Stefan Enchelmaier Company Law

SYLLABUS AND READING LIST FOR THE COMPANY LAW

COURSESCHOOL OF ENGLISH LAW, KRAKOW
Lesson 1: Introduction to the Law of Business Organisations; Law
of Partnerships

Relevant statutory provisions:

Partnership Act 1890; Limited Partnership Act 1907; Limited Liability
Partnerships Act 2000; Limited Liability Partnerships Regulations 2001
(SI 2001 No. 1090); The Limited Liability Partnerships (Application of
Companies Act 2006) Regulations 2009 (SI 2009 No. 1804

Cases:
Tann v Herrington [2009] EWHC 445 (Ch)
Cobbetts LLP and Lee Crowder (a firm) v Hodge [2009] EWHC 786
(Ch)
Hammonds (a firm) v Danilunas et al. [2009] EWHC 216 (Ch)
Protectacoat Firthglow Ltd v Szilagyi [2009] ICR 835

Textbooks and articles:

Kraakman et al., Anatomy of Corporate Law ch 1; Cheffins, Theory ch 1,
2, 5; Dignam & Lowry ch 1; Davies, Principles Part 1; Mayson, French &
Ryan ch 1; Boyle & Birds ch 1; Pettet ch 1.
J Rickford, Fundamentals, developments and trends in British company
law, [2004] ECFR 391415; E Ferran, Corporate law, codes and social
norms finding the right regulatory combination and institutional
structure, [2001] JCLS 381409

Practice case for the session:

Stefan Enchelmaier Company Law

Paul, Brenda, and Susan want to establish a publishing business
specialising in practitioner law books. Susan as a former solicitor is
familiar with the needs of practising lawyers, but she has no assets
except a white van worth about 5000. Brenda knows the publishing
business and is able to contribute a third towards the projected start-up
costs, in particular for word-processing and printing equipment. Pauls
inclinations are primarily academic; he is above all interested in a good
rate of return for the half of the anticipated costs that he could cover with
his savings. The three consider taking a bank loan to satisfy the
remainder of their capital needs. Alternatively, they wonder whether
Derek might be persuaded to bring his small printing business into the
venture. There is also the question of what to call the business: Brendas
surname is Sweet, Susans is Maxwell, Dereks is Hart, Pauls is
Jordans. Advise Paul, Brenda, Susan, and Derek.

Learning outcomes
- Available legal forms: (general/limited) partnership, LLP, Ltd.
-- All three would be viable, but major creditors will anyway demand
personal guaranties or other security from a start-up enterprise like this.
Limited liability is, therefore, largely illusory. If a partnership were the
form of choice, Paul might be interested in becoming a limited partner.
- Contributions to the business: tangible assets, services, intangibles
(business goodwill, also experience?), rules differentiated in accordance
with legal form
-- Any of the above, for Ltd. see s582(1). Limitations as to permissible
contributions apply only to Plc, ss584 ff, 593 ff.
- Other ways of financing the business
-- Finance lease for investment goods such as printing machinery.
-- Ltd can offer shares to select persons (not to the public, s755).
- How to share revenue from business activities
-- Partnership/LLP: equal share in profits default rule, s24(1) PA 1890,
r7(1) LLPR 2001, but in practice in accordance with contribution to
partnership capital;
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Stefan Enchelmaier Company Law

-- Ltd: only net profits distributable, s830, but no further restrictions as in
Plc, s831.
- Bank loan: who is party to the contract, who acts for the business?
--

LLP/Ltd:

separate

legal

personality,

liability

of

members

as

contributories only on winding-up, s74 IA 1986 (as modified by r5/sch3

LLPR 2001).
-- Partnership: joint (not several) liability of partners for partnership
debts.
- Business names: how to choose, which ones not to choose.
-- General provisions for Ltd/LLP in ss53 ff. CA 2006 (as modified by r8
LLPR 2009). (General) Partnership only subject to rules on passing-off.
Same for limited partnership, despite registration, because ss8A8C LPA
1907 do not contain rules that make applicable the relevant provisions of
CA 2006.
-- LLP/Ltd Must not choose name similar to one already on the register,
s66 (here no danger if surnames combined); must also not use a name
sufficiently similar to an existing one as so as to suggest a business
connection, s69(1)(b), r12 LLPR 2009.

Stefan Enchelmaier Company Law

Lesson 2: Incorporation, Corporate Personality, and Limited
Liability
Cases:
Salomon v A Salomon & Co Ltd [1897] AC 22 (HL)
Gilford Motor Co Ltd v Horne [1933] Ch 935 (read CA only)
Jones v Lipman [1962] 1 WLR 832 (Ch)
Dimbleby & Sons v National Union of Journalists [1984] 1 WLR 427 (HL)
(435 B 436 A)
Yukong Lines Ltd v Rendsburg Investments (The Rialto No 2) [1998] 1
WLR 294 (QBD)
Trustor v Smallbone (No 2) [2001] WLR 1177 (Ch)
Ricketts v Ad Valorem Factors Ltd [2004] BCC 164 (CA)
Phonogram Ltd v Lane [1982] QB 938 (CA)
Braymist Ltd v Wise Finance Co Ltd [2002] Ch 273 (CA)
Re Northumberland Avenue Hotel Co (1866) 33 Ch D 16 (CA)
Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156

Textbooks and articles:

Cheffins, Theory ch 11; Sealy & Worthington ch 1, 2; Dignam & Lowry
ch 2, 3; Davies, Principles Part 2; Mayson, French & Ryan ch 25; Boyle &
Birds ch 3; Pettet ch 2; Ferran ch 1, 2.
O Kahn-Freund, Some reflections on company law reform, [1944] MLR
5466
M Moore, A temple built on faulty foundations: piercing the corporate
veil and the legacy of Salomon v Salomon, [2006] JBL 180203
L Linklater, Piercing the corporate veil the never ending story?, [2006]
Comp. Law. 6566
R Pennington, The validation of pre-incorporation contracts, [2002]
Comp. Law. 284285

Stefan Enchelmaier Company Law

Practice case for the session:
Paul, Brenda, Susan, and Derek have incorporated their publishing
business as Lawbook Ltd. In exchange for selling his printing business
to the company, Derek has received 27 per cent of the shares. Also, the
companys Articles of Association provide that as long as Derek holds this
share in the companys capital, he is to be the Technical Director of
Lawbook Ltd. Paul is to be the Academic Director of the company with
responsibility for commissioning new titles; on any resolution to remove
him from this post, each of his shares (together amounting to 20 per cent
of the share capital) shall carry two votes. Brenda and Susan hold the
remainder of the share capital, at 20 and 33 per cent, respectively.
The day before Lawbook Ltd was incorporated, Susan leased new
offices to house the companys administration. During the negotiations,
she had stressed that she would sign the contract for and on behalf of
Lawbook Ltd. The lease reflects this by stipulating that under no
circumstances shall any person other than Lawbook Ltd be legally bound
in any way or liable pursuant to this lease.
A few weeks later, Derek buys computer equipment and printing
machinery for a price of 250.000 for the company. Lawbooks share
capital is 50.000, the total value of its assets 150.000. Brenda and
Susan are furious, but Paul supports Derek. Brenda and Susan want to
remove both shares and directorships from Paul and Derek, and they are
afraid they might be personally liable for the companys debts.

Learning outcomes
1) Methods of payment for shares - money or other assets
2) Entrenchment of directors and other positions in the company share qualification,
removal made more difficult
3) Pre-incorporation contracts liability of those acting for the company-to-be; (how) can
the company be/become bound?
4) Liability of shareholders and of directors for companys debts
5) Balance-sheet insolvency; consequences for directors duties
6) Removal of shares for breach of duty?
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Stefan Enchelmaier Company Law

Lesson 3: Directors Duties and the Management of the Company
Cases:
Royal British Bank v Turquand (1856) 6 EL & BL 327 = 119 ER 886
Percival v Wright [1902] 2 Ch 421
Cook v Deeks [1916] AC 554 (HL)
Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal)
Ltd [1964] 2 QB 480 (read Diplock LJs speech, 50010 )
Northern Counties Securities Ltd v Jackson & Steeple Ltd [1974] 1 WLR
1133
Breckland Group Holdings Ltd v London and Suffolk Properties
Ltd [1989] BCLC 100
Re DJan of London Ltd []1993 BCC 646
JJ Harrison (Properties) Ltd v Harrison [2002] BCC 729 (read only
CA at pp. 745 ff).
Wrexham Association Football Club Ltd (in admin) v Crucialmove Ltd
[2008] BCLC 508 (CA)

Textbooks and articles:

Kraakman et al., Anatomy of Corporate Law ch 5, 6; Sealy &
Worthington ch 3, 6; Dignam & Lowry ch 4, 1214; Mayson, French &
Ryan ch 157, 19; Boyle & Birds ch 157; Hannigan ch 713; Pettet ch 8,
9;
A Keay, Section 172(1) of the Companies Act 2006, [2007] Comp. Law.
106110
A Keay, The duty of directors to exercise independent judgment, [2008]
Comp. Law. 290296
R Davidson, The Companies Act 2006: directors' duties and promoting
the company's success, (2007) 11 JIBFL 631
J Lowry/J Sloszar, Judicial pragmatism: directors duties and postresignation conflicts of duty, [2008] JBL 8391
P Koh, The directors fiduciary obligations, [2003] CLJ 4245
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Stefan Enchelmaier Company Law

D Prentice/J Payne, The corporate opportunity doctrine, (2004) 120
LQR 198202

Practice case for the session:

Lawbook Ltds business is developing well, and the directors see a need
to take on additional personnel. Paul has, therefore, hired Marius as
commissioning editor. This enables Paul to continue in his private studies
which he much prefers over attending board meetings. He also uses the
company jet frequently to attend academic conferences.
Marius commissions Prof. Peter Shwindle, a renowned expert in the field,
to write a book on legal theory. Marius pays Shwindle an advance of
2.000 on the expected sales revenues. Such payments require approval
by the board of directors, which Marius has not obtained beforehand.
After the book is published and half of the edition already sold, it
transpires that Shwindles research assistant has written large parts of
the book. Those parts of the manuscript are in a style very different from
the rest. Also, the parts written by Shwindle are all plagiarised from
works by his former PhD-students. The unsold copies have to be
destroyed, and some purchasers demand reimbursement.
It has also come to light that many of the orders that Derek has made of
printing machinery were placed with a company in which he has
substantial share holdings. For each sale, he secretly received a
commission. He has invested part of these monies in shares which have
since appreciated considerably; with the remainder, he has bought a
sports car for his wife.
At the same time Edwin Elgin Ltd, a well-established family publishing
business, becomes available for purchase as the founders children have
lost interest in the firm after their fathers death. Brenda is in favour of a
takeover, but she is outvoted by the other directors. The atmosphere has
become so poisoned that Paul, Derek, and Susan at the same meeting
decide to remove Brenda from her directorship. Brenda proceeds to buy
Edwin Elgin Ltd and successfully extends the companys business into ebook publishing. This is a market niche which she had spotted while still
at Lawbook Ltd. She earns 100.000 in the first year of running Edwin
Elgin Ltd. What if the Elgin children would not have sold to Derek or to
any company in which he was involved because there had once been an
acrimonious business dispute between him and Elgin? What if Brenda
were not a shareholder but had been appointed, under the terms of a
debenture, by Edwin Elgin Ltd?

Stefan Enchelmaier Company Law

Learning outcomes
- Delegation of directors tasks and authority
Directors may delegate tasks, art5 Model Articles/Ltd. Must not, however,
put themselves in a position where they cannot fulfil their role as
provided for in the articles and thus breach their duties towards the
company. Permanent supervision and direction of delegatees is therefore
necessary.
- Authority of delgatees
The authority of the delegatee is circumscribed by the the conferral.
Nevertheless, third parties may rely on ostensible authority of delegatee
to deal with outsiders; follows not from s40 CA 2006 (only for directors),
but from Turquands case.
- Negligence by delegatee imputable to director because of insufficient
supervision?
Yes, director cannot be delegating task escape responsibility, particularly
not in matters that are important for the business of the company, such as
here maintaining the academic standards of the companys publications
Paul is specifically the academic director. Re Barings (No. 5) 1999,
Parker J, CA.
- Use of company jet to attend academic conferences misapplication of
company property?
Question of fact; here, attendance at conferences broadly within the remit
of Pauls responsibilities.
- Directors: conflicts of interest
-- Directors position
Directors are in a position similar to a fiduciary [students may use
untechnical language], i.e. they must not personally benefit from the
fulfilment of their duties, unless the company has assented to such
private benefit in full knowledge of the relevant facts.
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Stefan Enchelmaier Company Law

-- Dereks shareholdings in other company
Investment in other companies not prohibited, but commission indicates
that considerations alien to the interest of Lawbook have influenced the
decision to place orders with that company rather than with any other.
Here, no substantial property transaction, ss190 ff, nor loan to Derek,
ss197 ff, but breach of disclosure obligation under s177 (before order)
s182 (if ongoing business relationship) CA 2006. S175(1), (3).
-- Dereks commission on sales to Lawbook
Kickbacks are held on constructive trust (AG v Jonathan Cape), Derek
must account to company.
-- Appreciation of shares Dereks to keep, or Lawbooks?
The trust money and any assets into which it can be traced, belong in
equity to the company (Knatchbull v Hallett), and so does the
appreciation in value. Equally so if appreciation due to illicit transactions,
i.e. Dereks efforts.
-- Sports car
Tracing of funds acquired as consequence of breach of trust sports car
to be made over to the company; no competing equity in the wife because
car was a gift, or because knowing receipt of trust property/derivatives
from trust property.
- Removal of directors conditions and procedures
S168 CA 2006 any time and for any reason; but may be oppressive (see
now s994 CA 2006).
- Post-removal duties of directors
No non-compete obligation unless expressly stipulated; even more if Elgin
would not have dealt with Derek or associated company.
- Spotted market while still with LB corporate opportunity

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Stefan Enchelmaier Company Law

Former directors under a duty not to exploit confidential information that
came to their knowledge while in service, but fellow directors have here
declined to take the opportunity in full knowledge of the facts. Peso Silver
Mines 1965, Queensland Mines Ltd. v Hudson. S170(2)(a)
- Legal position of directors appointed by creditors
No lesser obligations vis--vis company, must not let conflict of interest
arise and if arisen, prefer interests of the company rather than the
appointors.

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Stefan Enchelmaier Company Law

Lesson 4: Corporate Governance
Relevant material for the class:
Financial

Reporting

Council:

the

Combined

Code

on

Corporate

Governance, June 2010 http://www.frc.org.uk/corporate/ukcgcode.cfm also for previous versions.

Cases:
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)
Grant v UK Switchback Railways Co (1888) 40 Ch D 135 (CA)
Automatic Self Cleansing v Cuninghame [1906] 2 Ch 34
Salmon v Quin & Axtens Ltd [1909] 1 Ch 311 (CA)
Barron v Potter [1914] 1 Ch 895
Sidebottom v Kershaw, Leese & Co Ltd [1920] 1 Ch 154 (CA)
In re Express Engineering Works, Ltd [1920] 1 Ch 466
Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 (CA) (not the
1946 case of the same name!)
In re Duomatic Ltd. [1969] 2 Ch 365
Bushell v Faith [1969] 2 Ch 438 (HL)
Guiness Plc v Saunders [1990] 2 AC 663 (HL)
Lexi Holdings Plc (in admin) v Luqman [2009] 2 BCLC 1

Textbooks and articles:

Kraakman et al., Anatomy of Corporate Law ch 2, 3; Cheffins, Theory ch
8, 13, 14; Sealy & Worthington ch 4, 5; Dignam & Lowry ch 8; Dignam &
Lowry ch 15, 16; Davies, Principles Part 3; Mayson, French & Ryan ch 14;
Boyle & Birds ch 11, 13; Hannigan ch 5, 6, 15; Pettet ch 7, 10;
J du Plessis, Corporate law and corporate governance lessons from the
past, parts 1 and 2, [2009] Comp. Law. 4351, 7175
A Young, Rethinking the fundamentals of corporate governance: the
relevance of culture in the global age, [2008] Comp. Law. 168174

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Stefan Enchelmaier Company Law

R Cheung, The use of statutory unanimous shareholder agreements and
entrenched articles in reserving minority shareholders rights, [2008]
Comp. Law. 234241
D Prentice, Alteration of articles of association expropriation of shares,
[1996] LQR 194197

Lesson 5: Shareholder Remedies

Cases:
Foss v Harbottle (1843) 2 Hare 461 = 67 ER 189
MacDougall v Gardiner (1875) 1 Ch D 13 (CA)
Eley v Positive Government Security Life Assurance Co (1876) 1 Ex D 88
(CA)
Pender v Lushington (1877) 6 Ch D 70 (CA)
Browne v La Trinidad (1887) 37 Ch D 1 (CA)
In re New British Iron Co, ex parte Beckwith [1898] 1 Ch 324
Hickman v Kent or Romney Sheep Breeders Association [1915] 1
Ch 881
Cook v Deeks [1916] 1 AC 554
Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 WLR 2
Re Sherborne Park Residents Co Ltd (1986) 2 BCC 99528 (sic;
Westlaw)
Re A Company [1986] BCLC 376
Re Baltic Real Estate Ltd (No 2) [1993] CLC 503
Re Macro (Ipswich) Ltd [1994] 2 BCLC 354
Re Saul D Harrison & Sons Plc [1995] 1 BCLC 14
ONeill v Phillips [1999] 1 WLR 1092 (HL)
Gardner v Parker [2004] 2 BCLC 554 (CA)
Oak Investment Partners XII v Boughtwood et al. [2009] EWHC
176 (Ch) (paras. 816)
Re McCarthy Surfacing Ltd, Hecquet v McCarthy [2009] 1 BCLC 622

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Stefan Enchelmaier Company Law

Textbooks and articles:
Kraakman et al., Anatomy of Corporate Law ch 8; Cheffins, Theory ch 7,
10; Sealy & Worthington ch 11; Dignam & Lowry ch 10, 11; Davies,
Principles Part 4; Mayson, French & Ryan ch 18; Hannigan ch 178;
Pettet ch 112;
A Keay/J Loughrey, Something old, something new, something borrowed:
an analysis of the new derivative action under the Companies Act 2006,
[2008] JBL 469500
M Almadani, Derivative actions: does the Companies Act 2006 offer a way
forward?, [2009] Comp. Law. 131140
R Cheung, Corporate wrongs litigated in the context of unfair prejudice
claims, [2008] Comp. Law. 98104

Practice case for the session:

Richard has sold half his shares in Lawbook plc to Janet. She is
disappointed to learn that the company will not be able to pay any
dividends for the foreseeable future because of its crippling liabilities in
directors remuneration. She has also found out that Derek has recently
ordered inappropriate printing machinery from a company in financial
difficulty because he wanted to help a friend. Janet is outraged that
Richard, Paul, and Derek have agreed to keep the matter out of court and
to work something out instead. Susan consented to this when later
heard about it on the telephone.
One proposal to repair Lawbooks finances is to ask all shareholders for a
one-off contribution of 20.000 each; another, to offer preference shares
worth 100.000 in total to all officers of the company. What if the latter
course is pursued as decided at a meeting attended by Richard, Paul, and
Derek, and the next dividend goes entirely to the holders of the
preference shares, of which Janet wanted to buy some but was not offered
any?

Learning outcomes
-

No

dividends

because

of

directors

remuneration:

right

to

dividends? Unfairly prejudicial? Misappropriation of company

property by directors?
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Stefan Enchelmaier Company Law

There is no right to dividends they have to be declared at the
suggestion of the directors, but depending on the circumstances,
failure so to suggest may be unfairly prejudicial, particularly in a quasipartnership. Here, there is no indication that the company has this
character. Conversely, there is no misappropriation (only) if the
directors remuneration is not excessive here it is crippling, which
indicates that it is out of proportion to the profitability of the company,
which also reflects badly on the directors achievements. Incompetent
management, however, is not unduly prejudicial but a risk every
shareholder incurs. This being a plc, she can always sell her shares.
-

Breach of duty by Derek? (How) could the others bar Janet decide
to release him from liability? Is Susans consent on the telephone
valid? What is the correct procedure? CA 2006 / Model Articles?

Dereks purchase of the equipment from that specific firm is informed

by motives alien to the business of Lawbook; he has not acted to
promote the success of the company, but to help a friend. He has, thus,
breached his duty. The members of the company can ratify this breach
under s239 CA 2006. In a plc, resolutions have to be adopted at
meetings (see s288). There appears to have been no meeting, and if
there was, Janet was apparently not invited. Susans consent, not
having been given at the meeting (if there was one), is irrelevant.
-

One-off contribution beyond/other than injecting new capital

lawful? Binding on all if adopted?

Members are not bound by alterations subsequent to their joining if the

alteration requires subscription for more shares or other payments of
money to the company.
-

Preference shares: meaning? How created? Correct procedure

followed? Who has to be offered new shares? Any kind of share?
Are there other bases on which Susan should have been offered?
What remedies does Susan have?

Preference shares receive a guaranteed share of the dividends

declared; the are commonly non-voting. Preference shares are issued
like all other shares but in the conditions of their issue, the preference
is stipulated. Because they are not part of the equity share capital,
ss548, 560, shareholders do not have a right of pre-emption, s561(1).
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Stefan Enchelmaier Company Law

Directors must have regard to the need to act fairly as between
members of the company, s172(1)(f), but the rules on pre-emption are
special provisions for this particular question, and thus take
precedence over the more general rule on directors duties. If the
action by the company is motivated specifically by a desire to put Janet
at a disadvantage (this would be required in view of the clear wording
of the law which makes the present course legal), she would be
unfairly prejudiced.

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Stefan Enchelmaier Company Law

Lesson 6: Shares and the Formation of Share Capital
Cases:
In re Baglan Hall Colliery Co (1870) LR Ch App 346 (CA)
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)
Borlands Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 (definition of a
share)
Re Discoverers Finance Corp Ltd, Lindlars case [1910] 1 Ch 312 (CA)
In re National Telephone Co [1914] 1 Ch 755
In re Roberts and Cooper, Ltd [1929] 2 Ch 383
Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 51 (CA) (note that
there is a different, 1951 case with these parties!)
Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland
Newspaper and Printing Co Ltd [1987] Ch 1
Hogg v Cramphorn Ltd [1967] 1 Ch 254
Bamford v Bamford [1970] 1 Ch 212 (CA)
McCarthy Surfacing Ltd, Re, also known as Hecquet v McCarthy [2006]
EWHC 832 (Ch)

Textbooks and articles:

Sealy & Worthington ch 7, 9; Dignam & Lowry ch 5, 9; Davies, Principles
Part 6; Mayson, French & Ryan ch 68; Boyle & Birds ch 7, 8, 19;
Hannigan ch 19; Pettet ch 13; Ferran ch 36
G Barton, The legal nature of a share, in: Palmer/McKendrick (eds),
Interests in goods, 2nd ed. 1998, 111115
R Pennington, Can shares in companies be defined?, [1989] Comp. Law.
140144
A Daehnert, The minimum capital requirement an anachronism under
conservation, parts 1 and 2, [2009] Comp. Law. 311, 3442

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Stefan Enchelmaier Company Law

Practice case for the session:
Mount Parade Lettings Ltd (MPL) is a York company whose business
consists in the letting of bedsits in a converted villa near the centre of
town. The villa had once been owned by Owen, who bequeathed it to his
grandchildren, the cousins Charlie and Lola. The two have since sold the
house to MPL. Charlie owns 60 per cent of the shares in MPL, Lola 40 per
cent; both are MPLs directors. Relations between them are so strained
that it has latterly been difficult to pass special resolutions. As a result,
only the necessary repairs and maintenance have been carried out on the
building. Charlie wants to make some up-market improvements to the
building, and he also thinks he could make more money out of the
company if he had more of a say. For this reason, he passes a resolution
at the next shareholder meeting authorising the allotment of new shares.
As Charlie knows that Lola cannot at the moment afford to subscribe for
the shares, he buys them all and thus increases his shareholding to 80
per cent. Subsequently, he passes a resolution authorising the compulsory
purchase of minortiy shares whenever the majority so decides.

Learning outcomes
- Meaning and significance of special resolutions; when required under
CA 2006/Model Articles
- Requirements of ordinary resolutions & meetings in Ltd.
- Duties of shareholders to one another?
- Procedure for the allotment of shares
- Permissibility of compulsory purchase
- Protection of minority shareholders (outline only)

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Stefan Enchelmaier Company Law

Lesson 7: Maintenance, Increase, and Reduction of share capital;
Distributions, Share Buy-Backs, and Redeemable Shares
Cases:
Trevor v Whitworth (1887) 12 App Cas 409 (HL)
Punt v Symons & Co, Ltd [1903] 2 Ch 506
Prudential Assurance Co v Chatterley Whitfield Collieries [1949] AC 512
(HL), [1948] 2 All ER 593 (CA)
Ex parte Westburn Sugar Refineries Ltd [1951] AC 625
Re Saltdean Estate Co Ltd [1968] 1 WLR 1844
Howard Smith v Ampol Petroleum Ltd [1974] AC 821 (PC)
Clemens v Clemens Bros Ltd [1976] 2 All ER 268 (Ch)
House of Fraser v AGCE Investments Ltd [1987] AC 387 (HL)
Russell v Northern Development Corp Ltd [1992] 1 WLR 588
Re Northern Engineering Industries plc [1994] 2 BCLC 704 (CA)
Re Hunting plc [2005] 2 BCLC 211
Re Exchange Banking Co, Flitcrofts case (1882) 21 Ch D 519 (CA)
Hill v Permanent Trustee Co of New South Wales [1930] AC 720 (PC)
Re VGM Holdings Ltd [1942] Ch 235
Brady v Brady [1989] AC 755 (HL)
Aveling Barford Ltd v Perion Ltd [1989] BCLC 626 (ChD)
MT Realisations Ltd (in liq.) v Digital Equipment Co. Ltd. [2003] BCC 415
Its a Wrap (UK) Ltd v Gula & anor [2006] 2 BCLC 531
AMG Global Nominees (Private) Ltd v Africa Resources Ltd [2008] EWCA
Civ 1278
Dashfield v Davidson (No 1) [2008] BCC 222
Progress Property Co Ltd v Moore [2009] EWCA Civ 629

Textbooks:
Anatomy ch 6.4; Sealy & Worthington ch 8; Mayson, French & Ryan ch
10; Boyle & Birds ch 8; Hannigan ch 20; Pettet ch 14; Ferran ch 7

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Stefan Enchelmaier Company Law

Practice case for the session:
Despite Charlies earlier manoeuvres, MPL requires further capital.
Lauren is willing to lend 10.000 in exchange for preference shares with
a 10 per cent return. Charlie is anxious to minimise Laurens influence
over the companys business. He also wants to repay her as soon as
possible, thereby removing her from the company even against her will.
How would MPL have to procede if the company had issued (i) non-voting
preference shares with limited dividend and capital rights; (ii) preference
shares which differed from ordinary shares only in relation to the
dividend right, which is fixed at 10 per cent?
In 1990, MPL bought an apartment in Heslington for 10.000. After a
revaluation in 2000, the appartment is entered in MPLs accounts as
worth 15.000; its market value is estimated at 40.000. MPL has
distributable profits of 10.000. The company wishes lawfully to transfer
the appartment to its sister company, Fulford Lettings Ltd, for the lowest
possible price.

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Stefan Enchelmaier Company Law

Lesson 8: Secured and Unsecured Debt; Company Charges
Cases:
Burlinson v Hall (1883-84) LR 12 QBD 347
Re

Yorkshire

Woolcombers

Association,

Houldsworth

Yorkshire

Woolcombers Association, Ltd. [1903] Ch 284 (CA)

Evans v Rival Granite Quarries [1910] 2 KB 979 (CA)
Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyds Rep 142
Re New Bullas Trading Ltd [1994] BCC 36
Re Cosslett (Contractors) Ltd [1998] Ch 495 (CA)
Agnew & anor v Commissioner of Inland Revenue [2001] UKPC 28,
[2001] 2 AC 710
National Westminster Bank plc v Spectrum Plus & ors [2005] UKHL 41,
[2005] 2 AC 680
In the matter of International Sections [2009] EWHC 137 (Ch)

Textbooks and articles:

SH ch. 2427; Goode CL ch. 2226; Anatomy ch 4; SW ch 10; Davies,
Principles Part 7; Ferran ch 12; Anatomy ch 6.5; MFR ch 112; BB ch 10;
Hannigan ch 21; Ferran ch 11;
R Pennington, Recent developments in the law and practice relating to
the creation of security for companies indebetedness, [2009] Comp. Law.
163
S Worthington, Floating charges: the current state of play, [2008] JIBFL
467
A Walters, Statutory redistribution of floating charge assets: victory
(again) to Revenue and Customs, [2008] Comp. Law. 129

Practice case for the session:

Fits like a Glove Ltd (FLG) manufactures ladies fashion accessories in the
upper price ranges. Its products are particularly popular with estate
agents and their spouses. Business was good during the years of the
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property boom, and FLG traded profitably. Since the autumn of 2008,
however, the company has incurred substantial losses. Its main account is
with the National Bank of Wales. By July 2009, the account was
overdrawn by 1.000.000.
The Bank is seriously worried about FLGs prospects. For any future
credit, the Bank demands instant repayment of the overdraft, and
security beyond the already existing floating charge over FLGs valuable
trade mark Fits like a glove. For this reason, FLG grants the bank a
floating charge over all its present and future assets. The bank further
takes a fixed charge over any positive balances in a new bank account
specifically to be created for payments to the company by FLGs debtors.
In fact, however, this account is never set up, and all payments continue
to go into the existing account. FLG repays the overdraft with its last
cash reserves of 600.000. The bank grants FLG a new overdraft of
400.000 to cover the remainder, and extends a further 500.000 to FLG
for the day-to-day running of its business.
At the same time FLGs German leather suppliers, Ziege & Leder
GmbH (ZL), demand security for their claims against FLG. To this end, ZL
reserve their property in every batch of leather supplied to FLG until all
amounts outstanding are paid. FLG may continue to process the leather,
but must within ninety days (the usual credit period in the industry)
either pay for each batch delivered, or assign to ZL claims against FLGs
customers up to the amount due to ZL at that time. FLG also takes a
mortgage of the Fits like a glove trademark. This transaction is duly
entered in the British trade marks register (as would have happened in
the equivalent transaction within Germany alone).
Disappointing Christmas sales entail further losses for FLG. To stem
these, FLGs management stops production for the whole of January. This
prompts the Bank to appoint an administrative receiver, in a move which
is vigorously opposed by FLG. Also, ZL demand back all unprocessed
leather and insist on assignment of all FLGs claims against its trade
debtors. What is more, ZL has sold FLGs trade mark to a buyer who
knew nothing of FLGs difficulties. That buyer wants to have his name

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entered in the British trade marks register. The receiver turns to you for
advice.

Primary Learning outcomes

1) Floating charge over all assets void pursuant to s245 IA 1986?
a) 600k extinguish by that amount the unsecured debt of 1 mil. then
in the account: Re Yeovil Glove, with reference to Claytons case first
in, first out, i.e. payments into the account go towards the oldest existing
debt first. FLG is unable to pay its debts as they fall due, s123(1)(e) IA
1986, and the charge was granted in the relevant time, s245(3)(b), (4)(a),
(5)(b) IA 1986.
b) 400k granted to FLG by the bank merely replaces unsecured loan
with secured one in substance no new money paid at the same time as,
or after, the creation of the charge, Re GT Whyte & Co Ltd [1983] BCLC
311. Result: bank is not secured for 400k.
c) The next 500k do not replace old debt, but are new funds paid
after, or at the same time as, the creation of the charge. Bank is, hence,
secured for that amount, Yeovil Glove.
2)

Fixed charge over bank balance or floating?

Before the creation of the designated account, there is no fixed charge

over that particular account. The existing account is subject only to a
floating charge. As long as the new account is not established, the
existing one is not subject to a fixed charge, see Re Keenan Bros.
3)

Floating charge over trade mark versus mortgage

A floating charge allows dispositions in the ordinary course of business,

including use as security for other creditors. Mortgage, therefore, ranks
with priority over floating charge. There is no constructive notice of the
contents of the securities register in ordinary sales transactions, but here
the documentation would reveal that ZL is a mere mortgagee buyer had
to make enquiries regarding equity of redemption. Questionable also
whether ZL entitled to foreclosure.
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4)

Reservation of property

Valid as long as leather not processed, because parties can determine

when property passes, s17(1) SGA 1979. Property is lost, however, as
soon as leather is processed: Clough Mill v Martin; Re Peachdart,
otherwise windfall of the value of processors labour and other
suppliers input for the reserving supplier.
5)

Credit period and assignment

In the meantime, FLG may use money as it pleases in running its

undertaking, therefore no trust, but mere charge: Clough Mill, Peachdart,
Borden v Scottish Timber in distinction from Romalpa; invalid for lack of
registration.

Secondary learning outcomes (not relevant for solving the case,

but still interesting in the context of security)
1) Crystallisation

of

the

floating

charge

and

appointment

of

administrative receiver
Holders of (as here) qualifying floating charges are no longer
entitled to appoint an administrative receiver, s72A IA 1986, safe as
in accordance with ss72B72GA. Mere misnomer, however, is
irrelevant: for a.r. read administrator. Right to appoint only
arises on crystallisation. Cessation of business leads to automatic
crystallisation: Hubbuck v Helms [1887] LT 232 (ChD) 234 (Stirling
J); Re Woodroffes, 377 f.; Re Borax Co., Foster v Borax Co. [1899] 2
Ch 130 (ChD), 135 (North J): This seems to me to be really the
special test: is the business upon which the debenture money is lent
being continued or not? One months interruption questionable
ground.
2) Banks charge over own debt
Credit balance in bank account means a debt of the bank to its
customer; charge would thus mean security over ones own
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Stefan Enchelmaier Company Law

indebtedness. Goode thinks conceptually impossible; Lord Hoffmann
in BCCI (No 8), without much explanation, saw no problem. I have
sided (in 2008 CYELS) with Hoffmann: charge is allowed quasi-setoff as if he were the creditor; requires mere book entry.
3) Register of company securities v specialist IP registers
No judgments nor much literature; better view that ss860 ff. CA
2006 leges speciales over ss24, 25 TMA 1994.

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Stefan Enchelmaier Company Law

Lesson 9: Assets Available for Distribution; Consequences of
Improper Trading
Cases:
Winkworth v Edward Baron Development Co Ltd [1987] 1 All ER 114
Liquidator of West Mercia Safetywear Ltd. v Dodd (1988) 4 BCC 30
In re Produce Marketing Consortium Ltd. (In Liquidation)No. 002142 of
1988 [1989] 1 W.L.R. 745
Re Grays Inn Construction Co Ltd [1980] 1 WLR 711
Re MC Bacon [1990] BCC 78
Re Oasis Merchandising Services Ltd [1998] Ch 170
Facia Footwear Ltd v Hinchcliffe [1998] 1 BCLC 218
Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 W.L.R. 143

Textbooks and articles:

BB ch 21.7; Hannigan ch 25; Pettet ch 21.4, 22;
R

Mokal/L

Chan

Ho,

Consideration,

characterisation,

evaluation:

transactions at an undervalue after Phillips v Brewin Dolphin, [2001]

JCLS 359379

Practice case for the session:

Scottish Hawk Airways plc (SHA) is a member of the European Air
Transport Association Ltd. (EATA). Only licensed air transport operators
may become members of EATA. Each member has one share which
carries the right to vote in EATAs affairs, but not to any dividends as
EATA is not run for profit, and its operations do in fact not generate any
profits. Instead, EATA keeps accounts for all members into which it enters
the value of any transport services provided by one airline for passengers
who had booked with another airline. Once a month, EATA nets out
these accounts. Members are then either entitled to a payment by EATA,
or must make a payment to EATA. The Association passes these payments
on to the airlines that are in credit. If a member persistently and
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Stefan Enchelmaier Company Law

definitively fails to make payments to EATA, it must leave the Association
and without consideration transfer its share to a new member or to EATA.
The member in this case also loses the right to use the prestigious EATA
logo.
The business of SHA develops very badly because the airlines costs are
too high. SHA notifies EATA that it cannot meet its payment obligations
under the Associations statutes anymore. EATA thereupon declares
SHAs membership in the association terminated, and its share forfeited.
SHA thinks it is entitled to 50.000 against Welsh International Airways,
for which it has recently carried out a number of charter flights to
Mallorca. At the same time, the Clydesdale Bank terminates its service
agreement with SHA under which SHA covered all executive travel needs
of the bank. SHA had obtained this contract because it is the only
sizeable airline operating out of an airport near the banks headquarters.
The agreement expressly declares unassignable any benefits under it.
What is more, SkyBus Industries SE, supplier of SHAs aircraft, invokes a
clause in the sale agreement according which property in all aircraft
revests in SkyBus in case of the termination of SHAs membership in
EATA.
SHAs liquidator turns to you for advice. Would it make a difference
whether the liquidator had given the above notice to EATA, or whether
she was appointed only subsequently?

Learning outcomes
1) Can contractual arrangements, such as EATAs statutes, supersede
the provisions of the IA 1986 on the distribution of an insolvent
companys assets?
In principle no, because these rules are stipulated in the public
interest, in particular for the protection of unsecured creditors of
the insolvent company. The clearing house arrangement cannot,
therefore, confer preferential treatment on EATAs members: thus
the majority of the HL in British Eagle the anti-deprivation
principle. It is different, however, where the assets of which the
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Stefan Enchelmaier Company Law

insolvent company is deprived have either no value (such as here
the share) or cannot be transferred to any other creditors (such as
the right to use the logo), Money Markets International v London
Stock Exchange.
2) Can a contract be terminated, on a companys insolvency, by the
other party such as Clydesdale Bank?
There is a controversy whether a mere non-assignment clause in a
contract removes the asset in question from the ambit of the antideprivation rule: see Prof. Armour in CLJ on Money Markets
International. Nevertheless, the rule is meant to protect other
creditors (although this, too, is somewhat controversial), so that the
mere extinction of rights, rather than their transfer to a creditor of
the insolvent company, does not offend against the principle. At any
rate, under the circumstances the contract was by its nature
unassignable.
3) Can it be agreed that property shall revert to the seller in the
buyers insolvency?
No. This is the classic case of the anti-deprivation principle: Ex p.
MacKay.
4) Does the anti-deprivation principle depend on the opening of
formal insolvency proceedings?
Re Oystertec (ChD) answers no, but the judgment is controversial
(in favour LC Ho, against Henderson), and the recent Perpetual
Trustee case is expressly against it: only formal procedures trigger
the application of the principle.
Lesson 10: Liquidation Procedures; Procedures for Averting
Liquidation
Cases:
Stonegate Securities Ltd v Gregory [1980] Ch 576 (CA)
Re Permcacell Finesse Ltd (in liq.) [2008] BCC 208
In re Airbase Services (UK) Ltd [2008] BCC 213
Re Courts Plc (in liq.) [2008] EWHC 2339 (Ch)
International Section Ltd. (in liq.) [2009] BCC 574
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Stefan Enchelmaier Company Law

Re Harris Simons Construction Ltd [1989] BCLC 202

Re AA Mutual International Insurance Co Ltd [2005] 2 BCLC 8
Re Charnley Davies Ltd (No. 2) [1990] BCLC 760
Downsview Nominees Ltd v First City Co Ltd [1993] AC 295
Medforth v Blake [2000] Ch 86

Textbooks:
BB ch 21.46; Hannigan ch 24; Pettet ch 21.3
SW ch 14; DL ch 17; MFR ch 20; BB ch 21.13; Hannigan ch 223; Pettet
ch 21.1

29