Examiners’ reports 2017

Examiners’ reports 2017

LA3021 Company law – Zone B

Introduction
The exam paper followed the same format as in previous years, save that for one
question (Part A, Q4) there was a choice within the question itself. Students should
refer to the Assessment Criteria to familiarise themselves with the criteria that are
applied to assessed work.
The best scripts tended to be those that ensured that each answer focused on the
actual question being asked and the specific issues it raised. Good answers also
demonstrated that the student had read around the subject and was able to apply
this wider reading to the issues raised by the questions. The most common
weakness was a failure to focus on the questions asked, as the specific comments
below explain.
Although most scripts attempted the requisite number of questions, a few scripts
failed to follow the rubric of the exam paper, which required students to answer at
least one question from Section A and at least two questions from Section B. Those
who failed to follow the rubric usually chose to answer all questions from Section B.
It is imperative that students are familiar with, and comply with, the instructions on
the paper.
Note that errors in student extracts, below, were present in the original extract.
References to ‘CA 2006’ are to Companies Act 2006. References to IA 1986 are to
the Insolvency Act 1986.

Comments on specific questions

PART A
Question 1
‘The reforms to derivative claims in Part 11 of the Companies Act 2006 have
done little to improve the effectiveness of such claims.’
Discuss.
General remarks
This question required discussion of the new procedure for bringing derivative claims, found in
Part 11 Companies Act 2006. It required students to explain what that procedure is and to explain
how this ‘statutory claim’ differs from its common law predecessor. Finally, having explained the
differences, the question requires a student to evaluate the impact of the changes that have been
made. Have they improved the derivative claim? If so, how – in what ways? Have they failed to
address outstanding problems that existed at common law?

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Law cases, reports and other references the examiners would expect you to use
Relevant cases here: Prudential Assurance v Newman; Franbar Holdings v Patel;
Iesini v Westrip Holdings Ltd; Kleanthous v Paphitis; Mission Capital plc v Sinclair;
Wishart v Castlecroft Securities Ltd; Wallersteiner v Moir (No.2); Smith v Croft;
Bhullar v Bhullar; Re Fort Gilkicker Ltd and Abouraya v Sigmund.
Common errors
A common error was a failure to answer the question asked. Some students simply
described, in very general terms, what derivative claims are, but failed to explain in
just what ways, and to what extent, the rules under Part 11 differ from the
corresponding common law rules governing derivative actions.
Likewise, even where students did explain changes that were made in introducing
the statutory claim under Part 11, many students failed to ask whether these
changes improved matters or made them worse and whether or not we can now
say, in light of the changes, that the derivative claim has become effective.
A good answer to this question would…
explain the introduction of the statutory derivative claim in Part 11 CA 2006 to
replace the previous common law action. Note the intention behind this change –
improving accessibility and clarity of the law; also arguably broadening the
circumstances when such claims can be brought. Note the removal of the ‘fraud’
requirement and, probably, of wrongdoer control. Note the clearer articulation of a
‘permission to continue’ requirement, in ss.262 and 263.
A good answer might analyse the criteria for determining if permission is to be
granted and show whether these conditions are unduly restrictive of the claimant’s
ability to proceed. A good answer would offer some analysis of relevant case law, to
show how the courts are interpreting and applying these criteria – whether for
example they are interpreting them strictly, or more favourably towards claimants. A
good answer might also try to give a sense of what proportion of claims that are
started are actually given permission to continue (around 40 per cent or less).
A good answer might also note continuing uncertainty within the law, especially due
to the failure to replace entirely the old case law, e.g. in respect of which breaches
of duty can be authorised/ratified (s.239(7)), and in respect of so-called ‘multiple’
derivative claims.
Poor answers to this question…
did not focus on the question asked. They spent too long talking generally around the rule in
Foss, and all the supposed exceptions to Foss, before eventually turning to mention derivative
claims. Poorer answers would then often give a very superficial account of the statutory action,
going into little depth about the rules found in Part 11 and, worse, saying nothing about how the
new rules differ from the common law rules. Finally, poorer answers usually made little attempt to
evaluate the new rules or to offer an opinion about whether the new statutory action is effective.
Question 2
‘Minority shareholders cannot rely on the company’s articles of association to
provide them with any protection against majority shareholders. It is unclear
when the courts will enforce the articles, and it is too easy for the majority to
alter the articles.’
Discuss.
General remarks
This question addresses the issue of minority shareholder protection but by asking,
specifically, about the protection that the articles provide. The essay must focus on
that. Simply writing out a pre-prepared essay on minority protection is insufficient.

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And an answer that makes no reference to the articles fails to answer the question
at all.
Law cases, reports and other references the examiners would expect you to use
Relevant cases here might include some of: Hickman v Kent or Romney Marsh
Sheep-Breeders' Association; Pender v Lushington; Welton v Saffery; Rayfield v
Hands; Eley v Positive Government Security Life Assurance; Beattie v E and F
Beattie; Salmon v Quin & Axtens; MacDougall v Gardiner; Allen v Gold Reefs of
West Africa; Shuttleworth v Cox Bros; Greenhalgh v Arderne Cinemas; Citco
Banking Corp NV v Pusser’s Ltd; Brown v British Abrasive Wheel Co; Sidebottom v
Kershaw, Leese & Co Ltd; Dafen Tinplate Co v Llanelly Steel Co; Cumbrian
Newspapers Group Ltd v Cumberland and Westmorland Herald Newspaper and
Printing Co Ltd.
Since the articles can also be relevant if a minority relies on s.994, s.994 is also
worth mentioning, including cases that make clear that a shareholder’s chance of
succeeding under s.994 does depend upon the content of the articles: see e.g.
Ebrahimi v Westbourne Galleries, O'Neill v Phillips, Re Saul D Harrison, Re Blue
Arrow, Grace v Biagioli and Fulham FC v Richards.
Common errors
The most common error was a tendency to focus only on the question’s reference
to ‘minority protection’, and to churn out a (possibly) pre-prepared essay on that
topic, without addressing the role the articles play in protecting a minority and,
specifically, whether it is true that they cannot be enforced and can too easily be
altered.
A good answer to this question would…
note the continuing uncertainty over key aspects of the ‘statutory contract’, created
by s.33 CA 2006. One area of doubt/controversy concerns the enforcement of
‘outsider rights’. A good answer would discuss some of the relevant case law that
illustrates the lack of consistency in the cases, and might note academic attempts to
explain or resolve such inconsistencies.
A second area of uncertainty concerns the courts’ refusal, sometimes, to enforce
those breaches of duty which are labelled as ‘mere internal irregularities’, where the
breach of the articles is said to be only a wrong to the company to be resolved by
the operation of majority rule. Again, a good answer would note the apparently
conflicting case law, such as Pender, and MacDougall, and again might note
academic attempts to resolve this controversy.
On the alteration point, a good answer would analyse how easily the majority can
alter the articles. It would reference s.21 and analyse the judicial policing of
alterations through the requirement that they be passed ‘bona fide for benefit of the
company as a whole’. A good answer would explore the judicial construction and
application of this test, through the relevant case law. It is generally applied as a
subjective test and the requirement of ‘benefit of the company as a whole’ has been
construed as a rather easily satisfied requirement to avoid discrimination. A good
answer might note a stricter approach in ‘expropriation’ cases, as well as the ability
of well-advised minorities to prevent future alteration through the use of s.22 CA
2006 or the creation of ‘class rights’.
Finally, although enforcing the articles under s.33 is often difficult for a minority, the
articles can still be of some assistance to the minority if they try to protect
themselves by suing under s.994 instead, for a breach of the articles may constitute
‘unfairly prejudicial conduct’. A good answer would note relevant cases here
(Ebrahimi, O’Neill, Fulham v Richards), and explain how a successful s.994 action
usually results not in ‘enforcement’ of the articles (but in a ‘buyout’).

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Poor answers to this question…
tended to discuss minority protection generally but saying little specifically about the
articles, or whether the articles do make a significant contribution to minority
protection.
Student extract
The question suggests that minorities are not well protected by a company’s
articles of association, due to uncertainties of enforcement and the ease of
alteration. The suggestion has weight, considering enforcing the s.33 CA
2006 contract is plagued by three unresolved hurdles: whether a member
may enforce against another member; whether shareholders can enforce as
an insider and whether it will be considered a personal right. As for
alterations, the courts have interpreted the test of alteration to include a good
faith requirement but case law has shown us that challenges on such bona
fides by the minority has been rarely successful.
Give that statutory protection of minorities have demonstrated to be difficult to
raise, the articles should be strengthened in terms of enforcement and
alteration. It is unsurprising that Lord Wedderburn in his 1957 article on Foss
v Harbottle, laments the protection given to minority shareholders.
S.33 provides that the company’s constitution binds the company and the
members as covenants … however in a situation where the member wishes
to sue another member to enforce his s.33 rights inter se, the position is
extremely unclear.
Hickman v Kent provides that the literal interpretation of s.33 would mean
there is no direct right of enforcing s.33 against shareholders by
shareholders. But, Rayfield v Hands has held that s.33 may bind
shareholders inter se. This is supported by Prentice who prefers this route of
enforcement in the interests of avoiding multiplicity of actions. The Company
Law Reform Steering Group, in Developing the Framework 2002, has
recommended for the confusion in the law to be clarified to allow for greater
protection for minorities. However, s.33 merely reproduces its counterpart in
CA 1985. …
The second uncertainty which often faces shareholders is whether the right in
question will be interpreted as an insider or an outsider right. This confusion
has spawned a long line of academic dissent and attempts of reconciliation,
leaving minorities unclear as to what their rights actually are. The starting
point is Ely v Positive Government, which defines an inside right as a right
common to all. Hence, individual rights would be excluded from s.33
enforcement. However, in Salmon v Quin and Axtens, the courts held that a
right of a director could be enforced if it was framed in a way to require the
courts to enforce ‘a shareholder’s right tangentially affecting his right as a
director’. This line of argument has been later used in Beattie causing
confusion to the neat way of discerning an outsider or insider’s right in Ely.
[The essay then looked at the academic debate around the insider/outsider
rights issue, and the work of the CLRSG. It continued with a detailed look at
the personal rights/mere internal irregularities uncertainty and finally provided
a detailed examination of the case law dealing with alterations to the articles.]
Comments on extract
Interpretation of the question: excellent – the student understood precisely what
they were being asked to discuss.

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Relevance of the answer to the question: again, excellent. The answer focused
clearly on the question asked and the issues it raised.
Substantive knowledge: also excellent. The student had an extremely detailed
and accurate knowledge of the different issues raised by reliance on the articles as
a source of minority protection. The knowledge covered not only the underlying
problems but also the case law that adds to the confusion in this area and academic
commentary.
Use of authorities: excellent: the student cited all the most relevant authorities and
generally showed a good understanding of the decisions reached by the courts, and
the significance of those decisions for the development of the law.
Articulation of argument: it flowed clearly and was very well structured and
coherent. The division/structure of the essay was logical. It was clear what the
student was arguing, and the material was well ordered and assembled to support
the student’s argument. A good conclusion emphasised and clarified the argument
that had been put forward.
Accuracy of information: generally, very good.
Clarity of expression: excellent – very clearly explained.
Legibility: good.
Overall, the essay got a clear first.
Question 3
‘The rules and principles set out in the UK Corporate Governance Code are
well designed to improve accountability in listed companies. However, their
enforcement is a major problem. Such rules and principles should therefore
be codified in a new Companies Act, and each shareholder should be given a
personal right to enforce those rules and principles against any listed
company in which they own shares.’
Discuss.
General remarks
This question addressed the UK corporate governance regime for large companies.
It required, however, a discussion of a specific issue with regard to that regime,
namely the effectiveness of the UK Corporate Governance Code. It asked whether
it is true that the content of the Code is well designed but its enforcement is
problematic. It then required students to discuss a possible reform, based on
codifying the Code into a statute, and giving each shareholder a personal right to
enforce its provisions.
Students had to address these different issues raised by the question. An answer
that merely wrote generally about the history of the Code, without addressing the
specific points raised – the quality of its content, the ease with which it can be
enforced, whether the proposed reform was attractive – would not be answering the
question asked.
There is no ‘right answer’ to the issues raised by the question. One very good
answer might agree strongly with the suggestions made in the question, while an
equally good answer might just as strongly disagree with them. But the important
point is that any good answer would focus on them and address them specifically.
Law cases, reports and other references the examiners would expect you to use
Students need to refer to the UK Corporate Governance Code (2016). They would
need to refer to relevant literature that has evaluated that Code, and especially its

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‘comply or explain’ mechanism, and any evidence of the extent to which companies
are forced to comply with its provisions. Refer also to the Stewardship Code (2012).
Common errors
The most common error is one that has been emphasised in previous years’
examiners’ reports: too many students appear to have prepared a ‘standard’ essay
on corporate governance, which simply recites the history of the UK Corporate
Governance Code and such students seem determined to regurgitate that answer
regardless of what the question actually asks. Questions on the topic of corporate
governance, such as this one, tend to be much more focused, requiring discussion
of a specific aspect or issue.
A good answer to this question would…
describe the UK Corporate Governance Code, and explain, briefly, the
rules/principles it contains. It would evaluate whether these are indeed well
designed to promote accountability, perhaps focusing upon the rules on board
composition, board structure, and the role of boards/NEDs. It might then consider
what mechanisms exist to enforce the Code, focusing on the comply or explain
system that underpins it, and the extent to which this encourages companies to
comply.
It might then address the suggestion of codification, backed by a personal right to
enforce. On codification, it might consider what might be gained thereby – say in
terms of greater specificity in the drafting of rules, democratic input/legitimacy, etc.
– and what might be lost, in terms of lack of flexibility, speed of updating, box ticking
and so on. Giving shareholders a personal right to enforce might increase
enforcement but replaces the sentiment of the market with individual shareholder
preferences and also loses the ‘democracy’ of majority rule. Why should a single
shareholder be allowed to enforce the Code, if a majority of shareholders are happy
for the company not to follow one of its provisions?
Poor answers to this question…
Tended simply to set out a discussion of the history of the Combined Code/UK
Corporate Governance Code, with little attempt to explain what the rules and
principles making up the Code say, why those rules and principles were chosen,
whether they are well designed to improve accountability in listed companies.
Nor would they address specifically the enforcement of the Code and its ‘comply or
explain’ mechanism, or offer any analysis of whether this works well or badly, as the
question suggests. Finally, they often failed to consider the suggestion in the
question regarding codifying the Code in a statute and giving each shareholder a
personal right to enforce those rules.
Student extract
The UK Corporate Governance Code, published by the FRC, an independent
regulator for corporate reporting and governance, is the Code of Best
Practice applying to public companies listed on the Stock Exchange. This
essay will consider the Code’s origin, its principles and its self-regulatory
system to demonstrate how far it encourages and enforces good corporate
governance. [There then followed a brief summary of the history of the Code
and then continued]:
The Code is an example of ‘soft law’. It does have the force of a statue, but
works on a comply or explain basis. Listed companies are obliged to make a
compliance statement and to explain to shareholders if they are non-
compliant and why. The Code indicates best practice of corporate
governance in a number of areas, including – Leadership, accountability,
effectiveness, remuneration, relations with shareholders – each consisting of

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a main and supporting principles. The code will be explored to demonstrate

how it encourages and enforces good corporate governance.
[The essay then went through a selection of the Code’s rules or principles,
explaining their content and their significance. It then continued:]
However admirable its principles, the Code is valuable only if it enforces good
corporate governance, which is doubted, as there are no penalties for failure
to comply with its provisions. For example, companies such as Marks and
Spencer plc and Stuart Rose allowed the same person to hold chief
executive and Chairman roles. Nevertheless, it seems that the ‘comply or
explain’ requirements impose just enough pressure and directors are aware
that, if the Code is seen to be failing, more rigid regulations might well take its
place.
The self-regulatory system has the benefit of flexibility, both by allowing
alterations to be made to the Code easily and freedom to operate businesses
with guidelines rather than rigid regulations. Moreover, involving experts in
drawing up the Code ensures that provisions better reflect real practices.
However, there are obvious concerns that those making the rules are the
ones to benefit from such a relaxed system.
[The essay continued to look at some recent scandals that suggested the
Code might not be fully effective and then at issues around pay and gender
diversity. It concluded by reasserting that the comply or explain approach is
probably just about effective enough to make it unnecessary to codify the
Code in statute, noting that] …keeping the rules and principles uncodified
allows them to be altered, with changes in circumstances immediately, whilst
codifying them might make them more rigid and inflexible.
Comments on extract
Interpretation of the question: this was very good – the student clearly
understood precisely what it was asking to be discussed.
Relevance of the answer to the question: again, excellent. The answer focused
just on what the question asked. Apart from discussing a little more than was
needed the history to the present Code, it otherwise never wandered away from the
focus of the question. It did not wander off onto other provisions, except
occasionally for purposes of comparison.
Substantive knowledge: very good. The student demonstrated an understanding
of the Code, a good knowledge of the detail of its rules and principles, understood
well how enforcement worked and was aware of debates about the Code’s
effectiveness. S/he included good examples of corporate governance scandals, and
also recent governance initiatives.
Use of authorities: not really applicable to this question.
Articulation of argument: it flowed very clearly and coherently. It was well
structured – related ideas fitted together. There was a clear ordering of issues – it
did not read like a ‘stream of consciousness’ with no structure to it. An excellent
conclusion tied the essay together well.
Accuracy of information: generally, very good.
Clarity of expression: excellent, well expressed, always comprehensible, a good
mature style.
Legibility: good.
Overall, the essay got a good first.

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Question 4
Examine how effectively creditors in the UK are protected by:
EITHER
a) the rules on the raising and maintenance of capital;
OR
b) the provisions of sections 213 and 214 of the Insolvency Act 1986
and the Company Directors Disqualification Act 1986.
General remarks
This question gave a choice of topics to students. Both parts required an analysis of whether
some areas of UK company law protect creditors effectively. But students could choose between
two areas to discuss from that point of view, namely the rules on the raising, and the
maintenance, of capital, or alternatively the rules found in ss.213 and 214 IA 1986 and in the
Company Directors Disqualification Act 1986 (‘CDDA’).
Law cases, reports and other references the examiners would expect you to use
For part (a), the relevant statutory provisions addressing the raising and
maintenance of capital; relevant case law such as Ooregum Gold Mining Company
v Roper; Re Wragg Ltd; Trevor v Whitworth; Bairstow v Queens Moat Houses plc;
Re Halt Garage (1964) Ltd; Chaston v SWP Group plc; MT Realisations Ltd; Anglo
Petroleum Ltd v TFB (Mortgages) Ltd; Brady v Brady.
For part (b), ss.213 and 214 of IA 1986; the CDDA; relevant cases such as: Re
Produce Marketing Consortium; Re Polly Peck International plc (No.2); Re Lo-Line
Electric Motors Ltd; Re Barings plc (No.5); Secretary of State for Trade and Industry
v Swan (No.2); Morphitis v Bernasconi Re William C Leitch Brothers Ltd; Re Gerald
Cooper Chemicals Ltd; Re Brian D Pierson (Contractors) Ltd; Re Purpoint Ltd.
Common errors
For part (a), some answers misunderstood what is meant by ‘the rules on the raising and
maintenance of capital’. Some answers addressed only either the rules on raising, or only the
rules on maintaining, capital but not both, as the question required. For part (b), many answers
failed to address all the provisions the question specifically required to be discussed.
So, students could choose between part (a) and part (b), but having made that choice, they then
had to address all the aspects of the question that the part they had chosen included.
A good answer to this question would…
for part (a): explain the rules on the raising and maintenance of capital that might be
relevant to creditor protection. As to raising of capital, the rules require, inter alia,
disclosure of the amount of share capital raised, restrictions on issuing shares at a
discount, restrictions on public companies on valuation of non-cash consideration
and restrictions on undertakings in return for shares. As to maintenance of capital,
note the rules regarding restrictions on distributions, capital reductions, share
buybacks and financial assistance for the acquisition of shares.
Explain how these rules protect creditors, ensuring companies disclose to creditors
how much capital has been raised, actually do raise the amount claimed and
preserve that capital within the company. Explain the limits to these rules: no
minimum capital for private companies; private companies are not required to value
non-cash considerations; the rules do not prevent loss of capital in the ordinary
course of trading; liberalisation of buyback rules for private companies, etc.
For part (b): explain ss.213/214 IA 1986. Show requirements that must be satisfied
for a liquidator to bring proceedings successfully under each provision. Explain
limits on the effectiveness of s.213, notably the requirement to show dishonesty.

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Contrast this with the ‘negligence-based standard’ that underpins s.214. Explain
who these provisions can be used against (anyone for s.213, only directors for
s.214) and the consequences of a successful action, including in terms of who gets
the fruits of an action. A good answer might note longstanding problems over
funding such actions, and liquidators’ refusal to bring them and note the introduction
of s.246ZD IA 1986 (by SBEEA 2015) allowing the sale of actions by liquidators.
On disqualification, explain how disqualification might promote creditor protection. A
good answer would probably focus on the s.6 ground – unfitness – explaining its
meaning and the number of successful cases brought each year. Perhaps address
the meaning of unfitness, controversy over whether mere incompetence
does/should suffice. The consequences of disqualification should be noted,
including in terms of typical disqualification periods and the possibility of securing
leave to act while disqualified. Some mention might also be made of the
introduction of ‘compensation orders’ under CDDA 1986.
Poor answers to this question…
did not address the full scope of creditor protection provisions that each alternative part of the
question required.
In part (a), students often struggled to explain clearly the rules that address the raising and the
maintenance of capital. These rules can be complex but some answers showed a lot of confusion
or misunderstanding of what those rules say.
In part (b), students often limited their answers to copying out sections of the statute – s.213 or
s.214 IA 1986, or parts of CDDA. That was insufficient to score a high mark. It is much better to
pick out just the key bits of wording from the statute and then analyse the meaning and
significance of that wording. Poorer answers also failed to reference much relevant case law.

PART B
Question 5
Porterhead plc is a large company, carrying on a number of different
businesses. Until 2015, one of these businesses involved making batteries for
mobile telephones. In 2015, Porterhead sold this battery-making business to
Batteries plc. In the contract for the sale of the business to Batteries plc,
Porterhead agreed not to make batteries for a period of five years.
In 2016, Porterhead decided it wanted to start making batteries again.
However, to get around the restriction in the contract with Batteries plc, it
arranged for one of its subsidiary companies, Selltech Ltd, to make the
batteries. Porterhead had formed Selltech many years earlier.
Selltech began making the batteries in a small factory in London.
Immediately, there were problems with chemical leaks from the factory. The
directors of Porterhead were not told about these problems. In March 2017,
due to Selltech’s negligence, a large leak of chemicals from the factory
injured Mary, an employee of Selltech, and Noris, a neighbour of Selltech’s
factory. The directors of Selltech have told Mary and Noris that Selltech has
no money to compensate them for their injuries.
a) Advise Batteries whether it could take any action against either
Porterhead or Selltech to enforce Porterhead’s promise not to make
batteries; and
b) Advise both Mary and Noris whether they could bring a claim against
Porterhead in respect of the injuries they have suffered.

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General remarks
This was a question that brought together two related areas of law. The first (the focus of part
(a), concerns veil-piercing. The second, relevant to part (b), concerns the possibility of bringing
an action in tort against a parent company in respect of harm caused by the parent’s subsidiary.
Students generally answered the second part well, and showed good awareness of recent case
law developing a duty of care by a parent company. The first part, addressing piercing the
corporate veil, was also handled well by some, but less confidently by others, with a failure to
explain clearly the ground on which the veil can now be pierced.
Law cases, reports and other references the examiners would expect you to use
Relevant cases would include: Adams v Cape; DHN Food Distributors v Tower
Hamlets LBC; Woolfson v Strathclyde Regional Council; Gilford Motor Co Ltd v
Horne; Jones v Lipman; Petrodel Resources Ltd v Prest; Re FG (Films); Smith,
Stone and Knight v Birmingham Corporation; Connelly v RTZ Corporation plc;
Lubbe v Cape Industries plc; Chandler v Cape plc; Thompson v The Renwick
Group plc; Lungowe v Vedanta Resources plc; Okpabi v Royal Dutch Shell plc.
Common errors
In discussing part (a), and the possibility of piercing the corporate veil, some students’ answers
failed either: 1) to note the most recent important case law, e.g. Prest v Petrodel Resources; or
2) to explain clearly what the legal position now is with regard to veil piercing.
Similarly, in part (b), although this was generally well done, some students failed to note the
most recent cases that have clarified in what circumstances, and in favour of what parties, a
parent company may owe a duty of care in tort. Chandler is very important but so too are the
more recent decisions, which have elaborated upon Chandler.
Another common error, across both parts of the question, was a failure to apply the law to the
facts of the question. It is imperative, in problem questions, that students apply the law to the
facts. Even a very good account of the legal rules and principles will not get a good mark if
those rules and principles are not then applied to the facts.
A good answer to this question would…
recognise that the focus in part (a) should be on veil piercing. A good answer might
note the law’s starting position, in terms of the separate personality enjoyed by
parent and subsidiary; prima facie, the parent alone is liable under the contract it
entered into. The subsidiary is not bound by the terms of the promise not to make
batteries and, since the parent is not making the batteries, it is not in breach. Then
consider whether the veil might be pierced/lifted. Explain the grounds on which this
might be done – the sham/façade test in Adams/Prest, and its linkage to the
evasion of an existing obligation. Note that control over the company seems to be
necessary but not that the company was created in order to evade the obligation.
Apply this to the facts of case – does the parent have control over its subsidiary?
When was company created?
Some discussion of whether S might be considered the agent of P would also
relevant.
In part (b) the focus should be on whether P owed a duty of care to prevent S from
injuring M and N. Discuss Chandler v Cape; identify the four conditions for imposing
a duty of care in Chandler and apply them to the facts. Good answers will note that
Chandler itself focuses on duty to employees, but Lungowe suggests others
(including in that case neighbours) might also be able to claim a duty of care owed
to them. Thompson and Okpabi both suggest there will be no duty where the parent
company is a ‘pure holding company’, not itself engaged directly in the industry in
which its subsidiary has operated.
A good answer would apply the law to the specific facts of the question.

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Poor answers to this question…

in part (a), poorer answers tended to exhibit the following weaknesses.
(i) Some answers mentioned very little case law at all – they stated some rules about
when the veil could/could not be pierced but did not give any authority for those rules, or
they only referred to a few outdated cases, rather than the leading authorities
mentioned above.
(ii) Some answers failed to explain clearly the ground for veil piercing, which has now
been established in Adams and confirmed in Prest, in terms of the use of a company by
its controller to evade an existing obligation of that controller.
In part (b), poorer answers tended to exhibit the following weaknesses.
(i) Some students also failed to mention the more recent cases establishing the extent
of the parent company’s duty of care in tort (Thompson, Okpabi, Lungowe).
(ii) Weaker answers generally failed to apply the law to the facts. Remember: explain
the legal issue that arises, describe clearly the law that is applicable; apply that law to
the facts of the question – you must do each of these things for problem questions.
Student extract
This question relates to corporate personality and whether Batteries plc could
take any action against Porterhead or Selltech to enforce Porterhead’s
promise not to make batteries. B plc is advised to enforce its claim against P
through company law by relying on veil lifting. B plc is advised that the
general principles of company law as seen in Salomon v Salomon is that
once a company is formed properly it is a body corporate with its own rights
and liabilities. It can sue and be sued. It can own property – Lee v Lees Air
Farming; Macaura v Northern Assurance.
This principle applies also to group companies as well – Adams v Cape;
Woolfson v SRC. Thus, P and Selltech are separate legal entities and P will
not be held liable for any losses or liabilities incurred by the subsidiary,
Selltech (Re Southward). As such, B plc is advised that they cannot enforce
P’s promise since it was Selltech, P’s subsidiary which made the batteries,
rather than P. As such, B plc would want to rely on corporate veil lifting
against P.
B plc is advised that English courts are very protective of the Salomon
principle. It is very difficult for them for them to pierce the corporate veil in
normal circumstances. As in Adams, Wolfson, VTB v Nutritek, Prest v
Petrodel and the 2 recent cases of Boyle Transport v R and Campbell v
Gordon, their respective lordships stressed that the corporate veil will only be
lifted in limited, special and carefully defined circumstances.
According to Lowry and Dignam, Adams effectively narrowed down the
possibility of veil lifting to only 3 situations. Firstly, where there is any statute
or document indicating that P plc and Selltech are to be treated as a single
economic entity – DHN v Tower Hamlets. On the facts there is none.
Secondly, whether there is an agency agreement. On the facts we are not
told of any express agreement between P and S and we are not told of any
possibility of an implied agency agreement as Adams makes it clear there
has to be day to day control by P over Selltech: Miriam v The Print Factory.
Lastly, whether S is a mere façade concealing true facts. The classic
example where a company is a façade is seen in Gilford Motor v Horne and
Jones v Lipman, where both of the wrongdoers purposefully set up a
company and transferred the assets to the company so as to evade existing

11
 legal obligations. In Adams and Prest, where the courts really looking to
whether there is a pre-existing legal obligation or liability which existed before
the formation of the company.
On that, P plc agreed not to make batteries for 5 years in 2015 and
subsequently P plc arranged for one of its subsidiary companies, S, to make
batteries. B plc is advised that following VTB v Nutritek, since the parties to
the contract are P and, only they are privy to the contract which can enforce
their rights and obligations against each other. There is no reason for the
court to lift the veil to make S Ltd a part[y] to the contract and thus the
principle of privity of contract is upheld.
As such, B is advised that since it was S which made the batteries, P did not
breach its promise unless B can prove S is a mere façade. On the facts, P
had formed S many years ago. Following cases like Smallbone v Trustor and
Raja v Van Hoogstraten, the company having been originally formed for a
legitimate purpose does not prevent it from being a façade subsequently.
...clearly there are pre-existing legal obligations on the part of P not to make
batteries and by arranging to make batteries instead through S, P is using S
to frustrate B’s legal right to enforce against P – Prest, Adams.
[The essay then continued to part (b).]
Comments on extract
Overall, this was a very good piece of work.
Interpretation of the question: excellent. The student understood the facts of the
question well, and understood the legal issues raised. The student appreciated the
different legal issues arising in parts (a) and (b) – that (a) involved veil
lifting/piercing, whereas (b) required discussion of a duty of care in tort owed by the
parent company.
Relevance of the answer to the question: very good. The answer focused on the
precise issues raised by the facts of the question. All the discussion was directly
relevant to the main legal issue here, the ability to lift/pierce the corporate veil.
Substantive knowledge and application to the facts: generally, very good. The
student’s understanding of the veil piercing doctrine was good and included the
most recent judicial developments – it was very much up-to-date. The student also
applied this well to the facts of the question – especially in terms of whether there
was here a pre-existing obligation, the relevance of the company having been
formed many years earlier and so on.
The only point where the essay goes slightly astray is when it discusses VTB. At
this point, the essay seems to say there is no possibility of veil piercing, which is
surely wrong, and slightly misunderstands VTB. But it then gets back on track,
focusing again on the crucial issue of whether P is evading a pre-existing obligation.
Use of authorities: excellent – a good analysis of a great deal of relevant case law,
showing generally a clear understanding of the relevant decisions.
Articulation of argument: clear. Good structure overall.
Accuracy of information: excellent.
Clarity of expression: mostly good, a few slips in language but the essay was
always perfectly comprehensible.
Legibility: OK.

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 Examiners’ reports 2017

Question 6
In 2000, Mei formed Safehomes Ltd. The company owns a large hostel in
London, which provides accommodation for victims of domestic violence.
Originally, Mei was the only shareholder and director of the company. In 2016,
Mei decided to hand over day to day control of the company to her two
daughters, Bik and Chun. She gave each of them 30% of the shares in the
company, and appointed each a director of the company. Mei remained a
director. The company’s articles provide that no contract for more than
£100,000 can be entered into without Mei’s consent.
At a board meeting two weeks ago, Bik and Chun passed a resolution to
convert the hostel into a luxury hotel. Mei is passionately opposed to this. On
behalf of the company, Bik and Chun have now entered into a contract with
Darren, a builder, to carry out the conversion works, which will cost £500,000.
Darren has read the company’s articles. He knows that Mei does not consent
to this contract.
a) Advise Mei whether she can prevent Bik and Chun going ahead with
these conversion works.
b) In addition, explain whether your answer would be any different in
EACH of the following situations:
i) If Darren were Bik’s husband;
ii) If the company’s articles contained a clause saying that the
objects of the company were limited to running a hostel for
the victims of domestic violence.
General remarks
This question concerns the ability of a shareholder to prevent the company entering into a
transaction with which the shareholder disagrees. The primary areas of law that are relevant, on
the facts of this question, are those relating to the authority of the directors, and the capacity
of the company (which in turn involves applying the ‘ultra vires’ doctrine).
Many students failed to realise the importance of those areas of law in answering the question.
Law cases, reports and other references the examiners would expect you to use
The rules on directors’ authority, including the provisions of the Model Articles, regs
3 and 4. RBB v Turquand; ss.40 and 41 CA 2006; ss.31 and 39, CA 2006 and ss.33
and 171 CA 2006.
Common errors
A common error was a failure to understand the importance of the issues of
directors’ authority and corporate capacity, in answering the question. The reason
why Mei may be able to prevent the works going ahead in part (a) of the question is
because the directors may have no authority to enter into the contract for those
works. So, students needed to explain clearly whether the directors did have
authority and whether a lack of authority would allow Mei to prevent the works
agreed to under the contract from going ahead.
There was also a failure to distinguish between the legal issues raised for part (a)
and those raised in part (b). In (b), we are told the company may lack capacity to
enter into this contract. So, capacity is relevant in (but only in) part (b). Many
students failed to make this clear.
A good answer to this question would…
for part (a), note that the board normally enjoys authority to exercise all powers of
the company (see for example Model Constitution, Reg.3), giving the sisters power
to decide that the company shall change its line of business and to contract for the

13
conversion works. Shareholders can instruct their board to do/refrain from doing
something but only by passing a special resolution (Reg.4). Mei does not have
sufficient votes to pass such a resolution.
However, the constitutional provision (‘no contract for more than £100,000 …’ etc.)
means here the directors lack actual authority to enter that contract, which in
consequence would be void. Note that a contract void for lack of authority can still
be ratified by the company – but such ratification must be passed by those who had
the actual authority to make the contract in the first place – so presumably
ratification would require the consent of Mei.
All this would seem to permit M to argue that the contract is void. But so what?
What can M do about it? Here, a good answer would bring in s.33 CA 2006. It
would explain how, under s.33, a shareholder (such as Mei) has an individual,
personal right to enforce the articles (against the company). So M would be able,
under s.33, to enforce the provision that requires her consent to such a contract,
and by enforcing it, obtain an injunction to prevent the company going ahead with
the contract.
However, we must now note the effect of s.40. Section 40 probably prevents Mei
exercising this right under s.33. Explain what s.40 says and means. Explain the
preconditions for it to apply. Note the requirement of ‘good faith’ and discuss
whether D’s knowledge of the articles and of M’s lack of consent prevent his
claiming good faith.
Finally, note that the sisters probably breach s.171 if they proceed, disregarding the
articles, but that duty is owed to the company and it is difficult for M to use that
breach to prevent the conversion going ahead.
For the purposes of part (a), you are not told of any restriction on the objects and
therefore the capacity of the company. So issues of ultra vires are not really
relevant in part (a).
For part (b)(i): if D were B’s husband then two consequences follow. First, the
contract requires shareholder approval under s.190. Since the sisters own over 50
per cent of the shares, they can secure such consent. So s.190 would still not allow
M to prevent the company going ahead with the conversion works. However,
secondly, and more helpfully for Mei, s.41 now applies. It renders the contract
voidable. Explain whether this would now enable Mei to take steps under s.33 to
have the contract set aside.
For part (b)(ii): if the articles contained a limit on the company’s capacity then the
conversion (and the subsequent running of the hotel) would arguably be ultra vires.
Note, this is the first time that corporate capacity and ultra vires really become
relevant in this question. However, note now that s.39 renders an ultra vires
contract valid and enforceable, although again the sisters would be in breach of
duty (under s.171) if they failed to observe that term of the articles.
Poor answers to this question…
failed to understand the underlying legal issues that this question raised – and the
need to advise Mei specifically on preventing the works under the contract from
going ahead. Some very poor answers said nothing on these crucial issues of
authority and corporate capacity.
Other weak answers failed to understand the different issues that were raised by
the different parts of the question. The question was deliberately structured – and
broken up into different sections – precisely in order to distinguish between the
different issues that each section raised (as described above). Good answers
understood that, and treated the different issues where they belonged. Poor

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 Examiners’ reports 2017

answers failed to understand this separation. They often said everything they had to
say about authority and capacity (ultra vires) in answering part (a) and then had
nothing left to say for part (b).
Some answers, in addressing (b)(ii), only mentioned s.190 CA 2006. This was not a
very poor answer – s.190 is worth mentioning. But s.190 only requires an ordinary
resolution of shareholders to approve the substantial property transaction. For
someone like Mei, who has only 40 per cent of the shares, and votes, that is little
use in enabling her to prevent the contract/works going ahead. A much better
answer is to see how s.41 is relevant.
Question 7
Jose and Philip are directors of Diggers plc, which makes gardening
equipment. Simone, a qualified accountant, has never been appointed a
director of Diggers, but often attends board meetings. When Jose agreed to
become a director, he advised Diggers that his other commitments would
prevent him attending many board meetings. Diggers accepted this.
In 2016, Diggers was offered the opportunity to purchase, for £2 million,
Earthers Ltd, which also makes gardening equipment. A board meeting of
Diggers was held. Jose, who had not attended any board meeting for over a
year, was not present. Simone was present, and told Philip that she had
looked over Earthers’ accounts, and believed Earthers was on the verge of
insolvency. In fact, Earthers was in excellent financial health. Philip and
Simone agreed that Diggers would not buy Earthers.
Philip decided he would like to buy Earthers himself, and set up in
competition with Diggers. For two months, he did not tell Diggers of his plans.
During that time, he negotiated for the purchase of Earthers, and arranged the
finance he needed. In December 2016, he resigned as a director of Diggers,
and in January 2017 he acquired Earthers for £1.9 million.
Earthers has proved very profitable since Philip acquired it, and Philip has
persuaded many of Diggers’ former customers to switch their orders to
Earthers.
Discuss whether Jose, Philip or Simone might face any liability to Diggers.
General remarks
This is a question on directors’ duties. It requires students to identify the duties that
might be being breached and apply the relevant provisions from CA 2006 to the
directors’ conduct. But since those statutory provisions must be interpreted in the
light of the older, ‘pre-Act’, case law, the question requires students to demonstrate
good knowledge of relevant cases.
Law cases, reports and other references the examiners would expect you to use
Relevant cases here include: Secretary of State for Trade and Industry v Hollier; Re
Gemma Ltd (in liq); Regal (Hastings) Ltd v Gulliver; IDC v Cooley; Peso Silver
Mines Ltd v Cropper; Bhullar v Bhullar; British Midland Tool v Midland International
Tooling; Shepherds Investments Ltd v Walters; Foster Bryant Surveying Ltd v
Bryant; IEF v Umunna; Thermascan Ltd v Norman.
Common errors
Most students noted that Simone’s non-appointment as a director raised a difficulty
but many argued that she would be treated as a shadow director. This was a good
effort but it is much more likely that she would be a de facto director, rather than a
shadow.
Treating Philip’s various actions – his secret decision to set up in competition, his
eventual departure and active competition, his acquisition of Earthers – as just one

15
breach of duty was a common error. However, his actions continue over many
months and involve different potential conflicts of interest. Each needs to be dealt
with separately; weaker answers failed to do this, and treated his actions, and the
potential breaches of s.175, as a single ‘all or nothing’ issue.
A good answer to this question would…
re Jose: note his potential liability under s.174, for his absence from the meeting.
Note that s.174 does now seem to require at least a minimal level of involvement in
the affairs of the company. But consider here first whether the understanding of
regular non-attendance avoids liability and whether J actually causes any loss by
his non-attendance. He arguably merely failed to prevent the board rejecting a
valuable opportunity (to acquire E) – but would his presence have made any
difference, if both other directors were minded to reject?
Re Simone: first, decide if she is a de facto director. Then, assuming she is, discuss
her potential liability under s.174. Note how, given her professional qualification,
she is likely to be subject to the ‘higher’ subjective standard in s.174(2)(b).
Re Philip: he might be in breach of s.174 but, since we are not told he has any
particular qualification or expertise, he is more likely to be judged by an objective
standard of care and skill. He is more likely to be in breach of s.175. He takes an
opportunity that comes to him as a result of his directorship. Note the wording of
s.175(1) and (2), and apply relevant case law. The fact he takes this post-
resignation seems not to matter – s.170(2) and IDC v Cooley, unless he can bring
himself within the test in e.g. IEF v Umunna – but this is unlikely, given his
resignation is motivated by the intention to compete and secure the opportunity.
Even if he could avoid liability for taking the opportunity, he also competes with the
company; apply relevant ‘competition’ cases: British Midland Tool v Midland
International Tooling; Shepherds Investments Ltd v Walters; Foster Bryant
Surveying Ltd v Bryant.
Uses knowledge of D’s customers – is it misuse of D’s information? Thermascan
Ltd v Norman.
Poor answers to this question…
failed to deal fully with each of the three characters and all their potential breaches of duty. They
failed to identify Simone’s most likely status as a de facto director and failed to explain clearly
how s.174 has both an objective and subjective test; how and why the subjective test probably
applies to Simone and the significance of this on the facts of the case.
Other poor answers failed to break down the various aspects of Philip’s behaviour and to deal
separately with the different possible breaches of s.175 this might involve.
Poorer answers also tended to mention too little case law, especially in discussing Philip’s
liability. The no-conflict rule/s.175 have generated a lot of case law. A problem question like this
is testing whether you know that case law in reasonable depth, as it deals with specific issues
such as the acquisition of a corporate opportunity post-resignation, secret decisions to compete,
using company information and the like.
Question 8
In 2012, Alan and his girlfriend, Samantha, formed Tasters Ltd. The company
owns and runs a large hotel and restaurant. Alan owns 51% of its shares, and
Samantha owns 49%. Both are directors. The company’s articles say each
shareholder shall be a ‘director for life’.
Originally, the business was very successful, largely because of Samantha’s
business expertise. However, in June 2016 Samantha discovered that Alan
had, for some years, been having an affair with the restaurant’s pastry chef.

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 Examiners’ reports 2017

Samantha started telling hotel and restaurant guests about Alan’s affair. Alan
responded by calling a shareholders’ meeting, where a resolution was passed
to remove Samantha as a director. Samantha objected, but Alan told her to
stay away from the business or ‘something very painful will happen to you’.
Samantha has since played no part in running the company. Alan has tried to
run the company alone. Unfortunately, his performance has been very poor,
and the company’s profits, and its value, have fallen significantly.
Advise Samantha whether:
a) her removal as a director is lawful; and
b) whether she could force Alan either to buy her shares, or to sell his
shares to her, and in either case how the shares being sold would
be valued.
General remarks
This question had two parts. The first concerned the removal of a director. The second part
concerned the statutory protection for minorities and the remedies that such protection gives.
Students answered the question largely by reference to s.994 CA 2006 and the remedies that can
be obtained under s.996. Most students produced a reasonable answer by working through and
applying that provision. However, the question did ask, in part (a), whether Samantha’s removal
was specifically lawful. Asking whether a shareholder can use s.994 does not fully answer that. A
removal of someone as a director may be lawful, yet the shareholder may still be able to use
s.994 successfully to complain about her (lawful) removal as a director. So students did need to
address specifically the lawfulness of the removal.
The question also required some discussion of the ‘valuation principles’ that are used when
shares are ordered to be bought under s.996.
Law cases, reports and other references the examiners would expect you to use
Sections 168, 994 and 996 CA 2006. Section 33 CA 2006 in respect of the ‘director
for life’ provision in the articles. Relevant cases included Eley v Positive
Government Life Assurance Society; Beattie v Beattie; Ebrahimi v Westbourne
Galleries; Oak Investment Partners v Boughtwood; O'Neill v Phillips; Re R A Noble
& Sons; Grace v Biagioli; Re Blue Index Ltd; Bird Precision Bellows Ltd; Re Home
and Office Fire Extinguishers Ltd; Re Blue Arrow; Re Elgindata Ltd.
Common errors
A common error was the failure to address the lawfulness of the removal of Samantha as a
director – including the effect of s.168 and the significance of the ‘director for life’ provision in the
articles.
Also, the failure to consider the specific question of remedies under s.996 – the question requires
students to advise specifically about whether a share purchase order (a ‘buyout’) would be
obtained.
Failure to address the issue of valuation of shares.
Another common error was to focus only on s.122(1)(g) IA 1986, instead of s.994. While
s.122(1)(g) can be used by minorities, it cannot be used to insist on a buyout. The only remedy
under s.122(1)(g) is to wind up the company. (The court can refuse to make that order, where the
court feels the shareholder would have some more reasonable remedy available (s.125) but the
court cannot, under s.122(1)(g), itself then order that more reasonable remedy.)
A good answer to this question would…
in part (a): first address the removal effected under s.168; requires ordinary
resolution, which A can presumably pass. Note the effect of the provision in the
articles. S faces two difficulties in relying on this to challenge the lawfulness of
removal. First, she would have to enforce it under s.33. But it seems the courts will

17
not enforce ‘outsider rights’– Eley; Beattie. Is this such a provision? Secondly,
power to remove by ordinary resolution under s.168 is a mandatory provision that
overrides any article to the contrary. Distinguish this from a weighted vote: Bushell v
Faith.
In part (b): the most obvious way to secure a buyout would be by using s.994.
Explain the wording of this provision, and what S would need to show. Is she
complaining about the conduct of the affairs of the company? A’s affair with the
pastry chef probably does not count – it is not about the management of the
company. But A’s removal of her as a director is; and his poor management of the
company would also constitute the conduct of the affairs of the company, as would
his threat to harm her (Home and Office Fire Extinguishers).
Consider if this behaviour affects her ‘interests’. Note expansive definition of
interests, at least in quasi partnership – Ebrahimi and O’Neill. Ask if this is a quasi-
partnership – test laid down in Ebrahimi – show this probably satisfies the relevant
criteria. Her removal from the board does probably prejudice her interests –
especially given the ‘director for life’ provision in the articles. The drop in profits is
less clear – poor management is unlikely to be unfairly prejudicial conduct if it falls
short of breach of duty of care and skill: re Elgindata. Consider if this is actually
unfair however: did she bring this on herself, by her own actions in ‘publicising’ A’s
behaviour – note Noble?
Discuss remedies under s.996; note the prevalence of buyout – Biagioli – and the
fact that a minority usually must leave. Note valuation terms – independent valuers,
no discount (pro rata) and at date of buyout (O’Neill). It is possible to backdate to
take account of reduction in value due to mismanagement.
Poor answers to this question…
made the mistakes noted above. They failed to address specifically the lawfulness of the removal,
or the significance of the ‘director for life’ provision in the company’s articles.
Poor answers were also rather superficial in explaining what needs to be established to bring a
successful claim under s.994. Some answers largely just copied the wording of the sections. This
is poor. Sections should be summarised and explained, not merely copied.
Poor answers often said more about s.122(1)(g) IA 1986 than s.994 CA 2006. For reasons given
above, it is only under s.994 and the related s.996, that a shareholder can actually get a buyout
order. She cannot get such an order from the court under s.122(1)(g). (That said, a shareholder
who started proceedings under s.122(1)(g) might then be able to use those proceedings as a
‘bargaining tool’ to persuade her fellow shareholder to give her what she wants – a buyout. If a
student explained all that then she would certainly be given credit for such discussion.)
Student extract
(a) Removal of Samantha: S is advised that the Articles of Association (AA)
form a statutory contract between Tasters (T) and her (s.33 CA 2006).
However, not all rights conferred by the AA are enforceable. In Eley v
Positive Government, the court did not allow the member to enforce the
‘solicitor clause’ in favour of him under the AA because it is an outsider right
(reaffirmed in Hickman v Kent (1915) and Globalink Telecommunications v
Wilmbury (2003)).
Based on facts, the right to be a director is similar[l]y enjoyed by Alan (A) and
thus it is an insider right (Eley contrasted). However, s.168 CA 2006 provides
that T can remove her as a director provided an ordinary resolution (50%) is
passed and reasonable notice (28 days) is given to her, notwithstanding any
agreement between S and T (which includes the AA). Since A holds 51% he
can trigger s.168 and remove S. However, if S has a service contract which is

18
 Examiners’ reports 2017

in compliance with s.188, she will be entitled to compensation (s.168(5) and

Southern Foundries v Shirlaw).
(b) S.994 CA 2006: S can force A to sell her his shares or ask A to buy her
shares if she gets a court order under s.994 on the ground that the
company’s affairs are being conducted in a way which is unfair and
prejudicial to her interests as a member.
Company’s affairs: Re Charterhouse Capital Ltd ruled that this term is to be
construed widely to include matters passed by company’s meeting or relates
to the company’s management (Re City Branch Group]. In Re Legal Costs
Negotiators (1999) ruled that refusal to transfer shares and insist to remain
as a director is not company’s affairs but personal affairs. Applying these into
the facts, the removal of S as a director is the company’s affairs as it is
passed by the company’s meeting (Re Charterhouse applied).
Interest qua member: the H of L in O’Neill v Phillips ruled that the word
‘interests’ is to be construed widely as it carries wider meaning than rights.
Ebrahimi v Westbourne Galleries (1973) ruled that behind every corporate
veil there exists rights, obligations and expectations inter se which are not
submerged in the corporate structure. In Re A Company (1986) Lord
Hoffmann explained that the courts’ jurisdiction under this remedy is wide
enough to protect members’ expectations especially in quasi-partnerships.
Recently, in Re BC and G Care Homes Ltd (2015) it was ruled that by
excluding the director in a QP company this infringed his interests as member
because he had legitimate expectation to participate in company’s
management (Jackman v Jackets Enterprises (1977)).
Applying these points to the facts, the removal of S from T (a quasi
partnership) infringes her legitimate expectations (fundamental
understanding) of participation, thus affecting her interest qua member.
Unfairly prejudicial: Jenkins committee defined this term as visible departure
from the standard of fair dealing and fair play. O’Neill explained that both
unfair and prejudicial must be established and this can be done by showing
breach of fundamental understanding without good faith. In Sikorski there
was an understanding that the minority will receive a dividend via special
way. The majority then reduced the company’s income so that the minority
receive nothing from the channel as agreed.
[The essay continued with further analysis of the significance of the decision
in O’Neill, then a detailed examination of the remedy that S would get and the
rules that would be applied to determine the price to be paid for any shares
ordered to be bought out.]
Comments on extract
Interpretation of the question: excellent. The student understood the facts of the
question well and understood also the legal issues raised. It was very pleasing to
see the student understood the significance of the question in part (a), dealing with
the lawfulness of the removal of S.
Relevance of the answer to the question: again, excellent. The answer was
focused very clearly on the issues raised by the facts of the question and by the
division of the question into parts (a) and (b). As noted, the answer to part (a)
focused precisely on the issue of the lawfulness of the removal as a director. The
answer to (b) explored fully the availability of relief under s.994 and the valuation of
shares thereunder.

19
Substantive knowledge: excellent, in respect of both parts of the answer. For (a):
clear understanding of the rules governing removal of a director; of the provisions in
the articles; the significance of the ‘outsider rights’ problem in enforcing the articles
and the mandatory nature of s.168. Very detailed knowledge of s.994 and of the
rules for buyouts.
Use of authorities: excellent – a very rich analysis of relevant case law, showing
clear understanding of the relevant decisions.
Articulation of argument: and the analysis was very clear and very logically
structured. It approached s.994 in a very methodical way, identifying the different
hurdles that a claimant must surmount and dealing thoroughly with each in turn.
Accuracy of information: excellent:
Clarity of expression: mostly good, a few slips in language but nothing that
obscured the meaning of the essay or its comprehensibility.
Legibility: good.
Overall, the essay got a first.

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