Company / Corporate Law (UK LLB undergraduate module)

# UK COMPANY LAW REVISION NOTES

## 1. INCORPORATION & SEPARATE LEGAL PERSONALITY
**Key Authority:** *Salomon v Salomon & Co Ltd* [1897] AC 22 (HL)
- **Separate Legal Personality:** Once incorporated under Companies Act 2006 (CA 2006), a company is a legal person distinct from its members/shareholders.
- **Consequences:** Company can own property, sue/be sued, contract in its own name. Members' liability limited to unpaid share capital (if any).
- **Corporate Groups:** Each group company is separate (*Adams v Cape Industries* [1990] Ch 433).
- **Exceptions:** Statutory exceptions (e.g., wrongful trading, fraudulent trading).

## 2. LIFTING THE CORPORATE VEIL
**Judicial Approaches:** Courts are generally reluctant but may in limited circumstances:
- **Statutory:** CA 2006 s.993 (fraudulent trading), Insolvency Act 1986 s.213-214 (fraudulent/wrongful trading).
- **Common Law:**
  - **Agency/Trust:** Where company acts as agent for members (*Smith, Stone & Knight v Birmingham Corp* [1939]).
  - **Fraud/Evasion:** Where corporate form used to evade existing legal obligations (*Gilford Motor Co v Horne* [1933]).
  - **Single Economic Unit:** Limited application; rejected in *Adams v Cape Industries*.
  - **Justice/Public Interest:** Rare; *Prest v Petrodel* [2013] UKSC 34 clarified veil-piercing only where separate personality abused as a "facade/concealment."

## 3. COMPANY CONSTITUTION & ARTICLES
**CA 2006 Framework:**
- **Memorandum:** Historical document; limited significance post-2006.
- **Articles of Association:** Company's internal rulebook (CA 2006 s.18). Model Articles apply if not specifically adopted.
- **Contractual Effect:** CA 2006 s.33 creates statutory contract between (a) company and each member, (b) members inter se.
- **Alteration:** Special resolution (75%) required (s.21). Must be *bona fide* for benefit of company as a whole (*Greenhalgh v Arderne Cinemas* [1951]).
- **Entrenched Provisions:** Possible under s.22 (require higher threshold to amend).

## 4. DIRECTORS' DUTIES
**CA 2006 ss.171-177 codifies common law/fiduciary duties:**
1. **s.171 Act within powers** (constitutional, proper purpose).
2. **s.172 Promote company success** (duty to act in good faith to benefit members as a whole; consider stakeholders).
3. **s.173 Exercise independent judgment.**
4. **s.174 Exercise reasonable care, skill, diligence** (objective/subjective test).
5. **s.175 Avoid conflicts of interest** (especially regarding property, information, opportunity).
6. **s.176 Not accept benefits from third parties.**
7. **s.177 Declare interest in proposed transaction/arrangement.**
- **Remedies:** Breach may lead to damages, restoration of property, rescission, account of profits.
- **Relief/Ratification:** s.1157 (court relief), s.239 (shareholder ratification by ordinary resolution, excluding interested director votes).

## 5. SHAREHOLDERS' RIGHTS & MEETINGS
**Decision-Making:**
- **Ordinary Resolution:** Simple majority (>50%) for routine matters.
- **Special Resolution:** 75% majority for significant changes (alter articles, reduce capital).
- **Written Resolution:** Possible for private companies (s.288).
- **General Meetings:** AGM optional for private companies (s.336). Members with 5%+ voting rights can requisition (s.303).
- **Voting Rights:** Typically one vote per share unless weighted. Proxies allowed.
- **Class Rights:** Rights attached to particular share classes (e.g., dividends, voting). Variation requires consent per s.630.

## 6. MINORITY PROTECTION & UNFAIR PREJUDICE
**Key Remedy:** CA 2006 s.994 (Unfair Prejudice)
- **Petition:** Member may petition court if company's affairs conducted in manner unfairly prejudicial to members generally or to petitioner.
- **Test:** Conduct must be both unfair and prejudicial to petitioner's interests as a member (*O'Neill v Phillips* [1999] 1 WLR 1092).
- **Examples:** Exclusion from management in quasi-partnership companies, mismanagement, improper allotments, non-payment of dividends.
- **Remedies (s.996):** Wide discretion including buy-out order, regulation of future conduct, damages.
- **Alternative:** Just and equitable winding up (Insolvency Act 1986 s.122(1)(g)) but remedy of last resort.

## 7. DERIVATIVE CLAIMS
**CA 2006 ss.260-264** (replaces common law)
- **Nature:** Action brought by member on company's behalf against wrongdoer (usually director) for loss to company.
- **Scope:** Covers negligence, default, breach of duty, breach of trust by director, former director, or third party.
- **Procedure:** Two-stage permission process:
  1. **Prima facie case** (no substantial evidence required).
  2. **Court considers** good faith, importance to company, ratification prospects, member's motives, alternative remedies.
- **Multiple Derivative Claim:** Possible for group companies (*Universal Project Management Service Ltd v Fort Gilkicker Ltd* [2013]).

## 8. SHARE CAPITAL & MAINTENANCE
**Capital Maintenance Doctrine:** Company capital fund for creditor protection.
- **Allotment of Shares:** Directors usually authorized by articles or ordinary resolution (s.549). Pre-emption rights apply (s.561) unless disapplied.
- **Reduction of Capital:** Requires special resolution and court confirmation (s.641) (private companies may use solvency statement procedure under s.642).
- **Dividends:** Only payable out of distributable profits (s.830).
- **Financial Assistance:** Prohibition for public companies (s.678) but generally permitted for private companies (s.677).
- **Issues at Premium/Discount:** Shares may be issued at premium (share premium account). Generally cannot be issued at discount (s.580).
- **Purchase of Own Shares:** Permitted if following procedure in CA 2006 Chapter 4 (must be out of distributable profits or fresh issue).

## EXAM APPLICATION TIPS
- **Spot Issues:** Identify separate personality vs. veil-lifting scenarios.
- **Structure Answers:** Use statutory frameworks (CA 2006 sections) as primary reference.
- **Apply Tests:** e.g., *O'Neill* for unfair prejudice, *Prest* for veil-lifting.
- **Consider Remedies:** Always discuss available remedies for breaches.
- **Prioritize:** Directors' duties and unfair prejudice are highly examinable.

1. **Separate Legal Personality is Absolute**: Trap: Thinking *Salomon v Salomon* means the veil can never be pierced. Reality: The principle is fundamental but not absolute. Examiners look for recognition of established exceptions: statute (e.g., s.213/214 IA 1986 fraudulent/wrongful trading), agency, single economic unit (ignored in *Adams v Cape Industries* but arguable in specific contexts), and evasion of a legal obligation or fraud (the 'concealment' vs. 'evasion' distinction from *Prest v Petrodel*). Misapplying 'piercing' to mere group structures is a classic error.

2. **Directors' Duties are Only to the Company**: Trap: Stating duties are owed solely to the company is correct, but missing the exam-critical nuance. Under s.172 CA 2006, the duty to promote company success requires consideration of stakeholder interests (employees, suppliers, community, environment) but this is a means to the end of shareholder success. It is not a freestanding duty to those stakeholders. Also, in scenarios of insolvency or near-insolvency, the focus shifts to creditors' interests (*West Mercia Safetywear v Dodd*).

3. **Unfair Prejudice (s.994) Requires Bad Faith**: Trap: Believing petitioner must prove subjective 'bad faith' by controllers. Reality: The test is objective unfairness to the interests of members. Conduct can be technically legal but still unfairly prejudicial (*Re Saul D Harrison & Sons plc*). In quasi-partnerships, exclusion from management or breach of legitimate expectations (even if not in the articles) is key (*O'Neill v Phillips*). Confusing this with the *Foss v Harbottle* rule is another pitfall.

4. **Derivative Claims are for Any Wrong to a Shareholder**: Trap: Thinking a derivative claim under Part 11 CA 2006 is available for a wrong done personally to a member. Reality: It is for a cause of action vested in the *company* (e.g., a breach of director's duty harming the company). The member sues on the company's behalf. The court's permission stage involves considering good faith, importance of the issue, and whether the act could be ratified. Mischaracterising a personal claim as derivative loses marks.

5. **Financial Assistance is Always Prohibited**: Trap: Stating the general prohibition (s.678 CA 2006) without acknowledging the critical, exam-favourite exceptions. The prohibition applies only to public companies and private companies with public company subsidiaries. For private companies, the 'whitewash' procedure (s.682-687) allows assistance subject to solvency declarations and shareholder approval. Missing this distinction is a frequent error.

6. **Articles are Just a Contract Under s.33**: Trap: Reciting s.33 CA 2006 (articles bind company and members) as creating a full contractual relationship. Reality: The 'statutory contract' is of a special nature. Rights must be in capacity as *member* (*Eley v Positive Life Assurance*). It may not bind the company to outsiders, even if they are members. Also, amendments by special resolution under s.21 are possible, subject to minority protection (e.g., *Allen v Gold Reefs* – bona fide for the benefit of the company as a whole).

7. **Capital Maintenance is Rigid**: Trap: Assuming all returns of capital to shareholders are forbidden. Reality: The rules are strict but have precise, examinable exceptions. Key traps: (a) Confusing permissible dividend distributions (from distributable profits) with unlawful capital reductions. (b) Forgetting private companies can reduce capital via a solvency statement procedure (ss.641-644 CA 2006), not just a court confirmation. (c) Overlooking that a company can purchase its own shares out of capital (private companies, via a permissible capital payment) subject to stringent procedures.

8. **Majority Rule Under *Foss v Harbottle* is Infallible**: Trap: Citing the rule (the company is the proper claimant for wrongs against it) as an absolute bar to minority suits. Reality: The exam focus is on the *exceptions*: (i) derivative claim procedure (CA 2006), (ii) personal rights (infringement of member's personal rights under articles), (iii) fraud on the minority where wrongdoers control the company, and (iv) ultra vires/illegal acts. Simply stating the rule without analysing applicable exceptions is insufficient.

9. **Shadow Directors Have All Formal Duties**: Trap: Assuming a shadow director (s.251 CA 2006) is identical to a de jure director. Reality: While subject to key duties (e.g., wrongful trading), they are not subject to *all* statutory duties and formalities. The application is nuanced and fact-specific (someone whose instructions the board are accustomed to act on). Mislabeling a strong influencer (like a major shareholder) as a shadow director without evidence of board subservience is a common overreach.

10. **Pre-incorporation Contracts Bind the Company**: Trap: Thinking a contract made by a promoter before incorporation automatically binds the company once formed. Reality: At common law, it does not (*Kelner v Baxter*). Under s.51 CA 2006, the contract is deemed made with the promoter, who is personally liable. The company can later adopt it by a *novation* (a new contract), not by ratification. Confusing adoption with ratification is a technical trap.

**INCORPORATION & SEPARATE LEGAL PERSONALITY**
- Companies Act 2006 s.16: Certificate of incorporation conclusive evidence
- Salomon v Salomon (1897): Core principle - company separate from members
- Lee v Lee's Air Farming (1961): Company can employ its shareholders
- Macaura v Northern Assurance (1925): Shareholders have no insurable interest in company property

**LIFTING THE CORPORATE VEIL**
- Statutory exceptions: Fraudulent trading (s.213 IA 1986), Wrongful trading (s.214 IA 1986)
- Common law exceptions: Agency, Fraud, Single economic unit (DHN v Tower Hamlets 1976)
- Prest v Petrodel (2013): Two principles - concealment vs evasion
- Adams v Cape Industries (1990): Veil not lifted for tort liability

**COMPANY CONSTITUTION & ARTICLES**
- s.17: Constitution comprises articles + resolutions/agreements
- s.33: Articles create statutory contract between company and members
- Hickman v Kent Romney Marsh Sheepbreeders (1915): Articles binding on company and members
- Automatic Self-Cleansing Filter v Cuninghame (1906): Directors' powers not restricted by articles unless specified

**DIRECTORS' DUTIES (ss.171-177)**
- s.171: Act within powers (constitutional + proper purpose)
- s.172: Promote company success (duty to act in good faith)
- s.173: Exercise independent judgment
- s.174: Exercise reasonable care, skill and diligence
- s.175: Avoid conflicts of interest
- s.176: Not accept benefits from third parties
- s.177: Declare interest in proposed transaction
- Regentcrest v Cohen (2001): Business judgment rule application

**SHAREHOLDERS' RIGHTS & MEETINGS**
- s.282: Ordinary resolution (simple majority)
- s.283: Special resolution (75% majority)
- s.168: Removal of directors by ordinary resolution
- Table A articles: Default provisions for meetings
- Pender v Lushington (1877): Right to vote is property right

**MINORITY PROTECTION & UNFAIR PREJUDICE**
- s.994: Unfair prejudice petition grounds
- O'Neill v Phillips (1999): Test for unfair prejudice - legitimate expectations
- Ebrahimi v Westbourne Galleries (1973): 'Just and equitable' winding up
- Re Saul D Harrison (1995): Quasi-partnership companies

**DERIVATIVE CLAIMS**
- ss.260-264: Statutory derivative claim procedure
- Foss v Harbottle (1843): Proper plaintiff rule + exceptions
- Exceptions: Fraud on minority, Ultra vires acts, Special majorities required
- Prudential Assurance v Newman Industries (1982): Refining exceptions

**SHARE CAPITAL & MAINTENANCE**
- s.830: Companies must not make distributions except from profits
- s.831: Public company distribution restrictions
- Trevor v Whitworth (1887): Capital maintenance principle
- Aveling Barford v Perion (1989): Disguised distributions
- s.641: Reduction of capital procedures

## UK Company Law Study Roadmap

### **Phase 1: Foundational Concepts (Weeks 1-2)**
**1. Incorporation & Separate Legal Personality**
*   **Core Authority:** *Salomon v Salomon & Co Ltd* [1897] AC 22 – the foundational case establishing separate legal personality.
*   **Key Principles:** Consequences of incorporation (contractual capacity, property ownership, perpetual succession, ability to sue/be sued).
*   **Exam Focus:** Applying the *Salomon* principle to factual scenarios to determine if rights/liabilities belong to the company or its members.

**2. Company Constitution & Articles**
*   **Core Framework:** Companies Act 2006 (CA 2006), ss. 17-18, 20-21, 33.
*   **Key Principles:** Memorandum as a historical document; Articles of Association as the company's internal rulebook (model articles under CA 2006); the statutory contract under s.33 CA 2006.
*   **Exam Focus:** Interpreting articles and the effect of the s.33 contract on members and, in limited circumstances, directors (*Hickman v Kent*).

---

### **Phase 2: Governance & Internal Dynamics (Weeks 3-5)**
**3. Directors' Duties**
*   **Core Framework:** Codified duties in CA 2006, ss. 171-177.
*   **Key Duties:** Act within powers (s.171); Promote company success (s.172 – ‘enlightened shareholder value’); Exercise independent judgment (s.173); Exercise reasonable care, skill and diligence (s.174); Avoid conflicts of interest (ss.175-177).
*   **Exam Focus:** Identifying breaches in problem questions, applying s.172 factors, understanding the consequences of breach (ss.178-179).

**4. Shareholders' Rights & Meetings**
*   **Core Framework:** CA 2006, Part 13 (Resolutions & Meetings).
*   **Key Principles:** Types of resolutions (ordinary, special); calling and conducting general meetings; voting rights; written resolutions.
*   **Exam Focus:** Procedural validity of meetings and resolutions, and their impact on company decisions.

---

### **Phase 3: Tensions & Remedies (Weeks 6-8)**
**5. Lifting the Corporate Veil**
*   **Core Principles:** The exceptional departure from *Salomon*.
*   **Key Categories:** Statutory (e.g., fraudulent/wrongful trading – Insolvency Act 1986; group enterprises – CA 2006 s.399); Common law (evasion of legal obligations (*Gilford Motor Co v Horne*), agency, fraud/façade (*Prest v Petrodel*)).
*   **Exam Focus:** Arguing for/against piercing the veil, distinguishing between true veil-piercing and attribution of knowledge/liability.

**6. Minority Protection & Unfair Prejudice**
*   **Core Remedy:** CA 2006, s.994 (Unfairly Prejudicial Conduct).
*   **Key Principles:** What constitutes ‘unfair prejudice’ to members’ interests (conduct must be both prejudicial and unfair – *O’Neill v Phillips*); the ‘legitimate expectations’ of quasi-partnership companies.
*   **Exam Focus:** Analysing whether majority actions (e.g., exclusion from management, non-payment of dividends) ground a s.994 petition and discussing potential remedies (s.996).

**7. Derivative Claims**
*   **Core Framework:** CA 2006, ss. 260-264 (Part 11).
*   **Key Principles:** Action brought by a member *on behalf of* the company for a wrong done to it (e.g., breach of director's duty). The two-stage permission process and criteria (good faith, prima facie case, company interest).
*   **Exam Focus:** Contrasting derivative claims with unfair prejudice petitions; advising on procedural hurdles and likelihood of obtaining permission.

---

### **Phase 4: Capital & Final Review (Weeks 9-10)**
**8. Share Capital & Maintenance**
*   **Core Framework:** CA 2006, Parts 17-18.
*   **Key Rules:** Rules on issuance of shares (pre-emption rights – ss.561-577); reduction of capital (s.641); financial assistance prohibition (repealed for private companies); dividend distributions (s.830 – profits available for distribution).
*   **Exam Focus:** Applying capital maintenance rules to corporate transactions to assess their legality.

### **Final Integration & Exam Technique (Week 11+)**
*   **Link Topics:** E.g., A breach of duty (Topic 3) may lead to a derivative claim (Topic 7) or be part of unfair prejudice (Topic 6). Articles (Topic 2) define shareholder rights (Topic 4).
*   **Problem Question Strategy:** 1) Identify the company as a separate person. 2) Apply constitutional/internal rules. 3) Identify any breaches/wrongs. 4) Advise on available remedies, discussing hurdles and likely outcomes.
*   **Essay Question Strategy:** Critically analyse doctrines (e.g., the tension between *Salomon* and veil-piercing), referencing key cases and statutory reforms.

**Primary Materials:** Companies Act 2006 (key sections); Core Cases listed above; a recommended textbook (e.g., Gower & Davies, Sealy & Worthington).

**INTRODUCTION**
- Identify key legal issues: [List specific issues from question e.g., separate personality, potential veil piercing, breach of director duties]
- State relevant statutes: Companies Act 2006 (primary), Insolvency Act 1986 (where relevant)
- Outline structure of answer

**SEPARATE LEGAL PERSONALITY & INCORPORATION**
- Establish company's separate status: Salomon v Salomon [1897] AC 22 principle
- Legal consequences: Limited liability, property ownership, contractual capacity
- Incorporation formalities: Registration with Companies House, memorandum/articles

**LIFTING THE CORPORATE VEIL**
- General rule: Veil is sacrosanct (Adams v Cape Industries [1990] Ch 433)
- Exceptions analysis:
  - Statute: s.214 IA 1986 (wrongful trading), s.993 CA 2006 (fraudulent trading)
  - Common law: Fraud/impropriety (Gilford Motor Co v Horne [1933] Ch 935), agency/group enterprise (DHN Food Distributors v Tower Hamlets [1976] 1 WLR 852)
  - Apply to facts: Is there evidence of fraud/sham/improper purpose?

**COMPANY CONSTITUTION & ARTICLES**
- Articles as contract: s.33 CA 2006 (contract between company and members)
- Entrenchment provisions: s.22 CA 2006
- Alteration: Special resolution (s.21), must be bona fide for company's benefit (Allen v Gold Reefs [1900] 1 Ch 656)
- Constitutional documents' interaction with shareholders' agreements

**DIRECTORS' DUTIES (ss.171-177 CA 2006)**
- Identify applicable duties:
  - s.171: Within powers
  - s.172: Promote company success
  - s.175: Avoid conflicts of interest
  - s.176: Not accept benefits from third parties
  - s.177: Declare interest in proposed transaction
- Standard: Objective/subjective mix (s.174 - care, skill and diligence)
- Defences: Authorization (s.175(4)-(6)), ratification (s.239)

**SHAREHOLDERS' RIGHTS & MEETINGS**
- Voting rights: Ordinary/special resolutions (ss.281-282)
- Meeting procedures: Notice periods, quorum (s.318), proxies (s.324)
- Class rights: Variation procedures (s.630), protection mechanisms
- Unanimous consent rule: Duomatic principle

**MINORITY PROTECTION & UNFAIR PREJUDICE (s.994)**
- Establish petitioner's status: Member (including personal representatives)
- Identify conduct: 'Affairs of company' broadly construed
- Unfairness test: Objective commercial standard (O'Neill v Phillips [1999] 1 WLR 1092)
- Legitimate expectations analysis
- Remedies: Order under s.996 (buy-out, regulation of affairs, etc.)

**DERIVATIVE CLAIMS (ss.260-264)**
- Distinguish from personal claims
- Procedure: Permission required (s.261)
- Test: Prima facie case (s.263(2)), consideration of good faith, importance to company, director authorization/ratification
- Reflective loss principle: Johnson v Gore Wood [2002] 2 AC 1

**SHARE CAPITAL & MAINTENANCE**
- Capital maintenance rules: Prohibition on financial assistance (ss.677-683), reduction of capital (ss.641-653)
- Dividends: Profits available for distribution (ss.829-830)
- Capital vs. revenue distinctions

**CONCLUSION**
- Summarise findings on each issue
- Apply legal principles to reach reasoned conclusion
- Suggest appropriate remedies/outcomes

**I. Introduction & Initial Analysis**
- Identify parties: Company (separate legal personality), directors (potential breach of duties), majority shareholder(s), minority shareholder(s) (potential unfair prejudice/derivative claim)
- Outline key issues: (1) Validity of company actions (incorporation/constitution); (2) Director conduct analysis; (3) Shareholder rights/mechanics; (4) Minority protection remedies
- Apply Salomon v Salomon [1897] AC 22 immediately to establish corporate separateness as starting point

**II. Incorporation & Corporate Veil Analysis**
- Check company properly incorporated (Companies Act 2006, s.7) with constitutional documents (memorandum/articles)
- Apply separate legal personality principle (Salomon) – company distinct from members/directors
- Consider whether veil-piercing justified: (a) Fraud/impropriety (Gilford Motor Co v Horne [1933]); (b) Agency/façade (Adams v Cape Industries [1990]); (c) Statutory exceptions (CA 2006 ss.213-215 on fraudulent trading)
- Conclude on separateness unless exceptional circumstances

**III. Company Constitution & Internal Governance**
- Identify relevant articles (typically Model Articles or bespoke provisions)
- Analyze director powers (art.3-5) and shareholder decision-making processes (ordinary/special resolutions)
- Check procedural compliance for meetings (notice, quorum, voting – CA 2006 ss.282-300)
- Consider effect of any shareholders' agreement alongside articles

**IV. Directors' Duties Breach Analysis**
- Apply CA 2006 ss.171-177 duties to specific facts:
  - s.171 (powers compliance) – ultra vires actions?
  - s.172 (success promotion) – did directors consider company interests? (ICR plc v Rimer [2010])
  - s.173 (independent judgment) – conflicts of interest?
  - s.175 (avoid conflicts) – disclosure/authorization procedures followed?
  - s.176 (benefits from third parties) – improper gains?
- Consider relief under s.1157 if breach honest/reasonable

**V. Shareholder Rights & Minority Protection**
- Identify prejudicial conduct affecting minority (e.g., exclusion from management, dividend policy, property transfers)
- Analyze unfair prejudice claim (CA 2006 s.994): 
  - 'Member' interest affected (O'Neill v Phillips [1999] HL)
  - Objective unfairness test (reasonable expectations)
  - Potential remedies (s.996: buy-out, regulation of affairs)
- Consider derivative claim (CA 2006 ss.260-264): 
  - Whether prima facie case (procedural permission stage)
  - Director negligence/misfeasance (Prest v Petrodel [2013])
  - Company as proper claimant

**VI. Share Capital Issues (if relevant)**
- Check capital maintenance rules (CA 2006 ss.829-853)
- Analyze any financial assistance, distributions, or capital reductions
- Consider creditor protection aspects

**VII. Conclusion & Remedy Prioritization**
- Weigh strongest claims: typically unfair prejudice (s.994) more accessible than derivative action
- Consider practical outcomes: buy-out valuation, injunction, or procedural orders
- Reiterate corporate separateness but emphasize statutory protections for minorities

You are a trainee solicitor at Sterling & Co. advising Mr Ahmed Khan, a 40% shareholder in 'EcoBuild Solutions Ltd', a company incorporated in England. The company was formed by Mr David Croft (60% shareholder and sole director) to operate his sustainable construction business. The articles are Model Articles (unamended).

FACTS:
1. Croft incorporated the company with £100,000 capital: £60,000 from him (60 ordinary shares) and £40,000 from Khan (40 ordinary shares)
2. Last month, Croft caused the company to:
   - Enter a £80,000 contract with 'Croft Developments' (his personally owned company) for office renovations at above-market rates
   - Reject a genuine offer from Khan to provide equivalent renovation services at market rates
   - Pay Croft a £20,000 'bonus' despite the company reporting losses
3. The company is now insolvent with debts exceeding assets
4. Croft refuses to call a shareholders' meeting despite Khan's formal request

QUESTIONS:
1. Analyse whether the corporate veil could be lifted in these circumstances, referring to both common law and statutory exceptions. (15 marks)

2. Discuss which directors' duties under Companies Act 2006 Croft has potentially breached, with specific reference to sections. (20 marks)

3. Advise Khan on whether he could bring:
   a) An unfair prejudice petition under s.994 (15 marks)
   b) A derivative claim under Pt 11 (10 marks)

4. Explain the capital maintenance implications of the £20,000 bonus payment given the company's insolvent position. (10 marks)

## Drill Set 1: Lifting the Corporate Veil - Identifying the Correct Grounds

**Scenario 1:** A Ltd is wholly owned by Mr. X. Mr. X uses A Ltd to purchase goods on credit, then transfers the assets at undervalue to B Ltd (also owned by Mr. X), leaving A Ltd as an empty shell unable to pay creditors. A Ltd's creditors seek to make Mr. X personally liable.

*   **Drill Question:** On which primary legal ground(s) might the court lift the veil against Mr. X? Distinguish between statutory and common law grounds.
*   **Key Authorities to Apply:**
    *   *Salomon v Salomon & Co Ltd* (foundational principle).
    *   Statutory 'fraudulent trading' under s.213 Insolvency Act 1986.
    *   Statutory 'wrongful trading' under s.214 IA 1986 (note the different requirements).
    *   Common law 'evasion of legal obligations' principle from *Gilford Motor Co Ltd v Horne* and *Jones v Lipman*.
*   **Common Pitfall:** Confusing 'fraudulent trading' (requiring intent to defraud) with 'wrongful trading' (objective test of knowing insolvency). Do not rely on vague 'justice' grounds; cite specific tests.

---

## Drill Set 2: Unfair Prejudice (s.994 CA 2006) vs. Derivative Claims

**Scenario 2:** Emma (40% shareholder) and David (60%) are directors of EcoClean Ltd. David, using his controlling vote, consistently appoints his family to lucrative consultancy roles without proper board approval, depleting company funds. Emma objects but is outvoted.

*   **Drill Question 2A:** Advise Emma on a potential s.994 claim. What must she establish regarding 'the affairs of the company' and 'unfairly prejudicial' conduct? What remedies might she seek?
*   **Key Authorities for 2A:**
    *   *O'Neill v Phillips* (the 'legitimate expectations' test, often in quasi-partnerships).
    *   *Re Saul D Harrison & Sons plc* (conduct must relate to the company's affairs).
    *   Typical remedies: buy-out order, regulation of future conduct.

*   **Drill Question 2B:** Could Emma pursue a *derivative claim* on behalf of the company against David for breach of duty? Explain the procedural hurdles under Part 11 CA 2006.
*   **Key Authorities for 2B:**
    *   The two-stage permission process (s.261 CA 2006).
    *   The test for 'prima facie case' and factors in s.263 CA 2006 (e.g., good faith, importance of the wrong).
    *   Key distinction: A derivative claim seeks a remedy *for the company* (e.g., restitution from David), while s.994 provides a personal remedy to the shareholder.

---

## Drill Set 3: Share Capital Maintenance & Lawful Distributions

**Scenario 3:** Swift Ltd has a share capital of £100,000. Its last audited accounts show net assets of £150,000, share premium account of £20,000, and profit and loss reserves of £30,000. The directors propose a dividend of £40,000.

*   **Drill Question:** Is the proposed dividend lawful? If not, what is the maximum distributable amount? Walk through the calculation step-by-step.
*   **Key Rules to Apply:**
    *   The fundamental rule: distributions can only be made out of 'profits available for the purpose' (s.830 CA 2006).
    *   The 'net assets' test: Profits available = accumulated, realised profits (not previously distributed/capitalised) - accumulated, realised losses (not previously written off).
    *   **Calculation Drill:**
        1.  Identify realised profits: P&L reserves (£30k) are presumed realised.
        2.  Identify realised losses: None stated.
        3.  Therefore, maximum distributable amount from *profits* = **£30,000**.
        4.  The share premium account is *capital* and cannot be used for distributions (*Re Duff's Settlement*).
    *   **Conclusion:** The £40k dividend is unlawful by £10k. Directors voting for an unlawful dividend may be personally liable under s.847 CA 2006.

---

## Drill Set 4: Directors' Duties - Conflicts & Substantial Property Transactions

**Scenario 4:** Chloe, a director of BuildRight Ltd, owns a vacant plot of land. BuildRight needs a new warehouse. Chloe proposes, and the board (excluding Chloe) approves, the company purchasing her land for £500,000. The transaction is not mentioned to the general meeting.

*   **Drill Question:** Identify the breaches of the Companies Act 2006. What are the consequences and how might the transaction be validated?
*   **Key Provisions to Apply:**
    *   Duty to avoid conflicts of interest (s.175 CA 2006) – likely breached unless authorised by *non-interested directors*.
    *   **Major Pitfall:** This is also a 'substantial property transaction' (s.190 CA 2006) requiring *member approval* (not just board) as the asset value (£500k) likely exceeds 10% of company asset value and is > £5,000.
    *   Consequences under s.195: The transaction is *voidable* and Chloe is liable to account for gains.
    *   Validation: Possible by shareholder resolution (s.196).
*   **Exam Tip:** Always check if a director's transaction with the company triggers *both* s.175 *and* s.190. Missing s.190 is a frequent error.

**SECTION A: PROBLEM QUESTION (40 marks)**

Fleur, Giles, and Harriet incorporate 'Floral Designs Ltd' to run a flower shop. The company's articles adopt Table A with a modification granting Fleur (managing director) power to veto board decisions. The company issues 100 £1 shares: Fleur (40), Giles (30), Harriet (30).

Fleur uses company funds to: (a) pay her personal credit card debt; (b) purchase a van exclusively for her side business delivering wedding cakes. When challenged, she claims "the company owes me for unpaid overtime." Giles discovers Fleur has been diverting corporate opportunities to her private company and calls a shareholders' meeting to remove her. Fleur uses her veto to block the resolution.

Harriet, disillusioned, wishes to sell her shares but finds no market. The company's profits decline due to Fleur's actions.

**Advise Giles and Harriet on:**
1. The legal implications of Fleur's use of company funds. Refer to relevant duties and cases. (15 marks)
2. The validity of Fleur's veto blocking her removal and alternative routes to challenge her conduct. Consider both statutory and common law avenues. (15 marks)
3. Potential remedies for Harriet's position as a minority shareholder. (10 marks)

**SECTION B: SHORT NOTES (20 marks)**

Answer **TWO** of the following:
1. Explain the capital maintenance rules regarding redemption of shares under the Companies Act 2006. (10 marks)
2. Discuss the circumstances in which courts may lift the corporate veil, referring to key authorities. (10 marks)
3. Outline the differences between ordinary and special resolutions under the Companies Act 2006. (10 marks)

────────────────────────────────────────────────────────────

[INTERMEDIATE]

QUESTION
--------
Darius and Elara are the sole shareholders and directors of 'Pinnacle Properties Ltd' (Pinnacle), a company incorporated in England to develop a luxury apartment block. To secure a £2 million development loan from Castle Bank, Darius and Elara each gave personal guarantees, pledging their family homes as security. The loan agreement stipulated that the funds were to be used 'exclusively for the Pinnacle View development project'. Pinnacle's business struggled. Darius, fearing the company would default, caused Pinnacle to transfer £200,000 of the loan funds to a separate company he wholly owned, 'Darius Retail Ltd', ostensibly for 'consultancy fees'. No genuine consultancy services were ever provided. Pinnacle subsequently went into insolvent liquidation, owing Castle Bank £1.8 million. The liquidator discovers the £200,000 transfer. Castle Bank seeks to enforce the personal guarantees against Darius and Elara. It also wishes to recover the £200,000 directly from Darius, arguing he should be held personally liable for that sum. Advise Castle Bank.

ANSWER FRAMEWORK
----------------
1. Introduction: Outline the principle of separate legal personality (Salomon v Salomon) and the exceptional circumstances where courts may 'lift the corporate veil' or impose personal liability.

2. Personal Guarantees: Analyse the liability of Darius and Elara under their personal guarantees. Consider the nature of a guarantee and the impact of Pinnacle's insolvency.

3. The £200,000 Transfer: 
   a. Potential claims against Darius for the misapplied funds, focusing on personal liability outside of veil-lifting (e.g., breach of director's duties).
   b. Analysis of whether the corporate veil can be lifted to make Darius personally liable for the company's debt related to this transfer. Discuss relevant case law on improper conduct, fraud, and evasion of existing obligations (e.g., Gilford Motor Co v Horne, Jones v Lipman, Prest v Petrodel). Distinguish between concealment and evasion.
   c. Alternative statutory claims the liquidator might have (e.g., wrongful trading, fraudulent trading under the Insolvency Act 1986, or transaction at an undervalue).

4. Conclusion: Summarise the Bank's likely avenues for recovery against Darius and Elara, indicating which arguments are strongest.

MARKING GUIDANCE
----------------
**Excellent (70+):** Comprehensive and accurate application of Salomon and the exceptions. Clear distinction between veil-lifting (Prest) and personal liability for breach of duty. Detailed discussion of relevant cases (Gilford, Jones, Prest) and statutory provisions (s.213/214 IA 1986, s.172/175 CA 2006). Practical advice on the Bank's position versus the liquidator's potential claims. 

**Good (60-69):** Solid understanding of core principles and key cases. Correctly identifies issues with the transfer and guarantees. May lack some depth in analysing the distinction between evasion and concealment or the interplay with statutory duties.

**Satisfactory (50-59):** Identifies the main issues (separate personality, guarantees, misuse of funds). Describes basic veil-lifting concepts but application may be superficial. Limited case law or statutory analysis.

**Below Standard (<50):** Inaccurate or incomplete statement of legal principles. Fails to properly address the specific facts of the transfer or conflates different legal concepts. Significant omissions.

COMMON PITFALLS
---------------
['Assuming the misuse of funds automatically justifies piercing the corporate veil for all company debts.', "Conflating a director's personal liability for breach of duty with the separate concept of lifting the veil to attribute liability for the company's actions.", 'Overlooking the personal guarantees as a straightforward contractual route to recovery against the shareholders.', "Failing to distinguish between the Bank's claims and those which might be pursued by the liquidator for the benefit of all creditors.", 'Misapplying Prest v Petrodel by not focusing on whether the transfer was an evasion of a pre-existing legal obligation or a sham.']

[INTERMEDIATE]

QUESTION
--------
Alpha Ltd is a small company that manufactures specialist components. Its sole director and shareholder is David. David has always treated the company's bank account as his own, frequently transferring funds to pay for personal expenses such as holidays and his daughter's private school fees. He has also ignored formal company procedures, failing to hold annual general meetings or maintain proper accounting records. Alpha Ltd enters into a contract with Beta Supplies Ltd for the purchase of raw materials on credit. The contract is signed by David 'for and on behalf of Alpha Ltd'. Alpha Ltd fails to pay Beta Supplies Ltd when the invoice becomes due, as the company is now insolvent. Beta Supplies Ltd wishes to pursue David personally for the debt. Which of the following arguments, grounded in established UK case law principles, provides Beta Supplies Ltd with the STRONGEST basis for seeking to lift the corporate veil and hold David personally liable?

ANSWER FRAMEWORK
----------------
A. David is the sole director and shareholder, so he is automatically liable for the company's debts.
B. The corporate veil can be lifted because David failed to follow corporate formalities, such as holding AGMs and keeping proper records.
C. The corporate veil can be lifted on the grounds that Alpha Ltd is a mere façade or sham, used by David to avoid his existing legal obligations.
D. The corporate veil can be lifted because David used the company as an agent for himself, or because the company was used as a device or façade to conceal his true liability.
E. The corporate veil can be lifted under the principle of 'wrongful trading', as David continued to trade when he knew the company was insolvent.

MARKING GUIDANCE
----------------
Correct Answer: D. This option correctly identifies the two key, and often intertwined, common law grounds for lifting the veil: the 'agency' principle (as discussed in cases like Smith, Stone & Knight Ltd v Birmingham Corporation) and the 'façade' or 'shame' principle (as established in Gilford Motor Co Ltd v Horne and Jones v Lipman). The scenario suggests David treated the company as an alter ego (agency) and potentially as a device to avoid personal liability (façade).

Incorrect Answers:
A. Incorrect. Salomon v Salomon & Co Ltd firmly establishes that a company is a separate legal entity from its members, even if it is a one-person company. Being a sole director/shareholder does not, in itself, create personal liability.
B. Incorrect. While a failure to follow corporate formalities may be evidence of treating the company as a mere façade, it is not, by itself, a standalone ground for lifting the veil. It is a relevant factor but not the core legal principle.
C. Incorrect. This option is too narrow and factually imprecise. The 'façade' principle typically applies where the corporate structure is used to avoid existing legal obligations (e.g., a covenant in restraint of trade, as in Gilford Motor Co v Horne). There is no suggestion in the facts that David incorporated Alpha Ltd to avoid a pre-existing legal duty to Beta Supplies Ltd or anyone else.
E. Incorrect. Wrongful trading is a statutory provision (s.214 Insolvency Act 1986) that can impose personal liability on directors, but it is a distinct concept from 'lifting the corporate veil'. It requires a formal insolvency process (liquidation) and proof that the director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation. The question asks for grounds to 'lift the veil', which is a common law doctrine, and the facts do not specify that the company is in liquidation.

COMMON PITFALLS
---------------
['Trap 1: Confusing separate legal personality (Salomon) with personal liability. Option A is a direct rejection of the Salomon principle and is a classic trap for students who do not understand its fundamental nature.', 'Trap 2: Misidentifying procedural failures as a direct cause of action. Option B presents a common factual scenario but elevates it to an incorrect legal principle.', "Trap 3: Over-extending the 'façade' principle. Option C uses the correct terminology but applies it to an incorrect factual premise (avoiding 'existing' obligations).", "Trap 4: Conflating statutory insolvency law with common law veil-lifting. Option E introduces a relevant but distinct area of law, which is not the 'strongest basis' on these facts for a common law veil-lifting claim."]

[INTERMEDIATE]

QUESTION
--------
In 2022, three friends—Aisha, Ben, and Chloe—decided to start a business selling artisanal coffee. They wanted to limit their personal liability, so on 1 March 2022, they incorporated 'Brewed Awakening Ltd' under the Companies Act 2006. The company's issued share capital was £100, divided into 100 ordinary shares. Aisha, Ben, and Chloe were the only shareholders and directors. The company entered into a lease for a shop unit with a landlord, signed by Aisha as 'Director, Brewed Awakening Ltd'. The company also ordered an expensive commercial coffee machine from 'BeanGrind Ltd' on credit. The order form was signed by Ben, but he forgot to write the company's name or indicate he was signing on behalf of the company; he simply signed 'Ben'. The business struggled, and by January 2023, Brewed Awakening Ltd was insolvent, owing rent to the landlord and the full price of the coffee machine to BeanGrind Ltd. The company has no assets. The landlord and BeanGrind Ltd are now seeking payment. Which of the following statements is MOST ACCURATE regarding the potential personal liability of Aisha, Ben, and Chloe?

ANSWER FRAMEWORK
----------------
A) Aisha is personally liable for the rent because she signed the lease, but Ben and Chloe are not liable for the coffee machine debt because the company is a separate legal person.
B) Ben is personally liable for the coffee machine debt because he failed to indicate he was signing on behalf of the company, but Aisha is not personally liable for the rent as she signed correctly as a director.
C) Under the principle of separate legal personality established in Salomon v Salomon & Co Ltd [1897] AC 22, none of them are personally liable for the company's debts, regardless of how the contracts were signed, as the company was properly incorporated.
D) All three may be personally liable for both debts if the court finds they traded wrongfully or fraudulently, but based purely on the facts given, Ben is personally liable for the coffee machine debt due to his signing, while Aisha and Chloe are not personally liable for the rent.

MARKING GUIDANCE
----------------
The correct answer is B. This question tests understanding of separate legal personality, the rules on agent liability when contracting for a company, and the distinction between proper and improper signing. Key points: 1) Separate legal personality (Salomon) means the company is liable for its debts, not members/directors, UNLESS an exception applies. 2) One key exception is when an agent (e.g., director) signs a contract in a way that makes them personally liable. Under common law principles (e.g., Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549) and statute (s.51(1) Companies Act 2006), an agent must make clear they are signing for the company to avoid personal liability. Ben's signature alone, without indicating the company or his representative capacity, likely makes him personally liable (see Badgerhill Properties Ltd v Cottrell (1991) BCC 463). Aisha signed correctly, indicating her capacity and the company, so she is not personally liable. 3) No evidence of wrongful or fraudulent trading is presented, so personal liability on that basis cannot be assumed. 4) Chloe, who did not sign either contract, has no personal liability arising from these facts. Therefore, B is the most accurate. A is incorrect because Aisha signed correctly. C is incorrect because it ignores the exception for agent signing. D is partially correct but includes unnecessary speculation about wrongful/fraudulent trading which is not supported by the facts.

COMMON PITFALLS
---------------
['Trap 1: Over-reliance on Salomon without considering exceptions, leading to choice C.', 'Trap 2: Assuming that because Aisha signed the lease, she is automatically liable, ignoring the proper indication of capacity, leading to choice A.', 'Trap 3: Conflating potential liability for wrongful trading (which requires specific findings) with the clear-cut contractual liability issue, making D seem plausible but less accurate than B.']

[INTERMEDIATE]

QUESTION
--------
Alice and Bob are the sole shareholders and directors of 'Widgets Ltd', a private company limited by shares. The company's articles of association are the Model Articles for private companies limited by shares. The company was incorporated five years ago. Alice holds 60% of the shares and Bob holds 40%. The relationship between Alice and Bob has deteriorated. Alice wishes to amend the articles to include a new clause stating: 'Any shareholder wishing to transfer their shares must first offer them to the other shareholder at a price to be determined by the company's auditors.' Bob objects to this change. Alice proposes to pass the amendment by an ordinary resolution at a general meeting, relying on her majority shareholding.

Advise Bob on:
1. Whether Alice can validly amend the articles as proposed.
2. What grounds Bob might have to challenge the amendment if it is passed.
3. Any alternative courses of action available to Bob to protect his position.

ANSWER FRAMEWORK
----------------
1. Validity of the Proposed Amendment:
   - Legal basis for amending articles: [Cite relevant statutory provision].
   - Required majority: [Specify].
   - Analysis of Alice's proposed method: [Apply law to facts].
   - Conclusion on validity: [State].

2. Grounds for Challenging the Amendment if Passed:
   - Statutory restriction: [Cite relevant provision and explain its purpose].
   - The 'bona fide for the benefit of the company as a whole' test: [Explain the test from leading case].
   - Application to the proposed clause: [Analyse whether the clause is for a 'proper purpose' and benefits the company, considering Alice's majority power and Bob's minority position].
   - Potential for 'unfair prejudice' under [Cite relevant statutory provision]: [Briefly outline how the amendment might form grounds for a petition].

3. Alternative Courses of Action for Bob:
   - Seeking a shareholder agreement: [Explain purpose and enforceability].
   - Utilising the company's existing articles: [Mention any relevant Model Article on share transfers].
   - Derivative claim?: [Briefly consider if applicable].
   - Exit mechanisms: [Mention possible routes such as a buy-out or unfair prejudice petition].

Overall conclusion: [Summarise key advice to Bob].

MARKING GUIDANCE
----------------
**High Marks (70-100):** Correctly identifies s.21 of the Companies Act 2006 as the power to amend by special resolution. Clearly explains that an ordinary resolution is insufficient. Comprehensively discusses grounds for challenge under s.22(1) (not infringing other agreements) and the common law 'bona fide for the benefit of the company' test from *Allen v Gold Reefs of West Africa Ltd* [1900] and *Greenhalgh v Arderne Cinemas Ltd* [1951]. Applies test to facts, analysing potential for majority oppression and lack of proper purpose. Identifies s.994 as a potential remedy for unfair prejudice. Suggests practical alternatives like a shareholder agreement or invoking Model Article 26(5) for a transfer offer. Structure is logical, and law is accurately applied.

**Medium Marks (40-69):** Identifies the need for a special resolution but may not cite s.21. Mentions the 'bona fide' test but application to facts is superficial. May not mention s.22 or s.994. Suggests some alternatives but without full legal basis. Answer may lack depth in analysis or miss some key points.

**Low Marks (0-39):** Fails to identify the correct procedure for amending articles. Little or no reference to relevant case law or statutes. Advice is generic, not tailored to the problem. Significant legal inaccuracies present.

COMMON PITFALLS
---------------
['Assuming an ordinary resolution is sufficient to amend articles.', 'Focusing only on the procedural validity without considering substantive challenges.', "Confusing the 'bona fide for the benefit of the company' test with subjective good faith of the majority.", 'Overlooking the interaction between the articles and any potential shareholder agreement (though none is mentioned).', 'Suggesting a derivative claim where it is not appropriate (this is a shareholder personal rights issue).']