MEMBERS AND FINANCE

OF A COMPANY
1
M.A. Bùi Hà Hạnh Quyên
hanhquyen2606@[Link]
Faculty of Economics, Academy of Finance, Hanoi, Vietnam
 30111 : [Link] .
-
tu? high ( giang thi c. ki)

Choi study
Content
-
case
✓
2

I. MEMBER
II. MAJORITY RULE AND MINORITY PROTECTION
III. COMPANY MEETING
IV. CAPITAL
3 I. MEMBER
Hi
• The subscribers of a company’s memorandum are deemed to
have agreed to become members of the company.
=> They are the first members of company
• Every other person who agrees to become a member of a
company, and whose name is registered on its register of
members, is a member of the company.
4 Characteristics

• The members have invested money in the company and they

ban chat cat twins oteii ta nhai doin ti
'
hope to profit from the company.
'

→ .

• The members are owners and they have control of the company. → nbñ
cottons
• While the company exists, the profit
held
to the members might come
'
ce

in the form of a dividend paid on their shares or from their

investment increasing in value.
• Upon liquidation, the surplus assets of the company will be
divided amongst some or all of the members.
tsan [Link]
'
cho members
[Link] _
, tra .
 ngtad da so' -
v8 aing quan trong

II. MAJORITY RULE AND

5
MINORITY PROTECTION
udé chung and
cty
'

• r
A member of a company who owns the majority of the company’s
voting shares can ensure that an ordinary resolution is passed.
• If two shareholders each own 50% of a company’s shares then they
will both have negative control of the company. In other hand, if
complete deadlock is reached then the court may well wind the
company up (if either party so requests) on the ground that to do so
would be just and equitable. vote cud h ed % cé dong 1in I
→
vote to thing
' ' '
→ .

• When the shareholders who control the company defraud the minority
shareholders or distribute all of the company’s profits as salary at the
expense of paying any dividends, if there were no exceptions to the
rule the minority would be powerless.
at doing lad nliat gag a'1h to! ei doing ±
'
nhi wide seu duk
→ biépphap bue?
ra
6 1. THE RULE IN “Foss v Harbottle” (1843)
Khoi
chi ai dy ed ai g-.

• If a wrong is done to a company then only the company has the

-

right to sue in respect of that wrong, and that the court will not
interfere with the internal management of a company while the
company is acting within its powers.
• This rule prevents the huge number of legal actions which would
inevitably arise if any member of a company had the power to
sue on the company’s behalf. The rule also upholds a general
principle of company law – that if the members of a company
are in disagreement they should resolve this at a general meeting
of the company.
 Foss v Harbottle (1843)
7 [Link] their tan
cod [Link] oak
gotta
.

• Fact: Hank chip ?i

no bo? 2
Statuary company
.

Foss together with Starkie Turton were shareholders in the “Victoria Park
Company”. The company was incorporated by an act of Parliament. They brought
an action against their directors for misappropriation of the company’s assets. The
claimants alleged that the property of the company had been misapplied and wasted
and various mortgages were given improperly over the company’s property. They
asked that the guilty parties be held accountable to the company and that a receiver
be appointed
[Link]#.ngXaie chico ok bhd! [Link]
'
→
cty
• Issue: Whether or not a company’s right to sue can be exercised by it’s
cooperate characters in their own capacity or in the name of the company.
• Held: As a general rule, a shareholder can not sue for wrong done to a
company or to recover money as damages due to it, unless the action is taken by
the company itself. The proper plaintiff in this action, a wrong done against a
company, is the company. → giani thien Cu Cho toa air ngñnh tu phapl toa ah Ii can
,
→ thiép
? boo
'

no .

tu? do
.

the [Link] ri ton Hong g- KD ← what g- .

 [Link]?-1 :

8 2. FRAUD ON THE MINORITY

tha h doin khd? Kien
'
'
idk nhaln Sei
otén Toi
tag
an
.

'
tak
dong
→
Cale Idn i .

• If the majority of the shareholders were to divide the assets of the company amongst
themselves, to the exclusion of the minority, as mentioned above, then it is clear on the
case law that this would amount to a fraud on a minority.
• When a wrong is done to a company, a shareholder who is allowed to sue despite the rule
in Foss v Harbottle is said to have a right to bring a derivative action. He is bringing an
action for the company’s benefit, or to enforce a right of the company, and joins the
company as a defendant because those who control the company will not allow the
company to act as a claimant. (The member’s right to sue derives from the right to sue
which the company has not exercised.) If the action is successful a remedy is given to the
company rather than to the claimant. Any judgment gained is enforceable by the other
shareholders and is binding upon them.
9 In decide to grant permission, the court will
have regard to:
• Whether the member is acting in-
good faith
• The importance that a person promoting the success of the
company would attach to it mid off [Link]

• Whether authorisation or ratification by the company is likely

! the
• Whether the company has dicided not to pursue the claim cty duo?meeekhd
'
co
? Kien

• Whether its member could pursue the claim in their own right
rather than on behalf of the company
• The views of members with no personal interest in the matter.
god Iii bein 73
 Example:
10
Cook v Deeks [1916]
• Cook was one of 4 directors in a construction company. The company
had often done profitable business with the Canadian Pacific Railway
Company and had built up a good relationship with this company.
When a new contract with the Canadian Pacific Railway Company
had finished being negotiated, the other 3 directors made the contract
ill
[Link]
ñ 1¥
# in their own names rather than in the company name. The 3 directors
al ntñn
(who owned 75% of the shares) then passed a resolution that the
↓ xui company had no interest in the new contract. Cook claimed that the
ah tgiaxet resolution was ineffective and that the benefit of the contract should
toa
↓
ich du
.

cty go to the company.

lo?
too bei
'

• Held. The resolution was ineffective and the company was entitled to
the benefit of the contract.
 gotta hotoignhan dank
'
3 Ki ten ca nhñn

cty ti boo g- to?i

'
-
coin 1am dung 75% oté thing qua :-c
an hop [Link] .

Cook ki gotod nein cd g- khd? g- .

licari grand the toa air cxphai the hi .
 Example:
11
Menier v Hooper’s Telegraph Works (1874)
• E. Limited (E) had allotted 5.325 ordinary shares, 3.000 of these being
allotted to H. Limited (H). E had won a concession from the
Portuguese government to lay a transatlantic cable from Portugal to
Brazil. H were to manufacture the cable. H then found that they could
make more money by laying the cable for another company, and H
managed to persuade the Portuguese government to transfer the
cable-laying concession to this other company. To prevent E from
suing, H used its 3.000 shares to wind E up. The claimant, a minority
shareholder, brought an action on behalf of himself and the other
minority shareholders.
• Held. The claimant was entitled to bring the action. H had committed
a fraud on the minority and had to account to E for the profits made.
 h tha! [Link] : whom' ai dong nho'

E -
H :
cty me ( H) -
con (E)
.

trong hotoñg : H - E do! take

Hui Idi ich [Link] g-

toa air vain
'
→ ai h
'
12 Example:
Clemens v Clemens Bros Ltd [1976]
• The claimant held 45% of the issued share capital of a company and her aunt held 55%.
The company operated in the building trade and was very successful. The articles provided
that if either shareholder wished to sell her shares, the other had the right to buy them. The
claimant therefore had negative control of the company and if she outlived her aunt would
eventually have total control. The aunt and four non-shareholders were directors. The five
directors proposed to issue a large number of new shares to themselves and to a special
employees’ trust. The effect of this would be that the claimant’s holding would fall to
below 25%. The aunt used her shares to pass the resolution. In the three years prior to the
resolution the directors’ total emoluments exceeded the company’s pre-tax profit. The
claimant brought an action against the company and her aunt, asking for the resolution to
be set aside.
• Held. The resolution was set aside. It was a fraud on the minority, its real purpose being to
deprive the claimant of her control of the company. The aunt was bound by equitable
considerations which could prevent her from exercising her control of the company in
certain ways.
Mtbf
13 3. STATUTORY PROTECTION OF THE
MINORITY
• Those with a minority shareholding in a company are given
various statutory rights.
• Company Act 2006: Section 292; 303; 633

#dthom bvé g-b.i

.
'
• tag
thiai sit .
 '
Kho
→

[Link] baiig
14
→nh"t
4. UNFAIR PREJUDICE
aid cho
✗ 1 nhoni '
co
doing at
the" .
coñg

• Any company member, or the personal representative of a

deceased member, may petition the court on the grounds that
the affairs of the company are being, or have been, or will be,
conducted in a manner which is unfairly prejudicial to the
members generally or to particular members.

- phat brief dining to

? .

\
but doing gidi .
15 If the court agrees that the conduct is unfairly
prejudicial it can:
• Order the company to behave in a certain way in the future.
• Prevent the company from doing certain acts.
• Order the company to sue for a wrong done to it.
• Order some members of the company, or the company itself, to
buy the shares of other members at a fair price.
• Make any order which it sees fit.
 Example:
16
O'Neill v Phillips [1999]
doing vien •
Mr Phillips (P) owned a 75% shareholding of a company called Pectel Ltd. Mr O'Neill
>
tic
( Enghien (O) started to work for the company in 1983. In 1985, P was so impressed with O's
work that he made him a director and gave him 25% of the shares. They had an
informal chat in May 1985, and P said that one day, he hoped O could take over the
so whole management, and would then be allowed- to draw 50% of the company's
ophaiai €
profits. P retired and O took over management. There were further talks about
phañ
I
.

increasing O's actual shareholding to 50%, but this did not happen. After 5 years the

€-
business declined. P came back in and took business control. He demoted O to be a
a'lhaiathi . branch manager of the German operations and withdrew O's share of the profits. thnhii
- →

However, O remained a director. O claimed unfairly prejudicial for the termination of citric
trg .

equal profit-sharing and the alleged repudiation agreement for the allotment of more ↓
shares.
thing [Link]
• Held: uaiteogotid
The House of Lord held that there was no firm agreement to increase O's shareholding uietytr
and so he had no legitimate expectation of such action that the law would enforce. The
most important feature of the case was that P had never actually agreed to transfer O the
shares of the company, so it could not be unfair that he had decided not to, because he
17 5. PETITION FOR WINDING-UP
1 am tag tho tho? [Link] [Link]?et-sgiai the city .

• A court can wind a company up on the grounds that it is just

and equitable to do so.
• Even a single shareholder can petition the court to do this.
• Whether or not it is just and equitable to wind a company up is a
question of fact in every case and will depend upon the
circumstances of the case.
• Example: Ebrahimi v Westbourne Galleries Ltd (1973).
18 III. COMPANY MEETING

meetings

D
1. tripe of
 =D)
[Link] hay '

1. TYPE OF MEETINGS the havin k°qua

' '

19 co
2M

f
bait bug
Company
ap
Public
dying -
.

{
-

all members dai ho? 1h5 rien ( [Link]?[Link]'d-dngthg-nien1naim/1lari )

4 thang otaii
nain think .

ngoñ thing
Ichi nain GA .

[Link]?id--ngbaithg--
_
-

day h&i bait thg chis [Link] BOD

quadri BOD
.

ex : →

→ bine cel chit [Link] .

{
BOD us

presˢ
-

ai 1- logical [Link] then

'
ath
phñn I

-
a
tried be? toa ah
[Link] .
20 2. NOTICE OF MEETINGS 9¥ die? voila:p thai
[Link] toni
[Link]
.

• Proper and adequate notice must be sent to all those who are entitled
←

to attend any meeting.

€ public )
'
c.v cud their 1g company
21
3. TYPES OF RESOLUTIONS
phair :
voting share .

Bia Y' 9-
bien nʰÉ oh?a teen high
'
da so ≤
'
vote
ngtid
.

phi
' →

kitgia Kaj g-
,
.

=
nghi guyett thing thinking
.

class meeting
it apt day ,
eh'
ray
✗

solvency clause
#
•
ghi qyé't bait' 1h5

c-
→

[Link]
 '
vote" '
ath
af [Link] 1 at I
chi us
.

nhon¥ :

⑤
't d? ¥9
'

22 Written resolutions →
nghi .
gauge day I
Ma
Kalp deng public company
tÉohuihg#
.

c.
bi hi
.
gi
Si doing too% doing y →
? , thong qua
'
dz .

• Anything which in the case -of a private company might be done

by resolution in a general or class meeting may be done by
resolution in writing, signed by, or on behalf of, all members
who would be entitled to attend and vote at such meeting.
C-
• However, resolutions for the removal of directors or auditors -

before expiry of their term of office cannot be the subject of

written resolutions. [Link] bi I gotod
→ ᵗᵈ [Link] 15
'
Ii d? [Link] " →
kiém toad uien
• The written resolution requires-
unanimity.
&! ok
digit
'

doing [Link] tyit → ma .

class !
→
Rapt drug ngtid
23 IV. CAPITAL

d- .

7.
24 1. SHARE CAPITAL v2! phiri → chai ban' do nhéotaii
ti .

• The capital which is invested in a company limited by shares by

shareholders is call its share capital.

teach [Link] L mua

phat phat tea Ichi

'
cé →

Mua .
25 Liability

t@[Link].F
• Shareholders must pay at least the full nominal value of any
shares issued to them.
• But where, as is quite common, the company issues shares at a
“premium”, that is, at more than the nominal value of the
shares, then the holders of those shares will be liable to pay the
amount owed over and above the nominal value.
chieh rien
'
Hi try Cao hin nominal
phat
'
ga
.

nominal
→ mush
'
mma → phat trap
g-
.

premium
.
26 Interest
• The share is a form of property of shareholders.
• What shareholders possess is a right to receive a part of the
profit generated by the business of company
• This right is contingent upon the company making a profit and
the directors recommending the declaration of a dividend.

nails
til phai gut
' '
co ≈ as
 27 Mutual covenants [Link]
at
[Link]
[Link]
qua
.

• Shares are personal property and are transferable in the manner

provided for in the company’s articles of association.
listed
doing
'
5% → a-

[Link] phat d? thing qua BOD

 2. TYPES OF SHARE CAPITAL
28 ' thi
Co

case
study

[Link]
→

tide •
£
→
ai
→
✗ II.
→
 out hot tile toad .

1. tong se
' '
vein to! [Link]#to?ngdzghinh.a-ntr?nbie-nbanthoa
÷ [Link]

Types Definition trong [Link] cty .

29
hip trig gia ←
'
tu:c
Nominal or This is the figure stated in the company’s memorandum of
-

authorised association. It sets the maximum number of shares that the

'
←
grant tiép
-

Nian 2 company can issue, together with the value of each share.
→
gti .
capital

ed the chia
'
Issued or allotted This represents the nominal value of the shares actually issued by
Ah , Mj ←
the company. [Link] htai
v◦ñ'
"
that ñ lain bad .
←

ap
'
dung .
capital co .

Ii [Link] so
'
lari chai ban!
This is the proportion of the nominal value of the issued capital
Paid up capital
chia ki hap Thanh I toah actually#paid by the shareholder → then di chitra do to! htai
aiding
'
= :c té mi eat
$50.000 di that toad Ichi mua
$ 86.600 Where a company has issued shares as not fully paid up, it can at a
Cia hit [Link] [Link]'n
a
Uncalled capital later time make a call on those shares. In other words, uncalled
mua
,

do u ai chuk tra ok
[Link] ai phñnchaobann Waimea capital is the amount remaining unpaid on issued capital.
.
' '
. .

So vin
' '
ca
'
phat
'
co h d-ky' mua . Called up share Some companies may issue shares I to investors with the
←
capital understanding they will be paid at a later date

Vain du?
' tut The unpaid capital then becomes a reserve, only to be called upon if
unpaid capital
'

Ling ti nai
←
Reserve capital the company cannot pay its debts from existing assets in the event of
*
thou tunan us hmna I share capital .
its liquidation
$30.000 moi vai
≈

coin trail riot

da.
hiking to! a Ichi
dy coin →
phai tea ngay .
 car

Paid up unpaid uncalled cap

cap
-
dntivao thcidieñi hit [Link]?toan
uncalled
unpaid
'
•
nai
'
hit hap :
→ .

• chela hit hap unpaid

'
: t uncalled .

TE dñtva'
tried
hotly
'
meat chuk
→
'
tra
30 3. TYPES OF SHARES céphaii
=
:

} [Link] .
 [Link]?[Link]
Complain
31
thieañ :

First second third

• Ordinary shares: These shares are sometimes referred to as ‘equity in the

company’. Ownership of ordinary shares entitles the holder to attend and -

#
vote at general meetings Éhroñg 1 vote =

Got:L : ☒ • Preference shares: These are shares with dividends that are paid out before

[
common stock. If the company enters bankruptcy, preferred stockholders are
=
entitled to be paid from company assets before common stockholders. Most
gotoi dividend ☒ preference shares have a fixed dividend, while common stocks generally do
+
viii. →

ordinary share not. Preferred stock shareholders also typically do not hold any voting rights,
'
but common shareholders usually do. tic Ichi arguing KD [Link] tan
→ tea triad cho coiphaiiñndñ
→ → .

vote
Ii co
'
g-
←
• Deferred shares: This type of share postpones the rights of its holder to
=

thing thing g.
'
a
High I
'
.
dividends until after the ordinary shareholders have received a fixed return.
g- .la: tchlh
'
lied
-#y Gi vote
ordinary shares
'
a co .
si ≈ .
32
33 Other shares
teal hinh
phai cindaihoanlai pheidig third uagvoñ
.

'
co
.

I
• Redeemable shares: These shares issued on the understanding
that they may be bought back by the company. Redemption may
be at the option of either the company or the shareholder,
depending on the terms of issue. %
tgian gia Sei twig
'

Cam kit naiig G

1 a .

Iai
'

Dñ ten [Link] botaii

the '

.a dy ,
co mna vs

phiéu cty Ii ting dry 19

gia*
'
do' c
'

us
Neii San tgian → mua
gia
'

Iai suit that how so

bank.
 phén
'
Choi so
Chai bark E g- aid
34 4. ISSUE OF SHARES -

him cud cty .

the' Chai bail them phat

'

mi tha ed
co

z
.

• Directors generally are not allowed to issue shares without the

authority of the members.
• In practice, however, it is usual for them to be granted general
authority to issue the company’s shares as they see fit, under the
Association of Articles.
• The directors must not use their power to issue shares for an
improper purpose.
 Example:
35
Hogg v Cramphorn (1967)
• Fact
Hogg approached the board of directors of Cramphorn Ltd. to make a takeover offer
for the company. The directors believed that the takeover would be bad for the
company and so they issued new shares to a trust so that they could outvote Hogg's bid
for majority control.
• Held
The new shares issued by the directors are invalid. The directors violated their duties
as directors by issuing shares for the purpose of preventing the takeover. The power to
issue shares creates a fiduciary duty and must only be exercised in order to raise
capital and not for any other purposes such as to prevent a takeover. The act could not
be justified on the basis that the directors honestly believed that it would be in the best
interest of the company. The improper issuance of shares can only be made valid if the
decision is ratified by the shareholders at a general meeting.
36 5. PAYMENT FOR SHARES [Link]
[Link]

kin qtr.i
moi lien tang 2 .

bank lot 24g

~

, qua bank
( been 1-3
.

• Shares are only treated as paid up when the company has

received money orI
money’s worth. tien Hao chalo mud chi ok Ichi
→ → dei phu:3
di [Link] ok tiéñ .

• Any shortfall in payment will have to be made up in the future

and this is especially true if the company =
goes into insolvent
liquidation.
-

[Link]#
37 6. CAPITAL MAINTENANCE
[Link] ion ti bi ki
god nlnñphap by ué catch .
.

phai
' '
→
win ai dy ei .

• Once the capital has been received by the company, there are
important rules controlling what can be done with capital, or,
more accurately, controlling what cannot be done with it.
ait lo"
→
phi ho
:p .
38 6.1. Capital reduction :
giant uoñ
'
co
phat .

da! bit vii.

nghi
'
q
→ giant
(
.

• A company may reduce its capital in any way, if so authorised in

its articles, by passing a special resolution to that end.
• Any proposal to reduce a company’s capital is subject to
confirmation by the court, on such terms as it thinks fit. In
considering any capital reduction scheme, the court will take
into account the interests not just of the members and creditors
of the company, but of the general public as well.
[Link] cain tag /giani void
'
.

Giani voi thi phai to child hop adding

'
[Link] die [Link]
→
.
céthi → take example [Link] us khoain vain chela ok [Link] →
licari got

39 There are three particular ways in which such

capital can be reduced by:
bit base hop dzi hiii connoting → [Link] die
'

[Link]
→

• removing or reducing liability for any capital remaining as yet unpaid, that is,
deciding that the company will not need to make any call on that unpaid capital -

in the future; ✗ ? unpaid capital cho shareholder dki a cheek hoañ thank a shareholder
vain
'
mua
→ oa no →

d? hiking g- to! tri [Link]!

• cancelling any paid up share capital which has been lost through trading and is
unrepresented in the current assets of the company, that is, bringing the
balance sheet into balance at a lower level by reducing the capital liabilities in
acknowledgement of the loss of assets; ghi ✗ cat Khoa'n thee lot ✗aig ra -0 kg kdoanh
→ a .

É vein .

• paying off any already paid up share capital that is in excess of the company’s
requirement, either now or in the future, that is, giving the shareholders back
some of the capital that they have invested in the company.
loin tea [Link] plain iron gap cho Cai citing
'
40 6.2. Redemption of shares Mira [Link] phair moi
dy phat
hash

{
• Where shares are redeemed, the amount of the company’s issued
share capital is diminished accordingly.→ Mua lqi thank coñg giani issued capital →

d-if • Redeemable shares can only be issued if the company issued

guy other shares. µ ¢, a. , um paganawe shares , 1£ *i*n
,

@ → a
, .

child? [Link] Ichi di that tool Ii ok tri'd Kiat

• The shares must be fully paid. → .

unpaid cap cud redeemable sang reserve .

• Redeemable shares and the premium can only be redeemed out

of distributable profits of the company or out of the proceeds of
a fresh issue of shares made specifically for the purpose of the
redemption. nguñi tai chih [Link] ate
'
la.i Redeemable share chico the
'
→ mua

'

region 1¥ [Link] there

'

lñy ti 2 _ San .

\ vñl ti [Link] chino bad share f- .

case study -

30ps -
d? [Link] [Link]?u
'
4
y
13-3-41
41 6.3. Purchase of own shares
Mua Lai shares let phai Redeemable shares .

• A limited company may if authorised to do by its articles '

purchase its own shares. chinna nu ai phai dñ

thah toan
'
→

• The shares must be fully paid and any purchase must be

financed out of distributable profits or the proceeds of a fresh
issue. Mma Igi
boring \ LAST
_ .

'
won ti chai hag share ¥ .
[Link]
42 3 distinct ways in which companies can buy
their own shares:
• Through a market purchase, conducted under the rules of
recognized investment exchange
• Through an off-market purchase, which effectively relates to any
other method of purchase
• Through a contingent purchase contract, which essentially relates
to options to buy shares
43

" →
hu% cts
" "

" 9- "
'

Ñt
hᵈ"
µ; ion
'
tip Trung so ofaii tri
→ trail Iain kiang g- So"
cty hiii .
→ kid eine trong again hay _ [Link]
( chi phiictg '

a'◦ 7 '
tot
g- .

(tang gia gia

 Public company [Link] [Link]
HE to? tchih eté phat
' ' -
.
.

mma an
\ hi hi ksoalt
private _ :
Ko cain ,
.

6.4. Financial assistanceohoto buy shares

.

phai tsaoiehoctyT3Cnon_ime s [email protected]

44 oté
'

thing qua cat [Link] ,

. ..
e' 1-

• It covers gifts, loans and any other transactions that allow the
purchaser of the shares to use the company’s assets to pay for those
shares. chi tai hihsu?
' '

aim →
[Link]
• English law makes it illegal for a public company to provide financial
-

assistance to any person to enable them to buy shares in the company.

- Private companies are allowed to provide financial assistance, as long
_

as it does not come out of the company’s capital, but only from profits '
there!
available for distribution. obit child si? gli cud ni ycaii nguñi taichih phai lag ti LN
'
San
→ , :

• The company, and any officer, in breach of the section is liable to

#criminal sanctions. [Link] hits:i public company :
-

• The most significant exception allows the company to finance share

purchases as long as it is done in
o good faith and in the pursuit of some -

'
larger purpose. → ed the' che
-

giant [Link] lo!

Ii
 '
b at tic g- and gated etg .

phñn
:

45
6.5. Distribution/dividend law
Dividends may only be paid out of
accumulated profits and not if the
effect would be to reduce the
company’s net assets below the value
of its share capital.
A dividend paid in breach of this rule
is unlawful and ultra vires. A director
who knew (or ought to have known)
that the payment amounted to a
breach is liable to repay the
dividends.
tea d tic San Ichi chitra train be cphi
' ' ' ' Tai dat
,
ti , . . .

.
 C
chapter
→ ti toe Re Exchange Banking Co., Flitcroft’s Case (1982)
46
.

• Fact:
The directors of the Exchange Banking Company had presented account
reports before shareholder meetings, which were untrue. Between 1873
and 1878 they paid half yearly dividends totalling £3,192 when they knew
items in the accounts were bad debts, irrecoverable and consequently
there were no distributable profits. The shareholders acted on the reports
and declared dividends. The liquidator issued a summons against five
former directors.
Held:
Sir George Jessel MR and Brett LJ held unequivocally that the dividends
were recoverable in full, and would have been even had the company
remained solvent.
47 7. LOAN CAPITAL
É
• A trading company has an implied power to borrow money for
#
business purposes through directors or BOD. and 1ha ke ' y a-
'
'
ca
'

• Although outsiders who lend money will not be affected by the

company’s lack of capacity to make the loan, the directors who
authorise the loan might - 0
be personally liable if loss is caused to
-

the company.
 chino? d? otani bad
'
ten
48 7.1. Debentures :
gig uay
- s

debentures
hic thi ihr tien h ed
[Link] aing
.

• Debenture often used by companies to raise money, that is paid

back over a long period of time and at a fixed rate of interest. A
debenture is usually a formal legal document.
 do?
tu? There are certain distinctions between shares and
49
debentures:
 chip
'
oui chin?
50 7.2. Charge :
the →
trig boé
.
+2

ed debenture
' '

the choice diam

ed charge
.

• There is nothing to prevent the interest on debentures from

being paid out of capital if there is insufficient profit from which
to pay it. The person lending money to a company will want his
debenture to be backed up by security.
• There are two types of security for company loans: fixed charge
and floating charge.
51 Fixed charges :

oté
" ' '

d-
,chÑ
"

nhi mua no

doin Sid ang way

.

way

-
• This means the company mortgages assets to the creditor (the
debenture holder). tsan tain bad moi I d? chophelp ti
doing
'
tic
→ dry lid?
tu ? y
chef not
• Consequently, the company will not be able to dispose of, or
.

change the nature of, the property charged without the

permission of the debenture holder.
• The asset most commonly subject to fixed charges is land. →
52 Example

• A Co Ltd wants to borrow £120.000 from the bank. The bank

lends the money but takes a fixed charge on the company’s
factory. As long as the company is repaying the loan as agreed it
will retain possession of the factory and can use it in the
ordinary way. The company cannot however sell the factory
without the bank’s permission. Furthermore, if the company
fails to repay the debt the bank can sell the factory and deduct
what it is owed from the proceeds of sale.
53 Floating charges

• A floating charge permits a company to deal with the charged

assets without the permission of the chargeholder until such
time as the charge crystallises (thereby becoming a fixed charge)
con ?
[Link]#tam-nd.gfaok0caiiykieiitiohuPno?
.

no

If coñg = a vain ton tai ! Ui Sae .

54 Example
• C Co Ltd, which manufactures TV, has already granted a fixed charge over
all those assets, such as its factory and its company cars, which it does not
need to sell. In addition, C has a warehouse stocked with TV ready for sale. C
-

is owed money by various creditors and that it has a large stock of materials
with which it makes the TV. None of these remaining assets could be the
subject of a fixed charge without crippling the company’s activities. C would
not be able to sell the TV already manufactured, or work the raw materials
into TV, without the permission of the fixed chargeholder. If such permission
was granted the chargeholders would then lose their security. But the
finished TV, the money owed and the raw materials are worth a great deal. A
a-
creditor might well therefore take a floating charge over these assets, secure
in the knowledge that if C did not repay him he could recoup his loan by
calling in the charge, selling the assets charged, and deducting what he was
owed from the proceeds.
 '
Fixed charge : the
'
chip ñ tsar's
dry Ii eat bad ( TSCA )
[Link]:L .

Khoo
liang : - MUL
K Phi Fixed charge Lai Floating charge
\ thanh phoim P
→ → .

Thing thing :

Fixed dñ hap Iai suit thgi Kham' Idn'

:
, ,
vay .

'
lai suit
Floating :
ngari hap ,
cao ,
Khani
way
nho'
 thai diém
:
gloating → fixed .
55

Fixed charge Floating charge

Debtor cannot deal with the charged assets without the permission of the chargeholder Cannot become a floating charge Debtor can deal with the charged assets without the permission of the chargeholder Can become a fixed charge
56 Crystallisation
• A company can continue to sell assets over which a floating charge
has been granted up until the time of ‘crystallisation’.
• If the assets which were the subject of the charge are sold after
crystallisation then the chargeholder can recover them from the
party to whom they were sold.
57 Crystallisation occurs automaticall:
baiting bot nhieen receiver tie '
ksoat
'
tiéi Hy

[Link]?cpha' sad
58 7.3. Priority of charges :
thi ti thank toad .

• Legal charges rank according to the order of creation. : [Link]

• Equitable charges also take priority according to the order of creation.
• A legal charge created before an equitable one has priority.
• An equitable charge created before a legal charge will only take
priority over the latter if, when the latter was created, the legal charge
had notice of the equitable charge.
• A fixed charge ranks higher than existing floating charges unless the
floating charge expressly prohibits the creation of another charge over
the same property and the person taking the later fixed charge knew
that this was the case.
wing bi fixed or
gloating →
[Link] hating
banotaii

a
'
debenture in lien

fixed > gloating

fixed ban chin fixed

7 San Ichi
crystallision
59