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Week 4 - oceana view exam q

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Week 8 - Spring Bank PLC exam q.

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Fountain Shiu - Homework week 8

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New question: Spring plc (Spring) is a manufacturer of electric scooters and it was incorporated in 2020. Tom and Omar are the only directors. The business was hit by low demand and rising costs. In July 2024, Spring was placed in compulsory liquidation and the liquidator was appointed.

The liquidator collected all the available assets of the company and sold them for £200,000. They discovered that Spring borrowed £70,000 from Hope Bank plc in May 2020 and this loan was secured by a charge over all its business and assets. The charge instrument describes it as a fixed charge and it has been validly registered. The liquidator discovers that Hope Bank plc has allowed Spring to deal with the charged assets without any restriction.

The liquidation fee is £20,000 and the liquidator has incurred additional expenses of £64,000. Spring has unpaid corporation tax bill of £40,000.

Twenty employees are claiming unpaid wages of £6,000 each. It also has the following outstanding unsecured debts:

•

£60,000 owed to Hightech Ltd for the supply of IT equipment.

•

£6,000 water bill owed to Jellyfish Ltd.

•

£90,000 owed to Green Building Ltd for building maintenance.

Explain how Spring’s assets will be distributed by the liquidator. A detailed calculation is required in your answer.

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Week 7 howework - Fountain Shiu

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Week 7 Greencloud exam question

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Week 7 - March Hare Exam Question

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Foster Part B question

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Kathryn Berrill homework - Foster Part B question

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Week 6 Homework

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Introduction:

A company must keep a register of its members. It is important to be able to identify who controls a company, in order to hold companies and those who control them to account. The information that must be included on the register:

•       the names and addresses of each member;

•       the date on which each person was registered as a member;

•       the date on which any person ceased to be a member;

•       if the company has a share capital, the register must contain a statement of the shares of each member, setting out:

–  the number of shares the member holds and, if applicable, the class of shares; and

–  the amount paid or agreed to be considered as paid on the shares; and

•       if the company does not have a share capital, but it does have more than one class of member, then the register must identify to which class each member belongs.

A company is also required under the Companies Act to maintain a register of persons with significant control (a PSC register). The Companies Act provides that a person will have significant control if any one of the following conditions are satisfied:

•       (a)  a person holds, directly or indirectly, more than 25% of the company’s shares;

•       (b)  a person holds, directly or indirectly, more than 25% of the company’s voting rights;

•       (c)  a person holds the right, directly or indirectly, to appoint or remove a majority of the company’s directors;

•       (d)  a person has the right to exercise, or actually exercises, significant influence or control over the company; or

•       Also includes trustees of a trust or the members of the firm that is not a legal person

Applying this to the scenario

5,000 shares are purchased by Southlands Tennis Club, an unincorporated association. The chair of the Tennis Club is Jude.

The tennis club is not a company and so cannot be added to the register of members as it has no legal personality. Instead the register of interest will include all the members of Southlands (Matt is this correct or would the members usually just nominate one person?) including Jude who is also a director of Violet. As Violet’s other 20,000 shares are held by its parent company Rainbow Jude does not indirectly hold any of those shares so the entry in the registry will reflect that Jude and the their members of Southlands hold 5,000 ordinary shares and the date they became members.

12,000 shares are purchased by Image Ltd (Image). Image is a nominee for Navigation plc, one of Violet’s main competitors.

Shares can be registered in the name of someone else (known as the ‘nominee’) so Image would be added to the register as holding 12,000 ordinary shares. Although this is legitimate use of a nominee it can be used to mask the fact that one of Violet’s main competitors is actually the owner of the shares.

As a public company Violet can use a section 793 of the Companies Act 2006 to request to require anyone who is, or might be  ‘interested’ in its shares to answer written questions about the nature of that interest.

Violet could therefore use section 793 to find out if a different company has used Image as a nominee. If Image or Navigation (Matt – would Navigation be obliged to reply if the request was only sent to Image as the Nominee or only Image?)  failure to respond to a s793 request this would enable Violet to ‘block’ the shares in question, preventing the shareholder from voting or transferring its shares, until the answers were provided. A person who fails to comply with a s. 793 notice, or who provides false information when complying with a s. 793 notice, commits a criminal offence (s. 795).

Violet must keep a register of interests disclosed detailing any information disclosed to it under s. 793 (s. 808(1)) so I would also be entering the relevant information disclosed.

However one of the drawbacks of S793 is that Violet would need cause to believe that a company other than Image has an interest. If they don’t realise they have cause to make a S793 request it is more likely that the details of Image will be added to the register instead as the PSC.

Rainbow holds 20,000 shares so also counts as a PSC so would also need to be listed o the PSC register if they were not already.

No buyer can be found for the remaining 3,000 shares so the Board decides that Violet should purchase them itself.

Generally speaking a company cannot buy shares in itself (unless through share buyback). If the purchase has already been made the directors of Violet have acted ultra vires and committed a criminal offence. The act would be void and cannot be enforced so I would not be adding anything to the members register here as the 3,000 shares would remain available.

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Week 5 Homework

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Week Five Test and Exam Question

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Week 5 - written up Violet PLC Exam Question Answer

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Answer A to the Violet PLC exam

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Week 4 Test and Exam Question

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Week 5 Exam Question

(a)  Discuss the various entries you will make in Violet’s statutory registers. (15 marks)

Violet PLC has issues a fresh batch of 20,000 £1 ordinary shares. Already have 20,000 shares owned by parent company Rainbow International PLC.

5000 shares purchased by Southlands Tennis Club, an unincorporated association. – as an unincorporated association has no legal personality it cannot be a member. Would not be able to enter into the register of members due to membership restrictions. Jude could however, be entered as the nominee holder of the shares. She would be the legal owner and Southlands Tennis Club is beneficial owner.

12,000 shares purchased by Image Ltd who is a nominee of Navigations PLC. Could enter Image Ltd as nominee legal owner of 12,000 shares with value of £12K into register of members and could also request under S793 could request confirmation of whether Navigation PLC has interest in the shares if it has reason to believe or knows it has interest in the company. Would record this in the Register of Interests.

A company cannot be a member of itself save for a treasury share. So the company can hold shares but won’t be a member and therefore have any of the rights, such as carrying right to vote, attend a general meeting etc. Could go into Trevor V Whitworth 1887 which rules that no company under the Companies Act has the power to purchase its own shares and any act doing so is ultra vires.

PSC register  - Image Ltd / Navigation PLC as it holds more than 25% of shares in company.

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Discuss various entries you will make in Violet’s statutory registers:

First- discuss each register- register of members, register of interests disclosed, PSC register, register of overseas entities- all briefly

-Rainbow- on register of members, PSC register as hold more than 25% shares in the company

-Southlands Tennis Club- not register of members as it is an unincorporated association and they have no legal personality so shouldn’t be accepted as members, register of interests as chair is Jude (one of Violet’s directors) so Violet could issue a s793 notice as they are likely to know that Jude is the Chair

-Image- register of members as a nominee for Navigation plc- Image is the legal owner of the shares. As Violet is a public company, they can give s793 notice to Image to request its interest in shares, especially as they are likely to know that Image is one of their main competitors. Violet must keep register of interests disclosed. Image must comply with S793 notice, if not, criminal offence.

-Navigation- not on register of members as they have brought shares and put in Image’s name- so even though they are the beneficial owner, they are not on register of members. They will need to be listed on the PSC Register as a beneficial owner- as they hold more than 25% of shares in Violet Plc

-Violet Plc- companies cannot be members of themselves- so even though Board decides Violet should purchase remaining 3000 shares, they would not be entered on register of members as this is not allowed.

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Q7a (June-2024) Answer outline

(a) Entries in Violet's statutory register

- Register of member

S113 provides that every compnay must keep a register of member.

- who can be member? s112

- restriction on membership? e.g. Unincorporated associations - no; company itself also no

-nominee sharedholders

- explain each entry.

(i) Southlands Tennis Club is unincporated so can't be entered in Register of Member, name of the sole proprietor or partners should be entered intead +5000 shares

(ii) Image Ltd as nominee shardholder for Navigation plc +12,000 shares

(iii)Rainbow +3000 shares - can't be entered (Trevor v Whitworth) (1887))

- explain what information should be included in detailed in (i) and (ii): e.g. name and address, date regsitered, dated ceased, number of shares, amount paid up (s127 and 128H)

- Register of PSC

Rainbow company as a plc (not listed) can keep PSC information on a central resigtesr of Company House.

s790M(12): requires company to keep a reigster of any registratable persons who have significant control over the company and failure to keep is a crinimal offence

-define PSC (> 25% of company's shares or voting right; a person has the right to exercise significant contorl over the company, and trustee or trust or member who is not legal person)

-Navigator Plc holds 30% of the shares so need to be entered

-Rainbow holds more than 50% and have more share now so need to be disclosed

(b)‘squeeze-out’ provisions.   With reference to Dafen Tinplate Co Ltd v Llanelly Steel Co, the court would consider that the clause is too board (just mention selling of shares at a fair value) and not specific enough to illustrate the selling of shares is bona fide for the benefit of the company.   If the share expropriation clause is narrower and can benefit the company, it will be deemed valid.   In ‘Sidebottom v Kershaw Lease & Co Ltd’, the clause to provide that a shareholder who competed with the company could be required to sell their shares to the directors was considered valid by the court, as it clearly benefited the company

may need more refinement if want to pass this as special resolution

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Violet plc question (in class)

Notes:

2000 £1 shares owned by Rainbow International (parent)

5000 £1 shares owned by Jude on behalf of Southlands Tennis Club

12000 £1 shares owned by Image with the beneficial owner being Navigation

3000 remaining shares (proposed to be bought by Violet itself but not possible)

Introduction:

Statutory register requirement for plc's and background.

Register of members

Southlands Tennis Club is unincorporated and so does not have a legal personality, Jude may be able to be entered into the register of members as the legal owner (Salomon) of the 5000 shares on behalf of Southlands Tennis Club.

Image Ltd is a nominee of Navigation plc, so it should be noted that Navigation is the UBO of Image when the shares are registered into the register of members for the 12,000 shares.

Violet proposes to buy the 3000 remaining shares in itself, but it is not possible to buy shares in itself. The parent company Rainbow international may buy the shares instead.

PSC register

Southlands Tennis Club/Jude does not need to be entered into the PSC register as their ownership does not meet the threshold of:

Qualifiers of a PSC:

>25% shares

>25% voting rights

ability to remove or appoint the majority of the board

exercise excessive control or influence over Violet

Image, with its beneficial owner being Navigation, should be entered into the PSC now that it owns 30% of the shares in Violet (takeover code*** as ownership is over 30%).

Rainbow should be entered as a PSC as it has power to influence the company as the parent in addition to owning 50% of the shares in Violet and potentially the 3000 more of the shares that have not been bought (takeover code*** as ownership is over 30%).

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ROM/ROD/PSC registers

Violet is a public company

ROM - what is it? when are you a member?

ROM: 20,000 Rainbow (previous PSC)

you cannot allocate shares to an unincorporated company. Must be in a persons name - so Jude, the tennis Chair's name would be added. Detail out who else cannot be on an ROM: under 16s, companies with no legal personality eg SLPs,

5,000 Jude the Chair

12,000 Image plc which is a competitor and will need to lead back to Navigator

3,000 to Violet

total: 40,000 but Violet cannot be it's own shareholder (?)

37,000/4=9250

both Rainbow and Image plc, are to be registered as the PSCs. What information need?

As Image holds over 30%, need to offer a takeover bid

You are a PSC when you :

-hold 25% of the shares

-25% of the voting rights

-right to remove or appoint the majority of -the directors

-right to exercise/exercise significant influence or control over the company

-trustee of a trust

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Violet plc has a statutory duty to keep a number of registers. Failure to keep these registers will be a criminal offense.

Firstly, Voilet should keep a register of membership. this will include the names and addresses of each member, as well as the date they became a member as well as when they ceased to be a member. Entry into the register of members is only with consent. If a person owns shares but does not consent to membership, they will be a shareholder with no voting rights.

5000 shares are bought by teh Southlands Tennis Club (Southlands). As Southlands is an unincorporated association, each of the people part of this association will need to be recorded either as a shareholder or as a member. As Jude is a the Chairman of Southlands and is also a director of Violet, it would be best if she was entered into the register to alert or pre-emptively declare any potential conflicts of interest that may arise in the future. At the very least, Jude should declare her interests formally to both the association and Violet plc.

12,000 shares are purchased by Image Ltd, which is a nominee of Violet's competitor Navigation plc. . As such, Voilet can issue a or s197 order to Navigation to disclose any interest they have in Violet's shares. Failure to disclose will be a criminal offence for Navigation plc. Violet also has a duty to make available any disclosures made under a s 197 request.

12,000 shares are above 25% of the total shares available, which would make Image ltd a PSC, which would need to be entered into the PSC register with companies house. Until the request is fulfilled, Voilet can put a block on voting rights for those shares. However, as Image Ltd's ultimate beneficiary is Navigation, once Violet has the outcome of the s.197 request, Navigation would need to be entered as the PSC instead.

Once Voilet plc purchases 3000 of its own shares, Violet need not enter itself onto the companys membership register as it is

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Week 4 Homework Questions

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Week 3- Exam Question- Q9a November 2021

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Company Law- Lecture 4- Test with my Answers

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Week 3 Questions

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Week 4 Homework Fountain Shiu

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Intro

Marks allocated

Parts

Knowledge points

Link back to scenario

Q: Explain whether the directors of Oceana View have breached any of their duties under the CA2006, if so, what are the consequences of the breach:

Intro:

Directors duties s170-177 CA2006

1. Owen was in negotiation with Green-tech to purchase 4 new computers from its offices. At the board meeting, all Sophia, Owen and Lin approved the contract to purchase the computers from Green-tech for £4000. Owen did not mention that he holds 30% of the shares in Green-tech, Sophia and Lin later found out that the market price for the computers was £2000:

Owen is in breach of s175 CA2006 in his duty to avoid conflicts of interest and his s177 duty to declare interest in transactions or arrangements. The consequences:

The contract with Green-tech is voidable at the company's instance, if Green-tech knew of the breach (Hely-Hutchinson & Co Ltd v Brayhead Ltd [1968])

The director in breach can be required by the company to account for any gains made, in this case the £2000 profit made by Owen on behalf of Green-tech (Aberdeen Rly Co v Blaikie Bros [1854]).

Owen asked Sophia and Lin whether he could borrow £30,000 from Oceana View. Sophia and Lin approved the loan at a board meeting without asking any questions. Jasmine was not aware of the loan:

Sophia and Lin are in breach of their duties to exercise reasonable care, skill and diligence s174 in that they approved the loan on behalf of Oceana without proper interrogation or informing Jasmine as the other shareholder. The consequences (Dorchester Finance Co. Ltd v Stebbing [1989]):

Courts in the UK are generally reluctant to condemn business decisions made by directors that appear to show errors in judgement.

Jasmine discovered that Owen set up his own property management company in the same local area. He also received £1000 commission from Green-tech:

Owen is in breach of his s175 and s177 duties here again.

Jasmine, Sophia and Lin are considering removing Owen as a director and buying his shares in Oceana View. Owen does not wish to sell his shares in Ocean View. There is a clause added to the articles of Oceana "A director cannot be removed without their consent. Oceana can, by passing an ordinary resolution, require a shareholder to sell their shares to the other shareholders of the company at a fair value." Owen is both a director and a shareholder, so while he cannot be removed as a director without his consent, he can be required in his capacity as a member to sell his shares to Jasmine, Sophia and Lin, at a fair value.

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1.      Break the question into parts?

o   Laws about additional clauses.  You can’t add a clause that is illegal

o   Law around Articles and passing resolutions and who has the ‘power’.

o   Detail the directors’ duties from 171-176 – brief history of how they were codified from case law – consequences and the remedies

o   The law around members approval

o   Gilford v Horne 1933 regarding disregarding corporate personality

2.      How the marks allocated between parts of the question?

3.      How will you introduce your answer?

o   How do we then order (knowledge points and then linked to the scenario)

4.      What are the relevant knowledge points for each part of your answer?

o   You can’t add a clause that is illegal

o   Procedure around passing resolutions.  Changing Articles require special resolution

o   Go into detail of what a breach of duty is for each 171-176

o   The law around members approval:Members must agree to loans

o   Gilford v Horne 1933 regarding disregarding corporate personality

5.      How will you link to the scenario?  This is the conclusion

o   Jasmine is a member/shareholder.  It is the members who agree loans and, therefore, Sophia, Owen and Lin has breached the passing of the resolution

o   Owen has breached s172 as failed to promote the success of the company by buying computers at 4k when the market price was 2k

o   Sophia and Lin have approved a loan without asking questions so they have breached 174.  Dorchester v Stebbings.  There should be an objective and subjective tests

o

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CA 2006 s.170 - 177 codify the duties of directors. Directors owe their duties to the company, not to other members, suppliers or employees - s. 170. If a director is in breach of their duties only a person acting on behalf of the compay are empowered to bring a claim.

Shareholders empower the directors to make decisions, but should not normally be making decisions on the day to day management of the company in their role as a member. However, directors are duty bound to make decisions for the benefit of the company and its members.

A director must act within their delegated powers and has a duty to only exercise those powers for the purpose for which it was conferred (s. 171). As members delegate authority through the company's constitution, we should look to the company's articles to find the limits of the director's powers.

A director has a duty to promote teh success of the company (s. 172) which includes the need to act fairly between members of the company and to disclose their own breaches of duty as well as those of others.

Directors are duty bound to exercise their own independent judgment (s. 173) with reasonable care, skill and dilligence (174). They are also expected to avoid conflict of interest by declaring it as soon as possible and abstaining from any decisions related to that interest (s. 175). Directors should not accept benefits from third parties (s. 176) and that includes loans guaranteed by the company. Any transations or arrangements should be declared under s 177.

Directors found in breach of these duties could be liable for any losses sustained by the company, although the interests of third parties acting in good faith will be protected.

With this in mind, Owen was potentially in breach of several duties, including not declaring a conflict of interest, receiving benefits from Oceana view in a personal capacity. Sophia and Lin did not act with due diligence when approving the loan to Owen. Owen also had a conflict of interest.

Ran out of time....

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1)      Set out what the duties are (S171-177)

a.      Set out what the consequences for the breach of those duties are

2)      Go through the scenario and determine whether each director has breached their duties

a.      Green-tech: Owen breach 172,175 and 177.

b.      Loan: all breach of 174 as should have got member approval (i.e Jasmine should know)

c.      Owen’s property management company: Owen breach 175 and potentially 173

3)      Apply consequences

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Start off with general - Directors duty is to the company. Codification of common law

Owen - breach of duties:

computers: s175 conflict, s172 success of company and benefit members as a whole. duty to act bona fide in interests of the company. codification of directors fiduciary duty - not in good faith

did Sophia and Lin disclose that Owen held 30% shares in Green-tech? if not, they are in breach too

£30k loan needs member approval over £10k (liable for the loan - jointly and severally with the directors??). Needs to be a member decision via ordinary resolution.

Sophia and Lin did not have authority to grant the loan - breach of s174

s.175 for property management company

s176 for £1k breach

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Week 4 - classwork question (Oceana View)

(a) breach of duties and consequence

15 marks - (a) legal framework - CA2006 directors' duties (1-2 marks) (b) anlayse each director's breach of duties by quoting relevant provision (5 marks) (c) consequence (3-4 marks)

Owen - breach of s175 conflict of interest , 176 accepting commission from Green Tech and 177 failure to declare interest in transaction

Sophia and Lin - breach of 171, 174 - failture to exercise care and diligence in approving the loan to Owen; ultra wires as no authority to approve loan over 10,000 to Owen without seeking members' approval (s207(1))

Consequce for each breach of duty

(b) legal procedures for removing Owen (10 marks)

Authority, constitution, statue, relate to scenario

-model articles: removal requires director agreement; sell of shares with members' approval by ordinary resolution

-proposed ordinary resolution and obtained agreement from member to pass the resolution > then can ask Owen to sell at faire price

-Owen may not agree his removal; may need special resolution to amend article (need to seucre Jasmine support for resolution to pass 75%)

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Tool Ltd Question: Skeleton answer

Advise Tool Ltd if they are legally bound by the contract with Beta Build, the loan from the Great Bank, or the contract with Furnishright.

Intro:

-          Board of Directors as agents of company are typically granted general managerial powers via the company’s constitution. This includes the authority to enter into contracts on the company’s behalf.

Tool Ltd:

Contract with Beta Build

-          Whilst David had express authority from the Board to enter the contract the contract value was contrary to the Tool Ltd Articles which held that anything over 1M needed shareholder approval. This was not sought so the Directors were acting ultra vires.

-          Beta Build have recourse to s. 40 of CA2006 which holds “in favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company's constitution.”

-          In this case whilst the decision to engage with Beta Build was outside the authority of the Board Beta Build could still enforce the contract. It cannot be set aside due to lack of authority.

-          Whilst Tools Ltd cannot get out of the contract, the Directors could still find themselves liable based on a breach of duty under s. 171 of CA2006 to act according the to the Articles.

-          With regards the good faith of Beta Build that is required for s. 40 to apply, it would be easy for Beta Build to demonstrate that. For s. 40 to apply the third party are no bound to enquire about limitations, are presumed to have acted in good faith, and knowing that the matter was beyond the power of the person contracting is not grounds enough to demonstrate bad faith.

Loan from Great Bank

-          The bank could supplement the above with recourse to the “indoor management rule” whereby third parties can assume that a company’s internal rules have been complied with.

-          This was the case in Royal British Bank v Turquand.

Contract with Furnishright

-          As evidenced by Panorama Developments Ltd v Fidelis Furnishing Fabrics a company secretary is “no longer a mere clerk” and as an officer of the company can be regarded as having the authority to contract for things on the administrative side of the company’s operations. Furnishright could rely on this which would be characterised as apparent authority based on the position of company secretary.

Ccl:

-          Tool Ltd are therefore bound by the contracts and loan even though they acted outside of the company’s articles.

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Week 3 Homework Q1

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CGIQP : Company Law : Lesson 4

Alpha Question

Advise Alec and Jake if they can rely on the Articles of Association and Shareholders Agreement

Outline structure/main points

Intro:

o   Articles of Association (AoA) are a core part of the constitution of a company – cite s.33 of CA2006 which states that “the provisions of a company's constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions.”

o   Shareholders Agreement does not form part of the constitution but is an agreement between members and can be enforced by or against any person who is party to it.

Alec (A):

o   3 core issues to address: 1/ veto ignored; 2/ raise share capital; 3/ removal from office

o   Re 1/ AoA are between members as Beattie v E and F Beattie demonstrated – if A acts as anything other than a member he would have no recourse to the AoA – could as a member though sue the company. Additionally, A could consider whether the Board meeting was run in a correct manner that followed procedure. To have a veto ignored may contravene aspects of the AoA.

o   Re 2/ A could look to the shareholders agreement but the court might hold that whilst shareholders are bound by the agreement the company is not and that by not increasing the share capital the company’s statutory rights were being restricted – as per Russell v northern bank development

o   Re 3/ As per Bushell v Faith which established that a director can use weighted voting rights (3 per share in the case of Alec) to block a resolution to remove them Alec could use his votes to block Christine and Barry’s attempts to remove him.

Jake:

o   The AoA are between Members of the company. Whilst Jake was referenced by name in them he was not a Member. He would therefore be an “outsider” if he tried to sue Alpha in this instance and as Eley v Positive Government Security Life Assurance Co demonstrated, even if the AoA were breached Jake would not be able to sue as an outsider i.e., he is not party to s.33 in this instance.

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Week 3 Exam Question

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This is Siobhan

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Week Three Test and Examination Question- Natalie Applegarth

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Week Three Legally Binding a Company Test and Exam Question

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Week 3 Homework questions - Fountain shiu

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Company Law- Lecture 3- Test with my Answers

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Company Law- Lecture 2- Test with my Answers

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Session 2 : Company Law : Incorporation and Legal Personality

Test Questions :

1/ Promoter is a word to sum up all the business operations undertaken to create a new company (as well as the name for the person or group that undertake the initial steps to form a new company). In company law promoters have duties to the unformed company and can be held liable for acts of the unformed company.

2/ A pre-incorporation contact is a contract signed before a company is formed. It is when a promoter signs a contract with a 3rd party on behalf of a company that is not fully incorporated. Whilst the company is not formed it has no contractual capacity. A company can be bound by a pre-incorporation contract if the contract contained a term that upon incorporation the promoter will no longer be liable if the company adopts the same contract terms or the new company enters into a new contract with the 3rd party i.e., novates the pre-corporation contract.

3/ An unregistered company is one that is not listed on the Companies House register. The 3 methods to incorporate an unregistered company are: 1/ royal charter that is granted by the crown (e.g., The Chartered Governance Institute); 2/ an act of parliament where parliament passes an act to incorporate (e.g., the Olympics Delivery Authority); and 3/ a delegation of authority to incorporate where legislation gives an entity the ability to create companies (e.g., the FCA and Open-Ended Investment companies).

4/ The following are restrictions that apply to Company names: 1/ the name cannot already but on the Companies House index; 2/ the name cannot cause offence; 3/ the name cannot be created to facilitate a criminal act; 4/ the name cannot infringe on the intellectual property of others.

5/ An off-the-shelf company is one that is created (incorporated) but left dormant until purchased. The benefits so such a company are that the person incorporating does not need to have any knowledge of the incorporation process, it is fast and easy to do, and generally less administrative overhead. The disadvantages however are that the company has not been created on a bespoke basis for one single company (unless that service is paid for) and the promoter might need to change name, articles etc.

6/ Corporate personality means that a company is a person, a separate legal personality. The consequences of this are that a company has the rights of a natural person, can own assets, enter contracts and conduct its own business as well as commence and defend legal proceedings. A corporate personality can exist forever.

7/ The three statutory provisions that disregard a company’s corporate personality are:

-         If it starts trading or borrowing before it has a trade certificate

-         If it engages in fraudulent trading

-         Other justifiable means such as a parent company not filing for the whole group.

8/ Although obiter the Petrodel Resources v Prest divorce settlement case clarified when courts can disregard corporate personality. This is only when the evasion principle is in place. The principle holds when a person interposes a company to frustrate a legal obligation or liability i.e., when a person deliberately tries to evade enforcement by putting a company that they control in between. Three conditions needs to be met: 1/ the liability or obligation needs to be existing; 2/ the company must be interposed by the person; and 3/ the company interposed must be under the control of the person.

9/ The four forms of liability to determine upon whom liability should be placed are: personal liability (civil or criminal); strict liability; vicarious liability; and attribution.

Exam Question : Problem Question 1

Qu. Advise Chris, John and Sue on their potential personal liability for the debts of the company and on any other matters that you feel are relevant.

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To: Clever Mechanics Ltd

Date: 8th September 2025

Ref: Advice on potential personal liability for debts of Clever Mechanics Ltd

Please find herein advice regarding each of your personal liabilities following the liquidation of Clever Mechanics Ltd. Case law has been introduced where appropriate to support the advice given.

Clever Mechanics Ltd became a separate legal entity when it incorporated on the 10th January 2010 – the date it’s certification of incorporation was issued. As a separate legal entity Clever Mechanics Ltd debts are its own and limited liability would typically allow that Chris, John and Sue would only be liable for the amounts they paid in, plus any amounts unpaid on their shares. There are some specificities in the case of Clever Mechanics Ltd that mean this is not the case for all of them.

John

o   Based on the fact that John continued to insure the garage premises in his own name he will be personally liable. Refer to Macaura v Northern Assurance for example of an individual insuring goods (in this case timber) under their own name when they were actually owned by the company. In this case John should have insured the premises under the company.

o   The £25K loan from South Bank was personally guaranteed by John therefore he will be liable for this as well.

o   John will also be liable for the partially paid shares to the extent of 50p per share (of 10,000 shares).

Sue

o   Based on the fact that Clever Mechanics Ltd was a private company limited by shares Sue will only be personally liable for the sum of £2K that she invested.

Chris

o   As per the note above regarding the partially paid shares Chris is personally liable for the £500 owed.

o   Although Chris signed a contract with a 3rd party before the company was incorporated as “For and on behalf of Clever Mechanics Ltd (in formation)” and no company has contractual capacity pre-incorporation, s.51 of CA 2006 sees him personally liable for the £1K contract as promoter unless there was an agreement to the contrary in the contract.

o   The issue of Chris’ disqualification for 3 years from 2009 is important to raise as he should not have been setting up a new company. This is a criminal offence.

o   The name Clever Mechanics could also pose issues for Chris as the name of his old company was Intelligent Mechanics Ltd which is similar to Clever Mechanics Ltd. There are limitations on the use of names that went into insolvent liquidation such as Chris’ previous company. There will be interest in the similarity of what the companies do and who they serve as well as the name.

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Week Two Test and Question

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Problem question 1:

When the company was formed, Clever Mechanics Ltd became a separate legal entity, separate to that of it's owners. This was established within the Salomon v A Salomon case.

On 1 January 2010, Chris entered in to a contract with Dan, ordering parts which cost £1,000. As this contract was agreed prior to the company being incorporated on 10 January 2010, this is a pre-incorporation contract which results in Chris being liable for this. For the company to be liable, the contract would have had to be novated upon incorporation (the old contract Chris made disregarded and a new contract formed), but there is no mention of this happening so Chris is ultimately liable.

Sue invested £2,000 in to the company and that is all she will be liable for. If she has fully paid up her shares, no further action will be taken.

The facts of the fire / insurance issue are similar to the Macaura v Northern Assurance Co case. As the insurance policy was held in John's personal name rather than the company, the insurance company would not pay out for this. Upon incorporation of the company, John should have transferred the insurance policy in to the companies name and there would not have been this issue.

Chris was disqualified in 2009 for a period of 3 years, but he was acting as a director while being disqualified. This is a criminal offence under the Company Directors Disqualification Act.

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Week 2 - Problem Question 1

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Draft notes for question completion this week:

Solomon: Clever Mechanics Ltd has a separate legal personality and holds all of the assets that used to belong to the previous sole trader businesses of Chris and John

Incorporated on 10 January 2010

Chris and John are the only directors and members and hold 20,000 £1, shares partly paid to the value of £10,000

Run from the company's garage, not in Clever Mechanics Ltd's name but in John's name

1 January 2010, before incorporation on 10 January 2010, Chris ordered motor parts from Dan costing £1,000, he signed contract with Dan 'For and on behalf of CLM (in formation)'. Cannot be taken as a preincorporation contract as the business is made up of two previous sole trader businesses. The way in which Chris signed, i.e. 'For and on behalf of CLM (information)' could be used to imply intent that CLM, upon incorporation, was being bound to the contract with Dan rather than by Chris.

Financing has come from a £25,000 loan from South Bank Plc, personally guaranteed by John. Additionally, Sue has invested £2000 by taking 1000, 6% non-voting preference shares of £2 each in the company

In May 2010, the premises which were under John's name were destroyed and the insurance company refused to indemnify him, because they were not under the name of CLM

CLM then went into insolvent liquidation.

Chris was a disqualified director, he should not have subscribed to the memorandum of association of CLM.

Phoenix company

Sue may not have any liability but may lose her investment

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Problem Question 1

There are several incidents in this case which need to be addressed. Firstly, it is important to address the case of Salomen v Salomen & Co Ltd because this will help explain the liabilities and the reasons why the insurers will not pay out following the fire.

Salomen v Salomen & Co 1897 was the first case which demonstrated that an incorporated company is an separate legal entity with its own rights and liabilities. The insurance company can see that John has insured the business under his own name and not as the company, Clever Mechanics. The insurers will not pay because the contents did not belong to him but to Clever Mechanics. This is as per the case of Macaura v Northern Assurance & Co whereby an insurance company did not pay out on timber which had been insured by a person and not the company.

It is noted that he was a director of a company that went into liquidation in 2009. He became a director of Clever Mechanics upon incorporation in January 2010. He has been acting when disqualified.

Clever Mechanics is a limited company and the assets have been transferred. Therefore, Chris and John are not personally liable for their assets but the company is.

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Problem Question 1:

Sole trader: own liability, private, easy to set up via HMRC

Private Limited Company: Not private, needs to file accounts, PSC, confirm that Directors have not been disqualified (criminal offence)

Chris & John liability on shares: £5,000 as the only liability with the company being a private limited (as per Salomon) is what is outstanding unpaid on the members shares

Contract with Dan: as Clever Mechanics was in formation, in order for it to be enforceable it would need to either be ratified or novated. However as Dan signed it for an on behalf, it is legally binding as per Kelner v Baxter therefore the company is liable for the contract

Loan: as this was personally guaranteed by John, and there is not sufficient assets to pay the loan off, it falls to the guarantor to settle the debt

Sue: She is a member of the company by paying in £2k into the company and receiving 6% preference shares. Loans take precedence over preference shares but she would still be paid out before Chris and John

Insurance policy: As the company has its own legal personality as proven by Salomon, the insurance policy for the company should have been taken out in the company's name. Instead, as per Macaura v Northern Assurance Co Ltd, as the insurance is in John's name, it will not pay out on the damage of the company's property.

Liquidation: As Chris was disqualified, he is liable for punishment by law. As he was not eligible to be a Director I wonder if he therefore is not liable for the final debts of the company as he was never officially a Director in the first place?

Phoenix company:

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Problem Question 1:

Chris has been acting as a director while disqualified. He is likely to face criminal prosecution under the Company Directors Disqualification Act 1986 s. 13. He may be held personally liable for Clever Mechanics while he was a or promoter of a company director and may be imprisoned up to 2 years. He might be asked to provide compensation to creditors. As Chris placed the order for spare parts with Dan, it is likely Chris will be personally liable for Dan's loss - CDDA 1986 s. 15.

Southbank plc has a loan personally guaranteed by John. This means that John has agreed to allow Southbank plc to pursue the £25k loan recovery with him as an individual if the company is unable to pay. John transferred assets to Clever Mechanics Ltd on incorporation. These now belong to the company and not to John, as held in Salomon v A Salomon & Co Ltd [1897]. It is the company's responsibility to insure it's own assets, and John is unable to insure the company's assets in his own name. This is why the insurer has not held up his claim. This principle was held in Macaura vs Northern Assurance Co Ltd [1925]

Sue has invested her own money in the company with preference shares. It is unlikely that Clever Mechanics Ltd would have generated a profit in the short time it was operational. Sue is unlikely to realise a return on her investment and may lose her capital. The liquidators would need to compensate the company's creditors before any remaining assets could be distributed to shareholders. If there is any profit or assets left in the event the company is wound up, she would have priority in being paid her shares before Chris or John could claim the value of the remaining ordinary shares.

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Chris and John were sole traders.

They joined forces and started a limited company, 10K shares.

Business runs from John's own premises which is insured in own name (*flag* need to change out of his own name and put insurance in the name of Clever Mechanics Limited who own the garage)

Chris ordered parts in Clever Mechanics name but bill was not paid. Clever Mechanics is liable for the £1K bill NOT Chris personally.

The shareholders (Chris/John/Sue) are only liable for the shares they have invested.

Clever Mechanics has £25K loan from South Bank which is personally guaranteed by John (not his).

John's claim on building because of fire was not paid out as the insurance should have been in the name of Clever Mechanics.

Liquidator has discovered Chris is a disqualified director. Disqualified director can be personally liable, so assume John and Sue can make a civil (tort?) claim against Chris at least for the motor parts ... but can they also make claim for misrepresentation of Chris. Chris didn't use fiduciary duty by not disclosing his disqualification.

ADVICE FOR JOHN AND SUE:

They are not covered for the damage to the garage. Assume this is lost as the insurance was invalid.

They do have a claim against Chris for £1K car parts

Explore if there is a civil suit against Chris who misrpresented himself as a director "good sort - can't remember right term"

Possible criminal action? Could John and Sue report Chris under Companies Act for acting whilst being disqualified? (who would that go to? Report to Companies House?)

John is personally liable for the loan as the loan was granted to John and not to Clever Mechanics. Therefore John will have to pay back the £25K.

John will not be recomenpensed for the loss of the building due to the way he took out the insurance. So this is a company loss.

ADVICE FOR CHRIS

Needs immediate legal advice as in precarious situation

He got listed as a director whilst disqualified. This must have penalties- clauses in Insolvency Act?

Could face further criminal charges for misrepresentation as a company director.

Is liable (???) / open to civil proceedings by John and Sue in relation to the motor parts. This would have to be proved that Chris took the parts and then did not tell John that he had ordered them? Had he taken the parts and used them in the business or taken them for his own gain?

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