DISQUALIFICATION
‘Compare the regime for
removing directors, under
section 168 of the Companies
Act 2006, with the regime for
disqualifying directors under
the Company Directors
Disqualification Act 1986.’
‘It is much too difficult to
disqualify a director under the
Company Directors
Disqualification Act 1986, and
it is much too easy for
shareholders to remove a
director under section 168
Describe, and then compare, the two regimes referred to.
It would explain
 what s.168 addresses – the removal from office of a director
by the company’s shareholders.
 It would explain how s.168 is an empowering provision,
designed to facilitate (a) majority (of) shareholders in
removing a director they no longer wish to remain on the
board.
 It is designed to address the ‘agency problem’ between
shareholders and directors.
 It is a mandatory provision, but is subject to a number of
limitations.
 Relevant to mention here are the right of directors to speak
in their defence (s.169), and the contractual limits which
may arise (notwithstanding the ‘mandatory’ nature of the
section).
 These contractual limits include: the insertion of 5
‘weighted voting’ provisions in the articles,
 the existence of long-service contracts, which can make
exercising the power of removal expensive (s.168(5)) and
 quasicontractual legitimate expectations of participation in
management, which can form the basis of challenge under
s.994 CA 2006 or s.122(1)(g) IA 1986.
It would then explain the disqualification regime under CDDA 1986.
 It should note how, in contrast to s.168’s empowering of
private actors – shareholders – to reduce their agency costs,
CDDA is a system of public regulation designed to provide
public (and perhaps especially creditor) protection.
 It might describe the procedure for disqualifying under the
Act, and say a little about the wide range of grounds on
which disqualification can be ordered.
 Some concentration on the s.6 ground would probably be
appropriate.
 The essay might also note the different consequences that
follow from disqualification under CDDA, compared to
removal under s.168.
removal, and disqualification, of director
if it is indeed too easy to remove a director but too difficult to
disqualify one.
begin by taking, say, disqualification first,
 explain what ‘disqualification’ means and
 how CDDA 1986 sets out the grounds and procedure for
disqualification, and its consequences.
Companies Act 2006.’ Discuss.
The regime for disqualifying
directors is a much better way
of protecting companies’
creditors than are the
provisions of sections 213 and
 Note the wide grounds for disqualification, with most
proceedings brought under s.6, producing over 1,000
disqualifications a year. It would give a sense of how the
courts have applied the s.6 unfitness ground.
 It might note the debate over whether mere incompetence
should suffice, or whether something more egregious – such
as ‘commercial dishonesty’ – ought to be the test.
The answer might note the serious consequences of disqualification,
 suggesting disqualifying someone should indeed be quite
difficult.
 A good answer might note the increased reliance on
disqualification undertakings and how these have made it
easier to continue with relative high rates of
disqualification.
 A good answer would, through the above analysis of CDDA
1986, show whether, in the student’s opinion,
disqualification is indeed ‘too difficult’.
Removal under s.168:
 explain the difference between disqualification (by the state
and done to protect the public) and removal under s.168
(by a majority of shareholders and done to protect those
shareholders’ interests).
 The answer would explain what s.168 says and pick out its
key elements.
 It requires only an ordinary resolution, and is ‘mandatory’ –
overriding anything in, say, a director’s employment
contract.
 The answer might address why the law attempts to make it
easy for a simple majority of shareholders to remove
directors – in terms of the importance of ‘removal’ as a
means of ensuring directors are accountable.
 Yet things are often different in practice; directors in smaller
companies may have weighted votes on removal, and
Bushell says these are valid.
 If directors have long employment contracts, these might
make it expensive to remove the director (s.168(5) but note
s.188).
 Finally, a removed director may be able to bring successful
proceedings under s.994, at least in a quasi-partnership
type of company (Ebrahimi).
explain ss.213/214 IA 1986.
 Show the requirements that must be satisfied for a
liquidator to bring proceedings successfully under each
provision.
 Explain the limits on the effectiveness of s.213, notably the
214 Insolvency Act 1986.’
Discuss.
‘The rules on the maintenance
of capital, the regime for
disqualifying directors, and
the provisions of sections 213
and 214 of the Insolvency Act
1986, together ensure that
creditors are well protected.’
Discuss.
requirement to show dishonesty.
 Contrast this with the ‘negligence-based standard’ that
underpins section 214.
 Explain who these provisions can be used against (anyone
for s.213, only directors for section 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’ 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,
 explain how disqualification might promote creditor
protection.
 A good answer would probably focus on the section 6
ground – unfitness – explaining its meaning and the number
of successful cases brought each year.
 Perhaps address the meaning of unfitness – see Re Lo-Line -
including controversy over whether mere incompetence
does/should suffice.
 Discuss the consequences of disqualification, including
typical disqualification periods, and the possibility of
securing leave to act whilst disqualified.
 Mention might also be made of the introduction of
‘compensation orders’ under CDDA 1986.
The best answers will discuss how far it’s possible to compare the
two regimes (are they trying to do very different things?) and,
insofar as comparisons are possible, will draw some.
examine the rules governing the three areas of creditor protection
which are mentioned, and then evaluate their effectiveness.
Regarding capital, these 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 rules regarding restrictions on distributions, capital
reductions, share buybacks, and financial assistance for the
acquisition of shares.
 Explain how these rules protect creditors, ensuring

How well are creditors
protected by section 214
Insolvency Act 1986 and the
regime for disqualifying
directors?
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 not required to value
non-cash considerations; rules don’t prevent loss of capital
in the ordinary course of trading; liberalisation of buyback
rules for private companies; etc.
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 effectiveness of s.213, notably the
requirement to show dishonesty.
 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/shadow directors for s.214), and
the consequences of a successful action, including who gets
the fruits of an action.
 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,
 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 whilst disqualified.
 Some mention might also be made of the introduction of
‘compensation orders’ under CDDA 1986.
explain s.214 IA 1986:
 it requires directors to take all steps to protect creditors
once they do, or should, realise insolvency is ‘inevitable’.
 The director bears the burden of proving they took all such
steps (Brooks v Armstrong).
 The provision also applies to shadow directors.
 The director is judged objectively or subjectively.
 Breach results in directors having to make a contribution to
the company’s assets, assessed on a ‘compensatory basis’

How well do UK company law
and insolvency law protect
the interests of a company’s
creditors?
(Re Produce).
 The foregoing might suggest s.214 is likely to be very
effective in deterring directors from continuing to trade
once insolvency is inevitable.
 But proceedings under s.214 remain quite rare – mainly
because of funding issues.
 It might note that this was purportedly addressed by
permitting liquidators to sell s.214 proceedings (now,
s.246ZD IA 1986) but we do not yet know how often
liquidators do so.
 And anyway, the courts generally are quite reluctant to
condemn directors.
 In small companies, where directors often give personal
guarantees to banks, directors may have little money left by
the time a liquidator could successfully sue them under
s.214.
Turning next to disqualification under CDDA.
 A good answer would explain the grounds for, and
consequences of, disqualification.
 It might then ask whether this regime provides good
deterrence against misbehavior by directors.
 Since most orders are made under s.6 (unfitness), students
might be expected to spend a fair amount of time discussing
the courts’ conceptualization of ‘unfitness’ and evaluate
how strictly s.6 deals with directorial misconduct.
 A good answer would show some awareness of the number
of disqualifications being made and of the typical length of a
disqualification order, and the ability of disqualified
directors to secure leave to act, softening the impact of the
disqualification order.
 It might note the reform to the CDDA by now permitting
compensation orders to be made: ss.15A and B of CDDA
1986 and Re Noble Vintners Ltd.
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 veil piercing doctrine is
so narrow, and so
unpredictable, that it provides
no protection for a company’s
creditors. However, other
aspects of company law, such
as the directors’
disqualification regime and
the rules on raising and
maintenance of capital – are
far more effective in
protecting creditors.’ Discuss.
 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
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.
begin with the law governing veil piercing.
 It would explain how, historically, the law permitted veil
piercing in a fairly wide range of circumstances but often
the law did not clearly define or precisely what these
circumstances were.
 So, the veil could sometimes be pierced on the ‘single
economic entity’ ground (DHN), on the agency ground
(Smith Stone and Knight), where justice so required, where
the company was a sham or façade, or used for fraud
(Gilford).
 Explain how more recent cases have substantially narrowed
down the grounds for veil piercing to, essentially, evasion of
an existing obligation (Adams, Prest).
 Arguably, the law is now more predictable (so the question
seems wrong on that point) but it is certainly much
narrower. And this makes it much less effective in
protecting creditors.
Turn next to the rules on capital:
 these require, inter alia, disclosure of 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 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 not required to value
non-cash considerations; rules do not prevent loss of capital
in ordinary course of trading; liberalisation of buyback rules
for private companies; etc.
 All told, these rules again probably do little to protect
creditors – especially in private companies.

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, and 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 whilst disqualified.
 Some mention might also be made of the introduction of
‘compensation orders’ under CDDA 1986.
 Disqualification is perhaps reasonably effective in protecting
creditors against, at least, dishonest/fraudulent characters
becoming directors but probably does little to protect them
against the merely incompetent.

VEIL LIFTING/ LIMITED LIABILITY

‘The ‘evasion principle’ for
veil piercing is too narrow and
too unclear. Judges should be
free to pierce the veil
whenever justice requires this
to be done.’ Discuss.
‘Parent companies should be
held liable for all the debts
and the torts of their
subsidiaries. Fortunately, UK
law has moved in this
direction through its
approach to veil piercing and
through its approach to a
parent company’s duty of
care in tort.’ Discuss.
( NOTE FORTH QUESTION)
explain what is meant by ‘veil piercing’ and what the ‘evasion’
principle says about when the veil can be pierced.
Reference should be made to relevant case law, especially Adams v
Cape Industries plc and Prest v Petrodel.
Then a good answer would consider whether the principle is too
uncertain.
 Courts seem to think the principle is certain, compared to
earlier accepted principles such as ‘justice of the case’.
 The need to establish a ‘pre-existing’ obligation arguably
introduces a degree of uncertainty, given that it is not always
clear at what point an obligation comes into existence – see
Van Hoogstraten.
Is it too narrow?
 It does strip the court of the greater flexibility that broader
principles, such as ‘justice’, would give.
 Arguably, the restrictive nature of the evasion principle has
been made more tolerable by courts’ willingness to find
alternatives to veil piercing – achieving a similar effect but
under a different doctrine: e.g. under trust law (Petrodel); by
finding an agency relationship (Smith Stone and Knight);
using statute law (as in Hurstwood Properties); tort law
(Chandler; Okpabi) and so on.
Finally, should the courts be free to pierce the veil on the ground of
‘justice’ (as suggested in Re a Company (1985))?
 A good answer might consider the relative importance, in
company law, of ‘certainty and predictability’ compared to
the need for judicial flexibility.
cover both the normative and the descriptive issues:
 It would say both whether parents should be liable and
 whether the law currently holds them liable.
 In covering both these issues, a good answer would also
distinguish, as the question does, between liability for debts
and liability for torts.
Should parents be liable?
 Consider the literature addressing the benefits of limited
liability for shareholders.
 Note how these arguments for the benefits of limited liability
apply most strongly to debts, where creditors arguably
understand and agree that the company alone will be liable.
 Note how ‘tort victims’ are involuntary creditors – and note
the literature that asks whether, for this and other reasons,
tort victims should be treated differently from contractual
 creditors.

Then turn to the descriptive part of the question. Again, a distinction

should be drawn between liability for debts and liability for torts.

For debts,
 if a subsidiary cannot repay a creditor, company law would
generally not make the parent liable.
 Parent and subsidiary would be considered separate legal
persons (Salomon, Adams).
 Although the veil can be pierced if the parent had used its
subsidiary to evade the parent’s existing obligation, this
would not apply where the obligation (say on a loan to the
creditor) only ever applied to the subsidiary.
 Nor could the courts pierce the veil merely because the
parent and subsidiary formed a single economic unit, nor
because ‘justice’ might be served by veil piercing: DHN and
Adams v Cape.

What about the parent’s liability for its subsidiary’s torts?

 After Chandler, tort law did seem to be moving in this
direction.
 However, the post-Chandler case law, in Unilever, Lungowe
and Okpabi have substantially restricted the circumstances
where parents will be held liable for their subsidiary torts:
sufficient interference must be proved.
 A well-advised and organised parent can easily avoid this
danger.
‘The veil piercing doctrine is Disqualification
so narrow, and so
unpredictable, that it
provides no protection for a
company’s creditors.
However, other aspects of
company law, such as the
directors’ disqualification
regime and the rules on
raising and maintenance of
capital – are far more
effective in protecting
creditors.’ Discuss.
a) ‘A parent company should For part (a) have some discussion of whether a parent company
be liable for any injuries should be held liable for injuries inflicted by the parent’s subsidiary.
negligently inflicted by its Should parents be liable?
subsidiaries. Unfortunately,  It might note economic arguments - parent liability might
despite the decision in reduce excessive risk taking, but also decrease investment.
Chandler v Cape plc [2012]  It might note moral arguments – can parents be seen to be
EWCA Civ 525, UK law is
moving away from this
position.’ Discuss.
b) ‘The case of Prest v
Petrodel Resources Ltd
[2013] UKSC 32 has made the
law regarding the piercing of
the corporate veil much
more certain, but much less
effective.’ Discuss.
A parent company which
exercises control over a
morally responsible for harm inflicted by their subsidiaries?
 It might note ‘distributional’ arguments – that parents have
deeper pockets and can spread losses more widely.
As to current UK law,
 a good answer might start with Chandler v Cape.
 This imposed a duty of care on a parent where the Caparo
test is met, and offered four ‘indicia’ for identifying when
that will be so.
 A very good answer would show awareness of the more
restrictive post-Chandler case law.
 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.
 Lungowe and AAA v Unilever both seem to suggest a parent
will be liable only if it has itself been responsible for
managing the subsidiary activity which gives rise to the tort
(or at least has designed and imposed the policy which
produces the tort).
For part (b)
 a good answer would begin with Prest, and explain the main
elements of the Supreme Court’s judgement.
 It would emphasise the court’s acceptance that there is a
doctrine of veil piercing in UK law, but probably as a remedy
of last resort.
 It should note the restriction of veil piercing to situations
where a controller uses a company under her control to
evade an existing obligation.
 This restricted scope of veil piercing continues to exclude
some grounds which had in the past been accepted as
grounds for veil piercing (e.g. single economic entity or
justice of the case) which were arguably rather vaguer. A
 good answer might still ask how precise the ‘evasion’
ground itself is (e.g. when exactly does an obligation arise).
 It would then consider whether veil piercing has become less
effective as a result of this narrower approach (which did not
start with Prest, but was already clearly evident in, for
example, Adams v Cape).
 It might note that the ineffectiveness of veil piercing proper
is arguably softened by the court’s supposed ability to use
the ‘concealment principle’ but this perhaps creates as much
uncertainty of its own.
begin by
 asking whether a parent company that is controlling its
 subsidiary will be held liable
for any torts that the
subsidiary commits.
Moreover, such a parent will
also be liable for any
contractual debts incurred by
the subsidiary, in accordance
with the so-called “single
economic entity” principle.
To what extent do you agree
with the above statement?
DERIVATIVE CLAIMS
‘The derivative claim is a very
ineffective way of ensuring
that directors comply with
their duties. It would be much
better if each shareholder
subsidiary would be held liable for torts committed by its
subsidiary.
 It is true that, in some circumstances, a parent can owe a
duty of care to those who might be injured by the negligence
of its subsidiary.
 This is first established in Chandler v Cape. Chandler imposed
a duty of care on a parent where the Caparo test is satisfied,
and offered four ‘indicia’ for identifying whether the Caparo
test was likely to be met.
However,
 It is not quite accurate to suggest that a parent which
controls its subsidiary will always be liable for its subsidiary’s
torts.
 For one thing, the Chandler indicia don’t necessarily require
the parent to be in control of the subsidiary.
 And the post-Chandler cases, such as Okpabi, Lungowe,
Vedanta, and AAA v Unilever, while putting more emphasis
on control, require that the parent be controlling the
particular activity which causes harm, rather than requiring
the parent to be generally in control of all its subsidiary’s
activities.
Moving to the second half of the question,
 it is not true that a parent controlling its subsidiary is likely to
be held liable for its subsidiary’s contractual debts.
 The ‘single economic entity’ ground for veil piercing was
rejected in both Adams v Cape and Prest v Petrodel.
 Moreover, VTB Capital v Nutritek suggests that even where
the veil can be lifted, it should not be done in order to
impose on a shareholder a contractual liability incurred by
their company.
 A good answer would explain when the veil can be pierced,
post-Prest, and show how this is a much narrower ground
than the question suggests.
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 CA 2006, showing the conditions
could bring a personal claim
against a misbehaving
director for any loss the
shareholder suffers as a result
of that misbehavior.
Unfortunately, such personal
claims against directors are
impossible in the UK.’ Discuss.
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.
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.
 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.
Do the rules governing explain the nature of a derivative claim, and the purpose behind it –
derivative claims require  permitting a shareholder to sue a director for breach where,
reform and, if so, how? at least in some circumstances, the company itself is
unwilling to sue.

 Explain the introduction of the statutory derivative claim in

Part 11 CA 2006 to replace the previous common law
action.
 Describe and explain the main elements of Part 11 and
examine the conditions which must be satisfied for a
shareholder to bring such a claim, including especially the
claimant’s obligation to get permission to continue the
claim, and 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 what
proportion of claims that are started are actually given
permission to continue (less than half).
 It 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.

 A good answer would ensure it not only describes, but also

offers some evaluation, of the statutory regime and its
application by the courts.
 Possible points of criticism might include the widening of
the grounds on which a derivative claim can now be
brought (s.260(3)), whether ‘wrongdoer control’ remains a
condition, the ability of the majority to excuse a breach and
thereby forestall a claim, the ability of wrongdoers to vote
on an authorisation, whether courts are influenced by the
views of the board in applying, for example, the
‘hypothetical director’ test, or the ‘decision of the company
not to sue’.
 Mention might also be made of the rules governing
costs/indemnity orders.
 Finally, good answers would include some indication of how
they think the criticisms they have made of the current
regime might be addressed.

‘When directors breach their explain (very briefly) how directors owe duties to their company and
duties in small companies,
there is little chance of a
shareholder being able to
bring successful proceedings
under section 994 Companies
Act 2006 in respect of that
breach of duty. It would be
much better if the shareholder
could bring a personal action
against the misbehaving
director for the drop in the
value of her shares caused by
the breach of duty.
Unfortunately, such a
personal action against a
director is impossible in UK
company law.’
explain how the key issue raised by the question is how these duties
can be enforced by shareholders.
The first issue is whether a shareholder can use a s.994 action to
complain about a breach of duty. A good answer would summarise
what a shareholder must establish to succeed under s.994 and use
this discussion to test whether a shareholder is likely to succeed if
she is complaining about a breach of duty.
First, shareholders must be complaining of ‘the conduct of the
company’s affairs’. Breaches of duty by directors would definitely
fall within this test. Second, they must show that the breach of duty
‘prejudices their interests’. It might note how a shareholder’s
interests are wider than their legal rights and note the broader
definition of interests in quasi-partnership companies (Ebrahimi;
and O’Neill v Phillips). Again, a breach of duty likely to be seen as
prejudicing a member’s interests, especially in a quasi-partnership.
A good answer might note that conduct that prejudices the
interests ‘of the members generally or of some part of the
members’ now suffices under s.994. So, the fact that all members
may be equally affected by the breach does not prevent one
particular member bringing a s.994 claim. Finally, the conduct must
unfairly prejudice the member’s interests. Again, this is likely to be
satisfied (unless, perhaps, the member bringing the claim was
themself implicated in the breach of duty).
A good answer might then note that the preceding analysis,
suggesting that a s.994 action is in fact possible for breach of duty,
is borne out by the case law, with a number of s.994 actions being
brought, successfully, for such breaches: Re Elgindata; Re London
School of Electronics and so on. A good answer might say a few
words about the remedies for breach of s.994, noting that typically
these involve a ‘buyout’ (Biagioli), rather than requiring the director
who has breached their duties to pay compensation for that breach
(whether to the company or to the shareholder).
That discussion of ‘remedies’ might provide a good link into the
second part of the question, asking whether shareholders should be
allowed to bring a personal action against directors for breach of
their duties. A good answer would explain how an action under
s.994 is not a personal action against the director – it does not sue
the director, nor does it claim compensation from the director for
the harm their breach of duty has caused.
A good answer would then 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;
s.170(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
against the director for ‘reflective loss’ (Johnson v Gore Wood;
Marex).

Reasons for UK law’s current restrictions on such personal actions

might be analysed – such as avoiding the ‘floodgates’ problem of
multiple actions from a single breach of duty; ensuring some 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.