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From Contracts to Claims: Examining the Legal Fallout of Valhalla's Dissolution

Introduction

In this scenario, the pertinent issues are raised with regard to transfer of contracts (and the validity of the same) from Valhalla to Heimdall. Related to this is the issue of novation. There are five shareholders, who are, Loki, Thor, Freyja, Frigg and Balder whose names are recorded in the shareholders register. Out of these four, Thor has fully paid shares, while the others’ shares are unpaid. Upon the liquidation of Valhalla, the question of what claims Loki, Freyja, Frigg and Balder can have as shareholders arises. There are three specific issues that are answered in this essay, which relate to the possible claims of Valhalla, identification of shareholders, and obligation to pay for unpaid shares of the company. These issues are discussed separately in the sections below. The law applied to these different issues is contained in the common law of contract, doctrines of undue influence and mistake, the Companies Act 2006 and the Insolvency Act 1986.

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Claims of Valhalla plc

With regard to claims of Valhalla plc, the principal issue that arises in this case is with regard to the transfer of the remaining contracts of Valhalla plc to Heimdall Ltd by Loki. The question is whether Valhalla plc can prohibit or restrict the transfer of the existing contracts when it is in liquidation. Thus, the points to be discussed in this context relate to whether the contract can be validly transferred, and what role is played by rules related to conflict of interests because the transfer is made by Loki.

The relevant rules are related to novation and principle of agency in the law of contract and the conflict of interest rules in the company law. Novation refers to the substitution of a new contract for an old one, which can take place by replacing one or more of the original parties, and thus terminating the original parties’ rights and duties under the contract. Thus, novation means that the original contract between two parties is extinguished and is replaced by a new contract between one of the original parties and another party. In order for novation to take place, there should be a valid, prior agreement, agreement between parties to substitute a new contract, discharge of the prior obligation, and a valid, new agreement. It is essential that parties agree to novation for it to take effect. Consent for novation must be clearly expressed by the parties to the original contract as well as the new contract and may be given in an agreement. Finally, consideration must also be given for the new contract. If the novation is valid, its effect will be to extinguish the original agreement and create a new contract.

Even if novation requirements were met in the current situation, a question also arises as to whether Loki had the authority to bind Valhalla plc to novation by giving consent for the same. In this case, Loki has taken a unilateral decision to transfer the contracts to a another company of which he is the director. The question of his ability to bind Valhalla plc is raised in the case. The law of agency is relevant here and the question is whether Loki was a valid agent to bind Valhalla plc as his principal. Generally, the agent can bind the principal to contractual liability if he is acting within his authority. Even though the agent did not have actual authority, he may bind the principal if the third party reasonably perceives that the agent has the authority to bind the principal (ostensible authority). Ostensible or apparent authority is premised on the principal's words or conduct to a third party, leading to such reasonable belief.

  1. Energy Works (Hull) Limited v MW High Tech Projects UK Limited & Others [2020] EWHC 2537 (TCC).
  2. Habibsons Bank Ltd v Standard Chartered Bank (Hong Kong) Ltd [2010] EWCA Civ 1335.
  3. IFE Fund v Goldman Sachs International [2007] EWCA Civ 811, per Cooke J.
  4. Re Agriculturist Cattle Insurance Co. {Baird's Case) (1870) 23 L.T. 424.

Companies Act 2006, Section 40 relates to the power of the directors to bind the company and clause 1 provides that “in favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company's constitution.” Also relevant is Freeman principle that if an agent lacks actual authority to contract on a company's behalf, but has the authority to enter into similar kinds of contracts, then the contract can still be enforced provided it would have been valid had the principal entered into it.

Even if Loki had the authority to enter into the contract on the behalf of Valhalla plc, the issue of conflict of interest arises. The Companies Act 2006, Section 175(1) provides the duty of directors to avoid conflict of interest. This is a fiduciary duty under the common law and also a statutory duty under Section 175 of the Companies Act 2006. Conflict of interest duty requires that the directors should not prioritise their personal interest over the interest of the company in a given situation or transaction. Thus, directors must avoid business opportunities that come to the director for the company, and avoid situations or transactions in which they have direct or indirect personal interest that conflicts with the company’s interests. Conflict of interest does not arise if in relation to a transaction or arrangement with the company (Section 175(3)), and if situation cannot reasonably be regarded as likely to give rise to a conflict of interest or is authorised by the directors (Section 175(4)), and was approved through a meeting (Section 175(6)).

The question would be in the event of conflict of interest, was there an approval or authorisation of novation. The Companies Act 2006, Sections 281-283 provide resolutions and voting rights. A special resolution is required to alter the articles of association and prdinary resolution is required for other purposes. It would be pertinent to see if the transfer of contract through novation was approved through a resolution.

Applying the above discussion to the claims of Valhalla plc, with regard to novation, the decision to transfer the remaining contracts to Heimdall plc was taken by Loki who is the sole director of the company. Loki had not been been authorised to transfer the contracts through any shareholder resolution and he took this decision as the director of the company. He could bind the company if he had ostensible authority to do so. This is more concerned with the third party’s perception of Loki’s authority to bind the company rather than Loki’s own actual authority to do so. In this case, the third party, that is, Heimdall could have assumed that Loki was authorised to make the transfer as Valhalla plc’s sole director. As the contract would have been valid had Valhalla plc itself entered into it, and Heimdall did not enter into the contract in bad faith, it is possible for Heimdall plc to claim that Valhalla is bound by the new contract.

  1. United Bank of Kuwait plc v Sahib [1997] Ch 107.
  2. Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147.
  3. Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
  4. Aberdeen Railway Co v Blaikie Brothers [1854] UKHL 1.
  5. Bhullar v Bhullar [2003] EWCA Civ 424.
  6. Towers v. Premier Waste Management Limited [2011] EWCA Civ 923.

With regard to conflict of interest, Loki must avoid situations in which he has a direct or indirect interest that could cause a conflict of interests of Valhalla plc. However, in this case there is no continuing interest of Valhalla in the contract since it is in liquidation and cannot gain from the continuance of the contract. Thus, Loki’s transfer of the last remaining contracts plc to Heimdall Ltd is premised on the fact that due to its ongoing liquidation, Valhalla is not in a position to complete the contracts or even gain from them. Alternatively, by transferring the contracts to Heimdall Ltd, Loki is trying to prevent a breach of contract litigation against Valhalla plc. Therefore, there does not appear to be a conflict of interests in this situation.

Company’s shareholders

The second issue in this situation relates to identifying the shareholders of the company and whether Loki, Thor, Freyga, Frigg and Balder all qualify as shareholders. The issue arises because only one shareholder has fully paid up shares while the others have unpaid shares. This raises questions about allotment of the shares to the shareholders for the purpose of identifying the shareholders of the company at the time of its liquidation. The Companies Act 2006 contains rules as to allotment of shares, which are applied here to answer these issues.

A shareholder is a person who owns shares in a company's stock. The Companies Act, Section 558 provides that shares are allotted ‘when a person acquires the unconditional right to be included in the company’s register of members’ in respect of the shares. In this scenario, all the five members are registered as shareholders of Valhalla plc in the company’s shareholder register by the company secretary, Hod. Even so, their claims as shareholders may also be considered based on their peculiar facts and conditions of the shares allotment. The question is what status do they have as shareholders considering that some of them have claims of undue influence and mistake at the time of allotment of shares.

With respect to Loki, he has explained that he received the shares allotted to him as sweat equity. Employees can be given sweat equity shares by the company and such shares are issued to employees for a number of reasons including as rewards for work well performed or in lieu of unpaid work. It may be questioned as to whether Loki has paid for these shares because general rules regarding payment for shares are provided in the Companies Act 2006. Section 582 provided the general rules as to means of payment and clause 1 of this provision states that “shares may be paid in money or money's worth, which may include goodwill and know-how.” Thus, it is not necessary that shares will only be paid for in cash and it is possible for shares to be paid in money’s worth, which can also include employee’s services to the company. This would be the case for sweat equity shares for Loki. Loki is the sole director of Valhalla plc and is an employee of the company with various responsibilities and duties including responsibility of company’s day to day operations, management and decision making. He can establish that he has paid for the shares in money’s worth through his services and that the shares are sweat equity allotted to him. Thus, Loki can be identified as a shareholder of the company.

With regard to Frigg, she claims that she received the shares in Valhalla plc in exchange for two years’ worth of dividends and under undue influence of Loki, who happens to be her husband. She is therefore claiming to be a preferred shareholder with rights to dividends but without voting rights. Preference shareholders are also shareholders of the company having all the rights of shareholders. However, Frigg has also stated that she got the shares under undue influence of her husband, Loki. Therefore, the question remains as to whether she can be identified as a shareholder of the company. If undue influence is established then the transfer of the shares to Frigg will not be valid because it will be vitiated by undue influence. There can be a presumption of undue influence if there is a relationship of trust and confidence and the transaction calls for explanation.

  1. Dominion Petroleum Admin Services Ltd v Seidel [2008] EWHC 633 (Ch).

Thus, if there is a pre-existing relationship of trust and confidence between the two parties then one of them can be presumed to have exercised undue influence over the other under certain circumstances. Furthermore, a presumption of undue influence may arise where the requisite relationship exists during the transaction, provided that the transaction calls for an explanation. It is also relevant that the transfer of shares have entitled Frigg to dividends for two years therefore, she is receiving some consideration from the company for the purchase of the shares. Thus, there is no excessively onerous nature of the transaction into which Frigg was persuaded to enter by Loki which can show that the latter improperly exploited for his own benefit the relationship of trust and confidence between himself and Frigg. This may be significant to determining whether undue influence actually vitiated the contract or not. At this point, being registered as a shareholder, Frigg may be identified as such.

With regard to Thor, he is the only shareholder who has fully paid for his shares in the company.Thor owns 13,000 ordinary shares for which he has paid £13,000. He can be identified as a shareholder.

With regard to Freyja, she is claiming that the allotment of shares to her should be set aside based on the doctrine of mistake. Her claim is that “she knows now that buying the shares was a bad business deal.” However, does that amount to mistake for the purpose of setting aside the transaction of allotment of shares to her? The Supreme Court has recently explained that transaction (in this case, a gift) can be rescinded for mistake as to the legal effect or to an existing fact which is basic to the transaction. At the same time, it has been held in another case that for the purpose of setting aside a transaction, the common law rules for the setting aside of a transaction must be followed. The doctrine of mistake in common law includes mistakes of law and fact. Mistakes of fact can be related to a shared misconception of the fact, a unilateral mistake, and a mutual mistake of both parties. If such mistakes happen, then the transaction can be set aside as having entered upon a common mistake. Freyja’s claim is that she did not know at the time when she was buying the shares that this would not be profitable for her, or as she put it, it would be a bad business deal. This is not the kind of mistake that is covered under the common law doctrine of mistake because she is essentially asking to be freed of a bad business transaction. Also, she is relying on the knowledge that she has acquired in hindsight about the shares not being profitable to get her out of paying for the shares now. She is therefore, trying to rescind a legal agreement when she has realised that it is of no financial benefit to her. Hence, Freyja can be identified as a shareholder.

  1. Birch v Cropper (1889) 14 App Cas 525.
  2. Royal Bank of Scotland plc v Etridge and others No 2 [2001] UKHL 44.
  3. Macklin v Dowsett [2004] EWCA 904.
  4. Credit Lyonnais Bank NV v Burch [1997] 1 All ER 144.
  5. Pitt v Holt [2013] UKSC 26.
  6. Van der Merwe v Goldman [2016] 4 WLR 71.
  7. Cooper v Phibbs [1867] UKHL 1.

With regard to Balder, the issue of consideration for shares is raised because his claim is that the shares are valueless. Thus, the question is whether the transaction and allotment of shares is valid and whether the shares allotted are adequate consideration. A valuable consideration is defined as some consideration that consists of some right, interest, profit, or benefit for one party to the contract or some forbearance, detriment, loss, or responsibility for the other party to the contract. Consideration is an essential element of a binding contract because on the basis of consideration, the intention of the parties to create legally binding contract can be established. With regard to adequacy of consideration, the case of Thomas v Thomas, may be discussed here. In this case, Mr Thomas desired his wife to have the house for her lifetime, but did not make a will provision for the same. The executors of his will allowed Mrs Thomas to continue living in the house for rent of £1 per year and in consideration of the promise made by Mr. The question that arose in dispossession proceedings later was whether rent of £1 per year was adequate consideration. The court held that consideration means something which is of some value. If in a case, it can be shown that something of value was provided, adequacy of the consideration becomes irrelevant. The promise made to Mrs Thomas that she shall continue to live in the house for her lifetime and the return promise to pay £1 rent per year was considered to be valid consideration. In Chappel, the court explained that if the offer requires the offeree to do something, then whether this held real value in the mind of the offeror becomes irrelevant.

In the present scenario, Balder has not paid any consideration for the shares to Valhalla plc. Balder’s claim is that ‘the shares are valueless and they cannot constitute valuable consideration’. This is not accurate because when the company issues shares to a shareholder and registers them as shareholder, the shareholder gets rights to vote and dividends in the company. Balder is therefore identified as a shareholder in the company and he is bound to be treated as such by the liquidator.

Who owes money for their shares

The final issue in this essay is who have to pay for the shares they hold in the company. Thor has already paid for his stock in the company, but the other five shareholders are yet to pay for their shares. The Companies Act 2006 provides rules for payment for shares and these are applied here to determine the liability of the different parties to pay for the shares at the time of liquidation.

According to Companies Act 2006, Section 581, the company may be authorised by its articles to make arrangements on the issue of shares for a difference between the shareholders in the amounts and times of payment of calls on their shares and accept whole or part of the amount remaining unpaid on any shares held by members. Therefore, it is not necessary that all members will be asked to pay at same time and there can be different times for payment of the shares that can be decided by the company. The articles of association may provide for when the shares have to be paid up and this could be done at different times, including incorporation, allotment, some future date, on a payment demand or call-in case of financial difficulty, and at the time of winding up.

  1. Currie v Misa (1875) LR 10 Ex 153.
  2. Edmonds v Lawson, [2000] QB 504.
  3. Ibid, [859] per Patterson J.
  4. Ibid
  5. Chappell and Co. v The Nestle Co Ltd [1960] AC 87.

In the event that a member has received shares in the company but has not paid the required nominal value and the premium, such shares are deemed to be unpaid shares and the company may call for the payment of such shares at some later date. Such members also become liable to make the payment at such time that the company goes into liquidation. In this situation, Valhalla plc has gone into liquidation and this is the time when call for payment of the unpaid shares can be made by the liquidator to all such members of the company who have received shares, but have not paid the nominal value and the premium.

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The Insolvency Act 1986 is also applicable here. Section 74(1) of the Act provides that when winding up is taking place, present and past members are required to “contribute to its assets to any amount sufficient for payment of its debts and liabilities, and the expenses of the winding up, and for the adjustment of the rights of the contributories among themselves.” Therefore, there is an obligation to pay for the unpaid shares for all identified members of the company at the time of winding up. The obligation of the members at the time of winding up cannot exceed the amount unpaid on the shares in respect of which they are liable as members (Section 74(2)(d) of the Insolvency Act 1986). According to Section 80 the liability of members creates a debt payable.

Valhalla plc is a private company limited by shares. According to the discussion above, this would mean that at the time of liquidation, all members who have unpaid shares, are liable to contribute to the assets of Valhalla plc. Applying this to the current scenario, Loki cannot be considered to be an unpaid member because he was allotted sweat equity in return for his services. He has already provided consideration for the shares through his services. As such, Loki does not owe payment for shares held in his name. Thor is also not liable to pay for the shares held in his name since he has already made the payment for the same. Frigg is required to pay for her shares because she has not as yet made the payment to the company for the same and her shares are unpaid shares. Freyja cannot rely on the doctrine of mistake and is liable to pay for her unpaid shares when the call is made upon liquidation of the company. Balder is similarly liable to pay and he cannot claim that the shares were valueless once allotted to him.

Finally, to conclude this essay with regard to the three issues that were raised here, the transfer of the remaining contracts by Loki will bind Valhalla plc because the third party can claim that he had ostensible authority to do so. . Because of the ongoing liquidation, Valhalla plc is not in a position to complete the contracts or even gain from them while by transferring the contracts to Heimdall Ltd, Loki is trying to prevent a breach of contract litigation against Valhalla plc. Therefore, there does not appear to be a conflict of interest in this situation. With regard to the second issue, all the registered members are shareholders in Valhalla plc. Loki is the sole director of Valhalla plc and is an employee and the shares are sweat equity allotted to him. Frigg cannot claim undue influence in this situation because there is no excessively onerous nature of the transaction into which Frigg was persuaded to enter by Loki or improperly exploited for Loki’s own benefit. Frejya cannot claim mistake because this is not the kind of mistake that is covered under the common law doctrine of mistake. She is trying to rescind a legal agreement when she has realised after the fact to be of no financial benefit to her. Hence, Freyja can be identified as a shareholder. Balder’s claim is that ‘the shares are valueless and they cannot constitute valuable consideration’, is not accurate because he has rights as shareholder of the company. Balder is therefore identified as a shareholder in the company. With regard to the final issue, which is, who is liable to pay for the shares at the time of liquidation, Thor and Loki are not liable to pay. Loki is not liable because he has been allotted sweat equity which means that he has already paid for the shares with services provided to the company. Freyja is also liable to pay because she has not paid for the shares. Frigg is liable to pay. Balder is liable to pay. The liability of these members arises from the provisions of the Companies Act 2006 and the Insolvency Act 1986. Under the latter Act, the members ae liable to pay the unpaid value of their shares to the company at the time of liquidation and this liability amounts to a debt due to the company. The liquidator can enforce the debt by making a call on these members to pay the unpaid value of the shares allotted to them.


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