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i

Sealy and Worthington’s

Text, Cases, and Materials
in Company Law

Eleventh edition

Sarah Worthington QC(Hon), FBA

Downing Professor of the Laws of England
Fellow of Trinity College, University of Cambridge
Bencher of Middle Temple

1
ii

1
Great Clarendon Street, Oxford, OX2 6DP,
United Kingdom
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It furthers the University’s objective of excellence in research, scholarship,
and education by publishing worldwide. Oxford is a registered trade mark of
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Eighth edition 2008
Ninth edition 2010
Tenth edition 2013
Impression: 1
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prior permission in writing of Oxford University Press, or as expressly permitted
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address above
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Public sector information reproduced under Open Government Licence v3.0
(http://​w ww.nationalarchives.gov.uk/​doc/​open-​government-​l icence/​open-​government-​l icence.htm)
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Links to third party websites are provided by Oxford in good faith and
for information only. Oxford disclaims any responsibility for the materials
contained in any third party website referenced in this work.
iii

Preface

The ambitions with this book remain as they have always been: to take the broad subject
matter of company law and present it as simply as possible, and in a manner which in-
forms and challenges; which reveals its distinctive goals and its underlying structure; and
which prompts questions and provokes deeper understanding and insight. To generations
of students and teachers this book is simply ‘Sealy’. Nevertheless, with a further tweak to
the title, this eleventh edition becomes Sealy and Worthington’s Text, Cases, and Materials
in Company Law. The nod to ‘text’ in the title does little more than acknowledge the
mechanism by which Len Sealy always sought to deliver his own ambitions for this book.
As in previous editions, I have aimed to continue this.
This edition also marks a change in formatting (and in paper—​perhaps in line with the
new plastic banknotes). As the subject matter of company law becomes increasingly vast,
the job of exposing its underlying structure becomes correspondingly more important.
To that end, two of the less obvious presentational changes are more important than they
might at first seem. Firstly, each chapter begins with a headline excerpt of its ‘contents’.
This is intended to serve as a succinct identification of the legal issues to be addressed.
Secondly, and more importantly—​even if less often appreciated as such—​the ‘Contents’
pages at the start of the book (at pp vii–xviii) set out in full all the headings and sub-​head-
ings in each chapter. These pages thus provide a detailed diagram of the skeleton of the
subject of company law on which the substance of each chapter then hangs.
Turning from the form of presentation to the subject’s essential substance, both the leg-
islature and the courts have been active. The Companies Act 2006 continues to be revised
and updated to reflect modern needs and commercial practices. On this front, perhaps
the most noteworthy change, in both philosophy and content, is the new requirement
for all companies to compile a public register of ‘people with significant control’ (a PSC
Register: see Chapter 14). This PSC Register must disclose the names of people who are
able to exert ‘significant influence or control’ over the company’s business: it matters not
whether the ‘person’ is corporate or human, a company shareholder or not, and, if a share-
holder, whether the legal owner of the shares or not. This change from earlier practices
was introduced, along with other important changes (such as to the CDDA 1986), by the
Small Business, Enterprise and Employment Act 2015 (SBEEA 2015).
In addition, corporate governance has remained firmly under the microscope, with fur-
ther revisions to the UK Corporate Governance Code and the UK Stewardship Code; and
continued attention to the issues addressed in the Kay Report (including problems of short-​
termism) and the Davies Report (gender diversity on boards).
The courts too have proved a significant source of further change. The Supreme Court
has been particularly active. Its major decisions include those on the separate legal per-
sonality of companies (Prest v Petrodel Resources Ltd [2013] UKSC 34, included in the last
edition only by way of late addendum); on attribution in corporate activity, especially
corporate wrongdoing (Bilta (UK) Ltd (In Liq) v Nazir [2015] UKSC 23); on directors’ duties
and proper purposes (Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71); and on rem-
edies (AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58; FHR European
Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45). The lower courts, too, have
been equally active.
All of this serves as a pointed reminder that companies are not mere abstractions.
Everything done by a company and everything done within a company is done by human
beings. Every case that comes to court involves real people facing real pressures. It is this
that brings the subject alive, fills it with events and characters and makes it fun to study
iv

iv  Preface

and to teach. The 2006 Act, as amended, may have introduced some new concepts and
changed some of the rules, but its role will only be, as before, to serve the same needs of
commerce and the people who engage in it: the same problems and questions will arise,
and there will be no better way for students to understand the law and to test how it will
work in practice than by examining how it would apply to the facts of known cases.
In this eleventh edition there has been some major restructuring of individual chapters.
In particular, Chapter 2 (on corporate personality and limited liability) and Chapter 3
(on corporate activity and legal liability) have been completely revised, with much ex-
tended text and commentary and the addition and reorganisation of relevant case extracts.
Chapter 7 (on directors’ duties) and Chapter 8 (on auditor liability) have also been modi-
fied. Extracts from the judgments in a good few older cases have again had to be discarded
or shortened in favour of newer substitutes.
Apart from statute and cases, other major influences on corporate law and practice con-
tinue to grow in importance, and need inclusion in order to give a balanced view: the regu-
lation of the financial services industry, the rules of the Stock Exchange, new rulings of
the European Court, and directives and reform proposals from the European Commission.
Finally, I must record my thanks to a number of people. First and foremost, Michael
Lok has once again provided unparalleled research assistance on all the areas addressed
in this book, and managed to do that while conducting an increasingly busy and suc-
cessful practice in Hong Kong. I am enormously grateful to him. Joy Ruskin-​Tompkins as
copy editor and Jonathan Price as proof reader have provided admirably rigorous, effec-
tive, prompt, and professional service. And John Carroll and Sarah Stephenson at Oxford
University Press have provided thoughtful, careful and proactive help at all stages of pro-
duction. Thank you to all of you.
This eleventh edition endeavours to state the law as at 31 March 2016, with some minor
additions at proofs stage.
Sarah Worthington
June 2016
v

New to this edition

Key revisions in the 11th edition include:

• Complete updating of statutory, regulatory and case law materials, including the
major changes introduced by SBEEA 2015, but also including changes to the core leg-
islation in CA 2006 and to the various corporate governance codes requiring ‘comply
or explain’ adherence.
• Major rewriting of Chapter 2 (Corporate personality and limited liability) in the light
of Prest v Petrodel Resources Ltd (2013, SC): ie changed structure, considerable new
text, and new cases.
• Major rewriting of Chapter 3 (Corporate activity and legal liability) to take into ac-
count a number of recent cases: ie changed structure, considerable new text, and
new cases.
• Supreme Court cases including:
• Prest v Petrodel Resources Ltd
• Bilta (UK) Ltd v Nazir
• AIB Group (UK) plc v Mark Redler & Co Solicitors
• Eclairs Group Ltd v JKX Oil & Gas Plc
• FHR European Ventures LLP v Cedar Capital Partners LLC
• Braganza v BP Shipping Ltd
• Re Nortel GmbH; Re Lehman Bros International (Europe)
• Court of Appeal cases including:
• Re Coroin Ltd
• Antonio Gramsci Shipping Corporation v Recoletos Ltd
• Brumder v Motornet Service and Repairs Ltd
• Speechley v Allott
• Smithton Ltd v Naggar
• Burry & Knight Ltd v Knight
• Relfo Ltd (In Liquidation) v Varsani
• Additional coverage of statutory derivative actions, with excerpts from leading recent
HCt and CA cases.
• Additional coverage of insolvency and proprietary issues, including notes on leading
recent HCt and CA cases.
vi

Source acknowledgements

Grateful acknowledgement is made to all the authors and publishers of copyright material
which appears in this book, and in particular to the following for permission to reprint
material from the sources indicated:
The Government of the Hong Kong Special Administrative Region: for extracts from
the following cases—Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings
Ltd (In Liquidation) FACV 9/2010; Moulin Global Eyecare Trading Ltd (In Liquidation)
(formerly known as Moulin Optical Manufactory Ltd) v The Commissioner of Inland
Revenue FACV5/​2013.
The Judgment published in this text is reproduced from those posted on the Judiciary’s
website with the permission of the Government. The Government accepts no liability or re-
sponsibility for the accuracy or completeness of any judgment being published in this text.
The Incorporated Council of Law Reporting: for extracts from the Appeal Cases (AC),
Chancery Reports (Ch), Court of Appeal (EWCA), High Court (EWHC), King’s Bench Reports
(KB), Queen’s Bench Reports (QB), and the Weekly Law Reports (WLR).
Informa Law: for an extract from Lloyd’s Law Reports.
RELX (UK) Limited, trading as LexisNexis: for extracts from the All England Law
Reports (ALL ER) and Butterworths Company Law Cases (BCLC).
Thomson Reuters (Professional) UK Limited: for extracts from British Company Law
Cases (BCLC) and British Company Cases (BCC).
Extracts from unreported case reports, Law Commission Reports, Consultation papers,
and Home Office reports and statistics are Crown copyright material and are reproduced
under Class Licence Number C2006010631 with the permission of the Controller of OPSI
and the Queen’s Printer for Scotland. Extracts from House of Lords Reports (UKHL) are
Parliamentary copyright and are reproduced by permission of the Controller of HMSO on
behalf of Parliament.
Every effort has been made to trace and contact the copyright holders but this has not
been possible in all cases. If notified, the publisher will undertake to rectify any errors or
omissions at the earliest opportunity.
vii

Contents

List of abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix

Table of statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xx
Table of secondary legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxii
Table of cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxiv

1 THE COMPANY AND ITS INCORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Companies in action: special features and key parties . . . . . . . . . . . . . . . . . . . . . . . 2
Sources of company law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UK Companies Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Regulatory amendments to CA 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
History of legislative reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Company Law Review (CLR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Case law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
European law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Directives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
European Directives and Regulations relating to company law . . . . . . . . . . . . . . . 12
European law harmonisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
The market for corporate law: country of incorporation, ‘seat’ and ‘COMI’ . . . . . . . 13
Human rights legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Self-​regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
The process of company law reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
The purpose of company law: enabling or regulatory? . . . . . . . . . . . . . . . . . . . . . . 21
Classification of companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Limited and unlimited companies: CA 2006 s 3 . . . . . . . . . . . . . . . . . . . . . . . . 21
Companies limited by shares and companies limited by guarantee . . . . . . . . . . 22
Public and private companies: CA 2006 s 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Change of company status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Charitable and community interest companies . . . . . . . . . . . . . . . . . . . . . . . . . 23
European public limited-​liability companies (SEs) . . . . . . . . . . . . . . . . . . . . . . 23
Classifications based on size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
‘Single member’ companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Parent and subsidiary companies: CA 2006 s 1159 . . . . . . . . . . . . . . . . . . . . . . 24
Companies and other business structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Incorporation, registration and the role of the registrar . . . . . . . . . . . . . . . . . . . . . 25
Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Memorandum of association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Constitutional documents: articles of association and the company’s objects . . . . 26
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Company names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
The registrar’s decision to register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
viii

viii  Contents

2 CORPORATE PERSONALITY AND LIMITED LIABILITY . . . . . . . . . . . . . . . . . . 34

General issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Separate corporate personality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
The consequences of separate legal personality . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
The company owns its own property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
The company enters into its own contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
The company runs its own business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
The company sues and is sued on its own liabilities . . . . . . . . . . . . . . . . . . . . . 48
Corporate groups: do they warrant special treatment? . . . . . . . . . . . . . . . . . . . . 51
General recognition that the company is a legal person . . . . . . . . . . . . . . . . . . 52
Presumption that the law applies to corporate persons as it does
to human persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
The Human Rights Act 1998 and companies . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Nationality, domicile and residence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Status questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Limits to the idea of a company as a ‘person’? . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
‘Piercing the corporate veil’ vs separate legal personality . . . . . . . . . . . . . . . . . . . 63
The meaning of ‘piercing the corporate veil’ . . . . . . . . . . . . . . . . . . . . . . . . . . 64
The current position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Illustrating ‘concealment’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Illustrating ‘evasion’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Connections between the company and other persons . . . . . . . . . . . . . . . . . . . . . . 75
Control of the company is not enough . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Contractual agreements and third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Agency rules and third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Property law and third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Property held on trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Unjust enrichment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Freezing orders and restraint orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Tort law and third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Statutory rules and third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

3 CORPORATE ACTIVITY AND LEGAL LIABILITY . . . . . . . . . . . . . . . . . . . . . 83

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Rules of attribution: how does a company act? . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Contractual liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
General issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
The framework for assessing effective contractual engagement . . . . . . . . . . . . . . . 91
Capacity: what is a company legally set up to do? . . . . . . . . . . . . . . . . . . . . . . 92
Agency and authority in corporate contracting . . . . . . . . . . . . . . . . . . . . . . . . . 93
Overview of agency principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Agency and actual authority—​who is ‘actually’ allowed to act for the company? . . . 94
1. Implied actual authority from appointment to a specific role in the company . . . 94
2. Implied actual authority from a course of dealing . . . . . . . . . . . . . . . . . . . . 98
ix

Contents  ix

Deemed authority I: statutory deeming provisions to avoid constitutional

limitations on directors’ authority—​CA 2006 s 40 . . . . . . . . . . . . . . . . . . . . . . 100
1. Meaning of ‘a person’ in CA 2006 s 40 . . . . . . . . . . . . . . . . . . . . . . . . . . 101
2. Meaning of ‘a dealing with the company’ in CA 2006 s 40 . . . . . . . . . . . . . 104
3. Meaning of ‘good faith’ in CA 2006 s 40 . . . . . . . . . . . . . . . . . . . . . . . . . 105
4. Meaning of ‘directors’ and ‘limitation under the constitution’ in CA 2006 s 40 . . 107
Deemed authority II: common law intervention in the absence of actual
authority—​relying on ostensible (or apparent) authority . . . . . . . . . . . . . . . . . . 107
1. The representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
2. The authority of the representor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
3. Reliance—​no notice of the agent’s want of actual authority and causal links . . . 112
4. Bars on ‘self-​authorising agents’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Deemed authority III: common law intervention in the absence of actual
authority—​the residual role of the ‘indoor management rule’ or ‘the rule
in Turquand’s case’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
116
1. The interaction between the indoor management rule and agency rules . . . . . 118
Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118
Transactions involving directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Ratification by the company of unauthorised transactions . . . . . . . . . . . . . . . . . 123
Formalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123
Particular problems in this area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124
1. Directors’ authority and breach of directors’ duties . . . . . . . . . . . . . . . . . . 124
2. The problem of forged documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
3. An amendment of the company’s articles will not excuse a breach of contract . . . 130
Summary of corporate contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Pre-​incorporation contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Corporate gifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Tort liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Criminal liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
Establishing corporate mental states, mens rea and criminal liability . . . . . . . . 148
What does a company know? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
Denying attribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Certain acts should not be attributed to the company at all . . . . . . . . . . . . . . 164
Certain acts, knowledge or intentions should not be attributed in
these particular circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Despite attribution, the usual legal consequences should not prevail in
these circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Attribution and illegality: companies and the ex turpi causa principle . . . . . . . . . 180
Litigation: procedural issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
Conduct of litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184

4 SHAREHOLDERS AS AN ORGAN OF THE COMPANY . . . . . . . . . . . . . . . . . 187

General issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
Dividing corporate power between members and directors . . . . . . . . . . . . . . . . . 189
Orthodox constitutional division of powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
Articles and the rules governing their interpretation . . . . . . . . . . . . . . . . . . . . . . . 191
Practical consequences of the constitutional allocation of powers . . . . . . . . . . . . 196
Formal decision-​making by members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
General issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
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Voting majorities: ordinary and special resolutions . . . . . . . . . . . . . . . . . . . . . . 202

Who can propose a written resolution? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
What are the essentials of a ‘meeting’? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
The role of the chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
Who can call a meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
What sort of notice must be given if a meeting is proposed? . . . . . . . . . . . . . . . 210
Who can propose a resolution (or circulate a statement) at a meeting? . . . . . . . 211
Are members’ meetings compulsory? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
How must meetings be conducted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
‘Voice’ in decision-​making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
Reform of the law relating to general meetings . . . . . . . . . . . . . . . . . . . . . . . . . 213
Informal decision-​making—​the ‘Duomatic’ principle . . . . . . . . . . . . . . . . . . . . . . . 214
Limitations on the free exercise of members’ voting rights . . . . . . . . . . . . . . . . . 222
General issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
Alteration of the articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
CA 2006 s 21: alteration of articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
Predecessor provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
Variation of class rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
Members’ decisions concerning directors’ breaches . . . . . . . . . . . . . . . . . . . . 247
CA 2006 s 180: consent, approval or authorisation by members . . . . . . . . . . . . . 248
CA 2006 s 239: ratification of acts of directors . . . . . . . . . . . . . . . . . . . . . . . . 248
Summary of limitations on members’ voting . . . . . . . . . . . . . . . . . . . . . . . . . 254
Shareholders’ agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256
Members’ personal rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

5 CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273

General issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
FRC and the UK Corporate Governance Code for listed companies . . . . . . . . . . . . 275
Regulation of listed companies by the UK Corporate Governance Code . . . . . . 276
Qualities of boards and board members . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276
Separation of the roles of chairman and managing director . . . . . . . . . . . . . . . . 277
Balance of executive and non-​executive directors . . . . . . . . . . . . . . . . . . . . . . 277
Directors’ remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278
Nomination committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278
Gender diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279
Regulation of institutional investors by the UK Stewardship Code . . . . . . . . . . 280
Client and beneficiary-​primacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
Enhanced interaction with investee companies . . . . . . . . . . . . . . . . . . . . . . . . . 281
Enhanced publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
Review and amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
Narrative reporting reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
Role of the company secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
Directors’ service contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
Remuneration of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
Binding contracts to provide remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . 284
Common law rules on setting directors’ remuneration . . . . . . . . . . . . . . . . . . 287
Statutory rules on setting directors’ remuneration . . . . . . . . . . . . . . . . . . . . . 291
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6 THE BOARD OF DIRECTORS AS AN ORGAN OF THE COMPANY . . . . . . . . . 294

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294
Appointment of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295
Eligibility for appointment as a director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
Defective appointments and the validity of acts of directors: CA 2006 s 161 . . . . . 298
Publicity and the appointment of directors: CA 2006 ss 162 and 167 . . . . . . . . . . 299
Acting as a board of directors: meetings and decisions . . . . . . . . . . . . . . . . . . . . 299
Removal of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Removal by the members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Dismissal by the board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
Directors acting after their office is vacated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
Rights of directors on termination of appointment . . . . . . . . . . . . . . . . . . . . . . . . . 303
Compensation claims for loss of office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
Other payments for loss of office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
Directors’ disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
Outline of the statutory jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
Jurisdiction to disqualify for ‘unfitness’ under CDDA ss 6 and 8 . . . . . . . . . . . . 312
Permitting disqualified directors to act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
Cross-​fertilisation: CDDA and directors’ general duties . . . . . . . . . . . . . . . . . . 320
Disqualification orders and the disqualification period . . . . . . . . . . . . . . . . . . 323

7 DIRECTORS’ DUTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326

General issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326
Overview of codified directors’ duties (the ‘general’ duties) . . . . . . . . . . . . . . 327
Other duties owned by directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328
Directors’ general duties are also owed by de facto and shadow directors . . . . . . . 328
Shadow directors: s 251 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
De facto directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330
People who are not typically directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335
Persons connected with a director: s 252 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336
Directors’ duties are owed to the company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336
Claims that directors owe duties to particular individuals . . . . . . . . . . . . . . . . 337
Duties to shareholders? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338
Duties to creditors? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340
Duties to employees? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
Scope and nature of directors’ general duties: CA 2006 s 170 . . . . . . . . . . . . . . . . . 341
Duty to act within powers: CA 2006 s 171 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
Duty to act in accordance with the company’s ‘constitution’: s 171(a) . . . . . . . 342
Duty to act for proper purposes: s 171(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 342
Duty to promote the success of the company: CA 2006 s 172 . . . . . . . . . . . . . . . . 355
The crucial elements of s 172 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356
The director’s ‘good faith’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356
‘The success of the company for the benefit of its members as a whole’ . . . . . . . . 356
A defence rather than duty? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357
xii

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Illustrations of the duty to act in good faith for the success of the company . . . 358
Duty to disclose own misconduct? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361
Regard for other stakeholders? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366
The interests of members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366
The interests of creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367
The interests of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372
Duty to exercise independent judgement: CA 2006 s 173 . . . . . . . . . . . . . . . . . . . 373
Duty to exercise reasonable care, skill and diligence: CA 2006 s 174 . . . . . . . . . . . 375
The old subjective test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376
The subjective/​objective test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378
‘Reasonable’ directors: keeping informed and delegating responsibilities . . . . . 380
Proving causative loss in negligence cases . . . . . . . . . . . . . . . . . . . . . . . . . . . 385
Duty to avoid conflicts of interest: CA 2006 s 175 . . . . . . . . . . . . . . . . . . . . . . . . 385
Context—​three sections dealing with fiduciary loyalty: CA 2006 ss 175–​177 . . . . 385
The earlier equitable principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386
Statutory changes to the equitable rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387
Illustrations of the ‘conflicts’ rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387
Irrelevant that company cannot or would not pursue the opportunity . . . . . . . . . 390
Which conflicts does CA 2006 s 175 catch? . . . . . . . . . . . . . . . . . . . . . . . . . . 394
What counts as a ‘conflict’? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394
What does not count as a conflict? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395
1. No possibility of a conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395
2. Prior authorisation by the directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
3. Subsequent ratification by the company . . . . . . . . . . . . . . . . . . . . . . . . . 398
Which ‘opportunities’ are caught by the conflicts rule? . . . . . . . . . . . . . . . . . . . 398
1. Scope issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398
2. Resigning to take up a corporate opportunity . . . . . . . . . . . . . . . . . . . . . . 412
Remedies for breach of the conflicts rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420
Conflicts of duty and duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423
Duty not to accept benefits from third parties: CA 2006 s 176 . . . . . . . . . . . . . . . 426
Duty to declare an interest in a proposed or existing transaction
or arrangement: CA 2006 ss 177 and 182 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427
Remedies for breach of the general duties: CA 2006 s 178 . . . . . . . . . . . . . . . . . . . 431
General issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
Remedial options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
Equitable compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
Disgorgement of profits—​personal remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . 432
Disgorgement of profits—​proprietary remedy . . . . . . . . . . . . . . . . . . . . . . . . . 433
Rescission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433
Limitation periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433
Specific examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
Relief from liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452
The available options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452
Consent, approval or authorisation by the company: CA 2006 s 180 . . . . . . . . 452
Equitable rules for authorisation by the company . . . . . . . . . . . . . . . . . . . . . . 452
Ratification of acts of directors: CA 2006 s 239 . . . . . . . . . . . . . . . . . . . . . . . . 454
Relief from liability granted by the court: CA 2006 s 1157 . . . . . . . . . . . . . . . . 460
Contracting out of liability: CA 2006 ss 232–​238 . . . . . . . . . . . . . . . . . . . . . . 462
xiii

Contents  xiii

Special rules on notice requirements and members’ approval for certain

transactions: CA 2006 ss 182–​231 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462
Declarations of interest in existing transactions or arrangements:
ss 182–​187 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462
Transactions with directors requiring the approval of members . . . . . . . . . . . . 464
Enhanced range of statutory remedies for these transactions . . . . . . . . . . . . . 465
Secondary liability (liability of third parties associated with directors’ wrongs) . . . 468
Required knowledge for secondary liability . . . . . . . . . . . . . . . . . . . . . . . . . . 469
Remedies associated with secondary liability . . . . . . . . . . . . . . . . . . . . . . . . . 475

8 COMPANY AUDITORS AND PROMOTERS . . . . . . . . . . . . . . . . . . . . . . . . . 481

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481
Auditors and their relationship with the company . . . . . . . . . . . . . . . . . . . . . . . . 481
General policy and regulatory issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482
Auditors’ liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484
Promoters and their dealings with the company . . . . . . . . . . . . . . . . . . . . . . . . . 498

9 THE RAISING OF CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506

Company ‘capital’ and its importance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506
Attracting and protecting shareholders and creditors . . . . . . . . . . . . . . . . . . . . . . 508
Terminology associated with legal capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509
The legal nature of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512
Minimum capital requirements for company formation . . . . . . . . . . . . . . . . . . . . . 514
Limiting access to shares: directors’ allotment rights and shareholders’
pre-​emption rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514
Allotment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514
Pre-​emption rights governing the issue of new shares . . . . . . . . . . . . . . . . . . . . 515
Pre-​emption rights governing the transfer of existing shares . . . . . . . . . . . . . . . 516
Offers to the public to purchase shares and remedies for misleading offers . . . . . . 519
Misrepresentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520
Loss of the remedy of rescission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 522
Availability of the remedy of damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523
Collecting in the company’s capital: payment for shares . . . . . . . . . . . . . . . . . . . 525
Issue of shares at a discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525
Issue of debentures at a discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527
Issue of shares at a premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527
Issue of shares in exchange for property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529
Rules for public companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530
Rules for private companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 531

10 DISTRIBUTIONS AND CAPITAL MAINTENANCE . . . . . . . . . . . . . . . . . . . . 533

Controls over a company’s distribution of capital . . . . . . . . . . . . . . . . . . . . . . . . 533
Permitted reductions of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534
xiv

xiv  Contents

Redemptions and repurchases of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542

General exceptions to the prohibition in CA 2006 s 658 . . . . . . . . . . . . . . . . . 543
Redeemable shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544
Protection of shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545
Financial assistance by a company for the acquisition of its own shares . . . . . . . 546
The meaning of ‘financial assistance’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 548
Further guidance on the meaning of ‘financial assistance’ . . . . . . . . . . . . . . . . . 553
Exceptions to the statutory prohibition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554
Consequences when a transaction breaches the prohibition . . . . . . . . . . . . . . 558
Dividend distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565
Permitted distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565
Requirement to pay dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566
Payment of a dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567
Distributions in kind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567
Consequences of an unauthorised distribution . . . . . . . . . . . . . . . . . . . . . . . . 567
Capitalisations and bonus shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 571
Disguised returns of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572

11 SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580
The nature and classification of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580
Classes of shares and class rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581
Variation of class rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 587
Statutory requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 587
Additional common law requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588
Meaning of ‘class right’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588
Defining a ‘variation’ of class rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588
Right of dissenting member to object to court . . . . . . . . . . . . . . . . . . . . . . . . 589
Transfer of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599
Share certificates, uncertificated shares and dematerialised securities . . . . . . . 600
Transfer of certificated securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
Transfer of uncertificated shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601
Restrictions on transfer: directors’ approval and pre-​emption rights . . . . . . . . . . 601
Forged and fraudulent transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 604
Equitable interests in shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608
Competing claims to shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 610
Disclosure of substantial interests in shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614
Valuation of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614

12 BORROWING, DEBENTURES AND CHARGES . . . . . . . . . . . . . . . . . . . . . . . 619

General issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619
Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622
Secured debt: mortgages, fixed and floating charges . . . . . . . . . . . . . . . . . . . . . . 623
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624
xv

Contents  xv

Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624
Fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624
Floating charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625
Debenture holders’ remedies and the protection afforded by charges . . . . . . . . . . 626
Different protections afforded to fixed and floating charge holders . . . . . . . . . 626
Requirement to register charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 627
Statutory requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 627
Certificate of registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628
Effect of failure to register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628
Extension of the registration period and rectification of the register . . . . . . . . . 629
Registration, priority and constructive notice of registered charges . . . . . . . . . 629
Company’s own register of charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 630
Further reform of the registration system . . . . . . . . . . . . . . . . . . . . . . . . . . . . 630
Fixed and floating charges: definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632
Floating charges: creation and effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 634
Creation of floating charges and impact of failure to register . . . . . . . . . . . . . . 634
Limitations on the assets which may be made subject to a floating charge . . . . . 636
Dealings with assets subject to a floating charge . . . . . . . . . . . . . . . . . . . . . . 638
Crystallisation of floating charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 641
Treatment of floating charges on the company’s liquidation . . . . . . . . . . . . . . 646
Distinguishing between fixed and floating charges . . . . . . . . . . . . . . . . . . . . . . . 650
Avoiding the statutory regime for company securities . . . . . . . . . . . . . . . . . . . . . 660
Retention of title agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660

13 REMEDIES FOR MALADMINISTRATION OF THE COMPANY . . . . . . . . . . . . 664

General issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664
Pursuing claims for maladministration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 665
Actionable wrongs committed against the company . . . . . . . . . . . . . . . . . . . . 665
Actionable wrongs committed against individual members . . . . . . . . . . . . . . . 666
Why is shareholder litigation such a problem? . . . . . . . . . . . . . . . . . . . . . . . . . . 667
The old common law rule in Foss v Harbottle . . . . . . . . . . . . . . . . . . . . . . . . . . . 669
The rule in Foss v Harbottle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 669
Exceptions to the rule in Foss v Harbottle . . . . . . . . . . . . . . . . . . . . . . . . . . . . 670
Company claims and the statutory derivative action: CA 2006 ss 260ff . . . . . . . . . . 671
In outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 671
Grounds for bringing a derivative claim and parties to the claim . . . . . . . . . . . 672
Court permission to continue a derivative claim . . . . . . . . . . . . . . . . . . . . . . . 674
Compulsory refusal of permission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674
1. The action is not designed to promote the success of the company . . . . . . . . . 675
2. Proper authorisation or ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675
Discretionary refusal of permission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675
Illustrations of the courts’ exercise of control over applications . . . . . . . . . . . . . 676
Residual use of common law derivative claims . . . . . . . . . . . . . . . . . . . . . . . . . . 695
Domestic companies and ‘multiple’ derivative claims . . . . . . . . . . . . . . . . . . . 695
Foreign-​registered companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697
xvi

xvi  Contents

Personal claims by members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700

The sources of members’ personal rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700
The procedural form of members’ personal claims . . . . . . . . . . . . . . . . . . . . . . 701
Establishing the member’s personal right: personal and corporate claims
can coexist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702
Can the member’s personal right be enforced? . . . . . . . . . . . . . . . . . . . . . . . . . 706
The ‘no reflective loss’ principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 706
Unfairly prejudicial conduct of the company’s affairs . . . . . . . . . . . . . . . . . . . . . . . 715
The pros and cons of CA 2006 s 994 claims . . . . . . . . . . . . . . . . . . . . . . . . . . . 716
Basic principles: comprehensive overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . 717
Who may apply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 717
Respondents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 718
Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 719
Grounds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720
Meaning of ‘the company’s affairs’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720
Meaning of ‘unfairly prejudicial’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 721
Meaning of ‘interests of members’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722
Members in their capacity as members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722
Use of CA 2006 s 994 to protect non-​member interests . . . . . . . . . . . . . . . . . . . 723
Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 725
Buy-​out orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 725
Relevance of alternative remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 726
Examples of ‘unfairly prejudicial’ conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . 727
Analysis of conduct which amounts to ‘unfair prejudice’ . . . . . . . . . . . . . . . . 729
A special approach to ‘legitimate expectations’? . . . . . . . . . . . . . . . . . . . . . . . 734
Remedies: valuing shares in buy-​out orders . . . . . . . . . . . . . . . . . . . . . . . . . . . 741
Unfair prejudice and other remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749

14 PUBLIC DISCLOSURE, MARKET REGULATION AND PUBLIC

INVESTIGATIONS OF COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 751
Public disclosure and the disclosure philosophy . . . . . . . . . . . . . . . . . . . . . . . . . . 751
General disclosure obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 752
The Registrar of Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 752
Errors on the register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 753
Register of ‘people with significant control’: the PSC Register . . . . . . . . . . . . . 753
Publication in the Gazette . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 754
Publicity at the company’s own registered office . . . . . . . . . . . . . . . . . . . . . . 755
Specific provision of information to members . . . . . . . . . . . . . . . . . . . . . . . . 755
Publicity on business documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 756
Enforcement of the disclosure regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 756
Listed companies and the Stock Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . 757
Public regulation of securities markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 757
Transparency obligations: investigation and notification of major voting
shareholdings in certain public companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 759
The Transparency Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 759
Substantial holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 759
Consequences of infringement of transparency obligations . . . . . . . . . . . . . . . . 760
Liability for false or misleading statements concerning the transparency rules . . . . 760
xvii

Contents  xvii

Company investigations into share ownership and the disclosure register . . . . . 761
Disclosure and public offerings of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762
Securities markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 763
Official listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764
Prospectuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764
Restrictions on public offers by private companies . . . . . . . . . . . . . . . . . . . . . . 765
Content of prospectuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765
Exemptions from the prospectus requirements . . . . . . . . . . . . . . . . . . . . . . . . 765
FCA sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 766
Liability for misleading statements and omissions in prospectuses . . . . . . . . . . . 766
Under-​subscription for the new issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 767
Market abuse: insider dealing and market manipulation . . . . . . . . . . . . . . . . . . . 767
Controlling market abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 767
Insider dealing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768
Insider dealing: common law protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768
Insider dealing: statutory civil protection (FSMA 2000 s 118) . . . . . . . . . . . . . . . 769
Insider dealing: criminal protection (Criminal Justice Act 1993 Pt V) . . . . . . . . . . 769
Market abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769
Public investigation of companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770
Powers of investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770
Conduct of the investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 771
Inspections and the privilege against self-​incrimination . . . . . . . . . . . . . . . . . . 777
Inspections and subsequent fair trials—​criminal and civil cases . . . . . . . . . . . . . 777

15 RECONSTRUCTIONS, MERGERS AND TAKEOVERS . . . . . . . . . . . . . . . . . . 779

General issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 779
Meaning of the terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 779
Schemes of reconstruction under IA 1986 ss 110–​111 . . . . . . . . . . . . . . . . . . . . . . 781
Arrangements and reconstructions under CA 2006 ss 895–​901 . . . . . . . . . . . . . . 784
What is a ‘compromise or arrangement’? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 785
Defining the classes for member or creditor meetings . . . . . . . . . . . . . . . . . . . 786
Court sanctioning of the scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792
Scheme jurisdiction: use of CA 2006 by foreign companies . . . . . . . . . . . . . . . 794
Proposals for reform of the law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 794
Takeovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 796
Regulation of takeovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 796
The Panel on Takeovers and Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 797
Restricting barriers to takeovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801
Disclosure requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801
‘Virtual bids’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 802
Mandatory offer rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 802
Deal protection measures and inducement fees . . . . . . . . . . . . . . . . . . . . . . . 802
Position of minority members following a takeover . . . . . . . . . . . . . . . . . . . . 802
Directors’ role in a takeover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 806
Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 808
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