Power of Members, distribution of profit and Disguised Distributions within a Company formation of UK

04 Oct

Power given to directors, members and shareholders etc. within a company is conferred according to the articles and is a set of limited compulsory rules that should be followed by a new company formation UK. The structure of the constitution determines the location of power.

Article 3 states the authority of a Director. The responsibilities of a director includes manage the company and different departments to keep the country in progressing area. Director is allowed to use all the authorities for the fulfillment of this task.

Special authorities of Members

Besides directors, special authorities are given to the members of a new company formation UK, so that a balance of power remains. According to Article 4, it states that the members get the leverage of changing i.e. impose or refrain director from performing an action under the following circumstances:

  • 75% of the members vote for altering a certain action.
  • The action CAN NOT be cancelled before the resolution is passed.

Under Model articles and Companies Act, members can enjoy different rights. They can appoint directors as stated in Article 17 & 20. According to Section 168, members can suspend the directors due to his actions. Members have the power to suspend the directors (Section 21). They can also approve the transactions that are risky and according to Section 239, they can allow to ratify the breach of duty of a director.

Decision Making Power of Members

  • The members are allowed to take decisions through voting.
  • This voting is to be conducted in general meetings.
  • The members can act informal under certain circumstances but outside the general meeting.

Intervention of Shareholders

Shareholders cannot intercede in the decision making process of the board. No resolution can be passed by the members on behalf of the company in any area if the article bestows the authority to the director in that area. Shareholders can give their consent to depict that members agree upon giving a certain authority to the board.

In the case of Breckland Group Holdings, company’s articles mentioned that the director was authorised for the management of the company. Additionally, agreement of shareholders stated that with the director’s consent litigation could be brought on behalf of company. The shareholder with majority acted on company’s behalf. Other shareholder restrained the action. Held:
Axtens & Quin principle implies that shareholders do not take decisions if it is one to be made properly by the board. But Shareholders’ agreement backs up this inference. The thought decision of shareholders was appropriately one for the board to be taken. Thus, the power given to the board only, could not be intervened by a general meeting. This was done for restraining the ligitation.


Section 336 states that the business forming a limited company UK that belongs to public sector, should arrange general meetings annually. However, the rule does not apply on private companies. Directors (Section 302), Members (Section 303-305) and Auditors (Section 306) are allowed to call meetings other than general meetings.

Court’s Rights to arrange a Meeting after business formation UK


Court has certain rights to call upon a meeting once a business formation UK is done. Section 306 mentions that court has the authority to arrange a meeting of the members. The meeting’s terms may also be established by the court. The court can exercise this power during a deadlock amongst the shareholders that are competitors to one another. The power can be used for enabling general meeting to be arranged for a particular reason. The power can also be used to restrict some members from attending the meeting. The court can allow certain members to elect a new director to end the deadlock.  The essentiality of a meeting is determined by the construction of articles or agreements of shareholders. 


Scenarios for Non usage of Court’s powers:


Court will not exercise its authorities in Section 306 in certain situations. If a deadlock situation has been deliberately created by adopting quorum when a dis-harmony between members takes place, the court will not use Section 306.  An example is the case of Union Music. Court will not use its right of breaking deadlocks if shareholders enjoy voting rights equally or any single shareholder has special rights due to its class or in case of entrenched rights.


Scenarios for Usage of Court’s power


The court may use its authorities mentioned in Section 306 where shareholders do not have equal shares. Majority shareholders will be permitted to call a meeting. Factors determining the use of power are the following:


The capability of the company to run its affairs


Majority shareholder’s right to use its voting power


Distribution of Profits and Disguised Distributions 


Corporate gifts and disguised distributions can be controlled by three ways which includes agency rules (authority to act on company’s behalf), specific statutory regulations and director’s duties.


Section 238 describes the transactions which are undervalued. By transaction at undervalue, it means that either company gains no consideration/benefit or gets consideration which is very less than that of which is provided by company as result of transaction. Section 238 applies when company goes into liquidation (closes voluntarily) and those transactions which were undervalued and performed before the company goes insolvent can be avoided by employing Section 238. The transaction is valid if company performs it in good faith or for the benefit of company and also there were chances that the company will be benefited by the transaction at the time when it performed. At the time when transaction is made it is not necessary for director to consider insolvency means it is a breach if Section 239 is met.


Section 239 deals with preferences which also applies when company is in liquidation state. It allows creditor to avoid transactions which allows him to be in a better position than he would have been in case of transaction given company is insolvent. Action which can be reviewed are those which are performed six months before company becomes insolvent and those which are performed before 2 years in case transaction is performed with connected party. When transaction was made by company based on influence of desire to prefer than relief can be provided assuming transaction was with connected person. If the desire to prefer was considered by those who made decision than it is valid and also there is no breach if directors made a move to make a transaction because they were desirous of continuing business.


The Sections 238 and 239 are only applicable if company is unable to pay its debts at transaction time or due to transaction and in case transaction is with a connected person than it is assumed that company is unable to pay. The remedies regarding insolvency are stated next:


Under Sections 238 and 239 order can be made by a court which it thinks is correct. According to Section 241, reinvesting of property in company and company’s security over assets can be released. Third parties can be affected by remedies.


Section 245 related with floating charges is applicable regarding floating charges which are granted over assets of company. Except the consideration which company gets in return charge is invalid. It is applicable when company cannot pay its debts or is able to do that because of result of charge. Section 423 is related with transactions defrauding creditors. It is applicable when company gets no or negligible consideration or benefit. Remedies are same as for Section 238 and 239.


Disguised Distributions




It is unlawful to have a disguised distribution in company formation of UK. The transaction between a company and shareholder is not a disguised distribution unless and until there is a problem associated with consideration received by shareholders which are less provided by company and it is considered fake by court. In case if transaction is not fake than it may still be fall under the category of disguised distribution if company pay more than the service it received or gets less for the services it provided. For example, assets selling at large undervalue and provide wages to shareholder or director which is not in compliance with the work done by them. If the two parties agreed in a transaction to sold assets at less value than this is not considered as disguised distribution.


There are different tests to decide whether distribution is disguise or not. Courts can make decision on objective and subjective basis. Court can declare a transaction a disguised distribution because in its objective nature it is a disguised distribution. For example, the difference between consideration and value is large.


Assets Distribution




Distribute of company’s assets among its members can be done either in form of cash or in other forms and it includes dividends except share issuance, capital reduction and buy-back shares redemption. Dividends can only be made out of profit according to law. There are different profits associated with distribution. According to Section 836, justification regarding distribution should be in reference to relevant (most recent) accounts. Profits which are available for distribution can either be accumulated realised profits which are profits not previously utilised by distribution or minus accumulated realised losses which are not previously written off in a capital reduction.


Revaluation associated with Distribution


According to this, fixed assets revaluation does not make profit in relation to non-cash assets like land. Company is not entitled to distribute money on the increase in the value of non-cash assets. But according to Section 846, when distribution is made from non-cash assets, un-realised profits are considered as realised. Under Section 841, fixed assets depreciation will be included under realised losses. Public companies can only make distribution if net assets amount is not less than called-up share capital and un-distributable reserves aggregated sum (Section 831).


Consequences of unlawful Distribution


Unlawful distribution is the distribution which is not covered by distributable reserves and which is not justifiable in reference to relevant accounts. Those shareholders are accountable for profits received under unlawful distribution. Under Section 847, the shareholders are liable to repay the profits which they received despite being aware of the fact that these fall under the category of unlawful distribution. It has been suggested that liability depends on unconscionability but later some cases showed that director’s duty breachness is a test for checking liability. Indemnity can be seek from directors which are sued for breach of duty from culpable shareholders.


Duties of Directors in case of Profits Distribution


Directors should fulfill duties according to Section 171 and 174 and are liable to pay full amount in case of breach and it’s been suggested that directors who are ignorant of rules can be treated leniently. If a company refuses to pay profits/dividends to shareholders and the reason can be based on justified and equitable basis or it can be an unfair practice.


Let’s have a look at the case study related to distribution of profits:


Case study No 1- Aveling Barford 


Transaction was made in which assets were sold to the shareholder by a company at a value less than the market. This was valid according to sale rules but not valid according to distribution laws and was unlawful.


Case study No 2- Halt Garage 


The two shareholders one of which was a director had two shares of 1 pound each. The director fell ill and company paid him 20 pounds a week although the work done by her was not so much. This was deemed as disguised return of capital because wages were not according to law and her duties despite she only had 1 pound share.


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