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(QUESTION 1)

SunnyHouse Ltd entered into a contract in June 2021 to supply plant pots with Pots Ltd. By

September 2021, SunnyHouse Ltd had failed to make payments as per their contract. The

issue in this question is whether Pots Ltd can sue the shareholders or directors of

SunnyHouse Ltd in their personal capacity for not paying for the supply of plant pots.

Generally, there is limited liability when it comes to an Ltd as corporate personality

facilitates limited liability by having the debts belong to the corporation and not the

members.1 The company is their own separate legal identity; however, it is possible to lose

the limited liability if directors do not act in good faith for the company. When it comes to

not acting in the best faith of the company as a director, this is a clear breach of section 174

of the Companies Act 2006, where the court adopts a strict standard of care and skill on

directors as their duties are fiduciary (they should act in the best interest of the company).

This is expressed throughout section 174, where directors are expected to perform specific

duties, such as following contractual obligations. The need to foster the company’s business

relationship with suppliers and to promote success is also of great importance when

exercising reasonable care or diligence as per section 172.2 Failure to follow through on

commitments can make the directors liable, as Lexi Holdings PLC v Luqman asserts.3

However, until fraud is committed or a personal guarantee by a director is made, the

company is its own legal entity, and the directors are protected from action involving the

company;4 setting up a company as limited does not, however, offer blanket protection from

1
Alan Dignam and John Lowry, Company Law (11th edn, OUP 2020) 23.

2
Ibid 27.

3
Lexi Holdings Plc v Luqman [2009] EWCA Civ 117.
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specific debts and liabilities if you are appointed as a director. 5 The concept of separate legal

personality is shown through Salomon v Salomon.6 Here Lord Macnaghten stated that ‘the

company is at law a different person altogether from the subscribers …; and, though it may

be that after incorporation the business is precisely the same as it was before’ confirming the

concept of separate legal personality. It is documented here that creditors should be aware

that a company is a separate entity from its members and that the company can borrow in

its name and is liable for its own debts. This links into the concept of Limited Liability as the

company is its own legal entity; the shareholders and directors are therefore not liable for

its debts.7

Concerning the case at hand, because SunnyHouse Ltd is a business with its own separate

legal entity as they are a registered private limited company and as per Lexi Holdings v

Luqman, Pots Ltd cannot sue the shareholders or directors in their personal capacity.

However, Pots Ltd can still bring legal action to the company itself. If at this point the

4
‘Can Directors Be Held Personally Liable For Business Debts?’ (Business Insolvency

Helpline), January 11 2021 < https://business-insolvency-helpline.co.uk/directors-

personally-liable-business-debts/ > accessed 03/03/2022.

5
‘Are Shareholders Liable For Company Debts? (Business Insolvency Helpline), November 12

2020 < https://business-insolvency-helpline.co.uk/shareholders-liable-for-company-debts/

#:~:text=Shareholders%20are%20only%20personally%20liable%20for%20company

%20debts%20beyond%20the,behalf%20of%20the%20company%3B%20or > accessed

03/03/2022.

6
Salomon v Salomon & Co Ltd [1897] AC 22.

7
Bourne Nicholas, Bourne on Company Law (7th edn, Routledge 2016) 3.
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directors continue to not pay Pots Ltd they will be in breach of their duties to promote their

own success and sort out the debts with its suppliers under section 172 and 174 of the

companies act. However, it should also be noted that although to act in reasonable skill,

diligence and care is a statutory duty, it is not fiduciary, and Pots Ltd would only be able to

claim damages where the company has suffered its loss.

In conclusion, Pots Ltd cannot hold the directors or shareholders of SunnyHouse Ltd

personally liable for the debt and should therefore pursue suing the company itself.

(QUESTION 2)

In this case, the managing director, Alex, of SunnyHouse Ltd has attempted to pass a

resolution altering the rights of preference shareholders under the Articles of Association to

reduce their fixed preferential dividend rate from 20% to 10%. The issue in this question is

whether it is possible to pass this resolution to successfully alter the dividend rate for

preference shareholders.

There are concrete stances in varying shareholders’ rights, including adjusting their dividend

rates. Under section 630 of the Companies Act 2006, subsection 2, the variation of class

rights for shareholders can only be performed in ‘accordance with the provision in the

company's articles for the variation of those rights,’ (Part A) or if the ‘holders of shares of

that class consent to the variation in accordance with this section.’ (Part B) If it is not

specified under the company’s articles, part b will come into effect. Here subsection four

would apply to how a variation of class rights can be accomplished. This is only through

consent from the ‘holders of at least three-quarters in nominal value of the issued shares of

that class’ (part a) or a ‘special resolution passed at a separate general meeting of the
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holders of that class sanctioning the variation (part b).’ Under the statute, it expresses

protection of varying class rights where only the class being impacted can pass for a

variation of their class rights, subject to a 75% nominal vote. It is confirmed that consent is

essential when altering shareholders’ rights; this is also shown through Combrian

Newspapers.8 Justice Scott confirms it is unfair for those in another class to change class

rights through special resolution of another class of shares, essentially running consistently

through statute and case law. Consent can be given in writing or passed by special

resolution through a 75% nominal vote of the holders of that share class. However, is it

possible to pass any resolution which impacts a class of shares? It is established that even if

the members of that class about varying their class rights have a 75% vote, they need to

assure that any variation to the class rights must benefit the class of a whole as shown per

Viscount Haldane in case British America Nickel Corporation Ltd v MJ O’Brien Ltd.9

Confirming that alteration of class rights must be for the benefit of the class as a whole and

an alteration cannot be voted which negatively impacts those shareholders (establishing a

requirement of bona fide decisions) and they are subject to proper decision making. 10

In the case of SunnyHouse Ltd, Alex had tried to pass a resolution reducing the fixed

preferential dividend at the rate of 20 per cent (which is contained under the company’s

articles of association) to 10% of their nominal value of preference shareholders. These

preference shareholders are Marie, Ellie and Andy, in which only Marie supported the

8
Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper &

Printing Co Ltd [1986] BCLC 286.

9
British America Nickel Corporation Ltd v MJ O’Brien Ltd [1927] AC 369.

10
Paul Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (10th

edn, Sweet & Maxwell 2016) 1121.

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resolution bringing a 33% vote to pass. It is not only established through section 630 of the

Companies Act that only those who are part of a class can submit for special resolution; the

requirements to meet such a resolution (which is 75%) is also not met. Another class of

shareholders cannot establish a variation in class rights of another, which is what Alex did,

and even if so, the nominal vote of 75% has not been met, meaning that the special

resolution will fail to pass. On top of this, it is not in the best interest of the preference

shareholders to reduce their rate of dividends from 20% to 10%, and therefore it is not

acting in the best interest of their class rights.

In conclusion, in the case of SunnyHouse Ltd, it is not possible for Alex to pass a resolution

altering the dividend rate for their preference shareholders and it will therefore be

unsuccessful.

(QUESTION 3)

Alex has made various decisions that have led to monetary losses for SunnyHouse Ltd, such

as approving large sale orders of plants at prices well below market value. Alex, Ellie and

Andy have also ceased to involve Marie in management decisions. Marie is unhappy with

this situation. It will be looked at as to whether Marie has any options regarding Alex’s

decisions and her exclusion from decision making in the company.

Under section 994 of the Companies Act 2006, a company member may apply to the court

by petitioning an order under unfairly prejudicial conduct by meeting three constituent

elements. Only when these three elements are satisfied can a claimant succeed in unfairly

prejudicial conduct. This is that it needs to first be concerning the company’s affairs, it needs

to be impacting the interest of members or some members in their capacity as members of

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the company, and it needs to be unfairly prejudicial. These elements need to be satisfied to

apply to the court under section 994 of the Companies Act and need to be looked at closely

to establish unfair prejudicial conduct. For the conduct of the company’s affairs, it is found

under the case of PrimeKings Holding Ltd v King11 whether it was permissible to include in a

statement for allegations of personal conduct by the respondents. Here it was stated in the

judgement that it might be legitimate for a concise statement of personal acts of the

respondents. Still, it must be connected to an act or omission of the company or the

conduct of the company’s affairs. This highlights that you can only bring in personal acts or

conduct if it has concerned the company's affairs. Otherwise, it is irrelevant. The second

element regards interests qua member (meaning interests as a member in their capacity

within the company), the conduct complained of must be conducted that is unfairly

prejudicial to the member's interest as opposed to any other interest that the member may

possess. The courts have expressed a broad approach in the interest of members as, like the

words just and equitable have been applied, the courts have broader, equitable

considerations as per Justice Hoffman in Re a Company (No 00477 of 1986). 12 This shows the

interest of members is designed to be more expansive than just the legal rights contained

under a company’s constitution. There is also a similar discussion in Ibrahim Westbourne

Galleries13 where Lord Wilberforce confirms that it’s not just written legal rights that need to

be looked at, but also expectations and obligations as a member of the company. On the

final constituent element of Section 994, the conduct needs to be both unfair and

11
PRIMEKINGS HOLDING LTD & ORS V KING & ORS (RE KINGS SOLUTIONS GROUP LTD)

[2021] EWCA Civ 1943.

12
Re a Company (No 00477 of 1986) [1986] BCLC 376.

13
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.
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prejudicial. O'Neill and Phillips14 is a critical case in unfairly prejudicial conduct that confirms

the idea that unfairness may consist of a breach of the rules or using the rules in a manner

that equity would regard as contrary to good faith. Unfair and prejudicial conduct can be

established in a few areas; exclusion from company management, mismanagement of the

company, breach of directors’ fiduciary duties, and excessive remuneration. Under exclusion

from company management Ebrahimi v Westbourne Galleries15 shows where a quasi-

partnership is formed, the petitioners have a right to participate. This is because members

would expect to be involved in management that may be created through an informal

agreement instead of a company’s constitution; excluding management would lead to

unfairly prejudicial conduct in such companies. In terms of mismanagement of the company,

the case to look at is Re Elgindata Ltd 199116, where Justice Warner confirmed that ‘short of

a breach by a director of his duty of skill and care… there is prima facie no unfairness to a

shareholder in the quality of the management turning out to be poor.” One of the usual

risks of being part of a company is that the management may not be of high quality.

However, suppose the decisions cause actual financial loss of the company where the

director owes duties under section 174 of the Companies Act 2006. In that case, the petition

is more likely to succeed since the allegation would be a failure to exercise reasonable

diligence, skill and care. However, it is essential to note that the petitioner must come to the

court with clean hands if they wish to rely on equity when determining whether the

14
O'Neill v Phillips [1999] UKHL 24.

15
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.

16
Re Elgindata [1991] BCLC 959.
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respondent’s behaviour was unfair and prejudicial, per Re RA Noble & Sons (clothing) Ltd

(1983).17

Regarding the issue at hand with Marie at SunnyHouse Ltd, going through each element, it

would be established that her claim would be sound under company affairs. This is as the

two claims are connected to an act or omission of the company or the conduct of the

company’s affairs as per PrimeKings Holding Ltd v King18 because the mismanagement of

Alex would impact the company in a negative way itself and Marie being excluded from

management decisions leads to an impact of her rights within the company. Next, it is

established, using a broad approach, through Ibrahim Westbourne Galleries 19 that the

expectations and obligations of the members of SunnyHouse Ltd have been impacted and,

therefore, impact the interest of members in their capacity as members of the company.

This is not only shown through the fact that Marie is excluded from decision making and

therefore impacts her rights within the company but also with Alex’s bad management

decisions, which will affect the profitability of the company as a whole (going against the

sole purpose of the company and therefore impacting the members). The final step is to

investigate whether these two issues are unfair and prejudiced. Concerning the exclusion of

Marie from decision making, using the rules in a manner which equity would regard as

contrary to good faith can amount to unfairness. Where Marie is excluded, this can amount

to not acting within good faith and would fall under unfair conduct. When looking at

prejudice, it is safe to say that the company was formed under a quasi-partnership as a

group of people had founded the company together. Under Ebrahimi v Westbourne

17
Re Noble and Sons (Clothing) Ltd [1983] BCLC 273.

18
[2021] EWCA Civ 1943.

19
[1973] AC 360.
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Galleries,20 it shows where a quasi-partnership type company is formed, the petitioners have

a right to participate as that is what they would have expected. Therefore, excluding Marie

from decision making would amount to unfairly prejudicial conduct. However, regarding

Alex’s bad decision-making, it would not be possible to claim for unfairly prejudicial

conduct. This is because under Re Elgindata Ltd 1991,21 Justice Warner confirmed that ‘short

of a breach by a director of his duty of skill and care… there is prima facie no unfairness to a

shareholder in the quality of the management turning out to be poor.” As Alex is the

managing director and mainly makes the decision, it is not a breach if he makes decisions

that may look like they lack the skill or diligence.

In conclusion, Marie would be able to petition for unfairly prejudicial conduct as she was

excluded from decision making in a quasi-partnership company. However, she needs to

make sure that her hands are clean and that the reasons behind her being excluded was not

a breach of Section 174 itself as per RA Noble & Sons. 22 On the other hand, she would not be

able to take action against Alex unless his decisions cause financial loss and is liable for

breaching his director’s duties under Section 174 of the Companies Act. Remedies for Marie

would be achieved by the court’s discretion under section 996 of the Companies Act 2006

and it is recommended that she claims for unfair and prejudicial conduct.

20
Ibid.

21
[1991] BCLC 959.

22
[1983] BCLC 273.
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Table of Cases

British America Nickel Corporation Ltd v MJ O’Brien Ltd [1927] AC 369.

Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper &

Printing Co Ltd [1986] BCLC 286.

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.

 Word Count: 2483

Lexi Holdings Plc v Luqman [2009] EWCA Civ 117.

O'Neill v Phillips [1999] UKHL 24.

PRIMEKINGS HOLDING LTD & ORS V KING & ORS (RE KINGS SOLUTIONS GROUP LTD) [2021]

EWCA Civ 1943.

Re a Company (No 00477 of 1986) [1986] BCLC 376.

Re Elgindata [1991] BCLC 959.

Re Noble and Sons (Clothing) Ltd [1983] BCLC 273.

Salomon v Salomon & Co Ltd [1897] AC 22.

Table of Legislations

Primary Legislation;

Companies Act 2006.

Bibliography
 Word Count: 2483

Books;

Alan D and John P, Company Law (11th edn, OUP 2020).

Nicholas B, Bourne on Company Law (7th edn, Routledge 2016).

Paul D and Sarah W, Gower’s Principles of Modern Company Law (10th edn, Sweet &

Maxwell 2016).

Websites;

‘Can Directors Be Held Personally Liable For Business Debts?’ (Business Insolvency Helpline),

January 11 2021 < https://business-insolvency-helpline.co.uk/directors-personally-liable-

business-debts/ > accessed 03/03/2022.

‘Are Shareholders Liable For Company Debts? (Business Insolvency Helpline), November 12

2020 < https://business-insolvency-helpline.co.uk/shareholders-liable-for-company-debts/

#:~:text=Shareholders%20are%20only%20personally%20liable%20for%20company

%20debts%20beyond%20the,behalf%20of%20the%20company%3B%20or > accessed

03/03/2022.