Advise on the law relating to alteration of articles and class rights (including on a reduction of capital) in relation to the facts of the problem. Examine the validity of the alteration of articles and class rights if any.

Section 21 of the Companies Act of 2006 provides that a “corporation' s Articles of Association may be amended by special resolution”. Section 26 of the law requires “the company to give the registrar a copy of the articles as amended not later than 15 days after the amendment takes effect for which failure to comply therewith shall subject the company and every officer of the company who is in default to a conviction of an offense punishable by fine”.

The registrar may also send compliance notice to the company pursuant to Section 27 of the same law and timely compliance therewith will extinguish any criminal liability while failure to comply will subject the company to civil penalty of £200 in addition to any criminal proceedings.

Magic Atom's articles of association contain the following clauses: (i) Preference shares are entitled to a 5% cumulative dividend and a right to participate in surplus assets on a winding up (ii) Management shares shall carry 5 votes each in general meeting as long as the holder of the management shares holds 75% of the preference shares. (iii) A member wishing to sell his shares must offer them to the directors who must purchase them at a reasonable price. (iv) Pip shall be a director of the company for a period of 20 years.

(v) Preference shares shall be entitled to vote in a general meeting when their dividends are 4 years in arrears.

(vi) The rights attached to any shares shall be deemed to be varied by the reduction of the capital paid up on such shares and by the creation of further shares ranking in any respect in priority thereto, but shall not (except as otherwise expressly provided by the foregoing provisions of these articles or by the conditions of issue of such shares) be deemed to be varied by the creation or issue of further shares ranking pari passu therewith or subsequent thereto.

David, Norman and their father John are proposing to delete these clauses from the Articles. To delete these clauses from  the Articles of Association would result to the variation or alteration of rights attached to preference and management shares.

Section 630 of the Companies Act 0f 2006, which deals with the variation of the rights attached to a class of shares in a company having a share capital,  provides that “ rights attached to a class of a company's shares may only be varied in accordance with the provisions in the company's articles for the variation of those rights, or absent such provision, if the holders of shares of that class consent to the variation without prejudice to any other restrictions on the variation of rights”.

Section 630(4) further states that “the consent by the holders of a class of a company's shares must be either in writing and that of the holders of at least ¾ in nominal value of the issued shares of that  class except treasury shares or by special resolution passed at a separate general meeting of the holders of that class sanctioning variation”. Section 630(6) also states that “except where the context otherwise requires, references to the variation of rights attached to a class of shares in the article includes references to their abrogation”.

Section 637 provides that “ where variation of rights attached to any shares of a company occurs, the company must within one month from the date on which the variation is made deliver to the registrar a notice giving particulars of the variation and in default thereof, the company and every officer of the company who is in default is subject to a conviction of an offense punishable by fine.

David, Norman and their father John's proposal to delete the above stated clauses from the Articles of Asociation cannot be valid, absent consent expressed either in writing by the holders of at least ¾ in nominal value of the class of shares which rights is to be varied, or by special resolution passed at a separate general meeting of the holders of that class sanctioning variation. This is on the premise that the Articles do not provide for the variation of rights attached to a class of shares.

Section 641 provides that “a limited company having a share capital may reduce its share capital by special resolution supported by a solvencey statement in the case of a private company limited by shares or by resolution confirmed by the court in any case”. Same section also provides that a private company limited by shares “may not reduce its capital by special resolution if as a result of the reduction there would no longer be holders of shares other than redeemable shares”. Subject to this condition, the company may

            (a)extinguish or reduce the liability on any of its shares in respect of share capital not paid up, or

            (b)cancel any paid-up share capital that is lost or unrepresented by available assets, or repay any paid-up share capital in excess of the company's wants with or without extinguishing or reducing liability on any of its shares.

Section 644 of the Companies Act of 2006 then provides that the company “must deliver to the registrar within 15 days after the resolution for reducing share capital is passed a copy of the solvency statement and a statement of capital in addition to the copy of the resolution itself. The registrar must register the documents delivered to him under on receipt and only upon the registration of those documents will the resoution take effect.

The company must also deliver to the registrar, within 15 days after the resolution is passed, a statement by the directors confirming that the solvency statement was made not more than 15 days before the date on which the resolution was passed, and provided to members in accordance with section 642(2) or (3).”

Section 645 provides for the reduction of capital through confirmation by the court. After passage of a resolution, the company may may apply to the court for an order confirming the reduction. Section 646 applies if “the proposed reduction of capital involves either diminution of liability in respect of unpaid share capital, or the payment to a shareholder of any paid-up share capita, unless the court directs otherwise”.

Whether there have been any breaches of directors' duties? Edward, Pip and Agatha  breached their duty of avoiding conflict of interest as regards the exploitaion of any property, information or opportunity of which they became aware at a time when they were directors of Magic Atom. They breached this duty when they diverted important contracts from Magic Atom to Energy Engineering despite their having retired as directors from Magic Atom.

Section 170 (2)(a) of the Companies Act of 2006 provides that “a person who ceases to be a director continues to be subject to the duty of a director in Section 175 which is the duty to avoid conflict of interest as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director.” This provision of law clearly states that the duty of a director to avoid conflict of interest as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director subsists even after he ceases to be a director.

When Edward, Pip and Agatha diverted important contracts from Magic Atom to Energy Engineering, they were guilty of having expoited information and opprtunity of which they were privy to when they were directors of Magic Atom. They thus, breached the duty imposed upon them by Section 175 of the Companies Act of 2006.

David and Norman committed breach of trust. The relationship between the corporation and the directors,  between the shareholders and the directors, and between the directors among themselves is one based on trust. The directors owe fiduciary duty to the company, to the stockholders and to other directors. When David and Norman misrepresented to Roland, Pip and Edward that the offer they were making for the shares was the best under the circumstances, which offer in fact failed to reflect the value of the underlying assets of the company, Norman and David committed breach of trust and reneged on the fiduciary duty they owed to the other directors.

Section 171 of the Companies Act of 2006 provides for a director's duty to act within his powers, that is, in accordance with the company's constitution and for the purposes for which they are conferred. David breached this duty to act within his powers. When he agreed to alter the shareholders' agreement with Jetstream Inc. without consulting the board of Magic Atom, he acted beyond his powers.

Section 172 of the law provides for the duty of a director to “act in the way he consideres,  in good faith, would most likely promote the success of the company for the benefit of its members as a whole, and in doing so have regard, among others, to the need to act fairly as between members of the company”. David breached this duty as his acts of being autocratic and erratic, alienating Edward, Agatha, and Pip and making their working environment increasingly difficult in the process, cannot be said to be fair as between members of the company.

Advise on the remedies of minority shareholders. One remedy of the minority stockholders is a derivative claim under Section 260 of the Companies Act of 2006. A derivative claim is a suit instituted by a member of a company

in respect to a cause of action vested in the company and seeking relief on behalf of the company. “A derivative claim may be brought in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. The cause of action may be against the director or another person (or both).” The term director for purposes of derivative claim includes a “former director and a shadow director” and a member of the company includes a person who is “not a member but to whom shares in the company have been transferred or transmitted by operation of law”.

A derivative suit may be instituted against Edward, Pip and Agatha for having breached their duty of avoiding conflict of interest as regards the exploitaion of any property, information or opportunity of which they became aware at a time when they were directors of Magic Atom.

Another remedy is provided for in Section 994 of the Companies Act of 2006. Said Section of the law provides that a member of the company may apply to the court by petition for an order on the ground that “the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial”.

These provisions of the law apply to a person who is “not a member of a company but to whom shares in the company have been transferred or transmitted by operation of law as they apply to a member of a company”.

This action of unfair prejudice may be instituted against David for having altered the shareholders' agreement with Jetstream Inc. without prior consultation with the board of Magic Atom resulting to unfair prejudice with respect to the interests of the members in general.

Another remedy of a member of a company is to bring proceedings to restrain the doing of an acttion that is beyond the powers of the directors. This remedy of an injunction suit is recognized in Section 40(4) which provides that “this section does not affect any right of a member of the company to bring proceedings to restrain the doing of an action that is beyond the powers of the directors”.

This injunction proceedings may be instituted by the holders of preference and management shares which are the classes of shares which rights are to be altered upon the deletion of certain provisions from the Articles of Association as proposed by Norman, David, and John. This is because in the scenario given, it is beyond the powers of the directors to alter or vary the rights attached to a class of shares, such variations being regulated by the law.

Another remedy is an action for damages against the directors. This right of the members of the company is recognized in Section 40(5) which states that “this section does not affect any liability incurred by the directors, or any other person, by reason of the directors' exceeding their powers.”

Another  remedy with respect to variation of rights attached to class of shares in a company having a share capital is to object to such variation by application to the court pursuant to Section 633 of the Companies Act of 2006. Under this section,  “the holders of not less than 15% of the issued shares of the class in question (being persons who did not consent to or vote in favour of the resolution for the variation) may apply to the court to have the variation cancelled. If such an application is made, the variation has no effect unless and until it is confirmed by the court.”

Examine the enforceability of the shareholders' agreement, and the loan which was secured by a floating charge over the company's entire undertaking.

The shareholders' agreement is enforceable. Section 40 of the Companies Act of 2007 provides for the power of directors to bind the company. Said section states that “in favor of a person dealing with a company in good faith, the power of the directors to bind the company, or authorize others to do so, is deemed to be free of any limitation under the company's constitution”. Under the same section, the person dealing with the company is

“is not bound to inquire as to any limitation on the powers of the directors to bind the company or authorize others to do so, is presumed to have acted in good faith unless the contrary is proved, and is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company's constitution”.

The same section also provides that the limitations on the directors' powers under the company's constitution include “limitations deriving from a resolution of the company or of any class of shareholders, or from any agreement between the members of the company or of any class of shareholders”. However, this section also reconizes the right of a member of the company to institute proceedings to enjoin the doing of an act that is beyond the powers of the directors or to hold the directors or any other person liable by reason of the directors' exceeding their powers.

The shareholders' agreement is enforceable as there is a presumption that Jetstream Inc. was in good faith when it dealt with David. However, David may be held liable for having exceeded his powers when he agreed to the alteration of the shareholders' agreement without prior consultation with the board of  directors of Magic Atom.

The loan is enforceable but the floating charge over the company's entire undertaking is void as against a liquidator of the company, an administrator of the company, and a creditor of the company. Because the floating charge is void, the loan secured by it becomes immediately payable.

The loan from Krypton Bank plc which was secured by a floating charge over the company's entire undertaking was negotiated on 10 January 2007.  It was only registered on February 12 as the  secretary forgot about it for four weeks. The debenture was dated February 12 by the Secretary.

Section 860 of the Companies Act provides that “ a company that creates a charge to which this section applies must deliver the prescribed particulars of the charge, together with the instrument (if any) by which the charge is created or evidenced, to the registrar for registration before the end of the period allowed for registration”. Paragraph 7(g)the same section of the law enumerates floating charge on the company's property or undertaking as among the charges to which this section is applicable. The period allowed for registration is supplied by Section 870 of the same law.

Said section provides that “the period allowed for registration of a charge created by a company is 21 days beginning with the day after the day on which the charge is created, or if the charge is created outside the United Kingdom, 21 days beginning with the day after the day on which the instrument by which the charge is created or evidenced (or a copy of it) could, in due course of post (and if despatched with due diligence) have been received in the United Kingdom”. Section 874 of the same law further provides for the consequence of failure to register a charge created by a company. Section 874 provides that:

“Consequence of failure to register charges created by a company

(1) If a company creates a charge to which section 860 applies, the charge is void (so far as any security on the company's property or undertaking is conferred by it) against—

            (a) a liquidator of the company,

            (b) an administrator of the company, and

            (c) a creditor of the company, unless that section is complied with.

(2) Subsection (1) is subject to the provisions of this Chapter.

(3) Subsection (1) is without prejudice to any contract or obligation for repayment of the money secured by the charge; and when a charge becomes void under this section, the money secured by it immediately becomes payable.

Said provisions of law clearly state that a floating charge on the company's undertaking needs to be registered within 21 days reckoned from the day after that day on which the charge was created. Failure to register within the time allowed for registration will render the floating charge void as against the liquidator, administrator and creditor of the company and the loan secured by the charge immediately payable. In the scenario given, the floating charge was supposed to be created on January 10, 2007.

Hence, for the floating charge to be valid, it should have been registered on or before January 31, 2007. Its late registration on February 12 rendered the floating charge void and the loan secured by it immediately payable pursuant to Section 874 of the Companies Act of 2006.

The floating charge is void, hence unenforceable as against Dodgy Bank plc, another creditor of Magic Atom, which granted a loan to Magic Atom on January 12, 2007 subject to a fixed charge over the company's book debts and which charge was duly registered in accordance with law.  The floating charge is also unenforceable as against Lush Finace plc which has an existing fixed charge on Oracle Industrial Building at the time of its purchase.