Acca F4 (En) Law Cases

Front 1

Re German Date Coffee Co

Back 1

The substratum of the company has gone – the only or main object(s) of the company (its
underlying basis or substratum) cannot be or can no longer be achieved.

Hint 1

The facts: The objects clause specified very pointedly that the sole object was to manufacture
coffee from dates under a German patent. The German government refused to grant a patent. The
company manufactured coffee under a Swedish patent for sale in Germany. A member petitioned
for compulsory winding up.
Decision: The company existed only to 'work a particular patent' and as it could not do so it should
be wound up.

Front 2

Re Yenidji Tobacco

Back 2

The company was formed for an illegal or fraudulent purpose or there is a complete deadlock in
the management of its affairs.

Hint 2

The facts: Two sole traders merged their businesses in a company of which they were the only
directors and shareholders. They quarrelled bitterly and one sued the other for fraud. Meanwhile
they refused to speak to each other and conducted board meetings by passing notes through the
hands of the secretary. The defendant in the fraud action petitioned for compulsory winding up.
Decision: 'In substance these two people are really partners' and by analogy with the law of
partnership (which permits dissolution if the partners are really unable to work together) it was just
and equitable to order liquidation.

Front 3

Ebrahimi v Westbourne Galleries

Back 3

Quasi-partnership situation. The understandings between members or directors which were the basis of the association
have been unfairly breached by lawful action

Hint 3

The facts: E and N carried on business together for 25 years, originally as partners and for the last 10
years through a company in which each originally had 500 shares. E and N were the first directors
and shared the profits as directors' remuneration; no dividends were paid. When N's son joined the
business he became a third director and E and N each transferred 100 shares to N's son. Eventually
there were disputes. N and his son used their voting control in general meeting (600 votes against
400) to remove E from his directorship under the power of removal given by what is now s 168 of the
Companies Act 2006 (removal by ordinary resolution).
Decision: The company should be wound up. N and his son were within their legal rights in removing
E from his directorship, but the past relationship made it 'unjust or inequitable' to insist on legal
rights and the court could intervene on equitable principles to order liquidation.

Front 4

re A Company

Back 4

An order for liquidation may only be made 'in the absence of any other
remedy

Hint 4

The facts: The facts were similar in essentials to those in Ebrahimi's case but the majority offered
and the petitioner agreed that they would settle the dispute by a sale of his shares to the majority.
This settlement broke down however because they could not agree on the price. The petitioner then
petitioned on the just and equitable ground.
Decision: An order for liquidation on this ground may only be made 'in the absence of any other
remedy'. As the parties had agreed in principle that there was an alternative to liquidation the
petition must be dismissed.

Front 5

Gibson v Barton

Back 5

Public companies must hold an AGM
every calendar year

Front 6

Salomon v Salomon

Back 6

Advantages of Being a Company as Distinct From a Partnership
• Separate legal personality

Hint 6

The facts: The claimant, S, had carried on business for 30 years. He decided to form a limited company to
purchase the business so he and six members of his family each subscribed for one share.
The company then purchased the business from S for £38,782, the purchase price being payable to the
claimant by way of the issue of 20,000 £1 shares, the issue of debentures, £10,000 of debentures and
£8,782 in cash.
The company did not prosper and was wound up a year later, at which point its liabilities exceeded its
assets. The liquidator, representing unsecured trade creditors of the company, claimed that the company's
business was in effect still the claimant's (he owned 20,001 of 20,007 shares). Therefore he should bear
liability for its debts and that payment of the debenture debt to him should be postponed until the
company's trade creditors were paid.
Decision: The House of Lords held that the business was owned by, and its debts were liabilities of, the
company. The claimant was under no liability to the company or its creditors, his debentures were validly
issued and the security created by them over the company's assets was effective. This was because the
company was a legal entity separate and distinct from S.

Front 7

Adams v Cape Industries

Back 7

Advantages of Being a Company as Distinct From a Partnership
• Separate legal personality

Hint 7

The facts: Mr Lee, who owned the majority of the shares of an aerial crop-spraying business, and was the
sole working director of the company, was killed while piloting the aircraft.
Decision: Although he was the majority shareholder and sole working director of the company, he and the
company were separate legal persons. Therefore he could also be an employee with rights against it when
killed in an accident in the course of his employment.

Front 8

Gilford Motor Co v Horne

Back 8

The courts may ignore the distinction between a company and its members and managers if
the latter use that distinction to evade their existing legal obligations

Hint 8

The facts: The defendant had been employed by the claimant company under a contract which forbade him
to solicit its customers after leaving its service. After the termination of his employment he formed a
company of which his wife and an employee were the sole directors and shareholders. However he
managed the company and through it evaded the covenant that prevented him from soliciting customers
of his former employer.
Decision: An injunction requiring observance of the covenant would be made both against the defendant
and the company which he had formed as a 'a mere cloak or sham'.

Front 9

Daimler v Continental Tyre and Rubber

Back 9

In time of war a company is not permitted to trade with 'enemy aliens

Front 10

Re F G Films

Back 10

The question of nationality may also arise in
peacetime, where it is convenient for a foreign entity to have a British facade on its operations

Hint 10

The facts: An English company was formed by an American company to 'make' a film which would obtain
certain marketing and other advantages from being called a British film. Staff and finance were American
and there were neither premises nor employees in England. The film was produced in India.
Decision: The British company was the American company's agent and so the film did not qualify as
British. Effectively, the corporate entity of the British company was swept away and it was exposed as a
'sham' company.

Front 11

DHN v Tower Hamlets

Back 11

The principle of the veil of incorporation extends to the holding (parent) company/subsidiary relationship.
Although holding companies and subsidiaries are part of a group under company law, they retain their
separate legal personalities. There is also some precedent for treating separate companies as a group
(DHN Food Distributors v Tower Hamlets LBC 1976) although doubt has since been cast on this by
subsequent cases.

Front 12

Kelner v Baxter

Back 12

Pre incorporation contracts by promoters

Hint 12

A contract for the delivery of goods was made on behalf of a company yet to be formed, with the aim that the company could sell the goods on incorporation. When the bill went unpaid the court held that the company could not be liable and that the promoter who had acted on behalf of the company was personally liable to pay the bill.

Front 13

Erlanger v New Sombrero Phosphate Mining Co

Back 13

Breach of duty by promoters - ie non-disclosure - allows the company to rescind the contract and recover the
purchase price

Hint 13

If the promoter does not make a proper disclosure of legitimate profits or if they make wrongful profits the
primary remedy of the company is to rescind the contract and recover its money: Erlanger v New
Sombrero Phosphate Co 1878.

Front 14

Jubilee Cotton Mills v Lewes

Back 14

If irregularities in formation procedure or an error in the certificate itself are later discovered, the certificate is nonetheless
valid and conclusive:

Front 15

Hickman v Kent or Romney Marsh Sheepbreeders Association

Back 15

The articles constitute a contract between:
• Company and members
• Members and the company
• Members and members

Hint 15

The facts: The claimant (H) was in dispute with the company which had threatened to expel him from
membership. The articles provided that disputes between the company and its members should be
submitted to arbitration. H, in breach of that article, began an action in court against the company.
Decision: The proceedings would be stayed since the dispute (which related to matters affecting H as a
member) must, in conformity with the articles, be submitted to arbitration.

Front 16

Eley v Positive Government Life Assurance Co.

Back 16

The articles do not create a contract between the company and third parties

Hint 16

The facts: E, a solicitor, drafted the original articles and included a provision that the company must
always employ him as its solicitor. E became a member of the company some months after its
incorporation. He later sued the company for breach of contract in not employing him as its solicitor.
Decision: E could not rely on the article since it was a contract between the company and its members and
he was not asserting any claim as a member.

Front 17

Greenhalgh v Arderne Cinemas

Back 17

To subdivide shares of another class with the incidental effect of increasing the voting strength
of that other class.

Hint 17

The facts: The company had two classes of ordinary shares, 50p shares and 10p shares. Every
share carried one vote. A resolution was passed to subdivide each 50p share into five 10p shares,
thus multiplying the votes of that class by five.
Decision: The rights of the original 10p shares had not been varied since they still had one vote per
share as before.

Front 18

Southern Foundries v Shirlaw

Back 18

No outside contract shall prevent a change of the Articles, but company may become liable for breach of that contract

Hint 18

The facts: In 1933 S entered into a written agreement to serve the company as Managing Director for ten
years. In 1936 F Co gained control of the company and used their votes to alter its articles to confer on F
Co power to remove any director from office. In 1937 F Co exercised the power by removing S from his
directorship and thereby terminated his appointment as Managing Director (which he could only hold so
long as he was a director).
Decision: The alteration of the articles was not a breach of the service agreement but the exercise of the
power was a breach of the service agreement for which the company was liable.

Front 19

Allen v Gold Reefs of
West Africa

Back 19

Even if proposed alteration of the Articles adversely affects only one member, it may still be valid.
If the purpose is to benefit the company as a whole the alteration is valid even though it can be shown that
the minority does in fact suffer special detriment and that other members escape loss

Front 20

Dafen Tinplate
v Llanelli Steel

Back 20

Alterations of the Articles allowing compulsory purchase of minority’s shares will be ( normally ) disallowed

Hint 20

The facts: The claimant was a minority shareholder which had transferred its custom from the defendant
company to another supplier. The majority shareholders of the defendant company sought to protect their
interests by altering the articles to provide for compulsory acquisition of the claimant's shares.
The new article was not restricted (as it was in Sidebottom's case above) to acquisition of shares on
specific grounds where benefit to the company would result. It was simply expressed as a power to
acquire the shares of a member. The claimant objected that the alteration was invalid since it was not for
the benefit of the company.
Decision: The alteration was invalid because it 'enables the majority of the shareholders to compel any
shareholder to transfer his shares'. This wide power could not 'properly be said to be for the benefit of the
company'. The mere unexpressed intention to use the power in a particular way was not enough.

Front 21

Shuttleworth v Cox Brothers

Back 21

Alterations of the Articles allowing expulsion of defrauding director – OK

Hint 21

The facts: Expulsion of director appointed by the articles who had failed to account for funds was held to
be valid.

Front 22

Sidebottom v Kershaw Leese

Back 22

Alterations of the Articles allowing expulsion of competing members – OK

Hint 22

The facts: The articles were altered to enable the directors to purchase at a fair price the shareholding of
any member who competed with the company in its business. The minority against whom the new article
was aimed did carry on a competing business. They challenged the validity of the alteration on the ground
that it was an abuse of majority power to 'expel' a member.
Decision: There was no objection to a power of 'expulsion' by this means. It was a justifiable alteration if
made bona fide in the interests of the company as a whole. On the facts this was justifiable.

Front 23

Bushell v Faith

Back 23

Possible to prevent alteration of the Artciles by weighted voting rights

Front 24

Ewing v Buttercup Margarine

Back 24

Company name may be disallowed as a tort ( passing-off )

Hint 24

The facts: The claimant had since 1904 run a chain of 150 shops in Scotland and the north of England
through which he sold margarine and tea. He traded as 'The Buttercup Dairy Co'. The defendant was a
registered company formed in 1916 with the name above. It sold margarine as a wholesaler in the London
area. The defendant contended that there was unlikely to be confusion between the goods sold by the two
concerns.
Decision: An injunction would be granted to restrain the defendants from the use of its name since the
claimant had the established connection under the Buttercup name. He planned to open shops in the south
of England and if the defendants sold margarine retail, there could be confusion between the two
businesses.

Front 25

Ashbury Railway v Riche

Back 25

Member can object

Hint 25

The facts: The company had an objects clause which stated that its objects were to make and sell, or lend
on hire, railway carriages and wagons and all kinds of railway plant, fittings, machinery and rolling stock;
and to carry on business as mechanical engineers. The company bought a concession to build a railway in
Belgium, subcontracting the work to the defendant. Later the company repudiated the contract.
Decision: Constructing a railway was not within the company's objects so the company did not have
capacity to enter into either the concession contract or the sub-contract. The contract was void for ultra
vires and so the defendant had no right to damages for breach. The members could not ratify it and the
company could neither enforce the contract nor be forced into performing its obligations.

Front 26

Re City Equitable Fire Insurance

Back 26

A director is
expected to show the degree of skill which may reasonably be expected from a person of his
knowledge and experience. The standard set is personal to the person in each case. An accountant
who is a director of a mining company is not required to have the expertise of a mining engineer,
but they should show the expertise of an accountant.

Front 27

Dorchester Finance Co v Stebbing

Back 27

The duty to be competent extends to non-executive directors, who may be liable if they fail in their duty.

Hint 27

The facts: Of all the company's three directors S, P and H, only S worked full-time. P and H signed blank
cheques at S's request who used them to make loans which became irrecoverable. The company sued all
three; P and H, who were experienced accountants, claimed that as non-executive directors they had no
liability.
Decision: All three were liable, P's and H's acts in signing blank cheques were negligent and did not show
the necessary objective or subjective skill and care.

Front 28

Cook v Deeks

Back 28

If the directors defraud the company and vote in general meeting to approve their own fraud, their
votes are invalid

Front 29

IDC v Cooley

Back 29

As agents, directors have a duty to avoid a conflict of interest. In particular:
• The directors must retain their freedom of action and not fetter their discretion by agreeing to
vote as some other person may direct.
• The directors owe a fiduciary duty to avoid a conflict of duty and personal interest.
• The directors must not obtain any personal advantage from their position as directors without the
consent of the company for whatever gain or profit they have obtained.

Hint 29

The facts: C was Managing Director of the company which provided consultancy services to gas
companies. A gas company was unlikely to award a particular contract to the company but C realised that,
acting personally, he might be able to obtain it. He told the board of his company that he was ill and
persuaded them to release him from his service agreement. On ceasing to be a director of the company C
obtained the contract on his own behalf. The company sued him to recover the profits of the contract.
Decision: C was accountable to his old company for his profit.

Front 30

Regal ( Hastings ) v Gulliver

Back 30

As agents, directors have a duty to avoid a conflict of interest. In particular:
• The directors must retain their freedom of action and not fetter their discretion by agreeing to
vote as some other person may direct.
• The directors owe a fiduciary duty to avoid a conflict of duty and personal interest.
• The directors must not obtain any personal advantage from their position as directors without the
consent of the company for whatever gain or profit they have obtained.

Hint 30

The facts: The company owned a cinema. It had the opportunity of acquiring two more cinemas through a
subsidiary to be formed with an issued capital of £5,000. However the company could not proceed with
this scheme since it only had £2,000 available for investment in the subsidiary.
The directors and their friends therefore subscribed £3,000 for shares of the new company to make up the
required £5,000. The chairman acquired his shares not for himself but as nominee of other persons. The
company's solicitor also subscribed for shares. The share capital of the two companies (which then
owned three cinemas) was sold at a price which yielded a profit of £2.80 per share of the new company in
which the directors had invested. The new controlling shareholder of the company caused it to sue the
directors to recover the profit which they had made.
Decision:
(a) The directors were accountable to the company for their profit since they had obtained it from an
opportunity which came to them as directors.
(b) It was immaterial that the company had lost nothing since it had been unable to make the
investment itself.
(c) The directors might have kept their profit if the company had agreed by resolution passed in
general meeting that they should do so. The directors might have used their votes to approve their
action since it was not fraudulent (there was no misappropriation of the company's property).
(d) The chairman was not accountable for the profit on his shares since he did not obtain it for himself.
The solicitor was not accountable for his profit since he was not a director and so was not subject
to the rule of accountability as a director for personal profits obtained in that capacity.

Front 31

Peso Silver Mines v Cropper

Back 31

Directors will not be liable for a breach of this duty if the company explicitly rejected the opportunity they took up

Front 32

Howard Smith v Ampol Petroleum

Back 32

If the irregular use of directors' powers is in the allotment of shares the votes attached to the new shares
may not be used in reaching a decision in general meeting to sanction it.

Hint 32

The facts: Shareholders who held 55% of the issued shares intended to reject a takeover bid for the
company. The directors honestly believed that it was in the company's interest that the bid should
succeed. The directors allotted new shares to a prospective bidder so that the shareholders opposed to the
bid would then have less than 50% of the enlarged capital and the bid would succeed.
Decision: The allotment was invalid. 'It must be unconstitutional for directors to use their fiduciary powers
over the shares in the company purely for the purpose of destroying an existing majority or creating a new
majority which did not previously exist'.

Front 33

Bamford v Bamford

Back 33

If the majority approve what has been
done (or have authorised it in advance) that decision is treated as a proper case of majority control to
which the minority must normally submit.

Hint 33

The facts: The directors of Bamford Ltd allotted 500,000 unissued shares to a third party to thwart a
takeover bid. A month after the allotment a general meeting was called and an ordinary resolution was
passed ratifying the allotment. The holders of the newly-issued shares did not vote. The claimants
(minority shareholders) alleged that the allotment was not made for a proper purpose.
Decision: The ratification was valid and the allotment was good. There had been a breach of fiduciary duty
but the act had been validated by an ordinary resolution passed in general meeting.

Front 34

Hogg v Cramphorn

Back 34

If the majority approve what has been
done (or have authorised it in advance) that decision is treated as a proper case of majority control to
which the minority must normally submit.

Hint 34

The facts: The directors of a company issued shares to trustees of a pension fund for employees to prevent a
takeover bid which they honestly thought would be bad for the company. The shares were paid for with
money belonging to the company provided from an employees' benevolent and pension fund account. The
shares carried 10 votes each and as a result the trustees and directors together had control of the company.
The directors had power to issue shares but not to attach more than one vote to each. A minority shareholder
brought the action on behalf of all the other shareholders.
Decision: If the directors act honestly in the best interests of the company, the company in general
meeting can ratify the use of their powers for an improper purpose, so the allotment of the shares would
be valid. But only one vote could be attached to each of the shares because that is what the articles
provided.

Front 35

Pavlides v Jensen

Back 35

Directors aren't liable for negligence

Hint 35

It was alleged that directors had been guilty of gross negligence in selling a valuable asset of the company at a price greatly below its true market value. It was stated that the since the sale of the asset in question was not beyond the powers of the company and since there was no allegation of fraud on the part of the directors or appropriation of the assets of the company by the makority shareholders in fraud of the minority, the action did not fall within the admitted exceptions to the rule in Foss v Harbottle. The sale of the asset was not beyond the powers of the company and it was not alleged to be ultra vires. It was held that a minority shareholders' action was not available since it was open to the company, on the resolution of the majority of the shareholders to sell the mine at a price decided by the company in that manner. Additionally, it was open to the company, on the resolution of the majority of the shareholders, to commence legal proceedings against the directors on the basis of negligence or error of judgment in selling the asset at an undervalue. Therefore in this case the court held that the directors' mere gross negligence in exercising their duties, when they had not benefited from that negligence, does not amount to fraud.

Front 36

Daniels v Daniels

Back 36

Directors aren't liable for negligence, But if negligence results in personal benefit

Hint 36

The minority shareholders had brought an action against the two directors of the company who were the majority shareholders. It was alleged that the company, according to the instructions of the directors, sold the company's land to one of the directors, who was the spouse of the other, at an undervalue. The spouse then sold the land later on for a much greater sum. It was held that the exception to the rule in Foss v Harbottle enabling a minority shareholder to bring an action against a company for fraud, where no other remedy was available, should include cases where even though there was no fraud expressly alleged, there was a breach of duty by the directors and majority shareholders, to the detriment of the company and the benefit of the directors. Templeman J concluded at p. 414: "a minority shareholder who has no other remedy may sue where directors use their powers intentionally or unintentionally, fraudulently or negligently, in a manner which benefits themselves at the expense of the company".

Front 37

Panorama Developments v Fidelis Furnishing Fabrics

Back 37

A company secretary has ostensible authority to sign contracts connected with the administrative side of the company‘s affairs

Hint 37

The court held that a company secretary has ostensible authority to sign contracts connected with the administrative side of the company‘s affairs such as employing staff, ordering cars and so forth.