Syllabus and reading list for the company law course


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Stefan Enchelmaier – Company Law



Lesson 1: Introduction to the Law of Business Organisations; Law of Partnerships

Relevant statutory provisions:

Partnership Act 1890; Limited Partnership Act 1907; Limited Liability Partnerships Act 2000; Limited Liability Partnerships Regulations 2001 (SI 2001 No. 1090); The Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 (SI 2009 No. 1804


Tann v Herrington [2009] EWHC 445 (Ch)

Cobbetts LLP and Lee Crowder (a firm) v Hodge [2009] EWHC 786 (Ch)

Hammonds (a firm) v Danilunas et al. [2009] EWHC 216 (Ch)

Protectacoat Firthglow Ltd v Szilagyi [2009] ICR 835

Textbooks and articles:

Kraakman et al., Anatomy of Corporate Law ch 1; Cheffins, Theory ch 1, 2, 5; Dignam & Lowry ch 1; Davies, Principles Part 1; Mayson, French & Ryan ch 1; Boyle & Birds ch 1; Pettet ch 1.
J Rickford, Fundamentals, developments and trends in British company law, [2004] ECFR 391–415; E Ferran, Corporate law, codes and social norms – finding the right regulatory combination and institutional structure, [2001] JCLS 381–409

Practice case for the session:

Paul, Brenda, and Susan want to establish a publishing business specialising in practitioner law books. Susan as a former solicitor is familiar with the needs of practising lawyers, but she has no assets except a white van worth about £5000. Brenda knows the publishing business and is able to contribute a third towards the projected start-up costs, in particular for word-processing and printing equipment. Paul’s inclinations are primarily academic; he is above all interested in a good rate of return for the half of the anticipated costs that he could cover with his savings. The three consider taking a bank loan to satisfy the remainder of their capital needs. Alternatively, they wonder whether Derek might be persuaded to bring his small printing business into the venture. There is also the question of what to call the business: Brenda’s surname is ‘Sweet’, Susan’s is ‘Maxwell’, Derek’s is ‘Hart’, Paul’s is ‘Jordans’. Advise Paul, Brenda, Susan, and Derek.

Learning outcomes

- Available legal forms: (general/limited) partnership, LLP, Ltd.

-- All three would be viable, but major creditors will anyway demand personal guaranties or other security from a start-up enterprise like this. Limited liability is, therefore, largely illusory. If a partnership were the form of choice, Paul might be interested in becoming a limited partner.

- Contributions to the business: tangible assets, services, intangibles (business goodwill, also experience?), rules differentiated in accordance with legal form

-- Any of the above, for Ltd. see s582(1). Limitations as to permissible contributions apply only to Plc, ss584 ff, 593 ff.

- Other ways of financing the business

-- Finance lease for investment goods such as printing machinery.

-- Ltd can offer shares to select persons (not to the public, s755).

- How to share revenue from business activities

-- Partnership/LLP: equal share in profits default rule, s24(1) PA 1890, r7(1) LLPR 2001, but in practice in accordance with contribution to partnership capital;

-- Ltd: only net profits distributable, s830, but no further restrictions as in Plc, s831.

- Bank loan: who is party to the contract, who acts for the business?

-- LLP/Ltd: separate legal personality, liability of members as contributories only on winding-up, s74 IA 1986 (as modified by r5/sch3 LLPR 2001).

-- Partnership: joint (not several) liability of partners for partnership debts.

- Business names: how to choose, which ones not to choose.

-- General provisions for Ltd/LLP in ss53 ff. CA 2006 (as modified by r8 LLPR 2009). (General) Partnership only subject to rules on passing-off. Same for limited partnership, despite registration, because ss8A–8C LPA 1907 do not contain rules that make applicable the relevant provisions of CA 2006.

-- LLP/Ltd Must not choose name similar to one already on the register, s66 (here no danger if surnames combined); must also not use a name sufficiently similar to an existing one as so as to suggest a business connection, s69(1)(b), r12 LLPR 2009.

Lesson 2: Incorporation, Corporate Personality, and Limited Liability


Salomon v A Salomon & Co Ltd [1897] AC 22 (HL)

Gilford Motor Co Ltd v Horne [1933] Ch 935 (read CA only)

Jones v Lipman [1962] 1 WLR 832 (Ch)

Dimbleby & Sons v National Union of Journalists [1984] 1 WLR 427 (HL) (435 B – 436 A)

Yukong Lines Ltd v Rendsburg Investments (The Rialto No 2) [1998] 1 WLR 294 (QBD)

Trustor v Smallbone (No 2) [2001] WLR 1177 (Ch)

Ricketts v Ad Valorem Factors Ltd [2004] BCC 164 (CA)
Phonogram Ltd v Lane [1982] QB 938 (CA)

Braymist Ltd v Wise Finance Co Ltd [2002] Ch 273 (CA)

Re Northumberland Avenue Hotel Co (1866) 33 Ch D 16 (CA)

Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156

Textbooks and articles:

Cheffins, Theory ch 11; Sealy & Worthington ch 1, 2; Dignam & Lowry ch 2, 3; Davies, Principles Part 2; Mayson, French & Ryan ch 2–5; Boyle & Birds ch 3; Pettet ch 2; Ferran ch 1, 2.

O Kahn-Freund, Some reflections on company law reform, [1944] MLR 54–66

M Moore, ‘A temple built on faulty foundations’: piercing the corporate veil and the legacy of Salomon v Salomon, [2006] JBL 180–203

L Linklater, ‘Piercing the corporate veil’ – the never ending story?, [2006] Comp. Law. 65–66

R Pennington, The validation of pre-incorporation contracts, [2002] Comp. Law. 284–285

Practice case for the session:

Paul, Brenda, Susan, and Derek have incorporated their publishing business as ‘Lawbook Ltd’. In exchange for selling his printing business to the company, Derek has received 27 per cent of the shares. Also, the company’s Articles of Association provide that as long as Derek holds this share in the company’s capital, he is to be the Technical Director of Lawbook Ltd. Paul is to be the Academic Director of the company with responsibility for commissioning new titles; on any resolution to remove him from this post, each of his shares (together amounting to 20 per cent of the share capital) shall carry two votes. Brenda and Susan hold the remainder of the share capital, at 20 and 33 per cent, respectively.

The day before Lawbook Ltd was incorporated, Susan leased new offices to house the company’s administration. During the negotiations, she had stressed that she would sign the contract ‘for and on behalf of Lawbook Ltd’. The lease reflects this by stipulating that ‘under no circumstances shall any person other than Lawbook Ltd be legally bound in any way or liable pursuant to this lease.’

A few weeks later, Derek buys computer equipment and printing machinery for a price of £250.000 for the company. Lawbook’s share capital is £50.000, the total value of its assets £150.000. Brenda and Susan are furious, but Paul supports Derek. Brenda and Susan want to remove both shares and directorships from Paul and Derek, and they are afraid they might be personally liable for the company’s debts.

Learning outcomes

1) Methods of payment for shares - money or other assets

2) Entrenchment of directors’ and other positions in the company – share qualification, removal made more difficult

3) Pre-incorporation contracts – liability of those acting for the company-to-be; (how) can the company be/become bound?

4) Liability of shareholders and of directors for company’s debts

5) ‘Balance-sheet’ insolvency; consequences for directors’ duties

6) Removal of shares for breach of duty?

Lesson 3: Directors’ Duties and the Management of the Company


Royal British Bank v Turquand (1856) 6 EL & BL 327 = 119 ER 886

Percival v Wright [1902] 2 Ch 421

Cook v Deeks [1916] AC 554 (HL)

Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (read Diplock LJ’s speech, 500–10 )

Northern Counties Securities Ltd v Jackson & Steeple Ltd [1974] 1 WLR 1133

Breckland Group Holdings Ltd v London and Suffolk Properties Ltd [1989] BCLC 100

Re D’Jan of London Ltd []1993 BCC 646

JJ Harrison (Properties) Ltd v Harrison [2002] BCC 729 (read only CA at pp. 745 ff).

Wrexham Association Football Club Ltd (in admin) v Crucialmove Ltd [2008] BCLC 508 (CA)

Textbooks and articles:

Kraakman et al., Anatomy of Corporate Law ch 5, 6; Sealy & Worthington ch 3, 6; Dignam & Lowry ch 4, 12–14; Mayson, French & Ryan ch 15–7, 19; Boyle & Birds ch 15–7; Hannigan ch 7–13; Pettet ch 8, 9;

A Keay, Section 172(1) of the Companies Act 2006, [2007] Comp. Law. 106–110

A Keay, The duty of directors to exercise independent judgment, [2008] Comp. Law. 290–296

R Davidson, The Companies Act 2006: directors' duties and promoting the company's success, (2007) 11 JIBFL 631

J Lowry/J Sloszar, Judicial pragmatism: directors’ duties and post-resignation conflicts of duty, [2008] JBL 83–91

P Koh, The director’s fiduciary obligations, [2003] CLJ 42–45

D Prentice/J Payne, The corporate opportunity doctrine, (2004) 120 LQR 198–202

Practice case for the session:

Lawbook Ltd’s business is developing well, and the directors see a need to take on additional personnel. Paul has, therefore, hired Marius as commissioning editor. This enables Paul to continue in his private studies which he much prefers over attending board meetings. He also uses the company jet frequently to attend academic conferences.

Marius commissions Prof. Peter Shwindle, a renowned expert in the field, to write a book on legal theory. Marius pays Shwindle an advance of £2.000 on the expected sales revenues. Such payments require approval by the board of directors, which Marius has not obtained beforehand.

After the book is published and half of the edition already sold, it transpires that Shwindle’s research assistant has written large parts of the book. Those parts of the manuscript are in a style very different from the rest. Also, the parts written by Shwindle are all plagiarised from works by his former PhD-students. The unsold copies have to be destroyed, and some purchasers demand reimbursement.

It has also come to light that many of the orders that Derek has made of printing machinery were placed with a company in which he has substantial share holdings. For each sale, he secretly received a commission. He has invested part of these monies in shares which have since appreciated considerably; with the remainder, he has bought a sports car for his wife.

At the same time Edwin Elgin Ltd, a well-established family publishing business, becomes available for purchase as the founder’s children have lost interest in the firm after their father’s death. Brenda is in favour of a takeover, but she is outvoted by the other directors. The atmosphere has become so poisoned that Paul, Derek, and Susan at the same meeting decide to remove Brenda from her directorship. Brenda proceeds to buy Edwin Elgin Ltd and successfully extends the company’s business into e-book publishing. This is a market niche which she had spotted while still at Lawbook Ltd. She earns £100.000 in the first year of running Edwin Elgin Ltd. What if the Elgin children would not have sold to Derek or to any company in which he was involved because there had once been an acrimonious business dispute between him and Elgin? What if Brenda were not a shareholder but had been appointed, under the terms of a debenture, by Edwin Elgin Ltd?

Learning outcomes

- Delegation of directors’ tasks and authority

Directors may delegate tasks, art5 Model Articles/Ltd. Must not, however, put themselves in a position where they cannot fulfil their role as provided for in the articles and thus breach their duties towards the company. Permanent supervision and direction of delegatees is therefore necessary.

- Authority of delgatees

The authority of the delegatee is circumscribed by the the conferral. Nevertheless, third parties may rely on ostensible authority of delegatee to deal with outsiders; follows not from s40 CA 2006 (only for directors), but from Turquand’s case.

- Negligence by delegatee – imputable to director because of insufficient supervision?

Yes, director cannot be delegating task escape responsibility, particularly not in matters that are important for the business of the company, such as here maintaining the academic standards of the company’s publications – Paul is specifically the “academic director”. Re Barings (No. 5) 1999, Parker J, CA.

- Use of company jet to attend academic conferences – misapplication of company property?

Question of fact; here, attendance at conferences broadly within the remit of Paul’s responsibilities.

- Directors: conflicts of interest

-- Directors’ position

Directors are in a position similar to a ‘fiduciary’ [students may use untechnical language], i.e. they must not personally benefit from the fulfilment of their duties, unless the company has assented to such private benefit in full knowledge of the relevant facts.

-- Derek’s shareholdings in other company

Investment in other companies not prohibited, but commission indicates that considerations alien to the interest of Lawbook have influenced the decision to place orders with that company rather than with any other. Here, no substantial property transaction, ss190 ff, nor loan to Derek, ss197 ff, but breach of disclosure obligation under s177 (before order) s182 (if ongoing business relationship) CA 2006. S175(1), (3).

-- Derek’s commission on sales to Lawbook

Kickbacks are held on constructive trust (AG v Jonathan Cape), Derek must account to company.

-- Appreciation of shares – Derek’s to keep, or Lawbook’s?

The trust money and any assets into which it can be traced, belong in equity to the company (Knatchbull v Hallett), and so does the appreciation in value. Equally so if appreciation due to illicit transactions, i.e. Derek’s efforts.

-- Sports car

Tracing of funds acquired as consequence of breach of trust – sports car to be made over to the company; no competing equity in the wife because car was a gift, or because knowing receipt of trust property/derivatives from trust property.

- Removal of directors – conditions and procedures

S168 CA 2006 – any time and for any reason; but may be oppressive (see now s994 CA 2006).

- Post-removal duties of directors

No non-compete obligation unless expressly stipulated; even more if Elgin would not have dealt with Derek or associated company.

- Spotted market while still with LB – ‘corporate opportunity’

Former directors under a duty not to exploit confidential information that came to their knowledge while in service, but fellow directors have here declined to take the opportunity in full knowledge of the facts. Peso Silver Mines 1965, Queensland Mines Ltd. v Hudson. S170(2)(a)

- Legal position of directors appointed by creditors

No lesser obligations vis-à-vis company, must not let conflict of interest arise and if arisen, prefer interests of the company rather than the appointor’s.

Lesson 4: Corporate Governance

Relevant material for the class:

Financial Reporting Council: the Combined Code on Corporate Governance, June 2010 - also for previous versions.


Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)

Grant v UK Switchback Railways Co (1888) 40 Ch D 135 (CA)

Automatic Self Cleansing v Cuninghame [1906] 2 Ch 34

Salmon v Quin & Axtens Ltd [1909] 1 Ch 311 (CA)

Barron v Potter [1914] 1 Ch 895

Sidebottom v Kershaw, Leese & Co Ltd [1920] 1 Ch 154 (CA)

In re Express Engineering Works, Ltd [1920] 1 Ch 466

Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 (CA) (not the 1946 case of the same name!)

In re Duomatic Ltd. [1969] 2 Ch 365

Bushell v Faith [1969] 2 Ch 438 (HL)

Guiness Plc v Saunders [1990] 2 AC 663 (HL)

Lexi Holdings Plc (in admin) v Luqman [2009] 2 BCLC 1

Textbooks and articles:

Kraakman et al., Anatomy of Corporate Law ch 2, 3; Cheffins, Theory ch 8, 13, 14; Sealy & Worthington ch 4, 5; Dignam & Lowry ch 8; Dignam & Lowry ch 15, 16; Davies, Principles Part 3; Mayson, French & Ryan ch 14; Boyle & Birds ch 11, 13; Hannigan ch 5, 6, 15; Pettet ch 7, 10;

J du Plessis, Corporate law and corporate governance lessons from the past, parts 1 and 2, [2009] Comp. Law. 43–51, 71–75

A Young, Rethinking the fundamentals of corporate governance: the relevance of culture in the global age, [2008] Comp. Law. 168–174

R Cheung, The use of statutory unanimous shareholder agreements and entrenched articles in reserving minority shareholders’ rights, [2008] Comp. Law. 234–241

D Prentice, Alteration of articles of association – expropriation of shares, [1996] LQR 194–197

Lesson 5: Shareholder Remedies


Foss v Harbottle (1843) 2 Hare 461 = 67 ER 189

MacDougall v Gardiner (1875) 1 Ch D 13 (CA)

Eley v Positive Government Security Life Assurance Co (1876) 1 Ex D 88 (CA)

Pender v Lushington (1877) 6 Ch D 70 (CA)

Browne v La Trinidad (1887) 37 Ch D 1 (CA)

In re New British Iron Co, ex parte Beckwith [1898] 1 Ch 324

Hickman v Kent or Romney Sheep Breeders Association [1915] 1 Ch 881

Cook v Deeks [1916] 1 AC 554

Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 WLR 2

Re Sherborne Park Residents Co Ltd (1986) 2 BCC 99528 (sic; Westlaw)

Re A Company [1986] BCLC 376

Re Baltic Real Estate Ltd (No 2) [1993] CLC 503

Re Macro (Ipswich) Ltd [1994] 2 BCLC 354

Re Saul D Harrison & Sons Plc [1995] 1 BCLC 14

O’Neill v Phillips [1999] 1 WLR 1092 (HL)

Gardner v Parker [2004] 2 BCLC 554 (CA)

Oak Investment Partners XII v Boughtwood et al. [2009] EWHC 176 (Ch) (paras. 8–16)

Re McCarthy Surfacing Ltd, Hecquet v McCarthy [2009] 1 BCLC 622

Textbooks and articles:

Kraakman et al., Anatomy of Corporate Law ch 8; Cheffins, Theory ch 7, 10; Sealy & Worthington ch 11; Dignam & Lowry ch 10, 11; Davies, Principles Part 4; Mayson, French & Ryan ch 18; Hannigan ch 17–8; Pettet ch 11–2;
A Keay/J Loughrey, Something old, something new, something borrowed: an analysis of the new derivative action under the Companies Act 2006, [2008] JBL 469–500

M Almadani, Derivative actions: does the Companies Act 2006 offer a way forward?, [2009] Comp. Law. 131–140

R Cheung, Corporate wrongs litigated in the context of unfair prejudice claims, [2008] Comp. Law. 98–104

Practice case for the session:

Richard has sold half his shares in Lawbook plc to Janet. She is disappointed to learn that the company will not be able to pay any dividends for the foreseeable future because of its crippling liabilities in directors’ remuneration. She has also found out that Derek has recently ordered inappropriate printing machinery from a company in financial difficulty because he wanted to help a friend. Janet is outraged that Richard, Paul, and Derek have agreed to keep the matter out of court and to ‘work something out’ instead. Susan consented to this when later heard about it on the telephone.

One proposal to repair Lawbook’s finances is to ask all shareholders for a one-off contribution of £20.000 each; another, to offer preference shares worth £100.000 in total to all officers of the company. What if the latter course is pursued as decided at a meeting attended by Richard, Paul, and Derek, and the next dividend goes entirely to the holders of the preference shares, of which Janet wanted to buy some but was not offered any?

Learning outcomes

  • No dividends because of directors’ remuneration: right to dividends? Unfairly prejudicial? Misappropriation of company property by directors?

There is no right to dividends – they have to be declared at the suggestion of the directors, but depending on the circumstances, failure so to suggest may be unfairly prejudicial, particularly in a quasi-partnership. Here, there is no indication that the company has this character. Conversely, there is no misappropriation (only) if the directors’ remuneration is not excessive – here it is “crippling”, which indicates that it is out of proportion to the profitability of the company, which also reflects badly on the directors’ achievements. Incompetent management, however, is not ‘unduly prejudicial’ but a risk every shareholder incurs. This being a plc, she can always sell her shares.

  • Breach of duty by Derek? (How) could the others bar Janet decide to release him from liability? Is Susan’s consent on the telephone valid? What is the correct procedure? CA 2006 / Model Articles?

Derek’s purchase of the equipment from that specific firm is informed by motives alien to the business of Lawbook; he has not acted to promote the success of the company, but to help a friend. He has, thus, breached his duty. The members of the company can ratify this breach under s239 CA 2006. In a plc, resolutions have to be adopted at meetings (see s288). There appears to have been no meeting, and if there was, Janet was apparently not invited. Susan’s consent, not having been given at the meeting (if there was one), is irrelevant.

  • One-off contribution beyond/other than injecting new capital lawful? Binding on all if adopted?

Members are not bound by alterations subsequent to their joining if the alteration requires subscription for more shares or other payments of money to the company.

  • Preference shares: meaning? How created? Correct procedure followed? Who has to be offered new shares? Any kind of share? Are there other bases on which Susan should have been offered? What remedies does Susan have?

Preference shares receive a guaranteed share of the dividends declared; the are commonly non-voting. Preference shares are issued like all other shares but in the conditions of their issue, the preference is stipulated. Because they are not part of the ‘equity’ share capital, ss548, 560, shareholders do not have a right of pre-emption, s561(1). Directors must ‘have regard to … the need to act fairly as between members of the company’, s172(1)(f), but the rules on pre-emption are special provisions for this particular question, and thus take precedence over the more general rule on directors’ duties. If the action by the company is motivated specifically by a desire to put Janet at a disadvantage (this would be required in view of the clear wording of the law which makes the present course legal), she would be unfairly prejudiced.

Lesson 6: Shares and the Formation of Share Capital


In re Baglan Hall Colliery Co (1870) LR Ch App 346 (CA)

Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)

Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 (definition of a share)

Re Discoverers Finance Corp Ltd, Lindlar’s case [1910] 1 Ch 312 (CA)

In re National Telephone Co [1914] 1 Ch 755

In re Roberts and Cooper, Ltd [1929] 2 Ch 383

Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 51 (CA) (note that there is a different, 1951 case with these parties!)

Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland Newspaper and Printing Co Ltd [1987] Ch 1

Hogg v Cramphorn Ltd [1967] 1 Ch 254

Bamford v Bamford [1970] 1 Ch 212 (CA)

McCarthy Surfacing Ltd, Re, also known as Hecquet v McCarthy [2006] EWHC 832 (Ch)

Textbooks and articles:

Sealy & Worthington ch 7, 9; Dignam & Lowry ch 5, 9; Davies, Principles Part 6; Mayson, French & Ryan ch 6–8; Boyle & Birds ch 7, 8, 19; Hannigan ch 19; Pettet ch 13; Ferran ch 3–6
G Barton, The legal nature of a share, in: Palmer/McKendrick (eds), Interests in goods, 2nd ed. 1998, 111–115

R Pennington, Can shares in companies be defined?, [1989] Comp. Law. 140–144

A Daehnert, The minimum capital requirement – an anachronism under conservation, parts 1 and 2, [2009] Comp. Law. 3–11, 34–42

Practice case for the session:

Mount Parade Lettings Ltd (MPL) is a York company whose business consists in the letting of bedsits in a converted villa near the centre of town. The villa had once been owned by Owen, who bequeathed it to his grandchildren, the cousins Charlie and Lola. The two have since sold the house to MPL. Charlie owns 60 per cent of the shares in MPL, Lola 40 per cent; both are MPL’s directors. Relations between them are so strained that it has latterly been difficult to pass special resolutions. As a result, only the necessary repairs and maintenance have been carried out on the building. Charlie wants to make some up-market improvements to the building, and he also thinks he could make more money out of the company if he had more of a say. For this reason, he passes a resolution at the next shareholder meeting authorising the allotment of new shares. As Charlie knows that Lola cannot at the moment afford to subscribe for the shares, he buys them all and thus increases his shareholding to 80 per cent. Subsequently, he passes a resolution authorising the compulsory purchase of minortiy shares whenever the majority so decides.

Learning outcomes

- Meaning and significance of „special resolutions“; when required under CA 2006/Model Articles

- Requirements of ordinary resolutions & meetings in Ltd.

- Duties of shareholders to one another?

- Procedure for the allotment of shares

- Permissibility of compulsory purchase

- Protection of minority shareholders (outline only)

Lesson 7: Maintenance, Increase, and Reduction of share capital;
Distributions, Share Buy-Backs, and Redeemable Shares


Trevor v Whitworth (1887) 12 App Cas 409 (HL)

Punt v Symons & Co, Ltd [1903] 2 Ch 506

Prudential Assurance Co v Chatterley Whitfield Collieries [1949] AC 512 (HL), [1948] 2 All ER 593 (CA)

Ex parte Westburn Sugar Refineries Ltd [1951] AC 625

Re Saltdean Estate Co Ltd [1968] 1 WLR 1844

Howard Smith v Ampol Petroleum Ltd  [1974] AC 821 (PC)

Clemens v Clemens Bros Ltd [1976] 2 All ER 268 (Ch)

House of Fraser v AGCE Investments Ltd [1987] AC 387 (HL)

Russell v Northern Development Corp Ltd [1992] 1 WLR 588

Re Northern Engineering Industries plc [1994] 2 BCLC 704 (CA)

Re Hunting plc [2005] 2 BCLC 211
Re Exchange Banking Co, Flitcroft’s case (1882) 21 Ch D 519 (CA)

Hill v Permanent Trustee Co of New South Wales [1930] AC 720 (PC)

Re VGM Holdings Ltd [1942] Ch 235

Brady v Brady [1989] AC 755 (HL)

Aveling Barford Ltd v Perion Ltd [1989] BCLC 626 (ChD)

MT Realisations Ltd (in liq.) v Digital Equipment Co. Ltd. [2003] BCC 415

It’s a Wrap (UK) Ltd v Gula & anor [2006] 2 BCLC 531

AMG Global Nominees (Private) Ltd v Africa Resources Ltd [2008] EWCA Civ 1278

Dashfield v Davidson (No 1) [2008] BCC 222

Progress Property Co Ltd v Moore [2009] EWCA Civ 629


Anatomy ch 6.4; Sealy & Worthington ch 8; Mayson, French & Ryan ch 10; Boyle & Birds ch 8; Hannigan ch 20; Pettet ch 14; Ferran ch 7

Practice case for the session:

Despite Charlie’s earlier manoeuvres, MPL requires further capital. Lauren is willing to lend £10.000 in exchange for preference shares with a 10 per cent return. Charlie is anxious to minimise Lauren’s influence over the company’s business. He also wants to repay her as soon as possible, thereby removing her from the company even against her will. How would MPL have to procede if the company had issued (i) non-voting preference shares with limited dividend and capital rights; (ii) preference shares which differed from ordinary shares only in relation to the dividend right, which is fixed at 10 per cent?

In 1990, MPL bought an apartment in Heslington for £10.000. After a revaluation in 2000, the appartment is entered in MPL’s accounts as worth £15.000; its market value is estimated at £40.000. MPL has distributable profits of £10.000. The company wishes lawfully to transfer the appartment to its sister company, Fulford Lettings Ltd, for the lowest possible price.

Lesson 8: Secured and Unsecured Debt; Company Charges


Burlinson v Hall (1883-84) LR 12 QBD 347

Re Yorkshire Woolcombers Association, Houldsworth v Yorkshire Woolcombers Association, Ltd. [1903] Ch 284 (CA)

Evans v Rival Granite Quarries [1910] 2 KB 979 (CA)

Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142

Re New Bullas Trading Ltd [1994] BCC 36

Re Cosslett (Contractors) Ltd [1998] Ch 495 (CA)

Agnew & anor v Commissioner of Inland Revenue [2001] UKPC 28, [2001] 2 AC 710

National Westminster Bank plc v Spectrum Plus & ors [2005] UKHL 41, [2005] 2 AC 680

In the matter of International Sections [2009] EWHC 137 (Ch)

Textbooks and articles:

SH ch. 24–27; Goode CL ch. 22–26; Anatomy ch 4; SW ch 10; Davies, Principles Part 7; Ferran ch 12; Anatomy ch 6.5; MFR ch 11–2; BB ch 10; Hannigan ch 21; Ferran ch 11;
R Pennington, Recent developments in the law and practice relating to the creation of security for companies’ indebetedness, [2009] Comp. Law. 163

S Worthington, Floating charges: the current state of play, [2008] JIBFL 467

A Walters, Statutory redistribution of floating charge assets: victory (again) to Revenue and Customs, [2008] Comp. Law. 129

Practice case for the session:

Fits like a Glove Ltd (FLG) manufactures ladies’ fashion accessories in the upper price ranges. Its products are particularly popular with estate agents and their spouses. Business was good during the years of the property boom, and FLG traded profitably. Since the autumn of 2008, however, the company has incurred substantial losses. Its main account is with the National Bank of Wales. By July 2009, the account was overdrawn by £1.000.000.

The Bank is seriously worried about FLG’s prospects. For any future credit, the Bank demands instant repayment of the overdraft, and security beyond the already existing floating charge over FLG’s valuable trade mark ‘Fits like a glove’. For this reason, FLG grants the bank a floating charge over all its present and future assets. The bank further takes a fixed charge over any positive balances in a new bank account specifically to be created for payments to the company by FLG’s debtors. In fact, however, this account is never set up, and all payments continue to go into the existing account. FLG repays the overdraft with its last cash reserves of £600.000. The bank grants FLG a new overdraft of £400.000 to cover the remainder, and extends a further £500.000 to FLG for the day-to-day running of its business.

At the same time FLG’s German leather suppliers, Ziege & Leder GmbH (ZL), demand security for their claims against FLG. To this end, ZL reserve their property in every batch of leather supplied to FLG until all amounts outstanding are paid. FLG may continue to process the leather, but must within ninety days (the usual credit period in the industry) either pay for each batch delivered, or assign to ZL claims against FLG’s customers up to the amount due to ZL at that time. FLG also takes a mortgage of the ‘Fits like a glove’ trademark. This transaction is duly entered in the British trade marks register (as would have happened in the equivalent transaction within Germany alone).

Disappointing Christmas sales entail further losses for FLG. To stem these, FLG’s management stops production for the whole of January. This prompts the Bank to appoint an administrative receiver, in a move which is vigorously opposed by FLG. Also, ZL demand back all unprocessed leather and insist on assignment of all FLG’s claims against its trade debtors. What is more, ZL has sold FLG’s trade mark to a buyer who knew nothing of FLG’s difficulties. That buyer wants to have his name entered in the British trade marks register. The receiver turns to you for advice.

Primary Learning outcomes

1) Floating charge over all assets – void pursuant to s245 IA 1986?

a) £600k extinguish by that amount the unsecured debt of £1 mil. then in the account: Re Yeovil Glove, with reference to Clayton’s case – ‘first in, first out’, i.e. payments into the account go towards the oldest existing debt first. FLG is unable to pay its debts as they fall due, s123(1)(e) IA 1986, and the charge was granted in the relevant time, s245(3)(b), (4)(a), (5)(b) IA 1986.

b) £400k granted to FLG by the bank merely replaces unsecured loan with secured one – in substance no new money paid ‘at the same time as, or after, the creation of the charge’, Re GT Whyte & Co Ltd [1983] BCLC 311. Result: bank is not secured for £400k.

c) The next £500k do not replace old debt, but are ‘new’ funds paid ‘after, or at the same time as, the creation of the charge’. Bank is, hence, secured for that amount, Yeovil Glove.

  1. Fixed charge over bank balance – or floating?

Before the creation of the designated account, there is no fixed charge over that particular account. The existing account is subject only to a floating charge. As long as the new account is not established, the existing one is not subject to a fixed charge, see Re Keenan Bros.

  1. Floating charge over trade mark versus mortgage

A floating charge allows dispositions in the ordinary course of business, including use as security for other creditors. Mortgage, therefore, ranks with priority over floating charge. There is no constructive notice of the contents of the securities register in ordinary sales transactions, but here the documentation would reveal that ZL is a mere mortgagee – buyer had to make enquiries regarding equity of redemption. Questionable also whether ZL entitled to foreclosure.

  1. Reservation of property

Valid as long as leather not processed, because parties can determine when property passes, s17(1) SGA 1979. Property is lost, however, as soon as leather is processed: Clough Mill v Martin; Re Peachdart, otherwise ‘windfall’ of the value of processor’s labour and other suppliers’ input for the reserving supplier.

  1. Credit period and assignment

In the meantime, FLG may use money as it pleases in running its undertaking, therefore no trust, but mere charge: Clough Mill, Peachdart, Borden v Scottish Timber in distinction from Romalpa; invalid for lack of registration.

Secondary learning outcomes (not relevant for solving the case, but still interesting in the context of security)

  1. Crystallisation of the floating charge and appointment of administrative receiver

Holders of (as here) qualifying floating charges are no longer entitled to appoint an administrative receiver, s72A IA 1986, safe as in accordance with ss72B–72GA. Mere misnomer, however, is irrelevant: for “a.r.” read “administrator”. Right to appoint only arises on crystallisation. Cessation of business leads to automatic crystallisation: Hubbuck v Helms [1887] LT 232 (ChD) 234 (Stirling J); Re Woodroffes, 377 f.; Re Borax Co., Foster v Borax Co. [1899] 2 Ch 130 (ChD), 135 (North J): ‘This seems to me to be really the special test: is the business upon which the debenture money is lent being con­tinued or not?’ One month’s interruption questionable ground.

  1. Bank’s charge over own debt

Credit balance in bank account means a debt of the bank to its customer; charge would thus mean security over one’s own indebtedness. Goode thinks conceptually impossible; Lord Hoffmann in BCCI (No 8), without much explanation, saw no problem. I have sided (in 2008 CYELS) with Hoffmann: charge is allowed quasi-set-off as if he were the creditor; requires mere book entry.

  1. Register of company securities v specialist IP registers

No judgments nor much literature; better view that ss860 ff. CA 2006 leges speciales over ss24, 25 TMA 1994.

Lesson 9: Assets Available for Distribution; Consequences of Improper Trading


Winkworth v Edward Baron Development Co Ltd [1987] 1 All ER 114

Liquidator of West Mercia Safetywear Ltd. v Dodd (1988) 4 BCC 30

In re Produce Marketing Consortium Ltd. (In Liquidation)No. 002142 of 1988 [1989] 1 W.L.R. 745

Re Gray’s Inn Construction Co Ltd [1980] 1 WLR 711

Re MC Bacon [1990] BCC 78

Re Oasis Merchandising Services Ltd [1998] Ch 170

Facia Footwear Ltd v Hinchcliffe [1998] 1 BCLC 218

Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 W.L.R. 143

Textbooks and articles:

BB ch 21.7; Hannigan ch 25; Pettet ch 21.4, 22;

R Mokal/L Chan Ho, Consideration, characterisation, evaluation: transactions at an undervalue after Phillips v Brewin Dolphin, [2001] JCLS 359–379

Practice case for the session:

Scottish Hawk Airways plc (SHA) is a member of the European Air Transport Association Ltd. (EATA). Only licensed air transport operators may become members of EATA. Each member has one share which carries the right to vote in EATA’s affairs, but not to any dividends as EATA is not run for profit, and its operations do in fact not generate any profits. Instead, EATA keeps accounts for all members into which it enters the value of any transport services provided by one airline for passengers who had booked with another airline. Once a month, EATA ‘nets out’ these accounts. Members are then either entitled to a payment by EATA, or must make a payment to EATA. The Association passes these payments on to the airlines that are in credit. If a member persistently and definitively fails to make payments to EATA, it must leave the Association and without consideration transfer its share to a new member or to EATA. The member in this case also loses the right to use the prestigious EATA logo.

The business of SHA develops very badly because the airline’s costs are too high. SHA notifies EATA that it cannot meet its payment obligations under the Association’s statutes anymore. EATA thereupon declares SHA’s membership in the association terminated, and its share forfeited. SHA thinks it is entitled to £50.000 against Welsh International Airways, for which it has recently carried out a number of charter flights to Mallorca. At the same time, the Clydesdale Bank terminates its service agreement with SHA under which SHA covered all executive travel needs of the bank. SHA had obtained this contract because it is the only sizeable airline operating out of an airport near the bank’s headquarters. The agreement expressly declares unassignable any benefits under it. What is more, SkyBus Industries SE, supplier of SHA’s aircraft, invokes a clause in the sale agreement according which property in all aircraft revests in SkyBus in case of the termination of SHA’s membership in EATA.

SHA’s liquidator turns to you for advice. Would it make a difference whether the liquidator had given the above notice to EATA, or whether she was appointed only subsequently?

Learning outcomes

  1. Can contractual arrangements, such as EATA’s statutes, supersede the provisions of the IA 1986 on the distribution of an insolvent company’s assets?

In principle no, because these rules are stipulated in the public interest, in particular for the protection of unsecured creditors of the insolvent company. The clearing house arrangement cannot, therefore, confer preferential treatment on EATA’s members: thus the majority of the HL in British Eagle – the ‘anti-deprivation’ principle. It is different, however, where the ‘assets’ of which the insolvent company is deprived have either no value (such as here the share) or cannot be transferred to any other creditors (such as the right to use the logo), Money Markets International v London Stock Exchange.

  1. Can a contract be terminated, on a company’s insolvency, by the other party such as Clydesdale Bank?

There is a controversy whether a mere non-assignment clause in a contract removes the asset in question from the ambit of the anti-deprivation rule: see Prof. Armour in CLJ on Money Markets International. Nevertheless, the rule is meant to protect other creditors (although this, too, is somewhat controversial), so that the mere extinction of rights, rather than their transfer to a creditor of the insolvent company, does not offend against the principle. At any rate, under the circumstances the contract was by its nature unassignable.

  1. Can it be agreed that property shall revert to the seller in the buyer’s insolvency?

No. This is the classic case of the anti-deprivation principle: Ex p. MacKay.

  1. Does the ‘anti-deprivation’ principle depend on the opening of formal insolvency proceedings?

Re Oystertec (ChD) answers ‘no’, but the judgment is controversial (in favour LC Ho, against Henderson), and the recent Perpetual Trustee case is expressly against it: only formal procedures trigger the application of the principle.

Lesson 10: Liquidation Procedures; Procedures for Averting Liquidation


Stonegate Securities Ltd v Gregory [1980] Ch 576 (CA)

Re Permcacell Finesse Ltd (in liq.) [2008] BCC 208

In re Airbase Services (UK) Ltd [2008] BCC 213

Re Courts Plc (in liq.) [2008] EWHC 2339 (Ch)

International Section Ltd. (in liq.) [2009] BCC 574

Re Harris Simons Construction Ltd [1989] BCLC 202

Re AA Mutual International Insurance Co Ltd [2005] 2 BCLC 8

Re Charnley Davies Ltd (No. 2) [1990] BCLC 760

Downsview Nominees Ltd v First City Co Ltd [1993] AC 295

Medforth v Blake [2000] Ch 86


BB ch 21.4–6; Hannigan ch 24; Pettet ch 21.3

SW ch 14; DL ch 17; MFR ch 20; BB ch 21.1–3; Hannigan ch 22–3; Pettet ch 21.1

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