Company Law Review Document

Contents
Cycle 1: What is a Company .......................................................................................................................... 3
The Company ............................................................................................................................................ 3
How to Create a Company ........................................................................................................................ 3
Structure of Companies ............................................................................................................................ 4
Other Business Vehicles ............................................................................................................................ 4
Cycle 2: Corporate Personality and The Veil ................................................................................................. 6
Corporate Personality ............................................................................................................................... 6
The Effects of the Salomon case ............................................................................................................... 6
Risk Balance Assessment .......................................................................................................................... 7
Veil of Incorporation ................................................................................................................................. 7
Lifting the Veil of Incorporation ................................................................................................................ 8
Conclusion on Veil Piercing ..................................................................................................................... 10
Cycle 3: Corporate Constitutions ................................................................................................................ 11
Articles of Association ............................................................................................................................. 11
Cycle 4: Shareholders, Directors, and Corporate Governance ................................................................... 13
Shares and Shareholders ........................................................................................................................ 13
Directors.................................................................................................................................................. 13
Decision Making ...................................................................................................................................... 14
Corporate Governance............................................................................................................................ 15
Cycle 5: Director’s Duties ............................................................................................................................ 17
s.171-173................................................................................................................................................. 18
s.175-176................................................................................................................................................. 19
Remedies and Relief ............................................................................................................................... 21
Cycle 6: Shareholder Remedies and Unfair Prejudice ................................................................................ 24
Shareholder Remedies ............................................................................................................................ 24
Personal Claims ....................................................................................................................................... 26
Unfair Prejudice ...................................................................................................................................... 28
Applications and Remedies for Unfair Prejudice .................................................................................... 30
Cycle 8: Corporate Contracts ...................................................................................................................... 32
Authority ................................................................................................................................................. 33
 Limits on Authority.............................................................................................................................. 38
Cycle 9: Vicarious Liability ........................................................................................................................... 41
Cycle 1: What is a Company
The Company
 A company is a separate legal entity which is created by registration
 It is a business vehicle
 Provides for a way to separate the individuals that work for the company and liability
 Companies need only one member/shareholder
o Most companies have an individual being both the member and director
 The company model is also a way to separate ownership and management
 Allows for individuals to take advantage of artificial entities with separate legal personalities
that they can control and put into legal relationships without being directly liable
 Companies must be for lawful purpose

How to Create a Company

 Created by registration
 Requires incorporation
 Subscribers (S.7(1)(a)) to the Memorandum of Association (s.8)
o This states that the subscribers wish to form a company under the CA 2006 and agree to
become members of it. Need at least one subscriber. If there is share capital, the
subscribers must agree to take at least one share.
 Application for Registration (s.9)
o Must state the propose name of the company
o Where it will be registered
o The type of liability
o Whether it is public or private
 Articles of Association (s.18)
o Set out the internal regulations of a company. It is part of the company’s constitution.
 Statement of share capital and initial shareholdings (s.9(4)(a))
o Records what shares the company will issue when it is registered and who will own
them
o Statement of capital must be updated every time the company issues shares or alters its
share capital
 Statement of the Company’s Proposed Officers (s.9(4)(c))
o The particulars of each proposed director of the company
o The particulars of the secretary
o Statement by the subscribers that each of the persons name as an officer has consented
to act in relevant capacity
 Statement of Initial Significant control (s.9(4)(d))
 Notice of election to keep registers at Companies House
 Statement of Compliance (s.13(1))
o An application for registration of a company must be accompanied by a statement of
compliance which states the requirements of CA 2006 have been complied with.
Structure of Companies
 Companies can be in a corporate group
o Holding (or parent) companies own shares in the subsidiary companies
o Corporate groups are a good way to make it hard for regulators to see what is going on
and who to blame
 Companies as an Association of Members
o Most company’s members are shareholders
 Shareholders own shares in the company
 Very limited control over company activities
 People have rights to dividends and voting rights, etc.
o Directors
 Manage the company, can be split into executive and non-executive
 May or may not own shares in the company
 Can be both director and member
o Company secretary
 Administrative role, only compulsory for companies
o Auditors
 Verify the company’s annual accounts
o Others with an interest
 Employees
 Creditors
 Customers
 Suppliers
 Advisers
 Regulators
 Subcontractors (liability goes to the parent companies)
 Etc.

Other Business Vehicles

1. Company
 Governed by the CA 2006
 Has separate legal identity and is incorporated
 Created by registration
 Members not liable for company’s debts
2. Limited Liability Partnership
 Governed by the LLPA 2000
 Has separate legal identity and is incorporated
 Created by registration
 Members not liable for LLP’s debts
3. Partnerships
 Governed by PA 1890
 Not incorporated
 No specific formation requirements
 Partners are liable for firm’s debts
4. Sole Traders/ Proprietors
 Not incorporated
 No specific formation requirements
 Trader liable for business debts
Cycle 2: Corporate Personality and The Veil
Corporate Personality
 Company is a legal person
 Company is separate from its members
 Salomon v Salomon
o Decided to run a business
o Formed a company with himself, wife, and each of his children to meet minimum 7
shareholders
o Transferred business to company for
 Further shares (20,000 at 1 pound a share)
 10k pound secured debt (debentures)
 9k cash for paying off creditors
 Company valued at 39k pounds
o All creditors to the sole trading business had been paid off
o Crisis in the industry led to financial difficulties which made the company go insolvent
o Salomon borrowed money from company B secured on debentures, but Salomon’s
company couldn’t pay the interest
o B was paid, remaining assets went to Salomon as secured creditor
o There was no money for other creditors
o Liquidator was appointed and was put in charge of settling the company’s debts and
claims
o House of Lords held that the company had been lawfully incorporated and it was not an
abuse of the corporate form. The company was separate from its members.
 Lord McNaghten: “The company is at law a different person altogether from the
subscribers to the memorandum; and, though it may be that after incorporation
the business is precisely the same as it was before, and the same persons are
managers, and the same hands receive the profits … the … members [are not]
liable, in any shape or form, except to the extent and in the manner provided by
the Act.”
o Consequences of this case
 Company is recognized as a separate legal person
 Members are not liable for company’s debts, even when only one effective
shareholder and where the old business continues unchanged
 No recovery for creditors, recovery can only be against the company and not the
members

The Effects of the Salomon case

 Salomon Principle: company is a legal person, separate from its members and directors and it
applies regardless of number of status members.
 Company is responsible for its own debts and liabilities
 Company acts in its own name, it enters into contracts and other liabilities
o Acting through directors on the principle of agency, but the company is the contractual
party
o Can enter contracts with own member or director
 o Tax obligation of company separate from that of members
 There is a separation of roles and responsibilities
o Individual can function in dual or more capacities
o Company owns its own property
o Company owns its own business, shareholders do not have rights in the business
o Company carries on own business
 Perpetual Succession
o Company can potentially live forever
o Death of members has no effect on company
 Corporate Groups
o Companies in a corporate group remain separate entities
o Cannot exercise each other’s rights
 Not Prima Facie Responsible for each other’s obligations
 Directors act as agents of the company and not as individuals
o They usually are not liable to creditors of companies
o Additional protection for directors have been available through use of corporate
directors

Risk Balance Assessment

 Limited liability allows maximization of wealth through encouragement of investment and
entrepreneurial activity
 Business risk is not eliminated but shifted to creditors
 Voluntary creditors can choose to trade with the company and can contract for risk
 Involuntary creditors do not choose to be involved with the company, therefore, there is no
opportunity to contract for risk
 Corporate groups can use the principle to hide involvement and insulate reputation
 Corporate groups can benefit from association with a name or brand without responsibility and
customers/employees/suppliers may associate the companies within a group without realizing
they are not protected by group’s resources

Veil of Incorporation
 Veil of incorporation lies between company and its members
 It enables secrecy, abuse, and prevent use of legal remedies
 The veil may allow for unfairness where shareholders or directors are insulated from risk
 Encourages abuse of corporate form and encourages fraud or undue risk taking
 Lifting the veil is when the veil between the company and members is ignored
 Piercing the Veil: Usually it is lifted to impose liability on a member
 There needs to be a balance between the protection of the principle of separate legal
personality and prevention of abuse of the corporate form
 Lifting the veil is extremely restricted and governed by cases
o Adams v Cape Industries
o Prest v Petrodel Resource
Lifting the Veil of Incorporation
 Current Approaches to Piercing the Veil
o Adams v Cape Industries
 Explaining and limiting circumstance in which veil could be pierced
 The court is not free to disregard the principle of salomon v salomon merely
because it considers that justice so requires
o Prest v Petrodel
 Redefining past cases, narrowing jurisdictions
 I consider that if it is not necessary to pierce the corporate veil, it is not
appropriate to so do
 It is not easy to lift the veil
 There are no longer categories for veil piercing after Prest v Petrodel
 Courts can be willing to go behind the veil to find out further info about the company:
 Daimler v Continental Tyre
o Attribution of enemy alien status to company through shareholders
o We respect corporate veil, but must look behind it because what is behind the veil is
relevant to their judgement
 Abbey Malvern Wells
o Consideration of constitution to assess tax liability
o Look behind the veil to find out what is going on
o Just looking behind the veil for info
 Different Approaches:
o Ottolenghi’s Peeping Behind the Veil
 Single Economic Unit Principle: every company in a corporate group has its own
legal personality
o Ottolenghi’s Extending the Veil
 A consequence of construction: fact or circumstance specific. Not piercing the
veil.
 What if there is an agency relationship between company and members?
Principal liable for acts of Agent within scope of agency
 Agency is occasionally found, must consider factors such as who is really
carrying on the business, who appointed them, and who is in effective control.
 Therefore, shareholders are liable for company’s debt in the case of an agency
relationship
o Ottolenghi’s Penetrating the Veil
 Can liability be imposed on a member or director through tort?
 Company, as separate person, responsible for own acts. But must act through
agents (directors)
 Company can therefore be made liable for torts, because of actions of
individuals. Director not normally liable personally (as acting on
company’s behalf)
 Director will not be identified automatically with the company for tort
even if they have control over company’s affairs
 Directors can be liable as joint tortfeasors with the company, but this would
breach the Salomon Principle, and this would be quite difficult
  There needs to be a show of something beyond routine involvement of
directors in company’s activities
 Williams v Natural Life
o There must have been an assumption of responsibility such as
to create a special relationship with the director or employee
himself. ... [I]n a small one-man company ... the managing
director will almost inevitably be the one possessed of qualities
essential to the functioning of the company .... By itself this
factor does not convey that the managing director is willing to
be personally answerable to the customers of the company. –
Lord Steyn
 Parent Companies can be liable for a tort, but only if there is a direct duty of
care and this is not lifting of the veil.
 Chandler v Cape
o A subsidiary and its company are separate entities. There is no
imposition or assumption of responsibility by reason only that a
company is the parent company of another company. The
question is simply whether what the parent company did
amounted to taking on a direct duty to the subsidiary's
employees. – Arden LJ
o [T]his case demonstrates that in appropriate circumstances the
law may impose on a parent company responsibility for the
health and safety of its subsidiary's employees. - Arden LJ
o Ottolenghi’s Piercing of the Veil
 Evasion principle or the Mere Façade principle
 Mere Façade Concealing the true facts
 This is accepted as a ground for lifting/piercing the veil in Woolfson and
Adams v Cape
o Woolfson: “[A]ny departure from a strict observance of the
principles laid down in Salomon has been made to deal with
special circumstances when a limited company might well be a
façade concealing the true facts.” (Lord Keith)
o Adams v Cape: “[T]here is one well-recognised exception to the
rule prohibiting the piercing of “the corporate veil” … where
special circumstances exist indicating that it is a mere façade
concealing the true facts.” (Slade LJ)
 It is appropriate to lift the veil where special circumstances exist indicating that
the company is a mere façade concealing the true facts
 Cited as one of the only true grounds for piercing the veil, especially after Prest
 Mere façade principle reformulated into the Evasion Principle in Prest
 Where an existing legal obligation, liability, or restriction is deliberately
evaded or frustrated through imposition of a company
 This means that the court can only pierce the veil where the company
only exists to evade something
 Establishing Grounds for Mere Façade or Evasion
 Starting Point is separate legal personality
 Prest leaves this principle as a last resort and only to be used where no
other remedy exists
  Establishing Grounds: Relevant Impropriety
 The evasion of existing rights or liabilities
 Veil can only be pierced under this ground where there is some relevant
impropriety
 Motive helps identify relevant impropriety
 Examples:
o Jones v Lipman: transfer of land to company to avoid order for
specific performance
o Gilford Motors V Horne: conducting business through company
to avoid restrictive covenant… the company was formed as a
device in order to mask the effective carrying on of a business
under a cloak or a sham
o Trustor v Smallbone: company used to receive money taken
wrongfully from another company
o Kensington International v Republic of Congo: oil sales put
through companies to hide involvement and avoid creditors
 Impropriety relevant if linked to the use of the company structure to
avoid or conceal liability for that impropriety. Impropriety can be
present in its use and does not need to be in the formation of the
company. The company must be the device used for the impropriety
though.
 Difference between Concealment and Evasion
 Concealment
o Not truly piercing the veil
o Company used to conceal identity
o Court simply looks behind façade to discover facts
 Arguably Gencor v Dalby, Trostor v Smallbone fall into
this category
 Evasion
o True piercing of the veil
o Company used to defeat a legal right against the person in
control of the company
 Arguably Gilford v Horne; Jones v Lipman fall into this
category

Conclusion on Veil Piercing

 Veil pierced only where existing legal obligation/liability/restriction is deliberately evaded or
frustrated through imposition of the company
 Piercing the veil limited to evasion cases
 Concealment principle is not veil piercing
 Even if circumstances would give rise to the ability to pierce the veil, this should only be a
remedy of last resort
 Prest established the difficulty in piercing the veil, only if the evasion principle is used and if
there are no other options
 Can lift the veil to explore the facts behind a situation under the concealment principle
Cycle 3: Corporate Constitutions
Articles of Association
 Corporate constitutions are made up of articles of association and resolutions and agreements
to which chapter 3 apply
o The memorandum of association is no longer considered a constitutional document
 Articles of association are internal regulations of a company that set out what will occur in the
company’s founding
o Generally model articles set out by the Companies Act 2006 will be used as it is a
general template. Any additions or changes to articles may be made with special
resolutions or unanimous consent of shareholders.
o Schedule 1 of the Companies (Model Articles) Regulation 2008 pertains to private
companies limited by shares
o Schedule 3 of the Companies (Model Articles) Regulation 2008 pertains to public
companies limited by shares
o In attempting to understand the articles, the court will not rectify articles to make them
work with the intentions of the individuals who registered them
o Articles are a part of the company’s constitution; the court will not imply terms into the
articles that are not apparent from the wording of the articles themselves
 Unless it prevents absurdity
 Or if it implies a term that is strictly necessary
o Courts should construe articles as a commercial or business document and should do so
to give reasonable business efficacy
 Courts are meant to interpret the document in the manner that a reasonable
person who had all info available to those that had the instrument addressed to
o Alteration of articles cannot be prohibited by Companies Act and cannot restrict the
ability to alter articles
 Shareholders can vote to not alter the articles
o Altering articles must be excercised “bona fide for the benefit of the company as a
whole”
 Bona Fide for the benefit of the company as a whole is assessed from a
subjective basis on the majority of shareholders, but oppressive alterations may
lead to suspicion and courts can choose to deny an alteration if they deem the
alteration to be unreasonable.
o Articles can be entrenched, this makes them much harder to alter
 These articles can generally only be altered by more stringent conditions other
than special resolutions
 They can be amended by unanimous agreement or court order
o Entrenchment can only be made on formation or by unanimous agreement of members
 The articles of association are a statutory contract under s.33 CA 2006, this is between members
and members and the company
o Articles affect individuals insofar as they are members, outsiders cannot enforce
provisions of articles under s.33. Insiders cannot enforce outsider rights.
o Directors may still rely on separate agreements from the articles to enforce articles
which have been implied into the extrinsic contract
Cycle 4: Shareholders, Directors, and Corporate Governance
Shares and Shareholders
 Shareholders are members of the company who are either subscribers to the memorandum or
have been allotted/purchased shares
o Shareholders rights depend on the type of share they own
o A share is an interest in a company
o All shares must have fixed nominal or par value
o Shares can be created with variety of different rights
 Ordinary shares: given right to vote and right to variable dividend, payment
upon winding up is subject to payment of creditors
 Preference shares: given right to fixed dividend, may or may not have voting
rights, repayment of dividend on winding up before distribution to ordinary
shareholders; fixed dividend before payment of dividend to ordinary
shareholders
 Deferred Shares: Prevent dividend being paid (as well as the return of capital
until ordinary shareholders have been paid a specific amount)
 Redeemable Shares: Created on terms that they shall or may be bought back by
the company at a future date.
o Alteration of class rights requires special resolution under s.21
 Variation is where the right itself is affected and not just the enjoyment of the
right
 Making a class right worthless may still not be a variation
o Variation of class rights require
 Provision of variation in the articles if the alteration is compliant with the
articles, or
 If there is not provision in the articles, a ¾ majority of the class of shares which
must be exercised for the benefit of the class as a whole
 Notice must be given to companies house within a month of the variation

Directors
 Companies can only act through directors
 Statutory requirement for all companies under s.154 to have…
o Private companies require minimum of 1 director
o Public companies require minimum of 2 directors
 S.157(1) requires the director to be over age of 16
 S.174 directors are expected to meet standards of care, skill, and diligence that would be
excercised by a reasonably diligent person carrying out the functions of that director
 Directors are initially listed at registration and need to leave a year after their appointment
o The appointment of the director must be for the benefit of the company as a whole
o There are executive and non-executive directors
 Executive directors often hold positions such as CEO or Managing Director,
Finance Director, Personnel Director, etc.
 Non-executive directors are often in supervisory roles and are important in
corporate governance of public companies
  S. 168 of CA2006 dictates how directors can be removed
 Directors can be disqualified under the Company Directors Disqualification Act 1986 from s.1-
s.11
 A director is a person doing business for the company, therefore he is not paid the same way
other employees are paid. Articles of association often give the power to pay directors and this
power is held by the board.
o They also hold service contracts which they may be paid under
o Courts will allow company to judge whether director should be remunerated unless the
payment is excessive, unreasonable, or is not the director’s remuneration
 Different types of directors
o De Jure: formally appointed, can be executive or non-executive, subject to all duties of a
director
o De Facto: a person occupying the position director by whatever name it is called, is not
formally appointed but acts as a director
o Shadow Director: someone who directs or instructs the real directors, not formally
appointed
 It is possible for de jure and shadow directors may be seen as the same by the courts
o Generally, duties apply to a shadow director of a company where and to the extent that
they are capable of so applying
 S.271: Company secretary is only compulsory for public companies
 Ss.485 Auditors must be appointed for each financial year

Decision Making
 Directors
o Run day to day operations and business
o Represent the company and are responsible for management of the company’s business
o Can exercise powers of the company subject to articles
 Shareholders
o Shareholders cannot interfere with powers within the scope of directors and cannot
force directors to prefer them
o Shareholders retain reserve power to direct action through special resolutions
o Shareholders are not the principle to the agent; the company is the principle to the
agent. Directors have responsibility to the company as their principle, not the
shareholders.
o S.168: Can remove directors by primary resolutions
o Company powers will go back to shareholders if directors are unable or unwilling to
exercise powers or if there is no board of directors
 Resolutions are passed…
o By written resolution or at a meeting for private companies; or
o At a meeting for public companies
 S.282: Ordinary resolutions are by simple majority of those voting
 S.283: special resolutions are by at a majority of at least 75% of those voting
 General meetings can be used to reach a resolution, annual general meeting compulsory for plcs
but not for private companies
 o For a resolution to be valid, a meeting must be called and conducted in accordance with
CA 2006 s.301-s.306
o There needs to be notice and Quorum to have a valid meeting. Notices must be sent to
every member and every director.
o Lack of notice can invalidate proceedings, but not on accidental lack of notice.
o Lack of quorum also invalidates proceedings because business cannot be done with just
one person in normal companies. Single person companies are okay to have one-person
quorum.
o Private companies can make written resolution.
o Unanimous consent (Duomatic principle) means that there is no need for formal
resolution if all members agree to something.
 Shareholders have little ability to sway a vote, and there is no incentive to vote. They will be
more likely to leave than to try and change things.
 Lack of checks on directors can lead to directors using their powers for self-interested purposes
and interest of company and shareholders can be harmed
o Use of legal and non-legal obligations act as deterrents for the directors

Corporate Governance
 Corporate governance generally concerns the question of who should own and control the
company and the relationship between shareholders and directors.
o It is the system by which companies are directed and controlled. Boards of directors are
responsible for the governance of their companies. The shareholders role in governance
is to appoint the directors and auditors and to satisfy themselves that an appropriate
governance structure is in place. The board’s actions are subject to laws, regulations,
and shareholders in general meetings.
 Large companies often have a split between the directors actions and the interest of the
shareholders, whereas smaller companies have their interests generally aligned
 Failure in corporate governance reflected in self-serving directors as they do not have shares in
the company and their action or inaction of the director can lead to failure in corporate
governance. They may also underperform or take excessive risk.
o Examples of this are BCCI, Lehman Brothers, Various Banking Failures in 2008 crisis
 To improve corporate governance there needs to be a better use of the existing law
o Shareholders should use their power to remove directors
o There needs to be enforcement of directors duties
o Minority shareholder remedies are of limited use to shareholders who wish to remain in
the company
o Regulation may not always be beneficial as it is inflexible, can deter good candidates
from taking on directorial roles, and there might be a hampering of commercial activity
and deter potentially profitable actions, ultimately preventing companies from
establishing in the UK. It may lead to behavior that is excessively cautious leading to
missed opportunities.
 Cadbury code was the original corporate governance code of practice which came from the
Cadbury report. What we use now is the Corproate Governance Code 2010 which was published
by the Financial Reporting Council. Code was split into 5 sections:
 o Leadership
o Effectiveness
o Accountability
o Remuneration
o Relations with shareholders
 The Corporate Governance Code operates on self-regulation and has no binding obligation. This
soft law approach means that it is adapatable, flexible, and pragmatic. However, it will not
always be observed nor enforced (enforcement heavily relies on shareholder or market
pressure).
 Issues that may arise from problematic corporate governance:
o Directors: directors can support each other’s actions and lead to groupthink because of
lack of diversity. Code requires balance of skill, experience, and knowledge. The role of
the Chairman and CEO should be separate, and there should be consideration of
diversity for the board
o Non-executive directors are independent and are crucial for corporate governance. Half
of the board in large companies should be independent NEDs. NEDs offer outsider
views, provide additional expertise and have sufficient expertise to challenge the
executive. However, they may not be fully attuned to the company because they are
part-time. Corporate Governance prefers NEDs.
o Where there is a high risk of self-interest or undue influence, committees should be
utilized.
o Auditors can be appointed to verify financial information as well as provide checks on
misbehavior. Auditors will always be independent. Audits are often overseen by auditor
committees which are made of NEDs. Larger listed companies have auditor positions to
be put to tender every 10 years.
 Shareholders need good governance as they benefit the most out of it. They are often faced
with a lack of information of what goes on in the company. The code encourages the board to
communicate with shareholders and encourage participation. Institutional investors have larger
proportions of shareholding than individual shareholders which give them more power. These
institutions have more knowledge of the market and corporate governance. Stewardship code
applies to institutional investors and encourages them to collaborate with other investors.
Cycle 5: Director’s Duties
 These duties try to balance director’s power and responsibility
 Duties cannot be too strict or they dissuade the appropriate people from being directors.
 Prior to the CA 2006, director duties were found in case law. Most of these duties have fiduciary
origins.
 Directors duties are found in CA 2006 in s.171-177 (s.179 also states that more than one duty
can apply at a time):
o Duty to act within powers
o Duty to promote the success of the company
o Duty to exercise independent judgement
o Duty to exercise reasonable care, skill, and diligence
o Duty to avoid conflicts of interest
o Duty not to accept benefits from third parties
o Duty to declare interest in proposed transaction or arrangement
 There are also specific duties to be aware of
o S.182: declaration of interest in existing transaction or arrangement
o S.190: substantial property transactions
o S.197: loans to directors
o S.198: quasi-loans (plcs)
o S.201: Credit Transactions (plcs)
 There are ways from which directors can escape liability under directors duties
o S.180 or s.239: Authorization and ratification
o S.232: Exclusion of liability
o S.1157: relief by the court
 Directors owe duties to the company and therefore, the company is the only one that can
enforce the duties (s.170(1))
 Shareholder primacy vs stakeholder pluralism
o Shareholder primacy: directors run the company for the benefit of shareholders
o Stakeholder pluralism: directors run the company for the benefit of all stakeholder
 S.172(1): dual nature of company as entity and as association of members leads to the
promotion of the success of the company for the benefit of its members as a whole.
o There are usually no duties owed to shareholders, there is not even a duty to disclose
information to them.
o There are specific circumstances where the directors have fiduciary duties that carry a
duty of disclosure.
o Duty is also not owed to employees; the only focus is on the success of the company.
o No duties are owed directly to the creditor while the company is solvent, but creditor’s
interests displace that of shareholders when the company becomes insolvent. However,
the duty is not explicitly for the creditors.
o CA2006 prefers the shareholder approach over stakeholder approach.
 Once again, it is the benefit of the company, not to its constituents
 S.174: There is a duty to exercise reasonable skill, care, and diligence
 o Measured by the dual objective/subjective test: that which would be excercised by a
reasonably diligent person with the general knowledge, skill, and experience
reasonably expected of a person carried out by the director (objective test) and the
general knowledge, skill, and experience the director has (subjective test)
o CA 2006 expects for a director to know about the company’s affairs and to be involved
 Having higher standards with the CA 2006 means that it would be easier to pursue negligent
directors and uphold a higher standard, but directors should not be at risk just for making the
wrong decision. Too relaxed and shareholders would not be able to establish a breach and
directors would easily avoid liability.

s.171-173
 A director is still a fiduciary
 S.171
o Must act in accordance with company’s constitution, an act outside of powers given in
the articles can still bind the company but will be a breach of duty
o Must only exercise powers for the purposes of which they were conferred
o Directors are still in breach even if they though the action as in the best interest of the
company
o Pretty much do not do anything outside of the company’s constitution or it will be a bad
time for the director
o Howard Smith v Ampol: “[W]hen a dispute arises whether directors … made a particular
decision for one purpose or for another, or whether, there being more than one
purpose, one or another purpose was the substantial or primary purpose, the court … is
entitled to look at the situation objectively in order to estimate how critical or pressing,
or substantial or, per contra, insubstantial an alleged requirement may have been. If it
finds that a particular requirement, though real, was not urgent, or critical, at the
relevant time, it may have reason to doubt, or discount, the assertions of individuals
that they acted solely in order to deal with it, particularly when the action they took was
unusual or even extreme.” (Lord Wilberforce)
o Eclairs Group v JKX Oil: Directors had a power to disenfranchise shareholders and
restrict share transfer if the deemed the shareholders disclosure of interest and
agreements between shareholders inadequate. Court Held that the power had been
exercised for the purpose of disenfranchising shareholders to defeat a corporate raid
and this was outside the constitution, therefore it was not exercised for proper use.
o Apply the proper purpose test
 Hogg case: Proper purpose of power to issue shares is to raise capital not to
prevent takeover
 Extrasure case: Power to deal with company’s assets; proper purpose was for
company’s survival and interests; her substantial purpose was to benefit other
companies in the group, so this was deemed as an improper purpose.
 S.172
o Director must act in a way he considers, in good faith, would be most likely to promote
success of the company for the benefit of its members as a whole having reagrds to…
 Long term consequences of actions
  Interests of employees
 The need to foster business relationships with suppliers, customers, etc
 Impact on the community and the environment
 Desirability of company maintaining reputation for high standards of business
conduct
 Need to act fairly between members
o This section is a subjective test
 1. Did the director act in a way that he believe to be the best for the company?
 Smith and Fawcett: Director must act bona fide in what they consider,
not what the court may consider, is in the interests of the company and
not for any collateral purpose.
 2. Do not impose the court’s view
 Subjectivity Test from Regentcrest case: It is not about whether the
action was best for the company but whether the director believed it
best for the company
 3. Objective element arises if director has not considered success of the
company.
 Reasonable belief of benefit: Whether an intelligent and honest man in
the position of a director of the company could have reasonably believe
that the transactions were for the benefit of the company. (Pennycuick
J)
o Unless it is an extreme decision, it is hard to challenge a director’s subjective view
o The director must act in a way that promotes the success for the company and is for the
benefit of its members as a whole. If the company is established for more than one
purpose, a director must balance the purposes.
 S.173
o There is a duty to exercise independent judgement
o Boulting Case: No one, who has duties of a fiduciary nature to discharge, can be allowed
to enter into an engagement by which he binds himself to disregard those duties or to
act inconsistently with them. -Lord Denning MR
o Directors must not enter into a contract that prevents later consideration of duties
o This section does not prevent directors making decision to bind company to future
course of action even though this will restrict future decisions

s.175-176
 S.175
o Director must avoid a situation where he has or can have a direct or indirect interest
that conflicts with the interest of the company
o Bray v Ford: There must not be a conflict of interest and there must be no profit from
the position.
o Generally, there is no breach if the situation cannot be regarded as likely to give rise to a
conflict of interest or if they have an authorized arrangement
o A director must not use corporate property, information, or opportunities for his own
benefit
o Regal (hastings): HoL held that the directors used knowledge and opportunity gained
through position and made profit and was therefore liable.
 Irrelevant that the directors acted in good faith
 Irrelevant that the company could not take advantage of opportunity
 Irrelevant that the company could have ratified actions
 Irrelevant that new shareholders obtained windfall
o Clear misappropriation of corporate opportunity or making use of information obtained
as director can lead to breach of s.175
o S.175 takes a strict obligation approach
 Bhullar v Bhullar: directors bought land that would have been of interest to the
company. Held: directors obliged to communicated existence of opportunity to
the company; even though knowledge of opportunity came to directors outside
scope of directorship.
o S.175 requires for the director to have undivided loyalty
 O’Donnell v Shnahan: It is irrelevant that the company might not have been
interested in taking up an opportunity; the director has the obligation to inform
the company.
o S.170(2): A director is subject to s.175 duty even after he ceases to be a director in
relation to the exploitation of any property, information, or opportunity of which he
became aware at the time when he was a director. However, this cannot stop a director
from moving on to new positions and using their own skills.
o Breach depends on director’s conduct and intentions prior to departure, it also depends
on what steps the director took before departure
o Generally, if the board authorizes a director to pursue an opportunity, there will be no
breach.
o S.175(4): there is no breach in a private company if there is authorization as long as the
action is not prohibited in the articles. For public companies, there needs to be
provisions in the articles.
o S.180(1)(a) provides that if there is an authorization by the board, then there is no
requirement of shareholder approval.
 Can fuck over the shareholders.
o Duty to not accept benefits, this is a part of the no conflict-no profit principle.
 S.179 overlaps with s.175
 Benefit must be conferred by reason of being a director or doing (or not doing)
anything as a director
 They must also prevent bribes. There is not breach if the benefit is not
reasonably regarded as likely to give rise to conflict o interest. The duty
continues notwithstanding resignation.
o S.176 does not provide for authorization by the board, but there is overlap between
s.176 and s.175 of which s.175 allows authorization of the board.
 It seems s.176 is not capable of authorization under s.175, but there is a
possibility of ratification by the company in a general meeting if the breach is
ratifiable
Remedies and Relief
 S.177:
o There is a duty to declare interest.
o If a director has interest in contract with the company, then there is a clear conflict of
interest(self-dealing).
o This section requires a director who is directly or indirectly interest in a proposed
transaction or arrangement with the company to declare the interest to the other
directors.
 Must declare any interest, direct or indirect
 Must be of the nature and extent of the interest
 Declaration can be made in meeting, by notice in writing, or by general notice
o S.177 is not necessary if…
 Other directors are aware of the interest
 If they are not needed to be aware and are not reasonably aware of the
transaction
 If there cannot be reasonably regarded as likely to give rise to a conflict of
interest
 Or if the company only has one director, cuz there aren’t any other directors to
declare to lol
o Disclosure means no breach of duty
o Failure to disclosre means
 Contract voidable
 Director liable for profits he has made or for losses
 New duty to disclose under s.182
 S.177 applies only to proposed transactions or arrangement and does not apply once contract
entered into the company.
 S.182 requires declaration to directors, if there is a failure to do so, this is a criminal offence.
o If the director makes declaration under s.177, he does not need to make another one
unders.182
 S.190: substantial property transactions require shareholder approval. This applies where
director or a connected person acquires a substantial non-cash asset from the company, or the
company acquires such from the director or connected person
o Requirements
 Acquisition or sale of property/interest
 S.1163: any property/interest that isn’t cash
 Where that is a substantial non-cash asset
 S.191: either 10% company’s asset value and exceeds 5k pounds or 100k
pounds
 Between company and director/connected person
 Ss.252-256
o Includes members of director’s family, partners, connected
companies, connected LLPs, etc.
o Substantial property transactions leave the transaction voidable unless…
 Restitutions is not possible
  Company has been indemnified
 Third party rights would be affected
o S.196: if transaction subsequently affirmed by general meeting within a reasonable
period, then the transaction is no longer voidable
o S.195(3):
 Director or connected person is liable to account for any profits made and
indemnify company for any loss
 S.195(7) unless connected person can show he did not know the relevant
circumstances constituting the contravention
 S.197: all companies require approval from member for loans to directors or the giving of
security/guarantees in connection with a loan
 S.198: quasi loans require the approval of members in public companies only
 S.199: quasi loans to director/connected person is an arrangement where company meets some
financial obligation of person on understanding that it will be reimbursed later
 S.201: credit transactions need approval of members in public companies.
 s.202: Credit transactions include hire-purchase, conditional sale agreements, etc.
 Exceptions to loan provisions
o s.204: loans to meet expenditure on company business upto 50k pounds
o s.205: loans to fund defense of legal proceedings for breach of duty in realtion to
company (provided to be repaid if director loses case)
o s.206: Loans to fund defense of investigation or action by regulatory authority
o s.207: Loans or quasi loans up to aggregate total of 10k pounds or credit transactions up
to a total of 15k pounds
o s.208: intra group transactions
o s.209: loans or quasi loans made by moneylending company in ordinary course of
business on normal terms or homeloans made by moneylending company in ordrinary
course of business for borrower’s private residence on normal terms for employees
 Remedies and Reliefs
o Remedies not codified, look to existing principles under s.178:
 Return of company’s property taken in breach of duty
 Account for profits made through breach
 Liability of stranger (recipient/accessory liability)
 Rescissions of contract, contract in breach of fiduciary duty is voidable
 Equitable compensation
 Common law damages for loss
o Ratification
 Duties owed to a company, so company can choose to accept the breach.
Acceptance must be by shareholders.
 S.180(4) allows for there to be an authorization of a breach in advance
 S.239 allows for ratification of the breach which excludes the votes of directors,
members, and connected members… ratifying is not available if it is unlawful
 S.1157 If court considers director acted honestly, reasonably, and ought fairly to
be excused can relieve the director in part in whole
 Test of honesty and reasonableness essentially objective
  Director can choose to apply in advance of any claim against him for relief of the
court and this also applies to all breaches of duty except wrongful trading
 Misfeasance Procedure under s.212 Insolvency Act
o Applies where
 Company is winding up
 Office of company has misapplied, retained, or become accountable for any
money/property of the company
 Officer of company guilty of any misfeasance or breach of fiduciary duty in
relation to company
o Summary remedy
 S.212(3) IA court can order contribution to assets by way of compensation as it
thinks fit
Cycle 6: Shareholder Remedies and Unfair Prejudice
Shareholder Remedies
 Selling shares may not be allowed nor possible and removing directors may not be available to
minority shareholders. Shareholders have limited scope to take action in respect of wrongs done
to the company.
 Foss v Harbottle Rule: company is a separate person, so wrongs can be done to the company
as a person distinct from the members. Therefore, the shareholder is bringing company’s
claim on the company’s behalf.
o Breach of fiduciary duty by directors or members not entitled to bring action
o The corporation and the aggregate members of the corporation are no the same thing
for purposes like this
o This case applies the Salomon principle and recognizes the majority rule
 Prevents minority from harassing or harming company and or directors
 Courts do not wish to question management decisions
 Recognizes futility of minority action where majority not in favor.
 Exceptions to Foss v Harbottle:
o Derivative Claims: longstanding true exception to the principle under s.260-264
o Personal Claims: not important and is not a true exception to the principle
 For just and equitable winding up is located under s.122(1)(g) of the IA 1986
o Minor exceptions such as ultra vires or illegal acts, or acts requiring special majority
o Statutory remedies such as unfairly prejudicial conduct under s.994
 Edwards v Halliwell established 2 rules
o Proper Claimant Principle
 Where a wrong is done to a company, the proper claimant is the company itself
o Majority rule
 Where the wrong could be made binding by a simple majority of members, no
action can be brought by an individual member
 Proper Claimant Principle
o Follows from the principle of separate corporate personality
o Company is a person separate from members, therefore, members have no right to
enforce rights belonging to the company
 Majority Rule
o Court unwilling to interfere with internal management of company
o If simple majority of company can regularize something, then no point in having
litigation about it
o Irregularity vs Illegality
 Prudential Assurance: The rule in Foss v Harbottle also embraces a related
principle, that an individual shareholder cannot bring an action in the courts to
complain of an irregularity (as distinct from an illegality) in the conduct of the
company's internal affairs provided that the irregularity is one which can be
cured by a vote of the company in general meeting. We are not concerned with
this aspect of the rule.
  Burland v Earle: “It is an elementary principle of the law relating to … companies
that the court will not interfere with the internal management of companies
acting within their powers, and in fact has no jurisdiction to do so. Again, it is
clear law that in order to redress a wrong done to the company or to recover
money or damages alleged to be due to the company, the action should prima
facie be brought by the company itself
 Derivative Claims
o This is where a right of action of the company is brought by a shareholder (the claim
derives from the company)
o This is the only true exception to the Foss v Harbottle rule
o Originated from Estmanco v GLC (case on fraud) and Burland v Earle (case on wrongdoer
control of the company, allowed shareholders that were complaining to bring an action
in their own names)
o Cause of action must arise from s.260(3)
 An actual or proposed act or omission
 Involving negligence, default, breach of duty or trust by a director of the
company (present or past)
 Doesn’t matter whether it arose before or after claimant became a member of a
company
 Wrong doer control where the individual had to be in control of the company is
no longer an essential factor to a derivative claim per Bramford v Harveyf
 Statutory Derivative Claim
o Found under s.260-264
o Defined un s.260(1): proceedings by a member of a company in respect of a cause of
action vested in the company and seeking relief on behalf of the company
o This supersedes all common law derivative claims except multiple derivative claims and
claim against foreign-registered companies
 Statutory Procedure:
o Apply to court to continue claim, getting permission to proceed is a necessary first step
o Preliminary hearing has 2 elements
 Absolute bars to permission
 Claims must be dismissed if person with s.172 duty would not seek to
continue the claim or if there was no hypothetical director to continue
the claim
 Or it must be dismissed if there has been authorization of the act by the
company
 Or if there has been ratification of the act by the company
 Factors influencing court’s discretion to grant permission
 Costs
o If a claim is brought by a member, the costs would be placed with the shareholder as a
claimant
o If beneficiary of the action is the company not the member directly the court may order
the company to indemnify claimant from liability for costs under a ‘Wallersteiner order’.
 This is only if shareholders were acting in good faith an action was brought on
reasonable grounds.
 Success of Derivative Claims
o Rarely successful for ‘fraud on the minority cases’
o Looking at statutory claims over the old claims…
 “... the threshold tests are sufficient, cumulatively, to deter many would-be
claimants, especially when costs issues are factored in, not the mention the
informational disadvantages facing a claimant. The judiciary will be anxious not
to open the doors here to ... speculative litigation ... and tight judicial control
will be imposed.” (Hannigan)
 “On the one hand, the traditional reluctance of the courts to intervene, and
experience of codification of derivative actions from other jurisdictions, suggest
that a wild proliferation in the number of derivative claims allowed to proceed is
unlikely. On the other hand, the expanded breadth of grounds upon which a
derivative claim may be based, combined with new statutory expressions of
directors’ duties, are likely to make it easier for activist or aggrieved members to
initiate a derivative claim.” (Sealy)

Personal Claims
 Foss v Harbottle applies where wrongs were done to the company, does not apply to individuals
o If a right is claimed by more than one shareholder, one member can make a
representative claim on behalf of the group
o Personal rights = rights attaching directly to shareholders
 Reflective Loss
o Personal rights to personal claims without recourse to Foss v Harbottle principle
o Members cannot bring a personal claim in respect of loss in value of member’s shares
caused by wrongs done to the company
o Prudential case: losses in value of shares that merely reflect the company’s losses
cannot be claimed in a personal claim. The shareholder does not suffer any personal
loss, the only loss is through the company in the diminution of the value of the net
assets of the company of which he has a shareholding.
o Individual shareholders can sue only for direct losses. Company losses are sued for
through the company.
o Loss suffered by company that results in diminution in value of shareholding/loss of
dividends is company’s loss, the shareholder’s loss is only reflective of that
 Limits to Reflective Loss Principle
o If a company is unable to claim for wrongdoings caused by the wrong doing the the
principle is limited.
o Giles v Rhind: “First, as it seems to me, part of that loss is not reflective at all. It is a
personal loss which would have been suffered at least in some measure even if the
company had pursued its claim for damages. Second, even in relation to that part of the
claim for diminution which could be said to be reflective of the company’s loss, since, if
the company had no cause of action to recover that loss the shareholder could bring a
 claim, the same should be true of a situation in which the wrongdoer has disabled the
company from pursuing that course of action
 Other Exceptions to Foss v Harbottle
o If there is Ultra Vires or Illegal Actions
 There are long-established exceptions
 Members can bring proceedings to restrain a transaction that is contrary to
company law or ultra vires
 Acts requiring special majority
o Member may bring proceedings in respect of matter which required some special
majority or procedure that have not been complied with
o Failure of company to comply with constitutional requirements for acting is a wrong by
the company
 Shareholder Agreements
o They can operate to provide enforceable minority shareholder remedies
o Growth Management case: shareholders’ agreements prevented majority from
proceeding with conversion of company from private to public without minority
shareholders’ consent
 Just and Equitable Winding Up s.122(1)(g) Insolvency Act 1986
o A company may be wound up by the court if the court is of the opinion that it is just and
equitable that the company should be wound up
 Ebrahimi Case for winding up of quasi-partnership companies: Held: it was just
and equitable to wind up the company because the other directors were not
entitled to remove him. The removal of E was an abuse of power and a breach
of good faith which the partners owe to each other… therefore the courts had
discretion to wind up the company.
 A petitioner who relied on just and equitable clause must come to court
with clean hands.
 Can wind up if there is mismanagement or lack of probity
 Can wind up if there is loss of substratum
 Re German Date Coffee: Shareholder did not enter into partnership on
these terms. They were entitled to the company winding up since the
original point of the partnership was not there.
 Alternative remedies
o If there is an alternative to winding up available, then it is unreasonable to seek to wind
up
o Possible alternatives are
 Offer to purchase shares
 Unfair prejudice
 Importance of Clean Hands
o Equitable remedies are only available if the claimant has clean hands, therefore the
conduct of the claimant must be clean.
o Bryanston Finance: ulterior motive in petitioning is not sufficient in itself to prevent
petition proceedings.
Unfair Prejudice
 Statutory remedy for unfairly prejudicial conduct under s.994
 Eligible Applicants are
o A member of a company, including those to whom shares have been transferred or
transmitted but who are not registered as a member (does not include former
members)
o The Secretary of state
 Grounds for applications
o Conduct of the company’s affairs must be unfair and prejudicial to the interest of a
member
 Conduct of the Company’s Affairs
 Single act or omission or continuing or past course of action, these
actions could be anything as it is widely construed
 Will not cover matters referable solely to conduct of individual’s affairs.
Explained well by Re Charterbridge Capital ltd: “The expression “the
company’s affairs” in sub-section 1(a) is of wide ambit and plainly
covers all matters decided by the board of directors. Equally plainly, it
does not extend to matters which are neither effected by the company
nor on its behalf but, for example, concern activities of shareholders
solely in that personal capacity and as between themselves.”
 Interests of a members
 S.994(1): Unfairly prejudicial to the interests of members generally or of
some part of its members
 The interests must relate to membership and can include participation
in management or wrongs done to the company
 Unfair and Prejudicial conduct
 Conduct must be both unfair and prejudicial, not just one
 Prejudice is just an infringement of a member’s rights and that is not
necessarily financial loss. It is possible that showing rights being
infringed without showing financial loss can be deemed prejudice.
 Unfairness
o Very important to s.994
o This concept must be applied judicially and not to be judged by subjective notions of
fairness.
o Unfairness is to be decided in the context of the commercial relationship and company
law.
o Per O’Neill v Phillips: Unfairness lies in…
 A breach of the terms on which was agree company’s affairs should be
conducted (like a breach of articles or binding agreements)
 In a case where equitable consideration make it unfair to rely on strict legal
position, a use of the rules in a manner which equity would regards as contrary
to good faith is unfairness as well.
 However, trivial or technical breaches may not amount to unfairness.
o Two types of unfairness:
  Legal: Breach of terms
 Equitable: a breach of good faith
 Look back at the Ebrahimi case:
o This case was under just and equitable winding up but heavily relied on in the O’Neill
case which established unfairness
o Equitable principles can be justified to be applied where
 Association formed or continued on basis of a personal relationship involving
mutual confidence
 Agreement or understanding that all shareholders will participate in conduct of
business
 Some restriction on transfer of members' interests in the company
 O’Neill Case
o Unfairness looks for either a breach of terms or a use of rules in an inequitable manner
o The concept of legitimate expectation should not be allowed to lead a life of its own,
capable of giving rise to equitable restraints in circumstances to which the tranditional
principles have no application.
 Other ways to show unfairness
o Hale v Waldock
 “[U]nfairness does not arise only out of a failure to comply with prior
agreements or to fulfil prior expectations. The relationships between
shareholders are more subtle than that, and … unfairness can come out of a
situation where the game has moved on so as to involve a situation not covered
by the previous arrangements and understanding. In those circumstances the
conduct of the affairs of the company can be unfairly prejudicial within [s. 994]
notwithstanding the absence of the prior arrangements” (Mann J)
 Approach to unfairness
o Was the conduct alleged to be unfair a breach of the agreed terms of association,
breach of articles, binding agreement, or company law?
 If yes, then maybe unfairness only
 If trivial or technical breaches were not sufficient, then no
o Can equitable considerations be imposed?
 Usually only justified when company is a quasi-partnership which is an
association based on personal relationships involving mutual confidence,
agreement or understanding that all would participate in the business, and a
restriction on transfer of members’ interests
o If a company is a quasi-partnership, then there needs to be an understanding that was
relied upon
 If understanding from start, then reliance shown in joining company
 If subsequent understanding/agreement, then need to show some separate
reliance to justify enforcement through equitable principles
o Or, possibly, that situation has changed so much that unfair for majority to maintain the
association
Applications and Remedies for Unfair Prejudice
 Most cases of unfair prejudice are in private companies, therefore, s.994 is often only successful
in private companies
 Interests of outsiders in public companies means it is less likely that a minority shareholder will
be able to rely on understandings and agreements within the company but outside the articles
 The clean hands rule does not apply to individuals that petition, they can petition even if they
are engaged in misconduct. Their behavior can show that the petitioner was not unfairly
prejudiced and can affect remedy that court willing to grant.
 S.994 applies to any member, in courts, they are unlikely to grant relief to majority
shareholders.
 A situation is not unfairly prejudicial if it can be resolved through voting control.
 There is no limitation period, so anyone can petition unfair prejudice at any time. However,
court is unlikely to grant relief where there has been a long delay with no good reason.
 Remedies to Unfair Prejudice give wide discretion to the court.
o Regulation of company’s affairs for future
o Require company to do particular act or refrain from acting
o Authorize proceedings in name of company
o Prevent alteration of articles without leave
o Purchase of shares of any members of the company by other members or the company
itself
 Share purchase order is the most common order of court on successful petitions. The reason for
this is that it frees petitioners and allows them to realize the investment and company and
business is preserved. This removes possibility of future discord between the parties. Orders are
usually for majority to buy out minority.
 Valuation of shares under share purchase orders: usually shares are valued at date of order for
purchase, but order can be backdated to date petition presented, or even to commencement of
unfairly prejudicial conduct. In quasi-partnership shares usually valued pro rata without minority
discount, other companies, valuation would normally reflect minority status.
 It is likely that the eventual order is to buy petitioner’s shares. If respondent offers to purchase
prior to hearing, then petitioner has got his remedy.
 S.122(1)(g) role: Re Guidezone claimed that implicit in O’Neill Reasoning that just and equitable
winding up no wider than unfair prejudice. There are cases where company wound-up on just
and equitable grounds, but unfair prejudice not found. Guidezone now overruled on this point
by Court of Appeal in Hawkes v Cuddy.
Dealing with Shareholder Remedies Problems, Skeleton:
 Identify complaint: what options open?
 Derivative claim
o Nature of claim and remedy
o Procedural hurdles
 Personal claim, limited scope
 Unfair prejudice petition
o Conduct of company’s affairs
o Prejudice to interests as a member
o Unfairness
 Breach of terms
 Equitable considerations à quasi-partnership companies à breach of understanding
o Has there been an offer to purchase?
o Remedy
 Just and equitable winding-up
o Quasi-partnerships and other situations
o Other remedies/relationship with unfair prejudice
Cycle 8: Corporate Contracts
 Companies, as a separate legal person, can itself be bound by contracts
 Company law’s concern with corporate contracts is the adjustments to the contracting
 The Company is not a natural person, so it cannot act on its own to enter into contracts, but it
can enter contracts
 There are rules to enable the attribution of acts to the company
o Meridian Global Funds: there would be little sense in deeming a persona ficta to exist
unless there were also rules to tell on what acts were to count as acts of the company.
Therefore, it is necessary part of corporate personality that there should be rules by
which acts are attributed to the company.
 A company makes a contract under s.43 of the CA 2006
o Contracting in writing under a seal
 The seal and formalities are listed in the Companies (Model Articles) Regulations
2008
o Model articles require witnessed authorized signature
 With regards to contract executed in writing by a company, a company need not have a seal
under s.45(1) of CA2006 and even if it does have a seal, company documents can formally be
executed by signature on behalf of the company.
 Contracts made by individuals acting under company authority needs to be assessed…
o Does the company have the capacity to enter into a contract of this nature>?
o Does the individual acting on behalf of the company have the authority to bind the
company to that contract?
 Legal Capacity
o The capcity is the legal ability to do things
o If a person cannot do a thing, they cannot act
o If a person cannot legally do something, the cannt act
o An act outside a person’s capacity is void
 Company itself had to states its objects, the objects clause in the company’s memorandum of
association sets out the nature of the company’s business.
 Ultra Vires Doctrine
o Company’s capacity is limited by its objects
o Contracts outside the objects were outside the company’s capacity
o Contracts were ultra vires and void
o Cannot be ratified by the company
 Ultra vires doctrine is discussed in Ashbury Railway Carraiign and Iron Co Ltd v Riche
o “[This contract was entirely … beyond the objects in the memorandum of association. If
so, it was thereby placed beyond the powers of the company to make the contract. If so,
my Lords, it is not a question whether the contract ever was ratified or was not ratified.
If it was a contract void at its beginning, it was void because the company could not
make the contract. If every shareholder of the company had been in the room, and
every shareholder of the company had said, “That is a contract which we desire to
make, which we authorize the directors to make, to which we sanction the placing the
 seal of the company,” the case would not have stood in any different position from that
in which it stands now.” (Lord Cairns)
 The purpose of the doctrine is to
o Protect shareholders and creditors of the company by limiting what the company can do
to what is set out in the public documents and provide certainty as to what the
company can do
o Accessibility of the objects clause does not mean they are read by parties to the
contract, the ultra vires doctrine had potential to cause unfairness
 Courts attempted to respond to the ultra vires doctrine by identifying a main object an treating
later objects as incidental to that main object,
 Companies responded with independent objects clauses, these clauses could not make a mere
power a separate object.
 Eventually, objects clauses became useless because they did not serve its original purpose.
 Rolled Steel Products case
o “[I]f a particular act … 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.” (Slade LJ)
 Eventually, there was a decline in both the ultra vires doctrine and object clauses
o Drafting techniques and changing judicial approach rendered the ultra vires doctrine
non-existent, but this did not mean that company’s actions would sometimes fall
outside of their objects, leaving them ultra vires, void, and non-ratifiable.
 S.31 CA 2006 states that unless a company’s articles specifically restricts the objects of the
company, its objects are unrestricted.
o A company can still choose to limit its objects and an existing company will retain its old
objects clauses (objects clauses are part of the articles of association)
 Reforms to this area of the law are interspersed between s.28 to s.39

Authority
 As a legal person but not a natural person, company can only act through others
 The acts of a natural persons acting on behalf of the legal personality of the company will be
attributed to the company, and the company will be bound by the contract, if that natural
person was acting within the scope of authority
 The Principal, which is usually the company, is bound by the acts of an agent who is acting
within their authority. The principal can make an agent to act within the authority given to them
by the principal.
 A company can choose to ratify a contract entered into outside the scope of the agent’s
authority, this can be retrospective
 Types of agents
o Actual/Express
o Ostensible/Apparent
o Usual/Implied
 Company agents:
 o Board of Directors
 Model articles give the board power to conduct all business of the company
 However, there may be express limitations on the board's powers, eg. In the
articles
 Mainly asking is there any reason why there wouldn't be any authority
o Individual directors
 What authority do individual directors have?
 What is the significance of directors' status within the corporate form?
 Doesn't have the backing of the model articles to show what powers the
individual director has
o Other Individuals
 Senior Managers, employees
 Shareholders?
 What authority do these individuals have?
o Companies (Model Articles) Regulations 2008, Sched 1, art 3
 Directors’ general authority
 3. Subject to the articles, the directors are responsible for the
management of the company’s business, for which purpose they may
exercise all the powers of the company.
 Actual/Express Authority
o Authority that is given to an individual for a transaction or a series of transactions. This
is conferred on the agent by the contract governing agency as agreed between the
agent and the company.
o Freeman v Lockyer (important Case): A legal relationship between principal and agent
created by a consensual agreement to which they alone are parties… “An “actual”
authority is a legal relationship between principal and agent created by a consensual
agreement to which they alone are parties. Its scope is to be ascertained by applying
ordinary principles of construction of contracts, including any proper implications from
the express words used, the usages of the trade, or the course of business between the
parties. To this agreement the contractor is a stranger; he may be totally ignorant of
the existence of any authority on the part of the agent. Nevertheless, if the agent does
enter into a contract pursuant to the “actual” authority, it does create contractual rights
and liabilities between the principal and the contractor.” (Diplock LJ)
o The scope of actual authority ‘is to be ascertained by applying ordinary principles of
construction of contracts, including any proper implications from the express words
used, the usages of the trade, or the course of business between the parties.’
o Sources of Actual Authority
 Board of Directors
 Has extensive actual authority
 Model articles give all the powers of the company to the board
 Other Directors or Individuals
 Actual authority is explicitly given for a particular action, or
 Implicitly extended through actual authority for another action
o Restrictions on Actual Authority
 If you are acting outside constitutional limitations under s.171 CA 2006
  Or, if you are acting contrary to the interests of the company.
 Look at Hopkins v Dallas case or Re Capital Films Ltd case
 Usual/Implied Authority
o Usual authority is authority that is usual for a person in the position of the individual to
have
o This is a consequence of the position of the individual agent, and the organization
structure and practice of the principal company
o Sources of Usual Authority: Jobs and Roles
 Managing Director/CEO
 Has the most authority because their role is to manage the business of
the company
 Look at Freeman & Locker or Hely-Hutchinson v Brayhead cases
 Director with Executive Role
 Authority within scope of specific role, the executive role is what their
authority should be (finance director, personnel director, technical
director, etc.)
 Chairman
 Limited authority, the role is running the board, not the company’s
business
 Director
 Outside specific executive role, the directors usually have limited
authority such as executing documents or signing cheques
 ‘[The] management of the business of the company was in the usual
course... The entrusting to the directors of the duties in connection with
the selling of the produce of the defendant company obviously did not
include the formation of a contract, under which the produce of the
company should be charged by way of collateral security to secure a
series of advances made and to be made to another company, however
closely associated in business with the defendant company.’
 Company Secretary
o Panorama v Fidelis: “[A company secretary] is no longer a mere
clerk. He regularly makes representations on behalf of the
company and enters into contracts on its behalf which come
within the day-to-day running of the company’s business. So
much so that he may be regarded as held out as having
authority to do such things on behalf of the company. He is
certainly entitled to sign contracts connected with the
administrative side of the company’s affairs, such as employing
staff, and ordering cars, and so forth.” (Lord Denning MR)
 Other Positions/Managers
 British Bank v Sun Life
o Limits on Usual Authority
 Usual Authority is subject to the articles an any express agreements as per
Smith v Butler
  “[T]he implied powers of a managing director are those that would
ordinary be exercisable by a managing director in his position. ... [T]he
managing director’s powers extend to carrying out those functions on
which he did not need to obtain the specific directions of the board.
This is simply the default position. It is, therefore, subject to the
company’s articles and anything that the parties have expressly agreed.
In essence, the issues is one of interpreting the contract of appointment
or employment in the light of all the relevant background ...” (Arden LJ)
 There is no usual authority to act contrary to the interests of the company as
per Re Capitol films Ltd
o Distinguishing Usual Authority
 Different perspective on whether usual authority is distinct from other
categories of authority
 It can be argued that usual authority is just implied actual authority, so it is not
clearly stated but implied through a role per Hely-Hutchinson case
 Another way to see it is that it could also be a part of apparent authority if they
looked at the roles and the authority the roles would have to an outside party
per Armagas v Mundogas.
 Apparent/Ostensible Authority
o Authority as it appears to the other party to the contract, not what it actually is within
the company. May extend existing actual or usual authority or may create authority
where there is no actual or usual authority.
o Freeman v Lockyer: An “apparent” or “ostensible” authority … is a legal relationship
between the principal and the contractor created by a representation, made by the
principal to the contractor, intended to be and in fact acted on by the contractor, that
the agent has authority to enter on behalf of the principal into a contract of a kind
within the scope of the “apparent” authority…
o Operates as a form of estoppel, protecting the party to a contract with a company to
rely on the contract and bind the company. The aim of the law behind apparent
authority is to protect third parties so that the third parties can rely on their
understanding and expectation of a transaction. The company itself cannot rely on
apparent authority. Apparent authority is only apparent to those who are not 100%
clear of what is going on in the company.
o Totterdell v Fareham Blu Brick and Tile Co Ltd: “[A] principal is bound, not only by such
acts of the agent as are within the scope of the agent’s actual authority, but by such acts
as are within the larger margin of an apparent or ostensible authority derived from the
representations, acts or default of the principal.”
o Sources of Apparent Authority (Estoppel):
 Representation
 A representation of authority made to the other party to a contract with
the company. The principal company holds out the individual as having
authority and the representation may be express or implied. Either an
express statement from the principal that the individual has authority or
they allow the individual to act in a particular way.
  Look at Hely-hutchinson case and Freeman & Lockyer cases for
representation examples
 Reliance
 Other contracting party relied on the representation on the holding out
of authority
 Ostensible authority comes about where the principal, by words or
conduct, has represented that the agent has the requisite actual
authority, and the party dealing with the agent has entered into a
contract with him in reliance on the representation.
 The Principal and the agent determine actual authority
 The principal and the third party determine ostensible authority.
o Freeman & Lockyer’s Factors for Apparent Authority:
 1. A representation of authority (Form)
 2. Made with authority (Source)
 3. Relied upon, and (Reliance)
 4. Within the constitutional limits.
o Forms of Representations, these are often made by conduct
 Freeman & Lockyer: Board allows the individual to act in a particular way,
thereby holding the individual as having authority
 Representation may be in the form of a particular position within the company
given to the individual.
 Overlap between apparent authority, actual, and implied authority.
o Sources of Representation
 Representation must be from the company or those with actual authority to run
the company
 Representation from ostensible agent is not sufficient
 Representation from someone without general or specific authority is not
sufficient per British Bank of Middle East v Sun Life
o Authority to make Representations
 It may be sufficient for the maker of the representation to have only the
authority to make representations, but not the authority for transaction itself.
 First Energy Case: Bank manager had no authority to make the offer, but did
have authority to communicate that approval had been given by the head
office. This is enough for third parties to rely on the representation.
o Showing Reliance
 Contracting party can rely on apparent authority if there is nothing to indicate
that the transaction is outside the powers otf the company or the individual
 However, the contracting party cannot rely on apparent authority if they knew
or should have known of the lack of actual authority per Rolled Steel Products
 Knowledge may show contracting party could not have believed the agent had
actual authority per Criterion Properties v Stratford
 The Nature of the transaction may put the contracting party on inquiry
 Re Capitol Films Ltd: It is clear that a counterparty can only rely upon
the doctrine of apparent authority provided that he does not know that
 the director has no actual authority. Therefore, if the counterparty
knows that a director is acting contrary to the commercial interests of
his company, he is unlikely to be able credibly to assert that he believed
that the director had actual authority.
o Justifying Apparent Authority
 Balance needs to be struck between 2 conflicting commercial considerations
 Contracting party cannot be expected to know or discover all internal
procedures within a company to be sure that they are dealing with fully
authorized agents, but
 Contracting party cannot simply rely on any person purporting to
represent the company

Limits on Authority
 If the individual actin ostensibly on behalf of the company has no actual, usual, or apparent
authority, the company is not bound.
 Restrictions can come from the company articles or by an individual acting outside the
company’s constitution
 If a contract entered into outside constitutional limitations, normally the principal can avoid a
contract entered into by agent without authority. But there are competing interests as to who
should prevail. The company/shareholders vs. the third party.
o The law strongly favours third parties
o There can be minisation of effect of constitutional restrictiongs on a person dealing with
the company thorugh
 The common law rule from the Turquand case
 S.40 of CA2006
 Turquand Rule
o The indoor management rule or internal management rule
o Gives protection to third party dealing with a company without awareness of internal
formalities
o Permits party contracting with company to assume that all matters of internal
management and procedure have been duly complied with.
 Limits on the Turquand rule
o The rule only applies in favour of persons dealing with the company in good faith. If such
persons have notice of the relevant irregularity they cannot rely on the rule as per
Rolled Steel
o If circumstances are such that the person claiming the benefit of the rule is really put on
inquiry, if there are circumstances which debar that person from relying on the prima
facie presumption, then it is clear that he cannot claim the benefit of the rule as per B
Ligget v Barclays
o The rule cannot be used by directors as they should know of any procedural limitations
or requirements as per Morris v Kanssen
 S.40 CA 2006
o Should be the core focus of the limitations of authority as it is more useful that the
Turquand case.
 o In favour of a person dealing with a company in good faith, the power of directors to
bind the company, or authorize others to do so, is deemed to be free of any limitation
under the company’s constitution. If you are an outside party dealing with the party in
good faith, you can rely on contract you have entered into; but you must be acting in
good faith in order to obtain protection.
o Smith v Henniker-Major & Co: the general policy seems to be that, if a document is put
forward as a decision of the board by someone appearing to act on behalf of the
company, in circumstances where there is no reason to doubt its authenticity, a person
dealing with the company should be able to take it at face value.
o A person deals with a company if he is a party to any transaction or other act to which
the company is a party. This section only applies to companies and third parties.
o Good faith is presumed. There is not obligation to make enquiries about limitations.
Knowledge of director exceeding restriction on powers does not in itself prevent dealing
being in good faith.
o Bad faith is likely in cases where the party themselves is dishonest, but otherwise good
faith needs to be genuinely and honestly perceived.
 Limitations for s.40
o If the person dealing with the company is a director or a connected person to the
director, the protection is removed by s.41
o The scope of this section is limited for charitable companies, Turquans case will be
useful when dealing with charities.
 Ratification
o If a company wishes to rely on the contract it will need to authorize it
o A lack of authority of a board can usually be ratified by ordinary resolution
o Directors breaches of duty in this situation can also be ratified by ordinary resolution
o Ratification of breaches must comply with s.239 Ca 2006

Basic Checklist of Issues for Corporate Contracts

 (1) Are there any restrictions on company’s objects in articles ?
o No, s31, company deemed to have unlimited capacity, company has capacity, go to (2)
o Yes, Is transaction within company’s capacity (eg through drafting devices)?
 No, s39 (company bound by contract anyway; remains issue for authority and
breach of duty)
 Yes, go to (2)
 (2) Who entered into the contract on company’s behalf?
o Board, model articles give company’s powers, go to (3)
o Individual, did that person have authority (actual/usual/apparent - explain and identify)?
 No, for reasons other than company’s constitution à company not bound, go to
(4)
 No, due to constitutional limits, go to (3)
 Yes, go to (3)
 (3) Are there any restrictions on authority?
o No, company bound, go to (4)
o Yes, s40 (effect; dealing with co; good faith; shareholder rights; director liability; s41 if
contracting party is director/connected person; continuing issues) and/or Turquand’s
case (effect; restrictions); breach of duty, go to (4)
 (4) Conclude/Advise
Cycle 9: Vicarious Liability
 Corporate responsibility is needed as a means of controlling and responding to the operations of
companies
 Companies engage in a range of activities that have significant consequences
 Companies are legal persons, but companies are not natural persons, and cannot themselves
fulfill the traditional elements of responsibility. The actions of individuals must be attributed to
companies in order to fulfill these requirements and enable corporate responsibility.
 A company can be liable for civil wrongs/torts.
o Campbell v Paddington
 If torts are always ultra vires, then companies will never be liable for torts, so
companies will be liable regardless of objects.
 A company can be found liable for torts through primary liability and vicarious liability.
 Courts have accepted that the subject has done something more than breach a legal standard
and a company without a conscience can be guilty of a crime even if they require mens rea as
per R v ICP Haulage.
o Where companies are incapable of meeting elements of the crime or where they cannot
be subject to the penalty of the crime (like murder) then this is a limit to corporate
criminal liability.
 Primary Liability:
o Company is liable for its own wrongdoing
o Actions of others treated as the actions of the company
 Vicarious Liability:
o Company can be liable for the wrongdoings of others as if it were a wrongdoer.
o An individual is primarily liable, the company is responsible for the individual as
employed or principal, this means the company is vicariously liable.
o This is a consequence of individual primary liability and the responsibility of the
company for that individual.
o Tort Liability often arise through vicarious liability. Companies are often found liable for
torts committed by agents or employees in the course of agency/employment.
o Criminal liability can also arise through vicarious liability. IF offense can be committed
vicariously, act of agent or employee will sufficient to attach liability to the company.
This is most common in regulatory offences.
 Vicarious liability is usually insufficient to attach criminal liability. Crime
normally connotes blame.
o Reach of vicarious liability is limited, as it cannot communicate blame to the company.
 Rules of Attribution for liability
o Primary rules of attribution found in the company’s constitution, either explicitly
included or specifically implied by company law
o General rules of attribution are found in agency or vicarious liability
o Special rules of attribution are specific to particular provision imposing liability.
 Limits of communicating blame
 o Principles of vicarious liability apply to a company as to any other person, the principal is
liable for acts of agent or employee acting within the scope of his employment or
agency.
o Where public policy requires liability of the employer/principal, vicarious liability will be
imposed. IT is the social expectation that the employer controls or takes responsibility
for the actions of employee.
 When does Vicarious liability arise
o Agents must be acting within scope of his authority, or employee acting within ordinary
course of his employment. Scope of employment includes acts that are not for the
benefit of the employer principal or against his instructions.
o Company can be liable even though agent is acting outside actual/usual authority
(because wrongful acts were not authorize or within usual scope of the role.)
o A company cannot be vicariously liable for employee’s deceit in fraudulently
representing that he had authority to enter into the transaction. Acting outside
authority and so not within course of employment.
 For vicarious liability it does not matter that companies itself could not have committed the tort.
Vicarious liability is liability as if the company were the wrongdoer. Company can be liable even
if company could not have committed the tort or would have had a defence to the tort.
 Therefore, the individual is primarily liable but the company is vicariously liable for the
individual.

Alternatives to Vicarious Liability

 Strict Liability
o Consequence of a failure to achieve an outcome required by law, or avoid an outcome
prohibited by law, a breach of an outcome focused standard
o There are not requirements of action or mental state, elements can be fulfilled by legal
as well as natural persons
o Basis of Strict Liability:
 Individual acts in breach of standard
 Company is responsible for individual
 Company is liable for breach of standard
 Re Supply of Ready Mixed Concrete (No 2): Parliament may be taken to have
imposed a liability on an employed for the acts of his employees, provided that
those acts were carried out in the course of employment. Liability can also be
imposed even though the acts in question were prohibited by the employer.
 Identification Doctrine:
o People use the identification if some offence has a mental element to it
 Intention, knowledge, or criminal law offences
o Companies do not have minds, so they cannot fulfill such offences on their own and
cannot act with required mental state
o Mental elements must be found in individuals who act with the required mental state
 Tesco v Nattrass: an embodiment of the company, a living person has a mind
which can have knowledge or intention or be negligent and he has hands to
carry out his intentions. A corporation has none of these, it must act through
 living persons, though no always one or the same person…? He is acting as the
company and his mind which directs his acts is the mind of the company.
o Directing Mind and Will
 Lennard’s Carrying Co v Asiatic Petroleum: A corporation is an abstraction, it has
no mind of its own any more than it has a body of its own; its active and
directing will must consequently be sought in the person of somebody who for
some purposes may be called an agent, but who is really the directing mind and
will of the corporation…
 R v Andrews-Weatherfoil: it is not every responsible agent or high executive or
manager or agent acting on behalf of a company who can by his actions make
the company criminally responsible. It is necessary to establish whether the
natural person or persons in question have the statue and authority which in
the law makes their act in the matter under consideration the acts of the
company, so the natural person is treated as the company itself.
 El Ajou v Dollar Land Holdings: Directing mind and will separate from
individual’s authority. Non-executive director with no authority to take business
decisions, this did not prevent him being the directing mind and will of the
company for the relevant acts.
 Tesco v Nattrass: Shop manager was not eh company’s directing mind and will.
Managing directors and perhaps other superior officers carry out the functions
of management and speak and act as the company. The subordinates do not.
o Finding the Mind and Will
 Who embnodies the company may depend on act in question. Might depend on
the nature of the matter under consideration.
 Depends on who has management and control in relation to the relevant act
 Directing mind will not always be located at the top of hierarchy
o Problems
 Can be difficult to find directing miund and will and so attribute liability to the
company. Act/ state of mind may lie in persons below board or managing
directors
 Act or state of mind may reside in more than one person, so no present in a
single directing mind and will, individual or organ. Courts rejected aggregating
the actions and state of mind of different persons for the purpose of primary
criminal liability
 Relied on the identification of someone who embodies the company. Might
come into conflict with the Salomon Principle of corporate personality.
 Meridian Rules of Attribution
o Attempts to displace identification doctrine by making it no longer the starting point for
corporate liability.
o If a primary or general rule of attribution do not provide an answer then create a special
rule of attribution.
 Starting point is the particular rule, then examine the purpose or policy of rule,
then use this to determine whose acts/state of mind is relevant to liability.
 o Given what it was intended to apply to a company, how was it intended to apply?
Whose act/knowledge/state of mind was for this purpose intended to count as the act
of the company? One finds the answer to this question by applying the usual canons of
interpretation, taking into account the language of the rule and its content and policy.
o Did not overrule the identification doctrine
 Attribution after meridian
o Courts can now consider relevant rule and its purpose, allows courts to be able to
impose liability even where no directing mind and will is present, provided this is
withing the policy of the act
o Meridian: What act/state of mind will be attributed to the company will depend on the
particular rule
o Meridian: Acts or knowledge from lower down the corporate hierarchy than directing
mind and will may be sufficient to fix liability to the company
o Re BCCI Morris v Bank of India: Knowledge of branch manager was attributed to the
bank for purpose of liability
o Identification doctrine still applies in some cases
 Especially in criminal law
 There is a reluctance to move away from directing mind and will test for
criminal offences involving mens rea
 Corporate and Individual Liability
o Relationship between corporate and individual liability
o Vicarious Liability
 Individual primarily liable, company vicariously liable
o Primary corporate liability
 Is the individual also liable?
 Important to tort victim if company does not have financial resources to pay the
claim
 Possibility of individua liability in cases of primary corporate responsibility
o Individual may be liable for their own conduct
 Standard chartered bank v Pakistan shipping: director liable for his own tort,
not for the company’s tort
o Individual is not personally liable simply by reason of the company’s liability
 Williams v Natural life: no individual liability for negligent misstatement as there
is no assumption of responsibility
o For individual to be liable as a joint tortfeasor, this must be for their conduct, not role
 Koninklijke Philips v Prico
 Role of director did not establish individual’s status as a joint tortfeasor
 Individual liability to the company
o Defence of ex turpi causa: no action can be founded on illegal or immoral conduct
 Jetivia SA v Bilta: where a company has been the victim of wrongdoing by its
directors, or of which its directors had notice, then the wrongdoing, or
knowledge, of the directors cannot be attributed to the company as a defense
to a claim brought against the directors by the company’s liquidator, in the
name of the company and or on behalf of its creditors, for the loss suffered by
 the company as a result of the wrongdoing, even where the directors were the
only directors and shareholders of the company, and even though the
wrongdoing or knowledge of the directors may be attributed to the company in
many other types of proceedings.

Corporate Manslaughter
 R v Northern Strip Minin Constryuction Co LTd: First company indicted for corporate
manslaughter
 R v HM Coroner for East Kent ex parte Spooner: Re-acknowledgement of the possibility of
corporate manslaughter, but no liability
 R v P & O European Ferries (Dover): If there is a person who is the embodiment of a corporate
and acting for the purposes of the corporation doing the act or omission which caused the
death, the corporation as well as the person may also be found guilty of manslaughter
 Necessary response to serious & far reaching consequences – companies involved in many
national/international activities, some risky – potential to affect large numbers of people.
 Large-scale disasters – often no one individual at fault.
 Eg. Southall – driver at fault, also safety system turned off – dominant co. practice.

 Problem – Cases rely on identification doctrine approach:

o AG Reference (No 2 of 1999) – need individual gross criminal negligence to
attribute to company, else no corporate manslaughter.
o P&O Ferries – despite investigation recognising company infected by ‘disease of
sloppiness’ – no corporate manslaughter because no person ‘embodying the
company’ guilty of manslaughter.
 Hard to prosecute large companies by identifying directing mind & will
 Alternative approach to liability for corporate killing
 Health and Safety at Work Act 1974 – s33 & s37
o Companies prosecuted for breach of standards, but strict liability so no
apportionment of guilt.
o Low penalties – focus of Regulator to ensure future safety.
o Victims’ families unhappy – didn’t send strong enough message.
o Eg. Southall – Great Western fines £1.5M – large fine for the Act, but pocket
change to GWT.
o Ineffective response led to repeat tragedies – Ladbroke Grove.
o Public anger led to Law Commission development of the Corporate
Manslaughter and Corporate Homicide Act 2007.
 Law Commission – Management Failure approach
o New approach doesn’t focus on individual blame – no identification of directing
mind and will – focus on blameworthiness of company.
o Manslaughter that can be committed by the company – no attribution.
o Corporate Manslaughter and Corporate Homicide Act 2007
 S1(1) – new offence - corporate manslaughter if the way company
activities managed or organised caused a persons death.
  S1(3) – company guilty only if management or organisation of senior
management a substantial element.
 Inclusion of senior management test arguably result of lobbying to
water own Act.
 Ambiguity – management failure or failure by senior managers
(individuals).
 Even narrow interpretation would allow aggregation of individual
actions – but hybrid of ‘management failure’ approach and
identification doctrine.
 Problems with Senior Management Test
o If identification of senior managers is required under s1(3) then familiar
problems arise:
 Need to look at company structure and operation in detail – company
advantage.
 Consider employment law – who is a ‘senior manager’?
 Set boundaries to the scope of liability which companies can try to abuse.
 Law Commission rejected this approach.
 Interpretation has significant consequences for utility of Act
o Might not be correct – but police & prosecutors have adopted this
interpretation.
o Consequently reluctant to prosecute the offence – stick to small companies.
o Despite sentencing guidelines includes fines in excess of £20M.
 Hope? R v Cotswold Geotechnical Holdings – failure of system of work – no requirement
at law for aggregation of individual fault.