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Company Law 2012-2013

Book Information

Book Cover

Company Law Statutes 2012-2013

4th Edition

Author: Marc Moore

Publication date: 16th August 2012

Purchasing Options:

How to Use This Book

Company law is one of the most heavily statute-based areas of law in the UK. The recent Companies Act 2006 in particular comprises 1300 sections, making it the longest piece of British legislation in history. As a student of company law, therefore, the importance of knowing one's way around a statute book cannot be understated. However, having taught this subject for many years now it still surprises me how frequently students tend to misuse statute books, with the unfortunate result that they fail to take advantage of having such a potentially valuable resource at their disposal during examinations.

Law students must respect that while a statute book is a valuable tool that in the long run will save you time and work, like many labour-saving tools it is not necessarily user-friendly at first. Getting value from a statute book thus involves an initial investment of time and effort on your part. Too often students tend to take the view that a statute book, while essential for examinations, is nevertheless something that you worry about at the last minute after you have undertaken your revision. It is thus unsurprising that sales of statutes in bookshops often tend to peak in the days imminently preceding an examination. But by failing to integrate the use of primary statutory materials into their week-to-week learning of the subject during term time, many students pass up the opportunity to develop the basic skills of locating, interpreting and applying statutory rules in relation to specific legal propositions or problems. Such attributes are especially valuable in the context of learning company law, given the sheer scale and complexity of much of the legislation.

The main benefit of a statute book for students (and also practising lawyers) is its capacity to alleviate the near-impossible task of learning complex legal doctrines in a comprehensive level of detail. However, this strength of the statute book can also be its main weakness, because excessive or unthinking reliance on primary legislation can sometimes cause its user ‘to fail to see the wood for the trees’: in other words, to get bogged down in the minutiae of the various sub-sections and exceptions, and, consequently, to fail to forge a proper critical understanding of what the rule is actually about and why it is important. This emphasises the necessity of using the statute book in conjunction with high quality secondary sources such as textbooks and academic articles on an ongoing basis, particular when it comes to formulating critical positions on the law for the purpose of answering essay-style questions. It also highlights the need to be economical with your use of statutory materials, in the sense of being able to select in an informed and discerning way those specific parts of a section that enable you to deal concisely with a legal proposition or problem within a limited space of time.

Last but not least, remember that while page dividers and/or highlighters are highly beneficial (if not essential) methods of gaining familiarity with your statute book in advance of an examination, annotation of statute books is strictly prohibited in orthodox (i.e. closed-book) law examinations. In any event, such practices will never be an effective substitute for thorough familiarity with your statute book and the ability to use it in an informed and proper manner under examination conditions.

Quizzes

Directors

Directors' Duties

Officers, Liability for Offences

Shareholders

Share Capital

Constitution

Corporate Governance

Takeovers

Winding Up

Micellaneous

Interpreting Statutes

Scenario 1

Emily started up in business as a florist. For the purpose of doing so she set up a private limited company, Floral Ltd, and became the company's sole shareholder and director. To fund the running of the business Emily caused Floral Ltd to take out a £5,000 loan from the Caledonian Bank. Due to an economic recession Floral Ltd's business stumbled upon hard times and, before long, the company was struggling to meet its day-to-day outgoings. Although Emily had no prior knowledge of accounting, it became clear to her by the end of her first year of trading that Floral Ltd was insolvent and had virtually no chance at all of surviving as a going concern. Nevertheless, Emily continued to purchase new stock on credit in the vain hope that custom would pick up. After a further 3 months had passed, Emily decided that Floral Ltd's trading debts had become completely unsustainable. She therefore closed down the shop immediately and left her remaining stock of flowers to perish. One week later Floral Ltd was put into insolvent liquidation.

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Scenario 2

Brian is a director of Stars Ltd, a company that specialises in providing agency and promotional services to musicians. In the course of developing the company's business Brian has built up close working relationships with a number of clients. Chelsea, one of Stars Ltd's most valuable clients, recently became discontented with some of Brian's colleagues at Stars Ltd and asked that Brian represent her in a personal capacity from now on. Brian agreed to this request, and has since received significant agency fees from Chelsea following the release of her new album. Furthermore, while walking in his local park Brian spotted a bright young amateur footballer called David. Brian offered to act as David's agent, and has since made a lucrative commission after David was signed by a leading professional club. Brian's co-directors at Stars Ltd have recently found out about Brian's dealings. They believe that the company is rightly entitled both to the fees that Brian made from his dealings with Chelsea, and also the commission that he received from David.

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Scenario 3

Tracks Ltd is a company that specialises in the operation and maintenance of public rail tracks. In 2009, four people were killed when a passenger train derailed as a result of a broken piece of track on a busy commuter route into London. In the years leading up to the crash, Tracks Ltd's board of directors had progressively reduced the frequency of internal safety inspections and ongoing maintenance work on the tracks, in an attempt to reduce the company's spiralling costs. A subsequent investigation established that the piece of track in question had not been replaced for a number of years, and that the crash would almost certainly have been avoidable had the company's safety inspections been more frequent. It has also transpired that no individual director or officer of Tracks Ltd had sole responsibility for determining the company's inspections and track maintenance schedule.

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Scenario 4

Gemma, Harry and Ian are the founders of Trips Ltd, an online travel agency. Each founder has retained a minority 3% equity holding in the company, although the majority of its voting share capital is owned by numerous small investors who are not involved at all in the running of the business. While Ian is the company's managing director, Gemma and Harry ceased being directors of Trips Ltd many years ago in order to pursue other business opportunities. However, following a period of poor performance Gemma and Harry now doubt Ian's competence as a director. They wish to call an extraordinary general meeting, at which they intend to persuade the company's shareholders to pass a resolution dismissing Ian as a director of the company with immediate effect. They are also unwilling to pay Ian any compensation for loss of office. Ian believes that Gemma and Harry have acted too hastily, and wishes to have a formal opportunity to put his side of the story to the shareholders in writing.

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Scenario 5

Harry had for a number of years carried on a retailing business through a company called Localstores Ltd. He decided that it was time to retire from the trade and, struggling to find a suitable person to run his business, had no choice but to appoint his 2 carefree and arrogant nephews Ian and John as directors of the company. Harry resigned as a director of Localstores Ltd but remained the company's majority shareholder. Worried about Ian and John's free-spending ways, Harry also initiated a change to Localstores Ltd's articles of association, inserting a special clause which provided that any borrowing in excess of £10,000 must be expressly authorised by the company's shareholders in General Meeting. On becoming directors of Localstores Ltd, Ian and John began to rapidly expand the company's business by investing in a number of expensive new shop premises. Struggling as a result to fund the day-to-day operation of the business, they approached Kwik-Kredit Bank with a view to borrowing £25,000. Kwik-Kredit Bank's manager Laura was familiar with Harry from past dealings and suspected that he would not be altogether happy with this arrangement. Nevertheless, she proceeded with setting up the loan agreement without asking any further questions. Ian and John then signed the loan agreement on the company's behalf. Harry has just found out about the arrangement and seeks your advice on whether the loan agreement is valid and binding on the company.

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Scenario 6

Boozy Ltd is a company which specialises in brewing beer. Its articles of association are in the form of the Draft Model Articles for Private Companies Limited by Shares. The company was formed by Charlie, who was initially the company's sole shareholder holding 500,000 ordinary shares each of £1 nominal value. Each of Charlie's ordinary shares carried a voting right but no definite entitlement to dividends. Later on Charlie decided to raise £1 million of new capital in order to expand his brewing business therefore he caused the company to issue 500,000 new preference shares each with a nominal value of £2. In contrast to Charlie's ordinary shares, each of the new preference shares entitled the holder to a fixed annual 8% dividend, but carried no voting rights. This meant that Charlie retained sole voting control over the General Meeting. Due to the declining market for alcoholic drinks Boozy Ltd is beset by cash flow problems. Charlie has therefore proposed to alter the rights of the preference shareholders so as to reduce their 8% dividend rate to the more manageable level of 5%. The preference shareholders are incensed by Charlie's proposal and seek your advice on how they can stop him from putting his plan into effect.

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Scenario 7

Brian, a retired chartered accountant, is a part-time non-executive director of Contex plc, a large UK-listed petrochemicals producer. Alan also chairs meetings of Contex plc's audit committee. In its most recent annual statement of accounts, Contex plc failed to disclose £2 million of trading debts that it had incurred over the most recent financial year. When the true state of Contex plc's financial affairs became apparent, the company found it impossible to raise further finance due to serious distrust from investors, and it has since gone into liquidation owing significant sums of money to many creditors. It has also transpired that Contex plc's unscrupulous chief executive director, David, has for a number of years been misappropriating company funds into his own personal offshore bank account. David has since been imprisoned for fraud. However creditors and the general public are furious that these serious lapses in accountability were allowed to occur in the first place, and blame has begun to focus also on Brian. The Secretary of State consults you on whether there are adequate grounds for obtaining a court order to disqualify Brian from acting as a company director in future.

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Useful Websites

  1. www.berr.gov.uk
    This is the website of the Department for Business, Enterprise and Regulatory Reform (or DoBERR for short), which is the UK government department responsible for promulgating and updating the vast majority of company law rules in this country, and in particular the new Companies Act 2006. This is the most authoritative and up-to-date online source on the 2006 Act and any recent amendments thereto.
  2. http://www.frc.co.uk
    This is the website of the UK Financial Reporting Council (FRC), which is the body responsible for maintaining and updating the Combined Code on Corporate Governance. This website contains a full-text pdf version of the Code itself, plus copies of recent discussion documents concerning possible future amendments to the Code.
  3. www.fsa.gov.uk
    This is the website of the UK Financial Services Authority. The FSA is the official UK Listing Authority and also the country's main financial markets regulator. Although the majority of information on this site relates to wider aspects of financial markets regulation outside of the strict scope of company law, it is nevertheless a useful source of information on some important company law issues affecting the listed sector. The website also contains a full-text html version of the FSA Handbook, in which you will find (amongst other things) the official UK Listing Rules and also the Disclosure Rules and Transparency Rules (DTR) applying to UK-listed companies.
  4. www.thetakeoverpanel.org.uk
    This is the website of the Takeover Panel, a City-based non-governmental body responsible for promulgating and administering the application of the Takeover Code. The website contains a full-text pdf version of the Code together with copies of the influential Practice Statements that are issued by the Panel on an ongoing basis.
  5. www.companylawforum.co.uk
    This is a new website established by the legal publisher LexisNexis in 2008. Although it is aimed primarily at the professional community, it is nevertheless a useful, free and up-to-date source of information and opinion on current regulatory developments with particular emphasis on the Companies Act 2006.
  6. www.companieshouse.gov.uk
    This is the official website of the Registrars of Companies for England & Wales, and Scotland, who are based in Cardiff and Edinburgh respectively. It is likewise aimed primarily at professional users, although it does contain up-to-date information on the Companies Act 2006 including a detailed breakdown of the implementation schedule for the new Act's various provisions.
  7. www.insolvency.gov.uk
    This is the official website of the UK government's Insolvency Service. It provides useful practical information not only in relation to corporate insolvency procedures, but also on directors' disqualification procedures and the work of the DoBERR's company investigations branch.
  8. www.icaew.com/companylaw
    This is the company law section of the website of the Institute of Chartered Accountants for England and Wales. It is a further up-to-date and reliable source of information on the new Companies Act 2006, albeit geared more towards an accountancy rather than legal readership.
  9. www.ecgi.org
    This is the website of the European Corporate Governance Institute, which is an international organisation bringing together academics, policy-makers and practitioners working within the field of corporate governance. It contains some useful information and publications in relation to this topical and growing field of company law, plus an excellent and comprehensive index of all major corporate governance codes and principles promulgated both in the UK and globally.
  10. www.ssrn.com
    This is the Social Science Research Network website, which is a vast and free-to-access database of unpublished working papers by academics, many of which are in the field of company law. Although it is US-based and much of the material is American in focus, it is possible to locate some excellent UK — and EU-focussed company law papers written by leading academic authors. Although the papers on the database are generally unpublished, it is normally okay to cite them in essays (unless the authors expressly state otherwise) and the as-yet-unpublished status of many of the papers means that they can often be an up-to-date source of academic opinion on current legal and wider social issues. You will need to register with the site in order to download any papers, although registration is free and relatively straightforward.
  11. www.legislation.gov.uk
    This is the official online database for all primary and secondary legislation of the UK Parliament, Scottish Parliament and the National Assembly for Wales.

Think Points

  1. Where a director of a company fails to observe a limitation on his powers under the company's articles of association, what are the implications of s 40 of the Companies Act 2006 in respect of: a) the validity of any transaction entered into by the company, and b) the personal liability of the director concerned? Which of the general duties in Pt X of the Act will the director have breached by virtue of exceeding his constitutional authority?
  2. How do the types of conduct governed by s 175 of the Companies Act 2006 (Duty to avoid conflicts of interest) differ from the type of conduct governed by s 176 (Duty not to accept benefits from third parties)? In what respect is the s 176 duty stricter in form than the s 175 duty? Can you think of any rationale for regulating these 2 situations differently from one another?
  3. In what way does the disclosure obligation established by s 417 of the Companies Act 2006 (Contents of directors' report: business review) support the application of the director's duty to promote the success of the company under s 172 of the Act? In large public companies, who ultimately will have the role of policing directors' conformity with their s 172 duty on an ongoing basis?
  4. Consider the statement in s 263(2) of the Companies Act 2006 to the effect that permission for a minority shareholder to bring a derivative claim against a director must be refused if the court is satisfied that a person acting in accordance with s 172 would not seek to continue the claim. What is the policy rationale for this particular mandatory bar to the raising of a derivative claim? Can you think of any example(s) of a situation where permission to bring a derivative claim is likely to be refused by a court on this ground?
  5. Compare and contrast the fraudulent and wrongful trading rules under ss 213 and 214 of the Insolvency Act 1986 respectively? How does the type of conduct prohibited by each of these rules differ, and which (if either) of the rules would you say is the wider reaching in terms of its potential application? From a policy perspective, what is actually ‘wrongful’ about wrongful trading? Why is it necessary to have s 993 of the Companies Act 2006 in addition to s 213 of the Insolvency Act 1986?
  6. Read the opening sections of the latest (June 2010) edition of the UK Corporate Governance Code. How does the novel method for the Code's enforcement differ from the normal method of statutory enforcement? In your opinion what are the advantages and disadvantages of the Code's mode of regulatory enforcement?
  7. What is the fundamental difference between a derivative claim (or, in Scotland, derivative proceedings) brought under Pt 11 of the Companies Act 2006, and a petition for unfair prejudice brought under Pt 30 of the Act? Why would it arguably be illogical for a claimant to seek to bring both types of action in respect of the same matter?
  8. Consider the combined effect of ss 232(2) and 233 of the Companies Act 2006, which provide that whilst, on the one hand, a company is prohibited from providing an indemnity for a director against any liability for breach of duty, this does not prevent the company from purchasing and maintaining an insurance policy to cover the director against such liability. Is there any rationale at all for this distinction? In your opinion, how will the widespread use of directors' liability insurance today impact on the practical effectiveness of directors' duties as a constraint on managerial misconduct? Can you think of any convincing policy rationale for allowing directors to insure themselves against potential liability at the company's expense?
  9. What is the effect of Rule 9 of the Takeover Code (the ‘mandatory bid’ rule) in respect of any person attempting to acquire a controlling shareholding in a public company? What possible ‘evil’ might be perpetrated by the offeror against the offeree company's shareholders if this rule did not exist?
  10. Compare and contrast the prohibitions on ‘transactions at an undervalue’ and ‘transactions defrauding creditors’ under ss 238 and 423 of the Insolvency Act 1986 respectively (applicable within England and Wales only). In what key respect does the type of conduct prohibited by each of these rules differ, and which (if either) of the rules is the more extensive in terms of the period of time over which it applies prior to the onset of insolvency? How are the rules of standing in respect of the latter rule arguably more liberal than those applying in the case of the former?