3 W.L.R. 939 SC.
140
See above, fn.125.
141
Insolvency Rules 1986 r.4.90.
142
Stein v Blake [1996] 1 A.C. 243 at 251 (Lord Hoffmann).
143
National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [1972]
A.C. 785 at 809 (Lord Scarman), although the extent is surely not great.
144
P. Wood, Set-off and Netting, Derivatives and Clearing Systems, (London: Sweet &
Maxwell, 2007), para.1–012.
145 Although, to the contrary, see the claims for fairness in National Westminster Bank
Ltd v Halesowen Presswork and Assemblies Ltd [1972] A.C. 785 at 813 (Lord Cross);
Stein v Blake [1996] 1 A.C. 243 at 251 (Lord Hoffmann); Forster v Wilson (1843) 12 M.
& W. 191 at 204 (Parke B).
146 Contrast this outcome with that where the debts are not mutual, as in British Eagle:
see above, para.33–20.
147
Re Bank of Credit and Commerce International SA (No.8) [1998] A.C. 214 HL.
148 Contrast the outcome in MS Fashions Ltd v BCCI SA (No.2) [1993] Ch. 425, where
the guaranteeing director had expressly agreed to accept liability as principal debtor for
the borrowing company’s loan.
149
Insolvency Rules 1986 r.4.90(3).
150 Manson v Smith [1997] 2 B.C.L.C. 161 CA.
152But if the security is more than adequate to enable full repayment of the outstanding
secured debt, then the extra is added to the insolvency pool to be distributed in the same
way as the rest.
154 Re Toshuku Finance UK Plc, Kahn v IRC [2002] UKHL 6 (on the relevant
corporations tax being such an expense). Also see IA 1986 s.156 and IR 1986 r.4.220(1)
which gives the court a discretion in a compulsory winding up to change this order of
priority between expenses. But once something is determined to be a liquidation
expense, the court has no discretion to deny it priority over other creditors’ claims which
are not liquidation expenses.
155 Re Toshuku Finance UK Plc, Kahn v IRC [2002] UKHL 6.
156 IA 1986 s.156 (compulsory liquidation) and s.115 (voluntary liquidation).
157Re Nortel GmbH and Lehman Bros International (Europe) Ltd [2011] EWCA Civ
1124 CA.
158 Bloom v Pensions Regulator [2013] UKSC 52; [2014] A.C. 209.
159
IA 1986 1986 Sch.4 and IR 1986 r.4.218(a) as amended, effectively reversing the
outcome in Re MC Bacon Ltd (No.2) [1990] B.C.L.C. 607 (Millett J); Re RS&M
Engineering Ltd, Mond v Studdards [1999] 2 B.C.L.C. 485 CA; and Re Floor Fourteen
Ltd, Lewis v IRC [2001] 2 B.C.L.C. 392 CA.
160
IA 1986 s.233(2)(b).
161
IA 1986 s.233(2)(a).
162
See the earlier discussion in relation to floating charges, above, para.32–15.
163
164
IA 1986 s.189.
165
Companies Act 2006 s.735.
166
IA 1986 s.74(2)(f).
167 Soden v British and Commonwealth Holdings Plc [1997] 2 B.C.L.C. 501 HL.
168 The justifications for this are various, not all equally compelling, but the gist is that
assets that are owned and worked produce more wealth, which is good for all, and the
availability of credit provides liquidity, enabling capital to be used profitably.
169 See Ch.4.
170In accordance with IA 1986 s.94 (members’ voluntary) or IA 1986 s.106 (creditors’
voluntary).
171
IA 1986 s.201(1) and (2).
172 IA 1986 s.201(3). It is then the duty of the applicant to deliver a copy of the order to
the Registrar for registration: IA 1986 s.201(4).
173
The relevant statutory provisions appear to apply to windings-up by the court on any
ground and whether or not the company is insolvent and not to require any final meeting
of the company (as in a voluntary liquidation). If this is correct, it is very curious. In a
winding up on the petition of a member on the ground that it is just and equitable, if the
company’s creditors have been fully paid it is only the members who will have any
interest in the result of the winding up.
174 See the draft Insolvency Regulations 2016:
https://www.gov.uk/government/news/draftinsolvency-rules-sent-to-the-insolvency-rules-
committee-for-statutory-consultation [Accessed 27 February 2016].
175
IA 1986 ss.146 and 172(8).
176 IA 1986 s.205(3). An appeal to the court lies from any such decision of the Secretary
of State: IA 1986 s.205(4).
177 IA 1986 s.205(1) and (2).
178 IA 1986 s.205(1)(b).
179 In Scotland (lacking official receivers) there is a procedure for early dissolution on
this ground alone but it involves an application to the court: IA 1986 s.204.
180 IA 1986 s.202(1) and (2).
181
IA 1986 s.202(3).
182
IA 1986 s.202(4).
183
IA 1986 s.202(5).
184
There is an apparent inconsistency between IA 1986 s.202(5) which says that the
application can be made by the official receiver “or any other person who appears to the
Secretary of State to be interested” and IA 1986 s.203(1) which says that it must be by
one of the persons mentioned in the text above. Presumably the Secretary of State will
not regard any other person as “interested”.
185
Neither of which is likely to be accepted by the Secretary of State if the official
receiver has concluded the contrary.
186
IA 1986 s.203(2).
187
IA 1986 s.203(3). There can be an appeal to the court against the Secretary of State’s
decision: IA 1986 s.203(4).
188CA 2006 s.1000(2). From hereon references to “the Act” are to the Companies Act
2006 unless the context otherwise requires.
189 CA 2006 s.1000(3).
190 CA 2006 s.1000(4)–(6).
191
See para.21–34.
192
See CA 2006 s.1002 for the methods of communication with the company.
194Companies (Striking Off) (Electronic Communications) Order 2014; ss.1000 and
1002 as amended.
195
CA 2006 s.1001.
196 CA 2006 s.1001(1)–(4).
197 CA 2006 s.13 and Sch.5.
198 Under s.652A of the 1985 Act the provision applied only to private companies, but
s.1003 of the 2006 Act applies to public companies as well.
199
What this involves (or rather does not involve) is set out in some detail in s.1004. A
change of name during the period will bar an application even if there has been no
trading: s.1004(1)(a).
200 CA 2006 s.1003(2).
201 CA 2006 s.1011.
202
CA 2006 s.1006(1).
203 CA 2006 s.1003(3).
204 CA 2006 s.1003(4),(5).
205
If the company has assets and the application is successful, these will become bona
vacantia upon the dissolution of the company and so pass to the Crown or one of its
emanations: s.1012. Chapter 2 of Pt 31 contains provisions dealing with the methods and
consequences of disclaimer by the Crown of bona vacantia, which are not dealt with
here.
206
See Ch.29, above.
207 CA 2006 s.1005—or the Insolvency (Northern Ireland) Order 1989. If an application
for striking off has been made and any of these events occurs or the company does any
of the acts mentioned in s.1004 (see fn.199, above), the then directors of the company
are under a duty to withdraw the application: s.1009.
208
CA 2006 s.1003(6)(a). The same provision applies to a striking off under the
Registrar’s own motion: s.1000(7)(a).
209
210
CA 2006 s.1024(1).
211
CA 2006 s.1025(2). See Re Priceland Ltd [1997] 1 B.C.L.C. 467.
212 CA 2006 s.1024(3)—who must provide a certificate that he or she has the necessary
standing: s.1026.
213
CA 2006 s.1024(4). By that time, it may be thought, those involved with running the
former company will have accepted its striking off.
214 See fn.205, above.
215 CA 2006 s.1025(3),(4).
216
CA 2006 s.1025(5).
217
CA 2006 s.1025(1). There is no formal right of appeal if the Registrar refuses to
restore, but (a) presumably judicial review is available; and (b) the disappointed
applicant could re-apply under the court-based procedure (see below) and is given 28
days to do so, even if the six-year time limit for that procedure has expired: s.1030(5).
218 CA 2006 s.1027(2).
219 CA 2006 s.1027(3),(4).
220 CA 2006 s.1028(1)—but not so as to make the company liable for failing to file
reports and accounts during the period of dissolution (s.1028(2))! Section 1033 deals
with the situation where the company cannot be restored under its former name without
a breach of s.66 because another company now has that name. See Ch.4.
221 CA 2006 s.1028(3), (4). The statute appears not to undermine the distinction drawn
by the courts between dissolution after winding up and administrative striking off (of
either type) in terms of the impact of restoration on action purportedly taken by the
company in litigation during the period of dissolution. In the latter case subsequent
restoration automatically validates action during the period of dissolution: Top Creative
Ltd v St Albans DC [2000] 2 B.C.L.C. 379 CA.
222 CA 2006 s.1029(1).
223 CA 2006 s.1029(2).
224
CA 2006 s.1030(4). Under the 1985 Act the limitation period for s.651 claims was
two years and for s.653 claims 20 years. Six years is the period in England and Wales
after which many claims against the company will be time-barred.
225 CA 2006 s.1030(1)—though if the claim against the company appears to the court to
be time-barred, it may not order the restoration of the company: s.1030(2), (3). However,
the court may order under s.1032(3) that the period of dissolution should not count for
limitation purposes in respect of the personal injury claim. See Smith v White Knight
Laundry Ltd [2002] 1 W.L.R. 616 CA.
226
CA 2006 s.1031(1). The wording of the section suggests that the third ground applies
as well to a defunct company and voluntary striking off where the particular ground set
out in (a) or (b) is not available. On the exercise of the court’s discretion see Re
Priceland Ltd [1997] 1 B.C.L.C. 467; Re Blenheim Leisure (Restaurants) Ltd (No.2)
[2000] B.C.C. 821; Re Blue Note Enterprises Ltd [2001] 2 B.C.L.C. 427.
227
CA 2006 s.1031(2),(3).
228
CA 2006 s.1032(1),(2).
229
CA 2006 s.1032(3). See Joddrell v Peaktone Ltd [2012] EWCA Civ 1035; [2013] 1
W.L.R. 784 CA at [40]–[49] (Munby LJ) for a description of the retrospective effect of
s.1032. Note, too, County Leasing Asset Management Ltd v Hawkes [2015] EWCA Civ
1251, where a limitation direction preventing time running granted in favour of a
restored company.
INDEX
This index has been prepared using Sweet and Maxwell’s Legal Taxonomy. Main index entries
conform to keywords provided by the Legal Taxonomy except where references to specific
documents or non-standard terms (denoted by quotation marks) have been included. These
keywords provide a means of identifying similar concepts in other Sweet and Maxwell publications
and online services to which keywords from the Legal Taxonomy have been applied. Readers may
find some minor differences between terms used in the text and those which appear in the index.
Suggestions to sweetandmaxwell.taxonomy@thomson.com.
All references are to paragraph number
Acceptance of benefits from third parties see Directors’ powers and duties
Accessories
criminal liability, 7–36
Account of profits
breach of directors’ duties
generally, 16–114—16–115
introduction, 16–106
substantial property transactions, 16–76
breach of promoter’s duties, 5–18—5–19
Accounting records see Financial records
Accounting standards
annual accounts
Companies Act accounts, 21–16
conclusion, 21–43
form and content, 21–13—21–21
generally, 21–17
going concern, 21–15
IAS accounts, 21–18—21–19
small companies, 21–20
annual reporting requirement, 21–1
auditors
claims by audit client, 22–36—22–37
independence and competence, 22–11
regulation, 22–28
generally, 21–17
introduction, 3–9
self-dealing, 16–54
Accounts
Accounting Principles and Rules, 21–16
accounting records, 21–7
accounting standards, 21–17
annual accounts
balance sheet, 21–16
financial year, 21–8
form and content, 21–13—21–21
group accounts, 21–9—21–12
IAS requirements, 21–18—21–19
individual accounts, 21–9—21–12
notes, 21–21
profit and loss account, 21–16
true and fair view, 21–14
approval, 21–29
circulation to members
generally, 21–40
Strategic Report only, of, 22–41
classification of companies
large companies, 21–6
medium-sized companies, 21–5
micro companies, 21–3
public interest entities, 21–6
rationale, 21–1
scope, 21–1
Companies Act requirements, 21–16
filing
modifications of requirements, 21–35—21–36
speed, 21–34
financial records, 21–7
foreign companies, 6–6
group accounts
companies excluded from consolidation, 21–12
parent and subsidiary undertakings, 21–10
parent companies which are part of larger group, 21–11
individual accounts
parent companies, 21–10
laying before members, 21–42
notes, 21–21
publicity, 21–39
records, 21–7
revision, 21–31—21–32
shareholder meetings, 15–43
standards, 21–17
‘statutory accounts’, 21–39
Acquisition of own shares
company may not be member of its holding company, 13–4
court orders, 13–5
exceptions to general rule
effect, 13–6
generally, 13–5
forfeiture, 13–5
general prohibition, 13–2—13–6
gifts, 13–5
nominee, through, 13–3
purchase of own shares
background, 13–8
conclusion, 13–29
creditor protection, 13–11—13–12
failure by company to perform, 13–28
general restrictions, 13–9—13–10
introduction, 13–7—13–10
private companies, 13–13—13–18
shareholder protection, 13–19—13–23
Treasury shares, 13–24—13–27
redemption
background, 13–8
conclusion, 13–29
reduction of capital, 13–5
repurchase
background, 13–8
conclusion, 13–29
share premium account, 13–1
unfair prejudice, 13–5
Act within scope of powers conferred see Directors’ powers and duties
Acting in concert see Takeovers
Acts of Parliament
unregistered companies, 1–31
Adjournments
Adjudicators
company names, 4–27—4–29
Administrators
appointment, 32–44
duties, 32–45—32–46
end of appointment, 32–50
expenses, 32–49
function, 32–43
powers, 32–45—32–46
protection for creditors and members, 32–47
publicity for appointment, 32–48
Admission to listing see Public offers
Agency
administrators, 32–47
attribution rules, 7–18
conclusion, 7–48
contracting through agents, 7–16
contractual liability of agents
agency principles, 7–18—7–19
attribution, 7–18
authority of corporate agents, 7–20—7–23
generally, 7–16—7–17
knowledge, 7–24—7–26
ostensible authority, 7–20—7–23
overall, 7–28
overview, 7–4
ratification, 7–27
directors’ duties
individual shareholders, 16–5—16–6
senior managers, 16–11
general principles, 7–18—7–19
limited liability
generally, 8–13
overseas companies, 6–2
partnership law, 1–2
proxies, 15–71
receivers, 32–38
vicarious liability, 7–31
Agendas
shareholder meetings
circulation of members’ statements, 15–59
information concerning, 15–60
placing item on the agenda, 15–57—15–58
Agents
see also Agency
contractual liability
attribution, 7–18
overall, 7–28
overview, 7–4
Alternative Investment Market
exchange admission standards, 25–16
promoters, 5–5
public offers, 25–5
publicly traded companies, 1–25
purchase of own shares, 13–19
redeemable shares, 13–19
Annual accounts
Accounting Principles and Rules, 21–16
approval, 21–29
auditors’ role, 22–1
circulation to members
generally, 21–40
Strategic Report only, of, 22–41
classification of companies
rationale, 21–1
scope, 21–1
Companies Act requirements, 21–16
filing
modifications of requirements, 21–35—21–36
speed, 21–34
financial records, 21–7
form and content
notes, 21–21
group accounts
individual accounts
laying before members, 21–42
notes, 21–21
publicity, 21–39
records, 21–7
revision, 21–31—21–32
small companies
generally, 21–4
standards, 21–17
Annual general meetings
see also General meetings
agenda items, 15–56—15–62
annual reporting requirement, 21–1
audit committees, 22–25
conclusion, 15–87
pre-emption rights, 24–14
verifying votes, 15–76
voluntary arrangements, 15–36
Annual reports
approval, 21–29
business review
verification, 21–26
classification of companies, 21–2
directors’ reports
approval, 21–29
liability for misstatements, 21–27—21–28
narrative reporting
approval, 21–29
background, 21–22
directors’ remuneration reports, 21–22
directors’ reports, 21–23
generally, 21–22
strategic reports, 21–24—21–25
verification, 21–26—21–27
Annual returns
disclosure of major shareholding, 26–14
generally, 21–38
Anti-deprivation principle
collection realisation and distribution of company’s assets, 33–20
“Appraisal rights”
mergers, 29–1
minority shareholders, 19–3
reorganisations, 29–25
Articles of association
alterations, 3–31—3–32
board of directors
default provision, 14–3—14–4
legal effect, 14–5—14–10
distributions and dividends, 12–1
enforcement
individual rights, 3–27—3–30
rights ‘as a member’, 3–23—3–26
filing, 21–37
formation of companies
choice, 4–32—4–33
generally, 4–5
individual rights to correct irregularities, 3–27—3–30
legal status
articles of association, 3–14—3–15
limits to enforcement, 3–23—3–30
nature, 3–16—3–17
parties to the contract, 3–19
public document, 3–20—3–22
nature, 3–16—3–17
self-help, 19–23—19–24
shareholder agreements, 3–33—3–35
significance, 3–13
written resolutions, 15–14
tortious liability, 7–32
Attendance
company representatives, 15–72
proxies, 15–67—15–71
Audit committees
auditor independence and competence, 22–10
composition, 22–24
directors’ duties of skill care and diligence, 16–19
functions, 22–25
Auditors
see also Audits
annual accounts, 22–1
competence
auditing standards, 22–28
generally, 22–26
investigations, 22–29
qualifications, 22–27
quality assurance, 22–29
regulatory structure, 22–11
discipline, 22–29
disqualified persons
auditors becoming non-independent, 22–14
auditors becoming prospectively non-independent, 22–15
non-audit remuneration, 22–13
non-independent persons, 22–12
duties, 22z-3
ethical standards, 22–13
failure to re-appoint, 22–20
independence
auditors becoming non-independent, 22–14
auditors becoming prospectively non-independent, 22–15
direct regulation, 22–12—22–
non-independent persons, 22–12
investigations, 22–29
liability
negligence, 22–31—22–52
negligence
assumption of responsibility, 22–47—22–51
client claims, 22–36—22–43
contractual limitation, 22–42
defences, 22–39—22–41
establishing liability, 22–36—22–37
limits of liability, 22–38—22–42
nature of the issue, 22–31—22–33
provision of audit services, 22–34—22–35
third party claims, 22–44—22–52
non-independent persons
becoming non-independent, 22–14
becoming prospectively non-independent, 22–15
generally, 22–12
overarching issues, 22–4
powers, 22–30
qualified reports, 22–1
removal
notifications, 22–19
shareholder resolution, 22–18
remuneration, 22–17
reports, 22–22
requests for information, 22–30
resignation
non-independent persons, and, 22–12
prospectively non-independent persons, and, 22–15
role, 22–1—22–2
shareholders’ role
appointment of auditors, 22–17
audit reports, 22–22
removal of auditors, 22–18—22–19
remuneration of auditors, 22–17
whistleblowing, 22–21
third party claims
duty of care, 22–44—22–46
other issues, 22–52
unqualified reports, 22–1
volunteered information, 22–32
Auditors’ reports
generally, 21–30
revision, 21–31—21–32
Audits
see also Auditors
audit committees
functions, 22–25
auditors
competence, 22–26—22–30
disqualified persons, 22–12—22–15
independence, 22–10—22–15
liability for negligence, 22–31—22–52
powers, 22–30
removal, 22–18—22–19
role, 22–1—22–2
charitable companies, 22–5
conclusion, 22–53
dormant companies, 22–8
exemption
dormant companies, 22–8
non-profit public sector companies, 22–9
small companies, 22–5—22–6
subsidiary companies, 22–7
non-profit public sector companies, 22–9
overarching issues, 22–4
purpose, 22–1
reports, 22–22
shareholders’ role
audit reports, 22–22
small charitable companies, 22–5
small companies, 22–5—22–6
sources of law, 22–2
Authority
board of directors
confirmation powers of general meeting, 14–11—14–14
involvement of shareholders, 14–18—14–20
unanimous consent of shareholders, 14–15—14–17
Balance sheet
capital
capitalisation issues, 11–20
meaning, 11–1
capital maintenance
acquisition of own shares, 13–6
dividends and distributions, 12–2—12–4
filing, 21–35—21–36
generally, 21–16
publicity, 21–39
small companies
audit exemption, 22–6
generally, 21–4
takeovers, 28–21
Bankruptcy
borrowing, 2–31
derivative claims, 17–12
directors disqualification, 10–16
share transfers, 27–21
wrongful trading, 9–8
Bearer bonds
debentures, 31–12
Beneficial ownership
takeovers, 28–50—28–52
Board of directors
appointment of directors, 14–23—14–29
articles of association
authority
confirmation powers of general meeting, 14–11—14–14
company incorporation, 2–27—2–30
composition
employee representatives, 14–67
gender diversity, 14–68
legal rule, 14–67—14–74
UK Corporate Governance Code, 14–69—14–80
conclusion, 14–81
confirmation powers of general meeting
constructive notice, 7–6—7–8
introduction, 7–5
overview, 7–4
protection for third parties dealing with the board, 7–9—7–15
rule in Turquand’s case, 7–6—7–8
Corporate Governance Code
enforcement, 14–77—14–80
requirements, 14–75—14–76
directors’ remuneration report, 14–44—14–47
employee representatives, 14–67
functions, 14–21—14–22
gender diversity, 14–68
involvement of shareholders in decisions, 14–18—14–20
long-term incentive pay schemes, 14–35—14–37
management, 14–9—14–10
powers, 14–5—14–17
removal of directors
directors’ contractual rights, 14–53—14–55
directors’ procedural rights, 14–52
shareholders’ statutory rights, 14–49—14–55
termination payments, 14–56—14–62
weighted voting rights, 14–51
remuneration of directors
composition of remuneration committee, 14–33
disclosure, 14–44—14–47
long-term incentive pay schemes, 14–35—14–37
remuneration report, 14–44—14–47
shareholder advisory vote, 14–38—14–43
shareholder approval of aspects, 14–34—14–37
requirements of UK Code, 14–75—14–80
role
senior management, 14–9—14–10
shareholders
confirmation powers, 14–15—14–17
general role, 14–5—14–8
removal of directors, 14–49—14–55
remuneration of directors, 14–34—14–43
termination payments for directors, 14–59—14–62
structure
legal rule, 14–64—14–66
termination payments for directors
general controls, 14–56
shareholder approval, 14–62
terms governing duration of directors’ contracts, 14–60—14–61
Bonds
debentures, 31–12—31–13
Bonus issues
capital, 11–20
financial assistance, 13–50
variation of class rights, 19–16—19–17
Borrowing powers
Branches
Breach of duty of care
directors’ duties
remedies, 16–109—16–116
shareholder approval, 16–117—16–124
remedies
accounting for profits, 16–114—16–115
act within scope of powers conferred, 16–30—16–32
avoidance of contracts, 16–113
benefits from third parties, 16–108
compensation, 16–111
competing directorships, 16–106
damages, 16–111
declarations, 16–110
diligence, 16–20
disclosure of interest in existing transactions, 16–66
disclosure of interest in proposed transactions, 16–62
disgorgement of disloyal gains, 16–114—16–115
generally, 16–109
injunctions, 16–110
multiple directorships, 16–106
restoration of property, 16–112
skill and care, 16–20
substantial property transactions, 16–73—16–76
summary dismissal, 16–116
types, 16–109
use of corporate opportunities, 16–106
shareholder approval
decisions being made, 16–118
disenfranchising voters, 16–121—16–122
not-ratifiable breaches, 16–124
person taking the decision, 16–119—16–120
voting majorities, 16–123
“Break-through rule”
Building societies
Business commencement
formation of companies, 4–38
Business names
formation of companies, 4–20—4–21
Business reviews
Capital
authorised capital, 11–12
board of directors, 12–1
bonus issues, 11–20
conclusion, 11–21
consideration received upon issue
all companies, 11–14
non-cash consideration, 11–16—11–17
public companies, 11–15
sanctions, 11–18
currency, 11–19
disclosure and verification
abolition of authorised capital, 11–12
consideration received upon issue, 11–13—11–18
currency, 11–19
return of allotments, 11–11
statements of capital, 11–11
meaning, 11–1—11–2
minimum capital
general requirement, 11–8
objections to requirement, 11–9
no issue of shares at a discount, 11–4—11–5
nominal value, 11–3
share premium, 11–6—11–7
Capital maintenance
acquisition of own shares
company may not be member of its holding company, 13–4
court orders, 13–5
exceptions to general rule, 13–5—13–6
forfeiture, 13–5
gifts, 13–5
nominee, through, 13–3
redemption, 13–7—13–29
re-purchase, 13–7—13–29
conclusion, 13–59
financial assistance
background, 13–44—13–46
exceptions, 13–50—13–54
private company exemption, 13–55
rationale of rule, 13–44
remedies for breach of prohibition, 13–56—13–58
overview, 11–2
background, 13–8
conclusion, 13–29
redeemable shares
background, 13–8
conclusion, 13–29
reduction of share capital
all companies, 13–34—13–38
confirmation by court, 13–36—13–38
creditor objection, 13–35
purpose, 13–31
statutory procedures, 13–33—13–43
“Capital redemption reserve”
purchase of own shares, 13–11—13–12
redeemable shares, 13–11—13–12
Care and skill see Directors’ powers and duties
“Certificated shares”
company lien, 27–11
estoppel, 27–6
legal ownership, 27–5
meaning, 27–3—27–4
positions of transferor and transferee, 27–8
priorities between competing transferees, 27–10
restrictions, 27–7
Certificates of incorporation
challenges to, 4–34—4–37
charter companies, 4–3
choice of type of company, 4–10—4–12
Chairman
Charges
administrators
duties, 32–45—32–46
expenses, 32–49
function, 32–43
powers, 32–45—32–46
benefits of security, 32–4
conclusion, 32–51
enforcement
administration, 32–43—32–50
receivership, 32–37—32–42
floating charges
administrators’ powers, 32–20
automatic crystallisation, 32–9
costs of liquidation, 32–18—32–19
crystallisation, 32–8—32–9
defective charges, 32–25—32–14
distinction from fixed charges, 32–21—32–23
negative pledge clauses, 32–11
practical differences from fixed charges, 32–5—32–7
preferential creditors, 32–15—32–16
prescribed part, 32–17
priority, 32–10—32–12
registration, 32–24—32–33
sharing with unsecured creditors, 32–17
statutory limitations, 32–13—32–20
subordination agreements, 32–12
legal nature, 32–2—32–3
receivers
function, 32–38—32–39
liability with respect to contracts, 32–40—32–41
publicity for appointment and reports, 32–42
status, 32–38—32–39
registration
current system, 32–26
defective, 32–31
effect, 32–32
failure to register, 32–29
geographical reach, 32–28
late, 32–30
mechanics, 32–27
purpose, 32–24—32–25
reform proposals, 32–33
registrable charges, 32–26
security interests, 32–2—32–4
Charitable companies
audits, 22–5
conflicts of interest, 16–86
contractual liability, 7–29
incorporation, 1–30
name, 4–15
not-for-profit organisations, 1–7
self-dealing, 16–86
Charitable incorporated organisations
formation, 4–1
Charter companies
formation, 4–3
Circulars
City Code on Takeovers and Mergers
see also Takeovers
companies covered
generally, 28–15
jurisdiction, 28–15—28–17
divided jurisdiction, 28–16—28–17
General Principles, 28–18
generally, 28–13
jurisdiction
divided, 28–16—28–17
full, 28–15
scope
companies, 28–15—28–17
transactions, 28–14
structure, 28–18
transactions covered, 28–14
Civil proceedings
company incorporation, 2–18
Class meetings
see also General meetings
generally, 15–84
Class rights
company constitution, 3–16
definition, 19–18—19–20
disclosure of shareholdings, 26–17
distribution of company’s assets on winding-up, 33–24—33–26
other cases, 19–21
procedure for variation, 19–14—19–15
self-help, 19–22
share classes, 23–6
shareholders’ role in management, 14–18
‘variation’, 19–16—19–17
Clawback
collection realisation and distribution of company’s assets
anti-deprivation principle, 33–20
avoidance provisions, 33–18
benefit, 33–21
clawback, 33–18
distribution of company’s assets, 33–24—33–26
generally, 33–18
maximising assets available for distribution, 33–17—33–21
proof of debts, 33–22
set off, 33–23
wrongdoer contributions, 33–19
Common law
Community interest companies
generally, 1–12
re-registration, 4–46
Companies
advantages, 1–13—1–16
business vehicles, 1–2—1–5
classification
activity, 1–29—1–30
limited, 1–27
officially listed, 1–22—1–26
public and private, 1–18—1–21
publicly traded, 1–22—1–26
size, 1–28
unlimited, 1–27
conclusion, 1–47
European Community forms, 1–37—1–46
incorporation, 2–1—2–48
legislative background, 1–2—1–5
meaning, 1–1
not-for-profit organisations, 1–6—1–7
types, 1–17—1–36
uses, 1–1—1–16
Companies limited by guarantee
not-for-profit organisations, 1–8—1–10
Company constitutions
see also Articles of association
filing, 21–37
legal status
nature, 3–16—3–17
nature, 3–16—3–17
Company formation see Company
incorporation
Company incorporation
advantages and disadvantages, 2–1—2–48
application, 4–5
choice, 4–32—4–33
generally, 4–5
borrowing, 2–31—2–33
business names, 4–20—4–21
certificate of incorporation
commencement of business, 4–38
community interest companies, 4–6
company names
adjudicators, 4–27—4–29
changes to, 4–22—4–31
choice, 4–13—4–21
defunct company’s name, 4–19
effect of change, 4–31
election to change, 4–30
illegal names, 4–16
index, 4–18
limited suffix, 4–14—4–15
mandatory changes, 4–23—4–24
name already allocated, 4–18
offensive names, 4–16
passing off actions, 4–25—4–26
phoenix companies, 4–19
special approval requirement, 4–17
conclusion, 4–47
documentation, 4–5—4–6
expense, 2–35—2–38
formalities, 2–35—2–38
introduction, 4–1
legal entity distinct from members, 2–1—2–8
limited liability, 2–9—2–15
management under Board structure, 2–27—2–30
memorandum of association, 4–5
property, 2–16—2–17
publicity
company’s affairs, 2–39
directors, 2–40
members of company, 2–41
‘people with significant control’, 2–42—2–47
registered companies, 4–4
registration
certificate of incorporation, 4–7—4–8
challenges, 4–34—4–37
choice of type, 4–10—4–12
shelf companies, 4–9
statement of compliance, 4–5
statutory undertakings, 4–2
succession, 2–19—2–23
suing and being sued, 2–18
taxation, 2–34
transferable shares, 2–24—2–26
Company investigations
appointment of inspectors, 18–5—18–6
company ownership, 18–11
conclusion, 18–15
disclosure of documents and information, 18–2—18–4
follow-ups, 18–13—18–14
formal investigations
appointment of inspectors, 18–5—18–6
conduct, 18–7—18–9
powers of inspectors, 18–7—18–9
reports, 18–10
informal investigations, 18–2—18–4
inspectors
appointment, 18–5—18–6
powers, 18–7—18–9
reports, 18–10
liability for costs, 18–12
powers of inspectors, 18–7—18–9
reports, 18–10
Company law
constitution
legal status, 3–18—3–32
nature, 3–16—3–17
EU law
corporate governance, 6–15
harmonisation, 6–9—6–11
reform of directives, 6–16
single financial market, 6–14
subsidiarity, 6–12—6–13
sources of law
common law, 3–10
delegated rule-making, 3–7—3–9
European companies, 3–36
FRC, 3–9
FSA rules, 3–7—3–8
primary legislation, 3–3—3–4
reform, 3–11—3–12
secondary legislation, 3–5—3–6
Company management
Company names
changes to
election by company, 4–30
Secretary of State, 4–23—4–24
choice, 4–13—4–21
index, 4–18
liability for abuses
exceptions, 9–19
generally, 9–16
prohibition, 9–17—9–18
mandatory and elective changes
election by company, 4–30
Secretary of State, 4–23—4–24
prohibitions
use of name already allocated, 4–18
Company registration
application, 4–5
choice, 4–32—4–33
generally, 4–5
business names, 4–20—4–21
certificate of incorporation
commencement of business, 4–38
company names
changes to, 4–22—4–31
choice, 4–13—4–21
index, 4–18
mandatory changes, 4–23—4–24
conclusion, 4–47
introduction, 4–1
memorandum of association, 4–5
registered companies, 4–4
re-registration
company becoming unlimited, 4–43—4–44
private company becoming public, 4–40
public company becoming private, 4–41—4–42
unlimited company becoming private, 4–45
statement of compliance, 4–5
statutory undertakings, 4–2
Compensation
breach of directors’ duties, 16–111
disqualification of directors, 10–4
takeovers, 28–10
Competing directorships see Directors’ powers
and duties
Compulsory winding-up
discretion of court, 33–6
grounds, 33–3
inability to pay debts, 33–5
liquidators, 33–7
official receivers, 33–7
petitioners, 33–4
proof of inability to pay debts, 33–5
provisional liquidators, 33–7
timing of commencement, 33–8
Confirmation statements
generally, 21–38
Conflicts of interest
acceptance of benefits from third parties
generally, 16–107
remedies for breach, 16–108
credit transactions
arrangements covered, 16–78—16–80
disclosures, 16–81
exceptions, 16–82
method of approval, 16–81
directors’ powers and duties
benefits from third parties, 16–107—16–108
exemptions from liability, and, 16–126—16–127
self-dealing, 16–54—16–66
transactions with the company, 16–54—16–85
use of corporate property etc, 16–106
directors’ remuneration, 16–84
directors’ service contracts, 16–84
disclosure of interest in existing transactions
generally, 16–64
methods, 16–65
disclosure of interest in proposed transactions
generally, 16–57
interests to be disclosed, 16–60
methods of disclosure, 16–61
persons subject to duty, 16–59
purpose of requirement, 16–58
role of articles of association, 16–63
loans
exceptions, 16–82
payments for loss of office, 16–84
political donations and expenditure, 16–85
self-dealing
approval mechanisms, 16–55—16–56
interest in existing transactions, 16–64—16–66
interest in proposed transactions, 16–57—16–63
substantial property transactions
listed companies, 16–77
remedies for breach, 16–73—16–76
requirement for approval, 16–70—16–71
transactions requiring special approval of members
loans and credit, 16–78—16–83
relationship with general duties, 16–68—16–69
transactions with the company
requiring special approval, 16–67—16–85
use of corporate information, 16–86
use of corporate opportunities
authorisation by the board, 16–103—16–104
conceptual issue, 16–105
identification, 16–89—16–98
use of corporate property, 16–86
Consent
shareholder decision-making, 15–15—15–21
Consideration
capital
all companies, 11–14
sanctions, 11–18
Consolidated Admissions Requirements
Directive (2001/34/EC)
admission to listing, 25–15
types of listing, 25–6
Constructive notice
contracting through the board or shareholders collectively, 7–6—7–8
Contractual liability
contracting through agents
attribution, 7–18
overall, 7–28
overview, 7–4
contracting through the board or shareholders collectively
introduction, 7–5
overview, 7–4
employees, 7–31
introduction, 7–4
objects clause, 7–29
protection for third parties dealing with the board
‘dealing with a company’, 7–11
directors, 7–13
effects of lack of authority, 7–15
‘in favour of a person dealing with a company in good faith’, 7–10
introduction, 7–9
lack of authority, 7–15
limitations under constitution, 7–14
‘persons’, 7–12
special cases, 7–29—7–31
ultra vires, 7–29
Co-operative societies
Corporate governance
board of directors
appointment of directors, 14–23—14–29
composition, 14–67—14–74
conclusion, 14–81
functions, 14–21—14–22
powers, 14–5—14–17
requirements of UK Code, 14–75—14–80
role, 14–1—14–21
structure, 14–63—14–66
controlling members’ voting
class rights, 19–13—19–21
conclusion, 19–29
review of shareholders’ decisions, 19–4—19–12
self-help, 19–22—19–28
derivative claims
conclusion, 17–39
conduct, 17–25—17–28
other solutions, 17–7—17–10
permission, 17–17—17–21
political expenditure, and, 17–29—17–31
purpose, 17–1
scope, 17–11—17–16
shareholders, 17–3
shareholders against directors, by, 17–32—17–38
types, 17–22
directors’ duties
act within powers, 16–23—16–32
approval of breach of duty, 16–117—16–124
care and skill, 16–15—16–20
conclusion, 16–140—16–141
diligence, 16–15—16–20
exemptions from liability, 16–125—16–132
exercise independent judgment, 16–33—16–36
liability of third parties, 16–134—16–137
limitation of actions, 16–138—16–139
loyalty, 16–21—16–22
no-conflict rules, 16–52—16–53
persons by whom duties owed, 6–13—6–26
persons to whom owed, 16–4—16–7
promote success of company, 16–37—16–51
relief from, 16–133
skill and care, 16–15—16–20
EU law, 6–15
investigations
conclusion, 18–15
follow-ups, 18–13—18–14
formal investigations, 18–5—18–9
reports, 18–10
minority shareholders
conclusion, 19–29
self-help, 19–22—19–28
shareholders
conclusion, 15–87
decision-making without meetings, 15–6—15–21
meetings, 15–42—15–86
participation, 15–22—15–41
role, 15–1—15–5
unfair prejudice
conclusion, 20–23
derivative claims, 20–14—20–17
equitable considerations, 20–6—20–13
independent illegality, 20–6
legitimate expectations, 20–6—20–13
litigation costs, 20–18
remedies, 20–19—20–20
scope of provisions, 20–4—20–5
winding up on just and equitable ground, 20–21—20–22
Corporate liability
accessory liability, 7–36
conclusion, 7–48
contracting through agents
attribution, 7–18
overall, 7–28
overview, 7–4
contracting through the board or shareholders collectively
introduction, 7–5
overview, 7–4
contractual rights and liabilities
contracting through agents, 7–16—7–29
employees, 7–31
introduction, 7–4
special cases, 7–29—7–31
criminal liability
corporate manslaughter, 7–43
‘directing mind and will’, 7–41
directors, of, 7–42
failure to prevent criminal acts, 7–46
generally, 7–38
identification, 7–40
personal liability, 7–45
regulatory offences, 7–39
sanctions, 7–44
litigation by the company, 7–47
objects clause, 7–29
protection for third parties dealing with the board
‘dealing with a company’, 7–11
directors, 7–13
effects of lack of authority, 7–15
‘in favour of a person dealing with a company in good faith’, 7–10
introduction, 7–9
lack of authority, 7–15
limitations under constitution, 7–14
‘persons’, 7–12
tortious liability
assumption of responsibility, 7–32
direct liability, 7–37
fraud, 7–33
non-involved directors, 7–35
recovery by company from the agent, 7–34
ultra vires, 7–29
Corporate manslaughter
generally, 7–43
“Corporate mobility”
domestic rules, 6–18—6–19
EU law
alternative transfer mechanisms, 6–27
initial incorporation, 6–20—6–23
subsequent re-incorporation, 6–24—6–26
generally, 6–17
Corporate opportunities see Directors’ powers
and duties
Corporate property see Directors’ powers and
duties
Corporate representatives
Costs
Covered bonds
debentures, 31–19—31–20
Credit
directors’ duties
exceptions, 16–82
Creditors’ voluntary winding-up
appointment of liquidators, 33–14
instigation, 33–13
liquidation committees, 33–15
CREST
share transfers, 27–3—27–4
Criminal liability
auditors, 22–43
corporate manslaughter, 7–43
‘directing mind and will’, 7–41
directors, of, 7–42
failure to prevent criminal acts, 7–46
generally, 7–38
identification, 7–40
personal liability, 7–45
regulatory offences, 7–39
sanctions, 7–44
takeovers, 28–12
Cross-border mergers
schemes of arrangement
employee participation, 29–20—29–21
further uses, 29–22—29–23
Crystallisation
floating charges, 32–8—32–9
Currencies
capital, 11–19
Damages
breach of promoter’s duties, 5–16, 5–19
De facto directors
see also Directors’ powers and duties
Debentures
bearer bonds, 31–12
bonds, 31–12—31–13
conclusion, 31–32
covered bonds, 31–19—31–20
debenture stock, 31–12
debenture-holders
protection of rights, 31–24—31–31
trustees, 31–14
debt and equity
choice by companies, 31–4
differences between, 31–2—31–3
default by borrowers, 31–26—31–27
direct financing, 31–8
indirect financing, 31–8
issue
covered bonds, 31–19—31–20
private issues, 31–15—31–16
public issues, 31–17—31–18
junior debt, 31–8
large scale loans, 31–8
loan stock, 31–12
mezzanine finance, 31–8
multiple lenders
protection from each other, 31–30—31–31
protection from their lead intermediary, 31–28—31–29
notes, 31–12—31–13
private issues, 31–15—31–16
protection of debenture-holders’ rights
borrower’s possible default, 31–26—31–27
multiple lenders, 31–28—31–31
repayment terms, 31–25
public issues, 31–17—31–18
repayment terms, 31–25
senior debt, 31–8
single lenders, 31–10—31–14
small scale loans, 31–8
stock, 31–12
structures, 31–5—31–9
subordination agreement, 31–10
syndicated loans, 31–11
terminology, 31–5
trading, 31–9
transfer
debt securities, 31–22—31–23
simple debts, 31–21
trustees for debenture-holders, 31–14
use by companies, 31–4
Debt securities
charges conclusion, 32–51
debentures conclusion, 31–32
issue, 31–15—31–20
protection of holders’ rights, 31–24—31–31
single and multiple lenders, 31–10—31–14
terminology, 31–5
transfer, 31–21—31–23
Decision-making
shareholder participation
nature of problem, 15–6—15–7
unanimous consent, 15–15—15–21
written resolutions, 15–8—15–14
Declarations of interest
existing transactions
generally, 16–64
methods, 16–65
proposed transactions
generally, 16–57
Delegated powers
sources of law
FRC, 3–9
FSA, 3–7—3–8
Delisting
Derivative claims
conclusion, 17–39
costs, 17–27
existing claims, 17–22—17–23
individual shareholders
reflective loss, 17–34—17–38
information rights, 17–26
judicial management of proceedings, 17–18
multiple claims, 17–24
permission
discretionary grant, 17–20—17–21
judicial management of proceedings, 17–18
mandatory refusal, 17–19
prima facie case, 17–18
political donations, 17–29—17–31
purpose, 17–1
reflective loss, 17–34—17–38
rule in Foss v Harbottle, 17–4—17–6
scope, 17–11—17–12
settlement, 17–28
Diligence
directors’ duties
historical development, 16–15
statutory standard, 16–16—16–19
Directors
appointment, 14–23—14–29
disclosure of shareholdings
disclosable information, 26–12
‘person discharging managerial responsibilities’, 26–11
recipients, 26–13
timing, 26–12
disqualification
bankruptcy, 10–16
conclusion, 10–18
grounds of unfitness, 10–5—10–11
non-mandatory, 10–12—10–15
orders and undertakings, 10–2—10–3
duties
act within powers, 16–23—16–32
approval of breach of duty, 16–117—16–124
care and skill, 16–15—16–20
diligence, 16–15—16–20
exemptions from liability, 16–125—16–132
loyalty, 16–21—16–22
persons by whom duties owed, 6–13—6–26
persons to whom owed, 16–4—16–7
skill and care, 16–15—16–20
fraudulent trading
declaration, 9–8
liability for abuse of limited liability
conclusion, 9–25
duties as to creditors, 9–11—9–15
fraudulent trading, 9–4—9–5
misdescription of the company, 9–20
phoenix companies, 9–16—9–19
premature trading, 9–3
wrongful trading, 9–6—9–10
list, 21–37
removal
directors’ contractual rights, 14–53—14–55
directors’ procedural rights, 14–52
shareholders’ statutory rights, 14–49—14–55
termination payments, 14–56—14–62
weighted voting rights, 14–51
remuneration
incentive pay schemes, 14–35—14–37
termination payments
wrongful trading
declaration, 9–8
generally, 9–6
impact, 9–9—9–10
shadow directors, 9–7
Directors disqualification
bankruptcy, 10–16
breach of commercial morality, 10–9
conclusion, 10–18
court’s role, 10–8
disqualification orders
generally, 10–2
register, 10–15
scope, 10–3
disqualification undertakings
generally, 10–2
register, 10–15
scope, 10–3
failure to comply with reporting requirement, 10–14
fraudulent trading, 10–13
incompetence, 10–10—10–11
Insolvency Service’s role, 10–7
market abuse, 30–56
non-mandatory
failure to comply with reporting requirement, 10–14
fraudulent trading, 10–13
serious offences, 10–12
orders and undertakings
generally, 10–2
register, 10–15
scope, 10–3
recklessness, 10–10—10–11
serious offences, 10–12
unfitness
breach of commercial morality, 10–9
incompetence, 10–10—10–11
recklessness, 10–10—10–11
role of Insolvency Service, 10–7
role of the court, 10–8
Directors’ powers and duties
generally, 16–107
act in accordance with the constitution, 16–24—16–25
act within scope of powers conferred
improper purposes, 16–26—16–29
in accordance with the constitution, 16–24—16–25
approval of breach of duty
benefits from third parties
generally, 16–107
breach of duty
remedies, 16–109—16–116
care and skill
common law principles, 16–1—16–3
competing directorships
generally, 16–100—16–101
conflicts of interest
exemptions from liability, and, 16–126—16–127
constitutional limitations, 16–24
corporate information, 16–86
corporate opportunities
corporate property, 16–86
credit transactions
exceptions, 16–82
damages, 16–111
diligence
generally, 16–64
methods, 16–65
generally, 16–57
disclosure of wrongdoing, 16–45
exemptions from liability
conflicts of interest, 16–126—16–127
insurance, 16–129
pension scheme indemnity, 16–132
provisions providing director with indemnity, 16–128—16–132
third party indemnities, 16–130—16–131
exercise of future discretion, 16–35
exercise of independent judgment
delegation of authority, 16–34
future discretion, 16–35
nominee directors, 16–36
taking advice, 16–34
improper purposes
general rule, 16–26
meaning, 16–27—16–28
when is power exercised, 16–29
indemnities
insurance, 16–129
pension scheme, 16–132
provisions providing director, 16–128—16–132
third party, 16–130—16–131
insurance, 16–129
loans
exceptions, 16–82
loyalty
act within powers conferred, 16–23—16–32
background, 16–21
categories of duties, 16–22
multiple directorships
generally, 16–102
no-conflict rules
not to accept benefits from third parties
generally, 16–107
pension scheme indemnity, 16–132
persons by whom duties owed
de facto directors, 16–8—16–10
directors of insolvent companies, 16–14
former directors, 16–13
senior managers, 16–11—16–12
shadow directors, 16–8—16–10
persons to whom owed
company, 16–4
individual shareholders, 16–5—16–6
other stakeholders, 16–7
promote success of company
common law, 16–37—16–39
corporate groups, 16–47
creditors, 16–49
defining company’s success, 16–40
donations, 16–50—16–51
employees, 16–48
failure to have regard to relevant matters, 16–41—16–44
groups of companies, 16–47
interpreting the statutory formula, 16–40—16–51
‘short-termism’, 16–46
quasi-loans
exceptions, 16–82
reasonable skill and care
remedies for breach
damages, 16–111
diligence, 16–20
generally, 16–109
types, 16–109
self-dealing
service contracts, 16–84
shareholder approval of breaches of duty
skill and care
exceptions, 16–72
third party indemnities, 16–130—16–131
‘whitewash’ of breaches of duty
Directors’ remuneration
transactions requiring special approval of members, 16–84
unfair prejudice, 20–10—20–11
Directors’ remuneration reports
revision, 21–31—21–32
Directors’ reports
approval, 21–29
revision, 21–31—21–32
Directors’ service contracts
Disclosure
acquisition of shares prior to takeover bid
acting in concert, 28–54
beneficial holdings, 28–50—28–52
company-triggered disclosures, 28–51—28–52
generally, 28–50
interests in shares, 28–54
major shareholdings, 26–14—26–32
s 793 notice, 28–51—28–53
capital
abolition of authorised capital, 11–12
consideration received upon issue, 11–13—11–18
currency, 11–19
control structures, 28–25
directors’ shareholdings
recipients, 26–13
timing, 26–12
foreign companies
annual reporting, 6–6
background, 6–3
trading disclosure, 6–6
interests in existing transactions
generally, 16–64
methods, 16–65
interests in proposed transactions
generally, 16–57
liability for abuse of limited liability, 9–20
major shareholdings
background, 26–15
companies affected, 26–16
exemptions, 26–22
financial instruments, 26–20—26–21
indirect holdings of voting rights, 26–19
procedure, 26–23
rationale, 26–14
sanctions for non-disclosure, 26–31
scope of obligation, 26–16—26–23
timing, 26–17—26–18
takeovers
acquisition of shares prior to bid, 28–50—28–54
control structures, 28–25
wrongdoing, 16–45
Disguised distributions see Distributions
Disqualification of directors see Directors
disqualification
Disqualification orders
generally, 10–2
register, 10–15
scope, 10–3
Disqualification undertakings
generally, 10–2
register, 10–15
scope, 10–3
Dissolution
early dissolution, 33–28
normal process, 33–27
resurrection of dissolved companies
administrative restoration, 33–32
court restoration, 33–33
generally, 33–31
striking off of defunct companies, 33–29
voluntary striking off, 33–30
Distributions
adverse developments subsequent to accounts, 12–8
articles of association, 12–1
balance sheet test, 12–2
basic rules
generally, 12–1
public companies, 12–2—12–4
capital, 12–1
capital redemption reserve, 12–2
definition, 12–9
disguised distributions
intra-group transfers, 12–11
distributable amount
adverse developments, 12–8
generally, 12–5
initial accounts, 12–6
interim accounts, 12–6
interim dividends, 12–7
relevant accounts, 12–5
initial accounts, 12–6
interim accounts, 12–6
intra-group transfers, 12–11
recovery of
directors, from, 12–13—12–14
reform of rules, 12–15—12–16
unlawful distributions
recovery from directors, 12–13—12–14
recovery from members, 12–12
‘unrealised profits’, 12–3
Diversity
Dividends
see also Distributions
interim amounts, 12–7
Doing business etc without a trading certificate
see Limited liability
Dormant companies
audits, 22–8
Employee representatives
Employees
contractual liability, 7–31
“Empty voting”
Equity finance
ad hoc reporting, 26–5—26–8
allotment of shares
directors’ authority, 24–4—24–5
failure of offer, 24–20
generally, 24–18
pre-emption rights, 24–6—24–16
renounceable allotments, 24–19
terms, 24–17
classes of shares
conversion of shares into stock, 23–11
ordinary shares, 23–9
preference shares, 23–7—23–8
special classes, 23–10
continuing obligations of publicly traded companies
compensation for misleading statements to the market, 26–25—26–27
compensation through FCA action, 26–28
conclusion, 26–33
criminal sanctions, 26–32
disclosure of directors’ interests, 26–9—26–13
disclosure of major shareholdings, 26–14—26–23
episodic reporting, 26–5—26–8
penalties for breaches of rules, 26–29—26–31
periodic reporting, 26–3—26–4
reporting requirements, 26–3—26–8
sanctions, 26–24—26–32
de-listing of shares, 25–45
disclosure of directors’ shareholdings
recipients, 26–13
timing, 26–12
disclosure of major shareholdings background, 26–15
exemptions, 26–22
procedure, 26–23
rationale, 26–14
timing, 26–17—26–18
insider dealing (criminal prohibition)
breach of confidence, 30–9
conclusion, 30–57
defences, 30–26—30–28
directors’ fiduciary duties, 30–8
disclosure, 30–5
general law, 30–7—30–10
impact on price, 30–21
inside information, 30–16—30–21
insiders, 30–22—30–23
made public, 30–19—30–20
meaning, 30–1
mental element, 30–24
misrepresentation, 30–10
particular securities or issuers, 30–17
precise information, 30–18
price impact, 30–21
prohibited acts, 30–25
prohibited dealing, 30–11
prohibited trading, 30–6
public information, 30–19—30–20
recipients from insiders, 30–23
regulated individuals, 30–15—30–14
regulated markets, 30–13—30–14
regulatory approaches, 30–5—30–11
specific information, 30–18
statutory basis, 30–12
insider dealing (regulatory control)
dealing, 30–32—30–36
exemptions, 30–38
generally, 30–31
inside information, 30–37
overview, 30–30
persons covered, 30–38
market abuse
background, 30–4
conclusion, 30–57
criminal prohibitions, 30–5—30–29
insider dealing, 30–5—30–28, 30–31—30–38
investigations, 30–48—30–50
market distortion, 30–41
market manipulation, 30–29, 30–39—30–42
meaning, 30–1
penalties, 30–52
regulatory control, 30–30—30–46
restitution, 30–53
safe harbours, 30–43—30–46
types, 30–1
market manipulation (criminal prohibition)
generally, 30–29
meaning, 30–1
market manipulation (regulatory control)
accepted market practices, 30–42
dissemination of information, 30–40
misleading behaviour, 30–41
orders to trade, 30–39
overview, 30–30
mergers
conclusion, 29–26
generally, 29–2
reorganisations, 29–24—29–25
schemes of arrangement, 29–2—29–23
takeovers, 29–3
nature of shares, 23–1—23–3
pre-emption rights
criticisms, 24–15—24–16
guidelines, 24–14
policy issues, 24–6
sanctions, 24–12
scope of right, 24–7—24–9
waiver, 24–10—24–11
presumption of equality between shareholders, 23–4—23–5
public offers
admission to listing, 25–15—25–16
cross-border listings, 25–44
de-listing, 25–45
listing, 25–5—25–6
prospectus, 25–17—25–30
public markets, 25–7—25–9
regulatory goals, 25–3
trading on public markets, 25–15—25–16
types, 25–11—25–14
reorganisations
conclusion, 29–26
reporting requirements
conclusion, 26–33
conclusion, 29–26
creditors’ schemes, 29–5
cross-border mergers, 29–16—29–23
function, 29–1
meetings, 29–8—29–10
other cases, 29–4
procedure, 29–6—29–11
proposal, 29–6
sanction of the court, 29–11
uses, 29–2
share issues
allotment of shares, 24–18—24–20
conclusion, 24–23
directors’ authority to allot, 24–4—24–5
non-public offers, 24–2—24–3
public offers, 25–1—25–45
terms, 24–17
shares
classes, 23–6—23–11
definition, 23–2
equality, 23–4—23–5
issue, 24–1—24–23
nature, 23–1—23–3
transfers, 27–1—27–21
takeovers
allocation of acceptance decision, 28–19—28–25
City Code on Takeovers and Mergers, 28–13—28–18
conclusion, 28–77
equality of treatment of target shareholders, 28–37—28–48
Panel on Takeovers and Mergers, 28–4—28–12
promotion of a bid, 28–26—28–36
transfer of shares
certificated shares, 27–5—27–11
operation of law, 27–21
register, 27–16—27–20
types of shares, 27–3—27–4
uncertificated shares, 27–12—27–15
EU law
company law
corporate governance, 6–15
harmonisation, 6–9—6–11
reform of directives, 6–16
single financial market, 6–14
subsidiarity, 6–12—6–13
European companies
background, 6–13
board structure, 14–66
European economic interest groupings
Execution
documents
Exercise of independent judgment see Directors’ powers and duties
“Exit rights”
Fidelity
generally, 16–107
act within powers conferred
improper purposes, 16–26—16–29
in accordance with the constitution, 16–24—16–25
credit transactions
exceptions, 16–82
directors’ powers and duties
act within powers conferred, 16–23—16–32
background, 16–21
categories of duties, 16–22
generally, 16–64
methods, 16–65
generally, 16–57
loans
exceptions, 16–82
no-conflict rules
promote success of company
common law, 16–37—16–39
corporate groups, 16–47
creditors, 16–49
defining company’s success, 16–40
donations, 16–50—16–51
employees, 16–48
failure to have regard to relevant matters, 16–41—16–44
interpreting the statutory formula, 16–40—16–51
‘short-termism’, 16–46
self-dealing
Financial assistance
exceptions
general, 13–52—13–54
specific, 13–50—13–51
private company exemption, 13–55
rationale of rule, 13–44
remedies for breach of prohibition, 13–56—13–58
Financial Conduct Authority
Financial records
Financial Reporting Council
audit committees, 22–25
contractual limitations, 22–42
ethical standards, 22–13
independence of auditors, 22–12
qualifications of auditors, 22–27
Financial Services Action Plan
EU law, 6–14
Financial Services Authority
sources of law, 3–7—3–8
“Financial year”
Firm intention to bid see Takeovers
Floating charges
administrators
duties, 32–45—32–46
expenses, 32–49
function, 32–43
powers, 32–45—32–46
administrators’ powers, 32–20
benefits, 32–4
conclusion, 32–51
costs of liquidation, 32–18—32–19
crystallisation
defective charges, 32–25—32–14
distinction from fixed charges, 32–21—32–23
enforcement
administration, 32–43—32–50
receivership, 32–37—32–42
legal nature, 32–2—32–3
negative pledge clauses, 32–11
practical differences from fixed charges, 32–5—32–7
preferential creditors, 32–15—32–16
prescribed part, 32–17
priority, 32–10—32–12
receivers
function, 32–38—32–39
status, 32–38—32–39
registration
defective, 32–31
effect, 32–32
late, 32–30
mechanics, 32–27
purpose, 32–24—32–25
sharing with unsecured creditors, 32–17
statutory limitations, 32–13—32–20
subordination agreements, 32–12
Foreign companies
‘branch’, 6–4
company names, 6–7
directors disqualification, 10–17
disclosure obligations
background, 6–3
trading disclosure, 6–6
establishment, 6–4
EU law, 6–2
execution of documents, 6–7
other mandatory provisions, 6–8
overview, 6–1
‘place of business’, 6–4
Forfeiture
Formalities
Formation of companies see Company
formation
Fraud
tortious liability, 7–33
Fraudulent trading
declaration, 9–8
Freedom of establishment
corporate mobility
EU law, 6–20—6–27
generally, 6–17
Friendly societies
Gender diversity see Diversity
General meetings
accounts, 15–43
adjournments, 15–83
agenda items
information concerning, 15–60
annual general meetings, 15–49—15–50
annual reports, 15–43
attendance
proxies, 15–67—15–71
chairman, 15–82
circulars, 15–65
class meetings, 15–84
communication of notice, 15–66
conduct, 15–43—15–47
contents of notice, 15–65
convening
court-ordered meetings, 15–53—15–54
general meetings, 15–51—15–52
‘empty’ voting, 15–81
forms of communication
by the company, 15–85
to the company, 15–86
length of notice, 15–61—15–62
minutes, 15–80
miscellaneous matters, 15–82—15–86
nature, 15–55
notices
communication to members, 15–66
contents, 15–65
length, 15–61—15–62
resolutions, 15–47
special notice, 15–63—15–64
ordinary resolutions, 15–44
polls
generally, 15–75
proxies, 15–67—15–71
publicity for votes and resolutions, 15–78—15–80
record dates, 15–77
resolutions
contents, 15–47
notices, 15–47
publicity, 15–78—15–80
special resolutions, 15–44
types, 15–44—15–46
voting requirements, 15–45—15–46
wording, 15–47
show of hands
generally, 15–75
voting
polls, 15–75
resolutions, 15–45—15–46
show of hands, 15–75
Gifts
Going concern
Group accounts
Groups of companies
accounts
limited liability
‘lifting the veil’, 9–24
Guarantee companies see Companies limited by
guarantee
Harmonisation
EU law, 6–9—6–11
Incorporation of companies see Company
incorporation
Independence
auditors
direct regulation, 22–12—22–
Indirect investors
governance rights, 15–34—15–39
information rights, 15–40—15–41
mandatory transfer options in traded companies, 15–40—15–41
role, 15–31—15–41
voluntary arrangements, 15–34—15–39
Individual accounts
Industrial and provident societies
generally, 1–35
Injunctions
market abuse
administrative provisions, 30–53
criminal prohibition, 30–55
Insider dealing
background, 30–4
conclusion, 30–57
criminal prohibition
conclusion, 30–57
defences, 30–26—30–28
disclosure, 30–5
insiders, 30–22—30–23
meaning, 30–1
prohibited dealig, 30–11
dealing, 30–32—30–36
defences
general, 30–27
special, 30–28
development of the law, 30–4
directors’ disqualification, 30–56
disclosure, 30–5
enforcement
inside information
generally, 30–16
regulatory control, and, 30–37
insiders
generally, 30–22
recipients from, 30–23
meaning, 30–1
price stabilisation, 30–45
regulatory approaches
disclosure, 30–5
reliance on general law, 30–7—30–10
trading prohibition, 30–6
regulatory control
dealing, 30–32—30–36
exemptions, 30–38
generally, 30–31
overview, 30–30
reliance on general law, 30–7—30–10
safe harbours
generally, 30–43
share buy-backs, 30–44
sanctions for breach of administrative provisions
penalties, 30–52
sanctions for breach of criminal law
takeovers, and, 28–57
trading prohibition, 30–6
types, 30–1
Institutional investors
fiduciary investors, 15–29
inactivity, 15–27—15–28
Myners Report, 15–25—15–29
role, 15–25—15–30
Statement of Investment Principles, 15–28
UK Stewardship Code, 15–30
Walker Report, 15–25
Intentions as to future business see Takeovers
“Interests of justice”
limited liability, 8–14
Interim dividends see Distributions
Internal market
EU law, 6–14
International co-operation
Investigations
company investigations
conclusion, 18–15
disclosure of documents and information, 18–2—18–4
follow-ups, 18–13—18–14
formal investigations, 18–5—18–9
reports, 18–10
market abuse
international co-operation, 30–50
Judgments and orders
shareholder meetings, 15–53—15–54
Judicial review
takeovers, 28–6
Junior debt see Debentures
Just and equitable see Winding-up
Large companies
generally, 1–28
Legal personality
common law
agency argument, 8–13
façade or sham, 8–12
impropriety, 8–15—8–16
interests of justice, 8–14
‘single economic unit’, 8–11
contract, 8–8—8–9
introduction, 8–7
statute, 8–8—8–9
Legislation
sources of law
primary, 3–3—3–4
reform, 3–11—3–12
secondary, 3–5—3–6
Legitimate expectation
unfair prejudice
balance between dividends and directors’ remuneration, 20–10—20–11
informal arrangements among members, 20–7—20–9
other categories, 20–12
prejudice, 20–13
Letters patent
“Lifting the veil”
see also Limited liability
common law, 8–10—8–16
Limitation periods
breach of directors’ duties, 16–138—16–139
Limited companies see Companies
Limited liability
agency argument, 8–13
‘asset partitioning’ rationale, 8–2
company names
exceptions, 9–19
generally, 9–16
conclusion, 8–17
disclosure of information, 8–6
doing business etc without a trading certificate, 9–3
façade or sham, 8–12
fraudulent trading
declaration, 9–8
groups of companies
‘lifting the veil’, 9–24
impropriety, 8–15—8–16
interests of justice, 8–14
legal personality
introduction, 8–7
legal responses
disclosure of information, 8–6
generally, 8–5
‘lifting the veil’
introduction, 8–7
personal liability for abuses
conclusion, 9–25
duties as to creditors, 9–11—9–15
fraudulent trading, 9–4—9–5
phoenix companies, 9–16—9–19
wrongful trading, 9–6—9–10
phoenix companies
exceptions, 9–19
generally, 9–16
rationale, 8–1—8–4
separate legal personality
introduction, 8–7
‘single economic unit’, 8–11
trading disclosures, 9–20
wrongful trading
declaration, 9–8
generally, 9–6
impact, 9–9—9–10
Limited liability partnerships
Liquidation
clawback
benefit, 33–21
generally, 33–18
clawback, 33–18
set off, 33–23
compulsory winding-up
grounds, 33–3
liquidators, 33–7
petitioners, 33–4
conclusion, 33–34
creditors’ voluntary winding-up
dissolution
just and equitable ground, 20–21—20–22
liquidators’ powers and duties, 33–16
maximising assets available for distribution
clawback, 33–18
members’ voluntary winding-up
declaration of solvency, 33–11
instigation, 33–9
generally, 33–31
set off, 33–23
striking off of defunct companies
generally, 33–29
voluntary, 33–30
types
compulsory winding-up, 33–3—33–8
creditors’ voluntary winding-up, 33–13—33–15
generally, 33–2
members’ voluntary winding-up, 33–11—33–12
voluntary winding-up
creditors, 33–27—33–32
general, 33–9—33–10
instigation, 33–9
members, 33–19—33–26
wrongdoer contributions
benefit, 33–21
generally, 33–19
Liquidators’ powers and duties
generally, 33–16
Listed companies
Listing
see also Public offers
admission, 25–15—25–16
cross-border, 25–44
generally, 25–5
regulated markets, 25–9
types, 25–6
Listing Rules
publicly traded companies, 1–23—1–25
Litigation
companies, and, 7–47
Loans
directors’ duties
exceptions, 16–82
London Stock Exchange
generally, 25–7
Loss of office
Loyalty see Directors’ powers and duties
Major shareholders
disclosure
background, 26–15
exemptions, 26–22
procedure, 26–23
rationale, 26–14
timing, 26–17—26–18
Management see Company management
Market abuse
background, 30–4
conclusion, 30–57
criminal prohibitions
insider dealing, 30–5—30–28
market manipulation, 30–29
enforcement
sanctions for breach of administrative provisions, 30–51—30–53
sanctions for breach of criminal law, 30–54—30–56
insider dealing (criminal prohibition)
conclusion, 30–57
defences, 30–26—30–28
disclosure, 30–5
insiders, 30–22—30–23
meaning, 30–1
insider dealing (regulatory control)
dealing, 30–32—30–36
exemptions, 30–38
generally, 30–31
overview, 30–30
market manipulation (criminal prohibition)
generally, 30–29
meaning, 30–1
market manipulation (regulatory control)
overview, 30–30
meaning, 30–1
penalties, 30–52
regulatory control
background, 30–30
insider dealing, 30–31—30–38
market manipulation, 30–39—30–42
safe harbours, 30–43—30–45
safe harbours
generally, 30–43
penalties, 30–52
types, 30–1
Market manipulation
background, 30–4
conclusion, 30–57
criminal prohibition
generally, 30–29
meaning, 30–1
enforcement
sanctions for breach of administrative provisions, 30–51—30–53
sanctions for breach of criminal law, 30–54—30–56
meaning, 30–1
regulatory control
overview, 30–30
safe harbours
generally, 30–43
penalties, 30–52
Markets in Financial Instruments Directive
(2004/39/EC)
Medium-sized companies
Members’ voluntary winding-up
instigation, 33–9
Memorandum of association
Mergers
conclusion, 29–26
cross-border mergers
rationale, 29–1
reorganisations
conclusion, 29–26
conclusion, 29–26
cross-border mergers, 29–16—29–23
function, 29–1
other cases, 29–4
proposal, 29–6
uses, 29–2
Mezzanine finance
debentures, 31–8
Microenterprises
generally, 1–28
Minimum share capital
general requirement, 11–8
objections to requirement, 11–9
Minority shareholders
appraisal rights, 19–3
class rights
other cases, 19–21
procedure for variation, 19–14—19–15
‘variation’, 19–16—19–17
conclusion, 19–29
exit rights, 19–3
ratification of wrongdoing, 19–4
related party transactions, 19–2
review of shareholders’ decisions
other resolutions, 19–10—19–11
resolutions generally, 19–7
resolutions to expropriate members’ shares, 19–8—19–9
resolutions where company’s interests are centre stage, 19–6
voting at class meetings, 19–12
self-help
binding only the shareholders, 19–28
prior contracts, 19–26—19–27
shareholder agreements
Minutes
Misleading statements
market manipulation, 30–29
Misstatements
takeovers, 28–64
Multilateral trading facilities
Myners Report (2001)
institutional investors, 15–25—15–29
Narrative reporting
approval, 21–29
background, 21–22
generally, 21–22
revision, 21–31—21–32
strategic reports, 21–24—21–25
Negative pledges
floating charges, 32–11
Negligence
auditors
client claims, 22–36—22–43
contractual limitation, 22–42
defences, 22–39—22–41
establishing liability, 22–36—22–37
limits of liability, 22–38—22–42
nature of the issue, 22–31—22–33
provision of audit services, 22–34—22–35
third party claims, 22–44—22–52
No-conflict rules see Conflicts of interest
Nominal value
capital, 11–3
Nominees
“Non-audit remuneration”
generally, 22–13
Not-for-profit organisations
audits, 22–9
classification of companies, 1–29—1–30
Notices
communication to members, 15–66
contents, 15–65
length, 15–61—15–62
resolutions, 15–47
Objects clauses
ultra vires, and, 7–29
Offers for sale
“Offers for subscription”
Open-ended investment companies
generally, 1–36
Operating and financial review
generally, 21–24
Ordinary resolutions
Ordinary shares
generally, 23–9
Overseas companies see Foreign companies
Panel on Takeovers and Mergers
see also Takeovers
‘cold-shoulder’, 28–11
compensation powers, 28–10
composition, 28–4
disciplinary powers, 28–10
generally, 28–3
internal appeals, 28–5
judicial review, 28–6
powers, 28–7—28–10
production of documents or information, 28–8
rule-making, 28–7
rulings on rules, 28–7
status, 28–4
Partnerships
Passing off
Penalties
People with significant control
“Phoenix companies”
abuse of company names
exceptions, 9–19
generally, 9–16
company names, 4–19
Place of business
Placings
PLUS Market
Political donations
“Poll”
generally, 15–75
Preference shares
canons of construction, 23–8
generally, 23–7
Preferential creditors
Pre-incorporation contracts
promoters, 5–24—5–28
“Premature trading”
liability for abuse of limited liability, 9–3
Premium listing
generally, 25–6
Price stabilisation
market abuse, 30–45—30–46
Primary legislation
Private companies
Profit and loss account
generally, 21–16
Profit forecasts
takeovers, 28–63
Promote success of company see Directors’
powers and duties
Promoters
conclusion, 5–29
duties
common law rules, 5–10
consent, 5–11—5–14
equitable rules, 5–10
introduction, 5–6
statutory rules, 5–7—5–8
introduction, 5–1
meaning, 5–2—5–5
pre-incorporation contracts, 5–24—5–28
preliminary contracts, 5–23
remuneration, 5–21—5–22
Property
Prospectuses
admission to trading trigger, 25–20—25–21
authorisation to omit material, 25–29
contents
registration statement, 25–25
securities note, 25–25
supplementary prospectus, 25–24
exemptions from requirement, 25–19
FCA vetting, 25–28
form, 25–22—25–25
public offer trigger, 25–18
publication, 25–30
reputational intermediaries, 25–27
verification authorisation to omit material, 25–29
generally, 25–26
vetting, 25–28
Proxies
shareholder meetings, 15–67—15–71
Public companies
officially listed companies, 1–22—1–26
“Public interest entities”
audits, 22–2
Public markets see Securities markets
Public offers
admission to listing cross-border, 25–44
eligibility criteria, 25–15
exchange admission standards, 25–16
Alternative Investment Market, 25–5
Consolidated Admissions Requirements Directive
admission to listing, 25–15
types of listing, 25–6
cross-border offers, 25–44
de-listing, 25–45
Financial Conduct Authority, 25–5
Financial Services Action Plan, 25–10
listing
admission, 25–15—25–16
cross-border, 25–44
generally, 25–5
types, 25–6
London Stock Exchange
generally, 25–7
Markets in Financial Instruments Directive, 25–8
multilateral trading facility, 25–8
offers for sale, 25–12
offers for subscription, 25–12
placings, 25–13
PLUS Markets, 25–7
premium listing, 25–6
prospectuses
admission to trading trigger, 25–20—25–21
authorisation to omit material, 25–29
contents, 25–22—25–25
exemptions from requirement, 25–19
form, 25–22—25–25
public offer trigger, 25–18
publication, 25–30
vetting, 25–28
public markets
exchange-regulated markets, 25–8
generally, 25–7
listing, 25–9
types, 25–7—25–9
rights issues, 25–14
sanctions
breach of contract, 25–40
civil remedies, 25–36—25–40
compensation under the Act, 25–32—25–35
criminal proceedings, 25–41—25–43
damages, 25–37—25–38
ex ante controls, 25–42
ex post sanctions, 25–43
generally, 25–31
regulatory proceedings, 25–41—25–43
rescission, 25–39
securities markets
standard listing, 25–6
types
offers for sale, 25–12
offers for subscription, 25–12
placings, 25–13
rights issues, 25–14
UK Listing Authority, 25–5
Publicity
company incorporation
company’s affairs, 2–39
directors, 2–40
members of company, 2–41
‘people with significant control’, 2–42—2–47
votes and resolutions, 15–78—15–80
Publicly controlled companies
continuing obligations
conclusion, 26–33
disclosure of directors’ interests, 26–9—26–13
disclosure of major shareholdings, 26–14—26–23
reporting requirements, 26–3—26–8
disclosure of directors’ shareholdings
recipients, 26–13
timing, 26–12
disclosure of major shareholdings
background, 26–15
exemptions, 26–22
procedure, 26–23
rationale, 26–14
timing, 26–17—26–18
officially listed companies, 1–22—1–26
public offers
de-listing, 25–45
listing, 25–5—25–6
types, 25–11—25–14
reporting requirements
conclusion, 26–33
substantial property transactions, 26–1
Purchase of own shares
background, 13–8
capital redemption reserve, 13–11—13–12
conclusion, 13–29
‘greenmail’, 13–7
private companies
appeals to court, 13–16
capital consequences, 13–17—13–18
directors’ statement, 13–14
public companies
purpose, 13–7
shareholder protection
generally, 13–19
market purchases, 13–21—13–22
off-market purchases, 13–20
payments otherwise than by way of price, 13–23
Treasury shares
exercise of rights, 13–27
sale, 13–26
“Put up or shut up”
takeovers, 28–56
Quasi-loans
directors’ duties
exceptions, 16–82
Reasonable skill and care
directors’ duties
Receivers
function, 32–38—32–39
status, 32–38—32–39
Recklessness
directors disqualification, 10–10—10–11
Redeemable shares
background, 13–8
capital redemption reserve, 13–11—13–12
conclusion, 13–29
private companies
shareholder protection, 13–19
public companies creditor protection, 13–11—13–12
purpose, 13–7
Redemption
acquisition of own shares
background, 13–8
conclusion, 13–29
Reduction of share capital
all companies procedure
generally, 13–34
private companies procedure
effect, 13–43
generally, 13–39
solvency statement, 13–40—13–42
purpose, 13–31
statutory procedures
all companies, 13–34—13–38
generally, 13–33
Registered companies see Companies
Registered offices
corporate mobility
EC law, 6–20—6–27
generally, 6–17
filing details, 21–37
Registers of interests in shares
rectification, 27–19—27–20
Registration
charges
defective, 32–31
effect, 32–32
late, 32–30
mechanics, 32–27
purpose, 32–24—32–25
Regulatory offences
Related party transactions
Relief
Remedies
breach of directors’ duties
damages, 16–111
diligence, 16–20
generally, 16–109
types, 16–109
public offers
breach of contract, 25–40
civil remedies, 25–36—25–40
compensation under the Act, 25–32—25–35
criminal proceedings, 25–41—25–43
damages, 25–37—25–38
ex ante controls, 25–42
ex post sanctions, 25–43
generally, 25–31
regulatory proceedings, 25–41—25–43
rescission, 25–39
Removal
auditors
Remuneration
auditors, 22–17
directors
promoters, 5–21—5–22
Remuneration committee
Reorganisations
conclusion, 29–26
reporting requirement
rationale, 21–1
revision, 21–31—21–32
scope, 21–1
strategic reports
approval, 21–29
background, 21–24
contents, 21–25
rationale, 21–24
Reports
directors’ shareholdings
recipients, 26–13
timing, 26–12
major shareholdings
background, 26–15
exemptions, 26–22
procedure, 26–23
rationale, 26–14
timing, 26–17—26–18
publicly traded companies
conclusion, 26–33
sanctions
administrative penalties for breaches, 26–29—26–31
criminal, 26–32
Re-registration
company becoming unlimited, 4–43—4–44
private company becoming public, 4–40
public company becoming private, 4–41—4–42
unlimited company becoming private, 4–45
Rescission
Resignation
auditors non-independent persons, and, 22–12
prospectively non-independent persons, and, 22–15
Resolutions
shareholder meetings contents, 15–47
notices, 15–47
types, 15–44—15–46
voting requirements, 15–45—15–46
wording, 15–47
written resolutions
members’ proposal, 15–13
when not available, 15–10
Restitution
market abuse
administrative provisions, 30–53
criminal prohibition, 30–55
Restoration of goods
Return of allotments see Capital
Rights issues
Royal British Bank v Turquand (1856)
Royal prerogative
Safe harbour
market abuse introduction, 30–43
price stabilisation, 30–45—30–46
Schemes of arrangement
conclusion, 29–26
cross-border mergers
function, 29–1
generally, 29–2
mergers, 29–2
other cases, 29–4
procedure
proposal, 29–7
proposal, 29–7
takeovers, 29–3
uses, 29–2
Secondary legislation
Secret profits
Securities markets
exchange-regulated markets, 25–8
generally, 25–7
listing, 25–9
types, 25–7—25–9
Security
charges
conclusion, 32–51
debentures
conclusion, 31–32
issue, 31–15—31–20
protection of holders’ rights, 31–24—31–31
single and multiple lenders, 31–10—31–14
terminology, 31–5
transfer, 31–21—31–23
Security interests see Charges
Self-dealing
generally, 16–64
methods, 16–65
generally, 16–57
Self-help
shareholder agreements
“Sell-out rights”
Senior debt see Debentures
Senior managers
directors’ duties, 16–11—16–12
Service contracts
Set off
winding-up, 33–23
Shadow directors
directors’ duties, 16–8—16–10
“Share buy-backs”
disclosure of major shareholdings, 26–18
Share certificates
CREST, 27–3—27–4
estoppel, 27–6
meaning, 27–3—27–4
registers of interests in shares
restrictions on transferability, 27–7
Share issues
allotment of shares
generally, 24–18
terms, 24–17
bearer shares, 24–22
conclusion, 24–23
pre-emption rights
guidelines, 24–14
sanctions, 24–12
waiver, 24–10—24–11
public offers
de-listing, 25–45
listing, 25–5—25–6
types, 25–11—25–14
registration
generally, 24–21
terms, 24–17
Share premium account
capital, 11–6—11–7
Share transfers
certificated shares
estoppel, 27–6
meaning, 27–3—27–4
CREST, 27–3—27–4
TALISMAN, 27–3
uncertificated shares
meaning, 27–3—27–4
protection of transferees, 27–14—27–15
Shareholder agreement see Shareholders’ agreements
“Shareholder democracy”
decision-making, 15–4
Shareholder meetings see General meetings
Shareholder resolutions
company’s interests are centre stage, where, 19–
expropriate members’ shares, to, 19–8—19–9
generally, 19–7
other, 19–10—19–11
Shareholders
approval of breaches of directors’ duties
audits
small charitable companies, 22–5
board of directors
confirmation powers, 14–15—14–17
general role, 14–5—14–8
introduction, 7–5
overview, 7–4
corporate governance conclusion, 15–87
decision-making without meetings, 15–6—15–21
meetings, 15–42—15–86
participation, 15–22—15–41
role, 15–1—15–5
decision-making without meetings nature of problem, 15–6—15–7
written resolutions, 15–8—15–14
derivative claims
approach to litigation, 17–3
claimants, 17–16
entitlement to vote, 15–4—15–5
indirect investors generally, 15–31—15–33
governance rights, 15–34—15–39
information rights, 15–40—15–41
mandatory transfer options in traded companies, 15–40—15–41
role, 15–31—15–41
voluntary arrangements, 15–34—15–39
institutional investors
fiduciary investors, 15–29
inactivity, 15–27—15–28
role, 15–25—15–30
liability for abuse of limited liability, 9–1—9–2
meetings
adjournments, 15–83
agenda items, 15–56—15–59
attendance, 15–67—15–72
chairman, 15–82
circulars, 15–65
class meetings, 15–84
communication of notice, 15–66
conduct, 15–43—15–47
contents of notice, 15–65
convening, 15–48—15–54
forms of communication by and to the company, 15–85—15–86
general meetings, 15–51—15–52
length of notice, 15–61—15–62
minutes, 15–80
miscellaneous matters, 15–82—15–86
nature, 15–55
notice, 15–60—15–66
placing item on the agenda, 15–57
polls, 15–75
proxies, 15–67—15–71
publicity for votes and resolutions, 15–78—15–80
voting, 15–73—15–81
minority shareholders
appraisal rights, 19–3
conclusion, 19–29
exit rights, 19–3
ratification of wrongdoing, 19–4
self-help, 19–22—19–28
participation
analyses, 15–22—15–24
indirect investors, 15–31—15–41
institutional investors, 15–25—15–30
generally, 13–19
market purchases, 13–21—13–22
off-market purchases, 13–20
payments otherwise than by way of price, 13–23
redeemable shares, 13–19
review of decisions
other resolutions, 19–10—19–11
resolutions generally, 19–7
resolutions to expropriate members’ shares, 19–8—19–9
resolutions where company’s interests are centre stage, 19–6
role, 15–1—15–5
‘shareholder democracy’, 15–4
voting entitlement, 15–4—15–5
written resolutions
Shareholders’ agreements
company constitution, and, 3–33—3–35
shareholders, by
approach to litigation, 17–3
claimants, 17–16
subsequent conduct
costs, 17–27
generally, 17–25
information rights, 17–26
settlement, 17–28
taking over existing claims, 17–22—17–23
types
existing claims, 17–22—17–23
multiple claims, 17–24
shareholder claimants, 17–16
unauthorised political expenditure, 17–29—17–31
Shares
allotment of shares
generally, 24–18
terms, 24–17
certificated shares
estoppel, 27–6
meaning, 27–3—27–4
classes of shares
conversion of shares into stock, 23–11
preference shares, 23–7—23–8
conversion into stock, 23–11
definition, 23–2
disclosure of directors’ holdings
recipients, 26–13
timing, 26–12
disclosure of major holdings
background, 26–15
exemptions, 26–22
procedure, 26–23
rationale, 26–14
timing, 26–17—26–18
issue
conclusion, 24–23
terms, 24–17
nature, 23–1—23–3
non-public offers
conclusion, 24–23
terms, 24–17
pre-emption rights
guidelines, 24–14
sanctions, 24–12
waiver, 24–10—24–11
preference shares
canons of construction, 23–8
generally, 23–7
presumption of equality, 23–4—23–5
public offers admission to listing, 25–15—25–16
de-listing, 25–45
listing, 25–5—25–6
types, 25–11—25–14
registration
generally, 24–21
terms of issue, 24–17
transfers certificated shares, 27–5—27–11
register, 27–16—27–20
uncertificated shares, 27–12—27–15
uncertificated shares generally, 27–12—27–13
meaning, 27–3—27–4
protection of transferees, 27–14—27–15
Shelf companies
“Show of hands”
generally, 15–75
“Single economic unit”
limited liability, 8–11
Single financial market see Internal market
Skill and care see Reasonable skill and care
Small companies
annual reporting
generally, 21–4
audits, 22–5—22–6
Societas Europaea see European companies
Solvency statements
reduction of share capital, 13–40—13–42
Sources of law
common law, 3–10
delegated rule-making, 3–7—3–9
European companies, 3–36
FRC, 3–9
FSA rules, 3–7—3–8
primary legislation, 3–3—3–4
reform, 3–11—3–12
secondary legislation, 3–5—3–6
Special resolutions
Squeeze outs
challenging, 28–73—28–74
Standard listing
generally, 25–6
Statement of Investment Principles
shareholder participation, 15–28
Statements of capital
capital, 11–11
Statements of compliance
Statutory undertakings
Strategic reports
approval, 21–29
background, 21–24
contents, 21–25
rationale, 21–24
revision, 21–31—21–32
Striking off
defunct companies
generally, 33–29
voluntary, 33–30
Subordination agreements
debentures, 31–10
floating charges, 32–12
Subsidiarity
EU law, 6–12—6–13
Subsidiary companies
audits, 22–7
Succession
Summary dismissal
breaches of directors’ duties, 16–116
Summary financial statements
generally, 21–41
Syndicated loans
debentures, 31–11
Takeover Panel
see also Takeovers
composition, 28–4
generally, 28–3
powers
rule-making, 28–7
sanctions
status, 28–4
Takeovers
acquisition of shares, 28–50
allocation of acceptance decision
break-through rule, 28–22—28–24
disclosure of control structures, 28–25
generally, 28–19
post-bid defensive measures, 28–20
pre-bid defensive measures, 28–21—28–25
auctions, 28–34—28–35
basic tenets, 28–2
before approach to target board, 28–50—28–54
before formal offer made to target shareholders
generally, 28–55
initial announcements, 28–57
put up or shut up, 28–56
bid documentation, 28–61
binding target board by contract, 28–36
City Code on Takeovers and Mergers
companies covered, 28–15
divided jurisdiction, 28–16—28–17
generally, 28–13
jurisdiction, 28–15—28–17
scope, 28–13—28–18
structure, 28–18
transactions covered, 28–14
compensation for loss of office, 28–28—28–32
competing bids
auctions, 28–34—28–35
binding target board by contract, 28–36
conclusion, 28–77
conditions, 28–58
consideration, 28–39—28–40
contractual compensation, 28–32
dealings in shares, 28–65
defensive measures
post-bid, 28–20
pre-bid, 28–21—28–25
disclosure of acquisition of shares
company-triggered disclosures, 28–51—28–52
generally, 28–50
major shareholdings, 26–14—26–32
s 793 notice, 28–51—28–53
disclosure of conflicts, 28–27
disclosure of major shareholdings
background, 26–15
exemptions, 26–22
procedure, 26–23
rationale, 26–14
timing, 26–17—26–18
employees’ interests, 28–62
equality of treatment of target shareholders
consideration, 28–39—28–40
mandatory offers, 28–41—28–46
partial bids, 28–38
recipients of offer, 28–47
wait and see, 28–48
firm intention to bid notice, 28–55
formal offer
bid documentation, 28–61
conditions, 28–58
dealings in shares, 28–65
employees’ interests, 28–62
intentions as to future business, 28–62
liability for misstatements, 28–64
pre-vetting of advertisements, 28–66—28–67
profit forecasts, 28–63
solicitation, 28–66—28–67
telephone campaign rules, 28–66—28–67
timetable, 28–59—28–60
valuations, 28–63
gratuitous payments, 28–29—28–31
independent advice, 28–27
initial announcements, 28–57
insider dealing, 28–57
intentions as to future business, 28–62
liability for misstatements, 28–64
mandatory offers acting in concert, 28–44
conclusion, 28–46
exemptions, 28–43
relaxations, 28–43
meaning, 28–1
misstatements, 28–64
no frustration rule
allocation of acceptance decision, 28–19
divided jurisdiction, 28–17
notification of firm intention to bid, 28–55
Panel on Takeovers and Mergers
composition, 28–4
generally, 28–3
powers, 28–7—28–10
rule-making, 28–7
status, 28–4
partial bids, 28–38
post-offer period
bidding again, 28–68
sell-out rights, 28–75—28–76
squeeze-out rights, 28–69—28–74
pre-bid defensive measures
generally, 28–21
pre-vetting of advertisements, 28–66—28–67
procedure
before approach to target board, 28–50—28–54
before formal offer made to target shareholders, 28–55—28–57
formal offer, 28–58—28–67
post-offer period, 28–68—28–76
profit forecasts, 28–63
promotion of offer by target management
compensation for loss of office, 28–28—28–32
competing bids, 28–33—28–36
contractual compensation, 28–32
disclosure of conflicts, 28–27
gratuitous payments, 28–29—28–31
independent advice, 28–27
put up or shut up, 28–56
recipients of offer, 28–47
rulings on interpretation application or effect of rules, 28–7
s 793 notices
sanctions, 28–53
sell-out rights, 28–75—28–76
solicitation, 28–66—28–67
squeeze-out rights
challenging, 28–73—28–74
Takeover Panel
composition, 28–4
generally, 28–3
powers, 28–7—28–10
rule-making, 28–7
status, 28–4
telephone campaign rules, 28–66—28–67
timetable, 28–59—28–60
valuations, 28–63
wait and see, 28–48
Tax
company incorporation, 2–34
Termination payments
directors
Tortious liability
assumption of responsibility, 7–32
direct liability, 7–37
fraud, 7–33
non-involved directors, 7–35
recovery by company from the agent, 7–34
Transfer of shares see Share transfers
Treasury shares
exercise of rights, 13–27
sale, 13–26
True and fair view
UK Corporate Governance Code
audit committees
functions, 22–25
board of directors
requirements, 14–75—14–76
UK Listing Authority
UK Stewardship Code
institutional investors, 15–30
Ultra vires
objects clauses, and, 7–29
Unfair prejudice
conclusion, 20–23
controlling shareholders, 20–2
directors’ remuneration, 20–10—20–11
dividends, 20–10—20–11
equitable considerations, 20–6—20–13
independent illegality, 20–6
legitimate expectations
balance between dividends and directors’ remuneration, 20–10—20–11
prejudice, 20–13
limitations, 20–7—20–8
litigation costs, 20–18
prejudice, 20–13
remedies, 20–19—20–20
restrictions, 20–7—20–8
right to relief, 20–4
scope of provisions, 20–4—20–5
winding up on just and equitable ground, 20–21—20–22
Unlimited companies
generally, 1–27
Unregistered companies
Utilities
Vicarious liability
generally, 7–31
Voluntary winding-up
general, 33–9—33–10
instigation, 33–9
instigation, 33–9
Voting
polls, 15–75
shareholders’ role, 15–4—15–5
Walker Report (2009)
institutional investors, 15–25
Whistleblowers
auditors, 22–21
Winding-up
clawback
benefit, 33–21
generally, 33–18
clawback, 33–18
set off, 33–23
compulsory winding-up
grounds, 33–3
liquidators, 33–7
petitioners, 33–4
conclusion, 33–34
dissolution
just and equitable ground, 20–21—20–22
liquidators’ powers and duties, 33–16
maximising assets available for distribution
clawback, 33–18
instigation, 33–9
generally, 33–31
set off, 33–23
striking off of defunct companies
generally, 33–29
voluntary, 33–30
types
compulsory winding-up, 33–3—33–8
creditors’ voluntary winding-up, 33–13—33–15
generally, 33–2
members’ voluntary winding-up, 33–11—33–12
voluntary winding-up
creditors, 33–27—33–32
general, 33–9—33–10
instigation, 33–9
members, 33–19—33–26
wrongdoer contributions
benefit, 33–21
generally, 33–19
Written resolutions
“Wrongdoer contributions”
benefit, 33–21
generally, 33–19
Wrongful trading
declaration, 9–8
generally, 9–6
impact, 9–9—9–10
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Classics Series

Gower’s Principles of Modern Company

Gower’s Principles of Modern

AADB Accounting and Actuarial Discipline Board

SBEEA 2015 Small Business, Enterprise and Employment Act

1. TYPES AND FUNCTIONS OF

COMPANIES’ PRE-INCORPORATION 5–24

COMPANY LAW AT EU LEVEL

COMMON LAW DUTIES IN RELATION TO 9–11

14. THE BOARD

Mandatory shareholder approval of

DUTY TO ACT WITHIN POWERS 16–23

(e) Accounting for profits: 16–114

FORMAL INVESTIGATIONS BY INSPECTORS

19. CONTROLLING MEMBERS’

REDUCING LITIGATION COSTS 20–18

21. ANNUAL ACCOUNTS AND

True and fair view 21–14

23. THE NATURE AND

25. PUBLIC OFFERS OF SHARES

31. DEBTS AND DEBT SECURITIES

DIFFERENT STRUCTURES IN DEBT

Late registration 32–30

33. WINDING UP, DISSOLUTION AND

Benefit of the statutory claw backs 33–21

A Harris v Harris Ltd. See Harris v A Harris Ltd

Barrett v Duckett [1995] B.C.C. 362; [1995] 1 B.C.L.C. 243 17–2

Diamond v Oreamuno (1969) 248 N.E. 2d 910 CA (NY) 30–8

Ernest v Nicholls, 10 E.R. 1351; (1857) 6 H.L. Cas. 401; 7–6

La SA des Anciens Etablissements Panhard et Levassor v 4–25

MacPherson v European Strategic Bureau Ltd [2002] 12–9, 13–41, 16–32

Old Silkstone Collieries, Re [1954] Ch. 169; [1954] 2 19–16

Phillips v Manufacturers Securities Ltd (1917) 116 L.T. 209 19–8

R. v Registrar of Companies Ex p. Att Gen [1991] B.C.L.C. 4–5, 4–35

Rother Iron Works Ltd v Canterbury Precision Engineers 32–10, 32–40

1677 Sunday Observance Act (c.7) 2–19

(a) 13–14, 13–40

1985 Companies (Tables A to F) Regulations (SI 1985/805)

Treaties and Conventions

The company, incorporated under the successive Companies

Uses to Which the Company May Be Put 1–1

USES TO WHICH THE COMPANY MAY BE PUT

Legal Entity Distinct from its Members 2–1

LEGAL ENTITY DISTINCT FROM ITS MEMBERS

Formation of Different Types of Company 4–1

FORMATION OF DIFFERENT TYPES OF COMPANY

Sometimes a charter will be granted to the members of an

The modern trend is in the same direction, and would seem to

The obvious aim of the provision is to increase security of

Overseas Companies 6–2

SEPARATE LEGAL PERSONALITY AND

We saw in Pt 1 that the separate legal personality of the

This provision overtakes the indoor management rule because it

However, this dictum does not help enormously in working out

(a) a person ‘deals with’ a company if he is a party to any

The Rationale for Limited Liability 8–1

THE RATIONALE FOR LIMITED LIABILITY

It seems, therefore, that in aid of interpretation (of statute or