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THE HONORABLE SOCIETY OF KINGS INNS

ENTRANCE EXAMINATION

AUGUST 2007

Examination: Company Law

Date: Wednesday 22 August 2007

Time: 10.00 a.m. – 1.00 p.m.

Internal Examiner: Professor Irene Lynch Fannon

External Examiner: Mr Lyndon McCann SC

Instructions:

Answer 4 Questions. Total marks: 100. All questions carry equal

marks. Answers should be supported by reference to statutory
materials and case law.

Candidates will be given copies of the Companies Acts 1963-2006 in

the examination hall.
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Question 1

Consider the following paragraph from the judgement of the Vice-Chancellor in the
decision of the English Court of Chancery in National Westminster Bank v. Spectrum
Plus Ltd. (in liquidation) and Ors. [2004] EWHC 9 (Ch)

“It is with the greatest hesitation and reluctance that I differ from the conclusion of Slade J in
Siebe Gorman. Nevertheless I am convinced that it is wrong. The error…[is that he]… sought to
give effect to the intention of the parties that the charge over the book debts should be a first fixed
charge and looked to see if that intention was negatived by the restrictions imposed ….the real
question was whether the rights and obligations conferred and imposed by clause 5(c) disclosed
an intention that the Company should be free to deal with the book debts and withdraw them from
the security without the consent of the Bank. Such an approach to the provisions of clause 5(c) of
the debenture in Siebe Gorman must have led to the conclusion that the collection and free use
of the proceeds of book debts through the ordinary operation of the bank account was not only
permitted but envisaged. The inevitable consequence would be to reject the description of the
transaction as a first fixed charge.”

Describe the significance of this statement in the context of Irish case law on the practise
of creating fixed charges over book debts. Please refer to relevant case law and statutory
material in your answer. (25 marks).

Question 2

Sean is a 50% shareholder in a venture capital company, Brilliant Ltd. Brilliant Ltd is
interested in investing in a growing IT company, Compsue Ltd. The latter is willing to
offer Brilliant Ltd. a 20% shareholding in Compsue Ltd. in return for an investment of
€300,000. When the deal is completed the issued share capital of Compsue Ltd. will be
100,000 shares with a nominal value of €1 each and 20,000 shares will be issued to
Brilliant Ltd. for a consideration of €300,000.

Sean seeks your advice on the following company law issues:

What is the significance of the 20% figure, if any, in terms of control over the company?
(10 marks).

How will Brilliant Ltd. get any financial return for their investment? For example will it
receive a dividend every year from Compsue Ltd.? (5 marks)

If the company becomes insolvent will Brilliant Ltd. be obliged to make contributions to
the debts of Compsue Ltd? At present it is envisaged that the shares will be transferred as
fully paid up and Sean wants to know what this means. (5 marks).

If Compsue Ltd achieves the growth expected, will Brilliant Ltd. be able to sell its 20%
shareholding and to whom? The Articles of Association of Compsue Ltd. are standard
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form Articles of Association based on Table A, Schedule I of the 1963 Companies Act
and as such contain pre-emption rights as provided for under the 1983 Companies
(Amendment) Act. (5 marks).

Question 3

Jane has been appointed the Managing Director of Rabbit Ltd., an Irish paper and
packaging company, which has recently become a very successful small competitor in
this important sector. One of the essential elements of its success is its branding as a
‘Green’ paper and packaging manufacturer, a corporate ethos which Jane is more than
happy to embrace. To that end she has sanctioned the donation of significant amounts of
corporate funds to various voluntary environmental groups. At a recent AGM it was
disclosed that over €40,000 had been donated for the financial year 2006 and a further
spend of €40,000 was proposed for 2007. Mick is a 10% shareholder and does not
approve of this amount of money being donated in this manner. He has said to you that
giving €40,000 to ‘a miscellaneous bunch of tree huggers, granola crunchers and lefty
lunatics’ is not quite the ‘Green’ branding the shareholders have in mind. The
Memorandum of Association states the main object of the company to be ‘the
manufacture, sale and distribution of paper, packaging and boxes……’ The objects
clause includes inter alia a statement that the company may ‘make payments as the
directors see fit to political parties and other organisations’. This phrase is repeated in the
Articles of Association and is a power delegated to the Managing Director, without any
limitation. There are no further relevant clauses.
Advise Mick as to whether the company could recover this money from the recipients of
the donations under the ultra vires doctrine. (20 marks).

Mick studied law as a student but decided to do an MBA rather than continue with his
legal career. 10 years later he is ‘appalled’ to hear that the ultra vires doctrine will
probably be abolished under the new Companies Bill. He seeks your views as to how the
problem of dissipation of corporate funds will be addressed by shareholders in the future.
(5 marks).

Question 4

Fintan and Sally are computer science graduates. In 1996 they formed a company
called IT Developments Ltd. to commercialise a software package they both developed
during their graduate studies. They are directors of the company and at present they own
50% of the shares each. The nominal issued share capital of the company is €1000. Their
operational costs were initially funded through some grant aid from the State and through
some borrowing. The relevant state agency agreed to give IT Developments Ltd. a sum of
€200,000 to be spent on the rental of a property and an additional €100,000 training grant
to go towards hiring a number of university graduates. On receipt of the State agency
cheque for €200,000 Fintan and Sally lodged this into the account of FinSal Ltd. a
property company they operated and used the money to assist in the purchase by FinSal
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Ltd. of a five room office suite, which was then leased by FinSal Ltd. to IT Development
Ltd. at a commercial rate.
In the last 10 years IT Development Ltd. has done extremely well and Fintan and
Sally are now considering bringing the company to the market and offering shares for
sale to the public. Mick, an auditor hired specifically to do a due diligence report, queried
this finance arrangement and is concerned that FinSal Ltd. has profited from the purchase
of a highly desirable commercial premises at the State’s expense (the property initially
purchased for €200,000 by FinSal Ltd. is now worth €1.5million) and that the money was
not used for the benefit of IT Developments Ltd. He also points out that IT Development
Ltd. could perhaps have equally bought the premises.

He seeks your advice as to whether Fintan and Sally are in breach of any obligations or
duties which they might owe to IT Development Ltd. (15 marks).
He also wants to know whether this transaction should be disclosed in the prospectus and
if it is not disclosed what are the potential consequences. (10 marks).

Question 5

In In re National Irish Bank Ltd: ODCE v Seymour [2007] IEHC 102 Murphy J.
observed the following:

“Mr. Seymour, as director, owes a duty of care, diligence and skill to the Bank as fully
considered by Romer J. in City Equitable Fire Insurance Co. Ltd. re (No. 1) (1925) Ch.
407, 427. The application before the court is not, however, an allegation of breach of
such duty but that the director’s conduct makes him unfit to be concerned in the
management of a company. The former duty is owed to the company, the latter to the
public.” He went on to observe that “There is an overlap between the breach of duties to
the company and breaches leading to disqualification. City Equitable recognised both
equitable and legal duties owed to the company.”

Discuss this quotation in light of the development of jurisprudence in the Irish courts on
restriction and disqualification of directors. (25 marks)

Question 6

Mary has been working for PNK plc a UK company which supplies high quality products
to the retail clothing sector in Ireland and the UK. PNK plc sources and manages the
manufacturing of such products from companies based all over the Far East. She has
recently taken up a position on the Board of Directors. During her extensive travels in
the Far East as a contractor for PNK plc. Mary has built up a huge network of
manufacturing and distribution contacts. She has decided to set up her own textile
importation and retail company serving the lucrative Irish market. She intends to
maintain her position on the Board of PNK plc for the moment and to continue working
for them, managing their buying function. However, she wants to devote a considerable
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part of her time to building up her own company, Nirvana Ltd. In particular she has
already negotiated a new lucrative supply contract for Nirvana with a high profile Irish
chain of retail outlets. This chain did have some contracts with PNK plc. but there are no
contracts outstanding at present. The Board of this chain has clearly indicated their
preference for dealing with Mary and with Nirvana Ltd. rather than PNK plc.
Accordingly Mary has secured a contract with them for Nirvana Ltd.

She is a little worried as to whether this is legally permissible. Most of the Board of PNK
plc seem to be supportive, but one member who also owns about 2% of the shareholding
has threatened that he will have her removed from the Board and that he will ask the
Board to consider suing her for breach of duty. She seeks your advice as to whether this
is possible. (25 marks)

Question 7

Sheila and Elaine are two of four directors of Sellout Ltd., a holding company which
operates a number of bars and cafes throughout the country. Sellout Ltd. is 95% owned
by the McCarthy family. Sheila and Elaine own the remaining 5%. The family wishes to
sell their various shareholdings and capitalize on their investment. The shareholding has
been valued at about €1 million. Sheila and Elaine are anxious to become at least
majority shareholders as they wish to continue their involvement in the business. They
approach Bluebank plc for a loan to help finance the purchase of these shares. In seeking
security for the loan, Mick, who works for Bluebank plc, has proposed that Sheila and
Elaine secure the loan by giving Bluebank plc a mortgage on a café in the centre of Cork
and a pub in Dublin, both of which are owned by Sellout Ltd. The McCarthys are
agreeable to this arrangement and so it is agreed that mortgages will be executed by
Sellout Ltd. in favour of Bluebank plc which will in turn lend the purchase money to
Sheila and Elaine, who will in turn buy the shares from the McCarthys.

Joe who is part of the Bluebank plc legal team has expressed concerns about this
arrangement. Mick considers Joe to be a ‘dry old (boring) solicitor’ and has to date
ignored Joe’s reservations.

What is your advice to Mick? (25 marks).

Question 8

Describe critically the examinership process as instituted under the Companies

(Amendment) Act 1990 as amended by the Companies (Amendment) Act No 2 1999.
(25 marks).