In January 2020, Cara, Andy, Daphne, and Robert registered a company through which to run their homeware and interior decoration business which they named DreamDecor Ltd (DreamDecor). DreamDecor had an initial share capital of 20,000 made up of 20,000 x 1 ordinary shares. Robert owns 11,000 shares, and Cara, Andy, and Daphne own 3,000 shares each. Cara and Andy were appointed as managing directors, and Daphne as the marketing director to manage the business full-time. It was also agreed that Robert's son, Pete who had accounting experience would be appointed as finance director of the company. DreamDecor needed approximately 300,000 to set up and run the company. Cara's brother-in law, Henry, was willing to provide funding and he was issued with 300,000 fully paid-up, non-voting preference shares shortly after the company's incorporation.

The company adopted the model articles for private companies limited by shares with the following additional clauses:

(i) Shareholder approval is required by an ordinary resolution in advance to approve any contract committing DreamDecor to spend 25,000 and above.

(ii) The rights attached to the preference shares include the right to a cumulative, preferential, fixed dividend of 5 per cent annum payable on the 31 January following the end of the relevant year and the right to return of capital on a winding up in priority to ordinary shareholders.

Business was initially good and in the year to 31 December 2020, its first financial year, DreamDecor made a profit of 60,000. However, in the year to 31 December 2021, things took a downturn, and the company made a loss of 40,000. Due to securing a lucrative interior decorating contract, the company made a profit of 80,000 in the year to 31 December 2022.

In February 2023, the directors confirmed that a dividend of 30,000 should be paid to Henry and recommended the payment of a dividend of 70,000 to themselves, as ordinary shareholders. Cara, Andy, Daphne, Robert, and Henry received their dividends later that week.

At a board meeting in March 2023, attended by all DreamDecor directors, they unanimously decided to enter into a contract on behalf of the company with Collectibles Ltd for the supply of 30,000 worth of homeware products. The managing director of Collectibles had checked the articles of DreamDecor and decided to structure the contract in a way to make it appear below a total commitment of 25,000.

In April 2023, Daphne ran into an old friend from University, Sharon who told her she was looking for an investor for her interior decoration business. Daphne felt that DreamDecor would not be interested in the investment opportunity, and she decided to invest in Sharon's business. Sharon and Daphne subsequently incorporated CozyNest Ltd (CozyNest) of which Sharon and Daphne each own 50 per cent. of the issued share capital. In June 2023, Cara attended an interior decoration trade fair where she saw Sharon and Daphne sourcing suppliers for CozyNest. Cara questioned Daphne about this, and she was shocked to discover that Daphne was a shareholder and director in CozyNest. Cara sent an email to inform the other directors and shareholders of the events at the trade fair. A few weeks later, at a board meeting attended by all the directors except Daphne who decided not to attend because of the tension, it was decided that as they no longer trusted Daphne she should be removed as a director and shareholder of DreamDecor. Robert was subsequently appointed as the new marketing director of the company. In late 2023, the business suffered a downturn and Pete expressed his concerns to his fellow directors advising them to consider selling old furniture and a few delivery vans to raise finance for the company. Cara, Andy, and Robert were reluctant to do this and assured Pete that they were optimistic about future sales. However, the earnings did not improve, and the company has been unable to pay its suppliers over the past few months. In November 2023, Pete advised his fellow directors that the company should consider taking out a bank loan to enable DreamDecor to trade through its difficulties. The directors are particularly concerned about their potential future liabilities, if DreamDecor cannot meet any loan repayments and the business consequently fails.

Explain, apply and, where appropriate, critically reflect upon the law governing:

(i) The liabilities the shareholders and directors may have in relation to the dividend payments made in 2023;

(ii) DreamDecor's liabilities in relation to the supply contract with Collectibles Ltd;

(iii) The procedure for removing Daphne as a director and shareholder of DreamDecor;

(iv) The breaches of duties by DreamDecor's directors and the remedies available to DreamDecor; and (v) Any personal liabilities the directors may face if DreamDecor goes into insolvent liquidation.