WORKSHEET FOUR

CORPORATE FINANCE

Per Goldson:
(1) Introduction
There is little that is constant in this world. What is brought into existence may soon perish or it
may flourish. This is certainly true of individual business enterprises. Some fail and disappear
almost as soon as they come into existence; some lead a successful life yielding without
interruption, a constant and liberal profit to their owners. Some “suddenly fail as if the gems of
decay had been quietly developing over a long period of time.” There is no single explanation
which lays bare the causes of underlying failure or success or which accounts for the profitable
expansion in one case and failure in another. Nevertheless, the problem is one of the most
important which the business executive and the legal practitioner are forced to face. Whilst we
are primarily concerned with objective concerns let us not forget that a business does not
expand itself. It expands as a result of the motives, passions and hopes of the men, and women
who operate it.

Methods of Raising finance:

● Equity and debt financing, venture capital.

● Sophisticated financial instruments: swaps, derivatives etc.

KEY TO NOTE FOR EXAMS

Nature of a share " 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
interest in accordance with [Section14] of the Companies Act 1985. [Section 20. 1948
Act].” Falwell J. in Re Borlands Trustees

JCA Section 2 “Share” means a share in the share capital of a company, and includes stock
except where a distinction between stock and shares is expressed or implied.

JCA Section 76 “The shares or other interest of any member in a company shall be personal
estate, transferable in a manner provided by the articles of the company, and shall not be of the
nature of real estate.”

2) Principal Rights and Duties of Shareholders

" Right to dividends, vote, share in capital on a winding up, receive notice of meetings, receive
copy of balance sheet, inspect directors service agreements, duty to pay anything due on
share.”
3) The Relevance of the Corporate Constitution: Contractual Effect – Old Law

i) The Shareholders inter se

Wood Odessa Waterworks Co. - Waterworks Co. (1889) 42 Ch. D 636.

Facts: The accounts of a company showed an excess of receipts over expenditure to a large
amount which was said to be available for payment or a dividend, but this profit had been
applied in extending the company’s works, being purposes for which the capital and not the
revenue of the company was applicable. An ordinary general meeting called to receive a report
of the directors, ‘to declare a dividend and to transact the ordinary business of the company,’
confirmed certain resolutions passed by the board of directors, the effect of which was to
authorise the raising of further capital, and the payment of the dividends already earned, not in
cash, but by means of the issue to the shareholders entitled to the dividends of debentures
charged on the company’s property to the amount of the dividends. The articles of association
did not authorise the payment of dividends in this manner. On motion by a dissentient
shareholder for an injunction to restrain the company from paying the dividends by means or
debentures

Held: The articles constitute not merely a contract between the shareholders and the
company, but between each individual shareholder and every other, and as by these
articles the payment of dividends should be in cash, and no steps had been taken under s
50 of 1862 Act (repealed) to alter the articles so as to enable the payment to be made in the
manner proposed, it was beyond the power of the majority of the shareholders present at a
general meeting to bind the minority to accept payment of their dividends otherwise than in
cash.

Concept: Where the articles of a company indicate a method of payment and there is a failure to
comply with them, even where the majority shareholders believe that they can effectively
overrule, it will be ignored because the articles aren’t only a contract between the shareholders
and the company but also between the shareholders and each other, thereby giving all
shareholders the opportunity to enforce the contract against their fellow shareholders.

“I am of opinion that such a proceeding was illegal, and not au arrangement as to which the
majority could bind the minority. … I think that under a direction to apportion, appropriate, and
pay the net revenues amongst all the shareholders rateably, the offering to the shareholders in
lieu of the dividend shares which some shareholders will take and others will not take, is entirely
beyond the power of the company; and that any one who declines to accept them may say:
'This is not a payment within the meaning of the Act; you are not proposing to pay anybody; you
are, indeed, proposing to give a thing that may be sold in the market, but you are not proposing
to give that which we are bound to take, you give us an option to take it, to some of us it may be
beneficial to accept the option, to others it may not be so; the offering such an option is not a
payment of he apportioned share of net profits, and is beyond your power - we decline to accept
it, and we ask the Court to interfere to prevent its being offered to others.'" - Stirling J
ii) Company and Its Members
Hickman v. Kent or Romney Marshal Sheep-Breeders' Association [1915] 1 Ch.881.

Facts: The association was a registered limited company. the articles in effect required that
members who were disgruntled, had to go to arbitration, rather than going directly to the courts.
One of the members who was disgruntled, went to the court to see whether or not he was
bound to first go to arbitration. The court was asked whether the articles of association created
rights between the shareholders and the company, or simply between the shareholders inter se
in respect of their rights as shareholders. The statutory provision was seen as creating the latter,
but not necessarily the former.

Held: A member of the association of the company in question, was not entitled to start court
proceedings against the company, without first submitting the dispute to arbitration. The
significance of this decision was that the company could enforce articles of association against
the member. Thus, articles of association is a contract between the company and the
members and equally this is a contract between the members and the company.

iii) The Company and Outsiders

Eley v. The Positive Government Security Life Assurance Co. Ltd. [1876] 1 ExD.88
Facts: Mr. E and the company came into an agreement that he would have been a solicitor (it
was also stated in the articles which he drafted; Art. 118) and he could not be removed. When
the company had become incorporated he had become a shareholder and they started to use
other solicitors. Mr. E sued for breach.

Held: Court of Appeal held articles did not create contract between company and Mr E. Article is
a covenant between parties that they will employ the plaintiff, but the plaintiff is not party to it.
There was no infringement. Eley had not been employed as a member and the termination of
work as a solicitor did not affect Eley’s status as a member of the company.
“The matter has been put in another way. It is said, this, though not an agreement in itself, is at
all events a statement of what had been agreed upon; it must have been intended to be brought
to the plaintiff’s knowledge, he has accepted and acted upon it, and therefore it is evidence of
another agreement on which he can rely. Now it may be considered that Art. 118 would have
warranted the directors in entering into an agreement with the plaintiff by which they should
contract to employ the plaintiff; but I ask, was such a contract ever made? A joint stock
company may act under their seal, or by the signature of their directors, which may have equal
effect as their seal, or possibly by a resolution of the board. Nothing of the kind exists here; and
if the article is not an agreement on which the plaintiff can rely, there is nothing in the case
before us but the fact of his employment, and that would entitle him to remuneration only for
work he has done. This seems to us to dispose of the whole of the case; and I think that,
irrespective of any question on the Statute of Frauds , the judgment of the Court below must be
affirmed.”

Quin & Axtens v. Salmon [1909] AC 442 HL.

Facts: William Raymond Axtens and Joseph Salmon were the majority shareholders of Quin
and Axtens Ltd. Axten and Salmon were also managing directors of the company. There was a
provision in the articles of association that either of ‘the managing directors, the said William
Raymond Axtens and Joseph Salmon’ could veto any board decision on a wide range of
matters. Salmon did issue such a veto but the other directors tried to approve the decision by
ordinary resolution.

Salmon claimed, as a member of the company, an injunction restraining it and the other
directors from acting on the decision.

Held: The Court of Appeal granted the injunction: the company was trying to bypass rules on
decision-making contained in its constitution without following the procedure for amending the
constitution. Accordingly, it was argued to have meant an attempt to alter the terms of the
contract between the parties by a simple resolution instead of special resolution (Farwell LJ).
The court would prevent the company acting on a decision taken unconstitutionally. Indirectly,
Salmon enforced his outsider right as a managing director to veto certain board decision by
suing as a member for the enforcement of the relevant articles.

The case was further appealed to the House of Lords which sought to affirm the decision
and stated that the resolutions of the company were inconsistent with the provisions of
the articles and the company ought to be restrained from acting upon them.

Read v. Astoria Garage (Streatham) Ltd. [1952] Ch.637.

Hickman v. Kent Romney Marshall (supra.)
Cumbrian Newspapers Group Ltd. v. Cumberland & Westmorland Herald Newspaper &
Printing Co. Ltd. [1987] Ch.1 (See Judgment of Scott J.).
Soden v. British and Commonwealth Holdings Plc. [1996] 3 All ER 951.HL

SLIDES START HERE

The Corporate Capacity and the Abolition of the Ultra Vires Doctrine
(4) The Relevance of the Corporate Constitution: New Law

a) Articles of Incorporation:
JCA Section 4 – “A company has the capacity, and subject to rights, powers and privileges of an
individual”

JCA Section 5 – “A company shall not carry on any business or exercise any power that is
restricted by its articles from carrying on or exercising, nor shall a company exercise any of its
powers in a manner contrary to its articles.”

(cf. BCA Sections 4-7)

JCA Section 19 – “Subject to the provisions of this Act, the articles shall, when registered, bind
the company and the members thereof to the same extent as if they respectively had been
signed and sealed by each member, and contained covenants on the part of each member to
observe all the provisions of the articles.”

b) Corporate Capacity and the Abolition of the Ultra Vires Doctrine.

JCA Sections 4 - 7
BCA Sections 17-25.

c) Alteration - Fundamental Company Change.

N.B: - Special resolution must be passed.
JCA Section 10
“Subject to this Act, a company may by special resolution alter or add to its articles.”
BCA Sections 197-205
By-Laws
These are regulatory and non-contractual.
See: BCA S5(2) (Dominica s.17 (3), St. Lucia S. 18, Guyana S. 21

(i) Interpretation
Guinness v. Land Corporation of Ireland Ltd (1882) 22 Ch. D. 349.

Facts:

The objects of the company as stated in the memorandum were land cultivation. The capital
clause of the memorandum stated that the capital was divided into Class A shares and Class B
shares. The articles of association provided that, if necessary, capital from the Class B shares
should be applied in the payment of a 5% dividend on the Class A shares. One of the Class B
shareholders applied to the court for a ruling on the effect of this provision in the articles.One of
the Class B shareholders applied to the court for a ruling on the effect of this provision in the
articles.

Held: that article 8 was invalid, as it purported to make the B capital applicable to purposes not
within the objects of the company as defined by the memorandum of association, and in a way
not incidental or conducive to the attainment of those objects, and that the directors must be
restrained from acting upon it.

The articles of association of a company cannot, except in the cases provided for by sect. 12 of
the Companies Act, 1862, modify the memorandum of association in any of the particulars
required by the Act to be stated in the memorandum.

Principle: Articles are subordinate to the Memo and cannot modify it!!! In essence, the
articles cannot cross it

Ashbury v. Watson (1885) 30 Ch. 376.

Principle: it was held that the articles are subordinate to the memorandum in the sense that they
cannot confer wider powers than the memorandum and any altercation to the articles which
conflicts with the memorandum is void to the extent of the conflict. The articles cannot be
brought to fill in the gap in the memorandum in respect of any matter which by law is required to
be in the memorandum. The first set of articles in the modern form were set out in table B of the
schedule to the Joint Stock Companies Act of 1856 and most modern companies now have
articles which are based to some extent or the form set out in table B.

In simple terms-The articles of a company are subordinate to and subject to the memorandum
of association and any clause in the Articles going beyond the memorandum will be ultra vires.
But the articles are only internal regulations, over which the members of the company have

(ii) Alteration
Peters American Delicacy Co. Ltd. v. Heath (1938 - 1939) 61 C.L.R. 457.

Principle:According to Dixon J: If the challenged alteration relates to an article which does or

may affect an individual, as, for instance, a director appointed for life or a shareholder whom it is
desired to expropriate, or to an article affecting the mutual rights and liabilities imer se of
shareholders or different classes or descriptions of shareholders, the very subject matter
involves a conflict of interests and advantages. To say that the shareholders forming the
majority must consider the advantage of the company as a whole in relation to such a question
seems inappropriate, if not meaningless, and at all events starts an impossible inquiry.

Greenhalgh v. Arderne Cinemas Ltd. (1951) 1 Ch. 286.

Facts: The articles of Arderne Cinemas Ltd contained a provision stating that existing members
have a pre-emption right to buy any shares that another member wanted to sell. This provision
was amended stating that, notwithstanding the pre-emption rights, any member could transfer
shares if the transfer was approved by an ordinary resolution of the members. The managing
director who also controlled a majority of votes intended to sell his interest to an outsider.

Held: The special resolution having been bona fide passed, it was not an objection to it that, by
lifting the ban in the original articles on sales to persons who were not members of the company,
the right on a sale to tender for the majority holding of shares would be lost to minority
shareholders, and that accordingly the special resolution could not be impeached. As a result
alteration was approved.

Lord Evershed had this to say: “The phrase, ‘the company as a whole’ does not (at any rate in
such a case as the present) mean the company as a commercial entity, distinct from the
corporators: it means the corporators as a general body. That is to say, the case may be taken
of an individual hypothetical member and it may be asked whether what is proposed is, in the
honest opinion of those who voted in its favour, for that person’s benefit. I think the matter can,
in practice, be more accurately and precisely stated by looking at the converse and by saying
that a special resolution of this kind would be liable to be impeached if the effect of it were to
discriminate between the majority shareholders and the minority shareholders, so as to give the
former an advantage of which the latter were deprived.”

(iii) Limitation on Alteration

Allen v. Gold Reefs of West Africa Ltd [1900] 1 Ch. 656.
Facts: A company by one of its articles provided that it should have a lien for all debts and
liabilities of any member to the company ‘upon all shares, not being fully paid, held by such
member.’ The company, by way of purchase-money for the property acquired by it, allotted
fully-paid shares to Z, a nominee of the vendor to the company. Z also applied for and had
allotted to him shares not paid up. He was the only holder of fully paid-up shares. At his death
he was indebted to the company in arrears of calls on the unpaid shares, but his assets were
insufficient to pay the arrears. Thereupon the company, by special resolution under 1882 Act, s
50 (repealed), altered the above article by omitting therefrom the words ‘not being fully paid,’
thus creating a lien on Z’s fully-paid shares

Held: The company had the power to alter its articles by extending its lien to fully-paid shares

Lindley MR noted that the only limitation on the power to alter the regulations contained in their
articles are the provisions contained in the statute and the conditions contained in the
company’s memorandum of association. Therefore the powers under the statute must be
exercised subject to the general principles of law and equity which are applicable to all powers
conferred on majorities and enabling them to bind minorities. These must be exercised not
only in the manner required by the law but als bona fide for the benefit of the company as
a whole and it must not be exceeded.

Principle: The ability to alter the articles via special resolution is limited by the exercise
of such powers “bona fide for the benefit of the company as a whole.”

Sidebottom v. Kershaw [1920] 1 Ch. 154.

Shuttleworth v. Cox Bros. & Co. [1927] 2 KB. 9 [1926] All E.R. 498

Facts: The articles of association of a company provided that the plaintiff and four others should
be the first directors of the company, and that they should be permanent directors, and that each
of them should be entitled to hold office so long as he should live unless he should become
disqualified from any one of six specified events. Owing to irregularities in the accounts
furnished by the plaintiff of sums received by him on the company's account an extraordinary
general meeting of the company was held and a special resolution was passed that the articles
should be altered by adding a seventh event disqualifying a director - namely, a request in
writing by all his co-directors that he should resign his office. Such a request was subsequently
made to the plaintiff. There was no evidence of bad faith on the part of the shareholders.
In an action by the plaintiff for breach of an alleged contract contained in the original articles that
he should be a permanent director, and for a declaration that he was still a director of the
company:-

Held: that the contract, if any, between the plaintiff and the company contained in the articles in
their original form was subject to the statutory power of alteration and that if the
alteration was bona fide for the benefit of the company it was valid and there was no
breach of that contract; that there was no ground for saying that the alteration could not
reasonably be considered for the benefit of the company; that, therefore, there being no
evidence of bad faith, there was no ground for questioning the decision of the shareholders that
the alteration was for the benefit of the company; and, consequently, that the plaintiff was not
entitled to the relief claimed.

d) Class Rights and Variation

JCA Section 73; BCA Section 224

Rights & Issues Investment Trust Ltd. v. Style Shoes Ltd. [1965] Ch.250
Facts: A company had an issued share capital of 3,600,000 ordinary shares and 400,000
management shares, each management share carrying eight votes. It was proposed to increase
the issued share capital of the company by issuing unissued shares and by creating new shares
and in order to ensure the continuity of management it was proposed to double the voting rights
of the management shares. At a class meeting held on October 2, 1964, the ordinary
shareholders sanctioned a special resolution increasing the voting rights of the management
shares, and on the same date the company passed a special resolution to that effect. The
holders of management shares did not vote at either the class meeting or the company meeting.
On a motion by holders of ordinary shares who had voted against the resolutions to restrain the
company from acting on those resolutions on the ground that they were oppressive:-

Held:(1) that members of a company acting in accordance with the Companies Act and the
constitution of the company and subject to any necessary consent on the part of the class
affected could alter the relative voting powers attached to various classes of shares.

(2) That since the resolution for the alteration of voting rights was passed in good faith for the
benefit of the company as a whole it could not be said to be oppressive, and that, accordingly,
the court would not interfere by interlocutory injunction to restrain the company from acting on
the resolution.
Per PENNYCUICK J.:
I am not persuaded that there has been here any discrimination against or oppression of the
holders of the ordinary shares. What has happened is that the members of this company, other
than the holders of the management shares, have come to the conclusion that it is for the
benefit of this company that the present basis of control through the management shares should
continue to subsist notwithstanding that the management shares will henceforward represent a
smaller proportion of the issued capital than heretofore. That, it seems to me, is a decision on a
matter of business policy to which they could properly come and it does not seem to me a
matter in which the court can interfere. So far as I am aware there is no principle under which
the members of a company acting in accordance with the Companies Act and the constitution of
the particular company and subject to any necessary consent on the part of a class affected,
cannot, if they are so minded, alter the relative voting powers attached to various classes of
shares. Of course, any resolution for the alteration of voting rights must be passed in good faith
for the benefit of the company as a whole, but, where it is so, I know of no ground on which
such an alteration would be objectionable and no authority has been cited to that effect. So here
this alteration in voting powers has been resolved upon by a great majority of those members of
the company who have themselves nothing to gain by it so far as their personal interest is
concerned and who, so far as one knows, are actuated only by consideration of what is for the
benefit of the company as a whole. I cannot see any ground on which that can be said to be
oppressive.

Greenhalgh v. Arderne Cinemas Ltd. [1946] 1 AER s.12 cf.

Cumbrian Newspapers Group Ltd. v. Cumberland &
Westmorland Herald
Newspapers & Printing Co. Ltd. [1986] 2 AER 816 [1986] 3
WLR 26.
White v Bristol Aeroplane Co. Ltd. [1953] Ch. 65

Re House of Fraser plc. [1987] BCLC 293

Facts: Preference shareholders objected to the compulsory payment-off of their shares at par,
effecting a reduction of capital by means of the paying off and cancelling of the company’s
preference shares. No meeting of preference shareholders had been held to approve the
reduction, despite an article which called for such a meeting if the rights attached to the
preference shares were ‘modified, commuted, affected or dealt with’.

Held: The reduction was confirmed. The cancellation of the preference shares constituted the
fulfilment or satisfaction of the contractual rights of the shareholders after which the rights
ceased to exist. It could not therefore constitute a variation of the rights, which presupposed a
continuation of the rights, or an abrogation of rights which presupposed the termination of rights
without satisfaction or fulfilment. Accordingly there was no variation or abrogation of class rights
within s 125 of the Companies Act 1985. Nor was the cancellation a 'dealing with' the rights of
the shareholders as that phrase in the context of a variation of rights clause. Upon no view of
the matter can it be said that as a result any of the special rights attached to the shares
has been ‘modified, commuted, affected or dealt with’ within the meaning of article 12.
These words all contemplate that after the relevant transaction the shareholders in
question will continue to possess some rights, albeit of a different nature from those
which they possessed before the transaction. The proposal for reduction of capital
involves complete cancellation of the shares.’
(5) Authority to Issue Shares
JCA Section 56, 62 A company limited by shares may, if so authorized by its articles, issue
preference shares which are, at the option of the company, are to be liable to be redeemed
subject to this Act

BCA Sections 27, 28

Ooregum Gold Mining Company v. Roper [1892] A.C. 125(HL)

Facts: The Ooregum Gold Mining Co of India issued 120,000 shares at £1 each. Shareholders
said they wanted to sell on the shares for 5 shillings, (i.e. 25 new pence) one quarter of the
value the shares were issued at, but that the buyers would be credited with a full £1 in the
company. This would mean that shareholders would get a 15 shilling (75 new pence) discount.
At the time of the litigation, the share price stood at £2 14s. The shareholders at the time of the
purchase (who now wanted money to pay off a debenture) even though they had voted for the
issue, then turned around to the buyers and argued that shares were prohibited from being
issued at a discount, and that the transaction was void.

Held: The House of Lords agreed that shares must not be issued at a discount. It was
concerned with the potential effects on creditors. Although it is arguable that any capital
increase would benefit creditors (hence speaking in favour of not preventing issue at a
discount), the Lords held the proper technical route would be for the company to reduce the
nominal value of the shares (as seen in the later case of Greenhalgh v Arderne Cinemas Ltd[1]).
Lord Halsbury LC said the following.

“the Act of 1862... makes [it] one of the conditions of the limitation of liability that the
memorandum shall contain the amount of the capital with which the company proposes
to be registered, divided into shares of a certain fixed amount. It seems to me that the
system thus created by which the shareholder’s liability is to be limited by the amount
unpaid upon his shares, renders it impossible for the company to depart from that
requirement, and by any expedient to arrange with their shareholders that they shall not
be liable for the amount unpaid on their shares.”

Lord Watson noted that otherwise, ‘so long as the company honestly regards the consideration
as fairly representing the nominal value of the shares in cash, its estimate ought not to be
critically examined.’

Hogg v. Cramphorn [1966] 3 A.E.

Facts: Directors issued around 6,000 shares for the purpose of defeating a takeover of the
company; claimed to be doing this in the best interests of employees and shareholders of the
company. This succeeded, but directors were sued by company for breach of duty.
Held: Test for improper purposes is objective i.e. fact that directors thought that they were acting
in best interests of employees/shareholders is irrelevant. The primary purpose of power to allot
shares is raising of capital.Therefore, use of power to block a takeover is breach of duty.

Buckley J. relied upon Punt v. Symons Ltd. and Piercy v. Illills, in both of which cases, directors
were held to have acted in breach of duty when they issued shares in order to procure a
majority for their side in an internal shareholders’ battle. He agreed with Petersen J. in the
latter case that :
‘‘ directors are not entitled to use their powers in issuing shares merely for the purpose
of maintaining their control or the control of themselves and their friends over the affairs
of the company, or merely for the purpose of defeating the wishes of the existing
majority of shareholders.”

(6) Class of Shares/Canons of Construction

JCA Section 73
BCA Sections 27, 28, 41
Andrews v. Gas Meter Co. [1897] Ch. 361 (C.A)
Birch v. Cropper [1889] 14 App. Cas. 525 (HC)
Facts: The articles of association of a limited company incorporated under 1862 Act (repealed),
provided that the net profits of each year should be divided pro rata upon the whole paid-up
share capital, and that the directors might declare a dividend thereout on the shares in
proportion to the amounts paid up thereon. The articles contained no provision as to the
distribution of assets on the winding up of the company. The original capital consisted of
ordinary shares, partly paid up. Afterwards preference shares were issued entitling the holders
to a dividend at a fixed rate with priority over all dividends and claims of the ordinary
shareholders. The preference shares were fully paid up. The undertaking having been sold
under an Act which made no provision for the distribution of the purchase money among the
shareholders, the company was voluntarily wound up and assets remained for distribution

Held: In distributing the assets ‘amongst the members according to their rights and interests in
the company,’ and in adjusting ‘the rights of the contributories amongst themselves’ under 1862
Act s 133(1), (10) (repealed), the liability of the ordinary shareholders for the unpaid balance of
their shares must not be disregarded, and after discharging all debts and liabilities and repaying
to the ordinary and preference shareholders the capital paid on their shares, the assets had to
be divided among all the shareholders, not in proportion to the amounts paid on the shares, but
in proportion to the shares held

[Sub. nom. Re Bridgewater Navigation Co. [1889] 39 CH.D.1]

Re Bridgewater Navigation Co. [1891] 2 Ch. 317 (C.A)
Facts: The articles of association of a limited company provided that the directors might, in
priority to any dividend, set aside out of profits such sum as they thought proper as a reserve
fund for certain specified purposes, or for meeting any other contingencies of the company; and
that, subject to that provision, the entire net profits of each year should belong to the
shareholders. At the date of the sale of the undertaking, the capital of the company consisted of
ordinary shares, and shares with a fixed preferential dividend. In August 1887, during the
currency of a financial year, the undertaking of the company was sold at a price which, after
repaying to the ordinary and preference shareholders the capital paid up on their shares, and
discharging all the liabilities of the company, left a large surplus. It had been the practice of the
company to apportion a part of the annual profits to three funds—namely, the depreciation of
steamers fund, the canal improvement fund, and an insurance fund—but no part of these funds
was ever required for the purposes for which they were intended. in the accounts for the year
1886, the plant and debts due to the company were estimated below, and the debts due from
the company were estimated above, what proved to be their actual value

Held: (1) the reserve funds were divisible as profits among the ordinary shareholders; (2) the
ordinary shareholders were entitled to the net profits of the broken year, after paying an
apportioned dividend to the preference shareholders, and in taking the accounts the actual
values of the plant and debts ought to be substituted for the estimated values.

Lord Justice Lindley says:

The problem is no longer what is to be done in the way of dividing the profits of a going
concern; the problem now is how much of the whole assets of the company belongs to
one class of shareholders and how much to another; and if it appears that some of those
assets consist of the undrawn profits of one of those classes, such undrawn profits ought to be
distributed among the members of that class unless some sufficient reason to the contrary can
be shown, and in this case there is no such reason.

Will v. United Lankat Plantations [1914] A.C 11 (HC)

Re William Metcalf Ltd. [1933] Ch. 142 overruled by.
Scottish Insurance Corporation v. Wilson & Clyde Coal Co. 1949] A.C 512 (HC)
Re William Jones & Sons Ltd. [1969] 1W.L.R 146

Facts: Under the memorandum of association of a company, which had issued capital consisting
of 2,000 preference shares of £5 each and 10,000 ordinary shares of £1 each, the preference
shareholders were entitled to a cumulative preferential dividend of 5½ per cent. per annum and,
at a final distribution of assets, were entitled to be first, repaid in full and then, after repayment in
full of ordinary shares, to share rateably with the ordinary shares in any surplus assets up to £1
5s. on each preference share. At an extraordinary general meeting of the company duly
convened and held on March 6, 1968, it was resolved to reduce the company's capital from
£25,000 to £15,000 by returning without any premium the capital paid up on the preference
shares and cancelling the shares. There was no present prospect of the company being wound
up and the preference shares stood below par. No class meeting of the preference shareholders
was held to approve the reduction. On the company's unopposed petition for the confirmation of
the reduction
Held: Section 66 of the Companies Act, 1948, 1 left the court fully at large to decide whether or
not to confirm a reduction; and that since the confirmation of the reduction would be fair to the
preference shareholders, there was no reason to refuse the confirmation without requiring a
class meeting of the preference shareholders and the reduction would be confirmed.
Webb v. Earle [1875] L.R. 20 Eq.556
Borland v. Earle [1902] A.C. 83
Re F. De Jong & Co. Ltd. Ch. [1946] Ch. 211
Re Crichton’s Oil Co. [1902]

(7) Issue of Shares at a Discount

JCA – Sections 36, 37, 38, 53
BCA Sections 26, 29, 30, 50
Ooregum Gold Mining v. Roper [1892] A.C. 125
Re Wragg [1897] 1 Ch. 796
Welton v. Saffrey [1897] A.C 299

Spargo's Case [1873] L.R. 8 Ch. App. 407

This case established the principle that where A’s obligation to pay a sum of money to B
is set off against B’s obligation to pay an equal sum of money to A, the setting-off of one
payment obligation against another is the same as the making of the appropriate cash
payments.
The result is that neither party is required to make a cash payment. In his judgment,
Mallish LJ stated the principle as follows:

“I am of opinion that if an action were brought at law for the amount originally payable
on these shares, there would be a valid defence, under a plea of payment.Nothing is
clearer than that if parties account with each other, and sums are stated to be due on
one side, and sums to an equal amount due on the other side on that account, and
those accounts settled by both parties, it is exactly the same thing as if the sums due on
both sides had been paid.Indeed, it is a general rule of law, that in every case where a
transaction resolves itself into paying money by A. to B., and then handing it back again
by B. to A., if the parties meet together and agree to set one demand against the other,
they need not go through the form and ceremony of handing the money backwards and
forwards.”
Re White Starline [1938] Ch. 458 C.A.

Facts: There had been a call on shares and the shareholder sought to satisfy the all by
issuing deferred creditor certificates. Those certificates entitled the company to receive payment
at a later date.

Held: Consideration was illusory and was not valuable consideration. Certificates under which
the company got no immediate payment but the prospect of payment in the indefinite future
does not amount to payment.The value of the consideration for an allotment of shares must be
more than sufficient consideration required under the law of contract. It must represent money’s
worth for the allotment

Palmer's Company Law notes at paragraph 5.892 if the consideration clearly does not on
the face of it equate to the nominal value of the shares or is illusory or colourable, the
courts may intervene and treat the shares as allotted at a discount such that the
shareholders may be held liable to pay for them in full.

(8) Issue of Shares at a Premium

Henry Head & Co. Ltd. v. Ropner Holdings Ltd. [1952] Ch. 124
Facts: In 1948, a holding company was incorporated to acquire, for amalgamation purposes,
two shipping companies formerly carried on under the same management. The assets of these
two companies were of slightly unequal value. There was issued in the aggregate to the
shareholders in these two companies the entire authorized capital of the amalgamated
company, which was £1,759,606. The real value of the shares at par was £5,066,506 in excess
of that sum. The balance sheet of the holding company showed that this sum of £5,066,506 was
appropriated to the credit of "Capital Reserve - Share Premium Account"

Held: Where a company issues shares at a premium(whether in cash or in the form of other
valuable consideration), CA requires that “a sum equal to the aggregate amount or value of the
premium on those shares” must be transferred to“share premium account”.

Shearer (Insp. of Taxes) v. Bercain Ltd. [1980] 3 All ER. 295

Facts: This case involved an amalgamation whereby the share capital in one company was
exchanged for the issue of shares in another company at a lower value. The issue was whether
the excess had to be capitalised. The Inland Revenue claimed the excess was subject to tax
because it was distributable.

Held: The court found the company was under an obligation to capitalise by setting up a share
premium account and the “profit” as such was not subject to tax. This decision illustrates that
share premium accounts may operate to reduce one's tax liability.
(9) Pre-emptive Rights - usually found in articles of Private Companies - often way of
preserving family control by the use of different classes of shares to reinforce pre-emption
provisions.
JCA Section 61(1)
BCA Sections 34, 228
Tett v. Phoenix Property Investment Co. Ltd. [1986] B.C.L.C. 599
Facts: A provision in the articles of a company which provided that no shares were to be
transferred by a member of the company to an outsider if any member was willing to purchase
them. A shareholder had died and her executors ignored the pre-emption provisions and sold
the shares to Tett. The directors refused to register the transfer.

Held: Appeal allowed. Article 5(E) and (F) contained a sufficiently clear express restriction to cut
down the right of a shareholder to transfer his shares. The restriction was not void as being
unworkable, since a term could be implied into the article to give it business efficacy requiring a
shareholder wishing to transfer his shares to an outsider to take reasonable steps to give notice
of that intention to those to whom notice had to be given and to allow a reasonable opportunity
for such persons to express their willingness to buy the shares. The requirement of reasonable
notice would be satisfied as far as non-members were concerned if notice was given to
members and they were left to pass it on to non-members. On the facts, M and T had not given
reasonable notice of their intention to transfer Marjorie's 90 shares as none of the
correspondence which they had with either the company's auditors or the company constituted
notice of an intention to transfer the shares. In so far as the circular to the members dated 4
May 1982 constituted notice, at least one member of the company had indicated a willingness to
buy the shares. Accordingly, as there had been no compliance with art 5(E), the directors could
not register the transfer and the appeal should be allowed.

Pritchard v. Briggs [1980] Ch. 388

Facts: In the conveyance of a hotel, the vendors (husband and wife) retained certain lands. The
conveyance provided that, for so long as the vendors and the purchaser of the hotel both lived,
the vendors would not sell the retained land without first giving the purchaser the option to
purchase it. The plaintiff was a tenant of the vendors. His lease contained an option to purchase
the retained lands upon the death of both vendors. The third defendant, in terms of a
receivership on behalf of the surviving vendor, sold the retained lands to the first and second
defendants. Thereafter, the plaintiff served notice purporting to exercise his option to purchase
the retained lands. At first instance, the judge dismissed the plaintiff’s claim and held that the
right of pre-emption in the retained lands exercisable by the first and second defendants created
an interest in land which took precedence over the plaintiff’s option due to its prior registration.

Held: The Court of Appeal allowed the plaintiff’s appeal. The first and second defendants’ right
of pre-emption (which stemmed from the original conveyance of the hotel) did not confer on
them a present or contingent interest in the retained land. The terms of the conveyance did not
prevent the vendors from granting the plaintiff an option to purchase the land after their deaths
and this option was an interest in land. This interest in land took priority over the prior
registration of the right of pre-emption. The sale of the retained land by the third defendant
whilst one of the vendors was still alive was subject to the option granted in favour of the
plaintiff.
Clemens v. Clemens [1976] 2 A.E.R. 268

Why Restrictive Provisions?

Barnett Ltd. v. Kerr Jarrett No. 66 of 1988 (Jamaica C.A.) Cannot be found
Knox v Deane and Others [2005] UKPC 25
Facts: This is a CWC case (Barbados). An old sugar plantation company was to sell its holding
to developers to repay debts. One shareholder asserted a right of pre-emption. She failed in a
claim that the company was acting in a manner prejudicial to her minority interests, and
appealed.
Held: The issue was decided by interpretation of the company’s articles. The clauses gave
pre-emption rights to existing members and to ‘selected persons’. The appellant said that
members were to be given priority over non-members. The respondent said that discretion was
given to directors. The clause was unlikely to restrict the directrs’ discretion as argued. The
argument proposed by the appellant would nullify entirely the pre-emption rights given to the
selected persons, and that could not stand. The appeal failed.

(10) The Maintenance of Capital

Corporate involvement with the purchase of its own shares, declaration of dividends, reduction
of capital.

(i) Corporate Involvement with the Purchase of its Own Shares

Old Law
(a) Direct prohibition on the company acquiring its own shares.
Trevor v. Whitworth [1887] 12 App. Cas. 409(HL)
Brady v. Brady [1988] BCLC 20
Facts: a company with an established business in haulage and drinks ran into difficulties
because of disagreements between the two brothers who were majority shareholders. In order
to save the business an agreement was reached to divide it between them: one would keep the
haulage business and the other one the drinks business. To effect this, a scheme of corporate
reorganisation was formulated: the businesses were to be divided equally but the main
company was left in existence. The defendants felt that the assets had not been distributed
equally and they refused to complete the transaction, claiming that the financial operation
involved unlawful financial assistance; the claimants started an action for specific performance

Held: At the CA they held that it was a scheme to give financial assistance for the purchase of
its own shares and as a result would not be in the best interest of the company. The House of
Lords overruled the decision of the Court of Appeal, and stated that there was no misfeasance
and furthermore, the interests of the creditors would improve in the long term. The transaction
was therefore in good faith and in the interest of the company. However the House of Lords
gave a narrow meaning to ‘some larger purpose’ and therefore severely restricted the use of the
provision.

Rolled Steel Products (Holdings) Ltd v. British Steel Corporation [1982] 3 All ER 1057.

Facts: The plaintiff company had guaranteed borrowings, using powers within the memorandum
of association, but for purposes which were held to be improper, because they were not in the
interests of the plaintiff company itself. One issue was whether the receiver of the company
could assert the invalidity of the transactions as against the defendant companies who had been
party to the proposals, and had full knowledge that they were ‘not entered into by the plaintiff for
any purpose of the plaintiff but were a gratuitous disposition of the property of the plaintiff’.
Complaint was also made as to the judge’s eight month delay in handing down his judgment.

Held: the court established six principles:

1. The basic rule is that a company incorporated under the Companies Acts only has the
capacity to do those acts which fall within its objects as set out in its memorandum of
association or are reasonably incidental to the attainment or pursuit of those objects.
Ultimately, therefore, the question whether a particular transaction is within or outside its
capacity must depend on the true construction of the memorandum.
2. Nevertheless, if a particular act (such as each of the transactions of 22 January 1969 in
the present case) is of a category which, on the true construction of the company’s
memorandum, is capable of being performed as reasonably incidental to the attainment
or pursuit of its objects, it will not be rendered ultra vires the company merely because in
a particular instance its directors, in performing the act in its name, are in truth doing so
for purposes other than those set out in its memorandum. Subject to any express
restrictions on the relevant power which may be contained in the memorandum, the state
of mind or knowledge of the persons managing the company’s affairs or of the persons
dealing with it is irrelevant in considering questions of corporate capacity.
3. While due regard must be paid to any express conditions attached to or limitations on
powers contained in a company’s memorandum (e.g. a power to borrow only up to a
specified amount), the court will not ordinarily construe a statement in a memorandum
that a particular power is exercisable ‘for the purposes of the company’ as a condition
limiting the company’s corporate capacity to exercise the power; it will regard it as simply
imposing a limit on the authority of the directors: see the David Payne case [1904] 2 Ch
608.
4. At least in default of the unanimous consent of all the shareholders (as to which see
below), the directors of a company will not have actual authority from the company to
exercise any express or implied power other than for the purposes of the company as
set out in its memorandum of association.
5. At least in default of the unanimous consent of all the shareholders (as to which see
below), the directors of a company will not have actual authority from the company to
exercise any express or implied power other than for the purposes of the company as
set out in its memorandum of association.
 6. If, however, a person dealing with a company is on notice that the directors are
exercising the relevant power for purposes other than the purposes of the company, he
cannot rely on the ostensible authority of the directors and, on ordinary principles of
agency, cannot hold the company to the transaction.’

Brown-Wilkinson LJ clarified the confusion which was in the earlier cases stating that
‘there clearly exists a distinction between acts done in excess of the capacity of the
company and acts done in excess or abuse of the powers of the company. Where it acts
outside the capacity of a company then it has acted ultra vires and where it abuses its
power it is in reality liable to legal transaction’

(b) Prohibition on the Company Financially

Assisting in the Acquisition of Shares.
Selangor United Rubber Estates Ltd. v. Craddock (a bankrupt) No. 3 [1968] 2 A.E.R. 1073
Facts: The plaintiff company had liquid assets including a credit for some £232,500 with a bank.
C Ltd a banking company concerned in take-over bids, acting on behalf of an undisclosed
principal who was C, bid for the share capital of the plaintiff company, and the offer was
accepted by holders of seventy-nine per cent of the plaintiff company's share capital. The cost
of this acquisition was about £195,000. C had an account with a branch of the D, bank which
was in negligible credit. At C's instance the D bank branch accepted a transfer of the plaintiff
company's account from N bank, and pursuant to a resolution of the board of the plaintiff
company (ie, the newly constituted board after the take-over, who were C Ltd's nominees) the
plaintiff company gave a mandate to the D bank authorising the account to be operated by
cheques signed by two directors. On 25 April 1958, a banker's draft for £195,000 on D bank was
given to C Ltd the amount being debited by arrangement between C and the D bank to C's
account. C's account was enabled to meet this by crediting a cheque for £232,500 drawn by the
plaintiff company in favour of W Ltd (a private investment company) and endorsed on behalf of
W Ltd to C. The £232,500 so paid by the plaintiff company represented a loan to W Ltd at
interest, and the further transfer to C represented a loan by W Ltd to C at slightly greater
interest. C Ltd out of the £195,000, paid the assenting shareholders of the plaintiff company
whose shares a were acquired on the take-over. Thus the credit balance of the plaintiff company
at the N bank was ultimately applied as to some £195,000 in paying for the acquisition of some
seventy-nine per cent of the plaintiff company's shares, which were acquired on behalf of C and
became registered in the name of D bank's nominee company as nominee for C …
Held:
“Directors are clearly not trustees identically with trustees of a will or marriage settlement…..
However much the company's purposes and the directors' duties, powers and functions may
differ from the purposes of a strict settlement and the duties, powers and functions of its
trustees, the directors and such trustees have this indisputably in common—that the property in
their lands or under their control must be applied for the specified purposes of the company or
the settlement; and to apply it otherwise is to mis-apply it in breach of the obligation to apply it to
those purposed for the company or the settlement beneficiaries. So, even though the scope and
operation of such obligation differs in the case of directors and strict settlement trustees, the
nature of the obligation with regard to property in their hands or under their control is identical,
namely to apply it to specified purposes for others beneficially.”

Heald v. O’Connor [1971] 2 A.E.R. 1105

Belmont Finance Corp. v. Williams Furniture Ltd. No. 2 [1980] 1 A.E.R 393 C.A.

Facts: It had been alleged that there had been a conspiracy involving the company giving
unlawful financial assistance for the purchase of its own shares. The company directors
operated an elaborate scheme to extract value from Belmont by causing it to buy the shares of
a company called Maximum at a considerable overvalue. This was a breach of the fiduciary
duties of the directors. They sought to recycle the profit on the sale of Maximum so that it could
be used to fund the purchase by three companies associated with the directors of Belmont’s
own shares. This was not only a breach of the directors’ fiduciary duty but a criminal
contravention of section 54 of the 1948 Act. Belmont went into liquidation, and an action was
brought in its name by receivers for damages for breach of duty against the directors who had
authorised the transaction, and for an account on the footing of knowing receipt against the
three companies.

Held: Dishonesty is not a necessary ingredient of liability in an allegation of a ‘knowing receipt’.

The court was not swayed by the parties having obtained counsel’s advice that the scheme was
lawful, apparently on the basis that: ‘if all the facts which make the transaction unlawful were
known to the parties . . ignorance of the law will not excuse them’ and ‘A limited company is of
course not a trustee of its own funds: it is their beneficial owner; but in consequence of the
fiduciary character of their duties the directors of a limited company are treated as if they were
trustees of those funds.’ An employee’s knowledge is not to be treated as the employer’s
knowledge: ‘But in my view such knowledge should not be imputed to the company, for the
essence of the arrangement was to deprive the company improperly of a large part of its assets.
As I have said, the company was a victim of the conspiracy. I think it would be irrational to treat
the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this
knowledge to the company; and indeed it is a well recognized exception from the general rule
that a principal is affected by notice received by his agent that, if the agent is acting in fraud of
his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not
to be imputed to the principal. So in my opinion the plaintiff company should not be regarded as
party to the conspiracy on the ground of lack of necessary guilty knowledge.’

(ii) Declaration of Dividends

● Restrictions on the use of capital, the distinction between fixed and circulating capital
and trading losses, and the distinction between realized and unrealized appreciation.
JCA Section 158; BCA Sections 51 and 52

● Historical perspective - The Common Law Rules

Re Exchange Banking Co., Flitcrofts Case [1882] 21 Ch. 519 C.A. prohibition on the
payment of a dividend out of capital
Facts: For several years, the company had paid dividends drawn against false accounts, and
paid them to the directors as shareholders. When in insolvent liquidation, the company sued
those directors for the return of all the dividends wrongly paid out.

Held: Lord Jessel MR agreed the directors must repay the money. Capital invested by
shareholders (at this time the aggregate of the nominal share value, not including share
premiums, as legal capital is defined under Companies Act 2006) could not be returned to them,
and dividends should be paid out of profits only.

Lee v. Neuchatel Asphalt Company [1889] 41 Ch. C.A. - distinction between fixed and
circulating capital.
Principle: the common law permitted dividends to be paid out of current trading profits without
making good losses in fixed capital or trading losses in previous years; and allowed dividends to
be paid out of an unrealised capital gain resulting from a bona fi de revaluation of fixed
assets;148 and did not require companies to provide for depreciation. Many of these legal rules
were commercially unwise and contrary to good accounting practice, but the courts were
reluctant to interfere with the directors’ discretion as men of business.

Verner v. General & Commercial Investment Trust [1894] 2 Ch. 239

Facts: The main question before the court was “whether a limited company which has lost a part
of its capital can lawfully declare or pay a dividend without first making good the capital which
has been lost”.

Held: (i) There was nothing in the Memorandum and the Articles of the company ne­cessitating
the lost capital to be made good before the declaration of dividend;

(ii) There was no pay­ment of dividend out of capital; and

(iii) There was no insolvency.

The case, thus, concludes that a com­pany can distribute dividends out of the current year’s
profit even without making good the part of lost capital if the Articles of Association permit.

Dimbula Valley (Ceylon Tea Company Ltd. v. Laurie [1961] Ch. 353- dividends permissible
out of an unrealized capital gain resulting from a bona fide revaluation of fixed assets.
This case was in relation to the permission the distribution of unrealised capital profits. Article 5
of the company’s articles in its constitution permitted the company to pay a dividend to
shareholders from an excess of assets on capital account.
Buckley J held that this provision was valid and hence the company could pay a dividend based
on an unrealised profit. (It is perhaps worth noting that, in a Scottish decision, the opposite
result had been reached

Ammonia Soda Company v. Chamberlain [1918] 1 Ch. 266 -no need to make good trading
losses in previous years before dividend payment.
Facts: a distribution of revenue profits was made in a trading year even though there was an
accumulated deficit from earlier years which had not been made good. The claimant company,
which had been incorporated for the purpose of acquiring, developing and working as brineland
an estate in Cheshire, sued to recover dividends that the company alleged had been wrongly
paid.
Held: The Court of Appeal held that there was no law that prohibited a company from
distributing the clear net profit of its trading in any year without making good trading losses of
previous years. The Court of Appeal considered it was legitimate for companies not to make
good past trading losses. Swinfen Eady LJ said: ‘The Companies Acts do not impose any
obligation upon a limited company, nor does the law require, that it shall not distribute as
dividend the clear net profits of its trading unless its paid-up capital is intact or until it has made
good all losses incurred in previous years.’ This is therefore no longer the case.

Per Swinfen Eady L.J.: The fixed capital of a company is what the company retains in the shape
of assets upon which the subscribed capital has been expended, and which assets either
themselves produce income independent of any further action of the company, or, being
retained by the company, are made use of to produce income or gain profits. The circulating
capital of a company is a portion of the subscribed capital intended to be used by being
temporarily parted with and circulated in business in the form of using goods or other assets
which, or the proceeds of which, are intended to return to the company with an increment and to
be used again and again and always return with accretions. When circulating capital is
expended in buying goods which are sold at a profit or in buying raw materials from which
goods are manufactured and sold at a profit the amount so expended must be charged against
or deducted from receipts before the amount of any profit can be considered.

See: Aveling Barford Ltd v. Perion Ltd [1989] BCLC 626

Facts: Company sold some assets to a shareholder at less than their market value.

Held:Transaction was a valid sale that is to say that it was not a sham. However as it was at an
undervalue. This therefore means it was an unlawful distribution which contravened rule that a
company must not return capital to its shareholders.

JCA Sections 71 and 72; BCA Section 44

Trevor v. Whitworth [1887] 12 App. Cas. 409 H.L.
Scottish Ins. Corporation v. Wilsons & Clyde Coal Company [1949] A.C. 462
Re Saltdean [1968] 1 W.L.R. 1844 [1968] 3 A.E.R. 829
Westburn Sugar Refineries [1951] A.C. 625
House of Fraser [1987] A.C. 387 [1987] B.C.L.C 478 H.L.
Preference shareholders objected to the compulsory payment-off of their shares at par, effecting
a reduction of capital by means of the paying off and cancelling of the company’s preference
shares. No meeting of preference shareholders had been held to approve the reduction, despite
an article which called for such a meeting if the rights attached to the preference shares were
‘modified, commuted, affected or dealt with’.

Held: The proposed cancellation of preference shares did not attract the protection of that
article, because the cancellation of the shares was in accordance with the rights originally
attached to those shares, specifically, the right to a return of capital in priority to other
shareholders where any capital was in excess of the company’s needs. The cancellation of the
shares did not constitute a modification, commutation, affecting or dealing with rights attached to
them.

Lord Keith of Kinkel stated: ‘The reduction of capital now proposed to be made gives effect to
that right [that the second preference shareholders were entitled to priority of repayment after
certain preferences shares and before any other shareholders on a reduction of capital]. This
necessarily involves, of course, that all other rights attached to the shares will come to an end,
but that is something to which the holders of the shares must be taken to have agreed as a
necessary consequence of their right to prior repayment receiving effect. Upon no view of the
matter can it be said that as a result any of the special rights attached to the shares has been
‘modified, commuted, affected or dealt with’ within the meaning of article 12. These words all
contemplate that after the relevant transaction the shareholders in question will continue to
possess some rights, albeit of a different nature from those which they possessed before the
transaction. The proposal for reduction of capital involves complete cancellation of the shares.’
Greenhalgh v. Arderne Cinemas,
White v. Bristol [1953] Ch. I All ER 40,
Adelaide Electrical Co V. Prudential, [1933] All ER 82

Re House of Frazer Plc. [1987] BCLC 478, [1987] AC 387;

Facts: Preference shareholders objected to the compulsory payment-off of their shares at par,
effecting a reduction of capital by means of the paying off and cancelling of the company’s
preference shares. No meeting of preference shareholders had been held to approve the
reduction, despite an article which called for such a meeting if the rights attached to the
preference shares were ‘modified, commuted, affected or dealt with’.

Held: The proposed cancellation of preference shares did not attract the protection of that
article, because the cancellation of the shares was in accordance with the rights originally
attached to those shares, specifically, the right to a return of capital in priority to other
shareholders where any capital was in excess of the company’s needs. The cancellation of the
shares did not constitute a modification, commutation, affecting or dealing with rights attached to
them. The reduction was confirmed. Further to this:
 1. In the circumstances it was permissible to take into account the loans due to the
company from its subsidiaries as these indicated that, even if a small proportion were
taken into account, the interests of the creditors would be protected. Accordingly this
was a case in which it was appropriate for the court to rule that s 136(3) to (5) did not
apply
2. The cancellation of the preference shares constituted the fulfilment or satisfaction of the
contractual rights of the shareholders after which the rights ceased to exist. It could not
therefore constitute a variation of the rights, which presupposed a continuation of the
rights, or an abrogation of rights which presupposed the termination of rights without
satisfaction or fulfilment. Accordingly there was no variation or abrogation of class rights
within s 125 of the Companies Act 1985. Nor was the cancellation a 'dealing with' the
rights of the shareholders as that phrase in the context of a variation of rights clause

(11) DEBENTURES

(i) Debentures Generally

A debenture is a document issued by a company containing an acknowledgement of
indebtedness, which need not give, although it usually does give, a charge on the assets of
company. Usually a debenture is a bond which is given in exchange for money lent to the
company. The debenture holder is a creditor of the company; he is entitled to the repayment of
the principal at some future date and in each year up to repayment a stated rate of interest in
return for the use of the funds. This interest has to be paid each year before a dividend is paid
to any class of shareholders.
JCA Sections 84 - 92
BCA Sections 253-274

Knightsbridge Estates Trust Ltd. v. Byrne [1940] A.C. 613 H.L.

Facts: The appellants in 1931 mortgaged their freehold properties to the respondents to secure
a loan of 310,000l. By the deed the appellants covenanted to repay the money so borrowed with
interest by eighty half-yearly instalments. By clause 2 of the deed the appellants demised the
mortgaged land to the respondents for a long term of years with the usual proviso for cesser. A
few years later the appellants, being desirous of redeeming the mortgaged property by the
repayment of the principal sum borrowed, notwithstanding the stipulation contained in the deed
as to the repayment by eighty half-yearly instalments, sought a declaration that they were so
entitled to redeem at any time by giving the usual notice

Held: the mortgage was a "debenture" within s. 74 of the Companies Act, 1929, having regard
to the definition in s. 380, and therefore was not rendered invalid by reason of being redeemable
only after forty years; and that the rule against perpetuities has no application to mortgages;
and that the appellants were not entitled to the declaration claimed.

(ii) Registration : Duty to register and the effect of non-registration

JCA Section 93 - the charge shall be void against the liquidator unless the prescribed particulars
of the charge, together with the original copy certified in the prescribed manner are filed with the
Registrar.
BCA Sections 237-251
Section 237 - The company must within 28 day after the creation of the charge, lodge with the
Registrar a statement of the charge and any instrument by which the charge is created or
evidenced... if this provision is not complied with, the charge is void...

(iii) The Effect of The Security Interests in Personal Property (SIPP) Act 2013 on Charges
 WORKSHEET FIVE

MANAGEMENT OF COMPANIES – DIRECTORS’ DUTIES

“Having sanctioned the granting of practically unlimited management powers to the board of
directors, the legal system must devise some means of controlling the directors in the exercise
of those powers. A balancing act is required: management must not be
stifled but neither can unfettered, unsupervised, absolute discretion be permitted.”- Hannigan

INTRODUCTION
The two primary constitutional organs of companies are the general meeting and the board of
directors. Of these, the board of directors is the organ which is entrusted with the management
of the company.

1. DIRECTOR – DEFINITION
JCA- Section 2
“director” includes any person occupying the position of director by whatever name is called.

Shadow Directors – JCA Section 2

“shadow director” in relation to a company, means a person in accordance with whose directions
or instructions the directors of the company are accustomed to act, so, however, that a person is
not deemed a shadow director by reason only that the directors act on advice given by him in a
professional capacity.

Re Hydrodam (Corby) Ltd. [1994] 2BCLC 180

Facts: Eagle Trust plc had a wholly-owned subsidiary, Midland City Partnerships Ltd (MCP),
which in turn had a wholly-owned subsidiary, Landsaver MCP Ltd (Landsaver 19). Hydrodam
(Corby) Ltd (the company) was a wholly-owned subsidiary of Landsaver 19. The company had
two corporate directors. The company went into liquidation and the liquidator commenced
proceedings against two of the directors of Eagle Trust plc alleging that they were liable under s
214 of the Insolvency Act 1986 as de facto or shadow directors in connection with the affairs of
the company. The directors applied to have the liquidator's application against them struck out.
The applications by the directors were dismissed and the directors appealed.

Held: Appeals allowed. Where a body corporate was a director of a company, whether de jure,
shadow or de facto, it did not follow that its own directors must ipso facto be shadow directors of
that company. On the facts, the liquidator had neither pleaded nor adduced evidence that either
of the directors against whom the wrongful trading proceedings had been commenced were at
the material times directors of the company. Accordingly, the appeal would be allowed.

Millett J stated:
“A shadow director, by contrast, does not claim or purport to act as a director. On the contrary,
he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims,
are the only directors of the company to the exclusion of himself. He is not held out as a director
by the company. 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. What is needed is first, a board of directors
claiming and purporting to act as such; and secondly, a pattern of behaviour in which the board
did not exercise any discretion or judgment of its own, but acted in accordance with the
directions of others.”

Secretary of State for Trade and Industry v Deverell [2000] 2 WLR 907

Facts: A company went into creditors' voluntary liquidation with an estimated deficiency with
regard to creditors of £4.46m. In due course the Secretary of State applied under section 6 of
the Company Directors Disqualification Act 19861 for disqualification orders to be made against
three of the company's duly appointed directors. He also sought disqualification orders against
D. and H. on the ground that they were shadow directors, i.e. persons in accordance with whose
directions or instructions the directors were accustomed to act, to whom section 6 applied by
virtue of section 22(4). The judge held that the mere giving of advice on its own was insufficient
and it was only relevant if given and accepted so as to amount to a direction or instruction,
coupled with a pattern of the board being accustomed to act on it, and that what the court had to
find was whether the board did what the shadow director told it to do and exercised no, or no
substantial, independent judgment. On that basis, he refused to make the orders sought against
the alleged shadow directors.

On appeal by the Secretary of State

Held: allowing the appeal, that “shadow director” was to be construed in the normal way to give
effect to the parliamentary intention ascertainable from the mischief to be dealt with and the
words used; that, since the purpose of the Act was the protection of the public, and given that
the definition was used in other legislative contexts, its quasi-penal consequences in the context
of the Act of 1986 did not lead to a strict construction; that the purpose of the legislation was to
identify those, other than professional advisers, with real influence in the corporate affairs of the
company, although it was not necessary that such influence was exercised over the whole of its
corporate activities; that the court had to ascertain objectively in the light of all the evidence
whether any particular communication from an alleged shadow director, whether by words or
conduct, was to be classified as a direction or instruction; that, while it would be sufficient to
show that in the face of directions or instructions from the alleged shadow director the properly
appointed directors or some of them cast themselves in a subservient role or surrendered their
respective discretions, it was not necessary to do so; that the judge, in looking for the additional
ingredient of a subservient role or the surrender of discretion by the board, had imposed a
qualification beyond that justified by the statutory language; and that, on the facts found by the
judge, D. and H. were both shadow directors of the company and were each unfit to be a
director of a company, and disqualification orders would be made against them
It is not necessary to the recognition of a shadow director that he should lurk in the
shadows, though frequently he may. For example, a person resident abroad who owns all
the shares in a company but chooses to operate it through a local board of directors may
from time to time, to the knowledge of all to whom it may be of concern, give directions
to the local board what to do but take no part in the management of the company himself.
Such an owner may be a shadow director notwithstanding that he takes no steps to hide
the part he plays in the affairs of the company

De facto Directors
A de facto director is someone who has assumed the status and functions of a company
director so as to make himself responsible as if he were a de jure director. [Hannigan]

Per Millett J in Re Hydrodam

A de facto director is a person who assumes to act as a director. He is held out as a director by
the company, and claims and purports to be a director, although never actually or validly
appointed as such. To establish that a person was a de facto director of a company it is
necessary to plead and prove that he undertook functions in relation 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 the company's affairs or undertook tasks in relation to its
business which can properly be performed by a manager below board level.

Re Kaytech International plc [1999] 2 BCLC 351.

Facts: The Secretary of State for Trade and Industry brought proceedings under s 6 of the
Company Directors Disqualification Act 1986 against the respondents all of whom were sued on
the footing that they had been, within the meaning of the 1986 Act, directors of a company
called K plc. It was common ground that P had never been formally appointed as a director of
the company and he contended that, although he was secretary, he had never been a de facto
or shadow director of the company; the respondent, S, signed a form giving his written consent
to his appointment as a director of the company but he contended that he had never actually
been appointed as a director, or that if he had been it was without his knowledge.

Held: (1) In ascertaining whether an individual was a de facto director of a company the crucial
question was whether he had assumed the status and functions of a company director so as to
make himself responsible under the 1986 Act as if he were a de jure director. In the present
case the second respondent had been deeply and openly involved in the company's affairs from
the outset, and although he had done his best to avoid being seen to act as a director, using his
office as de jure secretary and his professional status as camouflage, on some very important
occasions he openly acted as a director. Accordingly he was a de facto director of the company
and therefore a director for the purposes of s 6 of the 1986 Act. His appeal would therefore be
dismissed.

(2) Although the third respondent honestly believed that he was not a director of the company
that belief was thoroughly unreasonable since he was a professional man who made his living
by holding nominee directorships. Accordingly, he was not released from his duty to inform
himself about the affairs of the company. Since he had been totally inactive in the performance
of any of his duties as a non-executive director of the company he was liable not only for failure
to ensure the keeping of proper accounting records but also for the false representations to the
companies registry and its creditors and for continuing its business for as long as it did. He was
therefore unfit to be concerned in the management of a company and should have been
disqualified. The Secretary of State's appeal would therefore be allowed.

Per Rimer J: If, following the service of these proceedings, the second respondent had wanted
to challenge the validity of the winding up, his correct course was to apply promptly for a stay or
adjournment of the proceedings so that he could in the meantime start separate proceedings
challenging the liquidator's status, being proceedings in which all parties affected by the
challenge, including the liquidator and the company itself, would be joined as defendants.

Re Moorgate Metals Ltd. [1995] 1 BCLC 503

Facts: H and R set up a scrap metal company as a joint enterprise. At the time of the setting up
of the company, R was a recently discharged bankrupt so his wife acted as his nominee as both
shareholder and director, but took no active part in the company’s affairs. During the life of the
company R remained in sole charge of buying and selling, whilst H was responsible for finance
and administration. The company traded at a loss and eventually became insolvent, largely due
to a number of invoice deceptions perpetrated by R against H. The official receiver applied for
disqualification orders to be made against both men, in R’s case on the basis that he had been
a de facto or shadow director. R claimed that he was not a director, even though he controlled
the company’s entire trading operation, which he said was because of his professional expertise
in the metal trade
Held: the word ‘director’ in the 1986 Act s 6(1) included a de facto director, who for the purpose
of an application for disqualification meant someone who had in fact acted as a director, though
not appointed as such. The fact that the company existed because R had invited H to join him in
a business, that R was in sole charge of the company’s trading with no limit to the commitments
he could enter into on the company’s behalf and that R received, or was authorised by the board
to receive, equal remuneration and benefits, entitled the court to conclude that R was a de facto
director of the company and could therefore be made subject to a disqualification order under
the 1986 Act s 6(1).

Secretary of State for Trade and Industry v Tjolle [1998] 1BCL 333

Facts: A company went into liquidation leaving a substantial estimated deficiency in respect of
unsecured creditors. The principal director of the company pleaded guilty to fraudulent trading
and was sentenced to imprisonment. Proceedings for disqualification against the principal and
second directors and an employee of the company were brought by the Secretary of State in
1994, two years after the liquidation, but were stayed without the employee’s consent until 1995.
Subsequently, due to the inability of the second director to attend, separate trials were ordered.
At the present hearing, which concerned only the employee, the case against her was that she
was a de facto director of the company, The question arose as to the purpose of disqualification
orders
Held: It was difficult to postulate one decisive test of whether a person was a de facto director.
The court had to take account of all the relevant factors, including whether or not there was a
holding out by the company of the individual as a director, whether the individual used the title,
whether the individual had proper information (eg management accounts) on which to base
decisions, and whether the individual had to make major decisions and so on. The question was
then, was the individual part of the corporate governing structure. There would be no
justification for the law making a person liable to misfeasance or disqualification proceedings
unless they were truly in a position to exercise the powers and discharge the functions of a
director. An alleged de facto director was in a different position to a de jure director in that he
might not have had certain knowledge and no right or means to have that knowledge, which
was important when the Secretary of State's case in part relied on what K ought to have known.
It followed that someone who had no, or only peripheral, knowledge of matters of vital company
concern (eg financial state) and had no right, legal or de facto, to access to such matters was
not to be regarded by the law as in substance a director.

The use of the title 'director' with added words did not make K a de facto director, because she
was not in fact directing the company. There was clear evidence of K's lack of involvement in
anything financial. Her attendance at the meeting of 10 December did not make her a de facto
director. K was a manager, but she did not form part of the real corporate governance of the
company. There was no function she performed that could only properly be discharged by a
director. Nor did she accept the responsibilities of office; no one could properly do so who did
not have access to the company's financial position in reasonable detail.

The first two charges were not established. In relation to the first charge K was not in a position
to 'permit' the company to trade and until the company went down she in fact did not know that it
was hopelessly insolvent. In relation to the second charge, it was not K's actions which caused
the loss to creditors. The third and fourth charges were not made out: plainly she was not at
fault in relation to any supposed duty to file accounts, and her appearance on television was as
a spokesperson with no intent to mislead. In the result, even if K was to be regarded as a
director of the company, her conduct did not make her unfit to be concerned in the management
of a company.

The judge highlighted the grey scale, stating that being a de facto director was "very
much a question of degree". The court repeated some of the Hydrodan factors as
"relevant" and added further factors to include: whether the individual used the title of
director, whether the individual had proper information (e.g. management accounts) on
which to base decisions, and whether the individual had to make major decisions. The
judge distinguished his analysis from Hydrodan by stating that it was key to ask whether
the individual was "part of the governing structure"? The reason for this is that there
would be no justification for the lawmaking a person liable for misfeasance or
disqualification proceedings unless they were truly in a position to exercise the powers
and discharge the functions of a director.
2. Officer - Definition

JCA – Section 2
“officer” in relation to a body corporate includes a director, manager or secretary;
BCA - Section 2
“officer” in relation to a body corporate means:
i) The chairman, deputy chairman, president, or vice president of the board of
directors;

ii) The managing director, the general manager, the comptroller, the secretary, or the
treasurer; or
iii) Any other person who performs for the body corporate functions similar to those
normally performed by the holder of any office specified in sub-paragraph (i) or (ii).

3. THE POWER TO MANAGE

JCA Section 180
BCA Section 59, 64
Bahamas Section 80

i)Actual Authority
Hely Hutchinson v. Brayhead
Mahony v. East Holyford Mining Co. [HL 1875] LR7 HL 869
Principles: “When there are persons conducting the affairs of the company in a manner which
appears to be perfectly consonant with the articles of association, those so dealing with them
externally are not to be affected by irregularities which may take place in the internal
management of the company.

So, in Mahoney, where the company’s articles provided that cheques should be signed by any
two of the three named directors and by the secretary, the fact that the directors who had signed
the cheques had never been properly appointed was held to be a matter of internal
management, and the third parties who received those cheques were entitled to presume that
the directors had been properly appointed, and cash the cheques.

Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. [1964] 2QB 480.

Facts: K, who carried on business as a property developer, entered into a contract to purchase
an estate. He had not enough money to pay for it and obtained financial assistance from H.
They formed a limited company with a share capital of £70,000, subscribed equally by K and H,
to buy the estate with a view to selling it for development. K and H, with a nominee of each,
comprised the board. The quorum of directors was, by the articles of association, four. H was at
all material times abroad. There was power under the articles to appoint a managing director,
but the board did not in fact do so. K to the knowledge of the board acted as if he were
managing director of the company in relation to finding a purchaser for the estate and, again,
without express authority of the board, employed on behalf of the company a firm of architects
and surveyors for the submission of an application for planning permission, preparing an appeal
against a refusal of permission, preparing plans and defining estate boundaries. The firm
claimed from the company their fees for work done

Held: The company was liable for the fees claimed because: (1) K throughout acted as
managing director to the knowledge of the company and thus was held out by the company as
being managing director, and the ostensible authority thus conferred could bind the company
since its articles of association in fact provided for there being a managing director of the
company; (2) K's act in employing plaintiffs was within the ordinary ambit of the authority of such
a managing director; (3) the fact that plaintiffs had not examined the company's articles of
association and had not enquired whether K was properly appointed managing director did not
prevent their establishing their claim against the company based on their reliance on K's
ostensible authority.

Per Diplock, LJ: to entitle a contractor to enforce against a company a contract entered
into on behalf of the company by an agent who had no authority to do so four conditions
must be fulfilled, viz (a) a representation that the agent had authority to enter on behalf of
the company into a contract of the kind sought to be enforced must have been made to
the contractor; (b) the representation must have been made by a person or persons who
had ‘actual’ authority to manage the business of the company either generally or in
respect of those matters to which the contract related; (c) the contractor must have been
induced by the representation to enter into the contract; and (d) the company must not
have been deprived, under its memorandum or articles of association, of the capacity
either to enter into a contract of the kind sought to be enforced or to delegate authority to
the agent to enter into a contract of that kind.

ii)Ostensible/Apparent
Biggerstaff v. Rowatts Whart Ltd. [1896] 2 Ch.93

Principles:the question was whether an assignment of debt by the company to the plaintiff was
valid. The assignment was executed by the managing director, one Davy. By the articles of the
company the directors were authorized to appoint a managing director and to delegate to him
such of the power of the board as they thought fit. The company had power to assign the debts
but there was no minute shewing what powers had been delegated to the managing director,
nor his powers as such, although he had acted in that capacity. It was held that the assignment
was valid. Lindley L.J., in his judgment, at page 102, said:—

The persons dealing with him must look to the articles, and see that the managing director might
have power to do what he purports to do, and that is enough for a person dealing with him bona
fide.

British Bank of Middle East v. SunLife Ass. Co. of Canada [1933] BCLC 78
Armaghas Ltd. v. Mundoga SA [1986] AC 717

Facts: An agent in question sold some property belonging to a company to the third party. The
vessels remained in possession of the company throughout the transaction. Third party sought
to take possession of the vessels and presented the documents of sale. The company argued
that the agent did not have authority to sell. Agent was trying to make secret profits.

Held: dismissing the appeal,

(1) that notwithstanding M. having been appointed by the defendants as vice-president

(transportation) and chartering manager, he was known not to have any general authority to
enter into a three year charterparty and he could not, in the absence of any representation by
the defendants as to his authority, reasonably be believed to have specific authority to notify the
other contracting party that the defendants' consent had been obtained and thereafter to
complete the agreement

(2) That although an employer whose servant, having made a fraudulent representation which
had caused loss to an innocent party contracting with him, could be liable to bear the loss by
reason of having by words or conduct induced the innocent party to believe that the servant was
acting in the course of the employer's business, such circumstances did not exist where such
belief, although present, had been brought about through misguided reliance on the servant
himself, when the servant was not authorised to do what he was purporting to do, when what he
was purporting to do was not within the class of acts that an employee in his position was
usually authorised to do, and when the employer had done nothing to represent that he was
authorised to do it; and that, accordingly, the defendants were not vicariously liable for M.'s
deceit.

The House of Lords did not accept that in such a situation the agent did not have the
authority to sell the vessels.

4. Common Law Rule: The Rule in Turquand’s Case

Royal British Bank v. Turquand’s [1856] 6 E & B 327

Please Note : this rule in sum speaks to a situation where persons conduct the affairs of
the company in a manner which appears to be in accordance with the company’s
constitution then persons dealing with these agents are not affected by any irregularities
in the internal management of the company.” But note that the rule does not protect a
third party who in fact had notice or knowledge of the defective authorisation. The onus
lies on he who alleges that the third party had the required notice or knowledge as shown
in the case of B. Liggett (Liverpool) Ltd. v British Steel Corp.
TWO FACTS. PICK ONE.
Facts: By the deed of settlement of a joint-stock company, the directors were authorised to
borrow under the common seal of the company, such sums as should from time to time, by a
resolution passed at a general meeting of the company, be authorised to be borrowed, not to
exceed a certain sum. At a general meeting, the directors were authorised to borrow such sums
and at such interest and for such periods as they might deem expedient, in accordance with the
provisions of the deed of settlement and the Act of Parliament. The directors have borrowed
£1,000 on bond, under the common seal of the company.
Held: the company were liable to repay the amount, whether the resolution was or was not a
sufficient authority to the directors to borrow; for though parties dealing with joint-stock
companies are bound to take notice of any limitation of the authority of the directors in the deed
of settlement, yet, where the directors as in this case, have power to borrow, the lenders of the
money have a right to presume that the company which put forward their directors as authorised
to borrow have taken every step requisite to empower them to

Facts: The plaintiff sought payment from the defendants, a joint stock Company, on a bond,
signed by two directors, under the seal of the Company whereby the Company acknowledged
themselves to be bound to the plaintiff in pounds 2,000. The company said that there had been
no resolution authorising the making of the bond, and that it was given without the authority of
the shareholders.
Held: The plaintiff was entitled to judgement, the obligee having, on the facts alleged, a right to
presume that there had been a resolution at a general meeting, authorising the borrowing the
money on bond. Outsiders dealing with a company in good faith can assume that acts within the
company’s constitution and powers have been properly and duly performed and are not bound
to enquire whether acts of internal management have been regular.
Jervis CJ said: ‘We may now take for granted that the dealings with these companies are not
like dealings with other partnerships, and that the parties dealing with them are bound to read
the statute and the deed of settlement. But they are not bound to do more. And the party here,
on reading the deed of settlement, would find, not a prohibition from borrowing, but a permission
to do so on certain conditions. Finding that the authority might be made complete by a
resolution, he would have a right to infer the fact of a resolution authorizing that which on the
face of the document appeared to be legitimately done.’

Mahony v. East Holyford Mining Co. [1875] LR 7 HL 869

Irvine v. Union Bank of Australia [1877] 2 App. Case 366

B. Liggett (Liverpool) Ltd. v. British Steel Corp. [1986] Ch.246

Facts: A bank contrary to instructions paid out cheques signed by one director only. The plaintiff
company, which was in the business of importing and selling steel and of which S. was one of
the two directors and the majority shareholder, owed £400,000 to S. Ltd., a company owned by
S. A company controlled by the defendant corporation, C. Ltd., was owed over £800,000 by S.
Ltd., a debt personally guaranteed by S. Both C. Ltd. and the defendant corporation, doubtful
that S. Ltd. and S. had sufficient assets to satisfy the debt, instead of pursuing remedies against
them, put forward proposals whereby C. Ltd. would lend the plaintiff the money to repay S. Ltd.,
S. Ltd. in turn would use that money to repay part of its debt to C. Ltd. and the plaintiff would
guarantee S. Ltd.'s liabilities to C. Ltd. On 22 January 1969 the plaintiff, which by clause 3 (K) of
its memorandum of association had power to give guarantees or become security for such
persons, firms or companies "as may seem expedient," passed a resolution approving the
proposals at a board meeting at which S. did not declare any personal interest, as he was
required to do by the articles of association if he was to be counted in the quorum of two
directors. Pursuant to the resolution, the plaintiff accepted the loan from C. Ltd. and executed a
guarantee of S. Ltd.'s indebtedness to C. Ltd. and a debenture over all its assets in favour of C.
Ltd. Subsequently, the sums secured by the debenture having been demanded and not paid, C.
Ltd. appointed the second defendant receiver and manager, and the sums secured with interest
were paid to the defendant corporation as successor to C. Ltd.

In an action against, inter alia, the defendant corporation and the receiver, the plaintiff sought to
recover the sums paid out by the receiver, alleging that the guarantee and the debenture, and
consequently the appointment of the receiver were void. The judge held that, although the
resolution of 22 January 1969 was not formally valid because of the lack of quorum of directors
resulting from S.'s failure to declare his interest, C. Ltd. was entitled, in reliance on the rule in
Royal British Bank v. Turquand (1856) 6 E. & B. 327, to assume that it had been properly
passed, a point not taken until counsel's closing address and the subject of an amendment
allowed by the judge when giving judgment; but the judge found that the guarantee and, to the
extent of the sum guaranteed, the debenture were executed to the knowledge of C. Ltd. for a
purpose other than those authorised by the plaintiff's memorandum of association and that,
accordingly, the plaintiff was entitled to have them set aside and require the defendants to repay
the sum guaranteed.

On appeal by the defendants and cross-appeal by the plaintiff

Held: dismissing the appeal and allowing the cross-appeal. The bank should have made
enquiries to satisfy itself and could not rely on the indoor management rule. The onus
lies on he who alleges that the third party had the required notice or knowledge. a
defence based on the rule in Royal British Bank v. Turquand (1856) 6 E. & B. 327 was a
plea of mixed fact and law which required to be pleaded and it was far too late to allow
the defendants to do so by the time of judgment; and that, accordingly, as the resolution
of 22 January 1969 had not been and could not be assumed to have been duly passed,
the plaintiff was entitled to disclaim the guarantee and the debenture as having been
made without its authority

That, although as a matter of construction the power, accorded by clause 3 (K) of the
plaintiff's memorandum of association, to give guarantees and become security was a
mere power ancillary to the objects of the plaintiff and not an independent object, the
execution of the guarantee and the debenture were within the plaintiff's corporate
capacity and, thus, not ultra vires the plaintiff; but that it was beyond the authority of the
directors to enter into the guarantee and, to the extent of the guarantee, the debenture
in furtherance of purposes not authorised by the plaintiff's memorandum of association;
and that, as C. Ltd. and the defendant corporation knew of that lack of authority, they
could acquire no rights under those transactions

That, further, the directors of the plaintiff were acting in breach of the plaintiff's articles of
association and their fiduciary duties to the plaintiff in purporting to authorise and in
executing the guarantee and the debenture; and that, as the defendant corporation and
the receiver had notice of that breach when they received assets of the plaintiff, they
were accountable therefor to the plaintiff as constructive trustees
That, accordingly, the plaintiff was entitled to declarations that the guarantee and the
debenture were not deeds of the plaintiff and that the purported appointment of the
receiver was void; but that the plaintiff was under an obligation to repay the sum
borrowed from C. Ltd. and could not seek redress against the defendants on the basis
that such sum had been improperly paid to the defendant corporation, though the
defendant corporation was not entitled to retain the interest thereon paid to it by the
receiver.

Per Slade L.J. (i) The rule in Royal British Bank v. Turquand, 6 E. & B. 327 only
applies in favour of persons dealing with the company in good faith. Furthermore,
even if they do not have actual knowledge that an irregularity has occurred they
will be precluded from relying on the rule if the circumstances were such as to
put them on inquiry which they failed duly to make. The very nature of a proposed
transaction may put a person on inquiry, even if he has no special relationship
with the company

Howard v. Patent Ivory Manufacturing Co. [1888] 38 ChD156

Morris v Kanssen [1946] 1 AER 586 HL

Hely Hutchinson v Brayhead [1968] 1 QB 549

Facts: The plaintiff (Lord Suirdale Hely-Hutchinson), in the first instance, had injected money
into the company (Defendant) in which he later became a director. Before he injected the
money, he secured a repayment guarantee and was indemnified for potential losses in the deal
by one Mr. Richards who was the chairman of the company Brayhead Ltd. Subsequently the
company went into liquidation and refused to pay Lord Suirdale on the grounds that the Mr.
Richards had no authority to make the guarantees in the first place.
The Appeal Court held that Lord Suirdale had rights to claim the indemnity and guarantees
because Mr. Richards, from the company’s conduct over several months, had “actual authority”
being implied from the circumstances to make those guarantees as a representative of the
company.

Lord Denning MR, inter alia, held:

“I need not consider at length the law on the authority of an agent, actual, apparent, or
ostensible. That has been done in the judgments of this court in Freeman & Lockyer v
Buckhurst Park Properties (Mangal) Ltd. It is there shown that actual authority may be express
or implied. It is express when it is given by express words, such as when a board of directors
pass a resolution which authorises two of their number to sign cheques. It is implied when it is
inferred from the conduct of the parties and the circumstances of the case, such as when the
board of directors appoint one of their number to be managing director. They thereby impliedly
authorise him to do all such things as fall within the usual scope of that office. Actual authority,
express or implied, is binding as between the company and the agent, and also as between the
company and others, whether they are within the company or outside it…The judge held that
Mr. Richards had ostensible or apparent authority to make the contract, but I think his findings
carry with it the necessary inference that he had also actual authority, such authority being
implied from the circumstance that the board by their conduct over many months had
acquiesced in his acting as their chief executive and committing Brayhead Ltd to contracts
without the necessity of sanction from the board.”

Ruben v Great Fingal Consolidate [1906] AC 439

KreditBank Cassel GMBH v. Schenkers Ltd. (1927) 1 KB 826

Reform Initiatives: BCA Section 21 – codification of the Rule

Cf JCA Section 6
For the avoidance of doubt, it is hereby declared that, unless otherwise specifically provided in
this Act... an act of the company that is contrary to its articles... shall not be invalid by reason
only that the act is contrary to its articles.”

5. Constructive Notice
Ernest v. Nichols [1857] 6 H.L. Case 401
Facts: The contract was made by one company for the acquisition of another company’s
goodwill. It was sealed and attested by two directors. The company had four directors and its
deed specified the quorum of directors, for such activities, as three. It was said and inferred at
first instance that three of them had authorized the sealing while one of those had an “interest”
in the contract (though he did not authenticate the sealing). The Lord Chancellor noted that the
transaction was extraordinary, and one which a company could not be presumed to have power
to enter into the transaction. Lord Wensleydale laid down that the articles which restrict and
regulate authority are to be stipulated in obligatory manner for those who deal with the company.
Further, he also laid down that directors can make no contract so as to bind the whole body of
shareholders. The case assumed constructive notice and constructive knowledge of the
constitution.
It was decided that notwithstanding that the contractor has relied on apparent authority, an
outsider can’t make a company perform, based on purported authority of the contractor. Further,
Lord Wensleydale decided that the law of partnerships is not applicable to the company which
comprises greater numbers. Therefore, to make the whole company comply with the contracts
entered by contributors will lead to utter ruin.

Houghton v. Nothard Lowe & Wills Ltd. [1927] 1 KB 246

International Sales v. Marcus [1982] 3 AER 551

Facts: When a major shareholder became ill, his friend Marcus agreed he would repay loans to
some companies. The defendant, who was a director of the two companies, repaid the loans
using company cheques.

Held: The money had been paid to the defendants by M in breach of his fiduciary duty as
constructive trustee of the money in the bank account of the companies over which he had
control. Furthermore, the payments were ultra vires the objects clauses in the memoranda of
association of the companies, since the mere fact that the objects clauses contained express
power by the companies to draw cheques did not prevent the court from inquiring into the nature
and purpose for which the cheques were drawn. It followed that the defendants became
constructive trustees of the money received by them, since they had actual notice that the
money received was the property of the plaintiffs and that in arranging for the payment M had
acted in breach of trust.

(2) The defendants’ liability to account to the plaintiffs for the money received by them in breach
of trust was not affected by s 9(1) of the 1972 Act, since the purpose of s 9(1) was to protect
innocent third parties who entered into transactions with companies which might otherwise
avoid their obligations by relying on the ultra vires doctrine. Section 9(1) therefore did not affect
the operation of a constructive trust if the facts gave rise to such a trust.

Reform Initiatives: JCA Section 7

No person shall be affected by or presumed to have notice or knowledge of, the contents of a a
document concerning a company by reason only that the document has been filed with the
Registrar or is available for inspection at any office of the company.

6. FIDUCIARY DUTY

JCA Section 174(1)(A)

Regal Hastings v Gulliver [1967] 2AC 134, [1942] 1 ALL ER 378
Facts: Regal (Hastings) Ltd (Regal) owned a cinema. Regal took out leases on two more
cinemas, through a new subsidiary (Hastings Amalgamated Cinemas Ltd), in order to create a
viable sale package. The landlord wanted personal guarantees from the directors. The directors
refused to do so. The landlord then offered to up the share capital to £5,000. Regal itself put in
£2,000, but could not any afford more (though it could have got a loan). Four directors each put
in £500. Mr Gulliver, Regal’s chairman, got outside subscribers to put in £500 and the board
asked the company solicitor, Mr Garten, to put in the last £500. The directors sold the business
and made a profit of nearly £3 per share. Shortly after, the buyers brought an action against the
directors, saying that this profit was in breach of their fiduciary duty to the company. The
directors had not gained fully informed consent from the shareholders.

Shorter Facts Per Hannigan: A company could not finance the acquisition of additional cinemas
which it wished to acquire. It was unable to put up sufficient share capital for the acquiring
subsidiary and instead that capital was put up by the directors who then profited personally on
the sale of the shares in the subsidiary. The new controllers of the company successfully sued
the former directors to recover those profits.

Lord Russel stated: 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 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.

Lord Macmillan: The issue thus becomes one of fact. The plaintiff company has to establish two
things: (1) That what the directors did was so related to the affairs of the company that it can
properly be said to have been done in the course of their management and in utilisation of their
opportunities and special knowledge as directors; and (2) that what they did resulted in a profit
to themselves. The first of these propositions is clearly established by the analysis of the whole
complicated circumstances for which the House is indebted to my noble and learned friend who
has preceded me. The second proposition is admitted, except in the case of Mr. Gulliver, in
whose case I agree that on the evidence he is not proved to have made any profit personally.
The conditions are therefore in my opinion present which preclude the four directors who made
a personal profit by the transaction from retaining such profit.

Belmont Finance Corpn. V Williams Furniture Ltd. (No.2) [1980] 1 All ER 393.
Re Duckwari plc (No.2), Duckwari plc v Offerventure Ltd. (No.2) [1998] 2 BCLC 315

JJ Harrison (Properties) Ltd. V Harrison [2002] 1 BCLC 162

Facts: A director acquired property from the company of which he was a director. By failing to
disclose information to the company that would have affected the property's value, the director
ensured that he obtained the property below its true value. The director was sued for breach of
fiduciary duty more than six years after he had committed the breach.
Held: A company incorporated under the Companies Acts is not trustee of its own property; it is
both legal and beneficial owner of that property; the property of a company so incorporated
cannot lawfully be disposed of other than in accordance with the provisions of its memorandum
and articles of association; the powers to dispose of the company's property, conferred upon the
directors by the articles of association, must be exercised by the directors for the purposes, and
in the interests, of the company; and in that sense, the directors owe fiduciary duties to the
company in relation to those powers and a breach of those duties is treated as a breach of trust.

(2) A director, on appointment to that office, assumes the duties of a trustee in relation to the
company's property. If, thereafter, he takes possession of that property, his possession 'is
coloured from the first by the trust and confidence by means of which he obtained it'. His
obligations as a trustee in relation to that property do not arise out of the transaction by which
he obtained it for himself. The true analysis is that his obligations as a trustee in relation to the
property predate the transaction by which it was conveyed to him. The conveyance of the
property to himself by the exercise of his powers in breach of trust does not release him from
those obligations. He is trustee of the property because it has become vested in him; but his
obligations to deal with the property as a trustee arise out of his pre-existing duties as a director,
not out of the circumstances in which the property was conveyed.

(3) The present action was an action to recover trust property or the proceeds of trust property
received by PH as trustee and converted to his use. The Limitation Act 1980, s 21(3) was not
intended to permit a trustee, where he pleaded the statute, to retain something that he ought not
to have. Accordingly, PH could not rely on s 21(3), and s 21(1)(b) of the Act was applicable to
prevent PH profiting from his breach of trust. Accordingly, the Limitation Act 1980 provided no
defence in the present case. The judge had not erred in rejecting PH's defences of laches and
accordingly PH was liable to account.

Mills v Mills (1958) 60 CLR 150, 185 per Dixon J

A. LIABILITY OF THIRD PARTIES

i) Knowing Assistance
Barnes v Addy (1874) LR 9

Facts:
A stranger who acts as the agent of a trustee in a transaction legally within his power, but which
leads to a breach of trust, is not to be held responsible as a constructive trustee unless some of
the property passes into his hands, or unless he is cognisant of a dishonest design on the part
of the trustee.

The Court discourages the practice of making solicitors or other agents who are not primarily
liable for the loss of property, and who ought to be made witnesses, Defendants to a suit for the
purpose of charging them with costs.
A., the surviving trustee of a fund, one moiety of which was settled upon his wife and children,
and the other moiety upon the wife and children of B., in exercise of a power in the settlement,
appointed B. sole trustee of half the fund, taking an indemnity from him, and retained the other
half in his own name. B. sold out and misapplied the moiety of the fund transferred to him, and
became bankrupt. A.'s solicitor advised him against the appointment of B. as sole trustee, but
prepared the deeds of appointment and indemnity, and introduced him to a broker for the
purpose of selling out some of the stock to pay some costs to which it was liable, and the same
broker afterwards transferred a moiety of the residue to B. B. employed another solicitor, who
warned B's wife of the risk attending the proposed transaction, but settled the deed of indemnity
on her behalf

Held: (affirming the decision of Wickens, V.C.), in a suit by B.'s children, seeking to make A. and
the two solicitors responsible for the fund which was lost, that as neither of the solicitors had any
knowledge of, or any reason to suspect, a dishonest design in the transaction, and as the fund
had not passed into their hands, the bill must be dismissed against them both with costs.

Royal Brunei Airlines v Tan [1995] 2 AC 378.

Facts: The plaintiff airline appointed as its agent in a particular area for the sale of passenger
and cargo transportation a company of which the defendant was the managing director and
principal shareholder. Under the agreement the company was to hold in trust for the airline
money received from such sale until it was accounted for by the company to the airline. With the
defendant's knowledge and assistance the company paid the money into its current bank
account instead of into a separate account, and in breach of trust the company used that money
for its own business purposes. The company failed to pay the airline sums due within the time
specified by the agreement. The airline terminated the agreement and, the company having
become insolvent, commenced proceedings against the defendant to recover the money owed
by the company. The judge held that the defendant was liable as a constructive trustee to pay
that amount to the airline. On appeal the Court of Appeal of Brunei Darussalam reversed that
decision, holding that the defendant could not be so liable because it had not been established
that the company was guilty of fraud or dishonesty in relation to the money held in trust for the
airline.

Held: Allowing the appeal, that where a third party dishonestly assisted a trustee to commit a
breach of trust or procured him to do so, the third party would be liable to the beneficiary for the
loss occasioned by the breach of trust, even though the third party had received no trust
property and irrespective of whether the trustee had been dishonest or fraudulent; that in the
context of such accessory liability honesty was to be judged objectively and acting dishonestly,
or with a lack of probity, which was synonymous, meant not acting as an honest person would
act in the circumstances and could usually be equated with conscious impropriety as distinct
from inadvertent or negligent conduct or carelessness, although a third party might be acting
dishonestly if he recklessly disregarded the rights of others; that the third party's conduct had to
be assessed on the basis of his actual knowledge at the time not what a reasonable person
would have known or appreciated, and regard could be had to his personal attributes including
experience and intelligence and the reason for him acting in that way; and that, accordingly,
since the defendant had caused or permitted the company to commit a breach of trust by using
in the conduct of its business money held in trust for the airline when he knew that the company
was not authorised to do so by the terms of the trust, the defendant had acted dishonestly, and
was, therefore, liable to the airline for the amount owed to it by the company

ii) Knowing Receipt

Belmont Finance Corporation Ltd. V Williams Furniture Ltd.

Facts: The company directors operated an elaborate scheme to extract value from Belmont by
causing it to buy the shares of a company called Maximum at a considerable overvalue. This
was a breach of the fiduciary duties of the directors. They sought to recycle the profit on the sale
of Maximum so that it could be used to fund the purchase by three companies associated with
the directors of Belmont’s own shares. This was not only a breach of the directors’ fiduciary duty
but a criminal contravention of section 54 of the 1948 Act. Belmont went into liquidation, and an
action was brought in its name by receivers for damages for breach of duty against the directors
who had authorised the transaction, and for an account on the footing of knowing receipt
against the three companies.

Held: An employee’s knowledge is not to be treated as the employer’s knowledge: ‘But in my

view such knowledge should not be imputed to the company, for the essence of the
arrangement was to deprive the company improperly of a large part of its assets. As I have said,
the company was a victim of the conspiracy. I think it would be irrational to treat the directors,
who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to
the company; and indeed it is a well recognized exception from the general rule that a principal
is affected by notice received by his agent that, if the agent is acting in fraud of his principal and
the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to
the principal. So in my opinion the plaintiff company should not be regarded as party to the
conspiracy on the ground of lack of necessary guilty knowledge

Bank of Credit and Commerce International (Overseas) Ltd. V Akindele [2000] 4 All ER
221

Facts: The defendant, A, entered into an agreement with I Ltd, a company controlled by the
BCCI group, ostensibly for the purchase of shares in the group's holding company. That
agreement, which guaranteed A a return of 15% per annum, compounded annually, on an
investment of $US 10m, enabled officers of the group to conceal a series of 'dummy' loans
which had been fraudulently used by the holding company to buy parcels of its own shares. In
subsequent proceedings, the liquidators of I Ltd contended that A was liable to account, as
constructive trustee, for sums paid to him under the agreement. At trial, the judge held that A
had not been aware of the underlying fraud and that he had not been dishonest. Accordingly, he
dismissed the liquidators' claim which had been brought under both the knowing receipt and
knowing assistance heads of constructive trust. On the liquidators' appeal, two legal issues
arose, namely what state of knowledge was required in a claim for knowing receipt and whether
dishonesty was an essential ingredient of such a claim.

Held: Dishonesty was not an essential ingredient of a claim for knowing receipt, and the test for
knowledge in such a claim was simply whether the defendant's knowledge made it
unconscionable for him to retain the benefit of the receipt. Although such a test could not avoid
difficulties of application, it should avoid those of definition and allocation to which previous
categorisations had led. Moreover, it should better enable the courts to give commonsense
decisions in the commercial context in which claims in knowing receipt were now frequently
made, paying equal regard, on the one hand, to the need to avoid the mischief of paralysing
trade and, on the other hand, to the realisation that there were cases in which a commercial
man should not be allowed to shelter behind the exigencies of commercial life. In the instant
case, the judge had been entitled to find that A had acted honestly and thus the case in knowing
assistance was bound to fail. As for the claim in knowing receipt, A did not have any knowledge
which made it unconscionable for him to retain the benefit of the receipt. Accordingly, the appeal
would be dismissed
B. Overriding Nature of this Duty

Re Smith & Fawcett Ltd [1942] Ch. 304, 306 per Lord Greene

Dawson International plc v Coats Paton plc [1990] BCLC 560

Facts: Dawson International plc (Dawson) alleged that there had been a number of meetings
between its directors and the directors of Coats Patons plc (Coats) to discuss the terms of a
take-over bid by Dawson of Coats. Eventually both companies made a joint press
announcement of the terms of the bid and also stating that the board of Coats would
recommend the bid. The latter aspect of the agreement was important for Dawson as it wanted
to discourage any counter-bid from being made. It was also claimed by Dawson that the Coats
board had agreed not to co-operate with a rival bidder should one emerge. Subsequently
Vantona Viyella plc (Viyella) approached Coats to open negotiations for the acquisition of Coats
by Viyella. Eventually an agreed take-over of Coats by Viyella was announced. Dawson let its
offer lapse as it could not afford to be involved in a contested take-over. Dawson raised an
action against Coats in which it alleged that there had been an agreement between it and Coats
that Coats would recommend its offer and not seek alternative bidders for its shares and that
Coats had breached that agreement. Coats argued that it could not have validly entered into
such a contract as it would have been beyond the capacity of the company or alternatively that
such a contract would have been contrary to the fiduciary duty that the directors of Coats owed
to individual shareholders to advise them on the merits of any takeover bid. Dawson also raised
an action against Coats and two of its directors seeking reimbursement of the expenses they
had incurred in taking steps to implement the arrangement with Coats and which had been
wasted when their bid lapsed because of the bid made by Viyella. The case came before the
court on the defenders' plea that the pursuer's averments were irrelevant as disclosing no case
in law. The Lord Ordinary held that the pursuer's averments disclosed a cause of action and
allowed proof before answer on Dawson's claim of breach of contract. Coats Paton appealed on
the grounds that the Lord Ordinary had erred in allowing the alleged breach of contract to go to
inquiry.

Held: Dawson conceded that any contract between it and Coats was subject to the qualification
imported by the general law which defined directors' overriding duties that the directors could, if
circumstances altered materially, decide in fulfilment of their continuing duty to the company and
its shareholders not to implement any agreement between Dawson and Coats. On the basis of
that concession, the only question before the court was whether Dawson had made an
averment of breach which was sufficiently relevant and specific to entitle it to inquiry by proof
before answer. On the facts, such an averment had been made and accordingly the reclaiming
motion of the defenders would be refused.

BCE Inc. v 1976 Debenture holders, 2008 SCC 69 (CanLII), [2008] 3 SCR 560

Facts: BCE Inc. was the subject of multiple offers involving a leveraged buyout, for which an
auction process was held and offers were submitted by three groups. All three offers
contemplated the addition of a substantial amount of new debt for which Bell Canada, a
whollyowned subsidiary of BCE, would be liable. One of the offers, which involved a consortium
of three investors, was determined by BCE's directors to be in the best interests of BCE and
BCE's shareholders. That was to be implemented by a plan of arrangement under s. 192 of the
Canada Business Corporations Act,[3] which was approved by 97.93% of BCE's shareholders
but opposed by a group of financial and other institutions that held debentures issued by Bell
Canada and sought relief under the oppression remedy under s. 241 of the CBCA.[4] They also
alleged that the arrangement was not "fair and reasonable" and opposed s. 192 approval by the
court. Their main complaint was that, upon the completion of the arrangement, the short‑term
trading value of the debentures would decline by an average of 20 percent and could lose
investment grade status.

Facts: Directors of the corporation (appellants in B.) have (1) fiduciary duty to the company and
• This case concerns the “fair treatment” component of the directors’ fiduciary duty
• It is clear that where the interests of the stakeholders/company conflict, the directors owe
the duty to the corporation (Peoples)
However, in considering what is in the best interests of the corporation, directors can look to the
interests of shareholders, employees, creditors, consumers, governments, etc.
• Business Judgment Rule: Courts must give deference to the business judgment of directors
so long as those decisions lie within a range of reasonable alternatives

C. Interests to Which Regard May/Must Be Had

JCA Section 174(4)
BCA Section 95 (2)
Re Smith & Fawcett Ltd [1942] Ch. 304

Facts: Article 10 of the articles of association of a private company provided: "The directors may
at any time in their absolute and uncontrolled discretion refuse to register any transfer of shares,
and cl. 19 of Table A shall be modified accordingly." The issued capital of the company
consisted of 8002 ordinary shares of which the two directors of the company, J. F. and N. S.,
held 4001 each. J. F. died, and his son as his executor applied to have the testator's shares
registered in his name. N. S. refused to consent to the registration, but offered to register 2001
shares and to buy 2000 at a fixed price. The executor applied to the court by way of motion that
the register of members of the company might be rectified by inserting his name as the holder of
the 4001 shares

Held: affirming Simonds J., that art. 10 gave the directors the widest powers to refuse to register
a transfer, and that, while such powers are of a fiduciary nature and must be exercised in the
interests of the company, there was nothing to show that they had been otherwise exercised.
Affidavit evidence is unsatisfactory evidence of the motives of directors in exercising their
powers.

Mills v Mills (1938) 60 CLR 150

Mutual Ins. Co of New York v Rank Organization Ltd [1985] BCLC11

Facts: In 1975 The Rank Organisation Ltd (Rank), the first defendant, offered for sale to the
public 20 million A ordinary shares, half of which were made available on a preferential basis to
existing Rank A ordinary shareholders except those resident in the United States or Canada, or
their agents, who were excluded from the offer because of the securities legislation in those
countries. The articles of association of Rank vested in the directors of the company a power to
allot, deal with or dispose of the company's shares 'on such terms as they think proper'. The
plaintiffs were the beneficial owners of shares in Rank which were registered in the name of a
nominee company (Guaranty) which in turn was the nominee of an American company
(Morgan), these companies being the second and third defendants respectively. The plaintiffs
commenced an action for damages alleging that as the Rank offer discriminated against
shareholders resident in the United States or Canada or their agents (which included Guaranty)
it was in breach of the contract of membership constituted by s 20 of the Companies Act 1948
which required Rank to treat all shareholders of the same class equally.

Held: No overriding term could be implied into the contract of membership as constituted by s
20 of the Companies Act 1948 that shareholders of the same class were to be treated equally
either with respect to a resolution of the board of directors or of the shareholders in general
meeting. In the present case, the power to allot shares had been conferred in the widest terms
on the board of directors of Rank and it was subject to only two implied terms: (i) that the power
would be exercised by the directors in good faith and in the interests of the company and (ii) that
it would be exercised fairly as between different shareholders (which did not require that they be
treated identically). On the facts, the directors in making the allotment had exercised their power
bona fide in the interests of the company. The United States and Canadian shareholders had
not been treated unfairly, in that their exclusion from participation in the offer did not affect the
existence of their shares or the rights attached to them; there was no suggestion that the terms
of the offer were improvident; no shareholder in Rank had any right to expect his interest to
remain constant forever; and the reason for the exclusion of the North American shareholders
was because of a difficulty resulting only from their own personal situation. In addition, there
was no justification for implying a term that the directors of Rank should only proceed with the
discriminatory allotment if, after having considered the inherent unfairness of such a distribution,
they concluded that no alternative method of allotment not involving discrimination was
practicable and that it was essential for the prosperity of Rank that the shares be allotted.
Accordingly, there was no basis on which the allotment by Rank could be impugned

BCE Inc. v 1976 Debenture holders, 2008 SCC 69 (CanLII), [2008] 3 SCR 560

D. The No-Profit Rule

(i) General Principle
Regal (Hastings) Ltd v Gulliver [1967] 2AC 134n, [1942] 1 ALL ER 378

Facts: Appellant company were the owners of a cinema in H. With a view to the sale of the
property of the company as a going concern they were anxious to acquire two other cinemas in
H. For this purpose they formed a subsidiary company with a capital of £5,000 in £1 shares.
They were offered a lease of the two cinemas, but the landlord required a guarantee of the rent
by the directors unless the paid-up capital of the subsidiary company was £5,000. The intention
of the directors of the appellant company was that the appellant company should hold all the
shares in the subsidiary company, and, since appellant company at that time was unable to
provide more than £2,000, it seemed that the directors would be obliged to give the required
guarantee. The directors wished to avoid giving this guarantee, and the matter was arranged in
this way. Appellant company was to take up 2,000 shares at par; the chairman of the directors
promised to find £500; the other directors promised to do the same; and G, who was the
solicitor to appellant company, also promised to provide £500. This arrangement was made at a
board meeting to which the directors and G were called by two notices, one of a board meeting
of appellant company and the other of a board meeting of the subsidiary company. Both
meetings were to be held at the same time and place. In fulfilment of the arrangement 2,000
shares were allotted to appellant company; 500 to each of the directors and G, but the shares in
respect of the £500 ‘found’ by the chairman of the directors were allotted to and paid for by two
companies and one private individual, so that the companies and the individual took as
beneficial owners and not as nominees of the chairman. Ultimately the transaction was not
carried through by the sale of the property of the company as a going concern, but by the sale
of all the shares in appellant company and in the subsidiary company. The 3,000 shares in the
subsidiary company which were allotted to or on behalf of the directors of appellant company
and Q were sold at a profit of £2 16s 1d per share. It was found as a fact that all the
transactions were bonâ fide
Held: in the circumstances, the directors, other than the chairman, were in a fiduciary
relationship to appellant company and liable, therefore, to repay to it the profit they had made on
the sale of the shares; (2) the chairman of the directors, since he did not take the shares
beneficially, was not liable to repay the profit made by those who took the shares from him, as
the latter were not in a fiduciary relationship to the company; (3) since G was not a director of
appellant company he was not in a fiduciary relationship to it, and was not liable to make any
repayment, and, moreover, he took the shares at the express request of the directors of
appellant company.

(ii) Corporate Property, Information or Opportunities

Cook v Deeks [1916] AC 554

Facts: Three directors of a company carrying on the business of railway construction contractors
obtained a contract in their own names to the exclusion of the company. The contract was
obtained under circumstances which amounted to a breach of trust by the directors and
constituted them trustees of its benefits on behalf of the company. By their votes as holders of
three-quarters of the issued shares they subsequently passed a resolution at a general meeting

Held: that the benefit of the contract belonged in equity to the company, and the directors could
not validly use their voting power to vest it in themselves.

Canadian Aero Services Ltd v O’Malley (1973) 40 DLR (3rd) 371

Facts: Mr O’Malley and Dr Zarzycki were senior officers of the claimant (‘Canaero’). Having
attempted, unsuccessfully, to procure a contract for Canaero to carry out a topographical survey
and mapping of part of Guyana, they resigned from the company. Subsequently, they
incorporated their own company, Terra Surveys Ltd (‘Terra’). Terra was successful, shortly
afterwards, in obtaining the contract for the topographical survey and mapping. Canaero
brought a claim against Mr O’Malley, Dr Zarzycki and Terra. The argument concentrated on
breach of fiduciary duty; which was not how the case had been argued below.

Held: If a person, who owes a fiduciary duty, is associated with a maturing business opportunity,
he is precluded from so acting on it after his resignation (without the corporation’s approval),
where the resignation may fairly be said to have been prompted by a wish to acquire for himself
the opportunity sought by the company. Therefore Z and O breached their fiduciary duty

“...the fiduciary relationship goes at least this far: a director or a senior officer like O'Malley or
Zarzycki is precluded from obtaining for himself, either secretly or without the approval of the
company (which would have to be properly manifested upon full disclosure of the facts), any
property or business advantage either belonging to the company or for which it has been
negotiating; and especially is this so where the director or officer is a participant in the
negotiations on behalf of the company…” - Laskin J

(iii) Company Unable to Secure Opportunity

Industrial Development Consultants v Cooley [1972] 2 All ER 162

Facts: In Industrial Development Consultants Ltd v Cooley [1972] 1 W.L.R. 443, Cooley wast a
managing director of IDC. While negotiating on behalf of IDC, he decided to personally bid on a
contract. Subsequently, he pretended to be ill so that he could leave the company at short
notice. Cooley then took up the contract and made a large personal profit.

Held: (i) While the defendant was managing director of the plaintiffs a fiduciary relationship
existed between him and the plaintiffs; accordingly information which came to him while he was
managing director and was of concern to the plaintiffs, was information which it was his duty to
disclose to the plaintiffs. He was under a duty therefore to disclose all information which he
received in the course of his dealings with the gas board. Instead he had embarked on a
deliberate course of conduct which had put his personal interests as a potential contracting
party with the gas board in direct conflict with his pre-existing and continuing duty as managing
director to the plaintiffs. He was therefore in breach of his fiduciary duty to the plaintiffs in failing
to pass on the them all the relevant information received in the course of his dealings with the
gas board and in guarding it for his own personal purposes and profit

Because of his breach of duty the defendant was liable to account to the plaintiffs for all the
benefit he had received or would receive under the contract with the gas board. The question
whether the benefit of the contract would have been obtained for the plaintiffs but for the
defendant's breach of fiduciary duty was irrelevant. It was therefore irrelevant that, as a result of
the order to account, the plaintiffs would receive a benefit which they would not otherwise have
received
Canadian Aero Services Ltd v O’Malley (1973) 40 DLR (3rd) 371
Island Export Finance Ltd v Umunna [1986] BCLC 460

Facts: U was the managing director of IEF Ltd which pursued business in West Africa. In 1976
U secured a contract for IEF Ltd from the Cameroons postal authorities for postal caller boxes.
Although IEF Ltd hoped for further such orders it received no such assurance from the postal
authorities. In 1977 U resigned as managing director due to his dissatisfaction with IEF Ltd
rather than a desire to appropriate the postal call box business for his own company (the
second dependent). At this time IEF Ltd was not actively seeking repeat or further orders. U
subsequently obtained for his own company an order for postal caller boxes and for a travelling
post box from the Cameroons postal authorities. In the present proceedings IEF Ltd alleged that
U, in entering into the two contracts for his own company, had breached his fiduciary duty to IEF
Ltd; that he remained under such a duty even after his resignation as a director; and/or that he
made improper use of IEF Ltd's confidential information and accordingly U's company must
account for the profits derived from these two contracts.

Held: U had not breached his duty.

1.) A director's fiduciary duty did not necessarily come to an end when he ceased to be a
director. A director was precluded from diverting to himself a maturing business opportunity
which his company was actively pursuing even after his resignation where the resignation was
prompted or influenced by a desire to acquire that opportunity for himself. On the facts IEF Ltd's
claim that U had breached his fiduciary duty failed since: (a) IEF Ltd's hope of obtaining further
orders for postal caller boxes was not a maturing business opportunity; (b) IEF was not actively
pursuing further orders either when U resigned or when he subsequently obtained the contracts;
(c) U's resignation was not prompted or influenced by a wish to acquire for himself the
Cameroons postal caller box business

2.) U had not improperly exploited any confidential information he had acquired as a director. In
so far as IEF Ltd's claim was based on the principle that knowledge of the existence of a
particular market acquired as a director was confidential information which a director could not
use for his own purposes on termination of his directorship, this was too wide a proposition and
conflicted with public policy on restraint of trade

(iv) Company Considers and Rejects Opportunity

Queensland Mines Ltd v Hudson (1978) 52 ALJR 399
Gencor ACP ltd v Dalby [2000] 2 BCLC 734

Facts: The plaintiff made a large number of claims against a former director, Mr Dalby, for
misappropriating its funds. These included a claim for an account of a secret profit which Mr
Dalby was said to have been procured to be paid by a third party, Balfour Beatty, to a BVI
company under his control called Burnstead.

Held: It was a well established rule of equity that a person who was under a fiduciary obligation
had to account to the person to whom the obligation was owed for any benefit or gain which had
been obtained or received in circumstances where a conflict or a significant possibility of conflict
existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of
such a benefit or gain or which was obtained or received by use or by reason of his fiduciary
position or of opportunity or knowledge resulting from it. It was no answer to them that the
company could not or would not have taken up the business opportunity that the director took
up for his own benefit. Nor was it an answer that the director’s own skill or property were also
used in the course of making the profit. The only escape from potential accountability was the
obtaining of the prior approval of the company’s shareholders after full disclosure of all the facts
and circumstances. Applying those principles to the facts of the case, the court would give
judgment for the claimants against D, M and B Ltd on some of the claims..

Peso Silver Mines Ltd v Copper (1966) 58 DLR (2nd)1

Facts: Cropper was the managing director of Peso, which held about 20 square miles of
mineral claims in the Yukon Territory. A prospector, Dickson, made an offer for Peso to purchase
certain unproven claims (one of which was contiguous to Peso’s land). The offer was
considered by Peso’s full board of directors and was rejected, in part because of Peso’s
financial strained financial situation. A short while after Peso’s board had rejected the offer, a
geologist, Dr. A, approached Cropper with the possibility of forming a group to acquire the
claims. Cropper and three others took up these claims and each contributed an equal amount to
finance the purchase through a newly incorporated company, Cross Bow. Eventually another
company, Charter, purchased a large interest in Peso and a number of new directors were
appointed to the board at the request of Charter. At a meeting of the new board, Cropper
disclosed his interest in Cross Bow, but refused to comply with the chairman's request that he
turn over his interest in Cross Bow at cost. Cropper was fired as an officer and eventually
resigned as a director. Peso brought an action for a declaration that the shares in Cross Bow
acquired by Cropper were held by him in trust for Peso and that he be required to deliver the
shares to Peso or to account for the proceeds thereof

Held: No. The Court may find that a bargain made as a personal matter does not give rise to the
corporate opportunities doctrine.

“…I find it impossible to say that the respondent obtained the interests he holds in Cross Bow…
by reason of the fact that he was a director of the appellant and in the course of the execution of
that office…” - Cartwright J

E. The No-Conflict Rule

(i) General Principle

Movitex Ltd v Bulfield [1988] BCLC 104
Facts: The company’s articles were more extensive than Article 84 of the 1948 Table A. The
articles permitted a director to be interested in the transactions in which the company was
interested, and also allowed him to profit from them, if he disclosed his interest to the board and
if he did not vote, although there were circumstances where he could vote and his votes would
be counted. The difference between the articles in question andArticle 84 was that the number
of such circumstances was greater in the former than the latter.

Held: Vinelott J held that the articles were valid and did not violate section 205 of the
Companies Act 1948 (now section 232 of the Act). This is because the equitable principle
underlying the articles in question—a director is prohibited from placing themselves in a position
in which his personal interest conflicts with his duty to the company—is a disability, not duty.
Since section 205 concerned exemptions from liability, which presupposed a duty and its
breach, and given that the principle underlying the articles in question were concerned with
disability and notduty, it was not covered by section 205.

Aberdeen Rly Co v Blaikie Bros (1854) 1 Macq 461

Facts: The plaintiff needed a large quantity of iron chairs (rail sockets) and contracted for their
supply over an 18-month period with Blaikie Bros a partnership. Thomas Blaikie was the
managing partner of Blaikie Bros and a director and the chairman of the Aberdeen Railway
Company. The contract was partly performed but, having taken delivery of about two-thirds of
the iron chairs, the Aberdeen Railway Company refused to accept any more. The defendant
sought to enforce the contract or for damages for breach.
Held: The railway company’s defence succeeded on the grounds that Mr Blaikie’s self-dealing
rendered the contract voidable at its suit.
The equitable rule as to the accountability of directors is not limited to cases in which there is a
maturing business opportunity but extends to cases in which the director either has or can have
a personal interest conflicting, or which possibly may conflict, with the interests of whose whom
he is bound to protect. ‘This, therefore, brings us to the general question, whether a Director of
a Railway Company is or is not precluded from dealing on behalf of the Company with himself,
or with a firm in which he is a partner. The Directors are a body to whom is delegated the duty of
managing the general affairs of the Company. A corporate body can only act by agents, and it is
of course the duty of those agents so to act as best to promote the interests of the corporation
whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature
towards their principal. And it is a rule of universal application, that no one, having such duties
to discharge, shall be allowed to enter into engagements in which he has, or can have, a
personal interest conflicting, or which possibly may conflict, with the interests of those whom he
is bound to protect. So strictly is this principle adhered to, that no question is allowed to be
raised as to the fairness or unfairness of a contract so entered into.’

and ‘Mr Blaikie was not only a Director, but (if that was necessary) the Chairman of the
Directors. In that character it was his bounden duty to make the best bargains he could for the
benefit of the Company. While he filled that character, namely, on the 6th of February, 1846, he
entered into a contract on behalf of the Company with his own firm, for the purchase of a large
quantity of iron chairs at a certain stipulated price. His duty to the Company imposed on him the
obligation of obtaining these chairs at the lowest possible price. His personal interest would lead
him in an entirely opposite direction, would induce him to fix the price as high as possible. This
is the very evil against which the rule in question is directed, and I here see nothing whatever to
prevent its application. I observe that Lord Fullerton seemed to doubt whether the rule would
apply where the party whose act or contract is called in question is only one of a body of
Directors, not a sole trustee or manager. But, with all deference, this appears to me to make no
difference. It was Mr Blaikie’s duty to give his co-Directors, and through them to the Company,
the full benefit of all the knowledge and skill which he could bring to bear on the subject. He was
bound to assist them in getting the articles contracted for at the cheapest possible rate. As far
as related to the advice he should give them, he put his interest in conflict with his duty, and
whether he was the sole Director or only one of many, can make no difference in principle. The
same observation applies to the fact that he was not the sole person contracting with the
Company; he was one of the firm of Blaikie Brothers, with whom the contract was made, and so
interested in driving as hard a bargain with the Company as he could induce them to make.’

(ii) Duty to Avoid a Conflict of Interest

JCA(Amendment)2017 Section 174A
Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, 2004 SCC 68
Facts: Wise and Peoples were clothing retail companies competing in a highly competitive
market. Marks and Spencer, which owned Peoples, looked to sell the company. Wise bought it
under a leveraged buyout. To protect its interests, Marks and Spencer placed strict conditions
on the management of Peoples and took security in the assets of that corporation. As a result,
Peoples and Wise were forced to run two separate operations and could not consolidate fully
until M&S were paid fully. This caused serious problems for both companies.The directors of
Wise (who were also the directors of Peoples) initiated a new arrangement for acquiring and
partitioning merchandise. As a result of this arrangement, Peoples would buy the bulk of the
merchandise and Wise would owe a credit to peoples. Peoples was put into bankruptcy
proceedings and the trustee petitioned the court to include the director’s personal assets as a
result of a breach of their fiduciary duty.

Issues: Do directors owe a fiduciary duty to creditors? No. Was there a breach of the duty of
care to the creditors? No.

Reasoning: It’s important to differentiate the duty of care and fiduciary duties. Directors owe
creditors a duty of care, but not fiduciary duties.The creditors claimed that the inventory policy
was detrimental to Peoples, because Peoples had merchandise, while Wise controlled the cash.
The fiduciary duty is owed to the corporation and not to the creditors. The decision to allocate
the inventory in the particular manner was not a situation where the directors profited or put
themselves in conflict of interest. Therefore, any liability would have to arise by virtue of the
director’s breach of the generalized duty of care to the company, and not by virtue of their
breach of fiduciary duties. The directors can take the creditors’ interests into account, but they
do not have to (permissive approach to the “entity model”). The court found, to the contrary, that
the directors did act in Peoples’ best interests by trying to create a more efficient (less costly)
procedure for acquiring, storing, and sharing merchandise between the two companies.The
directors had no personal interest in this policy. They implemented the policy in the hopes that it
would solve some of the management and accounting difficulties that Peoples (and Wise) faced.

Ratio: The duty of loyalty does not extend to creditors. So long as the directors act in the best
interests of the corporation, even if creditors take a loss, the directors are not personally liable
for their decisions.

(iii) Statutory Disclosure

JCA Section 193
BCA Sections 89-92
F. Proper Purpose Test
Punt v Symons & Co Ltd [1903] Ch 304
Facts: A company cannot contract itself out of its statutory right to alter its articles, even by an
agreement independent of and outside the articles of association. The principle of Allen v. Gold
Reefs of West Africa, [1900] 1 Ch. 656, applies to a case between the company and an outsider
on a separate contract, as well as to a case between a company and a shareholder on the
contract contained in the articles. Where shares had been issued by the directors, not for the
general benefit of the company, but for the purpose of controlling the holders of the greater
number of shares by obtaining a majority of voting power:-
Held: applying the principle of Fraser v. Whalley, (1864) 2 H. & M. 10, that they ought to be
restrained from holding the meeting at which the votes of the new shareholders were to have
been used.
Important quote per BYRNE J. : The plaintiffs, as shareholders, have no right to try to prevent
any alteration of the articles by injunction, or to restrain any modification in the terms of the
agreement. As to the issue of further shares, the directors are clearly acting within their powers;
the number of original shareholders was so small that the statutory powers could not, as a rule,
be exercised; a special resolution could not be passed without creating more members by the
issue of fresh shares. Shares can be transferred for voting purposes: Pender v. Lushington (6);
Moffatt v. Farquhar (7); these fresh shares were issued bonƒ fide for the benefit of the company.
Fraser v. Whalley (8) was a case of a railway company, not a limited company, and the directors
there were acting on a stale resolution; that case is distinguishable, and does not apply.
Hogg v Cramphorn Ltd [1967] Ch. 254
Howard Smith Ltd v Ampol Petroleum Ltd [1974] 821

Stena Finance v Sea Containers Ltd (1989)

Facts: The plaintiffs, who were shareholders of the first defendant (SCL), a Bermuda exempted
company, brought an action in the Supreme Court claiming against, inter alia, SCL and certain
of its subsidiary companies that SCL's directors had adopted a plan, purportedly providing for a
dividend distribution to the shareholder of one preferred share purchase right for each common
share owned and designed to protect shareholders' interests in the event of a hostile bid to take
over SCL, which infringed the plaintiffs' personal rights, and those of the shareholders generally,
as members of SCL. The plaintiffs claimed further that the subsidiaries, wholly-owned and
controlled by SCL, unlawfully purchased shares in the parent company, contrary to s 39 (see pp
651-652, post) of the Companies Act 1981. The court made an order for trial to determine
preliminary issues raised by the statement of claim which included (i) whether as a matter of
Bermudian law it was lawful for a subsidiary to purchase for its own account shares in its parent,
and (ii) whether the plan adopted by SCL's directors was valid and not ultra vires their fiduciary
duties and the byelaws of SCL. The defendants applied by summonses to strike out the writ and
statement of claim and amendments to them on the grounds that they disclosed no reasonable
cause of action and were an abuse of the process of the court. The preliminary issues and
summonses were heard together. The plaintiffs contended, inter alia, that purchases by
subsidiaries, as defined in s 86 (see pp 649-650, post) of the 1981 Act, of shares in the parent
company infringed the rule in Trevor v Whitworth (1887) 12 App Cas 409 since such purchases
amounted to a return of assets (capital) to the shareholders, and were, moreover, contrary to s
39 of the 1981 Act. The defendants contended that a proper construction of the 1981 Act
showed there was no express provision against such purchases, and they were valid if
permitted by the company's memorandum of association and provided they did not amount to a
breach of fiduciary duty by the directors.

Held: A Bermuda subsidiary company was entitled to purchase for its own account shares in its
parent company, and there was no express provision in the Companies Act 1981 against such a
purchase. Any action taken by a company which had the effect of reducing the company's
capital and exposing the company's creditors to unnecessary risk had to be considered carefully
to determine whether the reduction was unlawful. Although in the United Kingdom there was
express provision against such a purchase in s 23 of the Companies Act 1985 (UK) (formerly s
27 of the Companies Act 1948 (UK)), it was a matter for Parliament to enact similar legislation
should any problems arise. Nor was there any authority to show that the rule in Trevor v
Whitworth (1887) 12 App Cas 409 was extended to prohibit a subsidiary company purchasing
shares in its parent (see pp 652, 653, 654, post). Trevor v Whitworth (1887) 12 App Cas 409
considered. Dicta of Goodridge J in Sparkes v Sparkes (1980) 119 DLR (3d) 330 at 343 and 351
approved. Per curiam. If at trial it was found as a fact that the subsidiaries purchased the shares
as agents for the parent, those purchases would be unlawful and void since the shares would
be owned by SCL and that would offend the rule in Trevor v Whitworth (seep 666, post).

(2) The company's byelaws expressly provided the directors with a wide and general power to
administer the company's affairs, under byelaw 23, and that was not inconsistent with s 13(3) of
the 1981 Act which was intended to be a guide only in respect of those matters which were left
to the directors of a company to regulate. Notwithstanding there was no express power in the
byelaws to allot shares or grant options over unissued shares, the court was not entitled to
interfere provided the directors did not abuse their fiduciary power. The plan adopted in May
1988 in order to block a threat from a hostile bid to take over the company appeared favourable
to all shareholders at the date of its adoption, and was, on a review of the evidence, for a
legitimate purpose. Those who became shareholders after its adoption did so knowing what
were its terms, and they could not now argue that the plan was unfavourable to their aspirations
to take over the company. Accordingly, the plan was valid under Bermudian law, and was a
proper and valid exercise of the directors powers under the byelaws (see pp 658, 659, post).

(3) The plaintiffs' pleadings as amended although lengthy were carefully drafted, could not be
faulted for lack of particularity and could be pleaded to without too much difficulty by the
defendants. It was clear that the plaintiffs had personal claims in respect of the plan and share
purchases, and there was a common interest in all shareholders having the company's affairs
run lawfully and in accordance with its byelaws. Moreover, the derivative claims that the
adoption of the plan was ultra vires the company or ultra vires the directors or that its adoption
was for improper or collateral purposes, were properly pleaded, were arguable and the plaintiffs
might succeed in some of their allegations in the statement of claim notwithstanding the court's
finding that the plan was lawful and in accordance with the company's byelaws. Accordingly
there was no basis on which to strike out the plaintiffs' pleadings (see pp 664- 665, 667, post).

Per curiam. Courts in Bermuda should not in future be quick to accede to counsel's agreements
to consider preliminary issues of law at the same time that they might be considering questions
of locus. In the present case no harm was done because the second plaintiff was entitled to
proceed on the basis that it was absolute beneficial owner of shares when the action was
started and the first plaintiff could maintain the action in its own right as a member of the
company (see pp 666, post).

Tech Corp. Ltd v Millar [1972] 33 DLR (3rd) 288

7. DUTY OF CARE, DILIGENCE AND SKILL
JCA Section 174(1) (b), (2) and (3)
BCA Section 95 (1) (b)
Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498.
Re Cardiff Savings Bank, Marquis of Bute [1892] 2 Ch.100.
Facts: A railway company, by agreement with a landowner, were let into possession of land
which they required for part of their line, and made their railway over it, giving a bond for
payment of the purchase-money on a future day. Default was made in payment of the bond:-
The defendant Marquis of Bute was the president of the company from when he was a
baby. He attended only one board meeting.It was held that his duties were of an intermittent
nature, however, he was not so involved to be held liable because omission to attend the
meeting of the bank was not the same neglect or omission of duties to be performed at
the meetings.

Held:That the landowner was not entitled to an injunction to restrain the company from
continuing in possession until the purchase-money was paid.Whether the landowner might not
be entitled to a receiver, or to have the purchase-money paid into Court - Quiere.Order of the
Master of the Rolls affirmed.

Re Brazilian Rubber Plantations & Estates Ltd. [1911] 1 Ch.425.

Directors of the rubber company had no expertise in the business and were sued in the
grounds of negligence when the company made financial losses.Neville J in the court of appeal
applied a reasonable care test i.e what an ordinary man might be expected to take in the
circumstances. He went on to say that if a director had special knowledge relevant to the
company's business he is bound to give the company that advantage.

Re City Equitable Fire Ins. [1925] Ch. 407.

The liquidators brought an action against other directors for negligently failing to detect
fraud.Romer J used adegree of objectivity as a basic standard of reasonable care as
might be expected of an ordinary person acting on his own behalf. And a subjective standard
that the director need not exhibit greater skill than can be expected of a person of his or her
knowledge and expertise. A director must act honestly but must also exercise some
degree of both skill and diligence

Re Pavlides v. Jensen [1956] Ch. 565.

Kuwait Asia Bank v. National Mutual Life Nominees
Ltd [1990] 3 All E.R. 404.
Winkworth v. Edward Baron Development & Co. Ltd. [1987] 1 AER 114 (HL)
Dovey v. Cory [1901] AC 477 (HL).

Re D’Jan of London Ltd [1994] BCLC 561.

Facts: D was 99% shareholder of the company, and a director. Signed a fire insurance form with
some insurers, as a result of which the insurers repudiated liability for a fire at company’s
premises; fire caused £174,000 of damage. Liquidator brought action against D under
Insolvency Act1986 (under equivalent provisions to those in s.175).

Held: If the document is huge and in legal prose, it is not a breach of duty for D to sign it on
advice of solicitor. However, here, the document was small and simple. Plus D was the best
person to sign it. Thus by failing to read it prior to signing it, D was not reasonably diligent

Relief by courtNevertheless, is appropriate for court to relieve liability (under predecessor to

s.1157). D is majority shareholder thus more reasonable for him to run the risk. Only person’s
interest he endangered were him and his wife. D’s misconduct was not gross
The court held that a director who signed an insurance proposal form without checking its
contents was considered as negligent

Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, 2004 SCC 68-
See above

USE THE LINK BELOW FOR CASE AND FACTS

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