National Corporate Law in a Globalised Market

CORPORATIONS, GLOBALISATION AND THE LAW

Series Editor: Janet Dine, Director, Centre for Commercial Law Studies,
Queen Mary College, University of London, UK
This new and uniquely positioned monograph series aims to draw together
high-quality research work from established and younger scholars on what is
an intriguing and under-researched area of the law. The books will offer
insights into a variety of legal issues that concern corporations operating on
the global stage, including interaction with the WTO, international financial
institutions and nation states, in both developing and developed countries.
Whilst the underlying foundation of the series will be that of company law,
broadly defined, authors are encouraged to take an approach that draws on the
work of other social sciences, such as politics, economics and development
studies, and to offer an international or comparative perspective where appro-
priate. Specific topics to be considered will include corporate governance,
corporate responsibility, taxation and criminal liability, amongst others. The
series will undoubtedly offer an important contribution to legal thinking and
to the wider globalization debate.
Titles in the series include:
Company Law in the New Europe
The EU Acquis, Comparative Methodology and Model Law
Janet Dine, Marios Koutsias and Michael Blecher
EU Corporate Law and EU Company Tax Law
Luca Cerioni
Corporate Governance and China’s H-Share Market
Alice de Jonge
Corporate Rescue Law – An Anglo-American Perspective
Gerard McCormack
Multinational Enterprises and Tort Liabilities
An Interdisciplinary and Comparative Examination
Muzaffer Eroglu
Perspectives on Corporate Social Responsibility
Edited by Nina Boeger, Rachel Murray and Charlotte Villiers
Corporate Governance in the 21st Century
Japan’s Gradual Transformation
Edited by Luke Nottage, Leon Wolff and Kent Anderson
National Corporate Law in a Globalised Market
The UK Experience in Perspective
David Milman
National Corporate
Law in a Globalised
Market
The UK Experience in Perspective

David Milman
Lancaster University, UK

CORPORATIONS, GLOBALISATION AND THE LAW

Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© David Milman 2009

All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, electronic, mechanical or photo-
copying, recording, or otherwise without the prior permission of the publisher.

Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK

Edward Elgar Publishing, Inc.

William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA

A catalogue record for this book

is available from the British Library

Library of Congress Control Number: 2009930861

ISBN 978 1 84542 699 6

Typeset by Cambrian Typesetters, Camberley, Surrey

Printed and bound in Great Britain by MPG Books Group, UK
This book is dedicated to the memory of Professor R.R. Pennington
(1927–2008)
Contents
Abbreviations used for law reports and periodicals xi
Table of cases xvi
Table of legislation xxix
Preface xxxv

1 Introduction 1
1 Aim of the text 1
2 Company law in society 3
3 Corporate law history 4
4 Corporate law ‘families’ 7
4.1 Systems based on English law 7
4.2 US-inspired models 9
4.3 Civil/continental law jurisdictions 10
4.4 Other families 10
5 Unitary and federal models 11
6 The picture in the UK and British Isles 12
7 Harmonisation of corporate law 15
7.1 The EEC programme 15
7.2 Other harmonisation schemes 19
8 Legislative measures 20
9 Convergence and the courts 21
10 Legal and other commercial transplants 24
11 The Company Law Review 1998–2001 26
12 The Companies Act 2006 27
13 Does corporate law matter? 28

2 Comparing core regulatory strategies 30

1 Regulating companies: justification 30
2 How to regulate? 34
2.1 Regulation by legislation 34
2.2 Delegated legislation 37
2.3 Self-regulatory codes, professional rules and
bureaucratic processes 37
2.4 A residual role for the courts? 40
3 Regulatory tools, bureaucratic efficiency and sanctions 42

vii
viii National corporate law in a globalised market

4 Critical regulatory goals 45

4.1 Effective and customer-driven incorporation processes 45
4.2 Protecting creditors from abuse of limited liability 46
4.3 Limiting unauthorised trading 50
4.4 Curbing misuse of managerial powers 51
4.5 Protecting shareholders 52
4.6 Effective termination procedures 54
4.7 Rehabilitation 54
4.8 Developing a user-friendly regime 56
4.9 Adapting to new technologies 57
4.10 Maintaining effective and reputed capital markets 58
5 Common problems/familiar responses 59

3 Commonality of fundamental principles 60

1 Introduction 60
2 The company as a separate entity 60
3 Limited liability 66
4 Legal recognition for shares: protection for shareholders 67
5 Regulating directors as managers 70
6 Providing for equality of creditors 71
7 Providing for differential treatment for public/private
companies 73
8 Establishing effective procedures for the incorporation/
dissolution of companies 74
9 Ensuring that companies remain subject to state control 75
10 Maintaining confidence in capital markets 76
11 Enabling companies to grow and restructure 77

4 Foreign shareholders and non-resident controllers 78

1 Exploitation of UK Company Law by foreign entrants 78
2 The overseas shareholder 78
2.1 Statistical significance 78
2.2 Judicial support for foreign shareholders 80
2.3 Problems in EU law 83
2.4 Equal treatment; not better treatment 84
3 Controlling foreign participation in strategic companies 86
4 Foreign (or non-resident) directors 88
5 The corporate director phenomenon 91

5 Reception of overseas companies by the English legal system 93

1 The inclusive tradition 93
2 Definition 95
 Contents ix

3 Non-resident companies: a note 96

4 Foreign enterprise activity in England and Wales:
strategic options 96
4.1 ‘Going native’ 96
4.2 Formal admission as an overseas company 96
4.3 Flouting the law 99
4.4 Redomestication 99
5 Applicability of general provisions in the Companies Acts 100
6 Foreign companies and listing rules 104
7 Foreign companies in litigation 104
7.1 Foreign company as claimant 104
7.2 Service of proceedings on foreign companies 105
8 Obligation to register company charges: problems with
overseas aspects 107

6 Cooperation with foreign courts and overseas regulators 110

1 Extraterritoriality 110
2 Judicial comity 112
3 Protocols 116
4 Regulatory authorities working together 117
5 Recognition of foreign disqualifications 118

7 Corporate law and conflict of laws 120

1 Essential propositions 120
2 Place of incorporation v real seat 120
3 Governing law of corporations 124
4 Choice of law and corporate disputes 127
5 Application of the Takeover Code 129

8 Dealing with transnational corporate collapse 130

1 Common law solutions 131
1.1 Principles 131
1.2 Attitudes – common law assistance 133
1.3 Common law remedies of potential use in
transnational insolvency 135
2 Legislative responses 136
3 Multilateral approaches 138
3.1 EC level 138
3.2 International level 143
x National corporate law in a globalised market

9 The future of national corporate law systems 145

1 Convergence 145
2 Factors promoting further convergence 146
2.1 Capitalism and consensus 146
2.2 Globalisation 147
2.3 Legal scholars as agents of convergence 147
2.4 Law reform processes 149
2.5 International law firms and accountancy practices 150
2.6 Higher education 150
2.7 Role of international organisations 151
2.8 Multinationals and international joint ventures 151
2.9 Race to the bottom 152
2.10 Harmonisation processes 152
2.11 Converging capital markets 152
2.12 Foreign players 153
2.13 New technology 153
2.14 The common law 154
2.15 The role of language and corporate discourse 154
2.16 Convergence through paralysis 155
3 Other likely trends in UK corporate law 156
3.1 Corporate mobility 156
3.2 Supranational companies 157
3.3 A twin track system 157
4 Overview 157

Appendix 162
Bibliography 165
Index 195
Abbreviations used for law reports and
periodicals
ABLR Australian Business Law Review
AC Appeal Cases
ACLR Australian Corporate Law Reports
ACSR Australian Corporate and Securities Reports
All ER All England Law Reports
ALR Australian Law Reports
Am Jo of Comp Law American Journal of Comparative Law
Am Jo of Int Law American Journal of International Law
Anglo-Am L Rev Anglo-American Law Review
App Cas Appeal Cases
Aust Jo of Corp Law Australian Journal of Corporate Law

B of Eng Quart Bull Bank of England Quarterly Bulletin

BCC British Company Cases
BCLC Butterworths Company Law Cases
BJIBFL British Journal of International Banking and
Financial Law
BPIR Bankruptcy and Personal Insolvency Reports
Bus L R Business Law Review

Calif L Rev California Law Review

Camb L Rev Cambrian Law Review
CFILR Company Financial and Insolvency Law
Review
Ch Chancery
Ch App Chancery Appeals
CJQ Civil Justice Quarterly
CLJ Cambridge Law Journal
CLP Current Legal Problems
CLR Commonwealth Law Reports
CLWR Common Law World Review
CMLR Common Market Law Reports
CMLRev Common Market Law Review

xi
xii National corporate law in a globalised market

Co Law The Company Lawyer

Col J of Transnat Law Columbia Journal of Transnational Law
Col L Rev Columbia Law Review
Conv Conveyancer and Property Lawyer
Cornell J of Int Law Cornell Journal of International law
Cornell L Rev Cornell Law Review
Corp Gov Corporate Governance
CSLJ Corporate and Securities Law Journal
CUP Cambridge University Press

DLR Dominion Law Reports

EBLR European Business Law Review

EBOLR European Business Organisations Law
Review
Econ Hist R Economic History Review
ECR European Cases Reports
EHRR European Human Rights Reports
ELJ European Law Journal
ELR European Law Review
ER English Reports
EWCA Civ England and Wales Court of Appeal Civil
Division (neutral citation)
EWCA Crim England and Wales Court of Appeal Criminal
Division (neutral citation)
EWHC England and Wales High Court (neutral
citation)
Exch Exchequer Cases

FCR Federal Cases Reports

Fed L Rev Federal Law Review

Griff L Rev Griffith Law Review

Harv L Rev Harvard Law Review

Hist Res Historical Research
HL Cas House of Lords Cases

ICCLR International Company and Commercial Law

Review
ICJ Rep International Court of Justice Reports
ICLQ International and Comparative Law Quarterly
 Abbreviations xiii

IFLRev International Financial Law Review

IIR International Insolvency Review
IJLMA International Journal of Law and
Management
IL & P Insolvency Law and Practice
ILRM Irish Law Reports Monthly
Ins Intell Insolvency Intelligence
Ins Law Insolvency Lawyer
Int Insolv Rev International Insolvency Review
Int Jo of Disc and Gov International Journal of Disclosure and
Governance
Int Rev of Law and Econ International Review of Law and Economics
IR Irish Reports
Ir Jur Irish Jurist

JAL Journal of African Law

JBL Journal of Business Law
JCLS Journal of Corporate Law Studies
JIBLR Journal of International Banking Law
JLS Journal of Law and Society
Jo of Comp Econ Journal of Comparative Economics
Jo of Econ Hist Journal of Economic History
Jo of Fin Journal of Finance
Jo of Fin Econ Journal of Financial Economics
Jo of Fin Reg and Comp Journal of Financial Regulation and
Compliance
Jo of Int Econ Law Journal of International Economic Law
Jo of Law Econ and Org Journal of Law, Economics, and
Organization
J of Leg Studs Journal of Legal Studies
Jo of Leg Hist Journal of Legal History
Jo of Law and Soc Journal of Law and Society
Jo of Pol Econ Journal of Political Economy
JWTL Journal of World Trade Law

KB King’s Bench

Law and Cont Prob Law and Contemporary Problems

Law Teach Law Teacher
Leg Hist Legal History
Leg Studs Legal Studies
Liv L Rev Liverpool Law Review
xiv National corporate law in a globalised market

Lloyds Rep Lloyds Law Reports

LMCLQ Lloyds Maritime and Commercial Law
Quarterly
LQR Law Quarterly Review

Mal L Rev Malaya Law Review

Manag Law Managerial Law
Melb Univ L Rev Melbourne University Law Review
MJ of Euro and Comp Law Maastricht Journal of European and
Comparative Law
MLR Modern Law Review

NI Northern Irish Reports

NILQ Northern Ireland Legal Quarterly
NLJ New Law Journal
NSWCA New South Wales Court of Appeal
NSWLR New South Wales Law Reports
NwULRev Northwestern University Law Review
NZLR New Zealand Law Reports
NZULR New Zealand Universities Law Review

OFT Office of Fair Trading

OJLS Oxford Journal of Legal Studies
Ottawa L Rev Ottawa Law Review
OUP Oxford University Press
Ox Univ Comm LJ Oxford University Commonwealth Law
Journal

PCC Palmers Company Cases

P & CR Property and Compensation Reports
PL Public Law
Pen L Rev Pennsylvania Law Review

QB Queen’s Bench

RabelsZ Rabel Journal of Comparative and

International Private Law
RALQ Receivers, Administrators and Liquidators
Quarterly
Recov Recovery

SALJ South African Law Journal

 Abbreviations xv

SASR South Australian State Reports

SC Session Cases
SJ Solicitors Journal
SLT Scots Law Times
SMCLN Sweet and Maxwell’s Company Law
Newsletter
Stan L Rev Stanford Law Review
STC Simons Tax Cases
Stat L Rev Statute Law Review
Syd L Rev Sydney Law Review

Th Inq Law Theoretical Inquiries in Law

Trin Coll L Rev Trinity College Law Review
Tul L Rev Tulane Law Review

UKHL House of Lords (neutral citation)

UKPC United Kingdom Privy Council (neutral
citation)
Univ Chic L Rev University of Chicago Law Review
Univ Penn L Rev University of Pennsylvania Law Review
US US Supreme Court Reports

WLR Weekly Law Reports

Table of cases
UNITED KINGDOM Arthur D Little v Ableco Finance
[2003] Ch 217 13, 108
A Ashbury Carriage v Riche (1875)
Acatos & Hutcheson plc v Watson LR 7 HL 653 46, 50
[1995] 1 BCLC 218 22 AWB (Geneva) SA v North America
Adams v Cape Industries [1990] Steam Ships Ltd [2007] EWCA
BCC 786 62, 63, 139 Civ 739 127
Adelaide Electric Supply Co v
Prudential Assurance Co Ltd B
[1934] AC 122 81 Baby Moon Ltd, Re (1984) 1 BCC
Agnew v IRC (Brumark) [2001] 99,298 13, 95
UKPC 28 8 Baku Consolidated Oilfields, Re
Airbase UK Ltd, Re [2008] EWHC [1994] 1 BCLC 173 6
124 (Ch), [2008] 1 BCLC 437 Banco de Bilbao v Sancha [1938] 2
49 KB 176 126
Allen v Gold Reefs of West Africa Banco de Portugal v Waddell (1880)
[1892] AC 125 6 5 App Cas 161 132
Al Sabah v Grupo Torres [2005] Banco Nacional de Cuba (BNC) v
BPIR 544 113 Cosmos Trading [2000] 1 BCLC
Alton Corporation, Re [1985] BCLC 813 94, 111, 132
27 108 Banque de Marchands de Moscou v
Ambrose Lake Tin and Copper Kindersley [1951] Ch 112 136
Mining Co, Re (1890) 14 Ch D Banque Indosuez v Ferromet
90 6 Resources [1993] BCLC 112
AMG Global Nominees v SMM 136
Holdings Ltd [2008] 1 BCLC 447 Barclays Bank v Homan [1993]
101 BCLC 680 116, 134
Aquachem Ltd v Delphis Bank Ltd Base Metal Trading Ltd v Shamurin
[2008] UKPC 7 159 [2005] 1 WLR 1157 126
Arab Bank v Mercantile Holdings Bateman v Service (1881) 6 App
[1993] BCC 816 101, 126 Cas 386 96, 100
Arab Monetary Fund v Hashim (No. BCCI, Re [1994] 1 WLR 708
3) [1991] 2 AC 114 93 134
Arena Corporation, Re [2004] BPIR BCCI (No. 8), Re [1997] 3 WLR
375, [2004] BPIR 415 137 909 23

xvi
 Table of cases xvii

BCCI (No. 10), Re [1997] Ch 213 Bulkeley v Shutz (1871) LR 3 PC

132 764 96
BCCI (No. 11), Re [1997] 1 BCLC Bushell v Faith [1970] AC 1099
80 132 32, 68
Bechuanaland Exploration Co v the Butler v Broadhead [1974] 2 All ER
London Trading Bank [1898] 2 401 30
QB 658 80 Business City Express, Re [1997]
Beckett Investment Management BCC 826 115
Group v Hall [2007] EWCA Civ
613 63 C
Benichou v Mauritius Commercial Cambridge Gas Transport v Official
Bank [2007] UKPC 36 8 Committee of Unsecured
Blackspur Group (No. 4), Re [2006] Creditors of Navigator Holdings
2 BCLC 489 2 [2006] UKPC 26, [2007] 1 AC
Blue Metal Industries v Dilley 508 131, 134, 135, 154
[1970] AC 827 52 Caparo v Dickman [1990] 2 AC 605
Bowman v Secular Society Ltd 40
[1917] AC 406 30 Cape Breton Co, Re (1885) 29 Ch D
BRAC Rent a Car Inc, Re [2003] 795 6
BCC 248 139 Carecraft Construction Ltd, Re
Brady v Brady [1989] AC 755 40 [1994] 1 WLR 172 44
British and Commonwealth Carse v Coppen [1951] SC 233 41
Holdings (No. 3), Re [1992] Central Railway Co of Venezuela v
BCLC 322 22 Kisch (1867) LR 2 HL 99 6
British Eagle International Airlines v Charge Card Services Ltd, Re [1986]
Cie Internationale Air France 3 WLR 697 23
[1975] 1 WLR 758 31, 71 Charles Forte Investments v Amanda
British Seamless Paper Box (1881) [1964] Ch 240 69
17 Ch D 467 20 Chez Nico Restaurants Ltd, Re
Brooks, C. Thurmond III v [1991] BCC 736 38
Rajapakse [2008] BPIR 283 Ci4net.com Inc, Re [2005] BCC 277
144 139
Brownridge Plastics Ltd, Re, unre- Citco Banking Corp v Pusser’s Ltd
ported 2005 13 [2007] UKPC 28 8, 159
Buckingham International plc (No. Citylink Ltd, Re [2005] EWHC
2), Re [1998] BCC 943 71 2875 (Ch) 92
Buckmaster & Moore v Fado Clarke v Oceanic Contractors Inc
Investments 1986 PCC 95 93 [1983] 2 AC 130 110
Bugle Press Ltd, Re [1961] Ch 270 Cleaver v Delta American
69 Reinsurance [2001] 2 WLR 1202
Bulawayo Market and Offices Co 132
Ltd, Re [1907] 2 Ch 457 91 Cleveland Art Museum v Capricorn
xviii National corporate law in a globalised market

Art International SA (1989) 5 Dallhold Estates Pty Ltd, Re [1992]

BCC 860 106, 124 BCC 394 101, 114
Collins & Aikman Corp Group, Re DAP Holdings, Re [2006] BCC 22
[2006] BCC 606 140 102
Collins & Aikman Europe SA, Re Datadeck Ltd, Re [1998] BCC 694
[2006] EWHC 1343 (Ch), [2006] 99
BCC 861 134 De Beers Consolidated Mines Ltd v
Colonial Bank v Cady & Williams Howe [1906] AC 455 96, 121
(1890) 5 Ch App 267 69 Derby & Co v Weldon [1990] Ch 48
Colt Group v Couchman [2000] ICR 136
327 62 DHN v Tower Hamlets LBC [1976]
Colt Telecom Group plc (No. 1), Re 1 WLR 852 63
[2003] BPIR 311 153 Dimbleby v NUJ [1984] 1 WLR 427
Colt Telecom Group plc (No. 2), Re 64
[2002] EWHC 2815 (Ch), [2003] Dimbula Valley (Ceylon) Tea Co v
BPIR 324 62, 127, 153 Laurie [1961] Ch 353 13
Compania Merabello San Nicholas Domoney v Godinho [2004] 2
SA, Re [1972] 3 All ER 448
BCLC 15 41
136
Downsview Nominees v First City
Cook v Deeks [1916] 1 AC 55 8
Corporation [1993] AC 295 8
Cosmic Insurance Corp v Khoo
Drax Holdings Ltd, Re [2004] 1
Chiang Poh [1981] 131 NLJ 286
BCLC 10 102
158
DTI v Rayner [1990] 2 AC 418 61
Courts plc, Re [2008] EWHC 2339
(Ch), [2008] BCC 917 72 Duke Group Ltd, Re [2001] BCC
Cover Europe Ltd, Re [2002] BPIR 144 115
1 127 Dunford and Elliott Ltd v Johnson
Cretanor Maritime Co Ltd v Irish and Firth Brown [1977] 1 Lloyds
Marine Management [1978] 1 Rep 505 38
WLR 966 135 Duomatic Ltd, Re [1969] 2 Ch 365
Curragh Investments v Cooke [1974] 41
1 WLR 1559 95, 99 Dynamics Corp of America [1976] 2
All ER 669 132
D
Dadourian Group International Inc v E
Simms [2006] EWCA Civ 399 Ebrahimi v Westbourne Galleries
136 [1973] AC 360 40
Daewoo Motor Co, Re [2006] BPIR Edelstein v Shuler [1902] 2 KB 144
415 134 80
Daimler v Continental Tyre [1916] 2 Eloc, Re [1981] 2 All ER 1111 136
AC 307 30, 82 England v Smith [2000] 2 WLR
Daisytek ISA, Re [2003] BCC 562, 1141 115
[2003] BCC 984 139 English, Scottish and Australian
 Table of cases xix

Chartered Bank [1893] 3 Ch 385 Focus Insurance, Re [1996] BCC

132 659 114
Enron Directo SA, Re (unreported, Foss v Harbottle (1843) 2 Hare 461
2002) 139 52, 158
Erlanger v New Sombrero Phosphate Franbar Holdings Ltd v Patel [2008]
Co (1878) App Cas 1218 6 EWHC 1534 (Ch), [2008] BCC
Ernest v Nicholls (1857) 6 HL Cas 885 52
401 47 Freeman and Lockyer v Buckhurst
Eurostem Maritime Ltd, Re [1987] Park Properties [1964] 1 QB 480
PCC 190 118 51
Ex parte Blain (1879) 12 Ch D 522 Fulham FC v Cabra [1992] BCLC
110 863 70
Exeter CC v Bairstow [2007] BCC
236 40 G
Exeter City AFC v Football Gamlestaden [2007] UKPC 26 8
Conference [2004] BCC 498 Gasque v IRC [1940] 2 KB 80 121
31, 53, 69 Gencor v ACP Ltd [2000] 2 BCLC
Extrasure Travel Insurance v 734 64
Scattergood [2003] 1 BCLC 598 German Date Coffee Co, Re (1882)
41 20 Ch D 169 6, 50
GHE Realisations Ltd, Re [2006]
F BCC 139 74
Fagin’s Bookshop Ltd, Re [1992] Government of India v Taylor
BCLC 118 128 [1955] AC 491 133
Farepak Food and Gifts Ltd [2006] Gross v Rackind [2005] BCC 11
EWHC 3272 (Ch), [2007] 2 63
BCLC 1 49 Guidezone Ltd, Re [2000] 2 BCLC
Felixstowe Dock and Rwy Co v US 321 13
Lines Inc [1989] QB 360
101 H
FG Films Ltd, Re [1953] 1 All ER Hague v Nam Tai Electronics [2006]
615 82 UKPC 52 72
FH Lloyd Holdings Ltd, Re (1985) 1 Hans Brochier Holdings Ltd v Exner
BCC 99,402 84 [2007] BCC 127 140
FH Lloyd Holdings plc, Re [1985] Harvard Securities, Re [1998] BCC
BCLC 293 84 567 126
First Independent Factors and Harrods (Buenos Aires) Ltd, Re
Finance Ltd v Mountford [2008] [1992] Ch 72 124
BPIR 515 49, 155 Henriques v Dutch West India Co
First Russian Insurance Co v (1728) 2 Ld Raym 1532 93
London and Lancashire Insurance Hibernian Merchants, Re [1958] Ch
Co Ltd [1928] Ch 922 121, 126 76 134
xx National corporate law in a globalised market

HIH Casualty and General Jon Beauforte (London) Ltd, Re

Insurance, Re [2006] EWCA Civ [1953] Ch 131 47
732 72, 114 Jubilee Cotton Mills Ltd v Lewis
HMRC v Benton-Diggins [2006] 2 [1924] AC 958 42
BCLC 255 49 Jubilee International Inc v Farlin
HMRC v Yousef [2008] EWHC 423 Timber Pte Ltd [2006] BPIR 765
(Ch), [2008] BPIR 1491 49 137
Holis Metal Industries v GMB Jyske Bank (Gibraltar) Ltd v
[2008] IRLR 187 110 Spjeldnaes (No. 2) [1999] 2
Houldsworth v City of Glasgow BCLC 101 111
Bank (1880) 5 App Cas 317 36
Howard Holdings Inc, Re [1998] K
BCC 549 91 Kensington International Ltd v
Howard Smith v Ampol Petroleum Republic of Congo [2006] 2
[1974] AC 821 70 BCLC 296 64, 94
Hughes v Hannover [1997] BCC Konameneni v Rolls Royce
921 114 Industrial Power (India) Ltd
[2002] 1 BCLC 336 113, 125
I Krug International (UK) Ltd, Re
Illingworth v Houldsworth [1904] [2008] EWHC 2256 (Ch), [2008]
AC 355 40 BPIR 1512 112
International Bulk Commodities Ltd,
Re [1992] 3 WLR 238 101 L
International Power Industries NV, Lagunas Nitrate Co v Lagunas
Re [1985] BCLC 128 113 Syndicate [1899] 2 Ch 292 6
IR v McEntaggart [2006] BPIR 750 Lakah Group v al Jazeera Satellite
49 Channel [2003] EWCA Civ 1781
IRC v Nash [2004] BCC 150 49 106
IRC v Walsh [2005] EWCA Civ La Mutuelle du Mans Assurance, Re
1291 49 [2005] EWHC 1599 (Ch), [2006]
BCC 11 102
J Lazard Bros & Co v Midland Bank
Jameel v Wall Street Journal [2006] [1933] AC 289 at 297 per Lord
UKHL 44, [2007] 1 AC 359 65, Wright 93
94 Lee v Lee’s Air Farming [1961] AC
Jesner v Jarad Properties [1993] 12 8
BCLC 1032 13 Lehman Bros International (Europe)
Jewish Colonial Trust, Re [1908] 2 Ltd, Re [2008] EWHC 2869 (Ch)
Ch 287 26 131
Jirehouse Capital v Beller [2008] Lewis v IRC [2002] BCC 198 40
EWCA Civ 908, [2008] BPIR Leyland Daf Ltd, Re [1994] 2 BCLC
1498 104 106 127
 Table of cases xxi

Leyland Daf Ltd, Re (Buchler v McGrath v Riddell [2008] UKHL 21

Talbot) [2004] UKHL 9 40 72, 114, 132, 135
Lines Brothers Ltd, Re [1983] Ch 1 McGuinness v Bremner plc [1988]
81 BCLC 673 80
Little Olympian Each-Ways Ltd (No. Mellinger v New Brunswick
2), Re [1995] 1 WLR 560 105 Development Corp [1971] 1
London and Globe Finance WLR 604 94
Corporation Ltd [1903] 1 Ch 728 MG Rover Belux SA/NV, Re [2007]
66 BCC 446 132, 138
London United Investment plc, Re MG Rover Espana, Re [2006] BCC
[1992] BCLC 285 2 599 134
Lonrho plc (No. 2), Re [1989] Mid East Trading Ltd, Re [1998] 1
BCLC 309 85 BCLC 240 91, 111
Lonhro v Shell Petroleum [1980] 1 Miliangos v Geo Frank Textiles Ltd
WLR 627 62 [1976] AC 443 81
Lord Advocate v Huron and Erie Millam v The Print Factory [2007]
Loan and Savings Company 1911 EWCA Civ 322 63
SC 612 97 Mitchell v Carter [1997] BCC 907
Lubbe v Cape Industries (No. 2) 113, 131
[2000] 1 WLR 1545 63, 125 Moseley v Koffyfontein Mines
[1911] AC 409 6
M Music Sales Ltd v Shapiro Bornstein
Macmillan Inc v Bishopsgate IT and Co Inc [2006] 1 BCLC 371
(No. 3) [1996] 1 WLR 387 126 127
Macro (Ipswich Ltd), Re [1994] 2 Mutual Life Insurance Company of
BCLC 354 39 New York v Rank Organization
Marann Brooks CSV Ltd, Re [2003] [1985] BCLC 11 85
BCC 239 138
Mareva Compania Naviera Sa v N
International Bulk Carriers (The Nasser v United Bank of Kuwait
Mareva) [1980] 1 All ER 213 [2001] EWCA Civ 556, [2002] 1
135 WLR 1868 105
Matchmet v Wm Blair & Co [2003] Natal Land v Pauline Colliery
2 BCLC 195 106 [1904] AC 120 8
Maxwell Communications (No 2), National Westminster Bank v
Re, [1994] 1 BCLC 1 22 Spectrum Plus Ltd [2005] UKHL
Maxwell Communications Corp 41 24, 40
(No. 3), Re, [1995] 1 BCLC 501 New Hampshire Insurance Co v
114 Rush and Tompkins Group [1998]
Mazur Media Ltd v Mazur Media 2 BCLC 471 113
GmbH [2004] EWHC 1566 (Ch), Norfolk House v Repsol Petroleum
[2005] 1 BCLC 305 110 1992 SLT 235 137
xxii National corporate law in a globalised market

Normandy Marketing, Re [1993] Paramount Airways Ltd, Re [1994]

BCC 879 103, 136 BCC 172 36
Norris v Govt of USA [2008] UKHL Paramount Airways Ltd (No. 2), Re
16, [2008] 2 WLR 673 118 [1992] 3 WLR 690 111, 131
North West Transportation Co v Parkside Flexibles SA, Re [2006]
Beatty (1887) 12 App Cas 589 BCC 589 139
8, 52 Parkstone Ltd v Gulf Guarantees
Norway’s Application (Nos 1 and 2), Bank plc [1990] BCC 589 85
Re [1990] 1 AC 723 133 Parmalat Capital Finance Ltd v Food
Norwest Holst Ltd v Secretary of Holdings Ltd [2008] UKPC 23
State [1978] Ch 201 47, 75 75
NV Slavenburg’s Bank v Percival v Wright [1902] 2 Ch 421
Intercontinental Natural 76
Resources [1980] 1 WLR 1076 Permacelle Finesse Ltd, Re [2008]
108 BCC 49
Peveril Gold Mines Ltd, Re [1898] 1
O Ch 122 31, 53
Phoenix Kapitaldienst GmbH, Re
Oakley v Ultra Vehicle Design Ltd
[2008] BPIR 1086 135
[2006] BPIR 115 138
PNC Telecom plc v Thomas [2004]
Official Receiver v Brady [1999]
1 BCLC 88 57
BCC 258 92
POW Trust Ltd, Re [2004] BCC 268
Official Receiver v Stern (No. 2)
43
[2001] BCC 305 102
Powdrill v Watson [1995] 2 AC 394
Official Receiver v Stojevic [2007] 36
EWHC 1186 (Ch), [2008] Bus L Prince Jefri v Bolkiah [1999] 1
R 641 90 BCLC 1 154
OJSC ANK Yugraneft, Re [2008] Princess of Reuss v Bos (1871) LR 5
EWHC 2614 (Ch) 137 HL 176 80
O’Neill v Phillips [1999] 1 WLR Prudential Assurance v Newman
1092 40 Industries (No. 2) [1982] Ch 204
Ord v Belhaven Pubs [1998] 2 159
BCLC 447 77
Ooregum Gold Mining Co of India v Q
Roper [1892] AC 125 6 QRS 1 Aps v Frandsen [1999] 1
Oriel Ltd , Re [1986] 1 WLR 180 WLR 2169 133
108
Oriental Steam Co, Re (1874) LR 9 R
Ch App 557 132 R (Bermingham) v Director of the
SFO [2007] 1 WLR 762 118
P R (on application of POW Trust) v
Panama, Re (1870) 5 Ch App 318 Registrar of Companies [2004]
40 BCC 268 40, 43
 Table of cases xxiii

R (on the application of National Russian Bank for Foreign Trade, Re

Grid plc) v Environment Agency [1933] 1 Ch 745 136
[2007] UKHL 30 86 Russian and English Bank v Baring
R v Cole [1998] BCC 87 43 Bros [1936] AC 405 136
R v de Berenger (1814) 3 M & S 67
76 S
R v Dodd (1808) 9 East 516 5 Saab v Saudi American Bank [1999]
R v Lyons [2002] 3 WLR 1562 2 2 BCLC 462 106
R v Registrar of Companies ex parte Salomon v Salomon & Co Ltd
AG [1991] BCLC 476 30 [1897] AC 22 20, 40, 61
R v Registrar of Companies ex parte Sarrio SA v Kuwait Investment
Central Bank of India [1986] 2 Authority [1997] CLC 280
WLR 177 42 93
R v Registrar of Joint Stock Scandinavian Bank plc, Re [1988] 1
Companies [1931] 2 KB 197 30 Ch 87 22, 81
R v Spens [1991] 1 WLR 624 38 Schemmer v Property Resources Ltd
R v Takeover Panel ex parte Datafin [1974] 3 All ER 451 135
plc [1987] QB 815 38
Seagull Manufacturing Co Ltd, Re
R v Takeover Panel ex parte Guinness
[1993] 2 WLR 872 89
plc [1990] 1 QB 146 38
Seagull Manufacturing Co Ltd (No.
Rafidain Bank Ltd, Re [1992] BCC
2), Re [1993] BCC 833 90
376 131
Selkrig v Davis (1814) 2 Rose 291
Rajapakse (Note) [2007] BPIR 99
132
144
Rakusens v Baser Ambalaj Plastik Senator Hanseatische, Re [1996] 2
Sanayi Ticaret AS [2001] BCC BCLC 562 138
294 106 Sendo Ltd, Re [2006] 1 BCLC 396
Rayner v DTI [1990] 2 AC 418 61 139
Real Estate Development Co, Re Serco Ltd v Lawson [2006] UKHL 3
[1991] BCLC 210 137 110
Reeves v Sprecher [2007] 2 BCLC Sharp v Thompson [1998] BCC 115
614 125 41
Registrar of Companies v Radio- Shearer v Bercain Ltd [1980] 3 All
Tech Engineering [2004] BCC ER 295 36
277 43 Shruth Ltd [2007] BCC 960 131
Romalpa [1976] 1 WLR 676 41 Siebe Gorman & Co v Barclays
Rome v Punjab National Bank (No. Bank [1979] 2 Lloyds Rep 142
2) [1989] 1 WLR 1211 106 24
Rover International v Cannon Film Slavenburg [1980] 1 WLR 1076
Sales (1987) 3 BCC 369, [1988] 108
BCLC 710 100 South India Shipping Corp v Export-
Russell v Northern Bank [1992] 1 Import Bank of Korea [1985] 1
WLR 588 32 WLR 585 106
xxiv National corporate law in a globalised market

Sovereign Marine, Re [2006] Titan International Inc, Re [1998] 1

EWHC 1335 (Ch) 102 BCLC 102 75, 103
Speed Investments Ltd v Formula Trendtex Trading Corp v Central
One Holdings Ltd (No. 2) [2004] Bank of Nigeria [1977] 2 WLR
EWCA Civ 1512, [2005] 1 WLR 356 94
1936 128 Trustor v Smallbone (No. 2) [2001]
Spiliada Maritime Corp v Cansulex 1 WLR 177 64
Ltd [1987] AC 460 124 Turquand’s case (1856) 6 E & B 327
St Piran Ltd, Re [1981] 1 WLR 1300 50
38 TXU German Finance BV, Re
State of Norway’s Application (Nos [2005] BCC 90 140
1 and 2) [1990] 1 AC 723 133
Stocznia Gdansk SA v Latreefers Inc U
(No. 2), Re [2001] 2 BCLC 116 Ultra Motorhomes Ltd, Re [2005]
137 EWHC 872 (Ch), [2006] BCC 57
Stojevic v Komercni Banka AS 138
[2007] BPIR 141 95, 108, 141 Unigreg Ltd, Re [2005] BPIR 220
Suidair International Airways [1951] 111
1 Ch 165 136 Unit Construction v Bullock [1960]
AC 351 96, 121
T
T & N Ltd, Re [2004] EWHC 2878 V
(Ch) 112, 116 V/O Sovfracht v Van Udens
Taupo Totara Ltd v Rowe [1978] AC Scheepvaart [1943] AC 203 30
537 8 Vocalion (Foreign) Ltd, Re [1932]
3 Tel Ltd, Re [2006] 2 BCLC 137 Ch 196 110
139 Vocam (Europe) Ltd Re [1998] BCC
Television Trade Rentals Ltd, Re 396 69
[2002] EWHC 211 (Ch) 115
Telewest Communications plc (No. W
2), Re [2005] 1 BCLC 772, Waste Recycling Group Ltd, Re
[2005] BCC 36 81 [2004] 1 BCLC 352 69
Telia AB v Hilcourt (Docklands) Ltd Weldtech Ltd [1991] BCLC 393
[2003] BCC 856 140 41
Texuna International Ltd v Cain Westburn Sugar Refineries, ex parte
Energy plc [2004] EWHC 1102 [1951] AC 625 13
(Comm), [2005] 1 BCLC 579 Westdeutsche Landesbank
105 Girozentrale v Islington LBC
The Home Insurance Co, Re [2005] [1996] AC 669 23
EWHC 2485 (Ch), [2006] BCC West Mercia Safetywear v Dodd
164 102 [1988] BCLC 250 24
Thistle Hotels v Orb Estates plc Weston’s case (1868) LR 4 Ch App
[2004] 2 BCLC 174 104, 105 20 68
 Table of cases xxv

Wight v Eckhardt Marine [2003] Commission v Belgium (C503/99)

UKPC 37, [2003] BCC 702 72, [2002] ECR 1-4809 87
132 Commission v Germany (C112/05)
Williams and Humbert v W & H [2008] 1 CMLR 643 88
Trade Marks [1985] 1 All ER 619 Commission v Italian Republic
80, 94 (C174/04) [2005] ECR 1-4933
Williams v Natural Life Health 87
Foods [1998] 1 WLR 880 61 Commission v Italy (C58/99) unre-
Wilson v Kelland [1910] 2 Ch 306 ported 87
47 Commission v Netherlands (C282
Winpar Holdings v Joseph Holt plc and 283/04) [2006] ECR 1-9141
[2001] 2 BCLC 407 85 87
Woolfson v Strathclyde Council Commission v Portugal (C367/98)
(1979) 38 P & CR 521 63 [2003] 2 WLR 1 87
Commission v Spain (C114/97)
X [1999] 2 CMLR 701 89
X Bank Ltd v G, The Times 13 April Commission v Spain (C463/00)
[2003] ECR 1-4581, [2003] All
1985, (1985) 1 BCC 99, 421 64
ER (EC) 878 87
Commission v UK (C98/01) [2003]
ECR 1-4641 87
INTERNATIONAL COURT Cooperative Rabobank ‘Vecht en
OF JUSTICE Plassengebied’ BA v Minderhoud
(C104/96) [1998] 1 WLR 1025
Barcelona Traction Light and Power 18
Co, Re [1970] ICJ Rep 3, (1973) Daily Mail (C81/87) [1988] ECR
46 Int L Rep 178 61 5483 99, 156
Danmarks (C117/96) [1998] 2
BCLC 395 142
EUROPEAN UNION Data Delecta v MSL Dynamics
(C43/95) [1996] ECR I-4661
Alpine Investments (C384/93) 105
[1995] 2 BCLC 214 58 Etablissement Somafer SA v Saar-
Cartesio Oktato as Szolgaltato bt Ferngas AG (C33/78) [1978]
(C210/06) [2008] BCC 745 ECR 2183 97
(Advocate General) [2009] BCC Eurofoods (C341/04) [2006] BCC
232 (ECJ) 156 397 141
Centros Ltd v Erhvervs-og Everson (C198/98) [2000] 1 CMLR
Selskabsstyrelsen (C212/97) 489 142
[2000] Ch 446 17, 74, 121, 122, Factortame (C213/89) [1990] ECR I-
152 2466 83
Commission v Belgium [2000] 2 Factortame (C221/89) [1991] ECR I-
CMLR 357 89 3905 18, 83
xxvi National corporate law in a globalised market

Factortame (C48/93) [1996] ECR I- Rainford-Towning [1999] 1 CMLR

1029 83 871 89
Fantask (C188/95) [1998] 1 CMLR Regeling (C125/97) [1999] 1 CMLR
473 15 1410 142
Francovich v Italy (C6 and 9/90) Reyners v Belgium [1974] ECR 631
[1991] ECR I-5537, 1992 ECR 18
133 18, 83, 142 Sar Schotte GmbH v Parfums
Gourdain v Nadler (C133/78) [1979] Rothschild (C218/86) [1992]
ECR 733 127 BCLC 235 128
Ipourgos Ikonomikon v Georgakis Segers (C79/85) [1987] 2 CMLR
(C391/04) [2007] 2 BCLC 692 247 18
16 Sevic AG v Amsgericht Neuwied
Kamer van de Koophandel en C411/03) [2006] 2 BCLC 510
Fabrieken voor Amsterdam v 123
Inspire Art Ltd (C167/01) [2003] Siemens AG v Nold (C42/95) [1997]
ECR I-10155 123 BCC 759 158
Karella v Ministry of Industry (C19 Staubitz-Schreiber (C1/04) [2006]
and 20/90) [1994] 1 BCLC 774 BCC 639 140
18 Svenska Staten v Anders Holmqvist
Manninen, Proceedings Brought by (C310/07) unreported 142
(C319/02) [2005] 2 WLR 670 Ubbink Isolatie BV v Dak-en
18, 83 Wandtechniek BV (C136/87)
Marleasing (C106/89) [1990] ECR I- [1990] BCC 255 15
4135 21 Uberseering BV v Nordic
Ministère Public v Blanguernon Construction Co Baumanagement
(C38/89) [1991] BCLC 635 18 GmbH (Case C208/00) [2005] 1
Modelo (C56/98) [2001] STC 1043 WLR 315 123
15 Wagner Miret (C334/92) [1995] 2
Mund and Fester v Firma Hatrex CMLR 49 142
International Transport (C398/92)
[1994] ECR I-467 89
Owusu v Jackson (C281/02) [2005] EUROPEAN COURT OF
QB 801 124 HUMAN RIGHTS
Portugal v Commission (C367/98
and C483/99) [2003] 2 WLR 1 Agrotexim v Greece (1996) 21
87 EHRR 250 61
Powell Duffryn v Petereit (C214/89), Bramelid and Malstrom v Sweden
The Times 15 April 1992 32, (1982) 5 EHRR 249 69
128 Davies v UK (42007/98) [2005]
Pucher, Re [2002] 2 CMLR 3 89 BCC 401 2
R v HM Treasury ex parte Daily DC, HS and AD v UK [2000] BCC
Mail [1988] ECR 5483 99, 156 710 2
 Table of cases xxvii

Eastaway v UK (74976/01) [2006] 2 Kinsella v Russell Kinsella Pty

BCLC 361 2 [1968] NSWLR 732 23
Fayed v UK (1994) 18 EHRR 393 Northside Developments v Registrar
2 General (1990) 170 CLR 146
GJ v Luxembourg [2000] BPIR 50
1021 2 New South Wales v the
IJL, GMR and AKP v UK [2002] Commonwealth (1990) 169 CLR
BCC 380 2 482 12
Lithgow v UK (1986) 8 EHRR 329 Sons of Gwalia v Margaretic [2007]
53, 69 HCA 1 36, 72
Pafitis v Greece (1999) 27 EHRR Thorby v Goldberg (1964) 112 CLR
566 69 597 70
Pine Valley Developments v Ireland Trade Practices Commission v
(1992) 14 EHRR 319 and (1993) Australian Iron and Steel Pty Ltd
16 EHRR 379 65 (1990) 22 FCR 305 22
Saunders v UK [1997] BCC 872 2 Walker v Wimbourne (1976) 17
Tinnelly and Sons Ltd v UK (1999) CLR 1 23
27 EHRR 249 65

AUSTRIA
AUSTRALIA
Graz [2001] 1 CMLR 38 122
ASC v Bank Leumi Le Israel (1996)
21 ACSR 474 84
August Investments Pty Ltd v FRANCE
Poseidon Ltd and Samin Ltd
[1971] 2 SASR 71 22 Energotech SARL [2007] BCC 123
Ayres v Evans (1982) 39 ALR 129, 139
[2000] BPIR 697 133 Klempka v ISA Daisytek SA [2003]
Bruninghausen v Glavanics [1999] BCC 984 139
NSWCA 199 76
Crabtree Vickers Pty v Australia
Direct Mail Advertising (1975) IRELAND
133 CLR 72 51
Dynason v JC Hutton Pty Ltd (1935) Allied Irish Coal v Powell Duffryn
ALR 419 22 [1997] 1 ILRM 306 63
Gambotto v WCP Ltd (1995) 182 Fennel v Frost [2003] 1 IR 80 48,
CLR 432 159 90
IATA v Ansett [2008] HCA 3, [2008] Frederick Inns Ltd, Re [1994] 1
BPIR 57 71 ILRM 387 23
Industrial Equity v Blackburn (1977) Interview Ltd, Re [1975] IR 382
137 CLR 567 63 41
xxviii National corporate law in a globalised market

Luby v McMahon [2003] 1 IR 133 v The Ship Cornelis Verolme

48 [1997] 2 NZLR 110, [2000] BPIR
O’Ferral v Coughlan [2004] 4 IR 896 134
266 62, 90
Private Motorists Provident Society
v AG [1983] IR 339 30 SOUTH AFRICA
Robinson v Frost [1999] 2 ILRM
169 48 Gumede v Bandha Vukani Bakithi
State v Dublin CC [1985] ILRM 513 Ltd 1950 (4) SA 560 61
63

UNITED STATES OF
NEW ZEALAND AMERICA
AG v Equiticorp [1996] 1 NZLR Liggett v Lee (1933) 288 US 517
528 63 154
Coleman v Myers [1977] 2 NZLR Loy, Re [2008] BPIR 111 115, 143
225 76 Maxwell Communications Corp v
Fournier v The Ship Margaret Z Société Générale [2000] BPIR
[1997] 1 NZLR 629 135 764 110, 134
Nicholson v Permakraft [1985] 1 Pepper v Linton (1939) 308 US 295
NZLR 242 23 65
Securitibank (No 2), Re [1978] 2 Santa Clara County v South Pacific
NZLR 136 63 Railroad (1886) 118 US 394
Supercool Refrigeration v Hoverd 65
Industries [1994] NZLR 300 24 Taylor v Standard Gas (1939) 306
Turners and Growers Exporters Ltd US 307 65
Table of legislation
ENGLAND AND WALES s. 118 82
s. 120 49
Statutes s. 151 101
s. 212 84
Navigation Acts 1650–63 80 s. 242A 43
South Sea Bubble Act 1720 5, 6, 22 s. 289 88
Bubble Repeal Act 1825 5 s. 309 71
Limited Liability Act 1855 66 s. 310 31, 70
Directors Liability Act 1890 6 s. 349 49
Companies (Memorandum of s. 359 128
Association) Act 1890 26 s. 362 80
Limited Partnerships Act 1907 25 s. 379A 42, 73
Companies Act 1907 97 s. 389A 6
Registration of Business Names Act s. 389B 6
1916 82 s. 401 42
The Companies (Foreign Interests) s. 409 107, 109
Act 1917 82 ss. 410–24 41
Companies Act 1928 ss. 425–27 101, 102
s. 43 107 s. 428 85
Foreign Judgments (Reciprocal s. 429 52
Enforcement) Act 1933 113 s. 430C 52
Trading with the Enemy Act 1939 s. 432 2, 75
s. 7 82 s. 434 2
Exchange Control Act 1947 82 s. 442 2
Companies Act 1948 8 s. 447 2
Administration of Justice Act 1977 s. 453 118
s. 7 137 s. 458 43
Companies Act 1980 35 s. 459 39, 44, 124
s. 72 77 s. 652 54
Companies Act 1985 (c. 6) s. 656 75
s. 13 42 s. 694A 106
s. 32 75 s. 695 106
s. 35A 51 s. 723B 47
s. 36C 100 s. 724 137
s. 111A 36 s. 726 104

xxix
xxx National corporate law in a globalised market

s. 735 100 s. 137 70

s. 745 13 s. 207 69
Part V 35 Foreign Corporations Act 1991 (c.
Part XIII 35 44) 93
Part XIV 35 Criminal Justice Act 1993
Part XXIII 95, 96, 102 s. 52 77
Insolvency Act 1986 s. 62 117
s. 8 101 VAT Act 1994
s. 72 137 s. 43 64
s. 84 54 Employment Rights Act 1996
s. 107 71 s. 231 64
s. 122 54, 124 Scotland Act 1998 13
s. 124A 30 Human Rights Act 1998 4
s. 130 110 Insolvency Act 2000
s. 176A 49 s. 6 44
s. 183 111 s. 14 143
s. 202 74 Electronic Communications Act
s. 214 43, 91 2000 57
s. 216 43 Limited Liability Partnerships Act
s. 217 43 2000 20
s. 221 136 Financial Services and Markets Act
s. 225 136 2000
s. 236 91, 112, 114 s. 123 43, 77
s. 238 111 Enterprise Act 2002
s. 239 13 s. 251 73
s. 242 13 s. 254 103, 138
s. 423 111 Extradition Act 2003
s. 426 101, 113–115, 135, 137 s. 137 118
s. 440 95 Companies (Audit Investigations and
s. 441 95 Community Enterprises) Act
s. 442 100 2004 (c. 27)
Sched B1 74 s. 8 6
Company Directors Disqualification s. 9 6
Act 1986 ss. 19–20 70
s. 6 90 Companies Act 2006 162–164
s. 7 39 s. 6 46
s. 15 49 s. 15 42
Companies Act 1989 s. 17 45
s. 70 103 s. 22 53
s. 82 118 s. 40 51
s. 105 108 s. 42 50
s. 116 42, 73 s. 51 100
 Table of legislation xxxi

s. 76 75 ss. 1024–28 54
s. 125 128 s. 1044 98
s. 129 81 s. 1046 98
ss. 129–35 80 s. 1052 109
s. 132 81 s. 1059 98
s. 155 92 s. 1067 90
s. 165 47 s. 1120 103
ss. 171–7 57 s. 1139 106
s. 172 70, 71, 147 s. 1180 108
s. 232 31, 70 s. 1185 119
s. 233 70 s. 1186 119
ss. 234–238 70 s. 1187 119
s. 239 52 ss 1188–9 119
s. 259 126 s. 1190 119
ss. 260–64 53 s. 1269 39
s. 265 95 s. 1282 40
s. 270 35 s. 1284 95
ss. 288–300 42, 73 ss. 1285–7 14
s. 333 57 s. 1289 37
s. 341 57 s. 1290 37
s. 453 43 Part 11 149
ss. 499–501 6 Part 15 35
ss. 527–31 57 Parts 17–20 35
s. 534 21 Part 22 47, 84
s. 542 22, 68, 82 Part 23 35
s. 580 67 Part 28 38, 85, 129
s. 612 36 Part 34 37, 95, 96
ss. 622–8 82 Part 35 103
s. 763 82 Part 40 48
s. 771 68
s. 793 44, 84 Delegated Legislation
s. 869 42
ss. 878–92 41 Insolvency Rules 1986 (SI
ss. 895–901 41 1986/1925)
s. 965 129 r.12.12 112
s. 979 52 The Cooperation of Insolvency
s. 986 52 Courts (Designation of Relevant
s. 993 43 Countries and Territories) Order
s. 994 44, 124 1986 (SI 1986/2123) 113
s. 1000 54 The European Economic Interest
s. 1003 54 Grouping (EEIG) Regulations
s. 1012 75 1989 (SI 1989/638) 16
xxxii National corporate law in a globalised market

The Companies (Single Member Shares) (Treasury Shares)

Private Limited Companies) Regulations 2003 (SI 2003/1116)
Regulations 1992 (SI 1992/1699) 158
45 The European Public Limited
The Foreign Companies (Execution Liability Company Regulations
of Documents) Regulations 1994 2004 (SI 2004/2326) 157
(SI 1994/950) 101 Cross-border Insolvency Regulations
The Uncertificated Securities 2006 (SI 2006/1030)
Regulations 1995 (SI 1995/3272) SI 2006/1183 19, 133, 143, 144
69 The Financial Services and Markets
The Cooperation of Insolvency Act 2000 (Markets in Financial
Courts (Designation of Relevant Instruments) Regulations 2007
Countries) Order 1996 (SI (SI 2007/126) 58
1996/253) 113 The Financial Services and Markets
The Open Ended Investment Act 2000 (Markets in Financial
Companies (Companies with Instruments) (Amendment)
Variable Capital) Regulations Regulations 2007 (SI 2007/763)
1996 (SI 1996/2827) 17 58
The Cooperation of Insolvency The Markets in Financial
Courts (Designation of Relevant Instruments Directive
Country) Order 1998 (SI (Amendment) Regulations 2007
1998/2766) 113 (SI 2007/2932) 58
Civil Procedure Rules 1998 (as The Companies (Cross-border
amended) SI 1998/3132 Mergers) Regulations 2007 (SI
6.5 106 2007/2974) 16
19.9 125 The Non-domestic Rating
25.13 104 (Unoccupied Property) (England)
The Transnational Information and Regulations 2008 (SI 2008/386)
Consultation of Employes 40
Regulations 1999 (SI 1999/3323) The Companies (Late Filing
17 Penalties) and LLPs (Filing
The Companies Act 1985 (Electronic Periods and Late Filing Penalties)
Communications) Order 2000 (SI Regulations 2008 (SI 2008/497)
2000/3373) 57 43
The Companies (Particulars of Usual The Companies (Reduction of
Residential Address) (Compliance Capital) (Creditor Protection)
Orders) Order 2002 (SI Regulations 2008 (SI 2008/719)
2002/912) 47 46
The Insolvency (Amendment) (No. The Companies Act 2006 (Extension
2) Rules 2002 (SI 2002/2712) of Takeover Panel Provisions)
40 (Isle of Man) Order 2008 (SI
Companies (Acquisition of Own 2008/3122) 129
 Table of legislation xxxiii

The Companies (Model Articles) Art 56 (ex 73b) 83, 86

Regulations 2008 (SI 2008/3229) Art 294 (ex 221) 18
69, 70
Overseas Companies Regulations First Company Law Harmonisation
2009 (SI 2009/Draft) 98, 101 Directive (151/1968) 15, 47, 51,
Overseas Companies (Company 158
Contracts and Registration of First Company Law Harmonisation
Charges) Regulations 2009 (SI Directive Amendment Directive
2009/Draft) 109 (58/2003) 15
Second Company Law
Harmonisation Directive
SCOTLAND Directive (91/1977) 15, 46,
158
Bankruptcy and Diligence etc. Act Second Directive Amendment
2007 13 Directive (68/2006) 15, 19, 46,
155
Third Company Law Harmonisation
NORTHERN IRELAND Directive (855/1978) 16
Fourth Company Law
Companies (Northern Ireland) Order Harmonisation Directive
1986 (SI 1986/1032) (NI 6) 13 (660/1978) 15
Sixth Company Law Harmonisation
Directive (891/1982) 16
EUROPEAN CONVENTION Seventh Company Law
ON HUMAN RIGHTS AND Harmonisation Directive
(349/1983) 15
FUNDAMENTAL
Eighth Company Law
FREEDOMS Harmonisation Directive
(253/1984) 15
Art 6 2, 43
Tenth Company Law Harmonisation
Art 14 105
Directive (56/2005) 16
First Protocol Art 1 69
Eleventh Company Law
Harmonisation Directive
(666/1989) 15, 123
EUROPEAN UNION Twelfth Company Law
Harmonisation Directive
EEC Treaty
(667/1989) 16, 45
Art 5(2) (ex 3b) 18, 160
Art 10 (ex 5) 21
Insider Dealing Directive (592/1989)
Art 43 (ex 52) 17, 30
117
Art 44 (ex 54) 15
Investment Services Directive
Art 49 (ex 59) 88
(22/1993) 16, 58
xxxiv National corporate law in a globalised market

Market Abuse Directive (6/2003) s. 297A 48

117 Companies Act 1990
Prospectus Directive (71/2003) 16 s. 138 48
Takeover Directive (25/2004) 16, s. 140 66, 149
68 s. 141 66, 149
Transparency Directive (109/2004) s. 150 48
16 Company Law Reform Enforcement
Shareholder Rights Directive Act 2001
2007/36 16, 58, 84 s. 42 119
Employee Rights Directive 2008/94 s. 56 39
142 s. 68 27

EEIG Regulation (2137/1985) 127

EC Regulation on Insolvency ISLE OF MAN
Proceedings (1346/2000) 124,
138–42 Companies Act 1931 14
Judgment Regulation (44/2001) Companies Act 2006 14
128–129
European Company Regulation
(2157/2001) 157 NEW ZEALAND
Companies Act 1993
AUSTRALIA s. 135 48
ss. 271–2 66
Corporations Law 2001 56 Companies Amendment Act 2006
66
CANADA
Canadian Business Corporations Act UNITED STATES OF
12 AMERICA
Sarbanes-Oxley Act 2001 12, 104,
IRELAND 110
Companies Act 1963
Preface
I am grateful for the opportunity to write this monograph as it enables me to
tie together diverse streams of consciousness acquired over the past 30 years
of teaching corporate law. When I entered academe as a lecturer in 1978, my
focus on Company Law (as the subject was then designated) was essentially
parochial. This was no fault of my teachers at the Faculty of Law at the
University of Birmingham, who included the visionary Professor Robert
Pennington, a scholar all too well aware of how membership of the EEC
would change the shape of our national corporate law model. The problem was
that for less perceptive individuals like myself, at this stage of evolution in the
subject, even the EEC input appeared fairly peripheral. My belated apprecia-
tion of a much wider perspective on corporate law came about through a vari-
ety of factors. First and foremost, from the mid 1980s I became involved in
teaching LL.M. candidates at the University of Manchester on a postgraduate
course entitled Corporations in International Business Law. This gave me the
opportunity (greatly aided by the insights of generations of students from a
range of overseas jurisdictions) to reflect upon the comparative nature of the
subject. Why do different jurisdictions adhere to certain basic corporate prin-
ciples, whilst adopting a diversity of approach in other areas of Company
Law? Are there universal core principles of Company Law? Is there an ideal
model of Company Law to be located on planet Earth? Will globalisation lead
to a state of convergence in Corporate Law?
Subsequently, I became wedded to the already well-established idea that for
instructional purposes, the UK system of corporate law might be viewed as a
commodity to be sold to the international business community, and that in the
interests of boosting the invisible earnings of UK plc, it was necessary to
develop a product that was commercially competitive. I was not alone in draw-
ing this apparently mercenary conclusion. A perusal of the first publication in
the UK Company Law Review (1998–2001) library, Modern Company Law
for a Competitive Economy, will unearth the following statements from
Margaret Beckett, the then Secretary of State for Trade and Industry:

An up-to-date company law framework, based on principles of consistency,

predictability and transparency, is particularly important in the context of a glob-

xxxv
xxxvi National corporate law in a globalised market

alised economy, in terms both of competing for inward investment, and producing
internationally competitive companies. (para 3.8)

Later she states:

In today’s increasingly globalised economy, the national framework of company

law cannot be considered in isolation. It represents part of the nation’s basic infra-
structure. This can best be seen in relation to business mobility. Naturally many
reasons affect the decisions of internationally mobile businesses as to the country in
which to locate, and it is worth emphasising that the UK scores extremely highly in
general in this area; surveys repeatedly confirm that a wealth of features make the
UK an excellent place in which to do business. But the security and predictability
of the business environment is a key element. The Government is determined to
ensure that the nation’s framework of company law does not through increasing
obsolescence become a disincentive to establishing business in the UK. (para 4.4)

Similar sentiments are also apparent in the terms of reference for the Company
Law Review – see second bullet point in para 5.1 of those terms. The Irish
Company Law Review Group, which produced its First Report in 2001 and
consolidated recommendations for reform in 2007, adopted a similar perspec-
tive when embarking upon its reform study.
If we want concrete examples of how businesses are prepared to relocate to
exploit more favourable corporate laws found in other jurisdictions, I would
point to the migration of German businesses to the UK to use our private
company format, with its lack of a minimum share capital requirement.
Similarly, distressed German firms have been keen to move their base to this
country prior to a declaration of insolvency, so as to be entitled to use the
company voluntary arrangement model. Both of these phenomena will be
discussed in this work.
My awareness of the diversity in national corporate systems, already whet-
ted by interaction with my LL.M. students, was sharpened when I was asked
in 1999 by the Company Law Review to lead a team of academics from the
Centre for Law and Business at the University of Manchester to produce a
study of national corporate law regimes in the EU. This study was made avail-
able on the Company Law Review website and is mentioned in the Final
Report (see p. 7).
Having moved to Lancaster University in 2005 I was exposed to a new way
of looking at the subject of corporate law. Heavy emphasis was given to the
social and cultural foundations of corporate law. Whilst not entirely comfort-
able with an approach exclusively based on such perceptions, I did find a
number of insights gleaned from this tradition particularly useful. My conver-
sations with Philip Lawton undoubtedly opened my eyes to a perspective on
Company Law that until that stage I had not fully appreciated.
I have taken liberties when defining the parameters of corporate law. In
 Preface xxxvii

particular, I have included reference to the limited liability partnership where

this is deemed appropriate. ‘Corporate law’ for the purposes of this study
encompasses both private companies and public undertakings. The regulation
of financial services and corporate insolvency fall within the catchment area.
In order to complete this study it has proved necessary to trespass into related
fields, such as private international law, though I claim no expertise in that
subject.
The project seeks to analyse how a national system of corporate law
responds to global trends. My primary goal is to focus on English law, but in
order to understand actual and potential developments in that jurisdiction, the
experience of other corporate systems can prove enlightening. Although the
focus is on factors impelling change in corporate law, it must not be imagined
that it is uniquely affected by globalisation; other substantive legal regimes
have also felt the pressure of the new world order, most notably fiscal law,
competition law and employment law.
The timing of this publication is not ideal. After sitting on the excellent
work of the Company Law Review for several years, the government eventu-
ally produced a Bill in 2005. That was designated the Company Law Reform
Bill. Although most of its reforming provisions were welcomed, many
commentators observed that, if enacted, this would leave UK corporate law in
a mess, in that most of the Companies Act 1985 would remain in force albeit
in amended form. Certainly, the law would not be available in a user-friendly
fashion. The government took this criticism on board and the Bill changed its
nature to part reform part consolidation. In the process it became the lengthi-
est Bill on record. The Bill was finally enacted in November 2006 as the
Companies Act 2006. However, because of the substantial transitional prob-
lems, its full and final implementation has been delayed until October 2009.
This book will therefore be published in the period of interregnum, which is
hardly ideal. I have attempted to include in an Appendix the latest state of play
on implementation, but the position changes regularly here, depending on the
latest ministerial announcement.
One other timing issue deserves mention. In the final months of writing up,
the world financial system went into meltdown. This has caused a reappraisal
of many articles of faith. The idea that free markets are the solution to every
regulatory issue is no longer seriously contended. The state clearly has a role
to play where markets fail. That is as true in corporate law as in every other
regulatory regime.
In completing this monograph, I have been assisted by many individuals
and a variety of organisations. Particular thanks go to John Birds, David
Burdette, Blanaid Clarke, Phil Lawton, Geoff Morse, Sol Picciotto, David
Sugarman, Adrian Walters and Gary Wilson. Former colleagues at the Centre
for Law and Business at the University of Manchester have collectively
xxxviii National corporate law in a globalised market

afforded me a rich vein of insights. Several academics at the Nottingham Law

School, where I held a Visiting Professorial Fellowship in 2008, were most
helpful. Gratitude is to be extended to all such parties. Responsibility lies
firmly at my door.
Generally, the law in England and Wales is stated as it stood at 31
December 2008, though some later developments have been included at proof
stage.

David Milman
Centre for Law and Society,
Lancaster University,
December 2008

1 Modern Company Law for a Competitive Economy (March 1998).

1. Introduction
No man is an island (John Donne, Meditation XVII, Devotions Upon Emergent
Occasions)

1 AIM OF THE TEXT

This book seeks to examine whether, and, if so, to what extent, UK Company
Law has been affected by those processes of globalisation that have increas-
ingly had a bearing on the course of our modern lives. This evaluation will
involve both a study of the characteristics of modern UK corporate law and
some comparison with the models adopted in other jurisdictions to regulate
companies. The reasons for this mutation, if indeed any such metamorphosis
has occurred, will also require analysis. Finally, it will be necessary to specu-
late on where this process will lead to in the medium term.
Globalisation is a phenomenon that has become widely discussed in popu-
lar discourse in the past two decades.1 Although not a new concept, it arouses
fierce emotions depending upon one’s political perspective. Its influence has
been felt in many areas of national law, particularly revenue law, employment
law and trade law. Clearly, it rests heavily upon the convergence of economies
and markets. However, it is a much wider manifestation than that. It is no
exaggeration to state that it involves the global/regional bonding of cultures
and societies. The convergence of legal cultures through transnational legal
measures forms part of the equation and hence part of our study.
Very often, of course, globalisation involves a combination of economic
and legal integratory forces; the emergence of the European ‘Project’ encom-
passing both EU law and the fundamental protections afforded by the
European Convention on Human Rights and Fundamental Freedoms (here-
after ‘ECHR’) best testifies to that phenomenon. In that context, let us offer

1 There is a vast literature on the phenomenon of globalisation and its

merits/demerits – see, for example, J. Stiglitz, Globalization and its Discontents (2001)
(Penguin/Allen Lane) and his follow-up text Making Globalization Work (2006)
(Penguin/Allen Lane). R. Cranston, chapter 1 in S. Worthington (ed) Commercial Law
and Commercial Practice (2003) (Hart Publishing) is also recommended. Note also W.
Twining, Globalisation and Legal Theory (2002) (Butterworths).

1
2 National corporate law in a globalised market

one example of how globalisation in this wider sense has worked change on
UK corporate law. In the 1980s, a headline financial scandal was the so-called
‘Guinness Affair’2 in which the shares in a party to a contested takeover (a
public company) were allegedly propped up by illegal means in order to
promote their attractiveness as an exchange for shares in the target company.
When this alleged abuse came to light, the Department of Trade and Industry
conducted an investigation3 which resulted in the prosecution of certain lead-
ing City figures. That prosecution rested heavily upon evidence gleaned from
interrogations by DTI inspectors, which were carried out without the benefit
of the interviewee enjoying ‘the right of silence’.4 After convictions were
obtained, one of the defendants, Ernest Saunders, challenged his conviction by
arguing that to base a prosecution largely on compelled evidence involved an
infringement of his civil rights under the European Convention on Human
Rights, in particular Art 6 ECHR. The right to remain silent was cited as being
allegedly infringed. The European Court of Human Rights, having concurred
with this contention,5 the offending statutory provisions in the Companies Act
1985 had to be changed6 to reflect this new perception. Thus, ‘how’ this form

2 For an insider’s account, see J. Guinness, Requiem for a Family Business

(1997) (Pan Books). Also see G. McCormack (1994) 15 Co Law 40.
3 The DTI Investigation was carried out under the aegis of what is now the
Companies Act (CA) 1985, ss. 432(2) and 442 (both provisions are largely unaffected
by the Companies Act 2006).
4 The English courts had denied the existence of such a right in DTI investiga-
tions – Re London United Investment plc [1992] BCLC 285.
5 Saunders v UK [1997] BCC 872. Followed in IJL [2002] BCC 380.
Notwithstanding any breach of ECHR rights (which were compensatable) the convic-
tions could not be said to be unsafe – R v Lyons [2002] 3 WLR 1562.
6 See now Companies Act 1985, s. 434(5A), s. 434(5B), s. 447 (all largely unaf-
fected by the Companies Act 2006). For comment on these enforced changes, see R.
Mitchell and M. Stockdale (2002) 23 Co Law 232. In this context, one could also cite
Davies v UK (42007/98) [2005] BCC 401, where the European Court of Human Rights
ruled that excessive delay in prosecuting director disqualification proceedings might
breach ECHR. See also DC, HS and AD v UK [2000] BCC 710. In Eastaway v UK
(74976/01) [2006] 2 BCLC 361, excessive delay in disqualification processes was
again held by the Strasbourg court to infringe Art 6, but in Re Blackspur Group (No. 4)
[2006] 2 BCLC 489, the English courts made the point that a breach of Art 6 did not
necessarily undermine any resulting disqualification. Having said that, these rulings
have had an impact and may well explain why the undertakings procedure is used so
extensively these days. The ruling of the ECHR in GJ v Luxembourg [2000] BPIR 1021
that protracted delay in completing liquidation may breach Art 6 is also beginning to
exercise the minds of practitioners. Not all ECHR challenges have proved as success-
ful – witness Fayed v UK (1994) 18 EHRR 393, where it was held that rights under Art
6 were not affected by the process of investigation itself, as the investigation process
did not determine rights.
 Introduction 3

of legal globalisation has worked change is exemplified in one particular

respect.
When evaluating the ‘why?’ question, two reasons become apparent imme-
diately. Firstly, European harmonisation processes have forced corporate law
change on the UK (and in fairness on the other 26 EU Member States).
Secondly, our understanding of (and respect for) different cultures has
increased immeasurably over the past 30 years. This is partly due to the power
of the media, the popularity of foreign travel, the rise of the internet, but also
as a result of a growing willingness to engage in commerce across foreign
borders on an arm’s length basis (as opposed to crude imperialistic exploita-
tion). Potentially profitable markets have to be tapped, no matter where
located. That willingness has been boosted by technological advances, partic-
ularly with regard to communications methods, transport innovations and
money transfer systems. This trend towards opening up our perspective on
global commercial life in turn has given impetus to comparative studies of law.
It is fair to say that no self-respecting law reform body would produce a report
for the adaptation of its national corporate law without recourse to some
comparative analysis. During the course of the following study, other influ-
ences will become evident.

2 COMPANY LAW IN SOCIETY

Most developed jurisdictions find room for a legal institution known as
Company (or Corporate7) Law, with the pivotal foundation being the artificial
legal person known as the company. This is not surprising because even so-
called primitive jurisdictions would feel at home with the idea of an artificial
entity (such as a temple or an idol) being treated as a legal person. The
company has become the prime exemplar of an artificial legal person existing
in modern society. Hundreds of millions of such ‘persons’ now inhabit the
globe. They provide the main employment prospects for much of the world’s
population of natural persons, and some corporations are so large as to rival
(and even supplant) many national governments of developing countries in
terms of their economic muscle.8 The company has become the pivotal

7 As far as I am concerned, these terms are interchangeable. The fact that this
branch of law is more usually labelled as ‘Corporate’ rather than ‘Company’ is an indi-
cator of a growing US influence on discourse – see Chapter 9 below.
8 For instance, Janet Dine, quoting published data, tells us in Company Law
(6th edition, 2007) (Palgrave Macmillan) at 353 that 51 of the top 100 economies in the
world are operated by corporations rather than by nation states. Having said that, it is
sometimes easy to overstate the case for the power of multinationals – see S. Wheeler,
Corporations and The Third Way (2002) (Hart) at 9–10.
4 National corporate law in a globalised market

economic player in Western-style capitalist societies. That socio-economic

model now dominates the globe, but it is not above criticism.9 Corporations
are an everyday feature of modern life, but are not always regarded as fully
fledged citizens (see, for example, their treatment under Indian constitutional
law10). It is not part of this study to examine whether the corporation is a force
for good or an instrument of the devil. This is a fruitless exercise often
coloured by one’s own political prejudices. We merely accept the corpora-
tion’s ubiquity and recognise the corresponding need to regulate it.
In Chapter 3, we shall attempt to define the fundamental components
necessary to make a Company Law model operate effectively.

3 CORPORATE LAW HISTORY

Companies have long been associated with commercial venturing in far-
flung territories. The earliest form of company recognised in English law,
the chartered company, was almost exclusively preoccupied with this sphere
of commercial activity. One could cite here the Muscovy (or Russia)
Company (1555), the Levant Company (1581), East India Company (1600),
the Hudson’s Bay Company (1670) and the Royal Africa Company (1672).11
Many of these chartered companies lasted for hundreds of years; some are
still with us today.12 In 1688, the power to charter corporations passed effec-
tively from the Crown to Parliament, but it was still exercised, with the
British South Africa Company (1889) being a good example of the latter
genre.
It should never be forgotten that one of the seminal events in the history
of UK company law was tied up indirectly with the forces of ‘mercantil-

9 The classic exposé was presented in A. Sampson’s The Seven Sisters (1975)
(Hodder and Stoughton). Note also P. Muchlinski, Multinational Enterprises and the
Law (1979) (Blackwell). See also Joel Bakan, The Corporation (2004) (Constable),
Noreen Hertz, The Silent Takeover (2002) (Arrow), Janet Dine, International Trade
and Human Rights (2005) (CUP). There is an excellent selection of essays in M.K.
Addo, Human Rights Standards and Responsibilities of Transnational Corporations
(1999) (Kluwer). See also D. Kinley (2004) 25 Co Law 298. The piece by R.
McCorquodale and P. Simons in (2007) 70 MLR 598 is also recommended.
10 In the UK, clearly little thought was given as to whether corporations quali-
fied for protection under the Human Rights Act 1998.
11 For the advent of chartered companies, see chapter 2 in J. Micklethwait and
A. Wooldridge, The Company (2003) (Weidenfeld and Nicholson), W.E. Minchinton in
chapter 7 in T. Orhnial, Limited Liability and the Corporation (1982) (Croom Helm)
and M.B. Likosky, The Silicon Empire (2005) (Ashgate) at 61–8. For an illuminating
history of the Russia Company, see R. Griffith (1994) 15 Co Law 105.
12 See DTI Annual Companies Report 2005–06 for further details.
 Introduction 5

ism’,13 in some senses a precursor to the modern phenomenon of globalisa-

tion, but in reality a crude vision of economic trade/global resources as a finite
cake to be divided between those exerting the greatest political/military might.
In effect we are talking about a zero-sum game in world trade. Developed in
France in the 17th century, mercantilism expostulated that export trade was to be
encouraged at all costs by opening up new markets through dubious means. In
England, it is arguable that this philosophy set in train the events that ultimately
led to the infamous South Sea Bubble Affair in 1720.14 The origins of the
company (which had been incorporated in 1711) that was later to achieve noto-
riety in that context lay in the desire to trade across national barriers, in particu-
lar the intention to dominate the slave trade with South America. The collapse
of that company, which by that stage had redesigned itself into a domestic spec-
ulator in the National Debt, led to a dead hand being placed on the development
of UK corporate law for over a century by the enactment of the Bubble Act15
(with its draconian, but little used,16 criminal enforcement procedure), a piece of
legislation which remained on the statute book until 1825.17
General incorporation18 was introduced in English law in 1844. The intro-
duction a decade later of limited liability in English law was undoubtedly
influenced by events elsewhere, as will become clear in Chapter 2.
In later times, the influence of transnational corporate venturing on the
shape of English corporate law was apparent. Many of the great prospectus
frauds in the late 19th century were carried out in the context of companies
said to be operating in the more remote corners of the globe.19 A general

13 For discussion of this economic theory of mercantilism and its impact on

English law see D. Hughes Parry (1931) 47 LQR 183 at 198. The theory itself clearly
has its limitations and was at the time rejected by influential thinkers such as Adam
Smith in The Wealth of Nations (1776) (Penguin Classics, 1968), where free trade was
preferred.
14 For studies of the Bubble, see Viscount Erleigh, The South Sea Bubble (1933)
(Peter Davies Ltd), V. Cowles, The Great Swindle (1960) (Collins), M. Balen, A Very
English Deceit (2002) (Fourth Estate) and R. Dale, The First Crash: Lessons of the
South Sea Bubble (2004) (Princeton University Press). The periodical literature is also
extensive: L.C.B. Gower (1952) 68 LQR 214, M. Patterson and D. Reiffen (1990) 50
Jo of Econ Hist 163, A. Santuari (1993) 14 Jo of Leg Hist 39.
15 6 Geo I c. 18.
16 Prosecutions were rare – see the comments of LCJ Ellenborough in R v Dodd
(1808) 9 East 516.
17 6 Geo IV c. 91.
18 See H.N. Butler (1986) 6 Int Rev of Law and Econ 169.
19 See R. Cranston, chapter 1 in S. Worthington, Commercial Law and
Commercial Practice (2003) (Hart ). On the fictional front, see A. Trollope, The Way
We Live Now (1875) (OUP edition, 1982), where a central plot line involved a fraud
connected with the incorporation of ‘The South Central Pacific and Mexican Railway’.
6 National corporate law in a globalised market

perusal of the case law of the period throws up some delightful and exotic
corporate names.20 Public outcry at prospectus frauds led to corrective legis-
lation in the form of the Directors Liability Act 1890. Another element in the
jigsaw was the issue of foreign seizure of assets held by UK companies
engaged in global commerce and in particular seizures effected in the wake of
the Russian Revolution in 1917. This caused many difficulties for the English
courts.21
Bringing us through to modern times, we can clearly see how the collapse
of the US-based energy giant Enron in 2001 has shaped the development of
corporate law not merely in the US (through the Sarbanes-Oxley Act 200122),
but also in many jurisdictions where Enron subsidiaries were incorporated and
operated.23 Foreign issuers in the US have been forced to comply with new
tougher US standards on disclosure and corporate governance, thereby
promoting a greater degree of convergence in these areas. In the UK, the
Companies (Audit, Investigations and Community Enterprise) Act 2004
contained a number of elements influenced by a desire to combat an Enron-
style fraud.24 There is a growing consensus that there has been an overreaction
to the Enron débâcle25 and parallels have been drawn with the misguided
Bubble Act. On a European level, the Parmalat scandal26 will have compara-

20 See Central Railway Co of Venezuela v Kisch (1867) LR 2 HL 99, Erlanger v

New Sombrero Phosphate Co (1878) 3 App Cas 1218, Re Cape Breton Co (1885) 29
Ch D 795, Re Ambrose Lake Tin and Copper Mining Co (1890) 14 Ch D 390, Lagunas
Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392. Generally, note Re German Date
Coffee Co (1882) 20 Ch D 169, Ooregum Gold Mining Co of India v Roper [1892] AC
125, Allen v Gold Reefs of West Africa [1900] 1 Ch 656, Moseley v Koffyfontein Mines
[1911] AC 409.
21 See, for example, Re Baku Consolidated Oilfields [1994] 1 BCLC 173.
22 On SOX see M.G. Lunt [2006] JBL 247, J. Friedland (2002) 23 Co Law 384
and E. Wymeersch (2003) 3 JCLS 283. The stringent requirements imposed by this Act
on directors signing up to public share offers issued by their companies has led to a
decline in placings in New York and a corresponding boost for the London market. For
the impact on foreign issuers, see S. Harter-Bachmann (2006) 27 Co Law 35
23 For European reactions to Enron, see K.J. Hopt (2003) 3 JCLS 211. For the
French response to Enron, see S. Hebert [2004] JBL 656.
24 See The Companies (Audit, Investigations and Community Enterprises) Act
2004, ss. 8 and 9 (CA 1985, ss. 389A, 389B) (provisions improving auditors’ access to
information and increasing the potential liability of directors for information provided
to auditors) – replaced by CA 2006, ss. 499–501.
25 On Enron and its consequences, see P. Davies, chapter 8 in J. Lowry and L.
Mistelis, Commercial Law: Practice and Perspectives (2006) (Butterworths), J.
Armour and J.A. McCahery (eds), After Enron: Reforming Corporate Governance and
Capital Markets in Europe and the US (2006) (Hart Publishing), W. Bratton (2002) 76
Tul L Lev 1275, S. Griffin [2003] Ins Law 214, T.R. Hurst (2006) 27 Co Law 41.
26 For background on the Parmalat collapse (which occurred in December
 Introduction 7

ble effect. It certainly appears to have influenced the adoption of EC Directive

2006/43 on Accounts.
Most recently of all, the sub-prime lending crisis in the US has caused
perturbation throughout the financial sector in Western Europe, placing more
than one banking corporation in jeopardy.27 This has led to the nationalisation
of one UK bank, the downgrading of many financial institutions and the
rethinking of banking regulation in many countries. The ensuing credit crunch
has spread from financial institutions to the retail and manufacturing sectors
of many economies by restricting access to capital and through reduced
consumer expenditure.

4 CORPORATE LAW ‘FAMILIES’28

It is possible to produce an ethnography of corporate law systems. Legal
scholars like Wood29 have done much to open our eyes to this phenomenon
and other academics have intervened in the debate. Here is my suggested
preliminary breakdown:

4.1 Systems Based on English Law

This group consists of jurisdictions which formerly were part of the British
Empire or territories that fell under the British mandate after the First World
War (for example, Palestine30/Israel). Reflecting the massive extent of that
political entity, one finds systems of corporate law dotted across the globe that
are reassuringly familiar. This similarity arose out of the wholesale export of

2003), see A. Melis (2005) 13 Corp Gov: An International Review 478. The Parmalat
case has not had a great impact in the UK, but it was problematical in Ireland hence the
fiercely contested Eurofoods litigation – see Chapter 8.
27 On the implications of Northern Rock for the European Single Market, see C.
Bamford (2007) 29 Co Law 65.
28 See J.H. Farrar and B.M. Hannigan, Farrar’s Company Law (4th edition,
1998) (Butterworths) by at 748. Note also K. Pistor et al. (2003) 31 Jo of Compar Econ
676 and K. Pistor et al. (2003) 23 Univ of Penn Jo of Int Econ Law 791.
29 See Maps of World Financial Law (3rd edition, 1997) (Allen & Overy Global
Law Maps), and P. Wood (2003) 24 Co Law 34 for an unusual classification.
Geographers have shown scholarly interest in the distribution of governance models –
see G.L. Clark and D. Wojcik, Geography of Finance: Corporate Governance in a
Global Marketplace (2007) (OUP).
30 For a recent study that suggests that the transplantation of English company
law into post-Ottoman Palestine was not as simple a process as it might appear to be,
see R. Harris and M.Crystal – http://works.bepress.com/ron_harris/13. This article will
appear in (2009) Th Inq Law.
8 National corporate law in a globalised market

UK statutory law (including the Companies Act) as part of a policy ultimately

tied up with imperialism and bolstering the position of British traders.31 One
result, according to Gower, was that the Companies Act 1948 acquired the status
of a Commonwealth statute!32 The application of common law principles had
both a similar motivation and effect. Some of these imported legal standards were
specifically retained by post-independence legislation to operate in default of new
lawmaking. The Privy Council undoubtedly played its part in this process
through the instrumentality of its Judicial Committee.33 A survey of corporate law
models found in Africa, the Indian subcontinent, Asia, the Caribbean and in the
old dominions would produce strong evidence of the impact of the English corpo-
rate law model. In some of these countries, the model is more advanced than that
operating in the home country, as some jurisdictions have been adept at imple-
menting company law reform proposals more quickly than English law.34 As that
Empire has fragmented, so have these ‘subordinate’ jurisdictions looked for
sources of inspiration other than English law, a process exacerbated by the move
of English company law into the EU tradition. Typically, corporate systems based
upon the increasingly dominant North American model have filled the void. This
has been noticeable in the Pacific rim jurisdictions, especially in New Zealand
and Australia. The Caribbean countries show a similar pattern. Israel moved in
that direction in 1999.

31 On this, see R. McQueen (1995) 5 Aust Jo of Corp Law 187 and his more
recent piece in (2008) 17 Griff L Rev 383. Note also R.S. Rungta, The Rise of the
Business Corporation in India (1970) (CUP).
32 (1962) 4 Mal L Rev 36.
33 See, for example, North West Transportation Co v Beatty (1887) 12 App Cas
589 (shareholder voting obligations), Natal Land v Pauline Colliery [1904] AC 120
(pre-incorporation contracts), Cook v Deeks [1916] 1 AC 554 (fiduciary duties of direc-
tors), Lee v Lee’s Air Farming [1961] AC 12 (corporate personality) Howard Smith v
Ampol Petroleum [1974] AC 821 (directors’ duties on a takeover), Taupo Totara v
Rowe [1978] AC 537 (directors’ payoffs), Downsview Nominees v First City
Corporation [1993] AC 295 (liability of receivers in negligence), Agnew v IRC
(Brumark) [2001] UKPC 28 (fixed or floating charge?), Citco Banking Corp v Pusser’s
Ltd [2007] UKPC 13 (alteration of articles), Gamlestaden [2007] UKPC 26 (unfair
prejudice jurisdiction), Benichou v Mauritius Commercial Bank [2007] UKPC 36
(floating charge crystallisation). Most former British colonies have discarded the Privy
Council and we are left with a number of small independent Commonwealth countries
plus a few Crown dependencies. Canada ceased sending cases to the Privy Council in
1949. Malaysia followed suit in 1985, as did Australia in the following year. In more
recent years, Singapore (1994), Hong Kong (1997) and New Zealand (2003) have gone
down the route of deciding not to send appeals to the Privy Council.
34 The prime example here is Ghana, which for many years had one of the most
advanced corporate law models in the Commonwealth. Jamaica implemented the
recommendations of the Jenkins Committee (1962) in 1965, some time before the UK
legislated – see S.J. Leacock [1975] JBL 252.
 Introduction 9

4.2 US-inspired Models

Originally a British colony, the USA became an imperialist power in the old
sense of the concept (witness its conquest of the Philippines35 and other
Spanish colonies) and that political status enabled its models of corporate law
to penetrate the furthest corners of the globe from the Caribbean36 across the
Pacific. The military victory of the US over Japan in 1945 also had profound
effects upon Japanese corporate law.37 In more modern times, the overwhelm-
ing economic power of the USA (and US-based multinationals) has led to an
even wider dissemination of US corporate law influence. Thus, today, much of
the Caribbean and many Central/South American states now take their corpo-
rate law lead from the US.38 The influence has spread to Canada, New Zealand
and other Pacific rim jurisdictions. Even within Continental Europe (where
latent hostility to US cultural dominance is strong), it is not uncommon to find
corporate law concepts and reforms being inspired by American ideas. The
idea of a group of companies is indisputably American in origin and is now
used as a primary business vehicle across the developed world. Certainly, a
perusal of reforms in the area of corporate rescue across many nations will find
the pervasive influence of the iconic Chapter 11 of the US Bankruptcy Code.39
The same could be said of the development of rules regulating insider trading/
market abuse, the evolution of codes of corporate governance practice and the
emergence of the corporate social responsibility philosophy. The role of US-
based institutional investors (such as CalPERS, the Californian public service
employees’ retirement services pension fund) also cannot be underestimated in
the spreading of US corporate law hegemony, as a significant percentage of its
holdings are in foreign securities. US vulture funds dealing in distressed debt
are making their presence felt in many economies (and legal systems). The
media has also played its part by elevating to cult status certain American law
corporate practices. Popular discourse in corporate law matters is dominated
by ‘Americanisms’ – terms such as ‘insider trading’, ‘Chinese walls’, ‘poison
pills’, ‘raiders’, ‘greenmail’, ‘junk bonds’, ‘prepacks’ and, most recent of all,
‘sub-prime lending’ are now universally recognised.

35 For the Philippines, see P. Herrera-Davila (1981) 2 Co Law 139.

36 For the Canadian influence in the Caribbean, see S.F. Goldson (2003) 24 Co
Law 378.
37 For a clear account of Japanese corporate law, see S. Bottomley in chapter 3
of R. Tomasic (ed.), Company Law in East Asia (1999) (Dartmouth).
38 On Barbados, see J. Purvis (1983) 4 Co Law 280.
39 This is certainly true of Germany, which reformed its law of corporate rescue
in 1999 with Chapter 11 very much in mind.
10 National corporate law in a globalised market

4.3 Civil/Continental Law Jurisdictions

The paradigm here is France, which of course built up an impressive imperial

portfolio in competition with the British Empire. The influence of French
corporate law is found in the wider Europe,40 Africa,41 in certain parts of the
Caribbean and South America, in South Asia and in Quebec. Louisiana corpo-
rate law has a strong French flavour to it. The Middle East is also an area
where French corporate law ideals have penetrated. Other continental legal
systems have left some imprint on global corporate law. The Dutch have
shaped corporate law developments in their former colonies (such as
Indonesia42) and also South Africa. The German influence is less marked
across the globe, mainly because of the loss of its imperial territories in the
wake of its defeat at the end of the First World War. Having said that, ideas can
prove more robust than political entities and German corporate law influences
can be detected in countries such as Cameroon43 and Japan pre-1945. China
has flirted with the two-tier board model. Within Central Europe there is a
strong and continuing German law influence, with Austrian Company Law
being the prime manifestation. The new accession Member States, based in
Eastern Europe with their transitional economies, will naturally look to
Germany for inspiration because of the geographical proximity of this
economic powerhouse. A perusal of the enterprise laws in the now defunct
state of Yugoslavia will attest to that.44 Rather like English law, this continen-
tal tradition is under threat from the American hegemony. Argentina moved
very much into the Anglo-Saxon camp with its corporate law reforms in 1983
and China appears to be heading in the same direction.

4.4 Other Families

This residual category is diverse. One could certainly assert that there is now
an EU family of corporate law spanning some 27 jurisdictions. That ‘family’
is best viewed as second generation, drawing upon traditions from the discrete
categories outlined above. The US influence on EU law is clearly present
(particularly in the area of business rescue), though until recently there has
been a marked reluctance to concede the fact.

40 There is a definite French corporate law influence in Turkey (see M. Yavasi

(2000) 21 Co Law 225) and Greece.
41 For the Ivory Coast, see V.B. Dumonteil and J.J. Bartagna (1984) 5 Co Law
47.
42 See A.I. Pulle (1996) 17 Co Law 122.
43 Cameroon was a former German colony transferred to a French mandate.
44 See J. Dine, M. Koutsias and M. Blecher, Company Law in the New Europe
(2007) (Edward Elgar) for discussion of the Yugoslav Enterprise Law 1996.
 Introduction 11

There is also a dwindling band of jurisdictions that locate a system of

corporate law (if they have one) within a strong socialist tradition. At present,
these countries, led by China, Russia and various non-EU Eastern European
states, are very much in the market for importing corporate law models. The
process of change here has been remarkable,45 though the net effect on diver-
sity has been negative.
The Islamic view on corporate law is interesting. Although usury is banned
by the Sharia, there is no fundamental objection to the idea of a company with
separate legal personality nor to the economic consequence of limited liabil-
ity. Corporate law systems in Egypt, Jordan and Saudi Arabia have much in
common with Western models. There is a growing and accessible body of
literature on corporate law systems in these traditions.46
Other jurisdictions are difficult to fit into any model – South Africa is
perhaps the best example of this genus.47 Although the impact of
Roman/Dutch law generally was marked in pre-Boer War days, the corporate
law system was for many years influenced by English law. Influence must not
be read as dominance; witness the South African hostility to the floating
charge for proof of that qualification. Increasingly, in recent years this juris-
diction has moved towards the orbit of US corporate law. This has caused
problems in certain areas (such as business rescue), where the US influence is
at odds with underlying cultural traditions.

5 UNITARY AND FEDERAL MODELS

In categorising systems of corporate law, the political structure of jurisdictions
can create difficulties. In a unitary state, the relevant corporate law applies
generally. However, many large modern states are organised constitutionally
along federal lines. The obvious example is the USA, but the same problem

45 On corporate law developments in Russia, see W.G. Frenkel (1996) 7 ICCLR

175, S. Lucas and Y. Maltsev (1996) 45 ICLQ 365, O. Markova (1998) 8 ICCLR 334.
Note also the essay by K. Pistor, chapter 9 in J. Sachs and K. Pistor (eds), The Rule of
Law and Economic Reform in Russia (1997) (Westview Press). More generally, the
work of R. Dragneva (ed.), Investor Protection in the CIS: Legal Reform and Voluntary
Harmonization (2007) (Martinus Nijhoff) is recommended.
46 See, for example, the pieces by L.M. Al-Rimawi, looking at corporate law in
various Arab countries, in particular Jordan – (1998) 19 Co Law 28, (1998) 19 Co Law
89, (1998) 9 EBLR 30.
47 For South African Company Law and its history, see S. Girvin (1992) 13 Jo
of Leg Hist 63 and J.J. du Plessis (1993) 14 Co Law 224. Sri Lanka also has a Roman-
Dutch law heritage in its Company Law model – see D. Jayasuriya (2008) 29 Co Law
250.
12 National corporate law in a globalised market

arises in major corporate law players such as Canada and Australia. In these
countries, corporate law is restricted by internal ‘state’ boundaries. This has
the potential to generate much confusion and economic dislocation.
‘Uniform’48 companies legislation seems to be the preferred solution, but
constiutional difficulties abound. Thus, in Australia in 1990, a bizarre legal
power battle over the soul of corporate law was played out. In NSW v The
Commonwealth,49 the High Court of Australia confirmed that the
Commonwealth of Australia lacked the constitutional power to enact a manda-
tory statute governing corporations. A pragmatic settlement then had to be
brokered which involved the states themselves opting into a new Uniform
model statute.50
The solutions to the problem of federal states here are varied. One way out
is to make corporate law the exclusive subject of federal legislation, but polit-
ical sensitivities need to be borne in mind. Another, more subtle, model is to
start from the premise that corporate law is the province of the local states, but
to provide a standard model into which such states can contract. This is now
the favoured approach. One could note here the Model Business Corporations
Act51 in the US and the Canadian Business Corporations Act52 as exemplars
of this methodology. This was also the solution worked out in Australia in the
wake of the constitutional litigation mentioned above. In addition, one could
identify certain strategic areas of corporate law that are to be governed by
federal law: for example, the Securities and Exchange Acts and more recently
the Sarbanes-Oxley Act 2001 in the USA.53 The US Bankruptcy Code of 1978
also exemplifies the federal perspective.

6 THE PICTURE IN THE UK AND BRITISH ISLES

The United Kingdom presents an interesting conundrum. Although, superfi-
cially, we have a unitary political entity, the forces of devolution are growing.

48 See R.W. Parsons [1962] JBL 235.

49 (1990) 169 CLR 482.
50 For discussion, see R. McQueen (1990) 19 Fed L Rev 245.
51 For information on the MBCA, which was produced by the American Bar
Association in 1950, see the ABA website.
52 On the Model Business Corporations Act and the Canadian Business
Corporations Act 1975, see L. Getz (1971) 5 Ottawa L Rev 154. The changes in Canada
can be traced back to the Dickerson Report of 1971.
53 On Sarbanes-Oxley, see M.G. Lunt [2006] JBL 249, J. Friedland (2002) 23 Co
Law 384. Part 1 of this Act boosts the powers of supervisory bodies and upgrades direc-
tors’ responsibilities.
 Introduction 13

Indeed, in the realm of corporate law, we have always had several distinct
systems operating alongside each other for some 150 years. Thus corporate
law is administered in England and Wales separately from the regimes operat-
ing in Scotland and Northern Ireland. Each of the latter jurisdictions has its
own Companies Registry, based in Edinburgh and Belfast respectively. The
significance of this multiplicity of company law administrative units was
reflected by the extraordinary case of Re Baby Moon (UK) Ltd,54 where it was
held by Harman J that an English company, which had erroneously located its
registered office to Scotland, could be wound up in England as the English
jurisdiction applied, but leave would need to be granted by the English courts
to serve the petition out of the jurisdiction at its registered office.
Although the administration of UK corporate law is devolved, the fundamen-
tal substantive core has much in common. Many of the provisions of the
Companies Act 1985 apply automatically in Scotland, though that Act did contain
discrete provisions designed solely for Scotland (for example, Part XVIII on float-
ing charges). These provisions have since been superseded by Part 2 of the
Bankruptcy and Distress (Scotland) Act 2007 (ss. 37–49). The same is, however,
still true of the Insolvency Act 1986 – one could note here the different approaches
taken towards preferences in ss. 239 and 242 respectively. Section 239 requires
the person giving the alleged preference to be influenced by a desire to prefer; no
such motivation requirement is found in s. 242, which focuses on the effect of the
alleged preference. Under the Scotland Act 1998, company law is a reserved
matter outside the competence of the Scottish Parliament and therefore notwith-
standing the fact of devolution, the power to legislate in company law matters is
reserved by Westminster.55 Notwithstanding these trends towards a harmonised
approach, the courts of the two jurisdictions have in the past indicated a propen-
sity for divergence and there is no reason to doubt that this healthy diversity of
judicial attitudes will continue and become more marked in the future.56
The position is somewhat different for Northern Ireland,57 which had its
own statutory code prescribed by the Companies Order (Northern Ireland)

54 (1984) 1 BCC 99, 298. The distinct nature of the two systems is also apparent
on reading Arthur Little v Ableco Finance [2003] Ch 217, though that case illustrates
how blurred the boundaries can become. Note also Re Brownridge Plastics Ltd (unre-
ported) (2005), where the question before Hart J was the appropriate court to file notice
with when putting a Scottish company into administration.
55 Under the Scotland Act 1998.
56 See, for example, the difference of opinion reflected in Dimbula Valley
(Ceylon) Tea Co v Laurie [1961] Ch 353 and ex parte Westburn Sugar Refineries
[1951] AC 625 (on dividend payments), and Jesner v Jarrad Properties [1993] BCLC
1032 and Re Guidezone Ltd [2000] 2 BCLC 321 (unfair prejudice jurisdiction).
57 Under CA 1985, s. 745, Northern Ireland generally fell outwith the scope of
the Companies Act.
14 National corporate law in a globalised market

1986 (SI 1986/1032, NI 6) (as amended), which usually mirrors legislation

enacted by the Westminster Parliament. There can, however, be a significant
time lag, which may work to the disadvantage of Northern Irish businesses.
That position is likely to change as s. 1284 of the Companies Act 2006 is now
largely fully implemented (with effect from October 2008), in that Northern
Ireland will be covered by the Companies Acts. This principle is further devel-
oped by ss. 1285–7 of the Companies Act 2006. This change has been brought
about to enable businesses in the Province to get the immediate benefit of
corporate law reforms enacted in Great Britain.58 This is particularly impor-
tant where deregulation is now often the prime mover behind company law
reform.
We must not forget other territories within the British Isles but technically
outside the UK (and the EU). The Crown Dependency of the Isle of Man has
its own distinct corporate law ‘brand’ (based upon the 1931 Companies Act59),
as does Jersey60 and Guernsey.61 These jurisdictions can be quite flexible as
they compete for offshore business, the main driver of their respective
economies. The Companies Acts do not for the most part apply to the Channel
Islands or the Isle of Man, apart from Part 28 of Companies Act 2006, which
regulates takeovers. This exception is justified because the jurisdiction of the
Takeover Panel used to extend to a comparable degree. Other constituencies
of the Channel Islands, such as Sark, do not appear to have any discrete corpo-
rate regulations.62

58 See the summer 2005 consultation carried out by Angela Smith MP acting on
behalf of the Department of Enterprise, Trade and Investment in Northern Ireland.
59 For Isle of Man Company Law, see J. Bates, The Isle of Man Companies Act
1992 (1992) (Sweet & Maxwell). The basic legislation is the 1931 Act as amended.
Note the Isle of Man Companies Act 2006, which was driven by the need to attract
offshore business – see (2007) 28 Co Law 46. As a result of the 2006 Act, companies
incorporated under the 1931 regime can re-register and take advantage of new facili-
ties (such as corporate directors and deregulated share capital maintenance rules).
Foreign companies can simply continue their personality by adopting the 2006 Act.
Protected cell companies are envisaged by Part VII of the 2006 Act.
60 A major source of Jersey Company Law is the Companies (Jersey) Law 1991
as amended.
61 See the Companies (Guernsey) Law 1994 as amended. For aspects of
Company Law in Guernsey, see A. Walters and A. Sarchet (1997) 18 Co Law 219
(protected cell company novelty). See also G. Moss [2001] 14 Ins Intell 73 and the
news item noted in (2006) 27 Co Law 21 which refers to the Protected Cell Companies
Regulations 2005. See N. Carey and A. Sarchet (2006) 27 Co Law 252 generally. The
protected cell idea has been adopted in jurisdictions such as Bermuda and the Cayman
Islands.
62 On this lacuna and its implications for English law see Official Receiver v
Vass [1999] BCC 516.
 Introduction 15

7 HARMONISATION OF CORPORATE LAW

7.1 The EEC Programme

Since 1972 the UK has been locked into the EEC Company Law harmonisa-
tion project.63 That project is carried out largely through the medium of direc-
tives authorised under Art 44(3)(g) of the EEC Treaty. That article forms part
of the regulatory matrix concerned with achieving the goal of freedom of
establishment. This right of establishment is protected by Art 43 of the Treaty
and the philosophy behind it is reinforced by the European Charter on
Fundamental Rights (Art 16). The prohibition on new incorporation taxes also
reflects the same mindset.64 Without a doubt, this harmonisation process has
proved to be the prime driver behind company law reform in the UK for the
past 35 years. That programme has advanced on many fronts and has experi-
enced the full range of ups and downs, with these setbacks often related to
general political problems within Europe rather than being due to inherent
problems with the proposed harmonisation measure. Looking at the picture
today, we can see the influence of harmonisation in most fields of corporate
law through adopted directives in the following fields:

• incorporation and disclosure (First Directive 1968/151);65

• share capital (Second Directive 1977/91 as amended by Directive
2006/68);
• company contracts (First Directive 1968/151);
• company accounts and audits (Fourth Directive 1978/660, Seventh
Directive 1983/349, Eighth Directive 1984/253) (soon to be replaced by
Directive 2006/43) and Accounts Modernisation Directive (2003/51).
The International Accounting Standards Regulation 2002/1606
completes the picture;
• branches (Eleventh Directive 1989/666);

63 There is an impressive literature base here – J. Dine (1988) 13 ELR 322, V.

Edwards [2000] CFILR 342, C. Barnard (2000) 25 ELRRev 57, P. Cabral and P. Cunha
(2000) 25 ELRRev 157, M. Andenas (2006) 27 Co Law 1, R. Drury [2005] JBL 709,
T.C. Hartley (2005) 54 ICLQ 813, E. Werlauff (1992) 17 ELR 207, M. Andenas, K.
Hopt and E. Wymeersch, Free Movement of Companies in EC Law (2003) (OUP).
64 See EC Council Directive (1969/335), Fantask (C188/95) [1998] 1 CMLR
473 and Modelo (C56/98) [2001] STC 1043.
65 For contemporary comment, see G.A. Zaphirou [1968] JBL 280. A good
insight into the thinking behind this Directive might also be gleaned from Ubbink
Isolatie (136/87) [1990] BCC 255 – see F. Wooldridge (1990) 11 Co Law 62. The First
Directive was amended by Directive 2003/58.
16 National corporate law in a globalised market

• single member companies (12th Directive 1989/667) (implemented via

SI 1992/1699);
• admission of securities to listing, prospectuses (Admissions Directive
1979/279, Listing Particulars Directive 1980/390, Public Offers
Directive 1989/298 and Investment Services Directive 1993/22 and new
Prospectus Directive 2003/71);
• takeovers (Takeover Directive 2004/25/EC);
• mergers, scissions and cross-border mergers (Third Directive 1978/855,
Sixth Directive 1982/891 and Tenth Directive 2005/56);66
• disclosure of major shareholdings and disclosure of information by
issuers (Directive 1999/627, Transparency Directive 2004/109);
• insider trading and market abuse (Insider Trading Directive 1989/59267
and Market Abuse Directive 2003/6);
• shareholder voting rights in listed companies (Shareholder Rights
Directive 2007/36).

For the future the most likely possibilities for Company Law Harmonisation
Directives relate to small businesses.68 The proposal for a Draft Fourteenth
Directive on relocation of registered office has now encountered problems and
it is not clear whether it will ever come to fruition (see below Chapter 9 for
consideration of this issue).
The harmonisation programme has also spawned new corporate entities
ranging from the European Economic Interest Grouping (EEIG Regulation
1985/213769), through the ‘single member company’ (Twelfth Directive
1989/667) to the European Company or Societas Europea (Regulation
2001/215770 and Directive 2001/86). More specialised organisational struc-
tures were harmonised with regard to Open Ended Investment Companies

66 Implemented in this country by SI 2007/2974. On the Directive see F.

Wooldridge (2006) 27 Co Law 309.
67 Considered by the ECJ in Ipourgos Ikonomikon v Georgakis (C391/04) [2007]
2 BCLC 692.
68 See [2008] 235 SMCLN 1 for details of the proposed statute for a European
Private Company (SPE).
69 Introduced into English law by SI 1989/638 – see S. Israel (1989) 9 Co Law
14, S. Keegan [1991] JBL 457. At the last count, there were only 186 EEIGs with their
principal place of establishment in Great Britain. The EEIG was modelled upon the
French GIE – see B. Bott and W. Rosener [1970] JBL 313.
70 Official figures for 2005/6 disclose one SE registered in Great Britain. On the
SE, see M. Vasseur [1964] JBL 358 and [1965] JBL 73, P. Sanders [1968] JBL 184, J.
Wouters (2000) 37 CMLRev 257, V. Edwards (2003) 40 CMLRev 443, F. Wooldridge
(2004) 25 Co Law 121, L. Cerioni (2004) 25 Co Law 228 and 259, J Schmidt (2006)
27 Co Law 99, M.C. di Luigi (2008) 19 ICCLR 58.
 Introduction 17

(UCITS Directive 1985/61171). The belated adoption of European Works

Councils (see Directives 1994/45 and 1997/54) in this country can also be
viewed as a consequence of this harmonisation strategy.72
If harmonisation is viewed in these terms, the areas where no progress has
been achieved stand out. In particular, the failure to address the issue of how
to regulate groups of companies, which was the subject of the draft Ninth
Directive,73 is obvious. Little has been done until recently in the area of share-
holder rights, an issue which was addressed in the Draft Fifth Directive.74
Private companies have attracted little attention until recent times. Most
notably, there has been virtually no harmonisation of the substantive rules
governing corporate insolvency law, though some worthwhile advances on the
procedural front have been achieved through the medium of the EC
Regulation on Insolvency Proceedings (1346/2000) (to be discussed in
Chapter 8).
Why was company law harmonisation seen as such a significant element in
the EC programme? The answer lies in that other cherished EC goal, namely
freedom of establishment, as demanded by Art 43 of the EEC Treaty. If busi-
nesses were to be given the freedom to operate and relocate across Europe it
was vital to create a level playing field in terms of regulation.75 The view was
taken that every effort should be made to avoid the possibility of a ‘race to the
bottom’ or Delaware syndrome76 developing on the European side of the
Atlantic. A Delaware syndrome involves companies incorporating in certain
states, not in order to extend market operations in that state, but rather to
exploit laxities (or, depending on one’s point of view, attractions) in the local
corporate law regime. States feel compelled to play this game to secure
economic advantage over their neighbours. The European Court of Justice
(ECJ) ruling in Centros77 has shown that freedom of establishment has

71 Implemented by SI 1996/2827 – see M. Thomas (1998) 19 Co Law 26.

72 Introduced into the UK by SI 1999/3323. On works councils generally, see S.
Wheeler (1997) 24 JLS 44.
73 For comment on the Draft Ninth Directive, see F. Wooldridge [1982] JBL 182.
74 On the Draft Fifth Directive, see M. Clough (1982) 3 Co Law 109, J. Welch
(1983) 8 ELR 83, J.J. du Plessis and J. Dine [1997] JBL 23.
75 See M. Andenas, K. Hopt and E. Wymeersch, Free Movement of Companies
in EC Law (2003) (OUP) and V. Edwards, EC Company Law (1999) (OUP). Note also
M. Gelter (2005) 5 JCLS 247.
76 The Delaware syndrome is well-documented and fiercely debated – W. Cary
[1974] 83 YLJ 663, R Drury [1998] 57 CLJ 165 and (2005) 5 JCLS 1, L.A. Bebchuk
(1992) 105 Harv LR 1435, R.K. Winter (1989) 89 Col L Rev 1526, M. Roe (2003) 117
Harv LR 588, J. Dean [2003] 14 ICCLR 196, P. Omar [2002] 13 ICCLR 445 and
[2005] 16 ICCLR 17.
77 Case C212/97 [2000] 2 WLR 1048. See V. Edwards [2000] CFILR 342. For
a fuller discussion, see Chapter 7.
18 National corporate law in a globalised market

outpaced company law harmonisation. Other factors have conspired to rein-

force the importance of corporate law harmonisation, namely the drive
towards a single capital market; we could note here Art 294 (ex 221) of the
Treaty, which seeks to prevent barriers being established to prevent free move-
ment of capital. This in effect has created a right to invest in the shares of
companies incorporated in other Member States without fear of discrimina-
tion.78 The economic and political need to encourage cross-border corporate
activity has also been a harmonisation driver.
It is important to reiterate that the programme has been driven entirely by
formal measures emanating from the EU institutions. Constitutionally, the
European Court of Justice has no residual power to introduce harmonisation
through the back door. Witness the case of Cooperative Rabobank v
Minderhoud (C104/96),79 where an attempt to argue that all of the rules
governing irregular company contracts should be harmonised along the lines
of promoting sanctity of transaction was decisively rejected by the European
Court of Justice. This type of deficient company contract (where one of the
parties was subject to a conflict of interest) was not specifically addressed by
the First Directive and therefore the Court of Justice was impotent when it
came to applying its mantra of security of transaction to that particular
scenario. However, as will become apparent later in this volume, the European
Court of Justice through its rulings can promote harmonisation indirectly.
Indeed, it has played a pivotal role through the development of the concept of
‘direct effect’ with regard to both Treaty provisions80 and directives.81 The
evolution of the concept of ‘state liability’ also is entirely attributable to ECJ
jurisprudence.82 The Court of Justice has decisively rejected arguments by
Member States that their non-implementation of Company Law
Harmonisation Directives can be justified by a similar degree of inactivity by
other Member States.83
The harmonisation programme is constantly evolving. There is a greater
recognition of the attractions of ‘subsidiarity’.84 The Winter Study Group,85

78 See, for example, Factortame (C221/89) [1991] ECR I-3905, Manninnen

(C319/02) [2005] 2 WLR 670.
79 [1998] 1 WLR 1025.
80 See Reyners v Belgium [1974] ECR 631, Segers (C79/85) [1987] 2 CMLR
247 for the direct effect of Treaty provisions in this context.
81 For the direct effect of directives, see Karella v Minister of Industry (C19 and
20/90) [1994] 1 BCLC 774.
82 See Francovich (C6 and 9/90) [1991] ECR I-5357.
83 Ministère Public v Blanguernon (C38/89) [1991] BCLC 635.
84 On subsidiarity, see Art 5(2) of the EC Treaty. See also K.J. Hopt [1999] 1
ICCLJ 41.
85 For discussion of the Winter Report from the High Level Group of Company
 Introduction 19

set up in the wake of the débâcle over the initial failure to adopt the Takeover
Directive, has made some significant proposals for reform. Reforms in the
area of corporate governance seem likely having been spurred on by the
Parmalat affair.86 Equally, existing harmonisation regimes may be revisited
under the SLIM (Simplified Legislation for the Internal Market) initiative.87
The Directive 2006/68, which introduces the possibility of deregulation of the
notorious Second Directive,88 is a perfect example of this new policy direction
at work.

7.2 Other Harmonisation Schemes

Europe is not alone in this strategy of seeking to develop a harmonised system

of corporate law. We have already seen how in federal jurisdictions, means
have been developed via model laws to promote commonality. Looking
further afield, in Africa there is the Organisation for the Harmonisation in
Africa of Business Law (OHADA) scheme.89 In the Caribbean, the CARI-
COM project90 has also achieved some success in bringing together corporate
law systems, though the proximity of the US has had a greater impact. Indeed,
the highly regarded Canadian model has attracted support in this region (the
Barbados Companies Act 1982 being heavily derived from the Canadian
Business Corporations Act).
At the truly global level, the United Nations Commission on International
Trade Law (UNCITRAL) programme also deserves mention. Its Model Law
on Cross-border Insolvency (1997)91 has proved a significant measure, being
adopted in a number of jurisdictions including the US, Japan and Great Britain
(through the Cross-Border Insolvency Regulations (SI 2006/1030)). Northern

Law Experts on a Modern Regulatory Framework for Company Law in Europe

(November 2002), see B. Pettet (2004) 57 CLP 393 and the editorial note in (2002) 23
Co Law 52.
86 See abovenote 26.
87 On Simplified Legislation for the Internal Market, see E. Ferran [2005] 6
EBOLR 93 at 96.
88 See above.
89 There are 16 countries in OHADA (which was established in 1993) and these
are mainly French-speaking jurisdictions. For OHADA generally, see P. Omar [2000]
Ins Law 257. The dominance of the French language has caused difficulties for
Cameroon (which is bilingual) – see N. Enonchong [2007] 51 JAL 95.
90 The activities of CARICOM are described at www.caricom.org. For its initia-
tive in the field of Company Law, see B.M. Surya (1982) 3 Co Law 44. See also P.
Maynard [1982] JBL 421, K.I.F. Kahn (1985) 6 Co Law 341.
91 See Chapter 8 for full discussion. The complete text of the Model Law and the
Cross-border Insolvency Regulations can be found in Volume 2 of L.S. Sealy and D.
Milman, Annotated Guide to Insolvency Legislation (11th edition) (2008) (Sweet &
Maxwell).
20 National corporate law in a globalised market

Ireland subsequently enacted the appropriate implementing measure via SR

2007/115 with effect from 12 April 2007.

8 LEGISLATIVE MEASURES
The UK Parliament has always kept one eye on commercial developments
occurring in other jurisdictions in the area of business organisation structures,
where those developments may threaten the economic stability of the UK. A
perusal of the Parliamentary and public debates in the mid-19th century, when
the possibility of limited liability companies being introduced into the UK was
being considered, clearly attests to that concern.92 This is certainly true if one
scrutinises the deliberations of the Mercantile Law Commission93 in 1854.
The formal introduction of the private limited company into English law in
1907 offers a good illustration of these convergence forces at work in the
legislative process.94 However, it should be noted that the private company
had in reality been on the scene for a number of years prior to that date, as is
clear from a perusal of the works of leading practitioners95 and from judicial
pronouncements.96
The Law Commissions in England/Wales and Scotland certainly undertake
comparative research before making recommendations for the reform of UK
company law.97 Indeed it appears from s. 3(1)(f) of the Law Commissions Act
1965 that they have a statutory obligation to do so. This technique is most
recently apparent when one looks at the policy deliberations leading to the
introduction of Part 11 of the Companies Act 2006 (statutory derivative
claims).
In more modern times, the introduction of the limited liability partnership
in April 2001, via the agency of the Limited Liability Partnerships Act 2000,

92 Bouverie was concerned about businesses being incorporated in the US and

France with limited liability and then trading in this country.
93 For discussion, see R.A. Bryer (1977) 50 Econ Hist Rev 37.
94 The advent of the private company is analysed in E. Manson (1910) 26 LQR
11. The GmbH was formally devised in Germany in 1892. By perverse coincidence, the
European idea of the limited partnership was introduced into English law at the same
time as the private company, but as an organisational structure it has proved unpopular
when set against the virtues of the private company.
95 Sir Francis Palmer had noted the phenomenon in 1877 in his treatise Private
Companies and Syndicates. For an account of Palmer’s role in promoting the private
company, see the Biographical Note in Palmer’s Company Law (24th ed) (1987)
(Stevens and Sons) at ix.
96 See British Seamless Paper Box (1881) 17 Ch D 467 at 478 per Cotton LJ and
Lord Macnaghten in Salomon v Salomon & Co Ltd [1897] AC 22 at 48.
97 See, for example, Shareholder Remedies (1997) (LC 246) (Cmnd 3769).
 Introduction 21

shows how concerns that the UK was falling behind commercial competitors
in the provision of business structures sought after by the professions, can lead
to legislative reform. The Limited Liability Partnerships (LLP) emerged in the
US in Texas in 1991 as a response by the professions to the burgeoning risks
of professional liability litigation. The recent introduction of the LLP into
Jersey98 coupled with threats from major accountancy firms that they would
‘go offshore’ arguably proved a decisive factor in persuading the UK govern-
ment to act. Since that legislation was enacted, several thousand firms (mainly
professional firms) have changed their legal basis from that of partnership to
that of limited liability partnership.99 The legal model devised in Texas has in
the space of a mere decade well and truly crossed a continent and ocean.

9 CONVERGENCE AND THE COURTS

We have already asserted that the European Court of Justice officially has no
residual role to play in pursuing a harmonisation policy beyond the scope of
measures formally agreed. At national level, however, the national Member
State courts are obliged by Art 10 (ex 5) of EC Treaty to facilitate the imple-
mentation of directives.100 More generally, they frequently take into account
global trends when formulating jurisprudence. Certainly, in English law, the
courts appear very sensitive to the notion that the health of the City of London
is vital to the economic well-being of the country. Let us consider a few illus-
trations of these thought processes at work.
Historically, the work of Lord Mansfield101 in the 18th century in seeking to
attune English commercial law with continental traditions is important, though
there is no direct impact on company law mainly because it was operating under

98 Under the Limited Liability Partnerships (Jersey) Law 1997. See P. Morris
and J. Stevenson (1997) 60 MLR 538. For the debate leading to the introduction of the
LLP into English Law, see A. Griffiths [1998] CFILR 157, C. Bradley [2001] CLWR
330. On LLPs, see J. Freedman and V. Finch [1997] JBL 387, V. Finch and J. Freedman
[2002] JBL 475, E. Deards [2003] JBL 435, M. Lower (2000) 22 Liv L Rev 89, S.
Cross [2003] JBL 268. For the leading monograph see Palmer’s Limited Liability
Partnership Law (2002) (Sweet & Maxwell) edited by G. Morse et al.
99 A perusal of the Companies Annual Report for 2005/06 discloses some 16,699
LLPs registered in England and Wales. The irony is that the Companies Act 2006 now
allows auditors to cap liability (see ss. 534 et seq.) – one wonders whether some of
those firms that have rushed into the LLP may now have had second thoughts.
100 See Marleasing (C106/89) [1990] ECR I-4135.
101 Lord Mansfield was Lord Chief Justice 1756–88. Lord Mansfield had a role
in devising the rule against fraudulent preferences, a staple of corporate insolvency law.
On Lord Mansfield’s influence generally, see C.H.S. Fifoot, Lord Mansfield (1936)
(Clarendon Press).
22 National corporate law in a globalised market

the dead hand of the Bubble Act for the entirety of Lord Mansfield’s tenure as
Lord Chief Justice. What matters was that Lord Mansfield affected the envi-
ronment in which company law later came to operate.
In Re Scandinavian Bank,102 a case which we discuss in Chapter 4 below,
Harman J gave the green light to UK public companies having shares denom-
inated in foreign currencies. The Companies Act 2006 has confirmed this
ruling by giving it a statutory imprimatur (see s. 542).
The issue in the test case of Acatos & Hutcheson plc v Watson103 was
whether there was a breach of the bar on companies acquiring their own shares
in a scenario where a company acquires another company which just happens
to own shares in the first company. After considering a range of factors,
including the stance taken by the Australian courts,104 Lightman J ruled that
this situation (which was not uncommon in practice) should not be deemed a
breach of company law. Again, the fact that to hold otherwise would be to frus-
trate takeovers in the City of London arguably influenced the process of form-
ing the judgment.105
In Re Maxwell Communications Corp (No. 2),106 Vinelott J had to decide
whether English law should permit a creditor to contractually assent to a
deferred or subordination status on liquidation. At first sight, this would
appear to offend against the fundamental principle of equality of treatment of
non-secured creditors. In deciding this question in the affirmative, the judge
was impressed by the fact that contractual subordination was permitted in a
number of jurisdictions enjoying developed economies – namely South Africa,
Switzerland and the USA. That survey again proved decisive in the final judg-
ment. As Vinelott J stated: ‘It would, I think, be a matter of grave concern if,
at a time when insolvency increasingly has international ramifications, it were
to be found that English law alone refused to give effect to a contractual subor-
dination’.107

102 [1988] 1 Ch 87.

103 [1995] BCLC 456.
104 For the Australian jurisprudence, see Dynason v JC Hutton Pty Ltd (1935)
ALR 419, August Investments Pty Ltd v Poseidon Ltd and Samin Ltd [1971] 2 SASR
71, Trade Practices Commission v Australian Iron and Steel Pty Ltd (1990) 22 FCR
305
105 Ibid at 451. Although the sentiment was not unequivocally expressed in the
judgment, the case typifies the approach of the English courts towards takeover facili-
tation. Approving devices that frustrate takeovers would be a cardinal sin, because
takeovers are major earners for a range of professional repeat players in the City of
London.
106 [1994] 1 BCLC 1 – discussed by M. Fealy [1993] CLJ 396, R. Nolan [1995]
JBL 485. See also Re British and Commonwealth Holdings (No. 3) [1992] BCLC 322.
107 [1994] 1 BCLC 1 at 20–21.
 Introduction 23

A different use of comparative legal material was at the heart of the House
of Lords ruling in Re BCCI (No. 8).108 Here the House of Lords had to deter-
mine, amongst other things, whether a bank could take a charge over monies
deposited with it by the chargor client, a so-called ‘charge-back’ arrangement.
Millett J, as he then was, had indicated in Re Charge Card Services109 that this
outcome was a conceptual impossibility. Banking practitioners were disap-
pointed with this analysis and the Legal Risks Review Committee expressed
its concerns.110 Subsequently, in Re BCCI (No. 8),111 Lord Hoffmann rejected
the ‘conceptual impossibility’ thesis by pointing out that a number of legal
systems based upon English law had explicitly legislated for charge-backs,
thereby proving that the concept was a feasible legal option. This argument
could have been countered by the retort that the need for legislation indicated
a non-acceptance at common law, but that is not significant to our discussion
here; comparative insights informed the conclusion.
This trend (which over the years admittedly has had its setbacks112)
towards ensuring that English law is internationally competitive runs along-
side a more established phenomenon reflecting the evolutionary processes of
the common law. Although it is true to say that the English courts have always
been prepared to give judicial notice to Commonwealth authorities, that will-
ingness to be receptive to new ideas has become more marked in recent
decades.113 This is not exclusively a phenomenon only reflected in corporate
law; it is much more pervasive. As far as corporate law is concerned, we could
point to Commonwealth authorities playing a pivotal role in the emerging law
of directors’ duties to creditors.114 Certainly, a perusal of the judgment of the

108 [1997] 3 WLR 909.

109 [1986] 3 WLR 697.
110 See Legal Risks Review Committee, Reducing Uncertainty: The Way
Forward (1992) – reviewed by D. Capper (1993) 44 NILQ 71.
111 Supra.
112 Witness the SWAPS affair – Westdeutsche Landesbank Girozentrale v
Islington LBC [1996] AC 669.
113 This phenomenon, whereby English courts are informed by Commonwealth
jurisprudence, is a general practice and not restricted to corporate law. This practice of
judicial borrowing is not restricted to common law judicial interaction – see B.
Markesinis [2002] CLJ 386.
114 See, for example, Kinsella v Russell Kinsella Pty Ltd [1968] NSWLR 722,
Walker v Wimborne (1976) 137 CLR 1, Nicholson v Permakraft [1985] 1 NZLR 242,
Jeffree v NSCC (1989) 15 ACLR 217. The principle has subsequently been introduced
into Ireland – Re Frederick Inns Ltd [1994] 1 ILRM 387. The literature mapping this
development is impressive – R. Grantham [1991] JBL 1, D. Prentice (1990) 10 OJLS
265, A. Keay [2002] JBL 379, (2003) 66 MLR 665, [2005] CLJ 614, [2005] 18 Ins
Intell 65. Professor Keay’s work in this area is also expanded in A. Keay, Company
Directors’ Responsibilities to Creditors (2006) (Routledge-Cavendish).
24 National corporate law in a globalised market

Court of Appeal in West Mercia Safetywear Ltd v Dodd115 would point to that
influence. More recently, in National Westminster Bank v Spectrum,116 the
House of Lords sided with their judicial brethren from New Zealand117 in
deciding that a fixed charge over future book debts based upon the orthodox
English Siebe Gorman118 precedent created only a floating charge. Thirty
years of City of London practice disappeared overnight, much to the angst of
the banking community.

10 LEGAL AND OTHER COMMERCIAL

TRANSPLANTS119
The process of national systems formally adopting (either by legislation,
precedent or evolving social norm) corporate structures and concepts from
other jurisdictions, although commonplace, is not without difficulty. Some
imported concepts fit in easily alongside existing structures. Others are less
successfully adopted. The difficulties of this practice were noted by Kahn-
Freund,120 who highlighted the importance of context when considering usage
of comparative analysis and in particular, in evaluating whether a transplant
could be viable.
On the positive side, one could cite the adoption of the informal rescue
procedures known as the London Approach to a number of leading Asian
economies.121 The spread of the private company from its genesis in Germany
(GmbH, 1892)122 to its reception in England (1907) and France (SARL,

115 [1988] BCLC 250. See A. Keay [2002] JBL 379.

116 [2005] UKHL 41. See A. Berg [2006] JBL 22.
117 Supercool Refrigeration v Hoverd Industries [1994] 3 NZLR 300.
118 Siebe Gorman & Co v Barclays Bank [1979] 2 Lloyds Rep 142.
119 See A. Watson, Legal Transplants: An Approach to Comparative Law (2nd
edition, 1993) (University of Georgia Press). See also his work in (1976) 92 LQR 79,
[1978] 37 CLJ 313. Note also the essay by P. Legrand in chapter 2 of D. Nelken and
J. Feest, Adapting Legal Cultures (2001) (Hart). For an outstanding review of ‘recep-
tion’ techniques in the British colonies, see B.H. Macpherson, The Reception of
English Law Abroad (2007) (Supreme Court of Queensland Library). Note also R.
McQueen (2008) 17 Griff L Rev 383. Scholars have also examined the economic
efficiency of legal transplants in general – see N. Garoupa and A. Ogus (2006) 35 Jo
of Leg Studs 339.
120 (1974) 37 MLR 1 (Chorley Lecture).
121 See N. Segal [2000] 13 Insolv Intell 17.
122 This was partly due to a reaction by the business community to over-regula-
tion of public companies – see F. Fabricius [1970] JBL 229.
 Introduction 25

1925)123 and finally to the Netherlands (BV, 1971)124 offers another good
illustration of how successful corporate models can migrate. On much the
same theme, we could cite the emigration of unit trusts125 from the US to the
UK in the 1930s, a transition that eventually required a regulatory response.
On the other hand, a good illustration of the difficulties that can arise is
provided by the story of the limited partnership in English law. This was a
model that had been operated successfully on the Continent for many a year.
Accordingly, it was introduced into English Law by the Limited Partnerships
Act (LPA) 1907. It proved to be unpopular and even today there are only
13,426 limited partnerships registered in this country.126 Compare this statis-
tic to the 17,499 LLPs registered since 2001. Why has the limited partnership
registered such a poor performance? The introduction of the private limited
company into English law in the same year may offer some explanation in that
apart from possible technical tax advantages, the limited partnership has little
to offer entrepreneurs over and above that provided by the private company.
The attempt to transplant the South African rescue device of judicial
management into Australia in 1961 (albeit under the guise of official manage-
ment) was a resounding failure.127 Another example of a failed transplant is
illustrated by the fate of the two-tier board in France. This German corporate
governance idea has never really taken off in France,128 though it has been
adopted successfully in the Netherlands.
Having noted the successes and failures, what one can conclude? As we
noted above, there is much in Kahn-Freund’s observation that failed trans-
plant may not necessarily be attributed to inherent weaknesses in the trans-

123 The GmbH model arrived in France through the back door. It had been used
in Alsace and Lorraine and when these provinces were returned to France at the end of
the First World War, this model was allowed to continue, thereby creating pressure to
introduce it generally into France – for the fascinating story, see F. Wooldridge [1970]
JBL 317.
124 See P. Sanders [1973] JBL 194.
125 See K.F. Sin, The Legal Nature of the Unit Trust (1997) (Clarendon Press) at
27–9.
126 On the LPA 1907, see E. Berry [2005] JBL 70 at 85, J. Henning (2000) 21 Co
Law 165, S. Sheikh (2002) 23 Co Law 179 and T Prime and G. Scanlan (2007) 28 Co
Law 262. For current limited partnership registrations, see DTI Annual Companies
Report 2004–05, where the figure of 12,377 is reported for Great Britain, with more
than a third of these in Scotland (an interesting statistic). The limited partnership has
enjoyed a significant boost in popularity in the past five years.
127 For a critique of judicial management, see H. Rajak and J. Henning (1999)
116 SALJ 262. On the failure of official management in Australia, see J. Farrar [1976]
JBL 214.
128 For French resistance to the German model, see CLAB survey of national
systems of European Corporate Law (1999).
26 National corporate law in a globalised market

plant but may owe more to underlying cultural differences. 129 There is a
path-dependency130 aspect to legal reform that is particularly relevant
when contemplating transplants. It is a recognition of this problem that has
led the EU to seek to harmonise not merely substantive company law, but
also the social and economic environment in which it operates. But, even
with this fair wind, transplants do not always succeed because culture is
resilient.

11 THE COMPANY LAW REVIEW (1998–2001)131

For many years prior to 1997, the process of corporate law reform in the UK
had been a disgrace.132 Clive Schmitthoff famously described a former
Companies Act as a ‘repository of historical relics’.133 In our preface, we
noted how the Company Law Review process, which produced two White
Papers134 in response, was largely driven by a desire to ensure that UK corpo-
rate law was an internationally competitive model. There is nothing new in
this concern.135 The Irish Company Law Review Group stressed this as an

129 See T. Ruskola (2000) 52 Stan L Rev 1598. See P. Lawton [2007] 49 Manag
Law 249 for discussion of how cultural aspects of the Chinese family firm might have
an impact upon the enforcement of shareholder rights through standard substantive
mechanisms.
130 For the convincing path dependency theory in corporate law, see M.J. Roe
(1996) 109 HLR 641.
131 For the Final Report see URN 01/942 (2001). See J. Rickford, chapter 1 in J.
de Lacy, The Reform of UK Company Law (2002) (Cavendish). Note also B. Pettet
(1998) 19 Co Law 134 for an early appraisal of the project. See also M. Arden [2002]
JBL 579. The UK was not alone in reflecting on the state of its company law. In France
in 1998, the Marini Report covered similar ground – see A. Tunc in B. Rider (ed.), The
Realm of Company Law (1998) (Kluwer) at 161–6, P. Omar (1998) 19 Co Law 62,
(1999) 20 Co Law 310.
132 A compelling critique of the process of company law reform before 1998 is
provided by L.C.B. Gower in (1980) 14 Law Teacher 111 at 115 and by J. Freedman,
chapter 11 in F. Patfield (ed.) Perspectives on Company Law (I) (1995) (Kluwer).
133 [1960] JBL 151 at 151.
134 See Modernising Company Law (Cm 5553-I, 2002) and Company Law
Reform (Cm 6456, 2005). For a reaction to the 2002 White Paper, see R. Goddard
(2003) 66 MLR 402 and for comment on the 2005 follow-up, see C. Howell (2005) 26
Co Law 203.
135 See here the observations of Eve J in Re Jewish Colonial Trust [1908] 2 Ch
287 at 295, commenting upon the rationale behind the Companies (Memorandum of
Association) Act 1890 which apparently was designed to enable English companies to
change their objects to compete more effectively with foreign firms.
 Introduction 27

important consideration in its first report in December 2001.136 The method-

ology of the UK Company Law Review is, however, interesting. The Steering
Group was composed of individuals with a wide range of skills and perspec-
tives. Extensive use was made of comparative research. The University of
Manchester Centre for Law and Business survey of European national corpo-
rate law systems has already been mentioned.137 In addition, the 1997 study
by a team led by Cally Jordan of Company Law in Hong Kong138 assisted in
the process of forming reform proposals for the UK. Academics and practi-
tioners on the Steering Group made use of their extensive knowledge of
comparative corporate law models.

12 THE COMPANIES ACT 2006

This new legislation, which represents a potent brew of reform and consolida-
tion contained within the longest Act in English law (all 1300 sections and 16
schedules at the time of initial enactment), does have considerable relevance
to our study. Some of the deregulation/modernisation strategy favoured by the
Company Law Review in order to make our system of corporate law more
competitive is indeed introduced through that legislative mechanism. For
example, the rules on share capital maintenance are loosened insofar as that is
consistent with the EC Second Company Law Harmonisation Directive
(1977/91). The 2006 Act remodels and simplifies the law of overseas compa-
nies (Part 34) and introduces a mechanism under which foreign disqualifica-
tion orders can be recognised and enforced in the UK (Part 40). More of these
matters later. In spite of these undoubted changes, much of the 2006 Act is
familiar and it is not as radical a measure as has been claimed.139
The 2006 Act has been such a massive venture140 that implementation has
been staged over three years, with 1 October 2009 now being set as the final
implementation date for all but a very few provisions. Whether that target is

136 For discussion of this issue, see para 1.2 of the Report. The point was made
that Ireland had updated other regulatory systems to cope with the globalised economy,
but that companies regulation had lagged behind. The Irish Company Law Reform
Group was established under s. 68 of the Company Law Enforcement Act 2001.
137 Centre for Law and Business (University of Manchester). Noted in Final
Report (URN 01/942) at p. 7
138 For this 1997 report (which is available electronically) see C. Jordan [1997]
IFLRev (July) 29.
139 See J. Birds (2007) 49 Manag Law 13.
140 For the background to the legislative passage, see P. Bovey (2008) 29 Stat L
Rev 11.
28 National corporate law in a globalised market

met remains to be seen. Further details on the current state of play with regard
to implementation can be found in Appendix 1.

13 DOES CORPORATE LAW MATTER?

One of the underlying themes in this work is that an effective national system
of corporate law is a relevant consideration in terms of attracting transnational
commerce. This assertion, which has its doubters in terms of general applica-
bility,141 is based in part on intuition. It is, however, supported by a more
scientific body of scholarship.142 John Dunning143 has argued that a rational
actor in the transnational sector would have regard to the local legal system
before investing in that country. It is difficult to argue with that assertion,
provided it is not taken too far. A group of scholars headed by La Porta144 have
reached similar conclusions when comparing levels of shareholder protection
in a range of jurisdictions. This type of numerical analysis as a comparative
tool is very much in vogue.145 Studies by Perry146 in Sri Lanka and other
South Asian countries suggest that the local legal infrastructure is not the only
major consideration taken into account before the decision to invest is made.
There is no doubt that other significant considerations may enter the equation
– such as language, political stability, robustness of critical institutions,147

141 See B. Cheffins (2001) 30 Jo of Legal Studs 459, where the point was made
that the development of corporate law regimes owes more to market forces than legal
norms.
142 For an excellent account of the ‘law matters’ thesis, see B. Cheffins (2001) 1
JCLS 71 at 76–7.
143 J. Dunning, Multinational Enterprises and the Global Economy (1993)
(Addison-Wesley).
144 See R. La Porta, F. Lopez de-Silanes, A. Shliefer and R. Vishny (1998) 106 Jo
of Pol Econ 1113, and the later work published in (1999) 54 Jo of Fin 471, (2000) 58
Jo of Fin Econ 3. For a review of the so-called ‘LLSV’ thesis with critique, see A.
Pekmezovic [2007] ICCLR 97 and 147.
145 For a compelling critique of this methodology, see M.M. Siems [2005] 16
ICCLR 300. An alternative ‘leximetric’ methodology is developed by P. Lele and M.M.
Siems in (2007) 7 JCLS 17.
146 A.J. Perry, Legal Systems as a Determinant of FDI: Lessons from Sri Lanka
(2001) (Kluwer). See also her work in (2003) 23 Leg Studs 649, (2002) 29 Jo of Law
and Soc 282 and (2000) 49 ICLQ 779.
147 On the importance of institutions in a variety of senses, see K. Pistor (2002)
50 Am Jo of Comp Law 97. In this context, M. Whincop, An Economic and
Jurisprudential Genealogy of Corporate Law (2001) (Ashgate) is worth reading. K.W.
Dam would agree with La Porta that law matters – but what really matters is efficient
legal institutions to enforce that law – see The Law-growth Nexus: The Rule of Law and
Economic Development (2006) (Brookings Institute Press), especially at 230. In
 Introduction 29

transport facilities, availability of appropriate skilled workers, raw materials,

available market, etc., but it would be difficult to persuade a lawyer that the
legal system is irrelevant to the decision-making processes of investors and
entrepreneurs.148 Indeed, the whole experience of Delaware corporate law
seems to suggest that it may be an important factor. It is vital to the economy
of offshore jurisdictions which are constantly seeking to steal a march on each
other in developing business-friendly corporate regimes. Even between main-
stream jurisdictions, differentials in corporate law are felt – witness the influx
of small European businesses into the UK, seeking to exploit our private
company format. Even more recently, we have seen distressed businesses
desperately seeking to relocate to the UK before insolvency proceedings are
commenced, simply in order to take advantage of our flexible insolvency
regimes. On the basis that law does matter but is not the only behavioural
determinant, we will proceed with our study.

support of this argument, Dam cites the failed attempt to import the highly successful
German bankruptcy law into Russia, a failure attributed to inefficient Russian legal
institutions.
148 This point with regard to the positive impact of protection on investors is
made by R. La Porta et al. (2002) 57 Jo of Fin 1147.
2. Comparing core regulatory strategies

1 REGULATING COMPANIES: JUSTIFICATION

There is a fierce intellectual debate under way here.1 The orthodox view of
companies is that they are creatures of the state, and, as they confer on their
incorporators the considerable economic advantage of limited liability for the
firm’s debts, it is entirely appropriate that in the public interest they be heav-
ily regulated. This has been the view traditionally taken in English law2 and is
a perspective that is shared in much of Continental Europe.3 On this view,
there is no constitutional entitlement or fundamental right guaranteeing incor-
poration.4 Companies can be controlled at the point of entry by refusing the
privilege of incorporation5 or by removing corporate status through processes
such as liquidation and dissolution. Companies can be wound up in the public
interest under s. 124A of the Insolvency Act 1986, even though they may be
solvent. Ultimately, companies can be taken into public ownership if this is
deemed necessary to protect the state interest. The nationalisation of Northern

1 For illuminating overviews of the paradigm theories on the juristic nature of

companies, see S. Bottomley [1990] 19 Fed L Rev 203 and S. Worthington (2001) 22
Co Law 258 at 263.
2 Companies are creatures of statute – Daimler v Continental Tyre [1916] 2 AC
307 per Lord Parker, Butler v Broadhead [1974] 2 All ER 401 per Templeman J.
Sovfracht [1943] AC 203 discussed by A. Farnsworth (1944) 7 MLR 80.
3 For the European view that companies merely enjoy a concession from the
state, see the work of Savigny.
4 Neither the ECHR nor the US Constitution recognises such a right as part of
the broader notion of freedom of association. The point is also considered in Private
Motorists Provident Society v AG [1983] IR 339, where Carroll J indicates that Art 40.6
of the Irish Constitution does not in itself guarantee a right to incorporate – for discus-
sion, see T.B. Courtney, The Law of Private Companies (2nd edition 2002)
(Butterworths) at para 1.050. In EU law, we have a formally recognised right of estab-
lishment (Art 43 EC Treaty) and in Art II-76 in the Draft Treaty on the European
Constitution, the right to engage in business was given explicit recognition – but
neither provision gives an explicit right to incorporate.
5 Bowman v Secular Society Ltd [1917] AC 406, R v Registrar of Joint Stock
Companies [1931] 2 KB 197, R v Registrar of Companies ex parte AG [1991] BCLC
476.

30
 Comparing core regulatory strategies 31

Rock6 in 2008 affirms this philosophy at work. In pragmatic terms, this

perspective leads to the further proposition that company laws should be
mandatory.7 Thus, individuals who operate a business using the corporate
form under the umbrella of limited liability are obliged to comply with corpo-
rate laws. This hypothesis is embodied in legislation,8 is well documented in
the literature 9 and has attracted considerable judicial support in the courts in
the UK.10 Within the parameters of this mindset, we can see extremes ranging
from a benign mandatory view to a more draconian approach (such as that
taken in India, where state control of companies is most apparent).
In more recent times, an alternative thesis (or more accurately collection of
theses) has emerged. This alternative argument, which originated in North
America, concentrates on the history of companies and argues that they arose
through market evolution rather than by an act of state legislation.11 It then
proceeds to expound the view that companies are good for society because of
the positive contribution that they make to the economy by reducing transac-
tion costs in the contracting process. Companies are at the hub of a web of
repeat contracts, encompassing shareholders, directors, creditors, employees
and other stakeholders. Therefore there is no need to excessively regulate
companies because the effect of such an approach would be to dilute the
undoubted economic benefits flowing from freely operating companies. This
approach has been espoused by the Chicago school of academics (such as
Easterbrook and Fischel) in recent decades,12 but the ideas underpinning it
have a long intellectual ancestry. For instance, Professor Ballantine13 was one
of the originators of this latter perspective. He played a key role in drafting the
corporate code for California in the 1930s, a fact well-reflected in its deregu-
latory tone. In an article written for the California Law Review, Ballantine
stated:

6 For background, see R. Tomasic (2008) 29 Co Law 297 and (2008) 29 Co

Law 330. Parallels exist in the US and Europe for emergency state bailouts for troubled
financial institutions and other key economic players.
7 For discussion see M.A. Eisenberg (1989) 89 Col L Rev 1549 at 1461.
8 See, for example, the prohibition on directors excluding their duties – CA
1985, s. 310 (CA 2006, s. 232).
9 J. Gordon (1989) 89 Col L Rev 1549. In English law, Otto Kahn-Freund was
a firm believer in greater regulation of limited companies – see (1944) 7 MLR 54.
10 British Eagle v Air France [1975] 1 WLR 758, Re Peveril Gold Mines Ltd
[1898] 1 Ch 122, Exeter City AFC v Football Conference [2004] BCC 498.
11 See G.M. Anderson and R.D. Tollison (1983) 3 Int Rev of Law and Econ 107.
For a rebuttal, see G.A. Mark, chapter 1 in F. Macmillan (ed.), International Corporate
Law Annual Volume 1 (2000) (Hart).
12 For further support for this flexible approach, see U. Procaccia (1987) 35 Am
Jo of Comp Law 581.
13 See, for instance, (1925) 14 Calif L Rev 12 and (1931) 19 Calif L Rev 465.
32 National corporate law in a globalised market

A serious dilemma in drafting a corporation law is to make it liberal enough to facil-

itate business transactions without undue formalities of checks and balances, of
votes and consents of shareholders, and applications to courts, and, at the same
time, not so lax that the management or the majority may manipulate the machin-
ery to the prejudice of creditors or investors or the oppression of minority share-
holders. The practical difficulty must always be remembered that with the freedom
of admission of foreign corporations to do business in the state and the exemption
of the internal organization and affairs of such corporations from local regulation,
it is perfectly useless to impose drastic limitations and requirements that will simply
have the effect of driving corporations from their home state to more hospitable
shores.14

This theory also draws support from the complimentary perspective offered by
Manne and others that there is limited need for harsh regulatory rules because
the capital markets provide the necessary regulatory constraints upon abusive
behaviour – the so-called market for corporate control theory.15
A further refinement of this approach has been to focus on the contractual
basis16 of companies as organisations. Academics17 have argued that, as the
key relationships within companies and between companies and the outside
world are regulated by a nexus of contracts, it is best left to the contracting
parties themselves to arrange their own private form of regulation to allocate
risks between the contractors. Such a perspective is not restricted to ivory
tower academics; it has been used, albeit in non-explicit fashion, by English
judges to underpin iconic rulings of the House of Lords in Bushell v Faith18
and Russell v Northern Bank.19 This is a valuable perspective, but it ignores
the impact of limited companies upon non-contracting parties (for example,
the passer-by who is run over by one of the company’s vehicles which is being

14 Ibid at 465. In more recent times, K. Pistor has stressed the importance of a
system of company law allowing for innovation – (2003) 31 Jo of Comp Econ 676.
15 See H. Manne (1965) 73 Jo of Pol Econ 110, C. Bradley (1990) 50 MLR 171,
A. Belcher (1997) 17 Leg Studs 22 at 28–9. Note also B. Clarke [2006] JBL 355 for a
discussion of this concept in the context of EU takeover regulation.
16 For excellent explanations of the origins and impact of contractarianism, see
M. Whincop (1999) 19 OJLS 19 at 27 et seq., P. Ireland (2003) 23 Leg Studs 453, B.R.
Cheffins [2004] CLJ 456 at 481 et seq., J. Armour and M. Whincop (2007) 27 OJLS
429.
17 For discussion of this idea, see F. Easterbrook and D. Fischel (1989) 89 Col L
Rev 1416 and their text, The Economic Structure of Corporate Law (1991) (Harvard
University Press). See further L.A. Bebchuk (1989) 102 HLR 1883. A critique is
provided by W. Bratton (1989) 74 Cornell L Rev 407. For an English perspective, see
also J. Parkinson, chapter 7 in D. Feldman and F. Meisel (eds), Corporate and
Commercial Law: Modern Developments (1996) (Lloyd’s of London Press).
18 [1970] AC 1099. It may also explain the ruling of the ECJ in Powell Duffryn
plc v Petereit (C214/89), The Times 15 April 1992.
19 [1992] 1 WLR 588. See E. Ferran [1994] CLJ 343 for in-depth analysis.
 Comparing core regulatory strategies 33

driven negligently) and underestimates the significance of inequalities of

bargaining power and the impact of information asymmetries. It is not surpris-
ing, therefore, that powerful critics have emerged.20
Professor Romano’s views21 offer a different (but no less valid) analysis.
Here we find a theory that law (and in particular corporate law) is essentially
a product comprising not merely the bare legislation but also the underlying
culture. That culture includes constitutional stability, availability of relevant
expertise and a database of precedent. Delaware scores highly on all of these
criteria. The nature of that product, which takes time to mature, can serve a
role in influencing reincorporation decisions by firms.
These alternatives to the concession/mandatory theories have influenced
corporate law reform debates in the UK. It is no surprise to note their influ-
ence on the 1985 White Paper, Lifting the Burden (Cmnd 9571), a key mile-
stone in Thatcherite reforms. Certainly, the Companies Act 1989 reflected that
influence in its measures on the written resolution procedure and the so-called
elective regime for private companies.22 Both the facilitation philosophy and
the regulatory competition perspective were very much to the fore in the Final
Report of the Company Law Review in 2001. We noted in our Preface how
those approaches informed the terms of reference of the Company Law
Review in 1998. It is hardly surprising therefore to find it in a prominent posi-
tion in the Final Report.

We start with the general principle that company law should be primarily enabling
or facilitative – i.e. it should provide the means for those engaged in business and
other corporate activity to arrange and manage their affairs in the way which they
believe is most likely to lead to mutual success and effective productive activity.23

Again:

Company law is also a factor in wider international competitiveness. Globalising

markets provide real choice as to where to locate economic activity and which juris-
diction to adopt. Our company law needs to be internationally competitive, to
ensure that we retain our existing companies and attract new ones.24

20 For a persuasive criticism of contractual perspectives, see D. Campbell in his

piece in (1997) 7 Aust Jo of Corp Law 343 at 361, where Campbell refers to the ‘nexus
of metaphors’. Note also V. Brudney (1985) 85 Col L Rev 1403.
21 See The Genius of American Corporate Law (1993) (AEI Press) and her semi-
nal article in (1985) 1 Jo of Law, Econ and Org 225.
22 See J. Birds (1990) 11 Co Law 142.
23 URN 01/942 (2001), para 1.10.
24 Ibid, para 1.13.
34 National corporate law in a globalised market

These comments were made within the past decade but now must be viewed
in the light of the global financial crisis, which has placed all regulatory
systems under strain, and may well lead to a general ratcheting up of corpo-
rate law regulation or even a bout of protectionism.

2 HOW TO REGULATE?
In spite of the existence of these alternative perspectives, not even the most
hardened zealot would deny that some regulation of limited companies is
necessary. There is considerable dispute, however, on both the most efficient
mode of such regulation and on the most appropriate degree of regulation.
Consensus favours a cocktail of regulatory devices.25

2.1 Regulation by Legislation

The use of primary legislation is the standard method of regulating companies

across the globe. This should surprise no one, as legislation is in general the
usual method of structuring the relationship between social actors in a modern
democratic society. Gower was so supportive of a legislative foundation for
Company Law that he argued for consolidation.26 This is not overly adventur-
ous, when one considers that Partnership Law and other key areas of
Commercial Law were consolidated in the UK in the late 19th century.
Matters are, however, more complex when it comes to regulating compa-
nies. Unlike the examples mentioned above, there was no well-established
fund of common law principles on which to draw.
There is another problem to overcome when legislating for companies: not
all companies pose the same type of regulatory problem. In English law, the
approach has been to use a single monolithic statute to cover both public and
private companies.27 In continental jurisdictions (for example, France and
Germany), it is more common to find separate and explicit regimes created for
both public and private companies. Some common law jurisdictions (such as
South Africa28) have also gone down this route. The UK has resisted this
trend, though increasingly there are signs of a rupture in our companies legis-
lation, most notably in the share capital maintenance and accounts provi-

25 See also E. Ferran (2001) 1 JCLS 381.

26 See L.C.B. Gower (1962) 4 Mal L Rev 36.
27 R.R. Pennington noted this weakness in the system of English company law
– see (1962) 25 MLR 703 at 704.
28 For the close company in South African law, see J.J. Henning in (2004) 25 Co
Law 95.
 Comparing core regulatory strategies 35

sions.29 Traditionally, this schizophrenic manifestation owes less to a domes-

tic reappraisal and more to EU influences, which have been most apparent in
this respect since the enactment of the Companies Act 1980.30 Having said
that, the governing philosophy at present is ‘Think Small First’. This certainly
was a dominant mantra for the Company Law Review31 and its impact upon
the Companies Act 2006 is readily apparent, particularly in the area of
company accounts, where the base rules are designed for small companies,
with variations being prescribed for their larger counterparts.32 The fact that
under s. 270, private companies are no longer required to have a company
secretary also exemplifies this policy. It is a pity that this philosophy has not
been followed through to the point of accepting the wisdom of discrete legisla-
tive regimes for public and private companies. In my opinion, this remains a
serious structural weakness in UK corporate law.
Other jurisdictions use legislation to regulate groups of companies.
Germany is the prime example, with its highly detailed group law dating back
to 1965. Whether this is the best way forward is a moot point, but other
European jurisdictions have followed suit, albeit with a greater degree of flex-
ibility being permitted.33
Legislation should naturally be clear.34 According to the eminent jurist Lon
Fuller, this requirement is one of the critical litmus tests for legality. Gower
lamented the failure in UK corporate law to comply with this aspect of
lawmaking.35 Certainly, whether UK Company Law, with its massive bulk and
micro-regulation, satisfies this Fuller criterion is doubtful.36 The Jenkins
Committee (Cmnd 1749) also saw the problem some 40 years ago, but felt
unable to offer constructive solutions. Thus, in paragraph 6 of its report, it
conceded: ‘We would gladly see a reduction in this unwieldy mass of legisla-
tion but have not found it possible to make suggestions contributing to that

29 See Companies Act 1985, Parts 5, 13 and 14 and now Companies Act 2006,
Parts 17–20 and 23.
30 For a comparative overview of the philosophy as applied in a range of coun-
tries, see J.J. Henning (2003) 24 Co Law 353.
31 Final Report URN 01/942 (2001) para 1.53. The Irish have adopted this
maxim – see Company Law Review Group First Report (2001), para 2.3.
32 See, for example the structure of Part 15 of CA 2006, which makes this point
apparent.
33 See, for example, the position in Italy (outlined by F. Wooldridge in (2004) 25
Co Law 93) and Belgium (see F. Wooldridge (2007) 28 Co Law 154).
34 Lon Fuller, The Morality of Law (1964) (Yale University Press) rule 3 (out of
eight).
35 (1980) 14 Law Teach 111 at 115.
36 D. Campbell (1997) 7 Aust Jo of Corp Law 343 at 344.
36 National corporate law in a globalised market

end’.37 All commentators agree that retrospective legislation should be

avoided because it is a denial of the basic idea of justice.38
Legislation may seek to micro-regulate or it may seek to lay down general
working principles. Compare here the different legislative approaches towards
proscribing insider dealing in the UK and US respectively. The UK approach
has in the past been in favour of detailed statutory proscription, whereas the
US has favoured a general ban, leaving the courts room to develop the prohi-
bition on insider dealing in more customised fashion as changing circum-
stances may demand.39
Legislation can break new ground or it can eliminate injustices located in
the common law.40
Where legislation is used as the primary regulatory tool, it must be respon-
sive in a prompt fashion. Legislative reform processes moving at the speed of
a tortoise benefit no one. Primary legislation can be enacted in an emergency
– witness the Insolvency Act 1994, which completed its Parliamentary passage
in a matter of a few weeks in order to address an inconvenient judicial ruling
what was perceived to be a major/immediate threat to government policy on
corporate rescue.41 In 2008, the Banking (Special Provisions) Act nationalis-
ing the troubled bank Northern Rock completed its Parliamentary progress in
three days!42 The slow progress of the legislative process that ended with the
enactment of the Companies Act 2006 shows that this is very much the excep-
tion to the rule.

37 Cmnd 1749, para 6.

38 Recent examples of retrospective companies legislation include CA 1981, s.
39, replaced by Companies Consequential Provisions Act 1985, s. 12 (now CA 2006,
s. 612), reversing Shearer v Bercain Ltd [1980] 3 All ER 295 and Insolvency Act 1994,
reversing the Court of Appeal in Paramount Airways [1994] BCC 172 (which in fact
was mitigated later by House of Lords on appeal in Powdrill v Watson [1995] 2 AC
394). Both of these examples show legislation aiding the business community in the
wake of inconvenient judicial rulings.
39 For an overview of the US approach towards insider trading, see J.M. Naylor
(1990) 11 Co Law 53 and 83.
40 The English reversal of Houldsworth v City of Glasgow Bank (1880) 5 App
Cas 317 by CA 1989, s. 131 (CA 1985, s. 111A; CA 2006, s. 655) is a good example
of legislation combating injustice. Unfortunately, this particular common law authority
denying remedies to members continues to cause difficulties in some jurisdictions – see
M. Sifris and A. Trichardt (2006) 27 Co Law 155. In Sons of Gwalia v Margaretic
[2007] HCA 1, the High Court of Australia discussed its current status in that jurisdic-
tion.
41 See above note 32.
42 For comment on this Northern Rock-inspired legislation, see R. Tomasic
(2008) 29 Co Law 297 and (2008) 29 Co Law 330.
 Comparing core regulatory strategies 37

Although responsive legislation is a credit to the system, there is a down-

side. Too much reform of the law can produce uncertainty for users and atten-
dant instability. Hardly an ideal recipe for a business community needing to
engage in forward planning. This is a criticism that has been applied to
company law reform43 and certainly those practitioners struggling with the
avalanche of change ushered in by the Companies Act 2006 might respond
sympathetically to that criticism.

2.2 Delegated Legislation

One trend is all too apparent in the UK – the use of delegated legislation as a
means of regulating companies. This approach, which has been self-evident
for the past 20 years, was favoured by the Company Law Review.44 Major
reforms of primary legislation have been carried out by this method, for exam-
ple, the introduction of treasury shares into English law in 2003.45 The
Company Law Reform Bill 2005 (as the Companies Act 2006 was initially
designated) sought to progress this trend further through the medium of
Company Law Reform Orders. Provisions catering for these were in the Bill
as originally introduced (see Part 31). They were rejected in the House of
Lords on constitutional grounds46 and no attempt was made to resurrect them
when the Bill returned to the Commons. That said, there is no doubting the
reliance placed by the Companies Act 2006 on secondary legislation. A perusal
of the sections contained in Part 34 on overseas companies (which lack the
critical detail) would confirm that observation. Such delegated legislation may
be subject to either the negative or the affirmative resolution procedure for
Parliamentary approval (see CA 2006, ss. 1289 and 1290 for these alterna-
tives).

2.3 Self-regulatory Codes, Professional Rules and Bureaucratic

Processes

These are also of growing significance. This is partly due to the increased
complexity of companies legislation, but the trend has also been boosted by
constraints upon Parliamentary time.
A pattern emerges of self-regulatory contracts becoming increasingly
‘legitimised’. The historical evolution of the Takeover Code provides the best

43 See S. Copp (2004) 25 Co Law 291.

44 Op. cit. note 23.
45 SI 2003/1116. For comment, see G. Morse [2004] JBL 303.
46 See C. Bamford (2006) 27 Co Law 161 for discussion.
38 National corporate law in a globalised market

example of this phenomenon at work. The Code emerged in the wake of

certain financial scandals in the mid-1960s. Initially, it was purely a work of
self-regulation.47 Progressively, it became the subject of judicial recognition
via cases such as R v Takeover Panel ex parte Datafin plc48 where the Court
of Appeal adopted a flexible and inventive approach which balanced the needs
of justice against the needs of the market. The possibility of a limited form of
judicial review of the Code was thus accepted.49 This was built on by the
courts, indicating that observance/non-observance of the Code was relevant to
issues such as compliance with compulsory share acquisition procedures,
fulfilment of directors’ duties and whether a company should be wound up in
the public interest.50 The Takeover Panel was then given a legal ‘home’ under
the auspices of the Financial Services and Markets Act 2000 regime.51 With
the adoption of the EC Takeovers Directive (2004/25/EC),52 it became neces-
sary to place it on an even firmer legal footing. Owing to the delay in enact-
ing and then bringing into force the Companies Act 2006, it was necessary to
introduce transitional measures to comply with EC obligations.53 Full
implementation came on 6 April 2007 when Part 28 of the 2006 Act was
commenced. A perusal of the history of the evolution of the Takeover Code
will thus show the move from contract-based regulation to statutory control. It
will also show that once again, native law has been changed to cater for EU
considerations, though the change here has less to do with substantive content
and more to do with juristic basis. The fact that a takeover system can work
well once put on a statutory footing is confirmed by reference to the positive
experience of related jurisdictions.54

47 For the early history of the Takeover Panel and its Code, see A. Johnston, The
City Takeover Code (1980) (Clarendon Press). See also A. Johnston [2007] CLJ 422.
48 R v Takeover Panel ex parte Datafin plc [1987] QB 815. See also R v
Takeover Panel ex parte Guinness plc [1990] 1 QB 146.
49 For the use of judicial review in Australia, see G. Morse (2007) 22 NZULR
622, R. Halstead and S. Magee [2005] (14) SMCLN 1, [2005] (16) SMCLN 5 and
[2005] (20) SMCLN 5.
50 Re Chez Nico Restaurants Ltd [1991] BCC 736, Dunford and Elliott Ltd v
Johnson and Firth Brown [1977] 1 Lloyds Rep 505, St Piran [1981] 1 WLR 1300. As
the Takeover Code was viewed as quasi law, matters of interpretation were for the
judge and not the jury in criminal trials – see R v Spens [1991] 1 WLR 624.
51 Under the auspices of the FSMA 2000, the Financial Services Authority
entered a concordat with the Takeover Panel in 2001.
52 See A. Johnston (2004) 25 Co Law 270.
53 See Takeovers Directive (Interim Implementation) Regulations 2006 (SI
2006/1183) superseded by Companies Act 2006, Part 28.
54 For example in Australia and Ireland – see B. Clarke, Takeovers and Mergers
Law in Ireland (1999) (Round Hall Press).
 Comparing core regulatory strategies 39

Corporate governance codes, originally entirely self-regulatory, have been

part of the topography since the Cadbury Code55 of 1992. The courts have on
occasions used these to inform their rulings.56 Corporate governance rules
necessary to implement European requirements can now be created under the
auspices of the Financial Services Authority.57 Again, the Companies Act 2006
further advances the process of according these formal legal recognition (see
s. 1269).
Self-regulation can also be introduced via the professional rules governing
key players – such as brokers, auditors and insolvency practitioners. The regu-
latory contribution of auditors is most obvious, but insolvency practitioners
have an important role to play in blowing the whistle on unfit directors of
insolvent companies. It is clear that the introduction of the whistleblowing
obligation imposed on insolvency practitioners by s. 7(3) of the Company
Directors Disqualification Act 1986 was the prime factor behind the explosion
of disqualification cases in the 1990s. Cases came to the attention of the
authorities in a way that previously did not happen. A similar strategy has
commended itself in Ireland, where under s. 56 of the Company Law
Enforcement Act 2001, a whistleblowing obligation has been imposed on all
liquidators, no matter how appointed, to report after six months of the period
of office to the authorities, such report to include reference to any suspected
abusive managerial behaviour.
Finally, self-regulation operates in the realm of corporate rescue, and is best
exemplified by the so-called London Approach.58 This is essentially a set of
social norms applied in the City of London to deal with major corporate
distress where several banks are involved as creditors. As yet, there are no
signs that these ‘rules’ have been marked down for formal legal recognition.
Bureaucratic processes can play a role in how the law is applied in practice.
These practices may introduce discretion or may in effect offer extra-statutory

55 Committee on Financial Aspects of Corporate Governance (1992) (Gee). For

comment, see A. Belcher [1995] JBL 321, J. Dine (1994) 15 Co Law 73. On the export-
ing of the Cadbury Code to overseas jurisdictions, see A. Dignam (2000) 21 Co Law
70. Germany developed a similar approach with its Cromme Code in 2001 (named after
Dr Gerhard Cromme). An English translation of this Code, which has since been
amended, is available on the internet.
56 In Re Macro (Ipswich) Ltd [1994] 2 BCLC 354 at 407, the Code was referred
to by Arden J in the context of an s. 459 unfair prejudice petition citing alleged
prolonged managerial behaviour.
57 Companies Act 2006, s. 1269.
58 See Pen Kent (1994) 33 Bank of Eng Quart Bull 110, R.E. Floyd (1995) 11 IL
& P 82, C. Bird (1996) 12 IL & P 87, N. Segal [2000] 13 Ins Intell 17 and J. Armour
and S. Deakin [2001] 1 JCLS 21.
40 National corporate law in a globalised market

concessions.59 Practice manuals should be in the public domain according to

Lightman J in Re POW Trust Ltd.60

2.4 A Residual Role for the Courts?

Although the regulation of companies is primarily founded in legislation, the

courts do have a critical role to play.61 One need look no further than the foun-
dational House of Lords authority in Salomon v Salomon & Co Ltd62 to appre-
ciate the significance of the judicial input. By revisiting another House of
Lords staple, Ebrahimi v Westbourne Galleries Ltd,63 we find the courts inter-
vening to combat conduct that was clearly unfair, but not apparently in breach
of existing discrete provisions in companies legislation. The law on auditor
liability is dominated by the Law Lords ruling Caparo plc v Dickman,64 a case
which in some senses undermines the legislative policy relating to the inher-
ent value of the company audit. This is not the only example one could cite
where the judges have placed a proverbial spanner in the works.65 From a
more helpful perspective, the need for legislation to curb over-use of the unfair
prejudice remedy was taken away by the House of Lords in O’Neill v
Phillips.66 Consideration of the floating charge origins in English law will
highlight the role of the courts in pivotal decisions ranging from Re Panama,
New Zealand and Australia Royal Mail Co,67 through Illingworth v
Houldsworth68 to National Westminster Bank v Spectrum Plus Ltd.69 Although
in English law the floating charge has certain features defined in legislation, it
is indisputably a creature of common law and remains so. In Scotland, by way

59 For an example of what may be viewed as an extra-statutory concession in the

corporate law field, see the Slavenburg file, which is discussed in Chapter 5 below.
60 [2004] BCC 268 at 275–6.
61 See D. Milman [1990] LMCLQ 401.
62 [1897] AC 22. See Lord Cooke’s Hamlyn Lecture, Turning Points of the
Common Law (1997) (Sweet and Maxwell) chapter 1.
63 [1973] AC 360.
64 [1990] 2 AC 605.
65 Witness Brady v Brady [1989] AC 755 (made redundant by the removal of the
financial assistance bar from private companies by CA 2006) and Re Leyland DAF
[2004] UKHL 9 (reversed by CA 2006, s. 1282 and Insolvency Amendment Rules 2008
(SI 2008/737)). The case of Lewis v IRC (Re Floor Fourteen Ltd) [2002] BCC 198 also
cut across official policy and was quickly neutralised by Insolvency (Amendment)
Rules (No. 2) 2002 (SI 2002/2712). Similarly, the negative effects of Exeter CC v
Bairstow [2007] BCC 236 were mitigated by SI 2008/386.
66 [1999] 1 WLR 1092.
67 (1870) 5 Ch App 318.
68 [1904] AC 355.
69 National Westminster Bank v Spectrum Plus Ltd [2005] UKHL 41.
 Comparing core regulatory strategies 41

of contrast, it is a creature of statute,70 with some judicial enlightenment (and

in some cases obfuscation)71 being added.
One negative aspect of the common law system is the stultifying effect of
precedent – old authorities are retained past their sell-by date.72
Focusing on the theme of this monograph, the Court of Appeal ruling in
Romalpa73 provides a good example of how English law has been changed by
the mere fact of the operation of cross-border commerce. Here, the English
courts, in reviewing a Dutch metal trader’s terms given to an English importer,
effectively incorporated continental commercial practice on reservation of title
to goods prior to full payment into English law and in so doing profoundly
disrupted corporate insolvency practice in this country. However, although the
validity of such clauses is within certain bounds accepted by the English
courts, any attempt to exclude the operation of the English law of security
interests is not permissible.74 The experience of English law in accommodat-
ing reservation of title clauses within the parameters of the established regime
for corporate insolvency law has been matched to a large extent in Ireland75
and Australia.76
Common law can often anticipate later statutory reforms. This is a recur-
rent pattern in English law. In Re Duomatic Ltd,77 the English courts allowed
informal variation of corporate constitutions (that is, where no formal special
resolution has been passed) in cases where unanimity could be established. A
significant corpus of jurisprudence has developed78 under this principle,

70 The arrival of the floating charge in Scotland in 1961 was entirely the result
of statutory intervention via Companies Floating Charges Act 1961, in that under
Scottish common law, floating charges were not recognised – Carse v Coppen [1951]
SC 233. It was an import from south of the border. Scottish floating charges are still
governed by CA 1985, Part XVIII. Registration of charges in Scotland is regulated by
CA 1985, ss. 410–24 and CA 2006, ss. 878–92. See now Bankruptcy and Diligence
(Scotland) Act 2007, Part 2.
71 See the furore over Sharp v Thompson [1998] BCC 115. The Scottish Law
Commission Report No. 208 (2007) is recommending change – see SE/2007/242.
72 A point made elegantly by the French academic A. Tunc (1982) 45 MLR 1 at
5.
73 [1976] 1 WLR 676.
74 See Re Weldtech Ltd [1991] BCLC 393. See Chapter 7 below.
75 The Irish experience commenced with Re Interview Ltd [1975] IR 382, which
is noted by D. Milman in (1978) 122 SJ 172. For an overview of title retention in
Ireland, see J de Lacy (1987) 22 Ir Jur 212.
76 See J de Lacy [2001] Ins Law 64 and K. Stock [2002] 15 Ins Intell 1.
77 [1969] 2 Ch 365.
78 For comment, see R. Grantham [1993] CLJ 245. For recent authorities apply-
ing this principle, see Extrasure Travel Insurance v Scattergood [2003] 1 BCLC 598.
Compare Domoney v Godinho [2004] 2 BCLC 15.
42 National corporate law in a globalised market

which has been further advanced by the introduction of the written resolution
procedure via statute.79 There have been suggestions that the Duomatic prin-
ciple is now so well established that it ought to be converted into a statutory
rule. This was the view of the Company Law Review.80 Those suggestions,
however, have not met with official support and were rejected in both the 2002
and 2005 White Papers.81 Certainly, the principle is not formally recognised in
the Companies Act 2006.

3 REGULATORY TOOLS, BUREAUCRATIC EFFICIENCY

AND SANCTIONS
Above we have touched upon alternative modes of regulation for use in the
companies context. Once that issue is resolved, there are secondary questions
that must be addressed.
Firstly, how can we ensure bureaucratic efficiency? The use of conclusive
certificates of incorporation82 and charge registration83 may be noted here.
These are designed to import a degree of finality should disputes arise. English
law does not go so far as to adopt the continental idea of nullity of compa-
nies.84
How are the appropriate corporate regulations to be enforced? Should the
law use civil sanctions, criminal law offences or other methods (such as
administrative penalties)? Australia85 has moved clearly in the direction of
civil penalties and this approach has attracted favourable comment.86 Ireland87
seems firmly wedded to its corpus of criminal sanctions. The view that English
law is coming round to is that there should be a basket of such different sanc-
tions to achieve the optimum effect. This is a sensible compromise.

79 See CA 1989, s. 116, introducing s. 379A into CA 1985. Now CA 2006, ss.
288–300.
80 Final Report (URN 01/942).
81 See Cm 5553-I (Modernising Company Law) and Cm 6456 (Company Law
Reform) respectively.
82 See CA 1985, s. 13(7) (CA 2006, s. 15(4)) and Jubilee Cotton Mills v Lewis
[1924] AC 958.
83 See CA 1985, s. 401(2)(b) (CA 2006, s. 869) and R v Registrar of Companies
ex parte Central Bank of India [1986] 2 WLR 177.
84 See R. Drury (1985) 48 MLR 644 for a lucid account of the concept of nullity
of companies.
85 The Cooney Committee (1989) recommended this approach towards adop-
tion of civil penalties and it was implemented in 1993.
86 On the suitability of civil penalties in Singapore, see P.-W. Lee [2006] CLWR
1.
87 On the Irish approach, see CLRG First Report (2001), para 8.2.4.
 Comparing core regulatory strategies 43

So, for instance, civil sanctions have been used in a variety of contexts
where directors are in breach of duty. This might involve the setting aside of
improper transactions regarded as voidable, exerting an ‘account’ or requiring
monetary compensation to be paid. It is significant that the wrongful trading
regulatory innovation (see Insolvency Act 1986, s. 214) fell exclusively under
the civil law umbrella.88
The criminal law has been used to punish the more serious types of breach of
companies regulation, for example fraudulent trading under CA 1985, s. 458
(now restated by CA 2006, s. 993, a provision which increases the maximum
penalty to ten years’ imprisonment). Successful prosecutions for fraudulent trad-
ing are rare, according to official figures. This reflects a general problem with
regard to the real value of criminal law sanctions in this area.89 As far as insider
trading/market abuse is concerned, English law again has traditionally opted for
criminal sanctions, but the failure of these has forced a rethink, with a move
towards administrative penalties operated through the auspices of the Financial
Services Authority being the result (see FSMA 2000, s. 123 here). Civil sanc-
tions are also a possibility, to compensate victims of market abuse.90
An alternative is the use of civil penalties imposed by bureaucratic bodies.
One such example is provided by s. 242A of the Companies Act 1985 (to be
replaced by CA 2006, s. 453). This provision enables the registrar to levy a
penalty upon a defaulting company, though that levy can only be enforced
where the company fails to pay up, by the registrar applying to the county
court. The scale of the levy was determined by regulation and enforcement
policy was guided by an internal practice manual.91 In R (on the application
of POW Trust) v Registrar of Companies,92 it was held by Lightman J that this
penalty system was ECHR-compliant and that it did not infringe Art 6 or Art
1 of the First Protocol. Lightman J did, however, suggest that the practice
manual be put into the public domain.
Finally, the state can resort to more subtle means. ‘Naming and shaming’,
a device made more effective by the dissemination opportunities offered by
the internet, is beginning to be used against unfit directors.93

88 Compare IA 1986, ss. 216 and 217, which operate both civil and criminal
sanctions in tandem. The criminal offence specified in s. 217 is one of strict liability –
R v Cole [1998] BCC 87.
89 See L. Linklater (2003) 24 Co Law 1. For evaluation of the role of criminal
sanctions, see (2001) 1 JCLS 381 at 406.
90 See the episode recorded in (2006) 27 Co Law 51 for this remedy at work. For
civil remedies in Singapore, see R. Chandran (2001) 22 Co Law 63.
91 For regulations under the 2006 Act see SI 2008/497.
92 [2004] BCC 268. On s. 242A civil penalties, see Registrar of Companies v
Radio-Tech Engineering Ltd [2004] BCC 277.
93 Details of disqualified directors are often mounted on the BERR website.
44 National corporate law in a globalised market

Issues can arise as to timing where multiple sanctions are involved.94

Should civil proceedings be allowed to continue where criminal prosecutions
are afoot? Would a prosecution be compromised by an adverse civil finding?
Should both types of proceeding be allowed to run concurrently? These issues
continue to raise concerns.
There is also the issue of who regulates. Auditors have been the standard
bulwark against infringement, but their performance in many a recent corpo-
rate collapse has been lamentable.95 Inadequate auditing performance has led
to professional sanctions being imposed. Increasingly, ways are being found
of spreading the enforcement burden by engaging regulatory intervention by
shareholders (CA 1985, s. 459; CA 2006, s. 994), companies themselves (CA
1985, s. 212; CA 2006, s. 793) and by other professional repeat players such
as insolvency practitioners (CDDA 1986, s. 7(3)). This is a sound policy,
reducing the burden of enforcement costs on the state, although the state
cannot absolve itself of all responsibility.
Enforcement can be aided by involving the public at large. People are
exhorted to blow the whistle on disqualified directors by ringing a hotline. If
necessary, a system of payment of bounties to informers and whistleblowers
might be deemed appropriate. The SEC operates such a regime in the USA
under the Insider Trading and Securities Enforcement Act 1988, so as to
encourage people to come forward and report insider trading.96
When considering appropriate enforcement mechanisms, the economic
burden needs to be borne in mind. The burgeoning cost to the public exche-
quer (as indicated in National Audit Office reports97) was one of the reasons
why the director disqualification order procedure had to change and effec-
tively be largely replaced by a more consensual undertakings model based
upon agreement between the accused director and the prosecuting authori-
ties.98 What we have here is officially sanctioned plea bargaining, albeit under
another name.99
The Company Law Review paid considerable attention to the question
of sanctions in its major study of UK corporate law. The conclusion

94 See the discussion of this problem of concurrent proceedings (criminal/civil/

disciplinary) in the editorial in (1996) 17 Co Law 1.
95 One need look no further than the example of Enron here, where the conse-
quences for the auditors were so severe as to lead to the break-up of the well-known
audit firm involved.
96 See J.M. Naylor (1990) 11 Co Law 53 and 83.
97 See National Audit Office Reports – HCP 1993–94 No. 907 and HCP
1998–99 No. 424.
98 By Insolvency Act 2000, s. 6.
99 The practice had already been developed by the courts in cases such as Re
Carecraft Construction Ltd [1994] 1 WLR 172.
 Comparing core regulatory strategies 45

reached100 was that there should be no general move towards decriminalisa-

tion. Financial assistance in share acquisition, so long as it was prohibited in
corporate law, should continue to attract a criminal sanction.101 Indeed, in the
area of fraudulent trading, the maximum penalty was recommended to be
increased from seven to ten years’ imprisonment.102 The idea of greater use of
administrative penalties only attracted an ambivalent response.103

4 CRITICAL REGULATORY GOALS

If we accept that companies have to be regulated, and we pass over the ques-
tion of the manner of that regulation, we now should consider the critical
points of reference for any regulatory regime governing limited liability
companies. Drawing on the UK experience, it is possible to identify a number
of central issues.

4.1 Effective and Customer-driven Incorporation Processes

This is a primary objective of any modern system of company law. Most prag-
matists accept that companies (unlike partnerships) do not materialise out of
thin air or alternatively through private contractual bargaining; there must be
some form of bureaucratic incorporation procedure designated by law.
Prior to the Companies Act 2006, incorporation procedures in English law
had remained largely unchanged since Victorian times. They were paper-based
and cumbersome. Admittedly, there was some tinkering as to the minimum
number of subscribing members,104 but the fundamentals were stable. With
the development of speedy incorporation models in other jurisdictions, the
English procedures were increasingly seen as uncompetitive.105 Under the
2006 Act, there have been changes to improve the position. For example, the
traditional distinction between memorandum and articles of association is no
longer maintained as an article of faith. The memorandum under the 2006 Act
is but a pale shadow of its former self and, indeed, it is no longer treated as
part of the constitution (see s. 17).

100 Final Report (URN 01/942), paras 15.4 and 15.20.

101 Ibid, para 15.18.
102 Ibid, para 15.7. It was also recommended that the offence here be extended to
overseas companies – para 15.8.
103 Ibid, para 15.22.
104 Witness the arrival of the single-member company in 1992 via SI 1992/1699,
implementing the 12th Company Law Harmonisation Directive (89/667).
105 But the UK procedures are more effective than those in Germany, which has
been forced to respond in order to preserve the future of the GmbH – see F. Wooldridge
(2007) 28 Co Law 381.
46 National corporate law in a globalised market

The incorporation process should also offer choice – that is, a menu of
different corporate entities suitable for the diverse needs of a range of would-
be incorporators. There is a world of difference between a large business set
up to generate profits for a myriad of shareholders and a small venture
designed to promote social good. English law has consistently broadened
choice here, with the most recent addition being the community interest
company introduced under the auspices of the Companies (Audit,
Investigations and Community Enterprise) Act 2004. This legislative base
remains intact, notwithstanding the enactment of the 2006 Act (for confirma-
tion, see CA 2006, s. 6).

4.2 Protecting Creditors from Abuse of Limited Liability

Notwithstanding the complaints of some commentators,106 this has always

been a concern of policymakers in English law since 1855. The ultra vires rule
was often justified by reference to this policy. The argument ran that creditors
would not extend credit to a limited company without reference to its stated
business objects and so to allow companies to engage in commerce beyond
those parameters would threaten creditors.107 Certainly, the cumbersome share
capital maintenance regime is posited upon the need to protect the largely
mythical ‘guarantee fund’ for unsecured creditors. In continental jurisdictions,
this philosophy is taken a step further by requiring mandatory transfers of
distributable profits to reserves. The weaknesses in the general capital mainte-
nance strategy have for many years been exposed108 but the straitjacket
imposed by the Second Company Law Harmonisation Directive (1977/91) has
barred major reform. The Companies Act 2006 has squeezed every last drop
of ‘wiggle room’ out of the situation; further change depends on European
movement. This movement has manifested itself through Amending Directive
(2006/68),109 which becomes operational in April 2008. This will give

106 Some 60 years ago Kahn-Freund argued that traditionally English law had
given greater emphasis to protecting shareholders than creditors – at the time of writ-
ing, that comment might not have been an inaccurate assertion, but it does not fully
reflect the position today.
107 See Ashbury Carriage v Riche (1875) LR 7 HL 653 at 667 per Lord Cairns.
This was a curious rationale when one considers that unsecured creditors could not
invoke the rule to stop a company acting ultra vires.
108 See J. Armour (2000) 63 MLR 355.
109 For background, see E. Ferran [2005] 6 EBOLR 93. Under this Amending
Direction, the protection available to creditors on a reduction of share capital has been
watered down by switching the burden of proof onto creditors wishing to challenge a
share capital reduction – see the Companies (Reduction of Capital) (Creditor
Protection) Regulations 2008 (SI 2008/719).
 Comparing core regulatory strategies 47

Member States the option to deregulate share capital maintenance rules for
public companies in a number of areas, including financial assistance, share
capital reduction procedures and issue of shares for non-cash consideration.
US-influenced corporate jurisdictions (including Canada, New Zealand and
Singapore110) have now discarded share capital maintenance in favour of
solvency-based regimes and the imposition of fiduciary duties upon directors.
This strategy appears to work well and the aforementioned EU reform should
be viewed in positive terms. The Isle of Man in its 2006 Companies Act has
also gone down this well-trodden route of deregulation.
A basic tool designed to ensure that there is public confidence in the system
of companies regulation is the so-called disclosure philosophy.111 It is no
surprise that it was the subject matter of the First EU Company Law
Harmonisation Directive (68/151) (since amended by Directive 2003/58).
Thus, the constitution of a company should be open to public inspection, as
should details of its directors, and information should be available as to its
balance sheet and accounts. Compliance rates are not perfect – the official esti-
mates suggest something in the region of 84 per cent in 2005/6. The flip side
of disclosure is that the public are deemed to have notice of these public docu-
ments112 and this has in the past113 and can continue to work to their disad-
vantage in some instances.114 This disclosure strategy, which has impacted
beyond the creditor protection sphere,115 has been called into question in
recent years in the UK, with abuse of open access to corporate information by
animal rights activists minded to attack the homes of directors of companies
whose businesses they disapprove of. Some corrective legislation geared to
offering protection through a system of ‘service addresses’ has therefore been
required.116
Another established control tool is the DTI investigation, which is often cited
as being a quid pro quo for access to limited liability.117 There are significant

110 H. Tijo (2006) 21 BJIBFL 316.

111 For an account see L.S. Sealy (1981) 2 Co Law 51.
112 Ernest v Nicholls (1857) 6 HL Cas 401.
113 Re Jon Beauforte (London) Ltd [1953] Ch 131.
114 In the area of charge registration, the public are deemed to have notice of the
fact that a charge is registered – but not of its contents, according to Wilson v Kelland
[1910] 2 Ch 306.
115 For example, it is now accepted that public companies have a right to know
who their shareholders are – first introduced into English law in CA 1981. See now CA
2006, Part 22.
116 See The Companies (Particulars of Usual Residential Address) (Compliance
Orders) Regulations 2002 (SI 2002/912), CA 1985, s. 723B and for the future CA 2006,
s. 165 with regulations made thereunder.
117 See Norwest Holst Ltd v Secretary of State [1978] Ch 201.
48 National corporate law in a globalised market

doubts about the real value of these procedures, which often take an aeon to
produce a report. A wag has compared the formal DTI investigation to being
more like an archaeological dig than a post mortem! At best, they provide
useful empirical material for future reform of the law. It is curious that the
statutory provisions on DTI investigations are not consolidated in the
Companies Act 2006, but remain stranded in the 1985 legislation. It seems
likely that they will be relocated into a discrete statute at some future date.
With heightened concerns about the effectiveness of these old protective
mechanisms, new strategies have emerged to ensure that the privilege of
limited liability is not misused. So, for example, the director disqualification
regime has in recent years taken centre stage as a means of protecting the
public from continued abuse of limited liability. Director disqualification for
unfit directors essentially dates back to the Insolvency Act 1976. The rules
were substantially upgraded in the Company Directors Disqualification Act
1986 and then, because of the success of the regime and the consequential cost
to the public purse, were later deregulated in the Insolvency Act 2000 with the
introduction of the contract-based undertakings procedure. This approach
based upon barring unfit entrepreneurs from future access to limited liability
companies has been adopted in various jurisdictions, with local variations. In
Ireland, for example, there are what are known as director restriction orders.118
With the increased usage of this strategy across the globe, Part 40 of the
Companies Act 2006 has introduced a new mechanism to give effect to foreign
disqualifications in the UK – this will be discussed in Chapter 6.
In English law,119 apart from denying the use of limited liability compa-
nies to undesirables, increasingly ways and means have been sought to
enable out-of-pocket creditors (and those acting for them) to pursue the
personal wealth of directors. In 1929, fraudulent trading was criminalised
and also made a civil wrong.120 The advent of wrongful trading liability,
being treated exclusively as a civil wrong via the enactment of s. 214 of the

118 See CA 1990 (Ireland), s. 150. A helpful general review of the mechanisms
used to control errant directors in Ireland is provided by N. Fitzgerald in (2004) 20 IL
& P 108. The key cases dealing with restriction orders are Robinson v Frost [1999] 2
ILRM 169, Luby v McMahon [2003] 1 IR 133, Fennel v Frost [2003] 1 IR 80. For
comment, see A. Leyden (2006) 9 Trin Coll L Rev 147 and A. O’Neill (2007) 28 Co
Law 116.
119 Ireland introduced the notion of reckless trading in 1990 via s. 138 of the CA
1990 (which became s. 297A of CA 1963). In so doing, the Irish drew heavily upon the
South African model in CA (SA) 1973, s. 424. For reckless trading in Ireland, see H.
Linnane (1995) 16 Co Law 26, 319. Australia employs a similar concept via CA 2001,
ss. 588G and 588H, as does New Zealand under the auspices of CA 1993, s.135 – see
S.M. Watson [1998] JBL 495.
120 This was recommended by the Greene Committee (Cm 1926).
 Comparing core regulatory strategies 49

Insolvency Act 1986121 is a good reflection of the new strategy, though it has
to be conceded that it has not been a resounding success.122 This disappoint-
ment is in sharp contrast to the satisfaction of policymakers with the disqual-
ification mechanism. The differential is almost entirely due to the fact that
wrongful trading requires private litigation finance, whereas the public purse
can fund disqualification. The courts in England have tended to increase the
risk of directors being held liable for corporate debts.123
The position here is fluid. In the wake of the high-profile Farepak
collapse,124 the government is again looking at imposed trust devices to
protect consumers who pay in advance for goods which are never delivered
because the supplier becomes insolvent.125 In the meantime, it has introduced
a statutory reserve fund for unsecured creditors out of floating charge realisa-
tions.126
Creditors themselves are taking matters into their own hands by exploiting
provisions imposing personal liability on directors. This has been happening
for some time in the area of incorrectly labelled company cheques,127 but more
recently, major creditors like the HMRC have utilised the potential of
s. 216 of the Insolvency Act 1986128 and s. 15 of the Company Directors
Disqualification Act 1986 to this end.129 These opportunistic developments on

121 Interestingly, in Zambia, wrongful trading is both a civil wrong and a crime
under the Zambian Companies Act 1994 – see K.K. Mwenda (2008) 8 Ox Univ Comm
LJ 93.
122 See D. Milman [2004] JBL 493.
123 In Germany, a similar trend has emerged under which shareholders in the
GmbH are being made personally liable for corporate obligations – see M. Shillig
(2006) 27 Co Law 348.
124 See the preliminary ruling of Mann J in Re Farepak Food and Gifts Ltd [2006]
EWHC 3272 (Ch), [2007] 2 BCLC 1.
125 See The Times March 2007. This is not a new issue – it was acknowledged to
be a problem in the 1980s and research was undertaken – see A. Ogus and C.K.
Rowley, Prepayments and Insolvency (1984) (OFT).
126 Insolvency Act 1986, s. 176A, inserted by Enterprise Act 2002. Attempts by
secured creditors to access this fund have been rebuffed – see Re Permacelle Finesse
Ltd [2008] BCC 208 and Re Airbase (UK) Ltd [2008] BCC 213 – discussed by A.
Walters in (2008) 29 Co Law 129. This statutory fund is likely to prove more useful
than the obsolete reserve capital mechanism (CA 1985, s. 120), which was abolished
by the Companies Act 2006.
127 CA 1985, s. 349. As far as the CA 2006 is concerned, it is not clear if this rule
will be reproduced.
128 IRC v Nash [2004] BCC 150, IRC v Walsh [2005] EWCA Civ 1291, HMRC v
Benton-Diggins [2006] 2 BCLC 255, HMRC v Yousef [2008] EWHC 423 (Ch), [2008]
BPIR 1491. Debt factors taking an assignment of a corporate debt can also exploit this
provision – First Independent Factors and Finance Ltd v Mountford [2008] BPIR 515.
129 IR v McEntaggart [2006] BPIR 750.
50 National corporate law in a globalised market

the ground might suggest the need for a rethink on core strategy.130
Undoubtedly, they should be a cause for concern for company directors.
Creditor protection may be self-executing, with the institution of security
being the prime mechanism to achieve this goal. Historically, English law has
always been pro-creditor. Witness the continued usage of the unique remedy
of administrative receivership,131 though its potential has been substantially
curtailed by the Enterprise Act 2002. Other jurisdictions, such as the US and
France, are pro-debtor – that is, in the present context, they are more inclined
to bolster the position of the borrowing company. However, socio-economic
as well as cultural factors come into play. It may be the case that in develop-
ing economies thirsty for inward investment, a pro-creditor strategy is the
sensible option in the medium term.

4.3 Limiting Unauthorised Trading

Clearly, this is related to the aforementioned creditor protection policy. The

ultra vires rule sought to restrict companies’ trading operations to those delin-
eated in their objects clause.132 The argument goes that investors have put
their money into a company simply in order for it to pursue its specified busi-
ness objectives. This idea justifies the winding of companies for failure of
substratum.133 In many cases, this assumption is a fallacy; investors invest in
successful businesses and are fairly unconcerned about how that success is
achieved. Accordingly, the ultra vires control mechanism was doomed to fail-
ure, though English law was slower than many jurisdictions to recognise that
reality.134 Even within the enactment of the Companies Act 2006, traces of it
still linger.135
The rules governing contracts made by directors exceeding authority
appear to undermine the general restriction on unauthorised trading. From the
earliest days of modern English company law, the courts have been inclined to
uphold such contracts with the well-known ruling in Turquand’s case136 oper-

130 See D. Milman [2008] 21 Ins Intell 25.

131 See I. Macdonald and D. Moujalli [2001] 14 Ins Intell 76.
132 Ashbury Carriage v Riche (1875) LR 7 HL 653. For history, see B. Pettet
(1997) 50 CLP 279.
133 Re German Date Coffee Co (1882) 20 Ch D 169.
134 See H. Rajak [1995] 26 Camb L Rev 9.
135 See CA 2006, s. 42, for example on charitable companies.
136 (1856) 6 E & B 327 followed by the High Court of Australia in Northside
Developments v Registrar General (1990) 170 CLR 146. For a fascinating historical
account of the collapse of the Royal British Bank and of the fate of the leading figures
involved, see J. Taylor (2005) 78 Hist Res 230. See also the account given by G. Wilson
and S. Wilson in (2001) 1 JCLS 211 at 222–3.
 Comparing core regulatory strategies 51

ating the so-called indoor management rule exemplifying that philosophy. A

comparable approach was manifested in modern times by the Court of Appeal
in Freeman and Lockyer v Buckhurst Park Properties.137 This approach has
been transported throughout the Commonwealth jurisdictions via the
processes of the common law.138 Fortunately, it is consistent with the EU
philosophy of sanctity of contract, as exemplified by Art 9 of the First
Company Law Harmonisation Directive (1968/151). The Companies Act
2006, s. 40 continues this trend by increasing the chances of unauthorised
contracts being enforced by third parties through its amendment of CA 1985,
s. 35A. This amendment in effect makes protection available to an outsider,
where the transaction was approved by only some of the directors (as opposed
to the whole board).
Taking an overview here, the fundamental problem has been to get the
balance right between restricting improper use of shareholder funds, whilst at
the same time not increasing the transaction costs of counterparties dealing
with companies by requiring them to make burdensome inquiries as to
whether appropriate internal procedures have been complied with. The trend
in recent years across the globe has been to move towards security of transac-
tion, at the cost of allowing breaches of organisational integrity to occur.

4.4 Curbing Misuse of Managerial Powers

There are echoes of this policy in the rules discussed above, but the issue is
much wider. What we are talking about here ties in with concerns about corpo-
rate governance. Since Berle and Means published their classic thesis139 in
1932, the problem of how to monitor agents who run companies has been a
dominant theme in corporate law discourse, though it must be pointed out that
the common law had begun to tackle this problem from the late 19th century
by applying equitable principles. Companies are artificial persons who neces-
sarily rely upon fiduciary agents (that is, directors) to undertake transactions
on their behalf. It is therefore essential to have in place rules which prevent
such agents from abusing their position. The general rules of agency law have
to be modified to reflect the peculiarities of the corporate context. A key ques-
tion is the extent to which these rules can be relaxed by shareholders them-
selves – issues of ex post facto ratification come to the fore here. For a long

137 [1964] 1 QB 480.

138 For an account, see D. Milman and A. Evans (1985) 6 Co Law 68. See
Crabtree Vickers Pty v Australia Direct Mail Advertising (1975) 133 CLR 72. Note also
D.A. Obadina (1997) 18 Co Law 45 and 76.
139 A.A. Berle and G.C. Means, The Modern Corporation and Private Property
(1932) (Macmillan).
52 National corporate law in a globalised market

time, the basic rule on ratification has been that shareholders can ratify and in
any vote held to consider the propriety of directors’ conduct, the shares held
by the alleged wrongdoer(s) can be voted upon,140 but this has now been
modified by s. 239 of the Companies Act 2006 to ensure that only independent
shareholders can in future ratify.

4.5 Protecting Shareholders

The shareholder is the central player in the modern limited liability company.
Without the shareholder’s capital, the company would be starved of equity
funds and would be forced into the clutches of bankers. All systems of corpo-
rate law must therefore have in place mechanisms to protect the shareholder
interest in order to encourage investment.
All shareholders in the same class should be treated equitably. This funda-
mental is one of the General Principles in the Takeover Code (see General
Principle 1).
There is an expectation, but not a formal requirement, that all shares should
carry votes. The Jenkins Committee set its face against compulsion here,
though there was significant dissent on the point.141 The exercise of voting
rights should be protected legally142 and should be facilitated – for example,
by permitting proxy votes to be used.143
At the most basic level, shareholders should be protected from expropria-
tion of their economic interest in the company, as reflected by their share-
holding. The courts will scrutinise carefully attempts to alter articles to
introduce such a facility.144 The Companies Act 1985, Part XIIIA did embody
an expropriation facility (s. 429, now restated in CA 2006, s. 979) in the event
of a hostile takeover bid, but the bid must be genuine for that mechanism to be
engaged, as the House of Lords pointed out in Blue Metal Industries v
Dilley.145 Art 1 of the First Protocol of European Convention on Human

140 North West Transportation Co v Beatty (1887) 12 App Cas 589 – reversed by
CA 2006, s. 239(3). But the Companies Act 2006 does not allow for ratification in
circumstances where this was not available at common law – Franbar Holdings Ltd v
Patel [2008] EWHC 1534 (Ch), [2008] BCC 885.
141 Cmnd 1749, para 137.
142 A shareholder has a personal right to vote – such a right can be enforced with-
out the obstacle of the rule in Foss v Harbottle (1843) 2 Hare 461 – see Pender v
Lushington (1877) 6 Ch D 70.
143 On the story of how proxy voting was accepted by English law, see V. Edgtton
(2000) 21 Co Law 294.
144 See B. Hannigan [2007] JBL 471.
145 [1970] AC 827. The existence of s. 430C (CA 2006, s. 986) also exemplifies
the protective approach.
 Comparing core regulatory strategies 53

Rights and Fundamental Freedoms will protect shareholders’ property rights,

but that protection is not absolute.146
Such protective mechanisms may take the form of substantive rights (for
example, the right to demand an EGM147). These rights may be seen as
inalienable.148 Alternatively, organisational structures may need to be adopted
to protect shareholders – the German two-tier board structure manifests this
approach.149 Here we have a management board overseen by a supervisory
board manned by representatives of various stakeholder groups. Litigation
procedures must also be taken account of where a legal system relies upon
substantive rights to be enforced via the courts as part of its shareholder
protection strategy. The possibilities afforded by alternative dispute resolution
mechanisms should be carefully evaluated, though the jurisdiction of the
courts cannot always be excluded.150
The CA 2006 will have enhanced shareholder protection as a central and
visible strategy. The statutory derivative claim procedure,151 unashamedly
borrowed from Canada, is introduced into English law via ss. 260–64.
Moreover, shareholder rights will be capable of entrenchment in the constitu-
tion (CA 2006, s. 22).
Attempts have been made by academics, such as La Porta et al.,152 to clas-
sify just how supportive jurisdictions are towards minority shareholders by
reference to the apparent strength of substantive law. This metric approach is
interesting, but can only be effective if local cultural variations are fully
accounted for. A comparison of paper shareholder rights is of limited value if
those notional rights cannot be enforced due to cultural factors or difficulties
with the local legal system (for example, the disincentive cost of shareholder
litigation).153

146 See Lithgow v UK (1986) 8 EHRR 329.

147 EGMs as such will disappear under CA 2006 – all shareholder gatherings will
be designated as ‘meetings’ without formal distinctions.
148 See Re Peveril Gold Mines [1898] 1 Ch 122, Exeter City AFC v Football
Conference [2004 ] BCC 498. There is no guaranteed right to vote in spite of a recom-
mendation from the dissenters on the Jenkins Committee (Cmnd 1749). Voteless
shares, however, are unlikely to appeal to listing authorities.
149 See the articles by J. Shearman in [1995] JBL 517 and (1997) 18 Co Law 123.
For corporate governance perspectives in France, see S. Hebert [2004] JBL 656.
150 Sri Lanka has introduced via Companies Act 2007 (No. 7) an innovative ADR
facility for shareholder disputes – see D. Jayasuriya (2008) 29 Co Law 250. In English
law, an ADR facility cannot exclude the jurisdiction of the courts where a statutory
right of access has been granted.
151 See A. Keay and J. Loughrey (2008) 124 LQR 469.
152 See chapter 1, note 144.
153 See the discussion in Chapter 1, at p. 28 above.
54 National corporate law in a globalised market

4.6 Effective Termination Procedures

Companies in principle enjoy a right of perpetual succession, which is

completely separate from the continued survival of shareholders – but many
companies do in fact die; companies on average have a life span that is more
tenuous than the domestic cat.154 Sometimes death is imposed by a private
actor (for example, by a creditor ‘pulling the plug’ via a hostile winding-up
petition under s. 122 of the Insolvency Act 1986): in other cases, death is trig-
gered by bureaucratic action (for example, by striking off the register under s.
652 of CA 1985 (see now CA 2006, s. 1000) or winding up in the public inter-
est under s. 124A of the Insolvency Act 1986). Also, it may be self-inflicted in
the form of a shareholder resolution to wind up the company voluntarily under
s. 84 of the Insolvency Act 1986 or by a shareholder petitioning for winding
up on the just and equitable ground under s. 122(1)(g) of the Insolvency Act
1986. To extend the metaphor, suicide may be a rational act in the world of
companies.
Legal systems need to develop appropriate mechanisms to cater for this
downside of corporate life. Those mechanisms need to ensure that the interests
of all stakeholders are adequately protected when the existence of a company
is terminated. The public interest needs protection in exercising this jurisdic-
tion. But, equally, such mechanisms need to be cost effective. These two goals
can on occasions come into conflict. The deregulatory trend is apparent via the
introduction of the voluntary striking-off procedure for private companies
(introduced in 1994), which has been extended to public companies by the
Companies Act 2006 (s. 1003).
Finally, measures should be available to undo the dissolution process where
that has operated unfairly. The current provisions in CA 1985 will be remod-
elled by ss. 1024–8 of CA 2006, with a view to enhancing the options for
administrative restoration where the involvement of the court is not required.

4.7 Rehabilitation

This is a new goal widely embraced by modern corporate systems across the
globe.155
Until the 1970s, little was heard of this trend, though English law has had
in place reconstruction procedures since the start of the 20th century. South
Africa, which did not recognise the floating charge, had been operating a

154 It has been estimated that the average life span of a UK company is now a
mere 8.6 years (DTI Annual Report 2004/05, table A5).
155 See D. Milman, chapter 17 in J. de Lacy (ed.), The Reform of UK Company
Law (2003) (Cavendish).
 Comparing core regulatory strategies 55

model called judicial management156 since 1926, with mixed success. The
global business rescue lobby received a major kickstart with the reforms
embodied in the US Bankruptcy Code of 1978 and particularly the revitalisa-
tion of the Chapter 11 procedure. In English law, the issue was taken on board
by the Cork Committee (1977–82).157 In the great reforms of 1985–6 two new
corporate rescue regimes, the Company Voluntary Arrangements (CVA) and
the administration order mechanism, arrived on the scene. Across the globe,
other jurisdictions felt the need to respond to corporate distress. Continental
jurisdictions upgraded their rescue models in the 1990s.158 Ireland introduced
its court examiner procedure in the Companies (Amendment) Act 1990, partly
in response to the sudden economic pressures placed on its native beef indus-
try by the UN embargo on trade with Iraq after its invasion of Kuwait.159
Australia introduced its highly successful voluntary administration procedure
in 1993.160 Asian jurisdictions rushed to introduce corporate rescue proce-
dures in the wake of the 1997 financial crisis.161 This is borne out by the expe-
rience of countries such as South Korea, Indonesia and Thailand.
What has happened in most of these jurisdictions is that they have now
moved to second-generation business rescue models. That is certainly true of
the UK, which has tweaked the CVA regime (via the Insolvency Act 2000) and
completely restructured the administration model via the Enterprise Act 2002.
The new administration model has gone from strength to strength, soaking up
cases that previously would have been disposed of via administrative receiver-
ship or creditors’ voluntary liquidation. Ireland also exemplifies a similar
pattern of evolution, in its court examinership rehabilitation tool.162 Even the
iconic Chapter 11 procedure in the US has required a facelift.163

156 On judicial management, see J. Henning, chapter 19 in H. Rajak, Insolvency

Law, Theory and Practice (1993) (Sweet & Maxwell).
157 Cmnd 8558.
158 So, for instance, Germany has adopted a Chapter 11 variant – see E. Ehlers,
chapter 4 in Corporate Rescue: An Overview of Recent Developments from Selected
Countries in Europe edited by K.G. Broc and R. Parry (2004) (Kluwer). For corporate
rescue reforms in Belgium in 1997, see M. Vanmeenen (2006) 27 Co Law 381.
159 See G. McCormack, chapter 17 in Rajak (op. cit. note 156), A Campbell and
C. Garrett [1996] (February) Ins Law 12.
160 For voluntary administration in Australia, see chapter 6 in A. Keay,
Insolvency: Personal and Corporate Law and Practice (3rd edition, 1998) (John
Libbey).
161 See R. Tomasic (ed.), Insolvency Law in East Asia (2006) (Ashgate) for a
review of developments in insolvency law in Asia.
162 For the Irish second-stage reforms to the examiner process, see C. Curran
[2003] 16 Ins Intell 7.
163 Even Chapter 11 has undergone change – so, for instance, in 2005 it was revised
to speed it up and reduce costs – see G. Lee and J. Bannister [2005] 21 SMCLN 1.
56 National corporate law in a globalised market

The rescue bandwagon has seemed inexorable in all corners of the globe.
One reason for its popularity is that it appeals to the diverse needs of politi-
cians and practitioners. Awkward questions, however, remain. Has it worked?
Statistics in the UK seem to suggest a negative answer164 but powerful lobbies
with vested interests are not always swayed by inconvenient data. So much
credibility has been invested in the corporate rescue idea that it is difficult to
see it being ditched. If anything, governmental interventions in the market to
prop up key players in a range of economies suggest that there is still consid-
erable vigour in the idea.

4.8 Developing a User-friendly Regime

Company law is inevitably complex. This is particularly true of UK company

law, with its massive legislative base. The Jenkins Committee noted this defi-
ciency way back in 1962, but, as we saw in a passage quoted above,165 was
unable to provide a solution. No such remedy has been found in the years since
then and the malady has grown worse.
This problem of legislative overload has been commented on unfavourably
in more recent times by Sealy.166 English law (and, to a greater extent,
Australia167) has opted for the micro-regulation of companies. US-based
systems (for example, Canada168) prefer a more fluid and overarching matrix
of general principles, with flexibility being reserved to the courts. The prob-
lem is how to balance certainty with flexibility; confusing masses of detail do
not always offer certainty and certainly do not promote transparency. But leav-
ing matters to be resolved by litigation is not an efficient solution. The prob-
lem is particularly acute for directors. Do they understand what is expected of
them? Probably not. Directors of large enterprises have ready access to legal
expertise, but that is less true of the director of the small private concern. The

164 See Insolvency Service seminar, 12 February 2008, unveiling its evaluation
study.
165 See above at 35, where a quotation is drawn from Cmnd 1749, para 6.
166 Company Law and Commercial Reality (1984) (Sweet & Maxwell). See also
E. Jacobs (1990) 11 Co Law 215 for an Anglo-Canadian comparison.
167 At the last count, the Australian Corporations Act had at least 1471 sections.
In fairness, the problem has been recognised in Australia and since 1992 a simplifica-
tion process has been under way producing reforms – see V. Mitchell (1999) 20 Co Law
98, G.P. Stapledon [1999] CFILR 114 and P. Darvas (2000) 21 Co Law 101. But see I.
Ramsay (1992) 14 Syd L Rev 474 (an excellent explanation of why companies legis-
lation is bound to be detailed and complex).
168 The Canadian Business Corporations Act (CBCA) 1985 has 268 sections. For
background to the CBCA see Partnerships and Business Corporations (edited by J.S.
Ziegel et al.) (2nd edition, 1989) (Carswell) at 99–103. New Zealand, whose 1993 Act
boasts a mere 397 sections, has adopted a similar approach.
 Comparing core regulatory strategies 57

policy now is ‘Think Small First’. The Companies Act 2006 tries to improve
the position by restating common law rules in accessible statutory form. The
best example of this is to be found in the new rules on directors’ duties (ss.
171–7). These provisions seek to lay out general standards of behaviour, with-
out stifling the possibility of organic development in the future through the
common law.
When considering this question, it is important to bear in mind the poten-
tial diversity of users. Professional groups (such as credit reference agencies)
may be users and may be entitled to expect clarity.169
Offshore jurisdictions place a high priority on the needs of international
users. Witness the recent reforms of Company Law in the Isle of Man.170

4.9 Adapting to New Technologies

Any system of corporate regulation should make the best of emerging tech-
nologies.171 The legislative challenge is immense here because the pace of
technological change will always outstrip legislative reform.172 English
company law has for generations operated a paper-based system in terms of
provisions for communication between stakeholders and the holding of infor-
mation. That has been replaced in many fields via orders made under the
Electronic Communications Act 2000,173 and, most recently, the Companies
Act 2006, which does much to move our system into the digital age. So, for
instance, ss. 527–31 of the 2006 Act make provision for shareholders in listed
companies to have their concerns about the audit process mounted on a
company website. Documents related to company meetings can be communi-
cated electronically (s. 333). Poll results can also be mounted on a website (s.
341). Although these moves are progressive, we do not appear to have gone as
far as jurisdictions like Delaware, Canada and Australia in permitting virtual
shareholder meetings, using modern remote but instantaneous communication
techniques.174 Germany has also recently introduced reforms designed to

169 So, for instance, mechanisms used to check corporate files with regard to the
usage of the new administration model are not working – see J. Harris (2006) 27 Co
Law 321. See also (2006) 27 Co Law 305.
170 For this development in the Isle of Man, see (2007) 28 Co Law 46.
171 See U. Noack (1998) 9 EBLR 100.
172 A point made by C.P. Rutledge (2000) 21 Co Law 62.
173 See Companies Act 1985 (Electronic Communications) Order 2000 (SI
2000/3373). The courts have also shown a willingness to adapt company law to new
technologies – PNC Telecom plc v Thomas [2004] 1 BCLC 88.
174 For an excellent review from a Nigerian perspective, see I.O. Bolodeoku
(2007) 36 CLWR 106. For Australia, see Corporations Law, s. 250B. In the Isle of Man,
electronic/telephonic shareholder and board meetings are permitted by ss. 67(4) and
58 National corporate law in a globalised market

exploit websites as communication tools.175 The issue was raised in the

Company Law Review consultative document, ‘General Meetings and
Shareholder Communications’, in October 1999 (at paras 39–40), but does not
appear to have progressed beyond that stage in English law. That may not
matter, as a new EU Directive (2007/36) will open up the usage of technology
as a communication tool in the context of listed companies.176

4.10 Maintaining Effective and Reputed Capital Markets

In this respect English law has kept up with the field. The UK Stock Exchange
has proved its competitive edge over the years, though it did require major
revision via the Big Bang177 in the 1980s. That revolution was designed to
introduce greater competitive forces into the London securities markets. The
advent of paperless shares is an important move in ensuring that market trans-
actions can be carried out effectively in a digital age. The Financial Services
Authority (which replaced the Securities and Investments Board in 1997) is
charged with this important responsibility and as such, has wide powers dele-
gated to it.
The EU has recognised the need for effective capital markets – hence the
Lamfalussy initiative.178 The importance of this goal for all systems is exem-
plified by the push to curtail abusive market activities like insider trading179
and cold calling.180 The General Principles of the Takeover Code also stress
the need to prevent the creation of false markets on a takeover.
The Markets in Financial Instruments Directive (2004/39) came into force
in 2007, having been implemented in the UK via a number of statutory instru-
ments.181 This Directive182 replaces the Investment Services Directive

106(2) of their Companies Act 2006. In Europe, Professor Noack has been a leading
exponent of better use of information technology in this context – see (1998) 9 EBLR
100.
175 See T. Naruisch and F. Liepe [2007] JBL 225 at 235–7.
176 Note in particular Art 8 (right to participate in general meeting by electronic
means). See the comment in (2007) 28 Co Law 337.
177 On the ‘Big Bang’, see J.L. Jones (1986) 7 Co Law 99.
178 For the Lamfalussy process (2001), which was designed to speed up the adop-
tion of measures in the financial services arena, see A. Schaub [2005] 13 Jo of Fin Reg
and Comp 110.
179 The UK banned insider trading in 1980. Singapore had already taken this step
in 1970 – see W.Y. Wan (2007) 28 Co Law 1200. The US proscription in effect dates
back to 1961 when a general anti-fraud provision (rule 10b5) was first applied to it.
180 See Alpine Investments (C384/93) [1995] 2 BCLC 214.
181 See SI 2007/126, SI 2007/763, SI 2007/2160 and SI 2007/2932.
182 For illuminating accounts of MIFID, see N. Moloney (2006) 55 ICLQ 982,
J.D. Haines (2007) 28 Co Law 344.
 Comparing core regulatory strategies 59

(1993/22) and seeks to ensure competition in stock markets across the EU is

not distorted by local restrictive practices. Investment firms, by securing a
passport from their home state, can now operate freely in any EU stock
market.

5 COMMON PROBLEMS/ FAMILIAR RESPONSES

The aforementioned survey reflects the truism that in the modern world the
regulation of companies raises common concerns, demanding comparable (but
not necessarily the same) responses.
3. Commonality of fundamental
principles

1 INTRODUCTION
We saw in Chapter 2 that all corporate law regimes seek to achieve certain
basic policy goals. It is hardly surprising, therefore, to find that all systems of
corporate law have a common core of substantive rules directed towards the
attainment of those same broad objectives. In the first chapter in their edited
work The Anatomy of Corporate Law, Henry Hansmann and Reinier
Kraakman observe that, notwithstanding inevitable cultural differences in
corporate law, ‘the underlying uniformity of the corporate form is at least as
impressive’.1 They continue on the same tack, thus: ‘Business corporations
have a fundamentally similar set of legal characteristics – and face a funda-
mentally similar set of legal problems – in all jurisdictions.’2
They identify five common features of any corporate system in another
paper.3 The effect of this homogeneity from the perspective of English law is
that there is now limited scope for cross-fertilisation of radically new ideas
from other corporate systems. A law of diminishing returns is in operation. But
possibilities do exist for subtle modifications in the common core.
Before examining the potential for change we must ask ourselves the ques-
tion: ‘What are these common core principles?’

2 THE COMPANY AS A SEPARATE ENTITY

If ever there was a universal principle of corporate law, it is the concept that a
company is to be regarded as a separate entity with its own distinct rights and
obligations. This is a sine qua non of any corporate law model. This principle,

1 (2004) (OUP) at 1.
2 Ibid at 1.
3 These are: 1. legal personality; 2. limited liability; 3. shared ownership of
capital by investors; 4. delegated management to directors; 5 transferable shares – see
H. Hansmann and R. Kraakman in J.N. Gordon and M.J. Roe (eds), Convergence in
Corporate Governance (2004) (CUP) at 34.

60
 Commonality of fundamental principles 61

which had been part of the subconscious of corporate law jurisprudence from
the earliest days, was finally determined in English law by the House of Lords
at the end of the 19th century in Salomon v Salomon & Co Ltd,4 an iconic deci-
sion that has attained the status of a world precedent in the common law
family. Any perusal of company law texts from a range of jurisdictions will
confirm the universal pre-eminence of this ruling. It has its own counterparts
in all company systems based originally upon English law.5 The idea is also
adopted in civil law jurisdictions. Its celebrated position in English law has
been cemented by the approval it received from the House of Lords in
Williams v Natural Life Health Foods,6 a clear policy decision in favour of
preserving the benefits of incorporation. The application of the separate
personality rule in the context of the globalised business environment was
underscored in DTI v Rayner,7 where the House of Lords ruled that the
Member States who made up the International Tin Council were not responsi-
ble for its debts to brokers when the world commodity market for tin
collapsed.
This principle has even been supported by the International Court of Justice
in the celebrated Barcelona Traction case.8 Here we were concerned, some-
what belatedly, with the legal consequences of the expropriation in 1938 in the
context of the Spanish Civil War of the assets of the Barcelona Traction
Company. This company had been incorporated in Canada in 1911, with a
view to constructing a transport system in Spain. To add to the legal compli-
cations, the majority of shareholders (some 88 per cent) were based in
Belgium. Many years after the event, the Belgian shareholders, acting through
the Belgian government, sought compensation from Spain. The International
Court of Justice ruled the claim inadmissible because the proper claimant
should have been the state of Canada, as technically it was a Canadian citizen
(that is, the company itself) which had been deprived of its property. Canada
had made no such claim. The separate corporate personality principle has thus
been established as a global legal standard, a point that is reflected in the
jurisprudence of other supranational courts.9

4 [1897] AC 22. See Lord Cooke in his Hamlyn Lecture, Turning Points of the
Common Law (1997) (Sweet & Maxwell) at chapter 1. For a superb review of the status
of this principle a century later, see R. Grantham and C. Rickett (eds), Corporate
Personality in the 20th Century (1998) (Hart).
5 See, for example, Gumede v Bandha Vukani Bakithi Ltd 1950 (4) SA 560. In
India, there are many state-owned corporations – see I. Carr [1991] 10 ICCLR 339.
6 [1998] 1 WLR 880.
7 [1990] 2 AC 418. For discussion, see C. Greenwood [1990] CLJ 8.
8 [1970] ICJ Rep 3. See H. Briggs (1971) 65 Am Jo of Int Law 327.
9 The ECHR at Strasbourg made use of the concept in Agrotexim v Greece
(1996) 21 EHRR 250.
62 National corporate law in a globalised market

One pervasive consequence of the principle is that where there is a group

of companies, all companies within the group are viewed as distinct entities,10
each with their own rights and liabilities. In reality, this means that parent
companies can avoid many liabilities of their subsidiaries, unless they have
explicitly guaranteed their obligations. This logical application of the Salomon
rule at a secondary level is valued highly by international commercial interests
and is the bedrock on which the multinational corporation exists. This has
been underlined on a number of occasions in English law through rulings such
as Lonrho v Shell Petroleum11 and Adams v Cape Industries.12 In this latter
instance, the Court of Appeal confirmed that there is nothing improper in an
international group of companies structuring their business affairs in such a
way as to reduce the exposure of the parent company to risk by insulating it
from the potential liabilities of subsidiaries operating in another state.
Multinationals are thus able to use subsidiaries to generate profits (which will
be remitted to the holding company as dividends) in high risk jurisdictions,
without worrying about the attendant liabilities. As Slade LJ said:13

. . . we do not accept as a matter of law that the court is entitled to lift the corporate
veil as against the defendant company which is a member of a corporate group
merely because the corporate structure has been used so as to ensure that the legal
liability (if any) in respect of particular future activities of the group (and corre-
spondingly the risk of enforcement of that liability) will fall on another member of
the group rather than the defendant company.

He continued by concluding: ‘Whether or not this is desirable, the right to use

a corporate structure in this manner is inherent in our corporate law.’14
The principle was also applied in Colt Group v Couchman,15 so that a small
distinct company operating within the parameters of a multinational car manu-
facturing group could take advantage of the ‘small employer’ concession
granted under English law from the obligations imposed with regard to
measures dealing with disability discrimination. An odd conclusion, but
perfectly logical.
An interesting Irish case again reflects the basic tenet that group members
are separate entities. In O’Ferral v Coughlan16 directors of an Irish subsidiary

10 But note Blumberg coined the distinction between the formal ‘entity’
approach and the more realistic ‘enterprise’ approach – see P.I. Blumberg, The
Multinational Challenge to Corporate Law (1993) (OUP).
11 [1980] 1 WLR 627.
12 [1990] BCLC 479.
13 Ibid at 520.
14 Ibid.
15 [2000] ICR 327.
16 [2004] 4 IR 266.
 Commonality of fundamental principles 63

of a global multinational faced sanctions for failing to fulfil their responsibil-

ities as directors. In response, they argued that their role was limited because
the group was effectively controlled from abroad. That contention did not go
down well in the Irish courts. Directors were responsible for the way in which
their company operated and they could not evade that responsibility by point-
ing to some invisible overseas controlling hand.
The orthodox approach towards this analysis of group relationships has not
always been universally favoured in the English courts. In DHN v Tower
Hamlets LBC,17 Lord Denning found a way to circumvent it by arguing that a
group of companies could in appropriate circumstances be viewed as a ‘single
economic entity’. This suggestion, which alarmed both the business commu-
nity and the majority of corporate lawyers, for the most part was rebuffed in
the UK18 and across the globe.19 After Lubbe v Cape Industries (No. 2),20
however, one suspects that application of the separate personality principle in
the group context is not entirely bullet proof. One interpretation of this high
profile case was that the English courts permitted the injured South African
miners and their dependants to bring their action in English law because they
had a fair prospect of establishing parental liability for the actions of the
employing South African subsidiary. These stirrings suggesting a departure
from orthodoxy have been reinforced by Gross v Rackind,21 where the Court
of Appeal held that when considering whether a member of a company had
had his interests unfairly prejudiced by the conduct of the company’s ‘affairs’,
it might be appropriate to examine the conduct of the affairs of other group
members. The most recently reported Court of Appeal cases in this area
suggest that there is still life in the single economic entity perspective,22 but
the position as ever remains confused and unpredictable.23 One cannot help
harbouring the suspicion that cases in this context are decided on their merits,
with retrospective rationalisation being then employed to produce the desired
conclusion.
One can see why there is a problem here. In many instances, applying the
concept of separate personality in the group scenario offends against basic

17 [1976] 1 WLR 852.

18 See, for example, Woolfson v Strathclyde Council (1979) 38 P & CR 521 and
Adams v Cape Industries [1990] 2 WLR 657.
19 Industrial Equity v Blackburn (1977) 137 CLR 567, Re Securitibank (No. 2)
[1978] 2 NZLR 136, State v Dublin CC [1985] ILRM 513, Allied Irish Coal v Powell
Duffryn [1997] 1 ILRM 306, AG v Equiticorp [1996] 1 NZLR 528.
20 [2000] 1 WLR 1545. See P. Muchlinski (2001) 50 ICLQ 1.
21 [2004] EWCA Civ 815, [2005] BCC 11.
22 Beckett Investment Management Group v Hall, The Times, 11 July 2007 for a
pro- DHN approach
23 Millam v The Print Factory [2007] EWCA Civ 322 for a more orthodox view.
64 National corporate law in a globalised market

justice and commonsense. Persons dealing with a company within a group

may not always appreciate the subtleties of the situation. These are powerful
forces of intuition for any corporate law system to reckon with. More
compelling, however, is the fear on the part of national courts that to discard
separate personality within groups could lead to damaging economic conse-
quences. The spectre of ‘multinational flight’ exerts a powerful constraint
upon judicial activism in this respect.
Moving away from the high profile issue of groups for a moment, although
the principle of separate personality is well established in English law, there is
equally abundant (though unpredictable) authority for ‘lifting the veil’ in a
range of situations. The jurisprudence here is voluminous and many academics
have sought to rationalise it.24 This may arise through statute, though the pre-
eminence of the separate personality presumption requires explicit displace-
ment. So, for example, a group of companies may be ‘associated’ for fiscal or
employment law purposes.25
The courts26 have also been prepared to lift the veil in a number of instances,
where overseas companies have been suspected of being used as a vehicle to
cover up fraud. For instance, in X Bank v G,27 the Court of Appeal indicated
that interlocutory remedies may be available to stop this activity by restricting
the transfer of assets out of the jurisdiction or the disposal of shares in the
company even if it involves disregarding the corporate veil. Again, in Gencor
v ACP Ltd,28 Rimer J had no hesitation in lifting the veil and treating an
offshore company set up by the defendant director, who had diverted company
profits to himself through it, as his ‘creature’ and equivalent merely to his
offshore bank account. A third example is offered by Kensington International
v Republic of Congo,29 where the veil was lifted by Cooke J with respect to a
state-owned company where the circumstances pointed to sham transactions
designed to defeat creditors. Foreign-based sham companies therefore cannot
in principle be used to stash away ill-gotten gains, though there is no denying
the fact that this may be an effective strategy in practice. Chasing misappropri-
ated assets overseas is never an easy task, though with advances in comity
between legal systems, the cause is not a completely lost one.

24 For recent attempts see M.T. Moore [2006] JBL 180, where the point is reit-
erated that the approach of English law is unsustainable.
25 On association of groups, see, for example, Employment Rights Act 1996, s.
231 and VAT Act 1994, s. 43. See also Dimbleby v NUJ [1984] 1 WLR 427.
26 For an empirical study, see C. Mitchell [1999] 3 CFILR 15.
27 The Times, 13 April 1985.
28 [2000] 2 BCLC 734
29 [2006] 2 BCLC 296. See also Trustor AB v Smallbone (No. 2) [2001] 1 WLR
177.
 Commonality of fundamental principles 65

The practice of lifting the corporate veil is found in all corporate law
models, and indeed, it is more prevalent beyond our shores.30 Within the US
corporate law system the mere fact that a company has been undercapitalised
may trigger such an approach, so as to deny an insider creditor the benefit of
equal treatment under the pari passu distributional rule.31 Such a creditor may,
in effect, be subordinated to the rights of outside creditors by the court using
its discretion to defer its claim.
Another qualification to note is that not all jurisdictions adopt a common
stance on the attributes that flow from having corporate personality. For exam-
ple, there is some disagreement as to what extent companies can enjoy funda-
mental rights: for example, the privilege against self-incrimination.32
Although this idea has been accepted in the UK, it has not attracted much
support in the USA, Canada or Australia. In Santa Clara County v South
Pacific Railroad Co,33 the US Supreme Court had to decide whether corpora-
tions could enjoy the protection of the 14th Amendment (equal protection
under the law). The Supreme Court ruled (without permitting argument on the
point) that companies did enjoy the protection of the 14th Amendment. In
Europe, the European Convention on Human Rights and Fundamental
Freedoms has helped to clarify the position on a number of issues relating to
fundamental rights in the corporate context.34 Thus, we know that companies
enjoy the protection of property rights. They may also enjoy a right to protect
their commercial reputation, according to the House of Lords in Jameel v Wall
Street Journal.35

30 For a selection of overseas scholarship on this issue, see J.M. Dobson (1986)
35 ICLQ 839 (Argentina), S. Gates (1984) 12 ABLR 162 (Australia), J. Rinze (1993)
14 Co Law 143 (Germany), P. Hood [2001] JBL 58 (Scotland), A. Daehnert (2007) 18
ICCLR 393 (Germany). The Canadian courts, like their US counterparts, seem more
inclined towards lifting the veil – see A. Hargovan and J. Harris (2007) 28 Co Law 58.
31 For an early account of this US approach, see H. Ballantine (1925) 14 Calif L
Rev 12. The leading US cases now are Taylor v Standard Gas (1939) 306 US 307,
Pepper v Linton (1939) 308 US 295 – these cases establish the so-called ‘Deep Rock’
doctrine. See C.L. Israels (1942) 42 Col L Rev 376, M. Whincup (1981) 2 Co Law 158,
R. Schulte (1997) 18 Co Law 2.
32 See G. McCormack, chapter 20 in D. Feldman and F. Meisel (eds), Corporate
and Commercial Law: Recent Developments (1996) (Lloyd’s of London Press), D.
Milman [2000] (3) SMCLN 1.
33 (1886) 118 US 394.
34 See A.J. Dignam and D. Allen, Company Law and the Human Rights Act 1998
(2001) (Butterworths), A. Aldred (2002) 23 Co Law 241. See Pine Valley
Developments Ltd v Ireland (1992) 14 EHRR 319 and (1993) 16 EHRR 379, Tinnelly
& Sons Ltd v UK (1999) 27 EHRR 249.
35 [2006] UKHL 44. Thus there is no need to prove special damage before suing
in libel.
66 National corporate law in a globalised market

3 LIMITED LIABILITY
The notion of limited liability flows directly (but not inexorably) from the
concept of separate corporate personality. Those who subscribe for shares in
limited companies have their exposure to risk capped at the level of their
investment. Therefore, once shares are fully paid up, there is no residual liabil-
ity for shareholders. This is a universal concept, first adopted in the US in the
early 19th century,36 then in English law in 1855 via the Limited Liability
Act.37 France introduced it into its system of company law in 1867.38
The commercial significance of limited liability cannot be overstated. In Re
London and Globe Finance Corporation Ltd, Buckley J declared:39

The statutes relating to limited liability have probably done more than any legisla-
tion in the last fifty years to further the commercial prosperity of the country. They
have, to the advantage as well of the investor as of the public, allowed and encour-
aged the aggregation of small or comparatively small sums into large capitals which
have been employed in undertakings of great public utility, largely increasing the
wealth of this country.

Again this is a corporate law standard, but there are subtle variations in the
way in which it is applied in the group context. In particular, New Zealand has
pioneered the mechanism of ‘contribution orders’, under which a controlling
company which has interfered in the management of an insolvent subsidiary
can be required to contribute to the assets of that subsidiary on liquidation. The
current mechanism, which dates back to 1980, is found in ss. 271–2 of the
Companies Act 1993 and is extended by the Companies Amendment Act 2006
to voluntary administrations. Pooling orders which ignore the separate assets/
liabilities of group members and facilitate a more efficient winding up/
administration of a group are also a possibility. These ideas have travelled. The
model of contribution orders was adopted by the Irish in s. 140 of their
Companies Act 1990. Pooling orders under Irish law are based on s. 141 of the
said Act. Having noted that, in both New Zealand and Ireland this mechanism
does not appear to have been extensively used, which might indicate a lack of

36 New York introduced it in 1811 and it had spread to the east coast states by
1830. For the arrival of limited liability into the USA, see A. Santuari (1996) 17 Co
Law 281.
37 See L. de Koker (2005) 26 Co Law 130. For the spread of the idea of the
limited liability company with separate personality throughout the colonies, see R.
McQueen (2008) 17 Griff L Rev 383.
38 Though limited liability partnerships pre-dated such companies. See gener-
ally, M. Lobban [1996] 25 Anglo-Am L Rev 397 at 411. Note also A. Santuari (1996)
17 Co Law 281.
39 [1903] 1 Ch 728 at 731. For general discussion, see B. Pettet [1995] CLP 124.
 Commonality of fundamental principles 67

practical utility.40 Other jurisdictions seek to attain the same result, but by
more circuitous methods. Thus, in Europe, an interfering parent company can
often be made liable for its subsidiaries’ debts.41
The importance of limited liability is reflected by the pressure placed on the
government by professional firms to introduce the LLP, pressure that produced
dividends in the form of the Limited Liability Partnerships Act 2000.
Although we have all come to accept limited liability as a permanent
feature of the corporate law landscape, that is not to say that it has escaped crit-
icism from those who question its role in a modern economy.42 Certainly,
some critics would argue that, for a developed economy where access to
investment funding is not difficult, the idea of limited liability should now be
questioned as part of a balanced debate.

4 LEGAL RECOGNITION FOR SHARES: PROTECTION

FOR SHAREHOLDERS
Modern capitalism has at its heart the instrument of the share. Indeed, the
shareholder-oriented model is the Western liberal capitalist paradigm.
It used to be the case that all shares had to possess a par value – that is, a
nominal monetary figure that appeared on the face of each share. That attribute
was seen as essential for the operation of the share capital maintenance
doctrine whose historic role has been noted above. For example, the rule
prohibiting the issue of shares at a discount (see now CA 2006, s. 580) could
not operate without the par value concept. However, the idea that shares must
have a nominal value has become tarnished, one of the problems being the
lack of correlation with market value. It has been displaced in many jurisdic-
tions which either permit or oblige companies to issue no par value shares.43
In the 1950s, the Gedge Committee44 recommended the mandatory par value
requirement to be abolished for English law, but nothing was done to imple-
ment that proposal. The Company Law Review adopted the position that the
concept should be scrapped for private companies.45 However, this would

40 For the position in New Zealand, see R.P. Austin, chapter 4 in R. Grantham
and C. Rickett (eds), Corporate Personality in the 20th Century (1998) (Hart).
41 See generally E.J. Cohn and C. Simitis (1963) 12 ICLQ 189.
42 See S. Griffin (2004) 25 Co Law 99, T. Morgan (2003) 24 Co Law 194.
43 For Canada, see CBCA, s. 24 (mandatory). No par value shares were intro-
duced into South Africa in 1973, whereas Singapore did not take this step until 2005.
They were recognised in the Isle of Man by s. 29 of the Companies Act 2006.
44 (1954, Cmnd 9112) paras 11 and 27. The Jenkins Committee in 1962 took a
similar view (see Cmnd 1749, para 34).
45 Final Report (URN 01/942).
68 National corporate law in a globalised market

have created an anomaly with public companies (where the concept had to be
retained in order to ensure compliance with the EC Second Company Law
Harmonisation Directive) and so the status quo prevailed. Accordingly, in the
Companies Act 2006, the par value concept is retained; indeed, it is specifi-
cally reinforced by explicit statutory provision (s. 542).
Shareholder membership is the relationship at the heart of the modern
company. The idea of one share one vote is an ideal espoused by many (but
not all) company law systems. Companies that do not adhere to this principle
may be denied access to the capital-raising facility of public stock exchanges.
But it is not universally adhered to even in English law. Private companies
may use a system of weighted votes on shares.46 In Scandinavian corporate
law systems, weighted votes are not uncommon. This tradition caused some
difficulty in the protracted debate surrounding the introduction of the EC
Takeovers Directive (2004/25/EC). Eventually concessions had to be made in
order to secure adoption of the Directive.47 Another variant is cumulative
voting rights, for example, on the election of directors. This clever vote accu-
mulation device which empowers small shareholders by allowing them to
target their overall voting power tactically is used in some US-inspired corpo-
rate law jurisdictions.48
If shares exist, there must be cost-effective procedures designed to facili-
tate share transfers. The English courts have talked about a presumption of
transferability.49 However, the preference has always been for a registration
procedure linked to transfer. In private companies, this has produced a situa-
tion where directors usually enjoy discretion not to register certain transferees
(see Table A, Art 24, which will be replicated in the new Table A, Art 26(5)
with effect from 1 October 2009). The justification for this right to block a
share transfer lies in the fact that private companies may still be viewed in
some quarters as exclusive clubs. The Companies Act 2006 modifies the posi-
tion here by requiring directors within two months to give reasons for a refusal
to register a transfer (see s. 771).50 English law has been more hostile than its
European counterparts to bearer shares or share warrants which can be trans-

46 Bushell v Faith [1970] AC 1099.

47 For the story behind the painful birth of this Directive, see B. Clarke,
Takeovers and Mergers Law in Ireland (1999) (Round Hall Press) chapter 4.
48 See, for example, MBCA, s. 33 (USA), CBCA, s. 102 (Canada), India
Companies Act 1956, s. 265. Both South Korea and China have adopted this mecha-
nism.
49 Weston’s case (1868) LR 4 Ch App 20 at 27–8 per Page-Wood LJ.
50 This issue of blocking share transfers in private companies was discussed by
the Company Law Review, which in its Final Report recommended change by requir-
ing refusals to be reasoned (see URN 01/942, paras 7.42–7.45).
 Commonality of fundamental principles 69

ferred as negotiable instruments without registration.51 Grudging acceptance

has been the standard response in this country, but share warrants have now
received the legislative seal of approval in the Companies Act 2006 (see s. 122
which permits the issue of share warrants de novo). Share warrants are also
accepted by Art 51 of the new Model Articles for Public Companies. Equally,
any transfer facility must respect the terms of the arrangement under which
those shares were originally acquired; transfer restrictions, for example in
private companies, may be justified.52 Electronic modes of transfer should be
considered – witness the CREST system,53 which replaced the ill-fated
TAURUS model in 1996.
Shares will not be popular investments if mechanisms are not put in place
to ensure that the investment is protected from expropriation at the hands of
managers, other shareholders or outside forces. Shareholder protective mech-
anisms may range from the provision of substantive rights, through the main-
tenance of grievance procedures or by other institutional mechanisms. The
compulsory purchase procedure only operates in the context of a genuine
takeover bid.54 Shareholder rights may in some cases be inalienable.55 Shares
are items of property and are guaranteed protection as such by Art 1 of the
First Protocol European Convention on Human Rights and Fundamental
Freedoms. This point has been confirmed in Lithgow v UK56 and Pafitis v
Greece,57 though, as always, the point needs to be reiterated that ECHR rights
are not absolute.58
Shareholder protection encompasses the economic expectation of share-
holders in a target company to receive a premium for their shares in the event

51 See, for example, Colonial Bank v Cady & Williams (1890) 15 App Cas 267
– refusal by court to treat registered shares as negotiable instruments in spite of
evidence that they were being dealt with as such in the market.
52 For typical private company share transfer curbs, see CA 1985, Table A, Art
24 and the philosophy reflected by cases such as Charles Forte Investments v Amanda
[1964] Ch 240. See now Art 26 of the new Model Articles for Private Companies
Limited by Shares (SI 2008/3229).
53 See CA 1989, s. 207 and the Uncertificated Securities Regulations 1995 (SI
1995/3272).
54 Re Bugle Press Ltd [1961] Ch 270.
55 Re Peveril Gold Mines [1898] 1 Ch 122, Exeter City AFC v Football
Conference [2004] BCC 498. But compare Re Vocam (Europe) Ltd [1998] BCC
396.
56 (1986) 8 EHRR 329.
57 (1999) 27 EHRR 566.
58 Bramelid and Malstrom v Sweden (1982) 5 EHRR 249. See also Re Waste
Recycling Group Ltd [2004] 1 BCLC 352.
70 National corporate law in a globalised market

of a takeover bid. This expectation is jealously guarded in English59 and

American law, but it is a novel idea for much of continental Europe.60

5 REGULATING DIRECTORS AS MANAGERS

Even in the smallest of companies the idea that shareholders are the best
persons to manage the enterprise is not without its critics. The solution of
shareholder management in larger undertakings becomes a practical impossi-
bility. Management delegated to an expert body of agents is therefore neces-
sary. The concept of management by directors is enshrined in Art 70 of Table
A (soon to be replaced under New Model Articles set forth in SI 2008/3229 by
Arts 3 and 4), but strangely not in the Companies Act itself. It is apt therefore
to talk about the managerial prerogative. But what should this encompass?
First and foremost, it should permit directors maximum flexibility in manag-
ing the business. That does not mean complete freedom. We have encountered
the ultra vires rule as an obsolete example of managerial constraint. Permitting
directors to fetter their powers may be appropriate in limited circumstances.61
In modern times, this prerogative has been impinged upon in various ways –
for example, by environmental law, consumer law and competition law. It is
also the traditional approach in English law to prohibit arrangements under
which directors are exempted from liability for breach of duty (witness CA
1985, s. 31062), but this approach has begun to fray at the edges in recent
decades with the introduction of indemnity insurance arrangements63 and
costs indemnities.64 The Companies Act 2006 introduces a new provision
which seeks to clarify the position. Looking at the issue of stakeholders and
enlighted shareholder value, s. 172 of the Companies Act 2006 states that
although directors have a duty to promote the success of the company (in the
sense of acting for the benefit of members), they must also take into account
long-term issues and the interests of stakeholders such as employees, the local
community, suppliers and the environment. They should also have regard to
the need to act fairly in business. What we have here is a move away from

59 Hence cases such as Howard Smith v Ampol Petroleum [1974] AC 821 and the
resistance to poison pills.
60 This was one reason why the issue of defensive measures poisoned the debate
over the adoption of the Takeovers Directive.
61 See Thorby v Goldberg (1964) 112 CLR 597 and Fulham FC v Cabra [1992]
BCLC 863.
62 See now CA 2006, s. 232.
63 See CA 1989, s. 137 (CA 1985, s. 310(3); CA 2006, s. 233).
64 See The Companies (Audit, Investigations and Community Enterprise) Act
2004, ss. 19 and 20, superseded by CA 2006, ss. 234–8.
 Commonality of fundamental principles 71

shareholder wealth-maximisation rhetoric to a perspective focusing upon the

idea of stakeholders and the socially responsible company. But critically, the
broader ‘responsibilities’ mentioned appear to be unenforceable by this wider
cohort of stakeholders under established mechanisms in UK company law.65
This has been heralded in some quarters as representing a fundamental
change in priorities. That is not so – drawing on the experience with s. 309 of
the Companies Act 1985 (a provision that was superseded by s. 172, CA
2006), which has often worked to the benefit of the managerial interest – all
that it will achieve is the accumulation of paperwork to show that directors
have considered (and usually then dismissed) a range of stakeholder concerns
in favour of maximising shareholder wealth.66 At the end of the day, a direc-
tor’s tenure in office is in the hands of shareholders. That said, with the arrival
of the state as a shareholder in a number of large private-sector public compa-
nies in the wake of the world financial crisis, it may be that the state will use
its power as a shareholder to move towards enforcing these wider management
goals.
A corpus of substantive law dealing with directors should cover issues such
as appointment, removal, powers and duties. Precise principles may vary from
jurisdiction to jurisdiction, but all of these functional matters must be
addressed in some way or another. Transparency and accountability are essen-
tial requirements.

6 PROVIDING FOR EQUALITY OF CREDITORS

Where a company becomes insolvent, the starting proposition is that all unse-
cured creditors rank equally, irrespective of the amount of their debt or the
date when it was incurred. In practice, where there is an insufficiency of assets,
such creditors will be repaid rateably, with a proportion of the amount due to
them. This is known as the pari passu principle and again, it forms the bedrock
of many corporate law systems.67 There are numerous exceptions (both at

65 For an in-depth study, see A. Keay (2007) 28 Co Law 106.

66 This cynicism is borne out of the experience with s. 309 CA 1985 which, far
from limiting the managerial prerogative, has made it more flexible by allowing direc-
tors greater room for manoeuvre if they wish, when reaching managerial decisions.
67 On this rule in English law, see Insolvency Act 1986, s. 107 and British Eagle
International Airlines v Cie Nationale Air France [1975] 1 WLR 758. By coincidence,
this issue has been revisited by the High Court of Australia in IATA v Ansett [2008]
HCA 3, where revised IATA regulations have been upheld as not being contrary to the
pari passu policy – for perceptive comment, see M. Bridge (2008) 124 LQR 379. The
English Court of Appeal was heavily influenced by the pari passu idea in Re
Buckingham International plc (No. 2) [1998] BCC 943. The principle was also
72 National corporate law in a globalised market

common law and through legislation) to this rule and as a result, there is
considerable academic debate as to the current status of this rule. Respected
scholars such as Rizwaan Mokal68 and Look Chan Ho69 would argue that the
pari passu rule as commonly understood is a myth. In spite of these well-
argued reservations, it remains the case (rightly or wrongly) that the principle
of pari passu distribution is still applied as a basic philosophy underpinning
many winding-up models across the globe.70 It is sometimes difficult to disen-
tangle myth from reality.
Although we have asserted that the pari passu rule may be viewed as the
starting point, there are exceptions.71 One of these relates to preferential cred-
itor status.72 It is not uncommon to find that certain creditors, typically
government agencies and employees, are given favourable treatment. As far as
the state protecting itself is concerned, this has long been regarded as unfair
and a blot on the landscape of the system. The Cork Committee73 was severely
critical of its continued existence. Preferential status for state debts has been
discarded in many jurisdictions,74 including Australia,75 though surprisingly it

endorsed by the Privy Council in a conflicts of law scenario in Wight v Eckhardt Marine
[2003] BCC 702. It is standard fare in all legal systems derived from English law – see,
for example, India Companies Act 1956, s. 528, Corporations Law, s. 555 (Australia),
Companies Act 1993, s. 313 (New Zealand), Companies Act 1963, s. 275 (Ireland). See
D. Milman, in A. Clarke, Current Issues in Insolvency Law (1991) (Stevens) at 57–85,
also V. Finch [2000] Ins Law 194. The pari passu debate took an interesting turn in Sons
of Gwalia v Margaretic [2007] HCA 1, where the High Court of Australia ruled that
shareholders who had been misled into investing in the company could be treated as
creditors. This surprising decision has provoked a government review.
68 Corporate Insolvency Law (2005) (OUP) especially Chapter 4. See also his
perceptive essay in [2001] CLJ 581.
69 For the views of Look Chan Ho on this controversy, see (2003) 19 IL & P 155,
and [2004] JIBLR 54.
70 Blackburne J used it to justify his ruling in the test case of Re Courts plc
[2008] EWHC 2339 (Ch), [2008] BCC 917 (no selective disapplication of the
prescribed part). It was an important element in the advice tendered by the Privy
Council in the British Virgin Islands case of Hague v Nam Tai Electronics Inc [2006]
UKPC 52, [2007] 2 BCLC 194.
71 In Australia under s. 562A of the Companies Act 2001, policyholders of an
insolvent insurance company enjoyed protected status – see Re HIH Casualty and
General Insurance Co [2006] EWCA Civ 732 (reversed appeal to the HL sub nomine
McGrath v Riddell [2008] UKHL 21, [2008] BCC 349).
72 First introduced into English law in 1888. See A. Keay and P. Walton [1999]
CFILR 84 and [1999] Ins Law 112.
73 Cmnd 8558 (1982).
74 Thus state preferential claims have been dropped in Germany and Austria. For
an instructive comparative survey see A. Keay, A. Boraine and D. Burdette (2001) 10
Int Insolv Rev 167.
75 Australian Crown preferential claims in respect of unpaid tax were abandoned
in 1993.
 Commonality of fundamental principles 73

has been retained in New Zealand.76 In the UK, Crown preferential debt status
was finally surrendered by the Enterprise Act 2002.77 Preferential status has
not disappeared completely in English law – it survives for certain employee
claims and other specialised debts – but its long-term future is under threat.
The problem here is that it is inconsistent on the one hand to view employees
as stakeholders and then to featherbed them in the event of enterprise failure.78

7 PROVIDING FOR DIFFERENTIAL TREATMENT FOR

PUBLIC/PRIVATE COMPANIES
This is a characteristic distinction found in corporate law models across the
globe – for example, in Australia,79 in South Africa80 and on the Continent of
Europe.81 Clearly, different issues arise when one is considering an appropri-
ate corporate regime for a large company with a multiplicity of dispersed
shareholdings as compared with a small private ‘close’ company. One of the
problems endemic in English law has been the tendency to use the former
model as the default position, with token gestures to the latter. The elective
regime for private companies introduced by CA 1989, s. 116 (inserting s. 379A
into CA 1985) is perhaps the clearest example of a more focused approach
towards private companies. Explicit provision on written resolutions for
private companies is to be found in ss. 288 et seq. of the Companies Act 2006.
The European Union initiatives have in the past also fallen into that trap of
over-obsession with public companies. As far as the UK is concerned, that
strategy is dead and buried with the Company Law Review. The governing

76 See s. 312 of New Zealand Companies Act 1993. The Insolvency Act 2006
surprisingly did not change the position in New Zealand – see D. Brown and T.G.W.
Telfer, Personal and Corporate Insolvency Legislation (2007) (LexisNexis NZ) at 86
et seq.
77 Section 251, with effect from 15 September 2003.
78 See D. Milman in A. Clarke, Current Issues in Insolvency Law (1991)
(Stevens) at 57 and C.L. Symes, Statutory Priorities in Corporate Insolvency Law: An
Analysis of Preferred Creditors (2008) (Ashgate).
79 In Australia there are distinctive rules for the proprietary company (designated
Pty).
80 Close Business Corporations Act 1984 – discussed by J.J. Henning in (2007)
28 Co Law 253.
81 For example, in Germany there are separate regimes for public companies
‘aktiengesellschaft’ (AG) in the form of the 1965 Act and for private companies
‘Gesellschaft mit beschranker Haftung’ (GmbH). On the latter, see K. Muller, The
GmbH – A Guide to the German Limited Liability Company (3rd edition, 2006)
(Kluwer).
74 National corporate law in a globalised market

philosophy now is ‘Think Small First’.82 Thus, the Companies Act 2006
focuses upon small companies first and then considers whether variants are
appropriate for larger counterparts. A similar strategy has been commended in
Ireland by the First Report of the Company Law Review Group83 and indeed
the proposed new Irish Companies Bill seems to reflect that wisdom. As far as
Europe is concerned, the Centros84 bombshell has led to a major reappraisal
of the traditional harmonisation obsession with public companies. There is
now a real push towards introducing a standardised format for a European
Private Company.85 So, for example, in July 2007 the European Commission
published a consultative document dealing with the proposed European
Private Company Statute.86 Events on the ground might suggest that that is
already occurring, with minimum share capital requirements for private
companies gradually being watered down.

8 ESTABLISHING EFFECTIVE PROCEDURES FOR THE

INCORPORATION/DISSOLUTION OF COMPANIES
This is a pragmatic matter, but an absolute prerequisite for any effective
system of corporate law. Most corporate law models have provision for the
winding up and eventual dissolution of companies. There is a constant search
for cost-effective variations. So, for example, in English law, a procedural
device for the quick dissolution of hopelessly insolvent companies with no
assets was introduced in 1985 on the back of proposals from the Cork
Committee87 (see now Insolvency Act 1986, s. 202). This idea was extended
to administration of companies by the Enterprise Act 2002 by the provision of
a dedicated exit option for hopelessly insolvent concerns (see Schedule B1 of
the Insolvency Act 1986, para 84). This latter facility has proved its worth.88

82 URN 01/942, para 1.53

83 (2001) Chapter 3.
84 (Case C212/97) [2000] Ch 446 – see T. Tridimas (1999) 48 ICLQ 708.
85 See [2008] SMCLN 1 for the latest developments. See also J. Schmidt (2006)
27 Co Law 99 at 108.
86 This consultation took the form of a questionnaire sent to interested parties.
87 Cmnd 8558, paras 649–51.
88 Para 84 of Sched B1 has been interpreted in a user-friendly way – see Re GHE
Realisations Ltd [2006] BCC 139.
 Commonality of fundamental principles 75

9 ENSURING THAT COMPANIES REMAIN SUBJECT TO

STATE CONTROL
This is a more controversial heading. Adherents to the Chicago school of
thinking would raise objections in principle. On the other hand, as corpora-
tions are now recognised as citizens of a state and subject to the protection of
fundamental rights in many jurisdictions, there is no reason why they should
be immune from state control. Most commentators agree that there is a need
for public control via the disclosure philosophy. In English law, one could cite
DTI investigations89 and the possibility of winding up in the public interest90
as further manifestations of the desire to maintain some state control. Winding
up in the public interest extends to foreign companies, provided a sufficient
jurisdictional link with English law can be established.91 Companies can be
required to change their names (see CA 1985, s. 32; CA 2006, s. 76). The fact
that where companies are dissolved and surplus unclaimed assets devolve
upon the state via the concept of bona vacantia92 might also indicate the
underlying nature of the relationship between companies and their ultimate
progenitor, the state. The fact that the state can nationalise companies93 or bail
out stakeholders in the event of market failure94 shows where the real power

89 CA 1985, s. 432. See the discussion in Norwest Holst Ltd v Secretary of State
for Trade and Industry [1978] Ch 201.
90 Insolvency Act 1986, s. 124A. Strangely, this facility is not available in
Ireland – see First Report of Company Law Review Group (2001) para 15.2.3.
91 Re Titan International Inc [1998] 1 BCLC 102 at 108–9 per Peter Gibson LJ.
92 CA 1985, s. 656, restated in CA 2006, s. 1012.
93 For nationalisation of UK companies, a dominant feature of the late 1940s,
see the Coal Industry Nationalisation Act 1946. In the 1970s, nationalisation again
became a prominent issue – see Aircraft and Shipbuilding Act 1977. When Railtrack
got into financial difficulties at the turn of the decade, it was effectively nationalised
via being put into a special administration regime in 2001. For this administration and
its outcome, see S. Plant (2002) 18 IL & P 18 and S. Elboz (2002) 18 IL & P 187. An
attempt by shareholders to challenge this governmental intervention via a class action
failed in 2005. In Malaysia, the so-called Danaharta Act 1998 was used to exert state
control over companies distressed in the wake of the 1997 financial crisis – see M.
Likosky, The Silicon Empire (2005) (Ashgate). A somewhat similar regime called
special administration was applied in the Italian Parmalat insolvency. For a flavour of
the global impact of the Parmalat collapse, see Parmalat Capital Finance Ltd v Food
Holdings Ltd [2008] UKPC 23.
94 As evidenced by the billions of pounds pumped into Northern Rock in
2007–8, finally resulting in the nationalisation of that company. See Banking (Special
Provisions) Act 2008. For comment on Northern Rock, see R. Tomasic (2008) 29 Co
Law 297 and (2008) 29 Co Law 330. For the EU implications of this state support, see
C. Bamford (2008) 29 Co Law 65. A similar, but in this case a public/private, bailout
was extended to Bear Stearns by the US Federal Reserve in March 2008, leading to the
76 National corporate law in a globalised market

lies. The real question is how far this characteristic should intrude into the
mainstream of companies regulation. That very question will exercise the
minds of policymakers and regulators in the months to come.
When considering state control, we need to distinguish between state
control in the general public interest and the notion of state control designed
to protect the direct economic interests of the state. The debate over the use of
golden shares, discussed below in Chapter 4, is apposite here. In post-
privatisation economies, this is a common issue that raises concerns best dealt
with later in this study.

10 MAINTAINING CONFIDENCE IN CAPITAL

MARKETS
If we persist with our expansive view of the parameters of corporate law, this
item must be covered. The links between capital market regulation and the
operations of companies are too close to ignore. The regulation of insider trad-
ing/market abuse springs to mind. English common law has had at its disposal
principles which might be useful to discourage improper conduct in the
market95 but in Percival v Wright,96 it appeared to send out a message that it
was not improper for directors to exploit their position in share transactions
with members through insider dealing. Such behaviour could not be chal-
lenged by individual shareholders. The courts of the Commonwealth97 were

sale of that investment bank to a competitor at a greatly reduced price, reflecting its
current perceived share market valuation. More evidence of Federal intervention came
in the wake of the rescue operation for the leading private financial institutions Fanny
Mae and Freddie Mac in 2008. After refusing to save Lehman from collapse in
September 2008, the Federal government then produced a plan to spend trillions of
dollars in buying up ‘toxic’ debts. Meanwhile, back in the UK at the same time, the
British government waived domestic competition laws to allow Lloyds Bank to take
over Halifax plc as part of a rescue operation. There is evidence that within the EU, the
European Commission is taking a relaxed view of state aids in the wake of the global
financial crisis.
95 R v De Berenger (1814) 3 M & S 67. For a fascinating account of the real
story behind this case featuring Admiral Lord Cochrane as one of the defendants, see
R. Dale, Napoleon is Dead: Lord Cochrane and the Great Stock Exchange Scandal
(2007) (Sutton Publishing). Cochrane was eventually vindicated in 1832, but doubts
still remain as to his culpability. See also D. Cordingly, Cochrane the Dauntless (2007)
(Bloomsbury Publishers) chapter 15. Full details of the trial can be sourced from the
contemporary work of B. Gurney, which is electronically available through Project
Gutenberg.
96 [1902] 2 Ch 421.
97 Coleman v Myers [1977] 2 NZLR 225, Bruninghausen v Glavanics [1999]
NSWCA 199.
 Commonality of fundamental principles 77

less reluctant to castigate such opportunistic behaviour. Insider dealing was

made a criminal offence in English law in 198098 and it is still a crime under
the Criminal Justice Act 1993.99 With the advent of the Financial Services
Authority100 and EC Market Abuse Directive,101 the regulatory matrix has
been firmed up by the addition of new ‘smart’ sanctions. These include admin-
istrative penalties. Under Part VIII of the Financial Services and Markets Act
2000, the FSA can impose such penalties for breaches of the Code of Practice
on Market Abuse (see s. 123 FSMA 2000 for the particular provision here).

11 ENABLING COMPANIES TO GROW AND

RESTRUCTURE
There are several points that could be included under this umbrella principle.
Any effective system of corporate law must develop procedures for the acqui-
sition of companies through takeover, whether that be private acquisition via
a contractual process, a friendly merger or hostile takeover. Equally, mergers
should be addressed, as should situations of financial distress requiring
restructuring. This latter characteristic has become a dominant feature in
global corporate law reform in the past 25 years. If one wished to find support
for the existence of such a general principle at common law outside the para-
meters of explicit statutory provision, the Court of Appeal judgment in Ord v
Belhaven Pubs102 would offer such support, in that the Court of Appeal there
affirmed the right of a company to restructure, notwithstanding the damaging
effect of such a restructuring upon a third party.

98 Companies Act 1980 s. 72 – see now Criminal Justice Act 1993, s. 52. Ireland
has favoured civil sanctions but there can be enforcement problems there – see B.
Clarke [2009] JBL 68 for discussion of recent litigation in the Irish courts.
99 On Part V of the Criminal Justice Act 1993, see K. Wotherspoon (1994) 57
MLR 419.
100 The FSA replaced the Securities and Investments Board in 1997.
101 EEC/2003/6. On market abuse, see A. Haynes (2007) 28 Co Law 323.
102 [1998] 2 BCLC 447.
4. Foreign shareholders and non-resident
controllers

1 EXPLOITATION OF UK COMPANY LAW BY FOREIGN

ENTRANTS
In this chapter, we propose to consider the relationship between UK Company
Law and a range of overseas players, namely foreign shareholders and non-
national directors. Issues connected with the non-residence of an actor (as
opposed to foreign nationality) will also be addressed in the course of the
discussion.
This is a topical question at the start of the 21st century. There is much
media attention being paid at the moment to the fact that UK firms are being
bought up by foreign investors at a record rate.1 The number of English
Premier League football clubs falling under overseas control has merely
served as a microcosm highlighting this more pervasive issue for the average
man and woman in the street.

2 THE OVERSEAS SHAREHOLDER

2.1 Statistical Significance

Since the dawn of modern company law, overseas shareholders have always
been present on the UK corporate scene, because the City of London has
always been seen as a magnet for foreign capital.2 For example, in the 18th
century foreign investors are believed to have held some 15 per cent of
government bonds. One reason for this was the availability of a capital market
operating within a stable political economy. Moving forward to the 20th

1 See The Times, 8 November 2006, p. 54.

2 For a history of the City of London and the drive to attract foreign capital, see
R.C. Michie, The London Stock Exchange: A History (1999) (OUP). More generally,
see G. Gilligan, chapter 1 in B.A.K. Rider and M. Andenas (eds), Developments in
European Company Law, Volume 1/96 (1997) (Kluwer) for a historical review of the
City and its ability to maintain self-regulatory regimes.

78
 Foreign shareholders and non-resident controllers 79

century, as far as public companies are concerned it has been possible for
many years to track the participation rate of the overseas investor. An exami-
nation of the data produced by what is now the Office of National Statistics3
reveals a clear pattern of increasing foreign ‘penetration’ of the UK equities
scene. Focusing on the position for listed companies for various dates over the
past 30 years, the statistics are revealing:

• 1981 – 4 per cent of equities owned by foreign shareholders;

• 1994 – 16.3 per cent of equities owned by foreign shareholders;
• 1997 – 24 per cent of equities owned by foreign shareholders;
• 2004 – 33 per cent of equities owned by foreign shareholders;
• 2006 – 40 per cent of equities owned by foreign shareholders.

It is also possible from analysing these percentages to gain an understanding

of which national groups are buying into ‘UK plc’. Looking at the 1997
figures, the key foreign groups today appear to hail from the EU (20.3 per
cent), the USA (51.2 per cent) and Japan (2.8 per cent). The proportion of
Chinese shareholdings is growing. Foreign investors these days are increas-
ingly not private individuals, nor indeed foreign private businesses, but rather
‘sovereign investment (or wealth) funds’, with huge quantities of petro-dollars
to invest. This rapidly evolving phenomenon has caused disquiet in some
quarters.4 The irony here, of course, is that the concerns are being raised in
those very economies which for generations have pioneered free capital
markets and have decried protectionism. This reversal of fortunes has been
lost on those countries calling for an international code of conduct governing
investment by sovereign wealth funds, demands that were vociferous at the
Davos World Economic Summit in 2008.5 The European Commission has also
raised concerns on this matter6 and the International Monetary Fund is exam-
ining the phenomenon.7 In fairness to those putting forward these views, it
should be noted that some of the concerns currently being aired relate more to
the lack of transparency on the part of the ultimate acquirer and less to the
identity of the new shareholder. In a final twist of irony, those concerns were
suddenly silenced in the final months of 2008, as leading financial institutions

3 Formerly Central Statistical Office.

4 See the Sunday Times Business Supplement, 9 September 2007 at p. 13, the
Times, 15 October 2007 at p. 42, also The Times, 22 December 2007 at pp. 56–7. For
Japanese concerns, see The Times, 8 February 2008.
5 See the Independent, 25 January 2008.
6 For the Commission’s views here, see its Communication of 27 February
2008 – the Commission favours transparency but also a balanced response to the issue.
7 See the IMF website March 2008 – www.imf.
80 National corporate law in a globalised market

in the West sought fresh capital injections from any available source in the
wake of the worldwide credit crunch.

2.2 Judicial Support for Foreign Shareholders

English law has generally adopted a welcoming approach to foreign share-

holders. As an imperialist nation, wedded to notions of free trade since the
demise of the Navigation Acts8 and the abolition of the Corn Laws,9 it could
hardly take a different stance. So, for example, it has always been the case that
foreign individuals could become subscribers to the memorandum.10 The fact
that a foreign state became a shareholder in a UK company as a result of a
local nationalisation process is immaterial.11 Bearer shares have been avail-
able in English law for over 100 years12 – such securities are highly attractive
to foreign investors. Annual General Meetings of UK companies apparently
could be held abroad, provided the articles of association did not prohibit
this.13 The Companies Acts have, for many years, contained provisions
permitting the setting up of local branch registers of foreign non-resident
shareholders. These provisions, which in future will be located within CA
2006, ss. 129–3514 only operate where the company is trading in that foreign

8 The Navigation Acts 1650–63 were designed to protect the English merchant
fleet, particularly from Dutch competition. They were repealed in 1849. Sir David
Hughes Parry regarded them as a legislative expression of the economic theory of
mercantilism – see (1931) 47 LQR 183 at 198.
9 The Corn Laws restricted the import of foreign corn and were another protec-
tionist measure designed to protect British farmers (at the expense of consumers). They
were repealed in 1846.
10 Princess of Reuss v Bos (1871) LR 5 HL 176.
11 Williams and Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1985] 1 All
ER 619.
12 Bechuanaland Exploration Co v London Trading Bank Ltd [1898] 2 QB 658.
See also Edelstein v Schuler [1902] 2 KB 144 (negotiability of bearer debentures).
Some jurisdictions exemplify a hostility to bearer securities – see the Isle of Man
Companies Act 2006, s. 30.
13 There is a lack of clarity here. The only restriction imposed by English law on
holding shareholder meetings abroad seems to be the unfair prejudice jurisdiction
which has been invoked in this context – see McGuinness v Bremner plc [1988] BCLC
673, where an attempt to delay and then to hold an EGM outside the jurisdiction was
overturned by the Scottish courts. A shareholder has a right at common law to attend
and vote at meetings. This issue of the venue for meetings was commented upon in the
First Report of the Irish Company Law Review Group – see para 6.5.7, where it was
noted that there is no right to hold an AGM abroad unless this is permitted by the arti-
cles or unless the shareholders agree. The possibility of holding company meetings
outside the jurisdiction is envisaged by the Isle of Man Companies Act 2006, s. 67(3).
14 Formerly s. 362 of and Sched 14 to CA 1985.
 Foreign shareholders and non-resident controllers 81

jurisdiction where shareholder residence is located. The jurisdictions where a

local branch register may be kept are listed in s. 129(2) – these are basically
former British colonies. A local branch register must be open to inspection in
the UK (s. 132). Local courts may be given the power to rectify a branch regis-
ter (s. 134). The 2006 Act here makes no significant changes in the substance
of the pre-existing law.
The desire to encourage foreign share ownership was one of the factors that
influenced the decision of Harman J in Re Scandinavian Bank plc.15 Here we
had a public company incorporated under English law wishing to rearrange its
capital structure in order to create a class of shares denominated in a range of
foreign currencies (in particular, US dollars). This possibility was not specifi-
cally addressed by the Companies Act 1985. The indications in the common
law were that this option would not be permitted, as there was a presumption
(based upon some influential obiter dicta16 of Lord Wright in the 1930s) that
shares in UK companies had to be denominated in sterling. Nevertheless, after
taking evidence and hearing the views of an amicus curiae, Harman J ruled
that denomination of shares in foreign currencies should indeed be permitted.
Cocktails of foreign currencies could also be used, provided no company had
a single share denominated in multiple currencies. Various factors informed
the judgment. Firstly, there had been a change of approach by the English judi-
ciary with regard to the pre-eminence of sterling in matters of court judgment.
The English courts could now award compensation denominated in a foreign
currency if that was appropriate.17 Secondly, the evidence indicated that the
Registrar of Companies had already registered a number of companies having
non-sterling shares; the cat had therefore been let out of the bag. To deny this
progressive possibility now would seriously embarrass the bureaucrats by
revealing a flaw in the system. The decision was therefore permissive. Harman
J did, however, indicate two restrictions on non-sterling shares:

(i) No single share could be denominated in multiple currencies; ‘schizo-

phrenic’ shares were not to be allowed.

15 [1988] 1 Ch 87.
16 Adelaide Electric Supply Co Ltd v Prudential Assurance Co Ltd [1934] AC
122.
17 See Miliangos v Geo Frank Textiles Ltd [1976] AC 443 – discussed in R.
Bowles and J. Phillips (1976) 39 MLR 196 and F.A. Mann (1976) 92 LQR 165. Having
said that, it is a rule of liquidation law that for matters of administrative convenience,
proof of debts must be converted into equivalent sterling amounts at the date of liqui-
dation – Re Lines Brothers Ltd [1983] Ch 1. For currency conversion processes in the
context of a scheme of arrangement, see Re Telewest Communications (No. 2) [2005]
1 BCLC 772.
82 National corporate law in a globalised market

(ii) In the case of a plc, there must be at least £50,000 worth of shares denom-
inated in sterling in order to comply with the terms of s. 118 of the
Companies Act 1985 (see now CA 2006, s. 763).

This conclusion was welcome. It made UK company shares more attractive to

foreign investors and will also facilitate the usage of the euro. It has received
the statutory imprimatur, in that the Companies Act 2006, s. 54218 specifically
permits the issue of foreign denomination shares. Indeed, it has gone so far as
to introduce a new tranche of provisions (ss. 622–8) which enable companies
to redenominate shares into foreign currencies, provided specified procedures
are adhered to. As these provisions do not come into effect until 1 October
2009, we shall have to wait and see if they are widely utilised.
If we discount the now defunct exchange control regime,19 one exception
to this welcoming approach is reflected in the House of Lords judgments in
Daimler v Continental Tyre.20 This case involves the quaint procedural rule,
founded in public policy, that the English courts would not aid an alien enemy
in time of war. Here we had a company suing in the English courts during the
First World War.21 The company had been incorporated in England, but was
controlled by foreign shareholders with strong connections in Germany. The
House of Lords, ignoring the concept of the separate personality of the
company, held that the company was an alien enemy. Lord Parker explained22
this ruling on the grounds that the problem did not lie in the existence of
foreign shareholders, but rather in foreign control. With due respect, this
analysis seems to involve splitting hairs. The case owes much to wartime
emergency conditions; a scenario that has generated some hostile legislation23
as far as shareholders are concerned. But the precedent may be more wide-
reaching, in that a similar approach has been applied24 in peacetime, where
foreign shareholders (admittedly from a friendly country) were using an
English company to circumvent protectionist regulatory legislation in the film
industry.

18 See CA 2006, s. 542.

19 Exchange Control Act 1947, ss. 8–10. Exchange control was abolished in
1987.
20 [1916] 2 AC 307.
21 One could also note that wartime pressures led to the enactment of the
Registration of Business Names Act 1916.
22 [1916] 2 AC 307 at 345.
23 See, for example, the Companies (Foreign Interests) Act 1917, which prohib-
ited alteration of articles without governmental consent where the original article
capped share ownership by aliens, and the Trading with the Enemy Act 1939, s. 7.
24 Re FG Films Ltd [1953] 1 All ER 615.
 Foreign shareholders and non-resident controllers 83

2.3 Problems in EU Law

In view of the traditionally welcoming attitude of English law in peacetime

conditions towards foreign shareholders, the facts of Factortame25 may seem
curious. The problem arose here because of concerns centring on ‘quota
hopping’ and the operation of the EU Common Fisheries Policy. Each Member
State had allocated to it a quota, but that quota could be exploited by foreign
fishermen buying up UK fishing boats by acquiring the companies that oper-
ated such boats. This provoked national disquiet, largely fuelled by underlying
hostility towards the concept of the EU in general. Accordingly, the UK
government secured the enactment of the Merchant Shipping Act 1988. This
legislation placed restrictions on the right of foreigners to acquire control of
UK fishing companies by imposing nationality/residence requirements. This
legislation was challenged by the Spanish fishermen in the English courts and
references to the European Court of Justice were required on a number of
occasions to clarify the position.26 On the central substantive issue, the
European Court of Justice ruled27 that it was contrary to the principles of free-
dom of establishment and free movement of capital for the 1988 Act to restrict
Spanish shareholders taking control of English fishing companies. As a result
of this finding, the proceedings were rejoined in the English courts and the UK
government was compelled to pay a substantial sum by way of compensation
to the Spanish fishermen under the emerging principle of EC law of ‘state
liability’.28
The importance of freedom to participate in the share capital of EC compa-
nies is also reflected by Proceedings brought by Manninen (C319/02).29 The
point at issue here was whether a Finnish tax credit system could operate in
such a way as to disadvantage Finnish taxpayers who received dividends from
Swedish (as opposed to Finnish companies). The European Court of Justice
held that this was not consistent with Art 56 of the Treaty, because it effec-
tively discouraged Finnish investors from investing in the share capital of
companies incorporated in other Member States.

25 [1990] ECR 2466.

26 See Factortame (C221/89) [1991] ECR I-3905 (main substantive ruling on
freedom of establishment and freedom of capital). Note also Factortame (C213/89)
[1990] ECR I-2466 (interim relief) and Factortame (C48/93) [1996] ECR I-1029 (state
liability).
27 [1990] ECR I-2466.
28 Factortame (C48/93) [1996] ECR I-1029, applying Francovich v Italy (C6
and 9/90) [1991] ECR I-5537.
29 [2005] 2 WLR 690.
84 National corporate law in a globalised market

This policy of encouraging cross-border ownership of shares will receive a

further boost when a new EC Directive (36/2007)30 is implemented. At the
moment, it is estimated that one-third of shares in EU companies is owned by
non-resident shareholders, yet the fact of non-residence can place barriers in
the way of shareholder empowerment. Under the new Directive, many of these
barriers will be swept away. For instance, notice periods for shareholder meet-
ings will be standardised at 21 days. Shorter periods will only be allowed
where electronic voting is in operation. Websites are to be encouraged as a tool
for communicating with shareholders. These reforms are welcome and will, of
course, promote further convergence in corporate law.

2.4 Equal Treatment; Not Better Treatment

Although foreign shareholders are welcome, they are only received on the
understanding that they become subject to the same obligations as native
shareholders. This fundamental point was exemplified by Re FH Lloyd
Holdings plc.31 Here we were concerned with the rules contained in what
became Companies Act 1985, Part VI (now Part 22 of the Companies Act
2006), requiring those investors acquiring beneficial interests in UK public
companies to disclose the nature of that interest. In order to circumvent that
obligation, it has become the practice for reclusive acquirers to hide behind
foreign nominees. Typically, such investors would build up a strategic stake in
a UK company in a clandestine fashion and then would pounce in the market
through what became known as a ‘dawn raid’,32 denying the directors of the
company any opportunity to react. To counteract this stratagem, the law
enables the company to apply to the court for a freezing order on the shares
registered against the name of the nominee, if the nominee refuses to identify
the real beneficial owner.33 This was similar to the scenario that presented
itself to the court in this case. Here the foreign nominee (for whose interme-
diate benefit shares were held by an English nominee) faced with the possi-
bility of being subjected to a share-freezing order was an institution based in
Luxembourg and it refused to disclose the identity of its client (the beneficial
share owner), possibly because to do so would result in an infringement of
Luxembourg law. Nourse J ruled that those foreign shareholders who acquire

30 For background, see (2006) 27 Co Law 119.

31 [1985] BCLC 293 – noted by D. Milman in (1985) 6 Co Law 184. Compare
the approach of the Federal Court of Australia in ASC v Bank Leumi Le Israel (1996)
21 ACSR 474.
32 For discussion, see M.T. Lazarides (1983) 4 Co Law 66.
33 See CA 1985, s. 212 and soon CA 2006, ss. 793 et seq. See generally D.
Milman and D. Singh (1992) 13 Co Law 51.
 Foreign shareholders and non-resident controllers 85

shares in UK public companies become subject to the same obligations as

local shareholders and those obligations cannot be relieved by commitments
under local law. The articles of association form the proper law of contract
with members and that proper law was English law. The lex situs of the shares
was also English law. The position was made no different by the reluctant
party being only an intermediate beneficial holder – the trust property of the
shares was located in England and therefore jurisdiction was engaged. Nourse
J put it succinctly when posing the rhetorical question: ‘Why should a true
foreigner, while able to enjoy all the benefits of holding shares in an English
company, be intended to escape the burdens?’34 Having made that point, it is
clear that English law does not completely disregard the predicament that a
foreign shareholder might find himself in.35
A similar refusal to accept special pleading on behalf of foreign share-
holders was exemplified in Winpar Holdings v Joseph Holt plc.36 Here the
Court of Appeal held that it was not fatal to the operation of the compulsory
share purchase procedure found in CA 1985, s. 428 (restated in Chapter 3
of Part 28 of the Companies Act 2006) that each and every foreign share-
holder had to be supplied with documentation relating to the bid in their
home jurisdiction. That was not feasible in every case. It was common prac-
tice in such offers to identify forbidden territories in which offers would not
be directly communicated; shareholders from such territories would have to
rely on methods of communication used in the UK, such as a notice in the
Financial Times. However, city practices with regard to communications
with overseas shareholders left something to be desired, as Peter Gibson LJ
indicated:37

However, I would add this caveat. I have some unease as to the practice, which
appears to become standard in the City, of not directly communicating a takeover

34 Ibid at 299.
35 Notwithstanding the apparently uncompromising approach reflected in the
above quotation, the English courts have acknowledged that a foreign shareholder may
be given a short period of grace to enable advice to be taken on the position under
English law – Re Lonrho plc (No. 2) [1989] BCLC 309. Here the court had to weigh
speed of communication against the need to respect local religious practices and days
of observance.
36 [2002] BCC 174. Similar reasoning may be said to explain the decision in
Mutual Life Insurance Co of New York v The Rank Organisation [1985] BCLC 11. See
also Parkstone Ltd v Gulf Guarantee Bank plc [1990] BCC 534, which offers another
illustration of the practical difficulties that can arise when communicating with foreign
shareholders. Here Warner J adopted a flexible interpretation of the articles to facilitate
the sending of postal notices to shareholders based in Gibraltar.
37 Ibid at 196.
86 National corporate law in a globalised market

offer to persons in the forbidden territories, understandable though that practice is

in view of the difficulty and cost of complying with local securities regulations This
judgment should not be taken as blessing that practice whatever the circumstances.

It remains to be seen whether this advice is taken to heart.

3 CONTROLLING FOREIGN PARTICIPATION IN

STRATEGIC COMPANIES
Notwithstanding what has been said above, it has long been the case that the
UK corporate law model has been prepared to accept the idea that certain
companies operating in strategic areas of the economy (for example, transport,
energy and the defence sector) should be permitted to place restrictions on
foreign shareholder participation. This may be achieved through a special
regulatory structure based upon legislation or by a domestic provision in the
articles of association of the relevant company. Such a strategy is often carried
out through the mechanism of what is colloquially described as a ‘golden
share’.38 A ‘golden share’ may enable the holder (usually a ministerial repre-
sentative of the government) rights to veto the transfer of the business or the
acquisition of control by a foreign shareholder. Typically, a ‘golden share’
arrangement is put in place in the wake of the privatisation39 of a sector of the
economy that was formerly under public ownership, so the state is able to gain
the immediate financial rewards of privatisation from the proceeds of share
sales, whilst retaining a degree of control over the sector. Truly a case of
having one’s cake and eating it!
This policy is now suspect, in that it potentially infringes EC law rules
against discrimination with regard to participation in capital, in particular Art
56 of the EEC Treaty. During the 1990s, the European Commission had indi-
cated to the UK government its concerns about the use of ‘golden shares’.
There is evidence that such devices were being quietly dropped in the UK,40

38 For an account of the legal issues associated with privatisation, see C. Graham
and T. Prosser (1987) 50 MLR 16, C. Graham (1988) 9 Co Law 23 and A.P.
Rutabanzibwa (1996) 17 Co Law 40.
39 See M. Likosky, The Silicon Empire: Law, Culture and Commerce: Global
Perspectives (2005) (Ashgate) at 44–51. Privatisation, the brainchild of the Thatcher
government in the 1990s, has spread as a commercial culture across Europe and to many
jurisdictions whose economies were formerly dominated by a state-controlled sector.
Complicated transitional issues can arise where an enterprise is switched between public
and private owners and vice versa – see R (on the application of National Grid Gas plc
[formerly Transco plc] v Environmental Agency [2007] UKHL 30.
40 See (2004) 25 Co Law 244.
 Foreign shareholders and non-resident controllers 87

but were still being maintained (and, in some cases, introduced) in other EU
states. The principles governing this usage of ‘golden shares’ were explained
in June 2002 by the European Court of Justice in Portugal et al v Commission
(Cases C367/98 and C483/99).41 In this instance, the Court of Justice was
invited to give its views on three ‘golden share’ arrangements adopted respec-
tively by the Portuguese, French and Belgian governments. The Portuguese
arrangement related to privatisation issues in general, and capped foreign
shareholders. The European Court of Justice ruled that this arrangement could
not be objectively justified. In the case of the French ‘golden share’, in an oil
company, the restriction was rejected. Again, the approach of the Court was to
rule this arrangement to be contrary to EU law and unjustified. In the third
case, that involving the Belgian veto designed to protect its energy supplies,
the Court of Justice here found in favour of the Belgian government.
Transparency and proportionality linked to a real public need seem to be the
essential requirements for a golden share or equivalent regime to survive
scrutiny by the ECJ. The reluctance of national governments to accept this loss
of state control was apparent by virtue of the fact that some twelve months
after this ECJ ruling, Portugal had to be reminded of the need to comply. A
similar approach was taken by the European Court of Justice in Commission v
Italy (C58/99),42 where Italian privatisation laws that retained special powers
for the state in the privatised companies were found to be incompatible with
freedom of establishment and free movement of capital.
Subsequent to these cases, other proceedings have arrived at the door of the
Court of Justice. In Commission v Spain (C463/00)43 and the Commission v
UK (C98/01),44 it was necessary to give judgment on the legality of a general
Spanish privatisation law and on the ‘golden share’ in British Airport
Authorities (BAA), which capped foreign share ownership in the company. In
both instances, a finding of incompatibility was made, with the restrictions
being unjustified. In the case of BAA, it was seen as an unwarranted restric-
tion on free movement of capital. Other cases of similar ilk and portent are
Commission v Italy (C174/04)45 and Commission v Netherlands (C282 and
283/04).46
‘Golden shares’ are not the only devices which can be used to restrict
foreign acquisitions. Witness the so-called ‘Volkswagen law’, which restricted
voting rights in Volkswagen to prevent any shareholder having more votes

41 [2003] 2 WLR 1.
42 [Unreported]. See also Commission v Belgium (C503/99) [2002] ECR I-4809.
43 [2003] ECR I-4581.
44 [2003] ECR I-4641.
45 [2005] ECR I-4933.
46 [2006] ECR I-9141.
88 National corporate law in a globalised market

than the state of Saxony, thereby effectively blocking a foreign takeover. This
arrangement was struck down by the European Court of Justice in Commission
v Germany (C112/05) in 2007.47
The conclusion must therefore be that each case turns on its own facts,
though with a strong presumption that ‘golden shares’ (and comparable
arrangements) do indeed infringe EU law. Had these rulings been handed
down 20 years ago, they would have had serious implications for UK privati-
sation policy. As it happens, the British government has quietly abandoned
most of its ‘golden share’ arrangements.48 A blemish on the face of our open-
door policy has fortunately been swept away.

4 FOREIGN (OR NON-RESIDENT) DIRECTORS

Although English Law does require the nationality of company directors to be
disclosed on business letters,49 there is no significant nationality barrier placed
in the way of those individuals who wish to become directors of companies
incorporated in this country.50 Some have argued that this latitude may be
abused by foreign undesirables becoming directors of British companies,51 but
this relaxed approach is fortunate because such an explicit nationality require-
ment would almost certainly be contrary to EC law, on the grounds that it
infringes either the Art 43 guarantee of freedom of establishment or more
likely the Art 49 freedom to provide services (that is, directorial services).52
Equally, the more subtle ploy of requiring directors to be resident in the UK
would again infringe those same principles as this would be seen by the ECJ
as in substance an indirect contravention of the basic principle of non-

47 [2008] 1 CMLR 643. For background on this Volkswagen affair, see F.

Sanders (2008) 14 Col Jo of Euro Law 359.
48 Though it appears to have retained a special share in the sell-off of its remain-
ing interests in the Aldermaston atomic weapons research establishment – see the
Independent, 20 December 2008.
49 See CA 1985, s. 289(1)(a)(iv).
50 Other countries have had fewer qualms – see, for instance, Canadian Business
Corporations Act, s. 100(3). In Switzerland, there is a requirement that the majority of
the board should be Swiss resident – see O.C. Meier-Boeschenstein [1994] JBL 212.
There have been questions raised as to whether English law is too lax in vetting those
individuals who may become a director – there have been instances where wanted
criminals and suspected war criminals have been recorded as directors of British
companies – see the Times 21 February 2008, p. 28.
51 For example, it has been alleged that war criminals are using British compa-
nies to mask their commercial activities – see the Times, 21 February 2008, p. 28.
52 It would also breach Art 12 EC (discrimination on grounds of nationality).
 Foreign shareholders and non-resident controllers 89

discrimination.53 Here we have clear authority in Commission v Spain

(C114/97),54 where the European Court of Justice ruled that a Spanish law
requiring directors of private security companies to be Spanish nationals was
discriminatory. Again, in the EFTA case of Rainford-Towning (E-3/98),55 it
was held that a comparable Liechtenstein law offended the same principle.
Indeed, the empirical evidence would suggest that a growing number of UK
companies have directors who are either non-nationals or at least resident
outside the jurisdiction. So in 1996 it was estimated that some 300,000 direc-
tors of UK companies were non-resident. That figure (which now may be as
high as 20 per cent) is likely to grow as the numbers of foreign shareholders
expand.
In the same way that nationality is an irrelevance when determining the
obligations of shareholders, so directors do not escape their responsibilities
under English law by virtue of foreign nationality or residence abroad. In Re
Seagull Manufacturing Co Ltd,56 the English courts were required to deter-
mine whether a non-resident director could be subject to the investigatory
procedures specified in the Insolvency Act 1986. In answering this question in
the affirmative, the court stressed that it was important for the integrity of UK
Company Law to extend the purview of these provisions to this scenario. Peter
Gibson J explained:

I can see no reasons of comity which would prevent those who voluntarily were
officers or otherwise participated in the formation or running of an English
company being capable of being summoned by the English court for the purposes
of public examination.57

The observation was made by Hirst LJ that, with advances in communications

technology, managing a UK company from overseas was an increasingly
attractive possibility. English law had to rise to that challenge:

The efficient and thorough conduct of such investigation by the official receiver is
of great public importance, as several recent notorious cases have demonstrated.

53 See Mund and Fester v Firma Hatrex International Transport (C398/92)

[1994] ECR I-467. The Danes had a residence requirement for directors until 2004.
54 Commission v Spain (C114/97) [1999] 2 CMLR 701. See also Commission v
Belgium (Case C355/98 ) [2000] 2 CMLR 357. These cases all involved directors of
private security firms – public interest could therefore not be used to justify the differ-
ential treatment.
55 Rainford-Towning [1999] 1 CMLR 871. See also Re Pucher [2002] 2 CMLR
3 (EFTA case in which Liechtenstein residence requirement for company directors
ruled unlawful).
56 [1993] BCC 241.
57 Ibid at 246.
90 National corporate law in a globalised market

This process would be frustrated if, for example, a director, who had with the aid of
modern methods of communication run the company entirely from abroad, was
immune from public examination . . . The same applies to a director who has
defrauded the company in England and then absconded abroad shortly before the
liquidation.58

In Re Seagull Manufacturing Co Ltd (No 2),59 much the same point was made
by the judge, Mary Arden QC, in the context of the operation of the director
disqualification regime against non-resident directors. Here the judge
dismissed an application to restrain the commencement of director disqualifi-
cation proceedings against a director who was not present in the jurisdiction in
circumstances where the alleged misdeeds may have occurred outside the
jurisdiction. Mary Arden QC ruled that s. 6 of the Company Directors
Disqualification Act 1986 was meant to have extraterritorial effect:
Accordingly, in my judgment, Parliament must be presumed to have been legislat-
ing not simply for British subjects and foreigners who happened to be here at the
relevant time, but also for other foreigners who were out of the jurisdiction at the
critical time. Likewise, in relation to conduct, section 6(1) contains no territorial
restriction. Accordingly, the court must ask what is the conduct in respect of which
Parliament must have been presumed to have been legislating?60

This conclusion was explained thus:

There are two factors which, in my judgment, indicate that the conduct in question
in section 6(1) need not be conduct which occurred within the jurisdiction. The first
such factor is the definition of ‘company’ to which I have already referred. This
includes foreign companies and the acts of the directors of those companies are
likely to have taken place abroad, and Parliament must have been presumed to have
been legislating with that in mind.61

She continued:
Secondly, in these days of modern communications, a person may conduct himself
as a director in such a way as to affect persons within the jurisdiction without
himself ever entering the jurisdiction. Again, in my judgment, Parliament must be
presumed to have been legislating with this in mind, and, accordingly, by plain
implication, to be taken to have been referring to conduct wherever committed.62

58 Ibid at 250.
59 [1993] BCC 833. A director can be disqualified even if his COMI is located
abroad – Official Receiver v Stojevic [2007] EWHC 1186 (Ch), [2008] Bus L R 641. In
Ireland similarly, it has been held that a restriction order can be granted against a non-
resident director – Fennel v Frost [2003] 1 IR 80 and O’Ferral v Coughlan [2004] 4
IR 266.
60 [1993] BCC 833 at 841.
61 Ibid at 841.
62 Ibid at 841.
 Foreign shareholders and non-resident controllers 91

Non-residence arguably was one of the reasons for the imposition of a 12-
year disqualification in respect of an individual in Official Receiver v Vass63
who had based himself offshore in Sark and had taken on no fewer than 1313
directorships of UK companies with complete disregard for the attendant
responsibilities!
This judicial policy was taken a step further in Re Howard Holdings Inc64
where the English courts indicated that foreign non-resident directors of a
foreign company, which was being wound up under English law, could in
theory become subject to wrongful trading liabilities pursuant to s. 214 of the
Insolvency Act 1986.
In Re Mid East Trading Ltd,65 the investigative procedures in s. 236 of the
Insolvency Act 1986 were made available to the liquidators of a foreign
company being wound up within the jurisdiction to permit the production of
documents located overseas. Although the case does not focus upon action
taken against foreign-based officers, the points made in the judgment by the
Court of Appeal on the need to balance carefully competing interests are appo-
site. Any extension of sovereignty must be justified.
Although legal systems can deal with the non-residence issue by stretching
the meaning of substantive problems, there is no denying the practical diffi-
culties involved in imposing corporate law standards against directors who are
outwith the jurisdiction. This point was noted in Ireland in the First Report of
the Company Law Review Group with regard to the difficulties often encoun-
tered in prosecuting such individuals.66

5 THE CORPORATE DIRECTOR PHENOMENON

Although there is no objection to foreign or non-resident directors, there is
scope for abuse where a company is allowed to become a director of a UK-
registered company. Unusually, English law has for many years permitted
companies to become directors of other companies (see CA 1985 s. 289(1)(b)).
This point was settled many years ago by Warrington J in Re Bulawayo Market
and Offices Co Ltd.67 Furthermore, the nationality of the corporate director is

63 [1999] BCC 516. See the news item in (1999) 20 Co Law 117 and L. Hitchens
[2000] CFILR 359.
64 [1998] BCC 549 – noted by K. Dawson in [1999] Ins Law 67.
65 [1998] BCC 726.
66 See para 8.3.15, where it was suggested that changes should be made in the
rules on service of prosecution papers to address this difficulty.
67 [1907] 2 Ch 458.
92 National corporate law in a globalised market

immaterial. The potential for abuse here was exemplified by Official Receiver
v Brady,68 where Jersey-based companies were used as part of a scheme
designed to disguise the participation of certain individuals in UK companies.
Most jurisdictions do not take such a liberal approach. Even the offshore juris-
diction of the Isle of Man banned corporate directors until the enactment of
reforms in 2006 (see Chapter 1 above). Ireland maintained its position of
opposition in the First Report of the Company Law Review Group.69 The posi-
tion in English law has been reviewed recently. At one stage, it seemed likely
that a prohibition would be introduced on corporate directors.70 The govern-
ment71 has backed away from this draconian option (possibly because of the
fact that there are many thousands of corporate directors recorded at present
and to replace all of these would be a massive task). Instead, the new rule,
which is now applied under s.155 of the Companies Act 2006 with effect from
1 October 2008, is that every company must have at least one natural person
acting as a director. If that requirement is met, corporate directors are still
viewed as acceptable. It remains to be seen if this classic British compromise
achieves the desired goal of eliminating the perceived abuse.

68[1999] BCC 259. See also the case mentioned by R. Goddard in (2007) 28 Co
Law 281 – based on Re Citylink Ltd [2005] EWHC 2875 (Ch).
69 (2001) para 11.8.10.
70 See Company Law Review, Final Report (URN 01/942).
71 See White Paper (Cm 6456) (2005).
5. Reception of overseas companies by
the English legal system1

1 THE INCLUSIVE TRADITION

English law has a long history of affording recognition to foreign entities
which have not incorporated as such under the processes provided by English
law. Witness the ancient House of Lords precedent of Henriques v Dutch West
India Co, where the English court gave recognition to a company which had
been incorporated in Holland.2 Even where overt discrimination existed within
the English legal system – see, for example, the bar on foreign companies
owning land in the UK – such negative treatment has long been ended.3
In more recent times, we find a useful illustration of this embracing tradi-
tion at work in the case of Arab Monetary Fund v Hashim (No. 3).4 Here the
AMF was allowed to bring proceedings in English law even though it had not
been incorporated under English law. The AMF was set up by treaty and had
been afforded status as a legal entity by a number of friendly Arab states, with
the result that the facilities of English law were made available to it. This
House of Lords majority ruling seemed to extend the parameters of the
common law. This decision was taken further by the Foreign Corporations Act
1991, which made provision for the recognition of entities incorporated in
territories not recognised as states by English law.5

1 For scholarly treatment of this subject, see F. Tansinda, chapter 12 in D.

Milman (ed.), Regulating Enterprise (1999) (Hart). See also his article in (1997) 18 Co
Law 98. Gower and Davies: The Principles of Company Law (P. Davies, ed.) (7th
edition, 2003) (Sweet & Maxwell) chapter 6 also provides some coverage.
2 (1728) 2 Ld Raym 1532. See also Lazard Bros & Co v Midland Bank [1933]
AC 289 at 297 per Lord Wright. A more recent overview of the position is provided by
Brooke LJ in Sarrio SA v Kuwait Investment Authority [1997] CLC 280 at 296.
3 This change occurred in 1908.
4 [1991] AC 114 – noted by G. Marston [1991] CLJ 218 and I. Cheyne (1991)
40 ICLQ 981. A similar approach was taken in Buckmaster & Moore (a firm) v Fado
Investments 1986 PCC 95. For an historical overview of the attitude of the English
courts towards foreign state entities, see G. Marston [1997] CLJ 374 and F.A. Mann
(1991) 107 LQR 357.
5 See A. Mayss (1990) 7 Co Law 140 and I. Cheyne (1991) 40 ICLQ 983.

93
94 National corporate law in a globalised market

Recognition of foreign companies is without regard to the question of who

owns such companies. There is no discrimination against overseas companies
owned by foreign governments.6 Indeed, there may even be a possibility of
such companies exploiting the concept of sovereign immunity, though such
immunity is limited where commercial activities are involved and in other
prescribed circumstances.7 Having said that, the device of lifting the veil of
corporate personality may be engaged in such circumstances, as the court in
Kensington International Ltd v Republic of the Congo8 indicated. In other
cases, the sensitive diplomatic considerations triggered by state-owned
companies may have influenced the ultimate court decision.9
Another expression of this non-discriminatory approach can be found in the
judgment of Lord Phillips MR in Jameel v Wall Street Journal,10 when it was
heard at Court of Appeal level prior to its progression to the House of Lords.
In response to a suggestion that the rule of English law that companies did not
need to show special damage before suing in libel did not apply to foreign
companies, Lord Phillips was most insistent that the same rule should apply.11
Why is this welcoming attitude adopted? Undoubtedly, it is a manifestation
of comity between courts of friendly jurisdictions. More pragmatically, the
consequence of such recognition is that litigation will be allowed to be under-
taken in the English law forum. English lawyers will have to be engaged to
represent parties and ancillary services used to facilitate such litigation. The
invisible earnings of ‘UK plc’ will thus be increased. This is part of a general
strategic approach taken by English law towards ‘capturing’ foreign-party liti-
gation. It is a strategy that has been given a major boost in recent years with
the advent of the EC Regulation on Insolvency Proceedings (1346/2000) (as
amended) which allocates primary jurisdiction in cross-border insolvency
cases to the jurisdiction where the debtor has its ‘centre of main interests’ (or
‘COMI’). This convenient device (which smacks of the real seat concept) has
enabled English law to ‘capture’ insolvency proceedings related to foreign
incorporated companies where their COMI was located here, even though the

6 Williams and Humbert v W & H Trade Marks [1985] 1 All ER 619.

7 Mellinger v New Brunswick Development Corp [1971] 1 WLR 604, Trendtex
Trading Corp v Central Bank of Nigeria [1977] 2 WLR 356. See also State Immunity
Act 1978, s. 3 (waiving immunity for commercial transactions) and s. 8 (waiving
immunity with respect to proceedings relating to a corporation in which the state has a
membership interest).
8 [2005] EWHC 2684 (Comm), [2006] 2 BCLC 296.
9 See, for example, Banco Nacional de Cuba v Cosmos Trading [2000] BCC
910.
10 [2005] 2 WLR 1577 (CA); [2006] UKHL 44.
11 [2005] 2 WLR 1577 at 1611. For discussion, see A. O’Neill (2007) 28 Co Law
75.
 Reception of overseas companies by the English legal system 95

place of incorporation is located in another Member State. Although there

have been the occasional criticisms12 of the ‘piratical’ approach of the English
courts, for the most part this Regulation has produced harmony. This particu-
lar EC Regulation will be considered in greater depth in Chapter 8.

2 DEFINITION
The law on overseas companies (that is, companies incorporated outside Great
Britain) is dealt with by Part 23 of the Companies Act 1985, which will be
replaced by Part 34 of the Companies Act 2006 with effect from October 2009.
Where do companies incorporated in other parts of the UK or the British
Isles fit into the picture?
Companies incorporated in Scotland are not within the scope of Part 23, but
are covered by the Companies Acts and Insolvency Act generally, unless
specific excusion is provided for.13 As far as Scotland is concerned, the posi-
tion is reflected by Re Baby Moon Ltd,14 where the distinctive nature of the
English and Scottish systems was stressed in the context of the English
winding-up jurisdiction.
The position is different vis-à-vis Northern Irish companies, which at
present fall outside the scope of the Companies Acts and the Insolvency Act.15
Northern Irish companies at present rank as oversea companies and there are
91 such companies registered under Part 23. The position has changed now
that the Companies Act 2006 has come into force, because s. 1284 extends the
Companies Acts to Northern Ireland.
Companies incorporated in Channel Islands jurisdictions16 and in the Isle
of Man17 also deserve special mention. They both fall within the parameters
of Part 23. Companies statistics indicate that there are 476 and 515 respec-
tively of these companies operating in the jurisdiction. In Curragh Investments
v Cooke,18 the court treated an Isle of Man company as an overseas company.

12 See Stojevic v Komercni Banka AS [2007] BPIR 141.

13 See, for example, Companies Act 2006, s. 265. Insolvency Act 1986, s. 440
lists those specific exceptions where the Insolvency Act 1986 does not apply.
14 [1985] PCC 103.
15 See CA 1985, s. 745 and IA 1986, s. 441 – Insolvency Act 1986 does not
apply to Northern Ireland unless provision is specifically identified.
16 See Chapter 1 for an explanation of the position here.
17 See Chapter 1 again.
18 [1974] 1 WLR 1559.
96 National corporate law in a globalised market

3 NON-RESIDENT COMPANIES: A NOTE

The residency of a company could be relevant for a host of legal reasons – for
example, taxation or jurisdictional matters. A company may be incorporated in
this country but treated as non-resident for the above purposes. Conversely, a
foreign company could be regarded as resident here. The acid test in all cases
is to identify where the central control and management is based.19

4 FOREIGN ENTERPRISE ACTIVITY IN ENGLAND AND

WALES: STRATEGIC OPTIONS
Where a foreign enterprise wishes to undertake business within the English
legal jurisdiction, it has a number of options available to it. One choice that is
not available is simply to register itself as an English company. Strict corpo-
rate law orthodoxy dictates that a company can only be incorporated in one
jurisdiction.20 Other courses of action must, therefore, be evaluated.

4.1 ‘Going Native’

Firstly, the enterprise could acquire or incorporate a local company. The

owners of the foreign enterprise would become the controlling shareholders of
the local company. The implications of this strategy have been considered in
Chapter 4.

4.2 Formal Admission as an Overseas Company

A second option would be to seek formal recognition for the foreign company
under English law. In English law, this is achieved by registration under Part
XXIII of the Companies Act 1985 (now Part 34 of the Companies Act 2006).
The registration process is painless and there are no risks that registration
would be refused.21 Statistics covering companies registered under Part XXIII
are revealing. In the DTI Companies Annual Report for 2005–6,22 we learn
that of 8066 registered overseas companies:

19 De Beers Consolidated Mines [1906] AC 455, Unit Construction Co Ltd v

Bullock [1960] AC 351.
20 Bulkeley v Shutz (1871) LR 3 PC 764, Bateman v Service (1881) 6 App Cas
386.
21 This is not always the case – see New Zealand Overseas Investment Act 1973
(special permission required).
22 See DTI Annual Report 05/06, Table E1.
 Reception of overseas companies by the English legal system 97

• 2410 were from the USA;

• 1882 were from the EU;
• 1449 were from the Commonwealth;
• 1082 were from other parts of the UK;
• 3653 were from the rest of the world (including 303 from the Virgin
Islands and 213 from Japan).

Compare this with the figures for 1993–4 where the total of registered overseas
companies was only 4881; we thus have a significant increase over the last
decade. In 1987/8, the equivalent figure was 3749; the total has now doubled in
two decades. Having said that, the total is still only a small drop in the ocean
when compared to the two million plus registered companies in Great Britain.
For many years, the legal rules here were settled. A separate legal regime
for overseas companies had been constructed on the recommendation of the
Loreburn Committee23 way back at the start of the 20th century. That regime
operated without major problems. So, for instance, the Jenkins Committee24 in
1962 concluded that it was fundamentally sound and needed only minor
surgery. Part XXIII of the Companies Act 1985 was engaged when the foreign
company established a place of business within the jurisdiction. Much
jurisprudence evolved around the concept of establishing a place of business;
the degree of permanence in the link was important.25 The waters here were
muddied26 by the transposition of the 11th EC Company Law Harmonisation
Directive (1989/666) into English law. This Directive used as its critical
element the concept of a ‘branch’, an idea well understood by continental
lawyers but new to their English counterparts. In Etablissement Somafer SA v
Saar-Ferngas AG (C33/78),27 a case dealing with jurisdiction under the
Brussels Convention, a ‘branch’ was defined as:

A place of business which has the appearance of permanency, such as the extension
of a parent body, has a management and is materially equipped to negotiate busi-
ness with third parties so that the latter, although knowing that there will, if neces-
sary, be a legal link with the parent body, the head office of which is abroad, do not
have to deal directly with such parent body but may transact business at the place
of business constituing the extension.28

23 Cd 3052 – this led to the enactment of s. 35 of CA 1907.

24 Cmnd 1749, para 525. For suggestions of the need for minor reform see D.G.
Rice [1962] JBL 155.
25 Lord Advocate v Huron and Erie Loan & Savings Co [1911] SC 612.
26 For a critique of the legislative method using delegated legislation made under
s. 2 of the European Communities Act 1972, see J. Rickford in J. de Lacy (ed.), The
Reform of UK Company Law (2002) (Cavendish) at 6.
27 [1978] ECR 2183.
28 Ibid at 2193.
98 National corporate law in a globalised market

In the light of this interpretation adopted by the European Court of Justice, in

this particular case a French firm with an office in Germany could in principle
be sued in the latter jurisdiction.
The position prior to the entry into force of the Companies Act 2006 is
extremely complicated and may be summarised thus. Foreign business emanat-
ing from non-EU states would only have to register under Part XXIII if they
established a place of business within the jurisdiction. Companies incorporated
in EU states clearly had to register the establishment of a branch. The real diffi-
culty concerned EU businesses that did not set up a branch, but in some other
way were deemed to be establishing a place of business. There were thus two
separate registration systems for companies which establish branches and places
of business, but the relationship between the two regimes was opaque.
The Company Law Review29 addressed the issue of the two systems for
registering overseas companies/branches and came down firmly in favour of a
single harmonised model, inevitably based upon the branch idea, which, of
course, ensures compliance with our EC obligations. It produced a separate
consultative document on this subject in October 1999. Entitled Reforming the
Law Concerning Overseas Companies,30 it put forward a solution along the
lines that there should be a single system based upon meeting the requirements
of the 11th Directive. Simplification and reducing the need for multiple regis-
tration were also suggested.
Under Part 34 of the Companies Act 2006, the position will be as follows.
A single criterion will be adopted instead of the current dual track system. That
will be based upon the concept of an establishment, which will be wide
enough to encompass a branch presence and establishing a place of business.
Under s. 1044, overseas companies (defined as companies incorporated
outside the UK) will have to comply with an obligation to make disclosures (a
duty imposed by s. 1046) if they meet certain criteria to be specified by
secondary legislation. At the other end of the spectrum, there will be an oblig-
ation under s. 1058 to notify the registrar in the event of an overseas company
ceasing to have a registrable presence by closing an establishment. We are told
by s. 1059 that moving a branch from one jurisdiction in the UK to another is
tantamount to closure, which is equated to ceasing to have a registrable pres-
ence. It is apparent from the aforementioned summary that much will depend
upon the details contained in the as yet unfinalised Draft Overseas Companies
Regulations.31 As things stand at present, these substantial regulations deal
with such matters as registration requirements, trading disclosures, accounts
and charge registration. Apart from embellishing the Act, they also introduce

29 Final Report (URN 01/942) paras 11.21–11.33.

30 URN 99/1146.
31 SI 2009/Draft.
 Reception of overseas companies by the English legal system 99

some amendments to the Companies Act 2006 itself by modifying s. 1067

(which provides for branches of overseas companies to be given a registered
number) to replace the word ‘branch’ with ‘UK establishment’. Once
finalised, these will take effect from 1 October 2009.

4.3 Flouting the Law

Thirdly, the foreign entity may seek to disregard both of the previous options.
What are the consequences of such behaviour? The legal status of the foreign
entity would still be recognised in English law. Moreover, any contracts made
by it would remain enforceable. In Curragh Investments v Cooke,32 which was
mentioned above, contracts made by an Isle of Man company in this country
in circumstances where the company had failed to fulfil its obligations under
Part XXIII were held to be enforceable. The court reasoned that, although
invalidity may be used as a sanction to support a criminal penalty, there has to
be a point of connection between the breach of the technical provision and the
use of a civil avoidance sanction. The court could find no such logical connec-
tion in this particular instance.33

4.4 Redomestication34

A route that is not often chosen is to redomesticate the foreign company under
English law. As far as English law35 (and many other legal systems) are
concerned, this is not an attractive option, as it would involve dissolution in
the home jurisdiction and incorporation in this country.36 Moreover, it is not
possible to simply move a company’s registered office from one EU Member
State to another.37 Needless to say, any transition involving dissolution is
fraught with legal difficulty, threatens goodwill and therefore is not used
widely. A private Act of Parliament, a time-consuming and expensive process,
may be required for such a redomestication.38 It is contrary to company law

32 [1974] 1 WLR 1559. The Jenkins Committee (1962, Cmnd 1749) para 515
would have applauded this ruling.
33 See the comments of Megarry J, ibid at 1564.
34 For an excellent review of this subject, see D. Lewis (1995) 16 Co Law 295.
35 Under the Manx Companies Act 2006, s. 162, foreign companies can simply
adopt the 2006 Act, thereby creating a form of redomestication by continuation.
36 For an insight into some of the issues that can arise, see Re Datadeck Ltd
[1998] BCC 694 (redomestication of an English company to Delaware).
37 Daily Mail (C81/87) [1988] ECR 5483. For comment, see C. Schmitthoff
[1988] JBL 454.
38 Note The Henry Johnson, Son & Co Ltd Act 1996. See D Lewis (op. cit. note
34) at 297 for comment.
100 National corporate law in a globalised market

orthodoxy simply to register a company as being incorporated in more than

one jurisdiction.39 A number of other offshore jurisdictions have, however,
developed procedures to facilitate this40 and at one stage it looked as if English
law might be moving in that same direction. So, for example, in the Final
Report of the Company Law Review41 (Chapter 14), it was recommended that
solvent companies should be allowed to move to scheduled jurisdictions with-
out a break in their corporate identity. Alas, the Companies Act 2006 is silent
on this matter. We return to this issue in Chapter 9.

5 APPLICABILITY OF GENERAL PROVISIONS IN THE

COMPANIES ACTS
The starting point here is that the Companies Act 1985 (and the Companies
Act 2006) do not generally apply to overseas companies.42 This is the result of
section 735 of the 1985 Act, which establishes a presumption of non-
applicability. A similar presumption is established by s. 1 of the Companies
Act 2006, which also in subsection (3) flags up the discrete regime for over-
seas companies set forth in Part 34. Let us examine a few illustrations of that
presumption at work. Unfortunately, in many situations, the legislation is
opaque and the courts have been left to resolve the matter.
So, for instance, in Rover International v Cannon Film Sales,43 the ques-
tion was whether the presumption of a promoter’s personal liability in respect
of preincorporation contracts (as created by s. 36C of the Companies Act
1985) applied where the company in question was to be incorporated in a
foreign jurisdiction. Applying the basic presumption of non-applicability
embodied in s. 735, Harman J held that s. 36C (which is now restated by s. 51
of CA 2006) did not encompass this factual situation. Parliament had not
intended to legislate for such a scenario. This was an odd conclusion, as the
provision was meant to protect the party contracting with the promoter and
therefore the national status of the prospective company should be immaterial.

39 Bateman v Service (1881) 6 App Cas 386. See P. Smart [1990] JBL 126.
40 See Isle of Man Companies Act 2006, ss. 162 and 167, which allow both
foreign companies and local companies to redomesticate provided they are solvent.
These provisions appear to date back to 2003 – see (2004) 25 Co Law 114. Note also
the Companies (Redomiciliation) Regulations 1996 in Gibraltar.
41 URN 01/942 especially at paras 14.3 et seq.
42 Under s. 442 of the Insolvency Act 1986, an order in council can extend the
Act to companies from the Channel Islands.
43 [1987] 3 BCC 369 – decision was reversed by Court of Appeal ([1988] BCLC
710), but on grounds unrelated to the preincorporation point.
 Reception of overseas companies by the English legal system 101

The inconvenience of this decision was quickly recognised and the case was
neutralised by the Foreign Companies (Execution of Documents) Regulations
1994.44 These regulations in turn will be superseded by Part 2 of the Draft
Overseas Companies (Company Contracts and Registration of Charges)
Regulations 2009).
In Re Dallhold Estates Pty Ltd, 45 Chadwick J sitting in the High Court was
required to decide whether a company incorporated in Western Australia could
enter into administration under English law. Possibly relying on comments of
Hirst J in the case of Felixstowe Dock and Rwy Co v US Lines Inc,46 the court
proceeded on the basis that the provision in s. 8 of the Insolvency Act 1986 did
not apply to foreign companies. Having drawn this inference, the court rescued
the position by invoking the judicial comity facility embodied in s. 426 of the
Insolvency Act 1986 to produce the desired effect (see Chapter 6 below).
A variant on this interpretative conundrum surfaced in Arab Bank v
Mercantile Holdings.47 Here Millett J was invited to decide whether the word
subsidiary when used in the Companies Act 1985, s. 151 (which prohibits
subsidiaries giving financial assistance to the acquisition of shares in their
parent) was restricted to domestic subsidiaries or whether it encompassed
foreign subsidiary companies. According to Millett J, the former construction
was to be preferred, with the consequence that a foreign subsidiary could
financially assist the acquisition of shares in the parent.48 This, of course,
assumed that such behaviour was not illegal under the law of the place of
incorporation. Furthermore, as Millett J was at pains to stress, the setting up of
a foreign subsidiary simply to evade the restrictions imposed by s. 151 would
not be tolerated by the English courts. This approach towards the interpreta-
tion of the financial assistance bar has recently been followed by Evans-
Lombe J in AMG Global Nominees (Private) Ltd v SMM Holdings Ltd.49
In Re International Bulk Commodities,50 the interpretative question
involved s. 29 of the Insolvency Act 1986. Did this permit a foreign company
to be placed into administrative receivership under English law? This question
was answered in the affirmative.
The availability to a foreign company of the corporate reconstruction
procedure mapped out by ss. 425–7 of the Companies Act 1985 (ss. 895–901

44 SI 1994/950.
45 [1992] BCC 394.
46 [1989] QB 360. See I. Fletcher [1993] 6 Ins Intell 10.
47 [1993] BCC 816.
48 This precedent has apparently been confirmed by the Companies Act 2006 –
see para 991 in the Explanatory Notes to the Act.
49 [2008] 1 BCLC 447. Confirmed on appeal sub nomine AMG Global
Nominees (Private) Ltd v Africa Resources Ltd [2008] EWCA Civ 1262.
50 [1992] 3 WLR 238.
102 National corporate law in a globalised market

of CA 2006) was the issue at stake in Re Drax Holdings Ltd.51 The court
(Lawrence Collins J) found no difficulty in holding that a scheme of arrange-
ment was available. Here the company had been incorporated in the Cayman
Islands, but was running a power station in this country: clear evidence of a
sufficient jurisdictional link. A similar conclusion was arrived at in Re The
Home Insurance Co,52 where a company incorporated in New Hampshire was
permitted by Mann J to exploit the scheme of arrangement procedure. To
permit this to happen did not infringe the concept of comity. In Re La Mutuelle
de Mans Assurance,53 Pumfrey J followed this line of authority and held that,
as the French insurer was not covered by the jurisdictional rules in the EC
Regulation on Insolvency Proceedings (1346/2000), it could in theory be
wound up under English law and, therefore, in fact was eligible for recon-
struction under ss. 425–7. This point at least therefore appears to be well
settled.
Issues of the applicability of English law to foreign companies have
cropped up with regard to the operation of director disqualification orders
handed down by the English courts. In Official Receiver v Stern (No. 2),54 the
Court of Appeal held the English courts, in spite of the uncertainty as to the
position, did indeed have the power to extend any disqualification of a direc-
tor to his/her actions in respect of a foreign company operating here. Lloyd J
explained:55

Nor do I accept that the public, with whose protection the court is concerned, is only
the public in the UK, or for that matter, in England and Wales. The effect of a
disqualification order is defined by the Act so as to extend to foreign companies and
therefore it is clear that an effective order from which no relevant exception is made
will have, or is capable of having, a protective effect in relation to some foreign
classes of actual or potential creditors.

Like all presumptions, there is the possibility of rebuttal. Explicit provisions

in the Companies Act may encompass foreign companies. The clearest exam-
ple here is afforded by Part XXIII of the 1985 Act, which provides a detailed
set of rules regulating companies which establish a place of business or branch
in Great Britain. Under the 2006 Act, this regime is to be found in Part 34. This
matter has been considered above in this chapter. Overseas companies may be

51[2004] 1 BCLC 10. See also Re DAP Holdings [2006] BCC 22 and Re
Sovereign Marine and General Insurance Co Ltd [2006] EWHC 1335 (Ch), [2006]
BCC 774.
52 [2005] EWHC 2485 (Ch), [2006] BCC 164.
53 [2005] EWHC 1599 (Ch), [2006] BCC 11.
54 [2001] BCC 305.
55 Ibid at 358.
 Reception of overseas companies by the English legal system 103

the subject of DTI investigation (see CA 1985, s. 453, as substituted by CA

1989, s. 70), though the powers of the state are more limited than those avail-
able when investigating domestic companies. The explicit jurisdiction to wind
up overseas companies (found in the Insolvency Act 1986, s. 221) may also be
noted here. This particular jurisdiction will be considered fully in Chapter 8.
The Enterprise Act 2002 also contains measures applying English law to
foreign companies.56 These instances are relatively clear; what is more of a
problem is where it is suggested that implied inclusion of foreign companies
has taken place. It is clear from the review of cases above that this remains a
vexed issue.
A distinct jurisdiction which indirectly justifies the winding up of foreign
companies in the public interest57 deserves mention here. The point to note is
that it can be exercised in respect of solvent companies incorporated abroad,
but only if a sufficient link with the English jurisdiction can be established. As
Peter Gibson J in Re Titan International Inc,58 explained:

To arrogate to the English court jurisdiction to wind up a foreign company merely

because of its association as an investment vehicle outside the jurisdiction with
another foreign company that has been active within the jurisdiction would be in my
view to make a giant, impermissible and unjustified extension of the jurisdiction of
the English court.59

It should be apparent to all that the position is unsatisfactory. What is

needed is a clear legislative steer on this increasingly important issue. A short
statute would prove useful; it would also serve to excise peripheral provisions
from our present Companies Acts which have no relevance to domestic
companies. Such a slimming-down exercise for the Companies Acts would be
seen as welcome in many quarters.
Unfortunately, the Companies Act 2006 does not change the position for
the better. We are wedded to the approach of a random scattering of provisions
made applicable to overseas companies – for example, s. 1120, which applies
Part 35 of the 2006 Act to overseas companies. An opportunity to enhance the
law has therefore been lost. The courts can consequently look forward to
further litigation on this vexed matter of statutory construction.

56 Enterprise Act 2002, s. 254.

57 See Re Titan International Inc [1998] 1 BCLC 102 (winding-up refused on
the facts), Re Normandy Marketing [1993] BCC 879.
58 [1998] 1 BCLC 102.
59 [1998] 1 BCLC 102 at 108–9.
104 National corporate law in a globalised market

6 FOREIGN COMPANIES AND LISTING RULES

Many securities issued by foreign companies are listed on the London Stock
Exchange, as they are keen to raise capital through the opportunities offered
by the London market. Cross-listing or secondary listing is not discouraged.
However, a light touch60 is often offered to such companies, possibly as a
result of a desire to get such issuers participating in the London market and
thereby boosting its status as a world capital markets hub. Compare this with
the position in the USA under the Sarbanes-Oxley Act 2001, where the full
gamut of disclosure and governance requirements is applied to foreign
issuers.61 This has not improved the attractiveness of the New York Stock
Exchange and has provoked some soul-searching in the US. Where a primary
listing is sought in the UK, the foreign issuer is generally subject to the same
rules as a domestic company.

7 FOREIGN COMPANIES IN LITIGATION

7.1 Foreign Company as Claimant

At the beginning of this chapter, we noted the desire of the English legal
system to attract foreign parties to litigate in this country. However, there is a
catch – where an overseas non-resident party wishes to commence litigation in
the English courts, it runs the risk of being required to pay a deposit in the
form of security for costs.62 This risk existed for all limited liability compa-
nies, no matter where resident, as section 726 of the Companies Act 1985
made clear. Under s. 726 (now conflated within CPR, r. 25.13),63 any corpo-
rate claimant that appears to be unlikely to meet an adverse costs award can
be required to provide security for costs. However, the risk is exacerbated for
non-residents, because under Civil Procedure Rule 25.13, the court may
require such security to be furnished irrespective of the financial standing of
the company in question. Under Rule 25.13, security may be ordered in the
case of a company not resident in a Brussels/Lugano Convention territory,

60 See I. MacNeil and A. Lau (2001) 50 ICLQ 787 for a lucid analysis.
61 For discussion of the position of foreign issuers in the US, see M.J. Lunt
[2006] JBL 249.
62 See D. Milman in B. Rider (ed.), The Realm of Company Law (Kluwer)
(1998) 167–81. For an up to-date review of the subject, see J. Ching (2009) 28 CJQ 89.
A defendant who is raising substantial counterclaims may be treated as a claimant for
these purposes – Thistle Hotels Ltd v Orb Estates plc [2004] 2 BCLC 174.
63 See Jirehouse Capital v Beller [2008] EWCA Civ 908, [2008] BPIR 1498 for
analysis of CPR 25.13.
 Reception of overseas companies by the English legal system 105

even if there are no questions about its ability to meet the costs of the proceed-
ings. How has that jurisdiction been exercised?
In Little Olympian Each-Ways Ltd (No. 2),64 the position was that a Jersey
company was treated as ordinarily resident overseas with the result that it
became susceptible to a security for costs order. It is difficult to see how
Lindsay J could have come to any other conclusion on the particular facts of
this case.
Attitudes in this area are changing. Within the EU, it is not possible by
virtue of Art 12 EEC to impose national65 discriminatory requirements and
indirectly this would cover discrimination based upon residence. Moreover,
Art 14 of the European Convention on Human Rights, with its prohibition
on discrimination, should also be noted in this context. In Texuna
International Ltd v Cain Energy plc,66 the court indicated that to order secu-
rity for costs simply because the claimant was non-resident might well
infringe the fundamental expectations embodied in Art 14. On the facts of
this case, Gross J ordered security for costs to be paid; the company was
incorporated in Hong Kong and although its directors were resident here, the
evidence suggested that it had not paid tax in this country and so must be
deemed to be non-resident. The additional expense in enforcing a costs order
abroad was a relevant consideration when considering an order for security
for costs.
At the end of the day, all factors need to be evaluated by the court before
making an order for security for costs in such circumstances. Non-residence is
a factor, but is no longer a major consideration in its own right.67 The making
of security for costs orders against foreign or non-resident companies as a
knee-jerk response looks to be a thing of the past.68 Companies litigation is
thus evolving in this respect in reflection of a changing world.

7.2 Service of Proceedings on Foreign Companies

Where a party wishes to commence proceedings against a foreign company in

English law, a range of preconditions must be satisfied. Firstly, there is the
jurisdictional issue – is the foreign company amenable to the jurisdiction of

64 [1995] 1 WLR 560.

65 Data Delecta v MSL Dynamics (C43/95) [1996] ECR I-4661.
66 [2005] 1 BCLC 579.
67 Thistle Hotels v Orb Estates plc [2004] 2 BCLC 174.
68 See the discussion in Nasser v United Bank of Kuwait [2001] EWCA Civ 556,
[2002] 1 WLR 1868. Noted in (2002) 51 ICLQ 463 at 469 by P. McEleavy and W.
Kennett. Although this case does not involve a corporate claimant, the observations
made by Mance LJ are most instructive.
106 National corporate law in a globalised market

the English courts? This to a large extent depends upon principles of private
international law.69
Even if the jurisdictional hurdle is overcome, there is the question of
service of proceedings. Under current rules, if the intended defendant has
established a place of business for the purposes of the Companies Act, then
proceedings can be served at that location.70 What constitutes ‘establishing a
place of business’ has occupied much judicial effort. There is clearly some
requirement for a substantial link,71 but it does not have to be a company’s
main place of business. The occupation of premises for business purposes
would suffice,72 but this is not an absolute prerequisite. Merely having an
agent (as opposed to having employees) located in the jurisdiction would not
be viewed as sufficient.73 Equally, if there is a branch, that can be an appro-
priate venue for service.74 In Saab v Saudi American Bank,75 the Court of
Appeal held that if there was a place of business suitable for service within the
terms of s. 694A of the Companies Act 1985, the fact that the litigation did not
exclusively relate to matters carried on at that branch was immaterial.
The above rules have their flaws. So, in Rome v Punjab Bank (No. 2),76 a
company established a place of business and gave an address for service. It
then ceased to have an established place of business, but the court held that
proceedings could still be served against it at the nominated address.
These dedicated company law solutions must now be viewed alongside the
Civil Procedure Rules, which complicate matters further. Under CPR,
r. 6.5(6), proceedings can be served at a place of business. The difference
between this more relaxed test and the stricter criterion applied by s. 695 of the
Companies Act 1985 was noted by the Court of Appeal in Lakah Group v al-
Jazeera Satellite Channel.77
Under s. 1139(2) of the Companies Act 2006, a general provision which
applies to overseas companies, the position will be that valid service is

69 On amenability of the jurisdiction of the English courts, see P. Rogerson

[2000] 3 CFILR 272.
70 CA 1985, s. 695 (established place of business) or s. 694A (branch).
71 South India Shipping Corp v Export-Import Bank of Korea [1985] 2 All ER
219. See L.S. Sealy (1985) 6 Co Law 231.
72 Cleveland Museum of Art v Capricorn Art International SA (1989) 5 BCC
860.
73 Rakusens Ltd v Baser Ambalaj Plastik Sanayi Tiscaret AS [2002] 1 BCLC
104. See also Matchmet plc v Wm Blair & Co LLC [2003] 2 BCLC 195, where Ferris
J concluded that a Delaware company had no established place of business nor indeed
any link to the jurisdiction.
74 CA 1985, s. 694A.
75 [2000] BCC 466.
76 [1989] 1 WLR 1211. For a critique, see A. Lidbetter [1990] JBL 137.
77 [2003] EWCA Civ 1781.
 Reception of overseas companies by the English legal system 107

effected by leaving the documentation at either the address of the nominated

person or at any place of business which the overseas company maintains. The
problem of companies ceasing to be present in the jurisdiction is addressed by
s. 1058 which, as we have seen earlier in this chapter, provides that the depart-
ing company must notify the registrar.
Essentially, once again we see in these cases the characteristic desire of the
English courts to capture litigation, notwithstanding its clear foreign compo-
nent.

8 OBLIGATIONS TO REGISTER COMPANY CHARGES:

PROBLEMS WITH OVERSEAS ASPECTS
One area where real difficulties have arisen is in the area of company charge
registration. This should not have been a problem, because a discrete statutory
provision has been on the books for many years, having first been introduced
via s. 43 of the Companies Act 1928 in response to the recommendations
of the Greene Committee.78 The established provision was s. 409 of the
Companies Act 1985. For historical reasons, it is worth replicating here:

(1) This Chapter extends to charges on property in England and Wales which are
created, and to charges on property in England and Wales which is acquired, by a
company (whether a company within the meaning of this Act or not) incorporated
outside Great Britain which has an established place of business in England and
Wales.
(2) In relation to such a company, sections 406 and 407 apply with the substitution,
for the reference to the company’s registered office, of a reference to its principal
place of business in England and Wales.

Unfortunately, that provision, which sought to render Chapter 1 of Part 12

in CA 1985 on registration of charges in England and Wales applicable to an
overseas company context, created a host of interpretative problems. In order
to grasp the potential impact of this provision, two points need to be borne in
mind. Firstly, companies that create charges can, and frequently do, move their
place of business between jurisdictions. Secondly, the charged assets them-
selves may be mobile; security over ships, aircraft and even vehicles springs
to mind. In order to guarantee the effectiveness of a charge in English law, the
requirements in the Companies Act on charge registration must be complied
with.

78 1926, Cmd 2657.

108 National corporate law in a globalised market

The first inkling of the problems to come was encountered in NV

Slavenburg Bank v Intercontinental Natural Resources.79 The issue here was
quite simple; did the obligation to register details of charges apply only to
those overseas companies registered under Part XXIII or was it a general
requirement for all foreign companies where charged assets may find their
way into the jurisdiction? Lloyd J favoured the latter expansive interpretation,
notwithstanding the fact that for some time the Companies Registry had been
refusing to register details of charges submitted by foreign companies that had
not complied with Part XXIII. The outcome of this fiasco was the bureaucratic
response of setting up the so-called ‘Slavenburg’ register,80 designed to
capture details of charges that had been submitted to, but then rejected by, the
Companies Registry. The Companies Act 1989, Part IV contained provisions
(s. 105 and Sched 15) which would have had the effect of reversing this incon-
venient ruling, that reversal having been recommended by the Diamond
Committee,81 but those provisions, along with the entirety of Part IV, were
never implemented and finally given a decent burial by the Companies Act
2006 (s. 1180).
A different issue arose in Re Oriel Ltd.82 Here the question was whether the
obligation to register would arise where a foreign company (originally outside
Part XXIII) subsequently established a place of business some time after the
creation of the charge. The Court of Appeal answered this question in the
negative – the critical issue was whether there was an established place of
business in England when the charge was created. The court concluded that for
some of the charges this criterion had been met, but not in other cases. The fact
that a director was personally resident in England did not mean that the
company had established a place of business here.83
The Company Law Review investigated the problems arising in this area of
law and corporate practice. In a consultative document in October 2000 enti-

79 [1980] 1 WLR 1076 – see A. Boyle (1980) 1 Co Law 214, D. Milman (1981)
125 SJ 294.
80 For details of the Slavenburg register, see Companies House website at
www.companieshouse.gov.uk. Note also Arthur D Little Ltd v Ableco Finance LLC
[2002] 2 BCLC 799 – noted by I. Fletcher [2004] 17 Ins Intell 61.
81 A Review of Security Interests in Property (1989). For discussion of the report
of the Diamond Committee, see M. Lawson [1989] JBL 287.
82 [1986] 1 WLR 180. See also Re Alton Corporation [1985] BCLC 27.
83 This distinction, which has been made in other cases such as Stojevic v
Komercni Banka AS [2007] BPIR 141, reflects the orthodox legal distinction between
the identity of the company and that of its controller. Where a director is present in a
jurisdiction to attend to a company’s affairs, this does not mean that the centre of main
interests is also located there.
 Reception of overseas companies by the English legal system 109

tled ‘The Registration of Company Charges’, it called for a simplification of

the law along the lines of a more logical approach.84
The position has, of course, moved on with the enactment of the Companies
Act 2006. As far as s. 409 of the 1985 Act is concerned, it is not restated in the
2006 Act. The position seems to be that the Secretary of State is empowered
by s. 1052 to make secondary rules in this context. One can only hope that
these new rules will be clearer than their predecessors.
Under Part 3 of the Draft Overseas Companies (Company Contracts and
Registration of Charges) Regulations 2009,85 published in 2008, the obliga-
tion to register will only apply to those overseas companies that have been
registered as having an establishment and which then create a charge. We have
thus reverted to the position pre-Slavenburg86 – registration will only be
required if the chargor company is registered as an overseas company. The
Slavenburg register will become redundant.
In the long term, there is the possibility of fundamental reform of the charge
registration system coming from proposals of the Law Commission,87 though
the timescale for implementation here is unclear.

84 See paras 3.63–3.68.

85 SI 2009/Draft.
86 Above note 71.
87 Company Security Interests, Law Commission Report No. 296 (Cm 6654)
(2005) – see G. McCormack (2005) 18 Sweet & Maxwell’s Company Law Newsletter
1. For an insider’s account of the thinking behind the Law Commission’s strategy here,
see H. Beale, chapter 3 in J. Lowry and L. Mistellis (eds), Commercial Law:
Perspectives and Practice (2006) (Butterworths).
6. Cooperation with foreign courts and
overseas regulators

1 EXTRATERRITORIALITY
It is somewhat ironic, bearing in mind the constructive theme of this chapter, but
we must first address the concept of the aggressive extraterritorial application of
national law. In a globalised economy, domestic courts will increasingly be
called upon to deal with parties or assets located in foreign jurisdictions. A range
of strategies has emerged to combat this problem. One controversial methodol-
ogy is to apply directly English law beyond the shores of this jurisdiction – that
is, in an ‘extraterritorial’ fashion. This is a vexed issue in international law gener-
ally.1 The legal device of extraterritoriality is used extensively by the US courts,
but only where sanctioned by Act of Congress.2 A few examples will show the
potential for usage of this strategy in English law.
The general principle is that provisions in the Companies Acts do not apply
extraterritorially.3 This reflects the general stance of English law.4 So, for

1 For general discussion of the problems associated with extraterritoriality, see

A.V. Lowe [1988] RabelsZ 163 and S. Dutson (1997) 60 MLR 668.
2 The RICO (Racketeer-Influenced and Corrupt Organisations) Act is perhaps
the most celebrated example of an Act of Congress that is used extraterritorially. On the
extraterritorial effect of the Sarbanes-Oxley Act 2001, see J. Friedland (2004) 25 Co
Law 162. The US courts will not, however, adopt an extraterritorial stance where the
legislature has not given a lead – see Maxwell Communications Corp v Société
Générale [2000] BPIR 764.
3 Ex parte Blain (1879) 12 Ch D 522, Re Vocalion (Foreign) Ltd [1932] Ch 196
(which dealt with the statutory predecessor of s. 130(2) of the Insolvency Act 1986).
See K. Dawson [2000] Ins Law 81. In Mazur Media Ltd v Mazur Media GmbH [2004]
1 WLR 2966, Lawrence Collins LJ held that the bar on proceedings imposed by s.
130(2) of the Insolvency Act 1986 could not be applied extraterritorially to stop over-
seas legal proceedings against a foreign company being wound up here. On the other
hand, in Holis Metal Industries v GMB [2008] IRLR 187, the Employment Appeal
Tribunal (HHJ Ansell sitting alone) has apparently held that the TUPE regulations deal-
ing with protection of employee rights on a business transfer can apply where the busi-
ness is transferred overseas – for a note on this case see (2008) 118 NLJ 42.
4 See Clarke v Oceanic Contractors Inc [1983] 2 AC 130 at 145 per Lord
Scarman and Serco Ltd v Lawson [2006] UKHL 3.

110
 Cooperation with foreign courts and overseas regulators 111

instance, in Mitchell v Carter,5 the Court of Appeal refused to accept an argu-

ment that the restrictions upon executions imposed by s. 183 of the Insolvency
Act 1986 could operate in an extraterritorial fashion by frustrating garnishee
proceedings in Florida.
But that aforementioned starting principle admits of exceptions. So, there-
fore, in Re Paramount Airways Ltd (No. 2),6 the administrators of an insolvent
airline sought to exercise their statutory power to recover assets now located
out of the jurisdiction (in Jersey), where those assets had allegedly been
disposed of by the company at an undervalue. The court held that this partic-
ular statutory transactional avoidance provision, namely Insolvency Act 1986,
s. 238, was capable of having such an extended compass. To hold otherwise
would be to severely inhibit its utility by opening up safe havens for exploita-
tion by asset strippers. As Jersey was a friendly jurisdiction, leave was given
to serve the proceedings in that legal jurisdiction.7 This case was followed in
Re Unigreg Ltd, 8 where HHJ Weeks indicated that, in principle, where a direc-
tor of a company had removed assets of the company by placing them in the
hands of a foreign party, then an order could be made for recovery under s. 238
of the Insolvency Act 1986 against that foreign party, notwithstanding the fact
that the foreign party in question was outwith the jurisdiction. The case of
Jyske Bank (Gibraltar) v Spjeldnaes (No. 2)9 provides yet another example of
a statutory transactional avoidance power being accorded extraterritorial
effect. The provision in question here was s. 423 of the Insolvency Act 1986,
which allows the court to avoid transactions entered into by insolvents with a
view to defeating creditors. Evans-Lombe J made such an avoidance order,
even though it affected property located in Ireland. Critically, all of the parties
were before the court and none of these had raised jurisdictional concerns. The
order would operate in personam so far as parties before the English courts
were concerned, but it would need the leave of the Irish courts in order to be
effective in that jurisdiction.
Perhaps the most significant discussion of this issue is found in Re Mid East
Trading Ltd.10 Amongst the several issues to be determined here was whether

5 [1997] BCC 907. Having so decided, the court affirmed its inherent jurisdic-
tion to prevent creditors from retaining the benefits of a foreign execution by granting
what was in effect an anti-suit injunction, though such a power was to be exercised
sparingly.
6 [1992] 3 WLR 690.
7 Compare BNC v Cosmos Trading Corp [2000] BCC 90 – refusal to make an
s. 238 order because of the protective effect of state immunity.
8 [2005] BPIR 220.
9 [1999] 2 BCLC 101 – for comment, see K. Dawson in [2000] Ins Law 81 and
(2000) 21 Co Law 132.
10 [1998] BCC 726.
112 National corporate law in a globalised market

the English courts, in exercising their jurisdiction to wind up an overseas

company, could make an order under s. 236 of the Insolvency Act 1986 direct-
ing the delivery up of documents held in a foreign jurisdiction. Chadwick LJ,
reading the composite judgment of the Court of Appeal, had no doubts:

In our view there is force in the submission that, in so far as the making of an order
under s. 236 of the Insolvency Act 1986 in respect of documents which are abroad
does involve an assertion of sovereignty, then that is an assertion which the legisla-
ture must be taken to have intended the courts to make in an appropriate case.11

Having made that point, it was conceded that at the end of the day, the court
must conduct a balancing exercise and will take account of the fact that
compliance with the s. 236 order may expose a party abroad to criminal liabil-
ity for breach of confidentiality in that foreign jurisdiction.
The use of extraterritoriality inevitably involves service of process out of
the jurisdiction. The general rules are now found in Civil Procedure Rules (SI
1998/3132 as amended) (in particular CPR 6.21).12 For insolvency cases in
particular, it is Insolvency Rules 1986 (SI 1986/1925) r. 12.12 which deter-
mines the appropriate procedures and requires the leave of the court before
insolvency proceedings can be served out of the jurisdiction.13 There are limits
to the ambit of Insolvency Rule 12.12. For instance, it only covers the service
of ‘proceedings’; not the serving of notice of creditors’ meetings. This point
was emphasised by David Richards J in Re T & N Ltd,14 where it was held that
the leave of the court was not required to give notice of a CVA creditors’ meet-
ing to foreign creditors and this conclusion will do much to reassure practi-
tioners, who increasingly these days are faced with foreign creditors of
English businesses. Any additional procedural burdens would be most unwel-
come because of their attendant cost implications.

2 JUDICIAL COMITY
Asserting extraterritorial jurisdiction is hardly a diplomatic or constructive
way forward in the modern world. Fortunately, for many years a principle of
judicial comity between courts of different nations has emerged as an alterna-
tive way forward. Comity has many aspects to it. Clearly, there is an element
of reciprocity involved; and therefore comity will only be extended to the

11 Ibid at 754.
12 See Re Krug International (UK) Ltd [2008] EWHC 2256 (Ch), [2008] BPIR
1512.
13 A. Walters, I.G. Williams and H.M. Marsh [2006] (19) Ins Intell 58.
14 [2006] EWHC 842 (Ch).
 Cooperation with foreign courts and overseas regulators 113

courts of those foreign jurisdictions that in turn extend their comity to the UK
courts. The comity approach might result in the recognition of foreign entities,
a process described in Chapter 5. It could more often feature practical cooper-
ation between courts in particular cases. It might lead to a policy of non-inter-
vention in foreign legal processes.15 It could involve the enforcement of
foreign judgments.16
One formal legal instrument used to access judicial comity is the letter of
request.17 This is a procedure whereby a foreign court at the behest of an appli-
cant seeks the assistance of the English courts. In the specific area of insol-
vency law, s. 426 of the Insolvency Act 1986 provides an opportunity for the
English courts to support requests for assistance from foreign courts based in
specified jurisdictions.18 This procedure has its origins in s. 122 of the
Bankruptcy Act 1914.19 The Cork Committee on Insolvency Law and
Practice20 recommended that this facility should be further developed.
Essentially, the procedure under s. 426 involves a party applying to their local
court in order to get that local court to request assistance in an insolvency
matter. The assistance sought must be particularised. There is no direct right
of application to the English courts; the existence of this local judicial filter is
therefore significant. Another restriction imposed on the jurisdiction is that it
is only available if the request is made from a court in a scheduled territory –
various statutory instruments21 have been made identifying these territories
and they are essentially countries that were at some stage former British
colonies. This makes practical sense, as the insolvency laws of such countries
will often embody familiar basic legal principles. If the application is proce-
durally well founded, the English courts have a range of options at their

15 See Mitchell v Carter [1997] BCC 907 at 913 per Millett LJ. Note New
Hampshire Insurance Co v Rush & Tompkins Group [1998] 2 BCLC 471, where the
English courts refused to wind up a foreign company that was already undergoing
insolvency proceedings in the Netherlands. The creditors would be adequately
protected under Dutch law.
16 Under the Foreign Judgments (Reciprocal Enforcement) Act 1933 – for the
relevance of this legislation in determining forum, see Konamaneni v Rolls Royce
Industrial Power (India) Ltd [2002] 1 BCLC 336 at 370 [para 131].
17 On the limitations of letters of request (or letters rogatory), see Re
International Power Industries NV [1985] BCLC 128.
18 The jurisdictions are specified by statutory instrument (see SI 1986/2123, SI
1996/253, SI 1998/2766) – essentially they are a selection of common law jurisdictions
– see L.S. Sealy and D. Milman, Annotated Guide to Insolvency Legislation (11th
edition, 2008) (Sweet & Maxwell) at 476 for the full list of jurisdictions falling within
the ambit of s. 426.
19 For discussion, see Al Sabah v Grupo Torras [2005] BPIR 544.
20 Cmnd 8558, Chapter 49.
21 See SI 1986/2123, SI 1996/253, SI 1998/2766.
114 National corporate law in a globalised market

disposal, which include applying English insolvency law (whether based in

statute or common law) to the scenario.
A substantial body of case law on s. 426 has emerged over the past 20 years
and that in turn has generated a considerable amount of published scholar-
ship.22 The leading case for many years was Hughes v Hannover-
Rucksversicherungs AG,23 where the Court of Appeal was at pains to stress
that the English courts enjoy a discretion whether or not to offer assistance to
the foreign requesting court. Assistance was refused in this instance because
of a change in circumstances between the date of the issue of the letter of
request and the final hearing in the English courts. This point was reinforced
a decade later by the Court of Appeal in Re HIH Casualty and General
Insurance Co,24 where again assistance in the form of a request that English
provisional liquidators hand over funds to Australian liquidators was refused.
The reason for this apparent lack of comity on the part of the Court of Appeal
lay in a curiosity in Australian law, whereby the pari passu rule of distribution
was displaced for winding up of insurance companies, so as to enable policy-
holders protective rights. The members of the English Court of Appeal felt that
this could have a negative effect upon English creditors who were not policy-
holders. This case then progressed on appeal to the House of Lords where their
lordships, sub nomine McGrath v Riddell,25 came to a very different conclu-
sion. The judgment, which is a milestone in the law, is not easy to decipher
because of a significant difference of opinion between Lords Hoffmann and
Scott as to the relationship between the statutory power of the court to assist
under s. 426 and the inherent jurisdiction of the court.26 Nevertheless, the
outcome is very much in favour of extending comity wherever possible.
Notwithstanding these cautionary tales, the utility of s. 426 was revealed in
the early case of Re Dallhold Pty Ltd.27 Here a company, which had been
incorporated in Western Australia but which owned assets located in England,
needed protection from its creditors. As English law stood then, it was not
possible for a foreign company to exploit the administration order regime

22 See P. Smart (1996) 112 LQR 397, (1998) 114 LQR 46, I. Fletcher [1997] JBL
471, P. Omar [2003] Ins Law 74, W. Trower [2004] 17 Ins Intell 136.
23 [1997] BCC 921.
24 [2006] EWCA Civ 732. See also Re Focus Insurance Co Ltd [1996] BCC 659
for a similar refusal of comity.
25 [2008] UKHL 21, [2008] BCC 349.
26 See G. Moss [2008] 22 Ins Intell 145 and J. Bannister [2008] (232) SMCLN
1.
27 [1992] BCC 394. Compare Re Maxwell Communications Corp (No. 3) [1995]
1 BCLC 501, where Vinelott J refused to let a US attorney conduct an s. 236 interro-
gation. This case did not involve a request for assistance under s. 426 and turned rather
upon the interpretation of s. 236.
 Cooperation with foreign courts and overseas regulators 115

because the relevant statutory provisions did not automatically apply to

foreign companies. To get around this apparent obstacle, an application was
made to the English courts to persuade them to apply the administration order
facility to this situation. This request was successful before Chadwick J.
In England v Smith (Re Southern Equities),28 the assistance sought was
designed to permit an Australian judge to sit in this country to take evidence
from a party who might have useful information about the background to a
corporate collapse. The Court of Appeal, stressing the need for comity,
allowed the request for assistance. The fact that the English courts might not
have permitted such an examination to take place was not decisive; the inter-
viewee could be adequately protected by safeguards found in Australian law
that did not exist in English law. To grant assistance would not be oppressive.
A similar scenario arose in Re Duke Group Ltd,29 where Jonathan Parker J
acceded to a request from the liquidator of a South Australian company to
enable an Australian judge to come to this country to interrogate an official of
the company. These decisions very much indicate a pro-comity trend.
In Re Television Trade Rentals Ltd,30 the s. 426 judicial assistance proce-
dure was used to permit a company incorporated in the Isle of Man to enter
into a company voluntary arrangement in this country. This conclusion was
arrived at because the company effectively operated within this jurisdiction
and the bulk of its creditors were located here.
It is apparent therefore that this comity jurisdiction has been embraced by
the English courts, though not to the extent that they feel obliged to exercise
it in every case where assistance is sought. Balanced decisions turning on the
facts of each individual case have to be reached.
The English courts are not unique in their constructive approach towards
judicial comity. Comparable examples can be found in many a jurisdiction.
Indeed, the practice is so widespread that it is the cases where comity is refused
that attract press attention. Witness the furore over the Bear Stearns case,31
where Judge Burton Lifland in the US Bankruptcy Court (Southern District of
New York) refused to make Chapter 15 US Bankruptcy Code assistance

28 [2000] 2 WLR 1141.

29 [2001] BCC 144.
30 [2002] BCC 807. See also the CVA case involving a BVI company in liqui-
dation which is discussed by M. Rutstein in [1999] 12 Ins Intell 57. For a comparable
case, see Re Business City Express Ltd [1997] BCC 826 where the assistance offered
by Rattee J facilitated an Irish business rescue plan.
31 See J. Marshall [2007] (Winter) Recovery 9 and G. Moss [2007] 21 Ins Intell
157 for comment on this affair. See also S. Moore (2007) 23 IL & P 178 for further
discussion. On Chapter 15 assistance generally, see Re Loy [2008] BPIR 111.
116 National corporate law in a globalised market

available to hedge funds32 based in the Cayman Islands. The decision appears
to turn on a lack of COMI. An appeal in this high profile case was heard by
District Judge Sweet, who upheld the first instance ruling.33

3 PROTOCOLS
Another device that has evolved is the use of a judicial protocol or concordat
between courts. An early example of its usage is found in the aftermath of the
Maxwell Communications Corporation collapse.34 Although welcome, such
concordats smack of ad hoc solutions brought about by the lack of a more
formal framework.
Advances in communications technology have opened up further avenues
for collaboration. For example, video conferencing between courts located in
different jurisdictions is now a real option. The courts will not, however,
always embrace new technology if there are concerns that it will be detrimen-
tal to the administration of justice in English law. In Re T & N Ltd,35 David
Richards J refused to agree to a conference call arrangement with a US court
in the context of resolving the affairs of companies which were undergoing
Chapter 11 bankruptcy proceedings in the US and administration under
English law. A protocol had already been agreed between the courts of the two
jurisdictions, but David Richards J refused to comply with the request for a
conference call because the matters which it was intended to discuss (deter-
mination of quantum of asbestos-related liabilities) were so controversial as to
require careful handling. These contested issues were likely to be addressed in
the English courts. Where a matter was so much in dispute between the parties,
it would not be appropriate for a conference call to make binding rulings on
the issue. The request to use this facility was viewed as premature. In
commenting ex cathedra on this type of scenario, Mr Justice Lightman has
gone on record as stating that telephone conferences with foreign courts are
acceptable provided adequate safeguards are put in place. These safeguards

32 For the problems of regulating hedge funds, see J. Harris (2007) 28 Co Law
277 and H. McVea (2007) 27 Leg Studs 709. See also Chapter 9.
33 See G. Moss [2008] 22 Ins Intell 27 and [2008] 22 Ins Intell 118 for critique
– ‘Bitter Pill is Delivered by Judge Sweet’.
34 For discussion of the Maxwell concordat, see Glidewell LJ in Barclays Bank
v Homan [1992] BCC 757 at 769. See also chapter 5 in J. Flood and E. Skordaki,
Insolvency Practitioners and Big Insolvencies (1995) (ACCA Research Report No.
43). Mark Homan in [2002] 15 Ins Intell 60 at 62 points out the limitations of such
concordats.
35 [2004] EWHC 2878 (Ch), [2005] BCC 982.
 Cooperation with foreign courts and overseas regulators 117

require all parties to participate in the telephone conference and for that
conference to be transcribed.36

4 REGULATORY AUTHORITIES WORKING TOGETHER

Relying on the courts exclusively to enhance cooperation is not a panacea. In
an era where corporations are regulated more and more by national legisla-
tures, it is important that the regulatory authorities operating in different coun-
tries work together for their mutual benefit.
The significance of such constructive cooperation is best exemplified in the
field of insider trading/market abuse. This is a good example to choose
because the development of a bar on such behaviour is a prime illustration of
a global response to what is now generally perceived to be an unacceptable
practice in the securities markets. It is unacceptable because it is seen as
damaging the reputation of particular markets. The market is thus seen as the
victim and the argument that insider dealing is a victimless crime is thereby
rebutted. Although the scope of English law and its criminal prohibition is
territorial,37 there are many indications of a recognition of the need for regu-
lators to work together. The Council of Europe Convention on Insider
Trading38 provides an early manifestation of this spirit of cooperation. On a
global level, the Airlie House Declaration39 of September 1990 shows a will-
ingness on the part of regulators in the US, Japan and UK to work together to
protect their financial markets. More recently, the Insider Dealing Directive
(1989/592) and its successor, the Market Abuse Directive (2006/3), have
provisions promoting cooperation between Member State supervisory bodies.
So, for example, in Art 16 of the Market Abuse Directive, we find a standard
set of cooperation provisions based on the need to cooperate, but paying
respect to national sovereignty.

36 [2005] (19) SMCLN 1. Sir Gavin Lightman’s comments relate to an actual

case where he engaged in a telephone conference with a US Bankruptcy Court judge –
for background, see G. Moss [2003] 16 Ins Intell 47.
37 See Criminal Justice Act 1993, s. 62.
38 See J. Lowry [1990] JBL 460.
39 For this Declaration, which was signed in Virginia, see Hansard, HoC
Debates, 31 October 1990, col 612.
118 National corporate law in a globalised market

Cooperation provisions are also found in the area of DTI investigations.40

Where cross-border criminality is suspected, agreements on extradition may
come to the fore. The Extradition Act 2003, s. 137(2) also facilitates extradi-
tion in such instances. The US and UK have such an extradition agreement,
which was exploited recently in the extradition of the so-called ‘Nat West
Three’.41 The Attorney General has issued Guidelines on the appropriate
approach to extradition where an alleged offence might be tried either in the
UK or in the USA. Needless to say, this is controversial territory, but such
cooperation is surely the only way forward where commercial activities and
business malpractices cross national borders.

5 RECOGNITION OF FOREIGN DISQUALIFICATIONS

We have asserted that the regulatory tool of disqualification of unfit directors
plays an important part in UK company law, by offering protection to the
public against future abuse of limited liability. We have also noted that there
is no bar upon a foreign individual being registered as a director under English
law. Foreign directors of foreign companies that are being wound up here may
be the subject of English disqualification procedures.42 But what of unfit/
undesirable foreign directors who might flit from jurisdiction to jurisdiction,
exploiting the advantages offered by limited liability companies and wreaking
havoc in the process? The law must address this scenario.
New provisions introduced in Part 40 of the Companies Act 2006 (ss.
1182–91) will enable recognition to be given to foreign director disqualifica-

40 Overseas companies operating in Great Britain are subject to DTI investiga-

tion – see CA 1985, s. 453. See CA 1989, ss. 82 et seq. for the cooperation provisions
with regard to assisting overseas regulators. These appear unaffected by CA 2006. See
also FSMA 2000, ss. 47, 169, 195.
41 See R. Burger (2007) 157 NLJ 354. This case, celebrated as the ‘Nat West
Three’ (Bermingham, Darby and Mulgrew), was linked to the ENRON collapse. For
the refusal of the English courts to block the extradition, see R (Bermingham) v
Director of the SFO [2007] 1 WLR 362. Eventually the Nat West Three, having been
extradited to the USA, entered a plea bargain in exchange for a reduced sentence.
Details of 37-month sentences of imprisonment are to be found in the Times, 23
February 2008 at p. 55. For discussion of another case involving the Extradition Act
2003 against a businessman alleged to have been involved in anti-competitive prac-
tices, see A. Stanic (2007) 157 NLJ 396. As it happened, in this particular case the
House of Lords later found good reasons for not allowing extradition without the clar-
ification of certain issues – see Norris v Government of the USA [2008] UKHL 16,
[2008] 2 WLR 673. On extradition in commercial matters generally, see C. Bamford
(2007) 28 Co Law 97.
42 See Re Eurostem Maritime Ltd [1987] PCC 190.
 Cooperation with foreign courts and overseas regulators 119

tion and similar restriction orders (such as those used in Ireland). Such orders
will prevent individuals who are subject to foreign disqualification from
accepting directorships in companies in this country. Severe consequences will
flow from a breach of such foreign disqualification orders. These adverse
consequences might involve the commission of a criminal offence (s. 1186) or
a director being made personally liable for business debts, as is made clear by
s. 1187 of the 2006 Act. Mandatory disclosure of any foreign restrictions may
also be imposed (ss. 1188–9) and such information can be made public (s.
1190). The full operational details are Part 40 are not fully spelled out in the
Act; secondary legislation, which is not yet available, will be critical, as s.
1185 makes clear. What we do know is that this type of mechanism is in oper-
ation in other jurisdictions (for example in Ireland43).

43 For discussion of of s. 42 of the Company Law Enforcement Act 2001, see A.

O’Neill (2007) 18 ICCLR 166.
7. Corporate law and conflict of laws

We have already encountered a number of instances where corporate law

comes into contact with the rules of private international law, a scenario
commonly called ‘conflicts of laws’. We now need to examine the relevant
issues more closely.

1 ESSENTIAL PROPOSITIONS
Certain fundamental building blocks should first be established. So, for
instance, it is well settled that a parent company is not to be treated as present
in a jurisdiction merely because of the presence of a subsidiary.1 This princi-
ple is of great significance when considering the prevalence of multinationals
with subsidiaries scattered across the globe. Companies interacting with each
other may identify a legal jurisdiction by which their relationship is to be
determined; but such a choice of law provision cannot exclude a jurisdiction
from determining rights under its own system of property law.2 The lex situs
is the dominant determinant here.

2 PLACE OF INCORPORATION V REAL SEAT

One fundamental problem encountered in this field is that there are two radi-
cally different traditions at work in the treatment of corporations in private
international law.3 Under the place of incorporation theory (which is favoured

1 Adams v Cape Industries [1990] 1 Ch 433.

2 Re Weldtech Ltd [1991] BCC 16 – but compare Re Leyland DAF Ltd [1994]
2 BCLC 106. See C.G.J. Morse [1993] JBL 168 for a general discussion of title reten-
tion and private international law. This article provides a helpful analysis of how the
choice of law clause in a title retention arrangement has been analysed in the courts in
Scotland.
3 On this issue in general, see Dicey, Morris and Collins on the Conflict of Laws
(14th edition, 2006) chapter 30, S.G. Rammeloo, Corporations in Private International
Law: A European Perspective (2001) (OUP), J.J. Fawcett (1988) 37 ICLQ 645 and
R.R. Drury [1998] 57 CLJ 165. Amongst the earlier literature worth consulting is the
piece by T.C. Drucker in (1968) 17 ICLQ 28.

120
 Corporate law and conflict of laws 121

by most common law jurisdictions – for example, USA, UK, Canada,

Australia, New Zealand, Japan (post-1945), Denmark, Finland, Ireland, the
Netherlands, Switzerland, Norway and Sweden), the governing law of corpo-
ration is the law of the place of original incorporation/registration. This
approach is simple but provides predictability, an essential quality for the
conduct of modern commerce. The place of incorporation will determine the
domicile of the company, which in turn determines its powers and status.4
Residence of a company is a different matter: here the crucial criterion is the
location of the central management.5 A company may therefore be foreign but
resident in the UK.6 The dichotomy between place of incorporation and resi-
dence is very much the downside of this common law model.
A continental tradition, favoured in major jurisdictions such as France and
Germany, argues that the governing law of a corporation is the law of the place
where its ‘real seat’ of management is based.7 This approach has the merit of real-
ism and avoids the dichotomy noted above, but it does engender some uncertainty
in terms of locating the place of the real seat. Indeed, it can lead to a situation
where a corporation having its real seat in a jurisdiction which is not a place of
incorporation might be treated as a nullity or a non-person for certain purposes.
These traditions in private international law predate the formation of the
European Union. That latter regime has had a profound effect upon the rela-
tive status of these competing models.8 If the real seat doctrine were to be
transplanted into English law, it could have significant implications for UK
company law. With our corporate law increasingly influenced by Europe, there
may have been concerns that such a development was a distinct possibility.
However, those concerns have been allayed by securing comfort from an
unexpected source. In Centros (Case C212/97),9 two Danish entrepreneurs,
being unable or unwilling to provide the minimum share capital needed to
establish a company in Denmark (a substantial sum), decided instead to incor-
porate a private company in England. There was no intention to trade in
England; the aim was to use the English company to set up a branch in
Denmark, trading with the benefit of limited liability. The Danish authorities
took a dim view of this opportunism and refused to register the branch.

4 First Russian Insurance Co v London and Lancashire Insurance Co Ltd

[1928] Ch 922, Gasque v CIR [1940] 2 KB 80.
5 De Beers Consolidated Mines [1906] AC 455.
6 See Unit Construction Co v Bullock [1960] AC 351.
7 This is the siège réel or sitzholie. For French perspectives here, see H.
Xanthaki (1996) 17 Co Law 28.
8 Though this divergence of perspectives was one of the factors behind the fail-
ure of the European Convention on the Mutual Recognition of Companies 1968 to be
adopted – see B. Goldman (1968–9) 6 CMLRev 104.
9 [2000] Ch 446.
122 National corporate law in a globalised market

Litigation ensued and a reference was made to the European Court of Justice,
seeking clarification as to whether freedom of establishment had been
infringed. The Court of Justice, came down in favour of the interpretation
favoured by the entrepreneurs. Where a company had been validly incorpo-
rated in one Member State, it had a right to establish branches in any other
Member State. There was no evidence of fraud here and the argument put by
the Danish authorities that the minimum share capital requirement offered an
essential safeguard to creditors was treated with considerable scepticism by
the European Court of Justice.
This development has thrown open many opportunities for UK corporate
law. It is estimated that hundreds of EC firms have relocated here by incorpo-
rating under English law. It is estimated that some 20,000 German firms have
used the Centros10 loophole by incorporating as a private company under
English law with the sole intention of trading with limited liability in
Germany. There are plans afoot to reduce the minimum share capital of the
GmbH from 25,000 to 10,000 euros.11 In response to this migration of enter-
prises, France in 2003 reduced its minimum share capital requirement for its
private company (SARL) to one euro! For dyed-in-the-wool share capital
maintenance lawyers this is a race to the bottom with a vengeance!
Centros12 has generated a huge amount of academic controversy.13 Some
continental corporate lawyers14 see it as the beginning of the emergence of a
‘Delaware syndrome’ in the EU. Certainly, it has serious implications for the
real seat tradition, because the tenor of the judgment suggests support for the
place of incorporation model. That interpretation has been challenged,15 but
subsequent rulings from the European Court of Justice indicate that it is a
reasonable analysis. Centros16 has also been followed by the Supreme Court
in Austria in Graz.17

10 Ibid.
11 See C. Jaehne and J. Henning (2007) 28 Co Law 34, J. Schmidt (2007) 18
ICCLR 306. Sweden is moving towards a reduction of its minimum share capital for
private companies, but the new figure will still be comparatively high – see C.
Svernlow and T.L. Dozet (2008) 19 ICCLR 379.
12 Ibid.
13 For articles on Centros, see, for example, T. Tridimas (1999) 48 ICLQ 708, P.
Cabral and P. Cunha (2000) 25 ELR 157, V. Edwards [2000] CFILR 342, E. Micheler
(2000) 21 Co Law 179, W.-H. Roth (2000) 37 CMLRev 147, H. Xanthaki (2001) 22
Co Law 2, J. Lowry [2004] CLJ 331, M. Gelter (2005) 5 JCLS 247, M. Andenas (2006)
27 Co Law 1.
14 On the Delaware syndrome generally, see the discussion in Chapter 1 and the
references cited therein.
15 S. Rammeloo (op. cit. note 3) at 85.
16 [2000] Ch 446.
17 [2001] 1 CMLR 38 – discussed by I. Rappaport in [2000] JBL 628. This case
 Corporate law and conflict of laws 123

As indicated above, the European Court of Justice followed up with the

ruling in Uberseering (Case C208/00).18 Here a Dutch company had its real
seat in Germany. This company wished to pursue proceedings in Germany, but
under the real seat theory it was treated as a nullity. This again was challenged
under EU law by invoking the argument that the right to litigate to protect
one’s rights was an integral aspect of freedom of establishment. The Court of
Justice agreed, thereby dealing a mortal wound to the real seat theory.
Another ECJ case worthy of scrutiny is Inspire Art (C167/01).19 The point
at issue here concerned Dutch share capital curbs on the establishment of
branches by English companies. The ECJ ruled that additional constraints not
envisaged by the 11th Company Law Harmonisation Directive (89/666) were
not permitted.
The latest case in this procession of consistent ECJ rulings is Re SEVIC
Systems AG (Case C411/03).20 Here the European Court of Justice ruled that
a German law that effectively placed barriers in the way of cross-border merg-
ers involving German companies infringed the right of establishment. In para-
graph [19] of its ruling, the Court made an important statement of principle:

Cross-border merger operations, like other company transformation operations,

respond to the needs for co-operation and consolidation between companies estab-
lished in different member states. They constitute particular methods of exercise of
the freedom of establishment, important for the proper functioning of the internal
market, and are therefore amongst those economic activities in respect of which
member states are required to comply with the freedom of establishment laid down
by art 43 EC.21

The Court noted that this prohibition in German law was general in nature and
lacked exceptions. The Court indicated that focused restrictions on cross-
border mergers that were intended to protect shareholder interests or the
integrity of revenue collection might be justified.
The pattern of these three rulings is thus consistent. The conclusion there-
fore that can be drawn from these rulings of the European Court of Justice is
that the place of incorporation model stands firm both in English and EU law.
Having said that, however, the real seat doctrine is not dead for all purposes.

is particularly interesting, in that the Austrian corporate law system applies the real seat
concept.
18 [2005] 1 WLR 315. See T. Bachner [2003] CLJ 47. For comment, see also D.
Robertson (2003) 24 Co Law 184, E. Micheler (2003) 52 ICLQ 521, D. Griffiths and
F. Tschentscher [2004] 17 Ins Intell 57.
19 [2003] ECR I 10155 or 10195. See W.-H. Roth (2003) 52 ICLQ 177, J. Lowry
[2004] CLJ 331.
20 [2006] 2 BCLC 510. See M. Andenas (2006) 27 Co Law 1.
21 Ibid, para [19].
124 National corporate law in a globalised market

Ironically, it is arguable that the ‘centre of main interests’ (or ‘COMI’)

concept, which is used to determine jurisdiction for the purposes of the EC
Regulation on Insolvency Proceedings (1346/2000), is an evolution of that
basic idea.22 Place of incorporation merely creates a presumption of COMI
(see Art 3(1) of the EC Regulation) and, on the evidence of cases coming
before the English courts, that presumption is frequently rebutted. Further
discussion of this issue is to be found in Chapter 8.

3 GOVERNING LAW OF CORPORATIONS

English courts have in recent years been invited to assume jurisdiction in cases
where a foreign law of corporations might appear to be more appropriate. In
such instances, the English courts may have the right to decline jurisdiction by
recourse to the notion of forum non conveniens.23 A few illustrations of this
manifestation may aid the discussion.
An aggrieved shareholder approached the English courts in Re Harrods
(Buenos Aires) Ltd,24 seeking either relief under CA 1985, s. 459 (the unfair
prejudice remedy25) or a winding-up on the just and equitable ground (under
s. 122(1)(g) of the Insolvency Act 1986). This solicitation was not inappro-
priate in this instance, as the company in question was incorporated in this
country. However, the company had always been effectively controlled and
managed in Argentina. Indeed, that was where all of the crucial documents
(which were written in Spanish) were located. Taking an overview, the Court
of Appeal held that Argentina would be the preferable location for the litiga-
tion and accordingly, the English proceedings were stayed on the basis of
forum non conveniens. In so deciding, the court took the opportunity to
examine the Argentinian law of shareholder protection and, having noted the
differences with English protection, concluded that there was an equivalent
level of protection available. There are questions as to whether this authority
can stand today as authority for a general proposition, when set against the
later ruling of the European Court of Justice in Owusu v Jackson (C281/02).26

22 See P. Omar [2002] Ins Law 122 – ‘Cross Border Allocation of Jurisdiction
and the European Insolvency Regulation’.
23 On the doctrine generally, see Spiliada Maritime Corp v Cansulex Ltd [1987]
AC 460. Note D.W Robertson (1987) 103 LQR 398. See also Cleveland Museum of Art
v Capricorn Art International (1989) 5 BCC 860.
24 [1991] BCC 249. For comment, see A.J. Boyle [2000] 11 EBLR 130.
25 Now CA 2006, s. 994.
26 [2005] QB 801 at paras [37]–[46] – for analysis, see C. Hare [2006] JBL 157
and A. Briggs (2005) 121 LQR 535. The background issues are admirably reviewed by
W. Kennett [1995] CLJ 552.
 Corporate law and conflict of laws 125

Although this case is not a ruling specifically on company law, it suggests

that to deny a party access to the legal system of a Member State by invok-
ing forum non conveniens where that party (as opposed to the defendant) was
domiciled in the jurisdiction was to be seen as unacceptable.
The case of Lubbe v Cape (No. 2)27 represents a significant milestone in
the evolving picture. The case is interesting in that it ostensibly says little
about corporate law and is more concerned with private international law. Its
implications for corporate lawyers are profound. Here South African miners
and their families wished to sue for wrongful exposure to asbestos. The most
likely defendant was the South African subsidiary company that employed
them. However, they decided to pursue the UK parent. The House of Lords
ruled that the proceedings could be heard in London. In so deciding, they took
into account the availability of litigation support in English law that would
not be available if the proceedings took place in South Africa.
The issue before Lawrence Collins J in Konamaneni v Rolls Royce
Industrial Power (India) Ltd28 was whether a derivative claim brought by
minority shareholders on behalf of an Indian company could be heard in this
country or whether it should be tried in India. The judge noted that the proce-
dural foundation for a derivative claim (CPR, r. 19.929) was not limited to
derivative claims with respect to English companies but adopted the position
that in general shareholder rights should be determined by the place of incor-
poration. Although the exceptional situations where a shareholder could bring
a derivative claim might be characterised as ‘procedural’ (and therefore
governed by the lex fori), it would be wrong to ignore the fact that the basic
rule relating to derivative claims was governed by the law of the place of
incorporation. Here, even taking into account that point, the links with India
were so overwhelming that the case should be tried there on the basis of
forum non conveniens.

27 [2000] 1 WLR 1545. The issue of pursuing MNEs to the courts of their home
jurisdiction is controversial. There have been particular problems in the US, particu-
larly with regard to the Alien Tort Claims Act 1789 and more recently in regard to the
Racketeer Influenced and Corrupt Organisations (‘RICO’) Act 2002 – see S. Joseph,
Corporations and Transnational Human Rights Litigation (2004) (Hart).
28 [2002] 1 BCLC 336 – discussed by A.J. Boyle (2002) 23 Co Law 263. This
decision was followed by Lewison J in Reeves v Sprecher [2007] EWHC 117 (Ch),
[2007] 2 BCLC 614, where the judge held that the place of incorporation was the
proper place for the determination of shareholder disputes. Investors who incorporate
overseas can hardly complain if the English courts adopt this stance.
29 See now CPR, r. 19.9A etc.
126 National corporate law in a globalised market

In my judgment the courts of the place of incorporation will almost invariably be the
most appropriate forum for the resolution of the issues which relate to the existence
of the right of shareholders to sue on behalf of the company. [para 128]30

Lawrence Collins J weighed up a number of factors before coming to this

conclusion. In particular, he noted the adequacy of the remedies available to
the disgruntled shareholders under Indian Company Law.
In Banco de Bilbao v Sancha,31 the Court of Appeal ruled that the place of
incorporation determines matters of the interpretation of the articles of associ-
ation and in particular issues concerned with the appointment of directors. The
place of incorporation will also determine issues concerned with restrictions
relating to share capital maintenance, unless there are rules of English law
specifically addressing this matter.32
In Base Metal Trading Ltd v Shamurin,33 the question was where to locate
the governing law of directors’ duties. The company here was incorporated in
Guernsey, but carried on business in Russia. The Court of Appeal ruled that
the law of Guernsey should be applied to determine what duties a director
owed to this company. Arden LJ declared at [75]

Companies are increasingly trading across national borders and moving their trad-
ing operations from country to country. They must not by so doing escape proper
regulation or otherwise creditors and shareholders will suffer. The only system of
law that can consistently and effectively regulate such multinational companies is
the law of the place of incorporation. Accordingly, I would strongly disagree with
any suggestion that the duties imposed on directors . . . by the law of the place of
its incorporation should be regarded as irrelevant or ‘mechanistic’.34

Arden LJ explained that the merit in this solution was the resulting certainty
and the benefit for corporate governance generally.
In Macmillan Inc v Bishopsgate Investment Trust (No. 3),35 a question
arose as to whether a dispute over title to a block of shares should be heard
under English law or under the law of New York. The English Court of

30 [2002] 1 BCLC 336 at 370.

31 [1938] 2 KB 176. The company’s powers are determined also by place of
incorporation – First Russian Insurance Co v London and Lancashire Insurance Co
Ltd [1928] Ch 922 at 935 per Romer J.
32 On this conundrum, see Arab Bank v Mercantile Holdings [1993] BCC 816.
33 [2005] 1 WLR 1157. See B. Jones [2005] 18 Ins Intell 29.
34 Ibid at [75]. Note also CA 2006, s. 259, which seems to confirm a similar
approach.
35 [1996] 1 WLR 387. See J. Stevens (1996) 59 MLR 741 and J. Bird [1996]
LMCLQ 57. See also Re Harvard Securities [1998] BCC 567, which is discussed by
R. Stevens in [1999] CFILR 138 and by P. Eden in (2000) 16 IL & P 134 and 175.
 Corporate law and conflict of laws 127

Appeal favoured New York as the more appropriate forum because the
shares were issued by a company incorporated in New York. That was also
the appropriate lex situs here. Had the shares in question been viewed as
negotiable instruments, a different conclusion might have ensued. Had the
share registers been kept in England, that might also have been an influen-
tial factor.

4 CHOICE OF LAW AND CORPORATE DISPUTES

English corporate law can also be given a role to play in commercial disputes
where the contracting parties include a choice of law clause36 and that clause
explicitly incorporates English law. Such clauses are common fare in commer-
cial precedents and are generally enforced by the courts by means of an anti-
suit injunction.37 However, if the dispute properly falls outside the ambit of the
clause, then the English courts will not restrain foreign litigation.38
Conversely, a foreign bond issuer may by explicit provision seek to prevent
disputes being litigated under English law, though the efficacy of such a ploy
can be a matter of contention.39
Setting aside issues of insolvent companies,40 the key European measure
here for many years was the Brussels Convention,41 which was implemented
in English Law by the Civil Jurisdiction and Judgments Act 1982. This
contained a number of provisions dealing with corporate issues. So for exam-
ple Art 16.2 conferred exclusive jurisdiction on the law of the place of domi-
cile where a dispute centred on the validity of a corporate constitution or a
decision of a company’s organs. Domicile was under Art 53 to be determined

36 See S.G. Rammeloo [1994] MJ of Euro and Comp Law 426.

37 See Look Chan Ho (2003) 52 ICLQ on anti-suit injunctions.
38 AWB (Geneva) SA v North America Steamships Ltd [2007] EWCA Civ 739.
39 See Jacob J in Colt Telecom Group plc (No. 2) [2002] EWHC 2815 (Ch),
[2003] BPIR 324. Note also the comments of Peter Smith J in Music Sales Ltd v
Shapiro Bornstein & Co Inc [2006] 1 BCLC 371, distinguishing the question of choice
of applicable law from the issue of forum in which that law is to be applied. Note also
Re Leyland DAF Ltd [1994] 2 BCLC 106, where receivers were bound by a choice of
law clause entered into by the company prior to the receivership.
40 Insolvency proceeedings fell outwith the scope of the Brussels Convention.
However, insolvency proceedings were narrowly defined – see Gourdain v Nadler
(C133/78) [1979] ECR 733. Having said that, winding-up proceedings featuring
solvent companies could fall under the Brussels Convention – Re Cover Europe Ltd
[2002] BPIR 1. Insolvency proceedings are now covered by the EC Regulation on
Insolvency Proceedings (1346/2000) (as amended).
41 The Brussels Convention applied to EU states. The Lugano Convention oper-
ated a parallel system for EFTA states.
128 National corporate law in a globalised market

by place of seat, which in turn depended upon rules of private international

law. Disputes as to public registers were under Art 16.3 to be resolved in the
jurisdiction where the register was kept. Art 17 permitted the parties by
contract to agree their own exclusive jurisdiction for the resolution of disputes.
Case law has added a gloss to this legislative regime. In Sar Schotte Gmbh
v Parfums Rothschild (C218/86),42 the European Court of Justice ruled that a
company was present in a jurisdiction, where it traded not through a branch
but through an independent firm using the same name and a common manage-
ment. In Re Fagin’s Bookshop Ltd,43 the case concerned the question whether
an application by a company pursuant to what is now CA 2006, s. 125
(formerly CA 1985, s. 359) to change its register of members could be heard
in England or whether under the Brussels Convention, it must be heard at the
place where the shareholder affected was domiciled. Harman J opted for the
former conclusion, on the grounds that as the register was open to public
inspection and the proceedings were intended to test the accuracy of that regis-
ter, the application fell within the exception envisaged in Art 16(3) of the
Convention. In Powell Duffryn plc v Petereit,44 the European Court of Justice
confirmed that provisions in the constitution of a company determining the
place of resolution of internal disputes constituted an agreement for the
purposes of Art 17 of the Convention and therefore achieved their intended
purpose.
The EC Judgments Regulation (44/2001) is now the significant measure
here, in that it has superseded the Brussels Convention to all intents and
purposes (see Art 68). Many of the principles embodied in the Brussels
Convention and case law thereunder, however, remain apposite. Insolvency
proceedings are specifically excluded from the ambit of this Regulation (Art
1.2(b)). Under Art 2.1 of this measure, domicile will normally determine juris-
diction, subject to a number of exceptions. One of these is prescribed by Art
22.2, which states that disputes which have as their object the validity of the
constitution or the nullity or dissolution of companies or the validity of the
decisions of their organs should be heard within the Member State in which
the company has its seat (as determined by private international law). In Speed
Investments v Formula One Holdings (No. 2),45 the Court of Appeal was faced
with a dispute over the interpretation of a shareholders’ agreement relating to
the composition of the board of directors of a Jersey company. In particular,
the dispute centred upon the appointment of two Swiss residents to the board.
Although the Swiss courts had first been seized of the proceedings, it was felt

42 [1992] BCLC 235.

43 [1992] BCLC 118.
44 The Times 15 April 1992.
45 [2004] EWCA Civ 1512.
 Corporate law and conflict of laws 129

that under both the Lugano Convention 1988 and under Art 22.2 of the EC
Judgments Regulation (44/2001), the proceedings should be heard in England
because they related to a constitutional issue relating to a Jersey company,
even though the agreement was stated to be subject to determination in the
courts in Switzerland.
Other important provisions in the Judgments Regulation are: Art 5.5, which
allows branches to be sued in the place where the branch is situated; Art 22.3,
which deals with disputes involving the validity of public registers; Art 23,
which retains the right of parties to make an agreement on exclusive jurisdic-
tion; and Art 60, which in effect determines the domicile of a company by
reference either to the real seat or place of incorporation.

5 APPLICATION OF THE TAKEOVER CODE

Jurisdictional issues can arise in the context of the regulation of takeovers,
where there is a cross-border element involved. For instance, it used to be the
case that the UK Takeover Code applied to takeovers effected on the Irish
Stock Exchange in Dublin, but in 1997 the Irish developed their own statutory-
based takeover code,46 thereby removing this curious arrangement. Looking at
takeovers from our domestic perspective, the critical criterion which governs
the application of the UK Code generally today is the location of the real seat
of management of the target company. If it is in the UK (no matter where the
target company is incorporated), then the Code will apply.47 The position is
not changed by Part 28 of the Companies Act 2006 which gives statutory
effect to the Takeover Code. Interestingly, Part 28 extends to the Channel
Islands and the Isle of Man,48 which again represents the continuance of the
former position.

46 For background, see B. Clarke, Takeovers and Mergers Law in Ireland (1999)
(Round Hall Press) at 35 et seq.
47 For enlightenment, see T. Ogowewo (2002) 23 Co Law 216.
48 See CA 2006, s. 965 and SI 2008/3122.
8. Dealing with transnational corporate
collapse

Transnational business failure is not a new phenomenon,1 but it is much more

common these days and the economic disruption caused and the legal prob-
lems generated can be immense. It is incumbent on any national system of
corporate law to provide an effective working set of rules to manage such a
crisis. Increasingly, it is seen as a necessity for the international corporate law
community to contribute to providing effective working solutions.2
Recent examples of transnational collapses or comparable incidences of
global/overseas firms’ experiencing financial distress that have posed chal-
lenges for English law include BCCI (1991),3 Maxwell Communications
Corporation (1991),4 Barings (1995),5 Enron (2001),6 Federal Mogul (2001)7

1 Historical examples of such cross-border insolvencies would include the Scali

bankruptcy in 1326 – see D. Graham [2000] 13 Ins Intell 36.
2 For scholarly analysis of the problems associated with cross-border insol-
vency, see P. St J. Smart, Cross-border Insolvency (1992) (Butterworths), K.H.
Nadelmann (1944) 93 Univ of Penn L Rev 58, P. St J. Smart [1999] Ins Law 12, P.
Omar (2006) 22 IL & P 132. For an historial perspective, see D. Graham (2001) 10 Int
Ins Rev 153.
3 BCCI was a bank whose activities spanned the globe. See N. Kochan and B.
Whittington, Bankrupt: The BCCI Fraud (1991) (Victor Gollancz Ltd) for the essential
details of this unprecedented financial scandal, which produced a huge volume of
reported litigation. See also A. Arora [2006] JBL 487 for the regulatory lessons.
4 The Maxwell Communications case, which is a story of a massive fraud span-
ning several jurisdictions perpetrated by the late Robert Maxwell, is fully described in
the 2001 DTI Inspectors Report on Mirror Group Newspapers, a Maxwell subsidiary.
Again, a voluminous body of case law resulted.
5 On the circumstances leading to the demise of Barings, see S. Fay, The
Collapse of Barings (1996) (Arrow Books). The watershed events, of course, occurred
in Singapore as a result of the unauthorised trading activities of Nick Leeson, who was
working for a Barings subsidiary. For Leeson’s own interpretation, see Rogue Trader
(1996) (Little Brown & Co).
6 For Enron, see J. Armour and J.A. McCahery, After Enron (2006) (Hart). Note
also S. Griffin [2003] Ins Law 214. For the response to Enron, see P. Davies, chapter 8
in J. Lowry and L. Mistelis, Commercial Law: Perspectives and Practice (2006)
(Butterworths).
7 The difficulties of Federal Mogul owe much to the crippling costs associated

130
 Dealing with transnational corporate collapse 131

and most recently, Lehman Bros (2008).8 In each of these cases, many of the
critical events leading to corporate failure arose outside the jurisdiction of
English law, but the consequences for creditors and other stakeholders were
felt acutely in this country. These are the most obvious examples in recent
memory; other modern instances can be cited to complete the overall picture.9

1 COMMON LAW SOLUTIONS

Companies have operated across national borders since the dawn of corporate
law. Companies have suffered financial collapse since those early days.
Initially, it was left to common law to resolve the legal difficulties posed by
collapse of transnational business. As might be expected, various pragmatic
rules and principles emerged.

1.1 Principles

One fundamental rule favoured by the English courts is the principle of

universality. This, in effect, states that the assets and liabilities of an insolvent
company are all one, no matter where located in the world.10 It also encom-
passes the idea that all creditors, no matter where located, should be treated
equally, subject to accepted priorities determined by English law.11 Debts

with asbestos liability. This led to the interminable T&N litigation, the burden of which
has been shouldered by David Richards J.
8 The Lehman collapse is already generating litigation in the English courts –
see, for example, Re Lehman Bros International (Europe) Ltd [2008] EWHC 2869
(Ch).
9 Barlow Clowes (1988) (an offshore investment scheme whose collapse led to
an official inquiry) – see L. Lever, The Barlow Clowes Affair (1992) (Macmillan) for
an intimate day-by-day account of the affair and the official Le Quesne Report, which
was summarised by D. Milman in (1989) 10 Co Law 113; Polly Peck (1990) (whose
high profile controller left these shores for Northern Cyprus); HIH Casualty and
General Insurance (2001) (an Australian insurance company whose difficulties led to
the setting up of a Royal Commission in Australia and have generated litigation before
the English courts) – for background, see M. Murray [2002] Ins Law 223; WorldCom
(2002) (a US Chapter 11 bankruptcy case).
10 See Cambridge Gas Transport Corp v Official Committee of Unsecured
Creditors of Navigator Holdings [2006] UKPC 26 and the analysis offered by Sir
Donald Nicholls VC in Re Paramount Airways Ltd (No. 2) [1992] 3 WLR 690 at
699–700.
11 On this, see the comments of Millett LJ in Mitchell v Carter [1997] BCC 907
at 912. Foreign creditors (for example, those claiming under a foreign judgment) are to
be treated with respect – on this, see Re Shruth Ltd [2005] EWHC 1293 (Ch), [2007]
BCC 960. Foreign governments have no special rights of preference – Re Rafidain
132 National corporate law in a globalised market

owed in a foreign currency are provable in an English liquidation.12 English

law does not accept the idea of a liquidation limited to national assets solely
for the benefit of local creditors; rather it takes the view that a winding-up
order granted by the English courts has universal effect. This is commendable
in its simplicity, but is a legal approach which is not above criticism.13 Having
said that, English law does recognise the idea of an ancillary liquidation
governed by English law, which is subordinate to the main winding-up.14
The ‘hotchpot’ rule15 is a useful illustration of the common law at work.
Under this principle of distributive justice, which was delineated by a number
of 19th-century bankruptcy cases,16 if a creditor of an insolvent debtor being
liquidated under English law has received a dividend in respect of a foreign
liquidation, then that dividend has to be surrendered before the foreign credi-
tor can benefit from a dividend under English winding-up procedures.17
Surrender of the foreign benefit is the price of admission to the English distri-
bution and in some cases it may not be a rational decision to participate in the
English distribution process. This rule, which may be rationalised by reference
to the pari passu principle of distributive justice, was considered most recently
by the Privy Council in Cleaver v Delta Reinsurance.18 Whilst upholding the
relevance of the rule in modern commerce, the Privy Council held that it did
not apply to funds received by a creditor in a foreign liquidation where that
realisation was the product of security rights, because secured creditors were
not subject to the pari passu principle. The rule should not be extended simply
because one creditor might be said to be behaving in an unfair fashion.
A different type of conflicts of law issue arose in Wight v Eckhardt
Marine.19 Here the question was whether a creditor could prove in a Cayman

Bank Ltd [1992] BCC 376. In MG Rover Belux SA/NV [2007] BCC 446, administrators
were authorised to make payments to foreign creditors for the good of the administra-
tion, even though such payments were not strictly in accordance with English law.
12 Re Dynamics Corp of America [1976] 2 All ER 669.
13 See the comments of Scott VC in Banco Nacional de Cuba v Cosmos Trading
Corp [2000] 1 BCLC 813 at 820.
14 See Re BCCI (No. 10) [1997] Ch 213, English, Scottish and Australian
Chartered Bank [1893] 3 Ch 385 at 394 per Vaughan Williams J. For a strong statement
to the effect that the English courts must apply English law in an ancillary liquidation,
see Re BCCI (No. 11) [1997] 1 BCLC 80 – but this must now be viewed in the light of
the range of views expressed by the Law Lords in McGrath v Riddell [2008] UKHL 21.
15 On the origins of the hotchpot rule, see the bankruptcy cases of Selkrig v
Davis (1814) 2 Rose 291 and Banco de Portugal v Waddell (1880) 5 App Cas 161.
16 Banco de Portugal v Waddell (1880) 5 App Cas 161.
17 Re Oriental Steam Co (1874) LR 9 Ch App 557.
18 [2001] 2 WLR 1202.
19 [2003] UKPC 37 – see P. Smart and C. Booth (2004) IL & P 147, Look Chan
Ho [2003] LMCLQ 95.
 Dealing with transnational corporate collapse 133

Islands liquidation in respect of a debt which had been extant at the time of
entry into liquidation, but which had been discharged by a statutory recon-
struction scheme in Bangladesh. The Privy Council advised that the pari passu
rule did not require the liquidators to admit proof of such a claim.
Another common law rule concerns the treatment of foreign revenue
authorities seeking to prove as creditors under English law. In spite of the
general trend in English corporate law not to discriminate against foreign
stakeholders, the traditional approach here is to deny this possibility of foreign
revenue authorities proving as creditors. In Government of India v Taylor,20
this discriminatory attitude was all too apparent. The thinking here is that
foreign revenue laws are viewed as akin to penal laws and therefore do not fall
within broad principles of comity. This House of Lords authority was followed
(and extended) by the Court of Appeal in QRS 1 Aps v Frandsen,21 where the
disqualification on proof was applied to the indirect enforcement of foreign
revenue laws. The point was noted that the Brussels Convention had not modi-
fied the position at common law. The status of this rule today is changing. As
far as revenue laws of EU Member States are concerned, it no longer applies,
as Art 39 of the EC Regulation on Insolvency Proceedings (1346/2000) specif-
ically displaces it. In the wider global community, the common law rule may
still have been regarded as valid. However, with the UNCITRAL Model Law
on Cross-border Insolvency being brought into effect in English law in April
2006 through the making of the Cross-border Insolvency Regulations22 (SI
2006/1030), we may safely assume that this common law rule has now been
superseded. Under Art 13 of the 2006 Regulations, foreign revenue debts are
not automatically to be disqualified, but may be challenged if characterised as
penal. The twin forces of globalisation and the need for greater judicial comity
have rendered the unthinking discriminatory approach at common law inap-
propriate in modern commercial conditions.

1.2 Attitudes – Common Law Assistance

The courts in the exercise of their inherent jurisdiction and armed with notions
of comity have on occasions exercised discretion to facilitate the handling of
cross-border insolvencies. What might comity involve? It could encompass

20 [1955] AC 491 – see K. Dawson [2000] Ins Law 81 and P. Fidler [2000] Ins
Law 219. Note also Re Norway’s Application (Nos 1 and 2) [1990] 1 AC 723 – see J.G.
Miller [1991] JBL 144.
21 [1999] 1 WLR 2169. See P. St J. Smart (2000) 116 LQR 360. The Australian
courts were less keen on the bar – Ayres v Evans (1981) 39 ALR 129.
22 SI 2006/1030.
134 National corporate law in a globalised market

the recognition of a foreign insolvency practitioner23 or some other form of

assistance to such a party. So, for example, in Barclays Bank v Homan,24
English administrators of one of the Maxwell companies were in effect
allowed by the Court of Appeal to forum shop in order to instigate transac-
tional avoidance litigation in the most favourable jurisdiction for the creditors
who stood to benefit if the claim succeeded. It is common knowledge that liti-
gation commenced in the US is likely to attract premium compensation
awards, but here the attraction was that the prospects of challenging a suspect
transaction were enhanced because of differences in the substantive law. In
refusing to grant an anti-suit injunction, Leggatt LJ commented:

In the insolvency of MCC in which both assets and creditors are distributed world-
wide, it cannot sensibly be suggested that any one forum is the natural forum, that
is, the forum in which exclusively proceedings should be brought . . . The very fact
that the foreign court constitutes a natural forum usually means that the institution
of proceedings in it is not unconscionable25

Again, in Re MG Rover Espana SA,26 His Honour Judge Norris allowed an

appendix to be added to his judgment, ordering the administration of a
company to explain to a foreign audience exactly what the administration
process under English law involved. This was innovative, but a clear indica-
tion of the English courts recognising their responsibilities in a shrinking
world of commerce. In Re Daewoo,27 provisional liquidators were authorised
by Lewison J to hand over funds collected in this country to Korean receivers.
This was not a difficult decision to reach, because the English provisional
liquidation had been initiated for that very purpose and the English creditors
did not object.
However, to be set against these authorities is the basic principle that the
powers of a liquidator do not automatically extend overseas.28
In Cambridge Gas Transport Corp v Official Committee of Unsecured
Creditors of Navigator Holdings,29 the Privy Council broke new ground in
offering common law assistance in an insolvency matter. Here the question

23 For insolvency practitioner recognition in New Zealand, see Turners and

Growers Exporters Ltd v The Ship Cornelis Verolme [1997] 2 NZLR 110.
24 [1992] BCC 757. For subsequent resulting litigation in the US courts, see
Maxwell Communications Corporation v Société Générale [2000] BPIR 764. See A.
Henshaw [1997] (July) Ins Law 5.
25 Ibid at 778.
26 [2006] BCC 599.
27 [2006] BPIR 415. See also Re Collins & Aikman [2006] EWHC 1343 (Ch).
28 Hibernian Merchants [1958] Ch 76, Re BCCI [1994] 1 WLR 708.
29 [2006] UKPC 26, [2006] BCC 962. For a critique, see Look Chan Ho (2006)
22 IL & P 217, G. Moss [2006] 19 Ins Intell 123, A. Walters (2007) 28 Co Law 73.
 Dealing with transnational corporate collapse 135

was whether the Manx courts could assist a Chapter 11 reorganisation in New
York. In deciding that assistance was possible in this instance, Lord Hoffmann
explained:

The English common law has traditionally taken the view that fairness between
creditors requires that, ideally, bankruptcy proceedings should have universal appli-
cation. There should be a single bankruptcy in which all creditors are entitled and
required to prove. (para [16])30

Of course, there is no obligation imposed on the courts to offer assistance

at common law. Discretion is the order of the day, though there may be an
obligation at common law to consider whether that discretion be exercised.31
We have encountered this principle in the context of s. 426 of the Insolvency
Act 1986. So, for instance, in Schemmer v Property Resources Ltd,32 Goulding
J refused to recognise the title of a US-appointed receiver over the assets of a
company incorporated in the Bahamas, because the circumstances of the
appointment were unusual and there was no evidence that the company had
submitted to the jurisdiction of the US courts.

1.3 Common Law Remedies of Potential Use in Transnational

Insolvency

A common law remedial device that has proved its worth in the context of
insolvency is the asset-freezing order. Although not restricted to the insol-
vency scenario, the prevention of assets leaving the jurisdiction clearly has
added utility in that traumatic context. Developed by the Court of Appeal in
Mareva,33 the mechanism is now contained in the Civil Procedure Rules.34 It
is possible to obtain orders freezing assets in this jurisdiction and also

30 [2006] BCC 962 at 967. Cambridge Gas (above) was followed by Registrar
Jaques in Re Phoenix Kapitaldienst GmbH [2008] BPIR 1086.
31 This, arguably, may be one consequence of the views expressed by certain of
the Law Lords in McGrath v Riddell [2008] UKHL 21.
32 [1974] 3 All ER 451. See also Fournier v The Ship Margaret Z [1997] 1
NZLR 629.
33 [1980] 1 All ER 213. It should be noted that the grant of such an injunction
does not create a security interest – Cretanor Maritime Co Ltd v Irish Marine
Management Ltd [1978] 1 WLR 966.
34 See CPR, r. 25.1(1)(f). In Ireland, under s. 55 of the Company Law Enforcement
Act 2001, there is a dedicated provision facilitating the grant of Mareva-type injunc-
tions against company directors who may be tempted to transfer assets out of the juris-
diction. This is an important facility if there is the chance of personal recovery actions
being brought against company directors.
136 National corporate law in a globalised market

worldwide freezing orders.35 As a matter of judicial comity, interlocutory

injunctive relief can be granted to aid a foreign court exercising insolvency
jurisdiction.36

2 LEGISLATIVE RESPONSES
Clearly, the common law had its limitations in dealing with all of the ramifica-
tions of cross-border insolvencies. For example, there is no power at common
law to wind up a foreign company; this is a wholly statutory jurisdiction. As was
mentioned in Chapter 5, Parliament intervened and such explicit power now
exists in the form of s. 221 of the Insolvency Act 1986, which permits the wind-
ing-up of unregistered companies. This statutory jurisdiction specifically states
(see s. 225) that it can be used, notwithstanding the fact that the foreign company
may have been dissolved in its home jurisdiction.37 Where the jurisdiction is
invoked, the winding-up will be carried out according to the requirements of
English law.38 Let us examine how this jurisdiction has been exercised by the
English courts. There is a respectable corpus of case law to note.39
The original view, as exemplified by Lord Evershed MR in Banque de
Marchands de Moscou Koupetchesky v Kindersley,40 was that this jurisdiction
could only be exercised if the foreign company had assets in the jurisdiction.
There was a presumption that the English courts would not interfere in the
administration of a winding-up properly afoot abroad.
In Re Compania Merabello San Nicholas S,41 the court moved towards the
modern position. Megarry J indicated that six factors needed to be taken into
account. Although there is some repetition involved in this exposition, those
factors included a recognition of the fact that there was no need to establish

35 See Derby & Co v Weldon [1990] Ch 48. For recent guidelines on worldwide
injunctions, see Dadourian Group International Inc v Simms [2006] EWCA Civ 399.
36 Discussed by T. Rutherford (2006) 156 NLJ 837, F. Meisel (2007) 26 CJQ
176, K. Qureshi and T. Sprange (2007) 157 NLJ 1958. On anti-suit injunctions in an
insolvency context, see Look Chan Ho (2003) 52 ICLQ 697. See also the comments of
Hoffmann J in Banque Indosuez v Ferromet Resources [1993] BCLC 112 at 117–18.
37 On this possibility, see Re Russian Bank for Foreign Trade [1933] 1 Ch 745
and Russian and English Bank v Baring Bros [1936] AC 405.
38 Re Suidair International Airways [1951] 1 Ch 165.
39 See Re Normandy Marketing Ltd [1993] BCC 879, where this jurisdiction was
used to wind up a company incorporated in Northern Ireland. See generally, I.J.
Dawson [1995] (October) Ins Law 3. For a review of a comparable jurisdiction in
Australia, see P. Omar [1999] Ins Law 69.
40 [1951] Ch 112.
41 [1972] 3 All ER 448. See also Eloc [1981] 3 WLR 176, where a Dutch
company was wound up here in order to trigger a strategic advantage for employees.
 Dealing with transnational corporate collapse 137

that the foreign company had ever carried on business here and that there was
no need to show the presence of hard assets. What did need to be shown was
the reasonable possibility of a benefit accruing to creditors if a winding-up
was ordered.
The leading modern case is the Court of Appeal ruling in Stocznia v
Latreefers,42 where the Court of Appeal indicated three prerequisites that must
be satisfied before the winding up jurisdiction could be exercised against a
foreign company – a sufficient link to the English jurisdiction, potential bene-
fit to creditors and the creditors should be subject to the English jurisdiction.
A potential benefit to creditors might exist where a liquidator could bring a
recovery action against directors or seek the setting aside of a transaction.
Conversely, in Re Real Estate Development Co,43 jurisdiction was declined
by Knox J, because the connection with the English jurisdiction was deemed
insufficient. Here there was an allegation that assets had been transferred into
this country under a transaction that was voidable under French law.
With the advent of the EC Regulation on Insolvency Proceedings
(1346/2000), these rules allocating insolvency jurisdiction require a rethink.
The ability of the English courts to wind up a foreign company having its
COMI in another participating Member State44 will be limited to territorial or
secondary proceedings (Arts 3(2) and 3(3)). Winding up of foreign companies
where there is no COMI located within a participating Member State remains
unaffected. The above principles therefore still have value.
Another statutory provision worthy of a footnote is s. 72 of the Insolvency
Act 1986, which permits a receiver appointed under Scottish law to exercise
powers of realisation of a floating charge in England and vice versa. There is,
however, little evidence of this provision (which ultimately can trace its
origins back to s. 7 of the Administration of Justice Act 1977 and then s. 724
of the Companies Act 1985) being engaged in practice.45
Section 426 of the Insolvency Act 1986 is the most apparent manifestation
of the need to have legislative mechanisms to enhance judicial comity. This
has been considered above in Chapter 6 and requires no further comment.

42 [2001] 2 BCLC 116. See K. Dawson [2000] Ins Law 173 and [2005] JBL 28.
43 [1991] BCLC 210. For further discussion, see Jubilee International Inc v
Farlin Timber Pte Ltd [2005] EWHC 765 (Ch), [2005] BPIR 765. Jurisdiction was also
refused by Clarke J in Re OJSC ANK Yugraneft [2008] EWHC 2614 (Ch), partly
because the court felt that the petitioners had not made full disclosure
44 Denmark has opted out of the Insolvency Proceedings Regulation – for discus-
sion of the implications, see Re Arena Corp [2004] BPIR 375 (Lawrence Collins J) and
[2004] BPIR 415 (CA), which involved analysis of whether an Isle of Man company with
its COMI in Denmark could be subject to the English winding-up jurisdiction.
45 For a rare example of the usage of s. 72, see Norfolk House v Repsol
Petroleum [1992] SLT 235.
138 National corporate law in a globalised market

There are provisions in the Enterprise Act 2002 that take matters further.
For example, under s. 254 the Secretary of State for Trade and Industry is
empowered to make regulations to extend insolvency legislation to companies
incorporated outside Great Britain. This power has not yet been exercised.

3 MULTILATERAL APPROACHES
3.1 EC Level

As we have stated above, the EC Regulation on Insolvency Proceedings

(ECRIP) (1346/2000)46 has had a major impact since taking effect in English
law on 31 May 2002.47 From the viewpoint of UK corporate law, the impact
has been wholly beneficial.
The EC Regulation is all about identifying jurisdiction in cases involving
collective insolvency proceedings.48 Central to this methodology is the idea
that primary jurisdiction to deal with a corporate collapse is to be determined
by identifying where the ‘centre of main interests’ (or COMI) lies. The centre
of main interests is the place where the company is effectively managed from.
In effect, it is a concept equivalent to the ‘real seat’ doctrine of private inter-
national law. We have already seen that this doctrine is not part of the English
law tradition and increasingly it is being marginalised in European law. It is
therefore ironic that its near relative, COMI, is playing such a prominent role
across Europe. Indeed, once again, UK corporate law appears to be a benefi-
ciary. English law has captured foreign liquidations through the COMI
concept, though there are clear signs of an increased sensitivity to the legiti-
mate expectations of foreign creditors.49
In order to determine the COMI of a company, the presumption is that the
place of its registered office is the key determinant (Art 3(1)). However, that

46 As amended by EC Regulations 603/2005, 694/2006 and 1791/2006. For

background, see H. Rajak [2000] CFILR 180, P. Omar [2000] Ins Law 211, K. Gaines
[2001] Ins Law 201, K. Dawson [2003] Ins Law 226, C. Campbell and Y. Sakkas
(2003) 19 IL & P 48. The Regulation has flaws, only some of which have been
addressed by the amending Regulations – see G. Moss and C. Paulus [2006] 19 Ins
Intell 1, P. Omar [2007] 20 (1) Ins Intell 7.
47 ECRIP does not apply if the insolvency proceedings were commenced before
31 May 2002 – see Oakley v Ultra Vehicle Design Ltd [2006] BPIR 115.
48 The regulation does not apply to public interest winding-up cases as the
company in question may be solvent – Re Marann Brooks CSV Ltd [2003] BCC 239.
Such cases are also outwith the Brussels Convention because they involve the exercise
of a public power – Re Senator Hanseatische [1996] 2 BCLC 562.
49 See, for example, Re MG Rover Belux SA/NV [2007] BCC 446.
 Dealing with transnational corporate collapse 139

presumption can be, and frequently is, rebutted, as we shall see illustrated
below.
Re BRAC Rent-a-Car International Inc,50 a company incorporated in
Delaware was placed in administration in this country, because its COMI was
located here. This was the first reported case on ECRIP in English law and in
his judgment, Lloyd J set the tone for future developments. Similarly, in Re
Ci4net.com Inc,51 the existence of COMI within the English jurisdiction
enabled the English court to place a Jersey company in administration and a
Delaware company into liquidation.
In Re Enron Directo SA,52 it was held that a company which had been
incorporated in Spain (where it also traded) in fact had its COMI in England
and so could be placed in administration here. Similar conclusions were
arrived at in Re Sendo Ltd53 (in respect of a Cayman Islands company), Re
Parkside Flexibles SA54 (which involved a Polish company) and Re 3 Tel Ltd55
(where the company had been incorporated in Northern Ireland). This impres-
sive stream of authority shows how frequently the presumption that COMI is
located at the place of incorporation can be rebutted.
The Daisytek-ISA Ltd case56 well illustrates the modern position. Here we
were dealing with a large business group ultimately controlled from the USA,
but having an intermediate parent company based in Bradford, which ran its
European operations. The Bradford parent company controlled the finance and
marketing activities of various European subsidiaries located in France and
Germany. Judge McGonigle (sitting as a Deputy Judge of the High Court)
concluded that all of these European subsidiaries had their COMI in England
and so could be placed in administration here. This conclusion met with initial
opposition from first instance courts in both France and Germany who
objected to loss of control of insolvency proceedings featuring ‘their’ compa-
nies. However, on appeals, both the French57 and German appellate courts

50 [2003] BCC 248. There is a marked similarity between the factors relevant for
COMI and those used under conflict of laws to determine presence in the jurisdiction
– see Adams v Cape Industries [1990] BCLC 479 at 506–7 per Slade LJ.
51 [2005] BCC 277.
52 Unreported, Lightman J, 4 July 2002 – but see the note of this case in [2002]
15 Ins Intell 64.
53 [2006] 1 BCLC 396.
54 [2006] BCC 589.
55 [2006] 2 BCLC 137.
56 [2003] BCC 984. The group implications of this case are evaluated by I.
Mevorach [2006] JBL 468. See also Energotech SARL [2007] BCC 123 – French courts
finding that COMI of Polish company was in France. Key factors underpinning this
decision were location of board meetings, governing law of contracts, situs of creditors
and place where commercial policy was determined.
57 Klempka v ISA Daisytek SA [2003] BCC 984.
140 National corporate law in a globalised market

adopted a communitaire perspective and concluded that COMI was indeed

located in England. By way of comparison, in Hans Brochier Holdings Ltd v
Exner,58 the initiation of administration proceedings in England was held by
Warren J to be misguided. Although the company had been incorporated here,
its business operations had been controlled from Germany, most of its employ-
ees were based there and the major contractual relationships were governed by
German law. Main proceedings in Germany was the only sensible outcome.
This case provides a welcome reminder that the COMI concept can be a
double-edged sword for those practitioners concerned with ‘capturing’ insol-
vency litigation.
In Re TXU German Finance,59 Chief Registrar Baister held that the EC
Regulation permitted the English courts to confirm the validity of a foreign
company being placed into creditors’ voluntary liquidation in this country.
This, in many quarters, represented an unexpected extension of the English
winding-up jurisdiction, which previously was believed to be limited to
compulsory liquidation.
If COMI exists, it seems that the fact that it took root in this country late in
the day is no bar to the exercise of insolvency jurisdiction.60
Where there is no COMI but the existence of an establishment can be
proved, secondary proceedings may be a possibility.61 However, the presence
of the establishment cannot be taken for granted merely because the company
has premises62 or a registered office within the jurisdiction. This point was
emphasised in the High Court by Warren J in Hans Brochier Holdings Ltd v
Exner,63 where attempts to establish first COMI and then jurisdiction to open
territorial proceedings failed; the COMI of this English company was in
Germany and there was no establishment to justify the opening of territorial
proceedings. This case is interesting in that it may deter the large numbers of
distressed German companies seeking to move their COMI to the UK at the
11th hour to exploit our more flexible restructuring models (particularly the
CVA).
Cases involving the impact of the EC Regulation in other Member States64
have progressed to the European Court of Justice. The most significant of

58 [2007] BCC 127. For background, see S. Moore [2009] 22 Ins Intell 9.
59 [2005] BCC 90.
60 Re Collins and Aikman [2006] BCC 606. But see Staubitz-Schreiber (C1/04)
[2006] BCC 639, where COMI is moved after commencement of insolvency proceed-
ings, but before the court opens proceedings.
61 Telia AB v Hilcourt (Docklands) Ltd [2003] BCC 856.
62 Ibid.
63 [2007] BCC 127 – noted by R. Rose in (2006) 22 IL & P 225.
64 Information on how the Regulation has fared in the national courts of other
member states can be obtained from the website – www.eir-database.com.
 Dealing with transnational corporate collapse 141

these is Eurofood IFSC Ltd (C341/04),65 which involved a jurisdiction contest

between Ireland and Italy in the aftermath of the Parmalat collapse. Here the
Irish courts permitted a company (an Irish Parmalat subsidiary) to be placed
into provisional liquidation under Irish law, notwithstanding the fact that it
was already undergoing special administration under Italian law. The Italian
administrator objected to this exercise of jurisdiction by the Irish courts, but
the European Court of Justice ruled that the COMI of this subsidiary was
indeed in Ireland. The existence of a large degree of control by the Italian
parent did not rebut the presumption that the place of incorporation deter-
mined the matter. A crucial fact was that creditors viewed this company as an
Irish concern. More generally, the ECJ ruled that the courts of one Member
State could not review the opening of main insolvency proceedings in another
Member State, unless the case fell within Art 26 (that is, where there were
public policy grounds).66 This conclusion will promote certainty and improve
the working of ECRIP.
One consequence of this Regulation is, as we have seen above, that the
common law principle of discrimination against foreign revenue authorities is
no longer permitted, as Art 39 implies.
Where the Regulation is engaged, there are mechanisms set in place for the
compulsory cooperation between insolvency practitioners operating within
different Member States.67
A side issue that is of interest to our broader study is the fact that the doctrine
of COMI looks suspiciously like the concept of ‘real seat’, which was discussed
above. Those companies that have incorporated in England but intend to oper-
ate in other Member States may therefore find that insolvency proceedings will
be governed by the law of the host state and not by English law.
One significant practical problem with the Regulation is that there is no
central registry within the EU indicating the opening of proceedings in any
particular Member State. This seems an alarming omission and may well lead
to the opening of main proceedings in one Member State in ignorance of the
fact that such proceedings have already been initiated in another Member
State.68 This systemic flaw is already manifesting itself.

65 [2006] BCC 397. See G. Moss [2006] 19 Ins Intell 97, J. Armour [2006] CLJ
505 and C. Rapinet [2006] (10) SMCLN 1 for comment.
66 See ibid at para 67 for discussion of the public policy angle.
67 See ECRIP Art 31.
68 There are instances where this systemic fault is already creating problems –
see Stojevic v Komercni Banka AS [2007] BPIR 141, where this led to recriminations
between the national courts in England and Austria, partly due to a fundamental misun-
derstanding of the role of the English courts in processing insolvency petitions. For
general discussion of the problems, see G. Flannery (2005) 21 IL & P 57.
142 National corporate law in a globalised market

The EC Regulation on Insolvency Proceedings is not the only measure rele-

vant to cross-border insolvency. Mention should also be made of the rules
relating to the operation of state guarantee funds, where an employing
company becomes insolvent, leaving arrears of wages due to its employees
unpaid. In such instances, the state is obliged to guarantee that the arrears will
be met. These protective measures, which were contained in EC Directive
1980/987 (as amended by Directives 1987/164 and 2002/74), have been
consolidated in Directive 2008/94. They are implemented in English law via
the Employment Rights Act 1996, s. 182.69 In Regeling (C125/97),70 the ECJ
set its face against national laws intended to undermine these guarantees. One
difficult issue that can arise here is to determine which state guarantee fund
should bear the cost, where the insolvent business was operating across
national boundaries. The case law here is instructive.
The position in Danmarks (C117/96)71 was that an English company had
one employee based in Denmark. It had no substantial presence in that juris-
diction and was undergoing solvency proceedings under English law. Bearing
in mind that combination of factors, it was hardly surprising that the European
Court of Justice ruled that the UK state guarantee fund should meet the
commitments to the employee in question. Again, in Everson v Secretary of
State for Trade and Industry (C198/98),72 the case involved the employment
commitments of an English branch of a foreign company. The ECJ ruled that
the claim for arrears which was made by a number of employees should be
made against the UK Redundancy Fund and not against the comparable insti-
tution where the company was incorporated. The link with the English juris-
diction here was substantial.
In response to this burgeoning case law, the Directive was amended by EC
Directive 2002/74. Art 8a of the amended Directive states that, where an
undertaking has activities in more than one Member State, the state guarantee
fund of the state in which they habitually work is responsible for arrears of
wages on the insolvency of the undertaking.
Further consideration to the state guarantee system in the cross-border
context in the light of Art 8a was given by the ECJ in Svenska Staten v Anders

69 It must be remembered that the state liability principle in EC Law emerged

from the non-transposition of this Directive – Francovich v Italy (C6 and 9/90) [1991]
ECR I-5537. Similar state guarantee funds designed to protect employees in the event
of employer insolvency operate outside the EU – for the position in Australia, see A.
Keay [2000] Ins Law 137.
70 [1999] 1 CMLR 1410. See also the view expressed in Wagner Miret
(C334/92) [1995] 2 CMLR 49 that higher management staff can enjoy the protection
of the state guarantee fund.
71 [1998] 2 BCLC 395.
72 [2000] 1 CMLR 489.
 Dealing with transnational corporate collapse 143

Holmqvist (Case C310/07).73 The point at issue here was whether an employee
of a Swedish transport company, which was carrying out operations in other
Member States without establishing a branch or establishment in such states,
could claim against the Swedish guarantee fund. The Court ruled that,
although a branch or establishment was not required, there must be evidence
of a stable economic presence featuring human resources which enable it to
perform its activities there. In the case of a transport company delivering to
businesses in other Member States, that criterion would not normally be met,
so the home guarantee fund should remain responsible. As Art 8a is replicated
by Art 9 of the consolidated EC Directive 2008/94, this preliminary ruling
should remain valuable for the foreseeable future.

3.2 International Level

The importance of providing effective legal rules to minimise national

conflicts where a transnational corporation collapses was quickly recognised
by UNCITRAL (a UN-sponsored body set up in 1966). In 1997, UNCITRAL
promulgated its Model Law on Cross-border Insolvency.74 The Model Law
has been widely adopted – by Ethiopia, Mexico, Serbia, Montenegro, South
Africa, New Zealand75 and most recently the USA.76 Australia is in the
process of adopting this Model Law.77 This law was adopted by the UK with
effect from 2007 (power to adopt was allocated to the Secretary of State for
Trade and Industry by the Insolvency Act 2000, s. 14). This power was exer-
cised in 2006 through the Cross-border Insolvency Regulations.78 These

73 Unreported
74 For analysis, see I. Fletcher [2000] 13 Ins Intell 57, P. Omar [2000] Ins Law
211, K. Dawson [2000] 4 RALQ 147, P. Omar [2002] Ins Law 228. The Model Law is
reproduced in Volume 2 of Sealy and Milman, Annotated Guide to Insolvency
Legislation (11th edition, 2008). See also Look Chan Ho (ed.), Cross Border
Insolvency (2006) (Globe Law and Business), which offers an excellent multi-jurisdic-
tional study by expert authors.
75 See Insolvency (Cross-border) Act 2006 – for comment, see D. Brown and
T.G.W. Telfer, Personal and Corporate Insolvency Legislation (2007) (LexisNexis) at
105 et seq.
76 The US have adopted the Model Law by introducing via the Bankruptcy
Abuse Prevention and Consumer Protection Act 2005 a new Chapter 15 into their US
Bankruptcy Code to replace the widely used mechanism in s. 304 of the Code – for
explanation, see J. Tovrov (2006) 22 IL & P 17, T. Zink and F. Vazquez [2007] 20 Ins
Intell 17. For discussion of Chapter 15 in the US bankruptcy courts, see Re Loy [2008]
BPIR 111.
77 See D. Emmett (2005) 21 IL & P 199.
78 SI 2006/1030. See I. Fletcher [2006] 19 Ins Intell 86, L.S. Sealy [2006] 7
SMCLN 1, L. Verrill (2006) 22 IL & P 155.
144 National corporate law in a globalised market

Regulations adopt the Model Law (which is reproduced in Schedule 1),

subject to minor modifications. The Regulations do not apply to Northern
Ireland, for which separate provision was made by the Cross-border
Insolvency Regulations (Northern Ireland) 2007 (SR 2007/115), which imple-
mented the Model Law in the Province with effect from 12 April 2007.
The Model Law and implementing Regulations work in much the same
way as the EC Regulation by determining jurisdiction. The device of using the
concept of centre of main interests to determine primary jurisdiction is also
employed for these purposes (see Art 2(b)). Place of incorporation creates only
a rebuttable presumption of COMI (art 16(3)). Although foreign revenue
claims may be proved in a liquidation, Art 13(3) of the adopted Model Law
reserves the right to refuse proof where the claim may be viewed as a penalty.
Disputes as to the applicability of the Regulations will be determined by the
English courts.79 Unlike the procedures under s. 426 of the Insolvency Act
1986, there is a direct right of access to the English courts and no filtering out
of applications by foreign courts.
These Cross-border Insolvency Regulations and the Model Law should
help, but problems remain. As the Model Law is not formally regarded as a
treaty, states can cherry pick when implementing it. Practitioners need to be
cautious about making assumptions – recourse to national implementing
measures will therefore be required.

79 Cases are beginning to surface – see Re Rajapakse (Note) [2007] BPIR 99 –

discussed by N. Griffiths in (2007) 23 IL & P 6. For later proceedings in this personal
insolvency case, see C. Brooks Thurmond III v Rajapakse [2008] BPIR 283.
9 The future of national corporate law
systems

1 CONVERGENCE
Any astute observer of the development of company law across the globe
could not fail to pick up on the fact that national systems of corporate law are
converging.1 In chapter 9 of The Anatomy of Corporate Law, Paul Davies,
Gerard Hertig and Klaus Hopt assert:

Our analysis clearly establishes that corporate law has converged significantly
across our benchmark jurisdictions over the past two decades. Jurisdictions are
under pressure to adopt uniform ‘best practices’ to facilitate the cross border tapping
of investors by their publicly-traded companies. In addition, national lawmakers
have come to realise that a modernised framework of company law can provide
even their closely held companies with a competitive advantage.2

Taking convergence to its logical extreme, are we about to see a version of

‘The End of History’ in corporate law?3 Accepting this as an instructive start-
ing point, this summative chapter will seek to bring together some of the
reasons for this pattern of evolution and consider where it will end up as far as
English law is concerned.

1 On convergence in corporate law generally, see J.A. McCahery (ed.),

Corporate Governance Regimes: Convergence and Diversity (2002) (OUP), J. Gordon
and M.J. Roe (eds), Convergence and Persistence in Corporate Governance (2004)
(CUP), M.M. Siems, Convergence in Shareholder Law (2007) (CUP), L.A.
Cunningham [2004] 1 Int Jo of Discl and Gov 269. For a strong counter-thesis, see D.
Branson (2001) 34 Cornell Jo of Int Law 321.
2 (2004) (OUP) at p. 218.
3 The commentator Francis Fukuyama coined this phrase most famously in his
text The End of History and the Last Man (1992) (Penguin), which further considered
the thesis raised in his 1989 paper that, with the victory of Western market liberalism
over communism, world political orders were becoming indistinguishable. Events over
the intervening decade have shown that History is remarkably robust and that new reli-
gious and political theories are always on hand to divide mankind.

145
146 National corporate law in a globalised market

2 FACTORS PROMOTING FURTHER CONVERGENCE

2.1 Capitalism and Consensus

The idea of the limited company with shareholder owners and managed by
directors is now standard fare in every developed legal jurisdiction.
Having made that point, the modern large corporate enterprise has its crit-
ics.4 That is not surprising, because it is an easy target that often conspires with
the forces of capitalism to produce a negative impact. Joel Bakan, in his
polemic The Corporation,5 attacks many of the aspects of its operation.
Noreena Hertz is equally scathing in her monograph, The Silent Takeover.6 In
response to such impressive voices of dissent, one could argue that, although
there is no doubt that corporations can provide the basis for inappropriate
behaviour, equally, they can be forces of progress by encouraging economic
development. Commentators such as Bakan and Hertz are still in a minority
and, more significantly, foreign governments are voting with their feet. Even
in countries where a socialist tradition has held sway, the adoption of the
Western corporate law paradigm seems inexorable. China, the fastest growing
economy in the world, appears firmly committed to a Western-style capitalist
structure, based upon the limited liability corporation. With its recent corpo-
rate law revisions of 1993 and 2005, China has shown a willingness to take on
board ideas from a range of cultures. The original 1993 law was heavily influ-
enced by continental corporate law traditions, with a strong liking for the
discipline of share capital maintenance and a two-tier board structure.7 In its
2005 corporate law revision, there has been a definite move towards the
Anglo-American model, with the share capital maintenance doctrine being
watered down to a considerable extent.8
Even the most hard-line of capitalists accept that some concession needs to
be made to a wider group of stakeholders – hence the rise to prominence of the
somewhat cosmetic campaign for ‘corporate social responsibility’.9 Attempts

4 For an extreme vision of the stakeholder-oriented company and how the law
might help to attain that vision by moving corporate law into the sphere of public law,
see K. Greenfield, The Failure of Corporate Law (2006) (University of Chicago Press).
5 (2004) (Constable).
6 (2002) (Arrow).
7 See P.C. Ann (1996) 17 Co Law 199. On shareholder rights in China, see L.
Miles and M. He (2005) 16 ICCLR 275.
8 For the 2005 China Company Law Revision, see A.Y.S. Li and S.S.M. Ho
(2006) 27 Co Law 311, A. Lau (2006) 27 Co Law 376. For the cultural background of
Chinese company law, see T. Ruskola (2000) 52 Stan L Rev 1599.
9 On the Corporate Social Responsibility debate, see W. Wedderburn (1985) 15
Melb Univ L Rev 4, B. Pettet [1997] CLP 279, C.M. Slaughter (1997) 18 Co Law 313
 The future of national corporate law systems 147

to produce a firmer basis on which shareholder wealth maximisation impera-

tives have been subordinated to the needs of wider stakeholders have met with
limited success in English law – one need look no further than the final
compromise wording of s. 172 of the Companies Act 2006 to confirm this crit-
icism.10 The global financial crisis will put this new statement of responsibil-
ities to a severe test, as the need to survive takes centre stage and will be
prioritised over social responsibilities.

2.2 Globalisation

One consequence of globalisation, with its emphasis on interlocking

economies, is the domino effect where a financial crisis hits a region. Witness
the Asian financial crisis of 1997 which forced many jurisdictions in South
East Asia to hurriedly introduce/remodel corporate rescue regimes based upon
Western precedents.11 A decade later, we witnessed the US sub-prime lending
fiasco sending shockwaves through both public stock markets and private
financial institutions around the globe.12
What globalisation has done is to neuter the power of the nation state.13
Inevitably, corporate law, as part of the trappings of national sovereignty, has
surrendered to international influences. This survey of how English law has
adapted to global influences should attest to that truism.

2.3 Legal Scholars as Agents of Convergence

Academics increasingly conduct comparative research to test their hypotheses.

They have always been inclined towards that method, but it is much easier to
conduct legal scholarship on that basis these days, with unlimited access to the
resources of the internet and the growth of legal publishing.
In the early days of post-colonialism, it was not unusual for newly inde-
pendent states to draw upon the expertise of English academics to model their

and I. Lynch-Fannon (2007) 58 NILQ 1. For an Australian perspective, see H.

Anderson (2007) 7 Ox Univ Comm LJ 93.
10 See A. McBeth (2004) 33 CLWR 222 on abortive legislation designed to
include extraterritorial curbs on multinational behaviour.
11 See R. Tomasic (ed.), Insolvency Law in East Asia (2006) (Ashgate). In 1998,
Indonesia, Thailand and South Korea revised their corporate insolvency regimes to
facilitate rescue.
12 For an illuminating account of the sub-prime crisis, see G. Walker (2008) 29
Co Law 22.
13 We are not merely talking about developing countries here. See D. Korten,
When Corporations Rule the World (1995) (Kumarian Press), G. Monbiot, Captive
State: The Corporate Takeover of Britain (2000) (Macmillan).
148 National corporate law in a globalised market

shiny new corporate law models. One could cite here the work of Professor
Jim Gower in devising the revolutionary Ghana Company Law14 and the
contribution of Professor Robert Pennington in advising governments on
corporate law reform in both the Seychelles and Trinidad and Tobago.15 Such
scholars do not simply transport in an uncritical way the existing system of
corporate law from their home jurisdiction to the host country. Cherished
reforms unimplemented in the home jurisdiction can be introduced into the
host jurisdiction. They may thus be forces for reform.
On a more subtle level, through the natural processes of academic debate
(which is increasingly internationalised), scholars raise awareness of the good
and bad points of their native system of corporate law, thereby enabling
foreign policymakers to adopt solutions seen to be working overseas. The
boom in international conference activity has also contributed to a broader
knowledge of corporate law models across the globe.
The influx of foreign academic corporate lawyers into the English legal
faculty, whether they be Jewish refugees from Nazi Germany (such as Clive
Schmitthoff16), academics dissatisfied with the apartheid system in South
Africa or simply scholars looking to broaden their intellectual horizons (or
enhance their salaries), has heightened our awareness of comparative solutions
to common problems affecting the operation of limited liability companies.
Globalisation is very much in evidence in the international market for the
services of legal academics.
The employment of academics, with their comparative insights, by law
reform bodies is becoming marked.17 It is the norm for any review panel in the
UK to include at least one academic, and not merely in a token role. In recent
decades, one could cite the Gower Report18 and the Prentice Report19 as exam-
ples of this reform process at work, with academics leading from the front.

14 Gower basically constitued a one-man committee reviewing Ghana Company

Law in the years 1958–61. On the story of Ghana company law reform, see O. Kahn-
Freund (1962) 25 MLR 78.
15 See B. Rider (1983) 4 Co Law 47.
16 For an example of an evaluation of their contribution, see J. Beatson and R.
Zimmerman, Jurists Uprooted (2004) (OUP).
17 The late Professor John Parkinson played a significant role in the Company
Law Review – see the tribute to him by S. MacLeod in Global Governance and the
Quest for Justice – Volume 2: Corporate Governance (2006) (Hart).
18 L.C.B. Gower, Review of Investor Protection (Part 1) (1984, Cmnd 9125) –
this led to the ground-breaking Financial Services Act 1986. For Gower’s own
thoughts, see (1988) 51 MLR 1.
19 Professor Dan Prentice reviewed the law on ultra vires in 1986 and his
proposals influenced reform in the Companies Act 1989 – see L.S. Sealy (1986) 7 Co
Law 90, J. Birds (1986) 7 Co Law 203, B. Hannigan [1987] JBL 173.
 The future of national corporate law systems 149

One danger to note here is the growing tendency always to look primarily
at US scholarship as an inspiration for theoretical debates in other jurisdic-
tions. Ideas that work well in the US context may have less value in the diverse
cultures in other parts of the world. One also detects an inward-looking
perspective in some US scholarship, a mindset which often plays down acad-
emic work undertaken beyond the circuit of the leading US universities.20 For
academic discourse to operate at an optimum level in corporate debates, it
must be bilateral. The need for a wider search for solutions to the conundrums
of corporate law regulation is highlighted by the global financial crisis which
has placed in jeopardy the assumed superiority of US regulatory ideas, with
their emphasis on market supremacy.

2.4 Law Reform Processes

Increasingly, all countries have reviewed the effectiveness of their current

corporate law models. As part of this process, opportunities have been taken
to consider corporate law mechanisms adopted abroad.
A few examples may serve to illustrate this. The Mercantile Law
Commission of 1854 certainly took advantage of comparative data. The
Jenkins Committee21 took evidence from representatives of the Securities and
Exchange Commission when considering appropriate rules for the disclosure
of interests in shares.
The spread of corporate rescue mechanisms across the globe in the past 20
years typifies a trend towards mimicry. The Cork Committee (Cmnd 8558)
was undoubtedly influenced by developments abroad and, in particular, by the
mystique surrounding the Chapter 11 bankruptcy reorganisation procedure in
the USA.
More recently, both the Law Commission and the Company Law Review
came down strongly in favour of adopting the Canadian statutory derivative
action as an effective means of protecting minority shareholders.22 This
reform has now materialised in English law in the shape of the Companies Act
2006 (Part 11), which came into effect on 1 October 2007.
Looking further afield, in Ireland,23 the adoption of pooling orders and
contribution orders in cases of group insolvency can, as we saw in Chapter 3
above, be traced back to New Zealand influences. More recently, the use of

20 A point made forcefully by D. Branson in (2001) 34 Cornell Jo of Int Law

321.
21 Cmnd 1749, paras 142 and 228.
22 See LC Report No. 246, Cm 3769 (1997), Shareholder Remedies and URN
(01/942) (2001) respectively.
23 See Companies Act 1993 (Ireland) ss. 140–41 (pooling).
150 National corporate law in a globalised market

comparative research is evident in the First Report of the Company Law

Review Group.24
Comparative research therefore has informed corporate law reform
processes. But the following warning from Sealy is worthy of record: ‘We
should look at developments abroad; not to copy what others have done, but
to jolt our preconceptions and stimulate in ourselves a fresh and questioning
approach.’25

2.5 International Law Firms and Accountancy Practices

These professional firms, increasingly dominated by US players, serve as

agents through which corporate law ideas are transmitted across the developed
world. Precedents and other standard documents used within the firm at its
many offices are significant here, as is the role played by such firms in policy
debates. Such global law firms and accountancy practices have considerable
resources at their disposal and are quite capable of mounting effective
campaigns to change the law.26 The speedy introduction of the Insolvency Act
1994 and the enactment of the Limited Liability Partnerships Act 2000
confirm this point in the context of English law. In spite of their ‘clout’, the
performance of these huge audit firms in discharging their responsibilities as
‘gatekeepers’27 with regard to a number of high profile collapses has been
poor. Ironically, this evidence of professional underperformance has triggered
a new round of convergence in the field by extending both the powers and
duties of auditors.

2.6 Higher Education

The emergence in UK universities over the past 20 years of an LLM in

International Business will have a long-term impact. Tens of thousands of
overseas students have had the opportunity to study Western Corporate Law
and to discuss corporate law ideas with their fellow postgraduates. On their
return to their home jurisdiction, such individuals will invariably occupy key
positions of influence within the legal, commercial and political elite, thereby
affording themselves the opportunity to influence the future direction of

24 (2001) para 1.8.2.

25 See Company Law and Commercial Reality (1984) (Sweet & Maxwell) at 87.
See also A. Boyle (2000) 21 Co Law 308.
26 For comment on this phenomenon, see J. Flood and E. Skordaki, Insolvency
Practitioners and Bi Corporate Insolvencies (1995) (ACCA Research Report No. 43).
27 See J. Coffee, Gatekeepers: The Role of the Professions in Corporate
Governance (2006) (OUP).
 The future of national corporate law systems 151

corporate law. This may be seen as a form of cultural imperialism, but with the
decline of alternative models to capitalism, few criticisms are being raised.

2.7 Role of International Organisations

Bodies such as the World Trade Organization, the Organisation for Economic
Cooperation and Development (OECD), the International Monetary Fund, the
World Bank, the International Institute for the Unification of Private Law
(UNIDROIT) and UNCITRAL have all contributed to the emergence of a
common corporate structure and guiding principles, particularly in the devel-
oping countries. This may happen in a variety of ways. Such jurisdictions may
be looking to borrow and changes in private law may be imposed as a precon-
dition for lending. Alternatively, such countries may be in the market for a new
corporate system and will naturally look to internationally favoured models.
OECD has produced a model code of conduct for multinationals,28 but the real
utility of such voluntary codes or ‘soft law’ is open to question.29

2.8 Multinationals and International Joint Ventures

Transnational businesses have always been a force to be reckoned with in

terms of their impact on local commercial law.30 It is believed that the Dutch
East India Company (which was incorporated in 1602) ‘introduced’ the
common Roman/Dutch law into the Cape Colony in 1652.31 Parallel examples
can be drawn from the operation of businesses linked to the rise of the British
Empire, particularly in India, where the separation of powers between
commercial enterprise (that is, the East India Company) and lawmaking was
blurred.
In more recent times it has also been argued by scholars32 that multinational
enterprises (MNEs) and other large commercial organisations are themselves
creators of a form of ‘law’.

28 The first OECD Code dates back to 1976. For the 2000 version, see the note
in (2000) 21 Co Law 306, A. Dignam and M. Galanis [1999] EBLR 396, S. Tully
(2001) 50 ICLQ 394. For later developments, note F. Macmillan (2003) 24 Co Law
355. See now Annual Report on OECD Guidelines for MNEs (2004). In the UK, see
DTI Press Notice, 13 July 2006 for details of the UK National Contact Point for the
implementation of the OECD Guidelines
29 For a lucid analysis, see S. Picciotto (2003) 42 Col Jo of Transnat Law 131.
See also S. Wheeler, Corporations and The Third Way (2002) (Hart) at 126.
30 See D. Branson (2001) 34 Cornell Jo of Int Law 321.
31 See generally S.D. Girvin (1992) 13 Jo of Leg Hist 63.
32 For a consideration of the issues here see the essays in G. Teubner (ed.),
Global Law without a State (1997) (Ashgate).
152 National corporate law in a globalised market

The fact that many businesses operate transnationally either by means of a

multinational group structure or possibly through the medium of a joint
venture means that there is a vested commercial interest in standardising rules
of corporate law, because this can reduce transaction costs.

2.9 Race to the Bottom

This manifestation of regulatory competition is not simply restricted to

Delaware and the USA. The Centros (C212/97)33 ruling of the ECJ and its
subsequent pronouncements (considered in Chapter 7 above) have exposed the
possibilities for the emergence of this syndrome within the context of the EU.
It has been suggested that the reduction of the minimum share capital for
private companies in France to a single euro is a manifestation of this respon-
sive syndrome at work. The GmbH in Germany is being forced to adapt or risk
facing extinction. As the EU family expands, those possibilities are accord-
ingly magnified. Offshore jurisdictions compete fiercely in order to attract
international business and a key element in that competitive process is the
design of the corporate law regime.

2.10 Harmonisation Processes

These have been discussed at length in Chapter 1 and require no further

comment. Their contribution to convergence is self-evident and measurable.

2.11 Converging Capital Markets

This economic phenomenon has played a role in producing common rules in

the area of market abuse. Certainly, the increasing competitiveness of capital
markets is one factor behind the spread of the insider dealing prohibition
beyond the US and EU into leading share market jurisdictions such as Japan,
Hong Kong and Singapore.
The move towards a single global capital market has been aided by the
advent of investors’ information tools such as Deminor ratings,34 which are
used to evaluate the effectiveness of corporate governance regimes in issuers
by applying no less than 300 indicators. This global measuring standard
compels issuers to adopt governance regimes that tick the right boxes and in
particular mirror the Anglo-American model.

33 [2000] Ch 446.
34 Deminor ratings originated in the 1990s. For comment on this and other rating
systems, see H. Sherman [2004] 12 Corp Gov 5.
 The future of national corporate law systems 153

2.12 Foreign Players

This factor is to some extent a by-product of the previous element. As capital

markets become more open to foreign entrants, so those entrants will begin to
play a more active role in corporate law systems. For example, the arrival of US
and offshore ‘vulture funds’35 in the UK secondary market for distressed debt
has generated much litigation as such funds tend to favour the use of aggressive
litigation in workout situations over the traditional British compromise (such as
the London Approach36). Having said that, one detects a certain disquiet on the
part of the English courts towards such aggressive tactics – the opinions
expressed by Jacob J in Re Colt Telecom Group plc (No. 2),37 a case involving
an abortive attempt by a vulture fund to have a company placed into adminis-
tration against its wishes, being just one example of this hostility being voiced.
In Germany, the entrance of US institutional investors (such as CalPERS38)
into its previously sedate corporate governance world has shaken things up.
Germany will not be the only jurisdiction to feel this institutional investor
flexing its muscles. It was estimated by Gilson39 that more than 20 per cent of
the holdings of CalPERS are in foreign securities.

2.13 New Technology

The influence of new communications technology is pervasive.

Firstly, it has enhanced awareness of foreign legal systems. We can all now
quickly access both legislation and case law emanating from a host of foreign
jurisdictions. Tools such as LEXIS and Westlaw are in wide usage and with the
advent of the internet, both primary and secondary sources on corporate law
regimes across the globe can be easily accessed.

35 On vulture funds see J. Flood in chapter 12 of D. Nelken and J. Feest (eds),

Adapting Legal Cultures (2001) (Hart) at 270 et seq. Vulture funds operate interna-
tionally in the field of distressed sovereign debt – see the recent case involving Zambia
discussed in the Times 15 February 2007. There is a question as to whether vulture
funds are the same as hedge funds, but the better view is that they represent a sub-
species of hedge fund – for discussion see Re Colt Telecom Group plc (No. 1) [2003]
BPIR 311 at 313 per Lawrence Collins J and Re Colt Telecom Group plc (No. 2) [2003]
BPIR 324 at 329 per Jacob J (judge refuses to be drawn on this distinction).
36 See Chapter 2 above.
37 [2002] EWHC 2815 (Ch), [2003] 1 BCLC 290.
38 The California Public Employees Retirement Systems fund has investments
worth some $256 billion. The fund was established in 1932 – its website
www.calpers.ca.gov is particularly informative. See M.P. Smith (1996) 51 Jo of Fin
227.
39 See R.J. Gilson, chapter 4 in J.N. Gordon and M.J. Roe, Convergence and
Persistence in Corporate Governance (2004) (CUP) at 146.
154 National corporate law in a globalised market

It has also necessitated change in national corporate rules to reflect new

technologies. This has been necessary to maintain the competitive edge of
national systems. If virtual shareholders meetings are permissible in jurisdic-
tions such as Delaware, Canada and Australia, why not in our home jurisdic-
tion? Websites will be used increasingly to communicate news to
shareholders, once the Companies Act 2006 is fully in force. The new EC
Directive 2007/36 will undoubtedly accelerate moves towards constructive
uses of technology to empower shareholders.

2.14 The Common Law

Although operating at greatly attenuated levels these days, the common law
can still promote convergence. Some of its vigour has been lost through
greater usage of legislation at a local level, but it still has a role to play. This
is particularly evident with the importation of principles developed in
Commonwealth courts into English Company Law (discussed in Chapter 1).
The Cambridge Gas Transport case40 shows the continued inventiveness of
the common law in areas where specific legislative models have been intro-
duced but may not be available to particular applicants (see Chapter 8).

2.15 The Role of Language and Corporate Discourse

Convergence can be promoted by the simple device of everyday discourse

between corporate law players. Certain phrases become common fare when
practitioners, academics and policymakers meet to discuss corporate law. For
more than a generation, we have been familiar with the phrase, ‘lifting the
veil’ of corporate personality.41 The ‘Berle and Means thesis’42 is a common
starting point for any analysis of corporate governance. Much discussion has
been devoted to the ‘race to the bottom’43 in the context of corporate regula-
tory competition. More recently, phrases such as ‘Chinese walls’,44 ‘hedge

40 [2006] UKPC 26 – see G. Moss [2006] 19 Ins Intell 123.

41 This phrase of lifting the veil probably originated in the US. In Germany, they
talk of breaching the wall of the corporation. Linguistic analysis can produce interest-
ing insights – see S. Ottolenghi (1990) 53 MLR 338.
42 The Modern Corporation and Private Property (1932) (Macmillan).
43 See Brandeis J in Liggett v Lee (1933) 288 US 517 at 557–60.
44 On Chinese walls (a term which incidentally is viewed as politically incorrect
in many quarters), see L. Herzel and D.E. Colling (1983) 4 Co Law 14, N. Poser (1988)
9 Co Law 120 and 165 and G. McCormack (1999) 1 ICCLJ 5. For judicial comment,
see Lord Millett in Prince Jefri v Bolkiah [1999] 1 BCLC 1 at 59. See generally H.
McVea [2000] CLJ 370, H. McVea, Financial Conglomerates and the Chinese Wall
(1993) (Clarendon Press).
 The future of national corporate law systems 155

funds’45 and ‘poison pills’ have become prominent and such concepts have
therefore become the subject of regulatory attention in a number of jurisdic-
tions at the same time. The characterisation of the final period of a company’s
existence as the ‘twilight zone’46 is well recognised in corporate law
discourse. A common language of corporate law is being created. That
language is indisputably American in character.47 That said, the English courts
have cautioned practitioners about using metaphors (no matter what their
origin) to draw legal conclusions as a substitute for following clear legislative
provision.48

2.16 Convergence through Paralysis

Convergence may already exist in certain fields of corporate law, but in theory
it could disappear, as new solutions to age-old problems emerge. Very often,
that novelty fails to materialise because a nation state is reluctant to break
ranks. It may be that it supports an extant legal principle because it is efficient.
But it may also do this in order not to offend the international business
constituency upon which the well-being of its economy depends. The failure
to tackle multinationals and, in particular, to make them responsible for the
actions of their subsidiaries, may be a manifestation of this malaise at work.49
Paralysis may be voluntary or it may be enforced. The best illustration of
this is the inability of Member States within the EU to change outmoded
corporate law models because they are locked into the harmonised structure.
Much work has to go on behind the scenes to convince European partners of
the need for change. However, this is not a futile exercise – witness the adop-
tion of Directive 68/2006, which introduces much-needed flexibility into share
capital maintenance regimes.

45 On the regulation of hedge funds, see H. McVea (2007) 27 Leg Studs 709 and
T.R. Hurst (2007) 28 Co Law 228.
46 The term is universally recognised – see Directors in the Twilight Zone
(INSOL, 2001). For discussion see D. Milman [2004] JBL 493.
47 Thus the English term ‘book debts’ increasingly gives way to the US phrase
‘receivables’. Had the Company Law Review been set up a decade later, it probably
would have been labelled the ‘Corporate Law Review’. Perhaps the only surprise is that
the Companies Act 2006 was so entitled.
48 See the comments of Lewison J in First Independent Factors v Mountford
[2008] BPIR 515 on the phoenix syndrome and its relevance to the interpretation of ss.
216 and 217 of the Insolvency Act 1986.
49 See A.J. Boyle (2002) 23 Co Law 35, P. Muchlinski (2002) 23 Co Law 168.
156 National corporate law in a globalised market

3 OTHER LIKELY TRENDS IN UK CORPORATE LAW

If we accept the inevitability of convergence, is that the sole future develop-
ment we may expect? The short answer is no.

3.1 Corporate Mobility

Corporate mobility will be very much part of the future of UK corporate law.
The presumptive 14th EC Harmonisation Directive, if it had ever been
adopted, would have permitted the moving of registered offices within the
EC.50 This initiative, first floated in 1997, is important because, at present, if
a company wishes to move its legal home from one Member State to another,
it will have to be dissolved in the first state and reincorporated in its new host.
This is profoundly disruptive in commercial terms. The discussion of this issue
is to be found in Chapter 5. As it happens, the future of the proposed 14th
Directive is now unclear partly because of general developments in the area of
freedom of establishment producing a view at Commission level that there is
no need for an explicit Directive.51
The UK government appears committed to change here. It has supported
the proposals of the Company Law Review52 designed to facilitate redomesti-
cation. The Company Law Review favoured opening up migration avenues for
companies to move within Great Britain and to and from Great Britain,
provided adequate safeguards for creditors were put in place.53 However, a
perusal of the Companies Act 2006 will find no such provisions.
As rules develop to iron out the inevitable difficulties of cross-border
commerce, this pattern will become more evident.

50 Thereby neutralising R v HM Treasury ex parte Daily Mail and General Trust

(C81/87) [1989] 1 All ER 328. For comment, see C. Schmitthoff [1988] JBL 454.
51 The Commission announced in March 2008 its present intention not to
proceed with this Directive – see G.-J. Vossestein (2008) 4 Utrecht Law Review 53.
This decision to pull back from reform may have influenced the views expressed by the
Advocate General in Cartesio Oktato as Szolgaltato bt (C210/06) [2008] BCC 745. For
comment on the Advocate General’s opinion, see S. Moore [2009] 22 Ins Intell 9.
Surprisingly, when Cartesio came before the ECJ, on the preliminary ruling the Court
did not follow the opinion of the Advocate General. We may therefore wonder whether
the Commission might look to revert to the proposal for a 14th Directive. See gener-
ally S. Rammeloo (2008) 15 MJ of Euro and Comp Law 359.
52 URN 01/942. See Gower and Davies: The Principles of Modern Company
Law (7th edition, 2003) (Sweet & Maxwell) chapter 6.
53 Companies have to be solvent and movement restricted to scheduled jurisdic-
tions. Ibid at paras 14.3 et seq.
 The future of national corporate law systems 157

3.2 Supranational Companies

The emergence of the ‘societas europea’, or European Company (which was

first mooted in 1958), points to the possibilities here. This model was intro-
duced into the UK system with effect from October 2004.54 Its take-up has
been minimal, with figures for 2005/6 disclosing only one such company
being registered in Great Britain. The prospects here do not look good.55
Could a uniform corporate entity be developed at global level? The chal-
lenge here would be immense, but not insurmountable, particularly as many of
the fundamentals are now common fare. UNCITRAL or OECD would appear
to be the most likely progenitors of such an ambitious initiative.

3.3 A Twin Track System

Historically, UK corporate law has been monolithic in legislating for compa-

nies. Our awareness of foreign systems shows that this is unusual; separate
legal regimes for public and private companies is quite a common phenome-
non. Having said that, the Irish Company Law Review Group, in its First
Report,56 rejected the idea of separate statutes, though it did favour greater
differentiation within a single statute, with the private company being given
pride of place. This policy has been taken further in Ireland, with their forth-
coming putative Companies Bill 2009.57 One can safely predict that the diver-
gence between company law for large and small firms will continue apace and
one might reasonably expect a separate legislative basis to be formalised. At
the moment, there is fresh impetus being given to the idea that there should be
a model private company statute for the EU.58

4 OVERVIEW
How has English law fared in respect of convergence?
The drive towards convergence in the UK and other national systems is
clear and the reasons for it are compelling. Since the millennium, we have

54 EC Regulation 2157/2001 – implemented in English law by SI 2004/2326.

See J. Rickford (ed.), The European Company (2003) (Intersentia).
55 See J. McCahery and E. Vermeulen [2005] ELJ 785.
56 (2001) para 1.8.2.
57 At the time of writing, a timescale for the enactment of the Irish reform
proposals was unclear.
58 This idea is not new – see R. Drury and A. Hicks [1999] JBL 429.
158 National corporate law in a globalised market

admitted into our corporate law system treasury shares,59 abolished financial
assistance bars for private companies,60 introduced statutory derivative
claims61 and allowed both LLPs and the Societas Europa (SE) to be set up in
this country. In the decades before 2000, title retention clauses and sharehold-
ers’ pre-emption rights62 made their entrance onto our local scene.
Convergence in corporate governance regimes (which does not necessarily
require legislative action) has been more marked. We thus have in this aspect
a form of what has been labelled as ‘functional convergence’.63
But one must not assume that complete convergence is inevitable64 or that
there will not be setbacks on the way. Looking at the history of UK corporate
law, we have steadfastly refused to admit the US ‘business judgment rule’ to
protect directors.65 Perversely, for no apparent reason we have held out against
the idea that preincorporation contracts may be ratified, when that solution has
been universally adopted elsewhere.66 Our refusal to accept the possibility of
a fifth exception67 to Foss v Harbottle68 has been robust,69 though with the

59 See G. Morse [2004] JBL 303. Singapore introduced treasury shares in 2005
– see H. Tijo (2006) 21 BJIBFL 316.
60 The financial assistance bar was removed from private companies in the UK
with effect from October 2008. For an impressive review of the financial assistance bar
in Pacific rim jurisdictions, see K. Fletcher (2006) 6 Ox Univ Comm LJ 157.
61 See A. Keay and J. Loughrey (2008) 124 LQR 469. Hong Kong has recently
introduced statutory derivative claims – see P. von Nessen, S.H. Goo and C.K. Low
[2008] JBL 627.
62 Pre-emption rights were a feature of US law, but were actually introduced into
English Law in 1980 via the Second EC Company Law Harmonisation Directive
(77/91) – see Art 29. The ECJ reviewed this Article in Siemens AG v Nold (C42/95)
[1997] BCC 759. For general background, see I. MacNeil [2002] JBL 78.
63 Coffee stresses this in his piece in (1999) NwUL Rev 641 at 679.
64 Once again I commend D. Branson (2001) 34 Cornell Jo of Int Law 321. E.
Micheler makes a similarly cautious observation in (2007) 123 LQR 251.
65 For the business judgment rule, see M.R. Pasban, C. Campbell and J. Birds
(1997) 26 Anglo-Am L Rev 461, M.R. Pasban [2001] JBL 33, M. Hemraj (2003) 24 Co
Law 218, D. Arsalidou (2003) 24 Co Law 228. A revised version of the business judg-
ment rule was recently introduced for German public companies – see T. Naruisch and
F. Liepe [2007] JBL 225 at 238.
66 See, for example, the acceptance of ratification of preincorporation contracts
in Singapore (Cosmic Insurance Corp v Khoo Chiang Poh (1981) 131 NLJ 286), which
is discussed by W. Woon in (1983) 25 Mal L Rev 399. Ratification is accepted in
Malaysia, India and New Zealand. Nigeria accepts this posibility – see L.O. Okeke
(2000) 21 Co Law 320. The Isle of Man accepted the idea most recently in s. 87(1)(b)
of its Companies Act 2006. The Jenkins Committee (Cmnd 1749, para 54) called for a
ratification facility to be adopted by English law. Indeed, the First Company Law
Harmonisation Directive (66/151) seems to assume that ratification is permitted.
67 The fifth exception, which is open ended and based on the interests of justice,
is recognised in jurisdictions such as Australia, Israel and Nigeria – see K.D. Barnes
 The future of national corporate law systems 159

advent of statutory derivative claims, that now may only be of historical rele-
vance. Most recently of all, the Privy Council70 has made it clear that the
Australian Gambotto principle,71 which seeks to protect minorities when arti-
cles of association are varied, has no place in English law. The idea pioneered
in North America of an appraisal remedy for shareholders in a private
company, guaranteeing exit rights in defined circumstances, has not found
favour.72 No par value shares have not been accepted in English law, though
one suspects that it is the EU factor that is preventing that.73 In the corporate
insolvency arena, we have refused to introduce an explicit facility offering
super-priority for business rescue funding.74 Attempts to introduce a security
registration scheme based upon Art 9 of the US Uniform Commercial Code
have come to nothing.75
Looking at matters from the other side of the fence, we have not been
particularly successful in selling the floating charge to those jurisdictions that
have enjoyed choice in the matter of corporate law reform.76 It is hardly coin-
cidental that the private receiver is also largely unique to the followers of
English law.77 Only offshore jurisdictions find our flexible approach to ‘corpo-
rate directors’ attractive. By way of balance, we have been successful in

(1987) 8 Co Law 93, O.A. Osunbor (1987) 36 ICLQ 1, L.S. Sealy (1989) 10 Co Law
52, A. Reisberg (2003) 24 Co Law 250.
68 (1843) 2 Hare 461.
69 See Prudential Assurance v Newman Industries (No. 2) [1982] Ch 204.
70 Citco Banking Corp v Pussers Ltd [2007] UKPC 13 – see R. Williams [2007]
CLJ 500.
71 Gambotto v WCP Ltd (1995) 182 CLR 432 – see M. Whincop (1995) 23
ABLR 276.
72 See O’Neill v Phillips [1999] 1 WLR 1092. Hong Kong is considering adopt-
ing this idea – R. Cheung (2008) 19 ICCLR 325.
73 The Jenkins Committee (Cmnd 1749, para 34) favoured no par value shares,
as had the Gedge Committee (Cmd 9112, para 11) previously.
74 This idea was dismissed in the policy discussions leading up to the Enterprise
Act 2002. With the poor record of rescue mechanisms in English law, it is likely to
return to the agenda – see G. McCormack [2007] JBL 701. For cultural differences
between the US and the UK on corporate rescue, see G. McCormack (2007) 56 ICLQ
515.
75 See the Law Commission Report No. 296 (2005) (Cm 6654) and the back-
ground analysis of G. McCormack in chapter 5 of J. de Lacy (ed.), The Reform of UK
Company Law (2002) (Cavendish).
76 Notable exceptions of non-common law jurisdictions where the floating
charge has found favour abroad are to be found in Scotland (1961) (where it was recog-
nised by legislation) and Mauritius (1969). On the floating charge in Mauritius, see
Aquachem Ltd v Delphis Bank [2008] UKPC 7. Surprisingly, Denmark introduced a
variant of the floating charge in 2006.
77 See I. Macdonald and D. Moujalli (2001) 14 Ins Intell 76. Note also F. Dahan
(1996) 17 Co Law 181.
160 National corporate law in a globalised market

exporting the idea that company accounts should present a true and fair picture
of a company’s finances78 and corporate governance standards.79 We have
also exported the idea of a takeover code, with its underlying philosophy of
protecting the interests of the shareholders in the target company as the main
priority.80 Our preference for the place of incorporation principle in private
international law has attracted widespread support.81
What these examples show us is that English law, like all other systems, is
not going to be rushed into harmonising in every instance. This reality has
been recognised in the European Union, with its political doctrine of
‘subsidiarity’82 now driving forward harmonisation in a more culturally sensi-
tive manner. This pattern of selective adoption of ideas is practised in most
jurisdictions, with few legal systems surrendering completely to foreign
corporate law influences.83
Why is there opposition to convergence when it may appear to be the only
rational option? Fundamental cultural heritage may offer an explanation,84 as
may naked self-interest on the part of those who would stand to lose out in the
event of corporate law reform.85 Lawyers can be influential figures here.

78 See K.P.E. Lasok and E. Grace (1989) 10 Co Law 13.

79 See A. Dignam (2000) 21 Co Law 70. For a critique of the practice of import-
ing Western-style corporate governance regimes without regard to the underlying
culture, see L. Miles [2007] JBL 851 (discussing the position in South Korea).
80 See A. Dignam (2008) 28 Leg Studs 96 for discussion.
81 See Chapter 7.
82 The doctrine was developed in the 1980s. It is reflected in Art 5(2) of the EC
Treaty. Its influence on Company Law Harmonisation Directives since then has been
all too apparent, in that it has speeded up the adoption process by allowing for some
local flexibility.
83 This selective approach may exacerbate transplantation problems if the non-
adopted element is critical to the whole. On the other hand, cultural differences may
justify selective adoption.
84 See D.M. Branson again (2001) 34 Cornell Jo of Int Law 321. See also T.
Ruskola (2000) 52 Stan L Rev 1599. In (2002) 50 Am Jo of Comp Law, K. Pistor
makes the point that harmonising substantive law in a developing jurisdiction is no
panacea; much more needs to be done to the underlying culture.
85 See L.A. Bebchuk and M.J. Roe, chapter 2 in J.N. Gordon and M.J. Roe,
Convergence and Persistence in Corporate Governance (2004) (CUP). On the evolu-
tion of the idea of path dependence, see M.J. Roe (1996) 109 HLR 641. How this can
happen is illustrated by the ending of the bar on financial assistance in private company
share acquisitions in UK law (effective from 1 October 2008). This might be seen as a
cause for universal joy, but it now transpires that many smaller law firms which have
made a nice living from ‘whitewashing’ transactions that would otherwise breach the
prohibition will suffer financially – see D. Jordan, The Lawyer, 4 November 2002.
There is no evidence of lawyers in the UK using their influence to block reform in this
area, but in Germany lawyers have been stout defenders of share capital maintenance
– F. Kubler (2004) 15 EBLR 1031.
 The future of national corporate law systems 161

Countries whose entire economies depend on having a more deregulated

system of corporate law will never be satisfied with a uniformity that destroys
their competitive advantage. Finally, one must never underestimate pure chau-
vinism, in the sense of a deep-seated reluctance to be seen to be surrendering
a native legal rule (no matter how obsolete) to external influences.
Notwithstanding these glitches, convergence is occurring in many areas of
corporate law, but is it a panacea or an unqualified blessing? Substantive
convergence that takes no account of enforcement possibilities, cultural
heritage or wider institutional issues will be destined to achieve only limited
success.86 Economic advantages may undoubtedly flow from the associated
reduction in transaction costs where convergence occurs,87 but will the foun-
tain of corporate law novelty dry up if it becomes entirely dependent on one
source, namely US corporate law philosophy, with its obsessional focus on
widely held public corporations?
It has been suggested that the credit crunch might trigger a new round of
convergence in corporate regulation, with US models again leading the field.
But as the credit crunch originated in the US, those market-based models
might themselves be seen as tarnished goods. What the world financial crisis
may do is to change the path of convergence towards a common model using
a wider range of regulatory tools. Those tools may not necessarily be
American-designed.
In summary, therefore, we can safely assert that convergence in corporate
law is a real phenomenon,88 but we cannot say that its total victory is assured
(or even desirable). Dissent and diversity are ideals that corporate lawyers
should not surrender simply on the grounds of supposed economic efficiency.

86 See K. Pistor (2002) 50 Am Jo of Comp Law 97 and also K. Pistor et al.

(2003) 31 Jo of Comp Econ 674 (where the importance of the ability of host nations to
innovate is emphasised). Further discussion of these issues can be found in G. Hertig,
chapter 10 in J.N. Gordon and M.J. Roe, Convergence and Persistence in Corporate
Governance (2004) (CUP).
87 See J.C. Coffee (1999) 93 NwULRev 641 at 705.
88 Convergence is occurring in many other legal areas, including constitutional
law.
Appendix

THE COMPANIES ACT 2006: A NOTE FOR READERS

The Companies Act 2006 received the Royal Assent in November 2006.
Weighing in on enactment at a massive 1300 sections and 16 schedules it repre-
sents the longest statute ever enacted by the UK Parliament. This legislation is
partly consolidatory and partly reforming; the consolidation element being an
afterthought once the full implications of the Company Law Reform Bill (the
precursor to the 2006 Act) became apparent to all. The Bill thus changed its
legislative character in a fundamental way during its Parliamentary passage.
Having made that point, it needs to be noted that the 2006 Act is not a full
consolidation of all UK companies legislation – a feature most readily apparent
from the fact that some provisions in the Companies Act 1985 survive (for
example, those relating to DTI investigations and Community Interest
Companies). The Financial Services and Markets Act 2000 is amended, but not
replaced. The Insolvency Act 1986 and Company Directors Disqualification
Act 1986 remain largely untouched.
The Companies Act 2006 will be brought into effect in stages with full
implementation being scheduled for 1 October 2009. Only one or two provi-
sions will be commenced at a later date (yet to be determined).
For a useful guide to the thinking behind the many provisions in the Act,
see Explanatory Notes to Companies Act 2006, available on the Department
of Business, Enterprise and Regulatory Reform website – http://www.
berr.gov.uk. Generally, the website of the Department of Business, Enterprise
and Regulatory Reform provides a valuable source of intelligence. The
government has also produced an invaluable guide showing how provisions in
the 1985 and earlier legislation have been restated in the 2006 Act, but this tool
needs to be treated with caution as the new restated provision may contain
subtle changes.
The following Commencement Orders should be consulted when consider-
ing whether particular provisions mentioned in the text are in force.

The Companies Act 2006 (Commencement No. 1, Transitional Provisions and

Savings) Order 2006 (SI 2006/3428, C. 132)

162
 Appendix 163

The Companies Act 2006 (Commencement No. 2, Consequential

Amendments, Transitional Provisions and Savings) Order 2007 (SI
2007/1093, C. 49)
The Companies Act 2006 (Commencement No. 3, Consequential
Amendments, Transitional Provisions and Savings) Order 2007 (SI
2007/2194, C. 84)
The Companies Act 2006 (Commencement No. 4, and Commencement No. 3
(Amendment)) Order 2007 (SI 2007/2607, C. 101)
The Companies Act 2006 (Commencement No. 5, Transitional Provisions and
Savings) Order 2007 (SI 2007/3495, C. 150)
The Companies Act 2006 (Commencement No. 6, Saving and
Commencement Nos 3 and 5 (Amendment) Order 2008 (SI 2008/674, C.
26)
The Companies Act 2007 (Commencement No. 7, Transitional Provisions and
Savings) Order 2008 (SI 2008/1886, C. 83)

At the time of going to press the major substantive Parts of the legislation not
fully commenced include elements of:

Part 1 (introductory)
Part 2 (formation)
Part 3 (constitution)
Part 4 (capacity)
Part 5 (name)
Part 6 (registered office)
Part 7 (re-registration)
Part 8 (members)
Part 10 (directors)
Part 12 (secretaries)
Part 17 (share capital)
Part 18 (financial assistance)
Part 24 (annual return)
Part 25 (company charges)
Part 31 (dissolution)
Part 33 (companies not formed under companies legislation)
Part 34 (overseas companies)
Part 35 (registrar of companies)
Part 36 (offences)
Part 40 (foreign disqualifications)
Part 41 (business names)
Part 45 (Northern Ireland)
164 National corporate law in a globalised market

There are literally dozens of discrete pieces of delegated legislation clarifying

and supplementing the primary statutory provisions. These are not listed here,
but may be referred to in the main text where relevant. Readers should,
however, note The Companies (Model Articles) Regulations 2008 (SI
2008/3229), which will provide model sets of articles for private and public
companies with effect from 1 October 2009.
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OFFICIAL REPORTS
Loreburn Committee (1906) (Cd 3052)
Greene Committee (1926) (Cmd 2657)
Cohen Committee (1945) (Cmd 6659)
Gedge Committee (1954) Report of the Committee on Shares of No Par Value
(Cmnd 9112)
Jenkins Committee (1962) (Cmnd 1749)
Cork Committee (1982) (Cmnd 8558)
Committee on Financial Aspects of Corporate Governance (1992) (Gee)
Gower, C.B., A Review of Investor Protection (Part I) (1984) (Cmnd 9125)
Company Law Review (1998–2001) (UK) Final Report (URN 01/942)
Company Law Review Group: First Report 2001 (Ireland)
Company Law Review Group: Second Report (2007) (Ireland)
Cromme Code (2001) (Germany)
Annual Report on OECD Guidelines for MNEs (2004)
Dickerson Report (Canada) – Dickerson, R.W.V., Howard J.L., and Getz, L.,
‘Proposals for a New Business Corporations Law for Canada’ (1971)
(Information Canada)
Law Commission Report, LC no. 296, ‘Company Security Interests’ (2005)
(Cm 6654)
Marini Report (1996) (France)
Index
academics, influence of 147–149 credit crunch 7, 161
Aktiengesellschaft (AG) 34, 73 criminal sanctions 42–43
alien enemies 82 cross-border insolvency 130–44
Asian financial crisis 1997 55 Crown dependencies 14
auditors 40 culture 1, 160
Australia 12, 56, 72, 73
Delaware 17
Barbados 19 Delaware effect 17
bearer shares 80 delegated legislation 37
Berle and Means 51, 154 deminor ratings 152
board of directors 70–71 denomination (of shares) 81
branches 15 Department of Business, Enterprise and
British Empire 7 Regulatory Reform (BERR) 162
Bubble Act 5 Department of Trade and Industry (DTI)
business judgment rule 158 2, 47–48
deregulation 33, 41, 47, 54
CalPERS 9, 153 Dickerson Report (Canada) 12
Canada 12, 56 directors 70
capital maintenance 47 discourse 154
capital markets 58 disqualification of directors 118
CARICOM 19 dividends 13, 83
centre of main interests (COMI) 94, domicile 121
138–141
China 146 electronic communication 57
Chinese walls 154 Enron 6
choice of law 127 established place of business 97, 106,
civil law 10 108
civil penalties 42–43 European Court of Justice 18
close companies 34 European Economic Interest Grouping
comity 112–116 (EEIG) 16
common law 154 European Union 3, 15
community interest companies 46 expropriation (of shares) 52
Companies Act 2006 27 extradition 118
Company Law Review 26–27 extraterritoriality 110
Concordat 116
conflict of laws 120–29 families (of corporate law) 7
consolidation xviii federal states 11
convergence 145–61 fiduciaries 47
corporate directors 91–92 Financial Services Authority 43
corporate governance 39 floating charge 159
corporate personality 60–61 foreign shareholders 78–92
Corporate Social Responsibility 146 forum non conveniens 124

195
196 National corporate law in a globalised market

France 10, 66 market in corporate control 32

fraudulent trading 43, 48 meetings 53, 80
freedom of capital 83 multinationals 151
freedom of establishment 17
fundamental rights 2, 65, 69 nationalisation 30, 75
New Zealand 56, 66, 67, 76, 143
Germany 10, 122 nexus of contracts 32
Gibraltar 100 non-resident (directors) 88–91
globalisation 1, 147 Northern Ireland 13, 95, 144
Gesellschaft mit beschranker Haftung Northern Rock 31
(GmbH) 20, 24, 122, 152
golden shares 86–88 OECD 151, 157
Gower 8, 35, 148 offshore companies 64
Greene Committee 107 OHADA 19
groups 62–64 overseas companies 93–109
Guernsey 14
Parmalat 6, 19
harmonisation 15-20, 152 par value shares 67
hedge funds 116, 153 pari passu 71
higher education 150 path dependency 26
history 4 Pennington 148
hotchpot rule 132 place of incorporation 120
poison pills 9, 155
incorporation 5, 45 precedent 33, 41
Indonesia 55 pre-emption rights 158
insider trading 36, 77 preferential debts 72
Ireland 55, 66, 92, 129, 149, 157 preincorporation contracts 158
Islamic perspectives 11 Prentice Report 148
Isle of Man 14, 47, 99 private companies 73, 157
Italy 141 private International law 120–121, 160
privatisation 86
Japan 9, 19 Privy Council 8
Jenkins Committee 8, 35, 56, 67, 99 protected cell companies 14
Jersey 14 public companies 73–74, 157
joint ventures 151
‘race to the bottom’ 17, 152, 154
Korea 55, 160 ratification (of preincorporation
contracts) 158
Lamafalussy Report 58 redomestication 99
Law Commission 20 redomiciliation 100
legal firms 150 regulation 34
limited liability 46, 66 regulatory bodies 117
limited liability partnerships 20, 150 rescue 54, 55, 149
limited partnerships 25 revenue debts 133
London approach 24, 39 Romalpa 41
Loreburn Committee 97 Roman law 11
Russia 11
Manne 32
Marini Report (France) 26 schemes of arrangement 101
market abuse 77, 117 Scotland 13, 40, 95
 Index 197

secured creditors 50 think small first 35, 74

Securities and Exchange Commission 44 transactional avoidance 111
self-regulation 39 transition economies 10, 11
separation of ownership and control 51 transplants 24
service of proceedings abroad 112 treasury shares 158
share capital 47 true and fair accounts 160
share holders 52–53, 69 two tier board 25, 53, 146
siège réal 121
Sitz 121 ultra vires 50, 70, 148
Slavenburg register 108–109 UNCITRAL 19, 143
Societas Europea (SE) 16, 158 UNIDROIT 151
South Africa 10, 11, 22, 73 undercapitalisation 65
South Sea Bubble 5 unsecured creditors 46
sovereign wealth funds 79 United States of America 66, 143, 149,
stakeholders 70 158, 161
subordinated debt 22
sub-prime lending crisis 7, 147 vulture funds 9, 153
subsidiaries 62–63, 66
Winter Report 18
takeovers 37–38, 129 World Trade Organization (WTO) 151
Thailand 55 wrongful trading 48–49, 91