LACF Revision Class

Topics:

Aim to have an idea of what the whole course; cover topics that are most
relevant to a proper understanding of an LACF course.
Main Topics:
The course focuses on the financial side
-

Separate Legal Personality and Limited Liability

Consequences:
i)

These are the cornerstones on which corporations are based; the

fact that they exist shape the direction of how a corporation. The
limited liability shapes the power and finance of a company
shareholders are residual claimants and thus have the last claim
to any money left over.
This is a unique facet of English company law and shapes the
vehicle itself the company is a

ii)

Transferable shares
This facilitates the financing of a company (raising of equity),
shareholders can liquidate their shares without liquidating the
company

Sources of Company Law

- EU Law at the top of the hierarchy partial harmonisation of company
law through directives
- Primary Legislation
o CA 2006
o FSMA 2000
- Secondary legislation
o EG s.657
- Common law
o Case law still relevant after CA
o EG s.170(4) CA 2006: regard shall be had to corresponding
common law rules
- Delegated Rule making

o FCA
Companys Constitution s.17 CA
-

A contract
Articles of Association
o The model articles are the
o Gap Filling Provisions
Special Resolution

Types of Company
- Limited company
o Limited by shares
- Limited by guarantee
- Private vs Public
o Public can offer securities to the public
Listed vs unlisted
Based on the same idea (versus the German model w/ different steps)

Formation
Registration in the competent registrar
Deposit of: memorandum of association, application for registration and
articles of Association

Corporate Governance
Companys bodies in UK company law
-

Shareholders
Board of directors

The fundamental rule is of contractual, the division of powers is delineated in

the articles of association and also the Model Articles. The essence of
corporations is contractual these can be changed in every different company.
Default Division of powers
- Directors are responsible for the management of the companys
business
Shareholders Approval required by the law for:

articles amendments
alteration of capital or of class rights
schemes of arrangements
winding up of the company

Division of powers between board and shareholders

Listed Companies:
- Directors Duties and Liability

Directors Duties to shareholders which is a contractual basis.

Duty of Care vs Duty of Loyalty
At Common Law
- Subjective test A director need not exhibit in the performance of his
duties a greater degree of care than he would in his own (Re Equitable
Fire Insurance Co) -- the shareholders have hired the director on the
basis of certain experience and skills and so he must live up to them.
- There is a major shift and development in the
- Objective Test same degree of care with the companys affairs as
they would with their own (Dorchester Finance Co v Stebbing [1989]
BCLC 498
Statutory Standard CA 2006
- Directors must use reasonable care skill and diligence s.174
Duty of Care
Required duties depend on the functions carried out
Substantial delegation is allowed
Duty to monitor companies activities
Appropriate
Duty of Loyalty: - who are the duties of directors owed to?
Duties to pursue shareholders interest?
Duties to act within the constitution s.171(a) CA restatement of the proper
purpose test duty to act within powers.

Hogg v Cramphorn [1967] 3 AER 420

-

Directors were carrying out activities to influence the outcome of a

takeover bid (defeats)
Improper purpose vs
Old case law now codified in the statute

Directors facing a takeover-bid

-

Targets board
Proper-purpose doctrine
Art 9 Takeover Directive; Rule 21.1 Takeover Code
No Frustration Rule stricter
David Kershaw paper

No Conflict Duties

Executive vs non-executive directors

Continuous monitoring
- Re equitable fire
o Absence of grounds to suspect then can rely on ino
- Re Barings [1999]

Creditors Protection: COVER THIS WELL!!!!

This topic is v. important

i)

Ex ante strategies to protect creditors

a. Prophylactic policies which aim at avoiding insolvency

ii)

A red-flag
a. The proxy for a minimal amount of invested capital

iii)

b. Internal regulation of crisis - Beyond this threshold there is a

crisis
c. Capital formation rules
i. PLC subject to more stringent rules
ii. of legal capital + whole premium paid up
ETC

Dividend Distributions
Net Assets etc
Disguised Distributions:
-

Transactions with shareholders at undervalue (or for free)

Any unjustified return of corporate assets to sharegholders is unlawful
o Ridge Securities
Re Halt Garage
Aveling Barford
Progress Property
State of Mind is relevant but still in development!

Reduction of Legal Capital

-

Solvency Statement not effective

Call a meeting to

Directors duties combined with creditor protection?

Duties to creditors!!! Make an essay plan for this!!
Can we also say that a director as a result of the concurrent duties and
protections that the director of a company must also
Take into account the interests of shareholders maximise the interests of
shareholders?
Creditors not
Before Actual Insolvency what interests are owed to creditors.
West Mercia Safetywear Ltd v Dodd [1988] read

Duty to creditors ex post but pre-bankruptcy. Fraudulent trading & wrongful

trading s.213 / 214 Insolvency Act
Anyone involved:

The extent to which directors are required to take the interests of creditors into
account when they are managing the company is a very important issue.
Creditors are not listed alongside other obvious stakeholders in s 172(1).
Instead, s 172(3) makes the duty to promote the success of the company for
the benefit of its members as a whole subject to any enactment or rule of law
requiring directors, in certain circumstances, to consider or act in the interests
of creditors of the company.
The interests of creditors predominate when there is no residual wealth left in
the company, that is, when shareholder equity has been dissipated, usually by
poor trading (see Chapters 7 and 8). At that point, the economic owners of the
company are the creditors: all the company has it owes to them. As the
financial health of a company deteriorates, the directors need to increasingly
focus on the interests of the creditors when they take decisions because the
interests of the company become increasingly aligned with the interests of its
creditors (Facia Footwear Ltd v Hinchcliffe [1998] 1 BCLC 218).
At the relevant point when the duty becomes creditor regarding, be it on
insolvency (West Mercia Safetywear v Dodd (1988) 4 BCC 30), or at some
point before insolvency, such as when the company is doubtfully solvent
(Brady v Brady [1988] BCLC 20 (CA)) (the courts have not been able to agree
on the point at which the need to prioritise the interests of creditors is
triggered), it is not a question of the directors owing a duty to its creditors, the

duty remains owed to the company. The duty simply needs to be performed
with different priorities in mind. The duty remains enforceable against the
directors only by the company but note that the shareholders cannot ratify
what would otherwise be a breach of duty (Sycotex Pty Ltd v Balser (1993) 13
ACSR 766).
The common law and equitable principles requiring directors, in certain
circumstances, to consider or act in the interests of creditors, preserved by s
172(3), have not had to be
developed in case law in recent years due to the enactment of s 214 of the
Insolvency Act 1986. Section 214 applies when a company is being woundup. It exposes directors to court orders to contribute to the assets of the
company if knowing, or in circumstances in which they ought to have known,
that the company had no reasonable prospect of not going into insolvent
liquidation, they continued to trade or otherwise took steps not in the interests
of creditors. Section 214 and other protections for creditors on a winding-up
are considered in Chapter 16.
[T]he implementation of the allegedly ineffective wrongful trading liability that
has not yet matched up to its expectations highlights the need to reassess
common law duties concerning creditors in the United Kingdom. The
commonly used term duty to creditors is a misnomer as fiduciary duties do
not provide either directors with clear guidelines with regard to economical
decisions, or creditors with directly enforceable claims. The UK duty to
creditors provides only mitigated creditor protection by sanctioning the
misappropriation of company funds and other serious opportunistic behaviour,
although British company and insolvency law seems to be well equipped to
deal with this type of conduct: for instance, the rules on undervalue
transactions and preferential payments (s.238, 239 IA 86) efficiently redeem
commercially inadequate transfers or endowments of company funds.
Though it is arguable whether directors should, when a company remains
solvent yet financially instable, prioritise creditor interests when two courses of
action are available, courts and legislators in both Germany and the United
Kingdom have chosen not to pursue such an approach in order not to unduly
restrict managerial discretion. Academic attention in both jurisdictions has
thus shifted towards the duty of care and skill as a means of creditor
protection ... In particular the consultation of professional advisers and the
initiation of directors and shareholders meetings to review the companys
situation at an early stage in the companys decline may, de lege lata and
ferenda, offer an effective back door to escape responsibility in both
jurisdictions. This approach is both feasible and superior to redirecting
fiduciary duties to creditors as directors are provided with hands-on
recommendations and courts with straightforward criteria to evaluate liability.

Lotz, S, Directors duties with regard to creditors in German and UK (core)

company law (2011) 22 ICCLR 264 at 269 (footnotes omitted).

Veil Piercing Mclaughlin pp 70 - 82

Principles of Corporate Finance Law:

-

A necessity to protect creditors is the sort of scenario.

Very limited scenarios
o Ownership and control of a company are not of themselves
sufficient to justify piercing the veil
o The court cannot pierce the veil, even when no unconnected
third party is involved, merely because it is perceived that to do
so is necessary in the interests of justice
o The corporate veil can only be pierced when there is some
impropriety
o The companys involvement in an impropriety will not by itself
justify a piercing of its veil: the impropriety must be linked to the
use of the company structure to avoid or conceal liability
o If the court is to pierce the veil it is necessary to show both
control of the company by the wrongdoer and impropriety in the
sense of a misuse of the company as a device or a faade to
conceal wrongdoing
o A company can be a faade for such purposes even though not
incorporated with deceptive intent.

Look at Chandler v Cape and Thompson

How is a Companys Finance Ordered

Debt to equity ratio
Equity (shares)
- Residual claim
- No profit or no liquidation surplus: no right
- Debt (debentures)
o Credit against the company
Claim to repay the debt with interest
No repayment = insolvency
o Shares v. Debentures

Presumption of equality
But different types
Preference Shares
Entitled to dividend prior to other shareholders or a
priority in case of winding up
Shares with special voting rights
A class higher voting rights
B class with lower voting shares
Ordinary Shares
Residual class
Allotment Price
o Directors have the duty to obtain the best price available
o But they can issue shares at a discount value (lower than
market but above the par value
o Shearer v Bercain

Share Allotments
-

Pre-emptive right
o Pre-emptive right
o Pre-emptive right is a call option
It can be bought and sold on the market

Exemptions
o Bonus shares
o Employees shares schemes
o Non-cash consideration

Disapplication of pre-emptive right

DEBT CORPORATE FINANCE (Part III Ferran Principles of Corporate

Finance Law // PP. 367-377 Mclaughlin))
Debentures rights
[Debenture] ... means a document which either creates a debt or
acknowledges it ... [there is no] precise legal definition of the term, it is not
either in law or commerce a strictly technical term, or what is called a term of
art.
Levy v Abercorris Slate and Slab Co (1887) 37 Ch D 260

738 Meaning of debenture

In the Companies Acts debenture includes debenture stock, bonds and any
other securities of a company, whether or not constituting a charge on the
assets of the company.
Typical Debt security
-

There is scope for a huge variation in the type of debenture

Up to the point that they become similar to an equity!

Debentures Holders
General Creditor protection?
- They may require further protection
- Financial covenants - acceleration
- Covenants with oversight rights
- Debentures Guarantees
o Rights in rem
- Securities over assets?
o Grant a priority over other debts in case of defaults
o Proprietary securities include
Mortgage
Floating / fixed charges
Possessory securities
- Possession of the guarantee is necessary to confer
Floating Charges
- Using their own (moveable) assets as a guarantee
- Leverage mechanism
- But use them as working capital
- This is possible with the floating charge

Crystallisation
- The movement from floating to fixed
- Can occur at different times depending on the agreement
o Re Brightlife Ltd [1987]
Priorities:
- The priority belongs to the party that registered it first
- Floating charge is weaker than a fixed charge
Statutory priorities

Weaker than a fixed charges

Insolvency Act
Winding Up

Insolvent and Solvent

Insolvent winding up
- Creditors voluntary winding up
- Compulsory winding up by the court under s.122(1)(f) IA
Solvent winding up

General
-

Two Sections:
o Section A problem solving
Be specific
What is the solution
o Section B Theoretical
Be vague

No need for firm conclusion unless there is a

Citing Cases do not remember the exact name

Past Papers Topic Review

2008
i)
ii)
iii)
iv)
v)
vi)

2009
i)

A Incorporating a Company under CA 2006

B Extraordinary General Meeting, resolution to wind up a
company that is insolvent.
C Directors Duties
D Gilford Motor Co. Ltd v Horne [1933] Ch 935 discuss the
difference between the decision and Salomon v Salomon
E Raising Funds for a company?
F Share Rights

A Piercing the corporate veil?

ii)
iii)
iv)
v)
vi)

2010
i)
ii)
iii)
iv)
v)
vi)

B Company with heavy losses; wrongful / fraudulent trading;

directors liability; winding up
C Takeover Bids
D Directors Duties, limits (to credit holders? And the wider world /
Environment)
E Powers and duties of the receiver of an insolvent company
F CA 2006 constitution changes

A Takeover Bid
B Winding Up a company w/ various provisions
C Insolvent Liquidation / directors liabilities IA s.213 Fraudulent
trading & IAs.214 Wrongful trading
D The success of the company factors
E Shareholders powers to remove a director
F Model Articles / Financial Crisis

2011
i)
ii)
iii)
iv)
v)
vi)

A?
B Minority shareholders
C - Takeovers
D Incorporation / piercing the corporate veil
E Dividend Policy
F Debt or Equity (Raising Capital)

2012
i)
ii)
iii)
iv)
v)
vi)

A Model Articles vs Articles of Association (private LTD)

B Liabilities of Directors in liquidation
C?
D Salomon v Salomon separate legal personality
E Disclosure requirements plc
F Raising capital from the public vs other means

2013
i)
ii)
iii)
iv)
v)
vi)

A Incorporation, articles of association

B Net Assets below Share Capital
C Takeover Defence
D Debentures vs Hybrid Securities
E Shareholder derivative action
F Disguised Distributions, CA 2006 changes

2014

i)
ii)
iii)
iv)
v)
vi)

A Takeover bid, takeover defences, pre-emptive rights, directors

powers
B Gifts, disguised distributions, Foss v Harbottle derivative claim
C Allotment and Issuing of new shares
D - Floating Charge, ranking of floating charges vs other securities
+ other floating charges
E Directors duty of care; subjective/objective test & common law
origins
F Capital reduction rules for public and private LTD companies and
rules for protecting creditors