COMPANY LAW

Fred and Ivy have been friends since university where they both studied architecture. After they completed all their studies, they become qualified architects and spent some years working for established companies in the City. One day, after a long lunch, they decide to leave their respective positions and go into business together designing homes and home renovations. They enjoy many successful years building the business and establishing their name.

Ivy has an adult son called John. She would like him to join their business and talks this through
with Fred. John is keen to learn new skills and has significant capital to put into the business,
having made his fortune in a City firm. Fred is eager to progress the business and agrees to this.
To facilitate this new arrangement, Fred, Ivy and John registered the business as Perfect Home
ltd. The new company has share capital of £30,000 divided into 3000 shares of £10. Fred, Ivy
and John, all hold 1000 shares each and are all appointed directors of the company, each with
authority to enter into contracts on behalf of the company. The company adopted the model
articles of association for private companies limited by shares with the following modifications:

(i) “The object of the company is to design homes and home renovations, and to do all
activities reasonably incidental to home renovation. The company has the power to
enter into any transaction, hold any type of property, and engage in any
arrangements that are conducive to the pursuit of its objects.”

(ii) “No director shall enter into any contract on behalf of the company with a value
exceeding £20,000.
The company’s business does well. So well in fact that John thinks he deserves a little treat and
borrows £15,000 from the bank in the company’s name, which he uses to buy his car on the
company’s behalf, for use as a company car. He also uses it for all personal activities. He doesn’t
inform Fred because the sum is below £20,000, although he does mention it to Ivy. He also agrees
to extend and refurbish a friend’s kitchen, for a price of £25,000 – a low price, but John is keen to
impress. His friend, Poppy, is aware that this work is being done at close to cost price, and the
company is making very little profit from it.
As John and Fred focus on the design part of the business, Ivy takes charge of new contracts and
of finding new business for the company. In one such meeting, she realises she knows the
potential customer, Ayesha, from her school days. Ayesha is looking for a really innovative design
for her new apartment. Inspired by the job and by meeting her old friend again, Ivy decides to
take charge of this design. She takes on the work personally, and not as part of the business of
Perfect Home ltd, to avoid interference from Fred, but she discusses it with John.
Fred finds out about the above transactions and is very unhappy about them. Fearful of possible
repercussions, Ivy and John vote out Fred as director at a duly convened general meeting. As the
directors receive high remunerations following previous agreements, Fred’s income from the
company which is now restricted to dividends drops significantly.

Discuss the possible legal issues that arise from these events for all parties including the
company.

Fred sets up a new company, The Last Drawer ltd, but with his heart no longer in the business, it
begins to fail very quickly. The years of goodwill built up in his previous businesses kept him going
for some time, but his accountant has warned him of the company’s financial difficulties. Fred
has hopes of a large contract designing apartments for new development, and so continues to
keep the business going. However, the large contract is never realized, and the company goes
into insolvent liquidation with a £100,000 shortfall of assets.

Advise the creditors of Last Drawer Ltd as to any available remedies under the Insolvency Act
1986 and Companies Act 2006.