05 - Asynch 2

Dagmar is the managing director of Etherea Limited, a private limited company specializing in top-of-the-range children's clothing. As managing director, Dagmar has significant authority in the day-to-day operations and strategic decisions of the company.
The company has 1,000 ordinary shares with a nominal value of 1p each. These shares represent the total ownership equity of the company.
Etherea Limited is registered without specific articles of association, meaning it operates under the model articles of association for private limited companies. The model articles are default rules for company governance under the Companies Act.
Shareholding:
- Dagmar: 50% (500 shares)
- Felix (also a director): 25% (250 shares)
- Gilly (also a director): 25% (250 shares)
Felix and Gilly are directors but do not manage the company, indicating they may have a non-executive role or less involvement in daily management.

Harmony, a designer and friend of Dagmar, is brought in to create a new clothing line exclusive to Etherea Limited. This collaboration aims to introduce new designs and potentially boost sales.
Harmony is considered a connected person to the company. This status may trigger specific scrutiny regarding transactions or share allotments to ensure fairness and compliance.
Dagmar agrees to allot Harmony 500 ordinary shares, giving her an equal share of the business if it were to be sold. This allotment significantly dilutes the existing shareholders' ownership and could impact their control and equity value.
As Etherea Limited is a private limited company with only one type of share (ordinary shares), Dagmar, as a director, likely has the authority to issue the shares, unless otherwise specified in the articles or by a company resolution. The articles of association or a specific resolution could restrict a director's power to allot shares.
If the company had multiple types of shares or was a public limited company, director's authority to issue shares would be restricted and require approval either from the articles of association of the company or a resolution of the company. Different share types often have varying rights, and public companies face stricter regulations regarding share issuance.

Felix and Gilly were unhappy about the new shares being issued to Harmony, but Dagmar told them she had the right to do this as the managing director, and they signed a memo agreeing to the allotment. This scenario raises questions about whether Felix and Gilly fully understood their rights and the implications of signing the memo.
Right of pre-emption: Existing shareholders must be offered new shares first, in proportion to their current shareholding. This right protects existing shareholders from dilution of their ownership and control.
- Dagmar should have been offered 50% of the 500 shares (250 shares).
- Felix and Gilly should have been offered 25% each (125 shares each).
Felix and Gilly can object to the allotment due to the right of preemption; however, the court may interpret the signed memo as a waiver of this right. The court would need to determine whether the memo constitutes a clear and informed waiver of their pre-emption rights.
Ignorance of the law (i.e., not knowing about the right of pre-emption) is not a valid defense. Directors and shareholders are expected to be aware of their legal rights and obligations.
The practical relevance of pre-emption rights is diminished if the company's failure has rendered the shares valueless. If the company is insolvent or nearing insolvency, the value of pre-emption rights may be negligible.

The Harmony range initially succeeds but leads to subcontracting manufacturing to factories in developing countries. While initially successful, the decision to subcontract raises ethical and quality control concerns.
A television documentary reveals poor working conditions and child labor, causing the company's sales to collapse and the Harmony brand to become toxic. This scandal leads to severe reputational damage and financial loss.
Excessive dividend payments were made over the last two years, without considering the company's financial position. These payments depleted the company's reserves and contributed to its financial instability.
Felix and Gilly claim they were unaware of what was happening, but ignorance is not a defense. Directors have a responsibility to stay informed about the company's operations and financial status.
Directors have a fiduciary duty to manage the company properly. This duty includes acting in the best interests of the company and exercising reasonable care and skill.

Dividend payments can only be made from distributable capital, which is accumulated realized profits minus accumulated realized losses. This ensures dividends are paid from actual earnings, not from capital or borrowed funds.
For private limited companies, accumulated unrealized losses do not need to be considered; however public limited companies do. This distinction affects how companies calculate their distributable profits.
Capital maintenance requirements dictate that dividends can only be paid from distributable profits. This legal principle aims to protect the company's capital for the benefit of its creditors and shareholders.
The members, by the shareholders, must vote and agree via ordinary resoulution to allow for the dividend distribution. This ensures that shareholders have a say in dividend payouts.
If dividends are paid in excess of distributable profits, it is considered an unlawful dividend. Such payments are illegal and can result in legal consequences for directors and shareholders.
Shareholders with knowledge of the unlawful dividend are liable to return the excess amount. This provision ensures that those who knowingly benefited from an unlawful dividend do not retain the ill-gotten gains.
Directors who authorize an unlawful dividend are jointly and severally liable to repay it to the company. This liability holds directors accountable for their decisions and protects the company's financial interests.
In this case, Gilly, Felix, and Dagmar, as directors,