UK: England and Wales: relieving directors from liability in respect of unlawfully paid dividends

In HMRC Commissioners v Holland (Ch.D., Deputy Judge Cawson QC, 24 June 2008) the judge had before him applications under Section 212 of the Insolvency Act (1986) relating to 42 separate companies. One of the questions considered was whether a director could be relieved from liability under Section 727 of the Companies Act (1985) in respect of the payment of unlawful dividends. In this regard, Deputy Judge Cawson QC observed:

"The headnote to Re Loquitur [Ltd., IRC v Richmond [2005] 2 BCLC 442] suggests that the case decides that there is no jurisdiction to grant relief under Section 727 CA 1985 where, as a result of directors failing to exercise proper skill and care a dividend is paid that renders the company insolvent or potentially insolvent. However, I consider  that this reads too much into Etherton J's judgment ... Whilst the Court will, necessarily, be most reluctant to grant relief under Section 727 when an officer/shareholder has benefited at the expense of the creditors by reason of the payment of the dividend, I consider that the Court does retain a discretion to relieve at least when, as in the present case, the director has not directly benefited from the payment of the dividend" (para. [224])

Notes: 

[1] The decision is not yet available on BAILII but a copy of the transcript is available on the Lawtel subscription service (the Lawtel staff have not yet prepared a summary). Update (29 Sept 2008): the decision is now on BAILII - click here. 

[2] The provision in Section 727 of the Companies Act (1985) permitting the court to grant relief is found in Section 1157 of the Companies Act (2006), which comes into force on 1 October 2008.

UK: England and Wales: unfair prejudice and directors' fiduciary duties

Interim post: Allegations concerning breaches of directors' fiduciary duties are often considered in the context of the unfair prejudice remedy (Section 994 of the Companies Act (2006), formerly Section 459 of the Companies Act (1985)). The recent High Court decision O'Donnell v Shanahan [2008] EWHC 1973 (Ch) provides a good example but the case is of particular interest because of the discussion of fiduciary duties. For example, the trial judge observes (at para. [212]):

Whilst the authorities make clear that, if a breach of the no conflict rule (and also the no-profit rule) is made out, it does not matter if the company (or trust or partnership) could not of itself have proceeded with the transaction, it does appear to me permissible to take into account when determining the scope of the directors' duties and in deciding whether 'there is a real sensible possibility of conflict' the inherent likelihood in fact of the company extending its existing scope of business into areas of business which might give rise to a conflict".

Notes:

[1] The judgment is not yet available on BAILII although it is available on Lawtel (for subscribers). The trial judge relied heavily upon the first instance decision Wilkinson v West Cost Capital & Ors [2005] EWHC 3009 (Ch). Update (28 August 2008): the decision is now available on BAILII - click here.

[2] The Companies Act (2006) has codified directors' fiduciary duties: see Part 10, Chapter 2 (and remember that the provisions within this Part have different implementation dates).  The O'Donnell case was concerned with the common law duties on which these codified duties are based. 

UK: England and Wales: members of the company?

In Southall Court v Buy your freehold Ltd & Ors [2008] EWLands LRX_124_2007 (available in PDF here), the England and Wales Land Tribunal considered a company law question: whether individuals had become members of a company in accordance with Section 22(2) of the Companies Act (1985). Section 22 - titled "definition of a member" - provides:

(1) The subscribers of a company’s memorandum are deemed to have agreed to become members of the company, and on its registration shall be entered as such in its register of members.

(2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company".

The individuals in question had agreed to become members but their names had not been entered in the register of members because no such register existed. The Tribunal held that they had not become members of the company and with reference to several cases - Nicol’s case (1885) 29 Ch D 421, Re a Company [1986] BCLC 391 and National Westminster Bank v IRC [1995] 1AC 119 at 127B - stated that the requirements of Section 22(2) are cumulative. As a result, a claim notice under Section 79(5) of the Commonhold and Leasehold Reform Act (2002) was invalid.

Note: The equivalent provision of the Companies Act (2006) - Section 112 - is due to come into force on October 1, 2009.

UK: Scotland: unfair prejudice, implied terms and the affairs of the company

An interesting judgment was handed down yesterday by Lord Glennie in Scotland's Court of Session (Outer House). The case - Gowanbrae Properties Ltd., a petition of [2008] CSOH 106 - concerned a petition presented under Section 994 of the Companies Act (2006) (the unfair prejudice remedy, formerly Section 459 of the Companies Act (1985)). The case deserves attention because of Lord Glennie's comments on the width of the remedy and also because it provides a good illustration of the difficulties associated with determining whether prejudice has been suffered by a shareholder qua shareholder.

The petitioner held redeemable preference shares in the company. At the time that the preference shares were created, the company's articles were amended to provide for the redemption of the preference shares on a specified date: the day on which a certificate of practical completion was issued in respect of the development of a property owned by the company. The company's board decided not to proceed with the development of the property. The petitioner claimed that this prevented the redeeming of its shares and that this amounted to the conduct of the company's affairs in a manner unfairly prejudicial to its interests.

In order to bring their claim within Section 994, the petitioner argued that the directors' decision ended the basis on which the parties had entered into association; it was thus unfair, the petitioner argued, for it to be bound to continue as a shareholder in the company. Lord Glennie rejected this argument and the argument that a term should be implied requiring the company to achieve practical completion. His Lordship dismissed the petition and in the course of his judgment observed (at para. [20]):

If there is no obligation on the Company in terms of the implied term contended for by the petitioner, it must follow that the Company is free to make commercial decisions in its own interests. The directors owe a fiduciary duty to the Company and complaints can be made against them if, in breach of that duty, they have regard to extraneous matters, such as a desire to benefit some other company. The court will not lightly infer from surrounding circumstances the existence of an understanding to which the Company should be held in equity and which would prevent it from making decisions in its best interests..."

Lord Glennie also made the following interesting observations with regard to the petitioner's claim and the court's jurisdiction under Section 994 (at para. [22]):

The essence of that jurisdiction [Section 994] is that the affairs of the company have been conducted in a manner which is unfairly prejudicial to the interests of the petitioner as a member of the company. The petitioner's claim, as was stressed repeatedly in argument, is based on the fact that it had an accrued right to payment ... It seems to me to be arguable that the prejudice which the petitioner has suffered, if it be prejudice, is as a seller of shares rather than as a member of the company. In response to this argument, I was referred on behalf of the petitioner to the case of Gamlestaden Fastigheter AB v Baltic Partners Limited [2007] 4 All ER 164. In that case a shareholder claimed under the Jersey equivalent of section 459 on the basis that he was a creditor, and would not have advanced sums to the company but for having been a shareholder. This, it was argued, illustrated the width of the jurisdiction. Those facts are, of course, the reverse of the present circumstances ..."

Note: For an earlier decision of Lord Glennie considering Section 994, see: West Coast Capital (Lios) Ltd. [2008] CSOH 72.

UK: Companies Act (2006) implementation - BERR update

Yesterday BERR published an update on its Companies Act (2006) website concerning (a) statutory instruments with a 1 October 2008 commencement date, (b) the restoration to the register of companies dissolved prior to 1969, (c) the amendment of Tables A to F of the Companies Act (1985), (d) the draft Overseas Companies Regulations and (e) accounts and reports guidance.

For further information see: 

BERR update | Regulations made or before Parliament | Application of the Companies Act (2006) to Limited Liability Partnerships | Frequently Asked Questions | Companies Act (2006) |

UK: Companies Act (2006) - final Commencement Order published

The Department for Business, Enterprise and Regulatory Reform (BERR) has today published in draft form the Companies Act 2006 (Commencement No. 8, Transitional Provisions and Savings) Order 2008. This is the eighth (and final) Companies Act (2006) Commencement Order, the purpose of which is to bring into force on 1 October 2009 the remaining provisions of the 2006 Act. Click here to view the draft Order and associated consultative document. The latter contains a summary of the provisions being brought into force on 1 October 2009 and an annex identifying those provisions of the Companies Act (1985), Companies Act (1989) and Companies (Audit, Investigations and Community Enterprise) Act (2004) which will remain in force after 1 October 2009.

England and Wales: the auditor's role and financial assistance

Section 151 of the Companies Act (1985) makes it is unlawful for a company to provide financial assistance for the purchase of its own shares.  Private companies can, however, provide financial assistance by complying with the so-called "whitewash" procedure.  This requires directors to make a solvency declaration (or statement) in accordance with Section 156. Atttached to this must be a report by the company's auditors stating that they have enquired into the company's affairs and that they are not aware of anything to indicate that the directors' opinion is unreasonable in all the circumstances.

The nature of the auditor's role in respect of this report has recently been considered in M&S Tarpaulins Ltd. v Green (Ch.D., Manchester, 2 May) (not yet available on BAILII). The trial judge: (a) held an auditor negligent in the preparation of the report (the auditor had failed, inter alia, to analyse the company's cash flow position) and (b) rejected the claim that the questions to be asked and the techniques to be used in preparing the report would vary depending on the size of the transaction.

The decision is, however, of wider interest because of the endorsement given to the Auditor's Code within the ICAEW's Audit Quality document and the way in which the Code was used by the trial judge to consider the auditor's role and responsibilities. The trial judge cited several Code provisions including:

Rigour

Auditors approach their work with thoroughness and with an attitude of professional scepticism. They assess critically the information and explanations obtained in the course of their work and such additional evidence as they consider necessary for the purposes of their audit

NB: Change is afoot: Part 18 of the Companies Act (2006) introduces a new regime, effective from 1 October 2008, under which it will no longer be unlawful for private companies to provide financial assistance. For further information, see here.

UK: the application of the Companies Act (2006) to limited liability partnerships

The Government has published its response to the consultation on the application of the Companies Act (2006) to limited liability partnerships (LLPs).  The Government proposes to apply to LLPs  those provisions of the 2006 Act which correspond to those provisions in the Companies Act (1985) that were applied to LLPs, with modifications where needed.  More detailed proposals are contained in the Government's response, including one for two sets of regulations governing the form and content of LLP accounts (one for small LLPs and another for medium and large LLPs).

UK: Section 644, Companies Act (2006): commencement date brought forward

The Department for Business, Enterprise and Regulatory Reform (BERR) has announced that Section 644 of the Companies Act (2006) will now come into force on 1 October 2008 and not 1 October 2009 as previously stated. According to BERR:

"Until 2 May 2008 the publicly stated position as regards the commencement of section 644 was that it would commence in October 2009, and that between October 2008 and October 2009 matters relating to the registration of documents at Companies House would be dealt with by amendments to section 138 of the Companies Act 1985, amendments that would have simply enabled suitable changes to be made to existing forms. This approach was agreed to provide sufficient time for Companies House to implement all necessary processes and procedures to ensure the proper operation of the solvency statement route for reducing share capital. Companies House, however, is confident that it can now have in place all necessary processes and procedures to ensure the proper operation of the solvency statement route by October 2008. That being the case there is now no barrier to commencing section 644 of the 2006 Act in October 2008, and that is what we now propose to do".

For further information see here.

UK: NAPF: Company articles and arbitration clauses

The UK's National Association of Pension Funds (NAPF) has updated Section D of its Corporate Governance Policy and Voting Guidelines 2007. Section D now includes a new section - D.1.6 - dealing with arbitration clauses and which reads as follows:
----------
D.1.6: Dispute Resolution
The introduction or maintenance of a provision in the Company's Articles of Association which prescribes arbitration as the sole mode for settlement of all or a significant class of disputes between shareholders (whether acting in their own right or in the name of the Company, as applicable) and any one or more of the Company, its directors, executive management, or its professional advisors, should be viewed in the first instance as a material reduction in shareholder rights.
Voting
Investors will normally wish to oppose any such provision in the absence of a clear demonstration by the Board that the inherent detriment of a reduction in shareholders rights represented by such provision is outweighed by the benefit the provision brings in the light of specific and extenuating circumstances to which the Company is subject.
----------

It is worth pointing out that even where such clauses are present in a company's articles of association, the right to petition under Section 994 of the Companies Act (2006) cannot be removed through contract. This point was made in Exeter City AFC Ltd v Football Conference Ltd [2004] EWHC 831 (Ch), [2004] 1 W.L.R. 2910, with regard to Section 459 of the Companies Act (1985) (the predecessor of Section 994). Such petitions are, however, unusual in public companies.

England and Wales: The phoenix syndrome, director's liability and S 727 of the Companies Act (1985)

Judgment in First Independent Factors & Finance Ltd v Mountford [2008] EWHC 835 (Ch) was given today. The trial judge, Lewison J., was required to consider a number of issues concerning Sections 216 and 217 of the Insolvency Act (1986). The main purpose of these sections is to deal with what has become known as the "phoenix syndrome": the continuation of a company's business, through a new company, where the original company has gone into insolvent liquidation. Section 216 prohibits the directors of the insolvent company from re-using the insolvent company's name (or a similar name) as part of the new venture. Contravention of Section 216 can result in the director's personal liability for the debts of the new company.

With regard to Sections 216 and 217, Lewison J. made the following points:

(a) Whilst the "phoenix syndrome" is the main target, the words of Sections 216 and 217 include situations that cannot be described as falling within this description. The operation of Sections 216 and 217 should not be confined to cases of "phoenix syndrome". [Ad Valorem Factors Ltd v Ricketts [2004] 1 All ER 894 was cited in support].

(b) When deciding whether a name suggests an association with another company, the person through whose eyes this should be considered is someone who might deal with the company or business. This person is closer to Laddie J's formulation of a "reasonable person in the relevant commercial field" (in HM Revenue & Customs v Walsh [2006] BCC 431) than Simon Brown LJ's reference to "members of the public" (in Ad Valorem Factors).

(c) "Association" can be based on ownership (e.g., between members of the same group of companies) or assets (e.g., where a successor company has the goodwill of the liquidated company).

(d) The defence available under rule 4.230 of the Insolvency Rules (1986) applies where a company was previously trading. Rule 4.230 referred to "company" and this could not be interpreted as "business".

(e) The court does not have the power under Section 727 of the Companies Act (1985) to relieve a director against liability imposed by Sections 216 and 217.

[Section 727 of the 1985 Act has been replaced by Section 1157 of the Companies Act (2006), the latter coming into force on 1 October 2008].

England and Wales: "Accounts and records"

In Gallaher International Ltd v TLAIS Enterprises Ltd [2008] EWHC 804 (Comm), various allegations of breach of contract were made, including one party's failure to keep "full, proper and accurate accounts and records". In considering this alleged breach, the trial judge explored the meaning of "accounts and records" and observed (at para. [661]):

"Accounts and the records from which accounts are prepared are recognisably distinct things. That is so as a matter of ordinary language. The distinction also appears in the English Companies Act 1985, which by section 221 requires every company to keep 'accounting records which are sufficient to … enable the directors to ensure that any balance sheet and profit and account' prepared under the relevant Part complies with the requirements of the Act. It also appears in the Cypriot Companies Law, section 141(1) of which requires the directors to ensure that 'proper books of account are kept that are deemed necessary for financial accounts' in accordance with the Law".

[Under the Companies Act (2006), Section 386 requires every company to keep "adequate accounting records"].

England and Wales: The director's right to inspect the company's books

In Oxford Legal Group Ltd v Sibbasbridge Services Plc and Another [2008] EWCA Civ 387, [2008] WLR (D) 121, the Court of Appeal considered the operation of the director's common law and statutory right to inspect the company's books. A unanimous court upheld the trial judge's finding - at [2007] EWHC 2265 (Ch) - that the court would decline to uphold this right where the director's purpose was improper or where he intended to injure the company. Hughes LJ noted (at para. [49]):

"Inspection may well not be ordered if a clear prima facie case is raised that the information sought will not be used qua director and especially if to the detriment of the company; one of many possible examples is where inspection is in effect sought for the benefit of a competitor"

[The decision was concerned with Section 222 of the Companies Act (1985); under the Companies Act (2006), Section 388(1) provides that a company's accounting records "must at all times be open to inspection by the company's officers"].

[Similar provisions exist in Australia: see the discussion in Boulos v Carter; Re Tarbs World Tv Australia Pty Ltd [2005] NSWSC 891].

UK: the Companies Act (2006) final implementation

In March 1998 the Department for Trade and Industry published Modern Company Law for a Competitive Economy, the consultation paper which launched the reform of company law which culminated today in the final implementation of the Companies Act (2006). 

Whilst much of the 2006 Act has already been implemented, the provisions coming into force today include, inter alia, those concerning company formation, capacity and name; the company's constitution; company members and share capital; the annual return and company charges. For a general overview, see the implementation timetable published by the Department for Business, Innovation and Skills. Specific guidance has recently been published by DBIS concerning the changes to constitutional documents and the model articles. Further information is also available in the FAQ section of the DBIS website. 

Reflecting the final implementation of the 2006 Act, a revised edition of the Takeover Code code comes force today. Changes have also been made to the FSA Handbook. Certain provisions of earlier Acts - including the Companies Act (1985) and Companies Act (1989) - remain in force: see here for an overview.

England and Wales: Unfair prejudice: deadlock and the company's affairs

S. 994 of the Companies Act (2006) – formerly S. 459 of the 1985 Act – has been considered in Hawkes v Cuddy [2007] EWHC 2999 (Ch). The trial judge held that there was no absolute rule that the affairs of one company could not constitute the affairs of another for the purposes of S. 994. His Lordship also accepted that relief could be granted under S. 994 where there is a breakdown in trust and confidence coupled with deadlock, the result of which is that the company cannot be run as initially contemplated.