Examiners’ reports 2021

Examiners’ reports 2021

LA3021 Company law – Zone A

Introduction
The best scripts tended to be those where 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.
A number of students did not follow the rubric of the examination paper in that they
failed to answer all the parts of a question. Remember that you must answer all
parts of each question unless the question specifically tells you that you do not
need to do so. Many students also exceeded the word-length limit. Explaining
points concisely, avoiding repetition and staying focused on the question are always
important whether there is a time, or word-length, limit.
Students should refer to the Assessment Criteria to familiarise themselves with the
criteria that are applied to assessed work.
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
How well do UK company law and insolvency law protect the interests of a
company’s creditors?
General remarks
This question draws on material from Chapters 4, 8, 14, 15 and 17 of the module
guide. It is therefore quite a broad-ranging question, allowing students to draw on
knowledge and understanding from a number of areas of corporate law, including
insolvency law. It is also important to note that the question requires students not
merely to describe some of these areas of law but also to analyse them – to say
‘how well’ they protect creditors.
Law cases, reports and other references the examiners would expect you to use
All of the following are relevant: the law governing ‘veil piercing’, including the key
cases of Adams v Cape Industries plc and Petrodel Resources v Prest. The law
governing the maintenance of share capital, including cases such as Trevor v

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Whitworth; Re Halt Garage (1964) Ltd. The law governing disqualification of
directors, including the Company Directors Disqualification Act 1986 (and especially
s.6) and relevant case law, such as Re Sevenoaks Stationers; Re Lo-Line Electric
Motors. The legal duties of directors, especially s.172 CA 2006, including s.172(3)
and relevant case law, such as West Mercia Safetywear; Dickinson v NAL
Realisations; BTI 2014 LLC v Sequana. The Insolvency Act 1986, especially those
provisions that allow a liquidator to increase the assets of the company, such as
ss.213, 214, 238, 239 and 245, and relevant case law, such as Re Produce
Marketing Consortium; Brooks v Armstrong.
Common errors
There were few major errors of understanding. However, weaker students tended to
base their answer only on one small area of creditor protection rules – say
addressing only disqualification, or only veil piercing. Whilst students were not
expected to address every possibly relevant area of law, a reasonable coverage
was necessary to obtain a good mark.
A good answer to this question would…
look at a reasonable range of creditor protection measures, drawn from company
law and insolvency law. It would describe those measures clearly and it would
analyse how effectively they protect creditors.
The answer might begin by considering limited liability and why this poses a risk to
creditors. The rules governing veil piercing might then be discussed, explaining how
this could benefit creditors. It would note the main ground for veil piercing (evasion
of existing obligation) in Adams and Prest, and explain how the narrowness of this
doctrine now provides little effective protection for creditors.
It might then address the rules regarding the raising and maintenance of capital,
explaining how these rules are supposed to protect creditors, by ensuring
companies disclose to creditors how much capital has been raised, actually do raise
the amount claimed and preserve that capital within the company. As to capital
raising, it might mention restrictions on issuing shares at a discount and controls on
public companies in relation to the valuation of non-cash consideration. As to
maintenance of capital, it might note restrictions on distributions, capital reductions,
share buybacks and financial assistance for the acquisition of shares. However, a
good answer would note the limited effectiveness of these rules, especially in
private companies: no minimum capital for private companies; private companies
not required to value non-cash considerations; the liberalisation of buyback rules for
private companies; etc. And for all companies, both private and public, note how the
capital maintenance rules do not prevent loss of capital in ordinary course of
trading.
It might also explain relevant creditor protection provisions in IA 1986, such ss.213
and 214, IA 1986, and again discuss their effectiveness. Section 213 is often
viewed as difficult to establish because of the need to prove ‘dishonesty’. A good
answer might note longstanding problems over funding such actions and liquidators’
apparent reluctance to bring them, and note the introduction of s.246ZD IA 1986 (by
SBEEA 2015) allowing the sale of actions by liquidators.
On disqualification, a good answer might 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 and controversy over whether mere
incompetence does/should suffice. The consequences of disqualification should be
noted, in terms of typical disqualification periods and the possibility of securing
leave to act while disqualified. Some mention might be made of the introduction of
‘compensation orders’ under CDDA 1986. Finally, mention the duty of directors to
promote the success of the company (s.172 CA 2006) explaining how this normally

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requires directors to prioritise shareholders’, not creditors’, interests. However, case

law (such as West Mercia Safetywear; Dickinson v NAL Realisations; BTI 2014 LLC
v Sequana) suggest directors must prioritise creditor interests where the company
is in financial difficulties and s.172(3) recognises this. However, again, this ‘duty to
creditors’ is undermined by uncertainty over the timing of its commencement.
Poor answers to this question…
tended either to focus on an unreasonably narrow range of provisions that protect
creditors (such as only on disqualification) or made no attempt to evaluate the
effectiveness of the law’s protections.
Student extract
In this given following essay we would discuss the nature of legal personality
and Lifting the Veil of incorporation Acts S 213 and S 214 would be
discussed. We will consider the relevant important cases.
We will consider The Doctrine of Corporate Veil is a legal concept that
separates the personality of a corporation from the personalities of its
shareholders and protects them from being personally liable for the
company’s debts and from other obligation (SALOMON). We will discuss the
two main provisions. S.213 IA 1986 and S.214 IA 1986. We will look at first
S.213 which is a fraudulent trading provision which was designed to deal with
situations where the corporate form was used as a vehicle for fraud. Anyone
with intention defraud creditors of company or creditors of any other person
or for any fraudulent purpose anyone involved can be called upon to
contribute to the debts of the company. This is most likely to be shareholders,
directors, agents or employees. In (RE TODD LTD) Director was found liable
to contribute to the debts of the company because of his activities as courts
sets a high standard of proof for intent to defraud creditors because of the
possibility of criminal charge also arising as the case of (RE PATRICK) this
involved proving ‘actual dishonesty involve to the current notion of fair trading
among commercial men real moral blame.
New provision was introduced in S.214 IA 1986 which covered lesser offence
of wrong trading. S.214 is a wrongful trading provision. …[there followed an
explanation of s.214]…
We will now considered the cases on judicial veil lifting, in (GILFORD
MOTOR) the court found that company was merely a front and issued an
injunction against both him and company. Other case would be considered
(JONES V LIPMAN) Judge found that company was but a façade or front for
Mr Lipman and granted a specific performance. LORD DENNING argued in a
case (DHN LTD) he said group of companies was in reality a single economic
entity and should be treated as one. After two years House of Lords in case
(WOOLFSON) disapproved DENNINGS view on group structure and
declared that veil of incorporation could be lifted if a company was façade.
Discussing very important case (ADAM V CAPE) first it represents important
move towards by judiciary introducing more certainty [sic] into the law. And
2nd COA clearly preferred a narrows and more restrictive approach to when
veil could be lifted. COA held in favour of CAPE when the veil can be lifted
the court said on these grounds. First judge believes that it would be in
interest of justice to do so. Second the court declared that mere fact group of
companies constituted a single economic unit was also not itself sufficient to
allow the veil to be lifted. doing.

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Comments on extract
Interpretation of the question: this was reasonable, in that the student identified
two areas of law relevant to creditor protection. But referencing more areas would
have improved the essay considerably – it remained a rather narrow, and limited,
analysis.
Relevance of the answer to the question: the essay was relevant – although it
focused more on describing (two) areas of creditor protection; it did not do enough
to really analyse (even) these two areas to assess their effectiveness in protecting
creditors.
Substantive knowledge: seemed rather weak – judging by the narrow range of
areas examined and the explanation of these areas.
Articulation of argument: rather weak. It was not clear what the overall argument
was. The introduction was quite long but it did not really say what overall conclusion
the essay would reach in terms of the effectiveness of creditor protection.
Accuracy of information: generally OK.
Clarity of expression: The essay was not every well written and the explanations
were not very clear.
Overall: the answer received a bare pass.
Question 2
‘The derivative claim is a very ineffective way of ensuring that directors
comply with their duties. It would be much better if each shareholder could
bring a personal claim against a misbehaving director for any loss the
shareholder suffers as a result of that misbehaviour. Unfortunately, such
personal claims against directors are impossible in the UK.’
Discuss.
General remarks
This question relates to Chapter 11 of the module guide. It requires discussion of
two assertions in the question. First, is it true that derivative claims are ineffective?
Second, would it be better to permit each shareholder to bring a personal action
against the director for their personal loss and does the law currently prevent this? It
is important to understand what the question means when it talks about
shareholders bringing a personal action against the director – see below.
Law cases, reports and other references the examiners would expect you to use
Relevant cases on derivative claims: e.g. 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. On personal actions against a director: e.g. Sharp v Blank; Peskin v
Anderson; Johnson v Gore Wood; Sevilleja v Marex Financial Ltd.
Common errors
Students tended to be much better at discussing derivative claims than discussing
the personal action against a director. On the latter, many students discussed an
action under s.994. That is not a personal action against a director for loss suffered.
However, if students addressed the possibility of a s.994 action for, specifically,
directorial misbehaviour, some credit was given for that discussion.
A good answer to this question would…
explain the nature of a derivative claim and the purpose behind it – permitting a
shareholder to sue a director for breach where the company itself is unwilling to
sue. It would describe the main rules governing the statutory derivative claim in Part

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11 CA 2006, showing the conditions that must be satisfied for a shareholder to bring
such a claim. It might note that some of these conditions have been relaxed in the
new statutory derivative claim compared to the old common law action, such as the
abandonment of the requirement to demonstrate ‘fraud’ and perhaps the
requirement to show wrongdoer control. It would also note, however, that the
claimant must still secure permission to continue the claim and would analyse the
criteria (in s.263(2) and (3)) that the courts apply in deciding whether or not to give
such permission. Such analysis should include some discussion of the relevant
case law, such as Iesini, Franbar, Kleanthous, Singh, Wishart, etc. to show how the
courts actually apply the statutory criteria – whether for example, the courts are
interpreting them strictly, or more favourably, towards claimants. A good answer
might also try to give a sense of the proportion of claims where permission to
continue is given (less than half).
A good answer might note the practical problems undermining the effectiveness of
derivative claims – especially the ‘collective action’ problem and ‘free riding’, the
lack of an effective incentive for any individual shareholder to sue, etc.
That could provide a good link into the second part of the question, asking whether
the derivative claim should be replaced with personal actions against directors for
breach of their duties. A good answer would consider whether, under UK company
law, such actions are ‘impossible’. It might note how the duties of directors are
owed to the company alone (Percival v Wright; s170(1)) but that, exceptionally,
directors can owe duties directly to the shareholders. It would also note how, even if
shareholders are owed some personal duty, still they cannot bring a personal action
for ‘reflective loss’ (Johnson v Gore Wood; Marex).
The reasons for UK law’s current restrictions on such personal actions might be
considered and evaluated – such as avoiding the ‘floodgates’ problem of multiple
actions from a single breach of duty; ensuring sharing amongst all shareholders of
whatever money a director has (where the director cannot afford to fully
compensate for the harm they have caused and multiple personal actions would
result in those who sue first securing full compensation but those who sue later
receiving nothing); upholding ‘majority rule’; ensuring the normal priority of creditors
is protected.
Poor answers to this question…
tended to address only derivative claims, sometimes presenting what seemed like a
‘pre-written’ answer to a different question (such as whether the statutory derivative
claim is an improvement on the common law derivative action). The question
required a discussion of personal claims against directors – both whether such
actions are possible and whether it is ‘better’ to allow shareholders to bring such
claims rather than insisting that they must sue ‘derivatively’.
Student extract
The first half of this essay will argue whether the derivative claim has proven
to be ineffective while the effectiveness and validity of personal claims will be
evaluated in the second half of the essay.
Sec.260 CA 2006 allows a minority shareholder to bring an action on behalf
of the company for the benefit of company if there’s an actual or proposed act
or omission arising from a director’s negligence, fraud, breach of duty and
breach of trust. (sec.260(3) This is very expansive in nature and so
encompasses many potential situations that may arise. However, there is a
long list of factors that a claimant may have to go through before a claim can
actually be made. This is given in sec.263(2) which reflect sec.172 and
asserts whether a reasonable person would continue or not and then
authorisation and ratification are also looked at. Then some additional factors

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 are considered as per sec.263(3) which might be quite onerous to go
through. A lot of importance is given to reasonable director test which adds
uncertainty. This is exemplified further by the fact that the two-step procedure
may also be tiresome for minority shareholders to actually go through.
Lengthy hearings and complicated procedure acts as hindrance to begin the
derivative claim in the first place and then the discretion of courts to see
whether it is a prima facie case or not has significantly impacted the
effectiveness of derivative claim.
[Then addressed costs and lack of shareholder incentive to sue.]
… the essay disagrees with the statement that the personal claims against
directors are impossible. A personal claim may be brought where it can be
shown that the directors a personal duty to shareholder and in the case of
Platt v Platt a fiduciary duty was found to exist between a director and
shareholder. Similarly, in Pesken v Anderson it was held that there needs to
be special circumstances to find that. …In addition, personal action for
reflective loss as per Johnson v Gorewood is also possible for reflective loss
if it can be shows the loss suffered is personal and distinct from that of
company. The Giles v Rhind exception has been done away with in the case
of Silveja which says that a claim may be brought where the company is
unable to sue legally rather than factually.
They have been allowed in very limited circumstances, but it is untrue to say
that it is impossible to claim one. Such a restriction does act in favor of law,
as if they are allowed to sparingly, there would be multiple claims on the
same issue and it would be an unnecessary burden on the courts. Now, it
could be said that if personal claims are allowed that would be better
however, it would lead to floodgates of litigation and may also cause divide in
the company. This doesn’t help counter the issues of derivative claim but
leads to more complications. It would be better if the regime of derivative
claim is regulated to ensure clarification, certainty and provide ease to
shareholders to bring an action under it.
Comments on extract
Interpretation of the question: excellent – fully understood the two parts of the
question.
Relevance of the answer to the question: excellent – focused on the two claims
in the title, addressed each in turn.
Substantive knowledge: good – a bit more detail on the drawbacks of derivative
claims, allied to a more detailed analysis of Part 11, would have improved the essay
further.
Articulation of argument: excellent – very brief clear introduction, constantly tells
us during the essay what the student is arguing.
Accuracy of information: good.
Clarity of expression: very clear.
Overall: a very high 2.1.

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 Examiners’ reports 2021

Question 3
‘UK company law is poorly designed to meet the needs of small businesses.’
Discuss.
General remarks
This question focuses on Chapter 2 of the module guide but material from other
chapters (such as the rules on maintenance of capital in Chapter 8, or the rules on
minority protection in Chapter 12) could also be discussed. It raises a long-running
issue: does company law serve the small business well? Like Question 1 (but unlike
Question 2) this also gave students more scope to choose certain areas on which to
focus in order to discuss the statement in the question.
Law cases, reports and other references the examiners would expect you to use
Provisions in company law that have an impact on the attractiveness of the
company for smaller businesses, such as: provisions on company meetings,
accounts, directors and their duties (including their codification), company
secretaries, derivative claims, raising and maintenance of capital, company
constitutions and company capacity, shareholder rights; the Model Articles of
Association. Some discussion of the Modern Company Law Review and its
emphasis on ‘think small first’. Some discussion of areas where the judiciary have
also developed company law so as to reflect the different needs of smaller
businesses, such as the application of s.994 to ‘quasi partnerships’ (Ebrahimi) or
the rules on informal, unanimous agreements by shareholders (Re Duomatic).
Common errors
There were rarely major errors of understanding. But weaker students tended to
mention only a very few relevant areas of law or made little attempt to analyse
whether the law is, or is not, well designed for smaller businesses.
A good answer to this question would…
perhaps begin with what is distinctive about the small business, what its special
‘needs’ are and what rules would need to be in place to make the company
attractive to such a business. It would then identify some of the historical problems
with the corporate form in the UK that have, arguably, limited the attractiveness of
the company for small businesses. It would discuss some of the academic literature
and the Government reports, which have addressed this issue, especially in the
lead-up to the CA 2006. It would then turn to the CA 2006 and consider what, if
anything, that Act did to address these limitations in the law. The focus would be on
the way the law, and CA 2006 especially, provide special rules for ‘private
companies’, since most small businesses will operate as such.
A good answer does not need to consider all the areas of UK company law where
different rules are provided for the ‘smaller business’. But a good answer would
show that the student was aware of at least a number of these and could explain
them clearly. Good examples might include changes to the incorporation process;
the introduction of updated Model articles and the generation of different rules for
private companies, compared to public companies, so as to make the private
company form better suited to the needs of the small business: simplifying the
process for passing written resolutions; abandoning the requirement for company
secretaries in private companies; the codification of the duties on directors; reforms
to the law on company charges and maintenance of capital; and so on.
A good essay might also note how it is not only statute that has sought to refine the
law in this way. Courts have sometimes added to this process – for example, in
relation to applying s.122(1)(g) IA 1986 (just and equitable winding up) or s.994 CA
2006 (unfair prejudice), with the development of a distinctive approach for ‘quasi-
partnerships’.

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Poor answers to this question…
failed to give any real explanation of why there might be an issue of the
‘attractiveness’ of the company form for small businesses, or to show what aspects
of the company form (and therefore of company law in the UK) might be
unattractive to small businesses. Weaker answers also showed too little awareness
of how CA 2006 tries to pursue a ‘think small first’ approach and whether this goes
far enough.
Question 4
a) Explain the requirements on listed companies to include independent
non-executive directors on their board, and discuss how effective
these requirements have been in improving corporate governance.
b) Should directors have to balance the interests of shareholders against
the interests of the company’s other stakeholders?
General remarks
Part (a) of this question relates to Chapter 16 of the module guide. Part (b) of this
question also relates primarily to Chapter 16 but Chapter 15 on directors’ duties
(especially the part discussing s.172) is relevant too. Students needed to answer
both parts of the question. Part (a) focused on ‘non-executive directors’. It required
students to do two things: first, to explain the rules requiring some companies to
have ‘NEDs’ and, second, to say something about whether NEDs are effective in
improving corporate governance. Part (b) required students to say something about
the debate between ‘shareholder primacy’ and ‘stakeholding’.
Law cases, reports and other references the examiners would expect you to use
Part (a): focus on the UK Corporate Governance Code 2018. For Part (b), reference
the abundant literature that discusses the debate around shareholder primacy
versus stakeholding; some mention of s.172 CA 2006.
Common errors
Some students answered only Part (a); remember that both parts of a question
must be answered, unless the question expressly says you must choose to answer
only one part. In answering Part (a), many students provided a long history of the
UK Corporate Governance Code, discussing all that it covers. Part (a) was focused
only on non-executive directors. It was sufficient to address only the current (2018)
version of the Code and to discuss only those provisions addressing NEDs.
A good answer to this question would…
Part (a)
discuss provisions of UK Corporate Governance Code regarding board composition
and requirements regarding independent non-executive directors. It would explain
the ‘status’ of these provisions in the Code – which companies are expected to
follow them and how the ‘comply or explain’ system is used to enforce these
recommendations.
Having described what these requirements are, a good answer would then address
their effectiveness in improving corporate governance. It might explain the
‘governance’ problem NEDs are supposed to address (the separation of ownership
and control in large, listed, companies) and the role that NEDs might play in holding
executive managers to account. It would note some of the strengths, and
weaknesses, of NEDs in performing this ‘policing’ role over executives. It might also
reflect on whether soft law, in a Code of voluntary recommendations, is a good way
of improving corporate governance.

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Part (b)
address the shareholder primacy versus stakeholding debate. It might (but does not
need to) address s.172 to ask whether, currently, directors are required to prioritise
shareholders’ interests.
The answer must address whether company law ought to require shareholder
interests to be prioritised. A good essay would give some flavour of the arguments
that are used in the debate between shareholder primacy and stakeholding. A very
good answer would discuss and critically evaluate some of the wider literature
addressing this question.
Poor answers to this question…
made the errors noted above. Some addressed only one part of the question. Some
tended to regurgitate what seemed like a pre-prepared answer on the history of the
UK Corporate Governance Code but with little focus on the provisions addressing,
specifically, NEDs and with no attempt to describe how effective those provisions
seem to have been. On Part (b), weaker answers tended only to describe s.172.
But the question asks not whether directors must balance shareholder and
stakeholder interests but whether they ought to have to do so.
PART B

Question 5
Dinghies Ltd makes small yachts. The company has three appointed
directors: Kiran, Ling and Mark. Mark is an expert in designing sailing craft.
Nora, who is the company’s solicitor and is married to Mark, often attends
board meetings.
In October 2020, Kiran was approached by Edith at a social event. Edith told
Kiran that she had just invented a new type of canoe. She asked Kiran if
Dinghies would be interested in buying all rights to the canoe for £1 million.
Kiran sent Edith’s designs for the canoe to Ling, Mark and Nora, and a board
meeting of Dinghies was held. Only Kiran voted in favour of Dinghies
purchasing the rights to the canoe. Mark voted against because he did not
think the canoe would sail very well. Nora also spoke against. She did this, in
part, because she did not like Kiran, and partly because Mark told her to do
so. Ling voted against the purchase because she was concerned that the
process for making the canoe would be environmentally harmful, although
she acknowledged that producing the canoe would probably be very
profitable.
In November 2020, Kiran had a health scare, and decided to retire as a
director of Dinghies. The other directors arranged for Dinghies to give her
£200,000 as a ‘thank you’ for her hard work. By January 2021, Kiran was
feeling much better, and decided to set up her own business making small
sailing-craft. In February 2021, she contacted Edith, and bought her invention
from her for £500,000. Sales of the new canoe, which sails very well, have
been hugely successful and very profitable for Kiran.
Discuss.
General remarks
This question concerns directors’ duties. It relates primarily to Chapter 15 of the
module guide (but also raises an issue about de facto directors from Chapter 14 of
the module guide). Students must identify the duties being breached, applying
relevant provisions from CA 2006. Since those statutory provisions must be

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interpreted in the light of the older, ‘pre-Act’ case law, the question also requires
students to demonstrate good knowledge of relevant cases too.
Law cases, reports and other references the examiners would expect you to use
Sections170–177 CA 2006; 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. On de facto
directors, s.250 CA 2006 and Secretary of State for Trade and Industry v Hollier, Re
Gemma Ltd (in liq) and Popely v Popely. On ‘golden handshakes’, s.215 CA 2006.
Common errors
Some answers treated Nora as a ‘shadow director’. But there is nothing to suggest
Nora satisfies the test for a shadow director, in s.251 CA 2006. She may well be a
de facto director, however. Many answers struggled with the £200,000 payment to
Kiran. The weakest answers ignored it entirely (but most facts in problem questions
are there for a reason!). Some answers thought the payment might breach s.176.
Arguing this was better than ignoring it but still wrong. To fall under s.176, the
benefit to the director must be paid by ‘a third party’ – i.e. not the director’s own
company. But here the payment is made by Kiran’s own company (Dinghies).
Many answers analysed Kiran’s potential liability as if all he were doing were setting
up in competition with Dinghies. But he is doing more than that. He is also,
arguably, taking a ‘corporate opportunity’ (Edith’s invention) that belonged to
Dinghies. His liability for doing that, under s.175, needs to be examined separately
from the competition issue.
Many students cited and applied Peso Silver Mines as if it were a UK authority. It is
not: it is a Commonwealth authority and so, at most, of only ‘persuasive’ authority
(and since it conflicts with cases such as Regal, it seems unlikely a UK court would
be ‘persuaded’ by its more lenient approach!).
A good answer to this question would…
address, in turn, the potential liability of each director:
Ling: She may potentially be in breach of s.172; by rejecting a profitable (albeit
environmentally harmful) project, she has not promoted the success of company for
benefit of members. However, s.172 adopts a subjective test (she must act ‘in good
faith’) and she may argue that she believed the profit on making the canoe would be
offset by other losses the company might suffer as a result of the harm caused to its
environmental reputation. But even if she avoids liability under s.172, she may be
liable under s.174.
Mark: he may breach s.174. A good answer would explain the objective and
subjective standards and explain which applies to him, in view of his specialist
expertise.
Nora: we need to decide if she is a de facto director. Explain and apply definition of
that (in s.250, and in relevant case law, mentioned above). Explain the
consequences of being a de facto director – she is treated in the same way (and
owes the same duties) as a de jure director. She may breach s.173 – if she is
merely following Mark’s instructions, rather than exercising her own judgement. She
may also breach s.172 given her decision may be motivated by hostility to Kiran.
Kiran: may breach s.175. There are two aspects to Kiran’s behaviour. First, he sets
up in competition with Dinghies. However, there is no evidence that he forms the
intention to do this before he ceases to be a director. And even if he did decide,
before resigning, to set up in competition, there’s no evidence he took any steps to
further this intention before resigning: see British Midland. Once he has resigned,

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he is free to compete: CMS Dolphin. Second, however, he takes what may be a

corporate opportunity for personal gain. On the one hand, it has been said that a
director can still be liable, even if they take such opportunities after resigning: what
matters is not when they take it but when they learnt about it: IDC v Cooley and
s.170(2) CA 2006. And Regal takes a very strict line in defining what are
opportunities that directors cannot take. However, other cases have suggested a
director will avoid liability, even if taking a corporate opportunity, if they take it post-
resignation provided the reason for resigning is not motivated by the desire to take
the opportunity and if it is not a ‘maturing business opportunity’ that the company is
itself still actively pursuing: see e.g. IEF v Umunna and CMS Dolphin.
Finally, the payment on retirement to Kiran needs shareholder approval – s.215.
Poor answers to this question…
made the errors mentioned above. Some weaker answers copied out large sections
of CA 2006 but mentioned no case law. Summarise the relevant provisions of the
Act; but deepen your analysis by identifying and applying relevant case law.
Student extract
[Note: the following extract illustrates a student dealing well with Kiran’s
position under s.175.]
Generally, when a director resigns, he is not liable for anything but s.170(2)
CA2006 says that there may be some duties from s.175 CA2006 and s.176
CA2006 still applicable. Kiran (hereafter referred to as K), could be liable
under s.175 CA2006 not because she set up in competition because this is
something which is allowed if you have resigned from the company which
she did (Balston v Headline). There is no issue here as she resigned not
because to set up in competition but because she was not well.
She had potentially breached s.175(2) CA2006 as she misappropriated
corporate opportunity from the D. If any opportunity has been presented to
the company, the director cannot take it for her own benefit. The case of
Prentice says that appropriating a corporate opportunity which belongs to the
company constitutes a breach. In IDC v Cooley, a third party specifically said
that they didn't want to contract with the company but with the director, still
this was not allowed. As long as you get to know about the opportunity
because of your position as a director, you are not allowed to exploit that
opportunity and it doesn't matter whether the company was ever interested or
not (O’Donnell).
This could have been a maturing business opportunity but is highly unlikely
as D had already rejected the proposal…
Comments on extract
Interpretation of the question: good – the student spots that Kiran may breach
s.175 in two ways: by competing (but notes that there is no breach on that ground
here) and by taking a corporate opportunity. This shows a good and perceptive
reading of the question, backed up by a good understanding of the range of
conflicts that can arise under s.175.
Relevance of the answer to the question: good – because the student spots the
different legal issues, under s.175, which the question raises, they are able to deal
with each separately.
Substantive knowledge: good.
Articulation of argument: good.
Accuracy of information: generally good.

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Clarity of expression: again, very clearly explained.
Question 6
Until 2019, Aviation Ltd, which makes aviation fuel, was a wholly owned
subsidiary of Conch plc. In 2019, Conch sold all its shares in Aviation to
Burnfast plc. It was a term of the sale contract between Conch and Burnfast
that Conch would not make or sell aviation fuel for 10 years. In 2021,
scientists working for Conch accidentally invented a new, and much more
efficient, type of aviation fuel. Conch has decided that Standby Ltd, another of
its wholly owned subsidiaries, will make and sell this aviation fuel.
Petrol Ltd is another wholly owned subsidiary of Conch. Delia, a director of
Petrol, wrote a report for Conch’s board. The report described a number of
safety issues concerning the design and maintenance of Petrol’s production
facilities, and outlined a number of expensive safety improvements Delia was
intending to introduce. In response, Conch removed her as a director of
Petrol. No safety improvements were made at Petrol. However, Conch did
issue detailed health and safety guidelines to all its subsidiaries, although it
takes no steps to enforce these guidelines. Conch also states on its website
that it ‘maintains the highest safety standards at all the group’s operations’. A
large number of Petrol’s employees have now suffered serious injuries at
work.
a) Will Standby or Conch be liable to Burnfast plc under the 2019 sale
contract?
b) Will Conch be liable in tort for the injuries caused to Petrol’s
employees?
General remarks
This question relates to Chapters 3 and 4 of the module guide. It brings 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.
Law cases, reports and other references the examiners would expect you to use
Relevant cases would include: for part (a): 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.
For part (b): Connelly v RTZ Corporation plc; Lubbe v Cape Industries plc; Chandler
v Cape plc; Thompson v The Renwick Group plc; and especially Lungowe Vedanta
Resources plc; Okpabi v Royal Dutch Shell plc.
Common errors
As in previous years, students tended to answer this question quite well. Students
generally explained well why Burnfast might need to pierce the veil in part (a).
There were also some excellent answers to part (b). However, a lot of students
showed they had not really kept up to date with the rapidly developing law in this
area. A lot of students began, and ended, their analysis with Chandler v Cape.
Certainly, it is important to mention Chandler and the test for liability it applied. But
more recent case law has moved away from Chandler: see below. Students needed
to show an awareness of these developments.
A good answer to this question would…
a) focus on veil piercing. Note the law’s starting position, in terms of the separate
personality enjoyed by parent and subsidiary. On this basis, Conch alone could be
liable under the contract it entered into with Burnfast but Conch does not appear to

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be making or selling aviation fuel (this is being done by Standby, a separate

company, which is not contractually bound to refrain from making/selling aviation
fuel).
Explain that the most obvious way for Burnfast to get around this outcome is
through veil piercing. Explain the meaning of veil piercing and the conditions to be
satisfied – that someone in control of a company is using that company to evade
their pre-existing obligation: Adams; Prest. Conch has such an obligation, and
seems to be using Standby to get out of it. Is Conch in control of Standby?
Presumably so, as Standby is its subsidiary. It does not matter that Standby was
formed many years earlier and not formed to evade the obligation.
Since veil piercing seems very likely here, it is not really necessary to mention
alternatives to veil piercing. But a good answer might note, very briefly, that we
cannot pierce the veil merely because C and S form a single economic unit, nor
merely because ‘justice’ so demands. And it is very unlikely S would be considered
C’s ‘agent’. An excellent answer might note that one could perhaps apply the
‘concealment’ principle from Prest to argue that Conch is, in truth, the company that
is really engaged in making/selling the fuel. This argument would not work to hold
Standby liable.
b) Here, the focus should be on whether Conch owed a duty of care to prevent
Petrol from injuring its employees. A good answer might start with Chandler v Cape,
noting that it held that, in some situations, a parent would owe a duty of care to
prevent its subsidiary harming its employees. However, because the case law has
now moved away from Chandler, a good answer would deal with Chandler quite
quickly and briefly and then turn to the more important post-Chandler case law.
AAA v Unilever, Vedanta Resources v Lungowe and the most recent case of
Okpabi v Royal Dutch Shell plc all suggest that a parent will only be liable if it is
guilty of sufficient ‘misfeasance’. It might be found to be so where it has intervened
sufficiently in the management of those subsidiary activities that have caused injury,
or where it has (negligently) advised the subsidiary how to manage those activities.
It is not clear if Conch has done these things. It seems mostly guilty of just non-
feasance – of simply failing to act. On the other hand, it has issued health and
safety guidelines and, if these were negligent, that may be sufficient to establish a
duty of care.
Poor answers to this question…
on part (a), they tended to mention too little case law, or failed to explain clearly the
ground for veil piercing, in terms of the use of a company by its controller to evade
an existing obligation of that controller.
On part (b), they failed to mention the more recent cases establishing the extent of
the parent company’s duty of care in tort.
Student extract
[This extract covers the student’s answer to part (b) and is chosen to illustrate
an answer that focuses well on the more recent case law, dealing only briefly
with the older law in Chandler.]
The next part of this paper will consider whether Conch owes a duty of care
to prevent Petrol from injuring the employees of Petrol. According to
Chandler v Cape (2012), a duty of care would arise for parent companies for
injuries caused by their subsidiaries where four conditions are satisfied. The
general trend found in recent cases in this area is to side-line these four
‘indicators’. As confirmed in the recent Supreme Court case of Okpabi v
Royal Dutch Shell plc (2021), ‘ordinary tort principles’ apply, so that parent
companies will ordinarily be liable only for their active misfeasance. Parent

13
 companies would only be liable where they sufficiently take over, intervene
in, control, supervise or advise the management of those subsidiary activities
which have caused harm to others (AAA v Unilever (2018); Vedanta v
Lungowe Resources (2017)).
The fact that Conch did not make safety improvements following Delia’s
report amounts only to nonfeasance. However, Conch’s removal of Delia, a
director of Petrol who may have remedied the unsafe working environment,
would surely amount to active misfeasance in the management of Petrol’s
activities which have caused harm to others.
Moreover, the Supreme Court in the recent case of Okpabi (2021) rejected
Royal Dutch Shell’s argument that a parent could never be liable merely
because it had issued group-wide policies that its subsidiaries were expected
to follow. Conch’s issuing of detailed health and safety guidelines to all its
subsidiaries might be sufficient to establish liability, even if it took no steps to
enforce them. Furthermore, Conch’s statement on its website that it
‘maintains the highest safety standards at all the group’s operations’ would
reinforce the argument that Conch would be found liable.
Comments on extract
Interpretation of the question: Excellent, the student understood clearly what Part b)
was about.
Relevance of the answer to the question: excellent – the student focuses most of
the time and words on the more relevant, more recent case law. Chandler is
mentioned as background, but briefly, allowing the student ample time to
demonstrate good knowledge of the right cases.
Substantive knowledge: very good.
Articulation of argument: clear – the application to the facts is good, so we
understand the answer being developed.
Accuracy of information: good.
Clarity of expression: excellent.
Overall: this part was first class.
Question 7
In 2000, Ann and Carlos met at university. In 2004 they married. They
immediately bought, and began running in partnership, a hotel. In 2010 they
incorporated Hotelux Ltd, to take over the business of running the hotel. Ann
and Carlos each owned 50 per cent of the company’s shares and were the
company’s only directors. They agreed they would share equally the running
of the company.
In 2018, the company needed to raise more finance to purchase another hotel.
Ann’s accountant introduced her to Kambili, a venture capitalist who bought
a 20 per cent shareholding in Hotelux (leaving Ann and Carlos each owning
40 per cent of the shares). Kambili was appointed a director but has never
attended any board meetings. In 2019, it was agreed that Kambili’s son, Tayo,
could work for Hotelux as a manager of one of its hotels.
In 2020, Ann and Carlos’s marriage broke down. Ann became very depressed
and stopped attending board meetings. Carlos persuaded Kambili to join with
him in voting for Ann’s removal as a director, and Carlos continued running
the company alone. Under Carlos’s sole management, the company’s
fortunes have declined considerably. Carlos recently made a number of

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Hotelux’s employees redundant, including Tayo. Kambili complains that this

goes against what the shareholders agreed in 2019. Carlos has offered to buy
Ann’s and Kambili’s shares from them at a fair market price, to be determined valuation of shares
by the company’s auditors.
Advise Ann, and Kambili, whether each of them could bring successful
proceedings under section 994 Companies Act 2006.
General remarks
This question concerns Chapter 12 of the module guide. It deals with shareholders’
ability to bring proceedings for ‘unfair prejudice’. The question was generally quite
well answered, with many students showing a well-structured analysis of the
conditions for bringing a successful claim under s.994.
Law cases, reports and other references the examiners would expect you to use
Section 994 and relevant cases, e.g. 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; Waldron v Waldron.
Common errors
There were few consistent ‘errors’ in understanding the law. However, weaker
scripts tended to be rather badly structured, listing a lot of cases but not identifying
the different ‘tests’ or ‘hurdles’ a shareholder must surmount to succeed under
s.994. Another common weakness was the failure to discuss whether the company
is a ‘quasi partnership’, which is important in determining what ‘interests’ the
potential claimants may have.
A good answer to this question would…
take the two potential claimants separately: you must advise each and their
chances of success may be different.
Regarding Ann: She is complaining about her removal from the board. First point:
to succeed, she must be complaining about ‘the way the company’s affairs are
being conducted’ (or about ‘an act or omission of the company’). She must not be
complaining about merely ‘private’ matters outside of the conduct of the company’s
affairs. Her complaint of removal from board does surely concern conduct of
company’s affairs.
Second point: does this removal prejudice her interests? It clearly harms her – but
does it harm her interests? It probably does not harm – prejudice – any of Ann’s
legal rights (she has no right to be a director). However, a good answer would note
that ‘interests’ may be broader than strict legal rights. They will be so in a quasi-
partnership. So, is this company a quasi-partnership? Probably yes: given
partnership history, marriage, participation in management – Ebrahimi. And a good
answer will then explain that in a quasi-partnership, Ann’s interests will include her
legitimate expectations based on informal agreements. Here, there was an
agreement to share equally the running of the company.
Third point: is the prejudicing of her interests unfair? A good answer would note the
relevance here of (i) her own non-participation in boards – might note rejection of
‘no-fault divorce’ in O’Neill; and (ii) the offer made to her – but this looks an
unreasonable offer given that it’s based on auditors valuing, rather than
independent valuation – see rules on valuation in Bird Precision Bellows, O’Neill,
Estera Trust, etc.
Finally, discuss likely remedy if she succeeds under s.994.
Regarding Kambili: There is no need to repeat all the same points made before.
Instead, it is enough to note some of the specific problems that might derail K’s

15
claim. For one thing, it is not clear he is a quasi-partner at all (remember that, per
Waldron v Waldron, the quasi-partnership relationship may not necessarily exist
between all the shareholders). If he is not, ask whether he can invoke the informal
agreement regarding his son’s employment, and even if he can, whether this affects
him qua shareholder. If he is not a QP – then even if he can, note remedy, valuation
of shares in a non-QP and why the offer to him might be more reasonable.
Poor answers to this question…
lacked a strong structure to work through, in a methodical way, the different relevant
issues set out above. Poor answers often failed to distinguish the claims of Ann and
Kambili. They often ignored the offer to purchase their shares and the impact this
might have on their s.994 claims.
Question 8
In 2010, Pierre formed Buildit Ltd Initially, he owned all the company’s shares
and was the company’s only director. In 2020, and then aged 65, he decided
to take life more easily. He gave 30 per cent of his shares to each of his two
daughters, Queenie and Rosalyn, and appointed them to be directors. Two
additional regulations were also added to the company’s articles. Regulation
54 says that Pierre can veto any board decision to enter into a contract over
£50,000. Regulation 55 says each director will be paid £80,000 per year. Pierre
was also given a 10-year employment contract as a director.
In 2021, at a board meeting, Queenie proposed the company buy a piece of
land from Simon for £200,000. Pierre objected, and vetoed the proposal.
Queenie and Rosalyn told Pierre they would ignore his veto, although Pierre
is unsure whether the company has yet entered into a contract with Simon.
Pierre’s salary as a director has not been paid to him for some months, and
his daughters are also now threatening to remove Pierre as a director.
Advise Pierre whether:
a) he can force the company to pay him his director’s salary;
b) he can prevent his removal as a director; and
c) he can prevent the company buying Simon’s land. Would your answer
differ if Simon were married to Queenie?
DO NOT discuss section 994 Companies Act 2006 or section 122(1)(g)
Insolvency Act 1986 in your answer.
General remarks
This question covers a number of different areas of company law, particularly
Chapter 9 of the module guide (on the effect of a company’s articles), Chapter 13
(on ‘internal authority’) and Chapter 14 (on removal of directors).
Law cases, reports and other references the examiners would expect you to use
Sections 21, 33, 168 and 188 CA 2006; Eley v Positive Government Life Assurance
Society; Salmon v Quin and Axtens; Allen v Gold Reefs; Greehalgh v Arderne
Cinemas; Shuttleworth v Cox. On stopping the contract, s.40 CA 2006; EIC
Services v Phipps.
Common errors
Many answers confused badly the issues of, on the one hand, directors exceeding
their authority and, on the other hand, companies exceeding their capacity
(companies acting ultra vires). So, many answers thought the problem concerned
ultra vires – that the company was acting outside its capacity – but this is not so.
The company has the capacity to enter into this contract but Q and R may be
exceeding their authority by making it do so. And many answers thought,

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accordingly, that s.39 CA 2006 was relevant. But it is not: s.39 is relevant only to
ultra vires actions. Since this question was not about ultra vires but about directors
exceeding their authority, s.40 (and s.41) are relevant.
Another surprisingly common error was to discuss s.994 CA 2006 or s.122(1)(g) IA
1986: given the question specifically told students not to discuss these provisions,
no marks could be given for such a discussion
A good answer to this question would…
take each part in turn.
a) Regarding his salary: Pierre has a right to a salary under articles. The articles
are enforceable (s.33) by each shareholder individually. However, note that the
courts have sometimes refused to enforce articles which confer so-called ‘outsider
rights’ on a shareholder. A good answer would explain the conflicting case law here,
focusing on cases such as Eley, Hickman, Beatty and Salmon.
b) Regarding Pierre’s removal: The majority can remove him under s168; his 10-
year contract will not prevent that.
c) Regarding the purchase of the land: Pierre has a power of veto. So long as no
contract has been entered into, Pierre can enforce this power, enjoining the
company from proceeding to purchase the land whose purchase Pierre has vetoed.
This right, again, arises under s.33 (see Salmon v Quin).
If Q and R do enter into the contract, despite P’s veto, then they would lack
authority to do so. At common law, the contract, because unauthorised, would
probably be void. However, once the contract has been entered into, s.40 seeks to
protect the purchaser. A good answer would explain the requirement of good faith in
s.40 (note EIC Services v Phipps). A good answer might note that whilst Pierre
could not stop the company performing the contract once entered into, Q and R
would breach their duties under s.171 by ignoring the constitutional veto exercised
by Pierre (although it would be for the company to enforce this breach of duty).
Finally, if Simon were Q’s spouse, then s.41 applies – the transaction would be
voidable.
Poor answers to this question…
confused the topics of ‘lack of authority’ and ‘ultra vires’. Poor answers failed to spot
that the remuneration article might be considered an ‘outsider rights’ article and
therefore unenforceable. The relevance of the long contract to Pierre’s removal was
also ignored.

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