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Week 1 Homework - exam question (Dean and Caroline scenario)

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Company Law- Week 1- Test with my Answers

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Company Law- Lecture 1- Test with my Answers

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Alice Middleton - week 1 homework test and exam q

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Alice Middleton - week 1 homework test and exam q

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Alice Middleton - Company Law week 1 homework

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a) Prepare an advice note for Lily and James, advising them of their options and indicating how best to accommodate their wishes and those of James’s parents. (17 marks)

There are a number of options open to Lily and James:

Sole Proprietorship

Lily and James have been in a partnership for three years. A sole proprietorship is unlikely to be desirable to them as it would mean one of them having to be removed from the business ownership and they both want to retain overall control. It could also make raising finance more difficult meaning the option of taking a loan from the Bank may not be possible. I would advise this option therefore be ruled out.

General Partner

Lily and James have been in a partnership for three years. It is not clear whether there is a formal written partnership agreement in place. If not the 10 rules set out in the PA1890 would apply including that all partners share equally in profits and are jointly and severally liable for losses and every partner is entitled to take part in the management of the company. The liability for all partners would be unlimited and they would be taxed on any share of profits. If James’ parents invest capital into the business they would be considered to be partners along with Lily and James. As they do not want to participate in the day to day running of the company this may not be desirable to them. It would also not achieve the aim of Lily and James retaining overall control of the business. However,  Lily and James could explore putting  a bespoke partnership agreement in place to ensure it was clear James' parents are not entitled to take part in the management of the company and to ensure they did not become jointly or severally liable for the company’s losses. However Lily and James may not wish to take the capital from James’ parents if they wish to be consulted on major decisions as this could compromise their overall control of the business. Lily and James may therefore wish to explore the loan option from the Bank instead. As they have existing debts this may be difficult but they have a number of assets the loan could potentially be secured against.

The benefits of keeping the partnership  would mean there would be no formal reporting requirements.

Limited Partnership

A Limited Partnership (LP) is a business structure where at least one partner (General Partner) has unlimited liability, while one or more Limited Partners have limited liability to the extent of their investment.  This could be a option for Lily, James and James’ parents with Lily and James taking the unlimited liability position and James’ parents being limited partners. However, James’ parents may not wish to have any liability and also would not be able to have any involvement in the management of the company including being consulted on major decisions. If that were to happen the unlimited liability would also apply to them. James’ parents would therefore have to be willing to be sleeping partners. A Limited Partnership option could also introduce reporting requirements by way of confirmation statements for Lily and James as the GPs which they may not have appetite for due to the additional burden and that the business is no longer private.

Limited Liability Partnership

Lily and James could consider setting up an LLP with James’ parents. An LLP is a body corporate, separate legal entity with a separate personality so liability for Lily, James and James’ parents would be limited to an agreed amount. However, as an LLP is so similar to a company structure the reporting obligations and are regulated in the same way as companies. This would not be desirable for a smaller business such a Lily and James’. LLP’s are usually used by larger service firms so unlikely to be most suitable in this case.

Company – Public/Private

Given their plans to expand the business Lily and James may wish to consider incorporating their company – either as a private or public company. Companies are subject to the Companies Act which would be a significant undertaking for a business like Lily and James’ and would include reporting requirements such as an annual report and accounts. A company set up might suit James’ parents as they could become shareholders (depending on the structure chosen) meaning they would not be involved in the day to day running of the business but could influence major decisions. This may not suit Lily and James however as they would not maintain overall control of the business.

A public company is for those with a minimum capital requirement of £50,000 and shares can be offered to the public at large. Given the stage of Lily and James’ business and they are only considering investment from James’ parents this would not be a suitable option.

A Private limited company limited by shares would enable a separation of ownership and control which may not be desirable for Lily and James as they want to maintain both. As shareholders James’ parents would have the right to vote on key matters.  James' parents could also transfer their shares in future meaning Lily and James would be further separated from the owners. However, the members liability would be limited and the members would have no liability for the payment of its debts and liabilities unlike currently where James and Lily’s liability is unlimited.

A Private unlimited company with shares would mean the members liability was unlimited as set out in the Companies Act. If the company cannot pay its creditors, a creditor could petition the court to have the company wound up, at which at point  the members will become liable to contribute to the company’s assets. The reporting requirements are slightly less burdomesome as they would be exempt from needing to file accounts at companies house

Conclusion

Overall the option that could help balance both Lily and James’ objectives and James’ parents requirement is to consider with an ordinary partnership but will an adapted partnership agreement to ensure James’ parents involvement and liability does not become the same as Lily and James’.

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Pre-incorporation contract -

Chris signed a contract with Dan before the company was incorporated signed 'for and on behalf of' this signifies a pre-incorporation contract and Chris is personally liable for the £1k debt to Dan. Clever Mechanics not liable unless draw up new contract (novation).

£25k bank loan - personally guaranteed by John so therefore liable.

Chris disqualified - disqualified person must not act as a director during the period. Criminal offence and Chris could be personally liable for all company debts.

Insurance - in John's own name rather than the company so insurance right to refuse.

Sister Sue - shareholder so not liable for company's debts

Might be able to pierce corporate veil as a last resort.

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By forming a company, Chris and John created a separate corporate personality.

Date of incorporation was 10 January 2010. On 1 January 2010, Chris ordered some motor parts from Dan costing £1,000. He signed the contract with Dan, „For and on behalf of Clever Mechanics Ltd (in formation)‟. Dan has not received any payment for these parts. Before a company is incorporated, agreements can be entered into but as there is no legal corporate personality, the company will have no legal liability to those assets.

John insures the company’s garage premises in his own name. In May 2010, the company’s premises were destroyed by a fire. The insurance company has refused to indemnify him because he had personally insured the premises and he was trying to make his claim via the business. John would be personally liable for the damage. When the premises became used by the company, John should have transferred it to the company and insured it under the company name.

Sue’s personal lability will be limited to the amount of her investment.

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A contract was entered into prior to incorporation (10 Jan) when Chris signed the contract with Dan for £1000-worth of parts on 1 Jan. There is a debt of £1000.

Limited company so members only liable for unpaid portion of their shares so Chris and John will only have to pay £5000 each to the company's creditors. EXCEPT that John personally guaranteed the £25,000 loan from South Bank.

The insurers will not pay out to Clever Mechanics on the fire at the premises because the garage was insured in John's name, and not the name of the company (the company is has separate corporate personality from the members).

?what are the implications of Chris having been disqualified from being a director after his previous company went into liquidation? This disqualification still stands because we are within the 3 year period.

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Question Q7a Jun 24

Breaking Down the Question

Fiduciary responsibility of directors

Note on exception to model articles - no removal without consent

Note that a director should declare conflicts of interest

Note that process around loaning to directors

CA 2006 it overturn company specifically articles when breach of fiduciary duty relating to Owen benefitting personally from (a) stealing clients from Oceania [assumed] (b) commission from Green-tech. Doing business with himself (c) Fraud??? Overcharging for computers

[Need to refer to case law:- *come back to this]

Link back to question

Can they remove him as director (Yes I think - breach of fiduciary duty)

Can they buy his shares back (Err going to guess as a no - come back to this check in model articles )

S172 - failure to promote success of company

s175 - conflict of interests (Owen own company and Greentech superior to Oceania)

s176 - duty not to accept benefits from 3rd parties (£1K bung from Greentech)

s177 - declare interest. Does this work for setting up his own company? No conflict /no profit

Things to flesh out

1. Review the actions of Owen as a director re:

1. Decision to buy computers from Greentech - purchasing policy

2. Director conflict of interest - why hadn't Owen declared his 30% stake at last Board meeting.

3. Non-declaration: does this open up review of Owen's fiduciary duty to Oceania. Owen has benefitted personally

4. Can they remove him?

5. Is loan illegal? Approved by members?

6. Non-compete: this would refer to Owen's employment agreement

7. Need to back up with case law {rule/application}

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Alice Middleton - Company Law week 2 homework

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Test

1. What is a ‘promoter’ and why is their role important in company law? (3 marks)

1. A promoter can also be referred to as the “founder” of the company, it is the person who initially has the idea to set up a company and puts in place initial agreements with e.g. individuals who may become employees, potential suppliers.

2. The role of a promoter is important in company law as it is the person responsible for the pre-incorporation steps to setting up a company.

2. Explain a pre-incorporation contract and how a company can be bound by a pre-incorporation contract (5 marks) Q1, Jun24

1. A pre-incorporation contract is an agreement put in place before the company has come into being (i.e before it has been incorporated and registered with Companies House). It may be an agreement with a potential supplier to provide e.g. services

2. A company can be bound by signing on behalf of the company pre-incorporation ensuring it adds “(in XX”) to make it clear that the company is not yet in existence.

3. What are the three methods of incorporation for unregistered companies and provide an example of each? (6 marks)

4. Explain what restrictions exist in relation to a company’s choice of name. (5 marks), Q2, Jun24

1. Check that the name is not already in existence

2. Use Ltd or Limited for a private company and plc or public limited company for a public company

3. Name may need to be checked by a regulator if it includes certain words e.g. Insurance

5. What is an “off the shelf” company? Explain the advantages and disadvantages of such a company. (5 marks) Q1, Jun23

1. An “off the shelf” company is one that has already been formed and incorporated and is in business.

2. Having a company already formed may be a benefit as it shows that they have already been trading for X years, giving comfort to customers that it can deliver what it sets out to.

3. A purchaser does not need to carry out the incorporation/registration process- a company can be obtained quickly and inexpensively (advantage)

4. The company may not meet the needs of the purchaser (disadvantage).

6. Explain the meaning of “corporate personality” and the consequences of “corporate personality”. (5 marks) Q2, Nov 23

1. Corporate personality means that the company is a person; either natural (human) or a legal person such as a company or LLP.

Consequences:

Ownership of assets Macaura v Northern Assurance Co Ltd [1925]

Contractual capacity Lee v Lee’s Air Farming Ltd [1961]

The company’s business Cristina v Seear [1985]

Commencing and defending legal proceedings

Nationality, domicile and residence

Perpetual succession

7. List three statutory provisions that disregard a company’s corporate personality (3 marks)

1. Disregarding a company’s corporate personality is also referred to as “piercing the corporate veil”.

2. There are statutory provisions that disregard a company’s corporatepersonality when a breach of law occurs, including:

1. if a public company commences business or exercises any borrowing powers prior to being issued with a trading certificate, (s. 767(1)- jointly and severally liable

2. Persons found to have engaged in fraudulent trading (s. 993) – courts can under statue set company aside and hold you accountable

3. Parent companies must, in addition to providing their own accounts, also prepare consolidated accounts covering all companies in the group (ss. 399 and 404)- they are liable for their subsidiary accounts.

8. Explain the evasion principle arising from the Prest case (4 marks)

1. For the evasion principle to apply and liability to be imposed upon a person, three conditions need to be met:

1. There must be an existing legal obligation, liability or restriction.Yukong Line Ltd of Korea v Rendsburg Investment Corps of Liberia [1998]

2. The person must interpose a company (put the company in the middle) in order to frustrate the obligation, liability or restriction in question. Gilford Motor Co Ltd v Horne [1933]

3. The company being interposed bymust be under their control. Gilford Motor Co Ltd v Horne [1933]

2. Piercing the corporate veil should be a remedy of last resort.

9. What are the four forms of liability to determine upon whom liability should be placed. (4 marks)

1. Personal liability

2. Strict liability

3.  Vicarious liability

4.  Attribution

Exam question

1. Discuss the significance of corporate personality and the circumstances in which the Court has historically ‘pierced the veil of corporate personality’. Refer to case law in your answer. (10 marks)

Pest case- three step evasion

Corporate personality refers to the fact a company is a person. A person can be a natural person (human) or a legal person (e.g. a company of LLP).

Legal personhood is to make companies as far as possible on the same status and footing of a natural person. A company, in law, is a person.

A company’s corporate personality results in various consequences.

1. Ownership of assets- Macaura v Northern Assurance Co Ltd [1925]

2. Contractual capacity- Lee v Lee’s Air Farming Ltd [1961]

3. The company’s business- Cristina v Seear [1985]

4. Commencing and defending legal proceedings

5. Nationality, domicile and residence

6. Perpetual succession- company survives even is members / directors die / cease membership

7. Human rights- e.g. rights of free speech

Salomon v Salomon & Co. (1897)  was the case that established corporate personality. In this case, the courts were trying to set aside the legal personality to hold the members personally liable for debt. However, the House of Lords found that, as the company was incorporated, it is an independent person with rights and liabilities appropriate to itself. This, the legal fiction of "corporate veil" between the company and its owners/controllers was firmly created. As a result of this case, many creditors now seek to protect themselves by personal guarantee, loans etc.

There are many statutory provisions that disregard a company’s corporate personality when a breach of the law occurs, including:

‘Lifting’ or ‘piercing’ the corporate veil

if a public company commences business or exercises any borrowing powers prior to being issued with a trading certificate, (s. 767(1)- jointly and severally liable

Persons found to have engaged in fraudulent trading (s. 993) – courts can under statue set company aside and hold you accountable

Parent companies must, in addition to providing their own accounts, also prepare consolidated accounts covering all companies in the group (ss. 399 and 404)- they are liable for their subsidiary accounts.

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Alice Middleton - Company Law week 3 exam q

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Alice Middleton - Company Law week 4 exam q

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Week 4 homework

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1.     PARTS (15 Marks)

a.     Originally had 20K ordinary shares @ £1 with 3 directors in Rainbow Intl. £20K capital

b.     Capital is an issue so Violet Board issue 20K additional shares @ £1 so total capital £40K

c.     Balance of 40K shares

d.     5K shares Southlands Tennis Club (unincorporated so cannot be entered into members register)

e.     12K shares to Image Limited.  Image Limited is a nominee for Navigation who are Violet’s largest competitor.  Share issue has meant that Violet has 30% shares owned by competitor.  Competitor needs to be put on interests register and describe its intent in Violet

f.      Issue of Violet buying its own shares.  It can’t just buy it’s own shares (prohibition rule  - general principle to protect creditors by preserving company’s capital)

g.     Change may be required to articles for balance of power

Company’s Articles/Seth Advice

Giving a director power to unilaterally remove a shareholder is problematic.

Yes - Articles can be amended, but Seth can't just throw out a shareholder.

If amends were to go in place process would be

Special resolution - this would require 75% of shareholders to cast votes

Company convenes general meting

But unlikely as Image has 30% of votes

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A company must keep a register of its members (s113) CA2006 and failure to keep this register is a criminal offence.   The register must contain the following:

·        names and addresses of each member

·        the date which each person as registered as a member

·        the date which the person ceased to be a member

·        the number of shares the member holds

·        the amount paid or agreed to be paid on the shares

Southlands Tennis Club – this is an unincorporated association and has no legal personality and should not be accepted as a member  but as Jude is the Chair his name could be entered if the members of the Tennis Club agree to it.

Violet – cannot hold shares in itself. The shares should be cancelled and taken back into the company.

Image is a Nominee for Navigation plc – Image is the legal owner and the beneficial owner is Navigation Plc.   The name on the register of members should be the legal owner.

Violet (as a public company) has the right to require anyone who is or might be interested in its shares to provide information about the nature of its interest therefore Violent could issue a notice to Navigation (S793 CA2006) requesting they confirm whether it has an interest in the shares and if so, provide details.

If Navigation discloses the information regarding its interest, then Violet mut enter this in the information on the register of interests disclosed.

It is also a requirement to maintain a register of persons with significant control which is defined as

·        a person holds indirectly or indirectly more than 25% of the company’s shares

·        a person holds indirectly or indirectly more than 25% of the company’s voting rights

·        a person holds the right indirectly or indirectly to appoint or remove a majority of the company’s directors or

·        a person has the right to exercise significant control over the company

Navigation holds 12,000 shares and it is person with significant control and should be entered into the PSC register

Rainbow is also a person with significant control and should be entered in the PSC register.

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Alice Middleton - Company Law week 5 exam q

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Debts owed by Riverside Taxis:

1. Step Bank - the extended portion of the overdraft secured by floating charge - invalid because created within 12 months of onset of insolvency. Onset of insolvency advised in January 2022, overdraft increase agreed one month previously. Return to position of unsecured creditor.

2. £10,000 unsecured loan from Eliza (a director and therefore a connected person) repaid already. Could be a preference and therefore Eliza could be returned to the position of unsecured creditor by the liquidator.

3. £10,000 VAT to HMRC - would be categorised as preferential debt.

4. Employee salaries - would be categorised as preferential debt.

5. Unsecured creditors and suppliers.

6. Members - Eliza and Marco £250 each

Would pay in the following order:

1. Employees and HMRC

2. Bank overdraft, Eliza, other unsecured creditors and suppliers

3. Members

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Legal

-       Minimising the potential loss

o   Could be liable for the debts

§  They were

·       Informed of financial position

·       Review the position with an auditor

·       They however did not raise concerns, or advise creditors of the risks of advancing further credit.

o   Might be declared liable, and might have to pay the amount by which the assets were discerned

o   Director could be disqualified for 15 years.

-       Wrongful trading

o   Auditor said they would unlikely avoid insolvent liquidation prior to winding up

o   Standard of care is the issue – so a director with general knowledge should have known they wouldn’t be able to continue trading

-       The preference

o   Eliza has been preferred because her unsecured loan was paid off within two years of the insolvency occurring. This would be deemed a preference because of the two required:

§  Person is one of the creditors

§   Person put into a position which, in the event of the company going into insolvent liquidation, will be better than the position they would have been in if that thing had not been done

o   Also has to be desired – company influenced by a desire to put that person into a position which, will be better

o   MC bacon - -must have influenced the decision to enter into the transaction’

o   However as Eliza is connected we can presume the desire to prefer exists, unless the contrary can be shown

o   Court may make a judgment to restore the payment

§  Return the repaid sum

Distribution

1.      Fixed charges – none

2.     Liquidator fees would need to be paid

3.     £10,000 VAT to HMRC, and 6 months employee wages, suppliers

4.     Floating charge – step bank – put aside the prescribed part for unsecured debtors

5.     Unsecured debts

6.     Members (marco and Eliza)

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If Riverside were to go into liquidation (in this instance, it would likely be insolvent liquidation with the company being unable to afford its debts), a key concern for the directors Marco and Eliza would be the consideration of any liability for malpractice. In terms of the statute, liquidation and insolvency is primarily governed by the Insolvency Act 1986 (IA 1986).  In particular, they ought to consider whether there has been any wrongful trading, which, to be determined, requires the satisfaction of three key conditions. Given that Marco and Eliza wish to continue trading, and would liquidate on the basis of finances, Riverside would have satisfied the condition of insolvent liquidation. Secondly, Marco and Eliza, as de jure directors of the company would be liable under section 214 for wrongful trading. However, their liability would depend on whether the courts could satisfy the condition that at some time before the winding up of the company, the persons (in this case, Marco and Eliza) knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvency. Applying the facts, given that the auditor of the company (who has sworn to provide a truthful and independent evaluation of the company) stated that “it was unlikely that the company would avoid insolvent liquidation”, there is potential for Marco and Eliza to be liable for wrongful trading. However, it is worth considering the fact that both directors believed they could trade their way into an improved financial position, suggesting that they did not believe that insolvent liquidation was unavoidable. Given that s214 relies on general knowledge, skill and experience that may reasonably be expected, if may be that this defence does not hold up in court given that the auditor’s opinion provided a significant level of knowledge that a reasonable person would likely follow. Regarding potential remedies for this situation, should they be found criminally liable for wrongful trading, the remedy would likely be that the defendant (Marco and Eliza) be liable to make contributions to the company’s assets as ordered by the courts. However, there is also the risk that Eliza and Marco could be disqualified for up to 15 years due to this wrongful trading.

In the process of liquidation however, it is also worth noting the validity of any recent floating charges undertaken. Under the IA 1986, the liquidator is able to adjust a number of transactions that occurred prior to the company entering into liquidation, if they harm creditor interests. Outlined in section 245 of IA 1986 invalidates floating charges (for a person unconnected to the company) if it was granted within 12 months prior to the date of insolvency. Whilst we know the date the floating charge was entered into (December 2021), the scenario does not provide the date of insolvency. If the charge is not invalidated, then the company will still owe the overdraft value to Step Bank as creditor.

When the company goes into liquidation, it will need to distribute its assets to those it owes money. As mentioned above, if wrongful trading is found, Marco and Eliza would need to contribute to this distribution. Whilst the scenario does not provide sufficient information to directly calculate the distribution to each creditor, we can consider the general hierarchy. Firstly, the company would need to pay the liquidation expenses to the liquidator. This will be followed by preferential debts, which includes employees outstanding remunerations. Given that Riverside has not paid its employees for the past six months of work, this will be included. However, it is worth noting that only remuneration for the 4 months prior to liquidation will be treated as preferential, with the remainder being unsecured. Preferential debts would then be followed by debts secured by a floating charge, minus the prescribed part, which is a portion of the available funds set outside for the unsecured creditors. It consists of 50% of the first 10k, followed by 20% of the rest up to £800,000. However, the scenario does not provide the figures to calculate this, and the floating charge may be set aside, depending on the date it was entered into. Unsecured creditors would then be next, either being paid in full should the funds be available, or allocated parri passu to their holdings. This would include the £10,000 owed to HMRC. Finally, if there are sufficient remaining assets, Marco and Eliza (as members of the company) would receive a return of capital.

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The applicable Code is the City Takeover Code which is operated by the Takeover Panel. The purpose of the Code is to ensure shareholders of the target company in a takeover are treated fairly and given a chance to consider the merits of the proposed takeover. Also to provide an orderly framework and process for takeovers to be conducted, and to ensure the integrity of the financial markets.

The Code has 6 general principles as follows:

1. Shareholders in the target company in the same class must be given equivalent treatment;

2. Shareholders of the target company must be given sufficient time and information to make an informed decision on the takeover proposal

3. The board of the target company must act in the interests of the company as a whole and give shareholders and opportunity to consider the merits of the bid;

4. False markets must not be created in the securities of any company concerned in the bid;

5. The bidder must only offer once they have ensured they can provide the consideration required;

6. The target company must not be hindered in the conduct of its affairs for longer than is reasonable by the process of considering a bid.

The Code is triggered by the fact that Edian plc is a public company based in the UK (the scope of the Code applies to offers for shares in companies based in the UK, Channel Islands and Isle of Man). Also relevant is the desire of Iron to increase its holding from 29% to 40% which is over the 30% threshold which constitutes control over a company.

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Edian plc - city code on takeovers and mergers applies which has 6 general principles as set out in Schedule 1C of CA2006

1. equivalent treatment for shareholders

2. sufficient time and information should be given for shareholders to enable proper informed decision

3. board must act in interests of company as a whole and not deny opportunity to decide on the bid's merits

4. should not create false market

5. offeror should announce a bid when they can fulfil cash consideration.

6. offeree must not be hindered for longer than reasonable to bid for securities.

When 30% or more is controlled by a person this triggers the code and a mandatory offer must be made.

Iron owns 20% of Edian and by acquiring 11% more they will be required to make a mandatory offer as they would own 40%.

The code helps to ensure shareholders are treated fairly during takeover and shareholders of same class treated equivalently. It also provides orderly framework for takeovers to be conducted.

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Briefing note for Iron- takeovers

Identify the applicable code and the facts that have triggered application of the code.

A takeover can occur where one company acquires sufficient shares in another in order to take it over. The applicable code is the City Code on Takeovers and Mergers (“the Code”). The Code applies to Edian being a UK based company listed on AIM.

The Code provides that control of a company is acquired if a person controls an interest in shares carrying 30% or more of the company’s voting rights. A person who acquires 30% or more of the company’s voting rights must offer to purchase the shares of all the other shareholders in the company- the mandatory offer. Iron wishes to increase its holding of Edian’s shares to 40% by acquiring Gotit’s 11% of shares so would need to make a mandatory offer as per the principles of the Code.

Explain the nature, purpose and general principles of the code.

The principle purpose of the Code is to ensure that shareholders in an offeree company are treated fairly and not denied an opportunity to decide on the merits of the takeover.

The Code provides an orderly framework but is not concerned with financial or commercial advantages or disadvantages of a takeover.

Part 1 of Sch 1C of the CA 2006 sets out the general principles of the Code

- Equivalent treatment- all holders of securities of an offeree company of the same class should be treated equally

- Sufficient time- holders of securities of the offereecompany must have time and information to allow them to reach a decision

- Act in the interests of the company- board of the offeree company must not deny the holders of securities to assess the merits

- False markets must not be created- in the securities of the offeree company

- Cash consideration – should be announced by the offeror only after ensuring that they an fulfil in full any cash consideration

- Hindering in the conduct of affairs

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1. Ordinary Partnership would not be appropriate as parents do not want to be involved in business, i.e. no liability

2. Limited Partnership would be appropriate as Lily and James will continue as general partners and the parents would be Limited Partners. But LP doesnt allow for Limited Partners to be involved in major decisions as parents wish

3. LTD would be an option where the parents could buy preference shares in business and invest money Lily and James need. James and Lily would be the members and directors of the company to take all the decisions

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Currently in an ordinary partnership defined in the Partnership Act 1890 which sets out implied terms:

-          All partners share equally in profits and are jointly and severally liable for losses

-          All partners are entitled to take part in the management of the company

-          All partners must agree before a new partner is admitted

-          All partners must agree before a partner is expelled

Benefits:

-          Easy and quick to set up

-          No disclosure reqs so affairs remain private

-          Flexible structure

-          Shared responsibility and decision making

Drawbacks:

-          Difficult to raise finance

-          No formal process to resolve disagreements

-          Partnership ends when a partner leave

-          Liability is joint, several and unlimited between partners – in L&J case they would both be liable for the lease and unpaid debts

L&J seeking to expand so should consider moving away from partnership and incorporating.

The Limited Liability Partnership Act 2000 defines an LLP as a body corporate with a separate corporate personability where the LLP is liable for the debts and liabilities. LLP created specifically as a business vehicle for professional service providers – not appropriate for L&J.

Describe factors affecting which type of company to form. Public not appropriate and private limited by guarantee also not.

Private company most appropriate business structure. No min capital reqs and the process to register a company with Companies House – online and straightforward. Option of ‘off the shelf’ – dormant company ready for purchase to save time with name change but registering online fairly quick and straightforward.

Benefits:

-          Hold assets and employ staff - allow L&J to acquire a workshop as asset

-          Ability to raise finance - allow L&J to raise finance for expansion plans without having bank loan

-          Limited liability – L&J no longer personally liable for lease and unpaid debts

Drawbacks:

-          Reporting reqs – CA2006

-          Financial info publically available

Benefits outweigh drawbacks.

L&J – retain control by becoming Directors.

Raise finance by issuing shares – James parents become shareholders. Meets req to not be involved in day to day but major decisions through vote at GM. They want return so if business runs profitably = dividend.

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Need to talk about current structure:

·         Ordinary partnership: They are both jointly and severally liable for any debts. Subject to Partnerships Act 1890. Difficult to raise finance. Unlimited liability

·         Could continue with partnership but borrowing may be difficult. May be difficult to grow without significant capital investment.

·         Could look at a limited partnership. James’ parents become limited partners and Lily/James become general partners (and will have unlimited liability) but this type of company is generally for PE/VC. James’ parents will also have no say in day to day running of company.

* PLC not suitable. Too small and burden of legislation too great. £50,000 minimum capital requirement. Generally only larger companies.

·         If they borrow money from James’ parents:

o   Suggest setting up a limited company with share capital.

§  Limited liability

§  Easier to raise finance

§  Lily/James become directors and therefore still have control

§  James’ parents become shareholders. Can take a dividend (to satisfy need to take an income BUT can only be paid out from retained earnings so risk of no payment in first few years or if the business does not succeed).

§  Although, more filing requirements. Subject to CA2006. Information will be available publicly (but micro enterprise so should be relatively low)

·

·         Any option does not cover every necessary issue so some form of compromise but limited company

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Current facts of the case:

L&J are trading in partnership. They have assets, debts and joint liabilities. In order to expand the require more capital however are keen to continue to retain control of their business.

1. Under the PA 1890 i would explain what this means i.e. right to share profits, joint and several liability, consent when taking on someone new or expelling someone.

2. Further explain the advantages and disadvantages of this partnership

As they are looking to expand they could look at incorporating their business They could look at Pvt Ltd Co as an option as they would have control and raise capital. they could offer shares to their parents

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Business structures- prepare an advice note for Lily and James, advising them of their options and indicating how best to accommodate their wishes and those of James’s parents. (17 marks)

To: Lily and James

Re: Advice note on structure of antiques business

Partnership

Lily and James have been running a successful antiques business in partnership for the past three years. Advantages to this type of business structure:

Shared responsibility and decision making

Flexible business structure- giving them the ability to change and expand their business without the need of consulting others (e.g. members)

Disadvantages are:

There may be difficulties in raising substantial finance- this may be an issue for Lily and James when they approach the bank for the loan.

Joint and several liability- Lily and James would be personally liable for any debts of the company as well as the lease.

A Partnership Agreement could be drawn up.

Company

Lily and James could consider forming a private limited company. There is no minimum capital requirement to set up a limited company.

If they set up a limited company they would not be personally liable for the debts in the way they would be if they continued in partnership as forming a company would limit their liability.

Control of company

Lily and James wish to retain control of the company’s management- they could be appointed as directors. James’ parents don’t want to be involved in the management but do want to be involved in key decisions- become members. shareholders/voting.

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They will need to consider which structure works for them. There are a number of considerations which need to be taken into account when considering which structure might work for them, those being what sort of ownership structure, what level of regulation, the ability to raise money and the limitation on liability. Some of the business structures which could be considered here would be to create a Limited Partnership, a Company - private limited by shares.

Limited Partnership: If they wish to take investment from James' parents then they could look to create a Limited Partnership, which would mean James' parents would be liable only for the money which they have loaned Lily and James, but would not have any responsibility for the day to day operations of the Partnership. However, if they wish to be consulted on major decisions then this would change their liability. Therefore, likely the Limited Partnership option would not fit.

A private company limited by shares - if this was created, they would then be subject to the CA 2006 and would need to be registered on Companies House. This structure would mean that that could raise capital.

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Lily and James are currently operating as a partnership. Under the Partnerships Act 1907, this means they have a right to jointly manage the company and equal share of the profits. They are also jointly and severally liable for any debts.

One advantage of this partnership is that it has less regulatory burden than an incorporated company which allows them to operate more freely. However, it also means it is more difficult for them to raise funds. Banks would likely be reluctant to loan money to their partnership unless audited accounts were available for inspection. James's parents could loan some money, but have indicated they woudl need a return on their investment. This becomes difficult as they put themselves at risk of becoming liable for the partnerships debts.

Lily and James could consider a limited liability partnership structure. This woudl allow James's parents to be silent partners who would not be held liable if the partnership was wound up. However, it does place a significant burden on James and Lily to comply with regulatory requirements (registering the LLP with companies house and adhering to the LLPA 2000, and publicly filing acconts with Companies House.

Lily and James could also consider registering a private company limited by shares with Companies House. This would allow James' parents to become shareholders without being involved in teh company's day to day activities, but still want to have a say in major decisions. As a micro business, the company would not be subject to teh full regulatory requirement of publishing full accounts, but could still publish abbreviated accounts. Banks would be more likely to loan money in the future once a few years worth of accounts were available to prove the viability of the company.

I would recommend they register as a company limited by shares as it allows James, Lily and James's parents to limit their personal liability in the event the company went into liquidation. It also allows teh company to grow and expand in future if James and Lily wished to continue growign their business.

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To: Lily and James

From: Company Secretary

Subject: Advice note- appropriate company structure

Intro:

In the absence of a written partnership agreement, an ordinary partnership in the UK is governed by the default rules set out in the Partnership Act 1890.

Advising options:

Current setup as an ordinary partnership is successful

They have stock, vans, unpaid debts and a lease on a new larger premises, currently their liability is unlimited

Indicate how best to accommodate their wishes:

Expansion

Would like to acquire a workshop and have unpaid debts

Funds for the expansion:

Loan from the bank

Borrow money from James' parents- would need income but would not need to participate in day to day running, but do want to be consulted on major decisions

Lily and James want to retain overall control

Continue as an Ordinary Partnership

May find it difficult to raise funds via the bank as their partnership has no legal personality and their liability is unlimited

Could bring in James' parents but would relinquish some control

Set up a Limited Partnership

They could represent the general partners while James' become limited partners, but there may be an issue in that James' parents want to be consulted on major issues and would immediately lose their limited liability and become general partners

Incorporate a company

May find it easier to raise funds from the bank

Their liability would be limited

They could issue shares to James' parents in a return of capital

They would be subject to CA2006 and significantly more disclosure to the public in return for their limited liability

Set up a Limited Liability Partnership

Generally suitable for larger professional services firms such as auditors and law firms. The LLP2000 is a cumbersome niche piece of legislation that would not be suitable for Lily and James' business purpose.

Conclusion:

There is no option that covers all of Lily and James' preferences, more information would be required to give a conclusive recommendation.

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1. List and provide overview for the main business structures, including ordinary partnership (which is what they currently are): sole proprietorship not useful as 2 of them, ordinary partnership is what they are, limited partnership is a strong choice, LLP not useful as usually for professional services, a company can be public (not relevant here as need 50k min capital, or private and limited by shares or guarantee (usually used for non-profit), or unlimited private (not commonly used.

2. Main ones focus on and compare will be Limited Partnership and Private company limited by shares

3. Limited Partnership is good as it allows a limited partner/silent partner to contribute investment without being involved in management. This is what James parents want. However, not suitable as they wish to be consulted on major decisions and if they are, they would be a general partner with unlimited liability. James and Lily would be personally liable for any debts and means his parents would only be liable for the amount contributed.

4. Private company limited by shares means that everyone would have limited liability, as the company would be a separate legal entity. it means the parents are not involved in management but can be consulted on major decisions as shareholders, and this could be covered in the articles of association and list what the shareholders can be consulted on. They will need to find legal advice as they will need to ensure they disclose all accounts and requirements as per CA 2006, so may be more expensive for them to set up, compared to limited partnership.

5. Conclusion - private company limited by shares is the best fit, as it provides all parties limited liability, it allows the parents to be consulted on decisions without being involved in management.

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Private company limited by shares (ltd)

This is most popular form of business structure. Incorporation is simple and relatively cheap.

The advantages for Lily and James would be:

·       They could offer James’ parents shares in the company and they would become members. This would meet the parents requirements as they wouldn’t take a role in the day to day running of the business but would be able to be consulted on major decisions as members and could add amended articles to set out which decisions they’d want to be consulted on.

·       An ltd is recognisable corporate structure with a separate legal personality. This means that the company can take out loans (and a bank will be more likely to lend to an ltd as it is a familiar structure) and can raise finance more easily then if other businesses structures such as Lily and James current structure of an ordinary partnership.

·       Lily and James’ liability will be limited, currently they’ve unlimited liability and are jointly and severally liable. This would that should the company default on a loan that it has secured the pair would not be expected to pay for this loan.

·       The would pay corporation tax on profits which may be beneficial.

The disadvantages are:

·       They would be subject to greater regulation currently, under an ordinary partnership, the pair have to have knowledge of the PA1890 which sets out relatively fewer requirements than the CA2006.

·       An ltd is required to have articles and would determine how the pair conduct the business.

·       They would cede some level of ownership should they give shares in the business to James’ parents.

Limited partnership

The pair may want to continue their partnership but with the added benefit of raising capital from James' parents. In this case a limited partnership could work. Although the parents liability is contingent on them being silent partners and would not be able to provide input on any decisions.

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To: Lily and James

Re: Advice on Business Structure

There are 5 factors that can influence the structure of a business which should be considered when Lily and James are choosing which to go with:

Purpose, Ability to raise money, Taxation, Regulation, Ownership, Liability.

Sole Proprietorship

There are benefits as running as a sole proprietorship which include

simple to operate

Able to take on employees

not required to disclose business info

less regulation

However this would not fit Lily and James as they are wanting to work together and a sole proprietorship is solely 1 person owning and running the business.

Partnership

Limited Partnership consists of 1 general partner and 1 or more limited partners. The limited partners are not involved in the running or management of the business and are essentially 'silent' partners. Again, this would not particularly fit Lily and James' situation with James' parents wanting to be consulted on major decisions, if they do this within a limited partnership, they would end up becoming general partners and their limited liability would be removed.

Companies

A limited company may be a good option for Lily and James as there is no minimum capital required to set up. James and Lily would not be personally liable for any debts and James' parents could be consulted in major business decisions.

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Directors duties part of Question.

s 172 - Duty to promote the success of the Company - previously the directors are under a duty to promote the bona fide interests of the Company, now section 172(1) focuses on the directors acting in good faith for the benefit of members as a whole. If Katrine is establishing another company and has stopped to input into the management of the company, then this could be seen as a breach of her duty as her sitting up another company could be seen as undermining the interests of the company.

Another section which could also be looked at here is s175, as directors must try at all costs to avoid situations whereby they have a director or indirect interest which could give raise to the possibility of a conflict. Katrine companies could be possibly seen as conflicting with the interests of the Red Pixel plc as they specialise in software engineering which could overlap.

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Advise the directors of Red Pixel- directors duties

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Advise the directors of Red Pixel- directors duties

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Karine has set up her own company and has been spending most of her time rather than working for Red Pixel.

Breach of duties

S172- duty to promote the success of the company for the benefit of its members as a whole. It could be argued that due to Karine’s time commitments to her new company, she is not spending sufficient time on Red Pixel to be able to properly promote the success of the company. Her capacity to do so will be reduced.

S173- duty to exercise independent judgment. This requires each director to raise, debate, reflect upon and then decide upon is own position. The decisions Karine makes in respect of Red Pixel may be compromised, if the is at the same time considering the interests of her new company.

Any breach of s173 is voidable at the company’s instance. Karine may be liable for any losses by the company.

A potential breach, though would need to be explored. S174- duty to exercise due skill, care and diligence. There is a reasonably diligent test which is either subjective or objective.

the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, (objective test and

the general knowledge, skill and experience that the director has.’ (subjective)

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Violet plc has a statutory requierment to keep updated registers of its' members, directors and persons of significant control.

As directors, Jude, Seth and Noah should be entered into Violet's director's register, which would include their legal names, dates they became directors, dates they cease to be directors and residential address. Their residential address may be withheld from public access to protect them against identity fraud.

Violet plc should also maintain a register of shareholders, listing their name, registered address and date they became shareholders. Initially, Rainbow International was Violet's only shareholder. However after issuing new shares, additional entries should be made. Teh Southlands Tennis Club is an unincorporated association, so cannot be registered as a shareholder. However, as Jude is the chair of the Tennis club, with her permission, her name can be entered as the shareholder on behalf of the Tennis club. Image should also be entered into the register as it has acquired shares.

The total number of shares issued was 37,000 (40,000 - 3000). with 12,000 shares Image owns 32% of Voilet's total shares. This means that Image woudl need to be entered into the persons with significant control as tehy own more than 25% of the total shares or more than 25% of teh voting rights. However, as Image has been nominated for Navigation plc, Voilet could request a notice of interest under s. 793 from Image. This will effectively pause any action that Navigation plc may make to takeover Voilet plc by stealth. Image is required to disclose any interests Navigation would have or be criminally liable for not disclosing the information. Voilet would also need to keep a register of any interests disclosed from s.793 notices within 3 days of recieving a response from Rainbow.

Violet can't be a member of itself, so cannot be entered onto the members register. Voilet has not followed the appropriate process to retain the excess shares and may have committed a criminal offence by buying back it's 3000 unbought shares.

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

Member register

Comprises of:

Full name

Address (usually a service address)

Date of becoming a member

Date of ceasing to be a member (if applicable)

Number and class of shares held

Amount paid or agreed to be paid on those shares

Format and location:

Can be kept in physical or electronic form; Must be kept at the company's registered office or SAIL

It must be available for inspection by members (for free) and the public (for a fee)

s.113-116 CA2006

Southlands Tennis Club is unincorporated, so its 5,000 shares cannot be kept in the member register. They need to be attributed to a legal or natural person. In this case they may choose to add them to the register under Jude's name

Image's 12,000 shares will be entered into the member register but the beneficial owner is Navigation plc

Violet will not be able to enter itself into its own register of member as it is not permitted to purchase its own shares

PSC register

A Person with Significant Control is someone who meets one or more of the following:

Holds more than 25% of shares

Holds more than 25% of voting rights

Has the right to appoint or remove a majority of directors

Exercises or has the right to exercise significant influence or control

Part 21A CA2006 requires most UK companies and LLPs to maintain a PSC register

Can be kept by the company or at Companies House

Can also be kept in physical or electronic form

Should be created and maintained by the company, filed with Companies House and kept up to date and made available for inspection

Image should be entered into the PSC register as it owns more than 25% of Violet's shares

Rainbow plc is the owner of Violet and should also be entered on the PSC register

Register of interests disclosed

Governed by s.808 to 819 CA2006

This register records information received by a company under Section 793, which allows companies to issue notices requiring disclosure of interests in their shares

Image should go into the register of interests disclosed so that it can disclose information which will highlight that it is a nominee of Navigation plc, which is especially important because it is one of Violet's main competitors

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Breach of Directors Duties:

Karine: Breach of s.172 to promote the success of the company: one could argue that she neglected Red Pixel and was promoting her own company instead. As a director she has certain duties however there is no indication that she was not discharging her responsibilities to Red pixel as she is allowed to have other interests outside of the current organisation so this may not apply to her.

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Karine may be in breach of her duty to declare interests for her mobile phone repair business under s. 175. It is unclear if the mobile repair business is in direct conflict with Red Pixel, but Karine seems unable to provide Red Pixel with the needed time to properly discharge her duties as a director.

Section 22A of the articles provides that DAnd and Astrid can remove Karine if required. This wording is vague and can be challenged in court. However, if Dan and Astrid can show that Karine is in breach of her duty to avoid conflict of interest or her duty to exercise reasonable care, skill and diligence (s.174), then her removal would likely be held up in court (Bushell v Faith). However, this will depend entirely on the facts of teh case, which have not been stated in the question.

S.168 removal process via resolution

If Karine is removed as director, this does not necessarily mean that she will be removed as a shareholder (Re Legal cost negotiators).

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1st entry 20K ordinary shares @ £1 share with Jude, Seth and Noah. Total share capital 20K

2nd additional 20K ordinary shares @£1/share. New share capital £40K

3rd entry: Jude has bought 5K on behalf of tennis club - she's the nominee for the club

4th entry: Image limited owns 12K shares so as third of company listed on PSC register. Notice needs to be given - s793?

Issues:

Violet can't buy it's own shares

To rectify balance of control articles will need to be changed to force out shareholder

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Violet’s statutory registers

Register of Members

CA2006 S.113 – name, address, date of registration, member’s shareholding

Enter into register:

Rainbow – 20,000 shares

Southlands – 5,000 shares - Unincorp association would need to identify trustee (as chair Jude may be nominated)

Image Ltd 12,000 shares – companies can hold shares in other companies. Image – legal owner, Beneficial owner – Navigation who control the shares

Buying own shares – cannot buy in this situation and shares should be cancelled. Could only acquire by buyback.

Register of Interests Disclosed

CA2006 s.793 – enter within 3 days kept for at least 6 yrs

Enter into register:

As chair of Southlands – Jude indirect interest

Violet allowed to enquire about Navigation’s reasons to acquire shares as a rival company – likely to have substantial interest

Navigation triggers takeover code to make a compulsory offer to remaining shareholders by acquiring 30% or more voting rights. Likely to be reason for acquiring shares so should have been declared.

PSC Register

Any person holding more than 25% shareholding or voting rights.

Enter into register:

Navigation – 32%

Rainbow – 54%

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Introduction

Violet plc is a public limited company.

Public companies must maintain statutory registers under CA 2006:

Register of Directors (s.162)

Register of Members (s.113)

PSC Register (s.790M)

Register of Interests Disclosed (s.808 for public companies)

Important to note for context in this scenario - some members in a company may be Nominees, which are those who are the legal owners of the shares and are placed on the Register of Members, but they hold the shares on behalf of someone else, who is referred to as the beneficial owner of the shares.

Register of Directors (s.162)

Violet plc should already be maintaining this register and thus should be updating when there are any changes and notifying companies house - e.g. resignations or removals of a director.

Must include director details (name, address, DOB, nationality, occupation).

Members inspect free; non-members pay fee.

Register of Members (s.113)

This maintains legal owners of shares.

Southlands Tennis Club - cannot register ( as unincorporated), need to use trustee/nominee (e.g., Jude).

Image Ltd - register as legal owner; competitor link with Navigation irrelevant for this entry.

Violet cannot register its own shares (s.658); 3,000 shares invalid/void transaction.

There are exceptions to being able to allot shares to themselves which is dependent on authority in articles/resolutions - e.g. if the company is authorised to do a share buyback or they were purchasing shares into treasury (s. 124)

Entries to register of members must include name, address, share details (s.113A).

PSC Register (s.790)

Identify persons with significant control (more than 25% shares/votes, power to appoint/remove directors).

Image Ltd is nominee; Navigation plc is PSC (beneficial owner). It is the person or legal entity with significant influence or control behind the nominee that is the PSC.

Register of Disclosed Interests (s.808)

Public company can issue s.793 notice to discover interests.

Failure to comply or answer falsely results in a criminal offence; court can restrict shares, cannot trade or vote on them until response provided.

Info must be entered in register within 3 days.

Members with more than 10% shares can require company to issue notice.

Conclusion

Ensure Register of Members and PSC Register are accurate.

Invalid share issue (company buying own shares) - possible criminal offence.

Navigation plc may trigger Takeover Code Rule 9

Navigation plc, now holds 12,000 shares out of 37,000 validly issued shares, equating to approximately 32% of Violet's share capital. Under Rule 9 of the Takeover Code, when own 30% or more of shares, they are required to make a mandatory offer to acquire the remaining shares. This could have significant implications for Violet’s independence and corporate strategy, particularly given that Navigation is a competitor.

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

Register of Members

CA 2006 s 113 provides that a company is required to keep a register of its members and failure to do so is a criminal offence.

The register of members should include the names and addresses of each member, the date on which each person was registered/ceased to be a member and the number of shares the member holders and amount paid or agreed to be paid on the shares.

5,000 shares are purchased by Southlands Tennis Club, an unincorporated association. The chair of the Tennis Club is Jude. Southlands Tennis Club is an unincorporated association and therefore cannot be entered into the register of members as it does not have its own legal personality. Jude as the chair of the Tennis Club could however be entered onto the register of members. Jude would have to agree for his name to be entered onto the register.

Image Ltd with 12,000 shares should be entered into the register of members, however its nominee Navigation may need to be added to the register of interests disclosed, discussed below.

No buyer can be found for the remaining 3,000 shares so the Board decides that Violet should purchase them itself. A company cannot purchase shares in itself. However, Violet could introduce a share buyback scheme to but the purchase 3,000 shares.

Register of interest disclosed

s793 CA2006 gives a public company the right to require anyone who is, or might be, ‘interested’ in its shares to answer written questions about the nature of that interest.

A company must keep a register of interests disclosed detailing any information disclosed to it under s793.

12,000 shares are purchased by Image Ltd (Image). Image is a nominee for Navigation plc, one of Violet’s main competitors. Violet would need to issue a s793 notice if it has reasonable cause to believe that a person is interested in its shares.

Under s793 Violet has a right to enquire regarding the relationship between Image and Navigation.

If a shareholder goes over the 30% threshold a mandatory offer would have to be made- links to takeover.

If the information is provided by Navigation, then their name must be entered onto the register of interests disclosed by Violet.

Register of PSC

CA2006 states that it s a requirement to maintain a register of Persons with Significant Control (PSC).

A person will have significant control if it meets any of the following:

A person holds more than 25% of the company’s shares (directly or indirectly)

A person holds more than 25% of the company’s voting rights (directly or indirectly)

A person holds the right to appoint or remove a majority of the company’s directors directly or indirectly,;

A person has the right to exercise, or actually exercises, significant influence or control over the company.

Rainbow, holding all of Violet’s 20,000 £1 ordinary shares is a PSC and should be entered into the PSC register.

Image with 12,000 shares should be entered into the PSC register.

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Under the Companies Act 2006, companies are required to hold certain information within the company's registers, which contain both current information and historical records.

Register of Directors and Secretaries

I will notify Companies House of the appointment of Jude, Seth and Noah as directors using form AP01. The form will contain particulars such as a statement that they have consented to act, their name, occupation, residential address, service address, date they become a director.

Similarly, I will notify Companies House of my appointment as secretary of Violet plc.

Register of Interests Disclosed

Under section 793 of the Companies Act 2006, public companies are entitled to issue a s793 notice to parties which it has reasonable cause to believe is interested in its shares. This can require them to answer certain questions regarding the nature of the interest. Image Ltd will hold an interest as they are a nominee for Navigation plc, one of the main competitors.

Register of Members

The Register of Members for a plc contains information regarding the shareholdings of the company. This is available for all members to inspect free of charge, and for anyone else to inspect should they have good purpose for doing so (and on receipt of a fee). It includes the name of the member, the date they became a member, the share class, number of shares, nominal value of the shares. I will include the following entries:

Rainbow International plc - 20,000 £1 ordinary shares

Jude - as Southlands Tennis Club is an unincorporated association, it has no legal capacity and so cannot be entered into the register in its own right. As such (with permission from the other members of the company), Jude could be entered as the nominee holder. Jude would then hold 5000 £1 ordinary shares

Image Ltd - 12,000 £1 ordinary shares

Violet plc cannot purchase its own shares so is void if the acquisition has already occurred and so is a criminal offence.

Register of PSCs

With the purpose being to maintain corporate transparency and to report ownership of the company, Violet plc will need to update its Register of PSCs (Persons with Significant Control), held at Companies House and publicly viewable to all regardless of membership. Initially, Rainbow (presuming it is UK registered at Companies House) will be the only PSC, by nature of holding all of the shares, all the voting rights (if they are voting shares) and the ability to appoint or remove a majority of the board of directors.

Upon the second allotment, a new entry will need to be made into the register and the statement of particulars will need to be updated for Rainbow as the nature of their PSC control has changed. Upon the allotment, they no longer hold more than 75% of the shares but instead 54% so fall into the category of more than 50% but less than 75% of the shares/voting rights.

Additionally, holding 12,000 shares (of the total 37,000), Navigation plc would be a plc.

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The company buys 3,000 shares which reduces the total share capital to 37,000.

5,000 shares to Southlands. As an unincorporated association cannot own shares. The Chair, Jude who is also a director of Violet, will have to have the shares registered in his name. 5,000 is less than 25% of the share capital. Jude would not be entered as a PSC but would need to register this as an interest in the Register of directors interests.

12,000 shares are bought by Image. This would equate to 32% of the share capital and an entry would have to be made into the PSC register as an RLE. An RLE is an entity with 25% or more of the voting share capital, shares or has the power to appoint/remove directors. The beneficial owner of the shares would need to be recorded in the PSC register so Navigation would be recorded not Image. A competitor is entitled to own shares of a company they are in competition with. If a company does not know who owns its shares a request under s.793 CA2006 can be made and this request should be recorded in the 808 register (as set out in s.808 of the CA2006).

20,000 shares for Rainbow would be diluted, holding now 50% rather than 100% of the shares. It will still be a RLE and therefore be recorded in the PSC register.

All of these would have to be added to the Register of Members. This register must be available for inspection at the companies registered office or SAIL. The SAIL must be located in the country of incorporation and in Violet’s case must be in England. As a plc

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The Register of members (s 113, CA 2006) would need to be updated with respect to the name and address of each member, plus the date of registration, the number of shares for each member, the amount paid or would agree to be paid on the shares.

Southern Tennis Club is an unincorporated association and therefore should not accept the membership as it is has no legal personality.

Will need to be added to the register Image Ltd.

A s 793, CA 2006, could be issued to Navigation Plc by Violet. If information is disclosed by Navigation then Violet will need to enter them on the Register of Interests.

The Persons of Significant Control may also require updating as Rainbow will be seen as a PSC and therefore their name should appear on the registry. If Navigation owns 12000 shares, then they would also be required to be added to the PSC Register.

Violet cannot hold shares it.

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___________________

Structure for Question Answer

Have directors breached general duties (5)

Consequences of breach of(5)

Legal Claim against Foster (5)

_______________________-

Answer

Advice

To Remi:

On: Foster Ltd Director Breaches | Consequences of Breaches and Remedies for Remi vs Foster Ltd.

Detail on Breaches

the directors have added an additional clause of non-liability for negligence.

This is not possible [CA 2006 s232], as a director cannot use a clause in their personal or company contract to escape consequences of breaching their general duties, which would be set out in Act [CA 2006 2170-177]. There is no evidence that Aja, Beth and Chi have a directors' insurance policy to protect against the decision of purchasing a laundry detergent which does not reach UK heatlth and safety standards.

Consequences of Breaches

Aja is in breach of s174 as they have not exercised reasonable, care and diligence in the purchase and did not meticulously cross reference the ingredients with the UK health standards. His rationale for being in a rush is not a sufficient excuse for lack of care.

Beth is not in breach of s175 (conflict of interests), she took the opportunity to (advantageous price of hardware), started a company and made a direct deal with Joe. She saw an advantage and bought the machines but she did not hinder Foster by selling the hardware to foster. She made the profit independently and without damaging Foster.

Advice for Remi

Remi is minority shareholder (10%).

He can look at process which is two stage (CA2006 s263) to check if his concerns meet the prime facie criteria.

Aja has caused a loss to the company and its members and Remi wants to seek redress

Remi could seek a derivative claim in respect to negligence of Aja

Remi houd seek court permission to determine if there is a prema facie case.

This is not a quasi partnership.

He should seek to get compensation - or winding up petition/

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A company's articles contian the internal regulations for which a company has elected to conduct itself. Companys are permitted to create their own internal rules, and may in exceptional circumstances include clauses that negate parts of statutory law (such as excluding pre-emptive rights).

Foster Ltd has adopted the model articels for private limited companies and chosen to alter one of them to exclude directors from liability from negligence, deflault, breach of duty or trust. This is contradictory to the s.174 director's duty to act with reasonable care, skill and dilligence. As Foster Ltd would owe a duty of care to the company, it's members and possibly external stakeholders, it is unlikely that the additional clause Foster Ltd would stand.

Aja purchased £20,000 of detergent without undertaking reasonable care, skill and diligence. As such he is in breach of s.174 of his director's duty. This has resulted in the loss of £20,000 from the company.

Beth setting up her own business in competition with Foster was in breach of s. 175 to avoid conflicts of interest. By purchasing the dry cleaning machines, Beth was also in breach of s. 177 to declare an interest in a proposed transaction. Industrial Development Consultants Ltd V Cooley found that even when a company had declined to purchase an asset, the director should still declare to the company their intent to purchase the asset for use outside of the company.

Chi remained silent in a meeting about the realiability of machines. By remaining silent, she may have been in breach of s.173 to exercise independent judgement. However, as the company chose not to purchase the equipment that Beth was advocating, ultimately Chi's lack of action did not result in any loss on behalf of the company.

Remi is a minor shareholder and could bring a derivative action claim against the other directors on behalf of the company. Directors found in breach of their duties could be held liable to the company for any losses incurred or held to account for any gains.

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a)      Aja – breached s.174 – exercise reasonable care, skill and diligence

Did not check ingredients – assumed he should have this knowledge as Director.

Aja liable to compensate for £20k loss

Beth – breached s.175 as has used property, information or opportunity from Foster to benefit herself personally in setting up B-clean. Purchasing machines from Perfect Clean and profiting.

Competing companies – allowed but circumstances narrow – given breach of 175 unlikely to be a conflict of interest that cannot be managed

Beth’s liability to Foster – profit of £10k?? unsure of liability here and whether Beth owes to Foster as they would have used the machines rather than sold them – but gained on energy efficiency?

Chi – breached s.173 by not speaking up about the reliability of the machines and agreeing with Beth – independent judgement.

All – s.172 – subjective

Article provision void as cannot limit liability if negligence, default or breach – s.232

b)      Statutory derivative claim s.260 – actual or proposed act or omission negligence, default, breach of duty or trust by director

Directors have breached their duties (174,175, 173).

2 stage process:

1.      Establish a prima facie case s.261 – actual evidence to filter out vexatious claims as company liable for cost – would have to provide evidence here – Aja and Beth’s breaches could be evidenced

2.      Court hearing s. 263 – grant permission for claim to continue considers 3 circumstances

Court takes into account 6 factors (6th most important)

If case wins awarded to company.

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a) Whether the directors of Foster breached any general duties under the CA2006 and if so, the consequences of the breach.

Aja:

Duty breached: s174 duty to exercise reasonable care, skill and diligence.

Aja ordered £20,000 worth of detergent without checking whether it met UK safety standards.

This shows a failure to exercise the objective and subjective tests under S174.

A reasonably careful director would have checked the safety standards beforehand.

Chi:

Duties breached:

s173 duty to exercise independent judgement, and;

s172 duty to promote the success of the company.

Chi failed to speak up at the board meeting, despite having concerns about the reliability of the new machines.

By remaining silent and agreeing with Beth, she failed to exercise her own independent judgement.

Her silence also shows a failure to act in a way most likely to promote the success of the company, as she did not raise a potentially material risk.

Beth:

Duties breached:

s177 declare an interest in a proposed transaction

s172 duty to promote success of the company

s175 conflicts of interest

Beth set up her own company and later bought from Joe without informing the Foster board.

This created a conflict due to her personal gain from the action.

Beth should have declared her interest before entering in to the proposed transaction.

By profiting from a business opportunity presenter to foster, she failed to act in the best interests of the company.

b)

Remi, as a shareholder, can bring a derivative claim on behalf of the company against the directors for breach of duty.

The claim is for the benefit of the company, not Remi, so any monies made from the claim will be paid to the company.

Court permission is required to bring a derivative claim.

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a) Aja breached his duty to exercise reasonable care, skill and diligence when he purchased the £20,000 online order of detergent which was not usable (s.174).

This may be determined by applying the objective and subjective test (Dorchester Finance v Stebbing) from s.174: what would a reasonably diligent person with the director's knowledge and experience do.

The consequences of this breach are that:

1. the company (or shareholders via a derivative claim) can bring a civil case against Aja for negligence.

2. Aja may be ordered to either pay compensation for the £20,000 lost or restore company profits (re D'Jan of London [1994]).

This is the case despite the clause in the articles that limits the directors duties as the articles cannot overrule CA2006 (s.232).

Chi breached her duty s.173 to exercise independent judgement when she did not voice her concerns about the reliability of the new machines that Beth suggested Foster buy. There are unlikely to be any consequences of the breach as the board did not progress with the purchase.

Beth breached her duties under s.175 (expand)

b) Remi is the minority shareholder of Foster and may be able to bring a derivative claim against the directors.

In this case, any benefits of the derivative claim go to Foster and not to Remi as the director.

Foster will be made a party to a derivative claim, so that it is able to enforce the court's judgement.

The procedure for the derivative claim involves two stages. First stage is to establish a prima facie case (s.261(4)).

Stage two is to determine permission for the claim.

This is done in a hearing to determine if permission to continue the claim should be granted.

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Cora would need to declare an interest under s.177 and 182. as her husband is the sole shareholder and director of Oscar Ltd. if she doesn't she would be in breach of her duties as director. As it was a substantial sum, the board would have had to approve this transaction with full knowledge. the transaction may be voidable under s. 2XX

(b) to reduce the preferential share dividend, the company will need to obtain the written consent of at least 75% of the nominal value of that class of shares or a special resolution at a class meeting for that class of share. Sami can apply to the courts to stop this variation as he holds more than 15% of the class of shares. However, this is unlikely to be successfully upheld as it is not unfairly prejudicial to him - all class share holders have had the same reduction of enjoyment in class rights.

(c) dividends can only be distributed out of profits, setting off any accumulated losses. However, the company has not made any profits in the past 3 years. This may be an unlawful distribution for which the directors and shareholders could be held liable as they would have known this at the time the dividend was approved.

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To: The Board

From: CoSec

a) The transaction between Ray plc and Oscar Ltd:

Cora directors' duties- s.177 directors must disclose any direct or indirect interest in company transactions to the board

Substantial property transaction s.190 CA2006:

A director (or someone connected to them, like a spouse or child)

Is involved in a deal where the company is buying or selling a non-cash asset

And that asset is worth more than £100,000 or more than 10% of the company’s net assets, as long as it’s over £5,000

The waterpark exceeds the threshold of £100,000 and Cora's husband meets the definition of a connected person. Therefore, the remedy is to void the transaction:

The company can cancel or reverse the transaction and the asset or money involved may have to be returned.

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1. The loan agreement entered into by Usman and Rifat would be deemed ultra vires (acting beyond the powers) as it goes against the articles of the company. The loan itself will be valid (s.40) and binding but as directors they will be liable. Breach of duty s.171.

2. Breach of duty section 172 i.e promoting the success of the company ( would need to elaborate as this is subjective)

3. Share allotment should be deemed invalid as pre-emption rights violated. Shares issue to marym without offering to existing shareholders first. s.560

4. Dividend must be paid out of the profits available (s.830(1) - it seems that the company has been suffering losses, although it did make a profit for the first 2 years. They have the right to declare dividends only from the profits so if they have violated this then they can be held personally accountable to repay the amount to the company

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Taking out the loan

The company had a clause stating that the directors may not enter into a loan agreement on behalf of the company unless it had been approved by ordinary resolution. Furthermore they are not allowde to grant securities over any assets. This procedure was not followed by Usman and Rifat and so they were acting ultra vires (beyond their powers) in breach of section 171 of the Companies Act 2006.

Section 171 requires that directors act within their powers, as in the CA2006 and company’s constitution.

Consequences for breach: Rifat and Usman try to argue that the loan agreement is void due to being entered into in breach of the articles, however, s39 of the CA2006 holds that “the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution”. This means that just because the loan was outside of their constitutional powers, it is still valid and thus cannot be rescinded (protecting the rights of the bank as the third party).

Similarly, under s40, the directors are still able to bind the company free from limitations in the constitution, meaning that their actions still provide legal obligation and the loan must be paid. Acting beyond their powers does not override the s33 contract, whereby the Articles form a statutory contract and legal obligation between the company and its members.

Under the indoor management rule, the bank is entitled (if acting in good faith) to assume that the person complied with the internal rules of the company, aka that the ordinary resolution had been passed.

However, due to breach of section 171, a criminal offence, the directors can be deemed jointly and severally liable for the loan and so could be personally liable to pay back the £10,000 loan, being the loss to the company.

Payment of the dividend

Procedure for payment of dividends is that the directors declare the dividend and for a final dividend, this must be approved by the members via ordinary resolution (more than 50% of the shareholders).

Maryam is the only one deemed to have assented, but she only has 2000/7000 shares = 29% and thus not the requisite majority.

In addition, dividends are only to be paid out of the distributable profits of the company (s830). The company has not made profit and so has no distributable profit from which to pay.

As such, the dividend is unlawful.

What does this mean? Not a criminal offence, instead there are civil remedies under section 847 against members who receive the distribution and directors who recommend an unlawful distribution. Members are liable to repay the amount of the divided to the company (or a sum equal to the value of the distribution if paid other than in cash).

Allotment of the shares

Private limited company with one class of shares (ordinary) and as such the directors are authorised to allot new shares without consulting the members.

This is presuming the company has no authorised share capital restrictions under the Articles (which would therefore need a special resolution to alter this) or has remaining unissued share capital.

However, unless this has been excluded within the Articles of Association, the company has not undertaken the pre-emption rights procedure, or disapplied them in this instance. Pre-emption rights protect the existing shareholders from dilution of their voting rights. It requires that the directors offer the existing shareholders new shares proportional to their current holdings and on the same terms.

But even if they did not issue the shares to the existing shareholders, Maryam's holding would still be valid.

Removal of directors

The shareholders would have the right to remove the directors if they so wished, however would have to follow the proper procedures in 168.

Ordinary resolution with special notice.

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Greencloud

Loan

Articles form a contract between company and its members (s.33) and give general authority for directors to manage the company’s business. The additional clause here has limited their authority – req shareholder approval for loan.

Loan has been entered into without shareholder approval – s.171 director duty acting outside of constitution. Also consider whether loan breaches s.172 – entering into a loan where company struggling financially – trading your way out of financial struggles does not usually end well.

S.40 protection for 3rd parties – assumes company’s internal rules have been complied with – indoor management rule (Royal British Bank v Turquand). Loan remains valid and will need to be re-paid.

Allotment of shares

Do directors have authority to allot? – s. 550 under model articles private company’s with only 1 class of shares - directors authorised to allot unless restricted by articles. GSL authorised to allot.

Pre-emption rights – s.561 – offer to existing shareholders at proportion so voting rights not diluted – no evidence of disapplying pre-emption rights - existing shareholders should have been offered.

Are Maryams shares valid?

Payment of dividend

s. 830 Should only be paid from distributable profits

Final divs should be approved from final account by ordinary res (Maryam 2000 so not can’t pass ordinary res alone) – GSL no profit should not have paid and no resolution

s.847 unlawful distribution – members who receive and directors who agreed liable to repay

Removal of Directors

s.168 directors removed by ordinary resolution with special notice (28 days) – directors right to speak

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Directors acting ultra vires

The company articles state: “The directors may not enter into any loan agreement on behalf of the company or grant security over any assets of the company, unless it has first been approved by an ordinary resolution of the company.”

·         Usman and Rifat have acted outside their powers and duty as directors under s 171 CA2006.

·         This does not invalidate the bank loan with Q Bank, but Usman and Rifat may be personally liable for the value of the loan. The terms of the loan have given Q bank control of a company’s premises, which may cause the company to lose its ability to operate. If the company is still able to use it’s asset to conduct its business then this may be regarded as floating charge rather than a fixed charge in the even of liquidation.

Share allotments

By allotting 2,000 new ordinary shares to Maryam, the directors have ignored the pre-emption rights of existing shareholders. The company’s articles do not explicitly state that pre-emption rights will be waived. As such, Usman and Rifat should have first notified shareholders that they wished to raise additional capital and offered them the chance to purchase additional shares in line with their initial pro-rata ownership. Any unsold shares could then be offered to Maryam. This would allow existing shareholders to not have thir voting power diluted. Members could seek  unfair prejudice remedies through the courts against Usman and Rifat.

Dividend distribution

The company can only distribute dividends if it has made a profit. As Greencloud has not made a profit since 2020, the dividend distribution would be unlawful. In order to distribute a dividend, the director would need to recommend an dividend out of the profits to be distributed and declare that it be paid by the members passing an ordinary resolution. As this process was not followed, S 847 provides that members should pay back the distributed amount.

Removal of directors

To remove the directors, members will need to call a meeting with 28 days notice clearly stating the intention of removing Usman and Rifat. The case for removing them should be circulated to all members, and to Usman and Rifat as directors. Usman and Rifat have the opportunity to respond to the case presented. In the meeting, both the proposal and the response to the proposal can be tabled. Members can then vote by either a show of hands or by poll whether they would like Usman and Rifat to be removed as directors individually.

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Q: Advise on the validity of the actions of GSL and its directors:

Loan agreement with Q:

Ultra vires

The directors have entered into a loan agreement which has granted security over the assets of the company without member approval. Together they also do not form a simple majority of the members owning 2000 shares together out of the 5000 shares issued

s.40 CA2006 provides protection for Q and the loan agreement can still stand if Q acted in good faith, despite the fact that the directors acted ultra vires by entering GSL into this loan agreement with security over GSL's assets with Q

s.39 CA2006 states that a company's capacity is not limited by its consititution, so even with the added clause prohibiting this action, the transaction remains valid

Royal British Bank v Turquand (1856) established the 'indoor management rule' protecting third parties dealing with a company

Outsiders are entitled to assume that internal company procedures have been properly followed

Additional 2,000 shares issued to Maryam:

Pre-emption rights

The directors should have given the existing shareholders the first opportunity to buy the new shares before offering them to Maryam, protecting them from dilution of their own shares

s.561 CA2006

Re Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper and Printing Co Ltd (1986)

Removal of the directors by the members:

s.168 CA2006

Notice of resolution

Directors' right to be heard

Vote by ordinary resolution

Re Bushell v Faith (1970)

Final dividend payment:

s.830 profits must be available for distribution

Directors propose the amount and timing

Members vote at the AGM via ordinary resolution

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Greencloud Solutions - Capital Maintenance

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Greencloud Solutions - Capital Maintenance

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ADVISE ON THE VALIDITY AND ACTIONS OF GSL AND DIRECTORS

- Loan is breach of s171 Dividend Question of the share allotments

Removal of director Unlawful dividend Notes:hasn’t traded propfitably Usman and Rifat did not obtain and ordinary resolution from the remaingin 33% of shareholders to approve the loan with Q bank PLC. Loan is a fixed charge over their premises Allotment of shares – were they able to increase share capital to Maryam – where does that get covered?? Extra 2,000 without member approval. This reduces the voting rights of the family members Maryam can still have the shares, but what is the reperucssions on the directors – civil liability?? Final dividend cannot be paid as the compnay is not in profits *what is the S for this* Maryam has influenced knowingly the vote – so she has colluded with the directors – repercussions on the Maryam Usam and Rifat Dividend should be used to pay off loan along with the liquidation of the premises. Maryam should return funding Minority shareholders have right to launch a derivative claim against Usman Rifat and Maryam for changing voting rights - push for wind director removal / replacement. Position of company may infer that Greencloud is unable to repay the loan at all – therefore only solution is wind down of company so premises can be used to pay off the loan and potentially distribute remaining capital to the ordinaty shareholders. Diviends should be returned from all shareholders, as they knew company was not in profit and that there was concern over repaying the loan. Dividends have to be returned to pay off the creditors, in the hierarchy the bank needs to be paid off first. (Re: Exchange Banking )Co, Flitcroft’s Case Paid dividends out of share capital instead of profits No solvency statement to reduce share cpaital Reduction has affected positoin of company’s creditors s646 Mayram

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1. Loan Agreement

GSL’s articles require shareholder approval for loans/security.

Usman & Rifat entered £10,000 loan + fixed charge without approval - breach of s.33 CA 2006.

Loan still valid under s.40 CA 2006 (third-party protection).

Directors breached s.171 duty to act within powers - may be personally liable to company.

2. Share Allotment to Maryam

Directors can allot shares under s.550 CA 2006 (Model Articles allow it).

Must respect pre-emption rights (s.561) unless disapplied.

If ignored - allotment challengeable; possible unfair prejudice petition (s.994) or rectification.

3. Final Dividend

Dividend unlawful if paid from capital (no profits) - breach of s.830 CA 2006.

Directors personally liable to repay under s.847 CA 2006.

Final dividend needs member approval (ordinary resolution) - Maryam alone insufficient.

4. Shareholder Concerns & Director Removal

Removal under s.168 CA 2006 by ordinary resolution at general meeting.

Requires 28 days’ special notice.

Remaining shareholders (60%) can remove directors despite Usman & Rifat’s 40%.

5. Derivative Claim

Shareholders may bring claim under s.260 CA 2006 for breaches:

s.171 (loan & dividend)

s.172 (success of company)

s.561 (pre-emption rights)

Court permission required; remedy useful when board won’t act against itself.

Conclusion

Loan enforceable but breaches internal governance.

Share allotment may be invalid if pre-emption ignored.

Dividend unlawful - directors liable.

Shareholders can remove directors and pursue derivative claim.