Company Law Case Law

Cycle 2: Separate Legal Personality and Piercing the Veil

Foss v Harbottle (1843)

 In law, the corporation and the aggregate members of the corporation are not the same thing. –
Wigram V-C
 Where a wrong is done to the company, the proper claimant is the company
 Members, even acting together, do not normally have the ability to bring proceedings on the
company’s behalf

Salomon v A. Salomon & Co Ltd (1897)

 Decided to incorporate company to run business. Legislation then required a minimum of 7

shareholders. In 1892 he formed a company with one share each for self, wife, and 5 children.
 He transferred his business to the company in exchange for 20k shares at 1 pound a share, 10k
secured debt, and 9k cash to pay off creditors. He owned the company, but the business was the
same. However, Crisis hit the industry leading to a financial crisis. He borrowed money from
another company (B), secured on debentures, but his company couldn’t pay the interest and the
company brought proceedings. The Company went into insolvent liquidation. B was paid as a
secured creditor and the remaining assets went to Salmon as a secured creditor. There was no
more money left for other creditors. A liquidator was appointed, and he sued Salomon to
reclaim for the creditors.
 House of Lords Held: the company had been lawfully incorporated and it was not an abuse of
the corporate form. The company was separate from its members. This case established that
the company is a separate legal person. Members are not liable for the company’s debts, even
when only one effective shareholder and where the old business continues unchanged. There
is no recovery for creditors, recovery can only be against the company and not the members.
 “In a popular sense, a company may in every case be said to carry on business for and on behalf
of its shareholders; but this certainly does not in point of law constitute the relation of principal
and agent between them or render the shareholders liable to indemnify the company against
the debts which it incurs.” (Lord Herschell)

Macaura v Northern Assurance (1925)

 M, controlling shareholder, took out insurance of company's property in own name. Property
destroyed, claimed under insurance.
 Held, no claim, even a sole shareholder has no interest in property belonging to the company
 “[T]he corporator even if he holds all the shares is not the corporation, and neither he nor any
creditor of the company has any property legal or equitable in the assets of the corporation.”
(Lord Wrenbury)
 A Company owns its own property

Re Lewis’ Will Trusts (1985)

 L left my freehold farm and premises to son in his will. Farm owned by company
 Held: gift failed, L could not bequeath farm and did not bequeath shares
  “I am wholly satisfied that the testator intended his son to have the farm. But he did not own
the farm so as to be able to make that gift. He owned shares in the company which owned the
farm; 750 out of 1,000 such shares. What gift he would have made had he had in mind that that
was the nature of his assets, I do not know, and ought not ...to speculate about.” (Scott J)

Lee v Lee’s Air Farming (1960)

 LAF = crop-spraying company. L = controlling shareholder, director, and chief pilot. L died whilst
working. Could L's wife claim compensation on basis L was a worker?
 Held: controlling shareholder and director could also be an employee of the company
o L as director could contract on behalf of Company with L as employee
 Established that an individual can function in dual or more capacities
 A company can enter into contracts with its own members or directors

Secretary of State v Neufield (2009)

 CA confirmed Lee
 Provided that the employment contract was not a sham and was properly a contract of
employment rather than a contract for services, the claims were proper. The details might
deserve close investigation, and the circumstances would need to be continuing at the time of
the insolvency.
o Recognized possibility of employment contract being sham

Tunstall v Steigmann (1962)

 T rented business premises from S. S served notice to quit on ground she intended to occupy
property for her butchery business. But business actually to be run by her company.
 Held: invalid notice to quit. The business carried on by a company is not carried on by the
company’s shareholder
 A company is a legal entity entirely separate from its corporators, the landlord and the company
are entirely separate entities
 A company carries on own business

Re Noel Tedman Holdings (1967)

 Joint Shareholders killed, but the company continues

The Albazero (1977)

 “[E]ach company in a group of companies is a separate legal entity possessed of separate legal
rights and liabilities so that the rights of one company in a group cannot be exercised by another
company in that group …” (Roskill LJ)
 Every company in a corporate group has its own legal personality

Re Southard (1979)

 "A parent company may spawn a number of subsidiary companies, all controlled directly or
indirectly by the shareholders of the parent company. If one of the subsidiary companies ...
turns out to be the runt of the litter and declines into insolvency to the dismay of its creditors,
the parent company and other subsidiary companies may prosper to the joy of the shareholders
without any liability for the debts of the insolvent subsidiary.” (Templeman LJ)
 Adams v Cape Industries (1990)
 Separate Legal Personality
o “Our law, for better or worse, recognises the creation of subsidiary companies, which
though in one sense the creatures of their parent companies, will nevertheless under
the general law fall to be treated as separate legal entities with all the rights and
liabilities which would normally attach to separate legal entities.” (Slade LJ)
 Piercing the Corporate Veil
o Explaining and limiting circumstances in which veil could be pierced
o “… the court is not free to disregard the principle of Salomon v A Salomon & Co Ltd …
merely because it considers that justice so requires.” (Slade LJ)
o [T]here is one well-recognised exception to the rule prohibiting the piercing of “the
corporate veil” … where special circumstances exist indicating that it is a mere façade
concealing the true facts.” (Slade LJ)
o CA confirmed each company in group is a separate legal person
o Cases to contrary explained on basis of construction of statute, contract, or another
document
o “Our law, for better or worse, recognises the creation of subsidiary companies, which
though in one sense the creatures of their parent companies, will nevertheless under
the general law fall to be treated as separate legal entities with all the rights and
liabilities which would normally attach to separate legal entities.” (Slade LJ)
o Rejected that American subsidiaries were agents of English parent company (substantial
part of business was carried out by subsidiary in its own right)

Prest v Petrodel Resources Ltd (2013)

 Piercing the Corporate Veil

o It redefined past cases and narrowed jurisdiction
o “I consider that if it is not necessary to pierce the corporate veil, it is not appropriate to
so do.” (Lord Sumption)
o “I was initially strongly attracted by the argument that we should decide that a
supposed doctrine, which is controversial and uncertain, and which, on analysis, appears
never to have been invoked successfully and appropriately in its 80 years of supposed
existence, should be given its quietus. ... However, I have reached the conclusion that it
would be wrong to discard a doctrine which, while it has been criticised by judges and
academics, has been generally assumed to exist in all common law jurisdictions, and
represents a potentially valuable judicial tool to undo wrongdoing in some cases, where
no other principle is available.” (Lord Neuberger)
o “[T]he principle that the court may be justified in piercing the corporate veil if a
company’s separate legal personality is being abused for the purpose of some relevant
wrongdoing is well established ... The difficulty is to identify what is a relevant
wrongdoing. ... It seems to me that two distinct principles lie behind ... the concealment
principle and the evasion principle.” (Lord Sumption)
o Piercing the Veil should only be used if there is the evasion principle applied and it was
the last resort
Woolfson v Strathclyde

 Company carried on business on W's land. W not entitled to compensation for disturbance of
business; not his business that was disturbed
 HoL expressed doubt about the principles applied in DHN
 “... I have some doubts whether in this respect the Court of Appeal [in DHN] properly applied
the principle that it is appropriate to pierce the corporate veil only where special circumstances
exist indicating that is a mere façade concealing the true facts.” (Lord Keith)
 “[A]ny departure from a strict observance of the principles laid down in Salomon has been made
to deal with special circumstances when a limited company might well be a façade concealing
the true facts.” (Lord Keith)

Smith, Stone, and Knight Ltd v Birmingham Corporation

 Subsidiary carrying on parent company’s business as its agent (so parent company received
compensation for compulsory purchase)
 Agency relationship dependent on facts of case; is subsidiary carrying on business as the parent
company's business or on its own account?
 Consider factors such as who is really carrying on business, who appointed them, who is in
effective control

Yukong Line Ltd v Rendensburg Investments

 Usually need clear agreement to shw agency intended
 Not just a matter for the factors identified in Smith, Stone & knight

MCA Records Inc v Charly Records

 “if all a director is doing is carrying out the duties entrusted to him as such by the company
under its constitution, the circumstances in which it would be right to hold him liable as a joint
tortfeasor with the company would be rare indeed.” (Chadwick LJ)

Williams v Natural Life

 There must have been an assumption of responsibility such as to create a special relationship
with the director or employee himself. ... [I]n a small one-man company ... the managing
director will almost inevitably be the one possessed of qualities essential to the functioning of
the company .... By itself this factor does not convey that the managing director is willing to be
personally answerable to the customers of the company.

Chandler v Cape
 A subsidiary and its company are separate entities. There is no imposition or assumption of
responsibility by reason only that a company is the parent company of another company. The
question is simply whether what the parent company did amounted to taking on a direct duty to
the subsidiary's employees. – Arden LJ
 [T]his case demonstrates that in appropriate circumstances the law may impose on a parent
company responsibility for the health and safety of its subsidiary's employees. - Arden LJ

Jones v Lipman
 Transfer of land to company to avoid order for specific performance deemed relevant
impropriety
 Considered a case for the Evasion Principle
Gilford Motors v Horne
 conducting business through company to avoid restrictive covenant… the company was formed
as a device in order to mask the effective carrying on of a business under a cloak or a sham
 Considered a case for the Evasion Principle

Trustor v Smallbone
 A company used to receive money taken wrongfully from another company is relevant
impropriety
 Considered a case for the concealment principle

Kensington International v Republic of Congo

 Oil sales put through companies to hide involvement and avoid creditors
Cycle 3: Corporate Constitution
Bratton Seymour v Oxborough
 Court will not rectify articles to make them accord with the intentions of the individuals who
registered them
 Because the articles are a part of the company’s constitution, court will not imply term into the
articles that are not apparent from the wording of the articles themselves

Rayfields v Hands
 Court construe the article as a commercial or business document

Holmes v Keyes
 Courts seek to construe to give reasonable business efficacy

Re Belize Telecom
 Court is trying to get the meaning conveyed to the reasonable person who had all the info which
would be available to those that the instrument is addressed.
 A Court is only concerned to discover what the instrument means. However, that meaning is not
necessarily always what the authors or parties to the document would have intended. It is the
meaning which the instrument would convey to a reasonable person having all the background
knowledge which would reasonably be available to the audience to whom the instrument is
addressed. -Lord Hoffman

Allen v Gold Reefs of West Africa Ltd

 Cannot alter articles to do things prohibited by Companies Act
 Powers to alter articles must be exercised bona fide for the benefit of the company as a whole
 Articles altered to give company lien over all shares of members in respect of debts owed by
that member to the company
 Only affected one member as only one member was in debt
 Held, alteration applied to all members, did not matter that only one member was in debt

Shuttlesworth v Cox Borthers & Co

 Alteration enabling the disqualification of any director for life on request by all other directors
 Alteration valid as for benefit of company
 Terms will not be implied from extrinsic surrounding circumstances
 The articles of association become, upon registration, a contract between a company and
members. It is however, a statutory contract of a special nature with its own distinctive features.
 “[I]t is a contract made upon the terms of an alterable article, and therefore neither of the
contracting parties can complain if the article is altered” (Atkin LJ)
 “By virtue of [the Act] the articles of association become, upon registration, a contract between
a company and members. It is, however, a statutory contract of a special nature with its own
distinctive features. It derives its binding force not from a bargain struck between parties but
from the terms of the statute. It is binding only insofar as it affects the rights and obligations
between the company and the members acting in their capacity as members. If it contains
..provisions conferring rights and obligations on outsiders, then those provisions do not bite as
part of the contract between the company and the members, even if the outsider is
coincidentally a member. Similarly, if the provisions are not truly referable to the rights and
obligations of members as such it does not operate as a contract. Moreover, the contract can be
 altered by a special resolution without the consent of all the contracting parties. It is also, unlike
an ordinary contract, not defeasible on the grounds of misrepresentation, common law mistake,
mistake in equity, undue influence or duress. Moreover, ... it cannot be rectified on the grounds
of mistake.... [N]either the company nor any member can seek to add to or subtract from the
terms of the articles by implying a term derived from extrinsic surrounding circumstances.”
(Steyn LJ)

Greenhalgh v Arderne Cinemas Ltd

 The phrase, the company as a whole, does not mean the company as a commercial entity,
distinct from the corporators, it eans the corporators as a general body (shareholders as general
body)
 The case may be taken of an individual hypothetical member and it may be asked whether what
is proposed is, in honest opinion of those who voted in its favor, for the person's benefit.
 Example of the hypothetical member test

Hickman v Kent or Romney Marsh

 Outsider cannot sue qua outside, even if also a member
 “An outsider to whom rights purport to be given by the articles in his capacity as such outsider,
whether he is or subsequently becomes a member, cannot sue on those articles treating them
as contracts between himself and the company to enforce those rights. Those rights are not part
of the general regulations of the company applicable alike to all shareholders and can only exist
by virtue of some contract between such person and the company, and the subsequent
allotment of shares to an outsider in whose favour such an article is inserted does not enable
him to sue the company on such an article to enforce rights which are ... not part of the general
rights of the corporators as such ...” (Astbury J)
 “I think this much is clear, first, that no article can constitute a contract between the company
and a third person; secondly, that no right merely purporting to be given by an article to a
person, whether a member or not, in a capacity other than that of a member, as, for instance, as
solicitor, promoter, director, can be enforced against the company; and, thirdly, that articles
regulating the rights and obligations of the members generally as such do create rights and
obligations between them and the company respectively.” (Astbury J)

Beattie v Beattie (Director)

 Director seeking to enforce a right of a director, and outsider right, even though he was also a
member
 “[T]he contractual force given to the articles of association by the section is limited to such
provisions of the articles as apply to the relationship of the members in their capacity as
members” (Greene MR)

Quin & Axtens v Salmon

 S and A were directors and help most of share. Articles required both to agree before
buying/letting certain property
 Board resolved to buy property, S disagreed. At GM: shareholders passed resolution to buy/l;et
property
 HoL Held: resolutions inconsistent with articles; company prevented from acting on them
 Outsider's right (ie right of director to prevent purchase) indirectly enforced
Re New British Iron

 Directors could not enforce article directly: but there was a separate contract of service
between company and directors into which a term was implied from the article
 “That article is not in itself a contract between the company and the directors; it is only part of
the contract constituted by the articles of association between the members of the company
inter se. But where on the footing of that article the directors are employed by the company and
accept office the terms of article 62 are embodied in and form part of the contract between the
company and the directors.” (Wright J)
 Terms of the article may be evidence of terms of this extrinsic contract
 Outsider may be able to rely on separate agreement that can be enforced
Cycle 4: Shareholders, Directors, and Corporate Governance

Short v Treasury Commissioners

 Company has its own property, you handle company property as though it is yours at your own
peril
 Shareholders are not part owners of an undertaking
 Shareholders have different rights depending on the type of share

Macaura v Northern Assurance

 A company owns property of its own

Borland’s Trustee v Steel Bros Ltd

 A share is an interest of a shareholder in the company measured by a sum of money, for the
purpose of liability in the first place, and of interest in the second, but also consisting of a series
of mutual covenants entered into by all the shareholders inter se in accordance with the
Companies Act. -Farwell J
 “A share is the interest of a shareholder in the company measured by a sum of money, for the
purpose of liability in the first place, and of interest in the second, but also consisting of a series
of mutual covenants entered into by all the shareholders inter se in accordance with [section 33
of the CA 2006]. The contract contained in the articles of association is one of the original
incidents of the share. A share is not a sum of money … but is an interest measured by a sum of
money and made up of various rights contained in the contract, including the right to a sum of
money of a more or less amount.” (Farwell J.)

Andrew v Gas Meter

 Shares may have differing membership rights

Re Scandinavian Bank Group Plc

 Shares may have differing nominal values

Webb v Earle

 Preferential shareholders receive fixed dividend before payment of dividend to ordinary

shareholders, usually cumulatively

Cumbrian Newspapers Case

 Rights attached to particular shares but not other shares are class rights
 Rights confirmed on individuals no qua member are not class rights
 Rights attached to particular shares but conferred qua member in effect create a separate class
of shares

White v Bristol Aeroplane

 Variation only where the right itself is affected, not just the enjoyment of the right
  Issue of further shares does not vary the rights of shareholders; rights remain the same, simply
the enjoyment of them has changed

Greenhalgh v Arderne Cinemas

 Subdivision of class 1 shares increased relative voting power, but it is not a variation of class 2
rights

Dimbula valley v Laurie

 Making a class right worthless may still not be a variation

 Assets distributed to ordinary shareholders before winding up, leaving preferential shareholders
rights to participate in surplus worthlessness

House of Fraser v ACGE

 Return of capital to preferential creditors, removing them from company was not a variation of
class rights

Woolf v East Niger Gold Mining Co Ltd

 Appointments of directors are provided in the articles, if the are not, then the power to appoint
directors sits with the members

Re HR Harmer Ltd

 Voting on appointment must be for the benefit of a company as a whole

Morris v Kanssen

 Appointing a defective director is the same as no appointment at all

Bushell v Faith

 3 equal shareholders, 2 were directors. Articles provided that on any resolution to remove a
director the individual’s shares would carry 3 votes.
 Held: this agreement was effective to prevent removal of a director.
 “[A]ll that Parliament was seeking to do … was to make an ordinary resolution sufficient to
remove a director. Had Parliament desired to go one further and enact that every share entitled
to vote should be deprived of its special rights under the articles it should have said so in plain
terms by making the vote on a poll one vote one share.” (Lord Upjohn)

Hutton v West Cork Railway

 There is not entitlement to be paid as a director.

 “[A] director is not a servant; he is a person doing business for the company, but not upon
ordinary terms. It is not implied from the mere fact that he is a director that he is to be paid for
it.” (Bowen LJ)

Guinness v Saunders

 Articles can give power to pay directors, but must follow provisions for payment to be valid.
RE Halt Garage

 Unless payments are patently excessive or unreasonable or are not genuinely director’s
remuneration the court will defer to the company’s judgement on the director’s pay.

Hydrodam Case

 To establish that someone is a de facto director, they need to plea and prove that they undertook
functions in elation to the company which could properly be discharged only by a director. IT is
not sufficient to show that he was concerned in the management of a company’s affairs or
undertook tasks in relation to his business which can be properly be performed by a manager
below board level.
 Re Hydrodam: “To establish that a defendant is a shadow director of a company it is necessary to
allege and prove:
1. Who are the directors of the company, whether de facto or de jure;
2. That the defendant directed those directors how to act in relation to the company or that he
was one of the persons who did so;
3. That those directors acted in accordance with such directions; and
4. That they were accustomed so to act.” (Millet J)
 Early cases indicated de facto and shadow director concepts were entirely distinct

RE Kaytech

 Did individuals assume status and functions of a director and openly exercised real influence in
corporate governance of the company

Vivendi Case

 States that shadow directors are subject to director’s duties

Automatic v Cuningham

 Directors are not bound to follow members’ decisions. If something is within the scope of a
directors’ powers, the shareholder cannot interfere.
 Shareholders retain reserve power to direct action through special resolutions

Barron v Potter

 A company power will revert to shareholders if the directors are unable or unwilling to exercise
powers

Alexander Ward v Samyang

 If there is no board of directors in existence, then the shareholders will have the authority of the
company’s powers.

Re Duomatic

 No need for formal resolution if all members agree

 Applied test of honesty and reasonableness, this test is objective
  “[W]here it can be shown that all shareholders who have a right to attend and vote at a general
meeting assent to some matter which a general meeting of the company could carry into effect,
that assent is as binding as a resolution in a general meeting would be.”

Cane v Jones

 Further the duomatic principle and allows for a unanimous agreement to alter articles

Re New Cedos Bowthorpe Holdings v Hills

 Cannot do something that the directors cannot do

 Cannot ratify the unratifiable breach of duty
Cycle 5: Directors Duties
Percival v Wright

 No duty to disclose information to the shareholders, duties in general are not owed to
shareholders

Peskin v Anderson

 no general duty to shareholders, affirming Percival v wright, accepted that duty to shareholders
could arise in appropriate/specific circumstances
 “…However, I am also satisfied that, in appropriate and specific circumstances, a director can be
under a fiduciary duty to a shareholder. It seems to me that as a general proposition a director’s
primary fiduciary duty is to the company. To hold that he has some sort of general fiduciary
duty to shareholders (a) would involve placing an unfair, unrealistic and uncertain burden on a
director and (b) would present him frequently with a position where his two competing duties,
namely his undoubted fiduciary duty to the company and his alleged fiduciary duty to
shareholders, would be in conflict.”

Multinational Gas Case

 The directors stand in a fiduciary relationship to the company, and they owe fiduciary duties to
the company, not the creditors…

West Mercia Safetywear Ltd v Dodd

 In a solvent company the proprietary interests of the shareholders entitle them as a general
body to be regarded as the company when questions of the duty of directors arise …. But where
a company is insolvent the interests of the creditors intrude. They become prospectively
entitled, through the mechanism of liquidation, to displace the power of the shareholders and
directors to deal with the company’s assets. It is in a practical sense their assets and not the
shareholders’ assets that, through the medium of the company, are under the management of
the directors pending liquidation, return to solvency, or the imposition of some alternative
administration
 This approach is recognized by s.172(3) of the CA 2006

Yukong Case

 [I]n my judgment [a director] does not owe a direct fiduciary duty towards an individual
creditor, nor is an individual creditor entitled to sue for breach of the fiduciary duty owed by the
director to the company
 Even when solvent, there is still a duty owed to the company and not directly to creditors. There
is no duty to individual creditors.

Re City Equitable Fire

 a director need not exhibit in the performance of his duties a greater degree of skill than may
reasonably be expected from a person of his knowledge and experience
  a director is not bound to give continuous attention to the affairs of his company. His duties are
of intermittent nature to be performed at periodical board meetings and at meetings of any
committee of the board upon which he happens to be placed. He is not bound to attend all such
meetings though he ought to attend whenever in the circumstances he is reasonably able to do
so.

Re Brazilian Rubber

 [A director] is … not bound to bring any special qualifications to his office. He may undertake
the management of a rubber company in complete ignorance of everything connected with
rubber, without incurring responsibility for the mistakes which may result from such ignorance.
Such reasonable care must … be measured by the care an ordinary man might be expected to
take in the same circumstances on his own behalf. He is clearly … not responsible for … errors of
judgement.” (Neville J)
 A director is not bound to take any definite part in the conduct of the company’s business

Howard Smith v Ampol

 Having ascertained, on a fair view, the nature of this power, and having defined as can best be
done in the light of modern conditions the, or some, limits within which it may be exercised, it is
then necessary for the court, if a particular exercise of it is challenged, to examine the
substantial purpose for which it was exercised, and to reach a conclusion whether that purpose
was proper or not.
 [W]hen a dispute arises whether directors … made a particular decision for one purpose or for
another, or whether, there being more than one purpose, one or another purpose was the
substantial or primary purpose, the court … is entitled to look at the situation objectively in
order to estimate how critical or pressing, or substantial or, per contra, insubstantial an alleged
requirement may have been. If it finds that a particular requirement, though real, was not
urgent, or critical, at the relevant time, it may have reason to doubt, or discount, the assertions
of individuals that they acted solely in order to deal with it, particularly when the action they
took was unusual or even extreme

Eclairs Groups v JKX Oil

 Directors had the power to require disclosure by shareholders of interest and agreements
between shareholders. Directors exercised power to disenfranchise shareholders and restrict
share transfer.
 Held: the power had 3 purposes, to induce disclosure, to protect other shareholders from
making uninformed decisions, punish non-compliance. However, power was used to
disenfranchise the shareholders, and this was not excercised for a proper use.

Hogg v Cramphorn Ltd

 Poison pill, share issue to prevent hostile takeover

 Held: proper purpose of power to issue shares is to raise capital, not to prevent takeover
Extrasure v Scattergood
 Transfer of assets from one company to another in group
 Held: Power was the power to deal with company's assets; proper purpose was for company's
survival and interests; her substantial purpose was to benefit other company in group so
improper purpose

Eclairs: dissenting from Briggs LJ

 Existence of proper subordinate purpose does not rescue a power excercised for an improper
substantial purpose
 Dissent, but seems to follow Howard Smith
 Look for substantial purpose and determine if it is proper
 “[W]here a fiduciary power is exercised predominantly for an improper purpose, it is not,
without more, saved from invalidity by the existence, at the same time, of a subordinate proper
purpose.” (Briggs LJ)

Re Smith and Fawcett

 “[Directors must act] bona fide in what they consider – not what a court may consider is in the
interests of the company, and not for any collateral purpose” (Lord Greene)

Regentcrest v Cohen

 Established a subjectivity test it is not about whether the action was best for the company but
whether the director believed that it was the best for the company
 “The duty imposed on directors to act bona fide in the interests of the company is a subjective
one. … The question is not whether, viewed objectively by the court, the particular act or
omission which is challenged was in fact in the interests of the company; still less is the question
whether the court, had it been in the position of the director at the relevant time, might have
acted differently. Rather the question is whether the director honestly believed that his act or
omission was in the interests of the company. The issue is as to the director’s state of mind. No
doubt, where it is clear that the act or omission … resulted in substantial detriment to the
company, the director will have a harder task persuading the court that he honestly believed it
to be in the company’s interest; but that does not detract from the subjective nature of the
test.” (Jonathan Parker J)

Charter corporations ltd v Lloyds bank

 “The proper test, I think, in the absence of actual separate consideration, must be whether an
intelligent and honest man in the position of a director of the company concerned, could, in the
whole of the existing circumstances, have reasonably believed that the transactions were for the
benefit of the company.” (Pennycuick J)

Bray v Ford

 2 related rules: the no conflict rule and the no profit rule

 No conflict means that there must not be a conflict of interest
 No profit means the director must not make a profit from the position
Regal (Hastings) v Gulliver

 Directors used knowledge and opportunity gained through position and made profit, therefore
they are liable
 It is irrelevant that
o Directors had acted in good faith
o Company could not take advantage of opportunity
o Company could have ratified actions
o New shareholders obtained windfall
 Strict application means no need to consider motive, there is a clear deterrent to self-serving
behavior.
 The rule of equity which insists on those, who by use of a fiduciary position make a profit, being
liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon
such questions or considerations as whether the profit would or should otherwise have gone to
the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the
plaintiff, or whether the he took a risk or acted as he did for the benefit of the plaintiff, or
whether the plaintiff has in fact been damaged or benefited by his action. The liability arises
from the mere fact of a profit having, in the stated circumstances, been made. The profiteer,
however honest and well-intentioned, cannot escape the risk of being called upon to account

Bhullar v Bhullar

 Directors are obliged to communicate the existence of opportunity to the company even though
knowledge of the opportunity came to directors outside of the scope of the directorship

O’Donnell v Shanahan

 It is irrelevant that the company may not have been interested in taking up an opportunity; the
director still has an obligation to inform the company.
 The company requires undivided loyalty.

Balston Ltd v Headline Filters

 Breach of s.175 depends on the director’s conduct and intentions prior to departure
 An intention by a director of a company to set up business in competition with the company
after his directorship has ceased is not a conflicting interest within the context of the rule… nor
is the taking of preliminary steps to investigate or forward that intention so long as there is no
actual competitive activity, such as, competitive tendering or actual trading while he remains a
director.

Boston Deep Sea Fishing v Ansell

 Benefit muyst be conferred by reason of being a director or doing or not doing anything as a
director
Belmont Finance Corporation LTd v Wiliams Furniture Ltd (No 2)

 “[I]f the directors of a company in breach of their fiduciary duties misapply the funds of their
company so that they come into the hands of some stranger to the trust who receives them
with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those
funds against the company ... He becomes a constructive trustee for the company of the
misapplied funds.” (Buckley LJ)

Sharma v Sharma

 It is possible to authorize a breach in advance, if this happens then there is no breach of duty
Cycle 6: Shareholder Remedies and Unfair Prejudice
Foss v Harbottle

 “The [company] is an incorporated body, and the conduct with which the defendants are
charged in this suit is an injury not to the plaintiffs exclusively; it is an injury to the whole
corporation. … In law the corporation and the aggregate members of the corporation are not
the same thing for purposes like this.” (Wigram V-C)
 Established the Foss v Harbottle Rule
 Breach of fiduciary duty by directors members not entitled to bring action
 The corporation and the aggregate members of the corporation are not the same thing for
purposes like this

Edwards v Halliwell

 The rule in Foss v Harbottle, as I understand it, comes to no more than this. First, the proper
plaintiff in an action in respect of a wrong alleged to be done to company or association of
persons is prima facie the company or the association of persons itself. Secondly, where the
alleged wrong is a transaction which might be made binding on the company or association and
on all its members by a simple majority of the members, no individual member of the company
is allowed to maintain an action in respect of that matter for the simple reason that, if a mere
majority of the members of the company or association is in favour of what has been done, then
cadit quaestio. No wrong had been done to the company or association and there is nothing in
respect of which anyone can sue. If, on the other hand, a simple majority of members of the
company or association is against what has been done, then there is no valid reason why the
company or association itself should not sue.”
 “[The rule in Foss v Harbottle] did not prevent an individual member from suing if the matter in
respect of which he was suing was one which could validly be done or sanctioned, not by a
simple majority … but only by some special majority … [T]he reason for that exception is clear,
because otherwise, if the rule were applied in its full rigour, a company which, by its directors,
had broken its own regulations by doing something without a special resolution which could
only be done validly by a special resolution could assert that it alone was the proper plaintiff in
any consequent action and the effect would be to allow a company acting in breach of its
articles to do de facto by ordinary resolution that which according to its own regulations could
only be done by special resolution.” (Jenkins LJ)
 Proper Claimant Principle
o Where a wrong is done to a company, the proper claimant is the company itself
 Majority Rule
o Where the wrong could be made binding by a simple majority of members, no action
can be brought by an individual member

Mozely v Alston

 “[In Foss v Harbottle] there existed in the company the means of rectifying what was
complained of, by a suit in the name of the corporation. And the same observation applies with
still greater force to the present case, for not only does it not appear that the Plaintiffs have not
the means of putting the corporation in motion, but the bill expressly alleges that a large
majority of the shareholders are of the same opinion with them; and, if that be so, there is
 obviously nothing to prevent the company from filing a bill in its corporate character to remedy
the evil complained of. Such a bill would be free from the objections to which I have referred as
existing in this case, for it would be a bill by a body legally authorized to represent the interests
of the shareholders generally; but to allow, under such circumstances, a bill to be filed by some
shareholders on behalf of themselves and others, would be to admit a form of pleading which
was originally introduced on the ground of necessity alone, to a case in which it is obvious that
no such necessity exists.”
 This case also provide an example of what is not a personal right in ensuring directors retire in
accordance with the articles

Prudential Assurance v Newman Industries

 A derivative action is an exception to the elementary principle that A cannot bring an action
against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C
is the proper plaintiff because C is the party injured, and therefore the person in whom the
cause of action is vested. This is the Foss v Harbottle rule when applied to corporations.
 An individual shareholder cannot bring an action in the courts to complain of an irregularity in
the conduct of the company’s internal affairs provided that the irregularity is one which can be
cured by a vote of the company in the general meeting.
 Losses in value of shares that merely reflective of company’s losses cannot be claimed in
personal claims.
o “The shareholder does not suffer any personal loss. His only “loss” is through the
company, in the diminution in the value of the net assets of the company, in which he
has ... a ... shareholding.”

Johnson v Gore Wood & Co

 Loss suffered by company that results in diminution in value of shareholding/loss of dividends is

company's loss; shareholder's loss is only reflective of that
 “[T]he shareholder’s loss, in so far as this is measured by the diminution in the value of his
shareholding or the loss of dividends, merely reflects that suffered by the company in respect of
which the company has its own cause of action. If the shareholder is allowed to recover in
respect of such loss, then either there will be double recovery at the expense of the defendant
or the shareholder will recover at the expense of the company and its creditors and other
shareholders. Neither course can be permitted.” (Lord Millett)

Giles v Rhind

 An exception to the no reflective loss principle is limited when a company’s inability to claim for
wrongdoing is caused by the wrongdoing
 “First, as it seems to me, part of that loss is not reflective at all. It is a personal loss which would
have been suffered at least in some measure even if the company had pursued its claim for
damages. Second, even in relation to that part of the claim for diminution which could be said to
be reflective of the company’s loss, since, if the company had no cause of action to recover that
loss the shareholder could bring a claim, the same should be true of a situation in which the
wrongdoer has disabled the company from pursuing that course of action
Burland v Earle

 The court will not interfere with the internal management of companies acting within their
powers and in fact has no jurisdiction to do so.
 “[A]n exception is made to the [proper claimant rule] where the persons against whom the relief
is sought themselves hold and control the majority of the shares in the company and will not
permit an action to be brought in the name of the company. In that case the courts allow the
shareholders complaining to bring an action in their own names.” (Lord Davey)

Wood v Odessa

 A case that shows an example of a personal right to receive dividends in cash

Pender v Lushington

 A case that shows an example of a personal right to have the vote recorded
 “He has a right to say, ‘Whether I vote in the majority or minority, you shall record my vote, as
that is a right of property belonging to my interest in this company, and if you refuse to record
my vote I will institute legal proceedings against you to compel you’.”

Baillie v Oriental Telephone

 A case that shows an example of a personal right to receive adequate notice of meetings

Ebrahimi v Westborne Galleries

 It was just & equitable to wind up the company, E & N joined association on basis the character
of the company would remain as it had been when a partnership; N & N thus not entitled to
remove E
 Recognized that individuals, expectations and obligations operate behind companies; that these
are not necessarily subsumed within the corporate structure
o In things like articles of associations
 Jurisdiction allowed court to subject the exercise of legal rights to equitable considerations; such
that it could be inequitable (or unjust) to insist on exercise of legal rights
o These rights would consequently be unenforceable
 Identified 3 factors that pointed to quasi-partnership companies which allows courts to have
certain powers…
o Associated based on personal relationship involving mutual confidence
o Agreement or understanding that all would participate in the business
o Restriction on transfer of members’ interest
 There are equitable obligations in this case, the removal of E as a director was within the law but
was and equitable wrong, it was an abuse of power and a breach of good faith which partners
owe to each other to exclude on of them from all participation of business upon which they
have embarked on the basis that all should participate in its management
 This case sets out the key concept of quasi-partnership companies
 Where can equitable principles be justified to be applied? (can require one or more of these)
o Association formed or continued on basis of a personal relationship invovlving mutual
confidence
o Agreement or understanding that all shareholders will participate in conduct of business
o Some restriction on transfer of members’ interest in the company
 o A quasi partnership

Re A & BC Chewing Gum

 This is a case on quasi partnerships
 This case had a breach of understanding between members

Re Yenidie Tobacco
 This is a case that is used in the case of deadlock
 All that is necessary to satisfy the court that is impossible for the partners to place their
confidence in each other which each has a right to expect, and that impossibility has not been
caused by the person seeking to take advantage of it

Loch v John Blockwood

 This case is used in the case that there is mismanagement or lack of probity and what would
happen when this is a problem.
 Lack of confidence must be grounded on conduct of the directors, not in regards to their private
life or afffairs, but in regards to the company’s business. Furthermore, the lack of confidence
must spring not from dissatisfaction at being outvoted on the business affairs or on what is
called the domestic policy of the company. On the other hand, wherever confidence is rested on
a lack of probity in the conduct of the company’s affairs then the former is justified by the latter,
and it is just and equitable that the company be wound up.

Re Unisoft

 Case where there is a problem with the jurisdiction

 Petitions under s.994 have become notorious to the judges of this court for their length,
unpredictability of management, and the enormous and appalling costs which are incurred upon
them particularly by reason of the volume of documents liable to be produced (Harman J)
 Established that there will be no cover for matters referable solely to conduct of individual’s
affairs
o The vital distinction between acts or conduct of the company and the acts or conduct of
the shareholder in his private capacity must be kepy clear. The first type of act will
found a petition under s.994, the second type of act will not. (Harman J)

Re Saul D Harrison

 Enabling the court in an appropriate case to outflank the rule in Foss v Harbottle was on of the
purposes of s.994
 Conduct must be both unfair and prejudicial and also unfairly so: conduct may be unfair without
being prejudicial or prejudicial without being fair, and it is not sufficient if the conduct satisfies
only one of those tests.
 The words unfairly prejudicial are general words and they should be applied flexibly to meet the
circumstances of the particular case (Neil LJ)
 Trivial or technical breaches do not amount to unfairness
Gross v Rackind

 Conduct of wholly owned subsidiary’s affairs could be unfairly prejudicial conduct of parent
company’s affairs
 The expression the affairs of the companys’ is one of the widest import which can include the
affairs of a subsidiary

Re Chartbridge Capital Ltd

 The expression “the company’s affairs” in subsection 1(a) is of wide ambit and plainly covers all
matters decided by the board of directors.
 Construes the term widely

O’Neill v Phillips

 The requirement that prejudice must be suffered as a member should not be too narrowly or
technically construed (Lord Hoffmann)
 The concept of fairness must be applied judicially
 “In [s. 994] Parliament has chosen fairness as the criterion by which the court must decide
whether it has jurisdiction to grant relief. It is clear … that is chose this concept to free the court
from technical considerations of legal right and to confer a wide power to do what appeared
just and equitable. But this does not mean that the court can do whatever the individual judge
happens to think fair. The concept of fairness must be applied judicially and the content which
it is given by the courts must be based upon rational principles.” (Lord Hoffmann)
 A company is an association of persons for an economic purposes, usually entered into with
legal advice and some degree of formality
 Unfairness is a breach of the terms on which it was agreed company’s affairs should be
conducted such as a breach of articles, binding agreements, etc.
 Unfairness is also present in a case where equitable consideration makes it unfair to rely on
strict legal position, a use of the frules in a manner which equity would regard as contrary to
good faith
 A member of a company will not ordinarily be entitled to complain of unfairness unless there
has been some breach of the terms on which he agreed that the affairs of the company should
be conducted, but there will be cases in which equitable considerations make it unfair for those
conducting the affairs of the company to rely upon their strict legal powers. Unfairness may
consist of a breach of the rules or in using the rules in a manner which equity would regard as
contrary to good faith.
 I do not suggest that excercising rights in breach of some promise or undertaking is the only
form of conduct which can be regarded as unfair
 Reasonable offer to purchase prevents unfairness as petitioner is no longer trapped in the
company
o What is a reasonable offer?
 Offer to purchase shares at fair value normally on pro rata basis without
minority discount
 Value to be determined by competent expert
 Both parties to have access to same info to make submissions to the expert
  Offer should normally include payment of costs of petitioner to date
 The approach to the concept of unfairness in .994 runs parallel to that which the Lordships
adopted in Ebrahimi in giving content to he concept of just and equitable as a grounds for
winding up. But the parallel drawn between the notion on just and equitable and the notion of
fairness does not mean that conduct will not be unfair unless it would have justified an order to
wind up the company.

Re Coroin Ltd

 A case in unfair and prejudicial conduct, shows what type of prejudice there can be
 Prejudice does not mean that there has to be financial loss. It may be enough to show that the
rights of the petitioning members have been infringed without should that it led to any financial
loss.
 To show unfairness, the individual had to demonstrate unfairness stemming from a breach of a
legal right conferred by the articles or the shareholder’s agreement.

Tobian Properties

 Unfairness is flexible and open-textured, but not unbounded

 Courts must act on principled basis even though the concept is to be approached flexibly. They
cannot decide whether to grant or refuse relief from unfair prejudice on the basis of palm-tree
justice
 The key phrase in s.994(1), unfairly prejudicial, comprises two elements, unfairness and
prejudice but both of these must be understood in the context of company law

Hale v Waldock

 Unfairness does not only arise out of a failure to comply with prior agreements or to fulfill prior
expectations. The relationships between shareholders are more subtle than that, and unfairness
can come out of a situation where the game has moved on so as to involve a situation not
covered by the previous arrangements and understandings. In those circumstances the conduct
of the affairs of the company can be unfairly prejudicial withing s.994 notwithstanding the
absence of the prior arrangements. (Mann J)

Re Elgindata

 Case on misue of company assets

 Short of a breach by a director of his duty of skill and care, there is prima facie no unfairness to a
shareholder in the quality of the management turning out to be poor
 There must be a serious mismanagement, not just poor quality or bad decisions

Re Macro (Ipswich) Ltd

 This is not a case where what happened was merely that quality of management turned out to
be poor, this is a case where there were specific acts of mismanagement which the respondent
failed to prevent or rectify. Moreover, several of the acts of mismanagement were repeated
over many years.

Re Blue Arrow
  Interests of outsiders in public companies mean it is less likely that a minority shareholder will
be able to rely on understandings and agreements withing the company but outside the articles

Re Baltic Real Estate Ltd

 Majority shareholders could simply have removed the wrongdoing directors, so petition
rejected

Re Legal Costs Negotiators

 Majority shareholders could prevent prejudice through voting control

 S.994 is not apt to deal with a case where the petitioner can himself readily put and end to the
unfair prejudice alleged, in truth this is a very clear case where the petitioners by reason of their
ownership of 75 percent of the shares always had the power to provide the passing of any
resolution of the company and so could bring to an end any prejudicial state of affairs in the
company and in fact did so by stopping Mr. Hately from conducting any of the company’s affairs
 Situation is not unfairly prejudicial if it can be resolved through voting control

Re Grandactual Ltd

 Courts will be unlikely to grant relief where there has been a long delay with no good reason

Grace v Biagioli

 Most common order of court is a share purchase order by the court

 This is becayse under this case it frees the petitioner and allows him to realise the investment
 Company and business are preserved
 Removes possibility of future discord between the parties

RE London School of Electronice

 Shares are usually valued as at date of order for purchase

Re Abbington Hotel

 Shares can be backdated to date petition presented, or even to the commencement of unfairly
prejudicial conduct
 The starting point for the date of valuation of shares for a buy-out order unders.996 is the date
of judgement, but the court is free to choose such date as is most appropriate and just in the
circumstances of the case. The date should be that which best remedies the unfair prejudice
held to be established

Strahan v Wilcock

 Valuation would normally reflect minority status

 Shares are generally ordered to be purchased on the basis of their valuation on a non-
discounted basis where the party against whom the order is made has acted in breach of the
obligation of good faith applicable to the parties’ relationship by analogy with partnership law,
that is to say where a “quasi partnership” relationshio has been found to exist.
Re Phoenix Office Supplies

 You can discount, even in quasi partnerships

Hawkes v Cuddy

 In many cases, the conduct of the respondent may give rise both to the jurisdiction under s.994
and to that under s.122(1)(g), but there may be cases which satisfy the requirements of one
jurisdiction but not the other. Parliament would not have used such different wording in s.994
of the CA 2006 and in s.122(1)(g) of the insolvency act 1986 if the jursdictions were intendered
to be used together.
 This case overruled Guidezone case