Separate Legal Personality.

        A shadow director is any person in accordance with whose directions or instructions the directors of a company are accustomed to act., The court may under this provision make an order for a contribution on the company’s assets by a director or shadow director in circumstances where it cannot be proved that he knowingly and fraudulently carried on the company’s business with intent to defraud the company’s and that he was therefore guilty of fraudulent trading.

DEF Ltd should be advised that since there seems to be no evidence of fraud by XYZ Ltd and TAR Ltd wrongful trading  appears a more likely basis for the imposition of personal liability upon them if XYZ can be regarded as a shadow director.It seems probable that XYZ Ltd exercised this degree of control over Clare and the section might apply. . Furthermore,the standard of determining what XYZ Ltd should or should not have known is that of general knowledge, skill and experience which might reasonably be expected of any person in their position and so it combines both a subjective and objective standard. The question is whether XYZ ltd has exercised sufficient skill- undoubtedly; they might be at fault if some degree of activity or active supervision is expected from them.  From the question, we can draw inference that the directors should have concluded from the foreseeable risks and increasing debts of TAR ltd that liquidation was inevitable and where they failed to take reasonable steps to reduce loss, they may be liable and may have to contribute to the company’s assets to pay its debt owed to DEF Ltd.        

OBJECT CLAUSE

The capacity of a company to perform acts and enter into contracts is prescribed by the objects clause in its memorandum of association. By virtue of s 2 (1) of the companies Act 1989,  the memo of a registered company must state the objects for which it is incorporated, mainly for the purpose of defining the authority of the directors and other agents of the company  and the company must be  accordingly incorporated only for the purpose of pursuing those objects. An object clause typically contains objects, which are the businesses a company is empowered to carry on and powers which are the acts a company is permitted to do in pursuit of its objects. A company acts outside its powers (ultra vires) if it carries on any business or exercises any power not authorised in its object clause. In Rolled steel products holdings v British steel corporation.  it was held that it is not possible for a company to give its directors or other agents’ authority to cause it to enter into any transaction which is not for the purposes of, or reasonably incidental to, attaining or pursuing the company’s objects as set out in its memorandum. And any director who is responsible for entering into a transaction outside its objects is liable to replace the money the company expended on the transaction ( Re Lands Allotment Co. [1894] 1 Ch 616)

According to Lord Parker of Waddington in Cotman v Broughmana court may take a different view of what is within or outside a company's object depending on whether the question before it is

(a) One of equity between the company and its member or whether to wind up the company for loss of substratum

             (b) One of law between the company and another person i.e whether the company is bound by      a particular contract.

      When deciding whether transactions between a company and an outsider can be repudiated, a court         is likely to take a wide view of what is within the company's object, and consequently a narrow view    of what is ultra vires. The common law consequences of both ultravires acts and acts which exceed the diectors’ authority have been affected by the s35 of the Companies Act 1989.

Advising TAR Ltd

Turning to the issue of TAR purchasing computer disc to sell, the question is whether it is ultra vires under s35 Companies Act1985.s35 states that the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s memorandum. To determine this, one would need to see the objects clause of the company. The object clause of the company states that its sole activity is was to buy and sell telephones. Since there are no express powers given in the memorandum to purchase and sell computer discs the extent of TAR Ltd implied powers to do this  must be determined .It was held in Attorney General v Great eastern Railway that whatever can fairly be regarded as whatever may be fairly regarded as incidental to, or consequential upon, those things which the legislature has authorised, ought not to be held by judicial construction ultra vires. However it was held in Evans v Brunner, Mond and Co Ltd, it was held that " When an act of the company is challenged on the ground that it is beyond the powers of the company the challenge is not disposed of by proving that the act is beneficial to the company, it must be established that it is an act the doing of which is authorised by the company's constitution. .

  If the purchase of the computer discs is found to be ultra vires it would seem that s35 CA 1985 will probably protect the third parties (i.e DEF Ltd). XYZ Ltd would be bound unless Clare has exceeded any limitations put onto her authority by the board. If she has then she will become personally liable to restore the company's funds except if the shareholders ratify his act by a special resolution. Nevertheless s35A will protect DEF Ltd and the section states that in favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, is to be deemed to be free of any limitation under the company’s constitution. This s35B CA provides that third parties to a transaction do not have to make enquiries about any limitations that have been put on a director’s powers. This provision also extends to the Agency rule applied in the case of Freeman & Lockyer v Buckhurst Park Properties which states that when those authorized to run a company hold a person out as having authority to undertake particular tasks, then a third person who relies upon that representation is entitled to assume that the person held out as ostensible authority to act. The result is that XYZ Ltd probably has no option but to honour the contract in any case, causing it liable to pay the debt. The question is whether the payment of that debt could or should be recovered from Clare. The sole purpose of a resolution seems to be to absolve the directors from liability. While s35(3) permits the company to ratify an ultra vires act, it must do so by passing a special resolution. Furthermore such ratification does not relieve a director of personal liability and a separate special resolution has to be passed in order to do so. If the majority do not support the passing of the resolution, then the resolution is invalid and the director remains personally liable. However indicating from the facts in question, any contracts entered by TAR Ltd had to be approved by Andy who is acting on behalf of XYZ Ltd. This means that since Claire is accustomed to act in accordance with XYZ Ltd directions and as regards contracts, habitually complies with the directions or instructions given by their managing director (Andy), XYZ Ltd remains a shadow director OF TAR Ltd and will be liable to pay the money the company expended on the transaction applying the principle in Re Lands Allotment Co

     

APPOINTMENT AND REMOVAL OF DIRECTORS IN THE ARTICLES OF ASSOCIATION

When a company is registered, the shareholders of the company possess the authority to determine, how the company will operate and be operated. The shareholders generally give away their power to run the company in the articles.s14 states that the articles bind the company and the members as though signed and sealed by each member. In Wood v Odessa Waterworks Co It was held that this provision must be read as if also deemed the company to have signed and sealed by every member. However s9 gives the company the power to alter its articles by special resolution thus, any  provision in a company’s Article which purports to limit the  exercise of the statutory power to alter the articles have no effect. The articles of a company may authorise the appointment of a director for any period, however long or short, and the appointment is valid if made consistently with the articles, however, neither the members nor the board of directors of a company have inherent powers to remove directors before the normal expiration of their period of office in the absence of a power to do so in the articles. If the articles do not specify the duration of the director’s appointment, however he holds office at will, and may be dismissed by an ordinary resolution passed by the members at any time .Nevertheless, even if the other directors’ motive for removing a director is an improper one the board resolution removing him from his office is effective to terminate his appointment. By s303(1) of  the Companies Act 1985, every company has the statutory power to remove any director before the expiration of his period of office by a ordinary resolution passed by a general meeting of which special notice is given notwithstanding anything in its articles. The Act does not define an ordinary resolution for this purpose, to the board is uncertain but is has been construed in Bushell v Faithas namely, a resolution passed by a simple majority of the votes cast in accordance with the rules governing the voting rights attached to shares which are laid down by the companies articles. When the company is notified that a member intends to move a resolution for the removal of a director it must inform the director concerned. If a director is removed under statutory power and the vacancy thereby caused is to be filled   at the general meeting at which the director is removed, special resolution to fill the vacancy must be given

Advising Andy

S14 Companies Act 1985 gives contractual effect to the memorandum and articles between members inter se, and between members and the company. The effect is every member has a contractual right to enforce the observance of the articles In the instant case the relevant article provides that Andy is to be director, the right is therefore enforceable if it affects the member in his capacity as a member  and prima facie Andy has no action on the basis of the contract contained in the articles.

There are however further possibilities, Andy may be able to bring an action as a member to have the articles enforced this will result in his being reinstated as a director being incidental to the action. There is no direct authority in Andy’s favour although the House of Lords in Quinn & Axtens v Salmon upheld the plaintiff’s injunction as a member although it affected him principally as a director.

Any provision in the articles purporting to make them unalterable is void, however, By the same token, shareholders may enter enforceable agreements as to how they will vote in the event of a resolution to alter the articles. there is no objection to voting rightsThere is no information about Andy’s voting rights, however if by the Company’s articles the shares owned by Andy carry additional or multiple voting rights as compared with the shared of Clare and Brian, he may use his voting rights to defeat the resolution for his removal and the attribution of multiple voting rights to Andy is valid even though its effect is to take the power which the other members would have otherwise had to remove him from office 

As a shareholder, Andy has potentially two remedies, under s459 he may petition the court alleging that the affairs of the company are being , have been or will be conducted in such a way as to be unfairly prejudicial to his interests. Interests in this context have been held to be interests as a member . Interests of a member can include a legitimate expectation that where he has ventured capital on the understanding that he would participate in management, he would continue as director (Re A Company No 00477 of 1986. In Re London School of Electronics  Ltd it was held that exclusion from management can from the basis of an unfair prejudice application. Andy could well argue that attempts to dismiss him would be unfairly prejudicial .By virtue of s461, the courts has an unlimited discretion as to the appropriate order upon hearing of a petition under s459 alleging unfairly prejudicial conduct .If such is the case, a court could order any dismissal to be invalid under but the powers of the are not limited to any particular remedy. Andy should also be advised that mere removal alone will not suffice and so much depends on the basis upon which he became a member of XYZ Ltd.

 Alternatively he may bring proceedings under s122 (1) (g) Insolvency Act 1986 and may petition the courts for a just and equitable winding up of XYZ Ltd

 The House of Lords in Ebrahimi v Westbourne Galleries Ltd held that exclusion from participating in management was recognized as a ground for just and equitable winding up. Andy is attempting to invoke an equitable jurisdiction and so the court will be interested in whether or not he has ‘clean hands’ and has delayed in seeking his remedy. However since Andy has not yet been dismissed he should present an interim petition to the court asking that the affairs of the company be frozen until full hearing.

      Advising John

Literally s14 appears to create a contract between the company and its members to observe all the terms of the article: Hickman v Kent. However the courts have generally refused to enforce non-membership rights. In Eley v The Positive Government Security Life Assurance company ltd (1876) 1 Ex D 88 it was held that s14 could not be used to enforce the right, contained in the articles to be a company solicitor. It was held that a third party cannot enforce a provision in the articles to obtain a benefit in them intended for him accordingly john may not be able to seek any action .

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