Question: - Administrator

ABC Ltd is in serious financial difficulty. The company has asked you to explain the
purpose and effect of an administration order on the company, and the power and duties
of the administrator.

Answer
Aim of administrators
The aims of administration is to rescue the company so that it may continue trading as a
going-concern.
Administration is often used as an alternative to putting a company into liquidation to:
1. Rescue a company in financial difficulty with the aim of allowing it to continue as a
going-concern.
2.
To achieve a better result for the creditors
3.
To realise property to pay one or more secured or preferential creditors

The effect of an administration

The rights of the creditors to enforce any security over the company assets are
suspended.
Any petition of winding up is dismissed
No resolution may be passed to windup the company
The directors still continue in office but their powers are suspended.

Powers and duties of an administrator

An administrator's powers are very broad, they include:
The powers to carry on the company's business and realise its assets.
The power to displace the company's board of directors from its management function
The power to remove or appoint directors.
The administrator must prepare proposals for approval by the creditors setting out how
he intends to achieve the purpose of administration.

Question
Explain fully the grounds for, and the effect of an order for compulsory liquidation.
(b) The power and duties of liquidators.
Answers
Liquidation is the winding up of the company. The ground for winding-up: S122A 1986
A compulsory winding-up commences when a petition for winding-up order is presented
to the court.
The possible grounds for the petition are set-out in S122A 1986:
1. The company has passed a special resolution to be wound-up by the court.
2. The public company has not been issued with a trading certificate within a year of
incorporation
3. The company as suspended its business for over a year
4. The company is unable to pay its debts; a company is deemed to be unable to pay
its debts where a creditor who is owed at least 750 has served a written demand
for payment and the company has failed to pay the sum due within three weeks.
5. It is just and equitable to wind-up the company, however, the court will not make
an order under this ground, if some other more reasonable remedy is available.
The effects of winding-up
1. All actions for the recovery of debt against the company are stopped
2. Any floating charges crystallised
3. Any legal proceedings against the company are halted and none may start unless
leave is granted by the court.
4. The company ceases to carry on business except where it is necessary to complete
the winding-up e.g. WIP.
5. The powers of the directors cease, although the directors remain in office
6. The employees are automatically made redundant but the liquidator can re-employ
them to help him complete the winding up.

Power of liquidator

Pay any class of creditor in full

Make arrangements with creditors
Bring or defend legal action
Carry on the business in a way beneficial to the winding-up company

Duties of liquidators

They must exercise their discretion personally

They can delegate clerical tasks, however, they cannot delegate the duty to use
their own judgement. Although, they can ask the court to appoint a person with
specialist skills

As a duty of trust to the company and its creditors

Must cooperate with official receiver
Must keep records of all proceedings
Must act quickly in carrying out their duties

Question: - Debentures
ABC Plc. need to raise additional capital, you are required to explain the following to
them:
a) The types of debenture which may be issued

b) The advantages of appointing Trustees on behalf of debenture holders

c) The rights of secured and unsecured debenture holders if the company defaults on the
payment of interest or the repayment of capital.
Answer
A debenture is a document issued by a company containing an acknowledgment of its
indebtedness whether charged on the companys assets or not.
Types of debentures
1. Single debenture: a single debenture is loan to the company from any person or
organisation prepared to lend it the money Usually comes from a bank.
2. Series debentures: the company may look to its own members for loans and issues
a series of debentures to participants who have equal rights to repayment.
3. Debenture stock: public companies are entitled to issue debenture stock, which
may be offered to the public through the stock exchange in the same way as
shares.
Advantages of trustee
1. The trustees have a legal mortgage over the companys property, so that persons
who subsequently lend money to the company cannot gain priority over the
debenture holders.
2. If and when, the company makes a default, the trustees can take action for
enforcing the security on behalf of the debenture holders.
3. The trustees can ensures that the property is kept insured and properly
maintained.
The right of secured debenture holders
1. Take possession of an asset subject to the legal charge
2. Sell the charge
3. Apply to the court for an assets transfer to their ownership
4. Appoint a receiver
The right of unsecured debenture holders
1. Sue the company

2. Petition to the court for compulsory liquidation

3. Present a petition for an administration order

Question
Explain fully the grounds on which Company directors may be disqualified as dictated by
the Companys Articles of Association and under The Company Directors Disqualification
Act 1986

Answers
The disqualification of directors
Any person (not just an existing director) may be disqualified by order of the court from
being a director, liquidator, administrator, receiver or manager of a companys property
or from being in any way directly or indirectly concerned in running a company.
Such an order may be made in the following circumstances:
(a) Conviction for an indictable offence in the Crown Court. The offence must be
connected with setting up or managing a company. The maximum disqualification
period is 15 years.
(b)Persistent failure to make the annual return. Persistent means three times over a
five year period.
The maximum disqualification period is five years.
(c) Fraudulent trading. The maximum disqualification period is 15 years.
(d)Unfit conduct by a director of an insolvent company. Unfit behaviour includes:
Breach of directors duties;
Misapplication or wrongful retention of company property;
Failure to comply with Companies Act requirements concerning accounts and

annual returns;
Failure to co-operate with the liquidator in accordance with the requirements of the
Insolvency Act 1986.

The maximum period for disqualification is 15 years.

Bankruptcy
An undischarged bankrupt is disqualified from holding office as company director .

Question
Chris has been asked to act as the promoter of a new private limited company. He is new
to this type of work and has approached you to advise him on the following matters.
a) List and state the purpose and contents of the documents which have to be submitted
to the registrar of companies in order to form the company
b) Discuss the advantages and disadvantages of purchasing a company off the shelf.
c) Advise Chris of any restrictions which must be taken into account when choosing a
name for their new company.

Answers
a)

The following documents must be delivered to the Companies Registry with the

appropriate fee:
1 the memorandum of association;
2 the application for registration, which includes:
(a) The companys name;
(b) The companys domicile (England/Wales/Northern Ireland);
(c) The address of the companys registered office;
(d) The articles of association;
(e) Whether the company is limited or unlimited;
(f) If limited, whether this is by shares/guarantee;
(g) A share statement (if the company is limited by shares) indicating the amount of
share capital, how it is to be divided and initial share holdings;
(h) The terms of any guarantee;
(i) Names and addresses of the proposed officers (director(s), company secretary);
(j) A statement of compliance with the registration procedure.
b)

Buying a company off the shelf

Advantages
Buying a company off the shelf is generally cheaper than completing the
registration process. The following documents will not need to be filed with the
registrar by the purchaser.
i)
Memorandum and article of association
ii)
Application of registration
iii)
Statement of proposed officer
iv)
Statement of compliance
v)
Statement of capital and initial shareholdings
vi)
fee

The company can start trading immediately

There is no problem of pre-incorporation contracts

It saves time and effort of having to go through the incorporation process

Disadvantages
The name and objects of the company may have to be changed to fit the needs of
the buyers business.

The article of association may be unsuitable, it can be altered, but that will entails
cost and administrative inconvenience

c)
Restriction in choosing a company name
It must have limited (ltd) or public limited company (plc) at the end as applicable
It cannot be the same as another in the index of names
It cannot use certain words which are illegal and offensive
It must have the secretary of states consent to use certain words (example,
England, Chartered, Royal etc) or any name suggesting a connection with
government or any local authority
It must avoid the tort of passing off.

Question
Identify and explain the 7 principle duties of directors required by the Companys Act
2006?
Answer
Director of a company owes seven general statutory duties to the company (Companies
Act 2006, sections 171 to 177). These seven duties are set out below:
1. To act within powers;
2. To promote the success of the company for the benefit of its members as a whole
3. To exercise independent judgment
4. To exercise reasonable care, skill and diligence
5. To avoid conflicts of interest
6. Not to accept benefits from third parties
7. To declare interest in proposed transaction or arrangement.
1.

Act within his or her powers (s 171). A director must comply with the companys

constitution and only use their powers for the purposes for which they are conferred.
This enacts the ultra vires rule.
2

Promote the success of the company (s 172). A director must in good faith

promote the success of the company to benefit its members as a whole (s 172(1)). This
re-states the directors duty to act in the companys best interests which is implicit in the
original fiduciary duty. The wording appears somewhat contradictory as, although the
duty initially sounds as if it is owed to the company, the Act continues by requiring the
director to carry it out for the benefit of the shareholders which could give rise to a
conflict. However, any contradiction is arguably resolved by the criteria for decision
making in s 172(1) which require a well-rounded approach:
A director should take the following into account when making decisions:
(a) Likely long-term consequences;
(b) Interests of the companys workforce (replaces the CA 2006 duty to have regard to
the employees interests);
(c) The need to foster good business relationships with all who deal with the company;
(d) Environmental and community impact of the company activities
(e) The desirability of the companys maintaining a good reputation for business
conduct;
(f) The need to act fairly as between company members.

Exercise independent judgement (s 173). The directors fiduciary duty has always

required the exercise of unfettered discretion. Section 173(1) indicates that this duty is
subject to any provision in the companys articles that authorises a restriction of
discretion. Parliamentary debate during passage of the legislation indicates that it does
not preclude delegation to committee or seeking expert advice where appropriate.
4

Exercise reasonable skill, care and diligence (s 174). This re-states the common

law duty of reasonable care and skill as applicable to company directors and does not
represent any real change.
Previously the standard of care had been defined by the Insolvency Act 1986, s 214
which also largely reflects Re City Equitable & Fire Insurance Co. Ltd (1925), and s
174(2) adopts a similar definition. It provides that the duty requires: the care, skill and
diligence that would be exercised by a reasonably diligent person with:
(a) The general knowledge, skill and expertise that may reasonably be expected of a
person carrying out the functions [of] the director in relation to the company
(b) The general knowledge, skill and experience that the director has.
Part (a) measures performance objectively but
Part (b) requires a subjective approach examining the skill, knowledge and experience of
the director in question.
5

Avoid conflict of interest (s 175). This general duty, which applies to the

exploitation of the companys property, information or opportunity, is identical to the

existing equitable duty as applied in IDC v Cooley (above).
6

Refuse third party benefits (s 176). This is another aspect of conflict of interest

made specific by the Act. Benefits include bribes and gifts from those seeking to obtain
business opportunities or advantageous terms.
Section 176(1) prohibits a director from obtaining a benefit from a third party which was
conferred because he or she is a director or doing/not doing something as a director.
A third party is defined (s 176(2)) as a person other than the company, its subsidiaries or
any person acting on behalf of the company or subsidiaries. Benefits for services
provided to the third party by the director are excluded (s 176(3)).
No breach occurs if the benefit could not reasonably be expected to give rise to a
conflict of interest or duties (s 176(4) and (5)).

7 Declare an interest in any proposed transaction or arrangement with the company (s

177). Directors had a statutory duty to declare any interest in any proposed or existing
contract with the company under s 317 of the CA 1985.
The CA 2006 splits this duty but the substance of the law remains the same. Existing
contracts are now covered by s 182 which is explained below and s 177 concerns
proposed contracts only.
Section 177(1) requires a director to disclose the nature and extent of any direct or
indirect interest to all the other directors. An interest may arise indirectly if, for example,
the directors spouse is involved in the proposed transaction. Provided the director has
not breached his duties under s 175 and s 177, the transaction is not voidable without
the approval of company members unless the articles of the company require this (s
180(1)).
A director is not in breach of this duty unless he should reasonably have been aware of
the conflict of interest.

Good luck to myself: - Read Types of company and the concept of

limited liability