Caselaw summary

Ball (PV Solar Solutions Ltd) v Hughes [2017]

Directors of a company who sought to avoid tax could be found to have breached their duty under section 172 to promote the success of the company.  They could not have reasonably concluded this would have been benefited the company's creditors.

Bushell v Faith [1970]

A clause in the Articles stating that on a vote to dismiss a director, any shares held by that director on a poll were to be counted as three votes per share was held to be valid.  Section 168 requires an ordinary resolution and so in this case, a director with 30% of the shares could block a resolution to dismiss him.

Foss v Harbottle [1957]

This case sets out the doctrine that if a company is in a position to bring a claim in the civil Courts, the company itself is the proper Claimant for that action and not the shareholders.

Ebrahimi v Westbourne Galleries Ltd [1973]

This case involved a "quasi-partnership" company. The three directors were also the three equal shareholders. Two of the directors (a father and son) had the other director removed under an ordinary resolution and the Court held this breached the third director's legitimate expectations and so the it was just and equitable to wind up the company.

Pender v Lushington [1877]

This case made it clear that a shareholder's right to vote was part of that member's property and any interference in it could lead to a derivative action or even a personal claim.  Lord Jessel MR was keen to stress a member could vote anyway they saw fit, even in a conflict of interest.

Re Duomatic [1969]

Here the Court decided that a company could take a decision in a way without necessarily suing all the requisite formalities of a general meeting. If all the members attended and voted at a general meeting, the decision they took at the meeting would be held to have the same binding effect as a formal resolution. There have been exceptions since then.

Salomon v A Salomon Co Ltd [1896]

In the House of Lords it was held that a company was entirely independent from the shareholders with a totally different legal personality.  This was the concept of limited liability.

O'Neill v Philips [1999]

Here the House of Lords held there was no unfair prejudice because the company had not breached any formal arrangements with the shareholder in question.  The concept of legitimate expectations was based on an expectation that the company's affairs would be conducted in the manner agreed by all the members.

Cook v Deeks [1916]

This case involves setting aside a fraud on a minority shareholder. The majority of shareholders had entered into a contract that competed with the company's business and the fourth shareholder applied to the Court in this regard. The Court held the majority had to account for this to the company.

Henry George Dickinson v NAL Realisations (Staffordshire) Limited [2017]

This case shows that the Courts do not have to wait for a company to be insolvent before they find that a transaction was aimed at defrauding creditors.

W T Ramsey v IRC [1982]

A Court can look over a whole series of transactions and form a view that they are being entered into with the aim of avoiding tax.  Here, the Court noted that the activities involved had no commercial significance apart from lowering the tax liability.

Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil & Gas plc [2015]

This case involved the "proper purpose" duty under section 171. The Court held that the company had only behaved in the way it did to prevent shareholders from taking the action they wanted, which breached the proper purpose test.

Hosking v Marathon Asset Management LLP [2016]

Here the Court held that a partner who breaches his fiduciary duties can be required to forfeit partnership profits.

Khan and Another v Miah and Another [2000]

This case looked at when a partnership can be said to have commenced; here it was held that it didn't necessarily when the business started trading as preparatory activities carried out with a common view to an eventual profit could be said to be the start of the partnership.

Dickenson v Gross (HM Inspector of Taxes) [1926]

A partnership deed had been entered into but it was ruled that in truth no such partnership existed as none of the terms of the deed had been put into practice.

Trego v Hunt [1896]

The Court looked at the meaning of goodwill in a business.  What goodwill meant would depend on the character and nature of the business. It was the "very sap and life of the business".

Greenhalgh v Arderne Cinema Ltd [1951]

This case was concerned with the concept of a fraud on the minority and the possibility of this being an exception to the rule in Foss v Harbottle. Here it was held there was no such fraud as the alteration to the Articles did not discriminate against minority shareholders.

Greenhalgh v Arderne Cinema Ltd [1951] CH 286

This case was concerned with the issue of shares and the concept of a "fraud on the minority" being an exception to the rule in the case of Foss v Harbottle. This rule states that in a potential claim for a loss incurred by a company, only that company should be the claimant, and not the shareholders.

Originally the Articles of the company stated that if a shareholder wanted to sell their shares, they had to be offered to existing shareholders first - that is there was a right of pre-emption.

Then this was changed at a general meeting by special resolution so that the right of pre-emption no longer existed.

One of the shareholders wanted to sell their shares and Mr Greenhalgh objected, saying the special resolution discriminated against him as a minority shareholder.

Lord Evershed MR held that there was no fraud on the minority shareholder.  None of the majority voters had voted for a private gain and so the alteration of the articles was perfectly legitimate because it was done properly.

As such, Mr Greenhalgh's action failed.

Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil & Gas plc [2015] UKSC 71

This interesting and detailed case involved a company in the petroleum industry, JKX Oil & Gas plc.  Eclairs and Glengary were two of the shareholders.

The directors of JKK took the view that Eclairs and Glengary were engaged in activities that were detrimental to the success of JKX.  As a result, they issued notices on them under section 793 of the Companies Act 2006.  The shareholders responded, but JKX then relied on a clause in its Articles (which a number of companies have) that if the company believes the shareholders have responded to the notice in a way that is incorrect or false, the company could then restrict their voting rights.  This meant Eclairs and Glengary could not vote at the AGM.

When JKX did this, Eclairs and Glengary brought an action alleging a breach of section 171(1) of the 2006 Act, alleging that the directors had breached their duty to only use their power for the purposes for which they were conferred.

In particular, the shareholders alleged that JKX had taken this action so as to prevent them from voting at the AGM.  The power under section 793 should have been limited to obtaining information about the shareholding, they alleged.

The High Court decided it in favour of the shareholders; the Court of Appeal reversed that decision.  In the House of Lords, this decision was again reversed and the Court found in favour of the shareholders.  Lord Sumption used a "but for" test in looking at the situation; if it had not been for the desire to restrain the shareholders, the company would not have issued the notices.  As a result, the Court decided that the company had breached the "proper purpose" duty under section 171.

W T Ramsey v IRC [1982] AC 300, (1981) 54 TC 101

This case sets out a general principle that over a series of transactions, the Courts can look at the overall effect and determine the tax liability on the scheme as a whole.  It is an important restraint on creative tax planning.

An interesting way to analyse these sorts of scheme was that the steps involved had no commercial significance of any kind apart from to lower the tax liability that would have been due if those steps had not been taken.  This principle therefore represents a significant change in the way these sorts of schemes are approached.

Recent cases have made it clear that statutory application is still of the utmost importance in such cases. So, the statute applicable to the situation must be capable of being interpreted in this way and should not be distorted just to achieve this affect.

Henry George Dickinson v NAL Realisations (Staffordshire) Limited & Others [2017] EWHC 28 (CH)

This case shows that there is no requirement that a company has to be insolvent for a finding that there was a transaction defrauding creditors.  The Court will focus on the intentions of the parties at the time of the transaction. 

As a company was going out of the business, the managing director and controlling shareholder brought a claim to recover a loan he had secured against NAL. The liquidators of NAL alleged he had breached his duty to the company's creidtors and preferred his own interests to those of NAL.

The liquidators also counterclaimed to set aside or recover compensation for various transactions.  The Court took the view that the director's primary intention was to reduce the asset value of NAL and to ensure his debt as a shareholder had priority.

The case shows the thoroughness with which Courts will set aside or undo any attempts to move assets out of the reach of creditors, regardless of whether the company was insolvent at that time or became insolvent as a result.

Cook v Deeks [1916] UKPC 10

This case from Canada illustrates the extent that the Courts can go to in setting aside or avoiding a fraud on a minority shareholder.

Here, there were four shareholders, each having an equal share, and each also were directors. Three of them wanted to enter into a contract for a competing business, without including Mr Cook.  When he realised what was happening, Mr Cook, in the Canadian Courts, made an application about this.

In the Privy Council, Lord Buckmaster LC held that persons who control a company's business must remember they are not at liberty "to sacrifice the interests which they are bound to protect, and, while ostensibly acting for the company, divert in their own favour businesses which should properly belong to the company they represent."

Although this was an appeal from a Canadian Court, it has still been of great use in English Courts.  The three shareholders therefore held the profits of the new contract on trust for the original company and an account had to be given.  A director must account to the company for any profit derived from his position as a director. It is also an instance of the Court not necessarily applying the principle of majority rule to permit a general meeting to ratify an unauthorised act of the directors where they control the company.

O'Neill v Philips [1999] 1 WLR 1092

This case centres on the concept of unfair prejudice and shows how the Courts can struggle with this notion and applying it to a particular case.

This case was appealed to the High Court, the Court of Appeal reversed the High Court's decision and then it was appealed to the House of Lords.  In the House of Lords, the Court of Appeal's decison was reversed.

Mr Philips owned a company and Mr O'Neill worked for him.  Mr O'Neill impressed Mr Philips and so was awarded shares in the company with a promise that further rewards might come his way.  However, due to a decline in the company's fortunes, this did not happen.

Ultimately Mr O'Neill bought an action claiming unfair prejudice under what is now section 994 of the Companies Act 2006.  The House of Lords analysed the situation and paid particular attention to that although various suggestions had been made about what might happen, as no formal arrangements had been made, this could not amount to legitimate expectations.

Lord Hoffman gave an interesting discussion of the equitable jurisdiction of the Court, stating that Parliament has chosen fairness as the criterion to decide whether to grant relief. Normally, there cannot be unfair prejudice unless there has been a breach of the terms which have been agreed for the conduct of the affairs of the company.

The concept of legitimate expectations, according to Lord Hoffman, was based on an expectation that the company's affairs will be conducted in the manner agreed by all the members, not a personal hope of the petitioner that the others will do something they had not in fact agreed to do.

Re Duomatic [1969] 1 All ER 161

In this case, the Court decided that a company could take a decision in a way without necessarily using all the requisite formalities of a general meeting.  Here, if there was a meeting with the requisite consent of the members entitled to attend and vote at a general meeting and are all present at the meeting, the decison they take will bind the company in the same way as a formal resolution at a general meeting, provided it was intra vires of the company.

This means that if all the directors are also all the membes, they can unanimously pass a resolution in a board meeting which ought to strictly require being passed by members at a general meeting.  The consent given can be express or implied, verbal or by conduct, but it has to be given and be unqualified.

This principle is subject to a range of limitations, including that it cannot apply if the company is insolvent or in danger of being so, or if it is sought in aid of removing a director or auditor.  It does not override the need for a special resolution for a company to purchase its own shares. Indeed, in the case law, these limitations are applied strictly so as to avoid the general extension of such a principle.  The members of a company cannot, by unanimous agreement, overcome prohbitions imposed on the company by the general law or the Companies Act.  For example, they cannot consent to theft of the company’s property by themselves.  

If possible though, it is better practice for a the directors to table an approriate written resolution or to immediately convene a general meeting, although consent to short notice in writing will need to be provided.

In these cases, if the resolution has to be filed with the Registrar, the Registrar's practice is to accept a printed copy of the resolution signed by the chairman of the board.

A good quote from this case is Buckley J, who states, “where it can be shown that all shareholders who have a right to attend and vote a general meeting of the company assent to seom matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.”

Pender v Lushington (1877) 6 CH 70

This case set out a general principle that part of a member's property when owning shares was the right to vote.  Any interference with that right, in the words of Lord Jessel MR, amounts to an interference with a property right that can lead to a cause of action.

This case indicated that interference with such a right could be both a derivative claim and a personal action.  Lord Jessel MR was keen to stress that members could vote in anyway they saw fit, even in circumstances of a conflict of interest. There was no moral or business test that was applicable. 

This case was also a reminder of the principle that company law does not look behind the ownership of the shares, for examples if the shares are held in trust.

Ebrahimi v Wesbourne Galleries Ltd [1973] AC 360

This case centres on the rights of minority shareholders.  Mr Ebrahimi had been in business with a man named Mr Nazar as buyers and sellers of expensive rugs. They were partners in the business but decided to incorporate the business as a limited company and moved to London.  Later, Mr Nazar's son was appointed as a director and became a shareholder as well, after both Mr Ebrahimi and Mr Nazar transferred some of their shares to him.  The directors were paid by director's fees and not as dividends.

There was a falling out between the directors and Mr Nazar and his son had their own meeting, at which time they passed an ordinary resolution which removed Mr Ebrahimi as a director in accordance with section 168 of the Companies Act 2006. Mr Ebrahimi then applied to the Courts to have the company wound up. Today, this application would be dealt with under section 122(1)(g) of the Insolvency Act 1986.

This case includes a discussion of the nature of a quasi-partnership company. Here, the Court was satisfied that when the partnership had been incorporated as a limited company, the directors expected the business still to be run effectively as a partnership.  Mr Ebrahimi had a legitimate expectation that the business be continued in this way. In addition, as the company had only paid its profits by way of director's fees, he was denied any income as well. 

Lord Wilberforce examined the phrase "just and equitable", which was the grounds for the application to wind up the company.  Due to the way the company had been set up and the way the directors were paid in fees rather than dividends, the House of Lords decided that Mr Ebrahimi's legitimate expectations had been breached.  This case was very fact specific and the House was keen to stress that it would not normally go beyond the legal rights set out in the Articles and other written documents of the company.

As a result, Mr Ebrahimi's application for the winding up of the company was successful as it was just and equitable.  This might today be dealt with under an application concerning the unfair prejudice of a shareholder, under section 994 to 996 of the Companies Act 2006. A particular point mentioned was that Mr Ebrahimi was supposed to work as a full time director.

Bushell v Faith [1970] AC 1099

This was a case involving the potential removal of a Director from a limited company under what is now section 168 of the Companies Act 2006.

The basic facts are that the Articles of Association of the company provided that, "in the event of a resolution begin proposed at any general meeting of the company for the removal from office of any director, any shares held by that director shall on a poll in respect of such resolution carry the right to three votes per share".

All but one of the Directors wanted to remove the other one.  The one who the others wanted to remove had a third of the shares.  As a result he could not be removed. 

Section 168 of the Companies Act 2006 (as it is now) only requires an ordinary resolution and as the legislative clause said nothing about this, it was ultimately deemed that this clause in the Articles was lawful.  A clause like this does not, of itself, prevent a resolution being an ordinary resolution. Whilst this decision has been criticised, such a clause could be useful in the situation of a quasi-partnership company. 

Top cases in Company Law

I'm studying for a fascinating course on Partnership and Company Law at present and this article will, as the course continues, feature what appear to me to be the leading cases in this area.

Ball (PV Solar Solutions Ltd) v Hughes and another [2017]

Here there were two directors of a private company, who had adopted a modified employer-financed retirement scheme.  The aim of this scheme was to avoid exposing their own remuneration to tax.  In addition, they applied three credit entries against their respective directors' loan accounts.  In this case, the directors held 100 per cent of the issued share capital of the company.

It was argued that under the Duomatic principle, as the directors were also the only shareholders, they could be taken to have approved of the way in which the credits were applied by an informal resolution.  The registrar rejected this ruling. This part of the ruling suggests a restriction on the Duomatic principle so that it could not be used to exonerate culpable conduct by the directors.

The Court went onto consider whether the directors had breached their fiduciary duties and had been guilty of misfeasance for the purposes of section 12 of the Insolvency Act 1986.

In the High Court, Registrar Barber needed to consider whether the directors had breached their duty under section 172 of the Companies Act 2006 to promote the success of the company.  The Registrar found that at the time each of the credit entries had arisen, the duty to prioritise creditors' interests had arisen. An objective test was applied here and the Court did not think that an honest director could have reasonably concluded that the company's credits would have been for the benefit of the company's creditors.  As a result, there had been a breach by the directors of their duty under section 172.

There was a real risk that the creditors' position was being put at risk, not just a remote one. In addition, they had also failed to exercise their powers for proper purposes as required under section 171 of the Companies Act 2006.  The Court found the directors were not entitled to be remunerated under a quantum meruit and the registrar made an order under Section 212 of the Insolvency Act 1986 that the directors had to repay slightly more than £750,000 to the company, with interest.