Options for Imp as a Minority Shareholder & Distinction between Financial Distress and Liquidation

This document discusses the options available to Imp as a minority shareholder against Mr Jon in The Dragon Stories Ltd. It covers topics such as shareholder rights, derivative action, veto power, and unfair prejudice petition. Additionally, it critically evaluates the distinction between the main options available to a company experiencing financial distress and the detrimental consequences associated with the liquidation of a company.

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Contents
Q1. What are the options are available to Imp as a minority shareholder against Mr Jon?........................2
Introduction.................................................................................................................................................2
Shareholder of the Company.......................................................................................................................2
The Dragon Stories Ltd................................................................................................................................3
Foss v Harbottle...........................................................................................................................................3
Derivative Action.........................................................................................................................................3
Rights of the Minority Shareholders............................................................................................................4
The Veto power of the Minority shareholders............................................................................................5
Unfair Prejudice Petition.............................................................................................................................5
Action can be taken by Mr Imp as a minority shareholder..........................................................................6
2. Critically evaluate the distinction between the main options available to a company experiencing
financial distress that wishes to avoid going bankrupt and the detrimental consequences associated with
the liquidation of a company.......................................................................................................................7
Financial Distress.........................................................................................................................................7
Insolvency....................................................................................................................................................8
“Leyland DAF”..............................................................................................................................................8
Administration Process................................................................................................................................9
Liquidation...................................................................................................................................................9
Reference:.................................................................................................................................................10

Q1. What are the options are available to Imp as a minority shareholder against Mr Jon?
Introduction
A business organisation whether corporate or incorporated registered under the Companies Act,
2006 is known as a company. A company can be an unlimited or limited company, public or a
private company, having a share capital or limited by guarantee. A company is a distinct lawful
entity which is different from the member or shareholder of the company and the company has a
capacity to enter into any transaction which is relevant for the company.1
For the formation of any private company minimum one director is require and for the public
company two directors are obligatory.2
Shareholder of the Company
A shareholder is a person who embraces a minimum one share of the stocks of a company. The
shareholder has a right to vote in the company and they can be elected for a seat of directorate.
The shareholders and the corporation both are binding with each other according to the contract
made between the company and the shareholders of the company.3
Chapter 2 of the Companies Act, 2006 directs the obligations of the director that the directors are
bound to exercise their power with integrity and for the interest of the company under section
172(1) of the act. A director can be removed by the member of the company by passing an
ordinary resolution at a meeting. For the removal of any director, it is important that a meeting is
called by a shareholder or concerned person by giving a notice to all the shareholders and
directors for the removal of the director.4
1 Robert Miles, Robert Hildyard and Nigel Boardman (2010), Annotated Companies Legislation (Oxford University
Press, 2010).
2 Jonathan Reuvid, (2014), Investors’ Guide to the United Kingdom 2014/15 (Legend Press Ltd, 2014).
3 Paul L. Davies, (2015), Shareholders in the United Kingdom (European Corporate Governance Institute (ECGI) -
Law Working Paper No. 280/2015).
4 The Companies Act, 2006, Section 172(1)

The Dragon Stories Ltd
In the Dragon Stories Ltd., Mr Jon and Ms. Daenerys are the stockholders and the administrators
of the company as they hold a 40% share capital of the company. The residual shares are equally
distributed among a number of the employees of the company. Mr Imp is a minority shareholder
and also holds the accounting department of the company. While holding the accounts of the
company he spotted two issues regarding Mr Jon. Mr John was pocketing a large amount of the
company fund on the name of the event of the company and he was not obeying the duties of the
director as he failed to attend the board meeting of the company and also failed to inform the
clients about the assignments and publication and because of that may clients pull out the
potential deal from the company.
Foss v Harbottle
The power of the company vested or exercised by the organs of the company. Generally, all
power of the company is exercised by the shareholders in the general meeting of the company
and by the directorate of the company according to the majority vote of the member of the
company. In the case of Foss v Harbottle, the court stated that if any majority shareholder or
director of the company illegally exercising the power beyond the power given by the
memorandum of association, only the company has a right to sue the director and the shareholder
of the company and when the majority rule can ratify the wrongs committed by the majority
shareholder and the director of the company, in that case, shareholder cannot bring an action
against the director in the court.5 In the case of The Dragon Stories Ltd, Mr Imp was the minority
shareholder and he was not satisfied with the decisions of Mr. Jon as he was exercising his power
illegally but Mr Imp was a minority shareholder therefore he has no right to take an action
against Mr Jon as per the rule identified in the case of Foss V Harbottle.
Derivative Action
5 Foss v Harbottle (1843) 67 ER 189

Derivative action is the exception of the case of Foss V Harbottle as the minority shareholder can
take a derivative action under section 260 of the Companies Act, 2006 against the wrongs
committed by the majority holder or director who commit wrong.6 The shareholders can seek a
remedy against director and the shareholder of the company in the personal capacity of
shareholder and director of the company for the legal activity or breach of any fiduciary duty by
taking a derivative action.7
Generally, the derivation action is taken by the minority shareholders when the majority
shareholders use their power for a wrong purpose. In very extremely problematical
circumstances, the minority shareholders made a claim or request the court to intervenes in the
affairs of the company for the prevention of director’s action which is harmful to the growth of
the company and when the company suffers a loss due to the action of the director and
shareholder of the company.8 In the case of The Dragon Stories Ltd, Mr Imp being a minority
shareholder can take a derivative action against Mr Jon in his personal capacity of the majority
shareholder and the director of the company.
Minority Stakeholders
The Companies Act, 2006 conferred the basic rights of the minority and majority shareholder of
the company. However, the minority shareholders of the company have limited right to control
the administration of the company and limited right to check that how company distribute the
profit between the members of the company. The minority shareholders have limited power but
it does not mean that minority shareholder cannot take action against any wrong committed by
majority shareholder of the company. A minority shareholder has a right to defend their welfare
and benefits and can seek claim in the court.9
6 The Companies Act 2006, Section 260.
7 Adolfo Paolini (2014), Research Handbook on Directors Duties (Edward Elgar Publishing, 2014).
8 Hill Jennifer, and Thomas Randall, (2015) Research Handbook on Shareholder Power (Edward Elgar Publishing,
2015).
9 Charles R Kelley, C. and Robert B Thompson, (2017) Corporations and Other Business Associations: Cases and
Materials, (Wolters Kluwer Law & Business, 2017).

A derivative action against the director of the company is taken by the minority shareholder on
behalf of the name of the company.10The minority shareholder did not get any direct benefit
through the derivative action against the shareholder and the director of the company; these
actions are taken by the shareholders for the benefit of the company and protection of the interest
of the business or shareholders. Conversely, the permission of the court is required for taking any
derivative action or any other claim against the director or shareholder of the company and for
succeeding the claim it is important that the shareholder must satisfy the court by giving
evidence supporting their claims.11
The Veto power of the Minority shareholders
The agreements of shareholder and the articles of the company have a right to give veto power to
minority shareholders. Power of veto gives the right to minority shareholders that minority
shareholder can block the actions of the company by using veto power.12
If the agreement and the article give the power of veto to the minority shareholder, in that case,
the consent of the minority shareholders is required on certain activities of the company which
are; the sales of the trade and the merger of the company and for the winding up and voluntarily
liquidation of the company. The minority shareholders have a right under veto power that they
can sale the considerable shareholding if the company or the member of the article of association
did not provide or presented the same terms to the minority shareholders of the company.13
Unfair Prejudice Petition
10 Sabrina Bruno, Eugenio Ruggiero (2011) Public Companies and the Role of Shareholders: National Models
towards Global Integration (Kluwer Law International B.V., 2011).
11 John De Lacy (2013), Reform of UK Company Law (Routledge, 2013).
12 Jack S. Levin, and Donald E. Rocap, D.(2018) Structuring Venture Capital, 2018 Edition (IL) (Wolters Kluwer
Law & Business, 2018).
13 Martin Ginsburg, Jack S. Levin and Donald E. Rocap (2018) Mergers, Acquisitions, and Buyouts, December 2018
Edition (5 voles) (IL), (Wolters Kluwer Law & Business, 2018).

An unfair prejudice petition is a file by the minority shareholders under section 994 of the
Companies Act, 2006,14 if majority shareholder of the company who is also holding a position of
director in the company, use or abuse the power of the director to encourage the own interest
which is the disadvantage for the minority shareholders of the company.15
Minority shareholder has a right to present an unfair prejudice petition in the court. For the
petition of unfair prejudice in the court against the director of the company, it is important that
minority shareholder must indicate an authentic and anticipated act or omission is done by the
director of the company which unethically discriminate the minority shareholder of the company.
The grounds of unfair prejudice petition in contradiction of the administrator of the company are:
Maladministration or misconduct of the directors of the company and because of the
maladministration and misconduct, severe financial loss arises in the company. The financial loss
can arise in the company if the directors of the company exercise their power exceeding their
limit or do any act which is omitted by the Company act or articles of the company.
If any shareholder of the company breach any term of the agreement or the article of the
company which affect the rights of the minority shareholder prohibits the minority shareholders
from administration and fails to provide any required information to the minority shareholder.16
Action can be taken by Mr Imp as a minority shareholder
If the minority shareholders believe that the company is being run by the shareholders or the
directors in an imbalanced deleterious way, the minority shareholder can seek remedy under the
Companies Act, 2006. In the Dragon Stories Ltd., the majority shareholder or the director Mr Jon
fails to hold annual general meetings and also fails to comply with the provisions of the
companies act as he was misusing the funds of the company for own purpose. Mr Imp who was
the minority shareholder and also he was holding the accounts of the company found that Mr Jon
pocketed a large amount £70,000 of the profit of the event of the company. Mr Imp can take
14 The Companies Act 2006, section 994.
15 A. Nwafor, (2011) the unfair prejudice remedy- a relief for the minority shareholders (Hein Online, 2011).
16 Sue McLaughlin (2015), Unlocking Company Law (3rd ed. Routledge, 2015).

derivation action against the director Mr Jon. To bring a claim against the director or majority
shareholder it is important that the conduct of the director or shareholder must be reflected unfair
from the viewpoint of the unprejudiced third person.
If the claim of minority shareholder against the director and majority shareholder convince the
court that the claim made by the minority shareholder is well established, in that case, the court
has the power to take certain action against the majority shareholder and the director of the
company:
Article of the association can be amended by the order of the court regarding the administering
an upcoming amendment in the article of the association of the company which is required for
the control over misuse of power by shareholder or director of the company.
The court can grant an injunction against the director or the shareholder and prohibit the
company from doing any act which is provoked by the minority shareholder against the
shareholder and director in the claim and the court can interfere in the administration of the
corporation’s undertakings.
Therefore, Mr Imp as a minority shareholder can bring a derivative claim under section 260 of
the Companies Act, 2006 and unfair prejudicial claim under section 994 of the Companies Act,
2006 against the director and the shareholder of the company by proving that Mr Jon misuse the
funds of the company and breaching the fiduciary duty of the director by not attending the
meetings of the company also failed to inform the clients about the assignments and publication
and because of that may clients pull out the potential deal from the company.17
2. Critically evaluate the distinction between the main options available to a company
experiencing financial distress that wishes to avoid going bankrupt and the detrimental
consequences associated with the liquidation of a company.
Financial Distress
17 Deirdre Ahern, Directors' Duties: Broadening the Focus beyond Content to Examine the Accountability Spectrum
(Hein online, 2011)

The term financial distress in the company identifies the failure, default and bankruptcy of the
company. On the stage of financial distress, the directors of the company are unable to pay the
income of the employees of the company. Usually, financial distress in the company occurs
because of the high fixed costs and illiquid assets. Evidence of the financial distress in the
company is that the equilibrium of the company cannot reach under the current situation and the
company cannot settle out the financial obligation and legitimate creditor’s obligation.18
Sometimes, bankruptcy is supposed as an ordinary outcome of the financial distress. However in
the United Kingdom; bankruptcy is a way in which the individuals can deal with the debts which
they are not able to pay to the creditors or others. The term bankruptcy is not applied to the UK
companies or partnerships.19
Insolvency
Insolvency of the company means that the company is going to be bankrupt as the company
incapable to pay the amount overdue of the creditors. In any case, if the director of the company
believes that the debt of the company is higher than the competency of the company and want to
avoid bankruptcy, in that case, the company can enter into Administration process and Voluntary
Liquidation.20 Section 122(1) of the Insolvency Act, 1986 identifies the circumstances in which
cases the directors can wind up the company and the test for defining the indebtedness of the
company is stated in section 123 of the Insolvency Act, identify by the legislation.21
Earlier, the liquidators and funder of the company decide the common charges of the winding up
of the corporation would not be paid out of the proceeding floating charge which was decided in
the case of Buchler and another v Talbot [2004] 2 W.L.R.582 ("Leyland DAF" ).22
“Leyland DAF”
18 Martin Schmuck, Financial Distress and Corporate Turnaround: An Empirical Analysis of the Automotive
Supplier Industry (Springer Science & Business Media, 2013)
19 Matteo Pozzoli and Francesco Paolone (Corporate Financial Distress: A Study of the Italian Manufacturing
Industry, Springer, 2017)
20 Lee Roach, Company Law, Oxford University Press, 2016
21 The Insolvency Act 1986, Section-122(1), 123 United Kingdom
22 Buchler and another v Talbot [2004] 2 W.L.R.582 ("Leyland DAF")

The government reversed the decision of Leyland DAF by exercising the power of section 1282
of the Companies Act, 2006 and made an amendment in the Insolvency Act, 1986 by inserting
Section 176ZA. It is not easy to force a voluntary liquidation or filing a petition of bankruptcy to
the court, the director and the shareholders of the company have to contact with the creditors of
the company and they have to ask the creditors for the company voluntary arrangements and
with the consent of the creditors put the corporation into the administration process.23
Administration Process
When the company went through the administration process, the stockholders and the directors
of the company are allowed to sell the valuable assets of the company but in case the value of the
assets not met with the liability of the company, in that case, the director of the company have
the option of liquidation of the company. According to the provision of section 176ZA the
director of the company can pay the expense of winding up by selling the insufficient
unencumbered assets of the company but the unencumbered assets floats with the charge and the
floating charge holder can claim the priority of assets and the privileged creditors (section 176 of
Insolvency Act) of the company will be authorized to pay the amount to the floating charge
holders of the company.
When the company became insolvent, the directors of the company have option of the
administration process and they can put the management under Licensed Insolvency
Practitioners. The administration process at the time of the insolvency of the company available
lenders of the company can appoint an administrator with the permission of the court under the
B1, Schedule of the Insolvency Act. Administration process protects the company and the
position of the business. The foremost goal of the administration process is to rescue the
company. The administration process automatically ends up after 12 months of the indebtedness
of the corporation.24
Liquidation
23 The Insolvency Act, 1986 Section 176 ZA, UK
24 Vanessa Finch, David Milman, Corporate Insolvency Law: Perspectives and Principles (Cambridge University
Press, 2017).

Liquidation of the company is a prescribed method of the formal insolvency of the company. By
the process of liquidation of a company, a company is conveyed to an end. At the time of the
liquidation, all the assets of the corporation are liquidated by the liquidator. The belongings of
the business are sold by the procedure of liquidation for the repayment of the debts of the
creditors of the company.25
An Insolvent company can go through the process of liquidation by the Compulsory Liquidation
or by a Creditor’s Voluntary Liquidation. The court of law can order the company for the
winding up which comes under the Compulsory Liquidation of the company under section 117
of the Insolvency Act, 1986.26
At the time of the liquidation procedure, it is important that the sharing of the chattels of the
business is equally dispersed among all levels of the creditors.27 If the condition of the
corporation became severe, the company enters into the liquidation procedure.
The detriment consequence of the liquidation is that the administrators of the company have no
extended control over the company and after compulsory liquidation, the director of the company
banned for 5 years from starting a new business with the same name of the liquidated company.
After entering into a process of liquidation a company ceases all the trades and sometimes the
company is in fact dissolved after the process of liquidation.28
The main aim of the liquidation process is to repay the debts of the creditors and in the
Administration process, the administrator makes efforts to rescue the position of the company.
Reference:
Ahern Deirdre, Directors' Duties: Broadening the Focus beyond Content to Examine the
Accountability Spectrum (Hein online, 2011)
Bruno, Sabrina and Ruggiero, Eugenio (2011) Public Companies and the Role of Shareholders:
National Models towards Global Integration (Kluwer Law International B.V. 2011)
25 BPP Learning Media, ACCA Skills F4 Corporate and Business Law (Global) Study Text 2014 (BPP Learning
Media, 2014).
26 L. S. Sealy, David Milman, Sealy & Milman: Annotated Guide to the Insolvency Legislation, 2011 (Sweet &
Maxwell, 2011).
27 Mahmud Samad, Court Applications under the Companies Acts (A&C Black, 2013).
28 Fiona Tolmie, Corporate and Personal Insolvency Law (Routledge, 2013).

BPP Learning Media, ACCA Skills F4 Corporate and Business Law (Global) Study Text 2014
(BPP Learning Media, 2014).
Buchler and another v Talbot [2004] 2 W.L.R.582 ("Leyland DAF")
Finch, Vanessa and Milman, David Corporate Insolvency Law: Perspectives and Principles
(Cambridge University Press, 2017)
Davies, Paul L. (2015) Shareholders in the United Kingdom (European Corporate Governance
Institute (ECGI) - Law Working Paper No. 280/2015). Available at SSRN:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2557680
Ginsburg Martin, Levin S. Jack and Rocap, Donald (2018) Mergers, Acquisitions, and Buyouts,
December 2018 Edition (5 vols) (IL) (Wolters Kluwer Law & Business, 2018)
Hill Jennifer, and Thomas Randall, (2015) Research Handbook on Shareholder Power (Edward
Elgar Publishing, 2015)
Kelley R Charles and Thompson B Robert, (2017) Corporations and Other Business
Associations: Cases and Materials (Wolters Kluwer Law & Business, 2017)
Lacy De John (2013) Reform of UK Company Law (Routledge, 2013)
Levin, S. Jack and Rocap E. Donald, (2018) Structuring Venture Capital, 2018 Edition (IL),
(Wolters Kluwer Law & Business, 2018)
L. S. Sealy, David Milman, Sealy & Milman: Annotated Guide to the Insolvency Legislation, 2011 (Sweet
& Maxwell, 2011).
Matteo, Pozzoli and Francesco, Paolone (2017) Corporate Financial Distress: A Study of the
Italian Manufacturing Industry (Springer, 2017)
McLaughlin, Sue, (2015) Unlocking Company Law (3rd ed. Routledge, 2015)
Miles, Robert, Hildyard, Robert and Boardman, Nigel (2010), Annotated Companies Legislation
(Oxford University Press, 2010)
Nwafor, A. (2011) The Unfair Prejudice Remedy- a relief for the minority shareholders (Hein
Online, 2011)
Paolini, Adolfo (2014) Research Handbook on Directors Duties (Edward Elgar Publishing,
2014)

Reuvid, Jonathan (2014), Investors’ Guide to the United Kingdom 2014/15 (Legend Press Ltd,
2014)
Roach Lee, Company Law (Oxford University Press, 2016)
Samad Mahmud, Court Applications under the Companies Acts (A&C Black, 2013)
Schmuck, Martin (2013) Financial Distress and Corporate Turnaround: An Empirical Analysis
of the Automotive Supplier Industry (Springer Science & Business Media, 2013)
The Companies Act 2006, section 994.
The Insolvency Act 1986, section-122(1), UK
Tolmie Fiona, Corporate and Personal Insolvency Law (Routledge, 2013)
Yeowart Geoffrey and Parsons Robin (2016) Yeowart and Parsons on the Law of Financial
Collateral, Edward Elgar Publishing, 2016