COMPANY LAW This page intentionally left blank COMPANY LAW Third Edition BRENDA HANNIGAN, MA, LLM, Solicitor (Ireland) Professor of Corporate Law University of Southampton 3 3 Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Brenda Hannigan 2012 Th e moral rights of the author have been asserted First Edition published 2003 Second Edition published 2009 Impression: 1 All rights reserved. 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Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work. Preface Th e three years since the last edition of this work have not seen any slackening of the pace in the world of company law, a dynamic subject which combines a rich historic case law with a responsiveness to the business challenges of today, an environment where a moratorium on legal development is not an option, particularly not in the face of the fi nancial crisis engulfi ng Europe. One level of response to the crisis has been a fl urry of corporate governance initiatives, all refl ected in a completely rewritten Chapter 5. Linked to those initiatives are changes to disclosure requirements, especially to narrative reporting, accounts and audit and these changes are addressed fully in Chapter 16. Th e fi nancial crisis has also meant a super- abundance of insolvency cases, some of which have had at least the incidental benefi t of giving the higher courts the opportunity to review some core doctrines, such as the anti- deprivation rule, considered at length in Belmont Park Investments Ltd v BNY Corporate Trustee Services Ltd (S Ct, 2011), with the commercial pragmatism on view there also visible in the Supreme Court ruling in Progress Property Co Ltd v Moorgarth Group Ltd (2010) on unlawful distributions, and in the Court of Appeal ruling in BNY Corporate Trustee Services Ltd v Eurosail (2011) on the meaning of balance sheet insolvency. Less pragmatic, perhaps, was the Supreme Court approach to the defi nition of ‘subsidiary’ in Enviroco Ltd v Farstad (2011) while all corporate groups will look with interest, and perhaps some concern, at the recent Court of Appeal ruling in Chandler v Cape plc (2012): groups are discussed in Chapter 3. On directors, there is much of interest in the fi nely balanced 3–2 Supreme Court decision in Re Paycheck Services 3 Ltd (2010) on corporate directors and in the Court of Appeal’s review of the position of nominee directors in Hawkes v Cuddy (No 2) (2009), discussed in Chapters 6 and 9 respectively. Unsurprisingly, in the current climate, a robust approach to directors’ confl icts of interest can be detected and recent important cases such as Commonwealth Oil & Gas Co Ltd v Baxter (CSIH, 2009), O’Donnell v Shanahan (CA, 2009) and Premier Waste Management Ltd v Towers (CA, 2011) are all discussed in detail in a reworked Chapter 11. Th e invaluable judgment of Lord Neuberger in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (2011) brings clarity and certainty to the diffi cult issue of the recoverability of secret profi ts and bribes and Chapter 13 has been recast to refl ect this and other recent decisions. Th e responsiveness of ‘soft law’ to business and political pressures can be seen in the signifi cant changes to the Takeover Code prompted by the contentious takeover of Cadbury plc by Kraft in 2010. Th ese changes are considered in Chapter 26, together with the use of schemes of arrangements for restructurings, while the merits or otherwise of pre-pack administrations are considered in Chapter 23. Shareholder remedies remain centre stage with the courts beginning to tease out the basis on which permission might be granted to bring a derivative claim. Th e fl oodgates have not opened with the availability of the statutory procedure, as some predicted, but cases such as Iesini v Westrip Holdings Ltd (2009), Kiani v Cooper (2010) and Stainer v Lee (2010), all discussed in Chapter 18, off er the beginnings of a judicial framework for such claims. At the same time, in Hawkes v Cuddy (No 2) (2009) the Court of Appeal has revived the winding up on the just and equitable ground remedy which had somewhat fallen off the radar. Th e decisions in vi PREFACE Re Sunrise Radio, Kohli v Lit (2009) and Oak Investment Partners XII v Boughtwood (2010) show that the unfairly prejudicial remedy still has great elastic qualities in terms of the abuses which it encompasses and the available remedies. For the traditionalist, there is even something of a resurgence of authorities on piercing the corporate veil, but in a modern commercial setting (disputes within shipping groups with assets being moved around to evade enforcement steps against particular subsidiaries): the discussion in Chapter 3 has been updated accordingly. Hence the tradition of a rich seam of case law on topical corporate issues continues and this edition attempts to bring the reader fully up to date with these developments. Th ese matters merely serve, however, to highlight the many interesting and challenging issues in company law which come before the courts as all stakeholders continually jostle for position. Whatever the basis of a particular dispute, a unifying theme arising from the fi nancial crisis, and evident in both the courts and in the regulatory reviews and developments taking place, is the universal question—in whose interests are companies to be run? Many commentators have argued in recent years that the fi nancial crisis calls for a rethinking of capitalism to make companies work for society and not just to enrich the few. Arguably, an adaptation of company law to refl ect broader constituencies can already be seen in areas like takeovers, insolvency, directors’ duties. Hopefully, these debates help the student reader to understand that company law is not just about the legislation, important though that is, nor about the cases, important though they are, but it is also about the role played by company law in achieving the broader political, economic and social goals of a democratic society. I am most grateful to the OUP editorial and production teams for their attentive, professional assistance at every stage of this work. Th e law is stated as of 1 February 2012. Brenda Hannigan Professor of Corporate Law University of Southampton 20 May 2012 Outline contents Table of statutes xiv Table of statutory instruments xxxvii Table of European legislation xli Table of cases xliii Part I The Corporate Structure 1 Formation, classifi cation and registration of companies 3 2 The framework of company law 20 3 Corporate personality 40 4 The company constitution 79 Part II Corporate Governance—Directors’ Roles and Responsibilities 5 Corporate governance—board structure and shareholder engagement 105 6 Board composition—appointment and removal of directors 139 7 A statutory statement of directors’ duties 153 8 Duty to act within constitution and powers 159 9 Duty to promote the success of the company 183 10 Duty of care, skill and independent judgement 203 11 Duty to avoid a confl ict of interest 221 12 Specifi c confl icts—CA 2006, Part 10, Ch 4 260 13 Directors’ liabilities for breach of duty 274 Part III Corporate Governance—Shareholders’ Rights and Remedies 14 Membership and the incidents of membership 303 15 Decision-making and company meetings 325 16 Informed shareholders and stakeholders—disclosure and the limited company 347 viii OUTLINE CONTENTS 17 The unfairly prejudicial remedy and the minority shareholder 383 18 The derivative claim and the rule in Foss v Harbottle 417 Part IV Corporate Finance—Share and Loan Capital 19 Share capital—capital raising and payment 451 20 The doctrine of capital maintenance 484 21 Loan capital—secured creditors and company charges 532 Part V Corporate Rescue and Restructuring 22 Company voluntary arrangements 561 23 Corporate rescue—administration 577 24 Liquidation and dissolution—winding up the insolvent company 617 25 Directors’ liabilities and vulnerable transactions on insolvency 647 26 Corporate takeovers and reconstruction 680 Index 725 Contents Table of statutes xiv Table of statutory instruments xxxvii Table of European legislation xli Table of cases xliii Part I The Corporate Structure 1 Formation, classifi cation and registration of companies 3 A Introduction 3 B Company formation—companies limited by shares 8 C Company formation—companies limited by guarantee 13 D Private and public companies 13 E Re-registration of companies 16 F Groups of companies 17 G The registrar of companies and the public registry 19 2 The framework of company law 20 A The statutory framework 20 B The European framework 23 C European structures 36 3 Corporate personality 40 A A separate legal entity 40 B Disregarding the separate entity 45 C The corporate group—separate entities or single unit 54 D Corporate acts and liabilities 62 4 The company constitution 79 A Defi ning the constitution 79 B Content of the articles 81 C Amending the articles 83 D Interpreting the articles 95 E Enforcing the articles 96 F Supplementing the constitution—shareholders’ agreements 100