Regulations on Members Rights in an Ltd Formation UK Company regarding their Protection, Decision Making and Voting Power


09 Jan

A general rule or the basics of how to setup a private limited company UK or Ltd formation UK, are the two main constituents of a company, namely the directors and the members. The total authorities of a company are divided between these two groups by the company’s articles or memorandum that are prepared as a requirement for set up company London or UK.

Protection given to the Members of a Company against any Unjust Prejudice

If any action is taken by the company after one open ltd company in UK online or any other form of company, in a manner that is disadvantageous to any members’ interests, then in this case that member is given certain remedies. Part 17 of Companies Act 1985 is dedicated for this purpose.

Section 459 of Companies Act 1985 states that:

  • A company’s member is allowed to make an application in the court to give an order against any step taken by the company in a way that is unjustly biased against the personal interests of that company’s members in general or at least unfair and prejudiced to his interests. It can also be done on the basis that any act of omission, or any actual or suggested act by the company, or any omitting act on behalf of that company is or likely to be prejudiced in that manner.
  • This part’s regulations find their application on someone who does not hold the membership of the company but has been transferred or given shares of the company under law, in the same manner as the regulations find their application on company’s members, and any reference made to the member should be interpreted accordingly.
  • In the section under consideration and for the matters concerning this section, company concerns a corporate body lying within the scope of the interpretation of this Act or any corporate body which is not any such kind of company, however, under the act of Statutory Water Companies (1991), it is to be deemed as a statutory water corporate body.

Section 460 of the Companies Act 1985 states that:

  • When in any company’s case:
  • The State’s secretary has been submitted a report by the virtue of Section 437 or has used the authorities given to him by Section 447 or 448 of Companies Act 1985, or Section 44(2)-(6) or Section 43A belonging to Insurance Companies Act (1982).
  • Also, the State’s secretary feels that the action taken by the company or any matter of the company has been managed in such a way that has shown prejudice to the interests of the company’s members in general or of some of the members or it seems to him that any real or suggested action or act of omitting by the company or omitting act on its behalf is showing or would show prejudice.

Then the secretary may on his own submit an application to the court for giving any verdict for this matter, by virtue of this part, along with or in place of, giving a petition for the liquidation of the company.

  • This section refers by the word ‘company’ to any corporate body which can be liquidated under this act.


Members taking Decisions for the Breach of Duty of Directors

A general perception is that the directors in an open ltd company in UK online or any other set up company London or UK, can act against their responsibilities, or do it for any personal interest that is detrimental to the company. Hence, the members are given authority to prevent the directors from taking any such action against the company. However, an interesting point to know is that, it is not always possible that any breach of responsibility done by directors is harmful to the interests of the company. They can be beneficial to the company as well. And in such a scenario, the members are allowed to approve the action taken by any of the directors, which albeit being a breach of duty, gives advantage to the company. For instance, study the cases of Regal and Brady.  In cases where any proposed action of the directors lies beyond the scope of their capacity but it can be taken by a company lawfully, then in such a case, if the majority of the company’s members agree to it, they can take either of the following actions:

  • The members can decide on their own to make a commitment of the company with that action. However, there are some restrictions on the power of company’s members to manage the matters of the company.
  • The members can ratify the company’s directors to indulge in that action given that the required power is bestowed on the members of the company for this to happen.

A common incident that takes place in the company is that the members remain unaware about the action unless it is taken by the directors. If even after the action is taken, the members wish to support it, then they can:

  • If to make the action that has been taken already, valid, it is a requirement that the members should give their approval to it, then the members will ratify or affirm it.
  • Also, the members are allowed to give authorisation, forgive the directors for their action or waive them off from the charge, thus protecting the directors from any possibility of the company of suing them at any later time for their wrongful action. This may be significant in cases where the old board of the company has been substituted by a new one and also in cases where the company gets into insolvency, and any person is appointed as the company’s liquidator, so creating a scenario where it is not possible for the members to support the directors.

These possibilities available to the members, differ trivially in their requirements. An investigation in a detailed manner should be done for authorising or ratifying any act of the directors, because there is a great risk that the directors in default can as members of the company be capable of getting the required approval or leave at least an impact on the approval which is to be given for any action that is generally unacceptable.

A Summary on the Limited use of Voting Power by the Members

From the case studies relevant to the limited exercise of power, it is apparent that generally, members have the independence to utilise their power of voting attached to the shares that they hold and they may use it as per the suitability of their interests. This general principle fits truly on majority of the businesses and decisions regarding policies of purchasing or deciding the director to be appointed. But, the freedom given to the members to use their authority is contingent to different restrictions. Few of these restrictions are well-known in the field of business, whereas others are under question. It is a tough task to consider all these exceptions under one common category. It is a point of significance that these exceptions are relevant to intra-company disputes. In such disputes, usually, one side of the members argue that the defendant side has used more authority to achieve a goal or benefit that was unjust.

Certain special exceptions are the following:

  • Most of the company’s members may not utilise their voting power to seize the property belonging to their company or for condoning any fraudulent action that was committed by them. For instance, the cases of Cook v Deeks as well as Menier v Hooper’s etc.
  • Another exception may be a situation where a resolution concerning a matter impacting the members’ rights. For example, changing the company’s articles or bringing a change in the rights attached to classes. Most of the members, in such a scenario, should vote considering bona fide the company’s interests on the whole. For instance, as in the cases of Allen v Gold and British America Nickel.
  • In cases where it is tried to take an action against those who are accused of committing any action detrimental and wrong to the company, the persons who have been accused for this action, are not permitted to participate in the voting for preventing any action against them.
  • The statute provides certain solutions which can be benefitted from by the company’s members, if they face any disadvantage as a consequence to any action taken by the majority. It is applicable even when the action taken is legally within the capacity of the majority members. The most common solution is relief that may be given against any conduct that was unfair and prejudiced. Consider, Scottish Co-operative and liquidation of the company on just and fair grounds, as in Ebrahimi v Westbourne.
  • The restrictions imposed in cases of Clemens as well as Re Halt, on the voting authority given to the members, are apparently the following: The first restriction is that there should be no such use of the voting power that leads to oppression and the second restriction is that the voting power must be exercised for genuine causes. None of these restrictions are given support by a major authority. Also these restrictions are not sufficiently strong to make any raid in the general principle regarding this matter.

It would not be correct to make any deduction from the above mentioned exempted situations such as a member has any responsibility of voting against his personal benefits or interests unselfishly in a way that has not been adopted by Dixon J in Peter’s American Delicacy, albeit, such a deduction is a trap for the judges as they may get stuck in it, for example, Re Holders. The option given realistically to the members in control who long for keeping away from having any part in the accused decision made in the general meeting, will be either leaving or changing the proposed decision, or on the other side, they make take a calculated risk and press ahead knowing that the burden of evidence laid on the members in minority challenging any decision has been conventionally tough to discharge. But, the structure of case law under the 2006 version of Companies Act Section 994, regarding ‘Unfair Prejudice’ as well as cases like Clemens, present an idea that the balance tips towards members with minority shares.

There is a debate regarding this topic of both extra-judicial and judicial nature, which has created a confusion between the requirements of fiducial responsibilities and requirements of public regulations or just rules relevant to appropriate reasoning. As the shareholders are not restricted by the former, so the debate is that even the latter cannot restrict the persons holding shares. Some consider the latter as a subpart of the former. It is a reality that the fiducial responsibilities do not bind the shareholders, but the directors are restricted by them. The shareholders need not ignore their personal interests and support the interests of the company or other persons holding shares. But it is still vague that why the shareholders should not be contingent to restrictions same as are applied in daily routine on those who are given the authority to utilise. In other scenarios, there is no controversy in the rule that for the validity of the use of authority, it should be done bona fide and for appropriate reasons.

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