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Law Notes Advanced Company Law Notes

Company Law Cases

Updated Company Law Cases Notes

Advanced Company Law Notes

Advanced Company Law

Approximately 65 pages

Full set of lecture notes, full set of crib sheets, and document describing key cases with discussion....

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Advanced Company Cases: Orthodontic Centre v MD Courtney Orthodontics Ltd: Facts: Their practices were separate but, through their respective companies, both were shareholders in The Specialist Orthodontic Centre Ltd, a service company which employed staff, met liabilities and held assets for the othodontic practices. They were 50:50 shareholders. They agreed that their joint occupation of the premises, and joint involvement as shareholders and directors in the service company should cease - considerable bitterness, disharmony, intransigence and conflict. An application was made by the Courtney interests pursuant to s241(2) that the Specialist Orthodontic Centre be placed in liquidation on just and equitable grounds. An application was made by the Tobin interests that the Courtney interests be required to sell its shares at a fair market value to be determined by an independent expert pursuant to s174. Discussion: It is well known that s174 and s241 overlap, basis of "just and equitable". Noted Thomas v H W Thomas Ltd that the remedy of winding up a company "is a blunt and drastic remedy ringed with difficulties and disadvantages...". There has to be some form of oppression in the guise of burdensome, harsh or wrongful conduct. But the Court's discretion is unfettered... here the company is viable, able to pay its debt and not trading in the usually accepted sense. It would be a radical step to order the company to be wound up simply because the two shareholders and directors have fallen out, and are no longer the joint recipients of the company's services. Mere disagreement or a falling out may not be sufficient to invoke the winding up remedy arising under the just and equitable test (Latimer Holdings v SEA Holdings). In Vujnovitch v Vujnovitch, however, the company was wound up on the just and equitable ground because the directors and shareholders were involved in a management deadlock. The disagreement was so great that the company was wound up. This was because only in unusual circumstances would the CA require the sale of an unwilling majority's interest to a minority shareholder. Observed in Marryatt v PC Home Hire, an order for the liquidation of a company is seen as something of a last resort, and if it is more appropriate for an order to be made under s174, then it is to be preferred. Result: s174 order, Tobin to acquire Courtney's shares. Sons of Gwalia Ltd v Margaretic: All judgements are included in the readings for this case. Could be studied quite in depth. Facts: Sons of Gwalia was a publicly listed mining company. They had failed to notify the Australian Stock Exchange that its gold reserves were insufficient to meet its gold delivery contacts, and that it could not continue as a going concern. The shares in the company were worthless. Margaretic argued that he was a victim of misleading and deceptive conduct. Discussion: Both appellants submitted that principles reflected in Houldsworth v City of Glasgow Bank supported their construction of s563A. They argued that it precludes a shareholder from proving in a windingup for damages for misrepresentation inducing any acquisition of shares unless the shareholder has first rescinded the mebership contract. Once the company has become insolvent, recission is not available. The principle in Houldsworth is famously elusive. The appellants submit that the respondent's claim is for a debt owed to him in his capacity as a member of the first appellant. Principle in Webb Distributors is relied upon by the respondent - claims by members will not be prevented for damages flowing from a breach of a contract separate from the contract to subscribe for the shares. Soden raised the same problem as the present case, and the HL reached the same conclusion as this case. The claim made by the respondent is not founded upon any rights he obtained or any obligation he incurred by virtue of his membership. Result: s563A does not embody a general policy that, in an insolvency, members come last. On the contrary, by distinguishing between debts owed to a member in the capacity as a member and debts owed to a member otherwise, it rejects such a general policy. The claim of Margaretic is not founded on any rights he obtained or any obligations he incurred by virtue of his membership. Macfarlane v Barlow: Facts: The Barlows held 77.5% of the shares, the Macfarlanes 22.5%. Salaries totalling $300K were paid to the Barlows between 1991 and 1994, when the company's net profit after the salaries averaged $500K. The premises from which the company operated were owned by Mara Investments Ltd, which was owned by the Barlows. Mara Investments was given an interestfree oncall loan from the company. The MacFarlanes sought leave under s165 to bring a derivative action against the Barlows for breach of s131, s133 and fiduciary duty. The Barlows argued that the breaches had been ratified. Discussion: For a s165 claim to succeed, the likelihood of success must be examined. In Vrig v Boyle Fisher J adopted the test suggested in Smith v Croft. The test is that which would be exercised by a prudent businessperson in the conduct of his or her own affairs when deciding whether to bring a claim. Such a decision requires one to consider such matters as the amount at stake, the apparent strength of the claim, likely costs and the prospect of executing any judgement. The evidence before the court is that the salaries are excessive. It is alleged that the relevant renumeration (salaries) were approved by the respondents in their capacity as directors of the company at the AGM of the companyu. The general position is that in the absense of provision otherwise in the Articles, the resolution of a majority of shareholders is binding upon the minority (North West Transportation Co Ltd v Beatty). That general proposition has been subjected to a number of exceptions. In Millers v Maddams the CA held that the use by the majority shareholder of his majority shareholding to approve excessive directors fees amounted to an appropriation of the company's funds and an abuse of the majority shareholder's powers. The respondents are not genuinely acting in the best interests of the company as a whole. There is clearly a conflict of interest between the respondents position as directors and their interests in Mara in relation to this. The claims proposed under s131 and 133 of the Act and breach of fiduciary duty could apply to this. Result: Appropriate to grant leave to bring a derivative action under s165 in this case. Wairau Energy Centre v First Fishing Company Ltd: Facts: Agreement for the sale and purchase of the shares in the appellant, Wairau. The vendors were two companies, Darlington and Von Tempsky, which were in some unexplained way associated with Cruise Corporation Ltd. The purchaser was Mr O'Malley. The contract between Darlington and O'Malley named Cruise as a partner, but not Wairau. Because of the tax liability, a management fee was elected. There was no agreement between Cruise and Wairau for the supply of management services, or that if there was, no services having been performed nothing was payable. Discussion: In the admitted absence of a contract between Cruise and Wairau the liability could only arise under the contract for the sale and purchase of the shares. The company was not named as a party to it, did not purport to enter into any covenant, and no one has purported to execute the document on its behalf. It was submitted that at the time of the covenant, control of the company was with Darlington, and that execution by the shareholders was sufficient to bind the company as well. The company's act is valid and binding if all the members concur in it. But this proposition is subversive of the fundamental principle of corporate personality. A company is a distinct personality from its members. For a company to be bound by a contract it must be a party to it. Result: Wairau is not liable to the respondent for the management fee. Westpac Securities Ltd v Kensington: Facts: Stream owned the certificate of title which was, at the material time in its possession. It was the whollyowned subsidiary of Leyland. The issue was whether BNZ could claim the security over the shares. Discussion: The often cited passage from Re Duomatic Ltd: "I proceed on the basis that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in a general meeting would be. In Salomon v Salomon Lord Davey stated: "Every member of a company assented to the purchase, and the company is bound in a matter intra vires by the unanimous agreement of its members.". The rule appears to reflect the view that it is unnecessarily formalistic to set aside a transaction which the very same people could have secured by prior resolution or subsequent ratification. So long as all those entitled to participate in a decision or a ratification of it all agree, the company is to be bound. It is necessary to determine whether Stream was bound by the acts of its ordinary shareholders without notice to the preference shareholder. If it is necessary to show unanimous assent, it woul dbe immaterial whether or not they are entitled to attend and vote at general meetings. The preference shareholder has no right to attend. The general principle has been stated in this court has requiring the unanimous consent of all members (Wairau). In that judgement Re Duomatic was cited, but no question arose as to the absence of assent of members not entitled to vote. Result: We conclude that the unanimous assent of the holders of the ordinary voting shares (not the preference shares) was sufficient to bind stream to the transaction. The shares were effectively pledged to BNZ. Estmanco Ltd v Greater London Council: Facts: The council owned a block of flats which it decided to sell on long leases, with one share allocated to each flat, shares in a nonprofit company to manage the flats. After 12 flats had been sold, the council changed its policy and decided that the remaining flat should be let to council tenants instead of sold on long leases. Initially the action was brought by the company, but the company wanted to discontinue it after a vote, comprising of a majority made up of the council. An exception to the rule in Foss v Harbottle was sought, derivative action against the council. Discussion: The rule in Foss v Harbottle is simple: If a wrong is done to a company, then it is the company alone which can decide whether or not to sue in respect of that wrong; and that decision must be made by the appropriate body. Directors of a company owe a fiduciary duty to the company, but the shareholders do not. When voting, a shareholder may use his voting powers as he likes, including to protect himself being sued by the company. Where the majority shareholder genuinely believe that it is in the best interests of the company, that is decisive, unless no reasonable shareholder in this position could hold that belief. The self interest of the council, though relevant, was not determinative. If the case falls within one of the exceptions to Foss v Harbottle, I cannot see why the right of the minorty to sue under the exception should be taken away from them, 'fraud on the minority' - abuse or misuse of power. In considering whether there is a fraud on the minority in this case, certain matters seem plain enough. I do not think that it can be reasonably said to have been established that is is, or could reasonably be though to be, for the benefit of the company that the action should be discontinued. The fact that the suppression of the action was so plainly in the best interests of the council.

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